7. Marketing Programs and Tactics

In this section we address several Pacific Bell marketing programs and tactics that are not directed at a specific service. "Offer on every call" refers to Pacific Bell's requirement that its service representatives offer customers additional services on every incoming call to Pacific Bell. Sequential offering is Pacific Bell's policy of ordering service representatives to offer large packages of services first and to only offer smaller packages upon refusal of the larger one. Incentives and targets refer to sales incentive programs for service representatives with specific sales goals. Finally, we address Pacific Bell's policy of releasing customer information to its affiliates and agents.

7.1. Offer on Every Call

In 1997, Pacific Bell instituted a policy of offering optional services, such as Call Waiting, Saver Packs, and Caller ID, on all customer contacts other than when a customer is disconnecting service or is temporarily disconnected for non-payment.

UCAN alleges that this policy elevates sales over service and results in excessive delays for customers to reach a service representative.¹⁹ Pacific Bell states that it has a constitutional right to offer its products and services to residential customers in California.

As the complainant, UCAN bears the burden under § 1702 of proving by a preponderance of the evidence that Pacific Bell has violated a provision of law or any order or rule of the Commission. Here, UCAN alleges that Pacific Bell gives higher priority to increasing sales than to providing service to its customers, and UCAN cites the 1986 "cease and desist" decision for the proposition that these priorities are impermissible. (UCAN Opening Brief at 40, citing 21 CPUC2d 182, 188 (D.86-05-072).) That decision, however, was directed at specific practices that violated other laws or rules.

UCAN alleges that Pacific Bell's offer on every call policy also violates § 2896, which requires that customers receive "sufficient information upon which to make informed choices among telecommunications services." UCAN, however, does not demonstrate that customers are being deprived of information; if anything, customers are receiving excess information in the form of undesired sales pitches. Section 2896 does not prohibit such information.

UCAN next contends that the offer on every call policy violates Tariff Rule 12, under which Pacific must quote all recurring rates and nonrecurring charges for all services. Again, proving a violation of this rule requires the opposite of what UCAN has shown: customers may be receiving unwanted information, but they are not being deprived of information.

UCAN has failed to meet its burden of proving that Pacific Bell's offer on every call policy violates a provision of law or any order or rule of the Commission. We can envision, however, implementation measures that could cause this policy to interfere unreasonably with a customer's attempt to obtain services from Pacific Bell. We caution Pacific Bell against forcing a customer to endure extended sales offers prior to responding to the customer's requests.

7.2. Sequential Offerings

When offering optional services, Pacific Bell's sales representatives were trained to offer first the Basics Plus Saver Pack with nine custom calling features, Caller ID, and The Message Center at a cost of $32.90/month.²⁰ If the customer was not interested in this package, the service representatives were trained to offer the Basics Saver Pack, which included all services except The Message Center, and costs $24.95/month.

Effective September 14, 1998, Pacific Bell changed the name, contents, and price of certain saver packs. The Basics Saver Pack with nine custom calling features became The Works Saver Pack and cost $16.95/month. Pacific Bell also created The Works Plus Saver Pack which included all the services contained in the Works Saver Pack along with The Message Center and cost $24.90/month. (See Hearing Exhibit 57.) The Basics Saver Pack continued at a cost of $14.95/month with four custom calling features or $12.95 with three custom calling features. Subsequent to filing this tariff, Pacific Bell service representatives were instructed to offer The Works or The Works Plus Saver Pack first and, if rejected, to offer The Basics Saver Pack or The Basics Plus Saver Pack.

TIU alleges that service representatives are directed to inform the customer of the availability of individual custom calling services only after all saver packs have been rejected. Pacific Bell states that as of September 1998, only the Basics Saver Pack is offered as a fallback package. TIU provided documents which revealed Pacific Bell's strategy to "offer high, watch them buy, offer low, nowhere to go." TIU also provided evidence that Pacific Bell requires service representatives to offer the packages of services on every call, establishes team and individual sales goals for such packages, and provides service representatives with financial incentives for these sales. TIU concludes that this system results in vital information regarding lower-cost options being withheld from customers.

In response, Pacific Bell states that service representatives are trained (and are reminded with prompts) to advise customers that they may separately purchase services in a saver pack. Pacific Bell states that package offers occur "only" on 50% to 75% of all calls. Pacific Bell contends that it discloses "sufficient information" for customers to make an informed decision, and that it has no obligation to disclose all material facts.

