Can the Federal Communications Commission save a huge government program that overpays carriers to provide old school phone service, overtaxes subscribers to subsidize it, discourages modernization, and doesn't even offer broadband to the low income and rural consumers it purports to serve?

Yes it can, insists FCC Chair Julius Genachowski.

The Commission's $8.7 billion Universal Service Fund and Intercarrier Compensation system was designed "for a world that no longer exists," Genachowski told the Information Technology and Innovation Foundation on Monday. The USF was created "for a world with separate local and long-distance telephone companies; a world of traditional, landline telephones before cell phones or Skype; a world without the Internet."

"Some say if USF is broken, we should eliminate it altogether," he continued. "I reject that idea. While the world has changed, the importance of universal service to our connectivity and competitiveness has not."

Tomorrow the FCC will propose massive changes to the USF program at its Open Commission meeting. Here are the details, along with our interview with Genachowski about the USF's future.

Millions bypassed

The Universal Service Fund tithes your phone service and uses the money in a variety of ways, subsidizing low income consumers and rural carriers, and providing schools and libraries with money for network connectivity.

But the program does all this with breathtaking inefficiency. It taxes consumers for "long distance" telephone calls, still presumed to be more expensive than local service, even though IP telephony has made this distinction irrelevant. As subscribers make fewer, old-school copper wire long distance calls, the USF must hike its base percentage to compensate for the shortfall in revenues.

And thanks to a bizarre funding formula, in some areas USF pays $20,000 a year for households to get phone service. The USF's "high cost" fund puts millions of dollars into regions where non-subsidized carriers already provide connectivity. Or the system subsidizes multiple carriers to provide service to the same areas, such as a region of Mississippi where, in 2009, no less than 13 carriers all received high cost cash.

Mostly importantly, the USF doesn't subsidize broadband service, to which every form of electronic communication is now migrating—something noted in the heartstring-pulling section of Genachowski's speech.

"We simply can't let millions of Americans be bypassed by the broadband revolution," he declared. "Americans like the 17-year-old girl in Alachua County, Florida who's doing her homework in the parking lot of the local library at night, because her family can't get broadband at home and the library's hot spot is her only option."

The big fix

Most agree it would be a grand thing if the USF were rerouted toward broadband—enticing the estimated 30 million Americans who can't or don't go online to explore the joys and necessities of cyberspace.

So last year the FCC's National Broadband Plan outlined some key reforms. First was the creation of a "Connect America Fund" to support broadband providers for poor and rural regions. The CAF will only subsidize providers in zones "where there is no private sector business case to provide broadband and high-quality voice-grade service." The program will only fund one provider per area. Its recipients will be adequately audited (one hopes). And, of course, they will have to provide broadband.

Second, the FCC wants Congress to authorize a "mobility fund" to help various states get up to speed in 3G wireless.

The Connect America Fund will be subsidized in part by a reform of the FCC's Intercarrier Compensation system, in which the big carriers pay smaller providers to complete phone calls to rural areas. Per-minute calling compensation rates will be dropped—reducing carrier incentives to stay with old technology. Shenanigans like "traffic pumping"—offering chat room services or other gimmicks that "stimulate" calling to a rural region in order to get intercarrier comp cash—will be stopped.

Much of this money will be gradually transitioned to ISP services. It would help, the NBP noted, if Capitol Hill could kick in some "optional public funding" for the Connect America program, "such as a few billion dollars per year over a two to three year period" to smooth out the process.

Whether that can happen with this hyperpolarized Congress is unclear. But the FCC says it wants to get this whole business done by 2020, with reforms of High Cost and disbursements from Connect America both beginning in 2012.

On Tuesday the FCC will vote to implement these new programs, launching the Connect America fund and tackling all these tough High Cost and Intercarrier Comp issues.

Bring us your proposals

We had the chance to speak briefly with FCC Chair Genachowski this morning about the plan.

Ars Technica: In your speech, you challenged critics who call for USF ISPs to provide "the highest speeds technically possible" to "bring us your proposals." Would you expect USF ISPs to offer speeds adequate enough to watch, say, Netflix on Apple TV?

Julius Genachowksi: It's a good question. It's something that we thought about in the context of the National Broadband Plan. At the time the definition of broadband was 768Kbps. Other countries that have looked at this for purposes of broadband funding have said 1Mbps or 2Mbps. And we looked at it and we looked at the kinds of functionalities in the near term that should be included—video conferencing for businesses and distance learning and remote diagnostics. And that's what informed the 4/1 proposal [4Mbps download/1Mbps upload] in the National Broadband Plan for the initial minimum speed for the purposes of USF and so it does reflect that kind of thinking.

Ars Technica: Is that a yes for Netflix and similar offerings?

Genachowski: Well, they'd be able to do what you can do with 4Mbps down and 1Mbps up. And the things that we focused on in the National Broadband Plan were things that small businesses can do and students can do and doctors and patients can do. A lot of it involves having basic video over broadband.

Ars Technica: Do you think that wholesale broadband line sharing would help accomplish some of the goals outlined in your USF plan?

Genachowski: That's not something that we are taking up tomorrow.

Ars Technica: Yes, but do you think it would?

Genachowski: That's not something that I'm going to comment on today.

Ars Technica: What do you say to critics who question whether there really is looming spectrum shortage for wireless carriers, as the FCC asserts?

Genachowski: I think that the data speaks for itself. And the data says that the demand is very rapidly outstripping the supply, not by a little bit, but by a lot. And if we don't act, we'll run into a spectrum wall. Obviously it takes a little bit of time from the time that you start doing spectrum reform to the time that it becomes available. So running out of spectrum tomorrow isn't the issue. We're looking at trends over the coming years. And the trend is very worrisome, and I think that there's broad agreement about that.

And the idea of incentive auctions is about bringing market incentives into the use of existing spectrum. And if we can do that, ultimately the market will be the judge of appropriate spectrum allocation.

Ars Technica: You argue that the FCC needs to discourage "traffic pumping." At least one former FCC economist argues that access stimulation is a good way to fund telecom services in remote areas.

Genachowski: I think that our policies to promote Universal Service in remote areas should be transparent, efficient, and market based. I think there's widespread agreement that traffic pumping isn't a transparent way to support it in rural areas.

Ars Technica: Do you think that Congress will help the FCC with the Connect America fund? Any optimism here? It's a pretty tough Congress, I'd imagine you'd agree.

Genachowski: As I said in my speech, we're really open to all ideas that would speed this transition.