Memorandum by the Bill Team on Spectrum Trading
OVERSEAS INTERNATIONAL EXPERIENCE OF SPECTRUM TRADING
A3-1 The UK Government is committed to introducing spectrum trading as a further market mechanism to assist with making the best use of the radio spectrum. Spectrum trading has the potential to make it easier for new services to access spectrum and for existing users to balance their spectrum needs against costs and consequently it has the potential to help optimise the use made of the spectrum on an ongoing dynamic basis. This paper looks at spectrum trading in other countries where it has been introduced, Australia, New Zealand, Guatemala, the USA and Canada, and identifies lessons that may be drawn from their experience. Each of the countries has introduced spectrum trading in a different way. For instance, Australia has developed Standard Trading Units, New Zealand has introduced management right holders, who are like individual spectrum band managers, while in the US spectrum trading has taken place for many years and current emphasis is on facilitating spectrum leasing. This paper is based on research carried out in 2001 and early 2002.
A3-2 Spectrum trading was introduced in 1997. There are two types of tradeable licences:
Spectrum Licences which are auctioned and then fully tradeable thereafter.
Apparatus Licences, which are technology specific and site and service specific. A number of types of apparatus licences have been sold over the years.
A3-3 The main challenges the Australian Communications Authority (ACA) faced were:
defining spectrum licences in engineering terms;
rules for allocating and trading spectrum property, namely trading rules;
management of spectrum and the secondary market; and
the transition from government to industry.
A3-4 The ACA developed the Standard Trading Unit (STU) to produce a small commodity like unit of spectrum that would seem to be easily tradable. The STU is like a building block, spectrum space is thought of as a cube and covers a geographic area authorised by a licence. The area is like the floor of the cube and the radio frequency bandwidth is represented by the height of the cube. STUs, can be stacked vertically to provide increased bandwidth or horizontally to cover a larger area. Ownership of an STU cannot be shared and this allows exclusivity of access to be preserved. Sharing is a matter for the access right holder to manage and not the ACA.
A3-5 Spectrum licences can be aggregated or sub-divided to form new licences. Licensees who wish to trade part of a licence can sub-divide the licence into its component STUs and sell them individually or in multiples. A single STU is the smallest unit of spectrum space for which the ACA will issue a licence or register trading. The frequency bandwidth of STUs may vary in size depending on the spectrum band in which licences are being issued, but the area grid will be constant for all bands.
A3-6 The Australian Competition Authority is responsible for competition concerns regarding the acquisition of spectrum. So far the competition authority has not been faced with any significant competition matters concerning spectrum. However it is believed that smaller users of spectrum would not be comfortable with the idea of leasing spectrum from larger incumbent users of spectrum because of concerns expressed as competition.
Availability of Information
A3-7 The ACA maintains a searchable public on-line register of radiocommunications licences to facilitate trading. There also exists an informal market of intermediaries, namely firms that provide spectrum consultancy services like Market Dynamics and Futurepace Solutions. A private on-line spectrum trading desk has been established by the Australian Merchant Bank Macquarie Bank. That trading platform is the first centralised Australian secondary market to trade spectrum rights although there has been limited activity so far. The ACA remains the government authority responsible for issuing spectrum licences.
A3-8 The Australian Productivity Commission published a Draft Report on Radiocommunications in February 2002 which includes draft findings and draft recommendations some of which relate to spectrum trading.
Observations on spectrum trading in Australia
Creation of spectrum licences with division of spectrum into small geographic and frequency units required much work and produced relatively few gains as most trades were in whole licences.
A significant change was liberalisation of technical rules associated with spectrum licences to give licensees greater flexibility. Trading has been made a little easier as a consequence although some express the view that it has been slow to develop.
As a consequence of spectrum trading (a) one company accumulated a number of private business radio licences in order to create a new public network (b) introduction of two-way broadband microwave distribution system was assisted and (c) additional spectrum was made available for a major sporting event (Olympic Games in 2000).
