Archived—DGRB-001-98 — ICO Global Communications

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Ico Global Communications (Canada) Inc.
914-50 O'Connor Street
Ottawa, Ontario K1P 5J6
Telephone: (613) 234-5139

September 11, 1998

Mr. Ronald G. Amero
Director, International Regulatory Activities
Radio Communication and Broadcasting Regulatory Branch
Industry Canada
300 Slater Street, 15th Floor
Ottawa, Ontario
K1A OC8
DSIR@ic.gc.ca

Dear Mr. Amero:

Re: Consultation on Spectrum License Fees for Mobile Satellite Services in Canada using Mobile Satellite Service Spectrum above 1 GHz (DGRB-001-98, June 13, 1998 and July 25, 1998)

ICO Global Communications (Canada) Inc. ("ICO Canada") is pleased to submit the following comments on the above-referenced Industry Canada Notice ("the Notice") with respect to Spectrum access fees for the use of radio spectrum for the provision of mobile satellite services in Canada.

Background

ICO Canada is a wholly owned subsidiary of ICO Global Communications (Holdings) Limited ("ICO"), which is registered as a legal entity in several jurisdictions, including England. ICO is a private, market-driven multinational corporation with a shareholder list drawn from more than 40 countries. ICO's satellite system is authorized, subject to appropriate conditions, and has complied to date with the stringent due diligence requirements, by the United Kingdom, which is also ICO's notifying administration for purposes of the International Telecommunication Union (ITU) coordination process.

ICO intends to provide global mobile personal communications by satellite ("GMPCS") to Canada within the 1990-2025 MHz and 2160-2200 MHz mobile-satellite service ("MSS") bands. ICO's satellite communications services will be available via hand-held and other terminal types to anyone, anytime, anywhere in the world.

ICO's GMPCS system is a unique global service offering voice, data, fax and messaging services interworking with existing terrestrial cellular and personal communications networks to mobile hand-held as well as semi-fixed and fixed terminals. The system consists of the space segment, ICO's terrestrial network, known as the ICONET, and the subscriber segment. Mobile telephone manufacturers will supply the user terminals.

ICO's first generation space segment will consist of ten operational satellites (12 satellites will be launched), providing complete, continuous, overlapping coverage of the earth's surface. On the ground, the ICO system will utilize earth stations or satellite access nodes ("SANs") located around the world. The SANs will provide the primary interface with the ICO satellites for routing traffic and maintaining certain subscriber data. Feeder link communications will be performed using the 5150-5250 MHz and 6975-7075 MHz bands. The SANs also will serve as the primary interface with public switched telephone, mobile, and data networks.

ICO expects that its satellite service will be operational no later than the second half of the year 2000 using ICO's first generation space segment and a national distribution network. ICO is negotiating with a number of Canadian entities to serve as distributors of ICO's mobile services in Canada. ICO expects that its service providers will apply for subscriber earth station licences at the appropriate time.

ICO's philosophy of open, competitive, and non-discriminatory market access for all MSS operators serves the public interest by producing high quality and competitively priced satellite services. ICO has supported the efforts of Canada and other member countries of the World Trade Organization ("WTO") to reach an agreement on the liberalization of the international telecommunications markets. Increasing the number of MSS operators will create an environment where multiple suppliers effectively can compete. Vigorous competition will benefit all consumers and ICO's access to the Canadian market will increase the opportunity for worldwide competition for MSS services. Canadian consumers using the ICO system, including in-country users and subscribers roaming throughout the world, will benefit from the provision of affordable high quality telecommunications services within Canada.

ICO notes that other geostationary and non-geostationary MSS systems have been, or are in the process of, being authorized by Industry Canada for service in Canada in the 1.5/1.6 GHz and 1.6/2.4 GHz MSS bands. ICO urges Industry Canada to take into consideration ICO's advanced state of development as well as its intent to provide competitive mobile-satellite services to the Canadian public in the year 2000 via Canadian based service providers in accordance with Canada's regulatory requirements.

General Comments

The proposals contained in the Notice are premised on Industry Canada setting a licence fee relative to particular use of radio spectrum to provide service. The statutory basis for such an approach is found in Section 19 of the Department of Industry Act. This Section provides the Minister with the discretion to fix licence fees. However, it is important to note that it does not mandate the fixing of licence fees relative to the issuing of a spectrum licence. Accordingly, ICO would respectfully request the Department to recognize the unique qualities inherent in a global MSS and make a determination that fees would not be levied for such a service.

ICO has conducted studies and undertaken analyses of global mobile satellite systems utilizing a non-geostationary satellite constellation ("global satellite systems") in comparison with domestic terrestrial wireless systems. For the purposes of comments relative to the Notice, ICO will review briefly some key economic and policy features of global satellite systems that distinguish them from domestic terrestrial wireless systems.

