Recommendation 4: Review the Limitation of Liability Consumer Protection
Public utilities have the potential to face a considerable amount of risk. The economic value to the purchasers of utility service is potentially much greater than the price the utility charges. For example, when an emergency requires the connectivity of a phone and the utility service fails, the implications could be catastrophic, and enormous compared to the cost of the phone service. For a large service outage, the liability could be astronomical. In the non-regulated marketplace, companies protect themselves first by ensuring service, and second by maintaining liability insurance.
Telecommunications utilities have traditionally enjoyed a Commission-sanctioned limitation on damages resulting from utility negligence.45 Similarly, the Commission has conferred a limitation of liability upon the energy services industry, though no limit is provided for at-fault damages.46 Industries previously rate regulated like the aviation and railroad industries do not have sanctioned limitations of liability.47 The limitation afforded utilities under the jurisdiction of this Commission was designed to insulate both companies and ratepayers from excessive liability and in so doing, ensure the availability and affordability of utility services. If utilities were subject to unlimited liability, conceivably a large award of damages could jeopardize services to its customers, and because carrier return (profit) was controlled within rate proceedings, ratepayers would bear any liability risk through Commission regulated rates.
The issue of the limitation of liability is germane to this discussion because removal of tariffs would result in a loss of the limitation of liability. The P.U. Code, Section 495.7(h) explicitly forbids the tariff limitation of liability from applying to services not offered under a tariff.48 It states:
Any telecommunication service exempted from the tariffing requirements of Section 454, 489 and 491 and 495 shall not be subject to the limitation on damages that applies to tariffed telecommunications services.49
In compliance with PU Code 495.7, the Commission, by D.98-08-031 established procedures to detariff services based upon an IEC carrier's request. The result is divergent application of the limitation of liability within a class of carrier for which the Commission no longer establishes rates, based solely upon filing of tariffs. Thus, an incentive exists for IECs to continue to file tariffs with the Commission in order to maintain the limitation of liability.50 Because this is occurring, staff asks the questions:
1. What public benefit is served by a state policy which treats the tariff liability limitation as a quid pro quo for the filing of tariffs?
2. Shouldn't a liability policy be rationalized based on public need?
Analysis of status quo: There is little benefit to the public of the continuation of tariff filings. The continuance of the tariff filing requirement is causing public harm in the form of increased regulatory costs and the continuation of utility rules which limit consumer rights, and which undermine the effective role of the Commission in filed disputes.
Continued unequal application of the Commission sanctioned limitation of liability may distort competition and investment and may result in unfair regulatory advantage. For example, in many metropolitan areas, wireless phones are used daily as a substitute for local wireline phones. Because the basic exchange services provided by wireline carriers must be tariffed, the wire line provider has a Commission-approved limitation on liability, whereas the wireless carrier may not, and thus the wireless carrier would be subject to damages in civil court, while the wire line carrier would not.51 Further, since the limitation of liability applies to LEC tariffed services non-tariffed resale carriers would be fully subject to tort liability even though the service fault may have been caused by the underlying carrier that is protected by limited liability. Such scenarios underscore the necessity to have rules that are consistent within the industry. Two options to the status quo are:
1. Entire elimination: Remove the sanctioned liability limitation from all carriers not subject to rate regulation, or
2. Blanket retention: Provide a limitation of liability in the consumer protection rules.
Argument for elimination: Entire elimination would be competitively neutral. Elimination would not preclude telecommunications carriers from instituting their own limitations of liability, though consumers would have the ability to challenge the utility beyond reasonable liability protections usually contained in service contacts. Entire elimination may result in an increase in costs, which would likely be recovered through rates. Vulnerable companies might default as a result of large damage awards, and investment may be negatively effected.
Elimination would put telecommunications companies on a similar par with energy utility tariff protections. In the energy services industry, PG&E is only protected from damages that are beyond its control; however it is responsible for reasonable damages resulting from its negligence.52
For the majority of telecommunication companies and the majority of Californians served by them, the Commission no longer sets rates, and carrier returns (profits) are subject to market risk. Because the mechanism used to justify the limitation of liability no longer exists, some have argued that the limitation of liability is no longer appropriate. Under this argument, the only telecommunications companies for which the traditional liability limitation rationale may still apply are LECs subject to traditional rate regulation and which have no wireline or wireless telephone competition.53
The rationale for the limitation of liability being tied to rate regulation is recognized by two court decisions. The California Supreme Court has stated that the purpose of the tariff limitation of liability is based upon the costs of limited liability being factored into rates established by the Commission.54 Further, the California Superior Court implied that, following federal "pre-emptive" rate making, the tariff liability limitation provision would no longer apply. 55
Argument for blanket retention: Blanket application of the sanctioned limitation of liability would do two things. First it would not allow compensation from damages that are beyond the utility's control. Second, it would limit damage award compensation resulting from utility negligence. The theory is that blanket application would protect carriers from excessive tort and liability costs thus reducing price increase pressures. Such protection may promote investment. Further, blanket retention would be competitively neutral for telecommunications carriers and would defer to a later date the issue of removing the sanctioned limitation of liability for all carriers.
