Technico-EconomicMethods for Radio Spectrum Assignment Technological advances have increased the amount of available radio spectrum, and hastened the development of new services utilizing the spectrum. Given the growing importance of spectrum for economic development, existing frequency management systems need to be improved. Abdul M. Youssef, Eva Kalman, and Laurent Benzoni
1864
Maxwell demonstrates the identity of electromagnetic waves. 1887
Hertz experimental& confirms the link between light and electriciy. 1896
Marconi uses “Hertzian”waves t o communicate, inventing wireless “telegraphy.’’
ABDUL ,W. YOUSSEF i,> U wnior reseurch eriginew with the techno-economic siudies sovice of France TelecomICNE T. EVA KALMAN i.s U .strmegic marketing mmuger with thp Global Srur Project nt Frunce TcleLoni iMohiles.
LAURE.NTBENZOhili.~U profesm- of economics N I ihe Lhiversiy of’Puns.
The approach contained in this article is empirical
and technical rather than iheoreticuL For a therirericul approach of the economics of frequency allocution, tee references [I-4, 14-lh/.
88
hese were the stages in the birth of radiocommunications ... From these principles, techniques were to develo p rapidly toward information transmission between fixed points (fixed services), between land stations and mobiles (mobile services), radio and television broadcasting and radar (radio reckoning, radionavigation, radiolocation), not to mention radioastronomy or meteorology. And each of these services made increasingly intensive use of the spectrum. Disposing of an international telecommunications network, watching the television, ensuring flight safety, communicating while traveling, and forecasting tomorrow’s weather all depend on the availabilityof radio frequencies,which in turn rcquire planning, management, and control of the spectrum. Who are the actors involved in spectrum management? And who hence have responsibility for the development of radio services? Four major actors may broadly be distinguished: The regulator, who determines access conditions to radio resources and just procedures for use. T h e operator, who defines and operates the services making total or partial use of frequencies. The manufacturer, who, dependingon regulations drafted by the regulator, bills and ensures the dissemination of the equipment required for thesupply ofthe serviceswhich the operatorwishes to offer or which the end user desires. The end user who may or may not know (but in either case has little more than a passing inter-
0163-6804/95/$04.00 1995 0 IEEE
est in the question) that the equipment he is using works o n radio frequencies, which d o e s not stop the previous three from claiming to speak in the end user’s interest. The interplay between these actors is complex and unstable. It is critically dependent on the regulatory environment in which these relationships evolve. Hence, if we consider that the radio frequency spectrum involves public ownership, the regulator is the only judge of the need and timeliness of using particular frequencies, and only the general interest as represented by the state is taken into account. Under this assumption, the operator and the manufacturer are in a situation of dependency under the regulator, who can furthermore make sole decisions as to the price of supplying a service, whether above its cost (thus creating a revenue for the state treasury) or below its cost, as in an indirect subsidy to a manufacturer (industrial policy) or to the cnd user (public service). Until the prescnt, account was taken principally (if not exclusively) of the following: technical parameters such as the power of the equipment, which determined the areas in which the services would be supplied; transmission characteristics, which defined the frequency bandwidth (either necessary o r occupied); and protection ratios, which defined any share-out between different systems. Hence, the term “economics of frequencies” often covered the analysis and comparison of construction costs for equipment and service provision on the basis of natural constraints (the propagation of radio waves obeys physical laws, which make the development of a service in a given frequency band possible or impossible -variations in the “quality” of the spectrum). Historic constraints were also taken into account (for example, when a certain frequency has been allocated to a particular use, it is in principle inaccessible for another service). During the last two decades the disequilibrium between the demand for radio frequencies and the available supply has continued to grow. This disequilibrium tends to be structural, at least in the industrialized countries. Consequently, there
IEEE Communications Magazine June 1995
.I.
