Fighting back against telecom surcharges

Understanding the distinction between regulatory charges and the extras carriers pass along is a powerful weapon when negotiating contracts.

Running a corporate telecom shop often feels like playing the Whack-a-Mole machine at a carnival - you keep pounding down the moles but they keep popping back up. That's never more true than in the game of bill surcharges, in which every move by user groups or the government to rein in confusing bill add-ons soon is parried by an even more maddening and confusing line item from the carriers.

Don't be fooled. When a new line item pops up on your bill, it's all revenue to the carrier, no matter whether it's labeled as a tax, surcharge or pass-through.

From time to time the government tries to get the carriers to explain accurately who is responsible for the purported costs leading to each surcharge. But usually that just leads the carriers to break out some fees and combine others in a fashion that just barely complies with whatever the latest rule requires.

Your best bet is to understand why the carriers view the fees as an essential part of their revenue management - and then build these fees into the real cost of each of your network services, rather than thinking of them as government mandates, as the carriers proclaim.

That way you can bring your entire projected surcharge you spend into your carrier contract negotiations and apply the same principles of competitive leverage that you do with each service's regular rate elements such as tolls, ports, circuits and features. Tallying the real cost this way can help bring about overall contract concessions and credits, even if each surcharge is called "undiscountable" in the carrier's official service guide. But to add up these costs you need to know each carrier's surcharge platforms and what their plans are for them, because even some of the most obvious surcharges have new twists and turns.

Reform and results

Most users are familiar with the big surcharge for universal service, or universal connectivity, but recent changes in the rules have altered the challenge in managing these expenses.

Last year the FCC declared it was fed up with what had become increasingly blatant markups of the universal service fee by long-distance carriers. For much of 2002, the FCC said it needed 7.28% of applicable carrier revenue to fund certain telephony and Internet subsidies. Yet by the fourth quarter business customers actually were being charged 8.3% to 9.6%. And what really peeved the FCC was that AT&T  was charging residential customers 11%.

So the FCC decided that starting April 1, the carriers would have to start passing along the universal service charge with no markup or get rid of the line item and incorporate the cost into their service prices. None of the major carriers dropped the separate fee, but they did fall into line and now all business and residential customers receive the exact surcharge that the FCC mandates. Except for three problems:

•  The insatiable needs of the universal service program caused the FCC to increase the official fee - what it calls the quarterly contribution factor - to 9.1% for the second quarter of 2003 and then to 9.5% for the third quarter before bumping it back down to 9.2% for the fourth quarter. That alone is close to or above what business users previously paid some carriers after the now-illegal markup was applied.

•  The FCC gave in to arguments especially by AT&T that the carriers incur "administrative costs" in collecting money for universal service. The government agency authorized carriers to separately recover these costs from users provided they didn't call this extra cost a regulatory fee or use other wording that seems to blame the government.

•  The resulting administrative expense fee of 0.74% that AT&T initiated April 1 might have a clever name meant to avoid explicitly blaming a government rule. But this type of fee is hard for many users to distinguish from the existing AT&T federal regulatory fee, which AT&T subsequently raised on Aug. 1 from 0.35% to 0.52%. What's more, the just-increased federal regulatory fee now is buried in a combined line item with an unrelated surcharge regarding AT&T's property taxes.

MCI and Sprint  customers face almost the same challenge. Both carriers charge nominal regulatory surcharges, but until recently had held out on adding an administrative fee relating to universal service fund (USF) collections. That also changed Aug. 1, when Sprint added a 0.03% administrative fee. So far MCI is holding back on issuing such a fee but might feel less constrained after it emerges from Chapter 11 bankruptcy.

