Setting licence fees for renewing telecommunication spectrum based on an auction

• A methodology is presented to set fees for renewal or extension of spectrum licences.
• A combination is used of market and cash flow valuation, using an auction outcome.
• This approach implies use of market information on the value of spectrum.
• It aligns with the policy aim to set licence fees to promote efficient use of spectrum.
• At the same time, providing state aid is avoided.

This paper presents a methodology for setting fees for the renewal or extension of spectrum licences, by using the outcome of an auction for comparable licences but with a different licence period. The methodology is a combination of market and cash flow valuation and consists of two main steps. First, prices for spectrum corresponding to that of the licences to be extended are derived from the auction outcome. Second, the relative value addition of the extension period for the new licensee, compared to the value of the licences auctioned, is derived by using a model for the development of EBITDA for an operator over time. A combination of these two is used to calculate fees that match the opportunity costs of extension. Thus, optimum alignment is achieved with the policy objective of using licence fees only to promote efficient use of spectrum, while avoiding state aid at the same time.