[Senate Report 105-259]
[From the U.S. Government Publishing Office]



105th Congress                                                   Report
                                SENATE

 2d Session                                                     105-259
_______________________________________________________________________


 
  ``SLAMMING''--THE UNAUTHORIZED SWITCHING OF LONG-DISTANCE TELEPHONE 
                                 SERVICE

                               __________

                              R E P O R T

                              made by the

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                                 OF THE

         COMMITTEE ON GOVERNMENTAL AFFAIRS UNITED STATES SENATE





                  July 23 1998.--Ordered to be printed


                   COMMITTEE ON GOVERNMENTAL AFFAIRS
                   FRED THOMPSON, Tennessee, Chairman
WILLIAM V. ROTH, Jr., Delaware       JOHN GLENN, Ohio
TED STEVENS, Alaska                  CARL LEVIN, Michigan
SUSAN M. COLLINS, Maine              JOSEPH I. LIEBERMAN, Connecticut
SAM BROWNBACK, Kansas                DANIEL K. AKAKA, Hawaii
PETE V. DOMENICI, New Mexico         RICHARD J. DURBIN, Illinois
THAD COCHRAN, Mississippi            ROBERT G. TORRICELLI,
DON NICKLES, Oklahoma                  New Jersey
ARLEN SPECTER, Pennsylvania          MAX CLELAND, Georgia
             Hannah S. Sistare, Staff Director and Counsel
                 Leonard Weiss, Minority Staff Director
                       Lynn L. Baker, Chief Clerk

                                 ------                                

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

SUSAN M. COLLINS, Maine, Chairman    JOHN GLENN, Ohio
WILLIAM V. ROTH, Jr., Delaware       CARL LEVIN, Michigan
TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
SAM BROWNBACK, Kansas                DANIEL K. AKAKA, Hawaii
PETE V. DOMENICI, New Mexico         RICHARD J. DURBIN, Illinois
THAD COCHRAN, Mississippi            ROBERT G. TORRICELLI,
DON NICKLES, Oklahoma                  New Jersey
ARLEN SPECTER, Pennsylvania          MAX CLELAND, Georgia
           Timothy J. Shea, Chief Counsel and Staff Director
                 Pamela Marple, Minority Chief Counsel
                 David McKean, Minority Staff Director
                     Mary D. Robertson, Chief Clerk


                          LETTER OF SUBMITTAL

                              ----------                              

                                       U.S. Senate,
                         Committee on Governmental Affairs,
                                     Washington, DC, July 20, 1998.
Hon. Fred Thompson,
Chairman, Committee on Governmental Affairs,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: Over the last several years, the number 
of incidents of telephone ``slamming--the unauthorized 
switching of a consumer's long distance telephone service 
provider--has increased significantly. The FCC received over 
20,000 complaints from consumers about slamming in 1997, a 900 
percent increase over the number of slamming complaints 
received in 1993. These numbers probably represent only the tip 
of the iceberg, since most consumers do not report slamming 
complaints to the FCC and since there is no central repository 
for slamming statistics. It is clear from the increase in the 
number of slamming incidents each year that the problem is 
getting worse, and that the Federal Communications Commission 
(FCC) has not been able to control slamming or to undertake 
effective enforcement actions against those carriers that 
repeatedly engage in slamming.
    For several months, the Senate Permanent Subcommittee on 
Investigations has been conducting an intensive investigation 
of the slamming problem, including the impact of slamming on 
consumers and small businesses, the extent of slamming across 
the country, the primary causes of slamming, and analysis of 
who is responsible for most of the slamming violations. 
Subcommittee investigators have also worked with the Office of 
Special Investigations of the General Accounting Office to 
document the primary causes of this fraudulent practice and the 
extent to which criminal elements have been responsible for the 
growing slamming problem. This comprehensive investigation 
identified many areas where changes to regulations and the law 
are needed.
    As a result of the Subcommittee's extensive investigation, 
the February 18 and April 23, 1998 hearings, as well as the 
investigation conducted by GAO's Office of Special 
Investigations at the request of the Subcommittee, the 
Subcommittee has prepared, and I submit to you at this time, 
the attached Report, ``Slamming'': The Unauthorized Switching 
Of Long-Distance Telephone Service. This Report sets forth the 
Subcommittee's findings and recommendations concerning the 
growing problem of telephone slamming and the current 
regulatory efforts to control this practice. In transmitting 
this Report of the Permanent Subcommittee on Investigations, I 
would respectfully request that it be filed on the Senate Floor 
as expeditiously as possible.
            Sincerely,
                                  Susan M. Collins,
                                                  Chairman,
                          Permanent Subcommittee on Investigations.
    Attachment.


105th Congress                                                   Report
                                 SENATE

 2d Session                                                     105-259
_______________________________________________________________________


  ``SLAMMING''--THE UNAUTHORIZED SWITCHING OF LONG-DISTANCE TELEPHONE 
                                SERVICE

                                _______
                                

                 July 23, 1990.--Ordered to be printed

                                _______
                                

Mr. Thompson, for the Committee on Governmental Affairs, submitted the 
                               following

                              R E P O R T

                                CONTENTS

_______________________________________________________________________


                                                             Page

  I. Introduction..........................................     1
 II. Background............................................     5
    A. The Telecommunications Industry.....................     5
    B. The Regulatory Framework............................     5
III. Subcommittee Investigation............................     6
    A. The Slamming Problem................................     6
    B. Entities Responsible for Slamming Incidents.........     8
    C. Process By Which Slamming Occurs....................    10
    D. The Fletcher Case...................................    15
    E. Enforcement Actions Against Slamming................    19
    F. Legislative and Regulatory Proposals to Control 
    Slamming...............................................    21
IV. Findings and Conclusions...............................    26
 V. Recommendations........................................    30

                            I. INTRODUCTION

    Over the last several years, the number of incidents of 
telephone ``slamming''--the unauthorized switching of a 
consumer's long distance telephone service provider--have 
increased significantly. The Federal Communications Commission 
(FCC) received over 20,000 complaints from consumers about 
slamming in 1997, a 900 percent increase over the number of 
slamming complaints received in 1993. In Maine, the local 
telephone carrier reported a 100 percent increase in slamming 
complaints from 1996 to 1997. These numbers probably represent 
only the tip of the iceberg, since most consumers do not report 
slamming complaints to the FCC and since there is no central 
repository for slamming statistics. It is clear from the 
increase in the number of slamming incidents each year that the 
problem is getting worse, and that the FCC has not been able to 
control slamming or to effectively enforce its regulations 
against those carriers that repeatedly engage in slamming.
    In December 1997, the Senate Permanent Subcommittee on 
Investigations (PSI) began its investigation of telephone 
slamming. After receiving numerous complaints from consumers 
and small businesses that had been slammed, the Subcommittee 
determined that it was necessary to review the prevalence of 
slamming and the adequacy of FCC regulations and enforcement 
efforts to control this practice. The General Accounting 
Office's (GAO) Office of Special Investigations assisted the 
Subcommittee in conducting its investigation of this growing 
practice.
    On January 6, 1998, the Subcommittee requested that GAO 
assist the Subcommittee by (1) determining which entities or 
companies engage in telephone slamming violations, (2) 
determining the process by which the providers defraud 
consumers, and (3) reviewing what the FCC, state regulatory 
entities, and the telecommunications industry have done to 
curtail slamming. In addition, the Subcommittee asked GAO to 
present a case study of a long distance company that repeatedly 
slammed consumers as a standard business practice. The GAO 
conducted an in-depth review and issued its report entitled 
``Telecommunications: Telephone Slamming and Its Harmful 
Effects'' (GAO/OSI-98-10). The report was made public at the 
Subcommittee's hearing on April 23, 1998.
    The Subcommittee initiated its first of two public hearings 
on slamming on February 18, 1998, in Portland, Maine. Chaired 
by Senator Susan Collins, with the participation of Senator 
Richard Durbin, the February hearing focused on (1) the extent 
of the slamming problem in Maine and across the country, (2) 
the effect of slamming on individual consumers and small 
businesses, and (3) the adequacy of Federal regulatory and 
enforcement efforts. Witnesses at the hearing included consumer 
slamming victims Susan Deblois, from Winthrop, Maine, and 
Pamela Corrigan, from West Farmington, Maine; Steve Klein, the 
owner of Mermaid Transportation Company, a small business 
located in Portland, Maine that was slammed by a long distance 
reseller; Susan Grant, Vice President, Public Policy, National 
Consumers League; Daniel Breton, Director, Governmental 
Affairs, Bell Atlantic; and the Hon. Susan Ness, FCC 
Commissioner.
    The February hearing provided an opportunity for consumers 
to testify about the problems they experienced with telephone 
slamming. At the hearing, Maine slamming victims explained how 
some long distance companies used fraudulent practices to 
change their telephone service. Witnesses used words such as 
``stealing,'' ``criminal,'' and ``break-in'' to describe 
practices employed by unscrupulous telephone companies to pick 
up customers and boost profits.
    Pamela Corrigan testified that she was sent an unsolicited 
``welcome package'' in the mail, which looked like the stacks 
of junk mail that consumers receive every day. However, this 
``junk mail'' was not what it appeared to be. This ``welcome 
package'' automatically signed her up for a new long distance 
service unless she returned a card rejecting the change. She 
was amazed and appalled that it was possible for a company to 
change her long distance service simply because she did not 
respond that she did not want their service. Susan Deblois 
testified that when she was slammed, her children were unable 
to use the 800 number she had for them to call home in case of 
an emergency.
    The February hearing also illustrated how slamming not only 
affects families but also small businesses and communities. For 
example, Steve Klein, the owner of Mermaid Transportation 
Company in Portland, Maine, testified that his business phone 
lines, which are critical to his livelihood, were tied up for 4 
days when he was slammed by a long-distance telephone reseller 
which falsely represented itself as AT&T. Similarly, Ms. 
Corrigan, who is the town manager of Farmington, Maine, 
reported that the town's phone lines were also slammed. It 
became clear from the hearing that no one is immune from this 
illegal activity.
    Also at the February field hearing, FCC Commissioner Susan 
Ness testified about the FCC's efforts to control slamming. The 
Commissioner acknowledged that the FCC really does not know how 
many of the 50 million carrier selection changes each year 
result in slamming, since many slammed consumers resolve the 
problem without bringing it to the FCC. However, the 
Commissioner did offer the conservative estimate that if just 
one percent of the carrier changes made each year are the 
result of unauthorized changes in service, over 500,000 
households are slammed each year.
    The February hearing also made it clear that the FCC must 
step up its enforcement efforts against slammers. Senator 
Collins pointed out to the FCC that the States are much more 
aggressive than the FCC in taking enforcement actions against 
slammers. The FCC Commissioner agreed however, that the 
relatively small fines imposed on slammers by the FCC might be 
considered by the company as just the cost of doing business, 
rather than a real deterrent to slamming. In addition, the 
Commissioner agreed that the FCC could increase its enforcement 
against slammers and that establishing criminal penalties for 
slamming would help to reduce the problem.
    Continuing with its overall inquiry into slamming, the 
Subcommittee held a second hearing on April 23, 1998, which 
focused on (1) the types of entities, both individuals and 
companies, who are responsible for a large number of the 
intentional slamming incidents, (2) the process by which 
slamming occurs under the existing regulatory scheme and market 
structure, (3) the adequacy of FCC efforts to control the 
slamming problem, and (4) the regulatory or legislative 
solutions to control the slamming problem. The hearing also 
documented the need for Congress to enact the key provisions of 
the ``Telephone Slamming Protection Act of 1998'' (S. 1740, 
introduced on March 10, 1998 by Senators Collins and Durbin).
    At the April hearing, the Subcommittee heard testimony from 
Eljay Bowron, the Assistant Comptroller General for Special 
Investigations of GAO, who presented the results of GAO's 
investigation of the types of entities that engage in slamming 
and the process by which such entities are able to defraud 
consumers. Mr. Bowron testified that long distance companies 
engage in slamming because there is a financial incentive to do 
so and that it is easy for fraudulent individuals to enter the 
long distance market because there are no controls in place at 
the FCC to screen potential providers. As part of its 
investigation, GAO investigators filed fictitious information 
with the FCC without any difficulty, that gave the 
investigators authority to ``resell'' long distance services. 
This authority gives the applicant the ability to enter the 
long distance market and slam consumers with little chance of 
being caught. In addition, to illustrate how an entity engages 
in slamming, Mr. Bowron presented a case study of Daniel 
Fletcher, an individual who operated as a long distance 
reseller under at least eight different company names, slamming 
thousands of consumers. According to the findings in the GAO 
report, Mr. Fletcher slammed or attempted to slam over 500,000 
consumers, billed consumers for at least $20 million in long 
distance charges, and left at least $3.8 million in unpaid 
bills to telecommunications industry firms. Furthermore, Mr. 
Bowron testified that the FCC took over 2 years to take final 
action against the Fletcher companies, and has been unable to 
locate Mr. Fletcher.
    The Subcommittee also heard testimony from William Kennard, 
the FCC Chairman, about the FCC's efforts to control slamming. 
Chairman Kennard testified that current FCC rules do not do 
enough to protect consumers against slamming and that tougher 
rules are needed take the profit out of slamming. The Chairman 
explained that the FCC has proposed new rules to improve its 
ability to protect consumers from this fraudulent practice. 
However, the new rules have not yet been adopted by the FCC. 
The Chairman also testified that the FCC took the unprecedented 
action of revoking the operating authority of the Fletcher 
companies on April 21, 1998, and fined these companies $5.7 
million.
    At the April hearing, the Subcommittee learned that billing 
practices in the telecommunications industry allow long 
distance companies to use misleading company names that are 
difficult for consumers to identify on their phone bills, and 
that the States have been much more aggressive than the FCC in 
taking enforcement action against companies that repeatedly 
slam consumers.
    The Subcommittee is issuing this report to set forth its 
findings and recommendations concerning the growing problem of 
telephone slamming and the current regulatory efforts to 
control this practice. This report is based on the 
Subcommittee's investigation, exhibits, and testimony from the 
February 18 and April 23, 1998 hearings, as well as on the 
investigation conducted by GAO's Office of Special 
Investigations at the request of the Subcommittee.
    These hearings and investigations were conducted by the 
Subcommittee's Majority Staff under the direction of Chairman 
Susan M. Collins, with the concurrence and support of Ranking 
Minority Member, Senator John Glenn. This investigation was 
authorized pursuant to Senate Resolution 54, Section 13, 
adopted February 13, 1997, which empowers the Subcommittee to 
investigate, among other things, ``the efficiency and economy 
of all branches of Government with particular references to the 
operations and management of Federal regulatory policies and 
programs.''

