Cellular subsidies enrich telecoms at consumers' expense

Subscribers pay fees intended to cover traditional landline service

Posted: Monday, January 15, 2007

SAN FRANCISCO - Cellular subscribers are paying hundreds of millions of dollars each year to subsidize landline telephone service, enriching big telecommunications companies while providing little or no benefit to cell phone users.

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The subsidies are intended to reimburse the companies for providing traditional phone service in rough terrain and rural areas where stringing lines can be costly. But rampant development has transformed some of these backwaters into booming subdivisions, with no real adjustment to the distribution formula; others, like the oceanfront celebrity playground of Malibu, are receiving subsidies simply because of their difficult topography.

Outdated formulas for tabulating the surcharges - coupled with feeble government oversight - have meant a windfall for phone companies, which are fighting to preserve them.

"It's egregious," said Kimberly Kuo, executive director of MyWireless.org, a national nonprofit advocacy group for cellular users. "By nature, these fees are highly discriminatory because cell users pay in far more than they get out of it."

Nineteen states charge customers a fee to defray the costs to phone companies of providing service in high-cost areas. Of these, 12 do not exempt cell phones - Alaska, Arizona, Arkansas, California, Colorado, Kansas, Maine, Nebraska, Nevada, Texas, Utah and Wyoming.

Since 2003, these states have together collected more than $4 billion, an Associated Press investigation found. The burden is shared by cellular and regular phone customers alike. In some states, cell users appear to be footing more than half the bill.

"There's an enormous inequity with wireless contributions," said Joe Farren of CTIA-The Wireless Association, a trade group representing the nation's cellular providers and wireless equipment manufacturers. "We think these funds should be no larger than necessary and not favor one technology over another. It's a major issue for us."

Phone companies also pay into a separate federal Universal Service Fund that has raised nearly $20 billion since 2003. Some of that money subsidizes landline service in hard-to-reach areas of every state. The Federal Communications Commission doesn't require telecoms to pass these costs along to their customers, but many do. Cell phone users pay into the federal fund, but it's difficult to determine how much of it they contribute.

Industry officials say these subsidies - known as high-cost universal service funds - are what make it worthwhile to do business in rural areas. If they were abolished, some other incentive would be needed.

"These are tough issues," said Phil Cleverly, director of regulatory affairs for Verizon California. If surcharge subsidies aren't continued, policy-makers "will have to decide how it is local rates in rural areas should be supported in the future," he said.

Most consumers overlook the small surcharges on their telephone bills. Usually no more than a few dollars per month, these support a variety of programs, including those that ensure affordable telephone service for low-income and disabled customers. But the high-cost subsidies are the most expensive and possibly the least regulated.

In California for example, the two biggest phone companies, AT&T Inc. and Verizon California, received $1.2 billion in subsidies during the past three years as compensation for serving more than 7,600 designated high-cost areas. That list has remained static for years and is based on the 1990 census.

The state's 25 million cellular subscribers contributed 60 percent of those payments, a proportion that is likely to increase given the growing number of consumers relying exclusively on wireless communication. California's full universal service program includes five funds and has received $2.8 billion since 2003 - 57 percent of that going to the high-cost fund.

California consumer advocates have become increasingly critical of the high-cost fees and the state's telecom giants have gone on the defensive, but no concrete action has been taken to roll back the subsidy.

A 2004 report from the California Public Utilities Commission's own ratepayer advocate found the fund amounted to a questionable subsidy for which "no cost-benefit analysis has been done to demonstrate that Californians receive value from this increasingly costly program."

Christine Mailloux, a telecommunications attorney with The Utility Reform Network, says the subsidy fund is "clearly bloated and mismanaged."

"Costs are horribly out of character and that gives AT&T a windfall," she said. But her group is in favor of retaining some smaller form of rural subsidy to ensure those consumers continue to be served. "You can't just eliminate the fund without first considering rates in rural areas."

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