Rural telecommunications companies are warning that a proposed revamp of key federal funding streams could put them at financial risk and expose customers to rate increases.

The low-simmering debate is expected to come to a head this fall, when the Federal Communications Commission issues new rules revamping the 14-year-old Universal Service Fund.

Most people probably never have heard of the fund, unless they look at the details of their phone bill.

The fund is capitalized by telecommunications companies that usually pass the cost to customers in the form of a Universal Service Fee.

A lot of the money from the fee has gone to rural areas, where it's more expensive for companies to provide services. And in many cases, it makes up the lion's share of a rural telecommunications company's budget.

"USF is a major thing for us," said Butch Rebman, president and chief operating officer for Central Scott Telephone Co. in Eldridge, Iowa. He warns a revamp likely would mean raising rates. "We'd have to make up for that loss of revenue somehow."

Rebman said half of the company's revenues come from the Universal Service Fund and from what's called intercarrier compensation, payments one carrier pays another to originate, carry or terminate traffic.

In past years, Rebman added, the federal revenues have been an even bigger part of the firm's budget.

The Universal Service Fund is a key ingredient in the FCC's National Broadband Plan, which was released last year. The plan calls for diverting $15.5 billion in universal service fees over 10 years to a Connect America Fund to help reach its goals of extending robust Internet services across the country.

Among the goals of the National Broadband Plan is to provide universal access to download speeds of 4 megabits a second, as well as provide 100 million Americans with speeds of at least 100 megabits per second.

The cost of the buildout is steep.

The FCC estimates the price tag would be $24 billion in 2010 dollars. The 2009 stimulus provided $5 billion for national broadband, but there are no other major funding sources.

Officials say one-third of Americans, 100 million people, don't have broadband in their homes and 14 million have no access to it at all. And even for those who do, costs and speeds vary.

In a report last year, Connect Iowa, a nonprofit group seeking to expand broadband in the state, said nearly 88 percent of Iowa households have access to Internet service with download speeds between 3 and 6 megabits a second.

The figures vary widely, however, depending on the part of the state, with many rural areas falling below that, according to FCC data.

"The goal of reform is to maintain voice and high-speed Internet for everyone who has it while expanding it to those that do not, all while not increasing the size of the Universal Service Fund," said Mark Wigfield, a spokesman for the FCC.

The agency has been taking comments on its reform plans, and executives say any changes to the universal fund will be done gradually, with an eye toward working with rural companies. An FCC decision could come this fall.

The impetus for providing universal communications services, including to sparsely populated rural areas, goes back to the 1930s. But it was the Telecommunications Act of 1996 that codified it and established a universal fund, which has historically been used for telephone service but has gone more and more toward development of Internet service.

Since 1998, nearly $74 billion from the fund has gone to all 50 states. It amounted to $8.7 billion in 2010, with $146 million going to Iowa and $173 million to Illinois.

Critics of the fund, including some in Congress, say there isn't enough oversight and money often goes to companies where there already is competition.

The FCC says the universal fund, as it stands, isn't equipped to buildout broadband across the country. And one idea for redistributing the money is using a "reverse auction," basically awarding subsidies to firms that offer to extend service at the lowest cost in underserved areas.

Rural companies, however, say diverting universal fees will hurt companies that have taken out loans to provide service to their customers, all under the existing rules and with the expectation it would have the revenues to retire debt.

Some rural companies also say they think the FCC's plan is tilted toward urban areas.

"We do understand it's a broadband world now. So, there's need for reform. We just want it to be done fairly," said Joe Hrdlicka, director of government relations for the Iowa Telecommunications Association, which has been traveling the state with its members recently to draw up opposition to the FCC's plans.

In a filing with the FCC, a coalition of rural telecommunications associations said the FCC's presumption that it can accomplish its national plan with existing funding levels is not feasible. Instead, the coalition submitted an alternative plan, saying it will reform the current system, demand accountability and constrain growth in the fund, all the while making it sustainable.

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