**Before the**

> **Federal Communications Commission**
>
> **Washington, D.C. 20554**

In the Matter of )

)

Request to Update Default Compensation Rate for ) WC Docket No. 03-225

Dial-Around Calls from Payphones )

**REPORT AND ORDER**

**Adopted: July 27, 2004 Released: August 12, 2004**

By the Commission:

**Table of contents**

Paragraph

I. Introduction and Summary 1

II\. Background 2

III\. Discussion 15

A. Level of Payphone Deployment 16

B. Cost Methodology 26

C. Elasticity 32

D. Cost Study Methodology 38

E. Cost Categories and Inputs 50

F. Calculation of a Modified Dial-Around Compensation Rate 80

G. Use of a \"Top Down\" Test of Validity 81

H. Caller Pays 86

IV\. Conclusion 92

V. Procedural Matters 93

VI\. Ordering Clauses 94

APPENDIX A \-- Final Rule

APPENDIX B \-- Final Regulatory Flexibility Analysis (FRFA)

# iNTRODUCTION AND SUMMARY

1.  In this order, we modify the default rate of payphone compensation
    for "dial-around" calls set forth in section 64.1300(c) of our
    rules.[^1] This action reflects our continued efforts to implement
    the requirements of section 276 of the Communications Act of 1934,
    as amended ("Act"), which directs the Commission to "promote the
    widespread deployment of payphone services to the benefit of the
    general public."[^2] In pursuit of this mandate, section 276(b)(1)
    also 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 call."[^3] More than five
    years ago, the Commission set a default compensation rate of \$.24
    per call for "dial-around" calls made from payphones.[^4] The
    Commission did, however, say that it would reexamine this rate
    should conditions warrant.[^5] Since then, the industry has changed
    from a growing industry to a shrinking industry, leading to a
    substantial increase in the local coin rate. Because the dial-around
    compensation rate is derived by spreading the largely fixed costs of
    payphones over a measure of the number of calls, the decline in call
    volumes also requires us to reexamine the dial-around rate. Thus, we
    initiated this proceeding to ensure that this rate continues to
    provide "fair\[\] compensat\[ion\]" for each and every payphone
    call. As we explain more fully below, we conclude that changes in
    the payphone market warrant increasing this rate to \$.494 per call.

# Background

2.  In a series of orders starting in 1996, the Commission promulgated
    pay telephone service regulations to implement section 276 of the
    Act, as amended by the Telecommunications Act of 1996 ("the 1996
    Act").[^6] Among the provisions of section 276 addressed in these
    orders is section 276(b)(1)(A), which specifically directs the
    Commission to establish a plan to ensure that PSPs are \"fairly
    compensated\" for every completed interstate and intrastate
    call.[^7] The statute does not prescribe a particular method for
    accomplishing this task, other than to specify that such action
    shall \"promote competition among payphone service providers and
    promote the widespread deployment of payphone services to the
    benefit of the general public\[.\]\"[^8]

3.  In implementing section 276(b)(1)(A), the Commission has relied
    whenever feasible on a market-based, deregulatory mechanism for
    payphone compensation, as required by both section 276 and the
    generally pro-competitive goals of the 1996 Act. In the case of
    certain types of calls broadly referred to as \"dial-around\"
    calls,[^9] however, the Commission recognized that various
    statutory, technological, and economic factors inhibited the
    development of a fully deregulated means of providing fair
    compensation. For example, the Commission determined that, because
    section 226 of the Act prohibits PSPs from blocking access code
    calls to interexchange carriers (IXCs),[^10] PSPs were deprived of
    market leverage to negotiate fair compensation for the delivery of
    such calls to IXCs.[^11] Unlike other aspects of payphone service,
    such as the local coin rate, the Commission found it necessary to
    adopt a more regulatory approach to ensure that PSPs are fairly
    compensated for these types of calls. The Commission, therefore,
    established a default per-call compensation amount to be paid by
    IXCs[^12] to PSPs for each and every completed intrastate and
    interstate dial-around call, in the absence of individual
    agreements.[^13]

4.  Based upon its determination that the payphone market has low entry
    and exit barriers and likely would become increasingly competitive,
    the Commission in the *First Report and Order* chose a market-based,
    rather than a cost-based, default compensation amount.[^14] Because
    a purely market-based approach was not then feasible, the Commission
    decided that compensation should be based on a market surrogate.
    Concluding that the costs of coin calls and dial-around calls were
    \"similar,\"[^15] the Commission set a PSP's default dial-around
    compensation rate (to be paid in the absence of a negotiated
    agreement) equal to the amount the particular PSP charges for local
    coin calls.[^16] Because it found that fully competitive conditions
    for coin calling did not yet exist, the Commission established a
    uniform interim rate of dial-around compensation of \$.35 per call,
    which was the local coin call price in several states where payphone
    coin calling rates had been deregulated.[^17] The Commission also
    concluded in the *First Report and Order* that use of a purely
    incremental or marginal cost standard for all calls would be
    inadequate because PSPs would be unable to recover a reasonable
    share of the joint and common costs of the payphone.[^18]

5.  On review, the court of appeals concluded, *inter alia*, that the
    Commission had not adequately justified its conclusion that the
    costs of local coin calls are similar to those of toll-free and
    access-code calls, and it remanded the matter to the
    Commission.[^19]

6.  The Commission responded to the court\'s remand in the *Second
    Report and Order*. The Commission affirmed its decision in the
    *First Report and Order* to use a market-based, interim compensation
    amount for compensable calls.[^20] Responding to the court\'s
    findings that it had failed to address information in the record
    regarding cost disparities between coin calls and dial-around calls,
    the Commission concluded that the appropriate per-call compensation
    amount for dial-around calls was the market-based local coin price,
    adjusted for the differences in the costs of providing coin calls
    and dial-around calls.[^21] The Commission examined the underlying
    cost components and found that the cost to PSPs of providing
    dial-around calls from a "marginal," or low traffic, payphone
    location[^22] was \$.066 less than the cost of providing coin
    calls.[^23] The Commission therefore reduced the market coin call
    price of \$.35 by \$.066 to arrive at a default per-call
    compensation amount of \$.284.[^24] The Commission also concluded
    that this default amount would be in effect for two years, until
    October 6, 1999.[^25] After two years, the per-call default amount
    would be the market-based local coin price, less \$.066,
    representing the net avoided costs of a dial-around call.[^26]

7.  On review, the court remanded portions of the *Second Report and
    Order* on the grounds that the Commission had not adequately
    justified the derivation of a compensation amount for coinless
    payphone calls. In particular, the court held that the Commission
    had failed to explain why a market-based compensation amount for
    coinless calls could be derived by subtracting avoided costs from a
    market price charged for coin calls.[^27]

8.  In response to this remand, the Commission set a default
    compensation rate of \$0.24 per call for a three-year period
    beginning April 21, 1999. In the *Third Report and Order,* the
    Commission switched from the top-down "market-based" methodology
    reflected in its prior orders to a \"bottom-up\" methodology to
    establish the default per-call compensation rate. [^28] Pursuant to
    the bottom-up methodology, the Commission calculated an average
    fully distributed cost for each type of call such that the default
    price for each type of call is set equal to the fully distributed
    cost of that type of call.[^29]

9.  The Commission determined that the joint and common costs of
    payphone operations should be recovered equally from each and every
    call.[^30] Joint and common costs are those that do not vary with
    the relative number of coin and coinless calls at the payphone.
    Thus, for example, coin collection costs are not joint and common
    costs because they vary depending on the number of coin calls placed
    at the payphone. The Commission identified five categories of joint
    and common costs for payphones: capital expenditures; line charge
    costs; maintenance costs; sales, general and administrative ("SG&A")
    costs; and FLEX ANI[^31] costs. The Commission determined that the
    sum of those costs was \$101.29 per payphone per month.[^32]

10. To translate the total monthly cost of \$101.29 per payphone into a
    per call rate, the Commission affirmed its finding in the *Second
    Report and Order* that monthly costs should be divided by the total
    number of calls made from a "marginal payphone," which the
    Commission defined as one "where the payphone operator is able to
    just recoup its costs, including earning a normal rate of return on
    the asset, but is unable to make payments to the location
    provider."[^33] The Commission concluded that the use of a marginal
    payphone, as opposed to an "average payphone," was "necessary to
    fairly compensate PSPs and ensure the widespread deployment of
    payphones."[^34] It found that "basing the default compensation
    amount on an average payphone location would cause many payphones
    with less-than-average call volumes to become unprofitable," which
    in turn would lead to the removal of existing payphones in
    contravention of the statutory mandate to ensure their "widespread
    deployment."[^35] Because the bottom-up methodology would assure
    fair compensation for the overwhelming majority of payphones, the
    Commission concluded that the per-call compensation methodology
    adopted in the *Third Report and Order* would not negatively affect
    the current deployment of payphones and thus would promote
    Congress\'s goal of widespread deployment of payphones.

11. Relying on data submitted by the RBOC Payphone Coalition, the
    Commission determined that the typical "marginal" payphone at the
    time of the *Third Report and Order* had a call volume of 439 calls
    per month.[^36] Dividing \$101.29 by 439 calls yields a per call
    figure of \$0.231. The Commission added \$0.009 to this figure to
    provide interest to PSPs to compensate them for the four-month time
    delay inherent in the dial-around compensation process, for a total
    of \$.24 per call.[^37]

12. The Commission therefore prescribed a default dial-around
    compensation rate of \$.24 per call to remain in effect until at
    least January 31, 2002. The Commission stated its belief that, in
    the future, targeted call blocking would play a significant role in
    bridging the gap between Congress\'s and the Commission\'s goal of a
    deregulatory solution and the need to ensure fair compensation. The
    Commission also stated, however, that if, by January 31, 2002,
    parties have not invested the time, capital, and effort necessary to
    remove the technological and other impediments to a market-based
    resolution, parties could petition the Commission regarding the
    default compensation amount.[^38]

13. On June 16, 2000, the court affirmed the default rate of \$0.24,
    concluding that the Commission\'s bottom-up calculation of the
    default payphone compensation rate was a reasonable exercise of its
    jurisdiction.[^39]

14. On August 29, 2002, the American Public Communications Council
    ("APCC") filed a Request that the Commission Issue a Notice of
    Proposed Rulemaking (or in the alternative, Petition for Rulemaking)
    to consider a new default compensation rate for dial-around calls
    from payphones.[^40] On September 4, 2002, the RBOC Payphone
    Coalition (BellSouth Public Communications, Inc., SBC
    Communications, Inc., and the Verizon telephone companies) filed a
    petition also requesting that the Commission establish a new
    dial-around compensation rate.[^41] On October 31, 2003, we granted
    the petitions for rulemaking filed by the PSPs and requested comment
    on whether to modify the default rate of payphone compensation for
    "dial-around" calls set forth in section 64.1300(c) of our
    rules.[^42]

# DISCUSSION

15. There appears to be no dispute among the commenting parties that
    industry conditions have changed significantly.[^43] Payphone usage
    is decreasing as the use of wireless services increases.[^44] As a
    result, payphones in growing numbers are being removed from many
    locations because they no longer have sufficient call volumes to
    remain economically viable.[^45] The number of RBOC payphones has
    fallen by about 40 percent \-- from 1.38 million in February 1997 to
    fewer than 900,000 as of March 31, 2003.[^46] APCC, on behalf of its
    independent payphone service provider membership, also reports a
    significant decline in the number of deployed payphones. For the
    overall period from 1998 to March 31, 2003, APCC reports a total
    decline in payphones of more than 30 percent.[^47] There is also
    wide agreement that the local coin rate continues to increase, most
    recently to \$.50 at most payphones.[^48] The point of disagreement
    concerns the implications of these changes for the dial-around
    compensation rate\--the PSPs favor a substantial increase in the
    compensation rate, while the IXCs argue that there is no need to
    increase the rate. As set forth in the *Third Report and Order* and
    affirmed by the court of appeals,[^49] the Commission's method of
    calculating the dial-around compensation rate spreads the costs of
    payphones, which are largely fixed, over a measure of the number of
    payphone calls. Thus, the dial-around rate is affected by the volume
    of payphone calls, which has indisputably declined since the
    Commission set the current rate, necessitating the reexamination we
    undertake here.

## Level of Payphone Deployment

16. PSPs contend that the lower level of payphone deployment is
    inadequate to serve the public interest.[^50] Many individuals,[^51]
    local governments,[^52] and community organizations[^53] have viewed
    with alarm the declining number of payphones. State public service
    commissions have similarly expressed concern with the declining
    number of payphones, as demonstrated by their interest in public
    interest payphone ("PIP") programs.[^54] Predicting that payphone
    deployment is likely to drop even further in future years, the PSPs
    urge the Commission to raise the dial-around compensation rate in
    order to prevent, or at least slow, further erosion of the payphone
    base.[^55]

17. The IXCs argue that the problem is too many payphones, not too few.
    They contend that the Commission should leave the compensation rate
    unchanged and allow market forces to determine the number of
    payphones in the marketplace.[^56] To the extent that public policy
    action is needed, the IXCs contend, it should take the form of state
    PIP programs.[^57]

18. In considering these issues, we must first acknowledge that, as we
    noted in the NPRM, the current per-call compensation rate is itself
    the result of government intervention in the payphone market.[^58]
    First, the Act requires PSPs to let callers access any carrier from
    payphones; this prohibition on call blocking impedes PSPs from
    negotiating market-based compensation.[^59] Second, concerns about
    direct payments for services using toll-free numbers at payphones
    resulted in various statutory limitations on direct payments at the
    payphone instrument.[^60] Moreover, the IXCs do not assert that they
    are currently able to implement targeted call blocking, a
    development which the Commission previously found could justify
    shifting from a prescribed compensation rate to a negotiated
    compensation rate.[^61]

19. For all these reasons, it was necessary for the Commission to
    intervene in the market by prescribing per-call compensation for
    "dial-around" calls. Although we attempted to set a cost-based
    compensation rate that would minimize regulatory distortion of the
    market, we acknowledged that we would have to periodically review
    that rate in order to ensure that it continues to "fairly
    compensate" PSPs and promote payphone competition and widespread
    deployment of payphones. Especially when market conditions have
    changed significantly, it is incumbent upon us to reexamine whether
    the conditions resulting in the present Commission-prescribed rate
    still apply.

