«JOURNAL OF LAW, ECONOMICS & POLICY VOLUME 10 SPRING 2014 NUMBER 2 EDITORIAL BOARD 2013-2014 Steve Dunn Editor-in-Chief Crystal Yi Meagan Dziura Sarah ...»
Advocates of the FCC’s current price caps also argue that, because the BOP operates at rates similar to the FCC mandated rates, state programs can survive at similar rates.162 While the BOP successfully operates at the rates proposed by the FCC order, it is composed of many large, similar facilities and thus may benefit from economies of scale not existing in smaller 156 Comments of Global Tel*Link at 11, in re Implementation of the Pay Tel. Reclassification & Compensation Provisions of the Telecomm. Act of 1996, Report and Order, 11 FCC Rcd. 20,541 (1996) (No. 96-128) [hereinafter Global Tel*Link May 2 Comments].
157 47 U.S.C. § 276(b)(1)(A) (2012).
158 Global Tel*Link May 2 Comments, supra note 156, at 13.
159 2002 Order and NPRM, supra note 4, at 11.
160 Id. at 7–11 (asking stakeholders to comment on numerous definitions of “fairly compensated”).
161 Securus May 23 Ex Parte Letter, supra note 47, at 5.
162 See Wright 2007 Proposal, supra note 70, at 18.
119534 JOURNAL OF LAW, ECONOMICS & POLICY [VOL. 10:2
state systems. The BOP has standard security requirements for its inmate payphones.163 Payphone service providers need only present a stock security suite during bidding for any BOP contract.164 This allows providers to efficiently develop technology and facilities to take advantage of the single level of security. Similar efficiencies do not exist for state payphone providers because security requirements vary among states and localities.165 As a result, successful bidders of state contracts may be required to develop unique security systems for different facilities.
Proponents of the FCC’s price caps may also argue that, because the regulation limits resources dedicated to research and development, service providers will be incentivized to standardize security systems among multiple facilities. However, security standards vary between high- and low-security facilities and among states. These standards may be set at the state legislative level through legislation and budgeting preferences. A convergence of security standards is thus unlikely to ever occur. Price caps that limit resources for the development of new security systems may instead reduce competition to serve high-security facilities.
1. The FCC’s Current Rate Caps Do Not Consider Differences in Costs
The FCC’s rate caps do not recognize economies of scale at play in the prisoner telephone market. Securus contends that costs fluctuate based on inmate numbers, call volume, and other site-specific costs, resulting in varying costs when supplying the market.166 Call volume may also differ due to facility payphone policies that limit the number of calls per day and the total minutes of calls per month.
State contracts range from five-bed local jails to 3,300-bed state prisons, requiring entirely different payphone structures.167 Securus primarily 163 GAO Report, supra note 5, at 6–7.
164 Inmate phone vendors provide stock hardware and software to BOP personnel, who operate a standard system called TRUFONE. Id. at 6. Unlike state contracts, the BOP personnel operate the security system and follow a standardized list of security procedures. See id. at 6–7. TRUFONE uses voice recognition to identify inmates, provides each inmate with personal access codes, checks inmate funds, records all calls, restricts calls to only an inmates’ verified contact list, and terminates calls if security issues arise. Id.
165 Zimmerman & Flaherty, supra note 6, at 262–63 n.7.
166 Securus May 23 Ex Parte Letter, supra note 47, at 2; see also Evercom May 2 Comments,
contracts for small, county-level facilities.168 These small facilities comprise 80% of its client base.169 Due to the need to install, operate, and maintain payphone facilities, the marginal costs associated with providing secured calling solutions to small facilities may be much higher than those associated with larger facilities.
In contrast to Securus’s client base, the Wright petition—the basis for the FCC’s latest rulemaking—claims that payphone providers’ contracts average 1,743 beds per facility.170 The FCC order bases its price caps on the efficiencies available in these larger contracts.171 It is difficult for smaller facilities, like those that Securus contracts for, to be as costefficient as larger facilities, and the upfront costs are nearly equivalent. If the rates fall below these larger costs, few payphone providers will bid for small, high-cost facilities. This may result in less competition for these facilities and may result in limiting access to payphones.172 Prison payphone providers also reject the Wright petition’s claim that providers have profit margins of 85%.173 Service providers claim that, if this were true, more competition would exist and several providers would not have left the market.174 Securus states that it only makes a profit of 2.28% after recovery of costs.175 Service providers may petition the FCC for an exemption from the price caps.176 However, this will create tremendous administrative burdens on the agency. Each service provider may be incentivized to petition for exemptions by artificially inflating costs, possibly through cross subsidization of tangentially related operations. While most faulty petitions will be denied by the FCC, submitting petitions is relatively low cost compared to the administrative resources needed to accurately assess them. The current FCC order may result in an influx of hundreds of petitions, corresponding to the large number of localities with unique, cost-varying facilities. This inundation may make it administratively infeasible for the FCC to adequately assess each petition under the current order.
