Before the

Federal Communications Commission

Washington, D.C. 20554

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ORDER ON REMAND & NOTICE OF PROPOSED RULEMAKING

**Adopted: February 12, 2002 Released: February 21, 2002**

Comment Date: 45 days after publication in the Federal Register

Reply Comment Date: 30 days after publication in the Federal Register

By the Commission:

# INTRODUCTION

1.  The Inmate Calling Services Providers Coalition (ICSPC) seeks
    reconsideration of certain issues relating to inmate calling
    services decided in the *Order on Reconsideration*.[^1] Section 276
    of the Communications Act of 1934, as amended (the Act),[^2] directs
    the Commission to "establish a per call compensation plan to ensure
    that all payphone service providers are fairly compensated for each
    and every completed intrastate and interstate call using their
    payphone."[^3] ICSPC claims that the statute requires the Commission
    either to preempt state rate caps on local collect calls or permit
    inmate calling service (ICS) providers to collect an additional per
    call surcharge above state rate caps on local collect calls. ICSPC
    also seeks the imposition of certain nonstructural safeguards on
    inmate calling services provided by the regional Bell operating
    companies (BOCs). The Commission rejected these claims in the *Order
    on Reconsideration.*[^4]

2.  ICSPC, along with numerous other parties, initially sought review of
    the *Order on Reconsideration* before the United States Court of
    Appeals for the District of Columbia Circuit and consolidated its
    appeal under the lead case *Illinois Public Telecommunications
    Association v. FCC.*[^5] In its appeal, ICSPC challenged the
    Commission's denial of its request for an additional \$0.90 per call
    surcharge on local inmate calls and the Commission's refusal to
    impose the nonstructural safeguards that ICSPC sought.[^6] The court
    subsequently severed ICSPC's appeal,[^7] and later remanded it at
    the Commission's request.[^8] The Commission issued a Public Notice
    asking parties to update and refresh the record with respect to the
    issues raised in ICSPC's appeal.[^9]

3.  In this order, we conclude that section 276's fair compensation
    requirement does not require either preemption of state local
    collect calling caps or imposition of a federally-tariffed surcharge
    above state rate caps for local inmate calls. We also conclude that
    ICSPC's requested nonstructural safeguards are not necessary, in
    light of those that section 276 and our rules already impose. In
    addition, we initiate a Notice of Proposed Rulemaking to examine the
    costs associated with the provision of inmate calling services.

# BACKGROUND

## A. Prior Payphone Orders and Inmate Calling Services {#a.-prior-payphone-orders-and-inmate-calling-services .unnumbered}

4.  The ICSPC remand is part of a larger proceeding concerning the
    Commission's implementation of the Act's payphone directives.
    Section 276 of the Act places two principal requirements on the
    provision of payphone service. First, the BOCs may neither subsidize
    their payphone services "from \[their\] telephone exchange service
    operations or . . . exchange access operations," nor "prefer or
    discriminate in favor of \[their\] payphone service."[^10] The
    statute requires the Commission to implement the subsidization and
    discrimination prohibitions through nonstructural safeguards that
    are "at a minimum . . . equal to those adopted in" the Computer III
    Inquiry.[^11] Second, section 276 directs the Commission to
    "establish a per call compensation plan to ensure that all payphone
    service providers \[(PSPs)\] are fairly compensated for each and
    every completed intrastate and interstate call."[^12] The statute
    explicitly includes "inmate telephone service" in the definition of
    "payphone services."[^13]

5.  Responding to the statutory mandate, the Commission issued the
    *First Report and Order*.[^14] The Commission subsequently
    supplemented this order with the *Order on Reconsideration*, and,
    following two appeals and remands, the *Second Report and Order* and
    *Third Report and Order* (collectively referred to as the "Payphone
    Orders").[^15] In its initial comments submitted prior to the *First
    Report and Order*, and in its petition for partial reconsideration
    and clarification of that order, ICSPC sought a \$0.90
    federally-tariffed inmate calling surcharge, on each and every
    intraLATA call, on the grounds that state-imposed rate ceilings were
    inadequate to recover the high costs of inmate calling. ICSPC also
    sought relief from the BOCs' alleged subsidization of and
    discrimination in favor of their payphone services.[^16]

6.  In the *First Report and Order*, the Commission rejected the ICSPC's
    request for additional compensation, reasoning that, although the
    costs of prison telephone services may exceed those of other
    payphone services, mandating per call compensation for inmate
    payphones could lead to a double recovery of costs. [^17] With
    respect to nonstructural safeguards, the Commission required the
    BOCs to reclassify or transfer payphone assets to nonregulated
    status to prevent subsidization and discrimination.[^18] It stated
    that "the loops connecting the payphones to the network, the central
    office 'coin-service,' or operator service facilities supporting
    incumbent LEC payphones" should not be included as payphone assets
    "because \[such assets\] are part of network equipment necessary to
    support basic telephone services."[^19]

7.  In the *Order on Reconsideration*, the Commission re-examined the
    Coalition's argument that "a special per-call compensation amount is
    warranted because inmate providers have higher service costs than
    other PSPs and that the \[rates for\] the intrastate . . . calls
    they carry are frequently capped by the states."[^20] The Commission
    decided that contracts between the inmate calling service providers
    and the confinement facilities provide "fair compensation," as
    required by the statute.[^21] The Commission reasoned that,
    "whenever a PSP is able to negotiate for itself the terms of
    compensation for the calls its payphones originate, then our
    statutory obligation to provide fair compensation is
    satisfied."[^22]

8.  Orders issued during the pendency of the remand have touched upon
    inmate calling service issues. The *Second Report and Order*, issued
    in response to the remand the *Illinois* decision, "reaffirm\[ed\]"
    the Commission's refusal "to treat 0+ calls and calls from inmate
    payphones differently from other payphone calls."[^23] The court of
    appeals reviewed the *Second Report and Order* and reversed in part,
    remanding the issue of compensation for 800 and access code calls
    for further evaluation.[^24] After the second remand, the Commission
    adopted the *Third Report and Order* in which it specifically
    deferred consideration of the issues here presented.[^25]

## B. The Inmate Calling Services Industry {#b.-the-inmate-calling-services-industry .unnumbered}

9.  Although section 276 classifies inmate calling service as a payphone
    service,[^26] inmate calling services, largely for security reasons,
    are quite different from the public payphone services that
    non-incarcerated individuals use. First, virtually all inmate phone
    calls must be collect; there can be no coin calls or credit card
    calls. Second, prison security rules typically require that a
    special automated voice-processing system, rather than a
    pre-subscribed operator service provider (OSP), process inmate
    collect calls, in order to provide prison authorities with the
    ability to screen phone calls.[^27] Third, inmate calling services
    employ numerous blocking mechanisms to prevent inmates from making
    direct-dialed calls, access code calls, 800/900 calls, or calls to
    certain individuals like judges or witnesses. In fact, calls from
    confinement facilities often are limited to certain pre-approved
    numbers.[^28] Fourth, confinement facilities also require that
    phones be monitored for frequent calls to the same number, a sign of
    possible criminal activity or a scheme to evade calling restrictions
    via call-forwarding or three-way calling.[^29] Fifth, confinement
    facilities usually require periodic voice-overlays that identify the
    call as being placed from a confinement facility, as well as
    listening and recording capabilities for all calls.[^30] Finally,
    inmate calling systems generally must provide detailed, customized
    reports for confinement facility officials.[^31]

10. Typically, the confinement facility awards a contract to provide
    calling services by competitive bidding and grants the winning
    provider a monopoly on all inmate calling services.[^32] To have a
    realistic chance of winning a contract, the bidder must include an
    amount to cover commissions paid to the inmate facility. In the case
    of state prisons, which are often located far from major population
    centers and where consequently most of the traffic is toll traffic
    and not subject to state ceilings for local calls, the confinement
    facility monopolies prove sufficiently remunerative to allow the ICS
    provider to offer generous commissions.[^33] In fact, under most
    contracts, the commission is the single largest component affecting
    the rates for inmate calling service.[^34]

11. A number of companies specialize in providing inmate calling
    services for state prisons, while other companies focus on city and
    county jails. In the case of local (city and county) jails, ICS
    providers operate in a largely state-regulated environment. Most
    calls made from city and county facilities are local or intraLATA
    toll, and most states impose rate ceilings on local calls.[^35] Some
    of these rate ceilings are based on the incumbent local exchange
    carriers' (LECs) standard collect calling rates; other ceilings are
    set specifically for inmate calls.[^36]

12. Inmate calling is economically different than other payphone
    services in two respects. First, inmates have none of the
    alternatives available to non-incarcerated payphone customers.
    Inmates only have access to payphones, not cell phones, and inmates
    lack dial-around capacity.[^37] Therefore, neither the inmates who
    initiate the call nor the individuals who bear the cost of inmate
    calls -- most often the inmates' families -- have a choice among
    providers.[^38] Second, the competition that does exist -- among ICS
    providers in the bidding process -- does not exert downward pressure
    on rates for consumers. Instead, perversely, because the bidder who
    charges the highest rates can afford to offer the confinement
    facilities the largest location commissions, the competitive bidding
    process may result in higher rates.[^39]

# DISCUSSION

13. This remand of ICSPC's appeal raises the same issues that ICSPC has
    raised in earlier submissions to the Commission. Specifically, the
    Coalition seeks additional compensation for local calls as well as
    nonstructural safeguards and certain anti-discrimination measures.
    ICSPC asserts that state rate ceilings prevent its members from
    recovering the high cost of inmate calling services,[^40] and seeks
    either a complete preemption of state rate ceilings or a \$0.90
    federal rate element that "may be added to the existing
    state-approved rates in those states where there is a rate
    ceiling."[^41] It bases this figure on the difference between AT&T's
    tariffed rates for interstate inmate and non-inmate interstate
    collect calls, and it argues that this rate difference can serve as
    a surrogate for the cost difference between inmate and non-inmate
    local collect calls.[^42] In its *ex parte* submission, the
    Coalition provided cost data that purports to show that inmate calls
    have approximately \$1.30 more costs than non-inmate costs.[^43]
    Significantly, ICSPC does *not* assert that ICS providers lose money
    on all of their calls. In addition, the Coalition seeks revision of
    the existing nonstructural safeguards in our current rules,
    asserting that section 276 requires additional safeguards and
    protections.[^44]

## A. What Being "Fairly Compensated" For "Each and Every Call" Means {#a.-what-being-fairly-compensated-for-each-and-every-call-means .unnumbered}

14. To evaluate ICSPC's claim that its members are not being "fairly
    compensated" for their local calls, we must determine what "fairly
    compensated for each and every call" means under section 276. Our
    prior orders implementing section 276, particularly the *Third
    Report and Order*, discussed this issue in detail. As the Commission
    stated there, "\[n\]either the statute nor the legislative history
    makes clear . . . what Congress meant by the phrase 'fairly
    compensated.'"[^45]

15. The Commission has previously described in detail the economic
    principles that control payphone telephony.[^46] Here, it is
    important to point out that the vast majority of payphone costs are
    fixed and common, even costs for operator assisted calls. Because of
    high fixed costs, any specific per call compensation rate will
    generate a profit or loss depending on how many calls are made from
    a particular payphone.[^47] It is difficult, therefore, to determine
    "fair compensation" for a particular call from a particular payphone
    because the "cost" of any call depends on how many other calls are
    made from that payphone. Finally, the Commission determined a
    payphone that "earns just enough revenue to warrant its placement,
    but not enough to pay anything to the premises owner" is "a viable
    payphone . . . . because the payphone provides increased value to
    the premises."[^48] Therefore, location rents are not a cost of
    payphones, but should be treated as profit.[^49]

16. As a matter of economics, it is relatively straightforward to
    determine fair compensation in cases in which costs are directly
    attributable to the product and few costs are shared between
    different products. One would simply calculate the cost of
    production. Payphones, however, do not fit that model. A payphone
    has numerous types of "products" (e.g., local, long distance, and
    collect calls), and each of these products has very few direct,
    incremental costs (*i.e*., the incremental costs to a PSP for
    placing even a collect call are minimal, particularly when compared
    to its fixed costs). The lion's share of payphone costs are those
    that are "shared" or "common" to all services, like the equipment
    expense and line charges. There are no logical or economic rules
    that assign these common costs to "each and every call." Thus, as
    the Commission recognized in the *Third Report and Order*, "because
    most payphone costs are fixed and each type of call has a relatively
    small marginal cost, a wide range of compensation amounts may be
    considered 'fair.'"[^50]

17. To illustrate this problem, consider a PSP that owns one telephone,
    with fixed costs of \$100 per month and with 100 calls made per
    month. (Variable costs are minimal and will be disregarded to
    simplify the illustration.) Seventy-five local calls are made on the
    phone per month, each producing \$0.25 in revenue. Twenty-five
    interstate calls are made, each producing \$4.00 in revenue. The
    total revenue is \$118.75. How should we determine the per call cost
    of production so as to determine "fair compensation"? Does the PSP
    divide total revenue by total costs, thereby earning \$0.1875 on
    each call? Or, does the PSP (i) divide interstate revenue by costs
    allocable to interstate calls, thereby making \$3.00 on each
    interstate call (\$100.00 minus \$25.00 fixed costs, divided by 25
    interstate calls) and (ii) divide local revenue by costs allocable
    to local calls, thereby losing \$0.75 on each local call (\$18.75
    revenue minus \$75.00 fixed costs divided by 75 local calls)? Each
    of these distributions of common cost \-- as well as an infinite
    number of other ones \-- results in a different cost of production
    and, therefore, different "fair compensation." How can any
    Commission regulation attempt to solve this intractable problem?

