Prison Phone Justice

Inmate Calling Services
Interstate Call Cost Study

August 15, 2008

Prepared by:
Don J. Wood

WOOD & WOOD
30000 Mill Creek Avenue
Suite 395
Alpharetta, Georgia 30022

A.

PURPOSE ...................................................................................................................................... 1

B.

STUDY OBJECTIVES .................................................................................................................... 2
TO PROVIDE THE BASIS FOR RATES THAT REPRESENT “FAIR COMPENSATION” AS SET FORTH IN §276(B)(1)(A)
OF THE 1996 ACT. ................................................................................................................................. 2
PROVIDE COST INFORMATION NECESSARY TO DEVELOP COST-BASED RATE LEVELS AND RATE STRUCTURES
THAT WILL AVOID CROSS SUBSIDIES; BOTH AMONG DIFFERENT CALL TYPES AND AMONG CUSTOMERS WITH
DIFFERENT CALLING CHARACTERISTICS. ................................................................................................... 2

C.

RESULTS ....................................................................................................................................... 4
C.1
C.2

D.

MARGINAL LOCATION RESULTS .................................................................................................. 4
ANALYSIS OF COST CAUSATION .................................................................................................. 5

METHODOLOGY............................................................................................................................ 7
D.1
BOTTOM-UP ANALYSIS OF MULTIPLE LOCATIONS ......................................................................... 7
D.2
MARGINAL LOCATION ANALYSIS.................................................................................................. 7
D.2.1 Definition of Marginal Locations .......................................................................................... 7
D.2.2 Identification of Marginal Locations ..................................................................................... 8
D.2.3 Notes on Distinctions Between ICSP Costs and Public Payphone Provider Costs ............... 9
D.3
FORMULA FOR CALCULATING PER-CALL COSTS ......................................................................... 10
D.3.1
Calculation of a Proportionate Share of Fixed Costs ..................................................... 12
D.3.3 Calculation of Other Per-Call Costs................................................................................... 13
D.3.4 Calculation of Per-MOU Costs .......................................................................................... 14
D.3.5 Adjustments for Unbillable and Uncollectible Calls ............................................................ 14
D.4
THE DEVELOPMENT OF CONSERVATIVE COST RESULTS .............................................................. 15

E.

NOTES ON THE RELATIONSHIP BETWEEN COST STRUCTURE AND RATE STRUCTURE.... 16
FIRST, A CLOSE MATCHING OF COST STRUCTURE AND RATE STRUCTURE HELPS TO ENSURE THAT WHATEVER
THE CUSTOMER’S SERVICE USAGE CHARACTERISTICS, THE SERVICE PROVIDER WILL BE FAIRLY COMPENSATED
AND THE CUSTOMER WILL BE FAIRLY CHARGED........................................................................................ 16
SECOND, A CLOSE MATCHING OF COST STRUCTURE AND RATE STRUCTURE HELPS TO ENSURE THAT WHATEVER
A CUSTOMER’S SERVICE USAGE CHARACTERISTICS, THAT A CUSTOMER WILL NOT BE FORCED TO SUBSIDIZE
OTHER CUSTOMERS. ............................................................................................................................ 17

F.

QUALIFICATIONS OF COST ANALYST ...................................................................................... 20

G.

INMATE CALLING SERVICE PROVIDERS CONTRIBUTING DATA TO THE STUDY ................. 21

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Interstate Call Cost Study
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A.

PURPOSE

The purpose of this study is to provide the cost information1 that the Commission
requested in order to evaluate rates for interstate toll calls made from confinement
facilities and to develop a rate structure and rate level that meets the definition of “fair
compensation” as set forth in §276(b)(1)(A) of the 1996 Act.
The cost development process used in this study follows the methodology
previously developed and adopted by the Commission for the calculation of payphonerelated costs, and the implementation of this methodology is fully consistent with the
Commission’s subsequent orders in which rates have been established based on costs
developed pursuant to this methodology.2
Section B sets forth the objectives of the analysis. Section C presents the
results. A full description of the methodology used and of each step of the cost
development process is provided in Section D, and Section E addresses the issue of
cost structures and cost causation. Section F provides a summary of the author’s
qualifications, and Section G contains a list of the Inmate Calling Service Providers
(“ICSPs”) who contributed data to the study.

1

The results of the study are summarized in Section C.
See Third Report and Order and Order on Reconsideration of the Second Report and Order, FCC 99-7,
released February 4, 1999, and Report and Order, FCC 04-182, released August 12, 2004. In the 1999
Report and Order, the Commission established a methodology to be followed when calculating costs of
public payphones that will serve as the basis for determining “fair compensation” for calls made from a
payphone location. In the 2004 Report and Order, the Commission evaluated various parties’
implementation of that methodology and reached specific conclusions regarding what actions constitute
an appropriate implementation that will yield sound cost results. For these reasons, this documentation
will refer to the 1999 Report and Order as the Methodology Order and the 2004 Report and Order as the
Implementation Order.
2

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Interstate Call Cost Study
August 15, 2008
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B.

