Managing spectrum in the 400 MHz band—Next steps

JANUARY 2016

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OverviewThemes raised in relation to the HDAs 2Conclusions for HDAs 4Themes raised in relation to the RDAs 6Conclusions for RDAs 6Amendments to the Tax Determinations 6

The monitoring framework

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Overview

Licensees using spectrum in the 403 to 520 MHz frequency range (the 400 MHz band) currently include a range of industry and government organisations providing predominantly land mobile services but also fixed (point-to-point and point-to-multipoint), radiolocation and amateur services.

There has been high demand for licences in the high density areas (HDAs) of Sydney/Wollongong, Melbourne/Geelong and Brisbane/Gold Coast. In comparison, spectrum within the 400 MHz band has been generally under-utilised in remote parts of Australia. Recognising this, the Australian Communications and Media Authority (the ACMA) has been focused on introducing reforms (including to taxing arrangements) that enable more efficient use of this spectrum.

The ACMA is implementing a series of initiatives to manage spectrum in the 400 MHz band predominantly focussed on alleviating congestion. These initiatives include:> a reduction in channel bandwidth> improved harmonisation of government spectrum use (including the establishment

of a consolidated state-wide government licensing arrangement)> a more flexible technical framework.

Pricing incentives through the use of opportunity cost is seen as a complementary initiative targeted at reducing congestion and encouraging long-term efficient use in the HDAs in the 400 MHz band.

On 24 June 2014, the ACMA released a discussion paper entitled, Progressing opportunity cost pricing in the 400 MHz band. The discussion paper detailed the rationale and monitoring program behind the ACMA’s intention to apply opportunity cost (OC) principles and proposed changes to the apparatus licence tax rates applicable to spectrum in the HDAs and remote density areas (RDAs) in the 400 MHz band. The proposed changes to the licence tax rates and reasons for the proposed changes were:> To increase the apparatus licence tax rates in the HDAs by approximately 15 per

cent—this represents the second of five proposed increments towards the estimated OC price. In 2012, Plum Consulting estimated that the OC in the HDAs of the 400 MHz band was $199/kHz with adjustments for inflation to be made over time. In implementing this change, the ACMA is seeking to rotate spectrum from low (uneconomic) to high value uses and to avoid inefficient investments occurring in the HDAs in the 400 MHz band by progressively raising the licence tax rate toward the estimated OC of $199 per kHz.

> To decrease the apparatus licence tax rates in RDAs so that licensees would pay the minimum annual tax for each spectrum access. This change was proposed because the ACMA found that overall demand for spectrum in RDAs in the 400 MHz band was low and therefore there was minimal OC.

The ACMA received seven submissions to the discussion paper, from:> Australian Radio Communications Industry Association (ARCIA)> Australasian Railway Association (ARA)> Naidia Test & Experimental Range

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> National Coordinating Committee for Government Radiocommunications (NCCGR) > NSW Telecommunications Authority > Telstra Corporation (Telstra)> WA Government/Department of Commerce.

Themes raised in relation to the HDAsThe main matters raised by respondents about the issues associated with the HDAs and the ACMA’s responses are included in the following table.

Table 1: Matters raised in submissions Table 2: ACMA’s response

Metrics are overly simplistic and unrelated to congestion > The proposed monitoring metrics were

characterised as general demand measures that did not directly relate to channel availability and/or congestion. In stating this respondents recognised that estimating change in channel availability and/or congestion is complex.

> The ACMA agrees that the original monitoring framework in the discussion paper did not adequately capture all of the factors relating to the evolution of both demand and supply and thus did not enable analysis of the potential for the re-emergence of congestion. Reflecting this, the ACMA has modified its approach to considering the appropriateness of further increases in the licence tax rates in the HDAs of the 400 MHz band and re-focussed its monitoring framework to a simplified analysis of the evolution of spectrum demand and supply and assessment of the risk of the re-emergence of spectrum congestion.

> The ACMA has modified its monitoring framework by:o accounting for the supply of spectrum made

available because of the new planning arrangements

o adjusting for the supply of spectrum and the demand for licences to account for the introduction of the new Harmonised Government Spectrum (HGS) licensing, planning and pricing arrangements

o predicting the potential growth in demand for licences over the near term to consider the likelihood of congestion.

> Details of the modified framework are available in the following section.

Application of price signals to government sector is ineffective> Respondents disagreed with the ACMA’s

conclusion that a further 15% increase in licence tax rates is required because the impact to date has not been sufficient. In their view this conclusion ignored the ineffectiveness of ‘price’ signals in the government sector; the regulatory reforms (including narrow-banding and the introduction of harmonised government spectrum bands (HGS)1) should be fully

> In the ACMA’s view, the OC of this spectrum is the same irrespective of whether the current user is a commercial or government user.

