# Rates for Interstate Inmate Calling Services

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2015-31252

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** December 18, 2015
- **Citation:** 80 FR 79136

## Text

FEDERAL COMMUNICATIONS COMMISSION
47 CFR Part 64
[WC Docket No. 12-375; FCC 15-136]
Rates for Interstate Inmate Calling Services

AGENCY:

Federal Communications Commission.

ACTION:

Final rule.

SUMMARY:

In this document, the Federal Communications Commission (Commission) adopts comprehensive reforms of Inmate Calling Services, regardless of the technology used to provide service, to ensure just reasonable and fair rates as mandated by the Communications Act.

DATES:

The rules in this document will become effective March 17, 2016, and the
Compliance Date
for this Second Report and Order will be January 19, 2016.

FOR FURTHER INFORMATION CONTACT:

Lynne Engledow, Wireline Competition Bureau, Pricing Policy Division at (202) 418-1540 or at
Lynne.Engledow@fcc.gov.

SUPPLEMENTARY INFORMATION:

This is a summary of the Commission's Second Report and Order, WC Docket 12-375, released November 5, 2015. The full text of this document may be downloaded at the following Internet Address:
http://transition.fcc.gov/Daily_Releases/Daily_Business/2015/db1105/FCC-15-136A1.pdf.
To request alternative formats for persons with disabilities (
e.g.
accessible format documents, sign language, interpreters, CARTS, etc.) send an email to
fcc504@fcc.gov
or call the Commission's Consumer and Governmental Affairs Bureau at (202) 418-0530 or (202) 418-0432 (TTY).

I. Introduction

1. Twelve years have passed since Martha Wright of Washington, DC petitioned this Commission for relief from exorbitant phone rates charged by inmate calling service (ICS) providers, so that she might afford telephone contact with her incarcerated grandson. For families, friends, clergy, and attorneys to the over 2 million Americans behind bars and 2.7 million children who have at least one parent behind bars, maintaining phone contact has been made extremely difficult due to prohibitively high charges on those calls. Family members report paying egregious amounts, adding up to hundreds of dollars each month, just to stay connected to incarcerated spouses, parents and children. For over a decade, they have pleaded with this agency for help fighting these excessive and unaffordable phone charges.

2. In the Report and Order, we grant relief, answer the call of those millions of citizens seeking ICS reform, and adopt comprehensive reform of interstate and intrastate ICS calls to ensure just, reasonable and fair ICS rates as mandated by the Act. (Interstate communication “means communication or transmission (A) from any State, Territory, or possession of the United States (other than the Canal Zone), or the District of Columbia, to any State, Territory, or possession of the United States (other than the Canal Zone), or the District of Columbia. Consistent with our authority under the Communications Act, this Order applies to all states and U.S. territories including Puerto Rico, Guam, and the U.S. Virgin Islands.) We follow these reforms with a Further Notice that recognizes there is more work yet to be done. While the Commission prefers to rely on competition and market forces to discipline prices, there is little dispute that the ICS market is a prime example of market failure. Market forces often lead to more competition, lower prices, and better services. Unfortunately, the ICS market, by contrast, is characterized by increasing rates, with no competitive pressures to reduce rates. With respect to the consumers who pay the bills, ICS providers operate as unchecked monopolists. The record indicates that, absent regulatory intervention, ICS rates and associated ancillary fees likely will continue to rise. After the adoption of interim interstate rate caps in 2013, there was hope that states would take a more active role in reforming intrastate ICS rates and ancillary fees. While this has occurred in a handful of states, such as Alabama, Minnesota, New Jersey, and Ohio, the unfortunate reality is that many states have not tackled reform and intrastate ICS rates have continued to increase since the
2013 Order.
78 FR 67956, Nov. 13, 2013.

3. Given this market failure, the Commission has a duty to act to fulfill our statutory mandate of ensuring that ICS rates are just, reasonable, and fair. Ensuring that rates comply with the statute also has several positive public interest benefits. Studies have shown that family contact during incarceration reduces recidivism and allows inmates to be more present parents for the 2.7 million children who suffer when an incarcerated parent cannot afford to keep in touch. One commenter tells us that “[m]y family paid outrageous amounts, between $300 and $400 a month for the 10 months while I was incarcerated in the state of MD. Their savings were drained just so they could correspond with their only daughter who was pregnant with their first grandchild at the time.” One mother writes: “I pay 40 dollars a week for calls. I can't afford them but it puts a smile on my kid's face;” another writes that her family has, at times, gone without food in order to pay these phone charges, “so we don't grow apart and so my kids feel like they still have a father.” These 2.7 million children are already coping with the anxiety of having an incarcerated parent, and often suffer additional economic and personal hardships that hinder their performance in school. By charging inmates exorbitant phone rates, ICS providers prevent incarcerated parents from maintaining a presence in their children's lives through regular phone contact. The testimony of a father in St. Cloud, Minnesota underscores the need for our efforts: “I want to be able to raise my child even if it's over the phone for the time being. I would love to be in her life as much as possible, but it's hard to do so when the phone [price] is steadily climbing higher and higher. I know I'm paying my debt to society for my crime, but I need to stay in contact with family.”

4. Furthermore, inmates given access to regular phone contact with family are less likely to return to jail or prison. A 2014 report by the Department of Justice found that a staggering 75 percent of individuals released from prison were rearrested within five years. Of the inmates who do find success and reintegrate after release, many credit phone contact and family support during their incarceration. As one former inmate writes, “The phone was my life line to that family and they got me through it intact. I thank God that my family was able to afford the phone calls. What happens to the families that can't? We all end up paying for it.” Incarceration costs taxpayers an average of $31,000 per inmate per year. If telephone contact is made more affordable, we will help ensure that former inmates are not sent home as strangers, which reduces both their chances of returning to prison or jail and the attendant burden on society of housing, feeding, and caring for additional inmates.

5. Another commenter stresses how regular phone contact makes prisons and jails safer spaces for inmates and officers alike:

I get to see my loved one once in every six months or so, and he doesn't get any visitors apart from me, so calling daily helps him retain his sanity. I think the connection he's given to his family is really important; there are so many times that he's called really

angry at other inmates, saying that he just wanted to talk so that he can cool down and not start a fight. If calls are made more affordable, especially for indigent families, it may reduce prison violence as well as make the prisons a safer place for [corrections officers] to work in.

6. The record indicates that our interim interstate rate caps increased call volumes, without compromising correctional facility security requirements. Similarly, we expect our actions in this Order to reduce rates and increase call volume, while ensuring that ICS providers receive fair compensation and a reasonable return. Some commenters have argued that lowering ICS rates will compromise security in correctional facilities and fail to cover the cost of providing calling services. Some have even argued the financial strain from rate regulation could lead to correctional facilities banning inmate calls altogether. However, we find these assertions unpersuasive and unsupported by the record and our experience from the 2013 reforms.

7. While the actions taken to date have been positive in key respects (
e.g.,
lower interstate rates and increased interstate call volume), more remains to be done. The Commission adopted interim interstate rate caps, but over 80 percent of calls to and from correctional facilities are intrastate, and were not subject to the reforms of the
2013 Order.
Throughout this proceeding, the Commission has repeatedly called on states to reform inmate calling within their jurisdictions, but rates remain egregiously high in over half the states. The Commission has the legal authority to reform the rate structure for all ICS calls, and herein we determine it is appropriate and necessary to do so.

8. In addition, we commit to continue evaluating the impact of these reforms and to conduct a review in two years to evaluate the changes in the market and determine whether further refinements are appropriate.

II. Executive Summary

9. In the Order, we adopt comprehensive reform of all aspects of ICS to correct a market failure, foster market efficiencies, encourage ongoing state reforms, and ensure that ICS rates and charges comply with the Communications Act. As a threshold matter, we make clear that the reforms adopted herein apply to ICS offered in all correctional facilities, regardless of the technology used to deliver the service. Specifically, we take the following steps, which together form a comprehensive package of long-overdue reform to inmate calling services:

• Adopt tiered debit and prepaid rate caps that apply to all interstate and intrastate ICS, as well as a tiered rate cap for collect calling (which, after two years, will phase down to the rate caps adopted for prepaid and debit calls);

• Address payments to correctional institutions by excluding site commission costs from our rate caps (we otherwise discourage, but do not prohibit, ICS providers from sharing their profits and paying site commissions to facilities);

• Limit and cap ancillary service charges and address the potential for loopholes and gaming, including third-party services, thus addressing a disturbing trend in which ancillary service charges increased exponentially and unfairly, to the detriment of inmates and their families and in contravention of the statute;

• Prohibit ICS prepaid calling account funding minimums and establish an ICS prepaid calling account funding maximum limit;

• Establish a periodic review of ICS reforms, recognizing that further refinements may be appropriate as the marketplace evolves—thus complementing the Further Notice we initiate today (described in more detail below);

• Make clear that the rate caps and reforms we adopt today operate as a ceiling in states that have not enacted reforms with equal or lower caps on rates and ancillary fees and that we will preempt state laws that are inconsistent with the federal framework;

• Take measures to address ongoing concerns with access to ICS by inmates and their families with communications disabilities, including requiring that the per-minute rates charged for TTY-to-TTY calls be no more than 25 percent of the rates the providers charge for traditional inmate calling services and that no provider shall levy or collect any charge or fee for TRS-to-voice or voice-to-TTY calls;

• Adopt a transition period for rate caps and ancillary service charge reforms of March 17, 2016 for ICS provided in prisons and June 20, 2016 for ICS provided in jails to enable providers time to adjust contracts if necessary, given that the reforms adopted herein constitute regulatory changes and thus may trigger change-in-law provisions in existing ICS contracts;

• Take measures to prevent possible gaming during the transition to the new rules adopted herein;

• Require annual reporting and certification by ICS providers, to allow the Commission to ensure compliance and enable monitoring of developments, and require the providers to be transparent with regard to disclosure of their rates and policies;

• Confirm that section 276 of the Act is technology neutral and thus any service—regardless of name—that meets the definitional criteria for “inmate calling services” is subject to our rules, including the reforms adopted today; and

• Make clear that ICS providers may seek waivers if they are unable to receive fair compensation or request that the Commission preempt inconsistent state laws, and encourage the Wireline Competition Bureau to resolve such waivers within 90 days of submission of complete information.

We adopt the following rate caps.

Table One

Size and type of facility

Debit/prepaid
rate cap per
MOU

Collect rate cap per MOU as of effective date
Collect rate cap per MOU as of July 1, 2017
Collect rate cap per MOU as of July 1, 2018

0-349 Jail ADP
$0.22
$0.49
$0.36
$0.22

350-999 Jail ADP
0.16
0.49
0.33
0.16

1,000+ Jail ADP
0.14
0.49
0.32
0.14

All Prisons
0.11
0.14
0.13
0.11

We prohibit any ancillary service charges except for the following.

Table Two

Permitted ancillary service charges and taxes
Monetary cap per use/instruction

Applicable taxes and regulatory fees
Provider shall pass these charges through to consumers directly with no markup.

Automated payment fees
$3.00.

Fees for single-call and related services,
e.g.
, direct bill to mobile phone without setting up an account

Provider shall directly pass through third-party financial transaction fees with no markup, plus adopted, per-minute rate.

Live agent fee,
i.e.
, phone payment or account set up with optional use of a live operator

$5.95.

Paper bill/statement fees (no charge permitted for electronic bills/statements)
$2.00.

Prepaid account funding minimums and maximums
Prohibit prepaid account funding minimums and prohibit prepaid account funding maximums under $50.

