The cable industry is proposing a sweeping measure to simplify the nation's subsidy system for rural phone service providers. Make it tougher for providers to get Universal Service Fund High Cost program subsidy money, the National Cable and Telecommunications Association recommends, in areas where an unsubsidized wireline service is available via a cable company or similar provider.

Paying USF support to carriers who compete with unsubsidized wireline competitors "is both inequitable and inefficient, and can easily be addressed in a targeted fashion," the NCTA wrote to the Federal Communications Commission on Thursday. Millions could be saved—money potentially redirected to programs that boost broadband rollout and competition.

Two-step reform

The USF's High Cost Fund subsidizes telcos in rural areas where it costs more to connect spread-out customers, but it has been leaking money fast. The program spent $1.7 billion on High Cost in 1999 and blew over $4 billion in 2007. Some of this spree can be blamed on an auditing system that the Government and Accountability Office has basically called bogus. More recently, the FCC estimated that from July 2006 through July 2007, the Fund overpaid carriers to the tune of close to a billion dollars. The audit was controversial, but nobody disputes that the High Cost fund needs fixing.

NCTA thinks it can save the taxpayers much of that with its proposed reform. Let any party request a reassessment of the degree of financial support the USF provides to a given geographic region via a two-step process, the trade association recommends. In step one, the petitioner would have to prove (a) that one or more unsubsidized wireline providers already serve more than three quarters of the customers in the area, and (b) that the state has deregulated service to an incumbent local exchange carrier in that market.

"The Commission’s high-cost support mechanisms are premised on the assumption that a particular location would not have affordable service available but for the support provided by the program," NCTA notes. "But in markets with extensive facilities-based competition, that assumption no longer holds true."

If the petitioner proves that both conditions exist, it would fall to the High Cost subsidized carriers in question to prove that they really need X amount of USF to serve "noncompetitive" areas in their region. About a billion dollars a year go to rural competitive carriers via the USF's High Cost fund, and another billion to nonrural providers.

The appropriate question

This proposal, if enacted, would obviously transfer customers from USF-subsidized local carriers to cable phone service providers. A survey attached to the NCTA petition finds that cable voice service is available to about 80 percent of United States households, and about 43 percent of households in rural areas. These cable operators have often extended service into various rural areas without any USF support, NCTA notes. So why should the government subsidize local carriers in those regions?

"When circumstances have changed to the point where competitive entry becomes economic without any subsidy, the appropriate question should be whether, and by how much, to decrease support," the petition concludes.

Thus we have another idea to add to the big stew of proposed ways to fix the USF system. These include awarding High Cost grants via reverse auctions (lowest bidder wins), and dumping the illogical "identical support rule," in which subsidies to smaller wireless carriers are based on the costs of the incumbent carriers to which they connect, rather than their own. Then there's the endless cry to fix the FCC's intercarrier compensation rules, in which local carriers get to charge access fees that rise and fall based on an increasingly meaningless criteria in the age of IP telephony: whether the call is inter- or intra-state.

All this has to be addressed, NCTA concedes. But "the difficulties of achieving comprehensive reform should not prevent the Commission for addressing obvious and unjustifiable inequities and inefficiencies in the current system on a case-by-case, issue-by-issue basis."