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Hong Kong consults on auction rules for 3G licences

Gabriela Kennedy

09 January 2013
Hong Kong authorities said they want to encourage new market entry when Hong Kong 3G licences expire in 2016 while minimizing service disruption.  A new consultation paper proposes rules for re-assigning the 3G spectrum and for setting license fees. Comments to the new paper are due February 28, 2013.

3G licences (frequency spectrum in the 1.9 – 2.2 GHz band) were first awarded in Hong Kong in October 2001 as a result of an auction for spectrum.  Four licences were awarded then and they are due to expire on 21 October 2016.  The Secretary for Commerce and Economic Development ("SCED") and the then Telecommunications Authority first sought views in March 2012  from the public and interested parties on the arrangements for re-assignment upon the expiry of the existing 3G licences (the "First Consultation Paper"). 

The First Consultation Paper proposed three options: 1) an administratively assigned approach whereby the current four incumbent 3G operators would be offered the right of first refusal; 2) a market-based approach, which involves the re-auction of all the spectrum in the 1.9 – 2.2 GHz band; and 3) a hybrid of these first two approaches, allowing incumbent 3G operators the right of first refusal to retain part of their existing assigned spectrum, whilst the remaining spectrum would be returned to the Communications Authority ("CA") for re-auction. The SCED and the CA have now issued a second consultation paper putting forward the hybrid approach.

The First Consultation Paper sets out the objectives of spectrum re-assignment, namely ensuring customer service continuity, efficient spectrum utilisation, promotion of effective competition and encouragement of investment and promotion of innovative services. 

In their submissions to the First Consultation Paper, all four incumbent 3G operators objected to Options 2 and 3, stating that Option 1 (the right of first refusal) would enable them to retain their spectrum to ensure service continuity.  They also submitted that any variation or withdrawal of 3G spectrum would result in regulatory uncertainty which would deter investment. China Mobile, which is currently providing 3G services under commercial arrangements with some of the incumbent operators, supported Option 2, a full re-auction of the spectrum and considered the right of first refusal to be against the market-driven approach, which is the cornerstone of the Hong Kong telecoms market.  China Mobile further submitted that Option 3 would be acceptable if a contiguous band of 2 x 10 MHz could be opened up for re-auction.

In response to the views received, the SCED and CA reiterated major policy principles, including the importance of adopting a market-based approach; not having a right of renewal or right of first refusal as of right; and in the event that a spectrum is to be renewed or frequencies re-assigned, that reasonable notification  be given to assignees. 

While the SECD and the CA agree with the incumbents that the Option 1 approach ensures a seamless transition, it does not promote competition.  Moreover, maintaining the status quo would not reflect the substantial market developments that have taken place since 2001 when the 3G licences were first awarded.  The re-auction of all the spectrum under Option 2 is undoubtedly a full-fledged market-based approach, but it also brings with it service disruption, especially if an incumbent loses all or part of its existing assigned spectrum.   Further if an incumbent were re-assigned a completely different frequency sub-band, it would have to reconfigure its system promptly, otherwise the quality of services provided would be compromised.  However, reconfiguration is costly and cannot be carried out before existing frequency assignments expire in 2016. 

In view of the impact Options 1 and 2 may have on the market and quality of service, the CA now puts forth Option 3 in the Second Consultation Paper for further comments.  Under Option 3, incumbents may lose one-third of their spectrum in the re-auction and as a result, data download speed is expected to be reduced during the transitional period.  Nevertheless, a degree of reduction and degradation of quality of service is envisaged regardless of the frequency re-assignment as mobile data traffic continues to grow.   Under Option 3, the re-auction is anticipated to take place in October 2014, 2 years in advance of expiration of existing 3G frequency assignments, giving regulatory certainty and thus allowing incumbents sufficient time to prepare for a smooth transition to maintain an acceptable level of customer service continuity.  At the same time, the re-auction would lead to a more competitive market, opening up opportunities for new market players.

The CA has proposed a band plan for re-assignment under which frequency slots would be aggregated to produce a contiguous block to enhance efficiency.

The Second Consultation Paper also solicits the views of the public and interested parties on the determination of a spectrum utilisation fee ("SUF") of the spectrum retained by service providers after the re-auction in Option 3.  The SECD finds some incumbents' suggestion of zero or minimal SUF unacceptable.  The SECD and CA are of the view that the level of SUF must reflect the market value of the spectrum; and propose two methods of determining the SUF. 

The first method determines the SUF on the basis of the annual royalty payment payable by the incumbent operators in 2015/16 or the level of SUF as determined by the re-auction, whichever is higher.  Alternatively, the second method proposes to set the SUF at the average of relevant past market benchmarks and the SUF for previously re-auctioned spectrum. 

Views and comments are to be submitted by 28 February 2013.  The consultation paper is available here.

Gabriela Kennedy

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