Policy evaluation report: AIP

52 Pages·2009·0.28 MB·English

Policy evaluation report: AIP
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Publication date: 3rd July 2009
Policy evaluation report: AIP 
Contents

Section Page
1 Executive Summary 1
2 History: the genesis of AIP 9
3 AIP Implementation – initial progress 12
4 Extending Pricing and Cave Review 19
5 Other spectrum market developments 23
6 AIP Implementation process 27
7 AIP Effects 29
8 Final Conclusions and Observations 36

Annex Page
1 AIP Fees for both WT Act Licences and Recognised Spectrum
Access (“RSA”) 38
2 Mobile Cellular Fees 40
3 Point to Point – Fixed Links 43
4 Licence Fee Timelines 45
5 Glossary 48
Policy evaluation report: AIP 
Section 1
1 Executive Summary
Introduction
1.1 This document provides an evaluation of the policy of charging spectrum fees based
on Administered Incentive Pricing (AIP) i.e. setting fees to reflect the opportunity cost
of spectrum denied to other uses and users, rather than just the costs of managing
the radio spectrum.
1.2 AIP is intended to provide long term signals of spectrum value to spectrum users.
These long-term value signals are intended to help spectrum users (and their
suppliers) make more efficient decisions concerning their use of spectrum and
investment in radio technology. At the same time, given the significant investment
that many users have tied up in radio equipment – which in most cases cannot easily
and quickly be retuned to different frequencies and has a lifetime of many years – it
cannot be expected that AIP will lead to significant changes to spectrum use in the
short term; AIP is not intended to achieve any specific short term spectrum
reallocation goals.
1.3 AIP was first introduced in the UK in 1998. As a new and fundamentally different
approach to fee-setting, it has to date been applied in a conservative manner:
implementation has been rolled out to different users of spectrum slowly, and fee
levels have generally been set at most at around 50% of the estimated full
opportunity cost. Significant fee increases have also been phased in over a number
of years.
1.4 As a result of both these factors we would not expect to observe a significant impact
of AIP on spectrum use at this relatively early stage. Nonetheless we would hope to
be able to identify at least some examples of beneficial changes that might in part be
attributable to AIP.
Overall conclusions
1.5 We believe that, in the main, AIP has met its primary objective in helping to
incentivise spectrum users to consider more carefully the value of the spectrum they
use alongside that of other inputs, and to take decisions that are more likely to lead
to optimal use of the available spectrum. Because each individual user’s decisions
reflect their particular circumstances and objectives, improvements in spectrum
allocation are difficult to attribute, with confidence, solely to the influence of AIP.
However in the course of this evaluation we have identified a number of important
actions by users, in the period since AIP has been implemented, where we believe
AIP may have contributed to incentivising more efficient use.
1.6 In particular:
 The removal of legacy fixed links in the 4 GHz band, generally regarded as
technically inefficient due to the age of the equipment deployed;
 The removal of constraints on active services in spectrum bands, used by the
Radio Astronomy Service, following the introduction of AIP fees for grants of
Recognised Spectrum Access (RSA);
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Policy evaluation report: AIP 
 The return of some UHF1 spectrum used by the police in Scotland.
1.7 We have found no evidence to suggest that the application of AIP has given rise to
material adverse consequences for spectrum efficiency. In particular it has not
resulted in demand for spectrum falling off significantly where AIP has been applied.

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Section 2
2 Introduction
2.1 This document details Ofcom’s evaluation of our policy of using Administered
Incentive Pricing (“AIP”)1 to set fees under the Wireless Telegraphy Act 2006(“WT
Act”) for the use of radio spectrum1 over the period 1998 to 2008. The evaluation
process is an important part of Ofcom’s approach to policy making, and is an
identified element in post policy implementation, in the timeline of all policy projects2.
Therefore, this report represents an historical evaluation of AIP and not a forward
look to the role of AIP in the future.
2.2 The National Audit Office has recently emphasised the importance of an effective
and transparent approach to policy evaluation. Their report entitled “A Review of
Economic Regulators’ Impact Assessments – for the House of Lords Select
Committee on Regulators”3 reflected:
2.3 “Evaluation completes the policy cycle and allows policy officials to ascertain the
extent to which a policy’s objectives have been achieved; assess the accuracy of the
expected impacts; and identify any unintended or unforeseen consequences.
Feedback from reviews can allow policy teams to identify where improvements can
be made to optimise the benefit delivered or to reduce the regulatory burden.
However this is rarely done in a systematic or proactive way. Often reviews of
policies are not undertaken unless a problem is flagged up either by Government or
stakeholders”.
2.4 This document summarises some key conclusions from the evaluation. We first
outline, below, the background to Ofcom’s approach to licensing. We then set out the
current objectives of AIP, against which we have assessed the impact potentially
attributable to it. We then briefly summarise the history behind the establishment of
AIP before identifying some of the impacts that might be associated with its
implementation, as well as considering the potential impact and implications of other
relevant developments such as spectrum awards and spectrum trading. However we
have not considered the processes that led to the establishment of AIP itself nor
those underpinning its application to specific wireless sectors, as most of these
predate the current legal framework and, therefore, Ofcom’s current objectives.
2.5 A number of terms, particularly economic terms, are used in this document for which
the exact meaning is important and that may not be the same as that which is
commonly understood. These terms are therefore included in a Glossary, as Annex
5.
Background
2.6 Ofcom is statutorily required to licence exempt (“exempt”) radio stations, equipment
or apparatus from the requirement for a Wireless Telegraphy Act licence (“WT Act
Licence”) if the use of stations or apparatus is not likely to involve undue interference
with wireless telegraphy4. As a result, our power to grant licences under the WT Act