Third-party financial transaction fees,
e.g.
, MoneyGram, Western Union, credit card processing fees and transfers from third party commissary accounts

Provider shall pass this charge through to end user directly, with no markup.

10. These reforms supersede the reforms adopted in the
2013 Order
and therefore will replace the interim interstate rate caps and cost-based framework previously adopted. Accordingly, the extensive reforms we adopt in this Order constitute material changes of law and may also trigger contractual force majeure clauses. To comply with the new rules we adopt herein, we therefore expect that ICS providers may need to renegotiate many of their contracts with correctional facilities but note that ICS rates in numerous states are already below our adopted caps.

11. While the steps we take today are significant, our work is not complete. With that in mind, in today's Further Notice, we seek additional comment on rates for international calls, promoting competition in the ICS industry, the benefits of a recurring Mandatory Data Collection, as well as a requirement that ICS providers file their ICS contracts with the Commission, video visitation, and other newer technologies to increase ICS options, and seek additional comment on the operations and economic impacts of providing those services as experienced by end users, correctional facilities, and ICS providers.

III. Background

12. In 2003, Martha Wright and her fellow petitioners, current or former prison inmates and their relatives and legal counsel (Wright Petitioners or Petitioners), filed a petition seeking a rulemaking to address high long-distance ICS rates. The petition sought to prohibit exclusive ICS contracts and collect-call-only restrictions in correctional facilities. In 2007, the Petitioners filed an alternative rulemaking petition, asking the Commission to address high ICS rates by requiring a debit-calling option in correctional facilities, prohibiting per-call charges, and establishing rate caps for interstate, interexchange ICS. The Commission sought and received comment on both petitions (Wright Petitions).

13. In December 2012, in response to the Wright Petitions, the Commission adopted a Notice of Proposed Rulemaking seeking comment on, among other things, the proposals in the Wright Petitions. The
2012 NPRM,
78 FR 4369, Jan. 22, 2013, proposed ways to “balance the goal of ensuring reasonable ICS rates for end users with the security concerns and expense inherent to ICS within the statutory guidelines of sections 201(b) and 276 of the Act.”

14. On August 9, 2013, the Commission adopted the
Inmate Calling Report and Order and FNPRM (2013 Order),
finding that market forces were not operating to ensure that interstate ICS rates were just, reasonable, and fair. The Commission concluded that, in light of the absence of competitive pressures working to keep rates just and reasonable in the ICS market, the default of cost-based regulation should apply. As such, the Commission focused on reforming interstate site commission payments, rates, and ancillary service charges. The Commission also determined that site commission payments “were not part of the cost of providing ICS and therefore not compensable in interstate ICS rates.” Analyzing data submitted into the record and public data, the Commission adopted interim per-minute interstate ICS safe harbor caps of $0.12 for debit and prepaid calls and $0.14 for collect calls and hard rate caps of $0.21 for debit and prepaid calls and $0.25 for collect calls. The Commission gave guidance to ICS providers regarding the process for obtaining waivers of the interim rate caps. The Commission also required that ancillary service charges be cost-based. At the time, the Commission declined to address intrastate ICS, noting instead that it had “structured [its reforms] in a manner to encourage . . . states to undertake reform and sought comment on intrastate reforms as part of the FNPRM.” Finally, the record indicates that as a result of our interim interstate rate caps, interstate call volumes have increased as much as 70 percent, while interstate debit and prepaid rates have decreased, on average, 32 percent and interstate collect rates have decreased, on average, 44 percent.

15. To enable the Commission to enact ICS reform, the
2013 Order
adopted a Mandatory Data Collection requiring ICS providers to file information regarding the costs of providing ICS, and an Annual Reporting and Certification Requirement for ICS rates. The Commission noted that the Mandatory Data Collection would help it “develop a permanent rate structure, which could include more targeted tiered rates in the future.” Through the data collected pursuant to the Mandatory Data Collection, the Commission obtained significant cost and operational data, including ancillary service charge cost data, from a variety of ICS providers representing well over 85 percent of the ICS market.

16. Prior to the effective date of the
Order,
the United States Court of Appeals for the District of Columbia Circuit stayed three rules adopted by the Commission pending resolution of the appeal, including the rule requiring rates to be based on costs, the rule adopting interim safe harbor rates, and the rule requiring ICS providers to file annual reports and certifications. The court allowed other aspects of the
2013 Order
to take effect, including the interim interstate rate caps and Mandatory Data Collection. Due to the partial stay, the requirement that ancillary service charges be based on costs did not go into effect. As a result,

there have been no reforms to ancillary service charges and fees and they have continued to increase since the
2013 Order.
The litigation has been held in abeyance pending resolution of this Order.

17. Since adoption of the
2013 Order,
the Commission has continued to monitor the effects of its reforms on the ICS industry and pursue additional reform, including holding a workshop entitled “Further Reform of Inmate Calling Services” on July 9, 2014. The workshop evaluated options for additional ICS reforms, discussed the effects of the
Order,
the role ancillary service charges play in the ICS market, the provision of ICS at different types of facilities, and communications technologies beyond traditional payphone calling being deployed in correctional facilities.

18.
Second Further Notice of Proposed Rulemaking.
In October 2014, the Commission adopted a
Second FNPRM
(79 FR 69682) and sought comment on several proposals in the record urging comprehensive ICS reform. The proposals the Commission sought comment on suggested a variety of ways to deal with issues identified in the record, including rate caps, site commission payments, and ancillary fees that were offered by various entities with differing perspectives in addressing ICS reform. For example, three ICS providers, GTL, Securus, and Telmate, jointly filed a proposal to comprehensively reform all aspects of ICS. Several other individual ICS providers, including CenturyLink and Pay Tel, submitted their own proposals for reform. The Wright Petitioners, along with several public interest groups, also urged the Commission to consider its proposals for comprehensive reform. Finally, the Commission sought comment on costs incurred by correctional facilities in the provision of ICS and the data received in response to the Mandatory Data Collection.

19.
State Reforms.
Several states have undertaken ICS reform since the
2013 Order
that reflect and are meant to address circumstances specific to their jurisdiction. The Alabama Public Service Commission (Alabama PSC), for example, adopted comprehensive ICS reforms that include tiered intrastate rate caps as well as a restricted number of ancillary service charges at caps it established. The Minnesota Department of Corrections initiated a pilot program in a limited number of correctional facilities in which a flat rate of $0.07 per minute is charged for all local and long-distance debit calls, bringing the cost of a 15-minute call to $1.05, plus applicable tax. New Jersey recently entered into a new ICS contract lowering rates for all interstate and intrastate calls from state prison facilities to $0.04348 a minute effective August 25, 2015. The Ohio Department of Rehabilitation and Correction reduced rates to $0.05 per minute for all ICS calls as of April 1, 2015. In announcing its change, the Ohio Department of Rehabilitation and Correction noted that “[t]elephone calls are one of the primary means of inmates maintaining connections with family and loved ones during incarceration; maintaining these connections positively influences behavior in prison and the likelihood an offender will succeed upon release from prison.” Inmates in the West Virginia Division of Corrections now pay $0.032/minute for all domestic ICS. We are pleased that some states have taken positive steps to reduce intrastate rates but remain concerned that many intrastate rates remain high and some have even increased following the
2013 Order.
The actions we take today embrace previous reforms and encourage additional states to follow and enact more-tailored relief in their states. The framework we adopt today acts as a ceiling to enable reforms, such as those undertaken by New Jersey, Ohio, and West Virginia.

IV. Report and Order

A. Rate Caps That Comply With the Statute

20. In this section we adopt tiered rate caps for intrastate and interstate ICS that will allow providers to continue to offer safe and secure ICS while complying with the requirements of the Communications Act. These rate caps will apply to jails, prisons and immigration detention facilities, secure mental health facilities and juvenile detention facilities.

21. A review of the record, including over 100 comments and replies, costs reported in response to the Mandatory Data Collection, and various
ex parte
filings, indicates that, notwithstanding our interim caps on interstate rates, more work still must be done to bring ICS rates in conformance with the mandates of the Communications Act. The record demonstrates that many interstate rates are not “just and reasonable rates as required by Sections 201 and 202” and that many interstate and intrastate rates result in compensation that exceeds the fair compensation permitted by section 276. The Commission's finding in the
2013 Order
that the marketplace alone has not ensured that ICS rates are just, reasonable, and fair remains true today. Nor has the risk of complaints filed under section 208, or enforcement actions pursuant to section 201(b) or section 276, been sufficient to keep ICS rates at levels that are just and reasonable and fairly compensatory. We therefore act, pursuant to our statutory authority, to ensure that ICS rates comply with the Communications Act, while balancing the unique security needs related to providing telecommunications service in correctional institutions and ensuring that ICS providers receive fair compensation and a reasonable return on investment.

22. Specifically, we adopt a rate cap of $0.22/MOU for debit and prepaid calls from jails with an ADP of 0-349; a $0.16/MOU cap for debit and prepaid calls from jails with an ADP of 350-999; and a $0.14/MOU cap for debit and prepaid calls from jails with an ADP of 1,000 or more. Debit and prepaid calls from prisons will be capped at a rate of $0.11/MOU. Collect calls from jail facilities will be capped at $0.49/MOU and collect calls from prison facilities will be capped at $0.14/MOU until July 1, 2017, and then transition down on an annual basis to the applicable debit/prepaid rate cap as described herein.

Table Three

Size and type of facility
Debit/prepaid rate cap per MOU
Collect rate cap per MOU as of effective date
Collect rate cap per MOU as of July 1, 2017
Collect rate cap per MOU as of July 1, 2018

0-349 Jail ADP
$0.22
$0.49
$0.36
$0.22

350-999 Jail ADP
0.16
0.49
0.33
0.16

1,000+ Jail ADP
0.14
0.49
0.32
0.14

All Prisons
0.11
0.14
0.13
0.11

23. In the subsections that follow, we describe our methodology for adopting these rate caps. Specifically, we: (1) Discuss the decision to adopt a tiered structure that distinguishes between jails and prisons, and, within jails, based upon ADP, (2) describe the reasoning for adopting the specified tiers, (3) describe the methodology and analysis supporting the specific rate caps adopted, using a carefully considered combination of analysis of the Mandatory Data Collection (including evidence suggesting that some providers submitted inflated cost data), successful reform in certain states, experience with the interim rate caps, and other data in the voluminous record of this proceeding, (4) explain the need for a temporary, separate rate for collect calls, which will phase out over a two-year period to equalize the rate for these calls with those of debit/prepaid calls, (5) reject per-call/per-connection charges and flat-rate calling as inherently unjust, unreasonable, and unfair in contravention of the statute, and (6) explain our legal authority to adopt these reforms.

1. Tiered Structure Distinguishing Between Jails and Prisons

24. Before determining the specific amount of any rate
caps
, a key question before us is the appropriate rate
structure
for ICS—
i.e.
, whether there should be a single unitary rate for inmate calling services regardless of the facility type or size. We find in this Order that the record supports distinguishing between the type of facility (jails vs. prisons) as well as, for jails, tiering based on the size of the facility.

a. Justification for Separate Tiers

25. In both the
2013 FNPRM
(78 FR 68005) and
Second FNPRM
, the Commission sought comment on rate tiering. In the
Second FNPRM
, the Commission also sought comment on the appropriate definition of “prison” and “jail,” and on the potential suitability of rate tiering based on differences between jails and prisons as well as population size. As discussed below, there was substantial record support for such an approach.

