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Brief for the FCC - Securus Tech. v. FCC and USA (D.C. Cir.)

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Released: July 22, 2014
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ORAL ARGUMENT NOT YET SCHEDULED

USCA Case #13-1280 Document #1503814 Filed: 07/21/2014 Page 1 of 96

BRIEF FOR THE FEDERAL COMMUNICATIONS COMMISSION

IN THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

NOS. 13-1280, 13-1281, 13-1291, 13-1300, 14-1006

SECURUS TECHNOLOGIES, INC., ET AL.,

PETITIONERS,

V.

FEDERAL COMMUNICATIONS COMMISSION

AND UNITED STATES OF AMERICA,

RESPONDENTS.

ON PETITION FOR REVIEW OF AN ORDER OF THE

FEDERAL COMMUNICATIONS COMMISSION

JONATHAN B. SALLET

GENERAL COUNSEL

DAVID M. GOSSETT

ACTING DEPUTY GENERAL COUNSEL

JACOB M. LEWIS

ASSOCIATE GENERAL COUNSEL

SARAH E. CITRIN

COUNSEL

FEDERAL COMMUNICATIONS COMMISSION

WASHINGTON, DC 20554

(202) 418-1740

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CERTIFICATE AS TO PARTIES, RULINGS, AND RELATED CASES

1. Parties and Amici Curiae.

All parties and intervenors appearing in this Court are listed in the

petitioners’ briefs. We understand that the following organizations and

individuals intend to participate as amici curiae in support of the FCC: Asian

Americans Advancing Justice-AAJC; Lawyers’ Committee for Civil Rights

Under Law; and Professors Richard H. Frankel, Steven H. Goldblatt, and

Alistair E. Newbern, on behalf of the Law School Appellate Litigation

Clinics at Drexel, Georgetown, and Vanderbilt Universities.

2. Rulings under review.

The ruling at issue is Rates for Interstate Inmate Calling Services,

Report and Order and Further Notice of Proposed Rulemaking, 28 FCC Rcd

14107 (JA __ ) (2013).

3. Related cases.

The order on review has not previously been the subject of a petition

for review in this Court or any other court. Counsel is not aware of any

related cases pending before this Court or any other court.

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TABLE OF CONTENTS

Table of Authorities......................................................................................... iii 

Glossary .......................................................................................................... vii 

Question Presented ............................................................................................ 1 

Jurisdiction ........................................................................................................ 2 

Statutes and Regulations ................................................................................... 2 

Counterstatement ............................................................................................... 2 

A.  FCC’s Statutory Authority over Inmate Calling Rates ......................... 2 

B.  Failure in the Market for Inmate Calling Services ................................ 3 

C.  Petitions for Relief and Notice of Proposed Rulemaking ..................... 5 

D.  Order on Review ................................................................................... 7 

E.  Subsequent Developments .................................................................. 11 

Summary of Argument .................................................................................... 12 

Standard of Review ......................................................................................... 18 

Argument ......................................................................................................... 19 

I.  THE COST-BASED RULE IS LAWFUL. ............................................. 23 

A.  The Rule Is a Logical Outgrowth of the 2012 Notice. ........................ 24 

B.  The Rule Does Not Impose Rate-of-Return Regulation. .................... 30 

C.  The Order Gives Reasonable and Appropriately Detailed

Guidance on Recoverable Costs. ......................................................... 32 

D.  The FCC Reasonably Concluded That Site Commissions

Are Not a Compensable Category of Costs. ....................................... 36 

II.  THE INTERIM HARD CAPS ARE REASONABLE AND

REASONABLY EXPLAINED. .............................................................. 40 

i

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A.  The FCC Reasonably Concluded That Most Inmate

Calling Providers Can Recover Their Costs within

Uniformly Applicable Hard Caps. ...................................................... 40 

B.  In Setting the Hard Caps, the FCC Reasonably

Considered Averaged, Per-Minute Costs. ........................................... 44 

C.  The Hard Caps Are Otherwise Methodologically Sound. .................. 47 

D.  The Order Provides Flexibility, Including a Waiver

Process, for Providers with Good Cause to Charge

Higher Rates. ....................................................................................... 50 

III.  THE INTERIM SAFE-HARBOR CAPS ARE

REASONABLE AND REASONABLY EXPLAINED. ......................... 52 

IV.  THE FCC’S REGULATION OF ANCILLARY CHARGES

WAS LAWFUL. ...................................................................................... 57 

A.  The FCC Has Statutory Authority to Regulate Ancillary

Charges. ............................................................................................... 58 

B.  The FCC Gave Adequate Notice It Might Regulate

Ancillary Charges. ............................................................................... 59 

V.  THE ORDER DOES NOT UNLAWFULLY INFRINGE

STATE OR LOCAL AUTHORITY. ....................................................... 61 

VI.  THE FCC REASONABLY CHOSE NOT TO EXEMPT

EXISTING CONTRACTS. ..................................................................... 64 

A.  The Order Does Not Abrogate Existing Contracts,

Although It Lawfully Could Have Done So. ...................................... 64 

B.  The FCC’s Decision Was Reasonable and Reasonably

Explained. ............................................................................................ 66 

Conclusion ....................................................................................................... 68 

ii

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TABLE OF AUTHORITIES

CASES 

Alina Health Servs. v. Sebelius, 746 F.3d 1102

(D.C. Cir. 2014) ........................................................................................... 28

Am. Pub. Commc’ns Council v. FCC, 215 F.3d 51

(D.C. Cir. 2000) .................................................................................... 44, 45

*

Ass’n of Oil Pipe Lines v. FERC, 83 F.3d 1424

(D.C. Cir. 1996) .................................................................................... 18, 19

Beethoven.com LLC v. Librarian of Congress, 394

F.3d 939 (D.C. Cir. 2005) ........................................................................... 57

*

Cable & Wireless P.L.C. v. FCC, 166 F.3d 1224

(D.C. Cir. 1999) ........................................................................................... 62

Cellco P’ship v. FCC, 357 F.3d 88 (D.C. Cir. 2004) ...................................... 18

Cellco P’ship v. FCC, 700 F.3d 534 (D.C. Cir.

2012) ............................................................................................................ 65

Chevron U.S.A. Inc. v. Nat’l Res. Def. Council, Inc.,

467 U.S. 837 (1984) .................................................................................... 19

City of Arlington, Texas v. FCC, 133 S. Ct. 1863

(2013) ................................................................................................... 19, 58

*

Competitive Telecomms. Ass’n v. FCC, 87 F.3d 522

(D.C. Cir. 1996) ........................................................................................... 27

Consumer Elecs. Ass’n v. FCC, 347 F.3d 291 (D.C.

Cir. 2003) ..................................................................................................... 34

*

Covad Commc’ns Co. v. FCC, 450 F.3d 528 (D.C.

Cir. 2006) ..................................................................................................... 24

E. Ky. Power Co-op, Inc. v. FERC, 489 F.3d 1299

(D.C. Cir. 2007) ........................................................................................... 66

*

Farmers Union Cent. Exch., Inc. v. FERC, 734 F.2d

1486 (D.C. Cir. 1984) .................................................................................. 28

Fertilizer Inst. v. EPA, 935 F.2d 1303 (D.C. Cir.

1991) ............................................................................................................ 24

Flying J, Inc. v. FERC, 363 F.3d 495 (D.C. Cir.

2004) ............................................................................................................ 48

iii

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FPC v. Texaco, Inc., 417 U.S. 380 (1974) ...................................................... 45

Freeport-McMoRan Corp. v. FERC, 669 F.3d 302

(D.C. Cir. 2012) ........................................................................................... 66

Home Box Office, Inc. v. FCC, 567 F.2d 9 (D.C.

Cir. 1977) (per curiam) ......................................................................... 51, 52

Ill. Pub. Telecomms. Ass’n v. FCC, 117 F.3d 555

(D.C. Cir.), supplemented by 123 F.3d 693 (D.C.

Cir. 1997) ..................................................................................................... 39

In re FCC 11-161, __ F.3d __, __, 2014 WL

2142106 (10th Cir. 2014) ............................................................................ 23

In re Permian Basin Area Rate Cases, 390 U.S. 747

(1968) .......................................................................................................... 45

Keller Commc’ns, Inc. v. FCC, 130 F.3d 1073 (D.C.

Cir. 1997) ..................................................................................................... 51

Long Is. Care at Home, Ltd. v. Coke, 551 U.S. 158

(2007) ................................................................................................... 24, 60

Mobil Oil Corp. v. FPC, 417 U.S. 283 (1974) ................................................ 28

Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto.

Ins. Co., 463 U.S. 29 (1983) ........................................................................ 18

N.E. Md. Waste Disposal Auth. v. EPA, 358 F.3d

936 (D.C. Cir. 2004) (per curiam) ............................................................... 30

NAACP v. FPC, 425 U.S. 662 (1976) ............................................................. 37

* NARUC v. FERC, 475 F.3d 1277 (D.C. Cir. 2007) ........................... 36, 37, 62

Omnipoint Corp. v. FCC, 78 F.3d 620 (D.C. Cir.

1996) ............................................................................................................ 24

Orloff v. FCC, 352 F.3d 415 (D.C. Cir. 2003) ................................................ 28

Petal Gas Storage, LLC v. FERC, 496 F.3d 695

(D.C. Cir. 2007) ........................................................................................... 46

Regents of Univ. Sys. v. Carroll, 338 U.S. 586

(1950) ................................................................................................... 64, 65

*

Rural Cellular Ass’n v. FCC, 588 F.3d 1095 (D.C.

Cir. 2009) ............................................................................ 18, 23, 34, 42, 50

Shays v. FEC, 528 F.3d 914 (D.C. Cir. 2008)................................................. 34

iv

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*

Sw. Bell Tel. Co. v. FCC, 168 F.3d 1344 (D.C. Cir.

1999) ..................................................................................................... 18, 45

*

Vonage Holdings Corp. v. FCC, 489 F.3d 1232

(D.C. Cir. 2007) .................................................................................... 43, 44

WAIT Radio v. FCC, 418 F.2d 1153 (D.C. Cir.

1969) ..................................................................................................... 50, 51

Z-Tel Commc’ns v. FCC, 333 F.3d 262 (D.C. Cir.

2003) ............................................................................................................ 48

STATUTES 

* 5 U.S.C. § 553(b)(3) ................................................................................. 24, 32

5 U.S.C. § 706(2)(A) ....................................................................................... 18

28 U.S.C. § 2342(1) .......................................................................................... 2

28 U.S.C. § 2344 ............................................................................................... 2

47 U.S.C. § 152(a) ........................................................................................... 61

* 47 U.S.C. § 201(b).......................................................... 2, 7, 16, 19, 39, 58, 61

47 U.S.C. § 208 ............................................................................................... 33

* 47 U.S.C. § 276(b)(1)(A) ..................................................... 3, 7, 16, 19, 39, 62

47 U.S.C. § 276(c). ......................................................................... 3, 17, 62, 63

* 47 U.S.C. § 276(d).............................................................. 3, 16, 19, 58, 62, 63

47 U.S.C. § 402(a) ............................................................................................. 2

Fla. Stat. § 945.215(b) ..................................................................................... 38

Miss. Code Ann. § 47-5-158 ........................................................................... 67

Tex. Gov’t Code Ann. § 495.027 .................................................................... 38

Wis. Stat. § 301.105 ........................................................................................ 38

REGULATIONS 

* 47 C.F.R. § 1.3 ......................................................................................... 11, 51

47 C.F.R. § 1.4(b)(1) ......................................................................................... 2

47 C.F.R. § 1.4(d) .............................................................................................. 2

v

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ADMINISTRATIVE DECISIONS 

Access Charge Reform, Second Order on

Reconsideration and Memorandum Opinion and

Order, 12 FCC Rcd 16606 (1997) ............................................................... 27

Implementation of the Pay Telephone

Reclassification and Compensation Provisions of

the Telecommunications Act of 1996, Order on

Remand and Notice of Proposed Rulemaking, 17

FCC Rcd 3248 (2002) ................................................................................... 3

Implementation of the Pay Telephone

Reclassification and Compensation Provisions of

the Telecommunications Act of 1996, Order on

Remand and Notice of Proposed Rulemaking, 17

FCC Rcd 3248, 3252 (2002) .............................................................. 3, 4, 37

Rates for Interstate Inmate Calling Services, Order,

29 FCC Rcd __, 2014 WL 3427430 (Wireline

Competition Bur. 2014) ............................................................................... 44

* Cases and other authorities principally relied upon are marked with

asterisks.

vi

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GLOSSARY

APA

Administrative Procedure Act, Pub L. No.

79-404, 60 Stat. 237 (1946) (codified as

amended in scattered sections of 5 U.S.C.)

Br.

Joint brief for the provider-petitioners

Communications Act or Act

Communications Act of 1934, Pub. L. No.

73-416, 48 Stat. 1064 (codified as

amended in scattered sections of 47

U.S.C.)

Corrections Br.

Joint brief for the corrections-petitioners

and supporting intervenors

FCC

Federal Communications Commission

FERC

Federal Energy Regulatory Commission

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QUESTION PRESENTED

For years, inmates and their families have asked the FCC to address

high rates for payphone services in correctional facilities. Market forces fail

to constrain those rates: Inmate calling providers do not compete for users of

their services, but rather for a facility’s monopoly franchise—often based on

how much they offer to pay the facility in “site commissions,” which state

and local governments appropriate for uses that in most if not all cases have

absolutely no connection to providing inmate calling services. To recover the

expense of site commissions, providers exploit their monopoly power and

charge consumers rates that grossly exceed the actual costs of providing

service. The resulting rates deter communication between inmates and their

families, with severe and highly detrimental social consequences. In the

order on review, the FCC took interim steps to exercise its statutory authority

to ensure that interstate inmate calling rates are just, reasonable, and fair.

The consolidated petitions for review present the following question:

Whether the FCC’s order and the rules promulgated therein reflect a lawful

exercise of the agency’s statutory authority to ensure that rates for interstate

inmate calling services are just, reasonable, and fair while the agency collects

further data and public comment to refine its reforms.

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JURISDICTION

The order on review, Rates for Interstate Inmate Calling Services,

Report and Order and Further Notice of Proposed Rulemaking, 28 FCC Rcd

14107 (JA __ ) (2013) (Order), is a final FCC order over which this Court

has jurisdiction pursuant to 47 U.S.C. § 402(a) and 28 U.S.C. § 2342(1). A

summary of the Order was published in the Federal Register on November

13, 2013. See 78 Fed. Reg. 67,956. As required by 28 U.S.C. § 2344 and

47 C.F.R. § 1.4(b)(1) & (d), the petitioners filed their respective petitions for

review within 60 days of that publication.

STATUTES AND REGULATIONS

An addendum to this brief sets forth the relevant statutes and rules.

