Summary of TRS Rate Methodology NPRM

I. Background

On July 20, 2006, the FCC released a notice of proposed rulemaking (NPRM) requesting feedback on a number of issues concerning the interstate compensation of TRS providers.1 The FCC explains that over the past several years, the present methodology has presented the FCC with "a variety of regulatory and administrative challenges," particularly with respect to VRS. There have been concerns about both the rates and the process of setting those rates. Therefore, the NPRM seeks comment on both the cost recovery methodology used for determining the TRS interstate compensation rates, as well as the scope of the "reasonable" costs that should be compensated. The FCC goes on to explain that because the costs associated with the provision of relay services is "really just another cost of doing business generally, i.e., of providing voice telephone service," the annual determination of TRS rates is not like a rate-making process that seeks to determine how much a telephone company may charge customers, but rather a determination of what it costs to cover the reasonable costs of providing TRS on a per-minute basis. The FCC emphasizes that the Interstate TRS Fund is not "an unbounded source of funding for enhancements that go beyond [the mandatory minimum] standards."

II. Cost Recovery Methodology for Traditional TRS, STS and IP Relay

A. Hamilton's MARS Plan

Back in 2004, in its petition for reconsideration of the FCC's 2004 Report and Order, Hamilton proposed what it calls the MARS Plan ("Multistate Average Rate Structure" Plan). Under this plan, the interstate traditional TRS rate would be determined by using a weighted average of all of the state intrastate traditional TRS rates.2 Because most states choose their TRS provider through a competitive bidding process, Hamilton believes that this cost recovery methodology would better reflect the competitively-based market value of TRS. It would also avoid the costs and complications associated with collecting and evaluating very detailed TRS provider projected cost and demand data, and would eliminate the "padding" of investments by providers. The FCC asks whether it should adopt the MARS plan either in whole or in part (the latter could use the states' average as a rate cap).

Session vs. conversation minutes. The Interstate TRS fund reimburses providers based on "conversation" minutes, i.e., only for the period of time that the actual call is taking place. This rate does not include the time it takes to set up a call. While some states similarly use conversation minutes, others use "session" minutes, i.e., the entire time that the call is connected to the communication assistant (CA), including the time used to set up the call. Hamilton has proposed using a factor of 1.46 to convert session minutes to conversation minutes (one conversation minute = 1.46 session minutes) under its MARS plan. The FCC asks whether making this conversion is appropriate. The Commission also asks whether it would be more appropriate to use session minutes for the interstate rate.

The FCC also asks the following additional questions about the MARS plan:

Will the practice of rounding call minutes to the nearest full minute, practiced by some states, affect use of the MARS plan, and if so, how?
If a state bases its rate on the interstate rate, should that state's rate be included in the MARS plan calculation?
Are there any other factors that would warrant excluding a state's rate from the calculation?
How often do states adopt TRS compensation rates? What data do the states require and is this readily available?
Hamilton proposes a weighted average to prevent states with very high or very low minutes from unfairly skewing the average rate. The FCC asks whether it is appropriate to weight the states' rates, and if so, how to calculate a weighted rate.
Should the MARS plan also be used to determine the speech-to-speech (STS) compensation rate?

B. Other issues

1. Same Compensation Rates. The FCC asks whether the same rate should apply to both TRS and STS (as recommended by NECA for the 2006-07 year) under any methodology. It also asks whether the same rate should apply to both TRS and IP relay. Data for the 2005-06 period found that IP costs were 11 percent less than traditional TRS costs, so NECA began separating these rates. The FCC notes that in many instances, the same CAs handle both types of calls, and that the only difference is how these calls reach the TRS center. It seeks information on any cost differences between these two services.

2. Use the Location to Determine the Rate. The FCC asks whether there are other cost recovery methodologies that should be applied for traditional TRS, STS and IP relay, and whether the rate for the location where the call is made should apply e.g., should an interstate call originating in Maryland use the Maryland rate if it is handled by the same provider that handles the state's intrastate calls? What if a state imposes additional requirements? In that case, should the compensation rate be the lesser of the state intrastate rate or the MARS plan rate?

3. Use Actual, Not Projected, Costs Plus a True-Up. The FCC asks whether, rather than basing compensation for providers on estimates of costs or minutes of use, providers should receive periodic payments for their actual reasonable costs and at the end of the year, reimburse the Fund for any amount by which payments exceeded those actual costs. The FCC asks how a true-up could be implemented, the record-keeping requirements that might be required, and how often a true-up should occur.

