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                                Before the
                     FEDERAL COMMUNICATIONS COMMISSION
                          Washington, D.C. 20554
In the Matter of                      )
                                      )
Implementation of the                 )     CC Docket No. 96-128
Pay Telephone Reclassification              )
and Compensation Provisions of the    )
Telecommunications Act of 1996        )
                                      )
Policies and Rules Concerning         )  CC Docket. No. 91-35
Operator Service Access and           )
Pay Telephone Compensation            )
                                      )
Petition of the Public Telephone      )
Council to Treat Bell Operating Company  )
Payphones as Customer Premises        )
Equipment                             )
                                      )
Petition of Oncor Communications      )
Requesting Compensation for           )
Competitive Payphone Premises         )
Owners and Presubscribed Operator     )
Services Providers                    )
                                      )
Petition of the California Payphone   )
Association to Amend and Clarify         )
Section 68.2(a)of the                 )
Commission's Rules                    )
                                      )
Amendment of Section 69.2(m)          )
and (ee) of the Commission's Rules    )
to Include Independent Public         )
Payphones Within the "Public          )
Telephone" Exemption from End User    )
Common Line Access Charges            )
REPORT AND ORDER
     Adopted:  September 20, 1996     Released:  September 20, 1996
By the Commission:  Commissioner Chong issuing a statement.
                            Table of Contents
Topic                                 Paragraph No.
I.    Introduction                          1
II.   Background                         9
III.  Issues                            11
     The Payphone Marketplace           11
     A.  Compensation for Each and Every Completed Intrastate
           and Interstate Call Originated by Payphones   20
                                      1.  Payphone Calls Subject to this Rulemaking and
                                           Compensation Amount            21
                                      2.  Entities Required to Pay Compensation            77
                                      3.  Ability of Carriers to Track Calls from Payphones      88
                                      4.  Administration of Per-Call Compensation                  102
                                      5.  Interim Compensation Mechanism          117
B.  Reclassification of LEC-Owned Payphones           127
                                      1.  Classification of LEC Payphones as CPE                   129
                                      2.  Transfer of Payphone Equipment to Unregulated Status         152
                                      3.  Termination of Access Charge Compensation and Other
                                           Subsidies                      173
                                      4.  Deregulation of AT&T Payphones          188
     C.  Nonstructural Safeguards for BOC Provision of Payphone
           Service                              192
     D.  Ability of BOCs to Negotiate with Location Providers on the
           Presubscribed InterLATA Carrier            208
     E.  Ability of Payphone Service Providers to Negotiate with
                     Location Providers on the Presubscribed IntraLATA Carrier     253
     F.  Establishment of Public Interest Payphones              264
     G.  Other Issues                           287
                                      1.  Dialing Parity      287
                                      2.  Letterless Keypads on Payphones               294
                                      3.  Oncor Petition      299
IV.  Procedural Matters                300
                                      1.  Petitions for Reconsideration  300
                                      2.  Paperwork Reduction Act Analysis     303
                                      3.  Regulatory Flexibility Act Analysis  311
V.    Conclusion                       363
VI.   Ordering Clauses                 364
     Appendix A  Text of Section 276
     Appendix B   List of Parties Filing Comments
     Appendix C   List of Parties Filing Replies
     Appendix D   Immediate Rules Adopted by This Order
     Appendix E    Rules Adopted by This Order
     Appendix F    Interim Compensation Obligations
                                       I.  INTRODUCTION
                                      1. On June 4, 1996, the Commission adopted a Notice of Proposed
Rulemaking ("Notice") to implement Section 276 of the Communications Act of 1934, as
amended by the Telecommunications Act of 1996 ("1996 Act").  In this Report and Order, the
Commission adopts new rules and policies governing the payphone industry that:  (1)  establish
a plan to ensure fair compensation for "each and every completed intrastate and interstate call
using [a] payphone[;]" (2) discontinue intrastate and interstate carrier access charge payphone
service elements and payments and intrastate and interstate payphone subsidies from basic
exchange services; (3) prescribe nonstructural safeguards for Bell Operating Company ("BOC")
payphones; (4) permit the BOCs to negotiate with payphone location providers on the
interLATA carrier presubscribed to their payphones; (5) permit all payphone service providers
to negotiate with location providers on the intraLATA carrier presubscribed to their payphones;
and (6) adopt guidelines for use by the states in establishing public interest payphones to be
located "where there would otherwise not be a payphone[.]"
                                  2.   The Telecommunications Act of 1996 fundamentally changes
telecommunications regulation.  The 1996 Act erects a "pro-competitive deregulatory national
framework designed to accelerate rapid private sector deployment of advanced
telecommunications and information technologies and services to all Americans by opening all
telecommunications markets to competition."  In this proceeding we advance the twin goals of
Section 276 the Act of "promot[ing] competition among payphone service providers and
promot[ing] the widespread deployment of payphone services to the benefit of the general
public..."  To this end, we seek to eliminate those regulatory constraints that inhibit the ability
both to enter and exit the payphone marketplace, and to compete for the right to provide services
to customers through payphones.  At the same time, we recognize that a transition period is
necessary to eliminate the effects of some long-standing barriers to full competition in the
payphone market.  For this reason, we will continue for a limited time to regulate certain aspects
of the payphone market, but only until such time as the market evolves to erase these sources
of market distortions.
                                  3.Congress has directed us to take certain actions to effectuate its goals in
the payphone area including the removal of subsidy schemes, providing for nondiscriminatory
access to bottleneck facilities, ensuring fair compensation for all calls from payphones, and
allowing all competitors equal opportunity to compete for essential aspects of the payphone
business.  In general, we believe that vigorous and unfettered competition is the best way of
achieving Congress' dual objectives.  Unfortunately, various barriers -- regulatory, structural,
economic, and technological -- stand in the way of having a fully competitive market providing
payphone services. For example, the lack of an effective per-call tracking mechanism is a
technological barrier that prevents market forces from readily achieving Congress' goal of
ensuring fair compensation to payphone services providers ("PSPs").  Regulatory restrictions on
the placement of payphones, and existing subsidies from other telecommunication services
available to certain competitors but not others are also examples of regulatory inefficiencies
affecting competition and the widespread deployment of payphones.
                                  4.In this Report and Order, we take the critical steps necessary to remove
these barriers.  Some barriers are removed right away.  For example, we establish an immediate
plan to ensure that PSPs receive fair compensation, especially for those calls for which PSPs have
not been compensated in the past.  We also order that subsidies from basic telecommunications
services paid to some carriers for providing payphone services be terminated as soon as it is
practicable.  We condition the competitive entry of these carriers into the nonregulated activity
of providing payphone services on their termination of these subsidies.  Similarly, we allow the
BOCs to negotiate with the payphone location providers in selecting and contracting with the
telecommunications carriers that provide interLATA service from their payphones, but only after
they have put in place nonstructural safeguards necessary to protect against a BOC from
unlawfully subsidizing its payphone operations from its local exchange services or otherwise
engaging in anti-competitive behavior.
                                  5.Removing other types of barriers to full competition will take more time.
For example, the ability to track toll-free calls has not been developed fully.  Until that
functionality is available, as we have specified in this Report and Order, our plan for ensuring
fair compensation will be a proxy that closely resembles the behavior of the marketplace as
demonstrated by the record of this proceeding.  To the extent that they exist, removing entry and
exit restrictions placed upon the provisioning of payphone services will also take time because
it requires action by the states.  During the interim period before subsidies for LEC payphones
are terminated and per-call compensation becomes effective, the states should examine and
remove those regulations that affect the ability of PSPs to freely enter and exit this business.
                                  6.Although we embark in this Report and Order on a new deregulatory
structure for the payphone industry, we take a number of steps to facilitate use of payphones by
consumers.  First, we require that each payphone clearly indicate the local coin rate within the
informational placard on each payphone.  Pursuant to existing requirements, this placard must
provide information on the operator service provider presubscribed to the payphone and the
address of the Commission, to which the consumer may direct complaints regarding operator
services.  Second, we require that each payphone provide access, free of charge to the caller, to
emergency calling, telecommunications relay service calls for the hearing disabled, and dialtone
generally.
                                  7.In addition, payphones unquestionably serve critical public interests in
health, safety and welfare.  It is possible, however, that reliance on the market may fail to
provide adequately for payphones in locations serving important public needs, because some
payphones providing these benefits may not be economically self-supporting.  For example,
payphones in neighborhoods with low residential phone penetration, or along deserted stretches
of highway, can be essential for public safety but fail to be revenue-generating for various
reasons, including lack of sufficient traffic, damage from extreme weather conditions, or high
maintenance costs.  For these reasons, we establish criteria by which the states may maintain and
fund public interest payphones in locations serving health, safety, and welfare goals, where they
would not otherwise exist as a result of the operation of the market.  Public interest payphones
will also further our policies on emergency access and telecommunications relay service calls
for the hearing disabled.   But while we grant the states broad discretion in administering and
funding public interest payphone programs, we also require that they do so in a manner which
does not upset the competitive balance of the payphone market (i.e., competitively neutral), and
that fairly and equitably compensates those entities providing public interest payphones.
                                  8.Our ultimate goal is to have a competitive payphone industry that meets
the needs of the public by a wide deployment of payphones.  In our view, we can best facilitate
this by putting in place rules and regulations that provide incentives to all the players in the
industry to eliminate, as soon as possible, all of the market distorting factors that exist today.
                              II.  BACKGROUND
                                  9.As the Commission discussed in the Notice, payphone services have
historically been regulated by the states and the Commission.  To date, the states have regulated
payphones as part of the LEC's network-based service.  Some states have also imposed regulation
on the operator service rates charged at payphones maintained by non-LEC, independent
payphone providers.  The Commission has focused on payphones primarily in the context of our
regulation of carriers that provide operator-assisted long-distance service, known as operator
service providers ("OSPs"), and in particular, our implementation of the Telephone Operator
Consumer Services Improvement Act ("TOCSIA").  Among other things, TOCSIA directed the
Commission to determine whether independent payphone providers should receive compensation
for originating interstate calls to non-presubscribed OSPs from their payphones.  The
Commission's consideration of compensation issues under TOCSIA led to the creation of a
compensation mechanism that is an antecedent to the one adopted in the instant proceeding.
Currently, there are approximately 1.5 million incumbent local exchange carrier ("LEC")
payphones and approximately 350,000 competitively provided payphones.
                                              10. As stated in the Notice, Section 276(b)(1)(A) directs the Commission to
establish a compensation plan to ensure "that all payphone service providers are fairly
compensated for each and every completed intrastate and interstate call" from their payphones.
Section 276(b)(1)(B) mandates that the Commission "discontinue the intrastate and interstate
carrier access charge payphone service elements and payments ... and all intrastate and interstate
subsidies from basic exchange and exchange access revenues."  In addition, Section
276(b)(1)(D) directs the Commission to consider whether BOCs should be granted certain rights
already available to all other PSPs to participate in the location provider's selection of
presubscribed interLATA carrier, while Section 276(b)(1)(E) grants certain rights to all PSPs to
participate in the selection of presubscribed intraLATA carriers.  Together with the other
subsections of Section 276, these three provisions help to establish regulatory parity for all PSPs,
whether independent payphone providers or incumbent LECs (both independents LECs and
BOCs).
                               III.  ISSUES
THE PAYPHONE MARKETPLACE
                                      11.According to the record in this proceeding, the payphone industry has the
potential to be very competitive.  Entry into the payphone business appears to be easy.  The
ability to purchase a payphone, secure a location contract, obtain a payphone line from the LEC,
and maintain the payphone are, together, the minimal technical requirements to enter into the
payphone business.  In addition, payphone lines are part of the tariffed offerings of local
exchange carriers and, in some jurisdictions, only a simple business line is required to the
payphone service.  As contracts come up for renewal, or as location providers find it economical
to put in new payphones, PSPs and interexchange carriers ("IXCs") routinely make themselves
available to negotiate new agreements among themselves and the location provider.
                                      12.A payphone can be removed and used at another location, which facilitates
entry and exit.  If a PSP can easily redeploy its assets, it will be more willing to place a
payphone in response to a small increase in price, because the risk of such placement is lower.
In addition, there appear to be no significant scale or scope economies or network externalities
that would impede entry of new firms.  As a result, barriers to entry appear to be very low.
In fact a large number of firms, both large and small, have entered the industry since it was
initially opened to competition in 1984, and those firms have provided competition in at least
some segments of the payphone market.
     13.                                   The competition we observe today, however, has been significantly
distorted by government regulation of prices, regulatory barriers to entry and exit, as well as by
significant subsidies from other telecommunications services.  Regulated prices prevent the
market from operating efficiently to deploy payphone facilities.  Moreover, some states currently
prohibit the provision of payphone service by any entity other than the incumbent LEC.
Removing these types of entry and exit restrictions is a necessary step toward allowing
competitive forces to guide both the deployment of payphones and the setting of prices for
payphone services.
     14.                                   Even after such regulatory barriers are removed, there are three structural
reasons why, at least initially, the full benefits of competition may not be realized by all
segments of the payphone market.  First, independent PSPs currently rely on LECs for basic
payphone services.  LEC participation both in providing payphones to the public and also
providing the underlying tariffed payphone services to independent PSPs may give LECs the
incentive and the potential ability to unfairly act to the detriment of their PSP competitors and
to act in other anti-competitive ways against PSPs.   However, by implementing safeguards, we
intend to ensure that LECs cooperate fully in the provision of any necessary payphone services
and do not otherwise restrain competition, as long as LECs remain the monopoly providers of
these services.
     15.                                   Second, there are certain locations where, because of the size of the
location or the caller's lack of time to identify potential substitute payphones, no "off premises"
payphone serves as an adequate substitute for an "on premises" payphone.  In such locations, the
location provider can contract exclusively with one PSP to establish that PSP as the monopoly
provider of payphone service.  Absent any regulation, this could allow the PSP to charge supra-
competitive prices.  The location provider would share in the resulting "locational rents" through
commissions paid by the PSPs.  To the extent that market forces cannot ensure competitive prices
at such locations, continued regulation may be necessary.  Payphones in many locations are
likely to face a sufficient level of competition from payphones at nearby locations to ensure that
prices are at the competitive level.  As a result, we believe that payphones at such locations are
unlikely to need additional scrutiny.
     16.                                   Third, for competitive markets to work properly, it is essential that
consumers have full information concerning the choices available to them.  Information on prices
for payphone service is of primary importance.  The instant Report and Order concerns two
different types of consumers who need to be informed of the charges they will face:  (1)
consumers who choose to use a payphone for local, 0+, or access code calls, and (2)
consumers who contract with an IXC for the ability to receive subscriber 800 calls.  Although
we have no evidence in the record that the current disclosure of local coin rates are inadequate,
our past experience requires us to ensure that such disclosures, including, at a minimum, the
posting of the local coin rate, are effective in communicating necessary cost information to
consumers.  We look to the states to review their regulations and modify them to ensure the
adequacy of the disclosure.  Consumers thus will have the information available to them at the
time they decide to make a call from a payphone.
                                              17. As discussed more fully below, the PSP will be permitted to levy a charge
each time a caller dials a subscriber 800 number.  We conclude that the charge must be paid
directly by the IXC, although the carrier may pass it through to the 800 subscriber, either on a
per-call basis, or in the form of higher per-minute rates.  Once it is possible to track subscriber
800 calls, a competitive market may pass these costs along in the same manner as they are
incurred -- on a per-call basis -- to the called customer.  If charges are not passed on in this
manner, the called party's incentives for accepting or declining a particular call will be distorted.
IXCs also have the option of blocking subscriber 800 calls from payphones, if they do not want
to pay the per-call payphone compensation charge.
                                              18. Aside from these three structural concerns, we recognize that the payphone
industry has not operated without the entry and exit restrictions and subsidies that currently exist.
When these subsidies are terminated and barriers are removed, other structural problems or
market imperfections may develop that would mitigate the benefits of a competitive market.
However, our continued monitoring of the marketplace will ensure that the rules we adopt will
lead to both competitive prices for payphone service and an efficient supply of payphones.
                                              19. One of the goals of Section 276 is the deployment of payphones to benefit
the "public health, safety and welfare."  The competitive marketplace, however, will not always
lead to an adequate supply of payphones in areas where they are not economically viable.  For
this reason, we conclude that public interest payphones should be maintained, although we define
the term narrowly to exclude those payphones that would be provided through the normal
workings of the marketplace.  Our conclusions regarding public interest payphones will ensure
that there will be an efficient supply of payphones, although we recognize that the states are
better equipped to determine where these public interest payphones should be placed.  In
addition, by ensuring that PSPs receive the benefits of their payphone investments, these PSPs
will compete to place additional payphones in a variety of geographic areas.  Therefore, public
safety will be enhanced because of requirements that emergency access be available from all
payphones at no cost the caller.  This increased emergency access from payphones is consistent
with the Commission's proposals to ensure telephone compatibility with enhanced emergency
calling systems.  In sum, we believe that the increased access, free of charge to the caller, to
emergency calling, telecommunications relay service calls for the hearing disabled, and dialtone
generally, may be one of the most significant benefits of the compensation approach we adopt
in this Report and Order .
A. COMPENSATION FOR EACH AND EVERY COMPLETED INTRASTATE AND
      INTERSTATE CALL ORIGINATED BY PAYPHONES
                                      20.Section 276 requires that we establish a plan to ensure fair compensation
for all calls.  As discussed below, fair compensation can be ensured best when the PSP can track
the calls made from the payphone on a call-by-call basis and be assured efficient payment for
those calls; when the market can set a fair rate for the call; and when the caller has the
information necessary to make an informed choice as to whether to make the call and incur the
compensation charge.
     1.  Payphone Calls Subject to this Rulemaking and Compensation Amount
                                      a.  The Notice
                                      21.Most calls originated on payphones are within one of the following
categories:  (1) coin calls; (2) directory assistance calls; (3) operator service ("0+" and "0-") calls;
(4) access code calls (using, e.g., "10XXX" codes and "1-800" or "950" carrier access numbers);
and (5) subscriber 800 calls. Each of these categories can be further subdivided between local,
intraLATA toll, intrastate interLATA, interstate interLATA, and international. In the Notice, the
Commission sought comment on what constitutes "fair" compensation; whether international calls
should be included in the compensation plan; and whether calls for which the PSP currently
receives compensation should be included in the plan.  The Commission tentatively concluded
that we must at least prescribe standards for determining fair compensation for all access code
calls, subscriber 800 and other toll-free number calls, and debit card calls.  The Commission
tentatively concluded that it was not necessary to prescribe per-call compensation for 0+ calls
originated by payphones, because these calls were compensated pursuant to contracts between
the PSP and the presubscribed IXC.  The Commission sought comment on whether intraLATA
0+ calls carried by the presubscribed intraLATA carrier should be treated differently than local
coin calls.
                                      22. With regard to local rates, the Commission stated that there is some
evidence that the rate may not necessarily fairly compensate the PSP.  We sought comment on
how to fulfill the Act's mandate in this regard.  The Commission proposed a range of options for
ensuring fair compensation for local coin calls.  One was to set a nationwide local coin rate for
all calls originated by payphones.  Another was for the Commission to prescribe specific
national guidelines that states would use to establish a local rate to ensure that all PSPs are fairly
compensated.  A third was for the states to continue to set the coin rates for local payphone
calls according to factors within their discretion.  Under each approach, the Commission sought
comment on what specific public interest benefits commenters believe would result from adoption
of a particular option.
                                      23.In addition, the Commission tentatively concluded that international calls
originated by payphones should be compensated, because we found no evidence of congressional
intent to leave these calls uncompensated.  The Commission also sought comment on what
rules, if any, should be adopted to prevent the improper use of subscriber 800 numbers to
increase compensation, as well as other types of fraud.
                                      24.Citing the lack of reliable independent payphone provider specific cost data,
the Commission tentatively concluded in the Notice that PSPs should be compensated for their
costs in originating the types of calls for which compensation is deemed appropriate, and that
these costs should be measured by appropriate cost-based surrogates.  For appropriate cost-based
surrogates, the Commission sought comment on whether some measure of generic or industry-
wide costs is available, whether incumbent LECs' costs would be a reasonable surrogate for
independent payphone providers' costs, and whether some other existing set of rates, such as
state-established rates for local coin calls, would be a reasonable surrogate.  The Commission
also sought comment on whether we should prescribe different per-call compensation amounts
for the different types of calls originated by payphones.  The Commission requested comment
on how compensation levels should be permitted to change in the future, and whether some cost
index or price cap system would be appropriate to ensure that compensation levels reflect
expected changes in unit costs over time.
                                      b.  Comments
                                      i.  Compensable Calls
                                      25.A wide range of commenters, including IXCs, RBOCs, independent LECs,
states, and independent payphone providers, support the Commission's tentative conclusion that
we must at least prescribe standards for determining fair compensation for all access code calls,
subscriber 800 and other toll-free number calls, and debit card calls.  Many of these
commenters also agree with the Commission's tentative conclusion that it is not necessary to
prescribe compensation for 0+ calls carried by a payphone's presubscribed carrier.  They argue
that compensation agreements between the presubscribed carrier and PSP or location provider
ensure that the PSP will be fairly compensated for these calls.  CompTel further contends that
mandating per-call compensation for 0+ calls in addition to that provided by contract would
overlap with the Commission's intent to address operator service rates for payphones in the OSP
Reform proceeding.  The RBOCs argue that the Commission need not prescribe compensation
for 0+ calls as a general rule, although the Commission must require OSPs to pay compensation
on all presubscribed calls made on BOC payphones to compensate the BOCs for use of their
payphones when the BOC does not have a contractual relationship with the presubscribed
carrier.  The RBOCs contend that because Section 276(b)(3) expressly grandfathers contracts
existing before the date of the statute's enactment between the location provider and the
presubscribed carrier on many BOC payphones, the BOCs would not otherwise receive any
compensation for these 0+ calls.  Sprint argues that the Commission should not mandate
compensation for any calls that make use of a payphone's presubscribed carrier, because any call
using the presubscribed carrier would be compensated under the terms of the contract.  The
RBOCs contend, however, that the amount of dial-around calls has no relationship to a
payphone's presubscribed carrier, and that the PSP has no authority to block these calls to force
revenue generating calls.  Conquest argues that the Commission should exempt 0+ calls that
make use of an 800 number as a presubscription device, which is transparent to the caller.
                                      26.Other commenters, notably USTA and APCC, argue that the statutory duty
to mandate compensation for "each and every completed intrastate and interstate call" requires
the Commission to mandate a per-call compensation rate for 0+ calls, regardless of any
compensation agreements between the presubscribed carrier and the PSP.  APCC argues that
state-imposed rate ceilings on intrastate 0+ calls prevent PSPs from receiving fair compensation.
In addition, it contends that 0+ commission payments are for the value to the IXC of receiving
the presubscribed traffic and do not address the need for use of the payphone.  The RBOCs,
Ameritech, and GTE argue that 0+ compensation could be established as a default rate, which
could be eliminated or supplanted through negotiations between the requisite parties.
                                      27.The commenters take varying positions on what action the Commission
should take to ensure fair compensation for local coin calls from payphones.  The independent
payphone providers support the Commission's option of a nationwide local coin call rate.  They
argue that a nationwide rate is necessary to override inconsistent state rules, to ensure
predictability of rates for interstate travelers, to break the dependence of PSPs on 0+
commissions, and to establish a single, uniform rate for all local coin calls.  APCC contends
that this nationwide rate would serve as the maximum rate that PSPs could receive for a local
coin call, and PSPs would likely respond to competition in local areas by lowering this per-call
rate.  Other parties specifically oppose a nationwide local coin rate.  They argue that regional
differences in handling payphone calls make a single nationwide rate impractical.  Several
commenters state that the Commission lacks authority to set local coin rates under both Section
276 and the Act.  They argue that the ability to ensure compensation is different than
jurisdiction over retail rates, and that nothing in Section 276 suggests that Congress intended to
remove local coin rates from the jurisdiction of the states.  APCC contends, however, that the
Commission has the requisite authority to impose a nationwide local coin rate, because Section
276's mandate to ensure fair compensation extends to setting local coin rates.
                                      28.Other commenters, including USTA, Ameritech, and GTE, argue that the
Commission should adopt federal guidelines that the states would use to adopt local coin rates
that fairly compensate PSPs for the use of their payphones.  They argue that the guidelines must
recognize that costs associated with local calls vary and have individual market characteristics,
and that the states must be directed to eliminate all subsidies from other local exchange
operations and from interexchange carriers.  US West argues that the Commission should not
require the states to reexamine their respective local coin rates unless the per-call rate is below
the nationwide predominant rate of $.25.
                                      29.Many states argue that the Commission must defer to the states in setting
the local coin rates.  They argue that the states must maintain their wide discretion in setting
the specific local coin rates.  Florida PSC, Indiana URC, and Tennessee contend that the
Commission should prescribe a nationwide local coin rate or price cap and allow the states to
petition for a variance.  APCC states that it would support a variance approach.  Ohio PUC
asserts that it is within its authority to keep local coin rates low by requiring LECs to reduce the
costs of various payphone services to PSPs.  California PUC argues that the Commission should
adopt an approach to local coin rates that is a hybrid of setting federal guidelines and deferring
to the states.  It argues that federal guidelines should allow states maximum participation in
setting rates for payphones generally, and should recognize the interest of states in setting end-
user rates for local calls and directory assistance calls.
                                      30.The RBOCs argue that the Commission should deregulate local coin rates
entirely and allow the market to determine the rate in any particular location.  BellSouth, SW
Bell, and US West argue that the Commission should deregulate local coin rates immediately.
Bell Atlantic, NYNEX, and Pacific Telesis contend that the Commission should deregulate local
coin rates pursuant to federal standards after a transition period.  GTE argues that deregulation
of local coin rates would be appropriate after a two-year transition period.  BellSouth contends
that the Commission has the requisite authority to review local coin rates during any transition
period.
                                      31.USTA, GTE, WorldCom, and Florida PSC argue that, because PSPs receive
commissions on 0+ intraLATA calls, these 0+ intraLATA calls should be treated like interLATA
0+ calls for purposes of compensation.  On the other hand, Virginia SCC contends that
intraLATA 0+ calls should be treated in the same manner as local coin calls.  CompTel argues
that because intraLATA calls are frequently routed to the LEC, not the presubscribed carrier, for
which there may not be a commission paid to the PSP or location provider, treating intraLATA
0+ calls as interLATA 0+ calls would require IXCs to pay compensation on calls for which they
receive no benefit.
                                      32.The RBOCs and APCC, among others, contend that the Commission, to
ensure compensation for "each and every completed intrastate and interstate call," should mandate
that callers make a coin deposit or otherwise provide per-call compensation for "411" directory
assistance calls.  They argue that such compensation is necessary to recover the costs associated
with use of the payphone to make a directory assistance call.  SW Bell believes that per-call
compensation for directory assistance calls is appropriate, but it specifies that the end user should
be required to pay for these calls through a coin deposit.  Oklahoma CC argues that if the
incumbent LEC charges independent payphone providers for directory assistance calls, then the
LEC should be required to impute this cost to its own payphones for each directory assistance
call.  Ohio PUC argues that the LEC providing the directory assistance service should not be
permitted to charge the PSP for it, and, therefore, per-call compensation would not be
necessary.
                                      33.Because Section 276(b)(1)(A) requires a plan to ensure fair compensation
for "each and every completed intrastate and interstate call," some commenters argue that the
Commission is obligated to determine what constitutes a "completed" call for purposes of per-call
compensation.  Several of these commenters further argue that the Commission should define a
"completed call" as a call that is answered by the called party.  They argue that compensating
unanswered calls will lead to uneconomic rates for payphone users and will be contrary to a
caller's expectations about when a call is billed.  On the other hand, some of the independent
payphone providers argue that a "completed call" consists of any call that reaches the carrier's
platform, regardless of whether the call ultimately reaches the called party.  These independent
payphone providers argue that per-call compensation is appropriate for these calls, because the
payphone is being used for these calls and is, therefore, unable to earn other revenue.
                                      34.Some IXCs provide different definitions of what should be considered a
"completed call."  Sprint and MCI argue that a call is completed when it earns revenue for the
carrier.  WorldCom contends that an access code call is completed when it is billed, and a
subscriber 800 call is completed when answer supervision is returned.  Other parties argue that,
because it is often difficult for the parties to know whether a call was answered by the called
party, the Commission should use a duration surrogate for completed calls.  The debit card
providers, in particular, favor a duration surrogate because they estimate that fifty percent of debit
card calls are not completed to the called party.  Under this approach, they argue, any call
placed from a payphone below a certain duration would be excluded because it would be likely
that the call was not completed to the called party within that time period.  The threshold
duration proposed by these commenters varies from 42 seconds to 60 seconds.  The RBOCs
argue that a 60-second threshold should be used, while APCC believes that the Commission
should not rely on any duration threshold.  The RBOCs argue that multiple calls made through
use of a payphone's "#" button, even though they require billing information to be dialed only
once, should be counted as separate calls for compensation purposes.
                                      35.Several commenters suggest alternative or supplementary approaches to per-
call compensation.  The RBOCs collectively contend that the Commission should look to
compensating incoming calls in the future, because Section 276 does not differentiate between
calls originated and received by a payphone.  SW Bell and US West, in their individual
capacities, argue that the Commission must ensure fair compensation for incoming calls in this
proceeding.
                                      36.AT&T, the RBOCs, GTE, USTA, Florida PSC, Indiana URC, and various
independent payphone providers agree with the tentative conclusion in the Notice that the
Commission should provide compensation for international calls that make use of a payphone.
These commenters argue that there is no basis to exclude these calls from a compensation
mechanism, and that a payphone performs the same functions for all types of calls.  AT&T and
APCC argue that the term "interstate," as used in Section 276(b)(1)(A), includes international
calls.  Sprint, MCI, and other IXCs oppose the Commission's tentative conclusion and argue
that compensation for international calls goes beyond the plain language of the Section 276; that
Congress would have specified compensation for "international" or "foreign" calls, as it did in
other provisions of the 1996 Act, if it intended such compensation; and that the Commission does
not otherwise have authority to impose this compensation obligation.  MCI argues that such
compensation for international calls billed to non-U.S. carrier customers is not practicable,
because the Commission does not have the requisite jurisdiction to require the foreign carrier to
bill and collect the PSP compensation.
                                      37.In response to the Commission's request for comment on how it might
address possible compensation fraud associated with the improper dialing of subscriber 800
numbers to increase compensation payments, a wide range of commenters argue that the
Commission must take strong enforcement action, including imposing severe penalties, on any
party engaging in such fraud.  These commenters further argue that while the possibility of
fraud exists, the Commission cannot refuse to compensate subscriber 800 calls.  The RBOCs,
GTE, and Cable & Wireless contend that, in addition to enforcement action by the Commission,
the carrier-payors should be given some latitude to take action and withhold compensation to
parties who engage in fraud.  MCI and American Express argue that the Commission should
require the LECs to report any suspicious calling patterns with regard to subscriber 800
numbers.  Other parties argue that the "carrier pays" compensation mechanism proposed by the
Commission encourages fraud.  Several parties further argue that requiring the calling party
to deposit coins for subscriber 800 calls would eliminate the incentive to engage in fraudulent
calling.  Sprint argues that keeping the per-call compensation amount at the marginal cost of
the use of the payphone would also reduce fraudulent calling.  AT&T contends that the
Commission should use a surrogate setting forth the average number of subscriber 800 calls from
a payphone to calculate the payment of per-call compensation for these calls.  To prevent other
types of potential fraud, Frontier and Sprint argue that the Commission must adopt a definition
of "payphone" for compensation purposes.
                                      38.Four states, Maine, New Hampshire, New Mexico, and Vermont, filing
joint comments, argue that Section 276 applies only to payphones provided by the RBOCs.
They argue further that the Commission is without authority under Section 276 to adopt rules that
apply to all payphones, including those provided by non-BOC LECs and independent payphone
providers.
                                      ii.  Compensation Amount
                                      39.APCC, AT&T, Sprint, and other commenters argue that the Commission
should adopt a national uniform rate that it deems compensable for all calls using a payphone.
They contend that uniformity is necessary to avoid imposing undue burdens on carriers that
would result from varying rates.  In addition, they assert that the payphones perform identical
functions for each type of compensable call.  The RBOCs argue that the Commission need not
prescribe a rate for each type of compensable call, and should, instead, let the market dictate the
appropriate per-call rate.
                                      40.Some commenters argue that certain types of calls should receive a
different per-call compensation amount than others.  WorldCom contends that the amount of
compensation should vary with the duration of the call to the extent that marginal cost also
varies.  Invision and the Inmate Coalition, providers of inmate payphones, assert that the
Commission should adopt a $.90 per-call compensation rate that would apply only to calls using
inmate payphones located in penal institutions.  They argue that payphone services for inmates
is a distinct, specialized industry, which is required to provide, at a significant capital investment,
operator service, fraud control, extensive call controls, and monitoring services throughout the
duration of its calls.  They argue further that these factors warrant a higher per-call compensation
rate.  Another inmate payphone provider, Gateway, contends that the Commission should not
adopt a separate, higher rate for inmate payphone calls, because such a rate would give inmate
providers double recovery of costs already included in their rates and surcharges.  Gateway also
argues that the Commission should defer consideration of a higher rate until after its OSP Reform
proceeding, and that inmate providers should petition the various states for relief from state
operator services rate caps.  MCI opposes the provision of per-call compensation for calls using
either inmate payphones or semi-public payphones.  It asserts that semi-public payphones
already receive adequate compensation from the premises owners.  The RBOCs contend that
per-call compensation for semi-public payphones is warranted, because there is no statutory basis
to preclude semi-public payphones from receiving compensation, and carriers benefit from dial-
around traffic that originated on semi-public payphones.
                                      41.The RBOCs also argue that any per-call rate the Commission sets should
be regarded as a default rate, which parties would be free to alter by contract.  MCI and Sprint
contend that the per-call amount should be adjusted downward in the future to account for
technological advances that will reduce PSP costs.  APCC contends, on the other hand, that
the per-call compensation rate should rise automatically at the same rate as inflation.
                                      42.A number of IXCs and other commenters support the Commission's
tentative conclusion that the amount of per-call compensation should be based on PSP costs and
argue that the Commission must adopt a marginal cost standard.  They argue that under a
marginal cost standard, a PSP would be allowed to recover the costs associated with the wear on
the payphone's keypad and handset, along with additional costs over fixed costs.  MCI provides
a study authored by the Hatfield Associates, which analyzes the costs of providing service for
access code calls, and concludes that the appropriate compensation amount would be $.083 for
each compensable call.  MCI argues that the $.083 per call is fair compensation, because PSPs
already receive revenues in excess of costs.  Sprint contends that the Commission should adopt
a marginal cost-based rate of $.0675 per call, based on its view that the $.25 rate it currently pays
for access code calls fairly compensates independent payphone providers for all calls.  In its
analysis, Sprint found that 27% of all non-revenue generating calls from payphones are operator
service calls for which 27% of $.25 is the appropriate per-call compensation amount, i.e.,
$.0675.  MCI and Sprint further argue that the Commission should consider anew the $.12 per-
call compensation amount originally proposed in the Commission's 1991 Notice of Proposed
Rulemaking in the access code call compensation proceeding, CC Docket No. 91-35, because this
rate reflects payphone costs on a per-call basis.  AT&T favors an unspecified compensation
amount related to marginal cost and based on the total services long-run incremental cost
("TSLRIC") method, which would recover the costs of providing and maintaining the payphone
instrument, exclusive of coin collection functions, and the monthly SLC and other tariffed LEC
services specific to payphones.  AT&T argues that the TSLRIC standard is "more generous"
than a marginal-cost standard, because it allows PSPs to recover the portion of payphone costs
that benefit the carriers whose customers initiate calls at payphones.
                                      43.The RBOCs and the independent payphone providers oppose the use of a
marginal cost-based compensation amount.  They argue that fair compensation embraces more
than cost recovery, and that marginal cost disregards fixed costs, which are significant for a
PSP.  USTA and GTE argue that AT&T's proposed TSLRIC-based compensation is not
relevant to the provision of competitive services where rates should be guided by the market, and
it does not permit full recovery of costs.
                                      44.The RBOCs and the independent payphone providers argue that the
Commission should adopt a per-call compensation standard that looks both to overall PSP costs
and revenues and to market-based pricing.  The RBOCs and GTE, in particular, advocate a per-
call compensation amount that relies on market-based proxies.  The RBOCs provide a study
that analyzes commission rates paid to PSPs by IXCs generally and commission rates paid by
AT&T and concludes that the appropriate per-call compensation amount should be in the range
of $.81 to $.90 per call.
                                      45.APCC contends that the Commission must consider market-based surrogates
in setting a per-call compensation amount.  It proposes that the Commission adopt a
compensation amount of $.40 per call, if the Commission extends this rate to local coin calls, or
$.80 per call for all non-local coin calls that use a payphone.  APCC argues that these proposed
amounts would fairly compensate PSPs for use of their payphones.  Peoples, the largest
independent payphone provider, argues that the Commission should adopt a per-call compensation
amount of $.45, which would apply to all calls, including local coin calls.  Peoples includes
in its comments summaries of data that, it maintains, show that Peoples' average pre-tax cost per
call using its payphones is $.40.  Other independent payphone providers argue that the
Commission should adopt per-call compensation amounts that range from $.40 to $.55 per call.
AT&T and Sprint disagree with the approach proposed by
APCC and the RBOCs and argue that it relies too much on the factors set forth in the Second
Report and Order, which they claim are flawed, and on 0+ commissions, which reflect PSP
opportunity costs, a basis for compensation rejected by the Commission in the  Second Report
and Order.  In addition, they argue that APCC and the RBOCs do not disclose actual costs, but
instead include substantial overhead, advertising, and marketing and sales expenses in their
model.
                                      46.One Call contends that the local coin rate should be used as a surrogate for
a fair per-call compensation amount.  Conquest argues that the Commission should cap the per-
call compensation amount at the rate for a local coin call. AT&T, MCI, and the RBOCs all
oppose use of a local coin rate surrogate to achieve fair compensation for PSPs.  They argue
that local coin rates are kept artificially low by regulators and have no relationship to either cost
or the market.
                                      47.Some commenters contend that the Commission should adopt a per-call
compensation amount that is within the range established by the 1992 Second Report and Order
in the access code call compensation proceeding.  NTCA argues that continued use of the $.40
per call rate adopted in the Second Report and Order would not be disruptive and would ensure
fair compensation for PSPs.  APCC argues that the Second Report and Order sets forth the type
of market-based surrogates that are appropriate for the Commission to consider in the instant
proceeding.  PageNet argues that the Commission should examine the $6 per month LEC
access charge compensation for payphones, as set forth in the Second Report and Order, and use
this amount plus an intrastate recovery element to reach an amount that could be divided by the
average number of compensable calls to equal the appropriate per-call rate.  The RBOCs
contend, on the other hand, that the $.40 per call amount in the Second Report and Order is out
of date and should be higher.  AT&T and Sprint argue that the factors used in the Second
Report and Order are irrelevant for determining fair compensation, because the factors do not
relate to  marginal cost and concern costs that are recovered through other revenue streams.
                                      c.  Discussion
                                      48.Defining "Fair Compensation".  Section 276(b)(1)(A) directs the
Commission to establish a plan "to ensure that all payphone service providers are fairly
compensated for each and every completed intrastate and interstate call using their payphone."
