Background information

Introduction

1. Radio spectrum in New Zealand is managed under the Radiocommunications Act 1989 ("the Act") by the Ministry of Economic Development on behalf of the Crown. In the past, the objectives of the spectrum management regime provided under the Act have been to:

• provide for economic efficiency. The Act enables the value of spectrum to society as a whole to be maximised, by allocating spectrum to its highest value use;
• 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;
• 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.

Spectrum rights

2. The Act provides for the creation of tradable, fixed term rights over parts of the radio spectrum. Spectrum rights have attributes similar to property rights, in that they have legal certainty, can be traded and are able to be mortgaged and placed under caveats. There are two tiers of spectrum rights:

• management rights - an exclusive right over a nation-wide frequency band, for up to 20 years, to grant spectrum licences to frequencies within that band; and
• spectrum licences - the right to transmit radio signals within a defined part of the band specified in a management right.

3. Since 1989, the Crown has progressively created management rights and spectrum licences for a range of different types of spectrum. The Crown has retained management rights in respect of spectrum suitable for broadcasting (i.e. it has allocated spectrum licences only). Spectrum suitable for telecommunications is held by way of management rights - nearly all of which are held privately. A list of all of the spectrum rights that have been created, their ownership and expiry date is provided in Appendix A.

4. The Act is silent as to how rights should be allocated, either initially or on expiry. Successive governments have initially allocated spectrum rights intended for commercial use through a competitive tender or auction. This is considered to be the best method of ensuring that rights are held by those that value them the most. The ability to trade rights in a secondary market helps to ensure that spectrum rights continue to be held by those that value them the most over time.

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Expiry of spectrum rights

5. Spectrum rights created under the Act since 1989 start to expire from 2010 onwards. The Act is silent as to how rights should be reallocated once they expire, other than that they revert to the Crown. However, the Crown is able to create a "succeeding" management right ahead of expiry for the purpose of ensuring a seamless transition from one term to another.

6. A lack of certainty for rightholders and other industry stakeholders regarding the policy for dealing with spectrum rights once they expire can have a negative impact on economic growth and innovation. For example, it is difficult for rightholders to make good investment decisions and plan effectively if they are uncertain of their ability to retain spectrum rights in the future. Rightholders also want to know the future of their existing rights before determining whether to compete in further auctions of similar or substitutable spectrum.

7. In order to promote the best use of radio spectrum, it is important that appropriate policy be developed and implemented for the reallocation of spectrum rights. From an economic perspective, the reallocation of commercial spectrum rights should:

• optimise incentives to invest - i.e. long-term tenure provides certainty for investment;
• minimise stranded investment - this could occur if existing rightholders lose their spectrum rights and are required to scrap any investment; and
• minimise supply discontinuity - this could occur if existing rightholders lose their spectrum rights and as a result must stop providing services to their customers.

8. In order to address this issue, the Government released a public discussion document in June 2000 entitled Discussion Document 14 - Radiocommunications Act: Expiry of Management Rights and Spectrum Licences. The document sought feedback from key stakeholders on policy options available to the Government when rights expire. The key issues that were canvassed in the document were:

• at what point in time, prior to expiry, should the future of rights be determined;
• whether it is appropriate to create succeeding rights in every case:
• where succeeding rights are created, what term should apply; and
• how should succeeding rights be allocated (e.g. auction, negotiated settlement, or on the basis of defined criteria).

9. The general view of respondents to the discussion document was that rights should be reallocated to existing rightholders at least five years in advance of their expiry for a price negotiated with the Government. Essentially, rightholders want the Government to decide its reallocation policy well ahead of when their rights expire so that they can plan and invest effectively, and protect their long-term investment in equipment and property, including brands.

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Policy decisions for the reallocation of rights

10. Following careful consideration of the options and the views of stakeholders, the Government announced its decisions on the policy for the reallocation of commercial spectrum rights on 10 May 2003. The policy decisions are that:

1. commercial spectrum rights be reallocated to existing rightholders five years before expiry for a further 20 years, subject to a review on a case by case basis to ensure consistency with New Zealand's international radio obligations and the general objective of maximising the value of the spectrum to society as a whole; and
2. spectrum rights will be reallocated for a price to be determined by price-setting formulae that estimate the market value of the rights; and
3. if existing rightholders do not wish to pay this price, the respective rights will be     reallocated by way of auction.

11. The first rights to be considered under the policy will be UHF television licences, which are due to expire in 2010. The assessment of the reallocation of these rights in accordance with the above policy will take place in 2005.

Where to from here?

12. The price-setting formulae referred to in the policy outlined above has not yet been developed. The Ministry of Economic Development has been directed to make recommendations to Cabinet on suitable price-setting formulae and how these are best implemented.

13. It is anticipated that it will take approximately 8-12 months to develop the price-setting formulae. This timeframe reflects the complexities associated with developing formulae that provide a credible approximation of market value. The timeframe also reflects the need to consult with rightholders and other key stakeholders over the development of the price-setting formulae.

14. It is expected that final decisions on the price-setting formulae and their implementation will be made by the Government in early 2004.

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Appendix A: Spectrum rights currently in existence