Testimony, Comments & Press Releases

The National Association of State Utility Consumer Advocates (NASUCA) is an association of 42 consumer advocate offices in 39 states and the District of Columbia. NASUCA’s members are designated by the laws of their respective states to represent the interests of utility consumers in state and federal regulatory proceedings and in the courts. NASUCA has previously participated in numerous proceedings, rulemakings and inquiries conducted by this Commission.

NASUCA appreciates the Commission’s recognition of the need for reform of the Universal Service Fund contribution mechanism and the manner that such contributions are reflected on the bills of consumers of telecommunications services. In these comments NASUCA advocates that carriers be allowed flexibility to recover their universal service assessments in any lawful manner, so long as the carrier does not use surcharges or line items to recover such assessments. NASUCA believes that elimination of surcharges and line items as a means to collect universal service assessments is the best way to promote and advance universal service, and to ensure consumer welfare. The adoption of the recommendations contained in these Initial Comments will result in a contribution and collection system for universal service which reduces complexity and confusion and benefits telecommunications customers in general.

In spite of repeated Commission efforts over the past five years to discipline interexchange carriers (carriers) in their method of collecting universal service fund (USF) assessments, the fact that the Commission is engaged in the current notice of proposed rulemaking (NPRM) speaks eloquently of the failure of those past efforts. NASUCA believes that only a fundamental change in Commission tolerance of carrier behavior will result in an approach to recovery of USF assessments that will truly serve the public interest. That fundamental change should be the prohibition of surcharges and line items used to recover USF assessments from end-users. In short, carriers should be allowed to recover USF assessments in their rates as a legitimate cost of business, but resort to surcharges and line items should be prohibited.

NASUCA urges the Commission to recognize that carriers have caused great and widespread customer confusion based on the manner in which USF surcharges have been billed to customers, and by means of carrier communications with customers explaining those charges. Each carrier has been free to designate its own label on its own bill. The result has been labels and surcharges which are misleading or confusing. Customers who made the effort to inquire further were often provided with incorrect characterizations of these charges, which led customers to believe that the surcharges constituted taxes or required regulatory fees. Many parties have also questioned whether excessive end-user surcharges have led to unjust enrichment of carriers and the improper shifting of USF responsibility to certain groups of customers.

The Commission’s proposed uniformity provisions would be an improvement to the status quo, however, the proposal falls short of ensuring the maximum fairness and consumer benefit which would ensue from an outright ban on USF surcharges and line items. Partial reforms are unlikely to end the abuses that the Commission has allowed to continue for the last several years. While NASUCA applauds the Commission’s efforts to reform the USF contribution mechanism and consider approaches that may mitigate inflated recoveries, undue complexity, misleading nomenclature, and discriminatory results, those goals can be achieved more effectively by a simple ban on USF surcharges and line items.

Federal USF payments began in 1986 to support local carriers with high loop costs. Lifeline support payments were added in 1988, long term support was added in 1989 and local switching support was added in 1993. By 1997 the federal USF amounted to $1.8 billion annually. Carriers recovered their contributions to the USF, whether implicit or explicit, through the price of the services they sold to end-use customers. There were no USF surcharges or line items on customers’ bills.

In February 1996 Congress passed the Telecommunications Act of 1996 (the Act) which contained specific provisions in Section 254 empowering the Commission to implement various universal service principles. Section 254(d) of the Act required all carriers to contribute to federal universal service support mechanisms, while Section 254(e) required that universal service support received by eligible carriers be explicit. There was no language in Section 254 or elsewhere in the Act which required or prohibited surcharges or line items related to universal service on the bills of end-users.

On May 7, 1997, the Commission adopted the First Report and Order on Universal Service. In that Order the Commission substantially reformed and expanded the federal USF, and included a $2.25 billion schools and libraries fund. The Commission also addressed the issue of how carriers should be allowed to recover contributions to the USF from their customers. The Commission rejected the suggestions of numerous carriers that the Commission mandate an end-user surcharge, stating "…an end user surcharge is not necessary to ensure that contributions be explicit." Instead, the Commission decided to: "…allow carriers the flexibility to decide how they should recover their contributions….Mandating recovery through an end-user surcharge would eliminate carriers’ pricing flexibility to the detriment of consumers." The Commission at that time cautioned carriers to "…include complete and truthful information regarding the contribution amount. …[I]t would be misleading for a carrier to characterize its contribution as a surcharge."