18. Although neither the text of section 276 nor its legislative history
    answers that question, economic theory applied by the Commission in
    the context of payphone compensation provides broad parameters for
    appropriate cost allocation. In the *Third Report and Order*, the
    Commission explained that any cost allocation is correct provided
    that each type of call recovers at least its incremental costs, and
    no one service recovers more than its stand-alone cost.[^51] "Within
    these parameters, many different compensation amounts may be
    considered fair."[^52] For example, because local coin calls should
    not subsidize dial-around calls, local call revenue should recover
    the direct costs of local calls and make some contribution to common
    costs.[^53]

19. Beyond the broad parameters outlined above for cost allocation,
    economic theory does not provide any basis to determine what precise
    portion of common costs a particular service, or for that matter any
    one call, must bear. Particular policy goals may dictate a
    particular cost allocation, however. For example, in the *Third
    Report and Order,* the Commission, interpreting the statutory
    mandate to promote widespread payphone deployment, concluded that it
    should set a payphone compensation rate that would be large enough
    "to ensure that the current number of payphones is maintained."[^54]
    To accomplish this goal, the Commission adopted a methodology that
    permitted a significant contribution to common costs.[^55] That
    policy has little or no application in the prison context because,
    considering that ICS providers offer commissions, prison payphones
    are already profitable. Any increase in inmate calling services'
    revenue to permit a larger contribution to common costs will not
    encourage it to provide more payphones but will only encourage
    higher location commissions. Further, the correctional facility and
    its communications policy, not the market, often determine the
    number of prison phones.

20. In its submissions, ICSPC never explicitly states an argument as to
    the correct cost and revenue allocation under section 276. It simply
    alleges that its members lose money on local calls in many states
    that impose rate ceilings.[^56] An implicit assumption of ICSPC's
    argument is that section 276 requires each service, like local
    inmate collect calling, to make the same contribution to common
    costs. If this were required, then *every call* would be required to
    make identical contributions to common costs in order to satisfy the
    fair compensation standard. In its *ex parte* submissions, this
    implicit position is made more clear, for ICSPC distributes its
    fixed costs equally over *all* of its calls in order to arrive at a
    per call inmate calling cost, a figure that exceeds some state rate
    ceilings.[^57]

21. None of the other parties submitting comments supports ICSPC's bid
    for additional compensation. AT&T, CURE, Gateway, and MCI all argue
    that, because an ICS provider negotiates its compensation with
    confinement facilities and because this market is allegedly robust,
    ICSPC's claim that its members are losing money carries no
    weight.[^58] If they were losing money, these parties argue, ICS
    providers would have no incentive to bid on contracts, yet many ICS
    providers continue to bid. In short, no one would be an ICS provider
    if ICS providers actually lost money on their operations.

22. In this vein, Gateway recognizes that ICSPC claims that its members
    are not being fairly compensated for local calls and does not allege
    that its members are losing money on both interstate and local
    calls.[^59] In other words, ICS providers recover more of their
    common costs from non-local calls than from local calls, but they
    make money overall. Therefore, most commenters' "market-based"
    opposition to additional inmate call compensation is based on the
    assertion that section 276 only requires "fair" compensation
    measured by comparing the total revenue and costs of *all* inmate
    calls, not simply one discrete type of call like local inmate
    calls.[^60]

23. Contrary to ICSPC's implicit position, we conclude that the relevant
    statutory language does not require *every* call to make an
    identical contribution to shared and common cost. Section 276
    directs the Commission to create a "per call compensation plan" to
    guarantee fair compensation, but it does not require the Commission
    to create the most inflexible and intrusive plan. To the contrary,
    the 1996 Act aimed to create a "pro-competitive, de-regulatory
    national policy framework."[^61] Given the goals of the 1996 Act, we
    will not construe section 276 inflexibly to require that each call
    make an identical contribution.[^62] Similarly, section 276
    certainly does not require that every submarket of the payphone
    market with higher costs should receive additional compensation.
    Following ICSPC\'s logic, PSPs with payphones in dangerous
    neighborhoods or those in distant locations that have higher
    operating costs or less usage should be able to charge higher rates
    for calls from such phones. Rather, given the de-regulatory aims of
    the 1996 Act, the critical factor is that the costs must ultimately
    be recovered, but we will not mandate a particular method of cost
    recovery. Unless an ICS provider can show that (i) revenue from its
    interstate or intrastate calls fails to recover, for *each* of these
    services, both its direct costs and some contribution to common
    costs, or (ii) the *overall* profitability of its payphone
    operations is deficient because the provider fails to recover its
    total costs from its aggregate revenues (including both revenues
    from interstate and intrastate calls), then we would see no reason
    to conclude that the provider has not been "fairly compensated."

24. Given this interpretation of "fairly compensated" and the record in
    this case, ICSPC's members have not demonstrated that they are
    entitled to further compensation, and we deny, at this time, ICSPC's
    request to preempt all state ceilings. First, as discussed at
    greater length below, having reviewed ICSPC's submissions concerning
    the adequacy of revenues from its local coinless calls, we conclude
    that ICSPC has not demonstrated that its members cannot recover from
    that intrastate service all its direct costs and some contribution
    to common costs as well.[^63] Moreover, having failed to demonstrate
    that local inmate calls do not recover their direct and incremental
    costs, ICSPC similarly has not shown that the existing revenue
    recovery mechanism has created an inappropriate subsidy among
    service categories. Second, with its focus upon local revenue
    recovery, ICSPC has made no claim that its members fail to recover
    the total costs of their interstate and intrastate calls in the
    aggregate. Thus, ICSPC has not demonstrated that the payphone
    operations of its members are not profitable overall; it has only
    claimed that a particular category of calls, local coinless inmate
    calls, fails to recover its fully distributed costs.

25. We also decline to impose the \$0.90 federal surcharge that ICSPC
    suggests for inmate calling. As we explain above, ICSPC derives this
    figure from the difference between AT&T's tariffed rates for inmate
    and non-inmate interLATA calls.[^64] ICSPC argues that this is an
    appropriate proxy for local inmate calls because it will ensure that
    ICS providers can recover the unique ICS costs not addressed by rate
    ceilings."[^65]

26. We reject this proposal for two reasons. First, the court of appeals
    has made clear that proxies may be used as the basis to set
    compensation only under certain conditions.[^66] The court of
    appeals rejected the determination in the *Order on Reconsideration*
    that the compensation due to PSPs for 800 and access code calls
    (dial-around compensation) should be equal to the deregulated local
    coin rate. There, the Commission had reasoned that coin and coinless
    calls are "similar," and, therefore, the coin rates could serve as a
    proxy for coinless rates. The court held, however, that the
    Commission's finding that these two types of calls are similar did
    not justify its conclusion that "the compensation . . . should be
    equal."[^67] In this proceeding, ICSPC has merely stated that
    long-distance call compensation and local calls are "functionally
    similar" and that, therefore, long-distance call compensation can
    serve as a proxy for local compensation.[^68] ICSPC has not,
    however, provided evidence beyond generalized assertion that the
    *costs* of these types of calls are similar.[^69] Second, many claim
    that, given the great diversity of local costs and conditions, a
    national surcharge on local inmate calls would result in excessive
    recovery in many states and confinement facilities.[^70] ICSPC has
    submitted data from only a few states, which do not support a
    national rate. Third, we are not persuaded by ICSPC's claims that
    the \$0.90 interstate surcharge functions as "a cost-based
    surrogate" that can define cost-based "fair" compensation for local
    calls.[^71] A rate differential does not necessarily speak to a cost
    differential, particularly when these differentials are driven, in
    large part, by the exorbitant location rents that ICS providers have
    agreed to pay in the form of commissions. We have previously ruled
    that location rents should not be treated as costs.[^72]

    **B. Location Monopolies: High Inmate Calling Rates and the
    Commissions Paid By ICS Providers to Confinement Facilities**

27. We also conclude that the relief proposed by ICSPC would be unlikely
    to improve the profitability of ICS providers because much of any
    additional revenue ICS providers receive would likely be retained by
    the location monopolist, the confinement facilities, in the form of
    higher commissions. As discussed above, a confinement facility
    typically awards a contract to provide calling service by
    competitive bidding and gives the winning provider a monopoly on all
    inmate calling services. To win a contract, a bidder's response to
    the institution's request for proposals must include an amount to
    cover commissions paid to the facility. The record in this
    proceeding indicates that these commissions have typically ranged
    between roughly 20 percent and 60 percent.[^73]

28. In this environment, neither a surcharge nor preemption of rate
    ceilings would necessarily increase an ICS provider's net revenue.
    The additional revenue stream likely would drive up the commissions
    offered by competing ICS providers to the confinement facilities,
    thereby keeping the ICS providers' net revenue flat.[^74] This would
    not only eliminate any relief afforded by higher compensation rates,
    but likely result in ICS providers returning to the Commission in a
    few years with the same concerns regarding the high cost of
    providing inmate calling services.

29. Under these circumstances, the record in this proceeding strongly
    suggests that any solution to the problem of high rates for inmates
    must embrace the states. States are encouraged to examine the issue
    of the significant commissions paid by ICS providers to confinement
    facilities and the downward pressure that these commissions have on
    ICS providers' net compensation and, more important, the upward
    pressure they impose on inmate calling rates. Furthermore, as CURE
    points out, these commissions limit incentives for the ICS providers
    to pass cost savings to consumers through lower rates.[^75]

# C. ICSPC's Proposal to Deregulate a Portion of Local Collect Calling {#c.-icspcs-proposal-to-deregulate-a-portion-of-local-collect-calling .unnumbered}

30. Several years after its appeal and voluntary remand, the Coalition
    submitted in an *ex parte* letter a new proposal, which it
    characterized as a "short term approach." It asks the Commission to
    preempt state rate caps on a portion of the local collect call,
    rather than all local collect calls rate caps.[^76]

31. Typically, rates for intrastate operator services (OS) are set by
    state public utility commissions. [^77] It is pursuant to this
    authority that states place caps on local collect calling \--
    collect calls cannot be made without OS; therefore, the power to
    regulate OS is the power to regulate collect calls.[^78] According
    to the Coalition, some \-- but not all \-- states divide their rate
    caps on collect calls into two elements: the operator surcharge and
    the "local calling rate element."[^79] When the Commission
    deregulated the local coin calling rate, some states pegged the
    local calling rate element for collect calls to the deregulated
    local coin rate as set forth in the incumbent LECs' tariff; others
    continued to peg the local calling rate element to the existing
    regulated coin rate.[^80]

32. The Coalition argues that we should preempt the state's authority to
    set the "local calling rate element," mandating that *all* states
    set the element equal to the deregulated local coin rate.[^81] It
    claims that this action is warranted because numerous states set the
    local calling rate element too low.[^82] The intrastate OSP element
    would remain subject to state rate caps.

33. When the Commission deregulated payphones, it created a market-based
    mechanism to ensure that PSPs receive fair compensation for each and
    every collect call. Collect calls are handled by a payphone's
    presubscribed OSP with which the payphone's PSP has a contractual
    relationship. Typically, the OSP collects the revenue for the
    collect call, which, as noted, for intrastate calls is often capped
    by state regulation, and returns to the PSP a per call commission
    payment. The PSP can negotiate, therefore, in its contract with OSPs
    a per call compensation for each collect call.[^83] Or, if the OSP
    and the PSP functions are performed by one company, as is often the
    case with inmate calls, such company is free to impute whatever
    price it so desires to its PSP operations.[^84]

34. The local calling rate element does not alter this compensation
    mechanism, and indeed, it could not. The local calling rate element
    is *not* necessarily the amount that a PSP receives; that amount is
    determined by contract or, in the case of an entity that performs
    both the PSP and OSP functions, by the amount that BOCs, LECs, or
    independent ICS providers impute to their PSP operations. Therefore,
    the local calling rate element is not the key factor in determining
    PSP compensation for collect calls. The critical factor is the
    amount set by negotiation or by imputation.

35. The only possible section 276 compensation claim that could arise in
    this context is if the state-regulated OSP-cap were so low as to
    prevent an OSP from offering (or imputing) a payment to the PSP so
    as to render a PSP's revenue insufficient in a manner described in
    paragraph 23, *supra*. As discussed above, the Coalition has not
    demonstrated that its members' operations cannot function properly
    under the existing OSP caps.

36. In addition, we have reservations about the Coalition's cost data
    that purport to show that its members lose money on local calls.
    While the Coalition's data indicate that an average inmate local
    collect call costs \$2.155, \$1.309 more than the average payphone
    call, we do not find this data reliable for three reasons.[^85]

37. First, the Coalition's comparison between inmate and non-inmate
    payphones is flawed. ICSPC claims that there are 439 calls from an
    average payphone. This number is derived from the average number of
    calls from a "marginal payphone" as defined in the *Third Report and
    Order*[^86] and includes *all* calls, of which operator assisted
    ("collect") calls are only a small fraction. ICSPC, however, does
    not separate the revenue and cost for local collect calls from its
    other services. As a result, there is no way from ICSPC's data to
    compare local payphone collect calls to local inmate collect calls,
    and, consequently, ICSPC has not proven the point that local
    payphone collect calls are profitable in comparison to inmate local
    collect calls.

38. Second, we find the cost data deficient because ICSPC treats the
    commissions paid to the inmate facilities as costs rather than
    profits. As noted earlier, these commissions are location rents[^87]
    that are negotiable by contract with the facility owners and
    represent an apportionment of profits between the facility owners
    and the providers of the inmate payphone service. When the
    commissions are properly treated as profit, rather than as fixed
    costs, the result is that ICSPC claims a \$0.73 profit for each call
    that costs roughly \$1.00 to provide (excluding the high
    uncollectibles which result at least in part from high profit
    levels). Thus, *even employing* ICSPC's problematic distribution of
    common costs, ICSPC claims \$0.73 profit on each call. Given that
    the deregulated local coin rate ranges from \$0.35 to \$0.50, this
    profit level is excessive compared to other services the payphone
    provides. This suggests that inmate calling services that employ
    collect calling are inefficient. Simply allowing *more* revenue will
    not enable companies to function profitably but will merely feed an
    inefficient calling system. In addition, several of ICSPC's figures
    seem so extraordinary that we cannot accept them without further
    justification \-- which this record fails to provide. ICSPC states
    that its equipment depreciation and overhead are \$0.334/call for
    inmate calls, almost *five* times greater than the comparable figure
    (\$0.074/call) for payphone calls. We acknowledge that inmate calls
    impose expensive security costs, but they also are cheaper in some
    respects, as they do not require a coin mechanism or coin
    collection. Similarly, ICSPC simply asserts without explanation that
    it should receive a 15% return on investment, as opposed to the
    11.25% that is accepted elsewhere in telecommunications.