is a rivalry for the exploitation of the spectrum and this rivalry will characterize a shortage where the expressed demand cannot be satisfied. Since the spectrum is a scarce resource, the rules of its allocation should proceed from an economic analysis [l]. According to economists, when demand exceeds supply a price system is needed to set up rationing mechanisms. Now, in the case of spectrum, demand exceeds supply, but the price of the resource remains nil. This atypical situation with regard to the allocation of a scarce natural resource in a market economy represents what we call the “spectrum paradox.” This paradox results from the methods of allocation and regulation of the spectrum which consider only technical and legal aspects and fail to take into account the economic value of the resource. The “spectrum paradox”started a body of important economic literature dealingwith the nature and mechanisms of allocation of the resource. Given the current scarcity of the spectrum, most OECD member countries are investigating the possibility of introducing economic incentives in frequency allocation procedures [6, 9, 10, 19,201. A number of countries have recently published reports on this subject and others have set up commissions or expert working parties to study proposals in this area. It is now universally recognized that the spectrum has an economicvalue. This value must therefore be taken into account in the allocation decisions and must b e revealed to the users of the resource, irrespective of whether they are private or public entities. In terms of general principles, all countries acknowledge the need for greater flexibility in the current allocation procedures so that the frequency bands can be reallocated relatively speedily when necessary without jeopardizing long-term planning objectives. Therefore, we shall study several methods of allocation which are complementary or alternative to the current system: the market, auctions, frequency coordination, lotteries, and user fees.
Methods for Spectrum A//ocation countriesof theworld the frequency spectrum loutisn alltreated as a publicgood. Management is carried by central government agencies, and except forcertainuses, it isconcededvirtuallyfree ofcharge to users. But whereas in the United States a large number of users have historically been private enterprises, in Europe they were essentially public sector organizations. The relationship between public and private sectors in the allocation of the spectrum explains the fact that the economic literature relating to it is essentially of Anglo-Saxon origin. Hence, in the O OS, U.S. economists called into question the windfall profits generated by private broadcasting companies on the radio spectrum as a public resource which they were able to use without payment of any fee [7]. According to American authors, free access t o this scarce resource led to a situation where profits were greater than normal profits on competitive markets.
The Liberal Approach From the standpoint of liberal analysis, competi-
IEEE Communications Magazine June 1995
tive mechanisms must therefore be restored, and in order to d o so, spectrum must become a “private good.” The American economic analysis is essentially based on the theoryof property rights [7]. It advocates the setting up of legal property entitlements (exclusivity) and a market for the exchange of these entitlements (transferability). If the right is exclusive, its owner shall bear all the negative consequences and profit from the global advantages attaching thereto [ll].The individual shall be able to make optimal decisions between competing uses only if he can at any time proceed to transfers. The transferability presupposes the existence of efficient markets [18]. The efficiency of the market allocation depends on the structure and the functioning of the market. From a theoretical standpoint, the superiorityof the market compared to the administrative and centralized system can be proved only i f 1) the market is perfectly competitive; 2) transaction and enforcement costs are nil; 3) information is perfect and the environment certain. If, however, transaction and enforcement costs are positive and externalities (interferences) cannot be avoided, the optimum is necessarily a second best and the compared efficiency of the two organizational patterns cannot be evaluated [3, 141. While the pure market and the centralized allocation are the boundaries of the “allocation field,” it is possible (and necessary) to mix the two methods to create an effective mechanism of allocation. Several methods of allocation/assignment could be implemented, each of them governed by different rationales.
-
There is a rivalryfor the exploitation of the spectrum and this rivalry will characterize a shortage where the expressed demand cannot be satisfied.
Spectrum Allocation in a Mixed Economy System Under an auction system, the rights associated with administrative control of the spectrum are retained by the government, which may also retain some role in specifying the terms and conditions under which spectrum is to be used. The price of spectrum is set by individual users, typically by means of an auction. The spectrum manager issues a number of licenses, each entitling the holder to transmit under certain specified conditions. He can then choose between different types of auctions: “English” (oral ascending-bid) auctions, “Dutch” (oral descending-bid) auctions, first price sealed-bid auctions, and second price sealed-bid (Vickrey) auctions [ l , 141. In the traditional (English) auction, oral bids start low, and increase until the good is finally obtained by the highest bidder at the price at which the second highest bidder dropped out. In Vickrey or second-bid auctions, bids are in writing and each bidder states a price and the good goes to the highest bidder who pays a price equal to the second highest bid. There is also a form of traditional auction where the bids are submitted in writing, with the good going to the highest bidder at the price stated. Dutch auctions are oral auctions where the auctioneer announces a high price and then reduces it until a bidder accepts to pay for the good at the price announced. The main problem with this method of allocation is that only empty frequency bands can b e auctioned and that most of the frequency bands are already occupied or allocated. Thus, only a very small part of the spectrum can be auctioned.
