U.S. bill would overhaul annual phone fund

* Bill includes broadband use for universal service fund

* A Nov. 17 hearing set

* AT&T, Verizon, Qwest support legislation

WASHINGTON, Nov 6 (Reuters) - U.S. lawmakers said on Friday they introduced a measure aimed at overhauling an annual fund intended to ensure nationwide telephone service in high-cost, rural areas by including money for high-speed Internet use.

Earlier this year, U.S. phone companies complained to lawmakers that the $7 billion universal service fund, whose mission is to help low income customers, rural healthcare, schools and libraries, is outdated and promotes inefficiency.

AT&T Inc (T.N), Verizon Communications and Qwest Communications International Inc (Q.N), which support the measure, want a competitive bidding process to set fund awards. Some also want its annual total capped, amid double digit growth in the last several years.

The bill, introduced by U.S. Representatives Rick Boucher, chairman of the House Energy and Commerce Subcommittee on Communications, Technology and the Internet, and Lee Terry, a Nebraska Republican, would establish a competitive bidding process and cap the fund.

Verizon Wireless is a joint venture of Verizon Communications Inc (VZ.N) and Vodafone Group Plc (VOD.L).

Rural carriers such as CenturyTel Inc's (CTL.N) Embarq and United States Cellular Corp (USM.N) have said funding should stay based on actual costs and said a cap would discourage investment and jeopardize coverage in hard-to-serve areas.

The bill would broaden the base of who pays into the fund to include companies that provide Internet calling services over wireless, cable and satellite networks, as well as the traditional telephone companies and local exchange service providers.

"This measure reflects broad areas of consensus," Boucher, a Virginia Democrat, and Lee said in a joint statement. They set a Nov. 17 hearing to discuss the legislation.

The proposal could help aid efforts by the Obama administration to extend broadband access to rural areas. The Federal Communications Commission is studying broadband use in the United States and crafting a report to be submitted to Congress in mid-February.

The bill, called the Universal Service Reform Act of 2009, would also direct the FCC, with the help of a federal-state joint board, to set policies including methodologies to determine access to the fund.

Most agree the fund's payment system is broken and that, in many cases, it subsidizes too many private carriers that do not need it. Most also agree it should be used to spur expansion of high-speed Internet, or broadband.

AT&T and Verizon lauded the measure, saying it also puts an end to traffic pumping, which is when third-party companies route adult chat and "free" conference calls through rural exchanges in order to generate fees.

The big telephone companies have complained for years of having to pay those high fees. In 2007, the FCC told them they could not block those calls.

"This bill takes a common-sense approach," said Steve Davis, Qwest senior vice president of public policy and government relations. "We are hopeful that, once introduced, it will move swiftly through Congress." (Reporting by John Poirier; editing by Andre Grenon)