oversight

Telecommunications: State and Federal Actions to Curb Slamming and Cramming

Published by the Government Accountability Office on 1999-07-27.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                  United States General Accounting Office

GAO               Report to the Chairman, Permanent
                  Subcommittee on Investigations,
                  Committee on Governmental Affairs, U.S.
                  Senate

July 1999
                  TELECOMMUNICATIONS

                  State and Federal Actions
                  to Curb Slamming and
                  Cramming




GAO/RCED-99-193
United States General Accounting Office                                            Resources, Community, and
Washington, D.C. 20548                                                         Economic Development Division



                                    B-281703                                                                Letter

                                    July 27, 1999

                                    The Honorable Susan M. Collins
                                    Chairman, Permanent Subcommittee
                                     on Investigations
                                    Committee on Governmental Affairs
                                    United States Senate

                                    Dear Madam Chairman:

                                    Two types of abuses involving telephone services have become prevalent
                                    nationwide. The first, called “slamming,” involves switching a consumer’s
                                    telephone service from one telephone company to another without the
                                    consumer’s authorization. The second, called “cramming,” involves placing
                                    unauthorized charges on a consumer’s telephone bill for services and
                                    products. Both state and federal agencies are responsible for protecting
                                    consumers from these abuses and taking regulatory and legal enforcement
                                    actions against their perpetrators. At the state level, public utilities
                                    commissions are responsible for regulating intrastate telephone services
                                    and resolving consumers’ complaints, while the attorneys general are
                                    responsible for resolving consumers’ complaints about unfair and
                                    deceptive marketing practices. At the federal level, the Federal
                                    Communications Commission (FCC) is responsible for protecting
                                    consumers against slamming, while both FCC and the Federal Trade
                                    Commission (FTC) are involved in protecting consumers against
                                    cramming. Under these separate statutory schemes, FCC’s authority is
                                    focused on preventing cramming by common carriers (telephone
                                    companies), while FTC’s authority is focused on preventing cramming by
                                    companies that are not common carriers, such as vendors that use
                                    telephone bills to charge for their services. The Congress has, in some
                                    limited circumstances, granted FTC concurrent authority with FCC to
                                    establish rules concerning certain areas of telephone billing and collection.

                                    You asked us to report on the scope of these problems and on state and
                                    federal actions taken to combat them. Specifically, you asked us to
                                    describe the (1) number of complaints about slamming and cramming
                                    received by state and federal authorities, (2) types of protections
                                    implemented by state and federal authorities to increase consumers’ ability
                                    to protect themselves against slamming and cramming, and (3) state and
                                    federal enforcement actions taken against slamming and cramming
                                    violations since 1996, including the names of the companies or individuals



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                      most frequently subject to such actions. To address these issues, we
                      surveyed the public utilities commissions of all 50 states and the District of
                      Columbia and assisted the National Association of Attorneys General in
                      surveying each state’s office of attorney general and the District’s corporate
                      counsel. In addition, we met with FCC and FTC officials to gather
                      information on the enforcement actions they have taken against companies
                      engaged in slamming and cramming. We also discussed recent regulatory
                      initiatives by FCC and FTC to combat these abuses and improve their
                      ability to take enforcement action.



Results in Brief      Slamming continues to be a significant problem for consumers. From 1996
                      through 1998, state public utilities commissions saw the number of
                      complaints about this abuse rise from 20,741 to 39,688 (a 91-percent
                      increase), and federal authorities saw the number of complaints rise from
                      12,795 to 20,154 (a 57-percent increase). In addition, cramming has
                      emerged as a new problem. Complaints to state authorities rose sharply
                      from about 800 in 1996 to nearly 20,000 in 1998. In 1998, complaints about
                      cramming became the fourth most common type of written complaint
                      received by FCC and the second most common type of complaint received
                      by FTC.

                      To help protect consumers against slamming and cramming, most state
                      public utilities commissions (1) require telephone companies to obtain oral
                      or written authorization from consumers before making changes to their
                      service, (2) have procedures for resolving consumers’ complaints, and (3)
                      provide consumers with information on ways to prevent telephone
                      slamming and cramming. At the federal level, FCC adopted new rules
                      against slamming in December 1998 that strengthen procedures for
                      verifying changes in service and absolve consumers of liability, within
                      certain limits, for charges by unauthorized companies. However, the Court
                      of Appeals for the District of Columbia has delayed the implementation of
                      these liability provisions at the request of several long-distance companies,
                      which have proposed the establishment of a neutral third-party
                      administrator to implement the liability rules. To protect consumers
                      against cramming, FCC adopted new rules in April 1999 requiring
                      telephone companies to format their bills so that consumers can more
                      easily identify any unauthorized charges. In October 1998, FTC proposed
                      rules addressing cramming that would, among other things, require a
                      consumer’s express authorization before charges other than for local or
                      long-distance calling could be placed on the consumer’s telephone bill and




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             would allow the consumer to dispute any unauthorized charges. These
             proposed FTC rules could be final before the end of 1999.

             State commissions were able to resolve through informal action nearly 60
             percent of the slamming complaints they received in calendar year 1998. In
             addition, from 1996 through 1998, the public utilities commissions and
             attorneys general in 35 states reported completing 219 formal enforcement
             actions against companies or individuals for telephone slamming and
             cramming violations. As a result of these state actions, which affected at
             least 397,765 consumers, violators were ordered to pay at least $27 million
             in restitution and penalties. The state public utilities commissions also
             reported initiating over 3,900 enforcement actions for slamming and
             cramming that had not been finalized as of early 1999. At the federal level,
             FCC has ordered 23 companies and individuals to pay $17.1 million in civil
             monetary penalties (forfeitures) for telephone slamming violations since it
             took its first enforcement action for slamming in 1994. One slamming case
             also involved cramming. To date, FCC has collected $2.6 million of these
             forfeitures in 12 of these actions. Since April 1998, FTC has taken seven
             enforcement actions against cramming that have resulted in injunctions
             and restraining orders. Two of these companies have agreed to final
             stipulated court orders providing consumers with $53 million in credits and
             restitution and have agreed to modify their business practices.



Background   Slamming, which began to emerge in the mid-1980s, is the switching of a
             consumer’s telephone company without his or her knowledge or consent.
             Consumers have the right to use any telephone company they have
             available to them and to change telephone companies whenever they wish.
             Under the Communications Act of 1934, as amended, it is unlawful to
             switch a consumer’s preferred telephone company without his or her
             express consent.1 Nevertheless, some telephone companies or their
             marketing agents have used deceptive contests, surveys, and telemarketing
             to lure consumers into switching to their service. For instance, a person
             filling out a form for a contest drawing may not notice that it contains fine
             print authorizing a switch in telephone service. Long-distance providers, or




             1
              47 U.S.C. 258.




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telemarketers acting on their behalf, may also falsify records to make it
appear that consumers have agreed verbally or in writing to a switch.2

Cramming, a more recent problem, is the placing of unauthorized,
misleading, or deceptive charges on a consumer’s telephone bill for
services and products. Cramming can include unauthorized charges for
services offered by the consumer’s own telephone company, such as call
messaging, or charges for services from other businesses or vendors selling
their services. Some of these vendors, known as “information providers,”
provide recorded or live information and entertainment, such as stock
market, sport, and product information, as well as “adult” services, “chat”
lines, and psychic advice. Consumers generally call an advertised
telephone number to receive the information or service. Some information
providers have levied hidden or deceptive charges, even recurring monthly
charges, that consumers did not know about and did not authorize.
Typically, an information provider will use the services of a larger company,
called a billing aggregator, that bundles the billing information from many
separate vendors and contracts with telephone companies to have the
charges included on consumers’ telephone bills.

The format of telephone bills can make it hard for consumers to recognize
that they have been slammed or crammed, especially when charges for
these services are listed on their bills in vague terms, such as “monthly fee,”
“service fee,” “mail server,” or “membership.” The bills may not even
clearly identify the entities charging for these services, making it difficult
for consumers to contact them directly to have the charge explained or
removed.

Consumers who are the victims of slamming or cramming can attempt to
resolve the problem by directly contacting the telephone company or
vendor involved. They can also file a complaint with their state public
utilities commission or their state attorney general’s office. These two
bodies may attempt to resolve the complaint informally, or they may take
formal regulatory or legal action, as authorized by state statute, against the
offending companies.

In addition, consumers can send complaints about slamming and cramming
to both FCC and FTC. Each complaint that FCC receives is sent to the


2
This type of fraud is discussed in our earlier report Telecommunications: Telephone Slamming and Its
Harmful Effects (GAO/OSI-98-10, Apr. 21, 1998).