> However, the ACMA adjusted the monitoring framework to exclude the effects on demand and supply because of the introduction of HGS arrangements. This adjustment is not because the licensees are government entities but due to the HGS arrangements having their own band planning, licensing and pricing arrangements and therefore having different demand and supply characteristics.

1 The HGS is a licensing solution enabling state and territory governments to coordinate their spectrum use through consolidating spectrum use into a dedicated spectrum segment and authorised by a single licence

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Table 1: Matters raised in submissions Table 2: ACMA’s response

implemented before determining whether a further tax change to introduce OC principles was necessary.

Broader regulatory reforms should have been fully implemented before considering OC-based licence tax rates > The regulatory reforms (especially narrow-

banding) were more significant in achieving the improvement in spectrum congestion apparent so far.

> The ACMA considers that there are a number of risks associated with delaying changes to the licence tax rates to reflect OC until the impacts of the regulatory changes have matured. In such a wait-and-see context, the investment decisions of licensees (actual and potential) would continue to be informed by the current licence tax rates which, in the case of the HDAs, are significantly below OC-based licence tax rates and thus considered too low. This generates a risk that inefficient investment decisions will occur. If an assessment of congestion is only undertaken after implementing all the regulatory reforms and it is found that congestion has reoccurred, the ACMA will find itself having to introduce more regulatory reforms. In the ACMA’s view this could be more disruptive to the industry than smoothly moving toward an OC-based licence tax rate relatively simultaneously with the regulatory reforms and ensuring robust long-term investment decisions are made.

The ACMA monitoring analysis does not account for the effect of regulatory changes > A numbers of respondents argued that the

regulatory reforms (including narrow-banding and re-stacking into the HGS) should be fully implemented before determining whether a tax change to introduce OC principles was necessary. Given that the impacts of the regulatory reforms were not yet mature, it was argued by respondents that it was premature to assess the need for an increase to the OC-based tax rates.

> The ACMA has introduced a number of regulatory changes contemporaneously with the tax increase with similar or overlapping intended behavioural responses from licensees. This makes it difficult to identify the unique contribution of tax increases towards the desired behaviours. Recognising this, the ACMA has not attempted to disaggregate the behavioural responses of licensees into components attributable separately to the tax increase and separately to the regulatory changes. The focus of the modified monitoring analysis has been on identifying whether risk of congestion in the HDAs in the 400 MHz band has been removed and is unlikely to return (whether due to regulatory changes or tax changes) such that further tax increases are not required.

Treatment of licences within 100 kms of the HDA boundaries > The NCCGR suggested that the current

licensing regime contributes to congestion in the HDAs by effectively not applying OC-based licence tax rates to licences located outside the HDA but within 100 kms of the various HDA boundaries.

> In announcing its intention to apply OC principles to the 400 MHz band, the ACMA has noted its commitment to first addressing issues with the HDAs. While the ACMA acknowledges that demand for spectrum is not solely affected by issues within the HDAs, it is unlikely that other factors are having such a material impact on the demand and supply of spectrum that it would change the general conclusions outlined in this paper.

Analysis period is too short > A number of respondents argued that the

monitoring period (effectively 21 months

> The ACMA considers that initiating the analysis around August 2012 (that is when the licence tax rates were first increased) provides a sufficient period of time from

for each participating state and territory.

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Table 1: Matters raised in submissions Table 2: ACMA’s response

at the time of consulting) was too short and this compromised the analysis. A short monitoring period did not allow for mature responses to the regulatory reforms and did not enable a valid comparison of congestion before and after the change to the licence tax rate (and the implementation of regulatory reforms).

which to analyse impacts on demand and congestion.> Associated with the development of the modified

monitoring framework, the ACMA extended the time period in the updated analysis to October 2015.

In light of the feedback received from stakeholders, the ACMA looked further at the likely future supply of spectrum and the current and emerging demand in the 400 MHz band, to assess their impacts on efficient spectrum use in the band. Without the introduction of new pricing (taxation) arrangements, demand for spectrum in the band is expected to remain high, and all new, as well as existing users, will continue to have difficulty in acquiring spectrum and deploying new technologies in the band.

In the balance of this paper, the ACMA considers the use of pricing as a mechanism to optimise efficient use in the band for commercial users.  As noted earlier, the ACMA is implementing other initiatives to optimise efficient use of the 400 MHz band for non-commercial users such as government users.

