FCC approves new Internet phone taxes

Cell phone bills, even broadband services, could also see hikes in quest to overcome subsidy shortfalls for phone service in rural and high-cost areas.

Anne Broache Staff Writer, CNET News.com
Anne Broache
covers Capitol Hill goings-on and technology policy from Washington, D.C.
Anne Broache
5 min read
WASHINGTON--An estimated 4 million subscribers to Internet phone services like Vonage could see new fees on their bills under a plan approved Wednesday by federal regulators.

The Federal Communications Commission voted unanimously at its monthly meeting here to require all voice over Internet Protocol services that connect to the public-switched telephone network--as opposed to using peer-to-peer technology, like Skype--to contribute to the Universal Service Fund.

The $7.3 billion fund, which has been a feature of U.S. policy for more than 70 years, subsidizes telephone service in rural and low-income areas. It also runs a controversy-plagued program called E-Rate that provides discounted Internet and phone service to schools and libraries.

Right now, only telecommunications services, including wireless, pay-phone, traditional telephone and DSL providers, are required to contribute a fixed percentage of their long-distance revenue to the multibillion-dollar fund. It had been unclear whether VoIP providers must also pay.

The same FCC order would also raise the share that cell phone providers must contribute to the pool, though it was not immediately clear how many consumers would see hikes or how much they would be. That's because the FCC raised the contribution rate for only one of three formulas that can be used by cell phone companies to determine how much they owe. If those companies choose to stick to the two unchanged formulas, their customers would likely see no additional fees.

"Certainly we're concerned whenever consumers are forced to pay higher government taxes or fees, but it depends on the carrier and what their approach is," said Joe Farren, a spokesman for CTIA-The Wireless Association, a trade group.

The new contribution scheme takes effect immediately, and any new fees would likely appear on customers' bills later this year, said Thomas Navin, chief of the FCC's Wireline Competition Bureau. He declined to speculate on the differences customers of each service may see on their bills, saying it would depend on a variety of factors and "there's not one typical scenario for me to paint for you."

Calculating what's fair
Pressured by consumer groups and the telecommunications industry, the FCC has long been contemplating changes to the USF contribution scheme. Critics of the current system say the means of calculating contributions needs sweeping changes. That's because the bulk of the money comes from actual or estimated long-distance revenues, which are steadily dwindling due to changing business models in the wireless and wireline worlds.

The FCC's decision Wednesday drew applause from the U.S. Telecom Association, which represents both large and small telephone companies.

"We applaud today's ruling for ensuring that all voice service providers are treated alike," Walter McCormick, the organization's CEO, said in a statement.

By one VoIP industry estimate, customers could owe as much as $2.12 extra on a $30 monthly bill because of the changes, said Jim Kohlenberger, executive director of the VON Coalition, which represents the Internet phone industry. Traditional wireline users would pay $1.38 on a comparable bill, while wireless users pay an average of $1.21, he said.

Those numbers are based on a "safe harbor" contribution rate, established by the FCC's order, that would require all VoIP providers to calculate what they owe based on the assumption that 64.9 percent of their total revenues represent long-distance calls. The safe harbor option for cell phone providers climbed to 37.1 percent from 28.5 percent under the FCC's order, but it remains far lower than the VoIP share.

The discrepancy has the industry scratching its head, Kohlenberger said. "The FCC's efforts on VoIP are like trying to solve traffic and energy problems by stifling the rollout of energy-efficient hybrid vehicles, while subsidizing SUVs," he said.

Cell phone and Internet phone providers would also have another option for calculating fees. They could do a complex analysis known as a "traffic study" to determine what percentage of their revenues are long distance. If the results prove to be lower than the safe harbor percentage, fees for consumers, in theory, wouldn't be as high.

Some Internet phone companies already contribute to the fund--albeit sometimes indirectly, via the telecommunications companies that provide pipes for their services. Vonage, for instance, already imposes a flat "regulatory recovery fee" for each phone number it issues.

Others urge caution
The VoIP industry wasn't alone in questioning the FCC's move. In a letter sent last week to commissioners, attorneys for the U.S. Small Business Administration urged the agency to postpone its action until it had done a thorough analysis of the economic effect on smaller providers.

Republican FCC Commissioner Deborah Tate said she would "continue to advocate a light regulatory touch on nascent services like VoIP." But she said she believed even more strongly that because the number of VoIP subscribers is growing rapidly, universal service obligations must be introduced early on.

The FCC made its move in its first meeting in months with a full slate of five commissioners. Each official emphasized that the move is merely an "interim step" intended to make up for an expected $350 million annual shortfall in the fund.

The reason for that gap is that, beginning in August, revenue from DSL services will no longer be included in the contribution mechanism. That's the result of an FCC decision last summer ="5820713">to exclude DSL from its definition of telecommunications services.

Some of the commissioners used the meeting to vow to conduct an even broader sweep that would incorporate all broadband providers in the USF contribution plan.

"I don't see with slam-dunk certainty that contributions from interconnected VoIP--which is, for all its impressive growth, still a nascent industry--and from wireless carriers...offset the funds lost by DSL's nonparticipation," Democratic Commissioner Michael Copps said.

Broadband's fate
The idea of making broadband providers pay has been proposed in Congress during this session but has not yet gone up for a vote. FCC Chairman Kevin Martin told reporters after the meeting that he had no timeline set for additional action but recognized the importance of more-comprehensive USF reform.

He reiterated that he would prefer to pursue a system in which a Universal Service Fund fee would be levied on all phone numbers, regardless of what kind of technology does the calling. In statements released Wednesday, both the National Cable and Telecommunications Association and the CTIA urged the commission to go ahead with that approach.

A number of proposals to change the Universal Service Fund remain on the table in Congress. The provisions that are most likely to proceed this year are included in the Senate Commerce Committee's sweeping communications bill.

The latest draft would instruct the FCC to come up with new contribution rules that are as "competitively and technologically neutral as possible," while leaving it up to the regulators to decide how best to meet that aim. It would also set aside up to $500 million per year to subsidize broadband services in "unserved areas." That measure is scheduled for a committee vote on Thursday afternoon.