Baby Bells paying to play

Introduction

The four regional Bell operating companies remaining from the break-up of AT&T accounted for roughly two-thirds of all Federal Communications Commission fines and settlements paid since January 2000, according to a Center for Public Integrity investigation.

The majority of the total was paid by companies that ran afoul of rules written to create competition in local telephone markets. Since a 1996 rewrite of federal communications law, the so-called Baby Bells have battled to hang on to their dominance of the local telephone service market in the United States.

The three companies that have paid the most fines or settlements since January 2000 are all Bells. On top of the list is Denver-based Qwest Communications International Inc., which has forked over $17.1 million, including a $9 million fine paid recently. Second is Verizon Communications with $12 million, and third is San Antonio, Texas-based SBC Communications Inc. which has paid $11.5 million. (BellSouth Corp. is ninth overall with $2.15 million.)

Thanks largely to the agency’s aggressive enforcement of competition rules and a creative approach to increase fines related to indecent broadcasts, proposed fines and settlements have increased dramatically so far this year, researchers discovered. The average amount proposed per infraction in 2003 was $119,933 compared with $362,282 through June 9.

Center researchers focused on both proposed fines and actual payments submitted to the government. The survey shows that a total of $64.6 million has been paid by companies regulated by the FCC to settle disciplinary actions, with $42.8 million, or 66.2 percent of the total, paid by the four Bell operating companies. Of that amount, $41 million is attributable to rules created following the Telecommunications Act of 1996.

The study is believed to be the first-ever comprehensive examination of both fines proposed by the FCC and fines or settlements paid to the FCC by all the companies the commission regulates.

The Center spent more than a year collecting and analyzing enforcement actions by the agency, a task made difficult due to the complex process involved in fining agency-regulated companies and weaknesses in the FCC’s method of tracking proposed fines and payments, particularly those issued prior to 2000. (See Tracking Enforcement)

Researchers identified a total of $101.3 million in proposed fines and settlement agreements and $64.6 million in payments.

The gap between total proposed fines and total payments is due to several factors. Some fines are still working their way through the FCC’s appeals system – a process that can last years – or have been challenged in federal court. Often, the proposed fine is lowered or even canceled during the appeals process. Finally, some companies hit with large fines refuse to pay or have gone out of business.

Local competition

One of the prime selling points of the Telecommunications Act of 1996 was the promise of competition in local telephone markets and lower bills for consumers. At the time, local telephone service was monopolized in most parts of the country by the regional telephone companies that emerged following the breakup of AT&T in 1984.

Rather than require new competitors to build new systems to compete with the Bells, the Act required the existing phone companies to open up their networks to competitors. Once a local phone service provider has opened its system to competitors to the satisfaction of the FCC, it was permitted to compete in the lucrative long-distance phone service market.

Thus far, the rules have allowed about 19 million customers to buy local telephone service from a company other than their traditional local provider, according to published reports.

Disputes rising from the law have sparked multiple lawsuits including one that led to a 1999 Supreme Court case ruling upholding the FCC’s power to implement local competition. Justice Antonin Scalia described the act as a “model of ambiguity or indeed even self-contradiction.”

Since the 1996 law passed, Bell companies like SBC Communications, Verizon and Qwest have been at war with AT&T and MCI as both sides have sought to gain a competitive advantage. U.S. Sen. John McCain, Republican from Arizona, frustrated with the ongoing dispute, has opened new hearings examining the landmark law. McCain has called the law a “fatally flawed piece of legislation, written by lobbyists, that freezes telecommunications policy in a bygone era.”

The Bells are required to lease parts of their networks to competitors. But the Bells contend that prices set by local public service commissions and the FCC are too low. The Bells won a huge victory when a federal appeals court rejected the pricing rules. Further helping the Bells was a decision by the Bush administration not to appeal the decision to the U.S. Supreme Court. The pricing rules were set to expire after the Court rejected a request from AT&T, MCI and other companies to issue a stay.

