Unfair At Any Price?

Channel Partners

December 1, 1997

6 Min Read
Unfair At Any Price?

Posted: 12/1997

Unfair At Any Price?

The Continuing Struggle Over Payphone

By Kathleen Franklin

Payphones are not a particularly sexy issue unless you
associate them with Clark Kent’s famous phone booth costume
changes. Nevertheless, in two rulings issued in early October,
the Federal Communications Commission (FCC) decided two important
issues that will have a profound impact on long distance carriers
and payphone service providers alike. And while readers may
recall Ralph Nader’s indictment of the Chevrolet Corvair as being
"unsafe at any speed," the wrangling over how to
compensate payphone service providers for coinless calls conjures
up the phrase, "Unfair at any price." It seems nobody
is happy with the FCC’s rulings.

In the first ruling, adopted Oct. 7, the FCC’s Common Carrier
Bureau granted a five-month waiver–until March 9, 1998–of rules
that would require local exchange carriers (LECs) to provide
payphone-specific coding digits to payphone service providers
(PSPs) and PSPs to provide payphone-specific coding digits to
interexchange carriers (IXCs). The provision of these
payphone-specific coding digits is a prerequisite to payphone
per-call compensation payments by IXCs to PSPs for so-called
"coinless" calls (i.e., subscriber 800 and access code

The Common Carrier Bureau established this limited waiver to
let LECs, IXCs, and PSPs have an extended transition period for
the provision of payphone-specific coding digits without delaying
the payment of per-call compensation as required by the
Telecommunications Act of 1996.

During the five-month waiver period, payphones appearing on
the LEC-provided lists of payphones will be eligible for per-call
compensation even if they do not transmit payphone-specific

The Common Carrier Bureau did acknowledge that the waiver will
force IXCs to pay compensation for certain calls without being
able to block those calls on a real-time basis. Nevertheless, the
bureau stated that it simply has to adopt rules that provide PSPs
with per-call compensation, "and the waiver will most
expeditiously lead to this result." This hardly seems fair.

The Common Carrier Bureau also maintained in its ruling that
this limited waiver will not cause any great hardship to LECs,
PSPs or IXCs. "The unavailability of these coding digits,
for instance, will not preclude IXCs from identifying payphone
calls for the purpose of determining the number of calls from
which compensation is owed. Nor will the waiver interfere with
the possibly 60 percent of payphones that currently are able to
transmit payphone-specific coding digits," the bureau

The FCC’s second payphone-related ruling, issued Oct. 9, poses
even more problems for IXCs. The commission has long grappled
with the question of what rate is fair in compensating payphone
service providers for the costs they incur in originating calls.

Briefly, the genesis of this particular battle can be
pinpointed as being September 1996, when the FCC adopted rules
that implement that portion of the Telecom Act that calls for the
creation 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

After the resulting regulations were roundly challenged by a
variety of parties, the U.S. Court of Appeals for the District of
Columbia Circuit issued a decision in July in which it 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
shoulder the costs of these calls. Second, the appeals court
upheld the FCC’s decision to require carriers to track payphone
calls. Unquestionably, this requirement burdens many carriers who
must develop and install costly new tracking mechanisms. It is up
to IXCs to obtain lists of PSPs from LECs; the commission is
virtually silent, however, on requirements governing the format
and timeliness of this information.

Most importantly, the court overturned the FCC’s default
compensation rate of 35 cents per call.

On the other hand, the appeals court tossed out 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 IXCs will pay even more in compensation to payphone

Fast-forward to Oct. 9: The FCC set the default per-call
compensation rate for payphone calls at 28.4 cents. Ironically,
although the 28.4 cents per call is more than five times higher
than can be justified by economics, the PSPs are still unhappy
with it, claiming that it falls short of the costs they incur.

The default per-call rate is the rate that applies in the
absence of a negotiated agreement between parties during the
first two years of per-call compensation–Oct. 7, 1997 through
Oct. 6, 1999. After Oct. 6, 1999, the default rate, in the
absence of a negotiated agreement, is the market-based local coin
rate minus 6.6 cents. The FCC also ruled that the default rate
will continue to be 28.4 cents per call for coinless payphones,
in the absence of a negotiated agreement.

The American Public Communications Council (APCC), which
represents PSPs, insists that the new default compensation rate
will not permit PSPs to recover their costs fully because the
cost to PSPs is between 32 and 42 cents per call. Thus, according
to the APCC, PSPs may be compelled to raise rates for other
services to make up the lost revenue.

AT&T, meanwhile, stated that the per-call default
compensation rate of 28.4 cents is much too high, and that the
rate should be lowered to 12 cents per call. AT&T plans to
appeal the FCC’s Oct. 9 ruling, just as it led the appeal of the
FCC’s September 1996 ruling. MCI also weighed in with an economic
study, asserting that the FCC’s ruling will result in an annual
windfall for PSPs of at least $1.3 billion.

The Competitive Telecommunications Association (CompTel)
always has maintained that PSPs should be compensated fairly for
coinless calls. PSPs ought to be able to earn a reasonable return
for the services they provide.

CompTel does believe, however, that the compensation amount
must be fair to all parties: PSPs, IXCs and end users.
Compensation should not result in the blocking of payphone calls
and the resulting deterioration of payphone service. Nor should
carriers be blind-sided by unfair payment obligations without
being afforded an opportunity to recover the additional costs
they may have incurred.

The appeals court already has recognized that the costs of all
payphone calls are not alike, citing data submitted by CompTel
and other parties that shows the costs of local coin calls were
higher than the costs of originating coinless calls.

The FCC has settled on 28.4 cents as the default compensation
amount that reflects only the cost of coinless calls, not the
costs of other calls originated from payphones. That’s a far cry
from the 3 cents- to 5 cents-per-call ceiling recommended by
CompTel, under the theory that compensation should be set at the
marginal costs of coinless calls. Even if compensation for access
code and subscriber 800 calls is set at direct costs, it would be
under 10 cents per call.

The record is clear: cost-based compensation set at the PSPs’
incremental cost in originating access code and subscriber 800
calls will fully and fairly compensate PSPs.

The FCC has created a costly, records-intensive scenario that
unfairly burdens IXCs. The 28.4 cents-per-call default
compensation rate is unjustifiably high and cannot be supported
by the inflated and unreliable data submitted by PSPs.

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.
Contact CompTel at (202) 296-6650 or visit the website at www.comptel.org/

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