Most attention on government communications funding has focused on how to award $7.2 billion for broadband by the Commerce and Agriculture Departments as part of the economic stimulus bill. But the FCC's universal service fund (USF) has been awarding nearly that much every year for many years. A consensus is emerging that, to a greater or lesser extent, the wrong people are paying into USF. And the wrong entities are receiving too much money for mostly the wrong services.

Federal USF is funded by a levy, called the contribution factor, imposed on charges for long distance calling. It is currently 12.3 per cent of a customer's long distance bill. USF goes mainly to small rural telephone companies (telcos), ostensibly to pay for the upkeep of expensive service lines to households in low density rural areas. It also goes to large phone companies like AT&T and Verizon to fund their rural customers, under a complicated formula that's bounced in and out of court. By April 2010 the FCC must file with the court its third try to divvy these funds among nonrural telcos.

Much has changed since the current system, adopted as part of the 1996 Act, was put into effect. Then, Congress anticipated a robust long distance market. After all, the 1996 Act's big benefit for the Bell companies was the right to enter into long distance if certain regulatory criteria were met. But technology, and competition from substitutes like Skype and e-mail, have reduced long distance revenues and led to an unsustainable upward projection in the contribution factor.

Another unanticipated outcome: cable VoIP service (and over-the-top broadband voice services like Vonage) have upended the assumption that companies serving rural areas need a subsidy or else affordable phone service would cease. If a cable operator offers service (without any USF support), why should long distance customers continue to subsidize the incumbent competitor? Add to that wireless companies that have entered even the remotest parts of the country without the promise of subsidy. The cable trade association estimates over $1 billion in high-cost support goes to rural LECs and other eligible telecommunications carriers (like wireless under a me-too principle) in areas with extensive facilities-based competition.

Another fissure: AT&T and Verizon among other non-rural companies have had prices deregulated by their state commissions. With deregulation goes the assumption that government regulators don't need to worry about how much is charged or the cost of that service. (Hogan & Hartson made this point in a FCC filing for the Mississippi Cable & Telecommunications Association last summer). Yet those companies still receive $1 billion in USF support in these deregulated states.

Finally, nearly all parties (except some small rural telcos) favor migrating USF to provide broadband to low income customers. Voice service is seen as one application of mobile and fixed broadband rather than a separately funded service or USF's primary focus.

How will Washington reposition USF? Cong. Rick Boucher, longtime Democrat from rural Virginia who heads the House Communications, Technology and the Internet Subcommittee, introduced (along with Rep. Lee Terry, Nebraska) a USF reform bill in November 2009 that aims to refocus USF to broadband in ways that have fairly broad buy-in from stakeholders.

The FCC's National Broadband Plan inquiry, meanwhile, raise USF reform broadly. That Plan is due in February 2010. The FCC has separately also put out for comment a cable industry proposal to reduce funds to rural telcos and redirect it to broadband for low income.

In Washington it is easier to slow or stop a proposal than to bring it across the finish line. 2010 may be the year that sees the current USF scheme - both as it its funding source and its distribution scheme - dissolve. If so, the policy consensus to extend broadband to low income residences will be the catalyst.