NERA supported UK mobile network operator VMO2 throughout Ofcom’s 2024/25 review of annual licence fees (ALFs) for the 900 MHz, 1800 MHz, and 2100 MHz mobile spectrum bands. These fees, which are paid annually to His Majesty’s Treasury, constitute a significant cost for UK mobile operators. NERA authored two submissions, one on the approach for calculating the market value of the spectrum and another on the appropriate approach for converting lump sum values (LSVs) to annual fees. We also advised VMO2 on the content of their submission.

The NERA team provided expertise on the valuation framework for estimating LSVs and ALFs by evaluating a range of auction benchmarks, including historical UK auctions and relevant international data. The team analyzed adjustments for inflation (backward- and forward-looking), spectrum value dynamics over time, and market factors influencing spectrum worth.

An element of NERA’s work was the analysis of the inflation risk premium applied in the cost of capital calculations. NERA demonstrated adopting a higher inflation risk premium more accurately reflects market realities and the inflation uncertainties faced by licensees. This adjustment materially affects the discount rates used to value spectrum rights, thereby influencing the level of licence fees.

Ofcom ultimately accepted NERA’s recommendation to increase the inflation risk premium, stating “…it would be reasonable to assume a CPI inflation risk premium between 60 and 70 basis points in line with the range suggested by NERA/VMO2.” This led to a reduction in the calculated annual fees.