Subsidies paid by cell subscribers enrich telecoms, provide no real benefit

Sunday, January 14th 2007, 12:00 pm

By: News On 6

SAN FRANCISCO (AP) _ 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Outdated formulas for tabulating the surcharges _ coupled with feeble government oversight _ have meant a windfall for phone companies, which are fighting to preserve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.

``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 changed.''

_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.

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 wireline carriers,'' said Kuo of MyWireless.org. ``(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 areas.

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's 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 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.''

Among other things, 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 CPUC 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 claim 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 CPUC's Division of Rate Payer Advocates. ``It doesn't make any sense for some companies to get millions in subsidies if you're going to have a level playing field.''

Christine Mailloux, a telecommunications attorney 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 areas.''