Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-99-01117/USCOURTS-caDC-99-01117-0/pdf.json

Parties Involved:
Federal Communications Commission
Respondent
MCI WorldCom, Inc.
Petitioner
United States of America
Respondent

Document Text:

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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.

Petitioners

v.

Federal Communications Commission and

United States of America,

Respondents

Telecommunications Resellers Association, et al.,

Intervenors

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

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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.

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Before: Edwards, Chief Judge, Sentelle and Randolph,

Circuit Judges.

Opinion for the Court filed by Circuit Judge Sentelle.

Sentelle, 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. s 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 s 276 obligations. We hold

that the FCC's order withstands scrutiny under the Administrative Procedure Act. See 5 U.S.C. s 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 percall fee for coinless 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

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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 mid1980s 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"

coinless calls, where the caller uses a long distance carrier

other than the payphone's presubscribed carrier. "Dial

around" coinless 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. s 226 (1994)).

In s 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. s 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.

s 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 p 70. But because no

market has previously existed for dial around coinless calls,

the Commission first adopted a market-based surrogate--the

price of a local coin call at a typical deregulated payphone of

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$.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 coinless call rate determination because the Commission

had ignored record evidence that the costs of coin calls and

coinless 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 coinless 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 coinless calls. See Second Order, 13

F.C.C.R. 1778 p 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

coinless calls, resulting in a per call rate of $.284. See id.

p 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 coinless

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,

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which we now review. The FCC switched from the "topdown methodology" of the Second Order to a "bottom-up"

method, meaning that it started from zero and added up the

costs of coinless calls to develop a coinless call rate. See

Third Order, 14 F.C.C.R. 2545 p 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

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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,

__________

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.

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. s 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 coinless call fee for bad debts associated with

the collection of coinless 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

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been able to calculate some amount for inclusion in the

coinless 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 p 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

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ly, 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.

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In upholding the reasonableness of the Commission's exclusion of the bad debt element from coinless 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. ss 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 p 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 p 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 coinless 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

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costs on a per-phone-per-month basis was $19.62. See id.

p 178-79.

The Commission included this SG&A figure in calculating

the coinless call cost but did not include in the coinless call

rate any additional amount to account for the marginal costs

of billing and collection of coinless fees. See id. p 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 coinless calls relative to coin calls. See

id. p 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 coinless call collection costs are properly viewed as

an incremental expense of coinless 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 coinless call business will increase in the future if

the market embraces coinless 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

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Commission as either a cost of coin calls or coinless 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 coinless 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 s 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

p 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

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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

coinless 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.

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