4. Discussion

A. Whether to Approve the Application

In this application, Applicant requests authority under § 854 to transfer indirect control of its public utility business through implementation of the Plans ordered by the U.S. Bankruptcy Court. Section 854(a) states, in relevant part, as follows:

No person or corporation...shall merge, acquire, or control...any public utility organized and doing business in this state without first securing authorization to do so from the commission...Any merger, acquisition, or control without that prior authorization shall be void and of no effect.

The Commission has broad discretion to determine if it is in the public interest to authorize a transaction pursuant to § 854(a).⁶ The primary standard used by the Commission to determine if a transaction should be authorized under § 854(a) is whether the transaction will adversely affect the public interest.⁷ The Commission may also consider if the transaction will serve the public interest.⁸ Where necessary and appropriate, the Commission may attach conditions to a transaction in order to protect and promote the public interest.⁹

For the following reasons, we conclude that it is reasonable to grant A.02-10-022 to the extent the application requests prospective authority under § 854(a) for the transfer of control of Applicant's parent company, 360 Corp. First, there will be no change to terms or conditions of service for Applicant's customers as a result of the transaction. Thus, Applicant's customers, and the public will not be harmed by the transfer of control. Second, Applicant's California operations will continue under the same management. Third, the public may benefit from the transfer of control to the extent the transaction improves the financial strength of Applicant's parent company and enhances Applicant's ability to compete through lower rates and/or new or improved services. Fourth, there is no opposition to this application. For these reasons, we see no reason to withhold authority for the indirect transfer of control before us here.

We deny A.02-10-022 to the extent it requests retroactive authority under § 854(a) for the transfer of control. The purpose of § 854(a) is to enable the Commission to review a proposed acquisition, before it takes place, in order to take such action as the public interest may require.¹⁰ Granting this application on a retroactive basis would thwart the purpose of § 854(a). Since we do not grant retroactive authority, the transfer of control is void under § 854(a) for the period of time prior to the effective date of this decision. The Applicant is at risk for any adverse consequences that may result from its parent company having implemented the transfer of control without Commission authority.

B. Whether to Penalize the Applicants for
Their Failure to Comply with Pub. Util. Code § 854(a)

Applicants failed to comply with § 854(a) by effectuating the transfer of control without Commission authorization. Violations of § 854(a) are subject to monetary penalties under § 2107 which states 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.

For the following reasons, we conclude that the Applicant should be fined for its failure to comply with § 854(a). First, any violation of § 854(a), regardless of the circumstances, is a serious offense that should be subject to fines. Second, the imposition of a fine will help to deter future violations of § 854(a) by the Applicants and others.

To determine the size of the fine, we shall rely on the criteria adopted by the Commission in D.98-12-075. We address these criteria below.

Criterion 1: Severity of the Offense

In D.98-12-075, the Commission held that the size of a fine should be proportionate to the severity of the offense. To determine the severity of the offense, the Commission stated that it would consider the following factors:¹¹

Physical harm: The most severe violations are those that cause physical harm to people or property, with violations that threatened such harm closely following.

Economic harm: The severity of a violation increases with (i) the level of costs imposed upon the victims of the violation, and (ii) the unlawful benefits gained by the public utility. Generally, the greater of these two amounts will be used in setting the fine. The fact that economic harm may be hard to quantify does not diminish the severity of the offense or the need for sanctions.

Harm to the Regulatory Process: A high level of severity will be accorded to violations of statutory or Commission directives, including violations of reporting or compliance requirements.

The number and scope of the violations: A single violation is less severe than multiple offenses. A widespread violation that affects a large number of consumers is a more severe offense than one that is limited in scope.

Applicant's violation of § 854(a) was not an especially egregious offense. The violation did not cause any physical or economic harm to others. In addition, there is no evidence that Applicant significantly benefited from its unlawful conduct or that its actions affected any consumers. The only factor that indicates the violation should be considered a serious offense is our general policy of according a high level of severity to any violation of the Pub. Util. Code. However, this factor must be weighed against the other factors indicating that Applicant's failure to comply with § 854(a) was not an egregious offense.

Criterion 2: Conduct of the Utility

In D.98-12-075, the Commission held that the size of a fine should reflect the conduct of the utility. When assessing the conduct of the utility, the Commission stated that it would consider the following factors:¹²

The Utility's Action to Prevent a Violation: Utilities are expected to take reasonable steps to ensure compliance with applicable laws and regulations. The utility's past record of compliance may be considered in assessing any penalty.

The Utility's Actions to Detect a Violation: Utilities are expected to diligently monitor their activities. Deliberate, as opposed to inadvertent wrongdoing, will be considered an aggravating factor. The level and extent of management's involvement in, or tolerance of, the offense will be considered in determining the amount of any penalty.

The Utility's Actions to Disclose and Rectify a Violation: Utilities are expected to promptly bring a violation to the Commission's attention. What constitutes "prompt" will depend on circumstances. Steps taken by a utility to promptly and cooperatively report and correct violations may be considered in assessing any penalty.

