[Federal Register Volume 85, Number 206 (Friday, October 23, 2020)]
[Proposed Rules]
[Pages 67480-67507]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-19954]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 64

[WC Docket No. 12-375, FCC 20-111; FRS 17046]


Rates for Interstate Inmate Calling Services

AGENCY: Federal Communications Commission.

ACTION: Proposed rule.

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SUMMARY: In this document, the Commission continues to comprehensively 
reform inmate calling services rates to ensure just and reasonable 
rates for interstate and international inmate calling services. 
Specifically, the Commission proposes to lower the current interstate 
rate caps to $0.14 per minute for debit, prepaid, and collect calls 
from prisons and $0.16 per minute for debit, prepaid, and collect calls 
from jails. The Commission also proposes to cap rates for international 
inmate calling services, which remain uncapped today. The Commission 
proposes a waiver process that would allow providers to seek relief 
from its rules at the facility or contract level if they can 
demonstrate that they are unable to recover their legitimate inmate 
calling services-related costs at that facility or for that contract. 
Finally, the Commission invites comment on whether the Commission 
should require the providers to submit additional data, and if so, how; 
on how the Commission's regulation of interstate and international 
inmate calling services should evolve in light of marketplace 
developments and innovations, including alternative rate structures; 
and on the needs of incarcerated people with hearing or speech 
disabilities.

DATES: Comments are due November 23, 2020. Reply Comments are due 
December 22, 2020.

ADDRESSES: Federal Communications Commission, 445 12th Street SW, 
Washington, DC 20554.

FOR FURTHER INFORMATION CONTACT: Minsoo Kim, Pricing Policy Division of 
the Wireline Competition Bureau, at (202) 418-1739 or via email at 
[email protected].

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Fourth 
Further Notice of Proposed Rulemaking, FCC 20-111, released August 7, 
2020. This summary is based on the public redacted version of the 
document, the full text of which can be obtained from the following 
internet address: https://docs.fcc.gov/public/attachments/FCC-20-111A1.pdf.

I. Introduction

    1. The Communications Act divides jurisdiction for regulating 
communications services, including inmate calling services, between the 
Commission and the states. Specifically, the Act empowers the 
Commission to regulate interstate communications services and preserves 
for the states jurisdiction over intrastate communications services. 
Because the Commission has not always respected this division, the U.S. 
Court of Appeals for the District of Columbia Circuit has twice 
remanded the agency's efforts to address rates and charges for inmate 
calling services.
    2. The Commission proposes rate reform of the inmate calling 
services within its jurisdiction. As a result of the D.C. Circuit's 
decisions, the interim interstate rate caps of $0.21 per minute for 
debit and prepaid calls and $0.25 per minute for collect calls that the 
Commission adopted in 2013 remain in effect today. Based on extensive 
analysis of the most recent cost data submitted by inmate calling 
services providers, the Commission proposes to lower its interstate 
rate caps to $0.14 per minute for debit, prepaid, and collect calls 
from prisons and $0.16 per minute for debit, prepaid, and collect calls 
from jails. In so doing, the Commission uses a methodology that 
addresses the flaws underlying the Commission's 2015 and 2016 rate caps 
and that is consistent with the mandate in section 276 of the Act that 
inmate calling services providers be fairly compensated for each and 
every completed interstate call. Additionally, the Commission proposes 
to cap rates for international inmate calling services, which remain 
uncapped today.
    3. The Commission believes that its actions today will ensure that 
rates and charges for interstate and international inmate calling 
services are just and

[[Page 67481]]

reasonable as required by section 201(b) of the Act and thereby enable 
incarcerated individuals and their loved ones to maintain critical 
connections. At the same time, given that the vast majority of calls 
made by incarcerated individuals are intrastate calls, the Commission 
urges its state partners to take action to address the egregiously high 
intrastate inmate calling services rates across the country.

II. Background

    4. Access to affordable communications services is critical for all 
Americans, including incarcerated members of its society. Studies have 
long shown that incarcerated individuals who have regular contact with 
family members are more likely to succeed after release and have lower 
recidivism rates. Unlike virtually every other American, however, 
incarcerated people and the individuals they call have no choice in 
their telephone service provider. Instead, their only option is 
typically an inmate calling services provider chosen by the 
correctional facility that, once chosen, operates as a monopolist. 
Absent effective regulation, rates for inmate calling services calls 
can be unjustly and unreasonably high and thereby impede the ability of 
incarcerated individuals and their loved ones to maintain vital 
connections.
    5. Statutory Background. The Communications Act of 1934, as amended 
(the Act) establishes a system of regulatory authority that divides 
power over interstate, intrastate, and international communications 
services between the Commission and the states. More specifically, 
section 2(a) of the Act empowers the Commission to regulate 
``interstate and foreign communication by wire or radio'' as provided 
by the Act. This regulatory authority includes ensuring that ``[a]ll 
charges, practices, classifications, and regulations for and in 
connection with'' interstate or international communications services 
are ``just and reasonable'' in accordance with section 201(b) of the 
Act. Section 201(b) also provides that ``[t]he Commission may prescribe 
such rules and regulations as may be necessary in the public interest 
to carry out'' these provisions.
    6. Section 2(b) of the Act preserves for the states jurisdiction 
over ``charges, classifications, practices, services, facilities, or 
regulations for or in connection with intrastate communication 
service.'' The Commission is thus `` `generally forbidden from entering 
the field of intrastate communication service, which remains the 
province of the states.' '' Stated differently, section 2(b) ``erects a 
presumption against the Commission's assertion of regulatory authority 
over intrastate communications.''
    7. Although the Telecommunications Act of 1996 ``chang[ed] the 
FCC's authority with respect to some intrastate activities,'' ``the 
strictures of [section 2(b)] remain in force.'' That is, ``[i]nosfar as 
Congress has remained silent . . . , [section 2(b)] continues to 
function.'' Thus, while section 276 of the Act specifically directs the 
Commission to ensure that payphone service providers, including inmate 
calling services providers, ``are fairly compensated for each and every 
completed intrastate and interstate call using their payphone,'' that 
provision does not authorize the Commission to regulate intrastate 
rates. Nor does section 276 give the Commission the authority to 
determine ``just and reasonable'' rates.
    8. Prior Commission Actions. The Commission has taken repeated 
action to address inmate calling services rates and charges. In the 
2012 ICS Notice, the Commission sought comment on whether to establish 
rate caps for interstate inmate calling services calls. In the 2013 ICS 
Order, the Commission established interim interstate rate caps for 
debit and prepaid calls as well as collect calls and required all 
inmate calling services providers to submit data (hereinafter, the 
First Mandatory Data Collection) on their underlying costs so that the 
agency could develop a permanent rate structure. In the 2014 ICS 
Notice, the Commission sought comment on reforming charges for services 
ancillary to the provision of inmate calling services and on 
establishing rate caps for both interstate and intrastate inmate 
calling services calls. In the 2015 ICS Order, the Commission attempted 
to adopt a comprehensive framework for interstate and intrastate inmate 
calling services. More specifically, the Commission adopted limits on 
ancillary service charges; set rate caps for interstate and intrastate 
inmate calling services calls; extended the interim interstate rate 
caps it adopted in 2013 to intrastate calls pending the effectiveness 
of the new rate caps; and sought comment on whether and how to reform 
rates for international inmate calling services calls. The Commission 
also addressed inmate calling services providers' ability to recover 
mandatory applicable pass-through taxes and regulatory fees. 
Additionally, the Commission adopted a Second Mandatory Data Collection 
to enable it to identify trends in the market and adopt further reform, 
and it required inmate calling services providers to annually report 
information on their operations, including their current interstate, 
intrastate, and international rates and their current ancillary service 
charge amounts. In the 2016 ICS Reconsideration Order, the Commission 
increased its rate caps to account for certain correctional facility 
costs related to the provision of inmate calling services.
    9. The Commission's attempts to reform inmate calling services 
rates and charges have a long history in the courts and have not always 
been well received. In January 2014, in response to inmate calling 
services providers' petitions for review of the 2013 ICS Order, the 
D.C. Circuit stayed the application of certain portions of that Order 
but allowed the Commission's interim rate caps to remain in effect. 
Later that year, the court held the petitions for review in abeyance 
while the Commission proceeded to set permanent rates. In March 2016, 
in response to inmate calling services providers' petitions for review 
of the 2015 ICS Order, the D.C. Circuit stayed the application of that 
Order's rate caps and ancillary service charge cap for single-call 
services while the appeal was pending. Later that month, the court 
stayed the application of the Commission's interim rate caps to 
intrastate inmate calling services. In November 2016, the court stayed 
the 2016 ICS Reconsideration Order pending the outcome of the challenge 
to the 2015 ICS Order. In 2017, in GTL v. FCC, the D.C. Circuit vacated 
the rate caps in the 2015 ICS Order, finding that the Commission lacked 
the statutory authority to regulate intrastate rates and that the 
methodology used to set the caps was arbitrary and capricious. The 
court remanded for further proceedings with respect to certain rate cap 
issues; remanded the ancillary service charge caps in that Order; and 
vacated one of the annual reporting requirements in that Order.
    10. Because this procedural history is somewhat complicated, the 
Commission provides background on the relevant issues in turn below.
    11. Ancillary Service Charges. Ancillary service charges are fees 
that inmate calling services providers assess on inmate calling service 
consumers that are not included in the per-minute rates assessed for 
individual calls. In the 2015 ICS Order, in light of the continued 
growth in the number and dollar amount of ancillary service charges, 
and the fact that such charges inflate the effective price that 
consumers pay for inmate calling services, the Commission adopted 
reforms to limit such charges. The Commission established five types of

[[Page 67482]]

permissible ancillary service charges, which are defined as follows: 
(1) Fees for Single-Call and Related Services--billing arrangements 
whereby an incarcerated person's collect calls are billed through a 
third party on a per-call basis, where the called party does not have 
an account with the inmate calling services provider or does not want 
to establish an account; (2) Automated Payment Fees--credit card 
payment, debit card payment, and bill processing fees, including fees 
for payments made by interactive voice response, web, or kiosk; (3) 
Third-Party Financial Transaction Fees--the exact fees, with no markup, 
that inmate calling services providers are charged by third parties to 
transfer money or process financial transactions to facilitate a 
consumer's ability to make account payments via a third party; (4) Live 
Agent Fees--fees associated with the optional use of a live operator to 
complete inmate calling services transactions; and (5) Paper Bill/
Statement Fees--fees associated with providing customers of inmate 
calling services an optional paper billing statement. The Commission 
then capped the amount of each of these charges and prohibited inmate 
calling services providers from assessing any other ancillary service 
charges. The D.C. Circuit stayed the rule setting the ancillary service 
charge cap for single-call services on March 7, 2016, before the rest 
of the ancillary service charge caps were to go into effect. Therefore, 
the ancillary service charge cap for single-call services never became 
effective.
    12. In the 2015 ICS Order, the Commission applied these caps to all 
services ancillary to inmate calling services, regardless of whether 
the underlying service was interstate or intrastate. In particular, the 
Commission held that ``section 276 of the Act authorizes the Commission 
to regulate charges for intrastate ancillary services.'' On review, the 
D.C. Circuit held that ``the Order's imposition of ancillary fee caps 
in connection with interstate calls is justified'' given the 
Commission's ``plenary authority to regulate interstate rates under 
Sec.  201(b), including `practices . . . for and in connection with' 
interstate calls.'' The court held, however, that just as the 
Commission lacks authority to regulate intrastate rates pursuant to 
section 276, the Commission likewise ``had no authority to impose 
ancillary fee caps with respect to intrastate calls.'' Because the 
court could not ``discern from the record whether ancillary fees can be 
segregated between interstate and intrastate calls,'' it remanded the 
issue ``to allow the Commission to determine whether it can segregate 
[the ancillary fee] caps on interstate calls (which are permissible) 
and the [ancillary fee] caps on intrastate calls (which are 
impermissible).''
    13. Mandatory Pass-Through Taxes and Fees. In the 2015 ICS Order, 
the Commission found record evidence that inmate calling services 
providers were charging end users fees under the guise of taxes. The 
Commission therefore held that such providers ``are permitted to 
recover mandatory-applicable pass-through taxes and regulatory fees, 
but without any additional mark-up or fees.'' To implement this 
determination, the Commission added rules governing an ``Authorized 
Fee'' and a ``Mandatory Tax or Mandatory Fee.'' The rule regarding 
authorized fees included language precluding markups in the absence of 
specific governmental authorization. The rule regarding mandatory taxes 
or fees, however, contained no parallel language. To correct this 
oversight, the Commission amended the rule in the 2016 ICS 
Reconsideration Order to specify: ``A Mandatory Tax or Fee that is 
passed through to a Consumer may not include a markup, unless the 
markup is specifically authorized by a federal, state, or local 
statute, rule, or regulation.''
    14. On review, the D.C. Circuit vacated the 2016 ICS 
Reconsideration Order ``insofar as it purport[ed] to set rate caps on 
inmate calling service'' and remanded ``the remaining provisions'' of 
that Order to the Commission ``for further consideration . . . in light 
of the disposition of this case and other related cases.'' As a result, 
the Commission's rule governing Mandatory Taxes or Mandatory Fees was 
vacated to the extent that it ``purport[ed] to set rate caps.''
    15. Rate Caps. In the 2013 ICS Order, in light of record evidence 
that rates for inmate calling services calls greatly exceeded the 
reasonable costs of providing service, the Commission adopted interim 
interstate rate caps of $0.21 per minute for debit and prepaid calls 
and $0.25 per minute for collect calls. In the 2015 ICS Order, in light 
of ``egregiously high'' rates for intrastate inmate calling services 
calls, the Commission relied on section 276 and section 201(b) of the 
Act to adopt rate caps for both intrastate and interstate inmate 
calling services calls. The Commission set tiered rate caps of $0.11 
per minute for prisons; $0.14 per minute for jails with average daily 
populations of 1,000 or more; $0.16 per minute for jails with average 
daily populations of 350 to 999; and $0.22 per minute for jails having 
average daily populations of less than 350. The Commission calculated 
these rate caps using industry- wide average costs and stated that this 
approach would allow providers to ``recover average costs at each and 
every tier.'' Additionally, the Commission held that site commissions--
payments made by inmate calling services providers to correctional 
facilities or state authorities that are often required to win the 
contract for provision of service to a given facility--were not costs 
reasonably related to the provision of inmate calling services. The 
Commission therefore excluded site commission payments from the cost 
data used to set the rate caps.
    16. On reconsideration in 2016, the Commission increased the rate 
caps for both interstate and intrastate inmate calling services to 
expressly account for correctional facility costs that are directly and 
reasonably related to the provision of inmate calling services. The 
Commission set the revised rate caps at $0.13 per minute for prisons; 
$0.19 per minute for jails with average daily populations of 1,000 or 
more; $0.21 per minute for jails with average daily populations of 350 
to 999; and $0.31 per minute for jails with average daily populations 
of less than 350.
    17. On review, the D.C. Circuit in GTL v. FCC vacated the rate caps 
adopted in the 2015 ICS Order. First, the court held that the 
Commission lacked the statutory authority to cap intrastate inmate 
calling services rates. The court explained that the Commission's 
authority over intrastate calls is, except as otherwise provided by 
Congress, limited by section 2(b) of the Act and nothing in section 276 
of the Act overcomes this limitation. In particular, section 276 
``merely directs the Commission to `ensure that all [inmate calling 
services] providers are fairly compensated' for their inter- and 
intrastate calls,'' and it ``is not a `general grant of jurisdiction' 
over intrastate ratemaking.''
    18. Second, the D.C. Circuit held that the ``Commission's 
categorial exclusion of site commissions from the calculus used to set 
[inmate calling services] rate caps defie[d] reasoned decisionmaking 
because site commissions obviously are costs of doing business incurred 
by [inmate calling services] providers.'' The court directed the 
Commission to ``assess on remand which portions of site commissions 
might be directly related to inmate calling services and therefore 
legitimate, and which are not.'' The court did not reach inmate calling 
services providers' remaining arguments ``that the exclusion of site 
commissions denies [them] fair compensation under

[[Page 67483]]

[section] 276 and violates the Takings Clause of the Constitution 
because it forces providers to provide services below cost,'' and it 
stated that the Commission should address these issues on remand once 
it revisits the exclusion of site commissions.
    19. Third, the D.C. Circuit held that the Commission's use of 
industry-wide averages in setting rate caps was arbitrary and 
capricious because it lacked justification in the record and was not 
supported by reasoned decisionmaking. More specifically, the court 
found the Commission's use of a weighted average per-minute cost to be 
``patently unreasonable'' given that such an approach made calls with 
above-average costs unprofitable and thus did ``not fulfill the mandate 
of [section] 276 that `each and every' '' call be fairly compensated. 
Additionally, the court found that the 2015 ICS Order ``advances an 
efficiency argument--that the larger providers can become profitable 
under the rate caps if they operate more efficiently--based on data 
from the two smallest firms,'' which ``represent less than one percent 
of the industry,'' and that the Order did not account for conflicting 
record data. The court therefore vacated this portion of the 2015 ICS 
Order and remanded to the Commission for further proceedings.
    20. Also in 2017, in Securus v. FCC, the D.C. Circuit ordered the 
2016 ICS Reconsideration Order ``summarily vacated insofar as it 
purports to set rate caps on inmate calling service'' because the 
revised rate caps in that Order were ``premised on the same legal 
framework and mathematical methodology'' rejected by the court in GTL 
v. FCC. The court remanded ``the remaining provisions'' of that Order 
to the Commission ``for further consideration . . . in light of the 
disposition of this case and other related cases.'' As a result of the 
D.C. Circuit's decisions in GTL and Securus, the interim rate caps that 
the Commission adopted in 2013 ($0.21 per minute for debit/prepaid 
calls and $0.25 per minute for collect calls) are in effect for 
interstate inmate calling services calls.
    21. More Recent Developments. In the 2015 ICS Order, the Commission 
directed that the Second Mandatory Data Collection be conducted two 
years from publication of Office of Management and Budget (OMB) 
approval of the information collection. The Commission received such 
approval in January 2017 and publication occurred on March 1, 2017. 
Accordingly, on March 1, 2019, inmate calling services providers 
submitted their responses to the Second Mandatory Data Collection. The 
Commission's Wireline Competition Bureau (Bureau) and Office of 
Economics and Analytics (OEA) undertook a comprehensive analysis of the 
Second Mandatory Data Collection responses and conducted multiple 
follow-up discussions with inmate calling services providers to 
supplement and clarify their responses.
    22. In February 2020, the Bureau issued a public notice seeking to 
refresh the record on ancillary service charges in light of the D.C. 
Circuit's remand in GTL v. FCC. The Bureau sought comment on, among 
other issues, (1) whether each permitted inmate calling services 
ancillary service charge may be segregated between interstate and 
intrastate calls and, if so, how; (2) how the Commission should proceed 
in the event any permitted ancillary service is ``jurisdictionally 
mixed'' and cannot be segregated between interstate and intrastate 
calls; and (3) any steps the Commission should take to ensure that 
providers of interstate inmate calling services do not circumvent or 
frustrate the Commission's ancillary service charge rules.
    23. In April 2020, inmate calling services providers submitted data 
pursuant to the Commission's annual reporting requirements and they did 
so using a revised annual reporting form and accompanying instructions. 
First, the Bureau made minor revisions to the form and instructions in 
light of the D.C. Circuit's vacatur of the Commission's annual 
reporting requirement for video visitation services offered by inmate 
calling services providers. The GTL court held that the video 
visitation services reporting requirement adopted in the 2015 ICS Order 
was ``too attenuated to the Commission's statutory authority to justify 
this requirement.'' Accordingly, the Bureau eliminated questions 
regarding video visitation from the annual reporting reform.
    24. Second, the Bureau made additional revisions to the annual 
reporting form and instructions based on its experience in analyzing 
past annual reports and based on formal and informal input from inmate 
calling services providers, thereby making the annual reports easier to 
understand and analyze. Bureau and OEA staff used the April 2020 annual 
report responses to supplement their understanding of the Second 
Mandatory Data Collection responses.
    25. Commission staff also analyzed the intrastate rate data 
submitted as part of inmate calling services providers' most recent 
annual reports. Staff's analysis reveals that the vast majority of 
inmate calls--roughly 80%--are reported to be intrastate and that 
inmate calling services providers are charging egregiously high 
intrastate rates across the country. Intrastate rates for debit or 
prepaid calls substantially exceed interstate rates in 45 states, with 
33 states allowing rates that are at least double the Commission's cap 
and 27 states allowing excessive ``first-minute'' charges up to 26 
times that of the first minute of an interstate call. Indeed, while 
interstate rates for the first minute and all subsequent minutes may 
not exceed $0.25, inmate calling services providers' first-minute 
charges for intrastate calls may range from $1.65 to $6.50. For 
example, one provider reported the first-minute intrastate rate of 
$5.341 and the additional per-minute intrastate rate of $1.391 in 
Arkansas while reporting the per-minute interstate rate of $0.21 for 
the same correctional facility. Similarly, another provider reported 
the first-minute intrastate rate of $6.50 and the additional per-minute 
intrastate rate of $1.25 in Michigan while reporting the per-minute 
interstate rate of $0.25 for the same correctional facility. Further, 
Commission staff identified instances in which a 15-minute intrastate 
debit or prepaid call costs as much as $24.80--almost seven times more 
than the maximum $3.15 that an interstate call of the same duration 
would cost.

