Csaap, Confronting Confinement, Appendices A-b
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APPENDIX A APPENDIX B Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of Implementation of the Pay Telephone Reclassification and Compensation Provisions of the Telecommunications Act of 1996 Petition for Rulemaking or, in the Alternative, Petition to Address Referral Issues In Pending Rulemaking ) ) ) ) ) ) ) ) ) ) ) ) CC Docket No. 96-128 DA 03-4027 DECLARATION OF DOUGLAS A. DAWSON IN SUPPORT OF PETITIONERS’ ALTERNATIVE PROPOSAL Douglas A. Dawson, being duly sworn, declares as follows: I. INTRODUCTION 1. My name is Douglas A. Dawson, and I am the President of CCG Consulting LLC (“CCG”), located at 7712 Stanmore Drive, Beltsville, Maryland, 20705. CCG is a general telephone consulting firm. CCG works for over 350 communications companies, which include local exchange carriers (“LECs”), competitive LECs, cable TV providers, electric utilities, wireless providers, paging companies, municipalities and other governments and interexchange carriers (“IXCs”). 2. I submit this Declaration in support of petitioners’ alternative proposal to have the Federal Communications Commission (“Commission” or “FCC”) address certain issues involving prison inmate calling services referred to the Commission by the United States District Court for the District of Columbia in Wright, et al. v. Corrections Corporation of America, et al. (“Wright”).1 I have specific experience and expertise relevant to the issues in 1 CA No. 00-293 (GK) (D.D.C.). this proceeding, which involves the provisioning of long distance calling for prison inmates. I have assisted in the launch of over 50 long distance companies in my career. In that role, I have done virtually everything associated with creating or running long distance companies, gaining substantial expertise in the long distance business. I am also familiar with all regulatory aspects of long distance, including the development of rates and costs and, prior to detariffing, the preparation and filing of tariffs. 3. I have helped numerous companies select hardware for long distance service, and I know the capabilities and technical specifications of such hardware. I have negotiated numerous wholesale long distance service agreements between facilities-based IXCs such as Sprint, Frontier, Qwest and WorldCom (now MCI), and resale carriers, and I understand the underlying long distance networks and issues associated with using them. I have had extensive experience with, and, consequently, have an in-depth understanding of, the capabilities and configurations of the network switching systems that lie at the heart of all telephone systems. I also have helped numerous companies with the provisioning of ancillary long distance products such as calling cards, operator services, pre-paid cards, international toll and Internet telephony. Most recently, my company has assisted clients in purchasing and installing Voice over Internet Protocol (“VoIP”) long distance service. My CV, including testimony in prior cases, is attached as Exhibit 1. II. PURPOSE OF THIS TESTIMONY 4. In this Declaration, I have been asked to examine the rates charged for interstate long distance calling in prison systems. Because the Wright case focuses on inmate calling at prisons operated by the Corrections Corporation of America (“CCA”) during a period when inmate calling services were provided at those facilities by Evercom Systems, Inc. (“Evercom”), AT&T, MCI and other service providers, I will use data relating to the service provider defendants in the Wright case, as well as other inmate service providers, to illustrate the points I 2 am making. The inmate calling services provided by the Wright defendants are typical, with regard to the rates and the methods used to bill long distance calls by prisoners, of most prison inmate calling services. The issue of inmate service pricing is a generic question, and the conclusions drawn in this analysis would apply to all prison calling systems, public and private. CCA and other prison administrators and the service providers control inmate calling on a monopoly basis and have permitted only a limited set of very expensive options for making long distance calls. 5. For the reasons set forth in this Declaration and based on my extensive background in the telecommunications field, I conclude that the rates charged for interstate calling in these and other prisons are excessive. First, most calls are billed as collect calls when in fact the calls are fully automated and do not require an operator. As such, the rates for such calls are set at historic operator-assisted rates and are far in excess of the costs of such calls. Other calls from prisons are made as debit calls but are still billed at rates far above their costs and above comparable rates for other debit calling services and comparable products. Finally, service providers are required to pay prison administrators hefty commissions based on calling volumes that add tremendous mark-ups to inmate calling rates. 6. In brief, in this Declaration, I will: a) demonstrate that collect calls today are very different from collect calls that historically used live operators; b) compare the prices that inmate service providers charge for prison calling to the actual cost of such calls; and c) compare the prices that inmate service providers charge to comparable commercial service rates. III. RATE ISSUES 7. This section will begin with a discussion of how collect calling rates have been set historically. Next I will examine the rates charged in prisons today. Most inmate calling rates have not decreased over time as the costs for providing long distance have decreased. I will demonstrate that most prison rates are set far in excess of cost. Finally, I will compare the rates 3 typically charged in prisons to some lower priced inmate telephone services and analogous commercial long distance rates. Historic Rates for Collect Calls 8. Rates for collect calls have historically been higher than rates for automated calls to account for the difference in the way the calls were processed. Collect calls, until several years ago, always required the intervention of a live operator. I touched on the processing of collect calls in my initial Affidavit in this matter, which is attached, without exhibits, hereto.2 Such live operators would be housed in stand-alone operator call centers and required expensive terminals to process the calls. Thus, the price of operator-handled calls reflected the cost of the operator’s wages plus the cost of the operator centers and the hardware needed to handle such calls. In addition, a large number of collect calls are never completed because the called party either does not answer or refuses to pay for the call. The cost of the labor for uncompleted calls had to be recovered in the price of the completed calls. Different types of operator calls were historically priced using standard work seconds, meaning that a standard rate per second was applied to different types of operator calls depending on how long each type of call lasted, on average. For example, if the average collect call required two minutes of live operator assistance, it would be priced at twice the rate of another operator call type that required only one minute of operator time. 9. Historically, the price for operator-handled calls was strictly regulated. AT&T, GTE and the Bell System companies provided the vast majority of all operator-handled calls. Regulators at both the federal and the state level would routinely look at the underlying costs of 2 Affidavit of Douglas A. Dawson, Martha Wright, et al.; Petition for Rulemaking or, in the Alternative, Petition to Address Referral Issues in Pending Rulemaking, CC Docket No. 96-128 (Oct. 29, 2003) (“Dawson Aff.”), attached hereto as Exhibit 2. 4 making operator-assisted calls for these companies and make certain that the rates reflected the underlying costs. 10. However, it has been many years since operator and collect call rates have been cost-based and cost justified. In general, both the FCC and the states have stopped looking at the cost of long distance calling due to the significant decreases in rates charged to customers brought about by competition. In the following paragraphs, I will look at some of the industry trends that have contributed to lower long distance rates. Collect calling has seen some of the largest decreases in costs since the era when regulators required cost-based long distance rates, largely because the costly elements of that system have been almost totally replaced by computers. Those cost declines, however, have not been matched by rate declines. In the prison systems discussed in my initial Affidavit, there were no live operators involved in completing collect calls (and there are fewer and fewer live operators doing this anywhere in the country). Expensive people have been replaced by computerized systems that have almost no incremental cost for processing an operator call. This Commission is no doubt well aware that there is no connection between the cost of a modern collect call and the price charged for these calls. 11. Collect calls are still priced at a high rate simply because people without cell phones or calling cards are willing to use such services at those rates, especially given that the called party pays for the call. In prisons, however, the callers do not have other options. They are not allowed to use cell phones or calling cards. Instead, they are faced with a monopoly provider insisting that they use collect calling, or, in some cases, debit calling. There is a huge difference between callers who voluntarily elect to use collect calling and prisoners who are given no options. The Decline in All Telecommunications Costs 12. The cost of providing long distance in general has dropped steadily over the last few decades. The cost required to process a collect call has dropped dramatically over the last 5 decade for a number of reasons. As noted above, live operators are no longer required to complete collect calls (or many of the other types of calls that were formerly handled by operators, such as calling card calls). Operators have not been totally eliminated, but the vast majority of collect calls are now fully automated. Large commercial automated collect calling products have been introduced into the marketplace, with the best known one perhaps being the “1-800 COLLECT” product that is constantly touted in advertisements on television. This commercial product does not use live operators and instead records the name of a caller and then queries the called party, using voice recognition software, to determine if the called party will accept the collect call. The way that this product functions is very similar to how prison systems process collect calls today – everything is done with computers, and it is a well known axiom that computer time is far cheaper than human labor time. The use of an automated operator has resulted in a drastic reduction in the cost of completing a collect call simply by removing the live operator and the infrastructure required to support the live operator from the process. 13. Other factors have also contributed to lower costs for providing long distance, and these cost reductions have been reflected in the long distance marketplace in the form of lower long distance rates. Without creating an exhaustive list, some of the more important trends that have contributed to lower long distance rates include: reduction in transport costs as transport technologies have improved; drastic reductions in switching costs as the cost of switching hardware and software has plummeted in recent years; reduction of access charges over the years; and a reduction in the regulation and thus the regulatory costs of providing long distance. Perhaps the most significant trend in the long distance market was the introduction and the flourishing of competition. The competitive marketplace has functioned as the Commission had hoped and resulted in significantly lowered long distance rates for consumers. 14. All of these various factors have lowered the cost of providing long distance service. These cost reductions, which have steadily gained momentum over time, have directly 6 led to ever lower prices for long distance calling for the general public. However, none of the reductions in costs have resulted in lower prison inmate calling rates. The prison long distance providers have benefited from the drop in industry-wide costs, as has every long distance provider; yet there has been no reduction in the rates charged for prison calling. 15. The steady drop in costs has resulted in a drop in rates for general commercial long distance products, over time. A typical residential interstate call that would have cost more than 20 cents per minute 15 years ago is now routinely available for as little as 5 cents per minute. As another example, calling card calls were priced at around 30 cents a call for many years through AT&T and the other major carriers. Again, these prices reflected the use of old technology and the lack of serious competition and deregulation. Today, one cannot read an airline magazine without seeing ads for calling cards offered at 6 or 7 cents per minute. Inmate Service Rates 16. The long distance rates in CCA and other prisons – privately administered and public – have not reflected the same sorts of price reductions seen everywhere else in the industry. As discussed in my initial Affidavit, the marketplace has not been allowed to operate in the prison inmate service market because the chosen service provider enjoys an effective monopoly in any given prison. In addition to allowing the provider to collect high rates for calling, the prison systems have layered on gigantic commissions, typically based on calling volumes, constituting more than 30 percent of the inmate calling service revenue. As monopolists, neither the service provider nor the prison administrator has any motivation to lower calling rates. 17. All of the prison facilities I have reviewed offer collect calling. In addition, as discussed in my initial Affidavit, some prisons offer debit calling. I will examine the inmate service rates for both collect calling and for debit calling. The rates charged for interstate collect calls in the prisons I have reviewed have two components. The first component is a flat rate, 7 per-call charge that mimics the traditional set-up charges that have been billed for operatorhandled calls. These flat rate charges are derived from the operator surcharges that operator service providers have historically charged to recover the fixed cost of the operator labor and systems used by the live operators. The second rate component for each long distance call is a per-minute charge. Debit calls typically are charged only a per-minute rate. 18. As discussed in my previous Affidavit, Evercom’s tariffed interstate inmate service rates just prior to detariffing in 2000 were $0.59 per minute plus a $3.95 per-call charge for collect calling and $0.65 per minute for debit card calls.3 Evercom’s and other inmate service providers’ rates apparently have not declined since then. Evercom is now a whollyowned subsidiary of Securus Technologies,4 and it no longer posts its rates, but as recently as August, 2005, Evercom’s website showed a per minute rate of $0.89 and a service charge of $3.95 for its interstate inmate service.5 SBC’s website shows an interstate inmate collect calling rate of $0.85 per minute plus a $3.95 service charge per call.6 3 During the period from September 14, 1999, to the detariffing of Evercom’s rates on June 27, 2000, Evercom’s standard tariffed debit card service rate, which applied to its Inmate-only Debit Account Service, was $0.65 per minute. See Evercom Systems, Inc. Tariff FCC No. 1, Section 3.4.1 (effective Sept. 14, 1999), and its standard tariffed rate for interstate, interexchange operator assisted inmate calls, including collect calls, was $0.59 per minute plus a $3.95 service charge. See Evercom Systems, Inc. Tariff FCC No. 1, Section 3.5 (effective Sept. 14, 1999), and FCC Public Notice, Tariff Transmittal Public Reference Log (June 28, 2000). The relevant portions of Evercom’s Tariff No. 1 and cancellation notice are attached as Exhibit 3 hereto. 4 See Securus Technologies Home Page, www.securus.net (follow “About Securus” hyperlink) (last visited Aug. 1, 2006). 5 Evercom Systems, Inc. Federal Rate Schedule, www.evercom.net/faqs/FCC.pdf (last visited Aug. 29, 2005) (no longer available). See Exhibit 4. 6 See, e.g., SBC, Alternate Billed Services in Ohio, http://www05.sbc.com/Products_Services/Residential/ProdInfo_1/1,,864--12-3-0,00.html (last visited Aug. 1, 2006); SBC, Alternate Billed Services in Oklahoma, www01.sbc.com/Products_Services/Residential/ProdInfo_1/1,1191,294--5-3-2,00.html (last visited Aug. 1, 2006). 8 19. Although service contracts are generally not public, inmate service providers’ rates also can be derived from telephone bills of the families and others accepting collect calls from prisoners and prisoners’ commissary bills for debit calls, which have been provided to counsel for the petitioners in this proceeding.7 For example, the telephone bills attached as Exhibit 5 show Evercom charges for inmate collect calls from a prison facility in Burlington, Colorado in May 2002 and February and March 2003. Based on the total charges shown for calls of different duration, Evercom charged $3.00 per call plus $0.45 per minute for those calls.8 By October 2003, Evercom’s rates for collect calls from the same facility had risen even higher. Exhibit 6 shows a charge of $17.30 for each of several 15 minute calls from October 2003 to January 2004, which had cost $9.75 in March 2003, more than a 77 percent increase.9 The $17.30 charge for a 15 minute call is consistent with the rates previously shown on Evercom’s website of $0.89 per minute plus a $3.95 service charge.10 7 Identifying information has been deleted from the attached copies of the bills. 8 These rates can be derived by solving two simultaneous equations using the data for two calls of different duration. For example, Exhibit 5 shows that a 15 minute call on May 1, 2002 cost $9.75, and a one minute call on the same day cost $3.45. Where x is the per-minute rate and y is the per-call rate, 15x + y = 9.75 and x + y = 3.45. Thus, y = 9.75 – 15x, and y = 3.45 – x. 9.75 – 15x = 3.45 – x. 6.30 = 14x. $0.45 = x, and y = 3.45 - .45, or $3.00. The same rates were charged in February and March 2003, when six 15 minute calls each cost $9.75, according to Exhibit 5. 9 Compare Exhibit 6 with Exhibit 5. 10 Applying the formula used in n. 8, supra, ($0.89 x 15) + $3.95 = $17.30. 9 20. Similarly, Exhibit 7 shows AT&T charges for inmate collect calls from a facility in Oklahoma from May through July, 2003. Applying the methodology used to derive Evercom’s inmate rates, AT&T’s charges in Exhibit 7 reflect a per-call rate of $3.95 and a usage rate of $0.89 per minute.11 Exhibit 8 shows a portion of a prisoner’s commissary bill for early 2003 at a Colorado prison facility served by Evercom containing two debit account calls. Applying the same methodology to derive the rates, Evercom charged $1.80 per call and $0.45 per minute for those calls.12 21. These rates are exceedingly high when judged by contemporary standards. Another way to judge how high these rates are is to look at the size of the long distance bills these calls generate for the families of prisoners. For example, if a prisoner were to call collect for only one hour per week (four calls of 15 minutes duration) from the Burlington facility served by Evercom, the total collect charges for a single month would be over $275. If a prisoner were to call collect for one hour per week (two calls of 30 minutes duration) from the Oklahoma facility served by AT&T, the total collect charges for a month would be over $245, or more than one dollar per minute. That is a gigantic phone bill for such a small amount of calling. Although the debit account rates are lower, they are still excessive compared to standard services. Four 15-minute debit calls per week for one month would total $136.80 under the debit account rates charged in early 2003 at the Colorado facility discussed above. At Evercom’s previously tariffed debit account rate of $0.65 per minute, the same amount of calling for one month would total $156. 