[Federal Register Volume 62, Number 210 (Thursday, October 30, 1997)]
[Rules and Regulations]
[Pages 58659-58686]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-28614]


-----------------------------------------------------------------------

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 64

[CC Docket 96-128; FCC 97-371]


Pay Telephone Reclassification and Compensation Provisions of the 
Telecommunications Act of 1996

AGENCY: Federal Communications Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: On October 9, 1997, the Commission adopted a Second Report and 
Order in CC Docket 96-128, FCC 97-371, in which it concluded that 
interexchange carriers must compensate payphone service providers for 
all coinless payphone calls not otherwise compensated pursuant to 
contract, including subscriber 800 and access code calls, 0+ and inmate 
calls, at the rate of $.284 per call. The Commission based this 
decision on the conclusion that the default rate for per-call 
compensation for these calls is the deregulated local coin rate 
adjusted for cost differences. This rate will continue to be the 
default rate for coinless payphone calls for the first two years of 
per-call compensation. After the first two years, the market-based 
local coin rate adjusted for certain costs is the surrogate for the 
default per-call rate.

EFFECTIVE DATE: October 30, 1997.

FOR FURTHER INFORMATION CONTACT: Rose Crellin or Greg Lipscomb, Formal 
Complaints and Information Branch, Enforcement Division, Common Carrier 
Bureau (202) 418-0960.

SUPPLEMENTARY INFORMATION:

    Adopted: October 9, 1997.

    Released: October 9, 1997.

    By the Commission: Commissioners Quello and Ness issuing 
separate statements.

                            Table of Contents                           
------------------------------------------------------------------------
                                                               Paragraph
                            Topic                                 No.   
------------------------------------------------------------------------
I. Introduction.............................................           1
II. Background..............................................           6
III. Per-Call Compensation..................................          16
    A. The Standard for Determining Per-Call Compensation...          16
    B. Market-Based Compensation Analysis...................          29
    C. Alternatives to a Market-Based Compensation Rate.....          68
    D. Per-Call Compensation Rate...........................         111
    E. Other................................................         123
IV. Procedural Matters......................................         134
    A. Paperwork Reduction Act Analysis.....................         134

[[Page 58660]]

                                                                        
    B. Final Regulatory Flexibility Act Analysis............         135
V. Conclusion...............................................         165
VI. Ordering Clauses........................................         166
------------------------------------------------------------------------

Rule Changes

Attachment B--List of Parties Filing Comments

Attachment C--List of Parties Filing Replies

(Note: In the FCC Record version of this order, Attachments are 
listed as Appendices, and their order is different from that stated 
above.)

I. Introduction

    1. In this order, we address the default per-call compensation rate 
<SUP>1</SUP> for subscriber 800 and access code calls <SUP>2</SUP> 
originated from payphones in light of the decision of the United States 
Court of Appeals for the District of Columbia Circuit (the court) in 
Illinois Public Telecommunications Ass'n versus FCC, <SUP>3</SUP> which 
vacated and remanded portions of the Payphone Orders. <SUP>4</SUP> In 
that decision, the court concluded that the Commission did not justify 
adequately setting the per-call compensation rate for subscriber 800 
and access code calls at the deregulated local coin rate of $0.35, 
<SUP>5</SUP> because it did not justify its conclusion that the costs 
of local coin calls are similar to those of subscriber 800 calls and 
access code calls. <SUP>6</SUP> After seeking additional comment on 
this issue, we conclude in this order that the default rate for per-
call compensation of subscriber 800 and access code calls from 
payphones is the deregulated local coin rate adjusted for cost 
differences. As discussed herein, based on our analysis of the record 
and the statutory policy goals of Section 276 of the Communications 
Act, <SUP>7</SUP> we establish a rate of $0.284 per call as the default 
per-call compensation rate for subscriber 800 and access code calls for 
the first two years of per-call compensation. <SUP>8</SUP> This rate 
will continue to be the default rate for coinless payphones absent a 
negotiated rate. Interexchange carriers (IXCs) must pay this per-call 
amount to payphone service providers (PSPs) for access code and 
subscriber 800 calls beginning October 7, 1997, as required by the 
Payphone Orders. <SUP>9</SUP> After the first two years of per-call 
compensation, the market-based local coin rate adjusted for certain 
costs is the surrogate for the default per-call rate for subscriber 800 
and access code calls. <SUP>10</SUP>
---------------------------------------------------------------------------

    \1\ The default per-call rate is the rate that shall apply in 
the absence of a negotiated agreement between parties during the 
first two years of per-call compensation (October 7, 1997, through 
October 6, 1999). Thereafter, the default rate, in the absence of a 
negotiated agreement, is the market-based local coin rate less 
$0.066. For coinless payphones, $0.284 will continue to be the 
default rate, absent a negotiated agreement.
    \2\ An ``access code'' is a sequence of numbers that, when 
dialed, connect the caller to the operator service provider 
(``OSP'') associated with that sequence, as opposed to the OSP 
presubscribed to the originating line. Access codes include 800 
numbers, 10XXX in equal access areas and ``950'' Feature Group B 
dialing (950-0XXX or 950-1XXX) anywhere, where the three-digit XXX 
denotes a particular interexchange carrier. See Policies and Rules 
Concerning Operator Service Access and Pay Telephone Compensation, 
57 FR 21038 (May 18, 1992); 7 FCC Rcd 3251, 3251 n.1 (1992) (``OSP 
Second Report and Order''). ``Subscriber 800 calls'' consist of 
calls to an 800 number assigned to a particular subscriber. See 
Implementation of the Pay Telephone Reclassification and 
Compensation Provisions of the Telecommunications Act of 1996, 
Notice of Proposed Rulemaking, 61 FR 31481 (June 20, 1996); 11 FCC 
Rcd 6716 (1996) (``NPRM''). In this order, subscriber 800 
encompasses toll-free subscriber calls, including 888 numbers. See 
Toll Free Service Access Codes, 61 FR 7738 (February 29, 1996); 11 
FCC Rcd 2496 (1996).
    \3\ 117 F.3d 555 ( D.C. Cir. 1997) (``Illinois Public 
Telecomm.'').
    \4\ Implementation of the Pay Telephone Reclassification and 
Compensation Provisions of the Telecommunications Act of 1996, CC 
Docket No. 96-128, Report and Order, 61 FR 52307 (October 7, 1996), 
11 FCC Rcd 20,541 (1996) (``Report and Order''); Order on 
Reconsideration, 61 FR 65341 (December 12, 1996), 11 FCC Rcd 21,233 
(1996) (``Order on Reconsideration'') (collectively the ``Payphone 
Orders'').
    \5\ Illinois Public Telecomm., 117 F.3d at 564.
    \6\ Id.
    \7\ 47 U.S.C. Sec. 276 Communications Act of 1934, Section 276 
was added by the Telecommunications Act of 1996 (``1996 Act'').
    \8\ In the Payphone Orders, we established a two-part 
compensation scheme for subscriber 800 and access code calls, as 
well as for local coin calls, to facilitate the transition from a 
highly regulated industry to a deregulated one. As noted above, the 
court vacated the interim compensation plan regarding compensation 
for subscriber 800 and access code calls; the court, however, upheld 
the interim compensation plan for local coin calls. Phase one, or 
the first year of interim compensation for access code and 
subscriber 800 calls, required that IXCs with a certain annual toll 
revenue pay PSPs a flat-rate compensation of $45.85 per payphone per 
month in shares proportionate to their share of total market long 
distance revenues. During the second year of interim compensation 
(also, the first year of per-call compensation) we required the IXCs 
to pay the PSP for each completed subscriber 800 and access code 
call. See Report and Order, 61 FR 52307 (October 7, 1996); 11 FCC 
Rcd at 20,568 at para. 51. This order addresses specifically the 
first two years of per-call compensation, and as noted above, 
establishes a default rate for per-call compensation at $0.284. See 
infra paras. 117-22.
    \9\ The Payphone Orders state that LEC PSPs are entitled to be 
paid per-call compensation by IXCs for access code and subscriber 
800 calls when they have complied with the requirements of the 
Payphone Orders and will certify to that effect. Order on 
Reconsideration, 61 FR 65341 (December 12, 1996); 11 FCC Rcd at 
21,293-94, paras. 130-32. We note that the Commission did not 
establish a requirement that LEC PSPs obtain a formal certification 
of compliance from the Commission or the states to receive per-call 
compensation pursuant to the Payphone Orders.
    \10\ As determined in this order, the difference between the 
per-call rate for subscriber 800 and access code calls and the local 
coin rate is $0.066.
---------------------------------------------------------------------------

    2. The compensation amount we adopt in this Second Report and Order 
is applicable, as Section 276(d) provides, to ``[t]he provision of 
public or semi-public pay telephones, the provision of inmate telephone 
service in correctional institutions, and any ancillary services.'' 
<SUP>11</SUP> We previously have declined to treat 0+ and calls from 
inmate payphones differently from other payphone calls, <SUP>12</SUP> 
and we reaffirm that decision here. As of October 7, 1997, PSPs must be 
compensated for all payphone calls not otherwise compensated pursuant 
to contract, including 0+ and inmate calls.
---------------------------------------------------------------------------

    \11\ 47 U.S.C. Sec. 276(d).
    \12\ See Report and Order, 61 FR 52307 (October 7, 1996); 11 FCC 
Rcd at 20,579, para. 74; Order on Reconsideration, 61 FR 65341 
(December 12, 1996); 11 FCC Rcd at 21,259, para. 52. A 0+ call 
occurs when the caller dials ``0'' plus the called telephone number. 
0+ calls include credit card, collect, and third number billing 
calls. See OSP Second Report and Order, 7 FCC Rcd at 3251 n.4. 0-
calls are calls in which the caller dials only the digit ``0'' and 
then waits for operator intervention. 0-transfer service is a 
service offered by LECs to OSPs under which LECs transfer a 0-call 
to the OSP requested by the calling party. See OSP Second Report and 
Order, 57 FR 21038 (May 18, 1992); 7 FCC Rcd at 3255 n.44.
---------------------------------------------------------------------------

    3. The immediate implementation of the rule provisions adopted 
herein is crucial to the Commission's efforts to ensure fair 
compensation for PSPs, encourage the deployment of payphones, and 
enhance competition among payphone providers, as mandated by Section 
276 of the Act.<SUP>13</SUP> The Commission's Payphone Orders require 
that per-call compensation for certain payphone calls begin by October 
7, 1997. To meet this obligation, we must revise those rules vacated by 
the court in Illinois Public Telecomm. that relate to the 
implementation of a per-call compensation scheme and commence on 
October 7, 1997. The Report and Order, released September 20, 1996 (61 
FR 52307 (October 7, 1996)), informed parties that per-call 
compensation would commence on October 7, 1997.<SUP>14</SUP> Therefore, 
parties affected by this rule change have had notice since the release 
of that order that they would be subject to certain obligations 
beginning October 7, 1997. Making this order effective immediately

[[Page 58661]]

minimizes disruption within the payphone industry by eliminating 
disputes about payment obligations and enhances the general 
availability of payphone services to the public.
---------------------------------------------------------------------------

    \13\ The normal period until effectiveness in a rulemaking is 
thirty days after publication of the changed rules in the Federal 
Register, but we accelerate that period here for good cause, 
pursuant to Section 553(d) of the Administrative Procedure Act. See 
5 U.S.C. Sec. 553(d).
    \14\ This requirement established in the Report and Order 
becomes effective October 7, 1997, one year after publication in the 
Federal Register, 61 FR 52,307 (1996).
---------------------------------------------------------------------------

    4. This order does not address other issues vacated and remanded by 
the court or otherwise alter the requirements of the Payphone Orders. 
Other requirements remanded in Illinois Public Telecomm., including the 
compensation obligations applicable during the period from November 
1996, through October 6, 1997, will be addressed in a subsequent order 
in this proceeding. We tentatively conclude in this regard that the 
$0.284 per-call rate we are adopting as a default rate on a going 
forward basis should also govern compensation obligations during the 
period ending October 6, 1997. We also tentatively conclude that PSPs 
are entitled to compensation for all of their access code and 
subscriber 800 calls during this period. We plan to address the manner 
in which the total payment obligation for that period will be 
calculated and allocated among IXCs in a subsequent order.
    5. We note that the Common Carrier Bureau (Bureau) has granted a 
limited waiver, until March 9, 1998, for those payphones that cannot 
provide payphone-specific digits as required by the Payphone 
Orders.<SUP>15</SUP> This limited waiver applies to the requirement 
that local exchange carriers (LECs) provide payphone-specific coding 
digits to PSPs, and that PSPs provide coding digits from their 
payphones before they can receive per-call compensation from IXCs for 
subscriber 800 and access code calls. This limited waiver was granted 
by the Bureau to afford LECs, IXCs, and PSPs an extended transition 
period for the provision of payphone-specific coding digits without 
further delaying the payment of per-call compensation as required by 
Section 276 of the Act and this order. The Bureau made this limited 
waiver effective immediately in order to ensure that PSPs receive per-
call compensation beginning October 7, 1997.
---------------------------------------------------------------------------

    \15\ Order on Reconsideration, 61 FR 65341 (December 12, 1996); 
11 FCC Rcd at 21,278-79, paras. 93-95. See Bureau Waiver Order, DA 
97-2162 (rel. Oct. 7, 1997).
---------------------------------------------------------------------------

II. Background

    6. In the Payphone Orders,<SUP>16</SUP> the Commission adopted new 
rules and policies governing the payphone industry to implement Section 
276 of the Act. Those rules and policies: (1) establish a plan to 
ensure fair compensation for ``each and every completed intrastate and 
interstate call using [a] payphone[;]'' <SUP>17</SUP> (2) discontinue 
intrastate and interstate carrier access charge service elements and 
payments in effect on such date of enactment, and all intrastate and 
interstate payphone subsidies from basic exchange services; 
<SUP>18</SUP> (3) prescribe nonstructural safeguards for Bell Operating 
Company (``BOC'') payphones; <SUP>19</SUP> (4) permit the BOCs to 
negotiate with payphone location providers on the interLATA carrier 
presubscribed to their payphones; <SUP>20</SUP> (5) permit all payphone 
service providers to negotiate with location providers on the intraLATA 
carriers that presubscribed to their payphones; <SUP>21</SUP> 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[.]'' <SUP>22</SUP>
---------------------------------------------------------------------------

    \16\ Report and Order, 61 FR 52307 (October 7, 1996); 11 FCC Rcd 
at 20,541; Order on Reconsideration, 61 FR 65341 (December 12, 
1996); 11 FCC Rcd at 21,233.
    \17\ 47 U.S.C. Sec. 276(b)(1)(A).
    \18\ 47 U.S.C. Sec. 276(b)(1)(B).
    \19\ 47 U.S.C. Sec. 276(b)(1)(C).
    \20\ 47 U.S.C. Sec. 276(b)(1)(D).
    \21\ 47 U.S.C. Sec. 276(b)(1)(E).
    \22\ 47 U.S.C. Sec. 276(b)(2).
---------------------------------------------------------------------------

    7. In the Report and Order, the Commission noted that the 1996 Act 
erects a ``procompetitive 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.'' 
<SUP>23</SUP> Thus, we sought to advance the twin goals of Section 276 
of 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 * * * ,'' <SUP>24</SUP> 
by eliminating the effects of some long-standing barriers to full 
competition in the payphone market. To effectuate this objective, we 
concluded that we would continue to regulate certain aspects of the 
payphone market, but only until such time as the market evolves to 
erase these sources of market distortions. <SUP>25</SUP>
---------------------------------------------------------------------------

    \23\ S. Conf. Rep. No. 104-230, 104th Cong. 1 (1996).
    \24\ 47 U.S.C. Sec. 276(b)(1).
    \25\  A number of parties subsequently filed petitions 
requesting that the Commission reconsider or clarify the rules the 
Commission adopted in the Report and Order. In the Order on 
Reconsideration, we substantially affirmed the rules adopted in the 
Report and Order. We denied all but two of the requested 
reconsiderations; those exceptions are not at issue here. In the 
Order on Reconsideration, the Commission modified: (1) the 
requirements for LEC tariffing of payphone services and unbundled 
network facilities; and (2) the requirements for LECs to remove 
unregulated payphone costs from the carrier common line charge and 
to reflect the application of multiline subscriber line charges to 
payphone lines. See Order on Reconsideration, 61 FR 65341 (December 
12, 1996); 11 FCC Rcd at 21,234, para. 3.
---------------------------------------------------------------------------

    8. Section 276(b)(1)(A) of the Act directs the Commission to 
establish a plan to ensure that all PSPs are fairly compensated for 
every completed call. <SUP>26</SUP> We defined ``fair compensation'' as 
the amount to which a willing seller (i.e. PSP) and a willing buyer 
(i.e. customer, or IXC) would agree for the completion of a payphone 
call. For certain calls, the PSP received no revenue for originating 
certain calls (i.e., for subscriber 800 and other toll-free number 
calls) and could not block callers from making such calls (access code 
calls). Based on evidence in the record, we noted in the Report and 
Order that the number of these types of calls completed from payphones 
had proliferated in the past several years, <SUP>27</SUP> and we 
concluded that PSPs must be compensated for access code, subscriber 
800, and other toll-free number calls, whether they are 
jurisdictionally intrastate or interstate. <SUP>28</SUP>
---------------------------------------------------------------------------

    \26\ See 47 CFR Sec. 276(b)(1)(A) (directing 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''). See also Report and Order, 
61 FR 52307 (October 7, 1996); 11 FCC Rcd at 20,566, para. 48.
    \27\ See Report and Order, 61 FR 52307 (October 7, 1996); 11 FCC 
Rcd at 20,568, para. 52 n.187.
    \28\ See id. at 20,568, para. 52.
---------------------------------------------------------------------------

    9. In the Report and Order, we concluded that the payphone 
marketplace has low entry and exit barriers and likely will become 
increasingly competitive, <SUP>29</SUP> and that the market generally 
is best able to set the appropriate price for payphone calls, including 
local coin calls, in the long term. <SUP>30</SUP> Therefore, because we 
have an obligation under Section 276 to ensure that the compensation 
for all local coin calls is fair, we concluded that the local market 
should be allowed to set the price for all compensable calls unless a 
state demonstrated that competition would not constrain prices; for 
example, payphones at certain locations would be priced at monopoly 
rates. 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 ultimately will determine whether a particular 
payphone is economically viable. Therefore, in the Payphone Orders, we 
concluded that the appropriate per-call compensation amount, in the 
absence of a negotiated agreement, ultimately is the amount the 
particular payphone charges for a local coin call, because the market 
will determine the fair compensation

[[Page 58662]]

rate for those calls. We further concluded that if a rate is 
compensatory for local coin calls, then it is an appropriate 
compensation amount for other calls as well, because we found the costs 
of originating various types of payphone calls such as access code and 
subscriber 800 calls to be similar to the costs incurred when 
initiating a local coin call. <SUP>31</SUP>
---------------------------------------------------------------------------

    \29\ See id. at 20,547, para. 11.
    \30\ See id. at 20,567, 20,577, paras. 49, 70.
    \31\ Id. at 20,577-78, para. 70; Order on Reconsideration, 61 FR 
65341 (December 12, 1996); 11 FCC Rcd at 21,268-69, para. 71.
---------------------------------------------------------------------------

    10. Before we moved to a local coin call default rate, however, we 
found that it was necessary to observe over time how the payphone 
marketplace would function in the absence of regulation. In particular, 
we concluded that consumers facing time constraints may not be able to 
find, in certain locations, a reasonable substitute for a payphone 
located on the premises. We stated that 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. We concluded that 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 concluded 
that we should establish the default per-call rate before leaving it to 
the market to set the rate, absent any changes in our rules.
    11. We recognized that competitive conditions, which are a 
prerequisite to a deregulatory market-based approach, did not exist 
yet, and would not be achieved instantaneously. Therefore, we 
established an interim compensation plan to ease the transition to 
market-based local coin rates and ensure fair compensation for coin and 
noncoin calls. In particular, we established a two phase interim plan 
to address coin calls. During the first year (phase) the states would 
be responsible for ensuring that PSPs were fairly compensated for local 
coin calls as well as for protecting consumers from excessive rates. We 
concluded that states could continue to set the local coin rate during 
the year prior to market-based per-call compensation. During the second 
phase, beginning October 7, 1997, we stated that the market would set 
the price for the local coin call, absent particular state concerns, 
and the need for modification. <SUP>32</SUP>
---------------------------------------------------------------------------

    \32\ See Report and Order, 61 FR 52307 (October 7, 1996); 11 FCC 
Rcd at 20,572, para. 60 (further stating that states are empowered 
to act where concerns exist about market failures, and that the 
Commission could address such market concerns if necessary).
---------------------------------------------------------------------------

    12. Additionally, in the Payphone Orders, the Commission 
established a two-year interim plan for payphone compensation for 
subscriber 800 and access code calls based on a rate of $0.35 per call 
that began November 7, 1996. For the first year after the effective 
date of the rules adopted in this proceeding, we required that IXCs pay 
flat-rate compensation to PSPs. More specifically, under the first year 
of the interim plan, IXCs with annual toll revenues in excess of $100 
million were required to pay, collectively, a flat-rate compensation of 
$45.85 per payphone per month in shares proportionate to their share of 
total market long distance revenues. During the second year of the 
interim plan, which is the first year of per-call compensation, all 
IXCs were required to pay $0.35 per subscriber 800 call or access code 
call unless they contracted with the PSP to pay a different amount. 
<SUP>33</SUP>
---------------------------------------------------------------------------

    \33\  We noted that $0.35 was the local coin rate in four of the 
five states where the local coin rate had been deregulated and 
concluded that the market-based rate in those states was the best 
evidence of the per-call compensation amount for PSPs for the first 
two years of interim compensation. See Letter to William Caton, 
Acting Secretary, FCC from Michael Kellogg, Counsel, Coalition (Aug. 
30, 1996) (noting that the local coin rate is $0.35 in four of the 
five states that have deregulated the local coin rate). The 
Coalition is comprised of the Bell Operating Companies (``BOCs'')--
Ameritech, the Bell Atlantic Telephone Companies, BellSouth 
Corporation, Pacific Bell, Nevada Bell, Southwestern Bell Telephone 
Company, and US West--together with GTE Service Corporation 
(``GTE'') and Southern New England Telephone Company (``SNET''). See 
also Report and Order, 61 FR 52307 (October 7, 1996); 11 FCC Rcd at 
20,578, para. 72. As we noted above, we believed the costs to 
originate access code and subscriber 800 calls were similar to those 
incurred when initiating a local coin call, and thus established a 
default rate based on the deregulated local coin rate. We note that 
of seven states that now have deregulated local coin rates, in five 
states (Michigan, Iowa, Nebraska, North Dakota and Wyoming) the rate 
is $0.35, and in two states (Montana and South Dakota) the rate is 
$0.25. See Ex Parte Presentation to FCC from Michael Kellogg, 
Counsel, Coalition (Sept. 26, 1997). In this order, the one year 
per-call compensation period subject to the $0.284 default rate is 
extended to two years.
---------------------------------------------------------------------------

    13. Numerous parties filed petitions in federal court seeking 
review of the Payphone Orders. In Illinois Public Telecomm, the court 
affirmed important parts of the Commission's rules implementing Section 
276, but also vacated and remanded certain other aspects of those 
rules. The court overturned our determination in the Payphone Orders 
regarding: (1) the interim and permanent compensation rates established 
for access code and subscriber 800 calls; (2) the requirement that only 
those IXCs with annual toll revenues over $100 million pay PSPs for 
these calls during the first year of the interim period; (3) the 
failure to provide any interim compensation to BOC PSPs for ``0+'' 
calls and calls made from inmate payphones; and (4) the use of fair 
market value for payphone assets transferred from a BOC to a separate 
affiliate. <SUP>34</SUP>
---------------------------------------------------------------------------

    \34\  Illinois Public Telecomm., 117 F.3d at 558.
---------------------------------------------------------------------------