The analysis starts with the observation that terrestrial systems can be built out market by market while generating cash from the most populous and profitable markets. In contrast, global satellite systems cannot be built on the basis of a country or a market at a time. The costs for a global satellite system tend to be largely fixed and threshold in nature. These costs are sunk and the assets cannot be converted to other uses. Domestic terrestrial wireless systems traditionally obtain all regulatory approvals before any investment is made, with the result that they are funded and built after regulatory approvals, as noted above, on a market-by-market basis. Again, in contrast, global satellite systems must be funded and built out prior to receiving any regulatory approvals. Furthermore, the regulatory approvals must be obtained from numerous countries around the world in which the global system will operate.

These differences in financing, construction, commencement of operation as well as the timing and process for obtaining regulatory approvals leads to an important point which can be described as "demonstration effects". Countries around the world will be looking to each other in order to discern the manner in which and the conditions under which regulatory authorizations are provided for the domestic element of a global system. Regulatory authorities in other jurisdictions will take direction from the decisions of countries like Canada. Accordingly, there is a particular significance to the determinations that will be made by Industry Canada in the present proceeding.

It is also important to note that access charges for utilization of spectrum are not imposed by all countries in the world. In fact, it is ICO's present expectation that the Federal Communications Commission in the United States and authorities in the United Kingdom will not levy any spectrum access charges relative to global satellite systems. The rationale for not imposing such spectrum access charges is fundamentally to minimize transaction costs for the implementation of such global services. As is demonstrated below, spectrum access charges, especially when multiplied by numerous jurisdictions around the world, can translate into substantial additional costs per minute of customer use. The imposition of such charges will increase costs and uncertainty of prices, all of which will ultimately be borne by consumers. Furthermore, the rest of the world will be invited to use the precedent, thereby magnifying unpredictably the costs on a world wide basis.

By way of example, at page 2 of the Notice, Industry Canada proposes an annual authorization fee of $18,000 per 500 kHz for use of the mobile satellite spectrum assigned by the Department. At page 1 of the Notice, the Department observed that global satellite systems will generally use a total of 2 to 30 MHz of radio frequency spectrum for communications between the subscriber stations and the space stations. Therefore, using a relatively modest 5 MHz of spectrum, a global satellite system operating in Canada would be required to pay an annual authorization fee of $180,000. Taken in isolation, that fee may appear to be justified. However, if the demonstration effect occurs, then a global satellite system could face comparable annual fees from some 180 countries. In this example, if the 180 countries followed the example set by Canada, then the $180,000 annual fee would become $32,400,000 on a world-wide basis. With an operating lifetime of ten years for the satellites used to provide the service, this annual fee would ultimately become some $324 million. It will be seen that the annual authorization fee suddenly attains a huge economic significance. In this respect, it is important to emphasize that the example was based upon a relatively modest utilization of five MHz of radio frequency spectrum. In a MSS system that might require 30 MHz of radio frequency of spectrum, the ten year lifetime expenditure for authorization fees alone would approach $2 billion approaching the capital cost of the entire global satellite system. As noted, these fees will ultimately be borne by consumers of the service. As a result, the fees, at whatever level, will lead to an artificial and excessive increase in the permanent charge to consumers.

In conclusion, the imposition of spectrum access charges will have a significant effect on consumers who ultimately pay all regulatory costs. The spectrum access charges will distort the market's determination of shares going to different competitors and, in the long run, they will have an important impact on success in the market place. These determinations should be left to the market and not be unduly prejudiced by regulation. For all of these reasons, ICO respectfully submits that Industry Canada should reconsider the fundamental basis of the Notice and make a determination that spectrum access charges will not be imposed upon the Canadian MSS service providers.

In the alternative, if the Department is not prepared to make such a determination, then ICO has the following comments on issues raised in the Notice.

1. The Impact of the change in Licensing Approach

ICO has a number of concerns regarding the impact of Industry Canada's spectrum licensing proposal on the provision of global satellite service in Canada. As indicated above, ICO endorses the principle of an open, competitive and market-based approach to the regulation of the global satellite industry world-wide. ICO has serious concerns, however, regarding Industry Canada's proposal to license the utilization of 500 kHz increments of spectrum at a prescribed annual fee, irrespective of the number of subscriber earth stations utilizing such spectrum, a licence fee "relating only to the value of spectrum used to provide mobile satellite services in Canada".

In contrast with the current systems described in the Notice, whereby the Minister of Industry issues radio licenses authorizing the operation of subscriber radio stations, the ancillary gateway and telemetry, telecommand and control (TT&C) earth stations, the proposed flat spectrum access charge would severely distort market forces in the nascent Canadian mobile satellite services industry through the imposition of an arbitrary spectrum access fee.

Such a fee, which under the proposal would be payable annually, would discourage investment in the industry and discourage new entrants from establishing operations in Canada. The disincentive to establishing Canadian mobile satellite operations is likely to be magnified by the fact that no similar spectrum access charges are yet levied for the utilization of such spectrum in key markets such as the United States, and the United Kingdom. Such a discrepancy between spectrum access charges could cause service providers to exit or bypass the Canadian MSS market altogether. Given the ITU rules applicable to the worldwide use and allocation of spectrum, this would render Canadian radio spectrum for MSS above 1 GHz worthless, resulting in a waste of a national resource.

