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from: Nieman Watchdog

Why is Congress considering such anti-consumer telecom bills?

ASK THIS | July 26, 2006

Activist Bruce Kushnick writes that both telecom bills before Congress would be huge giveaways to the very same telecommunications giants that have in the past pocketed massive government subsidies while shafting consumers and knee-capping American competitiveness. But they've taken very good care of members of Congress

By Bruce Kushnick
Bruce@teletruth.org

Q. Is 200KBPS a reasonable broadband standard for America? (Asian countries are now using 100 Mbps in both directions for their standard. That is 500 times more powerful.)

Q. Given that the telcos have repeatedly failed to live up to the promises they made in return for huge subsidies in the past, why would it be different this time?

Q. Who is speaking on behalf of the consumers?

Q. Why do phone companies with excessive profit margins need Universal Service Fund subsidies?

Congress has decided to update the Telecommunications Act of 1996. There are two proposed bills; both would benefit the large telephone firms at the expense of consumers. The press has pretty much left the public in the dark when it comes to what these bills would do. Decent coverage is long overdue, especially considering the likely increases in telephone, broadband taxes and new Internet constraints on users.

The 1996 legislation had the stated purpose of having the telecoms compete to spur on advanced networks and lower prices to consumers. That didn’t happen; instead America is 16th in the world in broadband access and competition has been removed. Firms that stand to benefit the most, like Verizon and AT&T (formerly SBC Communications), are offering new networks but they are crippled networks that will never be competitive on a global basis. They are simply too expensive and too slow.

In earlier articles in this series, I highlighted how the phone companies in the 1990s promised to deploy fiber optic services to America and pocketed over $200 billion but never delivered, how the FCC helped to kill off competitors on customer-funded networks, and how the telecoms have now taken exclusive rights to public-funded property.

The proposed House bill is titled the Barton “COPE bill: Communications, Opportunity, Promotion, and Enhancement Act of 2006, H.R. 5252 (Joe Barton, R-Texas).

The Senate bill is the “Stevens bill” (Ted Stevens, R-Alaska), S. 2686, Communications, Consumer's Choice, and Broadband Deployment Act of 2006 (Introduced in Senate).

These bill names use D.C.-Speak, a modern Orwellian vernacular. Both would give the Bells new incentives in the form of national franchises with no "build-out" requirements for states or cities to be fully wired. The cable companies currently have local franchises, where the companies have to meet specific requirements for local provisioning, such as local access channels. This new corporate “one size fits all” national franchise is not about customers but about expediency and lack of community services, as the House bill allows the new entrants (that is, the phone companies) not to worry about local, existing obligations. The House bill adds an additional 1 percent tax on the cable operators' gross revenues, and the language of the bill states that the operators can “designate that portion of a subscriber's bill attributable to such payment”, meaning that new taxes can be charged directly to the customer.

The phone companies have had extensive financial incentives before, but they have never fulfilled their obligations. Rewarding them for such a record is brazen, and raises the question of whether Capitol Hill lawmakers are in cahoots with the telecoms.

By 2010, the entire state of New Jersey – 100 percent – was supposed to have fiber-optic based 45 mbps bidirectional service, deployed in rich and poor areas, rural, urban and suburban alike. Other states had similar deals. Since 1993, customers have been paying higher phone rates and telecoms also have been getting tax breaks. The result was supposed to be intensive new construction. That hasn’t happened.

Imagine building a highway: Wouldn’t the regulators and lawmakers want to examine what happened in the past before freeing companies to simply build roads wherever they want? Wouldn’t it be more prudent to actually hold the companies accountable for deployments, much less the extra financial perks?

History, as a predictor for future events, dictates that serious build-out requirements for all municipalities and financial accountability should be key parts of new legislation.

There is virtually nothing to show for past commitments, many made as part of state law as well. And now the companies are asking that government "trust them"?

If America is really going to modernize its telecom system, you would think new legislation would require companies to be able to compete globally, with comparable speed and service capability. Both current bills call for America’s broadband standard to be 200KBPS in one direction. That is 1/5 of a megabit. Asian countries are now using 100 Mbps in both directions for their standard. That is 500 times more powerful.

Unfortunately, even the new products, Verizon's FiOS, and AT&T's Lightspeed, are inferior, crippled services that can't compete globally today and may never be fully deployed. These networks are lower in speed and higher in price than anything offered overseas. (SBC acquired AT&T in 2005; it is sometimes referred to as SBC and sometimes as AT&T.)

Shouldn’t the rewrite of the Telecommunications Act have a vision of the future that is not already part of history as the wrong direction?

Net Neutrality

The concept of “Net neutrality” is central in both bills – in that it is missing in both. Net neutrality refers to open access of data-transmission lines without favor to all Internet users, giving telecoms no control over content or applications. But the phone companies claim that they need more money to pay for new network investments and that Net neutrality harms their bottom line. Without Net neutrality, the proposed legislation gives the phone companies greater control of their networks, letting them charge more, offer different levels of service to customers, and place restrictions on what customers may do online.