    14. By Public Notice released August 5, 1997, we sought comment on 
the issues remanded by the court. <SUP>35</SUP> We sought comment on 
the differences in costs to the PSP of originating subscriber 800 and 
access code calls as compared to local coin calls. <SUP>36</SUP> We 
sought comment on whether these potential differences in costs should 
affect a market based compensation amount, and if so, how. 
<SUP>37</SUP> We sought comment on whether the local coin rate--subject 
to an offset for expenses unique to those calls--is an appropriate per-
call compensation rate for calls that are not compensated pursuant to a 
contract or other arrangement, such as subscriber 800 calls and access 
code calls. <SUP>38</SUP> We stated that parties should respond 
specifically to concerns raised by the court in setting forth their 
views on the appropriate per-call compensation amount. <SUP>39</SUP>
---------------------------------------------------------------------------

    \35\  See Pleading Cycle Established for Comment on Remand 
Issues in the Payphone Proceeding, CC Docket No. 96-128, 62 FR 43686 
(August 15, 1997); DA 97-1673, rel. Aug. 5, 1997 (Notice). In the 
Notice we indicated that we placed the industry on notice that 
payphone compensation obligations, or the absence of such 
obligations, incurred by providers of interexchange services, and 
compensation levels paid or received under our existing rules 
pending action on remand, may be subject to retroactive adjustment. 
Id. at 1. With regard to the interim compensation plan, we 
specifically sought comment on compensation for subscriber 800, 
access code, and 0+ calls, and on retroactive adjustments to interim 
compensation levels and obligations. See id.
    \36\  See id. at 2.
    \37\  Id.
    \38\  Id.
    \39\  Id. at 3.
---------------------------------------------------------------------------

    15. This order addresses only the amount of default per-call 
compensation. We decline to address in this order other issues related 
to the implementation of the per-call compensation 
structure.<SUP>40</SUP> Because the court vacated and remanded the per-
call compensation rate for access code and subscriber 800 calls, we 
have sought to act expeditiously to reevaluate the default per-call 
rate. We conclude, because of the exigency of the situation wherein 
PSPs are not receiving per-call

[[Page 58663]]

compensation as required by Congress in Section 276, that we must 
address quickly and efficiently the most urgent issue--the per call 
compensation amount to be paid by IXCs to PSPs beginning on October 7, 
1997, the beginning of per-call compensation.
---------------------------------------------------------------------------

    \40\  See infra paras. 123-33.
---------------------------------------------------------------------------

III. Per-Call Compensation

A. The Standard for Determining Per-Call Compensation

    16. In the Notice, we sought comment on whether the market-based 
local coin rate--subject to an offset for expenses unique to those 
calls--is an appropriate per-call compensation rate for calls that are 
not compensated pursuant to a contract or other arrangement, such as 
subscriber 800 and access code calls.<SUP>41</SUP> In Illinois Public 
Telecomm., the court in particular concluded that the Commission did 
not adequately justify ``tying the default rate [for per-call 
compensation] to local coin rates.'' <SUP>42</SUP> The court found 
evidence in the record that the costs of coin calls are higher than 
those for coinless calls because: (1) additional costs are incurred for 
equipment and coin collection; and (2) the PSP pays for originating and 
terminating local calls, while for coinless calls the PSP only pays for 
originating the calls.<SUP>43</SUP> Therefore, the court stated that 
setting the per-call compensation for subscriber 800 calls and access 
code calls at the deregulated local coin rate of $0.35 was not 
justified, and vacated and remanded the issue to the Commission for 
further consideration.<SUP>44</SUP>
---------------------------------------------------------------------------

    \41\  See Notice at 2-3.
    \42\  Illinois Public Telecomm. 117 F. 3d at 564.
    \43\  Id. at 563-64.
    \44\  See id.; Illinois Public Telecomm., Supplemental Opinion, 
slip op. at 2.
---------------------------------------------------------------------------

1. Comments <SUP>45</SUP>
---------------------------------------------------------------------------

    \45\  Abbreviations for parties are listed in Attachments B and 
C. The following section includes the analyses of the comments and 
reply comments submitted in this proceeding. Although for 
presentation the comments are summarized generally by subject area, 
we consider these comments and replies in reaching our decisions 
wherever the comment and reply comments are appropriate.
---------------------------------------------------------------------------

    17. APCC asserts that Illinois Public Telecomm. affirms the 
Commission's market-based approach to determine compensation and does 
not mandate an analysis of costs.<SUP>46</SUP> According to APCC, the 
court also affirmed the Commission's finding that the payphone 
marketplace is competitive, even if market forces do not yet operate 
freely for dial-around calling.<SUP>47</SUP> APCC further argues that 
the court did not preclude the Commission from relying on market-based 
surrogates, such as the local coin rate, or require the Commission to 
calculate an exact cost differential to be reflected in the per-call 
compensation figure.<SUP>48</SUP> The Commission, APCC asserts, could 
exclude consideration of cost evidence altogether and focus solely on 
market price indicators.<SUP>49</SUP> APCC contends that the court 
objected only to the Commission's attempt to compare the costs of dial-
around calls and local coin calls.<SUP>50</SUP> Only if the Commission 
continues to rely on cost comparisons as a factor in the application of 
a market-based approach, must the Commission adhere to the reasoning 
issues raised by the court, states APCC.<SUP>51</SUP> Parties further 
contend that a market-based approach will fulfill the requirements of 
the statute, i.e., provide rates that ``fairly compensate'' PSPs and 
``promote competition among payphone service providers and the 
widespread deployment of payphone services.'' <SUP>52</SUP> APCC 
alleges that the IXCs do not provide any arguments for rejecting a 
market-based approach, and challenges the arguments that there are 
local payphone provider monopolies that prevent the payphone market 
from being competitive.<SUP>53</SUP> Peoples adds that PSPs are not 
monopoly providers because Commission rules require PSPs to unblock 
access code calls, giving every caller the option to dial around a 
PSP's presubscribed service provider or to use a debit card to reach a 
carrier of their choice.<SUP>54</SUP>
---------------------------------------------------------------------------

    \46\ See APCC Comments at 2-3; see also CCI Comments at 5.
    \47\ APCC Comments at 2-3.
    \48\ Id. at 3-4.
    \49\ Id.
    \50\ APCC Reply at 5.
    \51\ Id. at 6.
    \52\ APCC Comments at 2 (citing 47 U.S.C. Secs. 276(b)(1), 
(1)(A)). See Coalition Reply at iv, 2, 5.
    \53\ APCC Reply at 7.
    \54\ Peoples Reply at 4.
---------------------------------------------------------------------------

    18. The Coalition argues that the court did not question the 
Commission's decision to rely on market-determined prices rather than 
regulatory accounting procedures.<SUP>55</SUP> The Coalition asserts 
that the court did not require the Commission to abandon its market-
based proxies, but instead required the Commission to consider 
appropriate differences, such as originating costs, between coin and 
coinless calls.<SUP>56</SUP>
---------------------------------------------------------------------------

    \55\ Coalition Reply at 6; Coalition Comments at 11-13.
    \56\ Id.
---------------------------------------------------------------------------

    19. AT&T asserts that the court found that the Commission acted 
unlawfully in establishing an assumed market rate for coinless calls, 
because the Commission ignored record evidence on the cost differences 
between coin and coinless calls.<SUP>57</SUP> Because of this error, 
AT&T states, the court found that there was no rational basis for the 
Commission's conclusion that per-call compensation should be set at the 
assumed deregulated market price, and therefore, that the Commission's 
compensation rate could not stand.<SUP>58</SUP>
---------------------------------------------------------------------------

    \57\ AT&T Reply at 2; see also ACTA Comments at 3, CWI Comments 
at 11.
    \58\ AT&T Comments at 3-4.
---------------------------------------------------------------------------

    20. Frontier similarly argues that the court did not endorse the 
Commission's market-based approach,<SUP>59</SUP> and further, that the 
court found the Commission's conclusion that the local coin rate 
represents the best surrogate of the costs of completing local calls 
unjustified.<SUP>60</SUP>
---------------------------------------------------------------------------

    \59\ Frontier Reply at 3-4.
    \60\ Id. (stating that the ``court plainly tied its assessment 
of what constitutes reasonable compensation to the costs of 
completing coinless calls'').
---------------------------------------------------------------------------

    21. Sprint asserts that although the Commission used a market-based 
approach to determine local coin rates, the Commission never purported 
to use a market-based approach for per-call compensation for access 
code and subscriber 800 calls.<SUP>61</SUP> Instead, Sprint contends 
that the Commission has viewed costs as the appropriate approach from 
the outset, and has sought surrogates for originating costs while 
rejecting non cost-based market surrogates.<SUP>62</SUP>
---------------------------------------------------------------------------

    \61\ Sprint Reply at 14.
    \62\ Id. at 14-15.
---------------------------------------------------------------------------

    22. PageMart and CPI argue that the great disparity in the record 
between the market rates and costs demonstrates that the payphone 
market is not yet competitive, <SUP>63</SUP> because price in a truly 
competitive market would have been driven closer to cost.<SUP>64</SUP> 
PageNet argues that market rates are misleading, because, as consumers, 
IXCs cannot decline a sale, i.e., block incoming payphone calls, and 
thus have a weakened market power.<SUP>65</SUP> WorldCom asserts that 
market-based rate would be more arbitrary and artificial than rates 
based on objective and verifiable costs.<SUP>66</SUP>

    \63\ CPI Comments at 3 (arguing that a market-based rate is 
inappropriate because the payphone industry is not competitive, and 
because PSPs are monopolies or near monopolies).
    \64\ PageMart Reply at 7.
    \65\ See PageNet Comments at 9-11; PageNet Reply at 5, 7. See 
also Section D infra (discussing reconsideration of caller pays and 
the paging carriers arguments that only a calling party pays system 
would result in a true market rate); see also WorldCom Comments at 
3-4 (arguing that the rates being proposed by the LECs and PSPs--
between $0.42 and $0.63 per call--would not be accepted if the 
consumer paid them directly).
    \66\ WorldCom Reply at 3.
---------------------------------------------------------------------------

2. Discussion

    23. Despite a careful review, we find no statement in the court's 
decision that precludes us from relying on market-based surrogates, or 
requires us to determine a rate based on cost data

[[Page 58664]]

submitted by incumbent LECs, independent PSPs, and other parties to 
determine the new per-call rate. The court did not reject the concept 
of linking the market-based local coin rate to the per-call rate for 
access code and subscriber 800 calls based on the similarity in costs, 
nor conclude that our approach was irrational. Rather, the court 
concluded that the Commission had not responded to information on the 
record regarding the cost disparities between the cost of providing 
coin calls and subscriber 800 and access code calls. Therefore, the 
court concluded that adoption of the default rate without further 
explanation was arbitrary and capricious.<SUP>67</SUP>
---------------------------------------------------------------------------

    \67\ See supra para. 13.
---------------------------------------------------------------------------

    24. The 1996 Act does not prescribe a particular course to ensure 
that all PSPs are fairly compensated for each and every 
call.<SUP>68</SUP> Nothing on the record in response to the Notice 
persuades us to change the deregulatory scheme established in the 
Payphone Orders. Based on the record in this proceeding, we affirm our 
decision in the Payphone Orders to use a market-based default rate for 
per-call compensation for subscriber 800 and access code calls. We 
conclude for the reasons stated there that a market-based rate best 
responds to the competitive marketplace for payphones consistent with 
the deregulatory scheme we adopted in the Payphone Orders for the 
provision of payphone services pursuant to Section 276, and also will 
effectively advance the statutory goals of encouraging competition and 
promoting the deployment of payphones.
---------------------------------------------------------------------------

    \68\ 47 U.S.C. Sec. 276(b)(1).
---------------------------------------------------------------------------

    25. As discussed above, because of market imperfections such as the 
inability of PSPs to block access code and subscriber 800 calls, we 
concluded in the Payphone Orders that a default rate was necessary to 
ensure that PSPs received fair compensation during the transition to a 
deregulated market. We also concluded in those orders, as we conclude 
here, that the default rate should be market-based. The method we use 
in this order to estimate a reasonable default per-call compensation 
rate addresses the court's concerns as well as those raised on the 
record in response to the Notice by LECs, IXCs, and PSPs. Specifically, 
our approach continues to rely on a market-based rate (the local coin 
rate).
    26. We, however, adjust the market-based local coin rate for 
differences in the costs of coin and coinless operation, reducing the 
market-based local coin rate for coin-related costs and increasing the 
market-based local coin rate to reflect costs that are related to 
access code and subscriber 800 calls. In addition, in response to the 
arguments of parties in this proceeding that a market-based rate would 
be unreasonable and that we must establish a rate based on cost data 
submitted by the parties, we also have performed an analysis of those 
cost data to test the reasonableness of the selected per-call market-
based rate. As discussed below, we find based on this analysis that the 
adjusted market-based rate is reasonable. Accordingly, we conclude that 
the deregulated local coin rate, adjusted for cost considerations, is a 
reasonable market-based surrogate for determining the default per-call 
compensation rate and specifically responds to the court's concerns 
that cost differences between coin calls and coinless access and 
subscriber 800 calls be explained. Furthermore, we conclude that the 
per-call rate established in this order will further the goals of 
Section 276 and is in the public interest.
    27. The record on remand supports our prior conclusion that per-
call compensation should be set by the marketplace and that full and 
unfettered competition is the best mechanism to achieve Congress' dual 
policy objectives.<SUP>69</SUP> 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 Second Report and Order that PSPs are 
fairly compensated for ``each and every completed intrastate and 
interstate call.''
---------------------------------------------------------------------------

    \69\ 47 U.S.C. Sec. 276(b)(1).
---------------------------------------------------------------------------

    28. We conclude that because we make the per-call amount subject to 
negotiations, the marketplace will make the appropriate adjustments in 
the per-call rate. We established the per-call default rate to be 
applied only if the PSP and the IXC are unable to negotiate some other 
rate 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 flat-rated charge 
rather than a usage-based compensation rate. Second, there may be 
locations where a payphone would not be viable financially if 
compensated at only the default rate per compensable call, but would be 
viable at a higher compensation rate. If an IXC found it profitable to 
carry calls at this higher rate, it would be in the mutual interest of 
the two parties to agree on a higher rate. Third, 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 the default rate, 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 the default rate. 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 the default rate, rather than give an IXC the 
incentive to place a competing payphone.

B. Market-Based Compensation Analysis

    29. As discussed above, we conclude that the appropriate rate of 
per-call compensation for access code and subscriber 800 calls is the 
market-based local coin rate adjusted for costs. In setting the per-
call compensation rate for the first two years of per-call 
compensation, we begin with the $0.35 market-based local coin rate 
established in the Payphone Orders and adjust that rate to remove coin-
related costs and add costs specific to subscriber 800 and access code 
calls.

1. Comments

    30. Market Rate. APCC, the Coalition, Peoples, and CCI request that 
the Commission adopt a market-based per-call compensation rate, and 
furthermore, assert that the underlying costs attributable to both coin 
and noncoin calls are similar.<SUP>70</SUP> APCC contends that any 
market-based rate-setting mistakes are self-corrective, because the 
market will demonstrate the mistake.<SUP>71</SUP> APCC further contends 
that contrary to the IXCs position, the market will prevent PSPs from 
gaining any long term windfall, and would force any such ``windfall,'' 
to be passed on to consumers.<SUP>72</SUP> APCC contends that market-
based rates are more objective than the subjective components of cost-
based rates.<SUP>73</SUP>
---------------------------------------------------------------------------

    \70\ See APCC Comments at 4; APCC Reply at 10 (stating that the 
Commission adopted a market-based approach in the Payphone Orders, 
and that the Commission should apply that approach in the instant 
proceeding); Peoples Comments at 8 (stating that the cost of a dial 
around call is similar to the deregulated market rate). See also 
Coalition Reply at 2-3 (stating that once the cost analyses provided 
by the IXCs are corrected for costs that should be included, the 
cost of a call reaches, and in some cases exceeds, the market rate).
    \71\ APCC Comments at 5.
    \72\ APCC Reply at 14.
    \73\ APCC Comments at 6.
---------------------------------------------------------------------------

    31. The Coalition further maintains that the market will reflect 
variations from region to region and payphone to

[[Page 58665]]

payphone.<SUP>74</SUP> The Coalition urges that the market rate be the 
local coin rate adjusted to reflect the relative elasticities of demand 
of the various types of calls.<SUP>75</SUP> The Coalition contends that 
under market conditions sellers will tend to load costs onto services 
for which prices are less likely to fluctuate, i.e., that have a lower 
elasticity of demand, than onto services that have a higher price 
sensitivity. The Coalition further argues that the elasticity of demand 
for local coin calls is higher than for long distance calls. In other 
words, the Coalition argues, customers of local calls will respond more 
quickly to price changes than customers of 0+, subscriber 800 and dial-
around calls.<SUP>76</SUP> Thus, the Coalition contends, the price of 
long distance calls should be the local call rate adjusted upward to 
reflect the lower elasticity of demand and the greater proportion of 
costs, relative to local calls, that such calls will carry under true 
market conditions.<SUP>77</SUP>
---------------------------------------------------------------------------

    \74\ Coalition Reply at 6 (citing Order on Reconsideration, 61 
FR 65341 (December 12, 1996); 11 FCC Rcd at 21,268-69, para. 71).
    \75\ Coalition Comments at 22.
    \76\ Id. at 23.
    \77\ Id. at 12-14; Coalition Reply at 4, 14-15.
---------------------------------------------------------------------------

    32. CCI, an independent payphone provider, argues that the 
Commission should adopt a market-based surrogate, and contends that 
there are few differences between the costs of a local coin call and a 
subscriber 800 or access code call.<SUP>78</SUP> CCI argues, however, 
that even under a cost-based approach, the cost of a local coin call 
and a dial around call is approximately $0.35.<SUP>79</SUP>
---------------------------------------------------------------------------

    \78\ CCI Comments at 2.
    \79\ See id.
---------------------------------------------------------------------------

    33. Several of the IXCs assert that the retail price for local coin 
calls is not an appropriate surrogate for the costs of a noncoin call, 
because there are substantial cost differences between these two types 
of calls.<SUP>80</SUP> AT&T and MCI assert that if the Commission 
develops a rate based on an offset from the local coin rate, the offset 
should be at least fifty percent,<SUP>81</SUP> or based on the rate 
negotiated between AT&T and APCC in 1994 for dial-around access code 
calls.<SUP>82</SUP> MCI asserts that a market-based rate, being higher 
than a cost-based rate, would lead to increased blocking by 800 
subscribers, as those subscribers try to avoid having to pay IXCs for 
unduly high payphone charges.<SUP>83</SUP> MCI also asserts that 
market-based rates are artificially driven up by location owners 
holding out for the highest bidding PSP.<SUP>84</SUP> These higher, 
market-based rates will lead to an unwarranted income transfer from 
consumers to payphone providers, MCI contends, because excessively high 
rates will encourage PSPs to place payphones in increasingly marginal 
locations.<SUP>85</SUP> The Coalition disputes MCI's assertion that a 
market-based rate would lead to increased blocking arguing that PSPs 
have an interest in seeing calls completed, which call blocking would 
defeat, and an acceptable market rate would result in more completed 
calls.<SUP>86</SUP>
---------------------------------------------------------------------------

    \80\ See, e.g., AT&T Comments at 4, 6; AT&T Reply at 4 (stating 
that market-based compensation is unrelated to and in excess of 
costs to originate coinless calls); Excel Reply at 1; MIDCOM 
Comments at 4-6 (stating that any alleged market rate would be 
distorted by the binding contracts to which the majority of payphone 
locations already are subject).
    \81\ See AT&T Comments at 13; MCI Reply at 3.
    \82\ See AT&T Reply at 12-13 (explaining that since AT&T 
negotiated the 25 cent rate, the average price of a dial around call 
has declined).
    \83\ MCI Comments at 4.
    \84\ MCI Reply at 10.
    \85\ Id.
    \86\  Coalition Reply at 8-9.
---------------------------------------------------------------------------

    34. Local Coin Rate as Surrogate. Several of the PSPs argue that if 
the local coin calling rate is used, no significant adjustment for cost 
differences between the coin rate and dial-around calls is required, 
because any cost differences are minimal.<SUP>87</SUP>
---------------------------------------------------------------------------

    \87\ See APCC Comments at 11-15 (arguing that fixed payphone 
costs do not change with the presence of dial-around calls, and 
further that there are no major differences in the variable costs); 
see also TEI Comments at 2; CCI Comments at 6-8 (arguing that the 
deregulated coin rate of $.35 per call is an appropriate surrogate).
---------------------------------------------------------------------------

    35. Peoples argues that a single, flat default rate would simplify 
procedures, much as a first-class postage stamp covers mail that goes 
various distances.<SUP>88</SUP> Peoples further argues that the local 
coin rate is such a flat rate, because it is used to originate all 
types of calls from a payphone.<SUP>89</SUP> Moreover, Peoples argues, 
coinless calls alone do not justify installing a payphone; payphones 
are installed for coin calls, thus, the local coin rate is a good 
market measure for all of the calls that originate from 
it.<SUP>90</SUP>
---------------------------------------------------------------------------

    \88\ Peoples Comments at 7.
    \89\ Id.
    \90\ Id. at 6-7.
---------------------------------------------------------------------------

    36. Several of the IXCs oppose the use of the local coin rate as a 
surrogate, but state that if the Commission uses the local coin rate, 
then the Commission should reduce the local coin rate so that it 
reflect only expenses unique to access code and subscriber 800 calls. 
<SUP>91</SUP> CPI objects to the use of the local coin rate as a 
starting point because the coin rate does not represent the result of a 
competitive market. <SUP>92</SUP> TRA says that using the local coin 
rate will lead to a grossly inflated default rate. <SUP>93</SUP> 
Frontier states that the coin rate bears little relationship to the 
costs of completing a coin call, much less a coinless call. 
<SUP>94</SUP>
---------------------------------------------------------------------------

    \91\  CWI Comments at 9 n.7; CompTel Comments at 14 n.7; LCI 
Comments at 8; RCN Reply at 1.
    \92\ CPI Comments at 7.
    \93\ TRA Comments at 20.
    \94\ Frontier Reply at 5.
---------------------------------------------------------------------------

    37. Other Surrogates. APCC requests that the Commission consider 
other surrogates for the market rate, such as 0+ commissions, 0- 
transfer rates and sent-paid toll call surcharges. <SUP>95</SUP> 
According to APCC, the 0+ call commissions are the only known instance 
where carriers and PSPs meet in the marketplace to negotiate a price 
for routing a call from the payphone to the carrier, and therefore, the 
Commission should reconsider 0+ commissions. <SUP>96</SUP> APCC further 
contends that sent-paid tolls are another reasonable indicator of the 
market price. <SUP>97</SUP> Additionally, APCC contends that the 0- 
transfer rates are a reasonable surrogate, because these rates indicate 
the minimum price IXCs are willing to pay to obtain telephone traffic. 
<SUP>98</SUP> APCC concludes that the most appropriate market-based 
surrogates are local coin calls, operator-assisted call commissions and 
sent-paid toll surcharges, because these three surrogates are based on 
prices actually charged in the marketplace for origination of payphone 
calls. APCC states that a weighted average price for these three 
charges is $0.45 per call. <SUP>99</SUP>
---------------------------------------------------------------------------

    \95\ APCC Comments at 8-10.
    \96\ Id. at 7-8 (arguing that the Commission erroneously 
rejected 0+ commissions in its Report and Order in this proceeding, 
but accepted them as a benchmark in CC Docket No. 91-35). The mid-
range level of these commissions, according to APCC's 1996 data, is 
$0.62 per call. See id.
    \97\ Id. at 9-10 (explaining that the sent-paid toll call 
surcharge is the amount, above the standard transmission charge, 
that a PSP charges for the convenience of making a toll call from a 
payphone). The middle-range price of such a call is $1.40 per call. 
See id.
    \98\ Id. at 9 (stating that the average price of a completed 0- 
transfer call is $0.41).
    \99\ Id. at 10.
---------------------------------------------------------------------------

    38. Several of the IXCs argue that 0+ commissions cannot be used as 
a market guide because these commissions include factors unrelated to 
the use of payphones for the use of access code and subscribers 800 
calls.<SUP>100</SUP>

[[Page 58666]]

Furthermore, carriers argue, sent-paid calls are not a reliable 
surrogate, because these charges cover such services as a payphone's 
capability to track time and amount, and recognize types of coins, 
services not needed for 800 subscriber calls.<SUP>101</SUP> MCI argues 
that these surrogates are not representative because they are narrowly 
tailored to specific types of calls.<SUP>102</SUP> Moreover, MCI 
contends, some of so-called surrogates apply to calls from telephones 
that are not even payphones.<SUP>103</SUP> Sprint argues that the only 
truly reliable indicator of the market for subscriber 800 and access 
code calls is what the market provided to PSPs for such calls prior to 
the imposition of the Commission's orders in CC Docket No. 91-
35.<SUP>104</SUP> At that time there was no compensation to PSPs for 
these calls, and therefore, Sprint contends, the market price was zero. 
<SUP>105</SUP>
---------------------------------------------------------------------------