In evaluating the opposing arguments, we recognize that some sort of sequence is inevitable whenever Pacific Bell presents customers with information on the multitude of custom calling services and packages. ²¹ The sequence that Pacific Bell has chosen and has mandated that service representatives use, however, is the sequence that most encourages sales. This sequence is driven by Pacific Bell's interest in increasing revenue, not by providing the customer complete information on the options available and allowing the customer to make an informed choice. This sequence starts with the highest-priced package and only goes as low as necessary to entice the customer to buy.

In the 1986 Pacific Bell marketing case,²² the Commission reviewed Pacific Bell's sales strategies. The Commission concluded that Pacific Bell, by means of "an array of activities that have been referred to generically . . . as `package selling,'" was causing customers to believe that local exchange service was part of a package of optional services. (D.86-05-072, 21 CPUC2d 182, 190.) The "array of activities" included the scripts for selling packages of services where the service representatives were instructed to recommend that a customer purchase a "full package" of telephone service which included all available custom calling features. This package increased the monthly price for unlimited local phone service from $8.25 to $31.95. If the customer objected, the script instructed the service representative to recommend a package with one less feature that costs 50 cents less per month. (Exhibit 511, A.85-01-034.) To remedy these "abusive marketing practices," the Commission ordered Pacific Bell to undertake a massive Customer Notification Plan to reach customers, to notify them of the services they currently have, and to afford them an opportunity to have unwanted services removed and obtain refunds.

Pacific Bell's 1986 script which was part of the package selling abuses (1) made service recommendations to customers which reflected Pacific Bell's objective to increase sales, not provide service recommendations to the customer tailored to meet the customer's needs, (2) had fallback positions which attempted to sell as many services as possible to the customer, again without regard to the customer's needs, and (3) did not offer optional services on an individual basis.

At hearing in the current proceeding, complainants introduced one of the 1998 scripts used by Pacific Bell in selling packages of optional services. (See Exhibit 23.) Entitled "Selling to Success with the New Connect Model Contacts!!!" the script has the service representative telling the customer "I'd like to ask you a few questions to help you select your services." The service representative then asks a series of questions about household composition, frequency of use of the phone, and whether the customer ever works at home or telecommutes.

Regardless of whether the customer is a frequent or infrequent user of the phone, the service representative is instructed to "recommend" to the customer "based on what you've told me about how you use the phone" that the customer purchase the Basics Saver Pack.²³ The customer's answers to the questions are thus irrelevant to the service representative's recommendation. If the customer refuses to purchase the packages, the Model Contacts direct the service representative to attempt to overcome objections by explaining the benefits of all the included services or, for customers that object to the price, pointing out that the per day price is only 70 cents. In all cases where the customer continues to object, a fallback package of fewer services is offered. Only after the fallback package is rejected is the service representative instructed to attempt to sell individual services.

Comparing the 1986 script to the 1998 script reveals striking similarities. In both cases, the scripts require the service representative to feign an interest in how the customer actually uses the telephone and to make a pre-determined "recommendation" ostensibly based on the customer's information. The recommendation, in both scripts, is one of Pacific Bell's most expensive packages of optional features. Should the customer refuse to purchase the package, both scripts require the service representative to offer a fallback package that has fewer features and is less expensive. If the customer persists in refusing to purchase a package, the 1998 script then allows the service representative to attempt to sell individual services.

The 1998 script then, like the 1986 script, (1) reflects Pacific Bell's objective to make service recommendations to customers to increase sales, not to tailor recommendations to meet the customer's needs, (2) has fallback positions which attempt to sell as many services as possible to the customer, again without regard to the customer's needs, and (3) offers optional services on an individual basis only after all packages had been refused.

We determined that Pacific Bell's 1986 sales strategies violated Tariff Rule 12 because the actions failed to separately quote the prices for each service. As discussed earlier in this decision, Tariff Rule 12 was subsequently modified to clarify that price quotations shall be "separately stated" for each service. A sales strategy which is designed to create the mistaken impression in a customer that a particular service package recommendation is based on the customer's needs, and which results in a quotation of individual services only if the customer persistently refuses the service packages, fails to meet the requirements of current Tariff Rule 12. Customers are not presented with a quotation for optional services and "allowed to designate which optional services they desire," as required by Tariff Rule 12.

