Commentary: The Hidden Tax In Your Phone Bill

On Apr. 14, MCI Communications Corp. petitioned the Federal Communications Commission to lower so-called access fees--the rates that long-distance carriers pay to local phone companies to pick up and complete their calls. MCI's argument: Local providers are making a killing off these charges.

Sure, MCI and other long-distance carriers have been lobbying for such a reduction for years. And their pleas are self-serving: They want to cut off what has become a windfall for local phone companies, their soon-to-be competitors.

On the other hand, they're right, and now is the time to address the issue. By all accounts--including that of the local phone companies--FCC-regulated access fees substantially exceed the costs they were designed to cover. At a time when the government is trying to deregulate the telecommunications industry, such out-of-whack charges tend to create craters in what needs to be a level playing field.

"A SLUSH FUND." How did this happen? Ever since the breakup of the Bell system, Baby Bells and other local service providers have collected the access fees from long-distance carriers. In turn, long-distance providers have passed the expense on to consumers through higher per-minute rates. The idea was to compensate local phone companies for the cost of using their networks to handle long-distance traffic.

But the FCC and local providers also figured that these fees could help fund "universal service," a decades-old policy of setting basic phone rates low enough so that almost all Americans--even those in rural areas that are costly to wire--could have a phone. Thanks to universal service, some poor city dwellers can get phones, and folks in interior Alaska pay about what other Americans do, even though the Bells claim the true cost of basic service there runs $137 a month. Access charges, the covert taxes that make this possible, now add up to about $20 billion a year.

AT&T and other long-distance providers, which have the unenviable task of collecting these fees, claim customers are being rooked. The fees are inflated by as much as $10 billion, or 50% more than the actual costs, they estimate. "Access charges are a slush fund for the Bells," says J. Richard Devlin, Sprint Corp.'s general counsel. Local phone companies object to that characterization, but concede that the sum is probably 20% to 25% above costs.

Here's a better idea. If politicians want to collect money from consumers for universal service, let it appear on the bill as a federal tax--a more honest way to fund the subsidy. Or let the government collect the money directly.

Both the FCC and Congress long ago acknowledged that a more up-front policy would be best. And to its credit, the FCC has moved in the right direction. Last July, it chopped access fees by about $1.7 billion, and it expects to trim them by $600 million more this July. Meanwhile, the agency has allowed long-distance phone companies to break out a portion that appears on customers' bills as flat-rate "subscriber fees," so at least people know a little more about where their money is going. In July, long-distance carriers also began to charge business customers a 4.9% tax on calls to pay for discounted Internet service for schools and libraries under a new universal service program. This charge is also broken out.


But the politics are perilous. Rural representatives have fought long and hard--and successfully--to keep the subsidy system. And they are afraid that a more overt subsidy would shock customers in, say, New York City, most of whom have no idea that they help shoulder the costs of service in Montana. And if the FCC slashes access fees before figuring out how to fund universal service, the Bells argue, local rates for millions of subsidized customers will jump. Then "consumers will complain that the only thing to come out of the Telecom Act is higher rates," says Robert T. Blau, BellSouth Corp.'s vice-president for regulatory affairs.

No doubt, that's a risk. But if the government owns up to its tax, then perhaps telecom providers will also have to be more honest about their actual costs and charges. That would be an important step toward fulfilling the promise of the Telecommunications Act of 1996: true competition and lower rates.

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