Pay Telephone Reclassification and Compensation Provisions of the Telecommunications Act of 1996

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 64

[CC Docket 96-128; FCC 99-7]

Pay Telephone Reclassification and Compensation Provisions of the

Telecommunications Act of 1996

AGENCY: Federal Communications Commission

ACTION: Final rule; Petition for Reconsideration.

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SUMMARY: This order implements pay phone compensation provisions of

section 276 of the Telecommications Act of 1996. This Order responds to

an order of the U.S. Court of Appeals for the DC. Circuit, which

remanded certain compensation rules adopted by the Federal

Communications Commission in the Second Report Order in CC Docket No.

96-128, FCC No. 97-371, 62 FR 58659 (October 30, 1997). This Order

reduces from $.284 to $.240 the default per-call compensation that is

owed by long distance carriers to pay phone providers for compensable

calls originating from pay phones. This Order also addresses other

issues relating to the Commission's rules implementing the pay phone

provisions of the Telecommunications Act of 1996.

DATES: Effective April 21, 1999.

FOR FURTHER INFORMATION CONTACT: Glenn Reynolds, Enforcement Division,

Common Carrier Bureau. (202) 418-0960.

SUPPLEMENTARY INFORMATION:

This is a summary of the Commission's Third Report and Order and

Order on Reconsideration of the Second Report and Order (Third Report

and Order) in CC Docket No. 96-128, adopted on January 28, 1999, and

released on February 4, 1999. The full text of the Third Report and

Order is available for inspection and copying during normal business

hours in the FCC Reference Center, Room 239, 1919 M Street, NW,

Washington DC. The complete text of this decision may also be

downloaded from the FCC's website, www.fcc.gov. The complete text may

be purchased from the Commission's duplicating contractor,

International Transcription Services, 1231 20th Street NW, Washington

DC. 20036, (202) 857-3800.

I. Introduction

1. In this proceeding, we continue our efforts to implement the

requirements of section 276 of the Telecommunications Act of 1996

(``the 1996 Act''). Section 276 directs us to promulgate regulations

that will achieve three basic policy objectives with respect to the

provision of payphone services: (1) promoting a competitive payphone

market; (2) ensuring the widespread deployment of payphones for the

benefit of the general public; and (3) ensuring that providers of

payphone services receive fair compensation for every call made using

their payphones. The overarching goals of the 1996 Act further instruct

us to establish these regulations in a pro-competitive, deregulatory

framework that will open up telecommunications services to competitive

forces nationwide. In this Order, we also respond specifically to

issues remanded to us by the Court upon its review of the Commission's

previous order.

A. The Commission's Prior Orders

2. In the prior orders in this proceeding, the Commission has

fulfilled much of the congressional mandate embodied in section 276 by

creating the structural groundwork necessary for competition to

flourish in the provision of payphone services. See Implementation of

the Pay Telephone Reclassification and Compensation Provisions of the

Telecommunications Act of 1996, CC Docket No. 96-128, Notice of

Proposed Rulemaking, 61 FR 31481 (June 20, 1996) (NPRM); Report and

Order, 61 FR 52307 (October 7, 1996) (First Report and Order); Order on

Reconsideration, 61 FR 65341 (December 12, 1996) (First Report and

Order on Reconsideration) (together the First Report and Order and the

First Report and Order on Reconsideration are referred to as the

Payphone Orders). The Payphone Orders were affirmed in part and vacated

in part. See Illinois Public Telecomm. Ass'n v. FCC, 117 F.3d 555 (D.C.

Cir. 1997) (Illinois Public Telecomm.). The Commission addressed the

issues remanded by Illinois Public Telecomm. in the Second Report and

Order, 62 FR 58659 (October 30, 1997) (Second Report and Order). The

Second Report and Order was also appealed. On appeal, the Court

remanded certain issues to the Commission. See MCI Telecomm. Corp. et

al. v. FCC, 143 F.3d 606 (D.C. Cir. 1998) (MCI v. FCC). In addition to

responding to those issues remanded by the Court, this Order also

addresses issues raised by parties that petitioned us to reconsider

various decisions made in the Second Report and Order.

3. Specifically, the Commission has eliminated implicit subsidies

to payphones provided by local exchange carriers (LECs) that gave such

companies an unfair competitive advantage compared to non-LEC payphone

providers. Similarly, the Commission established non-structural

safeguards to prevent Bell Operating Companies (BOCs) from

discriminating in favor of their own payphones in the provision of

local service, as well as other measures designed to place all

providers of payphone services on an equal competitive footing. The

Commission also deregulated the local coin rate for payphone calls to

allow the competitive marketplace to set fair compensation for such

calls. None of these actions is implicated by the steps we take in the

instant order.

4. The Commission has adopted two prior orders aimed at balancing

the policy objectives identified above. In these prior orders, the

Commission gave primary importance to Congress's objective of

establishing a market-based, deregulatory mechanism for payphone

compensation, as required both in section 276 and the generally pro-

competitive goals of the 1996 Act. The Commission recognized, however,

that various statutory, technological, and economic factors inhibited

the development of a fully deregulated means of providing fair

compensation

[[Page 13702]]

for certain types of calls broadly referred to as ``dial-around'' calls

for which payphone owners were largely uncompensated prior to the 1996

Act. Indeed, the Telephone Operator Consumer Services Improvement Act

(TOCSIA) limits the ability of payphone service providers (PSPs) to

negotiate with interexchange carriers (IXCs) fair compensation for

dial-around calls. Unlike other aspects of payphone service, such as

the local coin rate, the Commission accordingly found it necessary to

adopt a more regulatory approach to ensuring that PSPs are fairly

compensated for these types of calls.

5. By way of explanation, there are typically three types of calls

made from payphones: local calls; long distance calls using the long

distance carrier selected by the payphone owner (referred to as the

``presubscribed carrier''); and so-called ``dial-around'' calls, where

the caller makes a long distance call using a long distance carrier

other than the payphone's presubscribed long distance carrier.

6. Payphone owners receive direct payment for providing the first

two categories of calls. For example, a caller making a local call

deposits coins (typically $.35) and is connected to the called party.

That $.35 is paid directly to the payphone owner. A caller making long

distance calls using the payphone's presubscribed long distance carrier

dials the long distance number, and the payphone owner typically

receives payment through its presubscribed carrier.

7. The third category, referred to as ``dial-around'' calls,

consists of long distance calls that utilize a long distance carrier

other than the payphone's presubscribed carrier. Generally, there are

two types of dial-around calls. The first type is where a caller uses a

code to access his preferred long distance carrier to make a long

distance call, e.g., ``1/800/CALL-AT&T'' or ``10-10-321.'' The second

type of dial-around calls are known as ``toll-free'' calls, such as 1/

800-FLOWERS. In this type of call, the flower company will pay (or

``subscribes'' to) a long distance carrier for a toll-free number that

its customers can use to make long distance calls to the company.

Similar to the caller who uses 1/800-CALL-ATT, the flower customer

calling from a payphone is making a long distance call using a carrier

other than the payphone's presubscribed long distance carrier. This

Order addresses the question of how payphone owners should be

compensated for ``dial around'' calls made from their payphones.

8. In its prior two orders, the Commission established a phased-in

compensation mechanism to satisfy the statutory mandate to ensure that

payphone owners are ``fairly'' compensated for these dial-around calls.

The first phase of the compensation mechanism established a specific,

per-call default compensation amount to be paid to a PSP to cover the

cost of an access-code call or toll-free subscriber call in the absence

of a negotiated agreement between the PSP and the carrier handling the

call. In the Second Report and Order, the Commission calculated this

default amount using what might be described as a ``top-down''

approach. That is, the Commission used the typical deregulated coin

rate of $.35 as a starting point and subtracted net avoided cost

differences between the provision of these coin calls and the provision

of ``dial-around'' or compensable calls. The second phase used the same

``top-down'' methodology to determine a default amount but allowed the

``starting point'' to vary with the deregulated coin price at each

individual payphone.

9. As detailed below, both of the Commission's orders establishing

a mechanism for setting ``fair compensation'' for access code and toll-

free calls were appealed. While upholding most of the other market-

opening undertakings described above, the Court in both instances found

fault with the Commission's efforts to tie ``fair compensation'' for

these dial-around or compensable calls to the deregulated prices

charged by PSPs for local coin calls. In particular, the Court, in its

second remand order, found that the Commission failed to adequately

articulate why the price of a local call is an appropriate starting

point for deriving a regulated default price for ``dial-around'' or

compensable calls. The Commission's main rationale for this approach

was that it could be viewed as being fair in the sense that the margin

between price and incremental cost would be the same for all types of

calls. Thus all types of calls could be viewed as making the same

contribution to covering joint and common costs. Thus our justification

for choosing $.35 as a starting point was simply that it could be

viewed as producing a ``fair'' result.

B. The 1996 Act and Market Constraints

10. In this Order, we must reevaluate the appropriate means by

which to achieve the basic policy objectives expressly set out in

section 276. In setting a default compensation amount, the present

realizing any of these goals individually will not be the optimal means

of satisfying one or more of the other goals. For example, the market

for payphone services is characterized by increasing competitive

pressures due, in part, to the market-opening directives of our

previous orders in this proceeding. Additional pressures have arisen

from payphone-market substitutes, i.e., the rapidly growing

availability of Personal Communications Service (PCS) and cellular

technology, which provides some consumers with an economic alternative

to payphones. In a competitive payphone market, these factors certainly

may lead to a reduction in the deployment of payphones in some areas,

particularly in low-volume locations. Moreover, the number of payphones

deployed across the country is inexorably related to our determination

of a fair compensation amount, as we are directed to do by Congress.

Simply stated, a higher default compensation amount will lead to the

deployment of more payphones, and a lower default compensation amount

will lead to fewer payphones, irrespective of which rate represents

``fair compensation.'' Another example arises from the Congressional

mandate that the Commission's compensation methodology be established

on a ``per call'' basis. Because the overwhelming majority of a

payphone's costs are fixed, a per call compensation plan results in the

following anomaly: A payphone with a low number of calls, e.g., in a

rural area where few calls are made from the phone, will just barely

recover its costs. Under the same plan, a payphone with a high number

of calls, e.g., a payphone in a busy bus station, will recover much

more than its costs.

11. We place great weight on Congress's directive to ensure that

payphones remain widely deployed and available to the public at large,

in part, because we believe that, if we fail to adequately compensate

payphone owners for dial-around or compensable calls, the first

payphones likely to be eliminated are those payphones located where

consumers have the fewest real alternatives, such as in rural areas

that generate relatively fewer payphone calls and inner-city areas with

low residential subscription rates. We also give primary importance to

Congress's objective of widespread deployment because the public

benefits from widespread deployment. Furthermore, the accomplishment of

the remaining objectives necessarily flow from widespread deployment,

e.g., to ensure widespread deployment, there must be fair compensation.

12. After considering the record before us and the opinions of the

Court,

[[Page 13703]]

we conclude that the existing statutory, technological, and economic

constraints identified in the Commission's prior orders prevent us at

this time from relying upon deregulation to determine fair compensation

for access-code and toll-free subscriber calls. Nothing in the record

before us persuades us that we should reconsider our characterization

of the competitiveness of the payphone market in the First Report and

Order.

13. In contrast to the provision of local coin call service,

however, the provision of access-code and toll-free call service is

subject to statutory and technological restrictions that presently

inhibit the ability of the parties to the transaction to reach a

mutually agreeable price, or, alternatively, to decline to transact. In

particular, Congress previously mandated in section 226 of the Act that

PSPs must provide to consumers using their payphones access to all

IXCs. As a result, PSPs have minimal leverage to negotiate with these

IXCs for a fair compensation amount for delivering calls to the IXCs'

networks. Indeed, this concern was one of the fundamental reasons why

Congress adopted the compensation provisions of section 276. In its

previous orders, the Commission sought to overcome this lack of

bargaining power by establishing a system where the IXC could choose to

``block,'' or not accept, calls if it determined that the price being

demanded by the PSP was more than the IXC was willing to pay. We

conclude in this Order, however, that the present ability of carriers

to block is not sufficiently developed to ensure that allowing the

default rate to float with the PSP's local coin rate will necessarily

result in a compensation level that is ``fair,'' as contemplated by the

statute.

C. Summary of Our Actions in this Order

14. In this Order, we switch from the top-down methodology of our

prior orders to a ``bottom-up'' methodology to establish the default

per-call compensation amount that shall be paid to PSPs for compensable

calls that are not otherwise compensated. We refer to the compensation

amount as a ``default amount'' to emphasize that it applies only in the

absence of some other price that may be negotiated between the payphone

owner and the carrier. Pursuant to the bottom-up methodology adopted in

this Order, we calculate an average fully distributed cost for each

type of call such that the default price for each type of call is set

equal to the fully distributed cost of that type of call. We call this

a ``bottom-up'' approach to connote the idea that the price of dial-

around or compensable calls is calculated by ``building-up'' from a

starting point of zero using costs, instead of ``building-down'' from a

starting point of the price of coin calls using avoided costs. In our

explanation of the shift to a bottom-up methodology, we respond to the

concerns of the Court in MCI v. FCC, which remanded the Commission's

Second Report and Order.

15. We adjust the default per-call compensation amount for dial-

around or compensable calls from $.284 to $.24. We make this adjustment

both as a result of the new methodology we adopt and as a result of our

resolution of the petitions for reconsideration of the Second Report

and Order. Indeed, as detailed below, this reduction in the default

amount is more the result of new, more accurate cost data submitted in

connection with the petitions for reconsideration than due to the

switch from a top-down to bottom-up calculation. In reaching the

revised default amount, we consider the cost data submitted (1) for the

Second Report and Order; (2) in connection with the petitions for

reconsideration of the Second Report and Order; and (3) in response to

our Public Notice. Also, we reconsider our treatment of the costs

associated with the provision of compensable calls from payphones. The

more-developed record assures us that our current calculation of a

default compensation amount more accurately reflects the costs of

providing payphone service than our previous efforts.