The public funded the telecoms, and Congress in the Telecommunications Act and state law acknowledged the customer financial incentives in exchange for open networks, or “common carrier” obligations. No phone company has lived up to its obligations. Yet Congress apparently takes the view that this time there will be competition and this time the companies will not block or harm competitors.

Raising Universal Service Fund Taxes

On phone bills right now, every customer is paying what are called Universal Service Fund taxes, either state or federal or both. The federal tax varies but around 11 percent is currently tacked on to all long distance and international calls, including land lines and cell phones.

Because of really bad regulation, a Universal Service Fund tax is also applied to other charges on your phone bill, including the FCC Line charge (which is on your local phone bill) and even the local number portability charge.

The Universal Service Fund is supposed to subsidize schools, libraries, rural health care providers, and low-income phone users; these organizations get a discount for their services while the telco gets paid back in full for residential or business rates.

My group, Teletruth, has written separately about the Universal Service fund from the position of the proposed legislation. The fact is, the Universal Service Fund is little more than a slush fund, and the Senate bill would make it worse.

For one thing, the Stevens bill would increase USF costs to consumers by 200 percent, on average. It would add charges to local and toll service, which are the largest costs to customers, and it would increase the charges on wireless phones. It also would add charges to VOIP (use of the Internet as a telephone) and broadband, even though they are supposed to be exempt. In the past, VOIP and broadband were considered "information" services, and therefore not required to pay USF charges. However, right now every service is up for grabs.

From 1999 to 2005, Universal Fund charges on long distance phone calls increased by 185 percent, going from 3.9 percent in 1999 to 11.1 percent. (In the second quarter of 2006, the charge was 10.9 percent.) The largest part of this fund is not for wiring of schools and libraries and the like, but for so-called "high-cost support", which are corporate subsidies to the phone companies. The high cost support represents over 60 percent of the total collected, doubling from $1.7 in 1999 to $3.5 billion in 2004, and growing.

These funds are not going to corporations that need the money. Many of the phone companies receiving funds, such as Centurytel, Inc., or Citizens Communications Company have higher than 50 percent profit margins in terms of earnings before interest, taxes, depreciation and amortization (EBITDA), a standard business measurement that shows firms’ revenues in relation to primary working expenses, not including network upgrades. This high EBITDA is in large part due to the high-cost fund.

USA Today (November 14, 2004) found that one small telco, XIT Rural Telephone Cooperative, which serves only 1,500 customers in Texas, 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,” the article said.

A recent report on Universal Service sponsored by the Seniors’ Coalition found that some rural companies in states including Texas, Hawaii, Alaska and Arizona are receiving from $2,900 a line to $13,000 a line in high-cost fund benefits, not counting what the customer actually pays the phone company for service.

Many states have also added statewide high-cost funds and other Universal Fund type taxes that are already covered under the federal program. This is the equivalent of double taxation, sometimes quintuple taxation. To my knowledge, no one in a position of authority has examined the totality of taxes from multiple funds!

Daniel Berninger of Tier 1 Research, an independent tech research firm for investors, wrote an open letter to the Senate Commerce Committee saying that the "Universal Service Fund generated remarkably meager results for $50 billion spent."

Astroturf groups (phone company funded) sprout over these issues

Like unwanted weeds, many fake grass-roots groups have sprouted – Astroturf groups, you could call them – and lots of biased research reports have been pouring out over issues such as franchise agreements, Universal Service and Net neutrality.

One such group is called “Hands Off the Internet.” Its co-chairman is Mike McCurry, press secretary to former President Clinton. In fact, this is not a citizens group in the normal sense but a lobbying group whose major members are telecom firms.

Hands Off The Internet describes itself as “a nationwide coalition of Internet users united in the belief that the Net's phenomenal growth over the past decade stems from the ability of entrepreneurs to expand consumer choices and opportunities without worrying about government regulation.”

Here’s their membership: mostly phone companies and other Bell-funded groups.

Another group is Consumers for Cable Choice, led by a person who ran an AT&T fake group called Voices for Choices. Their Web site says the reason you should join is to “Tell Congress to Make Cable Choice a Priority”:

“Consumers deserve, need and want real choice in video services as soon as possible. At the stunning rate of $260 every second nationwide, American consumers are seeing hard-earned dollars pour out of their pockets for a total of over $8.2 billion in annual savings that consumers are missing.”

Here’s what Common Cause wrote about this group: “Consumers for Cable Choice, on the other hand, is financially backed largely by telephone companies, including Verizon and AT&T - the very companies that would benefit the most if Congress makes it easier for competitors to enter the cable television market.”

The ‘Keep USF Fair Coalition’

Our personal favorite is the “Keep USF Fair Coalition,” which has been around for years. It includes multiple fake consumer organizations, many of whose members are funded by the Bell companies. While the groups sound like they care, their principal point has been to call for an increase in the tax, and for VOIP to be taxed.

