Sanctions

In D.98-12-075, the Commission developed principles that it would consider in setting the appropriate fine to impose in the enforcement of affiliate transaction rules. The principles developed in D.98-12-075 distill numerous Commission decisions concerning fines in a wide range of cases. Thus, we look to these principles in determining an appropriate fine.

Reparations should be distinguished from fines. Reparations are not fines and conceptually should not be included in setting the amount of a fine. Reparations are refunds of excessive or discriminatory amounts collected by a public utility. (Section 734.) The purpose of reparations is to return unlawfully collected funds to the victim. Accordingly, the statute requires that all reparation amounts be paid to the victims. The record developed in this proceeding indicates that consumers who may have been crammed or slammed by Accutel have received credits and been made financially whole. Thus, the record does not support the need for further reparations.

The purpose of a fine is to go beyond reparation to the victim and to effectively deter further violations by this perpetrator or others. For this reason, fines are paid to the State of California, rather than to victims.

Effective deterrence creates an incentive for public utilities to avoid violations. Deterrence is particularly important for violations which could result in public harm. The two general factors used by the Commission in setting fines are (1) severity of the offense and (2) conduct of the utility. Fines should be set in proportion to the violation.

The severity of the offense includes several considerations. Economic harm reflects the expense that was imposed upon the victims as well as any unlawful benefits gained by the public utility. Generally, the greater of these two amounts will be used in establishing the fine. Compliance with Commission directives is required of all California public utilities:

"Every public utility shall obey and comply with every order, decision, direction, or rule made or prescribed by the commission in the matters specified in this part, or any other matter in any way relating to or affecting its business as a public utility, and shall do everything necessary or proper to secure compliance therewith by all of its officers, agents, and employees." (Section 702.)

Such compliance is absolutely necessary to the proper functioning of the regulatory process. For this reason, disregarding a statutory or Commission directive, regardless of the effects on the public, is considered a severe offense.

D.98-12-075 also stated that the number of the violations is a factor in determining the severity. A series of temporally distinct violations can suggest an on-going compliance deficiency that the public utility should have addressed after the first instance. Similarly, a widespread violation that affects a large number of consumers is a more severe offense than one that is limited in scope. For a "continuing offense," § 2108 counts each day as a separate offense.

D.98-12-075 also recognizes the important role of the public utility's conduct in (1) preventing the violation, (2) detecting the violation, and (3) disclosing and rectifying the violation. The public utility is responsible for the acts of all its officers, agents, and employees:

"In construing and enforcing the provisions of this part relating to penalties, the act, omission, or failure of any officer, agent, or employee of any public utility, acting within the scope of his [or her] official duties or employment, shall in every case be the act, omission, or failure of such public utility." (Section 2109.)

D.98-12-075 also weighs the utility's actions to prevent a violation. Prudent practice requires that all public utilities take reasonable steps to ensure compliance with Commission directives. This includes becoming familiar with applicable laws and regulations, and most critically, reviewing its own operations regularly to ensure full compliance. In evaluating the utility's efforts to ensure compliance, the Commission will consider the utility's past record of compliance with Commission directives.

The utility's actions to detect a violation are also a factor. The Commission expects public utilities to diligently monitor their activities. Where utilities for whatever reason failed to meet this standard, the Commission will continue to hold the utility responsible for its actions. Deliberate, as opposed to inadvertent, wrongdoing will be considered an aggravating factor. The Commission will also look at management's conduct during the period in which the violation occurred to ascertain the level and extent of involvement in or tolerance of the offense by management personnel.

Prompt reporting of violations furthers the public interest by allowing for expeditious correction. For this reason, steps taken by a public utility to promptly and cooperatively report and correct violations may be considered in assessing any fine.

The financial resources of the utility are another factor. Effective deterrence also requires that the Commission recognize the financial resources of the public utility in setting a fine that balances the need for deterrence with the constitutional limitations on excessive fines. Some California utilities are among the largest corporations in the United States and others are extremely modest, one-person operations. The Commission intends to adjust fine levels to achieve the objective of deterrence, without becoming excessive, based on each utility's financial resources.

The Commission will also apply a totality of the circumstances test in furtherance of the public interest. Setting a fine at a level that effectively deters further unlawful conduct by the subject utility and others requires that the Commission specifically tailor the package of sanctions, including any fine, to the unique facts of the case. The Commission will review facts that tend to mitigate the degree of wrongdoing as well as any facts that exacerbate the wrongdoing. In all cases, the harm will be evaluated from the perspective of the public interest.

We now apply these principles to the case at bar. Accutel has violated § 451 by placing on consumers' phone bills a monthly charge for a calling card not authorized by consumers. As discussed below, we will assess a fine of $760,000.