16. Because our bottom-up methodology assures fair compensation for

the overwhelming majority of payphones, we conclude that the per-call

compensation methodology that we adopt in this Order will not

negatively affect the current deployment of payphones and thus will

promote Congress's goal of widespread deployment of payphones. In

particular, by using a ``marginal'' payphone location for purposes of

calculating the default compensation amount, we have sought in this

Order to ensure the continued deployment of existing payphones to the

greatest practical extent. Furthermore, nothing in our Order affects or

jeopardizes the states' ability to ensure that public interest payphone

programs are viable and supported in an equitable and fair fashion. We

therefore conclude that the per-call compensation methodology adopted

herein is the best option available to implement section 276(b)(2) of

the Act in light of existing technological, statutory, and economic

constraints.

17. We believe that targeted call blocking ultimately will play a

significant role in bridging the gap between Congress's and the

Commission's goal of a deregulatory solution and the present state of

payphone telephony. Should the parties that are the principal economic

beneficiaries of the payphone market--the payphone providers, the IXCs,

and the subscribers to toll-free lines--be unable or unwilling to

resolve the technological issues regarding targeted call blocking, then

their inaction may require us to move to a more regulatory approach.

If, however, the parties are able to resolve these technological issues

surrounding the availability of targeted call blocking, we believe that

a move to a more market-based approach that would comply with both

statutory obligations and the Court's concerns is foreseeable. We note

that IXCs currently possess the technology and receive the coding

digits necessary to implement a targeted call blocking mechanism.

18. Until such time, we will monitor the development of call

blocking technology and act to ensure that the interests of the public

as payphone users are adequately addressed. We emphasize that our

finding concerning the current limitations of call blocking technology

only restricts our ability to rely upon a carrier-pays system in which

different payphones may charge different compensation amounts, such as

would be the case in the final phase of the compensation mechanism

established in the Commission's previous orders. As stated in those

orders, the adoption of a fixed default compensation amount, as we do

in this Order, is designed in part to address the existing

technological limitations relating to call-blocking.

19. As of 30 days after publication of this Order in the Federal

Register, IXCs must compensate PSPs the default per-call compensation

amount for all compensable payphone calls not otherwise compensated

pursuant to contract. For purposes of this Order, a compensable call

includes toll-free calls, access-code calls, certain 0+, and certain

inmate calls. The default per-call compensation amount shall be

applicable through at least January 31, 2002. We anticipate that, by

this time, the parties will have had the opportunity to resolve the

impediments that currently inhibit the ability of payphone owners and

carriers to negotiate fair compensation for dial-around calls. If, by

January 31, 2002, parties have not invested the time, capital, and

effort necessary to remove these technological impediments, or we

determine that other impediments to a market-based resolution continue

to exist, the parties may petition the

[[Page 13704]]

Commission regarding the default compensation amount, related issues

pursuant to technological advances, and the expected resultant market

changes. Barring an unforeseen change in the market or in the relevant

technology, we will look with disfavor upon any petition requesting

that we modify, before January 31, 2002, either the compensation amount

or compensation mechanism. We find that it will require a significant

amount of time for IXCs to fully implement and deploy the necessary

technologies and that it is important to provide stability to the

parties, the public, and the market concerning the amount of per-call

compensation.

II. Discussion

A. Remand Issues

20. In this section, we respond to the Court's remand of the

Commission's Second Report and Order. We explain our basis for deciding

on the appropriate compensation methodology, in light of the statutory

requirements of the Act, the underlying economic structure of payphone

telephony, current technological constraints, and the Court's findings

in MCI v. FCC.

21. We first define the scope of our compensation methodology by

specifically identifying the calls that are compensable under our

rules. We then explain the factors that guide our selection of a

compensation methodology. Specifically, we define, for purposes of this

Order, ``fair compensation'' in terms of the economic constructs of

payphone telephony. Applying our definition of fair compensation within

the confines of the Act's directives and the Court's findings in MCI v.

FCC, we decline to adopt, for now, a top-down methodology to calculate

the default compensation amount that uses the deregulated local coin

rate as the starting point.

22. We then explain our return to the Commission's initial view

that a bottom-up methodology should be used to establish a default

compensation amount. We explain our finding that a bottom-up

methodology is currently the most equitable means of ensuring fair

compensation for PSPs in light of the very real statutory,

technological, and economic constraints within which we must make our

decision. We emphasize again that our preference would be to rely on a

fully deregulated solution for setting compensation for coinless

payphone calls. As we explain, however, we conclude that there is no

such solution available to us that is workable at this time.

Accordingly, we examine the most appropriate methodology for

calculating the cost of providing the service. We conclude that a

bottom-up cost calculation is most reliable in light of the Court's

concerns in MCI v. FCC and our reexamination of the manner in which

PSPs allocate joint and common costs between local coin calls and

compensable calls. Finally, we set forth the manner in which we apply

our bottom-up approach to establish a fair default compensation amount.

1. Definition of Compensable Call

23. As an initial matter, we specify the types of calls for which

PSPs may receive the default per-call compensation amount that we

establish in this Order. ``Compensable calls'' for purposes of this

Order are calls from payphones for which the payphone owner cannot

receive compensation from another source.

24. Section 276 specifically provides that PSPs are not entitled to

compensation for 911 emergency and TRS calls. Consequently, when

entering the payphone business, PSPs assume the legal obligation of

allowing 911 emergency and TRS calls to be made from their payphones

without receiving per-call compensation. The term ``compensable call''

applies, as does this rulemaking proceeding, to intrastate as well as

interstate calls, by virtue of specific provisions of section

276(b)(1)(A).

25. Specifically, we establish for purposes of this Order that the

term ``compensable call'' includes: (1) access-code calls; (2) toll-

free calls; (3) certain 0+ calls (e.g., 0+ calls made from a payphone

where the PSP serve as an aggregator); (4) certain 0-calls (e.g., 0-

calls in states that, with FCC permission, prohibit blocking of such

calls); (5) certain inmate calls; and (6) certain toll-free Government

Emergency Telecommunications Systems (GETS) 710 calls. ``Compensable

calls,'' in the context of this Order, do not include: (1) coin calls

or other calls, such as directory assistance calls, for which the

payphone provider can otherwise charge; (2) presubscribed 0+ calls; and

(3) 0-calls in states that do not prohibit blocking of 0-calls. We

reiterate that, for purposes of this Order, calls that receive

compensation from some other source, e.g., as part of an individual

contract between a PSP and an IXC, are not entitled to per-call

compensation under this Order.

2. Definition of Fair Compensation

26. In relevant part, section 276(b)(1)(A) requires that PSPs be

``fairly compensated for each and every completed * * * call.'' Neither

the statute nor the legislative history makes clear, however, what

Congress meant by the phrase ``fairly compensated.'' At the same time,

section 276(b)(1) directs the Commission to achieve this goal in a

manner that will ``promote competition among PSPs and promote the

widespread deployment of payphone services to the benefit of the

general public.'' The legislative history again provides little

guidance. It would appear, however, that section 276 was enacted, in

part, in recognition of the limitation on the ability of PSPs and

carriers to negotiate a mutually agreeable amount as a result of

TOCSIA's prohibition on barring IXC-access calls by PSPs.

27. In light of the above, we find that PSPs will be fairly

compensated if, at a minimum, we: (1) balance the interest of PSPs and

those parties that will ultimately pay the default compensation amount;

and (2) ensure that the default compensation amount is sufficient to

support the continued widespread availability of payphones for use by

consumers.

28. We recognize that, because most payphone costs are fixed and

each type of call has a relatively small marginal cost, a wide range of

compensation amounts may be considered ``fair.'' As we discussed above,

the vast majority of the costs of providing payphone service are fixed

and common costs, and there is no one economically correct way to

allocate such costs among the different types of calls that may be made

from a payphone. Economic theory does suggest, however, that the costs

of one service should not be cross-subsidized by another service. That

is, consumers making one type of call, such as a local coin call,

should not pay a higher amount to subsidize consumers that make other

types of calls, such as dial-around or toll-free calls. In order to

avoid a cross-subsidy between two such services that are provided over

a common facility, each service must recover at least its incremental

cost, and neither service should recover more than its stand-alone

cost. Within these parameters, many different compensation amounts may

be considered fair.

29. In its prior orders, the Commission defined ``fair

compensation'' as the amount to which a willing seller (i.e., PSP) and

a willing buyer (i.e., customer, or IXC) would agree to pay for the

completion of a payphone call. In the Second Report and Order, the

Commission, in establishing a default compensation amount, found that

fair compensation required that dial-around calls contribute a

proportionate share of the common costs of payphone service. We

[[Page 13705]]

continue to believe that this is an essential element of our

determination of ``fair compensation'' in this context. We find that

any other approach would unfairly require one segment of payphone users

to disproportionately support the availability of payphones to the

benefit of another segment of payphone users. Such subsidies distort

competition and appear inconsistent with Congress's directive to

eliminate other types of subsidies. The default compensation amount

that we establish below seeks to ensure that the current number of

payphones is maintained.

30. In light of the above considerations, we conclude that the

default per-call compensation amount we establish should ensure that

each call at a marginal payphone location recovers the marginal cost of

that call plus a proportionate share of the joint and common costs of

providing the payphone. We find such an approach satisfies the first

condition set forth above of providing a per-call amount that is fair

to both payphone owners and the beneficiaries of these calls (e.g.,

IXCs and toll-free subscribers). We believe that the $.24 compensation

amount is fair, because it will allow PSPs to recover more than the

marginal cost of providing payphone service for dial-around calls and

thus contribute to the common costs of the payphone. We also find that

basing this calculation on the marginal payphone location satisfies

Congress's directive that we ensure the widespread deployment of

payphones. As opposed to a calculation based on the average payphone

location, use of a marginal payphone location should promote the

continued existence of the vast majority of payphones. Thus, payphone

owners will benefit because they will receive the compensation

necessary to profitably provide service. Consumers and long distance

carriers will benefit because payphones will remain widespread, which

will ensure that consumers have ready access to make payphone calls

using the long distance carrier of their choice.

3. Reconsideration of the Second Report and Order's Top-Down

Methodology

31. In this section, we explain the Second Report and Order's

compensation methodology that the Court remanded in MCI v. FCC and the

manner in which the statutory constraints associated with TOCSIA and

technological constraints limiting the availability of targeted call

blocking affect the viability of such a compensation methodology. In

light of these constraints, and mindful of the Court's findings in MCI

v. FCC, we find that a compensation methodology based on the market

rate for local coin calls currently will not ensure fair compensation

for coinless calls from payphones. Additionally, upon reconsideration,

we find that our prior assumption regarding recovery of joint and

common costs was incorrect. This incorrect assumption undermines an

important basis for a top-down methodology for determining the cost to

PSPs of providing coinless calls, because such a methodology assigns an

equal proportion of joint and common costs to both types of calls.

Therefore, upon reconsideration, we conclude that a bottom-up approach

is more appropriate than the top-down approach adopted in the

Commission's previous orders, in which the Commission set the

compensation amount for coinless calls from each payphone according to

that payphone's deregulated local coin call rate. Although we do not

adopt a top-down approach for calculating the compensation amount for

coinless calls, we use a top-down calculation to test the

reasonableness of our bottom-up calculation.

32. In the Second Report and Order, the Commission established a

two-phase compensation system. Under the first phase, PSPs would

receive, for a two-year period ending in October 1999, a default

compensation amount of $.284 for each compensable call, absent an

agreement between the PSP and IXC on a different rate. The Commission

arrived at this figure by using a top-down approach for determining the

costs to the PSP of making available coinless calls from their

payphone. The Commission's top-down approach started with what the

Commission determined was the most prevalent price of a deregulated

local coin call (i.e., $.35). From this starting point, and consistent

with the Commission's understanding of the Court's statements in

Illinois Public Telecomm., the Commission subtracted the costs of

providing coin calls that are not incurred for providing coinless

calls, an amount calculated to be $.066. Thus, for two years, an IXC

would be required to pay the PSP $.284 for every compensable call.

33. The Second Report and Order required that, after October 1999,

compensation for dial-around calls would be established by subtracting

the net avoided costs of the dial-around call ($.066) from the

deregulated local coin price charged by each payphone. Thus, under the

second phase of the compensation system, compensation to PSPs for

compensable calls would vary in relation to the local coin call price

of the payphone being used.

34. In MCI v. FCC, the Court concluded that the Commission failed

to adequately explain the underlying premise for the top-down approach

in setting a default compensation amount. Specifically, the Court found

that the Commission did not explain ``why a market-based rate for

coinless calls could be derived by subtracting costs from a rate

charged for coin calls.'' The Court found that if ``costs and rates

depend on different factors, as they sometimes do, then [the

Commission's] procedure would resemble subtracting apples from

oranges.'' The Court posited that the Commission's conclusion might

have depended on the premise that the market rate for coin calls

generally reflects the cost of coin calls. Although the Court reasoned

that such a premise could hold true in a competitive market in which

costs and rates converge, the Court found that the Commission failed to

explain its reliance on such a premise. The Court also cited the

Commission's First Report and Order, in which, according to the Court,

the Commission acknowledged that the coin call rate might potentially

diverge from the cost of coin calls. Based on the finding that the

Commission failed to adequately explain why the market-based method did

not equate to ``subtracting apples from oranges,'' the Court remanded

the matter to the Commission.

a. TOCSIA and Targeted Call Blocking.

