FCC May Raise Residential Phone Fees

Published February 1, 2009

The Federal Communications Commission under President Barack Obama’s administration is expected to consider an overhaul of the fees phone companies pay each other to connect calls and increase the fund subsidizing phone service in under-served areas.

Supporters of the policy, including telecom giants AT&T and Verizon, say the reforms will help bring broadband to places that lack high-speed Internet. But consumer advocates say the policy could raise phone bills for millions of customers.

Kevin Martin, the outgoing FCC chairman, last year proposed reforming the multibillion-dollar “intercarrier compensation” system, the complex menu of charges telecom carriers pay to access each other’s networks. The fee is imposed when a customer of one phone company calls someone who lives in another company’s territory.

FCC was poised to vote on the controversial proposal on November 4, but Martin pulled the item from the agenda the day before the vote because of a lack of support. Experts say a new FCC, which will include several Obama appointees sympathetic to Martin’s plan, should take up the issue this year.

Fee = Tax

The plan would make major changes to the $7 billion-plus Universal Service Fund (USF), a federal program subsidizing telecommunications service in rural and poor communities through a surcharge on long-distance bills.

“It’s sad, but typical, that the first resort of the government in response to a problem—in this case, universal service—is to raise taxes on users,” said Steve Titch, a telecom analyst for the Reason Foundation in Los Angeles. “While the universal service fee assessed on users is not a tax in terms of legislative approval, it is nonetheless a levy designed to fund a government program that is both costly and inefficient.”

Eleven Percent Tax Already

Randolph J. May, president of the Potomac, Maryland-based Free State Foundation, said FCC should give more consideration to the wide-ranging ramifications of its proposed USF reforms.

“It would be a mistake for the commission to forget that the ‘interest’ that really ought to matter in all this is the average American consumer, [such as] ‘Joe the Caller,’ who now pays an 11 percent tax on every interstate call to fund the various unreformed universal service programs,” May wrote on his foundation’s blog.

“There likely will be compromises and deals cut, and this is often a necessary part of the process of moving forward,” May continued. “But meaningful reform won’t be achieved and sound policy won’t be served by a pedestrian ‘split-the-difference’ or ‘hold harmless’ mentality.”

USF ‘Vicious Circle’

Titch agrees, saying FCC needs to reform the USF for a telecommunications industry that has been completely transformed over the decades.

“Before the FCC moves to start raising costs of service, it needs to thoroughly overhaul the universal service mechanism that is still rooted in the monopoly era,” Titch said. “Given the consumer choices with phone service, there’s only so much price elasticity built in to conventional wired and wireless service. At the same time, services like Skype escape regulatory oversight completely.

“Raise prices high enough, and customers will flee to these other, cheaper, services,” Titch said. “That, of course, results in a smaller pool of revenues feeding [the USF subsidy]. So the FCC is compelled to raise rates more, and the vicious circle continues.”

Phil Britt ([email protected]) writes from South Holland, Illinois.