11 Exhibit 7 shows several 30 minute calls, each costing $30.65. Thirty minutes times $0.89 per minute, plus $3.95, equals $30.65. 12 For example, Exhibit 8 shows a 20 minute-plus call costing $11.25. Rounding up to 21 minutes times $0.45 per minute, plus $1.80, equals $11.25. 10 22. These rates are clearly excessive, by any measure. The “collect” surcharge billed by service providers is no longer justified. Notwithstanding the “operator service,” “operator assist” and “Operator Assisted” designations on the tariffs and bills attached in Exhibits 3, 6-7, these calls are not truly operator assisted calls. Nevertheless, the service providers have maintained the collect calling rates and pricing mechanism that were developed decades ago when there were live operators for all prison inmate calls. With a mechanized collect call, there is no longer any justification for the large set-up charge levied for each call. Although there are automated commercial collect calling products for the general public that also still charge for the call set-up, there is one huge difference between commercial automated collect systems and the prison collect system -- the use of commercial collect products is optional for the caller. A caller in the outside world has a number of alternatives to the use of a collect product. The general public uses calling cards, pre-paid cards or cell phones, and most callers only rely on collect calling in the rare instance when there is no immediately available convenient alternative. They are paying a premium for the convenience of long distance service without any prior contract. The prisoners and their families never have an alternative to the inmate service providers’ monopoly systems. 23. In determining what rates would be reasonable for prison calling, one test of reasonableness is to look at the cost of providing calling. I examined cost issues in my initial Affidavit. The first issue that must be examined in any review of inmate service rates is the commissions that service providers pay to public and private prison administrators based on their traffic volumes. As the FCC has held, commissions do not constitute a legitimate cost of providing service; rather, they are an element of profit.13 Because they inflate service providers’ rates, however, they must be recognized and “backed out” in any attempt to derive a reasonable inmate service rate. As discussed in my initial Affidavit, inmate service providers estimate that 13 Dawson Aff. at ¶ 67 (attached as Exhibit 2 hereto). 11 commissions typically amount to about 30 percent of their total inmate calling service costs, including all profit.14 In other words, commissions add an average of 43 percent (i.e., 30%/70%) to all other costs before commissions. 24. Subtracting the cost of commissions from the illustrative inmate service rates discussed above should yield the amounts that service providers actually collect. Assuming a 15-minute long distance call at the Evercom rates in effect from October 2003 to January 2004 at the Burlington, Colorado facility, the charge would be $17.30. Assuming a 15-minute call at the AT&T rates in effect from May through July 2003 at the Oklahoma facility discussed above, the total charge would be the same.15 Assuming a 15-minute debit account call at the Evercom rates in effect in early 2003 at the Colorado facility discussed above, the total charge would be $8.55. Subtracting the average commission rate of 30 percent from these revenue figures yields the following net revenue: 15-Minute Collect Call - $17.30 Average Rate per Minute Commission Rate Commission per Minute Per Minute to Service Provider $1.15 30 % $0.35 $0.80 15-Minute Debit Account Call - $8.55 Average Rate per Minute Commission Rate Commission per Minute Per Minute to Service Provider $0.57 30 % $0.17 $0.40 Thus, service providers retain an extremely high rate per minute after paying commissions. 14 Id. 15 The per-minute rate of $0.89 times 15 plus the per-call charge of $3.95 equals $17.30. 12 Inmate Calling Costs 25. The first test of reasonableness for these rates is the cost to the providers to complete the calls. I analyzed the operating costs of completing inmate calls in my initial Affidavit. There, I calculated a range of costs for prison calling and also cited costs that were provided in other Commission filings by the Inmate Calling Service Providers Coalition (“Coalition”). I cited data from the Coalition showing that the cost of providing an inmate local collect call was $0.126 per minute.16 I then made the appropriate adjustments necessary to derive the cost of an inmate long distance collect call by substituting the cost of transport and termination of a long distance call for the local service charge, but accepting all of the Coalition’s other costs. The cost of an inmate long distance collect call derived in that manner was $0.133 per minute.17 26. It should be noted that this cost estimate included a cost of $0.027 per minute for wholesale long distance transport and termination. Today, I typically can procure wholesale transport and terminating service for around $0.0125 per minute. Accepting all of the Coalition’s other costs, while substituting today’s lower long distance transport and termination cost, the estimated cost of providing inmate long distance collect calling declines from $0.133 to $0.121 per minute. Within that cost of a collect call is roughly 6 cents of costs for billing and uncollectible revenues that do not apply to debit calls.18 Thus, using the Coalition’s own cost figures, the cost of making a debit call ought to cost the inmate providers roughly $0.06 per minute ($0.121 total cost less the cost of billing and uncollectibles). 16 See Dawson Aff. ¶ 72 (attached as Exhibit 2 hereto). 17 Id. 18 Id. ¶ 74. 13 27. There is clearly a huge difference between the rates the inmate service providers are charging and their costs. The margins retained by these providers are excessive. Every long distance provider strives to make a reasonable profit, and they also strive to find minutes that are highly profitable. However, the monopoly environment in these prisons allows the providers to collect rates that are vastly in excess of costs. Following is a comparison of the amount collected by providers compared to the underlying costs. The higher end of the range of estimated costs, as provided by the prison telephone providers themselves, is used in this chart in order to provide the most conservative possible comparison in favor of the prison providers. Collect Calls Revenue Kept by Provider Reasonable Direct Cost Profit Margin per Minute Profit as a Percentage of Revenue $0.80 $0.12 $0.68 85% Debit Calls Revenue kept by Provider Reasonable Direct Cost Profit Margin per Minute Profit as a Percentage of Revenue 28. $0.40 $0.06 $0.34 85% These profit margins are clearly excessive. Only a monopolist could expect a long distance product with 85 percent margins, after all costs. Most long distance products today generate margins of only a couple of cents per minute, at best. In a competitive market, these prison services would earn a profit of only a couple of pennies per minute. It also should be kept in mind that there is an additional large portion of revenue paid to administrators in the form of commissions, which also should be treated as profit, rather than an element of costs.19 19 Implementation of the Pay Telephone Reclassification and Compensation Provisions of the Telecommunications Act of 1996, Notice of Proposed Rulemaking, 17 FCC Rcd 3248, 3255 (2002) (“Inmate Payphone Order and NPRM”). See also id. at 3259-60. 14 Comparable Debit Calling Rates: Other Inmate Service Rates 29. Another way to analyze the reasonableness of these rates is to look at comparable long distance rates. The most directly analogous rate is the rate charged for debit calling in the federal prison system and other relatively low inmate debit calling rates. In a truly competitive market, all inmate service providers would have to match these lower inmate debit calling rates. There are also commercial long distance products that can be compared to inmate long distance debit calling. 30. The debit account rate applicable to the Inmate Telephone System (“ITS”) managed by the Federal Bureau of Prisons (“FBOP”) is only $0.23 per minute, and only $0.17 per minute of that amount is attributable to telephone service costs. Effective March 1, 2002, the ITS debit calling rate was $0.17 per minute.20 Effective March 1, 2003, the rate was raised to $0.20 per minute “[i]n order to maintain the financial integrity of the inmate Trust Fund Program.”21 According to a FBOP memorandum, “[a]ll of the funds generated from the ITS rate increases will go to the inmate Trust Fund to support Trust Fund Programs.”22 Similarly, on July 2, 2004, the ITS debit account rate was raised to $0.23 per minute “to ensure that adequate financial resources are available for the inmate Trust Fund Program given rising program costs.”23 Thus, for comparative purposes, the ITS debit account long distance rate is still $0.17 20 U.S. Department of Justice, Federal Bureau of Prisons, Memorandum For All Institution Controllers, All Trust Fund Supervisors, from Michael A. Atwood, Chief, Trust Fund Branch, Trust Fund Message Number: 18-02 (Feb. 8, 2002) at 2, attached hereto as Exhibit 9. 21 U.S. Department of Justice, Federal Bureau of Prisons, Memorandum For All Regional Directors regarding ITS Rate Increase Talking Points, from Robert J. Newport for Bruce K. Sasser, Assistant Director for Administration, attachment, Telephone Minutes and Rate Increases (Sept. 27, 2002), attached hereto as Exhibit 10. 22 Id. 23 U.S. Department of Justice, Federal Bureau of Prisons, Memorandum For Inmate Population, from W. Kern, Trust Fund Supervisor, (July 2, 2004), attached hereto as Exhibit 11. 15 per minute. For economic analytical purposes, the additional cost of six cents per minute can be treated as a commission. 31. Because the debit account rate applicable to federal prison inmates necessarily reflects security functions and the use of equipment similar to the security functions and equipment required at other prison facilities, as well as all of the other costs, including an acceptable profit, of providing inmate service, and because inmate service providers like AT&T, MCI, Evercom and T-NETIX are able to take advantage of the economies of scale generated by customer bases of hundreds or thousands of correctional facilities, the federal debit account rate should be taken into account in deriving an appropriate benchmark rate for inmate debit account and debit card rates generally. Another example is the interstate debit inmate calling rate at Colorado Department of Corrections (“CDOC”) facilities of $0.19 per minute, with a $1.25 per call surcharge, for a total blended per minute cost of just over $0.25 for a 20-minute call. The commission rate paid by Value Added Communications, Inc. (“VAC”) to the CDOC is 43 percent,24 leaving VAC with net revenue of less than $0.18 per minute. Similarly, the contract for inmate long distance calling services between the Indiana Department of Administration and T-NETIX provides for prepaid long distance calls at a rate of $0.25 per minute with no per-call charge and a commission rate of 35 percent,25 leaving T-NETIX with net per minute revenue of slightly over $0.185 per minute. The Nebraska Department of Corrections inmate telephone service contract with AT&T sets the interstate debit calling rate at $0.16 per minute plus a $0.60 24 See Contract between State of Colorado and Value Added Communications, Inc. for Inmate Telephone Services at 6 (Sept. 18, 2006). Relevant portions of the contract are attached hereto as Exhibit 12. 25 Contract for Services Between T-NETIX, Inc. and Indiana Department of Administration, Division of Information Technology at 5, App. 6 (Aug. 17, 2001); Amendment # 1 (Aug. 17, 2005); letter from Arthur E. Heckel, Vice President - Sales, T-NETIX, Inc., to Shelley Harris, Indiana Department of Administration (April 9, 2001). Relevant portions of the contract and the letter are attached as Exhibit 13. 16 service charge, with no commission payments.26 These charges are equivalent to a total blended charge of $0.20 per minute for a 15-minute call, with no per-call charge. 32. Even stronger support is provided by an inmate service contract covering Vermont correctional facilities providing an interstate inmate debit rate of $0.14 per minute plus a connection charge of $0.75, which is equivalent to a total blended rate of slightly under $0.18 per minute for a 20-minute call. After backing out the 31.6 percent commission rate paid to the state,27 the service provider is left with net blended revenue of less than $0.135 per minute. Maryland reduced interstate inmate debit rates in Maryland Department of Public Safety and Correctional Services facilities to $0.30 per minute, with no per-call charge, and awarded the inmate service contract to T-NETIX (now a wholly-owned subsidiary of Securus Technologies).28 This rate includes a huge 60 percent commission rate.29 After backing out the 60 percent commission, the revenue to T-NETIX is $0.12 per minute for long distance debit calling. Finally, the Missouri Office of Administration entered into an Offender Telephone Service (“OTS”) contract with Public Communications Services, Inc. providing interstate inmate debit and pre-paid calling services for $0.10 per minute, with no per-call charge and no 26 State of Nebraska, Service Contract Award to AT&T to provide Inmate Calling Systems, Contract Number SCA-0254 (Nov. 27, 2002), AT&T’s Response to Request for Proposal, SCA0254 at 51, 86 (Nov. 11, 2002). Relevant portions of the contract are attached hereto as Exhibit 14. 27 Contract between State of Vermont, Department of Corrections, and Public Communication Services for Inmate Services, Contract No. 10314, at Att. B, I (eff. Oct. 1, 2006). Relevant portions of the contract are attached hereto as Exhibit 15. 28 See Securus Technologies Home Page, www.securus.net (follow “About Securus” hyperlink) (last visited Aug. 1, 2006). 29 Maryland Department of Budget and Management Action Agenda, Information Technology Contract, Item 3-IT, at 24B, 25 B (Dec. 17, 2003), attached hereto as Exhibit 16. 17 commission payments.30 The service providers would not have accepted these contracts if these net rates did not cover costs and a reasonable profit, leaving the total cost of long distance inmate debit calling at less than $0.14 per minute. 33. In looking at these existing inmate debit service rates, a rate within a range of $0.15 to $0.20 per minute, with no per-call charge, would be a generously reasonable estimate of a rate that would be established in a competitive market. These FBOP and state contracts are of a sufficient scope and scale to provide a reasonably comparable sample by which to determine the inmate service rates that would be charged in a competitive market. It is not necessary or appropriate to look at higher inmate service rates than these examples because, in the absence of competition, even the lowest rates in comparable situations must be presumed to be significantly profitable. Service providers would have no incentive to agree to exclusive service arrangements at rates that were not profitable. These examples are sufficiently numerous and wide-ranging to conclude that they accurately represent the total cost of long distance inmate debit calling service plus a reasonable profit. Accordingly, the cost of providing long distance inmate debit calling service is somewhat less than these rates, adjusted for the cost of commissions. Because these federal and state inmate service rates provide a reasonably comparable sample of long distance inmate debit services, and the cost of providing such services, higher inmate rates at other facilities reflect only higher profits, not higher costs. Comparable Debit Calling Rates: Commercial Rates 34. Various commercial products also provide an additional reasonableness check for inmate debit rates. From the perspective of functionality, the commercial product that is most similar to the prison debit call is the commercial prepaid calling card. These two types of 30 State of Missouri Office of Administration, Notice of Award, Offender Telephone Service, Contract No. C205070001, Public Communications Services, Inc. (May 19, 2006), Best And Final Offer #002 at 8-10. Relevant portions of the contract are attached hereto as Exhibit 17. 18 services both use the same nationwide network to complete the call; a verification process using a personal identification number is used before placing the call to the final destination; and calls are processed to bill against a pre-established account. The big cost difference between commercial calling card calls and the prison debit call is the extra cost of installing the prison telephone system with all of its security and other penological features. Thus, a comparable rate for prison debit calling would be the price for commercial pre-paid calling cards plus the added cost of the prison telephone system, expressed on a usage basis. 35. Prepaid, debit and calling card rates charged by other carriers for comparable services are far below typical inmate debit calling rates. For example, as long ago as March of 2000, when long distance rates were higher than they are now, an AT&T prepaid card plan was offered for $0.849 for the first minute and $0.059 for each additional minute, or less than $0.14 per minute for a ten minute call.31 Also starting in March of 2000, an MCI prepaid card option was offered for $0.03 per minute plus a $0.70 per-call surcharge, or $0.10 per minute for a ten minute call.32 Later that year, another prepaid card option was offered for $0.029 per minute plus a $0.50 per-call surcharge, or $0.079 per minute for a ten minute call,33 and one of MCI’s calling card options was offered for a rate of $0.15 per minute with no per-call charge and a monthly charge of $1.00.34 31 See AT&T Communications Tariff FCC No. 27, Sections 9.1.1.F.9, 9.1.1.J and 24.1.6.C.9(a) (effective Mar. 15, 2000), attached hereto as Exhibit 18. 32 See MCI WorldCom Communications, Inc. Tariff FCC No. 1, Section C.3.2623311 (effective March 8, 2000), attached hereto as Exhibit 19. 33 See MCI WorldCom Communications, Inc. Tariff FCC No. 1, Section C.3.26231011 (effective Nov. 10, 2000), attached hereto as Exhibit 20. 34 See MCI WorldCom Communications, Inc. Tariff FCC No. 1, Section C.3.21112 (effective Nov. 1, 2000), attached hereto as Exhibit 21. 