Why raise prices when all you need is a fee?

updated 6:01 p.m. ET March 28, 2006

NEW YORK - 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.

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