1. Introduction

 
1.1 In accordance with our terms of engagement, this paper provides discussion on
the issues associated with determining an approach to pricing of rights renewals for cellular spectrum and concludes with a recommendation on an approach that could be used.

1.2 The objectives of the pricing exercise are to approximate a market value and to
use a methodology that is simple and transparent. It should be recognised that there will always be a level of uncertainty as to the extent to which any calculation methodology would predict the outcome of an actual market transaction. It should also be recognised that there are potential trade-offs between the objectives of simplicity and transparency on the one hand and accuracy of predicting market value on the other. Therefore, a balance needs to be struck between them.

1.3 The obvious approach to valuing the renewal rights would be to run a simulated
auction. However, creating the inputs to the simulated auction is likely to represent a significant challenge. This was discussed with the Ministry, which advised that this approach would not be consistent with the objectives of simplicity and transparency, nor the intended timetable for renewal.

1.4 The recommended methodology is to use an incremental Optimised Deprival
Value methodology. This has some similarities to the Administered Incentive Pricing (“AIP”) system used in the UK. We also recommend that the price calculated using the incremental ODV methodology is benchmarked against New Zealand and overseas spectrum values, as a reasonableness check on the calculated value. Compared to many other potential approaches, this methodology should be relatively practical to implement. It also has a strong underlying logic as to how, within given assumptions, it proxies market value.

1.5 Assessing the value of spectrum is highly complex and inevitably involves a
significant element of judgement. While some approaches to valuation might be relatively simple to apply in practice, there is no “magic bullet” solution that can generate absolute confidence that the offer price does approximate “market value.” At the time of performing the pricing calculation, the Ministry and its advisers will need to consider whether there are any current market-specific factors that might cause the values produced by the incremental ODV methodology to diverge from what might be expected in an auction. 

1.6 The fieldwork for this report was undertaken between October 2005 and March 2006.

1.7 The report is presented as follows:

• Chapter 2: Objectives of the Renewal Process
• Chapter 3 Context for the Renewals Process
• Chapter 4 Perspectives on Value
• Chapter 5 Potential Valuation Approaches
• Chapter 6 Assessment of Valuation Approaches
• Chapter 7 Recommended Methodology

Important notice and restrictions

1.8 In preparing this paper and forming our opinion, we have relied upon, and assumed the accuracy and completeness of, all information available to us from public sources, interviews with Telecom and Vodafone personnel and furnished to us by the Ministry. We have evaluated that information through analysis, inquiry and review but have not sought to verify the accuracy or completeness of any such information. It should not be construed that we have conducted an audit of the information we have used.

1.9 This paper has been prepared solely for the use by the Ministry and may not be copied or distributed to third parties without our prior written consent. We will not accept responsibility to any party unless specifically stated to the contrary by us in writing. We will accept no responsibility for any reliance that may be placed on our paper should it be used for any purpose other than that for which it is prepared.

1.10 Our paper has been prepared with care and diligence and the statements and opinions in the report are given in good faith and in the belief on reasonable grounds that such statements and opinions are not false or misleading. No responsibility arising in any way for errors or omissions (including responsibility to any person for negligence) is assumed by us or any of our partners or employees for the preparation of the report to the extent that such errors or omissions result from our reasonable reliance on information provided by others or assumptions disclosed in the report or assumptions reasonably taken as implicit.

1.11 We reserve the right, but are under no obligation, to revise or amend our paper if any additional information (particularly as regards the assumptions we have relied upon) which exists on the date of our report, but was not drawn to our attention during its preparation, subsequently comes to light.

Terminology

1.12 The New Zealand spectrum rights system is technology-neutral. Right holders are not required to use a particular technology in a particular frequency band for which they hold a right, although they are subject to conditions regarding interference and coordination with other rights.

1.13 The rights that are the subject of this paper are generally used for provision of cellular telecommunications services. Right holders could use them for entirely different technologies and service applications. Nevertheless, for ease of reading in this paper, we sometimes refer to them as “cellular rights” rather than the more cumbersome “rights that are generally used for cellular services.” The same applies in referring to spectrum rights used for radio and television broadcasting.