MCI Telecommunications Corp. v. Federal Communications Commission

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued May 8, 1998 Decided May 15, 1998

No. 97-1675

MCI Telecommunications Corporation, et al.,

Petitioners

v.

Federal Communications Commission and

United States of America,

Respondents

Sprint Corporation, et al.,

Intervenors

Consolidated with

Nos. 97-1685, 97-1709, 97-1713

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On Petitions for Review of an Order of the

Federal Communications Commission

John B. Morris, Jr. argued the cause for petitioners MCI
Telecommunications Corporation, et al., with whom Donald

B. Verrilli, Jr., Jodie L. Kelley, H. Richard Juhnke, Jay C.
Keithley, Leon M. Kestenbaum, Robert L. Hoggarth, Scott
Blake Harris and Kent D. Bressie were on the briefs.

Albert H. Kramer argued the cause for petitioner Illinois
Public Telecommunications Association, with whom Robert F.
Aldrich was on the joint briefs.

Kenneth L. Doroshow, Attorney, Federal Communications
Commission, argued the cause for respondents. Joel I. Klein,
Assistant Attorney General, U.S. Department of Justice, Rob-
ert B. Nicholson and Robert J. Wiggers, Attorneys, Christo-
pher J. Wright, General Counsel, Federal Communications
Commission, Daniel M. Armstrong, Associate General Coun-
sel, John E. Ingle, Deputy Associate General Counsel, and
Laurel R. Bergold, Counsel, were on the brief. Laurence N.
Bourne, Counsel, entered an appearance.

Michael K. Kellogg argued the cause for intervenors Amer-
itech Corporation, et al., with whom Albert H. Kramer,
Robert F. Aldrich, Richard P. Bress, Karen Brinkmann and
Bruce W. Renard were on the brief.

Danny E. Adams, Steven A. Augustino, James S. Blaszak,
Carl W. Northrop, E. Ashton Johnston, Robert M. McDowell,
Charles H. Helein, Daniel R. Barney, Robert Digges, Jr.,
Sarah F. Seidman, Howard J. Symons, David W. Carpenter,
Mark C. Rosenblum, Genevieve Morelli, John J. Heitmann,
Dana Frix, James M. Smith, Michael J. Shortley, III, Glenn
B. Manishin, James E. Magee, Frederick M. Joyce, Christine
McLaughlin, Wendy I. Kirchick, Charles C. Hunter, Cather-
ine M. Hannan and Richard S. Whitt were on the joint brief
of intervenors MCI Telecommunications Corporation, et al.
Jay C. Keithley and Leon M. Kestenbaum entered appear-
ances.

Before: Edwards, Chief Judge, Silberman and Rogers,
Circuit Judges.

Opinion for the Court filed Per Curiam.

Per Curiam: Because the Federal Communications Com-
mission ("Commission") failed to explain adequately its deri-
vation of a rate for coinless payphone calls, we grant the
petition for review in part and remand this case to the
Commission for further proceedings.

I. Background

The Telecommunications Act of 1996 ("the Act") required
the Commission to promulgate regulations ensuring that pay-
phone service providers would be "fairly compensated" for
calls made on their payphones. See 47 U.S.C.A.
s 276(b)(1)(A) (West Supp. 1998). In Implementation of the
Pay Telephone Reclassification and Compensation Provi-
sions of the Telecommunications Act of 1996, Report and
Order, CC Docket No. 96-128, FCC 96-388 (September 20,
1996), reprinted in Joint Appendix ("J.A.") 219 ("First Or-
der"), the Commission decided to set the charge for coinless
payphone calls at the same $.35 rate that it found was
prevalent for coin calls in several states that had deregulated
their payphone markets. In Illinois Public Telecom. Ass'n v.
FCC, 117 F.3d 555, 563-64 (D.C. Cir. 1997), the court vacated
this portion of the First Order on the ground that the
Commission had ignored record evidence that the costs of
coinless payphone calls and coin calls differ markedly. See
id.

