Previous decisions

Part A: Implementation process

Case by case assessment

Offers and settlement process

Part B: Rights expiring in 2010

UHF-TV and DMS spectrum licences

MDS management rights 3 to 14 (2.3GHz)

10. In May 2003 Cabinet [POLMin (03) 9/1] confirmed the following policy for dealing with commercial spectrum rights at their expiry:

1. "commercial spectrum rights be reallocated five years before expiry for a further 20 years, subject to [assessment] 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;
   
2. subject to the assessment outlined in [paragraph a], the Crown should receive a fair financial return for the use of spectrum in the future period;
   
3. spectrum rights be reallocated to existing rightholders based on price-setting formulae that estimate the market value of the rights, and, if existing rightholders do not wish to pay this price, the respective rights be reallocated by way of auction."

11. In May 2004 Cabinet [POLMin (04) 12/4] adopted a price-setting formula as a general framework for implementing the policy and authorised the public release of a discussion paper. Cabinet also took decisions on renewal of non-commercial spectrum rights and treatment of TVNZ'sUHF-TV licences. Cabinet then invited the Associate Minister of Communications to report back by 31 March 2005:

1. "seeking final approval of a process for implementation of policy on expiry of commercial radio spectrum rights;
2. seeking approval for contractual offers to be made to relevant parties for spectrum rights due to expire before 30 April 2011;"

12. Part A of this paper outlines the implementation process. Part B seeks agreement for application to UHF-TV spectrum licences and MDS management rights. A report on spectrum licences used for AM and FM radio will be provided by 31 March 2005.

Part A: Implementation processTop

Case-by-case assessment

13. The policy provides for the renewal process to commence with a case-by-case assessment of particular rights. This assessment should be initiated approximately six years before rights expire so that any renewals can be offered five years before expiry. The assessment will be released for public consultation and a report then provided to Cabinet in regard to the specific rights. Respondents to the discussion paper indicated that consultation on case-by-case assessments is important.
    

Scope of case-by-case assessment

14. Cabinet has agreed that the purpose of the assessment is 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 [POLMin (03) 9/1].
15. Respondents tended to support a narrow scope for the assessment, focussing on international obligations and overall use, rather than considerations such as whether individual rightholders are using their rights. They argued that trading of rights can ensure that value to society is maximised.
16. Trading between willing buyers and sellers is not common and expiry provides an infrequent opportunity for the Crown to consider the value of the spectrum to society as a whole. While a wider scope for the assessment may increase uncertainty, risk of reduced investment by rightholders appears to be low, given that the assessment will be concluded five years before expiry. A wide scope should therefore be retained.
17. Some rights allocated on a commercial basis may in fact be utilised for non-commercial purposes, as any person is free to purchase commercial spectrum. This issue can be considered in the assessment. Other issues to be considered may include, without limitation, future use of the band, appropriate renewal period, level of spectrum related investment, whether unused rights should be renewed, and appropriate technical parameters for renewed rights.
18. Cabinet noted that in particular circumstances it may be appropriate to offer spectrum licences for a shorter period [POLMin (04) 12/4]. These circumstances may occur if a significant change of technology is foreseen within the renewal period.

Application of the price-setting formulaTop

19. The policy requires a fair financial return to the Crown through a price-setting formula that estimates the market value of the rights. The case-by-case assessment will consider whether direct application of the formula meets this requirement, or whether original sale prices should be adjusted, a valuation approach used, or reallocation implemented by auction.
20. Most respondents believed that the formula, or a variation, could and should be used to calculate renewal prices in each industry. If the formula is inappropriate, a valuation was preferred to simply auctioning rights. Respondents agreed that any valuation should seek to find the market value of the spectrum, as opposed to the deprival value to the current rightholder.
21. Application of the formula, or a variation, will be considered before other options. Averaging of sale prices may be proposed, particularly where there is unreliable original price data, or for administrative simplicity. In some cases a formula-based price may be proposed that recognises additional information such as secondary market transactions, auction bids, and prices paid for comparable spectrum. Formula parameters, including the appropriate growth rate and scaling factor will be determined as part of the case-by-case assessment. A minimum offer price will be proposed to ensure reallocation costs are borne equitably across rightholders.
22. Other options such as auction or detailed valuation may be proposed where it is inappropriate to apply the formula, such as where the industry that uses the rights is relatively immature or is subject to dramatic changes in technology, or if it is not possible to forecast revenues with sufficient certainty. A valuation is likely to be complex and costly, and may only be appropriate for relatively high value rights.