39. We also are unconvinced by the claim that telephone service to
    prisons and jails may be threatened if we do not grant the
    Coalition's requested rate increase. While the Coalition claims that
    service could be threatened or is dwindling,[^88] numerous
    commenters that provide payphone service state that they are, in
    fact, adequately compensated for inmate calls, and they should be
    able to provide service in the event that the Coalition members
    cannot.[^89]

40. Additionally, if rates are so low that state prisons and jails
    cannot receive service, this should be brought to the attention of
    the states that regulate OSP rates, which is a more direct way of
    remedying an allegedly localized problem. The Coalition claims that
    rates are insufficient only in a few states.[^90] By the same token,
    if a prison cannot find a ICS provider, then it might lower the
    locational rent and/or require more cost-effective security
    protections.

41. Finally, we note that, apart from the deficiencies discussed herein,
    the Coalition's evaluation of the costs of collect inmate payphone
    calls will be altered, in many cases, by the order we recently
    adopted concerning payphone line rates.[^91] The Coalition has
    represented in both that proceeding and this proceeding that "the
    LEC bill for payphone lines and usage is *the single largest cost
    element* for PSPs seeking to deploy and maintain payphones . . .
    ."[^92]

42. Further, even assuming *arguendo* that the aggregate cost data
    submitted by the Coalition were reliable (contrary to our findings
    above), its approach runs afoul of the principle set forth in the
    *Illinois* case.[^93] As noted, under the Coalition's proposal, the
    Commission would mandate a specific rate for the PSP portion of
    compensation equal to the deregulated coin rate, rather than require
    that any such rate be set by negotiation or by imputation (where
    there is no separate OSP). The court of appeals held, however, that
    payphone rates must be based on actual cost and that hypothetical
    cost proxies may be relied upon only under highly specific
    circumstances. The court stated that dial-around compensation rates
    could not be set on the deregulated coin rate simply because
    "deregulated local coin rates are the best available surrogates for
    payphone costs."[^94] The court required the Commission to look at
    actual cost data, including "contrary data."[^95] Notwithstanding
    this judicial guidance, here the Coalition has presented no evidence
    that the costs attributable to the PSP functions its members perform
    (compensated, it argues, under the "local calling element" portion
    of applicable state tariffs) equal the cost of a coin call. The
    costs do not seem similar. In fact the "local calling element" for a
    collect calls seems *lower* than that for a coin call because a coin
    call has numerous costs (like coin mechanism, collection and
    security) that a coinless call does not. Moreover, the Coalition has
    presented only aggregate data on the costs of collect calls from
    inmate payphones, and it has not delineated those costs attributable
    to the PSP functions as distinct from those more properly attributed
    to the OSP functions performed by the automated payphones commonly
    used in prisons or jails.

43. Recognizing that equating the local calling element for collect
    calls to the cost of coin calls is "a vulnerable claim of cost
    equivalency,"[^96] the Coalition responds that the Commission need
    not find that the local coin costs and the collect calling local
    element costs are equivalent. Rather, because "ample cost data in
    the record clearly demonstrates that local collect inmate rates in
    the state in question are substantially . . . below costs today,"
    there is no risk of over-recovery. As discussed above, we are not
    convinced that the record demonstrates that local collect inmate
    rates are in fact "substantially below cost."

44. Finally, deregulating the local calling rate element would affect
    those states in which the public utility commission has determined
    that the local calling rate element should *not* be equal to the
    deregulated coin rate. Even if we found the aggregate cost data
    sufficiently reliable to conclude that the *aggregate* compensation
    for local collect inmate calls is below cost (which we do not), we
    would still decline to set the compensation for the PSP functions of
    such calls at the deregulated rate prevailing for coin payphones,
    because of the lack of record evidence that the costs of these
    functions are equivalent for coinless inmate payphones and coin
    payphones.

# D. Discrimination and Subsidy Prohibitions {#d.-discrimination-and-subsidy-prohibitions .unnumbered}

45. Section 276 explicitly prohibits the Bell operating companies from
    subsidizing their payphone service directly or indirectly from their
    regulated services and from discriminating in favor of their
    payphone services.[^97] It directs the Commission to prescribe
    nonstructural safeguards to implement these prohibitions.[^98] These
    safeguards must be "at a minimum . . .equal to those adopted in the
    Computer Inquiry-III (CC Docket No. 90-623) proceeding" (the
    "Computer III safeguards").[^99] The Computer III safeguards were
    designed to allow BOCs to enter the enhanced services market while
    preventing them from subsidizing or discriminating in favor of their
    enhanced services.[^100] These safeguards include a wide variety of
    mechanisms, including comparably efficient interconnection
    (CEI)[^101] and open network architecture (ONA) plans,[^102] as well
    as certain discrimination, customer proprietary network information
    (CPNI), and accounting safeguards.[^103]

46. In the *Payphone Orders*, the Commission determined that accounting
    safeguards specified in section 276 require "payphone assets to be
    reclassified \[in nonregulated accounting pools\] . . . \[which\]
    include all facilities related to payphone service."[^104] The
    Commission did not require reclassification of "loops connecting the
    payphones to the network, the central office 'coin service,' or
    operator service facilities supporting incumbent LEC payphones
    because these are part of network equipment necessary to support
    basic telephone services."[^105] Subsequent Common Carrier Bureau
    orders applied this precedent and stated that the accounting
    safeguards apply to payphone equipment only.[^106]

47. The Coalition seeks reconsideration of the *Order on
    Reconsideration* and argues for broader application of the
    safeguards as well as application of numerous specific safeguards.
    It supports its call for broader application of the safeguards with
    allegations that the BOCs are subsidizing their payphone operations
    from their regulated services.[^107]

### ICSPC has failed to show subsidization to warrant changing the Commission's accounting safeguards

48. As an initial matter, ICSPC has presented no convincing evidence to
    support its claim that the BOCs subsidize their payphone operations
    or to warrant reconsideration or revision of our existing rules.
    Rather, its calls for broader regulatory safeguards proceed from
    speculative assertions that the BOCs subsidize their inmate calling
    services. Although the Coalition claims that the "record evidence
    suggests it is highly likely that some ILECs *are* operating their
    inmate collect calling at a loss,"[^108] we find its evidence
    lacking. ICSPC supports its subsidization claim with four
    assertions: (i) under their cost analyses inmate calling cannot be
    profitable under state local collect calling rate caps; (ii) inmate
    calling service providers pay high location commissions; (iii) under
    one request for proposal (RFP), Bell Atlantic stated that it had no
    bad debt associated with inmate calling services; and (iv) the BOCs
    are under no "obligation to offer equivalent commissions to their
    own and independent 'inmate service' operations."[^109] We respond
    to each assertion in turn.

49. First, the Coalition's cost analysis does not demonstrate
    subsidization because it does not show that inmate calling services
    lose money either overall or on local calling services (under our
    accepted cost allocations).[^110] Thus, BOCs could easily
    participate in the inmate calling market without subsidizing their
    ICS operations. Second, high location commissions could suggest
    subsidization if calling rates were unusually low. The record,
    however, shows that inmate calling rates are sufficient and, in many
    markets, quite high. Therefore, it seems quite reasonable to
    conclude that inmate calling provides sufficient revenue for both
    confinement facilities and ICS providers. Third, the single RFP from
    Bell Atlantic pertaining to bad debt establishes little. As
    discussed below, the non-regulated BOC PSP "sells" its receivables
    to the BOC OSP for a commission; technically, the BOC PSP does not
    bear the cost of bad debt. Fourth, the RBOC Payphone Coalition has
    made clear representations in this proceeding that it does, in fact,
    offer "equivalent commissions to their own and independent inmate
    service operations."[^111] In short, ICSPC has failed to
    substantiate a claim of subsidization that could warrant revision of
    our rules.

### The Commission's existing rules provide adequate safeguards

50. Our existing rules adequately implement the statutory prohibitions
    against subsidization and discrimination and in no way require the
    modifications that ICSPC seeks. Primarily, ICSPC argues that section
    276 requires the BOCs to allocate, pursuant to Part 64 of our rules,
    all revenue and costs related to inmate calling service, including
    operator services and bad debt, into nonregulated costs pools.[^112]
    Currently, our rules only apply such safeguards to equipment, not
    all the services needed for a collect call.[^113] Section 276 is
    little help in evaluating ICSPC's request. The statute states that
    Computer III safeguards must be applied to "payphone service" and
    simply defines "payphone service" as "the provision of public or
    semi-public pay telephone service, the provision of inmate telephone
    service in correctional institutions, and any ancillary
    services."[^114]

51. ICSPC argues that operator services are an integral part of
    *collect* inmate calls, so operator services supporting payphones
    should be reclassified as nonregulated.[^115] In addition to
    re-allocating operator service expense, it argues that bad debt and
    billing and collection expenses also must be allocated to
    nonregulated cost pools because they are major costs to inmate
    calling services.[^116] The Coalition alleges that the existing
    definition of payphone services enables the BOCs to allocate their
    payphone costs to their regulated services while assuring that they
    do "not assume the financial responsibility and risk associated with
    the provision of the collect calling service for inmates."[^117] In
    inmate calling services, this problem is acute because bad debt
    (which is quite high for inmate calling) is allegedly commingled
    with BOC receivables, allowing BOCs "to effectively use revenues
    from other services to subsidize the costs and lost revenue
    associated with their bad debt from ICS."[^118] The Coalition also
    argues that other costs, like validation fees, must be included in
    nonregulated cost pools because they support collect calls from
    payphones.[^119]

52. On the other hand, the RBOC Payphone Coalition argues that operator
    services are regulated services that should not be separated into
    nonregulated cost pools.[^120] It argues that the current
    relationship between the BOC PSP and BOC OSP provides an adequate
    accounting safeguard. As it explains, the relationship requires the
    BOC OSP to pay a commission or per call compensation to the BOC PSP
    for each collect call.[^121] The RBOC Payphone Coalition states that
    the BOC PSP's revenue (the commission or per call compensation)
    adequately reflects the value of the call to the BOC OSP.[^122] The
    BOC OSP will pay no more for the call than the revenue it will
    produce \-- minus costs like bad debt and operator services. As a
    consequence, the nonregulated revenue the BOC PSP receives reflects
    its nonregulated costs, and cost follows revenue, as accounting
    safeguards require. Further, the BOCs argue that, because most LECs
    operate under price-cap regimes, they have no incentive to subsidize
    because any losses they suffer in OSP provisioning cannot be made up
    through other services.[^123]

53. In order to determine whether the Inmate Coalition's or the RBOC
    Payphone Coalition's suggested accounting safeguards are
    appropriate, we must recognize that the primary purposes of Computer
    III accounting safeguards are to prevent BOCs "from improperly
    shifting costs from their unregulated to their regulated offerings"
    and to ensure proper allocation of common costs.[^124] In other
    words, the accounting safeguards must guarantee that regulated
    revenue properly follows regulated costs, and unregulated revenue
    follows unregulated costs.[^125] From that perspective, it makes
    little difference whether the Commission adopts the Inmate
    Coalition's or the RBOC Payphone Coalition's accounting safeguards.

54. Under either approach, nonregulated costs will follow nonregulated
    revenue without improper shifting. In the Inmate Coalition's
    suggested approach, the BOCs allocate all services used to support
    payphone services to nonregulated cost pools under Part 64, along
    with other costs associated with payphone revenue, like billing and
    collection, operator services and validation. The revenue received
    from the collect payphone calls would offset these costs. Under the
    RBOC Payphone Coalition approach, the costs of providing payphone
    equipment would be allocated to nonregulated cost pools under Part
    64 and the commission or per call compensation revenue paid by the
    BOC OSP to the BOC PSP would offset such costs. This revenue would
    accurately reflect the operator service, billing and collection, and
    other costs that the BOC OSP must bear to obtain the collect call
    revenue from end-users. Indeed, the BOCs explicitly state that they
    offer these commissions to all parties, not just their own
    PSPs.[^126] In addition, services provided to BOC PSPs, like LIDB
    (line identification database) dips, would be charged to BOC PSP
    cost pools. Thus, the revenue the BOC payphone produced in
    commissions or per call compensation would offset the costs of the
    payphone equipment and services that the BOC PSP "purchases" from
    the BOC OSP. Finally, the Inmate Coalition's suggested approach
    would impose extensive and burdensome accounting and reporting
    requirements in order to determine what elements of the regulated
    BOC "support" an inmate collect call. The RBOC Payphone Coalition's
    accounting method, on the other hand, is far less burdensome and
    involves far less administrative effort, yet achieves the same ends.

55. We observe that there is a factual dispute in the record concerning
    the commissions that BOCs pay their PSPs. The Inmate Coalition
    claims that the BOCs do not offer their commissions generally or on
    a non-discriminatory basis.[^127] All parties appear to agree that
    these commissions must be generally offered on a transparent and
    non-discriminatory basis.[^128] We agree with parties that this is
    the only permissible application of section 276.

56. Finally, ICSPC claims that, because as a statutory matter "operator
    services" does not include inmate calling, *all* intrastate inmate
    calling costs and revenue are not subject to state regulation (as
    are other intrastate operator services). Because inmate calling is
    not subject to state regulation, intrastate inmate calling costs are
    *not* part of the BOC's regulated operations and must be placed in
    deregulated cost pools \-- or so ICSPC argues. [^129] To support its
    argument, ICSPC points out, quite accurately, that in implementing
    the Telephone Operator Consumer Services Improvement Act of 1990
    (TOCSIA), the Commission stated that "the carrier providing service
    to inmate-only phones at correctional institutions would not fall
    under the definition of 'provider of operator services.'"[^130]

57. The RBOC Payphone Coalition, on the other hand, responds that the
    Commission's conclusion that operator services do not include inmate
    calling services were due to the "exceptional set of circumstances"
    that inmate calling presents and has no application to the question
    whether operator services are "included within the definition of
    inmate payphone services."[^131]

58. We need not rest our decision on the answer to this statutory
    question. Whether or not intrastate inmate operator services are
    regulated does not necessarily determine the appropriate
    nonstructural safeguards under section 276. If the BOC imputes a
    commission rate to its ICS division and if that rate is transparent
    and available to all, the anti-subsidization and anti-discrimination
    requirements of section 276 will be met \-- just as if inmate
    operator services were segregated into a distinct cost pool.
    Further, we cannot accept ICSPC's suggestion to apply safeguards
    only to inmate calling, but not to other collect calling services.
    ICSPC justifies applying safeguards only on inmate calling because
    of its unique features, such as the predominance of collect calling
    and its use of dedicated, on-site equipment, that, it contends,
    render inmate calling different from "payphone-accessible operator
    service."[^132] There are, however, many varieties of collect
    payphone services. We find it inappropriate to apply special
    nonstructural safeguards to various subsets of these services
    without a complete record on all types of collect calls; such a
    record is here lacking.

