Rates for Interstate Inmate Calling Services

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 64

[WC Docket No. 12-375, FCC 21-60; FRS 35683]

Rates for Interstate Inmate Calling Services

AGENCY:

Federal Communications Commission.

ACTION:

Final rule.

SUMMARY:

In this document, the Federal Communications Commission (Commission) reforms its rules for inmate calling services by taking the following steps. The Commission eliminates a separate rate cap for collect calling. The Commission lowers the interim interstate rate caps to $0.12 for prisons and $0.14 for jails with an average daily population of 1,000 or more incarcerated people. The Commission reforms the current treatment of site commission payments to permit recovery only of the portions of such payments related specifically to calling services and requires them to be separately listed on bills. Site commission payments that are legally mandated may be passed through to consumers, without any markup, and site commission payments that result from contractual obligations between facilities and providers are recoverable only up to $0.02 per minute for both prisons and jails with average daily populations of 1,000 incarcerated people or more. The Commission caps, for the first time, international calling rates at the applicable total interstate rate cap, plus the amount paid by the calling services provider to its underlying wholesale carriers for completing international calls. The Commission adopts a process for providers to follow when seeking waivers of the rate caps for interstate and international calling services; reforms the ancillary service third-party transaction fee caps for calls that are billed on a single per-call basis and charges for transferring or processing third-party financial transactions; adopts a new mandatory data collection; and reaffirms providers' obligations regarding functionally equivalent access for incarcerated people with hearing and speech disabilities, delegating authority to its Consumer and Governmental Affairs Bureau (CGB) to undertake a separate data collection to help the Commission resolve critically important disability access issues.

DATES:

This rule is effective October 26, 2021. Amendatory instructions 5 and 6, concerning §§ 64.6110 and 64.6120, respectively, are delayed indefinitely. The Federal Communications Commission will publish a document in the

Federal Register

announcing the effective date for the amendment to § 64.6110 and the addition of § 64.6120.

The delegations of authority to the Wireline Competition Bureau (WCB), the Office of Economics and Analytics (OEA), and CGB (see section III.H.3 of

SUPPLEMENTARY INFORMATION

) are effective on July 28, 2021.

ADDRESSES:

Federal Communications Commission, 45 L Street NE, Washington, DC 20554.

FOR FURTHER INFORMATION CONTACT:

Michael Scott, Disability Rights Office of the Consumer and Governmental Affairs Bureau, at (202) 418-1264 or via email at

michael.scott@fcc.gov

regarding portions of the Third Report and Order relating specifically to the provision of communications services to incarcerated people with hearing and speech disabilities and Simon Solemani, Pricing Policy Division of the Wireline Competition Bureau, at (202) 418-2270, or via email at

Simon.Solemani@fcc.gov

regarding other portions of the Report and Order.

SUPPLEMENTARY INFORMATION:

The amendment to § 64.6110 and the addition of § 64.6120 are delayed pending OMB approval. The Federal Communications Commission will publish a document in the

Federal Register

announcing the effective date for these amendments.

This is a summary of the Commission's Third Report and Order, FCC 21-60, released May 24, 2021. This summary is based on the public redacted version of the document, the full text of which can be obtained from the following internet address:

https://docs.fcc.gov/public/attachments/FCC-21-60A1.pdf.

Synopsis

I. Introduction

1. Unlike virtually everyone else in the United States, incarcerated people have no choice in their telephone service provider. Instead, their only option typically is to use a service provider chosen by the correctional facility, and once chosen, that service provider typically operates on a monopoly basis. Egregiously high rates and charges and associated unreasonable practices for the most basic and essential communications capability—telephone service—impedes incarcerated peoples' ability to stay connected with family and loved ones, clergy, and counsel, and financially burdens incarcerated people and their loved ones. Never have such connections been as vital as they are now, as many correctional facilities have eliminated in-person visitation in response to the COVID-19 pandemic.

2. In August 2020, the Commission unanimously adopted the Fourth Further Notice of Proposed Rulemaking (

2020 ICS FNPRM

) proposing to reduce interstate rates and, for the first time, to cap international rates. Today, the Commission moves forward as proposed, lowering interstate rates and charges for the vast majority of incarcerated people, limiting international rates for the first time, and making other reforms to its rules.

3. Specifically, the Report and Order:

• Lowers the interstate interim rate caps of $0.21 per minute for debit and prepaid calls from prisons and jails with 1,000 or more incarcerated people to new lower interim caps of $0.12 per minute for prisons and $0.14 per minute for larger jails.

• Reforms the current treatment of site commission payments to permit recovery only of the portions of such payments related specifically to calling services and requires them to be separately listed on bills.

○ Where site commission payments are mandated by federal, state, or local law, providers may pass these payments through to consumers, without any markup, as an additional component of the new interim interstate per-minute rate caps.

○ Where site commission payments result from contractual obligations or negotiations with providers, providers may recover from consumers no more than the $0.02 per minute for prisons and $0.02 per minute for larger jails, as proposed in the

2020 ICS FNPRM.

○ Therefore, consistent with the proposal in the

2020 ICS FNPRM,

the maximum total interstate rate caps are $0.14 per minute for prisons and $0.16 per minute for jails with 1,000 or more incarcerated people.

• Eliminates the current interim interstate collect calling rate cap of $0.25 per minute resulting in a single uniform interim interstate maximum rate cap of $0.21 per minute for all calls for all facilities, consistent with the proposal in the

2020 ICS FNPRM.

• Caps, for the first time, international calling rates at the applicable total interstate rate cap, plus the amount paid by the calling services provider to its underlying wholesale carriers for completing international calls, consistent with the

2020 ICS FNPRM.

• Reforms the ancillary service third-party transaction fee caps for (1) calls that are billed on a single per-call basis, and (2) charges for transferring or

processing third-party financial transactions, as proposed in the

2020 ICS FNPRM.

• Adopts a new mandatory data collection to obtain more uniform cost data based on consistent prescribed allocation methodologies to determine reasonable permanent cost-based rate caps for facilities of all sizes, as suggested in the

2020 ICS FNPRM.

• Reaffirms providers' obligations regarding functionally equivalent access for incarcerated people with hearing and speech disabilities, consistent with the

2020 ICS FNPRM

and federal law.

4. The Commission expects today's actions to have immediate meaningful and positive impacts on the ability of incarcerated people and their loved ones to satisfy our universal, basic need to communicate. Although the Commission uses various terminology throughout this item to refer to the intended beneficiaries of the actions herein, unless context specifically indicates otherwise, these beneficiaries are broadly defined as the people placing and receiving inmate calling services (ICS) calls, whether they are incarcerated people, members of their family, or other loved ones and friends. The Commission also may refer to them, generally, as consumers.

II. Background

5. Access to affordable communications services is critical for everyone in the United States, including incarcerated members of our society. Studies have long shown that incarcerated people who have regular contact with family members are more likely to succeed after release and have lower recidivism rates. Because correctional facilities generally grant exclusive rights to service providers, incarcerated people must purchase service from “locational monopolies” and subsequently face rates far higher than those charged to other Americans.

A. Statutory Background

6. The Communications Act of 1934, as amended (Communications Act or Act) divides regulatory authority over interstate, intrastate, and international communications services between the Commission and the states. Section 2(a) of the Act empowers the Commission to regulate “interstate and foreign communication by wire or radio.” This regulatory authority includes ensuring that “[a]ll charges, practices, classifications, and regulations for and in connection with” interstate or international communications services are “just and reasonable” in accordance with section 201(b) of the Act. Section 201(b) also provides that “[t]he Commission may prescribe such rules and regulations as may be necessary in the public interest to carry out” these provisions.

7. Section 2(b) of the Act preserves states' jurisdiction over “charges, classifications, practices, services, facilities, or regulations for or in connection with intrastate communication service.” The Commission is thus “generally forbidden from entering the field of intrastate communication service, which remains the province of the states.” Stated differently, section 2(b) “erects a presumption against the Commission's assertion of regulatory authority over intrastate communications.”

8. Section 276 of the Act directs the Commission to prescribe regulations that ensure that payphone service providers, including inmate calling services providers, “are fairly compensated for each and every completed intrastate and interstate call using their payphone.” Although the Telecommunications Act of 1996 (1996 Act) amended the Act and “chang[ed] the FCC's authority with respect to some intrastate activities,” with respect to section 276, the U.S. Court of Appeals for the District of Columbia Circuit has held that “the strictures of [section 2(b)] remain in force.” Accordingly, that court concluded that section 276 does not authorize the Commission to determine “just and reasonable” rates for intrastate calls, and that the Commission's authority under that provision to ensure that providers “are fairly compensated” both for intrastate and interstate calls does not extend to establishing rate caps on intrastate services.

B. History of Commission Proceedings Prior to 2020

9. In 2003, Martha Wright and her fellow petitioners, current and former incarcerated people and their relatives and legal counsel (Wright Petitioners), filed a petition seeking a rulemaking to address “excessive” inmate calling services rates. The petition sought to prohibit exclusive inmate calling services contracts and collect-call-only restrictions in correctional facilities. In 2007, the Wright Petitioners filed an alternative petition for rulemaking in which they emphasized the urgency of the need for Commission action due to “exorbitant” inmate calling services rates. The Wright Petitioners proposed benchmark rates for interstate long distance inmate calling services calls and reiterated their request that providers offer debit calling as an alternative option to collect calling. The Commission sought and received comment on both petitions.

10. In 2012, the Commission commenced an inmate calling services rulemaking proceeding by releasing the

2012 ICS FNPRM

seeking comment on, among other matters, the proposals in the Wright Petitioners' petitions and whether to establish rate caps for interstate inmate calling services calls.

11. In the

2013 ICS Order,

in light of record evidence that rates for calling services used by incarcerated people greatly exceeded the reasonable costs of providing those services, the Commission adopted interim interstate rate caps of $0.21 per minute for debit and prepaid calls and $0.25 per minute for collect calls. Under the Commission's rules, “Debit Calling” means “a presubscription or comparable service which allows an Inmate, or someone acting on an Inmate's behalf, to fund an account set up [through] a Provider that can be used to pay for Inmate Calling Services calls originated by the Inmate.” “Prepaid Calling” means “a presubscription or comparable service in which a Consumer, other than an Inmate, funds an account set up [through] a Provider of Inmate Calling Services. Funds from the account can then be used to pay for Inmate Calling Services, including calls that originate with an Inmate.” “Collect Calling” means “an arrangement whereby the called party takes affirmative action clearly indicating that it will pay the charges associated with a call originating from an Inmate Telephone.” In the First Mandatory Data Collection, the Commission required all inmate calling services providers to submit data on their underlying costs so that the agency could develop permanent rate caps. In

2014,

the Commission sought comment on reforming charges for services ancillary to the provision of inmate calling services and on establishing rate caps for both interstate and intrastate calls. Ancillary service charges are fees that providers assess on calling services used by incarcerated people that are not included in the per-minute rates assessed for individual calls.

12. The Commission adopted a comprehensive framework for interstate and intrastate inmate calling services in the

2015 ICS Order,

including limits on ancillary service charges and permanent rate caps for interstate and intrastate inmate calling services calls in light of “egregiously high” rates for inmate calling services calls. Because of continued growth in the number and dollar amount of ancillary service charges that inflated the effective price paid for inmate calling services, the

Commission limited permissible ancillary service charges to only five types and capped the charges for each: (1) Fees for Single-Call and Related Services—billing arrangements whereby an incarcerated person's collect calls are billed through a third party on a per-call basis, where the called party does not have an account with the inmate calling services provider or does not want to establish an account; (2) Automated Payment Fees—credit card payment, debit card payment, and bill processing fees, including fees for payments made by interactive voice response, web, or kiosk; (3) Third-Party Financial Transaction Fees—the exact fees, with no markup, that providers of calling services used by incarcerated people are charged by third parties to transfer money or process financial transactions to facilitate a consumer's ability to make account payments via a third party; (4) Live Agent Fees—fees associated with the optional use of a live operator to complete inmate calling services transactions; and (5) Paper Bill/Statement Fees—fees associated with providing customers of inmate calling services an optional paper billing statement. The Commission relied on sections 201(b) and 276 of the Act to adopt rate caps for both interstate and intrastate inmate calling services. The Commission relied on sections 201(b) and 276 of the Act to adopt rate caps for both interstate and intrastate inmate calling services. The Commission set tiered rate caps of $0.11 per minute for prisons; $0.14 per minute for jails with average daily populations of 1,000 or more; $0.16 per minute for jails with average daily populations of 350 to 999; and $0.22 per minute for jails having average daily populations of less than 350. The Commission calculated these rate caps using industry-wide average costs based on data from the First Mandatory Data Collection and stated that this approach would allow providers to “recover average costs at each and every tier.” The Commission did not include site commission payments in its permanent rate caps, finding these payments were not costs reasonably related to the provision of inmate calling services. The Commission also readopted the interim interstate rate caps it had adopted in 2013, and extended them to intrastate calls, pending the effectiveness of the new rate caps, and sought comment on whether and how to reform rates for international inmate calling services calls. At the same time, the Commission adopted a Second Mandatory Data Collection to identify trends in the market and form the basis for further reform as well as an annual filing obligation requiring providers to report information on their current operations, including their interstate, intrastate, and international rates as well as their ancillary service charges.

13. In the

2016 ICS Reconsideration Order,

the Commission reconsidered its decision to entirely exclude site commission payments from its 2015 permanent rate caps. The Commission increased those permanent rate caps to account for claims that certain correctional facility costs reflected in site commission payments are directly and reasonably related to the provision of inmate calling services. The Commission set the revised rate caps at $0.13 per minute for prisons; $0.19 per minute for jails with average daily populations of 1,000 or more; $0.21 per minute for jails with average daily populations of 350 to 999; and $0.31 per minute for jails with average daily populations of less than 350.

C. Judicial Actions

14. In January 2014, in response to providers' petitions for review of the

2013 ICS Order,

the D.C. Circuit stayed the application of certain portions of the

2013 ICS Order

but allowed the Commission's interim rate caps to remain in effect. Later that year, the court held the petitions for review in abeyance while the Commission proceeded to set permanent rates. In March 2016, in response to providers' petitions for review of the

2015 ICS Order,

the D.C. Circuit stayed the application of the

2015 ICS Order'

s permanent rate caps and ancillary service charge caps for Single Call Services while the appeal was pending. Single-Call Services mean “billing arrangements whereby an Inmate's collect calls are billed through a third party on a per-call basis, where the called party does not have an account with the Provider of Inmate Calling Services or does not want to establish an account.” Later that month, the court stayed the application of the Commission's interim rate caps to intrastate inmate calling services. In November 2016, the D.C. Circuit also stayed the

2016 ICS Reconsideration Order,

pending the outcome of the challenge to the

2015 ICS Order.

15. In 2017, in

GTL

v.

