The FCC's Lifeline subsidy program is plagued by "massive fraud" and "waste," according to the top Democrat on the Senate Homeland Security & Governmental Affairs Committee.

Sen. Claire McCaskill (D-Mo.) released the results of a three-year GAO study that identifed significant risks in the program, which subsidizes baseline telecom services to low-income residents; historically the program covered phone service, though it is being migrated to broadband.

FCC chair Ajit Pai has long said the program needs a reset to institute better protections against waste, fraud and abuse. McCaskill has also called for Lifeline reforms, including stronger FCC oversight. Former FCC chair Tom Wheeler also instituted reforms to boost oversight, but there were continuing problems, said McCaskill.

For example, GAO was unable to confirm whether 36% of the 3.5 million invididuals it reviewed (or some 1.2 million) actually participated in any of the qualifying programs, like Medicaid, that they stated on their applications for the subsidy.

Related: Pai Pushes States for Lifeline Subsidy Abuse Info

McCaskill requested the GAO investigation, and didn't like what she saw.

“A complete lack of oversight is causing this program to fail the American taxpayer — everything that could go wrong is going wrong,” said McCaskill, who is the former Missouri State Auditor. “We’re currently letting phone companies cash a government check every month with little more than the honor system to hold them accountable, and that simply can’t continue.”

Related: Senate Drills Down on Universal Service Fund

Among the report's key takeaways, according to McCaskill, are:
• "Eligibility could not be verified for 36% of Lifeline customers. Auditors reviewed 3.5 million Lifeline accounts by comparing subscribers’ stated eligibility information with multiple federal and state databases. Of the 3.5 million accounts examined, the eligibility of 1.2 million subscribers could not be confirmed—who collectively represent $137 million per year in Lifeline subsidies.

• "$1.2 million per year in subsidies is going to fictitious or deceased individuals. Auditors found over 5,500 active Lifeline subscriber accounts with matching names, dates of birth and Social Security Numbers, collectively representing $612,000 per year in Lifeline subsidies. Over 5,400 deceased individuals were enrolled in Lifeline more than a year after they died, totaling $600,288 in improper subsidies.

• "Undercover testing found that phone companies approved Lifeline applicants with fictitious eligibility information 63 percent of the time. GAO investigators contacted 19 Lifeline providers and applied for service using false eligibility information. They were approved in 12 cases.

• "Many providers rely on contractors or subcontractors—in some cases using overseas call centers—to enroll Lifeline subscribers and review government benefit documentation to verify eligibility. However, the FCC was unaware that providers were using third-party call centers. When undercover investigators applied to work for a company that contracts with Lifeline providers to perform eligibility verification, they were hired without an interview or background check and subsequently were paid for enrolling fictitious Lifeline subscribers.

• "USAC is supposed to audit telecommunication providers to ensure they pay required USF contributions, but GAO investigators found USAC only audited one-half of one percent of providers; in the most recent year GAO reviewed, they audited less than one-tenth of one percent of all carriers.

• "The FCC keeps funding for the Lifeline program and other USF programs in a private bank account with a current balance of over $9 billion, but does not have direct control over these funds. Only USAC is a party to the contract with the bank that governs the USF account. Since 2005, GAO has recommended that the FCC move these federal funds to the U.S. Treasury, but so far no change has been made."

The GAO recommended the FCC come up with a comprehensive review and enforcement plan. The GAO made the report available to the FCC, which said it generally agreed with the assessment and was already taking steps to address some of the issue.

Another prominent Democrat, Rep. Frank Pallone (D-N.J.), ranking member of the House Energy & Commerce Committee, was warning against throwing out the lifeline baby with the waste, fraud and abuse bathwater.

“The Lifeline program provides millions of low-income Americans access to basic communications services,"  he said in statement on the report. Today cell phones are a necessity, and low-income Americans rely on them more heavily than the overall population.  Lifeline has been a critical springboard for struggling families across the country for decades, and it would be a mistake to use this report as an excuse to rip away this essential service from struggling families and hardworking people."

“As an Energy & Commerce Democratic Staff Report found last year, the FCC has already reined in a billion dollars in waste, fraud, and abuse that was allowed under Bush-era changes to the program. In fact, much of GAO’s investigation took place before the FCC adopted its latest reforms. GAO’s report confirms the need for the FCC to act on our recommendations as quickly as possible.”

