7. Local Disconnect for Failure to Pay Long Distance Charges

7.1. Background and Draft Decision

In certain circumstances, LECs will disconnect customers' local telephone service for nonpayment of other charges. In the "Access Charges" dockets, A. 83-01-022, I.83-04-02 and C.83-11-07, the Commission authorized the rates that LECs could charge interexchange carriers for a wide variety of access charges, including billing and collection services. Among the features the LECs were authorized to offer with the billing and collection service was termination of local service for nonpayment of interexchange charges:

As we analyze the various challenges to Pacific's billing and collection tariff, we bear in mind the policy established in D.83-12-024: that these services should be priced to generate the maximum sustainable contribution toward meeting Pacific's overall costs of service. To the extent that a particular element of these services is available to IECs only through Pacific, it may be unfair to price that service element based on "what the market will bear." There is one particular "service" element, however, to which we shall not apply this consideration of monopoly power. That is the "service" of terminating local service for nonpayment of interLATA charges (which AT&T-C calls "credit management" and MCI calls "dial tone leverage").

We only recently determined that it is lawful for us to authorize Pacific's local service termination procedure. (D.85-01-010, mimeo. at 80-84.) [17 CPUC 2d 6] We gave Pacific that authority in order to enhance the value of its billing and collection services, and to "preserve a portion of the efficiencies of an integrated local and toll network for the benefit of local subscribers. (D.83-12-024, mimeo. at 126 (emphasis added).) We should not have permitted Pacific to disconnect customers' local service for nonpayment of IECs' charges merely as a convenience to the IECs. Rather, we find that, as a means of limiting the need for local rate increases, it is fair for Pacific to extract substantial revenues in excess of costs for the provision of a Bill Processing Service incorporating the local service termination procedure.

Re Pacific Telephone and Telegraph Company, 18 CPUC 2d 133, 213-4 (D.85-06-115).

In a previous decision, the Commission explicitly limited the types of service for which a LEC might terminate local service to "interexchange service." That decision clearly stated that Pacific Bell could not disconnect local service for nonpayment of any other services: "We will not permit Pacific to extend its power to collect bills for an essential public service into the area of general bill collection services." Re Pacific Telephone and Telegraph Company, 13 CPUC2d 331, 395 (D.83-12-024).

In short, the Commission allowed Pacific Bell to enhance the value of its billing and collection services to IECs by authorizing Pacific Bell to disconnect local service for nonpayment of interexchange bills. The revenue generated by the higher priced billing service would be used to lower local service charges to local customers.

With the passage of 15 years, the telecommunications industry has changed dramatically from the early 1980s. Commission-certificated IEC now number nearly 1,000. Consumers have enjoyed the benefits of competition but have also been subject to unauthorized transfer from one service provider to another.

The FCC also recognized this change. The FCC discontinued its practice of allowing LECs to disconnect a customer's local telephone service for non-payment of toll charges in certain cases. As explained by the FCC in its Universal Service Order, FCC 97-157:

"[Local Exchange Carriers] have maintained this special prerogative, although the interstate long distance market and local exchange markets legally have been separated for over a decade, and interstate billing and collection activities have been deregulated since 1986. Because the practice of disconnecting local service for non-payment of toll charges essentially is a vestige of the monopoly era, we find our rule prohibiting that practice will further advance the pro-competitive, deregulatory goals of the 1996 Act." Order at 391.

Specifically, in its Universal Service Order, the FCC decided to prohibit those carriers eligible to receive federal universal service support from disconnecting Lifeline service for non-payment of toll charges. Order at ¶ 390.⁸ In doing so, the FCC stated that its decision "should not be construed to affect the ability of the states to implement a rule prohibiting disconnection of local service for non-payment of toll charges for non-Lifeline customers." Id. at n. 998.

In a ruling issued earlier this year, the assigned Commissioner found that the issue of unauthorized billing required that the Commission review its 1983 policy to ensure that it comports with current market conditions and consumers' interests. Accordingly, the parties submitted comments on the continuing need for this authorization.