26.
Background.
Some commenters support differentiating rates between different facility types or sizes. For example, Petitioners assert that the “cost of providing service in these large facilities is substantially less than the cost of providing service in small jails, and that ICS providers can serve these larger facilities with less administrative costs.” Other commenters assert that “characteristics unique to different types of facilities” should lead to rate tiering. Some commenters contend that it costs more to provide ICS in smaller jails than it does in larger jails. These parties argue that a one-size-fits-all rate cap will not work, ignores the record and likely will lead to a violation of sections 201 and 276 of the Act. We note that the Alabama PSC recently adopted rate tiers tied to facility type, with separate rates for jails and prisons.

27. The Los Angeles Sheriff's Department advocates that the Commission “resist the temptation to set uniform rates” because the differences in security requirements, inmates, age, infrastructure and maintenance needs of facilities must be accounted for in the Commission's decision-making process.” The California State Sheriff's Association echoes these concerns, explaining that in California, the smallest jail can hold a maximum of 14 inmates, while the largest jail can hold a maximum of over 14,000 inmates, and contends that accounting for these differences “is much more important and realistic than attempting to craft a single `solution' for uniformity's sake.” NCIC also supports tiering in order to “balance the needs of inmates, their families, correction facilities and ICS providers.”

28. Moreover, some commenters assert that, without tiering, providers serving small- to medium-sized jails “would likely be forced out of the market, particularly if the larger companies cross-subsidize between low-cost (Prison) and high-cost (Jail) facilities” because it is more costly to providers to serve smaller facilities (as confirmed by our analysis of the Mandatory Data Collection). Additionally, there is evidence that some large ICS providers refuse to bid on contracts to serve only smaller institutions—suggesting again that the cost structure of serving smaller institutions is higher than that of larger institutions.

29. Other commenters, however, disagree with a tiered rate approach and counter that the Commission should continue to impose unitary rate caps, similar to the current, interim rate caps. These commenters contend that unitary rates are less complex to understand and to administer, and that no real difference exists between the cost of serving jails and prisons. For instance, GTL and CenturyLink contend that “there is no clean proxy for cost that could be relied upon to create tiers.” Additionally, some commenters argue that adopting tiers based on a prison/jail distinction would be arbitrary, especially as many large providers serve both prisons and jails. Securus claims that “to adopt vastly different calling rates based on that empty [jails vs. prisons] distinction would constitute dissimilar treatment of customers that plainly are similarly situated,” which it asserts is “unjustifiable.”

30.
Discussion.
Based on the record and market evidence, we find that tiering based on jail versus prison is appropriate, and therefore reject proposals that we should adopt a unitary rate similar to the unitary rate caps adopted in the
2013 Order.

31. In the
2013 Order
, the Commission found it appropriate to adopt interim unitary rates for a number of reasons. First, the Commission observed the challenges to setting interim rates, including the fact that although the Commission relied on the best data available to it at the time, that data represented a very small subset of data, and included cost data from locations with varying cost and call volume characteristics. Second, the Commission noted that it considered setting different rate caps based on the size or type of correctional facility, but stated that “the record contains conflicting assertions as to what those distinctions should be.” Instead, the Commission adopted interim interstate rate caps “for correctional facilities generally,” “based on the highest cost data available in the record, which [it] anticipated will ensure fair compensation for providers servicing jails and prisons alike.” Finally, the Commission noted that unitary rates were the focus of the original petition for rulemaking and the focus of the majority of comments at that time. Upon release of that item, the Commission adopted the Mandatory Data Collection to “enable [it] to take further action to reform rates, including developing a permanent cap or safe harbor for interstate rates, as well as to inform our evaluation of other rate reform options in the Further Notice.” The responses to the Mandatory Data Collection have greatly expanded the cost data available to us for analysis.

32. We conclude that adopting tiered interstate and intrastate rates accounts for the differences in costs to ICS providers serving smaller, higher-cost facilities, such as the vast majority of jails. A similar concern applies to the potential for over-compensating ICS providers serving larger, lower cost facilities, such as very large jails and prisons. We agree with those commenters who assert that the $0.20 and $0.24 rate caps proposed in the Joint Provider Proposal could result in excessive profits for the largest providers to the detriment of end users who would have to pay inflated rates far

above the providers' costs. For example, in the public portion of its cost data filing Securus noted that its overall cost per minute across all of its ICS contracts is $0.1776. GTL similarly provided its overall cost per minute across all ICS contracts, which it estimated at $0.1341. These averaged, self-reported, costs are well below the $0.20 and $0.24 rate caps proposed by these same providers in the Joint Provider Proposal.

33. The record, and our analysis of costs reported in response to the Mandatory Data Collection, support rate tiering because, holding other factors constant, the costs to serve prisons are lower than to serve jails. This is not surprising. Prisons typically have more stable, long-term inmate populations. For example, there is less than one percent inmate churn in prisons per week compared to an average of 58 percent inmate churn in jails. The record suggests that higher churn rates increase costs to process and grant a new inmate access to calling services, and also when an inmate exits a facility. The record also indicates that prison inmates make fewer but longer calls and providers appear to incur fewer bad debt costs when serving prisons.

34. We also find that economies of scale, such as the recovering of fixed ICS costs over a larger number of inmates, support the tiering approach we adopt today. In the
2013 Order
, the Commission noted that unit or average costs of providing ICS were decreasing as scale increased because of, for example, centralized application of security measures and “the ability to centrally provision across multiple facilities.” More generally, providers of ICS typically incur a range of costs that do not scale with volume, sometimes known as fixed costs. For example, the cost of a calling center is largely shared over a provider's entire operations, so the unit costs of the calling center fall quickly as call volumes increase. Similarly, the cost of connecting a facility to the ICS provider's network increases at a much lower rate when minutes of use increase. Indeed, in general, the incremental cost of a minute of use is almost zero. The Kansas Department of Corrections echoes these findings, stating in its support for rate tiering that “[t]he cost to provide an ICS is largely driven by the size of a facility and length of stay. Larger facilities benefit from the economies of scale that allows agencies and ICS providers to spread the cost among a larger population.” Pay Tel also reports that there are material fixed costs in providing ICS which can be distributed across larger facilities, like prisons, more readily than smaller facilities such as jails. Indeed, many ICS providers currently offer service to multiple facilities under one contract, reflecting the benefits of centralizing fixed costs across a larger base of customers. Lastly, ongoing industry consolidation supports our finding that there are economies of scale in the provision of ICS,
i.e.
, the incentive to become more efficient through scale is an incentive for providers to enter into mergers.

35. Recent state reforms also support tiering. Indeed, the Alabama PSC recently adopted rate tiers tied to facility type with separate rates adopted for jails and prisons. In December 2014, the Alabama PSC adopted a rate structure that “provides lower rates [for prisons] in recognition that the per-minute costs for service in prisons is lower than it is for jails.” In order “to ensure ample opportunity to correct any funding shortfalls resulting from potential reductions in site commissions,” the adopted rate caps included a two-year phase-down period from $0.30/minute to $0.25/minute for collect and debit/prepaid calling from jails and $0.25/minute to $0.21/minute for debit/prepaid calling from prisons, while the prison collect rate stays at the initial $0.25/minute rate cap.

36. We disagree with assertions that a tiered rate structure would be difficult for the Commission to administer, for ICS providers to implement, and for correctional officials to oversee. Those commenters who make such assertions already charge different rates across different ICS contracts and provide no real evidence or support for why rate tiers would be any more difficult or challenging than their current approaches.

37. For all of these reasons, we conclude that adopting rate tiers based on facility type as well as size, or ADP, allows us to recognize the differences in the costs of serving facilities of different types as well as providing multiple checks to prevent gaming or manipulation as discussed below. Tiering will limit “the impact of the higher rates to those facilities most in need, while ensuring that the vast majority of ICS calls are charged at a rate commensurate with the cost of providing the ICS service.”

b. Determination of Facility Type and Average Daily Population

38.
Defining Jails and Prisons.
Given that our rates will differ for prisons and jails, it is necessary to define these key terms with specificity. The Commission sought comment on defining the terms “prison” and “jail” in the
Second FNPRM.
Subsequent to the
Second FNPRM,
several commenters provided suggested definitions. We have considered these submissions and adopt the following definitions.

39. Specifically, for purposes of this proceeding a jail is defined as the facility of a local, state, or federal law enforcement agency that is used primarily to hold individuals who are: (1) Awaiting adjudication of criminal charges, (2) post-conviction and committed to confinement for sentences of one year or less, or (3) post-conviction and are awaiting transfer to another facility. The term also includes city, county or regional facilities that have contracted with a private company to manage day-to-day operations; privately-owned and operated facilities primarily engaged in housing city, county or regional inmates; and facilities used to detain individuals pursuant to a contract with U.S. Immigration and Customs Enforcement (ICE) and facilities operated by ICE. For purposes of this proceeding a prison is defined as a facility operated by a territorial, state, or federal agency that is used primarily to confine individuals convicted of felonies and sentenced to terms in excess of one year. The term also includes public and private facilities that provide housing to other agencies such as the State Departments of Correction and the Federal Bureau of Prisons; and facilities that would otherwise fall under the definition of a jail but in which the majority of inmates are post-conviction or are committed to confinement for sentences of longer than one year.

40.
Facility or Institution.
The record indicates concern that some ICS providers may try to take advantage of the rate tiering structure we adopt in this Order by increasing the number of “facilities” in which they are allowed to charge the higher rate caps adopted for smaller jails above. For example, ICS providers may do this, commenters explain, by seeking to divide a detention facility into sub-units, such as wards or wings. The Commission sought comment on these possibilities in the
Second FNPRM.
Comments received in response confirmed that concerns that providers might try to game our rules were justified. Such gaming would be contrary to this Order, and would serve to frustrate the underlying purposes of sections 201 and 276 of the Communications Act. It would allow providers to appear as though they are serving smaller jails than they actually are, even though they achieve economies of scale by combining multiple small facilities under a single contract, because they are able to centralize services, like call monitoring

and recording, thereby reducing their overall costs. In order to establish and maintain just, reasonable, and fair ICS compensation, we must consider these issues and take steps to ensure that our adopted tiered rate caps cannot be undone by gaming.

41. As such, we find that a jail, as defined above, and a prison, as defined above, cannot be divided into multiple wings, units, or wards by, for example, for the purpose of taking advantage of our tiered rate caps. If interested parties believe such gaming is occurring they may bring the issue to the Commission's attention, at which time the Commission will review the totality of the circumstances (
e.g.,
treatment of the facility under state law, relevant contracts, physical attachment or proximity of units, etc.) to determine whether unlawful gaming has occurred.

42.
Average Daily Population for Jails.
As an initial matter, for purposes of the reforms adopted in this Order, the initial average daily population will be the sum of all inmates in a facility each day in the 12-month period prior to the effective date of this Order divided by the number of days in the year. This definition is consistent with that used by the Department of Justice's Bureau of Jail Statistics. We note that correctional institutions often publicly report their ADP. This publicly-reported population data should be used, where available, to determine the appropriate ADP for a facility. Going forward, when the relevant ADP is not publicly reported, beginning with January 31, 2017, the ADP will be calculated on a calendar year basis as the sum of all inmates in a facility each day between January 1 and December 31 of the previous year, divided by the number of days in the year. The applicable ADP will then be determined as of January 31 of each year pursuant to the ADP from the previous year and will remain in effect throughout that year. Consistent with this approach, if a correctional facility adds a new building or wing to a facility, the inmate population of the new wing will not be accounted for immediately. Rather, the inmate population of a new building or wing will first be considered in the calculations for ADP to be applied in the following year. For example, if a new wing is established anytime between January 1, 2017 and December 31, 2017, its inmate population during this time frame will be included in the ADP to be applied on January 31, 2018. We find this to be the most administratively efficient and feasible option, rather than potentially having numerous rate changes during a calendar year. New buildings or wings may not be filled immediately, and it may take some time before population levels in a newly-established wing increase enough to push the facility as a whole into a new tier. We find these detailed definitions are necessary to ensure that end users are charged just, reasonable, and fair rates and that ICS providers receive fair compensation for the costs they incur in providing ICS to smaller and larger facilities.

