Reuters, April 28, 2008
By Peter Kaplan

The U.S. Federal Communications Commission was poised on Monday to impose a cap on fast-growing subsidies the government allots to providers of telephone service in rural America.

A proposal to limit the phone subsidies moved towards passage as FCC commissioner Robert McDowell threw his support behind the idea, giving it a crucial third vote on the five- member commission.

"Like an unabated fever, expenditures from this fund continue to spike out of control," McDowell said in a statement.

The measure to be adopted by the FCC would cap the fund at March 2008 levels, or about $1.3 billion to $1.4 billion a year according to recent estimates. McDowell said he also supports a provision that would exempt phone carriers that serve tribal lands and Alaska native lands.

The rural phone subsidies are the largest component in a larger, "universal service" fund administered by the FCC, which is paid for through a surcharge on long distance phone calls that is billed to carriers and typically passed on to their subscribers.

In addition to rural service, the fund subsidizes phone service to low-income households, as well as communications services and Internet access for schools, hospitals and libraries.

In recent years, the cost of the rural subsidy program has ballooned, boosting the surcharge rate to 11 percent, up from about 5.5 percent in 2000.

The subsidies are increasing at a rate of roughly $150 million per year and could reach as high as $1.4 billion by 2009 if left unchecked, McDowell said.

Much of the added cost has gone to subsidize wireless service and the idea of capping the fund has long been opposed by the wireless phone industry.

Some efforts to reform the subsidy program have been supported by Verizon Communications (VZ.N: Quote, Profile, Research) and Qwest Communications International Inc (Q.N: Quote, Profile, Research), whose customers have increasingly had to pay more to keep the fund afloat.

The FCC is also studying several other reforms to the subsidy program, including rescinding rules that critics say leads to excessive payments to some carriers.

"Consumers will be happy to hear the FCC is taking control of the fund's growth," Tom Tauke, Verizon executive vice president, said in a statment.

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