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(1) (a) (i) 1) a)CU -2( -Ct )/` ` ` "S^*8]SS888S_*8*.SSSSSSSSSS88___SxoxxofASoxfx]oxxxxo8.8aS8S]J]J8S].8].]S]]JA8]SxSSJB%BW8*888888888888].xSxSxSxSxSxxJoJoJoJoJA.A.A.A.x]SSSSx]x]x]x]xSxSx]SSxSxSf]xSxSxJxJxJxJx]oJoJoJoJSSSSS]]A]A]A8A]S8]o.o8o8o8o.x]x]x]SSxxJxJxJ]A]A]A]Ao8o8o8x]x]x]x]xxSoJoJN:*ZS8SSSSSS27}}S2}}S}2.SSS88SS]]8S2t__\\__ee*C_.wR)Ewn\1fy\r\]xx\r"S^2CoddȧCCCdr2C28ddddddddddCCrrrdzNdzoȐC8CtdCdoYoYCdo8Co8odooYNCodddYO,OhC2CC!CCCCCCCCCCo8dddddȐYYYYYN8N8N8N8oddddooooddoddddzoddYYYYoYYYYdddddooNoNoNCNodCo8CCC8oooddȐYYYoNoNoNoNCCCooooȐdYYNF2ldCddddddd<d<+oodCCddddCo-(1966) (NPRM); Report and Order, 11 FCC Rcd 20541 (1996) (First Report and Order); Order on  {O -Reconsideration, 11 FCC Rcd 21233 (1996) (First Report and Order on Reconsideration) (together the First  {O -Report and Order and the First Report and Order on Reconsideration are referred to as the Payphone Orders).  {O!-The Payphone Orders were affirmed in part and vacated in part. See Illinois Public Telecomm. Ass'n v. FCC,  {Of"-117 F.3d 555 (D.C. Cir. 1997) ("Illinois Public Telecomm."). The Commission addressed the issues remanded  {O0#-by Illinois Public Telecomm. in the Second Report and Order, 13 FCC Rcd 1778 (1997) (Second Report and  {O#-Order). The Second Report and Order was also appealed. On appeal, the Court remanded certain issues to the  {O$-Commission. See MCI Telecomm. Corp. et al. v. FCC, 143 F.3d 606 (D.C. Cir. 1998) (MCI v. FCC). In addition to responding to those issues remanded by the Court, this Order also addresses issues raised by parties  {OV&-that petitioned us to reconsider various decisions made in the Second Report and Order.5 For example, the Commission eliminated implicit subsidies to payphones provided by local exchange carriers"H0*t(t(ll" (LECs) that gave such companies an unfair competitive advantage compared to nonLEC payphone providers. Similarly, the Commission established nonstructural safeguards to prevent Bell Operating Companies (BOCs) from discriminating in favor of their own payphones in the provision of local service, as well as other measures designed to place all providers of payphone services on an equal competitive footing. The Commission also deregulated the local coin rate for payphone calls to allow the competitive marketplace to set fair compensation for such calls. None of these actions is implicated by the steps we take in the instant order.  X1-x3.` ` The Commission has adopted two prior orders aimed at balancing the policy objectives identified above. In these prior orders, the Commission gave primary importance  X -to Congress's objective of establishing a marketbased, deregulatory mechanism for payphone compensation, as required both in section 276 and the generally procompetitive goals of the  X -1996 Act. K {ON-ԍxSee 47 U.S.C.  276(b). See generally 47 U.S.C.  251261. Đ The Commission recognized, however, that various statutory, technological, and economic factors inhibited the development of a fully deregulated means of providing fair compensation for certain types of calls broadly referred to as "dialaround" calls for which  X-payphone owners were largely uncompensated prior to the 1996 Act. Indeed, the Telephone Operator Consumer Services Improvement Act (TOCSIA) limits the ability of payphone service providers (PSPs) to negotiate with interexchange carriers (IXCs) fair compensation for  XK-dialaround calls.KZK {OV-ԍxSee Telephone Operator Consumer Services Improvement Act (TOCSIA), Pub. L. No. 101435, 104 Stat. 986 (1990) (codified at 47 U.S.C.  226). Unlike other aspects of payphone service, such as the local coin rate, the Commission accordingly found it necessary to adopt a more regulatory approach to ensuring that PSPs are fairly compensated for these types of calls.  X-x4.` ` By way of explanation, there are typically three types of calls made from payphones: local calls; long distance calls using the long distance carrier selected by the payphone owner (referred to as the "presubscribed carrier"); and socalled "dialaround" calls, where the caller makes a long distance call using a long distance carrier other than the payphone's presubscribed long distance carrier.  Xe-x5.` ` Payphone owners receive direct payment for providing the first two categories of calls. For example, a caller making a local call deposits coins (typically $.35) and is connected to the called party. That $.35 is paid directly to the payphone owner. A caller  X -making long distance calls using the payphone's presubscribed long distance carrier dials the long distance number, and the payphone owner typically receives payment through its  X-presubscribed carrier.X K yOW%-ԍxThe payphone owner and its presubscribed long distance carrier typically will have negotiated an agreement whereby the long distance carrier pays the payphone owner some agreedupon amount or "commission" for these types of long distance calls. A related subset of this category of long distance calls"&0*t(t( '" made using the payphone's presubscribed carrier are the socalled "1+" calls where the caller makes a long distance call from the payphone by dialing "1" plus the long distance number. The payphone's presubscribed carrier carries the call and the payphone owner receives payment directly from the caller, typically through the deposit of coins. "0*t(t(ll"Ԍ X-ԙx6.` ` The third category, referred to as "dialaround" calls, consists of long distance calls that utilize a long distance carrier other than the payphone's presubscribed carrier. Generally, there are two types of dialaround calls. The first type is where a caller uses a  X-code to access his preferred long distance carrier to make a long distance call, e.g.,  X-"1/800/CALLAT&T" or "1010321." The second type of dialaround calls are known as "tollfree" calls, such as 1/800FLOWERS. In this type of call, the flower company will pay (or "subscribes" to) a long distance carrier for a tollfree number that its customers can use to make long distance calls to the company. Similar to the caller who uses 1/800CALLATT, the flower customer calling from a payphone is making a long distance call using a carrier other than the payphone's presubscribed long distance carrier. This Order addresses the question of how payphone owners should be compensated for "dial around" calls made from their payphones.  X -x7.` ` In its prior two orders, the Commission established a phasedin compensation mechanism to satisfy the statutory mandate to ensure that payphone owners are "fairly" compensated for these dialaround calls. The first phase of the compensation mechanism established a specific, percall default compensation amount to be paid to a PSP to cover the cost of an accesscode call or tollfree subscriber call in the absence of a negotiated  Xd-agreement between the PSP and the carrier handling the call. In the Second Report and  XO-Order, the Commission calculated this default amount using what might be described as a  X:-"topdown" approach.r:K {O-ԍxSee Second Report and Order, 13 FCC Rcd at 1825, 111.r That is, the Commission used the typical deregulated coin rate of $.35 as a starting point and subtracted net avoided cost differences between the provision of these coin calls and the provision of "dialaround" or compensable calls. The second phase used the same "topdown" methodology to determine a default amount but allowed the "starting point" to vary with the deregulated coin price at each individual payphone.  X-x8.` ` As detailed below, both of the Commission's orders establishing a mechanism for setting "fair compensation" for access code and tollfree calls were appealed. While  X-upholding most of the other marketopening undertakings described above, the Court in both instances found fault with the Commission's efforts to tie "fair compensation" for these dialaround or compensable calls to the deregulated prices charged by PSPs for local coin calls. In particular, the Court, in its second remand order, found that the Commission failed to adequately articulate why the price of a local call is an appropriate starting point for deriving  X-a regulated default price for "dialaround" or compensable calls.S BK {O&-ԍxMCI v. FCC, 143 F.3d at 608.S The Commission's main rationale for this approach was that it could be viewed as being fair in the sense that the" 0*t(t(ll" margin between price and incremental cost would be the same for all types of calls. Thus all types of calls could be viewed as making the same contribution to covering joint and common costs. Thus our justification for choosing $.35 as a starting point was simply that it could be  X-viewed as producing a "fair" result.  X- B.xThe 1996 Act and Market Constraints.  X_-x9.` ` In this Order, we must reevaluate the appropriate means by which to achieve  XH-the basic policy objectives expressly set out in section 276.G HK yO -ԍx47 U.S.C.  276(b).G In setting a default compensation amount, the present realizing any of these goals individually will not be the optimal means of satisfying one or more of the other goals. For example, the market for payphone services is characterized by increasing competitive pressures due, in part, to the  X -marketopening directives of our previous orders in this proceeding. " XK {O-ԍxSee Second Report and Order, 13 FCC Rcd at 1789,  24. Prior to the elimination of these subsidies, LECs were able to use revenue from the provision of local telephone service to subsidize their payphone operations, to the detriment of nonLEC payphone providers who had no such subsidy revenues to help support their payphone operations. Additional pressures  X -have arisen from payphonemarket substitutes, i.e., the rapidly growing availability of Personal Communications Service (PCS) and cellular technology, which provides some consumers with an economic alternative to payphones. In a competitive payphone market, these factors certainly may lead to a reduction in the deployment of payphones in some areas, particularly in lowvolume locations. Moreover, the number of payphones deployed across the country is inexorably related to our determination of a fair compensation amount, as we are directed to do by Congress. Simply stated, a higher default compensation amount will lead to the deployment of more payphones, and a lower default compensation amount will lead to fewer payphones, irrespective of which rate represents "fair compensation." Another example arises from the Congressional mandate that the Commission's compensation methodology be established on a "per call" basis. Because the overwhelming majority of a payphone's costs are fixed, a per call compensation plan results in the following anomaly: A  X-payphone with a low number of calls, e.g., in a rural area where few calls are made from the phone, will just barely recover its costs. Under the same plan, a payphone with a high  X-number of calls, e.g., a payphone in a busy bus station, will recover much more than its costs.  Xk-x 10.` ` We place great weight on Congress's directive to ensure that payphones remain widely deployed and available to the public at large, in part, because we believe that, if we fail to adequately compensate payphone owners for dialaround or compensable calls, the first payphones likely to be eliminated are those payphones located where consumers have the fewest real alternatives, such as in rural areas that generate relatively fewer payphone calls and innercity areas with low residential subscription rates. We also give primary importance to Congress's objective of widespread deployment because the public benefits from widespread deployment. Furthermore, the accomplishment of the remaining objectives" B 0*t(t(ll"  X-necessarily flow from widespread deployment, e.g., to ensure widespread deployment, there must be fair compensation.  X-x 11.` ` After considering the record before us and the opinions of the Court, we conclude that the existing statutory, technological, and economic constraints identified in the Commission's prior orders prevent us at this time from relying upon deregulation to determine fair compensation for accesscode and tollfree subscriber calls. Nothing in the  Xa-record before us persuades us that we should reconsider our characterization of the  XJ-competitiveness of the payphone market in the First Report and Order.m JK {O -ԍxFirst Report and Order, 11 FCC Rcd at 20611,  142.m  X -x 12.` ` In contrast to the provision of local coin call service, however, the provision of accesscode and tollfree call service is subject to statutory and technological restrictions that presently inhibit the ability of the parties to the transaction to reach a mutually agreeable  X -price, or, alternatively, to decline to transact. In particular, Congress previously mandated in section 226 of the Act that PSPs must provide to consumers using their payphones access to  X -all IXCs.M ZK yO-ԍx47 U.S.C.  226(c)(1)(B).M As a result, PSPs have minimal leverage to negotiate with these IXCs for a fair compensation amount for delivering calls to the IXCs' networks. Indeed, this concern was one of the fundamental reasons why Congress adopted the compensation provisions of section  Xf-276.JfK yO-ԍx47 U.S.C.  276(b)(1).J In its previous orders, the Commission sought to overcome this lack of bargaining power by establishing a system where the IXC could choose to "block," or not accept, calls if it determined that the price being demanded by the PSP was more than the IXC was willing to pay. We conclude in this Order, however, that the present ability of carriers to block is not sufficiently developed to ensure that allowing the default rate to float with the PSP's local  X-coin rate will necessarily result in a compensation level that is "fair," as contemplated by the  X-statute.zK {O-ԍxSee Section IV.A.3.a. below for a more complete explanation of the role of targeted call blocking in moving to a purely marketbased mechanism for dialaround compensation.  X- C.xSummary of Our Actions in this Order.  X-x 13.` ` In this Order, we switch from the topdown methodology of our prior orders to a "bottomup" methodology to establish the default percall compensation amount that shall  XR-be paid to PSPs for compensable callsX\RK {O$-ԍxSee Section IV.A.1 below, for the definition of compensable calls. We note here that section 276 specifically provides that 911 emergency and Telecommunications Relay Service (TRS) calls are not entitled to  {Oi&-receive compensation. See 47 U.S.C. 276(b)(1)(A).X that are not otherwise compensated. We refer to the compensation amount as a "default amount" to emphasize that it applies only in the absence"; 0*t(t(ll" of some other price that may be negotiated between the payphone owner and the carrier. Pursuant to the bottomup methodology adopted in this Order, we calculate an average fully distributed cost for each type of call such that the default price for each type of call is set equal to the fully distributed cost of that type of call. We call this a "bottomup" approach to connote the idea that the price of dialaround or compensable calls is calculated by "buildingup" from a starting point of zero using costs, instead of "buildingdown" from a starting point of the price of coin calls using avoided costs. In our explanation of the shift to a bottomup  X_-methodology, we respond to the concerns of the Court in MCI v. FCC, which remanded the  XJ-Commission's Second Report and Order. x  X -x 14.` ` We adjust the default percall compensation amount for dialaround or  X -compensable calls from $.284 to $.24. We make this adjustment both as a result of the new methodology we adopt and as a result of our resolution of the petitions for reconsideration of  X -the Second Report and Order.Q K {OR-ԍxSee Section IV.B. below. Q Indeed, as detailed below, this reduction in the default amount is more the result of new, more accurate cost data submitted in connection with the petitions for reconsideration than due to the switch from a topdown to bottomup  X-calculation.XZK yO-ԍxAs explained in Section IV.B.3.g(8) below, had we retained a topdown approach, the new cost data would have resulted in a default rate of $.23, which is less than the default compensation amount of $.24 that we establish in this Order. In reaching the revised default amount, we consider the cost data submitted  X-(1)for the Second Report and Order; (2)in connection with the petitions for reconsideration  Xj-of the Second Report and Order; and (3)in response to our Public Notice.jzK {O-ԍxSee Pleading Cycle Established for Comment on Remand Issues in the Payphone Proceeding, CC  {O_-Docket No. 96128, DA 981198 (rel. June 19, 1998) (Public Notice). Also, we reconsider our treatment of the costs associated with the provision of compensable calls from payphones. The moredeveloped record assures us that our current calculation of a default compensation amount more accurately reflects the costs of providing payphone service than our previous efforts.  X-x15.` ` Because our bottomup methodology assures fair compensation for the overwhelming majority of payphones, we conclude that the percall compensation methodology that we adopt in this Order will not negatively affect the current deployment of  X-payphones and thus will promote Congress's goal of widespread deployment of payphones.  X-In particular, by using a "marginal" payphone locationK yO #-ԍxA marginal payphone location is a location where the payphone operator is able to just recoup its costs, including earning a normal rate of return on the asset, but is unable to make payments to the location owner.  for purposes of calculating the default compensation amount, we have sought in this Order to ensure the continued deployment of existing payphones to the greatest practical extent. Furthermore, nothing in our Order affects or jeopardizes the states' ability to ensure that public interest payphone programs are viable and supported in an equitable and fair fashion. We therefore conclude that the percall"*. 0*t(t(ll" compensation methodology adopted herein is the best option available to implement section 276(b)(2) of the Act in light of existing technological, statutory, and economic constraints.  X-x16.` ` We believe that targeted call blocking ultimately will play a significant role in  X-bridging the gap between Congress's and the Commission's goal of a deregulatory solution  X-and the present state of payphone telephony.K {O-ԍxSee Section IV.A.3.a. (discussing the role of targeted call blocking in any move to a deregulatory solution to dialaround compensation). Should the parties that are the principal economic beneficiaries of the payphone market the payphone providers, the IXCs, and the subscribers to tollfree lines be unable or unwilling to resolve the technological issues regarding targeted call blocking, then their inaction may require us to move to a more  X1-regulatory approach. If, however, the parties are able to resolve these technological issues surrounding the availability of targeted call blocking, we believe that a move to a more marketbased approach that would comply with both statutory obligations and the Court's concerns is foreseeable. We note that IXCs currently possess the technology and receive the  X -coding digits necessary to implement a targeted call blocking mechanism. "K {O-ԍxSee Illinois Public Telecomm., 117 F.3d at 564 (recognizing that IXCs possess the necessary technology to implement targeted call blocking). We also note that the vast majority of dialaround calls transmit the appropriate coding digits. We note, however, that a small number of calls do not transmit the appropriate coding  {O-digits.  See SBC Request to Extend Limited Waiver of Coding Digit Requirements, CC Docket 96128 (Dec. 9, 1998).  X -x17.` ` Until such time, we will monitor the development of call blocking technology and act to ensure that the interests of the public as payphone users are adequately addressed. We emphasize that our finding concerning the current limitations of call blocking technology only restricts our ability to rely upon a carrierpays system in which different payphones may  XK-charge different compensation amounts, such as would be the case in the final phase of the  X4-compensation mechanism established in the Commission's previous orders.4K {O-ԍxThis final phase was scheduled to take effect in October, 1999. See Second Report and Order, 13 FCC Rcd at 1828,  117. As stated in those orders, the adoption of a fixed default compensation amount, as we do in this Order, is  X-designed in part to address the existing technological limitations relating to callblocking.(0 K {O-ԍxSecond Report and Order, 13 FCC Rcd at 17891790, 17961809, 18281831,  2328, 4167, 117122.  {O -See also In the Matter of Implementation of the Pay Telephone Reclassification and Compensation Provisions of  {O{!-the Telecommunications Act of 1996, Memorandum Opinion and Order, CC Docket No. 96128, 13 FCC 4998,  {OE"-50425045,  8689 (rel. March 9, 1998) (Coding Digits Order). x  X-x18.` ` As of 30 days after publication of this Order in the Federal Register, IXCs must compensate PSPs the default percall compensation amount for all compensable payphone calls not otherwise compensated pursuant to contract. For purposes of this Order, a compensable call includes tollfree calls, accesscode calls, certain 0+, and certain inmate" 0*t(t(ll3"  X-calls.K {Oy-ԍxSee Section IV.A.1. below, explaining the difference between these types of calls. The default percall compensation amount shall be applicable through at least January 31, 2001. We anticipate that, by this time, the parties will have had the opportunity to resolve the impediments that currently inhibit the ability of payphone owners and carriers to negotiate fair compensation for dialaround calls. If, by January 31, 2001, parties have not invested the time, capital, and effort necessary to remove these technological impediments, or we determine that other impediments to a marketbased resolution continue to exist, the  Xv-parties may petition the Commission regarding the default compensation amount, related  X_-issues pursuant to technological advances, and the expected resultant market changes.$_ZK yOj -ԍxTwo petitioners maintain that the default percall compensation amount selected on a goingforward  {O2 -basis in this Order should be designated the default percall compensation amount for the interim period of  {O -November 7, 1996 through October 6, 1997. See APCC Recon. Pet. at 18; Peoples Recon. Pet. at 9. This issue will be addressed in a separate order. Barring an unforeseen change in the market or in the relevant technology, we will look with disfavor upon any petition requesting that we modify, before January 31, 2001, either the compensation amount or compensation mechanism. We find that it will require a significant amount of time for IXCs to fully implement and deploy the necessary technologies and that it is important to provide stability to the parties, the public, and the market concerning the amount of percall compensation.  X -  f II. BACKGROUND ă  Xy-x19.` ` Both the states and the Commission historically have regulated the payphone  Xb-industry.bFK {OY-ԍxFor a brief history of the regulation of the payphone industry, see NPRM, 11 FCC Rcd 67186724,  212. At the time of the Bell System breakup, payphones were considered part of basic local telephone service, and thus, under the Modified Final Judgment, were assigned to the  X4-BOCs rather than AT&T.4K {O-ԍxSee United States v. Western Elec. Co., 569 F. Supp. 1057, 1102 n.195 (D.D.C. 1983), aff'd sub nom.  {OO-California v. United States, 464 U.S. 1013 (1983).  Soon thereafter, technological advancements resulted in the deployment of "smart" payphones that, through computerization, could perform much of the  X-control and supervision functions previously provided by the local exchange carrier. As a result of this innovation, the Commission recognized that nonLEC providers should be  X-allowed to interconnect smart payphones with the local and interstate network.\ K {O"-ԍxSee NPRM, 11 FCC Rcd at 6720,  5.\ This resulted in the advent of independent payphone providers competing with LECs in the provision of  X-payphone services.XX K yO%-ԍxAs a general matter, neither the independent payphone providers nor the LECs own the premises where a particular payphone is located. Instead, the premises owner will select which payphone provider will provide payphone service. In many instances, the payphone provider will pay the premises owner for the right to"y'0*t(t('" provide payphone service at that site. This arrangement arises in large part from the compensation that the payphone service provider receives both through local coin calls and for delivering long distance traffic to a long distance service provider. Payphones, like residential phones, typically have presubscribed long" 0*t(t(llp" distance carriers. In most instances, the presubscribed carrier compensates the PSP for the right to be the 0+ or presubscribed carrier. This compensation typically takes the form of a certain percentage of the revenue derived from long distance traffic from the payphone.  X-x20.` ` Prior to the 1996 Act, the Commission's payphone regulation focused primarily on carriers known as operator service providers (OSPs) that provided operatorassisted long distance service. Specifically, these efforts concerned the implementation of the  X_-TOCSIA.N_p {O -ԍxSee 47 U.S.C.  226.N In order to allow consumers to choose their long distance carrier, the Commission implemented additional regulations pursuant to TOCSIA. Under these regulations, a PSP may not prevent consumers from dialing around the PSP's presubscribed  X -operator service provider in order to access their preferred carrier.G  zp yOE-ԍx47 C.F.R.  64.704.G Thus, under TOCSIA,  X -PSPs may not bar outgoing access calls.!z p yO-ԍxIn addition, TOCSIA directed the Commission to determine whether independent payphone providers should receive compensation for originating from their payphones interstate calls to nonpresubscribed OSPs. 47U.S.C.  226(e)(2). At the time TOCSIA was enacted, LEC payphones recovered compensation through the carrier common line (CCL) charge for connecting payphone callers to the long distance network. Thus, the compensation provision of section 226 was directly solely at the independent PSPs. Pursuant to section 276, the  {O-Commission removed the LEC payphone subsidization mechanism. See First Report and Order, 11 FCC Rcd at 20632634,  180187.  X -x21.` ` Section 276(b)(1)(A) of the Act specifically directs the Commission to establish a plan to ensure that PSPs are "fairly compensated" for every completed call on a percall  X -basis."$ L p {O-ԍxSee 47 U.S.C.  276(b)(1)(A). The exact language 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, except that emergency calls and telecommunications  {O-relay service calls for hearing disabled individuals shall not be subject to such compensation." Id. The 1996 Act does not prescribe a particular method for achieving these goals, other than to specify that such action shall "promote competition among payphone service providers and promote the widespread deployment of payphone services to the benefit of the general  Xb-public[.]"#b8p {OK#-ԍx47 U.S.C.  276(b)(1). See First Report and Order, 11 FCC Rcd at 20566,  48; Second Report and  {O$-Order, 13 FCC Rcd at 1789,  24.  X4-x22.` ` The Commission determined in the First Report and Order that the primary"4 #0*&&ll*" economic beneficiaries of accesscode and tollfree subscriber calls, the IXCs, should be  X-responsible for compensating the PSPs.9$\p {Ob-ԍxFirst Report and Order, 11 FCC Rcd at 20584,  83. For purposes of this Order, the term "IXC" also  {O,-includes a LEC when it provides interstate, intraLATA toll service. See First Report and Order, 11 FCC Rcd at 20584 n.293.9 The Commission determined that because of section  X-226's prohibition against PSPs barring access calls to IXCs,G%Zp {Oo-ԍxSee Telephone Operator Consumer Services Improvement Act (TOCSIA), Pub. L. No. 101435, 104 Stat. 986 (1990) (codified at 47 U.S.C.  226). The effect of this statutory provision of TOCSIA is to prohibit PSPs from barring outgoing 800 calls, including tollfree calls.G PSPs were deprived of market  X-leverage to negotiate fair compensation for the delivery of such calls to IXCs.l&p {Oz -ԍxFirst Report and Order, 11 FCC Rcd at 20567,  49.l The Commission, therefore, established a default percall compensation amount to be paid by  X-IXCs to PSPs, in the absence of individual agreements.{'p {O-ԍxSee First Report and Order, 11 FCC Rcd at 20567568,  5051.{  X_-x23.` ` The Commission concluded in the First Report and Order that use of a purely  XJ-incremental or marginal cost standard for all calls would be inadequate, because PSPs would  X3-be unable to recover a reasonable share of the joint and common costs of the payphone.(&32 p {O-ԍxFirst Report and Order, 11 FCC Rcd at 20576,  68. Cf. Implementation of the Local Competition  {O-Provisions of the Telecommunications Act of 1996, First Report and Order, 11 FCC Rcd 15499, 15844856,  {O-672703 (rel. Aug. 8, 1996) (Local Competition Order) (describing total element longrun incremental cost methodology for pricing interconnection and unbundled network elements).  The Commission further determined that, because the payphone market has low entry and exit barriers and likely would become increasingly competitive, the Commission should choose a  X - marketbased, rather than a costbased, methodology to establish a default compensation  X -amount.) p {O-ԍxFirst Report and Order, 11 FCC Rcd at 20541,  70; Id. at 20568,  52 n.187; Second Report and  {Or-Order, 13 FCC Rcd at 1789, 24. hh In setting a default compensation amount, the Commission noted that, over the long term, the payphone market generally will be best equipped to set the appropriate price  X -for payphone calls.l* |p {O-ԍxFirst Report and Order, 11 FCC Rcd at 20568,  52.l The Commission found that, ultimately, the appropriate percall compensation amount for compensable calls, in the absence of a negotiated agreement, will be  X{-the amount a particular PSP charges for local coin calls.s+{p {O:#-ԍxFirst Report and Order, 11 FCC Rcd at 20577578,  7071.s The Commission based this  Xd-conclusion on its belief that the market eventually will determine the fair compensation amount for local coin calls. Because fully competitive conditions did not exist, however, the Commission established an interim compensation plan that would be in effect for two years,"6 +0*&&ll"  X-after which the market would set the amount.l,p {Oy-ԍxFirst Report and Order, 11 FCC Rcd at 20578,  72.l  X-x24.` ` In establishing an interim default compensation plan for tollfree and accesscode calls, the Commission chose a surrogate market price of $.35 per call, which was the  X-local coin call price in several states where payphone call prices had been deregulated.w-Zp {O-ԍxFirst Report and Order, 11 FCC Rcd at 20577578,  7072.w In making its selection, the Commission concluded that the costs of coin calls and dialaround  Xv-calls were "similar."q.\vp {O -ԍxFirst Report and Order, 11 FCC Rcd at 20577,  70. In the Second Report and Order, in which we set a topdown default compensation amount, we calculated, for comparison purposes, a bottomup set of figures.  {O -See Second Report and Order, 13 FCC Rcd at 1824,  108.q  X_-  XH-x25.` ` On appeal, the Court concluded that the Commission had not adequately justified its conclusion that the costs of local coin calls are similar to those of tollfree and  X -accesscode calls, and remanded the matter to the Commission.b/ p {O-ԍxIllinois Public Telecomm., 117 F.3d at 564.b The Court found evidence in the record that the costs of coin calls exceeded the costs of coinless calls, due to: (1) the  X -equipment and coincollection costs associated only with coin calls; and (2) the PSP's responsibility to pay for originating and terminating local coin calls, while being responsible  X -for paying only for originating coinless calls.e0 p {O-ԍxIllinois Public Telecomm., 117 F.3d at 56364.e  X-x26.` ` In the Second Report and Order, the Commission responded to the Court's  X{-remand. The Commission affirmed its decision in the First Report and Order to use a  Xf- marketbased, interim compensation amount for compensable calls.l1f4 p {OK-ԍxSecond Report and Order, 13 FCC Rcd at 1789,  24.l The Commission explained that it found no statement in the Court's decision that would preclude the Commission from relying on marketbased surrogates in establishing the percall  X!-compensation amount.l2! p {O -ԍxSecond Report and Order, 13 FCC Rcd at 1789,  23.l The Commission instead determined that the Court remanded  X -portions of the Second Report and Order so that the Commission could more sufficiently address information on the record regarding cost disparities between the cost of providing coin calls and the cost of providing tollfree and accesscode calls.  X-x27.` ` Responding to the Court's findings, the Commission concluded that the" X 20*&&ll"  X-appropriate percall compensation amount for dialaround calls was the marketbased local coin price, adjusted for the differences in costs between providing coin calls and compensable  X-calls.q3p {OK-ԍxSee Second Report and Order, 13 FCC Rcd at 1828,  117.q The Commission examined the underlying cost components and found that the cost to  X-PSPs of providing compensable calls was $.066 less than the cost of providing coin calls.q4Zp {O-ԍxSee Second Report and Order, 13 FCC Rcd at 1828,  117.q Based on this finding, the Commission determined that the market coin call price of $.35  X-should be reduced $.066 to arrive at a default percall compensation amount of $.284.s5p {O* -ԍxSecond Report and Order, 13 FCC Rcd at 1828,  117.s The Commission concluded that this default amount would be in effect for two years, until  X_-October 6, 1999.s6_~p {O -ԍxSecond Report and Order, 13 FCC Rcd at 1828,  117.s After two years, the percall default amount would be the marketbased  XH-local coin price, less $.066, representing the net avoided costs of a dialaround call.u7Hp {O -ԍ xSecond Report and Order, 13 FCC Rcd at 1828,  117.u  X -x28.` ` On appeal, the Court remanded portions of the Second Report and Order. The Court held that the Commission did not adequately justify the derivation of a compensation amount for coinless payphone calls. In particular, the Court held that the Commission failed  X -to explain why a marketbased compensation amount for coinless calls could be derived by  X -subtracting avoided costs from a market price charged for coin calls.S8 p {O-ԍxMCI v. FCC, 143 F.3d at 608.S By public notice  X -released June 19, 1998, the Commission sought comment on the issues remanded by the  X-Court.U94 p {Ow-ԍxSee Public Notice.U In addition, several parties filed petitions for reconsideration of the Second Report  X}-and Order.:} p {O-ԍxSee, e.g., American Alpha Dispatch Recon. Pet.; APCC Recon. Pet.; Consumer Business Coalition Recon. Pet. Additional petitioners are listed at Appendix B.  XQ-  III. THE ECONOMICS OF PAYPHONE TELEPHONY ă  X#-x29.` ` In order to explain more clearly our reasons for adopting the compensation methodology we do in this order, we briefly summarize here our understanding of the cost structure of payphones, the nature of competition among payphones, and the problems associated with designing a mechanism for allocating the common costs of payphones. " :0*&&ll"Ԍ X- A.XxPayphone Costs and Revenues . (#  X-x30.` ` Payphones offer access to a number of different services, including local coin calls, dialaround calls to access a user's preferred long distance company or a tollfree subscriber such as 1800FLOWERS, and long distance calls using a particular payphone's presubscribed IXC. For purposes of this discussion, we focus primarily on local coin calls and dialaround and tollfree subscriber calls. We generally will refer to the latter two types of calls as "dialaround or compensable calls."  X1-x31.