Amer Pub Comm Cncl v. FCC

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 2, 2000 Decided June 16, 2000

No. 99-1114

American Public Communications Council, et al.
Petitioners

v.

Federal Communications Commission and
United States of America,
Respondents

Telecommunications Resellers Association, et al.,
Intervenors

Consolidated with
99-1115, 99-1117, 99-1122

On Petitions for Review of an Order of the
Federal Communications Commission

Michael K. Kellogg argued the cause for petitioner Pay-
phone Service Providers. With him on the briefs were Albert

H. Kramer and Robert F. Aldrich. David M. Janas, Michael
J. Zpevak and Robert M. Lynch entered appearances.

Jodie L. Kelley argued the cause for petitioners MCI
WorldCom, Inc., et al. and supporting intervenors. With her
on the briefs were Maria L. Woodbridge, Mark B. Ehrlich,
Donald B. Verrilli, Jr., Leon M. Kestenbaum, Jay C. Keith-
ley, H. Richard Juhnke, Robert Digges, Jr., Mark C. Rosen-
blum, James S. Blaszak, Janine F. Goodman, Carl W. Nor-
throp, E. Ashton Johnston, Howard J. Symons, Sara F.
Seidman, David Carpenter, Peter Keisler, Danny E. Adams,
Steven A. Augustino, Robert J. Aamoth, Dana Frix, C. Joel
Van Over, Teresa K. Gaugler, Michael J. Shortley, III,
Thomas Gutierrez, J. Justin McClure, Charles C. Hunter and
Catherine M. Hannan. John B. Morris, Jr., Michelle W.
Cohen, James M. Smith and Genevieve Morelli entered ap-
pearances.

Joel Marcus, Counsel, Federal Communications Commis-
sion, argued the cause for respondents. Joel I. Klein, Assis-
tant Attorney General, U.S. Department of Justice, Robert B.
Nicholson and Robert J. Wiggers, Attorneys, Christopher J.
Wright, General Counsel, Federal Communications Commis-
sion, John E. Ingle, Deputy Associate General Counsel, and
Lisa A. Burns, Counsel, were on the brief.

Albert H. Kramer argued the cause for intervenors Pay-
phone Service Providers. With him on the brief were Robert
F. Aldrich and Michael K. Kellogg.

H. Richard Juhnke argued the cause for Long Distance,
Paging and Consumer intervenors. With him on the brief
were Leon M. Kestenbaum, Jay C. Keithley, Charles C.
Hunter, Catherine M. Hannan, Carl W. Northrop, Robert
Digges, Jr., Howard J. Symons, Sara F. Seidman, Mark C.
Rosenblum, David W. Carpenter, Danny E. Adams, Steven
A. Augustino, Robert J. Aamoth, Dana Frix, C. Joel Van
Over, Michael J. Shortley, III, Teresa K. Gaugler, Thomas
Gutierrez and J. Justin McClure.

 Before: Edwards, Chief Judge, Sentelle and Randolph,
Circuit Judges.

Opinion for the Court filed by Circuit Judge Sentelle.

Sentelle, Circuit Judge: Section 276 of the Telecommuni-
cations Act of 1996, that comprehensively amended the Com-
munications Act of 1934, see Telecommunications Act of 1996,
Pub. L. No. 104-104, 110 Stat. 56 ("1996 Act"), concerns
payphone services. It requires the Federal Communications
Commission ("FCC" or "Commission") to promulgate regula-
tions to "establish a per call compensation plan to ensure that
all payphone service providers are fairly compensated for
each and every completed intrastate and interstate call using
their payphone." 47 U.S.C. s 276(b)(1)(A) (Supp. III 1997).
Petitioners representing various interests of the payphone
industry seek review of the FCC's third attempt at a sustain-
able per-call fee plan to fulfill its s 276 obligations. We hold
that the FCC's order withstands scrutiny under the Adminis-
trative Procedure Act. See 5 U.S.C. s 706 (1994).

