1. Context

1.1 Expiry of rights policy

1.2 The price-setting formula

1.3 Implementation

1. Since 1989, the Crown has progressively created and allocated tradable rights to spectrum under the Radiocommunications Act 1989 ("the Act"). Generally speaking spectrum rights have been allocated as:

(b). site and frequency specific "spectrum licences" under Crown-owned management rights in frequency bands used for television and radio broadcasting.

2. Spectrum rights for commercial use are usually allocated by competitive tender or auction. The Government reserves and allocates spectrum rights to meet specific government objectives contained in non-commercial broadcasting policy and to meet Treaty of Waitangi obligations. All spectrum rights are subject to the fees set out in the Radiocommunications Regulations.

3. Under the Act, spectrum rights have a maximum term of 20 years. The first rights created, for UHF television, expire in 2010. Rights for AM and FM sound broadcasting expire in 2011 and VHF television rights (TV1, TV2, TV3 and C4) in 2015. Expiry dates for mobile telephone services vary, with the first rights expiring in 2011. Appendix 1 contains a full list of management rights and expiry dates.

4. The Act provides that rights revert to the Crown at expiry, but is silent as to how they should be allocated or reallocated. An amendment to the Act in 2000 allows the Crown to create a "succeeding" management right ahead of expiry, to ensure a seamless transition from one term to another.

1.1 Expiry of rights policy

5. In mid 2003, following consultation with industry, Cabinet agreed the following policy for the reallocation of commercial spectrum rights:

(b). that the Crown should receive a fair financial return for the use of spectrum in the future period; and

(c). that spectrum rights be reallocated to existing rightholders based on price-setting formulae that estimate the market value of the rights, and that, if existing rightholders do not wish to pay this price, the respective rights be reallocated by auction.

6. Cabinet directed the Ministry of Economic Development to recommend a suitable price setting formula, which would approximate the true market value of the spectrum right, be administratively simple and be applicable in a transparent manner.

7. The renewal of spectrum rights allocated to non-commercial use or to meet specific government policy objectives will be managed under a separate process led by the Ministry for Culture and Heritage, or Te Puni Kōkiri, as appropriate.

1.2 The price-setting formula

8. The Ministry commissioned econometric consultants Covec Limited ("Covec") to develop a price setting formula, and PricewaterhouseCoopers ("PwC") to peer review Covec's work. PwC provided additional advice about the valuation of VHF-TV rights.

9. A simplified version of the price-setting formula proposed by Covec is:

V2 = (1+z)ⁿ x V1

where:

V1 = original acquisition price of spectrum right

V2 = renewal price

z = growth factor

n = term of right (maximum 20 years).

10. The price-setting formula calculates the renewal price for a spectrum right (V2) by taking the acquisition price (V1) and applying a compound growth factor ("z"). The growth factor represents an estimate of how much the net cashflows from the use of rights in the renewal period compare to the net cashflows from the current period.

11. This version of the formula assumes that the original rights had a term of 20 years, whereas many current rights are for shorter periods. For example, the licences auctioned in November/December 2003 had a six or seven year term but will be renewed for 20. A method of scaling up such licences to a notional 20-year term can be incorporated into the formula to reflect the relative increase in value.

12. Reports from Covec and PwC were released for discussion, and submissions invited from interested parties. A calculation tool was provided by PwC. Respondents generally supported the use of the price-setting formula for reallocation of commercial spectrum rights.

13. Cabinet has adopted the price-setting formula as a general framework for implementing its policy for dealing with commercial spectrum rights at their expiry.

14. Consultants' reports relevant to expiry of rights policy were commissioned and released via the Ministry's website:

Development of Price Setting Formulae for Commercial Spectrum Rights at Expiry(October 2003) Covec Ltd

Review of Proposed Radio Spectrum Price Setting Formulae (November 2003) PricewaterhouseCoopers

The Initial Value of VHF Television Licences (October 2003) PricewaterhouseCoopers (see section 3.2.1);

Averaging of Spectrum Rights Renewal Prices(April 2004) PricewaterhouseCoopers (see section 3.2.1).

1.3 Implementation

15. A process is required for the implementation of government's overall policy on expiry of rights, and for the application of the price-setting formula to specific rights. Cabinet has directed the Ministry of Economic Development to report back on these matters, following further consultation, and to seek approval for contractual offers to be made to the relevant parties for rights due to expire before April 2011.

16. This paper sets out the Ministry of Economic Development's preferred approach to the implementation of the policy and covers the following issues.

(b). The procedure for case-by-case review, including application of the price-setting formula.

(c). Initial case-by-case reviews for UHF-TV, AM and FM sound broadcasting, and MDS (multipoint distribution services), due to expire prior to March 2011.

(d). Next steps towards application of the policy to rights that expire after March 2011, including cellular telephony and VHF television rights.

17. Public comment is invited on each of these issues.