19 36. Current prepaid, debit and calling card rates are even lower. There is a wide range of prepaid calling products available. The calling card from AT&T is probably the most easily recognized brand name product. If one gets a prepaid calling card today directly from AT&T, the rate for interstate calling within the U.S. (excluding Alaska and Hawaii) is $0.05 per minute, with a 1-minute minimum billing period but no other monthly or per-call charges.35 The same AT&T cards are available from “Sam’s Club” (Wal-Mart) for $0.0347 per minute.36 There are many vendors of calling cards today with rates quoted as low as 2 cents per minute. However, most of the cards with rates at that level have other requirements, such as 3-minute minimum billing periods, that equate to effectively higher rates than the published rate. For purposes of this analysis, the AT&T $0.05 rate may conservatively be used as representative of current calling card rates. It must be assumed that the carriers offering those rates to consumers are doing so profitably and that a large volume carrier like an inmate service provider could be profitable at that rate or even a lower rate. 37. The next step in deriving an estimate of the cost of inmate debit calling from these commercial retail debit product rates is to add the cost of the prison telephone system. In my initial Affidavit, I estimated the total cost of installing an entire prison telephone system, expressed on a usage basis, to be between $0.044 and $0.059 per minute.37 Because that estimate includes all of the costs generated by penological requirements, it can be added to commercial debit product rates to derive a total inmate debit calling cost. In the three years since 35 See “SpeedyPin” Promo AT&T Prepaid Phone Cards, http://speedypin.com/phone/card/promo-att-prepaid.html?&aff=698 (last visited July 7, 2006). 36 See Sam’s Club: AT&T® 800-Minute Phone Card for $27.76; AT&T® 1200-Minute Phone Card for $41.64; AT&T® 1500-Minute Prepaid Phone Card for $52.04, http://www.samsclub.com/shopping/navigate.do?dest=0 (search “AT&T”) (last visited July 6, 2006). 37 Dawson Aff. ¶¶ 50-71 (attached hereto as Exhibit 2). 20 the preparation of my initial Affidavit, telecommunications system component costs have declined even further. As I predicted, soft switches have reduced switching costs by splitting switching functions into separate components, thereby allowing signaling and penological control functions to be provided to many facilities from a central location.38 Thus, nationwide inmate calling service providers such as MCI, AT&T and Evercom can serve hundreds or thousands of prison facilities from a single switching platform with a central feature server and signaling gateway, leaving only call processing to be provided at each facility. Centralizing switching components that used to be provided at each facility permits additional cost reductions, which may account for some of the decline in rates reflected in the state inmate calling contracts discussed above and makes my previous cost estimate of a prison telephone system of $0.044 to $0.059 per minute an absolute ceiling and probably too high. 38. Alternatively, I demonstrated in my previous Reply Declaration in this proceeding, the relevant portion of which is also attached hereto, without exhibits,39 that MCI’s inmate calling cost analysis, adjusted to correct overstated cost elements, could be shown to support an estimate of $0.066 per minute for the cost of installing a prison telephone system.40 Thus, the cost of installing a prison telephone system is no more than six cents (based on my cost analysis) to seven cents (based on my adjustments to MCI’s cost analysis) per minute. Accepting the estimate of seven cents per minute derived from MCI’s adjusted data, an inmate debit rate that would be comparable to a commercial calling card rate today would be $0.12 per 38 Id. ¶ 55. 39 Reply Declaration of Douglas A. Dawson ¶¶ 28-33, Petition for Rulemaking or, in the Alternative, Petition to Address Referral Issues in Pending Rulemaking, CC Docket No. 96-128 (Apr. 21, 2004) (“Dawson Reply Decl.”), relevant portions of which are attached hereto as Exhibit 22. 40 Id. The adjusted MCI estimate of the cost of inmate debit calling -- $0.086 per minute -included a $0.02 per minute long distance termination cost, leaving a cost of $0.066 per minute for the underlying prison system. See id. ¶ 33. 21 minute (the $0.05 AT&T calling card rate plus $0.07 for the prison telephone system). This rate is even less than most of the comparable inmate debit rates discussed above, which strengthens the conclusion that the inmate debit card rate, absent any commissions paid to the prisons, should be no more than $0.15 to $0.20 per minute, including profit, and probably less. From the previous analysis of the monies currently collected by service providers, it is clear that they are keeping as much as $0.40 per minute from each debit call -- a tremendous excess profit.41 The Cost Difference Between Inmate Collect and Inmate Debit Calling Services 39. With regard to the issue of the reasonable rate for inmate long distance collect calls, it must be remembered that the prison calling product is “collect” only in the sense that the charges are ultimately paid for by the families and friends of the prisoners. These calls are not operator assisted, unlike the historical collect calls performed by live operators, and inmate collect calling rates should not be compared with historical collect calling rates. 40. In the typical prison system, the only difference between a debit call and a collect call is who pays for the call. With limited exceptions, discussed below, the underlying cost of providing the call and the system used to complete a call is the same for both types of calls. Accordingly, the most direct way to derive a reasonable rate for inmate collect calls is to begin with the inmate debit calling rate. The inmate collect rate should be equal to the inmate debit rate plus the additional costs of those processes that are required to provide a collect service – billing costs paid to the Bell company or other local telephone company serving the called party 41 The Inmate Payphone Order and NPRM notes that a coalition of inmate telephone service providers provided data purporting to show that a 12-minute inmate call costs approximately $1.30 more than a typical 12-minute non-inmate call. Inmate Payphone Order and NPRM, 17 FCC Rcd at 3254. That cost difference comes to only about $0.11 per minute, and not all of the cost differences are attributed to additional security costs. Even accepting the full difference of $0.11 per minute, adding that amount to a $0.05 per minute commercial debit rate yields a total inmate debit calling cost of $0.16 per minute, which is less than the FBOP debit rate and well within the estimated comparable rate range of $0.15 to $0.20 per minute. 22 and uncollectible revenue resulting from nonpayment of bills. Using the highest estimate available for these costs submitted by the Coalition, billing costs are $0.029 per minute, and uncollectibles are $0.034 per minute,42 for a total additional cost of $0.063 per minute. 41. That figure would overestimate the additional costs of collect calling, however, because the $0.034 per minute component for uncollectible revenues is derived from a much higher assumed billed rate per minute - $0.82 per minute.43 If prison calling rates were reduced, the amounts of revenue that would be uncollectible would decline. Lower rates equate to smaller bills to families, lowering the amount of revenue to be collected. Also, with lower bills, families could afford to pay the collect call bills. That the derived uncollectible figure of $0.034 per minute is unrealistically high can be demonstrated by combining the entire potential additional cost of $0.063 per minute -- which includes the $0.034 per minute uncollectible figure -- with the high end of the estimated debit calling rate range -- $0.20 per minute -- to estimate the maximum total collect calling rate, which would come to $0.263 per minute. If the collect calling billed rate were actually reduced to that level, however, the estimated derived cost of uncollectibles would be reduced accordingly, as discussed above. This would suggest that a reasonable rate for long distance inmate collect calling, using a more realistic uncollectibles adjustment, would be no higher than $0.05 per minute more than debit calling, or $0.20 to $0.25 per minute, with no per-call charge. 42. The conservative nature of a $0.20 to $0.25 per minute long distance inmate collect calling rate is demonstrated by the rate charged for inmate collect calling services at New York Department of Correctional Services (“NYDCS”) facilities by MCI. NYDCS prisoners pay a $3.00 connect fee per call plus a per-minute rate of $0.16 for all calls. Thus, for an 18-plus 42 Dawson Aff. ¶ 72 (attached hereto as Exhibit 2). The $0.029 figure overstates the cost of billing, given that the Coalition included both billing and validation within that estimate. Id. 43 See id. ¶ 62. 23 minute call, which is the average for NYDCS prisoner calls, the overall rate is slightly under $0.32 per minute. MCI pays a 57.5 percent commission in New York.44 Accordingly, the effective rate collected by MCI, net of commissions, is about $0.135 per minute. Similarly, the recent Missouri OTS contract discussed above provides interstate inmate collect calling for only $0.10 per minute with a $1.00 set-up charge, which comes to an effective rate of $0.15 per minute on a 20-minute collect call.45 Prisoners in New Hampshire correctional facilities, which are limited to collect calling, pay a $1.45 connect fee per call plus $0.20 per minute forinterstate long distance calls. Netting out the 18 percent commission paid to the state, the service provider receives just over $0.23 per minute on a 20-minute collect call.46 These directly comparable 44 See New York State Department of Correctional Services Comments in Opposition to Petition for Rulemaking Filed Regarding Issues Related to Inmate Calling Services, Exh. A at 4-5, Implementation of the Pay Telephone Reclassification and Compensation Provisionsof the Telecommunications Act of 1996, CC Docket No. 96-128 (Mar. 9, 2004). An 18 minute-plus call is rounded up to the next whole minute in applying these rates. Id. Pursuant to an order of Governor Eliot Spitzer, the state will no longer collect its commission after April 1, 2007, which will greatly reduce inmate service rates in NYDCS facilities. See N.Y. Governor Orders Cuts In Cost of Inmate Collect Calls, Telecommunications Reports, Feb. 1, 2007. 45 See Missouri OTS contract, Best And Final Offer #002 at 9, attached as Exhibit 17. 46 See Inmate Calling and Public Pay Telephone Services Contract between New Hampshire Department of Administrative Services and Public Communications Services, Inc. at 15, 22 (Aug. 23, 2000) (“NH Inmate Service Contract”), and Second Amendment to Inmate Calling and Public Pay Telephone Services (Aug. 13, 2003), which are attached hereto as Exhibit 23. One facility is covered by a different contract, under which the rates and terms are the same as the NH Inmate Service Contract, except that the connect fee is $1.50. See Inmate Calling Services, Northern Correctional Facility, Berlin, NH Contract between New Hampshire Department of Administrative Services and Public Communications Services, Inc. at Exh. A, §15.32, Exh. B, §1.1 (Dec. 15, 1999) (“Northern Correctional Contract”), and Third Amendment to Inmate Calling Services (Aug. 13, 2003), which are attached hereto as Exhibit 24. Under the Northern Correctional Contract, the service provider nets $0.233 per minute on a 20-minute call after commissions. Both contracts have been extended through August 22, 2007. See New Hampshire Governor and Executive Council Minutes, Sept. 13, 2006, Department of Administrative Services items 19 and 20, http://www.nh.gov/council/ (follow “Current Agenda” hyperlink; then search “Minutes” for September 13, 2006) (last visited Oct. 4, 2006). 24 EXHIBIT 1 CV OF DOUGLAS A. DAWSON I received a Bachelor of Science in Accounting from the University of Maryland in 1977. In addition, I received a Masters degree in Mathematics from the University of California at Berkeley in 1985. I began my telephone career in 1975 as a test technician building telephone switches for Litton Industries in College Park, Maryland. In this position I did system integration testing and learned in detail how early digital switches operate. My next telephone job began in 1978 with John Staurulakis, Inc. ("JSI"). JSI is a telephone consulting firm that specializes in consulting for independent telephone companies (those smaller telephone companies that were not part of the Bell System). In this job, I worked on separations cost of service studies for Independent Telephone Companies. In this role, I had my first detailed exposure to developing the costs of providing telephone service. Additionally, I performed numerous traffic studies for switches. These studies were used to determine the patterns of customer usage for switches, and were used to determine costs, but also were used to determine the most efficient way to configure the switch and the network. Next, in 1981 I became a Staff Manager of Industry Relations at Southwestern Bell Telephone Company in St. Louis, Missouri. Southwestern Bell is a huge regional telephone company that is now part of the reconstituted AT&T. My functions there included tracking issues that impacted Bell's relationships with the independent telephone industry, calculating and negotiating various interconnection and settlement rates between companies for local calling and other network arrangements, and overseeing the review of an independent telephone company's traffic and toll cost studies. In performing the traffic studies I had hands on experience working with measuring usage on a number of different brands of switches. I also served for a period of time as a member of the rate case team for the Missouri operations. In working on rate cases, I further developed my knowledge of calculating and developing telephone costs. In my next position, beginning in 1984, I gained operating telephone company experience at CP National in Concord, California. CP National was a holding company that owned, among other things, 13 telephone companies. I had several jobs with increasing responsibility and ended as Director of Revenues. In that capacity, I oversaw a large group that performed telephone accounting, separations and traffic engineering studies for a seven-state area. My group also monitored earnings, developed access and local rates, maintained tariffs, filed rate cases, and monitored and commented in state and federal regulatory proceedings. In this role, I was directly responsible for setting rates and for defending those rates in front of various regulatory authorities. Thus, I testified in a number of rate-making cases and regulatory proceedings in California, Texas, Nevada, Oregon and Arizona and New Mexico. Part of my responsibility at CP National included calculating costs and setting rates for four separate operator centers where the company maintained telephone operators for completing collect and other types of operator-assisted calls. While at CP National, I also became responsible for earnings monitoring and rate case development for electric, gas and water properties. In my next position, in 1991 I again joined John Staurulakis, Inc. in various capacities. My final position there was as Director of Special Projects. In that capacity, I oversaw all projects and clients who were not historically part of JSI's core cost separations business. Some of the projects I worked on included assisting clients in launching long distance companies and Internet service providers; studying and implementing traditional and measured local calling plans; developing optional toll and local calling plans; performing embedded, Total Element Long-Run Incremental Cost ("TELRIC")1 and incremental cost studies for products and services; assisting in local rate case preparation and defense; and conducting cross-subsidy studies 1 By “embedded” cost study I am referring to cost studies that rely on historical accounting data to calculate costs. By “Total Element Long-Run Incremental Cost”, I am referring to a specific type of cost study that has been mandated by the Federal Communications Commission and that is used to calculate the costs of pieces of the network referred to as unbundled network elements, the key components that has allowed competitors to lease portions of the Bell networks. determining the embedded overlap between telephone services. In this role, I gained in-depth experience in long distance rates rate setting and the regulatory process. I also became thoroughly familiar with the underlying costs of running a long distance company, and providing telephone service. In 1997, I became a founder and owner of Competitive Communications group, LLC. My title at CCG is President and Chief Technical Officer and I am directly responsible for all of the consulting work performed by our company. The company began with 3 employees in April 1997 and currently has 13 employees. As a firm we offer the following telephone consulting products and services that are needed by companies that are launching new ventures or entering new markets, all under my direct control and supervision: Engineering services, including: Analysis of telephone hardware for switching and networks Detailed network design and development Developing switching specifications and provisioning new switches into service Developing RFPs and analyzing vendors; Development of financial business plans; Market segmentation studies to understand markets and customers; Competitive research including rates and services of other providers; Strategic analysis and planning; Marketing plans; Regulatory work including certification of companies to provider service, development and filing of tariffs and regulatory compliance to make certain companies are meeting regulatory requirements; Implementation assistance for start-up companies including: Negotiating interconnection agreements with other carriers Negotiating network implementation and collocation of equipment with other carriers; Choosing vendors for billing, back office, operator services and other external requirements; Ordering trunks (telephone lines that go between different networks); Detailed hands-on project management; Assistance in developing and implementing accounting systems; Development of rates; Calculation of costs. EXHIBIT 2 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 In the Matter of: Martha Wright, Dorothy Wade, Annette Wade, Ethel Peoples, Mattie Lucas, Laurie Nelson, Winston Bliss, Sheila Taylor, Gaffney & Schember, M. Elizabeth Kent, Katharine Goray, Ulandis Forte, Charles Wade, Earl Peoples, Darrell Nelson, Melvin Taylor, Jackie Lucas, Peter Bliss, David Hernandez, Lisa Hernandez and Vendella F. Oura Petition for Rulemaking or, in the Alternative, Petition to Address Referral Issues In Pending Rulemaking AFFIDAVIT OF DOUGLAS A. DAWSON STATE OF MARYLAND COUNTY OF PRINCE GEORGES: ss Douglas A. Dawson, being duly sworn, deposes and says: I. INTRODUCTION 1. My name is Douglas A. Dawson, and I am the President of CCG Consulting, Inc. (“CCG”), located at 681 1 Kenilworth Ave., Suite 300, Riverdale, Maryland, 20737. CCG is a general telephone consulting firm.CCG works for over 250 communications companies, which include local exchange carriers (“LECs”), competitive LECs (“CLECs”), cable TV providers, electric utilities, wireless providers, paging companies, municipalities and other governments and interexchange carriers C‘IXCs’’). 2. I submit this affidavit in support of the above-captioned petition to have the Federal Communications Commission (“Commission” or “FCC”) address certain issues involving prison inmate calling services referred to the Commission by the United States District Court for the District of Columbia in Wright, et a/. v. Corrections Corporation of America, et al. (“Wright”).’ I have specific experience and expertise relevant to the issues in this proceeding, which involves the provisioning of long distance calling for prison inmates. 1 have assisted in the launch of over 50 long distance companies in my career. In that role, I have done virtually everything associated with creating or running long distance businesses. 1 am also familiar with all regulatory aspects of long distance, including the development of rates and costs and the preparation and filing of tariffs. I have helped numerous companies select switching hardware for long distance service, and I know the capabilities and technical specifications of such hardware. I have negotiated numerous wholesale long distance service agreements between facilities-based IXCs such as Sprint, Frontier, Qwest and WorldCom, and resale carriers, and I understand the underlying long distance networks and issues associated with using them. I have had extensive experience with, and, consequently, have an in-depth understanding of, the capabilities and configurations of the network switching systems that lie at the heart of all telephone systems. I also have helped numerous companies with the provisioning of ancillary long distance products such as calling cards, operator services, prepaid cards, international toll and Internet telephony. My CV, including prior testimony, is appended as Exhibit 1. 11. PURPOSE OF THIS TESTIMONY 3. In this affidavit, I have been asked to examine whether competition would work in the prison calling environment. Because the Wright case focuses largely on inmate calling at three specific prisons operated by the Corrections Corporation of America (“CCA”) - the Central Arizona Detention Center (“CADC”) in Florence, Arizona, the Torrence County Detention Facility (“TCDF”) in Estancia, New Mexico, and the Northeast Ohio Correction Center (“NOCC”) in Youngstown, Ohio - during a period when inmate calling services were ’ CA No. 00-293 (GK)(D.D.C.). 2 provided there by Evercom Systems, Inc. of Irving, Texas (“Evercom”), I will use data relating to those facilities and Evercom to illustrate the points I want to make.2 Evercom’s inmate calling services to those prisons are typical, with regard to the rates and the methods used to bill long distance calls by prisoners, of most prison inmate calling services. The issue of inmate service competition is a generic question, and the conclusions drawn in this analysis would apply to all prison calling systems. CCA and Evercom controlled, and, in the case of the CADC and TCDF, still control, inmate calling on a monopoly basis from those three prisons and have permitted only a limited set of very expensive options for making long distance calls. 1 will analyze how competition could be brought to bear in inmate calling and demonstrate how it could lower inmate calling rates. 4. For the reasons set forth in this affidavit and based on my extensive background in the telecommunications field, I conclude that there are competitive alternatives to the monopoly environment found in these prisons. I will demonstrate a way that any prison system could allow open access to competition and still meet all of the security and other penological requirements of the prisons. 5. In brief, in this affidavit, I will: a) describe the history and development of telephone systems - both generally as well as specifically for prison systems; b) discuss the various penological requirements that must be satisfied by a prison calling system; c) discuss specifically the current payment methods that are used with prison calling systems; d) demonstrate that there are no justifications for prison administrators not to allow debit card or debit account calling or for inmate service providers not to offer debit card or debit account calling; and e) demonstrate the feasibility and reasonableness of opening inmate calling services to competition, so that inmates have a choice of carriers. On information and belief, Evercom is still providing inmate calling services to the CADC and TCDF. 3 111. PRISON TELEPHONE SYSTEMS 6. Since I will be discussing specific details of the various telephone systems used in prisons, such as debit systems and collect call systems, I will first discuss telephone systems generally and describe how they work. I will then discuss the specific attributes of the prison systems that relate to this proceeding. 7. Historically, all telephone systems in the U.S.began with operator assisted calling. Every call required an operator to complete a call using the large plug panels that we have all seen in movies. Even today, it is still possible to use a live operator to complete a call. In the late 1930s and into the I940s,local switches were developed that allowed some automation in completing local calls; that is, a caller could complete some calls without using a, live operator, as long as the called party was connected to the same local switch. However, all long distance calls, or even calls to other switches in the same city, still required live operators. Beginning in the 1940s and into the 1950s, automated switches were introduced that allowed for the automatic switching of calls between local switches, and this allowed for the long distance network in place today, where dialing “ I ” plus the long distance number allows a caller to directly dial long distance calls without the intervention of an operator. The early local and long distance switches were electromechanical. They worked by creating a mechanical connection between the called and calling party, much as operators had done mechanically before that. These electromechanical switches were not very sophisticated, and they could not perform very many functions beyond connecting calls. 8. In the late 1960s, computer technology was introduced into telephone networks. With the advent of computers, a new set of telephone services, referred to as vertical features, was developed. Vertical features are computerized functions that provide callers more sophisticated services than simply the completion of calls, such as call waiting, call forwarding, call hold and speed dialing. These features relied on the new computer core of the switch to perform logical processes. With these new switches, the old electromechanical portions of the 4 switch used for basic call completion were replaced with computerized hardware. During this same period, the hardware that was used by the remaining operators was also computerized, and terminals that automated many of the operator’s tasks replaced the old manual plug panels. However, even with computer assistance, collect and other similar calls still required live operators in order to be completed. 9. The next big breakthrough in telephone switching systcms came in the early 1980s and was referred to as Signaling System 7 (“SS7”). SS7 is a technology that provides a second electrical path in the telephone network. The original path, referred to as the voice path, is where the electrical voice signal is sent across the network to complete calls. This new second signal, the SS7 signal, uses a different frequency and allows the switching system to communicate and perform tasks without disrupting the voice path. For example, the SS7 signal is the mechanism used to transmit the telephone number of the calling party and is what enables a new service like caller ID, which allows a called party to see the caller’s phone number. The new telephone products that were enabled by SS7 were referred to generically as “CLASS” (Custom Local Area Signaling Services) features. The SS7 system allowed for many of the features present in the prison telephone systems in place today. For example, SS7 allows for prison officials to monitor the numbers that prisoners dial. Many of the new CLASS Features using SS7 required computerized databases, and these were introduced into the network in the early 1980s along with SS7. 10. The next technology breakthrough that is relevant to this case is the introduction of dial pulse recognition. With dial pulse recognition, any caller with a touchtone phone is able to give feedback to questions asked by a mechanized recording. For example., in the prison system, a mechanized recording may say “You have a call from prisoner X. To accept this c d l dial 5.” The technology needed to do this on an automated basis was created in the late 1980s. This was a significant technological breakthrough in that, for the first time, collect calls and other similar types of calls could be completed without utilizing a live operator. This 5 technology relied on two technologies to be implemented. First, a phone company needed to update each subscriber line card so that a given subscriber could dial using a touch-tone phone. This required significant capital outlay and was usually done as part of updating and replacing the entire switch. Second, the phone company had to update the switch core itself to be able to recognize dial pulses. 11. There are recent technological changes that also impact prison telephone systems. The most recent breakthrough is voice recognition. Voice recognition just entered the market in a useable format in the late 1990s. Voice recognition technology allows the phone system to elicit responses from customers verbally without requiring them to dial digits, as is needed with dial pulse recognition. For example, a customer may be asked to answer “yes” or “no” to a question, and the voice recognition software is set to recognize one of these two answers. This technology is now widely used in the marketplace in various collect calling systems. Today, technology has taken another leap forward, and there are now switching systems that can recognize a person by his or her voice print using voice recognition software, thus eliminating the need for PIN numbers or the use of dial pulse recognition. 12. There is one additional technology that has evolved over time that is key to prison telephone systems, and that is recording technologies that make it possible to record and monitor calls. For most of the history outlined above, no widespread technology was available to record and monitor calls on an automated basis. It has been possible for a very long time to monitor calls by having a person tap into the calls and listen to them. The ability to record calls and to later listen to them, as prison officials require, is now a key penological requirement. The first hardware that could record calls on a wide-scale basis was available in the early 1970s. This consisted of little more than a bank of tape recorders that could allow for the simultaneous recording of many calls. Such a system required a massive storage of computer tapes, and it was not easy in such a system to pinpoint or retrieve a specific call from a specific inmate. Newer recording technology is available that solves such problems. Modem recording systems 6 use computer drum storage, much as is done for the storage of data on a commercial company's local area network. Such storage is done digitally, and a digital record is made of each call, thus making it easy to later retrieve specific recorded calls. The size and cost of the storage devices that can be used for such a purpose have drastically decreased over time, and the cost continues to decline as digital storage techniques improve year after year, with a seeming doubling in storage capacity per dollar every 18 months or so. 13. Because of the need to satisfy penological requirements, there are unique features of prison calling systems that, in combination, differentiate them from other types of telephone systems. For many years, prison systems were at the cutting edge of technology, as prisons tried to meet their requirements with the latest available technologies. However, with the advent of modem switching technologies, technology has finally caught up to the penological requirements, and there are now many different switching platforms that can be modified to meet the requirements of prison systems. 14. A prison calling system is comprised of four basic components. First is the switching platform referred to above. This is essentially a piece of hardware that allows for the dialing and completion of calls along with a core computer logic system that allows for the creation of specific features and functions that, taken together, are unique to prison calling requirements. The second requirement for a prison telephone system is a recording storage system that allows for the easy monitoring, recording and retrieval of prisoner calls as needed. The ideal prison recording system records calls automatically and also allows authorities to easily listen to calls later. Third, the prison telephone system requires a master control system that allows the authorities to quickly intervene and modify prison calling patterns as needed. Such a master control system is basically a terminal with an easy interface into the switching system software, where authorities can make quick changes to such functions as the list of numbers that a specific prisoner is permitted to call. All modem switching systems have such control interfaces. The last component of a prison telephone system is the software 7 programming that enables the features that are unique to the prison system. For example, a feature allowing a called party to request to be automatically removed from a prisoner's calling list is unique to the prison system. Such a feature is created by specific software developed by a prison switch vendor to meet this specific requirement. 15. Prison telephone systems have evolved over the years in response to two trends. First, such systems have evolved to introduce new functions and features in response to the availability of new technology, as outlined above. To illustrate, consider the example of one specific penological requirement: that prison telephone systems allow prison administrators to restrict prisoners to a relatively short list of pre-approved telephone numbers that they may call. This particular requirement was not feasible until the late 1960s, when similar features were introduced into commercial telephone switching systems. As switches became more like computers, it became technically possible to devise a system that could limit prisoner calls to specific numbers. Thus, each separate penological requirement for prison telephone switching systems has only been made possible, and thus really created, in response to changes in technology. In summary, technology has expanded the ability to provide more hnctions with a switch, and the basic requirements for prison switching systems have constantly evolved to exploit these technical capabilities. 16. The second trend that affected the development of prison switching systems W ~ U the expansion of prisoner calling rights. For a long time, prisoners were allowed to make very few calls. However, as prisoners won greater calling rights, prison telephone systems were developed to respond to these expanded calling rights while meeting penological requirements. As prisoners called more, the penological requirements for the prison systems have grown to meet the evolving challenges presented by prisoners. 17. For many years, all prison inmate calls were collect calls. This was largely due to the fact that only a live operator could satisfy the basic penological requirement that prisoners could not make calls to those who did not wish to talk to them. There was no other way 8 historically to automate this function, and thus the intervention of a live operator and the use Of collect calling was necessary to ensure against the harassment of witnesses and other similar abuses. Live operators are no longer needed to meet this requirement. With easily programmable switches, very complex features can be introduced today, and if a switching requirement can be imagined, it probably can be programmed. 18. The three prison facilities under examination in this proceeding -- the CADC, the TCDF and the NOCC -- have used or now use Evercorn’s telephone calling systems and services for inmate calling. Evercom specializes in prison calling systems and services. According to Evercom’s year-end 2000 10-K Report (“10-KReport”), it served almost 2000 prisons in the United States as of December 31,2000.’ Evercom refers to its product as CAM (Inmate Call Access Management).“ The Evercom CAM system can meet all of the penologicd requirements described in this affidavit. Note that Evercom is not the only provider of prison telephone systems. There are several other prison switch providers, but Evercom is the predominant supplier of prison calling systems in the U.S. marketplace today. IV. PENOLOGICAL REQUIREMENTS OF PRISON CALLING SYSTEMS 19. The following description of the penological requirements of prison inmate telephone systems is derived from various documents gathered from the manufacturers of such systems. Additionally, these requirements are usually specified in great detail in the various periodic Requests for Proposal (“RFPs”) issued by the prison administrators when they are seeking a new telephone service provider. For example, these requirements are specified in detail by the Federal Bureau of Prisons (“BOP”) in its 1997 Request for Proposal for its inmate Evercom, Inc., SEC Form lO-K, Part 11, Item 7,at “Overview” (filed June 1,2001 for the fiscal year ended December 3 1,2000) (“1 0-K Report”). The relevant portions of the 10-KReport ax attached hereto as Exhibit 2. Id. at Part 1, Item 1, “Systems.” 9 telephone system, relevant portions of which are attached hereto as Exhibit 3 (“BOP RFP”).’ I also understand from a technical perspective how all of these penological requirements can be made to work in a prison calling system. These penological requirements for a prison calling system can be broken down into the major categories listed below. Different prisons have selected different subsets of these requirements, but overall, most prison systems are designed to fulfill the same basic list of penological requirements, which are: Number Control Personal Allowed Numbers (“PAN) Individual Phone and Phone Group Definitions Voice Prompts Personal Identification Numbers (“PIN) Monitoring Recording and Playback Reporting Calling as a Commodity 20. Number Control consists of those telephone features, such as blocking, unblocking, validation and the defining of telephone numbers, that allow the prison to control the telephone calls that can be placed by prisoners. With number control, prisons can satisfy various penological requirements. One almost universal use of number control is the prohibition against inmate calls to certain types of numbers, such as 800 or other toll-free numbers or 900 numbers. This stops prisoners from re-originating calls. It is possible, when dialing 800 or other toll-free access numbers that terminate to a non-prison telephone switch, to connect with call systems that allow the caller to get an additional dial tone and then re-originate the call to another number. The blocking of 800 and 900 calls greatly reduces the chances Of ’Federal Bureau of Prisons, Request for Proposal, June 2,1997 (“BOP my). 10 call re-origination. In a modem switch, numerous types of blocking can be performed. Universal blocking rules block certain categories of calls for all inmates, such as not allowing any prisoner to call an 800 number. Individual blocking rules can also be applied, allowing certain categories of calls to be blocked for certain prisoners. Blocking can be made very specific. For example, a prison can prevent calls to an individual number, and many prison systems allow outsiders to elect not to receive calls from prisoners. 