Wednesday, February 8, 2017

FCC Chairman Pai’s Alternative Personalities, Facts, Economics and Law—Part One

            FCC Chairman Pai has launched a charm offensive showcasing his commitment to transparency and regulatory restraint.  However, behind the scenes, he ignores due process, the rule of law, FCC tradition, bipartisanship and fair play to shut down previous FCC initiatives of which he disapproves. 

            For example, this bi-polar personality makes it possible for the Chairman to claim how much he cares about curbing extraordinarily gouging long distance telephone rates borne by the “captive” 2.2 million inmates in the U.S. even as he instructs his General Counsel to abandon any participation in an ongoing judicial review of prior FCC decision which resulted in rules.  See New Chairman Orders FCC To Abandon Court Defense Of Rule Limiting Prison Phone Rates; https://consumerist.com/2017/02/02/new-chairman-orders-fcc-to-abandon-court-defense-of-rule-limiting-prison-phone-rates/. By ordering his counsel’s no show,—akin to the Democratic Senators’ boycotts of Trump Cabinet nominee confirmation hearings—Chairman Pai facilitates maintenance of the status quo.
            Ironically, the Chairman has acknowledged the inmate calling marketplace fails to support his heartfelt belief that markets usually are infallible and efficient:

I believe that the government should usually stay its hand in economic matters and allow the price of goods and services to respond to consumer choice and competition. But sometimes the market fails, and government intervention carefully tailored to address that market failure is appropriate. Dissenting Statement of Commissioner Ajit Pai as Delivered at the August 9, 2013 Open Agenda Meeting, Re: Rates for Interstate Inmate Calling Services, WC Docket No. 12-375; available at: https://apps.fcc.gov/edocs_public/attachmatch/DOC-322749A4.pdf.

            On the other hand, Chairman Pai willingly works to prevent the consequences of market failure and the need for remedies, if the FCC errs in any way that he believes might establish a precedent for jurisdiction and overreach where market self-regulation suffices.  Better to eliminate in its entirety a ruling containing Pai-identified flaws than subject it to a court test, and refinements under his administration.

            The Pai-identified flaws are based on alternative facts, economics, accounting and law.
The Chairman has determined that the FCC’s prescribed per minute caps would prevent inmate calling companies from recouping costs.  He has interpreted Sec. 276 of the Communications Act as foreclosing any FCC jurisdiction over intrastate calling by inmates.  Additionally, the Chairman reads Sec. 276 as authorizing the FCC to remedy the unlikely instances of below cost rates, but prohibiting the Commission from remedying the far more likely scenario of rate gouging.

            To reach these conclusions, Chairman Pai accepts an alternative reality.  For example, he appears to believe that interested parties report the actual costs of doing business to the last dollar.  The Chairman takes as a fact the calculation made by the National Sheriffs’ Association that annual administration costs for jail-based calling amounted to $244,253,292 around 2012-13, but the FCC’s price cap/safe harbor rate would yield only $136,704,062 in revenue. See Dissenting Statement of Commissioner Ajit Pai, Re: Rates for Interstate Inmate Calling Services, WC Docket No. 12-375; available at: https://apps.fcc.gov/edocs_public/attachmatch/DOC-340632A5.pdf.  He can conclude that the FCC would impose “confiscatory” rates on long suffering inmate calling companies should they have to reduce rates.

             Let’s take a look at the U.S. inmate calling industry and its financial viability.  Two privately owned companies, Global Tel*Link and Securus Technologies control 70% of the market.  These companies pay massive commissions—some would say kickbacks—to jails and prisons. That surely contributed significantly to the Sheriffs’ $244.2 million calculation.  Let’s call them franchise fees.  No stakeholder, no one at the FCC, no one period has provided credible evidence that these inmate carrier costs plus franchise fees are compensatory vis a vis the cost of providing telephone service. Inmate calling companies operate as telecommunications service providers, subject to Title II common carrier regulation.  Their rates have to be cost-compensatory, plus a reasonable profit.  Fees of any sort have to relate to the cost of providing service and not doughnuts, boondoggle trips to conferences and kickbacks.

