NERA Reports on Ofcom's Consultation on Annual Licence Fees for 900 MHz and 1800 MHz Spectrum

Tue Sep 16 16:57:00 EDT 2014
By Richard Marsden, Jonathan Falk, and Jonathan Pike; and Tomas Haug, Philipp Kröger, and Alexander Malanyuk

NERA experts drafted two separate reports in support of Telefónica UK in response to a consultation by Ofcom, the UK communications regulator, on setting annual fees for radio spectrum. Telefónica UK asked NERA to review Ofcom's revised proposals to determine annual license fees (ALF) for the 900 MHz and 1800 MHz spectrum bands, which incorporate new information on the market value of spectrum inferred from the 2013 UK 4G spectrum auction.

The first report, Review of Country Benchmarks used for Setting Lump-Sum Values for UK 900 MHz and 1800 MHz, led by Senior Vice President Richard Marsden, focuses on Ofcom's approach to using European country benchmarks to derive an estimate for the relative value of spectrum across bands used to deliver mobile broadband. NERA's report sets out a "top-down" econometric approach to test for probable outliers in Ofcom's sample of country data points. Having identified the potential outliers using a statistical approach, NERA then undertakes a "bottom up" qualitative analysis of these country data points to determine if the evidence supports the conclusion that they are outliers. The report concludes that Ofcom's analysis places undue weight on high price outliers, leading Ofcom to overstate the value of 900 MHz and 1800 MHz.

The second report, Deriving ALFs from Lump-Sum Valuations, led by Associate Director Tomas Haug, addresses Ofcom's discount rate used for converting lump-sum payments into annuities. Ofcom seeks to convert its estimate of the lump-sum spectrum value into annuities using its discount rate estimate while taking account of inflation and tax effects. NERA's report demonstrates that Ofcom's revised proposals still contain a number of conceptual errors, including the use of long-run averages to calculate the discount rate and failing to make appropriate adjustments for liquidity and inflation risk in the calculation of ALFs.

NERA’s reports are now available for download on the Ofcom website.