Teletruth Analysis: June 22, 2006

Contacts: Bruce Kushnick, [email protected]

Tom Allibone, [email protected]

Mini-Report on Universal Service http://www.newnetworks.com/universalservicefund.htm

The Senate is examining a new bill by Senator Stevens that would give the local phone companies more financial concessions, but more to the point, will raise your phone taxes. This bill needs to be stopped.

First, five points about the bill and the 'landscape' in Washington.

1) Over 200% increase to the customer --- The Senate bill intends to add Universal Service to new areas of your phone bill, including "intra-state" services --- the entire local and toll call phone part of the bill. This could add over 200% to the average customers' USF fees since the tax is currently only applied to the long distance portion of wireless phone service, or long distance service, which represents the smaller part of total phone charges as compared to local and toll services.

Under the current regime, customers pay approximately $43 annually for USF, applied to parts of broadband, wireless, long distance services. Under the Senate bill this could increase to $141 or more --- a 233% increase. For small businesses, these increases equates to hundreds of dollars in new taxes.

The Math of the USF increases has been outlined here:

http://www.newnetworks.com/mathusf.htm (2005 Report, released 5/05)

2) The Senate bill will also add this TAX to both broadband and VOIP service, which have been restricted because they are still considered 'information services' and are not taxed the same way. (Note; The FCC is also planning new changes.)

3) Observation. The sponsors of this bill, Senator Stevens of Alaska, the Chairman of the Commerce Committee, and Senator Inouye from Hawaii, the Democratic chair, seems to represent the states with the most to gain from increasing the Universal Service Fund. The bill even has an entire section dedicated to the two states - Alaska and Hawaii, pertaining to new satellite licenses, and separate funding for broadband in underserved areas through the USF.

4) SLEEZE ALERT: --There have been numerous heavily funded phone company astroturf groups, such as KeepUSFFair Coalition, who advocate increasing the Universal Fund Tax and adding it to new services, including VOIP. Why would Hispanics, seniors, blacks, disabled and ethnic groups back the phone companies' need for more USF fees?

See; http://www.teletruth.org/USF.html

5) Total Irony. While the Republicans kept complaining about Universal Service Tax and the 'E-Rate', having called it the "Gore Tax", we now have the Republicans increasing our taxes without adequate audits and safeguards.

9 Reasons the Universal Service Fund Is Seriously Flawed

FCC Universal Service Homepage: http://www.fcc.gov/wcb/universal_service/welcome.html

Teletruth believes that the Universal Service Fund has turned into massive, out of control slush fund and instead of adding to this, the Senate has the opportunity to fix the abuses of this system.

6) 185% increase in six years: The Universal Service Fund increased from 3.9% on long distance services in 1999 to 11.1% in 2005 --- a 185% increase. (Second quarter of 2006 was 10.9%).

7) The largest part of this fund is NOT for wiring of schools and libraries but to "High-Cost Support", which are corporate subsidies to the phone companies. The High Cost Support represents over 60% of the total collected, doubling from $1.7 in 1999 to $3.5 billion in 2004 --- and growing.

8) These funds are NOT going to corporations that need this money. Many of the phone companies receiving funds have 55% profit margins (EBITDA), in a large part from this High Cost fund. USA Today (November 14, 2004) found that one small telco, XIT Rural Telephone Cooperative, which serves only 1,500 customers in the Texas Panhandle, received $2.9 million in USF subsidies. It was so profitable that it gave a "dividend to its customers, who also own XIT, an average $375.".

9) Major Decreases to Local Service Costs: The costs to offer local service has continued to drop, especially over the last 6 years. The USF increases have been against a backdrop of construction cuts, down 50%, and employees-per-line plummeting 65% since 1984. If the two largest costs continue to decline, how can the high-cost fund continue to rise?

10) Regulators no longer examine profits so High Cost funds shouldn't exist. --- 90% of the states no longer examine these companies' profits because of local phone deregulation. And under previous laws, in most states, the costs per customer was averaged for all customers. How can the FCC give billions in High Cost funds when costs are no longer taken into account? Where are the audits or need?

11) Double-Quintuple Taxation? Many states have also added statewide High-cost funds, Erates, Lifeline services and other services covered under the federal program, and NO ONE has examined the totality of taxes from multiple funds!

12) Questionable application of taxation? The Universal Service Fund is being applied to charges on the local phone bill, including "Local Number Portability" and the "FCC Line Charge", which are not interstate by definition. Also, the USF charges are being taxed multiple state and federal taxes as well, adding insult to injury.

13) The phone companies are the largest recipient of the Erate because they get paid back on network charges at full business rates, no discounts for schools or libraries. With the combined buying power of the schools, why wouldn't there be discounts?

14) Major Fraud and Lack of Audits -- The FCC's Office of the Inspector General (OIG) and other regulators are finding Erate fraud, and a lack of audits. The FCC's latest report, March 2006, continues to outline that there aren't enough resources to handle the current work load.

http://www.fcc.gov/oig/oigreportssemiannual.html

"As discussed in previous semi-annual reports, the primary obstacle to an effective, independent oversight program (of Universal Service) has been, and continues to be, inadequate audit and investigative resources so that OIG can conduct its own audits and provide adequate support to investigations.... Inadequate investigative and internal audit resources have prevented the OIG from fulfilling completing the body of work it believes is essential to 'assessing fraud, waste, and abuse'."

(NOTE: The FCC released a series of changes to Universal Service June 20th, 2006, which includes taxing VOIP and increasing the wireless long distance tax.)

What should happen next?

The Senate vote comes up on Thursday, while the House is now examining USF -Contact Your Congressmen - send them this analysis and tell them to investigate, not reward the Universal Service Slush Fund.

* Need Not Greed - Low Income families have to show need before they can receive the benefits of lifeline and other services. Why shouldn't the companies receiving 'high-cost' funds base their application on need, not simply because they can collect.

* Audits -- There have been no substantial audits to determine if the phone companies are paying the correct amounts to the government, much less all of the other audits to be done.

The Math of the USF Increases has been outlined here: http://www.newnetworks.com/mathusf.htm (2005 Report, released 5/05)

For more information about this bill and the current amendments, see Drew Clark's analysis: http://www.drewclark.com/2006/06/three-drafts-of-stevens-bill.shtml

The bill also has a lot of other serious problems, see our FREE ebook. GIVEAWAY about Broadband Scandals http://www.newnetworks.com/scandals.htm

Very Dirty Phone Bill - Taxes and Surcharges, each with a sad story to tell. http://www.newnetworks.com/dirtyphonebill.htm

For more information about Phone Bill charges and Teletruth http://www.teletruth.org