Etain Doyle, Ireland's telecommunications regulator, has concluded that auctioning third-generation (3G) mobile licences is not in the interests of Irish consumers. Rather, she has opted to award them to those who best meet selected criteria and are prepared to pay an administratively determined licence fee.

She will, claim the critics, deprive the Government of tens of millions, given the spectacular sums raised by the recent British and German auctions (approximately £37 and £50 billion respectively).

As telecoms regulator, Ms Doyle's approach leaves open the question of how the licence fee should be set by her office. There is a danger that reference to the very high fees generated in the UK and Germany will still lead to an excessive licence fee, with the consumer ultimately footing the bill.

There are good reasons to believe that the licence fees generated by the recent UK and German auctions are excessive in that they are higher than the competitive price for the underlying spectrum.

Spectrum auctions involve the sale of limited bandwidth to a few firms determined by governments, not market forces. Hence there is no reason to believe that the licensing process has exhausted the potential for effective competition in the provision of mobile services.

In short, the licence fee contains a large element of monopoly rents which Ms Doyle believes should be passed on to consumers in the form of lower prices rather than flow into the Government's coffers.

Third-generation mobile phone licence auctions have been designed to gouge existing operators. Without a 3G licence, the existing mobile operators would have no longterm future. Against the back ground of this fear, the auction has led them to bid away all their expected profits to stay in business. Thus a proportion of the licence fee takes the form of a survival or ransom tax arising from the limitation on the number of 3G licences. It is no coincidence that the successful bidders for the UK 3G licences were the existing mobile operators.

The central issue in the looming debate over the licensing of 3G across Europe is whether the consumers will ultimately pay the high licence fees. Ms Doyle believes it is most likely that they will, one way or the other. Others share this fear. Indeed, the EU Commission and the British National Audit Office have both recently launched investigations on this question.

The supporters of spectrum auctions say this is nothing more than scare-mongering and economic nonsense. The licence fee is a sunk cost that will not affect future mobile tariffs, which market forces will force down to long-run (incremental) costs.

This analysis is a simplistic response to a complex issue, and is wrong. In network industries with high infrastructure costs, pricing at marginal costs would see all mobile operators going bankrupt overnight. At such prices they would not recover either the costs of building the network or the licence fee.

In the real world, prices are properly set above marginal costs to recover these overheads. Since the licence fee is borne by all mobile operators, the competitive and regulatory pressures will inevitably lead to higher prices than in the absence of high licence fees. And there is a concern that high licence fees will further reduce competitive pressures in the mobile sector by fostering collusive arrangement.

In short, high licence fees make it more likely that mobile tariffs will be higher.

The current round of 3G licensing may lead to other effects which further raise the mobile sector's costs. First, it has prematurely forced the introduction of 3G networks. Many believe that existing mobile networks can provide many of the new broadband services more cheaply. It has also increased the initial funding requirements, raised the costs of introducing service competition in mobile markets, and reduced the credit rating of mobile operators and their share prices. These factors have raised costs and risks in the mobile sector, and inevitably increased pressures to maximise profits and to limit other risky investments which may benefit consumers.

Ms Doyle has identified a critical trade-off and tension in the contest between higher licence fees, and more competition and consumer benefits. She now has to undertake a difficult balancing act which accommodates a complexity of interests, including those of the consumers.

The margins involved are considerable, especially when it is recognised that the licence fees generated by the UK and German auctions are many times greater than the investment needed to build a new national 3G network.

This and the factors discussed above suggest that the licence fee should be significantly lower on a pro rata basis than the UK or German licence fees, but how much lower requires detailed consideration of many intractable factors over the speculated 20-year period of the 3G licence.

The task now is for a clear framework for determining the licence fee, and payment arrangements that better share the risks of 3G investment which, after all, is based on an untested technology and unknown appetite for broadband mobile services.

Cento Veljanovski is managing partner with Case Associates, an economic consulting practice, and a research fellow at the Institute of Advanced Legal Studies, University of London. He is also an adviser to Eircom on economic and competitive matters.