State utilities regulators on Thursday ordered substantial cuts to the subsidies paid to telephone companies for providing traditional landline service in rural areas.
Carriers will instead be allowed to levy a small increase on residential phone rates, while cellular users, who have traditionally paid the bulk of the subsidies, will eventually see a discount on their monthly bills.
Consumers pay into the fund via a surcharge on their monthly phone bill.
The money is used to reimburse companies for installing phone lines in rough terrain and rural areas where it can be costly.
Cellular customers are not excused from the fees, even though they derive little or no benefit.
An Associated Press investigation in January found that the monthly surcharges had enriched the state's telecommunications giants to the tune of $1.6 billion since 2003, with 60 percent of that paid by cell phone users.
Despite lobbying by the state's largest carriers to keep the subsidies intact, the California Public Utilities Commission voted unanimously to reduce the payouts to phone companies by more than $315 million over the next two years, and to cut the surcharge on monthly phone bills by 40 percent beginning in January.
Commissioner Rachelle Chong, who pushed the reduction, said the decision was driven by a surplus in the fund.
"We looked at how much we collected and we have plenty of money
because we have slightly over-collected," she said.
Customers will see the reduction on their monthly bill beginning Jan. 1.
However, the PUC softened the blow on telephone companies by allowing the state's two biggest carriers - AT&T and Verizon California - to increase rates by more than 2 percent for residential customers.
This will amount to an average increase of about 25 cents for AT&T customers and 41 cents for Verizon's.
The state's two other major carriers, SureWest and Frontier, can raise their rates in 2009.
Cellular customers will see no such increase.
Phone companies have consistently argued that without the high cost subsidies, they would have no incentive to provide service in hard-to-reach areas.
In comments filed with the commission, AT&T called the reduction in subsidies an "unconstitutional taking of private property."
But critics point out that since the high-cost areas were established in 1996, many of them have been transformed by development, including suburbs east of San Francisco Bay and the celebrity enclave of Malibu.
Among those who have lobbied for the reduction or elimination of the surcharges are cable television providers.
Since phone companies can use the money for anything they want, the cable companies argue, it could be used to provide competing television
Lesla Lehtonen, vice president for legal and regulatory affairs at the California Cable & Telecommunications Association, called the PUC's vote "a very bold decision."
"We're supportive of the Commission's decision to significantly reduce subsidies that no longer contribute to service in high-cost areas," she said.