             Chairman Pai has railed against voodoo economics and the absence of economics.  Yet when it comes to inmate calling, he accepts the accounting of a stakeholder having every incentive to pad the cost calculation.

             The Sheriffs’ calculation and Chairman Pai’s endorsement of it do not pass the smell test.  Outside the penal environment, long distance telephone calls cost retail subscribers about 2-5 cents for interstate calls and about 10-15 cents for intrastate calls.  For example, see http://www.phonedog.com/long-distance.  Outside jail, telecommunications costs are so cheap that it makes financial sense to use cheap overseas labor to provide operator assistance.  Operator assistance is also computerized.

            I don’t believe the Sheriffs have made a credible calculation, nor do I believe their threat to yank out phones if the FCC’s 13 cent rate cap were implemented.  If a jail’s phones accrue $2 million in phone commissions annually, which would management choose: $0, or $1.5 million?  Similarly, I have seen no evidence that jailors are spending millions policing, monitoring, and safeguarding the payphones.

            I readily accept that jails house a lot of “bad dudes,” foreign and domestic.  They have to pay a debt to society, but it does not have to include $15 for a 10 minute telephone call.        

            In this time of alternative realities, apparently the Chairman can be all things to all people.  It simply depends on your selective perception.

6 comments:

Anonymous said...

If you knew anything about the industry you could be dangerous. Truth is there is an immense amount of technology associated with these calls. This technology, in the form of call monitoring, call recording, biometrics, key word searching amongst others are used by investigators on a daily basis to prosecute crimes in our courts. Regarding commissions or 'kickbacks' these are generally used for inmate welfare or other offsets to the taxpayer and you can't find calls that run for $15 anymore. It's old news on that front.

Rob Frieden said...

Hello Anonymous:

You lose points by wrapping yourself in anonymity and implying I know nothing about the industry.

Additionally, you list an array of technologies that could raise the cost of service. Are you implying that each and every call triggers such technological safeguards and costs, or are you writing that because such technological capabilities have to be created, it's only fair that the inmate communications carriers recoup the cost?

I take issue with your statement that the commissions--in any significant volume--accrue for the "welfare" of inmates. I'd welcome such evidence and of course I will publish it.

Oh an on the $15 charge, that's what I paid for a collect 3-5 minute intrastate call from an acquaintance located 39 miles from me. The inmate communications carriers have raised rates in expectation that the gig will be up soon. Thanks to Chairman Pai, that won't be the case.

David Cosson said...

Contrary to the Consumerist story you cite, the FCC counsel letter did not abandon complete defense of the inmate calling order only the part prescribing intrastate rates. Rather, he said he would defend the "significant remaining portions of the order." Since the FCC generally has no jurisdiction over intrastate rates under the Communications Act, criticism of its action would seem to require an argument that it does have authority to regulate the intrastate rates at issue, despite the limitation in 47 U.S.C. 2(b). Until its jurisdiction over the rates is established, the question of their reasonableness is irrelevant.

Rob Frieden said...

Hello David:

Thanks very much for your insights.

I appreciate your general observation about the FCC not having jurisdiction over intrastate services and rates. There are exceptions as when interstate and intrastate service combines in ways that prevent easy separation. i.e., the so-called contamination principle.

Section 276(b)(1) of the Communications Act states that "the Commission shall take all actions necessary (including any reconsideration) to prescribe regulations that—

(A) 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 . . .."

This Section may address interconnection (access) charges only. However, as you know, there are many instances where federal preemption occurs on grounds that states would balkanize and frustrate congressional intent.



Richard Bennett said...

Come on Rob, we know what happens when the FCC tries to preempt state law.

Rob Frieden said...

Hello Richard:

Thanks for checking in. You are spot on about federal preemption of late, but going back in time appellate courts were far more supportive. For example, Telerent and several NARUC cases affirmed federal preemption of the states on Customer Premises Equipment.

Hope you're doing well.