Federal Communications Commission FCC 07-186 Before the Federal Communications Commission Washington, D.C. 20554 In the Matter of Telecommunications Relay Services and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities ) ) ) ) ) ) CG Docket No. 03-123 REPORT AND ORDER AND DECLARATORY RULING Adopted: October 26, 2007 Released: November 19, 2007 By the Commission: Chairman Martin, Commissioners Copps and Adelstein issuing separate statements. TABLE OF CONTENTS Heading Paragraph # I. INTRODUCTION.....................................................................................................................1 II. BACKGROUND.......................................................................................................................3 A. The Provision and Compensation of TRS ...........................................................................3 B. The 2006 TRS Cost Recovery FNPRM................................................................................8 1. Cost Recovery Methodology for Traditional TRS, STS, and IP Relay.........................9 2. Cost Recovery Methodology for VRS.........................................................................11 3. “Reasonable” Costs Compensable from the Fund.......................................................13 4. Management and Administration of the Fund.............................................................15 III. REPORT AND ORDER..........................................................................................................16 A. TRS Cost Recovery Methodologies ..................................................................................16 1. The Cost Recovery Methodology for Interstate Traditional TRS, Interstate STS, Interstate CTS, and IP CTS – the MARS Plan ...................................................16 a. Adoption of the MARS Plan .................................................................................16 b. Calculation of the MARS Plan Rate for Interstate Traditional TRS and Interstate STS ........................................................................................................26 c. Calculation of the MARS Plan Rate for Interstate CTS and IP CTS ....................36 2. The Cost Recovery Methodology for IP Relay ...........................................................39 3. The Cost Recovery Methodology for VRS .................................................................47 B. The TRS Compensation Rates for the 2007-2008 Under the New Cost Recovery Methodologies ...................................................................................................................57 1. Interstate Traditional TRS and Interstate STS.............................................................57 2. Interstate CTS and Interstate and Intrastate IP CTS....................................................62 3. IP Relay .......................................................................................................................66 Federal Communications Commission FCC 07-186 2 4. VRS .............................................................................................................................67 C. Specific Guidelines on Allowable Costs ...........................................................................73 D. Management and Administration of the Fund...................................................................83 1. The Interstate TRS Fund Advisory Council................................................................83 2. Other Issues .................................................................................................................86 IV. DECLARATORY RULING ...................................................................................................89 V. CONCLUSION .......................................................................................................................97 VI. PROCEDURAL MATTERS...................................................................................................98 A. Final Regulatory Flexibility Analysis ...............................................................................98 B. Paperwork Reduction Act Analysis...................................................................................99 C. Congressional Review Act ..............................................................................................102 D. Materials in Accessible Formats......................................................................................103 VII. ORDERING CLAUSES ......................................................................................................104 APPENDICES: APPENDIX A - List of Commenters APPENDIX B - Collection of State Data from State Programs and Providers and Sample Analysis APPENDIX C - Calculating Total Dollars for all States for MARS Calculation and Sample Analysis APPENDIX D - Final MARS Rate Calculation and Sample Analysis APPENDIX E - TRS and STS Intrastate Rate Data for 2006 APPENDIX F - Captioned Telephone Service Intrastate Rate Data for 2006 APPENDIX G - Final Regulatory Flexibility Analysis APPENDIX H - Final Rule Changes I. INTRODUCTION 1. In July 2006, the Commission released a Further Notice of Proposed Rulemaking1 seeking comment on issues concerning the compensation of telecommunications relay services (TRS) providers from the Interstate TRS Fund (Fund).2 In this Report and Order and Declaratory Ruling (Order) we: (1) adopt a new cost recovery methodology for interstate traditional TRS3 and interstate Speech-to-Speech (STS)4 based on the “MARS” plan (“Multi- 1 Telecommunications Relay Services and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities, CG Docket No. 03-123, Further Notice of Proposed Rulemaking, 21 FCC Rcd 8379 (July 20, 2006) (2006 TRS Cost Recovery FNPRM). 2 TRS, created by Title IV of the Americans with Disabilities Act of 1990 (ADA), enables a person with a hearing or speech disability to access the nation’s telephone system to communicate with voice telephone users through a relay provider and a communications assistant (CA). See 47 U.S.C. § 225(a)(3) (defining TRS); 47 C.F.R. § 64.601(14). As noted below, there are various forms of TRS. The Fund compensates providers of eligible interstate TRS services, and other TRS services not compensated by the states, for their reasonable costs of providing service. See generally Telecommunications Relay Services and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities, CC Docket Nos. 90-571 & 98-67, CG Docket No. 03-123, Report and Order, Order on Reconsideration, and Further Notice of Proposed Rulemaking, 19 FCC Rcd 12475, 12479-83, paras. 3-8 (June 30, 2004) (2004 TRS Report & Order). 3 Traditional TRS is a text-based form of TRS with the text provided via a text telephone (TTY) and the Public Switched Telephone Network (PSTN). See 47 C.F.R. § 64.601(14). This service includes Spanish-to-Spanish relay. (continued…) Federal Communications Commission FCC 07-186 3 state Average Rate Structure”), proposed by one of the providers5; (2) adopt a new cost recovery methodology for interstate captioned telephone service (CTS)6 and interstate and intrastate Internet Protocol (IP) captioned telephone service (IP CTS) 7 based on the MARS plan; (3) adopt a cost recovery methodology for Internet Protocol (IP) Relay8 based on price caps; (4) adopt a cost recovery methodology for Video Relay Service (VRS)9 that adopts tiered rates based on call volume; (5) clarify the nature and extent that certain categories of costs are compensable from the Fund; and (6) address certain issues concerning the management and oversight of the Fund, (…continued from previous page) See Telecommunications Relay Services for Individuals with Hearing and Speech Disabilities, CC Docket No. 98- 67, Report and Order and Further Notice of Proposed Rulemaking, 15 FCC Rcd 5140, 5154-55, paras. 28-31 (March 6, 2000) (2000 TRS Order) (mandating interstate Spanish-to-Spanish traditional TRS). 4 STS is a form of TRS that allows persons with speech disabilities to communicate with voice telephone users through the use of specially trained CAs who understand the speech patterns of persons with disabilities and can repeat the words spoken by that person. See 47 C.F.R. § 64.601(12). STS is a mandatory service, so that all common carriers obligated to provide TRS and all states with a certified state TRS program must offer this service. 2000 TRS Order, 15 FCC Rcd at 5149, para. 15. 5 Hamilton Relay, Inc. (Hamilton) raised this proposal, which would base the compensation rate paid by the Fund on the average of the intrastate TRS rates paid by the states, in its petition for reconsideration of the 2004 TRS Report & Order. Hamilton Relay Service, Inc., Petition for Reconsideration (filed Oct. 1, 2004) (Hamilton Petition). Hamilton also raised this issue in its application for review of the 2004 Bureau TRS Rate Order, which adopted the compensation rates for the various forms of TRS for the 2004-2005 Fund year. See Telecommunications Relay Services and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities, CC Docket No. 98- 67, Order, 19 FCC Rcd 12224 (June 30, 2004) (2004 Bureau TRS Rate Order), modified by Telecommunications Relay Services and Speech-to Speech Services for Individuals with Hearing and Speech Disabilities, CC Docket No. 98-67, Order, 19 FCC Rcd 24981 (Dec. 30, 2004) (Modified 2004 Bureau TRS Order). 6 CTS is a form of TRS generally used by someone who can speak and has some residual hearing. A special telephone displays the text of what the other party is saying, so that the user can simultaneously both listen to what is said over the telephone (to the extent possible) and read captions of what the other person is saying. See Telecommunications Relay Services, and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities, CC Docket No. 98-67, Declaratory Ruling, 18 FCC Rcd 16121 (Aug. 1, 2003) (2003 Captioned Telephone Declaratory Ruling). CTS is not a mandatory form of TRS, although that issue is subject to a pending petition. See Telecommunications Relay Services and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities; Internet-based Captioned Telephone Service, CG Docket No. 03-123, Declaratory Ruling, 22 FCC Rcd 379, at 379-80, para. 1 n.3 (Jan. 11, 2007) (2007 IP CTS Declaratory Ruling). 7 IP CTS is a form of captioned telephone service where the connection carrying the captions between the relay provider and the user is via the Internet, rather than the PSTN. See generally 2007 IP CTS Declaratory Ruling. IP CTS is not a mandatory form of TRS, and, pursuant to the 2007 IP CTS Declaratory Ruling, is compensated at the IP Relay rate. Id., 22 FCC Rcd at 390, para. 26. 8 IP Relay is a text-based form of TRS that uses the Internet, rather than the PSTN, for the link of the call between the relay user and the CA. See Provision of Improved Telecommunications Relay Services and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities, CC Docket No. 98-67, Declaratory Ruling and Second Further Notice of Proposed Rulemaking, 17 FCC Rcd 7779 (April 22, 2002) (IP Relay Declaratory Ruling). IP Relay is not a mandatory form of TRS. See 2004 TRS Report & Order, 19 FCC Rcd at 12564, paras. 231-32 (raising issue whether IP Relay should be a mandatory service). 9 VRS is a form of TRS that that enables the VRS user and the CA to communicate via a video link in sign language, rather than through text. VRS presently requires a broadband Internet connection. See 2000 TRS Order,15 FCC Rcd at 5152-54, paras. 21-27 (recognizing VRS as a form of TRS); 47 C.F.R. § 64.601(17) (defining VRS). VRS is not a mandatory form of TRS. See 2004 TRS Report & Order, 19 FCC Rcd at 12567-68, paras. 243-45 (raising issue whether VRS should be a mandatory service). Federal Communications Commission FCC 07-186 4 including financial incentives offered to consumers to make relay calls and the role of the Interstate TRS Fund Advisory Council. 2. In addition, we adopt new compensation rates for these services as follows: · For interstate traditional TRS, we adopt the MARS plan rate of $1.592 per-minute based on the states’ competitively bid compensation rates for intrastate traditional TRS and STS. This rate shall be effective for the remainder of the 2007-2008 Fund year on the first day of the month following the effective date of this Order.10 · For interstate STS, we adopt a rate of $2.723 per-minute. This rate is based on the MARS plan rate of $1.592, but includes an additional $1.131 per minute in compensation that shall be directed for outreach, as set forth below. This rate shall be effective for the remainder of the 2007-2008 Fund year on the first day of the month following the effective date of this Order. · For interstate CTS and interstate and intrastate IP CTS, we adopt the MARS plan rate of $1.629 per-minute based on the states’ competitively bid compensation rates for intrastate captioned telephone service. This rate shall be effective for the remainder of the 2007-2008 Fund year on the first day of the month following the effective date of this Order. · For interstate and intrastate IP Relay, we adopt the rate of $1.293. This rate shall be effective for the 2007-2008 through 2009-2010 Fund years, subject to annual adjustment as set forth below. · For interstate and intrastate VRS, we adopt the following rates and tiers: (1) for the first 50,000 monthly minutes: $6.77; (2) for monthly minutes between 50,001 and 500,000: $6.50; and (3) for monthly minutes above 500,000: $6.30. The VRS rates shall be effective for the 2007-2008 through 2009-2010 Fund years, subject to annual adjustment as set forth below.11 10 The effective date of this Order with respect to the 2007-2008 rates adopted pursuant to the new cost recovery methodologies is 30 days after publication in the Federal Register. See infra para. 111. 11 On June 29, 2007, the Consumer & Governmental Affairs Bureau (CGB) released the 2007-2008 TRS rate order, extending the 2006-2007 per-minute rates but adopting a new Fund size and carrier contribution factor. See Telecommunications Relay Services and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities, CG Docket No. 03-123, Order, 22 FCC Rcd 11706 (June 29, 2007) (2007 Bureau TRS Rate Order). Although we are adopting new rates for certain services, we do not in this Order amend the Fund size or carrier contribution factor. If necessary, we will make an appropriate adjustment later in the Fund year to account for these revised rates, or do so in conjunction with the revised carrier billing that will be necessary as a result of the recent order requiring interconnected VoIP providers to contribute to the Fund. See IP-Enabled Services, WC Docket No. 04-36, Implementation of Sections 255 and 251(a)(2) of The Communications Act of 1934 , as Enacted by The Telecommunications Act of 1996: Access to Telecommunications Service, Telecommunications Equipment and Customer Premises Equipment by Persons with Disabilities, WT Docket No. 96-198, Telecommunications Relay Services and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities, CG Docket No. 03- 123, The Use of N11 Codes and Other Abbreviated Dialing Arrangements, CC Docket No. 92-105, Report and Order, 22 FCC Rcd 11275 (June 15, 2007) (Sections 225/255 VoIP Order). Federal Communications Commission FCC 07-186 5 II. BACKGROUND A. The Provision and Compensation of TRS 3. The 2006 TRS Cost Recovery FNPRM and prior orders have set forth in detail the evolution of TRS and the compensation of providers from the Fund for the various forms of TRS, and therefore we do not repeat that history here.12 We note, however, that Congress mandated that TRS users cannot be required to pay for the service costs of using TRS. Specifically, Congress provided that TRS users cannot be required to pay rates “greater than the rates paid for functionally equivalent voice communication services with respect to such factors as the duration of the call, the time of day, and the distance from point of origination to point of termination.”13 Therefore, the cost of relay facilities, and the relaying of the calls, cannot be passed on to consumers of TRS, since doing so would result in TRS users paying rates greater than those for similar voice telephone calls. 