1 Definitions for all terms are provided in the Glossary as Annex 5
2 http://www.ofcom.org.uk/consult/policy_making/guidelines.pdf. See paragraph 3.12.
3
http://www.nao.org.uk/publications/0607/impact_assessments_review.aspx 
. See Section 3.13. 
4 See section 8 of the Wireless Telegraphy Act 2006.
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is exercised where it is judged that exemption is not appropriate for the purposes of
spectrum management.
2.7 Where spectrum use is licensed, it normally attracts a licence fee. Ofcom has set
these fees according to two alternative pricing methodologies:
 “Cost Recovery” , which enables us to recover the costs of administering and
managing the radio spectrum (or part of such costs only, by means of a
“contribution” to cost recovery), or
 “Administered Incentive Pricing” (“AIP”), which involves us setting licence fees
by reference to our estimate of the “opportunity cost”1 of the relevant spectrum,
so that the licensee is given a signal of the value of the spectrum to citizens and
consumers.
2.8 AIP is applied to many licences granted under the WT Act. Ofcom’s opportunity cost
estimates and relevant AIP-based fees are also used by Government in deriving the
payments that should be made in respect of the spectrum used by the Ministry of
Defence5 and some other Crown bodies under section 28 of the WT Act. Ofcom has
also consulted on applying AIP to the aeronautical and maritime use of spectrum6.
Additionally, AIP forms the basis of the fees applied to the non-Crown grants of
Recognised Spectrum Access (“RSA”) for the Radio Astronomy Service (“RAS”).
2.9 AIP has now been in existence for nearly 10 years and Ofcom continues to revise
both the level of fees and charges applied and how they are calculated according to
AIP. In this context we are currently undertaking a Strategic Review of Spectrum
Pricing7 (“SRSP”) which is examining the general principles and methods by which
both Cost Recovery and AIP fees should be set and reviewed in future. The SRSP is
a separate project to this policy evaluation and, in line with guidance on undertaking
evaluations, is not directly linked to it. However this backward-looking evaluation is
timely as relevant input evidence for the SRSP.
Current objectives of AIP and evaluation criteria
The legal framework
2.10 AIP is one of the pricing methodologies used by Ofcom to make decisions on the
amount to be paid by licence holders for the use of the radio spectrum. In adopting
any of these pricing methodologies (i.e. whether AIP or Cost Recovery) Ofcom is
required to comply with a legal framework defined in the European Union (“EU”) and
implemented in UK law, which sets out (i) overarching general duties applying across
all our functions as well as (ii) specific duties concerning spectrum management.
Ofcom’s general duties
2.11 Ofcom’s principal duties under the Communications Act 2003 (“Communications
Act”) are:
 to further the interests of citizens in relation to communications matters; and

