November 22, 2007 / 12:40 AM / 12 years ago

UPDATE 3-US panel urges FCC to cap rural phone subsidies

(Adds comment from rural landline carriers)

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 and also recommended a more specific limit on subsidies for wireless service in those areas. The $4.5 billion 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.

The broadband fund would be set at about $300 million a year under the panel’s recommendations and the wireless fund would distribute about $1 billion a year.

The idea of capping wireless subsidies from the fund has long been opposed by the wireless phone industry.

“I think we’re going to continue to work with the commission on longer-term, more structural reforms,” said Joe Farren, a spokesman for the industry trade group CTIA.

The panel recommended that the changes go into effect after a transition period, but did not specify exactly how long that period should be.

In addition to rural service, the fund subsidizes phone service to low-income households, as well as communications services and Internet access for schools, hospitals and libraries.

Some efforts to reform the subsidy program have been supported by Verizon Communications (VZ.N) and Qwest Communications International Inc Q.N, whose customers have increasingly had to pay more to keep the fund afloat.

Verizon issued a statement by senior vice president Susanne Guyer on Wednesday saying the panel’s proposal “would help bring fiscal responsibility to a program ultimately paid for by every telephone customer.”

“We hope the FCC moves quickly both to stabilize the fund in the short term and to adopt comprehensive, long-term reform of the program,” Guyer said in the statement.

The recommendation also was applauded by a trade association representing smaller, rural landline phone companies, called Coalition to Keep America Connected.

“The sustainability of (the fund) is contingent on putting policies in place that use the funds as efficiently and effectively as possible,” the group said in a statement.

Analysts at Stifel Nicolaus said the recommendations looked like an attempt to balance the concerns of wireless and wireline carriers.

Stifel Nicolaus said the FCC has up to a year to act on the recommendations. It said it expected all the interested companies “to push for changes favorable to their interests” but the specifics of what the FCC would do were unclear. (Reporting by Peter Kaplan; editing by Gary Hill and Andre Grenon)

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