Conclusions for HDAsThe ACMA considers that the introduction of efficient pricing signals is one of a number of mechanisms to encourage efficient spectrum use; especially for non-government demand in the 400 MHz band. Where licence tax rates for spectrum remain below a level consistent with OC and congestion exists, some low value (or uneconomic) uses of spectrum are likely to remain, potentially crowding-out alternative high value users. Further, there is a risk that inefficient investments (in both spectrum and spectrum-complementary inputs/assets (including long-lived network assets) will be undertaken using return expectations artificially improved by the lower than appropriate licence tax rate for spectrum. Such outcomes are inconsistent with efficient spectrum management.

Implementing OC pricing arrangements ensures that current spectrum users encounter the long-term OC of their spectrum use. It encourages efficient long-term use of spectrum by licensees; and facilitates efficient investment decisions in spectrum-complementary assets. This approach encourages spectrum users to take the OC of spectrum into account when making spectrum use and associated investment decisions.

One purpose of the monitoring exercise undertaken by the ACMA is to mitigate the risk that the long-term licence tax rate is set too high and, as a consequence, demand contracts more than is needed to redress high demand and congestion. To date, the monitoring undertaken indicates an improvement in spectrum availability, but it does not indicate a sharp contraction in demand consistent with the likelihood that the long-term licence tax rate is now too high relative to the estimated OC.

The monitoring framework also needs to have a forward-looking focus to identify in future risk of congestion occurring, and, if necessary, pre-emptively adjusting licence tax rates. Reflecting these considerations, the monitoring framework has been modified as a result of the stakeholder consultation undertaken mid-2014 and further monitoring undertaken by the ACMA. The main changes include:

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> Excluding government spectrum demand and quarantining the impact of the introduction of the HGS which is not part of the long-term spectrum supply for non-government demand. Inclusion of the HGS in the original monitoring was arguably distorting the monitoring analysis. This exclusion reflected that the ACMA is implementing other non-price strategies to more effectively manage government spectrum demand.

> Developing an indicative metric of supply in non-HGS spectrum and a short-term glide-path reflecting the positive impact on supply of the reduction in channel bandwidth. As a result, the monitoring analysis aligns coverage of both demand (future expected use by non-government licensees) with supply available to satisfy this demand (non-HGS spectrum).

> Developing an indicative scenario for the forward evolution of private demand for non-HGS spectrum. This re-focussing to a simplified analysis of the likely evolution of spectrum demand and supply enables a pre-emptive identification of congestion risk uncomplicated by the inclusion of government sector licensees.

Using this more dynamic monitoring framework and simple trend-based projections of demand, it suggests a material risk that demand for this spectrum in HDAs is likely to match augmented supply in the medium term (within a three-year horizon).

In summary, the ACMA considers that the following factors reinforce the need for a further increment of 15 per cent to the licence tax rates in the HDAs in the 400 MHz band:> The spectrum made available by the regulatory reforms associated with the new

band planning arrangements is progressively being utilised in an orderly manner. > While the monitoring framework generally indicates that there has been

improvement in spectrum availability and congestion it does not indicate a sharp contraction in demand consistent with the likelihood that the long-term licence tax rate is now too high relative to the estimated OC.

> As Figure 1 below shows, demand for spectrum is continuing to grow in terms of numbers of licensees. Analysis undertaken by the ACMA suggests there is a material risk of congestion commensurate with that experienced around 2010 (adjusted for enhanced supply) re-emerging over the next few years.

> To ensure long-term efficient outcomes requires that new and existing uses encounter the estimated OC of their spectrum use. As a result, leaving licence tax rates at current levels would increase the risk that inefficient spectrum use outcomes would persist.

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Figure 1: Evolution of demand and supply of spectrum in the HDAs in the 400 MHz band

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Supply congestion buffer Actual data Linear projection

Themes raised in relation to the RDAsStakeholders supported the reduction in the licence tax rate in RDAs given low demand and lack of congestion in these areas. However, some respondents were nevertheless sceptical about whether the reduction in the licence tax rate would achieve a material impact on demand.

More efficient use of currently underutilised spectrum is the intended objective and rationale for OC pricing in the RDAs in the 400 MHz band. Reducing taxes towards OC may facilitate entry of licensees who value this spectrum above the OC tax but below the current tax level. This would have the effect of encouraging greater use of this spectrum. Consistent with the principles of OC pricing, in cases where supply exceeds demand into the foreseeable future, there are unlikely to be productive alternative uses of spectrum, and thus OC is expected to be zero or negligible.

Some respondents expressed reservation about the substitutability of segments in the Pilbara region but were nevertheless comfortable with the reduced licence tax rate applying to that region.