FCC,

the D.C. Circuit vacated the permanent rate caps adopted in the

2015 ICS Order.

First, the panel majority held that the Commission lacked the statutory authority to cap intrastate calling services rates. The court explained that the Commission's authority over intrastate calls is, except as otherwise provided by Congress, limited by section 2(b) of the Act and nothing in section 276 of the Act overcomes this limitation. In particular, section 276 “merely directs the Commission to `ensure that all providers [of calling services to incarcerated people] are fairly compensated' for their inter- and intrastate calls,” and it “is not a `general grant of jurisdiction' over intrastate ratemaking.” The court noted that it “need not decide the precise parameters of the Commission's authority under § 276.”

16. Second, the D.C. Circuit concluded that the “Commission's categorical exclusion of site commissions from the calculus used to set [inmate calling services] rate caps defie[d] reasoned decision making because site commissions obviously are costs of doing business incurred by [inmate calling services] providers.” The court noted that some site commissions were “mandated by state statute,” while others were “required by state correctional institutions” and were thus also a “condition of doing business.” The court directed the Commission to “assess on remand which portions of site commissions might be directly related to the provision of [inmate calling services] and therefore legitimate, and which are not.” The court did not reach the providers' remaining arguments “that the exclusion of site commissions denies [them] fair compensation under [section] 276 and violates the Takings Clause of the Constitution because it forces providers to provide services below cost.” Instead, the court stated that the Commission should address these issues on remand when revisiting the categorical exclusion of site commissions. Judge Pillard dissented from this view, noting that site commissions are not legitimate simply because a state demands them.

17. Third, the D.C. Circuit held that the Commission's use of industry-wide averages in setting rate caps was arbitrary and capricious because it lacked justification in the record and was not supported by reasoned decision making. Judge Pillard also dissented on this point, noting that the Commission has “wide discretion” under section 201 of the Act to decide “which costs to take into account and to use industry-wide averages that do not necessarily compensate `each and every' call.” More specifically, the court found the Commission's use of a weighted average per-minute cost to be “patently unreasonable” given that such an approach made calls with above-average costs unprofitable and thus did “not fulfill the mandate of § 276 that `each and every'” call be fairly compensated.

Additionally, the court found that the

2015 ICS Order

“advance[d] an efficiency argument—that the larger providers can become profitable under the rate caps if they operate more efficiently—based on data from the two smallest firms,” which “represent[ed] less than one percent of the industry,” and that the

Order

did not account for conflicting record data. The court therefore vacated this portion of the

2015 ICS Order.

18. Finally, the court remanded the ancillary service charge caps. The D.C. Circuit held that “the Order's imposition of ancillary fee caps in connection with interstate calls is justified” given the Commission's “plenary authority to regulate interstate rates under § 201(b), including `practices . . . for and in connection with' interstate calls.” The court held that the Commission “had no authority to impose ancillary fee caps with respect to intrastate calls.” Because the court could not “discern from the record whether ancillary fees can be segregated between interstate and intrastate calls,” it remanded the issue so the Commission could determine whether it could segregate ancillary fee caps on interstate calls (which are permissible) and on intrastate calls (which are impermissible). The court also vacated the video visitation annual reporting requirements adopted in the

2015 ICS Order.

19. In December 2017, after it issued the

GTL

v.

FCC

opinion, the D.C. Circuit in

Securus

v.

FCC

ordered the

2016 ICS Reconsideration Order

“summarily vacated insofar as it purports to set rate caps on inmate calling service” because the revised rate caps in that

2016 Order

were “premised on the same legal framework and mathematical methodology” rejected by the court in

GTL

v.

FCC.

The court remanded “the remaining provisions” of that

Order

to the Commission “for further consideration . . . in light of the disposition of this case and other related cases.” As a result of the D.C. Circuit's decisions in

GTL

and

Securus,

the interim rate caps that the Commission adopted in 2013 ($0.21 per minute for debit/prepaid calls and $0.25 per minute for collect calls) remain in effect for interstate inmate calling services calls.

D. 2020 Rates and Charges Reform Efforts

20.

2020 ICS Order on Remand and FNPRM.

In February 2020, the Wireline Competition Bureau (Bureau or WCB) issued a public notice seeking to refresh the record on ancillary service charges in light of the D.C. Circuit's remand in

GTL

v.

FCC.

This Public Notice was published in the

Federal Register

. In the

Ancillary Services Refresh Public Notice,

the Bureau sought comment on “whether each permitted [inmate calling services] ancillary service charge may be segregated between interstate and intrastate calls and, if so, how.” The Bureau also sought comment on any steps the Commission should take to ensure, consistent with the D.C. Circuit's opinion, that providers of interstate inmate calling services do not circumvent or frustrate the Commission's ancillary service charge rules. The Bureau also defined jurisdictionally mixed services as “ `[s]ervices that are capable of communications both between intrastate end points and between interstate end points' ” and sought comment on, among other issues, how the Commission should proceed if any permitted ancillary service is “jurisdictionally mixed” and cannot be segregated between interstate and intrastate calls.

21. In August 2020, the Commission adopted the

2020 ICS Order on Remand

and

2020 ICS FNPRM.

The Commission responded to the court's remands and took action to comprehensively reform inmate calling services rates and charges. First, the Commission addressed the D.C. Circuit's directive that the Commission consider whether ancillary service charges—separate fees that are not included in the per-minute rates assessed for individual inmate calling services calls—can be segregated into interstate and intrastate components for the purpose of excluding the intrastate components from the reach of the Commission's rules. The Commission found that ancillary service charges generally are jurisdictionally mixed and cannot be practicably segregated between the interstate and intrastate jurisdictions except in the limited number of cases where, at the time a charge is imposed and the consumer accepts the charge, the call to which the service is ancillary is clearly an intrastate call. As a result, the Commission concluded that inmate calling services providers are generally prohibited from imposing any ancillary service charges other than those permitted by the Commission's rules, and providers are generally prohibited from imposing charges in excess of the Commission's applicable ancillary service fee caps.

22. Second, the Commission proposed rate reform of the inmate calling services within its jurisdiction. As a result of the D.C. Circuit's decisions, the interim interstate rate caps of $0.21 per minute for debit and prepaid calls and $0.25 per minute for collect calls that the Commission adopted in 2013 remain in effect today. Commission staff performed extensive analyses of the data it collected in the Second Mandatory Data Collection as well as the data in the April 1, 2020, annual reports. In the

2015 ICS Order,

the Commission directed that the Second Mandatory Data Collection be conducted “two years from publication of Office of Management and Budget (OMB) approval of the information collection.” The Commission received OMB approval in January 2017, and

Federal Register

publication occurred on March 1, 2017. Accordingly, on March 1, 2019, inmate calling services providers submitted their responses to the Second Mandatory Data Collection. WCB and the Office of Economics and Analytics (OEA) undertook a comprehensive analysis of the Second Mandatory Data Collection responses, and conducted multiple follow-up discussions with providers to supplement and clarify their responses, in order to conduct the data analysis upon which the proposals in the August

2020 ICS FNPRM

are based. Based on that analysis, the Commission proposed to lower the interstate rate caps to $0.14 per minute for debit, prepaid, and collect calls from prisons and $0.16 per minute for debit, prepaid, and collect calls from jails. In so doing, the Commission used a methodology that addresses the flaws underlying the Commission's 2015 and 2016 rate caps (which used industry-wide averages to set rate caps) and that is consistent with the mandate in section 276 of the Act that inmate calling services providers be fairly compensated for each and every completed interstate call. The Commission's methodology included a proposed 10% reduction in GTL's costs to account, in part, for seemingly substantially overstated costs. The Commission also proposed to adopt a waiver process that would permit providers to seek waivers of the proposed rate caps on a facility-by-facility or contract basis if the rate caps would prevent a provider from recovering the costs of providing interstate inmate calling services at a facility or facilities covered by a contract. The

2020 ICS FNPRM

also proposed “to adopt a rate cap formula for international inmate calling services calls that permits a provider to charge a rate up to the sum of the inmate calling services provider's per-minute interstate rate cap for that correctional facility plus the amount that the provider must pay its underlying international service provider for that

call on a per-minute basis (without a markup).” The Commission explained that this cap “would enable inmate calling services providers to account for widely varying costs,” be consistent with the “just and reasonable' standard in section 201(b) of the Act, and comport with the “fair compensation” provision of section 276 of the Act.

23. In response to the

2020 ICS FNPRM,

the Commission received over 90 comments and reply comments and 9 economic studies. Filers included providers of calling services to incarcerated people, public interest groups and advocates for the incarcerated, telecommunications companies, organizations representing individuals who are deaf or hard of hearing, and providers of telecommunications relay service.

24.

Intrastate Rate Reform Efforts.

By April 1 of each year, inmate calling services providers file annual reports with the Commission that include rates, ancillary service charges, and site commissions. In an effort to compare interstate inmate calling services rate levels with intrastate rate levels, Commission staff analyzed the intrastate rate data submitted as part of the providers' April 1, 2020, annual reports. Commission staff's review revealed that intrastate rates for debit or prepaid calls exceed interstate rates in 45 states, with 33 states allowing rates that are at least double the Commission's interstate cap and 27 states allowing “first-minute” charges that can be more than 25 times that of the first minute of an interstate call. For example, one provider reported a first-minute intrastate rate of $5.34 and additional per-minute intrastate rates of $1.39 while reporting the per-minute interstate rate of $0.21 for the same correctional facility. Similarly, another provider reported a first-minute intrastate rate of $6.50 and an additional per-minute intrastate rate of $1.25 while reporting the per-minute interstate rate of $0.25 for the same correctional facility. Further, Commission staff identified instances in which a 15-minute intrastate debit or prepaid call costs as much as $24.80—almost seven times more than the maximum $3.15 that an interstate call of the same duration would cost.

25. In light of these data, in September 2020, former Chairman Pai and Brandon Presley, then president of the National Association of Regulatory Utility Commissioners (NARUC), jointly sent a letter to the co-chairs of the National Governors Association urging state governments to take action to reduce intrastate rates and related fees. At least one state has enacted a law to reduce intrastate inmate calling services rates and fees, at least one state commenced a regulatory proceeding aimed at reducing intrastate inmate calling services rates and fees, and several states are considering legislation.

III. Third Report and Order

26. In this Third Report and Order, the Commission takes several important steps to provide significant financial relief to incarcerated people and their families, all substantially consistent with the

August 2020 ICS FNPRM,

except where the record evidence requires the Commission to take a more conservative approach. The Commission takes these actions now in light of the exigent circumstances facing incarcerated people as they continue to deal with hardships related to the COVID-19 pandemic. First, the Commission reforms per-minute inmate calling services rates on an interim basis, capping interstate rates at $0.12 per minute for prisons and $0.14 per minute for larger jails. Second, the Commission reforms the current treatment of site commissions by adopting two distinct interim site commission-related rate components reflecting the different types of site commissions: Site commission payments that providers are obligated to pay under formally codified laws or regulations; and payments that providers agree, by contract, to make. Third, the Commission caps international calling rates for the first time. These and other reforms adopted here will enable consumers—incarcerated people and their families—to obtain essential communications capability at just and reasonable rates while the Commission remains faithful to its obligations under section 276 of the Act.

27. The reforms the Commission adopts today reflect its findings, as detailed below, regarding the monopoly power that each calling service provider has over the individual correctional facilities it serves; the numerous negative impacts the providers' exercise of that market power has had on incarcerated people, their families and communities, and society as a whole; and the substantial record evidence of the need for at least interim reforms to the Commission's rate caps and related regulations. In these circumstances, to the extent the record permits, the Commission exercises its authority under section 201(b) of the Act to “prescribe such rules and regulations as may be necessary” to ensure that “[a]ll charges [and] practices . . . for and in connection with [interstate and international] communication service” by wire or radio are `just and reasonable.' ” This provision provides the Commission with ample authority to regulate the interstate and international rates and the practices of providers of calling services for incarcerated people, including setting interim rate caps for interstate and international calls given that providers have monopoly power in the facilities they serve. The Commission has previously exerted jurisdiction over rates where it found it necessary to constrain monopoly power exercised by competitive LECs.

28. Although the record makes clear that the current interim rate caps for calling service to prisons and larger jails are unreasonably high, limitations in the reported data—arising in significant part from shortcomings in certain providers' responses to the Second Mandatory Data Collection—make the Commission wary of establishing permanent rate caps based on the current record. The Commission also declines to consider ICSolutions' proposal that the Commission forbear from the requirement that calling services providers contribute to the Universal Service Fund. The Commission has already addressed forbearance from universal service contribution obligations in the inmate calling services context in a separate proceeding, and the Commission declines to revisit that matter in this proceeding. Nor does the record allow the Commission to reasonably set permanent or even new interim interstate rate caps for jails with less than 1,000 average daily population, adjust its caps on ancillary service fees beyond the new cap on fees for single-call services and third-party financial transaction fees, or ensure that incarcerated people with disabilities have any greater access to functionally equivalent communications capabilities than they have today. The Commission therefore institutes a Mandatory Data Collection to provide the Commission and interested parties with more complete and accurate data regarding the costs of providing inmate calling services. The Commission anticipates that those data, in combination with the record developed in response to the attached Fifth Further Notice of Proposed Rulemaking (Fifth FNPRM), will enable the Commission to take these important steps in the near future. The Commission also delegates authority to the Consumer and Governmental Affairs Bureau (CGB) to undertake a separate data collection related to service providers' costs and other key aspects of their provision of telecommunications relay services

(TRS) and other assistive technologies if necessary to help the Commission resolve the critically important disability access issues the Commission explores in the Fifth FNPRM, published elsewhere in this issue of the

Federal Register

.

A. Unique Marketplace for Telephone Services Provided to Incarcerated People

29. The Commission has previously determined that providers of telephone services to incarcerated people have monopoly power in the facilities they serve. The Commission reaffirms this long-established finding, one that applies equally not only to the rates and charges for calling services provided to incarcerated people, including ancillary services, but also to providers' practices associated with their provision of calling services. Indeed, ICSolutions requests that the Commission investigate providers' compliance with the interim rate caps, in addition to other instances of asserted noncompliance. While this rulemaking proceeding is the wrong vehicle to address ICSolution's first two concerns, the Commission welcomes suggestions on how to revise its rules to better detect noncompliance, which the Commission seeks as part of the Fifth FNPRM, published elsewhere in this issue of the

Federal Register

.