                             II. BACKGROUND

                   A. The Telecommunications Industry

    Prior to 1982, AT&T had a monopoly on long distance 
service. To settle a lawsuit brought by the Justice Department, 
AT&T agreed to be broken up into regional Bell operating 
companies, which would continue to have a monopoly on local 
service, while AT&T would compete with other carriers for long 
distance service. By the 1990's, competition in the long 
distance telephone market increased significantly. Currently, 
over 500 companies provide long distance telephone service to 
customers throughout the country.
    In an attempt to further increase competition in telephone 
service, the Telecommunications Act of 1996 was enacted, in 
part, to allow the Bell operating companies to expand outside 
of local service and to open up competition in the local 
service market. The act allows the regional Bell companies to 
offer long-distance service to their customers only after the 
FCC and state regulators agree that the Bell companies have 
taken appropriate steps to allow competitors to offer local 
phone service in their markets.\1\ The long distance market is 
expected to become even more competitive as local telephone 
companies start providing long distance service to customers. 
Several of the regional Bell companies are ready to offer long 
distance service as soon as they get approval from the FCC and 
state regulators.
---------------------------------------------------------------------------
    \1\ The future of Section 271 of the act, which set out the steps 
that the Bell operating companies are required to take in order to 
enter the long distance market, has now been thrown into doubt. A U.S. 
District judge in Texas ruled on December 31, 1997 that the law 
violated the Bell's constitutional rights by not letting them into the 
long-distance business. The court held that section 271 violated the 
Constitution's ``bill of attainder'' clause that protects individuals 
from being targeted by legislation. Critics of the ruling argue that 
the Bell operating companies, which worked with Congress to write the 
act, have yet to open their markets to competition, and until then 
should not be allowed to compete in the long- distance market.
---------------------------------------------------------------------------

                      B. The Regulatory Framework

    Federal Role: The FCC is responsible for investigating 
complaints of telephone slamming and has the authority to 
punish companies that violate anti-slamming laws. The FCC has 
had regulations against slamming since 1985, after the breakup 
of AT&T, in order to protect a consumer's right to choose a 
long distance carrier as competition increased.
    The Congress further bolstered the FCC's authority to 
regulate slamming by passing the Telecommunications Act of 
1996. The Act prohibits telecommunications carriers from 
changing a customer's selection of a telephone service provider 
except in accordance with FCC verification procedures.\2\ In 
addition, any carrier that violates FCC verification procedures 
by slamming, shall be liable to the previous carrier for all 
charges paid by the consumer. FCC regulations require long 
distance carriers to use one of four verification procedures to 
confirm carrier change orders resulting from telemarketing:
---------------------------------------------------------------------------
    \2\ Section 258 of the act, which is the section that prohibits 
slamming, was unaffected by the Texas ruling, discussed in footnote 1, 
striking down section 271 of the act.

        1.  LWritten authorization from the subscriber 
---------------------------------------------------------------------------
        (referred to as a letter of agency or LOA);

        2.  LConfirmation from the subscriber via a toll-free 
        number provided exclusively for this purpose;

        3.  LAn independent third party to verify the 
        subscriber's order; or

        4.  LA ``welcome package'' that the consumer receives 
        in the mail that requires the consumer to affirmatively 
        reject the change in carrier; otherwise, the change 
        goes into effect after 2 weeks.

FCC regulations also require carriers who provide unauthorized 
services to recompute the consumer's bill so that the consumer 
pays no more than would have been paid to the properly 
authorized carrier.
    FCC rules regarding LOAs detail the minimum form and 
content for written authorizations of carrier changes. 
Misleading and deceptive LOAs are now prohibited under FCC 
regulations, such as those having a combination sweepstakes 
entry and letter of authorization to switch long distance 
service, or promotional materials in one language (Spanish, for 
example) and the LOA in another language (English, when sent to 
non-English speaking minorities).
    The FCC can also impose penalties against carriers that 
violate its regulations, including slamming violations, as set 
out in its authorizing legislation, the Communications Act of 
1934 (47 U.S.C. 205). Current FCC guidelines recommend a 
forfeiture of $40,000 for each ``unauthorized conversion of 
long distance telephone service.'' The Commission and its staff 
retain discretion to issue a higher or lower fine than provided 
in the guidelines, or to issue no fine at all.
    State Role: State Attorneys General and public service 
commissions have worked aggressively to take enforcement 
actions against companies that engage in slamming. The 
Telecommunications Act of 1996 specifically preserves the 
rights of States to regulate slamming in intrastate long 
distance services. While the Act is silent about the states' 
authority to regulate slamming in interstate long distance 
services, FCC officials welcome States to pass such 
regulations, provided they conform to FCC anti-slamming 
regulations. Some state courts have ruled that the 1996 Act 
preempts States from regulating interstate slamming, striking 
down state anti-slamming regulations. For example, in April 
1996, a Minnesota state judge struck down that State's anti-
slamming statute. However, many other States do regulate 
interstate slamming and have taken aggressive enforcement 
action against long distance companies that have engaged in 
this practice.

              III. SUBCOMMITTEE INVESTIGATION OF SLAMMING

                        A. The Slamming Problem

    The Subcommittee found that the number of slamming 
incidents has increased dramatically over the last few years. 
At the April 23, 1998 hearing, the Subcommittee displayed a 
chart detailing the total slamming complaints reported to the 
FCC from 1993 to 1998 (Exhibit 39a). The FCC received over 
20,000 complaints from consumers about telephone slamming in 
1997, making it the number one consumer complaint to the 
commission. This represents a 50 percent increase over the 
12,795 slamming complaints received in 1996, and a 900 percent 
increase over the 1,867 slamming complaints received in 1993.
    FCC Commissioner Susan Ness testified at the February 18, 
1998 hearing that the FCC does not know how many of the 50 
million carrier selection changes each year result from 
slamming, and stated:

        ``If it were just even 1 percent, which as we all agree 
        is extremely low and well understating the case, it 
        would total over 500,000 complaints nationwide or 
        slamming incidents nationwide.''

However, other organizations have estimated that the slamming 
problem is worse than the FCC Commissioner suggested. For 
example, the National Association of State Utility Consumer 
Advocates estimated that as many as one million consumers are 
fraudulently transferred annually to a provider which they have 
not chosen.
    Local exchange carriers, which are likely the single best 
source of the total number of slamming complaints, have 
reported a surge in slamming in recent years. For example, 
Southwestern Bell, which provides local service to customers in 
Texas, Missouri, Oklahoma, Arkansas, and Kansas, recently 
reported that they received nearly 558,000 slamming complaints 
from its customers in 1997, a nearly 50 percent increase from 
1996. Bell Atlantic, which serves most of the Northeast with 
local telephone service, found that slamming complaints 
increased over 100 percent in Maine over the last 2 years, with 
1582 slamming complaints from Maine consumers in 1997, up from 
643 slamming complaints in 1996.
    The National Consumers League (NCL), an organization that 
has taken an active role in educating consumers about 
telephone-related fraud and abuse, has also seen an alarming 
increase in slamming complaints in 1997. The NCL operates the 
National Fraud Information Center, a hotline for consumers to 
report telemarketing abuses. In 1997, the hotline received over 
800 slamming complaints from consumers, making it the one of 
the top ten most frequent subjects of fraud reports made to the 
NCL. At the February 18, 1998 hearing, Susan Grant, the Vice 
President for Public Policy for the NCL and the Director of its 
National Fraud Information Center, testified that the slamming 
complaints they receive are ``just a tiny fraction of the 
actual problem'' of the total number of slamming incidents. In 
her written statement, Susan Grant presented evidence that 
Ameritech, a local exchange carrier serving five States in the 
Midwest, received 115,585 slamming complaints in 1997. The 
written statement also refers to a Louis Harris & Associates 
survey commissioned by the NCL to look at the effects of 
telephone competition in three Midwest markets (Chicago, 
Detroit/Grand Rapids, and Milwaukee), which found that nearly 
one-third of the respondents had been slammed or knew someone 
who had. Only 7 percent of the respondents who had been slammed 
reported the complaint to a government agency, and only 2 
percent to a consumer group. Most consumers complained to the 
slammer, the original carrier, or the local exchange carrier.
    While the incidences of slamming are clearly increasing, 
there is no reliable source for the total number of slamming 
cases. GAO States in its slamming report that:

        ``determining the prevalence of slamming is extremely 
        difficult . . . contributing to the uncertainty 
        concerning the prevalence of slamming, some consumers, 
        who do not review their monthly telephone bills 
        closely, are unaware that they have been slammed.''

