Power to the People

Posted: 03/1999

Power to the People
FCC’s Slamming Crackdown Bodes Well for Customers, Ill for IXCs
By Kim Sunderland

In the quiet suburbs of Herndon, Va., located west of the nation’s capital, the
proverbial Smith family was outraged to learn they had been "slammed."

The Smiths, young professionals with two small children, regularly call family in
Canada and France, their homelands. And with a hefty monthly phone bill totaling more than
$400, the Smiths unknowingly became prime targets for unauthorized telecom carriers
changing their long distance provider without the family’s approval.

It was a fluke they were slammed, the Smiths say, because they fancied themselves the
only family among several of their friends who hadn’t been. "I’ll try anything
once," Mr. Smith says, "but only on my terms."

The Smiths’ story doesn’t surprise the Federal Communications Commission (FCC), which
in 1998 alone received almost 20,000 complaints from people who had been slammed, an
approximately 135 percent increase over 1995. That alarming increase, coupled with the
efforts last year of several congressmen calling for swift anti-slamming action, forced
the FCC in December 1998 to hand down new rules designed "to take the profit out of
slamming."

So while the Smiths and other slammed customers appear more empowered, the new rules
nonetheless will be extremely tough on any smaller interexchange carriers (IXCs) involved
in the practice of slamming.

"The carrier liability provisions are going to be very onerous and extremely
difficult to administer, particularly for smaller carriers," says Genevieve Morelli,
outgoing executive vice president and general counsel of the carrier trade group
Competitive Telecommunications Association (CompTel). "And consumer fraud could
become an additional burden."

Even though the rules are stringent, the FCC has left open the door of possibilities.
In addition to its Second Report and Order on slamming, the FCC issued a Further Notice of
Proposed Rulemaking (FNPRM) asking for comments on myriad issues, indicating that this
order isn’t quite finished. "The commission is open to alternatives," Morelli
says. "It’s asked the industry to come to it with proposals on how to handle the
liability issue."

While currently trying to work out issues with the FCC on this slamming order, sources
say the long distance industry nonetheless plans to head to court seeking either a stay or
extension of the rules.

Under Pressure

The fact that the FCC seeks additional information on almost 10 more slamming-related
items attests to the pressure the commission was under when it issued this Second Report
and Order. With 20,000 consumer complaints and the issue being hotly debated on Capitol
Hill, the FCC no doubt was pinched between a rock and a hard place on accomplishing some
sort of slamming solution before 1998 ended.

Anti-slamming legislation on the Hill failed to materialize when the House and Senate
could not come to terms on a compromise bill before the 105th Congress adjourned.
Republican Sen. John McCain of Arizona, head of the powerful Senate Commerce Committee,
then issued harsh directives to the FCC that the commission adopt its own rules and
continue with whatever measures were possible to prevent slamming.

"If the commission fails to do so," Sen. McCain warned, "[slamming] will
be one of the committee’s first priorities" in 1999. It’s "unconscionable,"
he added, "that consumers have to deal with fraudulent and abusive telemarketing
practices engaged in by companies selling long distance telephone service."

On the House side, Rep. W.J. "Billy" Tauzin, R-La., chairman of the Commerce
Committee’s telecom subcommittee, said slamming legislation should have been accomplished
last year. He threatened that both parties "are ready to cooperate in an immediate
effort to legislate quickly on … the final compromise that was reached in the waning
days of the [105th] session."

The smaller carriers and resellers, who advocate keeping government involvement in this
matter to a minimum, all along have feared Congress might pass an overly restrictive bill
that includes steep fines and criminal action.

House Commerce Committee Chairman Thomas Bliley, R-Va., now is reviewing the FCC’s new
rules to determine if they do protect consumers and encourage competition. Congressman
Bliley was one of 15 lawmakers who sent a letter to FCC Chairman William Kennard in
January urging the adoption of slamming rules that correlate with the congressional
efforts of the 105th Congress.

Consumer Protection Unleashed

The FCC’s new slamming rules give consumers like the Smiths stronger rights in three
areas: the relief awarded to slamming victims; the method by which a carrier must obtain
customer verification of preferred carrier (PC) change requests; and the method by which
consumers can "freeze" their existing carrier.