30. The record demonstrates, as the Commission previously found and reiterated in the

August 2020 ICS FNRPM,

that incarcerated people have no choice in the selection of their calling services provider. For these consumers, the relevant market is the incarcerating facility. The authorities responsible for prisons or jails typically negotiate with the providers of inmate calling services and make their selection without input from the incarcerated people who will use the service. Once the facility makes its choice—often resulting in contracts with providers lasting several years into the future—incarcerated people in such facilities have no means to switch to another provider, even if the chosen provider raises rates, imposes additional fees, adopts unreasonable terms and conditions for use of the service, or offers inferior service. On the contrary, correctional authorities exercise near total control over how incarcerated people are able to communicate with the outside world. This control extends to control over visitation rights, the use of traditional mail and courier services, and the ability to use any form of electronic communication. Indeed, the only way an incarcerated person may legally communicate with the outside world is with the explicit permission of the correctional authority. Therefore, no competitive forces within the facility constrain providers from charging rates that far exceed the costs such providers incur in offering service.

31. Some commenters argue the market for inmate calling services is competitive because providers of those services bid against each other to win contracts with correctional facilities. GTL, in particular, makes much of this claim. Because correctional officials typically allow only one provider to serve any given facility, however, there are no competitive constraints on a provider's rates once it has entered into a contract to serve a particular facility. Some experts representing inmate calling services providers recognize this to be the case. The Commission has observed that “because the bidder who charges the highest rates can afford to offer the confinement facilities the largest location commissions, the competitive bidding process may result in higher rates.” Thus, even if there is “competition” in the bidding market as some providers assert, it is not the type of competition the Commission recognizes as having an ability to “exert downward pressure on rates for consumers.”

B. Impact on Consumers and Society

32. The Commission has long recognized the far-ranging consequences that high calling rates inflict on incarcerated people, their families, and society as a whole. The record in this proceeding confirms that excessive telephone rates continue to impose an unreasonable burden on the ability of incarcerated people—one of the most economically disadvantaged segments of our population—to maintain vital connections with the outside world. And reduced prison visitation as a result of the COVID-19 pandemic has made these consequences even more dire, exacerbating the urgent need for inmate calling rate reform.

33. A national survey identified the cost of phone calls as the primary barrier preventing incarcerated people from keeping in touch with loved ones. As one commenter sums it up: “A sentence to jail or prison should not include the additional punishment of being cut off from family, friends, legal assistance, and community resources.” Studies confirm that incarcerated people who have regular contact with family members are more likely to succeed after release and have lower recidivism rates because they are able to maintain vital support networks.

34. The high cost of calling services causes damaging consequences not only for incarcerated people but also for their families. The record suggests that as many as 34% of families go into debt to keep in touch with an incarcerated family member. Some low-income families are forced “to choose between calling an incarcerated family member and buying essential food and medicines.” Rate reform will reduce these financial burdens and also promote increased communication which preserves essential family ties, allowing incarcerated people “to parent their children and connect with their spouses, helping families stay intact,” and decreasing the trauma suffered by children whose parents have been incarcerated.

35. The benefits of lowering inmate calling services rates also ripple throughout communities and society in other tangible and intangible ways. For example, making communications less costly and easier to use for incarcerated people promotes their ability to plan for housing, employment, and successful integration into communities once released from prison. In financial terms, increased communication helps reduce repeated incarceration, which benefits society by saving millions of dollars in incarceration-related costs annually. Additionally, the record shows that the ability to communicate regularly with families “reduces foster placement of children of incarcerated people, which result[s] in measurable savings to society of tens of millions of dollars per year.”

36. The COVID-19 pandemic has intensified the need to reform inmate calling services rates. Even before the pandemic, it could be impractical, costly, and time-prohibitive for family members to make regular visits to those in prisons often located hundreds of miles away. But as a result of the pandemic, most jails and prisons have prohibited or severely limited in-person visitation. Thus, telephone calls have become even more of “an essential lifeline for connection”—adding to the exigency and importance of the reforms that the Commission adopts today.

C. Interim Interstate Rate Cap Components

37. In the

2020 ICS FNRPM,

the Commission proposed to adopt permanent interstate rate caps of $0.14 per minute for all calls from prisons and $0.16 per minute for all calls from jails. These proposed caps included an allowance of $0.02 per minute added to provider-related rate caps of $0.12 and $0.14 per minute, respectively, to account for the costs correctional facilities incur that are reasonably related to the provision of inmate

calling services. The proposed rate caps generated extensive debate in the record, with providers contending that the available data do not justify any reduction in the existing interstate rate caps of $0.21 per minute for debit and prepaid calls, and public interest groups suggesting even lower rates than those the Commission proposed. Although collect calls are subject to a separate rate cap of $0.25 per minute under the existing interim interstate caps, as discussed below, the Commission and the parties on record agree that there is no longer a need to maintain this distinction.

38. After carefully considering the record, including data from the Second Mandatory Data Collection and commenting parties' analyses of those data, and refining its analysis based on record feedback, the Commission takes the following actions. First, as proposed in the

2020 ICS FNRPM,

the Commission eliminates a separate rate cap for all collect calls. Second, the Commission adopts new interim provider-related interstate rate caps of $0.12 per minute for calling services provided to incarcerated people in prisons and $0.14 per minute for calling services provided to incarcerated people in larger jails, as proposed in the

2020 ICS FNPRM.

As the Commission explains below, and in recognition of the concerns raised by various commenters, the Commission does not establish new interim rate caps for jails having average daily populations below 1,000. Those facilities remain subject to the maximum total per-minute rate cap of $0.21. The Commission refrains from adopting new interim rate caps for jails with average daily populations below 1,000, which remain subject to the interstate total per-minute rate cap of $0.21. Next, the Commission adopts new interim facility-related rate caps associated with site commission payments. Together, these rate cap components result in new lower total interstate rate caps that will remain interim in status, pending a further data collection which the Commission also adopts today in order to facilitate the Commission's adoption of permanent interstate rate caps.

39. Consistent with the

2020 ICS FNPRM,

the new interim interstate rate cap components will apply to all calls that a provider identifies as interstate as well as to all calls that the provider cannot definitively identify as intrastate, as determined through the application of the Commission's traditional end-to-end jurisdictional analysis. Securus asks that the Commission forbear from enforcing the end-to-end analysis reflected in the Enforcement Bureau's November 2020 Enforcement Advisory to per-minute interstate rates. The Commission declines to do so at this time. As the Commission explains in the Order on Reconsideration published elsewhere in this issue of the

Federal Register

, the end-to-end analysis is, and has been, the generally applicable jurisdictional standard for determining the jurisdiction of a telephone call in the absence of an express Commission determination that some other method is permissible. As the Commission has never expressly permitted another method of jurisdictional classification for inmate calling services calls, the end-to-end analysis continues to apply to those calls. Under this analysis, the jurisdictional nature of a call “depends on the physical location of the endpoints of the call and not on whether the area code or NXX prefix of the telephone number, or the billing address of the credit card associated with the account, are associated with a particular state.” Thus, to the extent that a provider cannot determine that the physical endpoints of a call are within the same state, that provider must not exceed the Commission's new interim interstate rate caps for that call. The use of physical endpoints for determining the appropriate rate cap for a call, including related ancillary services charges, does not, however, preclude the use of telephone number or other proxies, where permitted by the Commission or state or local authorities, in determining the appropriate taxing jurisdiction for such calls. It similarly has no bearing on the use of permissible proxies or other good faith estimates for federal or state Universal Service Fund contributions or similar regulatory fees or assessments for jurisdictionally indeterminant calling services.

1. Eliminating Separate Rate Caps for Collect Calls

40. Consistent with the proposal in the

2020 ICS FNPRM,

the Commission eliminates the separate interim rate cap that has applied to interstate collect calls since 2013. The record overwhelmingly supports this action, which recognizes the limited role that collect calls play in today's inmate calling services marketplace and the relatively small, if any, difference in cost between collect and non-collect inmate calling services calls.

41. Under the interim rate caps the Commission first adopted in 2013, interstate debit and prepaid calls are capped at $0.21 per minute, while interstate collect calls are capped at $0.25 per minute. In the

2015 ICS Order,

the Commission adopted a two-year phasedown for collect calls, after which rate caps for those calls were to be the same as those of debit and prepaid calls. The Commission found that the number of collect calls had dropped significantly over the preceding few years and predicted that the number of collect calls “will most likely be at a nominal level in two years.” Although this phasedown was vacated by the D.C. Circuit in

GTL

as part of that court's larger vacatur of the

2015 ICS Order,

the court did not criticize the Commission's phasedown of collect calls.

42. In the

2020 ICS FNPRM,

the Commission proposed to eliminate the distinct rate cap for collect calls, given “the absence of any data demonstrating a material difference in the costs of providing these different types of calls.” Commenters overwhelmingly support this proposal, with both providers and public interest groups agreeing that there is no longer any need for a separate rate cap for collect calls. Both Securus and GTL point out that collect call volumes continue to decline. And commenters agree that there are no longer significant cost differences between collect calls and debit or prepaid calls. Indeed, the record provides no support for a separate rate cap for collect calls, and comments make clear that eliminating the “collect-only” rate cap will benefit all stakeholders by making it easier for providers to administer, and for consumers to understand, rate caps for interstate and international calls.

43. The Commission finds that the lack of cost disparity in providing prepaid, debit, or collect calling services, coupled with the low and ever-diminishing demand for collect calls and the benefits to all stakeholders from having a single cap for all calls from a facility, support ending the distinction between prepaid, debit, and collect calling rates. The Commission therefore eliminates the separate interim cap for interstate collect calls for jails with average daily populations below 1,000 that remain subject to the 2013 interim rate caps. As a result of this change, all interstate calls from jails with average daily populations below 1,000 will be subject to a single, uniform, interim rate cap of $0.21 per minute. All interstate calls from prisons and larger jails will be subject to the new uniform interim rate caps the Commission adopts today for each type of facility, without regard to whether the interstate calls are collect, debit, or prepaid, as those terms are defined in its rules.

2. Setting a Threshold of 1,000 Average Daily Population for Larger Jails

44. The Commission adopts an average daily population threshold of

1,000 or greater to differentiate larger jails from smaller jails and apply its new interim provider-related and facility-related rate caps to larger jails, while leaving jails with average daily populations below 1,000 subject to the existing total interim rate cap of $0.21 per minute for all interstate calls. This larger jail threshold is aligned with the approach the Commission adopted in 2015, when it likewise used an average daily population of 1,000 to distinguish between rate cap tiers. In the 2015 ICS Order, the Commission adopted 1,000 average daily population as the larger jail size threshold. As one commenter points out, many of the cost analyses in the record segment jails by reference to the same 1,000 average daily population figure, a fact that supports the Commission's decision to set the average daily population threshold at 1,000 here. Numerous commenters have advanced the 1,000 average daily population figure to segment their own data analyses and resultant proposals, and none have criticized this cutoff as irrational or unduly difficult to administer. Although some commenters have argued that turnover may provide a more accurate indicator of costs, the Commission has not received turnover rate data in the record and must work with the data provided. However, the Commission finds that the cost data available from jails with average daily populations less than 1,000, including turnover and admission rates, deserves further investigation, and specifically seek such data in the Fifth FNPRM the Commission issues today accompanying this Report and Order. Providers shall calculate average daily population in accordance with section 64.6000 of the Commission's rules, which specifies that average daily population means “the sum of all inmates in a facility for each day of the preceding calendar year, divided by the number of days in the year.”

45. The Commission's decision to exclude jails having average daily populations below 1,000 from the new interim caps is based on record evidence suggesting that providers incur higher costs per minute for jails with average daily populations below 1,000 than for larger jails. Securus asserts that “small jails are more expensive to serve than larger jails.” Securus points to its cost study showing “a strong and consistent relationship between cost and facility size.” Pay Tel also broadly argues that inmate calling services “costs vary substantially based on facility size.” More specifically, Pay Tel explains that its “experiences regarding its costs of providing ICS” demonstrate that costs increase “in terms of jail” average daily population, providing further evidence that providers incur greater costs to serve smaller jails. The Commission agrees with these commenters that, based on the current record, providers appear to incur somewhat higher costs in serving jails with average daily populations less than 1,000 than larger jails and the Commission finds this evidence credible and sufficient to support a cutoff of 1,000 average daily population for distinguishing larger jails from those with average daily populations below 1,000 for purposes of applying the Commission's new interim rate caps.

46. The data before the Commission preclude any specific determination of the extent to which the costs of providing calling services vary with jail size, and the Commission therefore disagrees with the Public Interest Parties' assertion that “size does not impact costs,” at least on the basis of this record. For example, the Second Mandatory Data Collection did not collect data on turnover rates so the Commission cannot determine how that variable affects providers' or facilities' costs. Given this, the Commission takes a bifurcated approach with regard to its new interim rate caps for jails. First, because the Commission is convinced that providers' costs of serving larger jails are likely below the industry average for all jails, the Commission uses the available data to set interim provider-related rate caps for larger jails. These interim caps are separate from those the Commission sets for prisons. Second, because the available data do not allow the Commission to quantify the extent to which providers' cost of serving jails with average daily populations below 1,000 exceed the industry average, the Commission defers further rate cap setting with respect to these jails until such time as the Commission is able to gather and analyze additional cost information. In the Fifth FNPRM, published elsewhere in this issue of the

Federal Register

, the Commission seeks detailed information on provider costs associated with serving jails with average daily populations below 1,000. On the record before the Commission, the Commission finds it reasonable and appropriate to exclude these jails from the new interim rate caps it adopts today for interstate calls. As explained in Part III.C.2 above, the Commission also uses the 1,000 average daily population threshold to distinguish larger jails for purposes of the facility-related rate component.

3. Accounting for Provider Costs

47.

Deciding to Adopt Separate Interim Interstate Provider-Related Rate Caps for Prisons and Larger Jails.

In the

2020 ICS FNPRM,

the Commission found that the reported data showed greater variations from mean costs for jails than for prisons (and therefore a greater standard deviation from the mean for jails than for prisons). A mean is the arithmetic average of numbers in a distribution. A standard deviation is a measure of dispersion calculated as the square root of the average of the squared differences from the mean. These greater variations from mean costs were one reason that led the Commission to propose a higher interstate rate cap for jails than for prisons. After analyzing the record, consistent with the proposal in the

2020 ICS FNPRM,

the Commission adopts separate interim interstate provider-related rate caps for prisons and larger jails.

