Comment

Progress on broadcasting issues

Other important issues

Timing of policy confirmation

Next steps

Non-commercial spectrum rights

Progress on broadcasting issues

16. Work on proposals for radio services for young people was progressed by the Government throughout 2001. This included ongoing discussions with interested parties and the commercial broadcasting industry. In February 2002, Cabinet agreed to the establishment of a Youth Radio Advisory Group to provide advice to Ministers on radio services for young people [CBC Min (02) 3/6 refers].

17. On 18 March 2002, the then Minister of Broadcasting reported to Cabinet on progress on the implementation of a voluntary Code of Practice for local content on commercial radio. Cabinet noted the Minister's advice that the conditions set by Cabinet for a final decision on the policy for dealing with commercial spectrum rights at their expiry had been satisfied with respect to youth radio services, and that a public announcement of the Code of Practice would satisfy these conditions with respect to local content on radio [POL Min (02) 4/9 refers]. The Code of Practice for New Zealand Music Content was publicly launched by the then Minister of Broadcasting on 26 March 2002.

18. In addition, on 12 June 2002, the Cabinet Policy Committee noted that the then Minister of Broadcasting and other interested Ministers had met with the Youth Radio Advisory Committee on 11 June 2002, and that the then Minister of Broadcasting was satisfied with the progress being made towards finalising a decision on providing radio services for young people [POL Min (02) 14/1 refers]. Accordingly, both conditions set by Cabinet have been met, clearing the way to confirm the interim decisions on the policy for dealing with commercial spectrum rights at their expiry.

19. Notwithstanding Cabinet Policy Committee's decision in December 2002 to defer further consideration of the proposed policy on expiry of rights until further decisions have been made on radio services for young people [POL Min (02) 22/5 refers], it is now considered appropriate to decouple youth radio and expiry policy, in light of the widespread economic impact of the latter and the disadvantages of ongoing delay in finalising expiry policy.

Other important issues

20. In deciding the final policy for the reallocation of spectrum rights, it is important that any possible perceived downsides to the policy are addressed. Possible criticisms of the proposed policy (each of which is addressed below) include that it:

• may set a precedent for the future allocation of spectrum rights;
• would not leave sufficient spectrum available to the Crown to meet future social objectives;
• would not allow new users to bid for spectrum at expiry;
• would not allow spectrum to be allocated to new or emerging uses; and
• does not provide rightholders with adequate certainty as to whether they will retain spectrum rights or not.
  

21. Some stakeholders may consider that the decision to "roll-over" spectrum rights to existing rightholders may set a precedent for all future decisions on the expiry of spectrum rights, and therefore effectively amounts to allocating rights in perpetuity. The policy addresses the first expiry of the full range of commercial spectrum rights (for example, the approach to rolling over UHF licences in 2010 would be the same as the approach to rolling over VHF licences in 2015). However, deciding to reallocate rights to existing rightholders for an additional fixed period of 20 years is very different from allocating those rights in perpetuity. Before rights start to expire for a second time i.e. from 2030, a decision would need to be taken on the preferred approach to reallocation. While rightholders then might point to the policy adopted for the first reallocation as a precedent, there would be nothing to stop the Government of the day from adopting a different approach to the second or subsequent expiry of rights should this be considered appropriate. It follows that all current rightholders will obtain, under the proposed policy, is a presumption of rollover for a further 20 years, and not a presumption of (let alone any legal entitlement to) indefinite rollover.

22. Then there is the question of whether the policy, by creating a presumption that rights in private hands will be rolled over to incumbents, would leave insufficient spectrum available to the Crown to meet future social objectives. Answering this question requires an assessment of Crown and privately owned spectrum within the rights regime, and of spectrum outside the rights regime and which therefore would not be subject to the expiry policy. The Crown holds all the management rights in the AM and FM sound broadcasting bands, as well as in the VHF and UHF TV bands. Commercial spectrum licences within these bands would normally be rolled over under the proposed policy. However, within these bands there are already reservations supporting a wide variety of non-commercial services including Radio NZ and Television New Zealand, Access radio and other non-commercial radio including future national Māori and Pacific Island FM networks, regional UHF-TV broadcasting, iwi radio and, potentially, Māori television. In addition, the Crown has in the past two years reserved spectrum suitable for telecommunications at 2GHz in favour of the Māori Spectrum Trust (25% of available 3rd generation mobile spectrum), and spectrum at 3.5GHz (18% of available spectrum) for local providers of wireless broadband services [CBC Min (01) 5/6 refers].Top

