United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 2, 2000 Decided June 16, 2000

No. 99-1114

[American Public Communications Council, et al. ]{.smallcaps}

[Petitioners]{.smallcaps}

v\.

[Federal Communications Commission and ]{.smallcaps}

[United States of America, ]{.smallcaps}

[Respondents]{.smallcaps}

[Telecommunications Resellers Association, et al., ]{.smallcaps}

[Intervenors]{.smallcaps}

Consolidated with

99-1115, 99-1117, 99-1122

On Petitions for Review of an Order of the

Federal Communications Commission

*Michael K. Kellogg* argued the cause for petitioner Payphone Service
Providers. With him on the briefs were *Albert H. Kramer* and *Robert F.
Aldrich. David M. Janas, Michael J. Zpevak* and *Robert M. Lynch*
entered appearances.

*Jodie L. Kelley* argued the cause for petitioners MCI WorldCom, Inc.,
et al. and supporting intervenors. With her on the briefs were *Maria L.
Woodbridge, Mark B. Ehrlich, Donald B. Verrilli, Jr., Leon M.
Kestenbaum, Jay C. Keithley, H. Richard Juhnke, Robert Digges, Jr., Mark
C. Rosenblum, James S. Blaszak, Janine F. Goodman, Carl W. Northrop, E.
Ashton Johnston, Howard J. Symons, Sara F. Seidman, David Carpenter,
Peter Keisler, Danny E. Adams, Steven A. Augustino, Robert J. Aamoth,
Dana Frix, C. Joel Van Over, Teresa K. Gaugler, Michael J. Shortley,
III, Thomas Gutierrez, J. Justin McClure, Charles C. Hunter* and
*Catherine M. Hannan. John B. Morris, Jr., Michelle W. Cohen, James M.
Smith* and *Genevieve Morelli* entered appearances.

*Joel Marcus*, Counsel, Federal Communications Commission, argued the
cause for respondents. *Joel I. Klein*, Assistant Attorney General, U.S.
Department of Justice, *Robert B. Nicholson* and *Robert J. Wiggers*,
Attorneys, *Christopher J. Wright*, General Counsel, Federal
Communications Commission, *John E. Ingle*, Deputy Associate General
Counsel, and *Lisa A. Burns*, Counsel, were on the brief.

*Albert H. Kramer* argued the cause for intervenors Payphone Service
Providers. With him on the brief were *Robert F. Aldrich* and *Michael
K. Kellogg*.

*H. Richard Juhnke* argued the cause for Long Distance, Paging and
Consumer intervenors. With him on the brief were *Leon M. Kestenbaum,
Jay C. Keithley, Charles C. Hunter, Catherine M. Hannan, Carl W.
Northrop, Robert Digges, Jr., Howard J. Symons, Sara F. Seidman, Mark C.
Rosenblum, David W. Carpenter, Danny E. Adams, Steven A. Augustino,
Robert J. Aamoth, Dana Frix, C. Joel Van Over, Michael J. Shortley, III,
Teresa K. Gaugler, Thomas Gutierrez* and *J. Justin McClure*.

Before: [Edwards]{.smallcaps}, *Chief Judge*, [Sentelle]{.smallcaps} and
[Randolph]{.smallcaps}, *Circuit Judges*.

Opinion for the Court filed by *Circuit Judge* [Sentelle]{.smallcaps}.

[Sentelle]{.smallcaps}, *Circuit Judge*: Section 276 of the
Telecommunications Act of 1996, that comprehensively amended the
Communications Act of 1934, *see* Telecommunications Act of 1996, Pub.
L. No. 104-104, 110 Stat. 56 (\"1996 Act\"), concerns payphone services.
It requires the Federal Communications Commission (\"FCC\" or
\"Commission\") to promulgate regulations to \"establish a per call
compensation plan to ensure that all payphone service providers are
fairly compensated for each and every completed intrastate and
interstate call using their payphone.\" 47 U.S.C. § 276(b)(1)(A) (Supp.
III 1997). Petitioners representing various interests of the payphone
industry seek review of the FCC\'s third attempt at a sustainable
per‑call fee plan to fulfill its § 276 obligations. We hold that the
FCC\'s order withstands scrutiny under the Administrative Procedure Act.
*See* 5 U.S.C. § 706 (1994).