Applicant did not take reasonable steps to comply with §854(a) because the application was not timely. The application was filed only days before the order of the U.S. Bankruptcy Court took effect and did not allow the Commission reasonable time to review the transaction before it took effect. Although Applicant and its parent company were required to comply with the order of the Bankruptcy Court and implement the Plans, Applicant initially gave the Commission only six days to process this application before the scheduled date for the Plans to take effect. Even though implementation of the Plans was ultimately delayed until November 12, 2002, Applicant's timing would not have allowed for the customary 30-day comment period on applications or for any comments on a draft order before the transfer of control took effect. Applicant states that it could not file earlier because the Bankruptcy Court did not issue its order until October 1, 2002 and because of the underlying complexity of the transaction.

We find that Applicant could have given the Commission earlier notice by filing the application with the proposed Plans while awaiting the final order of the Bankruptcy Court. This would have allowed the Commission to consider the proposed plan and review any changes to it on an expedited basis following action by the Bankruptcy Court. Although Applicant filed in advance of the transfer of control, its timing was not reasonable. Nevertheless, Applicant did disclose its violation and its error in judgment in not filing earlier is not an especially egregious offense. This suggests a smaller fine is appropriate.

Criterion 3: Financial Resources of the Utility

In D.98-12-075, the Commission held that the size of a fine should reflect the financial resources of the utility. When assessing the financial resources of the utility, the Commission stated that it would consider the following factors:¹³

Need for Deterrence: Fines should be set at a level that deters future violations. Effective deterrence requires that the Commission recognize the financial resources of the utility in setting a fine.

Constitutional limitations on excessive fines: The Commission will adjust the size of fines to achieve the objective of deterrence, without becoming excessive, based on each utility's financial resources.

Applicant provided the most recent unaudited financial statements of its parent company, 360 Corp. which indicate the parent company has current assets of approximately $100 million dollars, and operating revenues of over $75 million for the first seven months of 2003. (See September 5, 2003 Motion to Supplement Record, Appendix A.) The financial statements also indicate that 360 Corp. has incurred a net loss for the same reporting period. (Id.) From this information, we conclude that Applicant, or its parent company, has the financial resources to pay a fine in the range normally applied by the Commission for violations of Section 854(a). We will weigh this information accordingly when setting the amount of the fine.

Other than the above information, Applicant requested confidential treatment of its financial statements because they are unaudited and have not yet been reviewed and made public. Because the financial statements have not yet been made public, we will grant the request for confidentiality.

Criterion 4: Totality of the Circumstances

In D.98-12-075, the Commission held that a fine should be tailored to the unique facts of each case. When assessing the unique facts of each case, the Commission stated that it would consider the following factors:¹⁴

The degree of wrongdoing: The Commission will review facts that tend to mitigate the degree of wrongdoing as well as facts that exacerbate the wrongdoing.

The public interest: In all cases, the harm will be evaluated from the perspective of the public interest.

The facts of this case indicate that the degree of wrongdoing was not egregious. Applicant was required to implement the order of the U.S. Bankruptcy Court, but should have exercised better judgment and filed its proposed reorganization plan earlier to allow the Commission adequate time to review the Plans before they took effect. No one was harmed by Applicant's failure to comply with § 854(a) and Applicant does not appear to have materially benefited from its unlawful conduct. These facts indicate that the public interest was not significantly harmed by Applicant's violation of § 854(a). In setting the fine, we will consider the relatively small harm to the public interest from this violation.

Criterion 5: The Role of Precedent

In D.98-12-075, the Commission held that any decision which imposes a fine should (1) address previous decisions that involve reasonably comparable factual circumstances, and (2) explain any substantial differences in outcome.¹⁵

In D.00-09-035, we held that our precedent of meting our lenient treatment to those who violate § 854(a) had failed to deter additional violations; and we indicated that henceforth we would impose fines in order to deter future violations of § 854(a). In both D.00-12-053 and D.03-05-033, the Commission fined telecommunications carriers $5,000 for failure to obtain advance approval under §854(a) for transfers of control. The facts of this case are somewhat unique in that this case involves implementation of an order of the U.S. Bankruptcy Court and Applicant's failure to make a timely application to the Commission. Therefore, we will impose a smaller fine in this case.

Conclusion: Setting the Fine

We conclude based on the facts of this case that the Applicant should be fined $2,500 for violating § 854(a). The fine we impose today is meant to deter future violations of § 854(a) by the Applicant and other parties. We emphasize that the size of the fine we impose today is tailored to the unique facts and circumstances before us in this proceeding. We may impose larger or smaller fines in other proceedings if the facts so warrant.

A review of Applicant's compliance with Commission reporting requirements reveals that Applicant has been delinquent in filing Public Program Surcharge Transmittal Reports. Applicant should correct this deficiency by submitting these Surcharge Transmittal Reports and paying any applicable surcharges it owes. Carriers are required to file these reports every six months, even if the surcharge collection is zero.