4. Length of Rate Period. The FCC asks for how long the TRS, STS and IP rates should be set: more than, equal to, or less than one year?

III. Cost Recovery Methodology for VRS

The FCC asks for additional comment on the following issues raised in its 2004 NPRM:

Whether to permanently adopt the per-minute methodology, and what safeguards are needed to ensure that this would provide fair and reasonable compensation in the face of difficult-to-predict demand levels.
Whether providers should instead be compensated with lump-sum or periodic payments of predicted costs, with a "true-up" at the end of the year. (Similar procedures were used to account for differences between predicted and actual costs in carrier per-line Interstate Common Line Support payments).
What data collection guidelines should be used for the usage data that providers give to NECA, and whether different guidelines should be used for VRS because of its unique aspects.
Because the labor costs for VRS constitute a much higher proportion of overall costs than for other forms of TRS, how these costs should be "accounted for and fairly compensated to provide for the efficient utilization of labor and functionally equivalent VRS."
Additional comments on the rate methodology in light of new requirements for VRS speed of answer, interoperability, and certification (the latter will add companies that are not traditional telephone companies to the scope of TRS providers).

The FCC notes that because TRS is an accommodation for people with disabilities, it wants a methodology that results in more predictability for the providers and one that ensures that providers are compensated for their "reasonable costs." It asks whether the methodology should be based on each individual provider's actual, reasonable costs, or whether the FCC should treat VRS as a national service, seek competitive bids, and allow the two to three lowest bidders to provide service at the lowest bid rate. Alternatively, the FCC could set compensation rates based on the lowest bid, with an incentive or disincentive built into the auction process to ensure competitive bidding.

True-up. The FCC again asks whether, regardless of the methodology used, providers should have to reimburse the Interstate Fund for any amount by which their payments exceed reasonable actual costs through a true-up. It notes that because demand forecasts have been lower than actual demand, in the past, the rate has been higher than it should have been, and providers have been overcompensated (above their costs), some by millions of dollars.

Rate Period. The FCC asks, given the lack of consistency in the VRS rate, whether the rate period should be longer than one year. The agency notes it may be difficult for VRS providers to plan and budget for VRS, especially with respect to labor costs and staffing, and notes that generally operating expenses for VRS are more complex than for other types of TRS. It asks how long the rate period should be, and how the FCC can ensure that the rate during this period "reasonably correlates to actual costs throughout the rate period."

IV. Reasonable Costs

The FCC seeks feedback on the reasonable costs that should be included in determining the rate, as follows:

A. Marketing and Outreach

The FCC notes that its rules require TRS providers to conduct outreach activities to ensure that "callers in their service area are aware of the availability and use of all forms of TRS."3 It notes that in 2004, it declined to allow the Interstate Fund to finance a national outreach campaign because its costs would be "prohibitive, with uncertain outcomes." At that time, it noted that some of the costs for outreach are already supported by the Interstate TRS Fund, and that because the majority of TRS calls are intrastate, state TRS providers and programs "should be taking the lead in providing meaningful outreach." It now asks about the nature of outreach expenses that would be appropriate for inclusion in provider cost submissions.

The FCC goes on to note that the separate definitions given to outreach and marketing/advertising in NECA's Data Collection Form and Instructions may be confusing. These define outreach as "[e]xpenses of programs to educate the public on TRS," and "marketing/advertising" as "[e]xpenses associated with promoting TRS within the community." The FCC asks how these can be more precisely defined, and the nature of outreach and marketing expenses that should be compensated. The Commission also tentatively concludes that "provider-specific 'branded' marketing is not appropriate for compensation from the Fund, and that the Fund should not be used to promote any particular provider's service over the service of competing providers, or to encourage consumers to switch providers." It asks for parties that disagree to explain what benefits people with hearing and speech disabilities may get from branded marketing that "would be different from more generalized outreach efforts, and why the public should pay for competitive marketing efforts." It also asks whether it is consistent with the statute to fund marketing or outreach campaigns by each provider, because these may be duplicative and directed at the same audience. Finally, it asks generally about the nature and cost of outreach and marketing activities that providers funded in the past and the amount and nature of current outreach and marketing efforts to prevent relay hang ups.