    \100\ See, e.g., AT&T Reply at 35; CWI Reply at 2-4; CompTel 
Reply at i, 2-3; RCN Reply at 7-8, Sprint Reply at 17; WorldCom 
Comments at 4; Excel Reply at 7 (arguing that these surrogates do 
not overcome the uncompetitive characteristic of the current 
payphone market by virtue of the fact that payphone callers are a 
captive audience); Frontier Comments at 3 (arguing that commissions 
paid on 0+ calls include monopoly rents and locational monopolies); 
ITA Comment at 6-7 (arguing that compensation for 0+ calls includes 
other compensation factors, such as the PSP's promotion of the 
operator service provider through payphone placards, and that market 
surrogates in general include costs not incurred in PSP origination 
of dial-around calls, such as LEC line costs, premise owner 
commissions, and billing and collection charges); PageNet Reply at 
11 (arguing that 0-transfer rates include compensation for operator 
assistance services that subscriber 800 calls do not use). See infra 
para. 62 for a more thorough discussion regarding commissions.
    \101\ PageNet Reply at 11-12.
    \102\ MCI Reply at 6 (arguing that the 0+ commission represents 
the value to the IXC of being a payphone's presubscribed carrier).
    \103\ Id.
    \104\ Sprint Reply at 18.
    \105\ Id.
---------------------------------------------------------------------------

    39. Excel argues that the Commission should start with a local coin 
rate at $0.25,<SUP>106</SUP> then subtract those costs unique to the 
local coin service--coin equipment and collection, coin rating, 
originating and terminating access from the local coin 
rate.<SUP>107</SUP> AT&T, CompTel, and CWI argue that the Commission 
should not rely on avoided costs in establishing the default 
compensation rate, because this method inappropriately compares the 
price of coin calls with the costs of coinless calls and may 
overcompensate PSPs. Nonetheless, if the Commission adopts this method, 
AT&T argues, the Commission must set the local coin rate at $0.25 and 
determine the actual avoided costs related to coinless 
calls,<SUP>108</SUP> and CompTel and CWI argue that the Commission 
should subtract the costs of tracking and billing 
compensation.<SUP>109</SUP> MCI argues that if the Commission adopts a 
top-down approach, it should calculate the default rate by subtracting 
the coin specific costs from the cost of a coin call, not from the 
market rate.<SUP>110</SUP> RCN argues that the Commission should 
determine a nationwide default rate and then subtract those costs that 
are unique to coin calls.<SUP>111</SUP>
---------------------------------------------------------------------------

    \106\ Excel Reply at 3, 9 (arguing that setting the default rate 
at the highest deregulated rate in the country is contrary to 
competition, and further that the proceeding before the 
Massachusetts DPUC regarding NYNEX's payphone rates demonstrates 
that the market rate for local coin calls should not be higher than 
$0.25 per call).
    \107\ Excel Comments at 4.
    \108\ AT&T Reply at 24 (stating that no charges should be added 
to this rate such as ANI or completion costs for local coin calls).
    \109\ CompTel Comments at 14 n.7.
    \110\ MCI Comments at 3.
    \111\ RCN Comments at 4 (stating that the per-call rate should 
not exceed the market-based local coin rate).
---------------------------------------------------------------------------

    40. The Coalition argues that the avoided cost methodology will not 
produce a per-call compensation rate lower than the deregulated coin 
rate, and in fact, will increase the amount of compensation owed to the 
PSPs.<SUP>112</SUP> Furthermore, the Coalition argues, avoided cost 
methodology will not produce competitive outcomes, because joint and 
common costs are a significant portion of the total costs, and the 
market does not price goods or services on costs alone.<SUP>113</SUP>
---------------------------------------------------------------------------

    \112\ Coalition Reply at 13-15 (arguing that an avoided cost 
methodology not only requires the deduction of certain costs, but 
also the addition of costs that PSPs must incur for a noncoin call).
    \113\ Id. at 14. See infra paras. 64-67 regarding demand 
elasticity.

---------------------------------------------------------------------------
2. Discussion

    41. In the Payphone Orders, we found that the market rate for a 
local coin call is $0.35 and we stated that this is also the rate for 
access code and subscriber 800 calls for the first year of per-call 
compensation. In response to the court's concern that there may be 
differences in cost between providing local coin calls and subscriber 
800 and access code calls, we have evaluated the evidence on the record 
to develop a default rate for access code and subscriber 800 calls that 
reflect those cost differences. On the record, parties discuss several 
cost factors suggesting that compensation for access code and 
subscriber 800 calls should be either above or below the market price 
for coin calls.<SUP>114</SUP> In section (a) we conclude that based on 
differences in costs, a market rate for access code and subscriber 800 
calls likely would be between 5.9 and 7.3 cents lower than the market 
rate for a local coin call, resulting in a rate of $0.284. In section 
(b) we conclude that the parties failed to provide sufficient 
information to adjust the default dial access and subscriber 800 rate 
to reflect differences in the elasticities of access code and 
subscriber 800 calls compared with local coin service. Thus, we do not 
make any adjustment for elasticity differences.
---------------------------------------------------------------------------

    \114\ See, e.g., AT&T Comments at 11 (per-call compensation 
should be lower than the default rate); Sprint Comments at 9; APCC 
Comments at 8; Coalition Comments at 30-33 (stating that per-call 
compensation should be above the local coin rate to account for 
implementing ANI and other costs).

---------------------------------------------------------------------------
a. Adjustments to the Local Coin Market Rate Based on Cost Differences

i. General Approach

    42. Our general approach is to start with the market rate for local 
coin service ($0.35), and subtract costs directly attributable to coin 
calls and add costs specific to access code and subscriber 800 calls. 
The majority of the costs associated with a payphone are joint and 
common costs that are shared by the different types of calls made by 
means of the payphone. These costs do not increase or decrease as the 
number or composition of calls changes at a particular location. By 
making no adjustment to the coin rate for these costs, we conclude that 
each call placed at a payphone should bear an equal share of joint and 
common costs.
    43. The long distance and paging companies argue that we should 
limit the costs attributed to access code and subscriber 800 calls to 
the costs that would be incurred from providing access at a coinless 
payphone; coin-related costs should not be included. Under this theory, 
all other costs that are incurred to support a payphone coin call would 
be attributed to coin calls and either removed from any market-based 
rate or excluded from any other type of cost estimate.<SUP>115</SUP> 
PSPs, however, maintain that few locations could support a coinless 
instrument.<SUP>116</SUP> Instead, they explain that most payphones are 
installed to handle both coin and coinless calls.<SUP>117</SUP>
---------------------------------------------------------------------------

    \115\ AT&T Comments, Analysis of Economist David Robinson at 6 
[hereinafter AT&T Comments, Robinson]; MCI Comments at 3.
    \116\ See Peoples Comments at 7.
    \117\ Coalition Comments, Analysis of Economist Jerry A. 
Hausman, Ph.D. at 9 [hereinafter Coalition Comments, Hausman].
---------------------------------------------------------------------------

    44. We agree with the IXCs, and paging companies, that costs 
directly associated with the coin mechanism should be borne by coin 
calls. Under their general approach, however, compensation for 
subscriber 800 and access code calls would not fairly contribute to the 
recovery of joint and common costs of payphone service that would 
occur, even if the payphone is used solely to place such calls. In our 
view, such joint and common costs are not ``additional'' costs occurred 
to provide local coin calls. Hence, compensation for subscriber 800 and 
access code calls should contribute to the recovery of such costs. Our 
calculation assumes that each call will contribute to a multi-use 
payphone's joint and common costs.

[[Page 58667]]

    45. We reject AT&T's contention that using a coinless payphone 
results in a per-call compensation rate of 11 cents per call and that 
this rate should be the basis for selecting a per-call compensation 
rate. We note that AT&T divided its monthly costs to install, operate, 
and maintain a coinless payphone ($76.85) by the number of calls at a 
coin payphone estimated by APCC.<SUP>118</SUP> The APCC study showed 
that the average payphone carried 713 calls per month, and that 511 of 
these calls were coin calls and 202 of these calls were coin-less 
calls.<SUP>119</SUP> It is more reasonable to assume that you would 
divide AT&T's estimated monthly costs for a coinless payphone ($76.85) 
by 202, the number of coinless calls. This calculation results in a 
cost of 38 cents per call, rather than the 11 cents estimated by AT&T. 
If the number of calls at coinless payphone were adjusted for a 
marginal location as we do in our analysis below, the per-call cost 
would be even greater. Thus, we conclude that the 11 cent rate obtained 
by AT&T in its analysis would not be an appropriate per-call 
compensation rate for subscriber 800 and access code 
calls.<SUP>120</SUP>
---------------------------------------------------------------------------

    \118\ AT&T Comments, Robinson at 12.
    \119\ APCC Comments, Attachment 4 at 2.
    \120\ Other parties believe that AT&T's estimated monthly cost 
of a coinless telephone is too low. Coalition Reply at 29.
---------------------------------------------------------------------------

    46. Selecting the number of calls to represent a low traffic 
location. Any analysis of the costs incurred for a call from a payphone 
must be based on a particular number of calls. Most of the parties 
presented cost information based on coin payphones serving locations 
with an average amount of calling. We believe, however, that it is 
appropriate to analyze cost for a location with less than average 
calling. Prices in competitive markets tend to be set at the marginal 
cost of production. For payphone service, the marginal unit of 
production is the installation of a payphone at a low traffic location. 
If prices for payphone calls increased, providers would be willing to 
install more payphones; however, customers would likely place fewer 
calls. At the equilibrium price for payphone calls, newly installed 
payphones would be expected to generate just sufficient calls to earn 
only a normal return on investment. Thus, we believe that setting a 
default compensation rate to achieve fair and reasonable compensation 
requires that a payphone operator be able to cover costs at a low 
traffic location. A single instrument would be required to provide both 
coin and coinless calls at such a location, with neither class of 
calls, by itself, sufficient to justify installation of a payphone.
    47. We select the number of calls to represent a low traffic 
location by estimating the number of calls that could cover all of the 
costs of operating a payphone with the exception of commissions paid to 
location owners. This number represents the lowest number of calls at 
which a payphone could be operated without requiring a subsidy. Most of 
the costs associated with a payphone do not vary with the number of 
calls made at an individual payphone. Thus an individual call must 
cover its own marginal costs as well as a share of the non-varying 
costs. The contribution made by an individual call is the price of the 
call less the marginal costs of the call. If the price of calls remains 
constant, each additional call adds a fixed amount of contribution. If 
the number of calls is high enough, the total of this contribution will 
exceed the total of non-varying costs, including a normal return on 
investment. The amount by which total revenue exceeds total cost is 
referred to as economic rent. In the long run, premises owners will be 
able to extract any economic rent from payphone owners through 
commissions.<SUP>121</SUP> If a location generates only enough traffic 
to support the installation and upkeep of a payphone, however, there 
will not be any commission payments. Some PSPs may choose to pay 
standardized commission amounts.<SUP>122</SUP> These companies will not 
serve as wide a mix of locations. All things being equal, the owner of 
a high traffic location would seek out the potential profits by 
choosing the PSP that is willing to pay the highest commissions. On the 
other hand, if the owner of a low traffic location insisted on a 
commission, no PSP would be willing to install a new payphone at that 
location because no PSP could pay the commission and generate a 
sufficient return on its new investment.<SUP>123</SUP> Accordingly, a 
marginal location is a location where traffic just covers costs other 
than premises owner commissions.
---------------------------------------------------------------------------

    \121\ Several PSPs suggested that commissions should be included 
in the cost of providing access code and subscriber 800 calls. See 
infra para. 62.
    \122\ See TEI Comments at 8.
    \123\ Existing LECs require premises owners to pay for placement 
of payphones, rather than receive a commission, if there is a 
sufficiently low volume of coin traffic at a location.
---------------------------------------------------------------------------

    48. Based on the data provided by the commenters, it is necessary 
to complete several steps to determine the appropriate number of calls 
needed to sustain a payphone at a marginal location. As explained more 
thoroughly below, we rely on APCC cost data, because these data are 
representative of the payphone industry as a whole. However, APCC did 
not provide a breakdown of the 689 calls that it reported as the 
average per payphone when it collected the cost data. Therefore, we 
first used APCC data from the call type study--which provided data 
based on an average of 713 calls--to determine the proportion of access 
code and subscriber 800, coin and other calls for the 689 calls 
reported in the cost study. Second, using these derived call numbers, 
we estimated the amount of coin and other calls necessary to generate 
commission payments, and subtract those calls to yield the number of 
calls needed to sustain the marginal payphone.
    49. We use APCC data to estimate the number of calls per month that 
an average PSP would need at a location to cover costs other than 
commissions.<SUP>124</SUP> APCC reported $242 monthly cost per 
payphone, including $45 in commissions, based on an average of 689 
calls of all types.<SUP>125</SUP> Until October 1996, $6 of the monthly 
cost per payphone was met from dial around compensation and the balance 
of the monthly cost per payphone had to be met with coin revenues and 
revenues from 0+, 0-, and 00- calls.<SUP>126</SUP> To determine the 
amount of revenue that the average coin, 0+, 0-, and 00- call had to 
produce so that the average number of calls would cover total costs, we 
had to determine the total number of each such call type. Therefore, we 
used the data in the APCC call distribution study, which produced a 
total of 713 calls of all call types--152 access code and subscriber 
800 calls and 561 coin and other calls--and applied this breakdown to 
the 689 calls in the cost study to develop a call distribution.

[[Page 58668]]

Applying the representative percentages of the call types resulted in 
the following distribution: 147 access code and subscriber 800 calls, 
494 coin calls, and 48 other calls.<SUP>127</SUP> Thus, to recover the 
$242 in monthly costs at an average location, the PSPs surveyed by APCC 
had to collect an average of 43.5 cents per call in revenue from coin 
and other calls.<SUP>128</SUP>
---------------------------------------------------------------------------

    \124\ APCC submitted data from two different studies; one 
pertaining to cost, and one pertaining to call type volumes. See 
APCC Comments, Attachment 3 (``Weighted Average of Cost and Call 
Volume Data from 46 Payphone Companies''), Attachment 4 (``Results 
of APCC's 1996 Survey of Payphone Call Volumes''). For this analysis 
we needed the following information: average cost per payphone; 
average commissions paid to premises owners per payphone; average 
number of calls per payphone; the marginal cost per coin call; and 
breakdown of average call types per payphone. APCC and CCI provided 
a breakdown by call type; in relying on APCCs data, we note that 
other commenters supplied APCC's call type data in their comments as 
representative of the payphone industry, and further, that CCI's 
call data is similar to that of APCC. See, e.g., CWI Comments, LCI 
Comments, CompTel Comments. APCC and several other commenters, such 
as Peoples and CCI, provided cost data; however, we selected the 
APCC data because it is the most thorough and representative of the 
payphone industry averages.
    \125\ See APCC Comments, Attachment 3.
    \126\ See OSP Second Report and Order, 57 FR 21038 (May 18, 
1992); 7 FCC Rcd at 3251.
    \127\ See APCC Comments, Exhibit 4 (providing specific amount of 
numbers of each call type). The APCC survey found $242 per month 
total cost based on an average of 689 calls per month. The APCC call 
distribution study (APCC Comments, Exhibit 4) showed 713 total 
calls, comprised of 152 access code and subscriber 800 calls (21%), 
and 561 coin and other calls (79%)). We applied this breakdown to 
689 calls to estimate 147 access code and subscriber 800 calls and 
542 coin and other calls. The 542 coin and other calls includes 411 
and 555 calls that we treated as coin calls for our analyses.
    \128\ The quantity ($242 less $6 dial around compensation) 
divided by (542 calls) results in 43.5 cents per call. The $6 in 
dial around compensation is based on historic data. We have used 
historic data rather than the default compensation rate times 
projected access code and subscriber 800 calls in order both to meet 
the concern that the compensation rate be fair to existing payphone 
providers and also because it is difficult to forecast the future 
number of access code and subscriber 800 calls.
---------------------------------------------------------------------------

    50. The APCC data illustrate that PSPs pay an average of $45 per 
month in commissions. For the purposes of this analysis, we impute the 
number of calls at a low traffic location by taking the number of calls 
at an average location, and subtract the number of coin and other calls 
that would produce marginal revenue of $45. As explained above, to 
break even at an average location, PSPs must have generated 43.5 cents 
per call from an average number of coin and other calls. This revenue 
per call, however, is offset by about 4.8 cents of marginal cost per 
call, <SUP>129</SUP> meaning that payphone providers must realize about 
38.7 cents in average net revenue per call. Dividing $45, the average 
compensation to premises owners, by 38.7 cents, which is the marginal 
revenue per call, results in 116 coin and other calls. In other words, 
if the number of coin and other calls is decreased by 116, all other 
things being equal, the PSP's net revenue would be reduced by $45 (116 
calls times 38.7 cents per call). Assuming a proportionate reduction in 
all calls, a break even or low traffic location would have 116 fewer 
coin and other calls and 31 fewer access code and subscriber 800 calls. 
<SUP>130</SUP> Using the total number of all calls from the cost study 
(689), we subtracted 116--the number of coin and other calls that would 
generate $45 in commissions. This resulted in 573 calls. We also expect 
that the number of access code and subscriber 800 calls at a marginal 
payphone location would be less. As noted above, we determined that 147 
of the 689 calls at an average location would be subscriber 800 and 
access code calls. To reduce that amount (147) by the decrease in 
access code and subscriber 800 calls that would be originated at a 
marginal location, we then determined how many of the remaining calls 
were subscriber 800 and access code calls. Comparing the numbers from 
the APCC call volume study, we determined that the number of coin and 
other calls (excluding subscriber 800 and access code calls) was 
approximately 21.4% less in the cost study. <SUP>131</SUP> Assuming 
that the subscriber 800 and access code calls also would decrease 
proportionately, we determined that there would be 31 fewer subscriber 
800 and access code calls. <SUP>132</SUP> Thus, we subtracted 31 from 
573, which results in 542 calls. Accordingly, we use this number, 542, 
as the total number of calls that would be made from a low traffic 
location. <SUP>133</SUP>
---------------------------------------------------------------------------

    \129\  We find below that the marginal collection, maintenance, 
and lines costs of a coin call are between 4.6 and 6.0 cents per 
call. The APCC usage study shows that if access code and subscriber 
800 calls are omitted, about 91% of the remaining calls are strictly 
coin (i.e., excluding 411 and 555 calls). To determine an average 
cost for coin and other call types, we used an average marginal cost 
for a coin call multiplied by the percentage of coin calls. This 
translated to 5.3 cents of marginal cost for a coin call [(4.6+6.0)/
2] multiplied by the percentage of coin calls (91%), which results 
in 4.8 cents per average coin and other call.
    \130\  Since our default compensation rate will cover more joint 
and common costs than the $6 per month compensation rate in effect 
through October 6, 1996, payphones will become economically viable 
at more locations, satisfying one of the goals of the 1996 Act.
    \131\  Using the number 116 calls, we divided 116 coin and other 
calls (excluding subscriber 800 and access code calls) by 542 total 
coin and other calls (again excluding subscriber 800 and access code 
calls). This resulted in a reduction of 21.4%. This percentage does 
not indicate that the type of calls declined, but rather, is a 
percentage used to develop the relative proportions of the various 
call types from the call volume study to the cost study.
    \132\  This assumes that access code and subscriber 800 calls 
also would decline by the same percentage as would coin and other 
calls. 116 coin and other calls times (152 average access code and 
subscriber 800 calls / 561 coin and other) equals 31 fewer access 
code and subscriber 800 calls.
    \133\  We use the 542 number of calls at a low traffic payphone 
location in the following sections of the market based analysis: 
coin mechanism capital costs; line savings (in part); and ANI ii.

---------------------------------------------------------------------------
ii. Estimate of avoided and added costs.

    51. The parties submitted data on avoided and added costs of dial 
access and subscriber 800 calls compared with local coin calls. 
Different parties have different costs by category due to differences 
in the type of location served and differences in accounting 
treatments. Line charges, for example, vary from state to state. One 
party may treat a specific cost as overhead while another party might 
include the same sort of cost a direct cost of maintenance. It is not 
possible to fully reconcile differences in cost estimates by analyzing 
the data filed on the record. Accordingly, we have used the information 
submitted by the parties along with information from Securities and 
Exchange Commission 10K filings to develop ranges within which cost for 
an average PSP might reasonably be expected to fall. <SUP>134</SUP>
---------------------------------------------------------------------------

    \134\  Bell Atlantic Telephone Companies v. FCC, 79 F.3d 1195, 
1202-04 (stating that the Commission is not required to include all 
data when determining a rate, and that the Commission has the 
authority to exclude suspicious data or statistical outliers).
---------------------------------------------------------------------------

    52. Coin Mechanism Capital Costs. While a single payphone may be 
installed to handle both coin and coinless traffic, the direct costs of 
the coin mechanism should be recovered by coin calls. After 
installation, the capital costs of a payphone become fixed. Because we 
are looking at the long run, where all costs are avoidable, we consider 
the decision made by the PSP at the time the phone is installed. When a 
payphone provider considers installing a telephone at a new location, 
it must consider whether the additional coin traffic at that location 
would justify the additional cost of installing a coin telephone. The 
PSP would not install a coin payphone instead of a coinless payphone 
unless the additional coin traffic would at least cover the additional 
costs of a coin mechanism. Therefore we conclude that costs directly 
associated with the coin mechanism should be attributed to coin 
traffic. We assume that the market rate for local coin calls recovers 
these costs and therefore conclude these costs should be removed from 
the adjusted market rate.
    53. David Robinson, in a study submitted by AT&T, provided the most 
detailed information on the costs of purchasing and installing 
different types of telephones. Independent PSPs typically use smart 
payphones. Robinson estimated that new smart coin payphones cost about 
$900 to $1200 per unit compared with $200 to $250 per unit for coinless 
units.<SUP>135</SUP> The differences in cost are primarily due to 
equipment used to accept, count, and hold coins.<SUP>136</SUP> Some 
cost differences,

[[Page 58669]]

however, may be due to quality features that allow the payphone to be 
used in harsher environments. We selected the $900 figure for smart 
coin telephones as an amount that would be suitable for general 
locations instead of the $1200 figure, because the latter figure likely 
included additional features that go beyond the standard smart coin 
telephone that would not be necessary at the general location. We 
determine that $250 is an appropriate amount for the coinless phone 
operated in a general location, to reflect some quality features, and 
further, because there is not a significant difference in the 
capabilities among the coinless phones and the difference between the 
estimates ($200 to $250) is not significant. The difference in price, 
from $900 to $250, $650 per telephone, would be due to added costs 
associated with coin traffic. Robinson also estimates that a smart coin 
telephone requires $60 more for installation than does a coinless 
telephone due to additional testing and programming for the coin rating 
and collection functions.<SUP>137</SUP> Thus, we estimate a total 
investment cost of $710 per payphone that is related to coin 
functions.<SUP>138</SUP> This equates to $12.36 in investment costs per 
month for a coin telephone.<SUP>139</SUP> Thus, we impute that the 
market rate for local coin service includes 3.1 cents per coin call at 
a low usage location and that this amount represents an avoided cost 
for dial around and subscriber 800 calls.<SUP>140</SUP>
---------------------------------------------------------------------------