89
*
The eficiency of the system depends on the regulator’s ability to “reproduce” users’ individual decisions and to centralize information needed for the market simulation.
90
Frequency coordination is a procedure already used in the United States to determine the design and location of microwave systems in the 4 and 6 GHz bands. Coordination provides a way for spectrum users to acquire the right t o b e free from unacceptable interference and to modify the right or transfer it toother users. The coordination process requires new users to determine whether their planned use of the spectrum might interfere with any existing user’s operation. T o obtain permission to operate, new userswill negotiate with existingusers, and sometimes pay for the changes to the existing station in return for permission to operate. Frequency coordination allows the sharing of a frequency band between several usesor users. This method is suitable only for compatible uses or for a single use [14]. When the rights of use for a public resource are attributed by a [otter)!procedure, the government has t o identify the lots, define t h e concession clauses, and organize and conduct the draw. In some versions, applicants would have t o meet minimum qualifications standards, and in others would be allowed to immediately re-sell channel rights to others. With a lottery procedure, the eligible candidates all have an equal chance of being selected. Lotteries a r e particularly well adapted to standardized uses where technical differences between the candidates are not important. Furthermore, as a random process is used to select among competing applicants, lotteriesdonot “engage” thegovernment’s responsibility in the selection decision. Nevertheless, lotteries seem suitable only as a means of deciding between claimants for empty radio channels who have similar qualifications [l, 141. A user fee system does away with the problem of incumbent users; it can be applied to all users and provides incentives for the efficient use of frequencies. Furthermore, the tarification helps raise revenues required for spectrum reallocations. From the standpoint of economic theory, the most efficient fee formulas are those taking into account the shadow price of the spectrum. T o calculate the shadow price, the regulator has to simulate a market from which he is able to determine spectrum users’ willingness to pay. Thus the efficiency of the system depends on the regulator’s ability to “reproduce” users’ individual decisions and t o centralize information needed for the market simulation [l, 141. In 1972, a technical proposal submitted to the Office of Telecommunications Policy (predecessor of the NTIA) concluded that “Although shadow pricing is conceptually popular among economists, there is almost no practical experience with it as a management tool” [22]. The “market simulation” project has since been canceled because of the unavailability and the large quantity of information required for its operation. Another possibility is to set the fee according to the opportunity cost of spectrum. “Opportunity cost is the evaluation placed on the most highly valued of the rejected alternatives or opportunities [4].” While the shadow price method requires consideration of the whole set of uses and users of the spectrum and should lead to a Pareto-optimal allocation, the opportunity cost method only requires consideration of the uses and users competing for a specific frequency band. In fact, because of the
lack of information, existing empirical estimates consideronlyaverylimited number of uses (between one and three). In order to cope with the problem of data collecting, the regulator may introduce so-called “incentive fee formulas,” containing factors such as the population or area served by the radiostation, the attributed bandwidth, etc.
Incentive Fee Formulas ecent attempts to reform spectrum manageR ment and control structures give an excellent opportunity to re-examine the existing license fee systems and t o propose new frequency pricing approaches. As the current gratuitousness of the spectrum often leads to wastage of the resource and hampers the development of systems with higher technical performances from the standpoint of spectrum efficiency, the new fee formulas should reflect t h e economic value of frequency bands and promote their efficient use. The economic value of frequencies depends upon several parameters, such as the bandwidth of occupied channels, their location in the radio spectrum, their service area (size and density of population of the area covered), and the types of services supplied. If F designates the amount of fee (in currency units) for a frequency band which bandwidth is Af, f, the central frequency of the band (e.g., its location in the radio spectrum), and (T and T the density and size of the service area: The integration of the function h throughout the whole set offrequenciesof the radio spectrum gives, in principle, the total amount of fees collected. Several forms have been proposed for the function h but only a few of them have been applied so far. In the following we shall attempt to analyze and compare some of the formulas and see how they could be applied in some particular cases. First of all let us analyze the function h itself Most spectrum management organizations apply the function h to frequencies between 30 MHz and 60 GHz, where most of the existing uses are located. As a matter of fact, since the high cost of equipments operating above 60 GHz involves a “redhibitory” price for services supplied, only frequencies below this limit are technically exploitable at the end of the 20th century. Frequencies below 30 MHz are mainly occupied by emergency and security services, as well as Defense uses. W e shall thus apply the function h to the portion of spectrum included between an initial frequency fini = 30 MHz and a final frequencyffi” = 60 GHz. *Taking into account in the function I? the type of use implemented in t h e band concerned is equivalent to defining an economic value for the Hertz, which varies according t o the different radiocommunications services. Doing so presupposes a relatively complex technical and economic analysis which requires an in-depth comparison of different services and an evaluation of their economic impact. In order to simplify the problem, we have established a function h that is homogeneous and applies to all services. Thus, the amount of fee for a given channel whose bandwidth is Af will not depend upon the type of service supplied
IEEE Communications Magazine June 1995
00 A
40
20
0 MHz
Figure 1. Staircase form of the tenn A of formula 13).