48. As set forth in Appendix B, the Commission's refined analysis suggests that it costs service providers approximately 22% more to provide calling services in jails than in prisons. That analysis also shows greater variations from mean costs for jails. At least one commenter provides credible evidence that providers generally incur higher costs to serve jails than prisons and therefore “support[s] the Commission's proposal to establish separate rate ceilings for prisons and jails.” Pay Tel agrees that the evidence demonstrates greater costs per minute for jails than prisons, and explains that its examination of the reported costs of three of the six providers that serve both types of facilities shows that the costs of serving jails are roughly 40% higher. Securus also concludes that, for jails, costs per minute decrease as facility size increases, and that costs per minute for prisons are lower than for jails.

49. Not all commenters agree with drawing a distinction between prisons and jails. The Public Interest Parties point out that some providers have argued that there are no real cost differences between serving prisons and jails and therefore there is no basis for a separate, higher cap for jails. They urge that the Commission moves towards a unitary rate structure that would “eliminate the multi-tier rate structure for jails” and create a “unified rate cap for prisons and jails.” Although the record indicates that some jails bear the characteristics the Commission otherwise associates with prisons, on this record the Commission is not persuaded that these situations are the norm, and it finds that, overall, the evidence suggests higher provider costs

at jails than prisons. At the same time, the Commission rejects the notion that it should delay any action until the Commission collects more detailed cost data. The Commission has sufficient record evidence now to set interim rate caps for prisons and larger jails, consistent with its obligations and authority under the Act. The Commission therefore finds it appropriate to set different interstate provider-related rate caps for prisons than for jails on an interim basis. The Commission does not, however, distinguish between prisons and larger jails for purposes of its facility-related rate component designed to recover portions of contractually prescribed site commission payments. As explained in Part III.C.4 below, there is record support that the same facility-related allowance for prisons and larger jails is appropriate, and the Commission proceeds that way on an interim basis. To the extent that the record developed in response to the Fifth FNPRM, published elsewhere in this issue of the

Federal Register

, reveals that the Commission should distinguish between prisons and larger jails, the Commission will revisit that at such time as it develops permanent rate caps.

50.

Methodology.

As with any exercise in cost-based ratemaking, setting reasonable interim interstate provider-related rate caps for inmate calling services requires a determination of the costs providers incur in providing those services. Traditionally, agencies have set regulated rates through company-specific cost-of-service studies that measure the regulated firms' total cost of providing the regulated service using the firms' accounting data. The costs of service include operating expenses (

e.g.,

operating, maintenance and repair, and administrative expenses), depreciation expenses (the loss of value of the firm's assets over time due to wear and tear and obsolescence), cost of capital (the cost incurred to finance the firm's assets with debt and equity), and income and other tax expenses. Regulators often establish rules that specify how costs, including those arising from affiliate transactions, are to be accounted for, apportioned between the firms' regulated operations and nonregulated operations, and assigned to, or allocated among, different jurisdictions and services.

51. The Commission's approach toward regulating inmate calling services rates has been less prescriptive. The Commission, to date, has not adopted accounting rules for calling service providers. Nor has it specified complex rules for directly assigning or allocating a provider's and its affiliates' costs between their calling services operations and nonregulated operations, or assigning or allocating a provider's calling services costs to or among the providers' contracts or facilities. And it did not require calling service providers to submit cost of service studies requiring each provider to show in detail each step of its costing process.

52. Instead, the Commission has relied on data obtained through Mandatory Data Collections to set reasonable cost-based rate caps for inmate calling services. The Second Mandatory Data Collection, in particular, required every calling service provider to submit detailed information regarding its operations, costs, and revenues, including: (1) Lists of its inmate calling services contracts and the correctional facilities to which they apply; (2) the average daily populations, number of calls annually, and minutes of use annually at each of those facilities; (3) the direct costs of providing inmate calling services on a total company basis and at each of those facilities; and (4) the indirect costs of providing inmate calling services on a total company basis. Direct costs are costs that are “completely attributable” to a particular service such as inmate calling services. Indirect costs are all costs related to a service other than direct costs and include “overhead, depreciation, or other costs that are allocated among different products or services.” Determining a company's indirect costs requires a calculation: Subtracting the company's indirect costs from its total costs. Providers were required to provide information about costs in several steps. First, providers had to identify which of their and their corporate affiliates' total costs were directly attributable to inmate calling services and which were directly attributable to other operations. Providers were then required to allocate the remainder of their costs and their affiliates' total costs—the costs identified as indirect costs or overhead—between inmate calling services and other, nonregulated, operations. Providers were then required to allocate the inmate calling services portion of their direct costs to specific facilities but were not required to allocate their indirect costs to specific facilities.

53. In the

2020 ICS FNPRM,

the Commission proposed to use data from the Second Mandatory Data Collection, as compiled into a database by Commission staff, to calculate the costs each provider incurs in providing inmate calling services under each of its contracts for prisons and jails separately. The Commission proposed to calculate the mean (or arithmetical average) of those costs, add one standard deviation to that mean, and use the resulting sum to determine the provider cost portions of the interstate rate caps. The Commission reasoned that this “mean contract costs per minute . . . plus one standard deviation” methodology would allow the vast majority of providers to recover at least their reported costs under each of their contracts.

54.

Reliance on Data from the Second Mandatory Data Collection.

As proposed in the

2020 ICS FNPRM,

the Commission's interim rate cap methodology begins with the calculation of mean contract costs paid per minute in the provision of calling services to incarcerated people. To perform this calculation, the Commission relies on the 2018 data submitted in response to the Second Mandatory Data Collection, as supplemented and clarified by the providers in response to follow-up discussions with Commission staff, as the Commission proposed in the

2020 ICS FNPRM.

This approach reflects both the robustness and the limitations of the data submitted in response to the Second Mandatory Data Collection. On the one hand, those data provide an unprecedented wealth of information about the inmate calling services industry and individual calling service providers. The reported information allows the Commission to perform sophisticated analyses that help the Commission estimate the providers' actual costs of providing interstate inmate calling services.

55. On the other hand, as the Commission explained in the

2020 ICS FNPRM,

the collected data have certain limitations. First, although the Commission had sought facility-level data in the Second Mandatory Data Collection, in many instances, providers reported data only at the contract level, reflecting the fact that “many providers assess their inmate calling services operations on a contract-by-contract basis, although many contracts include multiple correctional facilities.” Given the lack of facility-level data, the Commission proposed to analyze the information on a contract, rather than a facility, basis and sought comment on this approach. Second, the Commission recognized that some providers had interpreted different steps in the cost reporting instructions for the Second Mandatory Data Collection in different ways. The Commission sought comment on the submitted data and asked commenters to identify other data issues for consideration.

56. The Public Interest Parties argue that the 2018 data “provide more than sufficient evidence to support immediate rate reform.” The Commission agrees. As the Public Interest Parties' expert asserts, variations in internal cost records among providers affect how costs are reported, not the overall level of costs. In other words, the lack of uniformity in cost data reporting need not result in further delay in the Commission's rate reform efforts. Further, as explained in Appendix A, providers' reports of call minutes and revenues are likely to be accurate down to the level of the contract. All providers bill on a per-minute basis, and revenue tracking, and thus reported revenues, are also likely to be reliable because providers are incentivized to accurately track them. Accordingly, the Commission finds the reported minutes of use and revenue data to be reliable and suitable for setting interim interstate rate caps.

57. Certain providers argue that the 2018 cost data from the Second Mandatory Data Collection are unsuitable for setting new rate caps. Securus, for example, contends that the Commission should not rely on the 2018 data because providers did not report their costs using a consistent methodology. In particular, Securus emphasizes that because providers were not required to, and did not, disclose how they calculated their direct costs or how they allocated indirect costs between regulated and nonregulated services, “each company's measure of `costs' is unique to itself and inconsistent with that of every other company.” Pay Tel and its outside consultant highlight “numerous inconsistencies in the manner in which costs were reported” which, they argue, make the data unsuitable for cost-based ratemaking. Pay Tel's outside consultant points to providers' differing understandings of how to report direct and indirect costs and the accuracy of reported direct costs based on the chosen allocator for those costs. For its part, GTL finds it unsurprising that “there are differences in the data among [inmate calling services] providers given the different reporting methodolog[ies] because no uniform accounting is required or necessary.” GTL also notes that calling service providers are not subject to Part 32 accounting rules or any other uniform system of accounts. The Commission does not find these concerns sufficient to justify abandoning any reforms at this time, and find that “variations in internal cost records and lack of a common methodology” do not preclude the Commission from lowering egregiously high interstate rates now on an interim basis while waiting to obtain more reliable and consistent cost data. In sum, the 2018 data from the Second Mandatory Data Collection are the best data available upon which the Commission may, and does, reasonably rely here.

58. The limitations in the cost data identified in the record do, however, warrant a departure from the approach the Commission proposed in the

2020 ICS FNPRM.

That approach was premised on the Commission's ability to calculate providers' collective mean contract costs of providing inmate calling services to prisons and jails with a high degree of accuracy. Based on that premise, the Commission proposed relying on single measures of the industry-mean costs of providing calling services to permanently cap the interstate rates for prisons and jails, respectively.

59. After carefully considering the record, including providers' criticisms of the approach proposed in the

2020 ICS FNPRM,

the Commission takes a different approach than the one the Commission originally proposed and rely on the costs providers reported in response to the Second Mandatory Data Collection to develop separate zones, or ranges, of cost-based rates for prisons and larger jails from which the Commission selects the respective interim interstate provider-related rate caps. First, the costs, as reported in response to the Second Mandatory Data Collection, allow the Commission to calculate ceilings—or upper bounds—above which any interstate rate caps for prisons and larger jails would be unreasonably high. Second, the Commission adjusts the reported data to correct for outliers and contracts with reported costs that are significantly higher than other providers. These adjusted data allow the Commission to calculate floors—or lower bounds—below which any interstate rate caps for prisons and larger jails could be perceived as unreasonably low on the current record. These upper and lower bounds thus establish zones of reasonableness from which the Commission selects the interim interstate provider-related rate caps.

60. The approach the Commission takes here is fully consistent with judicial precedent and a logical outgrowth from the approach proposed in the

2020 ICS FNPRM.

Courts widely recognize that an agency may reasonably rely on the best available data where perfect information is unavailable. Indeed, the Supreme Court has recognized that the available data may not always settle a particular issue and that in such cases an agency must use its judgment to move from the facts in the record to a policy conclusion. Here, the Commission applies its judgment to the record before it and reach results that rationally connect “the facts found and the choice[s] made.” Importantly, by setting lower bounds that adjust for anomalies in the reported data, the Commission minimizes its reliance on data that the Commission finds inaccurate or unreliable.

61. The Commission recognizes, of course, that its reliance on imperfect data is not ideal, but a lack of perfect data is not fatal to agency action. The D.C. Circuit has held that an agency's decision should be upheld when from “among alternatives all of which are to some extent infirm because of a lack of concrete data, [the agency] has gone to great lengths to assemble the available facts, reveal its own doubts, refine its approach, and reach a temporary conclusion.” Here, the Commission has undertaken a robust analysis of all the data in the record and fully accounted for why the rate methodology it employs is reasonable, despite some providers' failure to meaningfully respond to Commission data requests and inaccuracies in their reported data. In the process, the Commission explains its misgivings about reliance on certain data and lays out its rationale for adopting these rate caps as an interim step, with a commitment going forward to collect further data to be used to set permanent rate caps.

62. GTL and Pay Tel claim that the absence of the Commission's underlying work papers limits their “ability to comment on the methodology” proposed in the

2020 ICS FNPRM

and prevents them from determining whether the adjustments to the data proposed in that

FNPRM

are appropriate. The Commission finds these assertions to be meritless. The record in this proceeding contradicts these views, as do the comments GTL and Pay Tel themselves offer concerning the Commission's methodology and treatment of data. Contrary to these providers' claims, the database on which the calculations in the

2020 ICS FNPRM

relied was made available to interested parties in this proceeding, subject to the terms of a protective order; and the record reflects that at least two parties have been able to replicate the Commission's rate cap analysis on their own, on the basis of the data available to them. The Commission also refers to this inmate calling services database as the “dataset.” The Commission made the

underlying data available and specified its analytical approach. The Commission is not required to do more.

63.

Allocation of Indirect Costs Based on Minutes of Use.

Consistent with the approach proposed in the

2020 ICS FNPRM,

the Commission's rate cap methodology relies on providers' collective mean contract costs per paid minute of use, plus one standard deviation. Because the instructions for the Second Mandatory Data Collection did not require providers to allocate their indirect costs (including their overhead costs) of providing inmate calling services among contracts, the Commission needs to adopt a mechanism for allocating those costs. These overheads include costs attributable to inmate calling services and to particular contracts, but not reported as such by the provider. In the

2020 ICS FNRPM,

the Commission proposed allocating the providers' indirect costs of providing inmate calling services among contracts based solely on relative minutes of use, a method that apportions a provider's indirect costs among its individual calling services contracts in proportion with each contract's share of the total minutes of use reported by that provider. The Commission sought comment on this proposal and on whether a different allocator would more effectively capture how costs are caused. The Commission adopts the proposed minute of use method of allocation for its new interim rate caps as one of only two reasonable allocation methods based on the current record.

64. Parties disagree whether minutes of use provides an appropriate method for allocating indirect costs, with some comments pointing out its shortcomings and others supporting its use. Although several parties argue that minutes of use does not provide an appropriate allocation method, its independent analysis shows that, while imperfect, minutes of use provides the most reasonable allocator given the data before the Commission. Specifically, after examining seven potential allocators—minutes of use, average daily population, number of calls, revenue, contracts, facilities, and direct costs—for allocating providers' indirect costs among contracts, the Commission finds minutes of use both reasonable and preferable to each potential alternative. Although none of these allocators fully capture the reasons for which providers incur inmate calling services costs, minutes of use constitutes the best available allocator under the circumstances because it produces plausible per-minute rates while ensuring that most calling services contracts would remain commercially viable, even assuming the accuracy of providers' reported costs.

