FINAL REPORT - Stakeholders - Ofcom

that produces overall revenue in excess of the NRA’s cost, where this can be justified on
the basis of ensuring optimal use of scarce spectrum resources.
There are two main approaches to determining spectrum charges, namely administrative
pricing and market-based mechanisms such as auctions. Administrative pricing can be
used in conjunction with beauty contests, since the scarcity tends to limit the number of
licences that can be offered; it may also be applied to services that are licensed on a first
come first served basis, such as private CSR maritime services, to differentiate between
congested and uncongested frequency bands or geographic areas. It should not be
applied to spectrum that has been auctioned.
The following sections provide a brief overview of administrative and market based
spectrum pricing concepts.
7.2.10.2 Administrative Pricing
In instances where spectrum is congested (i.e. demand exceeds supply), administrative
pricing offers an approach by which the value of the use of radio frequencies is taken into
account and reflected in spectrum charges, thereby encouraging users who have an
alternative to migrate to other technologies or frequencies. Under an administrative pricing
regime spectrum charges tend to be set with reference either to the cost of the next best
alternative technology or service, or to the level of profit that will be foregone if the user
ceases to use the spectrum. The purpose of administrative pricing is to ration demand for
spectrum in a way that promotes the economically efficient use of spectrum. The objective
is far more than the recovery of costs. (See also Section 2.5)
Administrative pricing may also be applied where there is no scarcity, by applying lower
charges as an incentive (potentially below cost) to utilise frequency bands and/or locations
that are not congested in order to encourage migration from congested bands or locations.
A similar approach can be taken to providing incentives to introduce more spectrally
efficient technologies. The term Administrative Incentive Pricing (AIP) is often used in this
regard.
Administrative pricing may be used both with "first come first served" and comparative
(beauty contest) approaches to licensing. A "first come first served" approach is typically
used for licensing of individual stations. Beauty contests have historically been the most
common approach to awarding network licences where demand exceeds supply.
7.2.10.3 Auctions
Auctions are mentioned here for completeness. Essentially an auction involves the
awarding of licences to those who bid the greatest amount in monetary terms. There are
many varieties of auction and their design is a specialised skill. However, in all cases it is
likely that certain pre-qualification criteria must be met to enable bidders to participate.
These may be limited to simply demonstrating that the bidder has the financial resources
to back up its bid, or may extend to meeting certain minimum service criteria or obligations
should a licence be awarded.
7.2.10.4 Hybrid approach
A hybrid approach combines elements of both auctions and administrative pricing, for
example by including a financial bid as one element of a beauty contest.
7.2.10.5 NRA Objectives in setting fees and charges
Part of the brief of this Study was to investigate countries' priorities in setting administrative
fees and spectrum fees / charges. The questionnaire included a request to evaluate the
relative importance of various parameters that might be taken into account in setting fees
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