The Bells have been big contributors to the president. For the 2004 election cycle, employees and political action committees from the four companies contributed $300,520 to his re-election campaign, according to a Center analysis of campaign contributions. By way of comparison, the three major long-distance telephone companies, AT&T, MCI and Sprint, have contributed a combined $59,160 to the Bush campaign.

In addition, Edward E. Whitacre Jr., chairman and CEO of SBC Communications Inc., is a “Ranger,” meaning he has bundled together at least $200,000 in contributions for the campaign. Verizon CEO Ivan Seidenberg is listed as a Bush “Pioneer,” meaning he’s raised at least $100,000 for Bush.

Aggressive enforcement

Since the rules implementing the 1996 act were implemented, the FCC has aggressively pursued violators.

For example, while the agency’s crackdown on shock radio has gotten a tremendous amount of attention, one fine—the $9 million paid by Qwest— is twice as much as all the fines proposed by the FCC for broadcast indecency since 1990 combined.

David Solomon, chief of the FCC’s Enforcement Bureau since its formation, told the Center that the bureau was created in part to make competition enforcement one of the commission’s “high priorities.”

In fact, the four largest penalties in the history of the FCC are all against Bell-operating companies and are all related to competition. Qwest was fined for failing to disclose business agreements it made with local competitors. The concern is that secret agreements with selected competitors may not be offered to larger companies like MCI and AT&T which pose a much greater competitive threat.

Qwest rejects any notion that the company has been anti-competitive. “Qwest has been and remains a leader in competition policies,” company spokesman Skip Thurman told the Center in a prepared statement.

In the past six months, Qwest has been more likely to negotiate than fight. For example, Thurman said Qwest is the first company to offer “stand-alone DSL” – meaning customers may subscribe to super-fast Internet service without having to buy other services. And in what appears to be the strongest evidence of a truce, Qwest, at the urging of the FCC, “negotiated a landmark, business-to-business deal with MCI” that would allow the company access to Qwest’s network to allow long distance service.

As for the $9 million fine, the company maintains it did nothing wrong.

“At all times the terms and conditions of the agreements in question were available to carriers through the Qwest website and through other filings with state commissions,” Thurman said. “In the more than two years since these agreements were first made available, not one carrier has chosen to adopt any of them. Finally, these agreements have long since expired or been terminated.”

Qwest, which reported $14 billion in revenue in 2003, also was fined $20.7 million by the Arizona Corporation Commission for the same issues that generated the $9 million fine.

Qwest also was responsible for the second-largest enforcement bureau payment. In May of 2003, the company agreed to pay $6.5 million for violating a federal ban on providing long distance services in its 14-state region before receiving permission from the FCC.

The third-highest fine was issued to SBC for $6 million for “violating a competition-related condition” that the FCC imposed when it approved the 1999 merger of SBC and Ameritech Corp. “Such unlawful, anticompetitive behavior is unacceptable,” FCC Chairman Michael Powell said at the time the fine was announced.

SBC paid the fine, but is appealing it in court. The company disagrees with the FCC’s contention that it acted in an anti-competitive fashion. “We believed and we still believe this action was unjustified,” said Paul Mancini, senior vice president and assistant general counsel at the company.

Mancini also noted the fact that the Bells are the most fined companies only makes sense, given how heavily regulated they are. “The vast majority of FCC rules deal with landline local business,” he said.

By comparison, long distance, cable television and satellite have been largely deregulated, he added. “Where they (the commission) focus most of their enforcement action is local service.”

The fourth-highest payment was $5.7 million by Verizon. The company, in a March 2003 consent decree, admitted it violated a federal ban on marketing long distance services prior to FCC authorization. Jeff Ward, senior vice president/compliance with Verizon said the dispute was a result of Verizon “inadvertently doing some marketing of long distance before approval,” which he deemed “hardly anticompetitive.”