Nevertheless,soon after the entry of the Commission’s USF Order giving carriers "flexibility" in recovery of USF assessments, carriers began to impose the surcharges that are now the subject of this rulemaking. The outcry from consumers was immediate, and the number of customer complaints rose dramatically. In response to those new end-user surcharges, then FCC Chairman William Kennard wrote letters to each of the three largest interexchange carriers, which began:

I am writing to you regarding the growing body of evidence that suggests that the nation’s largest long distance companies are raising rates when their costs of providing service are decreasing, and are blaming congressional actions and federal implementation rules for those rate increases even though recent actions of this Commission have in fact reduced the long distance companies’ costs.

In spite of concerns expressed by the Commission and members of Congress, carriers continued to impose surcharges on end-users in order to recover USF assessments. In it’s Second Recommended Decision the Federal-State Joint Board on Universal Service recommended that the Commission consider imposing uniform nomenclature and uniform assessment rates if surcharges were used. The Joint Board stated: "Some carriers may attempt to exercise market power and recover through universal service charges in a non-competitive fashion more than they are contributing to universal service, believing they can describe those charges as mandated by the Commission or federal action." The Joint Board also recommended that the Commission address such issues in its "Truth-in-Billing" docket.

Unfortunately, the Commission rejected these recommendations. In its subsequent Truth-in-Billing Order the Commission adopted guidelines which continued to provide carriers with flexibility to bill customers as they saw fit, so long as the billing format complied with the Commission’s broad guidelines. The Commission specifically refused to adopt "…more prescriptive rules… to combat consumer fraud through the use of misleading telephone bills." The Commission also refused to address the uniform assessment issue raised by the Joint Board.

Not surprisingly, the Commission’s action - or lack of action - failed to cure customer confusion or to staunch the flow of customer billing complaints. As USF assessments have risen, the surcharges imposed on customers’ bills have soared, sometimes to levels twice as high as the underlying assessment on carriers. In response to this unresolved problem, the Commission initiated the current proceeding and proposed the imposition of "…a uniform universal service line item that corresponds to the contribution assessment on the carrier." As discussed in the comments below, NASUCA does not believe the Commission’s proposal addresses the fundamental problems inherent in surcharges and line items used to recover USF assessments, and recommends that the use of such surcharges and line items be clearly banned.

IV. THE COMMISSION SHOULD PROHIBIT USF END-USER SURCHARGES BECAUSE THEY ARE INHERENTLY CONFUSING TO CONSUMERS, ARE HARMFUL TO A COMPETITIVE MARKET, AND ARE UNNECESSARY

The Commission’s proposals aimed at enhanced uniformity, efficiency, and fairness are laudable but fail to address the real issues associated with end-user surcharges. Even if every carrier were required to use the same nomenclature, amount, and explanation of the charge, consumers will continue to be harmed. Consumers will continue to be bombarded with advertising promoting per-minute rates that substantially understate the real cost of the product. In addition, end-user surcharges will continue to insulate a substantial portion of consumer rates from the effects of competition.

The simple truth is that the Commission has failed to come to grips with the basic problem in carrier billing: surcharges and line items are inherently misleading and deceptive. In its Truth-in-Billing Order the Commission recognized the rampant customer confusion caused by carrier surcharges and line items, but stated "…the failure of carriers to label and accurately describe certain line item charges on their bills has led to increased consumer confusion about the nature of these charges." The Commission was wrong. It is the surcharges and line items themselves which have caused the confusion and deception, and no amount of description or uniformity will cure this inherent flaw. The simple solution, the best solution - the only solution - is to eliminate surcharges and line items used to recover USF assessments.

