IV. Discussion

A. Whether to Approve the Settlement

UCAN and Choctaw have tendered an "uncontested settlement" as defined in Rule 51(f) of the Commission's Rules of Practice and Procedure (Rule). The relevant criteria for determining if the Settlement should be approved are set forth in Rule 51.1(e), which states that a settlement must be "reasonable in light of the whole record, consistent with the law, and in the public interest." In addition, D.92-12-019⁸ provides that an all-party settlement should be approved only if the settlement satisfies all of the following criteria:

a. The all-party settlement commands the unanimous sponsorship of all active parties to the proceeding.

b. The sponsoring parties are fairly reflective of the affected interests.

c. No term of the settlement contravenes statutory provisions or prior Commission decisions.

d. The settlement conveys to the Commission sufficient information to permit it to discharge its future regulatory obligations with respect to the parties and their interests.

UCAN and Choctaw state that their Settlement conforms to all of the above criteria. We agree with one exception. The one exception concerns UCAN's allegation that Choctaw has not offered MRS to all of its customers as required by D.96-10-066. Choctaw admits that it does not offer MRS to all of its customers, but asserts that it is not required to. The Settlement resolves this issue by urging the Commission to open a generic investigation into whether and how prepaid providers of local service should comply with D.96-10-066.

We find that the Settlement's resolution of the MRS issue contravenes D.96-10-066, which clearly requires Choctaw to offer MRS to all of its residential customers.⁹ Thus, Choctaw's failure to offer MRS to all of its customers is a violation of D.96-10-066, and the Settlement allows the violation to continue. Therefore, we will modify the Settlement¹⁰ to require Choctaw to file an advice letter to revise its tariffs to offer MRS to all of its customers.¹¹ Choctaw shall file the advice letter no later than 30 days from the effective date of this decision.¹² Pursuant to D.97-07-028, the advice letter shall become effective 40 days after it is filed.¹³ Choctaw may also file an application for a waiver of its obligation to offer MRS.¹⁴ Our suggestion that Choctaw may file such an application in no way prejudges our decision on the application.

B. Whether to Penalize Choctaw for Its Failure to Comply with D.96-10-066

Choctaw has failed to offer MRS in violation of D.96-10-066. Violations of Commission decisions are subject to monetary penalties under § 2107 and § 2108, which state as follows:

§ 2107: 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, in a case in which a penalty has not otherwise been provided, is subject to a penalty of not less than five hundred dollars ($500), nor more than twenty thousand dollars ($20,000) for each offense.

2108: Every violation of the provisions of this part or of any part of any order, decision, decree, rule, direction, demand, or requirement of the commission, by any corporation or person is a separate and distinct offense, and in case of a continuing violation each day's continuance thereof shall be a separate and distinct offense.

For the following reasons, we conclude that Choctaw should be fined for its failure to comply with D.96-10-066. First, any violation of Commission decisions, 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 Commission decisions by Choctaw and others.

To determine the size of the fine, we shall rely on the criteria adopted by the Commission in D.98-12-075. We address these criteria below.

Criterion 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:¹⁵

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. For a "continuing violation," § 2108 counts each day as a separate offense.

We find that Choctaw's violation of D.96-10-066, while serious, is not an especially egregious offense. This is because the violation has not caused any physical or economic harm to others, including Choctaw's customers. In addition, there is no evidence that Choctaw has significantly benefited from its unlawful conduct.

We recognize that there are two factors that suggest a large fine may be warranted. The first is our general policy of according a high level of severity to any violation of Commission decisions. The second is § 2108, which counts each day of a continuing violation as a separate offense. Here, every day that Choctaw failed to offer MRS could be considered as a separate offense subject to fine of at least $500 pursuant to § 2107 and § 2108. However, these two factors must be weighed against other factors that indicate Choctaw's failure to offer MRS is not an especially severe offense.

Criterion 2: 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 the conduct of the utility, the Commission stated that it would consider the following factors:¹⁶

The Utility's Actions 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.

As described previously, a smaller fine may be warranted if a utility promptly brings a violation to the Commission's attention. Choctaw argues that the following statement in its application for a CPCN and its tariff provided notice that Choctaw would not be offering MRS:

The following types of calls and services may be blocked by the Company: long distance; collect calls; operator-assisted calls; third number billed calls; or any service that may be billed to the Customer's telephone number.

There is nothing in the above statement that provides explicit notice that Choctaw would not be offering MRS as required by D.96-10-066. Nor can the above statement be reasonably interpreted as providing notice that Choctaw would not be offering MRS.

Choctaw argues that the Commission should have known that Choctaw was not offering MRS, since there is no mention of MRS in Choctaw's tariffs (except in the context of ULTS). We disagree. While we wish we had discovered the omission of MRS from Choctaw's tariffs, the onus is not on the Commission to discover what Choctaw has chosen to omit. Rather, it is Choctaw's duty to inform the Commission when its tariffs omit MRS in contravention of a Commission decision.

Choctaw also states that the Commission approved Choctaw's tariff in D.98-07-028, Finding of Fact (FOF) 15, which states as follows:

As part of its application, applicant submitted a draft of its initial tariff which complied with the requirements established by the Commission.

Choctaw argues that because the Commission approved Choctaw' tariff in D.98-07-028, the Commission cannot penalize Choctaw for having adhered to its approved tariff. We disagree. FOF 15 is clearly erroneous, since Choctaw's tariffs did not comply with the requirements established by the Commission. Indeed, Choctaw bears much of responsibility for FOF 15 being erroneous, since Choctaw failed to disclose that its tariffs did not comply with Commission requirements. It would be unjust and unreasonable if Choctaw were protected from the consequences of its unlawful conduct by an erroneous finding of fact that Choctaw helped to create.