A3-9 In New Zealand, a scheme of tradable spectrum property rights was adopted in late 1989 following the Radiocommunications Act 1989. The new regime was applied first in broadcasting where the perceived need for reform was greatest. The Act provides for two basic types of tradable spectrum rights.
A management right over any defined frequency band, nationwide, and for a specified period (but limited to a maximum term of 20 years by the Act).
A licence right to be granted by the owner (manager) of a management right for frequencies within the frequency band of the management right.
A3-10 A management right may only be created by the Secretary of Commerce on behalf of the Crown. The right will either be disposed of to the private sector, or retained by the Government for them to issue licence rights (normally by tender and now by electronic auction through the Internet). A private sector holder of a management right can sell it or retain it and sell the associated licence rights to third parties.
A3-11 Management rights cover a block of the radio spectrum and are not inherently use-specific. Management rights can be aggregated or sub-divided. They are traded on a similar basis to land and can be mortgaged. Holders of management rights pay no annual fee for those rights but will have paid through a tender process for the management right. They also have to pay a fee to the Ministry of Commerce (MoC) for any licence rights they issue to themselves and others. Management rights themselves do not confer the right to make any transmissions.
A3-12 There were 41 management rights as at January 2001. The Government retained ownership of 15 of these rights including those covering the public broadcasting spectrum (radio and television). The Government issues licences according to a mix of commercial and social policies. The private sector owns 26 management rights, some of which are in the cellular telephone spectrum areas.
A3-13 Licence rights are use-specific and are defined in terms of transmitter sites. Transfer of ownership of a management right does not affect any underlying licence rights.
A3-14 Licence rights have unwanted emission limits and maximum permitted interference limits. A defined floor level of -50dBW for noise is set in the legislation.
Observations on spectrum trading in New Zealand
Little visible active management has been carried out by private sector spectrum managers with few resale or lease transactions taking place. Multipoint Distribution Service (MDS) management rights are largely unused despite the fact that they were bought for around $800,000.
Management rights for cellular bands around 900 MHz allowed operation of AMPS and GSM systems in adjacent bands. Interference problems resulted and Government had to intervene releasing spare spectrum to act as a guard band.
There have been a number of trades in broadcasting licences resulting in significant consolidation in New Zealand's largest city Auckland.
When television bands were converted to tradable spectrum rights in 1995 it proved possible, along with clever engineering, to create a fourth television channel covering 70 per cent of the population.
Spectrum sold for multipoint distribution service is being used flexibly as multipoint broadband wireless local loop.
A3-15 In 1996, the Guatemalan national assembly enacted a new telecommunications law, allowing free entry into all segments of telecommunications and requiring operators to grant competitive interconnection. The state telecommunications monopoly Guatel was the dominant incumbent and this firm had over 900 frequency rights, as did radio and television broadcasters and the single cellular operator ComCel.
A3-16 Under the new law a wireless licensee gains an explicit right to radio frequencies, known as Titulo de Usufructo de Frequencia (TUF). TUFs are awarded on request as users petition the state for rights to control unoccupied frequencies. Subsequently, auctions are held when competing claims are made.
A3-17 Also in 1996, an independent regulatory body was established, the Superintendent of Telecommunications (SIT). A registry of all uses of the communications spectrum was produced by the SIT. New entrants wishing to access frequencies are allowed to petition the SIT for the right to use any unoccupied bandwidth. Other spectrum users are allowed to file competing claims to requested bandwidth rights. If no competing claims are filed, then petitioner receives rights without auction (or payment). If competing claims are filed, then the SIT must quickly schedule a competitive bidding process to determine ultimate licensee. The rights (TUFs) extend for 15 years and are renewable (without competitive bidding) at the discretion of the user. The rights are freely tradable and regulation is limited to interfering emissions.
A3-18 Around 40 spectrum auctions have been held and it is understood the combination of auctions and trading has led to new entrants and greater competition in the FM sound broadcasting and cellular mobile markets.
Observation on spectrum trading in Guatemala
Auctions followed by spectrum trading have led to greater competition and new entrants.