4. As a result, Section 225 creates a cost recovery regime whereby providers of TRS are compensated for their costs of providing TRS.14 Section 225 provides that the “costs caused by” interstate TRS “shall be recovered from all subscribers for every interstate service,” and the “costs caused by” the provision of intrastate TRS “shall be recovered from the intrastate jurisdiction.”15 With respect to interstate TRS, contributions are collected from the common carriers providing interstate telecommunications services to create the Fund from which eligible TRS providers may be compensated.16 12 See 2006 TRS Cost Recovery FNPRM, 21 FCC Rcd at 8381-84, paras. 2-6. Recent TRS compensation rate orders include: 2007 Bureau TRS Rate Order; Telecommunications Relay Services and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities, CG Docket No. 03-123, Order, 21 FCC Rcd 7018 (June 29, 2006) (2006 Bureau TRS Rate Order); Telecommunications Relay Services and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities, CG Docket No. 03-123, Order, 20 FCC Rcd 12237 (June 28, 2005) (2005 TRS Rate Order); 2004 Bureau TRS Rate Order; Telecommunications Relay Services and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities, CC Docket No. 98-67, Order, 18 FCC Rcd 12823 (June 30, 2003) (2003 Bureau TRS Rate Order). 13 See 47 U.S.C. § 225(d)(1)(D); 47 C.F.R. § 64.604(c)(4). 14 47 U.S.C. § 225(d)(3). 15 47 U.S.C. § 225(d)(3)(B); see also 47 C.F.R. § 64.604(c)(5)(ii). No specific funding method is required for intrastate TRS or state TRS programs. States generally recover the costs of intrastate TRS either through rate adjustments or surcharges assessed on all intrastate end users, and reimburse TRS providers directly for their intrastate TRS costs. Most states presently select one provider to offer TRS within the state. On an interim basis, the costs of providing intrastate VRS, IP Relay, and IP CTS are presently compensated from the Interstate TRS Fund. See 2000 TRS Order, 15 FCC Rcd at 5154, para. 26 (addressing VRS); IP Relay Declaratory Ruling, 17 FCC Rcd at 7786, para. 20 (addressing IP Relay); IP CTS Declaratory Ruling, 18 FCC Rcd at 16125, para. 10 (addressing IP CTS). The issue of separation of costs relating to the provision of IP Relay and VRS is pending pursuant to the FNPRM in the 2004 TRS Report & Order. See 2004 TRS Report & Order, 19 FCC Rcd at 12561-65, paras. 221-30 (IP Relay), 12565-67, paras. 234-42 (VRS). 16 The amount of each carrier’s contribution is the product of the carrier’s interstate end-user telecommunications revenue and a contribution factor determined annually by the Commission. 47 C.F.R. § 64.604(c)(5)(iii). As noted above, interconnected VoIP providers are now also required to contribute to the Fund. See supra note 11; Sections 225/255 VoIP Order. Federal Communications Commission FCC 07-186 6 5. Under the present interstate cost recovery methodology, providers are compensated on the basis of a per-minute compensation rate.17 This rate is not a “price” that is charged to, and paid by, a service user, but rather is a settlement mechanism to ensure that providers are compensated from the Fund for their reasonable actual costs of providing service. Presently, compensation rates are determined annually based on the providers' projected cost and minutes of use data for a two-year period.18 This data is submitted to the Fund administrator, presently the National Exchange Carrier Association (NECA), which then calculates the average per-minute compensation rate for the various forms of TRS and submits 17 Compensation is presently based on per-minute rates adopted each year by the Commission for the following July 1 to June 30 Fund year. There are currently four different compensation rates for the different forms of TRS: traditional TRS, IP Relay, STS, and VRS. See 2006 Bureau TRS Rate Order, 21 FCC Rcd at 7024-25, paras. 17-18 (adopting separate rates for traditional TRS and IP Relay). The traditional TRS rate applies to Spanish Relay service and captioned telephone service. Presently, the IP Relay rate applies to IP CTS. See 2007 IP CTS Declaratory Ruling, 22 FCC Rcd at 390, para. 26. 18 See 47 C.F.R. § 64.604(c)(5)(iii)(C). Federal Communications Commission FCC 07-186 7 the rates to the Commission for approval.19 The Commission (or Bureau)20 issues a rate order each year by June 30, either approving or modifying these rates.21 6. During the first 10 years of the TRS program, the calculation and adoption of the interstate TRS compensation rates was largely uneventful, in large part because, until 2000, there was only one compensation rate – the rate for traditional TRS. That has not been the case, however, in more recent years, particularly with respect to VRS. As a result of the 2000 TRS Order, in 2000, the first VRS compensation rate was adopted, $5.143.22 The rate subsequently rose to $17.04 per-minute,23 and as a result the number of providers offering this service increased. In more recent years, the Commission disallowed some of the providers’ submitted costs (in particular, profits or mark-ups on expenses) and the VRS rate has been in the six or seven dollar per-minute range.24 7. As a result of the increased use of VRS and its relatively high compensation rate (compared to those for the other forms of TRS), the Fund has grown from approximately $40 million in 2000 to over $550 million for the 2007-2008 Fund year. Over $430 million of this $550 million, or nearly 75 percent, is attributable to VRS.25 As we have noted, carriers offering interstate telecommunications services contribute to the Fund, and these costs are generally passed on to their consumers. 19 See, e.g., NECA, Interstate Telecommunications Relay Services Fund Payment Formula and Fund Size Estimate, CG Docket No. 03-123, filed May 1, 2007 (2007 NECA Filing). The regulations provide that the Fund administrator shall administer the Interstate TRS Fund and oversee both the collection of contributions paid into the Fund and the compensation of TRS providers from the Fund. See 47 C.F.R. § 64.604(c)(5)(iii). 20 Some rate orders have been at the Commission level, and some have been at the Bureau level. See supra note 12 (citing orders). 21 Id.; see, e.g., 2006 Bureau TRS Rate Order (most recent order adopting annual per-minute compensation rates based on providers’ projected costs and minutes of use); 2003 Bureau TRS Rate Order, 18 FCC Rcd at 12836, para. 37 (disallowing certain costs and adopting a modified rate). 22 See generally 2003 Bureau TRS Rate Order, 18 FCC Rcd at 12830, para. 18 n.52 (setting forth history of VRS compensation rates). 23 Id.; see also www.neca.org (Resources, then TRS) (chart of the history of all TRS compensation rates). 24 Id.; 2004 Bureau TRS Order, 19 FCC Rcd at 12237-41 paras. 35-46 (addressing cost disallowances and challenges to the adoption of the 2004-2005 compensation rates); 2005 TRS Rate Order, 20 FCC Rcd at 12246-48, paras. 23-28 (adopting 2005-2006 VRS rate based on median rate of the providers because record reflected that the average rate would unfairly penalize most providers and providers’ cost projections may have been based on various levels of service quality); 2006 Bureau TRS Rate Order, 21 FCC Rcd at 7027, paras 28-29 (freezing the 2005-2006 VRS rate for the 2006-2007 Fund year because, in part, of the providers’ difficulty in accurately predicting minutes of use); 2007 Bureau TRS Rate Order (extending the 2006-2007 rates); 2004 TRS Report & Order, 19 FCC Rcd at 12537-52, paras. 163-200 (addressing challenges to the 2003-2004 compensation rates, including disallowances for profit, engineering costs, and labor costs); 2006 Order on Reconsideration (addressing challenge to 2003-2004 VRS role); Telecommunications Relay Services and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities, CG Docket No. 03-123, Memorandum Opinion and Order, 21 FCC Rcd 8063 (July 12, 2006) (2006 MO&O) (addressing challenge to 2004-2005 TRS rates). 25 2007 Bureau TRS Rate Order, 22 FCC Rcd at 11714, para 27; 2007 NECA Filing at 21 (estimating 65 million minutes of use for VRS for the 2007-2008 Fund year). Federal Communications Commission FCC 07-186 8 B. The 2006 TRS Cost Recovery FNPRM 8. Because the annual determination of the TRS compensation rates has presented a variety of regulatory and administrative challenges under the present methodology, in the 2006 TRS Cost Recovery FNPRM, the Commission sought comment on a range of issues concerning the compensation of relay providers from the Fund.26 More particularly, the Commission sought comment on four issues: (1) the adoption of an alternative cost recovery methodology for traditional TRS, STS, and IP Relay based, in some fashion, on Hamilton’s MARS plan27; (2) the adoption of an alternative cost recovery methodology for VRS; (3) whether certain types of costs are appropriately compensable from the Fund, and if so, the nature and extent of such costs; and (4) the management and administration of the Fund, including ways to combat waste, fraud, and abuse. 1. Cost Recovery Methodology for Traditional TRS, STS, and IP Relay 9. The Commission first sought comment on adoption of the MARS plan for determining the compensation rate for traditional TRS, as well as for STS and IP Relay.28 As the 26 We note that some comments filed in response to NECA’s 2006 and 2007 filings of proposed compensation rates for the 2006-2007 Fund year by providers reflect dissatisfaction with the rate setting process, as well as with the proposed rates. See NECA, Interstate Telecommunications Relay Services Fund Payment Formula and Fund Size Estimate, CG Docket No. 03-123, filed May 1, 2006 (2006 NECA Filing); 2007 NECA Filing; Sprint Nextel Corporation (Sprint Nextel) Comments (May 17, 2006) at 1-2; Communication Services for the Deaf, Inc. (CSD) Comments (May 17, 2006) at 6-8; Hamilton Comments (May 17, 2006) at 8-9; Hands On Video Relay Services, Inc. (Hands On) Reply Comments (May 24, 2006) at 17; CSD Reply Comments (May 24, 2006); see also Telecommunications for the Deaf, Inc., National Association of the Deaf, Deaf and Hard of Hearing Consumer Advocacy Network, and California Coalition of Agencies Serving the Deaf and Hard of Hearing (collectively, Consumer Groups) Reply Comments (May 24, 2006); TRS Advisory Council Ex Parte comments (July 21, 2006). Further, ex parte letters were filed by KPS Consulting on behalf of Ultratec (May 9, 2007); Ruth Milkman on behalf of Sorenson (May 11, 2007); Francis Buono on behalf of Sprint Nextel, Sorenson, and Snap!VRS (May 11, 2007); KPS Consulting on behalf of Ultratec (May 16, 2007); Ruth Milkman on behalf of Sorenson, Sprint Nextel, and Snap! VRS (May 23, 2007); Toni R. Acton on behalf of AT&T (May 23, 2007); Bob Segalman and Rebecca Ladew (May 24, 2007); Ruth Milkman on behalf of Sprint Nextel, Sorenson, and Snap!VRS (May 31, 2007); Ruth Milkman on behalf of Sprint Nextel, Sorenson, and Snap!VRS (June 1, 2007); Ruth Milkman on behalf of Sprint Nextel, Sorenson, and Snap!VRS (June 1, 2007); George L. Lyon, Jr. on behalf of HOVRS (June 5, 2007); KPS Consulting on behalf of Ultratec (June 6, 2007); (KPS Consulting on behalf of CSDVRS, HOVRS, GoAmerica, and CACDHH-VRS (June 12, 2007); Eliot J. Greenwald on behalf of TDI (June 15, 2007); David A. O’Conner on behalf of Hamilton (June 15, 2007); David A. O’Conner on behalf of Hamilton (June 15, 2007); Ruth Milkman on behalf of Sprint Nextel, Sorenson, and Snap!VRS (June 15, 2007); KPS Consulting on behalf of CSDVRS (June 16, 2007); Eliot J. Greenwald on behalf of TDI (June 20, 2007); Aileen A. Pisciotta on behalf of Speech Communication Assistance by Telephone, Inc. (SCT) (June 22, 2007); George Lyon, Jr. on behalf of HOVRS (June 26, 2007); Michael B. Fingerhut filed by Ruth Milkman on behalf of Sprint Nextel, Snap, and Sorenson (June 27, 2007) (corrected version); George Lyon, Jr. on behalf of HOVRS (July 5, 2007); George Lyon, Jr. Ex Parte on behalf of HOVRS (July 11, 2007); Bob Segalman (July 17, 2007); KPS Consulting on behalf of CSDVRS (July 19, 2007); David A. O’Conner on behalf of Hamilton (August 10, 2007); Ruth Milkman on behalf of Sprint Nextel, Snap, and Sorenson (August 10, 2007). 27 The Commission noted that the compensation rate for traditional TRS applied to captioned telephone service. 2006 TRS Cost Recovery FNPRM, 21 FCC Rcd at 8387, para. 17 & n.59. Therefore, the 2006 TRS Cost Recovery FNPRM did not expressly address the cost recovery methodology for captioned telephone service. But see id., 21 FCC Rcd at 8386, para. 13 (seeking comment on whether the MARS plan should apply to traditional TRS “and possibly other forms of TRS, such as STS”). Further, at this time, IP CTS had not yet been recognized as a form of TRS. 28 Id., 21 FCC Rcd at 8385-88, paras. 9-19. Federal Communications Commission FCC 07-186 9 Commission explained, under the MARS plan, the interstate traditional TRS rate would be calculated based on a weighted average of the intrastate TRS rates paid by the states.29 The Commission sought comment on whether the MARS plan, because it is based on competitively bid state rates, would provide for a more efficient provision of service and result in a fairer, more reasonable compensation rate. The Commission also sought comment on various details of how the MARS plan might be implemented, including reconciling state compensation rates based on session minutes rather than conversation minutes,30 whether any factors might warrant excluding a particular state’s rate from the calculation,31 and whether the individual state rates should be weighted by a state’s total minutes of use, so that states with relatively high rates and low minutes of use do not skew the average.32 10. The Commission also sought comment on the application of the MARS plan to STS.33 Because many states compensate intrastate traditional TRS and intrastate STS at the same rate,34 and NECA recommended that the Commission consider adopting one rate that would apply to both STS and traditional TRS,35 the Commission sought comment on whether the same rate should apply to both traditional TRS and STS.36 Finally, the Commission sought comment on whether the traditional TRS, STS, and IP Relay rate(s) should continue to be set for a one- year period or whether a longer rate period might be appropriate.37 2. Cost Recovery Methodology for VRS 11. Although the Commission has sought comment several times on the appropriate VRS cost recovery methodology,38 it concluded that because of the continued sharp growth in the 29 Id., 21 FCC Rcd at 8385, para. 9. In contrast, the present methodology is based on projected cost and demand data submitted by the providers. 30 Id., 21 FCC Rcd at 8387, para. 14. As the Commission noted, presently the Fund compensates providers for conversation minutes (or completed minutes), which are measured by conversation time between the calling and called party. Conversation minutes do not include time for call set-up, ringing, waiting for the called party to answer, or call wrap-up, and do not encompass calls that reach a busy signal or are not answered. Session minutes include all the time the CA spends on a call to the relay center, i.e., from the time the call is connected to the CA, regardless of whether the called party answers the call. Id., 21 FCC Rcd at 8385, para. 9 n.41. 31 For example, if a state rate is based on the interstate rate, inclusion of that state’s rate into the MARS plan would be circular. See id., 21 FCC Rcd at 8387, para. 15. 32 Id., 21 FCC Rcd at 8387, para. 16. 