5. Discussion
5.1. Whether to Approve the Application
Pub. Util. Code § 854(a) states that no person or corporation shall acquire control of any public utility organized and doing business in this state without first securing authorization to do so from the Commission, and any such acquisition without that prior authorization shall be void and of no effect.7
The Commission has broad discretion to determine if it is in the public interest to authorize a transaction pursuant to § 854(a).8 The primary standard used by the Commission to determine if a transaction should be authorized under § 854(a) is whether the transaction will adversely affect the public interest.9 The Commission may also consider if the transaction will serve the public interest.10 Where necessary and appropriate, the Commission may attach conditions to a transaction in order to protect and promote the public interest.11
In a situation where a company that does not possess a CPCN desires to acquire control of a company that does possess a CPCN, we apply the same requirements as in the case of an applicant seeking a CPCN to exercise the type of authority held by the company being acquired. Since Telenational possesses a CPCN to provide resold intra- and inter-Local Access and Transport Area services within California, we will apply the requirements for such authority to Rapid Link.
The Commission has established two major criteria for determining whether a CPCN should be granted. An applicant who desires to resell local exchange services and/or interexchange services must demonstrate that it has a minimum of $25,000 in cash or cash equivalent, reasonably liquid and readily available to show minimum financial viability. In addition, the applicant is required to make a reasonable showing of technical expertise in telecommunications or a related business.
Applicants provided a copy of audited consolidated financial statements from Rapid Link and its affiliated companies that demonstrate that Rapid Link controls sufficient resources to meet our financial requirements. However, the financial statements provided were consolidated for the corporate family and it appears Telenational may be in a better financial position than Rapid Link or one or more of the affiliates.
Background information provided by Applicants on Rapid Link's management is sufficient to satisfy our requirement for technical expertise. Applicants also represented that no one associated with or employed by Rapid Link as an affiliate, officer, director, partner, or owner of more than 10% of Applicants was previously associated with any telecommunication carrier that filed for bankruptcy, or has been found either civilly or criminally liable by a court of appropriate jurisdiction for a violation of § 17000, et seq. of the California Business and Professions Code, or for any actions which involved misrepresentations to consumers, nor is currently under investigation for similar violations. We found no evidence to the contrary. Based on this record, we find that Rapid Link meets the minimum criteria for a CPCN to be granted for purposes of approving the transfer of ownership.
In addition to satisfying the above requirements, there were no changes to Telenational's rates, terms or conditions of service as a result of the transaction. Thus, Telenational's customers and the public were not harmed by the transfer of control. The public may benefit from the transfer of control to the extent the transaction enhances Telenational's ability to offer other communications services to its customers such as VoIP. Also, there were no protests to the application.
For all of the above reasons, we find that the transaction is not adverse to the public interest, and conclude that it is reasonable to grant the application to the extent it requests prospective authority under § 854(a) for the transfer of control of Telenational. However, we have some concern about Telenational maintaining adequate capital to fulfill all of its public utility service obligations. The Declaration disclosed that there are affiliate transactions between Telenational and the Rapid Link companies. We are also concerned about several instances where Telenational did not timely or completely file compliance reports in California and other states. Based on the total facts and circumstances presented, we approve the transfer of ownership of Telenational from Apex to Rapid Link but caution that Rapid Link and its affiliates should take no action that would impair Telenational's ability to fulfill its public utility obligation to serve or operate in a prudent and efficient manner. Therefore, we will require Telenational to submit to the Commission, along with the 2009 and 2010 Annual Report, a summary of all transactions between Telenational and Rapid Link, and/or its other affiliates during the same period covered by the Annual Reports, including inter-affiliate loans and cash transfers.
The purpose of § 854(a) is to enable the Commission to review a proposed acquisition before it takes place in order to take such action as the public interest may require.12 Granting the application on a retroactive basis would thwart the purpose of § 854(a). Therefore, we deny it to the extent it requests retroactive authority under § 854(a) for the transfer of control. Since we do not grant retroactive authority, the transfer of control is void under § 854(a) for the period of time prior to the effective date of this decision. The applicants are at risk for any adverse consequences that may result from having implemented the transfer of control without Commission authority.
5.2. Whether to Impose a Fine
for a Violation of Section 854(a)
Applicants failed to comply with § 854(a) by effectuating the transfer of control without Commission authorization. Violations of § 854(a) are subject to monetary penalties under § 2107 which states that any public utility which violates or fails to comply with any provision of the Constitution of this state, 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, nor more than twenty thousand dollars for each offense.
For the following reasons, we conclude that Telenational should be fined for its failure to comply with § 854(a).13 First, any violation of § 854(a), regardless of the circumstances, is a serious offense that should be subject to fines. Second, the imposition of a fine will help to deter future violations of § 854(a) by Telenational and others.
To determine the size of the fine, we shall rely on the criteria adopted by the Commission in D.98-12-075 as discussed below.
