AT&T was insanely profitable in 2009, with $34.4 billion in revenue and $12.5 billion in net income. The company even returned most of this cash ($9.7 billion) to investors as dividends. So why did the US government direct $435 million into the company's coffers?

Thank (or blame) the Universal Service Fund, which last year collected $7.2 billion dollars from phone companies—charges that are passed on to consumers, often as a separate line item on their bills. The money amounts to a 14 percent tax on phone service. It pays for four things: telephone service to expensive-to-wire places, subsidies for low-income users, computers and Internet access for schools, and telecommunications services for rural health care providers.

Most of the money goes to install and maintain "high-cost" phone service, usually in rural areas. The House Energy and Commerce Committee is investigating the USF, a notorious pit of inefficiency and error—for instance, half the high-cost money paid out in 2009, a full $2 billion, went to "rate of return" telcos who are allowed to make an 11.25 percent profit. If they don't, the government makes up the difference.

The FCC has now supplied more detailed USF data to Congress. Among the revelations: AT&T has pulled down more than $1.3 billion in USF money over the last three years, while Verizon got $1.2 billion and CenturyTel picked up $930 million. In return, the companies must provide phone service to anyone in their service area who wants it.

Outrageous? Possibly. The program has been a useful one, making telephone service in the US truly ubiquitous, but critics have always charged that telcos get far too much cash, or got cash for projects they would have done anyway. Cecilia Kang at the Washington Post pointed out some of these complaints last week.

And the new FCC documents certainly provide fodder for critics.

$17,763 per line



There's the case of Weavtel, a tiny Washington state telco that raked in $301,966 in USF money in 2009—all in order to support 17 copper telephone lines. That's an average of $17,763 per line.

In 2008, the company was paid $188,382 for the 15 phones lines that it serviced, for an average of $12,559 per line.

Stehekin. It's remote! (Bing Maps)

In 2007, Weavtel supported 14 lines at an average of $16,621 per line.

Ponder these numbers for a moment. The company had already built the local exchange infrastructure needed to handle phone calls in 2007, but it still received almost $500,000 over the next two years—and it added service to a grand total of three lines in that time.

In three years, the $700,000 spent on phone service for these 17 residents could have been used instead to simply buy sat phones and satellite Internet—and pay for service—for the remote community of Stehekin, a place so remote that it is bordered by a national forest and is accessible only by boat.

In 2005, Weavtel tried to begin the project and ran into local opposition from Stehekin residents (the Seattle Times ran a nice profile of the town at the time, explaining the controversy over the phones). In a letter to residents (PDF), Weavtel noted "that there is a difference of opinion concerning the number of people who want telephone service. It is also clear that some people do want service. We have made a business decision that the number of people who do want service makes this a viable business opportunity."

Seventeen people paying monthly phone bills isn't much of a "business opportunity"... not unless the government directs a few hundred thousand dollars a year toward the project (and lets you run your towers and lines over federal parkland, as the company requested). Weavtel, in fact, collected the most money per line of any telco in the entire US in 2009.

Still making sense in a cellular world?



Terral. It's the best of everything, apparently.

But still, a case might be made for service to Stehekin, which has never had a local exchange. The FCC numbers show, however, that plenty of USF money is also being paid out to local telcos in areas that already have plenty of cell phone coverage. It's a policy that makes increasingly little sense for a program whose basic goal is mere voice connectivity.

Terral Telephone Company serves rural Oklahoma, and in 2009 it took home $1.6 million in USF money to provide service to 246 lines. That's $6,563 per line, per year, one of the highest rates in the country.

Unlike Weavtel, though, Terral's customers have a choice. The FCC points out that the company's service area is 100 percent covered by AT&T, Sprint, and Verizon. T-Mobile has 95 percent coverage. None of these carriers received USF "high-cost" support for this area in 2009.

Reform a-comin'



The FCC hopes to (finally) reform many of the worst elements of the USF system. In its National Broadband Plan, the agency argued that "rate of return" carriers should be eliminated and switched to an incentive-based scheme instead. "Rate-of-return regulation was not designed to promote efficiency or innovation," says the plan, noting that it was product of the 1960s and a world with a single monopoly telco.

It also wants Sprint and Verizon to "reduce the High-Cost funding they receive as competitive ETCs to zero over a five-year period as a condition of earlier merger decisions." (Both companies have already agreed to this, which could save $500 million a year.)

Just as importantly, these huge amounts of money won't be used to install archaic technology. Instead, the FCC wants to transition USF funding to support broadband and fully converged IP networks instead of simple POTS service. These proposals have been controversial with just about everyone, since they propose only modest speeds of 4Mbps and could also reduce money to existing telcos like Weavtel and Terral.