As GAO testified at the April 23, 1998 hearing, there is no 
central repository for slamming complaints, so no one entity 
has complete information on the total number of slamming 
incidents that occur each year. While local exchange carriers 
routinely track the number of slamming complaints they receive 
from customers, they do not routinely report such information 
to the FCC or any state regulatory agencies. Currently, there 
is no requirement that slamming incidents be reported to the 
FCC.

             B. Entities Responsible For Slamming Incidents

    The Subcommittee has found that while all three types of 
long distance providers--facilities-based carriers, switching 
resellers, and switchless resellers have slammed consumers, 
switchless resellers are responsible for an inordinate number 
of intentional slamming incidents.\3\ GAO stated in its report 
that representatives of the FCC, numerous state regulatory 
agencies, and the industry all identified resellers as ``those 
who most frequently engage in intentional slamming.'' During 
the April 23, 1998 hearing, the GAO witness, Mr. Bowron, 
testified that:
---------------------------------------------------------------------------
    \3\ Facilities-based carriers, such as AT&T and Sprint, have 
extensive physical equipment including hard lines and switching 
stations necessary to take in and forward calls. Switching resellers 
may have one or more switching stations, but purchase access to the 
lines of the facilities-based carriers to ``resell'' long distance 
service to their subscribers. Switchless resellers have no equipment 
and purchase access to all of the necessary physical equipment to 
resell long distance service to their subscribers.

        ``Switchless resellers, which have the most to gain and 
---------------------------------------------------------------------------
        the least to lose, slam most frequently.''

Furthermore, GAO reported that ``entrepreneurial criminals 
engaged in slamming operations prefer acting as switchless 
resellers to generate fast profits and to make criminal 
prosecution more difficult.''
    The Subcommittee has learned that FCC data on the number of 
slamming complaints also indicate that resellers are 
responsible for a large part of the slamming incidents. The FCC 
issues an annual Common Carrier Scorecard, which provides 
information on consumer complaints, including slamming 
complaints. The most recent scorecard was issued in December 
1997, and it shows the complaint ratios--slamming complaints 
per million dollars of revenue--for the long distance companies 
served with more than 100 slamming complaints in 1996. While 
the major facilities-based carriers like AT&T, MCI, and Sprint, 
also have numerous slamming complaints against them, they had 
the lowest complaint ratios, ranging from .05 to .12. Virtually 
all of the companies with the highest complaint ratios were 
classified as resellers by the FCC. Subcommittee analysis of 
the 20,000 slamming complaints received by the FCC in 1997 
shows that seven of the ten carriers with the largest number of 
complaints are resellers. Also, the carriers with the highest 
complaint ratios in 1997 are all resellers. (See exhibit 39h.) 
Although AT&T, MCI, and Sprint accounted for about 25 percent 
of the total number of complaints, when their revenue is 
factored in, their complaint ratios are very low. According to 
FCC officials, after further investigation, many of the 1997 
complaints against the major facilities-based carriers are 
likely to be actually caused by resellers that operate on the 
major carriers' networks.
    Furthermore, the Subcommittee learned that consumer 
advocates have also found that resellers cause a majority of 
the slamming incidents. At the February 18, 1998 hearing, Susan 
Grant testified that, based on the consumer complaints to the 
National Consumers League about slamming, ``most of those are 
about resellers of telephone service who buy service in bulk 
from the major carriers and resell it.''
    The Subcommittee has found that facilities-based carriers 
blame certain unscrupulous resellers for the bulk of the 
intentional slamming incidents. In its written statement for 
the February 18, 1998 hearing record, AT&T stated that ``the 
carriers that slam our customers are frequently resellers that 
lease time on AT&T's network to provide their service.'' As a 
result, on March 3, 1998, AT&T issued a zero tolerance policy 
against slamming that includes monitoring its resellers' 
marketing practices to ensure that they are not misrepresenting 
themselves as AT&T and charging resellers for the cost of 
handling each valid slamming complaint the resellers causes. 
AT&T also initiated legal action against one reseller of its 
long distance services, Business Discount Plan, \4\ due to 
subscriber complaints that Business Discount Plan slammed them 
by misrepresenting themselves as AT&T. In May 1998, Business 
Discount Plan entered into a settlement with AT&T, in which it 
agreed to send letters to its customers that it is not 
affiliated with AT&T and allowing them to switch back to AT&T 
without charge.
---------------------------------------------------------------------------
    \4\ Business Discount Plan is the company that slammed Mermaid 
Transportation Company, the small business owned by PSI witness Steve 
Klein.
---------------------------------------------------------------------------
    While the Subcommittee found that all three types of long 
distance providers have an economic incentive to slam 
subscribers, GAO reported that switchless resellers are 
responsible for a majority of the intentional slamming 
incidents because they have a strong economic incentive to slam 
consumers. GAO stated in its report that resellers make a 
profit by selling long distance services at rates that are 
higher than the fees resellers pay to the facilities-based 
carriers for handling their subscribers' calls. In order to get 
discounts on access fees charged by the facilities-based 
carriers, resellers often have to promise a certain level of 
usage from their subscribers. Therefore, it is critical to a 
reseller's profitability to maintain a certain subscriber 
level.
    GAO also reported that facilities-based carriers have high 
fixed costs for network equipment and low costs for providing 
service to additional subscribers. Adding more subscribers 
increases the carrier's profits. However, it should be noted 
that facilities-based carriers have a significant investment in 
their reputations which decreases the likelihood that they 
would deliberately slam consumers. Many slamming complaints 
against facilities-based carriers are caused by unscrupulous 
marketing agents working for them or by using marketing 
practices that lead to customer confusion.

                  C. Process By Which Slamming Occurs

    Slamming occurs when a customer's Primary Interexchange 
Carrier (PIC) is changed without his or her knowledge and 
consent. A PIC is the long distance carrier that provides 
service to the customer and can be changed by facilities-based 
carriers, resellers, or telemarketers acting on the customer's 
behalf. These entities slam consumers by changing their PICs 
through deceptive marketing practices such as getting customers 
to sign a misleading authorization form, by falsifying tape 
recordings to make it appear that the customer had verbally 
agreed to the PIC change, or by posing as the customer's 
currently authorized facilities-based carrier. Unscrupulous 
carriers also will forge LOAs or even just pull customers' 
numbers from a telephone book and submit them to the local 
exchange carrier for a PIC change.
    Carrier Changes Done Electronically: The Subcommittee found 
that slamming is possible because the legitimate ways in which 
a customer's PIC is changed can be easily manipulated by a 
fraudulent telecommunications carrier. Both business and 
individual customers must elect a PIC, through their local 
exchange carrier, to provide their long distance service. 
Customers can voluntarily change their PIC by contacting their 
local carrier to request a change or a long distance company 
can initiate a PIC change after it receives authorization from 
the customer. The local carrier usually receives an electronic 
tape from the long distance companies and automatically 
processes the customers' PIC changes on behalf of the long 
distance carriers. The local carrier assumes that the long 
distance provider has complied with all FCC regulations in 
obtaining authorization for a PIC change. Many resellers have 
arrangements with the facilities- based carriers that they 
purchase usage from, to submit the PIC changes to the local 
carrier on the resellers behalf. In these arrangements, the 
facilities-based carriers require their resellers to verify 
that their customers' PIC changes are made in accordance with 
FCC regulations, but the facilities-based carriers are not 
required to police those resellers to make sure that they are 
in compliance. There is no requirement that the reseller or 
facilities-based carrier present evidence of the customer's 
authorization to anyone before the local carrier changes the 
customer's long distance service.
    Industry Billing Practices Create Financial Incentives for 
Slamming: The Subcommittee found that current billing practices 
in the telecommunications industry allow long distance carriers 
to obtain a substantial percentage of the value of their 
customer's telephone usage in advance of customers paying for 
their service. Carriers need to maintain cash flow and customer 
usage data is considered a valuable commodity for which 
carriers can obtain advance payments from billing companies or 
local exchange carriers. Typically, long distance carriers, 
including resellers, enter into agreements with local carriers, 
for a fee, to bill customers for long distance service on their 
behalf. As part of the agreement, the local carrier will pay 
the long distance carrier upon submission of their charges for 
billing, holding back between 20 to 30 percent for its billing 
fee, discrepancies, uncollectible accounts, etc. Long distance 
carriers, can also enter into billing arrangements with a 
billing company (such as US Billing or Integretel), that, for a 
fee, acts as a middleman between the carrier and the various 
local carriers that have responsibility for the states that the 
carrier has customers in. This arrangement relieves the carrier 
from having to maintain separate agreements with each of the 
local carriers. Often, as part of the agreement, the billing 
company will pay the long distance carrier upon receipt of the 
data of customer phone usage, also holding back a percentage 
for the billing fee, uncollectible accounts, and billing 
discrepancies. The billing company will then send out bills to 
the customers on behalf of the carrier. When customers remit 
their payments to the billing company, the carrier owes to or 
receives from the billing company any difference between the 
advance payment and the total amount collected from the 
customers. The advance payments are particularly important to 
resellers, since they need to pay the facilities-based carriers 
for usage of the telephone lines and equipment.
    Furthermore, the Subcommittee found that companies that 
engage in slamming usually get paid for the customer's long 
distance usage, despite the fact that the business was obtained 
without the customer's authorization. Mr. Bowron testified at 
the April 23, 1998 hearing that:

        ``There is an economic incentive in that even if it 
        [slamming] is identified, complained about, and action 
        is taken, the slamming company still receives the 
        money, at least at the rate that would have been paid 
        to the customer's preferred carrier.''

According to FCC regulations, when a customer is slammed, the 
customer is only liable for the charges at the rate they would 
have paid to their properly authorized carrier. Although the 
Telecommunications Act of 1996 provides that the slamming 
carrier is liable to the authorized carrier for the amount of 
money it collects from the consumer, the FCC admitted that the 
slamming carrier usually keeps the money. FCC Chairman Kennard 
testified at the April 23, 1998 hearing that telecommunications 
industry billing practices may be the root cause of the 
slamming problem. He stated that as long as there is a 
financial incentive to slam, slamming will continue to be a 
problem. In his testimony at the April hearing, Chairman 
Kennard stated:

        ``I am concerned, however, that our rules don't yet do 
        enough for consumers, and that is something that I 
        intend to fix. We are considering tougher rules that I 
        hope will take the profit out of slamming.''

