Study of Market-based Exclusive Spectrum Rights

6. Detailed Recommendations

In this section, we make several recommendations to Industry Canada to assist in the policy formulation process. We have three main recommendations which concern: policies related to market-based exclusive spectrum rights; changes to the institutional framework approach for spectrum management; and implementation of spectrum trading and market-based exclusive spectrum rights in Canada. For each of the three main recommendations more detailed guidance is also provided.

6.1 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 flexible user rights and defined spectrum user rights. Current policy statements should be improved by specifying priorities associated with spectrum trading: strategies for managing the transition; implementation of a spectrum trading regime; and, the identification of clear targets (dates and spectrum bands) and related measures.

Tradable Licences

Where tradable licences apply, they 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 in which those involved in the trades certify that they have met all of the government requirements (which could be enumerated as a check list). This documentation could feature in the public information database and could be challenged not only by the Minister but by other parties. Auditing could also be used to ensure compliance.

Service and Technological Neutrality

Service neutrality means that the choice of service offered via spectrum usage rights is made by the rights holder. Technological neutrality means that there should be minimal constraints applied while ensuring that interference is appropriately dealt with.

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

Technically definitions for Spectrum Usage Rights (SURs)

The goal of technical and service neutrality will best be achieved if the spectrum usage rights are established on a firm technical footing. The approaches of a spectrum space defined in technical terms to ensure that the licensee does not cause interference for adjacent licensees advocated in slightly different forms by Matheson (NTIA)/OFCOM and Whittaker/Futurepace (Australia) provide sound guidance on the general direction. However, there remain a number of details to work out. Industry Canada needs to engage in the discussion on technical definitions for spectrum user rights. The approach adopted by Canada will be complicated because of the need to coordinate spectrum planning with the United States.

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6.2 Changes to the Institutional Framework for Spectrum Management

It is our view that the spectrum manager should be constituted as an independent regulatory agency subject to policy 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.

Structure

It is debatable whether the duties of such an independent spectrum regulator should be combined with those of regulating competition and protecting consumers in downstream service markets. The UK has recently set up such a combined regulator (Ofcom) which regulates broadcasting, (wireline and wireless) telecommunications and spectrum. In Germany, regulation of spectrum is combined with regulation of telecommunications (and of other infrastructures), but separate from regulation of broadcasting. In Australia, spectrum regulation is combined with regulatory functions relating to broadcasting, but not to telecommunications. In yet other countries, spectrum responsibilities are entirely separated from the regulation of services.

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

On this basis the regulator would be able to focus primarily on spectrum interference management which entails defining exclusive spectrum use licence rights and protecting primary users' presumptive rights to exclude other users from occupying their spectrum and by regulating the necessary technical conditions.

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6.3 Implementing Spectrum Trading and Market-based Exclusive Spectrum Rights in Canada

With regard to transition issues, 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 bands involved in each phase.

A Two-Phased Approach

PHASE 1

In the first phase, where trading without Departmental approval and with defined flexible spectrum user rights would begin, there are three main blocks of spectrum included:

The first group in Phase 1 involves spectrum which has been already assigned through an auction becoming tradable. There should be transition features which permit market participants to plan adjustments as required.

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.

With respect to broadcasting spectrum, policy directions on the analogue to digital switchover are required. Broadcasters should be permitted to utilize sufficient spectrum to meet existing programming requirements using the new digital technology. Surplus spectrum following the switch from analogue to digital television broadcasting should be auctioned and become tradable in Phase 1.

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, mobile telephony frequencies, etc. These licence holders are usually known as radiocommunication carriers (defined in the Canadian Radiocommunication Regulations as "a person who operates interconnected radio-based transmission facility used by that person or another person to provide radiocommunication services for compensation.") or radiocommunication service providers (defined in the Canadian Radiocommunication Regulations as "a person, including a radiocommunication carrier, who operates radio apparatus used by that person or another person to provide radiocommunication services for compensation.")