The 1996 Act does not prescribe a particular course to achieve these goals, 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[.]"  To
comply with this mandate, we tentatively concluded in the Notice that we must provide for
compensation only when PSPs are not already "fairly compensated" for a particular type of a call
using a payphone.  A number of commenters contend that we must look to all of a payphone's
possible revenue streams and ensure that the payphone, as a whole, is fairly compensated.  We
disagree.  We conclude that, by ensuring that all calls are fairly compensated, including those for
which the PSP currently receives no revenue, we will "promote competition" among  PSPs and
"promote the widespread deployment of payphone services to the benefit of the general
public[.]"  The marketplace will necessarily determine whether or not a particular payphone
is economically viable.
                                      49.We conclude that, once competitive market conditions exist, the most
appropriate way to ensure that PSPs receive fair compensation for each call is to let the market
set the price for individual calls originated on payphones. It is only in cases where the market
does not or cannot function properly that the Commission needs to take affirmative steps to
ensure fair compensation, such as in the following situations.  First, because TOCSIA requires
all payphones to unblock access to alternative OSPs through the use of access codes (including
800 access numbers), PSPs cannot block access to toll free numbers generally.  However,
TOCSIA does not prohibit an IXC from blocking subscriber 800 numbers from payphones,
particularly if the IXC wants to avoid paying the per-call compensation charge on these calls.
This uneven bargaining between parties necessitates the Commission's involvement.  Second, as
discussed more fully below, we conclude that each state should, in light of the instant
proceeding, examine and modify its regulations applicable to payphones and PSPs, particularly
those rules that impose market entry or exit requirements, and others that are not competitively
neutral and consistent with the requirements of Section 276 of the Act.  We conclude that, for
purposes of ensuring fair compensation through a competitive marketplace, states need only
remove those regulations that restrict competition, and they need not address those regulations
that, on a competitively neutral basis, provide consumers with information and price disclosure.
Third, we conclude that callers should have information in every instance about the price of the
calls they make from payphones.  To this end, we require that each payphone clearly indicate the
local coin rate within the informational placard on each payphone.
                                      50.While the most appropriate way to ensure fair compensation is to let the
market set the price for individual payphone calls, we conclude that this transition to market-
based rates should occur in two phases.  Because LECs will terminate, pursuant to Section
276(b)(1)(b), subsidies for their payphones within one year of the effective date of the rules
adopted in this proceeding, LECs will not be eligible to receive compensation under Section
276(b)(1)(a) until that termination date.  This one-year period before per-call compensation is
effective, as discussed below, will be the first phase of implementing the rules adopted in this
proceeding.  During this first phase, states may continue to set the local coin rate in the same
manner as they currently do.  States may, however, move to market-based local coin rates
anytime during this one-year period.  In addition, the states must conduct its examination of
payphone regulations during this one-year period to review and remove, if necessary, those
regulations that affect competition, such as entry and exit restrictions.  IXCs will pay
compensation for access code calls and subscriber 800 calls on a flat-rate basis.  In addition, all
payphones must provide free access to dialtone, emergency calls, and telecommunications relay
service calls for the hearing disabled.
                                      51.In the second phase, which will begin one year after the effective date of
rules adopted in this proceeding, LECs will be eligible to receive compensation, and per-call
tracking capabilities will be in place.  The carriers to whom payphone calls are routed will be
responsible for tracking each compensable call and remitting per-call compensation to the PSP.
During this second year, which is the first year of per-call compensation (as opposed to flat-rate
compensation), the market will be allowed to set the rate for local coin calls, unless the state can
show that there are market failures within the state that would not allow market-based rates.
In addition, during the second phase, which will be the first year of per-call compensation (after
the initial year of flat-rate compensation), to allow us to ascertain the status of competition in the
payphone marketplace, we conclude, as discussed below, that IXCs must pay PSPs a default
rate of $.35 for each compensable call, which may be changed by mutual agreement.  PSPs will
be required to post the local coin rate they choose to charge at each payphone.  During the
second phase, we may review, at our option, the deregulation of local coin rates nationwide and
determine whether marketplace disfunctions exist, such as locational monopolies caused by the
size of the location with an exclusive PSP contract or the caller's lack of time to identify potential
substitute payphones, and should be addressed by the Commission.  If we find that the
deregulation of local coin rates warrants a modification of our approach due to market failures,
we may choose to set a cap on the number of calls subject to compensation from particular
payphones to limit the exercise of locational market power.  Absent such a finding, at the
conclusion of the second phase, the market-based local coin rate at these payphones will be the
default compensation rate for all compensable calls in absence of an agreement between the PSP
and the carrier-payor.
                                      52.Ensuring Fair Compensation.  Most commenters who address the issue
agree with our tentative conclusion that we must provide for compensation for all access code
calls, subscriber 800 and other toll-free number calls, including debit card calls.  In keeping
with our long-term goal to have the market set the compensation amount, we define "fair
compensation" above as where there is a willing seller and a willing buyer at a price agreeable
to both.  For each of these types of calls, the PSP either receives no revenue for originating these
calls (i.e., for subscriber 800 and other toll-free number calls), or it is unable to block callers
from making such calls (access code calls).  The record in this proceeding includes substantial
evidence that the number of these types of calls using payphones has proliferated in the past
several years.  We conclude, therefore, that we must provide for compensation for access code
calls and subscriber 800 and other toll-free number calls, whether they are intrastate or interstate
in destination.
                                      53.We tentatively concluded in the Notice that we need not provide for
compensation for 0+ calls, because independent payphone providers and non-BOC LECs receive
compensation through individual contracts with the payphone's presubscribed IXC.  We also
tentatively concluded that "competition in this area ensures 'fair' compensation for PSPs."  The
RBOCs contend, however, that because Section 276(b)(3) expressly grandfathers contracts
existing before the date of the statute's enactment between the location provider and the
presubscribed carrier on many BOC payphones, the BOCs would not otherwise receive any
compensation for  0+ calls.  They argue that the Commission must ensure fair compensation
for 0+ calls that use BOC payphones.  We agree and modify our tentative conclusion so that,
once the BOCs reclassify their payphones and terminate all subsidies, pursuant to Section
276(b)(1)(B), they may receive the per-call compensation established by this Order, so long
as they do not otherwise receive compensation for use of their payphones in originating 0+ calls.
We conclude further that, in the absence of a contract providing compensation to the PSP for
intraLATA 0+ calls, the PSP shall be eligible to collect per-call compensation from the carrier
to whom the call is routed.  We also conclude that when a caller dials "0" and the payphone
subsequently translates this digit, unbeknownst to the caller, into an 800 access number (i.e., as
a way of presubscribing the payphone to a particular IXC), such a call is not compensable as an
access code call, because it does not put the caller into contact with an alternative carrier.
                                      54.We conclude that PSPs should receive compensation for international calls.
We conclude that we have authority under Sections 4(i) and 201(b) of the Communications Act
of 1934, as amended, to ensure that PSPs are fairly compensated for international as well as
interstate and intrastate calls using their payphones in the United States.  In addition, as we stated
in the Notice, we find no evidence of congressional intent to leave these calls uncompensated
under Section 276.  We agree with AT&T and other commenters that a payphone performs
similar functions, regardless of the destination of the call.
                                      55.Local Coin Calls.  As outlined above, we believe that full and unfettered
competition is the best way of achieving Congress' dual objectives to promote "competition
among payphone service providers and promote the widespread deployment of payphone services
to the benefit of the general public."  Competition over time will lead to the more efficient
placement of payphones, improved payphone service, and lower prices for consumers.  To
encourage competition in the payphone marketplace, we ensure in this Report and Order that
PSPs are fairly compensated for "each and every completed intrastate and interstate call[;]"
terminate certain LEC subsidies for payphones; and permit all PSPs, including BOCs, to negotiate
with the location provider regarding the selection of the presubscribed interLATA and intraLATA
carriers.
                                      56.Once competitive conditions exist, we believe that the market should set
the compensation amount for all payphone calls, including local coin calls.  Because we have an
obligation under Section 276 to ensure that the compensation for all local coin calls is fair, we
conclude that the market should be allowed to set the price for all compensable calls, including
a local coin call.  We believe this approach is appropriate because, once PSPs are free to enter
the market, and once callers are free to choose payphones for their calls, the market will
ultimately determine whether a particular payphone is economically viable.  According to the
record in this proceeding, five states have already deregulated local coin rates.  In four of those
states, Iowa, Nebraska, North Dakota, and Wyoming, the market-based rate is $.35 per call.
In the other deregulated state, South Dakota, the market-based rate is $.25 per call.
                                      57.Historically, however, the rate for the most common type of call -- the local
coin call -- has not been set by the market, but has instead been determined by state
commissions.  In the Notice, we stated that Section 276 of the Act requires the Commission
to ensure that the PSP receives fair compensation for each interstate and intrastate call, including
local coin sent-paid calls.  Section 276 also states that "to the extent that any State
requirements are inconsistent with the Commission's regulations, the Commission's regulations
on such matters shall preempt such State requirements."  We sought comment in the Notice
on how we should exercise our jurisdiction under Section 276, and noted that we have a range
of options for ensuring fair compensation for local coin calls, including setting a nationwide local
coin rate for all calls originated by payphones, establishing specific national guidelines that states
would use to establish a local rate that would ensure that all PSPs are fairly compensated and
permitting the states to continue setting the coin rates for local payphone calls according to
factors within their discretion.
                                  58.  As we stated in the Notice, the Commission recognizes that the states have
long had a traditional and primary role in regulating payphones, including setting local call rates
paid by end users.  This role, however, has been in the context of LECs providing local
payphone service as part of their regulated service.  Section 276, however, significantly alters the
regulatory landscape by requiring that LEC provision of payphone service be on par with
independent PSP provision of service.  In addition, by mandating that LEC payphones can no
longer receive subsidies from basic exchange services, Section 276 greatly changes the way in
which states set local coin rates.  Further, Section 276(b)(1)(A) gives the Commission both the
jurisdiction to ensure fair compensation for local coin calls and the mandate to establish a plan
to compensate PSPs on a per-call basis.  We also stated our concern in the Notice that "current
local rates may not always 'fairly' compensate the PSP for use of its payphone[,]" because the
caller may use the payphone at "a subsidized local coin rate[.]"  Based on the record in this
proceeding, we conclude that a deregulatory, market-based approach to setting local coin rates
is appropriate, because existing local coin rates are not necessarily fairly compensatory.
                                              59. We recognize, however, that the competitive conditions, which are a
prerequisite to a deregulatory, market-based approach, do not currently exist and cannot be
achieved immediately.  Many states impose regulations on PSPs, including certain requirements
that must be fulfilled before a PSP can enter or exit the payphone marketplace.  We conclude
that these state regulations are barriers to a fully competitive payphone market, and, therefore,
"to the extent that any State requirements are inconsistent with the Commission's regulations, the
Commission's regulations on such matters shall preempt such State requirements."  In addition,
in some locations, because of the size of the location with an exclusive PSP contract or the
caller's lack of time to identify potential substitute payphones, the PSP may be able to charge an
inflated rate for local calls based on its monopoly, pursuant to an exclusive contract with the
location provider, on all payphones at the location.  We conclude that such monopoly
arrangements, in the absence of regulatory oversight, could impair competition.
                                              60. Based on these concerns, we conclude that the overall transition to market-
based local coin rates should not occur immediately.  As discussed below, LECs will not be
required to terminate, pursuant to Section 276(b)(1)(b), certain subsidies associated with their
payphones until April 15, 1997.  LECs will not be eligible to receive per-call compensation under
Section 276(b)(1)(a) for one year, when all such subsidies are terminated.  For this one-year
period, the states will be responsible for both ensuring that PSPs are fairly compensated for local
coin calls and protecting consumers from excessive rates.  Eventually, when fully competitive
conditions exist, the marketplace will address both concerns.  We conclude that, during this one-
year period before per-call, as opposed to flat-rate, compensation becomes effective, states may
continue to set the local coin rate in the same manner as they currently do.  States may, however,
move to market-based local coin rates anytime during this one-year period, and are encouraged
to do so.  In addition, we conclude that during the same period, the states should take additional
action to ensure that payphone competition is promoted.  As discussed above, we believe that
ease of entry and exit in this market will foster competition and allow the market, rather than
regulation, to dictate the behavior of the various parties in the payphone industry.  To this end,
each state should examine and modify its regulations applicable to payphones and PSPs,
removing, in particular, those rules that impose market entry or exit requirements.  We conclude
that, for purposes of ensuring fair compensation through a competitive marketplace, the states
should remove only those regulations that affect payphone competition; the states remain free at
all times to impose regulations, on a competitively neutral basis, to provide consumers with
information and price disclosure.  In addition, the states at all times must ensure that access
to dialtone, emergency calls, and telecommunications relay service calls for the hearing disabled
is available from all payphones at no charge to the caller.
                                              61. At the conclusion of this first one-year period, the market will be allowed
to set the price for a local coin call, as discussed more fully above.  However, we conclude
that we should make an exception to the market-based approach for states that are able to
demonstrate to the Commission that there are market failures within the state that would not
allow market-based rates.  Such a detailed showing could consist of, for example, a detailed
summary of the record of a state proceeding that examines the costs of providing payphone
service within that state and the reasons why the public interest is served by having the state set
rates within that market.  In addition, under our deregulatory, market-based approach, when states
have concerns about possible market failures, such as that of payphone locations that charge
monopoly rates, they are empowered to act by, for example, mandating that additional PSPs be
allowed to provide payphones, or requiring that the PSP secure its contract through a competitive
bidding process that ensures the lowest possible rate for callers.  If a market failure persists after
such action, the state should recommend the matter to the Commission for possible
investigation.  In addition, during the second phase, after the initial year of flat-rate
compensation, we may review, at our option, the deregulation of local coin rates nationwide and
determine whether marketplace disfunctions, such as locational monopolies where the size of the
location or the caller's lack of time to identify potential substitute payphones, exist and should
be addressed by the Commission.  At this point, if we find that the deregulation of local coin
rates warrants a modification of our approach due to market failures, we may choose, for
example, to set a cap on the number of calls subject to compensation from particular payphones
to limit the exercise of locational market power.  Absent such a finding, at the conclusion of the
second phase, the market-based local coin rate at these payphones will be the default
compensation rate for all compensable calls in absence of an agreement between the PSP and the
carrier-payor.
                                              62. With regard to "411" directory-assistance calls, we noted that, while
incumbent LECs in many jurisdictions currently do not charge the payphone caller for "411" calls
made from their own phones, the LECs charge independent payphone providers for directory-
assistance calls made from their payphones, and are not always allowed by the state to pass those
charges on to callers.  We conclude that we must ensure fair compensation for "411" and other
directory assistance calls from payphones by permitting the PSP to charge a market-based rate
for this service, although a PSP may decline to charge for this service if it chooses.  In addition,
to help ensure that a LEC does not discriminate in favor of its own payphones, we conclude that
if the incumbent LEC imposes a fee on independent payphone providers for "411" calls, then the
LEC must impute the same fee to its own payphones for this service.
                                      63.Completed Calls.  We agree with the commenters that, because Section
276(b)(1)(A) mandates compensation for "each and every completed intrastate and interstate call,"
we must determine what constitutes a "completed" call for purposes of per-call compensation.
We conclude that a "completed call" is a call that is answered by the called party.  We have
previously found that, where an 800 calling card call is routed through an IXC's platform, it
should not be viewed as two distinct calls -- one to the platform and one to the called party.
In addition, in Florida Public Telecommunications Ass'n v. FCC, the United States Court of
Appeals for the District of Columbia Circuit emphasized the one-call nature of a subscriber 800
call from the caller's point of view.  A number of commenters contend that the Commission
should use a duration surrogate for completed calls.  We conclude that exempting calls from per-
call compensation because they are not of a requisite duration, whether 25 seconds or 60
seconds, would not be in accordance with Section 276's mandate that "each and every
completed intrastate and interstate call" be compensated.  In addition, to comply with this
mandate, we conclude that, as argued by the RBOCs, multiple sequential calls made through the
use of a payphone's "#" button should be counted as separate calls for compensation purposes.
                                      64.The RBOCs argue that the phrase "call using their payphone" in Section
276(b)(1)(A) covers completed calls received by payphones as well as those originated by
payphones.  Bell Atlantic, BellSouth, PacTel, and NYNEX, maintain that the Commission
should look to compensating incoming calls at some unspecified point in the future.  We do
not agree, however, that Section 276(b)(1)(A) was intended to apply to both incoming and
outgoing calls.  Because PSPs may block incoming calls, they are able to restrict use of their
payphones if they are concerned about a lack of compensation.  For this reason, we conclude that
incoming calls are not within the purview of Section 276, and we are not required, as a result,
to address them in the instant proceeding.
                                      65.Payphone Fraud.  The Commission has recognized, since it first addressed
the issue of compensation for subscriber 800 calls in 1991, that a PSP "could attach an autodialer
to a payphone and have it place repeated 800 calls ... to increase the amount of compensation [it]
receives."  Section 227(b)(1) of the Act states that it is unlawful for any person to use an
autodialer to call "any service for which the called party is charged for the call[.]"  We
conclude that this provision bars the use of autodialers to generate payphone compensation by
calling toll-free 800 numbers, which are billed to the called party.  A number of commenters
argue that the Commission must take strong enforcement action against those who engage in
autodialer fraud.  We agree.  We will aggressively take action against those involved in such
fraud.  We have authority under the 1996 Act and our rules to take civil enforcement action
against a payphone provider who deliberately violates the Commission's compensation rules by
placing toll free calls simply to obtain compensation from the carriers.  More importantly, such
activity may be fraud by wire and subject to criminal penalties.  Should we receive information
that a PSP is using, or is allowing use of, its facilities in this manner, we will refer the matter
to the appropriate law enforcement agencies for criminal prosecution.  Contrary to suggestions
by some commenters, it is not necessary, nor would it be in the public interest, for the
Commission to select a particular method of per-call compensation, such as a marginal cost-based
approach, or a particular compensation amount, i.e. low enough to discourage fraud, simply to
avoid the possibility of fraud.
                                      66.Both Frontier and Sprint argue that the Commission should adopt a
definition of "payphone" for compensation purposes.  We have previously adopted a definition
of "payphone" in the access code call compensation proceeding, although the definition is used
only for purposes of the billing and collection of the compensation in that proceeding.  We
concluded that payphones appearing on the LEC-provided customer-owned, coin-operated
telephone ("COCOT") lists were payphones that are eligible for compensation.  If a payphone
provider does not subscribe to an identifiable payphone service, or if its payphone is omitted
from the COCOT list in error, the provider is required to provide alternative verification
information to the IXC paying compensation.  We conclude that this definition of "payphone,"
regardless if the payphone in question is independently- or LEC-provided, will be sufficient for
the payment of compensation as mandated by Section 276 and the instant proceeding.  In
addition, as discussed below, all payphones will be required to transmit specific payphone
coding digits as a part of their automatic number identification ("ANI"), which will assist in
identifying them to compensation payors.  Beyond the immediate purposes of paying
compensation, we conclude that a payphone is any telephone made available to the public on a
fee-per-call basis, independent of any other commercial transaction, for the purpose of making
telephone calls, whether the telephone is coin-operated or is activated either by calling collect
or using a calling card.
                                      67.   Compensation Amount.  In the Notice, we noted that "while we are still
confronted in the instant proceeding by the lack of reliable [independent payphone provider] cost
data," we tentatively concluded that "PSPs should be compensated for their costs in originating
... calls" using their payphones.  We tentatively concluded further that these costs should be
measured by appropriate cost-based surrogates.  We sought comment, in particular, on whether
some measure of generic or industry-wide costs is available, or whether incumbent LEC costs
would be a reasonable surrogate for the costs of independent payphone providers.  Upon review
of the comments submitted in response to the Notice, we find that while few parties provided
cost surrogate data, the RBOCs, Peoples, IPTA, and MCI, among others, present studies on
payphone costs.  These studies vary in both their approaches to calculating compensation and
their conclusions on the appropriate per-call compensation amount that the Commission should
adopt.
                                      68.A number of commenters, notably the IXCs, argue that the Commission
should use the marginal cost of originating a payphone call as the basis for compensating PSPs.
We conclude that use of a purely incremental cost standard for all calls could leave PSPs without
fair compensation for certain types of payphone calls, because such a standard would not permit
the PSP to recover a reasonable share of the joint and common costs associated with those
calls.  We also reject, for similar reasons, suggestions by commenters that we use local coin
rates currently in place as a surrogate for a per-call compensation.  As we stated in the Notice,
"local coin rates in some jurisdictions may not cover the marginal [incremental] cost of the
service."  Therefore, basing the per-call compensation amount on current local coin rates,
which are frequently subsidized by state regulators, would not fairly compensate the PSPs.  We
also reject use of the $.12 per-call compensation amount the Commission first discussed in its
1991 Notice of Proposed Rulemaking in the access code call compensation proceeding.  We
never adopted the $.12 per-call amount, and that rate was effectively rejected when the
Commission adopted a $6 flat rate per payphone per month based on a per-call rate of $.40.
                                      69.On the other hand, the RBOCs and the independent payphone providers
propose that the Commission use market-based surrogates to support a per-call compensation
amount.  In particular, these commenters provide data on both the average commissions paid to
independent payphone providers by AT&T on 0+ calls and the average commission received by
independent payphone providers on 0+ calls from all IXCs.  Previously, in the access code call
compensation proceeding, we relied upon AT&T 0+ commissions as a measure of the fair value
of the service provided by independent payphone providers when they originate an interstate
call.  We conclude that use of 0+ commission data would tend to overcompensate PSPs,
because these commissions may include compensation for factors other than the use of the
payphone, such as a PSP's promotion of the OSP through placards on the payphone.  We,
therefore, reject use of this commission data, as provided by the RBOCs and independent
payphone providers, to calculate the per-call compensation amount.
                                      70.Because we have established elsewhere in this Report and Order that the
payphone marketplace has low entry and exit barriers and will likely become increasingly
competitive, we conclude that the market (or the states, where there are special circumstances)
is best able to set the appropriate price for payphone calls in the long term.  We conclude further
that the appropriate per-call compensation amount ultimately is the amount the particular
payphone charges for a local coin call, because the market will determine the fair compensation
rate for those calls.  For example, if the rate at a particular payphone is $.35, absent an
agreement between the PSP and the carrier-payor for a different amount, then the PSP should
receive $.35 for each compensable call (access code, subscriber 800, and directory assistance).
If a rate is compensatory for local coin calls, then it is an appropriate compensation amount for
other calls as well, because the cost of originating the various types of payphone calls are similar.
Although the Commission tentatively concluded in the Notice that PSPs should be compensated
for their costs in originating calls, as these costs are measured by appropriate cost-based
surrogates, we conclude that deregulated local coin rates are the best available surrogates for
payphone costs and are superior to the cost surrogate data provided by the commenters.
                                      71.We conclude that the per-call compensation amount equal to the local coin
rate, is a default rate that will apply only in the absence of a negotiated agreement between the
parties.  PSPs, IXCs, subscriber 800 carriers, and intraLATA carriers may agree on an amount
for some or all compensable calls that is either higher or lower than the local coin rate at a given
payphone.  In absence of an agreement, the PSP shall be entitled to receive compensation for
compensable calls at a per-call rate equal to its local coin rate, which represents the market-based
rate for a call at the payphone in question.
                                      72.Before we move to a local coin call default rate, however, we find it
necessary to observe over time how the payphone marketplace will function in the absence of
regulation.  In particular, consumers facing time constraints may not be able to find, in certain
locations, a reasonable substitute for a payphone located on the premises.  In these cases where
the location provider has an exclusive contract with a PSP, the PSP may be able to charge supra-
competitive prices.  The location provider would share in the resulting "locational rents" through
commissions paid by PSPs.  To the extent that market forces cannot ensure competitive prices
at such locations, we may want to continue regulating, along with the states, the provision of
payphone services generally or in particular types of locations where the size of the location or
the caller's lack of time to identify potential substitute payphones could lead to locational
monopolies.  To allow us to ascertain the status of competition in the payphone marketplace, we
conclude that we should establish the default per-call rate for two years before leaving it to the
market to set rate, absent any changes in our rules.  More specifically, as discussed below, for
the first year after the effective date of the rules adopted in this proceeding, IXCs will pay flat-
rate compensation to PSPs.  After the initial year, when per-call tracking capabilities will be in
place, we conclude that IXCs will be required to pay a default rate of $.35 per call, which is the
local coin rate in four of the five states that have deregulated their local calling rates.  We
conclude that the market-based rate in these states is the best evidence of a per-call compensation
amount that will fairly compensate PSPs.  Therefore, for the limited purpose of calculating
compensation for PSPs for the first two years of compensation (one year of flat-rate and one year
of per-call compensation), we will use a default rate of $.35 per call, which is the rate in the
majority of states that have allowed the market to determine the appropriate local coin rate.  As
discussed above, the carrier-payor and the PSP may agree to a compensation rate that is
different, and, therefore, the default rate would not apply.  For coinless payphones, which by
definition do not have a local coin rate, the default rate will remain $.35 per call for as long as
this rate is fairly compensable under Section 276(b)(1)(A).
                                      73.Various parties ask us to provide for either upward adjustments in the per-
call amount to account for inflation, or downward adjustments to take advantage of
technological advances.  We conclude that by making the per-call amount subject to
negotiations, the marketplace will make the appropriate adjustments, whether upward or
downward.  We set this compensation rate as a default rate to be applied only if the PSP and the
IXC are unable to negotiate some other form of compensation for compensable calls.
Negotiations may lead to rates other than the default rate for several reasons.  First, because
virtually all of the costs are fixed costs and are not incurred on a per call basis, an IXC and a
PSP might agree to a fixed compensation rate rather than compensation for the monthly number
of calls.  Second, there may be locations in which a payphone would not be financially viable
if compensated at only $.35 per compensable call, but would be viable at a higher compensation
rate.  If an IXC still found it profitable to carry calls at this higher rate, then it would be in the
mutual interest of the two parties to negotiate a higher rate.  Third, the IXCs may choose to pass
on the per-call compensation rate to their customers.  In the case of 800 subscriber calls, the IXC
could pass on the cost to the called party.  If the called party refused to accept calls for which
it was charged $.35, but was willing to accept calls with a lower charge, the IXC and the PSP
may find it in their mutual interest to negotiate a per-call rate lower than $.35.  Fourth, in
locations where a competing payphone could be placed without the permission of the location
provider, a PSP may be willing to negotiate a lower rate than $.35, rather than give an IXC the
incentive to place a competing payphone.
                                      74.Some PSPs argue that they should be entitled to a per-call compensation
amount greater than that set for local coin calls.  In particular, inmate payphone providers argue
that their costs of originating calls are greater than that of other payphone providers, which
should entitle them to a special compensation rate of $.90 per call.  We conclude at this
juncture, however, that mandating a per-call amount for inmate payphones, which do not allow
local coin calls, could possibly lead to a double recovery of costs already included in higher-than-
average operator service rates and special surcharges on end-user phone bills for calls made on
these payphones, as argued by Gateway, an inmate payphone provider that opposes a greater per-
call amount.
                                      75.   MCI argues that semi-public payphones should not receive any per-call
compensation.  Section 276(d) states, however, that "in this section, the term 'payphone service'
means the provision of public or semi-public pay telephones...."  Pursuant to this definition, all
subsidies for semi-public payphones are terminated under Section 276(b)(1)(B), just as they are
for public payphones, "in favor of a compensation plan as specified in subparagraph (A)[.]"
Therefore, we conclude that, contrary to MCI's arguments, semi-public payphones are entitled
to receive per-call compensation in the same manner as public payphones.
                                      76.We reject the argument by four states that Section 276 applies only to
payphones provided by the BOCs.  While Section 276(a), which the states cite as support for
their argument, applies only to the BOCs, as do Sections 276(b)(1)(C) and Section 276(b)(1)(D),
the remainder of Section 276 applies to all payphones, regardless of their provider.  When
Congress intended to limit the scope of a particular provision in Section 276 to the BOCs, it used
the term "Bell operating company."  Otherwise, it used the term "all payphone service
providers[,]" or simply "payphone service providers."  For example, Section 276(b)(1)(A)
states that the per-call compensation plan must "ensure that all payphone service providers are
fairly compensated[.]"  In addition, Section 276(b)(1) states that the Commission shall take
action to "promote competition among payphone service providers and promote the widespread
deployment of payphone services to the benefit of the general public[.]"   Therefore, based on
the plain language of the statute, we conclude that Section 276 grants us the requisite authority
to adopt rules that apply to all payphones, regardless of their provider, except where the language
clearly applies only to the BOCs.  Further, the legislative history of Section 276 refers to both
the BOCs and independent payphone service providers.
     2.  Entities Required to Pay Compensation
                                      a.  The Notice
                                      77.In the Notice, the Commission stated that either a "carrier-pays" system,
where the IXC who receives the call would be required to pay a per-call charge to the provider
of the payphone, or a "set use fee" system, where the toll-carrier would bill and collect from the
end user and then remit payment to the PSP, would satisfy the requirements of the 1996 Act.
The Commission stated, however, that the carrier-pays mechanism is preferable because it would
result in less transaction costs because the toll-carrier could aggregate its payments to payphone
providers.  Under a set use fee, the Commission stated, these payments would be spread among
a vast number of payphone callers through their individual telephone bills.  Therefore, the
Commission tentatively concluded that the appropriate compensation mechanism is a "carrier-
pays" mechanism that builds on existing procedures under which IXCs currently pay access code
call compensation.  Commenters were encouraged to include data on the transaction costs that
would likely be imposed by either the "carrier-pays" or "set use fee" compensation
mechanisms.
                                      b.  Comments
                                      78.A wide range of commenters, including AT&T, the RBOCs, GTE, various
states, and some independent payphone providers, supports the Commission's tentative conclusion
that a "carrier-pays" system for per-call compensation should be adopted.  They argue that this
approach is the least burdensome, most cost effective, and places the obligation to pay on the
primary economic beneficiary of the calls, the carrier that carries the call.  Some parties assert
that under this system, or any other system in which the carrier is responsible for paying
compensation, it is the underlying, facilities-based carrier that should be responsible for paying
compensation to PSPs.  Two debit card providers argue that IXCs and LECs should not be
permitted to pass on the costs of per-call compensation exclusively to 800 subscribers.  Frontier
contends that, under the carrier-pays system, LECs as well as
IXCs should be required to pay compensation.  Frontier also contends that the Commission
should adopt a carrier-pays system that is administered by the LECs, who, unlike the IXCs, will
be able to leverage their existing business relationships as billing and collection agents for other
carriers.
                                      79.Other commenters, including APCC, MCI, and Sprint, contend that the
Commission should adopt a "set use fee," which would be collected by the carrier that handles
the call and remitted to the PSP to compensate it for the use of its payphone.  These
commenters argue that such a government-mandated fee would give visibility to the costs of
payphone compensation, and would appropriately place these costs on the cost causer and lead
to better economic decisions.  They also argue that the carrier-pays approach involves greater
transaction costs than the set use fee, and that the carrier-pays approach is simply a payment of
a subsidy to PSPs.  Other parties specifically oppose a set use fee on the grounds, among
others, that it would make the IXC an involuntary billing agent for the PSPs.  With regard to
subscriber 800 calls, PageNet, a paging service whose customers use subscriber 800 numbers,
contends that charging 800 subscribers a set use fee would be an unjust and unreasonable practice
under Section 201(b) of the Act.  In addition, Intellicall, a debit card provider, argues that
imposing fees on 800 subscribers would interfere with existing contracts between carriers and
debit card providers.  While favoring a "carrier-pays" system, PacTel argues that the
Commission should "grandfather" the existing set use fee imposed at the state level by the
California PUC.  The RBOCs further argue that the Commission should grandfather all existing
state set use fees.  On the other hand, Sprint and MWAA argue that the Commission must
preempt all existing state set use fees and that the states must be directed to follow federal
compensation models to avoid inconsistent state regulations.
                                      80.Various commenters, including small IXCs and paging services, argue that
the Commission should adopt what they call a "caller-pays" compensation system.  Under this
system, the calling party would always pay for the call by either depositing a coin or by billing
the charge to a credit card or calling card.  For subscriber 800 calls, the calling party would
always be required to deposit a coin into the payphone.  These commenters argue all of the
following:  this approach would be no more burdensome than a local coin call; it would reduce
transaction costs; and it would avoid the coin-free approach that is inconsistent with CPE
treatment.  At least two commenters dispute the Commission's statement in the Notice that
TOCSIA barred the Commission from imposing a coin-deposit compensation system for access
code calls.  The two commenters argue that the adoption of rate guidelines or a rate cap would
not be a prescription of advance payment by callers, as prohibited by TOCSIA.  A number of
parties oppose either a fee imposed on the calling party or the coin-deposit requirement for
certain types of calls under this system.  They argue that the impact on callers should be either
minimized or transparent.
                                      81.   Conquest, Intellicall, MobileMedia, and PageNet contend that the
Commission should recover the funds necessary for per-call compensation by raising the monthly
subscriber line charge ("SLC") that is paid by all telephone customers.  They argue that
because payphones are used at one time or another by virtually all telephone customers, they
should collectively bear the cost of per-call compensation.  In addition, they argue that there are
no reliable data that show which segments of the population use payphones more than others.
                                      82.Some commenters argue that some parties should either be exempted from
the obligation to pay per-call compensation or be allowed to "phase-in" their payment obligations.
TRA and Scherers argue that resellers of interexchange service should not be required to pay per-
call compensation, at least on an interim basis, because they are unable to pass on these costs
without severely impacting their business.  TRA, ITA, and American Express further argue that
all existing debit cards should be "grandfathered" and the carriers exempted from having to pay
per-call compensation on the calls associated with those cards.  ITA and Voice contend that
per-call compensation obligations associated with debit cards should be phased in after six
months.
                                      c.  Discussion
                                      83.We agree with those commenters who maintain that the primary economic
beneficiary of payphone calls should compensate the PSPs.  We conclude that the "carrier-
pays" system for per-call compensation places the payment obligation on the primary economic
beneficiary in the least burdensome, most cost effective manner.  The Commission has previously
adopted such an approach in the access code compensation proceeding, and the compensation
participants have created a payment system that is an appropriate model for this proceeding.
We conclude that the carrier-pays system also gives IXCs the most flexibility to recover their
own costs, whether through increased rates to all or particular customers, through direct charges
to access code call or subscriber 800 customers, or through contractual agreements with
individual customers.  Although some commenters would have the Commission limit the ways
in which carriers could recover the cost of per-call compensation, we conclude that the
marketplace will determine, over time, the appropriate options for recovering these costs.  In
addition, under the carrier-pays system, individual carriers, while obligated to pay a specified per-
call rate to PSPs, have the option of recovering either a different amount from their customers,
including no amount at all.  We conclude further that all IXCs that carry calls from payphones
are required to pay per-call compensation.
                                      84.In the Notice, we discussed the option of adopting a "set use fee, " which
would be collected by the carrier and remitted to the PSP to compensate it for the use of its
payphone.  We tentatively concluded that this system involved greater transactions costs than
the carrier-pays system, because a set use fee would spread payments among a vast number of
payphone callers through their individual telephone bills.  A number of commenters maintain
that the set use fee would involve fewer transaction costs and that the carrier-pays system
represents the payment of a subsidy to PSPs.  We disagree and conclude that the Commission's
mandating that a particular set use fee be imposed and collected from callers on millions of
payphone calls would lead to far greater transaction costs than through the carrier-pays system,
particularly given the flexibility the carrier has under the carrier-pays system to recover the costs
of per-call compensation as it sees fits.
                                      85.The "caller-pays" system advocated by a number of commenters is a
variation of the set use fee under which the caller, as the "cost causer," would always be required
to deposit coins to make a subscriber 800 call, and would have the option of either depositing
coins or receiving a charge through a calling card for placing other types of calls that do not use
a payphone's presubscribed carrier.  For reasons similar to those cited for rejecting the set use
fee system, we likewise reject the caller-pays system.  While depositing coins into a payphone
to make, for example, a subscriber 800 call may not be more burdensome than a local coin call
and may involve fewer transaction costs than a billed charge, we found in the Notice that any
payment system that relies upon the deposit of coins "would appear to unduly burden many
transient payphone callers by requiring them to deposit coins in addition to providing call-billing
information."  We also noted in the Notice that "TOCSIA expressly prohibits the Commission
from adopting compensation rules for interstate access code calls that require 'advance payment
by consumers.'"  At least two commenters argue that the Commission could interpret this
statutory prohibition as applying only to the prescription of a specific compensation amount,
which would not preclude adoption of compensation amount guidelines, including a coin-deposit
approach, but we conclude that such an approach would contradict the congressional intent, and
possibly the plain language, of Section 226(e)(2) of the Act.  We also reject the approach
suggested by some commenters that the Commission should increase the monthly SLC, which
compensates a LEC for non-traffic-sensitive costs associated with the use of its network, for all
telephone customers to fund the per-call compensation system.  We conclude that raising the SLC
for this purpose would be contrary to the goals of the Act, because these payments would not be
borne by either the primary economic beneficiary of  payphone calls or the cost causer.
                                      86.Some commenters, including APCC, GTE, New York DPS, and Indiana
URC, argue that it is the underlying, facilities-based carrier that should be required to pay
compensation to the PSP in lieu of a non-facilities-based carrier that resells services, for example,
to specific subscribers or to debit card users.  We agree.  Although we have concluded that the
primary economic beneficiary of payphone calls should bear the burden of paying compensation
for these calls, we conclude that, in the interests of administrative efficiency and lower costs,
facilities-based carriers should pay the per-call compensation for the calls received by their
reseller customers.  Because they do not have their own networks, it would be significantly
more burdensome for resellers to track calls from payphones.  In addition, telecommunications
services are often sold in advance, particularly in the debit card context, and resold more than
once before a caller ultimately uses the service.  In such situations, it would be difficult to
identify the party that is liable for the per-call compensation.  We conclude further that the
facilities-based carriers may recover the expense of payphone per-call compensation from their
reseller customers as they deem appropriate, including negotiating future contract provisions that
would require the reseller to reimburse the facilities-based carrier for the actual payphone
compensation amounts associated with that particular reseller.
                                      87.Various commenters, notably resellers and debit card providers, argue that
the Commission should either exempt them on an interim basis from the obligation to pay
compensation, or to "grandfather" debit cards that have already been issued from the
compensation obligation.  We conclude that, because Section 276 creates no exceptions for calls
facilitated by resellers or debit card providers, such exemptions from the obligation to pay
compensation, even on an interim basis, would be contrary to the congressional mandate that we
ensure fair compensation for "each and every completed intrastate and interstate call."  While
we have not placed the burden of paying per-call compensation directly on resellers or debit card
providers, we conclude that the underlying carrier must begin paying compensation on all
compensable calls facilitated by its reseller and debit card customers and it is, in turn, permitted
to impose the payphone compensation amounts on these customers.
     3.  Ability of Carriers to Track Calls From Payphones
                                      a.  The Notice
                                      88.The Commission tentatively concluded, in the Notice, that tracking
mechanisms and surrogates exist, or might readily be made available, to support the per-call
compensation plan mandated by Section 276(b)(1)(A).  We sought comment on what tracking
options are currently, or may soon be, available.  Additionally, we sought further comment on
the ability of existing IXC-based tracking mechanisms to accommodate all payphone providers
and IXCs.  In the event that no standard technology or mechanism available for tracking exists,
the Commission sought comment on alternative surrogate methodologies that could be devised.