and the parameter T can be ruled out of the func tion h. *As the transmitting capacity of a channel depends on its bandwidth, 4,the economic value of each channel is directly proportional t o Af. Thus, the function h will vary in direct ratio to 4f. *Competition for spectrum utilization is generally more effective for lower frequencies which have better propagation characteristics. This phenomenon is closely linked to existing technologies. T h e amount of fee, F , will thus vary in inverse ratiowith the central frequency& which reflects the location of the band concerned in the spectrum. Revenues generated by spectrum exploitation increase in direct ratio to the population of the service area. F is therefore directly proportional to the density of population (3 and the surface T of the service area. *One of the main objectives of establishing a license fee system is to recover spectrum management and control costs. As the total amount of fees collected should cover at least these expenses, it is necessary to introduce into the function h a multiplier coefficient A , which may occasionally be re-evaluated according to objectives in terms of revenues. If we take the above remarks into consideration, the function 11 will take the following form:
F = h(Af,f,., (3. r ) = A.Af.p(o, T).q(lif,) (2) w h e r e p is a function depending upon (3 and T whichcanbeeitherlinear,continuousordiscrete,and q a non-linear continuous function off,. having the form lifc”,with n is a positive real number. The first formula we analyze is the one proposed in [14]. It takes the form: whereA is a constant expressed in currency units per MHz, Af the bandwidth of the channel used, R the average reuse ratio of the channel in the service area concerned (number of installed channels/ number of assigned channels), NCO,,the population in millions receiving the signal or excluded from the reception of other signals transmitted on the same frequency (N,,,, = o.T), and Nref the population in millions of the reference area
IEEE Communications Magazine June 1995
(generally the total population of a country). A comparison with formula ( 2 ) shows that formula (3) fails to take into account the term lif, relative to the location of the channel in the frequency spectrum. Nevertheless, in the formula ( 3 ) A is not constant throughout the spectrum but takes a different value in each of the “spectrum portions“ defined in Article 8 of ITU Radio Regulations (30-470 MHz, 470-960 MHz, 960-3300 MHz. and 3.4-31 G H z ) . As a matter of fact. in o r d e r to encourage extensive development of spectrum and recover the extensive differential rent (resulting from the heterogeneous quality of frequencies) A should decrease gradually a s higher frequencies are used. The value o f A changes from one portion to another, while remaining constant within each portion (Fig. 1). Furthermore, as the fee varies in direct ratio t o the bandwidth ( A f ) and in inverse ratio to the frequency reuse ratio ( R ) ,it should promote the intensive development of spectrum and reveal the intensive differential rent. Taking into account NcOu,/Nref (population coveredipopulation of the country concerned) should encourage geographic sharing of frequencies between uses and/or users. Nevertheless, as it stands, the formula could foster a certain spatial skimming since it does not give incentives to cover low density and low revenues /inhabitant rural areas. In case of time sharing. the fee should decrease in direct ratio to the “intensity” of sharing. In the previous formula (3). sinceA drops in steps, there is a phenomenon of edge effects between the various spectrum portions. Furthermore since propagation characteristics of frequencies are variable, the homogeneous treatment of all frequencies included in each spectrum portion induces a certain “unfairness.” In order to neutralize these secondary effects, the formula (3) was improved. Since A was filtered by a liffilter (A = A ’ $ ) (Fig. 2 ) and the formula (4) contains a variable Log(fmaxifmin),the cost of the reference spectrum unit falls continuously instead of decreasing gradually. Thus, this formula renders an account of the heterogeneous quality of frequencies between 960 MHz and 3 1 GHz. for example:
-
Since propagation characteristics of fiequencies are variable, the homogeneous treatment of all fiequencies included in each spectrum portion induces a certain “unfaimess.”