59. Beyond its request for broader application of the accounting
    safeguards, ICSPC argues for a variety of revisions to our
    nonstructural safeguards. ICSPC asks the Commission to modify our
    rules to require that: (i) the BOCs offer billing and collection to
    independent ICS providers on the same terms and conditions that they
    are provided to BOC PSPs;[^133] (ii) the BOCs report to independent
    ICS providers on a timely basis when the billed party has denied
    responsibility for the ICS providers portion of its
    bill;[^134] (iii) the BOCs treat all inmate calling services
    identically with respect to local service cut-offs;[^135] (iv) the
    BOCs provide account fraud information on a nondiscriminatory basis
    to independent ICS providers on a real-time basis;[^136] (v) account
    fraud information be provided to BOC PSPs on an arm's-length
    basis;[^137] (vi) BOC PSPs be provided LIDB validation dips on the
    same terms as they are provided to independent PSPs;[^138] (vii) the
    BOCs provide "any basic network function . . . supporting the BOCs'
    inmate calling services" under tariff";[^139] and, finally, (viii)
    the BOCs forward independent ICS provider calls to competitive LECs
    in the same fashion as the BOCs' own calls.[^140]

60. In general, our response to all of these requests is the same. We
    need not change our rules in response to speculative and unsupported
    claims of subsidization, as we have found ICSPC\'s to be. If any
    party believes that improper subsidization occurs, it should bring a
    complaint under section 208 of the Act. Nonetheless, we address each
    of these requests in turn.

61. First, ICSPC wants the BOCs to offer billing and collection services
    on a stand alone basis to independent ICS providers on the same
    terms and conditions they are provided to BOC PSPs.[^141] We reject
    this request for reconsideration. The Commission has ruled that the
    billing and collection services are "incidental to communications,"
    beyond the scope of Computer III, and need not be provided on a
    nondiscriminatory basis under the Computer III safeguards.[^142]
    Moreover, we have no evidence that BOCs are discriminating against
    independent PSPs. Further, billing and collection is available from
    third parties; it is not a bottleneck service that all independent
    PSPs need in order to compete effectively with a BOC PSP. If ICSPC
    members cannot receive billing and collection from a BOC, it can
    obtain these services at presumably competitive rates from an
    independent billing and collection clearinghouse; therefore, we see
    no reason to extend our existing safeguards.

62. Second, ICSPC wants the BOCs to report to independent ICS providers
    when the billed party has "denied responsibility for the ICS
    provider's portion of its bill on a timely basis."[^143] ICSPC
    alleged that billed parties often claim that they never accepted
    charges for collect calls and refuse to pay the charges as they
    appear on their local phone bill.[^144] This refusal is often not
    communicated to the independent ICS provider for months, a delay
    that can result in large costs to the ICS provider. Because the
    Computer III safeguards apply to "information that is useful for
    bill preparation," the BOCs must provide this information on a
    non-discriminatory basis.[^145] Our rules already provide for what
    ICSPC requests.

63. Third, ICSPC asks that the BOCs treat all inmate calling services
    identically with respect to local service cut-off.[^146] State law
    often governs procedures for disconnect for non-payment through the
    so-called "Do Not Disconnect" or "DND" laws.[^147] Section 276
    already prohibits any BOC from "discriminat\[ing\] in favor of its
    payphone service."[^148] BOCs must treat collect calls from their
    PSPs identically to those from independent PSPs.

64. As its fourth and fifth requests, respectively, ICSPC wants the BOCs
    to provide account fraud information in a nondiscriminatory manner
    to independent ICS providers on a real-time basis,[^149] and to
    provide this account fraud information to BOC PSPs on an arms-length
    basis.[^150] Both requests have three related responses. As an
    initial matter, account fraud information is arguably an integral
    part of the OSP function; it cannot be unbundled. Independent ICS
    providers can take advantage of this information by subscribing to
    the BOC OSP.[^151] The rates an independent ICS provider pays, and
    the commission it receives, must be identical to that of the BOC
    PSPs. Therefore, there is no need to provide unbundled account
    information, either on an arms-length basis or a real-time basis.
    Section 276's anti-discrimination prohibitions will be satisfied
    provided that BOCs offer their OSP service and commission
    compensation on a transparent and non-discriminatory basis to both
    their PSPs and independent PSPs.[^152]

65. Further, ICSPC has failed to indicate what account fraud information
    it seeks or allege how the BOC PSPs use such account fraud
    information. ICSPC claims that "\[i\]nformation maintained by the
    'regulated' ILEC entity regarding its local service customers and
    local calling patterns is very useful in preventing fraudulent
    calling by inmates and in reducing uncollectable revenue."[^153] We
    have no evidence in the record of this proceeding that BOCs use
    information in this way; the BOCs, at least in other proceedings,
    deny this.[^154] We cannot in a rulemaking proceeding prescribe
    rules to correct problems that are inadequately defined or explained
    in the record. Last, if the BOC OSP somehow possesses some type of
    account fraud information that it uses exclusively for its own
    operations, then our rules already provide that the BOCs must
    provide such information on a nondiscriminatory basis.[^155]

66. As for its sixth request, ICSPC wants the BOCs to provide LIDB
    validation dips on the same terms as they are provided to
    independent PSPs. As the RBOC Payphone Coalition points out, LEC
    PSPs already access LIDB on the same tariffed terms and rates
    available to independent ICS providers.[^156] Seventh, ICSPC
    requests that all BOC transmission, switching, or inmate call
    processing functions used by the BOC PSPs be purchased at tariffed
    rates.[^157] Again, as the RBOC Payphone Coalition points out, they
    already are.[^158]

67. Finally, ICSPC asks that the BOCs forward independent ICS provider
    calls to competitive LECs in the same fashion as the BOCs forward
    their own calls.[^159] ICSPC alleges that BOCs do not inform ICS
    providers on a real time basis that a customer is being served by a
    competitive LEC.[^160] Rather, whenever an ICS provider places a
    call, the ICS provider performs a LIDB query that indicates whether
    the line is valid and that provides billing name and address[^161]
    but does not indicate whether the line has been resold or
    transferred as an unbundled network element (UNE) to a competitive
    LEC.[^162] If the number is served by a competitive LEC, the call
    will be processed, regardless of whether the ICS provider has a
    billing arrangement with that particular competitive LEC. While the
    LEC or BOC will charge the ICS provider for this call, the ICS
    provider will not be able to bill for such a call and may not learn
    until several months later that a competitive LEC carried the call,
    in what is termed a "Code 50 Reject."[^163] Many competitive LECs
    refuse to enter into billing relationships with ICS providers, and,
    according to ICSPC data, its members' unbillables have risen
    accordingly.[^164] ICSPC asks that BOCs treat calls to competitive
    LECs in the same manner, whether such call originated from BOC PSPs
    or independent PSPs. This would require BOCs to provide adequate
    information so that ICS providers could block a call to a number
    served by a competitive LEC, and request that the called-party's
    competitive LEC enter into a billing relationship with the ICS
    provider.

68. The RBOC Payphone Coalition responds that competitive LEC
    information is available on the Local Number Portability (LNP)
    database. That database "indicates whether a called number is served
    by the incumbent LEC or CLEC."[^165] To ensure that a call is
    properly forwarded, an ICS provider must merely query the LNP
    database, a procedure followed by all BOC OSPs. Because the LNP
    database is available on an equal basis to both the BOC OSP and the
    independent ICS providers, there is no need to reconsider our rules
    on this matter. To the extent that the competitive LECs refuse to
    enter into billing agreements with other carriers, both the BOC and
    the independent ICS provider face the same problems.[^166] If the
    BOCs can obtain this information concerning carrier service in a
    manner not requiring two database dips (*i.e.,* they have some way
    of knowing what lines have been resold to competitive LECs without
    recourse to the LNP and LIDB databases), it must offer this
    information to all PSPs on a non-discriminatory basis.

69. In sum, we decline to modify our accounting safeguards in the manner
    requested by ICSPC, in part because our existing rules already
    provide for much of the relief they are asking. To the extent an
    independent ICS provider believe that a BOC PSP is engaging in
    discrimination or otherwise failing to comply with these existing
    obligations, it should bring a complaint pursuant to section 208 of
    the Act.

# NOTICE OF PROPOSED RULEMAKING

70. We begin this Notice of Proposed Rulemaking to seek comment on
    issues related to the provision of inmate payphone service. Section
    276 of the Communications Act of 1934 (the Act), as amended by the
    Telecommunications Act of 1996, directs the Commission to establish
    rules related to the provision of payphone service. Section 276 was
    promulgated with the dual goals of promoting competition among
    payphone providers and promoting the widespread deployment of
    payphone service.[^167] The statute also directs the Commission to
    prescribe regulations that ensure the fair compensation of payphone
    providers for each and every call using their payphone.[^168] The
    statute specifically includes the provision of inmate telephone
    service in correctional institutions within the definition of
    payphone service.[^169]

71. In addition to section 276, Congress enacted the Telephone Operator
    Consumer Services Improvement Act of 1990 (TOCSIA).[^170] Its
    purpose, *inter alia,* is "to protect consumers who make interstate
    operator services calls from pay telephones . . . against
    unreasonably high rates and anti-competitive practices."[^171] For
    the most part, the Commission has exempted inmate calling services
    from TOCSIA's consumer protections on the grounds that inmate
    services constitute "an exceptional set of circumstances."[^172]

72. We recognize that the provision of inmate calling services
    implicates important security concerns and, therefore, involves
    costs unique to the prison environment. As discussed in the
    accompanying order, a prison payphone provider typically is
    contractually obligated to monitor and control inmate calling to
    prevent abuse and ongoing criminal activity and to assist in
    criminal investigations.[^173] Correctional facilities must balance
    the laudable goal of making calling services available to inmates at
    reasonable rates, so that they may contact their families and
    attorneys, with necessary security measures and costs related to
    those measures. For this reason, most prisons and jails contract
    with a single carrier to provide payphone service and perform
    associated security functions. Thus, legitimate security
    considerations preclude reliance on competitive choices, and the
    resulting market forces, to constrain rates for inmate calling. We
    initiate this rulemaking proceeding to explore whether the current
    regulatory regime applicable to the provision of inmate calling
    services is responsive to the needs of correctional facilities, ICS
    providers, and inmates, and, if not, whether and how we might
    address those unmet needs.

73. We seek comment generally on costs associated with the provision of
    inmate calling services. The record developed in the proceeding
    leading to the accompanying order suggests that rates for inmate
    calling services have increased over the last decade, yet ICS
    providers may not reap the benefits of these higher rates. As
    discussed in that order, high inmate calling rates may be partially
    attributable to the absence of market forces.[^174] The correctional
    institution exercises exclusive control over access to the inmate
    calling market. It can demand in location commissions the highest
    amounts the market will bear and will absorb any increase in
    consumer rates or any efficiency gains of ICS providers. The
    incentive for those bidding for a contract to provide inmate calling
    services is to offer higher commission payments than others bidding.
    This results in an upward spiral of increasing location rents and
    increasing inmate calling rates, to the detriment of the ICS
    providers and, because these calls are largely collect, to the
    friends and families of inmates who ultimately bear the costs of the
    calls. On the other hand, higher commissions may give confinement
    facilities a greater incentive to provide access to telephone
    services. Commission proceeds may be dedicated to a fund for inmate
    services or assigned to the state's general revenue fund. We seek
    comment on commissions demanded by correctional institutions,
    whether and how any states have addressed the relationship between
    these commissions and inmate calling rates, and on any factors
    unique to the provision of inmate calling services that affect the
    profitability of ICS operations.

74. As we explain in the accompanying order, we reject ICSPC's requests
    that we preempt state local collect calling rate caps or impose a
    per call surcharge above any such rate caps. The cost data contained
    in the record of that proceeding did not establish either that ICSPC
    members do not recover the direct costs of local inmate collect
    calls or that they do not recover, in the aggregate, the total costs
    of their interstate and intrastate calls.[^175] We seek additional
    data, to the extent such data can be developed, that might overcome
    the problems we identified. In particular, we seek cost and revenue
    data related to local collect calls made from confinement
    facilities, separate from data related to other services offered by
    payphone providers. We also seek support and justification for any
    costs related to inmate calling services (such as depreciation,
    overhead, or return on investment) that ICS providers assert differ
    from the costs incurred with respect to ordinary payphones. We also
    expressed concern that the relief sought by ICSPC might not improve
    the profitability of ICS providers because additional revenue might
    be retained by the confinement facilities in the form of higher
    commissions.[^176] We seek comment, therefore, on whether and how
    the ICSPC proposals might be modified to ensure that increased
    revenues are in fact retained by the ICS providers. In addition, we
    seek comment regarding any other proposals that might address the
    problems identified by ICSPC.

75. In the case of local (city and county) jails, ICS providers operate
    in a largely state-regulated environment. Most calls from city and
    county facilities are intraLATA toll or local calls, and most states
    impose rate ceilings on local calls. Some of these rate ceilings are
    based on the incumbent local exchange carriers' standard collect
    calling rates; other ceilings are set specifically for inmate calls.
    Commissions are generally paid in these settings despite the price
    ceilings. We seek information from states on the use of rate
    ceilings. What is the extent of these rate ceilings: are there
    specific ceilings for intralata toll calls and intrastate long
    distance collect calls? We seek comment on what role the states play
    in setting ceilings and on the possible bases for the rate ceilings.
    We also seek comment on which states have the lowest rate ceilings,
    and what impact those low rate ceilings have on inmate payphone
    provider compensation. Further, we are interested in information
    from those states that have enacted "rate-friendly" inmate service
    contracting practices. For example, can state contracting policies
    be designed to encourage awarding contracts to vendors that offer
    inmates the lowest rates?

