On November 18, 2011, the Federal Communications Commission (FCC) issued its much-anticipated 759-page proposed rulemaking for the Connect America Fund (CAF), which sets out to reform the Universal Service Fund (USF) and the Intercarrier Compensation (ICC) programs. Public comments on certain sections of the rulemaking are due by January 18, 2012, and on other sections by February 17, 2012.

The FCC initiated its reform proceedings on February 8, 2011. Using the administration’s National Broadband Plan as guidance, the commission voted on October 27, 2011 to approve plans to merge the USF and ICC into the CAF. The intent is to provide a response to the evolution and modernization of digital technology, as well as to address issues of waste within both the USF and ICC programs. According to the FCC, there are approximately 18 million Americans living in underserved areas who, under the new program, will receive broadband services in the next 10 years.

With many companies hiring job applicants online and schools relying more frequently on web-based textbooks, access to the Internet is critical to the nation’s economy, and according to the FCC’s website, “Broadband has gone from being a luxury to a necessity for full participation in our economy and society – for all Americans.” That begins to turn broadband into a new “entitlement” program at the taxpayers’ expense.

The original USF program defined universal service as telephone services for rural and underserved areas of the country, where the cost of providing these services was too high for communications companies to bear alone. In expanding the definition of universal service to include the provision of broadband services in February 2011, the FCC stated that Section 254(c) (1) of the Telecommunications Act of 1996 defines universal service as “evolving.” Through the November 28, 2011 order and report, the FCC has proposed a new principle that adopts “support for advanced services” as a universal service, which will result in the continuation of the USF fee or some other similar hidden tax on consumers in perpetuity.

The federal USF fee collects approximately $7.7 billion annually, which is used to provide infrastructure for communications (or phone) services for low-income residents in areas that are considered underserved. The money is distributed through the Universal Service Administrative Company through four methods: high-cost support, low-income support, rural health care support, and schools and libraries support. Peculiarities exist within the distribution of funds, which has helped lead to wasteful spending.

Although 96.2 percent of Americans have the ability to access phone service, funding to companies that support the USF high-cost component has grown from $2.6 billion in 2001 to a projected $4.5 billion in 2011. This subsidy exists despite the fact that wireless service could more efficiently provide service. According to FCC Chairman Genachowski’s remarks on October 6, 2011, the USF is wasteful and inefficient, paying some companies almost $2,000 a month for a single home phone line.

The FCC also included in its order and report reforms to the ICC program, which are the charges one carrier pays to another when originating, transporting, or terminating a call or other telecommunications traffic. Established before the era of long distance competition in the marketplace, the ICC is filled with inefficiencies and opportunities for waste. The rates are billed at a charge per minute, and are overseen at the interstate level by the FCC and the intrastate level by the states. Reciprocal compensation is applied to calls that begin and end within the same local calling area. Increased strains on the ICC program have developed as consumers increasingly utilize options such as voice-over-Internet protocol (VoIP) technology, wireless communications and bundled services.

Rules have been included in the ICC provisions of the CAF plan to address issues with artificially inflated traffic volumes and missing identifiers for intercarrier billing information, both of which have created payment problems within the program. According to the CAF executive summary, the FCC plans to adopt into the ICC program a national “bill-and-keep” framework similar to that used by wireless telephone industry, which should reduce billing problems generated by the current system.

Reforms of both the USF and ICC are urgently needed, as both programs have encountered numerous problems with waste and abuse. The CAF program continues using the funding stream provided by the USF fund to provide telephone communications to rural and underserved areas of the country, and expands the USF’s reach to deploy broadband communications to these areas and other locations as part of the administration’s National Broadband Plan.

However, even with these much-needed reforms, the cost for the USF program, which should be eliminated instead of expanded, is ultimately born by the taxpayers. Even without the funding provided by the USF program, the rigorous market-driven competition that is occurring in the telecommunications industry, particularly wireless, will address access and pricing problems. The provision for access to advanced services across the nation without a phase-out plan for the CAF program raises the specter of further expansion of universal service, fostering a continuation of this hidden and unnecessary tax and regulatory scheme.