At the April 23, 1998 hearing, Senator Collins noted that 
current billing practices may have been appropriate when there 
were only a few large long distance companies in the market, 
but that these practices may need to be reviewed now that the 
number of providers has grown. Chairman Kennard also testified 
that he is planning to meet with billing companies and local 
carriers to discuss ways to change billing practices to control 
slamming and to prevent another billing problem--cramming, that 
is, billing customers for unauthorized, non-telephone charges.
    Deceptive Practices Used to Slam Consumers: The 
Subcommittee learned that long distance companies use a variety 
of fraudulent and deceptive means to slam consumers. In her 
opening statement at the April 23, 1998 hearing, Senator 
Collins stated:

        ``Consumers all over the country are increasingly the 
        target of unscrupulous telephone service providers who 
        use blatantly deceptive marketing techniques or 
        outright fraud in order to change the long-distance 
        carrier selections of consumers.''

    In a statement to the press about the April 23, 1998 
hearing, Senator John Glenn agreed, stating:

        ``Slamming is a double whammy against millions of 
        American consumers who subscribe to telephone services 
        in their homes and businesses. Slammers get consumers 
        the first time by changing their telephone service 
        without permission, and then often get them again by 
        billing their phone calls at rates above industry 
        standards--all this before the consumer knows what has 
        happened.''

    At the February 18, 1998 hearing, National Consumers League 
representative Susan Grant testified that there are many ways 
that consumers are tricked and deceived, including:

        ``--someone in the household signing up to receive 
        coupons for products or to enter sweepstakes without 
        realizing that in the fine print, they are agreeing to 
        switch their telephone service;

        ``--receiving calls from companies pretending to be 
        their existing carriers, asking if they are satisfied 
        with their service, or from organizations supposedly 
        conducting surveys. If whoever answers says yes to any 
        of the questions, their answers are taped and then 
        presented later as proof of authorization;''

    Pamela Corrigan, of West Farmington, Maine, testified at 
the February 18, 1998 hearing that she was slammed when she was 
sent an unsolicited ``welcome package'' in the mail from a long 
distance reseller, Minimum Rate Pricing. When she failed to 
respond to the negative option notice, thinking it was simply 
junk mail, her long distance service was switched to the 
unauthorized company. Ms. Corrigan stated:

        ``. . . I felt I had been tricked. I wondered how it 
        was possible for a company to change your telephone 
        service simply because you did not respond within a 
        specified amount of time telling them that you didn't 
        want their service.''

    Steve Klein, the owner of a small Portland, Maine business, 
Mermaid Transportation Company, testified at the February 18, 
1998 hearing that his company was slammed by a reseller of AT&T 
services, Business Discount Plan. This company apparently 
slammed Mermaid Transportation Company's four business 
telephone lines when it used a deceptive telemarketing ploy to 
get an employee to say ``yes'' in response to their questions 
about which long distance service the company used. Business 
Discount Plan is currently being sued by AT&T for 
misrepresenting itself as AT&T to customers in telemarketing 
calls.
    GAO also reported that unscrupulous telemarketers or long 
distance providers may also falsify records to make it appear 
that the consumer agreed verbally or in writing to the carrier 
change. According to the GAO report, ``It is also possible to 
slam consumers without ever contacting them, such as obtaining 
their telephone numbers from a telephone book and submitting 
them to the local exchange carrier for changing.''
    The Subcommittee also learned that some unscrupulous 
resellers purposely use deceptive company names to make it more 
difficult for consumers to realize that a new company is 
offering its long distance services. At the April 23, 1998 
hearing, the Subcommittee presented two examples of customer 
bills generated on behalf of two of the companies owned by 
Daniel Fletcher, Phone Calls, Inc. and Long Distance Services. 
(See exhibits 39f and 39g.) The company names appear to be 
purposely chosen to confuse consumers looking at their bill, 
since it can appear to be the header for the list of the 
consumer's long distance calls made, rather than the name of a 
company. During the April hearing, Senator Collins asked FCC 
Chairman Kennard to identify the name of the long distance 
company on the bill for Phone Calls, Inc. (exhibit 39f), but he 
was unable to do so since the company name appeared on the bill 
as ``Phone Calls,'' misleading even the FCC Chairman into 
believing that it was the heading for the list of phone calls 
that followed.
    Long Distance Providers Can Easily Enter the Market: The 
Subcommittee also found that virtually anyone can easily enter 
the telecommunications market and become a long distance 
telephone service provider, without following licensing 
procedures. The April 23, 1998 hearing showed how the FCC's 
focus on increasing competition and making it easy for new 
companies to enter into the telecommunications marketplace has 
also created opportunities for unscrupulous actors to become 
long distance carriers. At the February 18, 1998 hearing, FCC 
Commissioner Ness advised that the FCC has no individual 
licensing process for long distance companies, and that 
authority is granted pursuant to a ``blanket authorization.'' 
At the direction of Congress, the FCC has adopted a ``laissez 
faire'' approach in order to increase competition and reduce 
administrative burdens for telecommunications carriers.
    GAO reported that to obtain an FCC license to be a 
telecommunications provider, a company must only pay a fee and 
file a tariff--a public statement of services, rates, and 
charges--with the FCC. The FCC provides blanket authority to 
operate as a long distance provider based on the carrier's 
assertion that it has provided the necessary information and 
fees. The FCC does not check the information in the application 
to ensure that it is accurate or complete, and does not perform 
any background checks on the principals of the company filing 
the tariff. Furthermore, the FCC has no system or procedure in 
place to prevent an individual or entity who has been barred 
from the telecommunications business from continuing to provide 
long distance service. After a long distance carrier files a 
tariff, the FCC requires it to file annual reports on 
communications related revenue, as well as the name of a 
designated agent for service of FCC notices and orders. 
However, only if the FCC receives complaints against a carrier, 
will the FCC check to see if the carrier is in compliance with 
filing requirements. This approach assumes that all carriers 
are trustworthy unless otherwise proven. GAO testified at the 
April 23, 1998 hearing that:

        ``We found no FCC practice that would help ensure that 
        applicants who become long distance service providers, 
        or other common carriers, have satisfactory records of 
        integrity and business ethics.''

    GAO also testified at the April 23, 1998 hearing that state 
regulators and the telecommunications industry views the tariff 
filing as a ``key credential that signifies legitimacy.'' GAO 
reported that States have their own certification requirements 
for telecommunications carriers, but these vary greatly from 
state to State. Some States will provide a license to any 
carrier that pays a fee, while others will require 
documentation about the carrier's financial, technical and 
managerial abilities to provide telecommunications services. 
The Subcommittee learned, for example, that Delaware requires 
carriers to show they have the financial, technical, or 
managerial means to provide service before issuing a license. 
In addition, if a reseller does not have at least $250,000 in 
assets, then it is required to obtain a $10,000 bond with a 
Delaware surety. Many States will issue licenses as long as the 
carrier has an FCC license, believing that the FCC has already 
determined that the company is capable of being a long distance 
service provider.
    Senator Carl Levin also commented at the April 23, 1998 
hearing that more needs to be done to keep slammers from 
getting into the telecommunications business. He noted that 
slamming is the number one complaint received by the Michigan 
Public Service Commission, and that nationally, Michigan ranks 
fourth in the number of slamming complaints received. Senator 
Levin asked Mr. Bowron if bonding requirements would help keep 
unscrupulous switchless resellers out of the system. Mr. Bowron 
replied, ``Yes.''
    At the April 23, 1998 hearing GAO testified about how 
investigators tested the FCC's oversight of the tariff filing 
process. GAO investigators filed a tariff with the FCC for 
``PSI Communications,'' a fictitious company. Using the FCC's 
instructions and sample tariff, the investigators submitted 
false information in the application, including the phone 
number from the sample tariff, and used a post office box as 
the company's address. (See exhibit 39b.) In addition, the 
investigators submitted a blank computer disk that was supposed 
to contain the tariff of rates to be charged by PSI 
Communications and failed to submit the required $600 filing 
fee. Nevertheless, within a few days, PSI Communications was 
listed by the FCC on the Internet as a licensed long distance 
carrier. (See exhibit 39c.) With this license, PSI 
Communications is now able to contract with a facilities-based 
carrier and resell long distance service to subscribers. After 
hearing GAO's testimony about the FCC filing procedures at the 
April hearing, Senator Collins stated:

        ``One of the aspects of this that troubles me is that 
        it seems that no one is really in charge, that the FCC 
        expects the industry to essentially police itself, and 
        for the major carriers to take responsibility for their 
        dealings with the resellers. The industry seems to rely 
        on the FCC's process.''

At a later point in the April hearing, FCC Chairman Kennard 
testified that expending FCC resources to conduct background 
investigations on companies applying to be long distance 
service providers would not solve the slamming problem and 
would place unnecessary burdens for entering the 
telecommunication market. However, Senator Durbin pointed out 
to Chairman Kennard that the FCC has no mechanism, and assumes 
no obligation, for screening out unscrupulous companies at the 
outset. Senator Durbin stated:

        ``I just don't buy your premise, and your premise is 
        that if we are in the world of deregulation, it is time 
        for the FCC to step aside and let the Wild West prevail 
        . . . But I don't think it is unreasonable to also say 
        that people who want to play in this arena have to be 
        legitimate, that you have to know who they are and 
        where they are and where they can be reached, because 
        the bottom line is if your tariffs are meaningless- -
        and it appears they are--your enforcement actions are 
        meaningless.''

                          D. The Fletcher Case

    The Subcommittee found that Daniel Fletcher, a long 
distance reseller operating under at least 8 different company 
names, slammed hundreds of thousands of consumers, billed at 
least $20 million in long distance charges, and left industry 
firms with about $4 million in unpaid bills for telephone 
network usage. Mr. Fletcher is an example of a long distance 
provider who repeatedly slammed subscribers as a standard 
business practice. The case study was limited to Fletcher's 
activities as a long distance reseller from 1993 to 1996. GAO 
presented the results of its investigation into the activities 
of Mr. Fletcher at the Subcommittee's hearing on April 23, 
1998. GAO testified that from 1993 to 1996, Mr. Fletcher 
operated as a switchless reseller under various company names, 
and apparently slammed or attempted to slam thousand of 
consumers, including approximately 544,000 at one time.
    Fletcher's Activities as a Long Distance Reseller: The 
Subcommittee learned that Mr. Fletcher began reselling long 
distance services in August 1993. It was at that time that Mr. 
Fletcher, operating as Christian Church Network, entered into a 
contract with Sprint and US Billing, Inc. (also known as 
Billing Concepts) to resell Sprint long distance services to 
subscribers. US Billing acted as the billing and collection 
agent for Christian Church Network through local exchange 
carriers. Under this arrangement, Sprint provided US Billing 
with the call usage of Mr. Fletcher's subscribers, which US 
Billing sent to the local carriers. The local carriers then 
billed their subscribers and sent payments back to US Billing. 
Initially, US Billing paid Sprint for telephone usage by 
Christian Church Network's customers, but in July 1994, 
Christian Church Network began paying Sprint directly for its 
phone usage. Also as part of these arrangements, Mr. Fletcher's 
company received advances on the cost of the calls charged to 
his customers from US Billing. According to US Billing records, 
Mr. Fletcher submitted over $12 million in bills for long 
distance usage to his customers. During the early portion of 
Mr. Fletcher's dealings with Sprint, the FCC received only a 
few slamming complaints from consumers about his companies. The 
number of consumer complaints against Mr. Fletcher's companies 
increased sharply during early 1996, as he attempted to 
fraudulently increase his customer base.
    In October 1994, Mr. Fletcher, operating as Long Distance 
Services, Inc., entered into an agreement to purchase long 
distance usage from AT&T for resale to his customers. Mr. 
Fletcher's agreement with AT&T allowed him to handle his own 
billing and collections, which he contracted out to another 
billing company. The agreement required Long Distance Services 
to purchase a minimum of $300,000 of long distance services 
annually from AT&T. AT&T records show that Mr. Fletcher was 
billed about $2.7 million for AT&T network usage and paid them 
about $1 million. Adding in penalties imposed by AT&T for Mr. 
Fletcher's failure to meet his 3 year commitment to them, Mr. 
Fletcher currently owes AT&T about $2 million. Mr. Fletcher 
placed over 130,000 PIC change orders with AT&T, although some 
may have been rejected or later left his company due to 
slamming. Correspondence from Mr. Fletcher to AT&T in April 
1996 indicates that his company was seeking to place over 
540,000 subscribers with AT&T.
    By mid-1996, Mr. Fletcher's relationships with Sprint, AT&T 
and US Billing began to deteriorate due to slamming complaints 
and nonpayment for telephone network usage. Between January and 
April 1996, Mr. Fletcher apparently stopped paying Sprint for 
network usage, causing Sprint to terminate its business 
relationship with him in September 1996. US Billing also 
terminated its relationship with Mr. Fletcher in September 
1996, after receiving a large number of slamming complaints 
from Mr. Fletcher's subscribers. In April 1996, AT&T 
representatives started to question Mr. Fletcher about the 
dramatic increase in his subscriber base and whether he was 
following FCC regulations on proper subscriber verification for 
PIC changes. In an April 9, 1996 letter to Mr. Fletcher 
(exhibit 25a), an AT&T representative wrote, after receiving a 
large volume of PIC change orders from him, that:

