Telecommunications: Telephone Slamming and Its Harmful Effects
(Testimony, 04/23/98, GAO/T-OSI-98-11).

Pursuant to a congressional request, GAO discussed the results of its
investigation on telephone slamming and its harmful effects, focusing
on: (1) what entities engage in intentional telephone slamming--a form
of telecommunications fraud and abuse; (2) the process by which
providers defraud customers; and (3) what federal and state regulatory
entities and the telecommunications industry are doing about it.

GAO noted that: (1) all three types of long-distance
providers--facility-based carriers, switching resellers, and switchless
resellers--have economic incentives to engage in slamming; (2)
switchless resellers, which have the most to gain and the least to lose,
slam most frequently; (3) intentional slamming is accomplished in
deceptive ways, such as by misleading consumers and falsifying or
forging documents; (4) the Federal Communications Commission (FCC),
state regulatory agencies, and the industry each rely on the others to
be the main forces in the fight against slamming; (5) thus, few of their
efforts are extensive; (6) to illustrate, the FCC has adopted some
antislaming measures but effectively does little to protect consumers;
(7) most states have some antislamming measures, but their extent varies
widely; (8) industry's measures appear to be more market-driven than
consumer-oriented; and (9) in fact, the most effective antislamming
measure appears to be one that consumers can take--contacting their
local exchange carrier and freezing their long-distance provider from
unwanted change.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-OSI-98-11
     TITLE:  Telecommunications: Telephone Slamming and Its Harmful 
             Effects
      DATE:  04/23/98
   SUBJECT:  Telecommunication industry
             Consumer protection
             Regulatory agencies
             Fraud
             Telephone
             Sanctions
             Fines (penalties)

             
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Cover
================================================================ COVER


Before the Permanent Subcommittee on Investigations,
Committee on Governmental Affairs,
U.S.  Senate

For Release on
Delivery Expected
at 9:30 a.m., EDT
Thursday
April 23, 1998

TELECOMMUNICATIONS - TELEPHONE
SLAMMING AND ITS HARMFUL EFFECTS

Statement of Eljay B.  Bowron
Assistant Comptroller General for Special Investigations
Office of Special Investigations

GAO/T-OSI-98-11

GAO/OSI-98-11t


(600464)


Abbreviations
=============================================================== ABBREV

  FCC -
  LOA -
  PCI -
  PIC -

TELECOMMUNICATIONS:  TELEPHONE
SLAMMING AND ITS HARMFUL EFFECTS
============================================================ Chapter 0

Madam Chairman and Members of the Subcommittee: 

Thank you for inviting me here today to discuss the results of our
investigation to determine (1) what entities engage in intentional
telephone slamming--a form of telecommunications fraud and abuse; (2)
how they go about it; and (3) what federal and state regulatory
entities and the telecommunications industry are doing about it.\1 I
will also discuss our case study concerning an individual whose known
companies apparently slammed 544,000 consumers in one effort. 

Slamming is the unauthorized switching of a consumer from the
long-distance provider of choice to another provider.  It can harm
consumers in a number of ways, such as by paying higher, sometimes
exorbitant, rates and experiencing frustration at having to correct
the problems resulting from being slammed.  Slamming also results in
losses to long-distance providers and other industry firms when
slammers take their profits and leave unpaid bills, sometimes
amounting to millions of dollars. 

  -- All three types of long-distance providers--facility-based
     carriers, switching resellers, and switchless resellers\2 --have
     economic incentives to engage in slamming.  Switchless
     resellers, which have the most to gain and the least to lose,
     slam most frequently. 

  -- Intentional slamming\3 is accomplished in deceptive ways, such
     as by misleading consumers and falsifying or forging documents. 

  -- The Federal Communications Commission (FCC), state regulatory
     agencies, and the industry each rely on the others to be the
     main forces in the fight against slamming.  Thus, few of their
     efforts are extensive.  To illustrate, the FCC has adopted some
     antislamming measures but effectively does little to protect
     consumers.  Most states have some antislamming measures, but
     their extent varies widely.  And industry's measures appear to
     be more market-driven than consumer-oriented.  In fact, the most
     effective antislamming measure appears to be one that consumers
     can take--contacting their local exchange carrier and "freezing"
     their long-distance provider from unwanted change. 

  -- Daniel H.  Fletcher, the owner/operator of the switchless
     resellers in our case study, apparently entered the industry in
     1993 and began large-scale slamming in 1995.  By 1996, when most
     industry firms had stopped dealing with the Fletcher companies,
     they had slammed or attempted to slam hundreds of thousands of
     consumers, billed their customers at least $20 million, and left
     industry firms with at least $3.8 million in unpaid bills. 


--------------------
\1 See also Telecommunications:  Telephone Slamming and Its Harmful
Effects (GAO/OSI-98-10, Apr.  21, 1998). 