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                        appropriate company. The company, in turn, sends its response to the
                        complaint to both FCC and the affected consumer. On the basis of these
                        complaints, FCC investigates patterns of slamming and cramming and
                        takes enforcement action when appropriate. FTC uses the cramming
                        complaints it receives, along with complaint data provided by state-level
                        sources and other contributors to its complaint database, to take law
                        enforcement action against individuals and companies engaged in this
                        abuse. FCC shares cramming complaints with FTC, and FTC, in turn,
                        shares slamming complaints it receives with FCC. As discussed below,
                        both FCC and FTC are currently taking additional steps to strengthen their
                        ability to combat slamming and cramming.



Increases in Slamming   As indicated in table 1, state public utilities commissions and federal
                        agencies reported overall increases in slamming and cramming complaints
and Cramming            from 1996 through 1998. The total number of slamming complaints
Complaints to State     received at the state level rose from 20,741 to 39,688 (a 91-percent
                        increase), while the number of written complaints received by FCC rose
and Federal             from 12,795 to 20,154 (a 57-percent increase).3 Although FCC saw a small
Authorities             decrease in slamming complaints from 1997 through 1998, the number was
                        still considerably higher in 1998 than in 1996. During the same period, the
                        number of cramming complaints received by state and federal agencies
                        increased dramatically. In 1997, public utilities commissions in 16 states
                        received 1,188 cramming complaints. By the end of 1998, however, the
                        commissions in 36 states had received 19,543 complaints. The situation is
                        similar at the federal level. FCC and FTC saw cramming emerge as a major
                        problem in 1998, as the number of cramming complaints to both agencies
                        sharply increased from 1997 to 1998. In 1998, cramming became the fourth
                        most common cause of written complaints received by FCC and the second
                        most common cause of complaints received by FTC. 4




                        3
                         Nine state public utilities commissions reported that they did not have records that tracked the
                        complaints they received about slamming and cramming. These states are Alaska, Arkansas, Colorado,
                        Delaware, Hawaii, Indiana, Louisiana, Rhode Island, and South Carolina.
                        4
                          The data in table 1 have some important qualifications. The complaint numbers do not equate to
                        verified slamming and cramming incidents, since a complaint could prove upon investigation to be
                        unwarranted. For example, a customer might misinterpret a legitimate service charge and mistakenly
                        complain about being slammed or crammed. Furthermore, adding state and federal complaint numbers
                        together would result in some double-counting because consumers can complain to both state and
                        federal authorities about a single slamming or cramming incident.




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Table 1: Number of Telephone Slamming and Cramming Complaints Reported to State Public Utilities Commissions, FCC, and
FTC for Calendar Years 1996-98
                                     Slamming                                                        Cramming

                               Complaints              Written                      Complaints                   Written
                         received by state         complaints                 received by state              complaints               Complaints
                            public utilities         received                    public utilities              received                 received
Calendar years               commissions              by FCCa                     commissions                   by FCCa                  by FTCb
1996                                20,741               12,795                                852                        0                     221
1997                                25,809               20,475                              1,188                        0                   3,173
1998                                39,688               20,154                             19,543                  4,558                     9,827
                                          a
                                           A consumer may call FCC’s National Call Center with either an inquiry or a complaint. While FCC
                                          keeps track of inquiries and complaints received by the Call Center for trend and analytical purposes, it
                                          did not, until recently, take action until a consumer had submitted a written complaint, accompanied by
                                          bills and any other supporting documentation. These FCC numbers reflect written complaints only.
                                          b
                                            The numbers for FTC include complaints received by mail, telephone, and the Internet. FTC also
                                          receives slamming complaints, which it shares with FCC.
                                          Sources: State public utilities commissions’ responses to GAO’s survey and data from FCC and FTC.


                                          The numbers in table 1 do not capture complaints about slamming and
                                          cramming that consumers tried to resolve by dealing directly with their
                                          telephone company without filing a complaint with state or federal
                                          authorities. Regional Bell operating companies reported to us that
                                          altogether they received well over 1 million unverified complaints in 1998
                                          about long-distance and toll-service slamming.5 Data from two of the
                                          companies indicated that the number of complaints was declining. Major
                                          long-distance companies reported a far smaller number of unverified
                                          complaints against them during 1998, though data associated with their
                                          resellers were not always included.6 Most of the long-distance companies
                                          indicated that the number of unverified slamming complaints against them
                                          had increased to some degree from 1996 to 1998.

                                          We were also able to obtain some data from the regional Bell operating
                                          companies and two long-distance companies on the number of cramming


                                          5
                                           The companies we contacted consider the slamming and cramming data provided to us to be
                                          proprietary. To protect the confidentiality of the data, we agreed to report only cumulative totals for all
                                          companies. The regional companies included Ameritech, Bell Atlantic, BellSouth, SBC
                                          Telecommunications, and US WEST. The long-distance companies included AT&T, MCI WorldCom, and
                                          Sprint. We also obtained data from GTE. We did not attempt to gather data from hundreds of smaller
                                          local and long-distance service providers.
                                          6
                                           A reseller is a telephone service provider that does not own transmission facilities but obtains
                                          communications services from another telephone company for resale to the public for profit.




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                        complaints they received in 1998. While no regional company had
                        cramming data that covered all of 1998, four of them reported a combined
                        total of under 160,000 unverified cramming complaints for part of the year,
                        with one company showing a steady decline in complaints. A fifth regional
                        company reported a substantially higher number of unverified complaints
                        for the last 9 months of 1998, but with a generally downward trend. Two
                        long-distance companies reported a combined total of fewer than 1,000
                        unverified complaints; the others reported having no data on cramming
                        complaints.



Consumer Protections    Both the states and the federal government have taken action to help
                        protect consumers against slamming and cramming. All states reported
Against Slamming and    implementing some consumer protections against slamming, and 40 states
Cramming                reported having some protections against the newer problem of cramming.
                        Many states are also making efforts to alert consumers to slamming and
                        cramming and to provide guidance on dealing with these abuses. At the
                        federal level, FCC recently adopted new regulations against slamming
                        designed to take the profit out of it. To combat cramming, FCC adopted
                        new regulations (“Truth-in-Billing”) in April 1999 that require telephone
                        bills to clearly identify all charges and highlight any changes in service so
                        that consumers can more easily spot unauthorized charges. FTC also has
                        proposed regulatory changes that would address cramming by, among
                        other things, requiring a consumer’s express authorization to charge for
                        services other than local or long-distance calling, enhancing the consumer’s
                        right to dispute unauthorized charges, and imposing liability on those
                        engaged in cramming.


State-Level Consumer    All state public utilities commissions reported initiating a variety of
Protections Against     actions, requirements, and services designed to help protect consumers
                        against telephone slamming. The most widely reported action is allowing
Slamming and Cramming
                        telephone companies to offer consumers the option of “freezing” their
                        long-distance service provider—often referred to as a “primary
                        interexchange carrier (PIC) freeze.” If a consumer asks the local telephone
                        company to place a freeze on his or her account, the telephone service
                        provider may not be switched unless the consumer expressly agrees to lift
                        the freeze. Other protections include

                        • requiring a consumer’s local telephone company to have an independent
                          third party verify the consumer’s oral authorization to switch to a new
                          telephone service provider;



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• requiring a consumer’s local telephone company to obtain from a new
  telephone service provider a form or “letter of agency” indicating in
  writing that the consumer is authorizing a switch;
• requiring telephone companies to provide consumers with a toll-free
  complaint number;
• providing a Web site, educational brochures, and public service
  announcements with information on preventing telephone slamming;
  and
• referring complaints to FCC.

In addition, all of the state commissions had procedures in place for
handling consumers’ complaints about slamming. The commissions either
resolved a complaint by contacting the consumer and/or the company
named in the complaint or referred the complaint to the state attorney
general. In 1998, the commissions informally resolved nearly 60 percent of
the 39,688 slamming complaints they received by reaching a settlement
between the consumer and the telephone company, without further
investigation or administrative hearings. For example, Maryland’s Public
Service Commission reported that in 1998 it received 259 slamming
complaints. The Commission resolved all of them informally and helped
consumers obtain approximately $19,000 in refunds stemming from these
complaints.

Forty-one state public utilities commissions reported initiating some
actions to help prevent telephone cramming. 7 These actions included
providing consumers with educational brochures and information on
Internet sites and establishing procedures for handling cramming
complaints. Some state commissions reported that they refer cramming
complaints to FCC. In addition, a few state commissions reported taking
additional actions to increase their ability to protect consumers against
cramming. For example, during 1998, Illinois passed legislation that, in
part, enhanced the enforcement actions the Illinois Commerce
Commission can take to protect customers against cramming. Specifically,
the legislation gave the Commission the authority to fine an offending
company up to $1,000 for each repeated and intentional cramming violation
as well as revoke the company’s certificate to provide service in the state.
In addition, the Tennessee Regulatory Authority implemented new



7
 The public utilities commissions in Alaska, Colorado, the District of Columbia, Iowa, Kentucky,
Louisiana, Nebraska, New Hampshire, New Jersey, and New Mexico reported initiating no actions to
help prevent telephone cramming.