I. Background

This case is before us for the third time. In two previous
orders, the FCC has attempted to develop and justify a per-
call fee for coinless calls from payphones. See In re Imple-
mentation of the Pay Telephone Reclassification and Com-
pensation Provisions of the Telecommunications Act of 1996,
11 F.C.C.R. 20541 (1996) ("First Order"); In re Implementa-
tion of the Pay Telephone Reclassification and Compensa-
tion Provisions of the Telecommunications Act of 1996, 13
F.C.C.R. 1778 (1997) ("Second Order"). Acting on previous
petitions for review, we have twice remanded the Commis-
sion's determinations for a lack of reasoned decisionmaking.
See Illinois Pub. Telecomms. Ass'n v. FCC, 117 F.3d 555, 558
(D.C. Cir. 1997) ("Payphones I"); MCI Telecomms. Corp. v.
FCC, 143 F.3d 606, 607 (D.C. Cir. 1998) ("Payphones II").
Today we consider petitions challenging the FCC's third
order on the subject. See In re Implementation of the Pay
Telephone Reclassification and Compensation Provisions of

the Telecommunications Act of 1996, 14 F.C.C.R. 2545 (1999)
("Third Order").

Historically, only local phone service providers (local ex-
change carriers or "LECs") provided payphone services.
The development of so-called "smart" payphones in the mid-
1980s allowed independent payphone service providers
("PSPs") to compete with the LECs. PSPs obtained their
revenues from either coin calls or from contracts with interex-
change carriers ("IXCs" or operations services providers,
"OSPs") for collect calls and calling card calls. See Pay-
phones I, 117 F.3d at 558-59.

Before the 1996 Act was passed, PSPs were largely uncom-
pensated for a third type of payphone call: "dial around"
coinless calls, where the caller uses a long distance carrier
other than the payphone's presubscribed carrier. "Dial
around" coinless calls include toll-free calls to long distance
providers (such as 1-800-CALL-ATT), and the 10-10-XXX
type of calls. See id. at 559. PSPs are prohibited from
blocking these dial around calls. See Telephone Operator
Consumer Services Improvement Act of 1990, Pub. L. No.
101-435, 104 Stat. 986 (codified at 47 U.S.C. s 226 (1994)).
In s 276 of the 1996 Act Congress addressed the problem of
uncompensated calls by requiring the FCC to "establish a per
call compensation plan to ensure that all payphone service
providers are fairly compensated for each and every complet-
ed intrastate and interstate call using their payphone." 47
U.S.C. s 276(b)(1)(A) (Supp. III 1997). The statute directs
the Commission to prescribe regulations "[i]n order to pro-
mote competition among payphone service providers and
promote the widespread deployment of payphone services to
the benefit of the general public" to meet this end. Id.
s 276(b)(1).

The FCC decided that the best way to ensure fair competi-
tion was to allow the market to set the price for each call.
See First Order, 11 F.C.C.R. 20541 p 70. But because no
market has previously existed for dial around coinless calls,
the Commission first adopted a market-based surrogate--the
price of a local coin call at a typical deregulated payphone of

$.35. In imposing this rate, the FCC simply said that the
"cost[s] of originating the various types of payphone calls are
similar." Id.

Various parties sought review of this part of the Commis-
sion's decision, as well as several other portions of the First
Order. See Payphones I, 117 F.3d at 563-64. We remanded
the coinless call rate determination because the Commission
had ignored record evidence that the costs of coin calls and
coinless calls are not similar. See id.; see also Illinois Pub.
Telecomms. Ass'n v. FCC, 123 F.3d 693, 694 (D.C. Cir. 1997).
For example, numerous IXCs had noted that coin calls cost
more than coinless calls because of the typical costs of using
coin mechanisms in payphones. We concluded that "[t]he
FCC's ipse dixit conclusion, coupled with its failure to re-
spond to contrary arguments resting on solid data, epitomizes
arbitrary and capricious decisionmaking." Payphones I, 117
F.3d at 564 (citing Motor Vehicle Mfrs. Ass'n v. State Farm
Mut. Auto. Ins. Co., 463 U.S. 29, 46-57 (1983)).

On remand, the FCC attempted to develop an actual mar-
ket-based rate for coinless calls. See Second Order, 13
F.C.C.R. 1778 p 29. The Commission used the deregulated
coin market rate as a starting point ($.35), and subtracted
$.066 per call as representing the difference between coin and
coinless calls, resulting in a per call rate of $.284. See id.
p 41-42. On appeal, we again found error in the agency's
decisionmaking. See Payphones II, 143 F.3d at 608-09. We
faulted the Commission's failure to explain why the coinless
market rate could be found by simply subtracting costs from
coin call rates: "If costs and rates depend on different
factors, as they sometimes do, then this procedure would
resemble subtracting apples from oranges." Id. at 608. We
noted that although the Commission "may have depended on
the premise that the market rate for coin calls generally
reflects the costs of those calls," it had failed to articulate its
assumptions and connect them to its reasoning. Id. We
remanded for further proceedings. See id. at 609.