33 Id., 21 FCC Rcd at 8387-88, para. 17 (also noting that STS is a mandatory form of TRS and states compensate providers for intrastate STS calls). The compensation rate for traditional TRS presently also applies to Spanish relay and captioned telephone service. 34 See generally 2006 NECA TRS Rate Filing at 17. 35 Id. 36 2006 TRS Cost Recovery FNPRM, 21 FCC Rcd at 8388, para. 18. 37 Id., 21 FCC Rcd at 8389, para. 23. 38 Id., 21 FCC Rcd at 8389-90, para. 24; see generally 2000 TRS Order, 15 FCC Rcd at 5152-56, paras. 22, 26-27, 32-33 (directing the TRS Advisory Council to develop cost recovery guidelines for VRS; the Council recommended using the same methodology for VRS as used for traditional TRS); Telecommunications Services for Individuals with Hearing and Speech Disabilities, Recommended TRS Cost Recovery Guidelines, Request by Hamilton Telephone Company for Clarification and Temporary Waivers, CC Docket No. 98-67, Memorandum Opinion and Order and Further Notice of Proposed Rulemaking, 16 FCC Rcd 22948, 22958-60, paras. 30-36 (Dec. 21, 2001) (continued…) Federal Communications Commission FCC 07-186 10 use of VRS, open issues concerning what costs may appropriately be included in determining the compensation rate under the current methodology, and the providers’ difficulty in accurately forecasting demand,39 it was appropriate to seek additional comment on this issue.40 The Commission emphasized that it was particularly interested in adopting a methodology that would result in more predictability for the providers, and be consistent with the principle that providers are entitled to their “reasonable” actual costs of providing service.41 The Commission therefore sought comment on whether modifications should be made to the current methodology, or whether a new methodology should be adopted. The Commission proposed various new methodologies, including compensating each provider based on the provider’s actual, reasonable costs, seeking competitive bids,42 or using a true-up based on each provider’s reasonable actual costs. 12. With respect to use of a true-up, the Commission sought comment on whether providers should be required to reimburse the Fund for any amount by which their payments exceed reasonable actual costs.43 The Commission also sought comment on whether “the VRS compensation rate should be set for a two-year period, rather than a one-year period.”44 (…continued from previous page) (declining to adopt a permanent cost recovery methodology for VRS and seeking additional comment on this issue); 2004 TRS Report & Order, 19 FCC Rcd at 12487-90, paras. 17-24 (declining to adopt a permanent cost recovery methodology for VRS), at 12565-67, paras. 234-40 (FNPRM seeking additional comments and noting that although the Commission had previously sought comment on this issue, the relative infancy and unique characteristics of VRS made it difficult to determine what the appropriate cost recovery methodology should be). In response to the 2004 TRS Report and Order’s FNPRM, six VRS providers filed comments. CSD Comments (Oct. 18, 2004); Hamilton Comments (Oct. 18, 2004); Hands On Comments (Oct. 15, 2004); MCI Comments (Oct. 18, 2004); Sorenson Comments (Oct. 18, 2004); Sprint Comments (Oct. 18, 2004). Four providers supported the use of the compensation methodology currently in use for VRS and all other forms of TRS. Commenters generally opposed NECA’s method of reviewing the providers’ projected cost and demand data, including the disallowance of certain expenses. See generally 2006 TRS Cost Recovery FNPRM, 21 FCC Rcd at 8390-91, para. 26. 39 Based on its review of the providers’ filings for the 2006-2007 Fund year, the Commission expressed concern that the providers’ data reflected virtually no growth in the projected use of VRS in 2006 and 2007. See 2006 Bureau TRS Rate Order, 21 FCC Rcd at 7022, para. 11 (citing 2006 NECA Filing at Ex. 1D). In fact, the use of VRS has continued to rapidly rise in the 2006-2007 Fund year: from 3.2 million minutes in January, to 3.6 million minutes in July, to over 4.2 million minutes in December, and to nearly 5.3 million minutes in May 2007. See 2007 NECA Filing; www.neca.org (Resources, then TRS) (monthly reports of minutes of use). 40 See 2006 TRS Cost Recovery FNPRM, 21 FCC Rcd at 8391, para. 27. The Commission also noted that since 2004 the Commission has adopted VRS speed of answer and interoperability requirements, which may affect cost recovery issues. In addition, the Commission noted that it recently permitted entities desiring to offer VRS to be certified by the Commission, which it expected would result in new VRS providers offering service, many of which will not be traditional telephone companies and therefore may present unique cost issues. Id. 41 Id., 21 FCC Rcd at 8391, para. 28. 42 Id., 21 FCC Rcd at 8389-92, paras. 24-29. The Commission noted that many states award contracts for the provision of intrastate TRS to a single provider through a competitive bidding process, which, as noted above, is the basis for the MARS plan. Id., 21 FCC Rcd at 8391, para. 28 n.82. 43 The Commission noted that the providers’ demand forecasts for VRS have generally been significantly lower than actual demand, and under the current cost recovery methodology, when demand is underestimated, the compensation rate will be higher, resulting in potential overcompensation for actual minutes. Id., 21 FCC Rcd at 8392, para. 29. The Commission also noted that it previously sought comment in 2004 on whether the VRS cost recovery methodology should include a true-up. Id., 21 FCC Rcd at 8392, para. 29 n.83 (seeking comment on (continued…) Federal Communications Commission FCC 07-186 11 3. “Reasonable” Costs Compensable from the Fund 13. The Commission noted that NECA’s Data Collection Form sets forth categories of costs related to the provision of TRS for which providers may seek compensation.45 The Commission sought comment on the nature and extent to which certain types of costs may be compensated from the Fund consistent with Section 225, including marketing and outreach expenses,46 overhead costs, legal and lobbying expenses, start-up expenses, and executive compensation.47 14. The Commission also sought comment on whether provider cost and demand data should be made public to make it easier for providers and the public to comment on the reasonableness of the rates.48 The Commission noted that it has honored requests by providers submitting projected cost and demand data to treat that information as confidential and, as a result, the Commission addresses such data only in the aggregate or in some other way that does not reveal the individual data of a particular provider.49 The Commission also recognized that this approach makes it is difficult for providers and the public (including carriers providing interstate telecommunications services that pay into the Fund) to comment on the reasonableness of the rates.50 As a result, the Commission sought comment on whether the providers’ projected (and/or actual) cost and demand data, or particular categories of the cost and demand data, should be made public, and on other ways to make the rate setting process more transparent.51 4. Management and Administration of the Fund 15. Finally, the Commission sought comment on the steps it might take to ensure the integrity of the Fund and that compensation is paid consistent with the statute. Specifically, the Commission sought comment on the oversight of the Fund administrator, the oversight of the providers, and ways to deter waste, fraud, and abuse.52 The Commission emphasized that it (…continued from previous page) whether VRS might be compensated by “a lump sum payment or periodic payments of estimated actual costs with a ‘true-up’ at the end of the fund year” (quoting 2004 TRS Report & Order, 19 FCC Rcd at 12565-66, para. 236)). 44 The Commission also sought comment on whether the VRS compensation rate should be set for a two-year or longer period, rather than a one-year period. Id., 21 FCC Rcd at 8392, paras. 30. 45 See 2006 NECA Filing at Appendix A. 46 In the 2006 NECA Filing, “marketing/advertising” was described as “[e]xpenses associated with promoting TRS services within the community.” “Outreach” was described as “[e]xpenses of programs to educate the public on TRS.” See id. 47 See 2006 TRS Cost Recovery FNPRM, 21 FCC Rcd at 8393-97, paras. 33-42. The Data Collection Form explicitly includes some of these cost categories, and implicitly includes others. See generally 2006 NECA Filing at Appendix A. 48 2006 TRS Cost Recovery FNPRM, 21 FCC Rcd. at 8397, paras. 43-44. 49 Id., 21 FCC Rcd at 8397, para. 43 (citing 2004 Bureau TRS Order, 19 FCC Rcd at 12232, para. 18 n.57); see also 47 C.F.R. § 64.604(c)(5)(iii)(I) (generally providing that Fund administrator shall keep all data confidential). 50 2006 TRS Cost Recovery FNPRM, 21 FCC Rcd at 8397, para. 43. 51 Id., 21 FCC Rcd at 8397, para. 44. 52 Id., 21 FCC Rcd at 8398-99, paras. 45-49. Federal Communications Commission FCC 07-186 12 sought to ensure that “with the number of providers and number of minutes of use continuing to increase, particularly with respect to VRS and IP Relay, the Fund compensates 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.”53 III. REPORT AND ORDER A. TRS Cost Recovery Methodologies 1. The Cost Recovery Methodology for Interstate Traditional TRS, Interstate STS, Interstate CTS, and IP CTS – the MARS Plan a. Adoption of the MARS Plan 16. As discussed more fully below, we adopt a cost recovery methodology for interstate traditional TRS, interstate STS, interstate CTS, and interstate and intrastate IP CTS based on the MARS plan – i.e., a weighted average of competitively bid state rates. We believe that this approach will simplify the rate setting process and result in more predictable, fair, and reasonable rates. We will calculate one MARS rate applicable to both interstate traditional TRS and interstate STS based on state rates for intrastate TRS and STS (which are generally the same); we will adopt a separate MARS rate for interstate captioned telephone service and IP CTS based on state rates for intrastate captioned telephone service. 17. Presently, the compensation rates are based on a weighted average of the providers’ projected minutes of use of the service, and their projected costs of providing these minutes, for a future two-year period.54 This methodology has several inherent drawbacks. First, the resulting rate is only as accurate as the providers’ projected minutes of use and costs. Providers have an inherent incentive to submit higher, rather than lower, costs to ensure the compensation rate is as high as possible to cover their costs and presumably make a profit.55 For the same reason, they have an incentive to underestimate minutes of use.56 We also recognize that, under the present cost recovery methodology, the resulting rates do not correlate precisely to any of the providers’ actual costs. 18. We believe the MARS plan, because it is based on competitively bid state rates, produces a rate that better approximates providers’ reasonable costs, and therefore promotes the efficient recovery of all costs. Further, the MARS plan eliminates the costs, burdens, and uncertainties associated with evaluating, correcting, and re-evaluating provider data.57 53 Id., 21 FCC Rcd at 8399, para. 49. 54 In other words, the determination of the rate for the July 1, 2007, to June 30, 2008, Fund year is based on the providers’ projected minutes of use and costs for calendar years 2007 and 2008. 55 This is true even though, when actually offering service, providers have an incentive to minimize their costs, since presently they are compensated at the weighted average national rate regardless of their actual costs and therefore, in effect, earn “profit” on the difference between their actual costs and the compensation rate. 56 See supra note 39 (noting that the providers’ filings for the 2006-2007 Fund year reflected virtually no growth in the projected minutes of use of VRS, but in fact VRS minutes have continued to grow rapidly). 57 See Hamilton Comments at 6-7. In this regard, we will no longer require traditional TRS, STS, CTS, and IP CTS providers to file the annual cost and demand data reports with the Fund administrator, as they have in the past. They will, however, have to file data related to state traditional TRS and STS rates, as discussed below. Federal Communications Commission FCC 07-186 13 19. Most commenting providers support using the MARS plan as the cost recovery methodology for at least some forms of TRS.58 Hamilton, the proponent of the plan, states that the MARS plan is easy to implement, offers regulatory certainty, and more closely approximates providers’ reasonable costs than the current rate methodology or any other methodology suggested in the 2006 TRS Cost Recovery FNPRM.59 Hamilton further asserts that detailed cost calculations for categories such as marketing, outreach, legal costs, lobbying costs, executive compensation, and overhead costs would be unnecessary under the MARS plan, because the plan relies on competitively based state rates.60 Hamilton explains that because the Commission certifies each state's TRS program, the individual state TRS programs’ costs are “presumptively reasonable” and should be deemed not to include extraneous costs.61 Hamilton also notes that the MARS plan accounts for states with low TRS rates as well as those with high TRS rates, and that an average of those competitive rates will result in a reasonable, competitively-based interstate TRS rate.62 Hamilton further asserts that the MARS plan can be used for traditional TRS, STS, IP Relay and possibly captioned telephone service.63 20. Verizon and AT&T support the MARS plan for traditional TRS, but not for STS, IP Relay, or VRS because there are no “market-based rates” for these services.64 Verizon asserts that, for traditional TRS, setting an interstate rate based on a weighted average of intrastate rates will yield an “accurate, market-driven rate sufficient to cover provider costs while encouraging efficiency.”65 AT&T asserts that “[t]he competitive bidding process necessarily encourages providers to minimize costs and increase productivity.”66 Ultratec supports the MARS plan for captioned telephone service, but states that the rate should be based on state captioned telephone rates rather than state traditional TRS rates.67 58 In addition to Hamilton, commenters supporting the MARS plan include Hands On, Verizon, AT&T, and Ultratec. See, e.g., Hands On Comments at 4-9 (supporting MARS plan for traditional TRS, STS, and IP Relay, but not VRS); Verizon Comments at 7 (supporting MARS plan only for traditional TRS); AT&T Reply Comments at 2 (supporting MARS plan only for traditional TRS); Ultratec Reply Comments at 1-2 (supporting MARS plan for captioned telephone service). 59 Hamilton Comments at 2. Verizon notes that “the relatively large number of competitors and the considerable number of bidding opportunities provide the Commission with a wealth of information about the appropriate competitive rates for providing traditional TRS in specific, competitive state markets.” Verizon Comments at 3; see also Hamilton Reply Comments at 2 (noting Verizon’s comments). 60 Hamilton Comments at 7. 61 Hamilton Ex Parte (Feb. 12, 2007) at 1. 62 Id. 63 See generally Hamilton Comments at 2-8; see also Hamilton Reply Comments at 4-9. 64 See Verizon Comments at 1-8; see also AT&T Reply Comments at 3 (stating that it supports Verizon’s approach, but also that it “could” support the MARS plan for IP Relay). Hamilton asserts, however, that the MARS rate can apply to IP Relay and STS because the costs are “virtually the same as traditional TRS.” See Hamilton Reply Comments at 2. 65 Verizon Comments at i. 66 AT&T Reply Comments at 2. 