On Oct. 26, FCC Chairman Kevin Martin circulated three USF proposals among his colleagues. New rules would freeze funding at 2007 levels to "competitive" carriers, mostly wireless firms that receive support in markets where dominant, traditional telephone companies are subsidized.

Critics complain that support to the carriers has grown by a billion dollars in recent years, threatening the fund's viability. Wireless companies counter that they provide critical service to rural regions and should not be singled out for reductions.

Martin also recommended that the FCC consider eliminating a rule requiring that assistance to competitors be based on subsidies to dominant firms, even if competitors' costs are lower. In addition, he suggested that the agency consider "reverse auctions," which award universal service funds to carriers agreeing to the lowest subsidies.

Both ideas would be outlined in proposed rulemakings subject to public comment. Meanwhile, the federal-state board may issue additional recommendations for long-term changes that reflect Martin's priorities.

A cap does not sit well with powerful lawmakers in both parties representing largely rural states that are heavily reliant on the program. "This is an ostrich approach as far as I'm concerned," Sen. Ted Stevens of Alaska, the ranking Republican on the Senate Commerce Committee, said at a June hearing that featured near-unanimous criticism.

Since then, however, some prominent lawmakers -- including Sen. Charles Grassley, R-Iowa -- have backed a threshold.

Martin has used telecom mergers to force major carriers to accept interim caps in exchange for approval of their deals. Last month, the agency conditioned a private equity firm's acquisition of Alltel on such a restriction, with similar conditions expected for AT&T's purchase of the wireless provider Dobson Communications and T-Mobile's acquisition of Suncom Wireless.

"That takes a large chunk of the [competitive] money off the table," a lobbyist noted, adding that the strategy makes it easier to impose the restriction industry-wide.

One source predicted that a USF cap will be approved along party lines. Supporters are Martin, who's spearheading the plan, and Deborah Taylor Tate, a fellow Republican FCC commissioner who heads the advisory board. Robert McDowell, the third Republican on the FCC, favored the Alltel cap, but his stance on the larger proposal is considered uncertain.

"My gut tells me that he would go along for a ride on this," the source added.

Regarding the FCC's Democratic members, Michael Copps is strongly opposed. Jonathan Adelstein supported the Alltel condition but clarified in an accompanying statement that his vote does not "prejudge" his view on a broader rule.