21. A related feature to blocking is Personal Allowed Numbers (“PAN”). PAN is a penological requirement that enables prison administrators to restrict inmate calling to a preapproved list of telephone numbers. A PAN system thus prevents harassing calls and fraudulent telephone schemes involving calls to non-approved numbers. Any attempt to dial a number not on a PAN list is blocked by the switch. 22. Another important set of penological tools is Individual Phone and Phone Group Definitions. This means that prisons can control calling in any manner they choose. For example, they can limit the duration of calls. They can track the time used by a given prisoner and cap his total usage at some fixed ceiling amount per day. The prison can restrict the hours of phone usage, either universally or by prisoner. Phone Group Definitions give prison administrators control over the basic functioning of the phone system. 23. Voice Prompts is a series of hnctions that allow the prison to control how prisoners can place and use calls. For example, voice prompts can be used to warn prisoners that a call will soon be terminated if it is running too long. One penological use of voice prompts is the use of a pre-recorded announcement to let a called party know the name of the inmate making the call. Voice prompts also allow the called party to accept or reject the call before the prisoner comes on the line. The announcements now provided by voice prompts were historically provided by live operators, but these functions have been replaced today with a mechanized and computerized series of recordings designed to meet every possible and allowable type of call. 24. Another penological concern is that each inmate should have a unique Personal Identification Number (“PIN”) that must be used in order to initiate calls. PINs ensure that inmates are identified and tracked individually. Every call can be tracked and traced to an individual inmate. The use of PINs also enables administrators to provide different telephone privileges to each inmate. The prison can place restrictions on any aspect of calling, from who can be called to how long calls last, by having all calls use the PIN system for access. The use of PINs is widespread in the telephone industry outside of prisons. PINs are used routinely for credit card calls, debit card calls, pre-paid card calls, international callback calls, within the PBXs of many large companies and in many other applications. PIN verification works by using a lookup table. In the prison example, the lookup table is a very simple one that consists ofjust one PIN for each prisoner. If the prisoner attempts to use a PIN that is not in the table, a call cannot be completed, and, usually, the prison is notified of the fraudulent attempt. 25. Modem prison telephone systems also require Monitoring. Monitoring allows prison officials to listen to calls on a real-time basis. Prisons routinely monitor inmate calls to make certain that no crimes are being committed or that people are not being harassed. A monitoring system allows the prison administrators to listen at any time to specific prisoners or to choose calls at random to monitor. Many prison telephone systems include camera surveillance of telephones along with voice monitoring. This allows the prison officials to see who is making the call while listening to the conversation. 26. Another requirement of modem prison telephone calling systems is Recording and Playback. This allows prison officials to listen to calls that were made in the past. For example, should a prison administrator discover a case oftelephone fraud, the administrator can listen to phone calls made by the same prisoner in the past. The recording of calls is done by separate hardware that is not an integrated part of the switching system. Modem telephone recording systems usually use drum storage devices to capture and store calls, and the number of calls and the length of retention of recorded calls is limited only by the size of the storage 12 system chosen. Such storage devices can be programmed to allow for instant retrieval of recorded messages by the authorities, much as is done by voice mail systems widely in use. In order to control the costs, most recording systems also allow the calls to be moved from drum storage to more permanent media for long-term retention. 27. Another penological requirement is Reporting, which allows the prison officials to create rules for calling and then to report any violations. For examgle, a system might record instances when a prisoner does not know his PIN on the first try. This will help identify any prisoner who is fishing for valid PINS by trial and error. The same sort of system can be used to track sequence calling by an inmate, that is, in calling numbers that are close to each other numerically. Such calling patterns are often associated with attempts at fraud. Reporting can also show when prisoners try to call people whose numbers are blocked for them, such as witnesses and judges. Modem reporting systems have become quite sophisticated in response to the demands placed upon the telephone system by prisoners. 28. A final penological requirement is one that is not directly related to the phone system hardware. Prisons prefer to have an inmate calling system that does not create 8 commodity, and thus is not subject to coercion or extortion among prisoners! Typically, any system that involves funds or a commodity that can be used by prisoners can be subject to these types of abuses. No calling system - be it collect only or a debit system -can completely eliminate such problems in a prison. The ideal system will have stringent enough rules to make calling reasonably unattractive as a commodity. For example, closely scrutinizing the pre-approved list of telephone numbers that each prisoner is allowed to call greatly reduces the attractiveness of another prisoner’s account, particularly if such scrutiny is combined with blocking that precludes the re-origination of calls. 6 This issue is not unique to a prison’s telephone system, inasmuch as inmates routinely maintain commissary accounts for the purchase of sundry items. 13 29. These penological requirements, taken together, are unique to a prison calling system.’ Many of these features are used individually elsewhere in the telephony world, but only the prison systems brings all of these unique attributes together as a package. There is a definite incremental cost of providing these features. These are costs that should be recoverable by the provider of the prison calling system. V. COST ISSUES 30. Historically prison inmate calling required collect calls using live operators. Only a live operator could make sure that prisoners were limited to the types of calling that the prison authorities allowed. But with today’s technology, there is no longer any reason to use only collect calling for prison calls. For example, the Evercom system in the three sample prisons it serves or has served allows for at least two types of calling. First, it offers an automated collect call, meaning that the called party pays for the call. Second, it offers a debit product, meaning that the call is pre-paid before being placed. 3 1. As described above, collect calling systems historically required live operators. Ascertaining whether the called party was willing to accept charges for a call required a live operator because there was no technology available to automate such a function. Today, the vast majority of commercial collect calls are performed entirely by computers and do not require a live operator. There are a number of automated collect call products available to the general public such as 1-800-COLLECT and 1-800-CALLATT. To a large degree, except for the extra layer of penological functions, these commercial collect systems operate much like the prison collect system. To place a prison collect call, a prisoner must first dial a desired number. The prison system then maintains complete control of the call. Typically, it mutes out the prisoner so that he cannot hear the called party being queried by the automated prompts. The computerized system connects to the desired number, and when the called party answers, a 7 The requirements discussed above are also reflected in the portions of the BOP RFP attached hereto as Exhibit 3. 14 voice prompt will ask whether the called party wishes to accept the charges for a call from the prisoner. Because the prisoner is muted, the system uses a recording of the prisoner’s name to announce the request. The called party is given instructions on how to accept the call if he or she wishes to pay for it. In some newer systems, the called party can accept the call by verbally saying “yes,” using voice recognition software that recognizes simple words. In most prison systems, the called party will be asked to dial a digit on the phone, for example, “Did 5 if you want to accept charges for this call.” When the system receives an affirmation that the call will be paid for, the prisoner is taken off of mute, and the call is completed. 32. The network process required for completing a prison pre-paid debit call is almost identical to the processing of a collect call. In a debit system, a prisoner will also dial the desired number. The system will then put the prisoner on hold until it determines that there are enough funds available to pay for the desired call. Once it has been determined that sufficient h d s exist, the call is completed. A debit platform is virtually identical to a collect system. The debit system requires the same major components -- a switching platform, a storage device with a voice mail-like system, a master control system and unique software. The only real difference between the prison collect call product and the pre-paid debit product is who pays for the calls and hence how payment is made. 33. This is a very important distinction and something that has been brought about by the convergence of technology. For most of the history of the industry, collect calls were very different from other types ofcalls. They required unique equipment and the use of live operators. As such, collect calls were billed under unique rate structures. However, the unique nature of collect calling has now disappeared. As can be seen in these prison systems, there is no practical difference between a prison debit call and a prison collect call, except for the decision of who is going to pay and how payment will be made. Moreover, because, discussed below, debit calling eliminates the significant amounts of uncollected revenues that service providers experience with collect calls, debit calls ought to be the preferred prison calling methodology. Both debit and collect calls meet all of the same penological requirements and use the same equipment. From a network perspective, the only difference is a very minor one related to call routing in the case of debit calling in order to verify that there are existing funds for the call -- a change that does not add cost to the call processing, Because debit card calling meets all of the same penological requirements as collect calling, there is no justification for restricting inmates to collect calling. All prisons thus should be required to allow debit calls. Such calls are less expensive for the providers, by definition, and should thus cost less for prisoners and families of prisoners. 34. Some prisons have not allowed debit calling, typically, on the grounds that the administrators do not want the extra administrative burdens of handling the cash for the debit , payments! Prison administrators claim that creating an additional source of prisoner funds might generate an additional possibility of extortion among prisoners. However, there are many options for establishing a debit calling system that can overcome these objections. For example, the federal prison system has had a debit product for prisoners for many years. One way to avoid having an extortable commodity is to have a debit system where the called parties (the families) control the funds. In such a system, a family member would purchase a debit account under his or her own name and control. A prisoner would be allowed to call this family member as long as there were funds in the pre-paid account. Removing the cash from prisoner control will remove most ofthe penological concern and eliminate any additional administrative costs for the prison in handling debit accounts. As will be demonstrated below, the collect calls initiated from the sample prison systems are quite expensive. At the end of the day, it is the families and acquaintances of the prisoners who pay for collect calls. Given a choice, many of these called parties would much rather establish a personal debit fund if the calls could be cheaper. * Upon information and belief, one of the CCA facilities involved in the Wright case, the Northfork Correctional Facility located in Sayre, Oklahoma, did not allow inmates to make debit card or debit account calls; they were provided only the option of collect calling. 16 35. A debit system that allows families to pay for calls instead of having the prisoners pay would not increase costs or administrative burdens for the prison. In most contracts between prisons and providers that I have seen, the carrier usually absorbs all of the costs Of running the prison telephone system, including the switch and the software. In this case, of course, Evercom also bills everyone who accepts collect calls. As long as the service provider is responsible for the cost of maintaining external family debit systems, there should be no additional cost or burdens for the prisons. 36. In the telephone industry, revenues that are billed but not collected ftom customers are classified as uncollectibles. A significant number of people who accept collect calls from prisoners subsequently refuse or are unable to pay for the calls. The underlying . prison calling provider must absorb the lost revenues from any calls that are not collected. The uncollectible rate for inmate collect calls can be very high. According to its year-end 2000 10-K Report, Evercom states that it has always had high uncollectible revenues from inmate collect ~ a l l i n g .However, ~ Evercom should experience very little, if any, uncollectibles from debit calls. In a debit system, the calls are pre-paid, and when a call is placed, the service provider can instantly collect from the debit card account. Accordingly, uncollectibles in a debit system should be virtually zero. A debit system would also allow the service provider to collect the cash from calls in advance -- at least thirty days earlier than with collect calling -- which is a big plus for any telecom provider. 37. Prison administrators have argued that debit calling does not offer as many penological safeguards as collect calling. In particular, they point to the penologicd requirement that telephone privileges not become a commodity. They suggest that allowing prisoner debit accounts can create a currency or credit that can be sold or extorted. The federal system, however, which allows debit calling, has taken several steps to reduce the possibility 9 Evercom’s 10-K Report, which is attached hereto as Exhibit 2, states, in Part I, Item 1, at “Federal Regulation,” that “[blad debt is substantially higher in the inmate telephone industry than in other segments of the telecommunications industry.” 17 that debit calling might result in the creation of a commodity. The Federal BOP has very strict rules concerning the ability of prisoners’ families to replenish the h d s in a debit account. They restrict such debit fund payments to a small list of outside parties that includes lawyers and direct family members. Other penological tools also help to reduce the possibility of creating a commodity. For example, strictly limiting the calling for each prisoner to apreapproved list of telephone numbers greatly reduces the attractiveness of any other inmate’s account, particularly if this technique is combined with the inability to re-originate calls. It should also be kept in mind that a collect calling system can be abused as much as a debit calling system. Whatever value can be extorted from another inmate’s debit account could also be extorted from his collect calling PIN. If implemented properly, as has been done in many prisons, there is no specific advantage to collect calling over a debit system. 38. In summary, a debit card system can meet all ofthe same penological requirements as a collect system. The only real difference between the two systems is who pays for calls and how they pay. In a properly designed debit system, there is no additional burden for prison officials. There also does not have to be an additional source of funds available to prisoners that can be extorted. The only real difference between a well-designed debit system and a collect system is how the prisoners or the families of prisoners pay for calls. There is therefore no penological justification for limiting inmates to collect calling services, rather than providing a choice between collect and debit calling. VI. COMPETITION IN PRISON CALLING 39. Many prison inmates and families of prisoners, including the petitioners in this proceeding, have asked for the introduction of competition into inmate calling services. In every other segment of the telephone industry, competition has very effectively lowered the cost of long distance calling. The cost of calling has tumbled everywhere over the last few decades except within prisons like the ones in the referral case. This asdavit will demonstrate that it would be economically and technologically feasible to introduce competition into prison inmate 18 calling services, consistently with all legitimate security and other penological requirements, thereby allowing for more options for families and ultimately resulting in lower rates. AS O t h e r observers have noted, the penological justifications for exclusive inmate calling service arrangements are factually unsubstantiated and pretextual." 40. The best way to get competition into inmate cal!ing services, and thereby benefit prisoners' families or other telephone service bill payers receiving calls from prisoners, vould be to allow inmates to choose among different IXCs; in effect, to create an equal access multi- carrier platform for each prison calling system. One possible mechanism for such a system will be discussed in more detail below. One question that is routinely asked by family members is why the prisons do not allow the use of commercial calling products, such as I-800-COLLECT or commercial debit cards. As described above, these commercial products allow the reorigination of calls. Prison administrators claim that the prison system needs to maintain control of the call from beginning to end for security reasons and that if a prisoner were allowed to use a commercial calling platform that allows the re-origination of calls, many of the penological safeguards discussed above would be bypassed, thereby making abuses possible. Leaving aside the merits of such claims and the potential use of techniques to maintain control over reoriginated calls, it would be feasible to allow multiple lXCs to offer services to any given pnson facility, and thereby bring the benefits of competition to prison inmate calling, while meeting all of these objections to the use of standard commercial calling products. 