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In re Regulation of Operator Service Providers

July 27, 2001

IN THE MATTER OF THE REGULATION OF OPERATOR SERVICE PROVIDERS
IN THE MATTER OF A FILING BY BELL ATLANTIC-NEW JERSEY, INC. OF A REVISION OF TARIFF B.P.U. NO. 2, EXCHANGE AND NETWORK SERVICES, PROVIDING FOR THE INTRODUCTIONS OF A CUSTOMER PROVIDED PAY TELEPHONE SERVICE (CPPTS) MONTHLY MESSAGE UNIT ALLOWANCE AND REDUCTION OF CPPTS LINE AND FEATURE RATES



On appeal from the Board of Public Utilities, TX95080361, TR97120890.

Before Judges Pressler, Kestin and Alley.

The opinion of the court was delivered by: Kestin, J.A.D.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued December 12, 2000

These two appeals challenge the validity of N.J.A.C. 14:10- 6.3(h), (i), (j) and (n) as adopted by the Board of Public Utilities (Board) in late 1998 to establish current rate caps on alternate operator service (AOS) providers in the telecommunications industry. We consolidate the appeals for the purposes of this opinion.

The provisions at issue establish maximum rates for intrastate telephone calls. N.J.A.C. 14:10-6.3(h) governs those which do not require the intervention of a live operator (0 calls); N.J.A.C. 14:10-6.3(i) governs those which require the intervention of a live operator (0- calls). N.J.A.C. 14:10-6.3(j) creates an opportunity for AOS companies to make 0 or 0- rate adjustments if their rates remain below the caps created. In addition to the setting of maximum rates, the Board adopted N.J.A.C. 14:10-6.3(n), which provides for Board "review of the rates to assess the effects of these maximum rates on the [payphone] industry."

Appellants, One Call Communications, Inc. (One Call), and the Division of the Ratepayer Advocate (Advocate) contend that the Board's rate caps and the Legislature's regulation of AOS providers are preempted by federal law. They further claim equal protection standards were violated when only the rates of AOS providers were regulated and not those of all operator service providers (OSPs). Finally, appellants argue that the caps are arbitrary, capricious and unreasonable; that the caps are not supported by the evidence; and that the Board violated the Administrative Procedure Act (APA), N.J.S.A. 52:14B-1 to -24, and other procedural requirements in promulgating the rate regulation.

In A-1728-98, One Call specifically raises the following issues on appeal:

POINT I

THE [BOARD'S] FAILURE TO HOLD EVIDENTIARY HEARINGS, TO DECIDE THE CASE BASED ON EVIDENCE AND TO MAKE THE FINDINGS NECESSARY TO SET REASONABLE RATES RENDER THE RATE ORDER AND RATE CAP RULES INVALID.

POINT II

THE [BOARD] LACKS JURISDICTION OVER AOS RATES BECAUSE IT FAILED TO TAKE PROCEDURAL STEPS NECESSARY TO LAWFULLY INITIATE SUCH JURISDICTION.

POINT III

THE RATE REGULATION IS PREEMPTED BY THE REQUIREMENTS OF SECTION §253 OF THE FEDERAL ACT BECAUSE THE RATE REGULATION HAS THE EFFECT OF LIMITING THE PROVISION OF SERVICE BY AOS PROVIDERS AND BECAUSE IT DISCRIMINATES AGAINST AOS PROVIDERS.

POINT IV

RATE REGULATION OF AOS PROVIDERS VIOLATES THEIR RIGHTS TO EQUAL PROTECTION OF THE LAWS GUARANTEED BY THE U.S. AND NEW JERSEY CONSTITUTIONS.

In addition to defending the validity of the regulation against One Call's attack, the Board argues that because One Call "failed to participate in the rulemaking proceeding before the Board despite adequate notice and opportunity to comment[, it] should not now be permitted to belatedly raise its concerns nor question the wisdom of the Board's expert factual and policy determinations."

In A-919-99, the Advocate argues:

POINT 1

THE BOARD'S SETTING OF THE CAP AND ITS DECISION TO LIMIT FUTURE INCREASE TO $1.00 IS ARBITRARY, CAPRICIOUS, AN ABUSE OF DISCRETION, HAS NO SUPPORT IN THE RECORD AND IS NOT SUPPORTED BY ANY REASONED DECISION.