20. The IXCs contend that we need not act because there is no evidence
    "that payphone deployment is now or will be insufficient to meet
    declining consumer demand."[^62] Even if the decline in payphone
    deployment were not outstripping the decline in consumer demand,
    payphones do not exist solely to meet a given level of economic
    demand. We acknowledge, as did Congress in passing section 276, that
    payphones are accessible on demand to consumers without initial
    investment or monthly charges, and provide a unique back-up
    communications option when subscription services -- whether wireline
    or wireless -- are unaffordable or unavailable.[^63] Payphone
    services are particularly critical to those with few other
    communications service options -- including low-income customers,
    the elderly, and residents of rural areas.[^64] Payphones also
    enhance access to emergency (public health and safety)
    services.[^65]

21. Further, in arguing that the decline in payphone deployment results
    from legitimate market forces, i.e., lower demand for payphone
    calls, the IXCs ignore the fact that PSPs' ability to respond to
    such market forces is restricted by the Commission's prescription of
    a maximum dial-around compensation rate. Given these factors, we
    cannot presume that the marketplace will automatically ensure that
    payphone deployment is sufficient; rather, section 276 makes it our
    responsibility to ensure that inadequate compensation does not cause
    deployment to drop to levels insufficient to serve the public
    interest. The evidence in the record shows that there has been a
    significant, accelerating decline in the number of payphones
    deployed.[^66] In the *Third Report and Order*, the Commission found
    that deployment was satisfactory because no grass roots concern with
    the deployment level had surfaced.[^67] Today, as the PSPs point
    out, declining deployment is causing inconvenience to consumers and
    may even be starting to pose a public safety issue.[^68] The public,
    community organizations, and government officials view the decline
    in deployment as a negative development.[^69]

22. While the IXCs claim that current deployment is sufficient despite
    the substantial and accelerating decline in the number of payphones
    deployed, they offer little support for this claim. AT&T points out
    that the West Virginia Payphone Task Force found that the impact of
    payphone declines on particular counties in West Virginia varied
    widely, and that urban counties, which have the most payphones and
    comparatively more expansive cellular coverage and availability,
    experienced the greatest decline in payphones. [^70] In other words,
    the counties that start out with more payphones lose more payphones
    because they have more payphones to lose. This predictable pattern
    hardly supports any inference that the remaining payphones are
    sufficient to serve the public interest.

23. As for cellular coverage, the West Virginia Payphone Task Force
    found that: "Although cell phones offer a convenient alternative to
    payphones for many customers, they provide little assistance to
    low-income citizens who may rely on payphones as a primary method of
    conducting business."[^71] Further, the Task Force's report also
    states that "because of the topography of West Virginia, there are
    many areas where cellular phone service simply isn't
    available."[^72] The Task Force concludes that "many areas,
    especially rural areas, are now on the edge of market failure."[^73]
    Although such a finding that areas "are now on the edge of market
    failure" is not necessary in order for us to conclude that current
    levels of deployment are insufficient, it strongly reinforces our
    conclusion to that effect.

24. If deployment is inadequate, section 276 requires us to take action
    to affect deployment, if possible, by adjusting the dial-around
    compensation rate. Although PIP programs may be useful in filling
    gaps in payphone availability, they typically require case-by-case
    determinations by regulators about whether payphones are needed in
    particular locations. For example, a recent PIP determination by the
    New Hampshire Public Utilities Commission required a seven-month
    proceeding and resulted in the placement of only one payphone.[^74]
    Such case-by-case determinations cannot possibly address the
    deployment issues caused by the removal of hundreds of thousands of
    payphones nationwide.

25. Unlike the West Virginia Commission in deciding whether to institute
    a PIP program, we find that it is not appropriate for us to wait
    until there is a manifest "market failure"[^75] in the payphone
    market before taking necessary action to ensure fair compensation
    for the deployment of payphone service. The predominant cause of the
    decrease in the deployment of payphones appears to be increasing use
    of wireless services. But, this trend does not absolve us of the
    need to follow the intent of the Act. As noted above, the payphone
    market does not function in isolation from a particular prescribed
    default dial-around compensation rate; rather, it is affected by
    that rate, whatever it may be. The purpose of that rate prescription
    is not to remedy "market failure" by subsidizing[^76] payphones, but
    to support, to the extent possible, a functioning market and promote
    payphone deployment by ensuring that dial-around calls bear an
    appropriate share of the costs of operating payphones.

## Cost Methodology

26. According to the cost studies submitted by the PSPs, although
    per-payphone costs have not changed dramatically, falling call
    volumes have caused a major increase \-- to between \$.48 and \$.59
    \-- in per-call costs at marginal payphones.[^77] As a result, the
    PSPs contend, the current dial-around compensation rate of \$.24 no
    longer provides cost recovery for PSPs and is therefore no longer
    adequate to ensure the widespread deployment of payphones.[^78]

27. In the *NPRM,* we tentatively concluded that the methodology the
    Commission adopted in the *Third Report and Order* is the
    appropriate methodology to use in reevaluating the default
    dial-around compensation rate.[^79] As noted above, the Commission
    found in the *Third Report and Order* that a bottom-up methodology
    based on fully distributed costs and the average monthly call volume
    at a marginal payphone would assure fair compensation for the
    overwhelming majority of payphones and would promote Congress\'s
    goal of widespread deployment of payphones.[^80] That methodology
    was affirmed by the United States Court of Appeals for the D.C.
    Circuit.[^81]

28. Some of the commenting parties oppose continued use of a rate
    methodology based on the costs of maintaining marginal payphones.
    The International Prepaid Communications Association, Inc., and MCI
    contend that marginal payphones are payphones that cannot be
    maintained without a subsidy, and that subsidies are more
    appropriately administered by state PIP programs or through the
    Universal Service Fund.[^82] Sprint argues that the Commission
    should abandon the marginal payphone methodology because it is
    inherently circular, discourages PSPs from removing unprofitable
    payphones, and overcompensates high-volume payphones.[^83] Sprint
    advocates replacement of the marginal payphone methodology with a
    caller-pays approach.[^84] Caller-pays is a compensation plan that
    requires the caller to deposit coins or other forms of advance
    payment before making a dial-around call.[^85]

29. These comments appear to exaggerate the defects of the marginal
    payphone methodology. As the *Third Report and Order* made clear,
    marginal payphones are not "unprofitable" by definition; rather,
    they are at the edge of profitability.[^86] Moreover, the IXCs
    appear to assume that the dial-around compensation rate is a
    subsidy. It is not \-- it is a cost-based compensation rate. Thus,
    whether payphones can remain profitable depends, in part, on the
    rate of dial-around compensation that we prescribe. If the rate is
    cost-based, it cannot be a "subsidy."

30. While some high-volume payphones may be "overcompensated" by a rate
    set according to the marginal payphone methodology, the result of
    such "overcompensation" will be to stimulate the installation of
    additional payphones until overcompensation disappears. Only in true
    "locational monopolies" could such overcompensation be sustained.
    Although some such monopolies may exist, no party has accepted our
    invitation, issued at the beginning of this proceeding, to identify
    and request this Commission to regulate or otherwise remedy such
    locational monopolies.[^87] Therefore, we have no reason to believe
    that a serious overcompensation problem results from the use of the
    marginal payphone methodology.

31. The IXCs do not offer any persuasive alternative to the marginal
    payphone methodology. A caller-pays program is less satisfactory
    than this methodology for the reasons discussed in Section III.H
    below. Further, as discussed in Section III.A above, PIP programs
    provide no remedy for widespread declines in payphone deployment.
    The IXCs also seem to argue that the compensation rate should not be
    increased because the payphone industry is doomed to a terminal
    decline no matter what action the Commission takes.[^88] Even if
    this somewhat self-serving assertion turned out to be true, we
    cannot evade the statutory directive 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\[s\]."[^89] In carrying out
    this task, we must attempt to "promote the widespread deployment of
    payphone services to the benefit of the general public." The
    possibility that no policy under the current statutory framework
    will succeed in increasing widespread payphone deployment does not
    relieve us of our statutory obligation to try to do so using a
    methodology that has been affirmed on review, and in any event, to
    ensure that PSPs are fairly compensated.[^90]

## Elasticity 

32. We invited comment on whether the methodology should be modified in
    any way due to changes in the payphone industry since its
    adoption.[^91] For example, in the *Third Report and Order*, the
    Commission considered the issue of demand elasticity in determining
    the appropriate allocation of overhead expenses between dial-around
    calls and other calls, but it was unable to reach a firm
    conclusion.[^92] In addition to the question of allocation of
    overhead, we asked for comment on whether elasticity of demand for
    dial-around calling could be so high that an increase in the
    dial-around rate would cause severe demand suppression resulting in
    lower overall revenues for PSPs.[^93] We sought comment on the
    impact of recent increases in the coin calling rate and the
    cross-elasticity of demand between payphones and wireless telephone
    service. We invited the submission of any further data that may have
    become available on these questions.[^94]

33. The PSPs argue that there is insufficient information to determine
    the elasticity of demand for purposes of cost allocation, and no
    reason to believe that dial-around calling is so price-elastic that
    a rate increase in the amount they propose would cause a reduction
    in revenues.[^95] APCC argues further that the Commission cannot
    legally deny PSPs a rate increase based on alleged elasticity
    effects.[^96]

34. Some IXCs argue that, due to the elasticity of the demand for
    dial-around calling, an increase in the dial-around rate would
    suppress demand,[^97] and some claim that demand suppression would
    be severe enough to cause increased removal of payphones.[^98] In
    support of this claim, the IXCs rely on information suggesting
    that (1) the decline in payphone deployment has corresponded to an
    increase in payphone rates and/or the ratio of payphone rates to
    cell phone rates,[^99] and (2) the demand for calling card calls is
    price sensitive.[^100]

35. The information provided by the IXCs does not justify an inference
    that demand for dial-around calls is so elastic that an increase in
    dial-around rates in the amount proposed would suppress demand to
    the point of decreasing revenues. First, data on local coin calling
    elasticities, even if persuasive, cannot, without more, justify the
    inference that the demand for dial-around calling is highly
    elastic.[^101] Second, data on the impact of increases in retail
    rates for coinless calls are of limited usefulness.[^102] The fact
    that, as AT&T alleges, a certain percentage increase in a calling
    card rate corresponded with a certain percentage decline in demand
    for card calling does not mean that the same percentage increase in
    the compensation rate would have the same effect. [^103] In fact,
    logic suggests that the impact of the same percentage increase in
    the compensation rate, which represents only a portion of calling
    card rates, would be far less.[^104] Third, the IXCs do not attempt
    to determine actual causation as opposed to correspondence, which is
    especially troubling given the likely impact of other factors.
    Specifically, they do not attempt to separate the impact of
    increased wireless use from the impact of payphone rate increases.
    It is likely that wireless service market developments, including
    the introduction of flat-rate plans[^105] and the major increases in
    demand for wireless service, have done far more than payphone rate
    increases to trigger and accelerate the decline in payphone
    deployment.

36. In summary, the Commission did not find sufficient evidence to
    determine elasticities in the *Third Report and Order*, and the
    IXCs' submissions in this proceeding do not remedy that
    insufficiency. Therefore, we lack a sufficient or persuasive
    evidentiary basis either to allocate joint and common costs between
    coin calls and dial-around calls on a basis other than equal
    per-call shares, or to predict that an increase in the compensation
    rate will accelerate the decline in payphone revenues and
    deployment.

37. We acknowledge the possibility that setting the "default"
    dial-around rate at increasingly high levels could cause a reduction
    in overall revenues, but we have no reason to believe that the
    currently proposed increases would produce that effect. Further, as
    some PSPs point out, they are not required to charge the default
    dial-around rate.[^106] In the event that a reduction in overall
    revenues occurs or is threatened, PSPs could protect themselves from
    adverse revenue effects by accepting a lower rate.[^107]

## Cost Study Methodology 

38. In the *NPRM*, we sought comment on the PSPs' cost studies, and we
    invited commenting parties to submit additional studies that support
    or refute the information presented in the APCC and RBOC Coalition
    studies.[^108] We also asked whether the methodologies reflected in
    those studies are consistent with the rate methodology the
    Commission adopted in the *Third Report and Order*.[^109] We
    specifically sought comment on the methods used and inputs developed
    to estimate the marginal payphone monthly call volume, a key driver
    in determining the per-call compensation rate.[^110]

39. In the *Third Report and Order,* the Commission defined a marginal
    payphone as a location where "the payphone operator is able to just
    recoup its costs, including earning a normal rate of return on the
    asset, but is unable to make payments to the premises owner."[^111]
    The call volume at a marginal payphone was estimated based on call
    volumes reported by the RBOC Coalition, which were derived from
    estimated revenue requirements for a marginal location, average call
    distributions at RBOC payphones, and prevailing per-call
    compensation rates.[^112]

40. APCC and the RBOC Coalition argue that, with minor modifications,
    their methodologies for determining the call volumes from marginal
    payphones are consistent with the *Third Report and Order*. APCC's
    cost study surveys actual call volumes from a random sample of
    payphones that do not pay the premises owner or receive commissions
    from the premises owner.[^113] APCC calculated a marginal payphone
    call volume of 233.9 calls per payphone per month.[^114] The RBOC
    cost study estimates call volumes from marginal payphones by
    averaging call volumes from all RBOC payphones and adjusting the
    average call volume for the number of calls necessary to recover
    commission payments.[^115] The RBOC Coalition initially calculated a
    marginal payphone call volume of 219 calls per payphone per
    month.[^116] In its comments, the RBOC Coalition updated its cost
    study to reflect call volumes experienced in 2003. The RBOC
    Coalition's revised marginal call volume is 166 calls per payphone
    per month.[^117]

41. The IXCs argue that the PSPs' methodologies for estimating call
    volumes from marginal payphones are inconsistent with the *Third
    Report and Order* because the PSPs did not limit their study samples
    to payphones that exactly recoup their costs. Specifically, AT&T
    argues that the studies fail to exclude "semi-public" payphones for
    which the PSP receives a payment from the premises owner.[^118] AT&T
    also contends that, even if the studies did not include
    "semi-public" payphones, the studies are still flawed because they
    fail to exclude payphones that "'will not be profitable, regardless
    of the compensation amount \[the Commission\]
    establish\[es\].'"[^119] The IXCs also claim that the RBOC cost
    study methodology is inconsistent with the *Third Report and Order*
    because it does not use actual marginal payphones.[^120]

42. The PSPs reject the IXCs' claims and also argue that minor
    differences between their study methodologies and the *Third Report
    and Order* methodology are justified by changed circumstances. APCC
    points out that its survey specifically requested respondents to
    state whether they received payments from the premises owner.[^121]
    Don Wood, the consultant who conducted the study, states that
    payphones for which the owners answered this question in the
    affirmative were excluded from the study.[^122] Further, APCC argues
    that AT&T incorrectly contends that the Commission's methodology
    requires the use of call volumes only at payphones that exactly
    "break even." According to APCC, in the real world, few if any
    payphones exactly break even.[^123] APCC states that most payphones
    that neither make payments to nor receive payments from the premises
    owner will not generate exactly the amount of revenue needed to
    recoup all costs plus a specified rate of return.[^124] Rather, such
    payphones will generate somewhat more or less than the amount needed
    to break even exactly.[^125] Since the PSP has decided that it will
    not demand or pay a commission payment for such payphones, APCC
    contends that it is reasonable to conclude that those payphones, on
    average, will come close to breaking even.[^126]

