WASHINGTON - The government issued three proposals Tuesday aimed at reining in the spiraling costs of the Universal Service Fund, a subsidy program that provides affordable phone service to people who live in rural areas.
The fund is an 11-year-old, multibillion-dollar program financed through a surcharge tacked on to most every American's phone bill. The surcharge has risen steadily over the past several years in order to keep up with increasing subsidy demands from cellular telephone companies.
The Federal Communications Commission released three proposals late Tuesday containing recommendations on how to stabilize the fund and asking for public input.
The cost of the program has ballooned thanks to steadily increasing payments made to cellular telephone carriers that are subsidized to offer competition to landline carriers in rural areas.
Telephone customers paid about $7.3 billion into the fund in 2006. About $4.1 billion of it was dedicated to the "high cost fund," which goes directly to carriers that provide service in rural areas. And about $1 billion of that amount is estimated to have gone to wireless carriers, up from $131 million in 2003, according to an Associated Press analysis in July.
The balance of the money goes to a fund for schools and libraries, low-income subscribers and to rural health care facilities.
All five commissioners agreed that the practice of paying cell phone companies the same subsidy as their landline competitors, even if their costs are lower, should be eliminated. Critics say this "identical support" rule creates a windfall for cell phone carriers. The commissioners tentatively agreed that cell carriers should be compensated based on their actual costs.
A second proposal that has been hotly contested by rural telephone companies is the creation of a "reverse auction" system, an idea that is supported by FCC Chairman Kevin Martin.
In a reverse auction, subsidies would be awarded to the lowest bidder in a particular area. In its order, the FCC tentatively concluded that such a system offers "several potential advantages" over the current system.
In his statement, Martin wrote that he believes "reverse auctions could provide a technologically and competitively neutral means of controlling the current growth in the fund and ensuring a move to most efficient technologies over time."
Martin was joined by fellow Republican commissioners Robert McDowell and Deborah Taylor Tate in favoring the proposal.
Democratic Commissioner Michael Copps opposed the reverse auction idea, citing concerns that it would make it difficult to ensure that the winning bidder would provide adequate service. Fellow Democratic commissioner Jonathan Adelstein also opposed the idea.
The agency also took up a recommendation for comprehensive reform from the joint federal-state board that advises the commission and includes Martin, Tate and Copps as members.
The joint board recommended that the FCC establish three separate funds to support broadband, cell phone service and "providers of last resort."
The agency is currently considering whether to cap payments to cellular carriers, but has been unable to reach a consensus. But recent mergers in the cellular telephone industry involving some of the largest beneficiaries of the fund have included conditions that require a cap.
Alltel Corp., the top recipient of Universal Service Fund money, agreed to an interim cap until "fundamental comprehensive reforms" are adopted as part of its buyout by private investment group. AT&T Inc. agreed to a similar cap when the FCC approved its buyout of Dobson Communications Corp.
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