[Federal Register Volume 62, Number 158 (Friday, August 15, 1997)] [Proposed Rules] [Pages 43686-43689] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 97-21819] ======================================================================= ----------------------------------------------------------------------- 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. ----------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \5\ Illinois Public Telecomm., No. 96-1394, slip op. at 16. \6\ Id. at 14. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \7\ Id. at 17. \8\ Id. \9\ Id. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- [[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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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] BILLING CODE 6712-01-P