1. DETERMINATION OF ADMINISTRATIVE PRICES AND SPECTRUM ROYALTIES AND PROCEDURE FOR CALCULATION OF FREQUENCY ASSIGNMENT FEES AND FREQUENCY USAGE CONTRIBUTIONS Yemen, 11-13 December 2005 Economic aspects of spectrum management for Arab States Director of NIIR Research Centre, Professor of MTUCI, Dr V. Tikhvinskiy

2. 2 Approaches to covering the cost of the spectrum management They based on: Spectrum use fees – Administrative pricing; Auctions as market approach of spectrum assignment. Economic aspects of spectrum management for Arab States

3. TECHNIQUE OF DETERMINATION OF ADMINISTRATIVE PRICES AND SPECTRUM ROYALTIES Economic aspects of spectrum management for Arab States Definiti on of pricing goals Demand assess ment Costs assessm ent Choice of pricing method s Price determinat ion Source: Nozdrin,ITU-R,Lusaca-2003

4. 4 Administrative pricing Spectrum pricing is method used the pricing as a spectrum management tool. Administrative pricing is form of spectrum pricing in which equipment licence fees or charges for spectrum rights are set by the Spectrum Manager. The aim of Administrative pricing is to make the users utilisation of the spectrum more efficiently. Economic aspects of spectrum management for Arab States

5. 5 Types of Administrative pricing Administrative pricing may include such types as: shadow pricing; incentive pricing, where an attempt is made to set prices to promote efficient spectrum use; regulatory pricing, where fees are set unrelated to market considerations, for example, to recover spectrum management costs. Administrative pricing involves the spectrum manager setting the level of licence fees as a surrogate for market forces. Economic aspects of spectrum management for Arab States

6. 6 Shadow pricing A form of administrative pricing in which the price is set according to a predetermined formula intended to mimic the effect of market forces by taking spectrum consumption, value and scarcity into account. Parameters commonly used include: bandwidth; frequency location; geographical location; coverage area. Economic aspects of spectrum management for Arab States

7. 7 Incentive pricing Method used to set a fee for the right of use of spectrum that reflects a certain value for that spectrum, in order to achieve certain spectrum management objectives. Incentive price is set by the Regulator; is prices charged to license holder (holder of recognized spectrum access (RSA)); is intended to reflect the opportunity cost of spectrum use (provide effective incentives for efficient use of spectrum). Economic aspects of spectrum management for Arab States

8. 8 Opportunity cost of spectrum The opportunity cost of spectrum represents the benefits that would be derived from the next best alternative use. The opportunity cost represents the benefits foregone from assigning spectrum to the best use instead of the next best use. Economic aspects of spectrum management for Arab States

9. 9 Regulatory pricing Regulatory (administrative) pricing is cost-based pricing method. Administrative spectrum price is set by the Regulator; is charges to license holder; is intended to recover the regulator's administrative costs incurred in spectrum management, control and enforcement. Economic aspects of spectrum management for Arab States

10. 10 Administrative pricing models Types of charges single and annual The principle of spectrum fees collection For the right of access to a spectrum For direct utilisation of spectrum The body establishing value of spectrum charging Government bodies/ agency Economic aspects of spectrum management for Arab States

11. Price setting method Economic aspects of spectrum management for Arab States Access to spectru m Licence or Permitio n of use Choice of method: Administrati ve Market Spectrum utilization for radio station In operation Not market FC-FR Lottery Beauty contest Market Auctions Annual fees Spectru m tariff unit Service Incentiv e factors

12. 12 Estimation of Spectrum Management costs Administrative charges (AC) levied on spectrum licence holders and applicants should recover spectrum management costs (SMC), be objective and transparent. total AC=SMC The total sum of charges must cover the costs of spectrum management. Economic aspects of spectrum management for Arab States

13. 13 Spectrum Management Costs Spectrum management costs are included. SMC =SF( DrCo, InCo) + SCh ( DrCo, InCo) Whereby SF- spectrum fees; SCh – spectrum charges; DrCo – direct cost of spectrum management; InCo – indirect cost of spectrum management. The total sum of charges must cover the costs of spectrum management( direct and indirect). Economic aspects of spectrum management for Arab States