III. Fourth Further Notice of Proposed Rulemaking

    26. As a result of the D.C. Circuit's decisions in GTL and Securus, 
the interim interstate rate caps that the Commission adopted in the 
2013 ICS Order--$0.21 per minute for debit and prepaid calls and $0.25 
per minute for collect calls--remain in effect today. Based on 
extensive analysis by Commission staff of the most recent cost data 
submitted by inmate calling services providers, the Commission proposes 
comprehensive rate reform of the inmate calling services within its 
jurisdiction.
    27. First, the Commission proposes to lower its rate caps for 
interstate inmate calling services to $0.14 per minute for debit, 
prepaid, and collect calls from prisons and $0.16 per minute for debit, 
prepaid, and collect from jails. In so doing, the Commission accounts 
for reasonable correctional facility costs, consistent with the court's 
opinion in GTL, and the Commission accounts for the fair compensation 
mandate of section 276 of the Act. The Commission further proposes to 
find that the benefits of its interstate rate cap proposal far exceed 
the costs.
    28. Second, the Commission proposes to cap rates for international 
inmate

[[Page 67484]]

calling services, which remain uncapped today. Specifically, the 
Commission proposes to adopt a rate cap formula that permits a provider 
to charge an international inmate calling services rate up to the sum 
of the provider's per-minute interstate rate cap for that correctional 
facility plus the amount that the provider must pay its underlying 
international service provider for that call on a per-minute basis. The 
Commission believes these proposals will ensure that the rates that 
incarcerated individuals and their loved ones pay for interstate and 
international inmate calling services are just and reasonable as 
required by section 201(b) of the Act.
    29. The Commission seeks comment on its proposals, including their 
impact on small businesses, and the Commission seeks comment on any 
alternative proposals.

A. Proposing New Interstate Rate Caps

    30. The Commission proposes to adopt permanent rate caps for 
interstate inmate calling services of $0.14 per minute for debit, 
prepaid, and collect calls from prisons and $0.16 per minute for such 
calls from jails. These rate caps would apply to all calls that a 
provider identifies as interstate and to calls that the provider cannot 
definitively identify as intrastate.
    31. The proposed rates are based on its analyses of detailed cost 
data submitted by inmate calling services providers in their Second 
Mandatory Data Collection responses. These data demonstrate that the 
proposed rates, in conjunction with the fees permitted for ancillary 
services, will generally allow providers to recover their costs, 
including their overheads, and reimburse correctional facilities for 
any costs that they incur that are directly related to the provision of 
inmate calling services. The Commission defines ``overheads'' as the 
difference between the costs inmate calling services providers assigned 
to their contracts and their total inmate calling services costs. The 
Commission establishes its proposed rate caps based on (1) its 
calculated mean contract costs per paid minute to provide inmate 
calling services as reported by providers plus one standard deviation; 
and (2) an allowance for recovery of correctional facility costs 
directly related to the provision of inmate calling services observed 
in that data. ``Contract costs per paid minute'' refers to the sum of a 
contract's direct costs and allocated overheads divided by the number 
of paid minutes of use reported for that contract. The Commission 
calculates the mean of this value across all contracts for each 
facility type and use those averages in determining its proposed rate 
caps. The Commission's proposed rate cap methodology and its impact on 
providers' ability to recover their costs differ materially from the 
methodology and impact that were before the D.C. Circuit in GTL v. FCC. 
The Commission seeks comment on each aspect of its proposed rate cap 
methodology and on whether it will result in interstate inmate calling 
services rates that are just and reasonable as required by the 
Communications Act.
    32. Uniform Caps for Prepaid/Debit and Collection Calls. The 
Commission proposes to adopt identical interstate rate caps for 
prepaid/debit and collect calls based on the absence of any data 
demonstrating a material difference in the costs of providing these 
different types of calls. For convenience, the Commission refers herein 
to prepaid and debit calls collectively as prepaid/debit calls. While 
each of these call types is separately defined in the Commission's 
rules, 47 CFR 64.6000(g) and (p), each involves a form of advanced 
payment for inmate telephone calls as distinguished from collect calls 
for which payment is sought from the called party at the time that the 
inmate call is placed. What is more, collect calling is no longer a 
popular method of inmate calling, and data show that the number of 
collect calls is small and has been declining relative to prepaid or 
debit calls. In 2014, collect call minutes represented 4.9% of all paid 
call minutes. In 2018, the share of collect calls in all paid call 
minutes had fallen to 2.2%. These findings are based on staff analysis 
of the data received in the Second Mandatory Data Collection. The 
Commission seeks comment on current trends for collect calling, and on 
its proposal to adopt a single rate cap for prepaid/debit and collect 
calls made from the same facilities and on the overall data upon which 
the Commission bases its proposal. Are there cost differences between 
collect and prepaid/debit calls that providers failed to identify in 
response to its data collection? If so, commenters should submit 
additional data on this point into the record. The Commission also 
seeks comment on whether attempting to distinguish between the costs of 
providing prepaid/debit calls and collect calls is necessary (or 
administratively efficient) given that collect calls appear to be a 
disappearing service.
    33. The Commission do notes one apparent difference between collect 
and prepaid/debit calls: Specifically, collect calls are more likely to 
be initiated through the use of a live operator. The Commission 
tentatively does not believe, however, that this difference merits 
different rates because inmate calling service providers are already 
permitted to charge a separate fee if an incarcerated individual makes 
use of a live operator to place an interstate collect call. This 
additional ancillary service charge is on top of the per-minute rate 
for the interstate collect call. Are there nevertheless reasons to 
maintain different interstate rate caps for collect versus prepaid/
debit calling? If so, commenters should explain these reasons in 
detail.
    34. Different Caps for Prisons and Jails. The Commission proposes 
to distinguish between two distinct facility types, proposing a rate 
cap for jails that is $0.02 per minute higher than the rate cap the 
Commission proposes for prisons. This $0.02 per-minute differential 
reflects the Commission's analysis of the cost data, which shows 
greater variations from mean costs for jails than prisons (and 
therefore a greater standard deviation from the mean for jail than 
prisons). This two-tier rate structure departs from the four-tier rate 
structure the Commission adopted in the 2015 ICS Order, which 
established a rate cap for prisons as well as three different rate caps 
for jails, based on the jails' average daily populations. As discussed 
in greater detail in an Appendix, staff analysis of the data submitted 
by the providers indicates that the average daily population for jails 
does not meaningfully influence per-minute costs. The analysis 
similarly indicates that per-minute costs are not materially influenced 
by other characteristics of the facilities being examined. The 
Commission seeks comment on this analysis.
    35. The Commission seeks comment on its proposal to adopt a single 
rate cap for prisons and a single rate cap for jails. Are there 
differences in the costs of serving different types of prisons or jails 
that are not apparent from the data submitted in response to the Second 
Mandatory Data Collection? If so, commenters should provide additional 
analysis or data establishing those differences and explain how the 
Commission should take them into account in setting interstate rate 
caps for different types of facilities.
    36. Cost Recovery at the Contract Level. The Second Mandatory Data 
Collection responses make clear that inmate calling services providers 
seek to recover their costs at the contract, rather than facility, 
level. The providers therefore do not typically keep, and have not 
submitted, data that would capture cost differences among facilities

[[Page 67485]]

of differing sizes under the same contract. In these circumstances, the 
Commission proposes to set interstate rate caps based on its analysis 
of costs at the contract level. The Commission invites comment on this 
approach.
    37. Effective Date for New Interstate Rate Caps. The Commission 
proposes that its new rate caps take effect 90 days after notice of 
them is published in the Federal Register. This is the same transition 
timeframe that the Commission adopted when providers first became 
subject to the current interim caps, and the record in this proceeding 
indicates that implementation occurred without difficulty. The 
Commission seeks comment on this view and on its proposal. Any 
commenter favoring a shorter or longer transition period should provide 
a detailed explanation of precisely what steps providers and 
correctional facilities must take before they can implement new rate 
caps for interstate inmate calling services and how much time they 
anticipate it will take to accomplish each of those steps.
1. Methodology
    38. Calculating Mean Contract Costs per Paid Minute. The 
Commission's rate cap methodology begins with the calculation of mean 
contract costs per paid minute in the provision of inmate calling 
services. This calculation is based on data for the most recent year 
(2018) submitted in providers' Second Mandatory Data Collection 
responses, as supplemented and clarified in the record via follow-up 
discussions with each provider. While the Second Mandatory Data 
Collection collected data for 2014 to 2018, the Commission relies on 
data from 2018 because it is likely to be most representative of the 
current situation. Although the Commission requested data for each 
facility a provider serves, including information such as the average 
daily inmate population, the number of calls annually, the number of 
annual call minutes, and the cost of serving that facility, in many 
instances providers reported data only at the contract level. The cost 
data include both (1) costs that may be directly attributed to the 
provider's inmate calling services operations and, in many instances, 
to a given inmate calling services contract; and (2) costs, such as 
general corporate overheads, that cannot be directly attributed to a 
particular facility or even, in some cases, a particular line of 
business.
    39. The collected data are subject to certain limitations based on 
differences in recordkeeping practices among the respondent providers. 
For example, many providers assess their inmate calling services 
operations on a contract-by-contract basis, although many contracts 
include multiple correctional facilities. Based on staff analysis of 
the data, CenturyLink treated the Wisconsin DOC contract similarly, and 
GTL treated many, and perhaps all, of its multifacility contracts 
similarly. These providers therefore reported information--and the 
Commission analyzed that information--on a contract, rather than a 
facility, basis. The Commission seeks comment on this approach, in the 
absence of information provided about the costs incurred on a facility-
by-facility basis.
    40. The Second Mandatory Data Collection sought information about 
costs in several steps. A filer must first identify which of its and 
its corporate affiliates' total costs are directly attributable to 
inmate calling services and which are directly attributable to other 
operations. The filer must then allocate the remainder of the inmate 
calling services provider's and its affiliates' total costs (i.e., the 
costs identified as indirect costs or overhead) between inmate calling 
services and the affiliate groups' other operations. The filer may then 
choose to allocate some or all of these costs to its particular inmate 
calling services contracts or even to a given facility. The Commission 
notes that some providers interpreted different steps in different 
ways. The Commission seeks comment on each aspect of the submitted data 
and invite parties to submit their own analyses consistent with the 
terms of the Protective Order in this proceeding. Are there other 
issues regarding the data that the Commission should consider? Are 
there other types of data the Commission could seek to more fully 
capture industry costs beyond the detailed and comprehensive data the 
Commission has already collected and which providers claim reflects the 
level of granular cost data they keep? The Commission invites parties 
to submit alternative proposals for us to consider in further 
evaluating the Second Mandatory Data Collection responses. To the 
extent that commenters believe the Commission should collect additional 
data, the Commission seeks comment on the likelihood that inmate 
calling services providers would be able to provide the requested data, 
and, if so, at what cost and in what timeframe.
    41. The Second Mandatory Data Collection did not require providers 
to allocate costs that are not directly associated with a specific 
contract among their different contracts. The Commission therefore 
needs to perform such an allocation. The Commission proposes to use the 
reported minutes of use associated with each contract to perform that 
allocation. The Commission seeks comment on this allocation method, 
including whether reported minutes of use provides a reasonable 
allocator. Would a different allocator better capture how costs are 
caused, and if so, why? Are there systematic differences in costs or 
systematic differences in the way costs are calculated that the 
Commission should consider in its analysis?
    42. In developing its Second Mandatory Data Collection response, 
one provider, GTL, allocated indirect costs between its inmate calling 
services operations and its other operations based on the percentages 
of total company revenue each operation generated. GTL and certain 
other providers also used relative revenues to allocate their indirect 
costs among contracts. The Commission has long disclaimed this 
allocation methodology because it fails to provide a reliable method 
for determining the costs of providing inmate calling services given 
that ``revenues measure only the ability of an activity to bear costs, 
and not the amount of resources used by the activity.'' One way of 
viewing the problem of using revenues as a cost allocation key is to 
consider two identical services that have different prices. A revenue 
cost allocation key would allocate costs to the two services 
differently even though, by definition, they have the exact same costs. 
Consider allocating costs between the interstate and intrastate 
jurisdiction based on revenues. The record shows no reason to think 
that intrastate costs should be any higher than interstate costs. 
However, because intrastate calls have higher prices and earn higher 
revenues per minute, such a mechanism would imply intrastate costs are 
significantly higher than interstate costs. A related problem is that 
using revenues to allocate costs is somewhat circular--because the 
whole point of allocating costs is to help determine what revenues need 
to be to cover those costs. Thus, a revenue-based allocator tends to 
``lock in'' the historical pricing decisions of providers rather than 
drive rates toward actual costs. The Commission instead considered 
several other means of allocating costs: Call minutes, call numbers, 
contracts, and facilities, and determined call minutes to be the most 
reasonable. The Commission invites comment on these observations and 
this allocator, and ask parties to suggest alternative ways to more 
appropriately allocate costs for

[[Page 67486]]

rate-making purposes that would provide more reliable results.
    43. Calculating Interstate Rate Caps for Prisons and Jails. The 
Commission next calculates proposed interstate rate caps for both 
prisons and jails. Those proposed caps equal the mean contract costs 
per minute for all reporting providers, plus one standard deviation, 
plus an additional $0.02 for correctional facility costs. Its 
calculations use total industry costs, both interstate and intrastate, 
because the available data do not suggest that there are any 
differences between the costs of providing interstate and intrastate 
inmate calling services. Nor do such data suggest a method for 
separating reported costs between the intrastate and interstate 
jurisdictions that might capture such differences, if any. Finally, 
providers do not assert any such differences. The Commission seeks 
comment on these views.
    44. The Commission's analysis of the cost data shows greater 
variations from mean costs for jails than for prisons, and its proposed 
rate caps reflect these standard deviations. The Commission examined 
whether various characteristics, such as location or size, would reveal 
additional, meaningful differences in costs that would justify separate 
rate caps for different groups of contracts. The Commission found the 
main predictors of both costs per minute and high-cost contracts were 
the provider's identity and the state where the facilities subject to a 
particular contract are located. The Commission also found that 
facility type (whether the contracts covered prisons or jails) was a 
less strong predictor of costs per minute and high-cost contracts. By 
contrast, other variables such as facility size (measured by average 
daily population) and rurality, or combinations of such variables 
provided negligible predictive value. The Commission seeks comment on 
this analysis and on whether the Commission nevertheless should set 
interstate rate caps on a more granular basis. The Commission invites 
parties to suggest alternative approaches. Any commenter proposing an 
alternative approach should submit an explanation of how the data 
support such an approach, as well as a discussion of the administrative 
feasibility of the proposed alternative.
    45. The Commission believes its proposed rate caps will permit cost 
recovery for interstate inmate calling services and the Commission 
seeks comment on this view. The Commission specifically invites comment 
on whether its proposed interstate rate caps would allow providers to 
recover their costs of providing interstate inmate calling services, 
including their direct costs of providing interstate inmate calling 
services under each of their contracts and correctional facility costs 
directly related to the provision of inmate calling services, while 
making reasonable contributions to providers' indirect costs that are 
associated with inmate calling services.
    46. The Commission's calculations show a limited number of 
contracts where providers' reported costs plus its allocation of 
overhead exceed the revenues that the proposed interstate rate caps 
would generate: Specifically, in only two out of 131 prison contracts, 
and 114 out of 2,804 jail contracts. The Commission notes that the 
inmate calling services providers' reported costs exclude site 
commission payments, although they do report information on site 
commission payments. The Commission has determined previously that some 
portion of these site commission payments do reflect legitimate costs 
that correctional facilities incur that are reasonably related to the 
provision of inmate calling services. Based on its analysis, the 
Commission's proposed rate caps include a $0.02 per minute allowance 
for these correctional facility costs. If revenues that are currently 
generated from certain ancillary services, such as automated payment 
fees and paper billing and statement fees, are included, only 42 jail 
contracts fail to recover costs under the Commission's allocation of 
overheads. Over half of these 42 jail contracts belong to a single 
provider, but account for a small portion of that provider's broad 
contract portfolio. Based on staff analysis of these 42 jail contracts, 
approximately [REDACTED]. In addition, the Commission does not include 
revenues earned from live operator fees because those data were not 
collected, even though the costs of live operators were collected and 
are included in its analysis. The Commission seeks comment on this 
approach and on whether the Commission should exclude both the costs 
of, and revenues from, live operator interactions from its analysis.
    47. In GTL v. FCC, the Court found the Commission's reliance on 
industry average costs unreasonable because even if any cost component 
of site commissions were disregarded, the proposed caps were ``below 
average costs documented by numerous ICS providers and would deny cost 
recovery for a substantial percentage of all inmate calls.'' Unlike 
that result, however, the Commission proposes a methodology that begins 
with an industry mean cost, increases that mean by a standard 
deviation, and then adds an additional amount--$0.02 per minute--to 
account for correctional facility costs. The revenues from the proposed 
rate caps would enable the vast majority of providers to recover at 
least their reported costs, leaving only 1.5% (or 42/2,804) of all jail 
contracts with reported average costs above what the proposed 
interstate rate caps would recover (and the Commission seeks comment 
below on potentially waiving its caps in these extraordinary cases).
    48. As discussed in an Appendix, the Commission assigned costs to 
contracts based on relative minutes of use. For robustness, the 
Commission also takes the data at face value and analyzes its proposed 
caps against those data. In that scenario, only one prison contract and 
32 jail contracts would fail to recover reported direct costs based on 
the Commission's analysis. And only one prison contract or 0.8% (1/131) 
of prison contracts and 21 or 0.7% (21/2,804) of jail contracts would 
fail to recover their reported direct costs after accounting for 
certain ancillary service fees. The Commission seeks comment on this 
analysis. The Commission also asks whether it would be appropriate to 
set rates based on the costs of the vast majority of providers (for 
example, all but the one or two providers with the highest average 
costs per minute), in order to incent providers with above average 
costs to be more efficient. While the court in GTL rejected an 
efficiency argument advanced by the Commission, its concern in that 
case was that the ``average rates'' relied on cost data from firms 
representing only a small fraction of the industry and were not 
sufficiently supported by the record. The approach the Commission 
proposes here, however, is based on the costs of a majority of 
providers and is consistent with the record.
    49. The presence of a number of prisons and jails with rates below 
the proposed interstate rate caps is further evidence that leads the 
Commission to conclude that its proposed caps will broadly allow cost 
recovery. The Commission has identified nearly 800 prisons in 35 states 
that have set their interstate debit, prepaid, and collect inmate 
calling service rates at levels below its proposed cap of $0.14. These 
include prisons in locations as diverse as Alabama, California, New 
Jersey, New Mexico, West Virginia, and Wyoming. Similarly, nearly 200 
jails in 35 states set all of their interstate debit, prepaid, and 
collect inmate calling service rates at levels below the Commission's 
proposed caps. Confirming the Commission's analysis

