Pay Phone Competition?

Written by Consumers Union Southwest Regional Office
May 1998

Executive Summary

The FCC removed the cap on the local coin rate because the pay phone industry claimed competition among the numerous pay phone providers would more effectively cap prices and give consumers more options. But does competition in the traditional sense -- consumers shopping for the best price and service, pressuring the market to respond -- exist in the pay phone market?

Consumers Union surveyed the existing pay phone market primarily in and around Austin (184 phones, 166 of them in Austin) to determine whether competition exists at the level of the consumer--two nearby phones competing based on the price of a call, for example. We looked at the price sand quality of service of the pay phone operators and examined an alternative to pay phone local and long distance companies--prepaid calling cards.

Findings

Six months after the deregulation of the coin rate, Consumers Union found that pay phone rates are often high, rate structures confusing or unavailable, and few pay phones are placed in direct competition with other pay phones at the same (or nearby) locations.

Further, Southwestern Bell (SWB) and AT&T still dominate the market; SWB as the owner of the pay phones as well as the local operator service provider, and AT&T as the long distance operator service provider. SWB owns pay phones in major phone locations (like airports and malls), but is comparatively less dominant in lower income areas and central Austin.

In lower income East Austin, SWB owns far fewer phones, and some of the non-SWB pay phones do not provide direct access to any local operator (23 percent of East Austin phones surveyed). Instead the long distance operator will offer to place local calls, generally at higher rates. On the other hand, many non-SWB owned phones offer long distance coin rates lower than AT&T (25 cents per minute is common).

Long distance operator-assisted rates from pay phones are often high, sometimes set at the maximum rate allowed under current regulations. MCI offered among the lowest operator assisted long distance collect rates for a call from Austin to Houston ($1.81 for the first minute and $0.34 for each additional), and AT&T was competitive with a "Call ATT" rate of $2.74/$0.35 and a normal operator assist rate of $4.15/$0.39. Oncor Communications operators quoted rates of $11.06 for the first minute and 66 cents for each additional minute.

Operators for 37 phones at 21 locations (29 percent of phones surveyed) quoted us the maximum rate allowed under current Texas regulations, demonstrating that many companies are charging as much as they can.

If you don't have a calling card or change for a local call, prepaid calling cards may be a reasonable choice, with rates lower than most local collect and credit card for short calls, and lower than all operator assisted long distance rates at pay phones. For local and long distance from many phones, coins are still the best bet.

We collected rate information by asking the operator at each phone. But, we found that different operators for the same company often gave conflicting or incorrect rate information. Operators at more than a third of our surveyed locations didn't provide complete or accurate information about the cost of making calls from pay phones.

Although intrastate long distance rates are capped by the PUC, operators at 10 phones (8 locations) quoted us rates above the maximum allowed. In addition, one in four phones did not post all the required information about rates and services. In other words, violations of the current Texas regulation were common.

We believe these findings demonstrate that the pay phone market is not competitive from the perspective of the consumer and that reforms are needed to ensure good service at reasonable rates.

Recommendations

• Require pay phones to give change.
• Lower current caps on charges for intrastate long distance calls from a pay phone.
• Post a warning on all pay phones that rates for some calls may be high.
• The PUC must investigate and end patterns of abuse by pay phone owners and operators. If the PUC does not have adequate resources to police the pay phone market, it needs additional funds to investigate violations.
• Amend current regulations to require that all pay phone information be in Spanish as well as English, and 911 information in any language appropriate to an area.
• Ultimately, Consumers Union recommends the FCC reverse its position that the pay phone market is competitive and restore consumer protections.
• Develop consumer protections for prepaid phone cards: post surcharges on the back of the card, limit pay phone surcharges, and protect consumers when card companies fail.