Further Delegation to the Executive Director
As mentioned above in our discussion of temporary restraining orders, the Commission has delegated to its Executive Director the authority to grant extensions of time to comply with Commission orders (Rule 48(b) of the Commission's Rules of Practice and Procedure). Pursuant to Rule 48(a), requests for extensions of time related to the Commission's rules are to be directed to the administrative law judge. PG&E proposes enlarging the delegation to the Executive Director to include the authority to grant extensions of any time limits set forth in these enforcement rules. That would include the time to file answers to complaints and other certain reports.
In order to avoid confusion and unnecessary inconsistency, we will not enlarge the delegation to the Executive Director for extensions of time related to these rules. Otherwise, participants will have to learn different rules for seeking extensions of time in different cases. For instance, for most complaints, a motion to accept the late filing of an answer to a complaint would be directed to the administrative law judge assigned to the case. In complaints related to affiliate rules, the request would be directed to the Executive Director. There is no apparent benefit to having such inconsistent rules.
An Option to Avoid Seeking Informal Dispute Resolution
The University of California/California State Universities (Universities) agree with the requirement, contained in the proposed rules, that the utilities cooperate with informal efforts to resolve disputes. However, the Universities ask for complainants to have the option of forgoing informal efforts when a violation is particularly egregious and it may be inappropriate to wait a month before pursuing a formal complaint. The change proposed by the Universities does not appear to be necessary to resolving their concerns. Where time is of the essence, our rules allow complainants to pursue a temporary restraining order without waiting for the informal dispute resolution period to expire. In any event, this requirement does not add time to the processing of a complaint, since the negotiations must occur during the time while an answer to the complaint is pending and the report on the efforts to resolve the dispute is due on the same day that the answer is filed. For these reasons, we decline to adopt the Universities' proposal.
Preliminary Discussions Prior to Filing a Complaint
ORA proposes adding a section to the rules facilitating informal contacts between utilities and potential complainants prior to the filing of a formal complaint. It is consistent with the entire thrust of these enforcement rules to encourage such contacts. We will adopt the portions of ORA's proposed language that ensure that utility representatives will be responsive to informal inquiries, while emphasizing that a potential complainant is not required to exercise this option before filing a formal complaint. The new subsection C.6 will read as follows
"C.6. Preliminary Discussions
"a. Prior to filing a formal complaint, a potential complainant may contact the responsible utility officer and/or the Energy Division to inform them of the possible violation of the affiliate rules. If the potential complainant seeks an informal meeting with the utility to discuss the complaint, the utility shall make reasonable efforts to arrange such a meeting. Upon mutual agreement, Energy Division staff and interested parties may attend any such meeting.
"b. If a potential complainant makes an informal contact with a utility regarding an alleged violation of the affiliate transaction rules, the utility officer in charge of affiliate compliance shall respond in writing to the complainant within 15 business days. The response would state whether or not the issues raised by the potential complainant require further investigation. (The potential complainant does not have to rely on the responses in deciding whether to file a formal complaint.)"
D. Penalties
Several parties have suggested renaming this section "Remedies," mostly likely to reflect the fact that the section encompasses more than just monetary penalties.We will make this change in an effort to encompass the range of steps the Commission may take in response to a violation, including penalties.
D.1. Overview of Enforcement Options
This section outlines seven steps the Commission may take in response to a violation. Sierra would eliminate all seven steps and have the rules simply state that the Commission may impose any or all penalties allowed by statute. This statement would be true, of course, whether or not it was stated in the rules. We do not see an advantage to including such a statement. Similarly, others have proposed that the rules cite the code sections pursuant to which the Commission may impose fines. There is no apparent illumination that would result from repeating or citing statutes in these rules. We do, however, see a purpose to identifying the types of steps we may consider when faced with a violation, so that all parties will understand the potential consequences of violating the rules. We will look at each of the steps individually and consider any proposed changes.
PG&E proposes striking this provision, arguing it raises abrogation of contract issues and is not authorized by statute. Edison would simply rewrite the provision to read: "The Commission may order the Utility to cease and desist from engaging in practices that the Complainant has proven violate the Rule(s)." PG&E Energy Services PacifiCorp and SoCalGas/SDG&E would leave the language unchanged. No other party has recommended changes to this subsection.