        ``. . . we are concerned regarding whether or not 
        proper authorization as required by the FCC's rules for 
        changing an end-user's primary interexchange carrier 
        were followed with respect to these orders.''

In another letter to Mr. Fletcher on April 16, 1996 (exhibit 
25f), an AT&T representative stated that the LOAs submitted by 
Mr. Fletcher to AT&T for proof of verification for PIC changes:

        ``. . . appear to violate the FCC rule that the LOA not 
        be combined with any sort of commercial inducement. 
        Furthermore, the LOA does not clearly inform the 
        subscriber that it is authorizing a change in its 
        primary interexchange carrier and does not clearly 
        identify the carrier to which the switch is being 
        made.''

However, AT&T did not terminate its relationship with Mr. 
Fletcher until October 1996 (several months later), and only 
after he became seriously delinquent in his payments to AT&T 
for telephone network usage. By the time Mr. Fletcher's 
business relationships were terminated, he owed about $586,000 
to US Billing, $547,000 to Sprint, and $2 million to AT&T. To 
date, Mr. Fletcher has never paid these companies for the 
outstanding amounts.
    In mid-1996, Mr. Fletcher, operating as Phone Calls, Inc., 
also entered into a contract with Atlas Communications, Inc., a 
reseller of Sprint long distance services. Under this 
agreement, Phone Calls, Inc. purchased network usage from Atlas 
for resale to its subscribers. In July 1996, Mr. Fletcher 
provided an electronic tape of 544,000 subscribers to Atlas. 
Atlas forwarded this tape to Sprint for placement on Sprint's 
telephone network. However, only about 200,000 of the 
subscribers were able to be switched to the new network. This 
was due to either PIC freezes that were on subscribers' 
telephone numbers or the telephone numbers did not exist. As a 
result, Atlas terminated its contract with Mr. Fletcher and 
later learned that an unusually high percentage (about 30 
percent) of Phone Calls, Inc. subscribers complained that they 
were slammed. Due to its prompt action, Atlas prevented Phone 
Calls, Inc from receiving any payments for its customers' long 
distance calls. Atlas subsequently sought to be allowed to keep 
serving Mr. Fletcher's customers that were placed on Sprint's 
network. According to Atlas officials, by February 1998, Atlas 
was providing long distance service for less than 20 percent of 
the original 200,000 customers placed by Mr. Fletcher on 
Sprint's network.
    The April 23, 1998 hearing highlighted how Mr. Fletcher 
used current telecommunications industry practices to his 
advantage to steal millions of dollars from customers, long 
distance service providers, and billing companies. Both the 
current regulatory scheme and market structure can allow 
unscrupulous individuals to operate with impunity in the long 
distance telephone industry. At the hearing, the Subcommittee 
displayed an example of the sweepstakes entry form that Mr. 
Fletcher used to deceive consumers into signing up for his 
companies' long distance services (exhibits 39d and 39e). One 
chart showed a poster used by Mr. Fletcher (exhibit 39d) and 
the other showed the three-by-five card which served as the 
letter of authorization to switch consumers long distance 
services to one of Mr. Fletcher's companies. Senator Collins 
pointed out at the April hearing that:

        ``most consumers thought that when they filled out this 
        postcard that they were signing up to win the new 
        Mustang convertible or $20,000 in cash.''

Mr. Bowron also testified that this method was often used by 
companies to slam consumers and stated that:

        ``[ . . . It was a] typical example of a deceptive 
        marketing practice to build your customer base.''

    The Subcommittee also learned that several of the companies 
that Mr. Fletcher had done business with suspected that he was 
in violation of FCC regulations to prevent slamming. However, 
these companies were under no obligation to report such 
activity to the FCC. Mr. Bowron testified at the April 23, 1998 
hearing that while AT&T wrote to Mr. Fletcher in April 1996 
questioning the legitimacy of his letters of authorization for 
customer change requests, AT&T did not report its suspicions 
about Mr. Fletcher to the FCC. Specifically, Mr. Bowron stated:

        ``From our interviews and investigation with respect to 
        the industry, they do not report that kind of activity. 
        They don't consider it their responsibility to report 
        that kind of activity . . . they expect the company to 
        comply with FCC regulations, but do not report it to 
        the FCC.''

    In addition, the Subcommittee learned that carriers that 
sell long distance network access to resellers are not required 
to check that the reseller has met FCC filing requirements or 
that the FCC has revoked the reseller's operating authority. 
While questioning the FCC Chairman at the April 23, 1998 
hearing, Senator Collins stated that:

        ``. . . the major carriers, the facility-based 
        carriers, are not checking to see whether there is a 
        tariff before doing business with a provider. And in 
        the Fletcher case, as you have pointed out, he 
        registered with you or filed the tariff for a couple of 
        his companies, but he didn't with others. . . . My 
        concern is that were it not for the notoriety that our 
        investigation has given Mr. Fletcher, there would be 
        nothing to stop one of the carriers from doing business 
        with him tomorrow, despite your order barring him, 
        because they are not checking with you.''

    Enforcement Action Against the Fletcher Companies: The 
Subcommittee learned that the FCC first began receiving 
slamming complaints against Mr. Fletcher's companies in 1993. 
As is standard FCC practice, the complaints were forwarded to 
the appropriate company with an official notice requesting a 
response to the FCC. According to the FCC, the Mr. Fletcher 
failed to respond to the vast majority of notices issued to 
them from 1993 to 1996. In the few instances in which Mr. 
Fletcher filed responses, the responses failed to satisfy the 
complaints. Notices issued and sent to Mr. Fletcher from June 
1996 and later were returned to the FCC by the U.S. Postal 
Service marked ``unclaimed,'' ``moved,'' or ``refused.'' 
Further investigation by the FCC determined that only two of 
Mr. Fletcher's companies, Discount Calling Card and Phone 
Calls, Inc., had tariffs on file, required by the FCC as a 
precondition to being licensed. The other companies operated 
without any tariff or license from the FCC. In addition, none 
of Mr. Fletcher's companies filed annual reports or the names 
of designated agents, as required by the FCC. The addresses 
that the FCC had on file for Mr. Fletcher's companies were all 
mail box drops that Mr. Fletcher no longer used.
    Despite the numerous slamming complaints against Mr. 
Fletcher's companies from about 1993 to 1996, the FCC did not 
start any official action against him until December 1996, when 
it proposed a fine against Long Distance Services, Inc. for 
$80,000. In addition, in June 1997, the FCC issued an ``Order 
to Show Cause and Notice of Opportunity for Hearing'' to 
propose that the operating authority of the Fletcher companies 
be revoked for slamming and other violations. However, this 
order was not finalized until April 21, 1998, 2 days before the 
Subcommittee's April 23, 1998 hearing. Senator Collins raised 
this issue at the April 23, 1998 hearing to the FCC Chairman:

        Senator Collins: ``. . . However, it is my 
        understanding that the FCC received the majority of the 
        complaints against the Fletcher companies in mid-1996, 
        and during the interim time, several States took action 
        against Fletcher. Alabama, Illinois, Florida, and New 
        York actually revoked his authority to operate over a 
        year ago. Why did it take the FCC almost 2 years to 
        issue a final order in this case banning him from the 
        business?''

        Chairman Kennard: ``Well, I have reviewed the 
        enforcement action in the Fletcher case, and first let 
        me say that the slamming complaints should be 
        expedited. I think the Commission can and will take 
        steps to make sure that complaints are expedited. They 
        are taking too long.''

    The Subcommittee also found that a number of States have 
taken more aggressive enforcement action against the Fletcher 
companies. In 1996 and 1997, Alabama, New York, Illinois, and 
South Carolina revoked Phone Calls, Inc.''s state 
telecommunications licenses, due to slamming and other 
complaints. In August 1997, the Florida Public Service 
Commission fined Phone Calls, Inc. $860,000 for slamming 
violations. This fine is significantly higher than the $80,000 
penalty assessed by the FCC in May 1997 against one of 
Fletcher's companies.
    At the April 23, 1998 hearing, Senator Collins asked Mr. 
Bowron to give his opinion of the FCC's enforcement activity in 
the Fletcher case. Mr Bowron stated:

        ``Well, the enforcement activity in this case really 
        was not more aggressive than sending a notice of the 
        orders to Mr. Fletcher. . . . So while they did 
        initiate some action, they really did not follow 
        through with the action as soon as they could have 
        based on his lack of response, which enabled him 
        probably to stay in business longer than he would 
        have.''

    Senator Durbin summed up the enforcement action taken 
against Fletcher by stating at the April 23, 1998 hearing:

        ``The more I get into this, the more I am convinced 
        that, to this point, no one has taken this seriously. 
        If a fellow like Fletcher can get into business and . . 
        . can make, it appears, millions of dollars off of this 
        and ultimately escape prosecution. As I understand it, 
        he has never been indicted or prosecuted for anything. 
        . . . You know, if you steal hubcaps they stop you, 
        arrest you, make you face the judge, and this fellow is 
        involved in millions of dollars of fraud, and no one 
        has ever prosecuted him.''