1. Surcharges and Line Items Hide the True Price of Service

Even with a new rule requiring uniformity, consumers will continue to be misled about the total costs of service so long as surcharges and line items are used to recover USF assessments. Most fundamentally, the use of surcharges and line items for recovery of USF assessments allows long distance carriers to engage in deceptive advertising. Although the USF assessment is a cost of doing business - just like access charges or CEO stock options - USF assessments are not included in the advertised cost of long distance service. This is solely because of Commission policy allowing carriers the option of surcharging the USF assessment. As a result, a carrier with a self-determined 10% USF surcharge, can advertise its rates as 10¢ per minute. In reality, a customer of that carrier will be paying a higher rate than advertised - 11¢ per minute – solely because of the Commission policy allowing recovery of the USF assessment through surcharges.

Another ongoing source of confusion arises from the fact that consumers are not told, and often been unable to determine, what rate components are subject to USF surcharges. For example, there seems to be inconsistency in the application of USF surcharges to billed minimums, billed monthly fees, and intraLATA services. Nothing in the Commission’s proposal appears to address this problem. However, even if such billing practices were required to be uniform, consumers would still be required to do substantial arithmetic in order to determine the real cost of a given service. The end result for customers would not be substantially different from the current intolerable situation. The Commission should declare that surcharges are inherently unfair, inherently deceptive, and serve no purpose other than to create the appearance of lower usage rates – the only rates that are usually disclosed in advertising.

2. Surcharges and Line Items Inhibit Comparison Shopping

Surcharges make it very difficult for consumers to shop for telephone services. Currently consumers cannot effectively compare the rates of different companies or for different types of calling services. For example, the cost of a presubscribed service which advertises a per-minute rate, but adds a USF surcharge of 12%, cannot be easily compared with a prepaid calling card service offered by the same or a different company that adds no USF fee. Based on advertised rates, the consumer may easily make the wrong choice, thereby introducing market distortions.

Such market distortions harm the development of competition, deprive many customers of the ability to make the most economical choices, and encourage carriers to advertise one rate and charge another. A true competitive market relies upon clear and readily available information. Moreover, even if a consumer were determined to do the complex arithmetic necessary for such comparisons, that consumer would have no way to determine what billing components a percentage-based surcharge would inflate. By prohibiting surcharges and line items used to recover USF assessments, the Commission would eliminate customer confusion and encourage "apples-to-apples" price comparisons of telecommunications offerings. Those carriers that were able to recover all of their costs - including the USF assessment - in the price of their service and still attract customers would be the carriers which would prevail in the market.

The critical importance of clear and unambiguous advertising of long distance services has previously been recognized by this Commission. In March 2000 the Commission issued a joint policy statement with the Federal Trade Commission (FTC) which set forth the central role played by advertising in the development of a competitive telecommunications market:

…advertising plays a critical role in informing consumers about the myriad choices in long-distance calling and, in the case of dial-around services, advertising is generally the only source of information consumers typically have before incurring charges. With accurate information, consumers benefit from being able to choose the particular carrier that meets their long-distance calling needs at the most economical price. However, if consumers are deceived by the advertising claims, they cannot make informed purchasing decisions and ultimately the growth of competition in the long-distance market will be stifled. [Emphasis added.]

The Joint Policy statement also recognized that price is the single most important factor used by consumers in making purchasing decisions:

The central characteristic touted in most long-distance advertising is price. As noted above, price representations are presumptively material to consumers. What matters to consumers is not just the per-minute rate, but rather how that rate, along with all additional fees and charges, will ultimately be reflected in the charges they see on their monthly phone bills. [Emphasis added.]

Simply stated, allowing carriers to continue the use of surcharges and line items to recover USF assessments will continue to hide the true rate reflected on the customer’s monthly bill, and will continue the confusion and deception in long distance pricing. These practices are directly contrary to the clear principles laid out by the Commission and the FTC in the Joint Policy Statement. No amount of explanation, no uniformity of description will remedy the central fact that consumers are being offered one price, but being charged another. In order to truly effectuate the basic consumer protection tenants contained in the Joint Policy Statement, the Commission should prohibit the use of surcharges and line items to recover USF assessments.