STUDY OBJECTIVES
The study is intended to support two primary objectives:
To provide the basis for rates that represent “fair compensation” as set
forth in §276(b)(1)(A) of the 1996 Act.
In its prior orders, the Commission has carefully considered the definition
of “fair compensation” in the context of rates associated with public payphones,
and has consistently reached the same conclusions: “the costs of one service
should not be cross-subsidized by another service,”3 and that in order to avoid
such a subsidy, each type of call must “contribute a proportionate share of the
common costs of payphone service.”4 According to the Commission, these
objectives can be met if the per-call compensation amount is sufficient to ensure
that “each call at a marginal payphone location recovers the marginal cost of that
call plus a proportionate share of the joint and common costs of providing the
payphone.”5
A study of the costs incurred by the providers of payphone services at
confinement facilities must address the same fundamental economic question
regarding cost recovery and “fair compensation.” For this reason, the
Commission’s rationale for using the methodology that it adopted for public
payphones applies equally in the more narrow context of payphones provided at
confinement facilities. The only distinction is factual rather than conceptual:
providing calling services at confinement facilities causes the service provider to
incur additional costs that are unique to this environment. These additional costs
are addressed in Section D.
Provide cost information necessary to develop cost-based rate levels and
rate structures that will avoid cross subsidies; both among different call
types and among customers with different calling characteristics.

3

Methodology Order, ¶56.
Methodology Order, ¶57.
5
Methodology Order, ¶59, Implementation Order ¶31. The definition and use of the Commission’s
“marginal payphone location” methodology is described in detail in Section D. In short, a “marginal
payphone location” is one in which “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”
Methodology Order, ¶15, footnote 20).
4

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Interstate Call Cost Study
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After carefully considering the issue, the Commission concluded that a
per-call rate structure that requires all call types to “contribute a proportionate
share of the common costs of payphone service.”6 The Commission observed
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.”7
This kind of “disproportionate support” can arise in two ways. First, if the
pricing of certain call types does not permit the recovery of a proportionate share
of the fixed (common) costs, then customers who make certain types of calls
may be subsidizing customers who make other kinds of calls. Second, if a rate
structure is adopted that deviates significantly from the way costs are incurred
(that is, the rate structure does not match the cost structure), then customers with
certain calling patterns may be subsidizing customers with different calling
patterns.
In order to provide a basis for these objectives to be met, the study was
organized and conducted based on the following. First, the methodology
previously developed by the Commission was used, without modification, to
calculate costs.8 Second, input data was collected, and calculations were
performed, in a manner that the Commission has previously considered and
accepted. In short, both the cost methodology and its implementation are
consistent with that found to be appropriate in previous orders.

6

It is important to note that in this context, the phrase “common cost” has been used to mean the costs
that are fixed and unaffected by the volume of usage at a given location (Methodology Order, ¶56). This
category of cost includes, but is not limited to, the kinds of SG&A or “overhead” costs that are sometimes
referred to as “common costs.”
7
Methodology Order, ¶57.
8
While the methodology adopted in a public payphone context is directly applicable when considering
rates for payphones located in confinement facilities, it is important to note that providing payphones in
confinement facilities, service providers incur additional costs that should be reflected. While the
economic question to be addressed is the same (and therefore the use of the same methodology is
appropriate), some differences in input values are necessary to reflect the unique challenges of providing
payphone service in a confinement facility.

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Interstate Call Cost Study
August 15, 2008
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C.

RESULTS

C.1

Marginal Location Results
The following results are based on an analysis of the costs incurred by
inmate calling service providers to provide interstate toll calls:
Table C-1:
Inmate Calling Services
Cost of Interstate Toll Calls
(Twenty-five Marginal
Locations) 9
Debit Calls
Fixed Per-Call Cost

$1.56

Time Sensitive Transmission Costs

$0.06

Collect Calls
Fixed Per-Call Cost

$2.49

Time Sensitive Transmission Costs

$0.07

These costs are based on information provided by seven different ICSPs
regarding twenty-five different locations. The locations ranged from small county
jails to large prison facilities.
As will be addressed in further detail in Section D.2.2, in the
Implementation Order the Commission proposed to modify the approach adopted
in the Methodology Order to include in the definition of “marginal” locations those
in which the service provider is just able to recover its costs and locations in
which the provider is unable to recover its costs. The following results reflect the

9

These results are limited to those locations that meet the Commission’s definition of a “marginal”
location as set forth in the Methodology Order. As described below, in the Implementation Order the
Commission expanded the definition of “marginal” to include additional locations.

