II. Background

III. Issues
The Payphone Marketplace
Compensation for Each and Every Completed Intrastate and Interstate Call Originated by Payphones
1. Payphone Calls Subject to this Rulemaking and Compensation Amount
2. Entities Required to Pay Compensation
3. Ability of Carriers to Track Calls from Payphones
4. Administration of Per-Call Compensation
5. Interim Compensation Mechanism

Reclassification of LEC-Owned Payphones
1. Classification of LEC Payphones as CPE
2. Transfer of Payphone Equipment to Unregulated Status
3. Termination of Access Charge Compensation and Other Subsidies
4. Deregulation of AT&T Payphones

Nonstructural Safeguards for BOC Provision of Payphone Service

Ability of BOCs to Negotiate with Location Providers on the Presubscribed InterLATA Carrier

Ability of Payphone Service Providers to Negotiate with Location Providers on the Presubscribed IntraLATA Carrier

Establishment of Public Interest Payphones

Other Issues
1. Dialing Parity
2. Letterless Keypads on Payphones
3. Oncor Petition

IV. Procedural Matters
1. Petitions for Reconsideration
2. Paperwork Reduction Act Analysis
3. Regulatory Flexibility Act Analysis

Conclusion

Ordering Clauses

Appendix A
Text of Section 276
Appendix B
List of Parties Filing Comments
Appendix C
List of Parties Filing Replies
Appendix D
Immediate Rules Adopted by This Order
Appendix E
Rules Adopted by This Order
Appendix F
Interim Compensation Obligations

ABILITY OF BOCs TO NEGOTIATE WITH LOCATION PROVIDERS ON THE PRESUBSCRIBED INTERLATA CARRIER

208. Section 276(b)(1)(D) of the 1996 Act directs the Commission to eliminate the court-ordered competitive barrier prohibiting the BOCs from participating in the selection of presubscribed interLATA carriers to their payphones, unless we find such activity to be contrary to the public interest. While independent payphone service providers, as well as non-BOC LECs, may receive a portion of the commissions from IXCs on interLATA operator service calls using the presubscribed carrier to their payphones, the BOCs do not receive any revenues directly from these calls. At the same time, BOCs have received subsidies from local access services for their payphone operations, which have not been available to independent payphone service providers. Section 276 promotes competition for the provision of payphone services by directing the elimination of both these market-distorting factors.

      

     1.Is BOC Ability to Negotiate Presubscription in the Public Interest?

     a. The Notice

209. Under Section 276(b)(1)(D) of the 1996 Act, the Commission is to "provide for Bell operating company payphone service providers to have the same right that independent payphone service providers have to negotiate with the location provider on the location provider's selecting and contracting with, and, subject to the terms of any agreement with the location provider, to select and contract with, the carriers that carry interLATA calls from their payphones, unless the Commission determines in the rulemaking pursuant to this section that it is not in the public interest." The legislative history of Section 276 states that the location provider "has the ultimate decision-making authority in determining interLATA services in connection with the choice of payphone providers."

      

210. In the Notice, the Commission sought comment on whether the BOCs should be permitted to select and contract with the interLATA carriers that carry interLATA traffic from BOC payphones. The Commission sought comment on whether the ability to select the interLATA carrier serving their payphones is likely to permit the BOCs to behave anticompetitively in the payphone market in the absence of safeguards to prevent cost misallocations and discrimination. Similarly, the Commission sought comment on whether the structural and accounting safeguards mandated under Sections 271 and 272 of the 1996 Act, and any Commission rules implementing these safeguards, are sufficient to prevent anticompetitive abuses. The Commission also sought comment on to what extent a BOC not authorized to provide in-region interLATA service under Section 271 of the 1996 Act should be allowed to participate in the selection of the interLATA carrier, especially if the BOC has a non-attributable interest in the interLATA carrier, such as an option to purchase or an agreement to merge.

      

     b.Comments

211. The RBOCs and Ameritech argue that the Act specifically directs the Commission to allow the BOCs to negotiate presubscription carriers for their payphones unless the Commission makes a finding that such authority is contrary to the public interest. Other commenters, however, argue that the Commission should grant this authority only if and when it can affirmatively conclude that allowing the BOCs to negotiate would be in the public interest. Oncor additionally asserts that consideration of this issue is premature until such time as the Commission has adopted rules addressing other requirements of the 1996 Act, including those governing interconnection rights, and the authority of BOCs to provide in-region interLATA service.

