CALLS Order Illegal, Group Says

Consumer groups and U S West are asking a court to strike down a new access fee formula created by long-distance companies and LECs that terminate their calls.

The Coalition for Affordable Local and Long Distance Service (CALLS)-which includes AT&T, BellSouth, GTE, SBC, Sprint and Verizon-last year hammered out a new formula for universal service fees and long-distance termination costs. The order, which became effective on July 1, is designed to lower consumer long-distance rates and simplify line items on phone bills, the group says.

Though it's too early to tell whether the CALLS order has resulted in cheaper phone rates, it has created headaches-and not just for the carriers that embrace it. Consumer groups argue that the order itself is illegal, and that the CALLS formula for reimbursing LECs for terminating long-distance calls is based on faulty analysis. One industry observer views the CALLS order with deep suspicion. "It was a political compromise where the consumer got the short end of the stick," he says.

What the CALLS order says

The organization's Web site, http://www.phonebillcentral.org, says the aim of the group was to "overhaul a complex system of hidden phone subsidies which have kept long-distance phone rates artificially high, stifled subscribership and telephone usage, and limited economic growth." The order, approved by the FCC on May 31, is designed to:

· Cut the per-minute cost of providing long-distance service by $2.1 billion annually by reducing per-minute charges made by local companies to long-distance companies, thereby reducing long-distance bills.

· Simplify customer phone bills by combining fixed, per-line access charges into a single item. The subscriber line charge (SLC) was combined with the Presubscribed Interexchange Company Charge (PICC) into a single charge of $4.35 a month on July 1 to single-line residential customers.

· End the confusing distinction between primary and secondary phone lines by phasing out the higher monthly per-line charge paid by residential customers for additional lines.

· Create a new $650 million interstate universal service fund to help defray the cost of providing rural phone service, which traditionally costs more.

· Extend the Lifeline Program, which helps defray the cost of phone service for low-income consumers. By combining the PICC and SLCs, the plan is designed to expand Lifeline protection to cover all of these charges so that they are waived for low-income consumers. Before the order, Lifeline protection did not cover the per-line PICC-related fees charged by the long-distance carriers.

Whose CALL is it?

The history of the CALLS agreement can be characterized as confusing at best, or at its worst, deceptive, opponents say. The FCC used the CALLS announcement to boast about a $3.2 billion reduction in access fees that would lead to lower long-distance rates. The commission had the promise of CALLS members-who had spent months working out the deal among themselves-that they would reform their access fee structure and pass the savings on to customers.

But as everyone in the industry knows by now, AT&T the next day filed a tariff to raise its basic rates to counteract any generosity it had felt the day before. The FCC and consumer groups cried foul, and AT&T backed off-temporarily. It has since raised its basic rates in some plans, erasing the promised savings, says Michael J. Travieso, Maryland People's Counsel and chairman of the National Association of State Utility Consumer Advocates (NASUCA). "These people are in business," he says. "They're not going to give that up."

We'll see you in court

NASUCA, the Texas Public Utility Counsel, and U S West Communications Inc. are taking the FCC to court over the order, which Travieso says is illegal, based on bad math, and unfair to consumers. The organizations filed a petition Sept. 20 asking the U.S. Court of Appeals for the Fifth District in New Orleans to reverse the order and force the commission to perform a cost study to determine whether the CALLS model is flawed.

NASUCA says basic telephone service charges shouldn't be used to cover the entire cost of the local loop. "The main argument is that it violates federal law," he says. "There's a provision in the 1996 act, section 254(k), which as we read it prohibits the FCC from assigning 100 percent of the cost of the local loop to basic telephone services. What 254(k) says is that those services that constitute universal services shall bear no more than a reasonable share of joint and common costs. You can't put 100 percent of your interstate cost of the loop on basic telephone service. That's exactly what the CALLS proposal does, however. We're asking the court to tell the FCC that they can't assign 100 percent of the local loop costs to basic services."

Where is benefit for consumer?

"The CALLS decision changes how much the carriers pay by doing two things," Travieso says. "It eliminates a fixed payment per line that the IXCs used to pay to the LECS, and it lowers their per-minute payment.

