Pleading Cycle Established For Comment On Remand Issues In The Payphone Proceeding

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 64

[CC Docket No. 96-128]

Pleading Cycle Established For Comment On Remand Issues In The

Payphone Proceeding

AGENCY: Federal Communications Commission.

ACTION: Proposed rule.

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SUMMARY: This document clarifies the status of the requirements in the

Payphone Orders in light of the D.C. Circuit's decision in Illinois

Public Telecommun., and establishes a pleading cycle for comment on

issues remanded by that Court.

DATES: Comments are due on or before August 26, 1997 and reply comments

are due on or before September 9, 1997.

ADDRESSES: Office of the Secretary, Federal Communications Commission,

Room 222, 1919 M St. N.W., Washington, D.C. 20554.

FOR FURTHER INFORMATION CONTACT: Greg Lipscomb, Formal Complaints and

Information Branch, Enforcement Division, Common Carrier Bureau. (202)

418-0960.

SUPPLEMENTARY INFORMATION: DA 97-1673, August 5, 1997.

Comments Due: August 26, 1997.

Reply Comments Due: September 9, 1997.

I. Introduction

1. This Public Notice clarifies the status of the requirements of

the Payphone Orders 1 in light of the D.C. Circuit's

decision in Illinois Public Telecommunications Ass'n v.

FCC,2 and seeks further comment on certain issues raised by

that court decision. In Illinois Public Telecomm., the court granted in

part and denied in part petitions for judicial review of the Payphone

Orders. In doing so, however, the court actually vacated only one

narrow aspect of those orders, i.e., the asset valuation standard that

the Commission adopted with respect to transfers of telephone company

payphone assets to separate affiliates. The remaining portions of the

orders were either upheld, or remanded to the Commission for further

consideration and explanation. Thus,

[[Page 43687]]

except for the vacated asset valuation standard, 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.3 We place the industry on notice,

however, that should the equities so dictate, payphone compensation

payment obligations (or the absence of such obligations) incurred by

providers of interexchange services and compensation levels paid or

received under our existing rules pending action on remand may be

subject to retroactive adjustment in order to undo the effects of

applying aspects of the current rules that were identified by the court

as potentially arbitrary.4

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\1\ Implementation of the Pay Telephone Reclassification and

Compensation Provisions of the Telecommunications Act of 1996, CC

Docket No. 96-128, Report and Order, 11 FCC Rcd 20541 (1996)

(``Payphone Order''); Order on Reconsideration, 11 FCC Rcd 21233

(1996) (``Order on Reconsideration'') (both orders together

``Payphone Orders''); 61 Fed. Reg. 65,341 (Dec. 12, 1996).

\2\ D.C. Circuit Nos. 96-1394 et al. (July 1, 1997).

\3\ See Allied-Signal Inc. v. NRC, 988 F.2d 146, 151 (D.C. Cir.

1993); Checkosky v. SEC, 23 F.3d 452, 463 (D.C. Cir. 1994) (opinion

of Silberman, J.). It follows logically that because the court held

that the failure of the Commission to provide interim compensation

for 0+ calls that are not compensated pursuant to contract is

arbitrary and capricious and not responsive to the Sec. 276

requirement that there be compensation for each and every call, the

court would similarly find a decision by the Commission to

discontinue interim compensation during the remand proceedings as

contrary to Sec. 276. The court's decision to remand but not vacate

the interim compensation provisions of the Payphone Orders supports

this assumption.

\4\ See Natural Gas Clearinghouse v. FERC, 965 F.2d 1066, 1073-

75 (D.C. Cir. 1992); Public Utils. Comm'n of California v. FERC, 988

F.2d 154, 162-63 (D.C. Cir. 1993).

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2. As discussed below, we also seek comment to supplement the

record on certain issues raised by the court's ruling in Illinois

Public Telecomm.

