Posted: 10/1997

What’s Fair?

FCC Ponders Payphone Compensation Rules in
Wake of Court Remand

"Fair’s fair," as the old saying goes. That’s
not a very enlightening definition in any context. Fortunately,
the circularity of this definition isn’t enough to support policy
arguments. Unfortunately, federal regulators continue to struggle
over trying to figure out what’s fair in compensating payphone
service providers for the costs they incur in originating calls.

Last September, the Federal Communica-tions Commission (FCC)
adopted rules that implement a section of the 1996
Telecommunications Act that requires the establishment of a
"per call compensation plan to ensure all payphone service
providers are fairly compensated for each and every completed
intrastate and interstate call using their payphone."

The new payphone compensation regulations were roundly
challenged by a variety of parties, including CompTel, and on
July 1 the U.S. Court of Appeals for the D.C. Circuit issued a
decision that struck down some of the FCC’s rules while upholding
others. On August 5, the FCC established a pleading cycle to
address the issues that the court remanded to it.

The appeals court upheld some of the FCC’s payphone
compensation rules. First, the appeals court upheld the portion
of the Commission’s plan to require interexchange
carriers–rather than callers–to pay compensation to PSPs. The
court agreed with the FCC that carriers–as the "primary
economic beneficiaries" of 800 service calls–should incur
the costs of these calls. Now, however, there is an uncomfortable
amount of uncertainty over the degree to which carriers will be
required to compensate PSPs. Second, the appeals court upheld the
FCC’s decision to require carriers to track payphone calls. This
requirement imposes new burdens on carriers, many of whom have
had to incur significant expenses in the installation of tracking
systems.

Furthermore, the appeals court rejected the FCC’s decision to
limit the type of traffic subject to compensation to 800 and
access code calls. The court ruled that payphone service
providers should be compensated on an interim basis for all 0+
and inmate payphone calls. The court’s instructions to the FCC to
include these types of calls in any new interim compensation plan
means that carriers will pay even more in compensation to
payphone providers.

In its comments filed with the Commission on August 26,
CompTel emphasized that its members do not dispute that payphone
service providers (PSPs) should be compensated for access code
and subscriber calls. PSPs ought to have a fair opportunity to
obtain a reasonable return for the services they provide;
therefore, CompTel does not object to the requirement that all
carriers handling so-called "coinless" calls–access
code or subscriber 800 calls–pay reasonable compensation to the
PSP that originates the call.

CompTel’s main concern is that the compensation amount must be
fair to all parties: the PSPs receiving it, the carriers paying
it, and the consumers that ultimately must bear the cost of it.
Compensation should not result in the blocking of payphone calls
and a corresponding erosion of the service available from public
payphones. Nor should compensation mechanisms impose unfair
payment obligations on carriers without advance notice and an
opportunity to recover the additional costs they may owe.

The appeals court, in its July 1 remand, recognized that the
costs of all payphone calls are not alike. It found that CompTel
and other parties submitted "solid data" showing that
the costs of local coin calls were higher than the costs of
originating coinless calls.

Now, the FCC must choose a default compensation amount that
reflects only the cost of coinless calls–not the costs of other
calls originated from payphones. Currently, there is no
ready-made surrogate for determining the cost of compensable
payphone calls. Instead, the Commission must consider the costs
of originating these calls, and then set the compensation level
equal to the additional, or marginal, costs created by coinless
calls.

CompTel stated in its comments that, if compensation is set at
the marginal costs of coinless calls, compensation should be less
than 5 cents per call. If compensation for access code and
subscriber 800 calls is set at direct costs, it should be no more
than approximately 8 cents per call. Direct costs would include
not only the marginal costs created by a coinless call, but also
a share of the equipment and payphone line expense attributable
to the usage of the payphone. Such costs would not and should not
include costs resulting from maintenance and site visits
associated with coin equipment and coin collection, neither of
which are needed to originate coinless calls.

Finally, CompTel also stated that the 1996 Telecommunications
Act requires the FCC to adopt rules to ensure fair compensation
for payphone calls. Clearly, carriers are not obligated to pay
compensation in the absence of FCC rules which require it, and
because the appeals court vacated the FCC’s rules, carriers
should not be obligated to make compensation payments until after
the Commission adopts new rules. The FCC lacks the authority to
prescribe compensation payments on a retroactive basis.

Fair compensation means that the compensation should be based
on the costs incurred by the handlers of the compensable call. In
fact, the appeals court recognized this when it concluded that
the FCC’s application of a surrogate (the local coin rate) to
coinless calls was unjustified. In its comments, CompTel asked
the FCC to establish a new default compensation rate that is
based solely on the costs that are incurred in originating
coinless calls.

Even though the appeals court vacated the so-called
"interim" compensation plan adopted by the FCC, CompTel
believes that the fairest approach to compensation payments
dictates that, if compensation is to be paid on a per-phone
basis, the FCC must apportion that compensation equitably among
all carriers.

CompTel also stated in its comments that the FCC actually
misinterpreted the appeals court’s decision when it asserted that
"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."
To the contrary, CompTel believes that the effect of the court’s
decision is to vacate the FCC’s rules, subject to its authority
to adopt interim rules during the remand or final rules on remand
that remedy the errors identified by the court.

Unless–and until–the FCC takes either of these courses,
carriers receiving compensable calls are not obliged to pay
compensation to PSPs for coinless calls. CompTel joined with
eight other carriers on August 15 and submitted a motion seeking
clarification that the rules have been vacated pending FCC action
on remand.

Thus, the FCC must now revisit this entire issue, including
the question of what will happen upon the expiration of the new
interim period. The new interim plan, moreover, will probably
apply to all interexchange carriers–and possibly to all
carriers–since the appeals court ruled that the FCC acted
arbitrarily and capriciously in requiring payments only from
large carriers for the first phase of the interim plan. Thus, an
interim compensation plan that would have applied only to about
two dozen carriers will now apply even to the smallest companies.
Whether that’s fair or not is a question that can be settled only
in the marketplace.

Kathleen Franklin is Director of Communications for the
Competitive Telecommunications Association (CompTel), the
principal national industry association representing more than
200 competitive telecommunications carriers and their suppliers.
CompTel can be reached at 202/296-6650. Visit CompTel on the
World Wide Web at www.comptel.org.