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Before the
Federal Communications Commission
Washington, D.C. 20554
Rates for Interstate Inmate Calling Services
WC Docket No. 12-375
SECURUS TECHNOLOGIES, INC. PETITION TO HOLD
FURTHER RULEMAKING PROCEEDING IN ABEYANCE
Securus Technologies, Inc. (“Securus”), through counsel and pursuant to 47
C.F.R. § 1.43, hereby files this Petition asking that the Commission hold in abeyance the further
rulemaking proceeding initiated by the Further Notice of Proposed Rulemaking included in Rates
for Interstate Inmate Calling Services, WC Docket No. 12-375, FCC 13-113, released September
26, 2013 (“FNRPM”). At this time, taking and considering comments on the FNPRM, the great
majority of which is expressly premised on the findings and conclusions in the Report and Order,
would not be an appropriate use of Commission resources for the reasons described below.
Due to the time sensitivity of the relief sought, Securus respectfully requests that
the Commission resolve this Petition by November 8, 2013.
I.
BACKGROUND
The FNPRM seeks comment on several matters arising from inmate telephone
rates. Initial Comments are due 30 days after Federal Register publication, and Reply Comments
are due 45 days after publication.
Contemporaneous with this filing, Securus is submitting a Petition for Stay of the
Report and Order in FCC 13-113 pending its forthcoming appeal of the findings, conclusions,
rates, and rules contained therein. As demonstrated in that petition, Securus is likely to prevail
on the merits of its appeal on any of several independent grounds.
II.
THE FCC SHOULD HOLD THE FURTHER PROCEEDING IN ABEYANCE
PENDING APPEAL FROM THE REPORT AND ORDER
The FNPRM presents questions and tentative conclusions for comment that rest
expressly on the findings and conclusions of the Report and Order, many of which will be
challenged before a federal court of appeals. Indeed, the very lens through which the
Commission looks at this market is likely to be altered by the appeal. Whatever data and
analysis that now would be responsive to the FNPRM therefore may be rendered useless. For
these reasons, the Commission should hold the further proceeding in abeyance until the appeal is
resolved.
A.
Standard for Granting an Abeyance
The Commission holds matters in abeyance when they involve or rest on
Commission rules that remain unsettled. The purpose of an abeyance is to “avoid unnecessary
expenditure of time and resources by the parties and [the] Commission[.]”1
For example, the Commission has held a petition for preemption of state law in
abeyance where the request for relief involved “certain outstanding issues regarding the
operation of the new federal universal service program.”2 It also has held petitions for
reconsideration of various rules in abeyance where they “may be rendered moot by the rules”
1
Donald J. Elardo, Esq. and Stephen C. Garavito, Esq., File No. E 92 88S, Letter, 9 FCC
Rcd. 7912 (1994) (granting MCI’s motion to hold damages phase of enforcement proceeding in
abeyance pending review of MCI’s Application for Review of liability findings entered against
it).
2
American Commc’ns Svcs., Inc. and MCI Telecomms. Corp., CC Docket No. 97-100,
Memorandum Opinion and Order, 14 FCC Rcd. 21579, 21581 ¶ 3 (1999).
2
under consideration in a related proceeding.”3 Thus, where a proceeding begins from a predicate
finding, rule, or policy that is under review, the Commission finds an abeyance appropriate.
B.
The FNPRM Builds on Findings and Conclusions That Will Be Appealed,
Creating the Strong Likelihood of a Waste of Resources Should Comment Be
Taken At This Time
The FNPRM creates a follow-on proceeding that expressly incorporates and
builds on the rules adopted in the Report and Order. Many of those rules, and indeed their entire
underpinning, will be challenged on appeal and are likely to be remanded, if not vacated. To
take comment on the follow-on questions in the FNPRM now would invite an “unnecessary
expenditure of time and resources by the parties and this Commission[.]”4
Several portions of the FNPRM build directly off the “cost-based” policy adopted
in the Report and Order that led to the “safe harbors” and “interim rate caps”, all of which will be
reviewed. They include:
“We tentatively conclude that site commissions should not be recoverable through
intrastate rates[.]” ¶ 133.
“Will the cost based rates required by the Order create a market-based solution for
driving intrastate rates to cost-based levels absent further regulatory action?” ¶ 134.
“Given the very small number of deaf and hard of hearing inmates relative to the
overall prison population, are the safe harbor rates adopted in today’s Order sufficient
to allow recovery of the discount?” ¶ 146.
3
Rules and Policies on Foreign Participation in the U.S. Telecomms. Market, IB Docket
No. 97-142, Order and Notice of Proposed Rulemaking, 12 FCC Rcd. 7847, 7849 n.2 (1997); see
also Amendment of Parts 15 and 90 of the Commission’s Rules to Provide Additional
Frequencies for Cordless Telephones, ET Docket No. 93-235, Report and Order, 10 FCC Rcd.
5622, 5627 ¶ 30 (1995) (noting that two petitions for reconsideration of the “offset channel rule”
had been held in abeyance “pending our determination on providing additional cordless
telephone channels in this proceeding.”).
4
Elardo/Garavito, 9 FCC Rcd. 7912.
3
“We seek comment on maintaining the interim rate caps and safe harbor rate levels
adopted in the Order and expanding that structure to encompass intrastate ICS rates.”
¶ 154.
“Should we maintain the current safe harbors and make them permanent or should
they be reduced over time given that they were set at conservative levels? ¶ 154.
“Additionally, we note that the Order adopts a historical cost methodology for the
interim rules and we seek comment on what measure of cost – e.g., historical, forward
looking – should be adopted for the permanent rate structure.” ¶ 163.
“In the Order, we require charges for any services that are ancillary to the costs of
providing ICS to be cost-based, and require ICS providers to submit cost data for
these ancillary charges as part of the mandatory data request. Here we seek comment
on how the Commission can ensure, going forward, that ancillary charges are just,
reasonable, and cost-based.” ¶ 168.
“We seek comment on whether our conclusion resolves the issues surrounding
billing-related blocking of interstate ICS calls. Additionally, we seek comment on
whether we should extend our prohibition on blocking to intrastate ICS calls.” ¶ 173.
These items depend absolutely upon the core of the Report and Order. They
reveal, by their terms, that the policy underpinnings, as well as the factual findings and
ratesetting methodologies, of the Report and Order form the very basis of the Further Notice of
Proposed Rulemaking. These items will be reviewed by a court of appeals and may be vacated
or reversed. As a result, the premise of the FNPRM will have been invalidated.
Taking comment now on the follow-on items in the FNPRM would be imprudent.
While the appeal is pending, the Bureau will be constrained from undergoing any meaningful
review of any comments or data. Thus, in order not to create an “unnecessary expenditure of
time and resources”5 on work that later could well be unhelpful, the Commission should hold the
FNPRM in abeyance until the appeal from the Report and Order is resolved.
5
Elardo/Garavito, 9 FCC Rcd. 7912.
4
CONCLUSION
For all these reasons, the Commission should hold the further proceeding,
including the call for comments in the Further Notice of Proposed Rulemaking, in abeyance
while the appeals from the companion Report and Order are pending. Securus respectfully
requests that the Commission resolve this petition by November 8, 2013.
By: s/Stephanie A. Joyce
Stephanie A. Joyce
G. David Carter
ARENT FOX LLP
1717 K Street, N.W.
Washington, D.C. 20036
202.857.6081 DD
202.857.6395 Fax
Stephanie.Joyce@arentfox.com
Counsel to Securus Technologies, Inc.
Dated: October 22, 2013
5
CERTIFICATE OF SERVICE
I hereby certify on this 22nd day of October, 2013, that the foregoing Petition to
Hold Further Rulemaking in Abeyance was served via electronic mail on the following persons:
Marlene H. Dortch
Secretary
Federal Communications Commission
Marlene.Dortch@fcc.gov
Acting Chairwoman Mignon Clyburn
Federal Communications Commission
Mignon.Clyburn@fcc.gov
Commissioner Jessica Rosenworcel
Federal Communications Commission
Jessica.Rosenworcel@fcc.gov
Commissioner Ajit Pai
Federal Communications Commission
Ajit.Pai@fcc.gov
Sean Lev
General Counsel
Federal Communications Commission
Sean.Lev@fcc.gov
Julie Veach
Chief
Wireline Competition Bureau
Federal Communications Commission
Julie.Veach@fcc.gov
By: s/Stephanie A. Joyce
Stephanie A. Joyce
Before the
Federal Communications Commission
Washington, D.C. 20554
Rates for Interstate Inmate Calling Services
WC Docket No. 12-375
SECURUS TECHNOLOGIES, INC.
PETITION FOR STAY OF REPORT AND ORDER PENDING APPEAL
(FCC 13-113)
Stephanie A. Joyce
G. David Carter
ARENT FOX LLP
1717 K Street, N.W.
Washington, D.C. 20036
202.857.6081 DD
202.857.6395 Fax
Stephanie.Joyce@arentfox.com
Counsel to Securus Technologies, Inc.
