Introduction

The Ministry of Economic Development (the "Ministry") is currently developing the process for re-allocation of current spectrum rights on their expiry. The underlying policy may be summarised as:

• Spectrum rights are to be initially offered to the incumbent rights-holders;
• The price at which the spectrum rights will be offered to incumbents will be set by a formula, based on the original rights price escalated by a constant factor per annum;
• If the existing rights holder does not wish to pay this price, the rights will be offered at open auction.

The formula and escalation factors for calculating renewal prices have been provided to the Ministry by Covec.¹

The Ministry is also considering averaging the renewal prices, so as to simplify the process of reallocating the licences. The Ministry has commissioned PricewaterhouseCoopers to develop a methodology for this averaging process. The purpose of this paper is to propose a basis for averaging within the constraints of the pricing approach developed by Covec for the Ministry. Particular constraints include:

• The escalation factor applied to licences remains the z factor calculated by Covec, on a national basis for each relevant market (e.g. radio broadcasting).
• The z factor is adjusted for regional differences by reference to relative regional and national population growth rates (as presented in Covec's paper).
• Averaging of licences is to take place between licences with similar geographic coverage and transmitter sites.
• The discount rate applied to calculations is 11%, as recommended in the Covec paper.

Please note the statement in Annex 1 regarding the preparation and purposes of this report.

1 Development of price setting formulae for commercial spectrum rights at expiry Covec, 9 October 2003