I. Background

This case is before us for the third time. In two previous orders, the
FCC has attempted to develop and justify a per‑call fee for chinless
calls from payphones. *See In re Implementation of the Pay Telephone
Reclassification and Compensation Provisions of the Telecommunications
Act of 1996*, 11 F.C.C.R. 20541 (1996) (\"First Order\"); *In re
Implementation of the Pay Telephone Reclassification and Compensation
Provisions of the Telecommunications Act of 1996*, 13 F.C.C.R. 1778
(1997) (\"Second Order\"). Acting on previous petitions for review, we
have twice remanded the Commission\'s determinations for a lack of
reasoned decisionmaking. *See Illinois Pub. Telecomms. Ass\'n v. FCC*,
117 F.3d 555, 558 (D.C. Cir. 1997) (\"*Payphones I*\"); *MCI Telecomms.
Corp. v. FCC*, 143 F.3d 606, 607 (D.C. Cir. 1998) (\"*Payphones II*\").
Today we consider petitions challenging the FCC\'s third order on the
subject. *See In re Implementation of the Pay Telephone Reclassification
and Compensation Provisions of the Telecommunications Act of 1996*, 14
F.C.C.R. 2545 (1999) (\"Third Order\").

Historically, only local phone service providers (local exchange
carriers or \"LECs\") provided payphone services. The development of
so‑called \"smart\" payphones in the mid-1980s allowed independent
payphone service providers (\"PSPs\") to compete with the LECs. PSPs
obtained their revenues from either coin calls or from contracts with
interexchange carriers (\"IXCs\" or operations services providers,
\"OSPs\") for collect calls and calling card calls. *See Payphones I,*
117 F.3d at 558-59.

Before the 1996 Act was passed, PSPs were largely uncompensated for a
third type of payphone call: \"dial around\" chinless calls, where the
caller uses a long distance carrier other than the payphone\'s
presubscribed carrier. \"Dial around\" chinless calls include toll‑free
calls to long distance providers (such as 1-800-CALL-ATT), and the
10-10-XXX type of calls. *See id.* at 559. PSPs are prohibited from
blocking these dial around calls. *See* Telephone Operator Consumer
Services Improvement Act of 1990, Pub. L. No. 101-435, 104 Stat. 986
(codified at 47 U.S.C. § 226 (1994)). In § 276 of the 1996 Act Congress
addressed the problem of uncompensated calls by requiring the FCC to
\"establish a per call compensation plan to ensure that all payphone
service providers are fairly compensated for each and every completed
intrastate and interstate call using their payphone.\" 47 U.S.C. §
276(b)(1)(A) (Supp. III 1997). The statute directs the Commission to
prescribe regulations \"\[i\]n order to promote competition among
payphone service providers and promote the widespread deployment of
payphone services to the benefit of the general public\" to meet this
end. *Id.* § 276(b)(1).

The FCC decided that the best way to ensure fair competition was to
allow the market to set the price for each call. *See* First Order, 11
F.C.C.R. 20541 ¶ 70. But because no market has previously existed for
dial around chinless calls, the Commission first adopted a market‑based
surrogate---the price of a local coin call at a typical deregulated
payphone of \$.35. In imposing this rate, the FCC simply said that the
\"cost\[s\] of originating the various types of payphone calls are
similar.\" *Id*.