COUNTERSTATEMENT

A. FCC’s Statutory Authority over Inmate Calling Rates

Under Section 201(b) of the Communications Act, the FCC is

empowered to “prescribe such rules and regulations as may be necessary” to

ensure that “[a]ll charges [and] practices . . . for and in connection with

[interstate] communication service” by wire or radio are “just and

reasonable.” 47 U.S.C. § 201(b). In addition, under Section 276 of the

Communications Act, the FCC is charged with implementing Congress’s

directive “that all payphone service providers [be] fairly compensated for

each and every completed intrastate and interstate call using their

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payphone[s].” Id. § 276(b)(1)(A). The FCC’s authority to regulate payphone

services expressly extends to “inmate telephone service in correctional

institutions, and any ancillary services.” Id. § 276(d). Congress specified

that FCC rules implementing Section 276 “shall preempt” any “inconsistent”

state requirements. Id. § 276(c).

B. Failure in the Market for Inmate Calling Services

Market forces fail to constrain rates for inmate calling services. See

Order ¶ 41 (JA __). This is because inmate calling providers do not compete

for the consumers who pay for calls—primarily inmates and their families.

See id. ¶ 3 (JA __). Instead, each provider has a monopoly franchise in the

correctional facilities it serves. See id.; Implementation of the Pay Telephone

Reclassification and Compensation Provisions of the Telecommunications

Act of 1996, Order on Remand and Notice of Proposed Rulemaking, 17 FCC

Rcd 3248, 3252 ¶ 10 & n.32 (2002) (2002 Order).

To be sure, providers may compete for the franchise at any given

facility, but such competition does not usually result in lower end-user rates.

See Order ¶ 41 (JA __); 2002 Order, 17 FCC Rcd at 3253 ¶ 12. Instead,

many facilities grant franchises based in part on how much money a provider

offers to pay them for the franchise. See Order ¶ 41 (JA __). Providers

therefore compete by increasing those payments—called “site

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commissions”—which leads to correspondingly higher end-user charges. See

id.; 2002 Order, 17 FCC Rcd at 3253 ¶ 12. In practice, providers and

correctional facilities share the monopoly profits extracted through end-user

rates from inmates and their families, see Order ¶ 33 (JA __), who have no

choice but to pay if they wish to keep in touch by telephone, see 2002 Order,

17 FCC Rcd at 3253 ¶ 12.

In some jurisdictions, correctional authorities use portions of their site-

commission payments to fund inmate welfare programs or other corrections-

related activities. See Order ¶ 34 & nn.131–132 (JA __). In many

jurisdictions, commission payments also or instead finance general expenses

of state and local governments, from employee salaries to road construction.

See id. ¶ 34 & n.132 (JA __).

High rates for inmate calling services deter communication between

inmates and their families, with severe and highly detrimental social

consequences. See Order ¶ 42 (JA __). Just one 15-minute call can cost

more than a month of ordinary residential telephone service. Id. Such rates

discourage communication between inmates and their families, who are often

among “the most economically disadvantaged in our society.” Id. Barriers to

communication caused by high inmate calling rates contribute to greater

inmate recidivism. See id. In addition, when jailed parents lack regular

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contact with their children, those children (2.7 million of them nationwide)

have higher rates of truancy, depression, and poor school performance. See

id. ¶ 2 (JA __). High rates for inmate calls also hinder the ability of inmates

to communicate with their attorneys and are associated with higher rates of

contraband cell phones in correctional institutions. See id. ¶ 44 (JA __). For

all of these reasons, the costs to society from high inmate calling rates are

considerable.

C. Petitions for Relief and Notice of Proposed Rulemaking

Over a decade ago, a grandmother from Washington, D.C., named

Martha Wright led a group of inmates and inmates’ family members in

petitioning for relief from the FCC. See Petition for Rulemaking by Martha

Wright, et al. (JA __), CC Docket No. 96-128 (Nov. 3, 2003) (First Wright

Petition). The Wright petitioners proposed that the FCC ban exclusive

payphone contracts in private prisons and create a “safe harbor” interstate rate

cap, id. at 19 (JA __), with the opportunity for inmate calling providers to

charge higher rates if they “could show that [their] costs justified” doing so,

id. at 20 (JA __). In 2007, the Wright petitioners filed a second petition in

which they asked, in the alternative, that the FCC cap interstate rates at all

facilities. See Order ¶ 9 (JA __); see also Petitioners’ Alternative

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Rulemaking Proposal 6 (JA __), CC Docket No. 96-128 (Mar. 1, 2007)

(Alternative Wright Petition).

To address the two Wright petitions—as well as the “significant

comment” they generated—the FCC initiated a rulemaking in 2012. Rates

for Interstate Inmate Calling Services, Notice of Proposed Rulemaking, 27

FCC Rcd 16629, 16629 ¶ 1 (JA __) (2012) (2012 Notice); see id. ¶ 35

(JA __).

The 2012 Notice sought comment on a broad array of topics. The FCC

asked whether the caps proposed by the Wright petitioners would “ensure just

and reasonable rates . . . consistent with sections 201 and 276 of the

[Communications] Act,” and “[w]hat factors . . . the [agency should] consider

in determining an appropriate per-minute cap.” 2012 Notice ¶ 20 (JA __).

The FCC further sought “specific, detailed cost information and other

relevant data” pertinent to rate caps. Id.; see id. ¶¶ 7, 25, 44 (JA __, __, __).

“If the [agency] decides to implement rate caps,” the FCC inquired, “how

should” the agency do so, and what would be the “best ways to determine just

and reasonable caps”? Id. ¶ 23 (JA __); see also id. ¶ 20 (JA __) (asking

“[w]hat factors” the agency should consider in setting rates). The FCC also

sought comment on how the agency should treat per-call charges, see id.

¶¶ 18–19 (JA __) (inquiring about costs in this context), and other charges,

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such as monthly account fees, that inmate calling providers impose on

consumers in connection with inmate calling services but that are not tied to

any particular call, see id. ¶ 33 (JA __).

D. Order on Review

In the Order, the FCC took a number of “critical, and long overdue”

actions to address excessive rates for interstate inmate calling services on a

temporary basis, while the agency gathers additional data and public

comment on which to base more permanent reform. Order ¶ 1 (JA __); see

id. ¶¶ 7–8 (JA __–__).

First, exercising its authority under the Communications Act to ensure

that interstate inmate calling rates are just, reasonable, and fair, see 47 U.S.C.

§§ 201(b), 276(b)(1)(A), the FCC determined that such rates must be based

on the costs of providing service, see Order ¶¶ 12, 45–46 (JA __, __–__).

The agency accordingly required that “[a]ll rates charged” for interstate

inmate calling services, as well as charges ancillary to such services, “be

based only on costs that are reasonably and directly related to the provision of

[inmate calling services].” 47 C.F.R. § 64.6010 (Order App. A (JA __)).

The Order includes detailed guidance on cost categories likely to

satisfy that standard, and others that likely do not. For example, in addition

to “a reasonable share of common costs,” costs recoverable in interstate

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inmate calling rates “likely include,” the agency explained, “the cost of

capital (reasonable return on investment); expenses for originating, switching,

transporting, and terminating [inmate] calls; and costs associated with

security features relating to the provision of [inmate calling services].” Order

¶ 53 (JA __); see also id. ¶ 53 n.196 (JA __) (indicating that recoverable

security costs would include advanced features such as “biometric caller

verification,” “sophisticated tracking tools,” “link analysis software,” and

“audio word search”). Conversely, the Order specifies that “site commission

payments, costs of nonregulated service, costs relating to general security

features of the correctional facility unrelated to [inmate calling services], and

costs to integrate inmate calling with other services, such as commissary

ordering,” are as a general rule not compensable in end-user rates. Id. ¶ 53

(JA __) (footnote omitted); see id. ¶ 54 (JA __).

Second, the FCC adopted a three-part interim rate structure to limit

interstate inmate calling rates: (1) “safe-harbor” rate caps, which permit

providers, in the first instance, to establish rates up to the capped levels

without regard to costs, see Order ¶¶ 60–72 (JA __–__); (2) “hard” caps,

which serve as a presumptive upper limit on permissible rates, but under

which rates must be set based on costs, see id. ¶¶ 5, 73–81 (JA __, __–__);

and (3) a waiver process for providers that, by virtue of unusually high costs

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or for other reasons, can “demonstrate good cause” to exceed the hard caps,

id. ¶ 82 (JA __); see id. ¶¶ 83–84 (JA __–__).

The agency set its safe-harbor caps at $0.12 per minute for debit and

prepaid calls (i.e., calls paid for through an inmate’s institutional account)

and $0.14 per minute for collect calls (which involve greater “bad debt” and

collection costs). See Order ¶ 48 (JA __).1 An inmate calling provider may

in the first instance set rates up to the safe-harbor caps without regard to cost,

making the caps “an administratively convenient pricing option” for

providers. Order ¶ 69 (JA __). When a provider sets rates across all facilities

it serves at or below safe-harbor levels, the Order provides that the provider’s

rates will “be treated as lawful” and presumed just, reasonable, and fair unless

proven otherwise. Id. ¶ 60 & n.226 (JA __); see 47 C.F.R. § 64.6020 (Order

App. A (JA __)). Moreover, should the rates of a provider electing to use the

safe harbors at some future point be invalidated—the Order does permit

challenges to safe-harbor rates under the FCC’s complaint process, see Order

¶ 120 & n.427 (JA __)—the provider would only be required to change its

rates prospectively and would not be liable for refunds, see id. ¶ 120 (JA __).

1 For both the safe-harbor and hard caps, the Order allows providers the

flexibility to “calculat[e] their compliance on the basis of a 15-minute call

(including any applicable per-connection charges).” Order ¶ 48 n.190

(JA __).

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The FCC “expect[ed] the vast majority of providers” to charge rates “at

or below safe-harbor rate levels.” Order ¶ 119 (JA __). The safe harbors

were not designed, however, as “binding rates.” Id. ¶ 69 (JA __).

Recognizing that some providers’ costs could exceed the safe-harbor limits,

the FCC allowed providers to charge higher rates based on their costs, up to a

“hard cap” of $0.21 per minute for debit and prepaid calls and $0.25 per

minute for collect calls. Id. ¶¶ 5, 48, 119 (JA __, __, __). The FCC based the

interim hard-cap rates on “the highest costs in the record.” Id. ¶ 74 (JA __).

Under the Order, rates between the safe-harbor and hard-cap levels

must be based on an inmate calling provider’s costs of service and will not

have the safe-harbor protections. See Order ¶¶ 88–89 (JA __–__). In a

challenge to rates above the safe harbors, the FCC will not presume them

lawful; instead, the provider will “bear the burdens of production and

persuasion” that its rates are “just, reasonable, and fair” (i.e., that they are

cost based). Id. ¶ 121 (JA __). Moreover, if the FCC were to find the rates

unjust, unreasonable, or unfair, the provider could “be ordered to pay

refunds.” Id. ¶ 123 (JA __). The agency emphasized, however, that inmate

calling providers will have significant flexibility in justifying their rates. A

provider that serves multiple facilities with different cost characteristics may

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base its cost justification on “groupings” of facilities, as long as a group

“reflect[s] reasonably related cost characteristics.” Order ¶ 123 (JA __).

As an additional accommodation for any inmate calling provider that

has especially high costs or faces other special circumstances, the Order

permits a “provider that believes that it has cost-based rates . . . that exceed

[the] interim rate caps” to file a petition for a waiver. Order ¶ 82 (JA __); see

47 C.F.R. § 1.3; Order ¶ 83 (JA __). In part because of providers’ ability to

“centraliz[e] . . . security and other functionalities,” the FCC determined to

evaluate waiver requests “at the holding company level,” and not with respect

to the costs of any specific facility or group of facilities. Id.

Finally, in a Further Notice adopted with the Order, the FCC sought

comment on “alternative ways of accomplishing interstate . . . rate reforms,”

Further Notice ¶ 153 (JA __), including ways to establish “permanent safe

harbors and rate caps,” id. ¶ 154 (JA __). That proceeding remains pending.

E. Subsequent Developments

Following release of the Order, several inmate calling providers and

correctional institutions petitioned the agency for a stay pending judicial

review. After the FCC’s Wireline Competition Bureau denied the two

earliest-filed petitions, see Rates for Interstate Inmate Calling Services, 28

FCC Rcd 15927, 15927 ¶ 1 (JA __) (Wireline Competition Bur. 2013) (Stay

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Denial Order), the petitioners sought a stay from this Court, which the Court

granted in part and denied in part, see Securus Techs., Inc. v. FCC, No. 13-

1280 and Consolidated Cases 1–2 (JA __–__) (D.C. Cir. Jan. 13, 2014)

(Partial Stay Order). The Court stayed three of the rules adopted in the

FCC’s Order—47 C.F.R. § 64.6010 (Cost-Based Rates for Inmate Calling

Services), 47 C.F.R. § 64.6020 (Interim Safe Harbor), and 47 C.F.R.

§ 64.6060 (Annual Reporting and Certification Requirement)—but otherwise

left the Order and rules intact, including the interim hard caps (47 C.F.R.

§ 64.6030). See Partial Stay Order, No. 13-1280 at 1 (JA __).

SUMMARY OF ARGUMENT

Driven by site commissions that providers pay correctional facilities,

excessive rates for inmate calling services impose unfair burdens on inmates

and their families, with profound and detrimental social consequences. To

address this pressing problem and carry out the agency’s statutory

responsibility to ensure that rates for interstate inmate calling services are

just, reasonable, and fair, the FCC adopted a number of reforms while the

agency considers further steps on a more developed record. Those reforms—

which implement a cost-based framework of lower safe harbors and higher

hard caps (subject to waiver for good cause)—are a sound exercise of the

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FCC’s broad discretion to adopt ratemaking rules on an interim basis. The

Court should uphold them.

1.

The FCC lawfully required that interstate inmate calling rates be

based on the reasonable costs of providing inmate calling services. See 47

C.F.R. § 64.6010 (Order App. A (JA __)).

a. There was ample notice to support the FCC’s adoption of a cost-

based rule. The 2012 Notice was sufficient to alert interested parties that the

FCC was considering various methods of limiting interstate inmate calling

rates, with a particular focus on costs that might justify such limits. The FCC

has long looked to costs when determining whether rates are just, reasonable,

and fair under the Communications Act. In view of that precedent—and

when the record already reflected significant debate over the reasonableness

of inmate calling costs—it should have come as no surprise that the FCC

might include as part of its reforms a rule that rates be based on the

reasonable costs of providing inmate calling services. Indeed, the record

shows that commenters did anticipate that result.

b. Contrary to the provider-petitioners’ contention, the cost-based rule

does not impose rate-of-return regulation. More fundamentally, how to label

the rule is beside the point. The cost-based rule was a firmly grounded

exercise of the FCC’s authority to ensure, just, reasonable, and fair rates for

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interstate inmate calling services, and it was a “logical outgrowth” of the

issues laid out in the 2012 Notice. The APA requires nothing more.

c. The provider-petitioners mistakenly contend that the Order gives

insufficient guidance on what kinds of costs typically are reasonably related

to the provision of inmate calling services. For example, the Order identifies

costs associated with advanced security features as a category likely to be

reasonably related to the provision of inmate calling services, and thus

recoverable through interstate rates under the cost-based rule. Conversely,

the Order explains that site commissions, as a category, are not reasonably

related to the provision of inmate calling services, and are likely not

recoverable in end-user rates. The Order’s use of the term “likely” is

unremarkable. It simply reflects the obvious proposition that specific cases

may pose special considerations.

d. The FCC’s determination that site commissions, as a category, are

not recoverable through interstate inmate calling rates was reasonable. The

provider-petitioners contend that commission payments are a “real” cost of

providing service, rather than an apportionment of profit between providers

and correctional facilities. To whatever extent site commissions may be a

cost to inmate calling providers, they remain an unreasonable cost to pass

through to consumers. As a category, they bear no necessary relationship to

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the cost of providing a communication service. In establishing just,

reasonable, and fair rates, the FCC has the undoubted authority to exclude

unjust, unreasonable, and unfair costs.

