Posted: 09/1997

Payphone Route

Court Rules Against Payphone Order:
Says FCC Erred in Setting Rate

By Mark Haney

In the July issue, we discussed the implications of the
Federal Communications Commission’s (FCC’s) Payphone Order. In
the order, the FCC ruled that payphone service providers (PSPs)
are entitled to fair and reasonable compensation for the use of
their facilities by parties initiating 800 and other dial-around
calls from their phones.

The ruling, mandated by the Federal Telecommunications Act of
1996, attempted to address years of perceived abuse of PSPs by
dial-around service providers. The order mandated that interim
compensation be paid to PSPs by all interexchange carriers (IXCs)
with more than $100 million in annual revenues. Based on each
IXC’s percentage of market share, they were obligated to
compensate PSPs their proportionate share of $45.85 per month,
which was established as the interim compensation amount, with
per-call compensation to be implemented in October.

The order was seen by some as an end to the dispute between
IXCs and PSPs. However, on July 1, after the order had been
appealed by several parties, the U.S. Court of Appeals issued its
decision in the consolidated case concerning 20 separate appeals
of portions of the September 1996 FCC Payphone Order. Of greatest
interest to the resale community are those portions dealing with
the amount and methodology for compensating the PSPs for use of
their facilities.

To summarize the relevant parts of the decision, the court
concluded that the FCC had erred in its justification for setting
the interim and per-call compensation rate at 35 cents per call.
(The 35 cents per call multiplied by the estimate of 131 calls
per phone per month is how the FCC arrived at the $45.85 figure.)
In the FCC’s previous decision, it had ruled that this rate was
the market-determined local coin rate in those markets where
local coin had already been deregulated. The court found this to
be in error, noting the following: "The problem with the
FCC’s decision is that the record in this case is replete with
evidence that the costs of the local coin calls vs. 800 and
access code calls are not similar. Even the APCC, a trade group
for the independent PSPs, acknowledged that the costs of coin
calls are higher than those of coinless calls."

The court then turned the issue back over to the FCC for
further consideration.

What this means is that it is unclear at what level both
interim and per- call compensation will ultimately be set.
However, it is abundantly clear from both the FCC’s and the
court’s rulings that PSPs will receive compensation. The FCC’s
decision and the court’s decision both reiterate that PSPs are
entitled to compensation by the Telecom Act for dial-around
calls. It should be noted that while the court’s decision was not
clear on the issue, regulatory precedent leads me to believe that
the PSPs who have already received compensation under the interim
compensation rules will not be required to repay or give back any
portion of those amounts already received. Accordingly, if the
FCC subsequently lowers the compensation levels due the PSPs, you
can expect that the IXCs will still be seeking a pass through
under their contracts of the already paid charges at the level of
compensation established by the original Payphone Order.

Additionally, as stated above, the FCC’s Payphone Order had
imposed the interim compensation to be paid by the "large
IXCs," those with annual revenues more than $100 million.

The court ruled that the FCC failed to provide any adequate
justification for this threshold, and stated the following:
"Administrative convenience cannot possibly justify an
interim plan that exempts all but large IXCs from paying for the
costs of services received. Perhaps more fundamentally, the FCC
did not adequately justify why it based its interim plan on total
revenues, as it did not establish a nexus between total revenues
and the number of payphone-originated calls."

At first glance this seems to impose a new burden on the
smaller IXCs/resellers. In reality, such a ruling by the court
should have little impact on such IXCs, as these charges were
already being passed on to the smaller IXCs by their underlying
carriers. It should merely change the methodology of accounting
and paying for these charges. Accordingly, you must be accruing
and adopting policies and altering your administrative processes
to be prepared to handle these charges as they are passed through
to you.

That includes, for instance, programming your switch to
account for these charges, modifying your sales and marketing
literature to inform consumers of the charges, modifying your
tariffs, etc. Although it might initially appear that the court
has issued a mandate to the FCC to come up with a lower level of
dial-around compensation, in actuality, the court’s ruling does
not say that.

Rather, the court’s objection was to how the FCC determined
that the compensation level established was a fair level of
compensation, as required under the Telecom Act. It is entirely
possible that the FCC will undertake the required reconsideration
and conclude that the compensation level originally established
under the Payphone Order was correct or that either a higher or
lower rate should be imposed.

Courts are generally reluctant to substitute their judgment
for what are generally thought of as expert agencies like the
FCC, and the court has not said that the compensation level
established by the FCC was incorrect, but rather that the FCC did
not show adequate justification for the level of compensation.
Compensation from the IXCs to the PSPs is going to occur. The
issue is just how much. You need to be preparing today for
handling these charges.

Mark Haney, the founding partner of Haney & Ticknor, a
law firm based in the Dallas/Fort Worth area that specializes in
telecommunications law, can be reached at (817) 498-9911. He is
also a principal in several telecommunications ventures and
serves as a consultant for strategic, regulatory and marketing
issues.