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Summary of FCC Orders on Rate Issues

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August 3, 2006

Summary of FCC Orders on Rate Issues

On June 29, 2006, the FCC released an order setting forth the TRS rates for the 2006-07 Fund year. On July 12, 2006, the FCC released two additional orders in response to challenges to earlier rate rulings. Below is a summary of each of these FCC rulings.

I. June 2006 Rate Order 1

On June 29, 2006, the FCC set the following rates for all interstate TRS services:

Traditional TRS:$1.291/minute (down from $1.440)Speech to Speech:$1.409/minute (down from $1.579)IP Relay:

$1.293/minute (down from $1.278)

VRS:$6.644/minute (frozen from 2005-06 Fund year until June 30, 2007or until the FCC adopts a new VRS rate pursuant to new cost recovery rules, whichever is sooner.)

The Order also adopts a total Interstate Fund size of $419,724,291, and requires carriers to make a contribution to the Fund of .00535 of their end-of-year revenues. (The contribution factor is based on the ratio between the total expected expenses and the interstate end user telecommunications revenues.)

TRS rates are determined by looking at each provider's projected costs of providing each relay service, divided by the providers' total projected minutes of use. NECA determines the Fund size by using the actual growth rates to estimate the number of minutes to be compensated by the Fund.

On May 1, 2006, NECA filed its annual Interstate TRS Fund Payment Formula and Fund Size Estimate for the 2006-07 Fund year. For each of the services, NECA excluded provider data where it was inconsistent with the data of other providers or lacked sufficient detail, as well as all marketing and advertising expenses. Some outreach expenses, determined to be those needed to "inform users of the availability of TRS" were included in NECA's calculations. The FCC upheld the exclusion of indirect expenses (expenses listed in subsection C of the Instructions to the Data Collection Form) by one provider because they were excessive compared to similar costs claimed by other providers. In addition, the FCC upheld the exclusion of expenses for a strategic consultant for one provider's IP relay service as inconsistent with expenses needed to support relay center operations under the minimum standards. However, the FCC restored all disallowed advertising and marketing expenses, because most commenters addressed this exclusion, and because "uncertainty regarding this issue may be compounded by the Fund Administrator's Data Collection Form and Instructions." Specifically, the FCC acknowledged that the form's similar definitions for "outreach" and "marketing/advertising" may have lead to confusion about the type of outreach expenses that are compensable.

The FCC's order does not address NECA's disallowances or adjustments on VRS cost and demand data because the Commission has temporarily frozen that rate. Among other things, the FCC has concluded that it was in the public interest to freeze this rate because the interoperability order and the new speed of answer benchmarks may have made it difficult for providers to accurately estimate costs and demand for the service.

The FCC's order also establishes the following:

Traditional TRS - To determine the Fund size requirement and carrier contribution rate, NECA used a growth rate of traditional TRS (which is declining), based on average daily minutes of use for the period from February 2005-2006. The new rate ($1.291) was determined by dividing the providers' adjusted total projected interstate costs for traditional TRS of $42,271,712 by the providers' total projected interstate minutes of traditional TRS of 33,214,297, and applying the 1.4 percent rate of return.

STS - The new $1.409 per minute rate was determined by dividing the providers' total projected interstate costs of $417,524 by the providers' total projected interstate minutes of 300,406, and applying the 1.4 percent rate of return.

IP Relay - The new IP Relay rate of $1.293 per minute was determined by dividing the providers' total projected costs for IP Relay of $247,857,066 by the providers' total projected minutes of IP Relay of 194,357,391, and applying the 1.4 percent rate of return.

VRS - In its original analysis, in addition to the expenses excluded for other types of TRS, NECA excluded expenses for certified deaf interpreters for one provider, expenses for a strategic consultant for one provider, outreach expenses for one provider, and made adjustments to CA costs for one provider. Although providers' data did not reflect any growth in the projected use of VRS, based on the average daily growth rate from February 2005 to February 2006, NECA determined that projected demand would be 51.7 million VRS minutes for the next Fund year. NECA upwardly adjusted the number of projected minutes of use, and made a corresponding adjustment in projected costs (for relay operations and certain indirect categories of expenses) because the additional minutes would add to the cost of these operations. (By contrast, the FCC has noted that when the projected demand by providers is underestimated, the compensation rate is higher; as a consequence, when actual demand exceeds projected demand, providers are overcompensated.) NECA then proposed a compensation rate of $6.138 per minute, a 50 cent decrease from the 2005-06 rate. As noted above, however, the FCC decided to freeze this rate, rather than accept NECA's recommendation.