POINT 2

THE BOARD'S FINAL RULE ON RATE CAPS VIOLATES THE NEW JERSEY ADMINISTRATIVE PROCEDURE ACT ("APA") IN THAT THE BOARD FAILED TO CONSIDER APPLICABLE FEDERAL STANDARDS.

POINT 3

MATERIAL CHANGES OCCURRED IN THE ASSUMPTIONS SUPPORTING THE EARLIER PUBLISHED NOTICE OF PROPOSED RULEMAKING FOR WHICH A FURTHER NOTICE OF PROPOSED RULEMAKING WAS REQUIRED.

POINT 4

THE BOARD'S RULE RESULTS IN UNJUST DISCRIMINATION AGAINST AOS OPERATORS WHEN OSP OPERATORS CAN CHARGE HIGHER RATES FOR OPERATOR SERVICES.

One Call and the Advocate are also nominal respondents in each other's appeals. Their positions in these connections are variations on the same themes they present in their respective appeals.

A brief overview of terms and industry practices will aid in understanding the regulation and the parties' arguments. We are mindful that a single person or entity can play multiple roles in the processes and relationships described.

A "public pay telephone service (PPTS) provider" is a person or entity offering telephone service to the transient public. A PPTS provider owns the public payphone and is required, among other things, to provide a dial-tone with its telephones and to repair the instruments. A subset of PPTS providers are the "customer provided pay telephone service (CPPTS) providers," which are the customers of record that own and service a payphone, but need to purchase the line, i.e., service, from a local exchange carrier. A CPPTS provider is a non-utility provider of payphones.

An "Aggregator" makes telephones available, in the ordinary course of its business, to the public or to transient visitors of its premises. These telephones include both public payphones and the private pay telephones found in hotels, motels, restaurants, airports, hospitals, and universities. Aggregators receive a commission for all of the calls placed on their phones. These commissions are paid by the telecommunications service providers.

Every private payphone in a hotel, motel, restaurant, airport, hospital, or university has one or more telecommunications companies supplying service to that phone, specifically, long distance service, local exchange service and operator-assisted service. An "interexchange telecommunications carrier" (IXC) is a carrier that provides long distance service in addition to any other local service; whereas a "local exchange telecommunications company" (LEC) provides only local service.

The issues before us concern operator-assisted services on private payphones at aggregator locations. Operator assistance on these phones occurs through live or automated intervention, and it is required for any collect call and for all calls using a credit card or any other third-party billed access card. "0 calls" are calls in which the caller dials "0" followed, within a few seconds, by the area code and telephone number. "0-calls" are calls in which the end user simply dials "0" followed by no other digits and waits for the operator.

When a caller places a call on these phones by first dialing the specific access code that is associated with the user's billing company, debit card or phone card, such as 1-800-COLLECT for MCI Telecommunications Corp. and 1-800-CALL-ATT for AT&T Communications, Inc. (AT&T), that caller will be connected to the interexchange carrier associated with that number sequence and to the provider of operator-assisted services associated with that interexchange company. When not dialing a specific access number, the caller will be connected to the operator-assistance provider contracted or presubscribed to that phone by the aggregator.

All companies, large or small, that provide such operator- assisted services are called "operator service providers" (OSPs). For example, Bell Atlantic-New Jersey, Inc. (BA-NJ), and AT&T are OSPs in addition to the other roles they discharge in the telecommunications industry.

A subset of OSPs are the AOS providers. Appellant One Call is an AOS provider. Unlike the other OSPs, an AOS provider, such as appellant, is a company that does not itself own the lines, the networks, or the telecommunications facilities; rather, it provides operator-assisted services by separately leasing the use of lines and networks from the local or long distance carriers and then employing its own operators or automated program. An AOS provider is a non-utility provider of operator assistance.

