In a Notice of Proposed Rulemaking (NPRM) adopted on Tuesday, the FCC took its first steps towards replacing the current Universal Service Fund (USF) with a new Connect America Fund (CAF) that will focus on the expansion of affordable broadband services in rural areas. At the same time, the agency approved a second NPRM that aims to spur investment in broadband services through reform of the intercarrier compensation (ICC) system. First implemented in the 1990s, the USF system subsidizes providers of voice telephony services in rural and impoverished areas. Over the years, however, the size of the USF (and the corresponding cost to consumers) has ballooned to more than $8 billion as increasing proportions of USF subsidies have gone to wireless carriers that claim eligibility as primary providers of voice services in rural areas. Citing the need for “ubiquitous broadband infrastructure,” and claiming that the current USF system has “become wasteful and inefficient,” the FCC said both proceedings would be guided by four principles: (1) the need to modernize both the USF and ICC systems to support broadband, (2) the promotion of fiscal responsibility, (3) accountability from companies that receive support, and (4) a transition to market-driven and incentive-based policies. As such, the FCC is seeking comment on the establishment of a more efficient CAF that would use a reverse auction process to select funding recipients for broadband networks in rural areas. Declaring, “it became clear to me that we needed to have efficient, market-based distribution mechanisms for . . . public funds,” FCC Chairman Julius Genachowski touted reverse auctions as a key tool in halting the soaring price tag of the USF. While calling for a gradual transition from voice telephony to broadband support, the NPRM also proposes capping the per-line subsidy in high-cost areas at $3,000 per year and seeks input on the development of a funding mechanism that “provides certainty” to rural carriers. The ICC item, meanwhile, seeks to close loopholes in the FCC’s rules to reduce or eliminate phantom traffic (i.e., traffic that is disguised so it cannot be identified for billing purposes) and traffic pumping. Comment is also sought on ways to reduce ICC charges, which, according to the FCC, “create incentives for carriers to maintain legacy networks that maximize intercarrier revenues rather than investing in advanced, efficient IP-based infrastructure.”