                E. Enforcement Actions Against Slamming

    The Subcommittee found that FCC enforcement actions against 
slamming have been ineffective in controlling this growing 
problem. Generally, the FCC's investigations of companies that 
engage in slamming take much too long, fines against such 
companies are too low to have a deterrent effect, and the 
States have been much more aggressive than the FCC in taking 
action against slamming.
    The Subcommittee learned that from 1994 until March 1998, 
the FCC took enforcement action against only 17 companies for 
slamming violations, including assessing $1.5 million in 
forfeitures and consent decrees and $280,000 in pending fines. 
Only after the Subcommittee had investigated Mr. Fletcher for 
several months did the FCC finally take an unprecedented 
enforcement action by revoking the operating authority of the 
Fletcher companies, and fining them $5.7 million for slamming 
and other violations on April 21, 1998. This marked the first 
time that the FCC has taken such aggressive action against a 
company for slamming.
    The Subcommittee learned that the FCC will initiate a 
formal investigation of a carrier for slamming complaints if 
the FCC receives a large volume of complaints, or if the 
complaint involves an allegation of forgery or other fraudulent 
activity by the carrier. First, the FCC will usually contact 
the carrier informally to request that they come in to the FCC 
and explain the reason for the slamming complaints against 
them. If the carrier does not satisfactorily explain the 
slamming complaints or does not meet with the FCC at all, the 
FCC can issue a ``Notice of Apparent Liability for 
Forfeiture,'' which proposes a fine against the carrier for the 
slamming violations. If the FCC does not have enough evidence 
to issue a forfeiture notice, then it can issue a public letter 
of admonition against the carrier, which puts the carrier on 
notice that its activities are under scrutiny by the FCC.
    When a carrier gets a forfeiture notice, it usually comes 
in to explain its actions. The carrier can then enter into a 
consent decree, whereby it voluntarily makes a payment to the 
U.S. Treasury and takes steps to eliminate the practices that 
led to the slamming complaints against it. (The carrier can 
enter into a consent decree even before getting a forfeiture 
notice, when it comes in to the FCC informally to discuss 
slamming complaints against it.) If the carrier does not enter 
into a consent decree, the FCC can finalize the forfeiture and 
issue a forfeiture order, which fines the carrier for the 
slamming violations. If warranted, the FCC can initiate 
revocation proceedings by issuing a ``Show Cause Order.'' Under 
such an order, the FCC asks the carrier to formally, in an 
administrative proceeding, show cause as to why the FCC should 
not revoke its authority to offer long distance services. The 
FCC has only issued one such order, against the Fletcher 
companies, for slamming violations.
    Current FCC guidelines recommend a forfeiture of $40,000 
for each ``unauthorized conversion of long distance telephone 
service.'' The Commission and its staff retain discretion to 
issue a higher or lower fine than provided in the guidelines, 
or to issue no fine at all. The FCC has statutory authority to 
impose a maximum fine of $110,000 per slamming incident, or 
$1,100,000 for continuing violations. Based on the fines 
imposed by the FCC to date, most of the fines against carriers 
for slamming have been for $80,000 or less. This is due to the 
limited authority delegated to the Common Carrier Bureau to 
assess fines above that amount. Fines above $80,000, which have 
been proposed against only two companies, require the 
Commission's approval. It is less work for the Commission to 
handle slamming enforcement actions at the bureau level, which 
accounts for the fact that most fines are $80,000 or less. In 
addition, the FCC does not have the resources to completely 
investigate every slamming offense, which is required before 
they can assess a fine against a carrier. As a result, they 
will choose one or two of the strongest cases against the 
carrier to investigate fully to use to support the fines.
    The Subcommittee found that state officials have been more 
aggressive than the FCC in pursuing slamming violators. At the 
February 18, 1998 hearing, Senator Collins provided a specific 
example to FCC Commissioner Susan Ness of how States have 
imposed much higher fines against companies for slamming than 
the FCC does for the same companies.

        Senator Collins: ``Well, let me give you a specific 
        example, because in several cases the States have been 
        far more aggressive than the FCC. You heard this 
        morning Pamela Corrigan describe her experience with a 
        company called Minimum Rate Pricing. Florida assessed a 
        fine of $500,000 against this company for slamming. The 
        FCC, by contrast, assessed a fine of only $80,000. My 
        concern is that an $80,000 fine----

        Ms. Ness: ``Is the cost of doing business.''

        Senator Collins: ``Exactly.''

    At the April 23, 1998 hearing, Mr. Bowron testified that 
``generally, the States have taken the stronger action.'' In 
its report, GAO stated that ``in comparison with some states' 
actions, the FCC has taken little punitive action against 
slammers.'' Furthermore, the GAO report concludes that ``the 
FCC takes an inordinate amount of time, as acknowledged by FCC 
officials, to identify companies that slam consumers and to 
issue orders for corrective actions (i.e., fines, suspensions) 
or to bar them from doing business altogether.''
    The Subcommittee presented two charts at the April 23 
hearing that show the disparity between the slamming penalties 
imposed by the States and those imposed by the FCC (exhibits 
39j and 39k). The charts showed that as of the beginning of 
April 1998, the FCC had taken a total of $1.8 million in 
enforcement actions against companies for slamming. However, 
just 17 States, which is not inclusive of all state enforcement 
efforts, took a total of at least $17.5 million in enforcement 
actions against companies for slamming. Senator Collins pointed 
out that the States have imposed higher fines and tougher 
penalties, and they have acted much sooner.

      F. Legislative and Regulatory Proposals To Control Slamming

    Legislative Responses to Slamming: The Subcommittee found 
that despite current laws and regulations that prohibit 
slamming, this practice continues to be used by long distance 
carriers against unwitting consumers. To attempt to stop the 
dramatic increase in slamming complaints in the last few years, 
several bills were introduced in the House and the Senate over 
the last year which would impose greater fines and penalties on 
companies that violate anti-slamming regulations, and allow 
consumers, or state Attorneys General on behalf of consumers, 
to sue such companies in state or federal court, among other 
things.
    On March 10, 1998, Senator Collins and Senator Richard 
Durbin introduced S. 1740, the ``Telephone Slamming Prevention 
Act of 1998.'' The bill includes the following provisions:

        Clarification of Verification Procedures: The bill 
        amends current law, which allows the FCC to determine 
        the verification procedures that telecommunications 
        carriers can use when executing a change in subscriber 
        service, to place some restrictions on the approved 
        verification methods. Specifically, this provision will 
        eliminate the ``welcome package'' method of 
        verification. It will still allow the FCC to determine 
        the appropriate forms of verification and the time and 
        manner in which such verification must be retained by 
        carriers.

        Liability for Charges: The bill also allows subscribers 
        who have been slammed, and who have not yet paid their 
        telephone bill to the unauthorized carrier, to pay 
        their original carrier for their phone usage, at the 
        rate they would have been charged by their original 
        carrier. The provision will not change existing law and 
        FCC regulations that make the slamming carrier liable 
        to the original carrier for any charges it collects 
        from a slammed subscriber. This provision is designed 
        to take away the financial incentive for slamming.

        Additional Penalties: The bill also increases the civil 
        penalties for slamming and creates criminal penalties.

        The civil penalties provision will require the FCC to 
        assess a minimum of $50,000 for the first slamming 
        offense, and $100,000 for any subsequent offense, 
        unless the Commission determines that there are 
        mitigating circumstances. Currently, the penalty 
        typically assessed by the FCC is only $40,000 for each 
        offense.

        In addition, this provision will allow the Commission, 
        at its discretion, to assess civil penalties against 
        carriers that make unauthorized carrier changes on 
        behalf of their agents or resellers. It will require 
        the Commission to promulgate regulations on the 
        oversight responsibilities of the underlying 
        facilities-based carriers for their agents or 
        resellers. This will make it clear to carriers, who 
        sell access to their telephone lines, that they have 
        some responsibility for the actions of their agents or 
        resellers.

        Currently, slamming is not a crime. The criminal 
        penalties provision will make intentional slamming a 
        misdemeanor for the first offense (not more than 1 year 
        imprisonment), and a felony for subsequent intentional 
        slamming offenses (not more than 5 years imprisonment). 
        Criminal fines for intentional slamming are the same as 
        those for any other federal crime: a maximum of 
        $100,000 for a misdemeanor and $250,000 for a felony. 
        In addition, anyone convicted of the crime of 
        intentional slamming will not be allowed to be a 
        telecommunications service provider, and any company 
        substantially controlled by a person convicted of 
        intentional slamming will also be disqualified from 
        providing such services. After 5 years, however, the 
        FCC shall have the option to reinstate such individuals 
        or companies disqualified under this provision, if it 
        is in the public interest to do so.

        State Actions: The bill gives the States the right to 
        take action against slammers on behalf of its 
        residents, and makes it clear that nothing in this 
        section preempts the States from taking action against 
        intra-state slammers. This provision is necessary 
        because some state supreme courts have ruled that FCC 
        regulatory authority preempts the States from acting in 
        this area.

        Reports on Slamming Complaints: The bill requires all 
        telecommunications carriers, including local exchange 
        carriers, to report on the number of subscriber 
        slamming complaints against each carrier. The provision 
        allows the FCC to determine how often these reports 
        have to be submitted. This provision will not require 
        carriers to refer complaints on an individual basis, 
        only a summary report that could be used by the FCC to 
        determine which companies are engaging in patterns and 
        practices of slamming.

        FCC Report on Slamming and Enforcement Actions: The 
        bill establishes a requirement that FCC submit a report 
        to Congress on its slamming enforcement actions. The 
        FCC already provides this information in its Common 
        Carrier Scorecard, so this provision does not establish 
        a new report. It is designed to make it clear to the 
        FCC that Congress considers slamming enforcement 
        important.

        FCC Report on Adequacy of FCC License Process: This 
        bill requires the FCC report to Congress on whether 
        current licensing requirements and procedures are 
        sufficient to prevent fraudulent telecommunications 
        providers from receiving an FCC license. Currently, the 
        FCC does not review telecommunications provider 
        applications prior to issuing FCC licenses, allowing 
        fraudulent companies into the telecommunications 
        marketplace.

    Support for Collins-Durbin Slamming Legislation: During the 
April 23, 1998 hearing, witnesses supported several provisions 
of the Telephone Slamming Prevention Act of 1998 (S. 1740), the 
Collins-Durbin slamming bill. Mr. Bowron testified that 
currently, there is an economic incentive to slam consumers, 
since slamming carriers receive money from consumers. He agreed 
that a provision like the one in the Collins-Durbin bill that 
would allow consumers to pay their original carrier rather than 
the carrier that slammed them would help reduce the financial 
incentive to slam. FCC Chairman Kennard also stated in his 
testimony at the April hearing that he wants to remove the 
financial incentive to slam.
    Another provision of the Collins-Durbin slamming bill that 
was discussed at the April 23, 1998 hearing was the requirement 
that all carriers report slamming complaints to the FCC. Both 
the GAO and FCC witnesses agreed that such a provision would be 
helpful to the FCC's slamming enforcement efforts. Chairman 
Kennard stated:

        ``I like this provision in your legislation which 
        requires the carriers to notify the FCC when they 
        become aware that there is a [slamming] problem. I 
        think that that would be a helpful solution.''

    Also at the April 23, 1998 hearing, witnesses supported 
having criminal penalties for intentional slamming, as the 
Collins-Durbin bill would do. Based on his 24 years of law 
enforcement experience and as the former director of the U.S. 
Secret Service, Mr. Bowron testified in support of 
criminalization of intentional slamming by stating that:

        ``. . . it would be, I think, from an enforcement 
        standpoint for prosecuting attorneys and law 
        enforcement agencies, preferable if there were specific 
        violations that were specific to slamming, rather than 
        trying to use the facts and circumstances to rely on 
        other statutes.''