“Last year, I led an investigation into the Lifeline program that revealed serious weaknesses in federal safeguards," said Pai of the report. "Today’s GAO report confirms what we discovered then:  Waste, fraud, and abuse are all too prevalent in the program.  Commission staff and the Office of Inspector General have already been developing recommendations to better safeguard taxpayer funds. I stand ready to work with my colleagues to crack down on the unscrupulous providers that abuse the program so that the dollars we spend support affordable, high-speed broadband Internet access for our nation’s poorest families.”

“The bottom line is the FCC must fix what little needs repair and get on with the job of making broadband accessible to those who cannot afford the high prices providers charge for something everyone must have," said Michael Copps, former FCC chairman and now special adviser to Common Cause.

Veteran cable critic Sen. Claire McCaskill (D-Mo.), ranking member of the Senate Permanent Subcommittee on Investigations, wants FCC Chairman Ajit Pai to limit "overly restrictive" alternate delivery method (ADM) and unconditional most-favored-nation clauses in programming contracts.

The FCC, over Pai's objection, proposed to do just that in a Notice of Proposed Rulemaking (NPRM)  last September stemming from an inquiry last year into program diversity.

In a letter, McCaskill said that the committee's investigation into programming practices, based on documents from "many of the largest cable and satellite providers" and interviews with distributors and networks, she concluded that the clauses may be limiting consumer choice, and said based on that investigation, limiting them "will succeed in removing these obstacles and facilitate competition in an industry increasingly dominated by a few large companies.

Pai is unlikely to agree, given that he views the marketplace as competitive and the effort to limit the clauses as an attempt by the FCC to exact regulatory tribute and give itself “carte blanche to regulate programming contracts."

McCaskill conceded the committee had only reviewed some contracts, and used "may" throughout, rather than "will" when talking about the potential harms. She also talked about limiting the contracts rather than banning them.

Smaller operators argue that the FCC should finesse its rule proposal to apply the prohibitions only on larger players who have the market power to make the contract terms anticompetitive.

"The rule proposed by the FCC is a much-needed step that may help level the playing field for small and new programmers," she said.

Pai, joined by fellow dissenter Commission Michael O'Rielly, argued when the NPRM was voted last September that limiting the contracts could actually hurt independents by making MVPDs less likely to strike deals with them.

They pointed out that MVPDs were under no obligation to carry independent channels.

"We have to consider whether banning unconditional MFN and certain types of ADM provisions would make it less likely that independent programmers would be able to secure carriage by MVPDs," said Pai. "Would banning such contract terms make it more likely that those independent programmers already being carried by MVPDs would be dropped? Or would prohibiting such provisions make it more likely that a large MVPD would insist on exclusive deals with independent programmers, thus limiting these programmers’ reach? Unfortunately, it is evident from the Notice that the Commission has already fixed upon an answer before the record has been compiled."

Daphna Ziman, president of independent programmer Cinémoi, who testified at the FCC and before Congress in favor of the FCC's proposal, says she is planning to invite legislators and FCC members to a summit on the issue in Washington "in the hope that we can develop bipartisan solutions to the problems to save our industry."

A spokesman for the chairman was checking on the status of their receipt of the letter, which was dated Feb. 6, at press time, but traditionally the only comment is that they have received it and are reviewing it.

FCC Chairman Tom Wheeler told the Senate Thursday that he is still open to changes in the FCC's new app-based set-top plan. That came in response, as well as in advance of, concerns expressed by various legislators.

In a Senate Commerce Committee oversight hearing, Wheeler said that they were probably "90%" there on the set-top box item and cited at least one provision -- on contracts between programmers and MVPDs that he said programmers had sought -- that he is willing to pull out if it helps.

Democratic Sens. Bill Nelson (Fla.), Claire McCaskill (Mo.) and Amy Klobuchar (Minn.) all expressed concerns, including Klobuchar about the impact of the proposal on independent programmers. Wheeler countered to Klobuchar that the Writers Guild of America West backed the plan and its impact on independent programmers and that others independents did as well.

Related: Sen. Nelson: Set-Top Plan Needs Work

McCaskill said that she had rarely seen such unanimous criticism of an item, suggesting that signaled that more work clearly needed to be done.

At the hearing, Wheeler quoted Rosenworcel's comment about the need to act on set-tops for consumers. But when asked for her take about the set-top plan, Rosenworcel said that that while set-tops were clunky and expensive -- she said that was her personal as well as professional position -- she had problems with the FCC getting "too involved in licensing schemes" adding that she did not think the FCC had the authority.