43.
Categorization of Certain High-Cost Facilities.
In the
Second FNPRM
the Commission sought comment on suggestions that it either exclude from any adopted rate caps what are reported to be high-cost facilities, such as juvenile detention facilities or secure mental health facilities, or provide a blanket waiver for such facilities. While the Commission did not request that providers separately calculate and report their costs for providing service to secure mental health facilities or juvenile detention facilities outside of jails or prisons in response to the Mandatory Data Collection, we agree with commenters that these facilities may be more costly to serve due to the smaller number of inmates. This is also consistent with our analysis above. We therefore conclude that the costs of providing ICS to juvenile detention facilities and secure mental health facilities are more akin to providing service to jail facilities. To the extent that juvenile detention facilities and secure mental health facilities operate outside of jail or prison institutions, they will be subject to the jail rate caps adopted herein.

2. Tiers for Jails

44. After placing issues relating to the Mandatory Data Collection out for public comment, the Bureau reviewed written comments, met with interested parties, and adopted a template for submission of required data in the Mandatory Data Collection. In it, the Bureau directed ICS providers to document applicable costs and fees by “contract size.” Potential contract size categories for jails include 0-99, 100-349, 349-999, and 1000 ADP and greater, and potential categories for prisons include 1-4999, 5000-19,999, and 20,000 ADP and greater.

45. The Commission sought comment on proposed rate tiering in the
Second FNPRM.
Pay Tel asserts that it supports three rate tiers, one for “small-to-medium sized jails (less than 350 ADP) based on `demonstrated operational and functional differences between prisons and jails—and the cost differences associated with [the] provision of ICS therein.'” Petitioners support a two-tiered structure and suggest rate caps for facilities with 0-349 ADP and facilities with 350 and over ADP in order to take into account the “alleged higher costs incurred by small jails. The Joint Provider Proposal does not favor any rate tiers. Securus asserts that if the Commission adopts a tiered rate structure, “the tiers should be defined in a way that account[s] not only for ADP but also differences in the investment required to serve a site. . . . And, as Securus previously has stated, ADP must be very closely defined such that carriers cannot game the system in the way that they report those figures.”

46. In this Order we adopt rate tiers based on the following ADP for jails: 0-349, 350-999, and 1,000 and greater. We adopt these rate tiers for jails because we find that they most closely resemble the breakdown between small-to-medium jails, large jails, and very large, or mega-jails. We have decided not to include a 0-99 ADP breakdown in the rate tiers in part because, according to the Bureau of Justice Statistics, jails with an ADP under 99 make up less than 10 percent of the inmate population. We also believe that adopting fewer tiers than those requested in response to the Mandatory Data Collection responds to comments in the record expressing concern over potential confusion and burden of multiple rates. By adopting these tiers for jails, we conclude that our rate caps will most closely conform to the costs as filed in the record. As a group, jails are more varied than prisons and, as we have discussed herein, there are economies of scale to be gained as facility size increases. Finally, as discussed below, the data received in response to the Mandatory Data Collection support these tiers.

47. Below we explain how we have determined that our prescribed rates will allow efficient providers to recover their costs. We rely principally upon: (1) Analysis of data received in response to the Mandatory Data Collection, which shows that firms operating efficiently would earn substantial profits under our prescribed rates, (2) evidence suggesting that providers' reported costs in response to the mandatory data collection are overstated, and (3) other evidence in the record, including ICS providers' provision of service in jurisdictions with rates lower than those we prescribe here.

3. Determination of Specific Rate Caps

48. Having determined the basic structure of rate caps, we describe the methodology for the specific rate caps within that structure. Specifically, we find that the following rate caps will ensure that ICS rates are just,

reasonable, and fair for inmates, their families and loved ones, as well as the ICS providers, and will incorporate the costs associated with the necessary security protocols: $0.22/MOU for debit and prepaid calls from jails with an ADP of 0-349; $0.16/MOU for debit and prepaid calls from jails with an ADP of 350-999; and $0.14/MOU for debit and prepaid calls from jails with an ADP of 1,000 or more. Debit and prepaid calls from prisons will be capped at a rate of $0.11/MOU. Collect calls from jails will be capped at $0.49/MOU and collect calls from prisons will be capped at $0.14/MOU until July 1, 2017, and then transition down to the appropriate debit/prepaid rate cap.

a. Marketplace Evidence of Rates in Certain States

49. Evidence of rates at the state level generally provides further support that the rate caps we adopt today allow sufficient room for providers to earn a fair profit. As noted above, Ohio eliminated site commissions and reduced ICS rates by 75 percent to $0.05 for Ohio Department of Rehabilitation and Correction (ODRC) facilities. West Virginia's Division of Corrections recently reviewed bids without regard to site commissions offered by the bidders (
i.e.,
the DOC did not take site commissions into account in deciding the winning bidder). New Jersey recently awarded an ICS contract for state prisons that eliminated site commission payments and reduced rates below $0.05 per minute, yet the winning bidder, GTL, reported to the Commission average 2012 through 2013 ICS costs of [BEGIN CONFIDENTIAL] [END CONFIDENTIAL]. The Pennsylvania Department of Corrections (DOC) contracted with Securus at a $0.059 per-minute rate for all ICS and the elimination of all ancillary fees, while offering a 35 percent site commission, even though Securus reported to the Commission that its average cost of providing ICS over 2012 and 2013 was [BEGIN CONFIDENTIAL] [END CONFIDENTIAL]. Similarly, in New Hampshire, the state DOC lowered intrastate rates to less than $0.06 per minute with a 20 percent site commission. That providers bid for these contracts, and supply ICS at rates consistent with these constraints, strongly suggests that efficient providers can provide ICS at rates closer to $0.05 per minute—less than half of our lowest rate cap of $0.11 per minute. This is not surprising, as a per-minute rate of approximately $0.05 per minute approximates the lowest average per-minute costs reported to us. We observe that it is unlikely that any provider would supply any state if the rates allowed in those states did not at least cover the incremental costs of supplying each of those states, which further suggests that reported costs may be inflated. We also note that no provider clearly argued that such rate levels are the result of cross-subsidization, and there is no data in the record to support such a conclusion. While one provider made statements unsupported by data that might be so interpreted, those statements are too vague to evaluate.

b. Analysis of Data Received in Response to the Mandatory Data Collection

50.
Rate Methodology.
In the
2013 Order,
the Commission adopted the Mandatory Data Collection to enable it “to take further action to reform rates, including developing a permanent cap or safe harbor for interstate rates, as well as to inform our evaluation of other rate reform options in the Further Notice.” In 2014, the Wireline Competition Bureau (Bureau) developed a template and related instructions for ICS providers to use in responding to the Mandatory Data Collection. The Commission also provided notice of the data collection, its due date, and information on contacting Bureau staff available to answer specific questions on how to comply with the filing requirement and the template and instructions. The instructions, template, and other related material were posted on the Commission's Web site, and the data collection due date was announced by Public Notice which was also published in the
Federal Register
, 79 FR 35956, Nov. 21, 2014. Responsive data were received in August 2014.

51. The Commission directed the Bureau to create the template in a manner intended to allow a provider to include all costs incurred in the provision of ICS. Without limiting or restricting costs or cost categories, the Bureau directed providers to report their ICS-related costs for telecommunications, equipment, and security, as well as any costs not captured in these categories (
i.e.,
“other costs”). The Commission directed providers to submit the data for fiscal years 2012, 2013, and 2014, which provided the two most recent years of actual data and one year of partial actual and partial forecasted data. Providers were required to report intrastate, interstate and international ICS cost data in the aggregate for debit, prepaid, and collect calling services. For each service, providers were required to identify which costs were direct or common, and to allocate costs by facility type and size. Providers also submitted call volume data (MOU and number of calls) for each category. The Commission received data filings from 14 of the 25 anticipated ICS provider respondents. We estimate that the 14 responding providers together represent over 90 percent of the market.

52. The debit and prepaid rate caps we adopt are based on 2012 and 2013 data submitted by the 14 responding providers. The caps rely on the 2012 and 2013 data because it represents actual, rather than projected, data, and allows averaging across the two years to account for cost variations that may occur between the years. Costs per minute were calculated using a weighted average per minute cost (which is the same as dividing aggregate costs (
i.e.,
the entirety of all costs reported by the providers for any category) by aggregate minutes of use in that category). This prevents small outliers from having a disproportionate impact on our analysis.

53. Based on the record and our analysis described below, we believe the applicable rate caps will ensure just, reasonable and fair compensation for ICS. We have relied on the cost data and allocations as submitted by ICS providers in calculating these rate caps. We note that the providers cost data reflect their determinations about how to allocate certain common costs, such as call centers and back-office operations. It is generally understood that an economically rational provider will serve a facility if it can recover its incremental cost of doing so, which the record and our analysis indicate will be the case. We take the data at face value, even though the analysis shows that there is significant evidence—both from our own analysis and commenters' critiques—suggesting that the reported costs are overstated. We also find support in the record evidence of increased demand and additional scale efficiencies, which are not included in our quantitative analysis. Our analysis and the record evidence support our conclusion that efficient providers would be able to operate profitably under our rate caps.

54.
Discussion and Analysis.
Based on the record and our own analysis described below, we find that our prescribed rate caps as outlined above are more than sufficient to allow providers to recover efficiently-incurred ICS costs (excluding reported commissions).

55. The record supports our conclusion. Coleman Bazelon, economics consultant for the Wright Petitioners, analyzed our rate caps and concluded that they “will largely cover the individual ICS providers' costs in

providing service.” [BEGIN CONFIDENTIAL] [END CONFIDENTIAL] The Bazelon economic analysis does not take into account the evidence that lower rates will spur demand, such that the vast majority of the industry costs will be covered by the rates adopted today.

56. ICSolutions, an ICS provider, states that it “can comply with the proposed rules” and notes that this “strongly suggests that any entity failures in the industry are likely a result of inefficient operations.” NCIC also supports our rate caps. Praeses “believes that Providers will generally be able to provide services pursuant to these rate caps at a profit.” Praeses also reports that interstate call volume and resulting revenue have increased since our 2013 interim reform, with facilities operated by its clients seeing approximately 76 percent interstate call volume increases and overall interstate revenue growth of approximately twelve percent. This is unsurprising, as reduced prices typically lead to higher volume. ICSolutions reports seeing call volumes increase “by as much as 150%, and revenues increase by about 30%” when it implements lower call rates. In addition, our rate caps are generally higher than rates that have been adopted in several states that have undertaken reform and there is no evidence in the record that such rates have made provision of ICS unprofitable. Also, nothing in the record suggests that states that have adopted such reforms are different from those states that have not adopted reform with respect to either costs or revenues.

57. Our own analysis likewise shows that the rate caps will permit just, reasonable, and fair recovery for the provision of ICS. Our approach is conservative in its analysis of both costs and call volumes (and hence revenues). It includes all the reported data, assumes they do not overstate costs, and takes no account of likely increases in call volumes that our rates would induce, thereby understating expected revenues. This analysis thus likely reflects a worst-case scenario, and, as discussed below, even in the worst-case scenario, our rates are fair and reasonable.