[[Page 67487]]

of the cost data, facility size also does not seem to matter in these 
cases. The Commission seeks comment on whether these data suggest that 
its proposed interstate rate caps should be lowered even further 
notwithstanding the fact that its proposed rates reflect what the 
providers have most recently reported as their inmate calling services 
costs. Is this evidence that some providers have indeed reported costs 
in excess of their actual costs?
    50. The Commission notes that its rate cap calculations do not 
account for revenues earned from certain ancillary services, even 
though the costs of these services, which were not independently 
collected, are included in reported inmate calling services costs. The 
Commission invites comment on whether the Commission should adjust the 
proposed interstate rate caps to address ancillary services. For 
example, should the Commission exclude the costs from these services 
from its calculations? The Commission notes that while revenues from 
such services are small or do not exist for many contracts, in other 
cases, they are significant. For example, the contract mean of 
automated payment and paper bill/statement revenues per paid minute of 
use is approximately $0.05. This is calculated by taking the mean of 
the quotient of revenues from automated payment and paper bill and 
statement fees and paid minutes of use for each contract. The 
Commission seeks comment on how the Commission should take these 
revenue sources into account in setting interstate rate caps. Should 
the Commission reduce its proposed interstate caps by $0.05 across the 
board or would this distort providers' pricing decisions, especially in 
the case of contracts where automated payment and paper bill/statement 
fees are small or zero? Should the Commission instead impose an 
interstate revenue cap and let providers decide how to raise those 
revenues? Or would that type of discretion lead to rates that are hard 
to police in practice? What alternative mechanisms could be applied to 
ensure that a provider's total revenue from interstate inmate calling 
services and related ancillary services allows the provider an 
opportunity to recover its costs of providing those services without 
subjecting incarcerated people and those they call to unreasonably high 
interstate rates?
    51. The Commission also asks whether there is any other source of 
revenue from inmate calling services that the Commission should 
consider in its analysis. For example, in the 2015 ICS Further Notice, 
the Commission expressed concern regarding alleged revenue sharing 
arrangements between inmate calling services providers and financial 
companies. Some commenters argue that certain inmate calling services 
providers have entered into revenue-sharing arrangements with third-
party processing companies such as Western Union and MoneyGram where a 
third-party processing company shares its revenues generated from 
processing transactions for an inmate calling services provider' 
customers. In contrast to typical third-party processing companies such 
as Western Union and MoneyGram, Pay Tel argues that affiliates of an 
inmate calling services provider should not be treated as third parties 
in applying the Commission rules as the affiliated processing company's 
revenues will end up in the same bucket as the affiliated inmate 
calling services provider's revenues. Commenters further argue that the 
shared revenue is an additional source of profits for these inmate 
calling services providers. One commenter suggests that certain 
providers have effectively created a third-party entity with whom those 
providers share revenue that is passed through to consumers in the form 
of a third-party fee for single-call services. Marking up third-party 
fees, whether directly or indirectly, is prohibited under the 
Commission's rules. The Commission seeks any evidence that providers 
are using kickbacks or other means to indirectly mark up such fees. 
What is the best way for us to detect these types of practices? Should 
we, for example, require providers to include in their Annual Reports 
detailed information on all sources of revenue in connection with their 
inmate calling services operations and, if so, what specific additional 
data should the Commission require providers to submit? The Commission 
also invites comment on how the Commission should account for any 
revenue that providers receive from such arrangements in its rate cap 
calculations. For example, should the Commission reduce the amount that 
a provider may recover through per-minute rates and ancillary fees by 
the amount it receives from sharing arrangements with third parties? 
The Commission seeks comment on any additional modifications to the 
language in its current ancillary services rules that may be necessary 
to clarify what providers are permitted and not permitted to do with 
respect to ancillary services charges.
2. Necessary Adjustments to Data
    52. The interstate rate caps the Commission proposes reflect 
certain adjustments to some provider data to correct for anomalies that 
would improperly skew its results and lead to unreasonably high 
interstate rate caps vis-[agrave]-vis rate caps that approximate the 
true costs of providing inmate calling service. The Commission seeks 
comment on these adjustments. Specifically, to calculate the return 
component of its costs, GTL uses what it refers to as the ``invested 
capital of GTL.'' That value equals the amount GTL's current owners 
paid in 2011 to purchase the company from its prior owners plus the 
amounts GTL paid for subsequent acquisitions. In December 2011, 
American Securities purchased GTL from Goldman Sachs Capital Partners 
and Veritas Capital Fund Management LLC for $1 billion, including a $50 
million contingencies bonus. That purchase price significantly exceeded 
the $345 million that Goldman Sachs and Veritas had paid to purchase 
GTL in February 2011. Those amounts as a matter of basic financial 
theory reflect GTL's estimate of the future profit streams the company 
would generate as an ongoing concern in the provision of inmate calling 
services and the other services GTL provides incarcerated people. 
Consequently, these prices include any expected market rents embodied 
in those profit streams. ``Market rents'' refers to the stream of 
profits that a company expects to earn that it would not otherwise earn 
if faced with effective competitive market constraints. Use of GTL's 
invested capital as a basis for a regulated cost-based rate is 
inconsistent with the well-established principle that the purchase 
prices of companies that possess market power ``are not a reliable or 
reasonable basis for ratemaking.''
    53. The Commission proposes to reduce the costs reported by GTL by 
10% in order to reduce or eliminate the distortion caused by the 
Commission's estimate of the market rents reflected in GTL's reported 
costs and to use those reduced costs in calculating its interstate rate 
caps for inmate calling services. The Commission adjusts its proposed 
interstate rate caps to reflect its reasoned estimate of the market 
rents captured in GTL's reported costs. As explained more fully in an 
Appendix, the Commission estimates those market rents by analyzing 
GTL's goodwill, as reported on its balance sheet. GTL's goodwill 
reflects the unamortized portion of excess purchase price and, 
presumably, market rents. This excess purchase price includes the value 
remaining after accounting for fair market values for tangible and 
intangible assets (excluding goodwill)

[[Page 67488]]

and liabilities at the time of acquisition. The Commission computes the 
share of GTL's net assets that its goodwill represents, and then 
further reduce this computed share to represent only the portion that 
corresponds with capital costs. The Commission invites comment on this 
approach. Do commenters believe it overstates, or understates, the 
market rents included in GTL's cost calculations? Would another 
adjustment method yield more accurate results? Would it be better to 
refrain from any adjustment to account for this apparent overstatement 
of GTL's costs? If so, why?
    54. The Commission recognizes that additional measures may be 
needed to eliminate what appear to be other significant overstatements 
in the inmate calling services costs reported by GTL. Indeed, the 
Commission's analysis of the cost data from all providers makes clear 
that GTL's reported costs are likely significantly overstated--both 
vis-[agrave]-vis other providers and in absolute terms. First, the 
Commission's analysis shows that GTL's reported costs are substantially 
greater than the industry average, an anomalous result given that the 
Commission would expect GTL--as the largest provider in the inmate 
calling services market--to benefit from economies of scale and scope. 
The Commission notes that ICSolutions and CenturyLink have just filed 
section 214 transfer of control applications with the Commission 
whereby ICSolutions would acquire control of all of CenturyLink's 
inmate calling services business, except for the Texas Department of 
Corrections contract which CenturyLink subcontracts with Securus. GTL's 
reported share of the total costs reported by all providers of inmate 
calling services is roughly 1.5 times greater than its reported share 
of the industry's minutes of use. Indeed, GTL's per paid minute 
contract costs are higher than those of all but two of the other 
providers. This data is difficult to reconcile with GTL's scale and 
scope, and apparent efficiency, which suggest that GTL's per-minute 
costs should be lower than other provider's costs. Scale economies 
arise when certain upfront costs, such as inmate calling services 
platform costs, can be shared over increasing volumes of service. 
Consistent with this, GTL, in its 2018 Description and Justification, 
reports [REDACTED]% of its assets to be intellectual property. The 
costs of developing and maintaining such assets are generally not 
related to extension of supply of call minutes, and so as call minutes 
increase, the per minute share of these costs decline. Economies of 
scope arise when certain upfront costs, such as a payment platform, can 
be shared over increasing numbers of services, such as inmate calling 
services, commissary services, and tablet access and internet access. 
This again applies to GTL. While GTL may not face full competitive 
pressure when it bids to supply inmate calling services, it is the 
largest provider in the industry. This suggests it is a reasonably 
effective competitor, which in turn suggests it is not a high cost 
provider, and therefore, its reported costs are likely significantly 
overstated. Second, even after a 10% reduction, GTL is still an outlier 
among the larger providers, having a materially higher share of 
reported costs than minutes and with reported costs still substantially 
above the industry average. While the reduction lowers GTL's average 
costs from [REDACTED] per minute, GTL's average costs remain [REDACTED] 
above the industry average per minute cost. Upon reducing GTL's costs 
by the proposed percentage, the industry average per minute cost falls 
from $0.089 to $0.084. Third, the highest per minute rates charged on 
many, including some large GTL contracts, are materially less than the 
Commission's estimate of the contract's per paid minute costs.
    55. While some of this imbalance stems from GTL's inflated asset 
valuations, other aspects of GTL's Second Mandatory Data Collection 
response suggest that the company's costing methodology systematically 
overstated its inmate calling services costs. For example, the Second 
Mandatory Data Collection required all providers to identify their 
direct costs (i.e., those costs that are completely attributable to a 
specific service, such as inmate calling services). GTL ignored this 
instruction and instead identified as direct inmate calling services 
costs only those costs ``that could be directly attributable to a 
particular correctional facility contract.'' This failure to comply 
with the instructions resulted in GTL incorrectly reporting as indirect 
inmate calling services costs its ``expenses for originating, 
switching, transporting, and terminating ICS calls'' and ``costs 
associated with security features relating to the provision of ICS,'' 
among other costs that appear to be completely attributable to and thus 
properly identifiable as direct costs of inmate calling services. The 
net result of this failure is that GTL's only reported direct inmate 
calling services cost is its ``bad debt expense.''
    56. Viewed in isolation, GTL's noncompliance with the instructions 
could have merely shifted its inmate calling services costs from one 
contract to another, a result that would have no impact on GTL's total 
reported costs for inmate calling services. GTL's Second Mandatory Data 
Collection response, however, leaves open the possibility that the 
company also failed to properly identify the direct costs of its non-
inmate calling services operations. In that case, then GTL's method of 
identifying its indirect inmate calling services cost--``multiplying 
its total indirect costs by a percentage received from ICS divided by 
its total revenue''--almost certainly overstated its inmate calling 
services costs. Indeed, allocating total company costs based on revenue 
is particularly inappropriate for a company, like GTL, that is not only 
expanding beyond a core business--inmate calling services--by investing 
in other lines of business, but that also reaps revenues from 
egregiously high intrastate rates that serve to increase the amount of 
indirect costs allocated to inmate calling services reported under this 
methodology.
    57. In light of the impact that overstatements of this magnitude by 
one of the market's largest providers may have on its analysis, the 
Bureau has directed GTL to provide additional information regarding its 
operations, costs, revenues, and cost allocation procedures. The 
information GTL files in response to this directive will be available 
to commenters, subject to the Protective Order in this proceeding. How 
should the Commission properly value GTL's assets in a manner that 
excludes all market rents? How should the Commission properly identify 
the direct costs of GTLs' inmate calling services and other operations? 
How should the Commission allocate GTL's indirect costs using methods 
that reflect how those costs are incurred? The Commission asks parties 
to address all aspects of GTL's responsive submission that may affect 
its ability to meaningfully evaluate GTL's cost data and methodology. 
The Commission also asks how the Commission should use the information 
in that submission in setting interstate rate caps for inmate calling 
services.
    58. It also appears that other providers, notably Securus, may have 
also overstated their inmate calling services costs, although likely 
not to the same degree as GTL. The Commission invites each provider to 
reexamine its costing methodology in light of this Further Notice and 
to address in detail in its comments whether that methodology properly 
identifies and allocates its inmate calling services costs. Providers 
should also update their Second Mandatory Data Collection responses to 
correct any discrepancies.

[[Page 67489]]

To the extent that providers do not do so, should the Commission 
discount their reported costs and, if so, to what extent? Or should the 
Commission instead require them to provide additional information 
regarding their operations, costs, revenues, and cost allocation 
procedures so that the Commission can meaningfully evaluate their cost 
data and methodologies?
3. Accounting for Correctional Facilities Costs
    59. The Commission's proposed interstate rate caps of $0.14 per 
minute for prisons and $0.16 per minute for jails include $0.02 per 
minute to account for the costs correctional facilities incur that are 
directly related to the provision of inmate calling services and that 
represent a legitimate cost for which providers of inmate calling 
services may have to compensate facilities. This $0.02 per-minute 
allowance reflects its analysis of data submitted in response to the 
Second Mandatory Data Collection. The Second Mandatory Data Collection 
indicates that payments in excess of $0.02 per minute would exceed the 
costs correctional facilities incur in the provision of inmate calling 
services. Nevertheless, the Commission recognizes that for contracts 
covering only smaller jails, the facility costs at these particular 
facilities may exceed $0.02 per minute. The Commission therefore 
considers adopting higher allowances for correctional facility costs 
for such contracts if the record in response to this Further Notice 
supports such allowances. The Commission invites comment on these 
proposals.
    60. Background. Site commissions are payments that inmate calling 
services providers make to correctional facilities. They have two 
components. They compensate correctional facilities for the costs they 
reasonably incur in the provision of inmate calling services, and they 
compensate those facilities for the transfer of their market power over 
inmate calling services to the inmate calling services provider. That 
market power is created by incarcerated people's inability to choose an 
inmate calling services provider other than the provider the 
correctional facility selects, effectively creating a monopoly for 
inmate calling services within a prison or jail. This dynamic produces 
site commission payments that exceed correctional facilities' costs. 
The responses to the Second Mandatory Data Collection show that inmate 
calling services providers paid [REDACTED] in site commissions which 
amounts to [REDACTED] of total inmate calling services-related revenues 
in 2018. The record in previous proceedings and the First Mandatory 
Data Collection also showed high site commission payments. In the 2013 
ICS Order, the record showed that site commission payments are often 
based on a percentage of revenues, which could range from 20% to 88%. 
Data from the First Mandatory Data Collection showed that site 
commissions for at least one contract had reached as much as 96% of 
gross revenues.
    61. Allowing inmate calling services providers to treat all their 
site commission payments as ``costs'' would almost inevitably result in 
unjust and unreasonably high rates for incarcerated individuals and 
their loved ones to stay connected. Prior to 2016, the Commission 
viewed these payments solely as an apportionment of profits between 
providers and facility owners even though it recognized some portion of 
them may be attributable to legitimate facility costs. In the 2016 ICS 
Reconsideration Order, however, the Commission recognized that ``some 
facilities likely incur costs that are directly related to the 
provision of ICS,'' and determined that ``it is reasonable for those 
facilities to expect ICS providers to compensate them for those costs . 
. . [as] a legitimate cost of ICS that should be accounted for in [the] 
rate cap calculations.'' The Commission therefore increased the rate 
caps it had adopted in 2015 to allow for the recovery of the 
facilities' legitimate costs. Because the qualitative record before it 
indicated that those per-minute costs increased as facilities' inmate 
populations decreased, the Commission varied its allowance for site 
commission payments based on correctional facilities' average daily 
populations. The rate caps for prepaid/debit inmate calling services 
calls were increased to ``$0.31 per minute for jails with an average 
daily population (ADP) below 350, $0.21 per minute for jails with an 
ADP between 350 and 999, $0.19 per minute for jails with an ADP of 
1,000 or more, and $0.13 per minute for prisons.'' The Commission also 
increased the rate caps for collect calls by a commensurate amount. The 
Commission based these adjustment factors on comments and information 
provided in the record at that time but did not base its adjustments on 
an analysis of provider-submitted data as the Commission does herein.
    62. In 2017, the D.C. Circuit held that the ``wholesale exclusion 
of site commission payments from the FCC's cost calculus'' in the 2015 
ICS Order was ``devoid of reasoned decision-making and thus arbitrary 
and capricious.'' The court therefore vacated the Commission's decision 
to exclude site commission payments from its cost calculus and remanded 
the matter to the Commission for further consideration.
    63. Allowance for Reasonable Correctional Facility Costs. 
Consistent with the D.C. Circuit's opinion in GTL v. FCC, 250 the 
Commission proposes to include an allowance for site commission 
payments in the interstate rate caps to the extent those payments 
represent legitimate correctional facility costs that are directly 
related to the provision of inmate calling services. The $0.02 per 
minute that the Commission proposes reflects its analysis of the costs 
correctional facilities incur that are directly related to providing 
inmate calling services and that the facilities recover from inmate 
calling services providers as reflected by comparing provider cost data 
for facilities with and without site commission requirements. This 
analysis treats any costs associated with site commission payments as 
correctional facility costs, and not inmate calling services provider 
costs. The Commission requests comment on this analysis, which is 
discussed in more detail in an Appendix. Does it properly capture the 
costs that providers should reasonably be expected to pay correctional 
facilities to cover the costs those facilities reasonably incur in 
connection with interstate inmate calling services? If not, how should 
the Commission adjust its analysis? Should we, for example, vary the 
allowance for reasonable correctional facility costs based on a 
facility's average daily population, annual minutes of use, or other 
measure of expected calling volume? The Commission asks correctional 
facilities to provide detailed information concerning the specific 
costs they incur in connection with the provision of interstate inmate 
calling services, to the extent those costs are not already reflected 
in providers' costs, and why those costs should be considered directly 
related to the provision of inmate calling services. The Commission 
also seeks alternative analyses that explain whether a $0.02 per-minute 
allowance would properly cover those correctional facility costs that 
are legitimately related to inmate calling services. The Commission 
similarly seeks comment on whether the Commission should reduce the 
allowance for prisons to $0.01 based on the analysis reflecting the 
differential of providers' costs with and without a site commission 
obligation for prison facilities.
    64. The Commission also invites comment on whether a $0.02 per 
minute allowance would be adequate to cover the costs that smaller 
jails incur in

[[Page 67490]]

connection with the provision of interstate inmate calling services. 
The Commission asks that parties seeking a higher allowance in this 
situation document in detail the specific costs smaller jails 
reasonably incur in the provision of interstate inmate calling 
services. The Commission also seeks comment on whether there is any 
other category of contracts or correctional facilities for which a 
$0.02 per-minute allowance may be inadequate.
    65. In GTL v. FCC, the D.C. Circuit directed that the Commission 
address on remand the issue of whether ``the exclusion of site 
commissions . . . violates the Takings Clause of the Constitution 
because it forces providers to provide services below cost.'' The 
Commission does not believe that there are any potential taking 
concerns arising from its rate cap proposals. The Commission has not 
received any post-remand comments addressing the takings issue with 
respect to adopting permanent interstate rate caps. The Commission did, 
however, receive a single comment from an inmate calling services 
provider in response to the Worth Rises Request that inmate calling 
services providers offer ``unlimited free service'' during COVID-19 in 
the event ICS providers did not sign the Chairman's Keep America 
Connected Pledge. The ``takings'' reference in that response, however, 
pertained to a request that providers offer service with no 
compensation, unlike the actions proposed herein where the Commission 
proposes just and reasonable rate caps that include recovery for 
facility provider costs, based on providers' reported costs. Inmate 
calling services providers' payment of site commissions is consistent 
with agreements between other types of payphone providers and property 
owners. Because ``many of the payphone locations are controlled by 
owners that can limit the entry of competing payphones,'' the property 
owners ``attempt to limit entry to increase the profitability of 
payphones and then demand at least a share of the profits in the form 
of a location rent.'' The Commission has acknowledged that, as a result 
of the dynamic between payphone operators and property owners, the 
Commission would ``not expect to see money-losing payphones[.]'' 
Because site commissions are part of voluntary, negotiated agreements 
between inmate calling services providers and the correctional 
facilities they serve, the Commission similarly dies not expect inmate 
calling services providers to be forced to provide services at a loss, 
provided that the rate caps allow them to recover their actual costs 
plus a reasonable opportunity for profit. Here, the Commission's 
proposed rate caps include an allowance of $0.02 per minute, as 
indicated above, to account for correctional facility costs included in 
reasonable site commissions; thus they reflect the actual costs of 
providing service as reported by providers in the record, plus a 
reasonable opportunity for profit. Because the Commission's proposed 
rate caps allow the correctional facility and the inmate calling 
services provider to recover all of their costs that are reasonably 
related to the provision of inmate calling services plus a reasonable 
opportunity for profit, there is no concern that the proposed rate caps 
violate the Takings Clause. The Commission seeks comment on these 
views.
    66. The Public Interest Advocates assert that, in GTL v. FCC, the 
D.C. Circuit ``did not consider several important factors in the FCC's 
decision-making, including decades of consistent competition policy 
excluding locational monopoly payments from rates . . . and repeated 
FCC decisions to preempt state and local rules or contract provisions 
that the FCC finds are anti-competitive . . . .'' To ensure a complete 
record, the Commission seeks comment on this view. Notwithstanding the 
Commission's decision in 2016 recognizing that some portion of site 
commissions reflect legitimate facility costs related to the provision 
of inmate calling services, the Commission seeks comment on whether 
including an allowance for correctional facility costs in its rate caps 
will have adverse competitive effects that the Commission should 
consider. If so, what are those effects?
    67. The Commission seeks comment on what types of correctional 
facility costs should properly be recovered through the rates that 
consumers pay for inmate calling services. Commenters are encouraged to 
provide detailed responses, describing with specificity which types of 
correctional facility costs they contend should, or should not be, 
recovered through those rates. The Commission asks, in particular, 
whether correctional facilities' security and surveillance costs in 
connection with inmate calling services should be recovered through 
inmate calling services rates. As the Public Interest Advocates point 
out, correctional facilities do not pass on the costs of other types of 
security measures, such as scrutinizing mail, to incarcerated people or 
their families. Given this, to what extent, if at all, should security 
and surveillance costs be recovered through inmate calling services 
rates, particularly in light of the D.C. Circuit's decision in GTL v. 
FCC?
4. Waiver Process for Outliers
    68. The Commission proposes to adopt a waiver process that permits 
inmate calling services providers to seek waivers on a facility-by-
facility or contract basis if the rate caps adopted by the Commission 
pursuant to this Further Notice would prevent the provider from 
recovering the costs of providing interstate inmate calling services at 
that facility or at the facilities covered by that contract. The 
Commission seeks comment on this proposal. Since first adopting 
interstate rate caps in the 2013 ICS Order, the Commission has 
permitted an inmate calling services provider to file a petition for 
waiver if it believed it could not recover its costs under the 
Commission-adopted rate caps. The Commission has required that, for 
``substantive and administrative reasons, waiver petitions would be 
evaluated at the holding company level.'' The Commission proposes to 
revise the waiver process so that it must be evaluated at a facility or 
contract level. The Commission seeks further comment on administering 
the waiver process to address cost recovery on a facility or contract 
basis. In particular, are there ways to decrease the administrative 
burdens of processing such requests on a facility or contract basis?
    69. The Commission proposes that a provider seeking a waiver of its 
interstate rate caps must demonstrate, through the submission of 
reliable, accurate, and transparent cost, demand, and revenue data, 
including data on any ancillary services it provides, that it will be 
unable to recover its costs for each facility or contract for which a 
waiver is sought. At a minimum, the Commission proposes that a provider 
seeking such a waiver be required to submit, among other information: 
(a) The providers' total company costs, including the original costs of 
the assets it uses to provide inmate calling services at the facility 
or under the contract; (b) the provider's methods for identifying its 
direct costs and for allocating its indirect costs among its various 
operations, contracts, and facilities; (c) the revenue the provider 
receives from interstate inmate calling services, including the portion 
of any permissible ancillary services fees attributable to interstate 
inmate calling services at the contract and facility level; (d) an 
unredacted copy of the contract with the correctional facilities and 
any amendments to such contract; and (e) a copy of the initial request 
for proposals