Finally, we sought comment on which party or parties, whether IXCs, PSPs, or intraLATA
carriers, should be required to develop and maintain the tracking or surrogate methodologies.
                                      89.The Commission also tentatively concluded that IXCs and intraLATA
carriers should be required to initiate an annual independent verification of their per-call tracking
functions, to be made available for FCC inspection, to ensure that they are tracking all of the
calls for which they are obligated to pay compensation.  Additionally, the Commission sought
comment on whether BOCs and other LECs that provide network tracking for their own
payphones should be required to make those tracking services available to independent payphone
providers at the same rates, terms, and conditions as they provide themselves.
                                      b.  Comments
                                      90.The RBOCs support the Commission's tentative conclusion that the requisite
technology currently exists for carriers to track calls routed to them from payphones.  The
RBOCs argue further that no standardized technology for tracking calls needs to be prescribed
by the Commission, and that carriers should be permitted to use whatever technology they prefer
to meet their tracking obligations.  They request that, if the Commission requires the carrier
receiving the call to provide the call tracking, then the Commission should not preclude LECs
and PSPs from developing their own call tracking capabilities.  The RBOCs also contend that
the Commission should establish both a timeline for achieving full call tracking capabilities
within 12 months after the effective date of the rules, and interim compensation rates based on
average calling rates until then.
                                      91.The RBOCs, USTA, Sprint, One Call, California PUC, and others argue
that the Commission should require that IXCs that receive the calls from payphones be obligated
to provide the call tracking necessary for compensation.  These parties argue that only IXCs
can track calls to completion, IXCs are the primary economic beneficiary of these calls, and that
non-IXC tracking surrogates are not reliable.  Ameritech argues, on the other hand, that the
IXCs should not be required to track calls, except during a brief transition period.
                                      92.Other commenters note difficulties that they argue are inherent with IXC
tracking capabilities.  MCI and Sprint argue that each payphone should be required to generate
07 or 27 coding digits within the automatic number identification ("ANI") for the carrier to track
calls.  AT&T states that it currently cannot track subscriber 800 calls because it receives only
the ANI of the terminating telephone.  Because it estimates that a per-call tracking ability for
subscriber 800 calls will take one year to achieve, AT&T argues that the Commission should use
a surrogate for these calls, which relies on "studies made from a representative weighted sample
of central-office-implemented payphones."  The RBOCs propose a year phase-in period for
tracking subscriber 800 calls, but argue that AT&T's proposed surrogate would rely on central-
office-implemented or "dumb" payphones, which are found in low usage areas and, therefore,
would underestimate the volume of subscriber 800 calls.  USTA also supports relying on a
surrogate for subscriber 800 calls for a one year transition period.  Some IXCs, such as MCI,
Cable & Wireless, and CompTel, contend that carrier tracking is not practical or appropriate, and
that it would involve substantial new investment.  Cable & Wireless estimates that it would
require a $1 million investment to establish a tracking mechanism for all of the calls that its
network carries.  Cable & Wireless also contends that requiring IXCs to track calls would lead
to an impossible administrative task on the part of the carriers, because the IXCs would need to
search all of their call records to identify and separate out calls from payphones.
                                      93.APCC argues that the Commission has a number of options for mediating
the per-call tracking burden of the small carriers.  One option, according to APCC, would be to
require the LECs to track calls on behalf of small IXCs.  A second option, APCC argues,
would be to relieve small carriers of the tracking obligation and have them pay per-call
compensation, particularly for subscriber 800 calls, on a flat rate per month according to their
percentage of toll revenue or, if possible, their percentage of overall payphone and non-payphone
800 service traffic.  The RBOCs contend, on the other hand, that the small carriers should be
required to track individual calls using payphones or contract out the tracking to another party,
because carriers that benefit from being in the market must accept the responsibilities that go
with it.
                                      94.Various commenters, particularly some IXCs and Ameritech, argue that the
Commission should place the obligation to track calls using a payphone on LECs, PSPs, or a
combination of both.  For example, CompTel argues that LECs should provide the tracking, and
the PSPs should pay the LECs for this service.  MCI and Indiana URC contend that LECs and
PSPs should share the responsibility for tracking calls.  WorldCom argues that per-call tracking
should be the responsibility of the LECs, while Ameritech and Scherers argue that
the PSPs should assume this obligation.  These parties contend that LEC- or PSP-based
tracking would be superior because those who want payment must keep count of compensable
calls and bill for them, and all payphones will soon be able to obtain call detail information to
make this possible.  Ameritech argues that the Commission should require IXCs to process
answer supervision for LECs engaged in tracking.  The RBOCs, GTE, and NECA oppose a
tracking system that would place the responsibility for tracking calls on LECs.  They argue
both that the Commission should not disproportionately burden the LECs while other parties
receive the primary benefit for these calls, and that only IXCs can track calls to completion and
detect multiple calls within a single dialing transaction.  USTA contends that LECs are not able
to track subscriber 800 calls.
                                      95.The RBOCs support the Commission's tentative conclusion that carriers
should be required to initiate an annual independent verification of their per-call tracking
functions for a period of two years, provided that both the Commission and PSPs be allowed to
inspect this verification.  APCC argues that the Commission should require annual independent
audits of carriers' per-call tracking functions and require the carriers to compare their data against
parallel LEC or smart payphone data.  Telaleasing argues that such an audit should occur on
a quarterly basis.
                                      c.  Discussion
                                      96.Based on the information in the record, we conclude that the requisite
technology exists for IXCs to track calls from payphones.  We recognize, however, that tracking
capabilities vary from carrier to carrier, and that it may be appropriate, for an interim period, for
some carriers to pay compensation for "each and every completed intrastate and interstate call"
on a flat-rate basis until per-call tracking capabilities are put into place, as discussed below.
                                      97.We conclude further that, as stated in the Notice, it is the responsibility of
the carrier, whether it provides intraLATA or interLATA services, as the primary economic
beneficiary of the payphone calls, to track the calls it receives from payphones, although the
carrier has the option of performing the tracking itself or contracting out these functions to
another party, such as a LEC or clearinghouse.  In other words, while we assign the burden of
tracking on the carrier receiving the call from a payphone, parties to a contract may find it
economically advantageous to place this tracking responsibility on another party.  We decline to
require LECs or PSPs to perform per-call tracking themselves.  Neither LECs nor PSPs are the
primary economic beneficiaries of payphone calls.  We conclude, however, that LECs, PSPs, and
the carriers receiving payphone calls should be able to take advantage of each other's
technological capabilities through the contracting process.  To this end, we agree with the RBOCs
and conclude that no standardized technology for tracking calls is necessary, and that IXCs may
use the technology of their choice to meet their tracking obligations.
                                      98.MCI and Sprint contend that each payphone should be required to generate
07 or 27 coding digits within the ANI for the carrier to track calls.  We agree.  Currently under
our rules, LECs are required to tariff federally originating line screening ("OLS") services that
provide a discrete code to identify payphones that are maintained by non-LEC providers.  We
conclude that LECs should be required to provide similar coding digits for their own payphones.
                                      99.AT&T states that it currently cannot track subscriber 800 calls because it
receives only the ANI of the terminating telephone, and it estimates that a per-call tracking
ability for subscriber 800 calls will take one year to achieve.  Other commenters, such as the
RBOCs and USTA, propose a one-year transition before carriers are required to track subscriber
800 calls.  In view of the current difficulties in tracking such calls, we conclude that a transition
is warranted for requiring carriers to track compensable calls.  Therefore, we require carriers to
provide for tracking of all compensable calls they receive from payphones, through any
arrangement they choose, as soon as possible, but no later than one year from the effective date
of the rules adopted in this proceeding.  Until that date, carriers must pay flat-rate
compensation, as specified below.
                                      100.  We recognize that implementing a per-call tracking capability will require
new investments for some carriers, particularly small carriers, but we conclude that the mandate
of Section 276 that we ensure a fair "per call compensation plan" for "each and every completed
intrastate and interstate call" requires these carriers to provide tracking for calls for which they
receive revenue, even though they previously did not have to compensate the PSP for many of
these calls.  We conclude further that, by permitting carriers to contract out their per-call tracking
responsibility, and by allowing a transition for tracking subscriber 800 calls, we have taken the
appropriate steps to minimize the per-call tracking burden on small carriers.  In addition, we
conclude that, to parallel the obligation of the facilities-based carrier to pay compensation, the
underlying, facilities-based carrier has the burden of tracking calls to its reseller customers, and
it may recover that cost from the reseller, if it chooses.
                                      101.  In the Notice, we tentatively concluded that carriers should be required to
initiate an annual verification of their per-call tracking functions to be made available for FCC
inspection upon request, to ensure that they are tracking all of the calls for which they are
obligated to pay compensation.  We require this verification for a one-year period, the 1998
calendar year, and delegate to the Chief, Common Carrier Bureau, the authority to establish the
form and content, if necessary, of the verification documentation of these per-call tracking
capabilities.  We conclude that requiring carriers to maintain the appropriate records and certify
as to the accuracy of both the data and the tracking methodology would facilitate the prompt and
accurate payment of per-call compensation.  We also conclude that PSPs should be allowed to
inspect this certification, apart from any proprietary network data.  In addition, we expect that
the PSPs and carriers performing the tracking will work together to reconcile or explain any PSP
data that are inconsistent with the annual certification.  We decline to adopt, however, the
suggestions of some commenters that we require a full-scale independent audit of a carrier's
tracking capability, or mandate that the verification occur on a quarterly basis.  A full-scale audit
or a quarterly verification would impose too great of a burden on carriers in an area where we
have encouraged them to use technology and other arrangements of their choice in implementing
a per-call tracking capability.
     4.  Administration of Per-Call Compensation
                                      a.  The Notice
                                      102.  In the Notice, the Commission tentatively concluded that the direct-billing
arrangement established for the payment of compensation from IXCs to PPOs should be used
with the simple addition of requiring IXCs, and the intrastate interexchange operations of LECs,
to send back to each PSP a statement indicating the number of toll-free and access code calls that
each carrier has received from each of that PSP's payphones.  The Commission also proposed
to establish a requirement that the carrier responsible for paying compensation file annually a
brief report with the Common Carrier Bureau listing the total amount of compensation paid,
pursuant to the rules adopted in this proceeding, to PSPs for intrastate, interstate, and
international calls; the number of compensable calls received by the carrier; and the number of
payees.  Such a requirement would help ensure that the carriers are tracking all of the calls for
which they are obligated to pay compensation.
                                      103.  Because the compensation mechanism proposed in the Notice uses the ANI
as the basis for tracking calls, the Commission tentatively concluded that minimal regulatory
guidelines for the industry should be adopted regarding resolution of disputed ANIs in the per-
call compensation context.  Possible guidelines for which the Commission has sought comment
are as follows:  (1) intraLATA carrier provision of a list of payphone ANIs to IXCs (e.g., each
quarter); (2) verification of disputed ANIs by intraLATA carrier on request; (3) maintenance of
verification data for at least 18 months after the close of a compensation period; (4) acceptance
of compensation claims once an intraLATA carrier makes a positive identification of an installed
payphone; (5) IXC denial of payment for compensation claims that are submitted by a PSP over
one year after the end of the period in question.
                                      b.  Comments
                                      104.  APCC argues that the compensation payor should bear the costs associated
with the administration of the compensation mechanism.  Various commenters argue that the
Commission should use a direct-billing arrangement for the payment of compensation from IXCs
to PSPs that is similar to the one adopted in the access code call compensation proceeding.
MCI argues that under the Commission's proposed direct-billing arrangement, carriers should be
required to report to the Commission only the total amount of compensation paid to all PSPs
annually.  Other commenters, notably the small IXCs, contend that the LECs are better
equipped than the IXCs and intraLATA carriers to administer the payment of per-call
compensation.  Some of these commenters argue that PSP-administered compensation would
be preferable to that handled by the carriers receiving the payphone calls.  SDN argues that
compensation should be based on a national formula and administered by the individual states.
                                      105.  The RBOCs, Sprint, APCC, and Peoples support the Commission's tentative
conclusion that minimal regulatory guidelines for the industry should be adopted regarding
resolution of disputed ANIs.  They argue that LECs must be given an incentive to provide
accurate and timely verification of ANIs for independently provided payphones.  MCI argues
that a dispute resolution process is not necessary if payphones are required to transmit certain
information digits associated with payphone-originated calls.
                                      106.  The commenters also make a number of suggestions on the possible dispute
resolution guidelines articulated by the Commission in the Notice.  GTE argues that mandatory
procedures in this area are not necessary, because of the increased costs they will entail.  In
addition, GTE argues that PSPs are able to file a complaint with the Commission when they have
a dispute regarding compensation.  With regard to the list of payphone ANIs provided each
quarter by the LECs, AT&T argues that it is the LEC that provides the payphone line that must
provide the list, not the intraLATA carrier presubscribed to the payphone.  GVNW argues that
requiring LECs to furnish IXCs with a quarterly list of ANIs is too costly and burdensome, and
technology-based solutions to tracking problems will eventually make this list unnecessary.
AT&T requests that the Commission require the LECs to submit the ANI list to the IXCs within
30 days of the end of a compensation period.
                                      107.  AT&T and Sprint contend that if the LEC does not provide verification of
a disputed payphone ANI, carriers should not be required to pay compensation.  AT&T further
contends that LECs should be required to provide verification in a timely fashion.  MICPA
argues that carriers should not be able to use delays in LEC verification to delay the payment of
compensation to PSPs.  APCC argues that the Commission should impose a penalty for LECs
that do not make a verification when requested.  MCI suggests that if a payphone is
disconnected, the LEC should be required to notify the compensation-paying carriers within 24
hours.  NTCA contends that the possible guidelines outlined by the Commission would impose
too great of a burden on small LECs.  MCI argues that the statute of limitations for the
payment of compensation should not be tolled while ANIs are being disputed.  Two state
associations of independent payphone providers argue that the Commission must prohibit the
carriers from imposing undue burdens on PSPs before paying compensation.
                                      108.  A number of independent payphone providers argue that the Commission
should shorten the quarterly compensation period.  Peoples and Telaleasing both suggest that
carriers should pay compensation to PSPs on a monthly basis.  MCI argues that it should not
be required to pay compensation on claims more than three months old.  Sprint argues that,
to reduce the administrative burden and costs associated with the payment of compensation,
carriers should be allowed to defer payment to PSPs until the PSP is due to receive a minimum
of $10 from that carrier.  The RBOCs contend that the Commission should impose a penalty
on carriers who demonstrate a wilful failure to pay compensation.  APCC argues that PSPs
should be allowed to charge interest for payments that have been due for more than 90 days.
                                      109.  To facilitate the payment of compensation, CompTel argues that PSPs
should register with a central resource all payphones for which carriers must pay compensation.
It argues that this step would reduce administrative costs for all parties, avoid duplication of
efforts, and negate the risk of multiple payments to separate parties claiming ownership of the
same payphone.  APCC argues that, to avoid additional payment disputes, each LEC bill for
payphone service must affirmatively state that it is for payphone service.
                                      c.  Discussion
                                      110.  We conclude that we should adopt a direct-billing arrangement between
IXCs and PSPs, once tracking capabilities are in place, that would build on the arrangement
established in the access code call compensation proceeding, with the addition of the requirement
that these carriers must send back to each PSP a statement indicating the number of toll-free and
access code calls that each carrier has received from each of that PSP's payphones.  This
arrangement places the burden of billing and collecting compensation on the parties who benefit
the most from calls from payphones -- carriers and PSPs.  For this reason, we conclude that it
would not be appropriate to burden LECs with the administration of the per-call compensation
mechanism, because their economic interest in the compensable calls is significantly less than
that of the IXCs and PSPs.  While PSPs could be efficient administrators of a compensation
mechanism, we conclude that the carriers already responsible for tracking the calls and paying
compensation for them have the greatest ability and incentive to establish the most efficient
means of administering the payment of compensation.  As with the tracking of calls, carrier-
payors are free to use clearinghouses, similar to those that exist for access code call
compensation, or to contract out the direct-billing arrangement associated with the payment of
compensation.  We decline to leave it to the individual states to administer compensation, as
suggested by SDN, because we believe the parties can agree on a solution more efficient than
the likely varying approaches adopted by each of the states.
                                      111.  We also proposed in the Notice to establish a requirement that the carrier
responsible for paying compensation file each year a brief report with the Common Carrier
Bureau listing the total compensation paid to PSPs for intrastate, interstate, and international
calls; the number of compensable calls carried by the carrier; and the number of payees.  Such
a requirement would help ensure that the carriers are tracking all of the calls for which they are
obligated to pay compensation.  This requirement will apply to calendar year 1998, when tracking
capabilities are in place and compensation is being paid on a per-call basis.   While MCI argues
that carriers should be required to report only the total amount of compensation to all PSPs
annually, we conclude that more detailed reporting is necessary to monitor the per-call payphone
compensation mechanism in its initial complete calendar year to help ensure that all IXCs are
paying their respective compensation obligations.  We conclude further that, once per-call
compensation is routinely paid by IXCs, this reporting requirement will be terminated after the
carriers have filed their reports for the 1998 calendar year.  Carrier-payors should file their
reports as soon as possible after the end of the calendar year, but no later than the end of the first
quarter of the following year.  To implement the reporting requirement, we delegate to the Chief,
Common Carrier Bureau, the authority to establish the form and content, if necessary, of the
annual report listing the total amount of compensation paid to PSPs, including the authority to
extend or limit the scope of this report.
                                      112.  While we have elected to burden the LECs only insignificantly in creating
the per-call compensation mechanism mandated by Section 276 of the Act, we conclude that we
must establish minimal regulatory guidelines for the payphone industry regarding resolution of
disputed ANIs to give LECs a greater incentive to provide accurate and timely verification of
ANIs for independently provided payphones.  While any party may file a complaint with the
Commission about disputed ANIs, we conclude that the better practice is for LECs who maintain
the list of ANIs to work with both carrier-payors and PSPs to resolve disputes more efficiently
and quickly before lodging a complaint with the Commission.  We also conclude that we should
require that each LEC must submit to each carrier-payor on a quarterly basis a list of ANIs of
all payphones in the LEC's service area (called the "COCOT list" in the access code call
compensation proceeding).  We disagree with GVNW's proposal that furnishing the quarterly
list of ANIs is too costly and burdensome for LECs.  As stated above, we have attempted to
minimize the burdens on LECs, and no party has shown that there is currently an effective
substitute for this list, despite the future promise of technological solutions.
                                      113.  In response to the various arguments made by commenters, we conclude
that the following guidelines will facilitate the proper verification of payphone ANIs by LECs.
First, LECs must provide a list of payphone ANIs to carrier-payors within 30 days of the close
of each compensation period (i.e., each quarter).  Second, LECs must provide verification of
disputed ANIs on request, in a timely fashion.  Such verification data must be maintained and
available for at least 18 months after the close of a compensation period.  Third, once a LEC
makes a positive identification of an installed payphone, the carrier-payor must accept claims for
that payphone's ANI until the LEC provides information, on a timely basis, that the payphone
has been disconnected.  Fourth, a LEC must respond to all requests for ANI verification, even
if the verification is a negative response.  Carrier-payors are not required to pay compensation
once the LEC verifies that the particular ANI is not associated with a COCOT line for which
compensation must be paid.  Fifth, carrier-payors should be able to refuse payment for
compensation claims that are submitted long after they were due.  Carriers should not refuse
payment on timeliness grounds, however, for ANIs submitted by a PSP up to one year after the
end of the period in question.  Further, the period for a PSP to bring a complaint to the
Commission based on an ANI disputed by the carrier-payor will not begin to accrue until the
carrier-payor issues a final denial of the claim.
                                      114.  We conclude that the guidelines, as outlined above, will facilitate the proper
verification of payphones without imposing undue burdens on LECs, PSPs, or carrier-payors.
In adopting these guidelines, we reject a number of proposals by commenters.  First, in response
to the argument of AT&T and Sprint that they not be required to pay compensation when a LEC
fails to verify a particular ANI, we conclude that by directing LECs to respond to all requests
for verification, carriers should be able to avoid payment only when the LEC issues a negative
response to the verification inquiry.  Second, we conclude that mandating a penalty on the LEC,
as urged by APCC, for failing to respond to a verification request in a timely manner, is not
necessary when the Commission's complaint process is available.  Similarly, the complaint
process is available to PSPs for instances of a carrier's wilful failure to pay compensation, as
discussed by the RBOCs.  We note that we will aggressively take action on such complaints.
Third, we conclude that requiring a LEC to notify all carrier-payors of a payphone disconnection
within 24 hours would be too great a burden to place on LECs, particularly when they are
required to provide ANI lists only on a quarterly basis.  Such notification, however, should occur
on a basis as timely as possible.  Fourth, we conclude that, for purposes of bringing a complaint
before the Commission concerning a carrier's payment of payphone compensation, the time period
for the statute of limitations does not begin to run until after the carrier-payor considers a
compensation claim and issues a final denial of the claim.  To conclude otherwise, as suggested
by MCI, would permit a carrier-payor to delay a denial of the claim to preclude a PSP's
complaint remedy before the Commission.
                                      115.  Various independent payphone providers argue that we should require
compensation to be paid on a monthly basis.  In the access code call compensation proceeding,
we allowed the parties to determine how and when compensation would be paid, and quarterly
compensation period was adopted by the industry through consensus.  While the industry may
decide upon a similar compensation period for per-call compensation, we leave the details
associated with the administration of this compensation mechanism to the parties to determine
for themselves through mutual agreement.  We disagree, however, with MCI's proposal that
carriers not be required to pay compensation claims that are more than three months old.
Because a carrier-payor's administrative expenses are presumably reduced through the payment
of compensation on a quarterly, as opposed to monthly, basis, we conclude that the reasonable
trade-off is that the carrier remains liable, as discussed above, for compensation claims that are
submitted within one year of the end of the compensation period in question.  The parties may
themselves revisit this issue if they elect a shorter compensation period.  Sprint argues that a
carrier should be allowed to defer payments to individual PSPs until the amount due aggregates
to $10 from that carrier to the particular PSP for all of its payphones.  We agree and conclude
that such a requirement would reduce the administrative expenses associated with the payment
of compensation.  If PSPs would like to charge interest on overdue payments from IXCs, as
suggested by APCC, they should negotiate such a provision in their compensation agreement
with the particular carrier.
                                      116.  We agree with APCC that the payment of compensation would be
facilitated and some disputes avoided if LECs were required to state affirmatively on their bills
to PSPs that the bills are for payphone service.  We conclude that LECs who have knowledge
that a particular phone line is used for a payphone, must indicate on that payphone's monthly bill
that the amount due is for payphone service.  We also agree with CompTel's suggestion that the
registration of all payphones with a central resource or clearinghouse would reduce administrative
costs for all parties and would avoid duplication of efforts.  We decline, however, to mandate
the creation of a central resource or clearinghouse for compensation purposes, and believe that
the parties themselves are better able to establish such a resource that would be directly
connected to the payment of compensation.
     5.  Interim Compensation Mechanism
                                      a.  The Notice
                                      117.  The Commission sought comment on whether independent payphone
providers should receive some measure of interim compensation, to be paid until the effective
date of the final rules adopted in this proceeding, for the growing volume of dial-around calls
originated from their payphones.  Those who support such relief were instructed to comment
on the appropriate interim compensation amount, how such an interim compensation mechanism
could be structured, and the feasibility of implementing an interim plan when final rules are
required to be in place in nine months.  The Commission also requested comment on the legal
basis for, and practical consequences of, making such interim compensation effective as of the
release date of the Notice.
                                      b.  Comments
                                      118.  Various independent payphone providers and BellSouth argue that the
Commission should prescribe interim relief for independent payphone providers, retroactive to
the date of the Notice and to be paid until the effective date of the rules adopted in this
proceeding, for the growing volume of dial-around calls originated from their payphones.  They
argue that independent payphone providers, unlike the LECs, are uncompensated for the majority
of coinless calls that use their payphones, and that the quantity of these calls is increasing.
They also argue that delays for unforeseen reasons will likely impact the effective date of the
final rules in this proceeding, which makes an interim relief mechanism a necessity for the
survival of their businesses.  These commenters suggest compensation amounts that range from
$.40 on a per-call basis to $24, $38.70, and $40 on a flat rate per phone basis.  Intellicall
suggests that the Commission prescribe interim relief through a "caller-pays" coin deposit
approach.  BellSouth also argues that LEC-owned payphones should be eligible to receive
interim relief once they have removed all subsidies from their payphone operations.  The
RBOCs, GTE, AT&T, MCI, Sprint, and One Call all oppose granting interim relief to
independent payphone providers.  They argue that such relief would be unadministrable
because it would require parties to participate in two payment systems, and interim relief would
be without a statutory basis.  AT&T states that it does not oppose interim relief for access code
calls only.
                                      c.  Discussion
                                      119.  Because the IXCs required to pay compensation to PSPs are not required
to track individual compensable calls until one year from the effective date of the rules adopted
in this proceeding, we conclude that PSPs should be paid monthly compensation on a flat rate
by IXCs with annual toll revenues in excess of $100 million, beginning on the effective date of
the rules adopted in this proceeding and ending on October 1, 1997.  This flat-rate monthly
compensation will apply proportionally to individual IXCs, based on their respective annual toll
revenues.  For reasons of administrative convenience of the parties, we conclude that we should
model the interim mechanism adopted in this Report and Order on that set forth in the access
code call compensation proceeding.  In the access code compensation proceeding, CC Docket
No. 91-35, we excused several carriers from the obligation to pay flat-rate compensation for
originating access code calls, because they certified that they were not providers of "operator
services," as defined by TOCSIA.  We note that Section 276's requirement that we ensure fair
compensation for "each and every completed intrastate and interstate call," including access code
calls, supersedes the compensation obligations established in CC Docket No. 91-35, including the
waivers granted to AT&T and Sprint.  Because Section 276 is the statutory authority for
mandating per-call compensation for all compensable calls, including access code calls, the
statutory exclusion in TOCSIA for those carriers that are not providers of "operator services" is
no longer a basis for being excused from the obligation to pay either the total flat-rate
compensation amount established in the instant proceeding, or a portion thereof.
                                  120. In the Notice, we set forth the history of the flat-rate compensation
mechanism we adopted for access code calls.  TOCSIA had directed the Commission to
determine whether independent payphone providers should receive compensation for originating
interstate calls to non-presubscribed OSPs from their payphones.  The Commission concluded
in the Second Report and Order that a per-call compensation mechanism was preferable because
it would create greater incentives for PPOs to place their payphones in locations that generate
the most traffic.  The Commission concluded, however, that it was not technically feasible to
implement such a mechanism at that time.  Instead, the Commission adopted flat-rate
compensation in the amount of $6 per phone per month (based on average of 15 access code
calls at a rate of $.40 per call), on an interim basis.
                                              121.   When we adopted a compensation mechanism for interstate access code
calls, the Commission concluded that, because they did not involve use of a "carrier-specific
access code" and were routed directly to an end user, subscriber 800 calls were not within the
class of calls for which TOCSIA directed the Commission to consider compensation.   The
Commission, therefore, limited compensation to interstate "access code calls."  In July
1992, in response to a petition for reconsideration by the APCC, the Commission affirmed its
conclusion that subscriber 800 calls were not within the Commission's definition of interstate
"access code calls" for which compensation should be paid.   In 1992, after the Commission
affirmed its exclusion of subscriber 800 calls from the class of compensable access code calls,
the Florida Pay Telephone Association ("FPTA") sought judicial review in the United States
Court of Appeals for the District of Columbia Circuit of this aspect of the First Report and Order
and the Subscriber 800 Reconsideration Order.  In its Florida Payphone decision, the Court
found no reason to distinguish between the routing of access code calls and subscriber 800 calls.
Therefore, it reversed and remanded the case to the Commission to "consider the need to
prescribe compensation for subscriber 800 calls 'routed to providers of operator services that are
other than the presubscribed provider of operator services.'"
                                              122.   We first re-examine the basis for setting the $.40 per-call compensation
amount that was aggregated to a flat rate of $6 per month.  In the 1992 Second Report and
Order, the Commission identified three reasonable compensation approaches that established a
range of reasonable compensation rates.  The three approaches were: (1) as a surrogate for
independent payphone provider costs, access charge compensation that a LEC receives for its
regulated provision of payphones; (2) as a measure of value to OSPs of receiving access code
calls, charges for a transfer by a LEC live operator to an OSP of the caller's choice ("O- transfer
service charges"); and (3) AT&T's federally regulated operator service rates on calls made from
payphones presubscribed to AT&T.  We conclude that these three approaches, which are based
on a different standard than that in Section 276, are inapplicable for determining interim
compensation in the instant proceeding.  Our focus in the instant proceeding is to let the market
set the appropriate compensation amount.  As discussed above, for the limited purpose of
calculating compensation for PSPs on a flat-rate basis until per-call compensation becomes
mandatory we will use a rate of $.35 per call, which is the rate in the majority of states that have
allowed the market to determine the appropriate local coin rate.
                                  123. We next re-examine the average number of access code calls originated by
a payphone per month.  In 1992, the Commission found that the average was 15 calls.  As
summarized below, data on the record in the instant proceeding indicate that the average number
of access code calls per month is now considerably higher.  In addition, similar data show the
volume of subscriber 800 calls generated by the average payphone.
                                  124. Various independent payphone providers and the RBOCs submitted data
on the average number of access code and subscriber 800 calls originated respectively by their
payphones.  Together, these data cover payphones located in geographically diverse areas across
the country.  Peoples, the largest independent provider, states that each of its payphones
originates, on average, 43 access code calls and 86 subscriber 800 calls per month (total of 129
compensable calls).  Communications Central, another large independent payphone provider,
states that each of its payphones originates an average of 49.5 access code calls and 79.7
subscriber 800 calls per month (total of 130 compensable calls).  Telaleasing states that each
of its payphones originates an average of 37 access code calls and 87 subscriber 800 calls per
month (total of 124 compensable calls).  APCC states that it surveyed approximately 100,000
payphones owned by 20 diverse providers and found that, in a three-month period in 1996, each
payphone originated an average of 40 access code calls and 100 subscriber 800 calls per month
(total of 140 compensable calls).  Data provided by the RBOCs show that the payphones
maintained by five of the seven RBOCs originate, on average, 52 access code calls and 80
subscriber 800 calls per payphone per month (total of 132 compensable calls).
                                  125.      The data on the record from the five PSP sources noted in the preceding
paragraph yield similar average monthly compensable call volumes. Based on the call volume
data provided by the PSPs, we conclude that, for purposes of calculating flat-rate compensation,
that the average payphone originates a combined total of 131 access code calls and subscriber
800 calls per month.  When 131 calls per month is multiplied by the $.35 compensation
amount, the monthly flat-rate compensation amount is $45.85.  We conclude that this $45.85 flat-
rate amount must be paid by carriers, proportionally to their annual toll revenues, to PSPs.  This
flat-rate obligation applies to access code calls and subscriber 800 calls originated on or after the
effective date of the rules adopted in this proceeding.  PSPs that are affiliated with LECs will
not be eligible for this interim compensation until the first day of the month following their
reclassification and transfer of payment equipment along with the termination of subsidies, as
discussed below.
                                  126. We decline to require that per-call compensation be paid retroactive to the
date of release of the Notice.  We conclude that the rules adopted in this Report and Order,
including the requirement that interim flat-rate compensation be paid until per-call tracking
capabilities are in place, provides compensation to PSPs as soon as practicable.  For the same
reasons discussed elsewhere in this Report and Order, we also reject Intellicall's argument that
interim compensation be mandated through a "caller pays" coin-deposit approach.
B.  RECLASSIFICATION OF INCUMBENT LEC-OWNED PAYPHONES
      127.                                         In the foregoing Part, we establish rules and guidelines to ensure that PSPs
are fairly compensated for calls originating at their payphones.  For certain PSPs -- those who
are LECs -- the new compensation arrangement can be implemented only upon the
discontinuance of the regulatory system under which they now recover their costs of providing
payphone service.  In this Part, we describe the necessary steps for the LECs' transition to the
new compensation framework, and set a schedule for the LECs' implementing actions.
      128.   Section 276(b)(1)(B) directs the Commission to "discontinue the intrastate
and interstate carrier access charge payphone service elements and payments in effect on such
date of enactment, and all intrastate and interstate payphone subsidies from basic exchange and
exchange access revenues, in favor of a [per-call] compensation plan[.]"  Currently, incumbent
LEC payphones, classified as part of the network, recover their costs from Carrier Common Line
(CCL) charges assessed on those carriers that connect with the incumbent LEC. In order to
comply with Section 276(b)(1)(B) by removing payphone costs from the CCL charge and all
intrastate and interstate payphone subsidies from basic exchange and exchange access revenues,
the Notice sought comment on: (1) the prospective classification of incumbent LEC payphones
as Customer Premises Equipment (CPE); (2) the transfer of incumbent LEC payphone equipment
assets from regulated to nonregulated status; (3) the termination of access charge compensation
and all other subsidies for incumbent LEC payphones; and (4) the classification of AT&T
payphones.
      1.  Classification of LEC Payphones as CPE
                                              a.  The Notice
                                              129.    In the Notice, we tentatively concluded that incumbent LEC payphones
should be treated as nonregulated, detariffed CPE.   We also proposed that incumbent LECs,
whether or not they provide payphone service, must offer individual central office coin
transmission services to PSPs under a nondiscriminatory, public, tariffed offering.  To this end,
we sought comment on both the central office coin services that must be made available by
incumbent LECs to the PSPs to achieve this goal, and the type of services and the technological
requirements necessary to allow independent payphone providers to use payphones that are
equivalent to those payphones currently used by LECs.  In addition, we sought comment on any
industry standards that may need to be developed with respect to potential claims regarding any
demonstrable network reliability concerns that may result from PSPs connecting their payphones
that make use of central office coin transmission services.
                                              130.    Because the incumbent LECs have used central office coin services in the
past, but have not made these services available to independent payphone providers for use in
their provision of payphone services, we sought comment on whether incumbent LEC provision
of coin transmission services on an unbundled basis should be treated as a new service under our
price cap rules.  Because incumbent LECs may have an incentive to charge their competitors
unreasonably high prices for these services, we tentatively concluded that the new services test
is necessary to ensure that central office coin services are priced reasonably.  Additionally, we
sought comment on whether incumbent LECs not currently subject to price cap regulation should
be required to submit cost support for their central office coin services, pursuant to Sections
61.38, 61.39, and 61.50(i) of our rules.
                                              131.   We also tentatively concluded that Section 68.2(a)(1) of our rules should
be amended to facilitate registration of both instrument-implemented and central-office-
implemented payphones and sought comment on this tentative conclusion.  In addition, we
tentatively concluded that the demarcation point for all new LEC payphones should be consistent
with the minimum point of entry standards for other wireline services and, in addition, tentatively
concluded that the demarcation point should be the same one as incumbent LECs use for
independent payphone providers today.  Finally, we sought comment on what services (such
as fraud protection, installation and maintenance services, joint marketing opportunities, per-call
tracking capabilities, and call validation services) other than those associated with central office
coin transmission services provided to their own payphones by incumbent LECs, particularly the
BOCs, should be unbundled under the rules to be adopted in this proceeding and made available
to PSPs.
                                              b.  Comments
                                              i.   CPE Deregulation
                                              132.   Most of the parties support reclassifying payphone equipment as CPE and
generally assert that deregulating payphone equipment is important in establishing a competitive
payphone market. Ohio PUC, on the other hand, argues that payphones should be detariffed
but not deregulated and a charge should be imputed for LEC payphones.  Florida PSC supports
deregulating payphones because needed functionalities are available either from the set or the
network and because deregulation will ensure that payphone service is not subsidized. Florida
PSC argues, however, that smaller LECs should be given a choice whether to deregulate CPE,
because separating costs is burdensome.  Ameritech contends that payphone deregulation
should apply to all LECs, not just incumbent LECs, because Section  276 (b)(1)(B) is not limited
in applicability.
                                              133.   The RBOCs argue that there should be a twelve-month transition period
to nonregulated status for payphone CPE. Others argue there should be no transition period,
or a shorter period than twelve months, for example, 90 days after release of an order.
BellSouth argues that it should be able to conduct deregulated operations immediately on the
release of this Report and Order.
                                              134.    GPCA argues that a separate subsidiary should be required for BOCs that
merge. Ohio PUC argues that Tier 1 LECs should provide payphones through a separate
subsidiary if payphone equipment is deregulated.  Most of the parties, however, do not argue
that a separate subsidiary is required and
Florida PSC argues that it should be the option of the LEC. The RBOCs argue that the
Commission's accounting safeguards and price cap rules are sufficient to deter cross-
subsidization.  They also argue that a separate subsidiary requirement is against the plain
language of the 1996 Act and that such a requirement was dropped from the Senate version.
PacTel argues that the nonstructural safeguards of Computer III were expressly mandated by
Section 276.
                                              ii.   Unbundling of Payphone Services
                                              135.   The RBOCs and PacTel argue that the Commission should not require more
unbundling than is necessary to ensure that PSPs and LECs are able to use the same payphones -
- standard central-office coin line and the alternate (smart set) access line.   They also argue that
the unbundling criteria used in Computer III should apply to any further unbundling.
California PUC and GTE state that access line and central office transmission services should be
tariffed.  Ameritech states that it will offer tariffed coin line service, centralized office based
coin rating, and signaling functionality, or payphone line (like business line). GPCA argues that
coin line and alternate access line do not provide all the needed capabilities.  MCI argues that
the BOCs should provide all functionalities used in their delivery of payphone services on a
nondiscriminatory basis, including coin transmission services and other associated services.
                                              136.    GVNW argues that the interconnection rules must be flexible for small
LECs because small LECs do not implement payphone services in the same way as do the BOCs,
and that small LECs should only have to provide payphone services to others that they are
providing to themselves. AT&T states that competitive access providers (CAPs) should not
have to offer central office coin service unless they provide payphone service themselves.
NCTA and OPASTCO argue that LECs should not have to provide a specific set of payphone
services, such as central coin services, that they are not already equipped to provide because of
the significant investment required to upgrade switches. Florida PSC states that all LECs in
Florida tariff payphone blocking, screening, and intercept services.
                                              137.   AT&T argues that LECs should be required to offer under tariff all
functions used in their delivery of payphone services, including: all central office intelligence,
answer supervision, collect refund, far end disconnect, call blocking and screening options, access
to some monitoring and disaggregation routines, and 911 services.  GPCA argues that all
network functions must be unbundled and charges should be imputed for inputs from regulated
services. GPCA also argues that the following functions should be unbundled: answer
supervision, the intercept signal (indicating that the call cannot be completed as dialed), coin
collect and return functionality, and rate schedule functionality.  In addition, GPCA asserts that
these functionalities are necessary to provide fraud protection and to ensure that cross subsidies
are eliminated. CPA supports GPCA's recommended list of functionalities.
                                              138.   AT&T contends that LECs must offer public access line services for resale
at rates that reflect the economic cost of providing the services through TSLRIC-based prices,
while SW Bell argues that Section 252 pricing should not apply to Section 276 payphones
services. California PUC asserts that LECs should unbundle and provide tariffed payphone
services and that new services should be justified with cost studies. CPA argues that whatever
rates are established for payphone services should be imputed to the LEC payphone operations.