67 Ultratec Reply Comments at 2 (noting that “[t]he market-driven, competitively based rate that would come out of this process would be both reasonable and meet the telecommunications needs of consumers, because it will draw on the expertise and analyses of all the states providing [captioned telephone service]”); see also Hamilton Reply (continued…) Federal Communications Commission FCC 07-186 14 21. We disagree with Sprint Nextel’s opposition to the MARS plan for traditional TRS and STS.68 Sprint Nextel asserts that the MARS plan would create new burdens and uncertainties, including developing and applying appropriate weighting factors and ensuring that call minutes are treated consistently.69 As outlined below, we do not believe that this will be the case; in any event, particular facets of the MARS can be adjusted in future years if necessary. Sprint Nextel also argues that rates based on state rates – even competitively bid state rates – may not be based on efficient costs.70 Although it is possible that some individual state rates may be relatively high because of inefficiencies or specific state requirements, we anticipate that the overall effect of any such rates on the final MARS rate will be minimal because of the large number of state rates (some relatively high, some relatively low) that will be averaged together.71 Sprint Nextel further argues that there is no certainty that the MARS plan will lead to lower rates.72 Our mandate, however, is not to achieve any particular rate level, but to ensure that the rates correlate to actual reasonable costs and that the process of determining the rates is fair, efficient, and predictable.73 22. Sprint Nextel also asserts that the Commission does not have the authority to implement the MARS plan because it constitutes a delegation of the Commission’s responsibilities under Section 225 to the states.74 Sprint Nextel asserts that if the MARS plan is viewed as a delegation to the states of the Commission’s responsibility under Section 225 to set interstate TRS compensation rates, “it would be beyond the Commission’s authority to adopt,” citing USTA v. FCC .75 Hamilton disagrees, asserting that the adoption of the MARS plan would not be a delegation of authority to the states. Hamilton argues that under the MARS plan, “the Commission would gather information about competitively-bid rates at the state level. The Commission would then use that information to calculate the interstate TRS rate.”76 (…continued from previous page) Comments at 7 (a separate MARS rate can be calculated for captioned telephone service because states generally contract separately for that service); Sprint Nextel Mar. 13, 2007 Ex Parte (although opposing the MARS plan, arguing that if it is adopted, a separate MARS rate for captioned telephone service should be adopted). 68 See Sprint Nextel Comments at 7-8. See generally Sorenson Comments at 58-59 (opposing MARS plan for VRS and IP Relay because there is no state data for these services upon which to base a rate). CSD, the Joint Consumers, the Joint Providers, and the FL PSC do not address the MARS plan. 69 Sprint Nextel Comments at 8; see also Sprint Nextel Mar. 13, 2007 Ex Parte. 70 Sprint Nextel Comments at 8 (asserting, for example, that if a “state insists that the provider open a relay center in the state so as to create jobs for its citizens rather than allow the provider to handle the state’s TRS traffic at a regional center located outside of the state,” costs may be higher). 71 See Verizon Comments at 5. 72 Sprint Nextel Comments at 8. Hamilton states that the Commission’s obligation is to ensure that providers are compensated for their reasonable costs, not to guarantee that relay rates are lowered over the long run. Hamilton Reply Comments at 3. Hamilton also asserts that if a provider’s price submission is not based on efficient cost data, that provider likely will not be the successful bidder. Id. at 4. 73 See Hamilton Reply Comments at 3-4. 74 Sprint Nextel Comments at 7 n.7. 75 Id. (citing USTA v. FCC, 359 F.3d 554 (D.C. Cir.), cert. denied, 125 S. Ct. 316 (2004)). 76 Hamilton Reply Comments at 3. Federal Communications Commission FCC 07-186 15 23. We agree with Hamilton and do not believe that using the MARS plan to determine TRS compensation rates paid by the Fund delegates to the states the Commission’s responsibility to set TRS rates. Under the MARS plan, the Commission simply gathers existing data from the states, and uses that data, along with other data, to determine the interstate compensation rate under its own rate methodology.77 This action is therefore distinguishable from that in USTA v. FCC cited by Sprint Nextel, where the court found that the Commission delegated to an outside party (a state) a responsibility given the Commission by statute. When the Commission uses the MARS plan to determine TRS compensation rates, the Commission has retained, and is exercising, its responsibility to adopt TRS compensation rates.78 24. Finally, Sprint Nextel asserts that a “price-cap” plan should be implemented for all forms of TRS, while the Joint Providers assert that price-cap plan should be implemented for VRS and IP Relay.79 Under this approach, a fixed compensation rate would apply for a specified period of time for each form of TRS compensated by the Fund. This rate would then be adjusted, “upward based on the Gross Domestic Product – Price Index (‘GDP-PI’) and downward by a productivity factor.”80 Sprint Nextel argues that this approach “eliminate[s] the discretion afforded NECA and the Commission to 77 See id.; see also infra paras. 26-38, addressing the implementation of the MARS plan. 78 Indeed, the court in USTA v. FCC, addressing the Commission’s delegation to the states of the determination of which network elements shall be available to competitive local exchange companies on an unbundled basis, reasoned that when authority is delegated to an “outside” party, “lines of accountability may blur, undermining an important democratic check on government decision-making.” USTA v. FCC, 359 F.3d at 565. Under the MARS plan, the Commission remains fully responsible for the adoption of the rates. 79 See Joint Provider Comments at 3-13, Sprint Nextel Comments at 5-7. We also address price caps below. See infra paras. 42-43, 50-52. 80 Sprint Nextel Comments at 6. Sprint asserts that “such a formula would assure that the cap would be reduced each year during the initial three year period.” Id. at 7. Federal Communications Commission FCC 07-186 16 disallow costs reported by providers without conducting the necessary cost studies to determine whether such costs were reasonably incurred.”81 25. For forms of TRS for which state rates are available, we believe the MARS plan is a better approach for determining the interstate compensation rate for the same service. As we have noted, under the TRS regime the compensation rate is not a “price” that is charged to, and paid by, a service user, but rather is a settlement mechanism to ensure that providers are compensated from the Fund for their actual reasonable costs of providing service. The MARS plan uses an average of competitively bid state rates as a measure of those reasonable costs. It also eliminates the need to review and possibly disallow costs reported by providers. Under price caps, we would have to determine an initial rate that accurately reflects providers’ historical, actual, reasonable costs. The best measure of these costs, where available, is the compensation rates by states for the same, albeit intrastate, service. 82 Therefore, for those services for which there are competitively bid state rates, we believe the MARS plan is superior to price caps. b. Calculation of the MARS Plan Rate for Interstate Traditional TRS and Interstate STS 26. We set forth below how the MARS plan rate for interstate traditional TRS and interstate STS will be calculated. First, the MARS plan rate will be calculated annually by the Fund administrator,83 and filed with the Commission by May 1st of each year. Although we sought comment on whether the rate period should be longer than one year to create more predictability for the providers,84 we will continue to adopt new rates on an annual basis, as under the MARS plan there should be less variation in the rates from year to year. If that proves not to be the case, we will revisit whether the rate should be set for a longer period of time. Second, the rate will be based on intrastate traditional TRS and STS data for each state for the prior calendar year. In addition, because some states compensate a much larger number of minutes than others, we will calculate a weighted average rate by dividing total state dollars paid by total conversation minutes. Further, in calculating total state dollars (the numerator), we will make adjustments that reflect that fact that some state rates are based on session minutes, and some state rates are based on conversation minutes. The calculations will also take into consideration the fact that some states may compensate intrastate traditional TRS and intrastate STS at different rates, and that for some states the contractual per-minute compensation rate does not include all of the costs paid by the state to the provider for the relay service.85 Finally, we 81 Id. at 5-6. Sprint Nextel also argues that customers and carriers that pay into the Fund would benefit from the realized efficiencies of the price-caps through the application of a formula to determine prices for a three-year period. Id. at 5-7. 82 See infra paras. 50-52 for a more extensive discussion of price cap proposals in the context of a VRS cost recovery methodology. 83 For the Fund year that begins July 1, 2007, the MARS plan rate may be calculated by the Commission in conjunction with the Fund administrator upon the effective date of this Order. 84 See generally 2006 TRS Cost Recovery FNPRM, 21 FCC Rcd at 8389, para. 23. 85 See Sprint Nextel Ex Parte (March 13, 2007) (asserting that if the Commission adopts the MARS plan, the calculation should include “all of the rate elements paid by a state for TRS service, including any monthly recurring charges [MRCs] paid by a state to cover non-traffic sensitive rates incurred by the TRS provider”). Federal Communications Commission FCC 07-186 17 will monitor implementation of the MARS plan and, if necessary, take further steps to ensure that the MARS rate compensates providers for their reasonable costs of providing service.86 27. As described more fully below, the determination of the rate by the Fund administrator will include the following steps: (1) the collection of intrastate traditional TRS and STS compensation rate data from the states and the providers for the prior calendar year, and the determination of whether any state’s data will be excluded from the calculation; (2) the calculation of each state’s total dollars paid for intrastate traditional TRS and STS services during the applicable period; and (3) the calculation of the final rate by dividing the total dollars paid by all states by the total conversation minutes of all states.87 The proposed MARS rate and a description of how it was calculated will be placed on public notice. By June 30th, the Commission will release an order adopting the compensation rate for the following July 1st to June 30th Fund year. 28. Collection of State Data. Each January,88 the Fund administrator will request that each state TRS administrator file with the Commission the following information related to the provision and compensation of intrastate traditional TRS and STS in the state for the previous calendar year: (1) the per-minute compensation rate(s) for intrastate traditional TRS and STS; (2) whether the rate applies to session minutes or conversation minutes89; (3) the number of intrastate session minutes for traditional TRS90 and STS; and (4) the number of intrastate conversation minutes for traditional TRS and STS.91 If the contractual per-minute compensation rate does not include all of the costs paid by the state to the provider for the relay service, the state should also list other amounts paid to the provider during the relevant calendar year. Because some states that compensate intrastate minutes based on session time may not have data indicating the number of intrastate conversation minutes, the Fund administrator will also request that each provider of interstate traditional TRS and STS file with the Commission the same data noted above.92 The Commission or Fund administrator will also ask each state and provider to 86 Sprint Nextel has also stated that if the MARS plan is adopted, it should provide for adjustment mid Fund year to reflect changes in state rates. Ex Parte letter filed by Francis M. Buono on behalf of Sprint Nextel, Sorenson, and Snap!VRS (May 11, 2007). We decline to adopt this approach but, as noted, will monitor the MARS rate as well as changes to state rates to determine if such an adjustment procedure should be adopted in the future. 87 We note that an allowance for working capital to the rate is unnecessary because, as Hamilton notes, “working capital is already built into the various state rates” that underlie the MARS rate. Hamilton Ex Parte (Feb. 12, 2007) at 1. 88 We intend to use the January timeframe beginning in January 2008 with respect to the 2008-2009 Fund year (and the collection of calendar 2007 data). We have already collected the relevant data from the states and providers for the 2007-2008 Fund year. 89 See supra note 30, addressing “session” and “conversation minutes.” Conversation minutes are a subset of session minutes. 90 References to traditional TRS include Spanish-to-Spanish traditional TRS. 91 If a state compensates intrastate traditional TRS and STS at the same rate, total session and conversation for minutes for these services may be reported together. If STS is compensated at a different rate, the state should set forth the number of session and conversation minutes for traditional TRS and the number of session and conversation minutes for STS. 92 See 47 C.F.R. § 64.604(c)(5)(iii)(C) (requiring providers to submit to the Fund administrator “true and adequate data necessary to determine TRS Fund revenue requirements and payments,” including “total TRS minutes of use, (continued…) Federal Communications Commission FCC 07-186 18 indicate what information should be considered confidential; as discussed below, the specifics of such information will not be publicly released.93 29. We understand that some states enter into multi-year contracts for the provision of intrastate traditional TRS and/or STS that may or may not conform to calendar years.94 Therefore, if the intrastate compensation rate(s) paid by a state for these services changed during the calendar year, or the provider changed, the state and the providers should list each rate separately and indicate the time period in which each rate was effective, whether the rate applied to session or conversation minutes, and the amount of conversation and session minutes associated with each period. In this way, each rate will be proportionally factored into the ultimate MARS rate. In addition, we recognize that some state’s data may have to be excluded for the MARS rate calculation. For example, if a state’s intrastate rate is based on the interstate rate, that rate will not be used in the MARS calculation.95 Although there may be other reasons to exclude a particular state’s data, which we will address on a case by case basis, we agree that we should not generally exclude a state’s data simply because it may be based on additional requirements in the state contract. Our rules contemplate that state programs may include standards that exceed the TRS mandatory minimum standards, and require that in such cases the state show that its program is nevertheless consistent with Section 225 and the regulations.96 Moreover, as noted above, averaging nearly 50 state rates will necessarily include some that are relatively low and some that are relatively high.97 30. Calculating Total State Costs. Using the above-listed data collected from the states and the providers, the Fund administrator will multiply each state’s TRS rate by the number of either intrastate session minutes or intrastate conversation minutes, whichever the (…continued from previous page) total interstate TRS minutes, total TRS operating expenses, ... total TRS investment, ... and other historical or projected information reasonably requested by the administrator for purposes of computing payments and revenue requirements”); Hamilton Ex Parte (Feb. 12, 2007) at 2 (noting that the Commission can obtain this information from both the states and the providers). 