Contra Costa Times (Walnut Creek, California)
Walnut Creek, CA — The state Public Utilities Commission knew as early as 1999 that it had a serious problem collecting fines from phone companies that were ripping off consumers, but it did not act on recommendations that it aggressively identify and pursue the firms’ assets, internal documents show.
The Times reported in April that the commission had failed to collect $32 million in fines from companies that had overcharged customers. The State Controller’s Office responded with an audit released Tuesday that faulted the commission for a lack of accounting practices and failure to aggressively pursue the debts.
Now, two confidential legal documents obtained by the Times show that the commission knew of the problem eight years ago — before most of the money was lost. The 1999 memos made many of the same recommendations later contained in the controller’s audit.
The memos call for the commission to “preserve (company) assets for possible fines” in case of bankruptcy or liquidation and to strengthen requirements to license such companies in the first place.
One memo, written in September 1999 by a commission group called the Consumer Protection Coordinating Committee, identified a growing problem with “small, thinly capitalized companies” in the phone business that did not have money to pay fines or restitution to customers if the commission took action.
Less than two weeks later, Peter Arth, the commission’s top lawyer, wrote in the second memo that the agency could solve the problem by requiring companies to post bonds in order to do business. The commission could also aggressively identify company assets early in an investigation so they could be pursued if fines were levied and the company closed, he wrote.
Commissioners, Arth wrote, had asked staff members to “consider from the outset of all enforcement cases any actions which could be taken to preserve (company) assets for possible reparations and fines.”
But no action on the memos was taken. At the time, the commission was investigating Corral Communications, a Florida company, for ripping off California consumers. In 2001, it fined Corral $5.1 million but never collected the money.
Nearly all of the $32 million in uncollected fines was levied after the memos were written.
Commission spokeswoman Susan Caruthers said last week that no one was available to discuss the memos. Paul Clanan, the commission’s executive director, and President Michael Peevey did not return messages.
None of the current commission members was in office when the memos were written. One memo is addressed to former Commissioner Carl Wood, who did not return telephone calls.
It was unclear if the controller’s auditors knew of the memos. A spokeswoman for the Controller’s Office said the lead auditor was unavailable Friday.
Arth, whose tenure as general counsel ended in 2001 and who recently retired as an aide to Peevey, said the recommendations were “acknowledged as good ideas, but there wasn’t enough staff to implement them.”
The commission’s 70 lawyers, Arth said, were almost solely dedicated to the state energy crisis that arose 10 months after the memos were written.
“All the resources were dedicated to deal with that,” he said. After the crisis ended, the commission moved on to other matters.
Californians should not accept the energy crisis as an excuse for a lack of action on the recommendations, said Doug Heller, executive director of the Foundation for Taxpayer and Consumer Rights, a watchdog group.
“They had 10 months before the energy crisis and years afterward,” he said. “They didn’t lift a finger. They knew exactly where they had problems, and they chose to do nothing about it, and the consumers of California suffered for it. They’ve screwed up a vital responsibility. It’s hard to have any confidence in the commission.”
As for the latest audit, Clanan and commissioners at a meeting Thursday said they took the controller’s recommendation seriously, according to a recording of their comments.
“The (commission) has not done a good job of internal accounting of fines,” Clanan said. “There are no standard operating procedures in place.”
Commissioner Timothy Simon said the commission needs to “make the bad debtors understand (they have committed) a breach of the public trust.”
Commission staff members has blamed the inability to collect debts on the fact that many of the companies were based out of state and most filed for bankruptcy.
But Simon, a lawyer and former investment banker, said the commission needed to get tougher. He advocated “going after the personal assets” of company officials and owners and to “exhaust every imaginable standpoint” in pursing the debts.
Commissioner Rachelle Chong said a need exists “to go back and look at rules” for allowing phone companies to do business in California.