"With respect to compensation," the FCC concludes in Common Carrier Docket
No. 94-129, "a subscriber will be absolved of liability for all calls made within 30
days after being slammed. If, however, the subscriber fails to notice that he or she has
been slammed and pays the unauthorized carrier for such calls, Section 258(b) of the
[Telecommunications Act of 1996] requires the unauthorized carrier to remit such payment
to the authorized carrier."

The authorized long distance carrier then would refund or credit the Smiths. But the
Smiths would get only the difference between what they paid the unauthorized carrier
compared to what they would have paid their authorized carrier absent the slam.
Unauthorized carriers additionally are required to pay for any "reasonable"
billing and collection expenses incurred by an authorized carrier trying to collect
charges from them. And they must pay for any expenses associated with restoring a
subscriber to his authorized carrier.

Meanwhile, authorized carriers must bear the burden of investigating alleged slamming.
For instance, if during the 30-day no-pay period an unauthorized carrier can prove a valid
carrier switch, it can make a claim to the consumer’s authorized carrier for any
"absolved" charges. The authorized carrier then must conduct an investigation
and issue a decision within 60 days after receipt of the claim.

This is bound to tie up resources, industry experts say. But the FCC explains that it’s
trying to strike a balance between the rights of consumers and those of carriers.
Consumers have a right to be compensated for fraud, the FCC says, "as well as for the
time and effort expended in reinstating the preferred carrier." And because an
authorized carrier isn’t actually providing a customer with services during a slam, that
carrier isn’t losing any profits.

"The authorized carrier is not out- of-pocket for most costs that it would have
borne if it had in fact provided service," according to the FCC. "This includes
not only the cost of transmission, but other costs of providing service, such as access
charges and other fees." And if a carrier has lost profits, it can take recourse
against the slamming carrier at the commission or in a state or federal court, the FCC
ruled.

Industry Fallout

IXCs, resellers, third-party verification (TPV) companies and some of the commissioners
themselves are concerned with the "consumer absolution’" portion of the rules
and claim the plan could worsen the problem of slamming.

Commissioner Harold Furchtgott-Roth, who dissented in this order, says "that the
consumer absolution scheme created here will lessen the incentives of the party most able
to take appropriate action to combat slamming–i.e. the authorized carrier–and may also
inadvertently lead to an increase in fraudulent claims of slamming." By removing
consumer liability, he says authorized carriers may be discouraged from policing slamming
because "there will be no payments by the consumer to the slamming carrier available
for them to collect."

Commissioner Michael K. Powell, who dissented in part, likewise worries that authorized
carriers are not being compensated as intended by the Telecom Act. Citing Sec. 258(b),
Powell says the act clearly states that a slamming carrier is liable to the authorized
carrier for the entire amount the slammed subscriber has paid to the unauthorized carrier.
"I worry that this shortcoming does not afford the authorized carrier the benefit of
the bargain it struck with the subscriber," Powell says.

The entire consumer liability section of the FCC’s rules "will result in customer
confusion and scarce resources will have to be devoted to sorting all this out,"
CompTel’s Morelli says.

People who "claim" they have been slammed get the benefit of the doubt
through this order, says Ernest B. Kelly III, president of the Telecom-munications
Resellers Association (TRA). This excuses them from having to pay for service "for
enough time as to make it difficult for carriers and resellers to ultimately collect any
payments rightfully due to them," he adds.

"Requiring carriers to give unfettered amounts of free long distance to consumers
who merely allege a slam will only strengthen the $12-billion-a- year telecom fraud
industry," agrees Robert M. McDowell, executive vice president and general counsel of
the America’s Carriers Telecommunication Association (ACTA).

ACTA is even contemplating filing a petition for reconsideration. "Four of the
five commissioners disagreed with all or part of the order," McDowell says. "The
commissioners themselves seem ashamed of their own product."