F = A’ . (liR) . (NcOuv’NtOt) . Logcfmufmin) (4) where A ‘ is a constant (given in currency units) applied to all frequencies between 30 MHz and 60 GHz, fmaXthe higher limit of the band and f,,,, its lower limit ( A f = f,,, -fmln). Numerical simulations with different values for A and A’ (inferred from existing license fees in Germany, Australia, Canada. Japan, the United Kingdom, Sweden, New Zealand, and France) show that average fees per MHz in the 30-470 MHz portionremainfarhigherwithformula(3) thanwith formula (3). In the following 470-960 MHz and 960-3400 MHz portions, one can observe the inverse phenomenon. Finally, in the last portion. average fees are similar with both formulas. A third interesting formula was proposed i n ;I recent French report (131. This formula. like the previous ones, attempts to promote the intensive (the fee varies in direct ratio to the bandwidth) as well as the extensive development of the spcctrum (the fee varies in inverse ratio to the central frequency), but fails t o encourage geographic
91
One defect of the incentive fee formula approach is that one must find a reasonably correct formula if eficiency is to be promoted.
A 1
0.8 I
0.6
0.4 0.2 I l I
!
’
MHz
I
Figure 2. Form in lifof term A of foniiula (4).
sharing of frequencies, as is the case with formulas (3) and (4). The general form of this formula is the following:
F = A . A f . ( lifrer)’ if fmax < fief F = A . A f . [ll(fcl’”)] iff,, >fief
(5)
where A is a constant, expressed in currency units, which will be periodically re-evaluated according to the cost of managing and controlling the spectrum, whilef,,, is t h e higher limit of t h e A f band, andf,,f a reference frequency representing a limit below which the tax per MHz should be constant and reflect a subjective economic value. One can notice that for a given bandwidth A f, formula ( 5 ) has two components: a flat component for frequencies belowf,,f, and a component in 1/cf1’”) for frequencies abovefr,f. Thus this formula is one of the type “flat lifl’”’’. Depending upon the values of the reference frequency, fief, and the exponent, n , the formula ( 5 ) can take different forms. Since frequencies below 1 GHz are those for which competition is the most important and in order to ensure a homogeneous treatment of existing mobile communications systems, in the French proposal fief is equal to 1GHz. Figure3givestheshapeofformula(5)with n = l ( 6 ) and n = 2 (7).
F = A . Af . ll1000MHz) if fmax < lOOOMHz F = A . A f . l/(fc)
iff,,
> lOOOMHz (6)
and
F = A . A f . 1/1000MHz)1/2 if fmax < lO00MHz F = A . A f . [ll(fC)l1”
iff,,
o
0
100
1000
> 1OOOMHz”)
With thevariant ( 6 ) ,19.2percentoftotalfeesare paid by uses below 1000 MHz, and 80.8 percent by uses above 1000 MHz. With the variant (7), 6.7 percent of total fees a r e paid by services below 1000 M H z and 93.3 percent by services above 1000 MHz. Thus, variant (6) ”taxes” broadcasting and mobile communication services more heavily, whereas with variant (7) terrestrial and satellite fixed services are more heavily “taxed.” Finally, the Australian Spectrum Management Agency (SMA) proposed an incentive fee formula which is a completely discontinuous function.
?*io4
I
Figure 3. Two r,ariants offlat n = 1, u r d n = 2.