2.

The FCC’s interim hard caps are reasonable and reasonably

explained. The FCC fully accounted for high-cost providers and facilities

when calculating the caps, and it was reasonable to apply the caps on a

uniform basis while the agency continues to consider the possibility of

adopting tiered pricing for the future. Likewise, there was nothing improper

in the FCC’s use of averaged and industry composite data to derive the caps,

nor was any other aspect of the agency’s methodological approach flawed.

Finally, the Order flexibly accommodates providers with especially high

costs, including by affording them the option to seek a waiver.

3.

The interim safe-harbor caps are likewise reasonable and

reasonably explained. As when setting the interim hard caps, the FCC

reasonably accounted for high-cost providers and facilities and permissibly

employed averaged data. The provider-petitioners’ remaining criticisms of

the agency’s methodological choices are unfounded. As the expert agency,

the FCC plainly had the discretion to determine what aspects of the data

before it seemed most persuasive. And quibbles about the precise safe-harbor

caps the FCC adopted are particularly misplaced when providers with higher

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costs are free to charge rates up to the hard caps (with the possibility of a

waiver beyond that).

4.

The Court should likewise reject the provider-petitioners’

challenge to the FCC’s requirement that ancillary charges be cost based. The

FCC’s authority under the Communications Act extends not only to inmate

calling, but to the provision of “ancillary services.” 47 U.S.C. § 276(d); see

also id. § 201(b) (granting the FCC authority to regulate “charges . . . in

connection with . . . communication service[s]”). As should have been

obvious to any interested party, regulating ancillary charges is a necessary

aspect of ensuring just, reasonable, and fair interstate inmate calling rates.

Otherwise, any limit on rates could easily be evaded by an increase in

ancillary fees. In any event, the FCC’s 2012 Notice included specific

requests for comment on ancillary charges, and the record reflects that

interested parties understood the agency might regulate such charges.

5.

The Court should also reject the petitioners’ claim that the Order

unlawfully infringes the power of state and local authorities to manage their

correctional facilities and budgetary affairs. The FCC has statutory authority

to ensure that rates for interstate inmate calling services are just, reasonable,

and fair. See 47 U.S.C. §§ 201(b), 276(b)(1)(A), (d). Furthermore, Congress

has provided that FCC rules ensuring fair rates “shall preempt” any

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“inconsistent” state requirements. Id. § 276(c). That state and local

governments and correctional facilities have opted to generate revenue and

fund unrelated programs through site commissions, which unreasonably drive

up inmate calling rates, in no way undermines the FCC’s statutory powers. In

any event, the Order does not bar inmate calling providers from having

“arrangements” with correctional facilities “that include site commissions,”

Order ¶ 56 (JA __)—only from passing the cost of commissions through to

consumers in interstate rates. Nor does the Order limit how correctional

facilities may spend commissions they receive. And the Order expressly

provides for recovery of security costs related to inmate calling services.

6. Finally, the Order does not abrogate contracts between inmate

calling providers and correctional facilities; it merely regulates the charges

that providers may impose on consumers. In many cases, providers may be

able to satisfy their existing contracts within the confines of the FCC’s rules,

or to revisit or amend those contracts under change-of-law provisions or

otherwise. Regulation often affects third-party arrangements, and such

arrangements have no power to constrain the FCC’s authority to act under

statute. Indeed, when necessary, the agency has the power to override

contracts that contravene the public interest.

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STANDARD OF REVIEW

The petitioners bear a heavy burden to establish that the FCC’s Order

is “arbitrary, capricious, [or] an abuse of discretion.” 5 U.S.C. § 706(2)(A).

Under this “highly deferential” standard, the Order is entitled to a

presumption of validity. E.g., Cellco P’ship v. FCC, 357 F.3d 88, 93 (D.C.

Cir. 2004). The Court must reject the petitioners’ challenges to the Order

unless the agency failed to consider relevant factors or made a clear error in

judgment. E.g., Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co.,

463 U.S. 29, 43 (1983).

Because “ratemaking is far from an exact science and involves policy

determinations in which the [FCC] is acknowledged to have expertise, courts

are particularly deferential when reviewing ratemaking orders.” Sw. Bell Tel.

Co. v. FCC, 168 F.3d 1344, 1352 (D.C. Cir. 1999) (quotation marks omitted);

see Ass’n of Oil Pipe Lines v. FERC, 83 F.3d 1424, 1431 (D.C. Cir. 1996).

The same is true “in matters implicating predictive judgments and interim

regulations.” Rural Cellular Ass’n v. FCC, 588 F.3d 1095, 1105 (D.C. Cir.

2009).

Insofar as the petitioners challenge the FCC’s interpretation of the

agency’s organic statute—including the agency’s view of the scope of its

jurisdiction—the Court applies the framework of Chevron, U.S.A., Inc. v.

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Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). E.g., City of

Arlington, Texas v. FCC, 133 S. Ct. 1863, 1868 (2013).

ARGUMENT

Section 201(b) of the Communications Act authorizes the FCC to

adopt “rules and regulations . . . necessary” to ensure that “[a]ll charges [and]

practices . . . for and in connection with” interstate telecommunications

services are “just and reasonable.” 47 U.S.C. § 201(b). Section 276 of the

Act additionally empowers the FCC to regulate both “the provision of inmate

telephone service in correctional institutions, and any ancillary services.” Id.

§ 276(d). The FCC is responsible under Section 276(b)(1)(A) for ensuring

that all payphone service providers—including inmate calling providers—are

“fairly,” not excessively, “compensated for . . . call[s] using their

payphone[s].” Id. § 276(b)(1)(A).

The Order and the rules it enacts are a firmly grounded exercise of this

statutory authority. Drawing upon policy judgments and “complex industry

analyses” of a kind this Court has repeatedly recognized lie within an

agency’s expertise, e.g., Association of Oil Pipe Lines, 83 F.3d at 1431, the

FCC reasonably concluded that the market’s failure to constrain rates for

inmate calling services created a pressing need for reform and warranted

immediate (if “long overdue”) action, Order ¶ 8 (JA __). At the same time,

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the agency appropriately recognized that its “work . . . is not done,” id., and

set about collecting additional data and public comment to craft more

permanent reforms, see id. ¶¶ 124–126 (JA __–__); Further Notice ¶¶ 128–

179 (JA __–__).

More specifically, after comprehensive review of a voluminous record,

the FCC determined in the Order that inmate calling rates “in far too many

cases greatly exceed the reasonable costs of providing service.” Order ¶ 3

(JA __). One “significant factor driving . . . excessive rates,” the agency

determined, are “site commission[s]” that inmate calling providers pay

correctional facilities “to win the exclusive right to provide inmate phone

service.” Id. Site commissions can account for nearly 90 percent of

consumer rates, see id. 34 (JA __), and they fund a host of non-call-related

expenses: “everything from inmate welfare to salaries and benefits, states’

general revenue funds, and personnel training,” id. ¶ 3 (JA __); see id. ¶ 34

(JA __).

Seeking to reduce a significant burden on the ability of inmates to

communicate—which the record showed has fostered considerable social

harm—the FCC in the Order took steps to address the inmate calling

industry’s “most egregious interstate long distance[] rates and practices.”

Order ¶ 3 (JA __). At the same time, recognizing that inmate calling systems

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“include important . . . features . . . that advance . . . safety and security,” the

agency took care to “ensure[] that security features that are part of modern

[inmate calling services] continue to be provided and improved.” Id. ¶ 2

(JA __).

The FCC adopted its rate reforms on an “interim” basis. E.g., Order

¶ 5 (JA __); see id. ¶ 81 n.308 (JA __). To ensure a robust record on which to

craft final rules, the FCC adopted a one-time, mandatory data collection to

procure cost information of a more detailed and objective nature than inmate

calling providers had offered in response to the 2012 Notice. See id. ¶¶ 68,

75 n.278, 124–126 (JA __, __, __–__). The agency also issued a Further

Notice soliciting comment on additional actions the agency might take to

reform inmate calling services, see Further Notice ¶¶ 128–179 (JA __–__),

including modifications to the interim rate structure, see id. ¶¶ 153–162 (JA

__–__), regulation of intrastate rates in addition to interstate rates, see id.

¶ 154 (JA __), and “further rate reductions,” id. ¶ 152 (JA __).

For the time being, the FCC adopted a multifaceted approach to

reforming interstate inmate calling rates. First, the agency required that those

rates and any ancillary charges “be based only on costs that are reasonably

and directly related to the provision of [inmate calling services].” 47 C.F.R.

§ 64.6010 (Order App. A (JA __)). The Order provides detailed guidance on

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the application of that rule, including “twenty specific examples of cost

categories that the [FCC] would likely find compensable,” such as security

costs, and eight cost categories, including site commissions, “that it would

not.” Stay Denial Order ¶ 19 (JA __) (citing Order ¶ 53 nn.196, 198 (JA __–

__)).2

Second, the FCC adopted a three-part framework of interim interstate

rate limitations, giving inmate calling providers three choices: A provider

may set rates at or below safe-harbor levels and receive a presumption that

those rates are lawful, as well as immunity from liability for refunds if the

rates are later proven unjustified in a complaint proceeding. See Order ¶ 60

(JA __). Alternatively, a provider may set its rates at or below the FCC’s

higher interim hard caps, in which case it foregoes the presumption of

lawfulness and the protection from refunds if its costs are later challenged and

found not to justify its rates. See id. ¶¶ 73–81 (JA __–__). Finally, a

provider that believes its costs justify rates above the interim hard caps may

seek a waiver to charge higher rates. See id. ¶¶ 82–83 (JA __–__).

2 Although site commissions, as general matter, are not a cost category that is

recoverable in interstate rates under the Order, the FCC noted “that some

portion of [commission] payments . . . may, in certain circumstances,

reimburse correctional facilities for their costs of providing [inmate calling

services]”—which would be compensable. Order ¶ 54 n.203 (JA __).

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Particularly given the agency’s broad discretion to formulate interim

rules while considering more permanent solutions to a regulatory problem

upon a more developed record, e.g., Rural Cellular, 588 F.3d at 1105; accord

In re FCC 11-161, __ F.3d __, __, 2014 WL 2142106, at *122 (10th Cir.

2014), the Court should uphold the Order and the FCC’s lawful and

reasonable three-part rate structure. The Court should likewise uphold the

Order’s requirement that ancillary charges be cost-based, reject the

petitioners’ claim that the Order unlawfully infringes state and local

authority, and uphold the FCC’s decision not to exempt existing inmate

calling contracts from the Order’s reach.

I. THE COST-BASED RULE IS LAWFUL.

The provider-petitioners argue that the FCC gave insufficient notice of

its intent to adopt the cost-based rule (47 C.F.R. § 64.6010), see Br. 16–22,

which they assert amounts to rate-of-return regulation, see id. at 18, 22–25.

Neither proposition is correct. The Court should likewise reject the provider-

petitioners’ theories (echoed by the corrections-petitioners) that the Order

gives insufficient guidance concerning costs recoverable under the cost-based

rule, see Br. 25–26; Corrections Br. 31, and that the FCC ignored “real costs”

of providing inmate calling services, Br. 26; see Corrections Br. 26, 28.

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A. The Rule Is a Logical Outgrowth of the 2012 Notice.

The APA requires agencies to publish a notice of proposed rulemaking

containing “either the terms or substance of the proposed rule or a description

of the subjects and issues involved” in a rulemaking proceeding. 5 U.S.C.

§ 553(b)(3) (emphasis added). Accordingly, “an agency may issue rules that

do not exactly coincide with the proposed rule so long as the final rule is [a]

‘logical outgrowth’ of the proposed rule.” Fertilizer Inst. v. EPA, 935 F.2d

1303, 1311 (D.C. Cir. 1991). A rule is not a logical outgrowth of a prior

notice only if the variation between the two is “so major that the original

notice did not adequately frame the subjects for discussion.” Omnipoint

Corp. v. FCC, 78 F.3d 620, 631 (D.C. Cir. 1996) (quotation marks omitted).

Accordingly, the logical outgrowth standard is satisfied so long as it was

“reasonably foreseeable” the agency would take the action it did. Long Is.

Care at Home, Ltd. v. Coke, 551 U.S. 158, 175 (2007); see Covad Commc’ns

Co. v. FCC, 450 F.3d 528, 548 (D.C. Cir. 2006).

Here, the 2012 Notice proposed a “per-minute rate cap approach” to

“ensure just and reasonable rates . . . consistent with sections 201 and 276 of

the [Communications] Act.” 2012 Notice ¶ 20 (JA __). The FCC made clear

that it was not committed to any single way of accomplishing that goal,

asking, for example: “If the [FCC] decides to implement rate caps in the

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[inmate calling] market[,] how should we? What additional data, if any, does

the [agency] require to set rates? . . . We seek comment on the best ways to

determine just and reasonable caps for [inmate calling] rates.” Id. ¶ 23

(JA __).

The FCC also specifically asked “whether the criteria used to develop

the . . . caps [proposed in the Alternative Wright Petition] are appropriate.”

2012 Notice ¶ 17 (JA __). In addition to the rate caps proposed in the

Alternative Wright Petition, moreover, the FCC had before it the Wright

petitioners’ 2003 proposal that the agency create a “safe harbor” interstate

rate cap, First Wright Petition 19 (JA __), with the opportunity for inmate

calling providers to charge higher rates if they “could show that [their] costs

justified” doing so, id. at 20 (JA __); see 2012 Notice ¶ 1 (JA __).

As well as seeking comment on the Wright petitioners’ proposed rate

caps and possible variants, the FCC solicited comment in the 2012 Notice on

other proposals in the record. See Order ¶ 59 & n.222 (JA __–__). For

example, before the FCC issued the 2012 Notice, one commenter had

proposed that the agency “rely on facility-specific [inmate calling] cost

evaluations” when instituting rate reforms. Id. ¶ 59 n.222 (JA __) (citing

GEO Group Comments 10–11 (JA __ –__), CC Docket No. 96-128 (May 2,

2007)). The FCC sought comment on that proposal in the 2012 Notice,

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inquiring: “Would a rate cap approach require the [agency] to conduct rate

cases, as some commenters suggest?” 2012 Notice ¶ 23 (JA __); see Order

¶ 59 n.222 (JA __).

The agency likewise sought comment on a rate methodology proposed

in 2008 by a group of inmate calling providers that included two of the

provider-petitioners—Securus Technologies, Inc. (Securus) and CenturyLink

Public Communications, Inc. (CenturyLink, then called Embarq). See Inmate

Calling Services Interstate Call Cost Study 21 (JA __), CC Dkt. 96-128 (Aug.

