[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.
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\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.
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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:
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\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
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(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:
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\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
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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.
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\4\ Business Discount Plan is the company that slammed Mermaid
Transportation Company, the small business owned by PSI witness Steve
Klein.
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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