+
92
1.2
1
i*105 MHz
+ l/fiInformula:
The general form of this formula permitting to calculate annual licenw fees is the following:
F, = (A . S,. G, . B, . T,) // L,
(8) This formula is certainly the most comprehensive one. It intends to cover the SMA’s overhead costs and to recover scarcity as well as differential rents. *The constant A (expressed in currency units) is the same for all licenses. It allows the SMA to obtain a set revenue target. The figure will be updated each financial year. *Siand G; are the spectrum and geographic locations, respectively. There a r e six possible groupings of spectrum locations: < 30 MHz, 301000 MHz, 1-5 GHz, 5-10 GHz, 10-30 GHz. and > 30 GHz. There are three possible groupings of geographic locations: extra-high density (Sydney, Melbourne, Brisbane): high density (Adelaide, Perth, Geelong, etc.): and elsewhere. This gives 18 combinations of spectrum and geographic locations. There is a weighting for each of these 18 combinations, depending upon the density of spectrum access at that spectrum and geographiclocation. The weightings will range down from ten, commencing with the highest density combination. *There are ten possible bandwidth groupings, B; or afin the formula (2): < 36 KHz. 36-200 KHz, 200-500 KHz, 500-2000 KHz. 7-7 MHz, 7-14 MHz, 14-28 MHz, 28-50 MHz. 50-200 MHz, > 200 MHz. There is a weighting for each licensee depending upon his bandwidth as a percentage of his spectrum location grouping (S,). The weightings range down from 10. commencing with the largest percentage. -There are four possible area groupings, T,: Australia. State. local. and sub local. There is a weighting for each of these four groupings, ranging from ten for Australia down. Finally, there are two possible sharing situations, L,, as follows. The first is shared allocations, where the licensee does not have an individual frequency assignment (e.g., amateurs), but shares a frequency allocation across Australia. Each licensee will pay the same fee. The fee calculation follows the formula outlined above. but the spectrum location is for the whole allocation. the geographic location is extra high density. the bandwidth is for the whole allocation, and the area coverage is Australia. T h e total fee is then divided by the number of licensees sharing the allocation. T h e second is
IEEE Communrcitions Magazine
June 1995
shared assignments. where two or more licenses share an individual frequency assignment (e.g., two land mobile users sharing the same transmitter in Sydney). The fee is calculated as above. but is then divided by the number of users sharing the assignment. The weightings will be updated each financial year. The groupings may also change, i.e., both the boundaries and the number of groupings. The problem with these formulas is that efficient spectrum management requires the determination of price, equal to the marginal willingness to pay for every assignment. There is no reason for these prices to be the same for each assignment, nor for the correct price to vary according to the proposed fee schedules. Thus, one defect of the incentive fee formula approach is that one must find a reasonably correct formula if efficiency is to be promoted. Another defect of the incentive formula system is that the value of the constant (A in the proposed formulas) has to be determined by an administrative process. There seems to be no a priori way to establish the value of this constant. unless, for example, the constant is chosen to satisfy some external goal defined by the government such as raising revenue.
Conclusions s we have already pointed out at the beginning A of this article, one can notice a considerable change of mentalities with regard to spectrum allocation during the last few years. As a matter of fact, the Radiocommunications Act of 1989 allowed the sale by auction of 20-year concessions on certain portions of the spectrum in New Zealand. The concessions sold by auction are of two types: “Management rights” which cover thewhole New Zealand national territory, are transferable, and are granted for a period of 20 years. “License rights”without predetermined use which are transferable; their durationvaries but is never greater than that of the “management right” to which they are subject. In the majority of cases, the government has reserved the management rights for itself and distributed only license rights. The Ministry of Commerce is currently reviewing the Radiocommunications Act in order to increase the flexibility of management and license rights in terms of utilization of the spectrum and government’s control of persons who may hold such rights. Comment is sought furthermore on options such as: Specifying the allocation mechanisms that may be used by the Crown (e.g., auction, tender, and direct negotiation). Specifying objectives or matters to be handled with regard to the Crown when making allocation decisions (e.g., maximizing public benefit through t h e efficient use and allocation of spectrum).”[5] The 1992 Radiocommunications Act implemented a reform of the management of radio spectrum in Australia. The Act provides for the progressive introduction of market system in defined bands, improvements to the administrative system, and the establishment of the Spectrum Management Agency (SMA), responsible for the
