Little Purpose Would Be Served by Imposing Penalties on Cox and Pacific at This Time

In the PD that was mailed to the parties on August 21, 2001, the assigned ALJ concluded that based on the declarations submitted by Cox and Pacific in connection with the TRO motion, it was appropriate to open a new phase of this proceeding to determine whether any penalties should be imposed on the two carriers.

Although he noted that neither Cox nor Pacific had yet had an opportunity to present any defenses (because of the settlement of June 8, 2000), the ALJ pointed out that the declarations suggested several violations of law had occurred. In Pacific's case, the ALJ concluded that the decision to resume distribution of the tainted directories on May 31, 2000 appeared to violate Pacific's duties under Sections 2891.1(a) and 451 of the Public Utilities Code, as well as several Commission decisions. Section 2891.1(a) provides that "a telephone corporation selling or licensing lists of residential subscribers shall not include the telephone number of any subscriber assigned an unlisted or unpublished access number." Section 451 requires public utilities to provide "such adequate, efficient, just and reasonable service" as is necessary to promote the "safety, health, comfort and convenience" of the utility's customers and the public. The PD concluded that the violation of § 2891.1(a) appeared clear-cut, and that there had been an apparent violation of § 451 because the decision to resume distribution on May 31 imperiled the safety of law enforcement personnel, judges and other persons who had requested unlisted numbers.

As for Commission decisions, the PD pointed out that under D.92860, 5 CPUC2d 745 (1981), all residential telephone customers who pay the appropriate fee are entitled to "nonpublished" (which includes unlisted) service. Moreover, under D.96-10-066, 68 CPUC2d 524, 673 (1996), both incumbent local exchange carriers (ILECs) such as Pacific and CLECs such as Cox are required to provide their customers with a "free white pages telephone directory." The PD concluded that under these decisions, Pacific was obliged to omit from the directory it provided to Cox customers (pursuant to its interconnection agreement with Cox) the names of those customers who had requested unlisted or nonpublished service. The PD also concluded that under Section 2107 of the Public Utilities Code, the Commission was authorized to impose fines on Pacific for the apparent violations of these Commission decisions.

In Cox's case, the analysis was less complex. The PD concluded that because of Cox's apparent negligence in transmitting customer listing data to Pacific, and because of Cox's failure to discover these errors for nearly nine months, it was appropriate to consider whether fines should be imposed pursuant to § 2107 on the ground that Cox had "neglect[ed] to comply" with a relevant order, decision, rule or requirement of the Commission.

In their September 10, 2001 comments on the PD, both Pacific and Cox argue strongly that no penalties should be imposed on account of their actions regarding the tainted directories. Pacific bases its argument largely on legal analysis. With respect to § 2891.1(a), Pacific maintains that the provision is inapplicable because (1) in resuming distribution of the tainted directories, Pacific was not engaged in the sale or licensing of residential subscriber lists; and (2) in any event, legislative history shows that the requirements of § 2891.1(a) were intended to apply only to lists of the ILEC's own residential subscribers. With respect to § 451, Pacific argues that no violation has occurred because § 451 incorporates a "reasonableness" standard, and the record shows that Pacific reasonably balanced the competing factors it was required to consider when it made the decision on May 31 to resume distribution. (Pacific Comments, pp. 6-13.)

Unlike Pacific, Cox bases its arguments against a penalty phase on policy grounds. In addition to pointing out that it is not aware of any customers who "suffered any physical harm to their person or property as a result of the erroneous publication," Cox states:

"Regulatory penalties generally serve to punish past behavior, deter future behavior or both. In this case, [Cox and Pacific] have been punished enough as a result of the extraordinary business costs associated with the inadvertent publication of Cox's customers' private directory listings. The direct costs Cox has incurred as a result of this event alone exceed $13 million. Furthermore, there is no need for the Commission to act to deter a similar event from happening in the future. Since the inadvertent publication of the private listings, two new White Pages directories have been published for the East and South San Diego counties, neither of which contained private listings . . .

"In addition, the public interest demands that no penalty phase be opened in this proceeding. The [PD] clearly recognizes that any action that would increase public awareness of the issue that tainted directories were circulated (and that some may remain in circulation) could only fuel the dying embers of the safety concerns over these issues. A penalty phase, which will be highly publicized, could only serve to reignite the safety concerns of the affected customers.

"Finally, because the erroneous publication of the listings was the result of an effort to establish automated processes for the passing of competitively sensitive information from a competitive carrier to an incumbent carrier, regulatory penalties would only serve to penalize competition." (Cox Comments, pp. 1-2.)