Various parties sought review of this part of the Commission\'s
decision, as well as several other portions of the First Order. *See
Payphones I,* 117 F.3d at 563-64. We remanded the chinless call rate
determination because the Commission had ignored record evidence that
the costs of coin calls and chinless calls are *not* similar. *See id.*;
*see also Illinois Pub. Telecomms. Ass\'n v. FCC*, 123 F.3d 693, 694
(D.C. Cir. 1997). For example, numerous IXCs had noted that coin calls
cost more than chinless calls because of the typical costs of using coin
mechanisms in payphones. We concluded that \"\[t\]he FCC\'s *ipse dixit*
conclusion, coupled with its failure to respond to contrary arguments
resting on solid data, epitomizes arbitrary and capricious
decisionmaking.\" *Payphones I*, 117 F.3d at 564 (citing *Motor Vehicle
Mfrs. Ass\'n v. State Farm Mut. Auto. Ins. Co.*, 463 U.S. 29, 46-57
(1983)).

On remand, the FCC attempted to develop an actual market‑based rate for
chinless calls. *See* Second Order, 13 F.C.C.R. 1778 ¶ 29. The
Commission used the deregulated coin market rate as a starting point
(\$.35), and subtracted \$.066 per call as representing the difference
between coin and chinless calls, resulting in a per call rate of \$.284.
*See id.* ¶ 41-42. On appeal, we again found error in the agency\'s
decisionmaking. *See Payphones II*, 143 F.3d at 608-09. We faulted the
Commission\'s failure to explain why the chinless market rate could be
found by simply subtracting costs from coin call rates: \"If costs and
rates depend on different factors, as they sometimes do, then this
procedure would resemble subtracting apples from oranges.\" *Id*. at
608. We noted that although the Commission \"may have depended on the
premise that the market rate for coin calls generally reflects the costs
of those calls,\" it had failed to articulate its assumptions and
connect them to its reasoning. *Id.* We remanded for further
proceedings. *See id.* at 609.

The Commission went back to the drawing board one more time. On February
9, 1999, the FCC issued its Third Order, which we now review. The FCC
switched from the \"top‑down methodology\" of the Second Order to a
\"bottom‑up\" method, meaning that it started from zero and added up the
costs of chinless calls to develop a chinless call rate. *See* Third
Order, 14 F.C.C.R. 2545 ¶ 13. The resulting new rate is \$.24.

Briefly put, the Commission first determined the \"joint and common\"
costs of a payphone; that is, the monthly capital expense of a payphone,
using the cost of a typical payphone and accoutrements. The FCC did not
include the cost of a coin mechanism in this figure because it
determined that that cost is only necessary for coin calls, but did
include amounts as joint and common costs for monthly line charge costs,
maintenance costs, overhead costs (known as Sales, General, and
Administrative Costs or \"SG&A\"), and coding digit costs. Total monthly
costs per payphone came to \$101.29.

To translate total monthly costs into a per call rate, the FCC divided
that figure by the average number of calls received by a marginal
payphone. A marginal payphone is one that gathers revenue to meet its
costs (including an assumption that the payphone does not pay location
rent to the owner of the premises because of its marginal status) but is
not otherwise profitable. Relying on data submitted by the Regional Bell
Operating Companies Coalition (\"RBOC Coalition\"), the FCC came up with
a figure of 439 calls per month. This number represents the midpoint
between 414, where the data showed that a premises owner would not need
to subsidize a payphone in order to keep it, and 464, where the data
showed that location rents would be typically required by premises
owners. The Commission declined to rely on other data which used call
volumes from an average payphone because it would cause many payphones
with below‑average call volume to become unprofitable.

This yielded a per call figure of \$.231 (\$101.29 divided by 439,
rounded to the nearest one‑thousandth). The FCC adjusted the figure
upwards \$.009 to cover the interest associated with having to wait for
payment from IXCs, for a grand total of \$.24. The FCC declined to add
additional amounts to the dial around rate for bad debts and collection
costs associated only with dial around calls.

