D0412021 Decision granting CPCN to Blue Ridge Telecom Systems, LLC to provide limited facilities-based and resold local exchange telecommunication services

C. Discussion

1. Blue Ridge's Fitness in View of the FCC Proceedings Brought Against Its Affiliates

Although we agree with the ALJ that it was appropriate to hold a hearing on Blue Ridge's fitness because of the two FCC enforcement proceedings described in D.04-06-017, we have concluded that these two proceedings do not preclude the issuance of a CPCN in this case. As noted above, the June 21, 2004 declaration of Michael Arnau, the CEO of NOS and one of Blue Ridge's principal managers, states unambiguously that no litigation, investigation or administrative proceeding has been brought, or is pending against or related to, Blue Ridge, NOS or any of their respective affiliates in connection with the marketing or provision of local exchange services. In view of this statement, which Koppy reaffirmed on the witness stand (id. at 23-24), we think that granting a CPCN to Blue Ridge for the authority sought here is unlikely to lead to a Commission enforcement action against the company in the near future.

Moreover, even though the NOS companies have joined in an application for rehearing of D.04-06-017, we are pleased that they sent one of their most senior officers, Mr. Koppy, to testify at the Blue Ridge hearing. His appearance at the hearing, and the direct way in which he answered the questions put to him, reinforce our belief that granting the authority sought here is unlikely to be a prelude to charges of deceptive marketing down the line.

The two reports to the FCC included with the MacBride letter also support this conclusion. For example, the January 27, 2004 letter from the NOS companies' counsel to David Solomon, Chief of the FCC's Enforcement Bureau, states that the companies have received no customer complaints in connection with their compliance with the Winback Consent Decree, nor have any employees been disciplined for infractions of the Code of Conduct that the companies agreed to implement as part of the Winback Consent Decree. The "Network Analyst/Winback Code of Conduct" and other training materials accompanying the January 27, 2004 letter suggest that the NOS companies take their responsibilities under the FCC consent decrees seriously.

In addition to the reports submitted to the FCC as a result of the two consent decrees, another reason for thinking that the risk of deceptive marketing by Blue Ridge is small is the breadth of the prohibitions against such conduct set forth in the Public Utilities Code and in our recently-promulgated General Order (GO) 168, which sets forth the rules governing telecommunications consumer protection. Pub. Util. Code §2896(a), for example, requires telephone corporations to provide service to customers that includes, among other things, "sufficient information upon which to make informed choices among telecommunications services and providers," including "information regarding the provider's identity, service options, pricing, and terms and conditions of service." Similarly, Pub. Util. Code § 2889.5(a)(1) prohibits any telephone corporation from making a change in the provider of a competitive telephone service, including local exchange service, unless and until "the telephone corporation, its representatives or agents [have] thoroughly inform[ed] the subscriber of the nature and extent of the service being offered."

Rule 1(d)(2) in GO 168 requires every carrier to provide subscribers or members of the public with "a description of the carrier's service offerings that relate to the customer's inquiry and are currently open to individual or small business subscribers in California, and the applicable key rates, terms and conditions." Rule 2(a) of GO 168 provides that "any offer by a carrier that is deceptive, untrue or misleading is prohibited," and that "statements about rates and services that are deceptive, untrue or misleading are prohibited." Rule 2(d) requires that "when disclosure of qualifying information (including key rates, terms and conditions) is necessary to prevent an offer from being deceptive, untrue or misleading, that information shall be clear and conspicuous."¹¹

The penalties that can be imposed for violations of these obligations are substantial. Under Pub. Util. Code § 2107, a penalty of up to $20,000 can be imposed on a public utility for violation of a Code provision or Commission rule or order unless a different penalty is prescribed. Under § 2108, every violation of a Code provision or Commission rule or order "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."