15, 2008) (2008 Provider Proposal); 2012 Notice ¶ 25 (JA __); see also Order

¶ 59 & n.222 (JA __) (citing the FCC’s request for comment on “costs studies

intended to provide a basis for [new] rates”). The providers themselves

characterized that proposal as providing “cost information” to enable the FCC

“to develop cost-based rate levels and rate structures.” Id. ¶ 79 (JA __)

(quoting 2008 Provider Proposal 2 (JA __) (emphasis omitted)); accord id.

¶ 78 n.288 (JA __); see also 2012 Notice ¶ 25 (JA __) (asking whether the

2008 Provider Proposal was supported by “sufficient cost, demand, and

revenue detail to allow the [agency] to determine whether the proposed rates

[were] just and reasonable”).

More generally, the FCC made clear in the 2012 Notice that it would

consider implementing a cost-based rate regime. See Order ¶ 59 n.222

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(JA __). The agency asked, for example “whether [existing inmate calling]

rates accurately reflect the costs of providing [inmate calling services] and

whether site commission payments are a reasonable cost of providing [inmate

calling services] that therefore should be recovered in the [inmate calling]

rates [that] inmates are charged.” 2012 Notice ¶ 7 (JA __). Elsewhere, the

FCC inquired whether the “data supporting the First Wright Petition, the

Alternative Wright Petition and the [2008 Provider Proposal]” were sufficient

to support the rates those submissions proposed. Id. ¶ 44 (JA __); see Stay

Denial Order ¶ 9 n.43 (JA __).

The 2012 Notice, moreover, was not issued on a blank slate. The

background precedent relevant to the proceeding was clear: Although “[t]he

FCC is not required to establish purely cost-based rates,” it must “specially

justify any rate differential that does not reflect cost.” Competitive

Telecomms. Ass’n v. FCC, 87 F.3d 522, 529 (D.C. Cir. 1996); accord Access

Charge Reform, Second Order on Reconsideration and Memorandum

Opinion and Order, 12 FCC Rcd 16606, 16619–20 ¶ 44 (1997) (“[T]he just

and reasonable rates required by Sections 201 and 202 of the

Communications Act must ordinarily be cost-based, absent a clear

explanation of the [FCC’s] reasons for a departure from cost-based

ratemaking.” (citation omitted)); see also Farmers Union Cent. Exch., Inc. v.

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FERC, 734 F.2d 1486, 1502 (D.C. Cir. 1984) (“[E]ach deviation from cost-

based pricing [must be] found not to be unreasonable and to be consistent

with the Commission’s [statutory] responsibility.” (quoting Mobil Oil Corp.

v. FPC, 417 U.S. 283, 308 (1974) (second and third alterations in original)).

As a result, parties interested in inmate calling reform (particularly

sophisticated entities like the provider-petitioners) would have had every

reason to understand, even apart from the multitude of indications in the 2012

Notice itself, that the FCC might codify a cost-based rate requirement for

interstate inmate calling. See Order ¶ 59 n.222 (JA __); see also Alina

Health Servs. v. Sebelius, 746 F.3d 1102, 1109 (D.C. Cir. 2014) (noting that

“proposed rules . . . obscure to the average reader” may yet adequately “alert

members of the regulated class”).3

Moreover, interested parties did in fact anticipate the agency might

implement a cost-based system. See Order ¶ 59 n.222 (JA __). CenturyLink,

for example, encouraged the FCC to adopt a system that would enable inmate

3 The provider-petitioners contend that “[t]his Court and the [FCC] itself have

often held that market-based rates are just and reasonable irrespective of

costs.” Br. 21. But the decisions upon which they rely involve markets that

were found to be competitive. E.g., Orloff v. FCC, 352 F.3d 415, 421 (D.C.

Cir. 2003). They have no bearing when, as here, there is a clear market

failure. See, e.g., Farmers Union, 734 F.2d at 1510 (holding that the FERC

could not lawfully rely on market prices to reflect “just and reasonable” rates

“[w]ithout empirical proof” that “existing competition would ensure” that

result).

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calling providers “to recover the[ir] costs . . . as well as a sufficient return.”

CenturyLink Comments 5 (JA __), WC Docket No. 12-375 (Mar. 25, 2013);

see also id. at 6 (JA __) (“Rate structures that generally align with the manner

in which costs are incurred are just and reasonable . . . .”). Similarly, Securus

stated that “rates set by the [FCC] must include a reasonable profit after

accounting for the costs that the carrier incurs in providing service.” Securus

Comments 7 (JA __), WC Docket No. 12-375 (Mar. 25, 2013).

Advocating for a form of “benchmark” rate cap, the National

Association of State Utility Consumer Advocates urged the FCC to “declare

that rates for interstate [inmate] calls are unjust and unreasonable to the extent

the rates exceed the reasonable costs of providing [inmate calling services],

including a reasonable return.” National Association of State Utility

Consumer Advocates Comments 4 (JA __), WC Docket No. 12-375 (Mar. 25,

2013). The organization recommended that its proposed rate cap “be without

prejudice,” “in a particular case,” “to any party’s ability to argue that a higher

or lower rate is in fact just and reasonable.” Id. at 6 (JA __). In other words,

the organization advocated that the FCC adopt a rate-cap approach but permit

both providers and consumers to argue, in individual cases, that the rate cap

was too low or too high based on the provider’s costs—much as the agency

eventually did. See Order ¶ 59 nn.222, 224 (JA __–__).

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Conversely, other parties that anticipated the FCC might adopt cost-

based rates sought to discourage the agency from doing so. For example,

inmate calling provider Telmate, LLC (Telmate), an intervenor here, tried to

dissuade the agency from “undertak[ing] the massive job of conducting

formal rate cases for each [inmate calling] provider at each correctional

facility location.” Telmate Reply Comments 9 n.19 (JA __), WC Docket No.

12-375 (Apr. 22, 2013). Likewise, the Wright petitioners, opposing the

particular cost-based methodology advocated in the 2008 Provider Proposal,

submitted an expert declaration that characterized “[c]ost-based rate

regulation” as “a second-best attempt to approximate the outcome of a

competitive market.” Wright Petitioners’ Comments, Exh. C 28 (JA __), WC

Docket No. 12-375 (Mar. 25, 2013).

These submissions further illustrate that the FCC gave interested

parties adequate notice of the possibility of a cost-based rule. See, e.g., N.E.

Md. Waste Disposal Auth. v. EPA, 358 F.3d 936, 952 (D.C. Cir. 2004) (per

curiam) (rejecting a notice challenge when the record revealed that multiple

parties had in fact anticipated the possibility of the agency’s action).

B. The Rule Does Not Impose Rate-of-Return Regulation.

The provider-petitioners repeatedly assert that the cost-based rule

constitutes unjustified “rate-of-return” regulation. Br. 18, 22–25. That is

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incorrect. A rate-of-return regime involves “a prescribed rate of return, ex

ante review [of rates by the FCC], tariff filings, [and] compliance with cost

accounting rules.” Order ¶ 53 n.195 (JA __). Rate-of-return carriers are

subject to complex regulations set forth in four lengthy and intricate parts of

the FCC’s rules. See Stay Denial Order ¶ 10 (JA __). They must use the

“Uniform System of Accounts in Part 32” of the rules, allocate “costs

between regulated and non-regulated categories pursuant to Part 64,” separate

“costs between interstate and intrastate jurisdictions under the Part 36 rules,”

and apportion “interstate costs to the appropriate services using the Part 69

rules.” Id.

In sharp contrast, under the interim regime established in the Order,

inmate calling providers may set their rates at or below the safe-harbor rate

caps—or even the hard caps—without prior FCC review, without reference to

the rules governing rate-of-return carriers, and without a need to cost-justify

their rates until and unless they are subject to a complaint or agency

enforcement proceeding (in which context they have always been subject to

an obligation to justify costs, irrespective of the Order). See Order ¶ 53

n.195 (JA __); Br. 21.

The provider-petitioners’ claim that the FCC was required to provide

good reasons for choosing to impose “rate-of-return regulation,” see Br. 22–

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25, is thus a straw man. The FCC did no such thing, and the agency need not

justify a choice it has not made.

In any event, how to label the rule is beside the point. For the reasons

we have explained, see supra pp. 19–23, the interim rate structure

implemented in the Order, including the cost-based rule, is a firmly grounded

exercise of the FCC’s authority to ensure that rates for interstate inmate

calling services are just, reasonable, and fair. And the cost-based rule is a

“logical outgrowth” of the issues laid out in the 2012 Notice. See supra

pp. 24–30. The APA requires nothing more. See 5 U.S.C. § 553(b)(3)

(requiring agencies to provide notice of the “substance of [a] proposed rule or

a description of the subjects and issues involved” in the rulemaking

proceeding).

C. The Order Gives Reasonable and Appropriately Detailed

Guidance on Recoverable Costs.

The provider-petitioners contend that the FCC failed to give adequate

guidance on what costs are and are not recoverable under the cost-based rule.

See Br. 25–26. On the contrary, the Order gives ample guidance on

recoverable costs.

To begin with, the Order provides that rates set at or below the safe-

harbor levels contained in 47 C.F.R. § 64.6020 “are presumptively in

compliance with § 64.6010.” 47 C.F.R. § 64.6020(a) (Order App. A

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(JA __)); see Order ¶¶ 69, 119–20 (JA __, __–__). There is nothing

amorphous about that standard. Although providers could theoretically be

forced to change those rates through a complaint proceeding under 47 U.S.C.

§ 208, succeeding on such a challenge would be “difficult,” as the FCC’s

Wireline Competition Bureau has explained, Stay Denial Order ¶ 13 (JA __);

see id. ¶ 45 (JA __), and any resulting rate change would be prospective only,

see Order ¶¶ 59 n.224, 120 (JA __, __).

Nor is there anything unclear about the rule for providers that elect not

to use the safe harbors. The Order provides “twenty specific examples of

cost categories that the [FCC] would likely find compensable and eight

examples of costs that it would not.” Stay Denial Order ¶ 19 (JA __) (citing

Order ¶ 53 nn.196, 198 (JA __–__)). The Order specifies, for example, that

recoverable cost categories include “the cost of capital (reasonable return on

investment); expenses for originating, switching, transporting, and

terminating [inmate] calls; and costs associated with security features relating

to the provision of [inmate calling]”—including advanced security features.

See Order ¶ 53 & n.196 (JA __).4 Unrecoverable categories include “costs of

4 Thus, contrary to assertions of the corrections-petitioners, see Corrections

Br. 42–44, the Order plainly permits the recovery of security costs related to

inmate calling services, see Order ¶¶ 53, 58 (JA __, __), including advanced

security features, see id. ¶ 53 n.196 (JA __). Moreover, in calculating the

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nonregulated service, costs relating to general security features of the

correctional facility unrelated to [inmate calling], and costs to integrate

inmate calling with other services, such as commissary ordering, internal and

external messaging, and personnel costs to manage inmate commissary

accounts.” Order ¶ 53 (JA __). “[S]ite commission payments” generally

may not be recovered, id., except to the extent they may “reimburse

correctional facilities for their costs of providing [inmate calling services],”

id. ¶ 54 n.203 (JA __).

Should specific questions arise concerning the application of this

guidance, agency staff routinely “works with providers to help guide them

through the implementation” of new rules. Stay Denial Order ¶ 20 (JA __).

Particularly for a temporary rate regime, the possibility that there might arise

some future need for additional guidance does not make the cost-based rule

impermissibly imprecise. See, e.g., Shays v. FEC, 528 F.3d 914, 930 (D.C.

Cir. 2008) (recognizing that an “agency is entitled to broad deference in

interim safe-harbor and hard caps, the FCC relied on data that it expressly

found to incorporate the cost of advanced security features. See id. ¶ 58

(JA __). The FCC further found that the costs of providing secure inmate

calling services are decreasing and will continue to do so, due in part to

increased automation and centralization of security features. See id. ¶¶ 29, 71

(JA __, __). Accordingly—in a reasonable exercise of expert, predictive

judgment—the FCC concluded that its “reforms will not impact security or

innovation in the [inmate calling] market.” Id. ¶ 71 (JA __); Consumer Elecs.

Ass’n v. FCC, 347 F.3d 291, 300–01 (D.C. Cir. 2003). That judgment

warrants considerable deference. E.g., Rural Cellular, 588 F.3d at 1105.

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picking the suitable level” of specificity when it implements a rule, and that

“there is no basis for suggesting that the agency has a statutory duty to

promulgate regulations that . . . address every conceivable question”

(quotation marks omitted)).

Nor does the fact that the Order uses the term “likely” when

identifying compensable cost categories undermine the FCC’s guidance. See

Br. 26 (citing Order ¶ 53 & n.196 (JA __)); Corrections Br. 31 (same). That

language merely reflects the fact that the Order sets forth an interim

framework for rates; the Order need not and does not resolve particular cases,

or determine the compensability of specific costs in precise circumstances. In

other words, the language reflects the fact that the guidance is just that, and

not a case-specific adjudication.

The fact that the cost-based rule forms part of an interim rate structure

similarly explains the FCC’s decision (about which the provider-petitioners

also complain) not to prescribe a firm threshold for what constitutes a

reasonable return on investment, see Br. 26 (citing Order ¶ 54 n.203 (JA__)),

or dictate the manner in which inmate calling providers must “apportion their

costs between interstate and intrastate calls,” id. at 26 n.30 (quotation marks

omitted) (citing Order ¶ 53 n.195 (JA __)). Inmate calling providers are well

positioned to know their costs of capital and of providing ancillary services,

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and they “routinely distinguish between interstate and intrastate costs and

traffic in the normal course of business, for example, to accurately price and

monitor the different services they offer.” Stay Denial Order ¶ 21 (JA __).

The FCC’s decision “to allow providers to utilize their existing accounting

systems and conventions” for an interim period, id. ¶ 19 (JA __), while the

agency collects further data and public comment to refine its rules, in no way

diminishes the reasonableness of the cost-based rule.

D. The FCC Reasonably Concluded That Site Commissions

Are Not a Compensable Category of Costs.

The provider-petitioners next challenge the FCC’s determination that

site commissions are not, “as a category[,] . . . a compensable component of

interstate [inmate calling] rates,” Order ¶ 56 (JA __), arguing that such

commissions are “real costs” of providing inmate calling services that the

agency has ignored, Br. 26, 29.5

As this Court has stated, “a common test for the lawfulness of rates is

their connection to the reasonably-incurred costs of providing the regulated

service.” NARUC v. FERC, 475 F.3d 1277, 1280 (D.C. Cir. 2007). Agencies

5 Both the provider-petitioners and the corrections-petitioners also challenge

the Order and its treatment of site commissions on a theory that the agency

has unlawfully infringed state and local authority. See Br. 27–28; Corrections

Br. 22–39. We explain separately why the Court should reject that challenge.

See infra Part V.

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routinely and appropriately “disallow recovery of costs imprudently

incurred.” Id.; see also NAACP v. FPC, 425 U.S. 662, 666–69 (1976)

(holding that the Federal Power Commission’s statutory authority to

“establish ‘just and reasonable’ rates” gave the agency “ample authority” to

prevent a regulatee from charging consumers for “unnecessary or illegitimate

costs” that the regulatee might incur through “racially discriminatory

employment practices”).

