A fresh dispute is set to break out between the telecoms regulator and five mobile phone companies over how to divide up a key slice of spectrum that allows broadband access on mobile phones.

The Government has ordered Vodafone and O2 to reach an agreement with rivals within three months over dividing up their 900 Mhz bandwidth. Ofcom said yesterday that if the two failed to reach agreement, it would force the two to give up 14 per cent of their bandwidth share. That imposition could cost the two operators hundreds of million of pounds.

Ofcom’s ultimatium came after the Government released plans to provide broadband internet access to every home by 2012.

The 900 Mhz frequency owned by Vodafone and O2 is crucial to the Government’s countrywide plan because it is best suited for transmitting large quantities of data long distances and providing wireless internet in remote areas.

Ofcom estimates that the cost to Vodafone and O2 of giving up a share of the spectrum could reach £90 million. O2 said yesterday that it believed the cost would be “considerably more”. Vodafone said it would cost both operators between £60 million and £90 million.

Lord Carter of Barnes, the Communications Minister, met representatives of the five UK networks two days ago to try to reach a compromise. Last month he made it clear that the Government would support an “imposed solution” to the dispute if the operators failed to hammer out a deal in three months.

Yesterday, Ofcom revealed what the imposed solution would look like.

The proposal, however, is more diluted than Ofcom’s original plan which would have required O2 and Vodafone to give up almost a third of their most valuable spectrum so that it could be sold to rivals in an auction.

The regulator has decided to reclaim only 10Mhz of the 70Mhz capacity that the two companies own in the 900Mhz band, much less than initially proposed.

But in pleasing the incumbents, Ofcom risks isolating companies such as T-Mobile and 3, which both want to win as large a slice of the 900Mhz spectrum as possible. “These proposals neither further competition nor benefit the UK consumer,” Kevin Russell, chief executive of 3 Mobile, said. “If this were to be the basis of a decision on spectrum, we would expect it to be openly challenged.” Other operators signalled yesterday that they would consider taking legal action against the regulator if it failed to wrest more of the spectrum back from O2 and Vodafone. 3 indicated that it remained keen to reach a commercial solution.

A spokesman for Ofcom said: “A lot has changed since the spectrum was originally allocated and this is making sure that the spectrum is being used as efficiently as possible for new services like mobile broadband, which is incredibly popular.”

In his Digital Britain report, published last month, Lord Carter said that the UK’s aim was to make 2012 the digital age’s equivalent of 1851 – when the Great Exhibition celebrated the country’s move from an agricultural to an industrial economy.

The report called for all homes to be given broadband internet access at download speeds of up to 2 megabits per second by 2012.

Since it would be too expensive to roll out fixed-line broadband to remote areas, Lord Carter called for mobile operators to solve the problem by providing mobile internet services over their spectrum. O2 and Vodafone’s 900Mhz spectrum and Orange and T-Mobile’s 1800Mhz spectrum are used only for 2G services such as voice calls. But the spectrum would be suitable for extending 3G mobile services, such as web surfing on handsets.

On the move

— According to Ofcom there has been a rapid increase in the use of mobile broadband in Britain

— Dongles - small devices that plug into the USB port of laptops, enabling internet access via a mobile network - have driven the surge in mobile broadband use

— Between February and June last year the number of dongles sold nearly doubled from 69,000 to 133,000 a month; there were 511,000 new mobile broadband connections.

— Two million adults claim to have used a data card, USB modem or dongle to access the internet

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