93 See Appendix B for sample template for this data to be obtained from the states. 94 See Hamilton Comments at 6 (“Hamilton is aware of about seven states that change per-minute rates annually”). 95 See id. at 4; Hamilton Reply Comments at 2-3. Presently we are aware of only one state (California) that may fall into this category. 96 See 47 C.F.R. § 64.605(b). We expect that the number of states whose data is excluded from the MARS calculation will be very small. 97 See Hamilton Ex Parte (Feb. 12, 2007) at 1 (asserting that state TRS rates are presumptively reasonable, and that the “MARS plan is beneficial in that it accounts for states with low TRS rates as well as those with high TRS rates, and that an average of those competitive rates will result in a reasonable, competitively-based interstate TRS rate”). Federal Communications Commission FCC 07-186 19 state rate is based upon.98 The total dollar amount for each state will then be totaled. This number becomes the numerator in the final calculation that determines the rate.99 31. Final Calculation of the Rate. To determine the final MARS rate to be applied to interstate conversation minutes, the total dollar amount for all the states (including costs not reflected in the rate) is divided by the total intrastate traditional TRS and STS conversation minutes for all the states (even if some states do not base their rate on conversation minutes).100 This proposed MARS rate, and a description of how it was calculated, will be placed on public notice. By June 30th, the Commission (or Bureau) will adopt the final compensation rate for the Fund year. 32. Under this approach, we do not need to calculate a conversation “factor” to conform session minutes to conversation minutes. Because we are calculating an interstate rate that will be applied to conversation minutes, for states that compensate conversation minutes we simply multiply the number of conversation minutes by the state rate, and include that amount in the numerator.101 For states that compensate session minutes, however, because the session time for a relay call will be longer than the conversation time, rates paid for session minutes are generally lower than rates paid for conversation minutes. Therefore, to avoid artificially reducing the MARS rate, for such states the state rate is multiplied by the larger number of session minutes, and that total is included in the numerator.102 In short, because each state’s dollar amount that is reflected in the numerator (i.e., total dollars of all states) is based on each state’s compensation rate multiplied by either total session or conversation minutes, depending on the basis for the state rate, under this approach the resulting MARS rate takes into account the inherent difference between state rates based on session minutes and state rates based on conversation minutes.103 33. Similarly, the “weighting” of each state’s rate in comparison to the other states’ rates is built into the calculation. States with a larger number of minutes will constitute a proportionately larger amount of both the numerator (total state dollars paid) and the denominator (total conversation minutes) in calculating the MARS rate. Further, each state’s practice with regard to the “rounding” of call minutes – e.g., to the nearest second or to the 98 In other words, if the state pays the provider based on session minutes, then the state rate is multiplied by session minutes; if the state pays the provider based on conversation minutes, then the state rate is multiplied by conversation minutes. As a practical matter, the TRS rates paid for session minutes are lower than that rates paid for conversation minutes because, for any particular call, the session minute time is greater than the conversation minute time. If the state has a separate rate for intrastate STS, the STS minutes will not be included with the traditional TRS minutes, but will separately be multiplied by the STS rate. See Appendix B. 99 See Appendix C for sample calculation of this data. 100 See Appendix D for sample calculation of the final rate. 101 See Hamilton Reply Comments at 5-6; Hamilton Ex Parte (Feb. 12, 2007) at 2-3. 102 See Hamilton Reply Comments at 5-6; Hamilton Ex Parte (Feb. 12, 2007) at 2-3. 103 In its initial comments, Hamilton proposed using a conversation factor to conform state rates that are based on session minutes to rates based on conversation minutes. Hamilton Comments at 3-4. In its Reply Comments, however, Hamilton explained that this would not be necessary if “each state’s total number of intrastate minutes is multiplied by that state’s intrastate rate.” Hamilton Reply Comments at 5-6; see also Hamilton Ex Parte (Feb. 12, 2007) at 2-3 (explaining that a conversion factor is unnecessary). Federal Communications Commission FCC 07-186 20 nearest minute – is not relevant because we can reasonably assume that bidders will adjust their proposed compensation rate to the state’s rounding practice.104 34. Finally, although historically we have calculated a separate compensation rate for interstate STS calls based on the providers’ projected costs and minutes of use for that service,105 as noted above we adopt a single MARS rate that will apply to both traditional TRS and STS based on the state intrastate rates and minutes of use for both services. Because the states generally compensate intrastate traditional TRS and STS calls at the same rate, and generally the same providers offer these services, we believe that, absent some unusual circumstances or specific needs of providers or consumers of one of the services, the Fund should be compensating interstate STS calls at the same rate.106 35. In sum, we believe that the MARS plan will simplify the determination of the annual compensation rate for interstate traditional TRS and interstate STS and result in a rate that reflects the reasonable costs of providing service based on the rates states pay through competitive bidding for the same, albeit intrastate, service.107 In addition, for those services to which it applies, the MARS plan also avoids the necessity of detailed analysis (and possible disallowance) of the projected cost and demand data for each provider, as such data will no 104 For example, if the state rounds all calls to the nearest minute, a provider can expect to be compensated for a larger number of minutes, and therefore will adjust its bid accordingly. In other words, projected volume will affect the proposed rate. 105 See www.neca.org (Resources, then TRS) (chart of the history of all TRS compensation rates). We note that average monthly interstate STS minutes have recently ranged between 14,000 and 17,000, compared to over one million for traditional TRS. See NECA TRS Fund Performance Status Report, Funding Year July 2006 – June 2007, available at www.neca.org (Resources, then TRS). 106 Between 2001 and 2004, the compensation rate for STS was significantly higher than the traditional TRS compensation rate. See 2006 Bureau TRS Rate Order, 21 FCC Rcd at 7021, para. 7 n.32 (“[s]ince its inception, the compensation rate for STS has ranged from $1.596 to $4.263 per-minute”); see also 2004 Bureau TRS Order, 19 FCC Rcd at 12232-12233, para. 21 n.63 (history of STS compensation rates). More recently, the rates have become much closer. For the 2006-2007 Fund year, the STS rate was $1.409 and the traditional TRS rate was $1.291. See also 2007 Bureau TRS Rate Order (extending the 2006-2007 rates to the 2007-2008 Fund year). However, NECA reports that based on the providers’ projected cost and demand data, with disallowances, the 2007-2008 STS rate would be $3.26 (compared to a similarly calculated traditional TRS rate of $1.69). 2007 NECA Filing at 12, 18. Notwithstanding this recent data suggesting a greater disparity between the providers’ traditional TRS and STS costs, we believe that, as a general matter, because states compensate these services at the same rate, use of the MARS plan requires that the same interstate rate apply to these services. See generally Hamilton Comments at 4 (“Most states compensate traditional TRS and STS services at the same rate.”); Hamilton Ex Parte (Feb. 12, 2007) at 3 (noting 18 state RFPs of which it is aware that apply the same rate to traditional TRS and IP Relay). Also, the Fund administrator and the Interstate TRS Advisory Council have supported compensating these services at the same rate. See 2006 NECA Filing at 17 & n.32; Hamilton Ex Parte (Feb. 12, 2007) at 3. As we have noted, the calculation of the MARS rate will take into consideration the fact that a particular state has separate rates for traditional TRS and STS. At the same time, in a particular Fund year unusual circumstances may require the Commission to make adjustments to the MARS rate of the one of these services. 107 We recognize that the number of bidders for a particular state contract may affect the ultimate state rate, and that if there are only a few bidders for a contract the resulting state rate may be higher than it would be if there were more bidders. We believe that this issue will be self-correcting over time. In any event, we will revisit this issue in the future to determine whether there are a sufficient number of bidders for state TRS contracts to ensure that particular state rates are not artificially high and that application of the MARS plan to interstate services results in reasonable rates. Federal Communications Commission FCC 07-186 21 longer be required to be filed by the providers of these services. 108 To the extent future or unforeseen circumstances suggest that the MARS rate is not fair and reasonable, we can make adjustments as appropriate. Our objective is to ensure that services are provided efficiently and that providers are compensated for their reasonable actual costs of doing so. We believe that the MARS plan fulfills that goal.109 c. Calculation of the MARS Plan Rate for Interstate CTS and IP CTS 36. We also will use the MARS plan to calculate a separate compensation rate for interstate CTS and interstate and intrastate IP CTS. In the 2003 Captioned Telephone Declaratory Ruling, the Commission concluded that interstate CTS calls would be compensated at the same rate as traditional TRS calls.110 Hamilton asserts, however, that a separate compensation rate for CTS calls can be calculated under the MARS analysis because those states that have contracted for this service pay a separate rate.111 Although Sprint Nextel generally opposes the MARS plan, it maintains that if the MARS plan is adopted, a separate MARS rate should be calculated for CTS.112 Ultratec, which addresses only 108 See supra note 57. 109 As noted above, states may request that their data be treated as confidential. At the same time, we recognize that there is a strong public interest in making the basis for the compensation rate as transparent as possible. For this reason, as Hamilton suggests, we will disclose the total intrastate conversation minutes and the total intrastate TRS dollars (the numerator and denominator in the MARS calculation, respectively) and the rate derived thereby. See Hamilton Ex Parte (Feb. 12, 2007) at 2. We will also disclose all of the state rates, and whether they are based on session or conversation minutes, in a random order and without identifying the particular states. In this way, the public will be advised of critical aspects of the rate calculation, but the confidentiality of individual state rates and minutes of use will be maintained. See id. 110 See 2003 Captioned Telephone Declaratory Ruling, 18 FCC Rcd at 16128, para. 22. 111 Hamilton Reply Comments at 7-8. 112 Sprint Nextel Mar. 13, 2007 Ex Parte; Ex Parte filed by Francis Buono (May 11, 2007) at 3. Federal Communications Commission FCC 07-186 22 CTS, supports the MARS plan for this service, and asserts that the rate should be based on state CTS rates rather than state traditional TRS rates.113 37. We agree that because we are adopting the MARS plan for traditional TRS and STS, and there are separate state rates for intrastate CTS, a separate MARS rate should be calculated for this service. Accordingly, we will also request that state administrators and interstate CTS providers file with Commission the information set forth in paragraph 28 above as applied to the provision of intrastate CTS, as requested by the Fund administrator. The calculation of the CTS MARS rate will be consistent with the analysis set forth above and in the examples set forth in Appendices B, C, and D. 38. With respect to IP CTS, although the 2007 IP CTS Declaratory Ruling concluded that IP CTS calls would be compensated at the same rate as IP Relay calls,114 we now conclude that IP CTS should be compensated at the same rate as CTS.115 IP CTS is a new service without cost history and, upon further examination, we believe that the cost recovery rate for CTS will more accurately reflect the reasonable actual costs of providing IP CTS. As a result, we will compensate IP CTS at the CTS MARS rate.116 2. The Cost Recovery Methodology for IP Relay 39. From its inception in 2002 through the 2004-2005 Fund year, IP Relay was compensated at the same rate as interstate traditional TRS.117 In the 2005 TRS Rate Order, the Commission, for the first time, adopted a separate rate for IP Relay.118 The Commission explained that because the providers’ cost and demand data indicated that IP Relay costs were approximately 11 percent less that traditional TRS costs, it was not appropriate to use the same rate for both services.119 The Commission adopted a rate of $1.278 for IP Relay, and $1.440 for traditional TRS, for the 2005-2006 Fund year.120 The following year, the Commission also adopted separate rates, but the difference in the rates was two-tenths of one cent ($1.291 for traditional TRS and $1.293 for IP Relay).121 113 Ultratec Reply Comments at 2 (noting that “[t]he market-driven, competitively based rate that would come out of this process would be both reasonable and meet the telecommunications needs of consumers, because it will draw on the expertise and analyses of all the states providing [captioned telephone service]”). 114 See 2007 IP CTS Declaratory Ruling, 22 FCC Rcd at 390, para. 26. 115 See generally Comments of Ultratec, Inc. on NECA proposed Compensation Rates for July 2007 Through June 2008, CC Docket No. 03-123 (May 9, 2007) (asserting that IP CTS should not be compensated at the IP Relay rate). 116 Because we are adopting the MARS plan for CTS and IP CTS, providers of these services will no longer be required to file annual cost and demand data submissions with the Fund administrator, although they will have to file other MARS-related data as requested by the Fund administrator. See supra note 57. 117 See 2004 Bureau TRS Rate Order, 19 FCC Rcd at 12230-31, para. 17 n.54; IP Relay Declaratory Ruling, 17 FCC Rcd at 7786, para. 22 (noting that the record reflected that IP Relay and traditional TRS calls exhibited “very similar cost and demand characteristics”). 118 2005 TRS Rate Order, 20 FCC Rcd at 12243-45, paras. 16-20. 119 Id., 20 FCC Rcd at 12244, para. 20 (nothing that, as a result of the cost differential, if a combined rate was applied IP Relay providers would be overcompensated, and traditional TRS providers would be undercompensated). 120 See id., 20 FCC Rcd at 12237, para 1. 