Kyiv Workshop (CoE 6842) Monitoring of Radio Frequency Spectrum Spectrum Monitoring & Spectrum...

Kyiv Workshop (CoE 6842)Monitoring of Radio Frequency SpectrumSpectrum Monitoring & Spectrum Valuation

Professor Anastasios D PapatsorisDepartment of Informatics & Communications

Serres Institute of Education & [email protected], Tel: +30 23210 49157

http://www.teiser.gr/icd/staff/papatsoris/index_en.html

1 – 4 June 2004, Kyiv Spectrum Monitoring & Valuation © ADP

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Radio spectrum and economics

Economic theory dictates that when demand for a commodity exceeds supply, a price system should be established. This is indeed the case with radio spectrum, for which the imbalance between the demand for radio frequencies and the availability of spectrum has led to the establishment of a spectrum pricing system.

Since the frequency spectrum is a scarce resource, decisions concerning spectrum management should not only be based on technical, social and sometimes political criteria, but on economic criteria as well. This is being reflected in current EU licensing Directives, which urge administrations to be technology neutral and issue general authorisations even for wireless services.

Thus, in order to improve national spectrum management and maximise the national benefit, all available means including economic methods are needed.

In the following, established and emerging strategies for economic approaches to national spectrum management and their financing will be reviewed, and the relation and importance of Spectrum Monitoring in implementing them will be presented.


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Financing spectrum management

The funding of the spectrum management structure should at least provide for the following basic functions:– spectrum management policy and planning/allocation

of spectrum;– frequency assignment and licensing;– standards, specifications, and equipment authorization;– spectrum control (enforcement and monitoring);– international cooperation;– liaison and consultation;– spectrum engineering support;– computer support;– administrative and legal support.


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Funding approaches

Traditional national budget financing:– Funding the spectrum management structure through a

centralized national budget process. This approach simply involves allocating a portion of the administration’s annual budget to spectrum management.

Spectrum fees:– Charging some or all licensees for their use of the

spectrum. The fees are based either directly on spectrum use or indirectly through general administrative or regulatory charges.

Auctions:– Using a percentage of the money raised through

auctions.


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Economic approaches Market-based approaches can be used to improve

national spectrum management by promoting economic, technical and administrative efficiency.

For any resource, including the spectrum, the primary economic objective is to maximize the net benefits to society that can be generated from that resource; this is what economists refer to as an economically efficient distribution of the resource.

In the case of spectrum, the economically efficient distribution is achieved when a redistribution of spectrum leads to an increase in overall social welfare and therefore should take place if those that are made better off by that redistribution could, in principle, fully compensate those that are made worse off and still receive greater benefits than was the case prior to the redistribution. (Potential Pareto Optimality Criterion)


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Value of radio spectrum

Economists refer to the value of a resource, be it any commodity including radio spectrum, as a “rent”. Right or privilege to use radio spectrum has value to a spectrum user, who can sell wireless services (e.g., a paging company) or use wireless technologies in the provision of other goods or services (e.g., a taxi company).

The rent accruing to a resource, including a spectrum license, can be quantified by the price that the resource would bring in an open market.

If a spectrum licensee receives for free a license that has economic value, the licensee has captured the rent accruing to that license.


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Spectrum “rent”

The value of spectrum is reflected in two inherent rents: scarcity rent and differential rent.– Scarcity rent exists because demand for spectrum, at

least in certain bands and at certain times, exceeds supply at zero price.

– Differential rent exists because each frequency band possesses specific propagation characteristics that make it suitable for specific services. Having access to the most suitable frequency band could minimize the cost of implementation and optimize the performance of a radio system.


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Economic anomalies Bands that are suitable for many different services using inexpensive

equipment are more valuable than bands that are suitable for only one type of service using costly equipment.

The differential rent affects a new spectrum entrant more than an incumbent user of frequencies. The latter’s costs have already been ‘sunk’, probably in a cheaper technology operating in a lower frequency band than available to the new entrant, whose higher investment need may form an effective barrier to market entry. Whether the differential rent should be collected by government or enjoyed as an extra profit by the incumbent, is a matter of public policy.

The other market anomaly, the scarcity rent, arises if the dearth of spectrum is such that the prices for use of wireless facilities or services can be raised greatly above the operational costs of a provider. The regulatory problem here appears to be whether abuse of the provider’s privileged position, e.g. by reaping monopoly profits, can best be prevented by price regulation, fair-trading rules, or technological innovation to improve spectrum efficiencies.


