TCS Daily

Phone Slam Sham

By Duane D. Freese - April 4, 2002 12:00 AM

Telephone slamming has gotten a bad rap. Really.

Last month, WorldCom ponied up $8.5 million to settle a lawsuit brought on behalf of hundreds of California consumers harmed by its alleged illicit switching their service from other long distance carriers. USA Today reported the beleaguered, second-ranked long distance provider had the worst record on slamming since 1997 for all long distance companies.

Such slamming has earned the condemnation of lawmakers, regulators, consumer advocates and consumers themselves. And for good reason. Nobody should foist on a consumer a service they don't really want and remove them from one they like.

And after the Telecommunications Act of 1996 further spurred long distance competition with the entrance of third party resellers, marketers and aggregators, slamming did get a bit out of hand.

The Federal Communications Commission saw slamming complaints skyrocket from less than 1,000 a month in 1995 to 1,700 a month by March 1999. And that was but the tip of slamming activity. By March of 1999, regional Bell operating company SBC was reporting 23,000 slamming complaints a month and sibling BellAtlantic (which became Verizon with completion of its merger with NYNEX) a whopping 35,000 a month.

So, the FCC acted appropriately when it took some dramatic steps, as also authorized by the 1996 Telecom Act, to halt slamming. Rules implemented through November of 2000 have granted consumers forgiveness for 30 days of calls if they are slammed, forced slammers to pay 150 percent of charges submitted to other carriers, and levied fines of $40,000 an incident that could be trebled in egregious cases. States likewise stepped in, with 47 of 50 states setting up means for handling anti-slamming complaints.

The result: Complaints have plummeted. By December of last year, monthly slamming complaints reported by the FCC had fallen by more than 90 percent, to a mere 123. In fact, the enforcement bureau has no outstanding cases for slamming, after issuing fines and forfeitures of more than $10 million in 2000 and imposing more than $3 million last year.

Even that, though, doesn't tell the whole story. Almost all the fines and forfeitures for slamming abuses against long-distance companies, marketers and resellers were for activities in 1998 and 1999. The settlement by WorldCom was for complaints in that era.

There's no reason to complain about that. But it is worth remembering, that even when slamming was at its worst - a "nightmare," as the National Consumers League called it, the competition that engendered it provided huge consumer benefits.

The break up of AT&T in 1984 made long distance service truly affordable for all Americans. In constant 1999 dollars, the basic rate for a long-distance phone call dropped from 64 cents a minute in 1984 to 26 cents a minute by 1999 - a whopping 60 percent. Only almost no pays the basic rate. Most long distance minutes are piled up on calling plans and by discount cards. And the measure of revenue per minute, that includes those discounts, plummeted 70 percent in that period, from 52 cents a minute in 1984 to 14 cents for an interstate phone call. During the period of heightened slamming, a cut of 4 cents a minute in that rate occurred.

What was the value of that to consumers and the nation? Well, take a look at the minutes. Minutes spent on interstate long distance calls totaled 208 billion in 1984. They increased to 454 billion by 1995, and to 585 billion by 1999. All this happened despite the widespread use of e-mail and the Internet in the last years of the 1990s as alternative means for long distance messaging. If inflation-adjusted rates had remained at 1984 prices, the cost of those minutes would have been $300 billion. Instead, they only cost around $80 billion - a $200 billion advantage. The savings between 1995 and the end of 1999 are smaller, but still a substantial $20 billion plus a year.

So, even if a million consumers a year were getting slammed, the benefits of competition still far outweighed the cost. Probably even to those getting slammed, as even their prices were going down.

That vibrant competition wouldn't have occurred, however, if it hadn't been easy for consumers to change their telephone provider. It took breaking AT&T to do that. Only after that did local telephone companies - mostly, regional Bell operating companies created from AT&T's break up - lack a financial interest in who consumers chose for their long distance carriers. Indeed, the Bells and other local companies even may have made money from all the switching going on, as they collected $5 from a long distance company every time a consumer's service was switched to it. The FCC only last month began hearings to determine whether that $5 fee was fair.

Now, though, the Bells are themselves pushing to get into long distance services. That means that there is no neutral agency through which switching of other phone services can occur. And that raises the specter of something worse than phone slamming, namely, remonopolization of telephone service.

Even though the 1996 Telecom act was supposed to encourage competition for local phone service - by allowing the local Bell monopolies into long distance if they opened up their local networks to competitors -- the results have fallen far short of what happened in long distance. Where AT&T's long distance monopoly disintegrated after the 1984 break up - with its share of the long distance market plummeting from 90 percent of the market to less than 40 percent today - incumbent local exchange carriers continue to control more than 91 percent of all local phone service. The former Bell companies, which made up AT&T's formidable local network, have seen their share of local phone revenues climb from 69 percent in 1998 to 78 percent in 2000.

New Jersey provides a sorry example of what's happened. The most densely populated and wealthiest state in the nation, it should have been a prime candidate for vibrant local phone competition of all kinds. Indeed, a Progress & Freedom Foundation report last July outright claimed that "competition exists in New Jersey [and] there appears to be no barriers to entry." And based on such studies, Verizon last week resubmitted to the FCC its application to provide long distance service to New Jersey businesses and residents.

If competition exists, though, it's well hidden from everyday consumers. Only 280 of 4.3 million residential phone lines has service delivered by non-Verizon New Jersey facilities, according to the state's Division of the Ratepayer Advocate.

Why? Well, one reason is that Verizon charges competitors $16.21 for unbundled network elements to serve consumers, a rate double its own rate for basic service to consumers. Furthermore, until it revised its submission to the FCC for long distance, it was charging competitors $160 to make a "hot cut" to switch the customer over to a competitor's system. Now, it will only cost $35.

Still, that's seven times as much as for long distance, which means that switching customers for local service isn't easy. But then, there is no real incentive for the Bells to make switching from their network to competitors' simple.

The FCC fixed the annoyance of slamming, but that wasn't the biggest problem phone consumers faced. It was -- and still remains -- a lack of choice in local service. And if the FCC fails to produce such competition, consumers may come to look nostalgically upon the "nightmare" time when slamming was rampant as the dream days in which they at least had some choices. It may even lead some to demand for local phone service what worked so well in long distance, a break up of some Bells.

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