While we recognize that Pacific Bell must present the many service and package options to customers in some sort of order, the 1998 script, like the 1986 script, falls far short of the standard set in Tariff Rule 12. That standard, and the more general statement found in § 2896, require Pacific Bell to provide information to customers and guidance based on the customers' needs, not its revenue goals. Customer service does not preclude sales efforts, but does require that sales efforts be consistent with the disclosure standards and informed choice requirements of Tariff Rule 12 and § 2896.

7.3. Incentives and Sales Quotas

Pursuant to agreements with the unions representing Pacific Bell's service representatives, Pacific Bell began paying service representatives monetary rewards for exceeding sales revenue targets in 1998. In the first level of the incentive system, service representatives receive up to $150/month for meeting their sales revenue targets. The second level of the incentive gives each service representative a 25% commission on all sales above the target. There is no upper bound to the amount of the commission: "[t]his plan is not capped." The example from the TIU agreement shows that on the first $1,890 of sales in a given month, a service representative could earn up to $150. On the second $1,890, with a commission of 25%, the service representative could earn $472.50, with no maximum. (See Hearing Exhibit 42.)

UCAN witnesses Patricia Greenan and Janet Spector, both Pacific Bell employees, testified that the implementation of incentives (money and prizes) for customer service employees had resulted in overly aggressive sales efforts: "everybody's so consumed about this - the money, that in a lot of cases ethics are thrown by the wayside." Low-income customers who are signed up for expensive optional services that exceed their ability to pay particularly troubled witness Spector. This witness recalled one customer, whose service was limited to local calls only, who was being charged $100/month for optional services. Both witnesses stated that they have observed an increase in the number of customer calls they receive requesting that optional services be discontinued.

Sales incentives and sales targets or quotas played a significant role in the earlier Pacific Bell marketing abuse case. In the initial 1986 "cease and desist" order, the Commission directed Pacific Bell to stop "cold selling telemarketing activities and [to] discontinue its sales quota program until further order of this Commission." (D.86-05-072, 21 CPUC2d 182, 191.) In 1989, the Commission subsequently granted Pacific Bell a limited waiver of the prohibition against incentive compensation²⁴ for a certain classification of employees, but only after the incentive compensation plan had been reviewed and approved by the Customer Marketing Oversight Committee (Committee) then advising Pacific Bell on its marketing operations. (D.89-02-048, 31 CPUC2d 112 (headnote only).)

The Committee retained The Center for Ethics and Social Policy, Drs. Charles S. McCoy and Fred N. Twining, to evaluate whether the safeguards put into place by Pacific Bell were adequate to restore public trust and prevent a recurrence of the marketing abuses which led to the 1986 "cease and desist' order. In their report to the Committee, McCoy and Twining stated that Pacific Bell's "practices and incentives used in residential marketing have changed from sales quotas, packaged selling and bonus/rewards based on sales volumes to evaluation of individual performance based primarily on customer service."²⁵ Based on this report and other information, the Committee reported to the Commission that Pacific Bell was in compliance with its tariffs, the Commission's general orders, and statutes. Relying on the Committee's report, the Commission lifted its prohibition on cold-selling telemarketing and sales quota programs. (D.90-02-043, 35 CPUC2d 488, 491.)

According to TIU witness Ribeiro, the Pacific Bell sales strategy that emerged following the 1986 decision was focused on customer service and full and accurate disclosure of service information. To demonstrate this, the witness presented a copy of Pacific Bell's 1992 Sales Quota Policy, which prohibits establishing sales quotas for nonsalaried employees and their immediate supervisors. This witness also offered Pacific Bell's 1992 Business Office Sales Policy and Guidelines, which stated that service representatives are to engage in "consultative selling" by responding to verbal cues from the customer and to cues from the customer records in order to make personalized product and service recommendations in all appropriate contacts.

In contrast to the 1992 policies, Pacific Bell's current sales strategies, as reflected in evidentiary record, rely on sales quotas, packaged selling and bonus/rewards based on sales volumes. Pacific Bell documents show that it established an Individual Incentive Plan that provided monetary compensation based on each service representative's sales of specific services. (See, e.g., Attachment A to Exhibit 58.) Pacific Bell also set revenue goals which were broken down into the number of Caller ID and custom calling features each service representative would need to sell each day to reach the overall total. The monthly goals also included numeric targets for Caller ID Complete Blocking removals, which were also broken down to per representative daily goal. (Exhibit 8 to Hearing Exhibit 38.)

Pacific Bell's current reliance on "packaged selling" is well documented, as discussed in the section above (Sequential Offerings). Similarly, the incentive compensation plans discussed previously clearly establish bonus/rewards based on sales volumes.

