[Federal Register Volume 64, Number 54 (Monday, March 22, 1999)]
[Rules and Regulations]
[Pages 13701-13719]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-6944]
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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