Background

By Decision (D.) 91-07-010 the Commission modified General Order (G.O.) 96-A to eliminate preapproval requirements for governmental agency contracts, and in so doing added fine and penalty provisions as safeguards against below-cost contracting by telecommunications utilities operating under the new regulatory framework. D.91-07-010 also established late-filing penalties applying to any telecommunications utility that does not file its governmental agency contracts within a specified time after execution.

In 1998 GTE California Incorporated (GTEC, Verizon's predecessor corporation) filed an advice letter requesting authority to provide service to UCLA under a government contract. During the course of the staff evaluation of GTEC's advice letter, GTEC revealed that it had determined there were other services being provided in violation of G.O. 96-A, and that it had contracted with an outside auditing firm to conduct a compliance audit of all of its governmental agency contracts to ensure compliance with D.91-07-010 and G.O. 96-A.

Commission Resolution T-16218 in December 1998 approved the UCLA filing, accepted GTEC's calculation of $809,289 in late filing and undercharging penalties,² placed GTEC on three years' probation, and warned GTEC that it was at risk of losing its authority to execute government contracts if it were to commit further violations of the Commission's G.O. 96-A rules pertaining to government contracting. The Resolution excluded from that warning any historical violations that GTEC might disclose in its outside auditor's report due to be submitted to Telecommunications Division in March 1999 (later extended to May 1, 1999).

In March 1999, the company reported: (i) the preliminary results of its auditor's review; (ii) that it had discovered instances of potential contract date alteration that would give the inaccurate appearance of compliance with Commission filing requirements, as well as other potential violations of Rule 1 of the Commission's Rules of Practice and Procedure;³ (iii) that it had undertaken an intensive review of all ICB contracting practices; and (iv) that it had engaged the services of a law firm to conduct an investigation of non-compliant activity and root causes, and to voluntarily report on them to the Commission. According to the settlement, Verizon timely submitted the auditor's and law firm's reports, as well as supplemental reports, to the Commission.

The record in this proceeding does not detail what activities subsequently took place, but we informally understand that Verizon and Commission staff representatives continued to review and discuss Verizon's reports and its ICB contracting practices. The Commission filed this OII into Verizon's ICB contracting practices on April 22, 2002,⁴ defining the issues as: "(1) whether there have been violations; (2) if there have been violations, how many there have been; (3) whether it is appropriate to adopt sanctions against Respondent (including whether Verizon should be placed under different rules for entering ICB contracts, or whether the probation should be modified and/or extended); and (4) whether the utility should continue to have ICB contracting flexibility under existing rules." The order directed CPSD to retain and supervise consultants for its review, and required Verizon to reimburse the Commission for the consultants' costs.

On June 5, 2002, the assigned Administrative Law Judge (ALJ) held a prehearing conference, and on June 18, 2002, the Assigned Commissioner issued his scoping memo establishing a schedule that would complete the proceeding within the 12-month requirement of Pub. Util. Code § 1701.2(d) for adjudication cases expected to require hearing.

CPSD was to mail its prepared testimony on October 15, 2002, and evidentiary hearings were set for November 18. However, on September 12, CPSD filed a motion asking the Commission to either issue an order under § 1701.2(d) extending the 12-month deadline or dismiss the proceeding without prejudice while at the same time ordering Verizon to underwrite the cost of outside consultants to complete the investigation under CPSD's direction.

With the parties unable to timely proceed, the ALJ held a second prehearing conference on November 15, 2002, at which he directed CPSD to prepare and file a proposed revised proceeding schedule. CPSD filed that schedule the following month, estimating that it would require at least three more years to complete the proceeding. For its part, Verizon opposed either extending the proceeding or closing it with an order requiring it to pay for continuing consultant studies, preferring instead to have it dismissed with prejudice. "As an alternative," Verizon suggested, "the Commission should direct the parties to enter into discussions toward a negotiated settlement based on the existing record...." The ALJ then issued a ruling directing CPSD and Verizon to meet to discuss the possibility of settling on a mutually acceptable outcome, and the Commission issued D.03-04-020, Order Extending Statutory Deadline.⁵ CPSD and Verizon did meet, and subsequently entered into the settlement agreement attached as Appendix A to this decision.

³ Rule 1: "Any person who signs a pleading or brief, enters an appearance at a hearing, or transacts business with the Commission, by such act represents that he or she is authorized to do so and agrees to comply with the laws of this State; to maintain the respect due to the Commission, members of the Commission and its Administrative Law Judges; and never to mislead the Commission or its staff by an artifice or false statement of fact or law."