    \135\ AT&T Comments, Robinson at 3.
    \136\ See Coalition Comments, Report of Arthur Andersen on per-
call compensation and cost calculations, Carl Geppert at 8 (Aug. 26, 
1997). Local exchange carriers, in contrast, have an installed base 
that typically consists of ``dumb'' payphones that must rely on 
telephone company central offices for functionality. The Coalition 
submitted a study by Carl Geppert for Arthur Andersen citing New 
England Telephone data for New Hampshire to show that the average 
costs of coin and coinless telephones were similar. Other parties 
have presented information to the effect that a coin mechanism by 
itself would cost less than $100. Stronger, theftproof housing, 
however, also is required if a coin mechanism is to be included. We 
conclude that the best information is the current prices of 
comparable telephones with and without coin mechanisms and that the 
Robinson data is most suitable for this comparison.
    \137\ AT&T Comments, Robinson at 3.
    \138\ In reviewing costs infra, we use data from Peoples and 
CCI's 10K reports to estimate that the total new investment for a 
payphone would be about $3000, including support facilities. Thus, 
the $710 in coin related costs represents about a quarter of the 
total new investment.
    \139\ Equal monthly payments of $12.36 would depreciate $710 
over a 10 year life and earn a return of 11.25% on net plant, 
allowing for the statutory federal income tax rate of 34%. We 
selected a 10 year life consistent with AT&T and Peoples. See AT&T 
Comments, Robinson at 5; Peoples 1996 10K at 31 (using a 10 year 
straight line depreciation rate for public payphones. Cf. CCI 
Comments at 10 (using a 7 year life). See also infra para. 59 for 
further explanation of interest rates.
    \140\ This is not a marginal cost per coin call. Rather, it 
represents the amount included in the market rate of local coin 
calls to recover the costs of equipment attributed to coin service. 
For this purpose, the market rate was assumed to be based on a low 
traffic location, meaning 542 total calls, including a total of 399 
coin, 411, and 555 calls.
---------------------------------------------------------------------------

    54. Line Savings. In some areas, all payphones are charged per-
message or per minute charges for all local calls. In other areas, all 
payphones use unmeasured lines. In still other areas, payphone 
providers can choose between using some form of measured service and 
unlimited calling. PSPs taking measured service pay message charges for 
local coin calls, but not for access code or 800 subscriber calls. This 
represents a marginal cost difference of coin versus coinless service. 
Based on the record, we conclude that the average cost savings for line 
charges is about 2.5 to 3.0 cents per call.<SUP>141</SUP>
---------------------------------------------------------------------------

    \141\ See Coalition Comments, Andersen at 4 ($0.02); CCI 
Comments at 9 ($0.02); Peoples Comments at 11 ($0.04). We note, 
however, that six of the eight Coalition members reported no 
measured service lines, and further, that the line savings per call 
was $0.07 and $0.08 for the other two. In a deregulated environment, 
LECs will have incentives to select measured service lines for 
payphones when such lines would be the low cost alternative. 
Accordingly, the LEC data is not representative of costs for the 
PSPs. The Peoples estimate contains some avoided toll costs in 
addition to avoided coin collection costs. Peoples did not provide 
sufficient information to separate this part of the costs. 
Accordingly, that amount is too high to serve as a high range for 
estimates. See also AT&T Comments at 4 ($0.029) (deriving this 
figure as total billing cost, $15.03 local usage for a smart phone 
divided by 511 coin calls as represented in the APCC study, 
Attachment 4 at 2). Telaleasing data was excluded because its 
estimates are radically different from the estimates filed by any 
other party and because its data could not be verified by parent 
company 10K filing. See Telaleasing Comments at 7; Davel 10K at 19. 
Also, all of Sprint's payphones appeared to be in non-measured 
service areas, which is not representative of the industry average, 
so we did not use Sprint's line cost data when determining line 
savings. Sprint Reply, Exhibit 1 at 2. Line costs are dependent on 
local exchange carrier rates which vary by community. We do not 
believe that the industry average would be much higher than the 
figure derived from AT&T data. Accordingly, we select 3.0 cents per 
call for the high call estimate (slightly higher figure than that 
derived from AT&T data). We select 2.5 cents per call as the low 
estimate, based on an average of the AT&T and CCI data.
---------------------------------------------------------------------------

    55. Collection and Maintenance Savings. The parties concur that 
coin collection costs are related to coin calls, that coin telephones 
have higher maintenance costs than coinless telephones and that 
maintenance costs increase as the number of coin calls 
increases.<SUP>142</SUP> It is difficult to separate maintenance from 
coin collection costs, however, because some coin collection and 
routine maintenance may occur at the same time.<SUP>143</SUP> Not all 
maintenance is related to coin calls.<SUP>144</SUP> For example, key 
pads and handsets are used for both coin and non-coin calls and 
vandalism may be directed against the phone or the enclosure as well as 
targeted against the coin box. Based on the record, we conclude that 
the average savings from coin collection and maintenance is 2.1 to 3.0 
cents per call.<SUP>145</SUP>
---------------------------------------------------------------------------

    \142\ See, e.g., AT&T Comments, Robinson at 7.
    \143\ This would more likely be the case at a low traffic 
location than a high traffic location, since more coin pickups are 
scheduled for high traffic locations.
    \144\ Peoples Comments at 13.
    \145\ Coalition Comments, Andersen at 4 ($0.02 attributed to 
collection and maintenance); CCI Comments at 9 ($0.01 based on 
comparing the collection and maintenance cost of a coin call of 
$0.06 and maintenance cost of an access code call of $0.05) This 
probably considers most, if not all, maintenance costs as joint and 
common. See also Peoples Comments at 13 ($0.03 attributed to 
collection and some avoided maintenance); AT&T Comments, Robinson at 
7 (maintenance: $.018 = $7 difference in coin vs. coinless monthly 
maintenance divided by 399). Note that the coinless phones Robinson 
studied might have had lower maintenance expense than the coin 
phones in his study not because of coin induced wear, but rather 
because the coinless phones were in sheltered locations. AT&T 
Comments at 9 (collection: $0.047 based on $13.50 collection costs 
per $100 of coins times 35 cents per call). Robinson's collection 
costs represent the cost of collections if performed on a stand 
alone basis. PSPs often perform maintenance and collections at the 
same time and much of the combined cost should be considered joint 
and common to all calls, rather than solely attributable to coin 
calls. Accordingly, we selected 2.1 cents as the low estimate (the 
Coalition estimate allowing for slightly higher cost per call at a 
low traffic location) and 3.0 cents as the high estimate (the 
Peoples estimate with no adjustment).
---------------------------------------------------------------------------

    56. Bad Debt / Collection Charges. Peoples identifies some 
collection and bad debt expenses that it attributes solely to 
compensation for access code and subscriber 800 calls. Under the 
interim compensation plan, Peoples was unable to collect from IXCs 
approximately $4.02 per payphone per month, which translates to $0.03 
per access code and subscriber 800 call.<SUP>146</SUP> Conversely, 
CompTel alleges that Peoples' bad debt expenses arose primarily from 
operator service operations.<SUP>147</SUP> CWI opposes including any 
allowance for increased collection costs of access calls, arguing this 
is not a cost of access and that the IXCs also bear such 
costs.<SUP>148</SUP> Furthermore, AT&T notes that collection costs 
should decrease steadily with the implementation of ANI and other 
Commission requirements.<SUP>149</SUP> CWI and CompTel contend that 
per-call compensation should not include billing or bad debt 
costs.<SUP>150</SUP> Neither the Coalition nor the other PSPs included 
specific estimates of increased

[[Page 58670]]

collection and bad debts. As such, we do not have sufficient 
information to attribute an amount to bad debt and/or collection 
charges.
---------------------------------------------------------------------------

    \146\ Peoples' 1996 Form 10K indicates that Peoples financial 
books for 1995 included approximately one million dollars in 
additional bad debt reserves related to both the inmate and payphone 
operations. Peoples 1996 10K at 29 (filed with the Securities and 
Exchange Commission Mar. 31, 1997). This translates to about $2 per 
payphone per month. Since there was no change in the FCC's payphone 
compensation plan in 1995, this increase is not attributable to 
access code and subscriber 800 calls. Thus, some, if not most, of 
the $4.02 per payphone per month cited by Peoples should not be 
viewed as an increased cost attributable solely to access code and 
subscriber 800 calls. Peoples Comments at 13.
    \147\ CompTel Reply at 13.
    \148\ CWI Reply at 11.
    \149\ AT&T Reply, Robinson at 11-12.
    \150\ CWI Reply at 11; CompTel Reply at 11.
---------------------------------------------------------------------------

    57. ANI ii. The Commission's rules require that LECs provide 
certain automatic number identification information (ANI ii) to the IXC 
with each call. These digits provide IXC's with automated information 
that enables them to bill, block, and track calls. On the record, the 
parties disagree about the costs associated with the provision of ANI 
ii digits, and further, who should bear those costs.<SUP>151</SUP> USTA 
estimated the cost of providing ANI ii digits through hardcoding and 
through FLEX ANI. The estimated total capital cost for hard coding the 
digits was about $1.035 billion of which $558 million was for upgrading 
all non-equal access switches and $477 million was for hard coding 
switches.<SUP>152</SUP> Sprint notes that the USTA figure assumes 
equipment upgrades for every non-equal access switch, while many of 
these switches do not support any payphones.<SUP>153</SUP> Given that 
not all non-equal access switches would be upgraded, and that the 
upgrade would benefit all users of the switches, it seems unlikely that 
all the upgrade expense would be attributed to payphone service. For 
the purpose of translating the USTA cost estimates into additional pay 
telephone costs, we assume that $600 million of additional LEC 
investment would be recovered from increased payphone line rates. $600 
million in increased investment recovered over 10 years would require 
increased monthly line charges of $5.65.<SUP>154</SUP> Divided by the 
low traffic location number of calls, 542, would equal approximately 
$0.01 per call.
---------------------------------------------------------------------------

    \151\ See, e.g., Coalition Comments at 19 (stating that the 
implementation of the Commission's ANI requirements for the 
provision of payphone specific coding digits might ultimately add 
$0.05 to $0.08 to the cost of a access code and subscriber 800 
call); AT&T Reply at 27-28 (arguing that less expensive alternatives 
exist to the plan promoted by USTA); Excel Reply at 5; RCN Reply at 
6. The Coalition based its figure on USTA estimates that LEC 
investments would increase by about $1.035 billion dollars to 
implement ANI, that all of the cost would be borne by PSPs, and that 
such costs should be attributed entirely to access code and 800 
subscriber calls. See Coalition Comments at 17. Sprint points out 
that most of the cost cited by USTA would arise from modifying all 
switches in non equal access areas. However, Sprint points out that 
many switches would not need to be modified because there are only 
10,000 payphones in non-equal access areas compared with 3400 
exchanges that lack equal access. See Sprint Reply at 8.
    \152\ Letter to Michael Carowitz, Common Carrier Bureau, from 
Keith Townsend, USTA, CC Docket 96-128, at 5 (July 28, 1997); USTA 
Petition for Waiver, CC Docket No. 96-128, Exhibit 1, 5 (Sept. 30, 
1997).
    \153\ Sprint Reply at 8.
    \154\  $5.65 is the levelized monthly amount per payphone that 
would depreciate $600 million over 10 years and earn an 11.25% 
return on net investment, allowing for income taxes at the statutory 
rate of 34%.
---------------------------------------------------------------------------

    58. AT&T notes that less expensive alternatives to the plan 
advanced by USTA exist.<SUP>155</SUP> The Coalition indicates that if 
LECs are allowed to use a combination of FLEX ANI or original line 
screening technology, payphone digit identification costs may be as low 
as $0.01 per call.<SUP>156</SUP> As discussed above, we have evaluated 
the data supplied by the USTA, the Coalition, AT&T, and Sprint, and we 
estimate a cost of $0.01 per call.
---------------------------------------------------------------------------

    \155\ See AT&T Reply at 27-28. See also Excel Reply at 5; RCN 
Reply at 6.
    \156\ Coalition Ex parte, Sept. 26, 1997.
---------------------------------------------------------------------------

    59. Interest. Several payphone providers note that they have the 
use of coin receipts almost immediately while they must wait to collect 
compensation on access calls.<SUP>157</SUP> Peoples, for example, 
collected payphone compensation for access calls completed between 
October 8 and December 31, 1996 in April 1997.<SUP>158</SUP> 
Accordingly, we conclude that the delay in receipt of compensation for 
access calls represents an additional cost of providing access code and 
subscriber 800 service calls that would not be included in the market 
rate for local coin calls.
---------------------------------------------------------------------------

    \157\ APCC Comments at 15; CCI Comments at 9-10; TEI Reply at 5.
    \158\ Peoples Comments at 13.
---------------------------------------------------------------------------

    60. AT&T uses 11.25% as the interest rate and the return 
requirement for payphone investment.<SUP>159</SUP> APCC claims that the 
appropriate interest rate for many payphone providers would exceed that 
rate significantly.<SUP>160</SUP> Peoples used a 10% interest rate in 
its calculations.<SUP>161</SUP> Most payphones, however, are owned by 
large local exchange carriers, whose authorized interstate rate of 
return has been 11.25% representing a weighted average of debt and 
equity costs.<SUP>162</SUP> Accordingly, we conclude that 11.25% is the 
appropriate cost of capital for payphone providers in this context. 
Thus, the delayed receipt of compensation for access code and 
subscriber 800 calls justifies an upward adjustment of .8 cents (11.25% 
for 3 months times the market rate adjusted for other costs).
---------------------------------------------------------------------------

    \159\ AT&T Comments, Robinson at 5.
    \160\ APCC Reply at 14.
    \161\ Peoples Comments at 10.
    \162\ Representing the Authorized Rate of Return for Interstate 
Services of Local Exchange Carriers, 55 FR 51423 (December 14, 
1990); 5 FCC Rcd 7507 (1990).
---------------------------------------------------------------------------

    61. Opportunity Costs. Teleport contends that the Commission should 
recognize the opportunity costs associated with use of a payphone for 
non-coin calls.<SUP>163</SUP> This cost theoretically arises because 
the payphone provider does not have the opportunity to realize coin or 
0+ commission revenue whenever its payphone is being utilized for an 
access code or subscriber 800 call. Sprint, however, notes that the 
payphone will be available for 0+ and coin calls 98.2% of the time 
based on average amounts of access code and subscriber 800 calling. 
Sprint also states that when a given phone is not available, another 
phone from the same company may be available, so the call is not 
necessarily lost.<SUP>164</SUP> Therefore, we make no adjustments to 
the local coin rate based on opportunity costs.
---------------------------------------------------------------------------

    \163\ Teleport Reply at 6. Teleport Comments at 3, 6 (arguing 
that whatever cost differences may exist are eliminated by the 
opportunity costs associated with noncoin calls because coin paying 
customers cannot use a payphone if it is being used by a noncoin 
customer).
    \164\ Sprint Reply at 4.
---------------------------------------------------------------------------

    62. Commissions. Several IXCs argue that commissions paid to 
location owners on 0+ and 1+ calls should not be attributed to per-call 
compensation rate.<SUP>165</SUP> CompTel argues that these commissions 
have been paid on 0+, 1+, and local calls, and recovered through these 
revenues. CompTel and RCN argue that there is no assurance that these 
commissions are just and reasonable.<SUP>166</SUP> WorldCom argues that 
0+ commissions should not be included as a cost in computing per-call 
compensation because these commissions reflect the value of being 
selected as the default 0+ provider and as such are unrelated to the 
costs of providing subscriber 800 and access code calls. The Coalition 
and the independent PSPs propose that per-call compensation default be 
set on the basis of the average commission received by independent 
payphone providers on 0+ calls to set the rate for access code and 
subscriber 800 calls.<SUP>167</SUP> CompTel and

[[Page 58671]]

RCN argue that there is no assurance that these commissions are just 
and reasonable.<SUP>168</SUP> Accordingly, we do not need to make any 
adjustments to reflect commission costs.
---------------------------------------------------------------------------

    \165\ See, e.g., CWI Comments at 9, n.7; CWI Reply at 9; CompTel 
Comments at 14; CompTel Reply at 11; Excel Reply at 4; LCI Comments 
at 8. See ITA Reply at 2, 4 (requesting that the Commission adopt an 
incremental cost approach, and that such a rate should not include 
premise owner commissions); Sprint Reply at 7 (stating that pre-
existing commission payments are recovered from local coin and 0+ 
calls); Frontier Comments at 3 (arguing that commissions cannot be 
included in computing the per-call compensation amount because 
compensation based on commissions paid on 0+ calls would allow 
monopoly rents for locational monopolies).
    \166\ CompTel Reply at 12; RCN Reply at 5 (arguing that without 
safeguards, PSPs have no incentive to keep rates low).
    \167\ APCC Comments at 13 (stating that commissions are unlikely 
to vary except in relation to the price of calls and that location 
owners demand and receive commissions on every form of revenue 
derived from a payphone including subscriber 800 and access code 
calls); CCI Comments at 9 (stating that commissions must be paid to 
location owners so that payphones can be placed for public use). CCI 
treated the costs as equal for coin calls and subscriber 800 and 
access code calls while noting that some marginal differences exist 
in the commission levels paid to coin as compared with noncoin 
calls. See also Peoples Reply at 11 (stating that commissions will 
not result in increased costs for the consumer).
    \168\ CompTel Reply at 12; RCN Reply at 5 (arguing that without 
safeguards, PSPs have no incentive to keep rates low).
---------------------------------------------------------------------------

    63. Total Adjustments to Market-Based Rate. The preceding analysis 
suggests that costs associated with coin equipment, line, coin 
collection and maintenance are not directly attributable to provision 
of access code or subscriber 800 call. We estimate that in total, 
between 7.7 cents and 9.1 cents per call are directly attributable to 
local coin calls, and thus should be subtracted from the market rate. 
There are uncertainties with the estimates but we found no evidence to 
suggest a preponderance of either high or low biases. On the other 
hand, we adjust the local coin market rate upward by 1.0 cent to 
account for additional costs to PSPs resulting from ANI ii 
implementation to identify payphone originated calls for the benefit of 
IXCs, and 0.8 cents for interest attributable to the delay in 
compensation for access code and subscriber 800 calls. These additions 
and subtractions produce an adjusted market-based range of $0.277 to 
$0.291. The midpoint of that range is $0.284. Thus, we conclude that 
the surrogate or adjusted market default price is $0.284 per access 
code and subscriber 800 call.

b. Adjustments to the Local Coin Market-Rate Based on Demand 
Differences

    64. The Coalition filed a study by Dr. Hausman that adjusts the 
local coin market rate for differences in demand. Dr. Hausman explains 
that in an industry with a significant amount of joint and common 
costs, competitive firms take into account demand conditions and 
competitive conditions as well as costs when setting 
price.<SUP>169</SUP> A competitive firm recovers joint and common costs 
through markups over marginal costs. Dr. Hausman states that the 
markups are set so that the firms recover total costs. Dr. Hausman then 
asserts that services, where the demand is relatively price elastic, 
compared to other services provided over the joint facility, would 
receive lower markups.<SUP>170</SUP> Dr. Hausman uses several methods 
to translate relative elasticities into relative prices for coin calls 
versus access code and subscriber 800 calls.<SUP>171</SUP> Dr. Hausman 
uses derived elasticities to show that access code and subscriber 800 
services are less elastic than local coin calling.<SUP>172</SUP> His 
analysis concludes that the Commission should set the default 
compensation rate at the local coin rate plus approximately $0.07 to 
$0.08 per call.<SUP>173</SUP>
---------------------------------------------------------------------------

    \169\ Coalition Comments, Hausman at 4-5.
    \170\ Id. at 11.
    \171\ Given the relative elasticities presented in the paper, 
these methods generally would produce market rates below $0.35 for 
local coin telephone calls.
    \172\ Hausman estimates that the local coin rate elasticity is 
about -.663. (Coalition Comments, Hausman at 11) Hausman estimates a 
derived elasticity for dial around calls by multiplying an 
elasticity for interstate calls (-.723) times the percentage that a 
$0.35 access cost would add to a dial around toll call, reported to 
have an average price of $2.16. Hausman makes a similar calculation 
using an elasticity of -.77 and an average call price of $0.50 for 
subscriber 800 calls. He calculates that the weighted average of 
these two derived elasticities is -.398, significantly less elastic 
than his estimated local coin call elasticity.
    \173\ Coalition Comments, Hausman at 28.
---------------------------------------------------------------------------

    65. AT&T replies with a study by Dr. Warren-Boulton, who contends 
that the derived elasticities presented by Dr. Hausman significantly 
underestimate true elasticities. Dr. Warren-Boulten notes that 
customers faced with a $0.35 increase in toll rates at payphones likely 
would substitute toll services that did not increase in price, rather 
than simply deciding not to make the calls.<SUP>174</SUP> This view is 
supported by MCI's comment that many 800 customers are interested in 
blocking subscriber 800 calls from payphones to avoid paying the 
compensation charge.<SUP>175</SUP> MCI, however, suggests that the 
demand for coin calls is significantly less elastic than Dr. Hausman 
suggests.<SUP>176</SUP> These customers may anticipate that at least 
some potential callers subsequently would make a subscriber 800 call 
from another location.
---------------------------------------------------------------------------

    \174\ AT&T Reply, Warren-Boulton at 4.
    \175\ MCI Comments at 4.
    \176\ MCI ex parte at 15 (Oct. 2, 1997).
---------------------------------------------------------------------------

    66. Dr. Hausman's derived elasticities are sensitive to several of 
his underlying assumptions. He based the average price of an access 
code call on historic AT&T data. These data probably overstate the 
current average price for an access code call because many firms 
exclusively operate by providing prepaid calling cards, which do not 
include a surcharge, <SUP>177</SUP> and because there have been 
significant decreases in some interstate and international toll rates. 
Furthermore, Dr. Hausman uses the overall toll elasticity as the 
elasticity for dial around access calls. Customers placing access code 
calls, as opposed to 0+, 0-, and 00-calls, have already made choices 
based on perceived price differences.<SUP>178</SUP> These customers 
therefore may be much more price sensitive than average toll customers, 
and may be far more willing to forego or delay calls than indicated by 
Hausman's derived elasticity. We conclude that the demand for access 
code and subscriber 800 calls are significantly more responsive to 
price than Dr. Hausman suggests.
---------------------------------------------------------------------------

    \177\ See ITA Comments at 8.
    \178\ For example, 0+ calls incorporate commission of $0.62 per 
call and toll calls that customers pay for by depositing coins 
incorporate commissions of about $1.40 per call. APCC Comments at 8-
10.
---------------------------------------------------------------------------

    67. We conclude that while differences in demand elasticities for 
access may prove useful to some firms in setting prices, the 
information presented in the current record evidences wide variations 
in assumed elasticities and the results are inadequate to determine 
whether access code and subscriber 800 service or local coin service is 
the more price elastic service. Because we do not have confidence in 
the elasticity analyses in the record given the variation in results, 
we decline to adjust the market-based default per-call compensation 
rate for differences in demand.

C. Alternatives to a Market-Based Compensation Rate

    68. As noted above, some commenters request that we establish the 
default per-call compensation rate based on cost information filed by 
the parties in this proceeding. We decline to adopt this approach, but 
we have assessed the record evidence on this matter and have calculated 
a cost-based default rate below to validate that our market-based 
adjusted per-call rate is reasonable.<SUP>179</SUP>
---------------------------------------------------------------------------

    \179\ See supra paras. 30-40 for specific cost components 
discussed in the comments. These costs were discussed previously in 
determining for what costs the market-based rate should be adjusted, 
and are incorporated herein.

