More Than Pocket Change:
Making Cents of the Cost of a Pay Phone Call

Your car breaks down in the middle of the night, and you need someone to fix it. Or your plane is delayed, and you need to call your ride. In these situations, most of us look for the nearest pay phone. Most people need pay phones on occasion, and to those without residential phone service, they are a day to day necessity.

When the Federal Communication Commission (FCC) deregulated local pay phone coin rates in October of 1997, allowing pay phone companies, like Southwestern Bell (SWB), to raise its coin rate to 35 cents, pay phones suddenly became a national issue. The nability of most pay phones to give change makes some calls effectively 50 cents and has led to the introduction of federal legislation to correct this problem.

The FCC removed the cap on the local coin rate because the industry claimed that competition among the numerous pay phone providers would more effectively cap prices and give consumers more and better 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? Most consumers cannot actually shop around for a pay phone. They use one located nearby: in the airport, in the mall, in the bus station, or wherever they happen to be.

Instead, competition is between pay phone companies for locations where a captive audience virtually guarantees pay phone revenue, regardless of the price or the quality of the service. And they compete by offering the owner of the location a portion of the pay phone revenues. Intense competition for the best locations may mean a higher cut for the middle man, which could be passed on to the consumer in the form of higher prices.

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

Method

We surveyed 184 pay phones at 79 locations in Austin, Houston and Dallas.⁽¹⁾ . Of these, 166 (the majority) were in the Greater Austin area. In the Austin area, we looked at pay phones in every sector of the city in order to determine if the number and type of pay phone providers differed from one sector to another. ⁽²⁾

We visited each phone and noted the written information on the phone, including the name of the local and long distance operator, and the rates charged for local and long distance coin, collect, and credit card calls.

The Public Utility Commission of Texas requires that certain information be printed on the phone, and we compared the actual written information to what was required.

We then called the local and long distance operator, to find out what company was the provider for each phone, and to ask what the rate structure was for each type of call. We selected a default number within Austin and one in Houston to give to the operator for price determination (day rates only) to ensure that the rate information was consistent for all pay phones.

Operator Assisted Local Collect Call, 3:00 p.m. Company Price for 1st Minute Each Additional Minute Southwestern Bell (SWB) $2.10 flat rate ACSI $2.10 flat rate *Sprint $2.35 $0.08 *Network Operator Services $5.08 $0.32 *USLD (1) $5.04 $0.26 *Opticom (2) *ASC $3.24 $0.08 * These long distance operators served pohones where there was no access to a local operator. They each offered to connect our local collect call at the rates listed here. (1) We found USLD operators at several phones without local operator service. We were given the price cited here most often, but one operator told us the first minute would cost $5.54, and another told us $3.79. (2) Opticom was unable to give the rate structure for local collect calls. However, prices were given for call of three and five minutes in length. The rate for a three minute call was $5.58, and the rate for a five minute call was $6.10.

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 pay phones control major phone locations (like airports and malls), but are less prominent in lower income areas.

Non-SWB pay phones offer coin rates comparable with SWB, frequently offer lower coin long distance rates than AT&T (25 cents per minute is common), but their charges for local and long distance collect and credit card calls can be exorbitant.

Prepaid calling cards sometimes offer the best deal, charging rates lower than most local collect and local credit card rates (especially for short calls), and rates lower than all long distance collect and credit card rates at pay phones.

Market Domination

Competition in the local pay phone market is limited by the dominant position of SWB, which owns the majority of pay phones, and provides local operator services to even more.

Consumers Union surveyed a total of 166 pay phones in 72 locations in Austin. SWB owned 105 phones at 40 locations and provided local operator service to an additional 18 phones at 11 locations, for a total of 123 SWB phones at 48 locations (74.1 percent of the phones and 66 percent of the locations). In addition, SWB owns pay phones at the airport (a total of 52 phones which we did not include in our survey totals). ⁽³⁾

APF was the second largest pay phone owner but much smaller than SWB, with 16 pay phones at eight locations.