The RBOCs, USTA and GTE argue that unbundled payphone services should be tariffed at the
state level and therefore not subject to the new services test under the Commission's rules.
                                              iii.   Other Payphone Services
                                              139.   GPCA asserts that other services should be available on an equal access
basis, including fraud protection, special number assignments, installation and maintenance,
billing and collection, validation, per call tracking, and joint marketing. GPCA also argues that
if operator services are available in the LEC network, and commissions are paid to the LEC, the
commissions should be available to independent payphone providers. MCI contends that fraud
protection, installation and maintenance, per-call tracking, and call validation services should be
available to independent payphone providers. The RBOCs and Sprint argue that these additional
services are not necessary for PSPs to provide service.
                                              iv.   Registration and Demarcation Point for Payphones
                                              140.    The RBOCs, MCI, and Oklahoma CC assert that Section 68.2(a)(1) of our
rules should be amended to include registration of both instrument-implemented and central-
office-implemented payphones. The RBOCs argue that the embedded, installed base should be
grandfathered but new sets and refurbished sets (with added functionality) should have to be
registered.  GPCA does not oppose grandfathering the installed base of payphones from Part
68 registration, but argues that refurbished payphones should not be grandfathered. The RBOCs
contend that standards for interconnection should be established by revising Section 68.3 of our
rules to include specifications for central-office-implemented payphones. Anchorage Telephone
suggests that a technical committee should be established to develop interconnection standards.
                                              141.    AT&T, MCI, and Sprint contend that the demarcation point for LEC
payphones should be the same as it is today for independent payphone providers.  GPCA
argues that the demarcation point should be applied in a nondiscriminatory manner to all
payphones and that LECs should be required to set demarcation points for different types of sites
if the points will vary.  GPCA also asserts that embedded inside wire should be available to all
providers on an equal basis and that the demarcation point for embedded and new inside wire
should be the same. The RBOCs argue that the demarcation point should be treated flexibly.
In contrast, CPA argues that the demarcation point should not be flexible and should be at the
minimum point of entry.
                                              c.   Discussion
                                              i.   CPE Deregulation
                                              142.   We conclude that to best effectuate the 1996 Act's mandate that access
charge payphone service elements and payphone subsidies from basic exchange and exchange
access revenues be discontinued, incumbent LEC payphones should be treated as deregulated and
detariffed CPE.  The Commission determined in Computer II that CPE should be deregulated and
detariffed to ensure that the costs associated with regulated services are separated from the
competitive provision of the equipment used in conjunction with those services.  The
Commission concluded that CPE should be unbundled from its underlying transmission service
in order to prevent improper cross-subsidization.   Consistent with this prior finding, we
conclude that LEC payphones must be treated as unregulated, detariffed CPE in order to ensure
that no subsidies are provided from basic exchange and exchange access revenues or access
charge payphone service elements as required by the Act.
       143.   In Computer II, the Commission specifically excluded coin-operated
payphones from the definition of CPE. The Commission found that, unlike other CPE, which
could be unbundled from basic exchange service, coin-operated payphones were still integrated
with the LECs' network facilities and concluded that payphones owned by LECs and AT&T
should remain part of regulated basic communications service.  The Commission later extended
this determination to LEC coinless payphones.  Thereafter, the Commission, in the Coin
Registration Order, recognized the right of nonLEC payphone providers to interconnect smart
payphones to the interstate public switched network.   Following this order allowing the
interconnection of smart payphones, independent payphone providers began to compete with the
LECs.  Currently, there are approximately 1.5 million LEC payphones and approximately 350,000
competitively provided payphones.  We conclude that the market for payphone CPE is
competitive and that it is no longer necessary to treat payphone CPE differently by integrating
LEC payphones with the underlying service.  Moreover, we conclude that the transient public that
uses payphones will best be served by the wide availability of competitive payphones services.
We also conclude that it is not in the public interest to continue to treat LEC payphones as
regulated equipment, while treating independent payphones as CPE, and that deregulation of
payphones is consistent with the procompetitive approach set forth in Section 276.  We have
recently deregulated inmate payphonesand most of the parties in this proceeding agree that
incumbent LEC payphones should also be deregulated and detariffed.  Accordingly, we
conclude that incumbent LEC payphones must be deregulated, detariffed and classified as CPE
for regulatory purposes.
                                  144. We decline to limit the deregulation of payphones to those owned by larger
LECs, as suggested by the Florida PSC, because Section 276 is not limited in application to
larger LECs. Moreover, we conclude that the benefits we have observed in CPE deregulation
apply to payphones and that these benefits apply regardless of the size of the LEC.
                                  145.   We decline to require the BOCs or other incumbent LECs to provide their
payphone CPE through a structurally separated affiliate.  We discuss below the nonstructural
safeguards we require for BOCs to provide payphone CPE on an integrated basis and decline to
require, as proposed by some commenters, that other incumbent LECs be required to provide
CPE through structurally separate affiliates.   Section 276 does not require LEC or BOC
provision of payphone service through a separate subsidiary.  Although the 1996 Act does not
specifically prohibit the Commission from imposing a separation requirement, it requires the
establishment of nonstructural safeguards for the BOCs, a clear statement that nonstructural
safeguards, rather than structural separation, are mandated.  Moreover, Section 276 does not
require even nonstructural safeguards for other LECs.   Other sections of the 1996 Act, including
Section 272, BOC provision of interLATA services, and Section 274, BOC provision of
electronic publishing, specifically require structural separation.  In addition, in the BOC CPE
Relief Order we removed the structural separation requirements established in Computer II for
BOC provision of CPE because we concluded that nonstructural safeguards were sufficient to
deter cross-subsidization and discrimination and the high costs of mandatory structural separation
were not in the public interest.   This conclusion is also applicable in the context of BOC
provision of payphone CPE.  We also note that the Computer II structural separation
requirements were not applied to the provision of CPE by other LECs. Finally, we note that
nonstructural accounting safeguards applicable to the BOCs' provision of payphone service are
being established in a separate proceeding.  Accordingly, we do not impose structural
separation requirements for the provision of payphones by the BOCs or other LECs.   As we did
in the BOC CPE Relief Order, we preempt states' ability to impose structural separation
requirements on the payphone operations of the BOCs or other LECs.   We do not, however,
preempt the states from imposing on nonBOC LECs nonstructural safeguards that are no more
stringent than those we impose on the BOCs.
       ii.   Unbundling of Payphone Services
       146.                                                  We conclude, pursuant to Computer II, Section 201, 202, and 276 of the
Act, and previous CPE decisions, that incumbent LECs must offer individual central office coin
transmission services to PSPs under nondiscriminatory, public, tariffed offerings if the LECs
provide those services for their own operations. Under Computer II, all carriers must unbundle
basic transmission services from CPE.  Moreover, Section 202 of the Act prohibits a carrier
from discriminating unreasonably in its provision of basic service.  We conclude that
incumbent LECs must provide coin service so competitive payphone providers can offer
payphone services using either instrument-implemented "smart payphones" or "dumb" payphones
that utilize central office coin services, or some combination of the two in a manner similar to
the LECs.  Because the incumbent LECs have used central office coin services in the past, but
have not made these services available to independent payphone providers for use in their
provision of payphone services, we require that incumbent LEC provision of coin transmission
services on an unbundled basis be treated as a new service under the Commission's price cap
rules.  Because incumbent LECs may have an incentive to charge their competitors unreasonably
high prices for these services, we conclude that the new services test is necessary to ensure that
central office coin services are priced reasonably.  Incumbent LECs not currently subject to price
cap regulation must submit cost support for their central office coin services, pursuant to Sections
61.38, 61.39, or 61.50(i) of the Commission's rules.  Incumbent LECs must file tariffs with the
Commission for these services no later than January 15, 1997.  To the extent that this
requirement precludes the BOCs from complying with the Computer II, Computer III, and ONA
network information disclosure requirements, we waive the notice period in order to ensure that
these services are provided on a timely basis consistent with the other deregulatory requirements
of this order. Pursuant to this waiver, network information disclosure on the basic network
payphone services must be made by the BOCs by January 15, 1997.
       147.  We conclude that tariffs for payphone services must be filed with the
Commission as part of the LECs' access services to ensure that the services are reasonably priced
and do not include subsidies. This requirement is consistent with the Section 276 prescription
that all subsidies be removed from payphone operations.  We decline to require, as proposed by
AT&T, that the pricing regime under Sections 251 and 252 apply to all Section 276 payphone
services offered by incumbent LECs.  Section 276 does not refer to or require the application of
Sections 251 and 252 to LEC payphone services.  In addition, the elements and services to be
offered under Sections 251 and 252 are not available to entities that are not telecommunications
carriers, and many PSPs are not telecommunications carriers.  In addition, Section 276 does
not refer to or require the application of Sections 251 and 252 to LEC payphone services.
Moreover, Section 276 specifically refers to the application of Computer III and ONA
requirements, at a minimum for BOC provision of payphone services. Accordingly, we conclude
that Computer III tariff procedures and pricing are more appropriate for basic payphone services
provided by LECs to other payphone providers.  Pursuant to Section 276(c), any inconsistent state
requirements with regard to this matter are preempted.
       148.                                                  Parties argue that several other network services and network elements
should be unbundled and provided to payphone providers.  We decline to impose this requirement
on all LECs. We do not find that such unbundling is necessary to provide payphone services.
In addition, some features require substantial costs to make switch changes.    Moreover,
pursuant to Computer III and ONA requirements discussed below, BOCs must unbundle
additional network elements when requested by payphone providers based on specific criteria
established in the Computer III and ONA proceedings.  In Computer III, we decided that it was
not necessary to apply this requirement to other LECs, and we similarly conclude that it is not
necessary to direct other LECs to unbundle additional services or unbundled elements in this
proceeding because additional services are not necessary to provide payphone services and
because other LECs do not represent the same control of payphone facilities as the BOCs. We
note, however, that any basic transmission services provided by a LEC to its own payphone
operations must be available under tariff to other payphone providers pursuant to Computer II.
States may impose further payphone service unbundling requirements that are not inconsistent
with Section 276 requirements and requirements established herein.
       iii.  Other LEC Payphone Services
       149.                                                  We conclude that incumbent LECs should provide certain other services
to other payphone providers if they provide those services to their own payphone operations.
These services must be made available by the LEC or its affiliate to other payphone providers
on a comparable basis in order to ensure that other payphone providers do not receive
discriminatory service from the LECs once LEC payphones are deregulated, and to ensure that
other payphone providers can compete with LEC payphone operations.  Specifically, parties have
indicated the need for the following services to enable them to compete effectively for the
provision of payphones: fraud protection, special number assignments, installation and
maintenance, billing and collection, validation, per-call tracking, and joint marketing.  We have
already addressed above the per-call tracking requirements. We conclude that fraud protection,
special numbering assignments, and installation and maintenance of basic payphone services
should be available to other providers of payphone services on a nondiscriminatory basis.
Validation services are required by another proceeding.  We do not require the incumbent
LECs to joint market the payphone operations of other providers.  We have concluded that the
market for payphone CPE is competitive and LECs do not have any specific advantage in
marketing payphone services in a deregulated payphone market.  LEC personnel or affiliates will
have to market to payphone location providers in the same manner as other payphone providers
to obtain payphone locations.   Regarding billing and collection services, we conclude that if a
LEC provides basic, tariffed payphone services that will only function in conjunction with billing
and collection services from the LEC, the LEC must provide the billing and collection services
it provides to its own payphone operations for these services to independent payphone providers
on a nondiscriminatory basis.    We expect this requirement to apply, for example, in situations
where coin services require the LEC to monitor coin deposits and such information is not
otherwise available to third parties for billing and collection.  We adopt this requirement to
ensure that when a LEC has structured its payphone services in a way that they could not operate
without the LECs billing and collection services, those services will be available to other
payphone providers on the same basis they are available to the LEC.
       iv.   Registration and Demarcation Point for Payphones
       150.                                                  We amend our Part 68 rules to provide for the registration of central-office-
implemented coin payphones to enable independent payphone providers as well as the LECs to
utilize "dumb" payphones.  Under the Coin Registration Order and current Part 68 rules, only
instrument-implemented payphones can be registered for connection to the network. Amending
our rules enables independent payphone providers to have the same choices as LECs in providing
payphone services.  Parties did not object to proposed Part 68 changes in the Notice.
Accordingly, we adopt amendments to Section 68.2(a)(1) and Section 68.3 of the Commission's
rules to facilitate registration of both instrument-implemented and central-office-implemented
payphones. Consistent with the Commission's prior practice with regard to existing CPE,  in order
to avoid unnecessary costs, and because these existing phones do not present potential harm to
the network, we grandfather existing LEC payphones from the our revised Part 68 requirements,
unless the basic functionality in the payphones is changed. We require incumbent LECs to
submit proposed interconnection requirements to effectuate such interconnection within 90 days
of the effective date of this order.  The California Payphone Association (CPA) filed before the
Commission a Petition for Rule Making requesting that Section 68.2(a)(1) of the rules be
amended to allow for the registration of all coin-operated telephones and that the Commission
re-examine and clarify its interpretation of Section 68.2(a)(1).  We note that our decision herein
addresses the relief requested in the CPA petition.  Our Report and Order also effectively grants
a petition filed by the Public Telephone Council to treat payphones as CPE, and resolves the
issues raised in RM 8723 regarding exclusion of public payphones from end user access charges.
       151.   Consistent with our objective of treating incumbent LEC and independent
payphone providers' payphones in a similar manner, we conclude that the demarcation point must
be the same as incumbent LECs use for independent payphone providers today.   Accordingly,
the demarcation for all new LEC payphones must be consistent with the minimum point of entry,
demarcation point standards for other wireline services.  The Commission has previously
allowed equipment reclassified as CPE, resulting in a change in the demarcation point,  to remain
in the same location because of the costs involved in relocating the equipment. Accordingly,
we grandfather the location of all existing LEC payphones in place on the effective date of this
order because of the difficulty and cost of moving these payphones to meet our new demarcation
point requirements.  Similarly, we do not require that network interfaces be placed for existing
LEC payphones unless these payphones are substantially refurbished, for example, upgraded from
dumb to smart payphones or replaced.
      2.  Reclassification or Transfer of Payphone Equipment to Nonregulated Status
                                              a.  The Notice
                                              152.   In the Notice, we sought comment on the specific assets to be transferred,
and tentatively concluded that the assets to be transferred should be defined generally in terms
of CPE deregulation.  Thus, we tentatively concluded that the assets to be transferred may
include all facilities related to payphone service, including associated deferred income tax
reserves and depreciation, but likely would not include the loops connecting the payphones to the
network, or the central office "coin-service" or operator-service facilities supporting incumbent
LEC payphones.  We proposed to transfer the payphone equipment at undepreciated baseline
cost plus an interest charge based on the authorized interstate rate of return to reflect the time
value of money.  We also tentatively concluded that a phase-in period for a transfer of
payphone-related assets is not necessary, because payphone terminal equipment consists of less
than one percent of total plant investment for the entire LEC industry.  In the Notice, we also
sought comment on whether our approach to asset transfer is consistent with the 1996 Act's
definition of "payphone service" as the "provision of public or semi-public pay telephones, the
provision of inmate telephone service in correctional institutions, and any ancillary services."
                                              b.  Comments
                                              153.   Both USTA and MCI indicate that all public telephone terminal equipment,
including associated assets and depreciation, should be transferred, but not loops or central office
coin-service or operator-service facilities.  GVNW argues that the assets to be transferred
should include investment, depreciation, maintenance and overhead. Florida PSC asserts that
loops and central office features should not be deregulated so that they will be available to all.
 GTE argues that only pay station investment should be transferred.  The RBOCs list the assets
that should be transferred to include: payphones, enclosures, pedestals, coin counting machines,
vehicles, land, and buildings used solely for payphone services.
                                              154.  GPCA argues that location contracts associated with payphones should be
assigned an economic value to recover ratepayer equity and achieve competitive equity.  GPCA
contends that the Commission can use present value, appraisals, or auctions to value the
contracts.  Peoples also argues that the contracts should be valued, noting that it had valued
the location contracts and goodwill at approximately 70 percent in a recent purchase of payphone
assets. SDPOA argues that the name brand associated with LEC payphones should also be
valued in the transfer of assets.   CPA asserts that LEC payphone assets should be valued at
a going concern value and that a transfer at net book value would give the LECs a competitive
advantage.  Brill argues that BOCs should not be allowed financial and accounting advantages,
and cites other competitive advantages that, it states, the BOCs  have in some jurisdictions.
                                              155.   Ameritech and USTA argue that the accounting treatment for transferred
assets should be governed by Section 32.27(c) of our rules regarding transactions with
affiliates.  USTA argues that there is no need to alter our Part 64 rules to create cost pools or
to change current accounting practices.  Ameritech states that Section 32.27(c) requires that
assets be transferred at the higher of estimated fair market value or net book value and that the
cost allocation manual process provides the mechanism for making the asset transfer. The
RBOCs argue that the payphone assets should be valued at net book value, as the Commission
has done in the past including the recent Inmate Services Order, and that the Commission
should require LECs to transfer only those assets in their existing regulated accounts.  They
assert that location contracts are not in their regulated accounts and are intangibles that have
never been recognized in Commission rate proceedings. The RBOCs also argue that
establishing market value for payphone assets would be costly and cause delays.  AT&T asserts
that payphone assets should be valued at net book value in accordance with the Commission's
existing rules.
                                              156.   The RBOCs contend that the asset transfer should occur within 12
months. GPCA opposes a delay of up to 12 months for asset transfers and elimination of access
charge elements and subsidies, and argues that these requirements must be completed by
November 8, 1996. GPCA recommends that the Commission implement requirements no later
than 90 days after release of this Report and Order.  Ameritech argues that there is no need
for a phase-in period. MCI does not object to up to 12 months for transition, but argues that
the Commission should set a specific date.  USTA contends that the deregulation should be
flash cut in order to eliminate subsidies.
                                              c.  Discussion
                                              157.    As an initial matter, we have already determined that neither Section 276
nor our past experience requires the BOCs' competitive provision of payphone services to take
place on a prospective basis through the use of structurally separate affiliates.  Instead, in this
Report and Order, we require that, if a BOC does not provide payphone services through a
separate affiliate, it must provide these payphone services using nonstructural safeguards as
described in our Computer III Orders and ONA proceedings and consistent with Section 276,
because we conclude that, in the absence of structural separation, our nonstructural safeguards
provide sufficient protection against the possibility of cross-subsidization of nonregulated
activities.  Those nonstructural safeguards include the cost allocation rules and affiliate
transactions rules adopted in the Joint Cost Order.  Under those rules, the BOCs and other
incumbent LECs must classify each of their activities as regulated or nonregulated in accordance
with our requirements.  We now require that the BOCs and other incumbent LECs, subject to
our joint cost rules, classify their payphone operations as nonregulated for our Part 32 accounting
purposes.  We note, however, that the BOCs or other incumbent LECs are free to provide these
services using structurally separate affiliates if they choose to do so.  Therefore, our discussion
below will address two possible approaches a carrier may take in reclassifying its payphone
activities as nonregulated: (1) a carrier may maintain its payphone assets on the carrier's books
but treat the assets as nonregulated, or (2) a carrier may transfer its payphone assets to a separate
affiliate engaged in nonregulated activities.
                                      158.   In the Notice, we sought comment on three primary aspects of the
reclassification of payphone assets from regulated to nonregulated status.  We solicited comment
on the proper accounting treatment for the reclassification or transfer of the payphone assets from
a regulated activity to a nonregulated activity.  We also sought comments on the specific assets
to be reclassified or transferred.  We tentatively concluded that the assets to be transferred
should be defined generally in terms of CPE deregulation and that this would include all facilities
related to payphone service, including associated depreciation and deferred income taxes, but
likely would not include the loops connecting the payphones to the network, the central office
"coin-service," or operator service facilities supporting incumbent LEC payphones.  We next
tentatively concluded that a phase-in period was not necessary for the reclassification or transfer
of the payphone assets to nonregulated status and sought comment on this tentative conclusion.
We address these questions and tentative conclusions in the sections that follow.
                                      i.  Specific Assets Reclassified or Transferred
                                      159.  We adopt our tentative conclusion, supported by numerous commenters,
that the payphone assets to be reclassified or transferred include all facilities related to payphone
service, including associated accumulated depreciation and deferred income tax liabilities.  We
do not agree with GVNW that related expenses, such as maintenance, should also be reclassified
and transferred because expenses are period costs that should be associated with the status of
the service at the time they were incurred.  That is, expenses incurred during the period
payphones were regulated remain as regulated expenses and expenses incurred after payphone
deregulation should be classified as nonregulated expenses.  We, however, do not include as
payphone assets to be reclassified or transferred the loops connecting the payphones to the
network, the central office "coin-service," or operator service facilities supporting incumbent LEC
payphones because these are part of network equipment necessary to support basic telephone
services.
                                      160.  In adopting our tentative conclusion, we disagree with commenters such
as GPCA, Peoples, SDPOA and others who assert that, in all instances, the value of intangible
assets that have not been capitalized on the books of the carrier, such as location contracts and
brand names, should be included in the payphone assets reclassified to nonregulated status.
We note that these assets are not recorded in the carriers' Part 32 accounts and, in fact, are not,
without some triggering event such as a purchase or sale, required to be recorded by either
generally accepted accounting principles or our Part 32 accounting rules. We do, however,
discuss these intangible assets in more detail below as they relate to actual payphone asset
transfers to separate affiliates or, in certain limited instances, to an operating division of the
carrier.
                                      ii.  Accounting Treatment for Assets Reclassified or Transferred
                                      161.   Our tentative conclusion in the Notice called for the transfer of the LECs'
payphone assets to nonregulated operations to take place at the undepreciated baseline costs plus
interest charges at the authorized rate of return for interstate services.  The parties have correctly
pointed out that this standard only applies in those circumstances where there has been an
underforecasting of demand for nonregulated usage requiring a transfer to compensate ratepayers
for the additional risks they have borne due to the underforecasting.  Since the issue at hand
does not involve an underallocation of payphone costs between regulated and nonregulated
activities, we see no need to consider this approach any further.
                                              162.   The parties question whether the carriers should account for the transfer
or reclassification of the payphone assets from regulated to nonregulated status at "fair market
value" or the net book value of the assets.  While Section 276 provides us with discretion to
change our accounting rules to provide safeguards in excess of those provided by Computer III,
we believe that our existing rules are sufficient to meet the requirements of Section 276.  We
conclude that our existing rules require that this determination be based on whether a carrier
maintains the assets in its regulated Part 32 accounts or instead transfers the payphone assets to
a separate affiliate or an operating division within the carrier that is treated as an affiliate.
                                              163.   Carriers that do not transfer the payphone assets to a separate affiliate make
no reclassification accounting entries to their Part 32 regulated accounts.  The reclassification of
these assets to nonregulated status is accomplished instead through the operation of our Part 64
cost allocation rules.  Accordingly, we conclude that payphone investment in Account 32.2351,
Public telephone terminal equipment, and any other assets used in the provision of payphone
service, along with the associated accumulated depreciation and deferred income tax liabilities
should be directly assigned or allocated to nonregulated activities pursuant to our cost allocation
rules.  LECs should establish whatever Part 64 cost pools are needed and should file
revisions to their cost allocations manuals within sixty (60) days prior to the effective date of the
change.  This will ensure that the provision of payphone service is separate and distinct from
the provision of common carrier services in accordance with our rules.
                                              164.   On the other hand, carriers that transfer their payphone assets to either a
separate affiliate or an operating division that has no joint and common use of assets or resources
with the LEC and maintains a separate set of books in accordance with Section 32.23(b) of our
rules must account for the transfer according to the affiliate transactions rules of Section 32.27(c)
which require that the transfer be recorded at the higher of fair market value or cost less all
applicable valuation reserves (net book cost).  Fair market value has been defined as "the price
at which the property would change hands between a willing buyer and a willing seller, neither
being under any compulsion to buy or sell and both having reasonable knowledge of relevant
facts."  We conclude, that in instances when the transfer of payphone assets is governed by
Section 32.27(c), it is appropriate, as argued by CPA, that the going concern value associated
with the payphone business be taken into consideration in determining fair market value.  Such
going concern value should, as asserted by GPCA and Peoples, include intangible assets such as
location contracts that add value to the payphone business.  These intangible assets would be
considered in the theoretical purchase price negotiated by a willing buyer and seller.  We do not
believe, however, that the intangible asset value of BOC or LEC brand names should be included
in the determination of going concern or fair market value because a BOC or a LEC would not
transfer the right to use its brand name to a third party willing buyer.
                                              165.   The operation of our cost allocation rules and our affiliate transactions rules
serve to protect ratepayers from different concerns.  The cost allocation rules are used to provide
guidance to carriers as to how joint and common costs are to be allocated among regulated and
nonregulated activities that impact upon regulated activities.  These rules are premised on the
assumption that ratepayers benefit from the economies of scope associated with integrated
operations of regulated and nonregulated activities.  Since costs are recorded in regulated
accounts, the Commission retains the ability to scrutinize costs associated with nonregulated
activities.  For example, carriers must file cost allocation manuals.  These manuals are subject
to public comment and must be audited annually by an independent auditor.  The report of the
independent auditor must also be submitted to the Commission.  These procedures promote fair
cost allocation and protect regulated ratepayers from absorbing the costs of nonregulated
activities.  In addition, as assets are retained on the books of the carrier, any resulting gains from
a sale of those nonregulated assets accrue to the carrier and to the benefit of ratepayers and
shareholders.
                                              166.   Our affiliate transactions rules also afford a level of protection to
ratepayers.  These rules first protect ratepayers by requiring that when an affiliate transfers to or
performs a service for the carrier, those assets or services are not charged to regulated ratepayers
at an inflated price.  In addition, when the carrier transfers assets to an affiliate, the operation of
our affiliate transactions rules effectively captures on the carrier's books any appreciation in value
of those assets, thus ensuring that any eventual gains would accrue to the benefit of the
ratepayers and shareholders.
                                              167.   The difference in accounting treatment for payphone assets either
reclassified as nonregulated pursuant to our Part 64 cost allocation rules or transferred to a
separate affiliate and accounted for in accordance with our Part 32 affiliate transactions rules
stems primarily from the fact that in one instance there is no transfer, only a reallocation of
assets to nonregulated status, and in the other instance, there has been an actual transfer.  In
addition, in the first instance our rules are designed to promote fair cost allocation between
regulated and nonregulated activities; in the second instance, our rules are designed to protect
against cross-subsidies between separate companies by capturing any appreciated value of assets
transferred on the books of the carrier.
                                              168.   We note that some parties assert that, based on the holding of the Court
of Appeals for the D.C. Circuit in Democratic Central Committee, the proper measure of value
for an asset reclassified from regulated to nonregulated status is the asset's economic value, which
would ordinarily be its fair market value.  Democratic Central Committee involved the
distribution of capital gains realized from the sale to a third party of property that had been
transferred out of the rate base.  Although Democratic Central Committee provided several
general guiding principles on which the Commission fashioned its affiliate transactions rules, we
note that the facts in that case did not involve affiliate transactions.  Accordingly, we do not
think that case is directly applicable either to the situation where a carrier retains the payphone
assets on its books or transfers the payphone assets to a separate affiliate.  In both instances,
ratepayers are protected by the application of our accounting safeguards.
                                               169.  One of the primary goals of Section 276 is that a BOC shall not be allowed
to subsidize its payphone operations directly or indirectly from its telephone exchange operations
or its exchange access operations.  In order to achieve this goal, Congress required that we adopt
at a minimum the nonstructural safeguards of Computer III.  In Computer III, the Commission
reexamined its regulatory regime for the provision of enhanced services and established
nonstructural safeguards for the provision of enhanced services on an integrated basis.  These
safeguards included the cost allocation rules and the affiliate transactions rules the Commission
developed in the Joint Cost Order.  These nonstructural safeguards include our Part 64 cost
allocation rules and our Part 32 affiliate transactions rules.  We also note that the Conference
Report states:
      "[t]he BOC payphone operations will be transferred, at an appropriate valuation,
      from the regulated accounts associated with local exchange services to the BOC's
      unregulated books. The Commission's implementing safeguards must be at least
      equal to those adopted in the Commission's Computer III proceedings."
We believe that, consistent with Computer III, our cost allocation rules and affiliate transactions
rules, as discussed above, provide rules for the appropriate valuation of the reclassification or
transfer of payphone assets and we see no compelling argument to deviate from those well-settled
rules at this time.
                                              170.   APCC and GPCA argue that the legislative history cited in the previous
paragraph makes clear that Congress intended that the assets be "transferred."  We disagree.
We have already stated that Section 276 does not require that a BOC establish a separate affiliate
to hold the payphone assets.  In fact, the Senate version of Section 276 authorized the
Commission to determine whether to require Bell operating companies "to provide payphone
service...through a separate subsidiary..."  This authorization was deleted from the final version
of Section 276.  If Congress intended that there be a "transfer", we believe that Congress would
have required the BOCs to establish separate affiliates for their payphone operations.  Congress
did not do so.  Instead, Congress in the very next sentence of the legislative history states that
the Commission's implementing safeguards must, at a minimum, be at least equal to those
adopted in the Computer III proceedings.  These safeguards include our cost allocation rules.
Our cost allocation rules are applicable when a carrier maintains integrated regulated and
nonregulated activities.  To read congressional intent to require a "transfer" would effectively
eliminate our cost allocation rules from application to payphone operations.  This is contrary to
Section 276 which states that the Commission shall prescribe regulations that prescribe a set of
nonstructural safeguards for BOC payphone service which "at a minimum, include[s] the
nonstructural safeguards equal to those adopted in the Computer Inquiry-III...proceeding."
Computer III included our cost allocation rules as a part of the nonstructural safeguards and thus
they are applicable to BOC payphone operations.  To exclude the cost allocation rules would be
contrary to Section 276's intent that they be included.
                                              171.   We also agree with the RBOCs that our cost allocation rules only require
a reassignment of payphone assets from regulated to nonregulated status.  In reality, carriers
maintain these assets in regulated Part 32 accounts and do not establish "unregulated books."
These accounts are considered "regulated" accounts even though a carrier may assign the entire
amount in an account to nonregulated activities.  Using regulated accounts serves the public
interest by allowing Commission scrutiny of nonregulated activities as they potentially impact
regulated activities, maintaining a minimal amount of regulatory burden while protecting
regulated ratepayers from cross-subsidies and cost misallocations, and preserving economies of
scope that accrue to ratepayers from integrated operations.   We believe regulated ratepayers are
better served by the requirement that carriers account for payphone operations in regulated
accounts than if we required them to account for payphone operations in "nonregulated" accounts
or "unregulated books."
                                              iii.  Other Matters
                                              172.   We require the LECs to reclassify any pay telephone investments recorded
in Account 32.2351, Public telephone terminal equipment, and other assets used in the provision
of payphone service, along with the associated accumulated depreciation and deferred income tax
liabilities, from regulated to nonregulated status pursuant to our Part 64 and Part 32 rules by
April 15, 1997 when the associated revised tariffs are effective.  We thus agree with Ameritech
that we should adopt our tentative conclusion that a phase-in period is unnecessary.
      3.  Termination of Access Charge Compensation and Other Subsidies
                                              a.  The Notice
                                              173.   In the Notice, we tentatively concluded that incumbent LECs must reduce
their interstate CCL charges by an amount equal to the interstate allocation of payphone costs
currently recovered through those charges.  LECs subject to the price cap rules would treat this
as an exogenous cost change to the Common Line basket pursuant to Section 61.45(d) of the
Commission's rules.  We requested incumbent LECs to identify in their comments all accounts
that contain costs attributable to their payphone operations and sought comment on whether
specific cost pools and allocators should be used to capture the nonregulated investment and
expenses associated with their payphone operations.  We also sought comment on whether a
transition period is necessary to move from subsidized compensation to per-call compensation
for LEC payphones, and how that transition would proceed.  We also proposed, in accordance
with the mandate of Section 276(b)(1)(B), to require incumbent LECs to remove from their
intrastate rates any charges that recover the costs of payphones.  Additionally, we solicited
comment on whether we should set a deadline and a specific mechanism for elimination of any
intrastate subsidies, or whether it would be consistent with the statute, as well as preferable from
a policy perspective, to permit the states to formulate their own mechanisms for achieving this
result within a specific time frame.
                                              174.   We also tentatively concluded that, to avoid discrimination among PSPs,
the Subscriber Line Charge should apply to subscriber lines that terminate at both LEC and
competitive payphones.  We sought comment on whether, to the extent that LECs charge or
impute to their own payphone operations only the multi-line business SLC, which is less than the
full interstate cost of the subscriber lines connecting their payphones to the network, and recover
the balance of the cost of these lines through the CCL charge, they may, in effect, be subsidizing
their payphones with access charge revenues, in violation of Section 276.  We sought comment
on whether LECs in those circumstances should charge or impute to their own payphone
operations, as well as to independent payphone providers, an additional monthly charge
representing the difference between the SLC cap and the full interstate cost of these subscriber
lines.  We also sought comment on whether comparable changes should be made to incumbent
LECs' intrastate rates.
                                              b.  Comments
                                              i.   Carrier Common Line Charge
                                              175.   The Florida PSC agrees that LECs must reduce their interstate CCL charge
by an amount equal to their interstate allocation of payphone set costs currently recovered
through these charges.  USTA asserts that there is no need for a federally-imposed cost
support, create cost pools, or change current accounting procedures.  USTA asserts that
incumbent LECs subject to price caps should remove the costs of payphone operations through
an exogenous cost adjustment to the common line price cap basket price cap index (PCI), and
that rate-of-return LECs should adjust regulated rates for the charges in asset and operating costs
based on the results of the accounting changes made to assets and expenses.
                                              176.   Ameritech agrees that exogenous treatment is appropriate for transfer of
payphone CPE from regulated to nonregulated status. One Call agrees that the CCL charge
should be reduced to eliminate both interstate and intrastate subsidies.  MCI argues that all
direct and indirect costs for interstate and intrastate costs should be removed and that Account
2351 and associated expenses and additional interstate allocated costs should be removed.
GPCA contends that the payphone providers' end-user common line charges should be in the
carrier common line fund. AT&T argues that the removal of payphone costs from interstate
access should not be transferred to the Base Factor Portion of the Common Line Basket, but
should remain as part of the Part 69 category.
                                              177.  CPA argues that attempts to extend the period should be rejected.  In
contrast, GVNW and Texas PUC assert that a short transition period is necessary to recover
costs. The RBOCs argue for a transition period of up to 12 months during which per-call
compensation would not be available to the RBOCs, while GPCA argues the there should be no
more than a 90-day transition period after release of this Report and Order.  NECA asserts that
the CCL charge should continue until the Commission finalizes decisions on access reform and
universal service have been made.  NECA argues there will be no discrimination because LECs
can bill the CCL charge for all interstate calls and the SLC to all payphones.
                                              ii.   Intrastate Rates
                                              178.   Florida PSC asserts that intrastate adjustments vary and that a national
scheme is impractical.  Instead, the Commission could set a date for removal of state subsidies.
California PUC is concerned that, if LECs cannot recover the interstate costs of subscriber lines
because the CCL mechanisms are removed, the state's local phone charges and the state-mandated
pay station service charge may not fully recover costs. USTA argues that the payphone line
is a common line and should be tariffed at the state level. USTA also contends that states
should be permitted to formulate mechanisms to remove intrastate costs.
                                              iii.   Subscriber Line Charge
                                              179.   Florida PSC and the Ohio PUC argue that access lines terminating at LEC
payphones should be subject to SLC imputation. Ameritech and SW Bell argue that a SLC
should be imputed to all payphones.  GPCA opposes application of the SLC to payphones but
if the Commission imposes such a requirement, GPCA also opposes any additional charge in
addition to what is required of other end users. USTA also opposes imposition of an additional
charge for the difference between the SLC cap and the full cost of subscriber lines.  USTA
argues that if there are any loop subsidies they will be uniform for all loops, not just payphone
loops.  SW Bell argues that the SLC should apply to payphones because payphones use
common lines and access the public switched network just like any other common line service.
Sprint supports the additional charge to all PSPs including LECs to the extent that the multi-line
business SLC is less than the full interstate cost of subscriber lines.
                                              c.   Discussion
                                              180.   In the telephone network, payphones, as well as all other telephones, are
connected to the local switch by means of a subscriber line.  The costs of the subscriber line that
are allocated to the interstate jurisdiction are recovered through two separate charges:  a flat-rate
SLC assessed upon the end-user customer who subscribes to local service; and a per-minute CCL
charge assessed upon IXCs that recovers the balance of the interstate subscriber line costs not
recovered through the SLC.  LEC payphone costs are also included in the CCL charge.  The CCL
charge, however, applies to interstate switched access service that is unrelated to payphone
service costs.  While independent payphone providers are required to pay the SLC for the loop
used by each of their payphones, LECs have not been required to pay this charge because the
subscriber lines connected to LEC payphones have been recovered entirely through the CCL
charge.
                                              181.   We conclude that to implement Section 276 (b)(1)(B) of the 1996 Act,
incumbent LECs must reduce their interstate CCL charges by an amount equal to the interstate
allocation of payphone costs currently recovered through those charges.  LECs subject to the
price cap rules would treat this as an exogenous cost change to the Common Line basket
pursuant to Section 61.45(d) of the Commission's rules. The incumbent LECs' residential SLC
is limited to $3.50 per month and their multi-line business SLC is currently subject to a $6.00
per month cap.  Those LECs with interstate subscriber line costs that exceed this amount
recover a portion of the interstate costs of subscriber lines through the CCL charge. The issue
of the appropriate interstate SLC has been referred to a Federal-State Joint Board.
                                              182.   Incumbent LECs today generally recover payphone costs allocated to the
interstate jurisdiction through the per-minute carrier CCL charge they assess on IXCs and other
interstate access customers for originating and terminating interstate calls.  The incumbent LEC
assesses the independent payphone provider a SLC (at the multi-line business rate) to recover the
payphone common line costs associated with that phone.  In the case of competitive payphones,
an independent payphone provider recovers its payphone costs out of the revenue it receives from
end users, premises owners, and OSPs to whom its payphones are presubscribed. The 1996 Act
mandates that the Commission "discontinue the intrastate and interstate carrier access charge
payphone service elements and payments ... and all intrastate and interstate subsidies from basic
exchange and exchange access revenues[.]"
                                              183.  Accordingly, we adopt rules that provide for the removal from regulated
intrastate and interstate rate structures of all charges that recover the costs of payphones (i.e., the
costs of payphone sets, not including the costs of the lines connecting those sets to the public
switched network, which, like the lines connecting competitive payphones to the network, will
continue to be treated as regulated).  Therefore, we conclude that incumbent LECs must file
revised CCL tariffs with the Common Carrier Bureau no later than January 15, 1997 to reduce
their interstate CCL charges by an amount equal to the interstate allocation of payphone costs
currently recovered through those charges, scheduled to take effect April 15, 1997.  LECs subject
to the price cap rules must treat this as an exogenous cost change to the Common Line basket
pursuant to Section 61.45(d)(1)(v) of our rules.  Incumbent LECs must identify and report
accounts that contain costs attributable to their payphone operations.  Incumbent LECs must
identify specific cost pools and allocators that are required to capture the nonregulated investment
and expenses associated with their payphone operations.  LECs must file this information with
the Common Carrier Bureau by January 15, 1997.