[[Page 67491]]

and bid response. The Commission seeks comment on these proposed 
requirements. Is there additional information available on a contract 
or facility level that the Commission should require providers to 
submit besides the information, documents, and data the Commission has 
proposed?
    70. The Commission also proposes to require that the provider 
explain why circumstances associated with that facility or contract 
differ from other similar facilities it serves, and from other 
facilities within the same contract, if applicable. Finally, the 
Commission proposes to require a company officer with knowledge of the 
underlying information to attest to the accuracy of all of the 
information the provider submits in support of its waiver request. The 
Commission seeks comment on these proposals.
    71. Consistent with its past waiver process for inmate calling 
services, the Commission proposes to direct the Bureau to rule on such 
petitions for waiver, and to seek any additional information as needed. 
The Commission also proposes to direct the Bureau to endeavor to 
complete its review of any such petitions within 90 days of the 
provider's submission of all information necessary to justify such a 
waiver, although the Bureau may extend this timeframe for good cause. 
The Commission proposes that, if a provider carries its burden of 
demonstrating that its rate caps are insufficient to cover the costs it 
incurs to serve a particular facility, the Bureau would waive the 
otherwise applicable rate cap and allow the provider to charge a rate 
sufficient to allow the provider an opportunity to recover its costs of 
providing interstate inmate calling services at that facility. The 
Commission seeks comment on this proposed approach and on the proposed 
remedies. The Commission also seeks comment on whether there are 
alternative procedures that would more efficiently facilitate the 
effective operation of the waiver process.
5. Consistency With Section 276 of the Act
    72. Section 276(b)(1)(A) of the Act requires that the Commission 
``ensure that all payphone service providers are fairly compensated for 
each and every completed intrastate and interstate call.'' In this 
Further Notice, the Commission proposes to adopt rules that satisfy 
this statutory mandate by setting rate caps for interstate calls that 
generate sufficient revenue for such calls (including any ancillary 
fees attributable to those calls) that (1) allow the provider to 
recover from those calls the direct costs of that call and (2) 
reasonably contribute to the provider's indirect costs related to 
inmate calling services. This approach would recognize that inmate 
calling services contracts typically apply to multiple facilities and 
that inmate calling services providers do not expect each call to make 
the same contribution toward indirect costs. The Commission invites 
comment on this proposal.
    73. In the 2015 ICS Order, the Commission set tiered rate caps, 
applicable to both interstate and intrastate inmate calling services 
using industry-wide average costs derived from inmate calling services 
providers' responses to the First Mandatory Data Collection. In GTL v. 
FCC, the D.C. Circuit rejected as ``patently unreasonable'' the 
Commission's ``averaging calculus'' in setting the 2015 rate caps. The 
court explained that the Commission erred in setting rate caps using 
industry average costs, because calls with above-average costs would be 
``unprofitable,'' in contravention of the ``mandate of Sec.  276 that 
`each and every' inter- and intrastate call be fairly compensated.''
    74. The Commission finds that its proposed rules are consistent 
with GTL v. FCC in this regard. Though the D.C. Circuit found that the 
Commission's averaging calculus did not comport with the fair 
compensation mandate under section 276, this finding does not mean that 
each and every completed call must make the same contribution to a 
provider's indirect costs. Instead, compensation is fair if each call 
``recovers at least its incremental costs, and no one service recovers 
more than its stand-alone cost.'' The Commission's proposed rate 
methodology, as detailed in an Appendix, is consistent with this 
approach. As the Commission recognized in the 2002 ICS Order, the 
``lion's share of payphone costs are those that are `shared' or 
`common' to all services,'' and there are ``no logical or economic 
rules that assign these common costs to `each and every call.' '' As a 
result ``a wide range of compensation amounts may be considered `fair.' 
'' The Commission seeks comment on this view. Is compensation ``fair'' 
if inmate calling services providers can recover their direct costs for 
a given call and receive a reasonable contribution to their indirect 
costs? Why or why not? Can inmate calling services providers assign 
indirect or common costs for each and every call? If so, how? 
Commenters arguing that indirect costs can be assigned to each call 
must provide data regarding how that assignment can be done and a 
justification for why a given allocation is reasonable.
    75. The Commission has estimated that more than 99% of existing 
contracts for both prisons and jails would recover their reported costs 
at its proposed rates, even accepting all the providers' costs 
submissions at face value with no adjustments. To the extent that the 
Commission's proposed rates would make it impossible in the unusual 
case where a contract was not able to recover its costs, providers may 
avail themselves of the Commission's waiver process. Moreover, the 
record in this proceeding strongly suggests that inmate calling 
services providers do not, in fact, expect that each call or even 
facility will make a contribution to their indirect costs. This is 
evidenced most acutely by the fact that providers largely fail to even 
record their costs on anything less than a contract basis, often where 
multiple facilities exist under one contract. For example, CenturyLink 
reports its inmate calling services cost data ``by correctional 
system,'' explaining that ``each facility within that correction[al] 
system reflects the costs developed for serving that contract.'' This 
evidence suggests that CenturyLink bids for contracts covering multiple 
facilities within a single correctional system, offering service at a 
single rate for all of those facilities, even though they may have 
different costs. Thus, the company does not expect to make the same 
profit from each facility or expect each call to contribute equally to 
CenturyLink's indirect costs. Similarly, Securus explains that its 
``accounting systems track costs as a company, and not on a customer or 
facility level'' but that ``facility-specific costs are taken from a 
separate data base used to track profits and losses for each site.'' 
And the assertion that Securus tracks costs ``as a company'' rather 
than on a customer or facility level strongly suggests that Securus, 
like other providers, bids for contracts, rather than specific 
facilities, with the idea that the company will profit from the 
contract as a whole but will not make the same amount from each 
facility or each call. It also appears that inmate calling services 
providers bid on contracts covering multiple facilities and offer a 
single interstate rate for calls from those facilities even though the 
provider may incur different costs to serve various facilities covered 
by a single contract. Do commenters agree? What factors do providers of 
inmate calling services consider in bidding on contracts, particularly 
contracts covering more than one facility? The Commission seeks comment 
on this issue and on whether commenters agree that its proposed rate 
caps would meet the fair

[[Page 67492]]

compensation standard of section 276 of the Act.
6. Cost-Benefit Analysis
    76. The Commission proposes to find that, independent of its 
statutory obligation, the benefits of its interstate rate cap proposal 
(reducing its current caps on interstate inmate calling rates to $0.14 
per minute for prisons and $0.16 per minute for jails) exceeds the 
costs at least five-fold. Specifically, the Commission expects an 
increase in interstate inmate call volumes elicited by lowered rates 
would conservatively generate approximately $7 million in direct 
benefits due to expanded call volumes, primarily to the benefit of 
incarcerated people, their families, and friends. The Commission also 
expects resulting expanded call volumes to reduce recidivism, which 
will in turn reduce prison operating costs, foster care costs, and 
crime. The Commission estimates these secondary benefits to well-exceed 
$23 million. The Commission estimates the one-time cost of implementing 
the interstate rate cap changes to be $6 million. The Commission seeks 
comment on these estimates.
    77. Expected Benefits of Expanded Call Volumes. To estimate the 
benefits of its proposed lower rates the Commission estimates how many 
call minutes are currently made at prices above those rates, the price 
decline on those call minutes that moving to its rates would imply, and 
the responsiveness of demand to a change in price. The Commission 
estimates, in 2018, approximately 592 million interstate prepaid and 
debit minutes and 3.3 million interstate collect minutes were made to 
or from prison individuals incarcerated in prisons at rates above its 
proposed caps, and approximately 453 million interstate prepaid and 
debit minutes and 2 million interstate collect minutes were made to and 
from individuals incarcerated in jails at rates above its proposed 
caps. The Commission used rate information from the 2019 Annual Reports 
and interstate minutes from the Second Mandatory Data Collection. These 
estimates are calculated as the difference between total interstate 
minutes in each category and the equivalent interstate minutes from 
nine states--Alaska, Delaware, Hawaii, Maryland, New Mexico, Texas, 
Vermont, Washington, and West Virginia--where either the rates of some 
important contracts are below the caps the Commission proposes, or all 
of the rates are below the caps the Commission proposes. These 
estimates likely understate the number of interstate minutes with rates 
that exceed the proposed caps because the Commission excludes from its 
calculations many contracts which have rates in excess of its proposed 
rates, even if in some cases the Commission includes those relatively 
rare contracts with rates below its proposed rates. The Commission 
estimates prices for those call minutes decline by half of the 
difference between its current caps and its proposed caps. Its current 
interim rate caps are $0.21 for debit and prepaid calls and $0.25 for 
collect calls. Its proposed rates imply the following price declines 
from these rates: For prison debit and prepaid calls, 33% (= ($0.21-
$0.14)/$0.21); for prison collect calls, 44% (= ($0.25-$0.14)/$0.25); 
for jail debit and prepaid calls, 24% (= ($0.21-$0.16)/$0.21); and for 
prison collect calls, 36% (= ($0.25-$0.16)/$0.25). To allow for 
contracts with rates below the current caps, the Commission assumes 
inmate calling services rates fall only one-half the difference between 
the existing rate caps and the proposed caps. Finally, the Commission 
estimates, relying on a price elasticity of demand at the lower end of 
those estimated for interstate calling, a price elasticity of demand at 
the lower end of those estimated for interstate calling: That for each 
percentage point drop in rates, inmate calling services demand will 
increase by 0.2%. The Commission assumes a price elasticity of -0.2. 
This estimate comes from the most recent data available to us and is 
conservative relative to most other estimates the Commission reviewed. 
On the one hand, this is likely an understatement because on average 
incarcerated individuals and their families and friends have lower 
incomes than the general population. On the other hand, inmates may not 
be fully able to respond to lower prices given limits on making calls. 
For example, call lengths are often limited to 15 or 20 minutes (based 
on staff analysis of the Second Mandatory Data Collection). Under these 
assumptions, the Commission estimates annual benefits of approximately 
$1 million, or a present value over ten years of approximately $7 
million. The present value of a 10-year annuity of $1 million at a 7% 
discount rate is approximately $7 million. The Office of Management and 
Budget recommends using discount rates of 7% and 3%. Erring on the side 
of understatement, the Commission uses the 7% rate. Additionally, even 
at current demand levels, the Commission estimates the cost savings to 
incarcerated individuals, their families, and friends, from lower 
calling rates alone, to be $32 million per year or $225 million in 
present value terms over 10 years. The Commission notes this benefit is 
not a ``net'' benefit, however, given that it is offset for purposes of 
its analysis by the loss of the inmate calling service industry of $218 
million in revenues in present value terms over 10 years.
    78. The Commission also expects greater call volumes to reduce 
recidivism, generating further benefits well in excess of $23 million. 
It is well established that family-to-incarcerated individual contact 
reduces recidivism. Although the Commission does not know exactly how 
much increased telephone contact would reduce recidivism among 
incarcerated individuals, savings of more than $3 million per year, or 
more than $20 million over 10 years in present value terms, would 
result if only 100 fewer individuals were incarcerated due to 
recidivism each year. Approximately $33,274 per year would be saved for 
every case of recidivism avoided, or $3.3 million per year for 100 
cases avoided. The average annual cost of incarceration for federal 
inmates was a comparable $34,704 in Fiscal Year 2016. One hundred fewer 
cases of recidivism in each year would represent approximately 0.02% of 
those released from prison each year, a negligible decline in the 
recidivism rate. To allow for releases to continue to exceed 
admissions, the calculation assumes that 500,000 persons are released 
every year. In 2018, approximately 600,000 persons were admitted to 
prison. The present value of a ten-year annuity of $3.3 million at a 
discount rate of 7% is approximately $23.2 million. Other savings would 
also be realized, for example, through reduced crime, and fewer 
children being placed in foster homes. The potential scale of fiscal 
saving--in addition to the immense social benefits--is suggested by the 
fact that administrative and maintenance costs incurred by state and 
local governments average $25,782 per foster placement. The Commission 
seeks comment on these expected societal cost reductions.
    79. Costs of Reducing Rates for Interstate Inmate Calling Services 
Calls. The costs of reducing rates for interstate inmate calling 
services calls are likely to be modest for providers, estimated at 
approximately $6 million. Including the Federal Bureau of Prisons and 
Immigration and Customs Enforcement, approximately 3,000 inmate calling 
services contracts would need to be revised if the Commission were to 
adopt its proposed rules, and a smaller number of administrative 
documents

[[Page 67493]]

may need to be filed to incorporate lower interstate rates. The 
Commission estimates that these changes would require approximately 25 
hours of work per contract. The Commission uses a $70 per hour labor 
cost to implement billing system changes, adjust contracts, and to make 
any necessary website changes. The Commission uses an hourly wage for 
this work of $42. (The Commission examined several potential wage 
costs. For example, in 2019, the median hourly wage for computer 
programmers was $41.61, and for accountants and auditors, it was 
$34.40. The Commission chose the higher of these. This rate does not 
include non-wage compensation. To capture this, the Commission marks up 
wage compensation by 46%. In March 2020, hourly wages for the civilian 
workforce averaged $25.91, and hourly benefits averaged $11.82 yielding 
a 46% markup on wages. The result is an hourly rate of $61.32 (= $42 x 
1.46), which the Commission rounds up to $70. The estimated cost of 
these actions is $5,139,750 (= 2,937 (number of contracts) * 25 (hours 
of work per contract) * $70 per hour), which the Commission rounds up 
to $6 million to be conservative. The Commission seeks comment on this 
estimate of costs.
    80. The Commission also recognizes that lowering per-minute rates 
could result in lower investment because a substantial proportion of 
industry costs do not vary with minutes carried, but must be covered. 
The Commission does not expect, however, reduced investment to be a 
significant concern, however, given its findings that the proposed 
rates would more than recover efficient total costs of operation. The 
Commission seeks comment on this view.
    81. Summary of Benefits and Costs. On net, the Commission estimates 
that the actions the Commission proposes today would result in benefits 
which far exceed their costs. While the Commission identifies a range 
of benefits, for the purposes of a cost benefit analysis, the 
Commission only quantifies the direct benefits from some of these. 
Looking out only ten years, the conservative estimate of these benefits 
alone is approximately $30 million in present value terms. The 
Commission expects other substantial benefits due to reduced 
recidivism. By contrast, the Commission conservatively estimates the 
high side of costs of its actions to be approximately $6 million. The 
Commission seeks comment on ways to improve these estimates, including 
how to quantify any indirect or secondary benefits the Commission 
unable to quantify here, as well as on any additional costs and 
benefits of its proposed actions that the Commission has not 
considered.

B. Proposing International Rate Caps

    82. The Commission proposes to establish a rate cap formula that 
inmate calling services providers must use in setting the maximum 
permissible per-minute rates for international inmate calling services. 
The Commission seeks comment on its proposal to cap international 
inmate calling service rates. In the 2015 ICS Further Notice, the 
Commission sought specific comment on whether and how to reform rates 
for international inmate calling services, including on extending its 
domestic inmate calling service rate caps to international inmate 
calling service calls. The Commission has also collected international 
inmate calling service rate and cost data from inmate calling services 
providers, including in annual reports and the Second Mandatory Data 
Collection.
    83. There is no question that the Commission has authority to adopt 
rate caps for international inmate calling services pursuant to section 
201(b) of the Act. Moreover, while the record on the need for 
international inmate calling service reform is mixed, the Commission's 
most recent data reflecting international calling rates for many inmate 
service providers convinces the Commission such reform is needed. Some 
commenters have urged the Commission to regulate international inmate 
calling services rates, arguing that the Commission has the authority 
and obligation to ensure just and reasonable rates. Another party has 
claimed that international calling is such a small percentage of inmate 
calling that it need not be regulated.
    84. Calculating International Rate Caps. The Commission proposes to 
adopt a rate cap formula for international inmate calling services 
calls that permits a provider to charge a rate up to the sum of the 
inmate calling services provider's per-minute interstate rate cap for 
that correctional facility plus the amount that the provider must pay 
its underlying international service provider for that call on a per-
minute basis (without a markup). This allowance for international 
transmission capability would exclude any amount that is rebated to, or 
otherwise shared with, the inmate calling services provider. The 
Commission seeks comment on this proposal. Its proposal is designed to 
enable the provider to recover the full costs of the international 
telephone service it is essentially reselling to the inmate calling 
services consumer, plus the cost it incurs to make that service 
available to persons incarcerated in that facility. As a result, the 
Commission believes this international rate cap would be just and 
reasonable under section 201(b) of the Act and would enable inmate 
calling services providers to account for the widely varying costs and 
associated international rates they are charged by their wholesale 
suppliers of international calling capability. The Commission seeks 
comment on this view.
    85. The Commission believes its proposal has the benefit of 
simplicity and ease of administrability. It would allow inmate calling 
services providers to recover the additional costs they incur to resell 
international calling services, yet should result in substantial 
reductions in international calling rates for incarcerated individuals 
and their families based on what many providers report for certain 
international calling rates in their latest Annual Reports. 
Additionally, it would account for the varied international rates 
identified by some commenters, and enable providers to charge higher 
international calling services rates than charged for domestic calls to 
the extent international settlement rates and foreign termination rates 
make the costs to transport and terminate international calls higher 
than those for domestic calls. The Commission seeks comment on this 
proposed approach. Would capping international rates in this way ensure 
that incarcerated individuals and their families and other loved ones 
do not pay unreasonably high international rates? Why or why not? Would 
it address the concerns of GTL and Pay Tel that imposing a single rate 
cap would be difficult because international calling rates vary based 
on factors including the location called or the type of call? Are there 
other factors besides the costs incurred by inmate calling services 
providers in paying their underlying facilities-based or wholesale 
international services providers that the Commission should consider in 
formulating international rate caps? If so, what are those factors and 
how could the Commission account for them in determining appropriate 
rate caps?
    86. The record contains a wealth of information regarding 
international inmate calling services rates. CenturyLink suggests that 
``[t]he cost to terminate residential or business international calls 
is often many times greater than the cost to terminate calls in the 
United States, even for frequently called countries like Canada and 
Mexico.'' CenturyLink also explains that ``simple network and 
termination costs--ignoring other prison-specific