Two groups of petitioners again seek review of the FCC\'s determination,
raising multiple issues. The first, representing the interests of PSPs,
claims that the final rate is too low.[^1] The other, representing the
interests of IXCs, claims, not surprisingly, that the final rate is too
high.[^2] Each interest group has also filed briefs intervening in the
petitions of the other.[^3]

II\. Analysis

Although the petitions from the First Order were more wide‑ranging, the
area of dispute has now narrowed to the coinless call rate. PSPs and
IXCs raise a number of objections to the Commission\'s order on that
subject. Although we have given attention to each, only three are
sufficiently weighty to warrant separate discussion in this opinion: (1)
the FCC\'s failure to include a bad debt figure in the coinless call
rate, (2) the FCC\'s failure to include a separate figure to account for
collection costs associated with coinless calls, and (3) the decision to
use data based on marginal rather than average payphones. In considering
those three objections, along with those which we do not separately
discuss herein, we apply the standard of review drawn from the
Administrative Procedure Act and uphold the Commission\'s determinations
unless they are \"arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law.\" 5 U.S.C. § 706(2)(A) (1994);
*see, e.g.*, *Achernar Broad. Co. v. FCC*, 62 F.3d 1441, 1445 (D.C. Cir.
1995). Each of the decisions questioned by petitioners herein survives
review under that standard.

A. Bad Debt

As we noted above, the Commission declined to add any amount to the
chinless call fee for bad debts associated with the collection of
chinless call fees. The PSPs, before the FCC, advanced arguments based
on their own alleged bad debt experience, and now argue that the FCC
should have been able to calculate some amount for inclusion in the
chinless call rate based on that evidence. Cross petitioners argued
before the Commission, and here, that the debts on which the proffered
evidence was based were either the result of PSP negligence in
collection, or do not genuinely represent bad debt losses at all, but
only unresolved billing disputes. The Commission concluded that it had
insufficient information about the levels of bad debt to enable it to
rationally calculate an appropriate figure for inclusion.

Specifically, the Commission found that the data regarding uncollected
per‑call compensation was not reliable enough to predict accurately
future levels of bad debt. *See* Third Order, 14 F.C.C.R. 2545 ¶ 162.
The Commission noted that it could not determine what percentage of
uncollected per‑call compensation was the result of PSP billing errors
(*i.e.*, not charging the correct IXC), as opposed to deadbeat carriers
(*i.e.*, the appropriate party is billed but refuses to pay). The
Commission further noted that providing an improperly computed allowance
for uncollectibles could result in double recovery if the PSP ultimately
collected from the delinquent carrier. That is, the PSP would collect
once from the IXC and once from the consumer (through the bad debt cost
element included in the higher compensation amount). Finally, the
Commission determined that a bad debt allowance was unnecessary because
the agency had ensured in the Third Order that PSPs will receive
interest on late payments for as long as such payments are overdue. In
short, with insufficient information, the Commission found \"that it
would be unwise to establish a cost element for bad debt at this time.\"
*Id*.

The PSP petitioners argue that the Commission was required to include
some estimate of bad debt in its calculation and that the failure to do
so \"effectively determin\[es\] that dial‑around uncollectibles would be
zero.\" (The PSPs rely on some of the same data that the Commission
deemed not sufficient to allow a rational decision.) We disagree.

Perhaps the FCC could have formulated some best‑guess figure for bad
debt, but we cannot require an agency to enter precise predictive
judgments on all questions as to which neither its staff nor interested
commenters have been able to supply certainty. \"Where existing
methodology or research in a new area of regulation is deficient, the
agency necessarily enjoys broad discretion to attempt to formulate a
solution to the best of its ability on the basis of available
information.\" *Industrial Union Dep\'t, AFL-CIO v. Hodgson*, 499 F.2d
467, 474-75 n.18 (D.C. Cir. 1974) (citing *Permian Basin Area Rate
Cases*, 390 U.S. 747, 811 (1968)); *see also FCC v. National Citizens
Comm. for Broad.*, 436 U.S. 775, 813-14 (1978). That is exactly the
situation the FCC faced here. The agency was presented with bad debt
data culled from a relatively short historical period, while knowing
that some of the factors affecting that data may change in the future.
Any figure that it might have chosen to represent bad debt would likely
be challenged on that and other similar evidentiary bases. We conclude
that it was prudent and reasonable for the Commission to decide that, on
balance, the existing bad debt data was not reliable enough to warrant
any educated guess as to future bad debt percentages. It may not have
been the only decision it could have made, but it was a reasonable one
under the circumstances.

