It's hard for phone companies to raise prices in the hyper-competitive telecom business. But since phone bills are already a blur of surcharges and taxes, many companies find there's no need to risk angering customers with a rate hike. They can just tack on another fee with a confusing name.
The latest example comes from AT&T Inc., which is imposing a new "Local Connectivity Charge" of up to $4 a month for 1.6 million of its local phone subscribers rather than just boosting its basic rates.
As with so many other surcharges assessed by AT&T and just about every other major wired and wireless phone company, this new fee is designed to defray a basic cost of supplying the service being provided. And like the other fees, it will generate tens of millions of dollars per year in added revenue for the company.
In just about every other industry but telecommunications, the advertised price of a good or service reflects the entire cost of that product except for taxes and, in cases such as a cab or restaurant, the tip. Sometimes, as with gasoline, the advertised price covers all applicable taxes.
Not so with phone service, where it's become a widely accepted norm for companies to advertise rates that don't come close to reflecting the final tab a customer will pay. Airlines have been treading this path also, advertising one rate, then adding on surcharges for rising fuel and security costs.
To be sure, a century of federal and state regulation has saddled the telecom industry with an array of costly burdens, from providing 911 emergency calling capabilities to ensuring that rural and low-income customers have phone service.
Federal and local lawmakers also have set a poor example for companies to follow. For a century, elected officials treated phone bills as a piggy bank to cover unrelated government spending. In recent years, state and local governments have repeatedly diverted funds that were supposed to be used to upgrade 911 emergency systems so dispatchers can better locate cell phone callers.
Phone companies often argue that surcharges drive home a point to customers and government officials, highlighting the costs of regulatory compliance they bear. While this argument has merit, it's fast become an addictive excuse for stealth rate hikes. In reality, these surcharges cover the full cost of doing business in the telecom industry even if companies believe them unfair.
Automakers don't tack on a special fee for the costs of complying with factory safety laws. A supermarket doesn't add a nickel surcharge for every quart of ice cream or milk to cover the store's rising refrigeration costs. Those expenses are reflected in the price.
But in the telecom business, there's an extra "Supplier FUSF Recovery Fee" on a DSL Internet bill from Verizon Communications Inc. Sprint Nextel Corp. charges a fee for "Federal Wireless Number Pooling and Portability" to Sprint cell phone users and a surcharge for "Federal Program Cost Recovery" to Nextel customers.
Thanks to all this conveniently confusing terminology, consumers are hard pressed to understand what the fees are about. Many mistakenly presume that their phone company is collecting taxes for the government rather than additional cash for its own bottom line.
To its credit, AT&T is being forthright about its new charge. "This fee will help AT&T recover increased connectivity costs associated with providing local service," a notice to customers states. "This fee is not a tax or charge required by the government."
Still, the rationale is twisted. The expense being "recovered" by AT&T does not involve some peripheral regulatory burden. It is central to the cost of providing phone service, not unlike the price of cotton for a clothing manufacturer or the cost of washing the dishes at a restaurant.
The new fee is being charged to 1.6 million subscribers who live outside the 13 states where AT&T owns most of the local phone network. Because it can't use its own phone lines to serve these customers, AT&T has to pay a monthly fee to other companies such as Verizon to use their local networks. Likewise, rivals such as MCI, now a unit of Verizon, pay a monthly fee to AT&T so they can sell local service in AT&T's 13-state region.
Until recently, local network owners were forced to discount these wholesale rates under regulations designed to fuel competition. AT&T was among the most outspoken opponents of this system, arguing that the discounted rate didn't cover its operating costs. Once the Federal Communications Commission backed away from dictating wholesale rates, AT&T and other local operators began charging more.
By imposing the new fee, it would appear AT&T wants it both ways: to charge rivals more for access to its network, but to pay the old discounted rates to use another company's property. Otherwise, it makes no sense to start treating the recent increase in the wholesale rates it pays Verizon and others as a separate expense from what it already pays those companies to serve the 1.6 million customers affected.
It doesn't make sense, that is, unless you'd like to continue to give the appearance that your prices are $4 less per month than you're actually charging.