II. Issues for Comment

A. Default Rate for Compensation of Subscriber 800 and Access Code

Calls

3. The court concluded that the Commission did not adequately

justify setting the per-call compensation rate for subscriber 800 and

access code calls at the same rate as the deregulated local call rate

of $.35. In particular, the court held that the Commission did not

justify its conclusion that the costs of coin calls, subscriber 800

calls, and access code calls all are similar.5 The court

concluded that the Commission had not responded to arguments by parties

in the proceeding that the ``costs of local coin calls versus 800 and

access code calls are not similar.'' The court cited the filings of

various IXCs that argued that: (1) the costs of coin calls are higher

than those for coinless calls because of additional costs for equipment

and coin collection; (2) the costs of local coin calls are higher

because the PSP pays for originating and completing local calls while,

for coinless calls (e.g., subscriber 800 calls or access code calls)

the PSP only pays for originating the calls.6

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\5\ Illinois Public Telecomm., No. 96-1394, slip op. at 16.

\6\ Id. at 14.

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4. We seek comment on the differences in costs to the PSP of

originating subscriber 800 calls and access code calls, on the one

hand, and local coin calls, on the other hand. We also seek comment on

whether and, if so, how these cost differences should affect a market-

based compensation amount. Finally, we seek comment on whether the

local coin rate, subject to an offset for expenses unique to those

calls, is an appropriate per-call compensation rate for calls not

compensated pursuant to a contract or other arrangement, such as

subscriber 800 calls and access code calls. Parties should respond

specifically to concerns raised by the court in setting forth their

views on the appropriate per-call compensation amount.

B. Interim Compensation Plan

5. In the Payphone Orders, the Commission established a two-year

interim plan for payphone compensation for subscriber 800 and access

code calls based on a rate of $.35 per call. Under the first year of

the interim plan, IXCs with annual toll revenues in excess of $100

million are required to pay, collectively, a flat-rate compensation of

$45.85 per payphone per month in shares proportionate to their share of

total market long distance revenues. During the second year, all IXCs

are required to pay $.35 per subscriber 800 call or access code call

unless they have contracted for a different amount.

6. The court remanded the interim plan for two reasons. First, the

court concluded that the Commission failed to provide a reasonable

justification for an interim rate based on $.35 per call. As discussed

above, the court remanded the decision to set compensation for

subscriber 800 calls and access code calls at the deregulated local

coin rate. The court concluded that the Commission ``must now set a new

interim rate and decide what is to happen once the interim period is

over.'' 7 Second, the court held that the Commission acted

arbitrarily and capriciously because it required payments only from

IXCs with over $100 million in toll revenues for the first year of the

interim plan. The court concluded that administrative convenience was

an insufficient justification for an interim plan that exempts all but

large IXCs from paying for the costs of services received.8

In addition, the court found that the Commission did not adequately

justify why it based its interim plan on total toll revenues, ``as it

did not establish a nexus between total toll revenues and the number of

payphone-originated calls.'' The court concluded that the Commission

could decide that the new interim rate is an appropriate default rate

after the interim period and that, through negotiations, PSPs and IXCs

could be left free to depart from the default rate.9

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\7\ Id. at 17.

\8\ Id.

\9\ Id.

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i. Compensation for Subscriber 800 and Access Code Calls During the

Interim Period

7. In response to the court's conclusion that the Commission had

not justified setting the interim flat rate compensation level on the

basis of $0.35 per call (which we had multiplied by an estimate of the

number of monthly compensable calls), we seek comment on the proper

aggregate amount of compensation PSPs should receive per payphone

during the period before per call compensation becomes available.

