United States General Accounting Office

GAO Testimony

Before the Permanent Subcommittee on Investigations,

Committee on Governmental Affairs,

U.S. Senate

For Release on

Delivery Expected

at 9:30 a.m., EDT

Thursday

April 23, 1998

TELECOMMUNICATIONS

Telephone Slamming and Its

Harmful Effects

Statement of Eljay B. Bowron

Assistant Comptroller General for Special Investigations

Office of Special Investigations

GAO/T-OSI-98-11

Telecommunications: Telephone Slamming

and Its Harmful Effects

Madam Chairman and Members of the Subcommittee:

Thank you for inviting me here today to discuss the results of our

investigation to determine (1) what entities engage in intentional

telephone slamming—a form of telecommunications fraud and abuse;

(2) how they go about it; and (3) what federal and state regulatory entities

and the telecommunications industry are doing about it.1

 I will also discuss

our case study concerning an individual whose known companies

apparently slammed 544,000 consumers in one effort.

Slamming is the unauthorized switching of a consumer from the

long-distance provider of choice to another provider. It can harm

consumers in a number of ways, such as by paying higher, sometimes

exorbitant, rates and experiencing frustration at having to correct the

problems resulting from being slammed. Slamming also results in losses to

long-distance providers and other industry firms when slammers take their

profits and leave unpaid bills, sometimes amounting to millions of dollars.

• All three types of long-distance providers—facility-based carriers,

switching resellers, and switchless resellers2

—have economic incentives

to engage in slamming. Switchless resellers, which have the most to gain

and the least to lose, slam most frequently.

• Intentional slamming3 is accomplished in deceptive ways, such as by

misleading consumers and falsifying or forging documents.

• The Federal Communications Commission (FCC), state regulatory

agencies, and the industry each rely on the others to be the main forces in

the fight against slamming. Thus, few of their efforts are extensive. To

illustrate, the FCC has adopted some antislamming measures but effectively

does little to protect consumers. Most states have some antislamming

measures, but their extent varies widely. And industry’s measures appear

to be more market-driven than consumer-oriented. In fact, the most

effective antislamming measure appears to be one that consumers can

1

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

1998).

2

Facility-based carriers, e.g., AT&T (American Telephone and Telegraph), MCI Telecommunications

Corporation, and Sprint, have the physical equipment including hard lines and switching stations

necessary to take in and forward calls. Switching resellers lease capacity on a facility-based carrier’s

long-distance lines, resell long-distance services, and have one or more switching stations. Switchless

resellers also lease capacity and resell long-distance services but have no equipment and little or no

substantive investment in their companies.

3

Sometimes, legitimate mistakes are made in transcribing data that result in slamming, but these

mistakes are not paramount to the slamming issue and can be easily rectified.

Page 1 GAO/T-OSI-98-11
Telecommunications: Telephone Slamming

and Its Harmful Effects

take—contacting their local exchange carrier and “freezing” their

long-distance provider from unwanted change.

• Daniel H. Fletcher, the owner/operator of the switchless resellers in our

case study, apparently entered the industry in 1993 and began large-scale

slamming in 1995. By 1996, when most industry firms had stopped dealing

with the Fletcher companies, they had slammed or attempted to slam

hundreds of thousands of consumers, billed their customers at least

$20 million, and left industry firms with at least $3.8 million in unpaid bills.

What Entities Engage

in Slamming and

Why?

According to representatives of the FCC, numerous state regulatory

agencies, and the industry, those who most frequently engage in

intentional slamming are switchless resellers. They have the least to lose

by using deceptive or fraudulent practices because they have no

substantive investment in the industry. Nevertheless, the economic

incentives for slamming are shared by all long-distance providers.

How Is Slamming

Accomplished?

Anyone with a telephone must select a long-distance provider, or Primary

Interexchange Carrier (PIC), through the appropriate local exchange

carrier. Consumers can change their PIC again through the local carrier or

through a long-distance provider with a written or verbal authorization.4

Intentional slamming is then possible because the legitimate

authorizations can easily be subverted. For example, the written

authorization, or letter of agency (LOA), can be changed or forged. In

addition, unscrupulous telemarketers or providers can use deceptive

marketing practices and mislead consumers into signing an authorization.