      

212. The RBOCs assert that granting them equal rights with the independent PSPs to negotiate presubscription for their payphones promotes the public interest. The RBOCs argue that an essential assumption underlying the 1996 Act is that competition is in the public interest, and it is therefore in the public interest to allow the them to compete against the independent PSPs with respect to presubscription of their payphones. The RBOCs assert that such authority is critical to establishing market parity and increasing competition between BOC and non-BOC PSPs. The RBOCs and Ameritech state that under the current rules, they are at a competitive disadvantage due to the inability to offer "one-stop shopping" to location providers who wish to deal with a single entity for equipment, local service and toll service. The RBOCs also argue that the existing presubscription restriction denies consumers the benefits of true competition by preventing them from aggregating interLATA and intraLATA traffic in order to negotiate the best possible rates from interLATA carriers, while allowing the independent PSPs to do so. Additionally, the RBOCs and Ameritech contend that if they are denied the equal opportunity to negotiate interLATA carriers, while simultaneously being stripped of existing payphone-supporting subsidies, the public will be harmed by the likely reduction in the number of payphones they provide. Finally, the RBOCs and Ameritech assert that granting them equal opportunity to choose the carrier for their payphones would serve to protect consumers from price-gouging carriers, since they have a strong interest in protecting the reputation and brand name recognition of their payphones.

      

213. Other commenters, including state regulatory agencies, agree that increased competition resulting from authorizing the BOCs to negotiate for presubscription of their payphones would, standing alone, be in the public interest. Many non-LEC commenters, however, also express concern that such authority would present serious risk of exclusionary conduct by the BOCs, which would be contrary to the public interest.

      

214. Many of the commenters expressing concern about the BOCs' ability to act anticompetitively if allowed to negotiate presubscription carriers with location providers pointed to the BOCs' 80 percent or greater share of the payphone units in their respective regions. These commenters argue that this high share of the payphone market will allow the BOCs to aggregate large volumes of traffic in order to extract concessions from the IXCs (in the form of either lower rates or higher commissions), not available to the independent PSPs, and which in turn could be used to extend their share of the payphone market. AT&T states that BellSouth, US West and GTE have already contacted AT&T and other IXCs concerning the possibility of entering into contracts for the delivery of 0+ interLATA service from their companies' entire base of payphones. Some of these commenters contend that the ability to aggregate their volumes and direct them to a single carrier would allow the BOCs to exercise a degree of control in the interLATA market prior to being authorized to provide interLATA service pursuant to Section 271 of the 1996 Act. WorldCom also identifies the BOCs' exclusive control over their line-based 0+ calling cards as an additional basis for leveraging the location providers selection of the presubscribed IXC.

      

215. Some commenters, including the IXCs, assert that the BOCs should not be allowed to negotiate for presubscription of their payphones at least until they satisfy the requirements for entering the interLATA market pursuant to Section 271 of the 1996 Act. These commenters argue that until the BOCs face significant competition in the local exchange market, they will be able to subsidize commission payments to location providers with regulated service revenue and, thus, behave anticompetitively in the payphone market. Some commenters also assert that the BOCs could be expected to leverage the market power they currently possess, both in the payphone market and local telephone markets, to inhibit the development of competition in the payphone market.

      

216. The RBOCs contend that the payphone market is competitive and that they do not, and cannot, exercise market power in the payphone industry. While acknowledging that they have between 60 and 80 percent of the payphone units in their respective regions, the RBOCs assert that this is not an appropriate measure of market share or market power. BellSouth argues that market share measurements based upon number of payphone units are misleading because a significant portion of the BOC payphones are non-competitive or semi-public payphones producing below market-level revenues, while the independent PSPs have targeted high volume locations. BellSouth asserts that within the most competitive market segments, market share numbers actually indicate competitive parity. BellSouth submitted estimated market share data for states within its region stating that, while independent PSPs have only 39 per cent of the payphone units, they have almost 55 per cent of the public payphone revenues, compared with BellSouth's 45 per cent. GPCA disagrees with the market share data submitted by the BOCs, including their exclusion of semi-public payphones while including small-business-self-supply payphones (payphone sets which permit small businesses to self-supply payphone service) in the independent payphone providers' market share.

