Ofcom: We got it right, but let’s have a licence consultation anyway

Ofcom has announced a consultation, revisiting the revisiting of the revised fees for the most-used mobile radio spectrum.

The conclusion of the consultation document is that Ofcom got it right last August and fees should be increased by 247 per cent. This is a smack in the face for the networks which shook hands with the Ministry of Fun on the basis that the price hike would be revisited.

Imagine the toddler who is told to eat his greens and asks mum if he can have ice cream for dessert. Mum says “Eat your greens I’ll think about it”, knowing there is no ice cream. Cow!

This is, however, a consultation document, and it will lead (we're sure) to strong responses from the industry. This has already come in from EE:

“While we fully support the government’s work to get more coverage to more parts of UK, we're disappointed to see that Ofcom’s current proposal fails to recognise the obvious costs associated with doing this, and note this could risk future network investment if not properly addressed. We'll examine the consultation more closely and respond in due course.”

The consultation closes on 17 April, or just a couple of weeks before the general election.

In the dim dark past of 1985, Cellnet and Vodafone were given 900MHz spectrum, then a decade later One2One and Orange were similarly given 1800MHz spectrum.

The government didn’t see any revenue for this.

There has been a fair bit of jiggery pokery on who has what since, but when the 2100MHz spectrum for 3G was sold for £22bn, against a prediction of £500,000, the government cottoned on to the idea that maybe it should have been a bit less free earlier on.

So Ofcom turned to a scheme called Administered Incentive Pricing (AIP) which it charges for the use of pretty much all radio spectrum, including that used by mountain rescue and the RNLI.

The idea is to fulfil the Ofcom remit of making sure that spectrum is used efficiently. It’s not supposed to be a revenue generating mechanism.

Ofcom told us that Annual Licence Fees (ALF) is a generic term for the fees paid by spectrum licensees in general. These fees are often set on the basis of AIP (which refers to “administered incentive pricing”), an approach used in situations where fees are set above the costs of licence administration – and where fees are typically set with reference to the opportunity costs associated with the use of the spectrum).

"In the case of the 900 and 1800 MHz bands, we are acting under the government direction to revise the existing set fee rates so that they reflect full market value" (for example, the MNOs won’t pay an 'AIP' fee in addition to an 'ALF' fee).

AIP was set at £65m per year but then Ofcom “rethought” the value and proposed a slight increase to £309m, but following howls of outrage from the operators this was modified to a mere £246.8m a year.

The 275 per cent increase still rankled and so when the government moved the goalposts from a 'population' to a 'geographic' measure to cover Not-spots the quid-pro quos were to revise the planning permission for building cell sites and to look at the sums for AIP again.

The plan to rush through legislation fell apart when Labour threatened to oppose the infrastructure bill on the basis that it had mentally banked the £246.8m for when it’s in power, and didn’t want to see it drop down to £65m again, screaming that the Not-spot deal was going to cost nearly a billion pounds over five years.

Such opposition was premature and Ofcom has just announced its thinking on how it should think again about what to charge for the 900MHz and 1800MHz bands.

This very much relies on how the bidding worked for the 800MHz and 2.6GHz bands sold last year as a reference point and goes into huge detail on how it might or might not have changed if the bidding rules were different on who was allowed to buy what, how to price in 5MHz and 10MHz pairs of spectrum, and the value of the first and incremental allocations.

It’s an interesting model because the rationale given for looking at 900MHz and 1800MHz again is the need to look at the added coverage requirements and only one of the packets bought by one of the networks had any kind of requirement attached to it – an allocation bought by O2, and even then that was a population requirement and not the geographic requirement which has kicked off the evaluation process.

The consultation document says that Ofcom believes that if the new geographic coverage was not taken into account it pretty much got the sums right the last time around.

Hence, £23m per megahertz over the life of the licence is right for 900MHz, but that an appropriate lump sum for 1800MHz is £13m per megahertz as opposed to the £14m per megahertz it decided was right last August.

The document then looks at how the new geographical requirement should affect the pricing, and comes to the conclusion that it shouldn’t make any difference.

So, ultimately, the Ministry of Fun trumpeted a landmark deal to get the operators to spend £5bn on infrastructure they were going to build anyway, and the operators did agree to increase geographic coverage in the UK to 90 per cent by (the end of) 2017 – in return for the government looking at planning permission and licence costs.

Right now it looks as though they will get neither. Perhaps they will get some ice cream. ®