43. The RBOC Coalition points out that its study does exclude call
    volumes necessary to recover commission payments and any revenues
    received on account of semi-public payphones.[^127] The RBOC study
    began by determining the average per-payphone call volume from its
    members' payphones, and then adjusted that average by determining
    the average net commission (total monthly commissions minus total
    monthly "semi-public" payments, divided by total payphones), and
    subtracting from the average call volume the number of calls
    necessary to generate the revenue for an average net commission.
    [^128] As a result, the RBOCs contend, "there is no reason to
    believe that a significant number of payphones included in the
    Coalition's study were unprofitable at the time the study was
    carried out."[^129]

44. The RBOC Coalition acknowledges that it modified the *Third Report
    and Order* methodology by basing its estimate of marginal call
    volumes on an adjustment of actual average call volumes rather than
    on a hypothetical calculation of calls needed to meet a revenue
    requirement. The Coalition contends, however, that this modification
    was appropriate to take account of the changed circumstance that the
    compensation rate must be set for a market with sharply declining
    call volumes, and to avoid the circularity that would otherwise
    result from applying the *Third Report and Order* methodology in
    such a market.[^130] Where payphone call volumes are sharply
    declining, the RBOC Coalition contends, "whether a marginal payphone
    will remain marginal depends on whether and by how much the per-call
    compensation rate is increased."[^131] If the Commission treats as
    marginal only those payphones that continue to recoup their costs
    despite declining call volumes, then the existing dial-around rate
    will automatically justify itself, because the prevailing
    dial-around rate is by definition sufficient to support a payphone
    that can recover its costs at prevailing rates. Under such a
    circular approach, however, the evident disparity between the
    contribution to common costs made by the current \$.50 local coin
    rate and the \$.24 dial-around compensation rate would remain
    unremedied.[^132] In addition, currently "marginal payphones would
    soon become sub-marginal as payphone call volumes continue to
    decline, necessitating either a further increase in the local coin
    rate (and in the disparity between coin and coinless calling rates)
    or the removal of even more payphones."[^133]

45. We find that the call volume estimates proffered by the PSPs with
    respect to marginal payphones are reasonable and that we may rely on
    them in setting a new compensation rate. The IXC objections
    regarding "semi-public" payphones ignore the fact that both the APCC
    and RBOC Coalition studies took steps either to exclude or to adjust
    for "semi-public" payphones that utilize payments from the premises
    owner in order to meet their costs. Further, we cannot conclude that
    the studies included a significant number of unprofitable payphones.
    Both APCC and the RBOC Coalition took a reasonable approach to
    limiting the data they used to calculate volume, and the IXCs do not
    provide any persuasive reasons to fault this approach, apart from
    their own very strict interpretation of the *Third Report and
    Order*. The PSPs' cost studies show that the steps they took ensure
    that their methodology is consistent with the *Third Report and
    Order* methodology.

46. We further find that it was not unreasonable for the RBOC Coalition
    to adjust the *Third Report and Order* methodology in order to take
    account of changed circumstances, in particular the sharp and
    continuing decline in payphone call volumes. In the *Third Report
    and Order*, the Commission noted a potential circularity in the
    methodology. It avoided such circularity by determining an
    appropriate level of payphone deployment -- the then-existing level
    -- and setting the compensation rate at the level necessary to
    recoup the costs of then-existing marginal payphones.[^134]

47. Under current circumstances, by contrast, it does not appear that
    the current deployment level is adequate, and even if it were, the
    sharp ongoing decline in call volumes suggests that maintaining the
    current compensation rate will *not* preserve even the current
    deployment level. Therefore, it is reasonable to modify the *Third
    Report and Order* methodology to include in the definition of
    "marginal payphones" all payphones that currently do not pay
    commissions to premises owners or receive payments from premises
    owners, even if some of those payphones may not currently recoup all
    their costs. This adjustment increases the likelihood that the
    compensation rate will either preserve the current level of payphone
    deployment or at least slow the decline in the deployment level.

48. Moreover, we note that the IXCs have failed to provide any marginal
    payphone call volume estimate of their own, even though they could
    have done so.[^135] Given the available evidence in the record,
    therefore, we find reasonable the call volume estimates proffered by
    the PSPs with respect to marginal payphones.

49. Finally, we note that as of March 31, 2003, there were about 854,295
    RBOC payphones and about 464,479 independent payphones.[^136] Thus,
    we estimate that RBOC payphones represent about 65 percent and
    independent payphones about 35 percent of the total of about
    1,318,774 RBOC and independent payphones. In order to calculate a
    fair "default" per-call compensation rate, where feasible, we
    reflect this weighted average in calculating the various per-call
    compensation (PCC) costs claimed by the RBOC Coalition and APCC.

## Cost Categories and Inputs

50. In the *NPRM*, we sought comment on whether the particular inputs
    the Commission adopted in the *Third Report and Order* for various
    cost categories continue to be appropriate or whether there are
    changed conditions that warrant modifications to the particular
    inputs used.[^137] We also sought comment on whether the cost
    categories identified in the *Third Report and Order* should be
    modified or new ones added.[^138]

### **Equipment Costs**

51. APCC's cost study uses vendor price quotes and survey data on PSP
    equipment types and configuration to calculate equipment costs of
    \$27.66 per payphone per month, slightly lower than the \$28.04
    amount calculated in the *Third Report and Order*.[^139] The RBOC
    Coalition's initial study concludes that equipment costs had not
    changed significantly since the *Third Report and Order* and
    therefore uses the \$28.04 amount from the *Third Report and Order*
    without change.[^140] Both APCC and the RBOC Coalition observe that
    a depreciation period shorter than the ten-year period used in the
    *Third Report and Order* could be appropriate. Nevertheless, both of
    the studies use the ten-year period in order to be consistent with
    the *Third Report and Order*. APCC also contends that return on
    investment should be higher than the 11.25 percent return used in
    the *Third Report and Order*, but it again uses the 11.25 percent
    number in order to be consistent with the *Third Report and
    Order*.[^141]

52. The IXCs contend that the PSP studies overstate equipment costs
    because, given the declining payphone base, estimates of capital
    costs should be based on the price of second-hand payphones.[^142]
    AT&T asserts that equipment costs associated with its 12,000
    military base payphones are significantly lower than the costs
    estimated by the PSPs, but does not provide any actual estimate of
    its own equipment costs.[^143] Sprint does not provide any data on
    equipment costs from its own payphone operations. MCI reviews price
    quotes collected from various payphone equipment vendor web sites,
    and on that basis estimates that nearly new payphones can be
    purchased for \$222.50.[^144] MCI contends that use of payphones
    available at these prices would not cause a decline in service
    quality.[^145]

53. APCC responds that it considered used equipment in its cost
    determinations if the equipment had been fully restored to like-new
    condition.[^146] APCC argues that the quality of service would
    diminish if PSPs must maintain marginal payphone locations only by
    recycling unrestored used equipment.[^147] APCC also argues that new
    equipment prices already reflect the widespread availability of used
    payphone equipment at depressed prices, because the price of new
    goods reflects the availability and price of used goods.[^148]

54. APCC also notes that MCI's survey relies on website advertisements
    for "dumb" sets, liquidation items of unknown origin, items posted
    on auction boards, and novelty items.[^149] The advertisements do
    not include complete information about the equipment to be provided,
    and thus APCC challenges the credibility of the price information
    proffered by MCI and questions the service quality of payphones
    available at the quoted prices.[^150] APCC also points out that
    maintenance cost calculations, which it based on equipment installed
    in new or like-new condition, would have to be reexamined if the
    Commission adopts an equipment cost input based on lower-quality
    equipment.[^151]

55. In its reply comments, the RBOC Coalition adjusts its estimate of
    capital costs to reflect MCI's estimate of the average price of used
    payphones, but it rejects MCI's other claims regarding the viability
    of used versions of other equipment, such as pedestals and
    enclosures, reasoning that those items must be purchased new even
    when a used payphone is installed.[^152] The RBOC Coalition also
    factored in estimates of the probability that various items such as
    pedestals and enclosures would be needed for a location.[^153] The
    RBOC Coalition's revised capital cost estimate is \$22.09 per
    payphone per month.[^154]

56. The IXCs also argue that the equipment investment values reflected
    in the PSP cost studies fail to reflect accumulated depreciation of
    the embedded base of assets.[^155] The PSPs reply that the
    Commission has consistently defined the cost basis for a bottom-up
    methodology to be forward-looking.[^156] They point out that
    rational economic decisions are based on the replacement cost, not
    booked cost, of assets. If payphone providers are permitted to
    recover only booked investment minus accumulated depreciation, the
    PSPs contend, they will be unable to invest in replacement assets
    when the existing assets reach the end of their useful life.[^157]

57. We conclude that it is appropriate for cost studies to reflect the
    availability of used equipment. Although APCC states that its cost
    study considered the price of used equipment restored to like-new
    condition, APCC does not provide any detail as to the inputs it used
    to determine used equipment prices. Therefore, we will not rely on
    APCC's equipment cost estimate of \$27.66. We find that WorldCom's
    estimates of the cost of payphone equipment and programming, which
    are accepted by the RBOC Coalition, are reasonably representative of
    the actual cost of equipment incurred in today's market. We agree
    with the RBOC Coalition, however, that other components, such as
    pedestals and enclosures, are purchased new. We therefore accept the
    RBOC Coalition's recalculation of the cost of each component of an
    average payphone, based on MCI's estimates for items that are
    purchased used and the RBOC Coalition's estimates for items that are
    purchased new. This revised cost is \$997.78.[^158] In converting
    this cost estimate to a monthly figure, however, the RBOC Coalition
    advocated utilizing a 6.5-year depreciation period.[^159] APCC, by
    contrast, used a 10-year depreciation period, as was used in the
    *Third Report and Order*.[^160] In response, the RBOC Coalition also
    offered its own calculation using a 10-year depreciation
    period.[^161] We find no basis for departing from our previous
    ruling that a 10-year period is appropriate, particularly given that
    both APCC and the RBOC Coalition used a ten-year depreciation period
    in their cost studies submitted in this proceeding. Therefore, we
    rely upon the alternative calculation submitted by the RBOC
    Coalition, based on a 10-year period, which computes a monthly
    equipment cost of \$17.66.[^162]

58. We reject the IXCs' arguments that equipment costs should be based
    on embedded equipment. As the PSPs point out, decisions are based on
    the replacement cost, not booked cost of assets.

### **Line Costs**

59. The PSPs' cost studies determined line costs by applying the *Third
    Report and Order* methodology to current data on line rates
    collected from PSPs.[^163] The APCC study uses the LEC line rates in
    effect for each location studied as of the second quarter of
    2002.[^164] The RBOC Coalition study initially used older data, from
    August 2001.[^165] The RBOC Coalition supplemented its study,
    however, with data from 2003.[^166]

60. Sprint argues that the inputs to the APCC study related to LEC line
    charges are overstated because "payphones have enjoyed significant
    reductions in their line costs, as a result of state implementation
    of the new services test."[^167] The Commission adopted the
    requirement that LECs price payphone lines under the new services
    test in its 1996 payphone orders.[^168] Thus, the Commission's order
    requiring application of the new services test to line rates had
    been in effect for five or six years when the final line cost
    estimates were made. In a subsequent order, which required certain
    Wisconsin LECs to submit cost justification for their payphone line
    rates directly to the Commission, the Common Carrier Bureau issued
    guidance clarifying application of the new services test for the
    benefit of state public service commissions.[^169] These guidelines
    had been available for two to three years when the final line cost
    estimates were made. In an order released January 31, 2002, we
    modified the Bureau's order, but generally affirmed application of
    the new services test.[^170] The final line cost estimates post-date
    this order as well. Accordingly, Sprint's argument is not
    convincing: line cost estimates most likely account for at least
    some reduction attributable to application of the new services test
    given that it has been applied by state commissions over time
    periods prior to or concurrent with the data provided by the PSPs.
    Moreover, even if we grant that some payphone line rates may have
    declined since that time, neither Sprint nor any other IXC has
    offered any competing data or estimates.

61. Given the available record evidence, therefore, we find that the
    most current data offered by APCC and the RBOC Coalition provide a
    reasonable basis for estimating line costs. Again, we take a
    weighted average of the APCC and RBOC Coalition study results. The
    weighted average of the RBOC Coalition's revised line cost of
    \$34.84 and the APCC study's line cost of \$38.77 is \$36.22.[^171]

### **Maintenance Costs**

62. The RBOC Coalition study initially calculated maintenance costs of
    \$13.81 per payphone per month.[^172] In the supplemental study,
    maintenance costs were determined to be \$9.67 per payphone per
    month.[^173] APCC's cost study found maintenance costs of \$17.45
    per payphone per month.[^174] Each of these estimates is less than
    the \$18.90 the Commission calculated in the *Third Report and
    Order*.[^175] No party challenges these determinations or supplies
    alternative data. We therefore find the most current APCC and RBOC
    calculations of maintenance costs reasonable and use those amounts.
    The weighted average of the RBOC Coalition's revised maintenance
    cost of \$9.67 and the APCC study's maintenance cost of \$17.45 is
    \$12.41.[^176]

### **SG&A Costs**

63. The RBOC Coalition study initially calculated SG&A[^177] costs of
    \$15.30 per payphone per month.[^178] Its supplemental study
    calculated costs of \$18.20 per payphone per month.[^179] This
    adjustment reflects the use of financial data from a more recent
    nine-month period, as opposed to the earlier one-month period used
    in the initial RBOC study. APCC's cost study found SG&A costs to be
    \$23.43 per payphone per month.[^180] These amounts are comparable
    to the \$19.62 amount the Commission calculated in the *Third Report
    and Order*.[^181] No party challenges these determinations or
    supplies alternative data. We therefore find the most current APCC
    and RBOC calculations of maintenance costs to be reasonable and
    utilize those amounts. The weighted average of the RBOC Coalition's
    revised SG&A cost of \$18.20 and the APCC study's SG&A cost of
    \$23.43 is \$20.04.[^182]

### **Collection Expenses**

64. Both the APCC and the RBOC Coalition cost studies add an element for
    collection costs, or, in the RBOC study, "carrier identification
    costs" that are specific to dial-around compensation.[^183] In the
    *Third Report and Order,* the Commission declined to include an
    element for such costs in setting the dial-around rate, finding that
    the record contained insufficient information to determine the
    extent to which administration costs vary when the number of
    coinless calls increases relative to coin calls. We invited comment
    on whether there is now an adequate record to justify such an
    element, and the appropriate amount of such an element.[^184]