In its June 21, 2004 comments on the Blue Ridge supplement, CPSD - which now supports issuance of the CPCN -- states that "in order to ensure that California customers are protected from improper behavior, if Blue Ridge is granted operating authority by the Commission, CPSD will monitor Blue Ridge for customer complaints and marketing abuse . . ." In our opinion, the penalty provisions in §§ 2107-2108 and CPSD's promise of vigilance, taken together, reduce the risk that granting a CPCN in this case will lead to litigation over Blue Ridge's marketing practices in the future.

Although we have concluded that the two FCC proceedings should not preclude the issuance of a CPCN in this case, we expect Blue Ridge to cooperate fully with any data requests it receives from CPSD (or other members of our staff) pursuant to Pub. Util. Code § 314(a), which confers authority on "the commission, each commissioner, and each officer and person employed by the commission" to "inspect the accounts, books, papers and documents of any public utility," and to "examine under oath any officer, agent, or employee of a public utility in relation to its business and affairs."¹² As we recently stated in D.04-09-061, the authority granted under §314 to obtain information relating to a public utility's affairs -- even in the absence of a specific proceeding -- is plenary, and is limited only by the utility's right in appropriate circumstances to invoke the attorney-client privilege, or to request that confidential and proprietary information be kept under seal pursuant to Pub. Util. Code § 583. (Mimeo. at 107-116.)¹³

2. Blue Ridge's Ability to Meet the Other Requirements for CLC Certification

As noted in the introduction, there is no suggestion in CPSD's protest that Blue Ridge does not meet the other criteria laid out in our prior decisions for applicants wishing to operate as facilities-based CLCs. For example, to be granted a CPCN authorizing the provision of facilities-based local exchange service, an applicant must demonstrate that it has $100,000 in cash or cash equivalents to meet the firm's start-up expenses. The applicant must also demonstrate that it has sufficient additional resources to cover all deposits that might be required by other telecommunications carriers.¹⁴

The instant application states that Blue Ridge expects to operate initially under the interconnection agreement between Pacific and MCIMetro, and that under that agreement, the amount of the deposit it would be required to pay would be $17,000. Based upon the financial showing set forth in Exhibit E to the application (an exhibit that Blue Ridge has moved to keep under seal), it is clear that the company will be able to meet the financial requirements that our decisions impose on applicants for facilities-based CLC authority.

In addition to a showing of financial responsibility, applicants for CLC authority are also required to demonstrate that they have the necessary technical competence in telecommunications, and that they have the requisite managerial qualifications. (D.95-12-056, Appendix A, Rule 4.A.) Based on their success in running the NOS companies, it is evident that Messrs. Arnau and Koppy, who will lead Blue Ridge's proposed management team, have the necessary skills.

To meet the requirements for CLC certification set forth in D.95-12-056, applicants are required to indicate whether anyone associated with or employed by them as an officer, director, partner, affiliate or owner of more than 10% of the company has been sanctioned by the FCC or by any state regulatory agency for failure to comply with any regulatory statute, rule or order.

Although the applicant has represented that no one associated with it falls into these categories, it is only because - as explained above - the two FCC proceedings brought against Blue Ridge's affiliates (NOS, Affinity Network, Inc. (ANI) and NOSVA Limited Partnership) have resulted in consent decrees rather than "sanctions." Nonetheless, for the reasons stated previously, the conduct of the NOS companies since the two FCC matters were settled gives us a reasonable degree of assurance that the companies' alleged problems with misleading marketing practices are a thing of the past, and not likely to recur.

Three final points deserve comment. First, since the Commission relaxed the standards for obtaining authority to operate as a non-dominant interexchange carrier (NDIEC) in D.90-08-032, applicants for such authority (and later, CLC authority) are required to state in their applications whether any member of their management team has previously been associated with an NDIEC that went bankrupt.¹⁵ On this question, the instant application states that in 1995, NOS and ANI jointly filed voluntary petitions under Chapter 11 of the Bankruptcy Code in connection with then-pending litigation against AT&T. The Chapter 11 proceedings did not last long, however. A joint plan of reorganization was confirmed in late 1995, and the two bankruptcy cases were closed in September 1997.

