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4. Case-by-case review - rights expiring to April 2011
4.1 Spectrum licences in management rights 1 and 2 (UHF-TV and DMS)
4.1.2 Applicability of the formula
4.2 Spectrum licences in management rights 15 and 143 (AM and FM)
4.2.2 Applicability of the formula
4.3 Management rights 3 to 14 (MDS)
48. The Ministry's proposals for initial case-by-case reviews for rights that expire to April 2011, are set out below.3 A separate section considers rights expiring after this date.
4.1 Spectrum licences in management rights 1 and 2 (UHF-TV and DMS)
4.1.1 Case-by-case review
49. The Ministry proposes to allocate new spectrum licences for UHF television use in these bands except that:
- unused licences will not be offered for renewal (rightholders may wish to provide evidence of use over the period of the right);
- used licences may be offered for renewal with varied technical parameters, or may not be offered for renewal where the current parameters limit the ability to create new digital licences.
50. The Ministry considers that the highest-value use of these bands is for UHF television, in analogue and/or digital formats, for the foreseeable future.4
51. A small number of licences in these bands were allocated for "distributed music services" (DMS). The Ministry understands that few, if any, of these licences are currently in use for DMS. The Ministry does not propose to provide new spectrum licences for DMS use in these circumstances.
4.1.2 Applicability of the formula
Base values for nationwide sets of UHF-TV spectrum licences
52. The Ministry's current view is that nation-wide sets of UHF-TV spectrum licences should be re-auctioned five years prior to expiry, because base prices (V1) do not appear to reflect market value for these rights and adjustments would be complex to apply.
53. Tender 1 included seven sets of UHF television licences, engineered to achieve approximately 80% population coverage from 29 locations. Prices for these licence sets ranged from $100,000 to $401,000. In a secondary market transaction in 1997, one of these sets sold for almost $4.1 million.5
54. A combination of factors may have led to these rights being significantly undervalued at original allocation.
- All were offered under the "second price tender", which may not provide realistic base prices for use in the price-setting formula, even with averaging.6
- UHF television services had not previously been delivered in New Zealand, and market acceptance, and hence valuation, was uncertain.
- Under policies recently announced by government, these rights are convertible on request to digital licences (which can provide up to five video programmes), which may enhance their potential value.
55. Some individual licences within the nationwide sets have been amended or replaced at the request of licensees since initial allocation, and may be further adjusted to accommodate digital services. If new sets of licences were created, it would be appropriate to include licences based on these amended licences. Unused licences will not be reallocated.
56. Values of nationwide UHF-TV licence sets could potentially be benchmarked with reference to the UCB/Prime secondary market transaction and international data, under the procedure described in the PwC report on benchmarking VHF-TV rights. This complex option is not currently favoured by the Ministry, but views are sought on the applicability of benchmarking to these rights.
Base prices for individual licences
57. The Ministry proposes to average the price of spectrum licences for UHF-TV that have been allocated individually to existing rightholders and used over the period, employing the procedure described in Appendix 2.
58. Adjustment to the base price data is required because individual UHFTV spectrum licences were allocated by a number of different methods (including second price tenders) at different times, so that individual base prices are inconsistent and may not reflect market value. In addition, many of these licences have complicated histories as a result of adjustments to transmitter locations and powers.
59. An averaging approach is appropriate, as market information is available from a number of different allocation rounds, which in turn provide a wide statistical base from which to derive base prices.
Growth factor
60. The Ministry proposes to use the "z" value agreed between Covec and NZIER for these rights, 2.60%.
4.1.3 Summary
61. Licences for UHFTV broadcasting use, originally allocated on an individual basis, will be offered to existing holders under the price-setting formula, subject to averaging of comparable rights. Spectrum licences originally allocated in licence sets designed for near nationwide coverage will be allocated by auction, as base prices for the current rights are unlikely to reflect market value. Spectrum licences used for "distributed music services" will not be offered for renewal as these are not currently used.
5. Do you consider the case-by case review process described in this section, for spectrum licences in management rights 1 and 2 (UHF-TV and DMS), satisfactory?
6. Are any amendments required to the Averaging Groups for individual UHF-TV rights (Appendix 3)?
7. Could nationwide sets of UHF-TV rights be benchmarked against secondary market transactions and/or international price information? If so, how?