65. The Commission calculated the per-minute caps that would apply under each potential allocator to compare the allocators. The Commission refers to these per-minute caps as “implied rate caps.” The Commission's calculations employed the mean contract costs per minute plus one standard deviation methodology proposed in the

2020 ICS FNPRM.

For simplicity, the Commission performed these calculations collectively for all facilities, rather than separately for different types or sizes of facilities. The Commission finds that only minutes of use ($0.149) and number of calls ($0.208) produce results below the current cap for prepaid and debit calls. In contrast, the implied per-minute rate caps for the revenue ($0.333), direct costs ($2.417), average daily population ($11.114), facilities ($303.685), and contracts ($318.636) allocators all suggest that interstate inmate calling services rate caps are presently unreasonably low, a proposition that not even any of the providers has tried to argue. This disparity is one of the reasons the Commission finds that minutes of use and number of calls are the only plausible allocators among the available alternatives. The Commission recognizes, as Securus and Pay Tel point out, allocating indirect costs based on minutes of use results in relatively uniform costs per minute in comparison to the other allocation methods. The Commission also agrees that this relative uniformity will necessarily result in a lower standard deviation from the mean for a minutes of use allocator than for any alternative method. The standard deviation the Commission calculates for minutes of use ($0.056) is significantly lower than those for each of the other potential allocators. But the implied rate caps for revenue ($0.220 = $0164 + $0.056) and direct costs ($0.284 = $0228 + $0.0506) would exceed current interstate rate levels if the standard deviation for those allocators were reduced to $0.056, and the implied rate caps for average daily population ($0.789), facilities ($16.485), and contracts ($18.499) would exceed those levels even without any standard deviation component.

66. Understanding that there is an element of circularity in using a minutes-based cost allocator when setting per-minute rate caps, the Commission further evaluated whether each potential allocator produces per-minute costs that are consistent with the rates currently set by providers. Specifically, the Commission calculated the percentage of contracts for which the provider reported per-minute revenues that are greater than the per-minute costs allocated to each contract under each allocator. Minutes of use yielded a higher percentage of viable contracts than did any other cost allocator. Minutes of use yielded 87.3% of contracts with per-minute provider revenues greater than their per-minute allocated costs. The next closest allocators are direct costs at 81.6% and number of calls at 81.3%. This confirms that minutes of use is the allocator that is most consistent with provider cost recovery, as it is illogical to assume that providers are entering into a significant number of contracts that are not commercially viable (

i.e.,

that do not allow providers to recover their costs). The Commission therefore finds minutes of use preferable to number of calls and use it in its provider-related rate caps calculations. The comparison of its per-minute cap to per-minute revenues is not subject to the objection that using a per-minute allocator will produce relatively uniform costs per minute in comparison to the other allocation methods.

67. The Commission recognizes that its choice of allocator is affected, in part, by its decision to continue to require providers to charge per-minute rates for inmate calling services. The Commission also rejects most of the cost allocators for additional reasons that are not subject to the objection that using a per-minute allocator will produce relatively uniform costs per minute in comparison to the other allocation methods. For example, use of the facility and direct cost allocator would require throwing out substantial amounts of data, while the remaining data would include egregious flaws, making any resulting cost allocation arbitrary. This critique applies to a more limited extent to average daily population, but it would still be a poor choice relative to the alternatives of call minutes or number of calls. Another example is the Commission's exclusion of the revenue allocator. But changing that rate structure would likely impose significant burdens on providers, and the Commission finds no basis for requiring such a change in connection with its adoption of new interim rate caps. The Commission also cannot meaningfully assess, on the record before it, how different rate structures would affect incarcerated persons and their families. The Commission therefore defers action on alternative rate structures—under which calling services consumers might be charged a predetermined monthly fee for

unlimited calls, for example—pending the development of a more complete record in response to the Fifth FNPRM, published elsewhere in this issue of the

Federal Register

. This reasoning again is not subject to the objection that using a per-minute allocator will produce relatively uniform costs per minute in comparison to the other allocation methods.

68. Some commenters contend that the available data preclude the Commission from allocating providers' costs with sufficient precision to support any changes in interstate rate caps. Pay Tel emphasizes that “the observed inability of many [inmate calling services] providers to track and assign direct costs” results in high levels of indirect costs to be allocated, which makes providers' costs appear more “homogenous” across locations and contracts than is actually the case. The Commission agrees there is some merit in these observations, particularly that the collected data appears to obscure cost differences between prisons and jails. Securus's outside experts are particularly critical of using minutes of use as the only allocator, arguing that “the majority of [providers'] costs, which include connectivity to the facilities, developing and implementing the call platform, on-site equipment and SG&A [(selling, general, and administrative expenses)], do not vary by the number of minutes.”

69. The Commission finds that such issues do not require it to postpone reforming its interstate rate caps pending the availability of better data that might allow the Commission to allocate providers' indirect costs in a more cost-causative manner. The Commission is not required to pursue “the perfect at the expense of the achievable.” The Commission finds that the better course is to adopt interim interstate provider-related rate caps for prisons and larger jails now, using the available data, while requiring that providers submit more accurate, consistent, and disaggregated data that will allow the Commission to set permanent interstate provider-related rate caps for all correctional facilities that more closely reflect providers' costs of serving individual correctional facilities. As the D.C. Circuit has explained, “[w]here existing methodology or research in a new area of regulation is deficient, the agency necessarily enjoys broad discretion to attempt to formulate a solution to the best of its ability on the basis of available information.” Consistent with this principle, the Commission chooses “to use the best available data, and to make whatever adjustments appear[ ] necessary and feasible” to ensure that interstate inmate calling services rates are just and reasonable.

70. The Commission independently rejects the “use of direct costs to allocate indirect costs” and related approaches at this time. Pointing to its own cost-tracking processes, Pay Tel argues that allocating indirect costs based on directly attributable costs would be “not only reasonable and consistent with prior Commission conclusions” but also “consistent with how [inmate calling services] providers incur costs.” Although the Commission agrees that allocating indirect costs based on directly attributable costs could yield reasonable results when providers have properly identified their directly attributable costs, the data from many of the providers fall far short of that mark. Indeed, allocation by direct costs would require the Commission to ignore all data submitted by the two providers that reported no direct costs. The providers that did not report direct costs are [REDACTED]. Similarly, this approach also would allocate essentially all of GTL's costs on the basis of bad debt, a measure that bears little, if any, relationship to the reasons GTL incurs costs in its provision of inmate calling services. Alone among providers, GTL reported a bad debt expense as their only identifiable direct cost. The evidence supports no relationship between bad debt expense and cost causation, and the bad debt expense amounts only to [REDACTED], making any related assumptions even more speculative. Accordingly, the Commission finds allocating indirect costs based on direct costs would provide less reliable results than allocating indirect costs based on minutes of use. The Commission likewise rejects the use of facilities to allocate costs, as providers often failed to report costs for individual facilities where multiple facilities were supplied under a single contract. In light of the drawbacks to these approaches, the Commission has a higher degree of confidence in providers' reported minutes of use by contract.

71. The Commission similarly declines at this time to divide indirect costs into “shared costs” and “common costs” and develop separate allocators for each set of costs, as Securus suggests, because the available data do not allow the Commission to make such granular distinctions. The available data do not allow the Commission to analyze or allocate costs on the basis that Securus suggests. What Securus identifies as “common costs” most closely tracks the “indirect costs” reported in the Second Mandatory Data Collection. The Commission likewise rejects any allocation key based on percentages of total company revenue. The Commission has long disclaimed this allocation methodology because it fails to provide a reliable method for determining costs, given that “revenues measure only the ability of an activity to bear costs, and not the amount of resources used by the activity.”

72.

Accurate Analysis Compels Adjustments to GTL's Reported Cost Data.

As the Commission recognized in the

2020 ICS FNPRM,

the critical question posed by its reliance on the available data is how to address the various issues reflected in the cost data reported by GTL, the largest provider of inmate calling services, with an estimated market share approaching 50%. One estimate from 2017 placed GTL's market share between 46% and 52.9% before it acquired Telmate, a company whose market share was between 1.9% and 3.1%. The Commission's internal analysis suggests GTL's share is around [REDACTED]. The Commission finds that GTL's cost data does not reflect its actual costs of providing inmate calling services and may overstate those costs. Given GTL's market share, including GTL's cost data as reported in the Commission's calculations for the entire industry, significantly affects the results. The Commission concludes that it must make certain adjustments to GTL's reported data if the Commission is to arrive at a more accurate estimate of industry costs. Courts have upheld the Commission's exclusion or substitution of flawed or inadequate data when the Commission has explained the evidence and demonstrated a rational connection between the facts found and the choice made, as the Commission does here.

73. On a company-wide basis, GTL's reported unit costs, which do not rely on cost allocation, are higher than those of all but one (much smaller) provider, and are nearly [REDACTED] the average of all the other providers excluding GTL. Unit costs are measured as the quotient of reported total costs and reported minutes. This remains true for GTL's allocated costs per minute for prisons or larger jails—both are higher than nearly all other providers' allocated costs, regardless of facility type. Despite being the largest provider, and commanding a disproportionate share of the larger contracts, GTL reports an average contract per-minute cost of [REDACTED], approximately [REDACTED] times larger than its nearest peers in size, Securus and CenturyLink, and more than [REDACTED] times larger than the average contract per-minute costs of the

next largest provider, ICSolutions. These results are inconsistent with the record evidence establishing that providers are able to achieve significant economies of scale. As the largest inmate calling services provider, GTL should be better enabled to spread its fixed costs over a relatively large portfolio of contracts relative to other providers, especially because GTL serves a higher proportion of larger facilities than other providers. Instead, taking GTL's reported costs at face value would imply that it does not achieve economies of scale. The record does not provide any explanation why GTL might incur higher inmate calling services costs than the rest of the industry. GTL's unit costs are also high when compared with the providers that are most like it. GTL's unit costs are nearly [REDACTED] times those of Securus, the second-largest provider, nearly [REDACTED] times those of CenturyLink, and nearly [REDACTED] times those of ICSolutions. Securus's reported unit costs are [REDACTED]; CenturyLink's reported unit costs are [REDACTED]; and ICSolutions' reported unit costs are [REDACTED]. Of equal concern, GTL uniquely reports large losses across all inmate calling services operations, totaling nearly [REDACTED] of GTL's reported costs. GTL's total revenues are [REDACTED] less than its reported costs, suggesting that GTL operates these facilities at a cumulative loss—a result contradicted by GTL's longevity in the market and the depth of its market presence. GTL is the only provider which records making a loss.

74. GTL's accounting practices also require adjustment to its data. Unlike every other provider, GTL reported “bad debt expense” as its only cost directly related to the provision of inmate calling services, though it almost certainly incurs other costs that are causally related to providing inmate calling services. As Pay Tel's expert explains, GTL's reported direct costs “represent only 0.01% of its Total [inmate calling services] costs, effectively reporting a cost structure that is 0% direct and 100% indirect.” Compounding this problem, GTL allocated its indirect costs between its inmate calling services operations and its other operations based on the percentages of total company revenue each operation generated, which fails to reflect the purposes for which GTL incurs costs.

75. Considering the impact that this cost data provided by the market's largest provider would have on its analysis, the Commission has repeatedly tried to obtain more accurate and complete data from GTL. These efforts began with several calls between staff and GTL representatives that sought to obtain a fuller explanation of the composition of the data provided by GTL in response to the Second Mandatory Data Collection. Following from these efforts, on July 15, 2020, before the release of the

2020 ICS Order on Remand,

the Wireline Competition Bureau directed GTL to provide “additional documents and information regarding GTL's operations, costs, revenues, and cost allocation procedures” to supplement GTL's previously filed submissions, and to enable the Commission “to make a full and meaningful evaluation of GTL's cost data and methodology.” This directive encompassed 14 separate categories of additional information. GTL's response, however, provided little additional information that would enable the Commission to determine the costs it actually incurs in providing calling services to incarcerated people. Instead, GTL objected to the requests on multiple grounds, routinely asserting that the Bureau sought information that GTL cannot provide and arguing that it does not maintain records that would allow it to respond. These objections included, inter alia, that the Bureau's requests lacked relevance, placed an undue burden on GTL, and were overbroad. Without the requested information, and in light of the issues the Commission describes above, the Commission is unable to take GTL's reported costs at face value in its analyses. Two commenters share its concerns and urge that the Commission adjust GTL's data. Although the Commission recognizes that GTL has not been required to keep, or indeed kept, accounting records that would enable it to isolate the costs it incurs in providing calling services to incarcerated individuals, those facts do not require that the Commission accepts GTL's reported costs at face value. The Commission therefore adjusts GTL's reported cost data with data that more accurately reflect the underlying characteristics of the prisons and larger jails that GTL serves. Specifically, as the Commission explains below, in establishing the lower bounds of its zones of reasonableness the Commission uses a generally accepted statistical tool—the

k

-nearest neighbor method—to replace the data reported for each prison and larger jail contract served by GTL with the weighted average of the data for the three most comparable (

i.e.,

nearest neighbor) contracts served by other providers. The Commission describes this method in greater detail and show its application to GTL's data in Appendix C, below.

76.

Ancillary Service Costs.

In the

2020 ICS FNPRM,

the Commission observed that its proposed rate cap calculations did not account for revenues earned from certain ancillary services even though providers reported the costs of these services as inmate calling services costs in their responses to the Mandatory Data Collection. The Commission sought comment on whether it should exclude the costs of these services from its rate cap calculations.

77. Based on the record before it, the Commission finds that there is no reliable way to exclude ancillary service costs from its provider-related rate cap calculations at this time. Accordingly, those costs will remain as a part of the industry costs that the Commission uses in its calculations of those interim rate caps. The instructions for the Second Mandatory Data Collection required certain ancillary service revenues to be reported separately, but providers were not required to report their ancillary service costs separately from other inmate calling services costs. Further, providers were not required to separately report costs relating to any specific ancillary service, and no commenter has suggested a way of identifying the providers' ancillary service costs. The Public Interest Parties argue that the Commission should deduct all revenues from ancillary services from the costs that go into its per-minute rate cap calculations. The Commission declines to take this step because doing so would lower the rate caps equally for all providers and therefore disproportionately affect those providers having the lowest ancillary service revenues. As a result, the Commission cannot isolate with any degree of accuracy the costs providers incur in providing ancillary services from their overall cost data.

78. The Commission recognizes that this approach will result in interim interstate rate caps that allow for the recovery of costs incurred in the provision of ancillary services that calling services consumers already pay for through separate charges and fees, a result that substantially increases the likelihood that the Commission's interim caps are too high. The Commission intends to collect detailed data on ancillary services costs from each inmate calling services provider in its next data collection and to use those data to set permanent provider-related rate caps that eliminate this problem.

79.

Implementing the Zone of Reasonableness Approach.

