UPDATE 2-US panel urges FCC to cap rural phone subsidies

(Adds comment from Verizon, analyst, detail, byline)

By Peter Kaplan

WASHINGTON, Nov 21 (Reuters) - A government advisory panel recommended on Wednesday that the U.S. Federal Communications Commission cap the fast-growing subsidies the government allots to providers of telephone service in rural America and allow some of the funds to be used for promoting broadband service.

The joint federal-state advisory board said the FCC should limit the largest part of the universal service fund -- the part used to subsidize high-cost rural service -- to $4.5 billion. That figure represents the current size of the rural subsidies.

The FCC's chairman, Kevin Martin, issued a statement praising the panel and expressing support for the idea of using the fund to promote broadband services.

"It is essential that we take actions that preserve and advance the benefits of the universal service program," Martin said in his statement.

The universal service fund is paid for through a surcharge on long distance phone calls that is billed to carriers and typically passed on to their subscribers.

In recent years, the cost of the program has ballooned, boosting the surcharge rate to 11 percent, up from about 5.5 percent in 2000. Much of the added cost has gone to subsidize wireless service in rural areas of the country.

The advisory panel recommended splitting the rural subsidy portion of the universal service fund into three funds: one for wireline phone service, one for wireless and a third for broadband.