Dated: October 22, 2013
SUMMARY
Securus respectfully seeks a stay of the Inmate Rate Order and demonstrates
herein that its request meets all four criteria of the Virginia Petroleum Jobbers test.
First, Securus is likely to prevail on the merits of its appeal on any of several
independent grounds:
The Inmate Rate Order adopts ongoing, “historical”, “cost-based” rate review without
providing any notice that such regulation was under consideration.
The Inmate Rate Order is fatally vague as to the rate regime to which inmate
telecommunications now will be subject.
Protestations to the contrary, the Commission is in fact abrogating existing service
contracts by imposing a flash-cut rate decrease and preventing inmate service
providers from paying site commissions.
In adopting rates and a new policy that prevents service providers from paying site
commissions, the Commission has overstepped its authority.
The Inmate Rate Order sets rates that are demonstrably below cost, even omitting the
cost of site commissions.
The Inmate Rate Order establishes, if not requires, nationwide cross-subsidization
across all facility sizes and types of call.
Secondly, Securus demonstrates, through the sworn affidavit of its Chief
Executive Officer Richard A. Smith, that it will suffer irreparable harm of several types:
The drastic rate decrease imposed by the Inmate Rate Order will prevent Securus
from paying the site commissions that are required by contract and often state statute,
causing it to lose customer goodwill and fear legal action.
The Inmate Rate Order would require Securus to renegotiate, assuming that it has the
right or opportunity to do so, more than 1,700 contracts within 90 days of Federal
Register publication, a task that no company reasonably could be expected to
complete.
The below-cost rates imposed by the Inmate Rate Order will cause Securus
significant financial losses that it could not recoup if the rates are overturned on
appeal.
i
The reporting requirements adopted in Rule 64.6060, with a due date of April 1,
2014, are so onerous that Securus would require 5 to 20 additional, full-time
employees devoted only to compliance with that rule.
The Inmate Rate Order exposes Securus to the strong possibility of litigating multiple
rate cases even for rates that are below the rate caps adopted therein. Securus offers
several different price structures on interstate calls among its 1,800 contracts, and
under the Inmate Rate Order a complaint from just one consumer as to each structure
would require a unique rate case.
Third, a stay of the Inmate Rate Order will not materially harm third parties and
in fact would serve their interests. The Wright Petitioners, whose request for per-minute rate
caps were the focal point of this proceeding, understood the tremendous work that will be
required to renegotiate the thousands of service contracts in this market and advocated for a oneyear “fresh look” period. The Inmate Rate Order provides just 90 days for that work; the
Petitioners had no expectation of such rapid change. In addition, the Inmate Rate Order will
create an inevitable and immediate loss of site commission funds that will jeopardize inmate
welfare programs across the country. That result certainly will harm inmates, depriving them of
irreplaceable programs intended expressly to encourage their rehabilitation and decrease
recidivism.
Fourth, the public interest favors a stay, for several reasons:
A stay will protect state, county, and local expectations of site commission funds on
which existing budgets and programs rely.
A stay will preserve the status quo of existing services and ensure that carriers can
continue providing telephone service without incurring the crippling losses imposed
by the new rates.
In permitting carriers to continue providing service, the stay will preserve the
competition in this market that the Commission consistently has recognized.
A stay will prevent these regulated utilities from suffering unrecoverable losses, a
result that the Commission has deemed a public benefit that weighs in favor of a stay.
ii
A stay of the rate regulation adopted in the Inmate Rate Order, which as explained
herein is fatally vague and not readily applied, will prevent the public harm that flows
from wasting agency resources on matters of uncertain basis and outcome.
Under Commission precedent, a petitioner need not make a strong showing as to
every prong of Virginia Petroleum Jobbers in order to obtain a stay. Here, however, Securus has
amply satisfied each prong and demonstrated that a stay is not only appropriate, but necessary.
iii
TABLE OF CONTENTS
SUMMARY..................................................................................................................................... i
STANDARD FOR ENTERING A STAY...................................................................................... 1
BACKGROUND ............................................................................................................................ 2
1.
Inmate Calling Rates (Rules 64.6020 and 64.6030) ............................................... 2
2.
Prohibition on Call-Blocking (Rule 64.6050)......................................................... 3
3.
Reporting Requirements (Rule 64.6060) ................................................................ 3
ARGUMENT.................................................................................................................................. 4
I.
SECURUS IS LIKELY TO PREVAIL IN ITS APPEAL OF THE INMATE RATE
ORDER ............................................................................................................................... 4
A.
The Inmate Rate Order Imposes New and Complex Rate Regulations Without
Notice...................................................................................................................... 5
B.
The Inmate Rate Order Is Fatally Vague in Describing the Rate Regulation It
Imposes ................................................................................................................... 6
C.
The Inmate Rate Order Unlawfully Impairs Existing Contracts .......................... 10
D.
The Inmate Rate Order Exceeds the Commission’s Authority ............................ 12
1.
The Commission improperly interferes with state and local corrections
operations and policies.............................................................................. 12
2.
The Commission has no authority over ancillary fees.............................. 14
E.
F.
II.
The Inmate Rate Order Imposes Below-Cost Rates............................................. 14
The Inmate Rate Order Effectively Mandates Cross-Subsidization Nationwide
and Among All Facilities ..................................................................................... 16
SECURUS WILL SUFFER IRREPARABLE HARM ABSENT A STAY..................... 18
A.
Securus Will Be Unable To Recover the Cost of Mandatory Site Commissions
Under Its Approximately1,800 Contracts ............................................................. 18
B.
Securus Will Be Unable To Renegotiate The More Than 1,700 Contracts
Affected By The Inmate Rate Order In The Allotted 90-day Period ................... 19
iv
C.
Securus Will Be Forced To Provide Below-Cost Service Under
The New Rates...................................................................................................... 21
D.
The Inmate Rate Order Subjects Securus To New Regulatory Reporting
Requirements In Less Than Six Months............................................................... 22
E.
The Inmate Rate Order Subjects Securus To Multiple, Potentially Endless
Rate Proceedings................................................................................................... 23
III.
THIRD PARTIES WILL NOT BE HARMED BY A STAY........................................... 24
IV.
THE PUBLIC INTEREST FAVORS A STAY................................................................ 25
A.
Enforcement Of The Inmate Rate Order Will Deprive State And County
Governments Of Funds Used For Salutary Purposes Such As Victims’ Rights
Funds And Inmate Welfare................................................................................... 25
B.
The Commission Failed To Consider The Possibility That Its Rate Caps Could
Lead Correctional Facilities To Deny Inmates Access To Telecommunications
Services ................................................................................................................. 26
C.
The Harsh, Flash-Cut New Rate Regime In The Inmate Rate Order Is Likely
To Have A Materially Adverse Effect On Competition ....................................... 27
D.
Requiring Securus To Charge Below-Contract Rates, Without A Mechanism
To Reclaim The Lost Revenue If The Inmate Rate Order Is Reversed, Is Also
Contrary To The Public Interest ........................................................................... 28
E.
Additional Public Interest Considerations Support A Stay................................... 28
CONCLUSION............................................................................................................................. 29
ATTACHMENT
Affidavit of Richard Smith, Chief Executive Officer,
Securus Technologies, Inc. (Oct. 17, 2013)
v
Securus Technologies, Inc. (“Securus”), through counsel and pursuant to 47
C.F.R. § 1.43, hereby files this Petition for Stay of the order titled Rates for Interstate Inmate
Calling Services, WC Docket No. 12-375, Report and Order and Further Notice of Proposed
Rulemaking, FCC 13-113, released September 26, 2013 (“Inmate Rate Order”).1 In support of
this Petition, Securus files herewith the sworn Affidavit of Richard Smith, Chief Executive
Officer (Oct. 17, 2013). Securus requests that the Inmate Rate Order be stayed pending review
to prevent the irreparable harm that would flow from the order’s immediate implementation. As
described more fully below, maintaining the status quo is in the best interest of inmate
telecommunications service providers, correctional facilities, and the public.
Due to the extremely brief implementation deadline in the Inmate Rate Order,
Securus respectfully requests that the Commission resolve this Petition by November 21, 2013,
which is 30 days from the date of this filing.
STANDARD FOR ENTERING A STAY
The Commission applies the four-part test in Virginia Petroleum Jobbers
Association when reviewing petitions for stay pending appeal.2 That test is: (1) petitioner is
likely to prevail on the merits of its appeal; (2) petitioner will suffer irreparable harm absent a
stay; (3) other interested parties will not be harmed by entry of a stay; and (4) the public interest
1
Contemporaneously with this Petition, Securus is filing a petition to hold in abeyance the
follow-on rate proceeding initiated by the Further Notice of Proposed Rulemaking portion of this
item.
