********************************************************    
                         NOTICE
********************************************************

This document was converted from
WordPerfect to ASCII Text format.

Content from the original version of the document such as
headers, footers, footnotes, endnotes, graphics, and page numbers
will not show up in this text version.

All text attributes such as bold, italic, underlining, etc. from the
original document will not show up in this text version.

Features of the original document layout such as
columns, tables, line and letter spacing, pagination, and margins
will not be preserved in the text version.

If you need the complete document, download the
WordPerfect version or Adobe Acrobat version, if available.

*****************************************************************
                            Before the
                FEDERAL COMMUNICATIONS COMMISSION
                     Washington, D.C.  20554



    In the Matter of)
     )
      New England Public)CCBPol 96-11
     Communications Council)
   Petition for Preemption)
   Pursuant to Section 253)


                   MEMORANDUM OPINION AND ORDER

      Adopted:December 6, 1996Released:December 10, 1996

By the Commission:

                         I.  INTRODUCTION

      1.On March 21, 1996, the New England Public Communications Council, Inc.
(NEPCC) filed the above-captioned petition asking the Commission to preempt a State of
Connecticut Department of Public Utility Control (DPUC) decision that prohibits all entities,
except incumbent local exchange carriers (LECs) and certified LECs, from providing pay
telephone service in the State of Connecticut.  NEPCC's petition asserts that the DPUC's
prohibition violates section 253 of the Communications Act of 1934, as amended (the
Communications Act or the Act).

      2.The Commission placed NEPCC's petition on public notice on March 26, 1996. 
The DPUC, through the Office of the Connecticut Attorney General (Connecticut Attorney
General), filed an opposition to NEPCC's petition on March 29, 1996.  Frontier Communications
International Inc. (Frontier) filed comments supporting NEPCC's petition on April 24, 1996.  The
NEPCC responded to the DPUC's opposition by filing comments on April 25, 1996.  For the
reasons set forth below, we grant NEPCC's petition.

                         II.  BACKGROUND

A.     The DPUC Decision

      3.The DPUC originally prohibited the competitive provision of payphone services
in Connecticut in 1989.  In a separate proceeding that concluded in 1993, the DPUC continued
its prohibition.  As a result, only incumbent LECs (i.e., Southern New England Telephone
(SNET), the New York Telephone Company (NYTel), and the Woodbury Telephone Company
(Woodbury)) were authorized to provide public and semi-public coin telephone service in
Connecticut.

      4.In 1994, the Connecticut General Assembly enacted new telecommunications
legislation.  According to the DPUC, "the central premise of the legislation [was] that broader
participation in the Connecticut telecommunications market will be more beneficial to the public
than will broader regulation."  As part of its implementation of this legislation, the DPUC
initiated a third investigation into the competitive provision of payphone services.  On June 30,
1995, the DPUC adopted the DPUC Decision, which held that the competitive provision of
customer-owned, coin-operated telephone (COCOT) services in Connecticut is not consistent
with the articulated goals of Connecticut's new telecommunications legislation.  Accordingly,
the DPUC upheld its longstanding prohibition on the provision of  payphone services by non-
LECs.

      5.Consistent with the two previous payphone decisions, the DPUC Decision limits
the provision of payphone services in Connecticut to incumbent LECs and certified LECs.  The
DPUC Decision permits these carriers to provide payphone services throughout Connecticut,
both inside and outside the areas in which they provide local exchange services.  The DPUC
justified its limitation of payphone services to incumbent LECs and certified LECs by finding
that they, unlike independent payphone providers, must operate according to specific
requirements, including, for example, public service obligations and service  standards.  The
DPUC found, on the other hand, that COCOT providers that enter into contractual arrangements
with operator service providers or COCOT operators utilizing the services of full
telecommunications service providers are not subject to similar obligations or standards.

      6.The DPUC also found that, based on experience in other jurisdictions,
independent payphone providers have a poor record of compliance with state and federal
regulations and have had little success regulating themselves.  The DPUC found that "the 
COCOT industry cannot be satisfactorily relied upon to police itself."  The DPUC placed
significant weight on the Connecticut Attorney General's argument that enforcement of payphone
regulation will depend heavily on consumer complaints.  Accordingly, the DPUC, stating that
its "ability to actively police the industry and enforce such rules is questionable," declined to
adopt certification requirements and service standards for the provision of payphone services by
independent payphone providers.