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Interstate Call Cost Study
August 15, 2008
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inclusion of three additional locations whose traffic characteristics cause them to
represent locations at which cost recovery is unlikely:

Table C-2:
Inmate Calling Services
Cost of Interstate Toll Calls
(Twenty-Eight Marginal
Locations) 10
Debit Calls
Fixed Per-Call Cost

$2.09

Time Sensitive Transmission Costs

$0.06

Collect Calls

C.2

Fixed Per-Call Cost

$3.19

Time Sensitive Transmission Costs

$0.07

Analysis of Cost Causation
An analysis of cost causation reveals that the costs incurred by ICSPs to
provide interstate toll calls fall into three categories. First, many of the costs
incurred to provide service at a given location (e.g., capital equipment costs,
maintenance and repair, telephone company monthly line charges, and overhead
costs) are volume insensitive; that is, they do not vary with the number or
duration of calls. Consistent with the Commission’s methodology, these costs
have been assigned to all call types based on a location’s total call volume, so
that all types of calls “contribute a proportionate share” to the recovery of these
costs. Interstate calls receive a proportionate share based on the ratio of

10

These results are based on those locations that meet the Commission’s original definition of “marginal”
and an additional three locations whose traffic characteristics cause service providers to be unable to
recover their costs of serving that location.

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Interstate Call Cost Study
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interstate toll calls to total calls for a given location. Second, some costs (e.g.,
call validation costs, billing and collection costs) vary directly with the number of
calls (in other words, the origination of a call causes a cost of a given magnitude
to be incurred, regardless of the duration of the call). Consistent with the
Commission’s methodology, each of these first two categories of cost are
reported on a per-call basis. The third category of costs (the costs incurred when
a carrier terminates an interstate toll call for an ICSP) vary based on call
duration. Again consistent with previous treatment, these costs have been
reported on a per minute of use (“MOU”) basis.
The proper interpretation of the costs reported in Table C-1 is as follows:
In order to recover the costs incurred when a customer uses a debit account to
make an interstate toll call, an ICSP needs to recover $1.56 per call (regardless
of call duration) and an additional $0.06 per MOU for the duration of the call.
When a customer makes a collect interstate call (using the credit of the called
party), an ICSP needs to recover $2.49 per call (regardless of call duration) and
an additional $0.07 per MOU for the duration of the call. If the rates and rate
structure in effect do not permit the recovery of these amounts, then customers
making other kinds of calls from confinement facilities (local or intrastate toll
calls) would need to pay a higher rate than would otherwise be necessary,
creating a scenario which would “unfairly require one segment of payphone users
to disproportionately support the availability of payphones to the benefit of
another segment of payphone users” (in this example, those who make interstate
toll calls). As the Commission has consistently made clear, this principle of
proportionate support “is an essential element” of a determination of “fair
compensation.”11

11

Methodology Order, ¶57.

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Interstate Call Cost Study
August 15, 2008
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D.

METHODOLOGY

D.1

Bottom-Up Analysis of Multiple Locations
In the Methodology Order, the Commission concluded that its definition of
“fair compensation” requires that a bottom-up analysis (i.e., one that uses
location-specific costs to build up an average cost per call) be utilized. The
Commission also found that while the analysis should be forward-looking, it
should also be fully-distributed; that is, the fixed costs of a location should be
distributed, on a proportionate basis, to all call types: “we find that a fully
distributed cost coverage approach that determines cost by working from the
bottom up will comport with statutory directives,” because “fully distributed cost
coverage allows the payphone owner an opportunity to recover the fixed costs
associated with the payphone.”12 In the Implementation Order, the Commission
affirmed the use of this methodology and adopted costs developed in this
manner.13
This study is based on the bottom-up analysis described in the
Commission’s orders. Location-specific costs are identified, fixed costs are
assigned to all call types on a proportionate basis, and a weighted average of
these per-call results is then calculated.14

D.2

Marginal Location Analysis

D.2.1 Definition of Marginal Locations
In the Methodology Order, the Commission adopted a marginal location
analysis to be used to calculate per-call costs associated with providing
payphone services. A marginal location is defined as “a location where the
payphone operator is able to just recoup its costs, including a normal rate of
return on the asset, but is unable to make payments to the location owner.”15 In
other words, a “marginal” location represents a break-even location. If costs and
call characteristics associated with a such marginal, or break-even, location are
used to establish rates, service providers will be able to recover their costs at
these locations. This can be accomplished if a rate level and rate structure is
adopted that ensures that “each call at a marginal payphone location recovers
12