8. We also seek comment on the proper allocation of a flat-rate

compensation obligation, if any, among providers of interexchange

service. The Commission currently does not have specific toll revenue

data or market share data for IXCs with toll revenues under $100

million. Consequently, we seek comment on how the Commission could

establish the relative compensation obligations of such smaller IXCs,

if such carriers were to be included in the interim compensation

mechanism. We also seek comment on whether annual toll revenues are the

appropriate basis for allocating flat-rate compensation obligations

among all of the IXCs, regardless of their annual toll revenues, or

whether some other basis is more appropriate. If parties argue that

another basis is appropriate for allocating flat-rate compensation,

they should also discuss how differences in the amount of interim

compensation obligations would be accounted for, given that the

existing interim mechanism continues to be in effect. We also seek

comment on whether the Commission should include LECs that carry toll

traffic among the carriers required to pay interim compensation, and,

if so, the data we would use to ascertain their respective

obligations.10

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\10\ LECs are currently excluded from interim obligations

because of ``. . . administrative practicality and because LECs, on

an individual basis, currently do not carry a significant volume of

compensable calls.'' Order on Reconsideration, 11 FCC Rcd at 21291,

para. 126.

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[[Page 43688]]

ii. Compensation for 0+ Calls During the Interim Period

9. The Payphone Orders do not provide compensation for any calls

that are compensated pursuant to a contract between the PSP and a

presubscribed carrier. The interim compensation mechanism provides

compensation only for subscriber 800 calls and access code

calls,11 which are the most significant classes of calls

currently not compensated pursuant to contract. The court found that

the Commission's ``failure to provide interim compensation for 0+ calls

is patently inconsistent with Sec. 276's command that fair compensation

be provided for `each and every completed . . . call.' '' 12

As the Commission noted in the Payphone Order, a significant number of

payphones maintained by the BOCs are not subject to a contract between

the PSP and the presubscribed IXC, due to the previous restrictions

imposed by the Modification of Final Judgment.13 Because the

court's statement is made in response to an argument made by the BOCs,

it appears that the court's concern about a lack of compensation for 0+

calls in the interim period is limited to situations where such

compensation is not paid pursuant to a contract. We seek comment on

this interpretation. Further, we seek comment on how the BOCs, and any

other similarly situated PSP, should be compensated during the interim

period for 0+ calls for which they do not receive compensation by

contract. More specifically, because the presubscribed carrier on a

particular payphone receives the 0+ calls from that payphone and often

pays a commission on such calls to the location provider, we seek

comment on whether it would be appropriate to have the presubscribed

carrier pay the default per-call compensation amount to the PSP for

each such call. The concerns that the Commission expressed when it

deferred per-call tracking and per-call compensation are not implicated

in this situation, because the presubscribed carrier is already keeping

track of these calls. The presubscribed carrier could simply pay the

PSP for the number of calls it has received from the payphone

multiplied by the default rate. We seek comment on this option, and any

other options parties may suggest for responding to the court's

concerns.

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\11\ Payphone Order, 11 FCC Rcd at 20603-04, paras. 124-25.

\12\ Illinois Public Telecomm., No. 96-1394, slip op. at 19.

\13\ See United States v. Western Elec. Co., 698 F. Supp. 348,

360 (D.D.C. 1988) (MFJ). The BOCs were not compensated for these

calls through contracts with IXCs like other PSPs. The Commission

included per-call compensation for 0+ plus calls made from BOC

payphones and inmate payphones so long as they do not otherwise

receive compensation for originating 0+ calls. The Commission did

not, however, provide for such compensation during the first year of

the interim period. Order on Reconsideration, 11 FCC Rcd at 21259-

60, para. 52.

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iii. Compensation for Inmate Calls During the Interim Period

10. In the Payphone Orders, the Commission decided that inmate

payphones would not be eligible for interim flat-rate compensation

because such payphones are not capable of originating either access

code or subscriber 800 calls, the only types of calls for which interim

compensation was provided.14 The Commission found that

virtually all calls originated by inmate payphones are 0+ calls, which

tend to be compensated pursuant to a contract between the PSP or

location provider and the presubscribed IXC.15 The court

remanded this issue because it held that Sec. 276 requires the

Commission to adopt regulations that will ensure that PSPs receive fair

compensation for every call using their payphone as required by the

Act.16 As with its discussion of interim compensation for 0+

calls, the court's statements were made in response to arguments made

by the BOCs. Thus, as we discussed above, it appears that the court's

concern about a lack of compensation for inmate calls in the interim

period is limited to situations where such compensation is not paid

pursuant to a contract. We seek comment on this interpretation.

