On January 31, the FCC announced a complete overhaul of its Lifeline program. The program has been around for 25 years and is part of the Universal Service Fund. Its purpose was to help low-income families and those that live in rural areas have access to telephone service.

It began with providing landline telephones but then added cell phones in more recent years. The funding for it comes from a “tax” that’s included in everyone’s monthly phone bill.

(image) Through the program’s rapid growth over the years, an overhaul was greatly needed, as Larry Downes, a Senior Adjunct Fellow at TechFreedom tells us.

“There’s general consensus among everyone, including all the commissioners at the FCC, that the Lifeline program has gotten very much out of control and very much sort of veered away from its intended goal,” he said.

He explained to us that the problems started because there was no cap included. As a result, everyone that was eligible applied, which meant that funds quickly ran out. To fix this, the FCC would simply raise the “tax” on ordinary users.

“The more people who apply, the more money that everyone else winds up paying on their phone bill every month to subsidize the plan,” said Downes.

An even greater problem, however, is the fact that the FCC didn’t have any checks and balances in place to monitor fraud or abuse. What this means is many people were getting multiple lifeline subsidies for both landline phones and wireless devices.

Downes explains that an entire industry was essentially built inside the program, in which groups of people would have the single job of signing up users. Since they didn’t have any equipment and had roaming arrangements with carriers, they were able to make a small profit.

“Some of the unscrupulous providers of the service were just signing up people multiple times or they were signing them up in multiple different programs and clearly violating the rules and, indeed, violating the law,” he said.

Downes believes that the FCC is rightly to blame for a lot of this fraud and abuse.

“It has never been particularly professional in the way it goes about its administration of this and other funds, including… [the] Internet fund for libraries called E-Rate fund as well as other universal service programs,” he points out.

In fact, an ongoing Department of Justice investigation into the E-Rate program recently sentenced 2 people to prison. Up to this point, the investigation has led to 7 companies and 24 people either pleading guilty, being convicted, or entering into civil settlements.

FCC Chairman Julius Genachowski released this statement on the news:

“The E-Rate program brings enormous benefits to students everywhere. I applaud today’s action by DOJ. This successful prosecution reflects the collaborative efforts of the DOJ and FCC to protect E-rate from waste, fraud, and abuse, and to deter future misconduct.”

“It’s pretty much, I think, inexcusable that the FCC just failed completely to introduce the kind of basic oversights – the kind of basic management techniques – to make sure that this kind of waste and fraud wasn’t escalating as it clearly was,” said Downes.

With the reform, the FCC now says it is putting in controls and expects to save an estimated $3 billion. With this money, it plans to begin a pilot program that would also grant high-speed Internet access to eligible participants.

Downes has a problem with this because he doesn’t think the Commission has the legal authority to implement such a program without Congressional consent. According to him, the FCC repeatedly uses Section 706 of the Telecommunications Act of 1996 to expand its authority even when it isn’t relevant.

While this is definitely a concern, he thinks an even greater issue is the fact that the agency is starting the broadband program now before it has had a chance to implement its checks and balances.

“If it turns out that they don’t actually save $3 billion over the next two years, they’re gonna have spent some of that money anyway on this pilot program,” said Downes.

He went on to say that a better plan would be to implement the audits and check them in six months. If they were working, then they would know the broadband plan was executable.

The FCC released its order late last week, which means that groups are likely reviewing it to see if they need to take legal action to get it reversed.

Do you think the FCC’s Lifeline program overhaul will solve the issues of fraud? Let us know in the comments.