The parties' comments revealed that all commenting LECs and IECs argued for continuing the policy, while the consumer groups - TURN, Greenlining and ORA - contended that the policy should be changed. Greenlining states that up to half of certain language groups experience abuse by telecommunications providers and then face the prospect of local service disconnection for failure to pay these unauthorized charges. CSBA saw both sides of the issue, i.e., protecting consumers from unauthorized charges but also the value of reducing uncollectibles, and adopted a wait and see stance. The comments suggest that most IECs and other service providers find the billing and collection services from the LEC particularly attractive due to their ability to "leverage dialtone" or keep uncollectibles low by disconnecting local service for nonpayment of other services. Carriers and service providers may disconnect their own services at any time for non-payment of charges.

We remain concerned that this policy has set the stage for unauthorized billing. We have repeatedly heard consumers' state their belief they fear disconnection for nonpayment, even if the nonpayment is of unauthorized charges. However, several parties pointed out that this policy benefits all consumers by encouraging customers to pay their bill, which keeps down the amount of debt which cannot be collected. Some parties even contend that it is statutorily mandated, citing § 779.2(b).

Four factors weigh heavily in support of abandoning this policy. First, the Commission adopted this commercially unusual practice, allowing one service provider to cease service for nonpayment to another, to allow the LECs to enhance their billing service revenue, which acted as an offset to local service rates. This rationale is no longer applicable. In fact, as the FCC correctly noted, given local exchange competition, this policy is anti-competitive.

Second, the phenomena of slamming and cramming can only flourish where consumers pay their bills, even unauthorized bills. This policy furthers the interests of unscrupulous carriers.

Third, the carriers' comments state that all consumers benefit from the low uncollectible rate enjoyed by carriers that bill through the LECs. While the carriers may be correct that this policy simply allows them to better collect their legitimate charges, this policy also helps carriers to collect erroneous charges.

Fourth, because the FCC's rule prohibiting Lifeline service disconnect for non-payment of toll service has been vacated, low-income customers are no longer protected from local service disconnect.

7.2. Additional Evidence Presented on the Local Disconnect Issue

At oral argument, the parties requested an additional opportunity to present evidence on the local disconnect issue. Pursuant to an ALJ ruling, the parties conducted limited discovery and filed written declarations and legal briefs.

7.2.1. Summary of Each Party's Evidence

MCI presented the declaration of its Senior Manager for Revenue Assurance, who stated that local disconnect⁹ benefits customers in four ways: (1) it provides customers with only one phone bill because long distance companies will prefer to bill through the LEC, (2) customers can dispute charges through one call to the LEC, and (3) long distance companies' costs are kept low because they can rely on the LEC billing services rather than create their own, and (4) the local disconnect policy keeps down the cost of uncollectibles which would have to be passed on to other customers. MCI conducted an analysis of its bad debt in the Bell Atlantic region and determined that its uncollectibles were 70% higher in states where local disconnect was prohibited. From this analysis, MCI forecast that it would experience a similar increase in its uncollectible rate in California.¹⁰

Pacific Bell presented evidence that vigorous enforcement of existing rules prohibiting slamming and cramming against the fairly small number of carriers that are responsible for the majority of complaints would reduce these problems more than eliminating the local disconnect policy. Pacific Bell explained its disconnect policy and contended that it does not disconnect local service for nonpayment of long distance charges where the customer disputes the charges. Moreover, Pacific Bell stated that 23% of its residential customers are Lifeline customers, and that the FCC prohibits disconnection of local service for nonpayment of long distance charges to these customers.¹¹ Lifeline customers also comprise 75% of customers that prefer to do business with Pacific Bell in Spanish, and 43% of customers that prefer to do business in an Asian language.

Citizens Communications presented evidence that it does not disconnect local service where the customer disputes the charges. Citizens also allows customers to make extended payments over a period of time, and gives required notice prior to disconnection. Citizens also stated that its current bills do not separately state local and long distance charges and to do so would cost several thousand dollars. It also contended that the ability to disconnect local service for nonpayment of long distance constituted a valuable service to its billing and collections customers.

GTE-California offered evidence that it does not disconnect local service for nonpayment of disputed charges, nor does it disconnect service to Lifeline customers.

Greenlining presented evidence that the states of Idaho, Montana, Delaware, Iowa, Arizona, Washington, Oregon, New York and South Dakota all had in place rules or statutes which prohibited the disconnection of local service for nonpayment of long distance. Greenlining argued that prohibiting local disconnect would promote competition, the local economy and continued telephone service to vulnerable and low-income consumers.