ACSI was the only other local operator, with only 20 phones at 12 locations, or 12 percent of the phones in the survey. At the remaining 21 pay phones, in 11 locations, we were unable to reach any local operator.

For long distance, AT&T provided service to 86 phones at 33 locations, or 51.8 percent of the surveyed phones in the Austin area. While 71.4 percent of the SWB owned phones use AT&T as the long distance provider, 82 percent of the non-SWB phones use other long distance providers. Only 10 phones at 5 locations, or 6 percent of the survey, offered a choice of long distance providers. At these phones, the consumer could choose which long distance provider to use for a long distance call.

Other long distance operators with only a small market share included International Operator Services (IOS) (12 phones, or 7.2 percent of the survey), MCI and US Long Distance (USLD) (11 phones each, or 6.6 percent) and nine other long distance operators serving fewer than 10 phones each. Of course, a consumer with a long distance calling card or a pre paid calling card can effectively "dial around" the long distance provider selected by the pay phone operator.

Pay Phone Rates

Shortly after local coin rate deregulation, SWB increased the cost of a call from 25 cents to 35 cents, and most other pay phone operators followed suit.

The coin rate for local calls at nearly all the pay phones surveyed was 35 cents. Only six phones surveyed in Austin, or 3.6 percent, charge 25 cents for a local call. Three of these phones were directly adjacent to pay phones of a competing company.

On the other hand, non-SWB pay phone service providers often offer lower long distance coin rates. AT&T's coin rate for a long distance call from Austin to Houston (or Houston to Austin) is $2.55 for the first minute, and 40 cents for each additional minute. The majority of pay phones owned by companies other than SWB (53 phones, or 87 percent of the non-SWB phones) charged long distance coin rates of 25 cents per minute. Of course, using coins for long distance calling requires a pocket full of change, or it limits the length of the call to the number of quarters you have on hand.

Regulations require all pay phones to provide direct access to a "local exchange carrier," or local operator. In the greater Austin area, Southwestern Bell and ACSI were the only local operators we found, quoting the same rates for local collect and credit card calls (a flat rate of $1.30 for automated service and $2.10 for operator assisted service.)

However, many pay phones did not provide access to either SWB or ACSI. Instead, when a caller dials "0" or "00" as directed, they connect to a long distance operator who offers to place the local collect or credit card call. These long distance companies generally charged higher rates than SWB, often more than $5.00 for the first minute plus an additional charge for every minute thereafter. 

SWB did not allow the use of a credit card to pay for local calls, but rates of the companies that did were comparable to their local collect rates: rates were often above $5.00 for the first minute with an charge for each additional minute.

If you don't carry change, long distance calls from a pay phone can be expensive. For a test call from Austin to Houston, with operator assistance, AT&T operators quoted a rate of $4.15 for the first minute and 39 cents for each additional minute if you use the operator (day rate). Most other competing providers charge between $5.00 and $6.00 for the first minute and 30-40 cents for each additional minute. Only MCI and Sprint charged less on a long distance collect call (see table). Oncor Communications quoted us a rate of $11.06 for the first minute and 66 cents for each additional minute.

The Public Utility Commission caps the rates for intrastate long distance calls from pay phones. For a call from Austin to Houston, companies may charge 40.25 cents for the first minute plus surcharges, and 38.5 cents for each additional minute. The surcharges include fees up to $3.75 for the operator services (on an operator assisted call) and another $1.00 "long distance access fee." But in total, an operator assisted call from Austin to Houston should cost no more than $5.15 for the first minute and 38.5 cents for each additional minute. ⁽⁴⁾

Operators at 8 locations with 10 phones quoted us rates higher than the maximum allowed by PUC rule. Operators at 21 locations with an additional 37 phones quoted the maximum rates allowed.

Getting Information

Consumers Union collected information about the rates charged at a particular pay phone the same way most consumers would: we asked the operator. Some operators were confused by the questions. Many of the smaller companies forwarded our question to a special "rate" operator.

Operators at one-third of phones were unable to provide complete or accurate rate information. In particular, many operators quoted us the residential local collect rate of $1.30 rather than the pay phone collect rate of $2.10. Several operators for the same long distance provider gave us different rate information for the same call.

