Internal divisions within the European Commission about the shape of a policy review for the telecommunications industry due this quarter sparked sharp criticism from industry analysts Tuesday.

"It is unproductive to have differing views inside the Commission on this important review," said Stefano Nicoletti, an analyst in the London offices of market research firm Ovum.

Two of telecom commissioner Viviane Reding's most ambitious new ideas for ensuring fair competition in the telecom market have been shot down by officials in the competition and industry departments, according to reports Tuesday, including an article in the Financial Times, that cited an internal Commission document.

Reding wants to increase pressure on former telecom monopolies to compete fairly with smaller players in their markets by introducing the penalty of functional separation of a dominant company's networks from its services.

But according to competition officials, functional separation "is not only superfluous but also damaging," they said in the internal document.

It is superfluous because it won't stop the former monopolies from discriminating against competitors who need to use their networks. And damaging, because the measure could deter investment in ultrafast broadband networks.

Nicoletti disagreed with Reding's critics. Functional separation would level the playing field for competitors, and "end users would benefit from more choice and more innovation," he said.

However, it would be easier for a former monopoly in a large country to separate its network from its services than it would be for one in a small country, he said.

"There are fixed costs associated with functional separation, such as setting up the new structure, changes to the workforce, adapting software interfaces between the company's own services and the networks. These costs do account for more in a small country with a limited number of subscribers," Nicoletti said.

Weighing the benefits of more consumer choice and innovation against these costs, Nicoletti said functional separation should be introduced as a pan-European tool with which to regulate the market.

"On balance I'd say it would be good for the Commission to have this additional tool, but it doesn't necessarily have to use it," he said.

Reding also wants to create a European Union telecom regulator, similar to the US's Federal Communications Commission, to ensure that all 27 countries in the EU apply the same rules. The powers of national regulators varies widely from country to country.

The competition department was equally critical of this idea. "In the electronic communications sector, granting powers to a community agency to perform competition assessments can only create confusion and impinge on the Commission's competences," it said in the internal document.

The industry department, with a broad remit that includes getting rid of bureaucracy, is reported to believe that the creation of an agency employing up to 110 staff is unnecessary red tape.

Matthew Howett, also with Ovum in London, agrees. "The review is intended to streamline telecom policy. The FCC idea would move away from that aim by creating another layer of red tape," he said.

Instead of creating a new agency the Commission should make better use of the institutions that already exist, he said, referring to the European Regulators' Group, which was set up in 2003 to help coordinate the regulation of national markets throughout the EU in a more consistent way.

"They should use this group better," Howett said.

Howett said the internal dispute about these two aspects of the telecom review threaten to overshadow the third, and in his opinion the most important strand of Reding's proposals: the reallocation of radio spectrum across the EU.

"Managing radio spectrum is more important but the risk is that attention will be drawn away from this because of the feuding over the regulatory agency and functional separation ideas," Howett said.

Reorganizing radio spectrum can have a dramatic effect on end users, he said, citing the move by British regulator Ofcom last week to allow 3G (third-generation) phones to use the 900MHz frequency used by GSM (Global System for Mobile Communications) mobile phones.

"The Commission plans for reallocating spectrum go far beyond the 900MHz frequency," Howett said, adding that one of the aims was to make popular frequencies more technology neutral.

Reding is expected to unveil the Commission's plans for the review in November. After that, national governments and the European Parliament will debate the proposals for up to a year before a final version is agreed.