Feds fumble phone fund

Fees passed along to corporate users has been an issue.

By David Rohde
Network World, 6/15/98

Washington, D.C. - Government officials threw the nation's decades-old system of universal telephone service into turmoil last week, and users were left holding the bill for the chaos.

The Federal Communications Commission, under a withering tide of criticism from Capitol Hill, late last week scaled back an ambitious program to provide Internet access to all the nation's classrooms, by delaying some expenditures until 1999.

In a 3-2 vote, the FCC decided to limit subsidies for connecting schols to the Internet to $1.3 billion this year, a 43% reduction from the $2.25 billion the agency had originally sought for this universal-service program. Universal service originally subsidized ordinary telephone lines in rural and other high-cost areas. The result has been a wave of new surcharges by carriers - first on corporate users' voice and data services and now increasingly on residential phone bills.

Advance betting was that the FCC would preserve E-rate but either scale back or extend over 18 months the subsidy payments to school districts for the most controversial part of the program: support for inside wiring and LAN connections. Congressional critics, including the Republican chairmen and ranking Democrats of both houses' telecom oversight committees, have scolded the FCC for including those items instead of just subsidizing Internet access service.

But E-rate defenders - including FCC Chairman William Kennard, the National Education Association and President Clinton - have blamed AT&T and MCI Communications Corp. for passing on their universal service subsidy costs to residential users. And the FCC's expected action was considered unlikely to stop impending rate increases for business users.

For example, MCI plans to hike its universal service surcharge for large businesses' interstate voice and data traffic from 4.4% to 4.9% on July 1, bringing it up to levels originally set by AT&T and Sprint Corp. for business users.

All this has led to a growing chorus of demands to scrap the universal service system entirely and start over.

"We believe it is too late for the commission to rescue itself merely by tinkering with a fundamentally flawed and legally suspect program," wrote the four congressional critics, led by Senate Commerce Committee Chairman John McCain (R-Ariz.). "Instead, it is time for you and your colleagues to put the mistakes of the [past] behind you and start anew."

The crux of the current brouhaha began in May 1997 when the FCC voted in E-rate. The vote followed Clinton's call to put Internet access in all classrooms across the nation by the year 2000.

The way E-rate works is school districts post a competitive bid on a Web site operated by the Schools and Libraries Corp. (SLC), a corporation established by the FCC to run the program. The SLC has drawn criticism for its lavish salaries.

Whoever wins the bid - a carrier, distributor or value-added reseller that has put together the necessary pieces - then sells the eligible services for 20% to 90% off their regular prices. The higher discounts apply to poorer school districts, usually measured by the percentage of student's eligible for the government's subsidized school lunch program.

Even so, school districts in wealthier areas have been among the first to apply, requesting discounts for such sophisticated services as ATM to the desktop and Switched Multimegabit Data Service to concentrate Internet access traffic.

Numerous academic authorities say the program is out of control and should be junked entirely.

"The plan is stupid because it's subsidizing Chevy Chase, Md., and Greenwich, Conn., as well as the inner cities," said Jerry Hausman, a professor of economics at the Massachusetts Institute of Technology. "Universal service was never meant to subsidize places where the average price of a house is $800,000."

Rather than a true subsidy program, the entire universal service system "is just a bunch of lawyers with their hands in the cookie jar," Hausman said. He estimated that for every dollar raised to pay for Internet access at schools, an additional $1.05 to $1.25 must be raised for the SLC to administer the program.

"I would advocate that universal service just go away tomorrow," said Kent Lassman, a telecommunications policy analyst at Citizens for a Sound Economy Foundation, a Washington, D.C. think tank. But since that's not "politically viable," the FCC should stop blaming Congress just for adding schools and libraries to the list of universal service recipients, he said.

"The act certainly didn't say anything about inside wiring or training," Lassman said. "[The FCC] could have decided that we'll send every school $20 a month for [America Online] and one computer," he added.

But who's to blame?

The controversy was muted until AT&T three weeks ago filed a tariff to impose a universal service surcharge of 5.0%

on residential phone calls. Kennard immediately fired off an unusual public statement criticizing AT&T's action, saying the fees to support universal service are meant to be paid by carriers, not users. Besides, Kennard added, other FCC actions have saved AT&T money in fees they must pay local carriers to complete phone calls. His statement created a firestorm of criticism from members of Congress and even another FCC commissioner claiming that no matter how you cut it, the money to fund E-rate is a "hidden tax" that AT&T has every right to pass along.

"The government shouldn't tell businesses how to write a bill," Lassman said. "It doesn't hold water for the government to impose the fee and then think they're not going to pass it along. There's really nowhere else for it to go."

Privately, some users agree. "These extra charges are getting tiring," said one telecommunications manager outside the education field who asked not to be identified. "But the FCC is awfully naive if they thought the carriers wouldn't pass [the charges] along. They always do."

He cited other new surcharges on 800 calls from pay phones - made up by a surcharge on those calls and a general increase in 800 rates - as well as a new fee due next year to repay regional Bell operating companies for setting up local telephone number portability.

Even some network professionals at schools came to the defense of both AT&T and MCI, the two carriers that so far have said they will impose a residential universal service fee.

"To me, the E-rate is like a sales tax that's added to communications services," said Steve Finch, a former school-district network manager who is now principal of Finch & Co., a Kansas City, Kan.-based firm that holds network management contracts with schools. "I think that anyone who thinks otherwise is being naive about it."

Deidra Massenberg, editorial assistant in Network World's Washington, D.C. bureau, contributed to this article.