4.2 Spectrum licences in management rights 15 and 143 (AM and FM)
4.2.1 Case-by-case review
62. The Ministry proposes to allocate new spectrum licences for AM and FM sound broadcasting use in these bands except that:
- unused licences will not be offered for renewal (current rightholders may wish to provide evidence of use over the period of the right); and
- technical parameters of used licences will be reviewed to ensure compatibility with such ancillary services as Radio Data Service; adjustments to frequencies may also be required for such technical efficiency reasons as alignment of licensed frequencies with national band plans.
63. The Ministry considers that the highest value use of these bands in the foreseeable future will be for analogue sound broadcasting, with digital broadcasting likely to become viable in later years. Spectrum licences designed for AM or FM broadcasting use would generally be offered as suitable for "analogue" broadcasting, but potentially could allow digital broadcasting using the "IBOC" or "DRM" standards alongside or instead of analogue services, in a similar manner to the policy for conversion of UHFTV spectrum licences from analogue to digital.
4.2.2 Applicability of the formula
Base prices
64. Spectrum licences for AM and FM sound broadcasting use have been allocated in a number of tender and auction rounds, and a significant number under transitional provisions of the Act. A high proportion of these licences have been amended or replaced (to accommodate alterations to transmitter locations and powers) and/or have complicated histories. The Ministry considers these bands to be suitable for averaging (separately for AM and FM) using the process set out in Appendix 2.
65. The Ministry proposes to include all clearing prices in its averaging calculation (except those paid under the transitional provisions of the Act), including data from early tenders (which used the second-price method) and the most recent auction, as these provide the best available information on market value.
66. Variation of price over time is expected in market allocations: low prices in initial allocations may reflect oversupply, and higher prices in later allocations represent near saturation of bands and maturity of demand.
Growth factor
67. The Ministry proposes to use the "z" value agreed between Covec and NZIER for these rights, 2.43%.
Licensing period
68. The Ministry recognises that responses to this consultation may propose a shorter renewal period of, say, ten years (i.e. 2011-2021) because of perceived technological uncertainty. Competition with existing AM and FM analogue broadcasting is possible from digital audio broadcasting, or through broadband and satellite. Any new technology is likely to take a considerable time to challenge present services, however, and there is likely to be continued high demand for FM and AM frequencies with the very high number of analogue receivers in use.
4.2.3 Summary
69. Where spectrum licences are used for AM and FM broadcasting, new licences will be offered to existing holders under the price-setting formula, subject to averaging of comparable rights. Depending on responses to the consultation, rights may be offered for a shorter term (e.g. 10 years)
8. Do you consider the case-by case review process described in this section, for spectrum licences in management rights 15 and 143 (AM and FM), satisfactory?
9. Are any changes to the approach, such as a renewal period shorter than 20 years, appropriate?
10. Are any amendments required to the Averaging Groups for these rights (Appendix 3)
4.3 Management rights 3 to 14 (MDS)
4.3.1 Case-by-case review
70. The Ministry does not propose to reallocate these management rights in their current form as there are no current licences in these bands and there has not been significant use.
71. These rights were originally allocated for broadcasting use, and tender clearing prices are likely to have reflected this assumption. Spectrum in these bands is suitable for fixed wireless access services. The Ministry will consider reallocation at a future date, possibly with different technical parameters, if these are more suitable for any emerging technology.
72. The Ministry recognises that present rightholders may wish to purchase new rights on similar terms now. The Ministry notes that if persuasive arguments were advanced for reallocation, an auction is the most likely allocation method. Application of the price-setting formula would only be possible if suitable values for V1 and z could be determined by benchmarking against auction clearing prices for comparable spectrum rights.
4.3.2 Summary
73. Management rights for MDS use will not be offered under the formula. These rights have not had significant use, and base prices are unlikely to reflect potential changes in technology for these bands.
11. Do you consider the case-by case review process described in this section, for management rights 3 to 14 (MDS), satisfactory?
12. Should management rights in these spectrum bands be reallocated at this time and, if so, could the rights be benchmarked against auction clearing prices for comparable spectrum rights?
3i.e. UHFTV, MDS, AM and FM broadcasting
4Under existing policy, UHFTV licences configured for analogue will be converted to digital rights on request, subject to technical compatibility (see Digital Terrestrial Television - Spectrum Allocation: Cabinet Economic Development Committee Minute of Decision)
5UCB International Ltd to Prime Television New Zealand Ltd, for 34 licences, 29 of which originated from a nationwide set.
6An alternative option (not currently favoured) is to adjust V1 prices with reference to the secondary market transfer data.
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