The Federal Communications Commission (FCC) sets forth certain disclosure requirements for all OSPs. New Jersey also has regulations that govern disclosure for all OSPs. N.J.A.C. 14:10- 6.1 to -6.8 govern all OSPs, AOS providers and aggregators in New Jersey. In addition to those regulations, PPTS providers are also subject to N.J.A.C. 14:10-9.1 to -9.8.

In late 1998, New Jersey adopted regulations specifically setting a cap on the maximum rates that AOS providers may charge. N.J.A.C. 14:10-6.3. The validity of these rate cap regulations and the legislation on which they are based, N.J.S.A. 48:2-21.22 and -21.23, are at issue in these two appeals.

Some historical and factual background is also needed for contextual understanding. Under the Telecommunications Act of 1934, c. 652, 48 Stat. 1064 (1934) (codified as amended in scattered sections of 47 U.S.C.A. (West 1991 & Supp. 2000)), the FCC does not have jurisdiction to regulate intrastate communications services, specifically "charges, classifications, practices, services, facilities, or regulations for or in connection with intrastate communication service by wire or radio of any carrier." 47 U.S.C.A. § 152(b)(1).

In October 1990, Congress found that the divestiture of AT&T had allowed open entry for competitors into the telephone marketplace and had produced a variety of new services and new providers of telephone services. Congressional Findings at Pub. L. No. 101-435, § 2, 104 Stat. 986 (1990). The findings noted that a variety of providers of operator services were competing to win contracts with hotels, hospitals, airports, and other aggregators of telephone business. Ibid. Consumers often had "no choices in selecting a provider of operator services, and often attempts by consumers to reach their preferred long distance carrier by using a telephone billing card, credit card, or prearranged access code number [were] blocked[.]" Ibid. The findings reported consumer complaints about being deceived regarding the identity of the company providing operator services for calls and in relation to the rates being charged. Ibid.

Consequently, Congress passed the Telephone Operator Consumer Services Improvement Act of 1990 (TOCSIA), Pub. L. No. 101-435, 104 Stat. 986, 47 U.S.C.A. § 226 (West 1991 & Supp. 2000)), setting forth specific disclosure requirements for aggregators and for providers of operator services. 47 U.S.C.A. §§ 226(b) and (c).

TOCSIA directed the FCC to promulgate regulations to "protect consumers from unfair and deceptive practices relating to their use of operator services to place interstate telephone calls . . . [and to] ensure that consumers have the opportunity to make informed choices in making such calls." 47 U.S.C.A. § 226(d)(1)(A) and (B). In addition, TOCSIA required the FCC to "consider the need to prescribe compensation (other than advance payment by consumers) for owners of competitive public pay telephones for calls routed to providers of operator services that are other than the presubscribed provider of operator services for such telephones." 47 U.S.C.A. § 226(e)(2). Congress gave the FCC nine months to "reach a final decision on whether to prescribe such compensation." Ibid.

TOCSIA further required each provider of operator services to file and update "an informational tariff specifying [its] rates, terms, and conditions, and including commissions, surcharges, any fees which are collected from consumers, and reasonable estimates of the amount of traffic priced at each rate, with respect to calls for which operator services are provided." 47 U.S.C.A. § 226(h)(1)(A). TOCSIA also required the FCC to review the rates of all OSPs in order to determine if they were just and reasonable, 47 U.S.C.A. § 226(h)(2), and authorized the FCC to establish pertinent regulations for its review and regulations that limit "the amount of commissions or any other compensation given to aggregators by providers of operator service." 47 U.S.C.A. § 226(h)(4)(A). TOCSIA applied only to interstate telecommunications, however. See 47 U.S.C.A. § 226(a)(2), (4), (7), (8).

Following Congress's lead, the New Jersey Legislature supplemented State law by enacting An Act Concerning Alternate Operator Service Providers (first AOSP Act), L. 1989, c. 337, N.J.S.A. 48:17-23 and -24, effective January 12, 1990. This legislation was enacted to clarify the Board's authority to regulate, on an intrastate basis, the conditions of service pertaining to AOS providers. It required AOS providers, at a minimum, to offer consumers rate quotes upon request and without charge; to inform consumers, before billing, which AOS provider was handling the call; and to allow callers access to other long distance or local exchange carriers, where technically possible. N.J.S.A. 48:17-24a to c. The first AOSP Act also directed the Board to adopt regulations governing operator-assisted services by AOS providers and to adopt a schedule of fines for violations. N.J.S.A. 48:17-24d.