      

217. The RBOCs also assert that the payphone market has very low entry barriers, so that any efforts to exclude competition would be futile. Information submitted by BellSouth states that, within its region, no state has fewer than 107 certificated independent PSPs, while two states (Florida and South Carolina) each have more than one-thousand independent PSPs. BellSouth and Ameritech contend that existing nonstructural and structural safeguards are adequate to protect against attempts to leverage market power in local telephone service or to engage in discriminatory conduct. BellSouth also argues that until a BOC is allowed to offer in-region interLATA service, interexchange service will be acquired by the BOC PSPs from a separate affiliate, making subsidization easily detected. Ameritech contends that Congress has specifically resolved this issue by both granting BOCs equal rights with non-BOC PSPs to participate in the selection of carriers for its payphones and granting them the right to provide interLATA service themselves. Thus, Ameritech argues, Congress has determined that the promotion of one's own affiliated interLATA services, whether done by a BOC itself or a through a separate pay telephone operation, is not to be condemned as discrimination. BellSouth and Ameritech also assert that the location provider's ultimate control in selecting the PSP will act as a check on a BOC's ability to exercise market power.

      

218. Many commenters urging against authorizing BOC presubscription rights also propose options for minimizing the anticompetitive potential should the Commission decide to approve that authority. As noted above, several of these comments assert that granting BOCs the ability to presubscribe their payphones should be delayed at least until the BOCs are faced with competition in the intraLATA market. Other commenters argue that the Commission should require structural separation between the BOCs' carrier services and their payphone services. Peoples supports giving BOCs the freedom to select the interLATA carrier serving their payphones, but only if they offer payphone service from a structurally separate subsidiary. California PUC expresses concern as to whether existing nonstructural safeguards provide sufficient protection against anticompetitive behavior by the BOCs, but contends that Commission oversight in the form of reporting requirements on the BOCs with respect to implementation of nondiscriminatory payphone service should provide adequate notice of anticompetitive abuses. To deter such abuses, California PUC asserts that the states should be given authority to prevent BOCs from giving more favorable interLATA rates to their own payphone operations or other similar anticompetitive behavior.

      

219. The RBOCs contend that the Commission need not adopt rules in addition to the structural and accounting safeguards mandated under Sections 271 and 272 of the 1996 Act in order to prevent them from engaging in cross-subsidization or other anticompetitive conduct with respect to their payphone activities. Ameritech asserts that the Commission has incorrectly assumed that the nondiscrimination provisions of Section 272 of the 1996 Act will apply to the BOCs' participation in the choice of interLATA carrier at BOC payphones. It argues that it will not be the network part of the BOC that will be selecting the interLATA carrier, but the entity that owns the payphones -- which by that time will have gone through the nonstructural separation required by Section 276. Ameritech contends that the payphone entity will not be required to maintain separation from the BOC subsidiary providing in-region interLATA services, and therefore there will be no Section 272 rule against discrimination applicable as between the payphone operation and the interLATA separate subsidiaries.

      

220. Some commenters propose limitations designed to prevent the BOCs from leveraging their high payphone interLATA volume in order to obtain rates not available to independent PSPs. APCC contends that if the Commission decides to grant the BOCs the ability to presubscribe their payphones, then the Commission should also adopt rules requiring any independent PSPs aggregating at least one-third of the non-LEC payphone volume in a region to qualify for the lowest rates made available by a carrier to a competing BOC. CPA and GPCA argue that the Commission should consider placing a limit on the volume of calls that must be aggregated to receive an IXC's highest available commission level for 0+ interLATA calls. Several other commenters urge the Commission to adopt safeguards that would limit the volume of traffic that a BOC could route to a single interLATA carrier, as well as limit the BOCs' ability to aggregate payphone volume into a single commission agreement. Florida PSC contends that the Commission should adopt rules to prevent the BOCs from giving more favorable interLATA rates to their own payphone operations than to their payphone competitors.