Methodology Order, ¶¶72-73.
Implementation Order, ¶¶27-31.
14
Fixed costs have been weighted based on the percentage of lines represented by each location, and
per-MOU transmission costs have been weighted based on the number of minutes of use represented by
each location.
15
Methodology Order, ¶15.
13

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Interstate Call Cost Study
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the marginal cost of that call plus a proportionate share of the joint and common
[fixed] costs of providing the payphone.”16
D.2.2 Identification of Marginal Locations
A list of potential “marginal” locations can be compiled by first identifying
locations where the ICSP makes no payment to the location owner. One
practical concession has been made in this study that may cause the reported
results to understate the actual costs. While there are very few locations with a
zero payment,17 there is a larger group of locations where such a payment is
relatively small. Locations with such a payment are likely to have either lower
equipment/operating costs or a higher call volume (each of which would cause
the per-call cost to be lower) than a true marginal location. As a result, the
inclusion of these additional locations is likely to cause the reported costs to be
understated. For this and other reasons (described below in Section D.4), the
results of the study should be treated as a conservatively low estimate of inmate
calling service provider costs.
It is then possible to consider two adjustments to this list of potential
marginal locations. First, a location may exist whose cost characteristics are
sufficiently low to make it possible, all else equal, for an ICSP to make a payment
to the location owner, even if no monetary payment is actually being made. Such
a location does not represent a location where the payphone operator is able “to
just recoup its costs, including a normal rate of return on the asset, but is unable
to make payments to the location owner.” As a result, such a location is properly
removed from the list of “marginal” locations.
Second, the absence of such a payment may indicate a location in which
the ICSP is “able to just recoup its costs,” but a payment would also be absent
from a location in which the service provider is unable to recoup its costs. Such
a location could also be excluded from a list of “marginal” locations, even though
the Commission has found it reasonable to include these low-volume, high-cost
locations in the average of “marginal” location costs.18
16

Methodology Order, ¶59.
As noted previously, there are some important distinctions between the costs incurred by ICSPs and
the costs incurred by the providers of public payphones. One critical distinction is described in more
detail in Section D.2.3 below.
18
In the Implementation Order (at ¶ 47), the Commission noted the existence of these high-cost locations,
and concluded that “it is reasonable to modify the Third Report and Order methodology to include in the
definition of “marginal payphones” all payphones that currently do not pay commissions to premises
owners or receive payments from premises owners, even if some of those payphones may not currently
recoup all their costs.”
17

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In this study, three low volume, high cost locations have been identified.
Costs were then calculated both with and without these locations. If these
locations are not included, the results shown in Table C-1 are calculated. It is
important to note that taking this more conservation approach makes it likely that
costs have been understated. If these additional locations are included (as the
Implementation Order states that they should be), the results are those shown in
Table C-2.
D.2.3 Notes on Distinctions Between ICSP Costs and Public Payphone Provider Costs
While the fundamental economic question of how to calculate “fair
compensation” is the same (and the appropriate methodology for calculating percall costs is therefore the same), ICSPs do operate in conditions that are
fundamentally different from other providers of payphone services and do incur
costs that providers of public payphones do not incur. For example, an amount
paid by an ICSP to a confinement facility (or to the agency that operates the
facility) is sometimes erroneously equated to a “commission” payment made to a
location owner by a public payphone provider.19 In reality, payments to a
confinement facility by an ICSP may include the equivalent of a “commission”
payment if the characteristics of the location cause the per-call costs to be low
enough, but at most locations such payments represent a means of recovery of
the costs incurred by the confinement facility to operate and administer
telecommunications facilities for inmates. These facility administration fees
represent a pass-through of costs from the confinement facility to the inmate, in
the form of an increase in the rates charged for calling services. As a result, it is
necessary to distinguish between facility administration fees (that represent a
direct cost to the ICSP assessed by the confinement facility) and “commission”
payments that could be made if the costs associated with providing service to the
facility are low enough.
Because the Commission did not permit the recovery of “commission”
payments made to location owners when calculating rates for calling services
made from public payphones, no payments from ICSPs to location owners have
been included in this analysis. Such an approach is likely to understate the
actual costs incurred by ICSPs, and potentially significantly so. A complete and
accurate calculation of ICSP costs should include an analysis of the amount of
any payment to a confinement facility that represents a facility administration fee
(i.e., a pass through of costs from the confinement facility to the inmates in the
form of an increased charge for calling services provided by an ICSP) rather than
19

In the Methodology Order (¶¶154-156), the Commission referred to these payments as “location rents.”