23. Aside from non-commercial and Māori broadcasting, the other main social objectives provided for through the use of radio spectrum are safety of life, defence/security, and scientific services as meteorology. All of these services operate outside the property rights regime, using spectrum that is administratively licensed by the Crown. Accordingly, the proposed policy would have no impact on the Crown's ability to ensure the future provision of these services. Indeed, the majority of usable spectrum is still within the administrative regime (59% of spectrum below 1GHz, and 85% of spectrum between 1GHz and 30GHz, above which spectrum is not currently in general use). This provides some comfort that the proposed policy will not prevent the Crown from being able to reserve additional spectrum to meet social objectives arising in the future, should it wish to do so.

24. A further possible criticism is that the roll over of rights would not allow new users to bid for spectrum at expiry. However, legal advice confirms that s47 of the Commerce Act (which prohibits acquisitions that would or may result in a substantial lessening of competition in a market) would apply to the acquisition of rights for a future period, even if the rights were rolled over to the same rightholder. It would be a divergence from current policy to rely primarily on spectrum allocation methods as opposed to existing competition regulation to manage competition concerns for radio spectrum. Finally, the wider concern that new users cannot bid for spectrum overlooks the fact that spectrum rights are tradable. Assuming a well-functioning secondary market, there is no reason to believe that someone else who values a spectrum right more than the existing rightholder will have been unable to acquire it.

25. There may be a view that by rolling over spectrum rights to current rightholders, the proposed policy does not allow spectrum to be allocated to new and emerging applications. The answer to this concern is that reallocation of spectrum to "higher value" new applications can occur at any time, not just when spectrum rights expire. Because spectrum rights are tradable, those investing in higher value new and emerging applications can seek to acquire them from current right holders. Secondly, holders of spectrum management rights are free to determine, within the parameters of frequency and power set out in the management right, what to use the spectrum for and what technology to adopt. For example, Telecom has been able to migrate from analogue AMPS to digital CDMA mobile telephone technology within its existing cellular management rights, without any Government involvement. This means that decisions about the highest value use for spectrum are able to be made by the market based on evolving information, rather than made by the Crown at the point of initial allocation. The proposed policy would not change this.Top

26. Finally, the proposed policy may be perceived as not providing rightholders with adequate certainty as to whether they will retain spectrum rights in the future, as it requires that the roll over of rights be reviewed on a case by case basis five years before expiry. The general assumption underpinning the policy is that spectrum rights will be reallocated to existing rightholders for a further 20 years. The purpose of the review is to ensure that any relevant unforeseen events that may occur between now and the point of reallocation can be taken into account in the final decision to reallocate individual spectrum rights. Such events could potentially make a decision to roll over spectrum rights to existing rightholders inconsistent with New Zealand's international radio obligations or the general objective of maximising the value of the spectrum to society as a whole. The review process provides the Government with some assurance that making policy decisions now about the treatment of rights on expiry will not result in unsatisfactory outcomes in the future.

27. The use of radio spectrum in New Zealand should be consistent with international radio obligations at all times. From this perspective, the case by case review provides no greater uncertainty for rightholders at the time of expiry than at any other time. If international technology is changing, then rightholders should be well aware of these changes.

28. However, it is desirable to articulate the underlying principles that the Government would wish to take into account on any such review to in order minimise any uncertainty for rightholders. (It should be emphasised that these are not tests, each of which must be satisfied in order for rights to be rolled over.) It is envisaged that the review five years prior to reallocation would seek to ensure that the roll over of rights did not compromise the ability of spectrum management to:

• provide for economic efficiency, ensuring spectrum is allocated to its highest value use;
• allow for the technically efficient use of spectrum;
• provide for security of tenure to encourage spectrum-related investment;
• ensure that concentration of control of the spectrum does not inhibit competition in downstream markets (i.e. primarily through the application of appropriate competition regulation);
• provide a reliable means to resolve interference problems, which minimises transaction costs; and
• allow spectrum to be easily changed over time to higher value uses, which emerge due to changing technology and demand.
  

29. It should be noted that in relation to television broadcasting, these factors could lead to amendments to the technical criteria for existing UHF or VHF spectrum licences at rollover in 2010 and 2015 respectively.Top

30. Rightholders could be advised of the factors to be considered on review as part of the final announcement of the detailed policy proposals.