B. Surcharges and Line Items Are Inherently Anti-Competitive

1. Surcharges Insulate Costs from Competition

The Commission should adhere to a policy that encourages price competition based on the entirety of the costs of doing business. Pass-throughs, by their very nature, are antithetical to efficiency incentives and competition. To the extent that carriers are allowed to isolate certain costs and pass them through dollar for dollar (or inflate them), the incentive for efficiency is reduced. Carriers should be required to incorporate USF contributions as a cost of doing business and recover those costs in their competitive rates. Requiring carriers to end the practice of separate surcharges would not harm carriers because the Commission places virtually no limits on the prices the carriers charge.

A competitive market, if it exists, will tend to drive prices toward marginal costs. USF contributions will increase marginal costs for all carriers, but consumers may benefit if carriers compete to handle these costs in the most efficient manner, or if some carriers decide to absorb a portion of the cost in order to gain market share. If a particular carrier passes on more than its real contributions, it will suffer in a competitive market because its prices will be visibly higher. Surcharges are inherently inconsistent with competition and consumer welfare, regardless of whether those surcharges are uniform or not, because surcharges hide the true price of a service. Surcharges should be prohibited.

As previously noted, in spite of the fact that the Commission assesses all carriers equally for universal service, the surcharges imposed by carriers on end-users vary widely. The carriers have alleged that these different surcharge rates are necessary to reflect the different costs of different carriers of recovering this uniform assessment. Assuming arguendo that the carriers are entirely correct and each carrier incurs a different cost to recover the uniform USF assessment, the end result is that less efficient carriers are favored by end-user surcharges. Because a less efficient carrier can encapsulate its inefficiency in recovering USF costs within the surcharge rate, it can still advertise lower usage rates for its services and retain market share. In other words, because of the surcharge, the less efficient carrier does not feel the competitive impact of its inefficiency. The Commission should not promote such distortions of a competitive market.

Former Chairman Kennard’s letter cited earlier points to another troubling aspect of end-user surcharges: carriers use surcharges to pass on new costs, while new savings may not be passed on at all. End-user surcharges facilitate this inequity by providing "cover" for rate increases, by allowing for advertised rates to mislead consumers, and by removing competitive pressures from those rate increases. Because the long-distance market is not perfectly competitive, cost savings are often not passed on to consumers. For example, the Commission should take notice that the latest round of access charge reductions that resulted from the CALLS Order has not resulted in lower long-distance rates. In fact, various carriers, including the big three, have actually increased rates since the CALLS Order.

The Commission continues to have the jurisdiction and obligation to ensure that rates remain just and reasonable. However, the rapidly growing revenues associated with USF surcharges, and the lack of symmetrical rate decreases for access rate reductions, have resulted in rates that are not just and reasonable. In the CALLS Order the Commission addressed its authority to remedy undue inflation of similar surcharges:

We are troubled by these mark-up allegations and remind carriers of our statutory authority to investigate any charges that appear unreasonable or unlawful. [footnote omitted]. We will not hesitate to take action on a case-by-case basis against carriers that impose unjust or unreasonable line item charges. [footnote omitted].

Although the Commission was discussing the primary interexchange carrier charge (PICC) in the above passage, the same concerns are also relevant to USF end-user surcharges. The Commission should ban regulatory-related surcharges because they tend to ensure rate increases while consumers get no similar assurance of savings from offsetting cost decreases. If carriers are entitled to mandatory recovery of USF contributions through surcharges and line items, consistency would require that consumers be entitled to reciprocal mandatory billing credits for access cost reductions resulting from regulatory actions of the Commission. This has obviously not been the case.

In the NPRM in this proceeding, the Commission noted that even though recent USF assessments on all carriers have ranged from 5.6% to 6.8%, carriers have imposed surcharges on end-users ranging from 5.8% to 12%. The Commission also noted that such discrepancies "…are inexplicable to the casual observer." The use of surcharges far in excess of the assessment rate imposed on carriers raises concerns that some carriers are recovering through surcharges more than they are assessed for universal service support. Verification or refutation of these claims would necessarily involve complex and time-consuming auditing procedures.