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                          regulations in 1998 against cramming that require the prior consent of an
                          authorized individual before charges for additional services can be placed
                          on the individual’s telephone bill. The Authority can assess a maximum
                          fine of $100 per day, per offense, against a company engaging in cramming.
                          The California Public Utilities Commission and the Indiana Utility
                          Regulatory Commission also recently implemented rules detailing the types
                          of information required before charges for other services can be added to a
                          consumer’s telephone bill.


Federal Consumer          Both FCC and FTC have undertaken rulemakings to provide greater
Protections Against       protection against slamming and cramming. They have also increased their
                          consumer education efforts and are making it easier for consumers to file
Slamming and Cramming     complaints about these abuses.

New Regulations Against   FCC has taken several steps to deter slamming since the advent of
Slamming                  competition in long-distance service during the mid-1980s. For example,
                          beginning in 1992, FCC established verification procedures for
                          long-distance service change-orders generated by telemarketing. When
                          slamming persisted, FCC adopted additional rules in 1995 prohibiting the
                          potentially deceptive and confusing practice of combining long-distance
                          service change authorizations (“letters of agency”) with promotional
                          materials, such as sweepstakes entry forms, in the same document. The
                          1995 rules also require that letters of agency be written in clear,
                          unambiguous language. The enactment of the Telecommunications Act of
                          1996, which included a provision prohibiting slamming and imposing
                          liability on carriers engaging in this abuse, led FCC to reexamine its rules
                          against slamming. Recognizing that its past actions were not sufficient to
                          stop slamming, FCC adopted new rules in December 1998 aimed at, among
                          other things, taking the profit out of slamming and ensuring that customers
                          do not have to pay for services that they did not authorize. 8

                          The new rules have several key features. The scope of the rules takes into
                          account that slamming is no longer limited to long-distance service but can
                          also occur with in-state toll service and local service as these markets
                          become open to competition. FCC therefore explicitly extended its new
                          rules to encompass (with limited exceptions) all telephone companies in
                          connection with changes in all telecommunications services, not just


                          8
                          “Implementation of the Subscriber Carrier Selection Changes Provisions of the Telecommunications
                          Act of 1996,” CC Docket No. 94-129, FCC 98-334 (rel. Dec. 22, 1998) (“Second Order”).




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long-distance service. The rules also tighten the methods that telephone
companies use to verify that changes have been authorized by consumers,
including eliminating the “welcome package,” a verification option that
FCC has found to be ineffective. 9 In addition, the rules clarify the method
by which consumers can order a “freeze” on changes to their existing
telephone service in order to prevent any unauthorized switches. These
verification rules became effective on April 27, 1999.

Another key element of the new rules governs consumers’ liability for
charges made by unauthorized telephone companies. The new rules would
absolve consumers of liability for any charges imposed by an unauthorized
telephone company for up to 30 days. If a consumer has already paid the
unauthorized company for calls made within 30 days of being slammed, the
unauthorized company would have to remit such payments to the
consumer’s authorized company, which would then provide the consumer
with a refund for any amounts paid in excess of the authorized company’s
rates. The unauthorized company would also pay the authorized company
for any expenses incurred in restoring the consumer’s service or collecting
charges from the unauthorized company.

Unlike the verification rules, these liability rules have not been
implemented because of court action. FCC recognized that some
telephone companies desired to establish an independent third-party
administrator, funded by participating telephone companies, to discharge
their obligations under the new rules for resolving slamming disputes
among themselves and consumers, including making adjustments to
consumers’ telephone bills. FCC therefore delayed the implementation of
its new liability rules until May 17, 1999 (90 days after the Second Order
was published in the Federal Register). According to FCC, the delay was
designed to give the companies time to develop and implement a
third-party administrator mechanism and file waiver requests. On March
30, 1999, several long-distance companies submitted a proposal for a
third-party administrator. They estimated that they would need at least 6
months to implement the proposal after FCC approved it and therefore
asked FCC to delay the implementation of the new liability provisions until
that time. In April, FCC asked for public comments on the proposal with a
view to reaching a decision by summer 1999 but decided not to further



9
 The “welcome package” was an information package mailed to a consumer after he or she agreed to
change telephone companies. It included a prepaid postcard that the consumer could use to deny,
cancel, or confirm the change order.




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                          delay its implementation of the liability provisions. Several long-distance
                          companies successfully petitioned the U.S. Court of Appeals for the District
                          of Columbia Circuit to order a stay on FCC’s implementation of the new
                          liability rules. The stay, granted on May 18, 1999, is for an indefinite period.
                          As yet, it is not clear when this issue will be resolved.

                          Additional antislamming steps are being considered by FCC. In its new
                          rules, FCC asked for public comment on several actions that could lead to
                          further rulemaking, including

                          • allowing both the authorized telephone company and the consumer to
                            recover any charges the consumer paid to the unauthorized telephone
                            company,
                          • registering new companies entering the telecommunications market to
                            determine whether they have a history of fraudulent activities,
                          • assigning identifying codes to all telephone companies to make it easier
                            to determine which ones are committing slamming violations, and
                          • requiring telephone companies to report to FCC the number of
                            slamming complaints they receive to help FCC take quicker action
                            against companies with high complaint rates.

                          When we concluded our review in June 1999, no additional rules pertaining
                          to these issues had been adopted. Several companies have filed petitions
                          with FCC to reconsider the Second Order.

New Regulations Against   New federal actions to combat cramming are being taken by both FCC and
Cramming                  FTC. According to FCC, over 60,000 consumers made inquiries at the
                          agency in 1998 about the confusing format of their telephone bills. FCC
                          believes that this confusion is contributing to the rise in cramming because
                          consumers are having difficulty detecting unauthorized charges. On April
                          15, 1999, FCC adopted its “Truth-in-Billing” order, which establishes
                          principles and guidelines to make telephone bills easier for customers to
                          understand.10 The new rules, which FTC commented on and supports,
                          require that telephone bills (1) clearly identify who is responsible for each
                          charge, (2) contain full and nonmisleading descriptions of the services
                          being billed, and (3) provide telephone numbers for consumers to call for
                          more information about specific charges on their bills. In addition, any
                          changes in the telephone service provider—whether local or
                          long-distance—must be highlighted, along with the name of the new


                          10
                           “Truth-in-Billing and Billing Format,” CC Docket No. 98-170, FCC 99-72 (rel. May 11, 1999).




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                          company, when this information first appears on the bill. These changes
                          should also make it easier for consumers to detect slamming, since a
                          change in the telephone service provider would also be highlighted on the
                          bill.

                          FTC is proposing direct action to combat cramming. Under the proposed
                          revision to its “Pay-per-Call” rule, FTC has suggested a fourfold approach to
                          the problem of cramming.11 First, a consumer’s express authorization
                          generally would be required for purchases unrelated to local or
                          long-distance telephone service that are billed to the consumer’s telephone
                          account. Second, a vendor would be prohibited from placing monthly or
                          other recurring charges for pay-per-call service on a telephone bill without
                          prior agreement with the customer billed for the service. Third, consumers
                          would have the legal right to dispute unauthorized charges “crammed” onto
                          their telephone bills and to have these charges removed. Finally, dispute
                          resolution protections would be provided for all transactions that resulted
                          in the placement of nontoll charges on a customer’s telephone bill.
                          Violators would be liable for civil penalties, currently $11,000 per violation.
                          FTC officials expect to issue a final rule before the end of 1999.

Complaint Reporting and   FCC and FTC are augmenting their regulatory efforts with expanded
Education Initiatives     consumer outreach and education, which they believe are key elements in
                          combating slamming and cramming. FCC is making it easier for consumers
                          to submit complaints about slamming and cramming. In the past, FCC
                          required consumers to submit complaints in writing before it took action
                          on them. Since January 1999, consumers have been able to file complaints
                          electronically via FCC’s Internet Web site. And in June 1999, operators at
                          FCC’s National Call Center started taking consumers’ complaints over the
                          telephone and electronically submitting them for action directly to FCC’s
                          Common Carrier Bureau. In response to each complaint, the Bureau
                          electronically issues an “Official Notice of Informal Complaint” to all
                          companies identified in the complaint.12 A served company has 30 days to


                          11
                            Under the authority of the Telephone Disclosure and Dispute Resolution Act of 1992, FTC adopted its
                          Pay-per-Call rule to curtail the unfair and deceptive practices engaged in by some pay-per-call
                          businesses. 16 C.F.R. part 308. At that time, pay-per-call services were generally provided via “900”
                          numbers that were billed directly to a consumer’s local telephone company. Since then,
                          “telephone-billed purchases” have expanded beyond simply “900” numbers. The Telecommunications
                          Act of 1996 authorized FTC, through its rule, to extend the definition of the term “pay-per-call service.”
                          On Oct. 30, 1998, FTC published a notice of proposed rulemaking to revise the rule. 63 Fed. Reg. 58524.
                          Part of this revision focuses on cramming.
                          12
                           The issuance of a notice of informal complaint does not necessarily indicate wrongdoing by the served
                          company.




