FCC's net neutrality rules open door to new fee on Internet service

Phone bill fee could start appearing on broadband bills in an expansion of the Universal Service Fund program

Recently adopted net neutrality regulations soon could make your monthly Internet bill more complicated — and potentially more expensive.

Every month, consumers pay a small fee on their phone bills for a federal program that uses the money — a total of $8.8 billion raised nationwide last year — to provide affordable access to telecommunications services in rural areas, underserved inner cities and schools.

Now the fee could start appearing on broadband bills too, in a major expansion of the nearly two-decade-old Universal Service Fund program.

It's not clear yet, however, if most consumers would end up paying more in total USF fees than they do now.

In approving the tough rules for online traffic in February, the Federal Communications Commission put broadband in the same regulatory category as phone service, opening the door for the charges.

For phone service, telecom firms pass the fees directly to their customers, with the average household paying about $3 a month.

Those who opposed the net neutrality rules foresee the fees rising.

"The federal government is sure to tap this new revenue stream soon to spend more of consumers' hard-earned dollars," warned Ajit Pai, a Republican on the FCC. "So when it comes to broadband, read my lips: More new taxes are coming. It's just a matter of when."

Higher fees on Internet bills could make the service unaffordable for some people, reducing broadband adoption instead of expanding it, critics said.

The FCC held off on adding the assessment until a special federal and state board that has been weighing whether broadband providers should contribute to the fund makes a decision in the coming weeks.

FCC Chairman Tom Wheeler, a Democrat, argued that even if broadband firms are required to contribute, there are no plans to increase the annual size of the fund. That means the cost simply would be spread among more customers, and in many cases a new broadband fee would be offset by a lower fee on a consumer's phone bill.

"I think it is incorrect ... to say anything in what we have done will lead to an increase in [USF] fee contributions," Wheeler told House lawmakers at a recent hearing.

"You would have a reduction in one area that may be accompanied by an increase in another that should end up washing out because the gross number is the same," he said.

So, for instance, under his view, a customer with both phone and Internet service from the same carrier might still pay about $3 a month, but it could be split between the two services instead of allocated all to phone service.

But when pressed on the issue at a House hearing last month, Wheeler would not guarantee that consumers will not end up contributing more to the fund.

Critics pointed out that his reckoning assumes that the total amount of the fund wouldn't be increased by the agency.

The FCC sets the size of the fund, and the size has been increasing almost every year as the focus has shifted from providing phone service to providing Internet access to those without it. The fund has grown about 47% since 2004.

In December, the agency approved a $1.5-billion annual increase in the amount the fund can spend to help boost high-speed online services for schools and libraries under the E-rate program.

E-rate is one of four programs funded by the USF, which was created as part of the 1996 overhaul of telecommunications laws. The other programs provide assistance for low-income consumers, help rural residents connect with healthcare providers and help customers in isolated areas pay the higher costs of reaching them.

Rep. Greg Walden (R-Ore.), who heads a House subcommittee that oversees the FCC, proposed last month that Congress cap the fund at $9 billion a year to stop its "runaway growth."

One of the problems with assessing USF fees is that they're based on what has quickly become a less popular way of communicating. Fees are collected on a percentage of carriers' revenue from long-distance calls. Intrastate calls are subject to fees for similar programs run by individual states, including California.

Revenue from long-distance calls, however, has been declining as conventional voice calling has been replaced by email, text messaging and Internet video calling services such as Skype.

So to raise the amounted needed for the USF every year, the FCC has had to increase the percentage of long-distance revenue subject to the fee. It has risen to 16.1% in December from 8.9% at the end of 2004.

Last summer, the FCC asked the joint federal-state board that helps implement the program to make recommendations about how to expand the contribution base, including whether broadband service should be assessed.

Public interest groups have argued that because the fund increasingly is being used to pay for Internet access, companies that provide such services should be contributing.

"We're funding broadband deployment with USF, but we're not bringing broadband into the contribution base," said Matt Wood, policy director at Free Press. "That's just not sustainable long term."

The Office of Ratepayer Advocates at the California Public Utilities Commission supported the FCC's net neutrality regulations, in part, because they would give federal and state officials more ability to expand broadband access.

The rules would "ensure that broadband users share in the financial burdens" of providing the service, the office said. They also expose broadband providers to additional state fees.

But the FCC has prohibited assessing fees on broadband while it awaits the joint board's recommendation on the issue.

If broadband is subject to new federal and state telecommunications fees, consumers could end up paying a total of as much as $11 billion a year more, said Hal Singer, a senior fellow at the Progressive Policy Institute, a centrist Washington think tank.

"As soon as the joint federal-state board moves forward, states are free to do what they want," said Singer, who studied the potential effect along with Robert Litan, a senior fellow at the Brookings Institution.

Wood of Free Press said Singer's estimate vastly overstates the potential effect because states would need to take steps to adapt their various fees. In addition, the Internet Tax Freedom Act prohibits any new taxes on Internet service that weren't in place when the law was passed in 1998, although it's unclear if the restriction applies to new fees.

The National Cable and Telecommunications Assn. trade group is worried about USF fees being applied to the service provided by its members, such as Comcast Corp. and Time Warner Cable Inc.

As the FCC was considering the net neutrality rules, the group urged it to permanently prohibit assessing the fees on broadband because they would "undermine the efforts being made by cable operators and the commission to promote broadband adoption."



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