Defining the averaging problem

The Ministry is investigating simplification of the renewals process by averaging licence prices. Covec's 9 October 2003 paper and PricewaterhouseCoopers' review of that paper note potential issues with averaging. Assuming that the z-based formula approach is used for the averaging renewal prices, the methodology may need to accommodate existing licences with:

1. different start dates;
2. different durations;
3. different population growth rates;
4. different sizes of population coverage;
5. no market-based starting price (licences that were grandfathered into the current system of regulating and allocating radio spectrum rights);
6. amended terms since award (e.g. changed coverage areas);

Points 1 and 2 are accommodated in Formulae 1 and 2 above, which are used to convert all original licence prices to a 20-year renewal, starting on the same date (assumed to be 2010).

Licences are based around individual transmitter locations. Each licence specifies the maximum transmission power output from that transmitter, which effectively determines the geographic and hence population coverage achievable under that licence. Licences transmitting from the same location may not have the same extent of coverage.

The Ministry has stated that it will only average groups of licences that are either:

• based on the same transmission locations; or
• comparable transmitter locations in terms of target population.

The Ministry has further stated that all licences within such a group (an "Averaging Group") will be assumed to have the same rate of population growth. For each Averaging Group, the Ministry will select the most appropriate population growth rate from the regional and district population growth rates provided in Covec's 9th October 2003 paper.

The assumptions specified by the Ministry simplify the averaging problem significantly, by effectively removing Point 3 above: all licences in an Averaging Group are assumed to have the same population growth rate. In the z-based formula, this means that the same population-adjusted z factor will be applied to each licence in the Averaging Group.

The remaining issues to resolve are therefore:

• averaging across different population coverages within the Averaging Group;
• the application of averages to grandfathered licences; and
• accommodating changed coverages made since the original licence award.

These points are dealt with below. An underlying averaging methodology is provided first. This is then adapted for grandfathered and changed licences.