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                            respond to FCC. FCC is also automating some of its old manual processes
                            for handling consumers’ complaints in order to shorten its response time.
                            With the help of this new system and additional staff, FCC hopes that its
                            April 1999 backlog of 10,733 written complaints about slamming will be
                            eliminated by the end of this year. In addition, FCC is bolstering its
                            customer education efforts by making information on slamming and
                            cramming available on its public Internet Web site. FCC is also proposing
                            to establish a centralized Public Information Bureau to be more responsive
                            to consumers’ concerns and requests for information.

                            FTC has expanded its efforts to educate consumers about telephone billing
                            abuses by creating a Web page on cramming and has formed a
                            telecommunications working group to develop consumer education
                            publications. These materials emphasize that a consumer does not owe for
                            unauthorized (crammed) services just because the call for the service may
                            have been placed from his or her home. In 1999, FTC added a toll-free
                            number for consumers to call with complaints about cramming and other
                            abuses and to obtain information on how to avoid such problems. FTC’s
                            database system, called the Consumer Sentinel, also contains details on
                            over 180,000 complaints from consumers on all topics, including complaint
                            data provided by sources such as Better Business bureaus, state attorneys
                            general, the National Fraud Information Center, Phone Busters, and private
                            companies. FTC uses the database to develop enforcement strategies
                            against companies engaged in abusive trade practices, including
                            cramming.13



State and Federal           Both state and federal enforcement actions against companies engaged in
                            slamming and cramming have resulted in financial penalties, restitution,
Enforcement Actions         and discontinued operations. At both the state and federal levels, the bulk
Against Slamming and        of actions from 1996 through 1998 were for slamming violations.
Cramming

State Enforcement Actions   As a whole, the states have successfully completed a large number of
                            enforcement actions against slamming and cramming that have resulted in
                            substantial fines and other penalties. For 1996 through 1998, the public


                            13
                             Over 170 law enforcement agencies in the United States and Canada also have access to this database
                            to assist them in their own consumer protection efforts.




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utilities commissions and offices of attorney general in 35 states reported
completing a total of 219 enforcement actions against companies that
engaged in slamming or cramming.14 In each of these cases, the public
utilities commission and/or office of attorney general participated in a
formal hearing against the company that resulted in a final disposition or
resolution of the case. Appendix I provides more detailed information
about each state’s completed enforcement actions.

Of the 219 completed state enforcement actions, 194 were against
companies or individuals involved in slamming, while 25 were against
companies or individuals involved in cramming. In most of these actions,
the company or individual was ordered to resolve the complaint by
providing the consumer with some restitution, paying a penalty, or
providing an assurance that the slamming or cramming would stop. In 30
of the 219 enforcement actions, the state public utilities commission and/or
attorney general issued a cease-and-desist order or suspended or revoked
the company’s authority to do business in the state.

As shown in table 2, the states ordered companies to pay at least $13.4
million in customer restitution 15 and $14.1 million in penalties and fines.16
These completed enforcement actions affected at least 397,765 consumers.
These totals, however, understate the actual outcomes of these actions
because the state public utilities commissions and attorneys general did
not always include in their survey responses the number of consumers
affected or the amount of customer restitution and penalties involved.




14
  Oregon’s Office of Attorney General reported completing one enforcement action that involved both
slamming and cramming violations. For the purpose of this report, this enforcement action was
counted as a slamming violation.
15
  Customer restitution can include a complete or partial refund of a consumer’s long-distance charges
and of the fees charged to switch the consumer back to his or her authorized long-distance provider.
16
 Penalties and fines include charges to cover the costs of court proceedings and investigations. In
some cases, the penalties and fines were used to cover the costs of consumer education campaigns.




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Table 2: Completed Enforcement Actions Taken by State Public Utilities
Commissions and State Attorneys General fo rSlamming and Cramming Violations,
1996-98

                                   Public utilities commissions              Attorneys general
                                         Slamming           Cramming        Slamming Cramming
Number of completed                               99                    6             95             19
enforcement actions
reported
Number of customers                         345,420              30,003          10,216         12,126
affecteda
Amount of penalties and                 $7,324,987          $1,016,000 $4,932,587            $827,350
finesb
Amount of customer                      $5,625,564            $500,808 $6,045,511 $1,192,400
restitutionc
a
  The survey responses did not include the number of customers affected in 86 of the 219 reported
enforcement actions.
b
  The survey responses did not include the amount of customer restitution ordered to be paid in 77 of
the 219 reported enforcement actions.
c
  The survey responses did not include the amount of penalties ordered to be paid in 34 of the 219
reported enforcement actions.
Sources: State public utilities commissions’ responses to GAO’s survey and responses of state
attorneys general to a survey from the National Association of Attorneys General.


Fourteen state public utilities commissions reported initiating a substantial
number of enforcement actions during calendar years 1996 through 1998
that had not been finalized as of early 1999. 17 Specifically, over 3,900
enforcement actions were initiated against companies or individuals
engaged in slamming or cramming. The state attorneys general were not
asked to provide information on pending enforcement actions. The
attorneys general in 10 states, however, reported that 20 slamming and 17
cramming enforcement actions were pending resolution.18




17
  The state public utilities commissions in Alabama, Connecticut, Florida, Georgia, Louisiana, Maine,
Mississippi, Missouri, New York, Pennsylvania, Tennessee, Texas, Vermont, and West Virginia reported
the pending enforcement actions.
18
  The state attorneys general in Arkansas, Arizona, Connecticut, Illinois, Missouri, New Jersey, Ohio,
Pennsylvania, Vermont, and Wisconsin reported the pending enforcement actions. Illinois’ Office of
Attorney General reported the largest number of enforcement actions pending resolution—11
slamming actions and 10 cramming actions.




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Federal Enforcement   FCC and FTC operate under different statutory schemes and generally have
Actions               different remedies available. 19 However, both of these agencies maintain
                      that strong enforcement actions are necessary to send a clear message to
                      the industry that slamming and cramming will not be tolerated. As a
                      regulatory agency, FCC has several tools for achieving its enforcement
                      goals. These include administrative remedies, such as revoking a
                      company’s operating authority, issuing a cease and desist order, and
                      assessing a civil monetary penalty (forfeiture). As a law enforcement
                      agency, FTC pursues cramming in federal district courts, seeking
                      temporary and permanent injunctive relief, and, ultimately, restitution to
                      affected customers. FTC can also take administrative enforcement action,
                      such as convening a trial before an administrative law judge.

                      From its first slamming enforcement action in 1994 through the end of
                      1998, FCC took 23 enforcement actions against slamming, resulting in a
                      total of $17.1 million in proposed forfeitures. 20 As of June 1999, FCC had
                      collected $2.6 million of the proposed forfeitures in 12 of these actions.
                      Companies in four actions filed for bankruptcy, and five others are now in
                      settlement negotiations with FCC. Settlement agreements generally
                      include both a payment and consumer protections. In addition, in 1996 and
                      1997, FCC took two actions against one individual, Daniel Fletcher, for $5.8
                      million in forfeitures for slamming activities by eight of the companies that
                      he apparently owned and operated. When he did not pay the $5.8 million in
                      forfeitures, FCC in 1998 referred the cases against him to the Department
                      of Justice for collection under the Communications Act. FCC also revoked
                      the operating authority of the eight companies to ensure that none of them
                      could resume operations and once again engage in slamming. Appendix II
                      provides additional details on all 23 FCC actions.




                      19
                        Under the Communications Act of 1934, as amended, FCC has explicit statutory authority over
                      slamming and general authority to prohibit carriers that provide interstate services (telephone
                      companies) from engaging in unjust and unreasonable practices, such as cramming. 47 U.S.C. 258; 47
                      U.S.C. 201(b). FTC, under the Federal Trade Commission Act, as amended, has the authority to pursue
                      law enforcement actions against unfair and deceptive acts or practices. 15 U.S.C. 45(a). Common
                      carriers (telephone companies) subject to the Communications Act of 1934, as amended, are exempt
                      from FTC’s statutory mandate under the Federal Trade Commission Act. 15 U.S.C. 45(a)(2). FTC has
                      taken the position that the statutory common-carrier exemption does not shield the
                      non-common-carrier activities of an entity that may otherwise engage in some common-carrier
                      activities under another statute.
                      20
                       One of these actions, against Long Distance Direct, Inc., was for both slamming and cramming
                      violations.