"AT&T, for instance, might pay Verizon a flat rate and a per-minute rate for the call. In addition to that, the end customers are also required by the FCC to pay a flat rate, the subscriber line charge. So those three kind of rate elements are how the LEC collects its revenue to recover the cost of the local line," Travieso says.

"The CALLS order eliminates the flat rate on the IXC; they don't have to pay it anymore. It rolls into the customer via the subscriber line charge. The SLC will go up from $3.50 to $4.35 in the first year, and goes up every year to $6.50 at the end of the five-year period," he says.

"The FCC also created $650 million USF, a new fund. Customers now have to pay 35 cents per month, to Verizon, for instance. That was never on your bill before. What the FCC is doing is touting this as a consumer benefit, but over the five-year period, Verizon will collect more under the new plan than if the old plan had stayed in effect. And the folks that are going to pay this are the end user."

The plaintiffs also say CALLS members didn't perform a cost analysis to arrive at the $650 million USF figure. "There is no record before the FCC that would support that number," he says. "They took to the FCC a range of estimates that ranged from a negative number to $1.2 billion. They didn't do any analysis, they just picked a number," he says.

The CALLS plan also shifts the burden of payment to the wrong end of the loop, Travieso says. "Under the old plan, using the productivity factor, the PICC went down every year, and the revenue the ILECs had to collect every year went down," he says. "The ILECs will collect more, and the IXCs are going to pay less-and the consumers are going to make up the difference."

Tough to get the bills right

Carriers, both long-distance and local, faced challenges implementing the new rates on customer bills. The changes in the structure necessitated redesigning consumer bills, an exercise that led to some frustration, says CALLS spokesman John Nakahata. "It was obviously a very big order. A number of things had to get met, such as getting the changes in the bills to reflect the different subscriber line charges, the PICC line charge, the federal line charge. Some were trickier than others, such as the ILEC universal service charge. Basically, you had to add a line to the bill or find a different way to deal with it, because it was difficult to do," he says. "Carriers don't charge universal service fee to Lifeline subscribers, so you had to differentiate between Lifeline and non-Lifeline subscribers on the bill."

Carriers are still changing their bill makeup to reflect the new model, he says. "We're still in the midst of implementing the FCC's order for universal service under the CALLS order. Lifeline is so complicated, it varies from state to state and carrier to carrier," Nakahata says.

Predicting FCC ruling

To speed up the changes to the bills, carriers had to predict the tariff requirements the FCC might put in its final order and create the paperwork to handle the changes, he says. "In this case we had to do a little bit of betting by doing some implementation planning before things were final," he says. To help facilitate the transition, CALLS members developed templates to deal with possible changes the order might bring about. "We were also working on the kinds of administrative forms that might be needed to prepare for those tariffs," Nakahata says. "It would have taken six months longer if we hadn't been involved."

Some unfinished business remains, such as a disbursement from the USF Corporation, which owes payments to carriers that provide service in high-cost areas. Some carrier bills already reflect the new USF charges, and the carriers were still waiting for the administrator to reimburse them as late as early October. "The carriers forward-funded the transition for two or three months," Nakahata says. "You could roughly say in the neighborhood of $100 million is owed to the carriers. It's just a matter of getting the administrator to get it done."

Educating the public

The CALLS members also promised the FCC that they would educate the public on the changes and how they affect monthly bills. The carriers set up a central Web site that explains the CALLS order, lists contact numbers, explains the USF and Lifeline programs, offers advice on how to shop for long-distance service, and provides other tips. The Web site is designed for community groups such as churches, legal aid organizations and other local groups to pass the word on to low-income residents, Nakahata says, because customers without phone lines also don't have access to the Internet.

But can the FCC, with its CALLS order oversight office, force the carriers to keep their word to keep long-distance rates down? Travieso believes the FCC lacks the teeth.

"Let's assume AT&T adds back the $3 MUC, he says. "They file the tariff putting the charge back in. What can the FCC do? They can get mad at the company, but it's hard to imagine how the FCC is going to regulate the agreement."