58.
Costs.
Our analysis of costs supports our conclusion that efficient providers will be assured just, reasonable, and fair compensation under our rate caps. In particular, based on the unaudited costs for 2012 and 2013 reported by the 14 respondents to the Commission's Mandatory Data Collection, the lowest rate cap we prescribe ($0.11) is greater than the average per minute cost of each of the more efficient reporting providers. Two of these providers are quite small, and operate in relatively small jails only. As a result, as discussed below, the expected efficient cost of these small providers on a per minute basis is likely higher than the efficient costs larger reporting providers face, which implies that larger providers should also be able to operate at a profit at our prescribed prices. We recognize that some providers may supply a range of services that go beyond ICS, and the prices that they charge may be used to cross-subsidize these services. However, we do not consider it appropriate for non-ICS services, such as location-monitoring, to be paid for by inmates and their families and friends through ICS rates.

59. Further, we find that providers reporting high costs could recover those costs and receive just, reasonable, and fair compensation under our rate caps through increased efficiencies. Our analysis suggests that providers generally may have been over inclusive in reporting their costs and that the supply of ICS is not fully competitive, implying that the adopted rate caps are conservative. We also note that no providers have submitted evidence that their higher costs may be attributable to higher-quality or more technologically-advanced ICS.

60. Other evidence reinforces our view that respondents' reported costs may in some cases exceed economic costs, and lead us to conclude that our prescribed rate caps will allow efficient firms to recover their economic costs, including a reasonable return. For example, the average per-paid minute cost of each of the seven largest firms substantially exceeds the average per-paid minute average cost of each of three smaller providers. This data point suggests these larger firms are either economically inefficient or that they overstated their costs of ICS provision. On one hand, if there were economies of scale or constant returns to scale in production of calls or call minutes of use, then larger firms would have lower or the same average costs as the smaller firms, implying that these larger firms' reported costs are above efficient levels. On the other hand, if there were diseconomies of scale (that is, the average per-minute cost rises with MOU volumes), then these firms are inefficiently large (they would be more effective broken up into smaller firms), and we should not subsidize that anomaly.

61. More generally, we find above that average costs should fall with the provider's size. However, the reported data (implausibly) show only a very weak negative relationship between average costs and the number of calls or MOU. Similarly, the data (again implausibly) do not support
a priori
assumptions about underlying costs. For example, regression analysis indicates that the firms' costs were highly correlated with different measures of MOU, type of call, and facilities serviced. However, in most specifications the coefficients associated with the MOU and call variables were implausible: they were typically well above the expected marginal cost of an additional MOU. Further, in some specifications, the differences between the marginal costs of different types of calls were implausibly large and statistically significant. Both of these facts (the lack of scale economies in call production and minutes of use and oddities about reported marginal costs) suggest that the data do not reflect the actual economic costs of supply and lead us to doubt the extent to which reported costs accurately reflect efficient costs. Additionally, reinforcing our view that reported costs are inefficiently high, there is evidence that some of the providers' costs include services that are not directly related to the provision of ICS. In short, all these observations make it all the more likely that our prescribed rate caps would allow an efficient provider to earn economic profits.

62. There is also evidence that competition to supply ICS may not always be robust, which in turn suggests providers are able to earn more than economic costs, and if faced with lower revenues, may remain profitable. The most important evidence in this last respect is that the providers' unaudited cost data show that roughly similarly situated providers have substantially different costs. This not only suggests that the higher cost providers are unlikely to be economically efficient, but also that if they were to operate more efficiently, they would have no difficulties in recovering their economic costs. For example, a lack of robust competition would explain why the reported cost data does not seem reflective of underlying costs (a result that is inconsistent with effective competition). Analysis of that data also finds a tight relationship between costs and output levels, both when commissions are included and excluded. This suggests a high degree of homogeneity in the industry between reported costs (with and without commissions) and output. One might expect such results if all bids for ICS were either competitive or non-competitive, but, as noted, other aspects

of the cost data are inconsistent with competition, and other evidence suggests competition, if it exists, is not found everywhere.

63. Two of the six smallest responding providers when ranked by paid MOU would earn substantial imputed profits at our prescribed rates. For example, over 2012 and 2013, [BEGIN CONFIDENTIAL] [END CONFIDENTIAL] had an average per paid minute cost of $0.05 (and a similar average per all minute cost) when rounded to the nearest $0.05, earning imputed profits of well over 200 percent. Similarly, in 2012 and 2013, [BEGIN CONFIDENTIAL] [END CONFIDENTIAL] had an average per-paid minute cost of $0.10 when rounded to the nearest $0.05, earning imputed profits in excess of 100 percent.

64. In contrast, our conservative approach imputed reductions in providers' ability to recover costs under our initial rate caps to seven of the reporting providers, but we find that all of these providers would be highly profitable if their cost structures resembled those of the two small efficient firms we identified. Four of these are among the six smallest responding providers. Each reported average per-paid minute costs over 2012 and 2013 of $0.25 or higher. That is, in all cases their average per-paid minute costs were more than two and a half times, and in some cases several multiples of, the highest paid MOU average cost of the two small providers with imputed profits. Consequently, if these four providers' average costs were halved, so that they still exceeded those of the two small providers with imputed profits, then all four would operate at a profit given our conservative revenue assumptions. The remaining three providers with imputed reductions in cost recovery are considerably larger than the two small providers with imputed profits discussed above, and more than one supplies services in prisons as well as jails. Yet, each has an average per-paid minute cost that is at least three times as high as that of [BEGIN CONFIDENTIAL] [END CONFIDENTIAL] (which we found to have large imputed profits). Again, if these providers' costs were considerably closer to, but still well above those of [BEGIN CONFIDENTIAL] [END CONFIDENTIAL], then they would be able to earn profits while charging rates consistent with our prescribed rate caps. In the two subsequent years, providers' ability to recover costs would change, but in all cases if these providers were as efficient as the two efficient providers discussed above, they would earn an economic profit in all of the years discussed.

65.
Revenue.
Turning to revenue, our analysis likewise demonstrates that our rate caps permit fair, reasonable, and just compensation. Once again, we take the provider's data as filed despite the evidence that they are overstated. Moreover, even assuming the same call volumes as experienced in 2012 and 2013, no other revenue sources, and no improved efficiency in service provision, we can impute in the initial year that all providers, if operating efficiently, would be profitable under our prescribed rate caps. With more realistic assumptions (greater call volumes, revenues from ancillary services, and productivity improvements), it is likely that any provider facing imputed revenue reductions in the range of 10 percent would remain profitable even if its reported costs were not overstated (and we find to the contrary). For example, for the reasons described below and based on record filings, capping rates is likely to increase minutes of use, thus raising revenues, and this would likely make up for such imputed reduction in revenue. The few remaining providers potentially could face larger imputed reductions in revenue (assuming their reported costs were efficient). However, these providers have reported costs significantly higher than the industry average, even more strongly suggesting that they are likely to be inefficient providers. In any event, to the extent such providers can demonstrate that they are unable to receive fair compensation under our rate caps, they would be eligible to seek a waiver as described below.

66. In short, our revenue estimates are likely understatements, for the reasons described below. We also find that many of the providers' reported costs are likely to be higher than efficiently-incurred costs, and this is specifically the case for the carriers just discussed. Consequently, we have a high degree of confidence that our prescribed caps would allow efficient providers of ICS to operate profitably.

67. Our revenue imputation likely underestimates the actual revenues providers would obtain for four reasons. First, our analysis does not take into account the demand stimulation from lower rates. But there is substantial record evidence showing that, to the extent that our caps lower existing rates, they will increase minutes of use and raise provider revenues.

68. Second, we impute rates that in some cases will be lower than the rates the providers may actually charge. The resulting revenue underestimate could be material for six of the providers for which we impute losses at our prescribed rate caps, meaning that as a practical matter they could make up for any shortfall. All these providers have jail contracts with ADPs of at least 350, and some of these providers have a large number of such contracts. To estimate each provider's revenues under the rate caps we adopt today, we calculate the revenues the provider would have earned given the MOU the provider reported for 2012 and 2013 for debit and prepaid calls in the three different jail size categories, 0-349, 350-999, and 1,000+, for prisons, and for collect calls (so, for example, if a carrier had 1,000 debit MOU in the 0-349 category, we assume the provider would earn $220 (= 1,000*$0.22)). This approach can understate revenues because providers reported contracts according to
the sum of the ADP of the facilities covered under the contract,
but in some cases providers will charge different rates in different facilities supplied under the same contract. In that case, when the contract has an ADP of 350 or more, but the provider serves under the contract jails with an ADP that is lower than the contract ADP, our estimate will understate the revenues they would have earned if our prescribed rates were applied. For example, a contract with an ADP of between 350 and 999 that currently sets different rates for different facilities might cover three jails, each with an ADP of 150. In that case, while we would impute a rate of $0.16 to the prepaid and debit MOU reported under that contract, in reality the provider could be entitled to the $0.22 rate cap on all those MOU. Similarly, all jails reported under contracts with an ADP of 1,000 or more were imputed the debit and prepaid rate of $0.14, but some of these jails could have ADPs of less than 1,000, and in some cases of less than 350. If the contract specified separate rates by facility, then the provider could be entitled to either the $0.16 or the $0.22 rate in those smaller jails.

69. Third, our analysis also does not take into account the caps that we impose on ancillary service charges, which likely will lead to an increase in minutes of use. Finally, our analysis does not take into account the fact that international calls are not subject to our rate caps and therefore, such calls will produce more revenue than reflected.

70. A few providers, including GTL, Securus and Telmate, contend that our rate caps are too low and will not allow them to recover their costs. Others assert that our rate caps may be too low with respect to particular facilities. Some representatives of jail facilities express concern that the provision of ICS in

their facilities may be in jeopardy. Based on our analysis and the record, we find these assertions unpersuasive. Several providers dispute their claims, noting that GTL, Securus, and Telmate failed to break out their costs by facility type, and proposed rate caps well above their reported average costs over both prisons and jails. As a result, “any claim that the Commission's draft rates are demonstrably below carriers' reported costs is wholly unsubstantiated and without merit.” Our analysis indicates that the rate caps we adopt will permit just, reasonable, and fair compensation. Moreover, we expect that the reforms adopted will lead to increased minutes of use, incentivize increased efficiency, and permit providers to generate increased revenues. Thus, we do not believe that there is a reason for service to facilities to be in jeopardy but, as noted below, there is a process for considering any unique circumstances that may justify a waiver to ensure fair compensation.

c. Evidence That the Mandatory Data Collection Likely Overstates Providers' Costs

71. In addition to the analysis detailed above, evidence in the record suggesting that a number of ICS providers overstated their costs in response to the Mandatory Data Collection provides us with further comfort that the rate caps adopted today are appropriate and ensure fair compensation to the providers.

