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 Federal  Communications  Commission  FCC  04-  182 
 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 
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 APPENDIX  A  --  Final  Rule 
 APPENDIX  B  --  Final  Regulatory  Flexibility  Analysis  (FRFA) 

 I.  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. 
 II.  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), 

 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  rehg,  123  F.  3d  693 
 (D.  C.  Cir.  1997),  cert.  denied  sub  nom.  Virginia  State  Corp.  Commn  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),  (footnote  continued  on  next  page) 
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 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, 

 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),  affd  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 
 payphones  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. 
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 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  PSPs  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 

 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. 
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 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 

 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 
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 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 

 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. 
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 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 

 III.  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 
 Commissions  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. 

 A.  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 

 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. 
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 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. 

 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. 
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 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  Commissions  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 

 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.  APCCs  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. 
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 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  Forces  report  also  states  that  because  of  the  topography  of  West  Virginia, 
 there  are  many  areas  where  cellular  phone  service  simply  isnt  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. 

 B.  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  - 

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

 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. 
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 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 
 C.  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 

 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  Congresss  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. 
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 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 
 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&  Ts  data,  then  a  100%  increase  in  the  dial-  around  compensation  rate  (from  $.  24  to  $.  48)  would  increase  AT&  Ts  average 

 charges  by  only  5.8%.  See  APCC  Reply  Comments  at  18. 
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 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 
 D.  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.  APCCs  cost  study  surveys  actual  call  volumes  from  a  random  sample  of  payphones 

 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. 
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 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  Coalitions  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  Commissions  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 

 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  APCCs  study  as  well.  AT&  T  complains  that  the  study  did  not  indicate  the  size  of  sampling  variability,  and  that  the  response  rate  to  APCCs  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  APCCs  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. 
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 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  Coalitions  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 

 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. 
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 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. 

 E.  Cost  Categories  and  Inputs 

 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. 
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 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 
 1.  Equipment  Costs 
 51.  APCCs  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  Coalitions  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 

 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.  APCCs  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. 
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 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  MCIs  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  MCIs  estimate  of  the  average  price  of  used  payphones,  but  it  rejects  MCIs  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  Coalitions  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  APCCs  equipment  cost  estimate  of  $27.66.  We  find 
 that  WorldComs  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  todays 
 market.  We  agree  with  the  RBOC  Coalition,  however,  that  other  components,  such  as  pedestals  and  enclosures,  are  purchased  new.  We  therefore  accept  the  RBOC  Coalitions  recalculation  of  the  cost  of 
 each  component  of  an  average  payphone,  based  on  MCIs  estimates  for  items  that  are  purchased  used  and 
 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. 
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 the  RBOC  Coalitions  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. 

 2.  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  Commissions  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 

 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). 
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 cost  estimates  were  made.  In  an  order  released  January  31,  2002,  we  modified  the  Bureaus  order,  but  generally  affirmed  application  of  the  new  services  test.  170  The  final  line  cost  estimates  post-  date  this 
 order  as  well.  Accordingly,  Sprints  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  Coalitions  revised  line  cost  of  $34.84  and  the  APCC  studys  line  cost  of  $38.77  is  $36.22.  171 

 3.  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  APCCs  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  Coalitions  revised  maintenance  cost  of  $9.67  and  the  APCC  studys  maintenance  cost  of  $17.45  is  $12.  41.  176 

 4.  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.  APCCs  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 

 170  Wisconsin  Public  Service  Commission,  Order  Directing  Filings,  17  FCC  Rcd  2051  (January  31,  2002),  affd  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. 
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 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  Coalitions  revised  SG&  A  cost  of  $18.20  and  the  APCC  studys  SG&  A  cost  of  $23.43  is  $20.04.  182 

 5.  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.  APCCs  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  Commissions  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  Coalitions  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 

 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. 
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 for  APCCs  cost  study,  we  think  it  unlikely  that  a  typical  respondent  to  APCCs  survey  would  assume  that  charges  imposed  by  third  parties  for  specific  collection  activities  would  be  included  in  SG&  A.  In  any 
 event,  APCCs  estimate  of  collection  costs  is  significantly  lower  than  the  RBOC  Coalitions  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  studys  collection  cost  of  $.  007.  191 

 6.  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  APCCs  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 

 191  We  individually  add  the  RBOC  Coalitions  submissions  for  collection  costs,  bad  debt  and  compensation  for  the 
 four-  month  delay  and  the  APCCs  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. 
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 uncollectible  and  removed  from  the  accounts  receivable  and  bad  debt  reserve  balances.  199  APCCs  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  APCCs 
 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  Commissions  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  Coalitions  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 

 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. 
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 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. 
 7.  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 
 Commissions  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  carriers  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  APCCs  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  Coalitions  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 

 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  APCCs  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  Commissions  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. 
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 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  Coalitions  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  Coalitions  determination  of  average  incidental  revenue.  Since  APCCs  cost  study  did 
 not  request  information  on  incidental  revenue,  we  will  not  accept  APCCs  determination  of  zero  incidental  revenue.  Instead,  we  will  subtract  the  RBOC  Coalitions  estimate  of  $.  74  per  payphone  per 
 month  from  APCCs  cost  study. 
 8.  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  Coalitions  and  APCCs  estimates  of  $.  021  and  $.  018,  respectively. 
 F.  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 

 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. 
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 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 
 G.  Use  of  a  Top-  Down  Test  of  Validity 
 81.  Commenters  argue  that  the  Commissions  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 

 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). 
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 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&  Ts  top-  down  analysis 
 yields  a  rate  of  $.  278,  the  RBOC  Coalition  analysis  yields  a  rate  of  $.  467.  AT&  Ts  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&  Ts  analysis  would  increase  the  resulting  rate  substantially.  Further,  AT&  Ts 
 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. 
 H.  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 

 1.  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 

 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). 
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 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. 

 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. 
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 2.  Per-  Payphone  Compensation  Rate 
 91.  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&  Ts  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. 
 IV.  CONCLUSION 
 92.  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. 

 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. 
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 V.  PROCEDURAL  MATTERS 
 A.  Final  Paperwork  Reduction  Act  Analysis 
 93.  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. 
 VI.  ORDERING  CLAUSES 
 94.  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. 
 95.  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. 

 96.  IT  IS  FURTHER  ORDERED  that  section  64.1301  of  the  Commissions  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 
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 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. 
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 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. 
 A.  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. 

 B.  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:  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 

 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. 
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 5.  Cost  Methodology  to  Evaluate  Dial-  Around  Rate:  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  Commissions  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:  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:  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  Commissions  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:  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 

 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. 
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 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:  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 

 C.  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 

 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). 
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 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  SBAs  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, 
 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). 
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 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 

 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). 
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 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. 

 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. 
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 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  Commissions  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. 

 D.  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. 
 E.  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.  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 

 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). 
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 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 

 317  See  5  U.  S.  C.    604(  b). 
40