PHASE 2

In the second phase for which planning should commence soon, there is a significant part of the spectrum used to provide services in the public interest and which should be made tradable permitting the disposal of any permanent or temporary surpluses. As well, organizations producing services in the public interest should be required to anticipate the need for more output 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, at a minimum, be subject to prices reflecting market price or opportunity cost but moreover should trade in secondary markets.

Government use of spectrum required to meet national security and international treaty commitments is not likely to become subject to market-based assignments.

Not all public sector users need to be on the same rung but it is reasonable to expect the reformed spectrum management regime to get all users up at least as far as the incorporation of spectrum valuation in major procurement decisions.

Long period but Fixed Licence Term Limits

The choice of the term duration for tradable and flexible licences involves making compromises between two desirable outcomes:

  • firstly, uninterrupted investment incentives for firms which avoid the emergence of disincentives to invest towards the end of a licence period for fear that investments in fixed assets whose lives go beyond the term of the licence may be stranded;
  • secondly, concern over the regulator's ability to influence or change downstream both spectrum use and the definition of spectrum user rights.

It must also be recognized that the nominal term of a licence may understate the licensee's legitimate and legally enforceable rights to continued use of the spectrum. As an extreme, traditional apparatus licences in the U.K. are annually renewable, but the custom and practice of almost automatic renewal imposes serious but vague constraints upon the regulator's freedom on action — vague because the extent of the rights have not been legally tested. New tradable licences formed out of existing licences in the U.K. are intended to be 15–20 years, and renewable. In Canada, licences have similar terms — 10 year duration and a 10 extension with a reasonable expectation of renewal.

The trade-off noted above between investment incentives can be resolved by giving the regulator, in the case of a very long licence duration, powers which can be exercised within highly specific conditions, to re-acquire licences perhaps by compulsory purchase subject to compensation. These powers might be exercizable in cases such as:

  • a security, defence or other national emergency;
  • a change in international agreements or treaties, e.g. a change in the ITU allocations; or
  • a need to redefine spectrum user rights to accommodate a new technology such as ultra wide band.

The mandatory acquisition of the spectrum under this last heading would have to be accompanied in all cases by i) a cost-benefit analysis and ii) a demonstration that the benefit of the technology could not be attained by ordinary commercial transactions among rights holders – in other words, by means of the so-called Coasian bargaining, by means of which advantageous exchanges are normally effected; a necessary condition for this would be presence of large transactions costs.

The alternatives we consider are therefore very long-term licences which safeguard investment in assets over a term of 30–40 years, or long-term licences for, say, 15–20 year, 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)

The ability of potential sellers and buyers (and regulators) to keep track of current licences is an important component of tradable markets facilitated by a database which should include publicly available information on the terms of all licensed spectrum and any sub-leases that are 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). Knowledge of the location of existing Tx's and Rx's (where feasible) will allow potential purchasers of rights to accurately model the existing interference environment they are seeking to enter and to enable them to properly assess the rights they seek to acquire.

Transitional Issues Relating to Windfalls

The transition to a property rights-based system of market allocation of spectrum requires a policy which responds to the prospect of windfall gains for holders of existing licences by addressing the question: should existing licensees benefit from the expansion of their rights in the direction of greater flexibility, or should the licences be re-issued via a new competitive process?

We have noted in Section 5 that granting rights to trade spectrum usage rights and to change the use to which a licence is used has an ambiguous effect on its monetary value; because the licensee has more flexibility, it goes up; because all licensees have more flexibility, it may go down if, in the status quo ante, the licensee were in receipt of monopoly rents.

For these reasons, 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 which spectrum markets allow.

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 or perhaps subsidies as in the U.S. for costs incurred by households.

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6.4 Conclusions

We believe that implementation should be in two phases. We do not believe that a "big bang" as described above is feasible in Canada. The first phase should begin with frequencies/authorizations used for the provision of telecom services (see Annex 2 for a clarification of definitions) and broadcasting services by both terrestrial and satellite technologies. What is crucial is the establishment of a detailed plan with milestones and annual reviews against these milestones.

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