NOS disclosed the same information about its Chapter 11 filings in A.98-08-043, in which it sought authority to provide resold local exchange services as a CLC. We granted the application in D.98-11-043, noting that "NOS [has] represented in its application that it is now financially sound." (Mimeo. at 3.) On the basis of this representation and the company's financial statements, we concluded that NOS possessed the financial resources necessary for CLC operation. In view of the financial success that NOS, ANI and their affiliated companies have apparently enjoyed since 1998, we see no reason to reach a different conclusion with respect to their affiliate, Blue Ridge.

The second issue that deserves mention is the question of construction permits, which raises the issue of compliance with the California Environmental Quality Act (CEQA). On this question, the application states that Blue Ridge will be "provid[ing] its services using facilities and services of other carriers, or its own facilities, which Applicant will install in existing structures." Based on this plan, Blue Ridge requests we find that "no material environmental impacts will result from Applicant's proposed activities because no external construction will be involved." (Application, Exhibit B.)

CEQA requires the Commission as the designated lead agency to assess the potential environmental impacts of a project so that adverse effects can be avoided, alternatives investigated, and environmental quality restored or enhanced to the fullest extent possible. Since Blue Ridge states that it will not be constructing any facilities to provide local exchange service except for equipment to be installed in existing buildings or structures, it can be seen with certainty that there is no possibility that granting this application will have an adverse impact upon the environment. If in the future Blue Ridge wishes to construct any facilities other than equipment to be installed within existing buildings or structures, then applicant will have to file for additional authority and submit to any necessary CEQA review.

The third point that should be mentioned is the issue of tariffs. Blue Ridge submitted a draft tariff as Exhibit D to its application. Commission staff has reviewed this draft tariff for compliance with Commission rules and regulations and has found certain deficiencies that are noted in Attachment A to this decision. In its compliance tariff filing, Blue Ridge is directed to correct these deficiencies as a condition of obtaining Commission approval of its tariff. Blue Ridge's compliance tariff filing should also include any language necessary to

cover the "Every Fourth Invoice Free" program, as well as similar promotional programs.¹⁶

¹¹ In language similar to Pub. Util. Code § 2896(a), Rule 3(b) of GO 168 also states that "carriers shall provide consumers initiating a service with sufficient information to enable consumers to make informed choices among services, and shall clearly and conspicuously disclose in the course of the sale transaction the customer's right to cancel a term contract. In an oral transaction, the right should be disclosed as well." ¹² Under § 314(b) of the Code, our authority also extends to "inspections of the accounts, books, papers, and documents of any business which is a subsidiary or affiliate of, or of a corporation which holds a controlling interest in, an electrical, gas, or telephone corporation with respect to any transaction between the electrical, gas, or telephone corporation and the subsidiary, affiliate, or holding corporation on any matter that might adversely affect the interests of the ratepayers of the electrical, gas, or telephone corporation." ¹³ In the Proposed Decision (PD) mailed to the parties on October 14, 2004, the assigned ALJ conditioned the issuance of a CPCN on Blue Ridge's agreement to conduct all of its marketing from within the United States for a period of three years. After noting that Koppy had not ruled out the possibility that Blue Ridge might eventually market its local exchange services from Egypt or another foreign country, the PD stated:

"Because of the difficulties that might be experienced in obtaining jurisdiction over the persons and documents of marketers if Blue Ridge were to begin marketing its local exchange service from outside the United States, we will require, as a condition of granting the authority requested here, that for the first three years after the CPCN is granted, all persons who market local exchange service on behalf of Blue Ridge shall be employees of that company or of a Blue Ridge affiliate holding a CPCN from this Commission, and that all of Blue Ridge's marketing of local exchange services be conducted from within the United States. For the first three years after the issuance of the CPCN, we will also require Blue Ridge to file semi-annual reports stating the number of persons who market local exchange services on its behalf, as well as the names of such persons." (PD, pp. 12-13.)