In upholding the reasonableness of the Commission\'s exclusion of the
bad debt element from chinless call cost, we are mindful of the nature
of the debt involved. As intervenor long distance carriers remind us,
the \"\[f\]ailure to pay the required compensation is a violation of FCC
rules for which the carrier is subject to damages as well as fines and
penalties.\" *See* 47 U.S.C. §§ 206-08, 501-03 (1994). The plight of the
allegedly uncompensated payphone service provider does not equate to
that of a merchant pursuing deadbeat customers in the marketplace.
Furthermore, for any harm that may be done to the PSPs, they are not
left without remedy. After noting that it was \"unable to generate a
sufficient record on this question for issuing this Order,\" the FCC
invited the parties to file petitions for clarification on the bad debt
issue. Third Order, 14 F.C.C.R. 2545 ¶ 162. The RBOC Coalition has made
such a filing; the Commission has received that petition; sought and
received comments; and, is considering the issue. *See Common Carrier
Bureau Seeks Comment on the RBOC/GTE/SNET Payphone Coalition Petition
for Clarification Regarding Carrier Responsibility for Payphone
Compensation Payment*, CC Docket No. 96-128, DA 99-730 (1999),
*available at* 1999 WL 335783.

B. Collection Costs

The Commission\'s calculation of the joint and common costs of a
payphone include a figure representing \"Sales, General, and
Administrative (SG&A) costs.\" Third Order, 14 F.C.C.R. 2545 ¶ 178. SG&A
includes \"overhead costs, such as legal fees, administrative costs,
salaries, and management costs.\" *Id.* The FCC reasoned that as the
proportion of coin calls changes as compared to chinless calls, more
employees in a payphone company would likely take on duties related to
the busier type of call traffic, but that the overall overhead costs
should remain the same. The Commission considered data on the subject
filed with it before the issuance of the Second Order and data provided
by the RBOC Coalition in the present proceeding. Based on its review of
the evidence, the Commission determined that a reasonable estimate of
SG&A costs on a per‑phone‑per‑month basis was \$19.62. *See id.* ¶
178-79.

The Commission included this SG&A figure in calculating the chinless
call cost but did not include in the chinless call rate any additional
amount to account for the marginal costs of billing and collection of
chinless fees. *See id*. ¶ 163-64. The FCC reasoned that it had
insufficient information with which to determine the variance of
administrative costs which occur from a rise in chinless calls relative
to coin calls. *See id.* ¶ 164. It stated that \"it \[is\] fair to
assume that the amount that coin‑related SG&A positions contribute to
SG&A expenses approximate the same expense that billing and collection
positions contribute to SG&A.\" *Id*.

The PSPs claim that record evidence showed considerable actual expenses
in the collection process. In their view, SG&A costs cannot be counted
as covering these expenses because chinless call collection costs are
properly viewed as an incremental expense of chinless calls, not a joint
and common cost of payphones.

