Limitation of Liability

The staff's report referenced in the OII proposed that fully competitive services be detariffed, and recognized that, under Section 495.7(h)⁸¹, 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 pointed 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 would be that competitive local reseller carriers could in some cases be subject to liability for problems caused by underlying facilities-based carriers.

However, there would also be advantages to eliminating the limitation of liability. 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 could motivate carriers to exercise greater care in providing service;⁸² 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. Consumer advocates observed in their comments that with rates for many services 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.

Staff's report stopped short of endorsing an end to the Commission-sanctioned limitation of liability, recommending instead that the Commission review whether it remains appropriate. It did endorse narrowing the limitation to protect carriers from negligence rather than from gross negligence as currently, and increasing the dollar limitations. The Assigned Commissioner's June 2002 draft decision's proposal to eliminate the Commission-sanctioned limitation for competitive services generated both strong support among consumer advocates and strong opposition from carriers. Carriers were particularly concerned that even though they would be allowed to follow standard commercial practices in establishing contractual limitations for their non-tariffed services, they would still be laid bare to claims for their tariffed competitive services, including basic exchange services.⁸³

We share staff's and the consumer advocates' concern that the Commission-sanctioned limitation of liability for competitive services may no longer be in the public interest, but we also acknowledge that the carriers raise legitimate questions that merit further consideration. Thus we will not narrow the limitation of liability today, but may consider the matter further in the next phase of this proceeding.