Although we do not agree as a general matter with Pacific's constricted interpretations of §§ 2891.1(a) and 451,¹¹ there is no need to reach the detailed legal issues that Pacific raises. The reason for this is that we have been persuaded by the argument that a penalty phase in this case would be both unnecessary and unwise. There can be little doubt, for example, that the $13 million in costs Cox claims to have incurred as a result of the tainted directories represents as substantial a deterrent as any fines we would be likely to impose under § 2107. While Pacific's costs in dealing with the tainted directory problem have been smaller than Cox's (about $2 million), these costs have still been substantial enough to give Pacific an incentive not to repeat the kind of heavy-handed, ultimatum-based conduct that characterized its decision to resume distribution on the morning of May 31.¹²

In addition to arguing that the costs of the directory retrieval effort and related litigation have punished it enough, Cox notes that the parties have taken steps to reduce the chance that such mishaps will occur in the future, and to increase the likelihood that any future problems will be dealt with promptly. On these questions, Cox states:

"The companies have carefully worked out their processes and verification procedures such that listing information can be exchanged with an assurance of accuracy regarding privacy indicators. Moreover, the companies have been working in this context and in others . . . to better establish rapid escalation procedures for customer-affecting events. While the early stages of this case do not exemplify a quick consensus as to how to respond to the listings publication problem, the companies have worked together to improve those communications and continue to cooperate to ensure rapid resolution of any future issues before they become customer affecting events." (Cox Comments, p. 8.)

We also think there is merit in Cox's argument that a penalty phase might have the perverse effect of reawakening public anxiety about the tainted directory problem. As noted above, the results of the Field Research survey indicate that of the tainted directories distributed to residences, 27% may remain in circulation. Under these circumstances, it is difficult to disagree with the following assertion in Cox's comments:

"History has shown that the press highly publicizes ALJ rulings merely proposing penalties[,] without regard to whether the penalties are ultimately adopted by the Commission. Such publicity of a penalty phase in this case could stand only to bring the issue of the erroneous directory listings . . . back to the public eye. Cox's customers stand to be further harmed as a result of the attendant publicity." (Id. at 9; footnote omitted.)

Our decision not to pursue penalties here should not be taken as an indication that we approve of Pacific's or Cox's handling of the directory problem prior to the request of the Chief ALJ on the afternoon of May 31, 2000 that distribution be suspended. Despite Pacific's efforts to argue in its comments that its decision to resume distribution represented a reasonable weighing of all the circumstances, it is difficult to escape the impression that this decision-which represented a 180 degree turnaround from Pacific's May 12 decision to suspend distribution-was motivated principally by financial concerns. As for Cox, it claimed never to be satisfied with the cost estimates it received from Pacific for reprinting and redistributing the directories, even though these estimates stayed within a fairly narrow range throughout the two companies' discussions in May 2000. Cox is surely understating the case when it observes in its comments that "the early stages of this case [did] not exemplify a quick consensus as to how to respond to the listings publication problem." (Id. at 8.)

Although one can certainly fault their conduct prior to the afternoon of May 31, Cox and Pacific have apparently handled the directory problem well since then. Their efforts to publicize the problem, retrieve the tainted directories, distribute new directories, and measure the success of their retrieval efforts appear to have been conducted professionally and skillfully. This good track record, along with the more than $15 million they claim to have spent, their representation that mechanisms are now in place to deal promptly with any future "customer-affecting events," and the likelihood that a penalty phase would serve to reawaken public anxiety, have persuaded us that it would not be appropriate to impose penalties on Cox and Pacific in this case.

"Pacific has spent a substantial amount of money on retrieval, destruction, republication and redistribution of the tainted directories and for follow-up surveys to guage the effectiveness of the process. Pacific has also made a number of charitable contributions, in conjunction with the retrieval and redistribution process. In addition, Pacific [has] been subjected to multiple class action lawsuits related to distribution of the tainted directories. Attorneys' fees and costs to defend against these lawsuits have been considerable. Likewise, Pacific must pay settlement costs associated with some of the lawsuits. Pacific has also suffered financial losses resulting from the delay in directory distribution. For example, Pacific has paid significant sums in offsets to advertisers for not distributing directories on the projected May 2000 distribution date. Furthermore, Pacific is subject to at least one lawsuit brought by an advertiser dissatisfied with the distribution delay and will have to pay the costs of defending or settling that suit. All told, Pacific is facing a financial `penalty' of several millions dollars, for a cascade of events initiated by another telephone provider's computer glitch." (Pacific Comments, pp. 14-15.)