41. Following is one such mechanism that could be used to allow multiple carriers to compete within a prison calling system. There may be other mechanisms that will work, but the goal of this example is to demonstrate that competition is technologically and economically feasible, consistent with all of the security and other penological concerns discussed above. The See Justin Carver, An Eficiency Analysis ofContractsfor rhe Provision ofTelephone Services to Prisons, 54 Fed. Comm. L.J. 391,394 (2002) ("Carver"). A copy ofthis article is attached Exhibit 4 hereto. lo 19 , primary reason to provide for multiple carriers is to allow choice, thereby creating competition and the resultant lower rates. The FCC has spent considerable effort in the last twenty years to ensure that consumers everywhere have choice, and the presumption has always been that choice is beneficial. The evolution to more choices for long distance and local calling has led to lower prices, creative new products and overall greater satisfaction among telephone subscribers in the U.S. However, the families of prisoners in the CCA and other prison systems are the last group of telephone consumers in the U.S. who are still being denied choice. 42. One way to allow competition in prison inmate long distance calling services would be to authorize a multi-carrier platform provided by an underlying service provider in each prison that would supply the prison telephone system hardware and software. This underlying, provider would supply the switch and software, the phones, the management control system and any other required components of the prison calling system. The various carriers offering competitive long distance services to the inmates would interconnect with the underlying carrier’s prison telephone system. The underlying sewice provider could be compensated for providing the prison telephone system by a charge imposed on the interconnecting competitive carriers, based on the costs of installing and operating the prison system. This charge would compensate the underlying carrier for the switch, software, maintenance and operating costs for providing the system, but would not include the cost of providing the long distance transmission. The underlying provider could recover its costs through a per minute charge levied against all long distance calls placed from the prison and carried by one of the competitive service providers. As discussed below, these costs would range from 4.4 to 5.9 cents per minute. 43. In order to implement a long distance multi-carrier choice through a prison telephone system switch, each competitive carrier should be required, at its own cost, to provide long distance transport facilities to the prison switch. These facilities would typically consist of T-1 trunks (a digital transmission link with a capacity of 1.544 Mbps, enough for 24 simultaneous voice conversations), that go from the prison switch to the IXC’s point of presence 20 (“POP”). Each 1XC also would be required to pay the underlying carrier for the fixed cost per minute of providing the prison system. Each 1XC would then be free to compete on pnce and service to get the prison calling business. Each 1XC would be free to charge any rate it chose as long as it agreed to first pay the underlying provider to interconnect with the prison system. In such a competitive system, the underlying provider could also be allowed to offer a competitive long distance product along with the other competitive camiers, as long as it also covered its basic per minute system fee on an imputed basis. 44. In this way, prisoners, or the prisoners’ families, would be able to select the carrier of choice from a menu of available interconnecting carriers. Today, the prisoners get a prompt in most prisons to choose between debit calls and collect calls. In the competitive environment, they would get an additional prompt asking them to select a carrier for whichever type of call they elected to use. Prisoners could also be allowed to “choose” a carrier on a more permanent basis in order to avoid going through the camer selection screen for each call. The competitive carriers would be free to market directly to the people who actually pay for the long distance calls made by prisoners -- in most cases, the families. Families could elect to purchase calling products from the competitive carriers offering the best deals. Since there is such a large volume of calls made from prisons, a number of different carriers could be expected to compete for the business from each prison. There is little doubt that such side-by-side competition among multiple IXCs would lead to much lower long distance rates than those in place in these prisons today. 45. It is important to note that even in such a multiple-provider system, all of the penological requirements discussed above would continue to be met. The softwarein the prison telephone system switch would continue to provide all of the necessary security functions, just as it does today. Adding a choice of carrier to the calling process would not affect or modify any of the penological safeguards built into today’s systems. Prisoners would still place calls under the complete control of the prison phone system. This system would maintain control of the entire 21 call using all of the rules and safeguards in place today. A call would only be completed after it could be ascertained that the prisoner was not making unauthorized calls and that the carrier was being paid for the call. Because the long distance provider carrying the call would be interconnected at the prison system switch, control over the entire call could be maintained, just as it is today. At the end of each call, the underlying service provider would assess the system fee to the IXC canying the call. The IXC that handled the call would then charge the inmate’s debit account for the call, including the underlying system fee. 46. There have been other proposals in the past that have suggested ways to offer competitive calling in prisons. Some of them involve handing off inmate calls to another network not directly interconnected with the prison telephone system. The proposal set forth in this affidavit would require that the underlying carrier process a call up to the point where the call was handed off to an IXC for completion. That hand-off would take place at the switch exclusively serving, and under the administrative control of, the prison. There would be a requirement that calls remain under the control of the initial switch for the entire duration of the call. Competitive carriers would be prohibited from transferring any inmate calls to other IXCS or to any carriers other than the terminating LEC serving the called party. The interconnecting carriers thus would be in the business of completing long distance calls, but, because they would take the calls at the prison system switch and deliver them to terminating LECs, they would not have the ability to bypass any of the penological requirements of each prison, which would be implemented and enforced by the underlying switch provider, just as Evercom enforces those requirements today. 47. As demonstrated above, this competitive proposal would be technically feasible and would not be a major burden for carriers, it would safeguard the rights of consumers, and it would maintain all of today’s penological safeguards. It would also attract numerous additional competitive IXCs to compete for long distance inmate calling service. Most IXCs would view a 22 prison system, with its many concentrated minutes, to be a premium opportunity to be pursued. If we build a competitive environment, the carriers will come. 48. Implementing such a competitive system would cause a hndamental change in the way that the underlying provider does business. Allowing multiple carriers to compete would require some hardware and software changes to the prison calling systems. While these changes are relatively minor, there would be some small incremental start-up costs in implementing competition. In the past, the FCC has not hesitated to impose requirements that increase carriers’ short run costs when such changes were necessary to facilitate competition. There are numerous examples of FCC orders that have required caniers to expend money for capital and software. In recent years, we have seen orders requiring the provision of “LIDB (line information database) functions,” payphone call tracking’‘ and others. As will be demonstrated below, the capital required to implement a competitive solution is too insignificant to be a barrier to change, especially given that the underlying telephone system provider would be able to recover the complete cost of providing the prison calling system from each call, including a reasonable profit. 49. There is no question that introducing competition into the prison calling system is in the public interest. Regulatory bodies have often assumed that exclusive inmate calling service arrangements were required in order to meet legitimate security and other penological See generally Policies and Rules Concerning Local Exchange Carrier Validalion and Billing Information for Joint Use Calling Cards, 7 FCC Rcd 3528 (1992) (subsequent history omitted) (requiring LECs to provide non-discriminatory access to the validation and screening information located in the LECs’ line information database so that IXCs can accept and complete calling card calls). “ See Implementation ofrhe Pay Telephone Reclassification and Compensation Provisions of the Te[ecommunicationsActof I996,l I FCC Rcd 20541,20588,20590-91 (1996) (subsequent history omitted) (requiring IXCs to track calls they receive from payphones in order to ensure fair compensation for each payphone call, despite the IXCs’ claims that implementing tracking mechanisms would require significant expenditures of capital). l2 23 requirements, and this assumption has contributed to past rulings that have upheld the current prison inmate calling regime. In the past, that assumption might have been valid. At this point, however, as explained above, it is clear that competitive long distance inmate calling services are perfectly compatible with security, antifraud and other penological requirements. Given that it is typically non-inmates -- families and attorneys -- that ultimately pay for inmate long distance calls, it must be concluded that these consumers deserve the same rights to choice as do all other callers. Moreover, lowering the cost of prison inmate calling would bring about penological benefits, such as improving family relations for prisoners and improving the chance of successful rehabilitation and integration into the community after the sentence is completed. Finally, as demonstrated below, the competitive system envisioned here would be economically feasible. VII. THE COST OF PRISON INMATE CALLING 50. This section will explore the potential cost of providing the competitive prison system described above. The goal in this section is not to specifically identify the precise costs of providing inmate long distance calling services. Rather, this section is intended to examine whether such a system would be economically feasible by analyzing the potential range of costs, particularly the costs of the underlying system that would be used by all of the competitive IXCs.” As will be demonstrated, even the most conservative estimate of the cost of implementing this proposal is so reasonable that any objections to it based on cost burdens could not be valid. Several different sources have been reviewed in analyzing the costs that would be incurred by the underlying system provider, including Evercom’s public financial data. Evercom is a useful source of data, not only because it is the primary provider involved in the referral case, but also because it is one of the largest prison inmate calling service providers in the country. l3 The cost of providing the long distance segment of the service will also be discussed, but only as a comparison with other estimates filed with the FCC by inmate service providers. The primary focus of this analysis will be the costs of providing the underlying telephone system. The costs of the long distance segment “wash out” of any economic feasibility analysis because competition in the provision of the long distance segment of the inmate service will quickly reduce the rates charged by the competitive long distance carriers to the most efficient cost. 24 Cost data provided to the FCC in filings by inmate telephone calling service providers also provide confirmation of the conclusions reached below. 51. The following calculations are intended to quantify a range of rates that would need to be charged by the underlying system provider under the proposal. These rates are intended to be profitable for the underlying system provider; thus, the rates include a profit margin in addition to costs. Because Evercom is the primary provider in the prisons under examination, the first set of calculations is based upon Evercom’s costs as an example of how such costs might be calculated. The costs for other experienced providers should be similar. 52. Based on my knowledge of the industry, financial reports from Evercorn,“ and evidence about Evercom’s and other inmate service providers’ costs from the public record in other cases, the basic components of prison system costs are defined below. The costs of a prison calling system include the hardware that makes up the prison phone system, maintenance, billing, administration and sales, uncollectibles, and the cost of providing long distance transmission and local termination. 53. The hardware in a prison calling system consists of the switch, the recording system, the monitoring interface and the cost of telephones in those cases where the phones are not provided by the prison, The cost of switching hardware has dropped tremendously over the past few years. There are two primary types of switches that can be purchased -- carrier class switches and enterprise switches.” A carrier class switch must be able to interface with the l4 Evercom’s December 31,2000 Independent Auditor’s Report by Deloitte & Touche LLP is an attachment to the 10-K Report, relevant portions of which are attached as Exhibit 2 hereto. I have also reviewed Evercom’s 10-Q Report for the quarter ended September 30,2001, Evercom’s 10-K Report for 2000 is the most recent SEC report covering a full year, however. Because the September 30,2001 10-Q Report covers only one quarter and shows little change from the data in the 10-K Report relevant to this analysis, this affidavit relies on the more complete IO-K Report. I5 As used in fhis discussion, the term “enterprise switch” has a different meaning from the way that term is used in the FCC’s Triennial Review Order. See Review of the Section 251 Unbundling Obligations of Incumbent Local Exchange Carriers, Report and Order and Order on 25 larger public switched telephone network and is generally used only by LECs. The switches required for prisons are enterprise switches, and are somewhat analogous to the large PBXs used by many businesses. Because enterprise switches are smaller and simpler than carrier class switches, they are far less expensive. A switch has several major components -- the line side connections, the trunk side connections, the operating software and a user interface. The line side connection is the hardware that interfaces with the telephone sets that use the switch. From the line side perspective, prison switches are relatively small switches. According to data included in the June 2,1997 BOP RFP, the average federal prison has just under 44 telephone sets.16 The trunk side connection is the interface to the public telephone network. As described elsewhere in this paper, these switches today only require only a handful of T-1 connections to the public switched telephone network -- making these relatively small switches. The most costly feature on a prison switch is the specific software that allows the switch to meet the various penological requirements listed earlier. If one were to develop such a switch for only one prison, such software would be quite expensive. However, most prison providers supply switching to many prisons, thus lowering the cost of this software on a per location basis. Evercom supplies switches to about 2,000 prisons, and thus its software cost is spread over many locations and i s relatively inexpensive per switch. 54. The cost of switching has dropped drastically over the last few years. As an example, a small Class 5 carrier grade switch that can handle 5,000 lines would have cost $2 - million $3 million just a few years ago. In the last several months, such switches have been available from every major switch manufacturer -- Lucent, Nortel and Siemens, plus a number of the new soft switch manufacturers -- for under $600,000, due in part to the collapsing of the Remand and Further Notice of Proposed Rulemaking, CC Docket No. 01 -338, FCC 03-36 (Aug. 21,2003). There, “enterprise switch,” see id at q 428 n. 1335, refers not to a type of switch but to any carrier class switch used by a CLEC to serve large business customers. Id at nI419-22. Here, it refers to the type of switch used by large non-carrier entities. l 6 See BOP RFP, Exhibit J-1, attached hereto as Exhibit 5 (3850 telephones in 88 prisons). 26 lelecom sector and resulting overcapacity. Even as far back as 1999, this Commission calculated that camer class switches cost less than $500,000.’’ Switch costs have fallen considerably since then, and especially since the collapse of the high-tech bubble. Recently, observers have found carrier switches advertised for as little as $lOO,OOO.’* As noted above, enterprise switches are far simpler and less expensive than carrier switches. Based on my recent experience in pricing switches for clients, a conservative current estimate for an enterprise switch with the features needed for a prison telephone system, including monitoring and recording equipment, would be approximately %350,000. 55. Moreover, there is a trend in the switching world that is going to lower the cost of switching even further in the near future, and this innovation is particularly relevant to prison calling systems. There are a number of new switches in the market referred to as soft switches. A soft switch is a switching device that separates the various switching functions into separate components. The major components of a soft switch are referred to as the call processor, the media gateway, the signaling gateway and the feature sewer. The call processor is the same as the core of the older switches and is the device that actually switches and routes calls. The media gateway is a device that allows for the interface to various other switching platforms. There is no real analog to the media gateway in older switches -- they were proprietary and self-contained. The signaling gateway allows the switch to interface with the SS7 network and thus use advanced features such as caller ID. Finally, the call feature server is the device that contains the unique systems and programs that operate the various features on the switch. The feature server in a soft switch would contain all of the unique penological features that distinguish prison See Implementation of the Local Competition Provisions of the Telecommunications Act of 1996, Third Report and Order and Fourth Further Notice of Proposed Rulemaking, 15 FCC Rcd 3696,3812-13 (1999). I’ “State Regulators Courted by ILECs and IXCs on WE-P Role,” Communications Daily, Apnl 28,2003, at 2 (comment attributed to Link Hoewing, Verizon Assistant Vice President-Internet), attached hereto as Exhibit 6. 