FCC Votes to Shift Costs for Phone Service

WASHINGTON — Unveiling the most sweeping price changes in telephone industry history, federal regulators on Wednesday approved new rules that will lower the cost of long-distance calls for most residential customers.

In exchange, basic phone rates for businesses and residential customers with second lines will increase. In addition, the Federal Communications Commission’s new rules will redirect funds to schools and libraries so they can obtain high-speed access to the Internet.

The FCC estimates that the cuts will save the average residential user on a basic-rate plan about 8% on the typical $22.50 monthly long-distance bill and will trim the $375 long-distance tab of the average small business user with four lines by $31 per month. But the changes would also boost rates for multiline residential and business users by more than $2 billion a year, according to industry estimates. Customers on discount plans will likely see less dramatic drops in the first few years of implementation.

About $2.25 billion raised annually as a result of the overhaul will be used to help schools and libraries connect to the Internet. Another $300 million a year will be used to connect rural hospitals to the Internet to help them gain access to the latest medical information.

The overhaul, which will undergo further refinement before the agency begins to implement them over the next eight months, will cut the $14 billion a year in long-distance fees that AT&T; Corp., MCI Communications Corp. and other long-distance carriers pay to local phone companies to complete or originate toll calls. The cuts should total $1.7 billion in the first year and $18.5 billion over six years.

The new rules are part of a complex federal initiative to maintain affordable “universal” phone service for the poor and those living in rural areas that are typically costly to serve while cutting the huge subsidies that are currently built into business phone rates, long-distance telephone fees and special services such as caller ID and call forwarding.

In the short term, multiline residential and business users will face sharply higher basic phone costs, particularly those users that make few long-distance calls and lack a private branch exchange, or PBX, to route a single external line to internal extensions. That’s because business and residential users are only assessed phone charges based on the incoming lines to their homes or offices.

“Because we seek to protect single-line customers, the new flat rate charges fall disproportionately upon the shoulders of multiline customers and may have a disparate impact on small businesses and people who have a second line at home,” said FCC Commissioner Rachelle B. Chong.

Under the FCC’s new rules, the basic subscriber line charge for businesses with more than one telephone line would rise 40 cents a line on July 1, to $6.40. A second increase of up to $2.60 would be implemented Jan. 1, 1998. However, the FCC estimates that because of competitive pressures, the average subscriber line charges only amount to about $7.61.

The average national $3.50 monthly residential subscriber line charge would remain the same until Jan. 1, 1998, when charges on second residential phone lines would climb $1.50 to $5.

Long-distance companies will also face a new $2.75 charge for every business line and $1.50 charge on residential lines, which they may pass on to consumers.

The politically charged issue touched off a firestorm of debate among local and long-distance carriers. The agency has also been flooded with faxes, electronic mail and more than 128,000 formal letters and filings from consumers on Main Street to lawmakers on Capitol Hill.

But in a decision incorporating a mix of political savvy and accounting razzle-dazzle, the FCC managed to appease many of the warring parties.

“The FCC has crafted a good compromise that will result in tangible benefits for American consumers,” AT&T; Chairman Robert E. Allen said in a statement.

Brian Moir, a Washington lobbyist who represents large business users, agreed. “Up until 24 hours ago, we were facing a multibillion-dollar anti-business tax,” he said.

The FCC indicated that it was able to hold the line against more aggressive price increases by reducing its estimates of the future costs of wiring the nation’s schools for Internet access. FCC officials explained that connecting institutions to the Internet will be a gradual process that will only consume about $1 billion--rather than $2.25 billion--in subsidies in the first year.

The agency also expects that the seven regional Baby Bells, which have increased their efficiency over the last decade by cutting more than 130,000 workers and deploying new technology, can boost their productivity further, enabling them to provide universal service at a lower cost.

Reaction to the rate plan among local phone companies was mixed.

US West and GTE Corp., whose service areas include a large number of poor and rural customers, complained bitterly that cuts in long-distance access fees were too big and wouldn’t adequately fund the subsidies.

“It is difficult to understand why the commission chose to continue to give the big long-distance companies like AT&T; and British Telcom/MCI such sweetheart deals, while at the same time leaving open the barn door through which these and other carriers can avoid their obligation to universal service,” said Geoffrey Gould, who oversees federal regulatory affairs for GTE.

But local phone company rivals, such as Teleport Communications Group Inc., the nation’s largest provider of competitive local telecommunications services, serving mostly businesses in about 57 major markets, were more upbeat. These companies will be able to collect the massive service subsidies for the first time because of the new rules.

By contrast, Internet access providers, which like other businesses will incur higher per-line telephone charges, were more sanguine. The access providers were spared any special new assessments in the plan, but face increased per-line assessments.

“We recognize that the provisions announced today will have a disproportionate impact on Internet service providers and their consumers,” said Steve Case, chairman of America Online Inc., which has about 350,000 phone lines that will be assessed higher basic monthly charges. “However, on balance we’re prepared to accept these additional costs because the FCC has taken off the table the possibility of additional access charges targeted at Internet use.”

Despite the sweeping nature of the ruling, the FCC has much unfinished business.

The agency must further pinpoint the size of the universal service fund. And the FCC’s new rules will have to be reconciled with those of state regulators, who some fear may be forced to raise rates of other phone services to compensate for loss of federal subsidies.

* DIALING FOR ANSWERS: How the phone regulation changes could affect you. D1