The Commission determines the levels of the

interim interstate provider-related rate caps using a zone of reasonableness approach. In the

2020 ICS FNPRM,

the Commission proposed to set separate caps for prisons and all jails at the mean contract costs per paid minute plus one standard deviation, as calculated separately for each of those two categories of facilities. After considering the record, including comments that make clear that limitations in the available data make it impossible for it to estimate true mean contract costs per paid minute with any degree of precision, the Commission finds that a zone of reasonableness approach is particularly well-suited to its task because it will allow the Commission to use different measures of mean contract costs per paid minute to establish separate ranges of rates—one for prisons and another for larger jails—from which the Commission can select just and reasonable interim provider-related rate caps. As a result of its new approach, which differs from the approach proposed in the

2020 ICS FNPRM,

the Commission finds that comments critical of the data analysis, including proposed adjustments to data, underlying the rate caps proposed in the

2020 ICS FNPRM

are now moot.

80. It is well-established that rates are lawful if they fall within a zone of reasonableness. Precedent also teaches that the Commission is “free, within the limitations imposed by pertinent constitutional and statutory commands, to devise methods of regulation capable of equitably reconciling diverse and competing interests.” A zone of reasonableness approach allows the Commission to reconcile, to the extent possible on the record before the Commission, the providers' and their customers' competing concerns regarding the rates incarcerated people and those they call pay to communicate. The Commission therefore relies on a zone of reasonableness approach to set rates in this instance, which helps avoid giving undue weight to the assumptions that would lead to either unduly high or unduly low per-minute rate caps.

81. Given the available data, any upper and lower bounds based on those data are necessarily estimates. The Commission finds it likely that its estimates overstate providers' inmate calling services costs. All providers have an incentive to overstate their costs in their responses to the Commission's data collections, as this would lead to higher interstate rate caps, thus resulting in both higher revenues and higher profits. In addition, imprecisions in the instructions for the Second Mandatory Data Collection regarding fundamental steps in the costing process, such as how providers should make sure that their costs of providing inmate calling services exclude all costs properly assignable to their non-inmate calling services operations, enabled providers to inflate their reported costs. The Commission finds that this combination of incentives and reporting latitude almost certainly resulted in some overstatement of the providers' costs of providing inmate calling services. Additionally, because the instructions for the Second Mandatory Data Collection did not require providers to separate the costs they incur in providing ancillary services from their total inmate calling services costs, the Commission's bounds include ancillary services costs for which providers separately recover fees and charges under its rules. Each of these factors skews the cost data upwards, resulting in upper and lower bounds that are likely higher than any bounds based on more accurate data.

82. The Commission's zone of reasonableness approach involves three distinct steps. The Commission begins by using data that providers submitted in response to the Second Mandatory Data Collection to establish upper bounds of potentially reasonable interstate provider-related rate caps for prisons and larger jails, respectively. Because the data the Commission uses in setting the upper bounds significantly overstate the providers' actual mean contract costs per minute of providing inmate calling services beyond the general factors the Commission has just discussed, the Commission then makes reasonable, conservative adjustments to the reported data and use those data to establish the lower bounds of its zones of reasonableness. The Commission describes these adjustments fully in Appendix C, below. Finally, the Commission relies on its analysis of the record evidence and on its agency expertise to pick, from within those zones, reasonable interim interstate provider-related rate caps for prisons and larger jails. The Commission reiterates that while its zone of reasonableness methodology relies on contract-level data, the Commission applies its interim rate caps to individual prisons and jails having average daily populations of 1,000 or more. For these jails, the data derived from a contract-level analysis likely overestimates actual costs. This is because the analysis incorporates jails having average daily populations lower than 1,000 (which the Commission would expect to have higher per-minute costs than larger jails) when such facilities are encompassed by the same contract. The Commission is comfortable with this approach for purposes of determining an interim rate cap for jails having average daily populations of 1,000 or more as it errs on the side of being conservative, while also being consistent with providers' understanding that the average daily population threshold is applied on a per-facility basis.

83.

Determining Upper Bounds for the Zones of Reasonableness.

The Commission finds that the method proposed in the

2020 ICS FNPRM,

taking the sum of the mean contract costs per minute plus one standard deviation relative to that mean, provides a reasonable method for determining the upper bounds of the zones of reasonableness for prisons and for larger jails. One standard deviation from the mean of a normal distribution accounts for approximately 68% of the data, with half of the remaining 32% being above the mean and half below the mean, thus creating an additional buffer that makes it more likely that a provider will be able to recover its costs for any particular contract or facility. Under this approach, using the data submitted by all 12 providers, the mean contract cost per minute for prisons is $0.092, and the standard deviation relative to this mean is $0.041 per minute, resulting in a mean plus one standard deviation of $0.133 per minute. The Commission calculates these statistics for prisons after removing the cost-per-minute outlier related to GTL's contract for [REDACTED]. By comparison, the mean cost per minute for prisons based on the data for the 12 responding providers including this outlier is $0.149, and the standard deviation is $0.658 per minute, resulting in the mean plus one standard deviation being $0.807 per minute. Appendix A explains why the Commission excludes the [REDACTED] contract. Similarly, the mean contract cost per minute for larger jails is $0.100, and the standard deviation from that mean is $0.118 per minute, making the mean plus one standard deviation $0.218 per minute.

84. The Commission finds that these upper bounds overstate, by a wide margin, the providers' actual costs of providing interstate inmate calling services for two reasons beyond the general effects it recounted above. First, at least two providers, GTL and Securus, calculated the return component of their costs using the prices their current owners paid to purchase the companies, rather than the amounts that they and the prior owners had invested in property used to provide interstate inmate calling services. Under rate-of-return ratemaking, a company's cost of

service equals a return component (

i.e.,

allowed rate of return times the company's rate base) plus the expenses the company incurs in providing the regulated service. The use of the sale prices of a company as what amounts to its rate base absent a showing specifically justifying that practice is inconsistent with fundamental ratemaking principles. Use of those purchase prices to calculate GTL's and Securus's costs is inconsistent with the well-established principle that the purchase prices of companies that possess market power “are not a reliable or reasonable basis for ratemaking.” Instead, the return component of GTL's and Securus's costs is properly calculated using the original cost of the property they use to provide inmate calling services at the point that property was first dedicated to public use through its use in the provision of inmate calling services. And, contrary to GTL's argument, the Commission has long held that payphone calling providers, including inmate calling services providers, possess monopoly power when (as is the case with GTL and Securus) they have obtained the exclusive right to provide calling services to correctional facilities. The Commission reiterates that finding and, to eliminate any possible doubt, apply it to the purchase prices that GTL and Securus used in calculating the return component of their costs.

85. Second, and more significantly, these upper bounds incorporate GTL's costs as reported, even though (1) GTL admits that it lacks the accounting records that it would need to determine its actual costs of providing inmate calling services and (2) GTL's reported costs far exceed those reported by other providers serving comparable facilities. Despite these shortcomings, the data from the providers' Second Mandatory Data Collection responses provide the best available data for determining the upper bounds of the zones of reasonableness. The Commission therefore uses $0.133 per minute as the upper bound for determining a reasonable interstate provider-related rate cap for prisons and $0.218 per minute as the upper bound for determining a reasonable interstate provider-related rate cap for larger jails. In establishing these upper bounds, the Commission is well aware that the industry's actual mean contract costs of providing inmate calling services plus one standard deviation are significantly lower.

86.

Determining Lower Bounds for the Zones of Reasonableness.

The Commission finds the approach it uses to determine the upper bounds of the zones of reasonableness—relying on data from the Second Mandatory Data Collection and calculating the mean cost per minute plus one standard deviation relative to that mean separately for prisons and larger jails—provides an appropriate starting point for determining the lower bounds of the zones. Because of the shortcomings in the providers' reported data, the Commission adjusts those data using generally accepted statistical tools to remove outlier contracts and to replace GTL's reported data with data derived from contracts comparable to those GTL serves. The related assumptions and adjustments are described at greater length below, and in Appendix C, below. Under this approach, the mean cost per minute for prisons is $0.052, the standard deviation relative to that mean is $0.012, and the mean plus one standard deviation is $0.064 per minute. Similarly, the mean cost per minute for larger jails is $0.065, the standard deviation from that mean is $0.015, and the mean plus one standard deviation is $0.080 per minute. These numbers—$0.064 per minute and $0.080 per minute—constitute the lower bounds of the Commission's zones of reasonableness for prisons and larger jails, respectively.

87. The construction of the lower bound begins by removing three outlying observations that skew the data and that would otherwise render the mean and standard deviation to be less precise measures of the data's central tendency. The central tendency of a distribution refers to the degree to which data is clustered around a central value, frequently measured by the mean, median, or mode. In general, the data's dispersion (as measured by the standard deviation) and central tendency are the main properties defining a distribution. These three outlier contracts report costs of [REDACTED] per minute for larger jails in Williamson, Texas, San Luis, Arizona, and West Texas, Texas, respectively. The outliers the Commission addresses here were identified using the Grubbs method, a statistical approach the Commission describes at length in Appendix C, below. To put these cost levels in context, [REDACTED] per minute is the highest cost per minute for any contract regardless of facility type or size, and [REDACTED] and [REDACTED] per minute are approximately three times and twice as large as the cost per minute for the next highest larger jail contract. Excluding these three outliers, costs per minute for larger jail contracts range from $0.03 to $0.17. As the Commission describes in Appendix A, a single observation from a prison contract reports a cost per minute of [REDACTED], which the Commission concludes is clearly erroneous and omit in entirety. Nothing in the record supports using such extreme costs to set provider-related rate caps. Further, these contracts would remain outliers, even under alternative methods of outlier identification proposed in the record.

88. Next, the Commission substitutes reasonable surrogates for GTL's reported cost data to address significant and unresolved issues with those data, as identified in the

2020 ICS FNPRM

and discussed more fully in this Report and Order. As recounted above, GTL's only reported direct costs for inmate calling services are bad debt costs, although it certainly incurs other direct costs that are causally related to providing inmate calling services. Additionally, GTL's reported total costs per minute are much higher than most other providers' reported total costs per minute, contrary to the Commission's expectation of economies of scale. In fact, GTL's total revenues per minute from prisons are less than its allocated costs per minute, the only provider for which this is true. These issues remain unresolved—and incurable on the record before the Commission—because GTL failed to provide meaningful cost data in its Second Mandatory Data Collection response or in its response to the Bureau's July 15, 2020, Letter, or to suggest any alternative means of assisting the Commission in its efforts to estimate GTL's costs of providing inmate calling services. The Commission finds that the best way to address this situation is to adjust GTL's reported contract-level cost data using the

k-

nearest neighbor method. The Commission describes this method in greater detail and show its application to GTL's data in Appendix C, below. Specifically, the Commission replaces the cost-per-paid-minute data reported for each prison and larger jail contract served by GTL with the weighted average of the data for the three most comparable (

i.e.,

nearest neighbor) contracts served by other providers. To determine a contract's “neighbors,” the Commission compares its average daily population, total inmate calling services minutes, total commissions paid, and facility type to all other contracts in its dataset. This approach reasonably preserves the non-cost information GTL reported for the prisons and larger jails it serves, while reducing the likelihood that the cost data for those facilities are overstated to a significant extent. The Commission finds that this approach, in

combination with the removal of outlier observations as described above, provides a reasonable method for determining the lower bounds of the zones of reasonableness.

89. In the

2020 ICS FNPRM,

the Commission proposed to reduce GTL's reported costs by 10% in order to address its data reporting issues, an approach the Commission now abandons in light of convincing opposition in the record. Commenters addressing this proposal were nearly unanimous in rejecting it. Some commenters observe that a 10% decrease would fail to resolve all of the issues presented by GTL's reported data, while others argue this approach suffers fundamental methodological flaws of its own. Instead, the Commission relies on the

k

-nearest neighbor method, rather than alternative methods for addressing the deficiencies in GTL's reported data, because the Commission finds it provides the best approach for setting the lower bounds of the zones of reasonableness. In particular, although the Winsor method also would provide a reasonable method for replacing GTL's data with surrogate data, that method would simply replace GTL's outlier data with the next-highest observation, as opposed to the multifactor comparison provided by the Commission's adopted approach. In other words, the Winsor method would adjust costs downward to the next-highest observation without consideration of whether the contract with the next highest costs is similar in any other dimensions, such as minutes of use or average daily population. The Commission finds the

k

-nearest neighbor method's reliance on three comparable contracts makes it a superior tool for addressing the dataset before the Commission because it identifies a greater degree of similarity between observations.

90. The Commission also considered removing all of GTL's data from its lower bound calculations, an approach on which the Commission sought comment in the

2020 ICS FNPRM.

The Commission finds this approach too sweeping, however, because it would exclude all of GTL's prisons and larger jails from its analysis. GTL's Second Mandatory Data Collection response includes extensive non-cost information on these facilities, regarding matters such as average daily population and paid minutes of use, that depict the inmate calling services operations of roughly [REDACTED] of all prisons and larger jails, or roughly [REDACTED] of the reported average daily population for those facilities. Excluding this information from its analysis would create a significantly incomplete picture of the industry, resulting in considerably less accurate estimates of industrywide mean contract costs. Additionally, the remaining contract information from GTL's data provides necessary distinguishing characteristics that informed the Commission's selection of the nearest neighboring contracts.

91.

Determining Interim Interstate Provider-Related Rate Caps for Prisons and Larger Jails.

The upper bound of the zone of reasonableness for the provider-related rate cap for prisons is $0.133 per minute and the lower bound is $0.0643 per minute. For larger jails, the upper bound is $0.218 per minute and the lower bound is $0.0802 per minute. Based on its analysis of the available information, the Commission finds that $0.12 per minute will provide a reasonable interim interstate provider-related rate cap for prisons and that $0.14 per minute will provide a reasonable interim interstate provider-related rate cap for larger jails. Significantly, its analysis confirms that these interim interstate rate caps will allow most, if not all, providers to recover their costs (as reported in their responses to the Second Mandatory Data Collection and allocated among their contracts as described above) of providing interstate calling services to incarcerated people. And, because those fully distributed costs likely overstate the actual costs of providing inmate calling services under any particular contract, the Commission finds it unlikely that any provider will be unable to recover its actual costs of providing interstate inmate calling services under any contract. To the extent that there are some small number of situations where a provider cannot recover its actual costs of providing interstate inmate calling services under the Commission's interim caps, the Commission adopts a waiver process that will allow it to grant relief from those caps if the Commission finds such relief is warranted based on its analysis of data that allows it to more accurately and precisely identify that provider's cost of providing interstate inmate calling services than can be achieved using the data currently before the Commission.

