III. Factual Background

A. How Unauthorized Charges Are Placed on Customers' Bills

The subject of this decision is the placing of unauthorized charges on customers' local telephone bills. To explain how this can occur, we first describe the billing process in general.

Local telephone bills can include charges for many services in addition to local telephone service. These services include long distance telephone calls and other telecommunications-related services, such as voicemail.² Although the charges appear on the customer's local service bill, the LEC does not necessarily provide each of the billed services. Instead, the actual service provider typically obtains billing and collection services from the LEC. The LEC offers these services pursuant to tariffs filed with this Commission. There can also be several billing and collection intermediaries between the service provider and the LEC. Understanding the various links in the billing chain, as well as their historical genesis, is necessary for this case and the remedies we order.

B. LEC Billing for Long Distance Carriers

Pacific Bell provides billing and collection services to other service providers pursuant to orders of this Commission and the Federal Communications Commission (FCC). Along with the FCC, we authorized LECs to provide billing and collection services as part of the "Access Charges" series of decisions. See, e.g., Pacific Telephone and Telegraph Company, (1983) 13 CPUC2d 331, 393 (D.83-12-024). These orders implemented the divestiture of the regional Bell operating companies from their former corporate parent, the American Telephone and Telegraph Company (AT&T) and allowed the newly independent regional operating companies to charge AT&T and other long distance carriers for access to the local system to initiate and terminate long distance calls. We authorized Pacific Bell and other LECs to provide billing and collection services because the provision of these services would allow consumers to continue to receive one bill for both local and long distance services, and would generate "the maximum sustainable contribution toward basic exchange plant cost recovery." (Id.) The revenue generated from long-distance carriers for billing and collection services would be an offset to local system costs that the customer would otherwise bear through rates and charges for local service. To provide this service, Pacific Bell obtains title to the billing and collection customers' accounts receivable, and the end-user customers are thereby obliged to remit the total amount to Pacific Bell. (Id.)

We also allowed the LECs to enhance the value of their billing and collection services by permitting them to disconnect local service for nonpayment of long distance service provided by another carrier.³ We recognized that this enhancement would tend to coerce customers to pay all charges on their bills, including those from other carriers. Thus, the other carriers would benefit by keeping uncollectible accounts low, which would enable the LEC to charge a premium for its billing and collection services. 13 CPUC2d at 394-5. We reasoned that this coercive effect would impose "no drastic change" on customers' then-current perception of the need to pay their entire bill or face service disruption.

C. The Advent of Billing Agents

After the AT&T divestiture, the number of long distance telephone companies grew tremendously; we have granted over 1,000 applications for long distance operating authority in California. The vast majority of these companies contract for their billing and collection services from the LECs, such as Pacific Bell. To process the billings, however, the LEC must receive the carrier billing information in a computer format that is compatible with the LEC's billing programs. Rather than having each individual carrier independently manage this computer formatting function (and the interaction with the LEC), billing aggregation service companies--or "billing agents"--have emerged. The billing agents receive billing information from the carrier providing the service, reformat the information, and submit it to the LECs for billing to customers. This arrangement allows the carriers to bypass negotiating individual contracts with the LECs and to provide for efficient billing data presentation to the LECs.

In addition to reformatting the billing information, the billing agents also must transfer the carriers' accounts receivable to Pacific Bell. Some billing agents actually take title to the accounts receivable before transferring the accounts to Pacific Bell, while others merely act as an agent on behalf of the carrier and transfer the accounts directly from the carrier to Pacific Bell.

Telecommunications-related services, such as voice mail, 900/976 information services, and others, are also billed through LECs. The providers of these services, however, are not required to obtain operating authority from the Commission. Thus, not only are certificated long distance carriers submitting customer billing information to the LECs, but so are various uncertificated telecommunications service providers. Like long-distance carriers, however, the service providers often engage billing agents in the process of preparing billing information to submit to the LECs.

D. Commission Authority Over Billing Agents

The California Legislature recognized the role that billing agents have come to play in placing charges from carriers and service providers on customers' local telephone bills. In 1998, the Legislature added §§ 2889.9 and 2890 to the Public Utilities Code,⁴ which for the first time expressly subjected billing agents to portions of the Public Utilities Code.

The legislative intent was to prevent "cramming," such as that engaged in by Coral, and to give the Commission means for dealing with cramming when it occurs. The new statutes impose new requirements on all entities that generate charges on a customer's bill. The statutes also require telephone companies to bill only for customer-authorized charges and to include a "clear and concise" description of the product or service. The Legislature granted the Commission authority to impose penalties on billing agents that violate §§ 2889.9 and 2890. Billing agents must also respond to Commission or staff requests for information, and failure to do so subjects them to immediate suspension of their rights to bill through California LECs.

E. Use of Multiple Billing Agents and Factors

Carriers or service providers sometimes use several billing agents to obtain the different services needed to get the billing information ready for the LECs. For example, one billing agent might provide "rating" service, i.e., applying the proper charges for each call made. A second billing agent may then actually prepare and submit the resulting data to the LEC. In this instance, the actual carrier or service provider is three steps removed from the customer. The chain is: carrier or service provider, billing agent 1, billing agent 2, LEC, and end-use customer. When the customer pays the bill, the money flows in reverse sequence from the LEC to the carrier or service provider. Because customers may subsequently seek refunds, LECs and billing agents typically hold a fraction of the payments as reserves.

We have learned in this proceeding that "factors" also play a large role in the streams of billing and payment. Factoring is defined as "[t]he buying of accounts receivable at a discount. The price is discounted because the factor (who buys them) assumes the risk of delay in collection and loss on the accounts receivable." Black's Law Dict. (7^th ed. 1999) p. 612, col. 2. Furthermore, as the record in this proceeding shows, a single entity may provide both billing and factoring services. Easy Access witness Spoden testified that factors typically retain approximately 60% of the total billed amount--about 50% for customer refund reserves and 10% for fees. Despite the high cost, many businesses use factoring service to finance business expansion.

The amount the factors are willing to advance is based on gross billings accepted by the LECs. If the reserves turn out to be unnecessary to pay customer refunds, the left-over reserve amount is typically turned over to the carrier or service provider.

Unfortunately, the use of multiple billing agents and factors creates a situation that facilitates cramming by carriers and service providers. On the basis of invalid authorizations, such carriers and service providers are able to generate accounts receivable to sell to factors before the end-use customers are even billed. Once these customers are billed, many of them unwittingly (or out of fear of losing their telephone service) pay the unauthorized charges. In addition, the multiple levels of billing agents provide distance between the LEC and the carrier or service provider, and help the carrier or service provider to conceal or misrepresent its identity. In short, a carrier or service provider that wishes to engage in cramming has ready means available to (1) gain access to end-user telephone bills, and (2) convert the unauthorized billings quickly into cash. The crammer may then dissipate these funds and declare bankruptcy. The facts of this case all too clearly illustrate the consequences of this system for California customers.