A decade-old telephone tax intended to help
bring affordable service to rural areas has instead turned into
something quite different: a bottomless and politically protected
well of cash for cell phone companies that do big business in rural
Over the past four years, there has been nearly a tenfold
increase in government-ordered subsidies paid to a few
"competitive" providers - cellular phone companies paid by the
fund to offer service in rural areas where an existing carrier
already receives a subsidy.
The Universal Service Fund has collected $44 billion over its
10-year lifetime from a surcharge on the phone bills of nearly
Regulators and lawmakers have long viewed the fund as inherently
flawed. Even a member of the federal-state board that runs the
program calls it "bizarre." But efforts to change it have been
derailed repeatedly by companies that benefit from the largesse and
by supporters in Congress who represent sparsely populated states.
Now there are new calls for change, driven by the dramatic
increase in money flowing to the cellular companies competing for
rural business. Payments have gone from $131 million in 2003 to an
expected $1.1 billion this year, according to an Associated Press
Increased demands by these carriers recently pushed the fee paid
by telephone customers to the highest level in program history. The
Federal Communications Commission will decide soon whether to cap
payments while it considers options for long-term changes - again.
The subsidy's roots
The Universal Service Fund was created by Congress in 1996 as
part of an overhaul of the nation's communications laws designed to
Specifically, Congress ordered that consumers - including those
in "rural, insular and high-cost areas" - have access to
telecommunications and information services at rates comparable to
those charged in urban areas. That was to be financed by a fee
added to long-distance bills. The charge may only be a few dollars
per month, but it adds up fast.
In 2006, the fund collected $6.6 billion, money that flows to
four programs. About $1.7 billion paid for schools and libraries to
connect to the Internet; two smaller funds subsidized telephone
service for the poor and rural health care facilities.
The largest chunk - about $4.1 billion last year - flows to the
aptly named "high cost" program, the source of the current
controversy. That money is paid directly to telephone companies
that do business in mostly rural areas where the cost of delivering
service is high.
In the early years of the fund, subsidies went almost
exclusively to old-fashioned wired phone companies - large and
small - that had served rural areas for decades. To spur
competition, Congress wanted to make subsidies available to other
Initially, the lure of a handout wasn't enough to attract new
entrants. But the dramatic growth of the cellular telephone
industry changed all that.
Wireless providers discovered that the subsidy - based on what
the wired companies were getting per customer - would cover their
costs and then some.
A "no losers support system"
Critics say the cellular companies are enjoying a windfall
because their networks are much cheaper to build and maintain than
miles of wires and telephone poles. They say logic dictates the
subsidy should be based on actual cost.
Making the system more expensive, companies are compensated on a
per-subscriber basis. Each time a cell phone company signs up a new
customer, it collects a subsidy.
If the customer keeps his land line, the fund pays a subsidy to
both carriers. If the customer opts to drop his land line and keep
his cellular phone (the goal of competition), the per-subscriber
subsidy for the land line carrier actually goes up, keeping the
overall subsidy unchanged. In some high-cost areas, the subsidy can
amount to several hundred dollars per customer per month.
Since the cellular competitor's rates are based on the
incumbent's per-customer subsidy, the cell company gets more money,
too. And so does every other cellular competitor that does business
in the area. In some places there are two, three or more.
"This is the essential irrationality of the system, says Billy
Jack Gregg, a consumer advocate and member of the federal-state
board that helps set fund policy. "It makes no sense to subsidize
multiple carriers in a high-cost area."
Gregg has testified to Congress that the "bizarre" program
amounts to a "no-losers support system" in which participants are
paid "for all lines they serve in high-cost areas, no matter how
duplicative or costly this additional support may be."
Mississippi tops the list
Mississippi's competitive cellular carriers received more than
$314 million from 2003 through the first four months of 2007, the
most of any state, according to an AP analysis of more than 20,000
Second was Puerto Rico, at $236 million, Kansas third at $139
million. At the bottom of the list, receiving no funding for
competitive carriers, were South Carolina, Rhode Island, Ohio,
Massachusetts, Idaho and Delaware.
The most highly compensated company, according to AP's analysis,
was Little Rock, Ark.-based Alltel Communications Corp. Alltel
collected at least $386 million over the study period for wireless
services. Second was Western Wireless Corp., bought by Alltel in
2005, with $274 million.
Those two companies, combined with Midwest Wireless, also bought
by Alltel, account for 30 percent of all funds paid to competitive
carriers over the study period.
Of the $2.45 billion that has been paid to competitive carriers
from 2003 through April 2007, 75 percent of the cash went to 10
companies, according to AP's analysis.
