Institutional Arrangements for Frequency Trading

Radio frequencies are an essential and scarce resource in terms of electronic communications services. National regulatory frameworks, in particular, should ensure that frequencies are allocated to their most efficient uses and that spectrum allocation fosters competition. However, spectrum management traditionally focuses on the primary allocation of frequencies (using beauty contests and/or auctions). So far, national regulatory frameworks in the European Union do not provide for spectrum trading and secondary markets for spectrum rights do not exist. The resulting problem with the traditional approach is clearly its lack of flexibility in reallocating spectrum. Technologies and markets may change and the primary allocation of spectrum may become largely inefficient. The difficulty in reallocating spectrum may also prevent market expansion or new entry of competitors, thereby reducing competition. The new EU regulatory framework for the electronic communications sector takes into account this lack of flexibility in spectrum allocation and explicitly provides for the possibility of spectrum trading. Member states may make provisions for undertakings to transfer rights to use radio frequencies with other operators. A number of member states such as Germany and the UK are currently discussing the introduction of spectrum trading. This paper discusses the institutional design of the relevant alternatives, along with their advantages and disadvantages. The intention is to find an institutional arrangement that satisfies the goals of moving spectrum rights to the most efficient users and fostering competition in end-user markets for electronic communications to provide a transparent, objective and non-discriminatory framework.