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

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 Contact: Mr. S K Mishra Email: irdivision@trai.gov.in Principal Advisor . TRAI

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 of 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) optimal 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 or 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 • Least Price Buyers • Maximum price • • Sellers Optimum value for the • Government • public Natural Resource/Revenue maximization Optimum value and • orderly growth of the • Regulator Sector What suits the client’s • Consultants/valuation • objectives experts Research • Economists/Academic • world

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 2 nd 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 of recommendations on 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

Different Methodologies Adopted 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

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.