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Interstate Call Cost Study
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a payment analogous to a “commission” payment made to a location owner by a
public payphone provider. Such a facility administrative fee represents a direct
cost to an ICSP and is therefore properly included in a study of the costs incurred
by an ICSP to provide calling services.20 If these additional direct costs are not
included − as they are not included in this analysis − the results set forth in
Section C should be treated as conservatively low.
D.3

Formula for Calculating Per-Call Costs
Two types of interstate toll calls have been considered in the study. Debit
calls are paid for by debiting an inmate’s prepaid account. Interstate toll calls are
also made as collect calls; in this scenario the call is being provided on credit to
the called party. The credit aspect of collect calls introduces additional risks and
costs to the ICSP: because the call is not paid for up front, the potential exists for
a given call to be unbillable, to be subject to post-billing adjustments made by the
local telephone company (acting as a billing agent), or to be billed but not
collected. Even if billed and collected, providing the call on credit requires the
service provider to incur additional costs for call validation and for billing and
collection. Because of the existence of the additional costs, results are being
provided separately for debit and collect calls.
Debit Calls: The formula for calculating the cost of an interstate toll call
paid for via a debit arrangement is as follows:
For n locations,
Fixed Per-Call Cost for Marginal Locations =
Σ1-n ((location1 fixed per-call cost * location1 percentage of lines), (location2 fixed
per-call cost * location2 percentage of lines), …(locationn fixed per-call cost *
locationn percentage of lines)) + other per-call costs
Where,
Location fixed per-call cost = capital costs per month per line/average number of
total calls per line at location;

20

The inclusion of these costs is fully consistent with the Commission’s reasoning when adopting the
marginal location analysis methodology. Because they represent direct costs to the ICSP that may be
incurred regardless of whether a location is profitable or unprofitable, facility administration fees should be
included as a cost in a marginal location analysis. These fees should be distinguished from any
“commission” payment that may be made at a location of sufficiently low cost.

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Interstate Call Cost Study
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Capital costs per month per line = monthly amount needed to recover the
total equipment investment per line, assuming an annual rate of return of
11.25%, combined federal, state, and local taxes of 39.25%,21 and a
depreciable life specific to the type of equipment
Total equipment investment per line = (location-specific equipment
investment/number of lines at location) + (common equipment
investment/number of lines served by common equipment)
Other per-call costs = Maintenance and repair per line per month + local telco
line charges per line per month + operations and SG&A costs per line per month

Time Sensitive Transmission Costs/MOU = incremental costs associated with the
termination of interstate toll calls per month/average number of interstate toll calls
per month

Collect Calls: The formula for calculating the cost of a collect interstate toll call
is as follows:
For n locations,
Fixed Per-Call Cost for Marginal Locations =
(Σ1-n ((location1 fixed per-call cost * location1 percentage of lines), (location2 fixed
per-call cost * location2 percentage of lines), …(locationn fixed per-call cost *
locationn percentage of lines)) + other per-call costs)*credit collections factor,
Where,
Location fixed per-call cost = capital costs per month per line/average number of
total calls per line at location;
Capital costs per month per line = monthly amount needed to recover the
total equipment investment per line, assuming a rate of return of 11.25%,

21

In the Methodology Order (¶169), the Commission adopted a rate of return of 11.25% and a combined
tax rate of 39.25% for use in payphone cost studies, and subsequently utilized capital costs based on
these assumptions in the Implementation Order (¶¶51-58, 80). While it is likely that the risks incurred by
inmate calling service providers supports the use of a higher rate of return than the 11.25% previously
relied upon by the Commission, this study takes a conservative approach and utilizes the Commission’s
assumptions.

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combined federal, state, and local taxes of 39.25%, and a depreciable life
specific to the type of equipment
Total equipment investment per line = (location-specific equipment
investment/number of lines at location) + (common equipment
investment/number of lines served by common equipment)
Other per-call costs = (Maintenance and repair per line per month + local telco
line charges per line per month + operations and SG&A costs per line per
month)/average number of total calls at location + call validation costs per call +
billing and collection costs per call
Credit collections factor = 1/(1-uncollected percentage)
Uncollected percentage = monthly unbillable revenue/total monthly
revenue + monthly revenue subject to post billing adjustments/total
monthly revenue + monthly billed but uncollectible revenue/total monthly
revenue

Time Sensitive Transmission Costs/MOU = (incremental costs associated with
the termination of interstate toll calls per month/average number of interstate toll
calls per month)*credit collections factor

These calculations are consistent with those performed by the
Commission in the Methodology Order (¶191) and the Implementation Order
(¶80).
D.3.1 Calculation of a Proportionate Share of Fixed Costs
As noted in Section C.2 above, the Commission has previously concluded
that most costs associated with the provisioning of payphone calls are “fixed –
that is, they do not vary with the volume of calls” and that “fair compensation
requires that the rate for each call at a marginal payphone location be sufficient
to permit the recovery of the incremental per-call costs “plus a proportionate
share of the joint and common costs of providing the service.”22 In this context,
the Commission treats a cost as “joint and common” if “the amount of the cost
does not vary with respect to the mixture of calls at the payphone.”23
22
23

Methodology Order¶¶47, 56-57, 59, 69, 74, 75, 81, 190; Implementation Order ¶27, 29, 31.
Methodology Order, ¶75.