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According to FCC officials, prior to 1998, FCC’s enforcement actions
initiated against companies with slamming violations usually resulted in
assessments of $80,000 or less. And most of these actions resulted in even
smaller settlement amounts. Two exceptions were actions against Cherry
Communications and Operator Communications, taken in 1994 and 1995,
respectively; both companies paid $500,000 each. During 1998, FCC
consistently assessed amounts greater than $1 million for slamming
violations. The five actions that it initiated in 1998 resulted in $7,920,000 in
proposed forfeitures. FCC officials stated that the forfeiture amounts were
increased in 1998 so that companies would not view them simply as a “cost
of doing business.” The officials noted that although companies paid
smaller forfeitures in the past, they did not necessarily change their
business practices to conform to FCC’s regulations. FCC’s goal in imposing
the higher amounts is to send a message to the industry that slamming will
not be tolerated. It is not yet clear how much of the higher forfeitures will
ultimately be paid. As of May 1999, none of the companies involved in the
1998 enforcement actions had settled with FCC or made any payments.

In addition, the FCC Chairman has proposed consolidating the agency’s
enforcement functions into an enforcement bureau. According to FCC, a
centralized bureau would be more efficient in conducting investigations
and enforcement actions in light of the proliferation in the types and
number of telecommunications services. FCC hopes to have the new
bureau operational in fiscal year 2000.

As a result of FTC’s efforts to combat cramming, seven cases have been
brought to court since April 1998. 21 These cases involve 36 defendants (16
companies and 20 individuals), including billing aggregators and vendors.
In six cases, FTC has sought and successfully obtained preliminary or
permanent injunctions and temporary restraining orders to stop these
companies’ cramming activities.

In addition, FTC is seeking restitution for the unauthorized charges that
these companies collected from consumers. According to FTC officials,
these unauthorized charges range from $4.7 million in one case to almost
$40 million in another case. Of the seven cases brought to district court,
one has resulted in approximately $13 million in consumer restitution and
compliance provisions, including a 3-year record-keeping requirement for


21
 FTC’s report Fighting Consumer Fraud: The Case Against Cramming (June 1999) discusses FTC’s
enforcement actions against cramming in detail.




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                             B-281703




                             the company. The parties in another case have agreed to $39.7 million in
                             consumer restitution and changes in their business practices. The other
                             five cases were still in various stages of discovery and negotiation as of
                             June 1999. Additional details on these cases are found in appendix II.

                             Officials at both FCC and FTC told us that they have several additional
                             investigations in progress, including one joint investigation. They expect to
                             take more enforcement actions against slamming and cramming before the
                             end of this year.


Companies With the Highest   Several companies listed in appendix II have been the subject of
Number of State and          enforcement actions by several states and the federal government. Table 3
                             lists 14 companies that have been subject to four or more state
Federal Enforcement          enforcement actions for slamming.22 Eight of these 14 companies have also
Actions                      been subject to enforcement actions by FCC.




                             22
                               These state enforcement actions include reported actions that have both been resolved and are
                             pending final resolution.




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                                                  B-281703




Table 3: Companies Subject to the Highest Number of State a ndFederal Enforcement Actions for Slamming, Calen d arYears
1996-98
                                                                                                                              Total federal
                                                                Total number      Total restitution                            forfeitures/
                                                               of consumers         and penalties          Federal              payments
                          States that                              affected at             ordered      agency that               made by
Name of company           took action                         the state level            by states      took action              company
Minimum Rate Pricing,     22 states: AL, AR,                              1,202          $812,802              FCC              $1.2 million
Inc.                      AZ, GA, IA, ID, KS,
                          MI, MN, MS, NC, NJ,
                          NY, OH, OR, PA, RI,
                          SC, VA, VT, WA, WI
Business Discount         16 states: AL, AR,                              1,354          $283,040              FCC             $2.4 millionb
Plan, Inc.                CT, FL, GA, ID, IL,
                          MO, MS, NC, NJ, NY,
                          OK, OR, PA, VT
                                                                                                                   a                        a
EqualNet Corp.            11 states: AR, AZ,                              1,596          $210,816
                          CA, ID, KS, MI, NC,
                          NJ, OR, TN, WI
Heartline                 8 states: AZ, CA,                             32,696         $1,087,500              FCC                $200,000c
Communications, Inc.      FL, IL, LA, NJ, NY,
                          TN, TX
                                                                                                                   a                        a
National Accounts, Inc.   7 states: ID, IL, KS,                              61          $429,000
                          MI, NJ, TN, WI
MCI                       7 states: FL, NC, NY,                             754        $1,727,872              FCC                 $30,000
                          OR, SD, TX, VT
Winstar Gateway           6 states: CA, ID, IL,                         13,030           $148,000              FCC                 $80,000
Network, Inc.             NJ, TN, WI
AT&T                      6 states: CT, FL, NC,                           1,004          $331,510              FCC                 $30,000
                          NY, OK, TX
                                                                                                                   a                        a
Least Cost Routing, Inc. 5 states: FL, ID, IL,                              252          $235,000
                         LA, OR
Long Distance             5 states: AL, FL,                               1,435           $16,000              FCC                 $80,000b
Services, Inc.            GA, MI, NY
                                                                                                                   a                        a
The Furst Group, Inc.     5 states: CA, FL,                                 197          $152,500
                          KS, NJ, OR
                                                                                                                   a                        a
Axces, Inc.               4 states: IL, MO, OK,                              88          $115,500
                          TX
                                                                                                                   a                        a
Communications            4 states: AZ, IL, NM,                             208        $1,997,281
Telesystems               TX
International, Inc.
Phone Calls, Inc.         4 states: FL, LA, NY,                             665          $861,000              FCC            $1,793,900b,d
                          SC
                                                  a
                                                      No federal action taken.

                                                                                                                         (notes continued) )




                                                  Page 19                                 GAO/RCED-99-193 Telephone Slamming and Cramming
B-281703




b
    This is a proposed forfeiture amount.
c
 FCC is planning to rescind this forfeiture because Heartline filed Chapter 7 bankruptcy before
reaching an agreement with FCC.
d
  FCC proposed this forfeiture amount against Phone Calls as part of the enforcement action it took
against eight companies owned by Daniel Fletcher.
Sources: Surveys of state public utilities commissions and state attorneys general and data from FCC.


As for cramming, the survey results indicated that two companies, Veterans
of America Association, Ltd., and Coral Communications, Inc., were the
subject of enforcement actions for cramming by four or more states during
calendar years 1996 through 1998. The states that took actions against
these companies were Florida, Idaho, Illinois, Missouri, New Jersey, New
York, Oregon, and Pennsylvania. These actions affected 136 customers and
resulted in $106,600 in restitution and penalties. FTC also took action
against Veterans of America Association, Ltd., and is currently seeking $4.7
million in customer restitution.

Both FCC and FTC officials told us that they are working with their state
counterparts to efficiently combat slamming and cramming. To achieve
this goal, the two agencies share complaint data with each other and the
states. FCC and the National Association of Regulatory Utility
Commissioners are also working to coordinate their enforcement actions
and jointly disseminate educational materials on telecommunications
issues affecting consumers. Both FCC and FTC officials told us that they
regularly participate in conference calls with representatives of the state
public utilities commissions and offices of attorney general, respectively, to
discuss telecommunications issues, including slamming and cramming.

FCC and FTC officials also told us that they are working with members of
the telecommunications industry to curb these abuses. For example, in
May 1998, FCC sponsored a workshop, attended by representatives of the
telephone industry, to develop a set of guidelines on “best practices” in
combating cramming that individual companies could implement
independently. These best practices cover issues such as screening
products and service providers to identify programs that may be deceptive
or misleading, establishing procedures for verifying that charges have been
authorized by the consumer, and establishing a dispute resolution process.
Several major local and long-distance telephone companies provided us
with examples of actions they are taking to curb slamming and cramming,
which are listed in appendix III. In addition, FTC has sponsored public
workshops with telecommunications representatives, consumer groups,
FCC officials, the National Association of Attorneys General, and others to
address cramming and provide additional consumer education.



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                  B-281703




Scope and         To determine the states’ actions to combat telephone slamming and
                  cramming, we administered a survey to the public utilities commissions in
Methodology       the 50 states and the District of Columbia. This survey collected
                  information on the types of consumer protections offered by the states, the
                  number of slamming and cramming complaints received, and details on
                  each of the formal enforcement actions taken by the commissions from
                  1996 through 1998. The National Association of Attorneys General
                  collected similar information about formal enforcement actions taken by
                  each state’s attorney general. We assisted in collecting this information. In
                  addition, we reviewed relevant FCC and FTC documents and met with
                  officials of these agencies to discuss their efforts in developing regulations
                  to combat slamming and cramming and their enforcement actions against
                  those engaging in these abuses. We also contacted regional Bell operating
                  companies and major long-distance companies for data on slamming and
                  cramming complaints and descriptions of their initiatives to curb slamming
                  and cramming. We performed our review from December 1998 through
                  June 1999 in accordance with generally accepted government auditing
                  standards.



Agency Comments   We provided a draft of this report to the Federal Communications
                  Commission and the Federal Trade Commission for their comment and
                  subsequently met with officials from FCC’s Enforcement Bureau and FTC’s
                  Bureau of Consumer Protection. Both agencies concurred with our
                  findings and provided several points of clarification, which we have
                  incorporated into our final report.