We find that Pacific Bell has essentially changed course and reinstated certain abusive marketing practices that we enjoined in 1986. The contrast between the 1992 sales policy and the current directions to service representatives well illustrates Pacific Bell's regression. The 1992 policy requires service representatives to engage in consultative selling, which is defined as responding "to verbal cues and cues provided by customer records to make personalized product and service recommendations." In contrast, the current sales strategy requires service representatives to ask questions but regardless of the response to recommend an expensive package of services. Similarly, the 1992 policy requires service representatives to ask customers if they wish to hear about additional products and services, while Pacific Bell's current policy is to offer packages of services on every call irrespective of the customer's interest or the purpose of the customer's call.

In conclusion, Pacific Bell's current incentive compensation programs closely resemble the marketing programs that we found did not comply with statutes, orders, and tariffs, and which led to the prohibition on cold selling telemarketing and sales quotas in D.86-05-072. These current policies are starkly at odds with the policies in place in 1990 when we both lifted those prohibitions and praised Pacific Bell for its "responsiveness and creativity in developing a series of internal safeguards to confront directly the internal problems that fostered these marketing abuses." (D.90-02-043, 35 CPUC2d 488, 491.)

Thus, we find ourselves in a dilemma. We have no desire to insert the Commission in day-to-day management decisions. Nevertheless, the above history shows a disturbing inability or unwillingness among Pacific Bell management to consistently comply with law absent exacting and continuous oversight. We see today essentially the same wrongdoing that we enjoined 13 years ago. The recurrence of these marketing abuses shows that our previous response failed to obtain, on a long-term basis, the level of customer protection we desired.

TIU requests that we order Pacific Bell to immediately cease and desist from offering any individual monetary incentives to service representatives. TIU would allow Pacific Bell to implement such incentive plans but only with Commission authorization. TIU would require that Pacific Bell file an application, and the Commission to hold hearings and issue a decision, demonstrating with "clear and convincing evidence that the incentive plan proposed by Pacific . . . would not be likely to encourage service representatives to engage in unethical or deceptive sales practices." (TIU Post-Hearing Brief at 48.)

TIU's proposal calls for a substantial increase in this Commission's oversight of Pacific Bell's day-to-day operations and interjects this Commission squarely into the collective bargaining process. Increasing regulatory oversight is contrary to our goals. We believe that the collective bargaining process is best left to employees and Pacific Bell. Therefore, we reject TIU's proposal.

Nevertheless, Pacific Bell's history and number of customers require that we take steps to ensure that these marketing abuses do not occur a third time. Accordingly, rather than create a temporary oversight committee as the Commission did in 1986, or create an approval process as TIU recommends, we will set out permanent limitations upon Pacific Bell's incentive compensation programs. We do not do so lightly. In this era of increasing competition, it is our general objective to decrease our regulatory function and to let the competitive marketplace winnow out firms that provide inept customer service. At this time, however, Pacific Bell's history and its nearly exclusive role as the provider of residential local exchange service for millions of California households warrants these limitations.

Therefore, we will limit sales-volume-based incentive compensation for service representatives and their direct supervisors to 5% of monthly compensation.²⁶ This applies only to compensation incentives which reward increased sales to customers, and does not extend to incentive compensation keyed to any other factors. One of our objectives in limiting sales volume incentives is to encourage Pacific Bell to re-focus its service representatives on meeting customers' true service needs, rather than increasing sales. We encourage Pacific Bell to develop innovative compensation plans that reward customer satisfaction or other factors that benefit customers. We envision broad policy-level changes in the values and traditions that guide Pacific Bell's service representatives.

The duration of this limitation shall be that which is necessary to achieve our goals. It will take some time for new values to take root, and Pacific Bell has shown a propensity for backsliding after several years of compliance. Thus, we conclude that the minimum duration of the 5 % limitation prohibition on sales-volume-based incentives for service representatives and their direct supervisors shall be 10 calendar years from the effective date of this decision. After that period, if Pacific Bell believes that such incentives are consistent with its new values, then Pacific Bell may file an application seeking Commission authorization to implement an expanded sales-volume-based incentive program as part of a comprehensive incentive program that also rewards customer satisfaction. In such application process, Pacific Bell shall bear the burden of proving that it has instilled within its management a commitment to putting customer service ahead of single-mindedly increasing sales. Ten years is a reasonable period of time for this prohibition because lasting change in values is required at the senior management level to ensure that this does not happen a third time.