2
E.g., Telecommunications Relay Services and Speech-to-Speech Services for Individuals
with Hearing and Speech Disabilities, CG Docket No. 03-123, Order, 23 FCC Rcd. 1705, 1706 ¶
4 (2008) (citing Virginia Petroleum Jobbers Ass’n v. Federal Power Comm’n, 259 F.2d 921, 925
(D.C. Cir. 1958) (granting petition for stay); Charter Commc’ns Entm’t I, LLC, Memorandum
Opinion and Order, 22 FCC Rcd. 13890, 13892 ¶ 4 (2007) (staying orders setting cable rates);
Comcast Cable Commc’ns, LLC, File No. CSB-A-0741, Order, 20 FCC Rcd. 8217 ¶ 2 (2005)
(citing same) (staying several orders that set local cable rates).
1
favors a stay.3 The Commission does not always accord each prong of this test equal weight: “If
there is a particularly overwhelming showing in at least one of the factors, the Commission may
find that a stay is warranted notwithstanding the absence of another one of the factors.”4 For
example, “[i]f the petitioner makes a strong showing of likely success on the merits, it need not
make a strong showing of irreparable injury.”5
BACKGROUND
On August 9, 2013, at its August Open Meeting, the Commission voted to adopt
new interstate calling rates and ongoing rate-review regulation for inmate telecommunications
services by a 2-1 vote. On September 26, 2013, the Commission released the Inmate Rate Order
which requires inmate calling service (“ICS”) providers to establish cost-based rates and sets
forth an interim rate regime consisting of both safe harbor rates and rate caps. The new rates and
other rules are codified in Rules 64.6000 – 64.6060. They include:
1.
Inmate Calling Rates (Rules 64.6020 and 64.6030)
The Inmate Rate Order sets “safe harbors” and “interim rate caps” for interstate
inmate calls, allowing for slightly higher rates on collect calls than on debit calls due to the
increased costs of billing and uncollectible revenue inherent in a collect environment. The rates
are:
3
TRS Services, 23 FCC Rcd. at 1706 ¶ 2; Comcast Cable, 20 FCC Rcd. 8217 ¶ 2.
4
TRS Services, 23 FCC Rcd. at 1707 ¶ 4.
5
Charter Commc’ns, 22 FCC Rcd. at 13892 ¶ 4.
2
Call Type
Debit
$0.12
$1.80
$0.14
$2.10
Debit
$0.21
$3.15
Credit
Interim Rate
Cap
15-Minute Total
Credit
Safe Harbor
Per-Minute
$0.25
$3.75
In addition to setting these rates, the Commission has decided that inmate
telecommunications service providers no longer may recover the cost of site commission
payments in their calling rates.6
2.
Prohibition on Call-Blocking (Rule 64.6050)
Inmate telecommunications service providers must complete collect calls to
persons with whom no billing relationship exists. This prohibition will not apply from
correctional facilities at which a prepaid calling option was offered prior to the inmate’s placing
the collect call.
3.
Reporting Requirements (Rule 64.6060)
All inmate telecommunications service providers must provide reports to the
Commission stating the number of both interstate and intrastate calling minutes provided in the
previous year. That data must include per-call charges, per-minute charges, and the average
duration of the calls. The providers must also state the number and the percentage of inmate
telephone calls that were terminated for reasons other than a party hanging up the handset. The
reports must be certified by an officer of the company.
6
Inmate Rate Order ¶¶ 54-58.
3
ARGUMENT
I.
SECURUS IS LIKELY TO PREVAIL IN ITS APPEAL OF THE INMATE RATE
ORDER
The first prong that the Commission considers in determining whether to stay the
effectiveness of new regulations during the pendency of the appeal is the likelihood of success
on the merits.7 The Inmate Rate Order is likely to be overturned on any of the several
independent grounds discussed below. Securus amply satisfies this prong.
A court of appeals reviewing the Commission’s action in the Inmate Rate Order
will evaluate Commission action under the strictures of 5 U.S.C. § 706 which states, in pertinent
part:
… The reviewing court shall –
(2) hold unlawful and set aside agency action, findings, and conclusions found to
be –
(A) arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with law;
(B) contrary to constitutional right, power, privilege, or immunity;
(C) in excess of statutory jurisdiction, authority, or limitations, or
short of statutory right;
(D) without observance of procedure required by law;
(E) unsupported by substantial evidence in a case subject to
sections 556 and 557 of this title or otherwise reviewed on the
record of an agency hearing provided by statute; or
(F) unwarranted by the facts to the extent that the facts are subject
to trial de novo by the reviewing court.
As demonstrated herein, the Inmate Rate Order is likely to be found unlawful pursuant to
subsections (A), (B), (C), (D), and (E).
7
TRS Services, 23 FCC Rcd. at 1706 ¶ 4; Comcast Cable, 20 FCC Rcd. 8217 ¶ 2.
4
A.
The Inmate Rate Order Imposes New and Complex Rate Regulations
Without Notice
The Inmate Rate Order adopts a novel “cost-based” ratemaking methodology that
was neither raised in the NPRM nor discussed in the record and is therefore subject to being set
aside pursuant to 5 U.S.C. § 706(2)(D). The NPRM simply sought further comment on the
Martha Wright $0.20/$0.25 per-minute rate proposal that was raised via Alternative Petition for
Rulemaking in 2007.8 The NRPM refers repeatedly to “rate caps”,9 “per-minute rate caps”,10
and the “Alternative Wright Petition”.11 And though the Inmate Rate Order states that the
“Commission sought comment on ways of regulating ICS rates based on the costs of providing
ICS” as part of the NPRM in this docket, its own record citations prove otherwise.12 Quite
contrary to the Commission’s assertion in the Inmate Rate Order, the citations prove that the
Commission sought cost information in the context of evaluating various proposals for what
level of rate caps would be “just and reasonable.” There simply was no indication there that the
Commission was considering the potential of requiring ICS providers to prove that their rates
were cost-based, even if those rates fellow below whatever rate cap the Commission might
adopt. The FCC thus failed to provide the requisite notice under the APA13 and interpretive
8
WC Docket No. 12-375, Rates for Interstate Inmate Calling Services, Notice of Proposed
Rulemaking, FCC 12-167 ¶¶ 14-15 (rel. Dec. 28, 2012) (“Inmate Rate NRPM”). Petitioners
requested a rate of $0.20 per minute for prepaid interstate calls and $0.25 per minute for collect
interstate calls.
9
E.g., Inmate Rate Order ¶¶ 13, 17, 23, 24, 28.
10
E.g., id. ¶¶ 20, 21, 22.
11
E.g., id. ¶¶ 17, 21, 22, 30.
12
See id. ¶ 50 & n.191.
13
“General notice of proposed rule making shall be published in the Federal Register,” and
such notice shall include “either the terms or substance of the proposed rule or a description of
the subjects and issues involved.” 5 U.S.C. § 553(b).
5
precedent14 that ongoing rate regulation, with periodic mandatory cost-based justification, could
be adopted here.
Cost-based regulation with rate caps is not only a surprise, it is unnecessary and
imposes heavy burdens on ICS providers and ultimately the Commission. This unexpected
burden offends the basic notion of notice and comment rulemaking. Having not appeared in the
NPRM, it was never the subject of active discussion during the comment period. Had it been
afforded the opportunity, Securus would no doubt have explained the hazards of this hybrid ratesetting approach. But on this proceeding’s record, it cannot be reasonably argued that the record
provides the Commission with thoughtful presentations as to why cost-based regulation coupled
with rate caps is or is not appropriate.15 As such, the FCC lacks a record on this issue and will be
unable to show sufficient evidence to support its decision.16
B.
The Inmate Rate Order Is Fatally Vague in Describing the Rate Regulation It
Imposes
The FCC has imposed a form of rate making that is inexplicable and amorphous.
At the least, it is a rate regime heretofore unseen. It is something akin to rate-of-return
regulation, something that has not been used in the long distance market since 1989, but also has
elements of a rate cap. The Commission describes it in the Further Notice of Proposed
14
Forester v. Cons. Prod. Safety Comm’n, 559 F.2d 774, 787 (D.C. Cir. 1977) (“sufficient
notice … affords interested parties a reasonable opportunity to participate in the rulemaking
process.”).
15
The Inmate Rate NRPM asks about the potential of applying the cost methodology that
applies to public pay phones, Inmate Rate NPRM ¶ 26, but that methodology is never
mentioned in the rules that the Commission adopted. Rather, as Securus explains in this section,
the Commission combined two other methodologies to create a wholly new system of rate
making. The Commission’s failure to give proper notice is also indicated by the fact that the
Inmate Rate NRPM never mentions the potential for a “safe harbor” for rates. A safe harbor is
unnecessary in a “rate cap” environment, in which the only thing that matters is whether the
provider’s rates are below the required cap.
16
See 5 U.S.C. § 706(2)(E).
6
Rulemaking (“FNPRM”) only as “historical”.17 Thus, at a minimum, the new regulations are so
vague as to warrant reversal on that ground alone.18
Even if a court of appeals was to reach past the threshold vagueness issue to
review the rules substantively, reversal would be required due to their unreasonable, even
nonsensical, structure. From what Securus can glean in the Inmate Rate Order, the
Commission’s new rate system for ICS service combines the worst of both worlds.