                  As agreed with your office, unless you publicly announce the contents of
                  this report earlier, we plan no further distribution until 30 days after the
                  date of this letter. We will then send copies to interested congressional
                  committees; the Honorable William E. Kennard, Chairman of the Federal
                  Communications Commission; the Honorable Robert Pitofsky, Chairman of
                  the Federal Trade Commission; the other commissioners of FCC and FTC;
                  the National Association of Regulatory Utility Commissioners; the National
                  Association of Attorneys General; the state public utilities commissions;
                  and the state attorneys general. Copies of this report will be made
                  available to others upon request.




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B-281703




If you have any questions about our review, please call me at
(202) 512-7631. Key contributors to this report are listed in appendix IV.

Sincerely yours,




Judy A. England-Joseph
Director, Housing and Community
 Development Issues




Page 22                        GAO/RCED-99-193 Telephone Slamming and Cramming
Page 23   GAO/RCED-99-193 Telephone Slamming and Cramming
Contents



Letter                                                                                              1


Appendix I                                                                                         26
Completed
Enforcement Actions
Reported by the States,
Calendar Years 1996-98

Appendix II                                                                                        29
Federal Enforcement       FCC’s Enforcement Actions                                                29
                          FTC’s Enforcement Actions                                                32
Actions Against
Slamming and
Cramming

Appendix III                                                                                       36
Telephone Company         Examples of Antislamming Initiatives                                     36
                          Examples of Anticramming Initiatives                                     36
Initiatives to Curb
Slamming and
Cramming

Appendix IV                                                                                        38
GAO Contact and Staff
Acknowledgements

Tables                    Table 1: Number of Telephone Slamming and Cramming
                            Complaints Reported to State Public Utilities Commissions,
                            FCC, and FTC for Calendar Years 1996-98                                 6
                          Table 2: Completed Enforcement Actions Taken by State Public
                            Utilities Commissions and State Attorneys General for
                            Slamming and Cramming Violations, 1996-98                              15




                          Page 24                      GAO/RCED-99-193 Telephone Slamming and Cramming
Contents




Table 3: Companies Subject to the Highest Number of State
  and Federal Enforcement Actions for Slamming, Calendar
  Years 1996-98                                                            19
Table I.1: Completed Enforcement Actions Reported by State
  Public Utilities Commissions and Offices of Attorney General
  for Telephone Slamming and Cramming, Calendar
  Years 1996-98                                                            27
Table II.1: FCC’s Enforcement Actions for Slamming Violations,
  as of June 1999                                                          30
Table II.2: FTC’s Publicly Filed Cramming Cases, as of June 1999           34




Abbreviations

DOJ           Department of Justice
FCC           Federal Communications Commission
FTC           Federal Trade Commission
NAL           notice of apparent liability
PIC           primary interexchange carrier
TDDRA         Telephone Disclosure and Dispute Resolution



Page 25                        GAO/RCED-99-193 Telephone Slamming and Cramming
Appendix I

Completed Enforcement Actions Reported by
the States, Calendar Years 1996-98                                                         Appenx
                                                                                                Idi




              All of the public utilities commissions and offices of attorney general in the
              50 states and the District of Columbia responded to our request for detailed
              information on the number of slamming and cramming enforcement
              actions that had reached a final resolution for calendar years 1996-98. This
              information included the number of consumers affected by the
              enforcement actions as well as the amount of customer restitution and
              penalties ordered to be paid. In some cases, the survey respondents were
              unable to provide all of the information. Table I provides a summary of the
              information provided on a state-by-state basis. In the table’s column
              headings, slamming is designated with an “S” and cramming with a “C.”




              Page 26                        GAO/RCED-99-193 Telephone Slamming and Cramming
                                            Appendix I
                                            Completed Enforcement Actions Reported by
                                            the States, Calendar Years 1996-98




Table I.1: Completed Enforcement Actions Reported by State Public Utilities Commissions and Offices of Attorney Genera lfor
Telephone Slamming and Cramming, Calendar Years 1996-98
                        Number of
                        completed
                       enforcement       Number of customers          Total amount of customer       Total amount of penalties
State                    actions              affected                   restitution reported                reported
                           S         C            S            C                  S              C               S               C
                                     a                                               c                              d
Alabama                     6                 1,705                                                       $57,450
                            a        a
Alaska
                                     a
Arizona                     5                   330                       $402,306c                       303,058d
                                     a
Arkansas                    4                                                 7,190                        205,631
                                                     b            b                  c
California                 19        2     336,123       30,000          8,078,426       $650,000        5,205,442       $25,000
                            a        a
Colorado
                                     a                                               c
Connecticut                 1                     5                                                         50,000
                            a        a
Delaware
                            a        a
District of Columbia
Florida                    23        3        2,552            2             18,694          579         2,056,000        21,000
                                                                  b                  c
Georgia                     4        1          408
                            a        a
Hawaii
Idaho                       7        1         285 b           5                     c           c
                                                                                                          362,000 d        1,500
                                                                                     c
Illinois                    7        1          566          57                             5,000         365,000 d       20,000
                            a        a
Indiana
                                     a                                               c
Iowa                        1                    98                                                        52,631 d
                                     a                                               c
Kansas                      9                   192                                                       191,058 d
Kentucky                    2        1            1                             817                          4,000         2,000
                                     a               b
Louisiana                   6                                                                               93,500
                            a        a
Maine
                            a        a
Maryland
                            a        a
Massachusetts
                                     a                                               c
Michigan                    4                    94                                                       128,058 d
                                     a
Minnesota                   4                 7,906                        195,633 c                       432,000
                                     a               b
Mississippi                 1                                                                               50,000
                                                     b            b                  c           c                  d            d
Missouri                    1        2
                            a        a
Montana
                            a        a
Nebraska
                            a        a
Nevada
                            a        a
New Hampshire




                                            Page 27                             GAO/RCED-99-193 Telephone Slamming and Cramming
                                      Appendix I
                                      Completed Enforcement Actions Reported by
                                      the States, Calendar Years 1996-98




                  Number of
                  completed
                 enforcement       Number of customers               Total amount of customer               Total amount of penalties
State              actions              affected                        restitution reported                        reported
                     S         C                S             C                     S                C                     S                C
                               a                   b                                  c                                     d
New Jersey            7                                                                                          $535,927
                               a                   b
New Mexico            1                                                    $308,140                                  95,000
                                                                                      c                c
New York             17        3           3,600            172             300,000          $67,000              116,350 d        $129,000
                                                   b           b                      c                c
North Carolina       11        1            110                                                                     53,167 d           273,000
                      a        a
North Dakota
                               a                   b                                  c
Ohio                  2                                                                                             57,631 d
                               a
Oklahoma              6                        19                                                                    34,000
                                                   b           b
Oregon               14        3                                                                                    185,500             14,350
                                                   b           b                      c                c                    d
Pennsylvania          3        2              94                                                                  117,600          1,002,500
Rhode Island          1        1               23            14                   723              400               52,631             35,000
                               a
South Carolina        3                      168
South Dakota          4        1           1,056               1              63,444               229
                                                   b                                  c                c
Tennessee             3        1               7        11,878                                                      95,427 d           280,000
                               a                   b
Texas                 8                     129                            1,000,000                                883,000
                      a        a
Utah
                               a
Vermont               2                       50 b                       1,292,400 c                                185,000
                                                   b           b                      c
Virginia              1        1                                                              435,000               52,631 d            15,000
                               a
Washington            1                      115                                                                     52,632
                               a                   b
West Virginia         1                                                        3,302                                 39,248
                                                   b           b                      c
Wisconsin             5        1                                                               40,000               146,000             25,000
                      a        a
Wyoming
Total               194    25         355,636            42,129         $11,671,075       $1,693,208           $12,257,572       $1,843,350
                                      a
                                          No completed enforcement actions were reported.
                                      b
                                          The number of customers affected was not provided in at least one of the reported actions.
                                      c
                                       Restitution was ordered to be paid in at least one of the reported actions, but the specific amount was
                                      not provided.
                                      d
                                        A penalty was ordered to be paid in at least one of the reported actions, but the specific amount was
                                      not provided.
                                      Sources: Responses of state public utilities commissions to GAO’s survey and of state offices of
                                      attorney general to a survey by the National Association of Attorneys General.




                                      Page 28                                     GAO/RCED-99-193 Telephone Slamming and Cramming
Appendix II

Federal Enforcement Actions Against
Slamming and Cramming                                                                                                         Appe
                                                                                                                                 nIx
                                                                                                                                   Idi




                    This appendix contains information on 23 enforcement actions taken by
                    the Federal Communications Commission (FCC) against companies for
                    slamming violations and 7 court cases filed by the Federal Trade
                    Commission (FTC) against companies and individuals for cramming
                    violations.