` ` The vast majority of the costs of providing payphone service are fixed costs  X -that are common;& p yO -ԍxThe cost of facilities that are used in the production of two or more different goods or services are  {O] -frequently referred to as "common" or "shared" costs. Alfred E. Kahn, The Economics of Regulation, Principles  {O' -and Institutions 7880 (1988). Fixed costs are costs that do not vary with the quantity of goods or services  {O -produced. Dennis Carlton and Jeffrey Perloff, Modern Industrial Organization (2nd ed.) 51. (also referred to as "joint and common") to the provision of all payphone services. These fixed common costs include the capital cost of buying and installing a payphone in a particular location and certain monthly recurring costs, such as the cost of leasing the local line and monthly maintenance and overhead costs, also known as sales,  X -general, and administrative (SG&A) costs. In addition, there are certain additional  X -incremental costs<  p yO-ԍxThe incremental cost of producing a specified quantity of a service is the additional cost that a firm incurs when it expands its output of that service by that specific amount, while maintaining the production levels of all other services. When the quantity of a service equals all of the output of that service (such as coin calls), the incremental cost of that service equals all of the additional costs that are incurred due to that service being offered. In the context of payphones, the costs associated with the coin mechanism are part of the incremental costs of coin calls, because the cost of building the coin mechanism is incurred only because the payphone operator seeks to offer the service of providing coin calls. Similarly, coin collection costs and termination costs  {O-are also incremental to coin calls. Baumol, Panzar and Willig, Contestable Markets and the Theory of Industrial  {OT-Structure 67 (1982).  to the payphone provider associated with the provision of coin calls.= p yO-ԍxIn Section IV.B.3.g below, we explain our classification of these cost components. These incremental coin costs include certain fixed costs, such as the cost of the coin box, and  X-certain variable costs, such as any termination charges for local coin calls>p yOJ-ԍxFor a more thorough discussion of termination charges, see Section IV.B.3.g(2) below. and the costs of  Xh-collecting the coins from the payphone.?hp yO!-ԍxWe explain below in Section IV.B.3.d. why we do not treat the coin mechanism as joint and common, but instead as incremental to coin calls. In contrast to coin calls, the incremental cost of a dialaround or compensable call is virtually zero. This is because the payphone provider is only providing access to the IXC, and the IXC pays any costs associated with transporting and terminating a call to a called party. The fact that payphone service consists of relatively"#?0*&&ll" high fixed costs and low or zero marginal costs is important in understanding the nature of competition among payphones.  X-x32.` ` The revenue a payphone generates depends upon the volume of each type of call made from the payphone and the price of those calls. Thus, if the number of calls is held constant, an increase in the price for a particular type of call will increase the revenue of the payphone. Similarly, holding the price constant, an increase in the number of calls at a  X_-payphone will increase the payphone's revenue.  X1-x 33.` ` The profit from a payphone is simply the revenue it generates, less the costs associated with the payphone. Because payphones have significant fixed costs that must be  X -recovered, the price for each type of payphone call must exceed the marginal cost of the call@ p yO| -ԍxThe marginal cost of a call is the additional cost that the PSP incurs when the payphone is used to make  {OD -one additional call. G. Stigler, The Theory of Price, 4th ed. (1987) .  X -if the payphone is to earn a normal rate of return.+A "p yO-ԍxA payphone earns a normal return when its revenue pays for itself, including the cost of capital used to  {O-buy the payphone and all the costs associated with that payphone, e.g., upkeep and the payphone operator's time. + Stated another way, if every call is priced at the marginal cost of that call, the payphone would be unprofitable, because it would fail to recover the predominant fixed costs of providing the payphone. Because the price for each type of call must exceed its marginal cost, it is also clear that an increase in the number of any type of call will increase the payphone's profitability by contributing either to the  Xy-recovery of the payphone's fixed cost or to the payphone's profitability.}BZy|p yO-ԍxFor purposes of this discussion, we use the term "profit" to refer to profits in excess of a normal return. Such abovenormal profits are frequently referred to as "economic profit," "supranormal profit," or "monopoly  {O6-profit." Carlton & Perloff, Modern Industrial Organization , 2nd ed. 340 (1994).} x  XK- B.xCompetition Among Payphones.  X-x!34.` ` To explain the nature of competition in the payphone market, we begin by assuming that payphones can only provide coin calls. In this case, a PSP will install a  X-payphone only if it believes that the demand for coin calls will be sufficient for it to earn at  X-least a normal rate of return.Cp yO' -ԍxIt is worth noting here that many payphones currently are located where revenues from local coin calls do not generate a normal rate of return. Many such payphones, particularly those provided by LECs, were installed before the 1996 Act and as a result of subsidies or other regulatory factors that were subsequently eliminated by the 1996 Act. Accordingly, absent sufficient total revenue from coin calls and dialaround or  {OG#-compensable calls, we can expect these payphones to be removed and possibly relocated. See U S West Nov.  {O$-19, 1998 ex parte letter from B. Nugent to Magalie Roman Salas. A highly profitable payphone typically attracts the entry of"C0*&&llr"  X-additional payphones.GDp yOy-ԍxWe note that the Commission previously found that the payphone market exhibits relatively low  {OA-economic barriers to entry and exit. See First Report and Order, 11 FCC Rcd at 20547, 20570  1112, 56.  {O -We interpret this to mean that there are relatively low sunk costs associated with entry and exit. See generally  {O-First Report and Order , 11 FCC Rcd at 20547,  11. Id. at 20577,  70. The sunk cost of entry appears to consist primarily of the costs of installing a payphone, while the sunk cost of exit consists primarily of the cost of removing it. We note that the installation costs of a payphone are less than 10 percent of the cost of an  {O/-installed payphone. Thus, the sunk costs of a payphone are fairly small. See, e.g., APCC Sept. 16, 1998 ex  {O-parte letter from R. Aldrich to Magalie Roman Salas. If the payphone is not placed where it can earn a profit, it can be moved.G The resulting competition should reduce the number of calls each payphone receives and possibly reduce the price. The reduction in the number of calls  X-and any reduction in price will reduce the incumbent payphone's profits. Economic theory suggests that entry will continue to occur until the last entrant earns just a normal rate of  X-return.Ep yO -ԍx Put another way, entry will continue until no payphone can enter the market and earn at least a normal rate of return. If we assume that demand for payphone calls is uniform in a particular area and that all payphones are equally efficient, we would expect that entry of new payphones into the area would continue until all payphones earn just a normal return and no supranormal  X_-profits.|F_ p {O -ԍxSee para. 37 for a more thorough discussion of locational monopolies.| Moreover, because of the high fixed costs of a payphone, we would expect the price for each coin call to exceed its marginal cost in order for a PSP to recoup its fixed costs.  X -x"35.` ` Now, let us add to this analysis the ability of coin payphones also to provide dialaround or compensable calls and the assumption that the payphone is required to charge a set, percall compensation amount for each dialaround or compensable call. As long as this percall compensation amount exceeds the marginal cost of providing a dialaround call, we would expect existing payphones to start earning a profit. As stated in the previous paragraph, this profitability will attract more payphone entry and increase the number of payphones in the market. Maintaining our assumptions of uniform demand and equally efficient payphones, we would expect entry to continue until all payphones are just breaking even.  X-x#36.` ` This theory is complicated, however, by the diversity of the payphone market.  X-First, demand varies greatly among locations. Not only does the number of calls (i.e., quantity of demand) for particular payphone services vary from location to location, but also the elasticity of demand for particular payphone services may vary. Thus, for example, if we compared a payphone at a busy bus station with a payphone at a corner grocery, we might expect that the bus station payphone would generate a larger total volume of calls and that a higher percentage of those calls would be dialaround calls, compared to the payphone at the" F0*&&ll"  X-local grocery.  Where demand is greater than average, it is possible that some payphones might generate a greater than average number of calls and thus positive profits. This might occur in areas where it is not possible for another competing payphone to enter profitably. If this were the case, it is possible for the first payphone to continue to earn positive profits.  X-x$37.` ` A second important characteristic of the payphone market is that many of the payphone locations are controlled by owners that can limit the entry of competing payphones. For example, the owner of a busy bus station can limit the number of payphones placed on its property. In such cases, we would not expect entry to reduce the number of calls per payphone (or the price) to the point where each payphone is earning only a normal rate of  X -return. Rather, we would expect the location owner to attempt to limit entry to increase the profitability of payphones and then demand at least a share of the profits in the form of a  X -location rent. This phenomenon is frequently described as a "locational monopoly"^G p {Oe -ԍx See, e.g., AT&T Recon. Opp. at 3.^ that  X -generates location rents. Where demand is higher than average, and the premises owner can limit entry, it is possible that some payphones would generate a higherthanaverage number  X -of calls, and thus positive profits. If this were the case, those payphones could continue to earn positive profits. This profit would be split between the owner of the locational monopoly and the payphone provider. Since the owner of a locational monopoly can choose between multiple possible payphone providers, we would generally expect the owner of the  XK-locational monopoly to capture the bulk of this profit.H KZp yOV-ԍxWe note that there is a dispute in the record as to whether these commissions, or locational rents, should  {O-be treated as a cost of the payphone or a part of profit. Cf. APCC Reply at 14 with MCI Sept. 9, 1998 ex parte letter at 1016. We conclude that these locational rents should be treated as a form of profit rather than a cost. First, the opportunity to demand locational rents occurs only when a particular payphone location generates a number of calls that exceeds the breakeven number of calls, given the prices of various types of payphone calls. Second, if the price of a particular type of payphone call increases, this not only would reduce the breakeven number of calls and increase the equilibrium number of payphones, but would also increase the profit earned on all payphones already earning a profit. Presumably, the location owner would seek to extract at least part of this additional profit. Thus, it does not seem appropriate to treat locational rent as a fixed cost, since the fixed cost will vary with changes in the price of various types of payphone calls. Finally, we note that, when a payphone earns positive profits, it is not clear exactly how the payphone provider and location owner will negotiate the division of those profits. We do know, however, that an increase in competition among payphones likely will result in a greater proportion of these profits going to the locational owner. Again, it would be odd in such a situation to treat the increase in locational rents resulting from the increased compensation rate as an increase in the fixed cost of a payphone.  X-x%38.` ` While not perfectly competitive (since some payphones are earning positive"H0*&&ll"  X-profits), this payphone market may still be characterized as workably competitive.pI p {Oy-ԍxSee First Report and Order, 11 FCC Rcd at 20611,  142. Nothing in the record before us convinces  {OC-us that we should reconsider our finding in the First Report and Order concerning competition in the payphone services market. We also note that a number of states examining their payphone markets have concluded that  {O-the payphone services market is competitive. See, e.g., Public Service Commission of West Virginia, In Re  {O-General Investigation into the Payphone Market in West Virginia, Case No. 980430TGI (Jan. 4, 1999) (concluding that "market failures" were not occurring in the deregulated payphone market in West Virginia at  {O1-this time); New York Public Service Commission, Proceeding on Motion of the Commission to Review Regulation of Coin Telephone Services under Revised Federal Regulations Adopted Pursuant to the  {O-Telecommunications Act of 1996, Case 96C1174 (July 15, 1998) (stating that the number of payphones  {O -available for public use appears to be increasing in New York); Montana Public Service Commission, In the Matter of the Commission's Inquiry into Payphone Issues Arising out of the Telecommunications Act of 1996 and  {O -Subsequent Federal Communications Commission Order to Implement the Payphone Provisions of the Act, Docket No. D97.2.33, Order No. 6050 (Feb. 26, 1998) (finding that there is no evidence indicating that the payphone marketplace is failing to serve the public interest).p It is important to recognize that, where different locations have different levels of demand, some payphones will be more profitable than others. Moreover, no level of regulation (except possibly confiscatory taxation) could eliminate these profits. Thus, the existence of some payphones that earn positive profits does not mean that the market necessarily should be regulated. It is also worth noting that, where demand varies among locations, unregulated coin rates may, but need not, vary. Most importantly for purposes of this Order, no percall method of payphone compensation could eliminate these profits, because that would require creating a unique price for each and every payphone. Indeed, those payphones that are profitable without dialaround calls would still be profitable with a zero price for dialaround calls.  X -x&39.` ` In summary, we offer the following observations. First, the cost structure of payphones and the nature of payphone competition suggests that competition will occur  X -primarily through the entry of new payphones (though possibly also through competing reductions in price), which will reduce the number of calls at each payphone (or percall  X-marginJ p yO-ԍxWe use the phrase "percall margin" to refer to the difference between the price and marginal cost of a particular payphone call.) until the new entrants are just earning normal rates of return. Second, because of the fixed cost of a payphone, the price for each type of payphone call will exceed its marginal cost, even for payphones that are just earning a normal return. Third, because of variations in demand and locational monopolies, we should expect that a significant number of payphones receive larger volumes of calls than a payphone in a marginal location that is earning a normal rate of return. Thus, those payphones with high call volumes will earn positive profits, regardless of the level of compensation for dialaround calls. Fourth, we note  X-that a payphone owner will never install a payphone unless it believes that the payphone will"J0*&&lls"  X-at least earn a normal rate of return.Kp yOy-ԍxThis is only true where the payphone is being installed only for its own profitability. Many payphones are installed because they improve the profitability of the premises as a whole. For instance, many restaurants install payphones as a courtesy for their customers. Although the revenue from the calls from these payphones is insufficient to pay for the payphones, the premises owners install them (and pay the PSP) in order to increase the overall profitability of the premises. Thus, absent regulations that require payphone owners to place phones in locations where they will lose money, we should not expect to see moneylosing payphones that offset the profits earned on profitable payphones. Fifth, we observe that because the marginal cost of dialaround calls is virtually zero, any compensation amount will represent some contribution to common fixed costs or profit. Moreover, any dialaround  X-compensation amount both will enable certain marginal payphones just to break even, and contribute positive profits to already profitable payphones. In fact, even if the compensation amount were set at zero, many payphones would earn a profit. Finally, we note that any increase in the compensation amount will not only reduce the breakeven number of calls and thus increase the number of payphones, but also increase the profits generated by payphones  X -that are already profitable, (i.e., inframarginal).  X -  X -C.xPossible Market Failures Relating to DialAround Compensation.  X - Xx` ` (#  X -x'40.` ` When the Commission deregulated the price of local coin calls in the First  X -Report and Order, it based its decision, at least in part, on the low barriers to entry and exit  X-in the payphone market and the ability of customers at a particular payphone to either use  X-another payphone or decline to make the call if the coin price was deemed too high.Lxp {O-ԍx First Report and Order, 11 FCC Rcd at 20547, 20570  1112, 56. These factors, along with the experience of states that had deregulated the price of local coin calls at payphones, persuaded the Commission that it could rely on competition in the market for payphones to constrain the price of these calls. We also note that, since the adoption of the  X#-First Report and Order, a number of state commissions have concluded that the market for  X-payphone service is competitive.OM p {O-ԍxSee note 73 above.O  X-x(41.` ` The Commission at that time, however, was unwilling to deregulate immediately compensation for dialaround calls. We continue to believe that it is not yet possible to immediately deregulate the price for dialaround calls. One reason for this is that,  X-under current arrangements, the party receiving the call is unable to ascertain the price that the payphone provider is charging for the call and thus to make an informed decision on whether to accept the call. That is, technology is not currently deployed for IXCs or tollfree subscribers to selectively block calls based on the price that the PSP is charging them. An IXC or tollfree subscriber must simply elect to accept all such calls from payphones or none. Therefore, under current circumstances, a market cannot exist because the person paying the"(M0*&&llz" price is not able to decide whether or not to purchase the call based on the price that is charged.  X-x)42.` ` One possible way around this problem would be to switch to a callerpays system where callers are required to insert coins (or to use a credit card) to place dial around or tollfree calls. However, as explained in the Commission's prior orders, and again below, this approach appears to contradict congressional directives set forth in other sections of the  X_-Act.N_p {O-ԍxSee, e.g., First Report and Order, 11 FCC Rcd at 20585,  85; Second Report and Order, 13 FCC Rcd  {O -at 1844,  162. See also 47 U.S.C.  226, 228. Furthermore, a callerpays system would impose significant extra transactions costs on payphone users because they would have to either insert coins or enter another credit card number in order to make these types of calls. Therefore, it is not clear that a callerpays system would either be legal under current statutes or desirable.  X -x*43.` ` Another more promising solution to this problem would be for IXCs to develop the technological capability to selectively block dialaround calls. That is, the IXC or tollfree subscriber would need the capability to know the price that a payphone provider was charging for a call, and be able to refuse to accept calls above a specified price. It is not yet clear when IXCs will be able to deploy such technology or what such deployment would cost. Therefore, it would not be prudent at this point to announce a firm date at which deregulation might occur based on the assumption that this technology will exist at that time. We are cognizant that problems other than the lack of targeted call blocking technology must be resolved before we can move to a purely marketbased mechanism. These additional problems will need to be resolved before such a move. The existence of these additional impediments, however, does not diminish the importance of targeted call blocking technology as a critical element to any such move.  X-x+44.` ` A related point concerns the final phase of the scheme established in the Commission's previous orders, in which the default price for dialaround calls at any particular payphone was based upon the price of a coin call at that particular payphone. In these orders, the Commission did not explicitly consider whether or not such an arrangement might create incentives for a payphone provider to raise its coin rate in order to be allowed to  XN-raise its dialaround compensation amount. It may be, however, that in the absence of targeted call blocking, tying the default compensation amount to the local coin rate may, in some instances, create an incentive to raise the price of dialaround calls. this is so because  X -the IXC could not respond by selectively refusing to accept calls from that payphone.O $p {O"-ԍxSee Section IV.A.3.a. below (discussing the role of targeted call blocking in any move to a deregulatory solution to dialaround compensation).  X-"~O0*&&ll"Ԍ X- D.XxThe Common Cost Allocation Problem. (#  X-x,45.` ` Regulators have long recognized that there is no single correct method for  X-allocating common costs among regulated services.P"p {O4-ԍxSee, e.g., Paul J. Garfield & Wallace F. Lovejoy, Public Utility Economics 14041 (1964) ("[T]he allocation of joint costs to customer classes or classes of service . . . has no universal or even generally satisfactory solution, because joint costs are incapable of `accurate' or `certain' allocation among the respective types of service."). Except for the general rule that  X-regulated services should not crosssubsidize each other,Qp yO -ԍx As long as each type of call recovers its incremental costs, but no more than its standalone costs, there  {O -is no crosssubsidy. See also 47 U.S.C.  276. economic theory provides no guidelines as to how common costs should be allocated. In the absence of such guidance, regulators have generally adopted various fullydistributed cost (FDC) allocators. For example, if the common input were used to produce two separate, regulated services, one simple rule would be to split the common cost equally between the two services. An alternative rule would be to allocate the common cost in proportion to the incremental cost or  X -investment of the two services. In many cases, regulators have allocated costs on the basis of  X -relative usage.gR p {O-ԍxSee 47 C.F.R.  36.2(a). g Another approach would be to use Ramsey'sstyle pricing, which allocates the costs of the firm to the products based on the products' relative marginal cost of  X -production and price elasticities.S p {O$-ԍxSee Section IV.B.2.b. where we explain our basis for rejecting the RBOC Coalition's Ramsey'sstyle pricing mechanism.  X -x-46.` ` These alternatives demonstrate that there is no single correct way for allocating the common costs of payphones. In fact, this difficulty is exacerbated by two additional factors arising in the payphone context that regulators normally do not confront. First, telecommunications regulators are usually asked to allocate the common costs of a network of relatively fixed size designed to serve a relatively fixed number of people. Some parts of the network are unprofitable, and others are profitable. In this scenario, the regulator can choose a price for the regulated company's product such that the regulated company earns a regulated rate of return, accounting for the range of profitability within the individual units. In other words, where there is a range of profitability, and where entry and exit are very difficult, the regulator may set a single price that offsets lessprofitable units with the very profitable units. In contrast, PSPs are free to enter the market where it is profitable and to exit where it is not. Thus, we are unable to set a price that accounts for the range of profitability.  X|-x.47.` ` A second complicating factor is that section 276 of the Act mandates a  Xe-structure for recovering payphone costs, i.e., percall compensation, that does not reflect the"e S0*&&ll" manner in which most costs are incurred by payphone owners. As previously indicated, most common costs of payphones are fixed that is, they do not vary with the volume of calls. Section 276, however, requires that PSPs be compensated on a percall basis. Because a percall compensation mechanism is trafficsensitive, in order to assure that the fixed costs are covered at a low traffic area, a fixed percall compensation amount necessarily results in overrecovery of common costs for payphones in high traffic locations. It is this requirement of a percall compensation mechanism that increases the profits at the payphones that are already profitable, as discussed above. #o\  PCcXP#  X1- IV. DISCUSSION  X -TP A.xRemand Issues.  X -  X -x/48.` ` In this section, we respond to the Court's remand of the Commission's Second  X -Report and Order. We explain our basis for deciding on the appropriate compensation methodology, in light of the statutory requirements of the Act, the underlying economic structure of payphone telephony, current technological constraints, and the Court's findings in  X-MCI v. FCC.  Xh-x049.` ` We first define the scope of our compensation methodology by specifically identifying the calls that are compensable under our rules. We then explain the factors that guide our selection of a compensation methodology. Specifically, we define, for purposes of  X#-this Order, "fair compensation" in terms of the economic constructs of payphone telephony.VT#p {O-ԍxSee Section IV.A.2 below.V Applying our definition of fair compensation within the confines of the Act's directives and  X-the Court's findings in MCI v. FCC, we decline to adopt, for now, a topdown methodology to calculate the default compensation amount that uses the deregulated local coin rate as the starting point.  X-x150.` ` We then explain our return to the Commission's initial view that a bottomup  X-methodology should be used to establish a default compensation amount.YUZp {O-ԍxNPRM, 11 FCC Rcd at 6736,  38.Y We explain our finding that a bottomup methodology is currently the most equitable means of ensuring fair compensation for PSPs in light of the very real statutory, technological, and economic constraints within which we must make our decision. We emphasize again that our preference would be to rely on a fully deregulated solution for setting compensation for coinless payphone calls. As we explain, however, we conclude that there is no such solution available to us that is workable at this time. Accordingly, we examine the most appropriate methodology for calculating the cost of providing the service. We conclude that a bottomup  X -cost calculation is most reliable in light of the Court's concerns in MCI v. FCC and our reexamination of the manner in which PSPs allocate joint and common costs between local"!U0*&&ll " coin calls and compensable calls. Finally, we set forth the manner in which we apply our bottomup approach to establish a fair default compensation amount.  X-x 1.` ` Definition of Compensable Call.  X-x251.` ` As an initial matter, we specify the types of calls for which PSPs may receive the default percall compensation amount that we establish in this Order. "Compensable calls" for purposes of this Order are calls from payphones for which the payphone owner cannot receive compensation from another source.  X1-  X -x352.` ` Section 276 specifically provides that PSPs are not entitled to compensation for  X -911 emergency and TRS calls.VB p yO| -Ѝ xThe TRS enables individuals with hearing or speech disabilities to communicate with individuals who do not have hearing or speech disabilities. The Public Switched Telephone Network (PSTN) processes TRS calls as toll-free, which means the receiving TRS center pays for the call, and not the TRS subscriber. When state public utility commissions introduce 711 as a replacement for the current toll-free numbers used by the TRS centers, the PSTN will be programmed to translate 711 so that the call is routed to the state's TRS center, designated by the TRS carrier to receive calls from the calling party's location. Calls placed by the TRS center to the party desired by the TRS user, however, are charged to the TRS user by the interexchange carrier selected  {O-by the TRS user. See generally 47 C.F.R.  64.603.  Consequently, when entering the payphone business, PSPs assume the legal obligation of allowing 911 emergency and TRS calls to be made from their  X -payphones without receiving percall compensation.OW~ p {OX-ԍx47 C.F.R. 64.1300(a), (b), (c). See 47 U.S.C. 276(b)(1)(A) (exempting TRS and 911 calls from  {O"-compensation requirement). Cf. Telecommunications Relay Services, and the Americans with Disabilities Act of  {O-1990, Memorandum Opinion and Order, CC Docket No. 90571, 1998 WL 45806 (Com. Car. Bur. 1998) (continuing suspension of enforcement of TRS coin sentpaid service requirements until August 26, 1999, and the interim plan wherein, inter alia, TRS users may make local TRS payphone calls free of charge and TRS users may make toll calls that connect the TRS center with the desired party using calling cards or debit cards at rates equivalent to or less than those that would apply to coin sentpaid calls made by nonTRS users).O The term "compensable call" applies,  X -as does this rulemaking proceeding, to intrastate as well as interstate calls, by virtue of specific provisions of section 276(b)(1)(A).  Xy-x453.` ` Specifically, we establish for purposes of this Order that the term "compensable  Xb-call" includes: (1) accesscode calls;Xbp yO+ -ԍxAn "accesscode call" is a call made using a sequence of numbers that, when dialed, connects the caller to the OSP associated with that sequence, rather than the OSP presubscribed to the originating line. Accesscode  {O!-calls include tollfree calls (e.g., 1800CALLATT, 1800COLLECT), 101XXXX calls in equal access areas,  {O"-and "950" Feature Group B dialing (e.g., 9500XXX or 9501XXX) anywhere, where the threedigit XXX is  {OO#-assigned to a particular IXC. See Policies and Rules Concerning Operator Service Access and Pay Telephone  {O$-Compensation, 7 FCC Rcd 3251, 3251 n.1 (1992) (OSP Second Report and Order). (2)tollfree calls;Y(bp {O-ԍx"Tollfree calls" consist of calls to a toll free number assigned to a particular subscriber (e.g., 1800 {OZ-FLOWERS). See Notice, 11 FCC Rcd 6716, 6723,  11, n.37. In this Order, the term "subscriber 800 calls"  {O$-encompasses all tollfree subscriber calls, including calls to 888 and 877 numbers. See Toll Free Service Access  {O-Codes, 11 FCC Rcd 2496,  1 (1996). (3)certain 0+ calls (e.g., 0+ calls"bY0*&&ll"  X-made from a payphone where the PSP serve as an aggregator);Z"p yOi-ԍxA 0+ call occurs when the caller dials "0" and then the desired telephone number. 0+ calls include  {O1-credit card, collect, and thirdnumberbilling calls. OSP Second Report and Order, 7 FCC Rcd at 3251 n.4. If, however, a PSP has chosen not to enter into a contract for payment for 0+ calls, any 0+ calls from that payphone are not compensable. (4) certain 0 calls (e.g., 0  X-calls in states that, with FCC permission, prohibit blocking of such calls);g[Zp yO> -ԍx0 calls occur when a caller dials 0 and then waits for operator intervention. 0 calls are made possible by LECs offering to OSPs a call transfer service under which LECs transfer calls to the OSP requested by the  {O -calling party. OSP Second Report and Order, 7 FCC Rcd at 3255 n.44.g (5) certain inmate  X-calls\ p yOI-ԍx"Inmate calls" are calls made by inmates using payphones located in the prison or penitentiary. (to be specifically addressed in a separate proceeding); and (6) certain tollfree  X-Government Emergency Telecommunications Systems (GETS) 710 calls.]T p yO-ԍxGETS calls are tollfree calls that certain government employees may make in the case of a national emergency by dialing 710 plus the appropriate number. "Compensable calls," in the context of this Order, do not include: (1) coin calls or other calls, such as directory assistance calls, for which the payphone provider can otherwise charge; (2)presubscribed 0+ calls; and (3) 0 calls in states that do not prohibit blocking of 0 calls. We reiterate that, for purposes of this Order, calls that receive compensation from some other  XJ-source, e.g., as part of an individual contract between a PSP and an IXC, are not entitled to percall compensation under this Order.  X -x 2.` ` Definition of Fair Compensation.  X -x554.` ` In relevant part, section 276(b)(1)(A) requires that PSPs be "fairly compensated for each and every completed . . . call." Neither the statute nor the legislative history makes clear, however, what Congress meant by the phrase "fairly compensated." At the same time, section 276(b)(1) directs the Commission to achieve this goal in a manner that will "promote competition among PSPs and promote the widespread deployment of payphone services to the benefit of the general public." The legislative history again provides little guidance. It would appear, however, that section 276 was enacted, in part, in recognition of the limitation on the ability of PSPs and carriers to negotiate a mutually agreeable amount as a result of TOCSIA's prohibition on barring IXCaccess calls by PSPs.  X-x655.` ` In light of the above, we find that PSPs will be fairly compensated if, at a minimum, we: (1) balance the interest of PSPs and those parties that will ultimately pay the"]0*&&ll" default compensation amount; and (2) ensure that the default compensation amount is sufficient to support the continued widespread availability of payphones for use by consumers.  X-x756.` ` We recognize that, because most payphone costs are fixed and each type of call has a relatively small marginal cost, a wide range of compensation amounts may be  X-considered "fair." As we discussed above, the vast majority of the costs of providing payphone service are fixed and common costs, and there is no one economically correct way  X_-to allocate such costs among the different types of calls that may be made from a payphone.P^_p {O-ԍxSee Section III.A. above.P Economic theory does suggest, however, that the costs of one service should not be crosssubsidized by another service. That is, consumers making one type of call, such as a local  X -coin call, should not pay a higher amount to subsidize consumers that make other types of calls, such as dialaround or tollfree calls. In order to avoid a crosssubsidy between two such services that are provided over a common facility, each service must recover at least its  X -incremental cost, and neither service should recover more than its standalone cost._ Zp yO-ԍx In the context of payphones, "standalone costs" are the costs associated with building a payphone capable of handling a certain type of call. Within these parameters, many different compensation amounts may be considered fair.  X -  X-x857.` ` In its prior orders, the Commission defined "fair compensation" as the amount  Xy-to which a willing seller (i.e., PSP) and a willing buyer (i.e., customer, or IXC) would agree  Xd-to pay for the completion of a payphone call.`dp {O-ԍx First Report and Order, 11 FCC Rcd at 20568,  52 n. 187. See also Second Report and Order, 13 FCC Rcd at 1783,  8. In the Second Report and Order, the Commission, in establishing a default compensation amount, found that fair compensation required that dialaround calls contribute a proportionate share of the common costs of  X!