6. Discussion
6.1 Violation of the Public Utilities Code
Having summarized the voluminous record, we now address whether this record establishes, by a preponderance of evidence, that Cingular has violated the law.
6.1.1 Section 451 -- Just and Reasonable Service Mandate
The OII's Ordering Paragraph 1(a) and 1(b) assert, respectively, that Cingular violated § 451 by failing to comply with that statute's service mandate and by establishing unreasonable rules. Section 451 requires that all public utilities not only charge just and reasonable rates but also "furnish and maintain adequate, efficient, just, and reasonable service ... necessary to promote the safety, health, comfort, and convenience of its patrons, employees, and the public." Section 451 further requires that the rules "affecting or pertaining to ... service to the public shall be just and reasonable."
A review of decisions spanning several decades30 reveals that, as relevant here, the Commission has interpreted § 451's reasonable service mandate to require, for example, that utilities provide accurate consumer information by a readily accessible means, refrain from misleading or potentially misleading marketing practices, and ensure their representatives assist customers by providing meaningful information about products and services.31
We find that the record in this proceeding establishes a corporate pattern and practice that resulted in unreasonable terms and conditions in violation of § 451 for the period January 2000 until May 2002,32 when Cingular adopted a 15-day return/cancellation policy and abandoned its prior official policy. That policy required customers to pay an ETF if they wished to cancel their contracts before the expiration of the typically one- or two-year contract terms that Cingular offered. That policy was unjust, and therefore unreasonable, because customers were unable to determine whether they would be able to use Cingular's wireless service in the ways they desired until they attempted to make or receive calls-and no customer could do this without first signing a contract for service.33
Cingular concedes that its ETF was designed to avoid churn. To that end, Cingular's prior official policy charged customers for canceling contracts for service regardless of whether Cingular could provide the coverage or capacity these customers sought. This is the crux of Cingular's violation of § 451. We focus upon the conditions under which Cingular imposed the ETF, resulting in an unjust rule and constituting unreasonable service. Our investigation does not seek, either directly or indirectly, to regulate Cingular's rates. We make no findings on whether imposition of an ETF is unreasonable per se. Neither do we make any findings about what amount, if any, constitutes a reasonable or unreasonable ETF.
All of the expert witnesses in this proceeding testified that wireless service cannot be guaranteed, given the physics of radio energy. Hilly or mountaineous terrain, large structures and thick walls may all prevent a wireless system from functioning at a particular location, as may other obstacles, natural and made-made. Cingular's Jacot testified that considering these vagaries, using the phone is the best way to determine if a wireless carrier can provide the service one requires. Other evidence in the record, on balance, reinforces our assessment that Cingular's no return/no refund/ETF policy, as applied to those customers whose phones did not function properly in normal use, resulted in unjust and unreasonable service to those customers and violated § 451.
Caceres and the customer witnesses provide firsthand, verified statements and sworn testimony about the frustrations they experienced as customers of Cingular. These witnesses' stories are not equally specific nor do they relate equally egregious facts, but they are largely credible. Considering the totality of the evidence, we conclude that these customers' experiences were not unique but that other customers discovered only after signing up with Cingular, that Cingular's service did not meet their needs. The imposition of substantial early termination fees under these circumstances was unjust and unreasonable.
Cingular argues that the complaint numbers need to be considered in the context of total customers, and that since its customer base expanded so greatly between 2000 and 2001, it is not surprising that the number of complaints also increased. Cingular calculates, for example, that the informal complaints to the Commission represent "a complaint rate measured only in the thousandths of a percentage point" and suggests that this measure indicates an enviable performance record. (Cingular opening brief, p. 8.)