A3-19 Some kinds of spectrum trading have been taking place in the US for many years. In late 2000 the Federal Communications Commission (FCC) issued a Policy Statement outlining proposals to promote efficient use of radio spectrum by encouraging wider development of secondary markets. The statement recognised that some services such as public safety, educational services, private wireless, amateur radio and other important services may have spectrum needs that are not addressed under a market approach. The FCC expressed four principles:
licensees should have clearly defined usage rights to their spectrum, including frequency bands, service areas, and licence terms of sufficient length, with reasonable renewal expectancy, to encourage investment; 
licences and spectrum usage rights should be easily transferable for lease or sale, divisible, or aggregatable;
licensees/users should have flexibility in determining the services to be provided and the technology used for operation consistent with the other policies and rules governing the service;
licensees/users have an obligation to protect against and the right to be protected from interference to the extent provided in the FCC's rules.
A3-20 The FCC's Policy Statement outlined three key areas that it will address.
(1) Eliminate unnecessary regulations and administrative requirements. In particular the FCC plans to consider:
harmonisation of operating rules for similar services to promote spectrum substitutability;
modifications to their service definitions, where appropriate, to increase flexibility and maximise spectrum efficiency. Flexibility will allow multiple services to operate in the same spectrum. This would reduce scope for any anti-competitive behaviour;
identification of circumstances where the FCC will favourably consider waivers from service and technical rules that will increase flexibility and maximise spectrum efficiency.
(2) Promote the availability of frequency and technically agile equipment.
(3) Promote more effective functioning of market processes. In particular, the FCC plans to consider the following:
maintaining an on-line listing of licences by service, frequencies, and service area, to identify spectrum usage rights to potential buyers/lessees. However, the FCC notes that this would not identify specific spectrum rights which licensees might be willing to sell or lease;
supporting development of services that list spectrum resources that licensees are actively offering for sale or lease. The FCC believes that this would be more useful than a simple comprehensive listing of licences by service;
supporting the establishment of private spectrum exchanges and brokers who would match buyers and sellers of spectrum usage rights. The FCC notes that spectrum brokers could bring specific expertise and knowledge of the unique properties of different spectrum bands to assist prospective buyers.
Comments from 37 economists on FCC's proposals
A3-21 The FCC received several comments to their Policy Statement. In particular, a group of 37 economists responded by welcoming the FCC's proposals on spectrum trading but commented that a more free market approach should be taken. The economists made three significant comments.
(1) The FCC should seek not to create secondary markets directly but instead to institute rules allowing such markets to emerge.
(2) Relaxing restrictions on the use of radio spectrum by current licensees and new entrants is essential. Wider use of spectrum leasing would increase efficiency and would encourage entry.
(3) The FCC should eliminate all wireless licence requirements unrelated to interference or competition issues, namely eligibility, service, technology and implementation requirements. For instance:
(a) Eligibility requirements restrict licence assignments to specific categories of potential licensees. These can impose costs on consumers by giving priority to relatively inefficient suppliers.
(b) Specifying the use of spectrum can prevent it from being used to deliver services that consumers demand.
(c) Rules limiting interference provide good information on where one operator's rights stop and another's begin. As long as new technology respects existing interference boundaries, it should be allowed.
(d) Build out requirements force licensees to introduce a service by a fixed date. A firm may wish to acquire more spectrum before rollout or it may want to wait for the next generation of capital equipment. It may be efficient to allow users to incur the opportunity costs of build out delays.
A3-22 The economists recommended that these changes would increase flexibility and reduce uncertainty in the secondary market. The flexibility could lead to windfall gains to incumbents of holders of spectrum, but would simultaneously reduce licence values by introducing competition. The economists highlighted that efforts to extract gains from licensees or compensate for losses should not be permitted unduly to hinder or delay the benefits of promoting competition through spectrum liberalisation.
A3-23 Recently the FCC created a new task force, the Spectrum Policy Task Force, to examine spectrum allocation processes and other issues so that spectrum can be put to the highest and best use in a timely manner. It is expected that spectrum trading will form a part of this work.