65. The PSPs argue that there should be a separate cost element for
    dial-around collection expenses such as fees paid to dial-around
    aggregators and litigation expenses incurred for the purpose of
    collecting compensation from delinquent IXCs. APCC's cost study
    estimates collection costs of \$.007 per call.[^185] The RBOC
    Coalition study estimates carrier identification costs of \$.011 per
    call.[^186]

66. The IXCs point out that, in the *Third Report and Order*, the
    Commission found that collection expenses were included in SG&A, and
    they argue that there is insufficient information to justify a
    different finding here.[^187] They also contend that the PSPs'
    estimate of collection expenses is inflated, arguing that such
    expenses will decrease in the future as a result of the Commission's
    switch-based reseller order.[^188] They do not, however, provide any
    specific estimates of their own. The PSPs respond that the
    collection costs included in their studies are not general expenses
    attributable to SG&A, but specific expenses attributable solely to
    dial-around compensation.[^189]

67. We agree with the PSPs that the collection costs they have
    identified are specific to dial-around compensation and are not
    reflected in SG&A costs. In the RBOC Coalition's study, SG&A costs
    and carrier identification costs were determined separately based on
    the same review of RBOCs' financial and operational data.[^190]
    There is no evidence that the cost data in the two categories were
    duplicative. As for APCC's cost study, we think it unlikely that a
    typical respondent to APCC's survey would assume that charges
    imposed by third parties for specific collection activities would be
    included in SG&A. In any event, APCC's estimate of collection costs
    is significantly lower than the RBOC Coalition's estimate.
    Therefore, again lacking any other record evidence, we accept the
    PSPs' estimates of collection expenses as reasonable; RBOC Coalition
    collection cost of .011 per-call, and the APCC study's collection
    cost of \$.007.[^191]

### **Bad Debt**

68. The PSPs argue that bad debt has been reasonably estimated or
    factored into their cost studies and must be reflected in the
    dial-around compensation rate to ensure fair compensation. The RBOCs
    provide a direct estimate of their bad debt,[^192] while APCC's cost
    study accounts for bad debt by including in marginal payphone call
    volumes only those dial-around calls for which PSPs were actually
    paid.[^193]

69. The IXCs contend that it is unlawful to include bad debt in the
    dial-around compensation rate. Citing the *Fifth Reconsideration
    Order*, the IXCs state that an allowance for bad debt impermissibly
    would require carriers that pay their compensation obligations to
    bear the expenses of non-paying carriers.[^194] As the RBOC
    Coalition explains, however, a cost component for bad debt is not
    intended to compensate PSPs for past losses, but instead to
    compensate them for the risk that they will not be compensated for
    the services they provide.[^195] Thus, we routinely approve cost
    elements for bad debt in, for example, access tariffs and UNE
    rates.[^196] Moreover, rates should factor in bad debt; virtually
    all businesses factor it into their pricing, and there is no
    persuasive argument that we should prevent PSPs from doing the
    same.[^197]

70. The IXCs also object that the PSPs' data are unreliable, because
    they include currently uncollected compensation that may yet be
    collected in the future, resulting in double recovery.[^198] The
    RBOC Coalition, however, states that its study includes only amounts
    that had been determined to be uncollectible and removed from the
    accounts receivable and bad debt reserve balances.[^199] APCC's
    approach of including only paid dial-around calls in call volumes
    could, however, result in double recovery if additional payments
    were subsequently collected for the payphones and periods included
    in the study. In its reply comments, however, APCC states that it
    reviewed the subsequent history of payments for the study period and
    adjusted the estimated call volumes to reflect a relatively small
    amount of additional payments received after the study data were
    collected.[^200] Therefore, we will accept APCC's adjusted figure.

71. The IXCs also contend that past bad debt is not a reliable predictor
    of future bad debt.[^201] This is potentially true of components of
    any cost study. To the extent determination of any of these
    components requires the Commission to exercise predictive judgment,
    the standard is not whether the Commission can predict future
    conditions perfectly, as the IXCs appear to argue, but instead
    whether the data provided to the Commission give it a sufficient
    basis to make a reasonable estimate. In 1999, the Commission
    declined to include a cost element for bad debt because the record
    reflected insufficient experience with the compensation regime to
    develop such a reasonable estimate.[^202] Now that five additional
    years have elapsed, such experience is available and is reflected in
    the data made available by the PSPs.

72. According to the RBOC Coalition, the data in its original study were
    collected at a time when an older version of a reseller-pays rule,
    which it views as similar to the rule we recently adopted, was in
    place.[^203] Therefore, the RBOC Coalition argues that those data
    provide an accurate estimate of future levels of bad debt. By
    contrast, AT&T points out that the Commission's new reseller-pays
    rule is intended to and should succeed in reducing the amount of bad
    debt compared with experience under the old reseller-pays
    rule.[^204]

73. We agree with AT&T that our new reseller-pays rule will most likely
    reduce the amount of bad debt to a lower level than experienced
    under the pre-2001 reseller-pays rule. We have carefully crafted our
    new rule to ensure that resellers establish accurate call tracking
    systems and to provide PSPs with the tools they need to verify
    compensation payments. For this reason, we do not expect that bad
    debt percentages will exceed those experienced under the current
    rule. Therefore, we will apply the RBOC Coalition's alternative
    estimate of a 5.4 percent bad debt percentage, which is based on its
    experience during the first nine months of 2003.[^205]

74. We note that APCC is conservative in its approach to accounting for
    bad debt, because it does not provide an actual bad-debt allowance,
    but only factors unpaid dial-around calls into the call volumes
    estimate for purposes of calculating the per-call rate.[^206]
    Therefore, it is reasonable to accept this conservative approach to
    bad debt, notwithstanding that we hope and expect that bad debt will
    decline under our new reseller-pays rule.

75. Because the APCC and RBOC Coalition studies use different
    methodologies to reflect bad debt (the RBOC Coalition provides a
    specific estimate, while APCC reflects bad debt by counting only
    paid dial-around calls), we do not use a weighted average to
    estimate bad debt. Instead, we complete the bad debt and call volume
    calculations separately for the APCC and RBOC Coalition approaches,
    and take a weighted average of the resulting rates.

### **Incidental Revenues**

76. In the *NPRM*, we sought comment on whether and how we should
    consider the revenues and costs associated with the provision of
    additional services and activities in conjunction with payphones,
    such as Internet access or rental of advertising space.[^207] The
    RBOC Coalition included in its study an offset for incidental
    revenues, including advertising.[^208] APCC did not include such an
    offset. APCC argues that revenues from activities such as
    advertising cannot legally be considered because they are derived
    from non-telecommunications activities that are not subject to
    regulation.[^209] Citing the Commission's Computer III
    decision,[^210] APCC claims that "the Commission can no more
    consider PSPs' advertising revenues in setting the dial-around rate
    that it can consider a local exchange carrier's
    non-telecommunications revenue in a rate-of-return
    proceeding."[^211] APCC also argues, that, in any event, advertising
    revenues are available for only a fraction of all payphones \--
    those with relatively large amounts of pedestrian traffic \-- and
    that marginal payphones in particular are unlikely to produce any
    incidental revenue.[^212] The IXCs claim that advertising revenue
    should be included and point to information on APCC's website
    suggesting that revenue from advertising is significant.[^213]

77. We do not believe that we are legally required to disregard any
    incidental revenues such as advertising revenues, and we find that
    the RBOC Coalition's approach to this issue is more reasonable than
    that of APCC. To the extent that Computer Inquiry classifications of
    "regulated" and "non-regulated" are relevant to this proceeding, we
    have previously ruled that payphone service falls squarely on the
    "non-regulated" side.[^214] Computer III does not require the
    separation of non-regulated payphone costs from non-regulated
    advertising costs otherwise related to those payphone costs.
    Moreover, the advertising is related to the payphone operation. It
    makes use of the very same enclosure used to house the payphone. To
    the extent that regulated accounting classifications are at all
    relevant here,[^215] advertising revenues appear to be analogous to
    "non-operating" revenues under section 32.7300 of our regulations,
    which can be addressed by simply subtracting such revenues from the
    overall payphone "revenue requirement."

78. The RBOC Coalition's initial study found average incidental revenue
    of \$.34 per payphone per month, and its supplemental study
    estimated average incidental revenue of \$.74 per payphone per
    month. The IXCs do not develop any competing estimate of average
    incidental revenue. We find reasonable the PSPs' assertions that
    advertising revenue is available only at a fraction of payphones and
    is much less likely to be available at marginal payphone locations.
    Accordingly, we accept the RBOC Coalition's determination of average
    incidental revenue. Since APCC's cost study did not request
    information on incidental revenue, we will not accept APCC's
    determination of zero incidental revenue. Instead, we will subtract
    the RBOC Coalition's estimate of \$.74 per payphone per month from
    APCC's cost study.

### **Compensation for the Four-Month Payment Delay**

79. For purposes of compensating PSPs for the four-month average delay
    between the placing of a dial-around call and payment of
    compensation, Sprint argues that the 11.25 percent number used by
    the PSPs is not reasonable and that "IRS overpayment rates" should
    be utilized as a proxy for the "time value of money."[^216] The
    Commission has twice upheld the 11.25 percent figure for application
    to payphone compensation, and, each time, explained why it is
    reasonable to use this figure in this context. [^217] Sprint has
    provided no persuasive reason to overrule those precedents, and we
    decline to do so here. Therefore, we accept the RBOC Coalition's and
    APCC's estimates of \$.021 and \$.018, respectively.

## Calculation of a Modified Dial-Around Compensation Rate

80. We calculate the modified dial-around compensation rate according to
    the following table:

Equipment cost \$17.66

Line cost \$36.22

Maintenance cost \$12.41

SG&A cost \$20.04

Incidental revenues (\$.74)

Total monthly joint and common costs \$85.60

Divide by: marginal payphone call volume 191[^218]

Per-call joint and common costs \$.450

Collection costs \$.011/.007

Bad debt costs \$.026[^219]/0

Compensation for 4 months delay \$.021/.018

Subtotal: Collection, Bad debt and Compensation for 4 months delay
\$.058/.025

Weighted average: Collection, Bad debt, Compensation For 4 \$.044[^220]

month delay

Weighted average per-call compensation rate \$0.494[^221]

## Use of a "Top-Down" Test of Validity

81. Commenters argue that the Commission's previous top-down approach
    should be used to assess the reasonableness of the results of any
    bottom-up analysis.[^222] According to AT&T, a top-down analysis
    yields a rate of \$.278 per call, considerably less than the
    \$.48-59 rate advocated by the PSPs.[^223]

82. The PSPs dispute that the results of a top-down analysis should be
    accorded any significance.[^224] In addition, the RBOC Coalition
    conducts its own top-down analysis, which yields a rate of \$.467
    per call, close to the \$.49 rate advocated by the Coalition.[^225]

83. The *Third Report and Order* does not require top-down "validation."
    Indeed, the top-down approach was rejected by the court of appeals
    in *MCI Telecomms. Corp. v. FCC.*[^226] In the *Third Report and
    Order*, the Commission held that "a top-down approach is unsuitable
    at present for setting default compensation."[^227] Furthermore, the
    Commission acknowledged that its use of the top-down methodology in
    the *Third Report and Order* was merely for purposes of
    validation,[^228] and that an application of it has been found to
    have no legal significance.[^229]

84. As noted above, the record contains conflicting evidence as to
    whether a top-down calculation would "validate" the rate increase
    requested by the PSPs. While AT&T's top-down analysis yields a rate
    of \$.278, the RBOC Coalition analysis yields a rate of \$.467.
    AT&T's analysis omits any dial-around specific costs. As discussed
    above, however, we find that it is appropriate to include
    dial-around compensation specific elements for four months interest,
    bad debt, and collection costs. Adding these elements to AT&T's
    analysis would increase the resulting rate substantially. Further,
    AT&T's calculation may overestimate coin mechanism costs, coin
    collection costs, and local usage charges,[^230] which would result
    in overstating avoided costs and, consequently, understating the
    dial-around rate.

85. Therefore, we find that no top-down analysis is necessary or
    warranted under the circumstances. Such an analysis does not permit
    us to draw any conclusions regarding the validity of any particular
    rate.

## Caller Pays

86. In the NPRM, we tentatively concluded that we should not adopt a
    "caller-pays" compensation plan, in which the caller would deposit
    coins or other forms of advance payment before making a dial-around
    call,[^231] based on our previous findings that the Act disapproves
    of the methodology.[^232] Nevertheless, we sought comment on whether
    circumstances have changed such that it is now appropriate to
    reconsider a caller-pays approach to payphone compensation. Noting
    that interexchange carrier payphone surcharges may impose a high
    price on the convenience of coinless calling, we sought comment on
    our authority to allow advance consumer payment for use of payphones
    and on how we should analyze the costs and benefits of carrier-pays
    and caller-pays systems.[^233]

### **Statutory Authority and Congressional Intent Regarding Caller Pays**

87. Some IXCs challenge our tentative conclusion and previous findings
    that Congress, through the Act, disapproves of a caller-pays
    methodology. Sprint argues that section 226(e) of the Act[^234] does
    not bar the Commission from *allowing* PSPs to require advance
    payment from callers for dial-around calls, but only bars the
    Commission from *prescribing* caller-pays compensation.[^235] Sprint
    adds that in any event section 226(e) has been "superseded" by
    section 276, which contains no indication of Congressional approval
    or disapproval of a caller-pays plan.[^236]

88. The PSP commenters, on the other hand, contend that section 226 "for
    all practical purposes" prohibits a caller-pays approach.[^237] Not
    only does section 226 prohibit the Commission from prescribing
    advance-payment compensation,[^238] but it also requires PSPs to
    allow callers to dial access codes to reach their preferred operator
    service provider[^239] and prohibits PSPs from requiring an "advance
    deposit" for access code calling unless they also require "advance
    deposits" for 0+ calls.[^240] The PSPs point out that these
    restrictions cannot be ignored merely because Sprint contends they
    are no longer applicable.[^241]

89. The provisions cited by the PSPs, taken together, indicate to us a
    statutory policy not to hinder consumers from using payphones to
    access their operator service providers of choice. Conceivably, we
    could fashion a caller-pays system that does not literally violate
    any of the restrictions of section 226. Nonetheless, in our
    judgment, to increase the inconvenience to consumers of dial-around
    calling would conflict with the clear statutory and Congressional
    intent to make access code calling more, not less, convenient for
    consumers. We see nothing in section 276 that "supersedes" this
    Congressional intent.