The first AOSP Act defined OSPs as "every telecommunications carrier which provides operator-assisted services." N.J.S.A. 48:17-23. An AOS provider was defined as "a non-facilities based telecommunications carrier who is a reseller leasing lines from local exchange carriers and interexchange carriers and who, using these leased facilities along with their own operators, provides operator-assisted services." Ibid. Operator-assisted services are "services which assist callers in the placement or charging of a telephone call, either through live intervention or automated intervention." Ibid.

AOS providers contract with aggregators to provide operator assistance to the public. An aggregator was defined by the act as "a person or entity, which is not a telecommunications carrier, who in the ordinary course of its business makes telephones available to the public or to transient users of its business, including, but not limited to, hotels, motels, hospitals, or universities, and which provides operator-assisted services through an operator service provider." Ibid.

In 1991, the Legislature enacted the Telecommunications Act of 1992 (State TCA), L. 1991, c. 428, N.J.S.A. 48:2-21.16 to -21.21. Under that act, all IXCs even those that provide operator-assisted services, are exempt from rate regulation and cannot have their rates capped. The State TCA provides that the Board "shall not regulate, fix or prescribe the rates, tolls, charges, rate structures, terms and conditions of service, rate base, rate of return, and cost of service, of competitive services." N.J.S.A. 48:2-21.19a. A competitive service is "any telecommunications service not regulated by the board." N.J.S.A. 48:2-21.17. The State TCA declares that all telecommunications services provided by IXCs are deemed to be competitive services. N.J.S.A. 48:2-21.20a.

On the other hand, as a "safeguard . . . to the offering of any competitive service," N.J.S.A. 48:2-21.19e, the State TCA provides that local exchange carriers "shall" only charge a rate for competitive services that "exceed[s] the rates charged to others for any noncompetitive services used by the local exchange telecommunications company to provide the competitive service[.]" N.J.S.A. 48:2-21.19e(2). For these carriers and for all other non- IXC carriers, the Board is "authorized to determine, after notice and hearing, whether a telecommunications service is a competitive service." N.J.S.A. 48:2-21.19b.

Notwithstanding differences in dealing with rates and services, both IXCs and local carriers are required to file and maintain tariffs with the Board for competitive telecommunications services. N.J.S.A. 48:2-21.19a and e(3). Moreover, under N.J.S.A. 48:2-21.20c, the Board is authorized to "establish service quality standards for interexchange telecommunications carriers[.]"

A consequence of the State TCA was that all OSPs were also relieved from any rate regulation. The Legislature explained that it had "acted to exempt competitive telecommunications services from traditional utility regulation [after] finding that such regulation [was] generally not necessary to protect the public interest in the competitive marketplace." N.J.S.A. 48:2-21.22a.

Thereafter, New Jersey consumers began complaining about the rates of AOS providers, that is, "companies which provide operator assistance for collect, third-party billed, and credit card calls, usually at pay phones on the premises of hotels, restaurants, hospitals or airports, with such establishments receiving a commission for calls placed through the AOS arrangement." N.J.S.A. 48:2-21.22b. In its report to the Governor and Legislature on the implementation of the State TCA, the Board "found that where a captive market exists for competitive telecommunications services, market conditions [were] not always able to protect the public interest." N.J.S.A. 48:2-21.22a. However, because of the provisions of the State TCA, the Board was unsure of its "authority to protect consumers' interests with regard to AOS companies." N.J.S.A. 48:2-21.22b. The Legislature took action, effective July 5, 1995,

to clarify the powers of the board with regard to AOS companies, and to specifically authorize the board to take appropriate action, including, but not limited to, rate regulation, to protect the interests of consumers of alternate operator services upon a finding of the board that such action is necessary to protect the users of those services. [N.J.S.A. 48:2-21.22c.]