---------------------------------------------------------------------------
1. Comments

a. Costing Methodologies

    69. Several of the commenters argue that the Commission should 
derive a compensation rate based on the costs that are incurred to 
originate coinless calls.<SUP>180</SUP> Several of the IXCs request 
that

[[Page 58672]]

the Commission adopt a bottom-up methodology to calculate per-call 
compensation.<SUP>181</SUP> AT&T argues that a rate computed in this 
manner will be sufficient to provide for the widespread deployment of 
payphones, and would not require the Commission to engage in lengthy 
cost proceedings.<SUP>182</SUP> AT&T argues that its analysis is based 
on TELRIC, which, AT&T argues, is the most appropriate methodology in 
the circumstances. Borden, Champion, and Sitel <SUP>183</SUP> argue 
that the fair compensation rate must be based on a PSP's actual costs 
for handling 800 calling card calls. SDN supports a national rate based 
on verifiable long range incremental costs for all PSPs. Excel argues 
that the Commission should adopt a rate that reflects the actual costs 
incurred by an efficient PSP for delivering subscriber 800 and access 
code calls.<SUP>184</SUP>
---------------------------------------------------------------------------

    \180\ See, e.g., ACTA Reply at 6 (arguing that any compensation 
scheme should focus the recovery on the PSPs forward looking direct 
costs associated with the origination of coinless calls). AT&T 
Comments at 2; AT&T Reply at 2 (including the following costs: 
maintaining the payphone instrument, excluding coin-related 
functions and coin collection costs; basic line costs, excluding 
coin rating functionalities but including the monthly subscriber 
line charge and tariffed screening and blocking service from the 
LEC; and other reasonable expenses such as touch tone and 911 
charges). AT&T and MCI argue that the Commission should adopt a 
cost-based compensation scheme based on a PSP's actual efficient 
costs to originate access code and subscriber 800 calls. See AT&T 
Comments at 2; MCI Comments at i.
    \181\ CPI Reply at 6. WorldCom Reply at 4. WorldCom cites the 
rates set forth in AT&T's comments ($0.11 per call), MCI's comments 
($0.083 cents per call), and Sprint's Comments ($0.057 cents per 
call), and states that the Commission should adopt one of these 
approaches or a blended approach using several methods. See WorldCom 
Reply at 4-5.
    \182\ AT&T Reply at 10, 17-18.
    \183\ Sitel Reply (stating that $0.35 cents per call is too high 
and that such a rate could adversely effect small business due to 
increased telecommunications costs).
    \184\ Excel Comments at 3-4.
---------------------------------------------------------------------------

    70. CompTel and ITA argue that the Commission should base 
compensation for subscriber 800 and access code calls on the PSPs' 
incremental cost of originating these calls.<SUP>185</SUP> ITA contends 
that the Commission should use the cost of a payphone call as 
determined by Massachusetts Department of Public Utilities 
(Massachusetts DPU) and adjust that number downward.<SUP>186</SUP> 
Sprint and AT&T also argue that the Commission should use the coin rate 
filed by New England Telephone (NET) with the Massachusetts DPU 
indicating a per-call local coin rate of $0.167 as the point at which 
we should begin our analysis of a rate adjusted for costs related to 
coin calls.<SUP>187</SUP> The Coalition argues, however, that this cost 
study is not an appropriate basis for establishing per-call rate in 
this proceeding.<SUP>188</SUP> CWI, LCI, CompTel, and Sprint argue that 
the incremental costs to be included are the additional or marginal 
costs created by access code and subscriber 800 calls--additional 
maintenance and wear and tear for increased usage, and the per minute 
usage charges, if any, imposed by a LEC for originating access code or 
subscriber 800 calls.<SUP>189</SUP>
---------------------------------------------------------------------------

    \185\ CompTel Reply at 6-7 (stating that the rate should be 
based on the costs of an efficient provider to originate subscriber 
800 and access code calls and noting that other call types would be 
compensated by market pricing); ITA Comments at 2 (stating that the 
rate should be based on economic costs including a reasonable profit 
for the PSPs).
    \186\ ITA Reply at 2, 5.
    \187\ Sprint Comments at 8-11; AT&T Comments at 15 n.12.
    \188\ Coalition Reply at 2.
    \189\ CWI Comments at 5; LCI Comments at 5 (stating that the 
only costs that are relevant are additional maintenance and wear and 
tear for usage attributed to access code and subscriber 800 calls); 
Sprint Reply at 3 n.5 (stating that although CWI, LCI, and CompTel 
raise the possibility that local usage charges should be included in 
marginal costs, Sprint is not aware that any LEC imposes such usage 
related costs for subscriber 800 and access code calls. Instead, 
Sprint states, the IXC carrying the call pays the LEC's access 
charges for the use of the LEC's network for call origination.). 
Sprint and CompTel also state that this method is appropriate 
because access code and subscriber 800 calls are by-products of 
payphone installation, not its primary purpose. Thus, the decision 
to install a payphone, Sprint and CompTel argue, is driven by the 
revenues the PSP anticipates from other types of calls such as 0+ 
and coin calls. Sprint Reply at 3; Comptel Comments at 10-13.
---------------------------------------------------------------------------

    71. Alternatively, Sprint argues that if the Commission takes a 
fully allocated approach to costs, then the rate should be based on the 
most efficient ``bellwether'' PSP's costs minus costs related to coin 
functionality, local call completion and premises owner commissions 
from a local coin call.<SUP>190</SUP> Sprint rejects Dr. Hausman's view 
that costs of the least efficient (or marginal) provider should be used 
as the default rate to prevent the removal of payphones, arguing that 
this approach overlooks the Commission's policy that inefficiency 
should not be rewarded in a multiprovider market and that rates should 
be based on the costs of an efficient provider to promote 
competition.<SUP>191</SUP> The Coalition and APCC contend that Sprint's 
``bellwether'' approach is flawed, because large, fixed joint and 
common costs that should be included as costs, were omitted; 
<SUP>192</SUP> relying on incremental costs only is inappropriate 
because the PSP cannot recover the total costs of providing the 
service; <SUP>193</SUP> and cost estimates for a single state are not 
representative.<SUP>194</SUP>
---------------------------------------------------------------------------

    \190\ Sprint Reply at 6.
    \191\ Sprint Reply at 5 (also arguing that the public is 
protected through the mandate for public interest payphones in the 
Act).
    \192\ Peoples Comments at 6-7; APCC Reply at 9.
    \193\ Coalition Comments at 21-23 (citing Reconsideration Order, 
61 FR 65341 (December 12, 1996); 11 FCC Rcd at 21,268, para. 69).
    \194\ Id.
---------------------------------------------------------------------------

    72. TRA and WorldCom argue that the Commission should apply total 
service long term incremental costs (TSLRIC) principles to determine 
forward looking costs on efficient provider would incur to provide 
access to noncoin calls.<SUP>195</SUP> CompTel, CWI, and LCI argue in 
the alternative that if the Commission wants access code and subscriber 
800 calls to bear some of the costs to ensure that PSPs are fairly 
compensated, then the Commission should set the compensation rate based 
on forward looking direct costs for access code and subscriber 800 
calls.<SUP>196</SUP> Frontier and RCN argue that the Commission should 
adopt a cost-based rate based on the costs of completing subscriber 800 
and access code calls.<SUP>197</SUP> GCI argues that PSPs should be 
compensated solely for the costs of subscriber 800 and access code 
calls.<SUP>198</SUP>
---------------------------------------------------------------------------

    \195\ TRA Comments at 19 (stating that a reasonable profit for 
PSPs could be included); WorldCom Comments at 4 (further stating 
that this rate should be based on the forward looking costs that an 
efficient PSP would incur).
    \196\ CWI Comments at 9; CompTel Comments at 13-14; LCI Comments 
at 7. CWI, CompTel, and LCI argue that costs to be included are the 
following: the amortized cost of installing a coinless payphone; 
costs of maintaining the equipment; and the cost of a basic phone 
line plus usage charges, if any, for subscriber 800 and access code 
calls. Costs for coin equipment and coin collections, terminating 
local calls, bad debt, depreciation, interest, commissions, and 
administrative or overhead charges not attributed to coinless calls 
should be excluded.
    \197\ Frontier Reply at 2; RCN Comments at 1.
    \198\ GCI Reply at 3.
---------------------------------------------------------------------------

    73. PageMart and PageNet argue that the Commission should adopt a 
caller-pays rate. Alternatively, PageMart argues that it should remove 
the avoided costs of a coinless call from the compensation 
rate.<SUP>199</SUP> Alternatively, PageNet requests that the Commission 
adopt a cost-based approach that apportions only the additional costs 
that are incurred through the origination or subscriber 800 calls on a 
per-call increment, not per-call basis.<SUP>200</SUP>
---------------------------------------------------------------------------

    \199\ PageMart Reply at 6; PageNet Comments at 12.
    \200\ PageNet Reply at 27-28.
---------------------------------------------------------------------------

    74. CCI argues that the Commission should not adopt a cost-based 
methodology because a marginal cost rate does not fairly compensate all 
calls as required by Section 276 of the Act and does not address fair 
compensation for other types of calls from payphones or whether 
additional costs could be recovered through compensation available to 
PSPs.<SUP>201</SUP> CCI contends that if the Commission adopts a 
marginal cost standard, then the rates would need to be sufficient such 
that revenues would recover the total marginal costs of installing and 
operating payphones, which in the long run could increase long distance 
rates and force some PSPs out of business.<SUP>202</SUP>
---------------------------------------------------------------------------

    \201\ CCI Comments at 15-16.
    \202\ Id. at 17.
---------------------------------------------------------------------------

    75. Peoples and the Coalition argue that the Commission should not 
adopt a cost-based rate because the costs for local coin calls and dial 
around calls are similar, and further that access code and

[[Page 58673]]

subscriber 800 calls may be more costly than coin calls. Several of the 
PSPs and the Coalition further argue that a cost-based rate would lead 
to the removal of payphones with low call volumes or above average 
costs.<SUP>203</SUP> TEI argues that cost plus a fair rate of return is 
not appropriate, because the underlying costs are similar and there is 
seldom agreement regarding costs or a fair rate of 
return.<SUP>204</SUP> APCC argues that the Court did not require the 
---------------------------------------------------------------------------
Commission to adopt a cost-based methodology.

    \203\ APCC Reply at 11.
    \204\ TEI Comments at 10.
---------------------------------------------------------------------------

b. Cost Components <SUP>205</SUP>

    \205\ The comments on commissions and billing/bad debt cost 
components are discussed supra at para. 62 and 56, respectively.
---------------------------------------------------------------------------

    76. Equipment. CWI contends that only forward-looking direct costs 
should be considered, including the amortized cost of installing a 
coinless payphone and the cost of maintaining the equipment, excluding 
the cost for coin equipment.<SUP>206</SUP> Several of the IXCs argue 
that coin equipment costs should be excluded when determining per-call 
compensation.<SUP>207</SUP> PageNet argues that coin related costs such 
as maintenance, repair and replacement for coin functions should not be 
included in determining per-call compensation.<SUP>208</SUP>
---------------------------------------------------------------------------

    \206\ CWI Comments at 8.
    \207\ MCI Comments at 3; RCN Comments at 4 (arguing that this 
cost is unique to the local coin rate and should be subtracted from 
a true rate that PSPs would provide as a deregulated local coin 
service on a nationwide basis). CompTel Comments at 13; CompTel 
Reply at 8 (CompTel argues that data is not available specifically 
for maintenance costs, but the cost for maintenance less coin 
capability is about $0.029 per call, thus the maximum incremental 
costs would be approximately between $0.01 to $0.02 per call); LCI 
Comments at 5-6 (requesting that the Commission adopt a default rate 
based on marginal costs and stating that costs associated with 
installing and maintaining a payphone should not be considered when 
determining per-call compensation).
    \208\ PageNet Comments at 14.
---------------------------------------------------------------------------

    77. The Coalition contends that equipment costs are attributable to 
both coin and noncoin calls. Teleport contends that the fixed costs 
associated with installing a coin operated payphone, such as the cost 
of the payphone, the enclosure, the cable plant, and supporting network 
infrastructure, are attributable to both coin and noncoin 
calls.<SUP>209</SUP> APCC states that most payphone costs, including 
purchasing, installing, and maintaining equipment, are fixed and should 
be attributed to both coin and noncoin calls.<SUP>210</SUP>
---------------------------------------------------------------------------

    \209\ Teleport Comments at 4.
    \210\ APCC Comments at 11(further stating that payphone 
equipment costs which include coin and coinless calling capabilities 
must be incurred by coin and noncoin calls); APCC Reply at 12.
---------------------------------------------------------------------------

    78. CCI contends that monthly direct costs such as the telephone 
bill (6 cents per call), location owner commissions ($0.05 per call), 
maintenance and collection ($0.05 per call), parts and supply are 
properly attributable to both coin and noncoin calls. CCI, however, 
discounts the telephone bill costs ($0.02 per call) and maintenance and 
collection costs ($0.01 per call) to deduct local measured usage charge 
and the costs associated with dial around collection.<SUP>211</SUP>
---------------------------------------------------------------------------

    \211\ CCI Comments at 9.
---------------------------------------------------------------------------

    79. Payphone Lines. APCC states that local exchange line charges 
represent a small differential between coin and noncoin calls--on 
average, about 3 cents per call.<SUP>212</SUP> AT&T argues that 
tariffed screening and blocking service from the LECs as well as other 
reasonable expenses such as touch tone and 911 charges should be 
included in the cost of a call when computing the appropriate amount of 
per-call compensation.<SUP>213</SUP> CompTel argues that the line 
charge should be no more than $0.046 per call.<SUP>214</SUP> CWI 
contends that basic phone line plus usage charges, if any, for 
subscriber 800 and access code calls should be included in computing 
per-call compensation.<SUP>215</SUP>
---------------------------------------------------------------------------

    \212\ APCC Comments at 13.
    \213\ AT&T Comments at 9: CompTel Reply at 11, 14 (stating that 
some PSPs' basic payphone line charges include line cost categories 
such as network costs, which should not be included).
    \214\ CompTel Reply at 11, 14.
    \215\ CWI Comments at 8 (arguing that these costs should be 
considered proportionately based on relative usage for access code 
and subscriber 800 calls).
---------------------------------------------------------------------------

    80. Several of the IXCs contend that the costs associated with 
terminating local calls should not be used to compute per-call 
compensation.<SUP>216</SUP> CompTel argues that per-minute usage 
charges, if any, imposed by a LEC for originating access code or 
subscriber 800 calls are appropriate.<SUP>217</SUP> PageNet argues that 
line charges should not be included because non-PSP carriers already 
pay the LEC for the use of the payphone line through originating access 
charges.<SUP>218</SUP>
---------------------------------------------------------------------------

    \216\ See, e.g., CWI Comments at 9; LCI Comments at 7; MCI 
Comments at 3; Sprint Reply at 6; Excel Comments at 3 (also arguing 
that originating access should not be included in the per-call 
compensation amount). See AT&T Comments at 9 (stating that local 
usage charges should not be included in the cost of a noncoin call).
    \217\ CompTel Comments at 13; CompTel Reply at 8 (stating that 
it does not object to applying the average per-call usage charge in 
areas where usage is employed, about $0.02-$0.03 per call, citing 
APCC Comments at 13 and Coalition Comments at 16).
    \218\ PageNet Reply at 20.
---------------------------------------------------------------------------

    81. Peoples argues that line charges are attributable to coin and 
noncoin calls. Peoples argues that there is a minimum fixed line 
charge, and that in some states, there is an additional usage 
charge.<SUP>224</SUP> Peoples further argues, however, that as more 
states require fixed charges, there will be no difference between line 
charges for coin and noncoin calls.<SUP>225</SUP>
---------------------------------------------------------------------------

    \224\ Peoples Comments at 11-12 (arguing that at a minimum 50% 
of the line charge is fixed and that the variable portion that would 
be related to coin calls only is less than $0.04 per call).
    \225\ Id. at 12.
---------------------------------------------------------------------------

    82. The Coalition contends that the Commission should not impose an 
offset for the local usage charge because in many cases payphone lines 
are flat-rated and PSPs do not recover termination or local usage 
charges. The Coalition contends, however, that if there is an offset, 
it should not be greater than $0.02 per call, which reflects the 
average local termination cost across all Coalition 
members.<SUP>226</SUP> CCI does not include local usage charges in 
calculating per call compensation amount.<SUP>227</SUP>
---------------------------------------------------------------------------

    \226\ Coalition Comments at 14-17.
    \227\ CCI Comments at 9.
---------------------------------------------------------------------------

    83. Coin/Noncoin Collections. The Coalition contends that the cost 
of coin collection, counting, and related equipment accounts for 
approximately $0.02 of the total cost of a local coin, but argues that 
this rate may be inflated because it allocates coin collection costs 
among coin calls based on coin volumes, not the number of coins 
deposited.<SUP>228</SUP> APCC argues that the differences between coin 
and noncoin calls in the area of coin collection are limited because 
coin collection is generally combined with general maintenance visits 
to the payphone, about $0.03. APCC further argues that coinless 
collection costs are likely to increase and may actually be $0.05-
$0.06, thus higher than coin calls.<SUP>229</SUP> Peoples contends that 
coinless collection costs are greater than coin call collection costs, 
and further that in the past six months, coin related maintenance 
accounted for only 38% of all maintenance visits.<SUP>230</SUP> Peoples 
estimates that coin collection related costs are approximately $0.03 
per call, and that coin collection costs are slightly lower than the 
cost involved in collecting for noncoin compensation.<SUP>231</SUP> 
Peoples contends that dial around collection costs are approximately 
$0.05-$0.06 per call.<SUP>232</SUP> CCI argues that it does not include 
coin collection costs of dial around calls in computing the appropriate 
amount of per-call

[[Page 58674]]

compensation,G5233 but argues, however, that the costs associated with 
noncoin calls may increase due to additional expenses for collecting 
and auditing such compensation.<SUP>234</SUP>
---------------------------------------------------------------------------

    \228\ Coalition Comments at 16.
    \229\ APCC Comments at 14-15 (estimating the costs of dial-
around compensation to be about 5-6 cents per call).
    \230\ Peoples Comments at 12-13.
    \231\ Id. at 13.
    \232\ Peoples Reply at 8.
    \233\ CCI Comments at 6-8.
    \234\ Id. at 2, 10.
---------------------------------------------------------------------------

    84. CPI and CompTel contend that PSPs experience lower costs for 
subscriber 800 and access code calls than for coin calls because it is 
more costly to maintain a coin phone than a coinless 
phone.<SUP>235</SUP> AT&T, CWI, Excel, Frontier, MCI, PageNet, RCN, and 
ITA state that coin collection costs should not be included in the rate 
of per-call compensation.<SUP>236</SUP> TEI states that some service 
costs can be deducted when determining the rate for a noncoin call.
---------------------------------------------------------------------------

    \235\ CPI Comments at 5 (arguing that only a keypad capable of 
originating dialing codes and electronics to identify the phone is 
needed and that PSPs do not incur costs of visiting a payphone and 
collecting and handling coins for subscriber 800 and access code 
calls); CompTel Reply at 11, 13. CompTel notes that Peoples argues a 
coin phone costs $41.66 per month to operate, but a coinless phone 
(as reported by AT&T) costs only $25.10 per month, and argues that 
coin phones are more costly, because a coin phone requires more 
frequent service and coin collection visits, and additional 
equipment that can be broken or vandalized. CompTel further argues 
that Peoples' cost figures for maintenance should be reduced by at 
least 50%. Comptel Reply, supra.
    \236\ See AT&T Comments at 9; CWI Comments at 9; MCI Comments at 
3; PageNet Comments at 14 (arguing that the majority of features and 
functions as well as maintenance and repairs provisions of payphones 
are related to the acceptance and handling of coins, and that such 
costs are not properly attributable to subscriber 800 and access 
code calls); PageNet Reply at 19. See also Frontier Comments at 7-8 
(stating that $0.043 is attributable to coin collection costs); ITA 
Comments at 6-7 (stating that in the Report and Order, at para. 44, 
the Commission estimated the cost of coin collection to be $0.02 per 
call); RCN Comments at 3 (stating that the PSP does not incur coin 
collection costs when originating a subscriber 800 or access code 
call, and therefore, the default rate of $0.35 must be reduced).
---------------------------------------------------------------------------

    85. Teleport contends that costs associated with coin calls--
collection, maintenance, and cost of transporting a call--on a per call 
basis are de minimis, and further that the opportunity costs associated 
with noncoin calls offset the de minimis difference in cost. TEI argues 
that the Commission should include a cost for the time value of money 
used in collecting the compensation should the Commission not prescribe 
collection tools for the PSP, and further, suggests that the Commission 
impose a stated interest rate on late payers of per-call 
compensation.<SUP>237</SUP>
---------------------------------------------------------------------------

    \237\ TEI Reply at 6.
---------------------------------------------------------------------------

    86. ANI ii. APCC contends that the Commission should not explicitly 
rule that such charges incurred in restructuring the LEC networks to 
provide a unique screening digit for dumb payphone lines may be 
assessed on PSPs. However, APCC contends, if LECs are allowed to assess 
such charges on PSPs, then PSPs are entitled to recover those charges 
from IXCs dial-around compensation as part of the cost of originating 
dial-around calls.<SUP>238</SUP> The Coalition contends that requiring 
PSPs to pay LEC tariffs for ANI ii digits would add $0.05 to $0.08 to 
the per call rate, and Peoples supports attributing this cost to 
subscriber 800 and access code calls.<SUP>239</SUP> AT&T, Excel, 
Sprint, and GCI argue that the PSPs are not entitled to recover any 
costs for Flex ANI.<SUP>240</SUP> Excel and RCN state that IXCs should 
not be required to pay for ANI information provided by the PSPs, 
because the PSPs are the beneficiary of the information.<SUP>241</SUP>
---------------------------------------------------------------------------

    \238\ APCC Reply at 23.
    \239\ Coalition Comments at 18; Peoples Reply at 8.
    \240\ AT&T Reply at 27-28; Excel Reply at 5; GCI Reply at 3; 
Sprint Reply at 8-10.
    \241\ Excel Reply at 5; RCN Reply at 5.
---------------------------------------------------------------------------

    87. Depreciation/ Overhead. CWI, PageNet, and CompTel contend that 
per-call compensation should not include depreciation costs or 
interest.<SUP>242</SUP> LCI, CompTel, and CWI argue that administrative 
and overhead costs are not attributable to noncoin calls.<SUP>243</SUP>
---------------------------------------------------------------------------

    \242\ CWI Reply at 11; CompTel Reply at 11, 14 (stating, 
however, that if these costs are included, then the cost per call 
should be only $0.011).
    \243\ LCI Comments at 8; CWI Comments at 9, n.7; CWI Reply at 9; 
CompTel Comments at 14.
---------------------------------------------------------------------------

    88. CCI and TEI argue that overhead, depreciation, amortization, 
and interest are attributable to coin and noncoin calls.<SUP>244</SUP> 
Peoples contends that overhead costs are attributable to all calls made 
from payphones, and argues that the IXCs do not justify why such costs 
should not be included.<SUP>245</SUP>
---------------------------------------------------------------------------

    \244\ CCI Comments at 10. CCI attributes $0.04 to overhead, 
$0.03 to depreciation, $0.02 to amortization, and $0.02 to interest. 
CCI notes that these costs relate only to their payphones, but 
reflect the payphone industry. See id.
    \245\ Peoples Reply at 10.
---------------------------------------------------------------------------

    89. Other. In its estimate, AT&T included an 11.25 percent interest 
on capital factor, maintenance/warehouse/part costs and added averaged 
costs for the basic line and other related charges.<SUP>246</SUP> AT&T 
admits that some costs such as overhead, general and administrative 
expenses and taxes are appropriate in the computation of the cost of a 
noncoin call. According to AT&T, these costs are approximately $0.012 
per call.<SUP>247</SUP> CCI includes taxes and the return on invested 
capital in the calculation of the costs of the per-call 
rate.<SUP>248</SUP>
---------------------------------------------------------------------------

    \246\ AT&T Comments at 10.
    \247\ AT&T Reply at 14.
    \248\ CCI Comments at 10.
---------------------------------------------------------------------------

    90. CPI contends that subscriber 800 and access code calls are 
generally shorter in duration than coin calls. Therefore, the longer 
duration of local calls could allow for opportunity costs since few 
local calls displace shorter long distance calls.<SUP>249</SUP> TRA 
contends that per-call rates should not include embedded or opportunity 
costs.<SUP>250</SUP> Excel argues that coin rating costs should not be 
included in determining per-call compensation.

