6. Penalty for Violating Section 854(a)

The purpose of Section 854(a) is to protect the public interest by enabling the Commission, before any transfer of control takes place, to review the proposed transfer of control and take such action as the public interest may require. Hence, any violation of Section 854(a) whether intentional or unintentional, is a serious offense that should be subject to fines. Such violations are subject to monetary penalties under Section 2107, which states as follows:

Any public utility which violates or fails to comply with any provision of the Constitution of this state or of this part, or which fails or neglects to comply with any part or provision of any order, decision, decree, rule, direction, demand, or requirement of the commission, in a case in which a penalty has not otherwise been provided, is subject to a penalty of not less than five hundred dollars ($500), nor more than twenty thousand dollars ($20,000) for each offense.

For the following reasons, we conclude that Applicant should be fined for its failure to comply with Section 854(a). First, any violation of Section 854(a), regardless of the circumstances, is a serious offense that should be subject to fines.⁸ Second, the imposition of a fine will help to deter future violations of Section 854(a) by the Applicant and others.

To determine the size of the fine, we will rely on the criteria adopted by the Commission in D.98-12-075. We address these criteria below.

Criterion 1: Severity of the Offense

In D.98-12-075, the Commission held that the size of a fine should be proportionate to the severity of the offense. To determine the severity of the offense, the Commission stated that it would consider the following factors:⁹

Physical harm: The most severe violations are those that cause physical harm to people or property, with violations that threatened such harm closely following.

Economic harm: The severity of a violation increases with (i) the level of costs imposed upon the victims of the violation, and (ii) the unlawful benefits gained by the public utility. Generally, the greater of these two amounts will be used in setting the fine. The fact that economic harm may be hard to quantify does not diminish the severity of the offense or the need for sanctions.

Harm to the Regulatory Process: A high level of severity will be accorded to violations of statutory or Commission directives, including violations of reporting or compliance requirements.

The number and scope of the violations: A single violation is less severe than multiple offenses. A widespread violation that affects a many consumers is a more severe offense than one that is limited in scope.

The Applicant's violation of Section 854(a), while serious, was not an especially egregious offense. This is because the violation did not cause, or threaten to cause, any physical or economic harm to others. In addition, there is no evidence that Applicant significantly benefited from its unlawful conduct. The beneficiaries of this transaction appear to have been the prior owners of Highspeed. The only factor that indicates the violation should be considered a grave offense is our general policy of according a high level of severity to any violation of the Public Utilities Code, including tariff and user fee violations.

Criterion 2: Conduct of the Offender

In D.98-12-075, the Commission held that the size of a fine should reflect the conduct of the offender. When assessing conduct, the Commission stated that it would consider the following factors:¹⁰

The Utility's Actions to Prevent a Violation: Utilities are expected to take reasonable steps to ensure compliance with applicable laws and regulations. The utility's past record of compliance may be considered in assessing any penalty.

The Utility's Actions to Detect a Violation: Utilities are expected to diligently monitor their activities. Deliberate, as opposed to inadvertent wrongdoing, will be considered an aggravating factor. The level and extent of management's involvement in, or tolerance of, the offense will be considered in determining the amount of any penalty.

The Utility's Actions to Disclose and Rectify a Violation: Utilities are expected to promptly bring a violation to the Commission's attention. What constitutes "prompt" will depend on circumstances. Steps taken by a utility to promptly and cooperatively report and correct violations may be considered in assessing any penalty.

Several aspects of the Applicant's conduct suggest that a larger fine is appropriate. First, Northwest, with CLEC telecommunications experience in other states with regulation similar to that of California,¹¹ relied on the representation of the sellers of Highspeed that California Commission authority to transfer control of Highspeed was not necessary. Second, Northwest changed the name of Highspeed approximately six months after taking control of it. Third, NTIC and Northwest were unaware of Highspeed's existing tariffs. Fourth, NTIC and Northwest were delinquent in filing user fee reports and fees.

Criterion 3: Financial Resources of the Offender

In D.98-12-075, the Commission held that the size of a fine should reflect the financial resources of the offender. The Commission also stated that it would consider the following factors when assessing financial resources:¹²

Need for Deterrence: Fines should be set at a level that deters future violations. Effective deterrence requires that the Commission recognize the financial resources of the utility in setting a fine.

Constitutional limitations on excessive fines: The Commission will adjust the size of fines to achieve the objective of deterrence, without becoming excessive, based on each utility's financial resources.

NTIC provided the most recent unaudited financial statements of itself and of Northwest for the year ended December 31, 2004. These financial statements indicate that NTIC has current assets of approximately $118,000 and operating revenue of approximately $446,000. Northwest has current assets of approximately $1,125,000 and operating revenue of approximately $5,255,000. The financial statements also indicated that NTIC and Northwest have incurred a net loss for the same reporting period.

Section 8 of the terms of the purchase and sale agreement entered into by the parties provide a 36-month indemnification period after the February, 2004 closing period. Hence, Northwest may seek recourse to recover any penalty assessed against it for violating Section 854(a) against the sellers for incorrect representations made by the sellers.

We conclude from this information that Applicant, or its parent company, has the financial resources to pay a fine in the range normally applied by the Commission for violations of Section 854 (a). We will weigh this information accordingly when setting the amount of the fine.

Criterion 4: Totality of the Circumstances

In D.98-12-075, the Commission held that a fine should be tailored to the unique facts of each case. In order to do so, the Commission indicated that the following factors should be considered:¹³

The degree of wrongdoing: The Commission will review facts that tend to mitigate the degree of wrongdoing as well as facts that exacerbate the wrongdoing.

The public interest: In all cases, the harm will be evaluated from the perspective of the public interest.

Some of the facts of this case indicate that the degree of wrongdoing, though serious, was not egregious. In particular, there is no evidence that anyone was seriously harmed by the Applicant's violation of Section 854(a) or

that Applicant materially benefited from their unlawful conduct. These same facts also indicate that the public interest was not seriously harmed by the Applicant's unlawful conduct. However, competitive telecommunications carriers and their customers were adversely impacted by Applicant's failure to report and pay its fair share of user fees.

Criterion 5: The Role of Precedent

In D.98-12-075, the Commission held that any decision which imposes a fine should (1) address previous decisions that involve reasonably comparable factual circumstances, and (2) explain any substantial differences in outcome.¹⁴

In D.00-09-035, we held that our precedent of meting out lenient treatment to those who violate Section 854(a) had failed to deter additional violations; and we indicated that henceforth we would impose fines in order to deter future violations of Section 854(a). The facts of this proceeding, except for Applicant's failure to report and pay user fees, are reasonably comparable to prior Commission decisions that imposed fines of $5,000 for violations of Section 854(a).¹⁵ This suggests that it would be appropriate to impose a similar fine.

We conclude that although the instant proceeding is factually distinguishable from Commission precedent in one respect (failure to report and pay user fees), the imposition of a $5,000 fine in the current proceeding is generally consistent with precedent.

Conclusion: Setting the Fine

We conclude based on the facts of this case that the Applicant should be fined $5,000 for violating Section 854(a). The fine we impose today is meant to deter future violations Section 854(a) by the Applicant and others. We emphasize that the size of the fine we impose today is tailored to the unique facts and circumstances before us in this proceeding. We may impose larger fines in other proceedings if the facts so warrant.