Canada's established telecom companies must spend more than half of a C$770 million ($727 million) fund kept in escrow to expand broadband Internet to rural and remote communities and return the remainder to urban customers, the communications regulator said on Tuesday.

The decision follows years of wrangling over how to spend the money, left in accounts known as deferral funds, set up by a 2002 CRTC ruling that encouraged competition and sought to break open regional telephone monopolies.

The rollout of broadband will be due within four years and the rebate must be paid within six months, the CRTC said.

Subscribers of the major telephone companies in urban areas will enjoy a rebate on their home telephone service, the Canadian Radio-television and Telecommunications Commission (CRTC) said.

And residents in hundreds of rural communities will soon be able to take advantage of the many social and economic benefits broadband Internet access provides, it added.

The regulator dismissed attempts by BCE Inc companies Bell Canada and Bell Aliant to use wireless technology in proposed rollouts in Ontario and Quebec, saying the service would not be equivalent to what its urban customers received and was not the lowest cost alternative.

It said BCE companies should spend only C$306.3 million on broadband expansion, much less than the group said it would cost, and rebate C$251.6 million.

The commission is wrong on all counts, said Mirko Bibic, Bell's senior vice-president for regulatory and government affairs. With wireless HSPA we can deliver speeds as fast as any speed we can deliver on legacy DSL, he said, noting that Bell would soon deploy technology that would boost wireless speeds quite significantly.

Quebecor Inc, whose Videotron arm competes with Bell and others in Quebec, said the decision banning wireless rollout was the only decision the CRTC could have made.

The idea that the commission would step into that highly competitive context and give a half billion dollar subsidy to one of the four competitors, to us was inconceivable, said Dennis Beland Quebecor's director of regulatory affairs, .

The companies were reluctant to pay rebates, arguing they made it appear they had unfairly withheld lower rates from consumers, and said they would be costly and difficult to administer.

FUNDS SET ASIDE

In 2002, in a bid to encourage competition, the CRTC made incumbent companies freeze rates they charge urban users and mandated they set aside a portion -- 3.5 percent of the set rate minus inflation -- into the deferral funds.

The regulator ruled in 2006 that 95 percent of the funds accrued should be spent expanding rural broadband services.

About C$35 million has already been allocated to improve access for people with disabilities, the CRTC said.

Some 5 percent of Canada's population does not have access to broadband landline services, the CRTC said in a recent report. The government budgeted C$225 million in 2009 for its own broadband deployment initiative. Revenues for the industry came to C$6.6 billion in 2009.

The CRTC had ordered the companies to compile lists of communities they would connect. A period of legal wrangling ensued and new telecom entrants stepped in to connect some of the regions the incumbents had listed.

The Supreme Court ruled in 2009 that the CRTC's initial decision should stand, at which point Bell Canada proposed it expand wireless service instead of wired broadband.

The CRTC has previously ruled that the lists can not be amended and any money left in the accounts should be rebated.

($1=$1.06 Canadian)

(Reporting by Alastair Sharp; editing by Peter Galloway and Rob Wilson)

Canada Broadband Broadband