Observations on spectrum trading in the US
Benefits have been achieved from spectrum trading eg trading and regulatory change allowed private mobile radio services in a number of cities to be consolidated eventually resulting in a national mobile telephone network. How to obtain further benefits in the future is being considered.
Spectrum leasing is seen as attractive.
Intermediaries and band managers have been encouraged. 
A3-24 Licences that have been auctioned can be transferred in a secondary market and are divisible. It is understood there has been no trading to date.
A3-25 The Canadian Government aimed to provide maximum flexibility to licensees to accommodate their future business plans with auctioned Personal Communication Services (PCS) spectrum around 2GHz. However during a public consultation process some concerns were expressed regarding the divisibility of spectrum. Some respondents were concerned that trading of spectrum blocks could create a number of co-ordination and technical issues which may make it difficult to implement 3G PCS services.
Observation on spectrum trading in Canada
It is too early to draw any
conclusions except to note that care is needed in providing
scope for partition of spectrum.
AN OVERVIEW OF SPECTRUM TRADING IN AUSTRALIA,
NEW ZEALAND, USA, GUATEMALA AND CANADA
Nature of Rights
Volume of trades
Spectrum licence trading was introduced in 1997.
Spectrum licences sold by auction then fully tradable.
Apparatus licences became tradable in 1995.
Spectrum access rights defined in terms of geography
and frequency. Rights are in the form of standard trading
units (stus). A spectrum licence comprises one or more
Apparatus licences with site specific licence conditions
may be traded. They retain the original licence conditions
unless the ACA agrees change.
Apparatus licences not usually auctioned.
Licences are for a fixed term of up to 15 years. Apparatus
licences have a maximum period of five years (more commonly
annual) with some scope to renew.
There are limits on emissions at the boundary of a
spectrum licence in order to manage interference with
a licensee's neighbour.
Maximum power levels set for out of band interference.
Spectrum is treated like an asset. The Australian Competition
Authority deals with any competition issues regarding
the acquisition of spectrum.
On-line register of spectrum licences is available
but information on confidential users is withheld.
The register allows buyers of spectrum to search for
potential sellers but not vice versa. Pricing information
is not collected nor recorded by the ACA.
Fewer than 100 spectrum licencestraded in recent 12
month periods. The majority of these trades were whole
licences. Around 2000 apparatus licence trades per year,
mainly in private business radio.
Introduced in 1989, applied first in broadcasting where
the perceived need for reform was greatest.
A management right over any defined frequency band,
nationwide, and for a specified period (but limited
to a maximum term of 20 years).
A licence right issued by the owner (manager) of a management
right for frequencies within the frequency band of the
Management rights are protected by adjacent frequency
emission limits that define the strength of out-of-band
Management rights holders are not responsible for ensuring
their licence rights holders comply with the interference
Licence rights are legally enforceable and conciliation
and arbitration processes are being established to resolve
disputes. If these fail, the courts provide a last resort.
General Competition law applies to spectrum trading.
Public register of spectrum rights, consists of government
and civil spectrum use. Some assignments are excluded.
Currently working towards making data available to the
public through the Internet.
Generally low volumeof trading overall. However the
greatestvolume of tradeswere in spectrumlicences within
AM and FM sound broadcasting.
FCC has been encouraging secondary markets. Measures
have consisted of some scope for partitioning of licences,
and for the leasing and resale of spectrum.
Licences can be transferred but must be notified to
the FCC for approval.
It is thought greater benefits would be achieved by
Interference issues are dealt with by FCC.
Spectrum caps and competition law, although caps are
being phased out.
Some wireless licensing data available on-line, including
maps showing licensing areas and service providers.
Information is available via private sector.
1000s of transfers a year.
Around 40 spectrum auctions since 1996 with trading
Licensees gain an explicit right to radio frequencies.
The rights are awarded on request and auctions are used
when competing claims are made. The rights are freely
With each right there is a maximum power emitted at
the border of adjacent frequencies.