FCC’s Enforcement   FCC relies on several enforcement mechanisms to deal with slamming and
                    cramming by some telephone companies. Civil monetary penalties
Actions             (forfeitures) are used to cause offending companies to change their
                    business practices. In 1998, FCC began consistently proposing higher
                    penalties so that companies could not treat them simply as a cost of doing
                    business. Often, after FCC issues a proposed forfeiture—through a notice
                    of apparent liability (NAL)—the telephone company will offer to discuss a
                    settlement. If a settlement can be reached, FCC will enter into a consent
                    decree with the company that generally includes a voluntary payment to
                    the U.S. Treasury and consumer protections. In two slamming cases, FCC
                    entered into a consent decree before issuing an NAL. When a settlement
                    cannot be reached and a payment is not made, FCC will issue a final
                    forfeiture order canceling or reducing the penalty or requiring that it be
                    paid. If a payment is not made after this order is issued, collection is turned
                    over to the Department of Justice (DOJ). 1

                    FCC can also revoke a company’s or an individual’s operating authority, as
                    it did this with several companies engaged in slamming that were
                    apparently owned and operated by an individual named Daniel Fletcher.
                    Table II.1 provides details on all of the enforcement actions that FCC took
                    against specific companies for slamming violations from its first such
                    action in 1994 through 1998.




                    1
                     DOJ’s collection action will not involve a review of the validity and appropriateness of the final FCC
                    order if the forfeiture was assessed after a full evidentiary hearing.




                    Page 29                                    GAO/RCED-99-193 Telephone Slamming and Cramming
                                                 Appendix II
                                                 Federal Enforcement Actions Against
                                                 Slamming and Cramming




Table II.1: FCC’s Enforcement Actions for Slamming Violations, as of June 1999
                                                                    Amount of
                                                                     proposed
Company                                 Date of action               forfeiture Resolution                   Current status
                                                                              a
1. Cherry Communications, Inc.          Investigation began in                    $500,000 payment;          Payment of $500,000;
                                        1/93.                                     changes in business        case is closed.
                                                                                  practices.
                                        Consent decree adopted
                                        4/15/94.
2. Operator Communications, Inc.,       NAL adopted 3/29/95.        $1,410,000 $500,000 payment;             Payment of $500,000;
doing business as Oncor                                                        changes in business           case is closed.
Communications, Inc.                    Consent decree adopted                 practices.
                                        9/20/95.
3. Excel Telecommunications, Inc.       NAL adopted 8/18/95.           $80,000 FCC denied Excel’s 9/6/95     Forfeiture of $80,000
                                                                               petition for reduction of     paid.
                                        Notice of forfeiture                   forfeiture amount.
                                        adopted 6/20/96.
4. Interstate Savings, Inc. d/b/a ISI   NAL adopted 8/18/95.           $40,000 FCC rescinded                 Closed.
Telecommunications                                                             enforcement action after
                                        Order to rescind NAL                   company filed for
                                        adopted 3/10/97.                       bankruptcy.
5. LCI International Worldwide          NAL adopted 9/15/95.           $40,000 $15,000 payment; changes $15,000 paid 8/97.
Telecommunications (LCI)                                                       in business practices.
                                        Consent decree adopted
                                        8/22/97.
6. TELCAM, Telecommunications           NAL adopted 10/6/95.           $40,000 $15,000 payment; changes $15,000 paid 2/98.
Company of the Americas, Inc.                                                  in business practices.
                                        Consent decree adopted
                                        2/13/98.
7. Matrix Telecom, Inc.                 NAL adopted 12/4/95.           $40,000 $30,000 payment; changes $30,000 paid 12/96.
                                                                               in business practices.
                                        Consent decree adopted
                                        12/12/96.
8. MCI Telecommunications Corp.         NAL adopted 1/19/96.           $80,000 $30,000 payment; changes $30,000 paid 6/96.
                                                                               in business practices.
                                        Consent decree adopted
                                        5/24/96.
9. Home Owners Long Distance,           NAL adopted 1/19/96.           $80,000 $30,000 payment; changes $30,000 paid 3/97.
Inc. (HOLD)                                                                    in business practices.
                                        Consent decree adopted
                                        3/20/97.
10. AT&T Corporation                    NAL adopted 1/19/96.           $40,000 $30,000 payment; changes $30,000 paid 12/96.
                                                                               in marketing and business
                                        Consent decree adopted                 practices.
                                        11/27/96.




                                                 Page 30                               GAO/RCED-99-193 Telephone Slamming and Cramming
                                               Appendix II
                                               Federal Enforcement Actions Against
                                               Slamming and Cramming




                                                                    Amount of
                                                                     proposed
Company                               Date of action                 forfeiture Resolution                       Current status
11. Nationwide Long Distance, Inc. NAL adopted 1/19/96.                $80,000 $30,000 payment; changes Payment referred to DOJ
                                                                               in business practices.   for collection; company is
                                      Consent decree adopted                                            in Chapter 7 bankruptcy.
                                      1/2/97.
12. Target Telecom, Inc.              NAL adopted 1/19/96.             $40,000 FCC denied Target’s       $40,000 paid 2/98.
                                                                               response that forfeiture
                                      Order of forfeiture                      should not be imposed or
                                      adopted 2/24/98.                         amount should be reduced.
                                                                               a
13. Winstar Gateway Network, Inc.     Investigation initiated in                   $80,000 payment; changes $80,000 paid 12/96.
                                      June 1996.                                   in business practices and
                                                                                   consumer redress.
                                      Consent decree adopted
                                      11/27/96.
14. Heartline Communications, Inc.    NAL adopted 6/20/96.            $200,000                                   FCC is rescinding
                                                                                                                 because Heartline filed
                                                                                                                 Chapter 7 bankruptcy
                                                                                                                 before reaching an
                                                                                                                 agreement with FCC.
15. Long Distance Services, Inc.      NAL adopted 12/12/96.            $80,000 FCC denied LDS’ petition          Referred to DOJ for
(LDS, Inc.)                                                                    for a reduction of the            forfeiture payment as a
                                      Order of forfeiture                      forfeiture.                       Chapter 11 bankruptcy
                                      adopted 2/24/98.                                                           case.
16. Long Distance Services, Inc.      NAL adopted 12/12/96.            $80,000 LDSI never responded to           Referred to DOJ for
(LDSI)                                                                         this enforcement action.          collection.
 (A Fletcher company)                 Order of forfeiture
                                      adopted 5/7/97.
17. CCN, Inc.; Church Discount        Order to show cause           $5,681,500 Fletcher never responded          Referred to DOJ for
Group, Inc.; Discount Calling Card,   and notice of opportunity     (total for all to this enforcement action.   collection.
Inc.; Donation Long Distance, Inc.;   for hearing to determine              eight
Long Distance Services, Inc.;         revocation of operating      companies).
Monthly Discounts, Inc.; Monthly      authority adopted
Phone Services, Inc.; and Phone       6/12/97.
Calls, Inc. (aka “Fletcher
Companies”)                           Order to revoke
                                      operating authority
                                      adopted 4/21/98.
18. Minimum Rate Pricing, Inc.        NAL adopted 10/31/97.             $80,000 $1.2 million payment;            MRP is currently paying
(MRP)                                                                    initially; changes in business          $1.2 million in
                                      Consent decree adopted       increased to practices.                       installments.
                                      12/16/98.                     $1.2 million
                                                                     as result of
                                                                            other
                                                                      slamming
                                                                      violations

                                                                               .




                                               Page 31                               GAO/RCED-99-193 Telephone Slamming and Cramming
                                               Appendix II
                                               Federal Enforcement Actions Against
                                               Slamming and Cramming




                                                                      Amount of
                                                                       proposed
Company                                Date of action                  forfeiture Resolution                          Current status
19. All American Telephone             NAL adopted 7/6/98.            $1,040,000 Company has filed a                  Open. U.S. Attorney’s
Company, Inc. (AAT)                                                              response with FCC;                   Office has asked FCC to
                                                                                 resolution not yet                   stay its proceedings. With
                                                                                 determined.                          FCC’s cooperation,
                                                                                                                      federal search warrants
                                                                                                                      were issued to AAT.
20. Amer-I-Net Services                NAL adopted 10/26/98.          $1,360,000 Company has filed                    Open.
Corporation                                                                      response with FCC;
                                                                                 settlement currently under
                                                                                 discussion.
21. Brittan Communications             NAL adopted 10/29/98.          $1,120,000 Company has filed                    Open.
International Corp.                                                              response with FCC;
                                                                                 resolution not yet
                                                                                 determined.
22. Business Discount Plan, Inc.       NAL adopted 12/16/98.          $2,400,000 Company has filed                    Open.
(BDP)                                                                            response with FCC;
Prior to 1/95, was knownas Trans                                                 resolution not yet
National Telephone, Inc. (incorp. in                                             determined.
8/92).
23. Long Distance Direct, Inc.         NAL adopted 12/16/98.b         $2,000,000 LDDI has filed a response;           Open.
(LDDI)                                                                           settlement currently under
(A subsidiary of Long Distance                                                   discussion.
Direct Holdings)
                                               a
                                                 FCC did not issue NALs for these companies. Instead, FCC directly entered into consent decree
                                               negotiations with these companies.
                                               b
                                                The NAL for Long Distance Direct, Inc., was also for cramming violations. All other NALs were only for
                                               slamming violations.
                                               Source: FCC.




