Rising Phone Subsidies Strain System

By Caron Carlson  |  Posted 2001-04-30

In some areas of the country, as much as 20 percent of a companys monthly telephone bill represents federal and state surcharges. These fees are levied to support a long-entrenched policy of universal, affordable, basic phone service.

But while a wide consensus among lawmakers ensures continuation of the policy, corporate users increasingly are questioning such surcharges, and Washingtons starting to listen.

"This is really a tax, but Congress has the benefit of not calling it a tax," said John Fike, who serves on the board of directors at the International Communications Association, an organization of high-volume corporate telecom users. "Business users are willing to do their part [to support universal telephone access], but I think they would prefer to see things funded directly through appropriations rather than through a disguised tax."

That was the root cause of a six-month study conducted by a forum of local and long-distance carriers, state and federal regulators, consumer advocates, academics, and policy makers that concluded last month. The study found that the system may not be sustainable given future demands.

As a result, the group recommended that regulators consider new funding options, including general taxes; a per-line tax on all telephone users; or funds from the telephone excise tax, which the industry has been lobbying hard to eliminate.

The so-called universal service policy originated early in the 20th century to promote affordable, "plain old telephone service" in households coast to coast. The 1996 Telecommunications Act expanded the program to include support for schools, libraries and rural health care providers to help them connect to the Internet. It was also expanded to support basic local residential telephone service in high-cost areas and low-income households.

Last year, telecommunications carriers contributions to the program exceeded $5 billion—a sum ultimately paid for by users.

Carriers are not required to pass their universal service contribution to customers, but they do, sometimes boosting rates to as high as 12 percent of a customers call total.

Interstate carriers also contribute to the fund by paying above-cost access charges to local telephone companies to complete calls on the local network. One year ago, the Federal Communications Commission adopted an industry proposal to make this implicit subsidy—approximately $650 million—explicit by reducing the access charge and increasing the subscriber-line charge on residential local telephone bills. The ruling is being challenged in court, however, on the basis that the projected increase—to $6.50 by July 1, 2003—will collect more than is warranted.

While regulators strive to simplify the unwieldy support mechanisms, others are examining whether the program should include more than plain old telephone service.

If universal service is expanded to include broadband access, the thorniest problem for policy makers will be setting the parameters for such access, say industry observers. "If universal service means Internet access, what bandwidth is required? Enough to get streaming video," said Fike, also a professor of telecommunications at Texas A&M University, in College Station.

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