27 switching systems from other systems. The availability of soft switches is relevant because they will allow a further large reduction in the cost of providing prison calling. With a soft switch platform, a prison provider could serve many prisons from one switching platform. For example, it would need only one feature server and one signaling gateway at some central site in the U.S. At each prison, it would need only the call processor. Such a distributed network would probably represent an additional 50 percent reduction over today’s cost of switching, and this distributed architecture is ideally suited for applications like prison calling that require services at many different locations. Thus, any costs quoted in this paper can be expected to further decrease over time as technology takes yet another leap forward. 56. Service providers like Evercom are often required to provide the telephone sets as part of providing service to a prison. The phones used by prisons are more expensive than the average phones used by most business and residential users. Prison phones are more like payphone sets, in that they are built to stand up to heavy use. There are a vast number of types of payphones available in the marketplace. Payphones vary in the functions they must perform and in the ruggedness of the environment for which they are constructed. Prison payphones can be of the “dumb” variety, ie.,they do not need to be able to perform such functions as coin counting. “Smart” telephones that process coins cost more than dumb phones that do not. Additionally, a prison phone does not need any of the advanced features often seen on payphones today, such a scanner that can read in calling card information from a caller. Prison payphones can be ofthe most basic type, in that they require a keypad on which to dial the desired numbers, and, in the case of the competition proposal presented in this affidavit,to choose the desired IXC, but very little else. The payphone industry is very competitive, and there are a large number of manufacturers and thus a wide range of prices. Eased on recent market research, there are 28 payphones that would work in a prison environment that are available from as low as $280 up to $550, with an average prison payphone price of 57. In order to translate that per-phone set estimate into an estimated payphone equipment cost for a typical prison, it is necessary to examine prison inmate telephone data. The data in the BOP RFP shows that the federal prison system has one telephone for every 25 prisoners?’ Using a subset of the federal data, an attachment to a report from the Virginia State Corporation Commission” shows a ratio of 1 telephone per 26 inmates?2 The three sample CCA prisons served by Evercom have an average capacity of 1,743 prisoners2’ Using that sample, applying a ratio of one phone per 25 inmates yields an average of 70 telephones per prison. Applying the $400 average payphone cost to the estimate of 70 phones per sample prison yields a total payphone cost of $28,000 per prison. Adding that cost to the $350,000 switch estimate above results in an average total equipment cost per prison of $378,000. l9 Attached as Exhibit 7 are sample advertisements from payphone websites for equipment that would be suitable for inmate services showing prices as low as $149. An estimate of $400 for an inmate telephone set is also consistent with the Commission’s estimate of $225 for a coinless payphone for general use in the Third Report and Order, and Order on Reconsideration of the Second Report and Order, Implementation ofthe Pay Telephone Reclassification and Compensation Provisions of rhe Telecommunications Act of 1996,14 FCC Rcd 2545,2622,2634 11.404 (1999), affdsub nom. American Pub. CommunicationsCouncil v. FCC,215 F.3d 51 (D.C. Cir. 2000). See BOP RFP, Exhibit J-1, attached hereto as Exhibit 5 . The total number of federal prisoners shown in this chart is 97,579, and the total number of phones is 3,850, or 25.35 prisoners per phone. 2o *’ Div. of Communs., Virginia State Corp. Comm’n, Report on Rates Charged to Recipients of Inmate Long Distance Calls (2000) (“Virginia Inmate Report”), attached hereto as Exhibit 8. Analysis of the Federal Bureau of Prisons Inmate Telephone System and Applicability to the California Department of Corrections, Executive Summary at 1 (“CDC Report”) (attached to Virginia Inmate Report) (see Exhibit 8). 2z ” The three prisons are as follows: Central Arizona Detention Center - 2,304, Torrence County Detention Facility - 910, and Northeast Ohio Correction Center - 2,016. See Correctional Corporation of America web site, at http://www.correctionscorp.com/map.html. 29 58. In deriving an estimate of total operating costs, the cost of the switch and the telephones is reflected as depreciation expense. Evercom’s audited financial statements show that it uses straight-line depreciation and that it uses depreciation lives ofbetween 3.5 years and 7.5 years for telephone system eq~ipment.’~In the cost calculation set forth below, a depreciation life of 5.5 years is used, which is in the middle of Evercom’s range of depreciation lives. This depreciation life also aligns very well with the typical length of a typical inmate service provider contract with a prison system, which is approximately five years,2’ and with data filed by the Inmate Calling Services Providers Coalition (“Coalition”): of which Evercom is a member.2’ 59. Another major cost of providing service is maintenance expense. Maintenance expense includes spare parts, repairs and the personnel required to answer customer questions and keep the systems working. Most companies budget maintenance as a percentage of equipment costs. This ratio can be used for Evercom by taking the maintenance expense figure set forth in its 10-K Report. There, Evercom states that its maintenance expense has been steady See 10-K Report at Part 11, Item 8, Notes to Consolidated Financial Statements, Note 1, “Property and Equipment,” attached hereto as Exhibit 2. 24 25 See Carver, 54 Fed. Comm. L.J.at 395 n.20, attached as Exhibit 4 hereto. 26 The Coalition uses a depreciation life of five years in its calculations of equipment costs. See, e.g., Don J. Wood et ai., “Inmate Phone Local Call Cost Study” D.3.3 (May 24,2002) (%mate Cost Study”) (attached to Comments of the Inmate Calling Service Providers Coalition, Implementation of the Pay Telephone Reclassfleation and Compensation Provisions ofthe Telecommunications Act of1996 CC Docket No. 96-128 (May 24,2002) (“2002 Coalition Comments”)). The relevant portions of the 2002 Coalition Comments are attached hereto as Exhibit 9. 27 See exparte letter from Robert F. Aldrich, Counsel to the Inmate Calling Service Providers Coalition, to Magalie Roman Salas, Secretary, FCC, at attachment captioned “Independent Inmate Phone Service Providers (as of May, 2000)” (May 9,2000), the relevant portions of which are attached as Exhibit 10 hereto. 30 and varies little over time?’ The amount of maintenance expense equates to approximately 13.2 percent of equipment c0sts.2~This is the ratio used for estimating maintenance expense in the operating cost calculations set forth below. 60. Another cost that prison providers face is billing costs. Most inmate calling service providers do not have direct billing relationships with the family members of prisoners, or others receiving collect calls from prisoners, across the U.S. Instead, the inmate service providers typically pay a third party, usually the Regional Bell Operating Company or other LEC serving the party paying for an inmate call, to bill such parties for them. In its 10-K Report, Evercom states that billing costs paid to third parties vary between 2 percent and 3 percent of the revenues billed?’ Accordingly, in the cost calculations set forth below, a figure equivalent to 2.5 percent of revenues is used to estimate billing costs, It should be noted that significant billing costs apply only to collect calling. The only billing cost required for a debit call is the cost of electronically extracting revenues from the pre-paid debit account, an insignificant expense per transaction. Given that Evercom provides both collect and debit calling to inmates, its reported billing costs represent an average for both types of services. Thus, its actual billing costs for collect calling only are probably much higher than 2.5 percent of collect calling revenues. 61. In order to derive an estimate of billing costs, it is necessary to compute a composite average per-minute revenue amount to which the 2.5 percent ratio can be applied. The ratio of collect to debit calling varies from prison to prison, although there is still more collect calling than debit calling. For simplicity, it is assumed that, once this competitive *’10-K Report at Part 11, Item 7, “Field Operations and Maintenance,” attached hereto as Exhibit 2. 29 Evercom’s 10-K Report shows maintenance expense of $6.67 million (in Part 11, Item 6) and total equipment costs of $50.39 (in Part 11, Item 8, Note 4 to Consolidated Financial Statements, “Property and Equipment”), a ratio of 13.2 percent ($6.67M/ 650.39M). See Exhibit 2. IO Id. at Part 1, Item 1, “Billing Arrangements.” 31 . proposal is adopted, it would be reasonable to expect that half of the calls will be debit calls and half will be collect. Using Evercom’s tariffed rates during a portion of the period it was providing service to the CADC, TCDF and NOCC -- a debit card rate of $0.65 per minute and a collect calling rate of $0.59 per minute plus a $3.95 per collect call charge -- and assuming a tenminute call, the composite calling rate charged to inmates would be $0.82 per minute in the cost calculation below.’’ If prisons were to switch to debit calling only for inmate calls, billing costs would essentially disappear. 62. Another major cost for inmate service providers offering collect calling is the cost of uncollectibles, as mentioned previously. Evercom does not show uncollectibles as a separate item in the financial statements in its 10-K Report. Evercom does state in the 10-K Report, however, that although inmate prepaid calling services have minimal uncollectible expenses:’ called parties’ failure to pay for inmate collect calls place unique demands on this sector of the industry.’-’ Data provided by the Coalition in an exparfe letter filed in April 2000 with an 31 During the period from September 14, 1999 to the detarifing of Evercom’s rates onJune 27, 2000, Evercom’s standard tariffed debit card service rate, which applied to its Inmate-only Debit Account Service, was $0.65 per minute. See Evercom Systems, Inc. Tariff FCC No. 1, Section 3.4.1 (effective Sept. 14, 1999), and FCC Public Notice, Tariff Transmittal Public Reference Log (June 29, 2000), and its standard tariffed rate for interstate, interexchange operator assisted inmate calls, including collect calls, was $0.59 per minute plus a $3.95 service charge. See Evercom Systems, Inc. Tariff FCC No. 1, Section 3.5 (effective Sept. 14, 1999). For a tenminute collect call, that comes to $0.99 per minute for collect calls. The average of $0.65 and $0.99 is $0.82 per minute. The relevant portions of Evercom’s Tariff No. 1 are attached as Exhibit 1 1 hereto. It should be noted that in the event that this competitive proposal is adopted, actual inmate rates will be far lower than they have been in the recent past. The 82 cent rate is used here purely as a conservative estimate. As demonstrated below, the cost of billing drops out in deriving the cost of providing the underlying inmate telephone system. 10-K Report at Part I, Item 1, “Products and Services” (“Prepaid Services”), attached hereto BS Exhibit 2. 32 33 Id. at Part I, Item 1, “Industry Overview.” 32 attached analysis of the cost of providing a 12-minute local inmate collect call (“Coalition Cost Analysis”), show a typical uncollectibles rate for inmate collect calling of 14 percent of revenues, and, in some cases, over 23 percent?4 Accordingly, the cost calculation below uses a 15 percent uncollectibles rate to apply to collect calling. Because there are virtually no uncollectibles from debit calls, for which revenue is collected directly from prepaid accounts, however, the overall uncollectibles rate must be adjusted to take into account a mix of collect and debit calling. Using the assumption discussed above that half of the calls will be debit calls and half will be collect, the composite uncollectible rate would be 7.5 percent oftotal revenue, and that rate is applied to an assumed composite calling rate of 82 cents per minute in the cost calculation below?5 63. One of the largest costs incurred by inmate calling service providers is the category of “Administration, General and Sales” expenses. On Evercom’s financial statements, this includes a broad category of costs. In addition to the cost of the salespeople who sell to prisons and related expenses, it includes the following types of costs: executive salaries, board of director expenses, accounting, legal, human resources, computer networks, insurance, the cost of running corporate headquarters and other overhead costs. In Evercom’s case, for 2000, these ~ a ratio of 2.6 times costs were roughly 2.6 times greater than maintenance c o ~ t s . )Accordingly, Exparre letter from Jacob S. Farher, Counsel to the Inmate Calling Service Providers Coalition, to Magalie Roman Salas, Secretary, FCC, at attachment, “Inmate Service Fee - 12 Minute Local Call Cost Analysis” (April 6,2000) (uncollectibles rate for inmate collect calls of 14 percent) (“Coalition Cost Analysis”), attached hereto as Exhibit 12. See also, 2002 Coalition Comments at 3-4; Inmate Cost Study at Workpapers labelled Input C, Input G, Input H, Input N, Input 0 and Input P (showing inmate collect uncollectibles rate of over 23 percent), and Input Q (showing uncollectibles rate ofover 19 percent), attached hereto as Exhibit 9. ’’As explained below, the cost of uncollectibles, like billing costs, drops out in deriving the cost of providing the underlying inmate telephone system, since the underlying system operator recovers its costs through rates charged to the competitive interconnected long distance carriers terminating each call, obviating any billing or uncollectibles costs. IO-K Report at Part 11, Item 6 (showing maintenance costs of $6.7 million and selling, general and administrative costs of $17.7 million). See Exhibit 2. 36 33 . maintenance costs is used to represent an allocation for administration, general and sales expenses in the cost calculation below. It should also be noted that the Coalition has represented overhead expenses to be just slightly less than 2.5 times maintenance expenses in their filings with the FCC.” 64. Another cost of providing long distance inmate calling service is the cost incurred in the transmission and termination of the calls, Le., the cost of long distance transport to the called party’s local calling area and the cost of terminating each long distance minute at the final destination. In the competitive scheme described here, this cost would be borne by the competitive interconnecting carriers, rather than the underlying inmate telephone system provider. For long distance transport, carriers typically use T-1s or larger circuits. In this case, such circuits would begin at each prison switch and reach to the nearest POP on the interconnecting carrier’s toll network. Using the average of 70 telephones in each prison, discussed above, a service provider would need approximately three T-1s for transport to its long distance network. Because a single T-1 has 24 voice channels available, three T-1s would allow for 72 simultaneous calls. Based on my recent experience, an average T-1circuit costs around $400 per month. T-1 costs vary drastically across the U.S. by market, but $400 is a conservatively high estimate of the composite monthly cost of T-1s across the country. Accordingly, an annual transport cost of $14,400 is used in the cost calculation below.” 65. Evercom, like most inmate service providers and other 1 x 0 , does not own a nationwide long distance network. It therefore has to pay a wholesale IXC to cany each long distance inmate call to the recipient’s local calling area and to arrange for local terminating See Coalition Cost Analysis (showing overhead -- $0.224 per call -- equal to 2.49 times maintenance -- $0.09 per call -- for an inmate local collect call), attached hereto as Exhibit 12. 3’ 38 Four hundred dollars per month for an average T-1 circuit is a rate that would be available O d Y to a carrier purchasing a fairly large volume of capacity. That rate multiplied by three circuits multiplied by 12 months equals $14,400. 34 ~ .. -- access to the recipient. Such wholesale long distance contracts are routine for long distance resellers like Evercom, which typically use the underlying network of one or more large IXCs, such as AT&T, MCI (formerly known as WorldCom) or Sprint.” A carrier would have to pay no more than 2.5 cents per minute to get long distance calls terminated through one of these facilities-based 1XCs. As far back as 1996, the Coalition estimated that its members’ long distance transmission cost was approximately 2.5 cents per minute.’O Since then, long distance wholesale costs have declined drastically, and wholesale long distance terminating rates, including terminating access charges paid to the terminating LEC, are now as low as 1.8 cents per minute for large volume users,4’ Accordingly, the 2.5 cents per minute rate will be used as a conservative estimate of long distance transmission plus termination in the cost calculation below, although these costs are certainly lower today. 66. Finally, it is necessary to estimate the volume of long distance usage from the average prison. Based on available data, a low and a high estimate of calling volume can be derived in order to develop a range of possible per-minute costs. This exercise also shows that costs decrease with increased calling volume. The low estimate assumes that each prisoner averages one hour of calling per week, and the high estimate assumes that each prisoner averages 39 It should be noted that, although resellers obtain facilities from other carriers, a reseller carrying an inmate call would nevertheless be fully capable of retaining complete control over the entire transmission of the call. 4n See Comments of Inmate Calling Services Providers Coalition at 8 n.14, Implementation of the Pay Telephone Reclasslfication and Compensation Provisions ofrhe Telecommunications Act of 1996, CC Docket No. 96-128 (July 1, 1996) (“1996 Coalition Comments”), attached hereto as Exhibit 13. AmeriTel Pay Phones, Inc. and lnVision Telecom, Inc., see id. at 1 n.1, were predecessors to Evercom. See 10-K Report at Part I, Item 1, “General,” attached hereto as Exhibit 2. Of that 1.8 cents per minute, only .71 cents per minute was accounted for by local terminating access charges as of June 2003. See Industry Analysis and Technology Division, Wireline Competition Bureau, Federal Communications Commission, Trends in Telephone Service at Table 1.2 (August 2003). The relevant portions of the FCC’s report are attached hereto as “ Exhibit 14. 35 1.5 hours of calling per week. The low estimate is derived from a report prepared by the California Department of Corrections concerning the BOP inmate telephone system, which estimated that BOP inmates average 242 minutes of calling per month (approximately one hour per week).” The higher estimate is derived from the BOP RFP discussed above, which indicates that the average federal prisoner makes 1.4 hours of long distance calls per week.” 67. There is one additional cost of prison calling that is not included in these cost figures. Many prison systems charge a commission to inmate service providers as a cost of doing business in the prison. As this Commission reiterated in the Inmate Payphone NPRM, location rents (i.e., commissions) are not legitimate costs of providing service; rather, they are an element of profit.