Operators Dispute Ofcom’s Proposed UK Corrections to Mobile Spectrum Fees

Mobile networks operators including EE (BT), O2 (Virgin Media), Vodafone and Three UK have warned that Ofcom’s proposals to change the cost of Annual Licence Fees (ALF) in the 900MHz, 1800MHz and 2100MHz radio spectrum bands – used to support 2G, 3G and 4G mobile (mobile broadband) services – still do not reflect reality.

The cost of Annual Licence Fees (ALF) for mobile-friendly radio spectrum can be influenced by various different factors, such as the ongoing removal of 3G services and the desire to make modern 5G services available via the same bands. Not to mention any changes in the supply and demand conditions since the fees were set.

In case anybody has forgotten, Ofcom, which was somewhat prompted by evidence from BT, has been investigating a “material misalignment between our fees and the underlying market value of the relevant spectrum” since early 2024. At the end of last year this resulted in a proposal to reduce the ALFs for the 900MHz and 1800MHz bands by 21% (here). But the fees for the 2100MHz band would increase by 12%.

The regulator has now published some of the responses they received to the above consultation, which shows that there’s still considerable disagreement. BT, for example, welcomed the move to redress some of the imbalance (here). But they also accused Ofcom of making “three material errors in its assessment of ALFs“, which when taken together would, they claim, “overstate BT’s ALFs by £36m” per year in the 1800MHz and 2100MHz bands (other operators made similar statements).

One of the primary “errors” highlighted by BT – using data from Ofcom’s own European database – is that international spectrum auctions have shown a downward trend in nominal spectrum prices since circa 2016, while Ofcom has continued to “inflate” their fees by CPI (consumer price index / inflation). “The effect of this error is to overstate ALFs by 41% or £30m pa,” claimed BT while hoping for a bigger reduction. BT also points to the difficulty of trying to make models around uncertain assumptions of future technological or commercial developments.

Meanwhile, some operators, such as Three UK, continued to argue that the whole concept of ALFs should be “abolished” (here). The operator also noted how “fundamental trends in data traffic, an increased supply of spectrum, falling industry returns and technological developments were actively at work in reducing the value of ALF spectrum over time“, before adding that Ofcom “appears to overestimate the value of spectrum in an environment of falling spectrum prices“.

Three UK Statement to Ofcom

We strongly support Ofcom’s attempt to update fees to reflect current market values and broadly agree with the proposed methodology. In our view, a couple of areas need revisiting to avoid the need for further reviews in the future.

irst, Ofcom’s proposal aligns only the 900MHz value with the latest evidence from the UK 2021 auction (i.e. the 700MHz price). The proposed 1800MHz and 2100MHz values continue to rely on the older, higher price benchmarks from the UK 2.3GHz and 3.4GHz 2018 auction, in addition to the latest evidence. This overstates the relative value of 1800MHz and 2100MHz compared to 900MHz. The 2021 UK auction prices are better indicators of today’s spectrum values and should be consistently preferred.

More importantly, Ofcom’s assumption that the value of spectrum has remained constant in real terms since the 2018 and 2021 UK auctions appears problematic. As far as we can see, a fee review is needed because supply and demand conditions have changed since 2018 and 2021, when Ofcom set the ALFs. Spectrum values have reduced in real terms, and relative values have also changed.

Mobile operator Vodafone similarly feels as if Ofcom has “failed to take a suitably conservative approach” to setting ALFs, which has resulted in the fees being too high. The operator also highlights some of the same concerns about CPI (inflation) based price rises as BT (here).

Vodafone Statement to Ofcom

It is incumbent on Ofcom to take a conservative approach to setting ALFs. If set too high, then there is a risk that licensees return the spectrum to Ofcom, resulting in inefficiently unused spectrum. Even if the ALF is set at a level so as not to trigger such an action, because ALFs are a regulatory fee they are of the highest priority to licensees when apportioning competing capital demands – so ALFs set too high risk either depriving growth projects of investment (where there is finite capital), or alternatively soaking up sources of low cost capital meaning that growth projects must deliver a higher rate of return to meet their cost of capital. This risks derailing the Government’s desire to invest for growth.

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In order to apply ALFs conservatively, Vodafone therefore believes that Ofcom should introduce guard rails in the application of CPI. We propose that the value of CPI applied should be minimum 0%, maximum 4%, thus stripping out the effect of inflationary pressures driven by external economic shocks rather than implicit changes in the UK economy. This would foster a stable regulatory regime, because when licensees set budgets (including investment plans), they could at least be certain of the maximum ALFs that would be payable.

However, we disagree with Ofcom’s assertion that limiting CPI in any way should lead to the risk premium in the annualisation calculation being limited – licensees will still be exposed to fluctuations in CPI, just protected from extraordinary changes.

Finally, O2 echoes some of the same arguments about falling market values and the impact of raising prices by CPI: “In addition to being the trigger for a review, these contradictory value and price trajectories should have informed Ofcom’s approach to setting revised ALFs … It is concerning that the current set of proposals do not account for this reality,” said the operator (here).

O2 Statement to Ofcom

There are important parts of Ofcom’s benchmarking proposals that we and other stakeholders agree with. We are aligned that the LSV for 900 MHz value should be determined based on the observed UK 700 MHz auction price in 2021 (accounting for the functional equivalence of all low band paired spectrum).

We also agree with the aim (though not Ofcom’s application) of putting greater weight on more recent auctions to benchmark 1800 and 2100 MHz values. Whilst we identify potential to refine benchmarking of the higher two frequency bands, we broadly agree with proposed and largely observed 2021 values for these bands.

Consequently, we believe that Ofcom has acted appropriately only with respect to benchmarking for value as of 2021. This provides a starting point for setting ALFs that all stakeholders can likely align on. Unfortunately, for reasons we set out in this response, Ofcom’s approach to subsequent steps is flawed, with the result that its proposals for ALFs in 2025 and beyond would exceed market value.

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Adjusting auction prices by inflation alone is fundamentally wrong. What Ofcom proposes is to correct for the change in the “value of money” but not for the change in the “value of spectrum” as it is required to do

O2 concluded that the combined impact of their own counter-proposals is for 2025 ALFs per MHz to be over 30% lower than the ALFs proposed by Ofcom. Naturally there’s an element of “well they would say that, wouldn’t they” to the responses from mobile operators, while Ofcom has already appeared to dismiss some of these arguments in their related consultation.

The regulator’s December 2024 consultation expressed a provisional view that they should “continue to increase ALFs in line with out-turn inflation, because we think it is appropriate to increase ALFs by actual, rather than forecast, inflation such that they remain constant in real terms“. But Ofcom added they were open to “considering arguments for why we should move to adjusting in line with the Bank of England’s target rate of inflation, which could give operators greater certainty over future ALF payments and reduce potential volatility.

The regulator previously intended to publish a final decision during summer 2025, although it now looks like we won’t get this until Q2 FY 2025/6 (i.e. this reflects the period between April 1st to June 30th, 2026).