The FCC also asks whether the amount of outreach and marketing expenses should be based on a specific percentage of the VRS rate. It notes that a factor of 1.4 percent is applied to the per-minute rate as an allowance for working capital (i.e., for the time providers are out of pocket money due for services rendered), and notes that if a similar approach were used for outreach and marketing, all providers would receive compensation for outreach costs, and their individual plans would not have to be scrutinized. It says this might be simpler and more predictable, instead of compensating providers for the reasonable costs of outreach.

B. Overhead Costs

The FCC notes that TRS was intended to be a service provided by common carriers that already provide voice telephone service. Accordingly, the Commission asks whether reasonable overhead costs should be limited to the marginal costs of providing TRS (i.e., only categories of costs actually incurred by providing TRS), not general overhead costs. The FCC asks what these costs would be. The FCC also asks, if compensation of some overhead costs should be permitted under the statute, what is the appropriate approach to allocating general overhead costs to TRS: Should they be allocated as a percentage of total revenues (or would this cause providers to submit "indirect costs that are grossly disproportionate" to direct TRS costs)? What limits should be placed on the recovery of such costs? What percentage would be appropriate?

C. Legal and Lobbying Expenses

The FCC notes that some providers have submitted lobbying expenses that exceed more than $2 million a year, and asks whether it is appropriate to reimburse for lobbying costs that are not connected to compliance with the TRS rules. In particular, the FCC asks whether it is "lawful and reasonable" to reimburse for (1) travel, hotel and meal costs associated with lobbying; (2) setting up web sites and mail campaigns to encourage the public to raise VRS rates; and (3) legal expenses associated with petitioning for rule changes. It also asks whether amounts permitted for legal and lobbying expenses should be uniform for all providers, or whether these should relate to the number or minutes of service provided.

D. Executive Compensation

The FCC asks what are "reasonable" costs associated with executive compensation, and whether the number of executives for whom compensation is sought should be tied to the size of certain providers.

E. Making Provider Cost and Demand Data Public

The FCC explains that projected cost and demand data of individual providers have always been treated as confidential information, but that this approach makes it hard for providers and the public to comment on the reasonableness of the rates. It now asks whether this information or particular categories of cost and demand data, should be made public (or whether certain categories should be given confidential treatment). Specifically, the FCC wants to know how keeping the data confidential or providing an open process would "impact the evaluation of costs, public comment regarding the rates, and the rate setting process generally." Finally, it asks whether there are other ways to make the rate setting process more transparent.

V. Management and Administration of the Interstate TRS Fund

The FCC notes that since 2000, the Interstate Fund has grown from $40 million to over $460 million. It asks how the administration of the Fund could be improved, and whether there are ways to modify the rules governing NECA's billing and collection processes. For example, it wants to know if there should be performance measures to assess NECA's and the TRS program's effectiveness. Should NECA be subject to additional reporting requirements, and if so, should these mirror those used for the universal service fund? The FCC asks for other changes that could be made to the Fund administrator's role in initially calculating the proposed compensation rates and whether it should adopt rules "to implement ethical standards and address conflicts of interest" for NECA's officers and employees.

The FCC also seeks input on ways to ensure that TRS compensation is "legitimate and proper." In addition to the information now submitted to NECA (projected cost and demand data to calculate the rate, monthly minutes of use to receive payment, and data to show compliance with certain rules such as the speed of answer rule), the FCC wants to know whether providers should have to submit other types of information to ensure the integrity of Fund payments. These might include financial statements, earning reports, and information related to company parents or affiliates. The FCC also wants to know if it should adopt more specific auditing requirements to ensure program integrity, and other ways to ensure the accuracy of the data submitted to determine rates, and the accuracy of the monthly minutes.

Last, the FCC asks for other ways to achieve more fair and efficient administration and management of the Fund, and to deter and detect waste, fraud, and abuse, so that the Fund is compensating providers "only for legitimate minutes of use provided in compliance with the mandatory minimum standards, and that the compensation rates are based on accurate demand and cost data."

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1Telecommunications Relay Services and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities, Further Notice of Proposed Rulemaking, CG Dkt. 03-123, FCC 05-106 (July 20, 2006).

2"Traditional" TRS is text-to-voice over the public switched telephone network (PSTN).

3 47 C.F.R. § 64.604(c)(3).

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 This page last updated:August 15, 2006

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