IEEE Communications Magazine June 1995
The fee Brisbane should , Cairns 0.16 remain a Canberra 0.02 0.03 tool for 1 Goldcost 0.08 0.15 I Hobart 0.05 0.06 rationalizing jI Melboume 0.08 0.2 utilization of Newcastle 0.1 1 0.13 Perth I 0.04 I 0.09 1 spectrum Sydney I 0.09 I 0.1 j Woltongong 0.14 I 0.16 j and in no Table 1. The interim results of MDS license event be auctions (in LIS. $). employed as management of radio frequencies. Australia is a source of already one of the very few countries where all users of the spectrum pay a user fee. The SMA intends to introduce first an incentive fee formula. and the recurrent next step would be t h e establishment of fees based on the market value of frequencies such as additional those revealed by auction procedures on empty frequency bands. During summer 1994, the SMA income for auctioned out 196 licenses (8 MHz each) to operate multipoint distribution transmitters on particular channels between 2076-21 11 MHz and 2300-2400 the state. MHzin 13areas[21].TheAustralianregulatorchose I
’
i
to implement English auctions (Table 1). The Omnibus Budget Reconciliation Act of August 1993 has modified the Communication Act of 1934 in order to allow the FCC to sell by auction licenses to companies providing mobile services to the public on a commercial basis. The FCC held the first auctions for ten nationwide narrowband personal communications services licenses at the end of July 1YY4 [12] (Table 2 ) . These auctions were a “test“ before the auctioning, probably at the beginning of 1995. of more than 2500 spectrum licenses f o r broadband personal communications services. “The auction is one of the biggest and most complicated in histop. The spectrum in offer is estimated by the Office of Management and Budget to be worth $10.6 billion” [17]. The FCC chose simultaneous multiple round auctions because the important amount o f information revealed during the auction facilitates the setting up of rational strategies from the standpoint of economic theory and because the possibility of efficient licenses aggregations increases competition between bidders. Finally, a 1994 report to the Prime Minister advocates the establishment o f a Radio Frequency Spectrum Management Agency in France [ 131. The administrative cost of thc agency and the cost of the compensation fund set up to finance spectrum reallocations (about FF 3 10 million) should be covered by an annual tax. which applies to private as well as public users. With regard to fee formulas, their introduction requires governments to determine the desired
93
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3.03
H Table 2. The winning bids (in U.S. 5). allocation of the spectrum and to set targets for redistribution. Thanks to their incentive properties and to the revenue they raise, fees will then help to achieve these objectives. However, the fee should remain a tool for rationalizing utilization of spectrum and in no event be employed as a source of recurrent additional income for the state. If, as many people suggest, the disequilibrium between the demand for spectrum and the available supply is a temporary situation resulting from a "poor"frequency allocationsystem,feeswill help to relieve congestion by encouraging redistribution and the use of resource-efficienttechnologies. The level of the fee might thus be gradually reduced. In the long run, if the scarcityvalue of the spectrum were to fall to zero, the fee should serve no other purpose than to cover the administrative costs of spectrum management, securing the right to protection against interference. This modulation of the level of the fee according to the prevailing economic situation guarantees the effectiveness of state intervention in spectrum management. In the absence of that guarantee, the legitimacy of the interventionwould be undermined. References [11 L. Benzoni and E. Kalman, The Economics of Frequency Allocation, Report for the OECD, ICCP 33,Paris, 1993. [21L. Benzoni, "Le Spectre Hertzien: Bien Public ou Bien Prive?" L. Benzoni and J. Hausman, eds., Innovation, D6kglementation et Concurrence dans les T6l6communicatiom.(Paris: Eyrolles, 1993). I31 L. Benzoni, E. Kalman, and C. Picory, "Property Rights and the Radio Frequency Market," F. Klaver and P. Slaa, eds., Telecommunication: NewSignpoststoOldRwds, (Amsterdam: IOS Press, 1992). [41L. Benzoni, E. Jeux. and E. Kalman, "La Rareti a-t-elle un Prix?" Le Communicateur, no. 10,summer 1990. 151 1. M. Buchanan. "Opportunity Cost," J. Eatwell, M. Milgate, P. Newman, eds., The New Palgrave, (London: Macmillan. 1987). [61Bureau of Transport and Communications Economics, Management of the Radio Frequency Spectrum: An Economic Analysis, Occasional Paper 102,Canberra, Sept. 1990. (71R. H. Coase, "The Federal Communications Commission," The 1. o f