Here, the FCC first determined, in accordance with its longstanding

view, that site commissions are “an apportionment of profit” between inmate

calling providers and correctional facilities. Order ¶ 54 (JA __); see id. ¶ 54

& nn.199–200 (JA __) (citing 2002 Order, 17 FCC Rcd at 3254–55, 3262–63

¶¶ 15, 38). As the agency explained, although they “may not be ‘profits’ to

[inmate calling] providers in the sense that [the providers] can keep these

excess revenues and use them for whatever purpose they like, they are excess

revenues above costs nonetheless.” Id. ¶ 55 (JA __).

Even if viewed as costs, the FCC found that site commissions “are not

costs that are reasonably and directly related to the provision of [inmate

calling services],” because the payments are used “for a wide range of

purposes, most or all of which have no reasonable and direct relation to the

provision of [inmate calling].” Order ¶ 54 (JA __); accord id. ¶ 55 (JA __).

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Facilities very often use the site commissions they collect to fund

ordinary corrections-related activities and expenses such as “employee

salaries and benefits, equipment, building renewal funds, . . . and personnel

training.” Order ¶ 34 & n.132 (JA __); see Corrections Br. 11 n.3. There are

also a number of jurisdictions in which large portions, or even all, of the site

commissions that correctional facilities collect are treated as general

governmental revenue. See Order ¶ 3 n.13 (JA __) (noting that

“commissions paid to the [Massachusetts] Department of Correction are

transferred to the General Fund of the Commonwealth”); see also Wright

Petitioners’ Reply Comments, WC Docket No. 12-375, Exh. H (JA __, __–

__, __–__) (Apr. 22, 2013) (identifying Fla. Stat. § 945.215(b) (2012), Tex.

Gov’t Code Ann. § 495.027 (2012), and Wis. Stat. § 3[01].105 (2013) as

allocating all or a substantial portion of site-commission payments to the

general fisc). The petitioners stress—as the Order acknowledges, e.g., Order

¶ 34 (JA __)—that some correctional facilities use portions of the

commissions they collect to fund inmate welfare programs, see Br. 27;

Corrections Br. 25–26. But even inmate welfare programs have no necessary

connection to the provision of inmate calling services. See Order ¶¶ 54–55

(JA __–__).6

6 The corrections-petitioners assert that some facilities use portions of the site

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The Communications Act grants the FCC express authority to ensure

that charges for telecommunications services are “just and reasonable,” 47

U.S.C. § 201(b), and that payphone services providers, including inmate

calling providers, are “fairly” compensated for calls, id. § 276(b)(1)(A); see

Ill. Pub. Telecomms. Ass’n v. FCC, 117 F.3d 555, 566 (D.C. Cir.) (holding

that the fair-compensation requirement of Section 276(b)(1)(A)

unequivocally applies to inmate payphones), supplemented by 123 F.3d 693

(D.C. Cir. 1997). It was entirely reasonable for the agency to determine that

site commissions, which typically bear no reasonable relation to the provision

of inmate calling services—but which can account for nearly 90 percent of

end-user rates, see Order ¶ 34 (JA __)—are as a category not compensable

costs under the cost-based rule, e.g., id. ¶ 56 (JA __). As the agency

reasonably determined, the Communications Act is not “a mechanism for

commissions they collect “to defray the costs of providing calling services,”

including security costs. Corrections Br. 26; see id. at 28. The record before

the FCC neither established nor “foreclose[d]” that “possibility.” Order ¶ 54

n.203 (JA __); see id. ¶ 57 n.213 (JA __). Accordingly, although the agency

did not deem site commissions, as a category, a compensable cost of

providing inmate calling services, see id. ¶¶ 53–58 (JA __–__), the agency

did allow some leeway: To the extent commission payments reimburse a

correctional facility for costs reasonably related to the provision of inmate

calling services, a provider may recover those portions of its payments in

end-user rates. See id. ¶ 54 n.203 (JA __).

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funding social welfare programs unrelated to the provision of [inmate calling

services], no matter how successful or worthy.” Id. ¶ 57 (JA __).7

II. THE INTERIM HARD CAPS ARE REASONABLE AND

REASONABLY EXPLAINED.

The petitioners claim that by electing to apply the interim hard caps to

inmate calling services at all types of correctional facilities, and thereby (the

petitioners contend) ignoring evidence of variation in costs among facilities,

the FCC violated the APA. See Br. 30–37; Corrections Br. 39–41. The

petitioners also challenge the hard caps as “[t]ainted by [m]ethodological

[f]laws.” Br. 37; see id. at 37–40; Corrections Br. 44. Their claims do not

withstand examination.

A. The FCC Reasonably Concluded That Most Inmate

Calling Providers Can Recover Their Costs within

Uniformly Applicable Hard Caps.

In calculating the interim hard caps, the FCC took care to account for

high-cost providers and facilities. See Order ¶¶ 76–80 (JA __–__). The

agency derived the caps using the record submissions that reflected the

highest costs: data from inmate calling provider Pay Tel Communications,

Inc. (Pay Tel) for debit calls, and from the 2008 Provider Proposal for collect

calls. See Order ¶¶ 76–78 (JA __–__). As the Order states, “Pay Tel serves

7 The provider-petitioners challenge the FCC’s annual reporting requirement

(47 C.F.R. § 64.6060) on the sole basis that it “hinge[s]” on the cost-based

rule. Br. 29. Because the cost-based rule is lawful, that challenge fails.

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jails exclusively, which are generally smaller and which providers claim are

more costly to serve than prisons.” Id. ¶ 77 (JA __). Likewise, the FCC

found that “smaller, potentially higher-cost facilities [were] over-represented

in the data . . . sample” used in the 2008 Provider Proposal. Id. ¶ 80 (JA __).

For numerous other reasons as well, the agency believed the data on which it

relied were likely to overstate providers’ actual service costs. See id. ¶¶ 77,

80 (JA __–__). Given the record before it, the FCC reasonably predicted it

would be “rare” that an inmate calling provider could not recover its costs

within the hard caps. Id. ¶ 74 (JA __); see also id. ¶ 119 (JA __) (predicting

that the “vast majority of providers” would be able to recover their costs

within even the lower safe harbors).

The provider-petitioners contend that the decision of agency staff to

grant Pay Tel a waiver discredits the FCC’s judgment. See Br. 34–35. In

seeking a waiver, however, Pay Tel did not dispute that its average costs of

providing interstate inmate calling services fall within the interim hard caps.

See Rates for Interstate Inmate Calling Services; Pay Tel Communications,

Inc.’s Petition for Waiver of Interim Interstate ICS Rates, Order, 29 FCC Rcd

1302, 1305, 1308–09 ¶¶ 6, 11 (JA __, __) (Wireline Competition Bur. 2014)

(Pay Tel Waiver Order). Rather, Pay Tel obtained its waiver on a showing

that state laws prevented the company from recovering its costs on intrastate

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inmate calling services—which, under the interim hard caps, meant Pay Tel

would operate at a loss at the holding company level. See id. at 1308–

11 ¶¶ 11, 15, 18 (JA __–__); accord Br. 36.

The provider-petitioners also contend that, under the FCC’s interim

hard caps, some providers “may cease providing [services] altogether at the

highest cost facilities they serve.” Br. 36. The FCC considered that objection

but found it unpersuasive. See Order ¶ 70 (JA __). Instead, the agency

concluded that regulation of interstate inmate calling services would not

“negatively impact . . . providers generally,” or “curtail[] . . . access” to

inmate calling services. Id. As the FCC explained, that finding “is supported

by the fact that many state departments of correction make [inmate calling

services] available . . . at rates lower than those . . . implement[ed in the

Order] and nonetheless operate in a safe, secure, and profitable manner.” Id.;

see id. ¶ 70 & n.263 (JA __) (citing evidence showing rates lower than the

safe-harbor caps in New Mexico, New York, Missouri and other states); see

also id. ¶¶ 63 & n.235, 65 & n.238 (citing evidence of rates approximating

$0.04–$0.05 per minute). The agency’s predictive judgment that inmate

calling providers will continue to offer service under the hard caps was a

reasonable exercise of the agency’s expertise in this area, which is entitled to

deference. E.g., Rural Cellular, 588 F.3d at 1105.

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Nor did the FCC ignore “unrebutted evidence” that costs vary among

facilities, as the provider-petitioners argue. Br. 30. In the 2012 Notice, the

FCC specifically requested information concerning “differences between

correctional facilities[,] including size, location, security levels, facility age

and staffing levels [that might] not allow a one size fits all solution.” 2012

Notice ¶ 22 (JA __); see id. ¶¶ 23, 25, 28 (JA __, __, __–__). Inmate calling

providers, however, offered “conflicting assertions as to what [the relevant]

distinctions [might] be.” Order ¶ 81 (JA __); see Further Notice ¶ 159

(JA __). Notably, the provider-petitioners do not contend the available record

was sufficient to sustain any particular tiered pricing scheme. See Br. 30–34.

They suggest only that the FCC should have “defer[red] action” altogether

until amassing better data. See Br. 32 n.36.

As the Order explains, the agency is “not required to defer action until

it can assemble perfect data, where, as here, it faces clear evidence of

widespread unreasonable [inmate calling] charges.” Order ¶ 81 n.308

(JA __). Unreasonably high rates were an urgent problem that had for too

long gone unaddressed. Under the circumstances, the agency reasonably

elected to act, on an interim basis, relying on the “only available data.”

Vonage Holdings Corp. v. FCC, 489 F.3d 1232, 1243 (D.C. Cir. 2007).

“[H]owever imperfect,” the available record was sufficient to support the

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FCC’s adoption of uniform hard caps while the agency collects further data to

craft more permanent reforms. Id.; see Am. Pub. Commc’ns Council v. FCC,

215 F.3d 51, 56 (D.C. Cir. 2000) (recognizing that the FCC “necessarily

enjoys broad discretion to attempt to formulate a solution to the best of its

ability on the basis of available information” (quotation marks omitted)).8

B. In Setting the Hard Caps, the FCC Reasonably

Considered Averaged, Per-Minute Costs.

The provider-petitioners also claim that the FCC’s decision to adopt

uniform hard caps was arbitrary and capricious because “average per-minute

[inmate calling] costs” for some providers “at some facilities” may exceed

hard-cap levels. Br. 31; see id. at 33, 35. The provider-petitioners stop

conspicuously short of claiming they cannot operate profitably under the

caps. See Br. 35–36. Instead, they appear to contend that the FCC’s

approach is arbitrary unless the caps permit providers to recover their costs at

each and every correctional facility they serve.

Contrary to that contention—and as this Court has recognized—“the

Supreme Court has affirmed ratemaking methodologies employing composite

industry data or other averaging methods on more than one occasion.”

8 Providers are required to submit detailed cost data to the FCC for this

purpose by August 18, 2014. See Rates for Interstate Inmate Calling

Services, Order, 29 FCC Rcd __, __ ¶ 5, 2014 WL 3427430, at *2 (Wireline

Competition Bur. 2014).

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Southwestern Bell, 168 F.3d at 1352; see FPC v. Texaco, Inc., 417 U.S. 380,

387 (1974); In re Permian Basin Area Rate Cases, 390 U.S. 747, 769 (1968).

Likewise, this Court has upheld the FCC’s calculation of rates to be paid by

long-distance companies to private payphone owners on the basis of average

call volume. See APCC, 215 F.3d at 54.

As the Order explains, “[i]t would not be possible, much less practical”

to require the agency to tailor rate caps in the “exquisitely granular” manner

the provider-petitioners desire. Order ¶ 62 n.230 (JA __). “Some averaging

of costs must occur, and there is no logical reason that it must occur at the

facility level.” Id. ¶ 123 (JA __). And “[i]t is a given that when a regulatory

pricing structure is established” on an industry-wide basis, “providers subject

to those rates will serve higher and lower cost customers.” Stay Denial Order

¶ 31 (JA __).

Indeed, as the FCC found, inmate calling providers—like many

telecommunications providers—routinely use uniform rates to serve

customers “with differing cost . . . characteristics.” Order ¶ 76 n.280 (JA __–

__). A cost study that Securus submitted, for example, “shows that the per

minute rates Securus charges for its . . . group of [smallest] facilities are

significantly below the per-minute costs Securus identified for those

facilities.” Stay Denial Order ¶ 32 (JA __); see also Order ¶ 81 n.301

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(JA __) (paraphrasing a statement by Telmate’s chief executive officer that

“even if a provider may under-recover at some facilities, it may over-recover

at others”); Br. 37 (confirming that providers at least “occasionally provide

service at facilities at rates below costs”).

The form of the cost data that inmate calling providers submitted to the

record is consistent with the FCC’s finding. Cost data that Pay Tel submitted,

for example, averaged costs across all of the facilities the company serves.

See Order ¶¶ 75–76 (JA __–__). Similarly, the 2008 Provider Proposal

“submitted a single set of costs” for the seven participating providers,

“regardless of the differing sizes of the correctional institutions they served.”

Id. ¶ 81 (JA __).

On this record, the provider-petitioners are mistaken to invoke Petal

Gas Storage, LLC v. FERC, 496 F.3d 695 (D.C. Cir. 2007). See Br. 38 n.41.

That case involved a challenge to a FERC decision to include natural gas

distribution companies in a proxy group to determine the cost of capital for

natural gas pipeline companies, when the agency had previously excluded gas

distribution companies from gas pipeline proxy groups. See Petal Gas, 496

F.3d at 699. Here, by contrast, there is no basis in the record that would

compel the FCC to analyze data from subgroups of correctional facilities

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separately. It was entirely reasonable for the FCC to rely on averaged and

industry composite data that inmate calling providers themselves supplied.

C. The Hard Caps Are Otherwise Methodologically Sound.

The petitioners fail to show that the interim hard caps are

methodologically flawed in any other respect, either. See Br. 37–40;

Corrections Br. 44.

First, the FCC cannot be faulted for relying on the 2008 Provider

Proposal’s calculation of collect-call costs using data from 25, as opposed to

28, of the correctional facilities that the participating providers included in

that study. See Br. 38–39. The 2008 Provider Proposal itself presented data

based on this sample of 25 facilities. See 2008 Provider Proposal 4 (JA __).

Although the study also contained data from an expanded sample of 28

facilities, the additional facilities were exceedingly small—as the Wright

petitioners emphasized before the agency—with “a total of only 20 . . . lines”

among them, “or less than seven lines each,” and for that reason “certainly

should not be considered in a Cost Study used to calculate average costs.”

Wright Petitioners’ Ex Parte Notice, Exh. A 8 (JA __), CC Docket No. 96-

128 (Dec. 23, 2008) (Dawson Report). By contrast, the other 25 facilities in

the proposal had, “on average, . . . 22 lines” each. Id. Given the evidence

that the additional facilities included as an alternative in the 2008 Provider

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Proposal were “outliers,” it was well within the FCC’s discretion to exclude

them from consideration. See Flying J, Inc. v. FERC, 363 F.3d 495, 498

(D.C. Cir. 2004); see also Z-Tel Commc’ns v. FCC, 333 F.3d 262, 272 (D.C.

