Procedural Background

The Order Instituting Investigation (OII) charged the respondents with violating several provisions of the Public Utilities Code. First, the OII alleged that the companies within the Gershenson Group had changed the long distance or toll service provider of nearly 4400 California customers without their authorization, a practice known as "slamming" that is unlawful under Pub. Util. Code § 2889.5. Second, the OII alleged that the Gershenson Group companies had misrepresented their relationships with local exchange carriers, in violation of § 2889.9(a). Third, the OII alleged that the companies had changed the customers' service providers without adequate verification by an independent, third-party verification company, in violation of § 2889.5(a)(3). The OII alleged that the Gershenson Group companies had committed these violations by using "telephone solicitors [who] falsely represented themselves as employees of the customers' local access provider, such as Pacific Bell or GTE, and/or presented misleadingly 'Least Cost Routing' as a discount or billing consolidation plan. When switched to LDC, consumers experienced higher toll or long-distance charges." (OII, p. 2.)

The OII also alleged that respondent Tel-Save appeared to have purchased the customer bases, accounts receivable and other assets of certain Gershenson Group companies in 1997 in exchange for the forgiveness of $2.2 million in debts owed by these companies. The OII alleged that this amounted to a de facto sale of the Gershenson Group companies that violated § 851 of the Pub. Util. Code because Commission authorization had not been obtained. In addition, the OII continued, this change of control appeared to make Tel-Save jointly and severally liable for the slamming and other unlawful conduct engaged in by the Gershenson Group companies after Tel-Save took control. As relief, the OII sought restitution for customers, cancellation of the CPCNs held by the Gershenson Group companies, and the imposition of fines.

The first prehearing conference (PHC) in this matter was held on April 6, 2000. After noting that charges of misconduct similar to those alleged in the OII had been filed against Long Distance Charges, Inc. and other Gershenson Group companies in several states, and that some of these charges had been settled with the payment of substantial fines, the assigned Administrative Law Judge (ALJ) observed that the case for liability appeared strong, and he urged the respondents to consider a settlement. (April 6, 2000 PHC Tr., pp. 7-9.)

On May 18, 2000, counsel for CSD sent the assigned ALJ a letter stating that all parties "have executed a letter of intent to settle," and that a settlement agreement and motion for approval thereof were expected to be filed within about a month.

Although no settlement papers were filed in June 2000, counsel for CSD informed the ALJ through the summer and fall that these papers were being prepared and should be filed soon. In mid-July 2000, for example, counsel informed the ALJ that comments from other counsel were expected shortly on a draft settlement agreement that had been circulated. On November 22, 2000, counsel for CSD informed the ALJ that "the substantive issues of the settlement are agreed to," and that the parties expected to sign the settlement agreement after receiving some necessary customer data from the affected local exchange carriers.

Because the 12-month deadline for the proceeding set forth in Pub. Util. Code § 1701.2(d) was quickly approaching, a second PHC was held on December 12, 2000 to obtain a progress report. At the PHC, counsel for CSD stated that he had recently reached separate agreement on settlement terms with counsel for Tel-Save and counsel for the Gershenson Group, that a revised settlement agreement reflecting these terms was being prepared, and that before it was filed, the revised agreement would have to be reviewed by CSD's newly-appointed Division Director. (December 12 PHC, pp. 32-37.)

After the second PHC, the review process appeared to be proceeding smoothly, because on February 13, 2001, counsel for CSD informed the ALJ that all respondents had signed the settlement agreement, that execution of the agreement by CSD was imminent, that a motion for adoption of the settlement agreement had also been prepared, and that the filing of all papers necessary for consideration of the settlement should be completed within a week.

On February 22, 2001, the Commission issued Decision (D.) 01-02-066, which extended, pursuant to § 1701.2(d) of the Pub. Util. Code, the 12-month deadline applicable to this proceeding. After noting that an extension was necessary to give the parties time to submit their settlement agreement and the Commission time to consider it, D.01-02-066 ordered the parties to file within 45 days "either a proposed settlement agreement (together with motion for approval thereof) or a status report indicating whether and when the settlement agreement will be forthcoming."

After the issuance of D.01-02-066, CSD apparently had a change of heart. On March 15, 2001, it filed a motion "to suspend the procedural schedule in order to have the [OII] amended or a new OII consolidated in this proceeding." CSD stated that its basis for seeking this relief was that CSD had just learned that Tel-Save's corporate successor had committed "numerous slamming violations not included in the OII." CSD stated that it had been unaware of these violations because Tel-Save had changed its corporate name to Talk.com. CSD continued that due to these newly-discovered violations, Tel-Save's liability appeared to be direct rather than vicarious (as the OII had alleged), and CSD wanted an opportunity to expand the scope of the OII to include these new charges. CSD also stated that as a result of the newly-discovered violations, "Staff now regards this proceeding as unamenable to resolution by settlement."

On May 18, 2001, the assigned ALJ issued a ruling denying CSD's motion.² The ALJ pointed out that Tel-Save's change of name to Talk.com had been noted during the first PHC on April 12, 2000, as well as in the scoping memo issued on May 2, 2000. The ruling continued:

"Under these circumstances, CSD cannot reasonably claim that it became aware of the relation between Tel-Save and Talk.com only recently, or that it has somehow been deprived of an opportunity to investigate the extent of consumer complaints against Talk.com.

"Moreover, CSD has not adequately explained why Talk.com's alleged misconduct should be litigated in this proceeding. As noted above, the focus of this OII is slamming allegedly committed by [Gershenson Group companies.] The OII names Tel-Save, Talk.com's predecessor, as a respondent based on a theory of vicarious liability. Under these circumstances, CSD has not explained why it would make sense to delay this proceeding to allow the existing OII to be amended, especially since CSD is free to seek a separate OII directed solely against Talk.com." (May 18, 2001 Ruling, p. 2; emphasis in original.)³

The ALJ's ruling also directed the parties to appear for a third PHC on June 4, 2001, at which time dates would be set for a hearing. (Id. at 10.) At this PHC, the ALJ ruled that opening testimony would be due on August 27, 2001, that rebuttal testimony and trial briefs would be due on September 6, and that a hearing not to exceed five days would take place from September 17-21, 2001. He also encouraged the parties once again to consider settlement of the proceeding, especially if the Commission chose to issue a new OII to examine the alleged misconduct of Talk.com. (June 4, 2001 PHC Tr., pp. 53-54.)

The next step in this proceeding took place on August 28, 2001, when CSD filed on behalf of all parties the settlement agreement attached as Appendix A, along with a motion seeking its approval.