It appears unnecessary to use contract-related words such as "termination" in stating that the Commission may order a utility to stop doing something that violates the rules. Edison suggests language that would avoid such words, but it proposed changes that go further, including a reference to a complainant's burden of proof. There is nothing that we are doing in these rules that changes the traditional burden of proof that applies in complaint cases. What we are trying to do here is simply recite the enforcement options available to the Commission. We also will refrain from using the phrase "cease and desist" because it is not clear whether it has particular meaning in this context. Instead, we will revise this subsection to read as follows:
"Order a utility to stop doing something that violates these rules;"
The prior subsection addresses the need to stop the activity causing a current violation. This subsection addresses the need, in some circumstances, to respond to a violation by placing restrictions on future interactions. Edison proposes revising the language to state "[t]he Commission may prospectively limit or restrict the amount, percentage, or value of a transaction between the utility and its affiliate(s) which violates a Rule, so as to prevent the utility from benefiting from such a violation." PacifiCorp proposes revising the language to focus the restrictions only on a particular affiliate involved in the transaction. PG&E Energy Services would limit the restrictions to a period of one year. PG&E and Sierra would eliminate this subsection in its entirety, while SDG&E/SoCalGas would leave it unchanged.
The changes proposed by Edison, PacifiCorp and PG&E Energy Services would place limits on the use of this enforcement option that may be appropriate in specific cases. The Commission must apply these rules in a manner that is reasonable in light of the facts underlying a specific complaint. However, we would make the rule unnecessarily rigid if we were to add restrictions on the time or manner or its application. We will, however, tighten the language by removing the reference to the use of this approach as a remedy for a violation. All of the options in this category are provided as potential remedies in response to violations of the rules. This subsection now reads as follows:
"Prospectively limit or restrict the amount, percentage, or value of transactions entered into between the utility and its affiliate(s);"
The purpose of this subsection is to include, in the list of potential remedies, the imposition of fines and penalties. We will modify this section to remove the extraneous reference to "damages" and to remove the reference to other paragraphs. It is unnecessary to refer to Paragraph 2 in the context of the rules. As discussed below, we are deleting Paragraph 3 in its current form. In its revised form, this subsection reads as follows:
"Assess fines or other penalties;"
We will eliminate this subsection, because this option is already reflected in subsection D.1.a.
This subsection serves as a reminder that the we do not intend, with these rules, to constrain the Commission's ability to use any remedy that may be within its powers. We will retain this section, but place it at after the current subsection D.1.f. It will still be labeled as subsection (e).
PG&E , Edison, and PacifiCorp would delete this provision. PG&E Energy Services would restrict its application to "affected" affiliates. SDG&E/SoCalGas would leave it unchanged. However, other than showing this section to be deleted or changed in its proposed revisions to the rules, no party has offered arguments as to why this provision should not be included. We see this option as one that should be employed only with great caution and only where less onerous options do not appear adequate in response to a violation or series of violations. While we do not anticipate turning to this solution, it should be available if ever it is needed. Thus, we will retain this subsection in the rules, although we will refer to it as subsection (d), since we are eliminating the subsection that previously bore that letter.
D.2. Principles to Apply to the Imposition of Fines
In its current form, this subsection describes some factors that would influence the Commission's determination of the appropriate fine to impose in the event of a violation. In addition, it states that the Commission shall impose penalties up to $10,000,000 if the penalty is determined on an incident-by-incident basis. The inclusion of this subsection in the proposed rules prompted extensive comment on the appropriate range for fines and on standards that should apply to the determination of an appropriate fine. As discussed above, we believe that we should establish a specific range of fines for use in the enforcement of the affiliate transaction rules. We will set forth that range in this revised subsection. In addition, we have considered the comments offered by parties on appropriate standards in light of the Commission's past practices in imposing fines, and in the context of standards employed by other agencies. As a result, we have developed principles that would apply to fines in response to violations of the affiliate transaction rules. An open question is whether we should consider these as general principles of applicability in other Commission contexts, as well. For reference in the context of the affiliate transaction rules, we will describe the principles in these rules in lieu of the proposed subsection D.2. The new subsection will read as follows:
"Any public utility which violates a provisions of these rules is subject to a fine of not less than one dollar ($1), nor more than $500,000 for each offense. The remainder of this subsection distills the principles that the Commission has historically relied upon in assessing fines and restates them in a manner that will form the analytical foundation for future decisions in which fines are assessed. Before discussing those principles, reparations are distinguished.
D.2.a. Reparations
Reparations are not fines and conceptually should not be included in setting the amount of a fine. Reparations are refunds of excessive or discriminatory amounts collected by a public utility. Public Utilities Code § 734. The purpose is to return funds to the victim which were unlawfully collected by the public utility. Accordingly, the statute requires that all reparation amounts are paid to the victims. Unclaimed reparations generally escheat to the state, Code of Civil Procedure § 1519.5, unless equitable or other authority directs otherwise, e.g., Public Utilities Code § 394.9.
