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Mar 15, 2007

The Legal Line

Legal Line Special Feature: DAC, Both Sides of the “Coin”

Ed Maldonado

Over the past several years, I have reported on the rolling boil brewing between the payphone and the prepaid calling card industries as the FCC has continued to lay down rulings further defining Dial Around Compensation, its assessment, and collection. DAC is clearly an open wound for both prepaid and payphone providers alike, as it goes to fundamental costs paid out by each in the operation of their services. On the prepaid side, hard cards have suffered heavily, and prepaid calling card providers are the most vocal about DAC’s impact and format. Indeed, shrinking margins and the retailer demand for deeper discounts to stay competitive have pushed the hard card markets that were un-imaginable in the industry ten years ago. On the payphone side, the APCC is now positioned to exact all past and present compensation owed from prepaid providers in both an aggressive and organized manner. Why? It has battled more than a decade for DAC enforcement. But, where did this all begin, what started all this? Though topics of little attention in the debate over DAC today, these questions speak large and loud to why prepaid and payphone providers are now at odds. Perhaps there’s something that the FCC missed when considering the interests of payphones and prepaid calling cards in the first analysis of DAC rulemaking in those early years. Perhaps another interest weighed in heavy, or perhaps, a combination of the two. Few people today really know.In a rare opportunity, I had the pleasure of sitting down with Attorney Richard DeWitt, a Florida technology lawyer who has seen both sides of the proverbial “coin” when it comes to the APCC, DAC and prepaid. While Mr. DeWitt now reserves his practice to a select number of telecom clients and serves as an Arbitrator for the American Arbitration Association, his prior experience is both an owner of a major payphone provider; and as an owner of a prepaid calling card company in Atlanta - Quest Telecommunications - which he sold in 1997. In his tenure in the payphone industry, Richard also served as Chairman of the APCC during the years when DAC was formulated, lobbied to Congress, and then brought before the FCC. I interviewed Richard this past February 2007 with the intent of learning more about the birth of DAC. From the prepaid side, I wanted to know what was its original legislative intent, from the people who proposed it. I wanted to know more of what went on behind the scenes in passing DAC in the Telecom Act, and in the rulemaking process of the FCC. I wanted to know both sides of the “coin” when it came to the inception of DAC.Basically, I’d like to begin by getting a little background on your experience in the payphone Industry and as a telecommunication attorney. I know that you are a technology attorney and an Arbitrator for American Arbitration Association, but could you elaborate a little more about your background in telecommunications and payphones specifically?Well, my background in the payphone business initially was as an attorney within the law firm of Squires Sanders. I began working with the client,TeleAmerica, which was, at the time, one of the first and larger firms in the competitive payphone business. It was funded, at the time, by USF&G, which was a large Baltimore-based insurance company. I initially served as outside counsel for the company. After some time they brought me in-house, as a Partner, and eventually Chairman of the company. We built the company primarily through acquisitions, buying up smaller phone companies and by de novo entry into the markets. As a larger company in the industry at the time, we were one of the original companies that formed the APCC and worked to rationalize the regulatory environment we were working in at the time. I later became President of the APCC, in the period after Jeff Hanft was Chairman, and worked together with the Board and members of the APCC in the various battles of the early regulatory environment.How did DAC (Dial Around Compensation) first come up?DAC actually came up, if I remember correctly, with a group of us primarily from the APCC Board in Washington DC, at a bar having one of our meetings, which back then was pretty informal. And, we were talking about some of the issues that faced the industry. At that time, we (payphones) were just starting to feel the benefit of 0+ Calling. At the beginning of the industry, it had been a “coin in the box” business and we did not have the ability to make money off the 0+ calls. When the 0+ industry expanded, several companies came into the market and we were able to get a percentage of 0+ calls and larger companies, like AT&T, MCI and the like, were now starting to pay some commissions to us. It resulted in two things. One was the incidence of abuse by these larger companies, particularly increased incidents of overcharging, which captured a lot of attention on payphones for 0+ Calls. And two, the fact that the carriers were being blocked, and as a result, started using dial around numbers, such as 10-10-XXX type numbers or 800 numbers, to dial around our phones so that their clients could use us even if we had our own 0+ carriers. They wanted to give their customers access to use our phones to access their services, but not implicate our carriers or commissions. Of course, there was some blocking involved with that at the time. There’s also pressure to not permit blocking, and, at this meeting in Washington DC, we were having a sort of brainstorming session on this dilemma. We came to the conclusion that we, payphones, should be compensated for any calls originated from our telephones where the other folks (carriers) were being compensated, particularly when the folks were being compensated for the call being routed – be it the 800 carrier who was routing the call for Sears, or, be it another carrier like AT&T or MCI. The thought was, if they were being compensated, we ought to be compensated.What kind of ideas did the APCC put on the table as an alternative for other providers to compensate them by virtue of use of their payphones?The big issue was really how, and how much. By that time, I had become President, and was Chairman of the Legal Committee. We were actively working out the concept first concluded at the DC meeting. There were two schools of thought in the industry, and on the APCC Board, on that issue at the