The House Energy and Commerce Committee is back in action, and that means that it's once again time to grapple with that perennial nightmare: the Federal Communications Commission's Universal Service Fund (USF). The FCC's telecom subcommittee held a hearing on the program on Thursday, and a mandate that USF funding recipients provide broadband services was a key bullet point.

Congress should "future-proof" the Fund, declared the subcommittee's Chair Rick Boucher (D-VA), "by requiring that all recipients offer broadband at preset minimum speeds to receive support." But the event was about a lot more than that, focusing on how to rescue what is probably the Federal Communications Commission's most troubled program.

Heart of the economy

You would think that a government agency with the USF's job description would cause little if any grief. The USF puts an assessment on interstate telephone bills to subsidize phone service for low-income consumers and to support rural and inner city telcos. Plus, it kicks in some cash to support telecom/computer services needed by schools, libraries, and rural health care outlets.

In theory, we're talking the High School Musical of telecom policies, here. "In this time, when electronic communications are at the heart of the national economy, it is perhaps more essential than ever before that all Americans remain connected," proclaimed Boucher. Who can argue with this? But in reality, the USF is all Rocky Horror Picture Show—scarily complicated, inefficient, fragmented, and corrupt. The FCC was supposed to fix many of the problems last year, but ex-Chair Kevin Martin couldn't get a majority to go with his proposals. Now Boucher and his colleague Lee Terry (R-NE) are working on a new bill to get USF off the slab.

What needs resuscitation? Everything. The USF is leaking money at an alarming rate. This is particularly true for the High Cost Fund, which subsidizes telcos in rural areas where it costs more to connect spread-out customers. 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. The USF office checks to make sure High Cost carriers complete their expense/revenue paperwork, GAO says, but it doesn't check their accuracy. So the FCC estimated that from July 2006 through July 2007, the Fund overpaid carriers to close to a billion dollars.

Then there's an episodic corruption issue. Last year the government finished prosecuting a dozen people for cheating the USF's E-Rate program—that's the part of the USF that helps schools with telecommunications costs. One scofflaw got a 7-1/2 year prison sentence.

But most of the USF's problems are structural. Bottom line: the USF would cost too much even if the auditing and con-artist problems were solved, because the ways it collects revenue and picks and compensates vendors don't make sense. USF watchers hope that Boucher and Terry's upcoming bill will address those issues, and at Thursday's hearing a gaggle of telecom executives, think tankers, and media reform folk showed up to offer their own thoughts about the whole mess. There are a lot of proposals being tossed around. Here's a sample of them.

Reverse auctions with one winner

One of the biggest questions facing the High Cost fund is how to pick recipients. Let's go with reverse auctions, say lots of experts. The current system "is akin to awarding no-bid contracts that last forever," charged Scott Wallsten of the Technology Policy Institute at the hearing. A competitive reverse auction offers the job to the lowest bidder rather than the highest. Verizon Vice President Thomas Tauke pushed this concept hard. "Competitive bidding forces providers to evaluate their own business models and network capabilities, and to make their own judgment about what amount of support is necessary," Tauke said. "If that amount is not competitive, the carrier will not win the support."

Right now, multiple vendors sometimes crowd various High Cost-eligible regions, and critics charge that this allows them to pick and choose where in the area to offer service.

This idea often comes in tandem with another reform: only one High Cost telco to an area. Right now, multiple vendors sometimes crowd various High Cost-eligible regions, and critics charge that this allows them to pick and choose where in the area to offer service. Qwest Senior Vice President Robert Steven Davis cited Hattiesburg, Mississippi, population 45,000, which enjoys 13 carriers, all getting high cost cash. What's the point of letting all these people into the game, Davis asked, when it's often uneconomical for even one provider to offer the service (as evinced by the need for a High Cost program in the first place). All these mob scenes do is drive up USF bills.

In case you haven't already noticed, the big incumbent local exchange carriers (ILECs) tend to favor the one-reverse-winner-takes-all approach; but smaller, high-cost recipients that connect to those ILECs don't. Take, for example, LeRoy T. Carlson, Jr. Chairman of the Board of United States Cellular Corporation, whose company provides wireless service in 200 mostly rural markets. At the hearing he warned that a single-winner system would create local and regional monopolies. "The healthy ability of competition to drive improved services and lower prices would be muted and even eliminated," Carlson warned.

But Qwest and Verizon have a point. Let's face it—where's the "competition" here? We're talking about mostly rural markets where telecommunications service is unprofitable without a subsidy. S. Derek Turner of Free Press came to the hearing with a compromise idea on this issue: use request for proposals (RFPs), to be decided by the FCC, rather than reverse bidding systems to pick providers.

Turner worries about FCC auctions—between collusion and designated entity mischief, they are not always a pretty picture. In contrast, RFPs would allow whoever awards the bid "to weigh alternative proposals on more dimensions than just cost," he argues. But auctions have become a pretty standard part of FCC operating procedure. Still, this question is probably one of the reasons why the FCC didn't get USF reform off the ground in 2007. Martin and now-interim Chair Michael Copps disagreed about it. We'll see what Boucher and Terry do with the issue as they introduce new legislation.

Identical support crisis

Most parties agree that the USF's "identical support rule" has to go. Rural telephone cooperative manager Gregory Hale called the regulation "arcane and nonsensical." The rule calculates subsidies to smaller wireless carriers that serve rural areas based on the funding that the incumbent carriers that they connect to receive per line, rather than on the actual costs of the smaller telcos.

Hale came to the hearing as spokesperson for the National Telecommunications Cooperative Association. He argued that identical support, in combination with no requirement that carriers serve an entire market area, functions as an incentive for companies to zone in on regions where incumbents have built out infrastructure. "Meanwhile the same competitors totally overlook the rural markets of the large carriers where deployment has typically not been widespread," he noted, "and where for this and other reasons universal service dollars are not flowing and thus would not flow under the identical support rule." This is probably the main reason why USF high cost payments have ballooned over the years—and perhaps why Hattiesburg has 13 carriers.

The FCC put a cap on high cost payments last year, but that's only a temporary measure until the identical support rule gets whacked, as per the recommendation of the USF's own Federal-State Joint Board.

Pretty much everybody also agrees that the USF has to do something about intercarrier compensation. Those are the fees that carriers charge other carriers to pass messages across their ends of the public network. Intercarrier comp access rates rise or fall depending on whether the call is an inter- or intra-state message or local or long distance. But as a chorus of critics observe, these differences have become meaningless in the age of IP telephony. "The distinctions underlying the intercarrier-compensation system no longer exist and should no longer drive policy," Verizon's Tauke told Boucher's committee.

Verizon wants the FCC to transition to a "single, low, uniform rate when companies terminate traffic." Intercarrier isn't directly part of the USF, however. The way that the USF collects revenue from mobile and wireline service subscribers is.