Surcharge summary

If you examine your corporate telecom bill closely, you’ll find several regulatory-related fees.
Surcharge and purported need AT&T MCI Sprint
Universal service fee: Fixed by federal decree.9.20%9.20%9.20%
Administrative expense fee: Recently set by carriers for expense of carrying out USF dictate.0.74%None0.03%
Federal regulatory fee: Historically set by carriers for general compliance with laws.0.52%0.43%0.51%
Property tax fee: Set by carriers to offset their costs.0.81%1.40%1.54%
Total11.27%11.03%11.28%
Does not include federal line charges, federal excise tax or state-specific charges.SOURCE: OCTOBER 2003, FCC, WASHINGTON, D.C., AND CARRIERS’ ONLINE SERVICE GUIDES

Decimal points add up

Don't let those decimal points fool you - the fees eat up dollars quickly. Business user advocacy groups such as the Ad Hoc Telecommunications Users Committee have warned the FCC that if it's going to let carriers charge administrative fees, the fees at least should be a percentage of the size of the programs they're supposedly administering. Right now they aren't.

Say a company spends $100,000 in a month on qualifying charges. Under the new rules it pays 9.2%, or $9,200, to the USF. So the extra administrative fee should be a token percentage of that $9,200, right? Instead, AT&T's administrative fee is 0.74% of the entire $100,000 - or another $740, an absurd number for the purported administrative expense of one line item on one customer's monthly bill.

The Ad Hoc Committee pointed the FCC to a long-standing practice with sales taxes, by which courts allow a percentage of administrative expense to be calculated only from the tax itself, not from the amount of the customer's purchase. Even then, the administrative expense is deducted from the government's tax receipts, not added on as another retail cost.

The FCC is considering new ideas to discard the revenue-based system of universal service assessments in favor of one based on the number of phone lines, telephone numbers or connection bandwidth installed. But until that matter is taken up again, users can expect that administrative expenses will be an open-ended invitation to surcharge creep.

The carriers point to the government when assessing some other non-tax surcharges, often saying that government "mandates" cause the charges. They don't indicate that the carriers' own lobbyists promoted some of these "mandates" as replacement revenue for failing business.

For example, when was the last time you dropped any coins into a pay phone? Several years ago, the Bell companies and the country's many independent pay phone operators were alarmed at the number of times that people were striding up to pay phones and dialing toll-free access numbers for calling card schemes and alternatives to collect calling. So the pay phone operators lobbied to have the recipient of a toll-free call pay something for the cost of the call having been initiated at a pay phone - and the concept was written into the Telecommunications Act of 1996. The FCC decided on a per-call surcharge of 26 cents, which has since raised by some carriers to as high as 47 cents.

The FCC thought the recipient would be the carrier on whose network the inbound toll-free call landed. But the called party ended up with the bill.

Some corporate users deal with this problem by blocking calls initiated at pay phones and eliminating calling cards in favor of corporate wireless deals. But this is no comfort if your customers expect to reach your call centers. And airlines and hotels have no practical option to block pay phone charges other than making it clear that this revenue - like all other carrier income - will be negotiated as part of the complete telecom deal.

Other surcharges are nothing more than cost recovery for software upgrades and other capital expenses that carriers don't want to shell out on their own, such as local number portability or telecom-related public safety initiatives.

Don't fall for carrier spin about surcharges as something they dislike, when they really are trying to put off reasonable network upgrades. Earlier this year wireless carriers stuffed bills with a "consumer alert" pointing to a Web site claiming that "taxes, government fees and the cost of government mandates" can add as much as 20% to your bill. But those mandates were simply for wireless number portability and E-911 capability that wireless carriers should be happy to undertake if they're serious about selling their services as a substitute for wireline connectivity.

The best option for users is to trust the information from real user advocacy organizations such as the Ad Hoc Committee and consumer groups that are trying to limit surcharges to actually unavoidable carrier expenses that the government directly bills them for.

Until that day comes, ask for contract clauses that limit surcharges to those reasonably related to the carrier costs. And make sure your carrier negotiations start with the assumption that surcharges are part of the price proposals, rather than wait until the end of a contract negotiation to recognize these costs when it's too late to do anything about it.

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Rohde is a senior analyst and Shea is a principal at TechCaliber Consulting, a telecom consulting firm. They can be reached at drohde@techcaliber.com and sshea@techcaliber.com.

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