The Settlement

Settlement Overview

The settlement begins by summarizing the ICB contracting-related requirements of G.O. 96-A, D.91-07-010, and Rule 1. It then describes the background leading up to Resolution T-16218's imposing $809,289 in penalties and placing Verizon on probation, and the results of the 1999 follow-up outside auditor's reports revealing additional violations. According to the settlement, CPSD believes Verizon's conduct as described in the auditor's reports constitutes numerous and serious instances of non-compliance with Commission rules and regulations, including Rule 1. Verizon does not dispute those charges and the parties' motion for adoption describes the funds Verizon will pay as "a substantial penalty on Verizon for previous violations." However, the parties are also careful not to include any explicit conclusions of guilt or innocence.⁶

Under the settlement's terms, Verizon agrees to pay $4,836,000 to the state General Fund in satisfaction of any fines or other remedies that could have been sought or imposed for violation of the Public Utilities and of Commission rules relating to ICB and express contracts through its effective date, to obey all Commission rules and regulations and all state laws including, but not limited to, Rule 1 and all statutes and rules governing ICB and express contracts, and to continue monitoring its compliance with those requirements. The parties agree the settlement resolves and concludes all Commission compliance enforcement efforts in connection with Verizon's ICB and express contracts, as specified.⁷

Standard of Review

Verizon and CPSD have tendered an "uncontested settlement" as defined in Rule 51(f) , i.e., a settlement that is "filed concurrently by all parties to the proceeding in which such ... settlement is proposed for adoption by the Commission...." Rule 51.1(e) requires that settlement agreements be reasonable in light of the whole record, consistent with the law, and in the public interest.

This settlement is tendered pursuant to Rule 51, and it is under this standard of review set forth in Rule 51.1(e) that we will evaluate it.

Reasonable in Light of the Whole Record

The settling parties spent considerable time and effort both before and during the formal proceeding to develop their positions. As they note, at the time of Resolution T-16218 Verizon had already begun an outside review of its ICB contracts through an outside consultant. Verizon subsequently engaged the services of a law firm to conduct an intensive review of all ICB contracting practices, to investigate non-compliant activity and its root causes, and to report back to the Commission.

The Commission attached as two appendices to the OII an inventory of the relevant materials then in its possession and a second inventory of materials Verizon was directed to produce within 30 days.⁸ CPSD reviewed those voluminous documents, most of which were the result of Verizon's intensive review, as well as additional work papers before entering into the settlement agreement. CPSD had also reviewed Verizon's presentation of the changes it had implemented to properly manage its ICB contracts and ensure compliance with Commission requirements. Thus, CPSD entered settlement discussions with a good understanding of the scope of the problem and the changes Verizon had made to prevent their recurrence, and the settlement it negotiated reflects the record.

The $4,836,000 penalty payment required under the settlement is also reasonable in light of the record and consistent with applicable law. Pub. Util. Code § 2107 provides for penalties ranging from $500 to $20,000 for each offense. The parties have not indicated how they actually derived the final penalty figure, but they do show how it likely falls within the range called for by § 2107. Verizon's auditors had calculated that penalties for the 80 non-compliant ICB contracts enumerated in their report ranged from $1.6 million to $2.8 million, depending on how § 2107 was applied. Applying the § 2107 maximum $20,000 per occurrence to the additional 61 offending service arrangements not accounted for in the auditors' calculations would yield additional penalties of $1.28 million, for a total penalty in the range of $2.8 million to $4.0 million. Thus, the settlement requires Verizon to pay a greater fine than would be required if a $20,000 penalty were to apply to each violation identified in Verizon's May 1999 reports. This, the parties point out, is reasonable in light of the record because the settlement encompasses an unspecified number of further instances of possible non-compliance reported by Verizon during 1999 through the effective date of the settlement and not included in the earlier penalty calculations. We conclude that the $4,836,000 penalty the parties propose reflects the likely number of violations and is consistent with § 2107.

Verizon does not dispute the seriousness of the violations detailed in its May 1999 reports to the Commission. We agree, however, that its conduct in reporting and remedying those violations must also be considered as a mitigating factor. As the parties' joint motion points out, Verizon did first voluntarily report its violations in 1998 and initiated an independent investigation before the Commission required it to do so in Resolution T-16128. It then expanded the scope of that investigation beyond the requirements of the resolution to include a review of all then-current ICB contracts, government and non-government alike, and reported the results to the Commission. Since that time it has continued to make periodic, voluntary compliance reports, and has included in its reports compliance issues associated with its California-regulated affiliate Verizon West Coast.⁹

The proposed settlement agreement is founded on the record the parties have developed, and the remedies it proposes are commensurate with the problems documented. We conclude that it is reasonable in light of the whole record.

Consistent with the Law

We explained in the previous section how the penalty the settlement proposes is consistent with § 2107. The settlement deals exclusively with ICB and express contracting violations that have occurred in the past. Nothing in the settlement purports to relieve Verizon of its responsibility for abiding by all applicable laws and the Commission's orders and rules, nor would we approve it if it did. Verizon itself remains responsible for adopting any and all necessary changes to ensure it is for the future in full compliance with all legal requirements.

The Parties assert that the settlement agreement is consistent with the law. After reviewing it, we agree.

In the Public Interest

In their joint motion to adopt the settlement, the parties briefly describe their aims as they negotiated this settlement. At the outset, they generally agreed that the key considerations in resolving the issues of the OII were to determine the appropriate penalties for Verizon's past violations of ICB contracting rules based on the record, and to determine whether Verizon's current practices are adequate to prevent recurring problems in the future.

During the course of its investigation, CPSD reviewed the voluminous reports Verizon had submitted as a result of its own investigation, and avers that Verizon cooperated in that review. Where there were problems with Verizon's practices that harmed the public, those problems have been exposed and measures taken to ensure they do not recur. Where there were violations of law, those violations have been exposed and an appropriate penalty applied.

As CPSD noted when it filed a revised schedule in December 2002, "[I]t appears that the cost of the audit ordered in I.02-04-027 may exceed the potential benefit that would be derived by Verizon's customers from the audit.... Given the difficult circumstances outlined above, the Commission would be wise to consider this case in a way that makes maximum use of work that has already been done, that carries out the Commission's enforcement responsibilities, but does not lead to a protracted review process." We agree. One of the important advantages a settlement may provide is avoiding the time, the expense and the uncertainty of continued litigation. It would make little sense to continue an investigation that would produce less public benefit than the cost that went into it. The public interest is best served when the Commission and its staff are able to carry out their responsibilities in the most efficient way possible, as was done here. Our approval of this settlement recognizes that Verizon has implemented corrective measures aimed at preventing further violations, and allows our staff to pursue consumer protection needs in other areas.

For these reasons, we find the proposed settlement to be in the public interest and will approve it.