-payphone service.la! p {O-ԍxSecond Report and Order, 13 FCC Rcd at 1796,  42.l We continue to believe that this is an essential element of our determination of "fair compensation" in this context. We find that any other approach would unfairly require one segment of payphone users to disproportionately support the availability of payphones to the benefit of another segment of payphone users. Such subsidies distort competition and appear inconsistent with Congress's directive to eliminate other types of  X-subsidies.bbp {O!-ԍxSee 47 U.S.C.  276(a)(1) and (b)(1)(B).b  X-x958.` ` As we have also recognized in previous orders, the default compensation"0 b0*&&ll2"  X-amount will have a very real impact on the deployment of payphones.|cp {Oy-ԍxSee Second Report and Order, 13 FCC Rcd at 18291830,  119.| The default  X-compensation amount will not simply affect the total number of payphones, but also the deployment of payphones in locations with comparatively lower volumes of traffic. MCI asserts that, in light of the compensation amount of $.284, the increase in profitable locations will be minimal, but the increase in profits at existing payphones will be large. While we agree with MCI that the effect of $.284 amount could be significant for certain high volume payphones, we believe MCI's concern is addressed in large measure by our reduction in the dialaround amount from $.284 to $.24 per call. Moreover, and perhaps more importantly, the statute requires us to develop a percall compensation plan. The default compensation amount that we establish below seeks to ensure that the current number of payphones is  X -maintained.d$ Zp yO% -ԍxWe note that some LECowned payphones were not placed with profitability in mind, and may cease to exist even when provided with a reasonable compensation amount. We emphasize, however, that the  {O-Commission took steps in the First Report and Order to ensure that public interest payphones are deployed, to  {O-the extent necessary. First Report and Order, 11 FCC Rcd at 2067786,  277286.   X -x:59.` ` In light of the above considerations, we conclude that the default percall compensation amount we establish should ensure that each call at a marginal payphone  X -location}e Fp {O-ԍxSee para. 15 above for the definition of "marginal payphone location."} recovers the marginal cost of that call plus a proportionate share of the joint and common costs of providing the payphone. We find such an approach satisfies the first condition set forth above of providing a percall amount that is fair to both payphone owners  Xy-and the beneficiaries of these calls (e.g., IXCs and tollfree subscribers). We believe that the $.24 compensation amount is fair, because it will allow PSPs to recover more than the marginal cost of providing payphone service for dialaround calls and thus contribute to the common costs of the payphone. We also find that basing this calculation on the marginal payphone location satisfies Congress's directive that we ensure the widespread deployment of payphones. As opposed to a calculation based on the average payphone location, use of a marginal payphone location should promote the continued existence of the vast majority of payphones. Thus, payphone owners will benefit because they will receive the compensation necessary to profitably provide service. Consumers and long distance carriers will benefit because payphones will remain widespread, which will ensure that consumers have ready  X-access to make payphone calls using the long distance carrier of their choice.fp {O"-ԍxSee Section IV.B.3.b. below, explaining how the use of a marginal payphone location will result in the continued widespread deployment of payphones. "~2 f0*&&ll"Ԍ X<x 3.` ` Reconsideration of the Second Report and Order's TopDown Methodology. (#`  X-x;60.` ` In this section, we explain the Second Report and Order's compensation  X-methodology that the Court remanded in MCI v. FCC and the manner in which the statutory constraints associated with TOCSIA and technological constraints limiting the availability of  X-targeted call blocking affect the viability of such a compensation methodology.gp yO -ԍxFor purposes of this Order, targeted call blocking refers to the technological ability of an IXC to not accept (or "block") a dialaround access call from one payphone while accepting calls from another payphone.  In light of  X{-these constraints, and mindful of the Court's findings in MCI v. FCC, we find that a compensation methodology based on the market rate for local coin calls currently will not  XO-ensure fair compensation for coinless calls from payphones. Additionally, upon reconsideration, we find that our prior assumption regarding recovery of joint and common costs was incorrect. This incorrect assumption undermines an important basis for a topdown methodology for determining the cost to PSPs of providing coinless calls, because such a  X -methodology assigns an equal proportion of joint and common costs to both types of calls.lh p {O-ԍxSecond Report and Order, 13 FCC Rcd at 1797,  44.l  X -Therefore, upon reconsideration, we conclude that a bottomup approach is more appropriate than the topdown approach adopted in the Commission's previous orders, in which the Commission set the compensation amount for coinless calls from each payphone according to  X-that payphone's deregulated local coin call rate.wip {O-ԍxSee Second Report and Order, 13 FCC Rcd at 1825, 111.w Although we do not adopt a topdown approach for calculating the compensation amount for coinless calls, we use a topdown  Xi-calculation to test the reasonableness of our bottomup calculation.gjiDp yO^-ԍx We make this calculation below in Section IV.B.3.g. g  X;-x<61.` ` In the Second Report and Order, the Commission established a twophase  X&-compensation system.kZ&p {O-ԍxSecond Report and Order, 13 FCC Rcd at 182829,  117. The Commission established this twophase system as an alternative to the preferred option that IXCs and PSPs negotiate with each other to set a fair compensation amount. Under the first phase, PSPs would receive, for a twoyear period ending in October 1999, a default compensation amount of $.284 for each compensable call, absent an agreement between the PSP and IXC on a different rate. The Commission arrived at this figure by using a topdown approach for determining the costs to the PSP of making available coinless calls from their payphone. The Commission's topdown approach started with what the Commission determined was the most prevalent price of a deregulated local  X-coin call (i.e., $.35). From this starting point, and consistent with the Commission's  X-understanding of the Court's statements in Illinois Public Telecomm., the Commission  Xr-subtracted the costs of providing coin calls that are not incurred for providing coinless calls,"r k0*&&ll""  X-an amount calculated to be $.066.l$p {Oy-ԍxSecond Report and Order, 13 FCC Rcd at 1807,  63. "Avoided costs" in the context of this Order refers to cost elements that are avoided, as well as cost elements that are added, such as interest (because payments are delayed several months) and a FLEX ANI element, because PSPs were not being charged for  {O-FLEX ANI at the time the Second Report and Order was released. Thus, for two years, an IXC would be required to pay  X-the PSP $.284 for every compensable call.nmp {ON-ԍxSecond Report and Order, 13 FCC Rcd at 1796,  42. n  X-x=62.` ` The Second Report and Order required that, after October 1999, compensation for dialaround calls would be established by subtracting the net avoided costs of the dial X-around call ($.066) from the deregulated local coin price charged by each payphone.+nZFp {O -ԍxSecond Report and Order, 13 FCC Rcd at 182829,  117. Accordingly, if the local coin price from a particular payphone were $.40, the default amount would be $.334. If the local coin price were $.30, the default amount would be $.234, etc.+ Thus, under the second phase of the compensation system, compensation to PSPs for compensable calls would vary in relation to the local coin call price of the payphone being used.  XJ-  X3-x>63.` ` In MCI v. FCC, the Court concluded that the Commission failed to adequately explain the underlying premise for the topdown approach in setting a default compensation amount. Specifically, the Court found that the Commission did not explain "why a marketbased rate for coinless calls could be derived by subtracting costs from a rate charged for coin  X -calls."So h p {O-ԍxMCI v. FCC, 143 F.3d at 608.S The Court found that if "costs and rates depend on different factors, as they  X -sometimes do, then [the Commission's] procedure would resemble subtracting apples from  X -oranges.":p p {OV-ԍxId.: The Court posited that the Commission's conclusion might have depended on the premise that the market rate for coin calls generally reflects the cost of coin calls. Although the Court reasoned that such a premise could hold true in a competitive market in which costs and rates converge, the Court found that the Commission failed to explain its reliance on such  XO-a premise. The Court also cited the Commission's First Report and Order, in which, according to the Court, the Commission acknowledged that the coin call rate might potentially  X#-diverge from the cost of coin calls.:q# p {O`!-ԍxId.: Based on the finding that the Commission failed to adequately explain why the marketbased method did not equate to "subtracting apples from oranges," the Court remanded the matter to the Commission. "q0*&&ll"Ԍ X- x` ` a.  TOCSIA and Targeted Call Blocking.  X-x?64.` ` Because of TOCSIA and the present lack of targeted call blocking, we  X-conclude that the compensation system established in the Second Report and Order is currently unworkable. First, under TOCSIA, the PSP (or seller) must connect (or sell) all  X-calls to the IXC.Urp yO-ԍx47 U.S.C.  226(e)(1)(A) and (B).U Under the Commission's prior approach, and after the twoyear phasein period, each PSP would be allowed to set the price for compensable calls at whatever level it chose by raising or lowering the local coin rate at a particular payphone. Accordingly, the PSP would be able to receive a greater compensation amount by raising the local coin price. At a minimum, this relationship creates a noncost based incentive on the part of the PSPs to raise the local coin rate from a payphone, not to make more money from coin calls but to increase the level of compensation from dialaround calls. In most instances, we believe that the ability of a PSP to raise its local rate in this manner will be constrained by competitive forces. As the Court pointed out, however, we also have previously recognized that locational monopolies allow PSPs to set some payphones' rates above cost. Additionally, where a  X -payphone generates few local coin calls relative to the number of coinless calls, e.g., a payphone located in an airport, linking the coinless rate to the coin rate potentially could create instances where a PSP seeks to maximize its total revenue by raising the local coin rate, even if doing so deterred customers from making coin calls. In this situation, a PSP may be able to more than offset lost revenues from local coin calls with the compensation it would receive from coinless calls.  X -x@65. ` ` Second, because the IXCs' current callblocking technology only allows for an allornothing approach to blocking dialaround calls from a payphone, the IXC (or buyer) is unable to choose whether or not to accept (or buy) a particular call. In other words, the IXC must either buy every call from every payphone, regardless of the amount it must compensate the PSP for the calls, or buy no payphone calls at all. In this scenario where the seller must sell and the buyer must buy every call or none at all market forces are rendered ineffective as a means of achieving an efficient price. We therefore conclude that a default compensation amount that varies according to the deregulated local coin price does not ensure  XR-a fair compensation level, unless carriers have some ability to reject a call based upon the compensation amount for that call. Parties contend that such call blocking technology presently is not readily available in the network and will take some time for carriers to  X -implement.Us Xp {O"-ԍxSee, e.g., Sprint Reply at 25.U  X-xA66.` ` In providing for a default compensation amount that was allowed to vary according to the deregulated local coin price, the Commission stated that, under deregulation, competitive pressures would constrain the amount PSPs could charge consumers for such"!s0*&&ll " calls. Similarly, in an unrestricted market where IXCs compensate payphone owners based on an amount that varies according to the local coin price, IXCs ideally should be able to  X-decline calls from payphones they believe to be excessively priced. Without targeted call blocking, however, IXCs cannot do this. Allornothing call blocking may provide some downward pressure on high dialaround prices charged by PSPs, but it is insufficient to reach a wholly competitive outcome under the circumstances surrounding the Commission's  Xv-previous compensation mechanism.tzvp yO-ԍxWe reiterate that the unavailability of targeted call blocking does not undermine the use of a single default rate, either here or as required to date by our previous orders. As we have previously stated, the adoption of a default amount was specifically designed, in part, to address the absence of a welldeveloped call  {OG -blocking technology to allow for a regulated rate. See Section I above. Thus, even without any blocking ability, the default amount is intended to ensure fair compensation. Moreover, existing call blocking technology provides carriers with a reasonable, additional level of protection, because they can decide whether to accept or reject calls from payphones at the single default amount.  X_-  XH-xB67.` ` We note that the lack of targeted call blocking is a temporary phenomenon. The overwhelming majority of payphones are, or soon will be, on payphone lines that transmit the appropriate coding digits, as required in the Commission's prior orders in this proceeding. Therefore, the ability to develop targeted call blocking technology rests largely  X -with the IXCs.u p {O-ԍxSee Illinois Public Telecomm., 117 F.3d at 564 (recognizing that IXCs possess the necessary technology to implement targeted call blocking). We strongly encourage the IXCs to develop targeted call blocking. Targeted call blocking is an essential element to an IXC's ability to negotiate with PSPs in a true market setting.  X-xC68.` ` As we stated above, we are aware that targeted call blocking is not the only  X{-problem that must be resolved in order to move to a deregulated resolution.Tv{d p {O-ԍxSee Section III.C., para. 43.T Targeted call blocking is, however, a critical element to realtime, widespread negotiations between  XM-payphone owners and carriers.wM p yO-ԍxIn this regard, we note the existence of several thousand PSPs and more than one thousand carriers that may wish to negotiate agreements for dialaround compensation. It is the threat that a PSP may have its dialaround calls blocked that brings PSPs and IXCs into equal bargaining positions. Because it is in the interests of both the PSP and the IXC to negotiate a mutually acceptable compensation amount, we do not desire, no do we foresee the need for, the widespread use of targeted call blocking once the technology is implemented and deployed. We also note that, although the default compensation amount that we establish in this Order is reasonable and fair to all parties, an IXC that finds the default compensation amount to be excessive may help remedy that situation by developing targeted call blocking capability."N w0*&&llR"Ԍ X-ԙx` ` b. Recovery of Joint and Common Costs.  X-x  X-xD69.` ` In establishing a compensation amount based on the price of a local call, the  X-Commission in the Second Report and Order sought to equalize the contribution that each  X-call made to the joint and common costs of each call.lxp {O-ԍxSecond Report and Order, 13 FCC Rcd at 1796,  42.l In adopting a topdown derivation of  X-the coinless default compensation amount based on the price of a local coin call, the Commission assumed that PSPs set prices so that each type of call contributes an equal  Xa-amount to joint and common costs.!yaZp {Ol -ԍxSecond Report and Order, 13 FCC Rcd at 1796,  42 ("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.").! Upon reconsideration, and based upon the additional information in the record, we reassess the Commission's prior assumption regarding recovery of joint and common costs, finding that our assumption is not necessarily valid. This  X -reassessment undermines an important basis for the Commission's topdown methodology.lz p {O-ԍxSecond Report and Order, 13 FCC Rcd at 1797,  44.l  X -xE70.` ` We find insufficient evidence in the record to ascertain the method by which PSPs set prices for a various types of calls in order to recover the common costs of providing payphone service. The error in the Commission's assumption that each call contributes equally to joint and common costs may be demonstrated by examining the revenue that PSPs  X-receive for 0+ and 1+ calls.r{p {O-ԍxSee Section IV.B. above, explaining various types of calls.r Although coinless calls (such as 0+ calls) cost less than coin  X{-calls, some PSPs receive more than $.70 per 0+ call.5|\{0 p {O\-ԍxSee Illinois Public Telecomm., 117 F.3d at 563 (recognizing that costs of local coin calls are higher than  {O&-coinless calls). See also APCC Recon. Opp. at 28 (stating that 0+ commissions range from $.45 to $.80 per call). 5 This is more than twice as much as  Xd-the prevailing $.35 local coin price.m}dT p {Oi-ԍxFirst Report and Order, 11 FCC Rcd at 20578,  72.m Also, the RBOC Coalition states that for many  XM-payphones, the 1+ sentpaid charges (i.e., the coin price for a long distance call) exceeds  X8-basic long distance charges by an average of $1.45 per call.~X8p yO"-ԍxRBOC Coalition Comments at 10. A "sentpaid" call is a long distance call made from a payphone, where the caller pays the long distance fees up front, typically by depositing coins or by inserting a credit card into a magnetic reader. Clearly, some PSPs do not price their calls such that each call makes an equal contribution to joint and common costs. "! ~0*&&llG" Therefore, if our goal is to price dialaround calls such that they make a proportionate contribution to joint and common costs, we cannot do so by basing their price on the local coin calling price, because we do not know how individual PSPs price local coin calls in relation to the recovery of joint and common costs. Therefore, upon reconsideration, we find unreliable the assumption that PSPs set prices so that each call recovers an equal amount of joint and common costs.  X_<x` `  D&#M   D&#M c. MCI v. FCC. D&#M   D&#M   X2-xF71.` ` Finally, in light of the Court's concerns regarding whether a marketbased rate for coinless calls could be derived by subtracting costs from a rate charged for coin calls, we find that a topdown approach is unsuitable at present for setting default compensation. By using a bottomup approach, we resolve the Court's concerns, because we focus on the costs of a dialaround call, rather than attempting to compare the rate and costs of a local coin call  X -to the cost of a dialaround call. The Court's concerns in MCI v. FCC and the other factors discussed in this section persuade us that, at this time, a bottomup compensation  X-methodology is more appropriate than a topdown methodology.Dj p yO -ԍxIn petitions for reconsideration, certain parties raise additional reasons why we should not use the top {O-down compensation methodology adopted in the Second Report and Order. Most of these commenters assert  {O-that the payphone market is not adequately competitive to allow the use of a topdown approach. See, e.g., Consumer Business Coalition Recon. Pet. at 2, 4, 1819; AT&T Recon. Pet. at 5, 67. As explained above, in  {O0-response to the Court's concerns in MCI v. FCC, and in light of the technological, statutory, and economic  {O-constraints, we conclude that we should use a bottomup default compensation mechanism at this time. See Section I above. As explained below, we believe the method adopted herein best responds to Congress's instruction concerning the widespread deployment of payphones. Because we are using a bottomup methodology in this Order, we need not discuss the validity of the various additional arguments raised by  {O-petitioners challenging the topdown approach used in the Second Report and Order. Should we succeed in moving to a marketbased system at some point in the future, we may address the validity of those arguments at that time.D  Xe-x 5.` ` Selection of a BottomUp Methodology.  X7-xG72.` ` In light of existing technological, statutory, and economic constraints, we find that the most appropriate mechanism for establishing fair compensation is a bottomup approach. We recognize that such a compensation mechanism does not replicate the price that the market would set for each and every call from a payphone, which, in an ideal setting, would be our preferred outcome. Under the constraints detailed previously, however, we conclude that a bottomup approach will best comply with the statutory directive of ensuring the widespread deployment of payphones in a manner that is consistent with our definition of fair compensation. x  Xh-xH73.` ` In establishing a bottomup approach, we considered three standard economic"h! 0*&&ll" approaches to setting prices, in addition to our review of the topdown methodology used in  X-the Second Report and Order: (1) marginal cost pricing;p yOb-ԍxThe marginal cost of a good is the additional cost from the production of one additional good. In the case of payphone calls, it is the cost of making one additional call using an existing payphone. (2)the RBOC Coalition's  X-Ramsey'sstyle pricing;X p yO-ԍx The RBOC Coalition's Ramsey'sstyle pricing sets prices based on the related goods' marginal costs and price elasticities. The less elastic the demand for one good (in relation to others), the more fixed costs are assigned to that good. and (3) fully distributed cost coverage.@p yO -ԍxFully distributed cost coverage allows the payphone owner an opportunity to recover the fixed costs associated with the payphone. As explained in Section IV.B. below, we find that a fully distributed costcoverage approach best fulfills our statutory directives within the economic, technological, and statutory constraints that currently exist. Specifically, we find that a fully distributed costcoverage approach that determines cost by working from the bottom up will comport with statutory directives and satisfy the Court's  Xa-concerns raised in MCI v. FCC. Furthermore, we find that, in keeping with Commission precedent arising from our implementation of the 1996 Act, payphone costs will be calculated  X5-on a forwardlooking basis. 5p {O~-ԍx  See, e.g., Local Competition Order, 11 FCC Rcd at 15813,  620 ("In dynamic competitive markets, firms take action based not on embedded costs, but on the relationship between marketdetermined prices and forwardlooking economic costs.") We previously stated that the "fairly compensated" standard in the payphone context was a different standard than the forwardlooking, costbased standard used in the context of  {O-interconnection and unbundled elements. First Report and Order on Reconsideration, 11 FCC Rcd at 21267,  68. Although we now adopt a forward-looking, costbased method, we are not using the TELRIC pricing  {O2-model from the Commission's Local Competition Order. Under that TELRIC approach, the Commission set a different price for each company. Here, we set a default compensation amount for all payphones. In addition,  {O-our approach differs from the Local Competition Order's version of TELRIC because that version excludes certain SG&A costs that we include in our cost analysis. Because TELRIC sets prices for unbundled network elements, and because CLECs always perform their own billing and collection, billing and collection costs (which are considered parts of SG&A) were not covered by TELRIC. In this Order, we estimate the total costs of a payphone operation, so we must include all the SG&A costs when establishing the default compensation amount. Thus, in setting a default compensation amount using a fully distributed costcoverage approach (our "bottomup" methodology), we examine the costs of a new payphone operation installing new payphones.  X -xI74.` ` As explained above, we find that "fair compensation" means that the marginal cost of compensable calls, plus an appropriate amount of the joint and common costs of the  X -payphone operation, will be recovered for each compensable call.l Xp {O#-ԍxSecond Report and Order, 13 FCC Rcd at 1796,  42.l We conclude that a bottomup methodology will provide fair compensation consistent with this standard. Thus, rather than focusing on the cost of adding one additional payphone to an operation, we"}"0*&&lli" instead examine the total costs of a payphone operation and distribute those costs across all of the payphones in that operation. We find that this approach results in a compensation amount that is fair to both payphone owners and the beneficiaries of these calls. We also conclude that establishing a compensation amount that allows a PSP to recover its costs will promote the continued existence of the vast majority of payphones presently deployed, thereby satisfying what we consider to be Congress's primary directive that we ensure the widespread deployment of payphones.  XH-xJ75.` ` In this Order, we consider a cost to be "joint and common" if the amount of  X1-the cost does not vary with respect to the mixture of calls at the payphone.1p {O -ԍxSee Section III.A. above, explaining joint and common costs in the context of payphone compensation.  {Ot -Cf. Local Competition Order, 11 FCC Rcd at 15845,  676 (defining joint costs and common costs). For example, the cost of a payphone's enclosure does not change due to an increase in the number of coin  X -calls relative to coinless calls, or vice versa. We conclude, therefore, that the enclosure is a joint and common cost, and we attribute the enclosure costs to all types of calls. We attribute costs that are not joint and common to the type of call associated with that cost. For example, as the number of coin calls from a payphone increases, the coin collection costs also will rise due to the higher frequency of coin collection trips. We therefore attribute coin collection costs solely to coin calls.  Xd-xK76.` ` As discussed above, we find that the use of a bottomup approach also resolves the concern that PSPs do not necessarily price their various services such that each call  X6-recovers an equal share of joint and common costs.6$p yO -ԍxIn this context, we define its "share" of the joint and common costs as that amount that is the monthly joint and common costs divided by the total number of calls in a month from a marginal payphone location. In the Second Report and Order, the Commission's goal was to set a compensation amount that would allow each call to recover  X -its share of joint and common costs.l |p {O7-ԍxSecond Report and Order, 13 FCC Rcd at 1796,  42.l The topdown approach, which subtracted the avoided costs of a compensable call from the price of the local coin call, assumed that each call would contribute equally to the joint and common cost. As explained above, we find that this assumption is not necessarily reliable, based on the manner in which PSPs price various  X-calls.Qp {Om -ԍxSee Section IV.A.4. above.Q Under our bottomup approach, however, that problem no longer is at issue. Under the bottomup approach, we use the total monthly joint and common costs of the payphone operation and divide these costs by the total monthly number of calls from a marginal payphone location. This results in a percall share of the joint and common costs. Thus, a bottomup approach alleviates the problem of how to ensure that each call has the opportunity to recover its share of joint and common costs. "$#0*&&ll"Ԍ X-xL77.` ` Our bottomup approach also avoids the impact of the technological restrictions discussed previously that undermine our previous approach of allowing the default rate to change with the deregulated coin rate of each payphone. As explained above, in the bottomup system we adopt herein, we have set a single amount for compensation, which we find fair and compensatory. IXCs do not need the ability to block calls from payphones based on a varying compensation amount because all payphones will use the same compensation amount, absent an agreement between the parties for some different level of compensation. Finally,  X_-our bottomup approach alleviates the Court's concerns in MCI v. FCC stemming from the Commission's use of the local coin price as the starting point of compensation for dialaround calls. Under the bottomup approach, we do not use the local coin price to determine the costs associated with a compensable call. Thus, we do not run afoul of the Court's concern  X -that the Commission was "subtracting apples from oranges." p {O~ -ԍxMCI v. FCC, 143 F.3d at 608 ("If costs and rates depend on different factors, as they sometimes do, then this procedure would resemble subtracting apples from oranges."). Rather, we determine each of the costs of the dialaround call and add them together, from the bottom up, to determine the percall compensation amount.  X -xM78.` ` Our default compensation amount is calculated to allow the payphone owner the opportunity to recover a proportionate share of joint and common costs associated with dialaround calls. Payphone owners may, of course, determine that contracting with IXCs to receive a lower amount will attract more dialaround traffic and thus increase their profits. Payphone owners also have the opportunity to set their own prices for noncompensable calls,  X6-e.g., coin calls and presubscribed calls, and may set the price for each type of call so that it covers the marginal cost plus a proportionate share of joint and common costs. This would allow a payphone in a marginal location the opportunity to recover all of its costs. Of course, a payphone owner may dismiss this pricing strategy in favor of an alternative strategy that may prove to be more profitable.  X-xN79.` ` We note that our approach is not designed to make every payphone profitable. Payphones with sufficiently low call volumes or sufficiently high costs will not be profitable,  X-regardless of the compensation amount we establish."p yOS-ԍxEven at an extremely high compensation rate, we would expect that so many IXCs would block calls that PSPs would receive minimal or no compensation for dial around calls. We discuss in Section III.B.3.b. below our selection of a marginal payphone location and our calculation of the number of calls from that location, important components of our calculation of the compensation amount.  X$-xO80.` ` Certain petitioners argue that we should use a marginal cost pricing approach, in which prices are set by considering the cost of producing one additional good. Others" $z0*&&ll="  X-argue that we should use a Ramsey'sstyle pricing approach.]p {Oy-ԍxSee RBOC Coalition Recon. Pet. at 46.] We find, for the reasons stated below, that marginal cost pricing and the RBOC Coalition's Ramsey'sstyle pricing are ineffective in complying with our statutory goals. As explained elsewhere, however, we conclude that basing our determination of fair compensation on the marginal payphone is the approach most consistent with the statutory directive of ensuring widespread deployment of  X-payphones.SZp {O-ԍxSee Section IV.B.3.b. below.S  X_-xP81.` ` Specifically, we reject marginal cost pricing for the same reasons given by the  XH-Commission in the First Report and Order and alluded to in Section III above.nHp {O -ԍxFirst Report and Order, 11 FCC Rcd at 20576,  68. n That is, a purely incremental cost standard for dialaround calls would undercompensate PSPs for dial-around calls, because it would prevent PSPs from recovering a reasonable share of joint and common costs from those calls. Thus, the revenue that would have been received from these calls would be subsidized by revenue from other types of calls, which, in and of itself, contradicts Congress's directive to eliminate subsidies and also distorts competition. Our bottomup approach, however, adequately considers and accounts for the dialaround call's  X -share of the joint and common costs.I ~p {O-ԍxSee IV.A.4. above.I In Section III.B.2.c. below, we reject the RBOC Coalition's version of Ramsey'sstyle pricing, in part, because the pricing methodology is extremely sensitive to small changes in input estimates. Furthermore, we find unreliable the  Xd-input estimates provided by the RBOC Coalition.Sdp {O%-ԍxSee Section IV.B.2.b. below.S  X6-xQ82.` ` Several economists argue that a topdown approach like that used in previous orders is superior to a bottomup approach. Dr. Becker argues that a bottomup approach would approximate the actual pricing of payphone services only by chance and would result  X-in an economically inefficient provision of payphone services.jp yOD-ԍxRBOC Coalition Recon. Opp., Declaration of Becker, at 13.j Dr. Kahn states that the determination of costs from the bottom up inevitably is more contentious and subject to  X-"political influence."i2 p yO"-ԍxRBOC Coalition Recon. Opp., Declaration of Kahn, at 78.i Dr. Hausman contends that a bottomup approach cannot incorporate all of the market information, such as demand and cost conditions, and states that an average cost approach would result in the elimination of marginal payphones with belowaverage call"% 0*&&ll"  X-volumes or aboveaverage costs.Tp yOy-ԍxRBOC Coalition, Recon. Opp. at 79.T  X-xR83.` ` In response to Dr. Becker's critique, we recognize that a bottomup method may not reflect the compensation amount that the market would set for a particular payphone. That is not our intention in this Order. Our goal is to provide a PSP with a payphone at a marginal location an opportunity to recoup all of that payphone's costs. In the alternative, PSPs are free to negotiate with IXCs to lower the compensation amount for dialaround calls,  X_-in an effort to attract more callers.7X_Xp yOh -ԍx Presumably, if the IXC contracted with the PSP for a compensation amount, the PSP would expect that the IXC would route callers to its payphones or that the IXC would not block calls from its payphones, once the IXC develops targeted call blocking. 7 In adopting a bottomup compensation methodology, we  XH-reconsider our conclusions in the First Report and Order on Reconsideration and Second  X3-Report and Order that reliance on cost studies to set the compensation rate may reduce the amount of revenue recovered by PSPs and therefore may reduce the number of payphones  X -deployed. xp {O0-ԍxFirst Report and Order on Reconsideration 11 FCC Rcd at 21266,  66; Second Report and Order, 13 FCC Rcd at 1818,  93. As we state herein, however, because payphone operations incur very large fixed costs and very low marginal costs, allowing PSPs to recover only their marginal costs would  X -be undercompensatory.J p {O\-ԍxSee Section IV.A.5.J  X -xS84.` ` In response to Dr. Kahn's concerns regarding the contentiousness of a bottomup approach, we find that, when applied to dialaround calls, both topdown and bottomup approaches are subject to differences of opinion. Although the topdown approach contains fewer cost estimates to consider compared to a bottomup approach, other difficult elements  XO-are associated with topdown pricing. For example, as identified by the Court in MCI v.  X:-FCC, under a topdown approach, one must determine the correct starting price for the adjustments. Moreover, we believe that the number of disputable aspects of a particular approach is not a dispositive basis for choosing a pricing methodology. Finally, in response to Dr. Hausman's concerns, we agree that our bottomup methodology does not consider the interactions of demand and cost. We explain in detail below our reasons for declining to adopt Dr. Hausman's recommendation that we use the RBOC Coalition's version of  X-Ramsey'sstyle pricing.Ud p {O"-ԍxSee Section IV.B.2.b. below. U  X-xT85.