90. Even if Congress had not disapproved, moreover, we are not persuaded
    that the benefits of caller pays outweigh its costs. To make such a
    determination, we would have to assign values to a number of
    unquantified factors. For example, the conclusion that caller pays
    is more efficient rests on the unproven assumption that coins are
    the most efficient means of payment for payphone service.[^242] Yet,
    the prevalence of coinless "operator assisted" calling illustrates
    that a large percentage of callers prefer *not* to use coins -- even
    though they may end up paying more for the convenience. Despite our
    invitation, no party has proffered a reasonable means to evaluate
    this trade-off. Further, a caller-pays system would result in
    callers having to pay, for the first time, for "toll-free" service
    -- a seeming contradiction in terms.[^243] The record is unclear on
    the costs that may result from introducing a new inhibition to toll
    free calling, or on the costs associated with the elimination of
    coinless calling from payphones.[^244] For all these reasons, we
    decline at this time to adopt a caller-pays system.

91. 

### **Per-Payphone Compensation Rate**

92. On May 5, 2004, AT&T filed an ex parte in this proceeding, asking
    the Commission to adopt a new, lower per-payphone compensation
    rate.[^245] The per payphone rate applies only to those payphones
    that are not supported by Flex ANI technology.[^246] In response to
    AT&T's filing, the RBOC Coalition and APCC filed ex parte letters on
    May 17, 2004[^247] and May 18, 2004,[^248] respectively. The RBOC
    Coalition states that fewer than five percent of its payphones
    qualify for per-payphone compensation.[^249] APCC indicates that
    approximately four percent of its payphones qualify for per-payphone
    compensation.[^250] APCC also states that AT&T has been on notice
    for six months that it should request a modification of the
    per-phone rate, and that it "has also had access for at least two
    years to information that would enable it to propose a new
    rate."[^251] The prescription of the new per-call compensation rate
    that we adopt in this order will not prejudice any reexamination of
    the per-payphone compensation rate. Indeed, the per-call
    compensation rate is one element of the per-payphone rate. Thus, in
    order to conclude this proceeding expeditiously, we decline to delay
    our decision in order to re-visit per phone compensation, as AT&T
    requests. Instead, we will release shortly a Further Notice of
    Proposed Rulemaking in this proceeding to develop a complete record
    on which to determine whether to set a new rate for per-payphone
    compensation.

# CONCLUSION

93. In our proceedings implementing section 276, our overarching
    objectives have been to promote payphone competition and "the
    widespread deployment of payphone services to the benefit of the
    general public." Conditions in the payphone industry have changed
    dramatically since we last prescribed the per-call payphone
    compensation rate. With the growth of wireless communications,
    payphone usage has declined substantially, resulting in the removal
    of more and more payphones. The record in this proceeding convinces
    us that a continued decline in payphone deployment risks leaving an
    insufficient number of payphones to meet the needs of the public,
    including, public safety requirements. The payphone market has
    reacted by increasing the local coin rate to \$.50 in most areas,
    creating a mismatch between an increasing market-based for local
    coin calls and a static, regulated compensation rate for access code
    and subscriber toll-free calls. Based on the substantial evidence in
    the record regarding per-call costs, we find that, to ensure that
    coinless calls bear a fair share of payphone costs, and to provide
    additional revenues to prevent or slow continuing declines, it is
    appropriate to prescribe an increased default dial-around
    compensation rate of \$.494 per call.

# PROCEDURAL MATTERS 

## Final Paperwork Reduction Act Analysis 

94. This action contained herein contains no new or modified information
    collections subject to the Paperwork Reduction Act of 1995 (PRA),
    Public Law 104-13. The Regulatory Flexibility Act analysis is
    contained in Appendix B, attached to this Order.

# Ordering CLAUSEs

95. Accordingly, IT IS 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 Report and Order IS ADOPTED.

96. IT IS FURTHER ORDERED that the Commission\'s Consumer Information
    Bureau, Reference Information Center, SHALL SEND a copy of this
    Report and Order, including the Final Regulatory Flexibility
    Analysis, to the Chief Counsel for Advocacy of the Small Business
    Administration.

97. IT IS FURTHER ORDERED that section 64.1301 of the Commission's
    Rules, 47 C.F.R. 64.1301 IS AMENDED as set forth in Appendix A of
    this Report and Order, and SHALL BE effective 30 days after Federal
    Register publication.

FEDERAL COMMUNICATIONS COMMISSION

Marlene H. Dortch

Secretary

**APPENDIX A**

The Federal Communications Commission amends 47 C.F.R. Part 64 as
follows:

§ 64.1301 Per-payphone compensation obligation.

**\* \* \***

\(c\) In the absence of an agreement as required by paragraph (a) of
this section, the carrier is obligated to compensate the payphone
service provider at a per-call rate of \$.494.

**APPENDIX B**

**FINAL REGULATORY FLEXIBILITY ANALYSIS**

1.  As required by the Regulatory Flexibility Act of 1980, as amended
    (RFA),[^252] an Initial Regulatory Flexibility Analysis (IRFA) was
    incorporated in the 2003 Order and *Notice of Proposed Rulemaking*
    (*Notice*) in WC Docket No. 03-225.[^253] The Commission sought
    written public comment on the proposals in that *Notice*, including
    comment on the IRFA. This present Final Regulatory Flexibility
    Analysis conforms to the RFA.[^254] To the extent that any statement
    in this FRFA is perceived as creating ambiguity with respect to
    Commission rules or statements made in this present order, the order
    is controlling.

## Need for, and Objectives of, the Rules 

2.  In the *Order and Notice of Proposed Rulemaking*, the Commission
    invited comments on whether the existing dial-around default rate
    applicable to calls made from payphones needed to be revisited.
    Among other things, the Commission noted that the existing rate had
    been in effect for nearly four years and that conditions in the
    payphone industry had change dramatically. In now adopting a revised
    default rate, the Commission sought to ensure that the new rate
    accurately reflected the current economic conditions in the payphone
    industry. The Commission also sought to ensure that the new rate
    would promote competition and provide for the widespread deployment
    of payphones. With this order, the Commission adopts a revised
    payphone dial-around default rate of \$.494.

## Summary of Significant Issues Raised by Public Comments in Response to the IRFA

3.  No comments were received directly in response to the IRFA. However,
    we have summarized some of the following significant issues: (1)
    level of payphone deployment; (2) cost methodology used to evaluate
    the default dial-around compensation rate; (3) impact of elasticity
    of demand on cost allocation; (4) methodologies for estimating call
    volumes; (5) particular inputs related to cost categories; and (6)
    methodology for validation of a rate increase.

4.  [Level of Payphone Deployment:]{.underline} The PSPs argue that
    payphone deployment is inadequate to serve the public interest, and
    that the Commission should raise the dial-around compensation rate
    to prevent, or at least slow, further erosion of the payphone
    base.[^255] IXCs contend that there are too many payphones, and that
    the Commission should leave the compensation rate unchanged.[^256]
    The Commission concluded that payphone deployment is inadequate, and
    concluded that it should adjust the dial-around compensation rate to
    affect deployment.[^257]

5.  [Cost Methodology to Evaluate Dial-Around Rate:]{.underline} The
    PSPs argue that the Commission should use a marginal payphone
    methodology to reevaluate and increase the dial-around compensation
    rate.[^258] Some parties oppose the Commission's use of a rate
    methodology based on the costs of maintaining a marginal
    payphone.[^259] The Commission concluded that there is no persuasive
    alternative to the marginal payphone methodology.[^260]

6.  [Elasticity of Demand and Cost Allocation:]{.underline} The PSPs
    argue that there is insufficient information to determine the
    elasticity of demand for purposes of cost allocation, and no reason
    to believe that dial-around calling is so price-elastic that a rate
    increase in the amount they propose would cause a reduction in
    revenues.[^261] Some IXCs argue that, due to the elasticity of the
    demand for dial-around calling, an increase in the dial-around rate
    would suppress demand,[^262] and some claim that demand suppression
    would be severe enough to cause increased removal of
    payphones.[^263] The Commission concluded that the proposed increase
    in the compensation rate would not accelerate the decline in
    payphone revenues and deployment.[^264]

7.  [Methodology for Call Volumes:]{.underline} The IXCs argue that the
    PSPs' methodologies for estimating call volumes from marginal
    payphones are incorrect because the PSPs did not limit their study
    samples to payphones that exactly recoup their costs, and because
    they do not use actual marginal payphones.[^265] The PSPs contend
    that any changes to the prescribed cost study methodology are
    justified by changed circumstances, and that the Commission's
    methodology does not require limiting study samples only to
    payphones that exactly "break even."[^266] The Commission found that
    the cost study methodologies used by the PSPs were reasonable, and
    that the Commission could rely on them in setting new compensation
    rates.[^267]

8.  [Cost Category Inputs:]{.underline} The IXCs argue that certain
    costs and expenses are overstated, and raise issues related to the
    treatment of bad debt and advertising revenue. Specifically, the
    IXCs contend that PSP studies overstate equipment costs by failing
    to account for used equipment, overestimate line costs by failing to
    account for changed circumstances, and double count collection
    expenses because they are already included in SG&A costs.[^268] Some
    PSPs argue that it is inappropriate to adopt an equipment cost input
    based on used equipment, while others contend that it is possible to
    factor used payphones into cost calculations, but not other used
    equipment.[^269] The Commission agreed with the IXCs that it is
    appropriate for cost studies to reflect the availability of used
    equipment.[^270] The Commission disagreed with the IXCs with respect
    to line costs, and found that the PSPs provided a reasonable basis
    for estimating line costs.[^271] Finally, the Commission disagreed
    that collection expenses were double-counted, finding the PSPs were
    correct in arguing that there are certain collection costs that are
    specific to dial-around compensation which are not reflected in SG&A
    costs.[^272]

9.  The IXCs further contend that it is unlawful for PSPs to include bad
    debt in the dial-around compensation rate.[^273] The Commission
    disagreed wit the IXCs, agreeing with the PSPs that rates should
    factor in bad debt.[^274] Finally, the IXCs argue that advertising
    revenue from marginal payphones should be included in cost studies
    as an offset.[^275] Some PSPs include advertising revenue as an
    offset, while others argue that they should not be considered.[^276]
    The Commission agreed with the IXCs, finding it is more reasonable
    to include advertising revenue as an offset.[^277]

10. [Rate Validation Methodology:]{.underline} Some IXCs argue that a
    top-down approach should be used to assess the reasonableness of the
    results of any bottom-up analysis.[^278] The Commission disagreed
    with the IXCs, noting that the PSPs were correct in their contention
    that a top-down validation is neither necessary not warranted.[^279]

## Description and Estimate of the Number of Small Entities to which the Rules Will Apply 

11. The RFA directs agencies to provide a description of and, where
    feasible, an estimate of the number of small entities that may be
    affected by the rules adopted herein.[^280] The RFA generally
    defines the term "small entity" as having the same meaning as the
    terms "small business," "small organization," and "small
    governmental jurisdiction."[^281] In addition, the term "small
    business" has the same meaning as the term "small business concern"
    under the Small Business Act.[^282] 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).[^283]

12. Below, we describe and estimate the number of small entity licensees
    and regulatees that may be affected by rules adopted pursuant to
    this *Order*. The most reliable source of information regarding the
    total numbers of certain common carrier and related providers
    nationwide, as well as the number of commercial wireless entities,
    appears to be the data that the Commission publishes in its *Trends
    in Telephone Service* report.[^284] The SBA has developed small
    business size standards for wireline and wireless small businesses
    within the three commercial census categories of Wired
    Telecommunications Carriers,[^285] Paging,[^286] and Cellular and
    Other Wireless Telecommunications. [^287] Under these categories, a
    business is small if it has 1,500 or fewer employees. Below, using
    the above size standards and others, we discuss the total estimated
    numbers of small businesses that might be affected by our actions.

13. 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
    wired telecommunications carrier having 1,500 or fewer employees),
    and "is not dominant in its field of operation."[^288] 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.[^289] We have therefore
    included small incumbent LECs in this RFA analysis, although we
    emphasize that this RFA action has no effect on Commission analyses
    and determinations in other, non-RFA contexts.

14. *Wired Telecommunications Carriers*. The SBA has developed a small
    business size standard for Wired Telecommunications Carriers, which
    consists of all such companies having 1,500 or fewer
    employees.[^290] According to Census Bureau data for 1997, there
    were 2,225 firms in this category, total, that operated for the
    entire year.[^291] Of this total, 2,201 firms had employment of 999
    or fewer employees, and an additional 24 firms had employment of
    1,000 employees or more.[^292] Thus, under this size standard, the
    majority of firms can be considered small.

15. *Incumbent Local Exchange Carriers (LECs)*. Neither the Commission
    nor the SBA has developed a size standard for small businesses
    specifically applicable to incumbent local exchange services. The
    closest applicable size standard under SBA rules is for Wired
    Telecommunications Carriers. Under that size standard, such a
    business is small if it has 1,500 or fewer employees.[^293]
    According to Commission data,[^294] 1,337 carriers reported that
    they were engaged in the provision of local exchange services. Of
    these 1,337 carriers, an estimated 1,032 have 1,500 or fewer
    employees and 305 have more than 1,500 employees. Consequently, the
    Commission estimates that most providers of incumbent local exchange
    service are small businesses that may be affected by the rules and
    policies adopted herein.

16. *Competitive Local Exchange Carriers (CLECs), Competitive Access
    Providers (CAPs), and "Other Local Exchange Carriers."* Neither the
    Commission nor the SBA has developed a size standard for small
    businesses specifically applicable to providers of competitive
    exchange services or to competitive access providers or to "Other
    Local Exchange Carriers," all of which are discrete categories under
    which TRS data are collected. The closest applicable size standard
    under SBA rules is for Wired Telecommunications Carriers. Under that
    size standard, such a business is small if it has 1,500 or fewer
    employees.[^295] According to Commission data,[^296] 609 companies
    reported that they were engaged in the provision of either
    competitive access provider services or competitive local exchange
    carrier services. Of these 609 companies, an estimated 458 have
    1,500 or fewer employees and 151 have more than 1,500
    employees.[^297] In addition, 35 carriers reported that they were
    "Other Local Service Providers." Of the 35 "Other Local Service
    Providers," an estimated 34 have 1,500 or fewer employees and one
    has more than 1,500 employees.[^298] Consequently, the Commission
    estimates that most providers of competitive local exchange service,
    competitive access providers, and "Other Local Exchange Carriers"
    are small entities that may be affected by the rules and policies
    adopted herein.

17. *Interexchange Carriers (IXCs)*. Neither the Commission nor the SBA
    has developed a size standard for small businesses specifically
    applicable to interexchange services. The closest applicable size
    standard under SBA rules is for Wired Telecommunications Carriers.
    Under that size standard, such a business is small if it has 1,500
    or fewer employees.[^299] According to Commission data,[^300] 261
    companies reported that their primary telecommunications service
    activity was the provision of interexchange services. Of these 261
    companies, an estimated 223 have 1,500 or fewer employees and
    38 have more than 1,500 employees.[^301] Consequently, the
    Commission estimates that the majority of interexchange service
    providers are small entities that may be affected by the rules and
    policies adopted herein.

