Local phone companies advertising steep discounts for high-speed Internet access are beginning to assess new "regulatory" fees that would effectively increase monthly costs by 10 percent or more for some customers.

BellSouth will begin assessing a "regulatory cost recovery fee" of $2.97 a month for its DSL (digital subscriber line) services on April 15, a company representative said Monday. As a result, its least expensive service, advertised at $29.95 a month, will in fact cost $32.92, plus other taxes and fees.

The new fee will offset payments to the federal Universal Service Fund (USF), which underwrites the costs of telephone service for rural and low-income areas, as well as other regulatory costs the phone giant previously picked up. USF charges typically apply to all phone and DSL lines and are usually disclosed in a separate line on a phone bill.

SBC Communications has also begun notifying customers that they are being assessed USF fees, starting at $1.84 on some residential DSL services, as of February.

Cable companies are not subject to the same regulatory requirements as telephone companies and do not charge similar fees. Although both BellSouth and SBC explain that the fee is used to offset regulatory costs, both also acknowledge that the fee is not a tax or government-required charge.

Mike Paxton, an analyst at In-Stat/MDR, said the new fees are price hikes in regulatory clothing.

"In this case, it sounds like they're trying to blame the (price) increase on taxes and regulatory fees they were already paying," Paxton said. "The bottom line: No new regulations were put in place; they were paying (USF) and taxes before; they are still paying for it now, but the consumer is paying an extra several dollars per month."

SBC did not return phone calls seeking comment. A BellSouth representative denied that the charges are a price increase.

"We had been battling in the regulatory environment that we should not have to pay into this," said Michael Bowling, BellSouth's vice president of broadband services. "After years of trying to do that, and because we're in a competitive marketplace, we can't pay fees and charges on behalf of users."

Offsetting costs
Bowling said about $2.50 of the $2.97 regulatory fee will pay for USF charges, which BellSouth has up to now "absorbed." The rest will pay for other federal regulations imposed on BellSouth, such as the federal requirement to lease its digital subscriber lines wholesale to other providers.

Line leasing is a profitable business for BellSouth. Still, the Baby Bells believe that these regulations are unfair, because their cable competitors are not required to lease their lines, nor are they required to pitch in to the USF, Bowling said.

BellSouth also separates out regulatory fees for its local and national phone service bills, charging 75 cents and 99 cents per month, respectively. Bowling said the DSL regulatory fees are more expensive than those for phone service.

The regulatory charges come as DSL providers have sought to use prices and bundled service deals as primary weapons in their fight with cable companies over broadband.

Cable companies, on average, charge between $40 and $45 a month for Internet service that typically outstrips DSL in performance, with download speeds that exceed 1.5 megabits per second. DSL has struck back, slashing prices to below $30 a month and beefing up bandwidth to match.

Analysts said Baby Bell phone giants SBC, Verizon Communications, Qwest Communications and BellSouth are eager to build up market share but are reluctant to sacrifice profit margins indefinitely to do so.

Over the past year, SBC has introduced aggressive promotions that have brought DSL to as low as $29.95 a month for a low-end service that provides download rates of between 384 kilobits per second and 1.5mbps. That trend continued last week, when the company unveiled a price promotion for its higher-end DSL service, offering speeds ranging from 1.5mbps to 3mbps for $36.99 a month.

To get the discount, people must subscribe for one year and become customers of SBC's local, long-distance and Cingular Wireless plans. For people who don't want the package of add-ons, SBC will charge $44.95 a month for one year.

"On the surface, it's a great strategy, because they can claim they've got the same speeds at lower prices," said Patrick Mahoney, an analyst at The Yankee Group. "But for that $36.99, you really need to subscribe to everything they offer, which, for many users, may not be worth it."

The tie-ins with SBC's vast array of voice products come as no surprise. The Bells face heated competition from cable providers such as Comcast, Time Warner Cable and Cox Communications, which bundle phone and broadband into their TV packages. These bundles have helped chip away at the Bells' bread-and-butter phone business, prompting them to take immediate action in order to retain their phone customers, offering cheap DSL promotions.

The Bells have taken additional steps to offer video. Last year, they struck a series of partnerships to sell satellite TV services from Hughes Electronics' DirecTV and EchoStar Communications' Dish Network to their voice customers. In early March, SBC began bundling the Dish Network into its local, long-distance, wireless and DSL bundles. Other Bells will begin offering satellite television later this year.

So far, the Bells are getting their desired result: more DSL subscribers. Last quarter, DSL maintained a strong growth rate against cable, reaching historically high growth rates, according to a study Leichtman Research Group conducted. Another study indicated that dial-up Internet users consider price more important than speed, according to Yankee. The survey suggested that DSL would benefit from this preference over cable's faster but pricier alternative.

Still, DSL continues to stagger behind cable in terms of overall market share, owning 37 percent of the broadband market, with the remaining 63 percent belonging to cable, according to Leichtman Research Group.

Cable's salvo
With more DSL packages and discounts appearing every quarter, cable companies continue to highlight their faster download speeds. Still, feelings are mixed over whether they should follow DSL's downward pricing trend.

Comcast, the nation's largest cable company, has dismissed the idea of offering cheaper alternatives. Company CEO Brian Roberts has advocated the opposite, offering higher-speed services at higher prices for bandwidth-heavy users.

Other cable bigwigs have taken a softer stance. Cox and Charter Communications have introduced different tiers that are priced according to speed. Cox has a discount tier in some states, offering only 128kbps downstream and upstream for $24.95 a month, when bundled into any other Cox video or voice service. It also has a 4mbps tier that costs $79.95 a month, when bundled.

Cox believes that it offers its customers flexibility by not requiring a contractual agreement and offering cheaper prices on any phone or basic TV package, according to a company representative.

Cable companies were the first to bundle voice, video and data onto one bill. These packages have been successful not only in keeping people onboard but also by attracting the millions of dial-up subscribers that are looking to upgrade. The question for the Bells is whether their bundles can be more appealing.

"If I'm a cable modem subscriber, and I'm paying $45 a month, it doesn't seem like I'd be attracted to (the Bells') offer, if I can get it $10 to $15 a month cheaper," In-Stat/MDR Paxton said. "The cable modem/cable TV/video service is an effective bundle."

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