FCC to use phone subsidy fund to pay for broadband

By Joelle Tessler, AP Technology Writer

WASHINGTON — Government regulators plan to overhaul the $8 billion federal program that subsidizes telephone service in rural and poor areas in order to pay for high-speed Internet connections.

The Federal Communications Commission voted 5-0 Tuesday to begin drafting a blueprint to bring the federal program, called the Universal Service Fund, into the digital age.

The fund, which is supported by a surcharge on long-distance bills, was created to ensure that all Americans have access to a basic telephone line. The FCC now wants to use the fund to underwrite the cost of building and operating broadband networks in even the most remote corners of the country. Those networks would be able to handle regular voice calls as well as data traffic.

If the FCC doesn't act now to alter the purpose of the fund, "we'll be left with a rickety, tottering, last-century system that did good things for plain old telephone service but hasn't got a shot at taking us where we need to go in the years ahead," said Michael Copps, one of the agency's three Democrats.

Today's Universal Service program subsidizes phone service for the poor, funds Internet access in schools and libraries, and pays for high-speed connections for rural health clinics. But more than half of last year's $7.9 billion in overall spending — $4.3 billion — went to the High Cost fund, which pays phone companies that provide voice service in rural, sparsely populated places where phone lines are unprofitable. The FCC envisions gradually transforming the High Cost program over a period of years into a new Connect America fund that would subsidize broadband.

FCC Chairman Julius Genachowski said the agency also hopes to eliminate waste in the fund, which has been criticized for subsidizing multiple rural phone companies in places where the free market doesn't support even one. Critics also complain that the program gives many carriers little incentive to keep their costs down since reimbursements are based on the expenses that they report.

The FCC will explore capping the size of the Universal Service program, limiting the number of carriers that can receive funding in a particular place and setting strict benchmarks to help determine reimbursement rates. It will also propose "reverse auctions" to award Universal Service money to carriers that can build broadband networks at the lowest cost.

In addition, the agency hope to overhaul the multibillion-dollar "intercarrier compensation" system, the complicated menu of charges that phone companies pay each other to connect calls and link their networks. Any changes to the Universal Service Fund would also require changes to intercarrier compensation, with rural phone companies depending on both.

The current intercarrier compensation system is considered outdated and irrational since phone company payments vary widely based on the type of carrier involved, the type of network traffic being exchanged and the distance that the traffic travels. That leads carriers to game the system — by sending traffic along inefficient routes or pumping up traffic volumes, for instance — in order to manipulate access payments.

The FCC hopes to gradually reduce these payments and use Universal Service funding to help fill the gap for companies that rely on that money.

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