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SIOUX FALLS, S.D. | Broadband Internet access should start reaching more rural parts of the country after the Federal Communication Commission retooled a fund that has traditionally subsidized rural phone service, the agency's chairman says.

But a South Dakota official says the new $4.5 billion Connect America Fund is actually hindering expansion, as companies in the state are backing off from future fiber optic projects because the companies aren't sure how much money they'll get from the government.

The FCC in November adopted a set of reforms aimed at bringing the $8 billion Universal Service Fund into the digital age. Its goal is to get broadband to all of rural America by 2020, helping states such as South Dakota, where 44 percent of the rural population is without high speed Internet, said FCC Chairman Julius Genachowski.

Genachowski said the Universal Service Fund, created in 1997, had become inefficient and wasteful, and it was leaving very large parts of rural America behind. Its replacement, Connect America Fund, is an attempt to bring things up to speed.

"It was a reform that was many years in the making," he said. "It was widely recognized for quite some time that the old USF program and only focusing on telephone service was out of date."

But Chris Nelson, chairman of the South Dakota Public Utilities Commission, said rural telephone companies in the state that had been expanding their Internet service through new fiber optic lines are scrapping future projects because they don't know how much the feds will help pay for the service.

"Rural phone companies are completing their broadband infrastructure expenditures this year but are making very, very few plans for next year and literally nothing the year beyond that because of the uncertainty the order has caused," Nelson said.

Why the uncertainty? Companies are subsidized based on a complicated formula that considers how many customers are served in how large an area. Critics say that the changed formula means companies can't predict up front how much money they'll get back, and are therefore hesitant to invest.

The Obama administration has identified universal broadband as critical to driving economic development, producing jobs and expanding the reach of cutting-edge medicine and educational opportunities.

The new fund, which continues to come from a surcharge on consumers' and businesses' monthly phone bills, will underwrite the cost of building and operating high-speed Internet networks in places that are too sparsely populated to justify costly corporate investments. It includes a $500 million "mobility fund" earmarked to help build mobile broadband networks in areas where businesses won't invest so travelers can have continuous data coverage.

The FCC announced this past week that CenturyLink Inc. has accepted $140,000 in Connect America Fund money to provide broadband in 180 locations in South Dakota. The company must complete two-thirds of its new broadband commitments within two years, and the remainder by the third year.

West River Cooperative Telephone Company in Bison serves about 6,300 square miles of northwest South Dakota from Lemmon to the Newell-Nisland area. The remote countryside has about one subscriber every two square miles, said general manager Jerry Reisenauer.

Since 2003, West River has been rolling out fiber optic coverage to bring DSL Internet service to its customers, but uncertainty over the FCC's funding formula is halting expansion that would allow it to provide higher speeds in some areas.

"We've put our construction on hold," Reisenauer said. "We're trying to understand more fully how the act will impact us."

FCC officials say the Universal Service Fund had some flaws, allowing some companies to spend much more per customer than other providers and allowing some companies to undercharge customers for service.

Genachowski said the old fund also supported multiple providers in some markets and none in others, and it sometimes subsidized one company in an area where there was an unsubsidized competitor.

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The Connect America Fund will expand broadband access "in a much more efficient, fiscally responsible and accountable way," he said.

"What our programs do is level the playing field so that an investor can look at a rural landscape and say, 'OK with a lower population density and this investment from the federal government, now I can make a business work in rural South Dakota,'" Genachowski said.

Former FCC commissioner Jonathan Adelstein now leads the agency that makes loans to rural telecommunications projects. Adelstein, administrator of the USDA's Rural Utilities Service, calls fund reform a "work in progress."

His agency is "acting prudently by asking borrowers for financial reassessments based on the FCC reforms and will continue to work hard to ensure rural consumers have access to quality, affordable broadband service, no matter where they live," Adelstein said in a statement.

Nelson said that the funding uncertainty has prompted the National Association of Regulatory Utility Commissioners to ask that the FCC rethink its reforms.

Business owners who can't predict what their revenue will be won't borrow money and won't invest in infrastructure, he said.

"It's really putting the brakes on the broadband development that we had seen in rural South Dakota," Nelson said.

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