Under rate-of-return regulation, a carrier is ensured a rate of return that is aimed
at ensuring continued business viability.19 Rate-of-return local exchange carriers, for example,
benefit from a 11.25% rate-of-return target.20 Here, however, no such assured returns exist.
Rather, the Commission purports to have used an 11.25% return as part of calculating the rate
caps,21 but makes no finding that this 11.25% rate-of-return is “appropriate in this context.” The
refusal to say that the return would be reasonable portends a future in which an ICS provider
may well be subject to a rate proceeding only to be found to have over-earned even if its rates
were under the rate caps and the provider used a cost-based methodology. In short, the
Commission suggests that ICS providers are entitled to a “reasonable profit,” but then leaves
them without sufficient guidance as to what that means.
17
Inmate Rate Order ¶ 163.
18
See, e.g., Salzer v. FCC, 778 F.2d 869, 875 (D.C. Cir. 1985) (FCC directions that were
too vague to provide regulated parties with sufficient notice of required conduct were vacated).
19
Represcribing the Authorized Rate of Return for Interstate Services of Local Exchange
Carriers, 5 FCC Rcd. 7507, 7532 ¶ 213 (1990) (“It is well established that rate of return
prescription under the ‘just and reasonable’ standard requires a balancing of ratepayer and
shareholder interests. The regulated company must be allowed the opportunity to earn a return
that is high enough to maintain the financial integrity of the company and to attract new capital
to the business.”) (citations omitted).
20
Id. ¶ 216.
21
Inmate Rate Order n.203.
7
But worse, the Commission then adds “interim” rate caps into the mix. Rate caps
were, after all, what the Wright Petitioners requested and what the NPRM proposed. Thus, the
Commission apparently decided it needed to purport to be applying a rate cap in theory, even if it
was not applying it in practice. And, indeed, the rate caps will mean little in practice, because an
ICS provider can only charge rates consistent with the rate cap if it shows that the rate is costjustified. Thus, if the provider’s costs decline, the Commission requires the carrier to reduce its
rates again, even though the rates are already below the cap. The result: ICS providers will no
longer have an incentive to innovate or to improve efficiency.22
If the ICS provider must relinquish the benefit of its efficiency gains, and in the
same time reduce its total revenue, then it is given little incentive to continue innovating.
A simple example will demonstrate. To begin, a rate cap is a form of rate
regulation that simply assigns what an agency believes is a reasonable end user price for service
and enables carriers to arrange their costs, and other sources of revenue, in a manner that
maximizes profit.23 Consider Provider A which has costs of $1 million. Assuming, arguendo,
22
The Commission previously appreciated this reality. Cf. CC Docket No. 92-77, In re
Billed Party Preference for Interlata 0+ Calls, Second Report and Order and Order on Recon.,
13 FCC Rcd. 6122, 6156 ¶ 59 (1998) (“If we set caps or benchmarks, carriers would have little
incentive to contract to offer services at a lower rate.”).
23
See, e.g., Implementation of Local Competition Provisions in Telecommunications Act of
1996, 16 FCC Rcd. 9151, 9155-56 ¶ 7 (2001), remanded by WorldCom, Inc. v. FCC, 288 F.3d
429 (D.C. Cir. 2001) (setting rate caps for intercarrier compensation on ISP-bound traffic where
the Commission wanted carriers to collect more revenue from end users than from other carriers
and “emphasiz[ing] that the rate caps we impose are not intended to reflect the costs incurred
by each carrier that delivers ISP traffic. Some carriers’ costs may be higher; some are probably
lower. Rather, we conclude, based upon all of the evidence in this record, that these rates are
appropriate limits on the amounts recovered from other carriers and provide a reasonable
transition from rates that have (at least until recently) typically been much higher.”) (emphasis
added); see also CC Docket No. 87-313, Policy and Rules Concerning Rates for Dominant
Carriers, Second Report and Order, 5 FCC Rcd. 6786, 6789-91 ¶¶ 22-37 (1990) (explaining the
justification for establishing price cap regime for certain local exchange carriers and establishing
rules that allowed LEC’s profits to increase if the LEC improves efficiency and stating “[b]y
8
the Commission at some point formally declared an 11.25% rate of return reasonable, the
provider would set rates that produced $112,500 in returns (assuming those rates comport with
the rate cap).
Assume now that Provider A could implement efficiencies that would reduce its
costs to $900,000. If Provider A pursued those efficiencies, with an 11.25% rate of return, it
now would be required to set its rates for a return of $101,250. Thus, once a carrier has been
able to constrain its costs sufficiently to get below the rate caps, the new rules eliminate any
incentive to innovate and, in many cases, even to compete for contracts. Decreased competition
among competent firms does not enhance consumer welfare.
It bears mention that the FCC has not regulated long distance services to this
degree in almost 25 years. Until that time, AT&T was subject to rate-of-return review as the sole
provider of retail long-distance service in the United States. The Commission realized in 1989,
however, that rate-of-return was not only “difficult and complex” but also “has certain inherent
flaws.”24 Moreover, the Commission found this type of regulation unnecessary “in an
environment marked by competition and technological change.”25 Here, the FCC’s record
demonstrates that the inmate telephone service industry also boasts of significant competition
and dramatic technological advancements. And unlike AT&T and the other rate-of-return
establishing limits on prices carriers can charge for their services, and placing downward
pressure on those limits or ‘caps,’ we create a regulatory environment that requires carriers to
become more productive. Carriers that can substantially increase their productivity can earn
and retain profits at reasonable levels above those we allow for rate of return carriers,
although earnings above a certain level are shared or returned. If carriers fail to become more
productive, they risk seeing their earnings erode. Rate of return regulation lacks incentives for
carriers to become more productive.”) (emphasis added).
24
Policy and Rules Concerning Rates for Dominant Carriers, 4 FCC Rcd. 2873, 2890-91
¶¶ 31, 33 (1989).
25
Id., 4 FCC Rcd. at 2891 ¶ 34.
9
incumbents whose costs were analyzed across an entire region, Securus’s costs must be reviewed
on a contract-by-contract basis, resulting in regulation unprecedented in its granularity and
burdensomeness.26 Adoption of such intrusive regulation on an indefinite basis inexplicably
reverses the Commission’s desire to avoid hyper-regulation and is thus unreasonable,
unwarranted, and unsupportable.
C.
The Inmate Rate Order Unlawfully Impairs Existing Contracts
The Inmate Rate Order is likely to be set aside on review, because it interferes
with thousands of existing ICS contracts without meeting the necessary legal standards. While
the Commission blithely asserts that it is not abrogating existing contracts,27 this statement
ignores the inescapable effect of the Commission’s new ICS pricing rules and its longunderstood and endorsed policy that ICS rates were to set by negotiated contract between
correctional facilities and ICS providers.
The Inmate Rate Order interferes with existing contracts in exactly the two
fundamental ways that Securus anticipated.28 First, it ignores that ICS service contracts
generally include the rate that will be charged for ICS services at correctional facilities – the
very thing the Commission now purports to regulate under a wholly different standard. The
record was abundantly clear and undisputed that rates for these services have been established by
contracts resulting from competitive bidding processes and that nearly all of those contracts will
26
Securus is aware that the Commission prefers to review the costs of inmate service on an
aggregated basis “at the holding company level.” Inmate Rate Order ¶ 83. That type of review
is itself arbitrary, capricious, and unreasonable, because it ignores the reality of this market, as
reflected in the record and the Order, that rates are derived on a contract-by-contract basis. Such
aggregated review encourages, if not requires, national cross-subsidization across all facilities.
See Section I.F., infra.
27
Inmate Rate Order ¶ 100.
28
Securus Initial Comments at 13.
10
remain in effect for months or years beyond when the new rate regulations take effect.29
Secondly, the FCC now is effectively prohibiting inmate telecommunications service providers
from recovering the cost of site commission payments through their calling rates.30
Sierra-Mobile requires the Commission to make explicit findings of public
interest to justify the intrusion into existing contracts and findings of unlawfulness to modify
rates set forth in private contracts.31 As the Commission observed in IDB v. COMSAT, “[t]he
threshold for demonstrating sufficient harm to the public interest to warrant contract reformation
under the Sierra-Mobile doctrine is much higher than the threshold for demonstrating
unreasonable conduct under Sections 201(b) and 202(a) of the Act.”32 The Commission also has
recognized that the doctrine would apply not just to contracts between two carriers, but also to
the Commission’s intrusion into contracts between a carrier and a non-carrier.33 Specifically
with regard to private contracts that contain rates for public utilities, “the Commission must
make a finding that [the rates] are ‘unlawful’ according to the terms of the governing statute …”
before it is authorized to modify those rates.34
29
Securus Initial Comments at 13.
30
Inmate Rate Order ¶¶ 54-58.