Further, we seek comment on how the BOCs, and any other similarly

situated PSP, should be compensated for inmate payphone calls during

the interim period. We specifically seek comment on whether it would be

appropriate to have the presubscribed carrier pay the default per-call

compensation amount to the PSP for each inmate payphone call for which

compensation is not provided pursuant to a contract with the PSP.

Again, the Commission's concerns absent tracking and per-call

compensation are not implicated in this situation, because the

presubscribed carrier is already keeping track of the calls.

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\14\ Order on Reconsideration, 11 FCC Rcd at 21259-21260, para.

52.

\15\ Id.

\16\ Illinois Public Telecomm., No. 96-1394, slip op. at 19-20.

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iv. Retroactive Adjustments to Interim Compensation Levels and

Obligations

11. As noted at the outset of the Public Notice, the Commission may

impose retroactive adjustments to the payment obligations and

compensation levels that are incurred under our existing rules during

the period before the Commission completes action on remand. We seek

comment on whether, how, and under what authority any such retroactive

adjustments should be made. Parties should specify the time period

covered by such potential adjustments, e.g., the entire first year of

interim compensation (beginning in October 1996), or from the date of

the court's remand in Illinois Public Telecomm. Ass'n.

C. Asset Valuation

12. In order to implement the Sec. 276 requirement to remove

subsidies from payphone operations,17 the Commission

required deregulation of payphone assets.18 Upon

deregulation of payphone assets, LECs are allowed either to maintain

the assets in their books of account but reclassify the assets as

nonregulated, or to transfer the payphone assets to a structurally

separate affiliate.19 In the Payphone Order, the Commission

stated that LECs that elect not to transfer their payphone assets to a

separate affiliate may maintain their assets on the books at net book

value. The Commission further stated that, under its affiliate

transactions rules, if a LEC transfers its payphone assets to either a

separate affiliate or an operating division that has no joint and

common use of assets or resources with the LEC and maintains a separate

set of books, the LEC must record the transfer of assets at the higher

of fair market value or net book value. The Commission concluded that

fair market valuation will capture any appreciation in value of those

assets, ``thus ensuring that any eventual gains

[[Page 43689]]

would accrue to the benefit of the ratepayers and shareholders.''

20

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\17\ Section 276(a)(1) provides that ``any Bell operating

company that provides payphone service shall not subsidize its

payphone service directly or indirectly from its telephone exchange

service operations or its exchange access operations.'' 47 U.S.C.

276(a)(1). Paragraph (b) of Sec. 276 requires the Commission to

issue ``regulations that . . . discontinue . . . all intrastate and

interstate payphone subsidies from basic exchange and exchange

access revenues.'' Id. U.S.C. 276(b)(1)(B).

\18\ See Payphone Order, 11 FCC Rcd at 20,621, para. 142-45.

\19\ 47 CFR 32.27(b). See Payphone Order, 11 FCC Rcd at 20,621,

para. 157. The court rejected the petitioners' argument that

Sec. 276 requires that a BOC's payphone assets be transferred to its

unregulated books. Illinois Public Telecomm., No. 96-1394, slip op.

at 28.

\20\ Payphone Order, 11 FCC Rcd at 20,623-20,625, paras. 163-66.

