Bloomberg News

FCC to Revamp Phone Subsidy to Spur Expanded Internet Access

October 06, 2011

(Updates with Rockefeller’s hearing in ninth paragraph.)

Oct. 6 (Bloomberg) -- U.S. regulators proposed overhauling an $8 billion phone subsidy program for landline service to help fund a nationwide expansion of high-speed Internet.

The changes to the program, known as the Universal Service Fund, will help increase access to broadband and spur job creation, Federal Communications Commission Chairman Julius Genachowski said during a speech today in Washington. The agency also plans to revise the fees that smaller regional carriers receive to connect calls, he said.

“Broadband has gone from being a luxury to a necessity for full participation in our economy and society,” Genachowski said. “If we want the United States to be the world’s leading market” for innovation, “we need to embrace the essential goal of universal broadband, and reform outdated programs.”

Under Genachowski, the FCC has sought to increase the share of people who use high-speed Internet at home to 90 percent from the current 65 percent, according to the agency’s national broadband plan. Between 14 million and 24 million Americans lack access to broadband, “and immediate prospects for deployment to them are bleak,” the FCC said in a report last year.

“The costs of this broadband gap are measured in jobs not created, existing job openings not filled, and our nation’s competitiveness not advanced,” Genachowski said today. The proposals will be brought before the agency’s four commissioners at an Oct. 27 FCC meeting.

Source of Money

The FCC is seeking to transform the USF into a “Connect America Fund” designed to ensure affordable high-speed Internet service in regions that lack access and to promote mobile broadband nationwide.

The Universal Service Fund supports phone service to schools, libraries, the poor and high-cost areas. The fund is financed by charges on long-distance calls paid by telephone subscribers, and it subsidizes companies including Windstream Corp. and Frontier Communications Corp.

In 2010, the program paid $4.3 billion to carriers doing business in high-cost areas, according to the website of the Universal Service Administrative Company, a Washington-based independent nonprofit group that administers the fund. More than 1,700 carriers receive support from the program for high-cost areas.

Senator Jay Rockefeller, a West Virginia Democrat who chairs the Senate Commerce committee, called for an Oct. 12 hearing to discuss the proposed reforms. Details of the plan announced today have not been released publicly by the FCC.

High-Cost Subsidy

Genachowski has singled out the subsidy program for high- cost regions as one possible source of money for broadband expansion. The agency voted in February to develop the USF overhaul, and since then has held workshops across the country.

The FCC also plans to revamp the fees paid to rural carriers for connecting calls, Genachowski said. The changes would be phased in over several years, he said.

Changes to so-called intercarrier connection fees “will result in significant consumer benefits,” Genachowski said. “Consumers can expect reduced costs, better value for their money, or both.”

A coalition of telephone companies led by AT&T Inc. and Verizon Communications Inc. in July asked the FCC to reduce those fees, which can amount to as much as $8 billion annually.

Bob Quinn, AT&T’s senior vice president-federal regulatory, said the company was committed to working with the FCC on the changes to the Universal Service Fund and intercarrier compensation.

Loitering Rules

“Absent reform, these rules will simply loiter on to foster more litigation and arbitrage, and ultimately stifle innovation and the benefits of broadband for consumers,” Quinn said in an e-mail.

The FCC’s push to overhaul the USF program may leave “mom and-pop” telephone providers behind, David Mitchell, director of the bureau of economic research at Missouri State University, said in an interview.

Small phone companies would likely stop offering service and be unable to afford the investment needed to become broadband providers. Their absence in the market may mean that “the winners would be larger corporations,” as AT&T and Verizon take over those markets, he said.

Rural telecommunications providers said they want to ensure that the FCC’s plan strengthens their networks.

Common-Sense Reforms

“We will continue to press for common-sense reforms that recognize the unique challenges faced by small carriers and the consumers they serve in rural areas across the country,” Shirley Bloomfield, chief executive officer of the National Telecommunications Cooperative Association, which represents more than 570 small phone providers nationwide, said in a statement.

“The entities that all along face the greatest risk are the small rural” carriers, said Jeffrey Silva, senior policy director for telecommunications, media and technology at Medley Global Advisors in Washington. “Even though they face the risk, their inclusion is essential for at least politically, getting reforms through.”

The plan outlined by Genachowski today left a number of questions unanswered, Art Brodsky, a spokesman for Washington- based advocacy group Public Knowledge, said in an e-mail.

“There is still a big question mark whether the FCC has the authority to deal with broadband as the Chairman wants to do,” Brodsky said.

--With assistance from Todd Shields in Washington. Editors: Michael Shepard, Joe Winski

To contact the reporter on this story: Juliann Francis in Washington at

To contact the editor responsible for this story: Michael Shepard at

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