31
See Texaco, Inc. v. FERC, 148 F.3d 1091, 1097 (D.C. Cir. 1998) (an agency’s
“rulemaking authority requires only that it point to a generic public interest in favor of a
proposed rule; the public interest necessary to override a private contract, however, is
significantly more particularized and requires analysis of the manner in which the contract harms
the public interest and of the extent to which abrogation or reformation mitigates the contract's
deleterious effect.”)
32
IDB v. COMSAT, File No. E-97-48, 16 FCC Rcd. 11474, 11480 ¶ 15 (2001).
33
Ryder Communications, Inc. v. AT&T Corp., File No. EB-02-MD-038, 18 FCC Rcd.
13603, 13614 ¶ 24 & n.78 (2003).
34
Western Union Telegraph Co. v. FCC, 815 F.2d 1495, 1501, n.2 (D.C. Cir. 1987)
11
Although the Commission seems to recognize, at least in part, the standard that is
required to interfere with existing contracts,35 it completely fails to make the findings necessary
to meet the standard established in the cases applying Sierra-Mobile. Indeed, it appears that the
Commission expressly denied that the Order abrogates contracts precisely because it could not
meet the Sierra-Mobile standard. Instead, the Commission makes broad pronouncements about
what it could do or what “would be in the public interest,” while explicitly not making the
required findings. In short, the Inmate Rate Order swings an axe where the Sierra-Mobile
doctrine requires a surgical scalpel. The Commission’s intrusion into private contracts is
therefore unlawful and likely to cause the Inmate Rate Order to be set aside upon review.
D.
The Inmate Rate Order Exceeds the Commission’s Authority
It is axiomatic that when a regulatory agency adopts rules that exceed its statutory
jurisdiction, a reviewing court must vacate the agency’s action.36 Here, the Inmate Rate Order
exceeds the Commission’s jurisdiction in two independent ways. First, the Commission
improperly intrudes into the regulation of correctional facilities. Second, the Commission
purports to regulate ancillary services over which it has no jurisdiction.
1.
The Commission improperly interferes with state and local
corrections operations and policies.
The FCC has exceeded its authority in the Inmate Rate Order. It has adopted
rates that will prevent Securus, and likely other inmate telephone service providers, from paying
the site commissions on which state and local correctional authorities rely. In effect, the
Commission abolished site commissions, prohibiting them from being passed through by rule
and preventing them in practice via slashed calling rates. This action not only improperly
35
See Inmate Rate Order n.365.
36
5 U.S.C. § 706(2)(C).
12
interferes with existing contracts, but it interferes with the operations and policies of state and
local corrections authorities which rely on that revenue. Securus attempted to forewarn the
Commission of this problem in its Comments.37
The decision to impose site commissions lies in the authority of state and local
governments. The FCC never disputed the record evidence that site commissions are mandated
by contract, if not state statute. The Commission is likewise aware of the uses to which site
commission revenue is put, many of which inure directly to the benefit of inmates.38 Now, in
proscribing and preventing the payment of site commissions, the FCC has encroached on that
authority. And in preventing carriers from paying site commissions, the FCC has changed the
manner in which facilities operate and the services that they can provide. This action is, as
Securus has explained in the docket, beyond the FCC’s purview.39
In addition, the Inmate Rate Order prohibits ICS blocking calls to destinations in
which the ICS provider has no billing relationship unless the facility agrees to permit an
alternative to collect calling.40 The decision of whether to have a collect calling alternative,
however, has been entirely within the purview of the correctional facility and is not controlled by
Securus. This new prohibition against call blocking therefore interferes with the decisionmaking authority of the correctional institution and requires Securus effectively to render free
37
Securus Initial Comments at 8-10 (citing Miranda v. Michigan, 141 F. Supp. 2d 747
(E.D. Mich. 2001); McGuire v. Ameritech Svcs., Inc., 253 F. Supp. 2d 988 (S.D. Ohio 2003);
Arsberry v. Illinois, 244 F.3d 558, 566 (7th Cir. 2001)).
38
See Smith Affidavit ¶ 6.
39
E.g., Arsberry, 244 F.3d at 566 (“[s]tates and other public agencies … have to get
revenue somehow, and the ‘somehow’ is not the business of the federal courts unless a specific
federal right is infringed.”); McGuire, 253 F. Supp. 2d at 1007 (“when the ODRC establishes a
collect calling telephone system in an Ohio correctional institution, that is the clear and
articulated policy of Ohio.”).
40
Inmate Rate Order ¶¶ 113-14.
13
services to inmates if the correctional facility does not agree to adopt an alternative to traditional
collect calling. The Order is thus likely to be vacated, set aside, or reversed on this additional
ground.
2.
The Commission has no authority over ancillary fees.
The Inmate Rate Order imposes new “cost-based” rate regulation on ancillary
fees that are charged in conjunction with ICS services. Though it does not set exact fees or caps,
it states that it can and will subject a carrier to a rate investigation where they allegedly are not
“cost-based”.41 As Securus articulated in its Reply Comments42 and again in its Supplemental
Reply Comments in response to the Commission’s request for more data,43 the Commission’s
statutory authority does not extend to financial transactions. Thus, the decision to impose
regulation on ancillary fees is ultra vires and likely to be set aside on review.
E.
The Inmate Rate Order Imposes Below-Cost Rates
The Inmate Rate Order sets a maximum rate of $0.21 per minute for calls that are
prepaid by an account or calling card, and $0.25 per minute for collect calls. And though a percall charge or call set-up charge is permitted, the total price of a 15-minute call must not exceed
the product of these per-minute rates multiplied by 15. The immediate and unavoidable result is
that the Order purports to adopt cost-based regulation but sets rate caps that are well below the
costs Securus incurs to provide service nearly all of its locations.
Through the sworn Expert Report of Stephen E. Siwek, Securus provided cost
information that included data which, the Commission acknowledged, was categorized
41
Inmate Rate Order ¶¶ 92, 91.
42
Securus Reply Comments at 16.
43
Securus Supplemental Reply Comments at 1-3 (July 24, 2013) (responding to WC
Docket No. 12-375, DA 13-2445, Public Notice, More Data Sought on Extra Fees Levied on
Inmate Calling Services (June 26, 2013)).
14
“according to type and size of facility.”44 The Report demonstrated that smaller facilities are
orders of magnitude more expensive to serve than larger facilities, especially state-run
penitentiaries. The Inmate Rate Order dismisses these differences in cost structure by observing
that smaller facilities “hold only a very small share of inmates nationally.”45
That statement is problematic for a few reasons. First, the fact that small facilities
hold few inmates was precisely Securus’s point. Smaller facilities are disproportionately more
expensive to serve, because they require many of the same infrastructure investments as larger
facilities, but have lower call volumes over which to spread those costs. Thus, the Commission’s
decision to set rate caps based entirely on the costs of serving larger prison facilities under
statewide contracts46 erroneously ignores the record evidence that demonstrates that smaller
sites, such as jails in rural areas, produce significantly higher costs.47 The Commission’s failure
to address Securus’s evidence, which was one of two cost data reports from the industry,48 is a
failure of “reasoned decisionmaking” and thus constitutes reversible error.49
Further, the failure to fully consider and analyze the record evidence regarding
site commissions that are imposed by contract or state law has also caused the Commission to set
44
Inmate Rate Order ¶ 26.
45
Id.
46
See id. ¶ 62 (setting rates based on data from bid submissions for “seven states that have
excluded site commission payments from their rates”).
47
The second unavoidable error flowing from the Commission’s “small share of inmates”
statement is that the Commission, in order to shoe-horn the entire country into one rate, has
effectively mandated cross-subsidization between large prisons and small facilities which is itself
an unreasonable decision. See Section I.F., infra.
48
CenturyLink also provided cost data for its calling rates. Inmate Rate Order ¶ 68.
49
E.g., Aeronautical Radio, Inc. v. FCC, 642 F.2d 1221, 1232 (D.C. Cir. 1980) (partially
vacating FCC order as to private line rates); see also id. at 1231 (“the FCC failed to take a
sufficiently careful look at the problem presented”) .
15
rate caps that are confiscatory in violation of the Takings Clause of the Fifth Amendment.50 The
Inmate Rate Order states that inmate telephone service providers may not include mandatory site
commission payments as a cost of providing interstate calling service, and then sets rates that, as
the record amply shows, will prevent providers from recouping those payments. In the parlance
of utility regulation, it will now be unlawful for carriers to “pass through” the cost of site
commissions. Simply put, the FCC deliberately set rates that are below Securus’ costs to a
staggering degree.
Stephen Siwek analyzed what would be the effect on Securus if the FCC were to
adopt a prohibition on site commission pass-through. His sworn report, filed contemporaneously
with Securus’s comments, showed that eliminating site commission pass-through would render
rates below cost by as much as 438%. The Commission’s disregard of this evidence is likely to
result in vacatur of the Inmate Rate Order.
F.