Offers and settlement process

23. The discussion paper outlined a process for offers and settlement that was generally supported by respondents. Respondents sought flexibility over payment dates to allow businesses to pay at the time that suited best. They sought a short time between the rejection of an offer and an auction. Two respondents proposed a bond to deter parties from defaulting on offers in an attempt to "game the system".
24. It is proposed that offers be made following Cabinet approval, generally five years before expiry. Offers will be open for three months and, where offers are rejected, an auction held within one year of the offer. If, however, the rightholder does not respond or rejects the offer and indicates that it will not bid for the rights at auction, the rights may be reconfigured and allocated at a later date.
25. It is proposed that rightholders who accept offers, and successful bidders at auction, be required to settle by a date six months before commencement of the new spectrum right, but may settle earlier if they choose. Purchasers will be allowed to transfer their contractual rights prior to settlement. Penalties will apply for failure to settle on time and the rights may be (re)auctioned. Pre-settlement requirements may also apply, such as confirmation of use and any Commerce Act requirements.
26. The discussion paper proposed that no discount apply for early settlement. While some respondents indicated a desire for an early payment discount, the position in the discussion paper is preferred as there is no obligation to pay early.

Part B: Rights expiring in 2010Top

UHF-TV and DMS spectrum licences

27. The discussion paper contained the following case-by-case assessments of spectrum licences allocated under Crown-owned management rights 1 and 2:

• seven UHF-TV licence sets sold in 1990 to achieve near nationwide coverage should be reallocated by auction, due to difficulties in reconciling the formula price with known market transactions;
• individual UHF-TV licences sold from 1990 should be reallocated using the price-setting formula, subject to averaging of comparable licences;
• individual licences for "distributed music services" or "muzak" (DMS) sold in 1991, should not be renewed due to low level of use.

Appropriateness of commercial renewal process

28. All submitters accepted that a commercial renewal process was appropriate for these rights and this approach should be confirmed.
29. Separate UHF-TV spectrum is allocated for non-commercial television and the Māori Television Service, although MTS currently uses a Sky nationwide set under contract. Cabinet has agreed that if it receives a proposal from TVNZ to initiate new public broadcasting services using its UHF-TV licences, it will, subject to certain conditions, consider issuing the relevant licences without charge, and that unless such a proposal is approved by Cabinet, TVNZ'sUHF-TV licences will be treated as commercial rights. If such a proposal is accepted by Cabinet following agreement by TVNZ to purchase the relevant UHF-TV spectrum licences on a commercial basis but prior to settlement in September 2009, any agreement to purchase the rights commercially would need to be terminated [POLMin (04) 12/4].

Likely future use and renewal period

30. Analogue television is expected to be replaced by digital television, but the timing of transition is uncertain. Based on overseas examples transition may be completed between 2010 and 2020. Digital technologies are more efficient, so parts of the band may be reallocated to other services following transition.
31. The assessment in the discussion paper did not discuss a renewal period of less than the maximum twenty years. This issue has been re-evaluated in light of submissions, and discussions with stakeholders and overseas counterparts. An "update" to the discussion paper released on 20 October 2004 raised the potential of a shorter period and sought further comment.
32. Most respondents prefer a twenty year renewal period, although one sought to link shorter periods to the provision of additional spectrum for digital television. One submitter considered that the renewal period for all licences should be the same, while another considered the appropriate period was likely to vary for each rightholder. TVNZ preferred twenty years on the basis that long term rights would have a higher potential resale value in the event that it did not invest in digital terrestrial television. One sought an option of a five year period to align expiry with its VHF-TV licences in 2015. One submitter believed that television did not represent the highest value use to society for much of the band already.
33. Sky Network Television Limited seeks twenty year renewals. Sky considers shorter term renewals to be inconsistent with previous decisions and discussions, and that insufficient evidence has been produced that a viable alternative use is foreseen that would require significant re-planning of the UHF-TV band. Sky states that a shorter term of renewal would significantly affect its business planning decisions, including any potential future investment by Sky in digital terrestrial television.
34. Future use of the current UHF-TV band is foreseen for both digital television and telecommunications services. Renewed licences can be converted to digital and new digital-only licences created, but the 1990 band plan is unlikely to be optimal in a fully digital world. Government's ability to respond to television demand and meet other demands in the band, would be limited if current licences were renewed to 2030. Renewal to 2030 could allow current rightholders to restrict opportunities to fully utilise the band or necessitate government repurchasing licences to achieve this.
35. It is proposed that UHF-TV licences be offered for a maximum period of ten years to 2020. This period provides investment certainty for existing analogue services until 2020, while enabling reassessment in 2015, at which time the television market may have changed significantly. Renewal to 30 August 2015, when VHF-TV licences expire, may be offered at the request of individual rightholders.
36. [...Withheld under section 9(2)(h) of the Official Information Act...]Top

