III. DISCUSSION

A. Violation of Public Utilities Code section 2890(a) - Cramming

Public Utilities Code section 2890(a) states "A telephone bill may only contain charges for products or services, the purchase of which the subscriber has authorized." Staff may recommend, and the Commission may consider, penalties pursuant to Public Utilities Code section 2107 and 2108 in the amount of $500 to $20,000 per offense per day. In each of the situations described in the summary of Staff's allegations, MCI may have imposed a monthly charge for long distance service that was not requested or authorized by the consumer, in violation of section 2890.

B. Violation of Public Utilities Code section 2889.5 - Slamming

Public Utilities Code section 2889.5 states that telephone companies must follow the requirements of that section prior to making any change or switch in service provider. Among other things, section 2889.5 requires telephone companies to thoroughly describe the nature and extent of the service being offered, to specifically establish whether the subscriber intends to make any change in his or her service provider, and to obtain and record confirmation by the subscriber of his or her intent to make any changes or switches. In the situations described above, MCI may be making changes to the subscriber's service without the subscriber's authorization, in violation of section 2889.5.

C. Monthly Minimum Fees on Inactive Accounts Found Illegal in Other Jurisdictions

We find that the above-described business practices may result in widespread violations of Public Utilities Code sections 2889.5 and 2890. According to Staff, these same monthly fees have been found to be illegal in other jurisdictions.

1. State of New York

In June 2004, the Attorney General of the State of New York and AT&T Communications of New York, Inc. (AT&T) entered into an agreement ending AT&T's practice of imposing monthly recurring charges (MRC) on non-customers. AT&T's MRC was essentially the same type of charge as MCI's MUF.

In that case, the Attorney General received complaints alleging that AT&T had erroneously billed consumers who were not AT&T customers. The erroneously billed customers fell into two groups (i) those who previously had notified AT&T that they wished to cancel their AT&T long distance service; and (ii) those who had not had a billing history with AT&T for an extended period of time. Residential customers who had previously been assigned to or had chosen AT&T as their long distance carrier, but had not selected one of AT&T's optional calling plans were assigned by default to AT&T's "Basic Rate Plan". Until January 1, 2004, customers assigned to AT&T's Basic Rate Plan were billed only for long distance calls actually made and incurred no monthly recurring or minimum charges. Beginning January 1, 2004 AT&T began imposing a monthly recurring charge on bills received by customers assigned to its Basic Rate Plan, regardless of whether the customer made any long distance calls. A number of consumers apparently were not aware that they were assigned to AT&T, thought they had canceled AT&T as their long distance provider and/or had not used AT&T or received bills from AT&T for months or even years prior to January 2004.

In that case, AT&T relied on the Primary Interexchange Carrier (PIC) status as reflected in AT&T's records and did not reconfirm the consumers' status by contacting the consumer and obtaining their authorization to institute the monthly recurring charge. Thus, AT&T billed an MRC to consumers who were unaware that they were assigned to AT&T or believed they had canceled their AT&T accounts. When consumers complained to AT&T that they were not AT&T customers and were improperly billed for the MRC, AT&T responded with letters that advised these consumers that AT&T was selected as their long distance carrier during some portion of the billing cycle. A number of these consumers were actually not assigned to AT&T during any portion of the billing cycle. Some consumers also advised the Attorney General that even after receiving confirmation numbers and assurances from AT&T representatives that their billing problems had been corrected, AT&T continued to send them bills and past due notices for the MRC and related charges.

AT&T agreed to immediately make its best efforts to mitigate the harm caused by the practice, by taking various steps to ensure the problem did not occur. The agreement also required AT&T to immediately amend its basic rate plan customer list to exclude consumers who are not AT&T customers, immediately cease collection efforts of the MRC plus related charges, and take steps to remove such charges from New York consumers who have not paid the MRC and have had no long distance direct dial usage on the AT&T network.

2. Federal Communications Commission

On November 30, 2004, the Federal Communications Commission (FCC) and AT&T Corp. (AT&T) entered into a Consent Decree concerning whether AT&T

violated section 201(b) of the Communications Act of 1934 by erroneously charging a monthly recurring charge to non-AT&T customers.

AT&T acknowledges in the Consent Decree that after January 1, 2004 due to coding and systems processing issues, it inadvertently billed the basic MRC to a total of 1,267,032 consumers, which included AT&T customers who were not on the basic rate state-to-state direct-dialed plan as well as non-AT&T customers in 50 states and the District of Columbia.

AT&T agreed, among many things, to verify the accuracy of its records for customer PIC status, compare its records for its basic schedule long distance customers in all 50 states to the records of certain local exchange carriers, and to make a voluntary payment of $500,000 to the United States Treasury.

3. MCI Has No Mandate to Collect Minimum Usage Fees from Non-Customers

MCI has informed Staff that federal law requires telephone companies to maintain account records of former customers for three years, but has provided Staff with no law that mandates that this expense be collected from non-customers. Staff has found no federal or state law that allows MCI to bill non-customers for this minimal cost. Staff believes that MCI has no contractual relationship with these consumers - the consumer is not an MCI customer nor receives any long distance service from MCI. Staff concludes that the consumer is not under an obligation to pay MCI's costs to maintain records.