      7.Finally, the DPUC declined to establish price ceilings to govern the rates charged
by independent payphone providers.  The DPUC found that such ceilings would likely
"discourage product innovation, distinction, and superiority."  Further, the DPUC held that
price ceilings would be an unreliable method of protecting consumers because such ceilings
could be legally challenged as confiscatory.

      8.After the 1996 Act became law on February 8, 1996, the NEPCC filed a petition
requesting the DPUC to reopen the record and reconsider the DPUC Decision.  On February
23, 1996, the DPUC denied the NEPCC's request.  The DPUC claimed that "the competitive
provision of pay telephone service in Connecticut is permitted" and that the DPUC Decision
complies with the 1996 Act.

B.     The Telecommunications Act of 1996

      9.Through the 1996 Act, Congress sought to establish "a pro-competitive, de-
regulatory national policy framework" for the United States telecommunications industry.  It
also sought "to accelerate deployment of advanced telecommunications services to all Americans
by opening all telecommunications markets to competition."  The 1996 Act accomplishes these
complementary goals in a number of different ways.  For example, the 1996 Act amended the
Communications Act, in part, by adding new section 253.  This section focuses on removing
barriers to entry in all telecommunications markets.  Specifically, section 253(d) requires that the
Commission preempt, to the extent necessary, the enforcement of any state or local statute,
regulation, or legal requirement that violates sections 253(a) or (b).  Section 253(a) states:

     No State or local statute or regulation, or other State or local legal requirement,
     may prohibit or have the effect of prohibiting the ability of any entity to  provide
     any interstate or intrastate telecommunications service.

Section 253(b) states that nothing in section 253

     shall affect the ability of a State to impose, on a competitively neutral basis and
     consistent with section 254, requirements necessary to preserve and advance
     universal service, protect the public safety and welfare, ensure the continued
     quality of telecommunications services, and safeguard the rights of consumers.

      10.The 1996 Act also specifically addressed pay telephone services by adding new
section 276 to the Communications Act.  The purpose of section 276 is "to promote
competition among payphone service providers and promote the widespread deployment of
payphone services to the benefit of the general public."  Section 276(b) requires the
Commission to implement several statutory requirements, including one intended to ensure that
all payphone owners are compensated for calls originating on their payphones.  Section 276(c)
states:

          To the extent that any State requirements are inconsistent with the
          Commission's regulations, the Commission's regulations on  such
          matters shall preempt such State requirements.

On September 20, 1996, we adopted new regulations implementing the provisions of
section 276.

                  III.  POSITIONS OF THE PARTIES

      11.In its petition for preemption, the NEPCC contends that the DPUC Decision
violates section 253 of the Communications Act, and that pursuant to section 253(d), the
Commission must preempt the DPUC's ban on the provision of pay telephone service by 
independent payphone providers.  Supporting the NEPCC's position, Frontier argues that
section 253(a) "flatly bars" such a prohibition on entry.

      12.  The NEPCC maintains that, by allowing only LECs to provide pay telephone
service, the DPUC Decision "prohibit[s] or [has] the effect of prohibiting" the ability of entities,
other than LECs, to provide intrastate telecommunications services in violation of section
253(a).  The NEPCC asserts that "the DPUC has been adamant in its desire to preserve local
exchange carrier monopoly in the Connecticut payphone market."  To support its assertion, the
NEPCC claims that the DPUC's prohibition is inconsistent with the new Connecticut
telecommunications legislation, which presumes competition to be in the public  interest. 
NEPCC notes that, in DPUC Docket No. 94-07-05, both SNET and the State's Consumer
Counsel supported competition by independent payphone companies.  The NEPCC also notes
that Connecticut is now only "one of two remaining states that retained an intrastate payphone
monopoly."

      13.In addition, the NEPCC contends that the DPUC's ban is a violation of
section 253(b) of the Communications Act.  The NEPCC asserts that the DPUC may impose
certain regulations under section 253(b), but that such regulations cannot condition entry into the
payphone market on the provision of local exchange services or certification as a LEC. 
According to NEPCC, even if one accepts the DPUC's holding that the ban protects the public
safety and welfare and the rights of consumers, the DPUC's exclusion of independent payphone
providers from providing payphone services is not competitively neutral.  

      14.Finally, the NEPCC asserts that the DPUC Decision should be preempted because
it is inconsistent with the Commission's Pay Telephone Order and Pay Telephone 
Reconsideration Order.  The NEPCC states that "[t]he continued prohibition by the [DPUC]
flies directly in the face of the policy adopted by the Commission in the Payphone
Reclassification Order" and section 64.1330 of the Commission's rules.