35. Because of TOCSIA and the present lack of targeted call

blocking, we conclude that the compensation system established in the

Second Report and Order is currently unworkable. First, under TOCSIA,

the PSP (or seller) must connect (or sell) all calls to the IXC. Under

the Commission's prior approach, and after the two-year phase-in

period, each PSP would be allowed to set the price for compensable

calls at whatever level it chose by raising or lowering the local coin

rate at a particular payphone. Accordingly, the PSP would be able to

receive a greater compensation amount by raising the local coin price.

At a minimum, this relationship creates a non-cost based incentive on

the part of the PSPs to raise the local coin rate from a payphone, not

to make more money from coin calls but to increase the level of

compensation from dial-around calls. In most instances, we believe that

the ability of a PSP to raise its local rate in this manner will be

constrained by competitive forces. As the Court pointed out, however,

we also have previously recognized that locational monopolies allow

PSPs to set some payphones' rates above cost. Additionally, where a

[[Page 13706]]

payphone generates few local coin calls relative to the number of

coinless calls, e.g., a payphone located in an airport, linking the

coinless rate to the coin rate potentially could create instances where

a PSP seeks to maximize its total revenue by raising the local coin

rate, even if doing so deterred customers from making coin calls. In

this situation, a PSP may be able to more than offset lost revenues

from local coin calls with the compensation it would receive from

coinless calls.

36. Second, because the IXCs' current call-blocking technology only

allows for an all-or-nothing approach to blocking dial-around calls

from a payphone, the IXC (or buyer) is unable to choose whether or not

to accept (or buy) a particular call. In other words, the IXC must

either buy every call from every payphone, regardless of the amount it

must compensate the PSP for the calls, or buy no payphone calls at all.

In this scenario--where the seller must sell and the buyer must buy

every call or none at all--market forces are rendered ineffective as a

means of achieving an efficient price. We therefore conclude that a

default compensation amount that varies according to the deregulated

local coin price does not ensure a fair compensation level, unless

carriers have some ability to reject a call based upon the compensation

amount for that call. Parties contend that such call blocking

technology presently is not readily available in the network and will

take some time for carriers to implement.

37. In providing for a default compensation amount that was allowed

to vary according to the deregulated local coin price, the Commission

stated that, under deregulation, competitive pressures would constrain

the amount PSPs could charge consumers for such calls. Similarly, in an

unrestricted market where IXCs compensate payphone owners based on an

amount that varies according to the local coin price, IXCs ideally

should be able to decline calls from payphones they believe to be

excessively priced. Without targeted call blocking, however, IXCs

cannot do this. All-or-nothing call blocking may provide some downward

pressure on high dial-around prices charged by PSPs, but it is

insufficient to reach a wholly competitive outcome under the

circumstances surrounding the Commission's previous compensation

mechanism.

38. We note that the lack of targeted call blocking is a temporary

phenomenon. The overwhelming majority of payphones are, or soon will

be, on payphone lines that transmit the appropriate coding digits, as

required in the Commission's prior orders in this proceeding.

Therefore, the ability to develop targeted call blocking technology

rests largely with the IXCs. We strongly encourage the IXCs to develop

targeted call blocking. Targeted call blocking is an essential element

to an IXC's ability to negotiate with PSPs in a true market setting.

39. As we stated above, we are aware that targeted call blocking is

not the only problem that must be resolved in order to move to a

deregulated resolution. Targeted call blocking is, however, a critical

element to real-time, wide-spread negotiations between payphone owners

and carriers. It is the threat that a PSP may have its dial-around

calls blocked that brings PSPs and IXCs into equal bargaining

positions. Because it is in the interests of both the PSP and the IXC

to negotiate a mutually acceptable compensation amount, we do not

desire, nor do we foresee the need for, the widespread use of targeted

call blocking once the technology is implemented and deployed. We also

note that, although the default compensation amount that we establish

in this Order is reasonable and fair to all parties, an IXC that finds

the default compensation amount to be excessive may help remedy that

situation by developing targeted call blocking capability.

b. Recovery of Joint and Common Costs.

40. In establishing a compensation amount based on the price of a

local call, the Commission in the Second Report and Order sought to

equalize the contribution that each call made to the joint and common

costs of each call. In adopting a top-down derivation of the coinless

default compensation amount based on the price of a local coin call,

the Commission assumed that PSPs set prices so that each type of call

contributes an equal amount to joint and common costs. Upon

reconsideration, and based upon the additional information in the

record, we reassess the Commission's prior assumption regarding

recovery of joint and common costs, finding that our assumption is not

necessarily valid. This reassessment undermines an important basis for

the Commission's top-down methodology.

41. We find insufficient evidence in the record to ascertain the

method by which PSPs set prices for a various types of calls in order

to recover the common costs of providing payphone service. The error in

the Commission's assumption that each call contributes equally to joint

and common costs may be demonstrated by examining the revenue that PSPs

receive for 0+ and 1+ calls. Although coinless calls (such as 0+ calls)

cost less than coin calls, some PSPs receive more than $.70 per 0+

call. This is more than twice as much as the prevailing $.35 local coin

price. Also, the RBOC Coalition states that for many payphones, the 1+

sent-paid charges (i.e., the coin price for a long distance call)

exceeds basic long distance charges by an average of $1.45 per call.

Clearly, some PSPs do not price their calls such that each call makes

an equal contribution to joint and common costs. Therefore, if our goal

is to price dial-around calls such that they make a proportionate

contribution to joint and common costs, we cannot do so by basing their

price on the local coin calling price, because we do not know how

individual PSPs price local coin calls in relation to the recovery of

joint and common costs. Therefore, upon reconsideration, we find

unreliable the assumption that PSPs set prices so that each call

recovers an equal amount of joint and common costs.

c. MCI v. FCC.

42. Finally, in light of the Court's concerns regarding whether a

market-based rate for coinless calls could be derived by subtracting

costs from a rate charged for coin calls, we find that a top-down

approach is unsuitable at present for setting default compensation. By

using a bottom-up approach, we resolve the Court's concerns, because we

focus on the costs of a dial-around call, rather than attempting to

compare the rate and costs of a local coin call to the cost of a dial-

around call. The Court's concerns in MCI v. FCC and the other factors

discussed in this section persuade us that, at this time, a bottom-up

compensation methodology is more appropriate than a top-down

methodology.

5. Selection of a Bottom-Up Methodology

43. In light of existing technological, statutory, and economic

constraints, we find that the most appropriate mechanism for

establishing fair compensation is a bottom-up approach. We recognize

that such a compensation mechanism does not replicate the price that

the market would set for each and every call from a payphone, which, in

an ideal setting, would be our preferred outcome. Under the constraints

detailed previously, however, we conclude that a bottom-up approach

will best comply with the statutory directive of ensuring the

widespread deployment of payphones in a manner that is consistent with

our definition of fair compensation.

44. In establishing a bottom-up approach, we considered three

standard

[[Page 13707]]

economic approaches to setting prices, in addition to our review of the

top-down methodology used in the Second Report and Order: (1) marginal

cost pricing; (2) the RBOC Coalition's Ramsey's-style pricing; and (3)

fully distributed cost coverage. As explained in Section IV.B. of the

Order, we find that a fully distributed cost-coverage approach best

fulfills our statutory directives within the economic, technological,

and statutory constraints that currently exist. Specifically, we find

that a fully distributed cost-coverage approach that determines cost by

working from the bottom up will comport with statutory directives and

satisfy the Court's concerns raised in MCI v. FCC. Furthermore, we find

that, in keeping with Commission precedent arising from our

implementation of the 1996 Act, payphone costs will be calculated on a

forward-looking basis. Thus, in setting a default compensation amount

using a fully distributed cost-coverage approach (our ``bottom-up''

methodology), we examine the costs of a new payphone operation

installing new payphones.

45. As explained above, we find that ``fair compensation'' means

that the marginal cost of compensable calls, plus an appropriate amount

of the joint and common costs of the payphone operation, will be

recovered for each compensable call. We conclude that a bottom-up

methodology will provide fair compensation consistent with this

standard. Thus, rather than focusing on the cost of adding one

additional payphone to an operation, we instead examine the total costs

of a payphone operation and distribute those costs across all of the

payphones in that operation. We find that this approach results in a

compensation amount that is fair to both payphone owners and the

beneficiaries of these calls. We also conclude that establishing a

compensation amount that allows a PSP to recover its costs will promote

the continued existence of the vast majority of payphones presently

deployed, thereby satisfying what we consider to be Congress's primary

directive that we ensure the widespread deployment of payphones.

46. In this Order, we consider a cost to be ``joint and common'' if

the amount of the cost does not vary with respect to the mixture of

calls at the payphone. For example, the cost of a payphone's enclosure

does not change due to an increase in the number of coin calls relative

to coinless calls, or vice versa. We conclude, therefore, that the

enclosure is a joint and common cost, and we attribute the enclosure

costs to all types of calls. We attribute costs that are not joint and

common to the type of call associated with that cost. For example, as

the number of coin calls from a payphone increases, the coin collection

costs also will rise due to the higher frequency of coin collection

trips. We therefore attribute coin collection costs solely to coin

calls.

47. As discussed above, we find that the use of a bottom-up

approach also resolves the concern that PSPs do not necessarily price

their various services such that each call recovers an equal share of

joint and common costs. In the Second Report and Order, the

Commission's goal was to set a compensation amount that would allow

each call to recover its share of joint and common costs. The top-down

approach, which subtracted the avoided costs of a compensable call from

the price of the local coin call, assumed that each call would

contribute equally to the joint and common cost. As explained above, we

find that this assumption is not necessarily reliable, based on the

manner in which PSPs price various calls. Under our bottom-up approach,

however, that problem no longer is at issue. Under the bottom-up

approach, we use the total monthly joint and common costs of the

payphone operation and divide these costs by the total monthly number

of calls from a marginal payphone location. This results in a per-call

share of the joint and common costs. Thus, a bottom-up approach

alleviates the problem of how to ensure that each call has the

opportunity to recover its share of joint and common costs.

48. Our bottom-up approach also avoids the impact of the

technological restrictions discussed previously that undermine our

previous approach of allowing the default rate to change with the

deregulated coin rate of each payphone. As explained above, in the

bottom-up system we adopt herein, we have set a single amount for

compensation, which we find fair and compensatory. IXCs do not need the

ability to block calls from payphones based on a varying compensation

amount because all payphones will use the same compensation amount,

absent an agreement between the parties for some different level of

compensation. Finally, our bottom-up approach alleviates the Court's

concerns in MCI v. FCC stemming from the Commission's use of the local

coin price as the starting point of compensation for dial-around calls.

Under the bottom-up approach, we do not use the local coin price to

determine the costs associated with a compensable call. Thus, we do not

run afoul of the Court's concern that the Commission was ``subtracting

apples from oranges.'' Rather, we determine each of the costs of the

dial-around call and add them together, from the bottom up, to

determine the per-call compensation amount.

49. Our default compensation amount is calculated to allow the

payphone owner the opportunity to recover a proportionate share of

joint and common costs associated with dial-around calls. Payphone

owners may, of course, determine that contracting with IXCs to receive

a lower amount will attract more dial-around traffic and thus increase

their profits. Payphone owners also have the opportunity to set their

own prices for non-compensable calls, e.g., coin calls and

presubscribed calls, and may set the price for each type of call so

that it covers the marginal cost plus a proportionate share of joint

and common costs. This would allow a payphone in a marginal location

the opportunity to recover all of its costs. Of course, a payphone

owner may dismiss this pricing strategy in favor of an alternative

strategy that may prove to be more profitable.

50. We note that our approach is not designed to make every

payphone profitable. Payphones with sufficiently low call volumes or

sufficiently high costs will not be profitable, regardless of the

compensation amount we establish. We discuss in Section III.B.3.b. of

the Order our selection of a marginal payphone location and our

calculation of the number of calls from that location, important

components of our calculation of the compensation amount.

51. Certain petitioners argue that we should use a marginal cost

pricing approach, in which prices are set by considering the cost of

producing one additional good. Others argue that we should use a

Ramsey's-style pricing approach. We find that marginal cost pricing and

the RBOC Coalition's Ramsey's-style pricing are ineffective in

complying with our statutory goals. As explained elsewhere, however, we

conclude that basing our determination of fair compensation on the

marginal payphone is the approach most consistent with the statutory

directive of ensuring widespread deployment of payphones.

52. Specifically, we reject marginal cost pricing for the same

reasons given by the Commission in the First Report and Order and

alluded to in Section III of the Order. That is, a purely incremental

cost standard for dial-around calls would undercompensate PSPs for

dial-around calls, because it would prevent PSPs from recovering a

reasonable share of joint and common costs from those calls. Thus, the

revenue

[[Page 13708]]

that would have been received from these calls would be subsidized by

revenue from other types of calls, which, in and of itself, contradicts

Congress's directive to eliminate subsidies and also distorts

competition. Our bottom-up approach, however, adequately considers and

accounts for the dial-around call's share of the joint and common

costs. In Section III.B.2.c. of the Order, we reject the RBOC

Coalition's version of Ramsey's-style pricing, in part, because the

pricing methodology is extremely sensitive to small changes in input

estimates. Furthermore, we find unreliable the input estimates provided

by the RBOC Coalition.

6. Conclusions and Response to the Court

53. We conclude, for the reasons stated above and elsewhere in this

Order, that a bottom-up methodology is the most appropriate means for

establishing a default compensation amount at this time. We also

conclude that our selection of a bottom-up methodology reasonably

resolves the Court's concerns, as expressed in MCI v. FCC. As the Court

indicated, a market-based rate may be an appropriate method at some

point in the future. When the time is appropriate, we will consider

revisiting this issue.

C. Reconsideration Issues

54. In this section, we address petitioners' arguments in support

of, and in opposition to, various methodologies for determining the

default compensation amount. In addition to the bottom-up methodology

described above, we set the default compensation amount.