The FCC, addressing the problem of consumer dissatisfaction concerning high pay phone charges, has passed regulations effective July 1 requiring pay phone companies to disclose to callers how to obtain the total cost of a call, before the call is connected. This would allow consumers to decide whether to have that operator service carry the call at the identified rates, or to use another carrier. While pay phone operators can pass the cost of this service on to consumers, the FCC believes that adoption of this rule will result in more informed consumers, foster a more competitive marketplace, and better serve the public interest than if the FCC were to establish price controls or rate benchmarks.

According to Texas Public Utility Commission regulations, certain basic consumer information must be printed on the phone. This information includes 911 emergency information written in English and Spanish, instructions for dialing local and toll calls and information on how to access the operator and directory assistance, information on the long distance provider, and information on who to contact for refunds, complaints and rates.

We found that 25 percent of the pay phones in the survey did not have the required information or had incorrect information printed on the pay phone. On the other hand, while only the 911 emergency information is required to be printed in Spanish, some pay phones went beyond the requirement and printed all information in both English and Spanish.

Operator Assisted Long Distance Collect Call, 3:00 pm, from Austin to Houston Company Price for 1st Minute Each Additional Minute AT&T Call-ATT $4.15 $2.74 $0.39 $0.35 US Networks $6.64-$7.14 (1) $0.35-$0.59 MCI $1.81 $0.34 US Long Distance (USLD) $2.60-$5.15 (1) $0.35-$0.38 American Network Exchange $5.15 $0.39 Oncor (OCI) $11.06 $1.91-$2.01 (1) US Sprint $3.80 $0.38-$0.39 Network Operator Services $5.15 $0.39 Opticom $5.15 $0.39 ATN $5.14 $0.39 International Operator Services (IOS) $5.15 $0.39 North American Intelicom $5.92 $0.39 (1) In cases where prices vary, the operators of the various companies gave different rate information whe asked at different phones. (2) Does not accept Visa. (3) These carriers do not allow charges to major credit cards. Some USLD operators said they could not accept credit cards while others did. (4) Opticom was unable to give the rate structure for long distance credit calls. However, prices were given for calls of one, five, and ten minutes in length. The rates for these calls were: one minute-$5.16, five minutes-$6.70, and ten minutes-$8.62.

Pay Phone Competition

At most locations, consumers cannot effectively shop for a better pay phone deal because there is only one pay phone choice reasonably nearby. We considered pay phones to be in direct competition if the phones were within visual range of each other.

Only 30.7 percent of the pay phones (a total of 51 phones at 31 different locations) were within visual range of another provider's pay phone.

And, at only three of these locations are payphones of competing companies directly adjacent to one another. At each of these three locations, one pay phone had substantially lower coin rates than the other. In these limited circumstances, competition may be having an effect on the pay phone prices.

However, we found little competition among pay phones that were within visual range. Of the pay phones in visual range of one another, nearly all charge $0.35 for a local call, and each phone's collect and long distance rates are the same as any other pay phone of the same operator and long distance provider.

In other words, the cost of a call does not appear to be affected by the availability of another pay phone in visual range. Realistically, a pay phone being in visual range is not always much of a choice, if it requires the consumer to do such things as cross a busy road, leave a hospital or walk in inclement weather.

Low Income Areas

Consumers Union surveyed 166 pay phones scattered across the Austin area (not including phones at the airport). In every area, consumers should have direct access to a local operator, but we found a number of phones where the operator was unable to transfer the customer to a local operator or quote local rates.

We found this at only one or two phones in most parts of the city, but in East Austin, which has a lower than average income than the rest of the city, and in central Austin, we found far more such phones. Phones without access to a local operator generally quoted a higher rate for local collect and local credit card calls.

We also found that fewer pay phones in east Austin used AT&T as the long distance provider. Citywide AT&T is the long distance operator for about half of the surveyed phones. However, in east Austin, AT&T provided long distance service at only 31.4 percent of the pay phones surveyed, a substantially lower share of the market than seen in other areas of the city.