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Restrictions in a free market In theory, both the goals of Potential Pareto Optimality Criterion and

resource rent capture can be promoted by creating a free market in spectrum. In such a market, all spectrum assignments would consist of well-defined, legal rights of possession that could be transferred, aggregated and sub‑divided, and used for any purpose the owner saw fit, so long as this use did not interfere with the possession rights of other spectrum users.

In practice however, certain restrictions apply to a free market approach, emanating from spectrum’s inherent properties, viz:– Economic anomalies linked to scarcity and differential rent,– Interference potential

and there are other reasons for imposing some limitations, including:– Spectrum’s link to critical government applications, scientific research

and safety of life,– The prevention of monopoly or oligopoly market patterns,– The facilitation of economies of scale in equipment production and the

benefits of delivering worldwide services through internationally harmonised frequency bands.


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Value of spectrum & SMon The non-exclusive use of a frequency band in a particular

geographic area may dramatically reduce its value. While some shared use of spectrum may be efficient, mutual harmful interference reduces the band’s value in that area at that time. Spectrum value is directly related to the determination of interference as a function of frequency, time and space.

The theoretical capacity of a communication link is restricted by bandwidth and the signal to noise plus interference ratio S/NI as suggested by Shannon, i.e.: C [bps] ≤ BW [Hz] log2 (1 + S/NI)

Since, interference can be quantified by the spectrum monitoring function of the national spectrum management system, Spectrum Monitoring should be directly associated to the development of economic policies intending to capture spectrum rent.


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Competing groups of users

From a technical point of view, interference is the main reason, or in economic terms the negative externality, that has provided the basic argument for the adoption of the current methodology of public management of frequencies and against the use of market mechanisms.

However, in the absence of a property rights system, spectrum managers may wish to consider spectrum valuations of competing groups of users ‑ broadcasters versus mobile telecommunications service providers, for example. Without a spectrum market, such valuations can be done only imperfectly, but using market proxies such as estimation of service revenues and impact of the service on gross domestic product and employment can be helpful in generating data for use in making allocation and other spectrum management decisions.


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Case study: broadcaster & cellular operator

Broadcaster with nationwide coverage license is considering the following issues:– The commercial and

political imperative to switchover to digital format

– The funding of the transmission infrastructure and the digital transmitter equipment required for the analogue to digital migration

A GSM/IMT-2000 operator is reviewing his strategy and considers the following issues:– By year 2006 3G services

have started taking up– 3G services are successful

in urban areas and network deployment there is complete

– Cost of rural coverage is prohibitive at 2GHz

– Threat from CDMA2000 technology at 400/450 MHz


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Case study: outline agreement

Broadcaster and cellular operator reach the following outline agreement:– Broadcaster to sell part of his UHF spectrum to cellular

operator.– Broadcaster will use the funds received to deploy

additional digital transmitter sites, invest in new programming and transmission infrastructure.

– Cellular operator’s cost to provide continuous 3G services coverage to road networks and rural areas decreases dramatically.

– Transfer of paired 2x5MHz of broadcaster’s spectrum (or more if required) will take place in year 2008.


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Case study: interference issues

Interference will be present to neighbouring countries, which will continue to use the same adjacent frequencies for broadcasting. Such interference will manifest itself in the following modes:– From cellular base stations and mobile transmitters to conventional

analogue television sets.– From high power broadcast transmitters to cellular base stations

and mobile receivers.– Intermodulation products generated in TV receivers.

Clearly, this requires the cellular operator to reach an agreement with broadcasters in adjacent countries. For such an agreement to be reached though, extensive spectrum monitoring measurement campaigns are needed to be performed by the competent SMon authorities.


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Spectrum assignment methods

When supply exceeds demand, licenses are assigned to applicants upon request.

In case mutually exclusive spectrum requests exist, an assignment method must be used to choose from among competing applicants. Assignment methods include:– Non-market based comparative processes:

• comparative hearings

• lotteries,

– and market-based assignment processes:• auctions.


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Transferable spectrum rights

While auctions are the assignment mechanism best suited to providing an initial economically efficient distribution of the spectrum resource, they will not ensure that spectrum continues to be used in an economically efficient manner in the future. As with other resources, economists recommend that spectrum users be allowed to transfer their spectrum rights (whether assigned by auction or some other assignment mechanism) and that spectrum users have a high degree of flexibility in the choice of the consumer services that they provide with their spectrum.


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Spectrum trading

The least restrictive form of transferable property rights permits unlimited technical flexibility without regard to an allocation structure, provided that harmful interference is not caused outside the assigned band. This system, if applied to all frequency bands, would result in an unfettered spectrum market. Nevertheless, interference management should be particularly demanding, imposing a serious burden to both the Spectrum Monitoring authority and the licensees.