                                              184.   LECs that file tariffs pursuant to Section 61.38 or Section 61.39, rate-of-
return regulation, or Section 61.50, optional incentive regulation, must file tariffs to revise
interstate CCL rates to remove the payphone investment and any other assets used in the
provision of payphone service along with the accumulated depreciation and deferred income tax
liabilities from the common line costs recovered through those rates.  As stated previously, these
LECs must reclassify payphone assets from regulated to nonregulated activity pursuant to Part
64 rules.  Expenses incurred after payphones are deregulated should be classified as nonregulated
expenses.  The CCL rate reduction must account for overhead costs assigned to common line
costs as a result of payphone investment and expenses.  We require these LECs to recalculate
their CCL rates, using the same data and methods they used to develop their current CCL rates,
except those calculations should exclude payphone costs.
                                              185.   Price cap LECs are also required to revise their CCL rates, using the
following method to remove payphone costs from their CCL rates.  First, price cap LECs should
develop a common line revenue requirement using ARMIS costs for calendar year 1995.  Second,
price cap LECs are required to develop a payphone cost allocator equal to the payphone costs
in Section 69.501(d) divided by total common line costs, based on 1995 ARMIS data.  Each LEC
is required to reduce its PCI in the common line basket by this payphone cost allocator minus
one.
                                              186.   We require, pursuant to the mandate of Section 276(b)(1)(B), incumbent
LECs to remove from their intrastate rates any charges that recover the costs of payphones.
Revised intrastate rates must be effective no later than April 15, 1997.  Parties did not submit
state-specific information regarding the intrastate rate elements that recover payphone costs.
States must determine the intrastate rates elements that must be removed to eliminate any
intrastate subsidies within this time frame.
                                              187.    Finally, we conclude that, to avoid discrimination among payphone
providers, the multiline business SLC must apply to subscriber lines that terminate at both LEC
and competitive payphones.   We conclude that the removal of payphone costs from the CCL and
the payment or imputation of a SLC to the subscriber line that terminates at a LEC nonregulated
payphone will result in the recovery of LEC payphone costs on a more cost-causative basis
consistent with the requirements of the 1996 Act.  No action we take today affects the authority
of states to address the state ratemaking implications of reclassification or transfer of payphone
assets.
      4.  Deregulation of AT&T Payphones
                                              a.  The Notice
                                              188.    In the Notice, we tentatively concluded that payphones provided by AT&T
should be classified as CPE, finding that discontinuing possible subsidies for AT&T payphones
would be congruent with the 1996 Act's requirement that the Commission discontinue subsidies
for other payphones (i.e., those owned by incumbent LECs) and would provide for symmetrical
regulation of the payphone industry.  We cited two other reasons why this proposed action is
in harmony with the other rules we proposed in this proceeding.  First, since Tonka Tools,
AT&T payphones have been subject to the same regulatory treatment as BOC payphones.  Once
LEC telephones, including those provided by the BOCs, are declared to be CPE, the basis for
treating AT&T payphones as network equipment no longer exists.  Second, we believe that
deregulating AT&T payphones is consistent with our general policy to deregulate non-dominant
carriers.  In the Notice, we also tentatively concluded that the bundling of pay telephone
equipment with underlying transmission capacity would be treated pursuant to the rules proposed
in the Interstate, Interexchange Marketplace proceeding.
                                              b.  Comments
                                              189.  Those commenting on AT&T payphones were unanimous in concluding that
AT&T payphones should be deregulated. The RBOCs assert that AT&T payphones should be
deregulated in the same manner as LEC payphones. AT&T argues, however, that AT&T
payphones should not be treated like LEC CPE but should be removed from all regulation except
Part 68 registration and treated like independent payphone providers.
                                              c.  Discussion
                                              190.   We conclude that AT&T payphones must be deregulated, detariffed and
treated as CPE.  As we concluded above, there is a competitive market for payphones, and,
pursuant to Section 276, subsidies must be removed from payphone service.  AT&T payphones
have been treated like BOC payphones for regulatory purposes.  It would be incongruous to
deregulate payphone equipment owned by all other carriers except AT&T.    We conclude,
therefore, that AT&T payphones must be removed from regulation and treated as independent
PSPs' payphones.  Accordingly, we require that AT&T follow the same procedures discussed
above for valuing LEC payphone assets and transferring them to nonregulated  status.  After
deregulation, AT&T payphones will be subject to the same requirements as independent
payphone provider payphones.
                                              191.   With regard to the issue of bundling of transmission capacity and payphone
CPE, we note that in the Interstate, Interexchange Marketplace Notice, we stated that we would
consider in this proceeding "the issue of bundling pay telephone equipment with the underlying
transmission capacity."  In the Notice, we tentatively concluded that other IXC bundling issues
should be treated under the same rules that we proposed in the Interstate, Interexchange
Marketplace proceeding.  We decline to adopt in this proceeding any rules regarding the
bundling of payphone CPE with the underlying transmission capacity.  We do not have a
sufficient record to revise, with regard to payphone CPE, the Commission's conclusion in the
Computer II proceeding that there are public interest benefits in unbundling CPE from the
underlying transmission service. The issue of IXC CPE bundling will be addressed in the
Interstate, Interexchange Marketplace  proceeding.
C. NONSTRUCTURAL SAFEGUARDS FOR BOC PROVISION OF PAYPHONE
SERVICE
                                              192.  The foregoing parts establish a compensation arrangement that applies
equally to the payphone operations of the BOCs, other LECs, AT&T and PSPs not affiliated with
LECs.  In this part, we address certain operating requirements that are imposed only on the
BOCs' payphone operations.
                                              193.   Section 276(b)(1)(C) directs the Commission to "prescribe a set of
nonstructural safeguards for Bell operating company payphone service to implement the
provisions of paragraphs (1) and (2) of subsection (a), which safeguards shall, at a minimum,
include the nonstructural safeguards equal to those adopted in the Computer Inquiry - III (CC
Docket No. 90-623) proceeding[.]"  As referred to in Section 276(b)(1)(C), Section 276(a)
provides that a BOC "(1) shall not subsidize its payphone service directly or indirectly from its
telephone exchange service operations or its exchange access operations; and (2) shall not prefer
or discriminate in favor of its payphone service."
      1.  The Notice
                                              194.   In the Notice, we tentatively concluded that all Computer III
nonstructural safeguards must be applied to meet our obligation "to prescribe nonstructural
safeguards for [BOC] payphone service" under the 1996 Act.  We also solicited comment on
whether there are other nonstructural safeguards that, while not explicitly specified in  Computer
III, should be applied to BOC payphones.
                                              195.   To ensure BOC compliance with the Computer III and Open Network
Architecture (ONA) requirements, we proposed a requirement that each BOC file, within 90 days
of the effective date of this Report and Order, an initial Comparably Efficient Interconnection
(CEI) plan describing how it intends to comply with the CEI equal access parameters and
nonstructural safeguards for the provision of payphone services.
                                              196.   Currently, the Commission regulates BOC provision of enhanced services
through CEI and ONA requirements that mandate unbundled nondiscriminatory access to BOC
network features and functionalities.  Pursuant to these requirements, BOCs must file a service-
specific CEI plan before offering any enhanced service on an integrated basis.  A BOC must
demonstrate in its CEI plan how it would provide competing enhanced service providers with
"equal access" to all basic underlying network services the BOC used to provide its own
enhanced services.  Subsequently, the Commission required BOCs to develop and implement
ONA plans detailing more fundamental unbundling of their basic network services.  ONA
requires further unbundling of network elements than under CEI because it is not limited to those
elements associated with specific BOC enhanced services.  In 1993, the Common Carrier
Bureau lifted structural separation requirements after each BOC demonstrated that its ONA plan
complied with the BOC Safeguards Order.  Following the California III court decision, the
Commission has continued to require BOCs to file CEI plans for each individual enhanced
service they offer in addition to fulfilling the access requirements of its ONA plan.
      2.  Comments
                                              197.   California PUC, One Call, Ameritech, and USTA support Computer III
safeguards and CEI. Florida PSC argues that, if nonstructural safeguards are used, specific cost
pools and allocators should be used to identify the existence of subsidies.    GPCA supports
the Computer III safeguards and argues that they should be strengthened by requiring that the
BOCs also:  (1)  provide unbundled specific services such as answer supervision and flexible call
rating based on subscribers specifications, and continue to provide dialtone and blocking and
screening; (2)  offer volume discounts on a equal basis to aggregators; (3) provide service order
processing; (4) implement safeguards against interference with letters of agency; (5) follow
Customer Proprietary Network Information (CPNI) restrictions; (6) file CEI plans; (7) conduct
independent audits; and (8) maintain publicly available contracts.   SW Bell argues that there
is no incentive for cross-subsidization with price cap regulation and the elimination of sharing.
Ameritech disagrees with the Commission that a separate proceeding is necessary to develop
accounting safeguards different than those applied in  Computer III.  Inmate Coalition argues
that additional safeguards should include accounting and fraud control, billing and collection, and
CPNI availability. USTA argues that pursuant to Section 276, nonstructural safeguards only
apply to BOCs.  GPCA argues that the Computer III safeguards should apply to other LECs,
particularly those with annual revenues greater than 100 million dollars, including GTE, Sprint
and Alltel, and LECs that service Puerto Rico and the Virgin Islands.   Ohio PUC argues that
Computer III nonstructural safeguards should apply to all LECs if payphones are deregulated and
structural separation is not imposed.
                                              198.   AT&T and GPCA support the imposition of CEI plans on the BOC
provision of payphone services. The RBOCs and PacTel argue that CEI plans are not necessary
because these are basic, not enhanced services.  AT&T contends that CPNI requirements
should apply to BOC provision of payphones. One Call argues that if CPNI is not restricted,
it should be available to all providers. GPCA contends that information about the use of LEC
payphones is CPNI that should be available to any party upon reasonable request.  AT&T
supports the network information disclosure requirements established in our implementation of
Section 251 of the 1996 Act, plus the addition of two requirements that BOCs file network
information disclosures with the Commission, and that there be one year notification of network
changes.
      3.   Discussion
                                              a.   Nonstructural Safeguards
                                              199.   In addition to the accounting safeguards that we will adopt with respect to
payphone services in the accounting safeguards proceeding, we conclude that the Computer III
and ONA nonstructural safeguards will provide an appropriate regulatory framework to ensure
that BOCs do not discriminate or cross-subsidize in their provision of payphone service.  The
Commission and the BOCs have substantial experience in the application of these safeguards that
will facilitate their use in the context of BOC payphone services.  We conclude that we do not
have to adopt any additional safeguards beyond Computer III and ONA because of the
comprehensive nature of that regulatory structure and the lack of a record necessary to conclude
that a more burdensome framework should be adopted and is in the public interest.  As discussed
above, we decline to require structural separation requirements.  To ensure that the BOCs comply
with the Computer III and ONA nonstructural separation requirements for the provision of
payphone services, we require that, within 90 days after the effective date of this Report and
Order, BOCs must file CEI plans describing how they will comply with the Computer III
unbundling, CEI parameters, accounting requirements, CPNI requirements as modified by Section
222 of the 1996 Act, network disclosure requirements,  and installation, maintenance, and quality
nondiscrimination requirements.
      200.                                         The Computer III nonstructural safeguards currently apply to a BOC's
provision of payphone service if enhanced services are provided through the payphone.  Under
the Computer III and ONA framework, BOCs are permitted to provide enhanced services on an
integrated basis subject to nondiscrimination safeguards.  The safeguards the Commission adopted
in Computer III and ONA include:  (1) nondiscriminatory access to network features and
functionalities;  (2) restrictions on the use of CPNI; (3) network information disclosure rules;
(4) nondiscrimination in the provision, installation, and maintenance of services as well as
nondiscrimination reporting requirements; and  (5) cost accounting safeguards.  We conclude that
all Computer III and ONA nonstructural safeguards must be applied to meet our obligation under
the 1996 Act.   Pursuant to these requirements, we note that any basic services provided by
a BOC to its payphone affiliate must be available on a nondiscriminatory basis to other payphone
providers and that payphone providers may request additional unbundled payphone services
through the 120 day ONA service request process.
                                              201.   Except for the Commission's Part 64 cost allocation rules and Part 32
affiliate transaction rules, we decline to apply the Computer III nonstructural safeguards to other
LECs.  We concluded in the BOC CPE Relief Order that application of those safeguards would
be "unduly burdensome and not necessary to protect against potential anticompetitive conduct."
We similarly, declined to apply Computer III and ONA nonstructural safeguards to other LECs,
except GTE.  Moreover, Section 276 specifically directs the Commission to establish
nonstructural safeguards for the BOCs, but does not include such a requirement regarding other
LECs.
                                              b.  BOC CEI Plans
                                              202.   We  require that each BOC file, within 90 days of the effective date of this
Report and Order, an initial CEI plan describing how it intends to comply with the CEI equal
access parameters and nonstructural safeguards for the provision of payphone services. In
Computer III, CEI plans have been an integral part of ensuring that BOCs do not discriminate
in providing basic underlying services to enhanced services providers. We likewise require the
filing of CEI plans for payphone services, even though we have traditionally only required such
plans for the BOC provision of enhanced services, to ensure that the BOCs provide payphone
services in a nondiscriminatory manner and consistent with other Computer III and ONA
requirements. Finally, we conclude that this requirement is consistent with the requirement in
Section 276 that we establish safeguards, at a minimum, "equal to those adopted in the Computer
III Inquiry."
                                              203.   In a CEI plan, a BOC must describe how it intends to comply with the CEI
"equal access" parameters for the specific payphone service it intends to offer.  The CEI equal
access parameters include:  interface functionality; unbundling of basic services; resale; technical
characteristics; installation, maintenance, and repair; end user access; CEI availability;
minimization of transport costs; and availability to all interested customers or enhanced service
providers.
                                              204.   In its CEI plan, a BOC must explain how it will unbundle basic payphone
services.  Thus, a BOC must indicate how it plans to unbundle, and associate with a specific rate
element in a tariff, the basic services and basic service functions that underlie its provision of
payphone service.  Nonproprietary information used by the BOC in providing the unbundled
basic services will be made available as part of CEI.  In addition, any options available to the
BOC in the provision of such basic services or functions would be included in the unbundled
offerings.
                                              205.   A BOC also must explain in its CEI plan how it will comply with the CPNI
requirements.  We have continued to require compliance with the Computer III and ONA CPNI
requirements that are not inconsistent with Section 222 of the 1996 Act, which was immediately
effective.  In the CPNI NPRM, we are currently examining a carrier's obligations under the
CPNI provisions of the 1996 Act.   We disagree with GPCA's contention that pursuant to the
Commission's CPNI requirements, usage of LEC payphones should be treated as aggregate CPNI
that should be made available to any party upon request.  Under Computer III and ONA BOCs
must make aggregate CPNI available to third parties if they make it available to BOC personnel
for marketing.  This requirement does not apply merely upon a third party's request, and the
requirement does not apply to LECs other than the BOCs.  Moreover, aggregate CPNI includes
compilations of CPNI information, not individual locations.  We will consider the requirements
for LEC provision of aggregate CPNI under Section 222 in the CPNI proceeding.
                                              206.   BOCs must comply with the Computer III and ONA network information
disclosure requirements.  The BOCs cannot design new network services or change network
technical specifications to the advantage of their own payphones.  Pursuant to these rules, the
BOCs must disclose information about changes in their networks or new network services at two
different points in time.  First, disclosure must occur at the "make/buy" point:  when a BOC
decides to make for itself, or procure from an unaffiliated entity, any product whose design
affects or relies on the network interface.  Second, a BOC must publicly disclose technical
information about a new service 12 months before it is introduced.  If the BOC can introduce the
service within 12 months of the make/buy point, it would make a public disclosure at the
make/buy point.  The public disclosure, however, must not occur less than six months before the
introduction of the service.
                                              207.   In addition, BOCs must comply with the Computer III and ONA
requirements regarding nondiscrimination in the quality of service, installation, and maintenance.
BOCs must indicate in their CEI plans how they will comply with these requirements.  We do
not impose any new continuing reporting requirement because BOCs are already subject to
reporting requirements pursuant to Computer III and ONA. BOCs must report on payphone
services as they do for other basic services.
D.    ABILITY OF BOCs TO NEGOTIATE WITH LOCATION
      PROVIDERS ON THE PRESUBSCRIBED INTERLATA CARRIER
                                              208.   Section 276(b)(1)(D) of the 1996 Act directs the Commission to eliminate
the court-ordered competitive barrier prohibiting the BOCs from participating in the selection of
presubscribed interLATA carriers to their payphones, unless we find such activity to be contrary
to the public interest.   While independent payphone service providers, as well as non-BOC
LECs, may receive a portion of the commissions from IXCs on interLATA operator service calls
using the presubscribed carrier to their payphones, the BOCs do not receive any revenues directly
from these calls.  At the same time, BOCs have received subsidies from local access services for
their payphone operations, which have not been available to independent payphone service
providers.  Section 276 promotes competition for the provision of payphone services by
directing the elimination of both these market-distorting factors.
    1.                            Is BOC Ability to Negotiate Presubscription
                                  in the Public Interest?
                                  a.   The Notice
                                  209. Under Section 276(b)(1)(D) of the 1996 Act, the Commission is to "provide
for Bell operating company payphone service providers to have the same right that independent
payphone service providers have to negotiate with the location provider on the location provider's
selecting and contracting with, and, subject to the terms of any agreement with the location
provider, to select and contract with, the carriers that carry interLATA calls from their
payphones, unless the Commission determines in the rulemaking pursuant to this section that it
is not in the public interest."  The legislative history of Section 276 states that the location
provider "has the ultimate decision-making authority in determining interLATA services in
connection with the choice of payphone providers."
                                  210. In the Notice, the Commission sought comment on whether the BOCs
should be permitted to select and contract with the interLATA carriers that carry interLATA
traffic from BOC payphones.  The Commission sought comment on whether the ability to
select the interLATA carrier serving their payphones is likely to permit the BOCs to behave
anticompetitively in the payphone market in the absence of safeguards to prevent cost
misallocations and discrimination.  Similarly, the Commission sought comment on whether the
structural and accounting safeguards mandated under Sections 271 and 272 of the 1996 Act, and
any Commission rules implementing these safeguards, are sufficient to prevent anticompetitive
abuses.  The Commission also sought comment on to what extent a BOC not authorized to
provide in-region interLATA service under Section 271 of the 1996 Act should be allowed to
participate in the selection of the interLATA carrier, especially if the BOC has a non-attributable
interest in the interLATA carrier, such as an option to purchase or an agreement to merge.
                                  b.Comments
                                  211. The RBOCs and Ameritech argue that the Act specifically directs the
Commission to allow the BOCs to negotiate presubscription carriers for their payphones unless
the Commission makes a finding that such authority is contrary to the public interest.  Other
commenters, however, argue that the Commission should grant this authority only if and when
it can affirmatively conclude that allowing the BOCs to negotiate would be in the public
interest.  Oncor additionally asserts that consideration of this issue is premature until such time
as the Commission has adopted rules addressing other requirements of the 1996 Act, including
those governing interconnection rights, and the authority of BOCs to provide in-region
interLATA service.
                                      212.  The RBOCs assert that granting them equal rights with the independent
PSPs to negotiate presubscription for their payphones promotes the public interest.  The RBOCs
argue that an essential assumption underlying the 1996 Act is that competition is in the public
interest, and it is therefore in the public interest to allow the them to compete against the
independent PSPs with respect to presubscription of their payphones.  The RBOCs assert that
such authority is critical to establishing market parity and increasing competition between BOC
and non-BOC PSPs.  The RBOCs and Ameritech state that under the current rules, they are
at a competitive disadvantage due to the inability to offer "one-stop shopping" to location
providers who wish to deal with a single entity for equipment, local service and toll service.
The RBOCs also argue that the existing presubscription restriction denies consumers the benefits
of true competition by preventing them from aggregating interLATA and intraLATA traffic in
order to negotiate the best possible rates from interLATA carriers, while allowing the independent
PSPs to do so.  Additionally, the RBOCs and Ameritech contend that if they are denied the
equal opportunity to negotiate interLATA carriers, while simultaneously being stripped of existing
payphone-supporting subsidies, the public will be harmed by the likely reduction in the number
of payphones they provide.  Finally, the RBOCs and Ameritech assert that granting them equal
opportunity to choose the carrier for their payphones would serve to protect consumers from
price-gouging carriers, since they have a strong interest in protecting the reputation and brand
name recognition of their payphones.
                                  213. Other commenters, including state regulatory agencies, agree that increased
competition resulting from authorizing the BOCs to negotiate for presubscription of their
payphones would, standing alone, be in the public interest.  Many non-LEC commenters,
however, also express concern that such authority would present serious risk of exclusionary
conduct by the BOCs, which would be contrary to the public interest.
                                  214. Many of the commenters expressing concern about the BOCs' ability to act
anticompetitively if allowed to negotiate presubscription carriers with location providers pointed
to the BOCs' 80 percent or greater share of the payphone units in their respective regions.
These commenters argue that this high share of the payphone market will allow the BOCs to
aggregate large volumes of traffic in order to extract concessions from the IXCs (in the form of
either lower rates or higher commissions), not available to the independent PSPs, and which in
turn could be used to extend their share of the payphone market.   AT&T states that BellSouth,
US West and GTE have already contacted AT&T and other IXCs concerning the possibility of
entering into contracts for the delivery of 0+ interLATA service from their companies' entire base
of payphones.  Some of these commenters contend that the ability to aggregate their volumes
and direct them to a single carrier would allow the BOCs to exercise a degree of control in the
interLATA market prior to being authorized to provide interLATA service pursuant to Section
271 of the 1996 Act.  WorldCom also identifies the BOCs' exclusive control over their line-
based 0+ calling cards as an additional basis for leveraging the location providers selection of
the presubscribed IXC.
                                  215. Some commenters, including the IXCs, assert that the BOCs should not be
allowed to negotiate for presubscription of their payphones at least until they satisfy the
requirements for entering the interLATA market pursuant to Section 271 of the 1996 Act.
These commenters argue that until the BOCs face significant competition in the local exchange
market, they will be able to subsidize commission payments to location providers with regulated
service revenue and, thus, behave anticompetitively in the payphone market.  Some commenters
also assert that the BOCs could be expected to leverage the market power they currently possess,
both in the payphone market and local telephone markets, to inhibit the development of
competition in the payphone market.
                                  216. The RBOCs contend that the payphone market is competitive and that they
do not, and cannot, exercise market power in the payphone industry.  While acknowledging
that they have between 60 and 80 percent of the payphone units in their respective regions, the
RBOCs assert that this is not an appropriate measure of market share or market power.
BellSouth argues that market share measurements based upon number of payphone units are
misleading because a significant portion of the BOC payphones are non-competitive or semi-
public payphones producing below market-level revenues, while the independent PSPs have
targeted high volume locations.  BellSouth asserts that within the most competitive market
segments, market share numbers actually indicate competitive parity.  BellSouth submitted
estimated market share data for states within its region stating that, while independent PSPs have
only 39 per cent of the payphone units, they have almost 55 per cent of the public payphone
revenues, compared with BellSouth's 45 per cent.  GPCA disagrees with the market share data
submitted by the BOCs, including their exclusion of semi-public payphones while including
small-business-self-supply payphones (payphone sets which permit small businesses to self-supply
payphone service) in the independent payphone providers' market share.
                                  217. The RBOCs also assert that the payphone market has very low entry
barriers, so that any efforts to exclude competition would be futile.   Information submitted by
BellSouth states that, within its region, no state has fewer than 107 certificated independent PSPs,
while two states (Florida and South Carolina) each have more than one-thousand independent
PSPs.   BellSouth and Ameritech contend that existing nonstructural and structural safeguards
are adequate to protect against attempts to leverage market power in local telephone service or
to engage in discriminatory conduct.  BellSouth also argues that until a BOC is allowed to
offer in-region interLATA service, interexchange service will be acquired by the BOC PSPs from
a separate affiliate, making subsidization easily detected. Ameritech contends that Congress has
specifically resolved this issue by both granting BOCs equal rights with non-BOC PSPs to
participate in the selection of carriers for its payphones and granting them the right to provide
interLATA service themselves.  Thus, Ameritech argues, Congress has determined that the
promotion of one's own affiliated interLATA services, whether done by a BOC itself or a through
a separate pay telephone operation, is not to be condemned as discrimination.  BellSouth and
Ameritech also assert that the location provider's ultimate control in selecting the PSP will act
as a check on a BOC's ability to exercise market power.
                                  218. Many commenters urging against authorizing BOC presubscription rights
also propose options for minimizing the anticompetitive potential should the Commission decide
to approve that authority.  As noted above, several of these comments assert that granting BOCs
the ability to presubscribe their payphones should be delayed at least until the BOCs are faced
with competition in the intraLATA market.  Other commenters argue that the Commission
should require structural separation between the BOCs' carrier services and their payphone
services.  Peoples supports giving BOCs the freedom to select the interLATA carrier serving
their payphones, but only if they offer payphone service from a structurally separate subsidiary.
California PUC expresses concern as to whether existing nonstructural safeguards
provide sufficient protection against anticompetitive behavior by the BOCs, but contends that
Commission oversight in the form of reporting requirements on the BOCs with respect to
implementation of nondiscriminatory payphone service should provide adequate notice of
anticompetitive abuses.  To deter such abuses, California PUC asserts that the states should be
given authority to prevent BOCs from giving more favorable interLATA rates to their own
payphone operations or other similar anticompetitive behavior.
                                  219. The RBOCs contend that the Commission need not adopt rules in addition
to the structural and accounting safeguards mandated under Sections 271 and 272 of the 1996
Act in order to prevent them from engaging in cross-subsidization or other anticompetitive
conduct with respect to their payphone activities.  Ameritech asserts that the Commission has
incorrectly assumed that the nondiscrimination provisions of Section 272 of the 1996 Act will
apply to the BOCs' participation in the choice of interLATA carrier at BOC payphones.  It argues
that it will not be the network part of the BOC that will be selecting the interLATA carrier, but
the entity that owns the payphones -- which by that time will have gone through the nonstructural
separation required by Section 276.  Ameritech contends that the payphone entity will not be
required to maintain separation from the BOC subsidiary providing in-region interLATA services,
and therefore there will be no Section 272 rule against discrimination applicable as between the
payphone operation and the interLATA separate subsidiaries.
                                  220. Some commenters propose limitations designed to prevent the BOCs from
leveraging their high payphone interLATA volume in order to obtain rates not available to
independent PSPs.  APCC contends that if the Commission decides to grant the BOCs the
ability to presubscribe their payphones, then the Commission should also adopt rules requiring
any independent PSPs aggregating at least one-third of the non-LEC payphone volume in a region
to qualify for the lowest rates made available by a carrier to a competing BOC.  CPA and
GPCA argue that the Commission should consider placing a limit on the volume of calls that
must be aggregated to receive an IXC's highest available commission level for 0+ interLATA
calls.  Several other commenters urge the Commission to adopt safeguards that would limit the
volume of traffic that a BOC could route to a single interLATA carrier, as well as limit the
BOCs' ability to aggregate payphone volume into a single commission agreement.  Florida PSC
contends that the Commission should adopt rules to prevent the BOCs from giving more
favorable interLATA rates to their own payphone operations than to their payphone
competitors.
                                  221. Some commenters urging limitations on the BOCs' ability to presubscribe
their payphones contend that such limitations are only needed until competition sufficiently
develops to prevent anticompetitive conduct by the BOCs.  Peoples asserts that structural
separation would be an appropriate transitional requirement to prevent cross-subsidization and
allow the development of full competition in the payphone industry, but could be phased out after
the BOCs have reclassified their payphone assets and removed all of the subsidies out of their
basic service rates.  Other commenters argue that restrictions should apply to a BOC's ability
to presubscribe itself even after being granted authority to offer interLATA service pursuant to
Section 271.  CompTel argues that BOC participation in the presubscription selection process
should be delayed at least until after the BOC satisfies the Section 271 competitive checklist.
Even then, CompTel asserts, safeguards will be necessary to prevent anticompetitive conduct by
the BOCs, including (1) limiting the volume of traffic a BOC can route to a single carrier; (2)
prohibiting the BOC from presubscribing itself for interLATA calls from it payphones; and/or
(3) limiting the number of calls the BOCs can aggregate into a single commission agreement.
NJPA asserts that once the BOCs are allowed to enter the interLATA market, they will
undoubtedly direct all interLATA calls from their payphones to themselves, and accordingly
asserts that the Commission should prohibit indefinitely the BOCs from negotiating
presubscription for their payphones.   AT&T argues that even after a BOC satisfies the Section
271 requirements, the Commission should not allow a BOC (or other LEC) to negotiate with
location providers within its own region until the Commission has individually evaluated how
each LEC's control over local exchange facilities and extensive payphone penetration affects its
ability to behave anticompetitively.
                                  222. The RBOCs assert that any regulatory restrictions which limit the portion
of interLATA traffic a BOC can deliver to any particular carrier, or the number of interLATA
calls that must be aggregated to receive an IXC's highest available commission level, are
inefficient, anticompetitive, and unnecessary.   The RBOCs contend that the public interest
standard of Section 276 does not require the Commission to delay granting them presubscription
negotiation authority until after they are authorized to provide in-region interLATA service
pursuant to Section 271, noting that Congress chose not to link those two section of the 1996
Act.
                                  223. Location providers, including airports and hospitals, maintain that
authorizing the BOCs to select the interLATA carrier for their payphones could deprive the
location providers of a significant source of revenues by reducing or eliminating commissions
paid to them for the placement of payphones.  These location providers assert that the 1996
Act establishes that location providers should retain ultimate authority to determine the carriers
serving payphones on their premises, and argue that the Commission should not implement rules
which would restrict the location provider's authority in this regard.  Airport and hospital
location providers also assert that the commissions they receive from PSPs help reduce the cost
of operating these public facilities, thus allowing the BOCs to engage in conduct likely to reduce
these commission levels would be contrary to the public interest.  Some location providers also
contend that they have a reputational interest in both the quality of service from payphones on
their premises and in protecting their customers from unfair rates when using such payphones.
Some location providers assert that if the Commission allows the BOCs to negotiate
presubscription, then the Commission should also make clear that the location providers retain
the ultimate decision concerning interLATA carriers for payphones on their premises.  ACI-NA
states that while it agrees with the tentative conclusion that all PSPs, including the BOCs, should
be authorized to negotiate with location providers concerning the choice of interLATA carrier,
the Commission should also make it clear that PSPs may not contract with any carrier over the
objection of the location provider.
                                  224. The RBOCs argue that location providers always retain the ultimate
decision-making authority concerning interLATA carriers for payphones on their premises
through their choice of payphone service provider.  Ameritech states that the public interest
analysis required under the 1996 Act does not protect the interests of location providers in high
commission levels, especially to the extent such commissions are recouped by the carriers
through higher rates to consumers.
                                  c.Discussion
                                  225. Section 276(b)(1)(D) directs the Commission to grant the BOCs the right
to negotiate with location providers for the presubscription of interLATA carriers for their
payphones, unless we determine that such rights would be contrary to the public interest.
                                  226. Commenters arguing that BOC participation in the selection of
presubscribed interLATA carriers for their payphones is contrary to the public interest contend
that the BOCs' large share of existing payphone units, as well as their continuing near-monopoly
over local access service, will allow them to engage in anticompetitive conduct in the payphone
services market if granted unfettered interLATA presubscription rights.  The proponents of this
view make two basic arguments.  First, they assert that the BOCs' large share of the existing
payphones will enable them to aggregate their payphone volumes, in order to obtain from IXCs
lower rates (or higher commission levels) than those available to independent payphone
providers.  This cost advantage would, in turn, allow the BOCs to strengthen their position as
the dominant players in the provision of payphone services by enabling them to either pay higher
commissions to location providers, or to offer lower rates to end users.  Second, these
commenters argue that the BOCs will be able to use their bottleneck control over local service
facilities to subsidize or discriminate in favor of their own payphone operations.  We address
each of these arguments separately below. We conclude, however, that the record does not
support a finding that it would be contrary to the public interest to allow the BOCs to negotiate
with location providers with respect to selecting and contracting for the interLATA carriers
presubscribed to their payphones.
                                  227. Some commenters arguing against granting the BOCs such presubscription
rights assert that the BOCs will be able to solidify, or even expand, their current dominant share
of the payphone services market by using their existing size to negotiate lower interexchange
rates than are available to non-BOC payphone service providers.  Even if we assume that the
BOCs will be able to aggregate their traffic to obtain superior deals from the IXCs, however, it
does not necessarily follow that this represents injury to competition or the public interest.
Rather, competition is injured only if the BOCs' size somehow allows them to exercise market
power.  As we stated in Competition in the Interstate Interexchange Marketplace:
                                  The issue is not whether [the dominant competitor] has
          advantages, but, if so, why, and whether any such advantages are
          so great as to preclude the effective functioning of a competitive
          market. . . . Such advantages do not . . . mean that these markets
          are not competitive . . . [or] that it is appropriate for government
          regulators to deny the incumbent the efficiencies its size confers in
          order to make it easier for others to compete.
Volume discounts are common in the business world, and typically represent a recognition by
the seller of the economies of scale it realizes from the transaction.  If these volume discounts
are passed through to the end user, consumers benefit.  Even if they are not passed on to
consumers, the pre-existing level of competition is not injured because prices remain the same
to end users.  The only resulting injury is to competitors, not competition.
                                              228.   The issue that we must examine is whether the BOCs will be able to
exercise market power if allowed to participate in the interLATA presubscription process for their
payphones.  We have previously defined "market power" as "the ability to maintain price above
the competitive level without driving away so many customers as to make the increase
unprofitable."  The 1992 Joint Merger Guidelines similarly define market power as "the ability
profitably to maintain prices above competitive levels for a significant period of time."  There
are two ways in which a competitor may profitably raise and sustain prices above competitive
levels and thereby exercise market power.  First, a competitor may be able to raise and sustain
prices by restricting its own output.  Second, a company may be able to raise and sustain prices
by increasing its rivals' costs or restricting its rivals' output through its control of an essential
output, such as access to bottleneck facilities, that its rivals need to offer their services.
                                  229. The commenters arguing that the BOCs will be able to exercise some
degree of market power each start with the assertion that the BOCs control 80 percent or more
of the installed payphone base.  The BOCs, however, have provided information that indicates
that their individual shares of payphone units in their regions range from 62-65 percent for
Pacific Bell, BellSouth and US West, to approximately 80 percent for Ameritech and
Southwestern Bell.  These percentage shares do not include semi-public payphones, which the
BOCs assert do not accurately reflect market power, because they are typically not revenue
generating and are therefore not subject to aggressively competition by the independent payphone
service providers.  The independent payphone service providers dispute these market share
figures.
                                  230. We first note that these market share figures are relevant only to the BOCs'
ability to exercise market power in the provision of payphone services -- not, as contended by
some commenters, to their ability to obtain interexchange rates lower than those available to the
independent payphone service providers.  Volume discounts are based on the volume of traffic,
not on the number of phones from which such traffic originates.  Thus, a more relevant
examination in this regard would be the volume of traffic generated by BOC payphones, versus
that of non-BOC payphones.  Unfortunately, there is very limited data in the record on this point.
The most pertinent information was submitted by BellSouth, showing that (excluding their semi-
public payphones) they currently generate only 45 per cent of the payphone revenues in their
region.  It is quite clear, in any event, that the BOCs' share of the payphone market does not
allow them to exercise market power with respect to the IXCs.
                                  231. As to the BOCs' ability to exercise market power in the provision of
payphone services, market share analysis, standing alone, does not tell us the likelihood that the
dominant firm will be able to sustain supracompetitive prices.  If entry into the market is
sufficiently easy, it will prevent the dominant competitor from profitably maintaining prices
above competitive levels.  Potential entry will act as a deterrent if it would be timely, likely,
and sufficient in magnitude, character and scope to counteract the anticompetitive effect of
concern.  In markets where entry meets these requirements, high market share generally does
not raise antitrust concerns.
                                      232.  We find the record demonstrates that the market for provision of payphone
services has very low barriers to entry, and such entry would act to prevent the BOCs from
sustaining prices above competitive levels if allowed to negotiate with location providers for the
interLATA carriers for their payphones.  In reaching this conclusion, we start with the fact that
thousands of competitors are already in the market.  Most of these companies have very small
operations.  Indeed, the largest of these independents, Peoples, has only 40,000 payphones, less
than 3 percent of the national payphone market.  While we understand the arguments of the
independent payphone providers that their small size makes them vulnerable to BOC predatory
conduct, the existence of literally thousands of small competitors demonstrates that entry is
relatively easy and does not require investment or scale levels that would deter many potential
competitors.
                                      233.  We also note that among the non-BOC payphone service providers are
AT&T, MCI and Sprint.  Although these companies' presence in the payphone market is
currently small, at least relative to the BOCs, these companies certainly have the financial
resources to make an aggressive expansion of their payphone operations.  We believe that this
would be particularly likely if, as at least one IXC commenter suggests, the BOCs attempt to use
their current market share to squeeze excessive concessions from the IXC providers.
                                  234. We also find that any ability that the BOCs might have to raise prices to
end users above competitive levels is severely restricted by the ability of end users to dial around
the presubscribed interLATA carrier.  TOCSIA requires, and will continue to require, open access
for such calls at payphones.  Peoples estimates that 19.4 per cent of the calls originated by its
payphones are either access code calls (6.5 per cent) or subscriber 800 calls (12.9 per cent).
A sustained effort by the BOCs to pass on monopoly price levels to consumers would certainly
induce more end users to take advantage of this alternative.
                                  235. As noted above, the second way in which a competitor can sustain
supracompetitive prices is through the control of a bottleneck facility.  We recognize that for the
immediate future, the BOCs will continue to retain effective control over local access facilities.
Accordingly, we are concerned about any potential ability the BOCs may have to leverage that
market power in favor of their payphone operations.
                                  236. One way in which a BOC might be able to leverage its market power over
local access facilities is by discriminating in favor of its own payphones in the provision of such
services.  For example, a BOC could discriminate against its payphone services competitors
by providing them with poorer quality interconnection to the BOC's local network than it
provides to its own payphone operations, or could unnecessarily delay satisfying its competitors'
requests to connect to the BOC's local network or with respect to repair services.  To the extent
that a BOC can thereby raise its rivals' costs of doing business, or damage its rivals' reputation
for quality service, the BOC may be able to raise its own payphone service rates.  Alternatively,
some commenters have asserted that the BOCs will attempt to leverage their control over local
access facilities by subsidizing their payphone operations from basic exchange and exchange
access revenues.  As addressed above, Section 276(b)(1)(B) of the 1996 Act requires the
elimination of all such subsidies.  Improper allocation of costs may allow a BOC to recover
costs incurred in its payphone operations from subscribers to the BOC's regulated exchange
services, potentially harming such captive subscribers of local services and providing the BOC's
payphone operations with an unfair advantage over its competitors.
