Limitation of Liability

Once carriers' competitive services are detariffed, under Section 495.7(h)⁶³ providers would no longer be afforded a Commission-sanctioned limitation of liability for those services. This would have both disadvantages and advantages. Among the disadvantages, it might encourage litigation; put upward pressure on competitive service rates; and put additional stress on marginal competitive providers, perhaps even causing some to exit from the market. Staff and some commenters point out that the largest customers stand to benefit most from discontinuing the limitation on liability because they tend to take more complex and expensive services and have better access to the court system to pursue damage awards. Smaller customers, who in the aggregate provide the bulk of the competitive providers' revenue, face significant barriers in pursuing their court remedies. Another drawback is that competitive local reseller carriers could in some cases be subject to liability for problems caused by underlying facilities-based carriers.

However, the advantages of eliminating the limitation of liability for competitive services outweigh the disadvantages. The Commission's limitation of liability provision has historically been intended to protect both carriers and their ratepayers from excessive liability risks and thus ensure the availability and affordability of utility services. This is less relevant in today's more competitive market environment where there are multiple providers and rates are not necessarily based on cost of service. Eliminating the Commission-sanctioned limitation on liability would motivate carriers to exercise greater care in providing service;⁶⁴ stop shifting consequences of utility negligence to injured parties and society at large; allow greater consumer access to legal remedies; align the system for competitive telecommunications services with the general practice for addressing commercial liability; remove an incentive for IECs to choose tariffs over detariffing; and generally reduce distortions caused by liability limitations in an increasingly competitive marketplace.

On balance, we believe a Commission-sanctioned limitation of liability for competitive services is no longer in the public interest. With rates now decoupled from costs of service, the primary historic benefit of limited liability - lower rates - has largely evaporated, and there is little justification for treating competitive service providers differently from, e.g., Internet service providers, cable companies, or any other non-Commission regulated competitive business. Competitive carriers who want to control their liability risks may still do so in other ways. They may, for example, carry liability insurance, maintain high service levels, and/or include commercially reasonable limitations in their customer contracts.

Non-competitive services, in contrast, will retain the Commission-sanctioned limitation of liability and its attendant lower costs, which benefit ratepayers. Even without a Commission-sanctioned limitation of liability, carriers will be free to follow standard commercial practices by establishing contractual limitations for their non-tariffed services. Consumers, who have very limited recourse today when they seek damages, would be able to pursue their claims in court, including in small claims court where appropriate.

As we have indicated, we will not detariff all fully competitive services at this time. However, after weighing parties' comments and the staff's analysis, we have decided to configure our limitation of liability rule largely as though we had. A Commission-sanctioned limitation will apply to those services not designated as competitive services in the Definitions section, i.e., to all GRC-LEC tariffed services, and the NRF-LECs' Category I tariffed services. We stress that the distinction between limited liability and no limited liability is to be made on a service-by-service rather than a carrier by carrier basis. Thus, NRF-LECs will have their liability limited for claims arising from non-competitive tariffed services, but not for claims arising from competitive services.

Following this policy, we would prefer the CMRS carriers' services, being fully competitive and entirely free from rate regulation, have no Commission-sanctioned limitation of liability. CMRS providers, however, argue that federal law⁶⁵ grants them the same limitation of liability as LECs. Our staff and some other parties differ on this point, reading P.L. 106-81 as pertaining to CMRS liability arising from the provision of 911 services only.⁶⁶ However, even if P.L. 106-81 is relevant here, it does not define which of the differing liability levels for LECs is to be the reference. Under our policy, LECs will have no Commission-sanctioned limitation for their Category II and Category III services which most closely parallel the CMRS carriers' service offerings. Is this to be P.L. 106-81's CMRS-to-LEC equivalency standard? This is a determination we need not make. Nothing in the law, federal or state, requires the Commission to affirmatively assert a limitation of liability for CMRS carriers' services. If such a limitation is to be, it will arise from P.L. 106-81's operation on the limitation afforded to LECs, not from a finding by this Commission that such a limitation is warranted for CMRS. The courts, not the Commission, adjudicate claims for damages. Now that we have established our limitation of liability policy for LECs, if and when claims for damages arise against CMRS providers, it will be the courts that the CMRS carriers will have to persuade.

Our new policy addresses a major concern staff expressed in its report:

In compliance with PU Code 495.7, the Commission, by D.98-08-031 established procedures to detariff services based upon an IEC carrier's request. The result is divergent application of the limitation of liability within a class of carrier for which the Commission no longer establishes rates, based solely upon filing of tariffs. Thus, an incentive exists for IECs to continue to file tariffs with the Commission in order to maintain the limitation of liability.

Since tariffed, competitive services will no longer enjoy a Commission-sanctioned limitation of liability, the incentive to file tariffs to obtain liability protection will disappear.

The effect of our new policy is that limitation of liability provisions in carriers' tariffs for non-competitive services will remain in effect. Non-tariffed services, which pursuant to Part 2, Rule 3(d) may be offered only on a contract basis, henceforth will have no Commission-sanctioned limitation of liability. Carriers may include reasonable commercial limitation of liability provisions for non-tariffed competitive services in their contracts with consumers. To the extent that carriers have limitation of liability provisions for competitive services in their tariffs, they will now be required to conform those tariffs to this order.

Several commenters representing carriers requested we hold evidentiary hearings on limitation of liability, saying they would introduce evidence to prove the very great impact loss of a Commission-sanctioned limitation would have on carriers. Their argument is based on increased liability causing increased risk of litigation, which would generate higher legal costs, damages and other costs, potentially leading to higher rates and for some carriers, inability to remain in business. We have recognized both the advantages and disadvantages of eliminating limitation of liability and have taken these potential impacts into account. Removal of the Commission-sanctioned limitation will be limited to competitive services, so the loss of some carriers would be taken up by others. Even if we were to assume that removal of the Commission-sanctioned limitation of liability for competitive services would increase the carriers' exposure to lawsuits, damage awards and legal and other costs, and those increased costs were to be borne through some combination of higher rates and lower profits, and even if we were further to assume the result to be that some carriers would be less viable (perhaps even to the extent of exiting), it would not change the outcome here. All businesses face risks, including risks of litigation. Most incorporate the resulting costs into their rates and profits (or losses) rather than externalizing them as is currently the case for the regulated competitive carriers. That is the nature of competition. Thus, even assuming the carriers were able to prove the effects they claim, it would not affect our conclusion. The evidentiary hearings carriers request would serve no purpose and are not needed.