Posted:  09/2000

FCC’s Payphone Payment Plan Stands
By Kim Sunderland

The United States Court of Appeals for the Eleventh Circuit
(www.ca11.uscourts.gov) has upheld the FCC’s
(www.fcc.gov) “Per Call Compensation Plan” rate calculation of 24 cents per call.

The ruling effectively resolves challenges to the FCC’s third order on this issue, which last year developed and adjusted the compensation rate to payphone service providers (PSPs) for all completed coinless payphone calls. Coinless calls include calling card, collect and toll-free dial-around calls.

The 24-cent compensation rate must be paid to PSPs by the IXC with whom the PSP is contracted, explains Dena
Alo-Colbeck, director of public policy for regulatory consulting firm Miller Isar
(www.millerisar.com).

The court twice sent this case back to the FCC due to what it called a lack of reasoned decision making. The commission went back to the drawing board and on Feb. 9, 1999, issued its third order, which the court reviewed this spring and summer.

In this case, the FCC switched from the “top-down methodology” of its second order to a “bottom-up” method, meaning it started from zero and added up the costs of coinless calls to develop a coinless call rate.

The petitioners did not establish that any portion of this rate calculation for coinless calls was “arbitrary, capricious, or otherwise contrary to law,” the court concluded in American Public Communications Council, et al. v. FCC and USA. And “the errors which required us to remand on two prior occasions have been rectified,” the court determined.

The court rejected PSP and IXC arguments to the contrary. The PSPs claimed the compensation rate was too low, while the IXCs said the rate was too high.

The PSPs argued the FCC should have included estimates of bad debt and a separate figure to represent collection costs in the compensation rate. In their view, overhead costs (known as sales, general and
administrative costs, or SG&A) cannot be counted as covering these expenses because coinless call collection costs are incremental expenses of coinless calls, not a joint and common cost of payphones.

“We again disagree,” the court said in its decision. “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 court said.

As for calculating in bad debt, the court said, “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.”

The IXCs challenged the FCC’s decision to use data based on marginal rather than average payphones to calculate the compensation rate as arbitrary and capricious. The court disagreed.

The FCC based its calculations on the number of calls from a marginal payphone–a payphone that breaks even–to ensure fair compensation. The FCC wanted to ensure the widespread deployment of payphones as required by the Telecommunications Act of 1996, and declined to use average payphone call volume because that would render below average payphones unprofitable.

To determine the number of calls a marginal payphone receives, the FCC requested that RBOCs provide two figures: the number of calls placed at a phone that does not pay rent, and the number of calls made from a location that begins to pay rent.

The two numbers reported were 414 and 464, with a midpoint of 439, which the
FCC adopted.

While the IXCs contend this is a RBOC-generated number, the court found that the FCC used good judgment in using the

figures it did.

Barring further challenges to the court’s order, Alo-Colbeck says it appears that the FCC’s third order should stand.