Rosenworcel's vote will be needed to approve the item, since the Republicans oppose it in its current form.

Sen. Brian Schatz (D-Hawaii) pressed Wheeler on his openness to modifying the proposal to address what he said were stakeholder's legitimate concerns. Wheeler said he was, so long as it stays true ot the congressional mandate -- to create navigation device competition.

Standing up for Wheeler's proposal was Sen. Ed Markey (D-Mass.). He held up a set-top wrapped in chains and compared that with an Amazon fire stick the size of a pack of gum.

He said the box had not changed and that 100 million pay TV households can't watch their pay programming on the Fire stick.

He said only the FCC can do something about the problem, and that its proposal would free consumers from exorbitant rental fees. "That lack of choice has to end now, Markey said.

Markey asked if Wheeler could find a solution in the next 14 days. Wheeler said he hoped the "significant departure" from structure but not principle that the new apps-based proposal represents, is an indication of how he is willing and seeking to resolve remaining concerns, while chopping the chains from the box.

Wheeler said Comcast is shipping 40,000 of those (chained) boxes a day.

Sen. John Thune (D-S.D.) pointed out that Amazon had registered its own problems with the proposal. He quoted their comment that the proposal would delay competition.

Markey said that was a concern about licensing, and that the licensing board issue could be worked out.

Sen. Richard Blumenthal (D-Conn.), who teamed with Markey to push for set-top reform, also said his state's consumers would stand to save millions of dollars from the FCC set-top proposal.

He said the proposal would simply enforce a law that has been unenforced since the 1990's. He called it a classic inside-the-Beltway vs. consumer issue and labelled set-tops "dollar devourers."

But one industry source pointed out that the law also prevents the FCC from doing some things that the proposal's critics say it would do, per below:

"The Commission shall not prescribe regulations under subsection (a) of this section which would jeopardize security of multichannel video programming and other services offered over multichannel video programming systems, or impede the legal rights of a provider of such services to prevent theft of service."

Sen. Claire McCaskill (D-Mo.) slammed cable operators for customer service at the opening of the Senate Permanent Subcommittee on Investigations hearing on customer service and billing.

McCaskill released a report outlining the issues addressed and problems discovered related to a year-long investigation and based on information supplied by MVPDs. "All of the companies in this investigation have increased their prices since 2011, with the cost of some packages
increasing by as much as 33%," said the report, "while all of the providers notified customers of upcoming price increases, this notification was not always effective."

Related:Senate Report Cites Charter, TWC Overcharges

She also narrated a "nightmare" customer service call she recently placed to try to get a fee removed from her bill, suggesting she was given the runaround before a customer retention rep took various steps to keep her from dropping the service. (She got $120 bucks in credits and cancelled a $7.99 fee.)She said the industry had a long way to go to cure its customer service problems. Most of the witnesses conceded the same, but said they were working dilligently to improve.

The first witness out of the gate was Tom Karinshak, SVP, customer service for Comcast, who acknowledged that Comcast and the industry in general have not always made customer service the priority it should have been, adding: "I am sorry for that."

Charter and Time Warner Cable (now part of Charter) have failed to refund customers for overcharges, but both have taken steps to correct the issue, according to a copy of a staff report from the Senate Permanent Subcommittee on Investigations.

The report found that MVPDs vary greatly in how they handle billing overcharges, but that while "Time Warner Cable and Charter have procedures for identifying overcharges and removing them from customers’ bills prospectively, [n]either company, however, has automatically provided full retroactive refunds or credits for past overcharges."

By contrast, the report said, "Comcast and DirecTV provide automatic refunds or credits to overcharged customers, while Dish’s billing system is designed to prevent these types of overcharges from occurring in the first place."

The report comes as the subcommittee holds a hearing on cable customer service and billing that will feature execs from those companies.

Related:Senate Subcommittee Eyes Fall Wrap-Up for MVPD Investigation

The report found that "between January and April, Time Warner Cable overbilled customers nationwide an estimated $639,948," and projected that in 2016, "Time Warner Cable will overbill customers nationwide a total of $1,919,844."

It said Charter had not completed the "underlying work necessary to determine how much it has overbilled customers," but said the MSO had informed the subcommittee it overbilled by at least $442,691 per month.

The subcommittee is headed by Rob Portman (R-Ohio) and Claire McCaskill (D-Mo.).

