Ofcom threatens O2 with £40m penalty for failing to reach 3G coverage targets

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O2 has just four months to avoid contract penalties that would cost it £40m following a warning shot fired across its bows by the telecoms regulator yesterday.

Ofcom said O2 was the only one of the UK's five licence holders for 3G mobile phone networks that had failed to hit the coverage targets agreed when the licences were originally awarded. It has given the company until the end of June to put its house in order.

The regulator warned that if O2 missed this deadline, it would reduce the duration of its license by four months, a sanction that Ofcom has calculated would be equivalent to a financial penalty of at least £40m.

Under the terms of the mobile phone licenses awarded in 2000, O2, Three, Orange, T-Mobile and Vodafone were all given until the end of last year to ensure their 3G networks covered at least 80 per cent of the UK's population. Yesterday, Ofcom said that while four of the five 3G networks now exceeded this target, O2 was only servicing 75.7 per cent of the population at the end of last year. The shortfall means 2.5m people who should be covered by O2's 3G network are currently missing out.

O2 paid a little over £4bn to acquire its 3G license, which is currently scheduled to expire on 31 December 2021. The regulator said yesterday that this expiry date would be brought forward to the end of August 2021 if O2 missed the latest deadline.

A spokesman for O2 said the company expected to be at 80 per cent before the end of June. "We accept that Ofcom is enforcing the terms of our licence," he said.

"However, we are fully committed to growing our 3G coverage and customer base with the best-quality 3G service and are confident that we will have met Ofcom's requirement before June 2008."