Biographies ABDUL YOuSSEF received his Engineer Diploma in Instrumentation and Metrology at the Ecole Superieure d'Electricite (SUPELEC), Paris, in 1987 and his Ph.D. in Electronics from the Ecole Centrale de Paris Research (ECP) in 1990.HejoinedtheFrench NationalTelecommunications Centre, CNET(CentreNationald'Etudes desTelkommunications), France Telecom. in 1988.From 1988 to 1990,he was engaged in research on space electronics to develop new technologies for integrating thermal control and radiations protection in space-hybrid technology; he validated and implemented these technologies onboard the ESNNASA Cluster mission, and he registered two patents. From 1991 to 1993, he worked on propagation modeling and prediction for wireless communications channels. Since 1993,he is senior research engineer on technico-economicstudies on telecomminication services and systems. He is a member of the IEEE Communications, Vehicular Technology, Professional Communication, and Instrumentation E Measurement Societies, and the Society of Electrician & Electronics Engineers (SEE) of France. His e-mail address is:
[email protected]. LAURENT BENZONIhas a Doctorate in economics (1985).a Habilitation to supervize research (1987).and an Agregation in economics (1988).He joined the Ecole Nationale Superieure des Telecommunications(ENST). Paris, as an assistant professor in 1986,became a fully tenured professorin 1987,and wasa professorattheUniversityof Pauin 1988-89,before returning t o ENST in 1990 t o become head of the Economics and Managment Department. Then, i n 1994 he was appointed full tenured professor in economics at the University of Paris, Sorbonne (Universite Paris 11). He is the author of many reports and articles on competition and the economics of information technology industries; an expert adviser and consultant t o the Ministry for Research, the Ministryfor Posts.TelecommunicationsandSpace, theEEC, and theOECD; vice-president of theeditorial board of theRevued'Economie Industrielle; a member of the editorial board of "Communications et Strategies"; and a member of the National Consultative Commission for Radiocommunications of France. EVA KALMANis a strategic marketing manager, Globalstar Project, France Telecom Mobiles. She received a Ph.D. in economics and management of information systems from Telecom Paris in 1993.She is coauthor of a bookoneconomicanalysis;reports, articles, and comminicationsonthe economics of communications industries; and in particular on the eccnomics of radio spectrum allocation. She i s a consultant with the OECD. ITU. and several French public and private organizations.
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Civil Telecommunications, Frequency Regulation in the Federal Republic of Germany, Report commissioned by the Federal Minister of Posts and Telecommunications, Bonn, June 1991. (101CSP International. Deregulation of the Radio Spectrum in the UK. Report for the Department of Trade and Industry, London, 1987. [ l l ] A. S. De Vany et al., "A Property System for Market Allocation of the ElectromagneticSpectrum: ALegal-Economic-EngineeringStudy," Stanfordlaw Review, vol. 21,no. 6,June 1969. [121FCC, Answers t o Questions from the June 6 . 1994 FCC Bidders Seminar for the Auction of Narrowband PCS Licenses and Interactive Video and Data Service Licenses, Public Notice, Washington, DC, June 17,1994. [13]P.Huet, ProjetdeRapportsurL'organisationdelaGestiondesFriquences Radioilectriques, Paris, Jan. 1994. [14]E. Kalman, L'Analyse Economique du Spectre Hertzien. Ph.D. Dissertation, Telecom Paris, Paris, July 1993. [15)H. J. Levin. "The Radio Spectrum Resource," The 1. of Law and Economics. vol. XI. Oct. 1969. (1 61W. H. Melody, "Radio Spectrum Allocation: RoleoftheMarket,"American Economic Review Papers and Proc., vol. 70,no. 2, May 1980. [17]1. McMillan, "Selling Spectrum Rights," article to be published in the 1. o f Economic Perspectives. 1994. [18lJ.R. Minasian."PropertyRightsinRadiation:AnAlternativeApproach to Radio Frequency Allocation." The 1.o f Law and Economics, vol. I, April 1975. [19]NERA,ManagementoftheRadioFrequencySpectrum inNewZealand, Report for the New Zealand Government, London, Nov. 1988. [201N.T.I.A.. US. Departmentof Commerce, US. Spectrum Management Policy: An Agenda for the Future, NTlA Special Publication 91-23, Washington D.C.. Feb. 1991. (21I Spectrum Management Agency, Multipoint Distribution Station Transmitter License Allocation, Information Memorandum, Canberra, Australia, May 1994. (221Tempo, Management of Federal Spectrum Use Through Shadow Pricescanit BeRendered Practicable?,TechnicaIProposalT-O17submitted to the Office of Telecommunications Policy, Washington, DC. April 1972.
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