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

THE PAYPHONE MARKETPLACE

11. According to the record in this proceeding, the payphone industry has the potential to be very competitive. Entry into the payphone business appears to be easy. The ability to purchase a payphone, secure a location contract, obtain a payphone line from the LEC, and maintain the payphone are, together, the minimal technical requirements to enter into the payphone business. In addition, payphone lines are part of the tariffed offerings of local exchange carriers and, in some jurisdictions, only a simple business line is required to the payphone service. As contracts come up for renewal, or as location providers find it economical to put in new payphones, PSPs and interexchange carriers ("IXCs") routinely make themselves available to negotiate new agreements among themselves and the location provider.

     

12. A payphone can be removed and used at another location, which facilitates entry and exit. If a PSP can easily redeploy its assets, it will be more willing to place a payphone in response to a small increase in price, because the risk of such placement is lower. In addition, there appear to be no significant scale or scope economies or network externalities that would impede entry of new firms. As a result, barriers to entry appear to be very low. In fact a large number of firms, both large and small, have entered the industry since it was initially opened to competition in 1984, and those firms have provided competition in at least some segments of the payphone market.

     

13. The competition we observe today, however, has been significantly distorted by government regulation of prices, regulatory barriers to entry and exit, as well as by significant subsidies from other telecommunications services. Regulated prices prevent the market from operating efficiently to deploy payphone facilities. Moreover, some states currently prohibit the provision of payphone service by any entity other than the incumbent LEC. Removing these types of entry and exit restrictions is a necessary step toward allowing competitive forces to guide both the deployment of payphones and the setting of prices for payphone services.

     

14. Even after such regulatory barriers are removed, there are three structural reasons why, at least initially, the full benefits of competition may not be realized by all segments of the payphone market. First, independent PSPs currently rely on LECs for basic payphone services. LEC participation both in providing payphones to the public and also providing the underlying tariffed payphone services to independent PSPs may give LECs the incentive and the potential ability to unfairly act to the detriment of their PSP competitors and to act in other anti-competitive ways against PSPs. However, by implementing safeguards, we intend to ensure that LECs cooperate fully in the provision of any necessary payphone services and do not otherwise restrain competition, as long as LECs remain the monopoly providers of these services.

     

15. Second, there are certain locations where, because of the size of the location or the caller's lack of time to identify potential substitute payphones, no "off premises" payphone serves as an adequate substitute for an "on premises" payphone. In such locations, the location provider can contract exclusively with one PSP to establish that PSP as the monopoly provider of payphone service. Absent any regulation, this could allow the PSP to charge supra-competitive prices. The location provider would share in the resulting "locational rents" through commissions paid by the PSPs. To the extent that market forces cannot ensure competitive prices at such locations, continued regulation may be necessary. Payphones in many locations are likely to face a sufficient level of competition from payphones at nearby locations to ensure that prices are at the competitive level. As a result, we believe that payphones at such locations are unlikely to need additional scrutiny.

     

16. Third, for competitive markets to work properly, it is essential that consumers have full information concerning the choices available to them. Information on prices for payphone service is of primary importance. The instant Report and Order concerns two different types of consumers who need to be informed of the charges they will face: (1) consumers who choose to use a payphone for local, 0+, or access code calls, and (2) consumers who contract with an IXC for the ability to receive subscriber 800 calls. Although we have no evidence in the record that the current disclosure of local coin rates are inadequate, our past experience requires us to ensure that such disclosures, including, at a minimum, the posting of the local coin rate, are effective in communicating necessary cost information to consumers. We look to the states to review their regulations and modify them to ensure the adequacy of the disclosure. Consumers thus will have the information available to them at the time they decide to make a call from a payphone.

     

17. As discussed more fully below, the PSP will be permitted to levy a charge each time a caller dials a subscriber 800 number. We conclude that the charge must be paid directly by the IXC, although the carrier may pass it through to the 800 subscriber, either on a per-call basis, or in the form of higher per-minute rates. Once it is possible to track subscriber 800 calls, a competitive market may pass these costs along in the same manner as they are incurred -- on a per-call basis -- to the called customer. If charges are not passed on in this manner, the called party's incentives for accepting or declining a particular call will be distorted. IXCs also have the option of blocking subscriber 800 calls from payphones, if they do not want to pay the per-call payphone compensation charge.

     

18. Aside from these three structural concerns, we recognize that the payphone industry has not operated without the entry and exit restrictions and subsidies that currently exist. When these subsidies are terminated and barriers are removed, other structural problems or market imperfections may develop that would mitigate the benefits of a competitive market. However, our continued monitoring of the marketplace will ensure that the rules we adopt will lead to both competitive prices for payphone service and an efficient supply of payphones.

     

19. One of the goals of Section 276 is the deployment of payphones to benefit the "public health, safety and welfare." The competitive marketplace, however, will not always lead to an adequate supply of payphones in areas where they are not economically viable. For this reason, we conclude that public interest payphones should be maintained, although we define the term narrowly to exclude those payphones that would be provided through the normal workings of the marketplace. Our conclusions regarding public interest payphones will ensure that there will be an efficient supply of payphones, although we recognize that the states are better equipped to determine where these public interest payphones should be placed. In addition, by ensuring that PSPs receive the benefits of their payphone investments, these PSPs will compete to place additional payphones in a variety of geographic areas. Therefore, public safety will be enhanced because of requirements that emergency access be available from all payphones at no cost the caller. This increased emergency access from payphones is consistent with the Commission's proposals to ensure telephone compatibility with enhanced emergency calling systems. In sum, we believe that the increased access, free of charge to the caller, to emergency calling, telecommunications relay service calls for the hearing disabled, and dialtone generally, may be one of the most significant benefits of the compensation approach we adopt in this Report and Order.