Incentive compensation is at the core of many of the violations detailed in this decision. It has a direct effect on the persons with whom customers interact. Thus, this prohibition plays a large role in the remedies of this case. Ensuring that customers will not be subject to service representatives excessively enticed by money and prizes to sell services is an important part of the overall remedy package we adopt in this decision.

7.4. Providing Customer Information

Pacific Bell from time to time hires outside vendors, such as telemarketing organizations, to contact its customers for sales or other reasons. In doing so, Pacific Bell necessarily provides the outside vendors the names and phone numbers of the customers. In some cases, the lists are created for a particular purpose, such as customers with Caller ID Complete Blocking. Pacific Bell also uses its corporate affiliates that are part of the SBC family of companies to answer customer service calls; these affiliates also have access to customer information.

Complainants object to this sharing of information as violating federal and state law regarding customer privacy. Specifically, UCAN states that 47 U.S.C. § 222 requires Pacific Bell to "protect the confidentiality of proprietary information of . . . customers." UCAN also states that customer proprietary information includes "information that relates to the quantity, technical configuration, type, destination, and amount of use . . . that is made available to the carrier by the customer solely by virtue of the carrier-customer relationship." (Hearing Exhibit 4.) UCAN also states that § 2891 prohibits Pacific Bell from providing customer information, including credit or financial information which services the customer purchases, to "any other person or corporation."

The outside vendors, Pacific Bell states, are acting as its agents in performing certain tasks. Pacific Bell states that it does not divulge to outside vendors unlisted numbers or numbers of customers that have asked Pacific Bell not to be contacted by these vendors. Pacific Bell concludes that it is in full compliance with the 1996 Telecommunications Act and the Federal Communications Commission (FCC) regulations, which explicitly address the use of customer information and of sales agents and affiliates in making sales.

Complainants have not alleged that the information disclosed to agents or corporate affiliates was used for any purpose other than marketing Pacific Bell's products, or that the agents or affiliates failed to keep the information secure. Complainants have not responded to Pacific Bell's statements that it is operating in compliance with the FCC's requirements for affiliates and vendors. Under the Total Service Approach adopted by the FCC, the determination of whether a telecommunications corporation may share customer information among its corporate family turns on the scope of the service provided, not the corporate structure.²⁷ Complainants presented no analysis of this requirement.

Complainants next object to Pacific Bell's sharing of information with SBC Operations, Inc. call centers on both "incoming and outgoing" calls. However, complainants do not address the exception to CPNI restrictions for inbound calls found in 47 U.S.C. § 222(d)(3).

While Pacific Bell has made customer information available to other persons or corporations, those persons or corporations, both outside vendors and corporate affiliates, have been under the direction of Pacific Bell and have been conducting Pacific Bell's business. Complainants have not provided us a citation to an FCC order that prohibits such commonplace arrangements. We note also that no complaint has been filed with the FCC regarding this alleged violation of federal law and regulatory policy.

We turn next to California law on privacy of customer information. Section 2891 prohibits all California telephone corporations from making available to "any other person or corporation" various types of customer information, including customer calling patterns and financial information.²⁸ UCAN alleges that Pacific Bell has violated this statute because it has shared such information with its corporate affiliates and unaffiliated vendors. Pacific Bell responded that it has the right to provide such information to its agents for use on Pacific Bell's behalf. Pacific Bell cites no statute or Commission decision for this proposition.

We observe that UCAN has not alleged that the third parties, whether corporate affiliates or not, were conducting business on behalf of any entity other than Pacific Bell. UCAN appears to be objecting to the mere availability of customer information to these third parties, not the use of the information. Similarly, UCAN has not alleged that Pacific Bell was inadequately supervising the third parties, nor has UCAN alleged any security failures by the third parties.

UCAN's reading of § 2891 - that a telephone corporation must obtain customer consent before sharing the information with anyone - would render the corporation powerless because a corporation can only act through natural persons. Under that reading, Pacific Bell, the corporation, would need customer consent in order to share customer information even with its employees, who are "persons" within the meaning of the statute. Such a narrow reading of the statute would also have the effect of prohibiting Pacific Bell from engaging in the commonplace business practice of hiring outside vendors.²⁹

For the reasons stated above, UCAN has not established a claim under 47 U.S.C. § 222. As we do not adopt UCAN's interpretation of § 2891, the facts alleged by UCAN fail to support a claim under that statute.