The Federal Communications Commission voted unanimously to shift roughly $4.5 billion spent annually to subsidize rural telephone service over to providing broadband in rural and costly-to-serve areas.
Broadband buildout to unserved areas could begin in early 2012 under the plan, helping bring high-speed Internet to the 18 million Americans who have no access to broadband where they live and work.
"We are taking a system designed for the Alexander Graham Bell era of rotary telephones and modernizing it for the era of Steve Jobs and the Internet future he imagined," FCC Chairman Julius Genachowski said at the agency's open meeting.
The revised universal service program would phase out funding for landline phone service over a period of years as companies move to a competitive bidding process for securing funds for broadband.
Companies now receiving phone service subsidies -- paid for through fees added to consumers' telephone bills -- would get first rights in some areas to receive support for deploying broadband service.
The new rules would also eliminate spending on duplicative services offered by several phone companies serving the same area.
As part of the changes, regulators are tweaking the complex system of payments among carriers to complete connections called intercarrier compensation, gradually reducing per-minute intercarrier compensation charges.
Incumbent phone carriers would be able to mitigate losses from reduced intercarrier revenues through a new access recovery charge on landline service.
The FCC put a $0.50 limit on the annual increase in the monthly charge, which could reach up to $2.50 per month after five years.
"The Commission did take steps to narrow the scope of these rate increases, but asking consumers to pay more into a broken system and letting the industry divvy up the pot will not increase broadband adoption," said Joel Kelsey, political advisor for public interest group Free Press.
FCC staff said they expect the charge to be closer to $0.10 to $0.15 per month as carriers must demonstrate an equivalent revenue loss from the reduction in intercarrier compensation rates.
Genachowski told a news conference after the FCC meeting that he expected consumer rates to fair better under the reforms than if the current system stayed in place.
"It's not a close call. The consumer benefits from the reforms today are massive, very significant," he said.
He added that hidden subsidies and a lack of oversight on the fund's size would have translated directly into increases on consumers' local phone bills had they gone unchecked.
The new Connect America Fund will have a firm $4.5 billion a year budget through 2017, the first budget constraint ever imposed on the universal service program.
Up to $2 billion would be available for small carriers serving mostly rural areas, $1.8 billion for large and mid-sized carriers like AT&T Inc, Verizon Communications and CenturyLink, and $500 million for mobile broadband.
(Reporting by Jasmin Melvin; Editing by Tim Dobbyn)