Every business receives complaints from some of its customers. The question for us here is whether the complaining customers are representative of Cingular's customer base as a whole during the period covered by the investigation. We find that we cannot reach a conclusion based on this evidence. In order to draw a valid inference about the characteristics of a population from a sample of that population, certain minimal statistical criteria need to be met. First among these is that the sample be randomly drawn from the population. Second the sample, even if random, has to be large enough to permit reliable estimates of the population to be inferred from the sample. The customer complaint data offered to support the charges in the OII fails to meet either of these basic statistical requirements. The complaining customers are a self-selected group who share the characteristic of dissatisfaction with their wireless service. No one contends that they are representative of the population of Cingular wireless customers in general, the vast majority of whom did not complain to anyone about their service during the period covered by the OII.34 Second, a sample consisting of 49 customer complaints gathered over a two-year period is too small to provide a reliable indication of the characteristics of the entire population of Cingular customers during that period.35 The burden of proof on the issues in this OII rests as we have noted on CPSD and UCAN. Failure to provide a reliable estimate of the scope of the alleged problems is a failure to carry that burden.
Nonetheless, the record establishes that during the period when Cingular operated without a grace period and with a mandatory ETF, some customers paid the ETF and terminated their contracts. Cingular's own research indicates that "network problems" was cited as a leading cause of customer deactivation during this period. As to these customers, it is reasonable to conclude that their phones did not work sufficiently well to permit the customer to use them as they had a right to expect when they signed the contract. While it is true that some of the customers likely cancelled their contracts for other reasons, it is also true that some customers who experienced network problems were not willing to pay the cancellation fee and were thus forced to live with unsatisfactory service contrary to their expectations when they signed a contract. It is impossible to distinguish between customers who were harmed as a result of Cingular's network problems and those who were not. Cingular's failure to provide a grace period and coupled with the imposition of a mandatory early termination fee was unjust and unreasonable and constituted a violation of Section 451.
In finding Cingular's ETF policy unreasonable, we also find its agents' and dealers' ETF policies unreasonable, and we hold Cingular accountable for those policies in accordance with the law of agency. Not only does the record as a whole establish that Cingular exercises substantial control over its agents and dealers when it chooses to, but Cingular's briefs concede that the law of agency governs its relations with its agents and dealers.
We further find that during the period February 1, 2002 through April 20, 2001, Cingular actively promoted and sold its service while knowing that its network capacity was inadequate to absorb significant numbers of additional customers. Evidence from Cingular's internal records, coupled records that show a significant spike in customer deactivations during this period, strongly implies that the customers added during this period strained the system beyond its capacity resulting in a substantial sales of phones that could not meet the reasonable expectations of the purchasers. Existing customers who had bought their phones prior to February 2000 were also impacted by the overloading of the system and were unreasonably deprived of adequately working phones with no alternative but to tolerate the system failure or to pay an ETF.
6.1.2 Section 451/Section 2896 - Required Disclosure
Ordering Paragraph 1(c) of the OII asserts that Cingular failed to provide adequate information to customers about its service, in violation of § 451 and § 2896. As relevant here, § 2896(a) requires all telephone corporations (including wireless carriers and resellers) to provide customers with "[s]ufficient information upon which to make informed choices among telecommunications services and providers."
In D.02-02-027, which granted limited rehearing of D.01-09-058, the underlying decision in UCAN v. Pacific Bell, supra, the Commission found no need to address definitely whether § 2896 is self-executing or "may only be implemented through rules adopted by the Commission." (D.02-02-027, slip op. at p. 7.) D.02-02-027 cites legislative history indicating the author's intent to codify minimum customer service standards, some already required by the Commission. The decision states:
While section 2896 provides a statutory basis for the Commission's requirements regarding the prospective remedies imposed by [D.01-09-058], we need not rely upon section 2896 alone to impose penalties. When misleading or potentially misleading information is provided to customers regarding optional services, such practices clearly violate section 451's mandate that telecommunications carriers provide reasonable service. (D.02-02-027, slip op. at p. 8.)
In fact, as we discuss in the preceding subsection, the Commission has long-required all public utilities-not solely telecommunications utilities-to provide enough information to customers to enable them to make informed choices about utility service.
We do not need to address Ordering Paragraph 1(f), which asserts that Cingular failed to establish statewide service quality standards in violation of § 2896(c), since neither CPSD nor UCAN pursued this charge at hearing or in the briefs. In our pending rulemaking, R.02-12-004, filed on December 5, 2002, we are reviewing whether the Commission should revise the service quality standards which govern telecommunications carriers, and if so, how.