FTC’s Enforcement                              FTC protects consumers by taking law enforcement actions against unfair
                                               or deceptive acts or practices. 2 According to FTC officials, the Telephone
Actions                                        Disclosure and Dispute Resolution Act (TDDRA) of 1992, as amended,
                                               gives FTC the authority to regulate all “telephone-billed purchases” that
                                               are distinct from charges for the transmission of local or long-distance
                                               telephone calls.3 FTC seeks and obtains temporary restraining orders,
                                               preliminary injunctions, permanent injunctions, and other equitable relief,


                                               2
                                                Common carriers (i.e., telephone companies) subject to the Communications Act of 1934, as amended,
                                               are exempt from FTC’s statutory mandate under the Federal Trade Commission Act. 15 U.S.C. 45(a)(2).
                                               FTC has taken the position that the statutory common-carrier exemption does not shield the
                                               non-common-carrier activities of an entity that may otherwise engage in some common-carrier
                                               activities under another statute.




                                               Page 32                                   GAO/RCED-99-193 Telephone Slamming and Cramming
Appendix II
Federal Enforcement Actions Against
Slamming and Cramming




such as the appointment of receivers, to halt unfair or deceptive practices
and to reserve the offending companies’ assets for consumer restitution.

Between April 1998 and June 1999, FTC filed seven cases against 16
companies and 20 individuals for cramming violations. In some instances,
FTC entered into court-approved settlements with the company. Table II.2
provides details on the publicly filed enforcement actions that FTC took
during this period.




3
 Under TDDRA, the term “telephone-billed purchase” includes any purchase that is completed solely as
a consequence of the completion of a telephone call, or subsequent dialing or comparable action of the
caller. The term specifically excludes all “local exchange” or interexchange telephone service.




Page 33                                  GAO/RCED-99-193 Telephone Slamming and Cramming
                                                       Appendix II
                                                       Federal Enforcement Actions Against
                                                       Slamming and Cramming




Table II.2: FTC’s Publicly Filed Cramming Cases, as of June 1999
                                                                 Amount of suspect                                    Comment/additional
Company                            Date of action                billing                  Status                      information
Interactive Audiotext              4/22/98, in U.S. District     $13 million              Permanent injunction; $13 Settlement entered as
Services, Inc. Includes            Court for the Central                                  million in restitution to final order; redress phase
American Billing and               District of California;                                consumers.                under way and changes
Collection Services; U.S.          amended filing on                                                                required in business
Interstate Distributing,           5/28/98.                                                                         practices.
Inc.; Allstate
Communications (parent
company).
International Telemedia            7/10/98, in U.S. District     $17.1 million            Temporary restraining       Trustee appointed for ITA
Associates, Inc. (ITA);            Court for the Northern                                 order with freezing of      by a bankruptcy court; ITA
and Online Consulting              District of Georgia.                                   Online’s assets and         closed down and its
Group (vendor for ITA).                                                                   preliminary injunction;     business affairs being
                                                                                          receiver appointed to       wound up by the trustee.
                                                                                          manage Online.              Online being closed by
                                                                                                                      receiver after receiver
                                                                                                                      decided it could not be run
                                                                                                                      as lawful business.
Hold Billing Services,     7/16/98, in U.S. District             $4.7 million             Preliminary injunction on   Settlement negotiations
Ltd.; HBS, Inc.; Avery     Court for the Western                                          8/24/98.                    ongoing. VOAA’s
Communications (all        District of Texas.                                                                         business closed and
closely related companies                                                                                             negotiations with VOAA
that are aggregators); and                                                                                            and principals ongoing.
Veterans of America
Association, Ltd. (VOAA)
(vendor).
Communications             12/22/98, in U.S. District            Not yet determined;      Not yet determined.         Formal discovery and
Concepts and               Court for the Southern                formal discovery under                               negotiations under way.
Investments, Inc. d/b/a    District of Florida.                  way.
Crown Communications &
Crown Communications
Two, Inc.; and Global
Collections, Inc. (Crown’s
in-house collection
agency).

Shared Network                     6/7/99 in U.S. District       Not yet determined.      Stipulated preliminary      Resolution not yet
Services, LLC, doing               Court for the Eastern                                  injunction; discovery       determined.
business as Shared                 District of California.                                under way.
Network Services and 1st
Page
Wazzu Corporation                  6/7/99 in U.S. District       Not yet determined.      Temporary restraining       Resolution not yet
                                   Court for the Central                                  order; discovery under      determined.
                                   District of California.                                way.




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                              rt                       Page 34                               GAO/RCED-99-193 Telephone Slamming and Cramming
                                            Appendix II
                                            Federal Enforcement Actions Against
                                            Slamming and Cramming




                                                      Amount of suspect                                 Comment/additional
Company                 Date of action                billing               Status                      information
American Telnet, Inc.   6/8/99, in U.S. District      $39.7 million         Permanent injunction;       $39.7 million in forgiven
                        Court for the Southern                              complaint and consent       charges and redress to
                        District of Florida.                                filed together, awaiting    consumers agreed to by
                                                                            entry by court.             parties; changes to
                                                                                                        business practices
                                                                                                        required.
                                            Source: FTC.




                                            Page 35                               GAO/RCED-99-193 Telephone Slamming and Cramming
Appendix III

Telephone Company Initiatives to Curb
Slamming and Cramming                                                                                              AppeInx
                                                                                                                         Idi




               Several major local and long-distance companies provided us with
               information on initiatives they have undertaken in response to the
               problems of slamming and cramming. The two following lists are not a
               complete inventory of the industry’s initiatives, nor we did attempt to
               assess their effectiveness. They do, however, give some indication of the
               range of actions that telephone companies are taking to curb these abuses.



Examples of    • Using brochures, press releases, and Web sites to educate consumers on
                 what constitutes slamming, what their rights are, and what steps they
Antislamming     can take if they have been slammed.
Initiatives    • Suspending the use of outside sales agents for certain marketing efforts
                 that have resulted in an unacceptable level of complaints about
                 slamming.
               • Allowing customers to block changes to their telephone accounts.
               • Using automatically dialed, prerecorded calls to notify customers when
                 their service provider is changed.
               • Providing toll-free numbers for customers to call to resolve complaints
                 about slamming.
               • Charging the company’s resellers for the cost of handling slamming
                 incidents that they caused. 1



Examples of    • Using brochures, press releases, and Web sites to educate customers on
                 what constitutes cramming, what their rights are, and what steps they
Anticramming     can take if they have been victims of cramming.
Initiatives    • Limiting billing to vendors engaged in telecommunications-related
                 services.
               • Eliminating billing for certain products and services susceptible to
                 abuse by third-party service providers, such as prepaid calling cards and
                 debit cards.
               • Eliminating billing for recurring monthly service charges associated
                 with pay-per-call 900 number services or charges for services accessed
                 via 800 and 888 numbers, which are widely associated in the public’s
                 mind with toll-free calling.
               • Refusing to bill on behalf of programs that use sweepstakes or “check
                 box” methods to sign up customers.


               1
                A reseller is a telephone service provider that does not own transmission facilities but obtains
               communications services from another telephone company for resale to the public for profit.




               Page 36                                    GAO/RCED-99-193 Telephone Slamming and Cramming
Appendix III
Telephone Company Initiatives to Curb
Slamming and Cramming




• Requiring information providers to provide clearer billing descriptions,
  toll-free numbers for complaints, and procedures for handling
  complaints.
• Requiring information providers to provide a notarized affidavit
  attesting to the validity of their descriptions and billings; requiring
  billing aggregators that submit bills on behalf of third-party service
  providers to sign an affidavit certifying that the third-party charges were
  authorized by the customer.
• Requiring information providers to block further charges to a
  consumer’s account if requested by the consumer.
• Discontinuing billing for information providers who generate too many
  complaints from customers about cramming.
• Providing customers with the option of blocking the inclusion of
  “miscellaneous” changes on their telephone bills.




Page 37                            GAO/RCED-99-193 Telephone Slamming and Cramming
Appendix IV

GAO Contact and Staff Acknowledgements                                                           Appenx
                                                                                                      IV
                                                                                                       di




GAO Contact          John P. Finedore, (202) 512-6248




Acknowledgements     Other key contributors to this report are Martha Chow, Alice Feldesman,
                     Mitchell Karpman, Teresa R. Russell, Michael R. Volpe, and Mindi
                     Weisenbloom.




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                rt   Page 38                       GAO/RCED-99-193 Telephone Slamming and Cramming
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