14. 14 Spectrum fees Fees: price charged by the Administration to a licence holder for the grant of rights of use of spectrum, with the aim of achieving certain spectrum management objectives such as to ensure the efficient use of that spectrum. Administrative fees are not primarily intended to cover the costs of the SMO and may be charged once-off or yearly. Economic aspects of spectrum management for Arab States Source: ECC Report 53

15. 15 Spectrum charges Charges: price charged by the administration to cover administrative costs incurred in the management, control and enforcement of the authorization scheme (this may include costs for e.g. international cooperation, harmonization and standardization, monitoring and enforcement). Economic aspects of spectrum management for Arab States Source: ECC Report 53

16. 16 Indirect costs Economic aspects of spectrum management for Arab States Indirect costs are the costs to take into account for the calculation of charges as they are not directly linked to the spectrum management work done for an individual license holder. Examples of indirect costs: general international consultation; propagation research covering many frequency bands; general spectrum monitoring; interference investigations. Source: ECC Report 53

17. 17 Direct costs Economic aspects of spectrum management for Arab States Direct costs are costs that can be allocated to individual license holder or groups of licensees as they are directly connected to tasks carried out for those particular license holders: e.g. the cost of staff time in the frequency assignment process; site clearance; interference analysis. The costs incurred can be determined using the cost accounting system to register the time spent for those specific tasks.

18. Selection of service for Administrative pricing applying Fixed links; Fixed Wireless Access; Maritime business radio; Private business radio; Programme making and special events; Public mobile networks; Public safety services (police, fire, ambulance services); Satellite uplinks (permanent and transportable earth stations and VSATs); Scanning telemetry (national channels only). Economic aspects of spectrum management for Arab States

19. Determination of Spectrum Price 1.Estimate of the marginal value of spectrum for each service. 2.Differentiation of the marginal value into one service (e.g. -Public wireless networks (2G public mobile network operators); –Business radio (incl. PBR, PAMR, CBS and paging); –Scanning telemetry.) 3.Derermination impact on spectrum price the bandwidth used and the geographic area over which use and the aria sterilized by the service. Economic aspects of spectrum management for Arab States

20. Spectrum Tariff Unit (STU) STUs aim to give a value for spectrum as a raw material from which individual product values can then be calculated. STU is a reference measure against which spectrum charges for different services are established. Economic aspects of spectrum management for Arab States Source: OFCOM Report,2004

21. Spectrum Tariff Unit (2) STUs are based on the estimated value of 1 MHz of spectrum over 1km 2 across the county. The use of the STU allows easier comparison of spectrum prices across different services and provides for greater transparency in licensing procedure and process. Economic aspects of spectrum management for Arab States

22. Spectrum Tariff Unit (3) Spectrum Fee = STU × Bandwidth in MHz × Aria sterilized Mobile communication operators £1.65/MHz/km 2 ; Radio Link operators £1.10/MHz/km 2 ; PAMR operators £1.58/MHz/km 2 ; Economic aspects of spectrum management for Arab States Source: Spectrum Pricing,OFCOM- 2004

23. Example of price determination for mobile service The national channel rate for Public Business Radio in typical frequency bands where some congestion occurs is calculated using the value of the Spectrum Tariff Unit for mobile communications: Value of STU for mobile communications = £1.65 per MHz per square kilometer Area of UK = 240,000 km2 Therefore, rate for 2 x 12.5 kHz national channel = £.1.65 x 240,000 x 2 x 0.0125 = £9,900 Economic aspects of spectrum management for Arab States Source: OFCOM Report,2004

24. 24 RadioserviceEvaluation for fee determination Public Mobile Networks K1×K2×K3× (occupied frequency band / 25 kHz) ×1 896.30 Euro Fixed Wireless Assess K1×K2× (occupied frequency band /25 kHz) ×1 896.30 Euro Paging Systems K1×K2× (occupied frequency band /25 kHz) ×1 896.30 Euro Government radio network K1×K2×K3×K4× (occupied frequency band /25 kHz) ×1 896.30 Euro GSM-R Networks K1×K2×K3×K4× (occupied frequency band /25 kHz) ×1 896.30 Euro STU index in Finland Economic aspects of spectrum management for Arab States Source: ECC Report 65