92. A provider-related rate cap component of $0.12 per minute for prisons is $0.02 above the midpoint between the upper and lower bounds of the zone of reasonableness (approximately $0.10). The providers' incentives to overstate costs provide a compelling reason to set the rate cap significantly below that upper bound. The Commission finds that removal of outliers as reflected in the lower bound number based on its statistical approach to be appropriate as a general matter, given the need to measure the central tendency of the data as accurately as possible. The Commission is reluctant to give this adjustment too much weight at this time, however, because the Commission does not know the precise reason why these outlier estimates are so high. Although the Commission also finds the adjustment to GTL's costs to be fully justified, the Commission is reluctant to place too much weight on this adjustment because this is an empirical approximation relying on the consistency and validity of the contract data reported by all other firms. After closely examining the imperfect data reported by providers that have an incentive to overstate their costs, and after developing the calculation of both of the upper and lower bounds, the Commission finds that an interim provider-related rate component of $0.12 per minute for prisons will allow providers to recover their actual costs of providing inmate calling services at those facilities, a conservative choice thereby ensuring that the providers will receive reasonable compensation for their services.

93. Likewise, the Commission finds that an interim rate cap of $0.14 per minute for larger jails will enable providers to recover their costs of providing interstate inmate calling services. In selecting this value, the Commission assigns significant weight to the result from the cost study conducted by Securus's outside consultant. This estimate, suggesting that Securus's cost of serving larger jails is at most [REDACTED] per minute, is based on highly disaggregated cost data and a relatively sophisticated set of cost allocation procedures tailored specifically to the business of providing inmate calling services and appears to be consistent with cost-causation principles. This number is the maximum per-minute cost estimate among the estimates Securus's consultant developed for Securus's larger jails, and the Commission finds that it provides a cushion large enough for providers to earn at least a normal risk-adjusted rate of return. Further, because there are relatively few providers for larger jails, as compared to the larger number of both large and small providers that serve jails with average daily populations less than 1,000, the Commission would expect a small variance in the true per-minute costs of providing inmate calling services at larger jails, relative to the overall variance. A rate cap of $0.14 per minute provides an even larger cushion,

further ensuring that providers will have the opportunity to recover actual costs.

94. A provider-related rate cap component of $0.14 per minute for larger jails is just below the midpoint between the upper and lower bounds of the zone of reasonableness (approximately $0.15), but still well above the lower bound of approximately $0.08. As with prisons, the providers' incentives to overstate their costs provide a compelling reason to set a rate cap significantly below the upper bound. The Commission again is reluctant to place too much weight on the GTL data adjustment for the reasons discussed regarding prisons. After closely examining the data, the Commission finds that an interim provider-related rate component of $0.14 per minute for larger jails will enable the majority of providers to recover their actual costs of providing inmate calling services at those facilities. Further, the Commission notes that this $0.02 differential between the rates the Commission selects for prisons and larger jails approximates the 22% cost differential shown in the record.

95. As the Commission describes in Appendix A, the Commission finds that setting the provider-related rate component at these levels for prisons and larger jails will allow providers at substantially all facilities to recover their reported costs. Analysis of contract revenues and underlying contract characteristics also suggests a significant majority of these contracts would be viable at the Commission's proposed caps. The responses to the Second Mandatory Data Collection provide data for 129 prisons and 182 larger jails. Following the process outlined in Appendix A, the Commission finds that 66 prisons and 15 larger jails reported per-minute costs above the respective interim provider-related rate caps. Looking at these outliers more closely, however, reveals that all but three of these facilities (66 prisons and 12 larger jails) are served by GTL, which lacked the records to accurately determine its costs of providing calling services to incarcerated people. This alone creates doubt as to whether these facilities should be viewed as legitimate outliers, rather than simply illustrations of the issues the Commission observes throughout GTL's reported data. Repeating this analysis after adjusting GTL's cost data using the

k-

nearest neighbor approach used to set the lower bound shows that all of GTL's facilities would have per-minute costs below the interim interstate provider-related rate caps. The remaining facilities (three larger jails) all exhibit per-minute costs that exceed their per-minute revenues, suggesting that the actual costs of providing inmate calling services to them are lower than the Commission's estimates. Finally, the Commission reiterates that to the extent the actual costs of serving a facility exceed the applicable interim rate cap, a provider may request a waiver using the process set forth in this Report and Order. As indicated in the

2020 ICS FNPRM,

“the Commission has permitted inmate calling services providers to file a petition for a waiver if it believed it could not recover its costs under the Commission-adopted rate caps.” The Commission refines its waiver procedure today.

96. The record supports these interim rate cap choices. The cost study presented by Securus's outside consultant estimates that Securus incurs maximum per-minute costs of [REDACTED] to serve prisons and [REDACTED] to serve larger jails, exclusive of site commissions. Although the Commission finds that these figures are overstated to the extent they calculate the return component of Securus's costs using the prices its current owners paid to purchase the company, the study's cost estimates suggest that interim provider-related rates caps of $0.12 for prisons and $0.14 for larger jails will provide a cushion large enough for the providers at those facilities to earn at least a normal risk-adjusted rate of return on their capital investment in providing inmate calling services. As the [REDACTED] per minute cost has been specifically developed for providers at these largest jails, and there are relatively few of these providers, the Commission would not expect there to be a big variance in the true per-minute costs of providing inmate calling services at these jails. Although the Commission does not agree with every aspect of this study, the Commission finds that a number of factors support its credibility and that it therefore provides valuable supporting evidence that the rate caps the Commission chooses here provide an adequate interim allowance for differences among providers and markets, relative to the average inmate calling services costs reflected in the data filed in response to the Second Mandatory Data Collection.

97. The Commission's analysis of the mean per-minute revenues from prisons and larger jails further corroborates its choices. As discussed in Appendix A, its revenue analysis indicates that it will be commercially viable for providers to serve the vast majority of prisons and larger jails under the provider-related rate caps the Commission adopts today. For example, as the Appendix illustrates, approximately 74% of prisons and 65% of larger jails have reported per-minute revenues net of site commissions under those interim caps. Revenues net of site commissions are reported revenues minus reported site commission payments. Because profit-maximizing firms are unlikely to bid for contracts at which they will operate at a loss, this suggests the interim interstate caps will not undermine providers' profitability. The Commission expects these revenues to cover costs of service below $0.12 per-minute for prisons and $0.14 per minute for larger jails, because higher costs would make such contracts unprofitable, and providers would have no reason to voluntarily accept such terms. And a large portion of the remaining prisons and larger jails—those with per-minute revenues that are higher than $0.12 and $0.14 per minute, respectively—have allocated per-minute costs less than the applicable interim provider-elated rate caps, which likewise suggests they will remain profitable under those caps. In total, therefore, the Commission's interim rate caps will allow approximately 81% of all prison contracts and approximately 96% of all larger jail contracts to cover the costs the providers reported in response to the Second Mandatory Data Collection. These percentages would be even higher if the Commission were to exclude the providers' costs of providing ancillary services and otherwise rely on the providers' actual, rather than reported, costs. These percentages are also higher if the Commission allows for the increased call minutes that will likely result because its new interim caps will, by lowering prices, increase call volumes. And these cost recovery figures ignore that all costs are likely overstated, such that there is further reason to believe these percentages would be even higher in practice.

4. Accounting for Correctional Facility Costs

98. Based on the record, the Commission adopts additional new interim rate cap components (the facility-related rate components) reflecting two different types of site commission payments—those required under codified law or regulations and those payments prescribed under negotiated contracts—made to correctional facilities. At the outset, and as explained in greater detail in this section, the Commission emphasizes that the facility-related rate components are interim reforms reflecting the limitations of the record before the

Commission and the current regulatory backdrop. Site commission payments are payments made by calling services providers to correctional facilities and broadly encompass any form of monetary payment, in-kind payment requirement, gift, exchange of services or goods, fee, technology allowance, product or the like. They can be expressed in a variety of ways, including as per-call or per-minute charges, a percentage of revenue, or a flat fee. The

2020 ICS FNPRM

proposed to permit providers to recover an additional $0.02 per minute for all types and sizes of facilities to account for the costs correctional facilities incur that are directly related to the provision of inmate calling services. The Commission adopts a modified version of that proposal based on record evidence that $0.02 per minute for every facility may not permit recovery of all legitimate facility costs related to inmate calling services, and may not be required at others. For the time being, the Commission declines to adopt defined facility-related rate components for jails with average daily populations below 1,000. Instead, for prisons and larger jails only, the Commission adopts two distinct interim site commission-related rate components reflecting different types of site commissions: Site commission payments that providers are obligated to pay under laws or regulations and payments that providers agree, by contract, to make. In referring to “law or regulation” the Commission means state statutes and laws and regulations that are adopted pursuant to state administrative procedure statutes where there is notice and an opportunity for public comment such as by a state public utility commission or similar regulatory body with jurisdiction to establish inmate calling rates, terms and conditions. The Commission specifically does not intend to include “regulations” for which no formal administrative process occurred prior to adoption, and the Commission also does not intend to include contractual negotiations that are merely approved or endorsed by state or local law. This approach to defining what are, by default, laws or regulations requiring site commission payments guards against the risk of abuse from a broader definition, given evidence that state and local correctional facilities might themselves be able to create so-called `rules' or `regulations' outside of formal process—simply by exercising their discretion regarding site commission payments in a different manner—and thereby evade the analytical differences underlying this distinction in the Commission's interim rules. To the extent that a scenario arises that falls outside the Commission's definition that a provider or correctional institution believes should be treated as a qualifying law or regulation, it is free to seek a waiver where the Commission can conduct a careful case-by-case review to ensure no evasion or abuse is occurring.

99. First, with regard to the former type of site commission, the Commission adopts an interim legally mandated facility rate component that reflects payments that providers make to correctional facilities pursuant to law or regulation that operates independently of the contracting process between correctional institutions and providers. These mandatory payments take varied forms, including per-call charges or prescribed revenue percentages, and may be imposed on calling service providers by state governments through statutes or regulations. Securus argues that this statute is a “general fee provision” that should be treated as a mandatory tax or fee rather than a site commission subject to the Commission's interim reforms here. As explained above, providers are free to seek a waiver if they believe that a law or regulation should not be treated as a legally mandated site commission but the Commission does not have sufficient information to make particular factual determinations in this Report and Order about any particular state mandated payment. The Commission confirms that its interim rate reforms do not include Mandatory Taxes or Fees as defined in the Commission's rules. Given the “mandatory” nature of these payments, for the purpose of the interim actions the Commission takes herein and based solely on the current record, the Commission recognizes them as a cost that providers must incur to provide calling services, consistent with section 276's fair compensation provision. For now, providers may recover the costs of these payments, without any markup, as a separate component of the total permissible interstate and international rate caps the Commission adopts today. In no event, however, can the total rate cap exceed $0.21 per minute.

100. As with other reforms in this Report and Order, the Commission emphasizes that its adoption of a legally mandated facility rate component is an interim reform that is aimed to balance the need to achieve immediate rate relief in light of the history of this proceeding, the record before it, and the exigent circumstances presented by the COVID-19 pandemic, consistent with the strictures of the D.C. Circuit's decision in

GTL

v.

FCC.

The Commission concludes, for purposes of this interim reform, that adopting a legally mandated facility rate component is consistent with the fair compensation mandate of section 276. The Commission lacks the evidence, however, to determine on a permanent basis whether and what portion of these payments are “legitimately” related to the cost of providing the service. The Commission leaves such determinations to its forthcoming action on the Fifth FNPRM, published elsewhere in this issue of the

Federal Register

.

101. Next, the Commission adopts a contractually prescribed facility rate component that permits providers to recover, as a component of their total per-minute interstate and international calling rates for prisons and larger jails, that portion of such site commission payments that the Commission determines for the purpose of this interim action is reasonably related to the facility's cost of enabling inmate calling services at that facility. Site commission payments prescribed under negotiated contracts impose contractual obligations on the provider and, in the Commission's judgment, on the current record, reflect not only correctional officials' discretion as to whether to request site commission payments as part of requests for proposals, and if so in what form and amount, but also providers' voluntary decisions to offer payments to facilities that are mutually beneficial in the course of the bidding and subsequent contracting process. The fact that a state law specifically permits certain correctional facilities to recover site commissions from providers but does not mandate such payments does not change the nature of these discretionary payments. Providers may recover up to $0.02 per minute to account for these facility costs. Where a law or regulation merely allows a correctional facility to collect site commissions, requires a correctional facility to collect some amount of site commission payment but does not prescribe any specific amount, or is not subject to state administrative procedural requirements, site commissions would also fall into the category of a site commission payment prescribed by contract, because the correctional facilities and providers can negotiate, in their discretion, regarding how much the providers will pay in site commissions.

102. To promote increased transparency regarding the total rates charged to consumers of inmate calling services, the Commission requires providers to clearly label a legally mandated facility rate component or a

contractually prescribed facility rate component, as applicable, in the rates and charges portion of a calling services consumer's bill, including disclosing the source of such provider's obligation to pay that facility-related rate component. Providers that make no site commission payments (and thus are not permitted to pass any facility-related rate component on to consumers) are not required to include a facility-related rate component line item on end user bills.

103. Finally, to avoid any confusion, the Commission reiterates that nothing in this section, or any other section of this Report and Order, is intended to result in a higher permissible

total

rate cap for any interstate call from any size facility than the $0.21 that existed for interstate debit and prepaid calls before today and that continues to apply to all providers for all types of calls from jail facilities with average daily populations below 1,000. During the eight-year period that providers have been subject to the $0.21 rate cap for all facilities, they have had the ability to avail themselves of a waiver process if they deemed that rate cap to be insufficient to enable them to recover their inmate calling services costs. With the exception of a single temporary waiver request relating specifically to the interim rate caps dating back to 2014, no other provider has sought a waiver of the $0.21 interstate rate cap claiming that cap fails to permit recovery of that provider's costs at any size facility. The Commission notes that Securus filed a general “me too” waiver request in 2014 asking the Commission to extend Pay Tel's limited waiver to all other providers serving the same size jails. The Commission denied Securus's waiver request without prejudice as Securus failed to make an adequate showing for a waiver to be granted, and also failed to provide sufficient, or any, cost and revenue data to support its claims. In addition, a handful of other waiver requests relating to other sections of the inmate calling services rules have also been filed but these waivers typically related to timeframes within which new regulations associated with ancillary services reforms became effective. The absence of further waiver requests over the past eight years leads the Commission to conclude that $0.21 is sufficient for providers to recover their costs, including any costs related to site commission payments. Thus, no provider may assess a provider-related rate component and facility-related rate component that, added together, results in a total interstate rate for any interstate call from any size facility of more than $0.21. Operationally, providers remain free to impose the legally mandated facility rate component at the level specified by the relevant statute or rule. If the resulting cumulative total rate exceeds $0.21 per minute, providers would need to charge a lower provider-related rate. Based on its understanding and awareness of the various state statutes or rules that underlie legally mandated facility rate components, the Commission does not expect this to occur, however. Nevertheless, providers that cannot cover their inmate calling services costs under the $0.21 per minute total maximum rate cap may seek a waiver of the Commission's interim rate caps.

