[Federal Register Volume 62, Number 158 (Friday, August 15, 1997)]
[Proposed Rules]
[Pages 43686-43689]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-21819]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 64

[CC Docket No. 96-128]


Pleading Cycle Established For Comment On Remand Issues In The 
Payphone Proceeding

AGENCY: Federal Communications Commission.

ACTION: Proposed rule.

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SUMMARY: This document clarifies the status of the requirements in the 
Payphone Orders in light of the D.C. Circuit's decision in Illinois 
Public Telecommun., and establishes a pleading cycle for comment on 
issues remanded by that Court.

DATES: Comments are due on or before August 26, 1997 and reply comments 
are due on or before September 9, 1997.

ADDRESSES: Office of the Secretary, Federal Communications Commission, 
Room 222, 1919 M St. N.W., Washington, D.C. 20554.

FOR FURTHER INFORMATION CONTACT: Greg Lipscomb, Formal Complaints and 
Information Branch, Enforcement Division, Common Carrier Bureau. (202) 
418-0960.

SUPPLEMENTARY INFORMATION: DA 97-1673, August 5, 1997.

    Comments Due: August 26, 1997.
    Reply Comments Due: September 9, 1997.

I. Introduction

    1. This Public Notice clarifies the status of the requirements of 
the Payphone Orders <SUP>1</SUP> in light of the D.C. Circuit's 
decision in Illinois Public Telecommunications Ass'n v. 
FCC,<SUP>2</SUP> and seeks further comment on certain issues raised by 
that court decision. In Illinois Public Telecomm., the court granted in 
part and denied in part petitions for judicial review of the Payphone 
Orders. In doing so, however, the court actually vacated only one 
narrow aspect of those orders, i.e., the asset valuation standard that 
the Commission adopted with respect to transfers of telephone company 
payphone assets to separate affiliates. The remaining portions of the 
orders were either upheld, or remanded to the Commission for further 
consideration and explanation. Thus,

[[Page 43687]]

except for the vacated asset valuation standard, all of the 
requirements of the Payphone Orders--including those portions that were 
remanded to the Commission--remain in effect pending further action by 
the Commission on remand.<SUP>3</SUP> We place the industry on notice, 
however, that should the equities so dictate, payphone compensation 
payment obligations (or the absence of such obligations) incurred by 
providers of interexchange services and compensation levels paid or 
received under our existing rules pending action on remand may be 
subject to retroactive adjustment in order to undo the effects of 
applying aspects of the current rules that were identified by the court 
as potentially arbitrary.<SUP>4</SUP>
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    \1\ Implementation of the Pay Telephone Reclassification and 
Compensation Provisions of the Telecommunications Act of 1996, CC 
Docket No. 96-128, Report and Order, 11 FCC Rcd 20541 (1996) 
(``Payphone Order''); Order on Reconsideration, 11 FCC Rcd 21233 
(1996) (``Order on Reconsideration'') (both orders together 
``Payphone Orders''); 61 Fed. Reg. 65,341 (Dec. 12, 1996).
    \2\ D.C. Circuit Nos. 96-1394 et al. (July 1, 1997).
    \3\ See Allied-Signal Inc. v. NRC, 988 F.2d 146, 151 (D.C. Cir. 
1993); Checkosky v. SEC, 23 F.3d 452, 463 (D.C. Cir. 1994) (opinion 
of Silberman, J.). It follows logically that because the court held 
that the failure of the Commission to provide interim compensation 
for 0+ calls that are not compensated pursuant to contract is 
arbitrary and capricious and not responsive to the Sec. 276 
requirement that there be compensation for each and every call, the 
court would similarly find a decision by the Commission to 
discontinue interim compensation during the remand proceedings as 
contrary to Sec. 276. The court's decision to remand but not vacate 
the interim compensation provisions of the Payphone Orders supports 
this assumption.
    \4\ See Natural Gas Clearinghouse v. FERC, 965 F.2d 1066, 1073-
75 (D.C. Cir. 1992); Public Utils. Comm'n of California v. FERC, 988 
F.2d 154, 162-63 (D.C. Cir. 1993).
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    2. As discussed below, we also seek comment to supplement the 
record on certain issues raised by the court's ruling in Illinois 
Public Telecomm.