“ Additionally, not all prisons systems charge commissions. For these reasons, commissions have been excluded from these cost calculations. Commissions have also been removed from the comparable costs figures cited from other FCC filings discussed throughout this affidavit. It should be noted that, although commissions are not a legitimate expense of inmate calling services, as a practical matter, they nevertheless inflate the rates charged by Evercom and other service providers. According to the Coalition Cost Analysis, commissions amount to 30 percent of the total cost of inmate calls, including all profit.“5 If that is true, commissions add another 43 percent ( i e . ,30% / 70%), to total costs before commissions, which must be presumed to exert a commensurate upward pressure on calling rates. 42 CDC Report, Executive Summary at 1 (attached to Virginia Inmate Report) (attached hereto as Exhibit 8). Exhibit 5-2 of the BOP RFP shows an average of 4,991 minutes per year of telephone usage per inmate, of which 749 minutes are local calls, for an average of 4,242 long distance minutes per year, which is slightly under 1.4 hours per week of long distance calling. Exhibit 5-2 is attached hereto as Exhibit 15. 44 Order on Remand & Notice of Proposed Rulemaking, Implementation of fhe Pay Telephone Reclassijication and Compensation Provisions of the Telecommunications Act of 1996, 17 FCC Rcd 3248,3255 & n.49 (2002) (“Inmate Payphone N P R W ) . 45 See Coalition Cost Analysis, attached hereto as Exhibit 12. 36 68. Following is a calculation of the total cost per minute of running a prison calling system using all ofthe assumptions and inputs discussed above. Because costs vary by call volume, one can easily postulate that costs also vary by prison size, with larger prisons having lower per minute costs. As noted above, the three sample CCA prisons currently or previously served by Evercom have an average population of 1,743 prisoners. The cost calculation is set forth in two columns, with the first column showing low prisoner calling at one hour per prisoner per week and the second column showing 1.5 hours of calling per prisoner per week. Each entry will first be calculated on an annualized basis, rounded off to the nearest thousands of dollars, and then divided by the low and high call volume estimates in order to derive low and high perminute c o ~ t s . ~ Estimate of Evercom Costs Low Estimate High Estimate Average Number of Prisoners Average Calling Per Prisoner Per Week 1,743 1.ohr 1,743 1.5 hr Calling Hours Per Week Annual Minutes 1,743 5,438K 2,615 8,157K Operating Costs Wholesale Long Distance and Termination4’ Transport Total Long Distance Costs $ $ $ 136K 14K 150K $ $ $ 204K 14K 218K 46 Because of the unavoidable ineficiencit ring extremely small facilities, this analysis may not apply to locally-administered jails and other low-capacity prison facilities. 47 The estimated wholesale cost of long distance transmission and termination of 2.5 cents per minute was multiplied by the low and high annual estimated minutes to derive low and high annualized totals. 37 Depreciation4* Maintenan~e~~ Billing*' Uncolle~tibles~' Administration & SalesJ2 Total Expenses Total Cost per Minute 69. $ $ $ $ $ 69K 50K 334K 130K $ 69K $ 50K $ 167K $ 502K $ 130K $ 844K $1 ,I 36K $ 0.155 S 0.139 lllK This demonstrates that the total cost of providing long distance inmate calling service, before profit and taxes, is somewhere between 13.9 cents and 15.5 cents per minute. This is far below the revenues providers like Evercom collect for interstate calling, as discussed above. 70. From these total cost estimates, it is then possible to break out the cost of providing just the underlying inmate telephone system by eliminating the long distance and other 48 As described in paragraph 58, depreciation is based on an average useful life for all equipment of 5.5 years. The equipment costs are as follows: Hardware Switch Telephones Total Hardware $ 350K $ 28K $ 378K ($378,000/5.5 = $69,000). 49 As described in paragraph 59, maintenance is estimated at 13.2 percent of the total equipment costs. so Billing costs are estimated to be 2.5 percent of billed revenues per paragraph 60. These amounts were calculated by assuming that average billing is 82 cents per minute for the assumed minutes multiplied by 2.5 percent. in paragraph 62, uncollectibles are calculated by taking 7.5 percent of total revenues, based on a composite revenue estimate of 82 cents per minute. " As explained As explained in paragraph 63, general, administration and sales expenses are estimated by multiplying maintenance expenses by 2.6. I2 38 costs that could be avoided by a firm acting solely as the provider of the underlying system. For example, the actual cost of providing the long distance transmission -- both the network costs per minute and the transport -- would become the responsibility of each competing interconnecting IXC. Also, under the system described here, because the underlying system provider would bill its per-minute charge to the competitive interconnected IXC terminating each call, the underlying system provider would have no billing or uncollectibles costs. Moreover, because most calls would become prepaid debit calls under a competitive system, the cost of billing and the avoided costs, the costs of uncollectibles would largely disappear in any e ~ e n t . ’Eliminating ~ providing the underlying inmate telephone system for long distance service is as follows: Low Estimate High Estimate Total Expenses (from above) $ 844K $1,136K Less Avoided Costs Less Long Distance Costs Less Billing Less Uncollectibles Total Underlying System Costs $ $ $ $ 150K lllK 334K 249K f 218K $ 167K $ 502K $ 249K $ 0.031 Underlying System Cost per Minute This demonstrates a range of costs for the underlying system provider of 3.1 cents to 4.6 cents per minute. Note that the cost per minute decreases with a greater calling volume. 71. There are two possible categories of costs to add to these figures. First, it is reasonable to allow the underlying system provider to make a profit. In the wholesale long distance business, a reasonable profit for most carriers, after all costs, is roughly one cent per ’’ It should be noted that in the BOP inmate telephone system, 92 percent of the long distance calls are prepaid debit calls, and the rest are collect. Virginia Inmate Report at 14, attached hereto as Exhibit 8. 39 minute. This estimate of profit compares well with the profit estimated by the Coalitions4and thus is a reasonable profit component. Along with profit comes the need to recognize the cost of income taxes. Evercom is a relatively young company and, as such, it has yet to pay any significant income taxes.” For other providers, however, and, eventually, for Evercom, there would be income taxes to be recovered. While taxes for most providers are theoretically as much as 40 percent (when using the maximum possible tax rate), most telecommunications carriers pay less than a full tax rate because of various tax loopholes and write-offs. A tax level of 25 percent is typical for the industry over the long run. Accordingly, assuming profit of one cent per minute, income taxes might eventually be around $0.0025 per minute, or $0.003 per minute, rounded off to the nearest tenth of a cent. Adding $0.013 per minute for income taxes and profit, the reasonable rate for providing the underlying inmate telephone system is calculated to be between $0.044 and $0.059 per minute. 72. These calculated costs are comparable to the costs of providing inmate calling services as reflected in the Coalition Cost Analysis, which is attached hereto as Exhibit 12. That analysis shows a total cost, less commissions, of $1.508 for a 12-minute local call, or $0.126 per minute.56 The basic costs for providing local inmate collect calls are very similar to the costs of providing long distance inmate collect calls. The difference between the two categories, from a cost perspective, is the difference between the cost of transport and termination of the long distance call and the local service charge for canying the local call to the public telephone Cost Analysis (showing profit of 8.2 cents on a 12 minute local inmate collect call), attached hereto as Exhibit 12. ” See Coalition -- See, e.g., 10-K Report at Part 11, Item 6 (income taxes for 2000 $553,000 -- slightly above one quarter of one percent of total operating expenses of $218,804,000), attached hereto as Exhibit 2. JS S6 As explained above, commission payments to prisons are not a legitimate expense. The commissions cost of $0.647 for a 12 minute local inmate call has therefore been removed from the Coalition’s total cost estimate of $2.155 in the Coalition Cost Analysis, attached hereto as Exhibit 12. 40 network. In the Coalition Cost Analysis, the Coalition indicates that the LEC service charges for carrying a 12-minute local inmate collect call to the public telephone network are $0.243, or $0.020 per minute.” In order to use the Coalition’s data in an apples-to-apples comparison with the long distance inmate service cost calculations presented in this affidavit, the cost of the long distance transmission and termination plus the cost of transport to the long distance carrier must be substituted for the Coalition’s local service charges. In the long distance cost calculations presented above, the costs of long distance transport and termination equate to about $0.027 per minute.” Substituting that figure for the Coalition’s local service charge in its cost analysis yields the following: Adiusted Coalition Costs Long Distance Costs (substituted for local costs) Billing & Validation Maintenance Depreciation Overheads Profit Uncollectibles Total Cost 12-Minute Call I-Minute Call $0.324 $0.027 $0.350 $0.090 $0.1 10 $0.224 $0.082 $0.410 $1.590 $0.029 $0.008 $0.009 $0.019 $0.007 %0.034 $0.133 It should be noted that the Coalition’s adjusted cost of $0.133 per minute is even less than the lower estimate of the cost of inmate calling presented above, or $0.139 per minute, which does not include profit or taxes. It must be assumed that, in light of the inmate calling service providers’ interest in higher rates, the Coalition data does not understate the cost of providing 57 Coalition Cost Analysis, attached hereto as Exhibit 12. Dividing the “low estimate” long distance costs of $150,000 by the low annual traffic estimate of 5,438,000 minutes yields a per-minute cost of $0.02758. Dividing the “high estimate” long distance costs of $218,000 by the high annual traffic estimate of 8,157,000 minutes yields a p a minute cost of $0.02672, for an overall estimate of slightly over $0.027 per minute. 41 inmate telephone service. Because the adjusted Coalition-based data results in a lower cost estimate than the low estimate calculated above from Evercom data, the cost of providing the underlying inmate telephone system is likely to be at the low end of the range of costs calculated above, if not even lower. Moreover, the cost analysis presented here allows the underlying provider a greater profit per minute than is claimed in the Coalition figures, further confirming that the cost estimates presented here might overstate, but certainly do not understate, the costs of inmate calling. 73. In order to compare the adjusted Coalition estimate to the estimated cost of providing the underlying inmate telephone system presented above, it is necessary to remove the avoided costs of long distance, billing and the uncollectibles to arrive at the cost ofthe underlying system, as follows: Adjusted Coalition Total Costs Less Avoided Costs Long Distance Costs Billfng & Validation Uncollectibles Underlying System Costs 12-minute Call Per Minute $1.590 $0.133 $0.324 $0.350 $0.027 $0.029 $0.410 %0.034 $0.506 $0.043 The adjusted Coalition data demonstrates a cost of $0.506 for a 12-minute call, or $0.043 per minute. This is even lower than the low end of the estimates of the cost of providing the underlying system presented above, which range between $0.044 and $0.059 per minute, thereby confirming the conservative nature of the cost calculations presented here. 74. Finally, As explained previously, the estimates of the total cost of providing inmate long distance calling service presented above -- $0.139 to $0.155 per minute before profit and taxes -- are a composite of debit and collect calling costs. As also explained above, billing costs and uncollectibles virtually disappear in the case of debit account or debit card calling. 42 Because billing costs and uncollectibles account for such a large portion of the total cost of providing inmate long distance calling service, debit calling could be provided much more cheaply than collect calling. Removing billing and uncollectibles costs from the composite total cost estimates reduces them by over six cents per minute, which is a tremendous proportion of the total cost of providing inmate long distance debit and collect services. Thus, long distance inmate debit calling could be provided at much lower rates than long distance inmate collect calling service. 75. Taken together, the analysis presented here and the comparison with the Coalition’s data demonstrate that there exists a reasonable range of rates at which an inmate telephone system provider could operate an inmate calling system, make a reasonable profit and still leave room for multiple interconnecting long distance carriers to compete for inmate long distance calling. The range of estimates reflects the economies of scale in providing prison inmate calling and the different possible methods of calculating costs. These estimates demonstrate that a competitive prison inmate calling system of the type described in this aflidavit is technologically and economically feasible and would result in much more affordable calling for prisoners. Moreover, as explained in Part VI above, such a system would meet all legitimate security, anti-fraud and other penological goals. DOUGLAS A. DAWSON Sworn to before me this 29R day of October, 2003. SHERRI N. SPENQ fdOfARY PUBLIC SrpJE OF MARYUND My Commission Expires August 14,2007 43 EXHIBIT 3 EXHIBIT 4 EXHIBIT 5 EXHIBIT 6 EXHIBIT 7 EXHIBIT 8 EXHIBIT 9 EXHIBIT 10 EXHIBIT 11 EXHIBIT 12 EXHIBIT 13 EXHIBIT 14 EXHIBIT 15 EXHIBIT 16 EXHIBIT 17 EXHIBIT 18 EXHIBIT 19 EXHIBIT 20 EXHIBIT 21 EXHIBIT 22 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. 20554 ) ) ) Implementation of Pay Telephone Reclassification and Compensation Provisions ) ) of the Telecommunications Act of 1996 ) ) Petition for Rulemaking or, in the ) Alternative, Petition to Address Referral Issues In Pending Rulemaking ) In the Matter of: CC Docket No. 96-128 DA 03-4027 REPLY DECLARATION OF DOUGLAS A. DAWSON Douglas A. Dawson declares as follows: INTRODUCTION 1. My name is Douglas A. Dawson, and I am the President of CCG Consulting, Inc. (“CCG”), located at 6811 Kenilworth Ave., Suite 300, Riverdale, Maryland, 20737. I previously filed an affidavit in this proceeding in support of the Petition for Rulemaking submitted by Martha Wright, et al. (“Petitioners”) in this docket. 2. In reviewing the record regarding the Petition for Rulemaking (“Wright Petition”), the Commission should keep in mind that the goal of the Wright Petition and my previous affidavit was to show that there are reasonable alternatives to the current exclusive service arrangements available for providing prison calling that would drive down long distance rates charged to prisoners and families of prisoners. I am not suggesting that the alternative set forth in the Wright Petition and my previous affidavit is the only possible solution, but, rather, constitutes at least one reasonable alternative. Many parties have criticized the proposal, under which an underlying inmate telephone system provider would process all inmate calls and GSA $ 406,692 $ 0.060 LD termination $ 509,812 $ 0.075 Annual Storage $ 69,000 $ 0.010 T1s $ 14,400 $ 0.002 Commission $2,209,187 $ 0.325 Total Expenses $4,415,552 $ 0.650 These are MCI’s estimates of costs for generic prison calling, not for debit calling specifically. A few of these cost factors do not apply to debit calling. There should be no cost of uncollectibles with debit calling. Debit calls would be allowed only if there were already sufficient funds in the pre-paid account. This is also true for unbillables, if the debit system is run properly. Commissions should also be eliminated, since they are not a legitimate direct cost of providing calling but are amounts that must be paid to the prisons out of profits. Removing the costs that do not apply to debit calling leaves MCI with an adjusted estimate of the cost for debit calling as follows: Cost Per Minute Minutes 6,797,500 Depreciation, Tax, Profits $ 160,186 $ 0.024 Maintenance $ 52,140 $ 0.008 Billing $ 110,459 $ 0.016 GSA $ 406,692 $ 0.060 LD termination $ 509,812 $ 0.075 Annual Storage $ 69,000 $ 0.010 T1s $ 14,400 $ 0.002 Total Expenses $1,322,690 $ 0.195 29. A few of MCI’s remaining costs must also be challenged. The most glaring overstatement of costs is the cost of $0.075 per minute for terminating a long distance call. MCI is one of the largest IXCs in the country, and it owns and operates its own long distance network. Subsequent to filing my original affidavit, my company has become a long distance agent, and I 17 now sell wholesale long distance minutes to some of my clients. One of the products in the portfolio I am reselling is MCI long distance, and I can buy the same type of MCI minutes as are being used in this example (delivered to MCI over a T1 line) for around $0.02 per minute as a wholesaler. I assume that MCI is making a profit at that wholesale rate, and I therefore estimate its actual cost to be closer to $0.01 per minute. In the recalculation of MCI’s estimate shown below, I was conservative and allowed the $0.02 cost. MCI cannot really expect to be taken seriously in claiming long distance termination costs of $0.075 per minute in today’s environment. That figure apparently was driven by the need to justify the rate of $0.65 per minute. 30. The cost of billing for debit calls also would be far less than cited by MCI. With collect calls, MCI has to print and mail actual bills to customers, and its estimate of billing cost is reasonable in a collect system. With a debit system, the transaction would be done by a settlement process between the transport carrier and the underlying prison provider or other entity handling the debit accounts. Since these calls would not be handed off to MCI until it was verified that there were sufficient funds in the debit account, there should not be any substantial billing costs. The only cost arises from electronically settling the bill between MCI and the entity handling the debit account, which could not be generously estimated to be more than 20 percent of what MCI is claiming. 31. MCI’s claimed overhead (GSA) costs of $400,000 annually to oversee the calling from a prison with less than 100 phones and with only 7 million annual minutes is extremely high. Compare this to MCI’s cited maintenance costs (the direct technical employees) of only $50,000 per year. MCI’s GSA estimate is not remotely reasonable and apparently is inflated in order to back into a high calling cost of $0.65 per minute. The GSA estimate of $130,000 per year in my previous affidavit is far more reasonable (and is still generously high, based on my experience). It certainly is not reasonable for GSA to be greater than direct costs, as reflected in MCI’s estimates. 18 EXHIBIT 23 EXHIBIT 24 EXHIBIT 24