76. We also seek comment on alternatives to collect calling in the
    inmate environment that might result in lower rates for inmate calls
    while continuing to satisfy security concerns. Alternatives have
    been offered; some inmate facilities allow the use of debit cards or
    commissary accounts. Such arrangements eliminate operator services,
    billing and collection, and bad debt, which, according to data
    submitted to the Commission, constitute nearly 30% of inmate calling
    cost.[^177]

77. The federal prison system has implemented a debit account system
    and, we are informed, offers rates better than many states do.[^178]
    We seek comment on why other ICS providers cannot offer rates
    available in federal prisons. We seek comment on whether the reduced
    rates are being offered in some inmate environments but not in
    others, and what factors contribute to any differences. We would
    like specific information on why rates for calls of similar duration
    in the same state vary significantly depending on whether the call
    is made from a federal prison or a state prison. We also seek
    comment on how debit cards or commissary accounts are working in
    non-federal prisons and the resulting benefits to inmates. In
    particular, we seek comment as to whether such mechanisms are
    workable in all types of correctional facilities, including small
    jails with high inmate turnover. We note that some have stated that
    small jails cannot implement a debit card system due to the turnover
    rate.[^179]

78. We also have been told of instances where the telephone calls are
    disconnected whenever there is a pause in conversation or after a
    given time period. This disconnect feature is in place to guard
    against three-way calling. Once disconnected, however, the inmate
    must call again resulting in a costly set-up charge. We seek comment
    on how pervasive this practice is and on solutions that would
    prevent three-way calling, but not result in premature
    disconnections. We seek comment on other inmate calling service
    practices that may serve legitimate security needs but have the
    unintended, and perhaps unnecessary, effect of increasing the costs
    incurred by inmates and their families.

79. Finally, we seek comment on any additional ways to reduce costs for
    inmate service providers (and, consequently, the costs of inmate
    calling). Will their costs be reduced significantly as a result of
    our recent order addressing payphone line rates?[^180] Are there
    other potential cost-cutting measures that the providers might
    undertake themselves or that this Commission or state public utility
    commissions might facilitate?

# PROCEDURAL MATTERS

**A. Initial Regulatory Flexibility Analysis**

80. As required by the Regulatory Flexibility Act of 1980, as amended
    (RFA),[^181] the Commission has prepared the present Initial
    Regulatory Flexibility Analysis (IRFA) of the possible significant
    economic impact on a substantial number of small entities by the
    policies and rules proposed in this Notice. Written public comments
    are requested on this IRFA. Comments must be identified as responses
    to the IRFA and must be filed by the deadlines for comments on the
    Notice provided above in Section B below. The Commission will send a
    copy of the Notice, including this IRFA, to the Chief Counsel for
    Advocacy of the Small Business Administration.[^182] In addition,
    the Notice and IRFA (or summaries thereof) will be published in the
    Federal Register.[^183] In particular, we seek comment on
    commissions demanded by correctional institutions, whether and how
    any states have addressed the relationship between these commissions
    and the inmate calling rates, and on any factors unique to the
    provision of inmate calling services that affect the profitability
    of ICS operations. We also seek support and justification for any
    costs related to inmate calling services (such as depreciation,
    overhead, or return on investment) that ICS providers assert differ
    from the costs incurred with respect to ordinary payphones. Finally,
    we seek comment on whether and how the ICSPC proposals might be
    modified to ensure that increased revenues are in fact retained by
    the ICS providers and we seek comment regarding any other proposals
    that might address the problems identified by ICSPC.

### Need for, and Objectives of, the Proposed Rules 

81. In this proceeding, we seek comment on the appropriate regulatory
    environment for Inmate Calling Service (ICS) providers. In choosing
    the appropriate regulatory environment we ask interested parties to
    address how the Commission can best achieve the goals set forth by
    Congress in section 276 of the Act.

### Legal Basis

82. The legal basis for any action that may be taken pursuant to the
    Notice is contained in sections 4, 10, 201-202, 214, 276, 303, and
    403 of the Communications Act of 1934, as amended, 47 U.S.C. §§ 154,
    160, 201-204, 214, 276, 303, and 403, section 706 of the
    Telecommunications Act of 1996, and sections 1.1, 1.48, 1.411,
    1.412, 1.415, 1.419, and 1.1200-1.1216, of the Commission's rules,
    47 C.F.R. §§ 1.1, 1.48, 1.411, 1.412, 1.415, 1.419, and
    1.1200-1.1216.

### Description and Estimate of the Number of Small Entities to Which the Proposed Rules will Apply

83. The RFA directs agencies to provide a description of and, where
    feasible, an estimate of the number of small entities that will be
    affected by the proposed rules.[^184] The RFA generally defines the
    term "small entity" as having the same meaning as the terms "small
    business," "small organization," and "small governmental
    jurisdiction."[^185] In addition, the term "small business" has the
    same meaning as the term "small business concern" under the Small
    Business Act.[^186] 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 Small Business Administration (SBA).[^187]

84. We have 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."[^188] The SBA\'s
    Office of Advocacy contends that, for RFA purposes, small incumbent
    LECs are not dominant in their field of operation because any such
    dominance is not "national" in scope.[^189] We have therefore
    included small incumbent LECs in this RFA analysis, although we
    emphasize that this RFA action has no effect on FCC analyses and
    determinations in other, non-RFA contexts.

85. *Local Exchange Carriers*. Neither the Commission nor the SBA has
    developed a definition specifically for small local exchange
    carriers. The closest applicable definitions for this type of
    carrier under SBA rules is for wired telecommunications
    carriers.[^190] The most reliable source of information regarding
    the number of LECs nationwide appears to be the data that we collect
    annually in connection with the Telecommunications Relay Service
    (TRS).[^191] According to our most recent data, there are 1,335
    incumbent LECs.[^192] We estimate that 1,037 of those carriers are
    small, pursuant to the SBA's size standard.[^193]

### Description of Projected Reporting, Recordkeeping and Other Compliance Requirements

86. Any proposal we may adopt pursuant this Notice may decrease existing
    reporting, recordkeeping or other compliance requirements. As noted
    above, carriers are currently subject to a broad range of regulatory
    requirements that are generally intended to protect consumers from
    unjust and unreasonable rates, terms, and conditions and
    unreasonable discrimination in the provision of communications
    services. The Commission's dominant carrier regulation includes rate
    regulation and tariff filing requirements,[^194] and also requires
    supporting information, which in some cases includes detailed cost
    data, to be filed by dominant carriers with their tariff
    filings.[^195] Incumbent LECs are subject to rate level regulation
    in the provision of their interstate access services.[^196] The BOCs
    and GTE are subject to mandatory price cap regulation, and several
    other incumbent LECs have entered price caps on an elective basis,
    while smaller incumbent LECs are regulated under rate-of-return
    regulation.[^197] In addition, in markets where carriers may have
    the incentive and ability to leverage control over bottleneck
    facilities to disadvantage competitors in related markets, the
    Commission has developed various safeguards to neutralize that
    ability.

### Steps Taken to Minimize Significant Economic Impact on Small Entities, and Significant Alternatives Considered

87. The RFA requires an agency to describe any significant, specifically
    small business, 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 or reporting
    requirements under the rule for small entities; (3) the use of
    performance, rather than design, standards; and (4) an exemption
    from coverage of the rule, or any part thereof, for small
    entities.[^198]

88. The overall objective of this proceeding is to establish an
    appropriate regulatory framework for ICS providers pursuant to
    section 276 of the Act. The Notice seeks comment on specific issues
    related to the provision of inmate payphone services, in particular,
    the costs associated with providing inmate calling services. As
    noted in paragraph 87, *supra*, we intend through this Notice and
    subsequent action, to reduce costs if possible. In addition to
    section 276 Congress enacted the Telephone Operator Consumer
    Services Improvement Act of 1990 (TOCSIA). Its purpose, *inter
    alia*, is "to protect consumers who make interstate operator
    services calls from pay telephones. . .against unreasonably high
    rates and anti-competitive practices."[^199] We note, however, that,
    for the most part, the Commission has exempted inmate calling
    services from TOCSIA's consumer protections on the grounds that
    inmate services constitute "an exceptional set of
    circumstances."[^200]

### Federal Rules that May Duplicate, Overlap, or Conflict with the Proposed Rules

89. None.

## B. Comment Filing Procedures {#b.-comment-filing-procedures .unnumbered}

90. Pursuant to sections 1.415 and 1.419 of the Commission's
    rules,[^201] interested parties may file comments within 45 days
    after publication of this Notice in the Federal Register and may
    file reply comments within 30 days after the date for filing
    comments. All filings should refer to CC Docket No. 96-128. Comments
    may be filed using the Commission's Electronic Comment Filing System
    (ECFS) or by filing paper copies.[^202] Comments filed through ECFS
    can be sent as an electronic file via the Internet to
    \<http://www.fcc.gov/e-file/ecfs.html\>. Generally, only one copy of
    an electronic submission must be filed. In completing the
    transmittal screen, commenters should include their full name,
    postal service mailing address, and the applicable docket number,
    which in this instance is CC Docket No. 96-128. Parties may also
    submit an electronic comment by Internet e-mail. To get filing
    instructions for e-mail comments, commenters should send an e-mail
    to <ecfs@fcc.gov>, and should include the following words in the
    body of the message: "get form\<your e-mail address." A sample form
    and directions will be sent in reply.

91. Parties that choose to file comments or reply comments by paper must
    file an original and four copies of each, and are hereby notified
    that effective December 18, 2001, the Commission's contractor,
    Vistronix, Inc., receives hand-delivered or messenger-delivered
    paper filings for the Commission's Secretary at a new location in
    downtown Washington, DC. The address is 236 Massachusetts Avenue,
    N.E., Suite 110, Washington, DC 20002. The filing hours at this
    location are 8:00 a.m. to 7:00 p.m. All hand deliveries must be held
    together with rubber bands or fasteners. Any envelopes must be
    disposed of before entering the building. This facility is the only
    location where hand-delivered or messenger-delivered paper filings
    for the Commission's Secretary will be accepted. Accordingly, the
    Commission will no longer accept these filings at 9300 East Hampton
    Drive, Capitol Heights, MD 20743. In addition, this is a reminder
    that, effective October 18, 2001, the Commission discontinued
    receiving hand-delivered or messenger-delivered filings for the
    Secretary at its headquarters location at 445 12th Street, SW,
    Washington, DC 20554.

92. Other messenger-delivered documents, including documents sent by
    overnight mail (other than United States Postal Service (USPS)
    Express Mail and Priority Mail), must be addressed to 9300 East
    Hampton Drive, Capitol Heights, MD 20743. This location will be open
    8:00 a.m. to 5:30 p.m. The USPS first-class mail, Express Mail, and
    Priority Mail should continue to be addressed to the Commission\'s
    headquarters at 445 12th Street, SW, Washington, DC 20554. The USPS
    mail addressed to the Commission\'s headquarters is delivered to our
    Capitol Heights facility for screening prior to delivery at the
    Commission.

+----------------------------------+-----------------------------------+
| **If you are sending this type   | **It should be addressed for      |
| of document or using this        | delivery to...**                  |
| delivery method...**             |                                   |
+----------------------------------+-----------------------------------+
| Hand-delivered or                | 236 Massachusetts                 |
| messenger-delivered paper        |                                   |
| filings for the Commission's     | Avenue, NE, Suite 110,            |
| Secretary                        |                                   |
|                                  | Washington, DC 20002 (8:00 to     |
|                                  | 7:00 p.m.                         |
+----------------------------------+-----------------------------------+
| Other messenger-delivered        | 9300 East Hampton Drive,          |
| documents, including documents   |                                   |
| sent by overnight mail (other    | Capitol Heights, MD 20743         |
| than United States Postal        |                                   |
| Service Express Mail and         | (8:00 a.m. to 5:30 p.m.)          |
| Priority Mail)                   |                                   |
+----------------------------------+-----------------------------------+
| United States Postal Service     | 445 12^th^ Street, SW             |
| first-class mail, Express Mail,  |                                   |
| and Priority Mail                | Washington, DC 20554              |
+----------------------------------+-----------------------------------+

93. Parties who choose to file by paper should also submit their
    comments on diskette. These diskettes should be submitted to the
    Chief, Competitive Pricing Division, Common Carrier Bureau, Federal
    Communications Commission, at the filing window at 236 Massachusetts
    Avenue, N.E., Suite 110, Washington, DC 20002. Such a submission
    should be on a 3.5 inch diskette formatted in an IBM compatible
    format using Microsoft Word or compatible software. The diskette
    should be accompanied by a cover letter and should be submitted in
    "read only" mode. The diskette should be clearly labeled with the
    commenter's name, proceeding (including the docket number, in this
    case, CC Docket No. 96-128), type of pleading (comment or reply
    comment), date of submission, and the name of the electronic file on
    the diskette. The label should also include the following phrase:
    "Disk Copy \-- Not an Original." Each diskette should contain only
    one party's pleading, preferably in a single electronic file. In
    addition, commenters must send diskette copies to the Commission's
    copy contractor, Qualex International, Portals II, 445 12^th^ Street
    S.W., CY-B402, Washington, D.C. 20554.

94. Regardless of whether parties choose to file electronically or by
    paper, parties should also file one copy of any documents filed in
    this docket with the Commission's copy contractor, Qualex
    International, Portals II, 445 12^th^ Street S.W., CY-B402,
    Washington, D.C. 20554 (telephone 202-863-2893; facsimile
    202-863-2898) or via e-mail at <qualexint@aol.com>.

95. 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 1.48 and all other
    applicable sections of the Commission's rules.[^203] We direct all
    interested 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 utilize a table of contents,
    regardless of the length of their submission.

#  *Ex Parte* Presentations

96. This matter shall be treated as a "permit-but-disclose" proceeding
    in accordance with the Commission's *ex parte* rules.[^204] Persons
    making oral *ex parte* presentations are reminded that memoranda
    summarizing the presentations must contain summaries of the
    substance of the presentations and not merely a listing of the
    subjects discussed. More than a one- or two-sentence description of
    the views and arguments presented is generally required.[^205] Other
    requirements pertaining to oral and written presentations are set
    forth in section 1.1206(b) of the Commission's rules.

97. Alternate formats (computer diskette, large print, audio recording,
    and Braille) are available to persons with disabilities by
    contacting Brian Millin at (202) 418-7426 voice, (202) 418-7365 TTY,
    or <bmillin@fcc.gov>. This *NPRM* can also be downloaded in
    Microsoft Word and ASCII formats at <http://www.fcc.gov/ccb/cpd>.