5 Ofcom cannot require the Crown to pay AIP because the Wireless Telegraphy Act 2006 does not bind the Crown and,
therefore, Crown bodies do not require authorisation to use spectrum. However, the Secretary of State may make payments to
Ofcom in respect of the use of spectrum by Crown bodies in line with the Government’s policy that the public sector will pay for
use of spectrum on a comparable basis to the private sector. See section 28 of the Wireless Telegraphy Act 2006.
6 http://www.ofcom.org.uk/consult/condocs/aip/
7 http://www.ofcom.org.uk/radiocomms/ifi/srsp/
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 to further the interests of consumers in relevant markets, where appropriate by
promoting competition8.
2.12 In securing the above duties, Ofcom is required to secure inter alia:
i) the optimal use for wireless telegraphy of the electro-magnetic spectrum9,
ii) the availability throughout the UK of a wide range of electronic communication
services10, as well as of a wide range of television and radio services which
(taken as a whole) are both of high quality and calculated to appeal to a variety of
tastes and interests; and
iii) the maintenance of a sufficient plurality of providers of different television and
radio services11. In performing those duties, Ofcom is also required to have
regard inter alia to the different needs and interests of everyone who may wish to
use the spectrum for wireless telegraphy12.
Ofcom’s duties in carrying out its radio spectrum functions
2.13 In exercising its radio spectrum functions, Ofcom is required, under section 3 of the
WT Act, to have regard inter alia to:
a) the extent to which the electro-magnetic spectrum is available for use, or further
use, for wireless telegraphy;
b) present and future demand for use of that spectrum for wireless telegraphy;
c) the desirability of promoting:
i) efficient use and management of the electro-magnetic spectrum
ii) economic and other benefits arising from the use of wireless telegraphy
iii) the development of innovative services, and
iv) competition in the provision of electronic communications services
Ofcom’s duties in setting licence fees under the WT Act
2.14 In establishing the pricing methodologies to set licence fees under the WT Act,
Ofcom is required to have regard to its relevant general duties as well as its specific
duties relating to the carrying out of its radio spectrum functions. In particular, section
13 of the WT Act permits Ofcom to recover sums greater than those necessary to
recover the costs incurred in connection with its radio spectrum functions (such as
the sums payable through AIP) if Ofcom thinks fit in the light (in particular) of the
matters to which Ofcom must have regard under section 3 of the WT Act 2006.
2.15 Furthermore, under Article 13 of Directive 2002/20/EC on the authorisation of
electronic communications networks and services (the “Authorisation Directive”), any
fees imposed for rights of use of radio frequencies must reflect the need to ensure
the optimal use of the resources. Such fees must be objectively justifiable,

8 Section 3(1) of the 2003 Act.
9 Section 3(2)(a) of the 2003 Act.
10 Section 3(2)(b) of the 2003 Act.
11 Section 3(2)(d) of the 2003 Act.
12 Section 3(4)(f) of the 2003 Act.
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transparent, non-discriminatory and proportionate in relation to their intended
purpose and take into account the objectives set out in Article 8 of Directive
2002/21/EC (the “Framework Directive”). These objectives include, among other
things, the promotion of competition in the provision of electronic communications
networks, electronic communications services and associated facilities and services
by inter alia encouraging efficient use and ensuring the effective management of the
radio frequencies13.
2.16 The policy objectives pursued by Ofcom by means of AIP must comply with this
general legal framework.
The role of AIP as a “complementary” policy
2.17 Since its introduction in 1998, the key objective of AIP for Ofcom has been to further
the achievement of our statutory duties and in particular to ensure the optimal use of
spectrum14 and in this respect to have regard, in particular, to its efficient
management and use15. In this respect, it is important to note that optimal use may
not imply that spectrum is utilised by particular radio transmissions at all times: there
are many potential reasons why the best interests of citizens and consumers are met
by temporary periods of excess demand as well as by licensed spectrum remaining
“fallow” for periods (e.g. while technology is developed and rolled out)).
2.18 Nevertheless, in the longer term it is unlikely that spectrum will be optimally used if
there is either persistent excess demand for it, or if spectrum is not being used when
there is demand for it (sufficient to cover the costs of managing it, including making it
available for use). Accordingly, we set out in our Spectrum Framework Review16 a
package of complementary policies aimed at using market mechanisms so that those
who use, or are considering using, spectrum can make economically rational
decisions that maximise welfare for society and therefore meet our duty to secure
optimal use of spectrum. These further policies complementary to AIP are to:
 release available spectrum to the market as quickly as possible;
 enable released spectrum to be assigned to its highest value use over time,
through the issue of Tradable1 and Liberalised1 licences; and
 incentivise such efficient, highest value, use through the continuation of AIP for
spectrum which has not been released via auction, in order to signal the
opportunity cost of spectrum to the market.
2.19 Because AIP was intended to be a complementary policy, it is inherently difficult to
assess its impact in isolation, for two key reasons:
 It is difficult to infer from actual evidence how the spectrum market would have
developed in the absence of AIP, given that AIP has been introduced
progressively over a period or more than 10 years; and
 the respective impacts of AIP, other complementary policies, and wider market
developments on the use of spectrum are impossible to isolate with confidence.

