Reforms urged in federal funding for phone lines

By Cecilia Kang
Washington Post Staff Writer
Tuesday, July 20, 2010; A17

Americans are turning away from home phone lines and toward mobile, but a federal program continues to pour $8 billion a year into phone service for rural homes and businesses. Last year in Chelan, Wash., for instance, the fund paid an average of $17,763 each for 17 residents to get phone lines.

But as the nation looks to wireless and fiber broadband networks as its on-ramp to e-mail, tweets and Skype calls, lawmakers and regulators have called for sweeping changes to the Universal Service Fund.

Created in 1997 to connect the nation by phone, the subsidy program has come under criticism as a symbol of inefficient federal telecommunications policy.

In some areas, the subsidies go to multiple companies providing the same services.

Critics suggest that satellite service would be cheaper than stringing phone lines across mountains and plains and then maintaining those services indefinitely through federal subsidies, which come from monthly fees charged to long-distance and wireless customers.

The biggest carriers, AT&T and Verizon Communications, are calling for changes and rallying behind legislative and policy reforms. Yet recent data released by the Federal Communications Commission and the House Energy and Commerce Committee show that the telecom giants are also benefiting the most from the service fund.

The firms are using the money to pay for wireless networks, which is allowed as long as they are providing cellphone service in unserved areas. But critics say the companies would be building cell towers even without federal help.

"In some parts of the country, there are up to 20 providers receiving subsidies," Rep. Cliff Stearns (R-Fla.) said in a recent news release about the data, adding that it calls "into question the size, structure and purpose of the subsidies."

AT&T and Verizon were the top recipients of Universal Service Fund grants last year. From 2007 to 2009, AT&T received $1.3 billion from the fund, and Verizon received $1.2 billion to bring communications services to areas that would be too costly to serve without federal assistance.

The companies point to the subsidy as symbol of backward regulation, among a string of policy moves by the federal government that the companies say could hurt the economy. They also have argued against a proposal to redefine broadband as a telecommunications service, saying the move could lead to rate regulation and force them to share their networks with competitors.

Ivan Seidenberg, chief executive of Verizon and chairman of the Business Roundtable trade group, said in a letter to the White House last month that the service fund was among a list of "policy burdens inhibiting growth."

The subsidy program "rewards inefficiency, discourages competition and broadband deployment, and unduly benefits specific companies rather than consumers," Seidenberg wrote.

He added that "the majority of high cost funding is distributed to incumbent wireline local exchange carriers without any serious demonstration of need and with little or no accountability as to how the money is used."

Asked why it opposes a program that it benefits from, Verizon said that it was not a major recipient of the funds until it acquired Alltell, a rural carrier, a few years ago. AT&T said that it serves more rural households than any other land-line provider.

After AT&T and Verizon, the next-biggest fund recipient was CenturyTel, which serves 33 states from its base in Louisiana and got $931 million from the fund from 1997 to 1999. Sprint Nextel received $241.4 million in the three-year period.

The FCC has proposed redirecting the program to support broadband. The agency has also suggested that only one provider in a geographic area receive grants.

Public interest groups say there needs to be better oversight of whether firms getting the money truly qualify for it. The groups also say that wireless technology is cheaper to deploy than traditional phone lines or underground fiber networks, but that cellphone companies don't seem to be getting smaller awards.

The groups also say the FCC should recalculate how much money it distributes for broadband connections because the return on investment is so much greater for Internet service. That should make companies better able to pay for their own operating costs without federal assistance, said Derek Turner, a policy director for the public interest group Free Press.

"We support the reform of the fund, but what you don't want is the same inefficiencies for a new fund that has only changed to provide money for a different technology," Turner said.

© 2010 The Washington Post Company