1. Alternative Compensation Methodologies

55. In this Section, we address alternative compensation mechanisms

put forth by commenters that were not discussed above in connection

with the Court's remand.

a. Duration Methodology.

56. Several commenters argue that the compensation amount for a

toll-free call should be based on the duration of the call. We are not

convinced by the record evidence that the marginal costs of a

relatively shorter dial-around call are significantly different than

those of a longer call. Although the line charge for some coin calls

may vary depending on the length of the call, dial-around calls do not

incur any additional line charge, regardless of their length. Indeed,

as we have discussed, because most payphone costs are fixed, they do

not vary with the length of the call. Nor are we convinced that longer

calls cause a significant amount of additional wear and tear on a

payphone. Consistent with the Commission's determination in the Second

Report and Order, we decline to make an adjustment for opportunity

costs of a dial-around call because we conclude that it is unlikely

that the revenue from another call will be lost. In the Second Report

and Order, the Commission concluded that compensating PSPs for

opportunity costs was not necessary because the evidence demonstrates

that dial-around calls only occupy 1.8 percent of available payphone

usage time. In this Order, we decline to consider location rents as a

cost of a dial-around call. Even if we were to consider including

compensating PSPs in connection with location rents, the amount of rent

would not vary with the duration of a phone call because the amount of

payphone revenue would not change.

57. Furthermore, we are persuaded that a duration-based methodology

would result in added expense, delay, and confusion. Several complaints

have already been filed with the Commission regarding payment of

payphone compensation. We believe the establishment of a duration-based

methodology would result in the filing of even more complaints, thereby

exacerbating, rather than resolving, the current situation.

58. Even if we based the compensation amount on the duration of a

call, we could not cap the compensation amount at $.285 or any other

amount, because it would not fully compensate PSPs. Assuming the

default amount were set at $.285, PSPs receiving less than $.285 for

short calls must receive more than $.285 for longer calls in order for

the PSP to be fully compensated. We therefore decline to alter the

payphone compensation mechanism to reflect the duration of the call. We

note, however, that IXCs and LECs are free to use measured service

compensation in their contracts, if they so choose.

b. RBOC Coalition's Ramsey's-Style Pricing Methodology.

59. We again decline to adopt the RBOC Coalition's elasticities

methodology. Our objection is not that elasticities and marginal costs

cannot be taken into account in setting product prices, especially in

an industry with high fixed and common costs. Rather, we find that we

do not have sufficiently accurate information in the record to use

elasticities and marginal costs in this particular case. We also

conclude that, for purposes of setting dial-around per-call

compensation, the RBOC Coalition's proffered methodology results in

prices that are unreliable. Specifically, the RBOC Coalition's

methodology is highly sensitive to estimated values of elasticities and

marginal costs. In conjunction with the RBOC Coalition's highly

speculative estimates of the elasticities and marginal costs at issue,

we find that the resulting ``suggested price'' is widely variant and

thus of little practical value in establishing a reasonable

compensation figure. Simply put, the RBOC Coalition's methodology gives

wildly divergent answers when the inputs are changed even slightly, and

we find such variance unacceptable given the unreliability of the

information we have for input data.

c. Bellwether Compensation.

60. Sprint argues that we should identify the most efficient

carrier and base the dial-around compensation amount on that carrier's

costs, i.e., the so-called ``bellwether'' approach. We decline to adopt

a bellwether approach because there is insufficient information on the

record to conclude that the cost differences among PSPs with data on

the record are due to differences in efficiency. All of the parties

that submitted data on the record operate payphones in multiple areas

and in multiple states. Each region of the country experiences

different costs. For example, payphones in dry climates require less

protection from rain than payphones in wetter climates. Therefore, a

PSP in a more arid region could install a less protective and thus

cheaper enclosure than a PSP in a wetter region. Clearly, a PSP in the

wetter region should not be deemed less efficient because it needs to

invest in a more expensive enclosure. Similarly, we find that regional

differences in labor costs and telephone line expenses would affect the

cost of a payphone operation. Sprint did not provide any justification

showing that any party was more efficient than another.

d. Caller-Pays Methodology.

61. Under a caller-pays compensation methodology, the calling party

would pay for dial-around calls by depositing coins or using a credit

card. The caller-pays compensation mechanism is a variation of the set

use fee compensation mechanism. Under the set use fee compensation

mechanism, the IXC imposes a charge on the caller, collects payment

from the caller, and remits that money to the PSP. In the First Report

and Order, the Commission rejected the caller-pays approach and the set

use fee approach on similar grounds. Despite some parties' requests,

[[Page 13709]]

we decline to adopt a caller-pays compensation methodology at this

time.

62. We expect IXCs to develop the technology necessary to employ

targeted call blocking, which will allow them to block calls from PSPs

that they find to be excessively priced. With the bargaining power

afforded to them by the ability to block calls, we are hopeful that

IXCs will negotiate privately with PSPs for fair and mutually agreeable

compensation amounts. Our preference is for IXCs and PSPs ultimately to

enter into privately negotiated agreements establishing compensation

amounts for dial-around calls. Although some economists would argue

that a caller-pays methodology forms the basis for the purest market-

based approach, we find that the statutory language and legislative

history indicate Congress's disapproval of a caller-pays methodology.

We therefore conclude that we should monitor the advancement of call

blocking technology and any accompanying marketplace developments

before reconsidering a caller-pays compensation approach.

63. We also note that some parties urge us to adopt a ``modified

caller-pays plan.'' Under a modified caller-pays plan, entities

subscribing to a toll-free number would have three options for handling

calls made from payphones. First, the subscriber could elect to accept

calls from payphones and pay the charges associated with those calls

that are passed through to it by the IXC. Second, the subscriber could

block all calls from payphones, eliminating the need for compensation

to the PSP. Third, the subscriber could elect to use a special ``area

code'' (i.e., 8XX, instead of ``800'' or ``877'' codes) that would

enable it to block incoming payphone calls that callers chose not to

pay for with coins or a credit card. For the reasons provided above for

not instituting a mandatory caller-pays system, we also decline in this

proceeding to impose the modified caller-pays or 8XX plan. We note that

a modified caller-pays plan is the subject of a petition for rulemaking

filed by AirTouch and that the Commission may examine the issue further

if that petition is granted.

e. Requests for Exemptions from Compensation.

64. Several petitioners assert that certain types of calls, such as

``help line'' or paging calls, should be exempt from per-call

compensation charges. Other petitioners urge us to exempt from

compensation requirements payphone calls to 800 hotlines and Electronic

Benefit Transfer (``EBT'') services. Specifically, these parties

request that we either waive the per-call compensation amount or

establish an 8XX number for non-profit organizations. We find that

Congress clearly instructed us in Section 276 to ensure compensation

for ``each and every'' call from a payphone. Congress explicitly

exempted only two types of calls: emergency calls (911) and TRS calls.

Because Congress did not provide for any other exceptions, we cannot

grant an exception for these types of calls. Even if Congress permitted

us to grant an exception for EBT calls, we are unconvinced that we

should do so. We understand that when a caller is placing an EBT call,

the buyer of that call will be the government. This is insufficient

justification, however, to deny payphone owners compensation for the

use of their payphone. We are confident that our default compensation

amount is fair to all parties involved. In receiving compensation,

payphone owners will benefit from their decision to place their

payphone where consumers benefit from using it. In addition, carriers

will pay no more than a proportionate share of the payphone's joint and

common costs.

65. We also decline requests to artificially raise the local coin

calling rate or to re-regulate payphone prices so that calls like EBT

calls can be made for free or at a reduced price. We understand that

because of our default compensation amount, government agencies will

ultimately spend more money to disburse benefits. Under Citicorp's

proposal to raise the local coin calling price, however, consumers will

still pay for those calls, albeit in a different form. Under Citicorp's

proposal for free or reduced-price EBT calls, PSPs would not receive

the extra compensation from EBT traffic and therefore would have no

economic incentive to locate payphones according to the needs of EBT

callers. Any such scheme also would involve creating a subsidy, an

option that Congress specifically eliminated in the 1996 Act.

66. We note that APCC states that some PSPs would be willing to

reduce the amount of per-call compensation if they find evidence that

IXCs do the same. We encourage those parties with budgetary concerns to

meet with the IXCs and PSPs to reach a voluntary agreement regarding

per-call compensation.

2. Cost Calculation

67. In this section, we address challenges to three aspects of the

Commission's calculation in the Second Report and Order of the cost of

a dial-around call. Petitioners challenge the accuracy of the various

sources of cost data on which we relied in determining the cost of a

dial-around call. Petitioners challenge our choice of a marginal

payphone location in establishing certain per-call costs. Finally,

petitioners argue that various components of our cost calculation were

either improperly allowed, improperly disallowed, or improperly

calculated.

a. Source of Cost Data.

68. In this section, we address issues raised concerning the cost

data discussed in the Second Report and Order. We also examine the cost

data submitted in response to our Public Notice and in petitions for

reconsideration. Petitioners raise concerns regarding five sources of

cost data. First, petitioners argue that, in the Second Report and

Order, the Commission relied too heavily on data from independent PSPs.

Second, parties claim that NYNEX's cost studies show that NYNEX's

average cost of a coin call is less than $.25, implying that the

compensation amount also should be less than $.25. Third, parties claim

that, in the Second Report and Order, the Commission ignored Sprint's

cost data. Fourth, AT&T submitted data from SBC that purportedly shows

that, in using a LEC's costs, the per-call compensation amount should

be less than $.25. Fifth, MCI submitted a cost study purporting that

the average cost of a dial-around call is significantly less than the

Commission estimated. We address each of these issues separately.

69. Reliance on APCC and Independent PSP data. When calculating the

average cost of a dial-around call in the Second Report and Order, the

Commission relied on data that it concluded was reliable. In its

petition for reconsideration, AT&T asserts that the Second Report and

Order generally overstates the costs of payphone calls, because the

Commission relied too heavily on cost data submitted by APCC and other

independent payphone providers. AT&T further states that most payphones

are operated by LECs, not independent payphone owners. In the Second

Report and Order, the Commission relied solely on APCC data only when

determining the number of calls made from a payphone in a marginal

location. In this Order, however, we do not rely on that calculation.

We therefore need not address AT&T's arguments regarding the use of

APCC data.

70. NYNEX cost studies for Massachusetts and New York State. Before

the Commission issued the Second Report and Order, Sprint petitioned

the Commission to require

[[Page 13710]]

NYNEX to distribute to all parties of record a copy of the confidential

Massachusetts DPUC study, which concludes that the cost of a coin call

is $.167. The Commission denied Sprint's petition. AT&T contends that

the Massachusetts DPUC study supports a per-call dial-around price of

less than $.167. AT&T suggests that the LECs failed to supply cost data

because such data would militate in favor of establishing a

compensation amount that is less than an amount that would benefit the

LECs.

71. On July 10, 1998, the New York Public Service Commission (PSC)

filed comments showing that, in a study conducted in New York, Bell

Atlantic's average cost of a coin call is less than $.25. Several

parties cite this study in support of AT&T's contention that, due to

lower costs experienced by LECs, the default, per-call compensation

amount should be less than $.25. We believe that, when taking into

account all the appropriate costs, the average cost of making a coin

call in New York is likely to be higher than the $.25 that the New York

PSC reported.

72. Sprint data. In the Second Report and Order, the Commission did

not rely heavily on Sprint cost data. AT&T alleges that the Commission

failed to adequately consider Sprint's cost data. We conclude that the

Sprint data are unreliable. First, Sprint's return and depreciation

estimates appear to be based on embedded costs, not forward-looking

costs. This is significant in assessing the reliability of Sprint's

data, because embedded costs do not necessarily reflect the economic

cost of establishing a current operation. Specifically, Sprint's cost

study suggests that it can recoup the value of a payphone by recovering

$6.98 each month for five years. Thus, based on Sprint's data, a Sprint

payphone, including pedestal, enclosure, and installation, costs

$418.80. The evidence on the record, however, demonstrates that a newly

installed coin payphone unit costs more than $2,300. Clearly, Sprint's

asset return requirement is too low.

73. Second, we find appropriate our decision in the Second Report

and Order to not rely on Sprint's estimate for Sales, General and

Administration (SG&A) costs (i.e., overhead costs). Sprint reported

that its SG&A costs are only $8.51 per payphone per month. This is

almost 70 percent less than a large PSP's SG&A cost and nearly 50

percent less than SBC's SG&A estimate of $16.52. In light of the

contrary record evidence, and given our experience regulating

telecommunications companies, including payphone operators, we find

that Sprint's SG&A estimate does not reasonably represent the costs of

a stand-alone payphone company. For this reason, we find that the

Commission properly exercised its discretion and did not rely on

Sprint's estimate of SG&A costs. We note that, although the Commission

did not fully explain its reasoning in the Second Report and Order, we

believe the Commission's decision was nonetheless correct. Furthermore,

for these same reasons, we conclude that we should not rely on Sprint's

costs in this Order.

74. SBC data (as submitted by AT&T). In its petition for

reconsideration, AT&T submits a new cost study, called Project Quintet,

that SBC performed to facilitate the possible sale of its payphone

operations. AT&T argues that the Project Quintet data demonstrate that

the average cost of a coin call is $.195. SBC states that the costs

enumerated in Project Quintet were incomplete and did not account for

several costs of a payphone operation, including legal support and

rent. The RBOC Coalition submitted supplemental information regarding

maintenance and SG&A costs. AT&T believes that the Project Quintet data

are sufficient to estimate SBC's payphone costs and do not require

modification.

75. We note that the Project Quintet data that AT&T submitted does

not include line items for legal support, rent, advertising, or other

similar costs. We therefore concur with SBC that those costs were not

included in the data submitted by AT&T. We find, however, that the

Project Quintet data, as supplemented by SBC, provides some assistance

to our determination of a fair default compensation amount. Although

the capital costs derived from the Project Quintet data are unusable

because they are based on embedded costs, we conclude that the SG&A and

maintenance costs, as supplied by SBC, are reliable.