On remand, in Implementation of the Pay Telephone Re-
classification and Compensation Provisions of the Telecom-
munications Act of 1996, Second Report and Order, CC
Docket No. 96-128, FCC 97-371 (October 9, 1997), reprinted
in J.A. 1418 ("Second Order"), the Commission purported to
derive a market-based rate for coinless calls. No discernible
"market rate" for coinless payphone calls actually existed,
because, prior to passage of the Act, payphone service provid-
ers never had been fully compensated for coinless calls.
Nonetheless, the Commission constructed a market rate for
coinless payphone calls by, first, starting with the $.35 rate,

which it called the "market rate" for coin calls, and then
subtracting costs of $.066 per call, which it found to be the
difference between the costs of coinless and coin calls. See
Second Order p 42, J.A. 1436. This led the Commission to
adopt a compensation rate of $.284 per coinless call from
October 7, 1997, to October 6, 1999, after which the default
rate would be determined by subtracting $.066 from the coin
call rate in a given locale. Petitioners challenge the reason-
ing of the Commission's general approach as well as its
specific computation of the $.066 cost differential.

II. Analysis

A. Ripeness

All parties agree that the Second Order is a final order
definitively establishing the disputed compensation rate.
There is therefore no doubt that the court has jurisdiction to
resolve the petitions for review. Although some parties other
than Petitioners here have filed pending petitions for recon-
sideration before the Commission challenging the computa-
tion of the $.066 cost differential, neither the Commission nor
the parties in the instant case contend that the matter before
us is unripe for judicial disposition. Indeed, during oral
argument, most counsel seemed to agree that prudential
considerations militate in favor of a prompt judicial decision.
We agree.

There is no reason for the court to delay deciding the
issues now before us. This case presents a concrete legal
issue regarding the reasonableness of the methodology used
to derive the $.284 rate. This is a question that is ripe for
judicial review. See Better Government Ass'n v. Department
of State, 780 F.2d 86, 92-93 (D.C. Cir. 1986). Additionally,
the pending petitions for reconsideration raise issues related
to and contingent on the central problem of the legitimacy of
the Commission's methodology in establishing the $.284 rate;
thus, resolution of the petitions for reconsideration will bene-
fit from a resolution of the present case. Furthermore, the
Commission has given no indication that it intends to recon-
sider its rate-setting approach, and its treatment of the

petitions for reconsideration will not shed light on this thresh-
old matter. In short, the instant case is ripe for review. We
therefore proceed to the merits of the matters before us.

B. Merits

Having examined the record thoroughly, we find the Com-
mission's explanation of its derivation of the $.284 rate plainly
inadequate. The Commission never explained why a market-
based rate for coinless calls could be derived by subtracting
costs from a rate charged for coin calls. If costs and rates
depend on different factors, as they sometimes do, then this
procedure would resemble subtracting apples from oranges.
If the Commission simply subtracted one quantity from an-
other, logically independent quantity, its action was unrea-
soned.

During oral argument, it was suggested that paragraph 42
of the Second Order suffices to justify the Commission's
position in this case. See Second Order p 42, J.A. 1436. But
in this paragraph the Commission merely says that "[t]he
majority of the costs associated with a payphone are joint and
common costs that are shared by the different types of calls
made by means of the payphone.... By making no adjust-
ment to the coin rate for these costs, we conclude that each
call placed at a payphone should bear an equal share of joint
and common costs." This reasoning is utterly unhelpful in
explaining why the Commission is correct in assuming that
the "market rate" for coinless calls, from which costs are
deducted, should be the same as the rate for coin calls.

The Commission's reasoning may have depended on the
premise that the market rate for coin calls generally reflects
the costs of those calls. This assumption would hold true in a
competitive market in which costs and rate converge. Unfor-
tunately, the Commission never went through the steps of
connecting this premise with its reasoning in the Second
Order. Nor did the Commission expressly claim that costs
and rate do in fact converge in the coin call market: it merely
rested on the assertion that "our approach continues to rely
on market-based rate (the local coin rate)." Second Order

p 25, J.A. 1430. Some articulation of this crucial assumption
was required, especially because the Commission itself has
suggested that the assumption may not be accurate. The
Commission acknowledged in the First Order that, because of
locational monopolies and incomplete information endemic to
the payphone market, the coin call rate may potentially
diverge from coin call costs. See First Order pp 13-16, J.A.
226-28. In the Second Order, without explanation, the Com-
mission merely declared itself "confident that market forces
will keep payphone prices at competitive levels." Second
Order p 118, J.A. 1469.