In the opening comments it filed on November 3, 2004, Blue Ridge strongly objected to these conditions, and made clear that their retention would not assist in bringing the related NOS proceeding, I.02-05-001, to a negotiated conclusion:

"The PD prohibits Blue Ridge from employing marketing operations outside the United States for three years. Moreover, it is to provide[] a semi-annual enumeration and identification of all employees engaged in marketing local service. We are unaware that any other CLEC in the nation is subject to such restrictions. The operating restrictions are unsupported by any finding in the PD. Even though Blue Ridge may not presently desire to locate its marketing operations outside the US, it may in the future wish to join the other carriers that do so. The imposition of the conditions is stigmatic, unreasonable and tantamount to a denial of the application. The conditions should be removed." (Blue Ridge Opening Comments, p. 2; footnotes omitted .)

Blue Ridge's comments also stated that CPSD's powers under Pub. Util. Code § 314 were sufficient to enable it to review any documents that staff deemed necessary, and that "[n]o certified entity, least of all Blue Ridge, harbors any illusion that it can refuse to respond to data requests submitted by CPSD simply because the documents requested are not located in California or the United States."" (Id. at 8.)

After reviewing D.04-09-061, D.01-08-062 and other recent authorities discussing our powers and those of our staff to obtain information under §314, we agree with Blue Ridge that it is unnecessary to require that all marketing of the company's services be conducted from within the United States for the first three years after a CPCN is granted.

¹⁴ The financial standards for certification to operate as a CLC are set forth in D.95-12-056, Appendix C, Rule 4.B. ¹⁵ These representations apparently began to appear in response to the concerns we expressed in D.90-02-019 that because of inadequate capitalization, an increasing number of NDIECs were having to seek bankruptcy protection, and that these bankruptcies were imposing hardship on both NDIEC customers and their underlying carriers. (Mimeo. at 19-21.) ¹⁶ In the comments it filed on the PD on November 3, 2004, CPSD not only joined Blue Ridge in objecting to the imposition of the three-year marketing restriction on the company, but also expressed concern that the PD did not clearly address the status of the settlement in the NOS proceeding, and in particular whether "issuing a CPCN to Blue Ridge is contingent on NOS' adherence to the settlement agreement." (CPSD Comments, p. 3.) Elaborating on this point, CPSD stated:

"NOS has expressed a willingness to abide by the terms of the settlement if the Commission did end up granting the Blue Ridge application as was intended when the parties drafted the settlement. The PD states that it `may, as a practical matter, moot the application for rehearing of D.04-06-017 and enable the settlement in I.02-05-001 to go forward.' (PD, p.3) What remains unresolved is the fundamental question of whether the PD holds that NOS is bound by the settlement because the Blue Ridge application has been granted with conditions." (Id. at 4-5.)

In its November 5, 2004 reply comments, Blue Ridge takes issue with CPSD's characterization of the status of the NOS settlement:

"At the present time there is no pending settlement agreement. That agreement was rejected by the Commission when it elected not to process the Blue Ridge application on an unopposed basis. Moreover, pursuant to the terms of that agreement Blue Ridge has withdrawn from it. Blue Ridge and CPSD, however, would still like to settle this matter. Accordingly, a new settlement agreement may be resubmitted if this matter is resolved in a fashion consistent with the terms of the original Blue Ridge/CPSD agreement." (Blue Ridge Reply Comments, pp. 2-3; emphasis in original.)

In a footnote elaborating upon this last suggestion, Blue Ridge continues:

"Since the granting of the Blue Ridge application is envisioned in the now withdrawn settlement in I.02-05-001, the Commission may want to make the effective date of an order granting a CPCN to Blue Ridge coordinate with the date of an order approving a settlement in I.02-05-001. Blue Ridge would not oppose such a condition. It would be consistent with the intent of the settlement agreement filed last December." (Id. at 3, n. 1; emphasis supplied.)

In view of this statement, we have revised the decision herein to provide that the effective date of this order shall be the same as the effective date of the order, if any, approving a new settlement in I.02-05-001. To give the parties an incentive to bring I.02-05-001 to a conclusion, we have retained the usual language that the authority granted herein shall lapse if not exercised within one year.