      15.The DPUC argues that this Commission should deny NEPCC's petition for
preemption.  It defends the DPUC Decision by arguing that it is consistent with the authority
reserved to the States under section 253(b).  The DPUC claims that the purpose of the DPUC
Decision is to protect consumers from the abusive practices of independent payphone providers. 
According to the DPUC, the evidence of abusive and deceptive practices by independent
payphone providers, combined with the evidence from other states that regulatory supervision of
independent payphone providers is largely ineffective, led it to conclude that the provision of
payphone service must be limited to LECs.  The DPUC  concludes that preemption of the
DPUC Decision will result in "serious and harmful abusive and deceptive practices," and will
frustrate the DPUC's protection of consumers.

                         IV.  DISCUSSION

      16.We find that the DPUC Decision violates section 253(a) of the Communications
Act and does not fall within the protected class of state regulation described in section 253(b). 
Accordingly, we preempt the enforcement of the DPUC Decision pursuant to section 253(d) for
the reasons set forth below.  We also find that the DPUC Decision is inconsistent with section
276 and our implementing rules, and therefore is preempted.

A.     Section 253 Analysis

      17.Section 253(a).  As discussed above, section 253(a) of the Communications Act
bars state governments from imposing requirements that "prohibit or have the effect of
prohibiting the ability of any entity to provide any interstate or intrastate telecommunications
service."  The Communications 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."  Payphone service is a
"telecommunications service" because it is an offering of telecommunications for a fee to the
public.  Payphones are openly available to the general public in the most public and semi-public
locations of our society, such as airports, hotels, street corners, and restaurants.  Moreover, new
section 276 of the Communications Act and the Pay Telephone Order implementing section 276
require that payphone providers be compensated fairly for all telephone calls placed using their
telephones and services.  Thus, payphone service is a telecommunications service, and state and
local regulations regarding the payphone market are subject to scrutiny under section 253 on the
basis of a claim that they "prohibit or have the effect of prohibiting" the ability of potential
competitors to provide payphone services.

      18.We conclude from the evidence presented in this proceeding that the DPUC
Decision contravenes section 253(a) of the Communications Act.  On its face, the DPUC
Decision "prohibit[s]" a certain class of telecommunications service providers, i.e., independent
payphone providers, from "provid[ing] [an] interstate or intrastate telecommunications service." 
Indeed, the DPUC characterized its policy as an "intrastate prohibition on COCOTs, with the
exception of the incumbent [local exchange carrier providers and certified LECs]."  This
statement unequivocally demonstrates the DPUC's intention to preclude independent payphone
providers from offering interstate and intrastate payphone services in Connecticut.  This
prohibition on competitive entry against a particular class of potential competitors is inconsistent
with the pro-competitive policies of the 1996 Act and violates section 253(a).

      19.Section 253(b).  We also reject the DPUC's argument that its action is permissible
under section 253(b).  The DPUC's prohibition on independent payphone providers is not
"competitively neutral," and the DPUC has failed to demonstrate that its prohibition is
"necessary" to protect the public safety and welfare or safeguard the rights of consumers, as
required by section 253(b).

      20.We conclude that the DPUC's prohibition is not competitively neutral.  First, the
DPUC's prohibition is not neutral on its face -- it singles out independent (i.e., non-LEC)
payphone providers and bars them from the payphone market unless they become certified LECs. 
The prohibition allows incumbent LECs and certified LECs to offer payphone services, but bars
another class of providers (independent payphone providers).  Moreover, the prohibition
significantly affects, if not completely eliminates, the ability of independent payphone providers
to compete for customers in the Connecticut payphone market.  We find that requiring payphone
providers to provide local exchange services in order to be eligible to offer payphone services
significantly hinders such providers relative to incumbent LECs and certified LECs.  Such a
requirement substantially raises the costs and other burdens of providing payphone services, thus
deterring the entry of potential competitors.  For example, if an independent payphone provider
were required to offer resold local exchange services in order to offer payphone services, it
would be forced to incur the costs of marketing, customer support, billing and collection, and
other supporting services. Yet, many of these services are not needed to offer only payphone
services.  For example, payphone providers typically do not advertise their payphone services,
because generally the location of a payphone is substantially more important to its commercial
success than any marketing associated with a payphone service.