We again disagree. It is plausible to reason, as the FCC did, that the
percentage of SG&A overhead costs which can be traced to chinless call
business will increase in the future if the market embraces chinless
calls. Before the advent of dial around call compensation, overhead
necessarily constituted costs attributable only to the prior forms of
payphone compensation. As the payphone service market shifts between
coin calls and coinless calls, it is reasonable to expect that the
relative portion of overhead attributable to separate underlying
elements of expense will change with it. This does not mean that either
the Commission or the regulated entities should expect to undertake a
perennial and constant adjustment of cost allocation based upon that
moving target. The use in accounting of the concept of \"overhead\"
presupposes that some details of costs will be submerged in that greater
item of calculation. If this were not the case, and if the PSP\'s
argument were accepted and taken to its logical extreme, we would be
forced to conclude that virtually every dollar characterized as overhead
should be treated by the Commission as either a cost of coin calls or
chinless calls. But the collective concept of overhead prevents us and
the Commission from having to determine that because a data input
employee of a PSP spends ten percent of the time at her computer on
chinless call matters and ninety percent on coin calls, the cost of her
mousepad should be divided on a one‑to‑nine basis between those expense
categories rather than classified as overhead. The FCC reasonably did
not go down that detailed a path, and therefore did not act arbitrarily,
capriciously, or contrary to law in deciding that the collection costs
of dial around compensation are fairly represented by the SG&A portion
of joint and common costs.

C. Marginal Payphone Methodology

The FCC based its calculations on the number of calls from a marginal
payphone---a payphone that breaks even---to ensure fair compensation
under § 276(b)(1). The Commission wanted to ensure the \"widespread
deployment of payphones\" as required by the statute, and declined to
use average payphone call volume because that would render below average
payphones unprofitable. Third Order, 14 F.C.C.R. 2545

¶ 141.

To determine the number of calls a marginal payphone receives, the FCC
requested that the RBOC Coalition provide two figures: (1) the number of
calls placed at a phone that does not pay rent, and (2) the number of
calls made from a location that begins to pay rent. The two numbers
reported back were 414 and 464, with a midpoint of 439 which the FCC
adopted.

The IXCs fault the FCC for relying on the RBOC Coalition data. They
claim that the data cannot be used because the RBOC Coalition did not
explain their underlying methodology for developing the data. In *City
of New Orleans v. SEC*, 969 F.2d 1163 (D.C. Cir. 1992), we found error
in an agency\'s reliance on estimates which had \"no explanation or
underlying support.\" *Id.* at 1167. However, that is not the case here.
The RBOC Coalition did explain how it developed the data, and noted
certain difficulties it had in doing so. For example, it pointed out
that average revenue depends in part on factors other than call volume,
such as the mix of types of calls and the maintenance expense of
specific locations. It explained its attempt to determine the average
daily revenue needed to decide to place a new payphone and the average
revenue needed to begin paying commissions on such a phone, and then
determined what mix of calls will produce that revenue. The RBOC
Coalition also explained that the final numbers were a weighted average
of numbers submitted by members of the Coalition. While the data
submitted by the RBOC Coalition could be subjected to various
challenges, we cannot say that it was unreasonable or arbitrary for the
FCC in the exercise of its expertise to rely upon it. *See Madison Gas
and Elec. Co. v. SEC*, 168 F.3d 1337, 1344 (D.C. Cir. 1999).

III\. Conclusion

In summary, we conclude that petitioners have not established that any
portion of the FCC\'s rate calculation for chinless calls is arbitrary,
capricious, or otherwise contrary to law. The errors which required us
to remand on two prior occasions have been rectified. The petitions for
review are therefore

*Denied.*

[^1]: The individual petitioners are American Public Communications
    Counsel (\"APCC\"), Ameritech Corporation, Bell Atlantic
    Corporation, Bellsouth Corporation, GTE Service Corporation, SBC
    Communications Inc., and US West, Inc.

[^2]: The individual petitioners are MCI Worldcom, Inc. and Sprint
    Corporation, joined by intervenors Ad Hoc Telecommunications Users
    Committee, AirTouch Communications, Inc., American Trucking
    Associations, Inc., Truckload Carriers Association, AT&T
    Corporation, Cable & Wireless USA, Inc., Competitive
    Telecommunications Association, Excel Telecommunications, Inc.,
    Frontier Corporation, Qwest Communications Corporation, Skytel
    Communications, Inc., and Telecommunications Resellers Association.

[^3]: MCI Worldcom, Inc. is not part of the IXC group intervening on the
    petitions of the PSPs.