Pursuant to § 2107, CSD asserts that we could assess a fine between $500 and $20,000 per violation. However, following CSD's recommended protocol would result in a total fine between $22 million and $880 million.¹³ CSD cites no Commission decision resulting in such a large fine for a carrier having a similar number of customers (roughly 45,000 to 55,000 customers). Although, the Commission could in theory construe § 2107 in the manner proposed by CSD, in similar situations the Commission has instead relied on the number of days the offense has continued.

Recently, in Investigation (I.) 98-08-004, into the operations, practices, and conduct of Coral Communications, Inc. et.al., (Coral), we issued D.01-04-035, which addressed among other things penalties for cramming. In D.01-04-035, we applied the principles enunciated in D.98-12-075 for setting a fine for cramming violations; and we follow a similar approach here. In Coral, we first looked at the severity of the offense, which we defined as the amount wrongfully obtained. In the present case, although the record is unclear,¹⁴ we can reasonably estimate that customers were billed $4.95 for two to three months on average prior to correction of the problem. Consequently, the amount wrongfully obtained from consumers was in the range of $435,000 to $654,000.¹⁵ Second, concerning conduct, in Coral we found that the unauthorized billing was the intended result of a "calculatedly deceptive promotional campaign to enlist customers under the guise of a sweepstakes." The opposite is true in the present case. Accutel did not engage in a sweepstakes or otherwise market its services deceptively. Accutel has admitted that, in obtaining customer lists from other carriers who themselves had not obtained proper authorizations from all customers, it caused some consumers to be crammed or slammed. Accutel took steps to resolve these incidents; specifically, and most importantly, Accutel adopted a "no questions asked" policy concerning refunds to consumers for erroneous charges.

The next factor the Commission applied in Coral is the totality of the circumstances test in furtherance of the public interest. In Coral, we found:

"widespread brazen acts to bill California end use customers for unauthorized services and charges. The public interest requires strong deterrence of future schemes of this type. The fine level should be set accordingly high." (Id. mimeo at p.55)

In the present case, the record does not support a finding that Accutel intended to defraud consumers, as was the case in Coral. However, Accutel's actions do reflect some level of negligence. For example, Accutel could have taken more precautions to verify the validity of consumer lists. Consequently, the fine level should be set at a low to moderate level that takes into account Accutel's remedial efforts.

The final factor we addressed in Coral was whether the number of violations used in calculating the fine should equal the number of consumers affected or duration (in days) of the misleading promotional activity. We there noted that imposing a fine based on the number of customers affected (258,000) multiplied by the lower end of the statutory fine range ($500) would result in a fine of over a $100 million. We declined to use number of customers, and instead we based our calculation on the number of days the carrier was in wrongful operation. We then multiplied the number of days by $10,000, which resulted in a fine of $5.1 million. We also observed in Coral the prior precedent for suspending a portion of a fine.¹⁶

In the present case, the record is unclear as to the length of time cramming occurred. CSD has alleged that Accutel crammed consumers for a two-year period, January 1997 to January 1999, or 760 days.¹⁷ Applying the same approach as in Coral, we calculate a fine range between $380,000 (760 days x $500/day) and $15,200,000 (760 days x $20,000/day). In more recent cases, such as D.00-12-050, in which the operation, practices and conduct of Coleman Enterprises, Inc. (Coleman) were investigated, we adopted via settlement total fines of $800,000. Further, we suspended the fines for three years and thereafter vacate the fines absent a motion from CSD to lift the suspension for non-performance of the settlement agreement terms. In Coleman, approximately 9,000 consumers were affected compared to the 43,000 in the instant case.

Taking into account Accutel's negligent versus intentional misconduct, and the severity of the offense, we impose, pursuant to § 2107, a fine of $1,520,000 (760 days x $2,000/day). Further given Accutel's remedial efforts, we will suspend the fine by $760,000 subject to Accutel demonstrating compliance with laws, and Commission orders, rules and regulations for three years. CSD may move to end the suspension if Accutel violates a law or Commission order, rule or regulation. After three years of full compliance and upon motion by Accutel, we will vacate the fine.

Although Accutel's financial resources are not exactly known, the size of the fine we impose exceeds the amount wrongfully obtained from consumers. The fine is less than the fine we imposed in Coral which involved more egregious conduct but greater than the most recently adopted fines cited above.

We direct the Commission's General Counsel to take all reasonable steps to collect this fine. All fines collected will be deposited in the State's General Fund. In the event Accutel fails to pay the imposed fine within 30 days of the effective date of this decision, we direct the Executive Director to issue an order suspending Accutel's Certificate of Public Convenience and Necessity and to take all necessary steps to ensure that Accutel ceases doing business in California, including, but not limited to, directing all California local exchange carriers and billing agents to cease doing business with Accutel.

We also require Accutel to make a compliance filing, within 30 days of the effective date of this decision, with Telecommunications Division showing authority from the Secretary of State to do business in the State of California.

Finally, today's decision is narrowly tailored to resolve the issues set forth in the OII and is based on the specific facts developed at evidentiary hearing. Today's decision does not purport to resolve any issues concerning Accutel in other proceedings.