The record on disclosure establishes that Cingular provided very little information to potential customers in its advertising or marketing materials, or via its sales agents, that could assist such customers in assessing Cingular's coverage and capacity capabilities. CPSD and UCAN go further; they argue that both in advertising and at the point of sale, Cingular and/or its agents misleadingly portrayed the capabilities of Cingular's network.
As Section 5.2 of today's decision discusses, the maps Cingular placed in brochures and stores are not particularly helpful, since they are rate area maps, not coverage maps. In other words, they show where Cingular's rate plan applies and thereby strongly suggest concurrent coverage, but they do not identify known areas within those rate areas where coverage is problematic or nonexistent. Furthermore, Caceres and some customer witnesses report receiving coverage assurances from agents that proved to be erroneous. There is no evidence that Cingular provided sales people with training about coverage or supplied them with up-to-date coverage information in any systematic way. In fact, Cingular admits that any information more specific than the maps generally was unavailable at the point of sale. It had to be obtained from customer service representatives, and even they did not have ready access to the information necessary to predict the actual likelihood of coverage at a given address, but had to contact radio frequency engineers for it.
Were Cingular's disclosure practices a violation of law? Weighing evidence on the recognized imperfections in wireless systems generally against evidence of the scope of Cingular's known network problems in 2001, including its inability to meet its own internal measurement standards at times, we find they were not. In reaching this conclusion, we note that uncontested record evidence demonstrates that coverage available to an individual subscriber varies depending on a host of environmental factors that change from minute to minute and are not within the control of the wireless provider. No amount of disclosure, no matter how detailed, can anticipate the particular conditions under which specific calls are made. As anyone who has ever attempted to make a wireless call from a weak signal area knows, signal strength can vary dramatically even when one is standing still in a fixed location. The record discloses that Cingular did in fact provide disclaimers to inform customers that service areas and coverage were not identical. CPSD and UCAN allege that these disclaimers were inadequate, too small in relation to the claims they qualified, etc., but even if we accept that criticism, it remains true that no amount of disclaimer can alter the technical limitations of wireless telephony. Even if Cingular had provided customers with engineering maps showing the locations of cell towers, the reality would remain that some areas in which the customer believed he or she would have service would, from time to time, or even most of the time, provide weak or non-existent signals. Further, the record discloses that Cingular spent $1.6 billion dollars during the time period covered by the OII in upgrading its system to provide better coverage. In short, what the record discloses is a customer base expanding faster than expectations and a company racing to keep up. What it does not show is a company deliberately misleading customers about their services in an effort to obtain money by deceptive practices.
CPSD and UCAN also argue that Cingular routinely failed to disclose its agents' ETFs to customers. Clearly, the newspaper ads we examine in Section 5.4 of today's decision do not disclose the existence of an agents' ETF, let alone the amount of that ETF, though they do provide notice that unidentified conditions/restrictions may apply in addition to Cingular's ETF. The evidence establishes that neither Cingular nor its agents attempted to spell out the full, potential cost of handset and service packages in advertising: Was this a violation of existing law? Kamins admitted that some customers might be confused. The sworn statements of customers, to the effect that they did not realize they had contracted with a Cingular agent until they tried to cancel their contracts and learned of the additional ETF, certainly suggests that some customers were confused. The confusion underscores the success of Cingular's "look and feel" marketing efforts and logo-driven advertising. It also suggests, however, that these customers did not read the contracts they were provided, since the contracts in the record not only require a customer's signature, but require the customer to initial the portion that discloses the applicable ETF.