[[Page 67494]]

costs related to such things as security, billing and consumer 
services--to many African and East European countries can be $0.25 per 
minute or greater.'' According to some commenters, international rates 
are exceedingly high in some correctional facilities, some as high as 
$45 for a 15-minute call. Another commenter cites rates of $0.75 per 
minute, or $11.25 for a 15-minute international call, at a facility in 
California. These data compare with a total permissible rate of $6.90 
or $7.50 for a 15-minute debit/prepaid or collect call, respectively, 
under the Commission's interim interstate rate caps ($3.15 or $3.75) 
plus the $0.25 per minute that CenturyLink's suggests are the costs for 
some international calls ($3.75). The Commission believes its proposal 
addresses the differences in international inmate calling services 
costs even without more specific information about each individual cost 
component of any specific international inmate calling services call. 
Do commenters agree? If not, why not, and what data should the 
Commission rely on instead to establish international rate caps?
    87. The Commission disagrees with commenters that suggest that 
because international inmate calling services calls represent such a 
small percentage of all inmate calls that the Commission should not 
consider establishing rate caps. In 2018, international call minutes 
represented 0.195% of all calling minutes.'' From 2014 to 2018, 
international calling in prisons did not exceed 0.5% of total annual 
minutes of use, while for jails, international calling never exceeded 
0.4% of total minutes of use. But the Commission is unable to determine 
from the record, however, whether these small percentages result from 
the needs of the incarcerated population or excessively high rates for 
international inmate calling services calls. For example, one provider 
reports international calling rates as high as $8.58 per minute for 
debit calls, yet other providers report far lower international rates 
(but still more than two to five times higher than interstate rate 
caps) for debit calls to that same country. GTL failed to provide in 
its most recent Annual Report the international rate it charges to call 
each country, and instead provides only the highest rate charged for an 
international call at each facility it serves without identifying the 
country to which that rate applies. When the Commission compares that 
GTL international rate to the highest international rate that other 
providers charge to serve any country, and assuming that highest rate 
is to the same country GTL charges $8.58 to serve (for example, 
CenturyLink's highest international rate to any country is $1.00 per 
minute; NCIC's highest is $1.50; Pay Tel's highest is $0.95; Prodigy's 
highest rate is $0.50 and ICSolutions's highest is $1.00), the 
Commission finds it difficult to believe such massive disparities in 
rates to the same foreign country are really attributable to cost 
differentials. What is more, just because international calls from 
correctional facilities may represent a small overall percentage of 
inmate calls does not mean incarcerated individuals and their loved 
ones reliant upon international telephone calls to stay in touch are 
not entitled to the same just and reasonable protections afforded 
domestic callers under the Act. This is especially the case when loved 
ones residing in foreign locations may be unable to take advantage of 
in-person visitation.
    88. Alternative Proposals. The Commission seeks comment on 
alternative proposals for establishing an international rate cap. The 
Commission invites commenters to propose specific alternative 
methodologies and associated rate caps for international calls that 
ensure that incarcerated individuals and their families pay just and 
reasonable rates for international inmate calling services while inmate 
calling providers receive fair compensation.
    89. Waiver Process for Outliers. In the event that its proposed 
international rate cap would prevent a provider from recovering the 
costs of providing international inmate calling services at a facility 
or facilities covered by a particular contract, the Commission proposes 
to adopt a waiver process similar to that discussed above for its 
proposed interstate rate caps. The Commission seeks comment on this 
proposal.
    90. Consistency with Section 276 of the Act. The Commission 
proposes to find that its international rate cap proposals are 
consistent with section 276 of the Act's ``fair compensation'' 
provisions for the same reasons the Commission proposes to find its 
interstate rate cap proposals to be consistent with section 276. The 
Commission seeks comment on this proposal.

C. Other Issues

    91. Ancillary Service Fee Caps. The Commission seeks comment on 
whether its ancillary services fee caps should be lowered or otherwise 
modified. What data should the Commission collect or rely upon in 
making such a determination? If the Commission were to revise its 
ancillary service fee caps, how frequently should the Commission revise 
those caps? Additionally, should the Commission limit the third-party 
transaction fees that providers may pass through to consumers and, if 
so, what should those limits be?
    92. Additional Data Collection. Pursuant to its annual reporting 
requirements, inmate calling services providers must submit data on 
their operations, including their current rates as well as their 
current ancillary service charge amounts. To ensure that providers' 
interstate and international rates as well as their ancillary service 
charges for inmate calling services are just and reasonable, the 
Commission invites comment on whether the Commission should require 
providers to submit additional data--including cost data--in the future 
and, if so, what data the Commission should collect. Should the 
Commission use the Second Mandatory Data Collection as the starting 
point in designing any additional data collection? If so, how should 
the Commission modify that collection to ensure that the Commission has 
sufficient information to meaningfully evaluate providers' reported 
cost data and methodology? Or should the Commission follow a different 
approach, such as that used in the First Mandatory Data Collection? If 
the Commission were to adopt a new data collection, the Commission 
seeks comment on whether the Commission should require providers to 
update their responses to that data collection periodically. What would 
be the relative benefits and burdens of a periodic data collection 
versus another one-time data collection? If the Commission were to 
require a periodic collection, how frequently should the Commission 
collect the relevant data? For example, would a biennial or triennial 
collection covering multiple years better balance those benefits and 
burdens than an annual collection?
    93. The Commission also seeks comment on how the Commission can 
ensure that inmate calling services providers submit accurate data to 
the Commission. The Public Interest Advocates express concern that 
``some providers, such as GTL, appear to submit inflated data to the 
Commission with impunity.'' It is imperative that inmate calling 
services providers proceed in good faith and with absolute candor in 
their interactions with the Commission. The Commission's rules already 
require providers to certify annually that the information in their 
Annual Reports is ``true and accurate'' and that they are in compliance 
with the Commission's inmate calling services

[[Page 67495]]

rules. The certifying senior executive must have ``first-hand knowledge 
of the accuracy and completeness of the information provided'' in the 
provider's Annual Report and also ``acknowledge that failure to comply 
with the [Commission's inmate calling services rules] may result in 
civil or criminal prosecution.'' Should any subsequent data collection 
contain a similar certification requirement? While the Commission takes 
this opportunity to again remind inmate calling services providers of 
their duty to provide complete and accurate information in required 
reports and responses, the Commission seeks comment on additional 
measures the Commission can take. Additionally, the Commission seeks 
comment on how the Commission can ensure that providers update their 
filings if they discover any material error or misrepresentation in 
their reported data and responses. Finally, the Commission seeks 
comment on whether there are any other methods of obtaining accurate 
cost data upon which to base just and reasonable rates that does not 
require reliance on service providers' self-reported cost data. The 
Commission asks commenters to provide a detailed explanation of how any 
such data may otherwise be obtained.
    94. Marketplace Developments. The Commission invites comment on how 
its regulation of interstate and international inmate calling services 
should evolve in light of marketplace developments to better 
accommodate the needs of incarcerated people while ensuring that 
providers are reasonably compensated for providing inmate calling 
services. The Commission's rules restrict providers to charging 
consumers on a per-minute basis, an approach that evolved from the need 
of payphone operators to collect payment from each of their transient 
users. The Commission invites comment on whether the Commission should 
change its rules to recognize industry innovations, such as emerging 
pay models where local jails pay for calls in a manner ``more similar 
to the modern marketplace'' and thus seek contracts on a per-line 
rather than a per-minute basis. For example, some jurisdictions are 
paying for the costs of calling just as they pay for other utilities 
such as electricity and water. The Public Interest Advocates state that 
when New York City negotiated a contract that was not billed on a per-
minute rate, the overall cost of telephone service decreased 
substantially, from $10 million annually to approximately $2.5 million 
annually, while call volume increased 40 percent. Would such contracts 
reduce the amounts incarcerated people and their loved ones pay to stay 
connected? Are there other innovations that the Commission should 
consider in revising its inmate calling services rules?
    95. Similarly, the Commission invites comment on how overall fees 
and per-minute rates for inmate calling services affect consumers and 
on whether alternative rate structures would reduce total consumer 
costs. The Public Interest Advocates assert that inmate services 
providers pressure correctional facilities to sign contracts that allow 
the providers to provide additional items or services such as tablets 
and video calling in addition to inmate calling services. The 
Commission invites comment on the prevalence of this type of 
``bundling'' practice and on the effects these types of practices may 
have on rates and fees for inmate calling services.
    96. Disability Access. The Commission seeks comment on the needs of 
incarcerated people with disabilities, including the types of 
Telecommunications Relay Services access technologies that these 
individuals require. Section 225 of the Act requires every common 
carrier that provides voice services to offer access to 
Telecommunications Relay Service within their service areas. Currently, 
the Commission requires two forms of Telecommunications Relay Services: 
TTY-based Telecommunications Relay Services and speech-to-speech 
services. Thus, all common carriers must make available or ensure the 
availability of these types of Telecommunications Relay Services. The 
Commission reminds inmate calling services providers of their 
obligations to ensure the availability and provision of these forms of 
Telecommunications Relay Services. Although the Commission currently 
requires these two types of Telecommunications Relay Services, the 
Commission recognizes that newer forms of these services, such as 
internet Protocol Captioned Telephone Service, Video Relay Service, and 
Real-Time Text, have come to the market in part as a result of 
``ongoing technology transitions from circuit switched to IP-based 
networks.'' In 2016, the Commission amended its rules to permit 
wireless carriers to support Real-Time Text in lieu of TTY technology. 
To further its mandate to ensure the availability of Telecommunications 
Relay Services, the Commission seeks comment broadly on the needs of 
incarcerated people with hearing or speech disabilities. Do these 
individuals have adequate access to Telecommunications Relay Services? 
Considering technological developments, what forms of 
Telecommunications Relay Services should inmate calling services 
providers make available, and what can the Commission do to facilitate 
that?

IV. Procedural Matters

    97. Filing of Comments and Replies. Pursuant to sections 1.415 and 
1.419 of the Commission's rules, 47 CFR 1.415, 1.419, interested 
parties may file comments and reply comments on or before the dates 
indicated on the first page of this document. Comments may be filed 
using the Commission's Electronic Comment Filing System. See FCC, 
Electronic Filing of Documents in Rulemaking Proceedings, 63 FR 24121 
(May 1, 1998).
     Electronic Filers: Comments may be filed electronically 
using the internet by accessing the ECFS: http://apps.fcc.gov/ecfs/.
     Paper Filers: Parties who choose to file by paper must 
file an original and one copy of each filing. If more than one docket 
or rulemaking number appears in the caption of this proceeding, filers 
must submit two additional copies for each additional docket or 
rulemaking number.
    [cir] Filings can be sent by commercial overnight courier, or by 
first-class or overnight U.S. Postal Service mail. All filings must be 
addressed to the Commission's Secretary, Office of the Secretary, 
Federal Communications Commission.
    [cir] Commercial overnight mail (other than U.S. Postal Service 
Express Mail and Priority Mail) must be sent to 9050 Junction Drive, 
Annapolis Junction, MD 20701. U.S. Postal Service first-class, Express, 
and Priority mail must be addressed to 445 12th Street SW, Washington, 
DC 20554.
    [cir] Effective March 19, 2020, and until further notice, the 
Commission no longer accepts any hand or messenger delivered filings. 
This is a temporary measure taken to help protect the health and safety 
of individuals, and to mitigate the transmission of COVID-19. See FCC 
Announces Closure of FCC Headquarters Open Window and Change in Hand-
Delivery Policy, Public Notice, DA 20-304 (March 19, 2020), https://www.fcc.gov/document/fcc-closes-headquarters-open-window-and-changes-hand-delivery-policy.
    98. Comments and reply comments must include a short and concise 
summary of the substantive arguments raised in the pleading. Comments 
and reply comments must also comply with section 1.49 and all other 
applicable sections of the Commission's rules. The Commission directs 
all interested

[[Page 67496]]

parties to include the name of the filing party and the date of the 
filing on each page of their comments and reply comments. All parties 
are encouraged to use a table of contents, regardless of the length of 
their submission. The Commission also strongly encourages parties to 
track the organization set forth in the Fourth Further Notice of 
Proposed Rulemaking in order to facilitate its internal review process.
    99. People with Disabilities. To request materials in accessible 
formats for people with disabilities (braille, large print, electronic 
files, audio format), send an email to [email protected] or call the 
Consumer & Governmental Affairs Bureau at 202-418-0530 (voice), 202-
418-0432 (TTY).
    100. Ex Parte Presentations. The proceeding that this Fourth 
Further Notice of Proposed Rulemaking initiates shall be treated as a 
``permit-but-disclose'' proceeding in accordance with the Commission's 
ex parte rules. Persons making ex parte presentations must file a copy 
of any written presentation or a memorandum summarizing any oral 
presentation within two business days after the presentation (unless a 
different deadline applicable to the Sunshine period applies).
    101. Persons making oral ex parte presentations are reminded that 
memoranda summarizing the presentation must (1) list all persons 
attending or otherwise participating in the meeting at which the ex 
parte presentation was made, and (2) summarize all data presented and 
arguments made during the presentation. If the presentation consisted 
in whole or in part of the presentation of data or arguments already 
reflected in the presenter's written comments, memoranda, or other 
filings in the proceeding, the presenter may provide citations to such 
data or arguments in his or her prior comments, memoranda, or other 
filings (specifying the relevant page and/or paragraph numbers where 
such data or arguments can be found) in lieu of summarizing them in the 
memorandum. Documents shown or given to Commission staff during ex 
parte meetings are deemed to be written ex parte presentations and must 
be filed consistent with section 1.1206(b) of the Commission's rules. 
Participants in this proceeding should familiarize themselves with the 
Commission's ex parte rules.
    102. Initial Regulatory Flexibility Act Analysis. As required by 
the Regulatory Flexibility Act of 1980, as amended (RFA), the 
Commission has prepared this Initial Regulatory Flexibility Analysis 
(IRFA) of the possible significant economic impact on small entities by 
the policies and rules proposed in this Fourth Further Notice of 
Proposed Rulemaking (Fourth Further Notice). The IRFA is set forth 
below. The Commission requests written public comments on this IRFA. 
Comments must be identified as responses to the IRFA and must be filed 
by the deadlines for comments provided on the first page of the Fourth 
Further Notice. The Commission will send a copy of the Fourth Further 
Notice, including this IRFA, to the Chief Counsel for Advocacy of the 
Small Business Administration (SBA). In addition, the Fourth Further 
Notice and the IRFA (or summaries thereof) will be published in the 
Federal Register.
    103. Initial Paperwork Reduction Act Analysis. This Fourth Further 
Notice of Proposed Rulemaking may propose new or modified information 
collections subject to the PRA requirements. If the Commission adopts 
any new or modified information collection requirements, they will be 
submitted to OMB for review under section 3507(d) of the PRA. The 
Commission, as part of its continuing effort to reduce paperwork 
burdens, will be inviting OMB, the general public, and other federal 
agencies to comment on any new or modified information collection 
requirements contained in this Fourth Further Notice of Proposed 
Rulemaking, as required by the Paperwork Reduction Act of 1995, Public 
Law 104-13. In addition, pursuant to the Small Business Paperwork 
Relief Act of 2002, the Commission seeks specific comment on how the 
Commission might ``further reduce the information collection burden for 
small business concerns with fewer than 25 employees.''

V. Initial Regulatory Flexibility Analysis

    104-105. As required by the Regulatory Flexibility Act of 1980, as 
amended (RFA), the Commission has prepared this Initial Regulatory 
Flexibility Analysis (IRFA) of the possible significant economic impact 
on small entities by the policies and rules proposed in this Fourth 
Further Notice of Proposed Rulemaking (Further Notice). The Commission 
requests written public comments on this IRFA. Comments must be 
identified as responses to the IRFA and must be filed by the deadlines 
for comments provided on the first page of this Further Notice. The 
Commission will send a copy of the Further Notice, including this IRFA, 
to the Chief Counsel for Advocacy of the Small Business Administration 
(SBA). In addition, the Further Notice and the IRFA (or summaries 
thereof) will be published in the Federal Register.

A. Need for, and Objectives of, the Proposed Rules

    105. In this Further Notice, the Commission seeks comment on its 
proposal to address the broken inmate calling services marketplace. The 
Commission proposes to reduce rate caps from the current interim rate 
caps to $0.14 per minute for all interstate inmate calling services 
calls from prisons and to $0.16 per minute for all interstate inmate 
calling services from jails. This rate cap reduction is designed to 
ensure that inmate calling services providers will have the opportunity 
to recover their costs--including their indirect costs--of providing 
interstate inmate calling services. Additionally, the proposed 
interstate rate caps include an allowance for the recovery of 
correctional facility costs that are legitimately related to the 
provision of inmate calling services. The Commission anticipates that 
its actions will have long-term and meaningful impacts on incarcerated 
individuals and their families while promoting competition in the 
inmate calling services marketplace.
    106. The Commission also proposes to cap inmate calling services 
rates for international calls on a facility basis. The Commission's 
proposal to adopt a rate cap formula that permits a provider to charge 
an international inmate calling services rate up to the sum of the 
provider's per-minute interstate rate cap for the inmate's facility 
plus the amount that the provider must pay its underlying international 
service provider for that call on a per minute basis has the benefits 
of simplicity and ease of administration. It would allow inmate calling 
services providers to recover the additional costs they incur to resell 
international calling services, yet should result in substantial 
reductions in international calling rates for incarcerated individuals 
and their families.

B. Legal Basis

    107. The legal basis for any action that may be taken pursuant to 
the Fourth Further Notice is contained in sections 1, 2, 4(i)-(j), 
201(b), 218, 220, 276, and 403 of the Communications Act of 1934, as 
amended, 47 U.S.C. 151, 152, 154(i)-(j), 201(b), 218, 220, 276, and 
403.