Thus, far from encouraging competition among service providers, and between different communications technologies, which are among the policies adopted by the Canadian government as part of its Information Highway Policy, the proposed spectrum access charge is likely instead to foster a duopoly or monopoly among satellite service providers in Canada and disadvantage such service providers relative to other service providers in the communications industry sector. At worst, the proposed spectrum access charge could discourage service providers from offering such services in Canada.

In the event Industry Canada determines that an access fee is appropriate, ICO submits that any of the following market-based approaches would be a more appropriate basis on which to set the charge:(i) a blend of average and marginal costs; (ii) a charge based upon a per-subscriber or minutes of usage fee; or (iii) a variation of the under 1 GHz MSS spectrum access charge.

On the basis of the likely negative impacts outlined above, ICO submits that Industry Canada should reconsider the proposed spectrum access fee model for the regulation of mobile satellite services utilizing spectrum above 1 GHz.

2. The Appropriateness of the Proposed Annual Fee

ICO has a number of concerns regarding the amount of the proposed annual spectrum access charge of $18,000 per 500 kHz. These concerns relate both to the appropriateness of the fee itself and the process pursuant to which interested parties have been asked to submit comments. These concerns are outlined below.

(a) Amount of Fee

ICO submits that the proposed spectrum access charge is arbitrary and, as a result, inappropriate. The inappropriateness of the proposed fee is demonstrated by a comparison between the access costs for comparable radio frequency spectrum as well as a comparison between the proposed access cost as an input and the underlying capital costs of MSS as a whole.

ICO would also note that Industry Canada has not provided an economic rationale justifying the amount of the proposed spectrum access charges. It is significant to cross reference the Department's Framework for Spectrum Auctions in Canada (DGRB-002-98). At page 2 the Department noted the international regulatory regime and the level of international co-ordination applicable to global satellite services and indicated that "auctions are not an appropriate spectrum assignment methodology" for such systems. The Department also agreed with a significant majority of respondents who advised that in no circumstances should existing licence fees be adjusted based on auction results.

A comparison between the spectrum access charges for mobile satellite services using spectrum below 1 GHz pursuant to Industry Canada Notice No. DGRB-001-97 and the charges proposed in the Notice confirms the inappropriateness of the charge proposed in the Notice. Assuming the average service provider utilizing radio frequency below 1 GHz utilizes 2.5 MHz of spectrum, such a service provider would pay an annual spectrum access charge of $28,500. In contrast, assuming a service provider utilizing spectrum over 1 GHz is authorized to utilize just 5 MHz of spectrum, an extremely conservative estimate in view of the Notice, which states such providers will generally use between 2 and 30 MHz, the annual cost would be $185,000, a figure six and a half times the cost paid by the service provider utilizing spectrum below the 1 GHz Range noted above.

The inappropriateness of the proposed fee is also demonstrated by the worldwide implication of such a proposal which has been discussed above.

(b) Process of Determining an Appropriate Fee

ICO wishes to comment briefly on the process by which the spectrum access charges are being determined.

ICO notes the Cost Recovery and Charging Policy ("the Policy") issued by the Treasury Board of Canada Secretariat in April 1997, which applies to Industry Canada by virtue of section 2 of the Financial Administration Act. Among the principles reflected in the Policy are: (i) departments must undertake meaningful consultations regarding the setting of fees; (ii) departments must identify and explain clearly how charges are determined, and (iii) departments must follow appropriate costing and pricing practices.

It is submitted that the fee setting process in this proceeding fails to satisfy these requirements to the extent that, among other things, it is not possible on the basis of the information provided in the Notice, for a prospective spectrum user to ascertain the basis and hence the appropriateness of the proposed fee. This is in contrast with previous Industry Canada spectrum fee-setting consultations, such as Fixed Radio Systems and LMCS in the 28 GHz Range.

3. Suitability of 500 kHz Bandwidth Blocks

ICO submits that the selection of minimum bandwidth of 500 kHz with increments of 500 kHz appears to be an appropriate basis for assigning radio frequency spectrum to mobile satellite service providers.

4. Fee Reductions for Sharing of Common Frequency Bands

While some degree of prorating may be desirable, ICO notes that its technology is not capable of enabling it to share bands of radio spectrum with other mobile satellite service providers. ICO is therefore not directly affected and will not comment on this particular aspect of the proposal.

Conclusions

ICO submits that the proposed spectrum access charges will unduly and irreparably distort the MSS market in Canada and on this basis alone, Industry Canada should determine not to impose such charges upon Canadian service providers.

Alternatively, if the Department considers such fees to be appropriate for MSS providers ICO urges Industry Canada to reject the arbitrary flat fee approach proposed in the Notice and to adopt an approach to establishing such spectrum access charges reflecting costs relating to the spectrum utilized and the access charges for spectrum utilized by MSS operating at frequencies under 1 GHz.

Yours sincerely,

ICO Global Communications (Canada) Inc.

Francis D. R. Coleman
Director, Regulatory Affairs
North America

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