72. For instance, providers were directed to file a Description and Justification (D&J) with their Mandatory Data Collection response to document and explain their cost submissions. Three providers did not submit a D&J to the Commission. The D&Js received varied widely in detail and thoroughness. Five providers (CenturyLink, GTL, Pay Tel, Securus, and Telmate) claimed a cost of capital of 11.25 percent in developing their cost data submission. (While other providers did not specify a cost of capital, given the length of this proceeding and the fact that the Commission clearly signaled its focus on setting appropriate ICS rates, as well as the fact that these respondents are sophisticated parties, we think that it is reasonable to assume that all responding providers included a cost of capital whether they specified it or not.) The cost of capital has to be estimated and their estimate of 11.25 percent might be significantly higher than the prevailing cost of capital for companies that provide telecommunication services. In any event, none of these companies submitted evidence as to their costs of debt or equity capital or capital structure, the three components of the cost of capital, and so have not justified any cost of capital estimate. In addition, several providers (Securus, Telmate, and CenturyLink) included in their costs financing items as well as interest expense, which is included in the cost of capital. This suggests that these providers, and possibly others, have over-estimated their capital costs, potentially double-counting their cost of debt. The five providers that specifically reported using 11.25 percent account for a large portion of the market, and thus a commensurate weight is reflected in the weighted average caps that we calculate. Consequently, in the unlikely event that a provider omitted its cost of capital, the omission is unlikely to have a significant impact on the weighted average caps. We also note that the Bureau has recommended to the Commission that a zone of reasonableness for the Weighted Average Cost of Capital (WACC) is between 7.39 and 8.72 percent.

73. We also find that the manner in which the data was collected and the clearly-stated purpose of the data collection, which occurred in the context of a Commission effort to set caps on ICS rates, gave providers every incentive to represent their ICS costs fully, and possibly, in some instances, even to overstate these costs. For example, one provider noted in its D&J that it even included in its ICS-related costs amounts for dues, subscriptions, entertainment and meals. We question the appropriateness of including such costs as ICS-related costs but as noted below we accept these reported costs without discounting or manipulating them. We have observed that at least one reporting provider did not actually calculate the percentage of traffic for each service (debit, prepaid or collect) represented but rather used the same percentage for each and merely offered a “guess” in reporting its 2014 data projections. This information forces us to call into question the accuracy of this provider's data and how rigorous this provider was in preparing its Mandatory Data Collection response. That the adopted rate caps include such costs, as well as the costs of international calls that are not subject to our rate caps, causes us to conclude that the adopted caps are generous. An analysis of the adopted rate caps shows that some providers will recover more than their stated costs, while others will recover less (because the caps are based on weighted industry averages but, as explained above, we believe all providers can more than recover the efficient costs of ICS supply).

74. Moreover, comments in the record have also highlighted how the data likely overstate costs. For example, the Petitioners' economist, Coleman Bazelon, and Pay Tel's economic consultant Don Wood identified problems they observed with the data. Dr. Bazelon also reported that, based on an analysis that included information not included in the provider's Mandatory Data Collection submissions, the reported costs of Securus and GTL “include many incorrectly calculated additions such as inappropriately recoverable financing costs.” Dr. Bazelon reports that, [BEGIN CONFIDENTIAL] [END CONFIDENTIAL].

75. After recalculating the providers' costs, Dr. Bazelon then concludes that their reported costs should be discounted by approximately [BEGIN CONFIDENTIAL] [END CONFIDENTIAL]. While we do not discount the costs as recommended by Dr. Bazelon and, instead, take a more conservative approach of using the data at face value, this analysis underscores that the data submitted likely overstates costs and, as a result, the rate caps we adopt today are conservative.

d. Alternative Proposals in the Record

76. Numerous commenters have submitted rate reform proposals in the record. The Petitioners, along with several public interest groups, initially urged the Commission to adopt a $0.07 per minute rate cap for all interstate debit, prepaid, and collect calls, with no per-call charge, and no ancillary fees or taxes allowed. GTL, Securus, and Telmate, who describe themselves as “the primary providers of inmate calling services . . . in the United States and represent[ ] 85% of the industry revenue in 2013,” jointly filed a proposal to comprehensively reform all aspects of ICS. The Joint Provider Proposal urges the adoption of rate caps of $0.20 per minute for debit and prepaid interstate and intrastate ICS, and $0.24 per minute for all interstate and intrastate collect ICS, effective 90 days after adoption of a final order. The Joint Provider Proposal does not indicate that it is based on cost data received in response to the Mandatory Data Collection. In addition, the Joint Provider Proposal was signed by only three of the 14 ICS providers that responded to the Mandatory Data Collection. Pay Tel submitted what it calls an “Ethical Proposal,” in which it proposes rate caps of $0.08 per minute for all prisons regardless of population, $0.26 per minute for jails with 1-349 ADP, and

$0.22 per minute for jails with 350 plus ADP. The Commission sought comment on these proposals in the
Second FNPRM.

77. In response to the
Second FNPRM,
Petitioners submitted another reform proposal. The Petitioners propose a rate of $0.08/minute for prepaid and debit calls and $0.10/minute for collect calls from all prisons and jails with over 350 beds. Petitioners propose a rate of $0.18/minute for prepaid and debit calls and $0.20/minute for collect for facilities with fewer than 350 beds. Petitioners suggest that the Commission adopt these tiered rates to account for higher churn rates, increased non-revenue calls, and higher bad debt issues experienced in smaller facilities. In its comments to the
Second FNPRM,
PPI supports a cap of $0.05 to $0.07 per minute.

78. Several commenters submitted economic justifications for their rate proposals, each of which relied on a slightly different subset of the data in the Mandatory Data Collection. For the reasons described below, the Commission declines to adopt any of these proposals.

79. After comments were received in response to the
Second FNPRM,
Pay Tel filed an additional proposal based on its economic consultant's analysis of the data filed in response to the Mandatory Data Collection. The company proposes tiered per-minute rate caps, for all call types, plus institution cost recovery amounts to be added to those caps. The rates (rate cap plus additional facility cost recovery) would range from $0.10/min for prisons to $0.29/min for jails of 0-349 inmates. Specifically, Pay Tel's economic consultant, Don Wood, excluded from his analysis, and subsequent proposed rate caps, the data from ATN, Encartele, and Protocall because he did not receive data from those providers, and from Combined Public Communications, Custom Teleconnect and Correct Solutions, because he deemed them “unreliable for the purpose at hand.” Mr. Wood then observed that the remaining eight reporting ICS providers' data included no description of how their cost studies were performed, and stated that “a number of the studies are decidedly imperfect, and more complete documentation would certainly be desirable.” Regardless, Mr. Wood suggested that “key results of these studies should be relied upon by the Commission when making any decisions regarding the level and structure of ICS costs.” We conclude that our approach is more appropriate because it includes data from all providers, rather than excluding six of the fourteen reporting providers' data. This approach is less reliable than our rate caps because of its selective nature. While we agree that the data are not perfect, we do not believe it is appropriate to ignore the filed data and we find Mr. Wood's rationale for excluding certain providers' data unpersuasive without additional justification. As such, the rate caps adopted herein are derived from all data filed in the record.

80. In comments to the
Second FNPRM,
the Wright Petitioners' economist, Coleman Bazelon, identified problems he observed with the data received in response to the Mandatory Data Collection. For example, Dr. Bazelon identified inconsistencies in how providers categorized and allocated costs. Dr. Bazelon then discussed the rate caps that the Wright Petitioners' proposed in their comments. These rate caps were based on Securus' and GTL's average cost data, which Dr. Bazelon then discounted because of concerns regarding Securus' cost-reporting methodology. As noted above, Dr. Bazelon found errors in Securus' and GTL's submissions, which led them to likely overstate their reported costs. After adjusting for these errors, the Wright Petitioners suggest that an appropriate rate cap for service to prison facilities should be $0.08/minute for debit/prepaid calling and $0.10/minute for collect calling.

81. We appreciate Dr. Bazelon's analysis highlighting that the data are likely to be overstated, but we do not believe it is appropriate for our purposes. Dr. Bazelon's analysis suggests that one provider may have overstated its costs by some significant amount. We find Dr. Bazelon's analysis of the submitted data troubling and believe that his conclusions, if true, might support discounting cost data from certain providers. (We note, however, that our filing instructions did not specify in detail how providers should account for the data that Dr. Bazelon discussed, although we required providers to identify and explain all costs in the accompanying Description and Justification. The lack of specific instruction regarding the method of cost reporting should not have been interpreted as license to manipulate or over-report cost data, and the reference to the penalty for willful false statements should have made that evident.) While we are concerned that the analysis from Dr. Bazelon suggests that costs were overstated, we do not believe it is appropriate to adopt a rate cap based on discounting a single provider's costs when we have data from 13 other providers. In addition, we determine above that we should not manipulate the data but more conservatively accept the providers' costs as filed to avoid potentially arbitrary means of working with the data.

82. Alabama Public Service Commission Utility Services Division Director Darrell Baker likewise reviewed the data. His proposal includes four tiers each for prisons and jails, based on inmate population, with both rate caps and additional facility cost-recovery amounts, yielding rates ranging from $0.12/min (prisons with more than 19,999 inmates) to $0.25/min (jails of less than 100 inmates). In support of his proposal for prison rates, Mr. Baker relied on cost data from only seven of the reporting 14 providers. He excluded from his rate cap and cost-recovery calculations the seven smallest reporting providers, on the basis “that the . . . [remaining] providers serve the overwhelming majority of jails and prisons and that . . . an analysis of their data should provide accurate and reliable results that are applicable across the entire industry.” In support of his proposal for jail rates, Mr. Baker relied on data from only six of the reporting providers, excluding one of the seven remaining providers' data because that “[o]ne provider's cost per MOU deviates substantially from the cost per MOU of other providers.” We find Mr. Baker's approach problematic because it eliminated the higher cost data in the record. Put another way, the seven smallest providers submitted what were among the highest reported costs of providing ICS and the other excluded provider by process of elimination must be a larger provider that is responsible for a more-significant portion of ICS minutes of use. Additionally, Mr. Baker appears to have given no consideration to potential justifications, if any, for that provider's higher costs. We are unable, on the record before us, to exclude providers' reported data in calculating the appropriate rate caps.

83. The comments in the record largely agree that the data are problematic but disagree on the reasons why and the overall effect on the reported data. Each analysis described above is based on a different data set and criticizes the data for slightly different reasons. We take seriously the concerns that the commenters have raised about inconsistencies in the data, and for at least some of the reasons described above, conclude that the reported data likely overstates the providers' actual costs. But, as explained herein, we are unable to agree with and do not adopt any of the commenters' choices about which data to exclude or discount.

e. Rate Caps for Collect Calls

84. In this section, we conclude that it is appropriate to put in place a temporary, distinct rate structure for collect calls, with a two-year phase down after which rate caps for collect calls will be the same as those of debit and prepaid calls.

85. In the
2013 Order,
the Commission established a rate cap for interstate debit and prepaid calling and a separate rate cap for interstate collect calling. The interim interstate collect calling rate cap was $0.25. In setting this separate rate cap, the Commission recognized that, based on the data available at the time, collect calling can be more expensive for ICS providers to offer than debit and prepaid calling. The Commission encouraged facilities to move away from collect calling, noting that the use of prepaid calling helps called parties to better manage their budgets for ICS, thus making end-user costs for maintaining contact more predictable. The Commission also noted that debit and prepaid calling address the problem of call blocking associated with collect calling by enabling service providers to obtain payment for calls up front, thus eliminating the risk of nonpayment.

86. In the
Second FNPRM,
the Commission sought comment on retaining the differentials between debit/prepaid and collect calling. The Commission noted that data received from the Mandatory Data Collection suggest that collect calling costs are higher than costs for prepaid and debit calls, and that collect calling accounted for less than nine percent of revenue producing minutes in the data collection in 2013. Commenters suggest that collect calling is more costly to provide because of bad debt, billing costs, uncollectible debts and issues related to collection of non-payment. For example, some commenters still assert that the Commission should adopt a higher rate cap for collect calling, largely because of the higher costs associated with collect call service. The Commission, along with several commenters, has noted that use of collect calling in correctional facilities has dropped significantly in recent years. Data received in response to the Mandatory Data Collection confirm this decline. Between 2012 and 2014, collect-calling minutes of use decreased over 50 percent, from 15 to 7 percent of minutes of use. CenturyLink recently told the Commission that “that traditional collect calling represents a small and
declining
percentage of inmate calls.”