121 2006 Bureau TRS Rate Order, 21 FCC Rcd at 7018-19, para. 1. Federal Communications Commission FCC 07-186 23 40. Because all IP Relay calls are presently compensated from the Fund, there are no state IP Relay rates to which the MARS analysis can be applied directly. Hamilton asserts, however, that because the costs associated with providing IP Relay and traditional TRS are essentially the same, the traditional TRS MARS rate should also be applied to IP Relay.122 Verizon does not support the MARS plan for IP Relay, because they argue, there are no “market- based rates” for that service.123 AT&T, however, states that it could support the MARS plan for IP Relay because it uses the same CAs and equipment to provide IP Relay and traditional TRS, and therefore “its cost in providing these two services is not materially different.124 41. We conclude that the MARS methodology, as proposed, is not appropriate for IP Relay because there are no state rates for this service. Although we believe that the costs of providing traditional TRS and IP Relay are generally similar – in many instances, for example, the same CAs, sitting at the same offices, handle both traditional TRS and IP Relay calls – we are also concerned that that use of the MARS rate for IP Relay may result in the overcompensation of IP Relay providers.125 As a result, we conclude that we will continue to calculate a separate compensation rate for IP Relay. 42. In their comments, the Joint Providers suggest implementing a price cap plan for regulating IP Relay rates.126 The plan is based on the price cap plan implemented for incumbent LECs.127 Under the plan, the compensation rate be set for a period of three years, “during which time the rates would be adjusted upward annually for inflation (according to a pre-defined inflation factor) and downward to account for efficiency gains (according to a factor also set at the outset of price caps).128 The Joint Providers assert that this approach would have at least three benefits: (1) it would create incentives for providers to lower costs; (3) the three year time frame gives providers “predictability about revenue to allocate money to programs that will reduce costs in the future”; and (3) it simplifies the rate setting process, saving time and money.129 Sprint Nextel also emphasizes that under price caps, providers would focus on increasing efficiencies to accommodate decreasing rates.130 122 Hamilton Comments at 4-5; Hamilton Reply Comments at 7. Hamilton also views the 2005-2006 Fund year differential as an aberration. Hamilton Comments at 5. 123 See Verizon Comments at 1. 124 AT&T Reply Comments at 3. 125 The 2007 NECA Filing indicates a widening gap between the costs of service for traditional TRS and IP Relay. For 2007-2008, the providers’ projected costs and minutes of use for traditional TRS, after disallowances, result in a per-minute rate of $1.69. For IP Relay, the same calculation results in a rate of $1.16. 2007 NECA Filing at 12, 16. In addition, there may be some inherent cost differentials between the provision of traditional TRS and the provision of IP Relay, e.g., IP Relay providers likely save on interconnection fees. 126 See Joint Provider Comments at 3-13. Joint Providers proposed this methodology for both VRS and IP Relay. As discussed below, we decline to adopt this methodology for VRS. 127 See Joint Provider Comments at 2. 128 See id. 129 Id. at 2-3. 130 Sprint Comments at 6. Federal Communications Commission FCC 07-186 24 43. We adopt a price cap plan for IP Relay based on the Joint Providers proposal.131 As a general matter, the price cap plan applies three factors to a base rate – an Inflation Factor, an Efficiency (or “X”) Factor, and Exogenous Costs.132 The basic formula takes a base rate and multiplies it a factor that reflects an increase due to inflation, offset by a decrease due to efficiencies. The Inflation Factor will be the Gross Domestic Product – Price Index (GDP- PI)).133 The Efficiency Factor will be set as a figure equal to the Inflation Factor, less 0.5 percent (or 0.005) to account for productivity gains.134 As a result the rate for a particular year will equal the rate for the previous year, reduced by 0.5 percent (i.e., RateYear Y = RateYear Y-1 (1 – 0.005)).135 Reducing the rate by this amount will encourage IP Relay providers to become more efficient in providing the service.136 44. We will also adjust the rate, as necessary, due to exogenous costs, i.e., those costs beyond the control of the IP Relay providers that are not reflected in the inflation adjustment.137 Therefore, to the extend the Commission adopts new service requirements, we will determine whether the costs of meeting the new requirements warrant an upward exogenous adjustment. 45. In addition, we believe that the three-year rate period for IP Relay, as set forth in the Joint Providers Comments, is a reasonable approach.138 The first rate period will be the 2007-2008 Fund year, and the rates will continue, with the annual adjustment for productivity gains, through the 2009-2010 Fund Year. After that time, we will reassess what the base rate should be for the next three year period. We note that commenters assert that a multi-year rate provides consistency that is necessary for planning and budgeting purposes, and avoids having to possibly adjust on short notice to a lower rate.139 We conclude that the IP Relay rates should be adopted for a three-year period.140 46. Finally, we do not believe it is necessary to adopt tiered rates for IP Relay, as we do below for VRS. First, there is not the same size disparity among IP Relay providers as there is with the VRS providers. Second, the IP Relay rates have been much lower than the VRS rates, 131 See Joint Provider Comments at 3-13. 132 Id. at 6-11. 133 Id. at 6-7. 134 Id. at 7-10. 135 Id. at 10. 136 Id. at 7. 137 Id. at 10-11. 138 Id. at 4. 139 See id. at 4; Sprint Comments at 4. 140 We do not believe it is necessary to amend our rules in this regard. The current regulations provide that the “payment formulas and revenue requirements shall be filed with the Commission on May 1 of each year, to be effective the following July 1.” 47 C.F.R. § 64.604(c)(5)(iii)(H). The Fund administrator’s annual May 1st filing must still address all the “payment formulas” (i.e., cost recovery methodologies) mandated by the Commission, the resulting rates that they have calculated for each form of TRS under those methodologies that will be effective in the upcoming Fund year, and the Fund size and carrier contribution factor that results from those rates and the Fund administrator’s projected demand for each service. Federal Communications Commission FCC 07-186 25 and have not varied significantly over time. Therefore, we believe that a single IP Relay rate, subject to price caps, is appropriate for IP Relay.141 3. The Cost Recovery Methodology for VRS 47. We conclude that we will continue to base the VRS rate on the providers’ projected costs and minutes of use, and other data submitted to the Fund administrator by the providers, subject to appropriate review and, where necessary, disallowances. However, we will no longer apply a single weighted average rate to all providers. Instead, we will adopt tiered rates based on the monthly minutes 141 Providers of IP Relay will still be required to file annual cost and demand data with the Fund administrator, as they have in the past. We believe that this information, which includes actual costs for prior years, will be helpful in reviewing the compensation rates resulting from price caps and whether they reasonable correlate with projected costs and prior actual costs. We will also need this information to evaluate the new base rate every three years. Federal Communications Commission FCC 07-186 26 of use provided. These rates will be set for a three-year period, and be reduced annually by 0.05 percent to reflect productivity gains. They may also be subject to other adjustment as provided below.142 48. In the 2006 TRS Cost Recovery FNPRM, the Commission sought comment on whether modifications should be made to the current cost recovery methodology for VRS, or whether there is a methodology other than the current compensation scheme that is more appropriate. The Commission expressed concern, based on comparisons of VRS providers’ cost and demand projections with their actual historical data, that some VRS providers have received compensation significantly in excess of their actual costs.143 The Commission also observed that providers’ demand forecasts for VRS generally have been lower than actual demand, resulting in overcompensation to providers for completed minutes under the current per-minute cost recovery scheme.144 49. In addition, the provision of TRS under the ADA is intended to give persons with hearing and speech disabilities access to nation’s telephone network so that they can call voice telephone users, and vice versa.145 We have also explained that “because Title IV places the obligation on carriers providing voice telephone service to also offer TRS to, in effect, remedy the discriminatory effects of a telephone system inaccessible to persons with disabilities, the costs of providing TRS are really just another cost of doing business generally, i.e.,of providing voice telephone service.”146 As a result, the Commission concluded that the “reasonable” costs of providing service for which providers are entitled to compensation do not include profit or a mark-up on expenses.147 Providers are entitled to their reasonable costs of providing service consistent with the mandatory minimum standards, as well as an 11.25% rate of return on capital investment so that they are not left to finance reasonable capital investments out of pocket.148 142 See generally Joint Provider Comments at 2-13; Sorenson Comments at 27-40; Hands On Comments at 36-37; Sprint Nextel Comments at 5-7 (supporting price caps for all forms of TRS, including VRS and IP Relay). Aside from Sorenson, Hands On, and Sprint Nextel, the Joint Providers also include CAC, CSD, GoAmerica, and SNAP. 143 2006 TRS Cost Recovery FNPRM, 21 FCC Rcd at 8392, para. 29. This concern is confirmed by a review of the providers’ more recently filed actual (or annualized actual) costs and minutes of use contained in their cost data submission for the 2007-2008 Fund year. Because of our confidentiality rules, we address matters relevant to the providers’ cost and demand only in the aggregate. See 47 C.F.R. § 64.604(c)(5)(iii)(I). 144 2006 TRS Cost Recovery FNPRM, 21 FCC Rcd at 8392, para. 29. The fact that at least some VRS providers have been overcompensated is reflected in the 2007 NECA Filing, which indicates that in 2006 VRS providers’ actual cost of providing service (based on providers actual costs, without any disallowances, and actual minutes billed) was $4.5568 per-minute – almost one-third less than the rate paid of $6.644 per-minute. 2007 NECA Filing at Ex. 1-4b. 145 See, e.g., 2004 TRS Report & Order, 19 FCC Rcd at 12479-80, para. 3. 146 Id., 19 FCC Rcd at 12543, para. 179. 147 Id., 19 FCC Rcd at 12542-45, paras. 177-82. The Commission found that the providers’ average mark-up of 27.2% was “inconsistent with the intent of the statutorily mandated TRS cost recovery scheme” and “plainly not cost-based.” Id., 19 FCC Rcd at 12545, para. 182. 148 Id., 19 FCC Rcd at 12544-45, para. 182. Federal Communications Commission FCC 07-186 27 50. Many commenters support a cost recovery methodology for VRS that is based on price caps, with an initial rate of the present $6.644.149 The Joint Providers, for example, assert that the initial rate should be the present rate of $6.644, and that the price cap methodology would include a price indexing formula to account for inflation, productivity gains, and additional costs, as described above.150 They further assert that the productivity factor (or X- factor) should be established in a manner that takes advantage of incentives to become more efficient and also ensures that cost savings from efficiency gains are shared with contributors to the fund; Sorenson specifically suggests following the price cap indices used for the local exchange companies (LECs).151 Sorenson asserts that a price cap approach is appropriate because providers do not compete on price, and therefore it would create incentives to innovate and lower costs.152 Hands On asserts that the use of price caps will provide a simple and stable means to calculate rates.153 51. Commenters suggest that price caps should remain in effect for a minimum of three years.154 Commenters argue that stable pricing will give providers the opportunity to budget their costs more effectively, and provide enough stability to make long-term investments and allocate money to programs that will reduce costs in the future.155 Joint Providers suggest that the price cap must be adjusted to account for the capital-intensive nature of the telephone industry as opposed to the labor-intensive nature of VRS and IP Relay.156 149 See generally Joint Provider Comments at 2-13; Sorenson Comments at 27-40; Hands On Comments at 36-37; Sprint Nextel Comments at 5-7 (supporting price caps for all forms of TRS, including VRS and IP Relay). Aside from Sorenson, Hands On, and Sprint Nextel, the Joint Providers also include CAC, CSD, GoAmerica, and SNAP. See supra note 82. Verizon proposes a similar plan that would set a base rate for three years, subject to annual adjustment to account for inflation and exogenous costs. Verizon Comments at 7-8; see also Verizon Reply Comments at 2. AT&T opposes the Joint Providers’ proposal, but views Verizon’s proposal as “a more reasoned approach.” AT&T Reply Comments at 5. As noted below, in subsequent ex parte meetings some providers favored a tiered rate approach. In addition, Sprint Nextel, Snap, and Sorenson jointly submitted a proposal they would be willing to support if a tiered rate methodology were adopted. See Michael B. Fingerhut Ex Parte (June 27, 2007). 150 See paras. 42-43, supra; Joint Providers Comments at 11; see also Sorenson Comments at 27-29, 38. Verizon suggests that the initial rate should be $7.01. Verizon Comments at 9 n.19. 151 See Joint Providers Comments at 3-5. According to Sorenson, the price cap indices used for the LECs have three main components: “(1) a measure of the previous year’s inflation; (2) a measure that reflects the extent to which the annual productivity gains of the telephone industry are expected to exceed the annual productivity gains of the economy as a whole; and (3) a provision for ‘exogenous’ cost changes- principally changes in costs that are beyond the telephone company’s control, such as a cost increase caused by a change in FCC regulations.” Sorenson Comments at 30. Hamilton argues, however, that the “X-factor” proposed may not reflect actual cost trends in the industry. Hamilton Reply Comments at 9. Hamilton urges the Commission to further consider the reasonableness of all VRS costs. Id. at 11. 152 Sorenson Comments at 27. 153 See, e.g., Hands On Comments at 36. Hands On also asserts that, “the primary merit in that methodology is that it encourages providers to limit costs and to improve efficiency while avoiding excessive expenditure of public and private resources in making rate determinations.” Id. at 36-37. 154 See Sorenson Comments at 27-28; Joint Providers Comments at 2. 155 See Hands On Comments at 36; Sorenson Comments at 27. 