Since SWB and AT&T provide lower cost service than many of their competitors, particularly for collect and credit card calls, their lower penetration in East Austin indicates that lower income people may be paying more for some pay phone services.

Conclusions

Consumers are virtually left on their own to navigate the pay phone market. Although the FCC believes that the pay phone market is competitive, our survey has shown that consumers of pay phone service have little competitive choice in the traditional sense.

The locational monopoly characteristics of pay phones, along with the disparity of rates, put consumers at a disadvantage. Consumers can gamble on the potentially exorbitant rates at the nearest pay phone, or go to extraordinary lengths checking rates and searching for a cheaper one, with no guarantee that a cheaper one will be anywhere nearby.

The unfortunate fact is, if you like what pay phone deregulation has done, just wait. Although there is little competition in the local market for residential telephone service, SWB and other local companies are busy charging additional new fees and hope to be allowed to raise the basic monthly service rate without restriction.

Consumers Union will oppose those efforts to prevent the very same outcome as in pay phones- no choice, confusing rate structures, and higher prices.

Recommendations

• Require pay phones to give change and prohibit companies from raising prices in response to the new requirement. Many consumers have found that the 35 cent rate amounts to 50 cents if the consumer does not have the correct change. In April 1998, U.S. Senator Patrick Leahy, D- Vermont, introduced federal legislation which would require pay phones to give change or the undistributed change would be used to fund public interest pay phones for safety, health, or emergency services. The bill prohibits pay phone owners from increasing costs or reducing or limiting services due to the legislation. The bill also requires the Federal Trade Commission to study competitiveness of the pay phone market.
  
• Post a warning in at least 12 point type on all pay phones that prices may be higher than residential prices, surcharges of up to $4.75 may apply on intrastate calls, and for the exact price of a call, contact the operator.
  
• Based on our survey, we believe that many pay phones are not in compliance with current Texas PUC rules. 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, additional funds may be required to investigate violations of regulations relating to consumer information and intrastate long distance pricing.
  
• Lower the cap on pay phone intrastate long distance rates. Too many companies are maximizing profits by charing the most allowed by law, and consumers most of the time cannot shop around for a better deal before making their pay phone call.
  
• Amend current regulations to require that all pay phone information be in Spanish as well as English. Current regulations require that only 911 information be in both languages, but not, for example, information about filing complaints or requesting rate information. In addition, 911 information should be posted in every language appropriate to a local area.
  
• Ultimately, Consumers Union recommends the FCC reverse its position that the pay phone market is competitive and restore consumer protections.
  
• Prepaid phone cards: see Recommendations.

Endnotes

1. This figure does not include pay phones at the Austin Municipal Airport. At this location there were 52 phones owned by SWB with AT&T as the long distance provider and an additional 22 coinless pay phones operated by AT&T, for a total of 74 pay phones. Our survey is admittedly not a "random" sample of all the available pay phones because the complete list of available pay phones from which to draw such a sample is not available to the public (although it is maintained at the PUC). Our survey instead attempts to look at pay phones at numerous different types of locations (convenience stores, strip shopping centers, malls, roadside phones, bars and restaurants) and in geographically varied urban and suburban neighborhoods.
   
2. The regions examined around Austin can be separated into east, south, central and north central, northwest, and Round Rock. East Austin is south of 51st Street and east of IH35. South Austin is south of the Colorado River, between Mopac and IH35. Central and north central Austin is between Mopac and IH35 north of the Colorado River, extending north of Research Blvd., and including locations immediately east of IH35 north of 51st Street. Northwest Austin is north of FM 2222 and west of Mopac. Round Rock is the city immediately north of Austin.
   
3. In order to fairly evaluate distribution of phones in the pay phone market we did not include phones at the airport because there were so many at a single location. We note however that the airport is a perfect example of "locational monopoly." Few people will try and leave the airport to shop for a cheaper pay phone when they need to make a call.
   
4. Public Utility Commission Substantive Rule 23.54(f)(1)(F), Pay Phone Telephone Service: Charges.