U.S. phone companies complained to U.S. lawmakers on Thursday that a $4.5 billion annual fund intended to ensure nationwide service in high-cost areas is outdated and promotes inefficiency.

But companies largely disagreed over how to fix it in a hearing before the U.S. House of Representatives Energy and Commerce Committee's subcommittee on telecommunications.

AT&T Inc and Verizon Communications, net payers into the fund, called for competitive bidding to set fund awards. Some also want its annual total capped, amid double digit growth in the last several years.

Rural carriers like Embarq Corp and United States Cellular Corp say funding should stay based on actual costs and said a cap would discourage investment and jeopardize coverage in hard-to-serve areas.

To be clear, we now serve many rural areas that do not generate sufficient revenues to meet ongoing operating expenses, LeRoy Carlson, chairman of the board of United States Cellular, told the panel. Significant additional investment is still required to bring mobile services to all Americans.

Most agree the fund's payment system is broken and that in many cases it subsidizes too many private carriers that do not need it. Most also agree it should be used to spur expansion of high-speed Internet, or broadband.

The fund as currently administered inefficiently supports redundant legacy technologies and enables private companies to become wholly dependent on continuance of the old system, said Derek Turner of the public interest group Free Press.

The problem is not that we are spending too little money on universal service. The problem is that we are not spending it on the right things, Verizon Vice President Thomas Tauke said.

Rep. Rick Boucher, the Virginia Democrat who chairs the subcommittee, suggested mandating that fund recipients offer broadband at a minimum speed.

Broadband is to communities today what electricity and basic telephone service were one hundred years ago, said Boucher, who will back a bill to revamp the program this year.

But smaller companies like Embarq said that would not be feasible in the most high-cost, hard-to-cover areas that they are by law required to cover by law as a carrier of last resort.

Some Republicans called for abolition of the program entirely, arguing the private sector is expanding fast enough to cover everyone in time.

Why should I tax people when AT&T just announced it would spend $12 billion on broadband in 2009? said Rep. Cliff Stearns of Florida, the ranking Republican on the panel.

AT&T told investors this week that its 2009 capital spending budget would be between $17 billion and $18 billion, with about two-thirds of that on broadband.

The high-cost fund is part of a $7 billion larger universal service fund administered by the Federal Communications Commission.

(Editing by Matthew Lewis)