104. As with the provider-related rate caps the Commission adopts today, its decision to allow a $0.02 additive for contractual site commissions and the full pass-through of legally mandated site commissions pursuant to section 276 up to the $0.21 cap are interim steps that the Commission adopts in light of the history of this proceeding, the available record, and the exigent circumstances caused by the COVID-19 pandemic, including the related decision by many prisons and jails to prohibit in-person visitation. Nothing in today's decision limits its ability, on a more complete record and with sufficient notice, to reconsider this treatment of site commission payments, and indeed the Commission seeks detailed comment in the Fifth FNPRM on site commissions, including what portion of all site commission payments, if any, actually represent “legitimate costs” connected to inmate calling services.

105.

Background.

The Commission has historically described site commission payments as “a division of locational monopoly profit.” Over the past five years, however, the Commission has recognized that site commissions may not always exclusively compensate correctional facilities “for the transfer of their market power over inmate calling services to the inmate calling services provider;” in some instances, site commission payments may serve in part to compensate correctional facilities for costs that the facilities “reasonably incur in the provision of inmate calling services.” Although the Commission and the D.C. Circuit each have recognized the distinction between portions of these payments, the Commission agrees with commenters, particularly on this record, that it is “difficult to disentangle which part of the site commission payment goes towards reasonable costs and which portion is due to the transfer of market power.”

106. Although the Commission declined to permit the recovery of any portion of site commission payments to account for facility-related costs in the

2015 ICS Order,

the Commission explained that record evidence suggested that if “facilities incurred any legitimate costs in connection with [inmate calling services], those costs would likely amount to no more than one or two cents per billable minute.” In 2016, when the Commission reconsidered its decision to categorically exclude site commissions in the

2015 ICS Order,

it concluded that some facilities likely incur costs directly related to the provision of inmate calling services that may amount to more than one or two cents a minute. The Commission therefore increased the rate caps it had adopted in the

2015 ICS Order

to “better ensure that providers are able to receive fair compensation for their services” by adopting an additive to the 2015 rate caps that differed among facility size. The data and other evidence supporting the 2016 facility-cost additives suggested that per-minute facility costs associated with inmate calling services were higher in smaller facilities than in larger ones, so the Commission adopted a tiered framework for site commission payments based on facilities' average daily populations. These rate tiers mirrored the tiers the Commission had used to establish the permanent rate caps adopted in the

2015 ICS Order.

107. The D.C. Circuit's 2017 vacatur of the

2015 ICS Order

rate caps in

GTL

v.

FCC,

based in part on the finding that the Commission's decision to categorically exclude site commission payments from those rate caps was arbitrary and capricious, led the Commission to ask questions in the

2020 ICS FNPRM

aimed at determining “which portions of site commissions might be directly related to the provision of inmate calling services and therefore legitimate, and which are not.” Because the revised rate caps adopted on reconsideration in 2016 to provide for the recovery of site commission costs were based on the same methodology the court had vacated in

GTL

v.

FCC,

the D.C. Circuit also vacated and remanded the

2016 ICS Reconsideration Order.

The

2020 ICS FNPRM

proposed a $0.02 per minute additive based on staff “analysis of the costs correctional facilities incur that are directly related to providing inmate calling services and that the facilities recover from calling service providers as reflected by comparing provider cost data for facilities with and without site

commissions.” The Commission sought comment on its analysis, including whether it should vary the allowance for site commission payments based on a facility's average daily population. It also sought comment on whether a $0.02 per minute allowance would be adequate to cover the costs that jails with average daily populations less than 1,000 incur in connection with the provision of interstate and international inmate calling services. The Commission asked correctional facilities to “provide detailed information concerning the specific costs they incur in connection with the provision of inmate calling services.”

108.

Full Recovery of Site Commissions Is Not Required.

Some providers argue that the Commission must allow for full recovery of all site commission payments because inmate calling services providers “are required to pay site commissions and have no say in the elimination or substantial reduction of such commissions.” The Commission disagrees.

109. The D.C. Circuit held that, because the Commission acknowledged that some portion of some providers' site commission payments might represent “legitimate” costs of providing inmate calling services, the Commission could not reasonably “categorically exclude[] site commissions and then set the rate caps at below cost.” “Ignoring costs that the Commission acknowledges to be legitimate,” the court explained, “is implausible.” But the court left it to the Commission to determine “

which portions

of site commissions

might be directly related to the provision of ICS and therefore legitimate,

and which are not.”

110. Under section 201(b), the Commission has a duty to ensure that “charges” and “practices” “for and in connection with” interstate and international telecommunications services—including inmate calling services—are not “unjust or unreasonable.” As explained, incarcerated people and the people they call have no choice in their telephone service provider. Instead, each correctional facility has a single provider of inmate calling services that operates as a monopolist within that facility. And very often, correctional authorities award the monopoly franchise for inmate calling services based in part on what portion of inmate calling services revenues a provider has offered to share with the facility. Without effective regulation, providers bidding for a facility's monopoly franchise compete to offer the highest site commission payments, which they then recover through correspondingly higher rates charged to incarcerated people and their families.

111. As discussed in greater detail below, in view of these market dynamics, and based on the record, the Commission rejects the claim that any and all site commission payments that a provider might elect to offer a correctional facility in the course of contract negotiations for the facility's monopoly franchise are “real, required costs [forced] on [inmate calling services] providers as a condition precedent to the providers' ability to offer [inmate calling services].” That claim is at odds with well-established principles of ratemaking. And the providers' position has no limiting principle. Under their logic, incarcerated people and the people with whom they communicate by telephone may be forced to pay rates for the calling services they use that cover items wholly unrelated to those services. This cannot be reconciled with the Commission's statutory duty to ensure that incarcerated people and the people with whom they speak are charged “just and reasonable” rates for inmate calling services. The claim that any and all site commission payments are costs reasonably related to the provision of interstate and international inmate calling services is particularly implausible with respect to future contracts. At least where site commissions are not required under formally codified laws or regulations, providers of inmate calling services cannot reasonably contend that they are bound to offer, or agree to pay, site commissions that are uneconomical for them on a going forward basis. The record before the Commission suggests that if, in the wake of this Report and Order, providers of inmate calling services should offer to pay site commissions at levels higher than they can recover through interstate and international inmate calling services rates, that is because they expect to profit from obtaining the franchise at a given facility in other ways (

e.g.,

by recovering the cost of the site commission payments they offer through intrastate inmate calling services rates or through revenue generated by providing other, nonregulated services). Even with respect to existing contracts, the Commission disagrees that any and all site commissions that a provider has agreed to pay are costs reasonably related to the provision of interstate and international inmate calling services. As it discusses above, the Commission's proceeding on how to regulate rates for interstate inmate calling services has been underway for many years. Throughout this period, providers have understood that the Commission might seek to bar the recovery of some or all site commissions through interstate rates. Under the circumstances, whatever the providers offered to pay, they offered at their own risk.

112. Neither

GTL

v.

FCC

nor section 276 of the Act compels a different conclusion. As the Commission has observed, and as the court acknowledged in

GTL

v.

FCC,

the Commission is entitled “to assess on remand which portions of site commissions might be directly related to the provision of [inmate calling services] and therefore legitimate, and which are not.” Due to the D.C. Circuit's remand on the issue of site commissions, the Commission declines NCIC's recommendation that the Commission simply “not disturb site commissions.” To leave the issue of site commissions untouched by the Commission's actions today would be contrary to the Commission's mandate to ensure just and reasonable rates under section 201(b) of the Act. And “fair” compensation for providers of inmate calling services, under section 276, does not mean that providers must be able to recover, through rates for interstate and international inmate calling services, revenue-sharing payments that they agree voluntarily to make to encourage a correctional facility to select them as the monopoly franchise holder for inmate calling services (both interstate/international and intrastate) and often other nonregulated services, too.

113. On the present record, the Commission cannot conclude that Commission precedent requires, at least based on current law and policy, that the Commission treat all site commissions

solely

as a division of locational monopoly profits none of which are recoverable through rates, as the United Church of Christ and Public Knowledge urge. The United Church of Christ and Public Knowledge rely on the Commission's conclusion in the

1999 Pay Telephone Order

that site commissions “should be treated as a form of profit rather than a cost.” As explained above, while the Commission has

historically

viewed site commissions as a division of monopoly profits, it took a different view in later decisions. UCC and Public Knowledge also argue that the Commission cannot “treat the costs of communications providers for incarcerated people differently from the costs of communications providers via payphones when the economic

incentives and factual circumstances are nearly identical and both are governed by the same statute.” As the Commission has recognized since 2002, however, calling services for the incarcerated are “are economically different than other payphone services.” The Commission's actions here reflect a reasonable approach to responding to

GTL

v.

FCC

and Commission precedent in the inmate calling services context in light of the current record. For example, in the

1999 Pay Telephone Order

the Commission reasoned that site commission payments are not costs because the ability to offer a site commission payment occurs “only when a particular payphone location generates a number of calls that exceeds the break-even number of calls” thereby producing “additional profit” that can be paid to the location owner. The

1999 Pay Telephone Order

also expressed confidence that providers reasonably could expect there to be locations where they would be allowed to operate payphones without paying locational rent. On the current record, the Commission is not persuaded that the Commission can apply those conclusions regarding locational rents from the traditional payphone context at the time of the

1999 Pay Telephone Order

to site commission payments in the inmate calling service context today given their tension with the Commission's views regarding the recoverability of certain correctional facility costs in the

2016 ICS Reconsideration Order,

as well as the D.C. Circuit's rejection of the categorical exclusion of site commission payments from recovery in inmate calling service rates at issue in

GTL

v.

FCC.

Thus, while the Commission concludes that full recovery of site commissions is not required, the Commission cannot conclude on the current record, and in light of the current legal treatment of site commissions, that no recovery of site commissions is justified. For this reason, and on the record before it, the Commission disagrees with the Public Interest Parties insofar as they suggest that it may be reasonable to fully exclude site commission payments.

114.

Legally Mandated vs. Contractually Prescribed Site Commission Requirements.

On the record now before it and in light of section 276, the Commission sees a meaningful difference between site commission payments in an amount that is prescribed under formally codified laws or regulations and other site commission payments that ultimately are embodied in contracts with correctional facilities or systems.

115. In

GTL

v.

FCC,

the D.C. Circuit rejected the FCC's categorical exclusion of site commission payments from costs to be recovered through inmate calling services rates in the regulations under review. In significant part, the D.C. Circuit reasoned:

The FCC's suggestion that site commissions “have nothing to do with the provision of [inmate calling services],” Order, 30 FCC Rcd. at 12822 (internal quotation marks omitted), makes no sense in light of the undisputed record in this case. In some instances, commissions are mandated by state statute, Rates for Interstate Inmate Calling Services, 27 FCC Rcd. 16629, 16643 (2012), and in other instances commissions are required by state correctional institutions as a condition of doing business with [inmate calling services] providers, 17 FCC Rcd. at 3252-53. “If agreeing to pay site commissions is a condition precedent to [inmate calling services] providers offering their services, those commissions are `related to the provision of [inmate calling services].'” Joint Br. for Pet'rs at 21. And it does not matter that the states may use the commissions for purposes unrelated to the activities of correctional facilities. The [inmate calling services] providers who are required to pay the site commissions as a condition of doing business have no control over the funds once they are paid. None of the other reasons offered by the Commission to justify the categorical exclusion of site commissions passes muster.

As the Commission has already discussed when explaining why the Commission is not required under

GTL

to allow the full recovery of any and all site commissions, as some providers contend, the court's statements rejecting “the categorical exclusion of site commissions” from the rate analysis in the

2015 ICS Order

must be interpreted in the context of the court's express recognition that it is “[up] to the Commission to assess on remand which portions of site commissions might be directly related to the provision of [inmate calling services] and therefore legitimate, and which are not.” In light of that recognition, the Commission reads the analysis excerpted above as turning on the particularities of the

2015 ICS Order

and its underlying record. The Commission now revisits and revises both its understanding and expectations regarding the operation of the inmate calling services marketplace and its approach to evaluating what nexus to interstate and international inmate calling services is required for a cost to warrant recovery through the rates for those services. The predicates for the Commission's actions regarding site commission payments in this Report and Order thus differ materially from the predicates underlying the D.C. Circuit's analysis in

GTL

v.

FCC.

116.

More Nuanced Understanding of the Inmate Calling Services Marketplace.

With respect to the inmate calling services marketplace, rather than the two basic scenarios of site commission payments identified by the D.C. Circuit in

GTL

v.

FCC

based on prior Commission decisions, the Commission identifies three conceptual scenarios where site commission payments can arise.

117. First, site commission payments at a specified level sometimes are mandated by state statute or regulation that operate independently of the inmate calling contracting process. As discussed above, some laws permit—but do not require—correctional institutions to collect site commissions, and others require site commission payments but do not specify any particular level. The Commission does not consider those to fall within category one—instead, they fall within category two and/or three (depending on how the correctional institution approaches the request for proposal process). Although some parties have advocated that the Commission preempt or otherwise prohibit the payment of site commissions mandated by state law, the Commission has not yet taken that step. Consequently, as the law stands today and consistent with section 276, it is reasonable to conclude that neither correctional institutions nor providers can avoid the need for site commission payments in this scenario. As explained above, on the current record and based on current law, the Commission only finds that such site commissions satisfy the requirement for fair compensation to providers under section 276 and leave for another day a complete analysis under section 201.

118. Second, there can be situations where the correctional institution's request for proposal, or the like, asks bidders to agree to pay site commissions at a specified level. While facilities may include a site commission component in the request for proposal's description along with other bid “requirements,” the Commission understands that most, if not all, requests for proposals include some form of an “exception” provision that enables bidding providers to explain why they are deviating from the request for proposal's bidding specifications or requirements, and that gives the issuer the discretion to accept such bids nonetheless. In this scenario, unlike in scenario one, a correctional institution is under no legal compulsion to insist upon receiving site commission payments, or payments at a particular level. If no provider accedes to the institution's request for such payments, the institution will be constrained to

entertain noncompliant offers if it wants the individuals in its custody to have access to interstate and international calling services. Given the well-documented benefits, for communities and correctional institutions alike, in allowing incarcerated people access to calling services, the Commission does not anticipate that correctional facilities would forgo making such calling services available merely because providers decline to pay

This text is long and has been trimmed here. Open the source document for the complete record.