The most restrictive form of property rights permits transferability only within the confines of a given allocation and only within strictly defined technical parameters. This system has the advantages of ensuring that the entity within the allocated service who values a particular frequency assignment the most will be able to use that assignment, while minimizing the possibility of interference. However, by restricting technical flexibility to ensure interference control, economic efficiency may also be significantly reduced.


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Spectrum trading & SMon The middle course with respect to spectrum rights, is to specify

emission rights within a given allocation rather than specific technologies, which may be broadly defined, for example, broadcasting or mobile radio.

This approach can lead to an increase in economic efficiency both because licensees are allowed to adjust their use of inputs in accordance with cost and demand considerations and because licensees may freely transfer their frequency rights in whole or in part to entities that value those rights more highly. Hence a tradable spectrum rights system provides licensees with the full incentive to use their spectrum in a technically efficient manner.

The application of such an approach, places a heavier interference control burden on licensees and assumes the instant support by the Spectrum Monitoring authority in order to resolve unambiguously cases of emission rights violation. Nevertheless, licensees can be allowed to negotiate their emission rights for monetary compensation. Dependent upon how often disputes requiring resolution by the spectrum monitoring authority or litigation to judicial courts is sought, permitting such negotiations may prove advantageous or disadvantageous.


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License fees

License fees represent another way which can be used to achieve some of the spectrum manager’s goals and objectives.

License fees range in complexity from a simple table by service, to a charge per frequency per station for each service, to complex formulas involving a number of variables.


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Fee implementation principles

Licence fees can be efficiently implemented using the following principles:– Decisions and changes related to fee collection should

be undertaken in an open manner through consultation with users and industry.

– Fees should take into consideration, to the maximum extent possible, the value of the spectrum.

– Fee mechanisms should be easy to understand and implement.

– Fees should not be an impediment to innovation and use of new radio technologies, or to competition.

– Fees should support the attainment of the spectrum manager’s national goals and objectives.


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Types of fees

The basic types of fees are those based on– a) the spectrum management costs for

processing license applications,– b) revenues derived from licensees’ use of the

frequency spectrum,– c) incentive fee formulas,– d) opportunity cost.


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Fees based on spectrum management costs

Fees based on spectrum management costs depend on two separate elements: the range of spectrum management authority’s functions included in the overall costs and the method used to determine the fees for an individual licensee.

A spectrum management authority’s costs can be broadly divided into two areas: direct and indirect costs.


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Direct costs

Direct cost is defined as the immediate and identifiable cost of issuing licences for specific application. Direct costs may include: the cost of staff time in the frequency assignment process, site clearance, interference analysis when it can be directly associated with a particular class of service – keeping the public news and entertainment channels clear, ITU and regional international consultation that is specific to an identifiable group of users. In some frequency bands and for some services, or if the equipment is located near neighbouring countries, the direct costs will include the cost of relevant international consultation.


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Indirect costs

The cost of the spectrum management functions used to support the administration’s frequency assignment process and the overhead of operating the administration’s spectrum management procedures.

They represent costs that cannot be identified as attributable to specific services or licensees such as general international consultation, for example with the ITU and regional groups, propagation research covering many frequency bands and services, general spectrum monitoring, interference investigations arising from the complaints of rightful users and the cost of support staff and equipment.


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Gross income based fees

A fee can be charged based on a percentage of the gross income of a company. The value of the gross income used in the fee calculation must be directly related to the company’s use of the spectrum to avoid difficulty in the accounting and auditing processes.


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Incentive fees

An incentive fee attempts to use price to achieve spectrum management objectives and hence to provide some incentive to use the spectrum efficiently. In other words spectrum pricing is used as a spectrum management tool.

Various elements of spectrum usage may be taken into consideration in the development of an approach or a formula (e.g. population density, bandwidth, frequency band, coverage area, exclusivity, power) and different formulae may be required for different frequency bands and services.

Developing an incentive fee formula may not be a simple task if it is to accurately reflect the variation in spectrum usage across a country. For the development of incentive fee formulae, the contribution of the Spectrum Monitoring Authority is needed.


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Example of incentive fee formula

In general, incentive fee formulae may be represented by the following functional representation: Fee = f (BW,CA,Cong,Exc,Freq,WF,NT,ST), where– BW: occupied bandwidth,– CA: coverage area,– Cong: congestion factor,– Exc: exclusivity of use,– Freq: frequency (or band) of operation,– WF: weighting factors to make fee approximate the market value of the

license– NT: network topology,– ST: service type (ie, emergency or commercial service).

Spectrum Monitoring is necessary to derive the true value of the geographical congestion factor, because a frequency register only indicates whether a frequency has been assigned or not, but does not reveal its actual usage.