Conclusions for RDAsThe ACMA intends to reduce licence tax rates to $0.00/kHz across all RDAs in the 400 MHz band, including in the Pilbara, and apply the minimum tax amount specified in the Radiocommunications (Transmitter Licence Tax) Determination 2015 (Transmitter Tax Determination) and Radiocommunications (Receiver Licence Tax) Determination 2015 (Receiver Tax Determination) (together, the Tax Determinations). More efficient use of currently underutilised spectrum is the intended objective and rationale for OC pricing in the RDAs in the 400 MHz band.

Amendments to the Tax DeterminationsAfter undertaking this analysis, the ACMA believes that there is appropriate evidence to implement both sets of proposed changes to the Tax Determinations to further implement OC pricing into the 400 MHz band.

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In summary, the ACMA has amended tables 202, 302, 402 and 502 of the Transmitter Tax Determination and tables 202 and 302 of the Receiver Tax Determination to increase the tax amounts for the 400 MHz band by 15 per cent. The following table outlines these changes, which will have effect in relation to licences that come into force on or after 5 April 2016. The changes to the Tax Determinations also include the 1.5 per cent increase to taxes for annual inflation.

Table 3: Transmitter Tax Determination

HDA RDA

Current As at 5 April 2016

Current As at 5 April 2016

Table 202 1.6963 1.9801 0.0574 0

Table 302 125.4214 146.398 4.2425 0

Table 402 31.3553 36.5995 0.7183 0

Table 502 125.4214 146.398 2.8367 0

Receiver Tax Determination

HDA RDA

Current As at 5 April 2016

Current As at 5 April 2016

Table 202 1.6963 1.9801 0.0574 0

Table 302 31.3553 36.5995 0.7183 0

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The monitoring frameworkAs noted in the overview section of this paper, the ACMA has undertaken further analysis to assess the potential for the re-emergence of congestion over the medium term. This analysis constructs plausible paths for the evolution of both spectrum supply and demand over the medium term. The key aspects of this analysis are explained below.

The purpose of these projections is not to provide precise forecasts of medium-term spectrum demand and supply, but to provide information about the materiality of risks around the re-emergence of congestion (that is, where demand is too close to augmented supply) across the medium-term.

Accurately forecasting demand for spectrum is difficult—partly because spectrum demand is a derived demand and dependent in part on the demand for the relevant final product that uses spectrum as an input; and partly because there are substitutes to spectrum as an input to the final product. Reflecting this complexity, the ACMA has used linear extrapolation to project the forward profile of relevant spectrum demand (proxied by the number of licences) across the medium term (to end-2021).

The monitoring framework on aggregate demand of licences suggests that the marginal decrease in licences apparent during the initial introduction of the regulatory reforms relating to the 400 MHz band has been replaced with an increase. Figure 2 below plots the increase in the number of licences in the HDAs in the 400 MHz band that has occurred since October 2013 and a linear extrapolation of that trend to end-2021. This recent increase is a positive development as it is consistent with both a rotation from low value to high value spectrum users and ensuring that spectrum freed up because of the regulatory reforms does not indefinitely remain unused or fallow.

Figure 2: Spectrum demand projection in the HDAs in the 400 MHz band

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Quantifying spectrum supply can also be quite complex. The ACMA has developed a simplified approach to the forward evolution of supply. The approach initialises spectrum supply (number of potential licensees) at the level of demand late-2012 when demand was close to supply (that is, there was congestion) and then evolves supply thereafter with the pace of reduction in channel bandwidth. On this basis, spectrum supply (the number of potential licensees) grows as existing licensees move to the reduced bandwidth of the channels, which previously enabled a single licensee,

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to accommodate two licensees. This analysis has been undertaken for the non-HGS spectrum to ensure the analysis is not compromised by government licensee movements associated with the intended establishment of the HGS. The constructed evolution of supply is depicted in Figure 3 below.

Figure 3: Indicative evolution of supply of spectrum in the HDAs in the 400 MHz band

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Supply congestion buffer Post re-channelisation supply Pre re-channelisation supply

Figure 4 below overlays the evolution of both aggregate demand and supply out to 2021. This enables a simultaneous comparison of the projected shifts in both demand and supply across time. This assists with an analysis of the risk that demand will consistently accelerate faster than supply and contribute to a re-emergence of congestion over the medium-term.

Figure 4: Overlay of demand and supply of spectrum in the HDAs in the 400 MHz band

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The trend-based projection of demand suggest that there is a material risk that demand for spectrum in the 400 MHz band in HDAs is likely to match augmented supply in the medium-term (that is a three-year horizon). There is a possibility that extrapolation of recent demand trends understates the extent of likely growth in

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demand and therefore understates the materiality of congestion risk in the short- to medium-term.

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