II. July 2006 Order on Reconsideration (on 2004 TRS Report and Order)2

This order addresses a number of issues raised in petitions seeking review of the FCC's 2004 TRS Report and Order:

Adoption of the 2003-2004 VRS compensation rate of $8.854. The 2003-04 rate had originally been set by NECA at $14.023 per minute, lowered by the FCC to $7.751, and then recalculated as $8.854, after the FCC reviewed supplemental provider cost data. The FCC now denies a petition filed by HOVRS to reconsider the final $8.854 rate. It notes that after providers had supplied additional information, the Commission had added back some costs originally excluded, including those related to salaries, engineering support, and return on capital investment: a total of $9,503,801 in costs were added back to the rate calculation. The FCC now maintains that it provided sufficient detail on which costs were reasonable in various cost categories. The FCC has, however, granted one of HOVRS's requests: that proprietary software (software developed and owned by a provider that is used for the provision of TRS) is a compensable cost so long as (1) it is used for the provision of TRS in compliance with non-waived mandatory minimum standards, and (2) it is not sold or licensed to any other entity. The FCC has directed such costs to be capitalized.

The final VRS rate should be fully retroactive. When the FCC adopted the final VRS rate 2003-04 of $8.854, it only made it retroactive to September 1, 2003, rather than back to the beginning of the Fund year (July 1, 2003), claiming that this was necessary because the new rate was based on cost data submitted after July 1, 2003. The FCC now concludes that this rate should have been fully retroactive to July 1, 2003 and has directed NECA to make supplemental payments to VRS providers compensated for providing VRS in July and August 2003, to reflect the difference between the interim rate of $7.751 and the final rate of $8.854.

Compensation for research and development expenses incurred for TRS enhancements beyond TRS mandatory minimum standards. When the FCC denied R&D expenses for waived standards, providers argued that they should be compensated for expenses needed to develop technology to meet the waived standards. CSD said this was particularly true to develop the technology needed to enable VRS to handle emergency calls. The FCC says that it recognizes the "Catch-22" that "so long as a mandatory minimum standard is waived providers cannot be compensated for the costs of meeting the requirement, but that without additional compensation they cannot cover the costs of meeting the requirement to therefore justify the end of the waiver." But it nevertheless upholds its original ruling that expenses for R&D that are expended to meet a waived minimum standard are not compensable because functional equivalence is defined by the mandatory minimum standards. It adds that, if some waivers are caused by "technological limitations presently inherent in Internet-based services generally, the Interstate TRS Fund should not be a source of funding to resolve these limitations. In addition, we do not believe we can meaningfully determine what costs are reasonable when they are incurred to resolve technological issues that no one can resolve in the near term." The FCC leaves a small door open, however, by reiterating a prior ruling that suggested that some reimbursement for R&D may be allowed if providers can identify the manner that a waived standard might be met and the projected costs to achieve that goal. This, it says, is to prevent the Fund from becoming "an open source of funding for research and development" over which neither the FCC nor NECA will have no control.

Applicability of "rate of return" regulation to traditional TRS. With little explanation, the FCC rejects Hamilton's petition for reconsideration of the FCC's decision to use a rate of return on capital investment to compensate TRS providers (rather than compensation based on a mark-up on expenses), and has sought comment on Hamilton's alternative cost recovery methodology (MARS plan) in its cost methodology proceeding.

VRS speed of answer requirements. Although some providers had submitted requests for reconsideration of the FCC's extension of the speed of answer requirement until January 2006, the FCC says these are now moot because new rules have been released on this matter.

III. July 2006 Memorandum Opinion and Order (on 2004 CGB Rate Order)3

This MO&O addresses three applications for review filed by CSD, HOVRS, and the National Video Relay Service Coalition (NVRSC) of the Consumer and Governmental Affairs Bureau's (CGB's) 2004 Bureau TRS Order, which had set the VRS rate for the 2004-05 Fund year. 4

The FCC begins this MO&O by noting that the cost recovery framework for TRS is not like a ratemaking process, but rather is designed to simply cover the reasonable costs incurred in providing mandated relay services. It also notes that the Fund administrator has a responsibility "to ensure the accuracy and reasonableness of the cost and demand data submitted by the providers so that its proposed rates will be based on permissible costs."

A review of what occurred in 2004 follows:

On June 30, 2004, CGB released the 2004 Bureau TRS Order, adopting NECA's proposed per-minute compensation rates for the 2004-2005 fund year. The FCC said these rates were subject to revision based on (1) supplemental provider cost data relating to capital investment, and (2) adjustments to cost disallowances that providers challenged. After receiving and reviewing this supplemental information, CGB re-adjusted the VRS rate as $7.596 per minute, an increase of 30 cents over NECA's proposed rate. The new rate was guided by a 2003 Bureau TRS Order that had ruled out profits, certain tax allowances, and certain labor costs as not being reasonable costs. It was this rate that CSD, HOVRS, and NVRSC challenged. CSD and NVRSC also filed a petition for emergency stay, which the FCC has now denies, as moot.