18. *Operator Service Providers (OSPs).* Neither the Commission nor the
    SBA has developed a size standard for small businesses specifically
    applicable to operator service providers. The closest applicable
    size standard under SBA rules is for Wired Telecommunications
    Carriers. Under that size standard, such a business is small if it
    has 1,500 or fewer employees.[^302] According to Commission
    data,[^303] 23 companies reported that they were engaged in the
    provision of operator services. Of these 23 companies, an estimated
    22 have 1,500 or fewer employees and one has more than 1,500
    employees.[^304] Consequently, the Commission estimates that the
    majority of operator service providers are small entities that may
    be affected by the rules and policies adopted herein.

19. *Payphone Service Providers (PSPs).* Neither the Commission nor the
    SBA has developed a size standard for small businesses specifically
    applicable to payphone service providers. The closest applicable
    size standard under SBA rules is for Wired Telecommunications
    Carriers. Under that size standard, such a business is small if it
    has 1,500 or fewer employees.[^305] According to Commission
    data,[^306] 761 companies reported that they were engaged in the
    provision of payphone services. Of these 761 companies, an estimated
    757 have 1,500 or fewer employees and four have more than 1,500
    employees.[^307] Consequently, the Commission estimates that the
    majority of payphone service providers are small entities that may
    be affected by the rules and policies adopted herein.

20. *Prepaid Calling Card Providers.* The SBA has developed a size
    standard for a small business within the category of
    Telecommunications Resellers. Under that SBA size standard, such a
    business is small if it has 1,500 or fewer employees.[^308]
    According to Commission data,[^309] 37 companies reported that they
    were engaged in the provision of prepaid calling cards. Of these 37
    companies, an estimated 36 have 1,500 or fewer employees and one has
    more than 1,500 employees.[^310] Consequently, the Commission
    estimates that the majority of prepaid calling card providers are
    small entities that may be affected by the rules and policies
    adopted herein.

21. *Other Toll Carriers.* Neither the Commission nor the SBA has
    developed a size standard for small businesses specifically
    applicable to "Other Toll Carriers." This category includes toll
    carriers that do not fall within the categories of interexchange
    carriers, operator service providers, prepaid calling card
    providers, satellite service carriers, or toll resellers.
    The closest applicable size standard under SBA rules is for Wired
    Telecommunications Carriers. Under that size standard, such a
    business is small if it has 1,500 or fewer employees.[^311]
    According to Commission's data,[^312] 92 companies reported that
    their primary telecommunications service activity was the provision
    of other toll carriage. Of these 92 companies, an estimated 82 have
    1,500 or fewer employees and ten have more than 1,500
    employees.[^313] Consequently, the Commission estimates that most
    "Other Toll Carriers" are small entities that may be affected by the
    rules and policies adopted herein.

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

22. With this order, the Commission finds that the revised default rate
    will not increase existing reporting, recordkeeping or other
    compliance requirements. The rate has been increased from \$.24 to
    \$.494. This increase creates no change in the way that directly
    affected parties operate.

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

23. 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.[^314]

24. In the IRFA, we stated, "\[T\]he overall objective of this
    proceeding is to evaluate whether changes are necessary in the
    current default rate of compensation for dial-around calls
    originating at payphones, in order to ensure that payphone service
    providers are fairly compensation, promote payphone competition, and
    promote the widespread deployment of payphone services. The *Notice*
    seeks comment on specific issues related solely to the level of
    dial-around compensation."[^315] In considering all of the comments
    filed in this proceeding, there has not been any identification of
    any alternative that would have further limited the impact on
    entities while remaining consistent with Congress' pro-competitive
    objectives set out in the Act.

25. [Report to Congress]{.underline}. The Commission will send a copy of
    this order, including this FRFA, in a report to be sent to Congress
    pursuant to the Congressional Review Act.[^316] In addition, the
    Commission will send a copy of this orders, including the FRFA, to
    the Chief Counsel for Advocacy of the Small Business Administration.
    A copy of this order and FRFA (or summaries thereof) will also be
    published in the Federal Register.[^317]

[^1]: 47 C.F.R. § 64.1300 (c).

[^2]: 47 U.S.C. § 276 (b) (1).

[^3]: 47 U.S.C. § 276 (b)(1)(A).

[^4]: *See 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 2545 (1999).

[^5]: *Id.* at 2658, para. 230.

[^6]: *See Implementation of the Pay Telephone Reclassification and
    Compensation Provisions of the Telecommunications Act of 1996*, CC
    Docket No. 96-128*,* Notice of Proposed Rulemaking, 11 FCC Rcd 6716
    (1996) (hereinafter *First Payphone NPRM*); Report and Order, 11 FCC
    Rcd 20541 (1996) (hereinafter *First Report and Order*); Order on
    Reconsideration, 11 FCC Rcd 21233 (1996) (hereinafter *First
    Reconsideration Order*), *aff\'d in part and remanded in part sub
    nom. Illinois Pub. Telecomm. Ass\'n v. FCC*, 117 F.3d 555 (D.C. Cir.
    1997), *clarified on reh'g,* 123 F.3d 693 (D.C. Cir. 1997), *cert.
    denied sub nom. Virginia State Corp. Comm'n v. FCC*, 523 U.S. 1046
    (1998) (hereinafter *IPTA)*; Second Report and Order, 13 FCC Rcd
    1778 (1997), *aff\'d in part and remanded in part sub nom. MCI v.
    FCC*, 143 F.3d 606 (D.C. Cir. 1998) (hereinafter *MCI*); Third
    Report and Order and Order on Reconsideration of the Second Report
    and Order, 14 FCC Rcd 2545 (1999) (hereinafter *Third Report and
    Order*), *aff\'d sub nom. American Pub. Communications Council v.
    FCC*, 215 F.3d 51 (D.C. Cir. 2000) (hereinafter *American*); Second
    Order on Reconsideration, 16 FCC Rcd 8098 (2001) (hereinafter
    *Second Reconsideration Order*); Third Order on Reconsideration and
    Order on Clarification, 16 FCC Rcd 20922 (2001) (hereinafter *Third
    Reconsideration Order*)*, remanded sub nom. Sprint Corp. v. FCC,*
    315 F.3d 369 (D.C. Cir. 2003); Fourth Order on Reconsideration and
    Order on Remand, 17 FCC Rcd 2020 (2002); Fifth Order on
    Reconsideration and Order on Remand, 17 FCC RCd 21274
    (2002)(hereinafter *Fifth Reconsideration Order*), *aff'd sub nom.
    AT&T v. FCC,* \_\_ F.3d \_\_ (D.C. Cir. 2004); Report and Order, 18
    FCC Rcd 19975 (2003)(hereinafter *Tollgate Remand Order*), *pets.
    for reconsideration pending*.

[^7]: *See* 47 U.S.C. § 276(b)(1)(A). The statute 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,
    except that emergency calls and telecommunications relay service
    calls for hearing disabled individuals shall not be subject to such
    compensation.\" *Id.*

[^8]: 47 U.S.C. § 276(b)(1). *See First Report and Order*, 11 FCC Rcd at
    20566, para. 48; *Second Report and Order*, 13 FCC Rcd at 1789,
    para. 24.

[^9]: There are typically three types of calls made from payphones: coin
    calls; coinless calls using the long distance carrier selected by
    the payphone owner (referred to as the \"presubscribed carrier\");
    and so-called \"dial-around\" calls, where the caller makes a
    coinless call using a carrier other than the payphone\'s
    presubscribed long distance carrier. Generally, there are two types
    of dial-around calls. The first type is where a caller uses a code
    to access his or her preferred long distance carrier to make a long
    distance call, e.g., "1/800/CALL-ATT" or "10-10-321." The second
    type of dial-around calls are known as "toll-free" calls, such as
    1/800/Flowers. In this type of call, the flower company will pay (or
    "subscribes" to) a long distance carrier for a toll-free number that
    its customers can use to make long distance calls to the company
    without incurring toll charges. Similar to the caller who uses
    1/800/CALL-ATT, the flower customer calling from a payphone is
    making a long distance call using a carrier other than the
    payphone's presubscribed long distance carrier.

[^10]: *See* Telephone Operator Consumer Services Improvement Act
    (TOCSIA), Pub. L. No. 101-435, 104 Stat. 986 (1990) (codified at 47
    U.S.C. § 226). The effect of this statutory provision is to preclude
    PSPs from blocking outgoing 800 and other 8XX calls, including
    toll-free subscriber calls.

[^11]: *First Report and Order*, 11 FCC Rcd at 20567, para. 49.

[^12]: The Commission determined in the *First Report and Order* that
    the primary economic beneficiaries of access-code and toll-free
    subscriber calls, the IXCs, should be responsible for compensating
    the PSPs. *Id.* at 20584, para. 83. For purposes of this *Report and
    Order*, the term \"IXC\" also includes a LEC when the LEC provides a
    toll-free subscriber service or a service accessed by access codes,
    *see id.* at 20584 n.293, and switched-based resellers that are the
    primary economic beneficiaries of coinless payphone calls
    transferred to their switches. *See Tollgate Remand Order*, 18 FCC
    Rcd at 19988, para. 27 (rel. Oct. 3, 2003); Errata (WCB, rel. Oct.
    23, 2003).

[^13]: *See First Report and Order,* 11 FCC Rcd at 20567-68, paras.
    50-51.

[^14]: *Id*. at 20541, para. 70; *id.* at 20568, para. 52.

[^15]: *Id.* at 20577, para. 70.

[^16]: *Id.* at 20577-578, paras. 70-71.

[^17]: *Id.* at 20577-578, paras. 70-72.

[^18]: *Id.* at 20576, para. 68.

[^19]: *Illinois*, 117 F.3d at 564.

[^20]: *Second Report and Order*, 13 FCC Rcd at 1789, para. 24.

[^21]: *Id.* at 1796, para. 41.

[^22]: *Id*. at 1797-1801, para. 42.

[^23]: *Id.* at 1828, para. 117.

[^24]: *Id.* at 1830, para. 121.

[^25]: *Id.* at 1828, para. 117.

[^26]: *Id.* at 1828, para. 117.

[^27]: *MCI*, 143 F.3d at 608.

[^28]: *Third Report and Order*, 14 FCC Rcd at 2545.

[^29]: *Id*. at 2545, para. 72. This is a \"bottom-up\" methodology
    because the price of dial-around or compensable calls is calculated
    by \"building-up\" the costs of these calls from a starting point of
    zero using costs, instead of \"building-down\" from a starting point
    of the price of coin calls using avoided costs.

[^30]: While the compensation rate should also recover the marginal cost
    of placing a dial-around call, the Commission concluded that no such
    costs existed or that such costs were so small as to be
    insignificant. *Id.* at 2631, para. 190.

[^31]: FLEX ANI is a coding digit technology that allows IXCs to
    identify payphone-originated calls for per-call compensation
    purposes*. See Implementation of the Pay Telephone Reclassification
    and Compensation Provisions of the Telecommunications Act of 1996,
    TDS Telecommunications Corporation Petition for Waiver of Coding
    Digit Requirement, International Telecard Association Petition for
    Reconsideration of Payphone Compensation Obligation,* CC Docket No.
    96-128, Memorandum Opinion and Order, 13 FCC Rcd 4998, 5000, para. 2
    and n.8.

[^32]: *Third Report and Order,* 14 FCC Rcd at 2632, para. 191

[^33]: *Id*. at 2607, para. 139. The location provider is the entity
    that owns or leases the space where the payphone is placed*. See
    First Payphone NPRM*, 11 FCC Rcd at 6721-22. In some cases, the PSP
    will pay commissions to the location provider. In other instances,
    the location provider will make payments to the PSP.

[^34]: *Id.* at 2608, para. 141.

[^35]: *Id.* at 2608-09, para. 141.

[^36]: *Id.* at 2614, para. 151 n.202.

[^37]: *Id.* at 2615, para. 153.

[^38]: *Id.* at 2658, para. 230.

[^39]: *American*, 215 F.3d at 51.

[^40]: Request that the Commission Issue a Notice of Proposed Rulemaking
    (Or, in the Alternative, Petition for Rulemaking) to Update
    Dial-Around Compensation Rate (filed Aug. 29, 2002) ("APCC
    Petition"). On August 30, 2002, APCC filed a corrected copy of its
    petition.

[^41]: Petition for Rulemaking to Establish Revised Per-Call Payphone
    Compensation Rate (filed Sept. 4, 2002) ("RBOC Coalition Petition").

[^42]: *Request to Update Default Compensation Rate for Dial-Around
    Calls From Payphones,* Order and Notice of Proposed Rulemaking, WC
    Docket No. 03-225, 18 FCC 22811 (2003) (hereinafter *NPRM).*

[^43]: *See, e.g.*, AT&T Comments at 6; MCI Comments at 2; Sprint
    Comments at 6; APCC Comments at 2.

[^44]: *See, e.g.*, AT&T Comments at 2; Illinois Public
    Telecommunications Association Comments at 9.

[^45]: *See, e.g.,* APCC Comments at 6-7; RBOC Coalition Comments at
    4-5; Sprint Comments at 8.

[^46]: RBOC Coalition Comments at 4.

[^47]: APCC Comments at 2.

[^48]: *See, e.g.,* APCC Comments at 9; IDT Comments on Petitions for
    Rulemaking at 12; Global Crossing Comments on Petitions for
    Rulemaking at 4; MCI Comments at 9; RBOC Coalition Comments at 7.

[^49]: *See supra* paras. 8-13.

[^50]: APCC Petition at 6-8; APCC Reply Comments at 2-9; RBOC Coalition
    Reply Comments at 5-7.

[^51]: *See, e.g*., APCC Petition, Atts. 4, 11.

[^52]: *See, e.g*., APCC Reply Comments, Exhs. 2, 4.

[^53]: *See, e.g*., APCC Reply Comments, Exhs. 2, 3.

[^54]: APCC Comments at 6, 8-9; APCC Reply Comments at 5-6.

[^55]: APCC Comments at 7; RBOC Coalition Comments at 5.

[^56]: *See, e.g.*, AT&T Comments at 7.

[^57]: AT&T Reply Comments at 15; MCI Reply Comments at 7-10; Global
    Crossing Reply Comments at 3.

[^58]: *NPRM* , 18 FCC Rcd at 22818, para. 20.

[^59]: *See* 47 U.S.C. § 226(c)(1)(B), which requires PSPs to ensure
    access to the operator services provider desired by the consumer.

[^60]: 47 U.S.C. §§ 226 (c)(1)(C), (e)(2).

