* Regulator allows reallocation of EE's spectrum
* Says decision swayed by new spectrum auction
* EE to launch a third brand in Britain by year-end
* EE agrees to sell some spectrum to Three
* Vodafone, Three, O2 say could distort competition
By Paul Sandle
LONDON, Aug 21 (Reuters) - Britain's biggest mobile operator, Everything Everywhere (EE), won approval to provide next generation 4G services while its rivals have to wait, with regulators saying the benefits to consumers outweighed the risks of unfair competition.
The operator, a joint venture between France Telecom's Orange and Deutsche Telekom's T-Mobile, said in February it wanted to start rolling out the first 4G services in Britain by the end of the year.
Rivals such as Vodafone protested that EE had an unfair advantage because only EE's allocation of the 1800 MHz radio frequency can be reconfigured to handle 4G, while they must wait to buy new licences in the next auction of frequencies.
Britain has fallen behind the United States, Asia and parts of Scandinavia in developing 4G networks, which offer much higher connection speeds for services such as video.
Regulator Ofcom, which said in March it was minded to approve EE's application, said its decision had been swayed by the firm prospect of the auction, which is set to begin later this year after prolonged wrangling between operators over the terms.
"Everything Everywhere 1800 MHz licences would deliver significant benefits to consumers, and ... there is no material risk that those benefits will be outweighed by a distortion of competition," Ofcom said on Tuesday.
The regulator said EE could start offering 4G services from Sept. 11, although the timing was up to the company.
Following the long-awaited decision, EE said later on Tuesday it had agreed to sell two chunks of its spectrum to Britain's smallest operator, Hutchison Whampoa's Three, to fulfil a requirement imposed by the European Commission when EE was formed in 2010.
It did not disclose the value of the deal.
Three's chief executive, Dave Dyson, said acquiring the EE spectrum would more than double the capacity available on its network for customers who were using more and more data.
"New spectrum, supported by further committed technology spend, is a clear signal that we are committed to maintain our lead as the network built for the mobile Internet," he said.
EE said it would launch a new brand by the end of the year in addition to Orange and T-Mobile. The new brand would not share the Everything Everywhere name of the parent group, a spokesman said. He would not say whether the brand would be dedicated solely to 4G services.
Ofcom already set a precedent in 2011 for allowing operators to re-use airwaves for new services by ruling that 2G spectrum could be used for 3G services.
Analysts at Espirito Santo Investment Bank said EE would get a temporary commercial advantage as it may be able to market 4G branded services ahead of the other UK mobile operators.
Vodafone and Telefonica's O2 were united in their condemnation of the ruling, with the former describing its reaction as "frankly shocked" and the latter as "hugely disappointed".
"The regulator has shown a careless disregard for the best interests of consumers, businesses and the wider economy through its refusal to properly regard the competitive distortion created by allowing one operator to run services before the ground has been laid for a fully competitive 4G market," a Vodafone spokesman said.
Vodafone said the timing of the decision was bizarre given that EE had sold some of its spectrum to Three.
"This means the balance in the auction will fundamentally change," the spokesman said.
"The regulator has spent several years refusing to carry out a fair and open auction. Now its decision today has granted the two most vociferous complainants during that entire process a massive incentive to further delay it," the spokesman added.
O2 said the announcement meant the majority of customers would be excluded from the first wave of digital services.