FCC chairman Julius Genachowski on Thursday sketched a proposal to overhaul the nation's complex system of subsidies for telecom services in rural areas. Calling the current system "outdated," "wasteful," and "inefficient," Genachowski announced several initiatives to shift subsidies from telephony to broadband and to rationalize the rates telecom companies charge to terminate one another's calls.

After paying tribute to Steve Jobs, Genachowski highlighted the plight of residents in Liberty, Nebraska, where he said most residents don't have broadband access. "Broadband has gone from being a luxury to a necessity for full participation in our economy and society," he said.

America's "outdated" system of subsidies dates to the breakup of AT&T in 1984. Before the breakup, AT&T controlled the overwhelming majority of both the local and long distance telephone markets, and it tended to charge below costs for local service—especially in rural areas—and charge a premium for long distance. When AT&T's local and long-distance businesses were separated, the FCC sought to preserve this cross-subsidy by requiring long distance companies to pay local phone companies high per-minute rates to terminate their calls.

When Congress overhauled telecommunications law in 1996, it augmented this "intercarrier compensation" (ICC) scheme with a system of explicit taxes and subsidies. Telephone subscribers pay taxes on their phone bills (for example, your correspondent pays $1.29 every month on his cell phone bill) into a Universal Service Fund (USF), which the FCC doles out to phone companies that serve rural areas.

The last 15 years have seen three major changes that rendered this scheme anachronistic. First, long-distance rates have plummeted, which has made ICC fees a disproportionate share of the costs of some long-distance calls. Google, for example, has refused to allow Google Voice calls to some numbers due to what it regards as unreasonable ICC rates. Second, the rise of cable and wireless telephone service has meant that some previously underserved areas now have multiple options for phone service. And finally, the USF's focus on telephone service has started to seem anachronistic given the growing importance of the Internet as a communications medium.

Chairman Genachowski argues his plan will address all three concerns. It will begin shifting USF money to a new Connect America Fund which will subsidize the provision of broadband services to rural areas that don't currently have access to it. That fund will include money for mobile broadband service. And for the first time, USF subsidies would be awarded using competitive bidding.

As for the ICC system, Genachowski promises to close loopholes like "phantom traffic" (where calls arrive without the information needed to bill the originating network) and "traffic pumping" (in which rural carriers with high ICC rates manufacture extra traffic in order to collect more termination fees). He also pledged to "phase down access rates over a measured but certain multi-year transition path."

According to the New York Times, an anonymous FCC official expressed skepticism that the changes would lead to lower phone bills for the average American.

Large telecom companies reacted cautiously to the news. "FCC Chairman Genachowski deserves credit for bringing this important issue to this point," said AT&T's Bob Quinn. "We and many others are committed to working with him and the entire Commission, as it works to bring this opportunity for a fair, reasonable plan across the finish line."