Big Subsidies for Big Phone Companies

Senator Trent Lott, R-Miss., left, confers with Rep. Chip Pickering, R-Miss., at the state Legislature in the Capitol in Jackson, Miss., in this Jan. 4, 2006, file photo. Mississippi's competitive cellular carriers received more than $314 million in federal funds from a telephone tax from 2003 through the first four months of 2007, the most of any state, according to an Associated Press analysis of more than 20,000 disbursement records. Pickering, a former member of Lott's staff, helped shape the 1996 telecommunications law, according to his congressional biography. (AP Photo/Rogelio Solis, File) (Rogelio Solis - Associated Press)

WASHINGTON -- A decade-old telephone tax intended to help bring affordable service to rural areas has instead turned into something quite different: a bottomless and politically protected well of cash for cell phone companies that do big business in rural America.

Over the past four years, there has been nearly a tenfold increase in government-ordered subsidies paid to a few "competitive" providers _ cellular phone companies paid by the fund to offer service in rural areas where an existing carrier already receives a subsidy.

The Universal Service Fund has collected $44 billion over its 10-year lifetime from a surcharge on the phone bills of nearly every American.

Regulators and lawmakers have long viewed the fund as inherently flawed. Even a member of the federal-state board that runs the program calls it "bizarre." But efforts to change it have been derailed repeatedly by companies that benefit from the largesse and by supporters in Congress who represent sparsely populated states.

Now there are new calls for change, driven by the dramatic increase in money flowing to the cellular companies competing for rural business. Payments have gone from $131 million in 2003 to an expected $1.1 billion this year, according to an Associated Press analysis.

Increased demands by these carriers recently pushed the fee paid by telephone customers to the highest level in program history. The Federal Communications Commission will decide soon whether to cap payments while it considers options for long-term changes _ again.

The subsidy's roots

The Universal Service Fund was created by Congress in 1996 as part of an overhaul of the nation's communications laws designed to create competition.

Specifically, Congress ordered that consumers _ including those in "rural, insular and high-cost areas" _ have access to telecommunications and information services at rates comparable to those charged in urban areas. That was to be financed by a fee added to long-distance bills. The charge may only be a few dollars per month, but it adds up fast.

In 2006, the fund collected $6.6 billion, money that flows to four programs. About $1.7 billion paid for schools and libraries to connect to the Internet; two smaller funds subsidized telephone service for the poor and rural health care facilities.

The largest chunk _ about $4.1 billion last year _ flows to the aptly named "high cost" program, the source of the current controversy. That money is paid directly to telephone companies that do business in mostly rural areas where the cost of delivering service is high.

In the early years of the fund, subsidies went almost exclusively to old-fashioned wired phone companies _ large and small _ that had served rural areas for decades. To spur competition, Congress wanted to make subsidies available to other companies.