Chairman Kennard also went on record during the April hearing 
in support criminalization of intentional slamming. In 
addition, in its written statement to the record, the 
Telecommunications Resellers Association, a major association 
representing over 500 telephone resellers, supported the notion 
that intentional slamming should be a criminal act:

        ``Those few entities who intentionally engage in 
        slamming are indeed criminals whose sole intent is to 
        gain from deceiving and defrauding the public, and 
        should be subject to swift, decisive, and harsh 
        enforcement action accordingly.''

    In addition, Susan Grant, of the National Consumers League, 
wrote to Senator McCain to specifically support several 
provisions that are contained in S. 1740, including the 
liability for charges provision, carrier reporting of slamming 
complaints, and criminalization of intentional slamming.
    Comprehensive Slamming Bill Passes the Senate: On May 12, 
1998, the Senate passed (99-0) the ``Consumer Anti-Slamming 
Act'' (S. 1618). This bill strengthens safeguards to prevent 
slamming from occurring in the first place, establishes a 
process to resolve slamming complaints, and increases the 
ability to punish those who are guilty of slamming. Three 
provisions from the Collins-Durbin anti-slamming bill (S. 1740) 
were offered on the Senate floor and included in the slamming 
bill passed by the Senate, including liability for charges, 
slamming reporting requirements, and criminal penalties for 
intentional slamming.
    Also included in the Senate slamming bill are two 
amendments sponsored by Senator Levin, and cosponsored by 
Senators Glenn and Durbin. One amendment requires telephone 
bills to clearly state the name of the company that is 
providing a consumer's long distance service. The second 
amendment requires switchless resellers of long distance 
service to furnish a bond to the FCC and prohibits carriers 
from billing customers on behalf of switchless resellers prior 
to verification that the bond has been furnished.
    House Slamming Bill Introduced: On May 14, 1998, 
Representative Tauzin (R-LA), along with several co-sponsors, 
introduced the ``Anti-slamming Amendments Act,'' (H.R. 3888) in 
the House of Representatives. This bill is essentially the same 
as the slamming bill passed by the Senate, S. 1618, except that 
it does not include the provision making intentional slamming a 
crime.
    FCC Regulations: The FCC is in the process of issuing 
revised regulations to further protect consumers against 
slamming, including improvement of existing verification 
procedures and preventing unauthorized carriers from keeping 
any revenue obtained through slamming. In July 1997, the FCC 
issued a notice about the proposals and received public 
comments. The commissioners have not yet decided on what 
changes will be made. The commissioners are expected to issue 
the new order sometime in 1998. However, due to passage of the 
Senate bill and pending legislation in the House, the 
Commission is waiting to see the outcome of the final slamming 
legislation before it issues its new rules. The FCC staff has 
recommended a number of changes to the commissioners, including 
the following:

        Liability For Charges: Require the slamming carrier to 
        pay the authorized carrier for any telephone services 
        paid by the slammed subscriber. Currently, the 
        authorized carriers can seek payment from the slamming 
        carrier, but they have not availed themselves of this 
        option. (Carriers would probably only bother to seek 
        payment from a slammer if they had lost significant 
        business due to one company's slamming practices. Under 
        the current rules, the FCC recommends that carriers 
        come to them to arbitrate with the slamming carrier 
        before bringing legal action.)

        As part of the rule change, the FCC is considering 
        allowing the subscriber to not pay for long distance 
        calls made with the slamming long distance carrier. 
        This would take away the economic incentive to slam. 
        However, this could also invite fraudulent slamming 
        complaints from subscribers trying to avoid long 
        distance charges.

        Also related to this rule change is the proposal to 
        require the slamming carrier to be responsible for 
        reinstating any premiums that the subscriber would have 
        earned with the authorized carrier, such as frequent 
        flyer miles. The FCC is looking for ways to make the 
        subscriber whole and is likely to adopt new rules that 
        would include some type of reimbursement for such 
        premiums.

        Eliminate Welcome Package: Eliminate the ``welcome 
        package'' method of verifying a subscriber's long 
        distance carrier change. Currently, after a 
        telemarketing call is made by the long distance 
        carrier, the carrier can send out a welcome package to 
        the subscriber to confirm the order. If the subscriber 
        does not affirmatively respond to the confirmation, 
        then that is an acceptable authorization to switch 
        carriers. Some carriers have fraudulently sent out 
        welcome packages without having made the initial 
        telemarketing call, knowing that most subscribers will 
        assume that it is junk mail and not even open the 
        package. The long distance carrier, Minimum Rate 
        Pricing, Inc., has used this method to slam 
        subscribers, including Pamela Corrigan, one of the 
        witnesses at the February 18, 1998 hearing. FCC 
        Commissioner Ness testified at the February hearing 
        that she would support eliminating the welcome package.

                      IV. FINDINGS AND CONCLUSIONS

    Based on its investigation into the exploding problem of 
telephone slamming, the Subcommittee makes the following 
factual findings and conclusions:

        1. LLong distance switchless resellers are responsible 
        for a large part of the intentional slamming problem. 
        Although some slamming is caused by facilities based 
        carriers (like AT&T, MCI and Sprint) and switched 
        resellers (those with some equipment and facilities), a 
        disproportionate number of slamming complaints are 
        filed against switchless resellers of 
        telecommunications services. Unlike the larger 
        companies which have a financial investment in the long 
        distance business, many of these switchless resellers 
        are largely middlemen who have no significant 
        investment in their businesses and who have little to 
        lose from widespread slamming. The facilities-based 
        carriers rely on their business name and reputation to 
        operate in this highly competitive market, and they 
        have less of an incentive to engage in the deceptive 
        practices used to slam consumers. Resellers, on the 
        other hand, are more likely to use deceptive company 
        names such as ``Long Distance Services'' or ``Business 
        Discount Plan'' to make it harder for a customer to 
        detect a new long distance company name on their 
        telephone bills. As the Subcommittee revealed in the 
        Fletcher case, it is very easy and inviting for 
        switchless resellers to start up a long distance 
        telephone service ``on paper,'' slam thousands of 
        consumers, steal millions of dollars and then just 
        abandon that business when federal or state authorities 
        begin investigating them. By the time the facilities-
        based carriers, billing companies, state regulators or 
        the FCC come around looking for the slamming 
        perpetrators, they are long gone and may have set up 
        another company with a different name but doing the 
        same business.

        2. LThe FCC does not review license applications prior 
        to granting authority to long distance companies to 
        operate, nor do they have procedures in place to ensure 
        that unscrupulous providers, who have been barred from 
        the industry, do not continue to operate long distance 
        service companies. As the April 23, 1998 hearing 
        revealed, GAO investigators filed fictitious 
        information with the FCC to get authority to operate a 
        long distance telephone company. Even though the 
        computer disk that was supposed to contain the tariff 
        information was blank, the phone numbers were 
        fictitious, and no filing fee was ever remitted, the 
        FCC listed ``PSI Communications'' on their Internet 
        site as an authorized long distance company.

          LBecause the FCC does not review license 
        applications, and does not have a system designed to 
        screen out fraudulent carriers in the first place, it 
        may be nearly impossible to catch the bad actors. For 
        example, in the Fletcher case, even though the FCC took 
        enforcement action against the Fletcher companies for 
        extensive slamming violations, the Commission could not 
        locate Mr. Fletcher. The addresses listed on his FCC 
        applications were long abandoned mail box drops and the 
        telephone numbers listed were not in operation. The FCC 
        notices were returned as undeliverable. At about the 
        same time that the FCC was investigating Mr. Fletcher 
        for slamming consumers, Mr. Fletcher filed a tariff and 
        received authority from the FCC for another long 
        distance company that he operated. The FCC did not 
        scrutinize Mr. Fletcher's application or check to see 
        if he was previously in violation of FCC regulations. 
        In a few cases, Mr. Fletcher operated long distance 
        companies which had no tariffs, annual reports or 
        designated agents on file with the FCC. Mr. Fletcher 
        operated as a reseller of telecommunications services 
        under at least 8 different company names, repeatedly 
        slamming consumers. As the GAO witness stated in his 
        testimony at the April hearing, despite the FCC's 
        recent enforcement action against Mr. Fletcher, there 
        are no FCC procedures preventing him from filing a 
        tariff with the FCC and getting back into the long 
        distance business again.

          LFurthermore, the FCC does not currently require 
        facilities-based carriers, or resellers that sell 
        telephone network access to other resellers, to check 
        with the FCC to determine if the reseller has met FCC 
        filing requirements or if the FCC has revoked the 
        reseller's operating authority. As the Subcommittee 
        investigation determined, if carriers are not required 
        to check with the FCC, someone like Mr. Fletcher can 
        purchase network access from facilities-based carriers 
        and other resellers without properly obtaining 
        authority to operate as a long distance carrier. 
        Furthermore, even though Mr. Fletcher's companies have 
        had their operating authority revoked by the FCC, he 
        could still purchase long distance access from other 
        carriers if the companies don't check with the FCC 
        first.

          LAlthough the FCC testified that screening license 
        applications would not be an economical or effective 
        means of preventing fraudulent actors from filing false 
        applications with the FCC, the Subcommittee found that 
        some basic screening would protect consumers and 
        enhance slamming enforcement actions.

        3. LDeceptive marketing practices and fraud account for 
        many of the slamming incidents. Deceptive practices, 
        such as high pressure phone calling and misleading 
        sweepstakes entries, account for a large number of 
        slamming complaints each year. These deceptive 
        practices are often employed by unscrupulous resellers 
        and in some cases by the direct marketing companies 
        hired by the larger, facilities-based carriers. In each 
        of these cases, slamming can occur because the long 
        distance company, and not just the consumer, is able to 
        change the consumer's long distance service provider. 
        Unlike most industries, long distance companies can 
        place a change order with the local telephone company 
        and switch the long distance service of the customer 
        without the customer's direct involvement at all. This 
        system was designed with good intentions--to facilitate 
        competition in a previously non-competitive marketplace 
        that was dominated by one, huge provider of telephone 
        service, AT&T. After the break-up of AT&T in the 
        1980's, this system was devised to allow smaller 
        companies to compete in providing long distance 
        services, and to reduce long distance costs to 
        consumers through competition. The weak link in the 
        system, however, is properly securing ``the customer's 
        permission'' to change the long distance provider.

          LThe problem of slamming occurs when customers are 
        deceived into changing their long distance provider or 
        a long distance company simply changes the service 
        without any contact with the customer. The Subcommittee 
        found instances of misleading sweepstakes forms and 
        high pressure telephone marketing practices used to 
        deceive consumers into switching long distance service. 
        During the April 23, 1998 hearing, the Subcommittee 
        revealed that Mr. Fletcher used deceptive sweepstakes 
        entry forms as letters of authorization, in some cases 
        even forging the customers' signatures. During the 
        February 18, 1998 hearing, the Subcommittee heard 
        testimony from Pamela Corrigan, who was slammed when 
        she received an unsolicited ``welcome package'' in the 
        mail that looked like junk mail, but automatically 
        signed her up for a new long distance service unless 
        she returned a post card rejecting the change. Another 
        witness at the February hearing, Steve Klein, testified 
        that his business long distance lines were slammed when 
        a reseller misrepresented itself as AT&T in order to 
        confuse an employee about the carrier switch.

