Telecom Regulatory Authority of India India case study on spectrum - - PDF document

Contact:

• Mr. S K Mishra

Principal Advisor. TRAI Email: irdivision@trai.gov.in ASIA-PACIFIC TELECOMMUNITY Document: SATRC Workshop on Spectrum Management SAPVII-WSSPEC/ INP-17 18 – 20 December 2019, Goa, India 18 December 2019 Telecom Regulatory Authority of India India case study on spectrum valuation and reserve price

SATRC WORKSHOP ON SPECTRUM MANAGEMENT

INDIA CASE STUDY SPECTRUM VALUATION & RESERVE PRICE

Evolution of Spectrum Pricing

• 1959- R H COASES

wrote article titled- The Federal Communications Commission

• 1994-Auction adopted by FCC and thereafter by

most regulators

• Spectrum

pricing methods have evolved alongside more market-based methods for assigning and authorizing spectrum use such as spectrum auctions, spectrum trading and leasing sharing

• However not

all radio frequency Spectrum is suitable for assignment through auctions as the means for assigning spectrum

Spectrum price objectives

• There are broad spectrum management objectives associated

with spectrum prices and spectrum fees.

• Spectrum prices should promote efficient use of spectrum. As a

vital natural resource, the price of spectrum should be sufficient to ensure that it is valued and used wisely. Use of spectrum provides considerable benefits to the economy and benefits from spectrum should be maximized.

• The

costs associated with managing and regulating radio frequencies (including monitor and control) should be recovered from those who benefit from spectrum management activities. This should apply to all users of spectrum – both public and private.

• Important social economic objectives can be advanced by use of

the spectrum and spectrum pricing should facilitate the achievement of countries social economic goals.

Determination of spectrum prices

Establishment of spectrum price closely linked to

• Economic and market conditions,
• Technical factors such as which technologies and

services are being used or deployed,

• Efficiency and quality of those technologies and

services,

• Need for Assignment of spectrum to spectrum users.

Factors affecting value of spectrum

• Regulatory/licensing restrictions
• Spectrum band location
• Geographic location
• Competitive situation
• Size of spectrum band
• Cost of alternates
• The returns from use of Spectrum as perceived by

the seeker–Savings/earnings/efficiency

• Eco-system/Market appetite

Alignment of revenue goals and requirements

• f government with spectrum pricing

recommendation

Notwithstanding these objectives, the revenue goals and requirements of government also influence the setting of spectrum fees. As best as possible these revenue targets should align with the objectives of: (i)

• ptimal spectrum efficiency,

(ii) achieving economic and social development goals, (iii) spectrum users paying for spectrum resource usage, (iv) recovering spectrum management costs

Determining spectrum prices: Administrative and Market based Mechanisms

• Spectrum prices for radio frequencies are established

using either an administrative method, a market based method, or by using a combination of both administrative and market-based mechanisms.

• Administrative mechanisms include administrative

incentive pricing (AIP) and spectrum fee formula that recover regulatory costs of spectrum management.

• Market-based

mechanisms for setting spectrum prices typically involve a market exchange such as spectrum auction and (in the secondary market) spectrum trading and sharing.

Market-based Economic Value

• In the case of auctions and spectrum trading, participants in a

competitive auction

• r

engaged in a spectrum trade will determine the price at which spectrum rights will be obtained

• In an auction, the economic value is reflected in the price paid

by the successful bidder, which will meet or exceed the reserve price established for the auction.

• In the case of spectrum trading, the economic value is reflected

in spectrum trading prices and the spectrum fee will include any transaction costs imposed on the participants in the trade.

• When

spectrum prices are determined through market mechanisms, price levels at a given time may be influenced by a number of factors such as geography, competition amongst potential users, advances in technology & eco-system, the present value of cash flows derived from a particular service over time, the general economic climate including the demand & supply, and particular conditions and obligations to licensees.

Evolving International Practice – Auction of Spectrum

• In general, worldwide, auction is evolving as the preferred way of

allocating spectrum to service providers.

• Many

countries like USA, UK, France, India, Germany, Italy, Netherlands, Australia, Brazil, Argentina, New Zealand, South Korea, Spain, Norway, Denmark, Greece, Mexico, Sweden, Pakistan, Sri Lanka follow auction route to allot spectrum to operators.

• China and Japan are some countries not following auction route and

assigning spectrum administratively to operators.

• However, it may not be always a good idea to adopt auction route

Differing Perspectives of the stakeholders

• Buyers
• Sellers
• Government
• Regulator
• Consultants/valuation

experts

• Economists/Academic

world

• Least Price
• Maximum price
• Optimum value for the

public Natural Resource/Revenue maximization

• Optimum value and
• rderly growth of the

Sector

• What suits the client’s
• bjectives
• Research

Valuation Approaches used by TRAI

For the valuations in 700, 800, 900, 1800, 2100, 2300 and 2500 MHz spectrum bands, TRAI has adopted multiple approaches because no single method would provide the right valuation. It has used models based on market valuations since the auctions started in 2014, incorporating concepts of producer surplus, technical efficiency, revenue surplus, production function, forecasted growth of data and economic efficiency and then calculated a simple average of the results of the various valuation methods.

Spectrum assignment

• 800 MHz, 900 MHz and 1800 MHz-

administratively till 2008,

• 2100 and 2300 MHz bands-Auction

mechanism for the very first time in 2010.

• After the Hon’ble Supreme Court of India

judgment dated 2nd February 2012, spectrum assignment for access services in all the bands is being done through auction process.