      

221. Some commenters urging limitations on the BOCs' ability to presubscribe their payphones contend that such limitations are only needed until competition sufficiently develops to prevent anticompetitive conduct by the BOCs. Peoples asserts that structural separation would be an appropriate transitional requirement to prevent cross-subsidization and allow the development of full competition in the payphone industry, but could be phased out after the BOCs have reclassified their payphone assets and removed all of the subsidies out of their basic service rates. Other commenters argue that restrictions should apply to a BOC's ability to presubscribe itself even after being granted authority to offer interLATA service pursuant to Section 271. CompTel argues that BOC participation in the presubscription selection process should be delayed at least until after the BOC satisfies the Section 271 competitive checklist. Even then, CompTel asserts, safeguards will be necessary to prevent anticompetitive conduct by the BOCs, including (1) limiting the volume of traffic a BOC can route to a single carrier; (2) prohibiting the BOC from presubscribing itself for interLATA calls from it payphones; and/or (3) limiting the number of calls the BOCs can aggregate into a single commission agreement. NJPA asserts that once the BOCs are allowed to enter the interLATA market, they will undoubtedly direct all interLATA calls from their payphones to themselves, and accordingly asserts that the Commission should prohibit indefinitely the BOCs from negotiating presubscription for their payphones. AT&T argues that even after a BOC satisfies the Section 271 requirements, the Commission should not allow a BOC (or other LEC) to negotiate with location providers within its own region until the Commission has individually evaluated how each LEC's control over local exchange facilities and extensive payphone penetration affects its ability to behave anticompetitively.

      

222. The RBOCs assert that any regulatory restrictions which limit the portion of interLATA traffic a BOC can deliver to any particular carrier, or the number of interLATA calls that must be aggregated to receive an IXC's highest available commission level, are inefficient, anticompetitive, and unnecessary. The RBOCs contend that the public interest standard of Section 276 does not require the Commission to delay granting them presubscription negotiation authority until after they are authorized to provide in-region interLATA service pursuant to Section 271, noting that Congress chose not to link those two section of the 1996 Act.

      

223. Location providers, including airports and hospitals, maintain that authorizing the BOCs to select the interLATA carrier for their payphones could deprive the location providers of a significant source of revenues by reducing or eliminating commissions paid to them for the placement of payphones. These location providers assert that the 1996 Act establishes that location providers should retain ultimate authority to determine the carriers serving payphones on their premises, and argue that the Commission should not implement rules which would restrict the location provider's authority in this regard. Airport and hospital location providers also assert that the commissions they receive from PSPs help reduce the cost of operating these public facilities, thus allowing the BOCs to engage in conduct likely to reduce these commission levels would be contrary to the public interest. Some location providers also contend that they have a reputational interest in both the quality of service from payphones on their premises and in protecting their customers from unfair rates when using such payphones. Some location providers assert that if the Commission allows the BOCs to negotiate presubscription, then the Commission should also make clear that the location providers retain the ultimate decision concerning interLATA carriers for payphones on their premises. ACI-NA states that while it agrees with the tentative conclusion that all PSPs, including the BOCs, should be authorized to negotiate with location providers concerning the choice of interLATA carrier, the Commission should also make it clear that PSPs may not contract with any carrier over the objection of the location provider.

      

224. The RBOCs argue that location providers always retain the ultimate decision-making authority concerning interLATA carriers for payphones on their premises through their choice of payphone service provider. Ameritech states that the public interest analysis required under the 1996 Act does not protect the interests of location providers in high commission levels, especially to the extent such commissions are recouped by the carriers through higher rates to consumers.

      

     c.Discussion

225. Section 276(b)(1)(D) directs the Commission to grant the BOCs the right to negotiate with location providers for the presubscription of interLATA carriers for their payphones, unless we determine that such rights would be contrary to the public interest.

      

226. Commenters arguing that BOC participation in the selection of presubscribed interLATA carriers for their payphones is contrary to the public interest contend that the BOCs' large share of existing payphone units, as well as their continuing near-monopoly over local access service, will allow them to engage in anticompetitive conduct in the payphone services market if granted unfettered interLATA presubscription rights. The proponents of this view make two basic arguments. First, they assert that the BOCs' large share of the existing payphones will enable them to aggregate their payphone volumes, in order to obtain from IXCs lower rates (or higher commission levels) than those available to independent payphone providers. This cost advantage would, in turn, allow the BOCs to strengthen their position as the dominant players in the provision of payphone services by enabling them to either pay higher commissions to location providers, or to offer lower rates to end users. Second, these commenters argue that the BOCs will be able to use their bottleneck control over local service facilities to subsidize or discriminate in favor of their own payphone operations. We address each of these arguments separately below. We conclude, however, that the record does not support a finding that it would be contrary to the public interest to allow the BOCs to negotiate with location providers with respect to selecting and contracting for the interLATA carriers presubscribed to their payphones.