C. Description and Estimate of the Number of Small Entities To Which 
the Proposed Rules Will Apply

    108. The RFA directs agencies to provide a description of, and 
where feasible, an estimate of the number of

[[Page 67497]]

small entities that may be affected by the proposed rule revisions, 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 which: (1) Is independently owned and operated; (2) is 
not dominant in its field of operation; and (3) satisfies any 
additional criteria established by the SBA.
    109. Small Businesses, Small Organizations, Small Governmental 
Jurisdictions. The Commission's actions, over time, may affect small 
entities that are not easily categorized at present. The Commission 
therefore describes here, at the outset, three broad groups of small 
entities that could be directly affected herein. First, while there are 
industry specific size standards for small businesses that are used in 
the regulatory flexibility analysis, according to data from the SBA's 
Office of Advocacy, in general a small business is an independent 
business having fewer than 500 employees. These types of small 
businesses represent 99.9% of all businesses in the United States, 
which translates to 30.7 million businesses.
    110. Next, the type of small entity described as a ``small 
organization'' is generally ``any not-for-profit enterprise which is 
independently owned and operated and is not dominant in its field.'' 
The Internal Revenue Service (IRS) uses a revenue benchmark of $50,000 
or less to delineate its annual electronic filing requirements for 
small exempt organizations. Nationwide, for tax year 2018, there were 
approximately 571,709 small exempt organizations in the U.S. reporting 
revenues of $50,000 or less according to the registration and tax data 
for exempt organizations available from the IRS.
    111. Finally, the small entity described as a ``small governmental 
jurisdiction'' is defined generally as ``governments of cities, 
counties, towns, townships, villages, school districts, or special 
districts, with a population of less than fifty thousand.'' U.S. Census 
Bureau data from the 2017 Census of Governments indicate that there 
were 90,075 local governmental jurisdictions consisting of general 
purpose governments and special purpose governments in the United 
States. Of this number there were 36,931 general purpose governments 
(county, municipal and town or township) with populations of less than 
50,000 and 12,040 special purpose governments--independent school 
districts with enrollment populations of less than 50,000. Accordingly, 
based on the 2017 U.S. Census of Governments data, the Commission 
estimates that at least 48,971 entities fall into the category of 
``small governmental jurisdictions.''
    112. Wired Telecommunications Carriers. The U.S. Census Bureau 
defines this industry as ``establishments primarily engaged in 
operating and/or providing access to transmission facilities and 
infrastructure that they own and/or lease for the transmission of 
voice, data, text, sound, and video using wired communications 
networks. Transmission facilities may be based on a single technology 
or a combination of technologies. Establishments in this industry use 
the wired telecommunications network facilities that they operate to 
provide a variety of services, such as wired telephony services, 
including VoIP services, wired (cable) audio and video programming 
distribution, and wired broadband internet services. By exception, 
establishments providing satellite television distribution services 
using facilities and infrastructure that they operate are included in 
this industry.'' The SBA has developed a small business size standard 
for Wired Telecommunications Carriers, which consists of all such 
companies having 1,500 or fewer employees. U.S. Census Bureau data for 
2012 show that there were 3,117 firms that operated that year. Of this 
total, 3,083 operated with fewer than 1,000 employees. Thus, under this 
size standard, the majority of firms in this industry can be considered 
small.
    113. Local Exchange Carriers (LECs). Neither the Commission nor the 
SBA has developed a size standard for small businesses specifically 
applicable to local exchange services. The closest applicable NAICS 
Code category is Wired Telecommunications Carriers. Under the 
applicable SBA size standard, such a business is small if it has 1,500 
or fewer employees. U.S. Census Bureau data for 2012 show that there 
were 3,117 firms that operated for the entire year. Of that total, 
3,083 operated with fewer than 1,000 employees. Thus under this 
category and the associated size standard, the Commission estimates 
that the majority of local exchange carriers are small entities.
    114. Incumbent Local Exchange Carriers (Incumbent LECs). Neither 
the Commission nor the SBA has developed a small business size standard 
specifically for incumbent local exchange services. The closest 
applicable NAICS Code category is Wired Telecommunications Carriers. 
Under the applicable SBA size standard, such a business is small if it 
has 1,500 or fewer employees. U.S. Census Bureau data for 2012 indicate 
that 3,117 firms operated the entire year. Of this total, 3,083 
operated with fewer than 1,000 employees. Consequently, the Commission 
estimates that most providers of incumbent local exchange service are 
small businesses that may be affected by its actions. According to 
Commission data, one thousand three hundred and seven (1,307) Incumbent 
Local Exchange Carriers reported that they were incumbent local 
exchange service providers. Of this total, an estimated 1,006 have 
1,500 or fewer employees. Thus, using the SBA's size standard the 
majority of incumbent LECs can be considered small entities.
    115. The Commission has included small incumbent LECs in this 
present RFA analysis. As noted above, a ``small business'' under the 
RFA is one that, inter alia, meets the pertinent small business size 
standard (e.g., a telephone communications business having 1,500 or 
fewer employees), and ``is not dominant in its field'' of operation. 
The SBA's Office of Advocacy contents that, for RFA purposes, small 
incumbent LECs are not dominant in their field of operation because any 
such dominance is not ``national'' in scope.
    116. Competitive Local Exchange Carriers (Competitive LECs), 
Competitive Access Providers (CAPs), Shared-Tenant Service Providers, 
and Other Local Service Providers. Neither the Commission nor the SBA 
has developed a small business size standard specifically for these 
service providers. The appropriate NAICS Code category is Wired 
Telecommunications Carriers, as defined above. Under that size 
standard, such a business is small if it has 1,500 or fewer employees. 
U.S. Census data for 2012 indicate that 3,117 firms operated during 
that year. Of that number, 3,083 operated with fewer than 1,000 
employees. Based on these data, the Commission concludes that the 
majority of Competitive LECS, CAPs, Shared-Tenant Service Providers, 
and Other Local Service Providers, are small entities. According to 
Commission data, 1,442 carriers reported that they were engaged in the 
provision of either competitive local exchange services or competitive 
access provider services. Of these 1,442 carriers, an estimated 1,256 
have 1,500 or fewer employees. In addition, 17 carriers have reported 
that they are Shared-Tenant Service Providers, and all 17 are estimated 
to have 1,500 or fewer employees. Also, 72 carriers have reported that 
they are Other Local Service Providers. Of this total, 70 have 1,500 or 
fewer employees.

[[Page 67498]]

Consequently, based on internally researched FCC data, the Commission 
estimates that most providers of competitive local exchange service, 
competitive access providers, Shared-Tenant Service Providers, and 
Other Local Service Providers are small entities.
    117. Interexchange Carriers (IXCs). Neither the Commission nor the 
SBA has developed a small business size standard specifically for 
Interexchange Carriers. The closest applicable NAICS Code category is 
Wired Telecommunications Carriers. The applicable size standard under 
SBA rules is that such a business is small if it has 1,500 or fewer 
employees. U.S. Census Bureau data for 2012 indicate that 3,117 firms 
operated for the entire year. Of that number, 3,083 operated with fewer 
than 1,000 employees. According to Commission data, 359 companies 
reported that their primary telecommunications service activity was the 
provision of interexchange services. Of this total, an estimated 317 
have 1,500 or fewer employees. Consequently, the Commission estimates 
that the majority of interexchange service providers are small 
entities.
    118. Local Resellers. The SBA has developed a small business size 
standard for the category of Telecommunications Resellers. The 
Telecommunications Resellers industry comprises establishments engaged 
in purchasing access and network capacity from owners and operators of 
telecommunications networks and reselling wired and wireless 
telecommunications services (except satellite) to businesses and 
households. Establishments in this industry resell telecommunications; 
they do not operate transmission facilities and infrastructure. Mobile 
virtual network operators (MVNOs) are included in this industry. Under 
that size standard, such a business is small if it has 1,500 or fewer 
employees. Census data for 2012 show that 1,341 firms provided resale 
services during that year. Of that number, all operated with fewer than 
1,000 employees. Thus, under this category and the associated small 
business size standard, the majority of these resellers can be 
considered small entities.
    119. Toll Resellers. The SBA has developed a small business size 
standard for the category of Telecommunications Resellers. Under that 
size standard, such a business is small if it has 1,500 or fewer 
employees. According to Commission data, 881 carriers have reported 
that they are engaged in the provisions of toll resale services. Of 
this total, an estimated 857 have 1,500 or fewer employees and 24 have 
more than 1,500 employees. Consequently, the Commission estimates that 
the majority of toll resellers are small entities that may be affected 
by its action.
    120. Other Toll Carriers. Neither the Commission nor the SBA has 
developed a size standard for small businesses specifically applicable 
to Other Toll Carriers. This category includes toll carriers that do 
not fall within the categories of interexchange carriers, operator 
service providers, prepaid calling card providers, satellite service 
carriers, or toll resellers. The closest applicable NAICS code is for 
Wired Telecommunications Carriers. The applicable size standard under 
SBA rules is that such a business is small if it has 1,500 or fewer 
employees. According to Commission data, 284 companies reported that 
their primary telecommunications service activity was the provision of 
other toll carriage. Of this total, an estimated 279 have 1,500 or 
fewer employees and five have more than 1,500 employees. Consequently, 
the Commission estimates that most Other Toll Carriers are small 
entities that may be affected by the Commission's action.
    121. Payphone Service Providers (PSPs). Neither the Commission nor 
the SBA has developed a small business size standard specifically for 
payphone services providers, a group that includes inmate calling 
services providers. The appropriate size standard under SBA rules is 
for the category Wired Telecommunications Carriers. Under that size 
standard, such a business is small if it has 1,500 or fewer employees. 
According to Commission data, 535 carriers have reported that they are 
engaged in the provision of payphone services. Of this total, an 
estimated 531 have 1,500 or fewer employees and four have more than 
1,500 employees. Consequently, the Commission estimates that the 
majority of payphone service providers are small entities that may be 
affected by its action.
    122. All Other Telecommunications. The ``All Other 
Telecommunications'' category is comprised of establishments primarily 
engaged in providing specialized telecommunications services, such as 
satellite tracking, communications telemetry, and radar station 
operation. This industry also includes establishments primarily engaged 
in providing satellite terminal stations and associated facilities 
connected with one or more terrestrial systems and capable of 
transmitting telecommunications to, and receiving telecommunications 
from, satellite systems. Establishments providing internet services or 
voice over internet protocol (VoIP) services via client-supplied 
telecommunications connections are also included in this industry. The 
SBA has developed a small business size standard for All Other 
Telecommunications, which consists of all such firms with annual 
receipts of $35 million or less. For this category, U.S. Census Bureau 
data for 2012 show that there were 1,442 firms that operated for the 
entire year. Of those firms, a total of 1,400 had annual receipts less 
than $25 million and 15 firms had annual receipts of $25 million to 
$49,999,999. Thus, the Commission estimates that the majority of ``All 
Other Telecommunications'' firms potentially affected by its action can 
be considered small.

D. Description of Projected Reporting, Recordkeeping, and Other 
Compliance Requirements for Small Entities

    123. Whereas the current interim rate caps differentiated between 
prepaid and debit calls and collect calls, the Commission proposes to 
adopt identical interstate rate caps for prepaid, debit, and collect 
calls. These proposed rates differentiate between facility types, 
proposing a rate cap for jails that is $0.02 per minute higher than the 
rate cap the Commission proposes for prisons. The Commission also 
proposes to adopt, for the first time, rate caps for international 
inmate calling services calls. The Commission recognizes that these 
proposed changes to the rate cap structure will likely require 
providers to make adjustments to their billing systems. The Commission 
proposes a 90-day transition period to alleviate any burden on 
providers associated with this change and to allow providers sufficient 
time to make the necessary changes.

E. Steps Taken To Minimize the Significant Economic Impact on Small 
Entities and Significant Alternatives Considered

    124. The RFA requires an agency to describe any significant 
alternatives that it has considered in reaching its proposed approach, 
which may include the following four alternatives (among others): (1) 
The establishment of differing compliance or reporting requirements or 
timetables that take into account the resources available to small 
entities; (2) the clarification, consolidation, or simplification of 
compliance and reporting requirements under the rules for such small 
entities; (3) the use of performance rather than design standards; and 
(4) an exemption from coverage of the rule, or any part

[[Page 67499]]

thereof, for such small entities. The Commission expects to consider 
all of these factors when the Commission receives substantive comment 
from the public and potentially affected entities.
    125. The Commission's proposed rate caps differentiate between 
prisons and jails to account for differences in costs incurred by 
inmate calling services providers servicing these different facility 
types. The Commission believes the proposed rate caps will ensure that 
inmate calling services providers serving jails, which may be smaller, 
higher-cost facilities, and larger prisons, which often benefit from 
economies of scale, can both recover their legitimate inmate calling 
services-related costs. To further ease the burdens on providers 
serving smaller jails, the Commission proposes to adopt higher 
allowances for correctional facility costs for inmate calling services 
providers serving smaller jails if the record supports such allowances. 
The Commission's proposed rate caps also include $0.02 allowance for 
costs correctional facilities incur that are directly related to the 
provision of inmate calling services and that represent a legitimate 
cost for which providers of inmate calling services may have to 
compensate facilities. The Commission recognizes that for contracts 
covering only smaller jails, the facility costs at these particular 
facilities may exceed $0.02 per minute, and seeks comment on whether 
the rate caps should adopt higher allowances for correctional facility 
costs for such contracts.
    126. The Commission recognizes that it cannot foreclose the 
possibility that in certain limited instances, the proposed rate caps 
may not be sufficient for certain providers to recover their legitimate 
costs for providing inmate calling services. To minimize the burden on 
providers, the Commission proposes a waiver process that allows 
providers to seek relief from its rules at the facility or contract 
level if they can demonstrate that they are unable to recover their 
legitimate inmate calling services-related costs at that facility or 
for that contract. If the provider demonstrates that its higher costs 
at the facility or contract level are legitimately related to the 
provision of inmate calling services, the Commission proposes to raise 
each applicable rate cap to a level that enables the provider to 
recover the costs of providing inmate calling services at that 
facility. The Commission seeks comment on this proposed waiver process, 
and on whether the same waiver process should be employed with respect 
to the proposed international rate caps.
    127. Given the significant reduction in interstate inmate calling 
services rates proposed by the Commission, some providers may need to 
re-negotiate their existing contracts with correctional facilities. To 
provide inmate calling services providers adequate time to make 
necessary adjustments to their contracts, and to mitigate any other 
burdens that may result from implementing the proposed interstate and 
international rate caps, the Commission proposes to allow a 90-day 
transition period for the proposed rate caps to take effect. The 
Commission seeks comment on the length of this transition period and 
whether it will afford inmate calling services providers and 
correctional facilities sufficient time to implement the proposed rate 
caps.
    128. The Commission expects to consider the economic impact on 
small entities, as identified in comments filed in response to the 
Further Notice and this IRFA, in reaching its final conclusions and 
promulgating rules in this proceeding. Specifically, the Commission 
will conduct a cost-benefit analysis as part of this proceeding and 
consider the public benefits of any such requirements it might adopt to 
ensure that they outweigh any impact on small business.

F. Federal Rules That May Duplicate, Overlap, or Conflict With the 
Proposed Rules

    129. None

VI. Ordering Clauses

    131. Accordingly, it is ordered that, pursuant to the authority 
contained in sections 1, 2, 4(i)-(j), 201(b), 218, 220, 276, and 403 of 
the Communications Act of 1934, as amended, 47 U.S.C. 151, 152, 154(i)-
(j), 201(b), 218, 220, 276, and 403, this Report and Order on Remand 
and this Fourth Further Notice of Proposed Rulemaking are adopted.
    132. It is further ordered that, pursuant to applicable procedures 
set forth in Sections 1.415 and 1.419 of the Commission's Rules, 47 CFR 
1.415, 1.419, interested parties may file comments on this Fourth 
Further Notice of Proposed Rulemaking on or before 30 days after 
publication of a summary of this Fourth Further Notice of Proposed 
Rulemaking in the Federal Register and reply comments on or before 60 
days after publication of a summary of this Fourth Further Notice of 
Proposed Rulemaking in the Federal Register.
    133. It is further ordered that the Commission's Consumer and 
Governmental Affairs Bureau, Reference Information Center, shall send a 
copy of this Report and Order on Remand and Fourth Further Notice of 
Proposed Rulemaking, including the Initial and Supplemental Final 
Regulatory Flexibility Analysis, to the Congress and the Government 
Accountability Office pursuant to the Congressional Review Act, see 5 
U.S.C. 801(a)(1)(A).
    134. It is further ordered that the Commission's Consumer and 
Governmental Affairs Bureau, Reference Information Center, shall send a 
copy of this Report and Order on Remand and Fourth Further Notice of 
Proposed Rulemaking, including the Initial Regulatory Flexibility 
Analysis and the Supplemental Final Regulatory Flexibility Analysis, to 
the Chief Counsel for Advocacy of the Small Business Administration.

List of Subjects in 47 CFR Part 64

    Communications common carriers, Individuals with disabilities, 
Prisons, Reporting and recordkeeping requirements, Telecommunications, 
Telephone, Waivers.

Federal Communications Commission.
Marlene Dortch,
Secretary, Federal Communications Commission.

Proposed Rules

    For the reasons set forth above, the Federal Communications 
Commission proposes to amend part 64, of Title 47 of the Code of 
Federal Regulations as follows:

PART 64--MISCELLANEOUS RULES RELATING TO COMMON CARRIERS

0
1. The authority citation for part 64 is revised to read as follows:

    Authority:  47 U.S.C. 151, 152, 154, 201, 202, 217, 218, 220, 
222, 225, 226, 227, 227b, 228, 251(a), 251(e), 254(k), 262, 276, 
403(b)(2)(B), (c), 616, 620, 1401-1473, unless otherwise noted; Pub. 
L. 115-141, Div. P, sec. 503, 132 Stat. 348, 1091.

0
2. Section 64.6010 is revised to read as follows:


Sec.  64.6010  Interstate and International Inmate Calling Services 
rate caps.

    (a) No Provider shall charge, in any Jail it serves, a per-minute 
rate for interstate Debit Calling, Prepaid Calling, or Prepaid Collect 
Calling in excess of $0.16.
    (b) No Provider shall charge, in any Prison it serves, a per-minute 
rate for interstate Debit Calling, Prepaid Calling, or Prepaid Collect 
Calling in excess of $0.14.
    (c) No Provider shall charge, in any Prison or Jail it serves, a 
per-minute rate for International Calls in excess of the applicable 
interstate rate set forth in paragraphs (a) and (b) of this section 
plus the amount that the provider must

[[Page 67500]]

pay its underlying international service provider for that call on a 
per-minute basis.

    Note:  The following Appendices will not appear in the Code of 
Federal Regulations.

Appendix A

Analysis of Responses to the Second Mandatory Data Collection

    1. In response to the Second Mandatory Data Collection, 13 
providers of inmate calling services submitted data to the 
Commission (see Table 1). The collected data included information on 
numerous characteristics of the providers' contracts, such as:
     Whether the contract was for a prison or a jail;
     The average daily inmate population (average daily 
population) of all the facilities covered by the contract;
     The total number of calls made annually under the 
contract, broken out by paid and unpaid, with paid calls further 
broken out by debit, prepaid, and collect;
     Total call minutes; call minutes broken out by paid and 
unpaid; interstate, intrastate, and international; and prepaid, 
debit, and collect calls;
     Inmate calling services revenues, broken out by 
prepaid, debit, and collect;
     Automated payment revenues and paper bill or statement 
revenues, earned under the contract (live operator revenues were not 
collected);
     Site commissions paid to facility operators under the 
contract; and
     Each provider's inmate calling services costs in total, 
exclusive of site commissions.
    2. Inmate calling services costs are for inmate calling services 
only, and thus do not include costs for lines of business such as 
video visitation services, or fees passed through to callers, such 
as credit card processing fees. While providers generally reported 
at least some inmate calling services costs at the level of the 
contract, and more rarely at the level of the facility, each did 
this differently. In this Appendix, the Commission defines costs 
reported at the level of the contract or facility respectively as 
the direct costs of the contract or facility.

                                                  Table 1--Selected Statistics of Responding Providers
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                       Number of                                                 Paid minutes      Paid minutes  (%    Per-paid  minute
            Provider                   contracts              ADP          ADP  (% of total)      (millions)           of total)             cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
[REDACTED]......................  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]
[REDACTED]......................  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]
[REDACTED]......................  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]
[REDACTED]......................  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]
[REDACTED]......................  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]
[REDACTED]......................  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]
[REDACTED]......................  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]
[REDACTED]......................  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]
[REDACTED]......................  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]
[REDACTED]......................  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]
[REDACTED]......................  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]
[REDACTED]......................  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]........  [REDACTED]
Industry........................  2,935.............  2,246,940.........  100.0.............  7,821.............  100.0.............  0.089
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Average daily population was reported for only 2,846 out of 2,935 contracts.

    3. Dropped observations. The Commission removed one contract 
reported by [REDACTED] that had a per-minute cost of $7.48 as this 
is most likely a data error. If the per-minute cost of providing 
this contract was $7.48, then that implies an implausible error in 
bidding on the part of the contracting provider. In 2018, 379,155 
total minutes were reported as delivered on this contract, while 
only 6,137 were reported as paid minutes, which in and of itself is 
implausible. These paid minutes earned revenues of $184, for an 
average per-minute price of $0.03, implying the contract incurred an 
annual loss of $2,824,705.
    4. The Commission also excluded two contracts that are not 
comparable to the average correctional facility because they are 
managed by Immigration and Customs Enforcement (ICE) and the Federal 
Bureau of Prisons (BOP). The ICE contract was the only contract held 
by Talton, so dropping this contract eliminated Talton from the 
Commission's dataset thus resulting in Table 1 showing only 12 
providers. Before dropping the BOP contract, the Commission 
allocated a share of GTL's overhead to the BOP contract as described 
below. This resulted in a final dataset of 2,935 contracts, 
accounting for 2.2 million incarcerated individuals and 7.8 billion 
paid minutes.
    5. Adjustments to the underlying data. Unless otherwise noted, 
the Commission accepted the filers' data and related information 
``as provided'' (i.e., without any modifications). The Commission 
applied three processes to ultimately geocode 3,784 or 88% of the 
4,319 filed facilities. Geocoding is a process of associating 
longitude and latitude coordinates to a facility's address to 
conduct geographic analyses. The Commission first used ArcMap 
software version 10.8 to geocode 3,321 or 77% of the 4,319 filed 
facilities. The Commission used the geocoding database ArcGIS 
StreetMap Premium North America (2020 Release 1). The Commission 
then took a random sample of 170, or 17%, of the 998 addresses the 
Commission was unable to geocode, and where possible, corrected them 
manually. The Commission was able to geocode 164 of these 170 
addresses. Finally, the Commission developed a Python script to 
clean up the remaining addresses--which the Commission then manually 
checked--and were able to geocode 299 additional facilities this 
way. In instances of contracts with multiple facilities, the 
Commission was unable to geocode the relevant facilities where a 
filer only provided a single address. In some instances a mailing 
address was reported. If this was different from the facility's 
physical address and the address correction process did not detect 
this error, then the mailing address was used.
    6. Unit of analysis. The Commission's analysis was typically 
conducted at the contract level. This approach is consistent with 
the Commission's view that the contract is the primary unit of 
supply for inmate calling services. That is, providers bid on 
contracts, rather than facilities (though in many instances the 
contract is for a single facility). This approach is also consistent 
with how the data were submitted. The Commission requested 
information to be submitted for each correctional facility where a 
provider offers inmate calling services, and some key variables--for 
example, the quantity of calls and minutes of use--were reported by 
facility. However, even though over 90% of contracts were reported 
as representing a single facility, most filers do not maintain all 
of the data the Commission requested by facility in the ordinary 
course of their business. As a result, in some instances, contracts 
were reported that covered multiple facilities without any breakout 
of those facilities. In other cases, some facility-level data was 
not reported. Examples of the latter include average daily inmate 
population and credit card processing costs. In any event, because 
the Commission required providers to cross-reference their contracts 
with the facilities they covered, the Commission was able to group 
facilities by contract, which facilitated its ability to conduct its 
analysis at the contract level.
    7. Cost allocation. General and administrative costs are, by 
definition, not directly attributable to any contract. In this 
Appendix, the difference between a filer's total costs and its 
direct costs (i.e., the costs it reported at the level of the 
contract or facility) is termed ``overheads.'' Each filer applied 
its own accounting practices in reporting overheads. For example, 
GTL reported bad debt as its only direct cost, all the way down to 
the facility. All of its other costs thus appear as if they were 
overheads. By contrast, one provider allocated all of its costs 
using the number of phones that it had installed down to the level 
of the contract, implying it had no overheads. Other firms allocated 
some costs using a fully distributed cost key, such as shares of 
minutes; others

[[Page 67501]]

used revenue shares which typically have no relation to why costs 
are incurred.
    8. To provide a common basis of comparison, and to allow a focus 
on per-minute rates, the Commission allocated overheads among each 
provider's contracts in proportion to the contracts' shares of the 
provider's total minutes. The Commission used total minutes at both 
the contract level and the provider level, rather than paid minutes, 
because all minutes cost something to provide, regardless of whether 
they generate any revenue.
    9. Once all costs were allocated, the per-minute cost of a 
contract was calculated by dividing the total cost of each contract 
by its quantity of paid minutes. Paid minutes were used because 
those are the minutes that providers rely on to recover their costs. 
See Table 2.

