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Net subsidy fight in Congress

The fight between the FCC and phone companies over financing federal subsidies for school Internet service goes to Capitol Hill.

Forces are escalating in Congress to stop the Federal Communications Commission from collecting funds to discount Net access for rural hospitals, libraries, and schools.

Opponents say the FCC's universal service program, which was revamped to provide the discounts for Net service, is resulting in unfair surcharges for telephone customers.

As reported Thursday, the leaders of the House and Senate commerce committees, which oversee the agency, called its implementation of the universal service a "spectacular failure" in a letter to FCC chairman William Kennard. The committee is asking the FCC to suspend collection of funds for the Net connection program.

"Congress expected that, in implementing these provisions, the commission would recognize the priorities established by Congress [to] maintain affordable local phone rates and help ensure that schools and libraries had discounted access to telecommunications services," states the letter sent by Sen. John McCain (R-Arizona) and Rep. Tom Bliley (R-Virginia).

"The evidence to date, however, leads us to the unmistakable conclusion that the commission has ignored Congress's clear priorities with regard to universal service," the lawmakers added.

The FCC could give in to critics during its meetings on universal service tomorrow. But sources within the agency say it would be a political debacle to cut off Net access discounts for the 30,000 schools and libraries that have applied for a total of $2 billion in funding.

The universal service fees have been collected since January, and are set to be doled out later this year. The FCC said earlier this year that only $1.67 billion would be available without raising long distance bills.

Under the Telecommunications Act of 1996, Congress directed the FCC to set up the program. Although phone carriers have been designated to pick up most of the cost for the discounted school and library services, the FCC pledged to balance that burden by cutting fees for the telcos in other areas.

Still, stinging statements came from Sen. Conrad Burns (R-Montana), when he called for a repeal of the "Gore Tax," a designation applied by foes of the vice president's push for online access for every school and library in the nation by the year 2000.

Gore today issued a statement in response to the letter.

"Every child in America deserves a 21st century education and access to 21st century technology," he said in the statement. "The e-rate is critical to our effort to put computers in every classroom and library, giving every child the tools to succeed.

"But some in the industry and in Congress would undermine this program, and hold our children back," the statement continues.

"Let me be clear: I strongly oppose any effort to pull the plug on the e-rate...I call on Congress and industry to put all politics aside and work with us to put 21st century educational technology in every school and library," the statement reads.

But groups such as the Americans for Fair Taxation and the Consumers Union are calling for the FCC to halt the Net discount program if it means an increase in long distance rates.

The criticism heated up recently when AT&T announced that it would raise fees to cover the universal service costs. AT&T had lobbied for Internet service providers to pay directly into the fund through access fees charged by local carriers, an idea that was rejected by regulators.

Now, phone companies are blaming universal service for rate hikes.

AT&T is planning a 5 percent surcharge on all out-of-state calls to cover the costs of the telephone subsidy programs and the Net connection discounts. MCI Communications has followed suit, saying customers will see a 5.9 percent increase for interstate and international phone calls. MCI claimed it had to pay twice as much--$4.1 billion--to universal service in the past six months than it contributed for the same period last year.

Last week in a statement, Kennard called the charges a "hidden rate increase," and said that AT&T and MCI "should not take advantage of consumers by overbilling their customers and then blaming it on the government.

"Not only must consumers be fully informed about what they are paying for on their monthly phone bills, consumers should also benefit from the savings the telephone companies are realizing," he added. "We are working to make sure that consumers get the full truth so that they can make informed decisions."

The FCC had expected the long distance carriers to offset universal service costs with decreases in their payments to local phone companies. Of the 5 percent collected in phone bills for universal service, just 1.5 percent goes to funding Net access, an agency official said today.

Moreover, local carrier access charges have dropped by billions of dollars in the past year, the agency said, with a more than $700 million cut expected in July.

In addition, the FCC is raising money for universal service by levying new charges for businesses and residences with second phone lines. For businesses, the charges are as much as $2 more per month for each additional phone line, which could increase by an average of $1.50 annually until the year 2000.

Government sources and proponents of the Net discounts argue that phone companies are using the universal service program to mask new fees. They also say Republicans are fueling the issue to stir public criticism of Gore, who is a presidential contender in 2000.

Sen. Bob Kerrey (D-Nebraska) scolded AT&T and MCI last week.

"I'm gravely disappointed in the long distance companies' behavior," Kerrey stated. "Congress passed a law that opened vast new opportunities for profits to you, and you are now complaining about sharing a piece of a substantially growing pie with schoolchildren and rural and high-cost areas."

Kerrey wants the companies to make their books public to prove that universal service cuts deeper into their profits now than before the 1996 telco deregulation act was implemented.

"If afterward you still feel the 1996 law is costing you too much money, I will be happy to entertain any suggestions for repealing it," he told them.

But foes of the plan contend that the trend to raise long distance fees means the FCC has failed to do its job.

As chairman of the Senate Commerce subcommittee on communications, Burns said that he will propose legislation to redirect a 3 percent excise tax on telephone service, enacted in 1914, toward Net access for schools and libraries. The tax raised $4.5 billion in 1997, and the current cost of the schools and libraries program is set at $2.25 billion per year, the senator added.

"The law explicitly states that this goal should only be accomplished in a way that is economically reasonable," Burns said in a statement. "I would argue that excessive line-item charges on consumers' phone bills that put the goals of universal service at risk fail this test miserably."

While visiting Silicon Valley last week, Burns expressed concern about the financial burden on rural states. His home state of Montana, for example, has fewer phone customers to support the fund, so the state has to make up the difference. In some cases, the commission's plan puts 75 percent of the governmental burden on states.

"In California, that would work well, but in Montana, it doesn't," he added. "It hurts us. So the formula has to be looked at."

Burns wants the agency to hold off its vote this week until his idea can be discussed at an FCC reauthorization hearing on Wednesday.

In February, Sens. Ted Stevens (R-Alaska), McCain, and Burns also charged that the FCC overstepped its bounds when it created two corporations to approve applications for the universal service fund. The senators argued that Congress should have more oversight in the program and were backed up by a General Accounting Office report released in February, which stated that the FCC had "exceeded" its authority.