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Interstate Call Cost Study
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As with other types of payphones, when providing inmate calling services
the primary fixed costs are associated with the equipment needed to provide the
services. Depending on the service provider and the size of the location being
served, this equipment may be physically located at the confinement location or a
mixture of on-site and centralized equipment may be used. Typically, this
centralized equipment is used to provide service to more than one location.
Each ICSP participating in the study reported the amount of equipment
investment at each location (this investment was limited to equipment directly
used to provide calling services to the location) and the number of lines (or line
equivalents) provided at that location.24 If centralized equipment is also used to
provide service at a given location, the investment in that centralized equipment,
and the total number of lines served by that equipment, were reported. This
information allows all equipment investment to be expressed on a per-line basis.
In order to calculate capital costs per month, service providers also
provided the depreciable life for each type of equipment (this life may be different
for on-site equipment and centralized equipment). The monthly amount needed
to recover this investment over the useful life of the asset, assuming a rate of
return of 11.25% and a combined tax rate of 39.25%, was then calculated using
the formula adopted in the Methodology Order and relied upon in the
Implementation Order.
Monthly capital costs per line for each location were then divided by the
average number of total calls per line for that location25 to calculate a per-call
amount.
D.3.3 Calculation of Other Per-Call Costs
Each ICSP participating in the study provided the amount of maintenance
and repair, local telco, and operations/SG&A costs directly associated with the
provisioning of inmate calling services. The total number of lines associated with
24

Depending on the location, an ICSP may use individual voice grade lines provided by the local
telephone company, or it may use a high volume facility capable of providing the equivalent to multiple
voice grade lines. Where these high volume facilities were used, the study assumes that they are being
used to provide the maximum theoretical number of line equivalents (a DS-1 is assumed to provide 24
line equivalents, for example), even if the demand at the location could be met with fewer actual lines.
This conservative assumption causes per-line costs to be understated in the study results.
25
Average monthly call volumes were calculated for each location based on actual January – March 2008
traffic studies. One of the locations included in the study was not yet in operation during the first quarter
of 2008, and its average monthly call volume was calculated based on the months the location was
actually in service.

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each of these categories of costs was also produced, so that a per-line amount
for each category of cost could be calculated.
These additional categories of per-line costs were explicitly found to be
appropriate in both the Methodology Order (¶¶170-179) and Implementation
Order (¶¶59-63).
D.3.4 Calculation of Per-MOU Costs
Time-sensitive transmission costs (per-MOU usage costs) are those costs
that are caused on a per-MOU, rather than per call, basis; that is, the costs that
vary based on the length of the call. While different ICSPs operate differently,
these costs primarily consist of the amounts paid to carriers to complete toll calls.
Participating service providers produced both the dollar value of costs directly
associated with (incremental to) the completion of interstate toll calls and the
number of associated interstate toll calls and minutes of use. From this
information, a cost per MOU was calculated.
D.3.5 Adjustments for Unbillable and Uncollectible Calls
When collect calls are made, the ICSP effectively offers a service on credit
to the called party. The extension of this credit creates risk in four ways: a collect
call may be initiated but not accepted by the called party, a call may be
completed but later prove to be unbillable, a call may initially be billed but subject
to a post-billing adjustment by the local telco acting as a billing agent, and a call
may be billed but never paid.
Participating service providers provided the amount of each of these forms
of bad debt and the relationship of each form of bad debt to total revenue.26 A
credit collections factor was calculated based (1/(1-bad debt percentage)). When
service costs are multiplied by this credit collections factor, the resulting value
provides a response to the question “what rate must be applied to a collect call
so that, after unbillable calls, post-billing adjustments, and uncollectibles are
considered, the service provider will ultimately receive revenue sufficient to
permit the recovery of the relevant costs?”

26

Some providers do not keep separate records for unbillable and uncollectible calls, and the various
categories of bad debt may have been reported on a aggregated basis. Ultimately, it is the total amount
of bad debt, as a percentage of revenue, that is important (the categories of bad debt are summed when
developing the applicable credit collections factor). As a result, treating the categories of bad debt on a
combined basis has no impact on the results of the study.

