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Special phone plans aren't for everyone

As long distance rates drop and carriers push cheap packages, consumers should be wary and pay attention to the fine print in their phone bills.

Question: Where is a nickel equal to 17 cents? Answer: On your phone bill.

Long distance telephone firms are engaged in a heated price war, with advertised rates dropping as low in some cases as 3 cents a minute.

But these low rates can be deceiving, consumer advocates say. For the average person who spends about 100 minutes a month making long distance calls, the cost per minute for these plans could be triple the amounts advertised or even more, once hidden fees or charges are factored in.

These new rate plans are just one way long distance firms are trying to differentiate themselves in a world of heightened competition and deregulation. Leaders like AT&T and MCI WorldCom are doing everything they can to attract the highest spenders in the consumer and business markets.

Amid the deluge of deals,

By the numbers
Calling plan Per minute rate Monthy charge Extra fees** Actual per-minute rate*
AT&T Five Cents 5 cents $9.95 $2.50 17.5 cents
AT&T Seven Cents 7 cents $5.95 $2.50 15.5 cents
MCI WorldCom Five Cents 5 cents $5.95 $1.07 + 7.2% 12.4 cents
MCI WorldCom One Net Savings 9 cents n/a $1.07 + 7.2% 10.7 cents
Qwest High Spender 5 cents $14.95 $2.50 22.5 cents
Qwest Q Home 9 cents $4.95 $2.50 16.5 cents
AOL Long Distance 9 cents n/a $2.98 + 4.9% 12.4 cents
Sprint Nickel Nights 5 cents $5.95 $1.50 + 5.8% 12.8 cents
* per 100 minutes of weekday phone use
** figures reflect percentage of base call cost
Source: A Bell, companies
it's become increasingly difficult for consumers to figure out whether the new plans will save them money each month.

"These plans are good for a particular type of user," said K.C. Choi, senior research associate at the Telecommunications Research & Action Center, a Washington-based consumer advocacy organization. "But many people aren't [heavy] long distance users. These people who move over to these rates are going to see their bills go up."

These plans have prompted considerable criticism from consumer groups, and have even attracted the attention of the Federal Communications Commission. Regulators opened a proceeding in July asking whether companies should be allowed to offer such deals. Comments on these plans and special billing rules are due to the FCC on Monday.

Pushing bundled packages
The new calling plans reflect genuinely falling costs inside the long distance industry. Technology advances have cut the price of carrying voice traffic from one state to another. Competition from new long distance entrants like Qwest and Level 3 has helped push down wholesale network costs; while fees that long distance carriers pay local phone companies to complete calls are falling.

But even as costs drop, new players in the market have helped to spur a sustained price war that is eating into long distance carriers' profit margins.

In response, most carriers are packaging wireless, Internet, and phone service together in an attempt to capture a consumer's entire communications spending dollar. AT&T's push to offer local telephone service over cable TV lines and Qwest's package of long distance and Internet service are just two examples of new bundled offerings.

Carriers are also selling all kinds of new phone plans that offer customers discounts depending on their calling habits. The number of such calling options, however, has grown into a bewildering array of bundles and exceptions.

Most of the cheap new plans have a catch: A consumer usually has to pay a monthly fee--sometimes more than $6 a month--to get the cheap rate. That means that if a caller does not spend a fairly substantial amount of time making long distance phone calls, the average bill could be even higher than those paid under a previous plan.

"The market is moving to a fixed and variable rate model," said Brian Adamik, senior vice president for telecommunications research at The Yankee Group. "They all come with monthly recurring charges which cover things like billing and customer care. The variable per-minute charge is used to cover [the cost of] access."

Fine print
But to figure out the real value of these new special deals, consumers should pay attention to other fees and charges added to a phone bill.

Every long distance phone company is required to pay into the national Universal Service Fund, which subsidizes telephone service for rural and low-income areas, and Internet connections for schools and libraries. Phone bills also contain charges that a long distance company has to pay to local phone companies like Bell Atlantic or SBC Communications for use of their networks.

Callers often ignore these fees and how they change when switching to a different provider, consumer advocates say.

"People often assume these are standardized," said Marc-David Seidel, assistant professor at the University of Texas at Austin and founder of a price comparison Web site called A Bell Tolls.

"In fact, [fees] can vary widely between carrier, depending on how the carrier decides to charge the fees," he added.

Companies like AT&T and Qwest charge a flat fee for both universal service and local charges. Others, like MCI WorldCom, charge a small percentage for every phone call--which can add up quickly if a customer is a frequent caller. Alternately, some smaller carriers include these fees in their ordinary rates, without adding additional charges to a customer's bill.

Nevertheless, these new calling plans can be extremely valuable for people who make a large amount of long distance calls per month: the high-spending customers all companies want to retain.

"After about three hours, most of these plans are extremely competitive," Choi said. "They are good plans, but they're just not made for everybody."