UNITED STATES COURT OF APPEALS FOR THE D.C. CIRCUIT


AMER PUB COMM CNCL

v.

FCC


99-1114a

D.C. Cir. 2000


*	*	*


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


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.


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, 




__________

n 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


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


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


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.