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Interstate Call Cost Study
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The process used in this study is mathematically equivalent to the method
used approved and relied upon by the Commission.27

D.4

The Development of Conservative Cost Results
The results shown in Tables C-1 C-2 should be treated as conservatively
low for the following reasons:
1. While data for several small jail locations are utilized in the study, the
use of line weightings means that this kind of low volume, high cost
location is likely to be statistically underrepresented in the study. Any
adjustment to make the results more reflective of the number of inmate
calling lines that are located at small confinement facilities would cause
the reported cost to increase.
2. Even though the risk characteristics of ICSPs might support a higher
risk premium and therefore a higher cost of capital, the Commission’s
value of 11.25% is used in the study.
3. Facility administration fees represent direct costs incurred by ICSPs
that are conceptually equivalent to other costs and are appropriately
included in a study based on the Commission’s methodology. The costs
reported in Section C of this study do not contain any payments made by
ICSPs to confinement facilities.
4. Debit calling costs have been understated in two ways. First, some call
validation costs are incurred for these calls, though no validation costs
have been included in the study for debit calls. Second, for existing debit
accounts vendors impose a concession fee for fund transfers. As a result,
the ICSP actually receives less than the total billed amount for an inmate’s
debit calls.
5. For those locations where a high-volume facility rather than individual
voice grade lines has been used, the capacity of the high-volume facility,
rather than the actual number of voice-grade equivalents required, is used
in the study to calculate per-line amounts. This approach causes the
number of line equivalents to be overstated, and as a result costs per line
for that location are understated. In addition, because line weightings
have been used to develop a weighted average of per-call costs, these
understated costs are overrepresented in the final per-call results.

27

Implementation Order, ¶¶68-75).

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Interstate Call Cost Study
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The results shown in Table C-1 should be treated as conservatively low
for the following additional reason:
6. If the 25 location results are used (a result based on the Commission’s
initial more narrow definition of “marginal” location), costs will be
understated when compared the results produced when the Commission’s
modified definition (as adopted in the Implementation Order) is used.

E.

NOTES ON THE RELATIONSHIP BETWEEN COST STRUCTURE AND RATE
STRUCTURE
When conducting this analysis of ICSP costs, cost causation has been
carefully considered so that the costs are reported in a way that accurately
reflects how the costs are actually incurred. Some costs are incurred each time
that a call is made (regardless of duration), while other costs vary with the length
of a call. Because of this fundamental difference in the way that costs are
incurred, the results have been reported separately for per-call costs and perMOU costs.
From an economic standpoint, rate structures should reflect the underlying
cost structure to the extent possible. In other words, a customer should pay for a
service in the same way that the provider incurs the cost of providing the service.
A close matching of cost structure and rate structure has two fundamental
advantages.
First, a close matching of cost structure and rate structure helps to ensure
that whatever the customer’s service usage characteristics, the service
provider will be fairly compensated and the customer will be fairly charged.
If a two-part rate structure consisting of separate per-call and per-MOU
elements is created, then the service provider will be fairly compensated (that is,
it will receive nether too much nor too little), and the customer will fairly pay (it will
pay neither too much nor too little), regardless of the length of a customer’s call
(or calls). In contrast, the adoption of either a flat per-call rate with no per-MOU
usage element, or the adoption of a rate structure consisting solely of a per-MOU
rate with no per-call charge, would distort the relationship between costs and

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rates, resulting in the over- or under-payment to the service provider by the
customer.
For example, assume a per-call cost of $2.50 and a per-MOU cost of
$0.10. If rate elements reflecting this cost structure are adopted, a customer will
pay the correct amount (and the service provider will receive the correct amount)
regardless of the length of the customer’s call. In contrast, if the rate structure is
distorted and consists of only a per-call charge, the payment made may not
match the cost incurred. If a 20 minute average call duration is assumed in order
to develop a per-call rate (such a rate would then be $2.50 + (20*$0.10) = $4.50),
only a customer making a call of exactly 20 minutes will pay the correct amount.
A customer making a 5 minute call would cause a cost of $3.00 ($2.50 +
(5*$0.10) = $3.00), but would pay $4.50 in order to do so – an overpayment of
$1.50. Conversely, a customer making a 30 minute call would cause a cost of
$5.50 ($2.50 + (30*$0.10) = $5.50), but the customer would only pay $4.50,
resulting in a $1.00 shortfall for the ICSP.
A similar problem is created if a rate structure consisting of only a perMOU charge is adopted. Assuming the same costs of $2.50 per call and $0.10
per MOU, a per-MOU rate based on a 20 minute average call duration would be
$0.225 ($2.50/20) + $0.10 = $0.225). In this scenario, a customer making a 5
minute call would still cause a cost of $3.00, but would pay only $1.13.
Conversely, a customer making a 30 minute call would continue to cause a cost
of $5.50, but would pay $6.75 for the call.
Clearly, if a rate structure that distorts the underlying cost structure is to be
developed, the assumption regarding the average number of minutes per call is
an important one. If the assumed call duration is inaccurate, if the average
duration changes over time, or – equally importantly − if the average call duration
varies significantly depending on the type and size of confinement facility, then
any attempt to arbitrarily compress a two part cost structure (one that consist of
costs caused on a per-call and per-MOU basis) into a single rate (either per-call
or per-MOU) is guaranteed to cause customers − both individually and in the
aggregate − to overpay or underpay (and cause service providers − for both
individual calls and all calls considered collectively − to be either under- or overcompensated for providing the service).
Second, a close matching of cost structure and rate structure helps to
ensure that whatever a customer’s service usage characteristics, that a
customer will not be forced to subsidize other customers.