    \249\ CPI Comments at 6.
    \250\ TRA Comments at 19.
---------------------------------------------------------------------------

2. Discussion

    91. As discussed above, we conclude in this order that an adjusted 
market-based local coin rate is the appropriate surrogate for the 
default per-call rate for subscriber 800 and access code calls. In this 
section, we explain our reasons for rejecting the proposals of various 
parties that we derive a default per-call rate for such calls based on 
cost estimates submitted in the record of this proceeding.
    a. Problems with the Proposed Methodologies for Deriving Payphone 
Compensation. 
    92. 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.<SUP>251</SUP> Most of the parties, 
however, estimate marginal costs based on the incremental cost of an 
individual coinless call. Thus, as the Coalition explains, setting the 
rate at marginal or incremental costs means that joint and common costs 
could not be recovered.<SUP>252</SUP> We conclude that the use of a 
purely incremental cost standard for each type of call could leave PSPs 
without fair compensation for 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.<SUP>253</SUP> We also reject, 
for similar reasons, suggestions by commenters that we use local coin 
rates currently in place as a surrogate for per-call compensation. As 
we stated in the NPRM, ``local coin rates in some jurisdictions may not 
cover the marginal [incremental] cost of the service.'' <SUP>254</SUP> 
Therefore, basing the per-call compensation amount on current local 
coin rates, which are frequently

[[Page 58675]]

subsidized by state regulators, would not fairly compensate the PSPs. 
In the Payphone Orders, we rejected the use of the $0.12 per-call 
compensation amount the Commission first discussed in its 1991 Notice 
of Proposed Rulemaking in the access code call compensation proceeding. 
We noted that we never adopted the $0.12 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 for access code calls of 
$0.40.<SUP>255</SUP>
---------------------------------------------------------------------------

    \251\ See CWI Comments at 5; Comptel Comments at 10; LCI 
Comments at 5; Sprint Comments at 3-4.
    \252\ Coalition Comments at 28 n.16.
    \253\ Cf. Implementation of the Local Competition Provisions of 
the Telecommunications Act of 1996, First Report and Order, 61 FR 
45476 (August 29, 1996); 11 FCC Rcd 15,499,15844-15856 (1996) 
(``Local Competition Order'') (describing total element long-run 
incremental cost methodology for pricing interconnection and 
unbundled network elements).
    \254\ NPRM at para. 22 n.64.
    \255\ OSP Second Report and Order, 57 FR 21038 (August 29, 
1992); 7 FCC Rcd at 3257.
---------------------------------------------------------------------------

    93. We determined in the Order on Reconsideration that reliance on 
cost studies, in general, could reduce the revenue recovered by the 
PSPs, and therefore, might reduce the number of payphones 
deployed.<SUP>256</SUP> We reaffirm that decision here. Adopting a per-
call compensation scheme that did not ``promote the widespread 
deployment of payphone services'' would be inconsistent with 
Congressional intent.<SUP>257</SUP>
---------------------------------------------------------------------------

    \256\ Order on Reconsideration, 61 FR 65341 (December 12, 1996); 
11 FCC Rcd at 21,266, para. 66.
    \257\ See infra para. 119.
---------------------------------------------------------------------------

    94. We also affirm our conclusion in the Report and Order that the 
cost-based TELRIC standard that the Commission relied upon in the local 
competition proceeding is inapplicable here, because the payphone 
industry is not a bottleneck facility that is subject to regulation at 
virtually all levels.<SUP>258</SUP> The TELRIC pricing principles 
adopted in the local competition proceeding were designed to reflect 
the long run cost of an element or physical facility. Since there are 
relatively few common costs between separate facilities, TELRIC 
compensation will compensate a carrier for virtually all costs 
associated with providing (the services of) that facility. With the 
addition of a share of the relatively small common costs, the firm will 
be able to cover its total costs.<SUP>259</SUP>
---------------------------------------------------------------------------

    \258\ See Order on Reconsideration, 61 FR 65341 (December 12, 
1996); 11 FCC Rcd at 21,240-43, 21,268, paras. 11-19, 70 (noting 
that the payphone industry is likely to become increasingly 
competitive). See also Implementation of the Local Competition 
Provisions in the Telecommunications Act of 1996, First Report and 
Order, 61 FR 45476 (August 29, 1996); 11 FCC Rcd 15,499 (1996), 
Order on Reconsideration, 61 FR 52706 (October 8, 1996); 11 FCC Rcd 
13,042 (1996), Second Order on Reconsideration, 61 FR 66931 
(December 19, 1996); 11 FCC Rcd 19,738 (1996), further recon 
pending, aff'd in part and vacated in part sub nom., CompTel v. FCC, 
11 F.3d 1068 (8th Cir. 1997), aff'd in part and vacated in part sub 
nom. Iowa Utilities Bd. v. FCC and consolidated cases, 120 F.3d 753 
(8th Cir. 1997).
    \259\ We also note that it would be particularly burdensome to 
impose a TELRIC-like costing standard on independent payphone 
providers, who have not had previous experience with any costing 
systems.
---------------------------------------------------------------------------

    95. Additionally, we conclude that Congress' use of the phrase ``* 
* * payphone service providers are fairly compensated for each and 
every completed interstate and intrastate call * * *'' <SUP>260</SUP> 
is a different standard than the cost-based standard articulated for 
the compensation for interconnection and unbundled elements. We 
conclude that the PSP will be providing a competitive service (payphone 
use) and should therefore receive compensation equal to the market-
determined rate for providing this service. In the Local Competition 
Order, we concluded that the cost-based interconnection standard, on 
the other hand, compensates a carrier for the long run incremental cost 
of providing interconnection or the long run incremental cost of 
providing an unbundled element plus a reasonable share of the common 
costs. Because the local exchange is not yet competitive, we could not 
rely on the market to set competitive rates for unbundled elements. In 
the case of payphones, the presence of multiple PSPs already operating 
in many markets, and the structure of the industry that allows 
relatively easy entry and exit, leads us to conclude that we can rely 
on market forces to provide for efficient pricing of these services in 
the near future.
---------------------------------------------------------------------------

    \260\ 47 U.S.C. Sec. 276(b)(1)(A).
---------------------------------------------------------------------------

    96. In this proceeding commenters also argue that we should apply a 
TSLRIC cost standard to only a subset of services (i.e., subscriber 800 
and access code calls) provided by a facility (payphone). In general, 
when several services are provided by the same facility, the 
incremental cost of providing any one service is very small and the 
common cost among these services is very large. Thus, a TSLRIC standard 
under which a carrier is compensated only for the incremental cost of 
each service individually without a reasonable allocation of common 
costs, as suggested by commenters, would not allow the carrier to 
recover the total costs of providing all of the services. A TSLRIC 
standard that yields prices that recover a reasonable share of joint 
and common costs would require the difficult allocation of those 
(large) costs among the different types of calls made from payphones.
    97. We also reject suggestions that use of a market-based 
compensation standard, in lieu of one that is cost-based, will 
overcompensate PSPs. The marketplace will ensure, over time, that PSPs 
are not overcompensated. Carriers have significant leverage within the 
marketplace to negotiate for lower per-call compensation amounts, 
regardless of the local coin rate at particular payphones, and to block 
subscriber 800 calls from payphones when the associated compensation 
amounts are not agreeable to the carrier.
    98. 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. Data presented above, however, suggest that the 0+ 
commission rate exceeds the market rate for local coin calls while the 
costs of access code and subscriber 800 calls are less than the costs 
of local coin calls. Furthermore, commissions may include compensation 
for factors other than the use of the payphone, such as a PSP's 
promotion of the Operator Service Provider (OSP) through placards on 
the payphone. Accordingly, we conclude that a market rate based on 0+ 
commissions would result in a default rate that overcompensates 
payphone providers for access code and subscriber 800 calls. Moreover, 
our approach is based on the costs of a low traffic location that does 
not support commission payments.

b. Analysis of Record Evidence of Payphone Costs

    99. Although we reject suggestions that we set the default rate 
based on the long run costs of providing service, our analysis of the 
record evidence indicates that an estimate of the long run costs of 
providing access code and subscriber 800 service, including an equal 
per call share of joint and common costs, <SUP>261</SUP> is not 
significantly less than the market-based rate determined above. Over 
time, the marginal cost associated with new entry (adding a payphone) 
may be an important determinant of the market rate for access 
compensation. For comparison, we estimated costs of the installation 
and operation of a payphone at a low traffic location; that is, at a 
location that would be expected to generate sufficient calls so that 
the payphone provider could earn only a normal return on investment and 
could not pay commissions to the premises owner.
---------------------------------------------------------------------------

    \261\ As explained above, market forces in a competitive market 
(including both marginal cost and demand differences) determine how 
joint and common costs are recovered from different services. We 
determined, however, that we lacked adequate elasticity information 
to determine whether access code and subscriber 800 calls would 
recoup more or less joint and common costs per call than would local 
coin service.
---------------------------------------------------------------------------

    100. We calculated a rate for access code and subscriber 800 calls 
by estimating the cost of a typical multi-use payphone that is capable 
of being

[[Page 58676]]

placed outdoors. We then subtracted all costs directly attributable to 
coin and access code calls to determine the amount of joint and common 
costs associated with a multi-use phone. We then determined the amount 
of joint and common costs attributable to each call by dividing these 
costs by an estimate of the number of calls placed at a location where 
a payphone will earn a normal return on investment. Three parties, 
Peoples, CCI and AT&T provided relatively consistent cost data that 
could be used to estimate joint and common costs. The following sub-
sections summarize our category-by-category estimation of costs.
    101. Maintenance. Data presented by Peoples indicates maintenance 
cost of 4.8 cents per call.<SUP>262</SUP> Sprint suggests 3.6 cents per 
call.<SUP>263</SUP> CCI data suggest 6.6 cents per call <SUP>264</SUP> 
and Robinson's data for AT&T suggest a total of between 2.5 and 4.0 
cents per call.<SUP>265</SUP> Based on the information presented by the 
parties, <SUP>266</SUP> we estimate that joint and common maintenance 
costs at a low traffic location would amount to between 4.0 and 5.0 
cents per call.<SUP>267</SUP>
---------------------------------------------------------------------------

    \262\ Peoples estimated total maintenance and coin collection 
costs per month of $41.66, 38% of which was for coin collection 
costs. Peoples Comments at 10-12. Dividing the maintenance portion 
by the low traffic number of calls (542) gives the estimate of 4.8 
cents per call. This estimate probably includes some incremental 
maintenance caused by coins being deposited in Peoples payphones.
    \263\ $19.62 for maintenance divided by 542 calls. Sprint Reply, 
Exhibit 1 at 2.
    \264\ Based on an average call volume of 720 calls, CCI 
estimated that it spent $0.05 per call for maintenance, exclusive of 
any costs solely due to coin collection and maintenance. CCI 
Comments at 9. We concluded above, however that this figure was 
probably biased high. Multiplying by 720 calls and dividing by the 
low traffic number of calls (542) gives an estimate of 6.6 cents per 
call.
    \265\ Robinson estimates that the monthly cost of maintenance 
plus repair parts for a coinless telephone is $13.35 and for a smart 
coin telephone is $21.70. AT&T Comments, Robinson at 13. Divided by 
542, the low traffic location number of calls, yields estimated 
costs of 2.5 and 4.0 cents per call. Some of the increased cost of a 
coin telephone would be attributable to the coin mechanism.
    \266\ Teleport filed a return on investment analysis partially 
based on hypothetical information from a study by John S. Bain 
(Teleport Ex. Parte). This analysis is not sufficient to support a 
direct estimation of either the costs directly attributable to coin 
calls or total joint and common costs.
    \267\ The Sprint data may not be representative of costs that 
would be incurred by independent pay telephone providers. We select 
4.0 cents as the low estimate of maintenance costs per call by 
selecting the highest value based on AT&T data. We select a figure 
between the Peoples and the CCI based estimates, 5.0 cents, as the 
high estimate. This amount is below the average of the estimates in 
recognition of possible biases in the Peoples and CCI estimates.
---------------------------------------------------------------------------

    102. Line costs. Data for Peoples suggests line costs of 5.9 cents 
per call.<SUP>268</SUP> Data for CCI suggests line costs of 7.9 cents 
per call.<SUP>269</SUP> Sprint suggest 8.0 cents per 
call.<SUP>270</SUP> Robinson's study suggests line costs of 6.5 cents 
per call.<SUP>271</SUP> We estimate that joint and common line costs at 
a low traffic location would amount to between 6.5 and 7.5 cents per 
call.<SUP>272</SUP>
---------------------------------------------------------------------------

    \268\ Peoples filed $59.54 of total line charges including 
message charges per month of $27.69. Peoples Comments at 10-12. The 
difference, $31.85, represents joint and common line costs. This 
amount, divided by the low traffic number of calls (542) equals 5.9 
cents per call.
    \269\ CCI estimates joint and common line costs of $0.06 per 
call, compared with $0.08 per call for coin calls, based on 720 
calls per payphone per month. CCI Comments at 9. Multiplying $0.06 
times 720 calls and dividing by the low traffic number of calls 
(542) equals 7.9 cents per call.
    \270\ $43.22 for line charges divided by 542 calls. Sprint 
Reply, Exhibit 1 at 2.
    \271\ AT&T estimated a monthly line charge for a smart coin 
telephone of $27.73, a subscriber line charge of $5.83, and other 
line costs of $1.84 for a total cost of $35.40. See AT&T Comments, 
Robinson at 12. This amount, divided by the number of low traffic 
number of calls (542) equals 6.5 cents per call.
    \272\ As explained above, different line costs for different 
PSPs may simply reflect the fact that they have payphones located in 
different areas. Sprint, for example, may have higher joint and 
common line costs than others that filed data because Sprint cannot 
take advantage of potentially lower cost measured service options. 
We estimated a likely range for average PSPs by adjusting the high 
and low estimates of the carriers by approximately half a cent.
---------------------------------------------------------------------------

    103. Sales, General & Administrative. Data for Peoples suggests 
SG&A of 5.4 cents per call.<SUP>273</SUP> Data for CCI indicates SG&A 
costs of 5.3 cents per call.<SUP>274</SUP> Sprint suggests 1.57 for 
SG&A.<SUP>275</SUP> Sprint, as a LEC and an IXC, has a significantly 
different organizational structure and payphone base from that of 
independent payphone providers. Accordingly, little weight was given to 
Sprint data for SG&A. Robinson did not develop an independent estimate 
of SG&A.<SUP>276</SUP> Accordingly, we use the estimates based on data 
for Peoples and CCI as the high and low estimates, respectively. We 
conclude that joint and common SG&A at a low traffic location would 
amount to between 5.3 and 5.4 cents per call.
---------------------------------------------------------------------------

    \273\ Peoples estimated sales and general administrative 
expenses of $25.27 per line as well as billing costs and bad debts 
of $4.02 per line per month. See Peoples Comments at 10. We do not 
have sufficient information to estimate a higher or lower billing 
and bad debt cost for access code and consumer 800 calls compared 
with other payphone calls. The total, $29.29, divided by the low 
traffic number of calls (542) equals 5.4 cents per call.
    \274\ CCI estimated expenses of $0.04 per minute based on 720 
calls per telephone. See CCI Comments at 10. Multiplying by 720 
calls and dividing by the low traffic number of calls (542) equals 
5.3 cents per call.
    \275\ ($2.78 sales salaries + $4.31 sales commissions + $1.42 
G&A) divided by 542 calls. Sprint Reply, Exhibit 1 at 2.
    \276\ Robinson accepts CCI and Peoples estimate of a total of 
$0.04 per call for SG&A. See AT&T Comments, Robinson at 6. He 
considers $0.02 of this to be attributable to coinless calls, 
implying that the total would be higher than $0.04 per call for coin 
calls. Robinson, however, does not adequately explain why so much of 
SG&A should be solely attributable to coin operations and not 
treated as joint and common.
---------------------------------------------------------------------------

    104. Capital and Equipments Costs. Most parties recognize that 
payphone providers should have an opportunity to recover depreciation 
costs and earn a return on investment. Joint and common investments for 
a new payphone should include not only the costs of purchasing and 
installing a payphone, but also a normal increase in leasehold 
improvements, spare parts and inventory, and cash working 
capital.<SUP>277</SUP>
---------------------------------------------------------------------------

    \277\ Some capital items, such as intangible assets and good 
will, would not need to be increased if the company added a payphone 
at a low traffic location.
---------------------------------------------------------------------------

    105. Robinson estimated the average outlay associated with adding a 
new smart coin telephone as $1,050 for the instrument,<SUP>278</SUP> 
$300 for a pedestal and enclosure, $395 for installation of the 
telephone, pedestal and enclosure, and $150 in local exchange carrier 
connection charges, for a total investment of $1,895.<SUP>279</SUP> 
Some PSPs claim that Robinson underestimated pedestal and enclosure and 
related installation charges.<SUP>280</SUP> The Robinson estimates do 
not include other investments, such as maintenance vehicles and office 
equipment, needed to support a payphone business. Several PSPs 
estimated average capital costs per call, but did not provide 
sufficient detail to allow these estimates to be used to estimate the 
direct capital costs of adding a payphone.
---------------------------------------------------------------------------

    \278\ The Coalition notes that some coinless telephones cost 
significantly more than the basic coinless sets used in the Robinson 
study. See Coalition Reply at 27. The Coalition filed a study by 
Carl R. Geppert estimating that the AT&T Public Phone 2000, which 
incorporates a nine-inch color monitor, a dataport for laptop or fax 
communications, built in keyboards for access to e-mail and on-line 
weather services, cost between $2000 and $4000. See Coalition Ex. 
Parte, Oct. 1, 1997 at 3. This information, however, does not bear 
on how much of the costs of a new smart coin telephone are due to 
the coin mechanism. The typical new smart coin telephone does not 
incorporate these features.
    \279\  AT&T Comments, Robinson at 5.
    \280\  APCC Reply at 14; Coalition Reply at 29.
---------------------------------------------------------------------------

    106. We estimate joint and common equipment costs by: (a) 
estimating the amount of assets that are likely to be added when a 
payphone is added; (b) subtracting the amount attributable to the coin 
mechanism; (c) calculating a monthly cost for the balance; and (d) 
dividing the monthly cost per payphone by the low traffic location 
number of calls. Peoples 10K data indicate that Peoples depreciable net 
investment per payphone amounted to $1,617 as of December 
1996.<SUP>281</SUP> CCI's 10K data indicate that CCI's depreciable net 
assets per payphone amounted to $1,704

[[Page 58677]]

as of December 1996.<SUP>282</SUP> Firms, however, add new assets 
rather than depreciated assets. Adjusting for depreciation, we estimate 
new depreciable investment per payphone of $3,234 for Peoples 
<SUP>283</SUP> and $2,799 for CCI.<SUP>284</SUP> As explained above, we 
impute $710 of new investment per payphone directly to coin calls. 
Accordingly, we calculate new joint and common investment per payphone 
of $2,524 and $2,089, respectively. These amounts of new investment 
would result in monthly investment costs of $43.94 and $37.07, 
respectively.<SUP>285</SUP> The carriers would also expect to earn a 
return on some other assets on the books--pre-paid expenses and 
inventory. These items add $1.79 <SUP>286</SUP> and $2.01 
<SUP>287</SUP> in investment costs per month, respectively. Summing the 
investment costs and dividing the low traffic location number of calls 
results in estimates of total investment costs of 7.2 cents per call 
and 8.4 cents per call, which we use as the likely range.
---------------------------------------------------------------------------

    \281\ $65.067 million of net plant and property divided by 
40,239 payphones.
    \282\ $73.263 million of gross property, plant and equipment 
plus $1.595 of gross leasehold improvements, less $29.922 of 
accumulated depreciation and amortization, divided by 26,377 
payphones.
    \283\ Based on an assumed ratio of depreciation reserve to net 
plant of 50% ($1,615 net plant and equipment per phone divided by 
.5).
    \284\ CCI's 10K depreciation reserve is 40% of gross depreciable 
net investment. The new investment per added payphone is $1,649 
average net plant and equipment per payphone, divided by 60%, plus 
$60 average leasehold improvements per payphone. (Leasehold 
improvements are a joint and common cost for all payphone. The 
addition of one payphone would not necessarily cause any specific 
investment but rather, would result in a general increase in the 
size of the business. Thus, CCI would add an average amount of net 
leasehold improvements as opposed to the specific amount of 
investment for the instrument, the pedestal, etc.).
    \285\ Calculated as equal monthly payments to depreciate the 
investment over 10 years and earn a return of 11.25% on net 
investment, allowing for federal income taxes a the 34% statutory 
rate.
    \286\ Peoples reports $2.665 million of pre-paid expenses and 
$2.412 million of inventory. Peoples 10K at 39.
    \287\ CCI's 10K shows prepaid expenses of $0.708 million and 
inventory and uninstalled equipment of $1.438 million. See CCI 10K 
at 44.
---------------------------------------------------------------------------

    107. Other Costs. We concluded above that it was reasonable to 
include $0.01 in adjusting the market rate for a local coin call to 
account for the cost of ANI ii deployment by the LECs, passed through 
to PSPs in the form of higher access line charges, and include that 
figure in our analysis here. We also concluded that carriers would 
receive access code and consumer 800 access compensation approximately 
3 months later than they would receive coin revenues, and thus included 
interest, based on an 11.25% annual cost of capital the long run cost 
estimate. We use that same figure in our analysis here. In addition, we 
explained earlier the positions regarding including commissions as a 
cost-factor, and thus conclude that those costs are excluded properly 
from a cost-based analysis.<SUP>288-289</SUP>
---------------------------------------------------------------------------

    \288\ See supra paras. 59, 62.
---------------------------------------------------------------------------

    108. Total Long Run Cost. The preceding analysis suggests that 
total long run cost of access code and consumer 800 calls would range 
from 24.7 cents per call (based on a sum of the low estimates) to 28.1 
cents per call (based on the sum of the high estimates).

------------------------------------------------------------------------
                                                       Low        High  
                                                     estimate   estimate
------------------------------------------------------------------------
Maintenance.......................................        4.0        5.0
Line costs........................................        6.5        7.5
SG&A..............................................        5.3        5.4
Capital costs.....................................        7.2        8.4
ANI ii............................................        1.0        1.0
Interest..........................................         .7         .8
                                                   ---------------------
    Total.........................................       24.7       28.1
------------------------------------------------------------------------

    109. Sprint's Motion. On September 16, 1997, Sprint filed a Motion 
asking that the Commission require Bell Atlantic to submit a copy of 
the NET cost study filed before the Massachusetts DPU and supporting 
papers to the Commission and to all parties of record in this 
proceeding. On September 26, 1997, Bell Atlantic filed an opposition to 
Sprint's motion to require production of a confidential cost study and 
conditional cross-motion for production of payphone cost data from 
Sprint and AT&T. Bell Atlantic argues that Sprint's motion should be 
rejected because: (1) The study was prepared for the Massachusetts DPU 
and Sprint should seek relief from that agency; (2) there is no 
justification for requiring the production of the study because the 
study examines incremental costs, which, Bell Atlantic argues, the 
Commission has rejected; and (3) the information is confidential.
    110. We deny Sprint's motion and decline to require Bell Atlantic 
to submit a copy of NET's cost analysis. We are not persuaded that the 
NET cost study, which Sprint indicates was submitted to the 
Massachusetts DPU on a confidential basis, is necessary for us to reach 
a decision in this proceeding. Furthermore, we note that there are 
differences of opinion regarding the NET methodology. The NET study as 
well as other confidential studies filed in other states are not before 
us. We further note that as Bell Atlantic states, the information is 
confidential, and therefore, should we require Bell Atlantic to make 
such a filing, Bell Atlantic likely would require that we treat the 
study as confidential. Were we to agree, the information would not be 
available to the parties. We note, moreover, information on the record 
provides deregulated coin rates for several states. Because we are 
denying Sprint's motion, we need not address Bell Atlantic's 
conditional motion for production of documents.

D. Per-Call Compensation Rate

    111. In this section, we conclude that the default market-based 
per-call rate for subscriber 800 and access code calls is $0.284, which 
reasonably accounts for the payphone costs that are incurred solely in 
connection with local coin calls and costs that are specific to access 
code and subscriber 800 calls.