25. Factors of the spectrum fee Currently the spectrum fee is calculated as follows: K1*K2*K3*K4*(frequency band in kHz / 25 kHz)×STU. whereby: K1 = the band factor (e.g. 0-470 MHz K1 = 1 and 470-960 MHz K1 = 0,8 etc) K2 = coverage area (for whole Finland K2 = 1; for limited area calculated proportion of 1) K3 = starting factor (first year begins from 0.1, then increases gradually to 1 on the 6th year) K4 = network factor, which takes into account different parameters and usage of the system. E.g. for the national emergency TETRA system K4 = 1 and for meteorological radiosonde system K4 = 0.1). All factors are not used for the calculation of all systems, e.g. K4 is not used at all for the calculation of GSM fees. Economic aspects of spectrum management for Arab States

26. Pricing proposals for fixed service applications Economic aspects of spectrum management for Arab States Fixed link licence fee Spectr um Price Band Width Factor Band Factor Path Length Factor Availabi lity Factor Antenn a Factor Sharin g Factor Source: An Economic Study to review Spectrum pricing / Aegis,Warwic businesss school-2004

27. Price factors determination Spectrum Price (reference fee, marginal value) - price for each unit of link bandwidth: £X per 2 x 1 MHz; Band Width Factor - Promote the use of lower-bandwidth channels so that users are encouraged to utilise the minimum necessary spectrum to achieve their requirements: charge bandwidth per MHz; Band Factor - Adjust the licence fee to reflect the degree of re-use possible within the band and the potential to cause interference in the chosen band; the higher the frequency band, the lower the value of the Band Factor; Economic aspects of spectrum management for Arab States

28. Price factors determination (2) Path Length Factor - Encourage assignments in the highest available fixed link frequency band to ensure the lower frequencies are kept for the longer links which are only achievable using the lower frequencies. Links shorter than the minimum path length are charged a premium ; Availability Factor -Encourage efficient behavior by making users aware of the impact availability has on spectrum use and associated opportunity cost: varied charging for availability requirements other than 99.99%; Antenna Factor - Encourage use of higher- performance antennas by making users aware of the impact on spectrum use and associated opportunity cost: calculate bore- sight gain ratio; Sharing Factor - Encourage site sharing for public policy reasons relating to environmental and social benefits: a 50% discount is given where operators share a site Economic aspects of spectrum management for Arab States

29. Example fees for a selection of 'typical' links Economic aspects of spectrum management for Arab States The following table shows example fees applying the proposed algorithm, assuming that the Antenna Factor, the Availability Factor, the Path Length Factor, and the Sharing Factor are equal to 1; and, in order to demonstrate that the algorithm generates fees below the proposed Minimum Fee, are calculated prior to the application of the £150 Minimum Fee. Channel bandwidth (in MHz) Band (GHz)3.5714285690 4£1,386£2,772£8,910 6L£1,145£2,290£7,360 7.5£256 £5 12 £1,024£2,049£4,098 13£151 £3 01 £603£1,205£2,410 15£151 £3 01 £603£1,205£2,410 18£128 £2 56 £513£1,026£2,051 23£121 £2 41 £482£964£1,928 25£105 £2 11 £422£844£1,687 38£90 £1 81 £362£723£1,446

30. Fee calculation for regional FM broadcasting Fee = S x B x Mg Economic aspects of spectrum management for Arab States FromToFee per 1000 listeners 0%5% 40,- 5% 10% 75,- 10% 15% 110,- 15% 20% 145,- 20% 25% 180,- 25% 30% 215,- 30% (=maximum) 250,- S = Fee based on the average amount of (net) turnover per 1000 listeners taken into account the area covered by the licence B = Number of potential listeners covered by the licence (coverage) per 1000 potential listeners Mg = Percentage to be paid of the total fee in case of non-nationwide (regional) FM broadcasting (50%). Whereby:

31. 31 Conclusions Administrative pricing is a spectrum management tool. Administrative prices and spectrum royalties based on cost recovered models as usually. Price determination process includes calculation of a spectrum tariff unit and a marginal value of spectrum for each service. There are not universal approaches to a Spectrum price determination. Different Administrations use different price determination models. Main factors which determine spectrum price: types of service; bandwidth; frequency location; geographical location; coverage area, technical parameters. Economic aspects of spectrum management for Arab States

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