Or consumers can be slammed without being contacted, such as when a

slammer obtains telephone numbers from a telephone book and submits

them to the local carrier for changing—and then presents forged LOAs if

asked for the authorizations.

What Have the FCC,

State Agencies, and

the Industry Done to

Fight Slamming?

Although the FCC, most state regulatory agencies, and the

telecommunications industry have some antislamming rules and practices,

each of the three entities relies on the others to be the main forces in the

antislamming battle. Indeed, of the antislamming measures, those by some

states are the most extensive. The FCC does not review information that

potential long-distance providers submit with their tariff filings, which are

4

Such written authorization is obtained by using a letter of agency (LOA), whose sole purpose is to

authorize a local exchange carrier to initiate a PIC change for the consumer. The LOA must be signed

and dated by the subscriber requesting the change. (47 C.F.R. section 64.1150(b)) Verbal

authorizations are usually initiated by a telemarketer.

Page 2 GAO/T-OSI-98-11
Telecommunications: Telephone Slamming

and Its Harmful Effects

required before the companies can begin service. Moreover, the FCC lags

far behind some states in the amount of fines imposed on companies for

slamming.

Antislamming Measures The FCC first adopted antislamming measures in 19855

 and revised or

amended them in 1992, 1995, and 1997.6

 However, we found no FCC

practice that would help ensure that applicants who become long-distance

providers, or other common carriers, have satisfactory records of integrity

and business ethics. To illustrate, long-distance providers are now

required to file a tariff—or schedule of services, rates, and charges—with

the FCC.

7

 State regulators and the industry rely on an entity’s filed tariff as

a key credential that signifies legitimacy. However, according to

knowledgeable FCC officials, the FCC merely accepts a tariff filing and does

not review the applicant’s information provided with the filing. For

example, to test FCC oversight of the tariff filing process, we easily filed a

tariff using fictitious information and avoided paying FCC’s $600 filing fee.

Our fictitious switchless reseller—PSI Communications—could now slam

consumers with little chance of adverse consequences. In short, FCC’s

tariff-filing procedure is no deterrent to a determined slammer. Neither

does it provide states, the telecommunications industry, or the public with

any assurance concerning a long-distance provider’s legitimacy.

While most state regulatory agencies have some licensing procedures and

requirements for an entity to become a long-distance provider, those

procedures/requirements vary widely. For example, in Georgia—a state

with more restrictive measures—a switchless reseller must, among other

activities, undergo two reviews and wait a period of time before receiving

a permanent certificate. The telecommunications industry, to some extent,

also attempts to weed out companies involved in slamming. For example,

various facility-based carriers, generally based on their marketing

5

In a 1985 policy statement (50 Fed. Reg. 25,982 (June 24, 1985)), the FCC decided that allowing

customers to select long-distance carriers rather than automatically assigning them to one provider

would benefit the public interest. Providers would then have incentive to provide consumers with

helpful information and competitive services, which the consumers could use to make informed

choices.

6

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

7

Under section 203 of The Telecommunications Act of 1934, each common carrier must file a tariff

with the Commission. However, under section 203 (b), the Commission has discretion to modify this

requirement. In 1996, the FCC promulgated a regulation (47 C.F.R. section 61.20), under which

nondominant long-distance providers (e.g., providers without the power to control prices) were

exempted from the requirement to file tariffs. However, the regulation was stayed in 1997 as a result of

MCI Telecommunications Corp. v. FCC, No. 96-1459. Therefore, all common carriers must file tariffs at

the Commission.

Page 3 GAO/T-OSI-98-11
Telecommunications: Telephone Slamming

and Its Harmful Effects

philosophies and not consumer protection, undertake different

antislamming measures including the use of third parties to verify requests

for a PIC change.

