Dial R for Reform : State Legislation Would Seek to Root Out Rogue Calling Card Companies

By JENNIFER OLDHAM

April 17, 1997 12 AM PT

TIMES STAFF WRITER

Lawmakers in California and several other states have drafted regulations designed to protect the public from fly-by-night companies in the prepaid calling card industry that sell consumers cards that don’t work and cast a bad light on the industry as a whole.

Sales of prepaid calling cards in the United States are expected to hit $1.4 billion this year, up from $75 million in 1993, according to a recent report by the Yankee Group, a market research firm in Boston. This explosive growth and ease of entry into the nation’s 4-year-old business has attracted a bevy of undercapitalized companies eager to cash in on rising profits.

To help consumers choose reputable products from among the 300 million cards issued nationwide each year, California legislators have drafted a bill that, if passed, would require companies to print on each card the per-minute or per-second rates charged for telephone calls, the incremental charges for telephone calls in minutes or seconds and the process for redeeming any time left on the card.

The Assembly’s Utilities and Commerce Committee is set for hearings on the measure on Monday. Public utility officials in Alaska, Florida and Louisiana are considering similar proposals.

Prepaid calling cards provide telecommunications companies with a convenient way to sell long-distance service in an increasingly competitive marketplace. But unlike more traditional means of providing phone service, these cards require payment up front for services to be rendered in the future, raising unique regulatory challenges.

Although rogue firms make up a fraction of the 500 or so prepaid calling card vendors, these companies are notorious for poor customer service, deceptive pricing and hawking worthless pieces of plastic, utilities officials and consumer advocates agree. The cards are sold by retailers, used for promotional purposes or as a fund-raising tool and purchased by collectors.

Analysts estimate about 12% to 14%--or up to 70--of the companies issuing cards today could falter within the next few years, leaving hundreds of thousands of useless cards in their wake.

“I’m not overly anxious to regulate businesses in California, but when one is so ripe for consumer fraud as this one is, it’s important for us to put protections for consumers in place,” said Assemblywoman Diane Martinez (D-Monterey Park), who wrote the bill and said she has heard no formal opposition to the measure.

“This isn’t for the 98% of the people that are doing a good job but for the 2% that are bad actors,” she said.

Martinez said the California Alliance for Consumer Protection contacted her after receiving numerous complaints and questions from consumers, who didn’t know which governmental agencies to alert regarding problems. The bill, which calls for misdemeanor penalties of up to one year in jail, a $1,000 fine and penalty assessments, charges the state Public Utilities Commission with enforcing the requirements.

Larger carriers are divided about the possible impacts of Martinez’s bill. Executives at Sprint, considered by analysts the largest producer of prepaid calling cards, say rooting out the rogue firms will be good for business overall, but they also question how much information they can print on a “two-by-three-inch piece of plastic.”

AT&T; has voiced concerns.

“The provision we’re concerned about involves the situation where someone gets a card for $10 and makes long-distance calls and has 30 cents left,” said Rich Mason, director of government affairs for AT&T.; “We don’t want to be required to write a check for 30 cents. It would cost us at least $10 or more to refund 30 cents.”

Prepaid calling card companies are required to abide by broad federal and state laws designed to regulate all companies that provide telephone service to the public.

But this market is made up of a confusing array of companies, including larger carriers like AT&T; and Sprint that issue their own cards, and numerous smaller carriers that buy wholesale air time from major carriers and resell it through the cards. In addition, some resellers sell the air time to a third party that sells the cards.

This diversity makes it difficult for regulators to track firms, placing the onus for reporting infractions on consumers. Consequently, regulators bedeviled by challenges presented by the frenetic growth of this industry must also contend with consumer apathy.

“The cash value involved in these transactions is so low that people don’t bother to complain if they buy a $10 card and it doesn’t work,” said Linda Sherry, spokeswoman for Consumer Action, a San Francisco-based consumer advocacy group.

In addition, the cards are sold in a variety of retail stores, banks and automated teller machines as well as post offices and are used in promotions by myriad corporations, blurring the line between telephone service and retail sales.

The Federal Communications Commission and the Federal Trade Commission share responsibility for regulating this industry, but agency officials say they have no plans to draft tighter controls.

That doesn’t mean, however, that rogue firms aren’t out there.

In 1996 alone, WorldCom was stuck with $90 million in unpaid bills, forcing it to cut off service to tens of thousands of cards; ComTel Debit Technologies cut off service on 200,000 phone cards issued by two undercapitalized companies after these firms didn’t pay their long-distance bills, according to industry newsletter Debit Card News.

Increasing awareness among state officials about calling card fraud has spurred trade associations to draft voluntary rules to govern their members and to warn companies that regulators are becoming more vigilant about abuses.

“Our proposed regulations have had a chilling effect already,” said Joe Garcia, Florida Public Service Commission member.

Florida lawmakers last year initiated the nation’s most aggressive approach to monitoring the market after receiving numerous reports of immigrants and tourists in Miami getting fleeced by vendors selling worthless cards.

In California, a business delegation from India visiting Los Angeles in 1995 purchased prepaid calling cards at a hotel sundry shop and found the toll-free number on the card did not work, said Pastor Herrera Jr., director of the Los Angeles County Department of Consumer Affairs.

To address such problems, Florida utilities officials drafted regulations that require companies to print on the card’s packaging or its store display the maximum charge per minute for services, the card’s expiration date, a toll-free customer service number and the refund policy for unused time on the card.

The proposal, which is expected to come before the Florida Public Service Commission this summer, also requires companies to provide a live operator or a taped message to answer consumer calls 24 hours a day, seven days a week. Companies must also complete 95% of call attempts, not change the per-minute value of already-purchased cards, have one-minute or less billing increments and must charge only for conversation time.

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Higher Calling

The burgeoning prepaid calling card market is expected to be worth $2.5 billion in 2000, up from $12 million in 1992. A look at trends in the industry:

Sales of prepaid calling cards

In billion of dollars:

1992: $.012

1993: $.100

1994: $.350

1995: $.750

1996: $1.10

1997: $1.47

1998*: $1.85

1999*: $2.22

2000*: $2.5

Distribution method