\2 Facility-based carriers, e.g., AT&T (American Telephone and
Telegraph), MCI Telecommunications Corporation, and Sprint, have the
physical equipment including hard lines and switching stations
necessary to take in and forward calls.  Switching resellers lease
capacity on a facility-based carrier's long-distance lines, resell
long-distance services, and have one or more switching stations. 
Switchless resellers also lease capacity and resell long-distance
services but have no equipment and little or no substantive
investment in their companies. 

\3 Sometimes, legitimate mistakes are made in transcribing data that
result in slamming, but these mistakes are not paramount to the
slamming issue and can be easily rectified. 


   WHAT ENTITIES ENGAGE IN
   SLAMMING AND WHY? 
---------------------------------------------------------- Chapter 0:1

According to representatives of the FCC, numerous state regulatory
agencies, and the industry, those who most frequently engage in
intentional slamming are switchless resellers.  They have the least
to lose by using deceptive or fraudulent practices because they have
no substantive investment in the industry.  Nevertheless, the
economic incentives for slamming are shared by all long-distance
providers. 


   HOW IS SLAMMING ACCOMPLISHED? 
---------------------------------------------------------- Chapter 0:2

Anyone with a telephone must select a long-distance provider, or
Primary Interexchange Carrier (PIC), through the appropriate local
exchange carrier.  Consumers can change their PIC again through the
local carrier or through a long-distance provider with a written or
verbal authorization.\4 Intentional slamming is then possible because
the legitimate authorizations can easily be subverted.  For example,
the written authorization, or letter of agency (LOA), can be changed
or forged.  In addition, unscrupulous telemarketers or providers can
use deceptive marketing practices and mislead consumers into signing
an authorization.  Or consumers can be slammed without being
contacted, such as when a slammer obtains telephone numbers from a
telephone book and submits them to the local carrier for
changing--and then presents forged LOAs if asked for the
authorizations. 


--------------------
\4 Such written authorization is obtained by using a letter of agency
(LOA), whose sole purpose is to authorize a local exchange carrier to
initiate a PIC change for the consumer.  The LOA must be signed and
dated by the subscriber requesting the change.  (47 C.F.R.  section
64.1150(b)) Verbal authorizations are usually initiated by a
telemarketer. 


   WHAT HAVE THE FCC, STATE
   AGENCIES, AND THE INDUSTRY DONE
   TO FIGHT SLAMMING? 
---------------------------------------------------------- Chapter 0:3

Although the FCC, most state regulatory agencies, and the
telecommunications industry have some antislamming rules and
practices, each of the three entities relies on the others to be the
main forces in the antislamming battle.  Indeed, of the antislamming
measures, those by some states are the most extensive.  The FCC does
not review information that potential long-distance providers submit
with their tariff filings, which are required before the companies
can begin service.  Moreover, the FCC lags far behind some states in
the amount of fines imposed on companies for slamming. 


      ANTISLAMMING MEASURES
-------------------------------------------------------- Chapter 0:3.1

The FCC first adopted antislamming measures in 1985\5 and revised or
amended them in 1992, 1995, and 1997.\6 However, we found no FCC
practice that would help ensure that applicants who become
long-distance providers, or other common carriers, have satisfactory
records of integrity and business ethics.  To illustrate,
long-distance providers are now required to file a tariff--or
schedule of services, rates, and charges--with the FCC.\7 State
regulators and the industry rely on an entity's filed tariff as a key
credential that signifies legitimacy.  However, according to
knowledgeable FCC officials, the FCC merely accepts a tariff filing
and does not review the applicant's information provided with the
filing.  For example, to test FCC oversight of the tariff filing
process, we easily filed a tariff using fictitious information and
avoided paying FCC's $600 filing fee.  Our fictitious switchless
reseller--PSI Communications--could now slam consumers with little
chance of adverse consequences.  In short, FCC's tariff-filing
procedure is no deterrent to a determined slammer.  Neither does it
provide states, the telecommunications industry, or the public with
any assurance concerning a long-distance provider's legitimacy. 

While most state regulatory agencies have some licensing procedures
and requirements for an entity to become a long-distance provider,
those procedures/requirements vary widely.  For example, in
Georgia--a state with more restrictive measures--a switchless
reseller must, among other activities, undergo two reviews and wait a
period of time before receiving a permanent certificate.  The
telecommunications industry, to some extent, also attempts to weed
out companies involved in slamming.  For example, various
facility-based carriers, generally based on their marketing
philosophies and not consumer protection, undertake different
antislamming measures including the use of third parties to verify
requests for a PIC change. 

However, what appears to be the most effective antislamming measure
of all can be effected by consumers themselves--a PIC freeze.  An
individual consumer can contact the local exchange carrier and ask
that the consumer's choice of long-distance provider be "frozen." The
consumer can lift the freeze at any time by recontacting the local
carrier. 


