By Amy Schatz
June 1, 2006
The Wall Street Journal
(Copyright (c) 2006, Dow Jones & Company, Inc.)

WASHINGTON, DC - Internet phone users and some wireless customers may see their bills increase this year, under a proposal by Federal Communications Commission Chairman Kevin Martin to shore up a fund that subsidizes phone service for low-income and rural consumers.

Under the plan, Internet phone companies would be required for the first time to pay directly into the Universal Service Fund, which subsidizes phone services. That may be problematic for cable operators and Internet phone companies such as Vonage Holdings Corp., which have attracted customers with lower prices than competitors. They have been able to offer lower rates in part because they haven't been required to pay fees such as this one.

For consumers, the change is likely to increase monthly bills. Most phone companies pass along universal-service costs to customers. Because companies have that discretion, it isn't clear just how much phone bills would rise. The change wouldn't affect customers of traditional phone services, who already pay a fee equal to about 11% of their long-distance charges.

"It's going to be a huge additional cost, just in terms of creating new systems to track and bill," said Staci Pies, president of the VON Coalition, which represents Internet phone companies. The group estimates the change would add about $1.77 to a typical $25-a-month Internet phone bill. "One of the reasons why early adopters took [Internet phone] services is because the price was lower," she says.

Mr. Martin's proposal has begun circulating among FCC commissioners, but it isn't clear that an agreement on wording will be reached in time for the commission to vote on the matter at its meeting in mid-June. One reason for a potential delay: newly confirmed FCC commissioner Robert McDowell, who would vote on the item and is a Republican, hasn't taken office yet.

The FCC is trying to shore up the $7.3 billion federal subsidy fund, which will lose a major revenue source in August when the fee charged to high-speed Internet customers expires. The agency decided last year to deregulate Internet lines, and the expected revenue shortfall may run to hundreds of millions of dollars. Mr. Martin proposed increasing contributions from wireless carriers and adding Internet phone companies to make the process fairer, an FCC official said.

Contributions by wireless companies that use the FCC's default cap instead of itemizing revenue would increase about 9% under the proposal. Internet phone companies would be charged a rate significantly higher than wireless providers. Phone companies preferred a proposal floated by Mr. Martin to charge a fee per phone number on all customers instead of tweaking the current system. That plan stalled under criticism by special-interest groups, including the National Education Association and the American Association of People with Disabilities, which say it would unfairly place more of a burden on low-income consumers.