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If a two-part rate structure consisting of separate per-call and per-MOU
elements is created, then a customer will fairly pay (pay neither too much nor too
little), regardless of the length of the calls made. Using the same cost
assumptions as in the previous example, the creation of an arbitrary “per-call
only” rate structure would cause a customer making a 5 minute call to pay too
much, and a customer making a 30 minute call to pay too little. Even if the
service provider is somehow able to recover its costs in the aggregate,28 this
deviation between cost structure and rate structure will still cause customers who
make shorter than average calls to subsidize customers who make longer than
average calls. Similarly, if an arbitrary “per-MOU only” rate structure is created,
customers who make longer than average calls would be required to subsidize
customers who make shorter than average calls.
The public policy implications of adopting a rate structure that does not
reflect the underlying cost structure are further revealed if it is assumed that
inmates at different kinds of confinement facilities make calls of different average
lengths (limits on call duration may be different at a large prison and a small jail,
for example). Assume, for example, that calls from large prisons have a longer
average duration than calls made from county jails. The adoption of a “per-call
only” rate structure would mean that people incarcerated at county jails would be
subsidizing calls made by those at large prisons. The adoption of a “per-MOU
only” rate structure would mean that persons confined at a large prisons would
be forced to subsidize calls made by a those confined at county jails.
Of course, if different providers have focused on either large or small
confinement facilities, then a distortion in rate structure would put the viability of
ICSPs (and the availability of payphones) at risk. A “per-call only” rate structure
would limit the ability of ICSPs serving large facilities to recover their costs and
could impact the availability of inmate calling services at those locations. A “per
MOU only” rate structure would limit the ability of ICSPs serving small
confinement facilities to recover their costs, and could directly threaten the
availability of payphones at small confinement locations.
In summary, any deviation of rate structure from the underlying cost
structure has significant implications and should be considered carefully. In this
study, cost causation has been carefully considered so that costs are reported in
28

It is important to note that if the assumed call duration exceeds the actual call duration, or if the
average duration decreases over time, it will be impossible for an ICSP to recover its costs in the
aggregate. If the average call duration varies significantly depending on the type and size of confinement
facility; or if average call duration at a large prison facilities exceeds the average call duration at small
county jails, for example, then it will be impossible for ICSPs serving these smaller facilities to recover
their costs in the aggregate. This is true even if the assumed call duration across all types of confinement
facilities is known, and true if that known call duration remains constant over time.

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the manner in which they are incurred. The resulting cost structure provides the
basis for a rational rate structure.

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F.

QUALIFICATIONS OF COST ANALYST
Don J. Wood is a principal in the firm of Wood & Wood. He provides
economic, financial, and regulatory analysis services in telecommunications and
related convergence industries, specializing in economic policy related to the
development of competitive markets, inter-carrier compensation, and cost of
service issues. Prior to his work as a consultant, Mr. Wood was employed in a
management capacity at a major Local Exchange Company and an
Interexchange Carrier.
In the area of administrative law, Mr. Wood has presented testimony
before the regulatory bodies of forty-two states, the District of Columbia, and
Puerto Rico, and has prepared comments and testimony for filing with the
Commission. The subject matter of his testimony has ranged from broad policy
issues to detailed cost and rate analysis. Mr. Wood has also presented
testimony in state, federal, and overseas courts regarding business plans and
strategies, competition policy, inter-carrier compensation, and cost of service
issues. He has presented studies of the damages incurred by plaintiffs and has
provided rebuttal testimony to damage calculations performed by others. Mr.
Wood has also testified in alternative dispute resolution proceedings conducted
pursuant to both AAA and CPR rules.
Mr. Wood performed the analysis of payphone service costs filed with the
Commission by the American Public Communications Council (“APCC”) in
Docket No. WC Docket No. 03-225. The APCC study is addressed in the
Implementation Order, and essential elements of that study were accepted as the
basis for the rates adopted in that proceeding.

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G.

INMATE CALLING SERVICE PROVIDERS CONTRIBUTING DATA TO THE
STUDY

ATN, Inc.
Custom Teleconnect, Inc.
Embarq
NCIC Inmate Telephone & Operator Services
Pay Tel Communications, Inc.
Public Communications Services, Inc.
Securus Technologies, Inc.