C.F. Communications Corp. v. F.C.C., s. 95-1563

• Decision Date: 31 October 1997
• Docket Number: Nos. 95-1563,95-1566,s. 95-1563
• Citation: 128 F.3d 735
• Parties: , 10 Communications Reg. (P&F) 488 C.F. COMMUNICATIONS CORPORATION, et al., Petitioners, v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents, Century Telephone of Wisconsin, Inc., et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 735

128 F.3d 735

327 U.S.App.D.C. 1, 10 Communications Reg. (P&F) 488

C.F. COMMUNICATIONS CORPORATION, et al., Petitioners, v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents Century Telephone of Wisconsin, Inc., et al., Intervenors.

Nos. 95-1563, 95-1566.

United States Court of Appeals District of Columbia Circuit.

Argued Sept. 2, 1997.

Decided Oct. 31, 1997.

Albert H. Kramer, Washington, DC, argued the cause for petitioners, with whom Robert F. Aldrich and Andrew J. Phillips were on the briefs.

Aaron J. Rappaport, Attorney, Federal Communications Commission, Washington, DC, argued the cause for respondents. William E. Kennard, General Counsel, Daniel M. Armstrong, Associate General Counsel, John E. Ingle, Deputy Associate General Counsel, and Carl D. Lawson, Counsel, Federal Communications Commission, Joel I. Klein, Acting Assistant Attorney General, United States Department of Justice, Robert B. Nicholson and Robert J. Wiggers, Attorneys, were on the brief. Susan L. Fox, Counsel, Federal Communications Commission, entered an appearance.

M. Edward Whelan, III, Los Angeles, CA, argued the cause for intervenors, with whom Benjamin H. Dickens, Jr., Susan J. Bahr, and David L. Nace, Washington, DC, were on the brief. David J. Gudino, Irving, TX, entered an appearance.

Before: EDWARDS, Chief Judge, SENTELLE and RANDOLPH, Circuit Judges.

Opinion for the court filed by Circuit Judge SENTELLE.

SENTELLE, Circuit Judge:

These petitions seek review of a Federal Communications Commission decision permitting local telephone companies (known as "local exchange carriers" or "LECs") to assess End User Common Line ("EUCL") charges on an independent payphone provider. Petitioners--the independent payphone provider and a trade association of independent payphone providers--argue that the Commission misinterpreted its rules to arrive at its decision. We agree, and grant the petitions for review.

I. Background

A.

When a telephone customer places a call, a "loop" links the telephone to the central office of a local exchange carrier, where switching equipment routes the call to a local or long-distance telecommunications network. Most of the LECs' costs in operating their facilities do not vary depending on how often the facilities are used; such costs are known as "nontraffic sensitive" ("NTS") costs. The cost of installing the loop is an NTS cost, for example, because that cost remains the same whether a customer uses the loop to make one call or one hundred calls. See National Ass'n of Regulatory Util. Comm'rs v. F.C.C., 737 F.2d 1095, 1104 (D.C.Cir.1984). In contrast, the cost of the switching equipment tends to increase with use, and is considered to be traffic-sensitive. Id.

In 1983, the Commission released rules governing the charges through which LECs would be compensated for providing long-distance carriers (known as "interexchange carriers" or "IXCs") with access to their local exchange facilities. In re MTS and WATS Market Structure, Third Report and Order, 93 F.C.C.2d 241, 242-43 (1983) ("Access Charge Order"), modified on recon., 97 F.C.C.2d 682 (1983) ("Access Charge Reconsideration"), modified on further recon., 97 F.C.C.2d 834 (1984), aff'd and remanded in part sub nom. National Ass'n of Regulatory Util. Comm'rs v. F.C.C., 737 F.2d 1095 (D.C.Cir.1984). The Commission decided that, as a general matter, "end users" placing interstate calls should bear the cost of the access charges. Therefore, the Commission's rules provided that most subscribers were assessed a monthly, flat-rate charge for the "end user common line" element, permitting LECs to recover a significant amount of the NTS costs associated with the subscribers' loops.

In crafting its rules, the Commission faced a dilemma: how to permit LECs to recover their investment in the public payphones (and payphone lines) that they owned and operated. Payphones required special treatment, reasoned the Commission, because the end users of payphones consisted of the "transient general public," rather than the subscribers, as in the case of private business or residential telephones. See In re C.F. Communications Corp. v. Century Telephone of Wisconsin, Inc., 8 F.C.C.R. 7334, 7335 p 10 (Com. Car. Bur.1993) ("Bureau Order"). At first, the Commission determined that LECs would recover their payphone investments solely through coin calls placed by end users. Access Charge Order at 280. Under this solution, however, LECs were not able to recover their investment from the many end users who used payphones to make non-coin calls, such as collect, credit card or third-party calls, causing either an inadequate recovery for the LECs or a disproportionate burden on end users paying by coin. Access Charge Reconsideration at 705.