These concerns are unnecessary if surcharges and line items are eliminated. If USF assessments are recovered like any other cost of business – through the price of services – it is really irrelevant what portion of that price goes to support any particular cost. So long as the customer has understood the price offered, and has accepted that price, it does not matter whether any individual cost is underrecovered or overrecovered. All that matters to the customer is what he pays, and all that matters to the carrier is whether all of its costs have been covered and it has made a profit. Carriers that can most efficiently recover all of their costs – including USF assessments – and offer lower prices, will be successful.

In the First Report and Order on Universal Service, the Commission allowed carriers to impose surcharges to recover USF assessments, but cautioned that "carriers may not shift more than an equitable share of their contributions to any customer or group of customers." As is obvious from the discussion above, past verbal injunctions from the Commission have not been sufficient to stop abuses of the flexibility currently allowed by the Commission. Different methods of recovery outside of rates result in shifting disproportionate amounts of USF contributions to different customer groups. For example, percentage-based recovery surcharges may recover a disproportionate amount of USF support from large users of telecommunications services, while per line surcharges may recover a disproportionate amount from low-usage or no-usage customers.

By prohibiting the use of surcharges and line items to recover USF contributions, such contributions will have to be recovered in the overall rates charged for services. Because consumers will be able to see the true price of service, they will be able to make economically rational choices among different carriers and different calling plans. A carrier that attempts to recover USF assessments - or any other general cost of doing business - only from calling plans directed to one customer group, will inevitably lose market share to carriers which spread the cost of USF contributions over all calling plans. By prohibiting the use of surcharges and line items to recover USF contributions, the Commission will actually increase the flexibility of carriers to price their products, and increase the ability of consumers to make choices based on the true price of the service.

3. State Experience Has Shown That Surcharges and Line Items Are Not Necessary

As previously mentioned, this Commission has allowed carriers the option of recovering USF assessments through surcharges or line items. This policy is not mandated by the Telecommunications Act of 1996 or any other federal statute. Rather it is a policy decision of the Commission which can be changed by the Commission. As a practical matter, the existing Commission policy has resulted in the widespread abuses related to surcharges and line items that the Commission is now trying to remedy.

Consumers do not necessarily have to put up with policy-engendered confusion and market distortion. In 1995 the state of Georgia rewrote its telecommunication laws and created a statewide Universal Access Fund. Section 167(h) of the Georgia statute banned end-user surcharges: "A local exchange company or other company shall not establish a surcharge on customers’ bills to collect from customers contributions required under this Code section." This principle was recently ratified by the Georgia Public Service Commission in a state universal service proceeding: "In order to be in compliance with the requirements of the statute, the Commission can not allow carriers to establish a surcharge on customers’ bills for the purpose of recovering their Universal Access Fund contributions." The Georgia Universal Access Fund has operated since July 1996 without recourse to surcharges or line items on customers’ bills to recover carrier contributions to the Georgia fund. The Georgia universal service assessments are recovered in the cost of services provided to consumers. There is no reason why the Commission cannot adopt a similar policy on a national basis.

IV. THE COMMISSION HAS THE LEGAL AUTHORITY TO PROHIBIT SURCHARGES AND LINE ITEMS USED TO RECOVER USF ASSESSMENTS

In the current NPRM the Commission sought comment on its legal authority to adopt the uniform labeling standards it proposed. NASUCA believes that not only does the Commission have requisite authority to adopt uniform labeling standards, it has more than sufficient authority to prohibit end-user surcharges as advocated by NASUCA in these comments.

The legal authority of the Commission in regards to billing was thoroughly explored in the Commission’s Truth-in-Billing Order. In that Order the Commission held that Section 201(b) of the Telecommunications Act gives the Commission power to remedy unjust and unreasonable billing practices. The Commission stated: "The Commission…has jurisdiction under Title II [of the Act] to regulate the manner in which a carrier bills and collects for its own interstate offerings, because such billing is an integral part of that carrier’s communications service."

