Consumer Groups Wary Of Changes To Universal Phone Fund

Its reach is big, however: It covers the high cost of making it possible for Americans to reach out and touch someone from mountains, swamps and other remote areas. It subsidizes phone bills for poor people and technology at schools and libraries.

Universal Service also is a big mess. Its main source of revenue, long-distance calls, isn't what it used to be, thanks to e-mail and other technologies. Meanwhile, more hands are dipping into the pot than ever, leading to some claims the program is in a "death spiral."

Rescue plans have been proposed, but consumer groups are worried. One plan submitted to the Federal Communications Commission could raise the average Universal Service charge-currently $2.24 per month-to $3.47 in 2004 and $3.81 in 2007, according to an FCC study.

Even though other proposals would lead to smaller increases, consumer groups say all of them would unfairly lower what big phone users pay while jacking up fees for infrequent callers.

"It doesn't get a lot of attention, but when the bill pops up, 100 million rate-paying households say, 'Hey, where'd that $1 come from, where'd that $1.50 come from?" said Mark Cooper, research director at the Consumer Federation of America. "And the answer is: It came from a lot of shenanigans in Washington."

Traditionally, phone companies were allowed to raise prices for connecting calls to cities to make up for losses they incurred stringing up and maintaining lines in remote areas.

The 1996 Telecommunications Act formalized the process by establishing the Universal Service tax, which is now 9.1 percent of interstate and international phone revenue, levied as a sales tax on each phone bill.

Last year, the nonprofit Universal Service Administrative Co., which administers the fund, shelled out $5.4 billion, including $3 billion, or 56 percent, to 1,500 phone companies that offer service in costly areas. The rest subsidized service for poor people, rural health care providers and the "e-rate" technology program for schools and libraries.

"For customers in rural states that we serve, where the cost of their phone service would be $60 or $70 a month just to have the line, the high-cost fund keeps their phone affordable," said John Jones, a policy vice president at CenturyTel, which has lines in 22 states.

Yet the pool of revenue taxed for Univeral Service is shrinking. Long-distance minutes and prices have fallen, while flat-rate packages of wireless and landline service have blurred the billing distinction between local and long-distance calls.

The FCC tried to plug part of the hole in December by nearly doubling the maximum percentage that wireless carriers must contribute to Universal Service.

But other inequities remain. High-speed DSL Internet access is taxed for Universal Service, though cable modem access is not.

Adding to the problem: Wireless carriers are increasingly persuading state regulators to give them Universal Service grants for rural areas _ even to serve customers who already have subsidized landline phone lines. Wireless carriers are reimbursed at the same rate as landline providers, even if the wireless companies' infrastructure costs are much lower.

Without changes, the tax on landline phone revenue is expected to steadily rise-perhaps hitting 12 percent in three years.

The FCC is likely to tweak the eligibility rules for Universal Service funds next year. Other changes are possible in Congress.

For now, consumer groups are worried about proposals for the FCC to replace the Universal Service tax with flat fees customers would pay regardless of phone usage.

Each plan's advocates say their system is the fairest and most predictable way of keeping Universal Service fully funded, while accounting for new technologies like Internet-based phone calls.

Bob Blau, a regulatory vice president for BellSouth, also points out that the 1996 Telecom Act limits the possible solutions.

Long-distance leader AT&T wants to slap a fee on every phone number, with businesses paying extra for high-capacity data lines and other special connections to the public network.

A plan backed by the United States Telecom Association, a group of local phone carriers, seeks a flat charge on every telecom and Internet access service, including long distance. That proposal would generate the highest average increase in per-household payments, the FCC study found.

A third proposal, backed by BellSouth and SBC Communications, takes a similar approach while also adding a tax on revenue generated by such nontraditional services as dial-around long-distance and prepaid calling cards.

David Bergmann, who heads the telecom committee for the National Association of State Utility Consumer Advocates, calls all these proposed changes "radical," crafted to help one part of the phone industry over another.

He believes the government should merely tighten the rules on when phone companies can get Universal Service funds and start taxing cable modems and Internet telephone services.

His view is essentially shared by a powerful ally: Verizon Communications, the nation's biggest phone company.

"The sky is not falling," said Susanne Guyer, a regulatory vice president for Verizon. "Let's sit back and take a deep breath."

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