                                              237.   We conclude, however, that the nonstructural and accounting safeguards
we are requiring with respect to the BOCs' payphone operations are sufficient to deter such
abuses, or to allow the Commission to identify abuses of they occur.  As discussed above, we
are applying all Computer III and ONA nonstructural and accounting safeguards to the BOCs'
provision of payphone services, and requiring that any basic services provided by a BOC to its
own payphone operations be available on a nondiscriminatory basis to other payphone
providers.  In particular, we are requiring each BOC to file an initial CEI plan describing how
it intends to comply with the Computer III and ONA equal access parameters and nonstructural
safeguards for the provision of payphone services, including a description of how each BOC will
comply with the requirements for nondiscrimination in the quality of service, installation, and
maintenance.  In connection with our discussion of these safeguards, we previously stated our
conclusion that they provide an appropriate regulatory framework to ensure that BOCs do not
engage in improper subsidization or discriminate in the provision of services required by their
payphone competitors.  We also note that such payphone competitors may file a complaint to
the Commission if they believe a BOC has failed to satisfy its obligations under these
provisions.
     238.                                   For the reasons stated above, we decline to adopt the recommendation of
commenters asserting that the risk that the BOCs will seek to leverage their control over local
access facilities requires us to mandate structural separation of the BOCs' payphone operations
before allowing them to participate in interLATA presubscription for their payphones.  As
discussed, we have previously found that Computer III-type nonstructural and accounting
safeguards generally to be effective in deterring improper allocation of costs and
discrimination.  Moreover, we find that the statutory language clearly reflects a Congressional
determination that structural separation of the BOCs' payphone operations from their core
business is neither necessary nor appropriate.  Section 276(b)(1)(C) specifically directs the
Commission to "prescribe a set of nonstructural safeguards for Bell operating company payphone
service to implement" the non-subsidization and non-discrimination provisions of Section 276(a).
We note that Congress has, where it deemed necessary, prescribed structural separation
requirements as a precondition to BOC entry into a line of business.
                                  239. Since we are relying on the nonstructural and accounting safeguards
established pursuant to Section 276(b)(1)(C) to deter anticompetitive conduct, however, we
believe that it is prudent to ensure that such safeguards are in place before the BOCs are allowed
to participate in interLATA presubscription for their payphones.  Accordingly, a BOC will not
be allowed to engage in the conduct authorized by Section 276(b)(1)(D) until it has submitted
and received approval of an initial CEI plan filed pursuant to Section 276(b)(1)(C).  We find
that this is a reasonable requirement for meeting our statutory mandate of protecting the public
interest in this area.
                                  240. For all of the reasons discussed above, we also decline to place restrictions
on the BOCs' ability to negotiate for the selecting and contracting of intraLATA carriers
presubscribed to their payphones.  Most of the commenters urging such restrictions base their
proposals on the BOCs' ability to exercise market power through the aggregation of interLATA
traffic from their payphones.  Since we find that the BOCs are unlikely to be able to exercise
such market power, any restrictions on their ability to aggregate interLATA volume, or to direct
interLATA traffic to a particular carrier, are unwarranted.
                                  241. We are also mindful of the statement in the Conference Report that location
providers retain "the ultimate decision-making authority in determining interLATA services in
connection with the choice of payphone providers."  We interpret this statement as a mandate
to ensure that strong competition exists in the payphone industry.  So long as competition exists
among payphone service providers, location providers will continue to have the ultimate choice
of carrier through their selection of payphone service provider.  As to the location providers'
argument that BOC participation in the presubscription process will lead to a reduction in, or
elimination of, the commissions they receive in connection with placing payphones on their
premises, we find this argument unpersuasive.  We find it unlikely that the introduction of
additional competition would lead to commissions being reduced below competitive levels.  In
this respect, we note that MCI and independent payphone service providers have asserted just the
opposite -- that the BOCs will attempt to gain market share by offering location providers higher
commissions which their competitors will be unable to match.  We also note that, to the extent
that these commissions are recouped from end users in the form of higher rates, protecting higher
commissions is not a strong public interest concern weighing heavily against granting the BOCs
presubscription authority.
                                  242. We conclude that competition in the provision of payphone services is
sufficiently strong to ensure location providers freedom of choice concerning the interLATA
carriers for payphones on their premises.  In addition to the conclusions expressed above, we also
note that the record indicates that many long-term agreements currently exist between location
providers and payphone service providers or carriers, concerning the choice of presubscribed
interLATA carrier.  Since these agreements will expire over time, the existence of these
enforceable agreements will help to ensure the continued availability of choice in the selection
of carriers.  We emphasize, however, that a location provider's ability to choose should be
protected from unjust and unreasonable practices which seek to foreclose meaningful choice.
Such practices include unreasonable interference with pre-existing agreements between location
providers and payphone service providers or carriers, or conduct which is unduly coercive of the
location provider's right to choose the carrier for payphones on its premises.  Such conduct may
violate Section 201 of the Act, which proscribes unjust and unreasonable practices by common
carriers.
                                  243. As a final point, we address the argument of some commenters that BOC
participation in the interLATA presubscription of their payphones would constitute the offering
of interLATA service, without first meeting the requirements of Sections 271 and 272 of the
1996 Act.  Section 276 of the 1996 Act, however, provides only that BOCs be given equal
rights with independent payphone providers "to select and contract with, the carriers that carry
interLATA calls from their payphones . . ."  We interpret the phrase "select and contract with,"
as granting the BOCs no more than the right to participate as a contractual intermediary between
a location provider and a third-party interLATA carrier.  Such conduct does not amount to the
provision of interLATA telecommunications service addressed under Sections 271 and 272.
Moreover, we find nothing in the statutory language, or legislative history, to indicate that
Congress intended the restrictions of Sections 271 and 272 to encompass the specific conduct
authorized in Section 276.
                                              244.   BellSouth, however, has asked us to find that Section 276(b)(1)(D) allows
the BOCs to engage in reselling, as well as branding, of presubscribed interLATA service to their
payphones.  BellSouth asserts that "Section 276 does not reference other sections of the 1996
Act but immediately does away with MFJ interLATA prohibitions (but only for RBOC payphone
units . . .) unless the FCC finds interLATA rights for RBOC PSPs not to be in the public
interest." While we recognize that independent payphone providers have the ability to engage
in the resale and/or branding of presubscribed interLATA service to their payphones, we do not
interpret the language of the 1996 Act to grant this authority to the BOCs.  As explained
above, the 1996 Act provides that the BOCs are to be given equal rights with independent
payphone service providers "to negotiate with the location provider on the location provider's
selecting and contracting with, and subject to the terms of any agreement with the location
provider, to select and contract with, the carriers that carry interLATA calls from their payphones
. . ."  We interpret this language as envisioning the "carrier" as being someone other than the
BOC to whom negotiating rights are being given.  We do not find that Congress intended to
allow BOCs to provide interLATA telecommunications services to its payphone customers,
including through resale, other than as set forth in Section 271(b).  In this respect, we note that
the 1996 Act defines telecommunications service as "the offering of telecommunications for a
fee directly to the public, or to such classes of users as to be effectively available directly to the
public, regardless of the facilities used."  We find that, for purposes of Section 276, resale by
a BOC of interLATA service for its in-region presubscribed payphones, which service will
ultimately be used by consumers of payphone services, lies outside of the specific rights granted
by Section 276(b)(1)(D) of the 1996 Act.
    2.  Grandfathering of Contracts
                                  a.The Notice
                                  245. Section 276(b)(3) states that "nothing in this section shall affect any
existing contracts between location providers and payphone service providers or interLATA or
intraLATA carriers that are in force and effect as of the date of enactment" of the 1996 Act.  We
tentatively concluded that this section of the 1996 Act grandfathers all contracts in existence as
of February 8, 1996.  In addition, we sought comment on what should be considered a Section
276(b)(3) contract for purposes of Section 276(b)(1)(D), and we tentatively concluded that a
Section 276(b)(1)(D) contract must be, at least, a lawful agreement where both parties intended
to be bound.
                                  b.Comments
                                  246. Each of the commenters agrees with the Commission's tentative conclusion
that contracts between location providers and payphone service providers or interLATA or
intraLATA carriers in force as of February 8, 1996 should be grandfathered and remain in
effect.   Oncor asserts that contracts entered into subsequent to February 8, 1996 should also
be given full effect by the Commission.
                                  247. The RBOCs argue that the Commission should specify that the
grandfathering provision applies only to contracts enforceable by either party and, specifically,
that a location provider's letter of authorization (which authorizes the IXC to serve a particular
payphone) is not enforceable by the IXC and should therefore not be grandfathered.  Sprint
also asserts that a contract can only be grandfathered if it includes binding obligations applicable
to both parties -- which would not include letters of authorization that do not require the location
provider to subscribe to the IXC's service for any fixed length of time.
                                  248. AT&T maintains that the definition of contract for these purposes should
include all agreements which commit a location owner to select a particular IXC for phones at
its premises.  AT&T asserts that this would include lawfully executed letters of authorization.
ACI-NA also contends that the Commission should adopt a broad definition of contracts to be
grandfathered under the 1996 Act, including letters of authorization and term extensions, so as
to not disadvantage location providers that may rely on existing presubscription agreements for
a necessary income stream.  CompTel also argues that location providers' letters of
authorization constitute contracts that Congress intended to be grandfathered by the 1996 Act,
since such agreements are typically part of mutually binding initial service orders or contracts
with IXCs.  AT&T urges the Commission to affirm that interference with any existing contract
at any time is an unjust and unreasonable practice under Section 201(b).
                                  249. Metropolitan Washington Airports Authority replies that so long as location
providers have decision-making authority, it is unnecessary for the Commission to resolve the
issue of whether LOAs are binding agreements grandfathered by the 1996 Act.  Instead, it
argues that the determination of whether specific LOAs are binding on the parties should be left
to applicable state law.
                                  c.Discussion
                                  250. We affirm our tentative conclusion that the 1996 Act grandfathers all
contracts in force between location providers and payphones service providers or interLATA or
intraLATA carriers which were in force and effect as of February 8, 1996.  Since the statutory
language is specifically limited to the date of enactment of the 1996 Act, and because there is
an insufficient record to evaluate the propriety of extending that provision, we reject the argument
that we extend this grandfathering protection to contracts entered into subsequent to February 8,
1996.
                                  251. As the statutory language specifically limits the scope of this provision to
"contracts," we leave to applicable state law the question of whether a particular agreement
constitutes an enforceable contract.  We note that the comments reflect a difference of opinion
as to the legal obligations involved in letters of authorization ("LOAs").  It may be that this
disagreement reflects the fact that LOAs may be entered into under differing circumstances,
reflecting various levels of commitment and/or consideration by the parties.  Accordingly, we
express no opinion as to whether particular LOAs would or would not constitute contracts for
purposes of this section of the 1996 Act.
                                  252. We do find, however, that interference with enforceable agreements
between a location provider and either a payphone service provider or an interLATA or
intraLATA carrier constitutes an unjust and unreasonable practice in violation of Section 201(b)
of the 1996 Act.  We also find that practices involving undue coercion of location providers
with respect to their choice of interLATA carrier for payphones on their premises may be found
unjust and unreasonable.  Such practices interfere with the efficient operation of the market by
restricting choices, and thereby limit the benefits of competition.
E.  ABILITY OF PAYPHONE SERVICE PROVIDERS TO NEGOTIATE WITH
    LOCATION PROVIDERS ON THE PRESUBSCRIBED INTRALATA CARRIER.
                                  253. Section 276(b)(1)(E) directs the Commission to provide all payphone
service providers with the right to participate in the selection of the intraLATA carriers
presubscribed to their payphones.  In implementing this mandate, we seek to eliminate existing
barriers upon any payphone service provider's ability to compete on this basis.
    1.                            The Notice
                                  254. Section 276(b)(1)(E) of the 1996 Act directs the Commission to "provide
for all payphone service providers to have the right to negotiate with the location provider on the
location provider's selecting and contracting with, and, subject to the terms of any agreement with
the location provider, to select and contract with, the carriers that carry intraLATA calls from
their payphones." In the Notice, we tentatively concluded that all PSPs, whether LECs or
independent payphone service providers, should be given the right to negotiate with location
providers concerning the intraLATA carrier.  We also tentatively concluded that the intraLATA
carrier presubscribed to a payphone should be required to meet minimum Commission standards
for the routing and handling of emergency calls.
    2.                            Comments
                                  255. Commenters generally agree with the tentative conclusion that all payphone
service providers should have the ability to negotiate with location providers for the selection of
intraLATA carriers from their payphones.  Those who commented on the issue also agree with
the our tentative conclusion that minimum standards for the handling and routing of emergency
calls should be required of all intraLATA carriers presubscribed to a payphone.
                                  256. Some commenters, including AT&T, MCI and SCPCA, assert that, in order
to ensure effective competition in the intraLATA market, the Commission should specifically
preempt any state requirement mandating the routing of intraLATA calls to the incumbent
LEC.  AT&T also argues that the Commission should preempt any other state requirements
that are inconsistent with the provisions of Section 276, including those requiring the inclusion
of ILEC payphones in the presubscription process in states with toll dialing parity orders issued
prior to December 15, 1995.  AT&T additionally asserts that the Commission should require
immediate intraLATA presubscription for all BOC payphones located in areas where intraLATA
presubscription is technically feasible.  Florida PSC argues that end-users placing 0- calls often
seek assistance from live operators for emergency purposes, and therefore the Commission should
continue to allow 0- traffic to be routed exclusively to the LEC.
                                  257. The RBOCs assert that the Commission should not mandate the adoption
of new technologies in order to allow intraLATA presubscription at the central office switch.
The RBOCs state that such a requirement is neither technically feasible, nor necessary, since
independent payphone service providers can program their "smart" payphones to select a
presubscribed intraLATA carrier without relying on the local exchange carrier's central switching
programming.  Instead, the RBOCs contend that central office based presubscription for
payphones should be addressed at the same time as all other intraLATA presubscription issues
under Section 251 of the 1996 Act.
                                  258. ACI-NA asserts that while all payphone service providers should be
authorized to negotiate with location providers on an equal basis, the Commission should make
it clear that payphone service providers may not contract with a carrier over the objections of the
location provider.  Independent payphone service providers also argue that  the Commission
should make explicit that the right to choose an intraLATA carrier includes the right to use the
carrier for local sent and non-sent paid calls.  SCPCA also contends that all PSPs should be
able to negotiate with location providers for selecting the local operator service for their
payphones.
    3.                            Discussion
                                  259. We affirm our conclusion that all payphone service providers should have
the right to negotiate with location providers concerning the intraLATA carriers presubscribed
to their payphones.  This conclusion is consistent with both the specific language of Section 276,
as well as with the 1996 Act's goal of bringing competition into this industry segment.
                                              260.   We also affirm our tentative conclusion that intraLATA carriers
presubscribed to payphones should be required to meet our minimum standards for routing and
handling of emergency calls.  We recently addressed this issue in CC Docket 94-198, in which
we extended to aggregators, including payphone owners, standards for routing emergency calls.
This conclusion reflects our finding, also discussed in connection with public interest payphones,
that payphones often serve a critical role in accessing emergency service.  By mandating the
application of these minimum standards to intraLATA carriers presubscribed to payphones, we
seek to ensure that individuals can receive timely and proper assistance when they rely on
payphones for 0- or 911 emergency calls.
                                  261. Because Section 276(b)(1)(E) establishes that all payphone service providers
are to have the right to negotiate for intraLATA carriers for their payphones, we find that state
regulations which require the routing of intraLATA calls to the incumbent LEC are inconsistent
with the 1996 Act.  Section 276(c) specifically states that "to the extent that any State
requirements are inconsistent with the Commission's regulations, the Commission's regulations
on such matters shall preempt such State requirements."  Since we have found state
requirements that mandate the routing of any or all intraLATA calls to an incumbent LEC to be
inconsistent with the requirements of Section 276(b)(1)(E), we conclude that all such state
requirements are preempted by the Commission's regulations.
                                  262. We take particular note, however, of Florida PSC's argument that states
should be allowed to mandate that 0- calls from payphones be routed exclusively to the
incumbent LEC.  Florida PSC notes that such a requirement is necessary to ensure that
emergency calls, where the caller simply dials "0" and nothing else, are delivered to a live, local
operator.  We believe that requiring 0- calls to be initially routed to the LEC is not necessarily
inconsistent with the provisions of Section 276(b)(1)(E), so long as the state does not mandate
that the LEC ultimately carry non-emergency intraLATA calls initiated by dialing "0" only.
                                  263. As with the selection of an interLATA carrier, payphone location providers
will have ultimate decision-making authority in the selection of intraLATA carriers for payphones
located on their premises through their selection of a payphone service provider.  Obviously
such choice is predicated on the development of competition in the in-region, intraLATA market.
Once choice of intraLATA providers becomes available, however, PSPs can be expected to
compete for locations through, among other things, the intraLATA carriers presubscribed to their
payphones.  As with the selection of interLATA carriers, interference with existing agreements
between location providers and payphone service providers or intraLATA carriers, as well as
undue coercion restricting the location provider's exercise of choice of such carriers, may
constitute unjust and unreasonable practices in violation of Section 201(b) of the Act.

F.  ESTABLISHMENT OF PUBLIC INTEREST PAYPHONES
                                  264. Section 276(b)(2) of the 1996 Act directs us to determine whether there is
a need for maintaining payphones serving public health, safety, and welfare goals, and, if so, to
ensure that such payphones are supported fairly and equitably.  As noted above, we recognize
the potential that a freely competitive marketplace may not provide for payphones in locations
where they serve important public policy objectives, but which, for various reasons, may not be
economically self-supporting.  To address the potential for such market failure, we establish
guidelines by which the states may ensure the maintenance of payphones serving public interests
in health, safety and welfare, in locations where they would not otherwise be available as a result
of the operation of the market.  Consistent with our primary reliance on the competitive
marketplace, however, these guideline require that the states administer and fund such public
interest payphone programs in a manner which is competitively neutral, and which fairly and
equitably compensates entities providing public interest payphones.
    1.                            The Notice
                                  265. Section 276(b)(2) of the 1996 Act directs the Commission to "determine
whether public interest payphones, which are provided in the interest of public health, safety, and
welfare, in locations where there would otherwise not be a payphone, should be maintained, and
if so, ensure that such public interest payphones are supported fairly and equitably."  In the
Notice, we sought comment on whether it is in the public interest to maintain payphones.  We
also sought comments on options for maintaining public interest payphones.  One option would
be for the Commission to prescribe federal regulations for the maintenance of these payphones.
A second option would be for the Commission to establish national guidelines for public interest
payphones.  A third option for maintaining public interest payphones would be to defer to the
states to determine, pursuant to their own statutes and regulations, which payphones should be
treated as "public interest payphones."
                                  266. In the Notice, we also sought comment on whether a "public interest
payphone" should be defined as a payphone that both (1) operates at a financial loss, but also
fulfills some public policy objective, such as emergency access; and (2) even though unprofitable
by itself, is not provided for a location provider with whom the PSP has a contract.  Under this
definition, many payphones that fulfill important public policy objectives would not be included
because they would be paid for, in the form of lower commission payments, by the entity that
is requesting that a payphone be placed in a particular location to fulfill a public policy
objective.
                                  267. In addition, we sought comment on appropriate mechanisms for meeting
the statutory directive that we ensure public interest payphones are funded "fairly and
equitably."  We sought comment on whether such a mechanism should be addressed through
federal regulations, federal guidelines for the states, or by the states themselves.  We requested
that those commenters supporting a Commission-mandated funding mechanism detail how the
mechanism would function, including who would be eligible to receive funding, who would be
responsible for paying into the fund, and who would administer the funding mechanism.
      2.                                      Comments
                                              268.   Most commenters agree that payphones can serve important public interests
in health, safety and welfare, and that there is a need to ensure that payphones are maintained
in locations where they may not be self-supporting.  For example, New York City asserts that,
in the absence of incentives, PSPs are unlikely to place payphones in indispensable locations such
as under-served residential neighborhoods and areas with significant emergency demands.  New
York City states that payphones in such areas serve an important role in providing the public
with basic communications services, an avenue to obtain information, and access to critical
emergency services.  Idaho PUC states that payphones in rural areas often generate little
revenue, but may be the only means of public telephone communication for miles.  New Jersey
DRA also asserts that public interest payphones provide services to individuals in poor and
isolated communities who might otherwise not have any access to the exchange network, and are
particularly necessary for assuring that such individuals have access to emergency services such
as 911.  Puerto Rico Telephone states that those who by necessity use payphones as a
substitute for residential telephone service rely on such payphones as their means of access to
emergency services, as well as their means of communication with family members, employers,
businesses and others.  Many commenters agree that public interest payphones are an integral
part of efforts to achieve universal service.
                                  269. A few commenters, however, assert that the Commission need not take any
action at this time to ensure the maintenance of public interest payphones.  MCI contends that
the issue of public interest payphones is part of the larger question of ensuring that all consumers
have access to telephone service, and should, therefore, be referred to the Federal-State Joint
Board on Universal Service.  The Iowa Utilities Board argues that the Commission should
defer to the states with respect to public interest payphones because Iowa has found that it is "not
necessary to establish rules requiring public interest payphones" in that state.
                                  270. Most commenters assert that the Commission should leave to the states the
primary responsibility for administering public interest payphone programs.  A number of state
and local regulatory agencies argue that any public interest payphones program should be left
primarily to the states, because national guidelines could not adequately and economically
prescribe locations or criteria for such payphones throughout the country.  These commenters
emphasize that state and local entities, including police, fire, rescue and public welfare agencies,
are best situated to evaluate community needs and objectives. Several state agencies note that
they already have, or are prepared to develop, programs which provide for placing payphones in
locations where they might otherwise not exist.   For example, several states comment that they
require incumbent local exchange carriers in their jurisdictions to place at least one payphone in
each exchange area.
                                  271. One state plan referenced often in the comments is the California Universal
Services program.  California's program requires that LECs maintain "public policy" payphones
at locations where revenues are not sufficient to profitably support a payphone.  The program
requires that: (1) a selected committee evaluate the need for payphones at locations where they
do not already exist; (2) the LECs install and maintain these payphones with the
acknowledgement that revenues will not cover costs of installation and operation; (3) all PSPs
support these payphones through a monthly rate charged to connect their payphones to the
network; and (4) all LECs with payphones support these payphones with a contribution from their
competitive public and semi-public payphones.  Thus, the costs of supporting these public interest
payphones are borne not by the general body of ratepayers, but rather by the payphone industry
as a whole.  CPA asserts that this program does not place an undue burden on PSPs because
the criteria for public interest payphones has been narrowly drawn, resulting in only one per cent
of all payphones in the state being identified as public interest payphones.  The RBOCs,
however, assert that the California plan may not work in other states, particularly in rural areas
where the number of competitive payphones may be small relative to the number of public
interest payphones.
                                  272. Several commenters, particularly the BOCs and independent payphone
providers, urge the Commission to adopt national guidelines for state implementation of a public
interest payphone program.  The RBOCs argue that the 1996 Act requires the Commission to
adopt a narrow definition of what constitutes a public interest payphone in order to limit what
state and local governments can require of payphone providers.  They argue that since the 1996
Act requires the installation of public interest payphones only "in locations where there would
otherwise not be a payphone," state and local regulators should not be allowed to require the
installation of public interest payphones in locations where a payphone already exists, or on the
premises of a location provider who has an existing contract for the placement of a payphone.
Ameritech specifically recommends adoption of guidelines, similar to the existing California
model, which specify that a public interest payphone is one that would not "break even," and
would not exist in the location absent public intervention.  The RBOCs and Ameritech urge
rules limiting the designation of "public interest payphones" to those requested by state or local
governmental agencies for purposes of ensuring health, safety, and welfare.  The RBOCs also
contend that local governmental agencies already provide for the public interest payphones by
requiring the placement of certain numbers of non-profitable payphones as part of their contracts
with individual payphone service providers for the placement of competitive payphones.  A few
state commenters also stated that it may be appropriate for the Commission to adopt basic
national guidelines in order to ensure the deployment of public interest payphones in critical
locations.
                                      273.  Puerto Rico Telephone contends that because of the particularly low level
of residential telephone service, any definition of public service payphones adopted by the
Commission should include payphones that are used as a substitute for local residential telephone
service.  GVNW, which represents small LECs, also recommends a broader definition of public
interest payphones in order to ensure adequate access to payphones in schools, public parks, and
other public locations.
                                  274. Among the independent payphone providers, APCC argues that the
legislative history indicates that location providers, including state and local governments, having
an existing contract with a PSP for the placement of payphones, should be precluded from having
public interest payphones located on their premises.  CPA argues that the Commission should
set basic national guidelines, while leaving implementation to the states.  It recommends the
criteria of the California program as a good model for narrowly defining the scope of public
interest payphones.
                                      275.  Many commenters, particularly state and local regulators, contend that
funding for public interest payphones should also be left to the discretion of the states.  Maine
PUC asserts that if the Commission does attempt to prescribe national siting standards, then the
Commission must also provide the states federal or interstate-derived funding to support such
requirements.  Otherwise, it contends, the Commission should not limit the funding options
available for state administration of public interest payphone programs.  Other commenters
argue that to meet the 1996 Act's requirement that public interest payphones be "supported fairly
and equitably," such payphones should be paid for by the requesting party. Specifically, the
RBOCs  assert that the Commission should require requesting entities, including state and local
governments, to compensate PSPs in an amount that allows the PSP to recover its costs for
establishing a public interest payphone, plus a reasonable rate of return.  The BOCs argue that
any funding mechanism that requires the PSPs to share in the responsibility of providing public
interest payphones would necessitate a complex analysis of market share or a running tally of the
number of payphones each PSP provides in a particular area.  Puerto Rico Telephone and
NTCA also contend that, if the Commission determines that public interest payphones should be
maintained, then the Commission is also obligated to ensure that such payphones are properly
funded.  They recommend that the Commission establish a fund segregated from other
universal service support mechanisms, and administered by the NECA, to support public interest
payphones.  NECA affirms in its comments its ability to implement such a program.
                                  276.      APCC also maintains that the states should be given the discretion to
determine the funding mechanism for public interest payphones, including funding based upon
surcharges for all PSPs serving the location, or through a universal service mechanism funded
by all rate payers.  While endorsing the funding mechanism adopted in the California plan,
CPA argues that an alternative funding mechanism would be to allow PSPs to seek subsidy
support for non-self-supporting payphones determined to be in the public interest, with award of
the payphone location to the PSP bidding to provide a payphone at that location for the lowest
subsidy amount.  GTE asserts that the Commission should require states to adopt rules for
public interest payphone programs that are competitively neutral, including requiring fair
compensation to PSPs providing public interest payphones, and ensuring that all PSPs may
participate in such programs on a voluntary basis.  GTE argues that states may establish funds
to ensure that public interest payphone programs are supported fairly, or could support such
payphones as part of their state universal services fund.  SW Bell also urges the Commission
to require the states to adopt competitively neutral funding mechanisms for public interest
payphone programs, including the use of competitive bidding for the right to provide public
interest payphones.
    3.                            Discussion
                                  277. We conclude that there is a need to ensure the maintenance of payphones
that serve the public policy interests of health, safety, and welfare in locations where there would
not otherwise be payphones as a result of the operation of the market.  As demonstrated by the
comments, all payphones serve the public interest by providing access to basic communications
services.  We are particularly concerned about the role served by payphones in providing
access to emergency services, especially in isolated locations and areas with low levels of
residential phone penetration.  Indeed, in some such areas, payphones are the only readily
available means of accessing these critical communications services.  Moreover, as several
commenters recognize, some payphones which are most critical for public health, safety and
welfare purposes, are also the least likely to be economically self-supporting.  With the
elimination of subsidies which have helped support such payphones in the past, as directed by
the 1996 Act, it is possible that many of these payphones could disappear absent the availability
of alternative methods to ensure their existence.
                                  278. Many states have already developed systems for identifying the need for
public interest payphones, and developing solutions to address that need.  Indeed, we find that
the states are typically in a superior position to evaluate the need for payphones which serve
community interests in health, safety and public welfare.  In particular, the states are better
equipped than the Commission to respond to geographic and socio-economic factors affecting the
need for such payphones that are too diverse to be effectively addressed on a national basis.
                                  279. We also find that the existence of a variety of state and local plans already
providing for payphones serving public welfare goals demonstrates that the states are able to
successfully administer such programs.  For example, we note the program adopted in California,
which all parties involved appear to view as having successfully provided for public interest
payphones in the most critical locations.  The California program is funded by the payphone
industry as a whole, yet is endorsed by payphone providers doing business in the state because,
in part, it narrowly defines the criteria for public interest payphones to locations where there is
a true public welfare need not being met by the competitive marketplace.  These criteria
include requirements that a public interest payphone not be located on the premises of a person
receiving compensation under a contract for the placement of other payphones, that access to the
payphone be unrestricted, and that the payphone be at least a specified distance away from any
other payphones.    The experience in California has been that only a very small number of
locations, relative to the overall number of payphones, meet the narrow criteria for public interest
payphones.  It may be, however, that in other states such a program would not effectively
provide for public interest telephones because there are insufficient numbers of competitive
payphones available to adequately and fairly support the locations meeting the criteria for public
interest payphones.  Other states, however, have responded to an identified need for payphones
necessary to satisfy public health, safety, and welfare concerns by requiring LECs to provide at
least one public payphone in each telephone exchange, or by requiring the placement of
unprofitable payphones as part of contracts with PSPs for the placement of profitable payphones
on public property.
                                  280. The existence of these various and diverse plans confirms both that the
states have the authority to adequately address the need for public interest payphones, and that
any effort to implement a uniform national program is unlikely to be as successful in accounting
for differing conditions among the states.  We also believe that any effort by the Commission
to implement such a national program would be beyond our current resource capabilities.  For
all of the above reasons, we conclude that the primary responsibility for administering and
funding of public interest payphone programs should be left to the states.
                                  281. While we leave the administration of public interest payphones to the states,
we believe that the 1996 Act requires us to impose minimum guidelines for establishment of a
public interest payphone program to meet our statutory obligation to ensure the maintenance of
such payphones.  In particular, we believe it is very important to establish a basic definition of
public interest payphones that is narrowly tailored to payphones that are truly needed for the
public interest reasons enunciated in the statute.  The 1996 Act describes public interest
payphones as those "which are provided in the interest of public health, safety, and welfare, in
locations where there would otherwise not be a payphone . . ."  The Conference Report further
explains that "the term does not apply to a payphone located near other payphones, or to a
payphone that, even though profitable by itself, is provided for a location provider with whom
the payphone provider has a contract."  The definition proposed in the Notice encompasses
both of these statements.  We also note that the limitations reflected in the Conference Report
are similar to those included in the California program's criteria for "public policy payphones."
                                  282. We adopt as a definition of "public interest payphone," a payphone which
(1) fulfills a public policy objective in health, safety, or public welfare, (2) is not provided for
a location provider with an existing contract for the provision of a payphone, and (3) would not
otherwise exist as a result of the operation of the competitive marketplace.  This definition is
similar in effect to the one proposed in the Notice.  We conclude that the statute and Conference
Report reflect a congressional intent that reliance on the public interest payphone provision is to
be limited to instances where a payphone location serves a strong public interest that would not
be fulfilled by the normal operation of the market.  Thus, a state may not require that a public
interest payphone be installed on premises where a location provider already has a contract for
the maintenance of a competitive payphone, even if such contract requires the location provider
to pay for the continued maintenance of such payphone.
                                  283. The 1996 Act directs the Commission, in the event that we find the need
for public interest payphone programs, to "ensure that such public interest payphones are
supported fairly and equitably."  We find that this provision requires a national guideline that
companies providing public interest payphones be fairly compensated for the cost of such
services.  We leave to the discretion of the states how to fund their respective public interest
payphone programs, so long as the funding mechanism, (1) "fairly and equitably" distributes the
costs of such a program, and (2) does not involve the use of subsidies prohibited by Section
276(b)(1)(B) of the 1996 Act.  Thus, a state may choose to fund public interest payphones
from its general revenues through a process that ensures that companies providing public interest
payphones are fairly compensated and in a manner that does not otherwise affect the competitive
balance of the industry.  Similarly, a state or local government may include requirements for
placing non-profitable payphones as part of a voluntary, contractual agreement with a payphone
services provider for the installation of competitive payphones on public property.
     284.                                   Alternatively, states may address the need for public interest payphones by
adopting appropriate rules in conjunction with their responsibilities for ensuring universal service
pursuant to Section 254(f) of the 1996 Act.  We note that issues relating to public interest
payphones were not referred to the Universal Services Federal-State Joint Board in Docket 96-
45.  Section 254(f), however, provides that states may adopt regulations to preserve and
advance universal service within each state, not inconsistent with the rules we will eventually
adopt in that proceeding.  Accordingly, any state may adopt regulations to provide for
additional definitions and standards to preserve and advance universal service within that state
so long as such regulations include additional specific, predictable, and sufficient mechanisms
to support such definitions or standards, and that do not burden or rely on federal universal
service support mechanisms.  We note that among the among the criteria established by the
1996 Act for defining services that are to be supported by a universal services program, are
whether such telecommunications services "are essential to education, public health, or public
safety . . . . [and] are consistent with the public interest, convenience, and necessity."  We find
that the implementation of a public interest payphone program is consistent with these goals, and
may be a valuable tool in the states' efforts to achieve universal service.  Therefore, we find
that states may establish funding mechanisms for public interest payphones either by meeting the
funding requirements of Section 276(b)(2), as limited by Section 276(b)(1)(B), or in accordance
with state universal service rules adopted pursuant to Section 254(f) in conjunction with Section
276(b)(2) and (b)(1)(B).
                                              285.   In furtherance of our statutory responsibility under Section 276(b)(2), we
direct each state to review whether it has adequately provided for public interest payphones in
a manner consistent with this Report and Order.  In particular, each state should evaluate whether
it needs to take any measures to ensure that payphones serving important public interests will
continue to exist in light of the elimination of subsidies and other competitive provisions
established pursuant to Section 276 of the 1996 Act, and that any existing programs are
administered and funded  consistent with the requirements described above.  This review must
be completed by each state within two years of the date of issuance of this Report and Order, and
may be conducted in conjunction with each state's study of the payphone marketplace which we
are requiring in connection with the transition to market-based payphone compensation.
                                              286.   Finally, we do not delegate our entire responsibility under Section 276(b)(2)
to "ensure that such public interest payphones are supported fairly and equitably."  If interested
parties believe that a state is not supporting public interest payphones fairly and equitably, such
parties may file a petition with the Commission asserting that the state is not providing for
payphones in accordance with Section 276(b)(2) and the guidelines we adopt in this Report and
Order, as may be amended from time to time.
G.  OTHER ISSUES
    1.  Dialing Parity
    a.  The Notice
    287.                             We tentatively concluded in the Notice that the benefits of the dialing
parity requirements to be adopted pursuant to Section 251(b)(3) of the 1996 Act should extend
to all payphone location providers.  We sought comment on this and other methods for
achieving dialing parity for payphone location providers, and users, of payphones that are
consistent with the definition of dialing parity under Section 3(15) of the 1934 Act, as
amended.  As a related matter, we also sought comment on whether we should extend the
unblocking requirements established in TOCSIA to all local and long distance calls.
    b.  Comments
    288.                             AT&T, MCI, Sprint and the Virginia SCC all agree with the Commission's
tentative conclusion that the benefits of the dialing parity requirements to be adopted pursuant
to Section 251(b)(3) of the 1996 Act should extend to all payphone location providers.  While
the RBOCs agree with the tentative conclusion, they assert that such benefits should be exercised
indirectly through the PSP's programming of their "smart" payphones to select a presubscribed
intraLATA carrier, as opposed to directly through presubscription at the LEC's central office
switch.  The Florida PSC contends that a PSP should be able to "program" its payphones to
route 1+ and 0+ toll calls to the preferred carrier.  GVNW argues that it is the states who
should be given the discretion of determining when and how dialing parity for intraLATA calls
should be applied to payphones.
    289.                             AT&T requests that the Commission mandate inclusion of all incumbent
LEC payphones in the presubscription process in the 15 states with toll dialing parity orders
issued prior to December 15, 1995 as well as immediate intraLATA presubscription for all BOC
payphones located in territories where intraLATA presubscription is now technically available.
The RBOCs argue that the Commission should deny AT&T's immediate intraLATA
presubscription request, contending that this request is without basis in Section 276 and cannot
be implemented for intraLATA payphone calls, apart from intraLATA residential and business
calls.  According to the RBOCs, intraLATA dialing parity for payphone calls should operate
on the same timetable as for all other calls.
    290.                             AT&T and MCI both argue that the Commission should adopt intraLATA
unblocking requirements similar to the interLATA carrier unblocking requirements established
in TOCSIA.  Sprint argues that the interLATA unblocking requirements established pursuant
to TOCSIA should extend to all local and long distance calls.  Ameritech argues that the
existing anti-blocking rules promulgated under TOCSIA remain sufficient to prevent aggregators
from defeating LEC equal access features, so long as all LECs are mandated to continue
providing these features.  According to Ameritech, Section 251(b)(3) of the 1996 Act does not
incorporate the full list of equal access features in that it relies on a definition of dialing parity
which includes only presubscription and omits mention of 10XXX or other dialed access codes.
Therefore, Ameritech argues that because the dialing parity rules of Section 251(b)(3) do not
include an express reaffirmation of the LECs' duty to honor 10XXX and other access codes, the
Commission should expressly articulate such a reaffirmation in its implementation of Section
251(b)(3).
    c.  Discussion
    291.                             In our recently issued order implementing the Section 251(b)(3) dialing
parity requirements, we concluded that dialing parity was an important element in fostering
vigorous local exchange and long distance competition "by ensuring that each customer has the
freedom and the flexibility to choose among different carriers for different services without the
burden of dialing access codes."  We believe that this statement is equally applicable to
fostering vigorous competition in the payphone industry, and accordingly affirm our tentative
conclusion that the benefits of dialing parity requirements adopted pursuant to Section 251(b)(3)
of the 1996 Act should extend to all payphone location providers.
    292.                             We also conclude that the technical and timing requirements established
pursuant to Section 251(b)(3), and Section 271(c)(2)(B), should apply equally to payphones.
We find that burden on the LECs in requiring them to provide dialing parity for payphones, prior
to all other phones, outweighs any competitive benefit that might result.  In this respect, we note
that independent payphone service providers' "smart payphones" can adequately create dialing
parity within the payphone unit pending the implementation of true dialing parity.
    293.                             Finally, we conclude that the unblocking of carrier access codes mandated
by TOCSIA and our rules for interstate calls should also apply to intrastate (including local)
access code calls.  This may already be normal within the industry, and no party objected to our
proposal.  Allowing unrestricted access to a caller's preferred carrier is an essential feature of
creating a competitive payphone industry, and we have created a mechanism that ensures that the
PSP will receive compensation for all access code calls, including intrastate calls.  Given the
existence of compensation and the pro-competitive purpose of Section 276 of the 1996 Act, and
in the absence of any technical limitations, we find that unblocked access for all access code calls
from payphones is required.