76. MCI data. In response to our Public Notice, MCI submitted a

payphone cost study suggesting that the average cost of a coin call is

$.16, and the average cost of a coinless call is $.12. Upon review, we

conclude that MCI's cost study is unreliable for four reasons. First,

the cost study is based on a hypothetical business model. Because

payphones serve a wide variety of locations, including outdoor

locations, we find that the capital cost data from actual payphone

operations will better reflect a PSPs actual costs. Second, MCI's SG&A

estimate is based on multiplying the capital investment by 10.4

percent. This 10.4 percentage was arrived at by examining AT&T's

overhead costs. AT&T is primarily a long distance company, not a

payphone operator. We find that MCI failed to adequately explain why a

payphone operator's overhead costs should bear the same relationship to

capital as AT&T's. We thus find unreliable MCI's percentage of 10.4 for

estimating overhead costs. Furthermore, MCI multiplies its overhead

factor by an amount of capital that we find to be too low, resulting in

an SG&A estimate that consequently is too low. We thus conclude that

MCI's SG&A cost estimate is unreliable.

77. Third, we find that MCI's cost study is incomplete. For

example, MCI did not include any cost estimates for trucks, replacement

parts, and other items. We find that these costs are required, however,

for a payphone operation. Also, MCI estimated the monthly telephone

expenses, in part, by using the 1996 ARMIS reports, using line items

USOA 2315 and 6315 (public telephone equipment), but did not account

for the payphone costs included in accounts 6533 and 6534. For these

reasons, we conclude that MCI's cost study is unreliable.

78. LEC payphone data versus non-LEC payphone data. Several parties

contend that LEC payphones are more efficient than non-LEC payphones.

Parties point to NYNEX cost studies that allegedly show that NYNEX

experienced lower costs than non-LEC PSPs. As we state above, we are

unable to verify the validity of some of this third-party information.

Also, some of the third-party data appears to be unreliable on its

face. Also, the RBOC Coalition states that the NYNEX studies do not

include all payphone costs. Thus, we find that, before using third-

party information, such information must be verified.

79. We conclude, however, that much of the data submitted by the

independent PSPs reliably reflect the costs of a stand-alone payphone

operation. First, as the Commission noted in the Second Report and

Order, the independent PSPs' data are consistent with their Securities

and Exchange Commission (SEC) forms 10K, which must be certified to by

an officer of the company. Further, these data are based on their own,

actual payphone operations. In certain instances, where we could not

use a particular cost element because it did not accurately measure the

cost we were examining, the RBOC Coalition and PSPs submitted

supplemental data that convinced us of the data's reliability. In

addition, in response to our request, the RBOC Coalition supplied data

for payphone line costs and FLEX ANI cost recovery tariffs. We find the

payphone line cost

[[Page 13711]]

data and FLEX ANI data to be reliable, because the cost estimates were

largely taken from tariffs, with the remaining figures provided with

sufficient documentation to convince us they are correct.

b. Use of Marginal Payphone Location.

80. To establish a per-call default compensation amount based on

the costs of a payphone operation, the cost of that operation must be

divided by a particular number of calls. In the Second Report and

Order, we concluded that we should use the number of calls at the

marginal payphone location. A marginal payphone location is a location

where the payphone operator is able to just recoup its costs, including

earning a normal rate of return on the asset, but is unable to make

payments to the location owner. The Commission determined that when the

1996 Act was passed and payphones were receiving dial-around

compensation on a per-phone basis, the marginal payphone location

experienced 542 calls per month.

81. We reaffirm that use of the marginal payphone location is

necessary to fairly compensate PSPs and ensure the widespread

deployment of payphones in compliance with the mandates of section 276.

We find that basing the default compensation amount on an average

payphone location would cause many payphones with less-than-average

call volumes to become unprofitable. We note that many states examining

the payphone market have concluded that there are a sufficient number

of payphones and thus a public interest payphone program is unnecessary

at this time. We conclude that, if we were to base the default

compensation amount on the average payphone location, many payphones

would become unprofitable and exit the industry. We therefore conclude

that we should use the marginal payphone location when establishing the

default compensation amount. Because it assures fair compensation for

the overwhelming majority of payphones, we conclude that the

methodology we adopt in this Order will not negatively affect the

current deployment of payphones and thus is consistent with Congress's

goal of widespread deployment of payphones.

82. MCI asserts that use of a marginal payphone location suffers

from a ``circularity'' problem because the number of calls at a

marginal payphone location is affected by the compensation amount.

Thus, an increase in the per call compensation amount means that a

payphone needs fewer calls to break even. The ``circle'' thus consists

of call volume being a function of compensation, and compensation being

a function of call volume. Although MCI argues that this circularity

undermines the use of a marginal location, this same concern applies

equally to the use of an average location, or for that matter any

volume level the Commission could choose as a rational starting point

for its analysis. This is true because the problem does not arise from

the selection of average versus marginal payphone locations, but rather

is inherent in the use of a per-call compensation scheme, as mandated

by the statute. As the default amount increases, more low volume

payphones become profitable; as default amount decreases, more

payphones become unprofitable and are likely to be taken out of

service.

83. The concern identified by MCI requires us first to deduce an

appropriate level of payphone deployment, in order to calculate a

``fair'' compensation amount. Based on the evidence in the record, we

have concluded that the current approximate level of deployment most

appropriately satisfies Congress's stated goal of promoting widespread

deployment of payphones to the benefit of the general public. This

conclusion is supported by the filings of several states that have

studied the payphone markets in their respective jurisdictions and

concluded that the current deployment of payphones is adequately

meeting the needs of the public. Realizing that many payphones with

below average call volumes will disappear if we use the average

payphone location to establish a default compensation amount, we

instead conclude that the use of marginal payphone location best

satisfies Congress's goal of widespread deployment by ensuring the

profitability of most existing payphones.

84. In the Second Report and Order, the Commission determined that

a payphone in a location where it originates 542 calls per month would

earn just enough revenue to recover its costs, but not enough to pay

the premises owner a commission. This number was derived using data

largely collected in 1996. After those data were collected, the price

of local coin calls was deregulated and payphone owners began receiving

per-call compensation. Because payphone owners may now receive per-call

compensation, payphones can be sustained with fewer calls being made.

Before the establishment of per-call compensation, payphones required

an artificially high number of calls to be profitable. We thus conclude

that we should re-estimate the number of calls at a marginal payphone

location to account for the effects of deregulation of the local coin

call and per-call compensation.

85. In order to determine the number of calls at a marginal

location, we consider three basic scenarios. In the first scenario, a

premises owner is willing to pay its LEC PSP to install a payphone on

its property, even though the payphone does not generate sufficient

revenue to pay for itself. In the second scenario, the payphone on the

premises owner's property generates sufficient revenue to pay for

itself. This premises owner need not pay the LEC PSP for the operation

of the payphone, but the LEC PSP may not generate enough revenue from

the payphone operation to pay the premises owner a location payment. In

the third scenario, the payphone generates revenue sufficient for the

premises owner to require the LEC PSP to pay a location rent.

86. We asked the RBOC Coalition to submit: (1) the number of

payphone calls that must be placed in order for the premises owner to

not have to pay the LEC PSP for the payphone; and (2) the number of

payphone calls that must be placed in order for the LEC PSP to begin

paying a location payment to the premises owner. The RBOC Coalition

found that, on average, if the payphone had 414 calls per month, the

premises owner would not have to pay for the payphone. The RBOC

Coalition states that it does not base these decisions on call counts,

but on daily revenues, or margins. The RBOC Coalition estimated the

call counts from their revenue or margin requirements. We find this to

be acceptable, because call counts correlate to revenues. The RBOC

Coalition also found that, on average, the LEC PSP would have to pay

location rents to a premises owner that had a payphone with 464 calls

or more per month. The midpoint between these two numbers is 439. The

RBOC Coalition notes that its member-LECs do not decide to pay a

location payment or require payment from the premises owner based

solely on monthly call volume, but also consider the mixture of call-

types and upkeep costs of the payphone. Because we are examining costs

of all payphones, we find that the average call volume that the RBOC

Coalition reported for these two locations is reasonable and

appropriate. We further conclude that we will use in our calculation of

the default compensation amount the midpoint between 414 and 464, i.e.,

439.

87. MCI alternatively argues that the cost of the payphone that a

PSP installs will be related to the call volume at that location. MCI

suggests that a PSP

[[Page 13712]]

operating in a marginal payphone location may install a less expensive

payphone unit than a PSP operating in an average payphone location. MCI

therefore concludes that if we use the average cost of a payphone

location, we should use the call volume from the average payphone

location.

88. Payphone unit requirements vary from site to site. Accordingly,

the costs of operating payphones at differing locations also vary. We

believe it is theoretically possible that some payphone elements

commonly used at high volume locations, such as a pedestal or

enclosure, will not be used at marginal payphone locations. There is

nothing in the record, however, indicating the extent to which this

might be true. MCI's assertion that low volume locations use less

expensive payphone units is unsupported by evidence from its own or any

other payphone operation. If, as MCI suggests, a payphone in a marginal

payphone location can operate successfully without some payphone

elements, such as a pedestal or enclosure, it is unclear why a PSP at

an average location would install these elements. Furthermore, other

costs, such as increased maintenance costs, may be incurred when a PSP

declines to install these same elements. For example, pedestals and

enclosures provide some protection for a payphone. We find it plausible

that a payphone without these elements would require greater

maintenance costs. MCI's rationale, however, makes no allocation for

these additional costs. Because we are establishing a compensation

amount for all payphones, we use the average cost of a typical PSP. For

the reasons stated previously, however, we do not use the average call

volume. In sum, there is no support in the record for MCI's assertion

that the fixed costs at a marginal payphone location will be

significantly different from the fixed costs at an average payphone

location.

89. Finally, in light of MCI's concern, we verify that a marginal

location can support an average payphone. We conclude that the costs of

the average payphone nearly matches the monthly revenue from a marginal

payphone. We explain the basis of our conclusion below.

90. The RBOC Coalition states that its average payphone has 478

payphone calls per month. The RBOC Coalition also states that these 478

calls consist of: 155 dial-around calls per month, 280 local coin calls

per month, and 43 other calls per month. We assume that two thirds of

the 43 ``other'' calls (i.e., 29 calls) are operator-assisted calls

(e.g., 0+, 0-, 00-calls) and that the remaining one third (i.e., 14

calls) are coin calls, such as directory assistance and 1+ calls. Thus,

we conclude that 61.5 percent of the average RBOC payphone's calls are

coin calls; 32.4 percent of the payphone's calls are dial-around calls;

and the remaining calls 6.0 percent of calls are operator assisted

calls.

91. Next, we determine that the monthly costs of a coin payphone in

a marginal payphone location is $140.17. We reach this figure by adding

the monthly joint and common costs of $101.29 to the coin-related costs

of $38.87. The monthly coin-related costs are comprised of the monthly

cost of the coin mechanism, the monthly termination charges, and the

monthly coin collection costs.

92. Assuming that a payphone receives $.35 for each of the 270 coin

calls at a marginal location, $.231 for each dial-around call (the

amount before interest for the four month delay) for each of the 142

dial-around calls at a marginal payphone location, and $.50 per call

for each of the 26 operator assisted calls at a marginal payphone

location, the payphone would generate $140.30 in revenue. Thus, we find

that the marginal payphone location can support the costs of a typical

payphone. We therefore find MCI's argument unconvincing.

c. Location Rents.

93. In the Second Report and Order, the Commission calculated an

estimate of the avoided cost of a dial-around call by dividing the

joint and common costs by the number of calls at a marginal payphone

location. Because the marginal payphone location cannot generate

revenue sufficient to pay the premises owner a location rent, the

Commission concluded that location rents should not be included in the

costs covered by a payphone at a marginal location. The Commission

declined to include location rents, believing that a payphone at a

marginal location should generate revenue sufficient to cover only the

payphone's installation and upkeep, plus a reasonable return on

investment.

94. It is axiomatic that, at a marginal payphone location, the

payphone earns just enough revenue to warrant its placement, but not

enough to pay anything to the premises owner. We further find that a

marginal payphone location is a viable payphone location, because the

payphone provides increased value to the premises. Many premises owners

find payphones to be sufficiently valuable to warrant paying for the

installation of a payphone where a payphone would not otherwise exist.

The Project Quintet data shows that SBC estimated that 14 percent of

its payphones are semi-public payphones. These are payphones that the

premises owner pays the LEC to install and operate, because the

payphone location does not generate enough traffic to support a

payphone. We therefore decline to reconsider the Commission's

determination in the Second Report and Order to not include location

rents in our cost calculation. We note that if we were to consider

rental payments, we would have to use a higher number of calls than the

marginal payphone location.

d. Coin Mechanism.

95. In the Second Report and Order, the Commission determined that

the per-call cost of the coin mechanism was $.031. PSPs argue that the

cost of a coin mechanism should not have been deducted, because the

cost cannot be avoided. On reconsideration, we reaffirm our treatment

of the payphone coin mechanism in the Second Report and Order. We find

the actual deployment of numerous coinless payphones is convincing

evidence that undermines the assertion that such payphones are not

economically viable. Even the RBOC Coalition apparently admits that

more than 20,000 of its members' payphones are coinless. While the

record does not appear to include similar data for independent PSPs, we

would expect that, given the historic differences in the manner in

which RBOCs and independent payphone owners have deployed their

payphones, the percentage of coinless payphones deployed by independent

PSPs is even higher that the RBOC Coalition members. This conclusion is

consistent with reports that nearly six percent of all installed

payphones in 1997 were coinless. Moreover, the RBOC data and this

latter information reflect industry deployment as of year end 1997, at

which time per call dial-around compensation had only recently been

implemented. Needless to say, the availability of dial-around

compensation greatly increases the economic viability of coinless

payphones. Such viability should be even further enhanced by the

continuing (and apparently rapid) growth of dial-around calls and

simultaneous decrease in the number of coin calls. Indeed, as the

percentage of dial-around calls increases relative to all calls from

payphones, the coin mechanism becomes increasingly unnecessary. In

fact, a coin mechanism is likely to be installed only where the coin

traffic warrants the expense. For these reasons we are convinced that

the

[[Page 13713]]

previous treatment of the payphone coin mechanism is correct.