time. One concept was that we should get paid the same amount as the “coin drop” as if someone made a local call. This was pretty straightforward, pretty easy to calculate, and seemed fair when presenting it to others. The alternative view, which had a lot of support I might add, was that there should be an “opportunity cost” factor put in there, and that we should be looking at the average or appropriate amount of profit we would have made if they used our 0+ service and that lost opportunity cost should be assessed against the carrier dialing around us. That involved a more complicated formula, higher numbers in compensation, and would meet more resistance from the underlying carriers. In the end, somewhat of a regulatory rate setting approach was used, and we came up with an approximate rate that matched, more or less, the “coin drop” value. That issue of how much, although controversial within the APCC at the time, did not become the major issue as to dial around compensation in the end. The major issue was, and is, the one that we are still struggling with in the industry today; how are we (payphones) going to collect this, and who is going to pay?How were those ideas first presented to the FCC by the APCC?The APCC was, and still is, represented by Attorney Al Kramer and we did it the old fashioned way, we presented first to the FCC. We didn’t get anywhere initially with them. So, we lobbied Congress and got included in the Telecom Act of 1996, a provision that the FCC do the rulemaking and actually look at this issue of dial around compensation, and that they (FCC) make a determination of what was appropriate or not. That actually became part of the Act, and Al Kramer, the regulatory lawyer for APCC, was instrumental along with the Board in that process. We (APCC) did the caravan - you know, going from Congressional office to office, talking with staffers, making our point, flying in people from different states to go see their representatives. If we had an APCC convention in Washington DC, we would take the opportunity to go door-to-door with the membership – and got the job done. Then, we took it to the FCC.What happened when it got to the hands of the FCC the second time around: what was that process like?Well, it was sort of more the same. We were just going to see the Commissioners and their staff rather than the Congressional folks and their staff. I will say that they were initially a little put off by it, but eventually got into the spirit of it, and the larger carriers got involved. Once it got put in the Act, everyone took it more seriously than before.had deadlines that they did not quite meet, but they did proceed, and it turned out to be a sort of grand negotiation with the large carriers and the APCC. And then the usual suspects, the folks at APCC Board, their attorney Al Kramer, the larger carriers like AT&T, MCI, Sprint and some Bell along with the FCC began to work it out.How did we get to the present format of the DAC?Well, the present format has changed from whenwas first doing this. However, the big issue again, that carries over even today, is this whole concept of how this is going to be collected? The original idea that we proposed was that the amount, be it the “coin drop” or whatever was determined fair, would be paid, in essence, like an access charge by the 800 carrier. We (payphones) would collect at that level of carrier, and it would impact the rate, and the rate base, rather than on an individual call basis.This would have made for a more efficient collection procedure, certainly, and for a more efficient payment procedure. This would have also gotten money to payphone providers fairly quickly. Granted, there were technical issues with pointing so that carriers would know the difference between LEC payphones and competitive payphones, and that they were, in fact, payphones. It would have also impacted a lot of those folks who had been cheating by using business lines rather than payphone lines, so they would have had to convert over, and, would have regulated that kind of activity. It went along that way for quite awhile, that this was the perceived method for DAC. However, near the end of the FCC rulemaking sessions, as I remember, MCI balked at that approach because they looked at it as an “access charge.” At that point in the sessions, it was an equipment charge, which was to be treated as an access charge, and MCI had a regulatory vent against any regulatory increase or any regulatory access charges. In the end, MCI prevailed. We moved to a regime where the actual service provider, not the underlying carriers of services, was going to be responsible for paying.Was MCI involved in the lobby in Congress for the inclusion of DAC?No, they weren’t on our side of the table. They were up there [Congress] the whole time, so I’m sure they would have been commenting and perhaps objecting, I don’t recall. The real meetings between MCI andwere before the FCC, rather than Congress.What do you see as the impact of DAC to both prepaid calling card and payphone providers?The industry that suffered the most from this change, that MCI proposed and was adopted by the FCC, is the prepaid calling card industry. Though DAC is an inconvenience for underlying long distance carriers, they can charge it through to their end-user consumers on a relatively easy per call basis; it’s just a straightforward charge. In the prepaid calling card industry, it is much more difficult. For one thing, they can’t charge end-users back on a per call basis. Because of the nature of the product, and how it’s sold at a discount to the retailer, for the prepaid card provider to just get back to status quo he’s got to recoup that discount, and perhaps charge more than the face amount of DAC to the end user, and many of those end users are the ones that can least afford it. So, it has an unusual impact on the prepaid calling card industry. It’s unfortunate, because, if the original proposal had gone through and this was a part of the rate base, that issue would not be present today.Do you think if there was a way that this could be revisited between the APCC, the prepaid industry and the FCC a more balanced approach could be reached?I’m not really in a position to say, the regulatory folks from both sides are in a much better position to answer that. You might want to ask them.Thank you Richard. Perhaps I will do that next.Send your questions tolegalline@prepaid-press.com.
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