6. Should a Performance Bond Be Required
as a Condition of Registration?
Two different kinds of performance bonds are provided for in § 1013. First, § 1013(e) provides that the Commission require, as a precondition to registration, the procurement of a performance bond sufficient to cover taxes or fees, or both, collected from customers and held for remittance and advances or deposits the telecommunications company may collect from its customers, or order that those advances or deposits be held in escrow or trust. Second, § 1013(f) permits the Commission to require, as a precondition to registration, the procurement of a performance bond sufficient to facilitate the collection of fines, penalties, and restitution related to enforcement actions that can be taken against a telecommunications company.
Performance bonds are surety bonds issued by an insurance company or a bank to guarantee satisfactory completion of a project by a contractor. Although § 1013 uses the term "performance bond", the purpose of the bond described in § 1013(e) is to facilitate the collection of taxes or fees, and customer advances or deposits, and the purpose of the bond described in § 1013(f) is to facilitate the collection of fines, penalties and restitution.
The OIR states that the Commission would reconsider the determination made in D.97-06-107 that no performance bond is necessary to ensure payment of fees or taxes or to protect consumers, and sought comment on the type of bond(s) registration applicants should be required to post and the amount of the bond that should be posted. The OIR also asks whether prepaid debit card providers that are required to register pursuant to Pub. Util. Code § 885(a) should be subject to the same performance bond requirement as other NDIEC registrants that provide only long distance services.14
CALTEL states that the Commission previously determined that no performance bond was necessary to ensure payment of fees or taxes or to protect consumers because the Commission ordered NDIECs to establish escrow accounts to hold advances or deposits from customers. CALTEL contends that the Commission requires sufficient evidence in this proceeding before the Commission could implement a new bonding requirement pursuant to § 1013(e).
ExteNet asserts that the Commission may require a bond as a precondition of registration but not as a retroactive qualification to keep a certificate. ExteNet contends that retroactively imposing a bond requirement exceeds the Commission's authority and is equivalent to penalizing NDIECs that have done nothing wrong.
UCAN recommends that the Commission adopt a performance bond requirement to address the concern raised in the Audit Report about the Commission's inability to collect fines and restitution. UCAN asserts that a bonding requirement will deter some unscrupulous companies, and the availability of a bond will help protect consumers. UCAN recommends that any bond requirements also apply to the services of telephone prepaid debit card providers to ensure consumers are equally protected regardless of the type of NDIEC they choose for service.
DRA recommends that the Commission require performance bonds. DRA contends that performance bonds are required by statute, and that the Commission must bring the current registration process into compliance with State law. DRA states that a bond requirement will increase scrutiny of registration applicants because these applicants will also be screened by the bonding company.
We affirm the determination reached in D.97-06-107, and will not require performance bonds to cover fees, taxes, advances or deposits, pursuant to § 1013(e). Section 1013(e) directs the Commission to require, as a condition of registration, the procurement of a performance bond sufficient to cover taxes or fees, or both, collected from customers and held for remittance and advances or deposits the telecommunications company may collect from its customers, or order that those advances or deposits be held in escrow or trust.
D.97-06-107 determined that no bond was necessary to ensure payment of fees because nonpayment of fees is cause for revocation of the authority granted pursuant to § 1013, and the prospect of revocation was a sufficient deterrent to ensure the payment of fees. D.97-06-107 also determined that no performance bond was necessary to ensure payment of taxes because the Commission does not collect or impose taxes, and because there was no evidence that utility taxes were not being timely remitted. D.97-06-107, however, required any advances or deposits collected from customers be held in escrow or trust for those customers, and, in doing so, exercised the Commission's discretion to choose between requiring a bond to cover customer advances or deposits or ordering that the advances or deposits be held in escrow or trust.
The Audit Report raised concerns about the Commission's ability to collect fines and restitution but does not raise concerns about the Commission's ability to collect fees or concerns with the handling of customer advances or deposits. There is no indication in the record of this proceeding that the determinations made in D.97-06-107 concerning performance bonds to cover fees, taxes, advances or deposits have hindered the Commission's ability to collect fees or to protect customer advances or deposits. Therefore, we find no basis at this time for changing the determinations reached in D.97-06-107 concerning the implementation of § 1013(e). We turn now to § 1013(f).