We conclude that while Cingular's ETF disclosures could have been clearer, they do not violate existing law. The contracts contained sufficiently detailed disclosures, and customers had the opportunity to decline to execute the contracts. We reiterate our opinion that Cingular's legal culpability stems from imposing the ETF (and permitting its agents to impose an ETF) from day one of the contract period-that is, without providing any trial period. Likewise, we are not persuaded that the coverage implications in the newspaper advertising or other marketing brochures introduced in the record support a finding that Cingular and its agents engaged in systematic deceptive marketing and advertising practices. Certainly some of the ads, particularly the "Where-ever, When-ever" ad, suggest that Cingular's network could provide better coverage and capacity than many customers experienced. But this ad, run by a Cingular agent, appeared in newspapers in 2002, when Cingular's internal service quality measurements showed marked improvements over 2001. The ads touting "anytime minutes" and the like use language that has become common parlance for competitive rate plans offered by the wireless industry generally, not only by Cingular. Thus, in determining whether advertising utilizes puffery or outright deception, interpretation is key, and the focus group evidence in the record reflects that consumers formulate differing interpretations, just as experts do. We do not find that Cingular or its agents crossed the line and violated these statutes. Again, given a reasonable trial period, consumers who determined that Cingular's service did not live up to the advertised claims would have had a simple remedy-they could have cancelled service. The violation we find centers on Cingular's failure to offer any trial period at all for the period from January 2000 through April 30, 2002. In fact until May 1, 2002, Cingular's official policy expressly prohibited returns or refunds once the contract was signed.
6.1.3 Section 451/D.95-04-028 - Bundling Decision Compliance
Ordering Paragraphs 1(d) and 1(e) of the OII assert that Cingular violated § 451, §702 (which requires all public utilities to comply with Commission orders and rules) and Ordering Paragraph 1(5) of D.95-04-028 (which permits bundling of wireless service and equipment as long as "[p]roviders conform to all applicable California and federal consumer protection and below-cost pricing laws"). The OII ties the asserted violations of D.95-04-028 to allegations that Cingular violated the Song-Beverly Consumer Warranty Act, the Consumer Legal Remedies Act, the UCL and Com. Code §§ 2314-2316.
The record developed in this investigation provides insufficient evidence to support allegations by CPSD and UCAN that Cingular and its agents/dealers sold ineffective or defective wireless phones. The evidence on this issue is confined to the statements of some customer witnesses that Cingular's sales agents advised them to upgrade their handsets to get better service but that after the upgrades, service did not improve. These statements alone do not prove faulty handsets. Customers who have additional evidence may pursue equipment issues in court under applicable consumer protection statutes, if they choose to do so.
As discussed in Section 4.1 of today's decision, appellate court precedent holds that we lack jurisdiction to adjudicate the UCL or impose its penalties. We conclude, similarly, that we cannot adjudicate the Song-Beverly Consumer Warranty Act or the Consumer Legal Remedies Act or impose remedies those acts provide. Moreover, since the record fails to establish that Cingular and its agents sold faulty wireless equipment, further review of the Song-Beverly Consumer Warranty Act, the Consumer Legal Remedies Act or the UCL cannot usefully inform our assessment of Cingular's culpability for poor service or disclosure failures under §§ 451 and 2896. Finally, given the lack of evidence that Cingular and its agents sold ineffective or defective wireless equipment, we have no need to consider the implied warranty provisions in Com. Code §§ 2314-2316.
6.1.4 Other Issues
In their briefs, both CPSD and UCAN argue that Cingular has violated Bus. and Prof. Code § 17026.1(b), which requires cellular phone retailers to post signs advising that the phones may be purchased separately from service.36 CPSD and UCAN also argue that Cingular's ETF constitutes an illegal liquidated damages charge under Civ. Code § 1671. Since the OII's Ordering Paragraphs cannot reasonably be interpreted to provide notice of either allegation, we do not address these issues further. Either party could have sought to modify the OII and/or the Assigned Commissioner's scoping memo to include such charges, explaining the Commission's subject matter jurisdiction and the factual basis for the proposed amendment. Neither did so. Advancing new legal theories in briefs, after submission of the evidentiary record, is improper. Such tactics are not only unfair to defendants, because they do not provide adequate notice and an opportunity to prepare a defense, but they hinder the Commission's ability to ensure full and fair record development, which is necessary to sound decision making.
6.2 Remedies
6.2.1 Penalties
We find that from January 1, 2000 to April 30, 2002, Cingular's official ETF policy, which prohibited returns or refunds and required an ETF, was unjust and unreasonable and thereby failed to provide adequate, just and reasonable service to those customers whose phones were functionally non-working given the customers' specific usage patterns, in violation of § 451. Additionally, we find that during the period February 1, 2001 through April 30, 2001 Cingular knowingly increased system usage beyond system capacity to the detriment of all customers.
