FCC Moves to Shift Phone Subsidy to Rural Broadband

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The Federal Communications Commission on Tuesday moved to begin the process of overhauling the $8 billion federal telephone subsidy to redirect funding to broadband service in rural areas.

The notice of proposed rulemaking (NPRM), approved by a unanimous vote, also outlines a path for reforming the system of payments among telephone providers for exchanging local and long-distance calls, known as intercarrier compensation.

Reform of the Universal Service Fund (USF) and the intercarrier compensation regime has been on the FCC’s agenda for years, with the programs widely criticized for ballooning in size and falling prey to waste and abuse.

“The Universal Service Fund is broken,” FCC Chairman Julius Genachowski said at today’s meeting. “The intercarrier compensation system, intertwined with USF, is broken, too. Neither program is up to the nation’s broadband challenge. Both are plagued with waste and inefficiency.”

But an overhaul of the byzantine programs has been hobbled as policy makers seek to rewrite the rules to provide a funding and payment regime that appropriately balances the needs of local, regional and national providers, while ensuring that support is not cut off for the areas that still rely on the USF for telephone service.

Today’s action addresses only one of the USF’s distinct programs, the so-called high-cost fund that helps support rural areas. FCC officials said that the high-cost fund is the largest of the USF programs, accounting for more than half the annual cost of the overall subsidy.

The commission plans to consider reforms to the USF programs that subsidize service for low-income Americans at its meeting next month. The NPRM approved today also does not address the testy issue of contributions, the rates by which USF payments are assessed and collected, which Genachowski noted is the subject of a separate open proceeding.

That approach frustrated Commissioner Robert McDowell, a staunch fiscal conservative who argued for a comprehensive overhaul of the system, but nonetheless voted to approve today’s item.

“While not ideal in my view, piecemeal reform is better than no reform at all,” McDowell said.

With the approval of the NPRM, the FCC will begin collecting comments on how to craft a final rulemaking order. Ahead of today’s vote, a consortium of groups representing rural service providers, including the National Telecommunications Cooperative Association and the Rural Broadband Alliance, issued a statementoffering cautious support for the reform effort to improve accountability and consistency in the programs, while at the same time highlighting the degree to which their member companies rely on the USF and intercarrier compensation to provide service.

“The rural representatives are hopeful that the FCC’s notice will strike an appropriate balance between the essential need for reform on the one hand, while also retaining the many effective elements of current programs that continue to play a vital role in promoting the availability and affordability of broadband services for rural consumers,” the groups said.

Among the many issues the proposed rules will attempt to tackle are abuses of the system known as phantom traffic, where providers mask traffic on their networks to evade billing charges, and traffic pumping, the practice of a local phone company artificially inflating its volume of incoming calls to reap higher fees under the intercarrier compensation rules.

Additionally, the proposed rules would aim to eliminate funds paid to companies operating in competitive markets with multiple service providers.

In the long term, the FCC is looking to consolidate the USF programs into a single Connect America Fund, which would shift funding toward broadband and away from telephone service without increasing the price tag of the fund. Transitioning to the Connect America Fund was a central piece of the national broadband plan the FCC issued last March.

The full NPRM, which FCC officials said numbers about 250 pages, is expected to be released later this week, and could be available as early as this afternoon.

Kenneth Corbin is an associate editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.