--------------------
\5 In a 1985 policy statement (50 Fed.  Reg.  25,982 (June 24,
1985)), the FCC decided that allowing customers to select
long-distance carriers rather than automatically assigning them to
one provider would benefit the public interest.  Providers would then
have incentive to provide consumers with helpful information and
competitive services, which the consumers could use to make informed
choices. 

\6 47 C.F.R.  section 64.1100 (1992); 47 C.F.R.  section 64.1150; and
47 C.F.R.  section 64.1150(g) (1997). 

\7 Under section 203 of The Telecommunications Act of 1934, each
common carrier must file a tariff with the Commission.  However,
under section 203 (b), the Commission has discretion to modify this
requirement.  In 1996, the FCC promulgated a regulation (47 C.F.R. 
section 61.20), under which nondominant long-distance providers
(e.g., providers without the power to control prices) were exempted
from the requirement to file tariffs.  However, the regulation was
stayed in 1997 as a result of MCI Telecommunications Corp.  v.  FCC,
No.  96-1459.  Therefore, all common carriers must file tariffs at
the Commission. 


      PENALTIES IMPOSED ON
      SLAMMERS
-------------------------------------------------------- Chapter 0:3.2

FCC's punitive actions against slammers are far less extensive than
those of some state regulatory agencies in the same general time
period.  For example, in 1997, the FCC obtained consent decrees from
nine companies nationwide that paid $1,245,000 in fines for slamming. 
But in May 1997, the California Public Utilities Commission suspended
one firm for 3 years for slamming, fined it $2 million, and ordered
it to refund another $2 million to its customers.  Further, in 1997,
the FCC issued a Notice of Apparent Liability to another firm
amounting to $80,000 for apparent slamming.  But in February 1998,
the Florida Public Service Commission voted to require the same firm
to show cause why it should not be fined $500,000 for slamming. 


   CASE STUDY
---------------------------------------------------------- Chapter 0:4

We did a limited investigation of four of Daniel H.  Fletcher's eight
known companies\8 that operated as switchless resellers between 1993,
when he apparently entered the business, and 1996.  Through each
company, Mr.  Fletcher apparently slammed or attempted to slam many
thousands of consumers, including 544,000 at one time.  This one
effort occurred after (1) Sprint cancelled its business relationships
with two Fletcher companies--Christian Church Network, Inc.  and Long
Distance Services, Inc.--and (2) Mr.  Fletcher transferred the two
companies' customer base, through a third Fletcher company--Phone
Calls, Inc.  (PCI), to another long-distance provider for servicing. 
As further evidence of the extent of Mr.  Fletcher's dealings,
industry records, although incomplete, indicate that between 1993 and
1996 the Fletcher companies billed their customers over $20 million
in long-distance charges. 

By mid-1996, industry firms, including such large facility-based
carriers as Sprint, began to end their business relationships with
Mr.  Fletcher's companies because of his customer's slamming
complaints and/or his companies' nonpayment for long-distance network
usage.  AT&T recognized a problem with Mr.  Fletcher and his business
practices during April 1996, but it continued service to Long
Distance Services, Inc.  until November 1, 1997, when it discontinued
service for nonpayment for network usage. 

Mr.  Fletcher's companies have also come under regulatory scrutiny by
several states and the FCC.  For example, in 1997 the Florida Public
Service Commission cancelled the right of the Fletcher-controlled PCI
to do business in the state and fined it $860,000 for slamming.  In
June 1997, the FCC, citing numerous complaints and evidence of forged
or falsified LOAs, issued an Order to Show Cause and Notice of
Opportunity for Hearing regarding Mr.  Fletcher and his eight
companies.  In that order, the FCC, in effect, directed Mr.  Fletcher
and his companies to show cause why the FCC should not require them
to stop providing long-distance services without prior FCC consent
and why the companies' operating authority should not be revoked. 
Since Mr.  Fletcher waived his right to an evidentiary hearing when
he did not provide the FCC a written appearance, stating he would
appear for such hearing, the FCC could have entered the order citing
its final enforcement action.  However, the FCC did not finalize its
order until after we briefed it on our findings, in April 1998. 

It appears that all eight known Fletcher-controlled companies were
out of business by the end of 1996.  However, our investigation
identified several instances of Mr.  Fletcher's continued involvement
since then in the telecommunications industry.  Because Mr.  Fletcher
knowingly used false information to conceal his identity and the
location of his companies and residence(s), he has not been located. 


--------------------
\8 The eight switchless resellers were CCN, Inc.; Christian Church
Network, Inc., doing business as Church Discount Group, Inc.;
Discount Calling Card, Inc.; Donation Long Distance, Inc.; Long
Distance Services, Inc.; Monthly Discounts, Inc.; Monthly Phone
Services, Inc.; and Phone Calls, Inc. 


-------------------------------------------------------- Chapter 0:4.1

Madam Chairman, this completes my prepared statement.  I would be
happy to respond to any questions that you or other members of the
Subcommittee may have. 


*** End of document. ***