TELECOM Digest OnLine - Sorted: Cell-Phone Taxes Subsidize Land Lines, Enrich Telecoms

Cell-Phone Taxes Subsidize Land Lines, Enrich Telecoms

Mike (
7 Feb 2007 19:44:25 -0800

By Bob Porterfield

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

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, such as 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Outdated formulas for tabulating the surcharges -- coupled with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, 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 together have 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 land-line service in hard-to-reach areas of every state.
The Federal Communications Commission doesn't require
telecommunications companies 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

"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.

Poor oversight

Most consumers overlook the small surcharges on their telephone
bills. Usually no more than a few dollars per month, these charges
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

In California, for example, the two biggest phone companies, AT&T
Inc. and Verizon California, received $1.2 billion in subsidies over
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.

"We believe the core principle is that everyone, including cell-
phone callers, benefits from being able to call people in the high-
cost areas," AT&T spokesman Gordon Diamond said. "If wireless
customers didn't contribute, the surcharge on wire-line customers
would have to be higher."

In other states, the financial reporting on phone-bill surcharges
is less detailed, so it's harder to break out the proportion
shouldered by cellular customers, or how much of it is going directly
to the telecommunications companies. Some states' subsidy programs are
managed by private companies that receive little oversight from

In Texas, which contracts with a private administrator, the
state's 15.6 million cell-phone users were substantial contributors to
the $1.9 billion collected for universal services since 2003, of which
$1.3 billion was distributed in high-cost subsidies. Although carriers
aren't required to pass along the costs to customers, they almost
always do. Last year, nearly 80 percent of these subsidies were paid
to AT&T, Verizon and two smaller carriers.

"The fund keeps growing in a way that's disturbing because it
takes more and more consumer funding," says Roger Stewart, a
telecommunications lawyer for the Texas Office of Public Utility
Counsel. "There should be a detailed accounting of how the money is
being used. There's no reporting by companies as to how they are using
the pots of money."

Kansas collects about $60 million annually from wireless
providers who are given the option of passing it along to customers,
and many do. Consumer advocates believe the program is necessary, but
they keep a close eye on the money.

"We certainly don't think the fund should be abolished," said
Steve Rarrick, a lawyer with the Citizens Utility Ratepayer Board in
Kansas whose office reviews subsidy reports annually. "Our overall
concern is the amount of subsidies, whether the amounts are

Colorado, another state with wide-open spaces, distributed about
$55 million in subsidies last year from a fund currently being
reviewed by regulators.

"We think the fund is too large. We're not saying it's mismanaged
-- just too large," said Jim Greenwood, director of the Colorado
Office of Consumer Counsel. "The high-cost support mechanism should be

Arizona contracts with a private administrator that collects
surcharges from the state's 3.8 million cellular customers and turns
all the money over to Citizens Telephone, the only provider in semi-
remote areas of northwestern Arizona and the only company to qualify
under state law for high-cost reimbursement.

Cloak of secrecy

In most of the states, where the money goes and how it's divvied
up among phone companies is often shrouded in secrecy because
government-sanctioned reporting procedures cloak the information from
public view.

"We're mostly concerned that high-cost universal service funding
has been used predominantly to subsidize inefficient wire-line
carriers," said Miss Kuo of "[But] we also have seen
significant waste in how that funding is distributed."

In California, much of it disappears into corporate treasuries to
be used at the companies' discretion; some sits in the bank, and some
has even vanished into the state's general fund. During the 2002-2003
fiscal year, the legislature "borrowed" more than $278 million from
the state's high-cost surcharge funds to help balance the budget. That
money has never been repaid.

"It's Verizon's position that special-purpose funds should only be
used for their intended purpose," Verizon spokesman Jon Davies said in
an e-mailed statement. The high-cost subsidy "should never be tapped
to balance the budget."

Each state calculates the high-cost subsidies differently. In
Texas, telephone companies receive fixed monthly amounts to defray the
cost of installing and maintaining the equipment. In other states,
subsidies take the form of payments between carriers to offset their
additional costs of providing basic service to high-cost residential

What is clear is that the subsidies aren't always used to install
phone lines in high-cost areas.

California designated its high-cost areas in 1996 using 1990
census tract data and hasn't addressed those areas since. State
regulators established an installation and maintenance cost for each
tract based on information from carriers and used a complex financial
model that considered the costs of installation, maintenance,
directory assistance, advertising, marketing and profit margins. Any
area that exceeds the average statewide cost incurs a subsidy that is
passed on to all consumers in the form of a small monthly fee.

Under this formula, phone companies are collecting subsidies for
residential service in Malibu -- the super-rich enclave north of Los
Angeles -- as well as suburbs of Sacramento and sections of the San
Francisco Bay area that have become dense with condominium and
subdivision development.

California consumer advocates have become increasingly critical of
the high-cost fees, and the state's telecommunications 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."

Among other issues, the advocate found the program "largely failed
to meet its objectives" and was operating under "ineffective and
flawed program rules." The telephone companies were not required to
spend subsidy money on their California networks and the costs they
claimed to have incurred might not be legitimate, the report said.

That prompted state lawmakers to order the utilities commission to
review the fund, but the legislature's Jan. 1, 2006, deadline for
completing the study passed with no action.

Finally, in June, the commission opened its study and began
collecting comment from the industry and consumer advocates. Many of
the phone companies filed their information secretly or submitted
heavily censored public versions. The companies say the information --
such as the number of subscribers, their California revenues and
methods of calculating subsidy requests -- is proprietary and would
put them at a competitive disadvantage if revealed.

When California deregulated telephone rates in August, the high-
cost surcharge fund was left intact, ensuring the subsidies will flow
at least through 2009.

"We think [the subsidy] should be totally eliminated," said
Cynthia Walker, deputy director of the commission's Division of
Ratepayer Advocates. "It doesn't make any sense for some companies to
get millions in subsidies if you're going to have a level playing

Christine Mailloux, a telecommunications lawyer with the Utility
Reform Network, a San Francisco consumer advocacy group, 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

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