156 See Joint Providers Comments at 5-6. Joint Providers also suggest that the Commission should conduct a review every three years addressing: (1) whether the price cap plan is promoting the achievement of statutory goals for each service; (2) whether there has been an increase in the number of VRS minutes provided, the number of (continued…) Federal Communications Commission FCC 07-186 28 52. We decline to adopt the price cap methodology as proposed. Instead, in order to compensate VRS providers in a manner that best reflects the financial situation of all providers, we will adopt tiered rates for VRS based on the providers’ projected costs and minutes of use, and other data submitted to the Fund administrator by the providers, subject to appropriate review and, where necessary, disallowances. The tiers will be based on the monthly minutes of use provided. We believe that doing so may more appropriately reflect the financial situation of all providers. Presently there are eleven VRS providers, and these providers are not similarly situated with respect to their market share and their costs of providing service.157 For several years now, one provider has a dominant market share, and thus this individual provider’s projected minutes and costs largely determine the rate.158 The record reflects, however, that providers with a relatively small number of minutes generally have higher per-minute costs.159 53. In light of these different per-minute costs, we conclude that we will adopt tiered VRS compensation rates based upon call volume, measured by monthly minutes of use submitted to the Fund administrator for payment. We further conclude that, at least initially, there will be three compensation rate tiers. These tiers are intended to reflect likely cost differentials between small providers (including new entrants); mid-level providers who are established but who do not hold a dominant market share; and large, dominant providers who are in the best position to achieve cost synergies. As a general matter, the three-tiered approach is based on market data reflecting the number of monthly minutes submitted to NECA by the various providers. The data reflects that the newer providers generally provide less than 100,000 minutes per month; that other, more established providers (with the exception of the dominant provider) generally provide monthly minutes ranging in the low hundreds of thousands; and that the dominant provider provides minutes ranging in the millions. We therefore believe that using three tiers is appropriate to ensure both that, in furtherance of promoting competition, the newer providers will cover their costs, and the larger and more established providers are not overcompensated due to economies of scale. 54. By adopting a tiered approach, providers that handle a relatively small amount of minutes and therefore have relatively higher per-minute costs will receive compensation on a monthly basis that likely more accurately correlates to their actual costs. Conversely, providers that handle a larger number of minutes, and therefore have lower per-minute costs, will also receive compensation on a monthly basis that likely more accurately correlates to their actual (…continued from previous page) interpreters, and the impact of these factors on interpreter training; (3) the net entry or exit of providers; (4) and changes in quality levels. Id. at 12-13. 157 See www.neca.org (Resources, then TRS, then). Some of these providers were companies that offer voice telephone service and offered TRS, and VRS, since their inception (e.g., Sprint, Hamilton). Others are not traditional telephone companies, but have now been offering VRS service for some time (e.g., Hands On, Sorenson). Finally, there are a number of VRS providers certified under the Commissions 2005 certification rules, some of which are have either only recently begun to offer service or only provide a relatively small number of minutes. 158 Cf. 2005 TRS Rate Order, 20 FCC Rcd at 12246, para. 23 (noting that the proposed VRS rate appeared to be driven by the cost and demand data of one provider). 159 See CSDVRS Ex Parte (Apr. 5, 2007) (as “a VRS provider gets larger, it can operate its service more efficiently by taking advantage of operating efficiencies[, which] allows larger VRS providers to have a lower cost per-minute cost than smaller VRS providers”). Federal Communications Commission FCC 07-186 29 costs. Furthermore, we conclude that under the tiered approach, all providers would be compensated on a “cascading” basis, such that providers would be compensated at the same rate for the minutes falling within a specific tier. In other words, all providers will be compensated at the highest rate for those minutes falling within the first tier; at the middle rate for those minutes falling within the middle tier, and at the lower rate for all additional minutes.160 55. The record reflects support for the adoption of tiered rates. Several providers support the following proposal (for ease of reference, we refer to this proposal as the VRS Tiered Proposal)161: · For the first 50,000 monthly minutes of use, which would generally encompass newer providers offering a relatively small number of minutes, the rate would be based on the providers’ projected costs and minutes of use: $6.77.162 · For monthly minutes of us between 50,001 and 500,000, which would generally encompass established but non-dominant providers, the rate would be based on the $6.77 rate noted above, less marketing (as reflected in the 2007 NECA Filing163) and certain undisputed cost disallowances164: the resulting rate is $6.50. · For monthly minutes of use above 500,000, which would generally encompass providers with a large number of minutes, the rate would be $6.30.165 The VRS Tiered Proposal also provides that each of the rates would be reduced annually by 0.05 percent, and that the providers would have the ability to seek exogenous cost adjustments if new costs were imposed that are beyond the providers’ control.166 160 We note that several VRS providers have filed comments addressing the use of tiered rates for VRS. See CSDVRS Ex Parte (April 4, 2007); CSDVRS Ex Parte (April 5, 2007) (attaching Proposal for a 3-Year Variable Tiered Rate Methodology); Hands On Comments to NECA’s May 1, 2007 TRS rate filing, CG Docket No. 03-123 (May 15, 2007); CSDVRS Comments to NECA’s May 1, 2007 TRS rate filing, CG Docket No. 03-123 (May 16, 2007); CSDVRS, Hands On, CAC, and GoAmerica Ex Parte (May 16, 2007); Hands On Reply Comments to NECA’s May 1, 2007 TRS rate filing, CG Docket No. 03-123 at 5-6; Healinc Reply Comments to NECA’s May 1, 2007 TRS rate filing, CG Docket No. 03-123 at 3-4; CSDVRS, Hands On, CAC, and GoAmerica Ex Parte (June 12, 2007); George Lyon, Jr. Ex Parte on behalf of HOVRS (June 26, 2007); Michael B. Fingerhut Ex Parte filed by Ruth Milkman on behalf of Sprint Nextel, Snap, and Sorenson (June 27, 2007) (corrected version); George Lyon, Jr. Ex Parte on behalf of HOVRS (July 5, 2007); George Lyon, Jr. Ex Parte on behalf of HOVRS (July 11, 2007); KPS Consulting Ex Parte on behalf of CSDVRS (July 19, 2007); David O’Conner Ex Parte on behalf of Hamilton (August 10, 2007); Ruth Milkman Ex Parte on behalf of Sprint Nextel, Snap, and Sorenson (August 10, 2007); TRS Advisory Council Ex Parte Comments (September 6, 2007); Karen Peltz Strauss Ex Parte (September 21, 2007); George Lyon, Jr. Ex Parte on behalf of HOVRS (September 25, 2007); Ruth Milkman Ex Parte on behalf of Sprint Nextel, Snap, and Sorenson (October 2, 2007); George Lyon, Jr. Ex Parte on behalf of HOVRS (October 9, 2007); Francis Buono Ex Parte on behalf of Sprint Nextel, Snap, and Sorenson (October 15, 2007); Ruth Milkman Ex Parte on behalf of Sprint Nextel, Snap, and Sorenson (October 23, 2007). 161 See Michael B. Fingerhut Ex Parte (June 27, 2007). 162 See 2007 NECA Filing at Ex. 1-4b. 163 Id. 164 See Michael B. Fingerhut Ex Parte (June 27, 2007). 165 Id. 166 Id. Federal Communications Commission FCC 07-186 30 56. We conclude that we will adopt tiered VRS rates based on monthly minutes of use, and that initially there will be three tiers. We also conclude that we will set the tiers, and the rate for each tier, for a three year period. We note that in the 2006 TRS Cost Recovery FNPRM, the Commission sought comment of whether the VRS rate should be set for a two-year, rather than a one-year, period.167 As noted above, however, the providers’ price cap proposal and related comments propose a three-year rate period for VRS.168 Commenters assert that a multi- year rate provides consistency that is necessary for planning and budgeting purposes, and avoids having to possibly adjust on short notice to a lower rate.169 We agree, and therefore conclude that the VRS tiers and rates will be adopted for a three-year period. We also will reduce the rates annually by 0.05 percent, and permit the providers to seek exogenous cost adjustments if new costs are imposed that are beyond the providers’ control. The annual downward 167 2006 TRS Cost Recovery FNPRM, 21 FCC Rcd at 8392, para. 30. 168 See para. 51, supra; see also See Michael B. Fingerhut Ex Parte (June 27, 2007) (proposing setting rates for three-year period). 169 See, e.g., Hands On Comments at 37. Federal Communications Commission FCC 07-186 31 adjustment for productivity gains will reduce Fund expenditures and encourage VRS providers to gain efficiencies in providing service.170 B. The TRS Compensation Rates for the 2007-2008 Under the New Cost Recovery Methodologies 1. Interstate Traditional TRS and Interstate STS 57. The 2007-2008 compensation rate for interstate traditional TRS and interstate STS calculated under the MARS plan is $1.592 per-minute. This rate of $1.592 shall apply to traditional TRS beginning on the first day of the month following the effective date of this Order. 171 With respect to STS, however, because we are concerned that outreach efforts directed at the STS community have not been effective, for the 2007-2008 Fund year we will add an additional amount of $1.131 per minute to the MARS-based STS compensation rate. The resulting rate is $2.723. This additional sum paid to each provider must be directed toward outreach efforts directed at the STS community, as set forth below. 58. As discussed above, the MARS rate is based on calendar 2006 intrastate TRS and STS data from 49 states and Puerto Rico; Michigan was excluded because they do not compensate the providers based on a per-minute rate. The rate from each state, and whether it is based on conversation minutes or session minutes, is set forth in Appendix E (rates are listed from lowest to highest). All states compensated traditional TRS and STS at the same rate. To determine the MARS rate, total dollars (calculated by multiplying each state’s per-minute rate by either session or conversation minutes, whichever the rate is based on) are divided by the total number of intrastate TRS and STS conversation minutes. That calculation is: $100,738,030 divided by 63,275,205, which equals $1.592.172 59. We note that the MARS rate of $1.592 represents an increase of $0.301 (approximately 23 percent) from the 2006-2007 rate ($1.291) for traditional TRS. Although this rate is less than the proposed rates set forth in the 2007 NECA Filing, which range from $1.687 to $1.735 (including both marketing and outreach),173 we recognize that there is upward pressure on the traditional TRS rate because of declining demand, and expect that in future years the MARS rate may be higher to reflect higher rates paid under more recently adopted state contracts. In any event, because, as discussed above, the MARS rate is based on competitively bid state rates, we believe that it is reasonable. 170 Providers of VRS and, as noted above, IP Relay, will still be required to file annual cost data with the Fund administrator, as they have in the past. We believe that this information, which includes actual costs for prior years, will be helpful in reviewing the reasonableness of rates adopted for each tier, and whether they reasonable correlate with projected costs and prior actual costs. We will also need this information to evaluate rates every three years. 171 As noted below, the effective date of this Order with respect to the 2007-2008 rates adopted pursuant to the new cost recovery methodologies is 30 days after publication in the Federal Register. See infra para. 111. 172 As noted above, we do not include an allowance for working capital because that factor is built into the state rates. See supra note 87. 173 See 2007 NECA Filing at Ex. 1-1b. We note, however, that the MARS rate of $1.592 is close to the rate submitted by NECA that is based on adjusted provider costs, less marketing (but including outreach), a rate of $1.635. Id. Federal Communications Commission FCC 07-186 32 60. We also note that the MARS rate of $1.592 (unadjusted for outreach) would represent an increase in the STS rate of $0.183 (approximately 13 percent). We recognized that this rate is less than the proposed rates in the 2007 NECA Filing, which range from $2.605 to $3.455 (including both marketing and outreach).174 Because of the relatively small volume of STS calls (less than 20,000 minutes were month), historically there has been a greater range in the providers’ projections of the STS rate.175 Again, we anticipate that the MARS rate will increase when it is recalculated in future years. In any event, because for the present Fund year we are increasing the MARS rate for STS by including additional sums for outreach, the resulting 2007-2008 rate falls within the range of rates proposed in the NECA filing. 61. For STS, in addition to the MARS rate, we will also provide an additional amount, on a per-minute basis, for the STS providers to conduct outreach. Consumers have expressed concern that present outreach efforts have not been sufficient to reach the potential pool of STS users.176 STS consumers assert, for example, that only a few thousand persons seem to be aware of, and use, STS, out of a much larger pool of potential users.177 Also, NECA monthly reports reflect that there has been virtually no growth in the use of STS over past year and a half.178 We agree that potential STS users are not being made aware of this important service. For this reason, for the 2007-2008 Fund year will add an additional amount of $1.131 per minute to the STS compensation rate calculated under the MARS plan.179 This amount represents the difference between the STS MARS rate and the STS rate based on 2006 actual costs, adjusted for inflation ($2.723), as reflected in the Fund administrator’s May 2007 filing.180 We require that this additional sum be used by the providers specifically for outreach. We also require that STS providers file a report annually with NECA and the Commission on their specific outreach efforts directly attributable to the additional support for STS outreach. We will revisit this issue in future Fund years to determine if, again, additional amounts may be necessary for STS outreach. 2. Interstate CTS and Interstate and Intrastate IP CTS 62. The 2007-2008 compensation rate for interstate CTS and IP CTS, as calculated under the MARS plan, is $1.629 per minute. This rate shall apply beginning on the first day of the month following the effective date of this Order. 174 See 2007 NECA Filing at Ex. 1-3b. 175 See, e.g., 2004 Bureau TRS Order, 19 FCC Rcd at 12233, para. 22; 2005 TRS Rate Order, 20 FCC Rcd at 12239- 40, para. 6. 176 See Bob Segalman Ex Parte (July 5, 2007); Bob Segalman Ex Parte (July 17, 2007); Bob Segalman Ex Parte (July 30, 2007). 177 See supra note 176. In this regard, we note that monthly minutes of STS use recently average approximately 15,000 minutes. See www.neca.org (Resources, then TRS). 178 See www.neca.org (Resources, then TRS) (for example, in January 2006 monthly minutes of STS use totaled 14,349; in December 2006 there were 16,430 minutes of use; and in June 2007 there were 16,000 minutes of use). 179 Because interstate STS minutes average approximately 15,000 minutes per month, the additional sum of $1.131 per minutes will result in an additional cost to the Fund of approximately $100,000 for the 2007-2008 Fund year (based on the effective date of the new rates). 180 See 2007 NECA Filing at Ex. 1-3b. Federal Communications Commission FCC 07-186 33 63. This rate is based on calendar 2006 intrastate captioned telephone service data from the 39 states that provided this service in 2006. The rate from each state, and whether it is based on conversation minutes or session minutes, is set forth in Appendix F (rates are listed from lowest to highest). 