1. Comments

    .112. Parties filed comments that varied considerably, primarily 
depending on whether they relied on a market-based or derived rate 
methodology. AT&T and ARCH argue that the compensation rate should be 
$0.11 per-call, based on the costs of providing a subscriber 800 or 
access code call.<SUP>290</SUP> AT&T arrives at this rate by estimating 
a cost of $76.85 per month for a payphone divided by an average of 700 
calls per phone per month.<SUP>291</SUP> AT&T contends that this rate 
is consistent with NYNEX's local coin rate of $0.167. Alternatively, 
AT&T and MCI argue that if the Commission adopts a rate based on an 
offset from the local rate, then the offset should be at least 
50%.<SUP>292</SUP> AT&T further argues that even using a adjusted 
market approach as suggested by the Coalition results in payphone 
compensation in the amount of $0.1067 cents per call, which is in line 
with the rate that AT&T has calculated for coinless calls based on its 
estimated monthly costs of a payphone.<SUP>293</SUP> AT&T further 
states that even if adjustments have to be made for depreciation, 
overhead, general and administrative expenses and taxes, the per-call 
cost for coinless calls would only increase to 12.2 cents per 
call.<SUP>294</SUP> AT&T maintains that $0.35 is not the appropriate

[[Page 58678]]

unregulated coin rate because it was based on a small and 
unrepresentative sample of rural states, and the cost in those states 
could be higher than in other areas.<SUP>295</SUP> The Commission 
ignored the deregulated rate in other rural states, where the rate is 
$0.25, which, AT&T asserts, also is the dominant rate where the 
majority of payphones are located.<SUP>296</SUP> Borden suggests a rate 
of approximately $0.133 per call, and Champion suggests a rate between 
$0.08 and $0.11.
---------------------------------------------------------------------------

    \290\ AT&T Comments at 2; AT&T Reply at 2; Arch Reply at 9. AT&T 
and ARCH state that this rate is based on the actual costs of an 
efficient PSP to originate access code and subscriber 800 calls. 
Note, however, that the Coalition challenges this estimate, arguing 
that AT&T's cost study merely reflects a hypothetical, not real, 
PSP, and links the costs to a coinless, not coin phone. The 
Coalition argues that adjusting AT&T's rate to reflect proper data 
would yield a rate of approximately $0.41 per-call. Thus, if the 
Commission relies on costs, it should rely on the costs of an actual 
payphone. Coalition Reply at 31.
    \291\ AT&T Comments at 10-11; AT&T Reply at 14.
    \292\ AT&T Comments at 13; MCI Reply at 3.
    \293\ AT&T Reply at 13.
    \294\ Id. at 14.
    \295\ See id. at 22-23; see also CFA Reply at 7; MIDCOM Comments 
at 5; RCN Comments at 4; TRA Comments at 21; Excel Reply at 9 
(stating that the four states that have deregulated rates account 
for only two percent of the nation's payphones).
    \296\ See, e.g., Excel Reply at 10 (stating that a Massachusetts 
proceeding determined that the rate there is $.25).
---------------------------------------------------------------------------

    113. CompTel argues that a fair compensation amount based on 
incremental costs is between $0.03 to $0.05 per call,<SUP>297</SUP> and 
that even under a direct cost approach, compensation should not exceed 
$0.10 per call.<SUP>298</SUP> Frontier argues that a cost-based rate 
should be approximately $0.10 per call,<SUP>299</SUP> but no higher 
than $0.11 per call.<SUP>300</SUP> ITA argues that the rate should be 
between $0.08 and $0.15 per call.<SUP>301</SUP> MCI argues that the 
per-call rate for access code calls is $0.083 per call, and that the 
number for subscriber 800 calls should be even lower.<SUP>302</SUP>
---------------------------------------------------------------------------

    \297\ CompTel Reply at i, 8.
    \298\ Id. at 14.
    \299\ Frontier Comments at 9.
    \300\ Frontier Reply at ii, 2 (arguing that a rate higher than 
$0.11 per call would harm consumers).
    \301\ ITA Comments at 7 (basing the upper number on the $0.17 
rate identified for a local coin call by the Massachusetts DPU for 
NYNEX minus the cost of coin collection ($0.02) and further stating 
that the $0.35 rate results in increased cost of a typical prepaid 
phone card call by over fifty percent per call).
    \302\ MCI Comments at 3.
---------------------------------------------------------------------------

    114. MIDCOM states that the rate should be $0.057. <SUP>303</SUP> 
Sprint argues that on a fully allocated approach to costs, using an 
efficient bellwether provider, the default rate per call should be 
$0.06. <SUP>304</SUP> TRA argues that the 35 cent rate is too 
high.<SUP>305</SUP> Excel argues that the Court decision demonstrates 
that we cannot set the rate for subscriber 800 and access code calls at 
the same level as the local coin rate, and thus the Commission must 
reduce the $0.35 rate.<SUP>306</SUP>
---------------------------------------------------------------------------

    \303\ MIDCOM Reply at 6. In its comments, MIDCOM argued that the 
rate should be between $0.067 to $0.25 per call. Seest MIDCOM 
Comments at 7.
    \304\ Sprint Reply at 4.
    \305\ TRA Comments at 21 (arguing that the costs associated with 
making a coinless call are significantly less than those associated 
with a coin call).
    \306\ Excel Comments at 2.
---------------------------------------------------------------------------

    115. The Coalition states that, to truly reflect the market, the 
local coin rate needs to be adjusted from $0.35 upward to $0.42 or 
$0.43 per call. <SUP>307</SUP> In a fully realized market, the 
Coalition states, noncoin calls would be carrying a greater portion of 
the payphone costs than coin calls, and therefore should be priced at a 
higher rate. <SUP>308</SUP> APCC alleges that the average per-call 
local coin rate is $0.41, not $0.35. <SUP>309</SUP> IPTA and TEI state 
that the record supports a compensation level of no less than $0.35 per 
call. <SUP>310</SUP> CCI requests that the Commission set the per-call 
compensation rate at $0.35. <SUP>311</SUP>
---------------------------------------------------------------------------

    \307\ Coalition Comments at 13-14.
    \308\ Id.
    \309\ APCC Comments at 15 (explaining that coinless calls 
generate additional costs such as ANI).
    \310\ See IPTA Reply at 5, 11; see also TEI Comments at 10; TEI 
Reply at 2 (arguing that a lower figure could result in the removal 
of payphones).
    \311\ CCI Comments at 2, 10 (arguing that total cost plus return 
on invested capital is $0.37 per call for a coin call, and $0.34 per 
call for a coinless call).
---------------------------------------------------------------------------

    116. The majority of the IXCs argue that there should be one 
national rate, <SUP>312</SUP> because a varying rate would be nearly 
impossible to administer, and could increase the costs to carrier-
payers of administering per-call compensation. <SUP>313</SUP> 
Furthermore, CWI argues that because not all carriers can block calls, 
the Commission should not create a situation where carriers must block 
calls because they are unaware of the rate to be charged. 
<SUP>314</SUP> MCI argues that if the Commission does not adopt one 
uniform rate, then it should set parameters such as notifying carriers 
of the coin rate in advance and changing the coin rate not more than 
once per year. <SUP>315</SUP> APCC argues that the Commission should 
not adopt a uniform compensation rate, and although the costs 
associated with a non-uniform rate may be higher, the benefits of 
directly market-based compensation are worth the extra costs. 
<SUP>316</SUP>
---------------------------------------------------------------------------

    \312\ See, e.g., CWI Comments at 10-11; CWI Reply at i, 1, 12 
(stating that the Commission should not start per-call compensation 
until thirty days after the release of an order on remand so that 
carriers will have ample time to recover per-call amount in their 
tariffed charges); LCI Comments at 8, n.14; MCI Comments at 5; RCN 
Comments at 4; Sprint Reply at 21; WorldCom Comments at 4 (stating 
that a national rate would enable IXCs to fulfill tracking and 
payment obligations and that this rate could be eligible for 
periodic adjustment based on changes in TSLRIC costs).
    \313\ CWI Reply at 12 (stating that it could cost carriers-
payers perhaps up to 300 percent above the cost of administering a 
uniform compensation rate); AT&T Comments at ii, 16-17 (stating that 
a ``floating'' rate could cost carriers ``hundreds of millions of 
dollars to track and block calls from excessively-priced payphones 
and would be virtually impossible, and extremely costly to 
administer.''); MCI Comments at 5 (stating that it would be costly 
due to administrative costs, switch software upgrades, and call 
processing systems development); LCI Comments at 8-9 (stating that 
the Commission should establish a uniform, national compensation 
rate for access code and subscriber 800 calls and that a uniform 
rate will allow the necessary business certainty and will reduce 
call blocking due to a carrier's lack of information concerning the 
rate to be charged); Sprint Reply at 21 (arguing that there is no 
basis for a mechanism to periodically adjust the rate upward because 
if the Commission bases the rate on costs that include fixed costs 
of the PSPs, then as traffic volumes grow, unit costs should 
decline).

    \314\ CWI Comments at 10-11; CWI Reply at 12.
    \315\ MCI Comments at 5; MCI Reply at 12.
    \316\ APCC Reply at 32.
---------------------------------------------------------------------------

2. Discussion

    117. We conclude from our analysis in Section B, that the market-
based rate for access code and subscriber 800 calls, adjusted for cost 
differences is $0.284.<SUP>317</SUP> We further conclude that the 
market-based rate we establish herein as a default rate for per-call 
compensation promotes the goals of Section 276 of the Act, fair 
compensation, the deployment of payphones, and competition, and is a 
rate that is reasonably related to the market-based local coin rate. As 
discussed below, we conclude that the $0.284 default rate for per-call 
compensation rate, absent negotiations, should be in effect for two 
years to enable LECs, PSPs and IXCs additional time to transition 
efficiently and without disruptions to the deregulated payphone market 
structure created in the Payphone Orders.<SUP>318</SUP> Furthermore, we 
conclude that after the two year per-call compensation rate period, 
``fair compensation'' for access code and subscriber 800 calls pursuant 
to Section 276 and an analysis of the record is the deregulated market 
rate for the local coin call adjusted for costs as discussed herein. 
Accordingly, the default rate for the first two years of per-call 
compensation is $0.284; after the first two years, the default rate is 
the market-based local coin rate minus $0.066 per call. We conclude 
that the default per-call rate falls within a zone of reasonableness 
that will provide fair compensation for subscriber 800 and access code 
calls as required by Section 276, while allowing the market to

[[Page 58679]]

develop, and PSPs who desire, to negotiate a different 
rate.<SUP>319</SUP>
---------------------------------------------------------------------------

    \317\ The Commission has the authority to employ different 
methodologies and/or regulatory models to arrive at a particular 
rate. See Permian Basin Area Rate Cases, 390 U.S. 747, 767 (1968). 
We note that as discussed above, parties have argued for a range of 
from $0.03 to $0.63. While determining an appropriate rate, we have 
kept in mind that Congress specifically stated that ``[c]arriers and 
customers that benefit from the availability of a payphone should 
pay for the service they receive when a payphone is used to place a 
call.'' House Report at 88. See supra paras. 23-28, 63.
    \318\ See infra para. 121.
    \319\ We note that the Illinois Commerce Commission adopted a 
rate of $0.30 for retail 1-800 calls (which are synonymous with 
access code calls) when it deregulated payphones. The Illinois 
proceeding raised many of the same concerns as those raised in this 
proceeding. See IPTA Comments, July 1, 1996, Appendix B, Order of 
the Illinois Commerce Commission, 92-0400 at 18-19, 24. We also note 
that the rate that AT&T negotiated with PSPs for access code calls 
was $0.25. The rate we adopt herein falls within the range of these 
rates. See AT&T Reply at 12-13.
---------------------------------------------------------------------------

    118. In adopting an adjusted market-based rate approach, we note 
that the Commission has the authority to rely on market forces, and 
further, that ``market predictions are within the institutional 
competence of the Commission.'' <SUP>320</SUP> In adopting this 
approach, we are confident that market forces will keep payphone prices 
at competitive levels, and that our default rate is in accordance with 
prevailing market conditions adjusted for costs. Courts have upheld 
rates established by regulatory agencies that lie within a ``zone of 
reasonableness,'' <SUP>321</SUP> particularly, in the context of 
ratemaking. While we do not consider the development of the default 
rate established herein to be ratemaking, because market imperfections 
currently exist within the evolving competitive payphone market, we 
have set a default rate to ensure competition.<SUP>322</SUP>
---------------------------------------------------------------------------

    \320\ FCC v. WNCN Listeners Guild, 450 U.S. 582, 593, 596 
(1981).
    \321\ See, e.g., Nader v. FCC, 520 F.2d 182 (D.C. Cir. 1975) 
(stating that there is a zone of reasonableness within which a rate 
will be upheld and that the Commission must identify the boundaries 
of such a zone); National Cable Television v. Copyright Royalty 
Tribunal, 724 F.2d 176 (D.C. Cir. 1983) (stating that rulings need 
not rest on precise mathematical calculations and that a ruling will 
be upheld if it lies within the zone of reasonableness); Bell 
Atlantic Tel. Co. v. FCC, 79 F.3d 1195, 1202 (D.C. Cir. 1996) 
(stating that the Commission is not required to include all data 
when determining a rate, and that the Commission has the authority 
to exclude suspicious data or statistical outliers).
    \322\ In Illinois Public Telecomm., the court stated that ``a 
market-based approach is as much a compensation scheme as a rate-
setting approach. 117 F.3d at 563.
---------------------------------------------------------------------------

    119. As discussed above, in response to the claims of parties on 
the record that only a rate derived from cost data submitted in the 
record will provide a valid per-call rate, we have also performed an 
analysis of those data for purposes of comparison with the market-based 
per-call rate we establish in this order. In setting the default rate 
for per-call compensation at $0.284 based on our market-based analysis, 
we have also considered the results of our analysis of the record 
information concerning the long run costs of payphone service. We have 
calculated the long run costs per-call for a provider to install a 
payphone to be in the range of $0.247 per call to $0.281 cents per 
call.<SUP>323</SUP> An estimate compiled under this long run costs 
approach must be considered a lower bound when establishing a default 
rate. The rate derived in this manner, by definition, just covers the 
cost of installing and operating a payphone at a marginal location. As 
such, it will not encourage either the deployment of additional 
payphones or an incentive for IXCs to negotiate with PSPs. Such minimal 
incentives are contrary to the goals of promoting competition among 
payphone service providers and promoting the widespread deployment of 
payphone services. Accomplishing these goals requires that we ensure 
that the default rate, in addition to covering cost, provide sufficient 
incentives for PSPs to deploy additional payphones and tangible 
incentives for IXC and PSPs to negotiate. Thus, the default rate we 
adopt for subscriber 800 and access code calls based on the market-
based local coin rate adjusted for costs differences is appropriately 
and reasonably at the high end of the range compiled from the long run 
cost analysis.
---------------------------------------------------------------------------

    \323\ In deriving a default per-call compensation rate based on 
the long run costs indicated in the record data, we do not adopt 
this approach on a going-forward basis but continue to rely instead 
on the market-based approach adjusted for cost differences. To do 
otherwise would lead to our continuing review of the costs 
associated with providing per-call compensation for subscriber 800 
and access code calls and provide disincentives to PSPs and IXCs to 
negotiate market based rates for these services. Moreover, market-
based rates lead to efficient allocation of resources and avoid the 
pitfalls of regulating rates for firms that use common facilities to 
produce both non-regulated and regulated services.
---------------------------------------------------------------------------

    120. We deny requests that we should mandate a uniform and fixed 
per-call compensation rate for each compensable call. A fixed rate 
would not promote the statutory goals of Section 276, because it would 
not encourage negotiations between IXCs and PSPs. It is our expectation 
that IXCs and PSPs will build business relationships and create 
operating procedures to provide compensation in an efficient manner. 
Given that we have adopted a deregulatory approach in this order, we 
conclude that we should not establish those procedures. Under the 
approach we established in the Report and Order, (61 FR 52307 (October 
7, 1996)) the market is allowed to set the compensation amount for 
calls originated by each payphone. The court did not vacate that part 
of the Report and Order. For market-based pricing to function 
effectively, it is not unreasonable that there be some variation in 
compensation amounts from location to location. We also decline to 
delay the effective date of this order as requested by CWI. As we 
discussed previously, we conclude that it is in the public interest to 
make this order effective immediately. <SUP>324</SUP>
---------------------------------------------------------------------------

    \324\ See supra para. 3.
---------------------------------------------------------------------------

    121. In this order, we extend the per-call interim compensation 
period subject to a default rate established in the Payphone Orders for 
an additional year. Thus, the per-call compensation period during which 
the default rate is $0.284 begins on October 7, 1997, and ends on 
October 6, 1999. We established the interim compensation plan in the 
Payphone Orders in order to ease the transition to market-based rates. 
We stated that it was necessary to observe over time how the payphone 
marketplace would function in the absence of regulation. We noted that 
market imperfections had led us to establish a default rate. On this 
record, we conclude that additional time is required to ease the 
transition to market-based rates and that continuing the applicability 
of the default rate for an additional year is in the public interest. 
As we have summarized in this order, we have received comments from 
LECs, PSPs, and IXCs regarding the problems and issues they face in 
transitioning to the payphone market compensation structure we 
established in the Payphone Orders. For example, IXCs and their 
customers allege that after the first year of per-call compensation 
established in the Payphone Orders, when the default rate will be the 
deregulated coin rate adjusted for cost differences, PSPs will raise 
the coin rate in a manner that will raise substantially the per-call 
rate for access code and subscriber 800 calls. They indicate that their 
systems are not adequately prepared to respond to such situations. In 
addition, LECs have indicated problems in providing the payphone-
specific coding digits required to respond to calls from payphones on a 
real-time basis for some payphones in their serving areas.
    122. Although we conclude in this order that the marketplace, based 
on negotiations between IXCs and PSPs, is where compensation decisions 
should be determined and that the default rate after the per-call 
transition period should be the market-based local coin rate adjusted 
for cost difference, we believe that this two year per-call 
compensation period subject to the default rate is necessary to afford 
IXCs, PSPs and LECs the opportunity to adjust to and adequately prepare 
for the

[[Page 58680]]

deregulatory market-based structure we adopted pursuant to Section 276. 
<SUP>325</SUP>
---------------------------------------------------------------------------

    \325\ We establish a default rate because certain call blocking 
capabilities are not yet available to participants in the provision 
of access code and subscriber 800 calls from a payphone, and thus 
the market is not yet free of impediments that interfere with the 
competitive negotiated process. In the Payphone Orders we concluded 
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. For example, 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 800 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. We concluded in the Payphone 
Orders that this uneven bargaining between parties necessitates the 
Commission's involvement.
---------------------------------------------------------------------------

E. Other

1. Comments

    123. AirTouch Plan. AirTouch suggests that the Commission explore a 
new method to resolve the compensation issue due to the wide divergence 
of views expressed in the replies, and its concern that call blocking 
options do not exist. AirTouch argues that the Commission should adopt 
a method that does not rely on call tracking or call blocking to place 
checks on the imposition of excessive charges by payphone service 
providers.<SUP>326</SUP> AirTouch proposes that the Commission adopt a 
unique 8XX approach that would be toll-free for long distance charges, 
but could be accessed from a payphone only if the caller deposits coins 
(presumably at a fraction of the local coin rate). PageNet and PCIA 
support AirTouch's unique 8XX approach and state that it merits further 
investigation.<SUP>327</SUP> PageMart argues that if the Commission 
does not adopt a caller-pays approach, then it should consider 
AirTouch's modified approach.<SUP>328</SUP> Several of the paging 
companies argue that they should pay less than other carriers due to 
the short duration of the calls used to initiate pages.<SUP>329</SUP>
---------------------------------------------------------------------------

    \326\ AirTouch Reply at 5.
    \327\ PageNet Reply at 10; PCIA Reply at 7.
    \328\ PageMart Reply 8.
    \329\ See, e.g., AirTouch Reply at 8-9 (arguing that the average 
paging call lasts approximately 20 seconds, as compared to the 
Coalition data stating that the typical duration of a call from a 
payphone lasts 3.22 to 3.42 minutes); PageNet Reply at ii, 14-15 
(stating that it should be charged rates that reflect its individual 
called party characteristics, because subscriber 800 calls are 
shorter in duration and generate less revenue than access code 
calls).
---------------------------------------------------------------------------

    124. Reconsider Use of Caller Pays. AirTouch, PageNet, PageMart, 
Arch, and PCIA argue that the Commission should adopt a caller-pays 
system, because such a system, they argue, is the only true surrogate 
for market-based compensation. <SUP>330</SUP> PCIA argues that the 
Commission should reconsider the caller-pays system because IXCs have a 
limited ability to block calls and thus have a check on excessive 
payphone rates. <SUP>331</SUP>
---------------------------------------------------------------------------

    \330\ AirTouch Reply at 5; PageNet Reply at i, 7 (arguing that a 
calling-party pays mechanism allows the calling party to seek out a 
lower priced payphone and thus exerts pressure on the PSPs to charge 
competitive rates and further, that the mechanism upon which the 
market scheme was established, call blocking, is not in place). 
PageNet further argues that a calling party pays system avoids FCC 
determination of payphone costs and the extent to which commissions 
paid to location owners should be included in these payphone costs. 
See PageNet Reply, supra. See also PageMart Reply at 3; PCIA Reply 
at 7; Arch Reply at 9.
    \331\ PCIA Reply at 2.
---------------------------------------------------------------------------

    125. APCC contends that the paging industry's recommendation that 
the Commission should adopt a caller pays approach is without merit. 
<SUP>332</SUP> APCC contends that the information needed to block calls 
from PSPs that charge ``too much'' is located within a database, not 
the screening digits. <SUP>333</SUP> APCC contends that it is not 
necessary to implement this database until per-call compensation is 
tied to individual providers' prices in October 1998. <SUP>334</SUP>
---------------------------------------------------------------------------

    \332\ APCC Reply at 23-32.
    \333\ Id. at 30.
    \334\ Id.
---------------------------------------------------------------------------

    126. Call Blocking. AirTouch reiterates its concern that call 
blocking options do not exist, and therefore suggests the proposal 
enumerated above, because the proposal does not rely on call tracking 
or call blocking to place checks on the imposition of excessive charges 
by payphone service providers.<SUP>335</SUP> AirTouch further states 
that paging companies should not have to pass through the $0.35 charge 
until targeted call blocking is available for payphone 
calls,<SUP>336</SUP> and PageMart contends that call blocking 
technology is an integral part of the development of a competitive PSP 
market.<SUP>337</SUP> MCI argues that Congress did not intend for 
carriers to have to block calls, and furthermore, carriers will not be 
able to selectively block calls until the third quarter of 
1998.<SUP>338</SUP>
---------------------------------------------------------------------------

    \335\ AirTouch Reply at 5.
    \336\ AirTouch Comments at 8; AirTouch Reply at 4.
    \337\ PageMart Comments at 2.
    \338\ MCI Comments at 4. See PageMart Reply at 4 (stating that a 
system that encourages call blocking does not further the 
Commission's goal of providing telecommunications services to the 
greatest possible number of consumers).
---------------------------------------------------------------------------

    127. PageNet, PageMart, and PCIA contend that without call blocking 
capability, the 800 subscriber does not have any leverage to negotiate 
for lower rates for calls placed from payphones, therefore, these 
carriers argue, a market-based compensation scheme cannot work. 
<SUP>339</SUP> GCI contends that as a small carrier operating primarily 
in Alaska, it is not in a position to negotiate with payphone providers 
around the country to get a better rate and furthermore, it does not 
want to block calls from payphone locations. <SUP>340</SUP>
---------------------------------------------------------------------------

    \339\ PageNet Reply at i, 3, 6 (arguing that the mechanism under 
which the Commission adopted a carrier party pays scheme-rates 
determined on real time basis'is not available); PageMart Reply at 
3; PCIA Reply at 3.
    \340\ GCI Comments at 3.
---------------------------------------------------------------------------

    128. Arch requests that if the Commission maintains a carrier-pays 
approach, it should either order all 800 carriers to deploy blocking 
capability so that each 800 customer has the option to block, or apply 
notions of cost-causation so payphone costs are instead paid by the 
cost-causer, the payphone user.<SUP>341</SUP> Champion argues that a 
call blocking option must be provided, because it does not want to be 
liable for calls from places such as prisons or other non-business 
related locations. CPI contends that the cost of tracking individual 
payphones and blocking calls may be cost prohibitive such that blocking 
does not necessarily give IXCs any leverage to negotiate with PSPs to 
constrain the compensation rate. Furthermore, CPI contends that 
customers do not benefit when calls are blocked, and call blocking will 
not result in a price that is market based.<SUP>342</SUP> Several of 
the IXCs argue that call blocking technology is extremely costly, and 
that they do not currently have this technology in place.<SUP>343</SUP>
---------------------------------------------------------------------------

    \341\ Arch Reply at 5.
    \342\ CPI Reply at 4.
    \343\ Sprint Comments at 6; AT&T Comments at 17; CWI Comments at 
10-11.
---------------------------------------------------------------------------

    129. The Coalition contends that the argument that market-based 
prices may lead to call blocking is without merit, because PSPs have an 
interest in seeing calls completed-- a blocked call does not generate 
compensation.<SUP>344</SUP>
---------------------------------------------------------------------------

    \344\ Coalition Reply at 8-9.
---------------------------------------------------------------------------

    130. Other. CWI argues that the Commission should clarify that 
payphones that do not transmit payphone specific coding digits are not 
eligible for compensation, and requests that the Commission clarify 
that the ``07'' coding digit does not identify a call from a 
payphone.<SUP>345</SUP>
---------------------------------------------------------------------------

    \345\ CWI Reply at 14-15.
---------------------------------------------------------------------------

    131. ACTA argues that pass-through billing of an IXCs reseller 
customer should not be permitted until a new compensation scheme is in 
place.<SUP>346</SUP>
---------------------------------------------------------------------------

    \346\ ACTA Comments at 4 (stating that if pass through billing 
is permitted, then requirements need to be established to ensure 
fair and accurate billing).