Cir. 2003) (holding that “the weight of the evidence . . . [is] a matter

peculiarly within the province of the [FCC]”).

Nor is it true that the FCC “ignored . . . record evidence” that the 2008

Provider Proposal “is based on understated costs in other respects.” Br. 39.

The author of the 2008 Provider Proposal did assert that even though the

study used “data for several small jail locations,” “low volume, high cost

location[s]” were “likely to be statistically underrepresented.” 2008 Provider

Proposal 15 (JA __); see Br. 40. But the FCC reasonably disagreed, finding

that—even with respect to the 25-facility data—“smaller, potentially higher-

cost facilities [were] over-represented in the data submission’s sample, as

compared with the national distribution of sizes of correctional facilities.”

Order ¶ 80 (JA __); see also Dawson Report 8 (JA __) (explaining that the

low number of inmate phone lines “shows that, on average, these are small

facilities”). Regarding an assertion that Securus made in a 2011 ex parte

letter that its costs had increased “by more than 16%” since the 2008 Provider

Proposal, Br. 40 (citing Securus Comments, Exh. 5 (JA __)), that claim was

wholly unsubstantiated, and Securus made no attempt to relate it to interstate

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collect calls (the category of calls for which the FCC used the 2008 Provider

Proposal), see Securus Comments, Exh. 5 (JA __–__). There was no basis

for the Order to address it. See Covad, 450 F.3d at 550 (holding that “[t]he

FCC need not address every comment” when it “respond[s] in a reasoned

manner to those that raise significant problems”).9

Finally, the corrections-petitioners are mistaken to claim that the

interim hard cap for collect calls “is unreasonably low when compared to

non-inmate, interstate collect calling offered to the public.” Corrections Br.

44. That argument improperly relies on two rate schedules, see id. at 44 &

nn.6–7, that the Mississippi and South Dakota Departments of Corrections

have previously conceded were not in the record before the FCC at the time

of the Order, see Reply in Support of Mot. of Miss. Dep’t of Corrections and

S.D. Dep’t of Corrections for Stay Pending Judicial Review 8 (Dec. 23,

2013). And even had the record established higher rates for “non-inmate

interstate collect calling,” Corrections Br. 44, the corrections-petitioners do

not attempt to show that the costs per call for collect calls outside the inmate

calling context is comparable to the costs of such calls in correctional

9 We note as well that even crediting the assertion that Securus’s costs have

increased since 2008 (which the FCC had no basis to do), Securus’s average

per-minute costs at the facilities for which it has provided data are only

$0.044—well below safe-harbor levels, let alone the hard caps. See Order

¶ 75 & n.277 (JA __).

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institutions, where—unlike in the non-inmate market—demand for services

of necessity remains robust.

D. The Order Provides Flexibility, Including a Waiver

Process, for Providers with Good Cause to Charge

Higher Rates.

The interim hard caps are particularly reasonable in view of the

considerable degree of flexibility the Order permits inmate calling providers

in setting rates at the facilities they serve. For one, while the FCC rejected

the notion that a provider could justify its costs “on the basis of a single

facility it serves,” the Order specifically allows a provider to base its cost

justification on “groupings” of facilities that “reflect reasonably related cost

characteristics.” Order ¶ 123 (JA __). And the agency’s waiver process

offers a further safety valve should an inmate calling provider that has

especially high costs (or faces other unusual circumstances) be unable to

operate profitably, at the holding company level, within the hard caps. See id.

¶¶ 73 n.270, 82 & n.309, 83 (JA __, __, __).

This Court has long recognized that a “safety valve procedure for

consideration of an application for exemption based on special

circumstances” supports the FCC’s “discretion to proceed in difficult areas

through general rules.” WAIT Radio v. FCC, 418 F.2d 1153, 1157 (D.C. Cir.

1969); see also Rural Cellular, 588 F.3d at 1100, 1104 (rejecting a challenge

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to an interim cap on universal-service subsidies to competitive carriers in part

because carriers could obtain an exemption by submitting cost data to

justify it).

To be sure, as the Order explains, the FCC “expect[s]” that waivers

will be received only to “account for extraordinary circumstances,” because

the interim hard caps are set at “conservative levels.” Order ¶ 83 (JA __); see

also id. ¶ 74 (JA __) (predicting that only “the rare provider” would have

costs justifying above-cap rates). But that expectation hardly means that the

waiver process is not a viable avenue of relief. See 47 C.F.R. § 1.3

(permitting waiver of FCC rules “for good cause shown”); Keller Commc’ns,

Inc. v. FCC, 130 F.3d 1073, 1076 (D.C. Cir. 1997) (citing WAIT Radio).

Indeed, as the provider-petitioners acknowledge, see Br. 35, the FCC has

already granted a waiver to inmate calling provider Pay Tel, see Pay Tel

Waiver Order, 29 FCC Rcd at 1302 ¶ 1 (JA __). The flexible nature of the

agency’s rate structure—including the waiver process—provides a further

reason to sustain the hard caps.10

10 The provider-petitioners’ reliance on Home Box Office, Inc. v. FCC, 567

F.2d 9, 50 (D.C. Cir. 1977) (per curiam), which evaluated FCC rules

regulating pay programming on cable television “without reference to”

waiver provisions, is misplaced. See Br. 33. The provider-petitioners

construe HBO to mean the Court must ignore the existence of a waiver

mechanism if the agency will not grant waivers liberally. See id. This Court

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III. THE INTERIM SAFE-HARBOR CAPS ARE

REASONABLE AND REASONABLY EXPLAINED.

As with the interim hard caps, the petitioners challenge the interim

safe-harbor caps on the basis that they apply uniformly to all types of

correctional facilities, see Br. 40; Corrections Br. 39–42, and derive from data

that reflect averaging, see Br. 42. Those arguments fail for the reasons

already set forth. See supra pp. 40–47.11 The provider-petitioners’ several

additional methodological challenges to the safe harbors, see Br. 40–43, are

also unavailing.

The FCC based its interim safe-harbor rates on 2012 inmate calling

data submitted by the Human Rights Defense Center—a nonprofit inmate

advocacy organization—that covered “virtually all of the state departments of

corrections in the country.” Order ¶ 61 (JA __). For purposes of the interim

has never construed HBO so broadly and should not do so now. In HBO, this

Court dismissed the significance of specific waiver provisions not just

because the FCC was on record that it would not “freely grant waivers,” but

more importantly because the agency’s waiver procedures, in the context of

rules subject to intermediate First Amendment scrutiny, did not comport with

applicable constitutional requirements. 567 F.2d at 50.

11 As when calculating the hard caps, the FCC accounted for high-cost

providers and facilities in calculating the safe-harbor caps, adopting a

“conservative” approach “to account for the fact that there may be cost

variances among correctional facilities.” Order ¶ 62 (JA __); see id. ¶¶ 63

n.235, 64 n.237 (JA __–__) (including data from two state departments of

corrections that evidence indicated were high-cost outliers).

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safe-harbor caps, the agency found “most relevant” a subset of that data

limited to “seven states that have excluded site commission payments from

their rates.” Id. ¶ 62 (JA __). It found that the more limited subset

“provide[d] a reasonable basis for establishing a conservative proxy for cost-

based rates.” Id.

“[C]alculating the average per-minute interstate [inmate calling] debit

and prepaid call rates of the seven identified state departments of

corrections,” the agency determined that the average rate for a 15-minute

debit call was $0.1186 per minute, and the average rate for a 15-minute

prepaid call was $0.1268 per minute. Id. ¶ 63 (JA __). “Given the

similarities of debit and prepaid charges,” the FCC “group[ed] the two into a

single category,” and obtained an overall per-minute average of $0.1227,

which it rounded to $0.12 per minute. Id. Using the same data and the same

methodology, the agency derived an average rate for interstate inmate collect

calls to be $0.1411 per minute, which it rounded to $0.14 per minute. See id.

¶ 64 (JA __).

“Other data in the record further validate that the interim interstate safe

harbor rates are just, reasonable, and fair.” Order ¶ 65 (JA __). The $0.12

per minute safe-harbor rate for debit and prepaid calls is “higher than rates

currently charged [at] several state departments of corrections without site

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commissions,” and “is at or above the rate that would result if site

commissions were deducted from the rates in ten states that allow them.” Id.;

see id. ¶ 65 nn.238–239 (JA __). Likewise, “there are nine states” that allow

site commissions where rates, excluding those commissions, are within the

$0.14 per minute safe-harbor rate for collect calls. Id. ¶ 65 (JA __). The

Order also notes that the interim safe-harbor rates “closely approximate” the

rates for prepaid and collect calling for detainees at U.S. Immigration and

Customs Enforcement facilities. Id.

As a threshold matter, the provider-petitioners’ several challenges to

the methodology the FCC employed in deriving the interim safe harbors all

suffer a common failing: They ignore the underlying nature of the caps. The

safe harbors protect providers that charge below their limits, but they do not

bind any provider with costs that exceed them. See Order ¶ 69 (JA __).

More specifically, the provider-petitioners mistakenly complain that in

two of the seven states the FCC used to construct the safe-harbor caps—

Michigan and Rhode Island—inmate calling rates exceed safe-harbor levels.

See Br. 42. As we have explained, see supra pp. 44–47, averaging cost data

is an unexceptional ratemaking practice. And as the FCC reasonably

determined, because the record evidence “does not suggest a dramatic

difference in costs among states (and, indeed, such states may be served by

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the same [inmate calling] provider using common, centralized facilities),” the

higher calling rates in those states “are likely to include” costs bearing no

relationship to inmate calling services. See Order ¶ 63 n.235 (JA __); see id.

(also noting that a statistical analysis of the variance of the two states’ rates

suggests they are anomalous); accord id. ¶ 64 n.237 (JA __). Even so, “in the

interest of being conservative,” the agency included those rates when

calculating the safe-harbor caps. Id. ¶ 64 n.235 (JA __).

The FCC reasonably declined to base its safe-harbor rates on cost and

revenue data submitted by Securus and CenturyLink. See Br. 41. As the

Order explains, the agency did so because “Securus did not provide the

disaggregated data used to derive the report’s total cost results, and the data it

submitted did not distinguish between collect, debit, or prepaid calls.” Order

¶ 68 (JA __). Similarly, the agency did not rely on CenturyLink’s submission

because CenturyLink did not provide the “underlying data” or “a description

of its methodology,” and also did not distinguish “between debit, prepaid, and

collect calling costs.” Id. Although the rate data from state departments of

corrections upon which the agency did rely may likewise not have

disaggregated costs, see Br. 41–42, those data—unlike the Securus and

CenturyLink submissions—were not selectively compiled for advocacy in the

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FCC’s proceeding and reflected actual, negotiated agreements with inmate

calling providers, see Order ¶ 62 (JA __).

Nor is it the case, as the provider-petitioners claim, that the FCC failed

to explain adequately why it excluded California when analyzing data from

states that have eliminated site commissions from their rates. See Br. 42–43.

The Order makes clear that although California’s inmate calling rates do not

include site-commission payments in precisely the same fashion as many

other states, California’s rates reflect “the costs of significant in-kind

contributions” analogous to site commissions “that, under [the state’s]

contract, the [inmate calling] provider is required to make.” Order ¶ 62 n.228

(JA __).12

The provider-petitioners also object to the FCC’s decision to “round

down” from the average rate data to construct the precise interim safe-harbor

caps the agency adopted. See Br. 43. But the agency’s application of

standard rules for mathematical simplification, especially in the context of a

12 California’s publicly available contract, which is cited in the Order, e.g.,

Order ¶ 76 n.280 (JA __), shows that required contributions include the

provision of a system to ensure “continuous blocking of all unauthorized

cellular wireless communications” and a “Contract Administration Fee of

$800,000,” State of California, California Technology Agency, IWTS/MASS

Agreement No. OTP 11-126805, available at

https://www.prisonphonejustice.org/CA/ca-contract-with-gtl-2012-2018-part-

1/ (last visited July 20, 2014) (JA __).

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safe harbor, was entirely reasonable. As the FCC explained, there was ample

evidence in the record to establish that the safe-harbor rates, even as rounded,

were “just, reasonable, and fair.” Order ¶ 65 (JA __); see Beethoven.com

LLC v. Librarian of Congress, 394 F.3d 939, 949 (D.C. Cir. 2005) (upholding

the decision of the Librarian of Congress to round down a rate for sound-

recording performance).

For all of these reasons, the interim safe-harbor caps are reasonable and

reasonably explained.13

IV. THE FCC’S REGULATION OF ANCILLARY CHARGES

WAS LAWFUL.

As a “necessary aspect” of the FCC’s “cost-based reforms,” Order ¶ 91

n.338 (JA __), the Order requires “[a]ncillary service charges,” in addition to

inmate calling rates, to be “cost-based” and “reasonably and directly related

to [the] provision of [inmate calling services],” id. ¶ 91 (JA __– __).

13 In addition to challenging the methodological underpinnings of the interim

safe-harbor caps, the provider-petitioners assert that the rule codifying those

caps (47 C.F.R. § 64.6020) “hinge[s]” on the cost-based rule and cannot

survive without it. Br. 29. As we have explained, there is no basis for the

Court to vacate the cost-based rule. See supra pp. 23–40. Moreover—as the

provider-petitioners appear to acknowledge, see Br. 21—even without the

cost-based rule, inmate calling rates are subject to cost-based challenges

under the FCC’s existing complaint process, e.g., Stay Denial Order ¶ 12

(JA __). Accordingly, independent of the cost-based rule, the safe-harbor

caps offer meaningful protections (and corresponding incentives) for inmate

calling providers. E.g., supra p. 9. The safe-harbor rule thus is severable.

See Order ¶ 127 (JA __).

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Interested parties are permitted to challenge ancillary charges through the

complaint process established by the Order, and inmate calling providers will

have the burden of demonstrating that their ancillary charges are “just,

reasonable, and fair.” Id. ¶ 92 (JA __).

The provider-petitioners claim that the FCC lacked jurisdiction to

regulate ancillary charges, see Br. 45, and that the agency failed to give

adequate notice it might do so, see id. at 44. Neither contention is persuasive.

A. The FCC Has Statutory Authority to Regulate Ancillary

Charges.

The FCC’s authority to regulate charges that are ancillary to inmate

calling services is firmly grounded in the Communications Act. The

payphone services that are subject to regulation under Section 276 of the Act

are expressly defined to include not only “the provision of inmate telephone

service in correctional institutions,” but also “any ancillary services.” 47

U.S.C. § 276(d). Likewise, Section 201(b) of the Act requires that “all

charges . . . in connection with . . . communication service[s] . . . be just and

reasonable.” Id. § 201(b). As the Order explains, “[t]he services associated

with . . . ancillary charges are ‘in connection with’” inmate calling services

within the meaning of Section 201(b), and are “ancillary” under Section 276.

Order ¶ 91 (JA __). The agency’s view warrants Chevron deference. See

City of Arlington, 133 S. Ct. at 1874–75.