` ` Although we could have attempted to price dialaround calls by equating the percentage markups over marginal cost for each type of call, we decline to do so for two"m& 0*&&ll" reasons. First, it would assume that payphone operators price their other calls, such as 0+  X-and 0 calls, in that manner.p {Ob-ԍxSee para. 70 above, explaining how the evidence supports our belief that PSPs price dialaround calls differently from 0+ and 0 calls. We find no credible evidence to conclude that they do. Second, the resulting suggested price would be greatly affected by small changes in the marginal cost estimates. Under this approach, the default price would be determined by taking one fraction the markup of a local coin call divided by its marginal cost and setting it equal to another fraction the markup of a dialaround call divided by its marginal  Xv-cost. Since three of the four factors are known quantities (i.e., the marginal cost of a coin call, the marginal cost of a dialaround call, and the markup of a local coin call), the fourth  XJ-factor (i.e., the markup for dialaround calls) can be determined by selecting an amount that equalizes the two fractions. The price of the dialaround call would then be the sum of its marginal cost and its newly determined markup. Because the marginal costs of payphone calls are so small, however, if one of the marginal cost estimates (such as the marginal cost of a coin call) changed by only a few cents, the amount of the markup for dialaround calls equalizing the two fractions would change greatly. Because the price of a dialaround call would be the sum of its marginal cost and its markup, the resulting change in the markup would have a large effect on the price of a dialaround call.  X}-xU86.` ` In summary, we find that using a Ramsey'sstyle pricing mechanism leads to highly varied prices, depending on the estimate of marginal costs and elasticities. We do not believe that we can obtain sufficiently accurate marginal cost and elasticity estimates to use a Ramsey'sstyle pricing mechanism. We note that the RBOC Coalition believes that its Ramsey'sstyle pricing mechanism leads to a default compensation amount higher than  X -$.35.m "p {O-ԍxSee RBOC Coalition Second R&O Comments, Hausman at 17.m We show in Section IV.B.2.b. below, however, that in using estimates that we consider more reasonable, the RBOC Coalition's Ramsey'sstyle pricing mechanism leads to a default price that is less than the default price arrived at by using bottomup approach we adopt in this Order. This underscores our concern about the large variance resulting from minor changes in assumptions.  X-xV87.` ` We decline to use marginal cost/demand considerations as a reason to choose topdown pricing. There is no reason to believe that pricing compensable calls based on the market price of local coin calls is superior to bottomup pricing, because the price of local coin calls is principally affected by the demand and marginal costs of coin calls, not coinless  X$-calls. This would result in what the Court in MCI v. FCC refers to as "comparing apples to oranges." Any attempt to modify the bottomup default compensation amount in an effort to account for some measure of the marginal cost/demand analysis would amount to a purely arbitrary adjustment, because the size of an appropriate adjustment could not be quantified. Further, we find incorrect the RBOC Coalition's contention that the dialaround price should" '0*&&ll" be at least $.35, because, as we show below in Section IV.B.2.b., reasonable marginal cost and elasticity estimates produce a price less than our default price.  X-x 6.` ` Conclusions and Response to the Court.  X-xW88.` ` We conclude, for the reasons stated above and elsewhere in this Order, that a bottomup methodology is the most appropriate means for establishing a default compensation amount at this time. We also conclude that our selection of a bottomup methodology  XH-reasonably resolves the Court's concerns, as expressed in MCI v. FCC. As the Court indicated, a marketbased rate may be an appropriate method at some point in the future. When the time is appropriate, we will consider revisiting this issue.  X - C.xReconsideration Issues.  X -xX89.` ` In this section, we address petitioners' arguments in support of, and in opposition to, various methodologies for determining the default compensation amount. In addition to the bottomup methodology described above, we set the default compensation amount.  XM- x1.` ` Overview  X-xY90.` ` In the Second Report and Order, the Commission established an interim default compensation amount for dialaround calls made from payphones by adjusting what the Commission determined to be the current deregulated coin price of $.35 to account for cost differences between coin calls and coinless calls. Thus, the Commission subtracted from $.35 costs directly attributable to coin calls and added costs directly attributable to dialaround or  X-compensable calls.p {O'-ԍxSecond Report and Order, 13 FCC Rcd at 1796, 1807, and 182930,  42, 63, and 119. In order to determine certain percall costs, the Commission estimated  X-the number of monthly calls made from a payphone in a marginal location.xZp {O-ԍxSecond Report and Order, 13 FCC Rcd at 17971801,  4650.x Specifically, the Commission deducted the following costs associated with coin calls from the deregulated local coin price: avoided costs for the coin mechanism; local coin call termination charges;  XR-and coin collection and maintenance costs.xRp {O -ԍxSecond Report and Order, 13 FCC Rcd at 18011803,  5255.x The Commission then added the following costs associated with dialaround or compensable calls: expenses for coding digits and interest  X$-on delayed receipts.y$~p {OS$-ԍxSecond Report and Order, 13 FCC Rcd at 18041805,  5760. y The Commission declined to make adjustments to the price for bad"$(0*&&llz"  X-debt, collection costs relating to percall compensation, opportunity costs, or location rents.p {Oy-ԍxSecond Report and Order, 13 FCC Rcd at 1804, 18061807,  56, 6162. These calculations produced an adjusted marketbased range for the cost of dialaround calls  X-of $.277 to $.291.lZp {O-ԍxSecond Report and Order, 13 FCC Rcd at 1807,  63.l The Commission established the interim default compensation amount at  X-$.284, the midpoint of this range.:p {OX-ԍxId.: As explained previously, this was to be the fixed default compensation amount until October 1999, after which the default compensation amount would vary with the local coin price for each payphone, less avoided costs.  X_-xZ91.` ` In response to the Second Report and Order, multiple parties filed petitions for  XJ-reconsideration.}J~p {Oy-ԍxSee Appendix B (listing parties filing petitions for reconsideration).} In addition to the record relating to these petitions, several parties filed  X3-comments in response to our Public Notice, released subsequent to the Court's remand in  X -MCI v. FCC. p {O-ԍxPleading Cycle Established for Comment on Remand Issues in the Payphone Proceeding, Public Notice, CC Docket No. 96128, DA 981198 (rel. June 19, 1998). Our resolution of the petitions for reconsideration is based on the record  X -arising from the reconsideration petitions, as well as the record created by the Public Notice.  X -x[92.` ` The reconsideration petitions generally challenge two aspects of the Second  X -Report and Order: (1)the Commission's overall methodology in setting the default compensation amount; and (2) the cost components underlying the Commission's calculation of the default compensation amount. In this Order, we have selected a bottomup  X-methodology to establish a default compensation amount for compensable calls.Tj p {O-ԍxSee Section IV.A.4. above. T This  Xn-decision renders moot, in large part, petitioners' challenges to the Second Report and Order's  XY-methodology.Y p {O-ԍxFor example, AT&T alleges that in making adjustments to the market coin rate in the Second Report  {O-and Order, the Commission failed to make adjustments for a PSP's profit that is included in every coin call. AT&T argues that the Commission deducted only $.066 for costs and nothing for the PSP's profit. AT&T also asserts that PSPs will profit twice from a coinless call because the adjusted coin market rate will include profit on a coin call as well as profit on a coinless call. AT&T Recon. Pet. at 1718. Our move to a bottomup  {O!-default compensation methodology renders moot AT&T's challenge. As APCC notes, however, in the Second  {O"-Report and Order, the Commission deducted the return on capital as well as the cost of the coin mechanism in  {O#-making the adjustment to the coin rate. APCC Recon. Opp. at 21 (citing Second Report and Order, 13 FCC Rcd at 18011802 n.139). Thus, when the Commission deducted the cost of the coin mechanism, it also deducted the  {O%-profit associated with it. We also note that in its bottomup analysis in the Second Report and Order, the  {O%-Commission similarly assumed all profit was associated with capital costs. See Second Report and Order, 13"%0*&&I&" FCC Rcd at 182224, n.289.  Below, however, we address petitioners' remaining arguments supporting"Y)X0*&&llg" and opposing various compensation approaches.  X-x` `  X- x\93.` ` As explained in Section IV.B.3. below, we establish a percall default compensation amount of $.24, using a bottomup methodology that we adopt in this Order. We set the default compensation amount by evaluating the component costs of a dialaround  X-call. Our evaluation incorporates our resolution of relevant arguments concerning the Second  Xx-Report and Order's cost components raised in petitions for reconsideration. In certain instances, our evaluation includes adjustments that were not explicitly requested by petitioners, but were raised by new evidence in the record.  X -x 2.` ` Alternative Compensation Methodologies.  X -x]94.` ` In this Section, we address alternative compensation mechanisms put forth by commenters that were not discussed above in connection with the Court's remand.  X -x` ` a.  Duration Methodology. x  X}-x^95.` ` Several commenters argue that the compensation amount for a tollfree call  Xf-should be based on the duration of the call.^ZfXp yOo-ԍxAirTouch Recon. Opp. at 3; Mtel Recon. Opp. at 67; Paging Network Comments at 10; PageMart  {O7-Recon. Pet. at 35; Skytel Comments at 34. See also DMA Recon. Pet. at 1 and Source One Recon. Pet. at 5 (asserting that paging response calls be exempt from per call compensation).^ PageMart asserts that most paging calls last  XO-less than 30 seconds, while other dialaround calls last three to five minutes.KOzp yOz-ԍxPageMart Recon. Pet. at 4.K PageMart suggests that the cost of a tollfree call from a payphone varies according to duration, noting that "[s]ome of the factors leading to higher costs for longer calls include (i) the potential for increased line charges; (ii) wear and tear and added depreciation from extended use of payphone equipment; (iii) opportunity costs incurred with extended use; and (iv) increased  X-commissions in connection with high usage payphones."r p yO-ԍxPageMart Recon. Pet. at 4.#XP\  P6QcXP#r Pocket Science contends that consumers would be better off if dialaround compensation were based on the duration of the call, in part, because lowincome consumers could more easily afford access to electronic  X-mail by using Pocket Science's product.Np yO"-ԍxPocket Science Comments at 1.N Specifically, Pocket Science maintains that the  X-compensation amount should be based on minutes of use and capped at $.285.N* p yO[%-ԍxPocket Science Comments at 2.N Although"* 0*&&ll" the RBOC Coalition is not in favor of basing dialaround compensation on the call's duration,  X-one of its economists suggests that doing so may be appropriate.Xp yOb-ԍxRBOC Coalition Comments, Analysis of Economist Gary S. Becker at 9, n.5 (stating that if coin calls and coinless calls are of different lengths, the proper policy would be to equate the margins per unit of time for each type of call).  X-x_96.` ` In contrast, APCC argues that, although "measured compensation may have some theoretical appeal," it is impractical at this time, because payphone operators do not  X-have the ability to monitor the length of the call.xp {O& -ԍxAPCC August 21, 1998 ex parte letter to Magalie Roman Salas at 2.x Further, AT&T states that implementation of such a system would: (1) cost millions of dollars; (2) require 1218 months so that it  X_-could update its systems; and (3) result in unnecessary administrative burdens.t_zp {O -ԍxAT&T October 21, 1998 ex parte letter to Magalie Roman Salas.t  X1-x`97.` ` We are not convinced by the record evidence that the marginal costs of a relatively shorter dialaround call are significantly different than those of a longer call. Although the line charge for some coin calls may vary depending on the length of the call,  X -dial-around calls do not incur any additional line charge, regardless of their length. p {O-ԍxSee Section IV.B.3.g(2) below, explaining that only local calls are assessed durationbased line termination charges. Indeed, as we have discussed, because most payphone costs are fixed, they do not vary with the  X -length of the call.P f p {O-ԍxSee Section III.A. above.P Nor are we convinced that longer calls cause a significant amount of additional wear and tear on a payphone. Consistent with the Commission's determination in  X-the Second Report and Order, we decline to make an adjustment for opportunity costs of a dial-around call because we conclude that it is unlikely that the revenue from another call will  Xd-be lost. In the Second Report and Order, the Commission concluded that compensating PSPs for opportunity costs was not necessary because the evidence demonstrates that dialaround  X8-calls only occupy 1.8 percent of available payphone usage time.l8 p {O-ԍxSecond Report and Order, 13 FCC Rcd at 1806,  61.l In this Order, we decline  X!-to consider location rents as a cost of a dialaround call.S! p {O\!-ԍxSee Section IV.B.3.c. below.S Even if we were to consider including compensating PSPs in connection with location rents, the amount of rent would not vary with the duration of a phone call because the amount of payphone revenue would not  X-change.:p {O%-ԍxId.: "+0*&&ll"Ԍ X-ԙxa98.` ` Furthermore, we are persuaded by APCC and AT&T that a durationbased methodology would result in added expense, delay, and confusion. Several complaints have already been filed with the Commission regarding payment of payphone compensation. We believe the establishment of a durationbased methodology would result in the filing of even more complaints, thereby exacerbating, rather than resolving, the current situation.  Xv-xb99.` ` Contrary to Pocket Science's suggestion,Nvp yO-ԍxPocket Science Comments at 2.N even if we based the compensation amount on the duration of a call, we could not cap the compensation amount at $.285 or any other amount, because it would not fully compensate PSPs. Assuming the default amount were set at $.285, PSPs receiving less than $.285 for short calls must receive more than $.285 for longer calls in order for the PSP to be fully compensated. We therefore decline to alter the payphone compensation mechanism to reflect the duration of the call. We note, however, that IXCs and LECs are free to use measured service compensation in their contracts, if they so choose.  X -x` ` b. RBOC Coalition's Ramsey'sStyle Pricing Methodology.  Xy-xc100.` ` In setting percall compensation in the Second Report and Order, the Commission declined to apply the RBOC Coalition's pricesetting methodology using an analysis of the comparative elasticities of demand associated with coin and dialaround calls,  X6-as advocated by the RBOC Coalition.l6Xp {O?-ԍxSecond Report and Order, 13 FCC Rcd at 1796,  41.l The RBOC Coalition sought to demonstrate that, in addition to considering avoided costs in setting a market price, competitive firms consider a  X-product's elasticity of demand. p yO-ԍxA product's demand elasticity measures consumer response to price changes in the product. If the quantity a consumer demands remains approximately the same despite relatively large changes in price, the demand is said to be inelastic. The less elastic the demand for a good, the higher the price consumers will tolerate before the quantity they demand lowers significantly. The RBOC Coalition argued that elasticities in this case would result in a market price for access calls of the coin rate plus $.07 to $.08, or a total of  X-$.42 to $.43.p {O]-ԍxSecond Report and Order, 13 FCC Rcd at 18071808,  64; RBOC Coalition Recon. Pet., Analysis of  yO' -Economist Dr. Hausman at 5.#XP\  P6QcXP# The Commission observed that there were wide variations in the record regarding the assumed elasticities and concluded that the evidence was inadequate to  X-determine the relative elasticities of coin and coinless calls.l, p {O#-ԍxSecond Report and Order, 13 FCC Rcd at 1809,  67.l  X~-xd101.` ` The RBOC Coalition argues that the Commission conceded in the Second"~, 0*&&ll2"  X-Report and Order that competitive firms consider demand elasticities in setting prices, but  X-failed to apply an elasticities analysis in this case.zp yOd-ԍxRBOC Coalition Recon. Pet. at 46.#XP\  P6QcXP#z The RBOC Coalition contends that its method of utilizing elasticities and marginal costs to set the price of tollfree and accesscode  X-calls from a payphone is based on conservative estimates and empirical data.,XXp yO-ԍxRBOC Coalition Recon. Pet. at 6 (stating that PSPs already receive commissions for 0+ calls which have similar demand characteristics to dialaround calls and which are set in a highly competitive market well in excess of the local coin rate)., According to the RBOC Coalition, consumer demand for dialaround calls is less elastic than consumer demand for coin calls. Thus, APCC argues, if a PSP examined its elasticities and marginal  Xx-costs, it would set the price of a dialaround call higher than the price of a coin call.Xxxp yO -ԍxRBOC Coalition Recon. Pet. at 6. Dr. Hausman further contends that as long as the price elasticity for long distance telephone service is less elastic than 1.24, the coinless rate should be higher than the coin rate.  yO1-RBOC Coalition Recon. Pet., Analysis of Economist Dr. Hausman at 3.#XP\  P6QcXP#ъ AT&T responds that there cannot be crosselasticities of demand between two products, such  XJ-as coin and coinless calls, that are in totally different markets.MJp yO-ԍxAT&T Recon. Pet. Reply at 9.M  X -xe102.` ` We again decline to adopt the RBOC Coalition's elasticities methodology.p ( p {O-ԍxSee Second Report and Order, 13 FCC Rcd at 1809,  67.p Our objection is not that elasticities and marginal costs cannot be taken into account in setting product prices, especially in an industry with high fixed and common costs. Rather, we find that we do not have sufficiently accurate information in the record to use elasticities and marginal costs in this particular case. We also conclude that, for purposes of setting dialaround percall compensation, the RBOC Coalition's proffered methodology results in prices that are unreliable. Specifically, the RBOC Coalition's methodology is highly sensitive to estimated values of elasticities and marginal costs. In conjunction with the RBOC Coalition's highly speculative estimates of the elasticities and marginal costs at issue, we find that the resulting "suggested price" is widely variant and thus of little practical value in establishing a reasonable compensation figure. Simply put, the RBOC Coalition's methodology gives wildly divergent answers when the inputs are changed even slightly, and we find such variance unacceptable given the unreliability of the information we have for input data.  X-xf103.` ` The RBOC Coalition's proposal is a variation of a traditional economic theory known as Ramsey's pricing. In the classic version of the theory, a regulator setting prices for a hypothetical firm considers the elasticity of all of the products related by joint and common"- 0*&&llp"  X-costs and sets the prices simultaneously.p {Oy-ԍx See, e.g., Kenneth Train, Optimal Regulation, MIT Press, Cambridge, MA, at 116145 (1992). Thus, when pricing, the regulator would set the prices for all the related goods such that the markup ratio (markup divided by price) of the first good divided by that good's price elasticity is equalized to the markup ratio of the  X-second good divided by the second good's price elasticity.Zp yO-ԍxUnder this approach, a greater proportion of fixed costs will be assigned to (and therefore, a higher price will be charged for) the types of calls that are relatively less price elastic. The regulator also would set the prices so that the firm earned only a normal rate of return.  Xv-xg104.` ` The RBOC Coalition's methodology varies from the classic theory in several respects. The RBOC Coalition's theory assumes that the price of a local coin call is fixed at the price that was established before percall compensation for dialaround calls was established. We believe that the RBOC Coalition's failure to set all payphone prices  X -simultaneously undermines its application of the theory. In strictly applying Ramsey's pricing, payphone owners would not consider the local coin call price as fixed when deciding  X -how much to charge for other types of calls. p {OO-ԍx See, e.g., Kenneth Train, Optimal Regulation, MIT Press, Cambridge, MA, at 116145 (1992). The problem with the RBOC Coalition's improper use of a fixed starting price is compounded by the fact that the local coin call price  X -is necessarily rounded to a nickel increment .^ Dp yO-ԍxPayphones currently accept only silver coins.^  X-xh105.` ` Performed properly, moreover, Ramsey's pricing would price all types of  Xy-payphone calls distinctly.yp {O-ԍxSee, e.g., Kenneth Train, Optimal Regulation, MIT Press, Cambridge, MA, at 116145 (1992). 0 Ġ The RBOC Coalition's analysis, however, does not properly price 0+ calls distinctly. The RBOC Coalition implicitly assumes that 0+ calls have the same elasticity as dialaround calls. We believe that the demand for 0+ services is much less  X4-elastic than the demand for other coinless calling services.4f p yOK-ԍxThe RBOC Coalition states that 0+ calls have similar demand characteristics to dialaround calls.  yO-RBOC Coalition Second R&O Comments, Hausman Declaration at 12. We disagree. At one time, all coinless payphone calls were essentially 0+ calls. Over time, alternative methods of making those same calls became available. Credit card calls became available, accesscode calls could be made using 1800 platforms, and now debit card calls can be made from a payphone. Most people that were making 0+ years ago have migrated to using these other methods of making coinless calls (and people who before did not make coinless calls now are). Those consumers that still make 0+ calls were not enticed by the inexpensive alternatives, which means that they are the least elastic consumers. The consumers that switched to making other types of coinless callers must be demanding coinless calls more elastically than the current 0+ callers.  We therefore believe that the resulting optimal price for dialaround calls would almost surely be lower than the price the".60*&&ll)"  X-RBOC Coalition suggests.p yOy-ԍxEven if we use the RBOC Coalition's estimates of marginal costs, which we believe to be flawed, we  {OA-still arrive at the same conclusion. See para. 108 above. This is due to the RBOC Coalition's failure to take into account the excess profitability resulting from the highpriced 0+ calls. We believe that 0+ calls  X-(perhaps the least priceelastic class of service provided by payphones) would have the  X-highest markup."p yO-ԍxRamsey'sstyle pricing would lead to a higher price for 0+ calls because the demand for 0+ calls is less  yOV-elastic than the demand for dialaround calls. With the increased revenue from dialaround and 0+ calls, payphones would become more profitable. Increased profitability would lead to more payphone installations, and the increased number of payphones would lead to a more elastic demand for the payphone in question. The payphone operation would then lower its calling prices.  X_- Accordingly, we find the RBOC Coalition's failure to treat 0+ calls distinctly, and its failure to account for the payphone's resulting profitability, leads to an overestimate for the price of dial-around calls.  X -xi106.` ` The RBOC Coalition's methodology also relies on speculative estimates of elasticities and marginal costs for both coin calling and dial-around access. Although the  X -RBOC Coalition presented casual empirical evidence of local coin call elasticity,s zp yO-ԍxRBOC Coalition Second R&O Comments, Analysis of Dr. Hausman at 13.s it did not present an empirical estimate of the elasticity associated with dialaround calls. Instead, the RBOC Coalition attempted to estimate the elasticity of dialaround calls by modifying the  X-betterestimated elasticity of interstate long distance toll calls.v p yOK-ԍxRBOC Coalition Second R&O Comments, Analysis of Dr. Hausman at 1315.v The RBOC Coalition states that this estimate is conservative because many long distance accesscode callers have higherthanaverage incomes, or are business callers, whose demand for accesscode calls is less  XK-elastic than for standard interstate long distance calls.jKp yO-ԍxRBOC Coalition Recon. Pet., Analysis of Dr. Hausman at 2.j  X-xj107.` ` We find this reasoning speculative. We note that frequent users of dialaround access have the incentive to acquire the most information about prices, terms, and conditions. Their longrun demand, therefore, may be very elastic. Many payphone calls are international, and the demand for international calls is much more elastic than domestic toll  X-calls.}Z* p {O"-ԍxFor instance, in Trends in the U.S. International Telecommunications Industry, Common Carrier Bureau,  yOf#-Industry Analysis Division (1998 ) at 39, the international toll price elasticity stated to be close to 1, which is more elastic than the .7 domestic toll price elasticity that Dr. Hausman assumed.} The RBOC Coalition estimated the blended elasticity for tollfree and accesscode"/L 0*&&ll"  X-calls to be .398.yp yOy-ԍx RBOC Coalition Second R&O Comments, Analysis of Dr. Hausman at 15.y Although the record does not contain any empirical estimates of the elasticity of dial-around calls, our experience in this area leads us to conclude that the blended elasticity could plausibly be as much as 50 percent higher, or .6. We do not believe that .6 is the correct value for the blended elasticity of a dialaround call. Rather, we find that .6 creates the elastic bound of the true estimate. In other words, for the reasons stated above, we believe that the RBOC Coalition's elasticity estimate of .398 is the inelastic bound of the actual blended dialaround elasticity and that .6 is the elastic bound.  XH- xk108.` ` We also disagree with the marginal cost estimates provided by the RBOC Coalition. First, the RBOC Coalition relies on an Arthur Andersen estimate of $.04 for the  X -marginal cost of a coin call, Xp yO# -ԍxRBOC Comments, Analysis of Dr. Hausman at 16.#XP\  P6QcXP#х but gives no basis for the Arthur Andersen estimate. We have  X -estimated that, on average, the marginal cost of a coin call is $.053,+ p {O-ԍxSecond Report and Order, 13 FCC Rcd at 18001801,  50, n.129. As a result of information we have received, we determine that the marginal cost of a coin call is somewhat higher than $.053. We use the estimate  {O.-from the Second Report and Order to be conservative in our examination of the RBOC Coalition's methodology. Were we to use the higher marginal cost of a coin call, the default price suggested by the RBOC Coalition's pricing methodology would be even lower. + and in some areas it  X -may be as high as $.127.\ p {O9-ԍxFor instance, AT&T suggests that coin collection and rating costs could be $.047. See Second Report  {O-and Order, 13 FCC Rcd at 18031804,  55, n.145. The RBOC Coalition shows that, in some areas, the line  yO-charge alone for coin calls is $.08 per call. RBOC Coalition Comments, Andersen Affidavit at 4.#XP\  P6QcXP#ѽ  X -xl109.` ` Additionally, the RBOC Coalition estimates that the marginal cost of a dial X -around call is $.05,h p yO-ԍxRBOC Coalition Comments, Analysis of Dr. Hausman at 16.h based solely on FLEX ANI costs.h P p yO-ԍxRBOC Coalition Comments, Analysis of Dr. Hausman at 16.h We conclude that the percall  X-marginal cost is less than $.01.p yO!-ԍxThe record indicates that the marginal cost of coinless calls is virtually zero.#XP\  P6QcXP#Ѩ First and foremost, FLEX ANI costs will not be marginal. Among the LECs that have tariffed the cost recovery element for FLEX ANI costs, the charge is a flat monthly rate element attached to all payphone lines. Because the charge does not vary with the number of dialaround calls or any other type of call, it will not affect the marginal cost of a dialaround call. Further, dialaround calls do not generate any additional line charges or coin collection costs. Other types of costs associated with a payphone, such as maintenance, SG&A, and capital costs, correlate to the number of payphones, but not to"0p0*&&ll "  X-the number of dialaround calls from a payphone.7xp yOy-ԍxOne possible exception to this statement may be the additional billing expense incurred because of an additional dialaround call. Theoretically, the additional call could be from a carrier that the PSP was not already billing, so the additional expense of billing this carrier would be a marginal cost. In this case, the additional expense associated with billing this carrier would be a marginal cost. This would be a rare event, however. Further, even in the rare event that the additional call caused the PSP to bill another carrier, the marginal cost of billing that carrier would itself be small, because most billing costs will be associated with the billing mechanism as a whole. Thus, the marginal SG&A cost associated with dialaround calls is virtually zero.7 The record does not contain any quantifiable marginal costs to support a specific estimate, and we conclude the marginal cost of these calls is less than $.01.  X-xm110.` ` The most serious flaw in the RBOC Coalition's methodology is that it is highly sensitive to the estimates of the very parameters that we find to be improperly estimated: the elasticity of dialaround access, the marginal cost of a coin call, and the marginal cost of a coinless call. We illustrate the vagaries of the RBOC Coalition's methodology in the following table, which shows the "optimal" dialaround price suggested by the RBOC's pricing methodology and the suggested price for the various permutations of marginal cost and elasticity estimates. Although we conclude that the marginal cost of a dialaround call is virtually zero, for purposes of examining the suggested price resulting from the RBOC Coalition's methodology, we assume that the marginal cost of a dialaround call is $.01. Without this assumption, the RBOC Coalition's methodology would result in a price of zero for dialaround calls. When calculating the suggested dialaround price, we use the weighted average coin calling elasticity of .663, as reported by the RBOC Coalition.  Xy-xn111.` ` The following table shows that the RBOC Coalition's suggested pricing methodology results in dial-around calls being priced from $.07 to $1.59. The RBOC Coalition's variant of Ramsey's pricing results in a range of optimal prices so wide that we conclude that it cannot be used as a basis for selecting the default compensation amount for dialaround calls. Further, the table shows that when using a more accurate (yet still a  X-conservatively low)IXp yO-ԍxWe again note that we estimate that the marginal cost of a coin call is higher than $.053, but we use the conservative estimate of $.053 here because it leads to a higher suggested default price, which is still less than the default compensation amount we establish in this Order.I marginal cost estimate of a coin call and a more accurate (yet still a  X-conservatively high)MX( p yO -ԍxWe reiterate that we estimate that the marginal cost of a coinless call is $.00, but we employ here a conservative estimate of $.01, because it leads to a higher suggested default price, which is still less than the costbased default compensation amount we establish in this Order. M marginal cost estimate of a dialaround call, the suggested price of a dialaround call ranges from $.07 to $.20. This demonstrates two points. First, when using the RBOC Coalition's Ramsey'sstyle pricing for payphone calls, uncertainty about even one of the inputs (in this case, the elasticity of dialaround calls) generates a range of prices that"1H 0*&&ll4" is much too wide to use. It also demonstrates that taking into account demand and cost conditions leads to a lower price than our default price of $.231 (before adjustment for interest). We therefore conclude that the RBOC Coalition's Ramsey'sstyle pricing should not be used to set the default compensation amount, and that the RBOC Coalition's methodology does not demonstrate that our methodology is undercompensatory. "v20*&&llF"  X-N{ OPTIMAL (DEFAULT) PRICE FOR A DIALAROUND CALL USING  X-hR THE RBOC COALITION'S RAMSEY'SSTYLE PRICING METHODOLOGY ĐTP T ddx!ddx3( ( ( @@@T  z g  Y  x   N?The Marginal Cost of a DialAround Call x ك zZ  gI hY  UK$.01 ك  Y  x a I  U$.05 x ك  Y  x Z z  Ig If the marginal cost of a  Y coin call is $.04 and g The Resulting  Y  Default Price g The Resulting  Y  Default Pricez Ja  g:  the elasticity of the  Y  access charge is%: Y %: Y JJ  Y  .398Y Y KU$.32Y  #$1.59 x ك  Y  x JJ% Y  .600Y  UK$.10 x ك  Y  x :  U$.50 x ك  Y  x JZ o :I If the marginal cost of a  Y coin call is $.053 andI The Resulting  Y  Default PriceI The Resulting  Y  Default PriceZ J I:  the elasticity of the  Y  access charge is]: Y ]: Y JJ Y  .398Y  UK$.20 x ك  Y  x :  #$1.02 x ك  Y  x Jz] :g  Y  .6008  UK$.07 x ك  Y  x !g  U$.37 x ك    - z g  "!30*&&llN"  X- x` ` c. Bellwether Compensation.     X,-xo112.` ` Sprint argues that we should identify the most efficient carrier and base the  X-dialaround compensation amount on that carrier's costs, i.e., the socalled "bellwether"  X-approach.G6 yOy-ԍxSprint Comments at 15.G Sprint contends that we have "no duty to ensure that each provider will earn a fair return on its investment, and that even using industry average costs would reward less efficient or less competent operators and would thus deprive the public the benefit of  X-competition."GX6 yO -ԍxSprint Comments at 16.G Dr. Baumol agrees, stating that the default price should be set to allow the  X-,"maximally efficient" payphone provider to recover its costs.a6 yO= -ԍxAT&T Reply, Analysis of William J. Baumol at 16.a     X -xp113.` ` We decline to adopt a bellwether approach because there is insufficient information on the record to conclude that the cost differences among PSPs with data on the record are due to differences in efficiency. All of the parties that submitted data on the  X -record operate payphones in multiple areas and in multiple states. x6 {O-ԍx See Davel 1998 10K at 2; Peoples Telephone 1998 10K at 4. Furthermore, the RBOC Coalition, which represents companies doing business in all 50 states, submitted data. Each region of the country experiences different costs. For example, payphones in dry climates require less protection from rain than payphones in wetter climates. Therefore, a PSP in a more arid region could install a less protective and thus cheaper enclosure than a PSP in a wetter region. Clearly, a PSP in the wetter region should not be deemed less efficient because it needs to invest in a more expensive enclosure. Similarly, we find that regional differences in  X-labor costs and telephone line expenses would affect the cost of a payphone operation.6 yO-ԍxThe problems with the search for the bellwether approach "most efficient" carrier extend into many different aspects of providing payphones. For example, when comparing the relative costs of maintenance on payphone enclosures, a PSP located predominantly in a densely populated urban area will have very different costs from a PSP in a rural, more sparsely populated area. The difference in costs, however, cannot be translated in a normative determination about which provider is more efficient. In short, this methodology implicates  {Ol-concerns similar to those expressed by the court in MCI v. FCC about comparing apples to oranges. Sprint did not provide any justification showing that any party was more efficient than  X-,another.:L 6 yO"-ԍxSprint may believe that LECs are more efficient than PSPs in providing payphones, but as we discuss in  yO#-Section IV.B.3.a, we do not believe that LEC payphone units are more efficient than PSP payphone units.#XP\  P6QcXP#:    "40*&&ll"Ԍ X-x` ` d. CallerPays Methodology.     X,-xq114.