Court Opinion

ID: 769026
Source: CourtListenerOpinion
Date Created: 2012-04-18 09:19:27+00
Date Added: 2024-06-11T12:38:01.774852
License: Public Domain

215 F.3d 51 (D.C. 2000)
American Public Communications Council, et al.Petitionersv.Federal Communications Commission and United States of America, RespondentsTelecommunications Resellers Association, et al., Intervenors
Nos. 99-1114, 99-1115, 99-1117, 99-1122
United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 2, 2000Decided June 16, 2000

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.

1
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.

2
Albert H. Kramer argued the cause for intervenors Payphone Service Providers.  With him on the brief were Robert  F. Aldrich and Michael K. Kellogg.

3
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.

4
Before:  Edwards, Chief Judge, Sentelle and Randolph,  Circuit Judges.

5
Opinion for the Court filed by Circuit Judge Sentelle.

Sentelle, Circuit Judge:

6
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

7
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 decision making. 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").

8
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.

9
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.    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).

10
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 $.35.  In imposing this rate, the FCC simply said that the  "cost[s] of originating the various types of payphone calls are  similar."  Id.

11
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 decision making."  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)).

12
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  decision making.  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.

13
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 "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.

14
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 accout rements.  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.

15
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.

16
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.

17
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.1The 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

18
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

19
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  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.

20
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  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.

21
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.

22
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.

23
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. §§ 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

24
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 costs on a per-phone-per-month basis was $19.62.  See id.  p 178-79.

25
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.

26
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.

27
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 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 mouse pad 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

28
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  p 141.

29
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.

30
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

31
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

32
Denied.

Notes:

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.