In principle, a market-based rate--as opposed to a cost-
based rate--could satisfy the statutory fair compensation
requirement. See Illinois Public Telecom. Ass'n, 117 F.3d at
563 ("A market-based approach is as much a compensation
scheme as a rate-setting approach."). But some explanation
of the logic of the derivation of the market-based rate is still
required. In Illinois Public Telecom. Ass'n, we did not reach
the question of the reasonableness of deriving a
market-based rate for coinless calls from the coin call rate,
because we found that there was unexplained record evidence
contradicting the Commission's claim that the costs of coin-
less and coin calls were similar. See id. at 563-64. While we
held that "it was not unreasonable for the Commission to
conclude that market forces generally will keep prices at a
reasonable level, thereby making locational monopolies the
exception rather than the rule," id. at 562, this holding went
to the Commission's decision to deregulate the coin call
market, not to the question of whether coin call rates con-
verge with costs.

C. Remedy

Although we conclude that the Commission did not ade-
quately explain the action at issue here, we exercise our
discretion to remand the rule for further explanation without
vacating it. See A.L. Pharma, Inc. v. Shalala, 62 F.3d 1484,
1492 (D.C. Cir. 1995). One factor we consider in exercising
such discretion is the potential for disruption that might be

caused by vacating the order. See id. Here, vacating the
order would leave payphone service providers all but uncom-
pensated for coinless calls made from their payphones, and
disrupt the business plans they have made on the basis of
their expectation of compensation. However, the Commission
must respond promptly to our remand. Congress required
the Commission to prescribe regulations ensuring fair com-
pensation "within 9 months after February 8, 1996," 47
U.S.C.A. s 276(b)(1), and this deadline has already passed.
If, within six months from the issuance of our mandate, the
Commission has not responded adequately to our remand,
any adversely affected party may request effective relief from
the court. See Telecommunications Research and Action
Ctr. v. F.C.C., 750 F.2d 70, 74-78 (D.C. Cir. 1984).

We choose not to vacate the $.284 rate on the clear
understanding that if and when on remand the Commission
establishes some different rate of fair compensation for coin-
less payphone calls, the Commission may order payphone
service providers to refund to their customers any excess
charges for coinless calls collected pursuant to the current
rate. The Commission itself has acknowledged that it has the
authority to adjust the compensation rate retroactively
"should the equities so dictate." See Pleading Cycle Estab-
lished for Comment on Remand Issues in the Payphone
Proceeding, CC Docket No. 96-128, FCC 97-1673 (Aug. 5,
1997), reprinted in J.A. 572; see also In the Matter of
Implementation of the Pay Telephone Reclassification and
Compensation Provisions of the Telecommunications Act of
1996, Memorandum Opinion and Order, CC Docket No.
98-128, FCC 98-642, 1998 WL 153171 (F.C.C.) (April 3, 1998);
In the Matter of Implementation of the Pay Telephone
Reclassification and Compensation Provisions of the Tele-
communications Act of 1996, Memorandum Opinion and Or-
der, CC Docket No. 96-128, FCC 98-481, 1998 WL 99371
(F.C.C.) (March 9, 1998).

It is clear that the Commission has the authority to order
refunds where overcompensation has occurred, on the basis of
the statutory provision permitting the Commission to take
such actions "as may be necessary in the execution of its

functions." 47 U.S.C. s 154(i) (1994). In addition, the Tele-
communications Act of 1996 requires the Commission to "take
all actions necessary (including any reconsideration)" to pro-
mulgate regulations to ensure fair compensation to payphone
service providers. See 47 U.S.C. s 276(b)(1). This language
authorizes the Commission to order refunds where doing so is
necessary to ensure fair compensation.

III. Conclusion

The Commission's order is remanded for further proceed-
ings consistent with the decision of the court.

Petition for review granted in part;
case remanded for further proceedings.