[[Page 58681]]


---------------------------------------------------------------------------

    2. Discussion

    132. We decline to address in this proceeding issues related to the 
implementation of the per-call compensation structure beyond the per-
call compensation rate. The above issues were raised by parties in 
response to the Notice, despite its limited scope. In this order, we do 
not revisit the issue of who is responsible for paying compensation and 
whether carriers can block, issues already addressed in the Payphone 
Orders, and upheld by the court. We also decline to evaluate at this 
time, a new proposal relating to the tracking of calls, or that we 
establish a compensation scheme on a per-minute rather than per-call 
basis, which could substantially delay the beginning of the per-call 
compensation scheme. To the extent that we decide to revisit any of 
these issues, such review will be addressed in a subsequent proceeding.
    133. We decline to grant CWI's request that we clarify the 
payphone-specific coding digit requirements set forth in the Payphone 
Orders, because the purpose of this order is to establish a default 
per-call compensation rate. We plan to address payphone-specific coding 
digit issues in a subsequent order. As discussed above, we note that 
the Bureau has granted a waiver until March 9, 1998, for PSPs to comply 
with payphone-specific coding digit requirements. Pursuant to that 
waiver, IXCs must pay compensation to PSPs including those with 
payphones that cannot transmit payphone-specific coding 
digits.<SUP>347</SUP>
---------------------------------------------------------------------------

    \347\ Bureau Waiver Order, DA 97-2162 (rel. Oct. 7, 1997).
---------------------------------------------------------------------------

IV. Procedural Matters

A. Final Paperwork Reduction Act Analysis

    134. The decision herein has been analyzed with respect to the 
Paperwork Reduction Act of 1995, Pub. L. 104-13, and does not contain 
new and/or modified information collections subject to Office of 
Management and Budget review. The information and collection 
requirements in this item are contingent upon approval by the Office of 
Management and Budget.

B. Final Regulatory Flexibility Act Analysis

    135. As required by the Regulatory Flexibility Act 
(RFA),<SUP>348</SUP> an Initial Regulatory Flexibility Analysis (IRFA) 
was incorporated in the Notice of Proposed Rulemaking.<SUP>349</SUP> 
The Commission sought written public comment on the proposals in the 
NPRM, including comment on the IRFA. This present Final Regulatory 
Flexibility Analysis (FRFA) conforms to the RFA.<SUP>350</SUP>
---------------------------------------------------------------------------

    \348\ See 5 U.S.C. Sec. 603. The RFA, see 5 U.S.C. Sec. 601 et. 
seq., has been amended by the Contract With America Advancement Act 
of 1996, Pub. L. No. 104-121, 110 Stat. 847 (1996) (CWAAA). Title II 
of the CWAAA is the Small Business Regulatory Enforcement Fairness 
Act of 1996 (SBREFA).
    \349\ Implementation of Pay Telephone Reclassification and 
Compensation Provisions of the Telecommunications Act of 1996, CC 
Docket No. 96-128, Notice of Proposed Rulemaking, 61 FR 31481 (June 
6, 1996); 11 FCC Rcd 6716 (1996) (``NPRM'').
    \350\ See 5 U.S.C. Sec. 604.

---------------------------------------------------------------------------
1. Need for, and Objectives of, the Second Report and Order

    136. 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.'' <SUP>351</SUP> In doing so, the Commission is 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 Telecommunications Act on small businesses.
---------------------------------------------------------------------------

    \351\ 47 U.S.C. Sec. 276(b)(1).

2. Summary of Significant Issues Raised by Public Comments in Response 
---------------------------------------------------------------------------
to the IRFA

    137. Summary of the Initial Regulatory Flexibility Analysis (IRFA). 
In the IRFA, the Commission solicited comment on alternatives to our 
proposed rules that would minimize the potential 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.'' <SUP>352</SUP> 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 beneficiaries of payphone calls, to track the calls 
they receive from payphones. These carriers have the option of 
performing these functions themselves 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.
---------------------------------------------------------------------------

    \352\  Frontier Comments in response to the IRFA at 2.

3. Description and Estimate of the Number of Small Entities to Which 
---------------------------------------------------------------------------
Rules Will Apply

    138. 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. Sec. 632, unless the Commission has 
developed one or more definitions that are appropriate to its 
activities.<SUP>353</SUP> 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).<SUP>354</SUP> 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 
no more than 1,500 employees.<SUP>355</SUP>
---------------------------------------------------------------------------

    \353\ See 5 U.S.C. Sec. 601(3) (incorporating by reference the 
definition of ``small business concern'' in 5 U.S.C. Sec. 632).
    \354\ 15 U.S.C. Sec. 632. See, e.g., Brown Transport Truckload, 
Inc. v. Southern Wipers, Inc., 176 B.R. 82 (N.D. Ga. 1994).
    \355\ 13 CFR Sec. 121.201.
---------------------------------------------------------------------------

    139. 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 <SUP>356</SUP> that incumbent LECs are not 
subject to regulatory flexibility analyses because they are not small 
businesses.<SUP>357</SUP> We have made similar

[[Page 58682]]

determinations in other areas.<SUP>358</SUP> 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.<SUP>359</SUP> 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, include 
small incumbent LECs in this FRFA, while continuing to hold that 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.'' <SUP>360</SUP>
---------------------------------------------------------------------------

    \356\ See 5 U.S.C. Sec. 605(b).
    \357\ See, e.g., Expanded Interconnection with Local Telephone 
Company Facilities, Supplemental Notice of Proposed Rulemaking, 56 
FR 52496 (October 21, 1991); 6 FCC Rcd 5809 (1991); MTS and WATS 
Market Structure, Report and Order, 52 FR 21536 (June 8, 1987); 2 
FCC Rcd 2953, 2959 (1987) (citing MTS and WATS Market Structure, 
Third Report and Order, 48 FR 10319 (March 11, 1983); 93 F.C.C.2d 
241, 338-39 (1983)).
    \358\ See, e.g., Implementation of Sections of the Cable 
Television Consumer Protection Act of 1992: Rate Regulation, Sixth 
Report and Order and Eleventh Order on Reconsideration, 60 FR 10534 
(February 27, 1995); 10 FCC Rcd 7393, 7418 (1995).
    \359\ The Small Business Administration (SBA), the Rural 
Telephone Coalition (Rural Tel. Coalition), and CompTel maintain 
that the Commission violated the RFA when it failed to include small 
incumbent LECs in its IRFA without first consulting SBA to establish 
a definition of ``small business.'' See Local Competition Order at 
paras. 1328-30.
    \360\ See 13 CFR Sec. 121.210 (SIC 4813).
---------------------------------------------------------------------------

    140. Total Number of Telephone Companies Affected. 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.<SUP>361</SUP> 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.'' <SUP>362</SUP> 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.
---------------------------------------------------------------------------

    \361\ United States Department of Commerce, Bureau of the 
Census, 1992 Census of Transportation, Communications, and 
Utilities: Establishment and Firm Size, at Firm Size 1-123 (1995) 
(``1992 Census'').
    \362\ 15 U.S.C. Sec. 632(a)(1).
---------------------------------------------------------------------------

    141. Wireline Carriers and Service Providers. The SBA's definition 
of small entities for telephone communications companies, other than 
radiotelephone (wireless) companies, is one employing no more than 
1,500 persons.<SUP>363</SUP> The Census Bureau reports that, there were 
2,321 such telephone companies in operation for at least one year at 
the end of 1992.<SUP>364</SUP> 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.
---------------------------------------------------------------------------

    \363\ 13 CFR Sec. 121.201, Standard Industrial Classification 
(SIC) Code 4812.
    \364\ 1992 Census, supra, at Firm Size 1-123.
---------------------------------------------------------------------------

    142. 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).<SUP>365</SUP> According to our most recent data, 
1,347 companies reported that they were engaged in the provision of 
local exchange services.<SUP>366</SUP> 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.
---------------------------------------------------------------------------

    \365\ All carriers that provide interstate service are required 
to pay into the TRS Fund, which provides access to 
Telecommunications Device for the Deaf (TDD). See generally 47 CFR 
Secs. 64.601 et seq.
    \366\ Federal Communications Commission, CCB, Industry Analysis 
Division, Telecommunications Industry Revenue: TRS Fund Worksheet 
Data, Tbl. 21 (Average Total Telecommunications Revenue Reported by 
Class of Carrier) (Feb. 1996) (``TRS Worksheet'').
---------------------------------------------------------------------------

    143. 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.<SUP>367</SUP> 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.
---------------------------------------------------------------------------

    \367\ Id.
---------------------------------------------------------------------------

    144. 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.<SUP>368</SUP> 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

[[Page 58683]]

fewer than 30 small entity CAPs that may be affected by the decisions 
and rules adopted in this Order.
---------------------------------------------------------------------------

    \368\ Id.
---------------------------------------------------------------------------

    145. 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.<SUP>369</SUP> 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.
---------------------------------------------------------------------------

    \369\ Id.
---------------------------------------------------------------------------

    146. Payphone 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 payphone 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 payphone services.<SUP>370</SUP> 
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 payphone operators that would qualify as small business concerns 
under SBA's definition. Consequently, we estimate that there are fewer 
than 197 small entity payphone operators that may be affected by the 
decisions and rules adopted in this Order.
---------------------------------------------------------------------------

    \370\ Id.
---------------------------------------------------------------------------

    147. 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.<SUP>371</SUP> 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.
---------------------------------------------------------------------------

    \371\ Id.
---------------------------------------------------------------------------

    148. 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.<SUP>372</SUP> 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.
---------------------------------------------------------------------------

    \372\ Federal Communications Commission, CCB, Industry Analysis 
Division, FCC Releases, Study on Telephone Trends, Tbl. 20 (May 16, 
1996).
---------------------------------------------------------------------------

    149. 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.<SUP>373</SUP> 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.
---------------------------------------------------------------------------

    \373\ There are approximately 1.5 million LEC payphones. 
Statistics of Communications Common Carriers, 1994/1995 edition, 
Common Carrier Bureau, FCC at 159, Table 2.10 (1995). There are 
approximately 350,000 competitively provided payphones. See Ex Parte 
Letter to Michael Carowitz, Attorney, Common Carrier Bureau, FCC 
from Michael Benson, Senior Product Manager, PPO Compensation 
Clearinghouse, Cincinnati Bell (Apr. 24, 1996). Cincinnati Bell, as 
the payphone compensation paying agent for three interexchange 
carriers, states that it receives quarterly bills from PPOs for more 
than 350,000 competitively provided payphones. Id.
---------------------------------------------------------------------------

    150. Wireless (Radiotelephone) Carriers (including paging 
services). The SBA's definition of a small business radiotelephone 
company is one employing fewer than 1,500 persons.<SUP>374</SUP> The 
Census Bureau reports that there were 1,176 such companies in operation 
for at least one year at the end of 1992.<SUP>375</SUP> The Census 
Bureau also reported that 1,164 of those radiotelephone companies had 
no more 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 and 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.
---------------------------------------------------------------------------

    \374\ 13 CFR 121.201, Standard Industrial Classification (SIC) 
Code 4812.
    \375\ United States Department of Commerce, Bureau of the 
Census, 1992 Census of Transportation, Communications, and 
Utilities: Establishment and Firm Size, at Firm Size 1-123 (1995) 
(``1992 Census'').
---------------------------------------------------------------------------

    151. 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

[[Page 58684]]

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.<SUP>376</SUP> 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.
---------------------------------------------------------------------------

    \376\ Id.
---------------------------------------------------------------------------

    152. 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.<SUP>377</SUP> 
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.
---------------------------------------------------------------------------

    \377\ Id.
---------------------------------------------------------------------------

    153. 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 CFR Sec. 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.<SUP>378</SUP> 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.<SUP>379</SUP> 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.
---------------------------------------------------------------------------

    \378\ See Implementation of Section 309(j) of the Communications 
Act--Competitive Bidding, PP Docket No. 93-253, Fifth Report and 
Order, 59 FR 37566 (July 22, 1994); 9 FCC Rcd 5532, 5581-84 (1994).
    \379\ The FCC's Personal Communications Services (PCS) 
Entrepreneurs' Block (C Block) auction began on December 18, 1995 
and closed on May 6, 1996. The reauction for 18 defaulted PCS C 
Block licenses commenced on July 3, 1996 and was completed on July 
16, 1996.
---------------------------------------------------------------------------

    154. 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.<SUP>380</SUP> Eligibility for the 493 F Block licenses is 
limited to entrepreneurs with average gross revenues of less than $125 
million. <SUP>381</SUP> There are 114 eligible bidders for the F 
Block.<SUP>382</SUP> 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 
<SUP>383</SUP> 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.
---------------------------------------------------------------------------

    \380\ See Auction of Broadband Personal Communications Service 
(D, E, and F Blocks), Public Notice, DA 96-1400 (rel. Aug. 20, 
1996).
    \381\ Amendment of Parts 20 and 24 of the Commission's Rules--
Broadband PCS Competitive Bidding and the Commercial Mobile Radio 
Service Spectrum Cap, WT Docket No. 96-59, Amendment of the 
Commission's Cellular/PCS Cross-Ownership Rule, Report and Order, GN 
Docket No. 90-314, 61 FR 33859 (July 1, 1996); 11 FCC Rcd 7824 
(1996).
    \382\ See Auction of Broadband Personal Communications Service 
(D, E, and F Blocks), Public Notice, DA 96-1400 (rel. Aug. 20, 
1996).
    \383\ 1992 Census, Table 5, Employment Size of Firms: 1992, SIC 
Code 4812.
---------------------------------------------------------------------------

    155. SMR Licensees (including paging services). Pursuant to 47 CFR 
Sec. 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.<SUP>384</SUP> 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.
---------------------------------------------------------------------------

    \384\ See Amendment of Parts 2 and 90 of the Commission's Rules 
to Provide for the Use of 200 Channels Outside the Designated Filing 
Areas in the 896-901 MHz and the 935-940 MHz Bands Allotted to the 
Specialized Mobile Radio Pool, PR Docket No. 89-583, Second Order on 
Reconsideration and Seventh Report and Order, 60 FR 48913 (September 
21, 1995); 11 FCC Rcd 2639, 2693-702 (1995); Amendment of Part 90 of 
the Commission's Rules to Facilitate Future Development of SMR 
Systems in the 800 MHz Frequency Band, PR Docket No. 93-144, First 
Report and Order, Eighth Report and Order, and Second Further Notice 
of Proposed Rulemaking, 61 FR 6212 (February 16, 1996); 11 FCC Rcd 
1463 (1995).
---------------------------------------------------------------------------

    156. 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

[[Page 58685]]

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.

4. Description of Projected Reporting, Recordkeeping, and Other 
Compliance Requirements.

    157. This order results in no additional filing requirements.

5. Steps Taken to Minimize Significant Economic Impact on Small 
Entities and Significant Alternatives Considered.

    158. 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. * * * '' 
<SUP>385</SUP> To implement Section 276(b)(1)(A), this Second Report 
and Order establishes a market-based per-call compensation rate of 
$0.284 to be paid to the independent payphone service providers (PSPs) 
for services rendered in connection with originating noncoin calls from 
payphones. 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 two potential areas that could have an 
economic impact on small businesses and small incumbent LECs: (1) the 
amount of compensation paid to PSPs, and (2) the administration of per-
call compensation.
---------------------------------------------------------------------------

    \385\ 47 U.S.C. Sec. 276(b)(1)(A).
---------------------------------------------------------------------------

    159. Amount of compensation: By adopting a market-based local coin 
rate adjusted for coin differences, we ensure that PSPs, many of whom 
may be small business entities, receive fair compensation for 
subscriber 800 and access code calls. By tying the per-call 
compensation to the market-based local coin rate, adjusted for cost 
differences, we further ensure that PSPs receive fair compensation for 
each and every completed call made from a payphone.<SUP>386</SUP>
---------------------------------------------------------------------------

    \386\ Additionally, by adopting a rate that is less than the 
$0.35 initially proposed, we are mindful of the concerns of small 
businesses that the $0.35 rate is too high.
---------------------------------------------------------------------------

    160. 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.
    161. 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.
    162. Payment of compensation: Various commenters, including small 
IXCs and paging services, proposed that the Commission reconsider the 
use of a ``caller-pays'' system.<SUP>387</SUP> We decline to revisit a 
caller-pays approach on remand, because the caller-pays system adopted 
in the Report and Order was upheld by the court in Illinois Public 
Telecomm, and reiterate that those approaches would involve greater 
transaction costs that can pose particular burdens for small 
businesses.
---------------------------------------------------------------------------

    \387\ See supra paras. 126, 132.
---------------------------------------------------------------------------

    163. 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.
    164. Report to Congress. The Commission will send a copy of the 
Second Report and Order, including this FRFA, in a report to be sent to 
Congress pursuant to the Small Business Regulatory Enforcement Fairness 
Act of 1996, see 5 U.S.C. Sec. 801(a)(1)(A). A copy of the Second 
Report and Order and this FRFA (or summary thereof) will also be 
published in the Federal Register, see 5 U.S.C. Sec. 604(b), and will 
be sent to the Chief Counsel for Advocacy of the Small Business 
Administration.

V. Conclusion

    165. We conclude in this order that as of October 7, 1997, IXCs 
must compensate PSPs for all coinless payphone calls not otherwise 
compensated pursuant to contract, including subscriber 800 and access 
code calls, 0+ and inmate calls, at the rate of $0.284 per call. We 
base this decision on the conclusion that the default rate for per-call 
compensation for these calls is the deregulated local coin rate 
adjusted for cost differences. The rate of $0.284 will serve as the 
default per-call compensation rate for coinless payphone calls for the 
first two years of per-call compensation. After the first two years of 
per-call compensation, the market-based local coin rate adjusted for 
net avoided costs is the surrogate for the default per-call rate for 
coinless calls.

VI. Ordering Clauses

    166. Accordingly, pursuant to authority contained in Sections 1, 4, 
201-205, 226, and 276 of the Communications Act of 1934, as amended, 47 
U.S.C. Secs. 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.
    167. It is further ordered that this order is effective upon 
publication in the Federal Register.
    168. It is further ordered that the September 10, 1997 Motion of 
the American Public Communications Council For Leave To File Reply 
Comments One Day Late, and the September 10, 1997 Motion of MCI For 
Leave To File An Erratum Are Granted.
    169. It is further ordered that the September 16, 1997 Motion of 
Sprint Corporation to Require Production of A Cost Study Is Denied.
    170. It is further ordered, that 47 CFR Part 64 Is amended  as set 
forth below, effective upon publication in the Federal 
Register.<SUP>388</SUP>
---------------------------------------------------------------------------

    \388\ The Commission finds, for the reasons set forth in para 
.3, supra, that good cause exists for the effective date to be less 
than 30 days after publication in the Federal Register.

---------------------------------------------------------------------------

[[Page 58686]]

    171. It is further ordered that the Commission's Office of Managing 
Director SHALL SEND a copy of this Second Report and Order, including 
the Final Regulatory Flexibility Analysis, to the Chief Counsel for 
Advocacy of the Small Business Administration.

Federal Communications Commission.
William F. Caton,
Acting Secretary.

List of Subjects in 47 CFR Part 64

    Communications common carriers, Operator service access, Payphone 
compensation, Telephone.

Rule Changes

    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 64.1300 (c) and (d) are revised to read as follows:


Sec. 64.1300  Payphone compensation obligation.

* * * * *
    (c) In the absence of an agreement as required by paragraph (a) of 
this section, the carrier is obligated to compensate the payphone 
service provider at a per-call rate equal to its local coin rate less 
$0.066 at the payphone in question.
    (d) For the initial two-year period during which carriers are 
required to pay per-call compensation, in the absence of an agreement 
as required by paragraph (a) of this section, the carrier is obligated 
to compensate the payphone service provider at a per-call rate of 
$0.284. After this initial two-year period of per-call compensation, 
paragraph (c) of this section will apply.

    Note: This attachment will not be published in the Code of 
Federal Regulations.

Attachment B--Parties Filing Comments in Response to Payphone Remand 
Public Notice

1. Air Touch Paging (``AirTouch'')
2. American Public Communications Council (``APCC'')
3. America's Carriers Telecommunications Association (``ACTA'')
4. AT&T Corp. (``AT&T'')
5. Cable and Wireless, Inc. (``CWI'')
6. Communications Central, Inc. (``CCI'')
7. Competition Policy Institute (``CPI'')
8. Competitive Telecommunications Association (``CompTel'')
9. Excel Telecommunications, Inc. (``Excel'')
10. Frontier Corporation (``Frontier'')
11. General Communication, Inc. (``GCI'')
12. Inmate Calling Services Providers Coalition (``Inmate'')
13. International Telecard Association (``ITA'')
14. LCI International Telecom Corp. (``LCI'')
15. MCI Telecommunications Corporation (``MCI'')
16. MIDCOM Communication, Inc. (``MIDCOM'')
17. NATSO, Inc. (``NATSO'')
18. PageMart Wireless, Inc. (``PageMart'')
19. Paging Network, Inc. (``PageNet'')
20. Peoples Telephone Company, Inc. (``Peoples'')
21. Personal Communications Industry Association (``PCIA'')
22. RBOC/GTE/SNET Payphone Coalition (``RBOC'')
23. RCN Telecom Services, Inc. (``RCN'')
24. Software Defined Network Users Association (``SDN'')
25. Sprint Corporation (``Sprint'')
26. Telaleasing Enterprises, Inc. (``TEI'')
27. Telecommunications Resellers Association (``TRA'')
28. Teleport Communications Group Inc. (``Teleport'')
29. United States Telephone Association (``USTA'')
30. WorldCom, Inc. d/b/a LDDS WorldCom (``WorldCom'')

    Note: This attachment will not be published in the Code of 
Federal Regulations.

Attachment C--Parties Filing Reply Comments to Payphone Remand Public 
Notice <SUP>389</SUP>
---------------------------------------------------------------------------

    \389\ The following parties have submitted letters to the 
Commission, which are treated as informal comments and considered 
part of the record in this proceeding: Borden, Champion, and Sitel.
---------------------------------------------------------------------------

1. Air Touch Paging (``AirTouch'')
2. American Public Communications Council (``APCC'')
3. America's Carriers Telecommunications Association (``ACTA'')
4. Arch Communications Group (``Arch'')
5. AT&T Corp. (``AT&T'')
6. Cable and Wireless, Inc. (``CWI'')
7. Competition Policy Institute (``CPI'')
8. Competitive Telecommunications Association (``CompTel'')
9. Consumer Federation of American and Consumer Action (``CFA'')
10. Excel Telecommunications, Inc. and Telco Communications Group, 
Inc. (``Excel'')
11. Frontier Corporation (``Frontier'')
12. GE Capital Communications Services Corporation (``GECCS'')
13. General Communication, Inc. (``GCI'')
14. Illinois Public Telecommunications Association (``IPTA'')
15. Inmate Calling Services Providers Coalition (``Inmate'')
16. International Telecard Association (``ITA'')
17. IPSP Ad Hoc Committee for Consumer Choice (``IPSP'')
18. MCI Telecommunications Corporation (``MCI'')
19. MIDCOM Communication, Inc. (MIDCOM)
20. Oncor Communications (``Oncor'')
21. PageMart Wireless, Inc. (``PageMart'')
22. Paging Network, Inc. (``PageNet'')
23. Peoples Telephone Company, Inc. and Communications Central, Inc. 
(``Peoples'')
24. Personal Communications Industry Association (``PCIA'')
25. RBOC/GTE/SNET Payphone Coalition (``Coalition'')
26. RCN Telecom Services, Inc. (``RCN'')
27. Sprint Corporation (``Sprint'')
28. Telaleasing Enterprises, Inc. (``TEI'')
29. United States Telephone Association (``USTA'')
30. WorldCom, Inc. d/b/a LDDS WorldCom (``WorldCom'')

[FR Doc. 97-28614 Filed 10-29 97; 8:45 am]
BILLING CODE 6712-01-p