D.2.b. Fines
The purpose of a fine is to go beyond restitution to the victim and to effectively deter further violations by this perpetrator or others. For this reason, fines are paid to the State of California, rather than to victims.
Effective deterrence creates an incentive for public utilities to avoid violations. Deterrence is particularly important against violations which could result in public harm, and particularly against those where severe consequences could result. To capture these ideas, the two general factors used by the Commission in setting fines are: (1) severity of the offense and (2) conduct of the utility. These help guide the Commission in setting fines which are proportionate to the violation.
D.2.b.i. Severity of the Offense
The severity of the offense includes several considerations. Violations which caused actual physical harm to people or property are generally considered the most severe, with violations that threatened such harm closely following. After physical harm, economic harm is considered; that is, the amount of expense which was imposed upon the victims. Another way of measuring economic harm is the unlawful benefits gained by the public utility. Generally, the greater of these two amounts will be used in establishing the fine.
The fact that the economic harm may be difficult to quantify does not itself diminish the severity or the need for sanctions. For example, the Commission has recognized that deprivation of choice of service providers, while not necessarily imposing quantifiable economic harm, diminishes the competitive marketplace such that some form of sanction is warranted.
Many potential penalty cases before the Commission do not involve any harm to consumers but are instead violations of reporting or compliance requirements. In these cases, the harm may not be to consumers but rather to the integrity of the regulatory processes. For example, compliance with Commission directives is required of all California public utilities:
"Every public utility shall obey and comply with every order, decision, direction, or rule made or prescribed by the commission in the matters specified in this party, or any other matter in any way relating to or affecting its business as a public utility, and shall do everything necessary or proper to secure compliance therewith by all of its officers, agents, and employees." Public Utilities Code § 702.
Such compliance is absolutely necessary to the proper functioning of the regulatory process. For this reason, disregarding a statutory or Commission directive, regardless of the effects on the public, will be accorded a high level of severity.
The number of the violations is a factor in determining the severity. A series of temporally distinct violations can suggest an on-going compliance deficiency which the public utility should have addressed after the first instance. Similarly, a widespread violation which affects a large number of consumers is a more severe offense than one which is limited in scope. For a "continuing offense," Public Utilities Code § 2108 directs the Commission to count each day as a separate offense.
D.2.b.ii. Conduct of the Utility
This factor recognizes the important role of the public utility's conduct in (1) preventing the violation, (2) detecting the violation, and (3) disclosing and rectifying the violation. The public utility is responsible for the acts of all its officers, agents, and employees:
"In construing and enforcing the provisions of this part relating to penalties, the act, omission, or failure of any officer, agent, or employee of any public utility, acting within the scope of his [or her] official duties or employment, shall in every case be the act, omission, or failure of such public utility." Public Utilities Code § 2109.
(1) The Utility's Actions to Prevent a Violation
Prudent practice requires that all public utilities take reasonable steps to ensure compliance with Commission directives. This includes becoming familiar with applicable laws and regulations, and most critically, the utility regularly reviewing its own operations to ensure full compliance. In evaluating the utility's pre-violation actions, the Commission will consider the utility's past record of compliance with Commission directives.
(2) The Utility's Actions to Detect a Violation
The Commission expects public utilities to monitor diligently their activities. Where utilities have for whatever reason failed to meet this standard, the Commission will continue to hold the utility responsible for its actions. Deliberate, as opposed to inadvertent wrong-doing, will be considered an aggravating factor. The Commission will also look at management's conduct during the period in which the violation occurred to ascertain particularly the level and extent of involvement in or tolerance of the offense by management personnel. The Commission will closely scrutinize any attempts by management to attribute wrong-doing to rogue employees. Managers will be considered, absent clear evidence to the contrary, to have condoned day-to-day actions by employees and agents under their supervision.
(3) The Utility's Actions to Disclose and Rectify a Violation
After a violation occurs, the Commission expects the public utility to promptly bring it to the attention of the Commission. The precise timetable that constitutes "prompt" will vary based on the nature of the violation. Violations which physically endanger the public must be immediately corrected and thereafter reported to the Commission staff. Reporting violations should be remedied at the earliest administratively feasible time.
Prompt reporting of violations furthers the public interest by allowing for expeditious correction. For this reason, steps taken by a public utility to promptly and cooperatively self-report and correct violations may be considered in assessing any penalty.