For the preceding reasons, we conclude that Choctaw failed to notify the Commission of its violation, which suggests that a large fine may be appropriate. However, Choctaw's other conduct weighs in favor of a smaller fine. First, there is no evidence that Choctaw previously failed to comply with applicable statutes and regulations. Second, Choctaw readily admits that it has not provided MRS. Finally, as discussed in more detail elsewhere in this decision, Choctaw presented plausible arguments why it reasonably believed that it could not feasibly offer MRS as required by D.96-10-066.

Criterion 3: Financial Resources of the Utility

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.

Choctaw's 1999 Annual Report filed at the Commission shows that for the 12-month period ending December 31, 1999, Choctaw had revenues of $207,900 and a net loss of $49,205. These figures suggest that a relatively small fine could effectively deter Choctaw from future violations of Commission decisions. However, the previously mentioned figures are for California only. Choctaw operates in several states,¹⁸ and its total revenues may be much higher. Furthermore, Choctaw is but one of the many subsidiaries of Telephone Electronic Corporation (TEC).¹⁹ Therefore, since Choctaw's California operations appear to be only a piece of a much larger business enterprise, a relatively large fine may be necessary to deter Choctaw from future violations of Commission decisions.

Criterion 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:²⁰

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.

The facts of this case indicate that the degree of wrongdoing is not severe, and that the public interest has not been seriously harmed by Choctaw's failure to offer MRS as required by D.96-10-066. This is because there is no evidence that Choctaw has materially benefited from its unlawful conduct, or that any party has been harmed by Choctaw's conduct.

The facts of this case also indicate that Choctaw's failure to offer MRS is not due to a wanton disregard for D.96-10-066. Rather, Choctaw has presented a plausible explanation for why it reasonably believes it cannot not offer MRS. According to Choctaw, the ILECs whose services are resold by Choctaw do not offer prepaid MRS. Consequently, there is no prepaid MRS for Choctaw to resell to its customers. In addition, Choctaw says it cannot offer MRS on a postpaid basis, since many of its customers will not pay for MRS after the fact because they are credit challenged or take service for only a short period of time.

Although Choctaw's explanation for why it has not offered MRS is plausible, we are not convinced.²¹ In our view, Choctaw could offer MRS and protect itself by charging a service deposit. Customers who do not pay their bill for MRS would forfeit their deposit.²² Chcotaw could also adjust its price for MRS to reflect bad debt costs associated with the service. While there might be few customers for MRS because of the relatively high price that Choctaw may have to charge to adequately protect itself, this should not be an impediment to Choctaw's offering MRS as required by D.96-10-066.

Criterion 5: The Role of Precedent

In D.98-12-075, the Commission held that any decision that imposes a fine should (1) address previous decisions that involve reasonably comparable factual circumstances, and (2) explain any substantial differences in outcome.²³

There are no previous Commission decisions that involve reasonably comparable factual circumstances. However, there is a body of Commission precedent that bears on an issue relevant to this proceeding, namely, whether the Commission is required by § 2108 to impose a fine for each day of a "continuing violation." Here, Choctaw's failure to offer MRS could be considered as a "continuing violation" subject to fine of at least $500 per day pursuant to § 2108.

In general, Commission precedent indicates that where there is a continuing violation, the Commission has discretion in deciding whether to assess a fine for each day of the violation. For example, in D.99-08-007 the Commission held that while it could find a continuing violation and assess additional fines pursuant to § 2108, the Commission is not required to do so:

"[W]hile we could find a continuing violation, and assess additional fines, we will use our discretion to assess a penalty of $ 8,000.00 for one offense -- the failure to seek approval for the transfer of the pipeline and related assets prior to the finalization of the sale. (See, e.g., TURN v. Pacific Bell, wherein we held that the Commission has `the discretion to set an appropriate penalty or to compromise an action for collection of the penalty.' (D.94-04-057, 54 CPUC2d 122, 124 (1994).)²⁴"

In D.99-11-044, the Commission declined to apply § 2108, since the minimum fine of $500 per day would result in a cumulative fine so large as to threaten the ability of the utility to provide service.²⁵ Other decisions where the Commission declined to assess a fine for each day of a continuing violation include the following: D.99-06-080, D.97-06-105, D.97-04-037, D.96-08-044, D.95-01-044, D.94-09-069, D.94-01-045, D.94-01-044, and D.93-03-073.

Conclusion: Setting the Fine

We previously concluded that Choctaw should be fined for its failure to provide MRS as required by D.96-10-066. The application of the criteria established by D.98-12-075 to the facts of this case indicates that a relatively small fine is warranted. In particular, Choctaw's violation of D.96-10-066 was not a particularly severe offense, since Choctaw's conduct was not egregious and the public interest was not significantly harmed by the Choctaw's unlawful conduct.

Although we have authority to assess a fine for each day that Choctaw failed to offer MRS, we decline to do so, since this would result in a large fine that would be grossly disproportionate to the offense.²⁶ We conclude based on the facts of this case that Choctaw should be fined $5,000 for not offering MRS to all of is customers as required by D.96-10-066. The fine we impose today is meant to deter future violations of Commission decisions by Choctaw and others. We emphasize that the size of the fine we adopt today is tailored to the unique facts before us in this proceeding. We may impose larger fines in other proceedings if the facts so warrant.