6. Discussion

A. Approval Pursuant to Section 854(a)

Application 04-05-034 is subject to Section 854(a), which states, in relevant part, as follows:

No person or corporation...shall merge, acquire, or control...any public utility...doing business in this state without first securing authorization to do so from the commission...Any merger, acquisition, or control without that prior authorization shall be void and of no effect.

The Commission has broad discretion to determine if a transaction should be authorized pursuant to Section 854(a). The primary standard used by the Commission is whether the transaction will adversely affect the public interest. The Commission may also consider if the transaction will serve the public interest. Where necessary and appropriate, the Commission may attach conditions to a transaction in order to protect and promote the public interest.⁶

The Commission uses several criteria to decide if a transaction should be authorized pursuant to Section 854(a). The first criterion concerns the nature and merit of any protests to the proposed transaction.⁷ There were no protests in this proceeding. Accordingly, this criterion has been met.

The second criterion is whether the person or entity acquiring a public utility has adequate financial resources to operate the utility. The specifics of this criterion vary depending on the circumstances of the acquirer and the utility being acquired. In this case, Dominion must demonstrate that it has (1) a minimum of $25,000 in cash or cash equivalent, and (2) sufficient additional financial resources to cover all deposits required by other telecommunications carriers in order to provide service in California.⁸ Dominion provided information that demonstrates it satisfies this criterion.

The third criterion is whether the person or entity acquiring a public utility has sufficient business and technical expertise to operate the utility.⁹ To satisfy this requirement, Dominion provided the following information regarding two of its key personnel:

Robert Sorrentino, President: Mr. Sorrentino has both managed and acted as a consultant to operator service providers, payphone providers, long-distance carriers, and local exchange carriers. His business experience in the telecommunications industry includes contract negotiation, network services, provisioning, back office support, billing and collections, customer support, data systems, and day-to-day operations.

Christine M. Stein, Secretary and Regulatory Director: Ms. Stein's business experience includes review and preparation of tax returns for corporations and partnerships. She also has experience in marketing, finance, and human resources.

The sufficiency of expertise may also be determined, in part, by whether anyone associated with the acquirer was previously connected with a company that filed for bankruptcy or went out of business.¹⁰ In this case, the owner of Dominion, Robert Sorrentino, previously owned Nationwide Telecom, Inc., a telecommunications carrier that went bankrupt. The Applicants assert that the bankruptcy was the result of a contractual dispute and not mismanagement. Our search of Lexis found no indication that ratepayers or other telecommunications carriers were harmed by the bankruptcy. Based on the information provided by the Applicants and our search of Lexis, we conclude that Dominion has sufficient expertise to operate RRLD proficiently.

The fourth criterion is whether the parties to the proposed transaction have complied with regulatory and statutory requirements in California and other jurisdictions.¹¹ The record of this proceeding reveals three instances of noncompliance. First, the FCC has granted three slamming complaints against RRLD.¹² Second, Nationwide Telecom, Inc., which was owed by Dominion's president, did not timely file its 1998 annual report at the Illinois Commerce Commission. Finally, this opinion finds, infra, that RRLD violated Section 854(a). We find these instances of noncompliance, while serious, do not warrant the denial of A.04-05-034.

The fifth criterion is whether the proposed transaction will adversely affect the provision of service to the public.¹³ The Applicants represent that the proposed transaction will not affect RRLD's rates, terms, or conditions of service. Based on this representation, we find that this criterion has been satisfied.

The final criterion is whether the transaction will benefit the public interest.¹⁴ We find that the public may benefit from the indirect transfer of control of RRLD to the extent the transaction enhances RRLD's ability to improve and expand its services in California. In addition, California derives substantial benefits from the services provided by nondominant utilities. Thus, it is in the public interest to foster a business climate in California that is hospitable to such utilities. Accordingly, ordinary business transactions by nondominant utilities that are subject to Section 854(a), like the transaction before us here, should be approved absent a compelling reason to the contrary. No such reason has been alleged or shown in this proceeding.