    2.  Letterless Keypads
    a.  The Notice
    294.                             In the Notice, the Commission expressed a concern that use of letterless
keypads may frustrate the intent of Congress, as expressed in TOCSIA, to permit callers to reach
the OSP of their choice from payphones.  We also stated that letterless keypads ultimately
frustrate Congressional intent, as expressed in the 1996 Act, "to promote competition among
payphone service providers and promote the widespread deployment of payphone services to the
benefit of the general public[.]"  Therefore, the Commission tentatively concluded that the use
of letterless keypads violates both TOCSIA and the 1996 Act by preventing callers from
accessing their OSP of choice, and we solicited comment on how the Commission should take
action to prohibit use of these "by-pass" letterless keypads to restrict the availability of "vanity"
access numbers.
    b.  Comments
    295.                             A wide range of commenters, including IXCs, RBOCs, independent LECs,
state utility commissions and PPOs, share our concern that letterless keypads prevent consumers
from reaching their OSP of choice and inhibit competition in the payphone industry.  The Ohio
PUC cites complaints by consumers and "representatives of persons with communications
disabilities."  In addition, many of the commenters agree with the Commission's tentative
conclusion that letterless keypads violate both TOCSIA and the 1996 Act.  A significant
number of commenters encourage the Commission to ban these devices entirely.  Alternatively,
Sprint argues for promulgation of positive rules requiring alphanumeric keypads on all
payphones.  MCI, Scherers, and the Indiana URC argue for penalties to be assessed against
offenders.  In particular, MCI calls for "significant Commission forfeitures," while Scherers
endorses punitive fines and disconnection of service as a response to violations.  Sprint
proposes further that no IXC should be required to provide compensation to any PSP found to
be violating the proposed rule on letterless keypads.
    c.  Discussion
    296.                             We now conclude, as we tentatively concluded in the Notice, that the use
of letterless keypads violates both TOCSIA and the 1996 Act.  We find that an exclusively
numeric payphone keypad defeats a caller's attempt to reach its OSP of choice through the use
of commonly-used "vanity" access sequences such as AT&T's "1-800-CALL-ATT" and "10ATT"
or MCI's "1-800-COLLECT."  Such access sequences, which can be easily remembered by
consumers, require the presence of both alphabetic and numeric characters on payphone keypads.
A letterless keypad, therefore, clearly defeats a consumer's attempt to utilize these heuristic
sequences.  In their sales material, letterless keypad manufacturers have specifically positioned
these devices as "by-pass keypad[s]" that "prevent[] dial around [calls]."  No party has
commented on a plausible purpose for these devices other than to restrict access to a non-
presubscribed carrier.
    297.                             To promote consumer access to OSPs, TOCSIA required the unblocking
of 800 and 950 access numbers at aggregator locations and directed the Commission to mandate
the unblocking of 10XXX access codes and/or the establishment of 800/950 access numbers by
each OSP. We conclude that letterless keypads violate the unblocking requirements of TOCSIA
by preventing consumers from reaching their OSP of choice through the dialing of vanity access
sequences. A payphone keypad without alphabetic characters serves the same purpose as the
blocking that is prohibited by TOCSIA.  Accordingly, we will take enforcement action, including
forfeitures, if such devices are used, just as we would take action against other forms of blocking.
Moreover, OSPs may not pay commissions to PSPs whose payphones block access.
    298.                              Independent of TOCSIA requirements,  we conclude  that the practice of
deploying letterless keypads inhibits consumer choice in the selection of OSP services and is
anticompetitive.  Likewise, we conclude that such deployment restricts the availability of
payphone OSP services to the general public.  The 1996 Act seeks "to promote competition
among payphone service providers and promote the widespread deployment of payphone services
to the benefit of the general public[.]"  Therefore, we conclude that use of letterless keypads
is inconsistent with the 1996 Act.
    3.  Oncor Petition
    299.  On August 7, 1995 Oncor Communications, Inc. filed a petition asking the
Commission to prescribe compensation for public payphone premises owners and presubscribed
OSPs.  Oncor states that such compensation "is necessary to remedy the injustices resulting from
access code calls."  The Commission invited comment on Oncor's petition by Public Notice
released September 12, 1995.  We deny Oncor's request.  As commenters note, the presubscribed
OSP incurs no costs when a consumer makes an access code call from a payphone, and it would
be inequitable to require any party to compensate the OSP because the caller chose not to use
it.  Moreover, there is no need for us to prescribe compensation for premises owners.  The
rules that we adopt in this Report and Order will ensure that PSPs are fairly compensated for
calls that originate on their facilities, and market forces will ensure that the PSPs fairly
compensate premises owners.
                          IV.  PROCEDURAL MATTERS
    1.  Petitions for Reconsideration and Ex Parte Presentations
    300.                             Parties must file any petitions for reconsideration of this Report and Order
within 30 days from release of this document.  We hereby waive, on our own motion, the
requirements of Section 1.4 of our rules to establish this new date of public notice in light of the
deadline established in the 1996 Act to complete this proceeding.  Parties may file oppositions
to the petitions for reconsideration pursuant to Section 1.106(g) of the rules, except that we
require that oppositions to the petitions be filed within seven (7) days after the date for filing the
petitions for reconsideration.  The Commission will not issue a separate notice of any petitions
for reconsideration; this paragraph serves as notice to all interested parties of the due dates for
petitions and oppositions.  In addition, the Commission hereby waives Section 1.106(h) of the
rules and will not accept reply comments in response to oppositions.  We conclude that these
actions are necessary to complete all Commission action in this proceeding, which involves issues
concerning the Commission's expedited implementation of the 1996 Act, by the statutory deadline
of November 8, 1996.  We will consider all relevant and timely petitions and oppositions  before
final action is taken in this proceeding.
    301.                             To file a petition for reconsideration in this proceeding parties must file an
original and ten copies of all petitions and oppositions.  Petitions and oppositions should be sent
to the Office of the Secretary, Federal Communications Commission, Washington, DC 20554.
If parties want each Commissioner to have a personal copy of their documents, an original plus
fourteen copies must be filed.  In addition, participants should submit two additional copies
directly to the Common Carrier Bureau, Enforcement Division, Room 6008, 2025 M Street NW,
Washington, D.C. 20554.  The petitions and oppositions will be available for public inspection
during regular business hours in the Dockets Reference Room (Room 230) of the Federal
Communications Commission, 1919 M Street, NW, Washington, DC 20554.  Copies of the
petition and any subsequently filed documents in this matter may be obtained from ITS, Inc.,
2100 M Street, NW, Suite 140, Washington, DC 20037, (202) 857-3800.
    302.  Petitions for reconsideration must comply with Sections 1.106 and 1.49 and
all other applicable sections of the Commission's rules.  Petitions also must clearly identify the
specific portion of this Report and Order for which relief is sought. If a portion of a party's
arguments does not fall under a particular topic listed in the outline of this Report and Order,
such arguments should be included in a clearly labelled section at the beginning or end of the
filing.  Parties may not file more than a total of ten (10) pages of ex parte submissions, excluding
cover letters.  This 10 page limit does not include:  (1) written ex parte filings made solely to
disclose an oral ex parte contact; (2) written material submitted at the time of an oral presentation
to Commission staff that provides a brief outline of the presentation; or (3) written material filed
in response to direct requests from Commission staff.  Ex parte filings in excess of this limit will
not be considered as part of the record in this proceeding.
      2.  Final Paperwork Reduction Act Analysis
                                              303.   The decision herein has been analyzed with respect to the Paperwork
Reduction Act of 1995, Pub. L. 104-13, and several of its requirements have been approved in
accordance with the provisions of that Act.  The Office of Management and Budget ("OMB")
made several suggestions for our proposals:
                                              304.   Report of Local Exchange Companies of Cost Accounting Studies.  OMB
suggested that the description and justification for this requirement be clarified.  The rules
require incumbent LECs to offer individual central office coin transmission services to PSPs
under a nondiscriminatory, public tariffed offering if the LECs provide those services for their
own operations.  Because the incumbent LECs may have an incentive to charge their competitors
unreasonably high prices for these services, we require them to submit cost support for their
central office coin services, on a one-time basis.  This will ensure that the services are reasonably
priced and do not include subsidies.
                                              305.   Report of Bell Operating Companies of Initial Comparably Efficient
Interconnection Plans.  OMB requested that we provide revised cost and burden hour estimates.
The cost and burden hour estimates have not changed.
                                              306.   Annual Filing of Nondiscrimination Reports by Bell Operating Companies.
OMB requested that we provide revised cost and burden hour estimates.  The cost and burden
hour estimates have not changed.
                                              307.   Quarterly Report of IntraLATA Carriers Listing Payphone Automatic
Number Identification (ANIs).  OMB suggested that we allow interLATA carriers to use
innovative approaches to provide ANIs, such as posting the information on the Internet or
distributing the information via electronic mail.  We have not specified the manner in which
interLATA carriers must supply carrier-payors with the list of payphone ANIs.  InterLATA
carriers are free to use any technologies at their disposal to distribute the necessary information.
                                              308.   Public Disclosure of Network Information by Bell Operating Companies.
OMB suggested that we weigh the reporting and notification burden of this requirement, as well
as consider shortening the period of public disclosure  from a minimum of six months, so as not
to unfairly burden BOCs by delaying technical modifications to their systems.  We agree with
OMB that we should choose the least burdensome method to accomplish our goal of prohibiting
the BOCs from discriminating in the provision of payphone service.  We believe, however, that
a minimum six-month period of public disclosure prior to the introduction of a new service is
vital to ensure that BOCs do not design new network services or change network technical
specifications to the advantage of their own payphones.
                                              309.   Annual Report of Interexchange Carriers Listing the Compensation Amount
Paid to Payphone Providers and the Number of Payees.  OMB suggested that we weigh the
burden imposed by the payment and information mechanism contained in this requirement.
We agree with OMB that we should choose the least burdensome method to accomplish our goal
of ensuring that all IXCs are paying their respective compensation obligations.  Therefore we
conclude that this reporting requirement will be terminated after the carriers have filed their
reports for the 1999 calendar year.  In addition, for further flexibility, we delegate to the Chief,
Common Carrier Bureau, the authority to establish the details, as necessary, of this annual report,
including the authority to extend or limit the scope of this report.
                                              310.   Quarterly Report of Interexchange Carriers Listing the Number of Dial
Around Calls for Which Compensation is Being Paid to Payphone Owners.  OMB suggested that
we weigh the burden imposed by the payment verification mechanism contained in this
requirement.  We agree with OMB that we should choose the least burdensome method to
accomplish our goal of ensuring that billing and collection are as efficient as possible.  In fact,
we weighed several alternatives to achieve optimum efficiency and the least burdensome
approach, before imposing this requirement.  This requirement is imposed on the IXCs  because
they have the greatest ability and incentive to establish the most efficient means of administering
the payment of compensation.
      3.  Final Regulatory Flexibility Act Analysis
                                              311.   As required by Section 603 of the Regulatory Flexibility Act (RFA),  5
U.S.C.  603, an Initial Regulatory Flexibility Analysis (IRFA) was incorporated in the Notice.
The Commission sought written public comment on the proposals in the Notice, including
comment on the IRFA.  The Commission's Final Regulatory Flexibility Analysis (FRFA) in
this Order conforms to the RFA, as amended by the Contract With America Advancement Act
of 1996 (CWAAA), Pub. L. No. 104-121, 110 Stat. 847 (1996).
      A.                                      Need for and Objectives of this Report
                                              and Order and the Rules Adopted Herein
                                              312.   The Commission, in compliance with Section 276 of the Communications
Act of 1934, as amended by the Telecommunications Act of 1996 (the 1996 Act), promulgates
the rules in this Order to promptly implement Section 276 of the 1996 Act, which directs the
Commission, among other things, to adopt rules that:  (1) establish a plan to ensure fair
compensation for "each and every completed intrastate and interstate call using [a]
payphone[;]" (2) discontinue intrastate and interstate carrier access charge payphone service
elements payments and intrastate and interstate payphone subsidies from basic exchange
services; (3) prescribe nonstructural safeguards for Bell Operating Company (BOC)
payphones; (4) permit the BOCs to negotiate with payphone location providers for the
intraLATA carriers presubscribed to their payphones; (5) permit all payphone providers to
negotiate with the location provider for the intraLATA carriers presubscribed to their
payphones; and (6) adopt guidelines for use by the states in establishing public interest
payphone programs.
                                              313.   The objective of the rules adopted in this Order is "to promote competition
among payphone service providers and promote the widespread deployment of payphone services
to the benefit of the general public."  In doing so, we are mindful of the balance that Congress
struck between this goal of bringing the benefits of competition to consumers and its concern for
the impact of the 1996 Act on small businesses.
      B.                                      Analysis of Significant Issues
                                              Raised in Response to the IRFA
                                              314.  Summary of the Initial Regulatory Flexibility Analysis (IRFA).  In the IRFA,
the Commission found that the rules we proposed to adopt in this proceeding may have a
significant impact on a substantial number of small business as defined by section 601(3) of the
RFA.  The IRFA solicited comment on alternatives to our proposed rules that would minimize
the impact on small entities consistent with the objectives of this proceeding.  The Commission
received one comment on the potential impact on small business entities, which the Commission
considered in promulgating the rules in this Order.  Frontier commented generally that the
compensation scheme advanced in the NPRM was "unnecessarily onerous and inefficient" and
"in conflict with the goals of the .... Regulatory Flexibility Act."  Frontier did not comment
specifically on what aspect of the compensation scheme would have economic impact on small
business entities.  We disagree with Frontier's general assertion that the compensation scheme
is in conflict with the Regulatory Flexibility Act.  Our rules are designed to facilitate the
development of competition, which benefits many small business entities.  The rules will ensure
that payphone services providers, many of whom may be small business entities, receive fair
compensation.  Our rules provide significant flexibility to permit the affected parties, including
small business entities, to structure procedures that would minimize their burdens.  For example,
the rules require IXCs and intraLATA carriers, as primary economic beneficiary of payphone
calls, to track the calls they receive from payphones.  The carrier has the option of performing
the function itself or contracting out these functions to another party, such a LEC or
clearinghouse.  We also provide a transition period.  We believe that our rules are designed to
effectively optimize the efficiency and minimize the burdens of the compensation scheme on all
parties, including small entities.
      C.                                      Description and Estimates of the Number of
                                              Small Entities Affected by this Report and Order
                                              315.   For the purposes of this Order, the RFA defines a "small business" to be
the same as a "small business concern" under the Small Business Act, 15 U.S.C.  632, unless
the Commission has developed one or more definitions that are appropriate to its activities.
Under the Small Business Act, a "small business concern" is one that:  (1) is independently
owned and operated; (2) is not dominant in its field of operation; and (3) meets any additional
criteria established by the Small Business Administration (SBA).  SBA has defined a small
business for Standard Industrial Classification (SIC) category 4813 (Telephone Communications,
Except Radiotelephone) to be a small entity when it has fewer than 1,500 employees.
                                              316.   We have found incumbent LECs to be "dominant in their field of
operation" since the early 1980s, and we consistently have certified under the RFA that
incumbent LECs are not subject to regulatory flexibility analyses because they are not small
businesses.  We have made similar determinations in other areas.  However, in the Local
Competition proceeding, several parties, including the SBA, commented that we should have
included small incumbent LECs in the IRFA pertaining to that order.  We recognize SBA's
special role and expertise with regard to the RFA, and intend to continue to consult with SBA
outside the context of this proceeding to ensure that the Commission is fully implementing the
RFA.  Although we are not fully persuaded that our prior practice has been incorrect, we will,
nevertheless, include small incumbent LECs in this FRFA to remove any possible issue of RFA
compliance.  Consistent with our prior practice, we shall continue to exclude small incumbent
LECs from the definition of a small entity for the purpose of this FRFA.  Nevertheless, as
mentioned above, we include small incumbent LECs in our FRFA.  Accordingly, our use of the
terms "small entities" and "small businesses" does not encompass "small incumbent LECs."  We
use the term "small incumbent LECs" to refer to any incumbent LECs that arguably might be
defined by SBA as "small business concerns."
                                              Telephone Companies (SIC 4813)
                                              317.   Total Number of Telephone Companies Affected.  Many of the decisions
and rules adopted herein may have a significant effect on a substantial number of the small
telephone companies identified by the SBA.  The United States Bureau of the Census (the Census
Bureau) reports that, at the end of 1992, there were 3,497 firms engaged in providing telephone
services, as defined therein, for at least one year.  This number encompasses a broad category
which contains a variety of different subsets of carriers, including local exchange carriers,
interexchange carriers, competitive access providers, cellular carriers, mobile service carriers,
operator service providers, pay telephone operators, PCS providers, covered SMR providers, and
resellers.  It seems certain that some of those 3,497 telephone service firms may not qualify as
small entities or small incumbent LECs because they are not "independently owned and
operated."  For example, a PCS provider that is affiliated with an interexchange carrier having
more than 1,500 employees would not meet the definition of a small business.  It seems
reasonable to conclude, therefore, that fewer than 3,497 telephone service firms are small entity
telephone service firms or small incumbent LECs that may be affected by this Order.  We
estimate below the potential small entity telephone service firms or small incumbent LECs that
may be affected by this Order by service category.
                                              318.  Wireline Carriers and Service Providers.  The SBA's definition of small
entities for telephone communications companies, other than radiotelephone (wireless) companies,
is one employing fewer than 1,500 persons.  The Census Bureau reports that, there were 2,321
such telephone companies in operation for at least one year at the end of 1992.  All but 26 of
the 2,321 non-radiotelephone companies listed by the Census Bureau were reported to have fewer
than 1,000 employees.  Thus, even if all 26 of those companies had more than 1,500 employees,
there would still be 2,295 non-radiotelephone companies that might qualify as small entities or
small incumbent LECs.  Although it seems certain that some of these carriers are not
independently owned and operated, we are unable at this time to estimate with greater precision
the number of wireline carriers and service providers that would qualify as small business
concerns under SBA's definition.  Consequently, we estimate that there are fewer than 2,295
small entity telephone communications companies other than radiotelephone companies that may
be affected by the decisions and rules adopted in this Order.
                                              319.   Local Exchange Carriers.  Neither the Commission nor SBA has developed
a definition of small providers of local exchange services (LECs).  The closest applicable
definition under SBA rules is for telephone communications companies other than radiotelephone
(wireless) companies (SIC 4813).  The most reliable source of information regarding the number
of LECs nationwide of which we are aware appears to be the data that we collect annually in
connection with the Telecommunications Relay Service (TRS).  According to our most recent
data, 1,347 companies reported that they were engaged in the provision of local exchange
services.  Although it seems certain that some of these carriers are not independently owned
and operated, or have more than 1,500 employees, we are unable at this time to estimate with
greater precision the number of LECs that would qualify as small business concerns under SBA's
definition.  Consequently, we estimate that there are fewer than 1,347 small incumbent LECs that
may be affected by the decisions and rules adopted in this Order.
                                              320.   Interexchange Carriers.  Neither the Commission nor SBA has developed
a definition of small entities specifically applicable to providers of interexchange services (IXCs).
The closest applicable definition under SBA rules is for telephone communications companies
other than radiotelephone (wireless) companies (SIC 4813).  The most reliable source of
information regarding the number of IXCs nationwide of which we are aware appears to be the
data that we collect annually in connection with TRS.  According to our most recent data, 97
companies reported that they were engaged in the provision of interexchange services.
Although it seems certain that some of these carriers are not independently owned and operated,
or have more than 1,500 employees, we are unable at this time to estimate with greater precision
the number of IXCs that would qualify as small business concerns under SBA's definition.
Consequently, we estimate that there are fewer than 97 small entity IXCs that may be affected
by the decisions and rules adopted in this Order.
                                              321.   Competitive Access Providers.  Neither the Commission nor SBA has
developed a definition of small entities specifically applicable to providers of competitive access
services (CAPs).  The closest applicable definition under SBA rules is for telephone
communications companies other than radiotelephone (wireless) companies (SIC 4813).  The
most reliable source of information regarding the number of CAPs nationwide of which we are
aware appears to be the data that we collect annually in connection with the TRS.  According
to our most recent data, 30 companies reported that they were engaged in the provision of
competitive access services.  Although it seems certain that some of these carriers are not
independently owned and operated, or have more than 1,500 employees, we are unable at this
time to estimate with greater precision the number of CAPs that would qualify as small business
concerns under SBA's definition.  Consequently, we estimate that there are fewer than 30 small
entity CAPs that may be affected by the decisions and rules adopted in this Order.
                                              322.   Operator Service Providers.  Neither the Commission nor SBA has
developed a definition of small entities specifically applicable to providers of operator services
(OSPs).  The closest applicable definition under SBA rules is for telephone communications
companies other than radiotelephone (wireless) companies (SIC 4813).  The most reliable source
of information regarding the number of operator service providers nationwide of which we are
aware appears to be the data that we collect annually in connection with the TRS.  According
to our most recent data, 29 companies reported that they were engaged in the provision of
operator services.  Although it seems certain that some of these companies are not
independently owned and operated, or have more than 1,500 employees, we are unable at this
time to estimate with greater precision the number of operator service providers that would
qualify as small business concerns under SBA's definition.  Consequently, we estimate that there
are fewer than 29 small entity operator service providers that may be affected by the decisions
and rules adopted in this Order.
                                              323.   Pay Telephone Operators.  Neither the Commission nor SBA has developed
a definition of small entities specifically applicable to pay telephone operators.  The closest
applicable definition under SBA rules is for telephone communications companies other than
radiotelephone (wireless) companies.  The most reliable source of information regarding the
number of pay telephone operators nationwide of which we are aware appears to be the data that
we collect annually in connection with the TRS.  According to our most recent data, 197
companies reported that they were engaged in the provision of pay telephone services.
Although it seems certain that some of these carriers are not independently owned and operated,
or have more than 1,500 employees, we are unable at this time to estimate with greater precision
the number of pay telephone operators that would qualify as small business concerns under SBA's
definition.  Consequently, we estimate that there are fewer than 197 small entity pay telephone
operators that may be affected by the decisions and rules adopted in this Order.
                                              324.   Resellers (including debit card providers).  Neither the Commission nor
SBA has developed a definition of small entities specifically applicable to resellers.  The closest
applicable definition under SBA rules is for all telephone communications companies (SIC 4812
and 4813). The most reliable source of information regarding the number of resellers nationwide
of which we are aware appears to be the data that we collect annually in connection with the
TRS.  According to our most recent data, 206 companies reported that they were engaged in the
resale of telephone services.  Although it seems certain that some of these carriers are not
independently owned and operated, or have more than 1,500 employees, we are unable at this
time to estimate with greater precision the number of resellers that would qualify as small
business concerns under SBA's definition.  Consequently, we estimate that there are fewer than
206 small entity resellers that may be affected by the decisions and rules adopted in this Order.
                                              325.   800-Subscribers.  Neither the Commission nor SBA has developed a
definition of small entities specifically applicable to 800-subscribers.  The most reliable source
of information regarding the number of 800-subscribers of which we are aware appears to be the
data we collect on the number of 800-numbers in use.  According to our most recent data, at
the end of 1995, the number of 800-numbers in use was 6,987,063.  Although it seems certain
that some of these subscribers are not independently owned and operated businesses, or have
more than 1,500 employees, we are unable at this time to estimate with greater precision the
number of 800-subscribers that would qualify as small business concerns under SBA's definition.
Consequently, we estimate that there are fewer than 6,987,063 small entity 800-subscribers that
may be affected by the decisions and rules adopted in this Order.
                                              326.   Location Providers.  Neither the Commission nor SBA has developed a
definition of small entities specifically applicable to location providers.  A location provider is
the entity that is responsible for maintaining the premises upon which the payphone is physically
located.  Due to the fact that location providers do not fall into any specific category of business
entity, it is impossible to estimate with any accuracy the number of location providers.  Using
several sources, however, we have derived a figure of 1,850,000 payphones in existence.
Although it seems certain that some of these payphones are not located on property owned by
location providers that are small business entities, nor does the figure take into account the
possibility of multiple payphones at a single location, we are unable at this time to estimate with
greater precision the number of location providers that would qualify as small business concerns
under SBA's definition.  Consequently, we estimate that there are fewer than 1,850,000 small
entity location providers that may be affected by the decisions and rules adopted in this Order.
                                              327.   Wireless (Radiotelephone) Carriers (including paging services).  The SBA's
definition of a small business radiotelephone company is one employing fewer than 1,500
persons.  The Census Bureau reports that there were 1,176 such companies in operation for at
least one year at the end of 1992.  The Census Bureau also reported that 1,164 of those
radiotelephone companies had fewer than 1,000 employees.  Thus, even if all of the remaining
12 companies had more than 1,500 employees, there would still be 1,164 radiotelephone
companies that might qualify as small entities if they are independently owned are operated.
Although it seems certain that some of these carriers are not independently owned and operated,
we are unable at this time to estimate with greater precision the number of radiotelephone carriers
and service providers that would qualify as small business concerns under SBA's definition.
Consequently, we estimate that there are fewer than 1,164 small entity radiotelephone companies
that may be affected by the decisions and rules adopted in this Order.
                                              328.   Cellular Service Carriers (including paging services).  Neither the
Commission nor SBA has developed a definition of small entities specifically applicable to
providers of cellular services.  The closest applicable definition under SBA rules is for telephone
communications companies other than radiotelephone (wireless) companies (SIC 4813).  The
most reliable source of information regarding the number of cellular service carriers nationwide
of which we are aware appears to be the data that we collect annually in connection with the
TRS.  According to our most recent data, 789 companies reported that they were engaged in the
provision of cellular services.  Although it seems certain that some of these carriers are not
independently owned and operated, or have more than 1,500 employees, we are unable at this
time to estimate with greater precision the number of cellular service carriers that would qualify
as small business concerns under SBA's definition.  Consequently, we estimate that there are
fewer than 789 small entity cellular service carriers that may be affected by the decisions and
rules adopted in this Order.
                                              329.   Mobile Service Carriers (including paging services).  Neither the
Commission nor SBA has developed a definition of small entities specifically applicable to
mobile service carriers, such as paging companies.  The closest applicable definition under SBA
rules is for telephone communications companies other than radiotelephone (wireless) companies.
The most reliable source of information regarding the number of mobile service carriers
nationwide of which we are aware appears to be the data that we collect annually in connection
with the TRS.  According to our most recent data, 117 companies reported that they were
engaged in the provision of mobile services.  Although it seems certain that some of these
carriers are not independently owned and operated, or have more than 1,500 employees, we are
unable at this time to estimate with greater precision the number of mobile service carriers that
would qualify under SBA's definition.  Consequently, we estimate that there are fewer than 117
small entity mobile service carriers that may be affected by the decisions and rules adopted in
this Order.
                                              330.   Broadband PCS Licensees (including paging services).  The broadband PCS
spectrum is divided into six frequency blocks designated A through F.  As set forth in 47 C.F.R.
 24.720(b), the Commission has defined "small entity" in the auctions for Blocks C and F as
a firm that had average gross revenues of less than $40 million in the three previous calendar
years.  Our definition of a "small entity" in the context of broadband PCS auctions has been
approved by SBA.   The Commission has auctioned broadband PCS licenses in Blocks A, B,
and C.  We do not have sufficient data to determine how many small businesses bid successfully
for licenses in Blocks A and B.  There were 90 winning bidders that qualified as small entities
in the Block C auctions.  Based on this information, we conclude that the number of
broadband PCS licensees affected by the decisions in this Order includes, at a minimum, the 90
winning bidders that qualified as small entities in the Block C broadband PCS auction.
                                              331.   At present, no licenses have been awarded for Blocks D, E, and F of
broadband PCS spectrum.  Therefore, there are no small businesses currently providing these
services.  However, a total of 1,479 licenses will be awarded in the D, E, and F Block broadband
PCS auctions, which are scheduled to begin on August 26, 1996.  Of the 153 qualified bidders
for the D, E, and F Block PCS auctions, 105 were small businesses.  Eligibility for the 493
F Block licenses is limited to entrepreneurs with average gross revenues of less than $125
million.  There are 114 eligible bidders for the F Block.  We cannot estimate, however, the
number of these licenses that will be won by small entities under our definition, nor how many
small entities will win D or E Block licenses.  Given that nearly all radiotelephone companies
have fewer than 1,000 employees and that no reliable estimate of the number of prospective
D, E, and F Block licensees can be made, we assume for purposes of this FRFA, that all of the
licenses in the D, E, and F Block Broadband PCS auctions may be awarded to small entities
under our rules, which may be affected by the decisions and rules adopted in this Order.
                                              332.   SMR Licensees (including paging services).  Pursuant to 47 C.F.R. 
90.814(b)(1), the Commission has defined "small entity" in auctions for geographic area 800
MHz and 900 MHz SMR licenses as a firm that had average annual gross revenues of less than
$15 million in the three previous calendar years.  This definition of a  "small entity" in the
context of 800 MHz and 900 MHz SMR has been approved by the SBA.  The rules adopted
in this Order may apply to SMR providers in the 800 MHz and 900 MHz bands that either hold
geographic area licenses or have obtained extended implementation authorizations.  We do not
know how many firms provide 800 MHz or 900 MHz geographic area SMR service pursuant to
extended implementation authorizations, nor how many of these providers have annual revenues
of less than $15 million.  We assume, for purposes of this FRFA, that all of the extended
implementation authorizations may be held by small entities, which may be affected by the
decisions and rules adopted in this Order.
                                              333.   The Commission recently held auctions for geographic area licenses in the
900 MHz SMR band.  There were 60 winning bidders who qualified as small entities in the 900
MHz auction.  Based on this information, we conclude that the number of geographic area SMR
licensees affected by the rule adopted in this Order includes these 60 small entities.  No auctions
have been held for 800 MHz geographic area SMR licenses.  Therefore, no small entities
currently hold these licenses.  A total of 525 licenses will be awarded for the upper 200 channels
in the 800 MHz geographic area SMR auction.  However, the Commission has not yet
determined how many licenses will be awarded for the lower 230 channels in the 800 MHz
geographic area SMR auction.  There is no basis, moreover, on which to estimate how many
small entities will win these licenses.  Given that nearly all radiotelephone companies have fewer
than 1,000 employees and that no reliable estimate of the number of prospective 800 MHz
licensees can be made, we assume, for purposes of this FRFA, that all of the licenses may be
awarded to small entities who, thus, may be affected by the decisions in this Order.
      D.                                      Description of Projected Reporting, Recordkeeping, and Other Compliance
                                              Requirements, and Steps Taken by Agency to Minimize Significant Economic
                                              Impact on Small Entities and Small Incumbent LECs, consistent with Stated
                                              Objectives
                                              334.   Structure of the Analysis.  In this section of the FRFA, we analyze the
projected reporting, recordkeeping, and other compliance requirements that may apply to small
entities and small incumbent LECs as a result of this Order.  As a part of this discussion, we
mention some of the types of skills that will be needed to meet the new requirements.  We also
describe the steps taken to minimize the economic impact of our decisions on small entities and
small incumbent LECs, including the significant alternatives considered and rejected.
              FAIR COMPENSATION FOR EACH AND EVERY COMPLETED
      INTRASTATE AND INTERSTATE CALL ORIGINATED BY PAYPHONES
                                              335.   Summary of Projected Reporting, Recordkeeping and other Compliance
Requirements.  Section 276(b)(1)(A) 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...."  To implement Section
276(b)(1)(A), this Order requires: (1) that the market set the price for local coin calls originated
by payphones; (2) the appropriate per-call compensation amount for the service provided by
independent payphone providers (PSPs) when they originate an interstate call should be the same
amount the particular payphone provider charges for a local coin call; (3) the adoption of the
"carrier pays" compensation system, which essentially places the payment obligation of per-call
compensation on the primary economic beneficiary of payphone calls; (4) that the carrier, as the
primary economic beneficiary of payphone calls, perform the tracking of calls it receives from
payphones; (5) that carriers initiate an annual independent verification of their per-call tracking
functions for a period of two years, to ensure that they are tracking all of the calls for which they
are obligated to pay compensation, (6) a direct billing arrangement between IXCs and intraLATA
carriers and PSPs; (7) that LECs, who maintain the list of ANIs, have the burden of resolving
disputed ANIs; and (8) that an interim compensation mechanism be set up under which PSPs are
paid compensation at a flat monthly rate.  Compliance with these requirements may require the
use of engineering, technical, operational, accounting, billing, and legal skills.
                                              336.   The payphone industry appears to have the potential of being a very
competitive industry once the significant subsidies and entry/exit restrictions which are presently
distorting the competition are removed.  However, we perceive five potential areas that could
have significant economic impact on small businesses and small incumbent LECs: (1) the amount
of compensation paid to PSPs; (2) the "carrier pays" compensation system; (3) the administration
of per-call compensation; (4) the direct billing arrangement between carriers and PSPs; and (5)
the interim compensation mechanism.
                                              337.   Steps Taken to Minimize Significant Economic Impact on Small Entities
and Small Incumbent LECs, and Alternatives Considered: Amount of compensation:  By
requiring that the market set the price for individual coin calls originated by payphones we ensure
that PSPs, many of whom may be small business entities, receive fair compensation.  We
considered different options in deciding upon this alternative.  We reject proposals for adopting
a national uniform rate of compensation for all calls using a payphone because a single,
nationwide rate could jeopardize the financial viability of a majority of payphones.  Rejection
of this option allows for accounting for the significant variation in payphones in order to ensure
the incentives to place and maintain phones in a variety of geographic areas.  We also reject
proposals that certain types of calls should receive a different per-call compensation amount than
others.  We decline to interfere in marketplace transactions by providing for different
compensation amounts for different types of calls, in instances where marketplace failures are
limited or would have minimal impact on consumer welfare.  We do not perceive the need
to intervene in an apparently structurally competitive industry.
                                              338.   Many commentators, notably the IXCs, contend that marginal cost of
originating a payphone call should be used as the basis for compensating PSPs.  We conclude
that use of a marginal cost standard or any closely related TSLRIC standard would leave PSPs
under compensated, because such cost standards do not permit the recovery of any of a PSPs'
fixed costs, which make up the bulk of a PSP's costs.  We also reject, for similar reasons,
suggestions that current local coin rates be used as a surrogate for per-call compensation.  Local
coin rates are not necessarily fairly compensatory.  Local coin rates in some jurisdictions may
not cover the marginal cost of service and therefore, would not fairly compensate the PSPs.
                                              339.   This "market sets the price" approach provides flexibility.  Some PSPs may
find it advantageous to set coin rates as low as $.10 per call in select locations, perhaps as
promotions to enhance their brand names.  PSPs in other locations may choose to set the coin
rate higher, e.g. $.35 or $.40 per call.  We expect our action to minimize regulatory burdens,
expedite and simplify negotiations, and minimize economic impacts through lower transaction
costs.
                                              340.   We reject the proposal of the BOCs and some independent payphone
providers to use AT&T O+ commissions as a measure of fair value of the service provided by
independent payphone providers when they originate an interstate call.  These commissions may
include compensation for factors other than the use of the payphone, such as a PSP's promotion
of the OSP through placards on the payphone.  In the absence of reliable data, the appropriate
per-call compensation amount is whatever amount the particular payphone charges for a local
coin call.  PSPs, IXCs, subscriber 800 carriers, and intraLATA carriers, many of whom may be
small business entities, may find it advantageous to agree on an amount for some or all
compensable calls that is either higher or lower than the local coin rate at a given payphone
because it will grant parties in the payphone industry some flexibility and allow them to take
advantage of technological advances.
                                              341.   Payment of compensation:  Various commenters, including small IXCs and
paging services, proposed that the Commission should adopt the "carrier-pays" system.  We
reject proposals to adopt "caller-pays" and "set use fee" systems, because we believe that they
would involve greater transaction costs which can pose particular burdens for small businesses.
We considered various alternatives to adopt the "carrier pays" system for per-call compensation
because it places the payment obligation on the primary economic beneficiary in the least
burdensome, most cost-effective manner.  All carriers that receive calls from payphones are
required to pay per-call compensation, whether they are IXCs or intraLATA carriers.  The
"carrier pays" system gives the carriers the broadest latitude on how to recover the costs of
payphone compensation, whether through increased rates to all or particular customers, through
direct charges to access code call or subscriber 800 customers, or through contractual agreements
with individual customers, thereby involving fewer transaction costs.  In addition, under the
carrier pays system, individual carriers have the option of recovering either a different amount
from their customers or no amount at all.
                                              342.   However, in the interests of administrative efficiency and lower costs, we
require that facilities based carriers should pay the per-call compensation for calls received by
their reseller customers.  This would permit competitive facilities based carriers to negotiate
contract provisions that would require the reseller to reimburse the carrier.  We believe our
actions will expedite and simplify negotiations, minimize regulatory burdens and the impact of
our decisions for all parties, including small entities.
                                              343.   Administration of per-call compensation:  We considered various proposals
to determine who should provide call tracking.  This Order requires IXCs and intraLATA
carriers, as primary economic beneficiary of payphone calls, to track the calls they receive from
payphones.  The carrier has the option of performing the function itself or contracting out these
functions to another party, such a LEC or clearinghouse.  We recognize that tracking capabilities
vary from carrier to carrier and it may be appropriate for some carriers to pay compensation at
a flat rate basis until per-call tracking capabilities are put into place.  Neither LECs nor PSPs are
primary economic beneficiaries of payphone calls and PSPs do not universally have call-tracking
capabilities.  However, LECs, PSPs, and carriers receiving payphone calls should be able to take
advantage of each others' technological capabilities through the contracting process.
                                              344.   In view of current difficulties in tracking such calls, we conclude that a
transition period is warranted.  By permitting carriers to contract out their per-call tracking
responsibility, and by allowing a transition period for tracking subscriber 800 calls, we have
taken appropriate steps to minimize the per-call tracking burden on small carriers.  In addition,
to parallel the obligation to pay compensation, the underlying, facilities-based carrier has the
burden of tracking calls to its reseller customers, and it may recover that cost from the reseller,
if it chooses.
                                              345.   We conclude that carriers should be required to initiate an annual
independent verification of their per-call tracking functions for a period of two years, to ensure
that they are tracking all of the calls for which they are obligated to pay compensation.  This
would facilitate the prompt and accurate payment of all per-call compensation.  We believe our
actions will foster opportunities for small entities to gain access to such information without
requiring investigation or discovery proceedings, and reduce delay and transaction costs.
                                              346.   To establish minimal regulatory guidelines for the payphone industry
regarding resolution of disputed ANIs, we conclude that LECs who maintain the list of ANIs
must work with both carrier-payors and PSPs to resolve disputes more efficiently and quickly for
all parties concerned.  This provides LECs with the incentive, which they do not currently have,
to provide accurate and timely verification of ANIs for independently provided payphones.
Additionally, no other party has the information more readily available.  We expect this action
to assist all parties, including small entities, expedite and simplify negotiations, and help equalize
bargaining power.
                                              347.   Each time a caller dials a subscriber 800 number, the PSP will also levy
a charge which may be paid directly by the IXC, but will eventually be passed through to the 800
subscriber, either on a per-call basis or in the form of higher per minute rates.  Establishment of
the requirement that PSPs inform these subscribers of the price of the call they are deciding to
accept, provide subscribers with the opportunity to accept or decline to accept the call based on
the cost.  Without the requirement, the PSP would have the ability to charge a high amount in
the face of the subscriber's lack of information.  We expect our action to facilitate good faith
negotiations, and minimize regulatory burdens and the impact of our decisions for all parties,
including small entities.
                                              348.   While incumbent LECs in many jurisdictions currently do not charge
payphone callers for "411" calls made from their own payphones, the LECs charge independent
PSPs for directory assistance calls made from their phones.  The PSPs are not always allowed
by the state to pass those charges on to callers, which can pose particular burdens for them.  In
this Order we conclude that, to ensure fair compensation for "411" and other directory assistance
calls from payphones, a PSP is permitted to charge a market-based rate for the service, although
the PSP may decline to charge for this service if it chooses.  In addition, we conclude that if the
incumbent LEC imposes a fee on independent payphone providers for "411" calls, then the LEC
must impute the same fee to its own payphones for this service.  We believe our action will
facilitate the development of competition.
