Good morning Chairwoman Collins and members of the Subcommittee, thank you very much for the opportunity to appear before you today to discuss the rapidly-growing consumer fraud known as "cramming" and what the Federal Communications Commission is doing to combat the problem.

From the viewpoint of the consumer, the essence of "cramming" is very simple -- it is the appearance on their local telephone bill of charges that they did not knowingly authorize. These charges run the gamut from failure on the part of the service provider to clearly and conspicuously disclose the terms of the service being offered to the consumer to the fraudulent submission of charges that the consumer simply never ordered and, in fact, are often non-existent. In either case, the practice constitutes consumer fraud.

Indeed, irrespective of the cause, consumers have a right to be protected from any charge appearing on their telephone bill that they did not knowingly authorize. Consumers also have a legitimate expectation to have services and charges clearly and conspicuously described both at the point of sale and on the telephone bill itself. Indeed, consumers expect, rightly so, that their local service providers render bills that provide them -- in a readily understandable, and consumer-friendly manner -- sufficiently detailed information to allow them to discern precisely the nature and origin of each charge appearing on their local telephone bill.

Parties in the Chain

In order to understand the underpinnings of this problem -- as well as its possible solutions -- it is important to understand the relationships of the players involved. In the typical cramming incident, there are at least three parties involved: the local exchange company that submits the local bill to its end-user customer, the billing consolidator or clearinghouse, and the service provider.

The telephone bill that consumers receive every month from their local telephone company contains not only charges for local telephone service, but also charges from other service providers such as long distance carriers. However, while large long distance carriers often contract directly with the local exchange company for the provision of billing and collections services, billing consolidators or clearinghouses typically play a middleman role for service providers that are too small -- or have too few transactions -- to contract directly with each local exchange company for billing services. Many of the service providers that utilize billing clearinghouses are common carriers, particularly resellers of long-distance service. Other service providers, however, are not carriers, but provide telecommunications-related services -- such as providers of phone mail, calling card and paging services -- often in competition with similar services provided by the local exchange companies. Finally, some charges that appear on local telephone bills are completely unrelated to telecommunications services, such as psychic club membership fees. These non-common carriers, as well as the billing clearinghouses themselves, are currently not within the enforcement jurisdiction of the FCC.

In terms of billing services provided by the local exchange companies, the Commission detariffed and deregulated the provision of third-party billing and collection services by local exchange companies more than a decade ago. While billing and collection are not common carrier services, the Commission reaffirmed that these services were within the Commission's ancillary jurisdiction under Title I of the Communications Act because such services are "incidental" to the transmission of the communications service. Nonetheless, the Commission found that deregulation of local exchange carrier billing and collection services was appropriate in light of the existence of significant competition for the provision of these services. In particular, this 1986 Commission order concluded that market forces should prevent carriers from charging excessive rates or engaging in unreasonable practices. Thus, while the Commission retains general authority under the Act to bring enforcement actions against carriers for unjust and unreasonable practices in connection with their billing and collection activities, we do not have any specific rules or requirements governing those activities.

Consistent with this deregulatory framework, the Commission does not require the local exchange companies to provide billing and collection services for any entity requesting such service. The carriers have wide latitude to decide for whom they will provide such service; the terms under which they will provide service; and the grounds under which they will discontinue providing service to customers who refuse to play by the rules. Local companies also have an interest in protecting their customers from unscrupulous service providers because their customers in the first instance look to their local carrier to fix these problems and prevent them from occurring in the future. Thus, the carriers themselves have the ability and incentive to cure much of this problem and, at the request of Chairman Kennard, they have recently taken serious steps in that direction, as I will outline for you in a moment.

How Does Cramming Occur?

Cramming occurs when any of the parties in the billing chain described above causes unauthorized charges to appear on the consumer's local telephone bill. Many crammers utilize practices that have been prohibited by the Commission with respect to slamming. For example, some crammers appear to use sweepstakes entry forms located at crowded shopping malls that include small print -- or no disclosure at all -- authorizing charges to be placed on the consumer's phone bill. Other crammers advertise free promotions to obtain the consumer's name, address and phone number, and then bill the consumer for other services without authorization.

Whatever the specific scheme, the service providers rely upon the billing clearinghouses, the local exchange carriers and the consumer to perpetrate their fraud. They rely upon the billing clearinghouse and local telephone company to fail to adequately screen the companies for whom they are billing and verify the charges they are passing along. And they rely on consumer confusion to get paid for these unauthorized charges. Specifically, consumers may be confused about what services are included on the bill, particularly where their local telephone bills do not adequately inform them of the service and identity of the service provider in a user-friendly fashion. Many consumers are also concerned that they may have their local service disconnected for failure to pay these unauthorized charges. While state law prohibits such termination in most instances, crammers clearly rely on this misapprehension to pull off their fraud.

What is the FCC Doing to Combat Cramming?

The incidence of cramming complaints has grown extremely quickly. In the first half of this year, we have processed on average more than 300 complaints each month from consumers claiming to have been crammed, ranking it with slamming as one of the single largest sources of consumer complaints received by the Commission. There is no simple explanation for why this problem has developed so rapidly. Unlike slamming, the rise in cramming incidents does not appear to be related to the arrival of new competition in an industry. The local telephone companies have been providing third-party billing services for many years. Like slamming, however, the entities engaging in this fraud appear clearly to be taking advantage of consumer confusion with respect to their local telephone bills.