Greenlining also interviewed clients of a community-based organization who were attending a class in the Mission District of San Francisco to ascertain whether any of them had any problems with their long distance service in relation to slamming, unauthorized charges and/or cramming that negatively affected their local service. In an hour and half, Greenlining spoke to 13 clients in two classrooms. Out of the 13 clients contacted, four reported such problems. Greenlining included signed sworn declarations from three persons. For privacy reasons, the customers will be referred to by initials, rather than full name.

Customer MM stated that she operated a small business out of her home and had accrued excessive long distance charges. When she asked the local telephone company if she could discontinue long distance service and pay only for local service, she was told "no." Subsequently, she lost both local and long distance service.

Customer CL's relative made $1,400 worth of long distance calls on her phone. CL moved soon thereafter and did not receive her closing bill containing the charges. When CL attempted to have local service connected in her new home, she was denied such service until she paid the full $1,400, plus interest. After being without any phone service for nine months, she paid the amount demanded and now receives local service only. To obtain long distance or toll services she will need to pay a $840 deposit.

Customer ACD changed from MCI to another long distance provider. Nevertheless, MCI billed her for $2.50 in a subsequent month, which she paid because it was such a small amount. MCI billed her the following month for $23.00, which she did not pay but called MCI and was told that the charge was related to her "local telephone number." Pacific Bell assures her that all services have been cancelled from MCI but MCI still contends that she owes $58. Customer ACD is worried about continuing to receive local telephone service.

Sprint submitted evidence that when its charges are billed through the LEC, Sprint purchases "inquiry" service from the carrier, which means that the carrier investigates disputed charges and awards adjustments when needed. The adjusted amount is "recoursed" to Sprint, and is written off as bad debt unless Sprint determines that the dispute was invalid, in which case it directly, i.e., not through the LEC, bills the customer. Slamming complaints are handled differently, in accord with FCC rules. Where Sprint bills customers directly, nonpaying customers are subject only to losing their access to Sprint's services, which may include local service. Sprint also conducted an analysis of its bad debt in states where local service disconnect is allowed as compared to states where it is not. Sprint determined that its bad debt is 23% higher in states that do not allow local service disconnect.

AT&T stated that the local disconnect policy serves the public interest by holding down costs (uncollectibles) and therefore prices. This policy does not harm consumers, AT&T contended, because Lifeline customers may not have local service disconnected for nonpayment of toll pursuant to FCC rule, and no customer is disconnected for disputed charges. Thus, AT&T concludes, only non-Lifeline customers that refuse to pay undisputed charges are affected by the current rule. AT&T advocated increased customer education about the dispute process as the best means to combat slamming and cramming.¹²

Roseville Telephone Company presented evidence that it does not disconnect customers while a dispute is pending. It also contended that to the extent the local disconnect rule was abandoned for LECs the same rules should be applied to competitive local carriers.

Nextlink California filed reply comments addressing TURN's comments challenging the Draft Decision's exception for competitive carriers that provide both local and long distance services. Nextlink stated that competitive carriers work very hard to obtain and retain customers and as a consequence would only disconnect service with good cause. Any such customers always have the option of returning to the local exchange carrier for local service. Nextlink contended that notwithstanding the Commission's universal service goals, competitive carriers should not be required to continue providing local service to a customer who refuses to pay undisputed long distance charges.

In its presentation, TURN contended that ending the outmoded practice of allowing local carriers to leverage dial tone as a collection device would also promote the Commission's universal service goals. TURN stated that local telephone service is necessary for participation in contemporary society, so necessary that the Commission has taken the extraordinary step of ensuring that it is available to everyone at affordable prices. Allowing disconnection of local service for nonpayment of long distance service runs counter to this policy.

TURN contended that the process for disputing charges through the local exchange carrier is not as favorable to the customers as the local exchange carriers suggest because their tariffs allow them to determine whether any disputed charge is "warranted."

TURN pointed out that the dispute process is often a frustrating and time-consuming experience for customers, so that customers with legitimate disputes of unauthorized charges, when coupled with the threat of losing local service, will simply pay the charges rather than endure a lengthy process.

TURN also argued that the long distance carriers had not substantiated their claims that changing the local disconnect policy would cause an increase in uncollectibles. TURN presented evidence in the form of a mathematical analysis by an expert economist of the workpapers underlying Sprint's and MCI's contention that uncollectibles would increase.¹³ This analysis concluded that Sprint's data was "subject to numerous data anomalies, inconsistencies, and misclassifications and its method is undocumented and unverifiable" and "do not substantiate the assertion that there is a 23% difference in the bad debt ratios of [local disconnect] versus non-[local disconnect] states." Similarly, MCI's 70% difference "is also suspect" because it is "based only on partial 1998 data, and on an inconsistent time period for the [local disconnect] and non-[local disconnect] states in the Bell Atlantic South region."

