UHF2 realignment study - Ofcom Licensing

7.2.2 Practical issues in assessing the costs and benefits of band alignment
In practice, the process of conducting a cost-benefit analysis of various band alignment
options involves estimating the monetary value of initial and ongoing expenses (costs)
caused by the market intervention. These costs are then weighed against the expected
return (benefits) of the market intervention to derive the net-benefits. The total net benefits
are then compared against the ‘do nothing’ scenario (the base case), as well as to the net-
benefits that result from other market interventions.
Constructing robust measures of the costs and benefits of specific actions is often difficult.
This is because the size of many of the costs and benefits can depend crucially on a number
of future unknowns, or involve making judgements on the consumers ‘willingness to pay’ or
the producers ‘willingness to supply’.
Methods to try to estimate total benefits include using survey methods such as asking
consumers how much they would be willing to pay for a certain service or by drawing
inferences from market behaviour, such as revealed preference techniques.
In order to simplify the calculations, many cost-benefit studies assume that the supply curve
is relatively flat. With a relatively flat – or horizontal – supply curve, there are only marginal
changes in the size of producer surplus (or none if the supply curve is horizontal) which
allows the analysis to focus solely on estimating the size of changes in consumer surplus as
it can provide a reasonable measure of the total change in social welfare.
In addition, we note that band alignment may lead to the freeing up of additional spectrum
that will facilitate the provision of new services. In this case, we are then interested in
estimating the entire value of the consumer and producer surplus (rather than change in
surplus measured for existing services). The value producers are willing to pay for spectrum
is a proxy of the magnitude of the social welfare benefits that accrues as a result of band
alignment.
Another practical issue to consider is to ensure that all relevant costs and benefits are
assessed on a comparable basis. To do this, a discount rate is used to compute all relevant
future costs and benefits in present-value terms. This is because the costs and benefits may
accrue both now and into the future. Our analysis will use the UK Treasury discount rate
estimates.
i. How accurate is cost-benefit analysis?
The accuracy of cost-benefit analysis studies are only as good as the quality of the data
used in the analysis. Many of the drivers of benefits and costs are based on estimates of
future unknown events, such as the potential number of consumers willing to purchase the
service once the intervention has been implemented. Hence, there are inherent dangers in
predicting finite net benefits or costs. Usually, sensitivity analysis is deployed to check the
impact of particular factors. As a result, it is normal to present a range of potential outcomes.
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