The Commission went back to the drawing board one more
time. On February 9, 1999, the FCC issued its Third Order,

which we now review. The FCC switched from the "top-
down methodology" of the Second Order to a "bottom-up"
method, meaning that it started from zero and added up the
costs of coinless calls to develop a coinless call rate. See
Third Order, 14 F.C.C.R. 2545 p 13. The resulting new rate
is $.24.

Briefly put, the Commission first determined the "joint and
common" costs of a payphone; that is, the monthly capital
expense of a payphone, using the cost of a typical payphone
and accoutrements. The FCC did not include the cost of a
coin mechanism in this figure because it determined that that
cost is only necessary for coin calls, but did include amounts
as joint and common costs for monthly line charge costs,
maintenance costs, overhead costs (known as Sales, General,
and Administrative Costs or "SG&A"), and coding digit costs.
Total monthly costs per payphone came to $101.29.

To translate total monthly costs into a per call rate, the
FCC divided that figure by the average number of calls
received by a marginal payphone. A marginal payphone is
one that gathers revenue to meet its costs (including an
assumption that the payphone does not pay location rent to
the owner of the premises because of its marginal status) but
is not otherwise profitable. Relying on data submitted by the
Regional Bell Operating Companies Coalition ("RBOC Coali-
tion"), the FCC came up with a figure of 439 calls per month.
This number represents the midpoint between 414, where the
data showed that a premises owner would not need to subsi-
dize a payphone in order to keep it, and 464, where the data
showed that location rents would be typically required by
premises owners. The Commission declined to rely on other
data which used call volumes from an average payphone
because it would cause many payphones with below-average
call volume to become unprofitable.

This yielded a per call figure of $.231 ($101.29 divided by
439, rounded to the nearest one-thousandth). The FCC
adjusted the figure upwards $.009 to cover the interest associ-
ated with having to wait for payment from IXCs, for a grand

total of $.24. The FCC declined to add additional amounts to
the dial around rate for bad debts and collection costs associ-
ated only with dial around calls.

Two groups of petitioners again seek review of the FCC's
determination, raising multiple issues. The first, represent-
ing the interests of PSPs, claims that the final rate is too low.1
The other, representing the interests of IXCs, claims, not
surprisingly, that the final rate is too high.2 Each interest
group has also filed briefs intervening in the petitions of the
other.3

II. Analysis

Although the petitions from the First Order were more
wide-ranging, the area of dispute has now narrowed to the
coinless call rate. PSPs and IXCs raise a number of objec-
tions to the Commission's order on that subject. Although
we have given attention to each, only three are sufficiently
weighty to warrant separate discussion in this opinion: (1)
the FCC's failure to include a bad debt figure in the coinless
call rate, (2) the FCC's failure to include a separate figure to
account for collection costs associated with coinless calls, and
(3) the decision to use data based on marginal rather than
average payphones. In considering those three objections,
along with those which we do not separately discuss herein,

__________
1 The individual petitioners are American Public Communica-
tions Counsel ("APCC"), Ameritech Corporation, Bell Atlantic Cor-
poration, Bellsouth Corporation, GTE Service Corporation, SBC
Communications Inc., and US West, Inc.

2 The individual petitioners are MCI Worldcom, Inc. and Sprint
Corporation, joined by intervenors Ad Hoc Telecommunications
Users Committee, AirTouch Communications, Inc., American
Trucking Associations, Inc., Truckload Carriers Association, AT&T
Corporation, Cable & Wireless USA, Inc., Competitive Telecommu-
nications Association, Excel Telecommunications, Inc., Frontier
Corporation, Qwest Communications Corporation, Skytel Communi-
cations, Inc., and Telecommunications Resellers Association.

3 MCI Worldcom, Inc. is not part of the IXC group intervening
on the petitions of the PSPs.

we apply the standard of review drawn from the Administra-
tive Procedure Act and uphold the Commission's determina-
tions unless they are "arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with law." 5
U.S.C. s 706(2)(A) (1994); see, e.g., Achernar Broad. Co. v.
FCC, 62 F.3d 1441, 1445 (D.C. Cir. 1995). Each of the
decisions questioned by petitioners herein survives review
under that standard.