           Table 2--Contract Per-Minute Costs by Facility Type Using an All-Minute Cost Allocation Key
----------------------------------------------------------------------------------------------------------------
     Metric  (2018 data only)               Prisons                                  Jails
----------------------------------------------------------------------------------------------------------------
Mean.............................  $0.091...................  $0.084
Standard Deviation...............  $0.040...................  $0.062
Mean + One Standard Deviation....  $0.131 (= $0.091 +         $0.146 (= $0.084 + $0.062)
                                    $0.040).
Number of Outliers (Mean + 1 Std.  9/131 contracts; 6.9%....  193/2,804 contracts; 6.9%
 Dev.).
Mean + Two Standard Deviations...  $0.171 (= $0.091 + $0.040  $0.208 (= $0.084 + $0.062 x 2)
                                    x 2).
Number of Outliers (Mean + 2 Std.  1/131 contracts; 0.8%....  50/2,804 contracts; 1.8%
 Dev.).
----------------------------------------------------------------------------------------------------------------

    10. Choosing among cost allocation keys. After looking at six 
possible cost allocation keys that the data would allow us to 
implement--call minutes, average daily population, calls, revenues, 
contracts, and facilities--the Commission found call minutes to 
provide the best allocator.
    11. The primary aim of a cost allocation key is to find a 
reasonable way of attributing costs, in this case to contracts, that 
either cannot be directly attributed, such as true overheads, or 
that, while conceptually could be attributed to a specific contract, 
cannot be attributed based on how providers' accounts are kept. Such 
a key must be likely to reflect cost causation and result in rates 
that demand can bear. On this basis, the Commission is able to 
narrow its focus to a call minute key or call key. The Commission 
chose call minutes over calls on the basis that a call minute key is 
the natural choice given the ubiquity of call minute pricing.
    12. Tables 3 and 4 provide information about the distribution of 
contract costs per minute under each of the six possible keys. The 
average daily population, contract, and facility cost allocation 
keys result in many contracts with implausible contract-level per-
minute costs. For example, the average daily population cost 
allocation key shows an average prison contract cost per paid minute 
of nearly $0.58 and a jail contract per paid minute cost of nearly 
$7. By contrast, average call revenue per paid minute including 
automated payment and paper bill/statement revenues is $0.148 for 
prison contracts, and $0.360 for jail contracts. (Ideally live 
operator service revenues would also be accounted for, but the 
Commission does not have these data.) The average daily population 
cost allocation key shows 10% of prison contracts have costs in 
excess of $0.319 per paid minute. Yet, 99% of prison contracts have 
an average paid minute rate (the sum of inmate calling services, 
automated payment, and paper bill or statement revenues divided by 
all paid minutes) of less than $0.319. The equivalent number for 
jail contracts is 37% have costs above $0.333 (the 90th percentile 
per paid minute cost for jail contracts with an average daily 
population cost allocation key), which looks more reasonable, but 
there is no reason to think allocating costs by average daily 
population should work for prisons, but not jails. Given that such 
contracts are surely mutually beneficial to both the provider and 
the correctional facility, they must generate enough revenues to 
cover costs. Just as implausibly, four jail contracts would have 
per-minute costs in excess of $240 (see Table 4), and three would 
have per-minute costs in excess of $480 (not shown in Table 4). 
Again, by contrast, when using the call minute key, no prison 
contracts have per-minute costs above $0.226, and the highest jail 
per-minute cost is $1.460.
    13. The average daily population key is additionally problematic 
because average daily population data are often inaccurate, and--in 
the case of 89 contracts--simply missing from the providers' 
responses. A cost allocation key based on the number of facilities 
is also problematic as facility data were not reported for many 
contracts with multiple facilities.
    14. The cost allocations based on contracts and facilities are 
even more unrealistic, with both displaying a mean contract per-
minute cost in excess of $40 (see Table 3).

                          Table 3--The Distribution of Contract Per-Minute Costs by Facility Type Using Various Cost Allocators
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                    Percentiles
             Allocation key                     Facility type          Mean    Std. Dev. ---------------------------------------------------------------
                                                                                            1st      10th     25th     50th     75th     90th     99th
--------------------------------------------------------------------------------------------------------------------------------------------------------
Minutes................................  Jail......................    0.084       0.062    0.009    0.027    0.055    0.073    0.118    0.137     0.262
                                         Prison....................    0.091       0.040    0.028    0.041    0.051    0.121    0.122    0.127     0.166
ADP....................................  Jail......................    6.974     236.854    0.000    0.022    0.044    0.075    0.132    0.333    10.495
                                         Prison....................    0.577       4.184    0.000    0.030    0.043    0.072    0.145    0.319    12.806
Calls..................................  Jail......................    0.107       0.097    0.009    0.025    0.052    0.090    0.132    0.197     0.448
                                         Prison....................    0.100       0.091    0.009    0.026    0.047    0.089    0.120    0.172     0.440
Revenue................................  Jail......................    0.135       0.121    0.007    0.027    0.059    0.107    0.172    0.266     0.522
                                         Prison....................    0.100       0.170    0.013    0.032    0.040    0.063    0.114    0.206     0.257
Contracts..............................  Jail......................   42.658   1,005.685    0.006    0.034    0.090    0.280    1.190    4.906   221.786
                                         Prison....................    3.869      37.995    0.003    0.008    0.019    0.055    0.232    0.915    26.031
Facilities.............................  Jail......................   41.284   1,002.770    0.006    0.034    0.085    0.237    1.034    4.446   158.262
                                         Prison....................    3.786      37.116    0.003    0.012    0.022    0.060    0.227    0.894    25.429
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                    Table 4--Contract Per-Minute Costs by Facility Type Using Various Cost Allocators
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                            Mean + one         Total         Contracts       Contracts       Contracts
              Allocation key                        Facility type            Std. Dev.       contracts         below           above         above (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Minutes...................................  Jail........................           0.146           2,804           2,610             194             6.9
                                            Prison......................           0.131             131             122               9             6.9
ADP.......................................  Jail........................         243.828           2,804           2,800               4             0.1

[[Page 67502]]

 
                                            Prison......................           4.761             131             129               2             1.5
Calls.....................................  Jail........................           0.204           2,804           2,558             246             8.8
                                            Prison......................           0.191             131             122               9             6.9
Revenue...................................  Jail........................           0.256           2,804           2,441             363            12.9
                                            Prison......................           0.270             131             130               1             0.8
Contracts.................................  Jail........................       1,048.343           2,804           2,794              10             0.4
                                            Prison......................          41.864             131             130               1             0.8
Facilities................................  Jail........................       1,044.054           2,804           2,794              10             0.4
                                            Prison......................          40.902             131             130               1             0.8
--------------------------------------------------------------------------------------------------------------------------------------------------------

    15. Although a revenue cost allocation key may be used for 
certain accounting purposes, a revenue key is inappropriate for 
regulatory purposes because revenue is not a cost driver. While 
costs can be expected to increase with quantity sold, revenues do 
not always increase with quantity sold, and this can lead to 
perverse effects. Quantity sold increases as price falls. Starting 
from a price where no sales are made, revenues also increase as 
prices fall. However, at some point as prices fall, revenues also 
begin to fall: The revenue gain from new sales made at the lower 
price is smaller than the revenue loss incurred due to the lower 
price as applied to all purchases that would have been made at the 
higher price. In that circumstance, holding other things constant, a 
revenue cost allocator would allocate less costs to a contract with 
a greater sales volume, contrary to cost causation. This also means 
a revenue key can reinforce monopoly prices. The exercise of market 
power can result in higher revenues than would be earned in a 
competitive market. In that circumstance, holding other things 
constant, a revenue allocation key would allocate more costs to 
monopolized services than competitive ones.
    16. This leaves call minutes and calls as potential cost 
allocation keys. A call minute cost allocation key is the natural 
choice for setting per-minute inmate calling services rates. It is 
common in inmate calling services supply to charge per-minute rates, 
and not per call rates, even if sometimes the first minute has a 
different rate from subsequent rates.
    17. Subcontracts. Some inmate calling services providers 
subcontract some or all of their contracts to a second provider. In 
2018, of CenturyLink's [REDACTED] inmate calling services contracts, 
the Commission has data on [REDACTED] which were subcontracted 
(CenturyLink has [REDACTED] subcontracts with [REDACTED] but 
[REDACTED] did not report data for these contracts), and a third 
contract has no reported subcontractor; additionally, [REDACTED] 
employed a subcontractor for all of its [REDACTED] contracts.). This 
raises the question of how to deal with overhead costs in the case 
of subcontractors. The Commission takes an approach that may double 
count some overhead costs, as the Commission cannot identify what 
fraction of the subcontractors' overhead costs are captured in what 
they charge the prime contractor.
    18. The reporting of costs for shared contracts varies by 
provider. Where the prime contractor only reported the cost of 
supplying the broadband connection on its contracts, while the 
subcontractor reported the costs of servicing the facilities 
(installation, maintenance, etc.), the Commission aggregated their 
costs. Because the reported costs represent the provision of 
different services, the Commission does not believe these contracts 
have costs that were double-counted. Other providers operating as 
prime contractors reported all costs (including subcontractors' 
costs). Where their associated subcontractor did not file reports on 
the subcontracts, the Commission used the costs as reported by the 
prime contractor. However, where the associated subcontractors 
reported their costs, the Commission removed their direct costs to 
avoid counting them twice.
    19. The subcontracting filers were also the main inmate calling 
services suppliers on other contracts, raising the question of how 
to avoid double counting the allocation the Commission made for 
overhead costs for their subcontracts. Leaning toward overstating 
costs, overhead on each shared contract was assigned using the 
methodology described above (i.e., a shared contract is allocated 
the overhead of both providers that report the contract). 
Afterwards, the two observations were aggregated into one and placed 
under the name of the firm that is the primary contract holder.
    20. Inclusion of the overhead costs reported by the 
subcontractors overstates the cost recovering rate if, as is likely, 
they charge a markup over their direct costs. The markup would be 
part of the prime contractor's reported expenses, and to avoid 
double counting, the Commission would need to remove the markup from 
its calculations. The Commission cannot determine the amount of this 
markup, however. One approach would be to assume the markup matched 
the Commission's overhead cost allocation. In that case, the 
overhead costs of a subcontractor that are allocated to a 
subcontract would not be counted as they would be captured in the 
prime contractor's costs. However, if the markup exceeded this 
amount, the Commission would still be double counting costs, while 
if the markup was less than this amount, then the Commission would 
be understating costs. Table 5, when compared with Table 3, shows 
the impact of assuming that the markup matches the Commission's 
overhead cost calculation on the distribution of per-minute costs to 
be small.

     Table 5--Contract Per-Minute Costs by Facility Type Using Various Cost Allocators Adjusted To Avoid Double Counting of Subcontractor Overheads
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                    Percentiles
             Allocation key                     Facility type          Mean    Std. Dev. ---------------------------------------------------------------
                                                                                            1st      10th     25th     50th     75th     90th     99th
--------------------------------------------------------------------------------------------------------------------------------------------------------
Minutes................................  Jail......................    0.084       0.062    0.009    0.027    0.055    0.073    0.118    0.136     0.262
                                         Prison....................    0.090       0.041    0.023    0.039    0.050    0.121    0.122    0.127     0.166
ADP....................................  Jail......................    6.977     236.896    0.000    0.022    0.044    0.075    0.132    0.333    10.495
                                         Prison....................    0.579       4.200    0.000    0.029    0.041    0.068    0.145    0.330    12.806
Calls..................................  Jail......................    0.106       0.097    0.009    0.025    0.052    0.089    0.132    0.196     0.448
                                         Prison....................    0.100       0.091    0.009    0.026    0.047    0.088    0.120    0.173     0.440
Revenue................................  Jail......................    0.134       0.122    0.007    0.027    0.058    0.107    0.171    0.266     0.522
                                         Prison....................    0.099       0.171    0.013    0.029    0.037    0.053    0.114    0.206     0.257
Contracts..............................  Jail......................   42.672   1,005.864    0.006    0.034    0.088    0.279    1.187    4.906   221.786
                                         Prison....................    3.898      38.140    0.003    0.007    0.019    0.053    0.232    0.922    26.031
Facilities.............................  Jail......................   41.297   1,002.949    0.006    0.034    0.082    0.236    1.033    4.446   158.262

[[Page 67503]]

 
                                         Prison....................    3.813      37.259    0.003    0.011    0.022    0.058    0.227    0.897    25.429
--------------------------------------------------------------------------------------------------------------------------------------------------------

    21. If the Commission were to remove all subcontractor overhead 
costs allocated to CenturyLink's contracts, the average per-minute 
cost of CenturyLink's contracts would decrease from [REDACTED]. If 
the Commission removed only half of the overhead, this would result 
in an average per-minute cost of [REDACTED].
    22. Ancillary Revenues and Cost Recovery. Inmate calling 
services revenues do not include ancillary revenues. However, in 
many instances, ancillary revenues contribute toward cost recovery. 
The Commission distinguishes two sources of ancillary revenues. The 
first are those earned from passthrough fees, that is fees that are 
required to no more than match the costs the provider pays to a 
third party. Examples are credit card processing revenues and third-
party transaction revenues. The costs that are passed through to 
incarcerated people in this manner are not included in inmate 
calling service costs. Thus, they net out of any cost-recovery 
estimation, and here the Commission considers them no further.
    23. The second are revenues earned on three ancillary services: 
Automated payments, paper billing and statements, and live agent 
services. The costs of these services are included in the providers' 
inmate calling costs. Thus, matching revenues with costs requires 
that the revenues from these sources also be included. However, it 
is likely the data the Commission collected do not fully match 
relevant ancillary revenues with reported inmate calling services 
costs because the Commission did not collect data on live agent 
service revenues and because the Commission does not know how 
providers allocated costs of shared services and revenues to inmate 
calling services. As an example, consider a payment account which 
must be used to purchase inmate calling services, as well as 
commissary services, tablet access, and other services. If usage 
fees are charged to set up or to deposit money, then the provider 
may not have reported these in their ancillary revenues, considering 
them not to solely be attributable to inmate calling services. 
However, they may have allocated some or all the costs of the 
payment system to inmate calling services.
    24. Table 6 shows for each provider, and for all providers, 
inmate calling revenues, automated payment revenues, paper billing 
and account revenues, the sum of these three revenues, inmate 
calling costs, and the difference between those summed revenues and 
inmate calling costs.

                                    Table 6--Inmate Calling Services Revenues and Costs by Provider and for Industry
                                                                     [In $ millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
            Provider                ICS revenues        APF revenues        PBF revenues      Total revenues      Total costs           Difference
--------------------------------------------------------------------------------------------------------------------------------------------------------
ATN............................  [REDACTED]........  [REDACTED]........  [REDACTED].......  [REDACTED].......  [REDACTED].......  [REDACTED]
CenturyLink....................  [REDACTED]........  [REDACTED]........  [REDACTED].......  [REDACTED].......  [REDACTED].......  [REDACTED]
Correct........................  [REDACTED]........  [REDACTED]........  [REDACTED].......  [REDACTED].......  [REDACTED].......  [REDACTED]
CPC............................  [REDACTED]........  [REDACTED]........  [REDACTED].......  [REDACTED].......  [REDACTED].......  [REDACTED]
Crown..........................  [REDACTED]........  [REDACTED]........  [REDACTED].......  [REDACTED].......  [REDACTED].......  [REDACTED]
GTL............................  [REDACTED]........  [REDACTED]........  [REDACTED].......  [REDACTED].......  [REDACTED].......  [REDACTED]
ICSolutions....................  [REDACTED]........  [REDACTED]........  [REDACTED].......  [REDACTED].......  [REDACTED].......  [REDACTED]
Legacy.........................  [REDACTED]........  [REDACTED]........  [REDACTED].......  [REDACTED].......  [REDACTED].......  [REDACTED]
NCIC...........................  [REDACTED]........  [REDACTED]........  [REDACTED].......  [REDACTED].......  [REDACTED].......  [REDACTED]
Pay Tel........................  [REDACTED]........  [REDACTED]........  [REDACTED].......  [REDACTED].......  [REDACTED].......  [REDACTED]
Prodigy........................  [REDACTED]........  [REDACTED]........  [REDACTED].......  [REDACTED].......  [REDACTED].......  [REDACTED]
Securus........................  [REDACTED]........  [REDACTED]........  [REDACTED].......  [REDACTED].......  [REDACTED].......  [REDACTED]
Industry.......................  1,096,391.........  116,124...........  410..............  1,212,926........  697,321..........  515,605
--------------------------------------------------------------------------------------------------------------------------------------------------------

    25. Table 7 shows for each provider, and for all providers, 
split by prisons and jails, the contract mean of total per paid 
minute revenues (that is, the mean for each contract of the sum of 
inmate calling revenues, automated payment revenues, paper billing 
and account revenues divided by paid minutes), the contract mean of 
per paid minute costs, the contract mean of per paid minute direct 
costs. At least three of the direct cost per minute entries are 
misleading: Legacy and NCIC report zero direct costs, while GTL only 
reports bad debt as a direct cost, the result being GTL's direct 
costs per minute are [REDACTED]. In actuality, these three providers 
almost certainly have substantially larger direct costs and hence 
substantially larger direct costs per minute.

 Table 7--Inmate Calling Services per Minute Revenues and Costs by Provider and for Industry by Jail and Prison
                                                       [$]
----------------------------------------------------------------------------------------------------------------
                                                      Contract mean      Contract mean
            Provider               Facility type    revenues per paid    costs per paid    Contract mean direct
                                                          minute             minute        costs per paid minute
----------------------------------------------------------------------------------------------------------------
ATN............................  Jail.............  [REDACTED].......  [REDACTED].......  [REDACTED]
CenturyLink....................  Jail.............  [REDACTED].......  [REDACTED].......  [REDACTED]
Correct........................  Jail.............  [REDACTED].......  [REDACTED].......  [REDACTED]
CPC............................  Jail.............  [REDACTED].......  [REDACTED].......  [REDACTED]
Crown..........................  Jail.............  [REDACTED].......  [REDACTED].......  [REDACTED]
GTL............................  Jail.............  [REDACTED].......  [REDACTED].......  [REDACTED]

[[Page 67504]]

 
ICSolutions....................  Jail.............  [REDACTED].......  [REDACTED].......  [REDACTED]
Legacy.........................  Jail.............  [REDACTED].......  [REDACTED].......  [REDACTED]
NCIC...........................  Jail.............  [REDACTED].......  [REDACTED].......  [REDACTED]
Pay Tel........................  Jail.............  [REDACTED].......  [REDACTED].......  [REDACTED]
Prodigy........................  Jail.............  [REDACTED].......  [REDACTED].......  [REDACTED]
Securus........................  Jail.............  [REDACTED].......  [REDACTED].......  [REDACTED]
Industry.......................  Jail.............  0.360............  0.084............  0.024
CenturyLink....................  Prison...........  [REDACTED].......  [REDACTED].......  [REDACTED]
GTL............................  Prison...........  [REDACTED].......  [REDACTED].......  [REDACTED]
ICSolutions....................  Prison...........  [REDACTED].......  [REDACTED].......  [REDACTED]
Legacy.........................  Prison...........  [REDACTED].......  [REDACTED].......  [REDACTED]
NCIC...........................  Prison...........  [REDACTED].......  [REDACTED].......  [REDACTED]
Securus........................  Prison...........  [REDACTED].......  [REDACTED].......  [REDACTED]
Industry.......................  Prison...........  0.148............  0.091............  0.010
----------------------------------------------------------------------------------------------------------------

    26. Table 8 shows the number and percent of contracts for which 
various revenue estimates cover total and direct costs. The number 
of Legacy, NCIC, and GTL contracts that cover direct costs as 
reported in the third last and last columns are overstated for the 
reasons just given. The Commission projects, at the proposed rates 
and assuming ancillary service revenues remain the same, 98% of 
contracts would recover their total costs as allocated (or 99%, if 
the 10% discount of GTL's costs is applied). This is likely an 
underestimate since many providers' costs may be overstated, and the 
full range of ancillary fees that contribute toward recovering 
inmate calling service costs are not reported.