To combat this administrative burden, the FCC could create a heightened presumption against petitions. The order already mandates a data-collection program where prison telephone providers must annually reId.; see also Global Tel*Link May 2 Comments, supra note 156, at 2 (explaining that Global Tel*Link “serves all types of correctional facilities, ranging from municipal and county jails that house fewer than ten inmates to state correctional systems that house tens of thousands of inmates”).
169 Securus May 23 Ex Parte Letter, supra note 48, at 2; see also Global Tel*Link May 2 Comments, supra note 156, at 2.
170 Securus May 23 Ex Parte Letter, supra note 48, at 2.
172 Global Tel*Link May 2 Comments, supra note 156, at 12.
173 Id. at 14.
175 Securus May 23 Ex Parte Letter, supra note 47, at 4.
176 See Aug. 9 FCC Press Release, supra note 13, at 2.
port facility costs to the FCC.177 However, the costs of collecting, analyzing, and reporting each facility’s ongoing operational costs will be inefficient and impose greater costs on the service providers, which are already being undercompensated.
While the FCC has mandated annual cost reports in other dockets, these orders are usually continuations of prior Notices of Proposed Rulemaking (“NPRM”) data collection requirements. In his dissent from the FCC’s Current Order, FCC Commissioner Ajit Pai (“Commissioner Pai”) suggested that the FCC had not collected sufficient data on payphone installation and service costs, stating that the price caps were arbitrarily set and did not rely on sufficient data.178 Berin Szoka of TechFreedom described the recent price cap vote as following a “Ready, Fire, Aim” mentality by imposing burdensome regulations before gathering essential facts.179 Both Commissioner Pai and Mr. Szoka believe that there is a lack of supporting evidence and that the price caps will not withstand court inspection.180 This sentiment was mirrored by several commentators prior to the price cap decision.181 Additionally, Commissioner Pai believes that the price caps were not contemplated by the FCC’s prior inmate NPRMs and that the record contains overwhelming evidence that the caps are set too low, opening the agency to accusations of arbitrary and capricious decision making.182 Section 706(2)(A) of the Administrative Procedure Act (APA) states that reviewing courts shall “set aside agency action, findings and conclusions found to be arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”183 The lack of supporting evidence in the record, the FCC’s decision to mandate data collection after imposing strict price caps, and Commissioner Pai’s dissent may provide opponents of prisId.
178 Press Release, FCC, Dissenting Statement of Comm’r Ajit Pai as Delivered at the August 9, 2013 Open Agenda Meeting (Aug. 9, 2013) [hereinafter Pai Dissent], http://transition.fcc.gov/Daily_Releases/Daily_Business/2013/db0809/DOC-322749A4.pdf.
179 Press Release, TechFreedom, FCC Botches Prison Payphone Reform with Price Controls Unlikely to Survive in Court (Aug. 9, 2013) [hereinafter TechFreedom], available at http://techfreedom.org/publications/fcc-botches-prison-payphone-reform-price-controls-unlikelysurvive-court.
180 Pai Dissent, supra note 178, at 3; TechFreedom, supra 179.
181 Notice of Proposed Rulemaking at 9, in re Rates for Interstate Inmate Calling Services, FCC 13-113 (2012), (No. 12-375).
182 Pai dissent, supra note 178, at 2–3.
183 Administrative Procedure Act, 5 U.S.C. § 706 (2012).
2014] CALLING FROM PRISON 537 oner payphone reform sufficient evidence to derail the FCC’s regulation. If the FCC is unable to explain its decision-making process and provide sound data supporting the low caps, the court system may remand the decision, further slowing needed reform and regulation of the inmate payphone industry.