• Since 2012, total five auctions have been held

for assignment of spectrum in various access bands

Methodologies: Valuation of Spectrum

• Post

2006, TRAI has given number

• f

recommendations

• n

valuation and reserve price of spectrum in different bands.

• From 2012 onwards Government decided to allot spectrum through

auction in view of Supreme Court Order .

• TRAI has used different methodologies for valuation of spectrum

based on technical efficiency relationship between different bands, market data analysis, opportunity cost models, discounted cash flows, economic efficiency approach etc.

• Number of approaches/methodologies were adopted to compute the

value of spectrum in a band. Considering each approach/method has its own strength as well as limitations and by adopting the basic principle of equal-probability of occurrence of each valuation, the final value of spectrum for the band was arrived at by taking simple mean of all the approaches adopted.

13

• Technical Efficiency Approach
• Opportunity Cost Models

– Production Function Approach – Producer Surplus Approach

• Market Data Analysis
• Discounted Cash Flow method
• Economic Efficiency Approach
• Achieved Price in last Auction
• Indexation of previous auction determined price
• Comparison with international spectrum price

14

Different Methodologies Adopted

Spectrum Valuation by International Experts

• Following

International Experts gave presentations in February 2018 before the Authority for Spectrum Valuation of 700 MHz and 3300‐3600 MHz bands

– Coleago Consulting – Boston Consulting Group – NERA Economic Consulting – Plum Consulting

Methodologies for spectrum valuation proposed by international experts

• Coleago Consulting

 International benchmarking  Benchmarking against prices previously paid in India, to look at relative differences between LSAs  Comparing annualised cost of spectrum with mobile operator revenue

• Boston Consulting Group

 Market Model  Traffic Model  Network Model  Financial Model  Commercial Model

Methodologies for spectrum valuation proposed by international experts

• NERA Economic Consulting

 Benchmarking of previous auctions in India  International benchmarking  Network capacity Model (Optional)

• Plum Consulting

 Based on market benchmarks

• Direct benchmarking
• Adjusted benchmarking
• Econometric benchmarking

 Modelling based approaches

• Full enterprise value
• Avoided cost model
• Iterated cost model

Methodologies for spectrum valuation proposed by international experts

• Consultants suggested various

methodologies for spectrum valuation without delving in details with a caveat that all the approaches may not be applicable in India.

• The approaches suggested by experts

and the approaches used by the Authority were quite similar except the degree of transparency ad the purpose.

Spectrum Valuation Methodologies by ITU

• ITU-T’s Technical Report on “Methodologies for valuation of

spectrum” 2017, proposed following methodologies that can be used for valuation of spectrum arriving at reserve price for auction of the air-waves:

• Price from previous auctions duly indexed
• Assessing Producer Surplus on Account of Additional

Spectrum

• Production Function Approach
• Revenue Surplus Approach
• The

above methodologies are being used by TRAI for valuations of various spectrum bands.

• In

addition, Cash Flow Discounting method, Economic Efficiency method, regression Method have also been used for valuation of spectrum

19

Can be a universal formula for valuation?

• Market

determined Prices if available- usually the best

• However each country and each band and

each occasion presents a unique scenario.

• One cannot blindly rely on a single method.
• Experiences
• f
• thers

do provide key lessons to regulators for developing one’s

• wn way of valuation of spectrum in many

countries.

THANK YOU

5G Auction Prices v/s TRAI Recommendations

Italy (Final) United Kingdom (Final) South Korea (Final) India (Reserve) Auction Time Oct'18 Apr'18 Jun'18 to be held Auction Price per MHz per Pop (PPP) EUR 0.51 EUR 0.17 EUR 0.23 EUR 0.086 (Reserve Price) Auction Price per MHz per Pop per year (PPP) EUR 0.03 EUR 0.0085 EUR 0.023 EUR 0.0043 (Reserve Price)

1. It is observed that Reserve Price per MHz per Pop (the standard unit of measurement world‐wide) for the similar spectrum band in India is 83% lower than the prices discovered in the latest auction in Italy, 49% lower than the auction prices discovered in Great Britain and 63% lower than the auction prices discovered in South Korea. 2. If the spectrum assignment duration is taken into consideration, the Indian Reserve Price per MHz per pop is 86% lower than the prices discovered in the Italy auction, 49% lower than the prices discovered in the Great Britain auction and 81% lower than the prices discovered in the Korean auction. 22

5G Auction Prices

Price per MHZ (EUR m) Price per MHZ per POP (PPP) Price per MHZ per POP per year (PPP) Ireland 0.17 0.04 ‐ Czech Republic 0.20 0.04 ‐ UK 8.85 0.17 0.0085 South Korea 8.56 0.23 0.0230 Spain 2.19 0.07 ‐ Latvia 0.13 0.14 ‐ Italy 21.73 0.51 0.0268 Finland 0.20 0.04 ‐ India (Reserve Price) 115.49 0.086 0.0043

Source: GSMA Intelligence & Rewheel Research

23

5G Auction Prices

• 1. Price per MHz per Pop (the standard unit of measurement world‐wide) for

the similar spectrum band in India is 83% lower than the price discovered in Italy, 49% lower than the auction prices discovered in Great Britain and 63% lower than the auction prices discovered in South Korea.

• 2. If the spectrum assignment duration is taken into consideration, the Indian

Reserve Price per MHz per pop is 86% lower than the prices discovered in the Italy auction, 49% lower than the prices discovered in the Great Britain auction and 81% lower than the prices discovered in the Korean auction. 3. ICRIER in its report has stated that reserve price for 5G spectrum set by TRAI is much above the international benchmarks; however, no specific example has been given.