                        Table 8--Number and Percent of Contracts for Which Various Revenue Estimates Cover Total and Direct Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                          Total costs      Direct costs
                                                                        Total costs     Total costs      Direct costs      covered by       covered by
                                                                        covered by       covered by       covered by     projected ICS    projected ICS
                Provider                         Facility type           ancillary     projected ICS    projected ICS     revenues and     revenues and
                                                                         revenues         revenues         revenues        ancillary        ancillary
                                                                                                                            revenues         revenues
--------------------------------------------------------------------------------------------------------------------------------------------------------
ATN.....................................  Jail                        [REDACTED]
CenturyLink.............................  Jail
Correct.................................  Jail
CPC.....................................  Jail
Crown...................................  Jail
GTL.....................................  Jail
ICSolutions.............................  Jail
Legacy..................................  Jail
NCIC....................................  Jail
Pay Tel.................................  Jail
Prodigy.................................  Jail
Securus.................................  Jail
                                                                     -----------------------------------------------------------------------------------
Industry................................  Jail                                   547       2677 (95%)       2768 (99%)       2759 (98%)           (100%)
                                                                     -----------------------------------------------------------------------------------
CenturyLink.............................  Prison                      [REDACTED]
GTL.....................................  Prison
ICSolutions.............................  Prison
Legacy..................................  Prison
NCIC....................................  Prison
Securus.................................  Prison
                                                                     -----------------------------------------------------------------------------------
Industry................................  Prison                              0 (0%)        123 (94%)       131 (100%)        129 (98%)       131 (100%)
--------------------------------------------------------------------------------------------------------------------------------------------------------

Appendix B

Sensitivity Testing: Additional Statistical Analysis of Cost Data

    1. The Commission analyzed inmate calling services providers' 
responses to the Second Mandatory Data Collection to determine 
whether certain characteristics of inmate calling services contracts 
could be shown to have a meaningful association with contract costs 
on a per-minute basis as reported by providers. In this analysis, 
the Commission considered characteristics such as the average daily 
population of the facilities covered by the contract, the type of 
those facilities (prison or jail), and rurality of those facilities. 
If such an association exists, it might be appropriate to set rates 
that vary according to the variables the Commission identified.

[[Page 67505]]

    2. The Commission used a statistical method called Lasso to 
explore: (a) Which variables are good predictors of per-minute 
contract costs and (b) the likelihood that a given contract is in 
the top 5% of contracts on a cost per minute basis (hereinafter 
referred to as an outlier). Lasso identifies predictors of an 
outcome variable--the logarithm of costs per minute, or outlier 
status in this case--by trading off goodness of fit against model 
parsimony. Lasso retains a set of predictors that optimally balance 
the quality of the prediction against the complexity of the model, 
as measured by the number of predictors, and is especially useful in 
situations like this where many variables, and interactions among 
those variables, could predict an outcome of interest. The 
Commission found the main predictors of both costs per minute and 
outlier contracts to be provider identity and the state where the 
contract's correctional facilities were located. The Commission also 
found that whether the facility is a prison or jail is a predictor 
of costs per minute, although weaker than provider identity and 
state. Finally, the Commission found a wide range of other variables 
have less or essentially no predictive power.
    3. The Commission chose the inmate calling services contract as 
the unit of observation for its analysis for two reasons. First, 
providers bid for contracts rather than individual facilities, so 
the contract is the level at which commercial decisions are made. 
Second, many contracts cover more than one facility but providers 
did not report data on those facilities separately, which precludes 
any analysis at the facility level. For example, this commonly 
occurred in the filings of both GTL and CenturyLink. For example, 
GTL's [REDACTED]. Contracts where the separate facilities were not 
reported would distort any facility-based analysis. The Commission 
focused on the logarithm of costs as the dependent variable. The 
contract variables that the Commission considered in its analysis 
are as follows:
     The identity of the inmate calling services provider;
     The state(s) in which correctional facilities covered 
by a contract are located;
     The Census division(s) and region(s) in which 
facilities covered by a contract are located;
     The type of facility covered by the contract (prison or 
jail);
     An indicator for joint contracts (i.e., contracts for 
which an inmate calling services provider subcontracts with another 
inmate calling services provider);
     Contract average daily population;
     Contract average daily population bins (average daily 
population <=25, average daily population <=50, average daily 
population <= 100, average daily population <=250, average daily 
population <=500, average daily population <=1,000, average daily 
population <=5,000);
     Rurality of the facilities covered by the contract 
(rural, if all the facilities covered by the contract are located in 
a census block designated by the Bureau of Census as rural, and 
urban, if all facilities were located in a census block not 
designated as rural, or mixed if the contract covered facilities 
designated as rural and not rural); and
     Various combinations (i.e., multiplicative 
interactions) among the above variables.
    4. Lasso and costs per minute. The Lasso results indicate 
economically significant differences in costs per minute primarily 
across providers and states. The provider and state variables 
retained by Lasso as predictors of cost explain approximately 71% of 
the variation in costs across contracts. Lasso results also indicate 
less important differences in costs per minute by facility type 
(prison or jail), average daily population and average daily 
population-related variables, and rurality. When retained as 
predictors by Lasso, these variables explain approximately 1% more 
of the variation in costs than the state and provider variables 
alone. The differences in costs measured by provider identity may 
reflect either systematic differences in costs across providers, or 
systematic differences in the way costs are calculated and reported 
by providers. The differences in cost measured by the state 
variables may reflect statewide differences in costs arising from 
different regulatory frameworks or other state-specific factors.
    5. One concern arising in the analysis is that a group of 
contracts representing a significant fraction--about 11%--of 
observations contained insufficient information to ascertain the 
rurality of facilities included in a contract. As a result, in the 
Commission's baseline model that includes all contracts, the 
Commission interprets the effect of the rurality variables as 
differences from the contracts for which the Commission did not have 
rurality information. To ensure that this is a sound approach, the 
Commission checked using a sample selection model that the factors 
that may be associated with a contract not having sufficient 
rurality information are not significantly correlated with costs. 
The Commission estimated a Heckman sample selection model where 
selection is for observations that contain rurality information. The 
dependent variable and controls in this model were chosen to be the 
same as the ones in Lasso. The Commission found that the coefficient 
on the inverse Mills ratio is not significant at reasonable levels 
of significance (p-value is 0.22), allaying potential concerns about 
sample selectivity. The Commission also ran its analysis using only 
the contracts that contain rurality information and found similar 
Lasso results to its baseline model.
    6. The Commission also explored the differences in the costs 
reported by the top three providers by size using a double selection 
Lasso model. Double selection Lasso is a method of statistical 
inference that uses Lasso for the dependent variable and for the 
variables of interest using a set of common controls; simple Lasso 
only selects predictors, without the possibility of statistical 
inference afforded by double selection. The Commission focuses on 
GTL, ICSolutions, and Securus because these firms' costs explain the 
bulk of industry costs. These providers supply [REDACTED] of all 
inmate calling services contracts and cover approximately [REDACTED] 
of all incarcerated individuals (see Table 1). These shares may in 
fact represent a significant understatement of their industry share 
because they are often subcontractors. For example, [REDACTED] 
instead for considering this part of the Commission's analysis 
considering factors that may impact costs. These three firms are 
also more suitable for making cross-firm comparisons because they do 
not subcontract the provision of their inmate calling service 
contracts to a third party, and because they are the largest three 
of the five providers that service prisons, covering [REDACTED] of 
all prison contracts. The results suggest that GTL's costs are--all 
other things equal--[REDACTED]. These cost differences are 
statistically significant at confidence levels greater than 99.99%. 
When the sample is restricted to the contracts with no missing 
rurality information, GTL's costs are--all other things equal--
approximately [REDACTED].
    7. The results of the double selection Lasso model also indicate 
that--all other things equal--the costs of providing inmate calling 
services are approximately 18% greater in jails than in prisons; 
this difference is statistically significant at confidence levels 
greater than 99.99%. For the sample restricted to contracts with 
complete rurality information, this estimate is approximately 17%, 
also statistically significant at confidence levels greater than 
99.99%.

                    Table 1--Inmate Calling Services Providers Ranked by Number of Contracts
----------------------------------------------------------------------------------------------------------------
                                                                                               Average daily
            Provider                 Contracts       Prison contracts      Facilities          population *
----------------------------------------------------------------------------------------------------------------
[REDACTED].....................  [REDACTED].......  [REDACTED].......  [REDACTED].......  [REDACTED]
[REDACTED].....................  [REDACTED].......  [REDACTED].......  [REDACTED].......  [REDACTED]
[REDACTED].....................  [REDACTED].......  [REDACTED].......  [REDACTED].......  [REDACTED]
[REDACTED].....................  [REDACTED].......  [REDACTED].......  [REDACTED].......  [REDACTED]
[REDACTED].....................  [REDACTED].......  [REDACTED].......  [REDACTED].......  [REDACTED]
[REDACTED].....................  [REDACTED].......  [REDACTED].......  [REDACTED].......  [REDACTED]
[REDACTED].....................  [REDACTED].......  [REDACTED].......  [REDACTED].......  [REDACTED]

[[Page 67506]]

 
[REDACTED].....................  [REDACTED].......  [REDACTED].......  [REDACTED].......  [REDACTED]
[REDACTED].....................  [REDACTED].......  [REDACTED].......  [REDACTED].......  [REDACTED]
[REDACTED].....................  [REDACTED].......  [REDACTED].......  [REDACTED].......  [REDACTED]
[REDACTED].....................  [REDACTED].......  [REDACTED].......  [REDACTED].......  [REDACTED]
[REDACTED].....................  [REDACTED].......  [REDACTED].......  [REDACTED].......  [REDACTED]
Industry Total.................  2,935............  131..............  3,668............  2,246,940
----------------------------------------------------------------------------------------------------------------
Notes: * Average daily population was reported for only 2,846 contracts.

    8. Lasso and outlier status. The Commission also analyzed the 
drivers of the likelihood of a contract to be included in the top 5% 
of costs per minute using logit Lasso. Similar to the linear Lasso 
employed for cost per minute, logit Lasso selects an optimal set of 
predictors for the likelihood of a contract to be an outlier in the 
sense defined above. The results were similar to those for cost per 
minute: Provider and state variables were retained by Lasso as the 
principal predictors of a contract's likelihood of being a cost 
outlier.

Appendix C

Estimating a Discount Factor To Remove Market Rents From GTL's Reported 
Costs

    1. GTL reports costs that are high relative to the industry and 
its nearest peers, Securus and ICSolutions. GTL reports a ratio of 
total costs to total paid minutes of [REDACTED], more than a third 
higher than that of the industry, $0.089. This ratio is more than 
twice the same ratio for both that of Securus, [REDACTED], and that 
of ICSolutions, [REDACTED]. Similarly, the mean per paid minute cost 
of a GTL contract, [REDACTED], is more than a third higher than that 
of the industry, $0.91, more than double that of Securus, 
[REDACTED], and nearly triple that of ICSolutions, [REDACTED]. GTL's 
costs are nearly three times greater than those of Securus and 
nearly twice those of ICSolutions when the Commission controls for 
confounding factors. This is particularly surprising given the 
economies of scale and scope GTL should be able to take advantage 
of, and given its success in the industry. Certain aspects of GTL's 
approach to measuring costs may partially explain why its costs 
appear so high. One is in how it derived its capital expenses. GTEL 
Holdings, Inc., and Subsidiaries (hereafter GTLH) included a 
Consolidated Financial Statement for 2018 as part of GTL's response 
to the Second Mandatory Data Collection. Based on its analysis of 
the financial information set forth in that Financial Statement, the 
Commission finds that a 10% reduction of GTL's inmate calling 
services costs as reported in that response is necessary to remove 
market rents incorporated into these costs as explained below.
    2. Market forces tend to result in a purchase price for an 
acquired firm reflecting the market's expectation of the present 
value of the expected future stream of net cash flows that the 
purchase would bring. This is especially the case with two or more 
informed purchasers, and a rational seller. A profit-maximizing firm 
seeking to acquire another firm would pay no more than its estimate 
of the present value of the expected future stream of net cash flows 
the purchase would bring. The selling party would not be willing to 
sell at a price less than what it could obtain from another 
purchaser. Nor would the selling party be willing to sell at a price 
less its estimate of the present value of the expected future stream 
of net cash flows it could obtain if it continued with the asset 
rather than selling it. To the extent the expected net cash flows 
that determine the purchase price are greater than what would be 
expected if the purchaser, using the purchased assets, faced 
effective competition, the purchaser expects to earn market rents. 
In that case, since the purchase price is capitalized on the 
purchaser's balance sheet, these market rents are also capitalized. 
The capitalized value of these market rents is periodically 
reflected as a depreciation or amortization expense in determining 
earnings on an income statement. Thus, to the extent there are such 
market rents in GTLH's capital base, these rents would be reflected 
in the expenses GTL reported in its Second Mandatory Data Collection 
response, likely in part accounting for GTL's reported costs 
appearing so far above those of other providers. For ratemaking 
purposes, however, any such rents should be excluded when evaluating 
costs, as they would not be earned in a competitive market, and the 
Commission's rate-cap setting efforts are designed to approximate 
competitive market conditions.
    3. GTLH's balance sheet reflects the cumulative total of the 
remaining unamortized value of ``goodwill'' associated with GTLH's 
various acquisitions at different points in time. GTLH records 
goodwill at the time it acquires a new firm as the difference 
between the purchase price and its estimate of the fair value of 
acquired tangible and identifiable intangible assets, net of assumed 
liabilities at the time of acquisition. Thus, goodwill should 
reflect these market rents--the amount over and above what one could 
earn from disposing of the underlying assets separately at a fair 
market rate, rather than together in a whole as part of the ongoing 
business.
    4. Thus, for the purpose of developing a regulated, cost-based 
rate for inmate calling services, the Commission excludes goodwill-
related expenses from GTL's reported expenses to approximate costs 
in competitive marketplace rather than the locational monopoly 
environment within which GTL operates. To identify the share of 
GTL's reported expenses that represents goodwill-related expenses, 
the Commission multiplies the share of goodwill in GTLH's assets, as 
reported in GTLH's consolidated balance sheet, by the share of 
capital expenses in GTLH's total expenses reported in the 
consolidated statement of operations and consolidated income 
(losses) for 2018. GTL is a direct subsidiary of GTLH and, as 
explained in the Description and Justification accompanying GTL's 
Second Mandatory Data Collection response, GTL's reported inmate 
calling services costs are directly derived from the costs reported 
on the balance sheet for that consolidated entity. GTLH's 2018 
balance sheet reports goodwill, net of amortization of [REDACTED]. 
GTLH's goodwill estimate has been declining since January 1, 2014 as 
GTLH has been amortizing goodwill over a 10-year period.
    5. GTLH's income statement for 2018 shows that [REDACTED] of 
GTLH's expenses were attributable to capital. To identify the share 
of capital expenses in GTL's reported expenses, the Commission 
relies on GTLH's 2018 statement of operating expenses in the 
consolidated statement of operations and consolidated income, 
dividing total expenses related to capital by total expenses. Total 
expenses excluding interest are [REDACTED]. The sum of depreciation 
and amortization expenses plus interest expenses is [REDACTED]. This 
is the amount of GTLH's total expenses that can be attributed to 
capital. Thus, the share of expenses, including interest expenses 
that can be attributed to capital is [REDACTED]. Staff also 
performed more detailed calculations to account for income tax 
treatment of capital expenses and other items on GTLH's financial 
statements but these other calculations do not yield materially 
different estimates.
    6. The product of these two percentages is 10.9% (= [REDACTED]). 
The Commission finds that this provides a reasonable approximation 
of the market rents included in GTL's reported inmate calling 
services costs. This estimate is stable over time: The same 
methodology yields discount factors of 10.9% in 2014; 11.3% in 2015; 
11.1% in 2016; and 10.9% in 2017. Although these discount factors 
are closer to 11% than 10% for each year from 2014 through 2018, in 
order to be conservative, the Commission uses a discount factor of 
10%. The Commission finds that this is an appropriate cost 
disallowance to remove the impact of market rents on the expenses 
that GTL reports in its Second Mandatory Data Collection response.
    7. The Commission also considered alternate methods, such as 
estimating the amount of market rents in proportion to

[[Page 67507]]

historical market valuations, or in proportion to an estimate of 
GTL's total intangibles, or by some combination of such approaches. 
However, these other methods require data, such as market valuation 
and total intangibles, that are either unavailable, unhelpful 
because of the timing issues, or not well-suited to ratemaking 
purposes.

Appendix D

Analysis of Site Commission Payments

    1. The Commission proposes to incorporate a $0.02 allowance for 
recovery of correctional facility costs directly related to the 
provision of inmate calling services. Although the Commission has no 
direct information on the level of costs incurred by the 
correctional facilities related to the provision of inmate calling 
services, the Commission can estimate these costs by comparing the 
relative per-minute costs for contracts with and without site 
commissions, as shown in Table 1.

                                                     Table 1--Site Commissions and Per-Minute Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                            Number of contracts
               Facility type                        Site commission             Mean          SD       Mean + SD  --------------------------------------
                                                                                                                      Below        Above        Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Jails......................................  No Commission Paid...........        0.094        0.085        0.179          277           10          287
                                             Commission Paid..............        0.080        0.056        0.137        2,323          194        2,517
                                             All Jails....................        0.082        0.060        0.142        2,619          185        2,804
Prisons....................................  No Commission Paid...........        0.087        0.033        0.120           39            2           41
                                             Commission Paid..............        0.083        0.035        0.118           83            7           90
                                             All Prisons..................        0.084        0.034        0.118          122            9          131
All Facilities.............................  No Commission Paid...........        0.093        0.081        0.174          318           10          328
                                             Commission Paid..............        0.080        0.056        0.136        2,402          205        2,607
                                             All Facilities...............        0.082        0.059        0.141        2,741          194        2,935
--------------------------------------------------------------------------------------------------------------------------------------------------------

    2. It is reasonable that the higher per-minute costs for 
contracts without site commissions reflect, at least in part, give-
and-take negotiations in which inmate calling services providers 
agree to incur additional inmate calling services-related costs in 
exchange for not having to pay site commissions. The lowest third of 
Table 1 shows a $0.013 difference in mean costs per minute reported 
by providers between contracts without site commissions ($0.093) and 
contracts with site commissions ($0.080). The Commission rounds 
upwards to allow for individual contracts for which this matters 
more than the average contract, and thereby reaches its $0.02 per 
minute allowance for correctional facility costs. Site commissions 
appear less critical for prisons than jails, with prison contracts 
without commissions earning on average only $0.004 more than per 
paid minute costs, while for jails this difference is $0.014. 
However, again to ensure the Commission does not harm unusual prison 
contracts, the Commission applies the same $0.02 markup for both 
prisons and jails.
    3. The interstate rate caps for prisons and jails the Commission 
proposes include the $0.02 per minute allowance for reasonable 
facility costs. Accordingly, the Commission's proposed rate caps 
would allow inmate calling services providers to recover their 
direct costs of providing interstate inmate calling services to each 
correctional facility it serves. The rate caps the Commission 
proposes would also allow providers to reimburse correctional 
authorities for the costs they reasonably incur in making their 
facilities available for inmate calling services, while making 
reasonable contributions to providers' indirect costs.

[FR Doc. 2020-19954 Filed 10-22-20; 8:45 am]
BILLING CODE 6712-01-P