` ` Under a callerpays compensation methodology, the calling party would pay for dialaround calls by depositing coins or using a credit card. The callerpays compensation mechanism is a variation of the set use fee compensation mechanism. Under the set use fee compensation mechanism, the IXC imposes a charge on the caller, collects payment from the  X-caller, and remits that money to the PSP.6 {OI-#]\  PC2P#эxSee First Report and Order, 11 FCC Rcd at 2058485,  84. In the First Report and Order, the Commission  X-rejected the callerpays approach and the set use fee approach on similar grounds.$Z6 {O -#]\  PC2P#эxFirst Report and Order, 11 FCC Rcd at 2058485,  8485. The Commission concluded that a particular set use fee would lead to greater transaction costs than what would be experienced under a carrierpays compensation plan. The Commission also found that a callerpays compensation plan could burden transient  {O -callers by requiring them to deposit coins and thus could conflict with section 226(e)(2). Id. Despite some parties' requests, we decline to adopt a callerpays compensation methodology at this  X-,time. F6 {O-ԍxSee, e.g., PageMart Recon. Pet. at 6; ATP Comments at 24; AT&T Comments at 13. See also Allen Lund Company Comments at 12 (estimating that 2530 percent of their tollfree calls originate from payphones, leaving them defenseless against potential fraud, and advocating mandatory caller pays method to protect against this type of fraud). APCC counters that any compensation system will have potential for fraud, but that with vigilance, the authorities can "detect, and quickly address actual fraud." APCC Reply Comments at 48. We agree with APCC. The potential for fraud, in and of itself, does not persuade us to choose one compensation system over another. Rather, the valid concerns about fraud allow us to reiterate that we will deal aggressively  {O-with any payphone owners found to be abusing the dialaround compensation process. First Report and Order, 11 FCC Rcd at 21265,  63.     X -xr115.` ` We expect IXCs to develop the technology necessary to employ targeted call blocking, which will allow them to block calls from PSPs that they find to be excessively priced. With the bargaining power afforded to them by the ability to block calls, we are hopeful that IXCs will negotiate privately with PSPs for fair and mutually agreeable  X]-compensation amounts.]6 {O(-ԍxSee Section IV.A.3.a. (discussing the role of targeted call blocking in any move to a deregulatory solution to dialaround compensation). Our preference is for IXCs and PSPs ultimately to enter into privately negotiated agreements establishing compensation amounts for dialaround calls. Although some economists would argue that a callerpays methodology forms the basis for the purest marketbased approach, we find that the statutory language and legislative history  X-indicate Congress's disapproval of a callerpays methodology.\Xt6 yO&$-ԍx Specifically, the relevant portions of the Senate Report provide that section 226(e)(2) bars the  {O$-Commission from concluding that compensation for compensable calls must be paid by the caller. See S. Rep.  {O%-No. 101439 at 20 (1990). See also 47 U.S.C.  226(e) ("The Commission shall consider the need to prescribe"%0*&&%" compensation (other than advance payment by consumers) for owners of competitive public pay telephones for calls routed to providers of operator services that are other than the presubscribed provider of operator services for such telephones."). We therefore conclude that"50*&&ll" we should monitor the advancement of call blocking technology and any accompanying   marketplace developments before reconsidering a callerpays compensation approach.     X-xs116.` ` We also note that some parties urge us to adopt a "modified caller-pays plan." Under a modified caller-pays plan, entities subscribing to a tollfree number would have three options for handling calls made from payphones. First, the subscriber could elect to accept calls from payphones and pay the charges associated with those calls that are passed through to it by the IXC. Second, the subscriber could block all calls from payphones, eliminating the need for compensation to the PSP. Third, the subscriber could elect to use a special "area  X-code" (i.e., 8XX, instead of "800" or "877" codes) that would enable it to block incoming payphone calls that callers chose not to pay for with coins or a credit card. For the reasons provided above for not instituting a mandatory callerpays system, we also decline in this proceeding to impose the modified callerpays or 8XX plan. We note that a modified callerpays plan is the subject of a petition for rulemaking filed by AirTouch and that the  X -,Commission may examine the issue further if that petition is granted.  6 {O-ԍxSee AirTouch Paging Petition for Rulemaking to Establish a Dedicated 8XX Code for Toll-Free Calls  {O}-Placed from Pay Telephones, Public Notice, RM-9273, Report No. 2274 (rel. May 6, 1998).      XF-x` ` e. Requests for Exemptions from Compensation.     Xr-xt117.` ` Several petitioners assert that certain types of calls, such as "help line" or  X[-paging calls, should be exempt from percall compensation charges.c[D6 yOP-ԍxDMA Recon. Pet. at 1; Source One Recon. Pet. at 5.c Other petitioners urge us to exempt from compensation requirements payphone calls to 800 hotlines and Electronic  X--Benefit Transfer ("EBT") services.'Z-6 {O-ԍxSee, e.g., Citicorp Comments at 3, 6. EBT is an automated payment process for government assistance programs, such as Food Stamps. EBT uses debit cards and banking technology to provide monetary assistance to recipients of these programs.' Specifically, these parties request that we either waive  X-the percall compensation amount or establish an 8XX number for nonprofit organizations." 6 {O!-ԍxSee CitiCorp Services Comments at 13, 5; Colorado Department of Human Services Reply Comments at 2; Kentucky Cabinet for Families & Children Reply Comments at 2; New Hampshire Department of Health & Human Services Reply Comments at 2; Pennsylvania Department of Public Welfare Reply Comments at 1; Washington Department of Social Services Reply Comments at 1. The petitioners supporting an EBT exemption claim that state contracts currently compensate EBT service providers on a fixed price basis. Because the contracts were signed before the"60*&&ll" implementation of percall compensation charges, EBT service providers did not factor  X-payphone access costs into the contract terms.^6 {Ob-ԍxSee, e.g., Citicorp Comments at 23, 6.^ As an alternative method of compensating PSPs for EBT and 800 hotline calls, these petitioners advocate increasing the cost of coin  X-calls._Z6 {O-ԍxSee, e.g., CitiCorp Comments at 5._ Several of these commenters encourage us to maintain jurisdiction over the  X-,regulation of payphones rates.6 yOA -ԍxOklahoma Department of Human Services Reply Comments at 1; Rhode Island Comments at 2; Vermont Department of Social Welfare Reply Comments at 2.  X-  X-xu118.` ` We find that Congress clearly instructed us in Section 276 to ensure compensation for "each and every" call from a payphone. Congress explicitly exempted only two types of calls: emergency calls (911) and TRS calls. Because Congress did not provide for any other exceptions, we cannot grant an exception for these types of calls. Even if Congress permitted us to grant an exception for EBT calls, we are unconvinced that we should do so. We understand that when a caller is placing an EBT call, the buyer of that call will be the government. This is insufficient justification, however, to deny payphone owners compensation for the use of their payphone. We are confident that our default compensation amount is fair to all parties involved. In receiving compensation, payphone owners will benefit from their decision to place their payphone where consumers benefit from using it. In addition, carriers will pay no more than a proportionate share of the payphone's joint and   common costs.     X-xv119.` ` We agree with APCC that EBT callers benefit greatly from the placement of  X-payphones in areas with EBT traffic.ND6 yO-ԍxAPCC Reply Comments at 4849.N The people who use payphones to complete EBT calls likely have no phone service in their home and are therefore likely to derive significant benefits from conveniently located payphones. Payphone owners that receive fair compensation for EBT calls are more likely to locate their payphones in areas where EBT calls are made, thus providing service for people who rely on payphones as a phone of last resort. Payphones will thus be placed where the amount of traffic warrants the payphone's   existence, which is one of the benefits of a deregulatory approach.     X-xw120.` ` We also decline requests to artificially raise the local coin calling rate or to reregulate payphone prices so that calls like EBT calls can be made for free or at a reduced price. We understand that because of our default compensation amount, government agencies will ultimately spend more money to disburse benefits. Under Citicorp's proposal to raise the"E70*&&ll" local coin calling price, however, consumers will still pay for those calls, albeit in a different form. Under Citicorp's proposal for free or reducedprice EBT calls, PSPs would not receive the extra compensation from EBT traffic and therefore would have no economic incentive to locate payphones according to the needs of EBT callers. Any such scheme also would  X-,involve creating a subsidy, an option that Congress specifically eliminated in the 1996 Act.6 yO-ԍx47 U.S.C.  276. For the same reasons stated above, we decline to create a special 8XX code that could be used by nonprofit companies.     X-xx121.` ` We note that APCC states that some PSPs would be willing to reduce the amount of percall compensation if they find evidence that IXCs do the same. We encourage those parties with budgetary concerns to meet with the IXCs and PSPs to reach a voluntary   agreement regarding percall compensation.     X -   x3.` ` Cost Calculation.     X -xy122.` ` In this section, we address challenges to three aspects of the Commission's  X -calculation in the Second Report and Order of the cost of a dialaround call. Petitioners challenge the accuracy of the various sources of cost data on which we relied in determining the cost of a dialaround call. Petitioners challenge our choice of a marginal payphone location in establishing certain percall costs. Finally, petitioners argue that various components of our cost calculation were either improperly allowed, improperly disallowed, or   improperly calculated.     X-x` ` a. Source of Cost Data.h     X-xz123.` ` In this section, we address issues raised concerning the cost data discussed in  X-the Second Report and Order. We also examine the cost data submitted in response to our  X-Public Notice and in petitions for reconsideration. Petitioners raise concerns regarding five  Xr-sources of cost data. First, petitioners argue that, in the Second Report and Order, the Commission relied too heavily on data from independent PSPs. Second, parties claim that NYNEX's cost studies show that NYNEX's average cost of a coin call is less than $.25, implying that the compensation amount also should be less than $.25. Third, parties claim  X-that, in the Second Report and Order, the Commission ignored Sprint's cost data. Fourth, AT&T submitted data from SBC that purportedly shows that, in using a LEC's costs, the percall compensation amount should be less than $.25. Fifth, MCI submitted a cost study purporting that the average cost of a dialaround call is significantly less than the Commission   estimated. We address each of these issues separately.   "!8 0*&&ll "Ԍ X-x{124.` ` Reliance on APCC and Independent PSP data. When calculating the average  X-cost of a dialaround call in the Second Report and Order, the Commission relied on data that  X-it concluded was reliable.x6 {OO-ԍxSecond Report and Order, 13 FCC Rcd at 182024,  99107.x In its petition for reconsideration, AT&T asserts that the Second  X-Report and Order generally overstates the costs of payphone calls, because the Commission relied too heavily on cost data submitted by APCC and other independent payphone  X-providers.XZ6 yO-ԍxAT&T Recon. Pet. at 1216 (stating that the Commission should not have relied only on independent PSP data when determining the average cost of a dialaround call, because independent PSPs have higher costs than LECowned PSPs). AT&T further states that most payphones are operated by LECs, not  X~-independent payphone owners.~z6 {O -ԍxAT&T Recon. Pet. at 13 ("IPPs . . . operate only about 20 to 25 percent of all payphones."). See also AirTouch Recon. Opp. at 8; Arch Recon. Reply at 3. In the Second Report and Order, the Commission relied solely on APCC data only when determining the number of calls made from a payphone in a  XR-marginal location.vR6 {O-ԍxSecond Report and Order, 13 FCC Rcd at 179899,  4650.v In this Order, however, we do not rely on that calculation. We   therefore need not address AT&T's arguments regarding the use of APCC data.     Xg -x|125.` ` NYNEX cost studies for Massachusetts and New York State. Before the  XR -Commission issued the Second Report and Order, Sprint petitioned the Commission to require NYNEX to distribute to all parties of record a copy of the confidential Massachusetts DPUC study, which concludes that the cost of a coin call is $.167. The Commission denied Sprint's  X-petition.f 6 {O&-ԍxSecond Report and Order, 13 FCC Rcd at 1825,  110. The Commission denied Sprint's petition, in part, based on Bell Atlantic's claim that the study was proprietary. AT&T contends that the Massachusetts DPUC study supports a percall dialaround price of less than $.167. AT&T suggests that the LECs failed to supply cost data because such data would militate in favor of establishing a compensation amount that is less  X-,than an amount that would benefit the LECs.I 6 yO;-ԍxAT&T Recon. Pet. at 14. I     X-x}126.` ` On July 10, 1998, the New York Public Service Commission (PSC) filed comments showing that, in a study conducted in New York, Bell Atlantic's average cost of a  X-coin call is less than $.25.nP 6 yO#-ԍxState of New York Department of Public Service Comments at 1.n Several parties cite this study in support of AT&T's contention that, due to lower costs experienced by LECs, the default, percall compensation amount"90*&&ll"  X-,should be less than $.25.^6 {Oy-ԍxSee, e.g., Sprint Comments at 18.^     X,-x~127.` ` The RBOC Coalition asserts that the Massachusetts DPUC and New York cost studies are not fully distributed cost studies, maintaining that several costs were omitted. The RBOC Coalition further states that the line costs in Massachusetts were less than line costs in  X-other states served by Bell Atlantic.Z6 yO-ԍxRBOC Coalition Second R&O Reply, Andersen at 23; RBOC Reply, Andersen at 67. Ć Arthur Andersen, on behalf of the RBOC Coalition, states that the New York study reported the provision of access lines at cost, rather than at tariffed rates. Arthur Andersen further states that the New York cost study excludes many  X-,fixed costs associated with providing payphone service.U6 yO= -ԍxRBOC Reply, Andersen at 6, 7. U     X -x128.` ` For the reasons provided by the RBOC Coalition, we decline to rely on the New York study in determining the costs of a standalone payphone provider. We believe that, when taking into account all the appropriate costs, the average cost of making a coin call   in New York is likely to be higher than the $.25 that the New York PSC reported.     X-x129.` ` Sprint data. In the Second Report and Order, the Commission did not rely  X-heavily on Sprint cost data.xz6 {O-ԍxSecond Report and Order, 13 FCC Rcd at 182024,  99108. x AT&T alleges that the Commission failed to adequately consider Sprint's cost data. AT&T believes that Sprint's data demonstrates that LECowned payphone operations are more efficient than independent PSP operations. AT&T avers that, because most payphones are owned by LECs, the dialaround default price should be less than  XD-,the amount established in the Second Report and Order.D 6 {O-ԍxAT&T Recon. Pet. at 1314 (citing Second Report and Order, 13 FCC Rcd at 1821,  101 n.267).     Xr-x130.` ` We conclude that the Sprint data are unreliable. First, Sprint's return and depreciation estimates appear to be based on embedded costs, not forwardlooking costs. This is significant in assessing the reliability of Sprint's data, because embedded costs do not necessarily reflect the economic cost of establishing a current operation. Specifically, Sprint's cost study suggests that it can recoup the value of a payphone by recovering $6.98 each  X-month for five years.6 yON$-ԍxSprint Second R&O Reply, Exhibit 1 at 2 (asserting that monthly depreciation for payphone assets is $6.98). Thus, based on Sprint's data, a Sprint payphone, including pedestal,": 0*&&ll"  X-enclosure, and installation, costs $418.80.6 yOy-ԍxWe arrive at $418.80 by multiplying the monthly payphone recovery cost of $6.98 by 60 months. The evidence on the record, however,  X-demonstrates that a newly installed coin payphone unit costs more than $2,300.GX6 {O-ԍxSee IV.B.3.g(1).G Clearly,   Sprint's asset return requirement is too low.     X-x131.` ` We assume that Sprint's $6.98 monthly depreciation amount results from its particular accounting procedures, in which, as a normal course of business, Sprint has been depreciating its payphone assets over a fiveyearperiod. We find, however, that the evidence  X-supports a conclusion that payphones last longer than five years.6 {OT -ԍxThe record evidence demonstrates that payphones should be depreciated over 10 years. See, e.g., Peoples Telephone 1997 SEC form 10K, page 31; MCI Comments, Exhibit 2 at 3. Thus, it appears that, when Sprint transferred the payphones to its unregulated payphone operation, the payphone  X-operation received those payphones at less than full market value.rZD6 yO-ԍxThe Commission required BOCs or other incumbent LECs subject to our joint cost rules to classify their payphone operations as nonregulated for our Part 32 accounting purposes, pursuant to our regulations  {O-implementing section 276. See First Report and Order, 11 FCC Rcd at 20621,  157.r We note that payphones that were older than five years at the time of transfer would have effectively been transferred at a book value of zero. Sprint would have completely depreciated those payphones, leaving them with a book value of zero. Thus, these payphones were transferred to Sprint's payphone  X/ -operation at a value of zero./ f 6 yOF-ԍxWe realize that not all LECs depreciate their payphones over a fiveyear schedule, but this does not obviate our conclusion that embedded costs do not necessarily correlate to economic value. This noneconomic accounting methodology alone justifies setting prices on a goingforward basis. More importantly, because the marketplace sets   prices on a forwardlooking basis, we do not use embedded costs in this Order.     X--x132.` ` Second, we find appropriate our decision in the Second Report and Order to  X-not rely on Sprint's estimate for Sales, General and Administration (SG&A) costs (i.e.,  X-overhead costs).m 6 {Or-ԍxSecond Report and Order, 13 FCC Rcd at 1822,  103.m Sprint reported that its SG&A costs are only $8.51 per payphone per  X-month. This is almost 70 percent less than a large PSP's SG&A costZP 6 {O!-ԍxCompare Sprint R&O Reply, Exhibit 1 at 2 (estimating monthly SG&A at $8.51) to CCI Second R&O Comments at 10 (monthly SG&A of $28.80, derived by multiply CCI's $.04 per call estimate times CCI's 720 average number of calls). and nearly 50 percent";r0*&&ll"  X-less than SBC's SG&A estimate of $16.52.4Z6 {Oy-ԍxRBOC Coalition Nov. 12, 1998 ex parte letter from M. Kellogg to Craig Stroup. The amount of $16.52 includes $10.38 reflected in the Project Quintet data that AT&T submitted, plus $6.14 of monthly costs originally omitted in the Project Quintet study. 4 In light of the contrary record evidence, and given our experience regulating telecommunications companies, including payphone operators, we find that Sprint's SG&A estimate does not reasonably represent the costs of a standalone payphone company. For this reason, we find that the Commission properly exercised its discretion and did not rely on Sprint's estimate of SG&A costs. We note that, although the Commission did not fully explain its reasoning in the  Xv-Second Report and Order, we believe the Commission's decision was nonetheless correct. Furthermore, for these same reasons, we conclude that we should not rely on Sprint's costs in   this Order.     Xv -x133.` ` SBC data (as submitted by AT&T). In its petition for reconsideration, AT&T submits a new cost study, called Project Quintet, that SBC performed to facilitate the possible  XJ -sale of its payphone operations.UJ 6 yO-ԍxAT&T Recon. Pet., Attachments IIII.U AT&T argues that the Project Quintet data demonstrate  X3 -that the average cost of a coin call is $.195.3 z6 {O^-ԍxId. at 15. See also ConsumerBusiness Coalition Recon. Opp. at 5 (arguing that SBC data proves LEC payphone operators have lower costs). SBC states that the costs enumerated in Project Quintet were incomplete and did not account for several costs of a payphone  X-operation, including legal support and rent.6 {O-ԍxRBOC Coalition Nov. 12, 1998 ex parte letter from M. Kellogg to Craig Stroup. The RBOC Coalition submitted supplemental  X-information regarding maintenance and SG&A costs.f 6 {O-ԍxRBOC Coalition Nov. 12, 1998 ex parte letter from M. Kellogg to Craig Stroup. AT&T believes that the Project Quintet data are sufficient to estimate SBC's payphone costs and do not require  X-,modification. 6 {Oi-ԍxAT&T Nov. 19, 1998 ex parte letter from J. Spurlock to Magalie Roman Salas at 1.     X-x134.` ` We note that the Project Quintet data that AT&T submitted does not include line items for legal support, rent, advertising, or other similar costs. We therefore concur with SBC that those costs were not included in the data submitted by AT&T. We find,  X-however, that the Project Quintet data, as supplemented by SBC, 6 {O#-ԍxRBOC Coalition Nov. 10, 1998 ex parte letter from M. Kellogg to Craig Stroup. provides some assistance to our determination of a fair default compensation amount. Although the capital costs"<0*&&ll" derived from the Project Quintet data are unusable because they are based on embedded  X-costs,U6 yOy-ԍxAT&T Recon. Pet., Attachments IIII.U we conclude that the SG&A and maintenance costs, as supplied by SBC, are reliable.     X-x135.` ` MCI data. In response to our Public Notice, MCI submitted a payphone cost study suggesting that the average cost of a coin call is $.16, and the average cost of a coinless call is $.12. Upon review, we conclude that MCI's cost study is unreliable for four reasons.  X-First, the cost study is based on a hypothetical business model.o6 yO-ԍxMCI operates its own payphones, but its cost study is not based on its own experience. We have no evidence on the record from actual payphone operations. For instance, APCC submitted payphone capital cost  {OU -data from two large payphone operations.  See APCC Aug. 21, 1998 ex parte letter to Magalie Roman Salas;  {O -APCC Sept. 16, 1998 ex parte letter from R. Aldrich to Magalie Roman Salas. We also used maintenance and  {O -SG&A data from SBC. See SBC Nov. 10, 1998 ex parte letter from M. Kellogg to Craig Stroup.  Because payphones serve a wide variety of locations, including outdoor locations, we find that the capital cost data from actual payphone operations will better reflect a PSPs actual costs. Second, MCI's SG&A  X`-estimate is based on multiplying the capital investment by 10.4 percent.N`%6 yO6-ԍxMCI Comments, Exhibit 2 at 4.N This 10.4  XI -percentage was arrived at by examining AT&T's overhead costs.I 6 {O-ԍxMCI Sept. 11, 1998 ex parte letter from L. Sawicki to Magalie Roman Salas at 2. AT&T is primarily a long distance company, not a payphone operator. We find that MCI failed to adequately explain why a payphone operator's overhead costs should bear the same relationship to capital as AT&T's. We thus find unreliable MCI's percentage of 10.4 for estimating overhead costs. Furthermore, MCI multiplies its overhead factor by an amount of capital that we find to be  X -too low, resulting in an SG&A estimate that consequently is too low.\ G 6 {O-ԍxMCI assumes that a newly installed payphone costs less than $1700 (see MCI Comments, Exhibit 2 at  {O-7 ), but we find that the average payphone costs more than that. See, e.g., APCC Aug. 21, 1998 ex parte letter from R. Aldrich to Magalie Roman Salas (stating that a newly installed payphone costs $2523). We thus conclude   that MCI's SG&A cost estimate is unreliable.     X-x136.` ` Third, we find that MCI's cost study is incomplete. For example, MCI did not  X-include any cost estimates for trucks, replacement parts, and other items.k 6 yO-ԍxAlthough some parties may argue that these costs are included in the overhead figure that MCI used, we  yO -conclude in para. 135 that MCI's calculation of overhead is unreliable. We find that these costs are required, however, for a payphone operation. Also, MCI estimated the monthly telephone expenses, in part, by using the 1996 ARMIS reports, using line items USOA 2315 and 6315 (public telephone equipment), but did not account for the payphone"=0*&&ll"  X-costs included in accounts 6533 and 6534.6 {Oy-ԍxIn an RBOC Sept. 14, 1998 ex parte letter from M. Kellogg to Craig Stroup, the RBOC Coalition states that additional payphone costs are reported in accounts 6533 and 6534. For these reasons, we conclude that MCI's cost  X-,study is unreliable.H"6 {O-ԍxIn addition to their cost study, MCI also submitted an ex parte letter analyzing an RBOC PSP's costs, in which MCI concluded, after adjusting for coin related costs, that the cost of a payphone operation is $109.543  {ON-per phone per month. MCI Aug. 26, 1998 ex parte letter from L. Sawicki to Magalie Roman Salas.  {O-Interestingly, MCI's estimate is actually higher than our estimate of $101.29 per month (see line 6 in the table in Section IV.B.3.g(8). below). MCI divides its cost estimate by 700 calls for a percall compensation estimate of $.156. Dividing MCI's estimate of $109.543 by 439 calls at a marginal payphone location results in per call  yOr -compensation amount of $. 233 per call, which is comparable to our estimate in this Order before interest is  {O: -allowed.  See line 7 in the table in Section IV.B.3.g(8) below.     X-x137.` ` LEC payphone data versus nonLEC payphone data.  Several parties contend  X-that LEC payphones are more efficient than nonLEC payphones.2 6 yO-ԍxFor instance, AT&T suggests that SBC payphone operations have lower SG&A and maintenance costs than nonLEC PSPs. AT&T Recon. Pet. Attachments IIII. Parties point to NYNEX cost studies that allegedly show that NYNEX experienced lower costs than nonLEC PSPs. As we state above, we are unable to verify the validity of some of this thirdparty  X-information.  6 {O-ԍxSee Section IV.B.3.a. above (discussing NYNEX's New York and Massachusetts data). In the case of the BellSouth data that AT&T filed, the information was not sufficiently detailed to use. Also, some of the thirdparty data appears to be unreliable on its face. For example, SBC states that the SG&A estimates that may be derived from the Project Quintet  X-data are too low because several SG&A costs are omitted. 6 {O"-ԍxRBOC Coalition Nov. 12, 1998 ex parte letter from M. Kellogg to Craig Stroup. Also, the RBOC Coalition states  Xv -that the NYNEX studies do not include all payphone costs. v v6 yO-ԍxRBOC Coalition Second R&O Reply, Andersen at 2, 3; RBOC Replies, Andersen at 6, 7. Thus, we find that, before   using thirdparty information, such information must be verified.     X -x138.` ` We conclude, however, that much of the data submitted by the independent PSPs reliably reflect the costs of a standalone payphone operation. First, as the Commission  X]-noted in the Second Report and Order, the independent PSPs' data are consistent with their Securities and Exchange Commission (SEC) forms 10K, which must be certified to by an  X1-officer of the company.m 16 {O#-ԍxSecond Report and Order, 13 FCC Rcd at 1823,  106.m Further, these data are based on their own, actual payphone operations. In certain instances, where we could not use a particular cost element because it did not accurately measure the cost we were examining, the RBOC Coalition and PSPs"> 0*&&ll9" submitted supplemental data that convinced us of the data's reliability. For example, because the cost of installing a new payphone cannot accurately be determined by examining the capital costs reported on a PSP's SEC form 10K, two large PSPs submitted information that  X-specifically addressed the costs associated with installing a new payphone. \6 {O4-ԍxIn the APCC Aug. 21, 1998 ex parte letter to Magalie Roman Salas, Peoples Telephone reported the  {O-costs of a new payphone, with installation and pedestal/enclosure. In the APCC Sept. 16, 1998 ex parte letter from R. Aldrich to Magalie Roman Salas, Davel also reported the costs of a newly installed payphone.  In addition, in response to our request, the RBOC Coalition supplied data for payphone line costs and FLEX  X-ANI cost recovery tariffs.6 {O* -ԍxRBOC Coalition Sept. 3, 1998 ex parte letter from M. Kellogg to Craig Stroup. We find the payphone line cost data and FLEX ANI data to be reliable, because the cost estimates were largely taken from tariffs, with the remaining figures   provided with sufficient documentation to convince us they are correct.     X-x` ` b. Use of Marginal Payphone Location.     X -x139.` ` To establish a percall default compensation amount based on the costs of a payphone operation, the cost of that operation must be divided by a particular number of  X -calls. In the Second Report and Order, we concluded that we should use the number of calls at the marginal payphone location. A marginal payphone location is a location where the payphone operator is able to just recoup its costs, including earning a normal rate of return on the asset, but is unable to make payments to the location owner. The Commission determined that when the 1996 Act was passed and payphones were receiving dialaround compensation  X-,on a perphone basis, the marginal payphone location experienced 542 calls per month.x~6 {OG-ԍxSecond Report and Order, 13 FCC Rcd at 17971801,  4650.x     XD-x140.` ` Some parties disagreed with the Commission's use of a marginal payphone location in establishing the default compensation amount for dialaround calls. For example, when MCI calculated the cost of a coin call, it assumed that 700 calls per month were made  X-from a particular location.N6 yO-ԍxMCI Comments, Exhibit 2 at 7.N CWI argues that, in the Second Report and Order, the cost of making a coin call was inflated by using a hypothetical payphone that experiences a relatively  X-low volume of calls.D6 yO$"-ԍxCWI Comments at 10.D Alternatively, Dr. Hausman states that the "Commission should set  X-prices so that a marginal payphone will still be able to recover its costs,"o0 6 yO$-ԍxRBOC Coalition Second R&O Comments, Hausman Declaration at 23.o and that using average call volumes will cause payphones with low call volumes or relatively high costs to"? 0*&&ll}"  X-exit the industry.c6 yOy-ԍxRBOC Coalition Comments, Hausman Declaration at 7.c Similarly, APCC contends that the use of an average call volume would lead to call volumes continually increasing, because payphones with submarginal call volumes would be forced to exit the industry due to lower compensation amounts that are based on the  X-average call volumes.EX6 yO-ԍxAPCC Reply at 2627.E Additionally, parties have submitted information showing that the  X-542 calls at a marginal location, which we relied on in the Second Report and Order, was too high. The RBOC Coalition submitted data showing that the average RBOC Coalition  Xx-payphone handles 478 calls per month.x6 {O -ԍxRBOC Coalition Sept. 3, 1998 ex parte letter to Magalie Roman Salas at 2. Cf. APCC Sept. 28 ex  {O -parte letter from R. Aldrich to Magalie Roman Salas. APCC stated that call volumes at independent  Xa-payphones fell sharply.raD6 {OV-ԍxAPCC Sept. 25, 1998 ex parte letter to Magalie Roman Salas.r APCC attributes the decrease in call volume to the drop in cellular and PCS prices and the increase in the number of payphones, and notes that the decreasing  X3-,call volumes occurred largely before the coin prices increased.:36 {O-ԍxId.:   x  X_ -x141.` ` We reaffirm that use of the marginal payphone location is necessary to fairly compensate PSPs and ensure the widespread deployment of payphones in compliance with the mandates of section 276. We find that basing the default compensation amount on an average payphone location would cause many payphones with lessthanaverage call volumes to become unprofitable. We note that many states examining the payphone market have concluded that there are a sufficient number of payphones and thus a public interest payphone  X-programHh 6 {O-ԍxIn the First Report and Order, the Commission finding that primary responsibility for administering and funding public interest payphones should rest with the states set forth basic guidelines that the states should follow in establishing a funding mechanism and directed the states to review whether they have  {OH-adequately provided for public interest payphones. First Report and Order, 11 FCC Rcd at 2067786,  277 {O-286. As the Commission defined them in the First Report and Order, public interest payphones are payphones that: (1) fulfill a public policy objective in health, safety, or public welfare; (2)are not provided for a location provider with an existing contract for the provision of a payphone; and (3) would not otherwise exist as a result  {Ol -of the operation of the competitive marketplace. First Report and Order, 11 FCC Rcd at 20680, 282.  is unnecessary at this time.Ex6 {O!-ԍxSee, e.g., North Carolina Utilities Commission, In Re Payphone Service, Docket No. P100, Sub 84a, (May 13, 1998) (noting that the restructuring and deregulation of the payphone industry will expand the availability of payphone service to the public and that the increased subscription to cellular services lessens the need for a public interest payphone program; concluding that a public interest payphone program in North  {O %-Carolina would be premature and inappropriate); Maine Public Utilities Commission, In Re Provision of  {O%-Payphone Service, Docket No. 98356, (August 25, 1998) (finding that a public interest payphone program is"%0*&&'&"  {O-unnecessary due to the wide availability of payphones in Maine); Pennsylvania Public Utility Commission, In Re  {OZ-Rescind Obsolete Regulations Regarding Telephone and Residential Telephone Service, L00960113 (April 10,  {O$-1998) (noting the wide availability of payphones in Pennsylvania); Colorado Public Utilities Commission, In the Matter of Proposed Amendments to the Rules Regulating Telecommunications Service Providers and Telephone  {O-Utilities, 4 CCR 7232; and the Rules Regulating Operator Service Providers, 4 CCR 72318 (Sept. 15, 1997) (concluding that the market should ensure the availability of public interest payphones and that regulators should  {OH-intervene only where necessary); Montana Public Service Commission, In the Matter of the Commission's Inquiry into Payphone Issues Arising out of the Telecommunications Act of 1996 and Subsequent Federal  {O-Communications Commission Order to Implement the Payphone Provisions of the Act, Docket No. D97.2.33, Order No. 6050 (Feb. 26, 1998) (finding that there is no evidence indicating that the payphone market is failing  {Ol -to serve the public interest); New York Public Service Commission, Proceeding on Motion of the Commission to Review Regulation of Coin Telephone Services under Revised Federal Regulations Adopted Pursuant to the  {O -Telecommunications Act of 1996, Case 96C1174 (July 15, 1998) (stating that the number of payphones available for public use appears to be increasing in New York and therefore declining to establish a public  {O -interest payphone program); Public Utility Commission of Oregon, In the Matter of an Investigation Concerning  {OZ -Public Interest Payphones Pursuant to Federal Communications Commission Dockets CC 96128 and 9135, Order No. 98435 (Oct. 26, 1998) (concluding that formal proceedings are unnecessary because Oregon has no state regulatory impediments to entry or exit in the payphone market and there is no need for a public interest  {O-payphone program at this time); Public Service Commission of Delaware, In the Matter of the Investigation and  {O~-Adoption of Rules to Govern Payphone Services within the State of Delaware, Order No. 4885 (August 25, 1998) (finding no identifiable need for a public interest payphone program in Delaware at the time); Public Service  {O-Commission of West Virginia, In Re General Investigation into the Payphone Market in West Virginia, Case No. 980430TGI (Jan. 4, 1999) (concluding that there is no need to take any additional regulatory actions to address "market failures" in the deregulated payphone market in West Virginia at this time).E We conclude that, if we were to base the default"@j0*&&ll" compensation amount on the average payphone location, many payphones would become unprofitable and exit the industry. We therefore conclude that we should use the marginal payphone location when establishing the default compensation amount. Because it assures fair compensation for the overwhelming majority of payphones, we conclude that the methodology we adopt in this Order will not negatively affect the current deployment of payphones and thus is consistent with Congress's goal of widespread deployment of  Xv-,payphones.vj6 yO-ԍxWe believe, however, that other factors, such as the decreasing prices for cellular and PCS service, may reduce the number of payphones. Such a reduction in the number of payphones would be the result of a competitive marketplace. That does not mean that state commissions should not take action regarding payphones if they believe market forces are causing the removal of payphones in locations where they continue to be needed.      