87. Based on our analysis of the record, including data submitted in response to the Mandatory Data Collection, we predict that collect calling usage will continue to decrease in the future. We do not want to include high collect calling costs in debit and prepaid rate tiers because that would compel the majority of ICS end users that do not use collect calling to subsidize such calls. In light of that concern, and because we continue to encourage correctional institutions to move away from collect calling, as the Commission did in the
2013 Order,
we adopt a separate rate cap tier for collect calling. This separate tier is consistent with the Commission's prior actions in adopting a separate collect calling rate tier based on data indicating that collect calls were more expensive than other types of ICS calls. Since the adoption of our interim rate caps, only one provider has been granted a waiver based on an assertion of unreasonable or unsustainable rate caps, further supporting the reasonableness of the rate of the interim collect calling rate caps.

88. We adopt a collect calling rate cap based on the cost data received in response to the Mandatory Data Collection, as well as a two-year step-down transitional period, as follows. First, we adopt a collect calling rate of $0.49/per minute for all jails and $0.14 for all prisons until July 1, 2017. Beginning July 1, 2017, we adopt a rate of $0.36/per minute for jails of 0-349 ADP, $0.33/per minute for jails of 349-999 ADP, and $0.32/per minute for jails of 1,000 or greater ADP, and $0.14/per minute for all prisons. This rate is halfway between the initial rate and the rates that are adopted in this Order for debit and prepaid calling. Finally, effective July 1, 2018 and beyond, we adopt a collect calling rate of $0.22/per minute for jails of 0-349 ADP, $0.16/per minute for jails with 359-999 ADP, and $0.14/per minute for jails of 1,000 or greater ADP, and $0.11/per minute for all prisons, in order to arrive at rates that are identical to those adopted in this Order for jails and prisons and the respective tiers therein.

89. We conclude that these separate tiers for collect calling rates will phase out after a two-year transition period. This two-year framework is justified by the data filed in response to the Mandatory Data Collection, showing that collect calling volume is decreasing and will most likely be at a nominal level in two years. By adopting a two-year glide path, the rates ICS providers are permitted to charge phase down over time, with certainty and sufficient time to adapt to a changed landscape that includes reduced use of collect calling overall. We find that this transitional approach will be administratively efficient for both providers and the Commission, as it involves a straightforward two-year step-down process and reflects our expectation that providers will gain efficiencies in their contracts and collect calling, and that they will thus more easily adjust to the lower rate caps adopted for debit and prepaid calling.

90. Moreover, the record supports a uniform rate for collect calls. Indeed, several commenters no longer support a separate rate cap for collect calling, indicating that collect calling costs may not, in fact, differ significantly from debit or prepaid calling costs, or that collect calling accounts for a relatively small portion of calls. The record indicates that this is because correctional institutions favor debit or prepaid calling over collect calling. For example, when the Commission adopted the
2013 Order,
evidence in the record indicated that collect calling was the only ICS option offered in four states and now the record indicates that collect calling is the only ICS option in one state. As the Commission has stated previously, we encourage providers and facilities to move away from collect calling for the many efficiencies and cost savings that other types of calling offer. Finally, we find that a two-year transition will allow the Bureau to monitor collect calling and address any potential traffic arbitrage issue that might occur if providers shift calling patterns to take advantage of the higher collect calling rate caps.

91. We acknowledge that the collect calling rate caps will be higher in year one than several of the collect calling caps proposed in the record. We expect that these caps will serve as backstops, not a target for providers, as efficiencies are gained by providers, and contracts are changed, or new contracts are entered into between parties. As discussed above, we expect that the trend towards declining collect calling volume will continue, and the adopted rate caps may be further modified in response to further data received as part of the MDC adopted herein.

92. We delegate to the Bureau the authority to seek comment on the possibility of adjusting the adopted collect calling rate cap if necessary to address any gaming issues that may arise prior to completion of the phase-down. As part of the annual reporting and certification requirement adopted herein, the Bureau will be monitoring collect call volume in order to review trends and to ensure that gaming does not occur. As discussed below, the

Commission also plans to collect rate data, including data about collect calling rates that will further inform this review.

f. Cost-Benefit Analysis

93. In adopting these rate caps, we have carefully considered each proposal or suggestion from the extensive comments in the record and weighed its potential benefit against any potential burden it may impose, bearing in mind our statutory mandate that ICS rates must be just, reasonable, and fair, maximizing the public benefit from any proposal we adopt. We find, on balance, that the benefits of our rate caps outweigh any potential burden that may be imposed. For example, regular family contact not only benefits the public broadly by reducing crime, lessening the need for additional correctional facilities and cutting overall costs to society, but also likely has a positive effect on the welfare of inmates' children. Ensuring just and reasonable ICS rates will foster regular contact between inmates and families, reduce the economic burden on ICS end users, support more cost-effective communication between inmates and their counsel, and produce cost savings for the justice system.

94. Additionally, as the Commission discussed in the
2012 NPRM,
studies show that regular contact with family reduces inmate recidivism. Children who continue to stay in touch with their parent in prison exhibit fewer disruptive and anxious behaviors. Yet, according to one study, only 38 percent of inmates reported “at least” monthly phone calls with their children. Real telephone contact between inmates and their loved ones at high rates places a heavy burden on inmates' families because families typically bear the burden of paying for the calls. The Government Accountability Office (GAO) has twice recognized the conclusions of Federal Bureau of Prisons officials that contact with family “aids an inmate's success when returning to the community” and thus lowers recidivism. Moreover, the GAO has found that “crowded visiting rooms make it more difficult for inmates to visit with their families” and that “[t]he infrastructure of the facility may not support the increase in visitors as a result of the growth in the prison population.”

95. As discussed above, there is little dispute that the ICS market is experiencing market failure. Numerous commenters have expressed as much. Various parties encourage the Commission to reform rates within inmate calling, and some offer specific reform proposals. Reforms are necessary to ensure that the benefits discussed above, which are in the public interest, will be realized.

96. The Order recognizes, however, that imposing rate caps may impose burdens on some providers. We have taken steps to minimize burdens on providers. As discussed below, we allow a 90-day transition period for the rate caps adopted in this Order to take effect for prisons and six months for the applicable rate caps to take effect in jails. We find that this length of time adequately balances the pressing need for reform while affording ICS providers and facilities sufficient time to prepare for the new rates. Further, our rate caps are designed to ensure that efficient providers will recover all legitimate costs of providing ICS, including a reasonable return, and, to the extent a provider can demonstrate special circumstances, it may seek relief from our rules in the form of a waiver. Specifically, the Commission will consider requests from a provider arguing that particular facts, when considered in the context of the totality of the relevant circumstances, deprive the provider of fair compensation or have a substantial and deleterious effect on competition in the ICS market.

97. Additionally, the rate caps adopted in the Order include fewer tiers than the number of tiers used in the data requested in our Mandatory Data Collection. The Commission collected data, for example, on the costs of serving jail facilities with 0-99 ADP, a grouping comprising less than 10 percent of the inmate population, but we did not adopt that as a rate tier, thereby mitigating any administrative burden on providers of adding a separate rate tier for this comparatively small grouping. The rate caps we adopt today respond to commenter concerns regarding potential confusion and burden caused by multiple rates. We also adopt a single rate cap for prisons, which should minimize the burden on providers that serve prisons. Finally, we disagree with those commenters who assert that adopting a tiered rate structure would be unduly burdensome and difficult for the Commission to administer and for ICS providers and correctional officers to implement. We find these allegations unsupported and commenters provide no persuasive evidence that our rate tiers would be more difficult for them to administer than the current approaches.

4. Rejection of Certain Types of Charges

a. No Per-Call or Per-Connection Charges

98.
Background.
Per-call or per-connection charges are one-time fees often charged to ICS users at call initiation. In the
2013 Order,
the Commission noted problems with per-call charges, “potentially rendering such charges unjust, unreasonable and unfair.” Problems included calls dropped “without regard to whether there is a potential security or technical issue, and a per-call charge . . . imposed on the initial call and each successive call.” The Commission expressed “serious concerns about such charges” and sought comment about the risks of such charges, but did not ban them.

99. In the
Second FNPRM,
the Commission sought additional comment about such charges. First, the Commission asked if it should consider per-call or per-connection charges to be part of the ICS rate and “therefore subject to the section 276 mandate to ensure fair compensation.” Second, the Commission asked, in the alternative, if it should consider per-call or per-connection fees more analogous to the ancillary fees discussed in section 276(d). The Commission asked if there are “instances in which the correctional facility or some other third party assesses a per-call or per-connection fee,” and, if so, the Commission sought comment on its authority to ban such charges. Finally, the Commission sought comment on whether the elimination of per-call charges would allow for just and reasonable interstate and intrastate ICS rates and fair compensation for ICS providers, on “transitions” away from such charges, and on its legal authority to act on per-call or per-connection charges.

100. We received limited comment in the record, but all supported the elimination of per-call or per-connection fees. For example, HRDC supports the “elimination of per-call charges” for existing contracts. Legal Services for Prisoners with Children asserts that “per-call” or connection fees are “unreasonably high” and that the Commission “should ban these charges” or, “at the very least,” should introduce a “dropped call” provision that “prohibits ICS providers from charging multiple times for a call that has been reinitiated within a few minutes.” Pay Tel notes that if the Commission adopts “any rate cap regime—including Pay Tel's Proposal—that does not allow providers to charge end users an upfront surcharge or per-call surcharge, it will

successfully eliminate the problem of premature disconnection of calls.”

101.
Discussion.
We disallow the use of per-call or per-connection charges pursuant to our legal authority to ensure just, reasonable, and fair ICS rates. No evidence in the record supports a conclusion that these charges are a necessary part of cost recovery for ICS calls. Indeed, no commenters indicated that these fees are tied to a cost that providers incur in initiating a call. Providers did not break out per-call or per-connection costs when they filed their per-minute costs in response to the Mandatory Data Collection, indicating that any costs incurred on a per-call basis were included in their per-minute cost calculations. Allowing providers to recover such charges on top of the per-minute rates we adopt in this Order would therefore risk allowing double recovery. Additionally, these fees appear to be less prevalent than they once were. Recent provider-drafted reform proposals in the record do not include per-call or per-connection charges, and many recently-adopted ICS contracts likewise do not include these fees. All of these factors indicate to us a trend away from the inclusion of such fees. Finally, we agree with the Commission's earlier finding in the
2013 Order
that allowing such fees may encourage providers to charge end users for dropped calls, which could lead to the “assessment of multiple per-call charges for what was, in effect, a single conversation,” which has no place in a framework for just, reasonable, and fair compensation. We find that disallowing such fees is in the public interest because it will decrease the cost to end users for shorter ICS calls and allow more contact between inmates and their loved ones.

b. No Flat-Rate Calling

102.
Background.
In the
2013 Order
the Commission noted that commenters raised issues regarding per-call charges that may be unjust, unreasonable, and unfair; callers are often charged more during a single conversation when calls are dropped, which the record reveals can be a frequent occurrence, thus resulting in multiple calls for a single conversation, each subject to a separate flat-rate charge. The Commission stated that “a rate will be considered consistent with our rate cap for a 15-minute conversation if it does not exceed $3.75 for a 15-minute call using collect calling, or $3.15 for a 15-minute call using debit, prepaid, or prepaid collect calling.” Rule 64.6030 mirrors this language and was intended to illustrate that the rate for a five-minute collect call must be capped at $1.25 and the rate for a five-minute debit or prepaid ICS call must be capped at $1.05, while a 30-minute collect call could cost consumers no more than $7.50 and a 30-minute debit or prepaid ICS call no more than $6.30.