        4. LUnscrupulous long distance companies have a 
        financial incentive to slam consumers. Under the 
        current billing system, crime does pay in the case of 
        slamming. Unscrupulous long distance telephone 
        companies have a financial incentive to slam as many 
        customers as they can. Currently, if a customer 
        complains about being slammed, the bill is recomputed 
        by the local telephone company and the customer pays 
        the phone bill based on the rates of the properly 
        authorized carrier. However, customers pay the carrier 
        that slammed them. In this case, crime pays for the 
        slamming carrier. In addition, if customers never 
        complain or don't notice that their long distance 
        service was changed without their permission, then the 
        slamming carrier continues to bill the customers at the 
        slamming carrier's rates. In either case, the slamming 
        company wins. As the Subcommittee investigation 
        revealed in the Fletcher case, Mr. Fletcher was able to 
        manipulate the industry's billing practices to obtain 
        millions of dollars in advance payments for the 
        customers that he slammed. Under current regulations, 
        long distance companies have a financial incentive to 
        repeatedly slam telephone customers. As FCC Chairman 
        Kennard testified at the April 23, 1998 hearing:

            L``I believe that the reason people slam is because 
        there is a financial incentive to do so, and we need to 
        remove that financial incentive.''

        5. LThe FCC's enforcement actions against slamming are 
        inadequate. The FCC has disciplined a relatively small 
        number of long distance telephone companies for 
        violation of slamming regulations, and the civil fines 
        imposed are very low compared to state actions against 
        the same companies. For example, in February 1998, the 
        Florida Public Service Commission proposed a $500,000 
        fine against Minimum Rate Pricing for slamming 
        subscribers while the FCC fined the same company only 
        $80,000. In the Fletcher case, Florida fined a Fletcher 
        company for $860,000, while the FCC originally fined 
        one of the Fletcher companies only $80,000. Even though 
        hundreds of thousands of Americans are slammed each 
        year, the FCC has taken action against just 17 
        companies for slamming violations since 1994, including 
        assessing $1.8 million in forfeitures, pending fines, 
        and consent decrees. In contrast, as demonstrated at 
        the April 23, 1998 hearing, 17 States have assessed at 
        least $17.5 million in fines, pending fines, and 
        consent decrees.

        6. LThe FCC does not have an complete estimate of the 
        total number of slamming incidents. The Subcommittee 
        has found that the FCC does not know the actual number 
        of slamming incidents that occur each year, because it 
        relies on customers to voluntarily write in to the FCC 
        with a slamming complaint. As GAO found in its 
        investigation, there is no central repository for 
        slamming complaints. Furthermore, the Subcommittee 
        hearings revealed that carriers, although more likely 
        to receive slamming complaints from consumers, are not 
        required to report such information to the FCC. Without 
        complete information on the total number of slamming 
        complaints, the FCC may not know which carriers are 
        responsible for the bulk of slamming complaints. In 
        addition, the FCC typically waits until it receives a 
        consumer complaint before it initiates any 
        investigation of a company's slamming activities.

                           V. RECOMMENDATIONS

    Based on the findings and conclusions of the slamming 
investigation, it is the Subcommittee's recommendations that:

        1. LCongress should enact legislation to remove the 
        financial incentive to slam. Currently, companies 
        engaging in slamming reap financial benefits from the 
        theft of telephone service from unsuspecting consumers. 
        Congress should make sure that crime does not pay. The 
        liability for charges provision in S. 1740, and 
        included in S. 1618, removes the financial incentive 
        for slamming companies by allowing subscribers who have 
        been slammed, and who have not yet paid their telephone 
        bill to the unauthorized carrier, to pay their original 
        carrier for their phone usage at the rate they would 
        have been charged by their original carrier. This 
        provision will not change existing law and FCC 
        regulations that make the slamming carrier liable to 
        the original carrier for any charges it collects from a 
        slammed subscriber. This provision will take away the 
        financial incentive for slamming and prevent companies, 
        such as those operated by Mr. Fletcher, from 
        benefitting from their fraudulent actions.

        2. LCongress should enact legislation to eliminate 
        deceptive methods of changing a consumer's long 
        distance service provider, such as the so-called 
        ``welcome package.'' A welcome package is material 
        received by a consumer in the mail that requires the 
        consumer to affirmatively reject the change in carrier; 
        otherwise, the change goes into effect after 2 weeks. 
        The problem is that these welcome packages look like 
        junk mail, and many consumers simply discard them 
        without reading the material. When this happens, the 
        consumers' long distance service is changed 
        automatically. The Subcommittee's investigation 
        revealed that some unscrupulous long distance telephone 
        companies used this verification method to deceive 
        consumers into changing their service by sending the 
        package without having any contact with the consumer or 
        sending the package after deceptively marketing their 
        service over the phone.

          LThe FCC is currently considering regulations that 
        would eliminate the welcome package option as a method 
        of verifying a consumer's authorization to switch long 
        distance carriers, but has been slow to approve revised 
        regulations. The Subcommittee strongly encourages the 
        FCC to act swiftly to approve these regulations. 
        Furthermore, the verification provisions of both S. 
        1740 and S. 1618 would make this change by law.

        3. LCongress should enact legislation to establish 
        tougher fines to deter slamming. Civil penalties must 
        be tough enough so that they are not considered just 
        the cost of doing business. As the Subcommittee 
        revealed in its hearings, most of the penalties the FCC 
        has imposed against companies for slamming have been in 
        the $40,000 to $80,000 range. In a system where an 
        unscrupulous company can make millions of dollars from 
        slamming and disrupt the lives of consumers, the civil 
        fines must be significant. The civil penalties 
        provisions of S. 1740 and S. 1618 mandate tough minimum 
        fines and greater fines for second offenses. Statutory 
        changes should be made to the FCC's fine structure for 
        slamming violations to make slamming hurt where it 
        counts--in the pocketbook of those unscrupulous long 
        distance telephone providers.

        4. LCongress should enact legislation that establishes 
        criminal penalties for intentional and deliberate 
        slamming. In addition to civil penalties, criminal 
        penalties are needed to deter intentional slamming. 
        Slamming is essentially stealing someone's long 
        distance service, and it should be treated as such. The 
        criminal penalties provisions of S. 1740 and S. 1618 
        make willful slamming a misdemeanor for the first 
        offense (not more than 1 year imprisonment), and a 
        felony for subsequent intentional slamming offenses 
        (not more than 5 years imprisonment). Under this 
        provision, criminal fines for intentional slamming are 
        the same as those for any other federal crime: a 
        maximum of $100,000 for a misdemeanor and $250,000 for 
        a felony. As the Subcommittee investigation revealed, 
        the impunity with which Mr. Fletcher slammed his 
        subscribers, and his ability to evade all enforcement 
        actions, makes it necessary to establish criminal 
        penalties to deter willful slammers. An individual like 
        Mr. Fletcher who intentionally slams thousands of 
        consumers and steals millions of dollars should be 
        subject to stiff criminal sanctions. The current 
        criminal law does not directly cover his actions, and 
        Congress should change that. Witnesses at both 
        Subcommittee hearings, including FCC Chairman Kennard, 
        FCC Commissioner Ness, GAO witness Mr. Bowron, and 
        Susan Grant of the National Consumers League, have all 
        stated their support of criminal penalties for 
        slamming. Intentional slamming should be a separate, 
        punishable criminal offense.

        5. LThe FCC must be more consistent and aggressive in 
        its enforcement efforts against companies that engage 
        in slamming. The FCC currently has the authority to 
        impose fines on those who engage in repeated and 
        intentional slamming and to revoke the operating 
        authority of carriers in the most severe cases. 
        However, the use of this authority has been 
        inconsistent, slow and inadequate. The FCC must be as 
        aggressive as many of the States have been in the 
        enforcement of anti-slamming laws and regulations. In 
        the Fletcher case, the Subcommittee found that the FCC 
        initially fined one of his eight companies for just 
        $80,000. In contrast, the Florida Public Service 
        Commission fined Phone Calls, Inc. $860,000 for 
        slamming violations. In addition, Alabama, New York, 
        Illinois, and South Carolina revoked one of the 
        Fletcher company's state telecommunications licenses, 
        due to slamming and other complaints, over a year ago. 
        The FCC only recently took a similar action, more than 
        2 years after it first began investigating Mr. 
        Fletcher.

        6. LCongress should enact legislation that requires all 
        carriers to report slamming complaints. The FCC must 
        have accurate and up-to-date information to effectively 
        investigate slamming complaints. The report on slamming 
        violations provisions of S. 1740 and S. 1618 would 
        accomplish this by requiring all telecommunications 
        carriers, including local exchange carriers, to report 
        on the number of subscriber slamming complaints against 
        each carrier. This provision allows the FCC to 
        determine how often these reports would have to be 
        submitted, and would not require carriers to refer 
        complaints on an individual basis. Carriers would be 
        required to provide a summary report that could be used 
        by the FCC to determine which companies are engaging in 
        patterns and practices of slamming. Carrier reporting 
        will enable the FCC to have better statistics on the 
        number of slamming incidences and which companies are 
        the most egregious slammers. Also, carrier reporting 
        may help the FCC to identify fraudulent providers, such 
        as the Fletcher companies, much earlier than if they 
        wait for consumer complaints to be filed with the FCC.

        7. LThe FCC should review its licensing system for long 
        distance providers, particularly with respect to 
        switchless resellers, to determine how to screen out 
        fraudulent providers. While the FCC is following 
        Congress' direction to eliminate unnecessary 
        requirements that would limit competition in the long 
        distance market, the FCC must be able to enforce its 
        orders and prevent fraudulent telephone service 
        providers from remaining in the telecommunication 
        business. Even though the FCC has recently revoked the 
        operating authority of the Fletcher companies, it has 
        no system in place to prevent Mr. Fletcher from 
        continuing to provide long distance services. In fact, 
        GAO reported that there is evidence that Mr. Fletcher 
        is still providing long distance services today, 
        despite numerous enforcement efforts by the FCC. One of 
        the provisions in S. 1740, the Telephone Slamming 
        Prevention Act of 1998, would require the FCC to review 
        the adequacy of its licensing requirements and 
        procedures, and report on steps it could take to screen 
        out fraudulent long distance providers, particularly 
        those who have had their operating authority revoked by 
        the FCC.

          LFurthermore, the FCC should, at a minimum, establish 
        requirements that facilities-based carriers, and other 
        companies that sell long distance network access, check 
        with the FCC to determine if a reseller has been 
        properly authorized to be a long distance service 
        provider and that the FCC has not revoked the 
        reseller's operating authority.

                              *    *    *

    The following Senators, who are Members of the Committee on 
Governmental Affairs and the Permanent Subcommittee on 
Investigations, have approved this report:

Susan M. Collins, Chairman          John Glenn, Ranking Member
Fred Thompson                       Carl Levin
William V. Roth, Jr.                Joseph I. Lieberman
Sam Brownback                       Daniel K. Akaka
Pete V. Domenici                    Richard J. Durbin
Thad Cochran                        Robert G. Torricelli
Don Nickles                         Max Cleland


                                
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