Preamble and methodology (ARCHIVED)

• Some policy assumptions
• The state of international policy
• Methodology

1. This assignment derives from an output agreement between the Minister of Communications and the CEO of the Ministry of Economic Development. Output 1.2: Broadcasting and Radio Spectrum Policy Advice lists on the work program a Report to the Minister on the adequacy of competition safeguards in relation to radio spectrum, including the operation of secondary markets, by 30 June 2003. The focus is in competition policy safeguards, i.e. mechanisms in the realm of competition policy and law that enhance competitive outcomes.
2. Competition policy and safeguards are generally directed towards solving one particular type of market failure that derives from an asymmetry in market power. As we discuss in this report, competition policy can also be about promoting competition - mostly as an offset to pre-existing market dominance issues, but sometimes in new markets to create a highly competitive market as an objective of public policy.
3. We also take the view that there are many other types of market failure that may exist in a market and many of them are unrelated to misuse of market power, but have the unwitting effect of enhancing the market power of dominant incumbents, giving the appearance of a failure of a competitive market. All of these issues need to be addressed properly in order for the market to function correctly. Some types of market failure induce anti-competitive outcomes and the reaction is sometimes to apply competition policy measures to the market failure, rather than identifying and solving the underlying structural issues.
4. Some of the content of this review may appear at first glance to deal more with spectrum management (i.e. structural issues) than of a review of spectrum allocation and trading and competition policy safeguards. However, we firmly believe that this content forms an essential part of this review because of the material impact that these matters can have on any overall framework for spectrum allocation and trading. We are also concerned at the anti-competitive asymmetries that the current market structure promotes. For example, the success of any market is fundamentally affected by product definition, availability of supply and information and therefore elements of the report deal with these issues at a fundamental level.
5. We also reiterate the importance of treating the disease rather than the symptoms. We observe that competition policy mechanisms are often applied as a fix to observed symptoms of market imperfection, whereas the source of that imperfection may emerge from other aspects of the design of the market. To ensure rigour and avoid this trap, we have started with fundamental issues about the market for spectrum and we then work towards recommendations to facilitate the market before turning our minds to specific competition policy issues.
6. To illustrate our concern, we found a compelling example of a market impediment at the very beginning of this assignment when we sought information from the MED about management rights and licences. We found we could only obtain an "extract" of the Register of management rights and we could not obtain any on-line access to the database of licences. We note and support the efforts of the MED to correct this deficiency in parallel with our study. However until this process is effectively completed, we believe that this simple absence of information in the market place has a distortionary and anti-competitive effect. Well resourced incumbents revel in these sorts of information asymmetries, because only they have the capability to build their own data sets. We found many other examples of information asymmetry, market dysfunction and misdirected design which seem to have created unwitting anti-competitive asymmetries in favour of incumbents that would not be directly addressed by traditional competition policy measures.
7. Therefore in addressing our assignment, we start first with an analysis of the product as described in the statutory framework to establish whether the design of the product could be improved to favour a more open and contestable market.
8. We then look at primary allocation mechanisms and address some of the issues we have observed there in relation to allocation design before looking at the way that competition law and policy is addressed in primary allocations.
9. Thirdly we examine the secondary market and ask simple questions such as is there a demand for the secondary market, what sort of market should it be and how can systems be better designed to promote market activity.
10. We then look at competition safeguards and the most appropriate mechanisms for promoting competitive outcomes in the environment we have described.
11. Finally, we note some of our observations about institutional matters and how these might be improved to facilitate the performance of the market.
     

Some policy assumptions

12. In preparing this report, we are cognisant of some policy assumptions that generally guide the direction of our recommendations. We note that a different set of policy assumptions might imply an entirely different set of recommendations.
13. Our assumptions include:
    1. that the New Zealand Government believes that properly functioning markets facilitate optimal resource allocation in preference to central Government planning and management;
    2. that spectrum is a commodity that is open to being allocated within a market model - we support this assumption in a limited way only because there are many examples where allocation by market is inappropriate;
    3. that markets fail and there can be a legitimate public interest in state intervention to correct market failures, and such intervention includes, as a subset, the issue of competition policy;
    4. that the New Zealand Government tends strongly towards general market regulation as opposed to industry specific regulation, although we note the existence of telecommunications specific measures contained in the Telecommunications Act; and
    5. that the MED's contribution towards New Zealand Government Goals includes the aim of actively promoting and enabling a higher rate of sustainable economic development and an improvement it its position relative to other OECD economies.¹