Moreover, TURN disputed MCI's and Sprint's assertion that the local disconnect was vital to long distance carriers by pointing out that AT&T directly bills 85% of its customers and despite lacking the local disconnect threat, has remained competitive and profitable.

TURN concluded that to the extent uncollectibles increase, this should be seen as restoring a normal cost of business to the long distance carriers.

ORA submitted copies of letters from consumers who either believed that their service would be disconnected if they disputed unauthorized charges or whose service was disconnected despite disputed charges. One such letter states "the operator said you have to pay or your telephone will be disconnected."

ORA also took issue with Pacific Bell's assertion that a limited number of long distance companies are responsible for most slamming complaints. ORA pointed out that local exchange carriers maintain complaint records based on codes (Carrier Identification Code or CIC). Some, but not all, long distance carriers have a unique code. Some long distance carriers which contract for service on another carrier's system and simply resell the service do not have a CIC but rely on their underlying carrier's CIC. Due to this fact, ORA contends, and until a unique numbering system is in place, the local exchange carriers, such as Pacific Bell, cannot report slamming rates on a carrier-by-carrier basis.

7.2.2. Discussion of Additional Evidence

Under the guise of additional evidence, the parties have presented argument but few new facts for the record. Many parties discussed the value of the dispute process to customers who are billed for unauthorized charges. As noted in other parts of this decision, the process indeed appears quite favorable to customers; however, many customers are unaware of it. To address this, we will retain the customer education plan requirements contained in the earlier drafts of this decision.

MCI and Sprint presented some attempt at quantification of their hypothesized increase in uncollectibles which would occur if this policy were changed. TURN's economist cast serious doubt on the mathematical accuracy of the analysis, and TURN's attorney points out that other states have addressed this precise issue and found that any actual increase in uncollectibles is simply restoring a cost of doing business.¹⁴ Greenlining presented additional evidence from other states which do not allow local service disconnect and which do not appear to be suffering from its absence.

Ending the policy which encourages this belief is our first step towards changing it. Our next step is the customer education plan outlined elsewhere in this decision. Our hope is that when consumers are free of the fear of losing local service, they will no longer feel compelled to pay unauthorized charges.

For these reasons, we abolish our policy of allowing local exchange carriers to disconnect local service for nonpayment of interexchange service charges billed by the local exchange carrier. Local exchange carriers shall file revised tariffs implementing this decision no later than 90 days after the effective date of this order.

7.3. Local Disconnect and Pub. Util. Code § 2890(d)

The Legislature confirmed the Commission's authority over the local disconnect when it adopted § 2890(d). That section reflects the Commission's authority to determine whether a local exchange carrier may disconnect local service for nonpayment of other charges, but limits that permissive authority to specific types of charges:

The Commission may only permit a subscriber's local telephone service to be disconnected for nonpayment of charges relating to the subscriber's local exchange telephone service, long distance telephone service within a local access and transport area (intraLATA), long distance telephone service between local access and transport areas (interLATA), and international telephone service.

In this recently enacted statute, the Legislature recognized the Commission's authority to determine whether local service may be disconnected for nonpayment of certain other charges by using the word "may." Generally, "may" is permissive and connotes discretion. See, e.g., § 14; Business and Professions Code § 19. Thus, this statute allows the Commission to determine whether a local exchange carrier may disconnect local exchange service for nonpayment of any or none of the listed charges. This statute does, however, limit the Commission's discretion to allow disconnection for only those listed charges.

In comments filed prior to the Legislature adopting § 2890(d), some of the parties to this proceeding argued that § 779.2(b) required the Commission to allow local service disconnection. This later-adopted legislation clarifies that the intent of § 779.2 was not to establish a Legislatively-mandated local disconnect policy, but rather to allow the Commission to determine, pursuant to extant authority, whether and on what terms such disconnections could occur.

Section 2890(d) is readily reconcilable with Section 779.2.

