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O2 has attacked Ofcom's new 4G coverage auction policy claiming that it is illegal under current EU law.

The key reason for the dispute between Ofcom and O2 revolves around Ofcom's policy on spectrum holdings.

The draft rules for Ofcom's policy aim to ensure that the U.K. retains at least four mobile network operators. These rules include the implementation of "spectrum floors". These would in turn ensure that each mobile operator would walk away from the auction with a sizable share of the highly desired low-frequency spectrum sub-1GHz bandwith.

The floors were suggested after Ofcom expressed concern that without the new policy network providers like Everything Everywhere and 3 -- which currently own none of the sub-1Ghz spectrum -- would not be able to compete with larger networks like O2 and Vodafone.

O2's attack on the policy claims that the floors and reserve prices will lead to certain providers paying less than those already holding parts of the key sub-1GHz spectrum, making the auction weighted in certain operators favor and thus unfair.

The company commented in a subsequent statement. "The 'spectrum floors' go beyond what is necessary to guard against strategic behaviour and have the side-effect of providing nearly £1bn of unlawful state aid, potentially to bidders which might not otherwise have viable investment cases for 4G."

O2 went on to add, that for such a policy to be implemented, Ofcom would first have to secure permission from the European Commission -- a move that would delay the auction from its current plans to hold it in the first quarter of 2012, allowing mobile operators to launch 4G services in 2013 or 2014.

Ofcom has since commented on O2's claims: "We are fully aware of state aid rules and would not have made proposals that we considered illegal."