103.
Discussion.
Subsequent to the
2013 Order,
Securus sought additional guidance on this issue, asking whether providers were allowed to impose a flat rate based on the interim rate caps for a 15-minute call regardless of actual call duration. That is, it wished to know if it could charge a flat fee of $3.75 for a collect call of any duration up to 15 minutes. The Commission sought comment on Securus' question, as well as on whether it should revise the existing rules to prohibit flat-rate charges or to develop new rules prohibiting flat-rated charges.

104. The record reflects minimal support for this practice. The Alabama PSC opposes Securus' proposed clarification, stating that “flat-rate pricing allows providers to maximize call revenues and to dictate phone usage to the end users.” It further asserts that flat-rate calling increases complaints related to dropped calls and penalizes inmates that want to make shorter calls. Several commenters suggest that ICS providers will benefit from a ban on flat-rate calls because it will lower their costs related to consumer complaints and bill adjustments. HRDC notes that the proposed flat rates “only fall within the rate caps when a full 15-minute call is actually completed” and argues that “this practice does not reflect the spirit” of the Commission's
2013 Order.
Pay Tel asserts that “numerous ICS providers have taken advantage of this language and vague guidance since release of the ICS Order and are charging end users a flat rate of $3.15 or $3.75 per call, even if the call is disconnected prior to expiration of fifteen minutes,” which it asserts is “an abuse of the intent of the Commission's rules.”

105. We prohibit the imposition of flat-rate calling. There is minimal record support for such charges, which penalize those who make shorter calls (the record indicates that ICS calls last typically less than 15 minutes). If an end user is charged for a 15-minute call but the duration of that call is less than 15 minutes, the price for that call is disproportionately high. We also agree with those commenters who assert that allowing providers to charge a flat rate based on a 15-minute call does not comport with our requirement to make ICS rates just, reasonable, and fair. As such, we ban flat-rate calling rate plans.

5. Legal Authority for Intrastate and Interstate Rate Caps

106.
Background.
In the
2013 FNPRM,
the Commission tentatively concluded that section 276 affords it broad authority to reform intrastate ICS rates and practices that deny fair compensation, as well as to preempt inconsistent state requirements. The Commission sought comment on these tentative conclusions. Multiple commenters supported the Commission's tentative conclusion that it has jurisdiction over intrastate as well as interstate ICS rates. These commenters argue that section 276 provides the Commission with clear jurisdiction, and that it must regulate intrastate rates to ensure comprehensive ICS reform. After examining the record, we affirm the tentative conclusion that intrastate ICS rates are well within the Commission's jurisdiction for the reasons described below.

107. Our authority to ensure the reasonableness of rates and practices for interstate ICS is not in dispute. 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.” Section 276 directs the Commission to “establish a per call compensation plan to ensure that all payphone service providers”—which the statute defines to include providers of ICS—“are fairly compensated for each and every completed intrastate and interstate call.” (The Commission has previously found that the term “fairly compensated” permits a range of compensation rates that could be considered fair, but that the interests of both the payphone service providers and the parties paying the compensation must be taken into account.) We find that these statutory sections provide the Commission with the authority to regulate interstate ICS rates and practices, including the use of per-call or per-connection fees as well as flat-rate calling.

108.
Legal Authority to Reform Intrastate Rates.
The Commission's authority over intrastate telecommunications is, except as otherwise provided by Congress, generally limited by section 2(b) of the Act, which states that “nothing in this Act shall . . . give the Commission jurisdiction with respect to . . . intrastate communication service by wire or radio.” As the Supreme Court has held, however, section 2(b) has no

effect where the Communications Act, by its terms, unambiguously applies to intrastate services. We conclude that such is the case here.

109. Under section 276 of the Communications Act, the Commission is charged with implementing Congress's directive “that all payphone service providers [be] fairly compensated for each and every completed intrastate and interstate call.” Section 276 contains several express references both to ICS and intrastate calling, making it clear that the Commission has the authority to regulate intrastate ICS calling. For example, section 276 requires the Commission to broadly craft regulations to “promote the widespread development of payphone services for the benefit of the general public” including, notably, “the provision of
inmate telephone service in correctional institutions,
and any ancillary services.” In addition to this general grant of jurisdiction, section 276 includes a mandate to “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.” Section 276 also expressly directs the Commission to “discontinue the
intrastate
and interstate carrier access charge payphone service elements. . .and all
intrastate
and interstate payphone subsidies.” In addition, section 276 explicitly grants the Commission authority to preempt state requirements to the extent they are inconsistent with FCC regulations.

110. Furthermore, significant judicial precedent supports the Commission's authority to regulate intrastate ICS. In
Illinois Public Telecommunications Association,
the U.S. Court of Appeals for the D.C. Circuit found that the Act's requirement that “all payphone service providers are fairly compensated” provides the FCC with “authority to set local coin call rates”—which included intrastate service rates. Additionally, in
New England Public Comm'ns Council, Inc.
v.
FCC,
the same court found that “section 276 unambiguously and straightforwardly authorizes the Commission to regulate . . . intrastate payphone line rates.” Therefore, we conclude that both section 276 and the associated case law give the Commission the authority to regulate ICS provider compensation for intrastate calls, including the rates ICS providers charge end users, per-call or per-connection charges, and flat-rate charges.

111. We find arguments that the Commission lacks the authority to regulate intrastate ICS unpersuasive. For example, we disagree with commenters who argue that section 276 is limited to prohibiting discrimination by Bell operating companies (BOCs). While section 276(a) includes provisions specifically prohibiting discrimination by BOCs, we do not believe Congress intended for that subsection to limit the scope of the remaining provisions of section 276. For example, section 276(b)(1) expressly mandates that the Commission adopt regulations addressing five specific subjects related to payphone services; only two of those subjects—clauses (C) and (D)—relate to preventing BOC discrimination.

112. In addition, although section 276(a) refers to Bell operating companies, and applies only to the BOCs, section 276(b) refers more broadly to “payphone service providers.” If Congress had intended for the regulations prescribed under section 276(b) to be limited to the narrow purpose of effectuating the nondiscrimination goals set forth in section 276(a), it easily could have made that clear. Instead, Congress made clear that it was conferring a broader mandate in section 276(b), stating that: “[i]n order to promote competition among payphone service providers and to promote the widespread deployment of payphone services . . . , the Commission shall take all actions necessary . . . to prescribe regulations that . . . [
inter alia
] ensure that all payphone service providers are fairly compensated for each and every completed intrastate and interstate call using their payphone[s] . . . .”

113. We also disagree with commenters who argue that the Commission has never determined that section 276 extends to intrastate rates or that section 276 applies only to “local calls made from a payphone and paid with coins.” Section 276 does not specify that compensation is only for calls paid by coin but rather “each and every” call. Indeed, the very Commission order under review in
Illinois Public Telecommunications
held that the Commission had the authority to regulate intrastate payphone rates and preempt state regulation of intrastate rates. Therefore, the Commission's position regarding its authority over intrastate rates under section 276 has remained consistent.

114.
Rate Caps are Just, Reasonable and Fair.
As noted above, we have accepted the data submitted by providers in response to the Mandatory Data Collection as reported even though there is evidence that they are overstated. As a result, we believe our rate caps are conservative and include sufficiently generous margins to allow providers to earn a profit. More generally, it is well-established that rates can be lawful if they fall within a zone of reasonableness, and hence a particular state's cap might be lower than our caps and still fall within that zone. The rate caps we adopt today are intended both to ensure that ICS rates are “just and reasonable” and do not take unfair advantage of inmates, their families, or providers consistent with the “fair compensation” mandate of section 276.

115. The Commission has broad discretion in establishing just and reasonable rates, as long as it articulates a rational basis for its decisions and as long as the result is not confiscatory. As the Supreme Court has explained in construing the similar “just and reasonable rates” provision of the Natural Gas Act, “the Commission is not required by the Constitution or the Natural Gas Act to adopt as just and reasonable any particular rate level; rather, courts are without authority to set aside any rate selected by the Commission which is within a `zone of reasonableness.'” Section 276(b) charges us with ensuring that “all payphone service providers [be] fairly compensated.” This provision must be read in conjunction with our obligation under section 201(b) to ensure that charges and practices be just and reasonable. Neither section 276(b) nor 201(b) require us to allow for recovery of costs that are not just, reasonable and fair.

116. We recognize that some ICS providers may see their profits decrease because the adopted caps are below the costs they reported to us under the Mandatory Data Collection (assuming that MOU stay constant). The Commission has broad authority to set rate caps to apply to a particular service and does not have to set provider-specific rates that embody a rate of return for each individual provider. Indeed, as at least one provider has explained in this proceeding, courts have recognized that the use of industry-wide average cost data to set rates is not arbitrary, and therefore agencies may use composite industry data or other averaging methods to set rates. We therefore find that the rates we adopt today are reasonable for the reasons provided above and will allow economically efficient—possibly all—providers to recover their costs that are reasonably and directly attributable to ICS. The costs reported by the providers that are above our rate caps represent significant outliers, suggesting that their reporting methods may have varied from those of other providers or that

they may be less efficient than their peers. Indeed, encouraging efficiency will lead to lower rates, which will both benefit end users as well as increase calling demand, thus furthering the dual goals of section 276 “to promote competition among payphone service providers” and encourage the “widespread deployment of payphone services to the benefit of the public.”

B. Payments to Correctional Institutions

117. The record indicates that, in many cases, ICS bids are predicated on the winning providers' willingness to share part of its ICS revenues with the correctional facility. These payments, commonly referred to as “site commissions,” may take the form of monetary payments, in-kind payments, exchanges, or allowances. In this Order, we define the term “site commission” broadly, to encompass any form of monetary payment, in-kind payment requirement, gift, exchange of services or goods, fee, technology allowance, product or the like.

118. After carefully considering the evidence in the record, we affirm our previous finding that site commissions do not constitute a legitimate cost to the providers of providing ICS. Accordingly, we do not include site commission payments in the cost data we use in setting the rate caps established in this Order. We conclude that we do not need to prohibit site commissions in order to ensure that interstate rates for ICS are fair, just, and reasonable and that intrastate rates are fair. We reiterate, however, that site commissions have been a significant driver of rates and that ICS rates have dropped dramatically in states that have eliminated site commissions. We therefore encourage other states and correctional facilities to curtail or prohibit such payments as part of an effort to further ensure that inmates and their families have access to ICS at affordable rates.

119. We recognize that some states have adopted reasonable rates that include a margin sufficient to allow providers to pay site commissions, thus demonstrating that it is possible to have rates that are consistent with our rate caps but still allow for the payment of site commissions. The decision to establish fair and reasonable rate caps for ICS and leave providers to decide whether to pay site commissions—and if so, how much to pay—is supported by a broad cross-section of commenters, including consumer advocates, such as the Wright Petitioners; ICS providers, such as CenturyLink, NCIC and ICSolutions; representatives of correctional facilities, such as Praeses; and state regulators, such as the Alabama PSC. This broad support from practically every type of interested party underscores the reasonableness of our approach. We will continue to monitor the market and will take appropriate action if we find that, notwithstanding our rate caps, site commissions are somehow driving ICS rates to levels that are unjust, unreasonable, or unfair.

1. Background

120. In the
2002 Order,
the Commission concluded that, consistent with prior precedent, site commissions

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2015-31252. Public record. Not legal advice.