The primary purpose of a fine is to deter future misconduct. Fines, even very large fines, are necessary to accomplish this purpose when the utility enjoys a state-conferred monopoly or is otherwise insulated against competitive market forces. Fines are typically unnecessary and counter-productive when imposed on participants in a fully competitive market, such as the market for wireless telephone services in California.37 Nonetheless, when a company in a competitive market seeks to restrain its customers from "voting with their feet" and knowingly compels them to accept either non-functional service or pay a substantial early termination fee, some level of fine is appropriate. The record in this case demonstrates that by May, 2002, one month before this Commission voted out the OII in this case, Cingular had abandoned its coercive ETF policy in response to competition from other carriers who granted their customers a grace period in which to try out their new phones. We also take official notice of the fact that even before our recent decision mandating a 30-day grace period for new wireless phone customers, all wireless service providers voluntarily granted their new customers at least 14 days in which to try out their new phones, and at least one carrier granted its new customers 30 days to do so. We further note that as a result of the FCC's decision mandating wireless number portability, it is easier than ever for wireless customers to take their business to a provider who meets their needs.
Having found Cingular in violation of law, Section 2107 requires that we order a monetary penalty. The statue sets for the parameters for maximum and minimum penalties 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, 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.
The monetary range mandated by §2107 applies here since the Public Utilities Code does not specify some other penalty for the violation we have found. Section 2108 provides, in relevant part, that "in case of a continuing violation, each day's continuance thereof shall be a separate and distinct offense."
Cingular's failure to disclose known network problems during the period February 1, 2001 through April 30, 2001 was sufficiently serious and constitutes a continuing violation, warranting a fine. In determining the size of a proposed penalty, we have held that the size of the fine should be proportionate to the severity of the offense and should take into account the conduct of the utility before, during and after the offense, its ability to pay and the totality of the circumstances. While the offense in this case is relatively severe, the record indicates that Cingular acted promptly to remedy the network problems that made its failure to disclose unreasonable and further indicates that the network problems arose in significant measure because of the unanticipated popularity of cellular telephony.
Considering these factors in their entirety, we conclude that a fine of $10,000 per day for each from February 1, 2001 to April 30, 2001 is appropriate.
6.2.2 Reparations
Considering the passage of time and the complicated facts, we cannot fashion additional remedies to both identify and make whole all customers who would have cancelled Cingular's service within 14 days if such an option had been disclosed to them at the time they contracted for service. However, we can devise measures to limit Cingular's unjust enrichment from the partial or full ETF payments it received for contract cancellations prior to May 15, 2002, the fourteenth day after the effective date of its present policy, and during the period of impaired system performance. Cingular shall return, with interest, any sums received for early cancellation of contracts entered into between January 1, 2000 and May 15, 2002, to the customers who paid those sums within fourteen (14) days of signing their contracts. Cingular shall also return, with interest, any sums received for early termination of contracts entered into between February 1, 2001 and April 30, 2001, regardless of when the contract was initiated.
In ordering this remedy it is our intention to make whole every customer of Cingular who was harmed by imposition of an ETF as a condition of terminating service because Cingular did not offer a grace period to new customers between January 1, 2000 and May 15, 2002, as well as those customers who paid an ETF between February 1, 200 and April 30, 2000 during the period of impaired network performance.
We direct Cingular, within 75 days of the mailing of this decision, to file a refund plan for accomplishing these customer reparations, to serve this compliance filing on the service list, and to provide a copy to the Director of the Commission's Telecommunications Division so that the Division may monitor implementation of the plan. Cingular shall undertake in good faith to locate all persons entitled to reparations. The refund plan shall include the methodology for locating such customers (for example, use of an independent claims administrator or an internet-based locator service) and an estimate of the amount of reparations due. Any unpaid reparations shall escheat to the State of California General Fund.