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14. The court held that the Commission's valuation methodology with

respect to the one-time transfer of assets mandated by industry reform

was arbitrary and capricious and contrary to precedent.21

The court concluded that the Commission failed to recognize that the

court's test in Democratic Central, which the Commission declined to

apply, was designed to protect not only the interests of ratepayers,

but also the competing interests of shareholders.22 The

court found inappropriate under Democratic Central the Commission's

valuation methodology, because the court held that the Commission was

attempting to transfer the increase in the value of the payphone

operations from the LECs' shareholders to ratepayers. The court held

that, under Democratic Central, as a result of the Commission's price

cap rules, investors rather than ratepayers have borne the risk of loss

on payphone assets. Therefore, the court concluded that investors

should reap the benefit of increases in the value of such

assets.23 The court stated that in Southwestern Bell Corp.

v. FCC, while upholding the Commission's affiliate transactions rules,

specifically ``noted Democratic Central's continued applicability to

`one-time' transfers mandated by industry reform.'' The court held that

the transfer of payphone assets pursuant to Sec. 276 fell within this

category.24 The court rejected upon similar analysis a

challenge by other petitioners to the net book valuation method

required by the Commission with respect to the reclassification of

payphone assets as nonregulated within the same corporate

entity.25

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\21\ Illinois Public Telecomm., No. 96-1394, slip op. at 28.

\22\ Id. at 26, citing Democratic Cent. Comm. of the Dist. of

Columbia v. Washington Metro. Area Transit Comm'n, 485 F.2d 785, 806

(D.C. Cir. 1973), cert. denied, 415 U.S. 935 (1974) (Democratic

Central).

\23\ Id. at 27.

\24\ Id. (citing Southwestern Bell Corp. v. FCC, 896 F.2d 1378,

1382 (D.C. Cir. 1990)).

\25\ Illinois Public Telecomm., No. 96-1394, slip op. at 28.

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15. We seek comment on how the asset valuation requirements for the

transfer of payphone assets established in the Payphone Orders should

be revised to respond to the concerns raised by the court. The court

appears to hold that net book value must be used for one-time transfers

mandated by industry reform, which would apply to payphone asset

transfers. If other approaches are recommended, parties should address

how such approaches comply with the court's Democratic Central

analysis.

III. Ex Parte Presentations

16. This Public Notice is a ``permit-but-disclose proceeding and

subject to the ``permit-but-disclose'' requirements under

Sec. 1.1206(b) of the rules, 47 CFR 1.1206(b), as revised. Persons

making oral ex parte presentations are reminded that memoranda

summarizing the presentation must contain a summary of the substance of

the presentation and not merely a listing of the subjects discussed.

More than a one or two sentence description of the views and arguments

presented is generally required. See 47 CFR 1.1206(b)(2), as revised.

Other rules pertaining to oral and written presentations are set forth

in Sec. 1.1206(b), as well. The Commission requires all written ex

parte presentations or summaries of oral ex parte presentations in this

proceeding to be served on all parties to this proceeding.

IV. Comment Filing Dates

17. Pursuant to applicable procedures set forth in Secs. 1.415 and

1.419 of the Commission's rules, 47 CFR 1.415, 1.419, interested

parties may file comments with the Office of the Secretary, Federal

Communications Commission, Room 222, 1919 M St., N.W., Washington, D.C.

20554 on or before August 26, 1997, and reply comments on or before

September 9, 1997 from the release of this public notice. To file

formally in this proceeding, participants must file an original and

four copies of all comments, reply comments, and supporting comments.

In addition, parties should file two copies of any such pleadings with

the Chief, Enforcement Division, Common Carrier Bureau, Stop 1600A,

Room 6008, 2025 M Street, N.W., Washington, D.C. 20554. Parties should

also file one copy of any documents filed in this docket with the

Commission's copy contractor, International Transcription Services,

Inc., 1231 20th Street, N.W., Washington, D.C. 20036. Comments and

reply comments will be available for public inspection during regular

business hours in the FCC Reference Center (Room 239), 1919 M Street,

N.W., Washington, D.C.

17. For further information, contact Michael Carowitz, Rose

Crellin, or Greg Lipscomb, Enforcement Division, Common Carrier Bureau,

202/418-0960.

Federal Communications Commission.

William F. Caton,

Acting Secretary.

[FR Doc. 97-21819 Filed 8-14-97; 8:45 am]

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