It supplemented the State TCA by An Act Providing for the Regulation of Alternate Operator Service Providers (second AOSP Act), L. 1995, c. 172, N.J.S.A. 48:2-21.22 to -21.23. This legislation clarifies the Board's authority to regulate the rates and terms and conditions of service pertaining to AOS providers. N.J.S.A. 48:2-21.23 states:

Notwithstanding the provisions of [the State TCA] or any other law to the contrary, the Board of Public Utilities, upon a finding by the board that such measures are necessary to protect the users of alternate operator service providers, may regulate the rates and terms and conditions of service of those providers, and use any other means necessary pursuant to law, rule or regulation to protect users of those services.

As used in this section, "alternate operator service provider" means a non- facilities based telecommunications carrier who is a reseller leasing lines from local exchange carriers and interexchange carriers and who, using these leased facilities along with its own operators, provides operator- assisted services.

Contemplating a promulgation of regulations, the Board's Division of Telecommunications began an investigation into the rates charged by OSPs. On August 9, 1995, it sent a letter to all AOS providers as well as payphone vendors using operator services, seeking written submission of all rates, terms and conditions of service applicable to intrastate operator-assisted calls. Specifically, the information was to include the total charge for each category of service, i.e., collect calls, credit or calling card calls, person-to-person calls, etc. as well as the individual rate elements that comprise the total charge, i.e., operator surcharge, premises imposed fees, mileage and time of day charges, and every other surcharge or fee. In September 1995, this letter was published in the New Jersey Register. 27 N.J.R. 3306 (September 5, 1995).

The Board received responses from seventy-five AOS and pay telephone providers, which disclosed that their rate schedules ranged from a low equivalent to the rates of a local exchange carrier to a high that was nine times higher, or $9.90 for the same call for which a local exchange carrier would charge $1.10. 28 N.J.R. 68 (January 2, 1996). The Board proposed instituting rate regulation, since the industry was "unable to provide a quality product at reasonable rates absent Board regulation." Ibid.

In January 1996, the Board proposed regulations which, among other things, would impose maximum rates on AOS operators. 28 N.J.R. 68-71 (January 2, 1996). Specifically, the Board proposed to "limit local operator-assisted calls to the rate charged by the incumbent local exchange carrier[,] and [to] cap AOS providers' rates at a rate not greater than $1.00 above the highest applicable operator-assisted rate of tariffed facilities-based carriers." 28 N.J.R. 68. The Board stated that it would notify AOS providers of these maximum rates through publication in the New Jersey Register, and that it would review the maximum rates semi-annually and adjust them, if appropriate. 28 N.J.R. 70.

The proposed rules also allowed at non-coin telephones, i.e., private payphones, additional unlimited surcharges that were "not part of the actual telephone bill" if there was a written notice of those surcharges on the phone. Ibid. In addition, the proposed rules required aggregators utilizing an OSP to place certain consumer information on their telephone instruments; required OSPs to identify themselves as part of a call and to provide rate quotes upon request; prohibited both unauthorized primary interexchange carrier changes and billing that did not reflect the origination of the call; required free access to all OSPs, including local exchange carriers; and included provisions for the completion of emergency calling and for a schedule of fines for violations of the rules. 28 N.J.R. 68. The proposed rules also required AOS providers to file informational tariffs with the Board. Ibid. After a comment period, a public hearing was held on the proposed rules on March 13, 1996. 29 N.J.R. 414 (February 3, 1997).

Meanwhile, in February 1996, Congress comprehensively rewrote the Telecommunications Act of 1934 by enacting the Telecommunications Act of 1996 (federal TCA), Pub. L. No. 104-104, 110 Stat. 56 (1996) (codified in scattered sections of 47 U.S.C.A. (West Supp. 2000)). The federal TCA was designed to establish "a pro-competitive, de-regulatory national policy framework" for telecommunications providers. H.R. Conf. Rep. No. 104-458, at 1 (1996). Accordingly, Congress placed significant limitations and preemptions on the states' authority, with certain exceptions. The federal TCA provides at 47 U.S.C.A. § 253:

(a) In general

No State or local statute or regulation, or other State or local legal requirement, may prohibit or have the effect of prohibiting the ability of any entity to provide any ...


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