      

227. Some commenters arguing against granting the BOCs such presubscription rights assert that the BOCs will be able to solidify, or even expand, their current dominant share of the payphone services market by using their existing size to negotiate lower interexchange rates than are available to non-BOC payphone service providers. Even if we assume that the BOCs will be able to aggregate their traffic to obtain superior deals from the IXCs, however, it does not necessarily follow that this represents injury to competition or the public interest. Rather, competition is injured only if the BOCs' size somehow allows them to exercise market power. As we stated in Competition in the Interstate Interexchange Marketplace:

      

     The issue is not whether [the dominant competitor] has advantages, but, if so, why, and whether any such advantages are so great as to preclude the effective functioning of a competitive market. . . . Such advantages do not . . . mean that these markets are not competitive . . . [or] that it is appropriate for government regulators to deny the incumbent the efficiencies its size confers in order to make it easier for others to compete.

      

     Volume discounts are common in the business world, and typically represent a recognition by the seller of the economies of scale it realizes from the transaction. If these volume discounts are passed through to the end user, consumers benefit. Even if they are not passed on to consumers, the pre-existing level of competition is not injured because prices remain the same to end users. The only resulting injury is to competitors, not competition.

      

228. The issue that we must examine is whether the BOCs will be able to exercise market power if allowed to participate in the interLATA presubscription process for their payphones. We have previously defined "market power" as "the ability to maintain price above the competitive level without driving away so many customers as to make the increase unprofitable." The 1992 Joint Merger Guidelines similarly define market power as "the ability profitably to maintain prices above competitive levels for a significant period of time." There are two ways in which a competitor may profitably raise and sustain prices above competitive levels and thereby exercise market power. First, a competitor may be able to raise and sustain prices by restricting its own output. Second, a company may be able to raise and sustain prices by increasing its rivals' costs or restricting its rivals' output through its control of an essential output, such as access to bottleneck facilities, that its rivals need to offer their services.

      

229. The commenters arguing that the BOCs will be able to exercise some degree of market power each start with the assertion that the BOCs control 80 percent or more of the installed payphone base. The BOCs, however, have provided information that indicates that their individual shares of payphone units in their regions range from 62-65 percent for Pacific Bell, BellSouth and US West, to approximately 80 percent for Ameritech and Southwestern Bell. These percentage shares do not include semi-public payphones, which the BOCs assert do not accurately reflect market power, because they are typically not revenue generating and are therefore not subject to aggressively competition by the independent payphone service providers. The independent payphone service providers dispute these market share figures.

      

230. We first note that these market share figures are relevant only to the BOCs' ability to exercise market power in the provision of payphone services -- not, as contended by some commenters, to their ability to obtain interexchange rates lower than those available to the independent payphone service providers. Volume discounts are based on the volume of traffic, not on the number of phones from which such traffic originates. Thus, a more relevant examination in this regard would be the volume of traffic generated by BOC payphones, versus that of non-BOC payphones. Unfortunately, there is very limited data in the record on this point. The most pertinent information was submitted by BellSouth, showing that (excluding their semi-public payphones) they currently generate only 45 per cent of the payphone revenues in their region. It is quite clear, in any event, that the BOCs' share of the payphone market does not allow them to exercise market power with respect to the IXCs.

      

231. As to the BOCs' ability to exercise market power in the provision of payphone services, market share analysis, standing alone, does not tell us the likelihood that the dominant firm will be able to sustain supracompetitive prices. If entry into the market is sufficiently easy, it will prevent the dominant competitor from profitably maintaining prices above competitive levels. Potential entry will act as a deterrent if it would be timely, likely, and sufficient in magnitude, character and scope to counteract the anticompetitive effect of concern. In markets where entry meets these requirements, high market share generally does not raise antitrust concerns.

      

232. We find the record demonstrates that the market for provision of payphone services has very low barriers to entry, and such entry would act to prevent the BOCs from sustaining prices above competitive levels if allowed to negotiate with location providers for the interLATA carriers for their payphones. In reaching this conclusion, we start with the fact that thousands of competitors are already in the market. Most of these companies have very small operations. Indeed, the largest of these independents, Peoples, has only 40,000 payphones, less than 3 percent of the national payphone market. While we understand the arguments of the independent payphone providers that their small size makes them vulnerable to BOC predatory conduct, the existence of literally thousands of small competitors demonstrates that entry is relatively easy and does not require investment or scale levels that would deter many potential competitors.

