Study of Market-based Exclusive Spectrum Rights

1. Executive Summary

The objectives of this report are to provide Industry Canada with a better understanding of international trends in adopting market-based exclusive spectrum rights and the associated benefits. Comparisons with current Canadian policy and practice are made in order to assist Industry Canada in the policy formulation process.

The main trends occurring are the introduction of market-based mechanisms to manage spectrum allocated and assigned on an exclusive-use basis, allowing such exclusive rights to be traded, and permitting increased flexibility in the choice of technologies and services offered. Major changes have already occurred in the United States, Australia, New Zealand and the United Kingdom.

In Canada the rationale for market mechanisms is clearly supported in the Spectrum Policy Framework document (June 2007). However, it is evident that the legal means are not in place to facilitate establishing robust flexible secondary markets (e.g., without both parties in secondary trades having to seek specific Ministerial approval).

We have three main recommendations to assist Industry Canada in its policy formulation process:

  1. Industry Canada should accelerate the pace of reform of spectrum management in Canada by specifically adopting policy directives which give greater force to the implementation of secondary markets namely by enabling spectrum trading along with defined, flexible user rights. Tradable licences where they apply should become fully transferable (primary users may replace each other); and sub-leasing/sub-division should be possible. Ministerial approval for every trade should not be required and should be replaced by a self-certification process.
  2. It is our view that the spectrum manager should be constituted as an independent regulatory agency responsible only for the regulation of the spectrum resource and subject to direction from the federal government as to the objectives of spectrum management, but with the power to choose its own means of accomplishing these objectives.
  3. The Department should develop a two-phased implementation plan with annual milestones that detail specific actions to be taken as part of the transition. This will be necessary to ensure that sufficient spectrum is made available at the same time to avoid congestion, hoarding and allegations of unequal treatment.

What is crucial is the establishment of a detailed plan with milestones and annual reviews against these milestones.

Summary of Recommendations

In this section, we summarize recommendations to Industry Canada to assist in the policy formulation process. Detailed recommendations are to be found in Section 6 of this report.

We have three main recommendations which concern: (1) policies related to market-based exclusive spectrum rights; (2) changes to the institutional framework for spectrum management; and (3) the implementation of spectrum trading. For each of the three main recommendations more detailed guidance is also provided.

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1. Spectrum Policy Changes

Industry Canada should accelerate the pace of reform of spectrum management in Canada by specifically adopting policy directives which give greater force to the implementation of secondary markets, namely by enabling spectrum trading along with defined, flexible user rights.

Tradable Licences

Tradable licences, where they apply, should become fully transferable (primary users may replace each other), and sub-leasing/sub-division should be possible. Ministerial approval for every trade should not be required and should be replaced by a self-certification process under which those involved in the trades self-certify that they have met all of the government requirements (which could be enumerated as a check list).

Service and Technological Neutrality

Industry Canada should ensure that licensing policies embrace service and technology neutrality with clear meaning and eliminate all arbitrary service- and technology-based restrictions.

Technical Definitions for Spectrum Usage Rights (SURs)

Industry Canada should move toward adopting spectrum usage rights that provide clear and unambiguous technical characterization of what is allowed under the rights so as to minimize ambiguity regarding what interference protection and obligations are associated with the rights. The OFCOM Spectrum Usage Rights (SUR) proposal and the space-centric approach advocated by Futurepace Solutions building on the Australian model offer useful guidance on how this may be accomplished. While certain details remain to be worked out, both proposals have the merit of closely approximating the goal of technical neutrality while preserving adequate protection against interference for the exclusive licensee and for adjacent licence holders.

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2. Changes to the Institutional Framework for Spectrum Management Structure

It is our view that the spectrum manager should be constituted as an independent regulatory agency responsible only for the regulation of the spectrum resource and subject to direction from the federal government as to the objectives of spectrum management, but with the power to choose its own means of accomplishing these objectives. Such an arrangement removes the details of spectrum management from the political arena.

In the Canadian context, we see advantages in establishing the spectrum regulator in the first instance as a stand-alone body, with a focus on achieving the transition to a market-based method of spectrum management, but subject to review after about five years.

Focus on Interference Management

The focus for the spectrum management organization in a market allocation-based approach should be primarily on interference management. This should be clearly indicated in the framing documents that establish the spectrum management organization.

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3. Implementing Spectrum Trading and Market-based Exclusive Spectrum Rights in Canada

The Department should develop a two-phased implementation plan with annual milestones that detail specific actions to be taken as part of the transition. This will be necessary to ensure that sufficient spectrum is made available at the same time to avoid congestion, hoarding and allegations of unequal treatment.

Our recommendations begin with a discussion of the frequency bands involved in each phase.

A Two-Phased Approach

Phase 1

In the first phase, there are three main blocks of spectrum which are included:

The first group of spectrum to become fully and flexibly tradable in Phase 1 should be spectrum which has already been assigned through an auction.

The second group includes spectrum for which licences, which today would be subject to an auction process, were awarded using a comparative process that predates the Radiocommunication Act of 1996 when the legal basis for auctions was established. All such spectrum should all be treated in the same manner. This should include cellular and broadcasting spectrum.

The third group includes all other frequencies/bands allocated to space or terrestrial services which are used for the commercial supply of telecom services to the public, including trunked radio frequencies, paging frequencies, and mobile telephony frequencies.

Phase 2

In the second phase, where planning should commence soon, there is a significant part of the spectrum used to provide services in the public interest which should be made tradable, thereby permitting the disposal of any permanent or temporary surpluses.

Furthermore, organizations producing services in the public interest should be required to anticipate the need for more spectrum and be responsible for acquiring (and given the means to acquire) the necessary spectrum by going to the market. Government use of spectrum utilized to provide services similar to those provided by the private sector should be, at a minimum, subject to prices reflecting the market price or opportunity cost and such spectrum should trade in secondary markets.

Long Period but Fixed Licence Term Limits

We have considered both very long-term licences, which safeguard investment in assets over a term of 30–40 years, and long-term licences for, say, 15–20 years, which give the regulator the opportunity to recover spectrum at intervals when it is desirable to do so.

On balance, very long-term arrangements are more favourable on the grounds that they give better investment incentives and involve a clearer definition of licensee's rights. However, departures from this may be appropriate in specific bands.

Public Information (Spectrum Database)

Tradable markets will be facilitated by a database which should include publicly available information on the terms of all licensed spectrum and any sub-leases also in force. The database should register the location and frequencies used by transmitters and receivers which may be entitled to interference protection (see further discussion below) as well as licensee information and financial information on trades made.

Transitional Issues Relating to Windfalls

We recommend that existing licensees be allowed to benefit from the greater freedoms associated with the liberalization of the spectrum management regime, essentially on the grounds that trying to unpick the details of capital gains made in individual cases would prove time-consuming and probably ultimately impossible. It is also the case that all Canadians should benefit from the cheaper services and innovations associated with spectrum markets.

However, we recommend a separate treatment of spectrum freed as a result of the switch-off of analogue terrestrial broadcasting services. Digital switch-over is a co-ordinated government policy which imposes costs on households with TV sets, as well as on broadcasters, in the interest of greater spectrum efficiency. Providing existing broadcasters are supplied with the same or similar transmission capacity in the digital environment, we recommend that the remainder of the spectrum be handed back to the government for auction to provide a 'digital dividend' for all Canadians in the form of new highly valued services, auction revenues and perhaps compensation to consumers for having to switch from analogue to digital receiving capability.

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