A. Bad Debt

As we noted above, the Commission declined to add any
amount to the coinless call fee for bad debts associated with
the collection of coinless call fees. The PSPs, before the
FCC, advanced arguments based on their own alleged bad
debt experience, and now argue that the FCC should have
been able to calculate some amount for inclusion in the
coinless call rate based on that evidence. Cross petitioners
argued before the Commission, and here, that the debts on
which the proffered evidence was based were either the result
of PSP negligence in collection, or do not genuinely represent
bad debt losses at all, but only unresolved billing disputes.
The Commission concluded that it had insufficient information
about the levels of bad debt to enable it to rationally calculate
an appropriate figure for inclusion.

Specifically, the Commission found that the data regarding
uncollected per-call compensation was not reliable enough to
predict accurately future levels of bad debt. See Third
Order, 14 F.C.C.R. 2545 p 162. The Commission noted that it
could not determine what percentage of uncollected per-call
compensation was the result of PSP billing errors (i.e., not
charging the correct IXC), as opposed to deadbeat carriers
(i.e., the appropriate party is billed but refuses to pay). The
Commission further noted that providing an improperly com-
puted allowance for uncollectibles could result in double re-
covery if the PSP ultimately collected from the delinquent
carrier. That is, the PSP would collect once from the IXC
and once from the consumer (through the bad debt cost
element included in the higher compensation amount). Final-

ly, the Commission determined that a bad debt allowance was
unnecessary because the agency had ensured in the Third
Order that PSPs will receive interest on late payments for as
long as such payments are overdue. In short, with insuffi-
cient information, the Commission found "that it would be
unwise to establish a cost element for bad debt at this time."
Id.

The PSP petitioners argue that the Commission was re-
quired to include some estimate of bad debt in its calculation
and that the failure to do so "effectively determin[es] that
dial-around uncollectibles would be zero." (The PSPs rely on
some of the same data that the Commission deemed not
sufficient to allow a rational decision.) We disagree.

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. "Where existing methodology or research
in a new area of regulation is deficient, the agency necessarily
enjoys broad discretion to attempt to formulate a solution to
the best of its ability on the basis of available information."
Industrial Union Dep't, AFL-CIO v. Hodgson, 499 F.2d 467,
474-75 n.18 (D.C. Cir. 1974) (citing Permian Basin Area Rate
Cases, 390 U.S. 747, 811 (1968)); see also FCC v. National
Citizens Comm. for Broad., 436 U.S. 775, 813-14 (1978).
That is exactly the situation the FCC faced here. The
agency was presented with bad debt data culled from a
relatively short historical period, while knowing that some of
the factors affecting that data may change in the future. Any
figure that it might have chosen to represent bad debt would
likely be challenged on that and other similar evidentiary
bases. We conclude that it was prudent and reasonable for
the Commission to decide that, on balance, the existing bad
debt data was not reliable enough to warrant any educated
guess as to future bad debt percentages. It may not have
been the only decision it could have made, but it was a
reasonable one under the circumstances.

 In upholding the reasonableness of the Commission's exclu-
sion of the bad debt element from coinless call cost, we are
mindful of the nature of the debt involved. As intervenor
long distance carriers remind us, the "[f]ailure to pay the
required compensation is a violation of FCC rules for which
the carrier is subject to damages as well as fines and penal-
ties." See 47 U.S.C. ss 206-08, 501-03 (1994). The plight of
the allegedly uncompensated payphone service provider does
not equate to that of a merchant pursuing deadbeat custom-
ers in the marketplace. Furthermore, for any harm that may
be done to the PSPs, they are not left without remedy. After
noting that it was "unable to generate a sufficient record on
this question for issuing this Order," the FCC invited the
parties to file petitions for clarification on the bad debt issue.
Third Order, 14 F.C.C.R. 2545 p 162. The RBOC Coalition
has made such a filing; the Commission has received that
petition; sought and received comments; and, is considering
the issue. See Common Carrier Bureau Seeks Comment on
the RBOC/GTE/SNET Payphone Coalition Petition for Clar-
ification Regarding Carrier Responsibility for Payphone
Compensation Payment, CC Docket No. 96-128, DA 99-730
(1999), available at 1999 WL 335783.