      

233. We also note that among the non-BOC payphone service providers are AT&T, MCI and Sprint. Although these companies' presence in the payphone market is currently small, at least relative to the BOCs, these companies certainly have the financial resources to make an aggressive expansion of their payphone operations. We believe that this would be particularly likely if, as at least one IXC commenter suggests, the BOCs attempt to use their current market share to squeeze excessive concessions from the IXC providers.

      

234. We also find that any ability that the BOCs might have to raise prices to end users above competitive levels is severely restricted by the ability of end users to dial around the presubscribed interLATA carrier. TOCSIA requires, and will continue to require, open access for such calls at payphones. Peoples estimates that 19.4 per cent of the calls originated by its payphones are either access code calls (6.5 per cent) or subscriber 800 calls (12.9 per cent). A sustained effort by the BOCs to pass on monopoly price levels to consumers would certainly induce more end users to take advantage of this alternative.

      

235. As noted above, the second way in which a competitor can sustain supracompetitive prices is through the control of a bottleneck facility. We recognize that for the immediate future, the BOCs will continue to retain effective control over local access facilities. Accordingly, we are concerned about any potential ability the BOCs may have to leverage that market power in favor of their payphone operations.

      

236. One way in which a BOC might be able to leverage its market power over local access facilities is by discriminating in favor of its own payphones in the provision of such services. For example, a BOC could discriminate against its payphone services competitors by providing them with poorer quality interconnection to the BOC's local network than it provides to its own payphone operations, or could unnecessarily delay satisfying its competitors' requests to connect to the BOC's local network or with respect to repair services. To the extent that a BOC can thereby raise its rivals' costs of doing business, or damage its rivals' reputation for quality service, the BOC may be able to raise its own payphone service rates. Alternatively, some commenters have asserted that the BOCs will attempt to leverage their control over local access facilities by subsidizing their payphone operations from basic exchange and exchange access revenues. As addressed above, Section 276(b)(1)(B) of the 1996 Act requires the elimination of all such subsidies. Improper allocation of costs may allow a BOC to recover costs incurred in its payphone operations from subscribers to the BOC's regulated exchange services, potentially harming such captive subscribers of local services and providing the BOC's payphone operations with an unfair advantage over its competitors.

      

237. We conclude, however, that the nonstructural and accounting safeguards we are requiring with respect to the BOCs' payphone operations are sufficient to deter such abuses, or to allow the Commission to identify abuses of they occur. As discussed above, we are applying all Computer III and ONA nonstructural and accounting safeguards to the BOCs' provision of payphone services, and requiring that any basic services provided by a BOC to its own payphone operations be available on a nondiscriminatory basis to other payphone providers. In particular, we are requiring each BOC to file an initial CEI plan describing how it intends to comply with the Computer III and ONA equal access parameters and nonstructural safeguards for the provision of payphone services, including a description of how each BOC will comply with the requirements for nondiscrimination in the quality of service, installation, and maintenance. In connection with our discussion of these safeguards, we previously stated our conclusion that they provide an appropriate regulatory framework to ensure that BOCs do not engage in improper subsidization or discriminate in the provision of services required by their payphone competitors. We also note that such payphone competitors may file a complaint to the Commission if they believe a BOC has failed to satisfy its obligations under these provisions.

      

238. For the reasons stated above, we decline to adopt the recommendation of commenters asserting that the risk that the BOCs will seek to leverage their control over local access facilities requires us to mandate structural separation of the BOCs' payphone operations before allowing them to participate in interLATA presubscription for their payphones. As discussed, we have previously found that Computer III-type nonstructural and accounting safeguards generally to be effective in deterring improper allocation of costs and discrimination. Moreover, we find that the statutory language clearly reflects a Congressional determination that structural separation of the BOCs' payphone operations from their core business is neither necessary nor appropriate. Section 276(b)(1)(C) specifically directs the Commission to "prescribe a set of nonstructural safeguards for Bell operating company payphone service to implement" the non-subsidization and non-discrimination provisions of Section 276(a). We note that Congress has, where it deemed necessary, prescribed structural separation requirements as a precondition to BOC entry into a line of business.

      

239. Since we are relying on the nonstructural and accounting safeguards established pursuant to Section 276(b)(1)(C) to deter anticompetitive conduct, however, we believe that it is prudent to ensure that such safeguards are in place before the BOCs are allowed to participate in interLATA presubscription for their payphones. Accordingly, a BOC will not be allowed to engage in the conduct authorized by Section 276(b)(1)(D) until it has submitted and received approval of an initial CEI plan filed pursuant to Section 276(b)(1)(C). We find that this is a reasonable requirement for meeting our statutory mandate of protecting the public interest in this area.