II. Issues for Comment

A. Default Rate for Compensation of Subscriber 800 and Access Code 
Calls

    3. The court concluded that the Commission did not adequately 
justify setting the per-call compensation rate for subscriber 800 and 
access code calls at the same rate as the deregulated local call rate 
of $.35. In particular, the court held that the Commission did not 
justify its conclusion that the costs of coin calls, subscriber 800 
calls, and access code calls all are similar.<SUP>5</SUP> The court 
concluded that the Commission had not responded to arguments by parties 
in the proceeding that the ``costs of local coin calls versus 800 and 
access code calls are not similar.'' The court cited the filings of 
various IXCs that argued that: (1) the costs of coin calls are higher 
than those for coinless calls because of additional costs for equipment 
and coin collection; (2) the costs of local coin calls are higher 
because the PSP pays for originating and completing local calls while, 
for coinless calls (e.g., subscriber 800 calls or access code calls) 
the PSP only pays for originating the calls.<SUP>6</SUP>
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    \5\ Illinois Public Telecomm., No. 96-1394, slip op. at 16.
    \6\ Id. at 14.
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    4. We seek comment on the differences in costs to the PSP of 
originating subscriber 800 calls and access code calls, on the one 
hand, and local coin calls, on the other hand. We also seek comment on 
whether and, if so, how these cost differences should affect a market-
based compensation amount. Finally, we seek comment on whether the 
local coin rate, subject to an offset for expenses unique to those 
calls, is an appropriate per-call compensation rate for calls not 
compensated pursuant to a contract or other arrangement, such as 
subscriber 800 calls and access code calls. Parties should respond 
specifically to concerns raised by the court in setting forth their 
views on the appropriate per-call compensation amount.

B. Interim Compensation Plan

    5. In the Payphone Orders, the Commission established a two-year 
interim plan for payphone compensation for subscriber 800 and access 
code calls based on a rate of $.35 per call. Under the first year of 
the interim plan, IXCs with annual toll revenues in excess of $100 
million are required to pay, collectively, a flat-rate compensation of 
$45.85 per payphone per month in shares proportionate to their share of 
total market long distance revenues. During the second year, all IXCs 
are required to pay $.35 per subscriber 800 call or access code call 
unless they have contracted for a different amount.
    6. The court remanded the interim plan for two reasons. First, the 
court concluded that the Commission failed to provide a reasonable 
justification for an interim rate based on $.35 per call. As discussed 
above, the court remanded the decision to set compensation for 
subscriber 800 calls and access code calls at the deregulated local 
coin rate. The court concluded that the Commission ``must now set a new 
interim rate and decide what is to happen once the interim period is 
over.'' <SUP>7</SUP> Second, the court held that the Commission acted 
arbitrarily and capriciously because it required payments only from 
IXCs with over $100 million in toll revenues for the first year of the 
interim plan. The court concluded that administrative convenience was 
an insufficient justification for an interim plan that exempts all but 
large IXCs from paying for the costs of services received.<SUP>8</SUP> 
In addition, the court found that the Commission did not adequately 
justify why it based its interim plan on total toll revenues, ``as it 
did not establish a nexus between total toll revenues and the number of 
payphone-originated calls.'' The court concluded that the Commission 
could decide that the new interim rate is an appropriate default rate 
after the interim period and that, through negotiations, PSPs and IXCs 
could be left free to depart from the default rate.<SUP>9</SUP>
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    \7\ Id. at 17.
    \8\ Id.
    \9\ Id.
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i. Compensation for Subscriber 800 and Access Code Calls During the 
Interim Period
    7. In response to the court's conclusion that the Commission had 
not justified setting the interim flat rate compensation level on the 
basis of $0.35 per call (which we had multiplied by an estimate of the 
number of monthly compensable calls), we seek comment on the proper 
aggregate amount of compensation PSPs should receive per payphone 
during the period before per call compensation becomes available.
    8. We also seek comment on the proper allocation of a flat-rate 
compensation obligation, if any, among providers of interexchange 
service. The Commission currently does not have specific toll revenue 
data or market share data for IXCs with toll revenues under $100 
million. Consequently, we seek comment on how the Commission could 
establish the relative compensation obligations of such smaller IXCs, 
if such carriers were to be included in the interim compensation 
mechanism. We also seek comment on whether annual toll revenues are the 
appropriate basis for allocating flat-rate compensation obligations 
among all of the IXCs, regardless of their annual toll revenues, or 
whether some other basis is more appropriate. If parties argue that 
another basis is appropriate for allocating flat-rate compensation, 
they should also discuss how differences in the amount of interim 
compensation obligations would be accounted for, given that the 
existing interim mechanism continues to be in effect. We also seek 
comment on whether the Commission should include LECs that carry toll 
traffic among the carriers required to pay interim compensation, and, 
if so, the data we would use to ascertain their respective 
obligations.<SUP>10</SUP>
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    \10\ LECs are currently excluded from interim obligations 
because of ``. . . administrative practicality and because LECs, on 
an individual basis, currently do not carry a significant volume of 
compensable calls.'' Order on Reconsideration, 11 FCC Rcd at 21291, 
para. 126.