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The provider-petitioners contend that ancillary charges “are entirely

outside and independent of inmate [calling].” Br. 45. That is plainly

incorrect. Ancillary charges, the FCC explained, are “non-call related

charges” that are imposed on users “to make [inmate] calls.” Order ¶ 90

(JA __); see id. (identifying, as examples, charges “to set up or add money to

a debit or prepaid account, . . . or to deliver calls to a wireless number”

(footnote omitted)). The provider petitioners contend that ancillary charges

fall outside the FCC’s authority because they are “assessed on . . . financial

transactions.” Br. 45. Regardless of that characterization, because ancillary

charges are closely intertwined with the provision of inmate calling services,

they fall squarely within the agency’s statutory grant.

B. The FCC Gave Adequate Notice It Might Regulate

Ancillary Charges.

Although the 2012 Notice did not use the term “ancillary charges,” it

did include requests for comment that were specifically directed to non-call

charges imposed on consumers to use inmate calling services. The 2012

Notice asked questions, for example, regarding “how to handle monthly fees;

how to load an inmate’s account; and minimum required account balance.”

2012 Notice ¶ 33 (JA __). And in doing so, the agency specifically referred to

comments in the record that addressed ancillary charges. See id. ¶ 33 &

n.106 (JA __). The 2012 Notice also sought comment on “any proposals in

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the record” that it had not expressly described. Id. ¶ 35 (JA __). The record

at the time contained a number of proposals asking the agency “to address

excessive fees for ancillary services.” Order ¶ 91 n.338 (JA __).14

In any event, as the FCC reasonably found, “regulating ancillary

charges” is “a necessary aspect of” any effective approach to ensuring just,

reasonable, and fair inmate calling rates. Order ¶ 91 n.338 (JA __).

“[O]therwise providers could simply increase their ancillary charges to offset

lower rates” under the agency’s rules. Id. Even apart from the specific

references in the 2012 Notice to such charges, it was thus “reasonably

foreseeable” to interested parties that inmate calling rate reform would carry

with it protections relating to excessive ancillary charges. Long Island Care,

551 U.S. at 175. The record in fact reflects that “commenters properly

understood that ancillary charges were part of the cost-based reform being

considered.” Order ¶ 91 n.338 (JA __) (citing Wright Petitioners’ Comments

14 For example, the American Bar Association had urged the FCC to

“prohibit[]” ancillary charges that “dramatically increase the cost of

communicating with” inmates but that “do not appear as part of the cost of

the call reflected on a telephone bill.” Letter from Director, American Bar

Association, to Secretary, FCC, at 2 n.4 (JA __–__), CC Docket No. 96-128

(Jan. 15, 2009). The record similarly included a request that the agency

“close the door to mechanisms that would allow prison phone service

providers to inflate service fees that unfairly and unjustifiably increase the

price of prisoner phone calls.” Ex Parte Presentation of Michael S. Hamden

14–15 (JA __–__), CC Docket No. 96-128 (Oct. 29, 2008); see also Order

¶ 91 n.338 (citing these and other proposals).

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3, 24–27 (JA __, __–__), WC Docket No. 12-375 (Mar. 25, 2013); Telmate

Reply Comments 3 (JA __); and Pay Tel Reply Comments 2–3 & n.6 (JA __–

__), WC Docket No. 12-375 (Apr. 22, 2013)).

V. THE ORDER DOES NOT UNLAWFULLY INFRINGE

STATE OR LOCAL AUTHORITY.

Apart from their specific criticisms of the Order, both sets of

petitioners mount a broad-brush challenge to the FCC’s authority to reform

inmate calling rates on the ground that the Order “intrud[es] on the

prerogatives of state and local authorities to manage their prisons and related

budgetary affairs.” Corrections Br. 21; see id. at 22–39; Br. 27–28. Indeed,

the corrections-petitioners claim that by restricting the ability of inmate

calling providers to pay site commissions, the Order “tramples on” the ability

of state and local authorities to make prison-management and budgetary

decisions. Corrections Br. 27; see id. at 27–30; accord Br. 27–28.

In putting forth these claims, the petitioners conspicuously ignore the

authority that Congress has expressly vested in the FCC to regulate interstate

telecommunications generally and inmate calling services in particular. The

Communications Act grants the FCC jurisdiction over “all interstate

. . . communication by wire or radio,” 47 U.S.C. § 152(a), and declares

“unlawful” all “unjust or unreasonable” rates for interstate service, id.

§ 201(b). The Act also authorizes the FCC to regulate “the provision of

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inmate telephone service in correctional institutions,” id. § 276(d), directs the

agency to adopt regulations to ensure that providers are “fairly compensated,”

id. § 276(b)(1)(A), and provides that the FCC’s regulations “shall preempt”

“State requirements [that] are inconsistent,” id. § 276(c). The FCC

reasonably determined that to permit “costs unrelated to the provision of

[inmate calling services], no matter how . . . worthy,” would be inconsistent

with the agency’s statutory charge to ensure that interstate inmate calling

charges are just, reasonable, and fair. Order ¶ 57 (JA __).

It is well settled that the FCC’s authority is not diminished “simply

because a regulatory action has . . . consequences” on parties beyond the

agency’s jurisdiction. Cable & Wireless P.L.C. v. FCC, 166 F.3d 1224, 1230

(D.C. Cir. 1999). Thus, a rate-regulating agency has “indisputable authority

to disallow recovery of costs imprudently incurred by jurisdictional firms,”

even when such a “conventional exercise[] of [the agency’s] jurisdiction”

might “impinge as a practical matter on the behavior of non-jurisdictional

[entities].” NARUC, 475 F.3d at 1280.

The corrections-petitioners contend that where consequences for state

and local government are at issue, a “clear statement” of congressional intent

is necessary. Corrections Br. 32–33. To the extent that requirement is

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applicable here, Congress has made its intent to vest authority over inmate

calling services unmistakable. See 47 U.S.C. § 276(c), (d).

In addition, the Order neither bars inmate calling providers from

continuing to pay site commissions out of their profits, nor restricts how

correctional facilities spend such payments. E.g., Order ¶¶ 55 n.205, 56

(JA __, __). Instead the Order simply provides that site-commission

payments, as a category, are not recoverable as a cost of interstate inmate

calling rates. See id. ¶ 56 (JA __). And as the corrections-petitioners

acknowledge, see Corrections Br. 29, the FCC’s reforms to date have no

effect at all on the ability of correctional institutions to collect site

commissions on intrastate calls—which constitute the vast majority of inmate

calling services, see Further Notice ¶ 131 & n.444 (JA __).

The corrections-petitioners are likewise incorrect to contend that the

interim rate caps “fail to account for” security costs and as a result are

“unreasonably low.” Corrections Br. 30; see id. at 30–31. As we have

explained, see supra note 4, the Order and the rates were expressly designed

to allow for recovery of “costs associated with security features relating to the

provision of [inmate calling services].” E.g., Order ¶ 53 (JA __); see id. ¶ 58

(JA __). The corrections-petitioners’ assertion to the contrary is baseless and

belied by the record.

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VI. THE FCC REASONABLY CHOSE NOT TO EXEMPT

EXISTING CONTRACTS.

The Order contains no exemption from the rules it enacts for existing

contracts between inmate calling providers and correctional facilities. The

corrections-petitioners contend that the Order therefore unlawfully

“abrogates” those contracts in violation of Regents of University System v.

Carroll, 338 U.S. 586 (1950). Corrections Br. 45; see id. at 45–46. The

provider-petitioners argue that the FCC’s failure to exempt existing contracts

was arbitrary and capricious. See Br. 46–48. Neither theory is correct.

A. The Order Does Not Abrogate Existing Contracts,

Although It Lawfully Could Have Done So.

To begin with, as the Order explains, the reforms adopted in the Order

do not abrogate inmate calling providers’ contracts with correctional

facilities; the FCC has merely regulated “the relationship between

. . . providers and end users.” Order ¶ 100 (JA __). It may be that many

providers can continue to satisfy the terms of their contracts with facilities

and at the same time comply with the FCC’s rate reforms. See supra p. 63.

Nothing in the Order “directly overrides such contracts.” Order ¶ 100

(JA __).

By the same token, however, agreements between inmate calling

providers and correctional facilities “cannot trump the [FCC’s] authority to

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enforce the requirements of the Communications Act to protect those users

within the [FCC’s] jurisdiction.” Order ¶ 101 (JA __). Thus, some

agreements may have to be “revisited or amended,” id., under “change of law

provisions” or otherwise, id. ¶ 102 (JA __). If that is the case, it will only be

“because [such] agreements cannot supersede the [FCC’s] authority to ensure

that” inmate calling rates are “fair, just, and reasonable.” Id. ¶ 101 (JA __).

As this Court recognized in upholding the FCC’s rules requiring wireless

telephone companies to offer “roaming agreements” governing the provision

of mobile data to other providers, “the third party impact” of FCC rules that

“dictate[] certain interactions between [regulated entities] and third parties . . .

differs in kind from the . . . issue at stake in Carroll.” Cellco P’ship v. FCC,

700 F.3d 534, 543 (D.C. Cir. 2012).

Indeed, even under Carroll, the FCC is free to require a party within its

jurisdiction to repudiate contracts with third parties that the agency deems

against the public interest. See 338 U.S. at 601–02. Carroll merely

establishes the uncontroversial point that in doing so, the FCC cannot

immunize the party it regulates from state-law remedies. See id. at 588, 602;

Cellco, 700 F.3d at 543 (“[Carroll] holds only that the [FCC] lacks authority

to invalidate licensees’ contracts with third parties and to abrogate state-law

contract remedies.” (emphasis added)).

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Similarly, under the “Mobile-Sierra doctrine,” an agency may modify

an established contract rate when doing so is “required by the ‘public

interest’” and “the changes are just, reasonable, and nondiscriminatory.”

E. Ky. Power Co-op, Inc. v. FERC, 489 F.3d 1299, 1309 (D.C. Cir. 2007). In

view of the long history of excessive charges for inmate calling services—

resulting in rates far out of compliance with the requirement of just,

reasonable, and fair rates under the Communications Act, with profoundly

detrimental social consequences—the FCC reasonably found that existing

rates violated the public interest. See Order ¶ 101 n.365 (JA __); Stay Denial

Order ¶ 25 (JA __). The agency thus had “authority under the Mobile-Sierra

doctrine to proscribe contractual arrangements that contravene the relevant

public interests.” Freeport-McMoRan Corp. v. FERC, 669 F.3d 302, 306

(D.C. Cir. 2012) (quotation marks omitted).

B. The FCC’s Decision Was Reasonable and Reasonably

Explained.

Contrary to the provider-petitioners’ claim, see Br. 46–48, the FCC’s

decision to apply its interim reforms to existing contracts was not arbitrary or

capricious. A number of commenters supported that choice. For example,

the National Association of State Utility Consumer Advocates warned that

grandfathering existing contracts “would only exacerbate the harm . . . to

inmates and their friends and relatives.” Order ¶ 99 n.361 (JA __). The

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Human Rights Defense Center opined that it would be unjust and

unreasonable to allow continued overcharges under existing contracts. Id.

¶ 99 n.361 (JA __). And even an inmate calling provider, Telmate, urged that

any new rules should apply to existing contracts. See id. Moreover, to

accommodate the operation of change-of-law provisions, as well as the

voluntary renegotiation or termination of existing contracts, the FCC

provided that its reforms would not take effect until 90 days after publication

in the Federal Register (which itself was not accomplished for a month after

the Order’s public release). See id. ¶ 102 (JA __).15

The petitioners assert that renegotiation may not always be an option—

for example in Texas, which is the only state the petitioners have identified as

statutorily requiring that correctional facilities collect site commissions. See

Br. 48; Corrections Br. 30.16 If inmate calling providers that serve

correctional facilities in Texas cannot recover their costs within the interim

rate caps, they may request a waiver or seek legislative change at the state

15 This Court’s order staying the cost-based and safe-harbor rules has given

parties even more time to adjust to the FCC’s rate reforms.

16 The provider-petitioners also cite Mississippi Code Annotated § 47-5-158.

Br. 27. That statute appears to authorize but not mandate the collection of

site commissions.

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level. E.g., Order ¶¶ 73 n.270, 82 & n.309, 83 (JA __, __– __); see Pay Tel

Waiver Order ¶ 1 (JA __).

CONCLUSION

The petition for review should be denied.

Respectfully submitted,

JONATHAN B. SALLET

GENERAL COUNSEL

DAVID M. GOSSETT

ACTING DEPUTY GENERAL

COUNSEL

JACOB M. LEWIS

ASSOCIATE GENERAL COUNSEL

/s/ Sarah E. Citrin

SARAH E. CITRIN

COUNSEL

FEDERAL COMMUNICATIONS

COMMISSION

WASHINGTON, DC 20554

(202) 418-1740

July 21, 2014

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IN THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

SECURUS TECHNOLOGIES, INC., ET AL.,

PETITIONERS,

NOS. 13-1280, 13-

v.

1281, 13-1291,

FEDERAL COMMUNICATIONS COMMISSION AND

13-1300, 14-1006

UNITED STATES OF AMERICA,

RESPONDENTS.

CERTIFICATE OF COMPLIANCE

Pursuant to the requirements of Fed. R. App. P. 32(a)(7), I hereby

certify that the accompanying Brief for the Federal Communications

Commission in the captioned case contains 15,571 words.

/s/ Sarah E. Citrin

Sarah E. Citrin

Counsel

Federal Communications Commission

Washington, DC 20554

(202) 418-1740 (Telephone)

(202) 418-2819 (Fax)

July 21, 2014

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ADDENDUM

47 U.S.C. § 201

47 U.S.C. § 276

47 C.F.R. § 64.6000

47 C.F.R. § 64.6010

47 C.F.R. § 64.6020

47 C.F.R. § 64.6030

47 C.F.R. § 64.6040

47 C.F.R. § 64.6050

47 C.F.R. § 64.6060

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47 U.S.C. § 201

UNITED STATES CODE ANNOTATED

TITLE 47. TELEGRAPHS, TELEPHONES, AND RADIOTELEGRAPHS

CHAPTER 5. WIRE OR RADIO COMMUNICATION

SUBCHAPTER II. COMMON CARRIERS

PART I. COMMON CARRIER REGULATION

§ 201. Service and charges

(a) It shall be the duty of every common carrier engaged in interstate or

foreign communication by wire or radio to furnish such communication

service upon reasonable request therefor; and, in accordance with the orders

of the Commission, in cases where the Commission, after opportunity for

hearing, finds such action necessary or desirable in the public interest, to

establish physical connections with other carriers, to establish through routes

and charges applicable thereto and the divisions of such charges, and to

establish and provide facilities and regulations for operating such through

routes.

(b) All charges, practices, classifications, and regulations for and in

connection with such communication service, shall be just and reasonable,

and any such charge, practice, classification, or regulation that is unjust or

unreasonable is declared to be unlawful: Provided, That communications by

wire or radio subject to this chapter may be classified into day, night,

repeated, unrepeated, letter, commercial, press, Government, and such other

classes as the Commission may decide to be just and reasonable, and

different charges may be made for the different classes of communications:

Provided further, That nothing in this chapter or in any other provision of

law shall be construed to prevent a common carrier subject to this chapter

from entering into or operating under any contract with any common carrier

not subject to this chapter, for the exchange of their services, if the

Commission is of the opinion that such contract is not contrary to the public

interest: Provided further, That nothing in this chapter or in any other

provision of law shall prevent a common carrier subject to this chapter from

Addendum-1

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47 U.S.C. § 201

furnishing reports of positions of ships at sea to newspapers of general

circulation, either at a nominal charge or without charge, provided the name

of such common carrier is displayed along with such ship position reports.