For all of the preceding reasons, we conclude that it is reasonable to grant A.04-05-034 to the extent it requests prospective authority under Section 854(a) for the indirect transfer of control of RLLD from David Butler and BSM to Dominion. However, we deny A.04-05-034 to the extent it requests retroactive authority for the transfer. The purpose of Section 854(a) is to enable the Commission to review a proposed transaction before it takes place in order to take such action as the public interest may require.¹⁵ Granting A.04-05-034 on a retroactive basis would thwart the purpose of Section 854(a). Since we do not grant retroactive authority, the transaction is void under Section 854(a) for the period of time prior to the effective date of this Opinion. The parties to the transaction are at risk for any adverse consequences that may result from their having implemented the transfer of control without Commission authorization.

B. Penalty for Violating Section 854(a)

The Applicants and Dominion¹⁶ violated Section 854(a) by transferring indirect control of RRLD without Commission authorization. Violations of Section 854(a) are subject to monetary penalties under Section 2107, which states, in relevant part, 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 . . . 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 RRLD - the public utility - should be fined for violating Section 854(a). First, it is vital that utilities comply with Section 854(a) so that the Commission may protect the public from harmful transactions. Any failure to comply with Section 854(a), regardless of the circumstances, is a serious offense that should be subject to fines. Second, imposing a fine will help to deter future violations of Section 854(a) by the Applicants 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.

i. 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 severity, the Commission stated that it would consider the following factors¹⁷:

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 Applicants' violation of Section 854(a), while serious, was not an especially egregious offense. This is because the violation was a single offense that did not cause, or threaten to cause, any physical or economic harm to others. In addition, there is no evidence that the Applicants significantly benefited from their unlawful conduct. 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.

ii. Conduct of the Utility

In D.98-12-075, the Commission held that the size of a fine should reflect the conduct of the utility. When assessing conduct, the Commission stated that it would consider the following factors¹⁸:

The Utility's Actions to Prevent a Violation: Utilities must 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.

The Applicants state that they signed the agreement to transfer indirect control of RRLD in April 2003. The Applicants maintain that they believed at the time that it would take two years to close the transaction and, therefore, they had ample time to obtain the necessary regulatory approvals. However, when the transaction closed sooner than expected, the Applicants state that they promptly applied for the necessary regulatory approvals. The Applicants submit that they did not wantonly of willfully ignore Section 854(a), but always intended to comply with the statute.

Two aspects of the Applicants' conduct suggest that a larger fine is warranted. First, the Applicants did not disclose their violation of Section 854(a) until asked by the assigned ALJ. This suggests that the Applicants intended to conceal their violation. Second, the Applicants did not take reasonable steps to comply with Section 854(a). In particular, the Applicants knew in April 2003 that they would have to obtain Section 854(a) approval for the transaction, but did not file their application for approval until May 2004. On the other hand, the Applicants did ultimately file A.04-05-034, which supports the Applicants' assertion that they did not wantonly or willfully ignore Section 854(a), but always intended to comply with the statute.

iii. Financial Resources Available to the Utility

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 resources¹⁹:

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.

The Applicants provided financial statements which show that RRLD, Visia, and Dominion had net income in 2003 of $559,844, $191,882, and $162,402, respectively. The Applicants also state that RRLD's intrastate revenues during 2001, 2002, and 2003 were $2,860, $29,426, and $11,468, respectively. In light of the relatively small size of the Applicants' net income and RRLD's operations in California, we conclude that a modest fine would be sufficient to deter the Applicants from further violations of the California Public Utilities Code.

iv. 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 considered²⁰:

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 harmed by the Applicants' violation of Section 854(a) or that the Applicants materially benefited from their unlawful conduct. These same facts also indicate that the public interest was not seriously harmed by the Applicants' unlawful conduct. On the other hand, the degree of wrongdoing was exacerbated by the Applicants' failure to disclose their violation.

v. The Role of Precedent

In D.98-12-075, the Commission held that any opinion which imposes a fine should (1) address previous opinions that involve reasonably comparable factual circumstances, and (2) explain any substantial differences in outcome.²¹

The facts of this case are reasonably comparable to prior opinions that imposed fines of $5,000 for violations of Section 854(a).²² Therefore, imposing a fine of $5,000 in the current proceeding would be consistent with precedent.

vi. Conclusion

We conclude that RRLD should be fined $5,000 for violating Section 854(a). This fine is meant to deter future violations of Section 854(a) by the Applicants and others. We emphasize that the size of the adopted fine is tailored to the unique facts and circumstances of this proceeding. We may impose larger fines in other proceedings if the facts so warrant.