5.2.1. 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:14
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 large number of consumers is a more severe offense than one that is limited in scope.
Applicants' violation of § 854(a) did not cause any physical or economic harm to others. In addition, there is no evidence that Applicants significantly benefited from their unlawful conduct, or that their actions adversely affected consumers. The only factor that indicates the violation should be considered a serious offense is our general policy of according a high level of severity to any violation of the Pub. Util. Code. However, this factor must be weighed against the other factors indicating that Applicants' failure to comply with § 854(a) was not an egregious offense.
In D.98-12-075, the Commission held that the size of a fine should reflect the conduct of the utility. When assessing the conduct of the utility, the Commission stated that it would consider the following factors:15
The Utility's Action 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.
Applicants did not take reasonable steps to comply with § 854(a) because they did not file this application before the transaction took effect. They did not allow for the customary 30-day comment period on the application, or for any comments on a draft order before the transfer of control took effect. Applicants should have given the Commission prior notice by filing the application prior to implementation of the transaction. This would have allowed the Commission to consider the transaction on an expedited basis prior to its execution.
Applicants represent that they did not intend to violate § 854(a), and that the violation was the result of ignorance of the law by management and their counsel. We are not persuaded the mistake was wholly inadvertent. In September 2001, Apex and Telenational filed a joint application to the Nebraska Public Service Commission16 seeking authority to transfer ownership and control of Telenational to Apex. Thus, Telenational knew that a change of ownership was the type of activity that could require approval by state regulatory authorities when it chose not to file a similar application in California, or any state that we could identify, four years later upon the occurrence of another change of ownership. Moreover, after the Agreement was executed and the transfer occurred, Telenational filed two annual reports with the Commission, for 2006 and for 2007, in which it failed to identify any affiliated companies, instead marking "N/A."
Applicants explain Telenational's failure to previously apply for a CPCN and to disclose affiliated entities in its 2006 and 2007 annual reports as a result of mistakes by an outside firm hired for regulatory compliance. However, we note that Christopher Canfield signed the erroneous 2007 annual report for Telenational while he was CEO of Rapid Link in April 2008. Furthermore, the Joint Application was not filed until after Rapid Link submitted an application to the Commission for certain grant funds relating to broadband services and was advised its ownership of Telenational had not been approved.
Applicants are responsible for their actions, including the actions or inactions of persons in its employ. Applicants state they will take the necessary steps to ensure complete compliance in the future. In particular, Applicants hired a different contractor for regulatory compliance and have said they will provide more oversight to required filings. This is appropriate action. Since the application was ultimately filed, the violation is not an egregious offense and a smaller fine will be applied.
5.2.3. Financial Resources Available to Telenational
In D.98-12-075, the Commission held that the size of a fine should reflect the financial resources of the utility. When assessing the financial resources of the utility, the Commission stated that it would consider the following factors:17
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.
Applicants provided financial information for Rapid Link and its affiliates, including Telenational, under seal. We will weigh this information when setting the amount of the fine.
5.2.4. 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. When assessing the unique facts of each case, the Commission stated that it would consider the following factors:18
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.
Applicants represent that no one was harmed by the failure to comply with § 854(a) and Applicants do not appear to have materially benefited from their unlawful conduct. We have no evidence to the contrary and these facts indicate that the public interest was not significantly harmed by the violation of § 854(a). In setting the fine, we will consider the relatively small harm to the public interest from this violation.
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.19
In D.00-09-035, we held that our precedent of meting out lenient treatment to those who violate § 854(a) had failed to deter additional violations; and we indicated that henceforth we would impose fines in order to deter future violations of § 854(a). In both D.04-01-039 and D.06-01-003, the Commission fined telecommunications carriers $500 for failure to obtain advance approval under § 854(a) for transfers of control. In this proceeding, Applicants' balance sheets and profit and loss statements show that their combined revenues, assets and equities are not far different from those of the of the Applicants in above cases. Therefore, based on a higher degree of carelessness in failing to file timely, we will impose a fine of $1000.
We conclude, based on the facts of this case, that Telenational should be fined $1000 for violating § 854(a). The fine is meant to deter future violations of § 854(a) by Applicants and others. 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 or smaller fines in other proceedings if the facts so warrant.
7 All references are to the Public Utilities Code unless otherwise specified.
8 D.95-10-045.
9 D.00-06-079.
10 D.00-06-005.
11 D.02-12-068.
12 D.99-02-061.
13 Since Telenational is the regulated entity, and a wholly-owned subsidiary of Rapid Link, the fine will be imposed on Telenational.
14 1998 Cal. PUC LEXIS 1016 at 71-73.
15 1998 Cal. PUC LEXIS 1016, *73-*75.
16 2001 Neb. PUC LEXIS 296 (October 16, 2001).
17 1998 Cal. PUC LEXIS 1016 at 75-76.
18 1998 Cal. PUC LEXIS 1016 at 76.
19 1998 Cal. PUC LEXIS 1016 at 77.