Related:McCaskill Hammers MVPDs Over Customer Service, Fees

"Time Warner Cable estimates that, in 2015, it overbilled 40,193 Ohio customers a total of $430,393 and 4,232 Missouri customers a total of $44,152," the study found, while "Charter estimates that it has annually overcharged approximately 5,897 Missouri customers a total of $494,000 each year. Charter does not provide service in Ohio."

The report also said Charter and Time Warner Cable have taken steps to correct the situation as a result of the investigation.

"Each month, Time Warner Cable performs an audit comparing its billing records with service records," the report said. "Going forward, the company will provide an automatic one-month credit to anyone who is identified in the audit as having been overcharged. Time Warner Cable will not, however, investigate when it began overcharging customers unless customers bring specific concerns to the company’s attention, nor will it provide a full refund dating back to when the overcharge began. Similarly, Charter will provide customers with a one-year credit for any equipment overcharges. Charter has also implemented systemic controls that it says will prevent equipment overcharges in the future."

Charter responded in a statement: “Since 2012, we have invested $7 billion in network improvements and added more than 7,000 jobs resulting in growing and longer customer relationships. An audit of our set-top boxes charges over the last nine months found them to be over 99 percent accurate. To move us closer to 100 percent accuracy and permanently resolve this issue, we have installed new controls to ensure discrepancies are caught and eliminated on a daily basis. Customers who were incorrectly charged for set-top boxes are being notified and given a 12-month credit for these fees.”

Charter said it believes it now has a system in place to fix the mismatches between equipment and billing going forward, adding that it has been auditing since last summer and and has found that it now has a 99.4% accuracy rate between equipment and billing. The MSO said it is working to eliinate the .6% error rate.

It said it is now running daily audits to catch any mismatches and correct them. It is providing a 12 month credit to those who have been overcharged.

John Keib, former EVP and COO for residential services at Time Warner Cable, pointed out during the hearing that Time Warner Cable had been undercharging more than it was overcharging.

Portman said the undercharges don't help those who are being overcharged. The point was that when an overcharge was discovered, customers be made whole, not just giving them a 12-month credit, or in the case of legacy TWC systems, only a month. Portman pressed Charter on why only a month.

Charter explained it this way in its testimony: "In May of 2016, Charter completed its acquisition of Time Warner Cable. At just a little more than 30 days post-closing, Charter has been advised that TWC currently catches and corrects any overcharges on a monthly basis," the company said. "We will put controls into place to catch such instances daily, as we now have installed at Charter, but that will take approximately 60--‐90 days. Until then, we will proactively issue a one month credit to any customer that the current monthly process reveals was overcharged."

Portman said auditing was a step forward, but the company was still not fully compensating those who had been overcharged.

McCaskill said the MVPD business model appears to be to set a low, promotional entry price, upsell, then deal with angry people in a way to calm them and keep them. Nobody knows how to get the best price, Said McCaskill, and the secret sauce appears to be getting mad.

McCaskill said she was really frustrated by "never advertised" secret rates offered by retention agents. Noone on the panel disagreed that such rates were offered. She said that was the kind of "hide the ball" regime that angers customers.

Some longtime cable rate critics will get another chance to publicly criticize cable rates.

Sens. Rob Portman (R-Ohio) and Claire McCaskill (D-Mo.), chair and ranking member, respectively, of the Permanent Subcommittee on Investigations, confirmed they will hold a hearing June 23 at 10 a.m. on the state of the pay TV industry, signaling their displeasure with it.

“Consumers in every corner of the country share common experiences about fending for themselves against customer service and billing practices by TV providers that are at best confusing, and at worst deceptive,” they said in a joint statement. “For more than a year, we have conducted a bipartisan investigation of the largest cable and satellite TV companies. We believe our hearing will be a big step forward for consumers, allowing them to understand how their TV providers really work and make informed decisions about their video service.”

McCaskill, who formerly chaired the Senate Commerce Committee's Consumer Protection subcommittee, has been hammering the cable industry on rates and customer service for years; her actons have included trying to amend STELAR, the satellite reauthorization bill, to include provisions to put cable's feet to the fire. Another veteran cable rate critic, Republican John McCain (R-ARiz.) is also on the subcommittee. 

McCaskill's office said the hearing will focus on billing, fees, refunds and customer service issues and is part of a general inquiry, which will extend into the fall, into potential barriers to competition .

No witnesses were identified, but they are said to represent more than 70 million subscribers and more than 70% of pay TV households.

The senators cited the recent American Customer Satisfaction Index survey, which found pay TV near the bottom of those industries surveyed, following the previous year's finding that pay TV was tied for the lowest score.