Ofcom has given O2 a deadline of June to increase its 3G coverage, or face a £40m bill.
Under the terms of their 3G licences, all five networks had an obligation to provide 3G coverage to at least 80% of the population by the end of last year.
Ofcom has found that O2 only covers 75.69% of the population – a shortfall of 2.5 million people.
O2 has now been issued with a warning notice that if it does not increase its coverage by June 2008, Ofcom will shorten the term of its 3G licence by four months, ending it in August 2021.
O2 paid £4bn for its 3G licence in 2000, and a reduction of four months would cost it £40m.
An O2 spokeswoman said: ‘We accept that Ofcom is enforcing the terms of our licence. We are fully committed to increasing our 3G coverage and customer base with the best quality 3G service, and are confident that we will meet Ofcom's requirements before June 2008.’
The enforcement notice will come as a blow to O2, as it is without a network share partner to help share the cost of increasing its coverage.
3 and T-Mobile estimate their partnership will shave a combined amount of £2bn off their network expansion plans, while Vodafone now estimates it will make a saving of 10% on its network costs from its arrangement with Orange.