96. We also find that the Commission correctly found that a typical

coinless payphone without a coin mechanism is similar to the 11A-type

payphone. We further conclude that it is proper for us to use the cost

of a 11A-type payphone in our current calculations underlying our

default compensation amount. AT&T states that it has operated the 11A-

type payphone in outdoor locations for many years and that it has a

useful life of 10 years. We find that, based on AT&T's evidence and our

own expertise, the 11A-type payphone would be materially similar to the

coinless payphone that PSPs would purchase today.

e. Bad Debt.

97. In the Second Report and Order, the Commission found

insufficient information on the record to account for the costs

relating to bad debt. We conclude that the recent history of per-call

compensation payments is not an accurate guide for future levels of bad

debt. We do not know the percentage of uncollected per-call

compensation that is due to billing errors of the PSPs, as opposed to

unscrupulous carriers. We also note that the RBOC Coalition asks us to

clarify our rules regarding the entity that is required to pay per-call

compensation. Although we were unable to generate a sufficient record

on this question before issuing this Order, parties may file a petition

for clarification on this issue. It appears that if we were to grant

such a petition, uncollectibles would be significantly reduced. An

additional reason why we decline to establish a cost element for bad

debt is that, in doing so, PSPs that ultimately recover their

uncollectibles from delinquent carriers would then double-recover: once

from the debtor and once from the consumer, i.e., through the cost

element included in the compensation amount. Furthermore, as discussed

below, we ensure that PSPs will receive interest on late payments for

as long as such payments are overdue. For these reasons, we find that

it would be unwise to establish a cost element for bad debt at this

time. We note that, in a forthcoming order, we will determine the

amount that IXCs owe PSPs for the period before October 7, 1997 and the

way in which IXCs may recover overpayments that result from the default

compensation amount established herein. If a petition for clarification

is resolved prior to the adoption of our order addressing IXCs payments

prior to October, 1997, we may visit the issue of uncollectibles in

that order.

f. Dial-Around Collection Costs.

98. In the Second Report and Order, the Commission found

insufficient information on the record to adjust the default

compensation amount to account for billing and collection costs. On

reconsideration, we find that the Commission's treatment of billing

expenses was appropriate. We are still faced with insufficient

information on the record to determine the extent to which

administration costs vary when the number of coinless calls increases

relative to coin calls. Given that both types of calls utilize

specialized positions within a company, we find it fair to assume that

the amount that coin-related SG&A positions contribute to SG&A expenses

approximate the same expense that billing and collection positions

contribute to SG&A. Finally, we find unpersuasive the RBOC Coalition's

argument concerning the need for additional employees to perform duties

related to administering per-call dial-around compensation. We note

that, if the RBOC Coalition members were just now receiving

compensation for local coin calls, as they are for dial-around calls,

the RBOC Coalition also would be in the process of hiring employees for

coin-related positions.

g. Components of the Cost Calculation.

(1) Payphone Capital Expense.

99. In the Second Report and Order, the Commission recognized the

need for a PSP to recover depreciation costs and earn a return on its

investment. The Commission concluded in the Second Report and Order

that the record did not provide sufficient detail regarding the cost of

capital. The Commission therefore estimated capital costs by examining

the 1996 SEC form 10-K data for two non-LEC PSPs, CCI and Peoples

Telephone. The Commission concluded that the amount of capital per new

payphone, including the coin mechanism, was between $2,799 and $3,234.

Upon reconsideration, we find that the cost of capital used in the

Second Report and Order included some costs that are not necessary to

run a payphone operation. Accordingly, we recalculate the cost of

capital.

100. In the Second Report and Order, the Commission used the

highest federal tax rate of 34 percent when calculating the levelized

monthly payments that represent the monthly cost of an installed

payphone. Although no party explicitly petitioned us for

reconsideration on the tax rate, the record demonstrates that MCI used

a tax rate of 39.25 percent in its payphone cost study, which accounted

for state and local taxes, in addition to federal taxes. Upon

reconsideration, we find that the Commission should have included state

and local taxes in its calculation. Thus, we now use a tax rate of

39.25 percent to calculate the monthly payments that a payphone owner

would make to pay for a payphone.

101. A working payphone unit consists of a payphone, enclosure,

pedestal, associated spare parts, and other associated capital costs.

We find above that the coin mechanism is not a joint and common cost.

Because there is no credible information on the record indicating that

the remainder of the costs associated with a payphone vary as the

number of coin calls increases relative to coinless calls, however, we

find that the remainder of the payphone unit is a joint and common

cost. We estimate the capital cost of a payphone in three steps. We

estimate the cost of a coinless payphone. We then estimate the cost of

the rest of the payphone unit (e.g., the enclosure, pedestal,

installation, and the associated parts) using data submitted by Davel

and Peoples Telephone. We then calculate the monthly payments that

would cover the costs of the payphone unit over a 10-year period,

including taxes and interest. This payment is analogous to a mortgage

payment, except that taxes are included in the calculation.

102. We conclude above that a coinless payphone is similar to the

11A-type payphone. AT&T states that the cost of a 11A-type coinless

payphone is $225. The median estimates provided by Peoples Telephone

and Davel for the remainder of the payphone unit (e.g., the enclosure,

pedestal, installation, and the associated parts) is $1,362.50.

Consistent with the Commission's determination in the Second Report and

Order, we agree with AT&T that we should subtract the $60 of

installation costs that are associated with the coin mechanism. We thus

conclude that a coinless payphone unit costs $1,527.50. We find that

$1,527.50 in capital costs amounts to a monthly payment of $28.04. We

arrive at the $28.04 monthly figure by determining the monthly payments

necessary to depreciate the $1,527.50 investment over ten years, while

earning a return of 11.25 percent on net investment, and allowing for

federal, state and local taxes at a rate of 39.25 percent.

(2) Line Charge Costs.

103. In the Second Report and Order, the Commission noted that PSPs

pay LECs for payphone lines under a variety of tariffs that range from

measured rates (e.g., per message or per minute) to flat,

[[Page 13714]]

monthly (i.e., unmeasured) rates. The Commission concluded that the

average line cost for a coinless call ranged from $.065 to $.075 per

call. The Commission calculated this cost by subtracting the average

per-call measured service charges from the average line cost data

reported by PSPs. AT&T avers that instead of subtracting the average

measured service charge for all payphones, the Commission should have

subtracted the average measured service charges for those phones that

actually paid measured service charges. The RBOC Coalition argues that

the Commission overstated the line savings of a coinless call.

104. In the Second Report and Order, the Commission found the data

in the record to be insufficient to distinguish among these different

types of costs. The RBOC Coalition subsequently submitted evidence

demonstrating the correct calculation of the joint and common cost of

the payphone line. In its calculation, the RBOC Coalition used the

monthly line charge where only unlimited service was available, the

fixed monthly charge where only measured service was available, and the

fixed monthly charge associated with measured service where the PSP had

the choice of unlimited service or measured service. The RBOC Coalition

calculated a weighted average joint and common line cost based on the

total number of payphones, including both BOC and independent

payphones, in each member's territory. The national average joint and

common line cost is $33.65.

(3) Maintenance Costs.

105. In the Second Report and Order, the Commission treated

maintenance as a joint and common expense, but treated coin collection

costs as attributable to coin calls. Upon reconsideration, we conclude

that the Commission properly assigned maintenance costs as joint and

common. Much of a payphone's maintenance is performed during regularly

scheduled visits, meaning a technician will visit a payphone whether or

not the payphone requires immediate maintenance. To the extent that

maintenance is performed on a periodic basis, maintenance costs will

change very little in response to an increasing number of coin calls.

We conclude, therefore, that maintenance costs are properly designated

as joint and common. In the Second Report and Order, the Commission

found that maintenance costs, other than coin collection costs, ranged

from $21.68 to $27.10 per month.

106. We find that the new SBC maintenance data submitted by the

RBOC Coalition reasonably reflects the maintenance costs of SBC and

probably other RBOCs, as well. We therefore create a weighted average

of the SBC data and the Peoples Telephone data. We use the Peoples

Telephone data to estimate the maintenance costs of a large non-LEC

PSP, because it was the only data consisting of monthly cost figures

that was submitted by a PSP. In addition, we find that the Peoples

Telephone data provides the most detail regarding the number of

maintenance visits and the portion of those visits that were strictly

coin-related.

107. SBC estimates that monthly per-phone maintenance costs amount

to $24.37. Peoples Telephone reports that maintenance costs amount to

$41.66. Because most payphones are RBOC payphones, we calculate the

weighted average as $30.49 per month. Peoples Telephone reports that 38

percent of its maintenance visits were strictly coin related. We

therefore subtracted 38 percent of $30.49 ($11.59) to reflect coin

collection costs and costs associated with maintenance of coin

payphones. We thus conclude that a payphone owner spends $18.90 per

payphone per month for maintenance.

(4) Sales, General, and Administrative Costs.

108. Payphone owners incur overhead costs, such as legal fees,

administrative costs, salaries, and management costs, all commonly

referred to as Sales, General, and Administrative (SG&A) costs. As the

proportion of coin calls increases relative to coinless calls, some

employees in the payphone company likely will assume more duties

related to coin calls, rather than coinless calls. We find no credible

evidence in the record that total SG&A costs change as the number of

coin calls increases relative to coinless calls. We therefore conclude

that SG&A is a joint and common cost that should be attributed to all

types of calls.

109. In the Second Report and Order, the Commission concluded that

per-call SG&A costs ranged from $28.80 to $29.27. Newly submitted data

suggests that SG&A costs are lower, however. We find that the new SBC

cost data, as supplemented by the RBOC Coalition, provides a reasonable

estimate of the maintenance costs of an RBOC payphone operation. We

also find that the Peoples Telephone data represents a reasonable

estimate of a non-LEC payphone operation. The new data suggests that,

on a per-phone, per-month basis, SG&A costs amount to $16.52 for RBOCs.

In its comments submitted in 1997, Peoples Telephone suggested that

SG&A amounted to $25.27. In the Second Report and Order, the Commission

added $4.02 to SG&A costs to account for bad debt. Because we consider

bad debt elsewhere in this Order, we do not add here the bad debt costs

provided by Peoples Telephone. Because there are more RBOC Coalition

payphones than independent payphones, we calculate a weighted average

SG&A cost of $19.62 per month.

(5) Coding Digit Costs (FLEX ANI Costs).

110. In the Second Report and Order, the Commission added $.01 per

call to the compensation amount to reflect the costs that PSPs must pay

LECs for the implementation of FLEX ANI, a coding digit technology that

allows IXCs to identify payphone-originated calls for per-call

compensation purposes. Under the market-based methodology, the

Commission determined that charges that recover FLEX ANI costs were

joint and common costs attributed to all types of calls.

111. We based the $.01 FLEX ANI cost estimate, in part, on evidence

filed by USTA, in which it stated that the costs associated with LECs

providing coding digits would be $600 million. Subsequent to the

adoption and release of the Second Report and Order, USTA filed a

revised coding digit estimated cost of $61.2 million, prompting some

parties to petition for reconsideration of our FLEX ANI cost estimate.

In addition to the updated USTA information, many LECs have since filed

their actual FLEX ANI tariffs, which establish with specificity the

costs to be recovered in relation to FLEX ANI. In light of this new

information, several parties have filed petitions requesting that our

decision reflect the revised coding digit cost estimates.

112. Upon reconsideration, we find that our treatment of the coding

digit costs in the Second Report and Order was correct. The coding

digit rate element that LECs apply to each payphone line to recover the

costs of FLEX ANI is not conditional on the amount of, or even the

presence of, dial-around traffic. Most PSPs are required by state law

to install payphones on payphone lines, where they are subject to the

FLEX ANI cost recovery tariff. We therefore conclude that the coding

digit rate element is an unavoidable cost of operating a payphone that

does not vary as the number of coin calls increases relative to

coinless calls. As such, we find that FLEX ANI costs are joint and

common and should be attributed to all calls.

113. We adjust the default compensation amount to reflect the

updated USTA coding digit cost estimate and the recently filed FLEX ANI

tariffs. We find that the average

[[Page 13715]]

payphone owner would pay $1.08 per payphone line for 36 months because

of FLEX ANI. We describe our calculation here. Pursuant to the Coding

Digit Waiver Order, 63 FR 20534 (April 27, 1998), LECs may account for

the recovery of the cost of implementing FLEX ANI over a variable

length of time. The RBOC Coalition submitted data showing that several

RBOCs chose to recover their FLEX ANI costs over a 24-month-period,

while BellSouth chose to recover its costs over a 12-month-period.

Because this Order establishes a three-year-period for default

compensation payments, we find that the amount PSPs are paid for FLEX

ANI should be calculated as if the RBOCs tariffed the FLEX ANI cost-

recovery element for 36 months.

114. Using the data that the RBOC Coalition submitted, we calculate

the present value of the payments that a payphone owner in each RBOC

territory would pay. We then calculate the amount that a PSP would pay

over a 36-month-period while maintaining the same present value of

payments. We then calculate the weighted average of these payments

based on the total number of payphones, including BOC and non-BOC

payphones, in each BOC's territory. We conclude that the average PSP

would pay $1.08 per month for 36 months, if that were how the LECs had

decided to tariff their coding digit cost recovery elements.