The Commission may prescribe such rules and regulations as may be

necessary in the public interest to carry out the provisions of this chapter.

Addendum-2

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47 U.S.C. § 276

UNITED STATES CODE ANNOTATED

TITLE 47. TELEGRAPHS, TELEPHONES, AND RADIOTELEGRAPHS

CHAPTER 5. WIRE OR RADIO COMMUNICATION

SUBCHAPTER II. COMMON CARRIERS

PART III. SPECIAL PROVISIONS CONCERNING BELL OPERATING

COMPANIES

§ 276. Provision of payphone service

(a) Nondiscrimination safeguards

After the effective date of the rules prescribed pursuant to subsection (b) of

this section, any Bell operating company that provides payphone service--

(1) shall not subsidize its payphone service directly or indirectly from its

telephone exchange service operations or its exchange access operations;

and

(2) shall not prefer or discriminate in favor of its payphone service.

(b) Regulations

(1) Contents of regulations

In order to promote competition among payphone service providers and

promote the widespread deployment of payphone services to the benefit of

the general public, within 9 months after February 8, 1996, the Commission

shall take all actions necessary (including any reconsideration) to prescribe

regulations that--

Addendum-3

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47 U.S.C. § 276

(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, except that emergency

calls and telecommunications relay service calls for hearing disabled

individuals shall not be subject to such compensation;

(B) discontinue the intrastate and interstate carrier access charge payphone

service elements and payments in effect on February 8, 1996, and all

intrastate and interstate payphone subsidies from basic exchange and

exchange access revenues, in favor of a compensation plan as specified in

subparagraph (A);

(C) prescribe a set of nonstructural safeguards for Bell operating company

payphone service to implement the provisions of paragraphs (1) and (2) of

subsection (a) of this section, which safeguards shall, at a minimum, include

the nonstructural safeguards equal to those adopted in the Computer Inquiry-

III (CC Docket No. 90-623) proceeding;

(D) provide for Bell operating company payphone service providers to have

the same right that independent payphone providers have to negotiate with

the location provider on the location provider's selecting and contracting

with, and, subject to the terms of any agreement with the location provider,

to select and contract with, the carriers that carry interLATA calls from their

payphones, unless the Commission determines in the rulemaking pursuant to

this section that it is not in the public interest; and

(E) provide for all payphone service providers to have the right to negotiate

with the location provider on the location provider's selecting and

contracting with, and, subject to the terms of any agreement with the

location provider, to select and contract with, the carriers that carry

intraLATA calls from their payphones.

Addendum-4

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47 U.S.C. § 276

(2) Public interest telephones

In the rulemaking conducted pursuant to paragraph (1), the Commission

shall determine whether public interest payphones, which are provided in the

interest of public health, safety, and welfare, in locations where there would

otherwise not be a payphone, should be maintained, and if so, ensure that

such public interest payphones are supported fairly and equitably.

(3) Existing contracts

Nothing in this section shall affect any existing contracts between location

providers and payphone service providers or interLATA or intraLATA

carriers that are in force and effect as of February 8, 1996.

(c) State preemption

To the extent that any State requirements are inconsistent with the

Commission's regulations, the Commission's regulations on such matters

shall preempt such State requirements.

(d) “Payphone service” defined

As used in this section, the term “payphone service” means the provision of

public or semi-public pay telephones, the provision of inmate telephone

service in correctional institutions, and any ancillary services.

Addendum-5

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47 C.F.R. § 64.6000

CODE OF FEDERAL REGULATIONS

TITLE 47. TELECOMMUNICATION

CHAPTER I. FEDERAL COMMUNICATIONS COMMISSION

SUBCHAPTER B. COMMON CARRIER SERVICES

PART 64. MISCELLANEOUS RULES RELATING TO COMMON

CARRIERS

SUBPART FF. INMATE CALLING SERVICES

§ 64.6000 Definitions.

As used in this subpart:

Ancillary charges mean any charges to Consumers not included in the

charges assessed for individual calls and that Consumers may be assessed

for the use of Inmate Calling Services. Ancillary Charges include, but are

not limited to, fees to create, maintain, or close an account with a Provider;

fees in connection with account balances, including fees to add money to an

account; and fees for obtaining refunds of outstanding funds in an account;

Collect calling means a calling arrangement whereby the called party agrees

to pay for charges associated with an Inmate Calling Services call

originating from an Inmate Telephone;

Consumer means the party paying a Provider of Inmate Calling Services;

Debit calling means a calling arrangement that allows a Consumer to pay for

Inmate Calling Services from an existing or established account;

Inmate means a person detained at a correctional institution, regardless of

the duration of the detention;

Inmate calling services means the offering of interstate calling capabilities

from an Inmate Telephone;

Addendum-6

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47 C.F.R. § 64.6000

Inmate telephone means a telephone instrument or other device capable of

initiating telephone calls set aside by authorities of a correctional institution

for use by Inmates;

Prepaid calling means a calling arrangement that allows Consumers to pay in

advance for a specified amount of Inmate Calling Services;

Prepaid collect calling means a calling arrangement that allows an Inmate to

initiate an Inmate Calling Services call without having a pre-established

billing arrangement and also provides a means, within that call, for the

called party to establish an arrangement to be billed directly by the Provider

of Inmate Calling Services for future calls from the same Inmate;

Provider of Inmate Calling Services, or Provider, means any

communications service provider that provides Inmate Calling Services,

regardless of the technology used.

Addendum-7

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47 C.F.R. § 64.6010

CODE OF FEDERAL REGULATIONS

TITLE 47. TELECOMMUNICATION

CHAPTER I. FEDERAL COMMUNICATIONS COMMISSION

SUBCHAPTER B. COMMON CARRIER SERVICES

PART 64. MISCELLANEOUS RULES RELATING TO COMMON

CARRIERS

SUBPART FF. INMATE CALLING SERVICES

§ 64.6010 Cost-based rates for inmate calling services.

All rates charged for Inmate Calling Services and all Ancillary Charges must

be based only on costs that are reasonably and directly related to the

provision of ICS.

Addendum-8

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47 C.F.R. § 64.6020

CODE OF FEDERAL REGULATIONS

TITLE 47. TELECOMMUNICATION

CHAPTER I. FEDERAL COMMUNICATIONS COMMISSION

SUBCHAPTER B. COMMON CARRIER SERVICES

PART 64. MISCELLANEOUS RULES RELATING TO COMMON

CARRIERS

SUBPART FF. INMATE CALLING SERVICES

§ 64.6020 Interim safe harbor.

(a) A Provider's rates are presumptively in compliance with § 64.6010

(subject to rebuttal) if:

(1) None of the Provider's rates for Collect Calling exceed $0.14 per

minute at any correctional institution, and

(2) None of the Provider's rates for Debit Calling, Prepaid Calling, or

Prepaid Collect Calling exceed $0.12 per minute at any correctional

institution.

(b) A Provider's rates shall be considered consistent with paragraph (a) of

this section if the total charge for a 15–minute call, including any per-call or

per-connection charges, does not exceed the appropriate rate in paragraph

(a)(1) or (2) of this section for a 15–minute call.

(c) A Provider's rates that are consistent with paragraph (a) of this section

will be treated as lawful unless and until the Commission or the Wireline

Competition Bureau, acting under delegated authority, issues a decision

finding otherwise.

Addendum-9

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47 C.F.R. § 64.6030

CODE OF FEDERAL REGULATIONS

TITLE 47. TELECOMMUNICATION

CHAPTER I. FEDERAL COMMUNICATIONS COMMISSION

SUBCHAPTER B. COMMON CARRIER SERVICES

PART 64. MISCELLANEOUS RULES RELATING TO COMMON

CARRIERS

SUBPART FF. INMATE CALLING SERVICES

§ 64.6030 Inmate calling services interim rate cap.

No provider shall charge a rate for Collect Calling in excess of $0.25 per

minute, or a rate for Debit Calling, Prepaid Calling, or Prepaid Collect

Calling in excess of $0.21 per minute. A Provider's rates shall be considered

consistent with this section if the total charge for a 15–minute call, including

any per-call or per-connection charges, does not exceed $3.75 for a 15–

minute call using Collect Calling, or $3.15 for a 15–minute call using Debit

Calling, Prepaid Calling, or Prepaid Collect Calling.

Addendum-10

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47 C.F.R. § 64.6040

CODE OF FEDERAL REGULATIONS

TITLE 47. TELECOMMUNICATION

CHAPTER I. FEDERAL COMMUNICATIONS COMMISSION

SUBCHAPTER B. COMMON CARRIER SERVICES

PART 64. MISCELLANEOUS RULES RELATING TO COMMON

CARRIERS

SUBPART FF. INMATE CALLING SERVICES

§ 64.6040 Rates for Telecommunications Relay Service (TRS) calling.

No Provider shall levy or collect any charge in addition to or in excess of the

rates for Inmate Calling Services or charges for Ancillary Charges for any

form of TRS call.

Addendum-11

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47 C.F.R. § 64.6050

CODE OF FEDERAL REGULATIONS

TITLE 47. TELECOMMUNICATION

CHAPTER I. FEDERAL COMMUNICATIONS COMMISSION

SUBCHAPTER B. COMMON CARRIER SERVICES

PART 64. MISCELLANEOUS RULES RELATING TO COMMON

CARRIERS

SUBPART FF. INMATE CALLING SERVICES

§ 64.6050 Billing-related call blocking.

No Provider shall prohibit or prevent completion of a Collect Calling call or

decline to establish or otherwise degrade Collect Calling solely for the

reason that it lacks a billing relationship with the called party's

communications service provider unless the Provider offers Debit Calling,

Prepaid Calling, or Prepaid Collect Calling.

Addendum-12

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47 C.F.R. § 64.6060

CODE OF FEDERAL REGULATIONS

TITLE 47. TELECOMMUNICATION

CHAPTER I. FEDERAL COMMUNICATIONS COMMISSION

SUBCHAPTER B. COMMON CARRIER SERVICES

PART 64. MISCELLANEOUS RULES RELATING TO COMMON

CARRIERS

SUBPART FF. INMATE CALLING SERVICES

§ 64.6060 Annual reporting and certification requirement.

(a) All Providers must submit a report to the Commission, by April 1st of

each year, regarding their interstate and intrastate Inmate Calling Services

for the prior calendar year. The report shall contain:

(1) The following information broken out by correctional institution; by

jurisdictional nature to the extent that there are differences among

interstate, intrastate, and local calls; and by the nature of the billing

arrangement to the extent there are differences among Collect Calling,

Debit Calling, Prepaid Calling, Prepaid Collect Calling, or any other type

of billing arrangement:

(i) Rates for Inmate Calling Services, reporting separately per-minute

rates and per-call or per-connection charges;

(ii) Ancillary charges;

(iii) Minutes of use;

(iv) The average duration of calls;

(v) The percentage of calls disconnected by the Provider for reasons

other than expiration of time;

(vi) The number of calls disconnected by the Provider for reasons other

than expiration of time;

Addendum-13

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47 C.F.R. § 64.6060

(2) A certification that the Provider was in compliance during the entire

prior calendar year with the rates for Telecommunications Relay Service

as required by § 64.6040;

(3) A certification that the Provider was in compliance during the entire

prior calendar year with the requirement that all rates and charges be

cost-based as required by § 64.6010, including Ancillary Charges.

(b) An officer or director from each Provider must certify that the reported

information and data are accurate and complete to the best of his or her

knowledge, information, and belief.

Addendum-14

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USCA Case #13-1280 Document #1503814 Filed: 07/21/2014 Page 94 of 96

IN THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

SECURUS TECHNOLOGIES, INC. et al.,

)

)

Petitioners, )

)

v.

) No. 13-1280 and

) consolidated cases

FEDERAL COMMUNICATIONS COMMISSION

)

and UNITED STATES OF AMERICA,

)

)

Respondents.

)

)

CERTIFICATE OF SERVICE

I, Sarah E. Citrin, hereby certify that on July 21, 2014, I electronically filed the

foregoing Brief for Federal Communications Commission with the Clerk of the

Court for the United States Court of Appeals for the D.C. Circuit by using the

CM/ECF system. Participants in the case who are registered CM/ECF users will

be served by the CM/ECF system.

Stephanie A. Joyce

Michael K. Kellogg

G. David Carter

Courtney S. Elwood

Arent, Fox LLP

Aaron M. Panner

1717 K Street, N.W.

John B. Ward

Washington, D.C. 20036

Kellogg Humber Hansen Todd

Counsel for: Securus Technologies,

Evans & Figel, PLLC

Inc.

1615 M Street, N.W., Suite 400

Washington, D.C. 20036

Counsel for: Global Tel*Link

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USCA Case #13-1280 Document #1503814 Filed: 07/21/2014 Page 95 of 96

Helgi C. Walker

Angela J. Campbell

Scott G. Stewart

Georgetown University Law Center

Philip S. Alito

Institute for Public Representation

Gibson, Dunn,& Crutcher

600 New Jersey Avenue, NW

1050 Connecticut Ave., N.W.

Suite 312

Washington, D.C. 20036

Washington, D.C. 20001

Counsel for: Mississippi Dept.

Counsel for: Intervenors

of Corrections & South Dakota

Dept. of Corrections

Robert B. Nicholson

Robert A. Long, Jr.

Daniel E. Haar

Matthew J. Berns

U.S. Department of Justice

Covington & Burling

Antitrust Division

1201 Pennsylvania Ave., N.W.

950 Pennsylvania Ave., N.W.

Washington, D.C. 20004

Room 3224

Counsel for: CenturyLink Public

Washington, D.C. 20530

Communications, Inc.

Counsel for: USA

C. Joseph Cordi, Jr.

Marcus W. Trathen

Senior Asst. Attorney General

Julia C. Ambrose

Office of Attorney General

Brooks, Pierce, McLendon,

323 Center Street, Suite 200

Humphrey & Leonard, LLP

Little Rock, AR 72201

1600 Wells Fargo Capitol Center

Counsel for: Arkansas Dept. 150 Fayetteville Street

Of Correction Post Office Box 1800

Raleigh, NC 27602

Matthew J. Murphy

Counsel for: Pay Tel Communications, Inc.

General Counsel

6000 Sheriff’s Place

Adam Proujansky

Bourne, MA 02532

Daniel A. Broderick

Counsel for: Barnstable County

DICKSTEIN SHAPIRO LLP

Sheriff’s Office

1825 Eye Street, N.W.

Washington, D.C. 20006

Counsel for: Telmate, LLC

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USCA Case #13-1280 Document #1503814 Filed: 07/21/2014 Page 96 of 96

Timothy J. Junk

Deputy Attorney General

302 West Washington Street

5th Floor

Indianapolis, IN 46204-2770

Counsel for: Indiana Dept. of

Correction

/s/ Sarah E. Citrin

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