Overall, Ward said the fines assessed to Verizon are old news. “Most of the action, most of the concerns that make up that $12 million (total) occurred as our networks were being opened up to competition. They were start-up issues,” he said. “Now most of our discussion is business to business, not over startup issues.”

Slamming

While local telephone competition enforcement is a top priority at the FCC, another major priority is protecting consumers from unsavory practices in the long-distance business, especially “slamming.”

Slamming, or slamming combined with other offenses, accounted for $21.7 million in fines and proposed settlements since 1999, according to the Center analysis.

A customer is slammed when a firm changes someone’s long-distance service to another provider without authorization. At times, the new long-distance provider adds insult to injury by “cramming” the new customer with unauthorized charges.

Slamming has been a top enforcement priority of the FCC since the late 1990s, when the agency began announcing new fines for the practice on a regular basis. While many of the fines were issued against no-name third party companies, the biggest payment ever issued relating to the practice was assessed against the nation’s second-largest long-distance company.

On June 6, 2000, the agency announced it had reached a settlement with MCI WorldCom Communications Inc. (now MCI) for $3.5 million to settle a slamming investigation. In addition to the payment, the company promised to restructure its telemarketing and other business practices to protect consumers.

Generally speaking, the more modern the communications service, the less regulation there is by the FCC. Local telephone service providers are fined more than cellular telephone service providers, for example. The cellular industry is largely unregulated.

But there is one key public safety issue that comes up often. The FCC requires cellular telephone companies to implement “enhanced” 911 services, which allows emergency vehicles to locate a cellular phone user in distress.

Fines regarding this service account for virtually all FCC enforcement actions against cellular telephone companies.

Since 1999, the FCC has issued about $5.56 million in paid fines and consent orders against wireless carriers with $5.23 million related to E911 rules. The largest single proposed fine was issued on May 20, 2002 against AT&T Wireless for $2.2 million. The fine was appealed and lowered to $2 million, which AT&T Wireless paid.

Overall, T-Mobile USA has paid the most at $2.35 million. AT&T Wireless is second at $2.1 million and Cingular Wireless is third at $775,000.

High fines, low payments

Large companies like Qwest and AT&T generally pay up when the FCC decides they have done something wrong. That’s not always the case with some lesser-known FCC offenders.

Part of the reason is that large phone companies often enter into agreements to settle a dispute. The company makes a payment to the U.S. Treasury and the FCC drops its investigation. Often, the offender admits to no wrongdoing.

But some of the biggest fines issued over the past few years have been against companies that are here today and gone tomorrow.

For example, America’s office workers are all-too-familiar with the daily deluge of unsolicited faxes that fill up the “in” basket. One of the chief culprits in the “junk fax” business is a company called Fax.com.

The company faxed messages on behalf of others for a fee, apparently violating FCC regulations and federal law on 489 separate occasions. The agency said the company was pursuing a “pervasive and egregious pattern of deception.” Fax.com was fined $5.38 million in August of 2002.

In January 2004, the Orange County Register reported the company’s Aliso Viejo headquarters were vacant. The newspaper also reported that Fax.com’s attorney said she was unable to reach the company’s co-founder.

Fax.com still has an active Web site that lists a telephone and fax number. Dialing either number results in a busy signal. Also on the site is a response from company president Kevin Katz to a $2.2 trillion lawsuit naming Fax.com. According to the August 2002 company press release, Katz said that businesses that utilize his company’s services have the constitutional right to advertise by fax and a U.S. District Court ruled in March that a ban on fax advertising “unnecessarily violates First Amendment rights.”

The FCC says the case against Fax.com is still open. Efforts to collect the fine continue.

Prospects for collecting a fine in such cases are slim, but Solomon said that’s not necessarily the primary goal. If the agency manages to put a company out of business and chill others from doing the same sort of business, it is a victory on behalf of consumers.