[^61]: In the *Third Report and Order,* the Commission noted that, while
    PSPs are prohibited from blocking dial-around calling, it appears
    that IXCs may legally decline to accept dial-around calls for which
    they are unable to negotiate a satisfactory price. The deployment of
    targeted call-blocking technology seemed to offer a means of
    transitioning to a negotiated, market-based rate. *Third Report and
    Order,* 14 FCC Rcd at 2647-48, para. 230. The Commission requested
    the industry to inform it in the event that technology was developed
    to allow economical deployment of targeted call blocking. *Id.*

[^62]: AT&T Comments at 7; *see also* Sprint Comments at 6-8.

[^63]: APCC Comments at 3-4.

[^64]: *Third Report and Order*, 14 FCC Rcd at 2550-51, para. 10.

[^65]: Payphones were vital in maintaining the communications network
    during the recent power outage and related blackout that stretched
    from Ohio to New York. *See* APCC Comments at 4.

[^66]: APCC Comments at 7; RBOC Coalition Comments at 4 & Exh. 1 at 11.
    Sprint argues that the decline in payphone deployment reflects
    primarily the removal of redundant payphones, i.e., the reduction in
    the number of payphones in banks of two or more payphones. Sprint
    Comments at 8. Sprint adds that the decline in per-payphone volume
    reflects PSPs' failure to remove all redundant payphones. APCC's
    cost study survey results indicate, however, that more than three
    quarters of independent payphones are the only payphone at their
    locations. APCC Reply Comments at 3, Exh. 1, para. 33.

[^67]: *Third Report and Order*, 14 FCC Rcd at 2608, para. 141.

[^68]: APCC Comments at 4-6 and documents cited therein; APCC Reply
    Comments at 3-5 and documents cited therein.

[^69]: *See* para. 16, *supra.*

[^70]: AT&T Reply Comments at 9-10.

[^71]: West Virginia Payphone Task Force, Sixth Interim Report,
    available on the internet at
    [http://www.cad.state.wv.us/03pp%20Survey.htm](http://www.cad.state.wv.us/03pp Survey.htm)
    (West Virginia Payphone Report).

[^72]: *Id*.

[^73]: *Id.*

[^74]: *See* New Hampshire Public Utilities Commission, Petition for
    Designation of Acworth Payphone as a Public Interest Payphone (PIP),
    DT 02-250, Order No. 24,008 (rel. July 9, 2002) (APCC Reply
    Comments, Exhibit 5).

[^75]: *See* West Virginia Payphone Report.

[^76]: The issue of whether there is a need to provide universal service
    support for payphones in a particular area was recently raised in
    *In The Matter of Federal-State Joint Board on Universal Service*,
    CC Docket No. 96-45, Order and Order on Reconsideration, 18 FCC Rcd
    15090, 15099, para. 21 (2003).

[^77]: APCC Petition, Att. 1 (calculating rate of \$.484); APCC Reply
    Comments at 33 (adjusting rate to \$.476); RBOC Coalition Petition,
    KPMG Study (calculating rate of \$.49); RBOC Coalition Comments,
    Exh. 1 (calculating updated rate of \$.59); RBOC Coalition Ex Parte
    Filing, May 21, 2004) (adjusting updated rate to \$.552).

[^78]: APCC Comments at 2-3.

[^79]: *NPRM*, 18 FCC Rcd at 22820, para. 27.

[^80]: Call volumes are determined on a monthly basis. *See Third Report
    and Order*, 14 FCC Rcd at 2613-14, para. 151.

[^81]: *American,* 215 F.3d 51, 57.

[^82]: IPCA Comments at 2-3; MCI Comments at 5-8. *But see* MCI Comments
    at 7 (supporting rationale for denying Universal Service Fund
    payments to PSPs).

[^83]: Sprint Comments at 9-11.

[^84]: *Id.* at 19-26.

[^85]: *NPRM,* 18 FCC Rcd at 22821-22, para. 32.

[^86]: *Third Report and Order*, 14 FCC Rcd at 2607, para. 139.

[^87]: *See First Report and Order,* 11 FCC Rcd at 20572-73, para. 61
    (suggesting that states might address payphone locations that charge
    monopoly rates, by, e.g., mandating that additional PSPs be allowed
    to provide payphones, and, if market failure persists, urging states
    to recommend the matter to the Commission for investigation).

[^88]: AT&T Comments at 6-7.

[^89]: 47 U.S.C. §276(b)(1)(A).

[^90]: *See Third Report and Order,* 14 FCC Rcd at 2550, para. 10 (in
    setting compensation, the Commission places "great weight on
    Congress's directive to ensure that payphones remain widely deployed
    and available to the public at large").

[^91]: *NPRM*, 18 FCC Rcd at 22820-21, para. 28.

[^92]: *Third Report and Order*, 14 FCC Rcd at 2588, para. 102.

[^93]: *NPRM*, 18 FCC Rcd at 22820-21, para. 28.

[^94]: *Id.*

[^95]: *See* RBOC Coalition Comments at 6-9; APCC Comments at 10-14.

[^96]: APCC Comments at 12-13.

[^97]: Global Crossing Comments at 2-7; AT&T Comments at 2-3, 7-11; MCI
    Comments at 9-10; Sprint Comments at 2, 8-11.

[^98]: Global Crossing Comments at 4-6; MCI Comments at 9-11.

[^99]: Global Crossing Comments at 2-7; MCI Comments at 9-11

[^100]: AT&T Comments at 7-11.

[^101]: In any event, the record provides no reason to believe that even
    local coin calling is so elastic that increasing the rate to \$.50
    has caused a reduction in overall local coin revenues.

[^102]: The IXCs do not provide any data on the impact on subscriber
    toll-free calling, which seems less likely than card calling to be
    affected by compensation rate increases, since the caller does not
    pay directly for the call.

[^103]: In any event, AT&T does not show that calling card rate
    increases have led to a reduction in total revenues. Presumably, if
    that were the case, IXCs would have returned their calling card
    rates to prior levels. *See* RBOC Coalition Reply Comments at 9. In
    fact, the PSPs provide evidence that IXCs often impose considerable
    surcharges on their customers for access code calls. APCC Comments
    at 10-11 (citing collect calling service charges of \$3.99 for AT&T
    and \$4.99 for MCI, plus usage charges of \$.99 per minute for both
    carriers); San Diego Payphone Owners Association Comments at 2-3
    (citing AT&T charges ranging from \$6.18 to \$7.96 for calling card
    calls ranging from one to three minutes).

[^104]: For example, if AT&T charges \$4.14 for an average access code
    call, as APCC estimates based on AT&T's data, then a 100% increase
    in the dial-around compensation rate (from \$.24 to \$.48) would
    increase AT&T's average charges by only 5.8%. *See* APCC Reply
    Comments at 18.

[^105]: *See Annual Report and Analysis of Competitive Market Conditions
    With Respect to Commercial Mobile Services*, Fourth Report, 14 FCC
    Rcd 10145, 10155-56 (1999)(discussing impact of flat-rate plans on
    demand for wireless service). *See also* APCC Reply Comments at 22.

[^106]: *See* RBOC Coalition Reply Comments at 2.

[^107]: *See* *id.* at 9.

[^108]: *NPRM*, 18 FCC Rcd at 22820, para. 26.

[^109]: *Id.*

[^110]: *Id.*, para. 28.

[^111]: *Third Report and Order*, 14 FCC Rcd at 2607, para. 139.

[^112]: *Third Report and Order* 14 FCC Rcd at 2612, para. 147.

[^113]: APCC Comments at 17-18.

[^114]: APCC Petition, Att. 1.

[^115]: RBOC Coalition Petition, KPMG Study at 11-13.

[^116]: *Id.*

[^117]: RBOC Coalition Comments, Exh. 1 at 14.

[^118]: AT&T Comments at 14 n.9, 17.

[^119]: AT&T Comments at 14 (quoting *Third Report and Order,* 14 FCC
    Rcd at 2580, para. 79), 17. AT&T objects to other aspects of APCC's
    study as well. AT&T complains that the study did not indicate the
    size of sampling variability, and that the response rate to APCC's
    survey was less than 50 percent. This non-response rate, AT&T
    contends, may have biased the results given the respondents'
    interest in the outcome. AT&T Comments at 15, n.10, Att. B at paras.
    13-15. APCC responds that the rate of response exceeds typical
    survey response rates, and that there is no evidence that the
    respondents were aware of how their responses might influence the
    outcome. APCC Reply Comments at 34, Wood Dec. at paras. 29-33. We
    find APCC's methodology reasonable under the circumstances,
    particularly given the IXCs' failure to offer any alternative data.

[^120]: AT&T Reply Comments at 18; MCI Reply Comments at 14-15; Sprint
    Reply Comments at 10.

[^121]: APCC Comments at 17-18.

[^122]: APCC Reply Comments, Exh. 1, Wood Dec. at para. 28.

[^123]: APCC Reply Comments at 9, n.8.

[^124]: *Id.*

[^125]: *Id.*

[^126]: *Id*. at 25-28, Wood Dec. at paras. 16-27.

[^127]: RBOC Coalition Reply Comments at 11. Semi-public payphones are
    payphones that a LEC typically provides in exchange for both the
    coin revenue generated and a monthly fee, paid by the location
    provider. Semi-public payphones tend to be located, at the request
    of the location provider, where public access is limited and an
    insignificant amount of calls are made. *See First Report and
    Order*, 11 FCC Rcd at 20562, n.142.

[^128]: RBOC Coalition Petition, KPMG Study at 11-12; RBOC Comments at
    5, Exh. 1 at 15-16.

[^129]: RBOC Coalition Reply Comments at 12.

[^130]: RBOC Coalition Comments at 3-5.

[^131]: *Id.* at 4.

[^132]: *Id.* at 7-8.

[^133]: *Id.* at 4-5.

[^134]: *Third Report and Order,* 14 FCC Rcd at 2609-11, paras. 142-43.

[^135]: MCI, Sprint, and AT&T all have significant payphone operations
    of their own*. See, e.g.,* AT&T Comments at 20.

[^136]: Industry Analysis and Technology Division, Wireline Competition
    Bureau, *Trends in Telephone Service*, Table 7.5 (May, 2004).
    Independent telephone company payphones were not represented in
    either study and therefore are not represented in the weighted
    average we employ.

[^137]: *NPRM*, 18 FCC Rcd at 22821, para. 29.

[^138]: *Id.*, para. 30.

[^139]: APCC Petition, Att. 1, §§ D.2.2.1, D.5.1, D.5.4. APCC's study
    adjusts the price of the equipment reviewed to exclude the cost of
    the coin mechanism. *Id.,* §§ D.2.2.1, D.5.4.

[^140]: RBOC Petition, KPMG Study at 3.

[^141]: APCC Petition, Att. 1, § D.2.2.3.

[^142]: AT&T Comments at 19-20, Heymann Dec. at paras. 23-24; MCI
    Comments at 16.

[^143]: AT&T Comments, Att. A, Heymann Dec., para. 25.

[^144]: MCI Comments at 12-15.

[^145]: MCI Reply Comments at 17; *see also* Global Crossing Reply
    Comments at 13.

[^146]: APCC Reply Comments at 36.

[^147]: APCC Comments at 28.

[^148]: *Id.;* APCC Reply Comments, Exh. 1, Wood Dec. at para. 37.

[^149]: APCC Reply Comments at 36 & Exh. 1, Wood Dec. at para. 36.

[^150]: *Id.*

[^151]: *Id.*, Exh. 1, Wood Dec. at paras. 37-38.

[^152]: RBOC Coalition Reply Comments, KPMG Supplemental Report at 7.

[^153]: *Id.*

[^154]: *Id.*

[^155]: AT&T Comments at 19-20; Sprint Comments at 15.

[^156]: APCC Reply Comments at 35 (citing *Third Report and Order*, 14
    FCC Rcd at 2603, para. 131).

[^157]: APCC Reply Comments at 35-36, Wood Dec. at para. 35.

[^158]: RBOC Coalition Reply Comments, KPMG Supplemental Report at 8.

[^159]: *Id.*

[^160]: APCC Petition, Att. 1, D.5.5.

[^161]: RBOC Coalition ex parte (May 21, 2004) at 2.

[^162]: *Id.*

[^163]: APCC Petition, Att. 1, Tab D; RBOC Coalition Petition, KPMG
    Study at 4-5.

[^164]: APCC Reply Comments at 36, Exh. 1, Wood Dec. at para. 40.

[^165]: RBOC Coalition Petition, KPMG Study at 2.

[^166]: RBOC Coalition Comments, Exh.1, at 6-7.

[^167]: Sprint Comments at 17.

[^168]: *First Report and Order*, 11 FCC Rcd at 20614, para. 146; *First
    Reconsideration Order*, 11 FCC Rcd at 21308, para. 163.

[^169]: *Wisconsin Public Service Commission*, *Order Directing
    Filings*, 15 FCC Rcd 9978 (Com. Car. Bur., March 2, 2000).

[^170]: *Wisconsin Public Service Commission*, *Order Directing
    Filings*, 17 FCC Rcd 2051 (January 31, 2002), *aff'd sub nom. New
    England Pub. Comms. Council v. FCC*, 334 F.3d 69 (D.C. Cir. 2003).

[^171]: \$34.84\*.65 + \$38.77\*.35 = \$36.22.

[^172]: RBOC Coalition Petition, KPMG Study at 5-6.

[^173]: RBOC Coalition Comments, Exh. 1 at 7.

[^174]: APCC Petition, Att. 1, Tab E.

[^175]: *Third Report and Order,* 14 FCC Rcd at 2626, para. 177.

[^176]: \$9.67\*.65 + \$17.45\*.35 = \$12.41.

[^177]: SG&A (sales, general and administrative) costs include all
    overhead costs. *See Third Report and Order,* 14 FCC Rcd at 2559,
    para. 31.

[^178]: RBOC Coalition Petition, KPMG Study at 6.

[^179]: RBOC Coalition Comments, Exh. 1 at 8.

[^180]: APCC Petition, Att. 1, Tab E.

[^181]: *Third Report and Order*, 14 FCC Rcd at 2626-27, para. 179.

[^182]: \$18.20\*.65 + \$23.43\*.35 = \$20.04.

[^183]: RBOC Coalition Petition at 10; APCC Petition at 13-15.

[^184]: *NPRM,* 18 FCC Rcd at 11, para. 30.

[^185]: APCC Petition, Att. 1.

[^186]: RBOC Coalition Comments, Exh. 1 at 12.

[^187]: AT&T Comments at 23; MCI Comments at 16.

[^188]: AT&T Comments at 23 (citing *Tollgate Remand Order*). MCI
    contends that the RBOC Coalition cost study improperly includes
    calling card validation costs as collection costs. MCI Comments at
    16. The RBOC Coalition states that it corrected its study for this
    error, with a *de minimis* impact on the rate. RBOC Coalition Reply
    Comments at 15 n.7.