Standing alone, Section 779.2(a) would prohibit a telephone corporation from disconnecting the residential service of a customer who fails to pay for services furnished by another provider (i.e., a provider other than the one offering the residential service). Section 779.2(b), however, provides that the prohibition contained in Section 779.2(a) does not apply where a telephone corporation providing intraLATA service also bills for the services provided by an interLATA carrier pursuant to a tariff for billing services on file with the Commission. In that situation, Section 779.2 does not prohibit termination of the residential service provided by the intraLATA company for failure to pay for the service provided by the interLATA carrier.

The later-enacted Section 2890(d), however, provides additional restrictions on the termination of telephone service. Section 2890(d) provides that a subscriber's local telephone service (both residential and non-residential) may be disconnected for nonpayment of charges if and only if (1) the charges are for basic local exchange telephone service, intraLATA long distance telephone service, interLATA long distance service, or international telephone service, and (2) the Commission permits the disconnection for nonpayment of these charges.¹⁵ Section 2890(d) prohibits disconnection of local service for nonpayment of any other kind of charges.

In sum Section 779.2 prohibits one telephone corporation from terminating residential service for failure to pay another telephone corporation's bill, except under specified circumstances. Section 2890(d), on the other hand, focuses on the kinds of telephone services for whose nonpayment local service may be disconnected with the permission of the Commission. Under Section 779.2(b), standing alone, a telephone corporation could disconnect local residential service for nonpayment of an interLATA carrier's bill (where the long distance service is billed by the resident's local telephone corporation under tariff). However, the two sections must be viewed together, and meaning given to each word in the two statutory provisions. Read together, they provide that local telephone service may be terminated only where the Commission has given permission for termination for nonpayment of one or more of the kinds of telephone services specified in Section 2890(d), and then, in the case of residential service, only where the local telephone company is billing for the interLATA carrier pursuant to a tariff on file with the Commission.

7.4. Competitive Local Carriers and Local Disconnect

Cox California Telcom, LCC, dba Cox Communications (Cox) raises the issue of competitive local carriers that may be providing both local and long distance service. Nextlink agreed with Cox that competitive local carriers should not be prohibited from disconnecting local service for nonpayment of long distance. Nextlink distinguishes the case of competitive local carriers disconnecting local service for nonpayment of long distance service from that of an incumbent local exchange carrier disconnecting service for nonpayment of a third party long distance provider. In the case of disconnection by the competitive carrier, the customer has the option of obtaining local service from the incumbent local exchange carrier.

TURN contends that allowing a vertically integrated competitive carrier to leverage dialtone is also anticompetitive because it benefits only those carriers that provide both local and long distance services.

Resolving this matter requires that we return to the basic facts of the local disconnect rule. In that case, local service was used as a means to coerce payment of long distance charges to a third party, which were billed through the local bill. In the case of competitive providers, no third party is involved and neither is an incumbent service provider. A disconnected customer of a competitive provider may return to an incumbent carrier and receive local service. There is no customer fear of a dead phone. Moreover, one carrier is providing both services, not using its local service to enhance the value of its billing and collections service to a third party.

However, there are reasons for prohibiting disconnection of local service for nonpayment of long distance service. As the Staff Report recognized such a prohibition policy would maximize customers' ability to retain local service in light of financial difficulties with non-local service charges. (See Staff Report, p. 41.) A uniform and competitively neutral policy on disconnect prohibition would also place LECs' and CLCs' billing operations on the same footing as that of carriers that bill through a LEC. At this time, however, we will not require competitive local carriers to continue to provide local service where the customer is in arrears for any long distance service (including interLATA , intraLATA, and international toll services) provided by that carrier.¹⁶ While we are wary of the potential for "dial tone leveraging" by competitive local carriers, we believe that key to short-circuiting any such "leveraging" is a readily available alternative local service provider. For the reasons raised in the Staff Report, we may revisit the policy to prohibit all carriers from disconnecting local service at another time. We do, however, clarify and emphasize that the competitive local carrier may disconnect only for nonpayment of long distance telecommunications services it provides directly or through an affiliate. This authority does not allow them to disconnect local service for nonpayment of (1) charges for non-communications related services, (2) any billing performed on behalf of a third party, or (3) any assignments or other transfers of rights to payment from third parties.

Incumbent local exchange carriers that also provide long distance service present different questions. At this point in time, we find that the local exchange market is not sufficiently competitive to allow incumbent local exchange carriers that also provide interexchange service to disconnect local service for nonpayment of interexchange charges.