FCC plans to redirect phone subsidies to broadband

The U.S. Federal Communications Commission will unveil a proposal Tuesday to phase out subsidies for traditional telephone service to rural areas, with the money transferred to a broadband deployment program.

The Universal Service Fund (USF) is outdated and inefficient, with much of its budget going to support last-century networks, FCC Chairman Julius Genachowski said Monday in a speech at the Information Technology and Innovation Foundation.

"In the 21st century, high-speed Internet, not telephone, is our essential communications platform, and Americans are using wired and wireless networks to access it," Genachowski said in a preview of Tuesday's FCC meeting. "But while the world has changed around it, USF -- in too many ways -- has stood still, and even moved backwards."

The notice of proposed rulemaking on the FCC's agenda Tuesday will propose ways to redirect the USF's high-cost fund -- the largest part of the program with a 2010 budget of US$4.3 billion -- to a broadband deployment and support fund, Genachowski said.

The FCC created USF in 1997 to subsidize telephone service for rural areas and poor people and to help schools and libraries pay for broadband, and the high-cost fund is directed at rural areas. More than 15 percent of a U.S. telephone customer's long-distance bill goes to support the $8-billion-a-year USF budget.

Several U.S. lawmakers have been calling for USF reform for years, with some suggesting the program should be eliminated entirely. The FCC's national broadband plan, released last March, also called for the agency to transition the high-cost fund from telephone to broadband subsidies.

A revamped USF is needed to bring broadband to an estimated 24 million U.S. residents who don't yet have access to traditional broadband service, Genachowski said.

But USF is "plagued with inefficiencies," he added. "The fund pays almost $2,000 per month -- more than $20,000 a year -- for some households to have phone service. And in many places, the existing system funds four or more phone companies to serve the same area."

The FCC proposal will focus on eliminating waste and inefficiency, and on finding better measures of effectiveness for the Connect America Fund, the broadband program that would replace the USF high-cost fund, Genachowski said.

The proposal will also suggest ways for the FCC to revamp intercarrier compensation, the complicated formulas that telecom providers use to carry each other's traffic. The proposal, he said, will address so-called traffic pumping, a controversial practice in which some small carriers with high intercarrier access fees partner with sex chat lines or free teleconferencing services to drive voice traffic to their networks.

The notice of proposed rulemaking, or NPRM, is an early step in the FCC's efforts to revamp USF. In an NPRM, the FCC makes proposals and asks for public comment on them.

Several groups, including the Organization for the Promotion and Advancement of Small Telecommunications Companies (OPASTCO), a trade group representing rural telecom carriers, praised the FCC efforts. OPASTCO members will be concerned about continued funding as the program transitions to broadband, said OPASTCO President John Rose.

"OPASTCO members ... appreciate the FCC's efforts to move forward with modernizing the high-cost USF program and intercarrier compensation rules," Rose said. "In order for rural consumers to have ongoing access to modern broadband service at reasonable rates, the stability of these critical sources of network cost recovery for small, rural carriers is essential."

Verizon Communications and USTelecom, another telecom trade group, also praised Genachowki's plans.

"Today's remarks by the chairman lay out a good road map for policymakers and the communications industry to work together to put in place updated policies that ensure all Americans have access to broadband networks and the Internet," Kathleen Grillo, Verizon's senior vice president for federal regulatory affairs, said in a statement.

Grant Gross covers technology and telecom policy in the U.S. government for The IDG News Service. Follow Grant on Twitter at GrantGross. Grant's e-mail address is grant_gross@idg.com.