The Inmate Rate Order Effectively Mandates Cross-Subsidization Nationwide
and Among All Facilities
Finally, the Commission’s failure to take into appropriate consideration the
disparate costs of providing service to smaller facilities, especially those located in more rural
locations, creates an unreasonable cross-subsidization that the Commission’s Order fails to
acknowledge or justify. Although the Commission sought information about how rates, call
volumes, and costs vary at facilities across the country,51 it simply ignored the data that was
provided when it came to establishing the rate caps. That data, there can be no dispute, showed
that costs to provide service to smaller facilities, which have lower call volume, were higher for
50
“The Constitution protects utilities from being limited to a charge for their property
serving the public which is so ‘unjust’ as to be confiscatory.” Duquesne Light Co. v. Barasch,
488 U.S. 299, 307 (1989); see also Verizon Commc’ns v. FCC, 535 U.S. 467, 481 (2002) (rates
must be “sufficiently reasonable to avoid unconstitutional confiscation”).
51
E.g., Inmate Rate NRPM ¶ 26.
16
Securus and other providers of ICS services at smaller facilities.52 The record also demonstrates
the fundamentally different calling patterns and cost structure at jails, which typically house
individuals for short periods of time, as opposed to state prisons.
The Commission ignored the record evidence and adopted a “one size fits all”
approach that is arbitrary and capricious. Moreover, it unreasonably has coupled this “one size
fits all” approach with a waiver standard that carriers are unlikely to meet.53 The result is a
policy that not only permits but requires nationwide cross-subsidization of ICS services.54 This
cross-subsidization contravenes the mandate of section 276, which expressly requires fair
compensation for “each and every” call,55 and the Commission’s own oft-repeated policy against
cross-subsidization.56 Here, the Commission not only fails to justify the cross-subsidization, it
never even acknowledges that it is the necessary outcome of its new rules. Inmates at prisons
will now be required to subsidize the calls of those in jail, and larger prisons will be required to
52
See Inmate Rate Order ¶ 26 (describing and citing to the data provided by Securus).
53
The Commission’s indicates that it will only entertain waiver requests of the rate cap on a
holding company basis. Inmate Rate Order ¶ 83. Thus, there is no way to obtain a waiver of the
rate cap for a particular high-cost facility. The result is a requirement that Securus subsidize that
service to high-cost facilities in the short term. See id. ¶ 123 (requiring cost averaging “on the
basis of either the whole of its ICS business or by groupings that reflect reasonably related cost
characteristics”). In the long term, Securus will choose between continuing to subsidize the
service or cease providing service to the facility all together.
54
This, of course, assumes incorrectly that all of the higher cost correctional facilities will
continue to be able to contract with ICS provider to provide services at their facility.
55
47 U.S.C. § 276.
56
See, e.g., Local Competition Order, 16 FCC Rcd. at 9192 ¶ 87 (finding no public policy
reason for basic telephone users to subsidize dial-up Internet access users); Billed Party
Preference Order, 13 FCC Rcd. 6122, 6154 ¶ 55 (finding cross-subsidization with regard to
operator services “would inhibit competition” and is “contrary to [the Commission’s] policies.”);
id. ¶ 61 (finding cross-subsidization with regard to prison phone service would be contrary to
Commission policy).
17
subsidize the costs of ICS for smaller prisons. In addition, revenue generated from local and
intrastate inmate calling services will now subsidize interstate services.
The Commission’s lack of reasoned analysis in all of these matters renders the
Inmate Rate Order an arbitrary and capricious decision that is likely to be vacated, reversed, or
set aside.
II.
SECURUS WILL SUFFER IRREPARABLE HARM ABSENT A STAY
As the foregoing discussions make clear, Securus is likely to prevail on the merits
of its appeal, a factor that strongly weighs in favor of granting the requested stay.57 Securus also
amply satisfies the second prong of Virginia Petroleum Jobbers, because it will suffer irreparable
harm if the Inmate Rate Order becomes effective.
The harm that Securus will suffer if the Inmate Rate Order becomes effective
prior to appellate review is of several types: (1) being forced to continue paying mandatory site
commissions during the duration of its existing contracts without the ability to recover those
costs; (2) the Herculean task of re-negotiating more than 1,700 contracts; (3) being forced to
provide interstate calling service at below-cost rates; (4) compliance with the extremely onerous
reporting requirements; and (5) the almost unavoidable, highly burdensome rate investigations
that the Inmate Rate Order invites.
A.
Securus Will Be Unable To Recover the Cost of Mandatory Site
Commissions Under Its Approximately 1,800 Contracts
The Inmate Rate Order sets rate caps that preclude Securus from recovering the
cost of mandatory site commissions. Despite acknowledging that site commissions are an
express term of service contracts, the Inmate Rate Order boldly asserts that it does not “explicitly
57
Charter Commc’ns, 22 FCC Rcd. at 13892 ¶ 4.
18
abrogate any agreements between ICS providers and correctional facilities.”58 “Explicitly” or
not, the Commission’s new policy leaves Securus and other ICS providers in the untenable
position of having contractual, and sometimes statutorily imposed, obligations to pay millions of
dollars in site commissions without any possibility of recoupment.
Further, although the Commission encourages “voluntarily renegotiation,”59 there
is no recourse for Securus if a correctional facility declines the Commission’s invitation to
voluntarily relinquish its contractual rights to funds that are allocated for anti-recidivism
programs and other penological purposes. The result could be that nonpayment would be
deemed a breach and expose Securus to hundreds of claims. At the least, failing to pay site
commissions will endanger Securus’s goodwill in a very competitive market, a harm that courts
have deemed sufficient to support entry of a stay.60
This need, or contractual obligation, to continue paying site commissions without
possibility of recoupment is another form of irreparable harm that warrants a stay of the Report
and Order.
B.
Securus Will Be Unable To Renegotiate The More Than 1,700 Contracts
Affected By The Inmate Rate Order In The Allotted 90-day Period
Having wholly modified the method by which ICS rates are set, abandoning a
market-based approach in favor of a heavily-regulated process, and in many instances requiring
Securus to assess below-cost rates for interstate calls, the Inmate Rate Order provides carriers
with a scant 90-day period in which to implement the new rate caps. Existing rates are, however,
58
Inmate Rate Order ¶ 101.
59
Id. ¶ 102.
60
BellSouth Telecomms., Inc. v. MCIMetro Access Transmission Svcs., LLC, 425 F.3d 964,
970 (11th Cir. 2005) (“‘the loss of customers and goodwill is an irreparable injury’”) (staying
FCC Triennial Review Remand Order) (internal citation omitted).
19
generally included as express terms of service contracts.61 The Commission recognizes that only
some “contracts may include change-of-law provisions” but then nevertheless appears to proceed
under the assumption that ICS providers can insist on modifying their existing contracts to meet
the Commission’s new rules or, perhaps more accurately, arbitrary ignores that many ICS
providers have no ability to demand immediate renegotiation of contract terms. In most cases,
Securus has no such right and will therefore be at the mercy of the correctional facilities in
seeking to implement negotiated changes to the existing rate structure.62
Even if Securus had the right to demand renegotiation of all or even most
contracts, it is a practical impossibility. Securus asserted in its comments that it would be
impossible for it to renegotiate its contracts in the one year period proposed by Petitioners.63 The
Inmate Rate Order never denies this assertion or the supporting evidence provided by Securus.
Of its approximately 1,800 contracts, 95% would require amendment.64 And even prior to
seeking renegotiation, where permitted, Securus must calculate its costs on a contract-by contract
basis to understand whether its cost would support charging the safe harbor, the interim rate cap,
or perhaps some other rate.
No company could reasonably be expected to change 1,000+ contracts in 90 days.
Indeed, Securus estimates that it will take approximately 20 person hours per contract to
complete analysis, negotiation and contract amendment, so approximately 19 person years of
61
Smith Affidavit ¶ 7.
62
Id. ¶ 10.
63
Securus Initial Comments at 11 (citing Hopfinger Decl. ¶ 3); see also Inmate Rate NRPM
¶ 45.
64
Smith Affidavit ¶ 11.
20
work for all 1800 contracts.65 The Inmate Rate Order thus purports to mandate an impossibility.
It “essentially is setting Securus up to fail.”66
Moreover, as a practical matter, if Securus were to seek a waiver of the interim
rate cap so as to avoid providing below-cost service, it would need to complete that process
before it could practicably complete contract renegotiations to modify the rates established in its
existing contracts. It is virtually impossible to believe that a waiver request could be filed,
briefed, and decided by the Wireline Competition Bureau in the 90-day period provided in the
Order, much less also engage in thousand of contract renegotiations. All of this uncertainty and
delay will bring the ICS industry to a standstill. For this additional reason, Securus will be
severely harmed if a stay is not entered.
C.
