Cell Phone Subsidies Enrich Telecoms

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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.
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 Outdated formulas for tabulating the surcharges - coupled with feeble government oversight - have meant a windfall for phone companies, which are fighting to preserve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 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 wireline 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 telecoms. Some states' subsidy programs are managed by private companies that receive little oversight from regulators. -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 attorney 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, an attorney for 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 reasonable." -Colorado, another state with wide open spaces, distributed about $55 million in subsidies last year from a fund currently being reviewed by regulators.