Phone Bills Don't (Quite) Lie

If your phone bill looks anything like mine -- and since my phone company is Verizon (NYSE: VZ  ) , the "largest provider of wireline and wireless communications in the United States," chances are good that it does -- it probably contains entries for monthly charges, relay center surcharge, public rights-of-way use fee, 911 fee, federal tax, and state tax.

Similar smorgasbords of fees arrive every month in the mailboxes of customers of Verizon peers SBC Communications (NYSE: SBC  ) and BellSouth (NYSE: BLS  ) , long-distance providers AT&T (NYSE: T  ) and Sprint (NYSE: FON  ) , and cell phone companies AT&T Wireless (NYSE: AWE  ) and Nextel (Nasdaq: NXTL  ) .

The taxes, fees, and surcharges can make up more than a quarter of the total bill. But aside from the "monthly charges" line, the entries seem designed to obfuscate as much as enlighten. On the one hand, the telephone companies argue that the line items help show customers where the money they pay is going. On the other hand, the names of the line-item charges lead many consumers to think these charges are fixed and government-mandated.

They aren't. Federal law permits imposing "just and reasonable" surcharges to fund their mandates. But the surcharges permitted are not capped, nor does the FCC actively monitor whether they are in fact "reasonable."

Last week, the National Association of State Utility Consumer Advocates (NASUCA), an association of consumer advocates in 42 states and the District of Columbia, petitioned the Federal Communications Commission (FCC) to force phone companies to merge the various fees back into the "monthly charge" line.

NASUCA believes that the line items mislead consumers and impede comparison shopping. After all, other products on the market -- such as gasoline, for example -- are priced to include taxes and excises. But gas stations don't advertise unleaded regular as selling for $1.25 a gallon, plus $0.184 federal gas tax, plus $0.20 state tax, plus a $0.25 delivery truck highway toll surcharge. All those extra costs get incorporated into the cost of "overhead" in the product's price.

As a consumer, I prefer the simplicity of the gas stations' (and NASUCA's) approach. If one station is selling unleaded regular for $1.65 a gallon and another for $1.70, the last thing on my mind is what portion of either price is going to finance the national debt. I just want to know which business has the cheapest gas.

As an investor, I again prefer NASUCA's approach. When companies compete for customers with the use of misleading "price lists," this distorts the way a free market is supposed to work -- with efficient companies winning customers and profits away from inefficient companies. Line-item pricing across the communications industry prevents customers from easily seeing which companies offer the best price for what are essentially fungible services. It enables badly run businesses to survive longer and distracts investor capital from its most efficient use -- investment in the best phone service providers.

In the April issue of Motley Fool Income Investor , Mathew Emmert discusses the challenges facing Bell South, AT&T, SBC, Verizon, and others in the newsletter's Cash Flow Corner feature. To see exactly what he has to say about these companies, you can sign up for a free 30-day trial.

Fool contributor Rich Smith has no interest in any of the companies mentioned in this article.