X-x142.` ` MCI asserts that use of a marginal payphone location suffers from a "circularity" problem because the number of calls at a marginal payphone location is affected  Xt -by the compensation amount.t 6 {O?$-ԍxSee MCI January 19, 1999 ex parte letter from G. Ford to Magalie Roman Salas at 24 (discussing the circularity associated with the use of a marginal payphone location). Thus, an increase in the per call compensation amount means that a payphone needs fewer calls to break even. The "circle" thus consists of call volume"] At0*&&llA " being a function of compensation, and compensation being a function of call volume. Although MCI argues that this circularity undermines the use of a marginal location, this same concern applies equally to the use of an average location, or for that matter any volume  X-level the Commission could choose as a rational starting point for its analysis. 6 yO4-#X\  P6G;2P#эxIndeed, MCI readily admits that an "averagepayphone approach" (which it supports) also suffers from  {O-this circularity problem, unless the Commission were to use "average call volumes prior to implementation of the  {O-percall compensation approach." MCI Jan. 19, 1999 ex parte letter from G. Ford to Magalie Roman Salas at 5. First, we note that MCI's condition would apply equally to the circularity concerns of a marginalpayphone approach. Second, MCI's assertion that this resolves the circularity concerns is misplaced because using precompensation volumes would still reflect the effects of a particular compensation amount, albeit one where the compensation level was little or zero. More generally, we reject MCI's approach because, before percall compensation, payphone owners were not receiving fair compensation for a large segment of their total call volume dialaround calls. We recognize that before percall compensation, some payphone owners were receiving $6.00 per month for dialaround compensation which compensated them solely for access code calls and not for toll free calls. Thus, in order for a payphone to break even in the period prior to per call compensation, that payphone required a higher number of local, 0+, and 0 calls as compared to payphones under the current per call compensation plan. This would result in a compensation amount that would not adequately compensate payphone owners for dialaround calls. We thus conclude that basing the default compensation amount on the number of calls at the current marginal payphone location is reasonable and appropriate.  This is true because the problem does not arise from the selection of average versus marginal payphone locations, but rather is inherent in the use of a percall compensation scheme, as mandated by  Xv-the statute.WvL 6 {Os-ԍxSee 47 U.S.C.  276(b)(1)(A).W As the default amount increases, more low volume payphones become profitable; as default amount decreases, more payphones become unprofitable and are likely  XH-,to be taken out of service.H6 yO-ԍxWe also note that the use of a top-down methodology likewise would suffer from a similar problem. To set the per-call default compensation amount using a topdown methodology, we would subtract the cost of the coin mechanism (a cost associated solely with coin calls) on a per-call basis. We would thus be required to determine the appropriate number of calls to use when calculating the per-call costs associated with the coin mechanism. As with the bottom-up approach, we would have to select either the average or marginal payphone location when determining call volume, both of which are dependent on the default compensation amount.      Xt -x143.` ` The concern identified by MCI requires us first to deduce an appropriate level of payphone deployment, in order to calculate a "fair" compensation amount. Based on the evidence in the record, we have concluded that the current approximate level of deployment most appropriately satisfies Congress's stated goal of promoting widespread deployment of  X -payphones to the benefit of the general public.J V6 yO#-ԍx47 U.S.C.  276(b)(1).J This conclusion is supported by the filings of several states that have studied the payphone markets in their respective jurisdictions and concluded that the current deployment of payphones is adequately meeting the needs of the"B0*&&ll"  X-public. 6 {Oy-ԍxSee para. 141, note 281, above. For example, the Maine Commission states that a "public interest payphone program is unnecessary due to the wide availability of payphones in Maine, and the Montana Commission found no indication that the payphone market is failing to serve the public interest. Similarly, the West Virginia Commission found no need to take any additional regulatory actions to address "market failures" in the deregulated payphone market. Realizing that many payphones with below average call volumes will disappear if we use the average payphone location to establish a default compensation amount, we instead conclude that the use of marginal payphone location best satisfies Congress's goal of   widespread deployment by ensuring the profitability of most existing payphones.     X-x144.` ` We note that some parties advocating the use of an average payphone location do not use an average payphone location in their cost studies, but instead submit cost studies using a high volume location. MCI's cost study assumes the average payphone is used 700  X-times per month.I!z6 yO-ԍxMCI Comments, Exhibit 2.I The evidence on the record indicates that the average call volume of a payphone is not nearly this high. For example, the payphones of RBOC Coalition members  Xt -experience, on average, 478 calls per month."t 6 {O/-ԍxRBOC Coalition Sept. 3 ex parte letter from M. Kellogg to Craig Stroup at 2. The 478 calls per month figure is a weighted average from the RBOC Coalition member's payphones. APCC reports that payphones experience an  X] -average of 588 calls per month.|#] d 6 {Or-ԍxAPCC Sept. 28 ex parte letter from R. Aldrich to Magalie Roman Salas.| The national average call volume is only 517,Z$] 6 {O-ԍxNational Payphone Clearinghouse Oct. 22, 1998 ex parte letter from D. Reuss to Craig Stroup (stating  {O-that, at the end of 1997, LECs reported a total of 2,139,511 LEC and nonLEC payphones). See also RBOC Coalition Reply, Andersen at 10 (stating that there were 1,381,800 RBOC payphones). Thus, 64.585 percent of payphones are RBOC payphones, and the remaining 35.415 percent of payphones are nonRBOC payphones. The national average call volume of 517 was calculated as follows: (478 x .64585) + (588 x .35415) = 517.Z which is  XF -much closer to the 439 calls per month that are made from a marginal payphone location.     Xr -x145.` ` In the Second Report and Order, the Commission determined that a payphone in a location where it originates 542 calls per month would earn just enough revenue to  XF-recover its costs, but not enough to pay the premises owner a commission.s%F6 {O -ԍxSecond Report and Order, 13 FCC Rcd at 17991800, 50. s This number was derived using data largely collected in 1996. After those data were collected, the price of local coin calls was deregulated and payphone owners began receiving percall compensation. Because payphone owners may now receive percall compensation, payphones can be sustained with fewer calls being made. Before the establishment of percall compensation, payphones required an artificially high number of calls to be profitable. We thus conclude"C<%0*&&ll" that we should re-estimate the number of calls at a marginal payphone location to account for   the effects of deregulation of the local coin call and percall compensation.     X-x146.` ` In order to determine the number of calls at a marginal location, we consider three basic scenarios. In the first scenario, a premises owner is willing to pay its LEC PSP to install a payphone on its property, even though the payphone does not generate sufficient  X-revenue to pay for itself.&6 yOI-ԍxIn this context, "pay for itself" refers to the money generated from calls being placed, not the increased profitability of the premises due to the addition of a payphone. In the second scenario, the payphone on the premises owner's property generates sufficient revenue to pay for itself. This premises owner need not pay the LEC PSP for the operation of the payphone, but the LEC PSP may not generate enough revenue from the payphone operation to pay the premises owner a location payment. In the third scenario, the payphone generates revenue sufficient for the premises owner to require   the LEC PSP to pay a location rent.     X - x147.` ` We asked the RBOC Coalition to submit: (1) the number of payphone calls that must be placed in order for the premises owner to not have to pay the LEC PSP for the payphone; and (2) the number of payphone calls that must be placed in order for the LEC PSP to begin paying a location payment to the premises owner. The RBOC Coalition found that, on average, if the payphone had 414 calls per month, the premises owner would not have to pay for the payphone. The RBOC Coalition states that it does not base these decisions on call counts, but on daily revenues, or margins. The RBOC Coalition estimated the call counts from their revenue or margin requirements. We find this to be acceptable, because call counts correlate to revenues. The RBOC Coalition also found that, on average, the LEC PSP would have to pay location rents to a premises owner that had a payphone with  X-464 calls or more per month.' 6 {Ot-ԍxAPCC Dec. 8, 1998 ex parte letter from A. Panner to Craig Stroup at 4.  The midpoint between these two numbers is 439. The RBOC Coalition notes that its memberLECs do not decide to pay a location payment or require payment from the premises owner based solely on monthly call volume, but also  X^-consider the mixture of calltypes and upkeep costs of the payphone.}(^6 {O-ԍxAPCC Dec. 8, 1998 ex parte letter from A. Panner to Craig Stroup at 2.} Because we are examining costs of all payphones, we find that the average call volume that the RBOC Coalition reported for these two locations is reasonable and appropriate. We further conclude that we will use in our calculation of the default compensation amount the midpoint between  X-414 and 464, i.e., 439.     X0-x148.` ` MCI alternatively argues that the cost of the payphone that a PSP installs will"0DD(0*&&ll"  X-be related to the call volume at that location.)6 {Oy-ԍxMCI Dec. 2, 1998 ex parte letter from G. Ford to Magalie Roman Salas at 2. MCI suggests that a PSP operating in a marginal payphone location may install a less expensive payphone unit than a PSP operating  X-in an average payphone location.*Z6 {O-ԍxId. (stating that a PSP at a marginal payphone location may not purchase a pedestal and enclosure, but instead may place the payphone on a table). MCI therefore concludes that if we use the average cost  X-of a payphone location, we should use the call volume from the average payphone location.:+6 {O -ԍxId.:     X-x149.` ` Payphone unit requirements vary from site to site.,F6 yO -ԍxSome payphone locations need more extensive enclosures than others. Others may need more maintenance, while others may have higher line costs than others. Accordingly, the costs of operating payphones at differing locations also vary. We believe it is theoretically possible that some payphone elements commonly used at high volume locations, such as a pedestal or enclosure, will not be used at marginal payphone locations. There is nothing in the record, however, indicating the extent to which this might be true. MCI's assertion that low volume locations use less expensive payphone units is unsupported by evidence from its own or any other payphone operation. If, as MCI suggests, a payphone in a marginal payphone location can operate successfully without some payphone elements, such as a pedestal or enclosure, it is unclear why a PSP at an average location would install these elements. Furthermore, other costs, such as increased maintenance costs, may be incurred when a PSP declines to install these same elements. For example, pedestals and enclosures provide some protection for a payphone. We find it plausible that a payphone without these elements would require greater maintenance costs. MCI's rationale, however, makes no allocation for these additional costs. Because we are establishing a compensation amount for all payphones, we use the average cost of a typical PSP. For the reasons stated previously, however, we do not use the average call volume. In sum, there is no support in the record for MCI's assertion that the fixed costs at a marginal payphone location will be significantly different from the fixed costs at an   average payphone location.     X_-x150.` ` Finally, in light of MCI's concern, we verify that a marginal location can  XH-support an average payphone. We conclude that the costs of the average payphone nearly matches the monthly revenue from a marginal payphone. We explain the basis of our   conclusion below.     XF-x151.` ` The RBOC Coalition states that its average payphone has 478 payphone calls"FE,0*&&ll"  X-per month.-6 {Oy-ԍxRBOC Coalition Sept. 3, 1998 ex parte from M. Kellogg to Craig Stroup at 2. The RBOC Coalition also states that these 478 calls consist of: 155 dial X-around calls per month, 280 local coin calls per month, and 43 other calls per month.^.Z6 {O-ԍxId. We assume that these call ratios are the same at the marginal location. Thus, the call break down at the marginal location is as follows: coin calls make up 61.5 percent of 439 marginal calls, which equals 270 calls, coinless calls make up 32.4 percent of 439 calls, which equals 142 calls, and operator assisted calls make up 6 percent of 439 calls, which is 26 calls, totalling 438 calls. This is one less than the 439 calls, and the difference is due to rounding. The effect, however, is not significant for purposes of these calculations.^ We  X-assume that two thirds of the 43 "other" calls (i.e., 29 calls) are operatorassisted calls (e.g.,  X-0+, 0, 00 calls) and that the remaining one third (i.e., 14 calls) are coin calls, such as  X-directory assistance and 1+ calls./ 6 yOe -ԍx For simplicity, we assume that the costs and revenues for the directory assistance and 1+ calls are similar to the costs and revenues for local coin calls. Thus, we conclude that 61.5 percent of the average  X-RBOC payphone's calls are coin calls;}0d 6 yO-ԍx 280 coin calls + 14 "other" calls divided by 478 calls equals 61.2 percent.} 32.4 percent of the payphone's calls are dialaround  Xz-,calls;p1z 6 yO-ԍx155 dialaround calls divided by 478 calls equals 32.4 percent.p and the remaining calls 6.0 percent of calls are operator assisted calls.r2z 6 yO-ԍx 29 "other" calls divided by 478 total calls equals 6.0 percent. r     X-x152.` ` Next, we determine that the monthly costs of a coin payphone in a marginal payphone location is $140.17. We reach this figure by adding the monthly joint and common  Xx -costs of $101.29M3x 6 {O=-ԍx See Section IV.B.3.g.M to the coinrelated costs of $38.87. The monthly coinrelated costs are  Xa -comprised of the monthly cost of the coin mechanism,4a 6 {O-ԍxThe monthly cost of the coin mechanism of $17.02. See Section IV.B.3.g. the monthly termination charges,s5Za 86 yOJ-ԍxThe RBOC Coalition states that the average call termination charge is $.038. RBOC Coalition Oct. 1,  {O-1998 ex parte letter from M. Kellogg to Craig Stroup at 2. We calculate the monthly termination charge as $10.26 by multiplying $.038 per call by 270 calls at a marginal payphone location.s  XJ -,and the monthly coin collection costs.{6J Z6 {OU!-ԍxThe monthly coin collection costs are $11.59. See Section IV.B.3.g.{     Xv -x153.` ` Assuming that a payphone receives $.35 for each of the 270 coin calls at a"v F60*&&ll "  X-marginal location,_76 yOy-ԍxWe use the prevailing local coin rate of $.35._ $.231 for each dialaround call (the amount before interest for the four  X-month delay) for each of the 142 dialaround calls at a marginal payphone location,m8X6 {O-ԍxSee line 7 of the table in Section IV.B.3.g(8), below.m and  X-$.50 per call for each of the 26 operator assisted calls at a marginal payphone location,x9Z6 {Om-ԍxWe have record evidence demonstrating charges for operatorassisted calls exceeding $.70 per call. See Section IV.A.3.b. We purposefully choose a low number to show that even with a very low revenue figure for operatorassisted calls, a payphone at a marginal location may still recover the costs of an average payphone.x the payphone would generate $140.30 in revenue. Thus, we find that the marginal payphone location can support the costs of a typical payphone. We therefore find MCI's argument   unconvincing.     X- xc.` ` Location Rents.     X-x154.` ` In the Second Report and Order, the Commission calculated an estimate of the avoided cost of a dialaround call by dividing the joint and common costs by the number of  X -calls at a marginal payphone location.z: 6 {Ov-ԍxSecond Report and Order, 13 FCC Rcd at 17971798,  4647. z Because the marginal payphone location cannot generate revenue sufficient to pay the premises owner a location rent, the Commission concluded that location rents should not be included in the costs covered by a payphone at a marginal location. The Commission declined to include location rents, believing that a payphone at a marginal location should generate revenue sufficient to cover only the   payphone's installation and upkeep, plus a reasonable return on investment.     Xr-x155.` ` The RBOC Coalition alleges that location rents are "real, unavoidable expenses" affecting all calls made from any location, including calls from marginal  XD-locations.O;D6 yO-ԍxRBOC Coalition Comments at 23.O The RBOC Coalition asserts that some measure of these rents should have been included in the Commission's computation of costs incurred at a marginal payphone  X-location.U<. 6 yO -ԍxRBOC Coalition Recon. Pet. at 2324.U The RBOC Coalition argues that, on average, LECs pay $29.22 per month per  X-,payphone for location rents, while an independent payphone owner pays $45 per month.= 6 {On#-ԍxId. (citing Second Report and Order, 13 FCC Rcd at 17991801,  50).     X+- x156.` ` It is axiomatic that, at a marginal payphone location, the payphone earns just"+GP =0*&&ll3" enough revenue to warrant its placement, but not enough to pay anything to the premises owner. We further find that a marginal payphone location is a viable payphone location, because the payphone provides increased value to the premises. Many premises owners find payphones to be sufficiently valuable to warrant paying for the installation of a payphone where a payphone would not otherwise exist. The Project Quintet data shows that SBC estimated that 14 percent of its payphones are semipublic payphones. These are payphones that the premises owner pays the LEC to install and operate, because the payphone location  X_-does not generate enough traffic to support a payphone.P>_6 yO-ԍxAT&T Recon. Pet., Attachment 2.P We therefore decline to reconsider  XH-the Commission's determination in the Second Report and Order to not include location rents in our cost calculation. We note that if we were to consider rental payments, we would have   to use a higher number of calls than the marginal payphone location.     XH -x d. ` ` Coin Mechanism.     Xt -x157.` ` In the Second Report and Order, the Commission determined that the percall  X_-cost of the coin mechanism was $.031.,?Z_X6 {Oh-ԍxSecond Report and Order, 13 FCC Rcd at 18011802,  5253 (avoided cost of $.031 per coin call should be deducted from the market coin price, to reflect the cost of the coin mechanism installed solely for the benefit of coin calls)., PSPs argue that the cost of a coin mechanism  XH-should not have been deducted, because the cost cannot be avoided.@Hz6 yOs-ԍxAPCC Recon. Pet. at 6 n.8, 9; Peoples Recon. Pet. at 4; RBOC Coalition Recon. Pet. at 8. They state that the revenue generated from most coinless payphones would not justify the installation of the  X-payphone.A 6 yO-ԍxRBOC Coalition Petition at 11 ("[O]f all the Coalition's public payphones, only 1.6% are coinless....And the one place where coinless phones are most commonly found is the exception that proves the rule: prisons."). According to these petitioners, a PSP considering payphone installation will install a coin payphone if the combined revenue from both coin and coinless calls will cover  X-the cost of the payphone.Bb 6 yO-ԍxAPCC Recon. Pet. at 9; Peoples Recon. Pet. at 4; RBOC Coalition Recon. Pet. at 8. They argue that the choice is not between a coin payphone and  X-coinless payphone, but between a coin payphone or no payphone at all.[C 6 yOx -ԍxRBOC Coalition Recon. Pet. at 10.@[ These PSPs argue  X-that our policy should reflect this market reality.iD 6 yO"-ԍxAPCC Recon. Pet. at 12; RBOC Coalition Recon. Pet. at 9.i The RBOC Coalition further contends that if we allocate FLEX ANI costs to all calls, we should also attribute the cost of the coin"HD0*&&ll"  X-mechanism to all calls.SE6 yOy-ԍx RBOC Coalition Recon. Pet. at 19.S The RBOC Coalition also asserts that the Commission overestimated the coin mechanism costs by failing to use a coinless payphone model that is sufficiently durable to accommodate outdoor use, and overstated the 10year estimated useful  X-life of the coinless payphone.FX6 yO-ԍxThe RBOC Coalition alleges the perpayphone cost difference is $200, not $710. RBOC Coalition Recon. Pet. at 13. AT&T, in contrast, states that the coinless payphone model selected by the Commission is representative of a PSP's options, both in cost and in estimated  X-,useful life.QG6 yO -ԍxAT&T Recon. Opp. at 13.hhQ     X-x158.` ` On reconsideration, we reaffirm our treatment of the payphone coin mechanism  X-in the Second Report and Order. We find the actual deployment of numerous coinless payphones is convincing evidence that undermines the assertion that such payphones are not economically viable. Even the RBOC Coalition apparently admits that more than 20,000 of  X_ -its members' payphones are coinless.H _ @6 yOP-ԍxThe RBOC Coalition states that 1.6 percent of its payphones are coinless payphones. RBOC Coalition Recon. Pet. at 11. Of 1,381,300 payphones, 1.6 percent amounts to more than 22,000 coinless payphones owned by the RBOC Coalition alone. RBOC Coalition Comments, Andersen at 10 (stating that in 1997 there were 1,381,800 RBOC Coalition payphones). While the record does not appear to include similar data for independent PSPs, we would expect that, given the historic differences in the manner in which RBOCs and independent payphone owners have deployed their payphones, the percentage of coinless payphones deployed by independent PSPs is even higher that the  X-RBOC Coalition members.I ( 6 yO-ԍxFor example, as a result of the previous regulatory treatment of RBOC payphones, and the subsidies they received from other services, RBOC payphones were often deployed in low traffic areas. Independent PSPs on the other hand, have been free to target higher traffic areas, where a payphone could be profitable relying solely on coinless revenues. This conclusion is consistent with reports that nearly six  X-percent of all installed payphones in 1997 were coinless.J6 {O-ԍxSee Frost & Sullivan, U.S. Payphone Equipment Markets, 1998 at 14. Moreover, the RBOC data and this latter information reflect industry deployment as of year end 1997, at which time per call dialaround compensation had only recently been implemented. Needless to say, the availability of dialaround compensation greatly increases the economic viability of coinless payphones. Such viability should be even further enhanced by the continuing (and apparently"IJ0*&&ll"  X-rapid) growth of dialaround calls and simultaneous decrease in the number of coin calls.K"6 {Oy-ԍxAPCC Sept. 28, 1998 ex parte from R. Aldrich to Magalie Roman Salas, reporting that in 1996 payphones were used to make 509 coin calls per month, and that in 1997 payphones were used to make 396 coin calls per month. In contrast, the number of dialaround calls per payphone increased from 152 calls per month in 1996 to 159 dialaround calls per month in 1997. Indeed, as the percentage of dialaround calls increases relative to all calls from payphones, the coin mechanism becomes increasingly unnecessary. In fact, a coin mechanism is likely to be installed only where the coin traffic warrants the expense. For these reasons we are  X-,convinced that the previous treatment of the payphone coin mechanism is correct.Lx6 yO -ԍxIn its comparison of the coin mechanism and FLEX ANI costs, it is apparent that the RBOC Coalition misunderstands our analysis. We consider FLEX ANI costs to be joint and common and thus the costs are attributable to all calls because FLEX ANI costs cannot be avoided by a payphone owner. Regardless of the number of dialaround calls that a payphone owner expects to be made from its payphone, the payphone owner will pay the same amount for FLEX ANI. As explained herein, the coin mechanism is an optional piece of the payphone, and is therefore, avoidable. Thus, the coin mechanism is an incremental cost to coin calls and is not a joint and common cost.     X-x159.` ` We also find that the Commission correctly found that a typical coinless payphone without a coin mechanism is similar to the 11Atype payphone. We further conclude that it is proper for us to use the cost of a 11Atype payphone in our current calculations underlying our default compensation amount. AT&T states that it has operated the 11Atype payphone in outdoor locations for many years and that it has a useful life of 10  X] -years.HM] 6 yO-ԍxAT&T Recon. Opp. at 13.H We find that, based on AT&T's evidence and our own expertise, the 11Atype payphone would be materially similar to the coinless payphone that PSPs would purchase   today.     X[- xe. ` ` Bad Debt.     X-x160.` ` In the Second Report and Order, the Commission found insufficient  Xr-information on the record to account for the costs relating to bad debt.lNr 6 {O-ԍxSecond Report and Order, 13 FCC Rcd at 1804,  56.l Peoples Telephone maintains that, based on its 1997 data, we should add $.012 to the percall cost to account for  XD-bad debt.<O"D6 {O #-ԍxPeoples Telephone Recon. Pet. at 7. See also APCC Recon. Pet. at 6 n.8, 15 (asserting that previously submitted data from five years of experience justifies additional $.043 for costs associated with bad debt and collection for dialaround calls). The RBOC Coalition states that it did not provide cost figures relating to bad debt because its members were not even permitted to charge for dialaround calls until payphones were"c%N0*&&%" deregulated. RBOC Coalition Recon. Pet. at 9.< The RBOC Coalition argues that the Commission erred in the Second Report and"DJXO0*&&ll"  X-Order by not considering data submitted by Peoples Telephone and APCC.QPX6 yO -ԍxRBOC Coalition Recon Pet. at 17.Q The RBOC Coalition also contends that PSPcosts relating to bad debt from dialaround calls will  X-increase as the number of IXCs increases.QQ6 yOm-ԍxRBOC Coalition Recon Pet. at 16.Q APCC and Peoples Telephone contend that, as the industry moves toward percall compensation, bad debt costs will increase due to the  X-,complexities of call tracking and billing.Rx6 {O -ԍxAPCC Recon Pet. at 14; Peoples Recon Pet. at 8. See also CCI Comments at 5.     X-x161.` ` AT&T and Sprint, by contrast, maintain that many of the current independent PSPs' collection problems are of their own making, and that coinless call debt and collection  X-costs will decrease as percall compensation is instituted.cS 6 yO_-ԍxSprint Recon. Opp. at 10; AT&T Recon. Opp. at 16. c AT&T and Sprint state that some of the alleged uncollectibles reported in the record actually are legitimate billing disputes arising during the percall compensation interim period a period in which payment  X_ -,obligations remain unsettled.T_ 6 {O-ԍxAT&T Recon. Opp. at 15; Sprint Recon Opp. at 9. See also CCI Comments at 5.     X -x162.` ` We conclude that the recent history of percall compensation payments is not an accurate guide for future levels of bad debt. We do not know the percentage of uncollected percall compensation that is due to billing errors of the PSPs, as opposed to unscrupulous carriers. We also note that the RBOC Coalition asks us to clarify our rules  X/-regarding the entity that is required to pay percall compensation.U/, 6 {O -ԍxRBOC Coalition Nov. 17, 1998 ex parte letter from M. Kellogg to Larry Strickling. Although we were unable to generate a sufficient record on this question before issuing this Order, parties may file a petition for clarification on this issue. It appears that if we were to grant such a petition, uncollectibles would be significantly reduced. An additional reason why we decline to establish a cost element for bad debt is that, in doing so, PSPs that ultimately recover their uncollectibles from delinquent carriers would then doublerecover: once from the debtor and  X-once from the consumer, i.e., through the cost element included in the compensation amount. Furthermore, as discussed below, we ensure that PSPs will receive interest on late payments  Xy-for as long as such payments are overdue.KVy 6 {O$-ԍxSee para. 189 below.K For these reasons, we find that it would be unwise to establish a cost element for bad debt at this time. We note that, in a forthcoming"bKP V0*&&ll`" order, we will determine the amount that IXCs owe PSPs for the period before October 7, 1997 and the way in which IXCs may recover overpayments that result from the default compensation amount established herein. If a petition for clarification is resolved prior to the adoption of our order addressing IXCs payments prior to October, 1997, we may visit the   issue of uncollectibles in that order.  X-  X- xf.` ` DialAround Collection Costs.     X-x163.` ` In the Second Report and Order, the Commission found insufficient information on the record to adjust the default compensation amount to account for billing  X -and collection costs.lW 6 {OI -ԍxSecond Report and Order, 13 FCC Rcd at 1804,  56.l APCC asserts that it costs $.005 per call to collect dialaround  X -compensation.HX Z6 yO-ԍxAPCC Recon. Pet. at 15.H The RBOC Coalition maintains that its members have had to hire additional employees to administer invoicing and collections at a cost of between $.005 and $.008 per call. Sprint contends that PSPs should absorb the costs of clearinghouses or other tools used  Xt -,in billing and collection efforts.JYt 6 yO-ԍxSprint Recon. Opp. at 10.J   x  X-x164.` ` On reconsideration, we find that the Commission's treatment of billing expenses was appropriate. We are still faced with insufficient information on the record to determine the extent to which administration costs vary when the number of coinless calls increases relative to coin calls. Given that both types of calls utilize specialized positions within a company, we find it fair to assume that the amount that coinrelated SG&A positions contribute to SG&A expenses approximate the same expense that billing and collection positions contribute to SG&A. Finally, we find unpersuasive the RBOC Coalition's argument concerning the need for additional employees to perform duties related to administering percall dialaround compensation. We note that, if the RBOC Coalition members were just now receiving compensation for local coin calls, as they are for dialaround calls, the RBOC   Coalition also would be in the process of hiring employees for coinrelated positions.  X-   x  X-Axg.` ` Components of the Cost Calculation.     X-x` ` (1) Payphone Capital Expense.     X>-x165.` ` In the Second Report and Order, the Commission recognized the need for aA">LzY0*&&ll"  X-PSP to recover depreciation costs and earn a return on its investment.rZ6 {Oy-ԍxSecond Report and Order, 13 FCC Rcd at 18221823,  104.r The Commission  X-concluded in the Second Report and Order that the record did not provide sufficient detail regarding the cost of capital. The Commission therefore estimated capital costs by examining  X-the 1996 SEC form 10-K data for two nonLEC PSPs, CCI and Peoples Telephone.r[Z6 {O-ԍxSecond Report and Order, 13 FCC Rcd at 18231824,  106.r The Commission concluded that the amount of capital per new payphone, including the coin  X-,mechanism, was between $2,799 and $3,234.r\6 {O, -ԍxSecond Report and Order, 13 FCC Rcd at 18231824,  106.r     X-x166.` ` MCI argues that the Commission's estimate overcompensates PSPs. MCI cites Peoples Telephone's 1997 10-K, which states that a new payphone, including installation,  X-costs $1,950.]~6 {O-ԍxMCI Comments at 8 (citing Peoples Telephone 10-K, at 9).#XP\  P6QcXP#і MCI also asserts that a newly installed payphone should cost only $1,650.^6 yON-ԍxMCI Comments, Exhibit 2 at 7. MCI states the independent PSPs may use more functional or durable  {O-payphones than MCI assumed.  Id.#XP\  P6QcXP# APCC counters that MCI omitted certain payphone operation costs, such as spare parts,  X_ -furniture, vehicles, tools, and building and improvements.B__ j 6 yOz-ԍxAPCC Reply at 29.B APCC states that these costs  XH -range from $474 to $486 per payphone.}`\H 6 {O-ԍxAPCC Sept. 16, 1998 ex parte from R. Aldrich to Magalie Roman Salas at 2 (estimating that these  {O-payphone station expenses cost $474). See also APCC Aug. 21, 1998 ex parte letter from R. Aldrich to Magalie Roman Salas at Exhibit at 2 (estimating that these payphone station expenses cost $486).} APCC further states that the price of a newly  X1 -installed payphone ranges from $2,387 to $2,523.xa\1 6 {O-ԍxSee APCC Sept. 16, 1998 ex parte letter from R. Aldrich to Magalie Roman Salas at 2 (estimating price  {O-of newly installed payphone at $2,387). See also APCC Aug. 21, 1998 ex parte letter from R. Aldrich to Magalie Roman Salas (estimating price of newly installed payphone at $2,523).x APCC explains that part of the difference between the $2,387$2,523 estimate and the $2,799$3,234 estimate reported in the companies SEC forms 10K stems from intangible assets, such as location contracts, signing  X-bonuses, line deposits, and deferred sales commissions.bB6 {O!-ԍxAPCC Aug. 21, 1998 ex parte letter from R. Aldrich to Magalie Roman Salas. Upon reconsideration, we find that  X-the cost of capital used in the Second Report and Order included some costs that are not   necessary to run a payphone operation. Accordingly, we recalculate the cost of capital.     X-x167.` ` In the Second Report and Order, the Commission used the highest federal tax"Mb0*&&ll8" rate of 34 percent when calculating the levelized monthly payments that represent the monthly  X-cost of an installed payphone.xc6 {Ob-ԍxSecond Report and Order, 13 FCC Rcd at 180102,  53, n.139. x Although no party explicitly petitioned us for reconsideration on the tax rate, the record demonstrates that MCI used a tax rate of 39.25 percent in its payphone cost study, which accounted for state and local taxes, in addition to  X-federal taxes.dZ6 yO-ԍxMCI Comments, Exhibit 2 at 3 (estimating federal, state, and local taxes at 39.25 percent).