Such industry giants as AT&T Corp., MCI WorldCom Inc. and Sprint Corp. currently
are working with these trade groups to devise alternatives to the FCC’s order, Morelli
says. MCI WorldCom, in fact, suggests that an independent third-party administrator
provide a negotiation or dispute resolution function for the industry. The commission
acknowledged that this approach holds merit and encourages carriers to submit similar
suggestions in the FNPRM.

Truthful Confirmation

The commission’s new rules also modify how carriers obtain and verify consumer carrier
change requests. In a nutshell, all calls generating a carrier switch must be verified.

"This uniform rule will ease administration by eliminating any possible confusion
or disputes regarding the applicability of call verification," the rules state.

Specifically, the rules eliminate a verification process that switches people to a new
carrier if they don’t return a postcard mailed by a telemarketer, commonly part of the
"welcome package." Long distance companies still can obtain consent by a written
letter from consumers authorizing a switch, a third-party verification of the switch or a
toll-free number to call for switching carriers.

The FCC also extended the verification rules to include local phone companies.
"Because LECs (local exchange carriers) will be competing with other carriers for
consumers’ local and long distance services," the FCC ruled, "LECs may not be
neutral third parties in implementing carrier changes."

Basically, the FCC rejects in-house verification procedures because they offer carriers
too much incentive and opportunity to commit fraud. And in modifying its former rules, the
FCC now sets out explicit criteria on how TPVs can be considered truly independent. A TPV
must:

• Not be owned, managed, controlled or directed by the carrier;
• Not be given financial incentives to approve carrier changes; and
• Operate in a location physically separate from the carrier.

"The FCC also has made it explicit that states can enforce the FCC rules
themselves and create additional verification requirements for intrastate service as long
as they don’t conflict with the FCC’s rules," explains James Veilleux, president of
TPV provider VoiceLog, Rockville, Md. "Presumably this means that state rules–like
California’s, which are more restrictive than the FCC’s–are okay."

Veilleux says TPV providers should see their business increase as a result of the new
FCC rules "unless it’s so difficult for smaller carriers and resellers to deal with
that they bag it and decide to bail on the business altogether."

Freezes Lock in Carriers

Also modified was the method by which consumers can "freeze" their PC to
prohibit another carrier from claiming that it’s been authorized to request a carrier
change.

The FCC says PC freezes must be implemented on a nondiscriminatory basis so that
neither incumbent LECs (ILECs) nor competitive LECs (CLECs) are able to use freezes as a
tool to gain an unreasonable competitive advantage. And all LECs must make any PC freeze
mechanisms available to all subscribers under the same terms and conditions.

In issuing its FNPRM, the FCC seeks comment on eight additional areas. The commission
predicts the most controversial issue regards PC changes and PC freezes over the Internet.
The commission concludes that PC changes submitted over the Internet cannot constitute
valid letters of agency (LOA) under the new verification rules because the electronic
signatures used in Internet submissions don’t comply with those of the LOAs. The
commission says that electronic signatures fail to identify the "signer" as the
actual individual named.

Comments, which are due this spring, also are being sought on the following:

1. Requiring unauthorized carriers to pay authorized carriers certain amounts in addition
   to what slammed subscribers have paid;
2. Eliminating confusion bet-ween resellers and their underlying facilities-based carriers;
3. Modifying the independent TPV method to ensure it effectively will prevent slamming;
4. Defining the term "subscriber" to determine which person should be authorized
   to make carrier changes;
5. Requiring carriers to submit reports to the FCC on the number of slamming complaints
   they have received;
6. Imposing a registration requirement to ensure that only qualified entities enter the
   telecommunications market; and
7. Implementing a third-party administrator to execute PC changes and freezes.

The Smiths Win

For now, the Smiths have gone to Washington and they’ve come out ahead. As long as they
don’t abuse the system, the FCC has ordered that they be protected from slamming and
financially rewarded if they have been slammed. That’s a sweet deal. For telecom carriers,
the tables are turning.

"We’re sending a clear message to anyone who even thinks about slamming that there
is no profit in it," FCC Chairman William Kennard said following adoption of the
order. "It will not pay to steal phone customers anymore."

Kim Sunderland is Washington bureau chief for PHONE+ magazine.