[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