Fines often reduced

Initial fines are often much higher than what companies ultimately pay. Sometimes the fine is lowered through the administrative appeals process within the agency. Larger fines attached to major investigations often are handled with a consent decree, where the company agrees to pay a lump settlement amount to the U.S. Treasury to resolve an investigation.

Regardless, at times the agency will announce a fine with considerable fanfare, only to lower it—sometimes dramatically—with no public announcement.

On Sept. 23, 2002, the FCC announced a $5.12 million proposed fine against One Call Communications Inc., doing business as Opticom. The enforcement action was over a scheme known as “fat-finger dialing.”

The investigation was conducted at heavily used payphone locations in the Washington D.C. area. Callers would misdial 1-800-COLLECT and instead dial 1-800-COOLECT, reaching Opticom. In one case, a four-minute call cost $31.94. According to the commission, the firm violated rules requiring operator service providers like Opticom to identify themselves by their company name.

The offenses, according to FCC documents, were “particularly egregious because they appear to have occurred as part of a deliberate plan to mislead consumers.”

The proposed fine was accompanied by a press release detailing the Opticom action and a $1.44 million fine against ASC Telecom Inc., a subsidiary of Sprint. The fines were reported in the national press.

In December of 2003, the agency reached a settlement with the company for $500,000—or for roughly one-tenth of the amount of the original, ballyhooed proposed fine. This action also did not warrant a press release or make a splash in the media. The company made the payment.

Solomon said that while assessing and collecting fines are important priorities, so is the deterrent effect high-profile disciplinary actions have on the rest of the industry.

One example was a proposed fine issued against a company called Globcom, a long-distance reseller, for $806,861 for failure to pay its share of the universal service fund and other fees. Shortly after the fine was announced, delinquent companies started paying the fee; as a result, the agency actually lowered the contribution requirement for all companies.

“It’s not always easy to prove the theory but the point of enforcement is punishment leads to deterrence leads to people to comply, which means consumers get the benefits of either the statutes that Congress has enacted or the rules the commission has adopted,” Solomon said.

Ribald radio

The FCC also has been cracking down hard on broadcasters for airing what the commission deems to be indecent material.

Thus far in 2004, the FCC has issued $1.57 million in proposed indecency fines against broadcasters. That’s more than the previous 10 years combined. The crackdown has been widely portrayed as a reaction to Janet Jackson’s partial disrobing at the Super Bowl halftime show. But if that’s the case, radio, not television, has been paying the price. All but $27,500 of the total has been issued against radio station owners.

The top recipients have been stations owned by broadcast giant Clear Channel Communications Inc. The increase has taken place despite no changes in broadcast indecency laws. A bill to increase fines passed the House, but stalled in the Senate.

The agency got the year off with a bang with a $715,000 fine against Clear Channel and its Florida-based disc jockey Bubba the Love Sponge. (Another $40,000 was assessed for violations of public file inspection rules, bringing the total fine to $755,000.)

On March 12, the agency issued another proposed fine against Clear Channel and Washington, D.C.-based DJ “Elliot in the Morning” for $247,500. Barely a week later, the agency fined a station $27,500 for an airing of the Howard Stern Show, the first enforcement action taken relating to the shock jock since 1998. On April 8, Clear Channel was hit again, this time for $495,000, against stations that aired another Stern show, which by then had been dropped by the broadcaster.

Most recently, Clear Channel entered into a consent agreement with the FCC to pay $1.75 million to settle three existing proposed fines and other ongoing indecency investigations. It is the largest such payment on record, eclipsing a $1.71 million settlement paid by Infinity to settle complaints against the Stern show. But unlike the Stern settlement, where the amount was roughly equal to the proposed fines, Clear Channel is paying much more than was proposed. Total outstanding fines are $797,500, a much smaller amount than what the company paid.

