Bloomberg News

FCC Trims Subsidy That Powers TracFone Amid Fraud Concern

February 02, 2012

(Adds senator’s letter in seventh paragraph.)

Jan. 31 (Bloomberg) -- U.S. regulators trimmed a telephone subsidy that powered growth for TracFone Wireless Inc. and provoked concerns of waste and fraud as wireless companies distribute free handsets.

The Federal Communications Commission voted 3-0 today to set up a database to prevent individuals from collecting subsidized phones from two companies, and told carriers to trim customer rolls to eliminate those who don’t use free wireless service for 60 days. One person per household may get subsidized phones, the agency said in its order.

FCC Chairman Julius Genachowski said today’s changes may save as much as $2 billion in the next three years from the Lifeline program, which was enacted in the 1980s with traditional wired phones.

“We will not tolerate waste or misuse of program funds,” Genachowski said today in Washington.

Lifeline climbed to $1.6 billion in 2011 from $772 million in 2008, according to figures from the Universal Service Administrative Co. The Washington-based nonprofit works with states to oversee the subsidies, which are funded by fees on phone customers’ bills.

In recent years, pre-paid wireless providers have begun “fiercely competing for the business of low-income consumers by marketing ‘free’ phones,” the FCC said last year as it proposed the rules it considered today. The program provides carriers with as much as $10 a month for each customer enrolled, depending on the state, according to the FCC.

‘Demands Scrutiny’

Senator Claire McCaskill, a Missouri Democrat, has said she may seek a congressional investigation of the program, which subsidizes service for people with incomes no more than 35 percent above the poverty line or who qualify for assistance programs such as food stamps.

“I am troubled by the expansive potential for the program to be abused,” McCaskill said in a Dec. 9 letter to Genachowski. Customers often don’t need to produce documentation showing their eligibility, and may sell their phones, she wrote.

“The Lifeline program demands scrutiny, along with intense controls, in order to prevent waste, fraud and abuse,” McCaskill wrote.

In a study of 3.6 million Lifeline records, about 269,000, or 7 percent, were for subscribers who had received subsidized service from more than one carrier, according to a Jan. 10 filing with the FCC by Karen Majcher, a Universal Service Administrative Co. vice president

About 12.5 million people have phones under the Lifeline program, compared with 7.1 million in 2008, according to figures from the Universal Service Administrative Co.

Prepaid Wireless

The program’s growth has been propelled by the addition of prepaid wireless service from America Movil SAB’s TracFone, according to an October 2010 report from the Government Accountability Office, the investigative arm of Congress.

America Movil of Mexico City, the largest mobile-phone carrier in the Americas, is controlled by Carlos Slim, who last year was named the world’s richest person for the second year in a row in March by Forbes magazine.

TracFone, based in Miami, began marketing its subsidized phones in 2008 under the SafeLink brand. It serves 3.8 million customers, the company said in a Nov. 21 filing.

Another subsidized wireless participant, Sprint Nextel Corp.’s Assurance service, has expanded to 31 states after beginning in four states in 2009, said John Taylor, a spokesman.

TracFone endorses reforms including a database, the company said in a Jan. 24 filing. TracFone annually verifies whether its customers remain eligible for the program, and removes those who don’t respond or who say they don’t qualify, according to the filing. It also removes customers who don’t use the service for 60 days, according to the filing.

“We’ve created a very sound system,” Jose Fuentes, a TracFone spokesman, said in an interview before the FCC vote. “We’ve had a lot of fly-by-night companies come in.”

More than 1,700 wireless companies take part in the program, he estimated.

--Editors: Steve Walsh, Michael Shepard

To contact the reporter on this story: Todd Shields in Washington at tshields3@bloomberg.net

To contact the editor responsible for this story: Michael Shepard at mshepard7@bloomberg.net


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