The FCC should preempt this appeal by reviewing the order on its own terms. To avoid accusations of arbitrary and capricious rulemaking, the FCC should evaluate existing data in the record that contradicts the validity of the current price caps. The FCC should consider the concerns of the service providers and consider implementing a tiered rate cap framework in lieu of the current price caps.
B. The FCC Should Reexamine its Blanket Prohibition of Monetary Com- missions
The FCC order also mandates that monetary commissions may not be supported in the per-minute charges.184 While blanket prohibition will ensure that states and localities are not able to take advantage of inmates and their families by shifting general expenses onto per-minute rates, the FCC’s order also prohibits monetary collections that fund inmate-focused projects and amenities. A tradeoff exists between efficiently protecting inmates from abusive commissions and funding programs that directly benefit inmates and reduce recidivism. The FCC should examine these tradeoffs to ensure that its decision to prohibit all commission fees is justified.
1. Limiting Commissions May Be Justified Due to Abuse
Some supporters of monetary commissions argue that these payments are necessary to support the state prison structure. For example, a Florida sheriff stated that eliminating or curtailing commissions “would have a negative impact on the inmates as phone companies and jails will be left with no option but for removal of the phones.”185 This argument does not survive close scrutiny. Costs associated with the installation and operation of payphones are borne by the payphone provider.186 While the elimination of monetary commissions will negatively impact state projects, such as victim compensation and notification systems, it will have no impact on the viability of payphones in prisons.
184 Aug. 9 FCC Press Release, supra note 13, at 2.
185 Letter from Jack Parker, sheriff, Brevard County, to Marlene H. Dortch, Sec’y, FCC, FCC Docket No. 96-128, 1 (filed on Oct. 30, 2008).
186 Carver, supra note 7, at 392.
The FCC’s prohibition on state commissions reduces the profitability of inmate payphone contracts for states. However, the costs of inmate calls will not shift to the states. For example, New York, Florida, and Washington all restrict or waive monetary commission rates without losing prisoner payphone services.187 Similarly, the incentives of payphone providers to enter into contracts and provide calling systems will not be adversely affected solely by blanket prohibition of monetary commissions.
In reality, prohibition of monetary commissions may incentivize payphone providers to extend their services by allowing them to recoup more revenue from per-minute rates. Without the need to share revenue with the states, payphone providers can lower consumer prices and still capture a portion of the revenues previously given to the states—assuming price caps are not set below costs. In future contract bidding, competition may push prices closer to payphone providers’ marginal costs and may eventually make FCC price caps unnecessary.
2. Blanket Prohibition of Commissions Will Defund Beneficial Inmate Programs The previous rationale suggests that the FCC’s blanket prohibition of monetary commissions will solve the high costs of inmate payphone rates without creating an administrative burden on the FCC. However, not all commissions are designed to take advantage of captive consumers. Monetary commissions are often used to fund projects that directly benefit inmates by increasing their quality of life while reducing recidivism. A few prison systems use monetary commission revenue to fund prison amenities otherwise unsupported by the state legislatures.
The BOP’s trust fund exemplifies how low monetary commissions can benefit prison systems.188 In 1999, the BOP created a trust fund account for all revenues derived from payphone commissions and used the money to provide inmates with certain amenities and activities not supported through the appropriations system.189 The trust fund provides for inmate wages, recreational activities, family programs, psychological assistance, and reading programs.190 Unlike Army and Marine Corps prisons, which use payphone commissions to fund projects for the entire base, the BOP uses its excess funds to provide special amenities and more employment, education, and recreational opportunities.191 The GAO believes that, under systems 187 Wright 2007 Proposal, supra note 70, at 3–4.
