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Subsidies blamed for phone hike

Higher rates planned by AT&T to pay for Internet and other services could result in substantial increases in the long distance market.

Higher rates planned by AT&T to subsidize the costs of Internet and other services could result in substantial increases for phone service throughout the long distance market.

AT&T is planning to impose a 5 percent surcharge on all out-of-state calls to cover the costs of federally mandated telephone subsidy programs, including Net connections for public schools and libraries. The surcharge, roundly criticized by regulators and consumers, may have a domino effect as other carriers follow suit.

No. 2 long distance carrier MCI Communications said yesterday that it could announce a universal service fund surcharge next week. The surcharge could be similar to AT&T's or much lower, depending on the Federal Communications Commission's decision on how much to raise for the subsidy programs, an MCI executive said.

So far, Sprint is watching from the sidelines, declining to comment on the proposed surcharge. "We haven't made any changes from what we're already doing," a spokeswoman said.

The planned increases immediately drew harsh criticism from federal regulators and consumer groups. The additional charges are "premature, unwarranted, and inconsistent," said FCC chairman William Kennard, according to a Reuters report.

FCC officials had expected the carriers would offset new universal service program charges with planned decreases in access charges the companies pay to local phone companies. Access charges have dropped by billions of dollars in the past year with another $700 million or more decline expected in July.

Under the 1996 Telecommunications Act and FCC rules, long distance carriers are required to support programs subsidizing phone service in sparsely populated and low-income areas and defraying the cost of Internet connections for schools, libraries, and rural health care facilities.

But the FCC has not yet announced how much the carriers must contribute to the programs for the second half of the year. A decision is expected in the next few weeks, an FCC official said.

AT&T said it would not wait for the FCC's decision and announced that beginning in July it would add 5 percent to the cost of all international and interstate calls and a 1.8 percent charge to all in-state calls.

AT&T spokesman Jim McGann defended the company's action. "We can't afford to meet our obligation to the universal service fund, which is $1.6 billion," he said. "If the size of the fund changes...or access fees are adjusted by the government, we will change the surcharges."

On Capitol Hill, news of the AT&T surcharge bolstered efforts by some lawmakers to curtail the Internet connection subsidy program, which was created by the Telecommunications Act.

Rep. Billy Tauzin (R-Louisiana), chairman of the House Commerce Committee's Telecommunications subcommittee, may seek legislation to "rein in the schools and libraries program that has become an unlimited entitlement," Tauzin spokesman Ken Johnson said. "Congress may place some institutional controls on the size of the program."

More than 30,000 schools and libraries have requested a total of $2 billion under the Internet subsidy program this year. The FCC had estimated it could raise about $1.67 billion without raising long distance bills by relying on access charge reductions.

Consumer groups have urged the FCC to delay the universal service programs until a better funding mechanism is developed.

"We've told the FCC to stop collecting the money until they find a way to do it without increasing people's bills," said Mark Cooper, research director of the Consumer Federation of America. "AT&T can call this whatever they want, but it's an increase in my bill."