However, what appears to be the most effective antislamming measure of

all can be effected by consumers themselves—a PIC freeze. An individual

consumer can contact the local exchange carrier and ask that the

consumer’s choice of long-distance provider be “frozen.” The consumer

can lift the freeze at any time by recontacting the local carrier.

Penalties Imposed on

Slammers

FCC’s punitive actions against slammers are far less extensive than those of

some state regulatory agencies in the same general time period. For

example, in 1997, the FCC obtained consent decrees from nine companies

nationwide that paid $1,245,000 in fines for slamming. But in May 1997, the

California Public Utilities Commission suspended one firm for 3 years for

slamming, fined it $2 million, and ordered it to refund another $2 million to

its customers. Further, in 1997, the FCC issued a Notice of Apparent

Liability to another firm amounting to $80,000 for apparent slamming. But

in February 1998, the Florida Public Service Commission voted to require

the same firm to show cause why it should not be fined $500,000 for

slamming.

Case Study We did a limited investigation of four of Daniel H. Fletcher’s eight known

companies8

 that operated as switchless resellers between 1993, when he

apparently entered the business, and 1996. Through each company, Mr.

Fletcher apparently slammed or attempted to slam many thousands of

consumers, including 544,000 at one time. This one effort occurred after

(1) Sprint cancelled its business relationships with two Fletcher

companies—Christian Church Network, Inc. and Long Distance Services,

Inc.—and (2) Mr. Fletcher transferred the two companies’ customer base,

through a third Fletcher company—Phone Calls, Inc. (PCI), to another

long-distance provider for servicing. As further evidence of the extent of

Mr. Fletcher’s dealings, industry records, although incomplete, indicate

that between 1993 and 1996 the Fletcher companies billed their customers

over $20 million in long-distance charges.

By mid-1996, industry firms, including such large facility-based carriers as

Sprint, began to end their business relationships with Mr. Fletcher’s

8

The eight switchless resellers were CCN, Inc.; Christian Church Network, Inc., doing business as

Church Discount Group, Inc.; Discount Calling Card, Inc.; Donation Long Distance, Inc.; Long Distance

Services, Inc.; Monthly Discounts, Inc.; Monthly Phone Services, Inc.; and Phone Calls, Inc.

Page 4 GAO/T-OSI-98-11
Telecommunications: Telephone Slamming

and Its Harmful Effects

companies because of his customer’s slamming complaints and/or his

companies’ nonpayment for long-distance network usage. AT&T

recognized a problem with Mr. Fletcher and his business practices during

April 1996, but it continued service to Long Distance Services, Inc. until

November 1, 1997, when it discontinued service for nonpayment for

network usage.

Mr. Fletcher’s companies have also come under regulatory scrutiny by

several states and the FCC. For example, in 1997 the Florida Public Service

Commission cancelled the right of the Fletcher-controlled PCI to do

business in the state and fined it $860,000 for slamming. In June 1997, the

FCC, citing numerous complaints and evidence of forged or falsified LOAs,

issued an Order to Show Cause and Notice of Opportunity for Hearing

regarding Mr. Fletcher and his eight companies. In that order, the FCC, in

effect, directed Mr. Fletcher and his companies to show cause why the FCC

should not require them to stop providing long-distance services without

prior FCC consent and why the companies’ operating authority should not

be revoked. Since Mr. Fletcher waived his right to an evidentiary hearing

when he did not provide the FCC a written appearance, stating he would

appear for such hearing, the FCC could have entered the order citing its

final enforcement action. However, the FCC did not finalize its order until

after we briefed it on our findings, in April 1998.

It appears that all eight known Fletcher-controlled companies were out of

business by the end of 1996. However, our investigation identified several

instances of Mr. Fletcher’s continued involvement since then in the

telecommunications industry. Because Mr. Fletcher knowingly used false

information to conceal his identity and the location of his companies and

residence(s), he has not been located.

Madam Chairman, this completes my prepared statement. I would be

happy to respond to any questions that you or other members of the

Subcommittee may have.

(600464) Page 5 GAO/T-OSI-98-11
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