# Ordering CLAUSEs

98. Accordingly, IT IS ORDERED that, pursuant to the authority contained
    in sections 1, 4(i)-4(j), and 276 of the Communications Act of 1934,
    as amended, 47 U.S.C. §§ 151, 154(i)-(j), 276, the Petition for
    Partial Reconsideration and Clarification of the Inmate Calling
    Services Providers Coalition is DENIED.

99. IT IS FURTHER ORDERED that, pursuant to the authority contained in
    sections 1, 4(i)-4(j), 201, 226 and 276 of the Communications Act of
    1934, as amended, 47 U.S.C. §§ 151, 154(i)-(j), 201, 226, 276, this
    Notice of Proposed Rulemaking IS ADOPTED.

100. IT IS FURTHER ORDERED that the Commission\'s Consumer Information
     Bureau, Reference Information Center, SHALL SEND a copy of this
     Order on Remand and Notice of Proposed Rulemaking, including the
     Initial Regulatory Flexibility Analysis, to the Chief Counsel for
     Advocacy of the Small Business Administration.

     FEDERAL COMMUNICATIONS COMMISSION

     William F. Caton

     Acting Secretary

APPENDIX A

LIST OF COMMENTS FILED

[COMMENTS]{.underline}

American Friends Service Committee

AT&T Corp. (AT&T)

Cincinnati Bell Telecommunications Services (Cincinnati Bell)

Citizens United for Rehabilitation of Errants and the Coalition of
Families and Friends of

Prisoners of the American Friends Service Committee (CURE)

Gateway Technologies, Inc. (Gateway)

Inmate Calling Service Providers Coalition (ICSPC, Inmate Coalition,
Coalition)

MCI WorldCom, Inc. (MCI)

RBOC/GTE Payphone Coalition (RBOC Payphone Coalition)

Utility Consumers' Action Network (UCAN)

[REPLY COMMENTS]{.underline}

Citizens United for Rehabilitation of Errants and the Coalition of
Families and Friends of

Prisoners of the American Friends Service Committee (CURE)

Gateway Technologies, Inc. (Gateway)

Inmate Calling Service Providers Coalition (ICSPC, Inmate Coalition,
Coalition)

MCI WorldCom, Inc. (MCI)

RBOC/GTE Payphone Coalition (RBOC Payphone Coalition)

Sprint Corporation (Sprint)

[^1]: Implementation of the Pay Telephone Reclassification and
    Compensation Provisions of the Telecommunications Act of 1996, CC
    Docket No. 96-128, Order on Reconsideration, 11 FCC Rcd 21233
    (1996)(*Order on Reconsideration*), *aff'd in part and remanded in
    part, Illinois Pub. Tel. Ass'n v. FCC*, 117 F.3d 555 (D.C. Cir.
    1997), *cert. denied* *sub nom., Virginia State Corp. Comm'n v.
    FCC*, 523 U.S. 1046 (1998)(*Illinois*). Henceforth in this order, we
    refer to the Inmate Calling Services Providers Coalition as "ICSPC,"
    the "Inmate Coalition," or the "Coalition."

[^2]: *See* 47 U.S.C. § 276; Telecommunications Act of 1996, Pub. L. No.
    104-104, 110 Stat. 56 (1996 Act). Hereinafter, all citations to the
    Act and to the 1996 Act will be to the relevant section of the
    United States Code unless otherwise noted.

[^3]: 47 U.S.C. § 276(b)(1)(A).

[^4]: 11 FCC Rcd at 21269, 21328.

[^5]: 117 F.3d 555.

[^6]: *See* Inmate Calling Services Providers Coalition, Petition for
    Partial Reconsideration and Clarification (seeking reconsideration
    of the *Order on Reconsideration*), at 6-11, 14-19 (filed Oct. 21,
    1996) (*Petition for Partial Reconsideration and Clarification*);
    Brief for Petitioner, *Inmate Calling Services Providers Coalition
    v. FCC* (No. 97-1046 (D.C. Cir. Nov. 21, 1997).

[^7]: *Illinois Pub. Telecomm. Ass'n. v. FCC,* No. 96-1394, (D.C. Cir.
    Feb. 7, 1997) (unpublished).

[^8]: *Inmate Calling Services Providers Coalition v. FCC,* No. 97-1046,
    1998 WL 65655 (D.C. Cir. Jan. 30, 1998) (unpublished).

[^9]: The Common Carrier Bureau Asks Parties to Update and Refresh
    Record for the Inmate Payphone Service Proceeding, CC Docket No.
    96-128, Public Notice, 14 FCC Rcd 7085 (1999) (*Public Notice*).

[^10]: 47 U.S.C. § 276(a).

[^11]: 47 U.S.C. § 276(b)(1)(C). The Computer III Inquiry refers to an
    extensive, on-going Commission proceeding concerning the provision
    of enhanced services. *See* Amendment of Section 64.702 of the
    Commission's Rules and Regulations (Third Computer Inquiry), CC
    Docket No. 85-229, Report and Order, 104 F.C.C. 2d 958 (1986).

[^12]: 47 U.S.C. § 276(b)(1)(A).

[^13]: 47 U.S.C. § 276(d). As a result of this statutory definition,
    this Order will treat, as a matter of terminology, ICS providers as
    a subset of PSPs.

[^14]: Implementation of the Pay Telephone Reclassification and
    Compensation Provisions of the Telecommunications Act of 1996*,* CC
    Docket 96-128, Report and Order, 11 FCC Rcd 20541 (1996) (*First
    Report and Order)*.

[^15]: *Order on Reconsideration*, 11 FCC Rcd 21233; Implementation of
    the Pay Telephone Reclassification and Compensation Provisions of
    the Telecommunications Act of 1996*,* CC Docket No. 96-128, Second
    Report and Order, 13 FCC Rcd 1778 (1997) (*Second Report and Order),
    aff'd in part and remanded in part sub nom. MCI v. FCC*, 143 F.3d
    606 (D.C. Cir. 1998); Implementation of the Pay Telephone
    Reclassification and Compensation Provisions of the
    Telecommunications Act of 1996*,* CC Docket No. 96-128, Third Report
    and Order, and Order on Reconsideration of the Second Report and
    Order, 14 FCC Rcd 2545 (1999) (*Third Report and Order*), *pet. den.
    sub nom.* *American Public Comm. Council v. FCC*, 215 F.3d 51 (D.C.
    Cir. 2000).

[^16]: *See* *Petition for Partial Reconsideration and Clarification* at
    15; *see also* Comments of Inmate Calling Services Providers
    Coalition (ICSPC) at 16 (filed June 1, 1996). Except if otherwise
    indicated, all comments and replies herein cited refer to those
    submitted in response to the May 1999 *Public Notice*. A list of
    parties submitting comments in response to the *Public Notice* is
    included at Appendix A. The list states how each commenter is
    identified in this order.

[^17]: *See First Report and Order,* 11 FCC Rcd at 20579 ("\[A\]t this
    juncture . . . mandating a per-call amount for inmate payphones, . .
    . could possibly lead to a double recovery of costs already included
    in higher-than-average operator service rates and special surcharges
    on end-user phone bills for calls made on these payphones, as argued
    by Gateway, an inmate payphone provider that opposes a greater
    per-call amount.").

[^18]: *First Report and Order,* 11 FCC Rcd at 20622.

[^19]: *First Report and Order*, 11 FCC Rcd at 20622.

[^20]: *Order on Reconsideration,* 11 FCC Rcd at 21250 (citing ICSPC
    Comments at 2-5 (Oct. 21, 1996)).

[^21]: *Order on Reconsideration*, 11 FCC Rcd at 21269.

[^22]: *Order on Reconsideration*, 11 FCC Rcd at 21269.

[^23]: *Second Report and Order*, 13 FCC Rcd at 1780.

[^24]: *MCI Telecomm. Corp. v. FCC*, 143 F.3d 606, 609 (D.C. Cir. 1998).

[^25]: Implementation of the Pay Telephone Reclassification and
    Compensation Provisions of the Telecommunications Act of 1996, CC
    Docket No. 96-128, Erratum, 14 FCC Rcd 7105, 7105 (1999) ("We note
    that the Commission will address in a separate order (1) a special
    compensation charge for payphone providers who serve inmates, and
    (2) allegations of subsidies and discrimination on the part of Bell
    Operating Company payphone providers in favor of their own inmate
    payphone operations.").

[^26]: *See* 47 U.S.C. § 276(d).

[^27]: ICSPC Comments at 7-11; *see also* ICSPC *ex parte* statement at
    5 (Sept. 12, 2000) ("the dominant paradigm for the provision of
    inmate telephone service is the use of dedicated, usually on-site,
    equipment that is separate from network operator service platforms
    and that integrates the functions of collect call processing and
    inmate call monitoring and restriction").

[^28]: ICSPC Comments at 7-11.

[^29]: ICSPC Comments at 7-11.

[^30]: ICSPC Comments at 7-11.

[^31]: ICSPC Comments at 7-11.

[^32]: There is no evidence in the record of this proceeding of any
    confinement facility that allows more than one company to provide
    inmate calling services. Most confinement facilities simply contract
    with one provider. *See* Joint Legislative Audit and Review
    Commission of the Virginia General Assembly, *Review of the
    Department of Corrections' Inmate Telephone System* at 31 (*Virginia
    Legislative Report*).

[^33]: The federal prison system has its own telecommunications policies
    that were significantly revamped as a result of a class action
    lawsuit. *See* United States Dept. of Justice, *Notice of Proposed
    Settlement and Fairness Hearing, Washington v. Reno,* Nos. 93-217,
    93-290 (E.D. Ky. Aug. 2, 1995).

[^34]: Commissions usually range between 20% and 63%, with most states
    charging more than 45%. Comments of Citizens United for
    Rehabilitation of Errants and the Coalition of Families and Friends
    of Prisoners of the American Friends Service Committee (CURE
    Comments) at 3 n.6.

[^35]: ICSPC *ex parte* statement, Attachment ("County Jail Type of Call
    Distribution") (May 9, 2000).

[^36]: ICSPC *ex parte* statement, Attachment ("Rates for a 12 Minute
    Local Inmate Collect Call and State-Imposed Rate Ceilings") (May 9,
    2000).

[^37]: *See, e.g., Virginia Legislative Report* at 6. Dial-around
    capacity permits the caller, by use of a 10xxx number or other
    access code number, to access a particular carrier and thus
    "dial-around" the payphone's pre-subscribed carrier.

[^38]: This problem is present in some other situations, like airports
    or bus stations, in which premise owners can exert a "locational
    monopoly." *See Third Report and Order,* 14 FCC Rcd at 2562. This
    problem is further discussed in Section III.B, *infra.*

[^39]: The Commission has recognized in other proceedings how
    commissions can drive up the price of inmate calls. *See, e.g.*,
    Billed Party Preference for InterLATA 0+ Calls, CC Docket No. 92-77,
    Second Report and Order and Order on Reconsideration, 13 FCC Rcd
    6122, 6156 (1998) (*Billed Party Preference Second Report and
    Order*) ("\[B\]y virtue of the monopoly contracts they confer,
    \[confinement facilities\] have the power and incentive to contract
    with OSPs that will give them the largest revenues from inmate
    phones."). The federal judiciary has also recognized this problem.
    *See infra* note 74.

[^40]: ICSPC Comments at 13.

[^41]: ICSPC Comments at 14.

[^42]: ICSPC Comments at 14-15.

[^43]: ICSPC *ex parte* statement, Attachment at 1-2 (Apr. 6, 2000).

[^44]: ICSPC Comments at 13-29.

[^45]: *Third Report and Order*, 14 FCC Rcd at 2569.

[^46]: *Third Report and Order*, 14 FCC Rcd at 2558-67.

[^47]: *Third Report and Order*, 14 FCC Rcd at 2566-67.

[^48]: *Third Report and Order*, 14 FCC Rcd at 2615-16.

[^49]: *Third Report and Order*, 14 FCC Rcd at 2562, 2615-16.

[^50]: *Third Report and Order*, 14 FCC Rcd at 2570. *See also* Paul J.
    Garfield & Wallace F. Lovejoy, *Public Utility Economics* 140-41
    (1964) ("\[T\]he allocation of joint costs to customer classes of
    classes of service . . . has no universal or even generally
    satisfactory solution because joint costs are incapable of
    'accurate' or 'certain' allocation.").

[^51]: *Third Report and Order*, 14 FCC Rcd at 2570. The Commission,
    drawing on established economic theory, has carefully defined
    cross-subsidization, stating that as long as the cost attributed to
    a class of service is "less than or equal to the stand-alone costs
    but greater than or equal to the incremental cost of that class,"
    there is no cross-subsidization. Jurisdictional Separations Reform
    and Referral to the Federal-State Joint Board, CC Docket No. 80-286,
    Notice of Proposed Rulemaking, 12 FCC Rcd 22120, 22134 (1997); *see
    also* William J. Baumol et al., *Contestable Markets and the Theory
    of Industry Structure* 352 (1982) ("\[I\]f a subset of services does
    not yield revenues sufficient to cover the additional or incremental
    costs incurred by providing them," there is subsidization.).

[^52]: *Third Report and Order*, 14 FCC Rcd at 2570.

[^53]: The direct or "incremental cost . . . equals all of the
    additional costs that are incurred due to that service being
    offered. In the context of payphones, \[these costs include\] the
    coin mechanism . . . coin collection costs and termination costs."
    *Third Report and Order,* 14 FCC Rcd at 2559.

[^54]: *Third Report and Order*, 14 FCC Rcd at 2571.

[^55]: *Third Report and Order*, 14 FCC Rcd at 2571.

[^56]: ICSPC Comments at 13 ("in each of the nine states, an independent
    ICS provider would lose money on the average local call").

[^57]: *See, e.g.,* ICSPC *ex parte* statement (Apr. 6, 2000).

[^58]: AT&T Comments at 2 ("no default compensation is due at all
    because the negotiated contracts cover all of the payphone
    provider's costs"); CURE Reply Comments at 5 ("If a service provider
    does not think it can make money on inmate calling services under a
    contract with a correctional facility or system, it should not . . .
    sign the contract."); Comments of Gateway Technologies, Inc.
    (Gateway Comments) at 6 ("ICSPC first presented its \$0.90 proposal
    three years ago; its members have continued to operate since then,
    effectively disproving their inability to earn fair compensation.");
    MCI Comments at 2 ("Were such surcharge limits as onerous as the
    Coalition suggests, no carrier would be willing to bid for contracts
    to service inmate populations.").