                                              349.   The direct billing arrangement between IXCs and intraLATA carriers and
PSPs adopted in this Order places the burden of billing and collecting information on the parties
who benefit the most from calls from payphones: carriers and PSPs.  Carriers must send to each
PSP a statement indicating the number of toll-free and access code calls received from that PSP's
payphones.  The carrier-payor has the option of using clearinghouses, similar to those that exist
for access code call compensation, or to contract out the direct-billing arrangement associated
with the payment of compensation.  We expect our action will foster opportunities for small
entities to gain access to such information without requiring investigation or discovery
proceedings.
                                              350.   Interim compensation mechanism:  We considered various proposals
regarding the feasibility of implementing an interim compensation mechanism before final rules
go into effect.  Because IXCs and intraLATA carriers are not required to track individual calls
until October 1, 1997, we conclude that PSPs should be paid monthly compensation on a flat
monthly rate.  We expect that the flat rate obligation will be of administrative convenience for
all parties involved, including small businesses.
RECLASSIFICATION OF LEC-OWNED PAYPHONES
                                              351.  Summary of Projected Reporting, Recordkeeping and Other Compliance
Requirements.  Section 276(b)(1)(B) directs the Commission to "discontinue the intrastate and
interstate carrier access charge payphone service elements and payments ... and all intrastate and
interstate payphone subsidies from basic exchange and exchange access revenues, in favor of a
[per-call] compensation plan."  Currently, incumbent LEC payphones, classified as part of the
network, recover their costs from Carrier Common Line (CCL) charges assessed on those carriers
that connect with the incumbent LEC.  This Order requires incumbent LECs to (1) classify their
payphones as detariffed and deregulated CPE; (2) provide to PSPs nondiscriminatory access
to unbundled central office coin transmission services and certain other services the LECs provide
to their own payphones, and must file tariffs for central office coin services and those incumbent
LECs that are not subject to price cap regulation must submit cost support for their central office
coin service; (3) transfer their payphone assets to unregulated accounts or affiliates at the
market value of the "payphone going concern," by April 15, 1997, and obtain independent
appraisal of the fair market value to submit to the Common Carrier Bureau within 180 days of
the effective date of this Order; and (4) reduce their interstate CCL charges by an amount
equal to the interstate allocation of payphone costs currently recovered through those charges,
and file revised CCL tariffs reflecting the changed rate structures.  Compliance with these
requirements may necessitate the use of engineering, technical, operational, accounting, billing,
and legal skills.
                                              352.   Some of the smaller incumbent LECs may find difficult the administrative
burdens of reclassifying payphones as CPE, transferring payphone assets to unregulated accounts,
and filing new tariffs.  Therefore, if a requesting carrier, which may be a small entity, seeks
access to an incumbent LEC's unbundled elements, the requesting carrier is required to
compensate the incumbent LEC for any costs incurred to provide such access.
                                              353.   Steps Taken to Minimize Significant Economic Impact on Small Entities
and Small Incumbent LECs, and Alternatives Considered.  The deregulation of LEC payphones
is essential to promoting competition in the payphone industry.  We reject several alternatives
in making this determination, including proposals suggesting that the Commission (1) should
allow smaller LECs to choose whether or not to deregulate their payphones; and (2) should
impose a structural separation requirement for incumbent LEC payphones.  The establishment
of minimum national requirements for discontinuation of payphone subsidies from basic exchange
and exchange access revenues should facilitate negotiations and reduce regulatory burdens and
uncertainty for all parties, including small entities and small incumbent LECs.  National
requirements may also allow new entrants, including small entities, to take advantage of
economies of scale.
                                              354.  By requiring the incumbent LECs to offer individual central office coin
transmission services to PSPs on a nondiscriminatory, public, tariffed offering, new entrants,
which may include small entities, should have access to the same technologies and economies
of scale and scope that are available to incumbent LECs.  This will permit competitive payphone
providers, some of whom are small business entities, to offer payphone services using either
instrument implemented "smart payphones" or "dumb" payphones that utilize central office coin
services.  We reject the proposal suggesting that the Commission require incumbent LECs to
provide on a nondiscriminatory basis all the services that they provide to their own payphone
operations or require incumbent LECs to perform joint marketing of the payphone operations of
other providers.  Instead, we require only that the incumbent LEC offer the following services
on a nondiscriminatory basis if it provides such services to its own payphone operations:  fraud
protection, special numbering assignments, and installation and maintenance of basic payphone
services.  Rejection of this alternative will allow small incumbent LECs to distinguish certain
services from services offered by other payphone providers.  Our actions in this area could
decrease entry barriers for small business entities and provide reasonable opportunities for all
payphone service providers to provide service.
ABILIT               Y OF PAYPHONE SERVICE PROVIDERS TO NEGOTIATE WITH
LOCATI     ON PROVIDERS ON THE PRESUBSCRIBED INTRALATA CARRIER
                                              355.  Summary of Projected Reporting, Recordkeeping and Other Compliance
Requirements.  Section 276(b)(1)(E) directs the Commission to "provide for all payphone service
providers to have the right to negotiate with the location provider on the location provider's
selecting and contracting with, and subject to the terms of any agreement with the location
provider, to select and contract with, the carriers that carry intraLATA calls from their
payphones."  This Order grants to all payphone service providers, including incumbent LECs,
the right to negotiate with location providers concerning the intraLATA carriers presubscribed
to their payphones.  We also preempt any state regulations mandating the routing of
intraLATA calls to the incumbent LEC.  Compliance with these requirements should not
necessitate the use of additional skills, since such skills are already used in negotiations
concerning the interLATA carriers presubscribed to payphones.
                                              356.   Allowing all payphone service providers to negotiate with location
providers concerning the intraLATA carriers presubscribed to their payphones could have a
positive economic impact on payphone providers who are small business entities by allowing
them flexibility to create favorable contract terms.  Small incumbent LECs may suffer some
negative economic impact because intraLATA calls will no longer be routinely routed to them.
                                              357.  Steps Taken to Minimize Significant Economic Impact on Small Entities and
Small Incumbent LECs, and Alternatives Considered.  State regulations that require routing of
intraLATA calls to the incumbent LEC are preempted by this Order, thereby creating a national
rule allowing all payphone service providers to negotiate with location providers concerning the
intraLATA carriers presubscribed to their payphones.  A national rule should facilitate
negotiations and reduce regulatory burdens and uncertainty for all parties, including small entities
and small incumbent LECs.  Our actions in granting to all payphone providers the same ability
to negotiate with location providers on the selection of the intraLATA carrier presubscribed to
the payphone will facilitate the development of competition.
          REQUIRING LECS TO PROVIDE DIALING PARITY FOR PAYPHONES
                                              358.  Summary of Projected Reporting, Recordkeeping, and Other Compliance
Requirements.  The Order concludes that the dialing parity requirements of Section 251(b)(3)
should extend to all payphone location providers and that the interLATA carrier unblocking
requirements established in TOCSIA should be extended to all local and long-distance calls.
The Order requires that the technical and timing requirements established pursuant to Section
251(b)(3) and Section 271(c)(2)(B) should apply equally to payphones.  Compliance with these
requirements may require the use of engineering, technical, and operational skills.
                                              359.   Requiring the LECs to extend dialing parity to payphone location providers
may burden some small LECs.
                                              360.   Steps Taken to Minimize Significant Economic Impact on Small Entities
and Small Incumbent LECs, and Alternatives Considered.  While this requirement may burden
some small LECs, such burdens are far outweighed by the benefits gained from competition
among local exchange and long distance carriers, many of whom are small business entities.  We
reject several alternatives in making this determination, including (1) a proposal suggesting that
the states be given discretion to determine when and how dialing parity for intraLATA calls
should be applied to payphones; (2) a proposal requiring LECs to provide dialing parity for
payphones prior to all other phones; and (3) not altering the existing anti-blocking rules under
TOCSIA.  Rejection of these alternatives helps to ensure that small LECs will not be
unnecessarily burdened.  Furthermore, establishing a national rule should facilitate negotiations
and reduce regulatory burdens and uncertainty for all parties, including small entities and small
incumbent LECs.
      E.                                      Commission's Outreach Efforts to Learn of and Respond to the Views of
Small Entities Pursuant to 5 U.S.C.  609
                                              361.   Our staff has conducted several ex parte meetings with numerous outside
parties and their counsel, several of whom may qualify as small business entities, during the
pendency of this rulemaking to identify and discuss various aspects of the implementation of
Section 276.  For example, we have received ex parte suggestions and comments from the
American Public Communications Council, a trade association that represents independent
payphone providers, many of whom qualify as small business entities.  We have attempted, to
the furthest possible extent, to take into account as many of these concerns as possible in
promulgating the rules contained in this Order.
      F.                                      Report to Congress
                                              362.  The Commission shall send a copy of this FRFA, along with this Order, in
a report to Congress pursuant to the Small Business Regulatory Enforcement Fairness Act of
1996, 5 U.S.C.  801(a)(1)(A).  A copy of this FRFA will also be published in the Federal
Register.
V.  CONCLUSION
                                        363.  In this Report and Order,  we have established  procedures that will ensure
that all payphone service providers are fairly compensated for every completed intrastate,
interstate and international call, except for those calls excepted by statute, and we adopt interim
compensation until the new compensation procedures are effective.  We have also established
procedures that ensure that all subsidies from basic exchange and exchange access revenues are
removed simultaneous with the LECs' receipt of compensation for calls from LEC payphones.
We require the BOCs to comply with certain nonstructural safeguards for their provision of
payphone service, and allow them to negotiate with location providers for selecting and
contracting with the carriers that provide interLata service from their phones.  We set forth herein
guidelines for public interest payphones, and establish guidelines for states to use in their
proceedings for funding of such payphones.
VI.  ORDERING CLAUSES
      364.  Accordingly, pursuant to authority contained in Sections 1, 4, 201-205, 215,
218, 219, 220, 226, and 276 of the Communications Act of 1934, as amended, 47 U.S.C.  151,
154, 201-205, 215, 218, 219, 220, 226, and 276, IT IS ORDERED that the policies, rules, and
requirements set forth herein ARE ADOPTED.
      365.  IT IS FURTHER ORDERED, that 47 C.F.R. Part 64, Subpart G and Subpart
M ARE AMENDED as set forth in Appendix D, effective (30) days after publication of the text
thereof in the Federal Register.
      366.  IT IS FURTHER ORDERED, that 47 C.F.R. Part 64, Subpart M IS
AMENDED as set forth in Appendix E, effective one year after publication of the text thereof
in the Federal Register.
      367.  IT IS FURTHER ORDERED, that 47 C.F.R. Part 68, Subpart A IS
AMENDED as set forth in Appendix E, effective April 15, 1997.
      368.  IT IS FURTHER ORDERED, that local exchange carriers SHALL
RECLASSIFY their payphone assets and related expenses to nonregulated status on April 15,
1997.
      369.  IT IS FURTHER ORDERED, that carriers required to file a cost allocation
manual pursuant to 47 C.F.R. Section 64.903 or by Commission order SHALL FILE revisions
to their manuals implementing the reclassification required herein no later than February 14,
1997.
      370.  IT IS FURTHER ORDERED, that local exchange carriers SHALL FILE
tariff revisions required by paras. 180 to 187 herein on January 15, 1997, to be effective April
15, 1997.
      371.  IT IS FURTHER ORDERED, the Bell Operating Companies ARE
GRANTED waivers of the time requirements of the Computer II and the Computer III network
disclosure requirements in order to provide basic network payphone services by April 15, 1997.
Pursuant to this waiver, network disclosure notification for these basic network payphone services
must be filed no later than January 15, 1997.
      372.  IT IS FURTHER ORDERED, that the Bell Operating Companies SHALL
FILE CEI plans for the provision of payphone service not later than 90 days following
publication of a summary of this Report and Order in the Federal Register.
      373.  IT IS FURTHER ORDERED, that the waivers of Section 64.1301 of the
Commission's Rules granted to AT&T and Sprint in the proceedings referenced in para. 119
above ARE REVOKED, effective 30 days after publication of a summary of this Report and
Order in the Federal Register.
      374.  IT IS FURTHER ORDERED, that the proceedings initiated by our
Memorandum Opinion and Order on Further Reconsideration and Second Further Notice of
Proposed Rulemaking in CC Docket 91-35, Policies and Rules Concerning Operator Service
Access and Pay Telephone Compensation, 10 FCC Rcd 11457 (1995), ARE TERMINATED.
      375.  IT IS FURTHER ORDERED, that the July 18, 1988 Petition of the Public
Telephone Council for a declaratory ruling that BOC Payphones should be treated as CPE IS
DISMISSED AS MOOT.
      376.  IT IS FURTHER ORDERED, that the August 7, 1995 Petition of Oncor
Communications, Inc. Requesting Compensation for Competitive Payphone Premises Owners and
Presubscribed Operator Services Providers IS DENIED.
      377.  IT IS FURTHER ORDERED, that the proceedings entitled Amendment of
Section 69.2(m) and (ee) of the Commission's Rules to Include Independent Public Payphones
Within the "Public Telephone" Exemption from End User Common Line Access Charges, RM
8723, ARE TERMINATED.
      378.     IT IS FURTHER ORDERED, that the December 28, 1989 Petition of the
California Payphone Association IS DISMISSED AS MOOT.
      379.  IT IS FURTHER ORDERED, that the provisions set forth in Section 1.4
of the Commission's rules establishing the date of public notice for this Report and Order ARE
WAIVED, and petitions for reconsideration SHALL BE FILED within 30 days of release of this
document, and oppositions to the petitions must be filed within seven (7) days after the date for
filing the petitions for reconsideration.  For purposes of this proceeding, Section 1.106(h) of the
Commission's Rules IS WAIVED, and the Commission will not accept replies to oppositions.
                             FEDERAL COMMUNICATIONS COMMISSION
                             William F. Caton
                             Acting Secretary

APPENDIX   A
TEXT OF SE                      CTION 276
PROVISION OF PAYPHONE SERVICE
 (a)  NONDISCRIMINATION SAFEGUARDS. -- After the effective date of the rules
prescribed pursuant to subsection (b), any Bell operating company that provides payphone
service--
      (1) shall not subsidize its payphone service directly or indirectly from its telephone
exchange service operations or its exchange access operations; and
      (2)  shall not prefer or discriminate in favor of its payphone service.
 (b)  REGULATIONS. --
      (1)  CONTENTS OF REGULATIONS. -- In order to promote competition among
payphone service providers and promote the widespread deployment of payphone services to the
benefit of the general public, within 9 months after the date of enactment of the
Telecommunications Act of 1996, the Commission shall take all actions necessary (including any
reconsideration) to prescribe regulations that --
      (A)  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;
      (B)  discontinue the intrastate and interstate carrier access charge payphone
service elements and payments in effect on such date of enactment, and all intrastate and
interstate payphone subsidies from basic exchange and exchange access revenues, in favor of a
compensation plan as specificed in subparagraph (A);
      (C)  prescribe a set of nonstructural safeguards for Bell operating company
payphone service to implement the provisions of paragraphs (1) and (2) of subsection (a), which
safeguards shall, at a minimum, include the nonstructural safeguards equal to those adopted in
the Computer Inquiry-III (CC Docket No. 90-623) proceeding;
      (D)  provide for Bell operating company payphone service providers to
have the same right that independent payphone providers have to negotiate with the location
provider on the location provider's selecting and contracting with, and, subject to the terms of any
agreement with the location provider, to select and contract with, the carriers that carry
interLATA calls from their payphones, unless the Commission determines in the rulemaking
pursuant to this section that it is not in the public interest; and
      (E)  provide for all payphone service providers to have the right to
negotiate with the location provider on the location provider's selecting and contracting with, and,
subject to the terms of any agreement with the location provider, to select and contract with, the
carriers that carry intraLATA calls from their payphones.
      (2)  PUBLIC INTEREST TELEPHONES.--  In the rulemaking conducted pursuant
to paragraph (1), the Commission shall determine whether public interest payphones, which are
provided in the interest of public health, safety, and welfare, in locations where there would
otherwise not be a payphone, should be maintained, and if so, ensure that such public interest
payphones are supported fairly and equitably.
      (3)  EXISTING CONTRACTS.-- Nothing in this section shall affect eny existing
contracts between location providers and payphone service providers or interLATA or intraLATA
carriers that are in force and effect as of the date of enactment of the Telecommunications Act
of 1996.
 (c)  STATE PREEMPTION.-- To the extent that any State requirements are inconsistent
with the Commission's regulations, the Commission's regulations on such matters shall preempt
such State requirements.
 (d)  DEFINITION.-- As used in this section, the term "payphone service" means the
provision of public or semi-public pay telephones, the provision of inmate telephone service in
correctional institutions, and any ancillary services.
                                                                    APPENDIX B
                         PARTIES FILING COMMENTS
1     American Association of Airport Executives  ("AAAE")
2     ACTEL, Inc.  ("ACTEL")
3     Admiral's Club
4     AHA TelePLAN
5     Aid Association for Lutherans
6     Air Touch Paging  ("Air Touch")
7     Airports Council International - North America  ("ACI-NA")
8     American Hotel & Motel Association  ("AHMA")
9     Ameritech
10    Anchorage Telephone Utility  ("Anchorage Telephone")
11    American Public Communications Council  ("APCC")
12    Arch Communications Group, Inc.  ("Arch")
13    AT&T Corp.  ("AT&T")
14    Bell Atlantic
15    Bell South Corporation  ("Bell South")
16    Robert M. Brill, Esquire  ("Brill")
17    Cable and Wireless, Inc.  ("Cable & Wireless")
18    California Association of Long Distance Telephone Companies  ("CALTEL")
19    California Payphone Association  ("CPA")
20    People of the State of California and the Public Utilities Commission of the State of
 California  ("California PUC")
21    Call West Communications, Inc.  ("Call West")
22    Cleveland Clinic Foundation  ("Cleveland Clinic")
23    Communications Central, Inc.  ("Communications Central")
24    Competitive Telecommunications Association  ("CompTel")
25    ConQuest Long Distance Corp.  ("ConQuest")
26    Dallas/Fort Worth International Airport  ("DFW")
27    Excel Telecommunications, Inc.  ("Excel")
28    Florida Public Service Commission  ("Florida PSC")
29    Florida Public Telecommunications Association, Inc.  ("FPTA")
30    Flying J Inc.  ("Flying J")
31    Frontier Corporation  ("Frontier")
32    Georgia Public Communications Association  ("GPCA")
33    Greyhound Lines, Inc.  ("Greyhound")
34    GTE Service Corporation  ("GTE")
35    GVNW Inc./Management  ("GVNW")
36    Idaho Public Utilities Commission  ("Idaho PUC")
37    Illinois Public Telecommunications Association  ("IPTA")
38    Independent Technologies, Inc.  ("Independent Technologies")
39    Indiana Utility Regulatory Commission  ("Indiana URC")
40    Inmate Calling Services Providers Coalition  ("Inmate")
41    Intellicall Companies  ("Intellicall")
42    International Telecard Association  ("ITA")
43    InVision Telecom, Inc.  ("InVision")
44    Iowa Utilities Board
45    City of Kansas City, Missouri  ("Kansas City")
46    Kampgrounds Of America, Inc.  ("KOA")
47    Lubbock County Sheriff's Office  ("Lubbock County Sheriff")
48    State of Maine Public Utilities Commission, State of New Hampshire Public Utilities
 Commission, State of New Mexico State Corporation Commission, State of Vermont
 Public Service Board and Department of Public Service  ("Maine PUC")
49    MCI Telecommunications Corporation  ("MCI")
50    Michigan Pay Telephone Association  ("MPTA")
51    Midwest Independent Coin Payphone Association  ("MICPA")
52    National Association of RV Parks and Campgrounds  ("ARVC")
53    National Exchange Carrier Association, Inc.  ("NECA")
54    NATSO, Inc.  ("NATSO")
55    New Jersey Payphone Association  ("NJPA")
56    New Jersey Division of the Ratepayer Advocate  ("New Jersey DRA")
57    New York City Department of Information Technology and Telecommunications  ("New
 York City")
58    New York State Department of Public Service  ("New York DPS")
59    National Telephone Cooperative Association  ("NTCA")
60    Public Utilities Commission of Ohio  ("Ohio PUC")
61    Oklahoma Corporation Commission  ("Oklahoma CC)
62    Oncor Communications, Inc.  ("Oncor")
63    One Call Communications, Inc. d/b/a Opticom  ("One Call")
64    Paging Network, Inc.  ("PageNet")
65    Personal Communications Industry Association  ("PCIA")
66    Pennsylvania Public Utility Commission  ("Pennsylvania PUC")
67    Peoples Telephone Company, Inc.  ("Peoples")
68    Promus Hotel Corporation  ("Promus")
69    Puerto Rico Telephone Company  ("Puerto Rico Telephone")
70    RBOC Payphone Coalition  ("RBOC")
71    Scherers Communications Group, Inc.  ("Scherers")
72    SDN Users Association, Inc.  ("SDN Users")
73    South Carolina Public Communications Association  ("SCPCA")
74    Southwestern Bell Telephone Company  ("SW Bell")
75    Sprint Corporation  ("Sprint")
76    Tarrant County, Texas  ("Tarrant County")
77    Telecommunications Resellers Association  ("TRA")
78    Teleport Communications Group Inc.  ("Teleport")
79    Public Utility Commission of Texas  ("Texas PUC")
80    Truckstops of America
81    United States Telephone Association  ("USTA")
82    US Satellite Corp.  ("US Satellite")
83    US WEST, Inc.  ("US WEST")
84    Virginia State Corporation Commission  ("Virginia SCC")
85    Wisconsin Public Communications Association  ("WPCA")
86    WorldCom, Inc. d/b/a LDDS WorldCom  ("WorldCom")
87    Yuma County Airport Authority, Inc.  ("Yuma County Airport")
APPENDIX C
                                   PA                     RTIES FILING REPLY COMMENTS
1     Air Touch Paging  ("Air Touch")
2     American Express Telecommunications, Inc.  ("American Express")
3     Ameritech
4     American Public Communications Council  ("APCC")
5     Arch Communications Group, Inc.  ("Arch")
6     AT&T Corp.  ("AT&T")
7     Bell Atlantic
8     Bell South Corporation  ("Bell South")
9     Robert M. Brill, Esquire  ("Brill")
10    California Payphone Association  ("CPA")
11    People of the State of California and the Public Utilities Commission of the State of
 California  ("California PUC")
12    Communications Central, Inc.  ("Communications Central")
13    Competitive Telecommunications Association  ("CompTel")
14    Frontier Corporation  ("Frontier")
15    Gateway Technologies, Inc.  ("Gateway")
16    Georgia Public Communications Association  ("GPCA")
17    GTE Service Corporation  ("GTE")
18    Indiana Utility Regulatory Commission  ("Indiana URC")
19    Inmate Calling Services Providers Coalition  ("Inmate")
20    Intellicall Companies  ("Intellicall")
21    International Telecard Association  ("ITA")
22    MCI Telecommunications Corporation  ("MCI")
23    Medeco
24    Metropolitan  Washington Airports Authority  ("Metropolitan  Washington")
25    Michigan Pay Telephone Association  ("MPTA")
26    Missouri Public Service Commission  ("Missouri PSC")
27    MobileMedia Communications, Inc.  ("MobileMedia")
28    Montana Public Service Commission  ("Montana PSC")
29    National Exchange Carrier Association, Inc.  ("NECA")
30    National Telephone Cooperative Association  ("NTCA")
31    Public Utilities Commission of Ohio  ("Ohio PUC")
32    One Call Communications, Inc. d/b/a Opticom  ("One Call")
33    Organization for the Promotion and Advancement of Small Telecommunications
 Companies  ("OPASTCO")
34    Pacific Telesis Group  ("PacTel")
35    Personal Communications Industry Association  ("PCIA")
36    Peoples Telephone Company, Inc.  ("Peoples")
37    Puerto Rico Telephone Company  ("Puerto Rico Telephone")
38    RBOC Payphone Coalition  ("RBOC")
39    San Diego Payphone Owners Association  ("SDPOA")
40    Southwestern Bell Telephone Company  ("SW Bell")
41    Sprint Corporation  ("Sprint")
42    Telaleasing Enterprises, Inc.  ("Telaleasing")
43    Telecommunications Resellers Association  ("TRA")
44    Tennessee Regulatory Authority
45    United States Telephone Association  ("USTA")
46    US WEST, Inc.  ("US WEST")
47    Voice Telephone Company  ("Voice")
48    Wisconsin Public Communications Association  ("WPCA")

                                APPENDIX D
                         RULES AMENDED (IMMEDIATE)
Part 64 of Title 47 of the Code of Federal Regulations is amended as follows:
1.  The authority citation for Part 64 is revised to read as follows:
AUTHORITY:  Sec. 4, 48 Stat. 1066, as amended:  47 U.S.C. 154, unless otherwise noted.
Interpret or apply secs. 201, 218, 226, 228, 276, 48 Stat. 1070, as amended; 47 U.S.C. 201,
218, 226, 228, 276 unless otherwise noted.
2.  The heading of Subpart M of Part 64 is revised to read as follows:
Subpart M -- Payphone Compensation
3. The first sentence of  Section 64.1301(a)  is revised to read as follows:
(a)  Each payphone service provider eligible to receive compensation shall be paid $45.85 per
payphone per month for originating access code and toll-free calls.
4.  Section 64.1301(b) is revised to read as follows:
(b)  This compensation shall be paid by interexchange carriers (IXCs) that earn annual toll
revenues in excess of $100 million, as reported in the FCC staff report entitled "Long Distance
Market Shares."   Each individual IXC's compensation obligation shall be set in accordance with
its relative share of toll revenues among IXCs required to pay compensation.  For example, if
total toll revenues of IXCs required to pay compensation is $50 billion, and one of these IXCs
had $5 billion of total toll revenues, the IXC must pay $4.585 per payphone per month.
5.  Section 64.1330 is added to read as follows:
64.1330  State Review of Payphone Entry and Exit Regulations and Public Interest
Payphones.
(a)   Each state must review and remove any of its regulations applicable to payphones and
payphone service providers that impose market entry or exit requirements.
(b)   Each state must ensure that access to dialtone, emergency calls, and telecommunications
relay service calls for the hearing disabled is available from all payphones at no charge to the
caller.
(c)   Each state must review its rules and policies to determine whether it has provided for
public interest payphones consistent with applicable Commission guidelines, evaluate whether it
needs to take measures to ensure that such payphones will continue to exist in light of the
Commision's implementation of Section 276 of the Communications Act, and administer and fund
such programs so that such payphones are supported fairly and equitably.  This review must be
completed by September 20, 1998.
6.  Section 64.1340  is added to read as follows:
64.1340 Right to Negotiate
 Unless prohibited by Commission order, payphone service providers have the right to
negotiate with the location provider on the location provider's selecting and contracting with, and,
subject to the terms of any agreement with the location provider, to select and contract with, the
carriers that carry interLATA and intraLATA calls from their payphones.
7.  Section 64.703(b) is revised by removing the "and" at the end of subsection (2); by
renumbering subsection (3) as (4);  and adding a new subsection (3) as follows:
 (3)  In the case of a pay telephone, the local coin rate for the pay telephone location; and

                                APPENDIX E
                         RULES AMENDED (DEFERRED)
Part 64 of Title 47 of the Code of Federal Regulations is amended as follows:
1.  The authority citation for Part 64 continues to read as follows:
AUTHORITY:  Sec. 4, 48 Stat. 1066, as amended:  47 U.S.C. 154, unless otherwise noted.
Interpret or apply secs. 201, 218, 226, 228, 276, 48 Stat. 1070, as amended; 47 U.S.C. 201,
218, 226, 228, 276 unless otherwise noted.
2.  Section 64.1301 is deleted.
3.  Section 64.1300 is added to read as follows:
 64.1300  Payphone Compensation Obligation.
(a)  Except as provided herein, every carrier to whom a completed call from a payphone is routed
shall compensate the payphone service provider for the call at a rate agreed upon by the parties
by contract.
(b)  The compensation obligation set forth herein shall not apply to calls to emergency numbers,
calls by hearing disabled persons to a telecommunications relay service or local calls for which
the caller has made the required coin deposit.
(c)  In the absence of an agreement as required by subsection (a) herein, the carrier is obligated
to compensate the payphone service provider shall do so at a per-call rate equal to its local coin
rate at the payphone in question.
(d)   For the initial one-year period during which carriers are required to pay per-call
compensation, in the absence of an agreement as required by subsection (a) herein, the carrier
is obligated to compensate the payphone service provider at a per-call rate of $.35 per call.  After
this initial one-year period of per-call compensation, subsection (c) herein will apply.
4.  Section 64.1310 is added to read as follows:
64.1310  Payphone Compensation Payment Procedures.
(a)  It is the responsibility of each carrier to whom a compensable call from a payphone is routed
to track, or arrange for the tracking of, each such call so that it may accurately compute the
compensation required by Section 64.1300(a).
(b) Carriers and payphone service providers shall establish arrangements for the billing and
collection of compensation for calls subject to Section 64.1300(a).
(c) Local Exchange Carriers must provide to carriers required to pay compensation pursuant to
Section 64.1300(a) a list of payphone numbers in their service areas.  The list must be provided
on a quarterly basis.  Local Exchange Carriers must verify disputed numbers in a timely manner,
and must maintain verification data for 18 months after close of the compensation period.
(d) Local Exchange Carriers must respond to all carrier requests for payphone number
verification in connection with the compensation requirements herein, even if such verification
is a negative response.
(e)  A payphone service provider that seeks compensation for payphones that are not included
on the Local Exchange Carrier's list satisfies its obligation to provide alternative reasonable
verification to a payor carrier if it provides to that carrier:
 (1)  A notarized affidavit attesting that each of the payphones for which the payphone
service provider seeks compensation is a payphone that was in working order as of the last day
of the compensation period; and
 (2)  Corroborating evidence that each such payphone is owned by the payphone service
provider seeking compensation and was in working order on the last day of the compensation
period.  Corroborating evidence shall include, at a minimum, the telephone bill for the last month
of the billing quarter indicating use of a line screening service.
5.  Section 64.1320 is added to read as follows:
64.1320  Payphone Compensation Verification and Reports.
(a)  Carriers subject to payment of compensation pursuant to Section 64.1300(a) shall conduct
an annual verification of calls routed to them that are subject to such compensation and file a
report with the Chief, Common Carrier Bureau within 90 days of the end of the calendar year,
provided, however, that such verification and report shall not be required for calls received after
December 31, 1998.
(b)   The annual verification required in this section shall list the total amount of compensation
paid to payphone service providers for intrastate, interstate and international calls, the number
of compensable calls received by the carrier and the number of payees.
6.  The authority citation for Part 68 continues to read as follows:
Authority:  Secs. 1, 4, 5, 201-5, 215, 218, 226, 227, 303, 313, 314, 403, 404, 410, 602 of the
Communications Act of 1934, as amended, 47 U.S.C. 151, 154, 155, 201-5, 208, 215, 218, 226,
227, 303, 313, 314, 403, 404, 410, 602.
7. Section 68.2(a)(1) is amended to read:
Of all terminal equipment to the public switched telephone network, for use in conjunction
with all services other than party line service;
8.  Section 68.3,  the definition of "coin-implemented telephone" is deleted.
9.  Section 68.3, is amended to add the definition of "instrument implemented telephone" to
read:
Instrument-implemented telephone:  A telephone containing all circuitry required to execute
coin acceptance and related functions within the instrument itself and not requiring coin
service signaling from the central office.
10.  Section 68.3  definition of  "Coin Service" is deleted.
11.  Section 68.3 is amended to add the definition of  "Central-office implemented telephone"
to read:
Central-office implemented telephone:  A telephone executing coin acceptance requiring coin
service signaling from the central office.
                                APPENDIX F
                     INTERIM COMPENSATION OBLIGATIONS
Company
1995 Total Toll
Services Revenues
($ in Millions)
% of Total
Toll Revenues
Amount Per
Phone Per
Month
AT&T COMPANIES:
   AT&T COMMUNICATIONS, INC.
$38,069
56.69%
$25.9923406
   ALASCOM, INC.
325
0.48%
0.2219000
MCI TELECOMMUNICATIONS
CORP.
12,924
19.25%
8.8241091
SPRINT COMMUNICATIONS CO.
7,277
10.84%
4.9685115
LDDS WORLDCOM
3,640
5.42%
2.4852799
FRONTIER COMPANIES:
   ALLNET COMM. SVCS. dba
     FRONTIER COMM. SVCS.
827
1.23%
0.5646501
   FRONTIER COMMUNICATIONS
    INT'L, INC.
309
0.46%
0.2109757
   FRONTIER COMM. OF THE
    NORTH CENTRAL REGION
133
0.20%
0.0908083
   FRONTIER COMMUNICATIONS
  OF THE WEST, INC.
127
0.19%
0.0867117
CABLE & WIRELESS
COMMUNICATIONS, INC.
700
1.04%
0.4779384
LCI INTERNATIONAL TELECOM
CORP.
671
1.00%
0.4581381
EXCEL TELECOMMUNICATIONS,
INC.
363
0.54%
0.2478452
TELCO COMMUNICATIONS
GROUP, INC.
215
0.32%
0.1467954
MIDCOM COMMUNICATIONS, INC.
204
0.30%
0.1392849
TEL-SAVE, INC. 9/
180
0.27%
0.1228985
U.S. LONG DISTANCE, INC.
155
0.23%
0.1058292
VARTEC TELECOM, INC.
125
0.19%
0.0853461
Continued from the previous page
Company
1995 Total Toll
Services Revenues
($ in Millions)
% of Total
Toll Revenues
Amount Per
Phone Per
Month
GENERAL COMMUNICATION, INC.
120
0.18%
0.0819323
BUSINESS TELECOM, INC.
115
0.17%
0.0785185
ONCOR COMMUNICATIONS, INC.
111
0.17%
0.0757874
THE FURST GROUP, INC.
109
0.16%
0.0744218
AMERICAN NETWORK
EXCHANGE, INC.
101
0.15%
0.0689597
TOTAL
67,153
100.00%
45.85
                                                             September 20, 1996
                           Separate Statement of
                      Commissioner Rachelle B. Chong
Re:                                           In the Matter of Implementation of the Pay Telephone Reclassification and
                                              Compensation Provisions of the Telecommunications Act of 1996, CC Docket No. 96-
                                              128; Policies and Rules Concerning Operator Service Access and Pay Telephone
                                              Compensation, CC Docket No. 91-35.
                                              In the Telecommunications Act of 1996, Congress mandated twin goals for a
restructuring of our nation's payphone industry.  Congress directed the Commission to
establish rules that "promote competition among payphone service providers and promote the
widespread deployment of payphone services to the general public."  In this order, we
effectuate Congress' intent by putting in place a new market-oriented scheme governing
payphones.  Thus, competition now becomes the new coin of the realm for the payphone
industry.
                               I write separately to show my strong support for the new policies we unanimously
adopt today.  In my view, these innovative policies will strip away outmoded regulations,
unleash competitive forces upon all segments of the payphone industry, and put in place a
mechanism to preserve the continuing availability of payphones that serve the public interest.
                                The payphone industry is one in which competition with its attendant consumer
benefits can easily thrive.  However, our current payphone regulations were not crafted in a
way that promoted regulatory parity between the market players or put a high premium on
consumer protection.  Under the statutory and regulatory framework that was in place prior to
the 1996 Act, payphone providers were subject to different regulations whose application
mainly depended upon whether an entity providing payphone service was a local exchange
company or an independent payphone provider.  For example, local exchange companies
traditionally had the ability to subsidize their payphone operations with telephone service
revenues and were restricted from choosing long distance providers on their payphones.  In
contrast, independent payphone providers had to support their operations mainly from
revenues received at payphone stations and through commission arrangements with operator
service providers.  This disparate treatment created certain incentives and distortions in the
market that, during the past decade, resulted in supracompetitive rates at certain payphones
and in consumer confusion.  As the rest of the telecommunications industry moves swiftly
into a new pro-competitive, deregulatory era, our payphone regulations cried out for revision.
                               In this order, we dismantle the existing regulatory system by putting in place rules that
in essence will establish a new competitive payphone industry.  These rules are designed to
remove existing subsidies, provide for nondiscriminatory access to bottleneck facilities, ensure
fair compensation for all calls originated on payphones, and allow all competitors equal
opportunity to compete for essential aspects of the payphone business.
                               At the heart of our new policies is that we have agreed that the best way to ensure fair
compensation for payphone service is to let the market set the price for individual payphone
calls.  In this order, we establish a two-stage process as a transition to market-based rates.
During stage one, or during the first year after this order becomes effective, local exchange
companies are required to terminate subsidies for their payphones and are not be eligible to
receive compensation for non-coin calls made on their payphones until such subsidies are
terminated.  Independent payphone providers, however, will begin to receive compensation for
access code calls and subscriber 800 calls on a flat-rate basis.  In addition, during this first
stage, the states may continue to set the local coin rate but may move to market-based local
coin rates at any time during this one-year period.  The states are asked to conduct an
examination of payphone regulations to review and remove any regulations that affect
competition.
                               In stage two, which will commence one year after this order becomes effective,
carriers to whom payphone calls are routed must have in place a per-call tracking capability
and are required to remit per-call compensation to payphone providers, including local
exchange carriers.  In this stage, the market will set the rate for local coin calls and we
establish a $.35 default compensation rate that interexchange carriers will pay to payphone
providers for each compensable call.  After the conclusion of the second stage, the market-
based local coin rate at these payphones will be the default compensation rate for all
compensable calls in the absence of an agreement between the payphone provider and the
carrier-payor.  Thus, in two years, with certain limited exceptions, we can look forward with
confidence to competition -- rather than regulation -- determining calling and compensation
rates in the payphone industry.
                               We also retain the discretion to review the deregulation of local coin rates nationwide
and determine whether marketplace disfunctions in certain locational monopoly areas -- such
as airports or train stations -- exist and should be addressed.  If a problem arises, we will
stand ready to step in and resolve any problems.
                               In deciding to rely on market forces, however, we have also refocused on consumers.
I am pleased that we have put in place several safeguards to ensure their protection.  We do
so in light of the fact that payphones serve an important role in allowing people to place calls
when they are away from home or the office.  We require that all payphones must provide
free access to dialtone.  Further, our new rules require that payphone providers must
prominently display the local coin rate they choose to charge at each payphone, so that
consumers will have full information about the charges and can make an informed choice to
use the payphone.
                               Payphones located in isolated or remote areas also serve as critical links to help when
a person is faced with an unexpected emergency.  In circumstances where the free market
may not adequately encourage the deployment of payphones in locations that would serve
public health, safety, and welfare needs, we establish guidelines by which the states may
maintain and fund such public interest payphones.  Under our order, states will be able to use
their knowledge of local conditions to ensure that the public has access to telecommunications
by requiring the maintenance of payphones at locations, such as along remote stretches of a
rural road or on a county beach, that may not be economically self-supporting in the free
market.
                               Our order also requires that every payphone provide free access to both emergency
services and to telecommunications relay service (TRS) calls for the hearing disabled.  I
believe it is appropriate for the states to take the lead on public interest payphones in their
states.  I look forward to their good work in this area that is so fundamental to Congress'
second goal in Section 276 -- the "widespread deployment of payphone services to the general
public."