The Commission also addressed any concerns that prohibiting end-user surcharges or line items would violate carriers’ freedom of speech. The Commission stated:

[C]ommercial speech that is only potentially misleading may be restricted if the restrictions directly advance a substantial government interest and are no more extensive than necessary to serve that interest. Finally, commercial speech that is neither actually nor potentially misleading may be regulated if the government satisfies a three-pronged test: first, the government must assert a substantial interest in support of its regulation; second, the government must demonstrate that the restriction on commercial speech directly and materially advances that interest; and third, the regulation must be "narrowly drawn."

In this case the record is clear that surcharges and line items are clearly misleading, causing customer confusion and harming competition. As such, the Commission has a compelling reason to prohibit surcharges and line items related to USF assessments. Furthermore, even if it was assumed arguendo that surcharges and line items were neither actually nor potentially misleading, the Commission would be justified in banning surcharges under the three-pronged Central Hudson test. First, the Commission and the public have a substantial interest in clear and unambiguous advertising, pricing and billing of telecommunications services and in the development of a competitive telecommunications market. Second, banning surcharges and line items would materially advance that interest by requiring USF assessments to be recovered in the price of services offered, rather than separate surcharges. Third, the prohibition would be narrowly drawn since it would apply only to surcharges related to a particular governmental action, namely USF assessments.

Moreover, a ban on surcharges would not be a ban on speech. As a result, Commission action banning surcharges would not be covered by the decision in 44 Liquormart v. Rhode Island. Even if surcharges were banned, carriers would be free to advertise their prices and to communicate with customers concerning federal USF charges; they would simply not be able to bill for those USF charges separately. This would be similar to the familiar signs at gas pumps which declare that "30¢ of the price of every gallon of gas goes to the state and federal governments." In spite of these government imposed fees, gasoline dealers must nevertheless disclose the full price of the product to customers. Sellers of gasoline are not allowed to advertise one price at the pump and charge another, higher price at the cash register.

Finally, a ban on surcharges and line items to recover USF assessments from end-users would not run afoul of the line of USF decisions of the Fifth Circuit. In those cases the Fifth Circuit held that because of the direction in Section 254(e) of the Act that universal service support "should be explicit," the Commission cannot require or permit carriers to recover USF assessments as part of access charges. The current proceeding does not involve access charges imposed on other carriers, but concerns the manner in which carriers can bill end-users for interstate services the carriers themselves provide. As previously stated, nothing in the Act prohibits or mandates end-user surcharges. The record of confusion and abuse in billing of end-users for USF assessments clearly compels the Commission in this case to exercise its discretion to eliminate surcharges and line items on end-users.

The Commission is fully empowered to ban surcharges and line items related to USF surcharges. Such a ban would advance an important governmental and public interest in clear and non-misleading pricing information, and would provide a substantial benefit to the public by the elimination of customer confusion.

It is clear that the Commission’s repeated attempts to address confusion in the marketing and billing of telecommunications services have been a failure. Any further attempt to simply refine the flexibility currently enjoyed by carriers will also fail. A proscriptive approach is simple, and it will simplify the lives of millions of American consumers. Prohibition of surcharges and line items will allow the direct comparison of telecommunications services based on the one factor that means the most: price.

The Commission should take the opportunity presented by this proceeding to squarely address the billing issue which has bedeviled consumers and the Commission for the last five years. The Commission should stand up for consumers - and stand up for clear and non-deceptive marketing and billing - by banning the use of surcharges and line items for the recovery of universal service assessments.

Respectfully submitted,

Billy Jack Gregg
West Virginia Consumer Advocate Division
700 Union Building
Charleston, West Virginia 25301

Michael J. Travieso,
Maryland People’s Counsel
Chair, Telecommunications Committee
National Association of State Utility Consumer Advocates

Dated: June 25, 2001

National Association of State Utility Consumer Advocates
8380 Colesville Road, Suite 101, Silver Spring, MD  20910
Phone: (301) 589-6313 Fax: 589-6380
e-mail: nasuca@nasuca.org