D.2.b.iii. Financial Resources of the Utility
Effective deterrence also requires that the Commission recognize the financial resources of the public utility in setting a fine which balances the need for deterrence with the constitutional limitations on excessive fines. Some California utilities are among the largest corporations in the United States and others are extremely modest, one-person operations. What is accounting rounding error to one company is annual revenue to another. The Commission intends to adjust fine levels to achieve the objective of deterrence, without becoming excessive, based on each utility's financial resources.
D.2.b.iv. Totality of the Circumstances in Furtherance
of the Public Interest
Setting a fine at a level which effectively deters further unlawful conduct by the subject utility and others requires that the Commission specifically tailor the package of sanctions, including any fine, to the unique facts of the case. The Commission will review facts which tend to mitigate the harm caused by the violation as well as any facts which exacerbate the harm. In all cases, the harm will be evaluated from the perspective of the public interest.
D.2.b.v. The Role of Precedent
The Commission adjudicates a wide range of cases which involve sanctions, many of which are cases of first impression. As such, the outcomes of cases are not usually directly comparable. In future decisions which impose sanctions,the parties and, in turn the Commission will, however, explicitly address those previously issued decisions which involve the most reasonably comparable factual circumstances and explain any substantial differences in outcome.
D.3. Fines are paid to the General Fund
This statutory requirement is now discussed in rule D.2. Thus, we will delete this subsection.
D.4. and D.5 Multiple Violations
These provisions would establish a point system under which each offense would count as a point. After a utility accumulated three points, the Commission would impose an immediate one-year prohibition on transactions between the utility and any affiliate or affiliates involved in the violations. In their comments, many have referred to these provisions as the `three strikes" rules.
Those who support these rules see them as a vital part of a program to ensure due diligence on the part of the utilities to comply with the rules. Those who oppose them characterize the rules as too rigid, excessive, punitive, and unfair.
The opponents point out that the rules, as drafted, do not distinguish between inadvertent or minor violations and more severe violations. The implication is that a one-year prohibition of this sort would be an excessive reaction to minor offenses. The rules do not take into account whether all three violations occurred as a result of a single act, such as an ongoing violation, or whether they occurred as a result of three separate acts. It would be unfairly punitive to apply such a severe sanction in response to most single acts. The rules are also criticized because they would appear to apply even if the three violations occurred many years apart, in which case it could be argued that they do not represent a pattern of consistent malfeasance. Another concern is that, as written, the sanctions could be applied to a utility that did not have notice that it had two points against it, and that it was in jeopardy of facing a one-year prohibition. This could occur because of the sequence in which violations are discovered, or cases are litigated. Without such notice, it is argued, the three-point rule would have little deterrent effect.
We are convinced that it is important to maintain and clearly state an option to impose such sanctions in response to repeated violations. However, we agree with each of the criticisms discussed above. Any rules should be structured to serve a clear purpose. Here, the purpose is to discourage utilities from allowing continued violations to occur. We wish to reserve such a stern response for situations where the repeated violations are of a serious nature and reflect a disregard for the importance of following the rules. In the rule's current simplified version, there are many ways that it could be applied to circumstances that do not fit this description. We will modify these rules to answer the legitimate concerns that many parties have expressed. The adopted rule which will become D.3 will read as follows:
"Each violation of any provision of Sections III, IV, or V of these Rules shall count as a point against the utility. In the event that a utility accumulates three or more points, the Commission may impose a one (1) year prohibition, to go into effect immediately, on the utility entering into any transactions (including sales of any tariffed or non-tariffed services) with any of the affiliate(s) involved in such violations. In determining whether to impose this sanction, the Commission will consider the severity of the offenses and conduct of the utility under the criteria of Rules D.2.b.i. and D.2.b.ii, and the time period over which the violations occurred. In the absence of special circumstances, such sanctions will not be imposed for a single, ongoing offense and will not be imposed unless the Commission previously finds that the utility has committed such serious violations and notifies the utility prior to the third offense that another serious violation will lead to the imposition of such sanctions.
"The ban will not be lifted prior to the end of one year and not until the utility demonstrates, through a filed application, that it is in compliance with all of the provisions of these rules, and specifies measures the utility has taken to prevent further violations of these rules from occurring. In the event that a utility violates a temporary affiliate transaction ban imposed by the Commission, the Commission shall impose additional penalties consistent with these rules."
The adopted rule which will become rule D.4 will read as follows:
"Each violation of any provision of Section VII of these rules shall count as a point against the utility. In the event that a utility accumulates three or more points, the Commission may impose a ban on the offering of any non-tarriffed products and services for a period of one year. The use of this sanction is subject to the same limitations set for in subsection D.3."
D.6. Other Penalties or Fines
This subsection is duplicative of D.1.e. and will therefore be deleted.