      21.As an independent basis for our decision that the DPUC Decision fails to satisfy
section 253(b), we conclude that the DPUC has not demonstrated that its prohibition is
"necessary" to "safeguard the rights of consumers" or to "protect the public safety or welfare." 
As an initial matter, we reject the DPUC's claim that its prohibition is defensible because it is a
"reasonable exercise of its explicitly reserved authority."  An interpretation of section 253(b)
that a state's action merely be reasonable ignores the specific language of the statute requiring
such state action to be "necessary."  Moreover, accepting the DPUC's claim would, in effect,
require us to employ a relaxed interpretation of the term "necessary" that is inconsistent with
Congress's purpose of removing regulatory barriers to entry in the provision of
telecommunications services.

      22.The DPUC has chosen the most restrictive means available in its efforts to protect
payphone customers -- a flat prohibition against non-LECs providing payphone services within
the state.  The record, however, does not support a finding that such an extreme approach is
"necessary" to protect payphone customers.  The DPUC has not demonstrated that other methods
short of a flat prohibition are insufficient to protect payphone  customers.  A prohibition on
entry by an entire class of potential competitors is fundamentally at odds with Congress's
directive to the Commission to "promote competition among payphone service providers and
promote the widespread deployment of payphone services to the benefit of the general public." 
In fact, section 276 expressly contemplates that independent payphone providers compete with
LECs, especially BOCs.  As a general matter, Congress has decided that competitive markets
will best serve the public interest and the interests of consumers.  In these circumstances, we
conclude that the DPUC's prohibition on entry is not "necessary" within the meaning of
section 253(b).

      23.The DPUC contends that limiting the class permitted to provide payphone
services to incumbent LECs and certified LECs will protect the public welfare and consumers'
rights because LECs are subject to certification requirements and service standards.  It fails,
however, to explain how the application of certification requirements and service standards to
LECs, but not to independent payphone providers, achieves this goal.  We note that the DPUC
expressly declined to establish independent certification requirements and service standards for
COCOT providers.  In addition, the DPUC fails to address how requiring a carrier to be a LEC
in one part of Connecticut will ensure its provision of quality payphone services in another part
of the state.  While the DPUC faults the economic structure of the COCOT industry for the
abusive practices of independent payphone providers, it fails to demonstrate how this structure
is any different for LECs that provide payphone services outside their local exchanges.

      24.We distinguish the use of the term "necessary" in section 253(b) from the duty
imposed on incumbent LECs by section 251(c)(6) to provide for physical collocation of
equipment that is "necessary" for interconnection or access to unbundled network elements at the
incumbent LEC's premises.  In the Local Competition Order, we interpreted "necessary" as it
appears in section 251(c)(6) to mean "used" or "useful."  We determined that "this
interpretation is most likely to promote fair competition consistent with the purposes of the
[1996] Act and that a strict reading of the term 'necessary' in these circumstances could allow
LECs to avoid collocating the equipment of the interconnectors' choosing, thus undermining the
pro-competitive purposes of the 1996 Act."  Similarly, we distinguish the use of the term
"necessary" in section 253(b) from the standard for determining whether access to proprietary 
network elements is necessary under section 251(d)(2)(A).  In the Local Competition Order, we
declined to adopt a general rule prohibiting access to proprietary network elements, or making
access available only upon a carrier demonstrating a heavy burden of need.  In declining to
adopt such a strict standard, we interpreted "necessary" as it appears in section 251(d)(2)(A) to
mean "that [a network] element is a prerequisite for competition."

      25.Employing either of these interpretations of "necessary" in the context of 253(b),
however, could thwart the clear intent of Congress by allowing States and local governments
overly broad discretion to adopt policies or regulations that "prohibit or have the effect of
prohibiting the ability of any entity" to provide competitive telecommunications services based
upon only a minimal showing of need regarding the specified purposes described in
section 253(b).  We do not believe that Congress intended that the term "necessary" be
interpreted here in a manner that could enable the exception contained in subsection 253(b) to
swallow the general rule prohibiting barriers to entry in subsection 253(a).  Our goal in
interpreting the term "necessary" in this specific context is to foster the overall pro-competitive,
de-regulatory framework that Congress sought to establish through the 1996 Act and the
directive in section 253 to remove barriers to entry.

B.     Section 276 Analysis

      26.As explained by the Supreme Court, 

          [t]he Supremacy Clause of Art. VI of the Constitution provides
          Congress with the power to pre-empt state law.  Pre-emption
          occurs when Congress, in enacting a federal statute, expresses a
          clear intent to preempt state law, when there is outright or actual
          conflict between federal and state law . . . or where the state law
          stands as an obstacle to the accomplishment and execution of the
          full objectives of Congress. . . . [A] federal agency acting within
          the scope of its congressionally delegated authority may preempt
          state regulation.

