Public Utilities (PU) Code § 701 empowers this agency to "do all things, whether specifically designated [in the code] or in addition thereto, which are necessary and convenient in the exercise of its powers and jurisdiction." It is fundamental to the Commission's exercise of its powers and jurisdiction that the agency take reasonable steps to ensure that the utilities comply with its orders and rules. As part of its enforcement efforts, the Commission has traditionally imposed fines when faced with persuasive evidence of non-compliance. A question raised by this rulemaking proceeding is what boundaries the Commission should establish for fines it may impose when faced with a violation of the affiliate transaction rules.
Section 798 establishes a fine to apply to one particular type of inappropriate affiliate transaction: when a utility attempts to pass on to its ratepayers costs resulting from a "less than reasonable payment" from an affiliate, the Commission may levy a penalty equal to three times the required or prohibited payment. The code provides no specific formula for assessing penalties in response to other types of affiliate transactions that are in violation of our rules.
Section 2107 states that, "in a case in which a penalty has not otherwise been provided," penalties shall be not less than $500 nor more than $20,000 for each offense. Parties in this proceeding have focused their debate on whether this provision limits the Commission's discretion in assessing fines, or simply states the framework for fines in circumstances where neither the Commission nor the Legislature has established a different penalty scheme.
Those arguing that § 2107 limits the Commission's power to impose penalties rely on cases such as Assembly v. Public Utilities Commission, 12 Cal.4th 103, 48 Cal. Rptr.2d 54 (1995) in which the California Supreme Court stated that § 701 does not "confer upon the Commission powers contrary to other legislative directives, or to express restrictions placed upon the Commission's authority by the Public Utilities Code." However, the specific framework for penalties included in the proposed rules represents neither of these things. The Legislature has directed us in two ways: (1) where improper affiliate transactions are of one specific type, apply the penalties provided in § 798; and (2) where no other penalty scheme has been established, apply the penalties provided in § 2107. It is not contrary to legislative directives or express restrictions for the Commission to establish a new penalty framework so long as it applies the § 798 penalties in the circumstances described in that section.3
Some parties argue that when the Legislature, through § 2107, provides an exception for a "case in which a penalty has not otherwise been provided," it is only referring to circumstances in which the Legislature itself has provided another penalty. However, the statute creates no such limitation. As the Joint Petitioners Coalition points out, in order to find such a restriction, one would have to assume that the Legislature intended to say "...case in which a penalty has not otherwise been provided by statute," or something similar. To the contrary, the Legislature has expressly left an opening for the development of other penalty approaches to apply in specific circumstances and has not restricted the Commission's ability to craft such approaches.
In this way, § 2107 differs from the statutes discussed in Assembly and other cases, which were drafted in more restrictive ways. The statute considered in Assembly was § 453.5, which establishes a protocol for distributing rate refunds to ratepayers "[w]henever the Commission orders rate refunds to be distributed." The court stated that the broader powers that the Commission may have pursuant to § 701 cannot be exercised in a manner that is inconsistent with express directives and restrictions placed upon the Commission's authority by the PU Code. The court then found that § 453.5 "constitutes one of the express legislative directives and restrictions upon the commission's regulatory authority." In contrast, § 2107 does not apply whenever the Commission imposes a fine. It applies "in a case in which a penalty has not otherwise been provided."
The passive construction of this clause offers no insight as to whether a different penalty can be provided by the Commission or must originate in the Legislature. We understand § 2107 to allow the Commission to establish a specific penalties framework so long as it does not conflict with § 798, the only statutory provision that focuses on an aspect of affiliate relations. Of course, any penalties framework we were to adopt must have a rational basis and must set forth clear standards for its application. As it is designed and applied, it must not result in excessive fines. In addition, it should apply on a prospective basis; all parties would have notice of them in advance of any potential violation.
The framework in § 2107 does not always meet the practical needs that we face in enforcing the affiliate transaction rules. We need a framework that will lead to a fine that is sufficient to discourage inappropriate behavior, while not being excessive. A $20,000 fine may be insufficient to discourage inappropriate behavior when the corporation responsible for the violation has billions of dollars in annual revenue. Consider, for instance, a utility found to have performed a single act which conferred preferential treatment on an affiliate. At the same time, a $500 fine may be excessive when there is a very large number of violations. Consider a situation where a utility with four million customers has violated the Corporate Identification and Advertising rules in a mailing sent to each customer. If each mailed item constituted a violation of the rules, the utility would face a minimum fine of $2 billion. A more practical framework for enforcing these rules would enable us to consider a minimum penalty of $1 or less for instances where there are hundreds of thousands or millions of small violations, and would enable us to consider a maximum penalty of $500,000 in the event of a single serious violation. We will revise this portion of the rules accordingly.
Commensurate with implementing a more expanded penalty scheme, we will provide more explicit guidance as to how fines will be assessed. We have reviewed the comments offered by various parties and consulted our senior managers to craft a set of principles that reflect the past practices of this and similar regulatory agencies. In establishing the appropriate fine, the principles call for the Commission to take into account the severity of the offense, the conduct of the utility (before, during and after the offense), the financial resources of the utility and the totality of circumstances related to the violation. The resulting fine must also be considered in the context of past Commission decisions. These principles appear as Rule VII.D.2.b. and its subparts.
3 We note PG&E's position that, in the context of these code sections, "the Commission may not devise other fines, it may not issue Temporary Restraining Orders, it may not order divestiture, and it may not utilize a three strikes mechanism, or other mechanism, to disable an affiliate." There is no basis for such a broad interpretation of the limitations created by these code sections. Sections 798 and 2107, prescribe monetary penalties for certain violations. They do not address or restrict the many other things the Commission must do to ensure that the utilities comply with applicable laws, rules and decisions. We will address the merits of each of these other enforcement mechanisms below.