CALTEL states that § 1013(f) permits but does not obligate the Commission to require performance bonds to facilitate the collection of fines and penalties. While CALTEL acknowledges that the Commission is permitted to impose performance bonds pursuant to § 1013(f) as a hedge against penalties and fines, CALTEL recommends that the Commission not require such bonds because of what CALTEL sees as their anticompetitive effects.
We are not persuaded that requiring registrants to obtain and maintain a bond to facilitate the collection of fines, penalties and restitution is anticompetitive, as NDIECs will continue to have a choice to either register through the simplified registration process or to obtain a CPCN through a formal CPCN application. CALTEL does not explain how changing the requirements for registration licenses, including requiring performance bonds, creates barriers to entry when prospective NDIECs may simply choose to instead obtain a CPCN, as CALTEL contends most existing NDIECs have already done.
Section 1013(f) was enacted by the Legislature in 2008 as a part of Assembly Bill (AB) 2578. AB 2578 was authored in response to the Audit Report in order to improve the Commission's ability to collect fines and restitution from public utilities and common carriers, and to allow the Commission to implement the recommendations of the Audit Report.15
Requiring the procurement of a performance bond, as a precondition to registration, is consistent with the authority granted to the Commission pursuant to § 1013(f), and will facilitate the collection of fines, penalties, and restitution. The requirement to obtain and maintain a performance bond should also apply to the services of telephone prepaid debit card providers to improve the Commission's ability to collect fines and restitution from prepaid telephone services debit card providers. Therefore, pursuant to § 1013(f), we establish a performance bond requirement on all registrants, including prepaid telephone services debit card providers that are required to register pursuant to § 885(a), to facilitate the collection of fines, penalties and restitution.
As stated above, D.97-06-107 determined that the prospect of having a CPCN revoked was a sufficient deterrent to ensure the payment of fees. However, revocation of a registration license is not a deterrent to an unscrupulous carrier engaged in fraudulent practices who may cease operations or file bankruptcy before the Commission is able to collect fines or bring about restitution. Requiring the posting of a bond may deter some unscrupulous companies from registering in the first place, and will help protect consumers and the Commission by ensuring that funds will be available to cover at least some portion of any fines, penalties, or restitution that may be imposed. Therefore, requiring registrants to post a bond to facilitate the collection of fines, penalties and restitution is appropriate due to the inherent difficulty in collecting fines or restitution from companies that engage in fraudulent or inappropriate practices and cease operations or file for bankruptcy before the Commission is able to collect fines or bring about restitution.
We reject ExteNet's assertion that establishing a requirement to obtain a performance bond creates a retroactive qualification to keep a license. The requirement to obtain a performance bond is applied only prospectively. No past authority is revoked and no prior conduct will become illegal.
DRA states that a "license bond" is the appropriate type of bond for a carrier to obtain because a "performance bond" is usually associated with the completion of construction projects. According to DRA, however, the Commission does not need to specify the type of bond. DRA recommends instead that the Commission require only that a bond be obtained, and allow each carrier and corporate surety company to determine the appropriate type.
We agree that the Commission does not need to specify the type of bond. However, we will continue to refer to the requirement as a "performance bond," consistent with its usage in § 1013(f), and clarify that its purpose is to facilitate the collection of fines, penalties and restitution, pursuant to § 1013(f).
DRA and UCAN recommend that any performance bond requirements should be similar to those adopted in D.07-03-014, addressing the Digital Infrastructure and Video Competition Act of 2006. In particular, DRA recommends that the bond be issued by a corporate surety company authorized to transact business in California and that the Commission be listed as the sole obligee on the bond. DRA also recommends that the Commission require registrants to obtain a bond large enough to cover surcharges due, fines owed, and to compensate customers in cases of fraud or bankruptcy of not less than $25,000. DRA states that $25,000 is the amount that switchless resellers are currently required to show they have in reasonably liquid assets when applying for their NDIEC registration certificate, and requiring carriers to post a bond in at least this amount will ensure that they have available at least the minimum amount initially required to become a licensed carrier.
We have previously not required registration applicants to post performance bonds to facilitate the collection of fines, penalties and restitution, and, therefore, have not established a procedure for determining the bond amount. The level of fines and penalties the Commission may impose will depend on a number of factors, including 1) severity of the offense, 2) conduct of the utility in detecting, preventing and rectifying a violation, 3) financial resources of the carrier and the need to deter future violations, 4) the totality of the circumstances in furtherance of the public interest, and 5) precedent.16
Some of these factors are related, in part, to the amount of revenues collected. For example, the severity of the offense includes the economic harm (i.e., the amount of expense which was imposed upon the victims), and any unlawful benefits gained by the carrier.