As noted above, section 276 of the Communications Act directs the Commission to prescribe
regulations to implement several statutory provisions regarding payphone services. 
Significantly, section 276(c) states:

          To the extent that any State requirements are inconsistent with the
          Commission's regulations, the Commission's regulations on  such
          matters shall preempt such State requirements.

Thus, in section 276 Congress clearly expressed its intent that the Commission's rules regarding
payphone services preempt inconsistent state regulations.

      27.We conclude that the DPUC Decision, on its face, is inconsistent with the terms,
tenor and purpose of section 276 and our implementing rules, and therefore is preempted. 
Section 276(b)(1) addresses "competition among payphone service providers" and seeks to
promote "the widespread deployment of payphone services to the general public."  That
subsection also acknowledges that BOC payphone service providers "have the same right that
independent payphone providers have" regarding interLATA presubscription.  Connecticut bars
entities other than incumbent or certified LECs from providing payphone services.  This state
regulatory prohibition conflicts with a federal statutory regime that contemplates and promotes
competition and the provision of payphone services by independent providers.  Accordingly, we
 find that section 276 preempts the DPUC Decision.

      28.We also find that the DPUC Decision is inconsistent with our rules implementing
section 276.  In implementing section 276(b)(1)(A), we concluded that the most appropriate way
to ensure that payphone service providers receive fair compensation for each telephone call made
using their services is to let the market set the price for individual calls originating on
payphones.  For the market to efficiently set payphone rates, however, it must be free of entry
and exit barriers.  As a result, we concluded that each state should examine and modify its
regulations applicable to payphones and payphone service providers, particularly those rules that
impose market entry and exit requirements.  Accordingly, we adopted section 64.1330(a) of the
Commission's rules, requiring "[e]ach state to review and remove any of its regulations
applicable to payphones and payphone service providers that  impose market entry or exit
requirements."

      29.The DPUC Decision is flatly at odds with the regulatory scheme we established in
the Pay Telephone Order pursuant to section 276.  In that order, we noted that some states
prohibit the provision of payphone services by entities other than incumbent LECs.  We
concluded that "[r]emoving 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."  By prohibiting independent payphone providers from offering services
in Connecticut, the DPUC Decision is inconsistent with the terms, tenor, and purpose of the
Commission's Pay Telephone Order.  The DPUC Decision will impair significantly the ability
of the market to set payphone rates and, thus, thwart the objectives we set forth in the Pay
Telephone Order and that of Congress as set forth in section 276.  Therefore, consistent with
the intent of Congress expressed in section 276(c), we conclude that the DPUC Decision is
preempted by our Pay Telephone Order.

      30.The inconsistency between our Pay Telephone Order and the DPUC Decision is
further demonstrated by the fact that, on its effective date (December 16, 1996),
section 64.1330(a) of the Commission's rules will require the DPUC to review and remove
regulations that impose market entry and exit requirements.  Failure to remove the requirements
of the DPUC Decision at issue here in the course of such review would plainly conflict with the
affirmative obligation imposed by the Commission's rule.

C.     Conclusion

      31.Because the DPUC Decision violates section 253(a) and because it does not fall
within the type of state regulation permitted by section 253(b), we preempt enforcement of the
DPUC Decision pursuant to section 253(d).  On independent grounds, we also conclude that the
DPUC Decision is inconsistent with section 276 of the Communications Act and the
implementing rules we established in our Pay Telephone Order.  Thus, the DPUC Decision is
preempted pursuant to section 276.  Any future action by the DPUC regarding the provision of
payphone services in Connecticut must be consistent with section 253, section 276 and our
implementing regulations, this order, and other relevant requirements of the Communications
Act.

                       V.  ORDERING CLAUSES

      32.Accordingly, IT IS ORDERED that, pursuant to sections 253 and 276 of the
Communications Act of 1934, as amended, 47 U.S.C.  253 and 276, the Petition for
Preemption filed by the New England Public Communications Council, Inc. IS GRANTED.

      33.IT IS FURTHER ORDERED that this order and the obligations set forth herein
ARE EFFECTIVE upon release of this order.


     FEDERAL COMMUNICATIONS COMMISSION


     William F. Caton
     Acting Secretary