Chairman Kennard's Cramming Initiative: As a result of this sudden rise in complaints received by the Commission and, not incidently, by concerns expressed by various Members of Congress, Chairman Kennard called together representatives of the local exchange companies and challenged them to find a solution to this problem. While the Commission could have tried to attack this issue by creating new rules to re-regulate local exchange carrier billing and collection services, such a process might have taken at least a year to complete. Consumers needed faster action than the normal regulatory process would have provided.

At the May 20th kick-off to this initiative, Chairman Kennard emphasized that the industry either would have to find a way to stop cramming soon, or they likely would have legislative and regulatory solutions imposed upon them. The industry took this challenge to heart, and has moved extremely quickly towards the development of voluntary "best practices" guidelines designed to prevent unauthorized charges from appearing on the bills that they issue to their local service customers. In several meetings over the past two months, the local exchange carrier industry has met to draft these guidelines -- either as a full group or in the form of smaller working groups. This process also included two open forums at which representatives of the billing and service providers, and then representatives of consumer groups and the law enforcement community, were invited to provide comments on the draft document. The group then modified the guidelines in an effort to reflect comments provided at these forums.

These best practices include the following provisions that local carriers will decide whether and how to implement:

• obligations on the part of both the local exchange companies and the clearinghouses to screen products, services, and marketing materials before agreeing to bill for third-party services.

• procedures for monitoring complaint levels generated by each service provider and program, and establishment of complaint level thresholds for terminating billing services for providers or programs.

• requirements for appropriate authorization and verification procedures to ensure that consumers have, in fact, knowingly approved charges to appear on their bill.

• assurances that the bills received by consumers provide clear and comprehensible information concerning the services being charged and how the consumer may question or challenge the charges, including a toll free number to reach representatives that can resolve any complaints.

• establishment of customer dispute resolution procedures.

• commitments to work with appropriate law enforcement and regulatory agencies to assist in eliminating cramming.

• recognition of the need to provide consumers with options for controlling the types of charges that may appear on their local telephone bills, such as blocking the inclusion of any charges for non-common carrier services.

These practices should go a long way towards weeding out the bad actors in this industry by cutting off access to billing services to those engaged in unfair or deceptive marketing, and providing consumers the ability to recognize and challenge improper charges before they make any payment.

A few observations about this process. First, the local exchange companies were able to complete this process in two months -- it would have taken the Commission many more months to complete a rulemaking. Second, it needs to be recognized that this was not a process that was directed or controlled by the Commission. Chairman Kennard's challenge was certainly the catalyst for this initiative, and the carriers should be congratulated for responding in a timely and meaningful fashion. However, this process was envisioned to be one that the local exchange companies undertook to address their own unique role in the billing process that has allowed cramming to take root. And the perspective of the resulting "best practices" is accordingly limited to policies and procedures these carriers can reasonably implement to combat cramming. As such, these "best practices" are not intended to be the complete solution to the problem of cramming. The other segments of this industry must also commit to doing what is necessary to eliminate this problem. To this end, a group of the largest billing clearinghouses last week announced their own policies to govern to prevent unauthorized charges from being submitted on consumers' bills. I also understand that certain segments of the service provider industry have been working on their own "best practices" for programs that utilize local exchange carrier billing services. These ongoing efforts by each segment of this billing process underscores, I believe, a recognition on the part of the legitimate participants in this industry that it is in their own best interests to develop aggressive measures to stop cramming.

Enforcement Activities: The Commission fully intends to attack cramming where we can. Indeed, we are currently in the final stages of investigations into the practices of long distance providers that appear to be engaging simultaneously in slamming and cramming. As is our practice with slammers, we anticipate issuing an order in the near future which will assess sizable forfeitures against carriers for their cramming practices as well.

As I mentioned previously, however, the Commission's jurisdiction stops at common carriers. Similarly, I understand that the FTC is restricted from exercising its jurisdiction against common carriers. As a result of this jurisdictional split, some of the players in this industry -- the bad actors -- are attempting to play both sides against the middle. The two agencies must work closely to ensure that no company uses this limitation to evade the law. Indeed, the agencies have worked informally to share information and forward complaints where violations appear to cross these jurisdictional boundaries.

Consumer Education Initiatives: We are also undertaking initiatives to educate consumers about the importance of closely reviewing their telephone bills and to help them actually understand these bills. I am attaching to my remarks a consumer bulletin on these issues that the FCC distributes broadly through our internet home page, through the press, and to consumers who contact the Commission's toll-free call center with cramming related complaints. Consumer education is an essential part of the effort to stop the flow of money before it ever gets to the slammers and crammers.

Proposed Legislation

We believe the more cops on the beat in this area the better. Congress can help us achieve this goal by ensuring that both the FCC and the FTC have broad jurisdiction over all of the entities perpetuating this fraud on consumers. Specifically, Congress should extend the jurisdiction of the FCC to reach the practices of the responsible billing clearinghouses and service providers when unauthorized charges appear on consumers' local telephone bills. At the same time, Congress should clarify that the Federal Trade Commission has jurisdiction to ensure fair advertising and marketing practices, whether or not the entity responsible for cramming is a common carrier. Although the combined effect of these changes might be an overlap in jurisdiction between the FTC and FCC, it is much more effective for the two agencies to coordinate enforcement activities where each has sufficient authority to deal with a matter, than to allow the bad actors to delay or avoid prosecution by taking advantage of potential gaps in jurisdiction. I am confident that, given the necessary authority, the FCC and FTC will take advantage of each other's respective expertise more effectively to combat cramming.

Once again, I thank the subcommittee for this opportunity to discuss this important issue. I look forward to working with you to protect consumers from this fraud.