      

240. For all of the reasons discussed above, we also decline to place restrictions on the BOCs' ability to negotiate for the selecting and contracting of intraLATA carriers presubscribed to their payphones. Most of the commenters urging such restrictions base their proposals on the BOCs' ability to exercise market power through the aggregation of interLATA traffic from their payphones. Since we find that the BOCs are unlikely to be able to exercise such market power, any restrictions on their ability to aggregate interLATA volume, or to direct interLATA traffic to a particular carrier, are unwarranted.

      

241. We are also mindful of the statement in the Conference Report that location providers retain "the ultimate decision-making authority in determining interLATA services in connection with the choice of payphone providers." We interpret this statement as a mandate to ensure that strong competition exists in the payphone industry. So long as competition exists among payphone service providers, location providers will continue to have the ultimate choice of carrier through their selection of payphone service provider. As to the location providers' argument that BOC participation in the presubscription process will lead to a reduction in, or elimination of, the commissions they receive in connection with placing payphones on their premises, we find this argument unpersuasive. We find it unlikely that the introduction of additional competition would lead to commissions being reduced below competitive levels. In this respect, we note that MCI and independent payphone service providers have asserted just the opposite -- that the BOCs will attempt to gain market share by offering location providers higher commissions which their competitors will be unable to match. We also note that, to the extent that these commissions are recouped from end users in the form of higher rates, protecting higher commissions is not a strong public interest concern weighing heavily against granting the BOCs presubscription authority.

      

242. We conclude that competition in the provision of payphone services is sufficiently strong to ensure location providers freedom of choice concerning the interLATA carriers for payphones on their premises. In addition to the conclusions expressed above, we also note that the record indicates that many long-term agreements currently exist between location providers and payphone service providers or carriers, concerning the choice of presubscribed interLATA carrier. Since these agreements will expire over time, the existence of these enforceable agreements will help to ensure the continued availability of choice in the selection of carriers. We emphasize, however, that a location provider's ability to choose should be protected from unjust and unreasonable practices which seek to foreclose meaningful choice. Such practices include unreasonable interference with pre-existing agreements between location providers and payphone service providers or carriers, or conduct which is unduly coercive of the location provider's right to choose the carrier for payphones on its premises. Such conduct may violate Section 201 of the Act, which proscribes unjust and unreasonable practices by common carriers.

      

243. As a final point, we address the argument of some commenters that BOC participation in the interLATA presubscription of their payphones would constitute the offering of interLATA service, without first meeting the requirements of Sections 271 and 272 of the 1996 Act. Section 276 of the 1996 Act, however, provides only that BOCs be given equal rights with independent payphone providers "to select and contract with, the carriers that carry interLATA calls from their payphones . . ." We interpret the phrase "select and contract with," as granting the BOCs no more than the right to participate as a contractual intermediary between a location provider and a third-party interLATA carrier. Such conduct does not amount to the provision of interLATA telecommunications service addressed under Sections 271 and 272. Moreover, we find nothing in the statutory language, or legislative history, to indicate that Congress intended the restrictions of Sections 271 and 272 to encompass the specific conduct authorized in Section 276.

      

244. BellSouth, however, has asked us to find that Section 276(b)(1)(D) allows the BOCs to engage in reselling, as well as branding, of presubscribed interLATA service to their payphones. BellSouth asserts that "Section 276 does not reference other sections of the 1996 Act but immediately does away with MFJ interLATA prohibitions (but only for RBOC payphone units . . .) unless the FCC finds interLATA rights for RBOC PSPs not to be in the public interest." While we recognize that independent payphone providers have the ability to engage in the resale and/or branding of presubscribed interLATA service to their payphones, we do not interpret the language of the 1996 Act to grant this authority to the BOCs. As explained above, the 1996 Act provides that the BOCs are to be given equal rights with independent payphone service providers "to negotiate with the location provider on the location provider's selecting and contracting with, and subject to the terms of any agreement with the location provider, to select and contract with, the carriers that carry interLATA calls from their payphones . . ." We interpret this language as envisioning the "carrier" as being someone other than the BOC to whom negotiating rights are being given. We do not find that Congress intended to allow BOCs to provide interLATA telecommunications services to its payphone customers, including through resale, other than as set forth in Section 271(b). In this respect, we note that the 1996 Act defines telecommunications service as "the offering of telecommunications for a fee directly to the public, or to such classes of users as to be effectively available directly to the public, regardless of the facilities used." We find that, for purposes of Section 276, resale by a BOC of interLATA service for its in-region presubscribed payphones, which service will ultimately be used by consumers of payphone services, lies outside of the specific rights granted by Section 276(b)(1)(D) of the 1996 Act.

