Starting point

Our starting point for this work is the renewal methodology developed for the Ministry by Covec. Under this methodology, renewal prices are calculated by escalating the original licence price forward to the renewal date at a constant growth factor. This constant growth factor, z, is nominal and calculated for New Zealand as a whole. It represents the expected growth in aggregate national cashflows for the relevant market (e.g. radio broadcasting). It therefore incorporates the effects of inflation and real market growth (including such factors as population growth).

For the calculation of spectrum rights covering specific regions or localities, z is adjusted by reference to regional population growth, as compared to national population growth.

Z (or a population-adjusted z) is also assumed to apply equally to all licensees within a regional population area, which implies constant market shares over the period to which z applies.

In developing the averaging methodology, we therefore take as our starting point the renewal formula for a single licence, as developed by Covec. This formula calculates the renewal price of an n-year licence renewed for m years. For simplicity, this formula assumes that the original and renewal licence prices were paid on the relevant award date. The formula below differs from the Covec formula in that it excludes a factor of (1+r)^-5 to bring payment 5 years in advance of the renewal date. We understand that the Ministry currently does not expect to introduce this requirement.

Where:

z = constant growth rate

r = discount rate

m = duration of licence renewal

n = duration of original licence

q = the number of years between the original award date and the renewal date

V1 = the original licence price

V2 = the renewal price

As noted above, Covec have calculated z on a national basis. When applied to specific regions, z is scaled to take account of regional population growth compared to national population growth. For calculating regional renewal prices, the formula therefore becomes:

Where:

Pr = Regional population growth rate²

Pn = National population growth rate