This project, for the ACMA, provided advice on administrative pricing for spectrum based on opportunity cost. Specifically, Plum advised on the appropriate level of opportunity cost pricing in the 400 MHz band across geographic areas with varying degrees of congestion, and on approaches to implementing spectrum pricing.
The 400 MHz band (380-430MHz and 450-520 MHz) is used for narrowband land mobile and fixed services, as well as wideband rural services mobile by government and commercial users. To address congestion in the band and enable more efficient use of the spectrum, the ACMA proposed administrative pricing for spectrum based on opportunity cost.
Economic efficiency is promoted if spectrum prices are set equal to opportunity cost, which equals the sum of the opportunity cost of spectrum and the cost of managing spectrum. This principle underpinned Plum’s pricing proposals. In practice, however, information on individual licencees’ opportunity costs is hard to come by. A second best position could be to set the same fee per MHz for all users (this requires knowledge of the aggregate level of indirect costs, ideally by band or type of spectrum use)
Plum’s recommendations were based on area classifications, for reasons of transparency and simplicity. Plum’s recommended principles were that:
- In low density and remote areas, the opportunity cost portion of the tax should be set to zero. There should be charge to recover indirect administrative costs alone. All licensees should pay a minimum fee.
- In areas of medium congestion, the tax should be set at a discount to the opportunity cost price for high congestion area. This discount should be determined based on a judgement on probability of the band becoming congested (the higher the probability the lower the discount).
- In highly congested areas, the tax should be based on the opportunity cost of spectrum use. In principle this should have a downward bias to facilitate trading and because of uncertainty in estimating the opportunity cost (in other words, the economic costs of setting the prices too high are greater than setting them too low).