188 GAO Report, supra note 5, at 7.
189 Id. at 6, 17 n.37.
190 Id. at 17, tbl.2. Nearly 75% of the trust fund’s 2010 profits were generated through the pay
similar to the BOP trust fund, lowering call rates and prohibiting monetary commissions will force facilities to cut inmate amenities, wages, and activities.192 Though the prohibition of state commissions will lower per-minute rates, the reduction in employment, recreational, and education programs will increase inmate idleness.193 This increased idleness may correspond to increased violence, escape attempts, and other disruptions within the correctional facilities.194 Recreational and educational activities also help inmates assimilate back into society, thereby reducing recidivism.195 A blanket prohibition against funding similar projects via per-minute charges may also make prisons more expensive because the funds underwrite lower inmate wages for janitorial, electrical, and laundry jobs in lieu of contracting out to expensive third parties.196 The FCC should investigate direct rate regulation of monetary commissions instead of blanket prohibition. Under direct FCC regulation of commission rates, inmate payphones can be a source of inmate project funding without overtaxing inmate families. The GAO reports that the federal prison system, even operating under a commission system, charges significantly less than its state counterparts.197 The BOP charges $0.06 per minute for local calls and $0.23 per minute for long distance calls.198 Under these lower prices, commissions still generated $34 million for the trust fund, with long-distance calls contributing 90% of the trust fund’s funding.199 While the BOP’s trust fund benefits from the large number of federal prisoners and significant economies of scale, state funds need not be large to be effective. Under a system similar to the BOP’s trust fund, monetary commission funding can correlate directly to the number of state prisoners.
If states only use monetary commissions to provide prisoner amenities, the smaller funds can adequately cover the smaller costs of providing services to smaller populations. However, directly regulating commission levels and designating what these funds may be used for presents enormous administrative challenges that may either result in overregulation of nonobvious, beneficial projects or be too burdensome on the FCC.
192 Id. at 12.
193 GAO Report, supra note 5, at 12, 18.
195 Id. at 18.
197 IDAHO STATE LEGISLATURE: OFFICE OF PERFORMANCE EVALUATIONS, Inmate Collect Call Rates and Telephone Access: Opportunities to Address High Phone Rates at 14 (Jan. 2001), available at http://idahodocs.contentdm.oclc.org/cdm/compoundobject/collection/p15100coll7/id/1028/rec/10.
198 Global Tel*Link Oct. 3 Ex Parte Letter, supra note 12, at attach.1, at 7–8.
199 GAO Report, supra note 5, at 14.
122540 JOURNAL OF LAW, ECONOMICS & POLICY [VOL. 10:2
States use monetary commissions to fund a variety of unique and creative operations. Although a few states, such as Virginia and Texas,200 use monetary commissions to fund programs that do not directly benefit the inmates or their families, completely prohibiting monetary commissions would also deter the funding of new, creative projects that do not facially benefit inmates. For instance, it is not obvious whether psychological therapy between inmates and victims reduces recidivism.201 A bright-line rule against funding projects via per-minute commissions could hamper the research, development, and funding of projects like this. Thus, the FCC should reexamine its strict prohibition against small state commissions and weigh any potential benefits created by these programs against the increases in per-minute payphone rates.
C. A Tiered Benchmark Structure is Efficient and Administratively Feasi- ble
The FCC should reevaluate its single price cap and instead adopt a different system. Blanket prohibition of monetary commissions may be untenable because it could harm prisoner-focused programs that would not otherwise be supported by prison budgets. Additionally, single per-minute rates may disincentivize advanced security procedures and lower the quality and quantity of payphones in small, inefficient jails. In contrast, a tiered system allows prisoner payphone providers to benefit from efficiencies and economies of scale while ensuring that prisoners pay reduced rates.
FCC pricing regulation via tiered price caps would ensure that states are not incentivized to take advantage of their inmates’ sequestered nature and inability to choose substitute goods. A tiered pricing structure would also allow inmate telephone providers of smaller, less efficient prisons to charge at higher cap rates to ensure that the service providers are adequately compensated via 47 U.S.C. § 276202 and that these facilities are not underserved. Finally, an open, tiered system, which automatically places prisons into separate pricing bands based on size efficiencies, would greatly decrease the administrative burdens of monitoring and responding to initial pricing petitions.
200 Global Tel*Link Oct. 3 Ex Parte Letter, supra note 12, at attach.1, at 7–8.
201 Restorative Justice is an alternative to prison sentences that utilizes face-to-face meetings among all parties connected to a crime. LAWRENCE W. SHERMAN & HEATHER STRANG, THE SMITH INSTITUTE, RESTORATIVE JUSTICE: THE EVIDENCE at 4 (2007), available at http://www.sas.upenn.edu/jerrylee/RJ_full_report.pdf.; see also Global Tel*Link Oct. 3 Ex Parte Letter, supra note 12, at 7–8 attach.1 (demonstrating that several UK studies suggest restorative justice reduced recidivism more than prisons while also reducing victims’ post-traumatic stress symptoms).
202 47 U.S.C. § 276 (2012).