 
The state of international policy

14. While in this report, we make many recommendations for improvement, we wish to acknowledge the very high state of advance that is evident in the New Zealand model of spectrum management. New Zealand was a pioneer in market based approaches to spectrum management and it leads the world with Australia in the deployment of these techniques.
15. No other country than Australia has gone as far as New Zealand in promoting a rights model combined with technology neutrality. For example, it was not until late 2002 that the US began to incorporate elements of this framework. The US continues to this day to apply a largely centrally planned model of spectrum management that assumes the primacy of the FCC.
16. The United Kingdom, once a source of innovation and leadership is now substantially behind and still mandates the use of particular bands to specific purposes. Such a policy has come under a lot of strain recently in the 3G bands, where the companies that won the rights actually have higher valued current uses for that spectrum than 3G mobile telecommunications, yet centralist regulation inhibits this deployment.
17. All through Europe, we observe regulators clinging to centrally planned models of spectrum management that abhor the idea that people may want to use spectrum for different things than those envisaged by the central planners. There is anecdotal evidence in abundance of strain on central planning models of spectrum management, and to us, the solution to these strains is the deployment of a property-like rights model.
18. New Zealand and Australia have already implemented pseudo² property rights models and are well placed to meet the challenges confronting telecommunications development. These challenges arise mainly from advances in technology that outpace the capacity of central planners to replan spectrum for different uses.
19. The New Zealand approach to spectrum management in policy and principle is substantially ahead of nearly every other OECD country practicing advanced spectrum management. In our view, only one other country has gone further in terms of theory, and then only marginally, and that is Australia. The advantages of the Australian system relate primarily to the definition of rights in a way that is more conducive to market activity. This is because the model in Australia was specifically designed from the ground up to facilitate trading and market determination of spectrum use, whereas we observe from our interviews and contemporary practice that the New Zealand approach is based more on facilitating private band management [they are described in law as "management rights"] as an alternative to Government performing this function.
20. We therefore see little benefit in making detailed comparison with other OECD nations. Recent reviews of other OECD countries spectrum policies³ have strongly supported moves towards predominately market based technology neutral regimes similar to those in New Zealand and Australia. In our view Australia and New Zealand are the world leaders in this area.
21. Whatever the strengths of the model, we believe that the principles of good policy embody a vision of continuous improvement that derives from a cycle of review, public debate, new policy, implementation followed by further periodic review.
22. We see this project very much in the context of post-implementation review and a "health check" following implementation of enhancements to the system undertaken in the late 1990s.
     

Methodology

23. The Terms of Reference⁴ for this report deal with a number of matters of public policy. As a result, our approach has been to undertake some initial background research to validate our initial views and then in consultation with stakeholders in Government and industry explore these views and test them for reaction.
24. In our initial preparations we reviewed:
    1. the current policy and statutory framework for a market in spectrum rights including initial allocations by reference to reports and statements available from MED and a complete review of the legislation;
    2. the recent history of market-based allocation from our observations and experience and from the records on the MED web site;
    3. policy statements surrounding market and competition policy issues and the basis for that advice;
    4. the outcomes of primary allocations assessed against Government expectations as expressed in policy statements;
    5. review of any post-implementation reviews of allocations;
    6. complaints, especially from industry, regarding the conduct of initial market allocations and regarding any aspect of a potential secondary market that might constrain its application;
    7. concerns raised by industry about the definition and efficacy of the rights that are prescribed; and
    8. contemporary international developments in these areas, in particular Australia, the US and the UK.
25. We met with officers of MED in Wellington for two days of briefings with different parts of the organisation and with officers of the Commerce Commission. Our first visit of two days gave us an opportunity to meet with senior managers from those areas of the Ministry that are associated with spectrum allocation and markets to obtain an informal view of what is happening in New Zealand and the dynamics of the policy issues as perceived by Government.
26. After preparing an initial draft of set of opinions, we returned to New Zealand for a further two days, meeting those industry representatives who replied to our request to meet. We met a number of players from all parts of the New Zealand radiocommunications user community during meetings in both Auckland and Wellington. We used these meetings to gather the views of industry on the current state of matters such as statutory framework, performance of relevant agencies, product definition, allocation of the product, secondary market activity and competition and to test some of our ideas.
27. We would especially like to thank the following parties for their valuable input:

• Prime TV;
• Vodafone;
• Econet;
• Commerce Commission;
• TelstraClear;
• New Zealand Television Broadcasters Council;
• Telecom New Zealand;
• Buddle Findlay;
• Radio Broadcasters Association;
• CanWest; and
• Walker Wireless.

28. We did not use a formal surveys or similar instruments, but rather we attempted to target those people who might have been able to provide useful contributions, and approach them directly. We are grateful for the assistance and substantial advice provided by MED, in particular Messrs Karl Simpson and Padraig McNamara, and for the well considered and robustly presented views of a number of other people within MED.
29. We closed our second visit to New Zealand with a briefing of MED officials covering some of our initial conclusions.
30. We then commenced detailed drafting of our report and submitted an advanced confidential draft for consideration by MED around the beginning of March. In response to that draft, MED provided a number of comments, suggestions and clarifications, as well as some further material for us to consider.
31. We are also indebted to Ms Beck Seddon for reviewing our draft report and making many helpful suggestions for improvement.
32. This final report represents our considered view of the state of the market for radiofrequency spectrum in New Zealand and the associated competition framework. Notwithstanding our substantial list of recommendations across the full breadth of our brief, we see that New Zealand has already developed a framework placing it at or near the forefront of international best practice.
33. We hope that the report serves to stimulate debate and further a dynamic and effective market for spectrum property rights.

 ¹Ministry of Economic Development, Statement of Intent 2002-2005, G.46 SOI 2002, pages 10-11. 
 
²The Australian model is certainly a pseudo-property rights model and it is moot whether the New Zealand model, despite its heavy reliance on Torrens Title concepts, is a true property rights model in a way that land is. While the land analogy is sometimes useful in describing an abstract like spectrum, it does have serious limitations and too much reliance on the land analogy and its simple definitional concepts can lead to problems in spectrum management, especially in relation to management of interference artifacts such as harmonics and intermodulation products where the effect may be perceived at some significant offset from a "boundary", even when boundary conditions have been met. 
 
³"A number of other national regulatory authorities, including Australia, Canada, New Zealand, and the USA, have begun to introduce a more generic approach to licensing access to radio spectrum, motivated by the desire to enable flexibility and innovation in spectrum use. Of these, the Australian approach is the most fundamental reform of traditional spectrum management methods" Review of Radio Spectrum Management, Professor Martin Cave, Department of Trade and Industry (UK), March 2002, page 108. 
 
⁴A copy of the Terms of Reference can be found at Market Dynamics PTY LTD.