On reconsideration, the Commission decided not to assess any charge on end users of public payphones. Rather, the Commission decided that LECs would recover the NTS costs of operating their payphones and payphone lines from a carrier common line element, which in turn was recovered from the switched access charges imposed on IXCs and interstate calls in general. Id. In other words, the Commission decided that public payphone users would no longer pay for the NTS costs of operating public payphones, but that those costs would in effect be subsidized by all interstate callers.

The Commission, however, did not exempt all payphones from EUCL charges. Although it excused "public" payphones from the charge, it determined that "semi-public" payphones would be subject to the charge. When it originally announced the public/semi-public distinction, the Commission explained that "[a] pay telephone is used to provide semipublic telephone service when there is a combination of general public and specific customer need for the service, such as at a gasoline station or pizza parlor. [Local telephone companies] provide directory listing with this service." Id. at 704 n. 40. By contrast, "[a] pay telephone is used to provide public telephone service when a public need exists, such as at an airport lobby, at the option of the telephone company and with the agreement of the owner of the property on which the phone is placed." Id. at 704 n. 41. The Commission determined that NTS costs associated with semi-public payphones should be "recovered from subscribers to that service in the same manner that costs associated with an ordinary business subscriber line are recovered" because "[t]hose fixed costs can be recovered from an identifiable business end user through flat charges." Id. at 706.

At the time the Commission developed this scheme for payphone access charges, the only existing payphones were owned by LECs. LEC-owned payphones are connected by special "coin lines" to an LEC central office. A processor located at the central office then does most of the work: determining the cost of the call, timing the call, telling the user how much money to deposit, and performing additional tasks. Because they are not capable of processing and supervising calls on their own, LEC-owned payphones are considered to be "dumb."

In 1984, the Commission permitted payphones not owned by LECs to enter the market. Unlike LEC-owned payphones, the new independent payphones were "smart," capable of processing and supervising calls by means of a microprocessor located inside the phone. These "smart" payphones were attached to ordinary telephone lines; because they were self-sufficient, there was no need for special "coin lines" to link them to an LEC central office. Callers encounter independent payphones in the same places where they would find LEC-owned payphones, such as street corners, airports, shopping malls, and rural "mom and pop" stores. Since callers are not able to tell whether a given payphone is "smart" or "dumb," from a caller's point of view, independent payphones are indistinguishable from those owned and operated by LECs.

B.

Petitioner C.F. Communications Corporation ("CFC") operates independent payphones in Wisconsin, Michigan, Minnesota and Iowa. On May 10, 1989, CFC filed a complaint with the Commission challenging several LECs' imposition of EUCL charges on CFC's independent payphones. Petitioner American Public Communications Council, Inc., a trade association of the independent payphone industry, intervened in and participated in the complaint proceeding on CFC's behalf.

In its complaint, CFC argued that it should be excused from EUCL charges because it did not qualify as an "end user" under the Commission's rules. CFC also argued that its payphones should be classified as "public"--and therefore exempt from EUCL charges--because they were located in public places and accessible to all members of the public. Accordingly, CFC sought damages from the LECs in the amount of the EUCL payments it had made to them.

The FCC's Common Carrier Bureau rejected CFC's arguments, and held that the LECs had properly assessed EUCL charges on CFC's independent payphones. See Bureau Order. In the Order challenged in this case, the Commission affirmed the Bureau's decision. See In re C.F. Communications Corp. v. Century Telephone of Wisconsin, Inc., 10 F.C.C.R. 9775 (1995) ("Order"). The Commission found that CFC was an "end user" under its rules, and thus subject to EUCL charges. Specifically, the Commission found that CFC met the regulatory definition of "end user" because it "offers telecommunications services exclusively as a reseller" and that all such resale transactions "originate on [CFC's] premises." See 47 C.F.R. § 69.2(m).

The Commission further concluded that CFC's independent payphones did not qualify for the "public telephone" exemption from the EUCL charges. Relying on an FCC rule defining "public telephone" as being "provided by a telephone company," 47 C.F.R. § 69.2(ee), the Commission reasoned that CFC's payphones were not "public" because CFC is not a "telephone company" under the applicable rules. See 47...