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[[Page 43688]]

ii. Compensation for 0+ Calls During the Interim Period
    9. The Payphone Orders do not provide compensation for any calls 
that are compensated pursuant to a contract between the PSP and a 
presubscribed carrier. The interim compensation mechanism provides 
compensation only for subscriber 800 calls and access code 
calls,<SUP>11</SUP> which are the most significant classes of calls 
currently not compensated pursuant to contract. The court found that 
the Commission's ``failure to provide interim compensation for 0+ calls 
is patently inconsistent with Sec. 276's command that fair compensation 
be provided for `each and every completed . . . call.' '' <SUP>12</SUP> 
As the Commission noted in the Payphone Order, a significant number of 
payphones maintained by the BOCs are not subject to a contract between 
the PSP and the presubscribed IXC, due to the previous restrictions 
imposed by the Modification of Final Judgment.<SUP>13</SUP> Because the 
court's statement is made in response to an argument made by the BOCs, 
it appears that the court's concern about a lack of compensation for 0+ 
calls in the interim period is limited to situations where such 
compensation is not paid pursuant to a contract. We seek comment on 
this interpretation. Further, we seek comment on how the BOCs, and any 
other similarly situated PSP, should be compensated during the interim 
period for 0+ calls for which they do not receive compensation by 
contract. More specifically, because the presubscribed carrier on a 
particular payphone receives the 0+ calls from that payphone and often 
pays a commission on such calls to the location provider, we seek 
comment on whether it would be appropriate to have the presubscribed 
carrier pay the default per-call compensation amount to the PSP for 
each such call. The concerns that the Commission expressed when it 
deferred per-call tracking and per-call compensation are not implicated 
in this situation, because the presubscribed carrier is already keeping 
track of these calls. The presubscribed carrier could simply pay the 
PSP for the number of calls it has received from the payphone 
multiplied by the default rate. We seek comment on this option, and any 
other options parties may suggest for responding to the court's 
concerns.
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    \11\ Payphone Order, 11 FCC Rcd at 20603-04, paras. 124-25.
    \12\ Illinois Public Telecomm., No. 96-1394, slip op. at 19.
    \13\ See United States v. Western Elec. Co., 698 F. Supp. 348, 
360 (D.D.C. 1988) (MFJ). The BOCs were not compensated for these 
calls through contracts with IXCs like other PSPs. The Commission 
included per-call compensation for 0+ plus calls made from BOC 
payphones and inmate payphones so long as they do not otherwise 
receive compensation for originating 0+ calls. The Commission did 
not, however, provide for such compensation during the first year of 
the interim period. Order on Reconsideration, 11 FCC Rcd at 21259-
60, para. 52.
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iii. Compensation for Inmate Calls During the Interim Period
    10. In the Payphone Orders, the Commission decided that inmate 
payphones would not be eligible for interim flat-rate compensation 
because such payphones are not capable of originating either access 
code or subscriber 800 calls, the only types of calls for which interim 
compensation was provided.<SUP>14</SUP> The Commission found that 
virtually all calls originated by inmate payphones are 0+ calls, which 
tend to be compensated pursuant to a contract between the PSP or 
location provider and the presubscribed IXC.<SUP>15</SUP> The court 
remanded this issue because it held that Sec. 276 requires the 
Commission to adopt regulations that will ensure that PSPs receive fair 
compensation for every call using their payphone as required by the 
Act.<SUP>16</SUP> As with its discussion of interim compensation for 0+ 
calls, the court's statements were made in response to arguments made 
by the BOCs. Thus, as we discussed above, it appears that the court's 
concern about a lack of compensation for inmate calls in the interim 
period is limited to situations where such compensation is not paid 
pursuant to a contract. We seek comment on this interpretation. 
Further, we seek comment on how the BOCs, and any other similarly 
situated PSP, should be compensated for inmate payphone calls during 
the interim period. We specifically seek comment on whether it would be 
appropriate to have the presubscribed carrier pay the default per-call 
compensation amount to the PSP for each inmate payphone call for which 
compensation is not provided pursuant to a contract with the PSP. 
Again, the Commission's concerns absent tracking and per-call 
compensation are not implicated in this situation, because the 
presubscribed carrier is already keeping track of the calls.
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    \14\ Order on Reconsideration, 11 FCC Rcd at 21259-21260, para. 
52.
    \15\ Id.
    \16\ Illinois Public Telecomm., No. 96-1394, slip op. at 19-20.
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iv. Retroactive Adjustments to Interim Compensation Levels and 
Obligations
    11. As noted at the outset of the Public Notice, the Commission may 
impose retroactive adjustments to the payment obligations and 
compensation levels that are incurred under our existing rules during 
the period before the Commission completes action on remand. We seek 
comment on whether, how, and under what authority any such retroactive 
adjustments should be made. Parties should specify the time period 
covered by such potential adjustments, e.g., the entire first year of 
interim compensation (beginning in October 1996), or from the date of 
the court's remand in Illinois Public Telecomm. Ass'n.

