Phone Regulators Must Throw Out the Lifeline

California’s Universal Lifeline telephone program is sinking.

The state fund designed to give needy Californians a break on phone service is running out of money, the tax on in-state toll calls that supports the fund is soaring, and there are indications that some people on Lifeline may not be so needy after all.

Why do Lifeline’s troubles matter to business? Because they underscore the financial, regulatory and ethical challenges California and its enterprises will have to face in the very near future.

Lifeline shows clearly what happens when the proportion of needy residents grows even as the state’s financial resources decline. It reminds us of how important communications technologies can become. It shows how desperately we need to change not just how we help people, but whom we choose to help.

And Lifeline illustrates, in a small way, the big changes in telecommunications regulation that California must sooner or later embrace.

On the other hand, if we can straighten out Lifeline, it will be a sign of hope in a state that has come to seem confused at times about how to secure its future.

Universal Lifeline started out sensibly enough. It levied a 1.5% tax on toll calls from point to point within California in order to offer half-price phone service to households with incomes at or below 150% of the federal poverty level. A family of four qualifies if its income doesn’t exceed $21,500.

Since the program was enacted in 1985, the number of participating households has grown from 500,000 to 2.2 million, probably as many households as are eligible. To pay for this, the tax on in-state toll calls has more than tripled.

Yet Lifeline is still running out of money. In March, the state Public Utilities Commission raised the levy from 4% to 5%, and Terry Gray, who administers the state’s Lifeline fund, says it will go up again, probably to 6%, in July.

Like many social programs, this one tends to experience rising demand and diminishing resources for the same reason: hard times. Even as more people need help paying their phone bill, businesses and individuals are doing less long-distance calling.

Jack Leutza, who heads the PUC’s telecommunications staff, worries that higher taxes could lead to even fewer toll calls, which in turn would necessitate higher taxes, etc. “In regulatory circles,” he says, “it’s called the death spiral.”

But hard times aren’t really the trouble. Lifeline participation has grown by leaps and bounds every year since the program’s inception. In most of those years, the California economy was booming.

Furthermore, there are signs that the program isn’t just helping the very poor. Most of Pacific Bell’s Lifeline customers choose unlimited local calling for $4.18 a month rather than 60 calls per month at $2.23, and Lifeline customers somehow find the means to spend just as much on long distance as regular customers do.

Pacific Telesis Chairman Sam Ginn adds that, every August, there is a marked increase in Lifeline participation, particularly in places such as Santa Cruz. Apparently the program is popular with some college students.

Some people blame the phone companies for Lifeline’s troubles. Toward Utility Rate Normalization, a consumer group, complains that Pacific Bell and GTE spend too much Lifeline money on administration. But those expenses are just 9% of total Lifeline spending, which Leutza says will reach $270 million this year.

The real trouble with Lifeline is threefold: Too many people get too little help; there’s no effort to make sure participants meet the requirements, and we’re paying for it the wrong way.

Fortunately, there’s a simple solution: telecommunications vouchers good for the entire cost of the most basic service for households that are really poor. It’s a model worth getting used to. Phone vouchers are coming sooner than you think, because we’ve all been on Lifeline, sort of, for years.

Long-distance calling has always subsidized basic residential service, and while interstate toll calls no longer do that (thanks to companies such as MCI), a variety of calls known oxymoronically as “local long distance” still does. Most of these surprisingly pricey calls--say, from Los Angeles to Riverside--are made by business.

Later this year, though, the PUC will open these calls to competition. Local long-distance rates will fall, which is good, but sometime in the not-so-distant future, residential users will have to pay the real cost of their own service. Believe it or not, that exceeds $20 a month, even though Pacific Bell charges just $8.35.

That’s where telecommunications vouchers come in. Like food stamps, they would let you target aid, vary the amount and allow recipients and providers to come together in the most efficient possible place, the free market.

Ideally, California would pay for these vouchers by taxing practically anything other than telecommunications, the consumption of which we want to encourage. (My preferred levies: gasoline and legal fees.) Cheap calling is good for the economy.

Every California household on welfare or federal disability benefits (there are less than 2 million) would automatically get vouchers they could use to pay their entire measured-rate phone bill, or an equivalent amount toward a costlier service if they choose it. Believe it or not, this would still cost less than the current system.

At last count, 42 states with Lifeline-type phone programs linked eligibility to some other form of assistance. In many states, it’s the only way to get benefits. That makes it easy to target the neediest--and safeguard against fraud. To discourage dependency, we could let the working poor claim a telecommunications tax credit. Depending on phone rates and family incomes, different households could get vouchers with different face values.

Eventually, if cable television evolves into a place to work, shop, visit and study, telecom vouchers may also have to cover that. Think of them as toll tokens for the electronic superhighway.

More and More Lifelines

Pacific Bell says an ever-increasing proportion of Californians are getting cut-rate phone service under its Lifeline program, subsidized by a surcharge on in-state toll calling. The chart applies only to customers of Pacific Bell, which covers most of the state.

Percentage of Pacific Bell customers with Lifeline:

1986: 8%

1993: 19%

Source: Pacific Bell