[^59]: Gateway Reply Comments at 4-5.

[^60]: In an interesting contrast, the RBOC Payphone Coalition endorses
    the proposition that the "Commission should . . . preempt
    state-imposed rate ceilings . . . where such a rate ceiling deprives
    inmate service providers of fair compensation for *some* calls made
    from their payphones." Comments of the RBOC Payphone Coalition
    Comments) at 2 (emphasis added ). The RBOC Payphone Coalition,
    however, never clarifies what "some calls" might encompass. In fact,
    no commenter squarely addresses the legal question of what revenue
    and cost allocation method satisfies section 276's requirement for
    "fair compensation for each and every call."

[^61]: S. Conf. Rep. No. 230, 104^th^ Cong., 2d Sess. 1 (1996).

[^62]: *See supra* para. 17.

[^63]: ICSPC *ex parte* statement, Attachment (Apr. 6, 2000). In the
    Billed Party Preference for InterLATA 0+ Calls proceedings, the
    Commission expressed in general terms discomfort with "subsidies"
    between interstate and intrastate services. Although the Commission
    declined to offer additional compensation for inmate calling in
    these proceedings, it did say that "some commenters believe that
    interstate telecommunications services ratepayers should subsidize
    providers of operator services whose intrastate operator service
    rates and surcharges have been capped by a state at a level that is
    alleged to be 'unfair' or which precludes recovery of the carrier's
    alleged 'reasonable' costs and profit. Any such subsidy or
    cross-subsidization would inhibit competition at the intrastate
    level, contrary to our policies encouraging competition in all
    telecommunications markets." *Billed Party Preference Second Report
    and Order*, 13 FCC Rcd at 6154. Because, as we state in the text of
    this section, ICSPC failed to show that revenue from local inmate
    calls does not recover their direct costs and contribute to common
    costs, this is not a case that involves interstate calls subsidizing
    intrastate calls.

[^64]: ICSPC Comments at 14-15.

[^65]: ICSPC Comments at 14.

[^66]: *Illinois Pub. Telecomm. Ass'n.*, 117 F.3d at 563.

[^67]: *Illinois Pub. Telecomm. Ass'n.*, 117 F.3d at 563.

[^68]: ICSPC Comments at 14.

[^69]: *Illinois Public Telecommunications Assoc. v. FCC*, 117 F.3d at
    564 (D.C. Cir. 1997) (rejecting the FCC's "cavalie\[r\]
    proclaim\[ing\] that the costs of local coin calls versus 800 and
    access code calls are 'similar'").

[^70]: Cincinnati Bell Comments at 2-3.

[^71]: ICSPC Comments at 15.

[^72]: *See Third Report and Order*, 14 FCC Rcd at 2615-16.

[^73]: Florida House of Representatives, Justice Council, Committee on
    Corrections, *Maintaining Family Contact When a Family Member Goes
    to Prison* 29 (1998) (*Florida Report*).

[^74]: This illustrates the perennial problem of monopolistic rents.
    Landowners simply increase their rents to absorb any increased
    revenue from increasing food prices or productivity. As prices for
    food rise, so do rents -- to the detriment of both laborers and
    society at large. *See* David Ricardo, *The Principles of Political
    Economy and Taxation*, ch. 2 (1821) (visited
    08/28/01)(<http://www.econlib.org/library/Ricardo/ricP.html>.).
    Although the term "rent" was once used to refer to the rent paid on
    agricultural land, the term is used generally to refer "that part of
    the payment to an owner of resources over and above that which those
    resources could command in any alternative use. Rent is receipt in
    excess of opportunity cost." James M. Buchanan, *The Limits to
    Liberty* 5 (1980). Monopolistic rents can occur whenever an owner
    has exclusive control of a resource, like inmate calling facilities.
    Rising commissions will likely offset any revenue increases or
    cost-savings and will not result in higher ICS provider profits or
    lower consumer costs. The federal judiciary, indeed, a father of the
    law and economics movement, has recognized how monopolistic location
    rents drive prices in inmate calling. *See Arsberry v. Illinois*,
    244 F.3d 558, 566 (7^th^ Cir. 2001)(Posner, J.)(noting that the
    state of Illinois is a monopolist, "exercising as it does an iron
    control over access to the inmate market, \[that\] has rented pieces
    of the market to different phone companies" and that these companies
    will pass on much of the rental fee to their customers).

[^75]: CURE Comments at 5-7.

[^76]: ICSPC *ex parte* statement (June 28, 2001).

[^77]: *Billed Party Preference Second Report and Order*, 13 FCC Rcd at
    6153-54 (clarifying that states may adopt greater safeguards or more
    stringent rules regarding intrastate operator services than those
    adopted by the Commission for interstate services).

[^78]: *First Report and Order,* 11 FCC Rcd at 20569.

[^79]: ICSPC *ex parte* statement at 1 (June 28, 2001).

[^80]: ICSPC *ex parte* statement at 1 (June 28, 2001).

[^81]: ICSPC *ex parte* statement at 2 (June 28, 2001).

[^82]: ICSPC *ex parte* statement at 2-3 (June 28, 2001).

[^83]: *First Report and Order,*11 FCC Rcd at 20569 ("We conclude
    further that, in the absence of a contract providing compensation to
    the PSP for intraLATA 0+ calls, the PSP shall be eligible to collect
    a per-call compensation."); *see also Order on Reconsideration*, 11
    FCC Rcd at 21238.

[^84]: We note that the Commission has defined "operator services" under
    section 226 of the Act, 47 U.S.C. § 226, to include "any automatic
    or live assistance to a consumer to arrange for billing or
    completion, or both" except for "\[a\]utomatic completion with
    billing to the telephone from which the call originated . . . ." 47
    C.F.R. § 64.708 (i).

[^85]: ICSPC *ex parte* statement, Attachment ("Inmate Service Fee \--
    12 Minute Local Call Cost Analysis") (June 28, 2001).

[^86]: 14 FCC Rcd at 2612.

[^87]: *See supra* n. 49 and accompanying text.

[^88]: *See, e.g.,* ICSPC *ex parte* statement (June 28, 2001), Exhibit
    (Letter from Connie R. Watson, Sheriff, Surry County, North
    Carolina, to William E. Kennard, FCC ).

[^89]: Gateway Comments at 3-6; RBOC Payphone Coalition at 1.

[^90]: *See* ICSPC *ex parte* statement, Attachment ("Rates for a
    12-Minute Local Collect Call and State-Imposed rate Ceilings") (June
    28, 2001).

[^91]: *In the Matter of Wisconsin Public Service Commission, Order
    Directing Filing*, CCB/CPD No. 00-01, Memorandum Opinion and Order,
    FCC No. 02-25 (rel. Jan. 31, 2002)(requiring BOCs to set intrastate
    payphone line rates in compliance with the cost-based,
    forward-looking new services test).

[^92]: *Ex parte* Letter from Vincent Townsend, ICSPC, to Linda Kinney,
    FCC, Attachment ("Memo on New Services Test"), page 4, Part IIA
    (Jan. 4, 2002).

[^93]: *Illinois*, 117 F.3d at 563.

[^94]: *Illinois*, 117 F.3d at 563.

[^95]: *Illinois Pub. Telecomm. Ass'n v. FCC*, 117 F.3d at 564.

[^96]: ICSPC *ex parte* statement, Attachment ("Inmate Service Fee \--12
    Minute Local Call Cost Analysis") (June 28, 2001).

[^97]: 47 U.S.C. § 276(a)(1)-(2).

[^98]: 47 U.S.C. § 276(b)(1)(C).

[^99]: 47 U.S.C. § 276(b)(1)(C). The statute specifically refers to "CC
    Docket No. 90-623." This docket is but one part of the Computer III
    proceeding and addressed, *inter alia*, "strengthen\[ing\] cost
    allocation and accounting safeguards applicable to all Tier 1 LECs."
    Computer III Remand Proceedings: Bell Operating Company Safeguards;
    and Tier 1 Local Exchange Company Safeguards, CC Docket No. 90-623,
    Notice of Proposed Rule Making and Order, 6 FCC Rcd 174 (1990).

[^100]: Robert Cannon, *Where Internet Service Providers and Telephone
    Companies Compete: A Guide to the Computer Inquiries, Enhanced
    Service Providers and Information Service Providers,* 9 CommLaw
    Conspectus 49, 56-57 (2001) (*A Guide to the Computer Trilogy).*

[^101]: CEI plans demonstrate to the Commission that the BOCs will
    "provide competing enhanced service providers (ESPs) with 'equal
    access' to all basic underlying network services the BOCs \[employ\]
    to provide their own enhanced services." Bell Operating Companies
    Joint Petition for Waiver of Computer II Rules, Order, 10 FCC Rcd
    13758, 13759 (1995) (*Joint Petition*).

[^102]: After completion of the CEI plans, the Computer III regime
    requires the "BOCs \[to\] develo\[p\] and implemen\[t\] Open Network
    Architecture (ONA) plans detailing the unbundling of basic network
    services." *Joint Petition*, 10 FCC Rcd at 13759.

[^103]: Cannon, *A Guide to the Computer Trilogy*, 9 CommLaw Conspectus
    66-69.

[^104]: *First Report and Order*, 11 FCC Rcd at 20622. Alternatively,
    incumbent LECs could provide payphone services through a
    structurally separate affiliate.

[^105]: *First Report and Order*, 11 FCC Rcd at 20622. A carrier
    electing to provide payphone service through a separate affiliate
    would transfer the assets in question to its payphone affiliate.
    *Joint Petition*, 10 FCC Rcd at 13,758.

[^106]: *See, e.g.,* Local Exchange Carriers Permanent Cost Allocation
    Manual For the Separation of Regulated and Nonregulated Costs, AAD
    97-9 et al., Memorandum Opinion and Order, 12 FCC Rcd 15145, 15153
    (1997) ("There is no support in the Payphone Order or the Payphone
    Reconsideration Order for the contention that BOCs or other ILECs
    are required to provide collect calling as a nonregulated service
    when used with inmate payphones."); Local Exchange Carriers
    Permanent Cost Allocation Manual for the Separation of Regulated and
    Nonregulated Costs, AAD 97-9 et al., Memorandum Opinion and Order,
    1999 WL 591753 at \*8, para. 11 (Aug. 6, 1999) ("inmate collect
    calls. . . are specifically excepted from deregulation in the
    Payphone Order") (*1999 CAM Order*).

[^107]: ICSPC Comments at 18-19.

[^108]: ICSPC *ex parte* statement at 8 (Sept. 12, 2000).

[^109]: ICSPC *ex parte* statement at 8-9 (Sept. 12, 2000).

[^110]: *See* Section III.A *supra.*

[^111]: *See* RBOC Payphone Coalition *ex parte* statement at 4 (June 7,
    2000) ("LEC operator services are available to independents on the
    same terms and conditions as to its affiliated inmate operation.").

[^112]: *See* ICSPC Comments at 21, 23-24; ICSPC *ex parte* statement,
    Attachment ("Bad Debt \-- Uncollectables and Unbillables") at 2 (May
    17, 2000).

[^113]: *1999 CAM Order*, 1999 WL 591753 at \*8, para. 11 ("That
    \[collect\] calls are processed by deregulated payphone CPE
    \[customer premise equipment\] does not change the fact that they
    involve operator services that are specifically excepted from
    deregulation by the Payphone Order.").

[^114]: 47 U.S.C. § 276(b)(1)(C); 47 U.S.C. § 276(d).

[^115]: ICSPC Comments at 22-23.

[^116]: ICSPC Comments at 20-21; ICSPC *ex parte* statement, Attachment,
    "Bad Debt \-- Uncollectables and Unbillables) at 1 (May 17, 2000)
    ("The extraordinary level of bad debt in inmate telephone service
    exacerbated the illegal subsidies . . . .").

[^117]: ICSPC Comments at 20.

[^118]: ICSPC Comments at 21.

[^119]: ICSPC Comments at 22-23.

[^120]: RBOC Payphone Coalition *ex parte* statement at 2-4 (Nov. 27,
    2000) (arguing that the Commission's definition of "operator
    services" cannot include inmate calling).

[^121]: RBOC Payphone Coalition Reply Comments at 3; RBOC Payphone
    Coalition *ex parte* statement, Attachment ("Inmate Payphones:
    Clearing Up Misconceptions") at 1-2 (June 7, 2000) ("When a customer
    makes an intraLATA or local collect call from a LEC-affiliated
    payphone, the LEC may provide the operator services; it would then
    pay a commission to the LEC-PSP, which pays a commission to the
    location provider. The revenues (and costs) of the operator services
    are booked to regulated operations.").

[^122]: RBOC Payphone Coalition *ex parte* statement at 2-4 (June 7,
    2000).

[^123]: RBOC Payphone Coalition *ex parte* statement at 3 (June 7,
    2000).

[^124]: *Third Computer Inquiry*, 104 F.C.C.2d at 1074.

[^125]: *See* A.N. Mosich & E. John Larsen, *Intermediate Accounting* 23
    (5^th^ ed. 1963) ("The matching principle means that after the
    revenue for an accounting period has been determined, the costs
    associated with this revenue must be deducted to measure net
    income.").

[^126]: RBOC Payphone Coalition *ex parte* statement at 4 (June 7,
    2000).

[^127]: *Compare* RBOC Payphone Coalition *ex parte* statement at 4
    (June 7, 2000) *with* ICSPC *ex parte* statement (Attachment,
    "Response to the RBOCs' November 27, 2000 *Ex Parte* Letter" at 4)
    (Dec. 20, 2000) (including an e-mail to Verizon which appears to
    indicate that Verizon does not offer a commission billing
    arrangement to independent PSPs).

[^128]: RBOC Payphone Coalition *ex parte* statement ("Inmate Payphones:
    Clearing Up Misconceptions") at 4 (June 7, 2000) ("LEC operator
    services are available to independents on the same terms and
    conditions as to its affiliated inmate operation.").

[^129]: *Compare* ICSPC *ex parte* statement at 2 (Sept. 12, 2000)
    ("inmate services do not fall within the Act's definition of
    'operator service'") *with* RBOC Payphone Coalition *ex parte*
    statement at 2-3 (Nov. 27, 2000) (arguing that neither the
    Commission's *Payphone Orders* nor sections 276 and 226(a)(7)
    require that inmate calling services receive different accounting
    treatment).