C. Asset Valuation

    12. In order to implement the Sec. 276 requirement to remove 
subsidies from payphone operations,<SUP>17</SUP> the Commission 
required deregulation of payphone assets.<SUP>18</SUP> Upon 
deregulation of payphone assets, LECs are allowed either to maintain 
the assets in their books of account but reclassify the assets as 
nonregulated, or to transfer the payphone assets to a structurally 
separate affiliate.<SUP>19</SUP> In the Payphone Order, the Commission 
stated that LECs that elect not to transfer their payphone assets to a 
separate affiliate may maintain their assets on the books at net book 
value. The Commission further stated that, under its affiliate 
transactions rules, if a LEC transfers its payphone assets to either a 
separate affiliate or an operating division that has no joint and 
common use of assets or resources with the LEC and maintains a separate 
set of books, the LEC must record the transfer of assets at the higher 
of fair market value or net book value. The Commission concluded that 
fair market valuation will capture any appreciation in value of those 
assets, ``thus ensuring that any eventual gains

[[Page 43689]]

would accrue to the benefit of the ratepayers and shareholders.'' 
<SUP>20</SUP>
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    \17\ Section 276(a)(1) provides that ``any Bell operating 
company that provides payphone service shall not subsidize its 
payphone service directly or indirectly from its telephone exchange 
service operations or its exchange access operations.'' 47 U.S.C. 
276(a)(1). Paragraph (b) of Sec. 276 requires the Commission to 
issue ``regulations that . . . discontinue . . . all intrastate and 
interstate payphone subsidies from basic exchange and exchange 
access revenues.'' Id. U.S.C. 276(b)(1)(B).
    \18\ See Payphone Order, 11 FCC Rcd at 20,621, para. 142-45.
    \19\ 47 CFR 32.27(b). See Payphone Order, 11 FCC Rcd at 20,621, 
para. 157. The court rejected the petitioners' argument that 
Sec. 276 requires that a BOC's payphone assets be transferred to its 
unregulated books. Illinois Public Telecomm., No. 96-1394, slip op. 
at 28.
    \20\ Payphone Order, 11 FCC Rcd at 20,623-20,625, paras. 163-66.
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    14. The court held that the Commission's valuation methodology with 
respect to the one-time transfer of assets mandated by industry reform 
was arbitrary and capricious and contrary to precedent.<SUP>21</SUP> 
The court concluded that the Commission failed to recognize that the 
court's test in Democratic Central, which the Commission declined to 
apply, was designed to protect not only the interests of ratepayers, 
but also the competing interests of shareholders.<SUP>22</SUP> The 
court found inappropriate under Democratic Central the Commission's 
valuation methodology, because the court held that the Commission was 
attempting to transfer the increase in the value of the payphone 
operations from the LECs' shareholders to ratepayers. The court held 
that, under Democratic Central, as a result of the Commission's price 
cap rules, investors rather than ratepayers have borne the risk of loss 
on payphone assets. Therefore, the court concluded that investors 
should reap the benefit of increases in the value of such 
assets.<SUP>23</SUP> The court stated that in Southwestern Bell Corp. 
v. FCC, while upholding the Commission's affiliate transactions rules, 
specifically ``noted Democratic Central's continued applicability to 
`one-time' transfers mandated by industry reform.'' The court held that 
the transfer of payphone assets pursuant to Sec. 276 fell within this 