Staff believes the consumer is being illegally charged by MCI for no usage on a calling plan the consumer did not request nor authorize. Despite the lack of a contract between the customer and MCI, the customer must engage in protracted negotiations with MCI in order to remove the charges. The consumer is not empowered to stop the billing because MCI will only recognize a PIC change request processed by the LEC or the new carrier, not the consumer. Moreover, MCI is inappropriately using TCSI codes that are "for information only" and not intended to be used to establish new subscriber accounts. Therefore, Staff believes the consumer is not responsible for the charges, and that the practice should cease.

Therefore IT IS ORDERED that:

1. An investigation on the Commission's own motion is hereby instituted into the operations of MCI, Worldcom, and MCI Worldcom (Respondents), to determine:

a. whether Respondents violated P.U. Code section 2890 by imposing charges on consumers' bills for products or services which the consumer did not request or authorize;

b. whether MCI has violated P.U. Code section 2889.5 by failing to confirm the consumer's intent to change service providers or establish a new account prior to establishing a new account for that consumer;

c. whether Respondents should be ordered to pay reparations pursuant to P.U. Code section 734;

d. whether Respondents should be ordered to cease and desist from any unlawful operations and practices, or have special conditions and restrictions imposed on it, pursuant to P.U. Code section 761;

e. whether Respondents should be fined pursuant to P.U. Code sections 2107 and 2108 for violations of the P.U. Code or other order, decision, rule, direction, demand or requirement of the Commission.

2. Respondents are directed not to impose any monthly recurring service charges on customer accounts ("minimum usage fees" is the terminology used by Respondents) where the consumer has: a) contacted Respondents and requested cancellation, disconnection, termination, or otherwise requested that his or her service be discontinued; b) switched to another long distance carrier; c) never had Respondents as the selected long distance carrier.

3. Respondents are hereby ordered to appear and show cause why the Commission should not order Respondents to permanently cease and desist the practice of imposing any type of monthly recurring service charges without first obtaining authorization from the prospective customer, on a date to be set at the Commission's hearing room, 505 Van Ness Avenue, San Francisco, 94102.

4. To facilitate the completion of this investigation, and consistent with the provisions of section 314, Respondents are ordered to preserve until further order by the Commission all consumer account records, verification tapes, PIC dispute records, and consumer complaints involving California consumers who have complained to either CAB or to MCI regarding minimum usage fees, and to respond in a timely fashion to all of Staff's data requests.

5. Staff's report includes information for Respondents that SBC has identified as proprietary pursuant to P.U. Code section 583. Staff's report also includes documents obtained from MCI, which MCI has designated proprietary information. The public interest in disclosure outweighs any need for confidentiality; thus any confidential information included with Staff's report is hereby made public.

6. Staff shall continue discovery and continue to investigate the operations of Respondents. Any additional information that Staff wishes to introduce shall be provided

to the Respondents in advance of any hearings in accordance with the schedule directed by the assigned Administrative Law Judge. Staff need only respond to discovery requests

directed at Staff's investigation of the Respondents and Staff's prepared testimony offered in this proceeding.

7. Staff shall monitor consumer complaints made against Respondents. We expect Staff to bring additional evidence of any alleged harmful business practices by Respondents to our attention (e.g. new types of violations). Staff may propose to amend the OII to add additional respondents or to raise additional charges. Any such proposal shall be presented to the Commission in the form of a motion to amend the OII and shall be supported by a Staff declaration supporting the proposed amendments or additional named respondents.

8. This ordering paragraph suffices for the "preliminary scoping memo" required by Rule 6 (c) of the Commission's Rules of Practice and Procedure. This proceeding is categorized as an adjudicatory proceeding and will be set for hearing. The issues of this proceeding are framed in the above order. A prehearing conference shall be scheduled for the purpose of setting a schedule for this proceeding including dates for the exchange of written testimony, determining which of the Staff's witnesses will need to testify, and addressing discovery issues. This order, as to categorization of this proceeding, can be appealed under the procedures in Rule 6.4. Any person filing a response to this order instituting investigation shall state in the response any objections to the order regarding the need for hearings, issues to be considered, or proposed schedule. However, objections must be confined to jurisdictional issues that could nullify any eventual Commission decision on the merits of the alleged violations, and not on factual assertions that are the subject of evidentiary hearings.

Service of this order on Respondents will be effectuated by personally serving a copy of the order and Staff's report on the Respondents' designated agent for service in California: The Prentice-Hall Corporation System, Inc., 2730 Gateway Oaks Drive, Suite 100, Sacramento, CA 95833.

This order is effective today.

Dated April 21, 2005 at San Francisco, California.

MICHAEL R. PEEVEY

President

GEOFFREY F. BROWN

SUSAN P. KENNEDY

DIAN GRUENEICH

Commissioners