(6) Interest.

115. In the Second Report and Order, the Commission found that,

because payments are made several months after the dial-around call is

made, PSPs should receive three months of interest calculated at 11.25

percent annually. The RBOC Coalition argues that although the

Commission provided for three months of interest in the Second Report

and Order, dial-around payments are actually made an average of at

least four months after the call is completed. The RBOC Coalition

therefore asks that we adjust our findings to reflect this difference.

116. We find that firms that expect a one-month delay before

receiving payment will price their goods accordingly, with the interest

already built into the quoted price. The calculations so far have not

considered a built-in 30-day delay in payment. Further, at the time the

Second Report and Order was released, the Commission anticipated a

three-month delay, not a four-month delay, in receiving payments. In

light of the average delay in payments of four months, we conclude that

we should add to the compensation amount a total of four months of

interest at 11.25 percent per year. The above default price will

therefore be raised by $.009 to reflect four months of interest on the

base amount of $.231. If IXCs are late in making their payments to

PSPs, interest on the principal will continue to accrue at 11.25

percent per year.

(7) Marginal Cost of a Payphone Call.

117. As stated earlier, our pricing strategy seeks to establish a

default amount for dial-around calls so that the calls recover their

marginal cost plus a share of joint and common costs. There is no

credible evidence on the record indicating that the process of picking

up a handset and dialing numbers imparts any measurable costs to the

PSP. To the extent that these costs exist, we find that they would be

insignificant on a per call basis and are already accounted for in the

depreciation and maintenance costs outlined above. We therefore

conclude that we do not need to add an element for the marginal cost of

a dial-around call.

(8) Default Compensation Amount.

118. The new default price for compensable calls is $.24. We

arrived at this amount by adding the joint and common costs and

dividing the sum of the joint and common costs by the number of calls

at a marginal location. We then add to this number four months of

interest at 11.25 percent. These calculations result in a default

compensation amount of $.24.

(9) Top-down Calculation. 119. Although we decline in the Order to

adopt a top-down methodology, we have performed a top-down calculation

to validate that our bottom-up methodology is reasonable. Similarly,

the Commission in the Second Report and Order undertook a bottom-up

calculation to validate the reasonableness of a top-down methodology.

In performing this calculation, we start with what commenters agree is

the predominant local coin calling price in the United States, $.35. We

subtract from this amount the cost of the coin mechanism, termination

charges, and coin collection charges.

120. We find that the installation of a coin mechanism costs a PSP

$17.02 per month. Dividing $17.02 by the 318 coin calls made at an

average payphone location, we conclude that we would subtract $.054 for

the coin mechanism. We would also subtract $.038 for local termination

charges, and subtract $.036 for coin collection charges. We do not

include coding digit cost recovery charges here because most PSPs are

now paying these charges. Further, because FLEX ANI costs are joint and

common, they are already reflected in the $.35 starting price. We thus

conclude that, under this approach, the default amount, before

interest, would be $.222. To this amount, we would add $.008 for

interest, resulting in a total of $.23. Thus, using the same data with

a top-down methodology, the default amount is within a penny of the

default amount arrived at under our bottom-up approach. We believe this

similarity supports the reasonableness of the default compensation

amount we adopt in this Order.

121. In the Second Report and Order, the Commission concluded that

a top-down approach yielded a default compensation amount of $.284 and

the bottom-up approach yielded a default amount of $.264. We now

conclude that a bottom-up approach yields a default amount of $.24, and

a top-down approach yields a compensation amount of $.23. These

differences arise from our use of the more accurate data submitted in

conjunction with the petitions for review of the Second Report and

Order. For instance, in the Second Report and Order, the Commission

estimated that the capital cost of a coin payphone was between $2,799

and $3,234. In this Order, we estimate that the capital cost is between

$2,387 and $2,523, based on the filings by PSPs. We also received

better data regarding the average termination costs that a PSP incurs,

from which we conclude that the proper estimate should be $.038,

instead of $.0275. We also amend our estimate of maintenance costs,

based on new LEC data. We also lower our estimate of FLEX ANI costs

from $.01 to $.002, based on actual tariffs filed by RBOCs. Based on

this new data and our decision to use a bottom-up approach, we conclude

that the default compensation amount will be $.24.

3. Compensation for October 7, 1997 to Present

122. In deciding to remand, rather than vacate, the Second Report

and Order, the Court explained that its decision was based, in part, on

``the clear understanding that if and when on remand the Commission

establishes some different rate of fair compensation for coinless

payphone calls, the Commission may order payphone service providers to

refund to their customers any excess charges for coinless calls

collected pursuant to the current [$.284] rate.'' The Court noted that

the Commission has authority to order such refunds pursuant to section

4(1) of the Act, which authorizes the Commission to take such actions

``as may be necessary in the execution of its

[[Page 13716]]

functions,'' as well as pursuant to the provisions of section 276,

which directs the Commission to ``take all actions necessary to

promulgate regulations to insure fair compensation.''

123. We conclude that the current default compensation amount

should apply, subject to the following minor adjustment, retroactively

to the period between October 7, 1997 and the effective date of this

Order (the October 1997 period). This Order, which sets a default

compensation amount of $.24, establishes a cost element of $.002 to

compensate PSPs for each dial-around call's share of FLEX ANI costs. As

explained above, we find that, over the next three years, the $.002

cost element will fully compensate PSPs for each dial-around call's

share of FLEX ANI costs. Therefore, in calculating the default

compensation amount for the October 1997 period, we deduct the $.002

cost element from the default compensation amount established in this

order. Thus, the default compensation amount for the October 1997

period, is $.238.

4. Method of IXC Overpayment Recovery

124. As noted above, PSPs will be obligated to refund overpayments

for the October 1997 period. In addition, in an upcoming order, we will

address the compensation amount for the period between November 7, 1996

and October 6, 1997 (Interim Period). In establishing a compensation

amount for the Interim Period, we anticipate using as a starting point

the default compensation amount established herein. We also anticipate

adjusting the default compensation amount for the Interim Period to

account for FLEX ANI costs and interest. The upcoming order also will

address the method that IXCs should use to calculate payments owed

PSPs.

125. This Order reduces the per-call compensation amount

established in the Second Report and Order for the period of October 7,

1997 to the effective date of this Order. Accordingly, we address the

way that IXCs which have made payments consistent with our prior order

may recover this overpayment. We note that, because most IXCs already

have collected money from their customers to cover the cost of

compensating PSPs, the IXCs will not be substantially harmed by a delay

in recovering their overpayment. At the same time, PSPs may be severely

harmed if they are required to immediately refund substantial

overpayment amounts to the IXCs. Indeed, most PSPs have not yet

received the majority of their payments for the Interim Period and do

not necessarily have the resources to issue refunds to the IXCs. We

therefore conclude that IXCs may recover their overpayments to the PSPs

at the same time as the PSPs receive payment from the IXCs for the

Interim Period. In other words, when an IXC calculates the amount owed

to each PSP for the Interim Period, it should deduct from that amount

any overpayment that it made to that PSP. Just as IXCs will be required

to compensate PSPs for interest on the money due the PSPs for the

Interim Period, IXCs will be allowed to recoup interest for

overpayments to the PSPs for the October 1997 Period. The same rate of

interest shall apply for both the Interim Period and October 1997

Period. In the event that the amount the IXC overpaid is larger than

the amount it owes to the PSP for the Interim Period, the IXC may

deduct the remaining overpayment from future payments to PSPs.

126. We also note that IXCs have recovered from their customers the

cost of compensating PSPs at a rate of $.284 per call. Although we do

not require IXCs to issue refunds to their customers, we believe that

doing so would serve the public interest. We therefore encourage IXCs

to issue refunds to their customers and to notify their customers of

any such refunds. We also encourage IXCs to publicly disclose the

manner in which they utilize any such refunds from PSPs.

V. Procedural Matters

A. Final Paperwork Reduction Act Analysis

127. The decision herein has been analyzed with respect to the

Paperwork Reduction Act of 1995, Pub. L. 104-13 and does not contain

new and/or modified information collections subject to Office of

Management and Budget review.

B. Supplemental Final Regulatory Flexibility Analysis

128. As required by the Regulatory Flexibility Act (RFA), an

Initial Regulatory Flexibility Analysis (IRFA) was incorporated in the

NPRM. The Commission sought written public comment on the proposals in

the NPRM, including comment on the IRFA. The Commission conducted a

Final Regulatory Flexibility Analysis (FRFA) in the Second Report and

Order. The Commission's Supplemental Final Regulatory Flexibility

Analysis (SFRFA) in this Order conforms to the RFA.

1. Need for, and Objectives of, the Reconsideration of the Second

Report and Order

129. The objective of the rules adopted in this Reconsideration of

the Second Report and Order is ``to promote competition among payphone

service providers and promote the widespread deployment of payphone

services to the benefit of the general public.'' In this order, we

adjust the per-call default rate for coinless calls that the Commission

set in the Second Report and Order. We adjust the rate from $0.284 to

$0.24, making the difference between the market-based local coin rate

and the coinless per-call default rate $0.11, instead of $0.066. In

doing so, the Commission is mindful of the balance that Congress struck

between this goal of bringing the benefits of competition to consumers

and its concern for the impact of the 1996 Telecommunications Act on

small businesses.

2. Summary of Significant Issues Raised by Public Comments in Response

to the IRFA

130. We received no comments in direct response to the FRFA in the

Second Report and Order. In the IRFA, the Commission solicited comment

on alternatives to our proposed rules that would minimize the potential

impact on small entities, consistent with the objectives of this

proceeding. At that time, the Commission received one comment on the

potential impact on small business entities, which the Commission

addressed in the FRFA in the Second Report and Order and considered in

promulgating the rules in the Second Report and Order. We believe that

our rules, as adopted in the Second Report and Order, and as modified

in this Order increase the efficiency of, and minimize the burdens of,

the compensation scheme to the benefit of all parties, including small

entities.

3. Description and Estimate of the Number of Small Entities to which

Rules Will Apply

131. The RFA directs agencies to provide a description of and,

where feasible, an estimate of the number of small entities that may be

affected by the proposed rules, if adopted. The RFA generally defines

the term ``small entity'' as having the same meaning as the terms

``small business,'' ``small organization,'' and ``small governmental

jurisdiction.'' In addition, the term ``small business'' has the same

meaning as the term ``small business concern'' under the Small Business

Act. A small business concern is one that: (1) is

[[Page 13717]]

independently owned and operated; (2) is not dominant in its field of

operation; and (3) satisfies any additional criteria established by the

Small Business Administration (SBA). A small organization is generally

``any not-for-sprofit enterprise which is independently owned and

operated and is not dominant in its field.'' As of 1992, there were

approximately 275,800 small organizations nationwide. ``Small

governmental jurisdiction'' generally means ``governments of cities,

counties, towns, townships, villages, school districts, or special

districts, with a population of less than 50,000.'' As of 1992, there

were approximately 85,000 such jurisdictions in the United States. This

number includes 38,978 counties, cities, and towns, of which 37,566 (96

percent) have populations of fewer than 50,000. The Census Bureau

estimates that this ratio is basically accurate for all governmental

entities. Thus, of the 85,006 governmental entities, we estimate that

81,600 (91 percent) are small entities. Below, we further describe and

estimate the number of small entity licensees and regulatees that may

be affected by the rule change.

a. Common Carrier Services and Related Entities.

132. The most reliable source of information regarding the total

numbers of certain common carriers and related providers nationwide, as

well as the numbers of commercial wireless entities, appears to be data

the Commission publishes annually in its Telecommunications Industry

Revenue report, regarding the TRS. According to data in the most recent

report, there are 3,459 interstate carriers. These carriers include,

inter alia, local exchange carriers, wireline carriers and service

providers, interexchange carriers, competitive access providers,

operator service providers, pay telephone operators, providers of

telephone toll service, providers of telephone exchange service, and

resellers.

133. The SBA has designated companies engaged in providing

``Radiotelephone Communications'' and ``Telephone Communications,

Except Radiotelephone'' as small businesses if they employ no more than

1,500 employees. Below, we discuss the total estimated number of

telephone companies falling within the two categories and the number of

small businesses in each, and we then attempt to refine further those

estimates to correspond with the categories of telephone companies that

are commonly used under our rules.

134. Although some incumbent local exchange carriers (ILECs) may

have no more than 1,500 employees, we do not believe that such entities

should be considered small entities within the meaning of the RFA.

These ILECs are either dominant in their field of operations or are not

independently owned and operated. Therefore, by definition, they are

not ``small entities'' or ``small business concerns'' under the RFA.

Accordingly, our use of the terms ``small entities'' and ``small

businesses'' does not encompass small ILECs. Out of an abundance of

caution, however, we will separately consider small ILECs within this

analysis. We will use the term ``small ILECs'' to refer to any ILECs

that arguably might be defined by the SBA as ``small business

concerns.''

135. Total Number of Telephone Companies Affected. The U.S. Bureau

of the Census (``Census Bureau'') reports that, at the end of 1992,

there were 3,497 firms engaged in providing telephone services, as

defined therein, for at least one year. This number contains a variety

of different categories of carriers, including local exchange carriers,

interexchange carriers, competitive access providers, cellular

carriers, mobile service carriers, operator service providers, pay

telephone operators, personal communications services providers,

covered specialized mobile radio providers, and resellers. It seems

certain that some of those 3,497 telephone service firms may not

qualify as small entities or small ILECs because they are not

``independently owned and operated.'' For example, a PCS provider that

is affiliated with an interexchange carrier having more than 1,500

employees would not meet the definition of a small business. It is

reasonable to conclude that fewer than 3,497 telephone service firms

are small entity telephone service firms or small ILECs that may be

affected by the rule change.

