The Federal Communications Commission on Thursday approved a sweeping overhaul of the nation's Universal Service Fund. The USF currently subsidizes traditional phone service in rural areas, but the plan proposed by Chairman Julius Genachowski will shift that money to support the buildout of broadband networks. The FCC also approved a gradual phase-out of the "intercarrier compensation" scheme, in which the company that originates a phone call pays the other company to terminate it. In its place, the FCC will institute an Internet-style "bill and keep" scheme in which each company bills its own customers and exchanges traffic without money changing hands. Oh yeah, and there will probably be a new "Access Recovery Charge" on your monthly phone bill.

The USF has exploded in recent years. It paid out just $1.7 billion in 1998. Last year, subscribers were charged more than $4 billion. The FCC pledges to cap this spending at $4.5 billion per year for the next six years. And it will gradually shift those subsidies from supporting phone service to supporting broadband. Specifically:

Carriers that elect to receive this additional support must provide broadband with actual speeds of at least 4 Mbps downstream and 1 Mbps upstream, with latency suitable for real-time applications and services such as VoIP, and with monthly usage capacity reasonably comparable to that of residential terrestrial fixed broadband offerings in urban areas.

The plan also sets aside money for expanding mobile broadband service in rural areas. Wireless firms that take FCC money must "deploy 4G service within three years, or 3G service within two years, accelerating the migration to 4G" in areas that don't currently enjoy wireless broadband service. The FCC will also earmark some money to support wireless infrastructure on Tribal lands.

At the same time, the FCC has ambitious plans for the nation's outdated rules for voice network interconnection. When a traditional long-distance phone call is made, the company originating the call pays "intercarrier compensation" (ICC) to the company terminating the call. As long distance rates have dropped, this provision has been a growing source of mischief, as some firms have artificially inflated their traffic to earn ICC revenues, and other firms retaliated by obfuscating the source of their calls to avoid paying the fees.

The FCC wants to get rid of the whole mess, and replace it with something like the "bill and keep" system that prevails on the Internet. In this scheme, firms simply bill their own customers and keep the money. In cases where firms need subsidies to stay in business, they are expected to look toward the USF fund, not other carriers, to make up the difference. In theory, the result should be more transparency and less game-playing.

However, the FCC apparently believes that a quick transition to bill-and-keep would leave some network providers unable to pay their bills. And so it is allowing companies to charge their customers a "new recovery mechanism" (read: subscriber fee) of up to 50¢ per month, to make up for revenue they're losing due to the loss of ICC fees.

"We share the concerns of other consumer organizations that the Commission's actions will lead to higher prices at a time when the average American is watching every penny," said Gigi Sohn, president of the advocacy group Public Knowledge, which declared itself "skeptical" of the plan. We are too. The system desperately needed reform, and this plan is probably an improvement over the old system, which also featured rising costs. But with telecommunications costs plunging, we would have preferred a plan that led to lower fees rather than higher ones.