[^130]: ICSPC *ex parte* statement, Attachment at 3 (Sept. 12, 2000)
    (citing Policies and Rules Concerning Operator Service Providers, CC
    Docket No. 90-313, Report and Order, 6 FCC Rcd 2744, 2752 n.30
    (1991)).

[^131]: RBOC Payphone Coalition *ex parte* statement at 2 (Sept. 12,
    2000) (citing Policies and Rules Concerning Operator Service
    Providers, CC Docket No. 90-313, Report and Order, 6 FCC Rcd 2744,
    2752 (1991)).

[^132]: ICSPC *ex parte* statement at 3 (Sept. 12, 2000).

[^133]: *See, e.g.,* ICSPC Comments at 26.

[^134]: ICSPC Comments at 26.

[^135]: ICSPC Comments at 26-27.

[^136]: ICSPC Comments at 28-29.

[^137]: ICSPC Comments at 29.

[^138]: ICSPC Comments at 29-30.

[^139]: ICSPC Comments at 29.

[^140]: ICSPC Comments at 30-31.

[^141]: ICSPC Comments at 25-26.

[^142]: Application of Open Network Architecture and Nondiscrimination
    Safeguards to GTE Corp., CC Docket No. 92-256, Memorandum Order and
    Opinion, 11 FCC Rcd 1388, 1427 (1995) (*GTE ONA Order*) ("the
    Commission . . . \[will not\] require BOCs to offer billing and
    collection services to ESPs, because those services are incidental
    to communications and need not be tarriffed").

[^143]: ICSPC Comments at 26.

[^144]: ICSPC Comments at 26.

[^145]: *GTE ONA Order*, 11 FCC Rcd at 1427.

[^146]: ICSPC Comments at 26.

[^147]: *See* Alexander Belinfante, *Telephone Penetration By Income By
    State*, 6-9 (Common Carrier Bureau, Industry Analysis Division)(Mar.
    2000) (listing states with DND laws or policies and analyzing their
    effect on subscription penetration). For an example of a DND law,
    see CA Pub. Util. § 2890 (c)(i) (1999).

[^148]: 47 U.S.C. § 276(a)(1).

[^149]: ICSPC Comments at 26-27. This information includes customers'
    social security number and customer code, service establishment
    date, disconnect date and reason for disconnect, additional lines,
    previous telephone numbers, service restrictions, class of service,
    payment history, calling patterns/returns, credit history and
    features, like call forwarding or three-way calling. *Id.*; *see
    also* ICSPC *ex parte* statement, Attachment at 10 (Sept. 12, 2000).

[^150]: ICSPC Comments at 28-29.

[^151]: RBOC Payphone Coalition *ex parte* statement at 4 (June 7, 2000)
    ("To the extent LECs have developed fraud control procedures as part
    of their OS operations, these same procedures are available to
    independents who purchase LEC OS.").

[^152]: We observe that there is a factual dispute as to whether a
    "tariffed OS offering" exists. ICSPC *ex parte* statement,
    Attachment at 10 (Sept. 12, 2000). In this ruling, we only point out
    what our regulations require. If any party alleges a violation of
    our rules, it may bring a complaint.

[^153]: ICSPC *ex parte* statement at 10 (Sept. 12, 2000).

[^154]: Southwestern Bell Telephone Company's Comparably Efficient
    Interconnection Plan for the Provision of Basic Payphone Services,
    CC Docket No. 96-128, Order, 12 FCC Rcd 5857, 5864 (1997) ("SWBT
    represents that its payphone operations do not use any network-based
    call control and call processing functions.").

[^155]: *GTE ONA Order*, 11 FCC Rcd at 1427.

[^156]: RBOC Payphone Coalition Reply at 29.

[^157]: ICSPC Comments at 5.

[^158]: RBOC Payphone Coalition Comments at 5. ICSPC has produced no
    evidence that BOCs fail to provide unbundled elements as our
    regulations require. *First Report and Order,*11 FCC Rcd at 20616;
    *Order on Reconsideration*, 11 FCC Rcd at 21308 ("any basic network
    services or unbundled features used by a LEC's operations to provide
    payphone services must be similarly available to independent
    payphone providers on a nondiscriminatory, tariffed basis").
    Further, BOCs have already recognized that they must charge their
    own PSP divisions tariffed rates for the services provided to such
    divisions, and ICSPC has not produced any evidence that the BOCs
    fail to do this. *See, e.g.,* Southwestern Bell Telephone Company's
    Comparably Efficient Interconnection Plan for the Provision of Basic
    Payphone Services, CC Docket No. 96-128, Order, 12 FCC Rcd 5857,
    5889 (1997) ("SWBT asserts its ICS \[inmate calling service\] will
    make use of SWBT operator services, which will be purchased from
    SWBT's state tariffs in the same manner that any other ICS provider
    may purchase them.").

[^159]: ICSPC Comments at 30-31.

[^160]: ICSPC Comments at 30.

[^161]: ICSPC Comments at 29.

[^162]: ICSPC *ex parte* statement, Attachment ("Bad Debt \--
    Uncollectables and Unbillables" at 3) (May 17, 2000) ("Currently,
    the call validation database ("LIDB") on which independent inmate
    service providers must rely provides no indication that a called
    party has changed telephone companies from an incumbent LEC to a
    CLEC."); *see also* ICSPC *ex parte* statement, Attachment at 11
    (Sept. 12, 2000).

[^163]: ICSPC Comments at 30.

[^164]: ICSPC Comments at 25.

[^165]: RBOC Payphone Coalition *ex parte* statement, Attachment at 4
    (June 7, 2000).

[^166]: RBOC Payphone Coalition *ex parte* at statement, Attachment 4
    (June 7, 2000).

[^167]: 47 U.S.C. § 276(b) (Commission directed to act "\[i\]n order to
    promote competition among payphone service providers and promote the
    widespread deployment of payphone services").

[^168]: 47 U.S.C. § 276 (b)(1)(A) (requiring the Commission to establish
    a per call compensation plan to "ensure that all payphone service
    providers are fairly compensated for each and every completed
    intrastate and interstate call").

[^169]: 47 U.S.C. § 276(d) ("the term 'payphone service' means the
    provision of public or semi-public pay telephones, the provision of
    inmate telephone service in correctional institutions").

[^170]: Telephone Operator Consumer Services Improvement Act of 1990
    (TOCSIA), Pub. L. No. 101-435, 104 Stat. 986 (1990)(codified at 47
    U.S.C. § 226).

[^171]: S. Rep. No. 439, 101^st^ Cong., 2d Sess. 1 (1990); *see also*
    H.R. Rep. No. 213, 101^st^ Cong., 1st Sess. 2 (1989) ("The purpose
    of \[the Act\] is to protect telephone consumers against unfair
    prices and practices of some operator service providers (OSPs), yet
    allow the legitimate companies in the industry the opportunity to
    compete in the market.").

[^172]: Policies and Rules Concerning Operator Service Providers, CC
    Docket No. 90-313, Report and Order, 6 FCC Rcd 2744, 2752 (1991);
    *see also* Billed Party Preference for InterLATA 0+ Calls, CC Docket
    No. 92-77, Second Further Notice of Proposed Rulemaking, 11 FCC Rcd
    7274, 7301 (1996) (neither TOCSIA nor Commission rules require
    telephones for use only by prison inmates to be unblocked; prisons
    often install and maintain security equipment for a number of
    legitimate reasons involving security and other government
    prerogatives").

[^173]: *See supra* paras. 9-10.

[^174]: *See* *supra* note 74 and accompanying text.

[^175]: *See generally supra* paras. 24, 36-38

[^176]: *See supra* paras. 27-29.

[^177]: ICSPC *ex parte* statement at 3 (May 7, 2000).

[^178]: DynCorp IS LLC serves federal prisons, and U.S. Sprint currently
    provides long-distance services. According to available data, their
    direct dial rates are as follows:

    [Call Type]{.underline} [Per Minute Rate]{.underline}

    Direct Dial -- Local Calls \$.04

    Direct Dial---Long Distance \$.15

    Direct Dial---Canada \$.25

    Direct Dial---Mexico \$.47

    Direct Dial---International \$.85

    Collect calls, whether long-distance or local, are \$.40 per minute
    with a \$2.45 surcharge. U.S. Dept. of Justice, Bureau of Prisons,
    ITS-II Direct Telephone Call Rates (effective Aug. 9, 1998). In
    marked contrast to the federal prison rates, according to available
    data, in Florida, direct dial local calls are \$.12-.28 per minute
    and long distance is \$.40 per minute. *Florida Report* at 22.

[^179]: Cincinnati Bell Comments at 3-5.

[^180]: *In the Matter of Wisconsin Public Service Commission, Order
    Directing Filing*, CCB/CPD No. 00-01, Memorandum Opinion and Order,
    FCC No. 02-25 (rel. Jan. 31, 2002)(requiring BOCs to set intrastate
    payphone line rates in compliance with the cost-based,
    forward-looking new services test).

[^181]: *See* 5 U.S.C. § 603. The RFA, *see* 5 U.S.C. § 601 *et. seq.*,
    has been amended by the Small Business Regulatory Enforcement
    Fairness Act of 1996 (SBREFA), Pub. L. No. 104-121, 110 Stat. 857
    (1996). The Regulatory Flexibility Act of 1980, as amended (RFA),
    does not require that this Order contain a regulatory flexibility
    analysis of the possible significant economic impact on a
    substantial number of small entities. First, in the previous
    Payphone Orders, the Commission included Final Regulatory
    Flexibility Analyses (FRFA) addressing the possible impact of the
    rules, adopted in those orders, on small entities. This *Order on
    Remand* denies requests to modify the existing rules and leaves in
    place the Payphone Orders. In this present Order, the Commission
    neither promulgates nor amends Commission rules; therefore, our
    action does not affect those previous FRFAs. Second, this item
    contains a Notice of Proposed Rulemaking. Accordingly, an Initial
    Regulatory Flexibility Analysis (IRFA) related to this Notice is
    provided below.

[^182]: *See* 5 U.S.C. § 603(a).

[^183]: *See* *id.*

[^184]: 5 U.S.C. §§ 603(b)(3), 604(a)(3).

[^185]: *Id*. § 601(6).

[^186]: *Id*. § 601(3) (incorporating by reference the definition of
    "small business concern" in the Small Business Act, 15 U.S.C.
    § 632). Pursuant to 5 U.S.C. § 601(3), the statutory definition of a
    small business applies "unless an agency, after consultation with
    the Office of Advocacy of the Small Business Administration and
    after opportunity for public comment, establishes one or more
    definitions of such terms which are appropriate to the activities of
    the agency and publishes such definitions(s) in the Federal
    Register."

[^187]: 5 U.S.C. § 632.

[^188]: *Id*.

[^189]: Letter from Jere W. Glover, Chief Counsel for Advocacy, SBA, to
    William E. Kennard, Chairman, FCC (May 27, 1999). The Small Business
    Act contains a definition of "small business concern," which the RFA
    incorporates into its own definition of "small business." *See* 15
    U.S.C. § 632(a) (Small Business Act); 5 U.S.C. § 601(3) (RFA). SBA
    regulations interpret "small business concern" to include the
    concept of dominance on a national basis. 13 C.F.R. § 121.102(b).
    Since 1996, out of an abundance of caution, the Commission has
    included small incumbent LECs in its regulatory flexibility
    analyses. *See, e.g., Implementation of the Local Competition
    Provisions in the Telecommunications Act of 1996*, CC Docket 96-98,
    First Report and Order, 11 FCC Rcd 15499, 16144-45 (1996).

[^190]: 13 C.F.R. § 121.201, NAICS codes 513310.

[^191]: 47 C.F.R. § 64.601 *et seq*.; Trends in Telephone Service, FCC
    Common Carrier Bureau, Industry Analysis Division (rel. Dec. 2000)
    (Trends in Telephone Service).

[^192]: Trends in Telephone Service at Table 5.3. The total for
    competitive LECs includes competitive access providers and
    competitive LECs.

[^193]: *Id.*

[^194]: Section 203(a) of the Communications Act generally requires
    common carriers to file tariffs governing the provision of their
    basic communications services, although section 203(b)(2) gives the
    Commission broad authority to modify requirements made pursuant to
    this authority. 47 U.S.C. § 203 (a) & (b)(2) (1996).

[^195]: 47 C.F.R. § 61.38-39 (1999). Non-dominant IXCs are prohibited
    from filing tariffs except for the limited purposes contained in
    61.19(b) and (c). Non-dominant (competitive) LECs are permitted to
    tariff access charges within the limits set in the *CLEC Access
    Charge Order*, but may not tariff charges above those benchmarks.

[^196]: *See* 47 C.F.R. §§ 61.41-49 (price cap rules) & 65.1-65.830
    (rate of return rules).

[^197]: *See generally* *MAG Plan Order*, 16 FCC Rcd 19613, 2001 WL
    1381097.

[^198]: 5 U.S.C. § 603(c).

[^199]: S.Rep. No. 439, 101^st^ Cong., 2^nd^ Sess. 1 (1990) ("The
    purpose of \[the Act\] is to protect telephone consumers against
    unfair prices and practices of some operator service providers
    (OSPs), yet allow the legitimate companies in the industry the
    opportunity to compete in the market.").

[^200]: Policies and Rules Concerning Operator Service Providers, CC
    Docket No. 90-313, Report and Order, 6 FCC Rcd 2744, 2752 (1991);
    *see also* Billed Party Preference for InterLATA 0+ Calls, CC Docket
    No. 92-77, Second Further Notice of Proposed Rulemaking, 11 FCC Rcd
    7274, 7301 (1996) (neither TOCSIA nor Commission rules require
    telephones for use only by prison inmates to be unblocked; prisons
    often install and maintain security equipment for a number of
    legitimate reasons involving security and other government
    prerogatives").

[^201]: 47 C.F.R. §§ 1.415, 1.419.

[^202]: *See Electronic Filing of Documents in Rulemaking Proceedings*,
    63 Fed. Reg. 24121 (1998).

[^203]: *See* 47 C.F.R. § 1.48.

[^204]: 47 C.F.R. §§ 1.1200-1.1216.

[^205]: *See* 47 C.F.R. § 1.1206(b)(2).