Securus Will Be Forced To Provide Below-Cost Service Under The New
Rates
The filings made by Securus clearly establish that its cost of providing service to
many correctional facilities are well above the rate caps established by the Inmate Rate Order,
even removing site commissions from the cost base. Although the Order purports to establish a
waiver process for situations in which the carrier can demonstrate that the rate caps are
insufficient to meet its costs on a holding company basis, as Securus noted above it is not
practicable to prepare, file, and conclude a necessary request for waiver in the 90-day period
provided in the Inmate Rate Order.67
65
Smith Affidavit ¶ 10.
66
Id.
67
The Commission may believe that the inclusion of a waiver option in the Order would
prevent Securus from showing irreparable harm. However, the waivers as described in the
Inmate Rate Order are ineffective in preventing irreparable harm, for two interrelated reasons.
First, the rules provide no time limit in which waivers will be evaluated. Secondly, during this
unknown time period in which a waiver request would be pending, Securus would be required to
21
Thus, although Securus already has demonstrated to the Commission that
hundreds of its sites have costs that exceed the adopted rate cap, if not stayed the Commission’s
order would require Securus to accept those below-cost rates for an extended period of time
while it goes through a proceeding with the Wireline Competition Bureau, which, of course, is
under no requirement to act within any given time period. The harm that would flow from
Securus’s inability to complete a waiver request, and thus be forced to provide below-cost
service, before the effective date of the Inmate Rate Order is another form of irreparable harm
that warrants a stay.
D.
The Inmate Rate Order Subjects Securus To New Regulatory Reporting
Requirements In Less Than Six Months
The Inmate Rate Order imposes new requirements to report annually on several
aspects of their rates and costs, minutes of use, as well as average call duration.68 In addition,
ICS providers must submit information regarding call terminations, the reason or cause for the
termination, and data regarding ancillary charges. The first filing deadline is April 1, 2014.
The Commission opines that these additional reporting requirements will be
“minimally burdensome.”69 According to Mr. Smith, they actually are extremely burdensome.
assess rates below the interim rate cap, even if those rates are insufficient to meet Securus’s
costs.
Moreover, the potential for a waiver from the rate caps is illusory as a practical matter
and itself presents additional burdens. For example, the Commission fails to consider as a
practical matter how an ICS provider will be able to determine obtain a waiver in the time period
typically permitted to respond to requests for competitive bids. Thus, Securus will be faced with
the dilemma of either competing for a contract without knowing how much it will be permitted
to charge or foregoing the opportunity to bid. With regard to pre-existing contracts, Securus
must accept below-cost payments until it can obtain a waiver and re-negotiate its contracts.
Then, because it is required to publish and/or its calling rates at each institution, a later-approved
waiver would require Securus to duplicate its notification efforts.
68
Inmate Rate Order ¶¶ 116-17, 124-26; Rule 64.6060.
69
Inmate Rate Order ¶ 117.
22
Securus estimates that providing the detailed reports that the FCC now demands would require
the hiring of an additional 5-10 full-time employees devoted to making these reports.70
The first report will be due during the pendency of the forthcoming appeal, and
yet the requirement very well may be vacated on appeal. Thus, compliance with Rule 64.6060
would result in unrecoverable losses. This problem presents an additional example of the
irreparable harm that will result absent a stay.
E.
The Inmate Rate Order Subjects Securus To Multiple, Potentially Endless
Rate Proceedings
The Inmate Rate Order states that the new rules are effective 90 days after
Federal Register publication. On the 91st day, any consumer can lodge a complaint with the
FCC and initiate a full rate investigation proceeding against Securus. If the rates charged by
Securus exceed the safe harbor at even a single location, Securus will not be entitled to the
protection of the safe harbor even for locations where its rates are within the safe harbor.71
And because each Securus contract carries its own calling rates, each consumer complaint could
trigger a different proceeding with Securus having the burden of production and persuasion in
each case.
The burden that a rate-of-return investigation imposes cannot be overstated. They
require submission of reams of cost and operational data, as well as expert analysis. The FCC
70
Smith Affidavit ¶ 13.
71
Inmate Rate Order n.226 & 429. This decision suggests that the Commission will
entertain complaints on a location-by-location basis. That type of location-based review,
however, is inconsistent with the manner in which the Commission discusses costs in other parts
of the Order. For example, the Order states that requests for waiver will be reviewed “at the
holding company level,” id. ¶ 83, and indicates that an ICS provider is entitled to “fair
compensation” only on an aggregated basis, id. ¶ 123.
23
itself has called rate-of-return review “an administrative quagmire for the industry and for this
agency.”72
Securus never has participated in a rate-of-return proceeding.73 It does not have
the human resources that may be required to address these inquiries and estimates that it would
be required to hire 5-20 new full time highly-skilled employees for these tasks alone.74 In a
word, the Inmate Rate Order creates a regulatory morass, the likes of which have not been seen
in the retail market for decades, and which will immediately impose enormous, unrecoverable
costs if permitted to go into effect. For this additional reason, Securus will suffer irreparable
harm absent a stay.
III.
THIRD PARTIES WILL NOT BE HARMED BY A STAY
With regard to the third prong of Virginia Petroleum Jobbers, the Wright
Petitioners and other consumers of ICS will not be materially harmed by a stay of the Inmate
Rate Order. As an initial matter, the Wright Petitioners did not envision or advocate the
ongoing, cost-based rate review that the Commission has established here. Suspension of that
regulatory regime thus would not deprive them of any expected relief in that regard.
Further, the Wright Petitioners did not advocate for new rate caps to become
effective within 90 days. Rather, their proposal suggested a “fresh look” period of one year, four
times the period the Commission ultimately provided in the Inmate Rate Order, for ICS
providers to review and adjust their contracts.75 Others agreed that 6 months was a minimally
reasonable time period for implementation of the new rates, unless contracts were earlier
72
Authorized Rate of Return for the Interstate Services of AT&T Commc’ns and Exchange
Telephone Carriers, 49 Fed. Reg. 32871, 32872 ¶ 4 (1984).
73
Smith Affidavit ¶ 12.
74
Id.
75
Inmate Rate NRPM ¶ 45.
24
negotiated.76 The record therefore demonstrates that more than 90 days would be required to
implement the changes that were then under consideration.
In addition, the drastic, almost immediate rate cuts that the Inmate Rate Order
imposes, coupled with the danger of decreased competition and unpaid site commission revenue,
pose a much greater harm to the public than would a stay pending review. A 78% decrease in
rates may seem attractive at first blush, but the competitive and operational repercussions would
quickly overshadow it.
IV.
THE PUBLIC INTEREST FAVORS A STAY
Finally, a stay will satisfy the fourth prong of Virginia Petroleum Jobbers,
because the public interest will be gravely impaired if the Inmate Rate Order becomes effective.
Most obviously, public will be harmed because the FCC has taken two actions that will prevent
correctional agencies from obtaining the site commission revenue that was an express part of
their RFPs and a material term of their service contracts: first, it has held that site commissions
are not a real cost of service for providers and thus cannot be recovered via their rates; secondly,
it has set interstate calling rates so low as to preclude site commission recovery even if the FCC
would permit it. This loss of revenue will have a significant impact on the operation of
correctional facilities. As discussed more below, there are several other public harms that will
also flow from the immediate implementation of the Inmate Rate Order that support Securus’s
petition for a stay pending appeal.
A.
Enforcement Of The Inmate Rate Order Will Deprive State And County
Governments Of Funds Used For Salutary Purposes Such As Victims’ Rights
Funds And Inmate Welfare
The Inmate Rate Order imposes grave harm to third parties, most notably to the
76
See Inmate Rate Order n.360.
25
inmates whom the Commission would like to serve and protect. It forbids, as a matter of law,
and precludes, as a matter of fact, carriers from remitting site commission revenue on which
agencies rely for prison operations, anti-recidivist programs like job training, and financial
assistance for indigent inmates. Depriving state, county and local budgets of expected revenue,
immediately resulting in either an increased the burden on the public tax base and or diminished
inmate welfare, is a serious and irreparable harm to the public interest.
Moreover, contrary to the Order’s hopeful prognosis, the deprivation of site
commissions also makes it inevitable that the continued advancement of security features and
functionalities necessary to maintain public safety inside and outside of the correctional facility
will be curtailed in the long run. Service providers will be without the resources to continue to
innovate and correctional facilities will be unable to pay for them. Public safety is perhaps the
most crucial responsibility for the government to protect and uphold yet it will be undermined
without the appropriate resources. Thus, the public interest weighs in favor of a stay.
B.
The Commission Failed To Consider The Possibility That Its Rate Caps
Could Lead Correctional Facilities To Deny Inmates Access To
Telecommunications Services
In addition to denying inmates access to services that are funded through site
commissions, the Inmate Rate Order failed to acknowledge the potential that the Commission’s
decision to impose a rate cap that is below the cost of providing service to smaller facilities, and
the elimination of an ISP providers’ ability to pass through site commission charges, could result
in certain inmates being denied access to the very services that the Commission seeks to make
more accessible. With limited budgets and the inability to make up site commissions through
other sources, the Commission should take seriously the possibility that correction facilities will
revisit its policies on providing regular access to phone services to inmates.
