Introduction

Policy background

Peer review process

We were engaged by the Ministry of Economic Development ("MED") to undertake a Peer Review of Covec's report Development of Price Setting Formulae for Commercial Spectrum Rights at Expiry, dated 9 October 2003. This report sets out the findings of our review.

Policy Background

In May 2003, the Government announced its decision on the policy for the reallocation of commercial spectrum rights created under the Radiocommunications Act 1989 and expiring from 2010 onwards.

Commercial spectrum rights will be offered to existing rights holders. Rights holders will be required to pay a fee or fees based on price setting formulae that estimate the market value of the rights. Should rights holders not wish to pay this price, the respective rights will be reallocated by way of auction. The intention is that the spectrum rights holders should be given this choice five years in advance of the end date of their existing licences, and that, in advance of the choice, licensees should have as much certainty as possible as to the likely renewal price(s) that they face.

MED wishes the renewal prices for spectrum rights to proxy the market value of those rights. Without actually selling the rights in the market (or observing secondary market sales of equivalent rights), it is impossible to determine a market price with absolute confidence. The next most accurate approach would be to model the licensee's business, so as to calculate the value to the licensee of the spectrum rights. This process could incorporate benchmarking against other market sales of spectrum rights.

These approaches are not without difficulties. Re-auctioning licences creates great uncertainties for rights holders whose businesses rely on using spectrum. Valuing individual businesses is likely to be a complex and time-consuming process. MED wishes to avoid these issues and to ensure that the price setting formulae are simple and transparent.

In developing the price-setting formulae, Covec was asked to consider the following key requirements:

• The price setting formulae should reflect the change in the market value of spectrum rights;
• The price setting formulae should be simple and transparent to calculate and administer, ideally using publicly available data;
• The Crown should continue to receive a fair return for use of the spectrum.

The price setting formulae are assessed against these requirements. It should be noted that by choosing a formula-based approach, MED has accepted a trade-off between simplicity and accuracy (particularly in relation to reflecting the true market value of the spectrum and thus obtaining a "fair" return for the Crown).

Peer Review Process

A draft report dated 22 August 2003 was made available to PricewaterhouseCoopers (PwC) for review. PwC produced a preliminary assessment¹ of the Covec price setting formulae and subsequently had extensive discussions with Covec and MED concerning points raised in the preliminary assessment.

Covec made changes to the proposed formulae, which have addressed key points made in the preliminary assessment regarding:

• assumptions on profit margins;
• mathematical consistency;
• the treatment of cellular telecommunications.