#XP\  P6QcXP#ѳ Upon reconsideration, we find that the Commission should have included state and local taxes in its calculation. Thus, we now use a tax rate of 39.25 percent to   calculate the monthly payments that a payphone owner would make to pay for a payphone.     X-x168.` ` A working payphone unit consists of a payphone, enclosure, pedestal,  X-associated spare parts, and other associated capital costs.e6 {O&-ԍxSee APCC Sept. 16, 1998 ex parte letter from R. Aldrich to Magalie Roman Salas at 2. See also APCC  {O-Aug. 21, 1998 ex parte letter from R. Aldrich to Magalie Roman Salas.  We find above that the coin mechanism is not a joint and common cost. Because there is no credible information on the record indicating that the remainder of the costs associated with a payphone vary as the number of coin calls increases relative to coinless calls, however, we find that the remainder of the payphone unit is a joint and common cost. We estimate the capital cost of a payphone in three steps. We estimate the cost of a coinless payphone. We then estimate the cost of the  X-rest of the payphone unit (e.g., the enclosure, pedestal, installation, and the associated parts) using data submitted by Davel and Peoples Telephone. We then calculate the monthly payments that would cover the costs of the payphone unit over a 10year period, including taxes and interest. This payment is analogous to a mortgage payment, except that taxes are   included in the calculation.  X- x  X-x169.` ` We conclude above that a coinless payphone is similar to the 11Atype  X-payphone. AT&T states that the cost of a 11Atype coinless payphone is $225.VfF6 yO-ԍxAT&T Second R&O Comments, Appendix 1.V The median estimates provided by Peoples Telephone and Davel for the remainder of the  X-payphone unit (e.g., the enclosure, pedestal, installation, and the associated parts) is  Xy-$1,362.50.gy6 {O!-ԍxIn the APCC Aug. 21, 1998 ex parte letter to Magalie Roman Salas, Peoples Telephone reported that a new payphone, with installation and pedestal/enclosure cost $2,523. We subtracted the $1,050 attributable to the  {O"-payphone instrument, resulting in a cost of $1,473. In the APCC Sept. 16, 1998 ex parte letter from R. Aldrich to Magalie Roman Salas, Davel reported that a newly installed payphone costs $2,387. We subtracted the $1,021 payphone instrument and $114 for sales costs. The remaining portion of the payphone costs $1,252. The median of $1,473 and $1,252 is $1,363.  Consistent with the Commission's determination in the Second Report and  Xd-Order, we agree with AT&T that we should subtract the $60 of installation costs that are"dNR g0*&&ll$"  X-associated with the coin mechanism.qh6 {Oy-ԍxSecond Report and Order, 13 FCC Rcd at 18011802,  53.q We thus conclude that a coinless payphone unit costs  X-$1,527.50.^iZ6 yO-ԍx That is, $225 + $1,362.50 $60 = $1,527.50.^ We find that $1,527.50 in capital costs amounts to a monthly payment of  X-$28.04.lj6 {Om-ԍxSee line 1 on the table in Section IV.B.3.g(8) below.l We arrive at the $28.04 monthly figure by determining the monthly payments necessary to depreciate the $1,527.50 investment over ten years, while earning a return of 11.25 percent on net investment, and allowing for federal, state and local taxes at a rate of   39.25 percent.     X-x` ` (2) Line Charge Costs.     X-x170.` ` In the Second Report and Order, the Commission noted that PSPs pay LECs  X -for payphone lines under a variety of tariffs that range from measured rates (e.g., per message  X -or per minute) to flat, monthly (i.e.,unmeasured) rates. The Commission concluded that the  X -average line cost for a coinless call ranged from $.065 to $.075 per call.vk |6 {O-ԍxSecond Report and Order, 13 FCC Rcd at 182122,  102.v The Commission calculated this cost by subtracting the average percall measured service charges from the average line cost data reported by PSPs. AT&T avers that instead of subtracting the average measured service charge for all payphones, the Commission should have subtracted the average measured service charges for those phones that actually paid measured service  X3-charges.Nl36 yO-ԍxAT&T Recon. Pet. at 18.N The RBOC Coalition argues that the Commission overstated the line savings of a  X-coinless call.Hm6 yOk-ԍxRBOC Recon. Pet. at 15.H In order to resolve the question, we asked the RBOC Coalition to supply us   with additional payphone line cost data.     X1-x171.` ` To understand how these costs are attributed, we will explain the way in which LECs price payphone lines. LECs use three different methods of charging for payphone lines. Some LECs charge only a flat fee for a payphone line, regardless of actual usage. Payphone owners in areas served by these LECs must pay this fee to install a payphone. Other LECs offer payphone operators only "measured service," which constitutes a somewhat lower flat fee, plus a percall or perminute charge for local calls. Other LECs offer payphone owners a choice between unlimited service for a relatively high monthly fee or a"O. m0*&&ll}"  X-,relatively low monthly fee plus a percall or perminute charge.n6 yOy-ԍxTypically, PSPs are not usually given a choice between perminute charges and percall charges.     X,-x172.` ` In areas with only unlimited service, the entire line charge is a joint and common cost, because the amount the payphone owner pays does not change as the number  X-of coin calls increases relative to coinless calls.PoX6 {O-ԍxSee Section III.A. above.P In areas where LECs offer only measured service, only the flat monthly fee is a joint and common cost, because the flat fee does not change as the mix of calls moves from coinless calls towards coin calls. The measured service charges, however, which apply to only certain local coin calls, are attributable to those coin calls. Coinless calls are always connected to a long distance company, and therefore the payphone operator does not pay any termination charges for them. In contrast, certain local  Xt -coin calls incur measured service charges.pt 6 yO-ԍxDepending on the LEC's billing practices and tariffs, PSPs may incur measured service charges for local calls. Accordingly, an increasing number of coin calls will result in more measured service charges. Because measured service charges are not joint   and common, we do not include them in the average line cost calculation.     Xr -x173.` ` Calculating the joint and common portion of the payphone line is more difficult where LECs offer payphone owners a choice between unlimited service and measured service. LECs generally charge a higher fixed price for unlimited service than for measured service. Thus, payphone owners with mostly coinless call traffic accept the measured service option, because coinless calls do not incur termination charges. As the number of coin calls increases relative to coinless calls, the payphone owner will benefit by switching to unlimited service to avoid the termination charges. Due to the call volumes generated by payphones, most payphone owners with a coin mechanism will select unlimited service. Thus, where payphone owners have a choice between unlimited and measured service, the fixed fee that payphone owners pay for a measured service line would be joint and common. This is true even if the payphone owner selects the unlimited service line. Thus, if the flat fee for a measured service line is $25 per month, but an unlimited service line is $45 per month, the joint and common portion of the payphone line will be $25 per month, even if the payphone   operator subscribed to the unlimited $45 per month line.     Xs-x174.` ` In the Second Report and Order, the Commission found the data in the record to be insufficient to distinguish among these different types of costs. The RBOC Coalition subsequently submitted evidence demonstrating the correct calculation of the joint and"GPBp0*&&ll"  X-common cost of the payphone line.q6 {Oy-ԍxRBOC Coalition Sept. 14, 1998 ex parte letter from M. Kellogg to Craig Stroup at 2. In its calculation, the RBOC Coalition used the monthly line charge where only unlimited service was available, the fixed monthly charge where only measured service was available, and the fixed monthly charge associated with measured service where the PSP had the choice of unlimited service or measured service. The RBOC Coalition calculated a weighted average joint and common line cost based on the total number of payphones, including both BOC and independent payphones, in each  Xv-,member's territory. The national average joint and common line cost is $33.65.rvZ6 yO -ԍxThe $33.65 figure equals the local line charge of $28.54 plus the Subscriber Line Charge of $5.11.  This is line 2 on the table in Section IV.B.3.g(8). below.     X-x` ` (3) Maintenance Costs.     X -x175.` ` In the Second Report and Order, the Commission treated maintenance as a  X -joint and common expense, but treated coin collection costs as attributable to coin calls.ls 6 {O-ԍxSecond Report and Order, 13 FCC Rcd at 1803,  55.l Upon reconsideration, we conclude that the Commission properly assigned maintenance costs as joint and common. Much of a payphone's maintenance is performed during regularly scheduled visits, meaning a technician will visit a payphone whether or not the payphone  X]-requires immediate maintenance.]t]D6 yOR-ԍxPeoples Telephone Second R&O Comments at 12.] To the extent that maintenance is performed on a periodic basis, maintenance costs will change very little in response to an increasing number of coin calls. We conclude, therefore, that maintenance costs are properly designated as joint and  X-common. In the Second Report and Order, the Commission found that maintenance costs,  X-,other than coin collection costs, ranged from $21.68 to $27.10 per month. uZ6 {O-ԍxSecond Report and Order, 13 FCC Rcd at 1821,  101. The Commission concluded that maintenance costs ranged from $.04 to $.05 per call. Multiplied by 542 calls, the monthly costs ranged from $21.68 to $27.10.      X/-x176.` ` We find that the new SBC maintenance data submitted by the RBOC Coalition reasonably reflects the maintenance costs of SBC and probably other RBOCs, as well. We therefore create a weighted average of the SBC data and the Peoples Telephone data. We use the Peoples Telephone data to estimate the maintenance costs of a large nonLEC PSP, because it was the only data consisting of monthly cost figures that was submitted by a PSP. In addition, we find that the Peoples Telephone data provides the most detail regarding the"Q u0*&&ll~"  X-,number of maintenance visits and the portion of those visits that were strictly coin-related.`v6 yOy-ԍxPeoples Telephone Second R&O Comments at 1213.`     X,-x177.` ` SBC estimates that monthly perphone maintenance costs amount to $24.37. Peoples Telephone reports that maintenance costs amount to $41.66. Because most  X-payphones are RBOC payphones, we calculate the weighted average as $30.49 per month.wX6 yO-ЍxAt the end of 1997, 1,381,800 RBOC Coalition payphones existed. RBOC Comments, Andersen at 10. The National Payphone Clearinghouse states that LECs reported a total of 2,139,511 LEC and nonLEC  {O -payphones in the fourth quarter of 1997. National Payphone Clearinghouse Oct. 22, 1998 ex parte letter from D. Reuss to Craig Stroup. Dividing 1,381,800 by 2,139,511 equals 64.585 percent. We thus calculate the weighted average cost by multiplying the SBC estimate of $24.37 by .64585 and adding this sum to the factor of $41.66 and .35415, which equals $30.49. Peoples Telephone reports that 38 percent of its maintenance visits were strictly coin  X-related.]x6 yOS-ԍxPeoples Telephone Second R&O Comments at 13.] We therefore subtracted 38 percent of $30.49 ($11.59) to reflect coin collection costs and costs associated with maintenance of coin payphones. We thus conclude that a  X-,payphone owner spends $18.90 per payphone per month for maintenance.kyb 6 yO-ԍxThis is line 3 on the table in Section IV.B.3.g(8), below.k     X -x` ` (4) Sales, General, and Administrative Costs.     X -x178.` ` Payphone owners incur overhead costs, such as legal fees, administrative costs, salaries, and management costs, all commonly referred to as Sales, General, and Administrative (SG&A) costs. As the proportion of coin calls increases relative to coinless calls, some employees in the payphone company likely will assume more duties related to coin calls, rather than coinless calls. We find no credible evidence in the record that total SG&A costs change as the number of coin calls increases relative to coinless calls. We therefore conclude that SG&A is a joint and common cost that should be attributed to all   types of calls.     X-x179.` ` In the Second Report and Order, the Commission concluded that percall  Xp-SG&A costs ranged from $28.80 to $29.27.mzp 6 {O"-ԍxSecond Report and Order, 13 FCC Rcd at 1822,  103.m Newly submitted data suggests that SG&A  XY-costs are lower, however.{Y 6 {O$-ԍxAT&T Recon. Pet., Attachment III; RBOC Coalition Nov. 12, 1998 ex parte letter from M. Kellogg to Craig Stroup. We find that the new SBC cost data, as supplemented by the"YR{0*&&ll5" RBOC Coalition, provides a reasonable estimate of the maintenance costs of an RBOC payphone operation. We also find that the Peoples Telephone data represents a reasonable  X-estimate of a nonLEC payphone operation.5|6 {OK-ԍxWe do not use here CCI's estimate of SG&A. See CCI Second R&O Comments at 10. Different firms likely use different accounting methods to separate maintenance and SG&A costs. Although the sum of maintenance costs and SG&A costs likely is comparable across firms, the two costs categories, taken separately, may not be. Because we rely on Peoples Telephone's data to estimate the maintenance cost of a large PSP, we also rely on Peoples Telephone's SG&A estimate for the SG&A cost of a large PSP.5 The new data suggests that, on a perphone, permonth basis, SG&A costs amount to $16.52 for RBOCs. In its comments submitted in  X-1997, Peoples Telephone suggested that SG&A amounted to $25.27. In the Second Report  X-and Order, the Commission added $4.02 to SG&A costs to account for bad debt.l}z6 {O -ԍxSee Second Report and Order at 1822,  103, n.273.l Because we consider bad debt elsewhere in this Order, we do not add here the bad debt costs provided by Peoples Telephone. Because there are more RBOC Coalition payphones than independent  XL-,payphones, we calculate a weighted average SG&A cost of $19.62 per month.B~ZL 6 {O -ԍxRBOC Coalition payphones comprise 64.585 percent of the payphones in the United States.  See Section IV.B.3.g(3). We therefore calculate the weighted average as: $16.52 x .64585 + $25.27 x .35415 = $19.62. This is line 4 on the table in Section IV.B.3.g(8), below.B     Xx -x` ` (5) Coding Digit Costs (FLEX ANI Costs).     X -x180.` ` In the Second Report and Order, the Commission added $.01 per call to the compensation amount to reflect the costs that PSPs must pay LECs for the implementation of  Xx -FLEX ANI,x . 6 {OW-ԍxSecond Report and Order, 13 FCC Rcd at 18041805,  5758. See Coding Digits Order, 13 FCC Rcd at 5000,  2 and n.8 (defining FLEX ANI). a coding digit technology that allows IXCs to identify payphoneoriginated calls for percall compensation purposes. Under the marketbased methodology, the Commission determined that charges that recover FLEX ANI costs were joint and common   costs attributed to all types of calls.     X_-x181.` ` We based the $.01 FLEX ANI cost estimate, in part, on evidence filed by USTA, in which it stated that the costs associated with LECs providing coding digits would  X1-be $600 million. Subsequent to the adoption and release of the Second Report and Order,  X-USTA filed a revised coding digit estimated cost of $61.2 million,| 6 {OU#-ԍxUSTA Oct. 24, 1997 ex parte letter from K. Townsend to John Muleta. | prompting some parties to petition for reconsideration of our FLEX ANI cost estimate. In addition to the updated USTA information, many LECs have since filed their actual FLEX ANI tariffs, which"S0*&&ll" establish with specificity the costs to be recovered in relation to FLEX ANI. In light of this  X-new information, s everal parties have filed petitions requesting that our decision reflect the  X-,revised coding digit cost estimates. 6 {OK-ԍxSee, e.g., AT&T Recon. Pet. at 1920; AirTouch Recon. Opp. at 8. See also APCC Recon. Pet. at 17; RBOC Coalition Recon. Pet. at 20; Arch Reply Comments at 2.     X-x182.` ` AT&T reasserts that coding digit costs are de minimis, should be borne by the PSPs alone, and therefore should not be used as a factor in calculating the default  X-compensation amount.q"6 yO -ԍxAT&T Recon. Pet. at 2, 20 (citing AT&T Reply Comments).q APCC and the RBOC Coalition contend that FLEX ANI is installed solely because of dialaround calls, and therefore the cost should be apportioned only to dial X-around calls.q6 yO-ԍxAPCC Recon. Pet. at 16, 1920; RBOC Coalition Recon. Pet. at 19.q The RBOC Coalition further contends that in the same way we allocate the cost of the coin mechanism only to coin calls, FLEX ANI costs similarly must be attributed  Xv -,only to dialaround calls.Sv B6 yOi-ԍx RBOC Coalition Recon. Pet. at 19.S     X -x183.` ` Upon reconsideration, we find that our treatment of the coding digit costs in  X -the Second Report and Order was correct. The coding digit rate element that LECs apply to each payphone line to recover the costs of FLEX ANI is not conditional on the amount of, or even the presence of, dialaround traffic. Most PSPs are required by state law to install  XH-payphones on payphone lines, where they are subject to the FLEX ANI cost recovery tariff.+H6 {O-ԍxIn fact, it appears that only Minnesota and Iowa allow payphones to be installed on business lines. See  {O-Coding Digits Order, 13 FCC Rcd at 50165017,  32. Some parties may argue that a PSP wishing to avoid paying the FLEX ANI cost recovery tariff (presumably because the PSP expects very little dialaround traffic) could avoid it by simply connecting the payphone to a normal business line. For PSPs in the majority of states, however, such an action is prohibited by law.+ We therefore conclude that the coding digit rate element is an unavoidable cost of operating a payphone that does not vary as the number of coin calls increases relative to coinless calls. As such, we find that FLEX ANI costs are joint and common and should be attributed to all   calls.     X-x184.` ` We disagree with AT&T's assertion that the coding digit charge is de minimis. When the LECs tariff their FLEX ANI cost recovery charge, we estimate that PSPs will pay"T 0*&&ll"  X-more than $2.5 million per month."6 yOy-ԍxWe arrive at this figure by multiplying the product of $1.63 (which represents the current weighted  {OA-average of monthly FLEX ANI payments) (see RBOC Coalition Sept. 3, 1998 ex parte letter from M. Kellogg to  yO -Craig Stroup at 1) and 2.15 million (the number of payphones) by 80 percent (representing our conservative estimate of the percentage of these payphones in territories that offer FLEX ANI).  We also note that APCC challenged several LEC FLEX  X-ANI tariffs.*6 {OL-ԍxSee, e.g., In the Matter of Pacific Bell Telephone Company Revision of Tariff FCC No. 128, Petition of  {O-the American Public Communications Council to Suspend and Investigate, Transmittal No. 1994 (July 16, 1998).* We believe that APCC would not expend resources challenging these tariffs if  X-payphone owners considered the charges de minimis. We also find that IXCs should bear the dialaround call's share of FLEX ANI costs and that we should add that cost to the default compensation amount. This finding is consistent with the Commission's previous determination that IXCs, as the primary beneficiaries of dialaround calls, should pay the  Xx-costs of these calls.x6 {O7-ԍxFirst Report and Order, 11 FCC Rcd at 20584,  83.#XP\  P6QcXP#ѓ We agree with petitioners, however, that urge us to recalculate the   costs of FLEX ANI.     X-x185.` ` We adjust the default compensation amount to reflect the updated USTA coding digit cost estimate and the recently filed FLEX ANI tariffs. We find that the average payphone owner would pay $1.08 per payphone line for 36 months because of FLEX ANI.  XH -We describe our calculation here. Pursuant to the Coding Digit Waiver Order, LECs may account for the recovery of the cost of implementing FLEX ANI over a variable length of time. The RBOC Coalition submitted data showing that several RBOCs chose to recover their FLEX ANI costs over a 24monthperiod, while BellSouth chose to recover its costs over a 12monthperiod. Because this Order establishes a threeyearperiod for default compensation payments, we find that the amount PSPs are paid for FLEX ANI should be  X-,calculated as if the RBOCs tariffed the FLEX ANI costrecovery element for 36 months.6 yO-ԍxAfter three years, if parties petition us to extend the application of the default compensation amount, they can ask for the discontinuation of the $.002 for FLEX ANI at that time.     X-x186.` ` Using the data that the RBOC Coalition submitted, 6 {O-ԍxRBOC Coalition Sept. 3, 1998 ex parte letter from M. Kellogg to Craig Stroup. we calculate the present  X-value of the payments that a payphone owner in each RBOC 6 yO"-ԍxThis figure is calculated by examining the FLEX ANI tariffs filed by the RBOC Coalition members that filed coding digit charges for PSPs. territory would pay.6 {Oh$-ԍxWe used a discount rate of 11.25 percent. See Second Report and Order, 13 FCC Rcd at 180102,  53,  yO2%-n.139. Ŀ We"U<0*&&ll" then calculate the amount that a PSP would pay over a 36monthperiod while maintaining the same present value of payments. We then calculate the weighted average of these payments based on the total number of payphones, including BOC and nonBOC payphones, in each BOC's territory. We conclude that the average PSP would pay $1.08 per month for 36 months, if that were how the LECs had decided to tariff their coding digit cost recovery  X-,elements.k6 yO-ԍxThis is line 5 on the table in Section IV.B.3.g(8), below.k     X-x` ` (6) Interest.  X-x  X-x187.` ` In the Second Report and Order, the Commission found that, because payments are made several months after the dialaround call is made, PSPs should receive three months of interest calculated at 11.25 percent annually. The RBOC Coalition argues that although  X -the Commission provided for three months of interest in the Second Report and Order, dialaround payments are actually made an average of at least four months after the call is completed. The RBOC Coalition therefore asks that we adjust our findings to reflect this  X_-,difference.X_X6 yOh-ԍxRBOC Coalition Comments, Andersen at 5.X     X-x188.` ` AT&T counters the RBOC Coalition's argument, stating that dialaround compensation is not a cash business. As such, AT&T argues, PSPs must "take into account  X]-the reasonable operations of a commercial market."]6 {O-ԍxAT&T Sept. 13 1998 ex parte letter from B. Masterson to Magalie Roman Salas. AT&T offers the following example in support of a three month interest figure for delayed compensation: An IXC is billed in April for calls made during the first quarter of the year, and the IXC issues a check to the PSP by July 1. The median phone call made during the first quarter will be made in the middle of February. AT&T avers that bills for calls made in February would be rendered in March and due April 1. AT&T asserts that interest would begin accruing after April 1. Because  X-,payments are made by July 1, there are three months of interest due.sz6 {O-ԍxId., Attachment at 2.#XP\  P6QcXP#s  X-x ` `  X-x189.` ` We are not persuaded by AT&T's argument. We find that firms that expect a onemonth delay before receiving payment will price their goods accordingly, with the interest already built into the quoted price. The calculations so far have not considered a  X-builtin 30day delay in payment. Further, at the time the Second Report and Order was released, the Commission anticipated a threemonth delay, not a fourmonth delay, in receiving payments. In light of the average delay in payments of four months, we conclude"V 0*&&ll" that we should add to the compensation amount a total of four months of interest at 11.25 percent per year. The above default price will therefore be raised by $.009 to reflect four months of interest on the base amount of $.231. If IXCs are late in making their payments to   PSPs, interest on the principal will continue to accrue at 11.25 percent per year.  X-  X-x` ` (7)  Marginal Cost of a Payphone Call.     X-x190.` ` As stated earlier, our pricing strategy seeks to establish a default amount for dialaround calls so that the calls recover their marginal cost plus a share of joint and common costs (line 6). There is no credible evidence on the record indicating that the process of picking up a handset and dialing numbers imparts any measurable costs to the  X -PSP.L 6 {O0 -ԍxSee Section IV.B.2.a.L To the extent that these costs exist, we find that they would be insignificant on a per call basis and are already accounted for in the depreciation and maintenance costs outlined above. We therefore conclude that we do not need to add an element for the marginal cost of   a dialaround call.   "WZ0*&&ll."Ԍ X-x` ` (8)  Default Compensation Amount.     X,-x191.` ` The new default price for compensable calls is $.24. We arrived at this amount by adding the joint and common costs (lines 15) and dividing the sum of the joint and common costs by the number of calls at a marginal location (line 7). We then add to this number four months of interest at 11.25 percent (line 8). These calculations result in a   default compensation amount of $.24 (line 9).       T!ddx3( ( ( @@@ Addx X 4T zz  g    Line     Cost Element t# ԃ Amount    (in dollars)z    g    Line 1    Costs Excluding Coin Mechanism t  $28.04 q   h    Line 2h  X -Line Costs DD8ht  $33.65q q     Line 3h  X-Maintenance CostsDD8`ht  $18.90q q    Line 4ph  X-SG&A Costs DD8pht  $19.62q q    Line 5h  X-FLEX ANI CostsDD8`ht   $ 1.08q q p   Line 6Rh  Xi-Subtotal of CostsDD8`Rht  A$ 101.29q q    Line 7h   Divided by 439 calls at the marginal payphone location:ht  # ԃ$.231q q R   Line 84h  XK-Interest for four monthsDD8`4ht  # ԃ$.009q    h    Line 9   Totalt  # ԃ!$.24   4    X- x` ` (9)  Topdown Calculation.     X-x192.` ` Although we decline in the Order to adopt a topdown methodology, we have performed a topdown calculation to validate that our bottomup methodology is reasonable.  X-Similarly, the Commission in the Second Report and Order undertook a bottomup calculation  X-to validate the reasonableness of a topdown methodology.l3 {OM!-ԍxSecond Report and Order, 13 FCC Rcd at 1809,  68.l In performing this calculation, we start with what commenters agree is the predominant local coin calling price in the United"XZ0*&&ll"  X-States, $.35.3 yOy-ԍxMCI states that some payphones impose charges for additional minutes on local coin calls and argues  {OA-that the price for a local coin call is not always $.35. MCI Nov. 17 ex parte letter from G. Ford to Magalie Roman Salas. While some payphone owners may charge more for longer coin calls, the predominant cost for  {O-the initial threeminute coin call is $.35. See, e.g., APCC Reply at 20; AT&T Comments at 2; RBOC Coalition Reply at 10. We subtract from this amount the cost of the coin mechanism, termination   charges, and coin collection charges.     X-x193.` ` We find that the installation of a coin mechanism costs a PSP $17.02 per  X-month.4 |3 {O+ -ԍxThe average price of a new payphone, without installation, pedestal, enclosure, etc, is $1,092. See  {O -APCC Sept. 16, 1998 ex parte letter from R. Aldrich to Magalie Roman Salas at 2 (estimating that the price of a  {O -new payphone, without installation, enclosure, pedestal, etc., costs $1,050). See also APCC Aug. 21, 1998 ex  {O -parte letter from R. Aldrich to Magalie Roman Salas (estimating price of a new payphone is $1,135). The average of $1,050 and $1,135 is $1,092.50. Payphones with coin mechanisms incur an extra $60 of installation  {O-costs (see para. 169 above), which brings the total to $1152.50. From this we subtract the cost of a payphone without a coin mechanism, which is $225. As we explain above, we establish that the cost of a type 11A  {O-payphone is consistent with the cost of the average coinless payphone. See paras. 159, 169 above. Thus, the decision to install a coin mechanism costs the PSP $927.50 ($1,152.50 $225). The $927.50 it costs to install a coin mechanism would equal a monthly payment of $17.02. We arrive at the $17.02 monthly figure by determining the monthly payments necessary to depreciate the $927.50 investment over ten years, while earning a return of 11.25 percent on net investment, and allowing for federal, state, and local taxes at a rate of 39.25 percent. Dividing $17.02 by the 318 coin calls made at an average payphone location,$x3 yO'-ԍxAs stated in para. 151 above, on average, 61.5 percent of an RBOC's payphone calls are coin calls.  {O-Multiplying 61.5 percent by the 517 calls at an average payphone location yields 318 coin calls. In the Second  {O-Report and Order, the Commission's topdown calculation was based on the marginal number of calls. If we use a marginal location in the topdown approach, the default compensation amount would be even lower. we conclude that we would subtract $.054 for the coin mechanism. We would also subtract  X-$.038 for local termination charges,d3 {O-ԍxSee RBOC Coalition Oct. 1, 1998 ex parte letter from M. Kellogg to Craig Stroup at 2, where the RBOC Coalition states that the average call termination charge is $.038. and subtract $.036 for coin collection charges.X3 yO?-ԍxIn para. 177 above, we establish that a PSP's coin collection cost amounts to $11.59 per month. Thus, coin collection costs, divided by the 318 coin call at an average payphone location, result in a figure of $.036 per call. We do not include coding digit cost recovery charges here because most PSPs are now paying these charges. Further, because FLEX ANI costs are joint and common, they are already  X-reflected in the $.35 starting price. 3 {O$-ԍxIn the Second Report and Order, we included the cost of FLEX ANI, because no PSPs were paying the  {O$-coding digit cost recovery tariffs when the Order was issued. See Section IV.B.3.g.(5).  We thus conclude that, under this approach, the default"Y:0*&&ll"  X-amount, before interest, would be $.222.3 yOy-ԍx$.222 equals $.35 (the starting price), less $.054 for the coin mechanism, less $.038 for termination, less $.036 for coin collection. To this amount, we would add $.008 for interest,{ 3 yO-ԍx$.008 equals four months of interest on $.222 at an annual rate of 11.25%.{ resulting in a total of $.23. Thus, using the same data with a topdown methodology, the default amount is within a penny of the default amount arrived at under our bottomup approach. We believe this similarity supports the reasonableness of the default   compensation amount we adopt in this Order.     X-x194.` ` In the Second Report and Order, the Commission concluded that a topdown  X-approach yielded a default compensation amount of $.2843 {O -ԍxSee Second Report and Order, 13 FCC Rcd at 1807,  63 (arriving at an adjusted market range of $.277 to $.291, the midpoint of which is $.284). and the bottomup approach  X-yielded a default amount of $.264.~ 3 {O_-ԍxSee Second Report and Order, 13 FCC Rcd at 1824,  108, n.289.~ We now conclude that a bottomup approach yields a  X-default amount of $.24,E3 {O-ԍxSee para. 191.E and a topdown approach yields a compensation amount of $.23.E. 3 {Ol-ԍxSee para. 193.E These differences arise from our use of the more accurate data submitted in conjunction with  X_ -the petitions for review of the Second Report and Order. For instance, in the Second Report  XJ -and Order, the Commission estimated that the capital cost of a coin payphone was between  X5 -$2,799 and $3,234.r5 3 {O-ԍxSecond Report and Order, 13 FCC Rcd at 18231824,  106.r In this Order, we estimate that the capital cost is between $2,387 and  X -$2,523, based on the filings by PSPs.y\ R 3 {O!-ԍxSee APCC Sept. 16, 1998 ex parte letter from R. Aldrich to Magalie Roman Salas, at 2 (estimating  {O-price of newly installed payphone at $2,387). See also APCC Aug. 21, 1998 ex parte letter from R. Aldrich to Magalie Roman Salas (estimating price of newly installed payphone at $2,523).y We also received better data regarding the average termination costs that a PSP incurs, from which we conclude that the proper estimate should  X-be $.038,v3 {O!-ԍxRBOC Coalition Oct. 1, 1998 ex parte letter from M. Kellogg to Craig Stroup at 2. instead of $.0275.3 {O"-ԍxWe note that $.0275 is the midpoint of the $.025$.03 range established in the Second Report and  {Os#-Order. Second Report and Order, 13 FCC Rcd at 180203,  54. We also amend our estimate of maintenance costs, based on  X-new LEC data.Pd3 {O%-ԍxSee Section IV.B.3.g.(3).P We also lower our estimate of FLEX ANI costs from $.01q3 {O-ԍxSecond Report and Order, 13 FCC Rcd at 180405,  57.q to $.002,PZ3 {O"-ԍxSee Section IV.B.3.g.(5).P"Z0*&&ll;" based on actual tariffs filed by RBOCs. Based on this new data and our decision to use a   bottomup approach, we conclude that the default compensation amount will be $.24.  X-   x  X-x4.` ` Compensation for October 7, 1997 to Present.     XA- x195.` ` In deciding to remand, rather than vacate, the Second Report and Order, the Court explained that its decision was based, in part, on "the clear understanding that if and when on remand the Commission establishes some different rate of fair compensation for coinless payphone calls, the Commission may order payphone service providers to refund to their customers any excess charges for coinless calls collected pursuant to the current [$.284]  X -rate."S 3 {Om-ԍxMCI v. FCC, 143 F.3d at 609.S The Court noted that the Commission has authority to order such refunds pursuant to section 4(1) of the Act, which authorizes the Commission to take such actions "as may be  X -necessary in the execution of its functions,"\ ~3 {O-ԍxId. See 47 U.S.C.  154(i).\ as well as pursuant to the provisions of section 276, which directs the Commission to "take all actions necessary to promulgate regulations to  Xt -,insure fair compensation."Gt 3 yO5-ԍx47 U.S.C.  276(b).G     X-x196.` ` We conclude that the current default compensation amount should apply, subject to the following minor adjustment, retroactively to the period between October 7, 1997 and the effective date of this Order (the October 1997 period). This Order, which sets a default compensation amount of $.24, establishes a cost element of $.002 to compensate PSPs for each dialaround call's share of FLEX ANI costs. As explained above, we find that, over the next three years, the $.002 cost element will fully compensate PSPs for each dialaround  X-call's share of FLEX ANI costs.3 {Og-ԍxSee Section IV.B.3.g(5). above, explaining the recovery of FLEX ANI costs. Therefore, in calculating the default compensation amount for the October 1997 period, we deduct the $.002 cost element from the default compensation amount established in this order. Thus, the default compensation amount for the October   1997 period, is $.238.   "[2 0*&&ll"Ԍ X- x5.` ` Method of IXC Overpayment Recovery.     X,-x197.` ` As noted above, PSPs will be obligated to refund overpayments for the October 1997 period. In addition, in an upcoming order, we will address the compensation amount for  X-the period between November 7, 1996 and October 6, 1997 (Interim Period).3 {Ow-ԍxSee Second Report and Order, 13 FCC Rcd at 18281829,  117 (addressing Interim Period  {OA-compensation). See also Public Notice. In establishing a compensation amount for the Interim Period, we anticipate using as a starting point the default compensation amount established herein. We also anticipate adjusting the default compensation amount for the Interim Period to account for FLEX ANI costs and  X-interest.$3 yOw -ԍxBecause we have accounted for the entire amount of FLEX ANI costs in our default compensation amount, and because no FLEX ANI costs accrued during the interim period, we will reduce the default compensation amount accordingly. Because PSPs have not received full compensation for this period, we will  {O-allow the recovery of interest on the unpaid amount.  See March 4, 1998 APCC ex parte letter from A. Kramer to Magalie Roman Salas, Attachment at 12-13. The upcoming order also will address the method that IXCs should use to   calculate payments owed PSPs.     