Universal service funding

While the objectives of "universal service" are often hard to argue with, implementation is often problematic. The approach taken by the US is to create a Universal Service Fund (USF) from taxes paid on certain telecommunications services, and then to distribute these funds to "eligible" carriers. This story illustrates how problematic this approach is:

Over the past four years, there has been nearly a tenfold increase in government-ordered subsidies paid to a few "competitive" providers - cellular phone companies paid by the fund to offer service in rural areas where an existing carrier already receives a subsidy.

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Critics say the cellular companies are enjoying a windfall because their networks are much cheaper to build and maintain than miles of wires and telephone poles. They say logic dictates the subsidy should be based on actual cost.

Making the system more expensive, companies are compensated on a per-subscriber basis. Each time a cell phone company signs up a new customer, it collects a subsidy.

If the customer keeps his land line, the fund pays a subsidy to both carriers. If the customer opts to drop his land line and keep his cellular phone (the goal of competition), the per-subscriber subsidy for the land line carrier actually goes up, keeping the overall subsidy unchanged. In some high-cost areas, the subsidy can amount to several hundred dollars per customer per month.

Since the cellular competitor's rates are based on the incumbent's per-customer subsidy, the cell company gets more money, too. And so does every other cellular competitor that does business in the area. In some places there are two, three or more.

Do you think that this approach is viable, with corrections? If so, what should the corrections be? What alternatives to a USF do you think are better?