The FCC now upholds the 2004-05 rate, and has ruled that its reliance on the 2003 Bureau TRS Order was justified as a basis for determining this rate. It also explains that it was appropriate for the Fund administrator to exclude certain categories of costs because the administrator need not defer to the judgment of providers with respect to what are allowable costs. Moreover, the FCC says each provider had a meaningful opportunity to review and contest its specific cost disallowances.

Quality of Service. The FCC also rejects the arguments that the Bureau should have considered the effect of the VRS rate on the quality of service, and should have permitted the inclusion of costs related to VRS hours (24/7) and answer speed. The Commission says that these were still waived requirements, and that the TRS rates are only intended "to compensate providers for the reasonable costs of providing service in compliance with non-waived mandatory minimum standards." Although the FCC says that the costs of meeting these standards may now be included in future cost submissions, at the time, these had only been proposed by the Commission, and "providers are not entitled to unlimited financing from the Interstate TRS Fund to enable them to further develop a service that is not even required."

Research and Development. The FCC has rejected the petitioners' arguments that providers should be compensated for R&D needed to comply with standards that have been waived. Petitioners had argued that denying such funds was inconsistent Section 225's directive for the Commission to ensure that its TRS regulations encourage the use of existing technology and not discourage or impair the development of new technology. The FCC responds that while providers are free to develop enhanced TRS features, they may do so to gain a competitive advantage, not to be compensated for waived minimum standards. It goes on to say that the very existence of VRS and the adoption of other forms of TRS such as captioned telephone, "reflect the Commission's faithful adherence to encouraging new technologies to meet this statutory mandate."

Installation of video cameras and software. The FCC has ruled that the costs associated with video customer premises equipment, its distribution, and its installation are not reasonable costs of providing TRS because expenses must be those incurred "in making the service available and not the customer's costs of receiving the service."

Allowance for Working Capital. The FCC denies HOVRS' request to increase the allowance for working capital and finds that the 1.4 factor based on a 30 day period, established to compensate providers for the time they are out of pocket their expenses before being compensated by NECA, reasonably compensates providers for the time they are actually out of pocket these expenses.

New year, new rate. The FCC also rejected an argument, made by CSD and NVRSC, that the FCC should have continued applying the $8.854 rate that had been in effect for 2003-04 for another year, while the Commission resolved the VRS issues raised in the FNPRM accompanying its 2004 TRS Report and Order. It stated that the compensation rates for each year are based on each provider's projected cost and demand data, and that "[i]f there is concern that the rates were not calculated correctly, the answer is not to apply rates from a previous fund year based on an entirely different set of cost and demand projections, but to review the calculation of the challenged rates and the data upon which they rely and make any resulting adjustments retroactive to the beginning of the fund year."

Note that in addition, to the above proceedings, the FCC has opened a new proceeding that seeks feedback on TRS cost recovery methodology, summarized in a separate memorandum. 5

______________________________

1In the Matter of Telecommunications Relay Services and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities, Order, CG Dkt. No. 03-123, DA 06-1345 (July 29, 2006).

2In the Matter of Telecommunications Relay Services and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities, Order on Reconsideration, CG Dkt. No. 03-123, FCC 06-87 (July 12, 2006).

3In the Matter of Telecommunications Relay Services and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities, Memorandum Opinion and Order, CG Dkt. No. 03-123, FCC 06-88 (July 12, 2006).

4NVRSC was a coalition of consumer groups that was formed when the FCC slashed the VRS rate in 2003. Hamilton had also filed an application of review, challenging the FCC's decision to abandon the cost-plus reimbursement rate methodology, but since the FCC has now determined that Hamilton's challenge was really to the 2004 TRS Report and Order (which accompanied the CGB order), it addresses Hamilton's petition in a separate order.

5In the Matter of Telecommunications Relay Services and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities, Further Notice of Proposed Rulemaking, CG Dkt. No. 03-123, FCC 06-106 (July 20, 2006)

This summary was prepared as part of the RERC on Telecommunications Access, a joint project of Gallaudet University and the Trace Center, University of Wisconsin-Madison under funding from the National Institute on Disability and Rehabilitation Research (NIDRR) of the US Dept of Education Grant H133E990006. The opinions offered herein are those of the author and do not necessarily represent those of the RERC on Telecommunications Access, the Universities or funding agencies

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