6.2.3 Fine
We impose a fine of $10,000 per day for the period February 1, 2001 through April 30, 2001 for Cingular's knowing failure to disclose to prospective customers its systemwide capacity constraints and continuing to advertise service and coverage which it knew it could not then provide when the only remedy available to a customer sold a non-functional phone was to pay an early termination fee.
30 Cingular's opening brief argues that in light of D.02-10-061's modification of the OII's Ordering Paragraph 1(c), the Commission may not consider its own precedents, that is, those prior decisions interpreting § 451. As originally worded, Ordering Paragraph 1(c) alleged that Cingular violated § 451 because it "failed to comply with standards" which are "described in previous Commission decisions" and in § 2896. D.02-10-061 struck the vague reference to "previous Commission decisions" in the charging paragraph. The vague reference suggested the existence of distinct rules, but did not identify them and therefore lacked the specificity required to allow Cingular to mount a defense to the charge. 31 See Higginbotham v. Pacific Bell, D.02-08-069, 2002 Cal. PUC LEXIS 487 [ceasing white pages publication of local call pricing information, including toll call prefixes, unreasonable under § 451]; UCAN v. Pacific Bell, D.01-09-058, 2001 Cal. PUC LEXIS 914, ltd rehrg D.02-02-027, [misleading or potentially misleading marketing tactics unreasonable under § 451]; First Financial v. Pacific Bell, D.98-06-014, 1998 Cal. PUC LEXIS 489 [§ 451 requires utility to disclose to business customers all service options that meet customers' needs]; National Communications Center Corp. v. PT&T Co., D.91784, (1980) 3 CPUC2d 672 [utility owes customers responsibility to provide all available and accurate information customers require to make intelligent choice between similar services where choice exists]; H.V.Welker Inc. v. PT&T Co, D.75807, (1969) 69 CPUC 579 [utility has duty to ensure its representatives inform business customers of options available to meet customers' needs]. 32 Though the OII, which issued on June 6, 2002 does not clearly dictate the specific timeframe subject to investigation, it states that the issues "arise from past behavior." (OII p. 13.) In fact, the preponderance of the evidence indicates that Cingular's network problems began to increase in 2000, concurrent with the rise that year in customer complaints. The OII relates that the Commission's Legal Division and CPSD jointly sent Cingular a cease and desist letter on September 28, 2001, approximately ten months before this OII issued, which asserted receipt of a large number of informal complaints against Cingular in 2000. As we note above, the declarations and sworn testimony from the 49 customer witnesses, who as a group are the source of the most credible individual complaints against Cingular, include 16 complaints in 2000 and 20 in 2001, but only one in 1999. Nine of the complaints allege problems in 2002, six of them in June and thereafter. 33 Our finding is narrow and turns on the absence of any trial period, which we conclude was unjust and unreasonable, given the totality of the record. We do not find, for example, that a 15-day trial provides consumers with sufficient time to reasonably assess whether a wireless service is adequate for their purposes. As we explain in Section 6.2.4, we defer such determination to the pending, generic proceeding which is considering that issue. 34 Statisticians identify two general kinds of sampling bias, "selection bias," a systematic tendency to exclude one kind of person or another from the sample and "non-response bias," the bias created because those who respond to surveys tend to be different in important ways from those who don't respond. The 49 sworn customer complaints are an example of selection bias; other evidence rejected by the ALJ, such as the Internet petition responses, almost certainly suffered from non-response bias. See generally Freedman, Pisani and Purves Statistics (W.W. Norton 1978) especially Ch. 19 "Sample Surveys". 35 See Freedman, et al, op. cit., ch. 20. When estimating the characteristics of a population from a sample, it is the absolute size of the sample that determines accuracy, not the size relative to the population. 36 Bus. and Prof. Code § 17026.1(b) provides:(b) In each retail location, all retailers of cellular telephones shall post a large conspicuous sign, in lettering no smaller than 36-point type, that states the following: "Activation of any cellular telephone is not required and the advertised price of any cellular telephone is not contingent upon activation, acceptance, or denial of cellular service by any cellular provider."
- The sign shall be prominently displayed and visible to consumers and located in that area in each retail location where cellular telephones are displayed and purchased.