136. Wireline Carriers and Service Providers. The SBA has developed

a definition of small entities for telephone communications companies,

except radiotelephone (wireless) companies. The Census Bureau reports

that there were 2,321 telephone companies in operation for at least one

year at the end of 1992. According to the SBA's definition, a small

business telephone company other than a radiotelephone company is one

employing no more than 1,500 persons. All but 26 of the 2,321 non-

radiotelephone companies listed by the Census Bureau were reported to

have fewer than 1,000 employees. Thus, even if all 26 of those

companies had more than 1,500 employees, there would still be 2,295

non-radiotelephone companies that might qualify as small entities or

small ILECs. We do not have data specifying the number of these

carriers that are not independently owned and operated, and thus are

unable at this time to estimate with greater precision the number of

wireline carriers and service providers that would qualify as small

business concerns under the SBA's definition. Consequently, we estimate

that fewer than 2,295 small telephone communications companies other

than radiotelephone companies are small entities or small ILECs that

may be affected by the rule change.

137. Local Exchange Carriers. Neither the Commission nor the SBA

has defined small local exchange carriers (LECs). The best available

definition under the SBA rules is for telephone communications

companies other than radiotelephone (wireless) companies. According to

the most recent Telecommunications Industry Revenue data, 1,371

carriers reported that they were engaged in the provision of local

exchange services. We do not have data specifying the number of these

carriers that are either dominant in their field of operations, are not

independently owned and operated, or have more than 1,500 employees.

Thus, we are unable at this time to estimate with greater precision the

number of LECs that would qualify as small business concerns under the

SBA's definition. Consequently, we estimate that fewer than 1,371

providers of local exchange service are small entities or small ILECs

that may be affected by the rule change.

138. Interexchange Carriers. Neither the Commission nor the SBA has

developed a definition of small entities specifically applicable to

providers of interexchange services (IXCs). The closest applicable

definition under the SBA rules is for telephone communications

companies other than radiotelephone (wireless) companies. According to

the most recent Telecommunications Industry Revenue data, 143 carriers

reported that they were engaged in the provision of interexchange

services. We do not have data specifying the number of these carriers

that are not independently owned and operated or have more than 1,500

employees. Thus, we are unable at this time to estimate with greater

precision the number of IXCs that would qualify as small business

concerns under the SBA's definition. Consequently, we estimate that

there are fewer than 143 small entity IXCs that may be affected by the

rule changes herein.

139. Competitive Access Providers. Neither the Commission nor the

SBA has developed a definition of small

[[Page 13718]]

entities specifically applicable to competitive access services

providers (CAPs). The closest applicable definition under the SBA rules

is for telephone communications companies other than radiotelephone

(wireless) companies. According to the most recent Telecommunications

Industry Revenue data, 109 carriers reported that they were engaged in

the provision of competitive access services. We do not have data

specifying the number of these carriers that are not independently

owned and operated or that have more than 1,500 employees. Thus, we are

unable at this time to estimate with greater precision the number of

CAPs that would qualify as small business concerns under the SBA's

definition. Consequently, we estimate that there are fewer than 109

small entity CAPs that may be affected by the rule changes herein.

140. Operator Service Providers. Neither the Commission nor the SBA

has developed a definition of small entities specifically applicable to

providers of operator services. The closest applicable definition under

the SBA rules is for telephone communications companies other than

radiotelephone (wireless) companies. According to the most recent

Telecommunications Industry Revenue data, 27 carriers reported that

they were engaged in the provision of operator services. We do not have

data specifying the number of these carriers that are not independently

owned and operated or have more than 1,500 employees, and thus are

unable at this time to estimate with greater precision the number of

operator service providers that would qualify as small business

concerns under the SBA's definition. Consequently, we estimate that

there are fewer than 27 small entity operator service providers that

may be affected by the rule changes herein.

141. Pay Telephone Operators. Neither the Commission nor the SBA

has developed a definition of small entities specifically applicable to

pay telephone operators. The closest applicable definition under SBA

rules is for telephone communications companies other than

radiotelephone (wireless) companies. According to the most recent

Telecommunications Industry Revenue data, 441 carriers reported that

they were engaged in the provision of pay telephone services. We do not

have data specifying the number of these carriers that are not

independently owned and operated or have more than 1,500 employees, and

thus are unable at this time to estimate with greater precision the

number of pay telephone operators that would qualify as small business

concerns under the SBA's definition. Consequently, we estimate that

there are fewer than 441 small entity pay telephone operators that may

be affected by the rule changes herein.

142. Resellers (including debit card providers). Neither the

Commission nor the SBA has developed a definition of small entities

specifically applicable to resellers. The closest applicable SBA

definition for a reseller is a telephone communications company other

than radiotelephone (wireless) companies. According to the most recent

Telecommunications Industry Revenue data, 339 reported that they were

engaged in the resale of telephone service. We do not have data

specifying the number of these carriers that are not independently

owned and operated or have more than 1,500 employees, and thus are

unable at this time to estimate with greater precision the number of

resellers that would qualify as small business concerns under the SBA's

definition. Consequently, we estimate that there are fewer than 339

small entity resellers that may be affected by the rule changes herein.

143. Toll Free Service Subscribers. We voluntarily describe here

toll free service subscribers, even though they are not affected by the

rules adopted herein such that they are within the scope of our

regulatory flexibilty analysis. Neither the Commission nor the SBA has

developed a definition of small entities specifically applicable to

toll free service subscribers. The most reliable source of information

regarding the number of 800 service subscribers appears to be data the

Commission collects on the toll free numbers in use. According to our

most recent data, 6,987,063 800 numbers were in use at the end of 1995.

Similarly, the most reliable source of information regarding the number

of 888 service subscribers appears to be data the Commission collects

on the 888 numbers in use. According to our most recent data, 2,014,059

888 numbers had been assigned at the end of 1996. We do not have data

specifying the number of these subscribers that are not independently

owned and operated or have more than 1,500 employees, and thus are

unable at this time to estimate with greater precision the number of

toll free subscribers that would qualify as small business concerns

under the SBA's definition. Consequently, we estimate that there are

fewer than 6,987,063 small entity 800 subscribers and fewer than

2,014,059 small entity 888 subscribers that may be affected by the rule

changes herein. In response to the Consumer-Business Coalition's

concerns about the effect that the compensation amount will have on

small businesses that subscribe to toll free numbers, we find that

small businesses that subscribe to toll free numbers are likely to

benefit by our reduction of the compensation amount in this Order. In

this Order, we reduce to $.24 the compensation amount that must be paid

to payphone service providers for compensable calls.

b. Wireless and Commercial Mobile Service. 144. Rural

Radiotelephone Service. The Commission has not adopted a definition of

small entity specific to the Rural Radiotelephone Service. A

significant subset of the Rural Radiotelephone Service is the Basic

Exchange Telephone Radio Systems (BETRS). We will use the SBA's

definition applicable to radiotelephone companies, i.e., an entity

employing no more than 1,500 persons. There are approximately 1,000

licensees in the Rural Radiotelephone Service, and we estimate that

almost all of them qualify as small entities under the SBA's

definition.

145. Air-Ground Radiotelephone Service. The Commission has not

adopted a definition of small entity specific to the Air-Ground

Radiotelephone Service. Accordingly, we will use the SBA's definition

applicable to radiotelephone companies, i.e., an entity employing no

more than 1,500 persons. There are approximately 100 licensees in the

Air-Ground Radiotelephone Service, and we estimate that almost all of

them qualify as small entities under the SBA's definition.

146. Offshore Radiotelephone Service. This service operates on

several UHF TV broadcast channels that are not used for TV broadcasting

in the coastal area of the states bordering the Gulf of Mexico. At

present, there are approximately 55 licensees in this service. We are

unable at this time to estimate the number of licensees that would

qualify as small under the SBA's definition for radiotelephone

communications.

4. Description of Projected Reporting, Recordkeeping, and Other

Compliance Requirements

147. This Order results in no additional filing requirements.

5. Steps Taken To Minimize Significant Economic Impact on Small

Entities and Significant Alternatives Considered

148. In the Second Report and Order, we addressed steps taken to

minimize the economic impact on small entities. In particular, we

addressed the potential economic impact on small businesses

[[Page 13719]]

and small incumbent LECs from (1) the amount of compensation paid to

PSPs, and (2) the administration of per-call compensation.

149. In this Order, we adjust the per-call default compensation

amount from $0.284 to $.24. This downward adjustment means that PSPs,

many of whom may be small business entities, will receive less call

revenue from coinless calls than they might have received under the

Second Report and Order. However, by this action, we ensure that PSPs

are more likely receive ``fair compensation'' for subscriber 800 and

access code calls. This measure also helps PSPs receive fair

compensation for each and every completed call made from a payphone, as

required by the Act.

150. The downward adjustment also means that IXCs, some of which

may be small businesses, will have lower per-call payphone expenses

than they would have under the Second Report and Order. Since many IXCs

pass on this expense directly to their 800 subscribers, many of which

are small businesses, the downward adjustment means that these entities

will experience lower 800 subscriber expenses.

151. Like the comments to the Second Report and Order, several

parties commented on alternatives to a market-based default rate, and

on alternatives to the approach selected by the Commission in which

IXCs are obligated to compensate PSPs for dial-around calls. The

Commission has responded to these comments.

152. Some of these commenters also charge that the Commission's

approach is significantly increasing the cost of the many small

businesses and public interest ``hot lines'' that depend on affordable

800 call rates. Our rules do not require IXCs to pass on the expense of

payphone dial-around call compensation, but neither do our rules

prohibit this. The Commission rejected proposals that IXCs be

restricted from passing on the per-call costs to at least some 800

subscribers. We reiterate that IXCs should be given maximum flexibility

to determine what, if any, per-call costs are passed on to their 800

subscribers.

153. Report to Congress. The Commission will send a copy of this

Order, including this SFRFA, in a report to be sent to Congress

pursuant to the Small Business Regulatory Enforcement Fairness Act of

1996, see 5 U.S.C. 801(a)(1)(A). A copy of this Order and SFRFA, or

summary thereof, will be published in the Federal Register, see 5

U.S.C. 604(b), and will be sent to the Chief Counsel for Advocacy of

the Small Business Administration.

VI. Conclusion

154. We conclude that the default price for coinless calls should

be adjusted from $.284 to $.24. In addition, we note that PSPs will not

be compensated for 911 and TRS calls.

155. In setting the default compensation amount, we shift to a

cost-based method from the market-based method used in the Second

Report and Order because of technological impediments that currently

inhibit the market as well as the present unreliability of certain

assumptions underlying the market-based method. In setting the cost-

based default amount, we incorporated our reconsideration of our prior

treatment of certain payphone costs as well as our examination of new

estimates of payphone costs submitted as part of this proceeding.

156. The $.24 default price will be the price that, beginning

thirty days after this order is published in the Federal Register, IXCs

must compensate PSPs for all coinless payphone calls not otherwise

compensated pursuant to contract, or advance consumer payment,

including subscriber 800 and access code calls, certain 0+ and certain

inmate calls. The $.24 price will serve as the default per-call

compensation price for coinless payphone calls through January 31,

2002. At the conclusion of the three year period, if parties have not

invested the time, capital, and effort necessary to move these issues

to a market-based resolution, parties may petition the Commission

regarding the default amount, related issues pursuant to technological

advances, and the expected resultant market changes.

157. We conclude that the default price, adjusted for certain

items, should be effective retroactive to October 7, 1997, and that

IXCs will recover their overpayments to PSPs by deducting the amount of

their overpayments, along with interest, from the payments the IXCs

will make to PSPs for calls made during the November 7, 1996 to October

6, 1997 period.

VII. Ordering Clauses

158. Accordingly, pursuant to authority contained in Sections 1, 4,

201-205, 226, and 276 of the Communications Act of 1934, as amended, 47

U.S.C. 151, 154, 201-205, 215, 218, 219, 220, 226, and 276, it is

ordered that the policies, rules, and requirements set forth herein are

adopted.

159. It is further ordered that this order is effective April 21,

1999.

160. It is further Ordered, that 47 CFR Part 64 is amended as set

forth in Appendix A, effective April 21, 1999.

161. It is further Ordered that the Commission's Office of Public

Affairs, Reference Operations Division, shall send a copy of this Third

Report and Order and Order on Reconsideration of the Second Report and

Order, including the Final Regulatory Flexibility Analysis, to the

Chief Counsel for Advocacy of the Small Business Administration.

162. It is further Ordered that the July 14, 1998 Motion of

Telecommunications Resellers Association to accept late-filed pleading

is granted.

List of Subjects in 47 CFR Part 64

Communications common carriers, Operator service access, Payphone

compensation, Telephone.

Federal Communications Commission.

Magalie Roman Salas,

Secretary.

Rule Changes

Part 64 of Title 47 of the Code of Federal Regulations is amended

as follows:

PART 64--MISCELLANEOUS RULES RELATING TO COMMON CARRIERS

1. The authority citation for Part 64 continues to read as follows:

Authority: Sec. 4, 48 Stat. 1066, as amended: 47 U.S.C. 154,

unless otherwise noted. Interpret or apply secs. 201, 218, 226, 228,

276, 48 Stat. 1070, as amended; 47 U.S.C. 201, 218, 226, 228, 276

unless otherwise noted.

2. Amend Sec. 64.1300 by removing paragraph (d) and by revising

paragraph (c) to read as follows:

Sec. 64.1300 Payphone compensation obligation.

* * * * *

(c) In the absence of an agreement as required by paragraph (a) of

this section, the carrier is obligated to compensate the payphone

service provider at a per-call rate of $.24.

[FR Doc. 99-6944 Filed 3-19-99; 8:45 am]

BILLING CODE 6712-01-P