category.<SUP>24</SUP> The court rejected upon similar analysis a 
challenge by other petitioners to the net book valuation method 
required by the Commission with respect to the reclassification of 
payphone assets as nonregulated within the same corporate 
entity.<SUP>25</SUP>
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    \21\ Illinois Public Telecomm., No. 96-1394, slip op. at 28.
    \22\ Id. at 26, citing Democratic Cent. Comm. of the Dist. of 
Columbia v. Washington Metro. Area Transit Comm'n, 485 F.2d 785, 806 
(D.C. Cir. 1973), cert. denied, 415 U.S. 935 (1974) (Democratic 
Central).
    \23\ Id. at 27.
    \24\ Id. (citing Southwestern Bell Corp. v. FCC, 896 F.2d 1378, 
1382 (D.C. Cir. 1990)).
    \25\ Illinois Public Telecomm., No. 96-1394, slip op. at 28.
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    15. We seek comment on how the asset valuation requirements for the 
transfer of payphone assets established in the Payphone Orders should 
be revised to respond to the concerns raised by the court. The court 
appears to hold that net book value must be used for one-time transfers 
mandated by industry reform, which would apply to payphone asset 
transfers. If other approaches are recommended, parties should address 
how such approaches comply with the court's Democratic Central 
analysis.

III. Ex Parte Presentations

    16. This Public Notice is a ``permit-but-disclose proceeding and 
subject to the ``permit-but-disclose'' requirements under 
Sec. 1.1206(b) of the rules, 47 CFR 1.1206(b), as revised. Persons 
making oral ex parte presentations are reminded that memoranda 
summarizing the presentation must contain a summary of the substance of 
the presentation and not merely a listing of the subjects discussed. 
More than a one or two sentence description of the views and arguments 
presented is generally required. See 47 CFR 1.1206(b)(2), as revised. 
Other rules pertaining to oral and written presentations are set forth 
in Sec. 1.1206(b), as well. The Commission requires all written ex 
parte presentations or summaries of oral ex parte presentations in this 
proceeding to be served on all parties to this proceeding.

IV. Comment Filing Dates

    17. Pursuant to applicable procedures set forth in Secs. 1.415 and 
1.419 of the Commission's rules, 47 CFR 1.415, 1.419, interested 
parties may file comments with the Office of the Secretary, Federal 
Communications Commission, Room 222, 1919 M St., N.W., Washington, D.C. 
20554 on or before August 26, 1997, and reply comments on or before 
September 9, 1997 from the release of this public notice. To file 
formally in this proceeding, participants must file an original and 
four copies of all comments, reply comments, and supporting comments. 
In addition, parties should file two copies of any such pleadings with 
the Chief, Enforcement Division, Common Carrier Bureau, Stop 1600A, 
Room 6008, 2025 M Street, N.W., Washington, D.C. 20554. Parties should 
also file one copy of any documents filed in this docket with the 
Commission's copy contractor, International Transcription Services, 
Inc., 1231 20th Street, N.W., Washington, D.C. 20036. Comments and 
reply comments will be available for public inspection during regular 
business hours in the FCC Reference Center (Room 239), 1919 M Street, 
N.W., Washington, D.C.
    17. For further information, contact Michael Carowitz, Rose 
Crellin, or Greg Lipscomb, Enforcement Division, Common Carrier Bureau, 
202/418-0960.

Federal Communications Commission.
William F. Caton,
Acting Secretary.
[FR Doc. 97-21819 Filed 8-14-97; 8:45 am]
BILLING CODE 6712-01-P