Clear Channel has been much more willing to settle disputes than Infinity, the No. 2 radio broadcaster. Infinity, part of media giant Viacom, chose to fight the $451,000 in fines proposed by the FCC from 2000 through April 1, having paid none of the total. During the same period, which was prior to Clear Channel’s $1.75 million consent decree, the nation’s largest radio company paid $956,000 out of $971,000 in agency fines.

Creative fining

FCC rules say the maximum amount a broadcaster can be fined is $27,500 per indecent utterance. (As this report was going to press, the FCC announced that number will be raised to $32,500 to account for inflation.) So how is it that the average fine amount has risen so much? The answer lies not in a change in the law or the rules, but in how the FCC has decided to apply them. Traditionally, the agency fined only the station against which a complaint was filed.

“What we began doing about a year ago was broadening our investigations, so that we now will go to the company that’s the subject of the complaint and say, ‘Tell us other stations that you broadcast the program on,'” Solomon said.

So rather than issuing a single fine against a single station, the fine may be levied against each station that airs the indecent broadcast, regardless of whether there is a complaint or not.

“Also the commission is using the statutory maximum more. It typically used to do the $7,000 base amount sort of against one station, and now it’s doing more the $27,500 maximum against numerous stations that broadcast it,” he said.

The commission also has for the first time started issuing fines for more than one indecent “utterance” in a single broadcast—a practice which both alarms radio station owners and raises some freedom of speech issues.

The Supreme Court has long held that for something to be obscene, it has to violate community standards. So how can a complaint in one city lead to a fine in another city? The answer lies in the FCC’s authority to regulate broadcasters and the difference between “obscenity” and “indecency.”

Unlike obscene speech, indecent speech is protected under the First Amendment. It is protected, but also regulated, with the FCC having the power to enforce the rules.

“What the commission has said is that the commission applies a national standard,” Solomon said. “Now if it gets to District Court for enforcement, the court would apply a local standard. But from the commission’s perspective, it’s applying a national-average-consumer, average-listener, average-viewer standard.”

The agency and the White House have been accused by Stern (and others) of cracking down for political reasons. The normally apolitical Stern has been railing against Bush and his policies. So, is there any political pressure to increase enforcement activity?

“We, at the staff level, look at every case, and we look at the facts and we apply the law and we make a recommendation to the commission for what we think is the right answer,” Solomon said.

Enforcement priorities

The FCC has come a long way since Solomon was named the Enforcement Bureau’s first chief in 1999 by then-FCC Chairman William Kennard.

At the time, the sprawling bureaucracy had no centralized system of meting out punishment for wayward licensees. It handled discipline bureau by bureau, making it difficult to track information on fines agency-wide, and virtually impossible to set priorities for the most egregious behavior.

Solomon spent six years in private practice before ultimately taking the FCC’s top enforcement job. In an interview with the Center, Solomon said that by centralizing enforcement authority, the FCC for the first time was able to decide what industry transgressions should receive the most attention.

There are three main priorities: local phone service competition enforcement, consumer protection and public safety. (The agency has rules making sure radio towers are well-lighted, for example, to discourage airplanes from flying into them.)

The priorities are set based on a review of complaints received and other sources, like the Federal Trade Commission and the National Consumer Fraud Center, for example. Currently, enforcement of the national “Do Not Call Registry” is a high priority.

The agency will also continue to aggressively pursue companies that violate competition rules. But there are those who wonder if the whole local phone debate might become a moot point in a few years. Roughly 145 million Americans have cellular telephones today, according to the industry, and many are forgoing the old home phone altogether. The Bells have anticipated this and for the most part, are entrenched in that line of business.

But there’s one other voice communication service that has sent a chill through the local phone industry.

“Voice-over-Internet-protocol,” known as VoIP, makes it possible for customers to skip their local phone providers altogether and receive calls over their cable modems. Comcast Corp., by far the nation’s largest cable television provider, wants to offer the service to more than 40 million households in 2006.

Assistant Database Editor Daniel Lathrop and researchers Morgan Jindrich, Katie Mills and Alexander Cohen contributed to this report.