F.C.C. to Propose Expanding Broadband Service to Underserved Areas

WASHINGTON — The Federal Communications Commission on Tuesday will propose the first steps toward converting the $8 billion fund that subsidizes rural telephone service into one for helping pay to provide broadband Internet service to underserved areas, according to commission officials.

The F.C.C. chairman, Julius Genachowski, is expected to outline the proposal in a speech on Monday, the officials said.

Most of the money under discussion involves a longstanding subsidy known as the Universal Service Fund, which is paid for through fees tacked onto most consumers’ phone bills and distributed among telephone companies to subsidize the high costs of providing service to rural areas.

Mr. Genachowski will propose phasing out the payments between phone companies, which he says create “inefficiencies and perverse incentives” that result in waste in the fund. The F.C.C. will also propose consolidating existing methods of paying for rural phone service into a new pool to be called the Connect America Fund, to be used for helping pay for making broadband available to underserved areas.

The current Universal Service Fund and its spending methods are “unsustainable,” according to a draft of Mr. Genachowski’s remarks prepared for Monday. “It was designed for a world with separate local and long-distance telephone companies, a world of traditional landline telephones before cellphones or Skype, a world without the Internet — a world that no longer exists.”

“At the end of this transition, we would no longer subsidize telephone networks; instead we would support broadband,” which then could be used for phone service, Mr. Genachowski plans to say. He will make the remarks in a speech to the Information Technology and Innovation Foundation, a nonpartisan research institute in Washington.

In some cases, the Universal Service Fund pays more than $20,000 a year just to connect a single rural household to telephone service. But in some local markets that still receive such subsidies, four or more companies are competing to provide service — indicating that it would be economically feasible to serve those areas without tapping the fund. Mr. Genachowski says that more than $100 million a year from the fund now goes to such areas.

Still, in an interview last Thursday, Mr. Genachowski said he rejected the idea, supported by some members of Congress, that the fund should simply be eliminated. Doing so, he said, would let the broadband revolution bypass a substantial portion of the 24 million Americans who the commission says lack access to high-speed Internet connections.

The F.C.C.’s proposed changes would deal with one portion of the Universal Service Fund known as the high-cost program, which typically accounts for about 55 percent of the fund’s annual disbursements, which totaled an estimated $8 billion last year.

Some other portions of the program already have been partially updated, including the E-Rate program, which helps provide faster Internet connections to schools and libraries, and the rural health program, which provides high-speed Internet connections to rural clinics so they can establish remote consultations with medical specialists.

Next month, the commission is expected to recommend changes to the Lifeline and Link-Up programs, which provide assistance to low-income households to help them pay for installation and monthly charges for telephone service.

But the F.C.C. is several months away from addressing what could be one of the toughest aspects of the fund to revamp — its financing. The program currently is paid for by telecommunications companies, which are required to contribute a percentage of their long-distance revenues to the fund. Telephone companies have long passed on to customers the cost of those mandatory contributions.

The contribution rates have risen sharply in recent years, as long-distance prices and therefore revenues — which are the benchmark measure for determining contribution rates — have fallen.

The contribution factor, as the rate is known, has increased to 15.5 percent, up from 7.3 percent at the beginning of 2003. Trying to thwart misuse of the funds, Congress has introduced bills in the last two sessions to overhaul the program — some of which would expand universal service and others that would limit its growth. Those efforts are expected to be revived in the current session.

So far, the F.C.C. has outlined efforts to expand broadband availability only though wired connections. But commission officials say that they will almost certainly look at whether it makes sense to try to use the growth of wireless Internet service as a spur to expand high-speed Internet access for underserved areas.