Phone fund overhaul has companies scrambling for money

Go into any home in the American countryside--no matter how remote--and you are able to make a landline phone call at an affordable price. It's easy to forget that wouldn't be the case without the U.S. government.

An $8 billion subsidy fund helps make landline phone service more affordable for low-income and rural households. Congress created the so-called Universal Service Fund (USF) in the 1996 update to the Communications Act for this purpose. Consumers pay into the fund through a line item on their landline telephone bills.

Part of the fund is up for a major overhaul this month. The section in question is known as the "high cost fund" - a slice devoted to lowering rural phone rates. This $4.5 billion chunk subsidizes the operating costs of telecom carriers who provide service in rural areas, where the dearth of customers over vast geographic regions makes it expensive to build out lines and connect customers.

Telecom carriers in Mississippi, Alaska, and Texas--which have large rural areas--received the most funding last year when calculated by state. The largest corporate recipients of funding over the last three years have been Verizon, AT&T, and CenturyLink.

Now the FCC wants to change the system. The idea is that in a world where high-speed Internet access is as essential as landline phone calls once were, the subsidy system should now pay to bring broadband to the 18 million rural customers who do not have it.

"By connecting millions of unserved Americans who are being left out of the broadband revolution, this plan will bring enormous benefits to individual consumers, our national economy, and our global competitiveness," FCC Chairman Julius Genachowski said when he announced his USF reform plan earlier this month.

To make the change, Genachowski wants to transform the high-cost fund into a so-called "Connect America Fund" for broadband service. Under the new regime, broadband providers would have to compete on service rates to qualify for the subsidy in a given area. And, his plan would also create a so-called "Mobility Fund" to subsidize wireless access in rural areas.

For companies that currently rely on the funds--many phone carriers--a lot of money is at stake. This overhaul could be a make-or-break transition for some industries. Rural phone companies are worried the commission will cut off a key revenue stream for them overnight. Cable companies are hoping to get their hands on subsidies once devoted only to voice service.

But Genachowski has promised to make the transition gradual so he doesn't upset the apple cart, which could prospectively cause landline customers to lose their service if the proposal is too hard on rural providers.

That's what the fight at the FCC is all about this month. It's still unclear how Genachowski will strike a balance between his push to modernize the fund and his effort to make sure companies reliant on the old subsidies don't get harmed. The cable and phone industries have gone to battle over their conflicting needs.

One major issue of contention is whether companies that currently receive phone subsidies should have a "right of first refusal" for the broadband dollars, delaying competitive bidding for these funds for several years. The FCC wants to encourage old-fashioned phone providers to get into the broadband business, and letting them have first call on the money would help them stay in business as the government alters the subsidy system. Another question is how quickly the FCC will phase out the old subsidies.

At the same time the FCC is trying to transform USF, it is trying to reform the system of payments between phone carriers in order to kill perverse incentives and make it more efficient.

Genachowski's proposal, still under revision at the FCC, goes up for a vote at an Oct. 27 meeting of commissioners.