Reuters, May 1, 2008
By Peter Kaplan

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

The FCC voted by a 3-2 margin to cap the fund at March 2008 levels, or about $1.3 billion to $1.4 billion a year, by one recent estimate. The measure approved by the commission exempts 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. It is funded by an 11-percent surcharge on long-distance phone calls that is billed to carriers and typically passed on to their subscribers.

"This action is essential to preserve and advance the benefits of the universal service program while we consider comprehensive reform (of the subsidy system)," FCC Chairman Kevin Martin said in a statement.

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.

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

Some efforts to reform the subsidy program have been supported by Verizon Communications and Qwest Communications International Inc, 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 lead to excessive payments to some carriers.

The FCC's two Democratic commissioners dissented from Thursday's decision. They said the agency should have taken the opportunity to make more dramatic changes, including using the fund to promote broadband service.

"As technology and the marketplace rapidly reshape the communications landscape, we face difficult questions about how our universal service policies should keep pace," commissioner Jonathan Adelstein said in a statement.

Martin has also called for broader reform. "Today's decision is not an end in itself, but a step on the path towards comprehensive reform," he said in his statement.

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