13 Article 8(1)(d) of the Framework Directive.
14 Communications Act 2003, Section 3(2)(a).
15 WT Act 2006, Section 3(2)(a).
16 http://www.ofcom.org.uk/consult/condocs/sfr/
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2.20 Assessing the impact of AIP to date is further complicated by the fact that users need
time to respond to AIP signals and, as noted above, AIP has only been in place for
10 years. Spectrum is used in combination with band–specific equipment with long
lifetimes. As a result, many changes in spectrum use (such as moving to less
congested bands, investing in more spectrum efficient technology or replacing
spectrum with other inputs) are inevitably tied up with investment/divestment
decisions and may only be considered periodically as equipment is needed to be
replaced. Hence, the full impact of AIP can only be realistically assessed over long
periods (which in many cases could be as long as 15-20 years) after users have had
sufficient time to adjust to pricing signals.
Evaluation criteria
2.21 Despite these difficulties, in order for us to consider whether AIP has facilitated the
allocation of spectrum into optimal use over the longer term, we have used the
following evaluation criteria. Whether AIP:
 has facilitated the allocation of spectrum into optimal use over time, for example
by encouraging trading or surrender of spectrum in lower value uses, and
reducing excess demand for spectrum; or
 has disrupted the optimal allocation of spectrum, for example by causing it to be
underused while demand for it exists.
2.22 In assessing the effects of AIP, we have also taken account of the fact that we have
continued a policy of setting AIP rates conservatively, below our estimates of
expected opportunity costs. This is because of the risks to optimal allocation posed
by sustaining AIP above opportunity costs, as well as the difficulties of estimating
opportunity costs with confidence. This conservative approach inherently limits the
expected benefits from AIP. However, we also recognised that by adopting a
conservative approach Ofcom has sought to minimise the risks of any inefficiency
and detriment to citizens and consumers arising from the application of AIP.
2.23 We have also evaluated whether the process used to introduce AIP reflected
regulatory good practice, which should also serve to limit the risks of unintended
consequences from the policy.
Overall conclusions
2.24 We believe that, in the main, AIP is continuing to meet its primary objective in helping
to incentivise spectrum users to ensure that the spectrum they have access to, is
used optimally. In essence, the case for AIP is relatively simple. Due to increasing
demand for applications and the introduction of new services, spectrum is scarce or
in excess demand1 in many frequencies and geographical areas – not all potential
users and uses can be accommodated in their preferred frequencies and locations,
and there is a need to ration demand by means of a price. In the absence of price
signals, users will lack incentives to economise in their use of scarce spectrum, and
will tend to hoard it or use it in greater quantities than if it was realistically priced.
Putting a price on scarce spectrum provides the necessary incentives and allows
those who value it most to gain access to it thereby providing services of a greater
economic value to the benefit of citizens and consumers.
2.25 Whilst improvements in spectrum allocation are seldom possible to attribute, with
confidence, solely to the influence of AIP, as noted above, in the course of this
evaluation we have identified a number of important individual areas where we
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believe the use of AIP may have contributed to incentivising optimal use in the limited
time in which AIP has been in place. In particular:
 The removal of legacy fixed links in the 4 GHz band, generally regarded as
technically inefficient due to the age of the equipment deployed;
 The removal of constraints on active services in spectrum bands, used by the
RAS, following the introduction of AIP fees for the grants of RSA;
 The return of some UHF1 spectrum used by the police in Scotland.
2.26 Similarly, we believe that, for the case study examples identified, alternative use of a
non-incentive pricing mechanism such as Cost Recovery would have been quite
likely to allow inefficiencies to continue.
2.27 We believe that we have used all appropriate available evidence in assessing
opportunity cost, and have applied sound regulatory principles in setting the
associated fee levels for particular licence classes. We have reduced or increased
fees where there have been sound reasons to do so, including evidence of a need
better to reflect opportunity costs in fees.
2.28 We do recognise that the introduction of AIP has not always been well received by
licensees when it has resulted in significant increases in their licences fees.
However, given that on such occasions the pre-existing levels of fees were often well
below the relevant estimates of opportunity cost, and AIP fees were set
conservatively below expected opportunity costs, it is unlikely that the application of
AIP-based fees, by themselves, made otherwise economic uses of spectrum
uneconomic, in cases of existing use.
2.29 Our general requirement to assess the impact of specific changes in fees before
implementing them should continue to guard against inefficient outcomes in future.
However, if we follow the recommendation of the Cave Review17 to move our AIP
fees closer to opportunity cost in future (in order to provide more effective incentives),
it is possible that this risk may increase, and accordingly we will need to continue to
take short term impacts fully into account.

17 Review of Radio Spectrum Management, March 2002, http://www.ofcom.org.uk/static/archive/ra/spectrum-review/index.htm
(recommendation 7.9)
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