Alltel, which recently announced the sale of the company,
reported a $230 million profit in the first three months of 2007, a
total boosted by the $65 million to $70 million in universal
service funds the company says it receives each quarter.
"We are the largest wireless recipient of (universal service
funding) because we are the largest rural carrier," company
spokesman Andrew Moreau told the AP in an e-mailed response to
Next on the list of recipients is AT&T Inc. with $239 million,
followed by U.S. Cellular Corp. at $212 million and Mississippi's
Cellular South Inc. with $156 million.
Problems are no surprise
The system's potential flaws have been well documented since it
The federal-state board recommended in 1996 that the subsidy be
limited to a single connection per household, but the FCC at first
By November of 2002, however, the agency took notice of the
growing problem and asked the joint board how to fix it. The board
again recommended, in February 2004, a one-line-per-household
solution. But before the FCC could act, a handful of senators from
rural states used their budget power to block implementation.
A trade group that represents rural carriers singled out Sens.
Byron Dorgan, D-N.D.; Conrad Burns, R-Mont., and Ted Stevens,
R-Alaska (representing the 48th, 44th and 47th most-populous
states, according to the Census Bureau) for playing instrumental
roles in blocking the provision.
The maneuver occurred during a House-Senate conference committee
hearing on Nov. 22, 2004. The same scenario played out a year
later, with rural telephone company trade groups again singling out
Dorgan and Stevens for their "extraordinary efforts" to block the
FCC from enacting the changes.
Dorgan has received $15,000 from Western Wireless Corp.'s
political action committee (now part of Alltel) making him the
former rural cellular company's favorite senator at the time. The
senator's leadership PAC picked up an additional $8,000.
Dorgan and Stevens say they oppose the primary line restriction
because it would put rural businesses at a competitive disadvantage
to their urban counterparts.
The core challenge for Congress is the law itself, which is
vague regarding what specific services should be subsidized.
"What is it we're willing to pay for?" Dorgan asks. "That's
why there needs to be some sort of resolution for what is the
Universal Service Fund and what it should cover going forward."
Big contributions from a small company
In Mississippi, the top recipient of cash among cellular
providers is Cellular South Inc., a 900-employee private company,
whose executives have been prolific in their giving. Officers of
the company and its corporate parent have dealt at least $142,550
in contributions to federal campaign committees, according to
Favorites include Mississippi Republican Rep. Charles E.
"Chip" Pickering and Sen. Trent Lott. Pickering is a former
member of Lott's staff and helped shape the 1996 telecommunications
law, according to his congressional biography.
The company's executives also gave heavily to the successful
gubernatorial campaign of Republican Haley Barbour in 2003. Barbour
is a former lobbyist who worked on behalf of BellSouth Corp. (now
part of AT&T) and the U.S. Telecom Association.
Sherry P. Stegall, senior vice president at Cellular South,
noted in an e-mail to AP that the company's political activity
"pales in comparison to larger carriers." She said Cellular South
has received no windfall.
The company is required to "reinvest all support" from the
fund and file quarterly reports with regulators. For every dollar
the company receives from the fund, it has invested $1.20 in
developing its networks, she said.
With the contribution percentage from consumers having recently
reached an all-time high and costs continuing to spiral, the
sustainability of the fund is in doubt, and pressure is on the FCC
The FCC is considering a recommendation by the federal-state
board to cap funds paid to competitive carriers. There is
considerable opposition among members of Congress, including
Stevens and Pickering, and rural wireless carriers.
"It would be a Band-Aid or stopgap that would prevent us from
getting to the comprehensive reform," Pickering said in an
interview. He supports funding for wireless carriers because, he
says, they are the most efficient providers when it comes to
serving rural areas.
The joint board is considering long-term change. But with so
many vested interests involved, progress has been difficult. "They
tend to checkmate each other," board member Gregg said. He likens
the fund to "a machine that somebody's created but nobody can find
the 'off' switch to."
AT&T, even though it collects huge subsidies for both its wired
and wireless operations, supports a temporary cap and the creation
of pilot programs to fund cellular and broadband services.
FCC Chairman Kevin Martin, a persistent critic of the universal
service system, says the challenge is to keep everyone connected
and move toward offering more advanced services like broadband.
"But we've got to do that in an efficient way," he says.
Martin has been pushing a "reverse auction" approach that he
says would accomplish that. Potential providers would bid against
one another to offer a set of services, with the low bidder winning
the subsidy. An auction would end the inefficient practice of
subsidizing multiple carriers in a single rural area, he argues.
Alltel has indicated it would support a reverse-auction trial.
The company would also support a separate fund for wireless
services. Verizon Communications Inc. is a major proponent of the
But Martin acknowledged the idea hasn't yet caught on among