B. Collection Costs

The Commission's calculation of the joint and common costs
of a payphone include a figure representing "Sales, General,
and Administrative (SG&A) costs." Third Order, 14 F.C.C.R.
2545 p 178. SG&A includes "overhead costs, such as legal
fees, administrative costs, salaries, and management costs."
Id. The FCC reasoned that as the proportion of coin calls
changes as compared to coinless calls, more employees in a
payphone company would likely take on duties related to the
busier type of call traffic, but that the overall overhead costs
should remain the same. The Commission considered data
on the subject filed with it before the issuance of the Second
Order and data provided by the RBOC Coalition in the
present proceeding. Based on its review of the evidence, the
Commission determined that a reasonable estimate of SG&A

costs on a per-phone-per-month basis was $19.62. See id.
p 178-79.

The Commission included this SG&A figure in calculating
the coinless call cost but did not include in the coinless call
rate any additional amount to account for the marginal costs
of billing and collection of coinless fees. See id. p 163-64.
The FCC reasoned that it had insufficient information with
which to determine the variance of administrative costs which
occur from a rise in coinless calls relative to coin calls. See
id. p 164. It stated that "it [is] fair to assume that the
amount that coin-related SG&A positions contribute to SG&A
expenses approximate the same expense that billing and
collection positions contribute to SG&A." Id.

The PSPs claim that record evidence showed considerable
actual expenses in the collection process. In their view,
SG&A costs cannot be counted as covering these expenses
because coinless call collection costs are properly viewed as
an incremental expense of coinless calls, not a joint and
common cost of payphones.

We again disagree. 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 com-
pensation. 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 underly-
ing 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 adjust-
ment of cost allocation based upon that moving target. The
use in accounting of the concept of "overhead" presupposes
that some details of costs will be submerged in that greater
item of calculation. If this were not the case, and if the
PSP's argument were accepted and taken to its logical ex-
treme, we would be forced to conclude that virtually every
dollar characterized as overhead should be treated by the

Commission as either a cost of coin calls or coinless calls.
But the collective concept of overhead prevents us and the
Commission from having to determine that because a data
input employee of a PSP spends ten percent of the time at
her computer on coinless call matters and ninety percent on
coin calls, the cost of her mousepad should be divided on a
one-to-nine basis between those expense categories rather
than classified as overhead. The FCC reasonably did not go
down that detailed a path, and therefore did not act arbitrari-
ly, capriciously, or contrary to law in deciding that the
collection costs of dial around compensation are fairly repre-
sented by the SG&A portion of joint and common costs.

C. Marginal Payphone Methodology

The FCC based its calculations on the number of calls from
a marginal payphone--a payphone that breaks even--to en-
sure fair compensation under s 276(b)(1). The Commission
wanted to ensure the "widespread deployment of payphones"
as required by the statute, and declined to use average
payphone call volume because that would render below aver-
age payphones unprofitable. Third Order, 14 F.C.C.R. 2545
p 141.

To determine the number of calls a marginal payphone
receives, the FCC requested that the RBOC Coalition provide
two figures: (1) the number of calls placed at a phone that
does not pay rent, and (2) the number of calls made from a
location that begins to pay rent. The two numbers reported
back were 414 and 464, with a midpoint of 439 which the FCC
adopted.

The IXCs fault the FCC for relying on the RBOC Coalition
data. They claim that the data cannot be used because the
RBOC Coalition did not explain their underlying methodology
for developing the data. In City of New Orleans v. SEC, 969
F.2d 1163 (D.C. Cir. 1992), we found error in an agency's
reliance on estimates which had "no explanation or underly-
ing support." Id. at 1167. However, that is not the case
here. The RBOC Coalition did explain how it developed the
data, and noted certain difficulties it had in doing so. For

example, it pointed out that average revenue depends in part
on factors other than call volume, such as the mix of types of
calls and the maintenance expense of specific locations. It
explained its attempt to determine the average daily revenue
needed to decide to place a new payphone and the average
revenue needed to begin paying commissions on such a
phone, and then determined what mix of calls will produce
that revenue. The RBOC Coalition also explained that the
final numbers were a weighted average of numbers submitted
by members of the Coalition. While the data submitted by
the RBOC Coalition could be subjected to various challenges,
we cannot say that it was unreasonable or arbitrary for the
FCC in the exercise of its expertise to rely upon it. See
Madison Gas and Elec. Co. v. SEC, 168 F.3d 1337, 1344 (D.C.
Cir. 1999).

III. Conclusion

In summary, we conclude that petitioners have not estab-
lished that any portion of the FCC's rate calculation for
coinless calls is arbitrary, capricious, or otherwise contrary to
law. The errors which required us to remand on two prior
occasions have been rectified. The petitions for review are
therefore

Denied.