Because the bond we require registration license holders to obtain is to facilitate the collection of fines, penalties and restitution to customers, the size of the bond should bear some relationship to the fines, penalties and restitution that may potentially be imposed. For example, the purpose of restitution is to return funds to victims that were unlawfully collected by a carrier, and the amount of restitution the Commission may require is likely to be related to the amount of revenues collected by a carrier.
Therefore, until we have more experience with the performance bond requirement, it is reasonable to base the amount of the performance bond on a registrant's reported annual intrastate revenues, and, as discussed below, to establish a minimum bond amount for registrant that have not reported or do not report annual intrastate revenues to the Commission.
Initially, we will require an existing registrant to post a bond that reflects, at a minimum, 10% of its intrastate revenues. We believe that this amount balances our objectives to ensure that funds will be available to cover at least some portion of any fines, penalties, or restitution that may be imposed while not unduly burdening registrants.
We further conclude that it would be appropriate to establish a minimum bond amount for all registrants. We currently require applicants seeking authority to become non-facilities-based carriers to demonstrate that they possess a minimum of $ 25,000 of cash or cash equivalent, reasonably liquid and readily available to meet the new firm's expenses. DRA has recommended that this amount be the minimum amount that should be required for a bond. Since no other parties expressed opposition to this recommendation, we adopt DRA's proposal.
All registrants are required to obtain a performance bond, pursuant to § 1013(f), equal to or greater than 10 percent of intrastate revenues reported on the Commission's User Fee Statement during the preceding calendar year or $25,000, whichever is greater. Within 90 days after the effective date of this Decision, each existing registration license holder must submit an Information-Only advice letter to the Director of the Communications Division containing a copy of the registration license holder's executed performance bond.
New registration license applicants that have not previously reported revenues to the Commission or submitted surcharges will be required to obtain a performance bond in the amount of $25,000 for the first year. In its application, the registration applicant must attest to the amount of the bond that will be obtained and that the required performance bond will be executed within five business days after the effective date of the issuance of a registration license. Accordingly, a new question (Question No. 10) is added to the Application Form requiring the applicant to verify that the applicant will obtain a continuous bond, issued by a corporate surety company authorized to transact surety business in California, in the amount of $25,000 that will be in effect during all periods of operation, and lists the California Public Utilities Commission as the obligee.
Within five business days after the effective date of the issuance of the registration license, the new registration licensee must submit an Information-Only advice letter to the Director of the Communications Division, pursuant to General Order 96-B, Telecommunication Industry Rule No. 2,17 containing a copy of the registration license holder's executed bond.
A registration license holder may not allow its performance bond to lapse during any period of its operation, and during all periods of operation a registration license holder must continue to possess the requisite legal, technical, and financial qualifications. Not later than March 31 of each year, each registration license holder must submit an Information-Only advice letter to the Director of the Communications Division containing a copy of its executed performance bond.18 In all cases, the bond must be a continuous bond (i.e., there is no termination date on the bond) issued by a corporate surety company authorized to transact surety business in California, and the Commission must be listed as the obligee on the bond.
A registration license holder will be deemed delinquent if it is more than ninety days late in submitting to the Director of the Communications Division an Information-Only advice letter containing a copy of its executed bond. However, the Communications Division may grant requests for additional time for a registration license holder to submit a copy of the executed bond if the license holder makes a written request to the Communications Division before license holder is deemed delinquent. A registration license holder must provide an explanation in its request for additional time that demonstrates good cause for the additional time needed to comply with the requirement to submit to the Commission a copy of the executed bond.
The Communications Division will prepare for Commission consideration a resolution revoking the registration license of any registration license holder that is more than 120 days late in providing the Director of the Communications Division a copy of its executed performance bond and that has not been granted an extension of time by the Communications Division.
14 Id., Finding of Fact 9.
15 Assembly Committee Bill Analysis, April 14, 2008.
16 See D.98-12-075.
17 See D.07-09-019.
18 In some cases, a registrant may be required to provide the Director of the Communications Division a copy of its executed performance bond more than once in a year. For example, a new registration licensee granted authority on June 1 is required to provide the Director of the Communications Division a copy of its executed bond by June 6, and by March 31 of the following year.