X -x198.` ` This Order reduces the percall compensation amount established in the Second  X -Report and Order for the period of October 7, 1997 to the effective date of this Order. Accordingly, we address the way that IXCs which have made payments consistent with our prior order may recover this overpayment. We note that, because most IXCs already have collected money from their customers to cover the cost of compensating PSPs, the IXCs will  XH-not be substantially harmed by a delay in recovering their overpayment.D\H3 {O-ԍxSee, e.g., tariff section 3.02120 filed by AT&T recovering payphone charge (effective on June 11, 1997  {O-and moved to 3.1.1.D. on November 1, 1997). See also tariff filed by MCI on January 20, 1998, recovering the cost of the payphone charge. D At the same time, PSPs may be severely harmed if they are required to immediately refund substantial overpayment amounts to the IXCs. Indeed, most PSPs have not yet received the majority of their payments for the Interim Period and do not necessarily have the resources to issue refunds to the IXCs. We therefore conclude that IXCs may recover their overpayments to the PSPs at the same time as the PSPs receive payment from the IXCs for the Interim Period. In other words, when an IXC calculates the amount owed to each PSP for the Interim Period, it should deduct from that amount any overpayment that it made to that PSP. Just as IXCs will be required to compensate PSPs for interest on the money due the PSPs for the Interim Period, IXCs will be allowed to recoup interest for overpayments to the PSPs for the October 1997 Period. The same rate of interest shall apply for both the Interim Period and October 1997 Period. In the event that the amount the IXC overpaid is larger than the amount it owes to the PSP for the Interim Period, the IXC may deduct the remaining overpayment from"4\ 0*&&ll"   future payments to PSPs.     X,-x199.` ` We also note that IXCs have recovered from their customers the cost of compensating PSPs at a rate of $.284 per call. Although we do not require IXCs to issue refunds to their customers, we believe that doing so would serve the public interest. We therefore encourage IXCs to issue refunds to their customers and to notify their customers of any such refunds. We also encourage IXCs to publicly disclose the manner in which they   utilize any such refunds from PSPs.     X-  x 6.` ` Other Issues.     X -x200.` ` TRA's Motion to Accept LateFiled Comments. On July 14, 1998, Telecommunications Resellers Association ("TRA") filed a Motion requesting the Commission to accept its latefiled pleading. In its motion, TRA states that it experienced logistical difficulties beyond its control related to the filing of the pleading and was unable to deliver the pleading on the due date. No parties opposed TRA's motion. We find that no parties suffered harm as a result of TRA's latefiled pleading. We conclude that accepting   TRA's comments will serve the public interest and we therefore grant their motion.     X-y V. PROCEDURAL MATTERS ă     X- A.xFinal Paperwork Reduction Act Analysis     X -x201.` ` The decision herein has been analyzed with respect to the Paperwork Reduction Act of 1995, Pub. L. 10413 and does not contain new and/or modified information   collections subject to Office of Management and Budget review.     X - B.XxSupplemental Final Regulatory Flexibility Analysis (#   x` `  X7-x202.` ` As required by the Regulatory Flexibility Act (RFA),OZ73 {O-ԍx5 U.S.C.  603. The RFA, see 5 U.S.C.  601 et seq., has been amended by the Contract with America Advancement Act of 1996, Pub. L. No. 104121, 110 847 (1996) (CWAAA). Title II of the CWAAA is the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA).O an Initial Regulatory  X -Flexibility Analysis (IRFA) was incorporated in the NPRM.U 3 {O#-ԍxNPRM, 11 FCC Rcd at 67616763.U The Commission sought  X -written public comment on the proposals in the NPRM, including comment on the IRFA. The  X-Commission conducted a Final Regulatory Flexibility Analysis (FRFA) in the Second Report"]|0*&&ll,"  X-and Order.3 {Oy-ԍxSecond Report and Order, 13 FCC Rcd at 18341845, 134165. The Commission's Supplemental Final Regulatory Flexibility Analysis  X-,(SFRFA) in this Order conforms to the RFA. mZZ3 {O-ԍxSee 5 U.S.C.  604. In the Second Report and Order, we conducted a FRFA and received no petitions  yO-for reconsideration of that FRFA. In this present Report and Order, the Commission promulgates no additional final rules, and our action does not affect the previous analysis.m      X-x 1.` ` Need for, and Objectives of, the Reconsideration of the Second Report and  X-Order (#`  X-  X,-x203.` ` The objective of the rules adopted in this Reconsideration of the Second Report  X-and Order is "to promote competition among payphone service providers and promote the  X-widespread deployment of payphone services to the benefit of the general public."q|3 yO/-#X\  P6G;2P#эx47 U.S.C.  276(b)(1).q In this  X-order, we adjust the percall default rate for coinless calls that the Commission set in the  X -Second Report and Order. We adjust the rate from $0.284 to $0.24, making the difference between the marketbased local coin rate and the coinless percall default rate $0.11, instead of $0.066. 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.     X-x 2.` ` Summary of Significant Issues Raised by Public Comments in Response to  X-the IRFA. (#`   x` `  X-x204.` ` We received no comments in direct response to the FRFA in the Second Report  X-and Order. 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. At that time, the Commission received one comment on the potential impact on small business entities, which the Commission addressed in the FRFA in the  XL-Second Report and Order{L 3 {O -ԍxSecond Report and Order, 13 FCC Rcd at 18351836, 137.{ and considered in promulgating the rules in the Second Report  X7-and Order. We believe that our rules, as adopted in the Second Report and Order, and as  X"-modified in this Order increase the efficiency of, and minimize the burdens of, the   compensation scheme to the benefit of all parties, including small entities.   "!^0*&&ll"Ԍ X-Xx 3.X` ` Description and Estimate of the Number of Small Entities to which Rules  X-Will Apply. (#`   x  X- x205.` ` The RFA directs agencies to provide a description of and, where feasible, an estimate of the number of small entities that may be affected by the proposed rules, if  X-adopted.J3 yO`-ԍx5 U.S.C.  603(b)(3). J The RFA generally defines the term "small entity " as having the same meaning  X-as the terms "small business," "small organization," and "small governmental jurisdiction."JX3 {O -ԍxId. at  601(6).J In addition, the term "small business" has the same meaning as the term "small business  X-concern" under the Small Business Act.93 yO= -ԍx5 U.S.C.  601(3) (incorporating by reference the definition of "small business concern" in 15 U.S.C. 632). Pursuant to the RFA, the statutory definition of a small business applies "unless an agency, after consultation with the Office of Advocacy of the Small Business Administration and after opportunity for public comment, establishes one or more definitions of such term which are appropriate to the activities of the agency and publishes such definition(s) in the Federal Register." 5 U.S.C.  601(3).9 A small business concern is one that: (1) is independently owned and operated; (2) is not dominant in its field of operation; and (3)  Xt -satisfies any additional criteria established by the Small Business Administration (SBA). _t 3 yO-ԍxSmall Business Act, 15 U.S.C.  632 (1996)._ A small organization is generally "any notforprofit enterprise which is independently owned  XF -and operated and is not dominant in its field."JF * 3 yO!-ԍx5 U.S.C.  601(4). J As of 1992, there were approximately  X/ -275,800 small organizations nationwide./ 3 yO-ԍx1992 Economic Census, U.S. Bureau of the Census, Table 6 (special tabulation of data under contract to Office of Advocacy of the U.S. Small Business Administration). "Small governmental jurisdiction" generally means "governments of cities, counties, towns, townships, villages, school districts, or special  X-districts, with a population of less than 50,000."G3 yO-ԍx5 U.S.C.  601(5). G As of 1992, there were approximately  X-85,000 such jurisdictions in the United States.~3 yO= -ԍxU.S. Dept. of Commerce, Bureau of the Census, "1992 Census of Governments." ~ This number includes 38,978 counties,  X-cities, and towns, of which 37,566 (96 percent) have populations of fewer than 50,000.:23 {O"-ԍxId.: The Census Bureau estimates that this ratio is basically accurate for all governmental entities. Thus, of the 85,006 governmental entities, we estimate that 81,600 (91 percent) are small entities. Below, we further describe and estimate the number of small entity licensees and"_0*&&ll"   regulatees that may be affected by the rule change.     X,- xa.` ` Common Carrier Services and Related Entities     XX- x206.` ` The most reliable source of information regarding the total numbers of certain common carriers and related providers nationwide, as well as the numbers of commercial wireless entities, appears to be data the Commission publishes annually in its  X-Telecommunications Industry Revenue report, regarding the TRS.3 yO -ԍxFCC, Telecommunications Industry Revenue: TRS Fund Worksheet Data, Figure 2 (Number of Carriers  {OT -Paying Into the TRS Fund by Type of Carrier) (Nov. 1997) (Telecommunications Industry Revenue).  According to data in the  X-most recent report, there are 3,459 interstate carriers.<"3 {O -ԍxId. < These carriers include, inter alia, local exchange carriers, wireline carriers and service providers, interexchange carriers,  X -competitive access providers, operator service providers, pay telephone operators , providers of  X -telephone toll service, providers of telephone exchange service, and resellers.     X - x207.` ` The SBA has designated companies engaged in providing "Radiotelephone Communications" and "Telephone Communications, Except Radiotelephone" as small  X-businesses if they employ no more than 1,500 employees.23 {O-ԍx13 C.F.R. 121.201, Standard Industrial Classification (SIC) codes 4812 and 4813. See also Executive  {O-Office of the President, Office of Management and Budget, Standard Industrial Classification Manual (1987).2 Below, we discuss the total estimated number of telephone companies falling within the two categories and the number of small businesses in each, and we then attempt to refine further those estimates to correspond   with the categories of telephone companies that are commonly used under our rules.     X-x208.` ` Although some incumbent local exchange carriers (ILECs) may have no more than 1,500 employees, we do not believe that such entities should be considered small entities within the meaning of the RFA. These ILECs are either dominant in their field of operations or are not independently owned and operated. Therefore, by definition, they are not "small entities" or "small business concerns" under the RFA. Accordingly, our use of the terms "small entities" and "small businesses" does not encompass small ILECs. Out of an abundance of caution, however, we will separately consider small ILECs within this analysis. We will use the term "small ILECs" to refer to any ILECs that arguably might be defined by  X-,the SBA as "small business concerns."\3 {O#-ԍxSee 13 C.F.R. 121.201, SIC code 4813. Since the time of the Commission's 1996 decision,  {Os$-Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, First Report and Order, 11 FCC Rcd 15499, 1614445 (1996), 61 FR 45476 (August 29, 1996), the Commission has consistently"=%0*&&\%" addressed in its regulatory flexibility analyses the impact of its rules on such ILECs."`X0*&&ll^,"Ԍ X-ԙx209.` `  Total Number of Telephone Companies Affected. The U.S. Bureau of the Census ("Census Bureau") reports that, at the end of 1992, there were 3,497 firms engaged in  X-providing telephone services, as defined therein, for at least one year. X3 {O-ԍxU.S. Department of Commerce, Bureau of the Census, 1992 Census of Transportation, Communications,  {O-and Utilities: Establishment and Firm Size, at Firm Size1-123 (1995) (1992 Census).  This number contains a variety of different categories of carriers, including local exchange carriers, interexchange carriers, competitive access providers, cellular carriers, mobile service carriers, operator service providers, pay telephone operators, personal communications services providers, covered specialized mobile radio providers, and resellers. It seems certain that some of those 3,497 telephone service firms may not qualify as small entities or small ILECs  XH-because they are not "independently owned and operated."dH3 {O -ԍxSee generally 15 U.S.C.  632(a)(1).d 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 is reasonable to conclude that fewer than 3,497 telephone service firms are small entity telephone service firms or small ILECs that may be   affected by the rule change.     X -x210.` ` Wireline Carriers and Service Providers. The SBA has developed a definition of small entities for telephone communications companies, except radiotelephone (wireless) companies. The Census Bureau reports that there were 2,321 telephone companies  X-in operation for at least one year at the end of 1992.dF3 {O-ԍx1992 Census, supra, at Firm Size1-123.d According to the SBA's definition, a small business telephone company other than a radiotelephone company is one employing no  X-more than 1,500 persons.Y3 yO.-ԍx13 C.F.R.  121.201, SIC code 4813. Y All but 26 of the 2,321 nonradiotelephone 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 ILECs. We do not have data specifying the number of these carriers that are not independently owned and operated, and thus 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 the SBA's definition. Consequently, we estimate that fewer than 2,295 small telephone communications companies other than radiotelephone companies are small entities or small   ILECs that may be affected by the rule change.     X-x211.` ` Local Exchange Carriers. Neither the Commission nor the SBA has defined"ah 0*&&ll" small local exchange carriers (LECs). The best available definition under the SBA rules is  X-for telephone communications companies other than radiotelephone (wireless) companies.a3 {Ob-#]\  PC2P#эxId.a  X-According to the most recent Telecommunications Industry Revenue data, 1,371 carriers  X-reported that they were engaged in the provision of local exchange services.kZ3 {O-ԍxTelecommunications Industry Revenue, Figure 2.k We do not have data specifying the number of these carriers that are either dominant in their field of operations, are not independently owned and operated, or have more than 1,500 employees. Thus, we are unable at this time to estimate with greater precision the number of LECs that would qualify as small business concerns under the SBA's definition. Consequently, we estimate that fewer than 1,371 providers of local exchange service are small entities or small   ILECs that may be affected by the rule change.     X_ -x212.` ` Interexchange Carriers . Neither the Commission nor the SBA has developed a definition of small entities specifically applicable to providers of interexchange services (IXCs). The closest applicable definition under the SBA rules is for telephone  X -communications companies other than radiotelephone (wireless) companies.W 3 yO-ԍx13 C.F.R. 121.201, SIC code 4813.W According to  X-the most recent Telecommunications Industry Revenue data, 143 carriers reported that they  X-were engaged in the provision of interexchange services.k|3 {O-ԍxTelecommunications Industry Revenue, Figure 2.k We do not have data specifying the number of these carriers that are not independently owned and operated or have more than 1,500 employees. Thus, we are unable at this time to estimate with greater precision the number of IXCs that would qualify as small business concerns under the SBA's definition. Consequently, we estimate that there are fewer than 143 small entity IXCs that may be   affected by the rule changes herein.     X-x213.` `  Competitive Access Providers. Neither the Commission nor the SBA has developed a definition of small entities specifically applicable to competitive access services providers (CAPs). The closest applicable definition under the SBA rules is for telephone  Xb-communications companies other than radiotelephone (wireless) companies.Wb3 yO!!-ԍx13 C.F.R. 121.201, SIC code 4813.W According to  XK-the most recent Telecommunications Industry Revenue data, 109 carriers reported that they  were engaged in the provision of competitive access services.k63 {O$-ԍxTelecommunications Industry Revenue, Figure 2.k We do not have data specifying the number of these carriers that are not independently owned and operated or that"b0 0*&&ll" have more than 1,500 employees. Thus, we are unable at this time to estimate with greater precision the number of CAPs that would qualify as small business concerns under the SBA's definition. Consequently, we estimate that there are fewer than 109 small entity CAPs that   may be affected by the rule changes herein.     X-x214.` ` Operator Service Providers. Neither the Commission nor the SBA has developed a definition of small entities specifically applicable to providers of operator services. The closest applicable definition under the SBA rules is for telephone  X-communications companies other than radiotelephone (wireless) companies.W3 yO -ԍx13 C.F.R. 121.201, SIC code 4813.W According to  X-the most recent Telecommunications Industry Revenue data, 27 carriers reported that they  Xv -were engaged in the provision of operator services.kv X3 {O -ԍxTelecommunications Industry Revenue, Figure 2.k We do not have data specifying the number of these carriers that are not independently owned and operated or have more than 1,500 employees, and thus are unable at this time to estimate with greater precision the number of operator service providers that would qualify as small business concerns under the SBA's definition. Consequently, we estimate that there are fewer than 27 small entity   operator service providers that may be affected by the rule changes herein.     X/-x215.` ` Pay Telephone Operators. Neither the Commission nor the 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  X-other than radiotelephone (wireless) companies.W3 yO-ԍx13 C.F.R. 121.201, SIC code 4813.W According to the most recent  X-Telecommunications Industry Revenue data, 441 carriers reported that they were engaged in  X-the provision of pay telephone services.ez3 {O-ԍxTelecommunications Industry Revenue, Figure 2.e We do not have data specifying the number of these carriers that are not independently owned and operated or have more than 1,500 employees, and thus are unable at this time to estimate with greater precision the number of pay telephone operators that would qualify as small business concerns under the SBA's definition. Consequently, we estimate that there are fewer than 441 small entity pay   telephone operators that may be affected by the rule changes herein.     Xw-x216.` ` Resellers (including debit card providers). Neither the Commission nor the SBA has developed a definition of small entities specifically applicable to resellers. The closest applicable SBA definition for a reseller is a telephone communications company other"Ic 0*&&ll"  X-than radiotelephone (wireless) companies.W3 yOy-ԍx13 C.F.R. 121.201, SIC code 4813.W According to the most recent  X-Telecommunications Industry Revenue data, 339 reported that they were engaged in the resale  X-of telephone service.kX3 {O-ԍxTelecommunications Industry Revenue, Figure 2.k We do not have data specifying the number of these carriers that are not independently owned and operated or have more than 1,500 employees, and thus are unable at this time to estimate with greater precision the number of resellers that would qualify as small business concerns under the SBA's definition. Consequently, we estimate that there are fewer than 339 small entity resellers that may be affected by the rule changes   herein.  Xw-  X-x217.` ` Toll Free Service Subscribers. 3 yO(-ԍxWe include all tollfree number subscribers in this category, including 888 numbers. We voluntarily describe here toll free service subscribers, even though they are not affected by the rules adopted herein such that they are within the scope of our regulatory flexibilty analysis. Neither the Commission nor the SBA has developed a definition of small entities specifically applicable to toll free service subscribers. The most reliable source of information regarding the number of 800 service  X -subscribers appears to be data the Commission collects on the toll free numbers in use. z3 {OE-ԍxFCC, CCB Industry Analysis Division, FCC Releases, Study on Telephone Trends, Tbl. 20 (May 16, 1996). According to our most recent data, 6,987,063 800 numbers were in use at the end of 1995. Similarly, the most reliable source of information regarding the number of 888 service  X-subscribers appears to be data the Commission collects on the 888 numbers in use.3 {OZ-ԍxFCC, CCB Industry Analysis Division, Long Distance Carrier Code Assignments, p. 80, Tbl. 10B (Oct. 18, 1996). According to our most recent data, 2,014,059 888 numbers had been assigned at the end of 1996. We do not have data specifying the number of these subscribers that are not independently owned and operated or have more than 1,500 employees, and thus are unable at this time to estimate with greater precision the number of toll free subscribers that would qualify as small business concerns under the SBA's definition. Consequently, we estimate that there are fewer than 6,987,063 small entity 800 subscribers and fewer than 2,014,059 small entity 888 subscribers that may be affected by the rule changes herein. In response to the ConsumerBusiness Coalition's concerns about the effect that the compensation amount  X-will have on small businesses that subscribe to toll free numbers,_. 3 yO#-ԍxConsumerBusiness Coalition Petition at 1617._ we find that small businesses that subscribe to toll free numbers are likely to benefit by our reduction of the compensation amount in this Order. In this Order, we reduce to $.24 the compensation"d 0*&&ll"   amount that must be paid to payphone service providers for compensable calls.  X- x  X,-x b.` ` Wireless and Commercial Mobile Service.     XX-x218.` ` Rural Radiotelephone Service. The Commission has not adopted a definition  XA-of small entity specific to the Rural Radiotelephone Service.A3 yO-ԍxThe service is defined in Section 22.99 of the Commission's Rules, 47 C.F.R.  22.99. A significant subset of the  X*-Rural Radiotelephone Service is the Basic Exchange Telephone Radio Systems (BETRS).*X3 yO3 -ԍxBETRS is defined in Sections 22.757 and 22.759 of the Commission's Rules, 47 C.F.R.  22.757, 22.759.  X-We will use the SBA's definition applicable to radiotelephone companies, i.e., an entity  X-employing no more than 1,500 persons.Y3 yO_-ԍx13 C.F.R.  121.201, SIC code 4812. Y There are approximately 1,000 licensees in the Rural Radiotelephone Service, and we estimate that almost all of them qualify as small  X -entities under the SBA's definition.        X -x219.` ` AirGround Radiotelephone Service. The Commission has not adopted a  X -definition of small entity specific to the AirGround Radiotelephone Service. @3 yO-ԍxThe service is defined in Section 22.99 of the Commission's Rules, 47 C.F.R.  22.99. Accordingly,  X -we will use the SBA's definition applicable to radiotelephone companies, i.e., an entity  X-employing no more than 1,500 persons.W3 yO:-ԍx13 C.F.R.  121.201, SIC code 4812.W There are approximately 100 licensees in the AirGround Radiotelephone Service, and we estimate that almost all of them qualify as small   entities under the SBA's definition.  X-   X-x220.` ` Offshore Radiotelephone Service. This service operates on several UHF TV broadcast channels that are not used for TV broadcasting in the coastal area of the states  X-bordering the Gulf of Mexico.` 3 {O-ԍxThis service is governed by Subpart I of Part 22 of the Commission's Rules. See 47 C.F.R. 22.1001-22.1037. At present, there are approximately 55 licensees in this  Xr-service. We are unable at this time to estimate the number of licensees that would qualify as   small under the SBA's definition for radiotelephone communications.   "qe 0*&&lla"Ԍx 4.` ` Description of Projected Reporting, Recordkeeping, and Other Compliance  X-Requirements. (#`     X-x221.` ` This Order results in no additional filing requirements.     XA-x 5.` ` Steps Taken to Minimize Significant Economic Impact on Small Entities  X*-and Significant Alternatives Considered. (#`     XV-x222.` ` In the Second Report and Order, we addressed steps taken to minimize the  XA -economic impact on small entities.yA 3 {O -ԍxSecond Report and Order at 13 FCC Rcd 18431844, 158161.y In particular, we addressed the potential economic impact on small businesses and small incumbent LECs from (1) the amount of compensation  X -,paid to PSPs, and (2) the administration of percall compensation.C Z3 {O-ԍxId.` ` C     X? -x223.` ` In this Order, we adjust the percall default compensation amount from $0.284 to $.24. This downward adjustment means that PSPs, many of whom may be small business entities, will receive less call revenue from coinless calls than they might have received under  X-the Second Report and Order. However, by this action, we ensure that PSPs are more likely receive "fair compensation" for subscriber 800 and access code calls. This measure also helps PSPs receive fair compensation for each and every completed call made from a payphone, as   required by the Act.     X-x224.` ` The downward adjustment also means that IXCs, some of which may be small businesses, will have lower percall payphone expenses than they would have under the  X-Second Report and Order. Since many IXCs pass on this expense directly to their 800 subscribers, many of which are small businesses, the downward adjustment means that these   entities will experience lower 800 subscriber expenses.     X-x225.` ` Like the comments to the Second Report and Order,w3 {OT -ԍxSecond Report and Order, 13 FCC Rcd at 1844, 160161. w several parties commented on alternatives to a marketbased default rate, and on alternatives to the approach selected by the Commission in which IXCs are obligated to compensate PSPs for dialaround  Xt-,calls. The Commission has responded to these comments.t~3 {O$-ԍxSee paras. 6070, 191 above (where we adopt a bottomup methodology for determining the percall compensation amount and set that amount at $.24). "tf0*&&ll,"Ԍ X-ԙx226.` ` Some of these commenters also charge that the Commission's approach is significantly increasing the cost of the many small businesses and public interest "hot lines"  X-that depend on affordable 800 call rates.h3 yOK-ԍxConsumerBusiness Coalition Petition at 1415.hh Our rules do not require IXCs to pass on the  X-expense of payphone dialaround call compensation, but neither do our rules prohibit this./\X3 {O-ԍxReport and Order, 11 FCC Rcd at 20584, 83. The Commission rejected proposals that enduser 800 subscribers be required to compensate PSPs for the dialaround calls these 800subscribers receive from  {OV-payphones. Id. / The Commission rejected proposals that IXCs be restricted from passing on the percall costs  X-to at least some 800 subscribers.@|3 {O -ԍxId.@ We reiterate that IXCs should be given maximum  Xv-,flexibility to determine what, if any, percall costs are passed on to their 800 subscribers.:v3 {O5-ԍxId.:  X-  X-x227.` ` Report to Congress . The Commission will send a copy of this Order, including this SFRFA, in a report to be sent to Congress pursuant to the Small Business  Xt -Regulatory Enforcement Fairness Act of 1996, see 5 U.S.C.  801(a)(1)(A). A copy of this  X_ -Order and SFRFA, or summary thereof, will be published in  the Federal Register, see 5 U.S.C.  604(b), and will be sent to the Chief Counsel for Advocacy of the Small Business  X3 -Administration.  XI -9VI. CONCLUSION Đ  TP  XH-x228.` ` We conclude that the default price for coinless calls should be adjusted from   $.284 to $.24. In addition, we note that PSPs will not be compensated for 911 and TRS calls.     X]-x229.` ` In setting the default compensation amount, we shift to a costbased method  XF-from the marketbased method used in the Second Report and Order because of technological impediments that currently inhibit the market as well as the present unreliability of certain assumptions underlying the marketbased method. In setting the costbased default amount, we incorporated our reconsideration of our prior treatment of certain payphone costs as well   as our examination of new estimates of payphone costs submitted as part of this proceeding.     X-x230.` ` The $.24 default price will be the price that, beginning thirty days after this order is published in the Federal Register, IXCs must compensate PSPs for all coinless payphone calls not otherwise compensated pursuant to contract, or advance consumer payment, including subscriber 800 and access code calls, certain 0+ and certain inmate calls. The $.24 price will serve as the default percall compensation price for coinless payphone"g0*&&ll>" calls through January 31, 2002. At the conclusion of the three year period, if parties have not invested the time, capital, and effort necessary to move these issues to a marketbased resolution, parties may petition the Commission regarding the default amount, related issues   pursuant to technological advances, and the expected resultant market changes.     X-x231.` ` We conclude that the default price, adjusted for certain items, should be effective retroactive to October 7, 1997, and that IXCs will recover their overpayments to PSPs by deducting the amount of their overpayments, along with interest, from the payments the IXCs will make to PSPs for calls made during the November 7, 1996 to October 6, 1997   period.     X - VII. ORDERING CLAUSES ă     X -x232.` ` Accordingly, pursuant to authority contained in Sections 1, 4, 201205, 226, and 276 of the Communications Act of 1934, as amended, 47 U.S.C.  151, 154, 201205, 215, 218, 219, 220, 226, and 276, IT IS ORDERED that the policies, rules, and requirements   set forth herein ARE ADOPTED.     X-x233.` ` IT IS FURTHER ORDERED that this order IS EFFECTIVE thirty days after  X-publication in the Federal Register.hh   x  X-x234.` ` IT IS FURTHER ORDERED, that 47 C.F.R. Part 64 IS AMENDED as set forth in Appendix A, effective 30 days after publication of the text thereof in the Federal  X-Register.` `     X-x235.` ` IT IS FURTHER ORDERED that the Commission's Office of Public Affairs,  X-Reference Operations Division, SHALL SEND a copy of this Third Report and Order and  X-Order on Reconsideration of the Second Report and Order, including the Final Regulatory   Flexibility Analysis, to the Chief Counsel for Advocacy of the Small Business Administration.     X-x236.` ` IT IS FURTHER ORDERED that the July 14, 1998 Motion of   Telecommunications Resellers Association to accept latefiled pleading IS GRANTED.    D&#M    x` `  hhFEDERAL COMMUNICATIONS COMMISSION         x` `  hhMagalie Roman Salas  X5%-x` `  hhSecretaryhpp  xx"5%h0*&&ll $"  X-) APPENDIX A Đ  TP  X-{ RULES AMENDED ă         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:     X - 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  Xk -U.S.C. 201, 218, 226, 228, 276 unless otherwise noted.      2. Section 64.1300 (c) is amended to read as follows:     X- 64.1300 Payphone Compensation Obligation.     X-(c) xIn the absence of an agreement as required by subsection (a) herein, the carrier is   obligated to compensate the payphone service provider at a percall rate of $.24.      3. Section 64.1300 (d) is deleted.  X- "i0*&&llr"  X-)APPENDIX B ă     X,- LIST OF PARTIES ă     XX-, A.xPARTIES FILING PETITIONS FOR RECONSIDERATION mX3 yO-ԍ In addition, a number of informal comments and letters were filed. m  Xn- x` `    X-x1.` ` American Alpha Dispatch Services, Inc., et al (American Alpha Dispatch)  X-x2.` ` American Public Communications Council (APCC)  X-x3.` ` ConsumerBusiness Coalition for Fair Payphone800 Fees (ConsumerBusiness   x` ` Coalition)  X -x4.` ` AT&T Corp. (AT&T)  X -x5.` ` Direct Marketing Association (DMA)  X -x6.` ` Mobile Telecommunication Technologies Corp. (MTTC)  X -x7.` ` Paging Network, Inc. (Paging Network)  X-x8.` ` PageMart Wireless, Inc. (PageMart)  X-x9.` ` Peoples Telephone Company, Inc. (Peoples)  X3-x10.` ` RBOC/GTE/SNET Payphone Coalition (RBOC Coalition)  XI-x11.` ` Source One Wireless II, L.L.C (Source One)     Xu- B.xPARTIES FILING OPPOSITIONS AND COMMENTS TO PETITIONS     X-x 1.` ` Ad Hoc Telecommunications Users Committee  X-x2.` ` Airtouch Paging  X-x3.` ` APCC  X-x4.` ` AT&T  X-x5.` ` Communications Central, Inc.  X-x6.` ` ConsumerBusiness Coalition for Fair Payphone800 Fees  X%-x7.` ` MCI  X;-x8.` ` Metrocall, Inc.  XQ-x9.` ` Mobile Telecommunications Technologies Corp.  Xg -x10.` ` Peoples Telephone Company, Inc.  X}!-x11.` ` RBOC/GTE/SNET Payphone Coalition  X"-x12.` ` RCN Telecom Services and US Xchange, L.L.C (RNC)""jX0*&&ll!"Ԍ X-x13.` ` Sprint  X-x14.` ` Telecommunications Resellers Association  X,-x15.` ` John Yoggerst     XX- C.xPARTIES FILING REPLIES TO OPPOSITIONS AND COMMENTS     X-x1.` ` Air Touch Paging  X-x2.` ` American Alpha Dispatch Services, Inc., et al  X-x3.` ` APCC  X -x4.` ` Arch Communications Group  X -x5.` ` AT&T  X -x6.` ` ConsumerBusiness Coalition for Fair Payphone800 Fees  X -x7.` ` Metrocall, Inc.  X-x8.` ` Mobile Telecommunications Technologies Corp.  X4-x9.` ` PageMart Wireless, Inc.  XJ-x10.` ` Paging Network, Inc.  X`-x11.` ` Peoples Telephone Company, Inc.  Xv-x12.` ` RBOC/GTE/SNET Payphone Coalition  X-x13.` ` Source One Wireless II, L.L.C.  X-x14.` ` Sprint     X< D.xPARTIES FILING COMMENTS ON MCI V. FCC     X-x1.` ` Airtouch Paging  X-x2.` ` Allen Lund Company  X'-x3.` ` American Public Communications Council (APCC)  X=-x4.` ` AT&T Corp. (AT&T)  XS-x5.` ` Cable and Wireless, Inc.  Xi-x6.` ` Citicorp  X-x7.` ` Competitive Telecommunications Corporation  X -x8.` ` ConsumerBusiness Coalition for Fair Payphone800 Fees (ConsumerBusiness   Coalition)(#`  X"-x9.` ` Excel Communications, Inc.  X#-x10.` ` Frontier Corporation  X$-x11.` ` International Telecard Association  X%-x12.` ` IXC Communications Services, Inc."%k0*&&ll$"Ԍ X-x13.` ` LCI International Telecom Corp.  X-x14.` ` MCI Telecommunications Corporation  X,-x15.` ` State of New York Department of Public Service  XB-x16.` ` Paging Network, Inc.  XX-x17.` ` Personal Communications Industry Association (PCIA)  Xn-x18.` ` PocketScience, Inc.  X-x19.` ` RBOC/GTE/SNET Payphone Coalition  X-x20.` ` Rhode Island Department of Human Services (Office of Financial Management   and Legal Services)(#`  X -x21.` ` Skytel  X -x22.` ` Sprint Corporation  X -x23.` ` Telecommunications Resellers Association  X -x24.` ` Vocall Communications  X -x25.` ` Worldcom, Inc.     X- E.xPARTIES FILING REPLY COMMENTS (7/27/98)     XI-x1.` ` Airtouch Paging  X_-x2.` ` American Public Communications Council (APCC)  Xu-x3.` ` AT&T Corp. (AT&T)  X-x4.` ` Citicorp  X-x5.` ` State of Colorado, Department of Human Services  X-x6.` ` ConsumerBusiness Coalition for Fair Payphone800 Fees (ConsumerBusiness   Coalition)(#`  X- x7.` ` District of Columbia, Office of the Chief Financial Officer  X-x8.` ` Electronic Benefit Transfer Council  X-x9. ` ` Excel Communications, Inc.  X-x10.` ` Frontier Corporation  X-x11.` ` Georgia State Department of Human Resources  X$-x12.` ` IXC Communications Services, Inc.  X: -x13.` ` State of Kentucky, Cabinet for Families and Children     XP!-x14.` ` LCI International Telecom Corp.  Xf"-x15. ` ` State of Louisiana, Department of Social Services  X|#-x16.` ` MCI Telecommunications Corporation  X$-x17.` ` State of New Hampshire, Department of Health and Human Services  X%-x18.` ` State of Oklahoma Department of Human Services  "%l0*&&ll$"Ԍ X-x19.` ` Personal Communications Industry Association (PCIA)  X-x20.` ` State of Pennsylvania, Department of Public Welfare  X,-x21.` ` RBOC/GTE/SNET Payphone Coalition  XB-x22.` ` Skytel  XX-x23.` ` Sprint Corporation  Xn-x24.` ` Telecommunications Resellers Association  X-x25.` ` State of Vermont, Agency of Human Services  X-x26.` ` State of Washington Department of Social and Health Services