This group’s core organizations represent senior citizens, Hispanics, blacks, low-income households and people with disabilities. Of course, raising rates doesn’t help these memberships, who might better be served by calls for investigations of the money.

Business cozies up to Congress?

One authentic grass roots group, Save Access.org, found that the Democratic House sponsors of the COPE bill received considerable money for their pet projects. It wrote, “This is a bi-partisan Bill, the Democratic co-sponsor is Rep. Bobby Rush (Ill.) whose non-profit community center received one million dollars in donations from an AT&T/SBC foundation over the past five years. Rep. [Joe] Barton [R-Texas] has pushed hard to get this legislation passed quickly and without revision.”

On the Senate side, I was surprised to see that there were sections of the bill dedicated to Alaska and Hawaii, the home states of Senator Stevens (R) and Daniel Inouye (D), co-sponsors of the bill, and that there was considerable increase to rural unserved markets for broadband to be paid for by the higher Universal Service Fund fees.

More surprising is that there is an entire section of the bill devoted to satellite services to be used in Alaska and Hawaii. TVPredictions, an online publication about new TV technologies, outlined how a significant portion of Stevens’s campaign contributions come from Rupert Murdoch’s stable, including DirecTV. Dated July 10, 2006, the report said that Stevens, “the powerful chairman of the Senate Commerce Committee, is pushing legislation that could give the Rupert Murdoch owned-DIRECTV a huge advantage over the cable TV industry.”

“Stevens has not explained why he supports the legislation,” it went on, “but TVPredictions.com has learned that nearly 10 percent of the senator's 2005-2006 individual campaign contributions have come from employees of companies owned by Murdoch, such as News Corp., Fox and DIRECTV.”

Something wrong with this picture? Ties between the various politicians and their funders influencing these bills?

And money has been flying all over the place from the phone companies to curry favor. The Center for Public Integrity wrote:

“Telecommunications companies spent $60.3 million on political contributions over six years and a minimum of $83.4 million on lobbying over two years in an attempt to curry favor with elected officials in the states, according to a new Center for Public Integrity analysis.” [Click here for the full story.]

We don’t need a new bill. We need accountability and enforcement and customers should have their rights returned.

The existing Telecom Act is flawed: There was no enforcement or accountability. But the new bills in Congress do not fix the primary problem – that customers’ rights have been taken away. Most customers no longer can use their own independent Internet Provider when they go from dialup to broadband (though some of the very large Internet providers have been able to cut a deal with the telcos). The phone companies got rid of line-sharing as well the wholesaling for their DSL broadband product. And competitors can no longer rent the phone networks, which included the original AT&T and MCI, who were forced to stop selling local service because it became unprofitable. Even the new networks are off limits. This is the opposite of the Telecom Act’s primary reason for existence – to bring in competition that would lower prices and bring advanced services.

The idea that "deregulation" now means "free the monopoly from pesky competition" is yet another twist in this tale. Therefore, simply reinstating the rights that customers were granted a decade ago should be the first on the agenda.

The second major problem is enforcement and accountability. The FCC’s track record on enforcing the provisions of the Telecom Act or the phone company mergers is non-existent. Individual states’ ability to monitor the companies’ infrastructure progress has also been missing in action.

For example, when SBC merged with Ameritech, it promised to be competing with wireline competition in 30 cities outside its region. The FCC never held them accountable under the rationale that if there were at least three customers in a city, that equated to “robust” competition. When it comes to small businesses, the FCC helped put 6,000 Internet providers out of business. It deregulated the Bell companies while re-regulating the ISPs and competitors, eliminating the basic laws of the Telecom Act of 1996. It did not enforce the protections built into the laws, so that the ISPs and competitors received sub-standard services from the telecoms.

Diversity

The Telecommunications Act of 1996 had at its core competition and diversity through the elimination of market-entry barriers and the express favoring of “diversity of media voices, vigorous economic competition, technological advancement, and promotion of the public interest, convenience, and necessity.”

Is real competition important? Most people reading this went online with an independent Internet Service Provider because this law said they could. These entrepreneurial firms created the skill and expertise to help customers navigate the Internet and World Wide Web. In fact, these companies, and NOT the phone companies, were the innovators. Ironically, the ISPs even helped to sell phone company second lines.

The original Telecom Act realized that innovation was for small business to add a telecom diversity. Instead, there is a duopoly, which is not competition; it is splitting up the world between two non-innovative companies.

Rewrite the Telecom Act of 1996? Don’t COPE: Revolt is the better solution.

Bruce Kushnick has been a telecom analyst for 24 years, and is currently the chairman of Teletruth, an independent customer advocacy group focusing on broadband and telecom issues, as well as executive director of New Networks Institute, a market research firm.

E-mail: bruce@newnetworks.com