2014] CALLING FROM PRISON 541 Securus calls for a tiered system based on facility size and allowable call length.203 Under an open, tiered rate structure, the FCC could set de facto rate benchmarks based on facility size. The Wright petitioners acknowledge that a tiered rate system would be effective.204 Under this framework, facilities serving small prisons would automatically charge at the highest price caps. Companies that specialize in serving facilities with fewer than twenty-five beds, higher marginal costs, and no economies of scale would be incentivized to continue serving these prisons. Under this tiered framework, facilities containing between 25 and 250 prisoners should be benchmarked at an intermediate price.205 The largest facilities, which benefit from the highest traffic volumes, economies of scale, and the lowest marginal service costs, can be benchmarked at pricing similar to that offered by the BOP and current FCC order.
While marginal costs also vary based on differing security requirements of each state, incorporating this variable into rate benchmarks creates an enormous administrative burden on the FCC. Provided that the FCC sets benchmarks above marginal costs, ignoring this variable does not inherently violate prison phone providers’ rights to fair compensation under 47 U.S.C.
§ 276. Thus, for expediency and to avoid additional administrative burdens, a tiered price cap framework should only focus on one variable— facility size.
It is also possible that, if benchmarks are set too low, payphone providers could be disincentivized from investing in research and development of cheaper and more secure services. However, telephone providers are already engaged in strong competition to provide new, more secure technology offerings during the bidding process.206 So long as benchmarks are set above marginal costs, competition for contracts will ensure that payphone providers are incentivized to continue developing security systems.
Under such a framework, facilities could still petition the FCC for rate-cap relief by making a showing of heightened costs due to higher security standards and other unique variables. The accommodating nature of this framework would ensure that the number of legitimate petitions is lower than those created by the FCC’s current rate caps. This would ensure that administrative burdens created by the regulation are minimized, allowing for more efficient utilization of FCC resources.
An FCC regulation mandating a tiered rate framework on the prison payphone industry would limit telecommunications providers to the rate cap designated for their facility’s size. This would ensure that service proSecurus July 2 Ex Parte Letter, supra note 37, at 1.
204 Letter from Lee G. Petro, Attorney for Martha Wright, to Marlene H. Dortch, Sec’y, FCC, CC Docket No. 96-128 at Ex. A, 2 (filed Oct. 24, 2012).
206 E.g., Global Tel*Link offers biometric caller verification of voice-analysis instead of typical call number identification. Global Tel*Link Oct. 3 Ex Parte Letter, supra note 12, at 4 attach.1.
viders of the smallest jails with the largest costs are justly compensated. A tiered rate cap would also constrain per-minute pricing at larger, more efficient prisons by subjecting them to lower price caps. This framework would ensure that service providers operating under different conditions are able to meet their varying operational costs while efficiently constraining attempts to extract monopoly profits from inmates and their families.
Prisoners like Winston Holloway and Natalie Bolds’s fiancé are captive consumers of a monopoly. Prior to the latest FCC ruling, state governments, the trustees of prisoners’ interests in payphone contracts, were frequently captured by monetary commissions that raised revenues by taxing the poorest segments of the community. High inmate telephone pricing had a direct effect on the well-being of the larger community. Recidivism is directly correlated with the frequency and quality of inmate communication with the outside world. By limiting communication through prohibitive pricing, states increased the probability that prisoners will be unable to successfully transition back into society. These commissions also resulted in unpredictable rates among states.
The FCC regulated these unjust and unreasonable payphone rates by implementing rate caps under 47 U.S.C. § 201(b). Although the new regulation is beneficial insofar as it standardizes and decreases prison payphone rates, it does not account for the varying costs of providing phone services in differently sized facilities. The FCC’s order also prohibits all monetary commissions, failing to consider the possible benefits of low monetary commissions.
Therefore, the FCC should reevaluate its August 9th, 2013 order and instead implement an open, tiered rate structure. Under a tiered rate system, prisoners would enjoy lower rates while payphone providers would benefit from efficiencies unrealized under the current rate caps. If the FCC chooses to repeal its blanket prohibition of monetary commissions and set direct rates, states could still reap the benefits of sensible commissions.
Additionally, a tiered rate framework would incentivize heightened competition and negotiations for lower per-minute pricing. This regulation would fully compensate service providers, ensure that prisoners like Holloway and Natalie Bolds’s fiancé are able to connect with their families, reduce recidivism, and thereby benefit society as a whole.