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PMR incentive fee example

Exclusive Transmitter Bandwidth Band Frequency MonthlyFreq. Use Power Used Congestion Band Fees

[euro] [drh] [ ] [W] [kHz] [euro]5.00 NO 5.0 12.5 B UHF1.00 NO 2.5 12.5 B UHF2.00 NO 2.5 12.5 B UHF

10.00 NO 10.0 12.5 B UHF

1 5.00 0.50 0.50 1.00 1.25 1.00 1.5610 10.00 0.50 0.25 1.00 1.25 1.00 15.6310 20.00 0.50 0.25 1.00 1.25 1.00 31.25 1 10.00 0.50 1.00 1.00 1.25 1.00 6.25

54.69

YES NO [ ] 1.5 0.5 1.00 656.25

2.5 5 10 25 50 >50 0.20 131.25 [ ] 0.25 0.50 1.00 3.00 6.00 20.00 0.20 131.25

A B C 0.50 328.13Factor [ ] 1.50 1.25 1.00 0.80 525.00

HF VHF UHF 0.35 229.69[ ] 2.0 1.5 1.0

10 20 30 100 200 >200 Billingnumber of portables [ ] 4.00 3.00 2.00 1.50 0.50 0.33 Address

Pay date

Tx/Portable Power [W]

Band Congestion

Fees Payable

Frequency Band

Factor depending onPMR Owner

Private

public transport

Ambulance serviceFire/Forest Brigadedistribution of energyPublic Sector

Annual Fees per User Class

Fees perstation/portable

Number of PortablesNumber of Repeaters

Exclusive Frequency Use

Base Station

PortablesHand-held portables

Number of Hand-held portables

Repeaters

Number of BS

CALCULATION METHODOLOGY FOR DETERMINING PMR FEES

System Description

1

[ ]t

mi i i i i i i i

NoT Exc BW P Cong Freqi

Fee Rate N f f f f f f ST


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Opportunity cost fees

An opportunity cost fee tries to simulate the market value of the spectrum. This process requires financial analysis, estimations of demand or market studies to achieve a valuation, and considerable expertise.

To do this with absolute precision is extremely difficult, nonetheless an approximation can be obtained which may make this a practical option.


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Spectrum Monitoring Spectrum monitoring data can provide information on the actual use of

frequencies, the quality of frequencies, the value of changing (inter) national frequency allocation plans and the need to do so. This aids in the evaluation and revision of various mathematical models used in spectrum usage patterns and valuation. This involves the monitoring of actual use,– to ensure that the available frequencies are used efficiently, and– to monitor the effects of their use.

The information from these activities is very important when it comes to allocating/re-allocating frequencies and verifying the allocation models used. The frequency monitoring function plays a major role: monitoring actual developments and controlling them and interpreting the results are essential parts of the policy-effect monitoring cycle.

The frequency monitoring process runs parallel and complementary to the frequency allocation process, licensing and spectrum pricing.


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Spectrum occupancy & valuation

The monitoring process provides a method of verification and closes the loop on the spectrum management process. For many services, such as Land Mobile and Fixed Links, the frequencies are re-used in a cell-like structure.

Occupancy measurements are necessary to enable the most efficient use of the channels where a number of separate users share a frequency.

The occupancy measurements enable an administration to determine how many other users may be able to use the same radio channel or frequency and assign value to particular frequency bands.


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Conclusions

New EC Communications Directives require administrations to be technologically neutral and require regulators to issue general authorisations for all electronic communication networks and services.

The incorporation of economic-based approaches to reduce regulation of the wireless market and at the same time improve the administrative efficiency and maximise the socio-economic benefit have serious implications on Spectrum Monitoring.

Spectrum Monitoring experts should make clear to their Administrations the implications in equipment and staff time.


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Conclusions (cont)

In a transferable and flexible spectrum rights market, the value of spectrum among other factors such as scarcity and differential “rent”, depends highly in its cleanliness (or pollution) and the application of particular radio technologies.

In such a market, the Spectrum Monitoring function plays a major role as it defines the degree of spectrum cleanliness (or cumulative interference level, equivalently) and consequently assigns value to it.

On the other hand, radio technology is generating in an ever increasing rate equipments that provide dynamic traffic channel monitoring and direct sequence / fast frequency hopping spread spectrum waveforms with in-built interference mitigation.


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Conclusions (cont)

Determining spectrum fees that reflect both the opportunity cost and represent the spectrum’s market value is generally a complicated and tedious task.

Spectrum Monitoring is an invaluable tool in assisting this effort, and certain spectrum monitoring tasks must be incorporated in the dynamic process of spectrum fee determination.

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