As Securus previously noted, courts have found that there is “no constitutionally
26
guaranteed right of inmates to use a telephone.”77 Thus, it is not at all clear that smaller facilities
that rely on site commissions to provide important services to inmates will continue to make
phone services available if the Commission eradicates site commissions. For this reason, the
public interest favors maintaining the status quo during the review process.
C.
The Harsh, Flash-Cut New Rate Regime In The Inmate Rate Order Is Likely
To Have A Materially Adverse Effect On Competition
As demonstrated herein, the Inmate Rate Order sets rates below cost, abrogates
thousands of publicly awarded service contracts, and puts service providers in the impossible
position of providing safe and secure service while overhauling their rates and operations in 90
days. Carriers now face an immediate loss of revenue as well as the threat of litigation to
remedy the breaches of contract that the Inmate Rate Order will create. These harms will be
substantial and will gravely imperil the ongoing operations of inmate telephone service
providers.
The record at the FCC demonstrates that this industry is fiercely competitive.
Rates are decreasing, many costs are decreasing, and margins are not fat. The tremendous
financial and operational body-blows that the Inmate Rate Order imposes could well drive
carriers to choose between acquisition and cessation of service. With a stated goal of fostering
competition in the inmate service market, the Commission’s new order could well lead to
increased consolidation and market exits in situations where ICS service cannot be provided
without a loss. As stated in Section I.B. above, a decrease in competition among competent
firms does not serve the public interest.
77
Walton v. New York State Dep’t of Correctional Svcs., 921 N.E. 2d 145, 155 (N.Y. 2009)
(citing U.S. v. Footman, 215 F.3d 145, 155 (1st Cir. 2000)).
27
D.
Requiring Securus To Charge Below-Contract Rates, Without A Mechanism
To Reclaim The Lost Revenue If The Inmate Rate Order Is Reversed, Is Also
Contrary To The Public Interest
The Commission has provided no mechanism that would allow ICS providers to
recover the difference in rates charged under the Inmate Rate Order and its existing contract
rates if a court subsequently determines that the Inmate Rate Order is invalid. The Commission’s
precedent provides that a carrier’s inability to recover uncollected revenue associated with
improper rate reduction orders is not only a harm to the carrier, but also against the public
interest.78 As the Commission has recognized, the effort to recoup the losses caused by
enforcing a rate reduction that is later vacated leads to a “waste of time and energy” that is
ultimately borne by subscribers to the service.79 Consistent with this prior precedent, staying the
effectiveness of the rate caps and allowing the status quo to remain is in the public interest.
E.
Additional Public Interest Considerations Support A Stay
As in the Comcast Cable decision, the Inmate Rate Order lacks specifics
regarding the appropriate calculation of the cost-based rates that the Commission purports to
mandate.80 This lack of specificity, together with the number of potential appeals involved, and
“the efficacy of having a uniform resolution imposed” are additional public interest factors that
the Commission has previously found to weigh in favor of a stay pending appeal.81
78
Comcast Cable, 20 FCC Rcd. 8217 ¶ 3 (granting stay in part on ground that public
interest would not be served if Comcast issued refunds to consumers without a mechanism for
recouping those funds if order was later reversed).
79
Charter Commc’ns, 22 FCC Rcd. at 13893 ¶ 9.
80
Comcast Cable, 20 FCC Rcd. 8217 ¶ 3.
81
Id.
28
CONCLUSION
For all these reasons, the Commission should stay the effectiveness of the Report
and Order until the forthcoming appeals from that order are resolved. Securus respectfully
requests that this Petition be resolved by November 21, 2013.
By: s/Stephanie A. Joyce
Stephanie A. Joyce
G. David Carter
ARENT FOX LLP
1717 K Street, N.W.
Washington, D.C. 20036
202.857.6081 DD
202.857.6395 Fax
Stephanie.Joyce@arentfox.com
Counsel to Securus Technologies, Inc.
Dated: October 22, 2013
29
CERTIFICATE OF SERVICE
I hereby certify on this 22nd day of October, 2013, that the foregoing Petition for
Stay of Report and Order Pending Appeal (FCC 13-113) was served via electronic mail on the
following persons:
Marlene H. Dortch
Secretary
Federal Communications Commission
Marlene.Dortch@fcc.gov
Acting Chairwoman Mignon Clyburn
Federal Communications Commission
Mignon.Clyburn@fcc.gov
Commissioner Jessica Rosenworcel
Federal Communications Commission
Jessica.Rosenworcel@fcc.gov
Commissioner Ajit Pai
Federal Communications Commission
Ajit.Pai@fcc.gov
Sean Lev
General Counsel
Federal Communications Commission
Sean.Lev@fcc.gov
Julie Veach
Chief
Wireline Competition Bureau
Federal Communications Commission
Julie.Veach@fcc.gov
By: s/Stephanie A. Joyce
Stephanie A. Joyce
ATTACHMENT
Affidavit of Richard Smith
Chief Executive Officer
Securus Technologies, Inc.
(October 17, 2013)
Before the
Federal Communications Commission
Washington, D.C. 20554
Rates for Interstate Inmate Calling Services
WC Docket No. 12-375
AFFIDAVIT OF RICHARD SMITH
I, Richard Smith, hereby affirm under penalty of perjury and pursuant to 18 U.S.C. § 1621, that
1. I am the Chief Executive Officer of Securus Technologies, Inc. (“Securus”) with
headquarters at 14651 Dallas Parkway, Sixth Floor, Dallas, TX 75254.
2. I am providing this Affidavit in support of the Motion for Stay seeking immediate relief
from the Inmate Rate Order of the FCC. I have personal knowledge of the facts stated
herein and could testify to the same.
3. I have been CEO of Securus since June 2008. I have been an executive officer in the
telecommunications industry since 1985, most recently as CEO of Eschelon Telecom
which was acquired by Integra Telecom in August 2007.
4. Securus provides services exclusively to correctional facilities. As Securus has told the
FCC, it presently serves approximately 2,200 correctional facilities in 43 states and the
District of Columbia. It holds approximately 1,800 service contracts with state, county,
and city governments.
5. Securus is required by the vast majority of its contracts to pay site commissions to its
correctional facility clients. Correctional agencies decide the level of site commissions
they require. In some instances, such as at state facilities in Maryland and Texas, site
commissions are mandated by state statute.
6. Site commission revenue is used for different purposes, all at the discretion of the
supervising governmental agency. In my experience, this money goes to inmate job
placement programs, inmate job training, inmate health care programs, inmate substance
abuse treatment programs, welfare funds for indigent inmates, and victims’ rights funds.
In some instances, site commission revenue goes straight to paying the cost of jail
operations. Securus has no input in where site commission revenue is spent.
7. Calling rates are key terms of Securus’s contracts. Each bid is customized to the stated
needs of the correctional facility, and each rate proposal is structured to recover the costs
of that customized package. In this way, the correctional facilities have actually set the
calling rates by choosing them.
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8. The new FCC rates make it impossible to pay site commissions. At rates that equate to
$0.21 per minute for debit calls, and $0.25 for collect calls, the FCC has cut Securus’s
interstate rates by as much as 78%. These rates will prevent Securus from paying site
commissions, and, in most cases, will not even cover the cost of facilities, software, and
service.
9. In addition, the FCC rates do not account for the fact that Securus already provides
approximately 20-30 million free calls per year because of State statutes and contractual
requirements. For example, some correctional agencies require the first 2 calls made by
an inmate to be free of charge; in addition, some correctional agencies require calls to
criminal attorneys, bail bondsmen, embassies, and certain state agencies to be free of
charge.
10. The FCC has given carriers 90 days to implement the new rules. In other words, Securus
has 90 days to change material contract terms in nearly all of its 1,800 contracts. But in
most instances, Securus does not even have the right to demand renegotiation at this time.
Even if we have the right, it is not possible to change so many contracts so quickly. The
FCC has set a completely unworkable deadline, and essentially is setting Securus up to
fail. My estimate is that it will take approximately 20 person hours per contract to
complete analysis, negotiation and contract amendment, so approximately 19 person
years of work for all 1800 contracts. Accordingly, it is clearly impossible for us to
complete this task in 90 days.
11. In order to amend its rate structures nationwide to comport with the new interstate rates,
Securus must amend more than 95% of its contracts.
12. I am also deeply concerned about the huge regulatory burden that will fall on Securus
under this new order. Securus has never been subject to ongoing rate review. Securus
has never participated in a rate-of-return proceeding. We do not have the human
resources to comply with the enormous data production and analysis required for this
kind of ratemaking. Securus would need to hire at least 5-20 new full-time employees
devoted solely to the task of complying with the FCC’s new rate-review rule.
13. Finally, the data reporting requirement contained in the Inmate Rate Order is extremely
burdensome. Securus processes hundreds of millions of calls each year. Providing the
detailed reports that the FCC now demands, the first of which is due in less than six
months, would require the hiring of an additional 5-10 full-time employees devoted to
making these reports.
2
