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FCC Looks to Overhaul Telephone Subsidies

Universal Service Fund (USF) reform at the U.S. Federal Communications Commission hasn't commanded as much attention as the recent debate about the so-called spectrum white spaces.

However, reform of the fund, which subsidizes telephone and some broadband service to rural and other underserved areas of the U.S., is on the FCC's Tuesday agenda, as is a debate over whether to allow new broadband devices to access the white spaces of unused television spectrum.

The FCC is scheduled to hear reports and vote to move forward on proposals that would reform both the USF and intercarrier compensation (ICC) rules, which determine the rates telecom carriers pay for using each other's networks.

Opponents of both proposals, advanced by FCC Chairman Kevin Martin, have called for time to study the plans. The details of Martin's proposals have not been made public, and opponents of the plans say Martin is trying to push them through without significant public debate.

"It is incomprehensible that the FCC would hastily determine the future of the Universal Service Fund without sufficient time for review by the public," Senator Olympia Snowe, a Maine Republican, said in a statement Friday. "Rural carriers in Maine depend on the USF and ICC to provide telephone and wireless services to remote areas and rash overhauls of these programs could place costly burdens on consumers, not to mention possible service setbacks."

Debates over the USF and ICC are highly technical and can be difficult to explain. However, billions of dollars are literally at stake, and critics say proposals from FCC Chairman Kevin Martin could result in increased fees or taxes on customers' phone bills.

The USF's 2009 budget is US$6.7 billion, not counting the $4.2 billion E-Rate program, which helps schools and libraries in poor areas connect to the Internet. The U.S. government raises the funds through a tax on telephone service, and some mobile carriers collect the tax as well.

A host of groups has called for USF reform in recent years, with some critics saying the program's focus on traditional telephone service doesn't address needs for broadband and mobile-phone service in rural areas. The Telecommunications Act of 1996 expanded the USF program, but there have been few changes since then.

Several people, including Democratic presidential candidate Barack Obama and FCC member Michael Copps, have called on the USF to shift its focus toward subsidizing broadband instead of traditional phone service.

"Bringing broadband to the far corners of the nation is the central infrastructure challenge our country confronts right now," Copps said late last year. "Broadband is our generation's infrastructure challenge, but we have fallen behind other nations in getting high-speed services out to our people. We have put ourselves in an untenable competitive position by denying the tools of high-speed opportunity to most Americans."

Martin is pushing a plan that would reportedly put a $1-a-month USF tax on any device that has a telephone number assigned to it, including VoIP (voice over Internet protocol) phones. USF fees are now based on a percentage of a customer's phone bill, and for many people, the $1 tax would be an increase.

In November 2007, a board made up of FCC members, state utility commissioners and a consumer representative recommended significant changes to the USF. That group proposed shifting $300 million of the USF to broadband services, a recommendation that Copps blasted as inadequate. "That's like fighting a bear with a fly swatter," he said.

Critics have argued that the USF is poorly managed and lacks oversight of how the money is spent. Some critics have said the fund gives billions of dollars to large and small telecom carriers that no longer need a subsidy to maintain existing telephone networks.

The largest portion of USF still focuses on basic phone service, said Larry Irving, CEO of the Irving Information Group and former telecom adviser to President Bill Clinton.

"If you're under 30 years old, you don't understand why anybody has wireline phone," Irving, an Obama supporter, said during a forum last week on telecom priorities in the next presidential administration. "And yet, we have the same policy on universal service since 1934. Let's use the Universal Service Fund purely for broadband, to bring broadband to those parts of the country that need it."

Intercarrier compensation is tied closely to USF reform, in that it could move money away from small carriers providing traditional telephone service.

Large telecom carriers Verizon and AT&T, as well as providers of VoIP service and some tech vendors, have argued the commission should set a flat rate for the fees to carry and terminate voice traffic, instead of a complicated set of rules that generally allows small carriers to charge more to carry traffic from competitors.

A Verizon proposal made in September would cap termination fees at $0.0007 per minute, when some carriers charge 175 times that much, according to Verizon. The proposal would include VoIP providers in those rates, ending debates about the proper fees they can charge, Verizon said.

Many carriers are now unable to collect access fees because of fraud and disputes over rates, the Sept. 12 Verizon filing said.

"The myriad rates under the current system and the growing difficulty of properly categorizing traffic also serve as an invitation to fraud and arbitrage, as providers attempt to manipulate and disguise traffic in order to gain illegal profits for themselves or deprive other providers of lawful revenues," the filing said. "A new plan should provide carriers, particularly those in rural areas, with a predictable and reliable source of any necessary support, without the uncertainty involved in policing the collection of access charges."

The Verizon proposal would hurt rural telecom carriers, the Independent Telephone and Telecommunications Alliance (ITTA), a trade group representing small carriers with 30 million customers, said in an October FCC filing.

"The commission must reject proposals that fail to consider the needs of carriers serving rural America," the ITTA said. "So-called '$0.0007' and similar proposals would not only eliminate a vital element of cost recovery but would also constrict severely carriers' ability to obtain capital in the financial markets as regulatory risk would reduce investor confidence in carriers."

Intercarrier compensation accounts for more than 12 percent of ITTA members' revenue, the filing said. "Inappropriate ICC reform will wreak adverse impacts across a wide swath of the nation," the filing said.

Verizon and other carriers have called on the FCC to move forward with both USF and ICC reform. The FCC has had six comment periods on ICC reform since 2001 and more than a dozen comment periods of USF reform since 2005, said Tom Tauke, Verizon's executive vice president for public affairs, policy and communications.

"It's time for action," Tauke said in a statement. "These two issues have been studied to death."

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