[^189]: APCC Reply Comments at 29; RBOC Payphone Coalition Reply
    Comments at 15-16.

[^190]: RBOC Coalition Petition, KPMG Study at 1.

[^191]: We individually add the RBOC Coalition's submissions for
    collection costs, bad debt and compensation for the four-month delay
    and the APCC's submissions for its collection costs, bad debt and
    compensation for the four-month delay and then take a weighted
    average of the individual totals.

[^192]: RBOC Coalition Petition at 10.

[^193]: APCC Reply Comments at 32.

[^194]: AT&T Comments at 22; MCI Comments at 16; Sprint Comments at 14.
    *See* *Fifth Reconsideration Order*, 17 FCC Rcd at 21303, para. 83.

[^195]: RBOC Coalition Reply Comments at 13. *IPTA*, cited by the IXCs,
    is also inapposite. That decision held that "administrative
    convenience cannot possibly justify an interim \[compensation\] plan
    that exempts all but large IXCs from paying for the costs of
    services received." 117 F. 3d at 565. A cost component for bad debt
    would not "exempt" any carrier from compensation, but would simply
    ensure that PSPs are fully compensated even though they are not able
    to collect from all carriers that owe compensation.

[^196]: RBOC Coalition Comments at 12, n.4; RBOC Coalition Reply
    Comments at 13-14.

[^197]: In *APCC v. FCC*, 215 F.3d 51 (D.C. Cir. 2000), where the court
    of appeals upheld the determination in the *Third Report and Order*
    not to include an element for bad debt in the \$.24 rate, the court
    did not hold that bad debt allowances are improper *per se*. The
    court merely upheld the determination that the record was
    insufficient to enable the Commission to establish a cost element
    for bad debt "at this time." *Id.* at 55-56.

[^198]: AT&T Comments at 21.

[^199]: RBOC Coalition Comments, Exh. 1 at 11.

[^200]: APCC Reply Comments at 18.

[^201]: AT&T Comments at 21.

[^202]: *Third Report and Order*, 14 FCC Rcd at 2619-20, para. 162.

[^203]: RBOC Coalition Comments at 12. Our original reseller-pays rule
    was in place from October 7, 1997 through November 22, 2001. The
    rule currently applicable is a first-facilities-based-IXC-pays rule,
    which took effect November 23, 2001, and is to remain in effect
    until the first day of the first calendar quarter following approval
    by the Office of Management and Budget of the
    switch-based-reseller-pays rule adopted in the *Tollgate Remand
    Order.* 18 FCC Rcd at 20014, para. 84. *See* OMB Approval No.
    3060-1046 (May 5, 2004).

[^204]: AT&T Comments at 21.

[^205]: RBOC Coalition Ex Parte (May 21, 2004) at 2.

[^206]: APCC Comments at 25. Thus, if there were 150 coin calls, 90 paid
    dial-around calls and 10 unpaid dial-around calls at a marginal
    payphone, then the bad debt ratio for dial-around is 1:9, and the
    cost-based rate should be multiplied by 1.11 to provide an
    appropriate allowance for bad debt. Under APCC's method, however,
    the 10 unpaid dial-around calls are excluded from the total
    estimated call volume (which includes coin calls) that is used in
    calculating the dial-around rate. As a result of the 10 unpaid
    calls, the call volume becomes 240 instead of 250, increasing the
    dial-around rate by a factor of 250/240, or only 1.04 instead of
    1.11.

[^207]: *NPRM*, 18 FCC Rcd at 22821, para. 31.

[^208]: RBOC Coalition Comments at 13.

[^209]: APCC Comments at 26.

[^210]: Amendment of Section 64.702 of the Commission's Rules and
    Regulations (Third Computer Inquiry), Report and Order, 104 FCC 2d
    958, 1086 (1986).

[^211]: APCC Comments at 26.

[^212]: APCC Comments at 27.

[^213]: AT&T Reply Comments at 21-22. Sprint argues for the inclusion of
    revenues from Internet access, but provides no supporting
    information. Sprint Comments at 18. We agree with APCC that Internet
    terminals are unlikely to be installed at marginal locations.

[^214]: *First Report and Order*, 11 FCC Rcd 20541, para. 142
    (1996)(payphones should be treated as "deregulated and detariffed
    (customer premises equipment)").

[^215]: As noted above, there is no direct relevance because both
    payphone service and advertising are "non-regulated" activities from
    a carrier accounting perspective.

[^216]: Sprint Comments at 15.

[^217]: *Third Payphone Order*, 14 FCC Rcd at 2630-31, paras. 187-89;
    *Fifth Reconsideration Order*, 17 FCC Rcd at 21284-85, paras. 30-31.
    Further, we note that PSPs have previously argued that the 11.25
    percent rate of return applied to determine capital costs and
    compensation for the four-month delay is too low and should be
    increased to account for the high level of risk incurred by
    investors in the payphone industry. *Fifth Reconsideration Order*,
    para. 28. While the PSPs do not press this issue here, we find that
    the concerns raised previously are not without significance, and
    further confirm that it would not be appropriate for us to reduce
    the applicable rate below the 11.25 percent level.

[^218]: Although the APCC and RBOC Coalition studies used different
    methodologies to determine call volume, with the APCC reflecting bad
    debt by counting only paid dial-around calls and the RBOC Coalition
    counting all completed calls and providing a specific estimate of
    bad debt, we take a weighted average of the estimates of call
    volume. We calculate the call volume as follows: 166\*.65 + 238\*.35
    = 191.

[^219]: .054\*(\$.45 + \$.011)/(1-.054) = \$.026.

[^220]: \$.058\*.65 + \$.025\*.35 = \$.044.

[^221]: Per-call joint and common costs \$.450 + add-ons \$.044 =
    \$.494.

[^222]: AT&T Comments at 24; Sprint Comments at 16.

[^223]: AT&T Comments at 25.

[^224]: APCC Reply Comments at 37-39, Exh. 1, Wood Dec. at paras. 43-45;
    RBOC Coalition Reply Comments at 17-18.

[^225]: RBOC Coalition Reply Comments, Supplemental KPMG Report at 2-7.

[^226]: 143 F.3d 606 (D.C. Cir. 1998).

[^227]: *Third Report and Order*, 14 FCC Rcd at 2577, para. 71.

[^228]: *Id.* at 2632, para. 192.

[^229]: *Z-Tel Communications, Inc. v. FCC*, 333 F.3d 262, 270-72 (D.C.
    Cir. 2003) (holding that the Commission did not "rely" on data that
    the Commission used only to obtain further assurance that its
    conclusion was correct); *AT&T Corp. v. FCC*, 220 F.3d 607, 625
    (D.C. Cir. 2000).

[^230]: RBOC Coalition Reply Comments, KPMG Supp. Report at 2-7; APCC
    Reply Comments, Exh. 1, Wood Dec. at para. 44 n. 11.

[^231]: *NPRM*, 18 FCC Rcd at 22821-22, para. 32.

[^232]: *See Third Report and Order*, 14 FCC Rcd at 2597, para. 115.

[^233]: *NPRM*, 18 FCC Rcd at 22822, para. 33.

[^234]: Section 226(e) of the Act, which was enacted prior to section
    276, requires the Commission to "consider the need to prescribe
    compensation (other than advance payment by consumers) for owners of
    competitive public pay telephones for calls routed to providers of
    operator services that are other than the presubscribed provider of
    operator services for such telephones." 47 U.S.C. § 226(e)(2).

[^235]: Sprint Comments at 24-26. *See also* MCI Reply Comments at 11.

[^236]: Sprint Comments at 24-26. *.*

[^237]: RBOC Coalition Comments at 9.

[^238]: 47 U.S.C. § 226(e)(2).

[^239]: 47 U.S.C. § 226(c)(1)(B).

[^240]: 47 U.S.C. § 226(c)(1)(C). *See* APCC Reply Comments at 42.

[^241]: RBOC Coalition Reply Comments at 10.

[^242]: Sprint provides no factual basis for its claim that the
    inconvenience of coins could be substantially mitigated by
    installing credit-card swipe equipment. As APCC notes, even if such
    equipment could be universally installed at reasonable cost, the
    lower-income and immigrant groups that rely most on payphones are
    least likely to have credit cards. APCC Reply Comments at 42 n.25.

[^243]: APCC Reply Comments at 41.

[^244]: APCC Comments at 15; APCC Reply Comments at 41-42.

[^245]: AT&T Notice of Ex Parte Communication, May 5, 2004.

[^246]: *See* para. 9, *supra.*

[^247]: RBOC Payphone Coalition Ex Parte Filing, May 17, 2004.

[^248]: APCC Ex Parte Communication, May 18, 2004.

[^249]: RBOC Coalition Ex Parte at 1.

[^250]: APCC Ex Parte at 2.

[^251]: *Id*. at 3.

[^252]: *See* 5 U.S.C. § 603. The RFA, *see* 5 U.S.C. §§ 601-612, has
    been amended by the Small Business Regulatory Enforcement Fairness
    Act of 1996 (SBREFA), Pub. L. No. 104-121, Title II, 110 Stat. 857
    (1996).

[^253]: Order and Notice of Proposed Rulemaking, WC Docket No. 03-225,
    18 FCC Rcd 22811, 22822 (2003).

[^254]: *See* 5 U.S.C. § 604.

[^255]: *See, e.g.,* APCC Petition at 6-8; RBOC Coalition Reply Comments
    at 5-7. *See also* Report and Order at para. 16.

[^256]: *See, e.g.,* AT&T Comments at 7. *See also* Report and Order at
    para. 17.

[^257]: *See* Report and Order at paras. 18-25.

[^258]: *See* APCC Petition, Att. 1, and RBOC Coalition Comments,
    Exh. 1. *See also* Report and Order at para. 26.

[^259]: *See* IPCA Comments at 2-3; MCI Comments at 5-8. *See also*
    Report and Order at para. 28.

[^260]: *See* Report and Order at paras. 27, 29-31.

[^261]: *See* RBOC Coalition Comments at 6-9; APCC Comments at 10-14.
    *See also* Report and Order at para. 33.

[^262]: Global Crossing Comments at 2-7; AT&T Comments at 2-3, 7-11; MCI
    Comments at 9-10; Sprint Comments at 2, 8-11.

[^263]: Global Crossing Comments at 4-6; MCI Comments at 9-11. *See
    also* Report and Order at para. 34.

[^264]: *See* Report and Order at paras. 35-37.

[^265]: *See* AT&T Comments at 14; AT&T Reply Comments at 18; MCI Reply
    Comments at 14-15; Sprint Reply Comments at 10. *See also* Report
    and Order at para. 41.

[^266]: *See* APCC Comments at 17-18; APCC Reply Comments at 9, 25-28;
    RBOC Coalition Comments at 3-5. *See also* Report and Order at
    paras. 40, 43-44.

[^267]: *See* Report and Order at paras. 45-49.

[^268]: *See generally* Report and Order at paras. 52, 56, 60, and 66.

[^269]: *See* Report and Order at paras. 54-55.

[^270]: *See* Report and Order at para. 56.

[^271]: *See* Report and Order at paras. 59 and 61.

[^272]: *See* Report and Order at paras. 64-65 and 67.

[^273]: *See* Report and Order at paras. 69-71.

[^274]: *See* Report and Order at para. 69.

[^275]: *See* Report and Order at para. 76.

[^276]: *See* Report and Order at para. 76.

[^277]: *See* Report and Order at para. 77.

[^278]: AT&T Comments at 24; Sprint Comments at 16. *See also* Report
    and Order at para. 81.

[^279]: *See* Report and Order at paras. 82-85.

[^280]: 5 U.S.C. §§ 603(b)(3), 604(a)(3).

[^281]: *Id*. § 601(6).

[^282]: *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."

[^283]: 15 U.S.C. § 632.

[^284]: FCC, Wireline Competition Bureau, Industry Analysis and
    Technology Division, *Trends in Telephone Service*, Table 5.3
    (August 2003) (*Trends in Telephone Service*).

[^285]: 13 C.F.R. § 121.201, North American Industry Classification
    System (NAICS) code 513310 (changed to 517110 in October 2002).

[^286]: *Id*. § 121.201, NAICS code 513321 (changed to 517211 in October
    2002).

[^287]: *Id*. § 121.201, NAICS code 513322 (changed to 517212 in October
    2002).

[^288]: 5 U.S.C. § 601(3).

[^289]: 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); 5 U.S.C. § 601(3). SBA regulations interpret "small
    business concern" to include the concept of dominance on a national
    basis. 13 C.F.R. § 121.102(b).

[^290]: 13 C.F.R. § 121.201, NAICS code 513310 (changed to 517110 in
    October 2002).

[^291]: U.S. Census Bureau, 1997 Economic Census, Subject Series:
    Information, "Establishment and Firm Size (Including Legal Form of
    Organization)," Table 5, NAICS code 513310 (issued October 2000).

[^292]: *Id.* The census data do not provide a more precise estimate of
    the number of firms that have employment of 1,500 or fewer
    employees; the largest category provided is "Firms with 1,000
    employees or more."

[^293]: 13 C.F.R. § 121.201, NAICS code 513310 (changed to 517110 in
    October 2002).

[^294]: *Trends in Telephone Service* at Table 5.3.

[^295]: 13 C.F.R. § 121.201, NAICS code 513310 (changed to 517110 in
    October 2002).

[^296]: *Trends in Telephone Service* at Table 5.3.

[^297]: *Id.*

[^298]: *Id.*

[^299]: 13 C.F.R. § 121.201, NAICS code 513310 (changed to 517110 in
    October 2002).

[^300]: *Trends in Telephone Service* at Table 5.3.

[^301]: *Id.*

[^302]: 13 C.F.R. § 121.201, NAICS code 513310 (changed to 517110 in
    October 2002).

[^303]: *Trends in Telephone Service* at Table 5.3.

[^304]: *Id.*

[^305]: 13 C.F.R. § 121.201, NAICS code 513310 (changed to 517110 in
    October 2002).

[^306]: *Trends in Telephone Service* at Table 5.3.

[^307]: *Id*.

[^308]: 13 C.F.R. § 121.201, NAICS code 513330 (changed to 517310 in
    October 2002).

[^309]: *Trends in Telephone Service* at Table 5.3.

[^310]: *Id.*

[^311]: 13 C.F.R. § 121.201, NAICS code 513310 (changed to 517110 in
    October 2002).

[^312]: *Trends in Telephone Service* at Table 5.3.

[^313]: *Id*.

[^314]: 5 U.S.C. § 603(c).

[^315]: 18 FCC Rcd 22832, para. 58.

[^316]: *See* 5 U.S.C. § 801(a)(1)(A).

[^317]: *See* 5 U.S.C. § 604(b).