The level of spectrum related investment and renewal of unused rights

37. The discussion paper proposed non-renewal of unused sites and licences, and changes to the technical specifications of renewed licences to facilitate the creation of new digital licences. This proposal recognises that investment in transmitters and related equipment has occurred only at major transmission sites, and that a significant number of the licences allocated from 1990 remain unused.
38. Respondents were concerned about timing of application of a test of "use" and that a use test applied five years before expiry could not take account of planning or market developments nearer the end of the current period. At least two respondents considered that a use test should not be applied at all. One submitter stated that the nationwide sets should be renewed in whole.
39. If a spectrum right is not in use, then offering a further right to the current rightholder is unlikely to maximise value to society and may prevent others from utilising the rights. Use criteria will therefore be imposed in all licence renewals.
40. Replacement licences will be offered only at those transmitter sites in use for UHF-TV broadcasting as at 31 December 2004. If a licence for which an offer is not made comes into use prior to settlement, that licence will be considered for renewal if it is not likely to cause technical detriment to planning for digital services.
41. Rightholders who accept offers will be required to demonstrate use of the corresponding current licence at the time of settlement. In the case of the nationwide sets, if a rightholder demonstrates use of a majority of the current licences, the rightholder will be deemed to use all the licences in the offered set; if not, only licences in use will be renewed, subject to a pro-rata price reduction to reflect the population able to be served by the renewed licences.

Technical parameters of replacement rights

42. Current technical parameters limit the ability to provide digital television and do not reflect current engineering practices. The discussion paper therefore proposed that licences may be offered for renewal with varied technical parameters. Some respondents believed adjustments should be subject to consultation with the affected rightholders and another considered that changes to technical parameters or sets of licences should be reflected in a reduced offer price.
43. It is proposed that technical parameters of replacement licences reflect current engineering practices and actual utilisation of rights. Any adjustments will not affect the actual utilisation of current licences and do not warrant a lower offer price.

Applicability of the price setting formula - Nationwide setsTop

44. The four current rightholders of nationwide licence sets (Sky, TVNZ, Prime and NZRB) expressed a preference for renewal offers, rather than the proposed reallocation by auction. Three considered the formula to be directly applicable. One proposed delaying offers to 2007 or 2008 and reallocation by a valuation process. All four (including Prime) considered the price paid by Prime on the secondary market ($4.1m) to not reflect current market conditions.
45. A valuation approach would require assumptions about the stability of business models (e.g. pay-TV or free-to-air) or in the case of unused licences, likely future use. Delaying offers may not provide additional clarity but would lower investment certainty. This approach is therefore not supported.
46. Investment in transmitters and related equipment represents a significant investment by rightholders. Provided market value can be determined, there is a legitimate basis for avoiding the uncertainty of an auction and risk of stranded investment. Consultants were engaged to review submissions and consider methodologies for establishing market value using the price-setting formula.
47. The consultants report states that we cannot conclude that one of these methodologies produces the "market value" of the spectrum rights. The various methodologies have also produced a reasonably broad spread of values, from approximately $0.7 million to $2.0 million, with an outlying figure of $3.1 million. There is a grouping of potential values in the range of $1.2 million to $1.6 million, which is also in the middle of the range of values. On this basis, we would suggest a renewal price in the range of $1.2 million to $1.6 million.
48. A renewal offer price in the middle of the recommended range is proposed (i.e. $1.4 million). When adjusted to 10 year licences, the proposed offer price for UHF-TV nationwide sets is $961,451 (plus GST).

Applicability of the price setting formula - Individual licences

49. Submissions on allocation of individual licences generally supported the approach in the discussion paper, although one submitter queried the makeup of some averaging groups and noted that base price data may not be available for some locations.
50. It is proposed that offer prices for individual UHF-TV licences be calculated using the formula, subject to population weighted averaging of rights at comparable transmitter locations in terms of the main target population, and subject to a minimum price.

DMSTop

51. The discussion paper proposed that replacement spectrum licences would not be provided for DMS use (i.e. "muzak"). This proposal did not result in any comments and is confirmed in the recommendations.

Formula inputs

52. A growth factor (z) of 2.60% and scaling factor (R) of 11% are recommended as proposed in the discussion paper. Sky noted that the growth factor, being based on advertising revenue growth, is not entirely satisfactory for Sky's licences as its revenue is primarily reliant on subscriptions. While this limitation is acknowledged, it is reasonable to assume that the proposed growth rate does not exceed the appropriate growth rate for subscription revenues, because Sky, as a commercial entity, could be expected to adopt the most profitable business model.
    

MDS management rights 3 to 14 (2.3GHz)

53. The discussion paper concluded that management rights in the band between 2.3 and 2.396GHz (MDS) due to expire in 2010 would not be offered for renewal, as these rights have not had significant use to date.
54. Two of the current rightholders preferred replacement MDS rights to be offered. One noted that it currently "used" its MDS right as a guard band, while the other was considering utilising its rights, provided certainty of tenure could be obtained. The holder of most rights in the band supported competitive reallocation of rights following technical re-engineering. All respondents on this issue agreed that the technical parameters (bandwidth) of the current rights were unlikely to be optimal for future services that might utilise this band.
55. As these rights are not currently utilised, have had little use over their lifetime and are not technically optimal for future uses, renewal offers are not proposed. This band will be reallocated in due course following re-planning.