      

     2. Grandfathering of Contracts

     a.The Notice

245. Section 276(b)(3) states that "nothing in this section shall affect any existing contracts between location providers and payphone service providers or interLATA or intraLATA carriers that are in force and effect as of the date of enactment" of the 1996 Act. We tentatively concluded that this section of the 1996 Act grandfathers all contracts in existence as of February 8, 1996. In addition, we sought comment on what should be considered a Section 276(b)(3) contract for purposes of Section 276(b)(1)(D), and we tentatively concluded that a Section 276(b)(1)(D) contract must be, at least, a lawful agreement where both parties intended to be bound.

      

     b.Comments

246. Each of the commenters agrees with the Commission's tentative conclusion that contracts between location providers and payphone service providers or interLATA or intraLATA carriers in force as of February 8, 1996 should be grandfathered and remain in effect. Oncor asserts that contracts entered into subsequent to February 8, 1996 should also be given full effect by the Commission.

      

247. The RBOCs argue that the Commission should specify that the grandfathering provision applies only to contracts enforceable by either party and, specifically, that a location provider's letter of authorization (which authorizes the IXC to serve a particular payphone) is not enforceable by the IXC and should therefore not be grandfathered. Sprint also asserts that a contract can only be grandfathered if it includes binding obligations applicable to both parties -- which would not include letters of authorization that do not require the location provider to subscribe to the IXC's service for any fixed length of time.

      

248. AT&T maintains that the definition of contract for these purposes should include all agreements which commit a location owner to select a particular IXC for phones at its premises. AT&T asserts that this would include lawfully executed letters of authorization. ACI-NA also contends that the Commission should adopt a broad definition of contracts to be grandfathered under the 1996 Act, including letters of authorization and term extensions, so as to not disadvantage location providers that may rely on existing presubscription agreements for a necessary income stream. CompTel also argues that location providers' letters of authorization constitute contracts that Congress intended to be grandfathered by the 1996 Act, since such agreements are typically part of mutually binding initial service orders or contracts with IXCs. AT&T urges the Commission to affirm that interference with any existing contract at any time is an unjust and unreasonable practice under Section 201(b).

      

249. Metropolitan Washington Airports Authority replies that so long as location providers have decision-making authority, it is unnecessary for the Commission to resolve the issue of whether LOAs are binding agreements grandfathered by the 1996 Act. Instead, it argues that the determination of whether specific LOAs are binding on the parties should be left to applicable state law.

      

     c.Discussion

250. We affirm our tentative conclusion that the 1996 Act grandfathers all contracts in force between location providers and payphones service providers or interLATA or intraLATA carriers which were in force and effect as of February 8, 1996. Since the statutory language is specifically limited to the date of enactment of the 1996 Act, and because there is an insufficient record to evaluate the propriety of extending that provision, we reject the argument that we extend this grandfathering protection to contracts entered into subsequent to February 8, 1996.

      

251. As the statutory language specifically limits the scope of this provision to "contracts," we leave to applicable state law the question of whether a particular agreement constitutes an enforceable contract. We note that the comments reflect a difference of opinion as to the legal obligations involved in letters of authorization ("LOAs"). It may be that this disagreement reflects the fact that LOAs may be entered into under differing circumstances, reflecting various levels of commitment and/or consideration by the parties. Accordingly, we express no opinion as to whether particular LOAs would or would not constitute contracts for purposes of this section of the 1996 Act.

      

252. We do find, however, that interference with enforceable agreements between a location provider and either a payphone service provider or an interLATA or intraLATA carrier constitutes an unjust and unreasonable practice in violation of Section 201(b) of the 1996 Act. We also find that practices involving undue coercion of location providers with respect to their choice of interLATA carrier for payphones on their premises may be found unjust and unreasonable. Such practices interfere with the efficient operation of the market by restricting choices, and thereby limit the benefits of competition.