Timing of Policy Confirmation

31. In addition to radio broadcast services, spectrum rights contribute to the delivery of a broad range of other communication-based services, all of which will be affected by the proposed reallocation policy.¹ It is recommended that interim decisions on the policy for reallocating spectrum rights be confirmed and publicly announced as soon as possible for four main reasons.

32. First, it is important that existing and potential spectrum rightholders have certainty about opportunities for the future tenure of spectrum rights in order to ensure that incentives for efficient investment in spectrum rights and associated communications services are maximised. For example, an announcement of the policy will give current rightholders clarity on their ability to invest in new technologies within existing rights which might otherwise expire before a satisfactory financial return could be obtained. Also, rightholders require certainty about the Government's reallocation policy in order to determine whether to participate in any future auction of spectrum rights that may be effective substitutes for their current rights (for example, FM spectrum licences that may become available in the upper FM band).

33. Second, having a policy confirmed well before spectrum rights expire is also important in order to minimise the risk of discontinuity of service supply and stranded investment. Discontinued service supply has a negative impact on the welfare of consumers that could be avoided if information is available early enough regarding the ongoing availability of services. Stranded investment is likely to have a negative impact on economic growth in the form of wasted economic resources.

34. Third, timely confirmation of the interim decisions is also necessary for the implementation of the reallocation policy. According to the interim decisions (outlined in paragraph 11) the reallocation of spectrum rights to existing rightholders will be determined five years before expiry. Therefore, the reallocation of the first rights to expire must take place in 2005. Before this can occur, price-setting formulae that estimate the market value of rights and provide a fair financial return to the Crown must be developed and confirmed by the Government.

35. Finally, any information required for the application of the price-setting formulae must be collected and prepared before 2005. An assessment of the proposed reallocation of rights against the criteria outlined in the interim decisions must also be completed. Procedures for the practical implementation of the policy also must be developed (for example, rules of engagement with existing rightholders and procedures for the auction of rights, if required).

Next Steps

36. It is recommended that the Government confirm its interim decisions on the reallocation of commercial spectrum rights on expiry as outlined in paragraph 11 as soon as possible, and that rightholders are advised of the Government's decisions so that they can plan and invest effectively.

37. In order that the policy be implemented by 2005 (in time for the expiry of the first set of spectrum rights in 2010) it is recommended that officials begin work to develop the price-setting formulae for the reallocation of rights as soon as possible, and report back to the Cabinet Policy Committee with proposed formulae and details of how they will be implemented by 30 September 2003. In particular, the formulae should:

• seek to approximate the true market value of the spectrum right and ensure that rightholders do not pay more for the right than its market value;
• provide rightholders with certainty well in advance of the expiry of rights;
• provide rightholders with an opportunity to resort to a market process (i.e. auction) should they disagree with the determined price;
• be administratively simple and applied in a transparent manner; and
• seek to minimise any impact on the efficient reallocation of spectrum rights.

38. Officials would consult with existing rightholders during the development of the price-setting formulae. This will help to ensure that the formulae provide the best estimate of the market value of the spectrum rights concerned.

Non-Commercial Spectrum Rights

39. The policy outlined in this paper applies to commercial spectrum management rights and spectrum licences only. Spectrum licences reserved for the promotion of Māori language and culture and the achievement of the Government's public broadcasting objectives are not addressed by this policy. However, issues similar to those outlined above for commercial spectrum rights also arise in relation to the expiry of non-commercial spectrum rights. For example, holders of reserved licences also require certainty of licence tenure in order to plan and invest effectively. It is therefore appropriate to articulate a clear policy for dealing with the expiry of non-commercial spectrum rights well before they expire.

40. Any policy for the expiry of non-commercial spectrum rights should take into account the original objectives surrounding the reservation and allocation of the licences, including whether the objectives are still relevant. The policy should also weigh the relative costs and benefits of reallocating licences to current licence holders as opposed to new holders. It is recommended that the Ministry of Economic Development, Te Puni Kōkiri and the Ministry for Culture and Heritage report to the Cabinet Policy Committee by 30 September 2003 with policy proposals for dealing with non-commercial spectrum rights when they expire.

¹Existing spectrum rights are used for services such as VHF and UHF television broadcasting, AM and FM radio broadcasting, cellular telephone, local multipoint distribution services and wireless local loop applications.