Computerised database is available which consists of
registry of all spectrum uses.
Over 3400 new rights have been awardedfollowing spectrumreforms.
Volume of trades unknown.
To date there has been no trading. Auction for PCS
in 2GHz frequency range allowed post auction licences
to be transferred and divisible in a secondary market.
All conditions that apply to a licence will continue,
Licences will be divisible by geography and band width.
Buyer must meet eligibility criteria. Buyer will receive
a licence term equal to that remaining on the original
licence and will be eligible for the same license renewal
provisions as the original licensee.
Incumbent licences are not subject to this transferability
regime, although it is under consideration.
Any license transfer may be subject to the Competition
The Government plans a publicly accessible database.
A3-26 The conclusions that it seems can be drawn from experience overseas are listed below.
(i) There is evidence that trading successfully releases spectrum for new services.
(ii) Unnecessary restrictions on spectrum use can create barriers to entry.
(iii) Defining detailed property rights to allow extensive partitioning and aggregation can be costly and unnecessary. However flexibility for partitioning and aggregation if and where required is useful to sellers and buyers.
(iv) Public registers can facilitate the market by bringing buyers and sellers together.
(v) Information intermediaries can perform a valuable role in providing market participants with useful information.
(vi) Auctions can be a good way to introduce spectrum trading.
(vii) Government may be in a better position to deal with interference problems than contractors.
(viii) There can be a role for spectrum band managers eg to assign licences, but how actively they carry out this role can vary.
(ix) Allowing change of radio use can encourage spectrum users to be innovative.
(x) Spectrum leasing can be an additional and flexible mode of trade which encourages release of spare capacity to others.
1 Australia shares few radiocommunications borders with its neighbours. Its population is concentrated into reasonably small and isolated pockets. Australia's demographic make-up enables the ACA to define market and radiocommunications service areas fairly clearly. Spectrum property concepts would need to be adapted to local conditions. Back
2 www.aca.gov.au/publications/info/transfer.htm. Back
3 www.market-dynamics.com.au. Back
4 www.futurepace.com.au. Back
5 www.macquariebank.com. Back
6 A copy of the Australian Productivity Commission Draft Report on Radiocommunications is available at www.pc.gov.au. Back
7 www.med.govt.nz. Back
8 When management rights are created, existing apparatus licences in the band are entitled to a transitional right, which may be either a 5-year spectrum licence (without payment) or a 20-year spectrum licence (for which a fee is charged). Back
9 Pablo T Spiller and Carlo Cardilli "Towards a Property rights approach to communications spectrum". 1999 Yale Journal on Regulation. Back
10 Pablo T Spiller and Carlo Cardilli "Towards a Property rights approach to communications spectrum". 1999 Yale Journal on Regulation. Back
11 T W Hazlett, "The Wireless Craze, the Unlimited Bandwidth Myth, the Spectrum Auctions Faux Pas and the Punchline to Ronald Coase's `Big Joke': an Essay on Airwave Allocation Policy", 15 Harv J Law & Tech, January 2001, also available from www.aei.org/scholars/hazlett, note page 167. Back
12 Notice of Proposed Rulemaking "Principles for Promoting the Efficient Use of Spectrum by Encouraging the Development of Secondary Markets". Federal Communications Commission. Adopted 9 November. Released 27 November 2000. Also Policy Statement, same title, Adopted 9 November, 2000. Released 1 December 2000. Both available from www.fcc.gov. Back
13 In this context, any transferees and lessees will have the same rights to protection against interference and incursions by other operators as the licensee from which they acquire the spectrum. Back
14 Economists response to the FCC's policy statement on Spectrum Trading, dated February 2001, available from www.fcc.gov Back
15 See eg www.spectrum-exchange.com, www.accessspectrum.com and www.comsearch.com. Back
16 Policy and Licensing Procedures for the auction of additional PCS Spectrum in the 2GHz Frequency Range. June 28, 2000. Industry Canada, available from www.strategis.ic.gc.ca. Back