The limitation of liability may be considered a consumer protection if it allows an individual to seek compensation for harm due to negligence, and if the effect of the award limitation amount keeps rates lower than they would be otherwise. This may be appropriate where the harm to a few large consumers is disproportionate to what might occur to the average residential or small business consumer. For example, the average consumer does not engage in million dollar financial transactions. If without a limitation of liability a utility were successfully sued for an individual's loss of a million-dollar transaction, the average consumer would be transferring wealth through higher rates due to a claim disproportionate to claims average consumers would ever make. Damage awards felt to be excessive for economic harm, and pain and suffering, have resulted in tort reform in competitive industries - such as the medical industry malpractice liability limitations initiated by California statutes56.
Staff Position: Staff proposes the Commission review the appropriateness of the limitation of liability policy. If the Commission determines that a sanctioned limitation is appropriate, Staff proposes that the standard of negligence that a consumer must prove against the utility be changed from "gross negligence" to "negligence". Further, staff would propose increasing the damage award limitation to reflect inflation.
45 The current negligence liability cap is $10,000 for the two largest California LECs. See Pacific Bell Tariff A.2, Rule 11 and GTE of California Tariff D&R, Rule 26. 46 For example, PG&E Tariff Rule 14 excludes liability for "acts of God"... "except that arising from its failure to exercise reasonable diligence." Under the exception, no liability limit is provided. 47 Department of Transportation (DOT), Federal Aviation Regulations require carriers to obtain liability insurance, per FAR, Part 198. The DOT, Federal Railway Administration does not confer any limitation of liability upon the rail industry. Any current limitation of liability would be contained within carrier agreements. 48 There are approximately 156 registered IECs that are not required to file tariffs with the Commission. It is presumed that these carriers serve few customers. 49 P.U. Code Section 495.7 does not preclude the establishment of a limitation of liability applicable to non-tariffed carriers when such limitation is separate from that contained in utility tariffs, such as in a contract (See D.98-08-031, p.5). 50 The tariff limitation of liability is not the only incentive for carriers to continue to file tariffs. Decision 98-08-031 requires all contracts with detariffed IECs to be written and signed, which would be prohibitively costly for carriers to implement retroactively. 51 CMRS carriers have successfully argued before civil courts that the Commission has the exclusive jurisdiction over terms and conditions, which include the limitation of liability. The applicability of the Commission's sanctioned limitation of liability is questionable when carriers do not file tariffs with the Commission, and thus, the CMRS industry has promoted state and federal legislation that limits their liability. Wireless carriers have been granted protection from liability on 911 calls to the same extent as wireline carriers. See FCC Docket No. 94-102; FCC 99-352, and "Wireless Communications and Public Safety Act of 1999, Page 113 STAT. 1286, Public Law 106-81, 106th Congress. 52 PG&E Tariff Rule 14 - Shortage of Supply and Interruption of Delivery. 53 The Commission regulates 19 small California LECs via General Rate Cases (GRCs). 54 See Waters v. Pacific Telephone Co., 12 C.3d (1974). The California Supreme Court stated that a Commission-approved limitation of liability provision contained in public utility tariffs barred a damage suit, based on ordinary negligence, in civil court. The court reasoned that the Commission had authorized the Telephone Company to include a limitation of liability provision in its tariffs, which the Commission took into account in setting rates for the company. The court thus concluded that to allow a suit for damages against the Telephone Company would impermissibly interfere with the Commission's ratemaking functions and its policies limiting liability, and thus conflicted with Section 1759 of the PU Code. 55 See LA Cellular v. Superior Court, 65 Cal. App. 4th 1013. The Superior Court notes in footnote 3 of that decision, that the injury suffered by the plaintiff occurred before the preemptive rules went into effect, so that LA Cellular's tariff, filed in 1989 with the limitation of liability provision, still applied. The implication is that once the preemptive rules took effect, which the court indicates happened in 1995, the tariff provision would no longer have applied. Note: The reason for the delay in the preemption provisions from 1993 until 1995 was that California had filed a petition with the FCC to continue to regulate cellular rates, and that petition was denied in 1995. The plaintiff in LA Cellular suffered her injury before the preemptive effect of the 1993 law was in place, so her claim was subject to the limitation of liability provision in the cellular carrier's tariff. 56 See the Medical Insurance Compensation Reform Act.