NERA Further Report on Setting Discount Rates for Annual License Fees for Spectrum

19 May 2015
By Tomas Haug, Dominik Hübler, Philipp Kroeger, and Georg Arndt

NERA experts have drafted a report, on behalf of Telefónica UK, which reviews Ofcom’s latest approach to determine a discount rate to convert lump sum values derived from the results of European spectrum auctions into an annuity for the purposes of setting UK annual license fees (ALFs) for 900 MHz and 1800 MHz spectrum. The authors support Ofcom’s switch to a short-run approach to estimate the discount rate, in line with the recommendations in NERA’s previous report. However, they find that Ofcom’s attempt to estimate the degree of “risk sharing” between a mobile network operator and the government lacks a methodologically sound framework and generates implausible results. The authors outline how a real options framework could instead be used to obtain a robust estimate of the degree of “risk sharing.”

This report was one of a series of reports prepared for Telefónica UK, as part of its submission in response to Ofcom’s February 2015 further consultation on the determination of annual license fees (ALF) for the 900 MHz and 1800 MHz spectrum bands.

The report is now available for download on the Ofcom website.