64. As set forth above, to determine the MARS rate, total dollars (calculated by multiplying each state’s per-minute captioned telephone service rate by either session or conversation minutes, whichever the rate is based on) are divided by the total number of intrastate captioned telephone service conversation minutes. That calculation is: $15,867,338 divided by 9,739,138, which equals $1.629. Federal Communications Commission FCC 07-186 34 Again, we do not include an allowance for working capital because that factor is built into the state rates.181 65. We note that previously interstate captioned telephone service was compensated at the same rate as interstate traditional TRS, and that the IP CTS rate was the same as the IP Relay rate.182 The MARS rate of $1.629 represents an increase of $0.338 (approximately 26 percent) from the 2006-2007 traditional TRS rate ($1.291) applied to captioned telephone service, and an increase of $0.336 (approximately 26 percent) from the 2006-2007 IP Relay rate ($1.293) applied to IP CTS. 3. IP Relay 66. We conclude that the initial rate for intrastate and interstate IP Relay under the price caps methodology described above shall be the present compensation rate of $1.293 per minute.183 This will be the base compensation rate that applies for the 2007-2008 through the 2009-2010 Fund years. As noted above, we will adjust this rate downward in future years by 0.5 percent to reflect efficiencies. NECA presented IP Relay rates ranging between $1.16 and $1.28, the latter reflecting both 2006 actual costs adjusted for inflation and a rate based on providers’ projected minutes of use and costs, unadjusted.184 We believe that the current rate reasonably compensates providers based on the cost data and the rates proposed by NECA. Further, because, for the first time, we are adopting a rate for a three-year period, we believe that this approach will add additional stability and predictability to the IP Relay rates. In sum, we will continue the current rate of $1.293 for the remainder of the 2007-2008 Fund year, and use it as the base rate for the price caps methodology over the first three year period. 4. VRS 67. As noted above, we adopt a tiered rate methodology for the compensation rates for interstate and intrastate VRS. After reviewing the comments in the record, as well as cost and market data received from NECA, we agree with the VRS Tiered Proposal. Therefore, for the 2007-2008 Fund year, effective on the first day of the month following the effective date of this Order, we adopt three tiers and respective rates, as follows: (1) for the first 50,000 monthly minutes: $6.77; (2) for monthly minutes between 50,001 and 500,000185: $6.50; and (3) for monthly minutes above 500,000: $6.30. Under this approach, all providers are compensated at 181 See supra note 87. 182 See supra note 17. 183 We note that this rate includes the 1.4 percent rate of return for an allowance for working capital, and therefore we do not further adjust this rate in this regard. In addition, although NECA has suggested increasing this rate to 1.6 percent, we need not address this issue because, we conclude, the rates adopted in this Order include this allowance. See 2007 Bureau TRS Rate Order, 22 FCC Rcd at 11708, para. 5 n.12. 184 See 2007 NECA Filing at Ex. 1-2b. 185 We note that, subsequent to the filing of the VRS Tiered Proposal, other providers suggested modifications to this proposal, including having the second tier extend to 1,000,000 minutes. See George Lyon, Jr. on behalf of HOVRS (July 11, 2007) (suggesting that the second tier run from 50,001 to 1,000,000 (rather than to 500,000), and noting that other providers concur with the proposed modification). Given that available market data shows that more established providers have monthly minutes in the low hundreds of thousands, a middle tier that is capped at 500,000 minutes is reasonable. Federal Communications Commission FCC 07-186 35 the highest rate for their first 50,000 minutes, at the middle rate for their minutes between 50,001 and 1,000,000, and at the lower rate for all minutes above 1,000,000. In this way, all providers are compensated at the same rate for the same number of minutes.186 These tiers and rates shall apply through the 2009-2010 Fund year, as addressed below. 68. We base these tiers on market data reflecting the number of monthly minutes submitted to NECA by the various providers. The data reflects that the newer providers generally provide less than 50,000 minutes of month; that other, more established providers (with the exception of the dominant provider) provide monthly minutes ranging in the low hundreds of thousands; and that the dominant provider provides minutes ranging in the millions. We believe that these tiers are appropriate to ensure that, in furtherance of promoting competition, the newer providers will cover their costs, and the larger and more established providers will not be overcompensated. The number and size of the tiers will be reevaluated every three years. 69. For the 2007-2008 Fund year, we base the rates for each tier on the following factors. First, for newer providers offering a relatively small number of minutes, we believe that it is appropriate to base the rate on the providers’ projected costs and minutes of use. As NECA’s filing reflects, the rate based on the providers’ projected demand and cost data, without any disallowances, is $6.77.187 We believe that this rate fairly reflects the actual reasonable costs of the newer or smaller providers offering VRS in compliance with all non-waived mandatory minimum standards. 70. Second, for the middle tier, which would generally apply to established but non- dominant providers, we believe it is appropriate to base the rate on the $6.77 rate noted above, less marketing (as reflected in the 2007 NECA Filing188) and certain undisputed cost disallowances.189 The resulting rate is $6.50. 71. Finally, for providers with a large number of minutes have generally been providing service for a number of years and, as noted above, have economies of scale that result in lower per-minute costs,190 we adopt a rate of $6.30. We believe this rate will encourage providers with large numbers of minutes to become more efficient. 72. These VRS tiers and rates will apply for a three year period (the 2007-2008 through 2009-2010 Fund years). At the end of each fund year, the compensation rates will be adjusted downward to reflect a consumer productivity dividend of 0.5 percent (0.005).191 Annually, VRS providers will be allowed to request exogenous treatment for costs they incurred 186 This approach is supported by some of the VRS providers. See Michael B. Fingerhut Ex Parte (June 27, 2007). 187 See 2007 NECA Filing at Ex. 1-4b. 188 Id. 189 See Michael B. Fingerhut Ex Parte (June 27, 2007). 190 See supra paras. 53-54. 191 Because we are adopting tiered rates based on minutes of use provided, we no longer believe it is necessary to treat an allowance for working capital as a cost that must be compensated separately. We believe compensation for such costs is subsumed in the rates we have adopted herein. Federal Communications Commission FCC 07-186 36 during the three-year period that are the result of new regulations or otherwise beyond their control. At the end of the three-year period, we will reassess what the tiers and rates shall be for the ensuing three-year period. C. Specific Guidelines on Allowable Costs 73. In the 2006 TRS Cost Recovery FNPRM, the Commission sought comment on cost categories including: (1) overhead costs; (2) start-up expenses; and (3) executive compensation.192 We address these cost categories, and others, below. 74. Overhead. The Commission sought comment on whether any general overhead costs – i.e., “those indirect costs that are neither cost-causative nor definable” – should be compensable by the Fund.193 Specifically, the Commission sought comment on whether providers’ reasonable costs should be limited to their marginal costs of providing TRS, which would not include an allocation of general overhead costs. The Commission noted that in the 2004 TRS Report & Order, the Commission stated that providers may recover reasonable overhead costs “directly attributable to the provision of TRS.”194 75. Although commenters assert that there must be adequate funding of overhead costs,195 the issue is whether there are limits on the types of overhead costs that may be included as reasonable costs attributable to the provision of TRS. We conclude that indirect overhead costs are not reasonable costs of providing TRS. In other words, appropriate overhead costs are those costs that are directly related to, and directly support, the provision of relay service. Therefore, indirect overhead costs may not be allocated to TRS by an entity that provides services other than TRS based on the percentage of the entity’s revenues that are derived from the provision of TRS. All costs submitted to the Fund administrator must directly support the provision of relay service. For example, executive salaries, or a portion thereof, may be attributed to the provision of TRS to the extent that it can be shown that a particular executive actually supported the provision of TRS.196 Our conclusion is consistent with Congress placing the obligation to provide TRS on carriers that were already offering voice telephone service.197 76. Start-up Expenses. The Commission sought comment on whether it is appropriate and consistent with Section 225 to reimburse the “start-up” expenses of new entities seeking to 192 2006 TRS Cost Recovery FNPRM, 21 FCC Rcd at 8393-97, paras. 32-42. 193 2006 TRS Cost Recovery FNPRM, 21 FCC Rcd at 8395-96, paras. 38-39. 194 Id., 21 FCC Rcd at 8396, para. 38 (citing 2004 TRS Report & Order, 19 FCC Rcd at 12544, para. 182 & n.520). 195 E.g., Joint Consumers Comments at 3-7 (arguing that insufficient funding for overhead costs would adversely affect deaf people as well as hearing people who rely on relay services, and that all reasonable operational costs – directly and indirectly linked to the provision of TRS services – should be compensated). 196 For example, if executives of a company that provides a variety of services in addition to TRS do not personally work on TRS issues, no part of their salaries can be included in the company’s TRS cost submission. If such executives devote 25 percent of their time to TRS matters, then 25 percent of their salaries can be included in the TRS cost submission. 197 See 47 U.S.C. § 225(c). This issue will not arise for entities that only offer relay services. In those circumstances, the issue is whether the particular costs are reasonable and necessary to the provision of relay service. Federal Communications Commission FCC 07-186 37 offer VRS or the other forms of TRS.198 The Commission asked, for example, whether the Fund should reimburse the legal and related organizational expenses of multiple new companies that desire to offer TRS, particularly when there are already numerous providers offering service. No comments were filed addressing this issue. 77. We recognize that the Commission has recently encouraged competition in the provision of VRS,199 and that as a practical matter new competitors must bear start-up expenses to become viable VRS providers. Therefore, we conclude that start-up costs are compensable, but must be amortized. We will require these costs to be amortized in accordance with generally accepted accounting rules. In this way, these costs will not skew the rate in a particular year, but will be recoverable over time. 78. Executive Compensation. The Commission sought comment concerning the appropriate amount of TRS providers’ executive compensation that may be included in the providers’ cost data, and on whether “the number of executives for whom compensation is sought should be tied to, or limited by, the overall size of certain providers.”200 The Commission sought to clarify the scope and nature of such costs that should be considered “reasonable” costs compensable by the Fund, and whether they should be limited to some percentage of other costs or in some other way. Hands On asserts that this is a necessary rate element in providing relay, although the executive structure will vary depending on the size of the provider.201 Joint Consumers similarly assert that reasonable executive compensation is necessary to providing TRS, and therefore should be reimbursable from the Fund.202 79. Reasonable executive compensation for persons who directly support the provision of TRS is compensable from the Fund. As noted above, these costs must be apportioned for persons who do not spend all of their time supporting the provision of relay.203 As a general matter, we will consider bonuses, stock options, and other indirect compensation in an assessment of what is reasonable compensation. 80. Other Costs. Financial transaction costs or fees unrelated to the provision of relay service are not compensable as reasonable costs of providing service. Such costs include costs and fees relating to a change in ownership of the entity providing relay service, the sale of the 198 2006 TRS Cost Recovery FNPRM, 21 FCC Rcd at 8397, para. 41; see also 47 U.S.C. § 225(d)(3)(B) (providing for the recovery of ”costs caused” by the provision of TRS). 199 See Telecommunications Relay Services and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities, CG Docket 03-123, Report and Order and Order on Reconsideration, 20 FCC Rcd 20577 (Dec. 12, 2005) (2005 TRS Certification Order) (adopting Commission certification procedures for entities desiring to offer IP Relay and VRS and receive compensation from the Fund). 200 2006 TRS Cost Recovery FNPRM, 21 FCC Rcd at 8397, para. 42 (also noting that the Commission expressed concern about this issue in the 2004 TRS Report & Order). 201 Hands On Comments at 50-51. 202 Joint Consumer Comments at 7. The Joint Consumers further suggest that the TRS Advisory Council, the Fund Administrator, and the Commission should look carefully at executive compensation and other general overhead costs to make sure that the level of such compensation is reasonable and that the allocation to TRS services is also fair and reasonable. 203 See generally 2004 TRS Report & Order, 19 FCC Rcd at 12544, para. 182 n.520; see also supra para. 57. Federal Communications Commission FCC 07-186 38 entity, the spin off of part of the entity, or any other transaction directed at the ownership, control, or structure of the relay provider. 81. Further, Hands On asserts that the Fund should compensate “certified deaf interpreters” (CDI), i.e., interpreters who are deaf and for whom ASL is their native language.204 Although Hands On acknowledges that the rules require that VRS providers use qualified interpreters,205 Hands On maintains that CDIs’ “possess a skill set that is not available to hearing interpreters,” and therefore they may be needed in certain circumstances to ensure that effective and accurate communication is taking place between the VRS user and the CA.206 We need not address whether, as a general matter, CDI costs should be compensable from the Fund. Rather, we will apply the reasonableness standard to providers’ staffing and compensation of CAs. 82. Because some providers appear to continue the practice of giving video equipment to consumers and installing it at no cost to the consumer,207 we also reiterate that costs attributable to relay hardware and software used by the consumer, including installation, maintenance costs, and testing are not compensable from the Fund.208 As the Commission has explained, “compensable expenses must be the providers’ expenses in making the service available and not the customer’s costs of receiving the equipment. Compensable expenses, therefore, do not include expenses for customer premises equipment – whether for the equipment itself, equipment distribution, or installation of the equipment or necessary software.”209 We will closely scrutinize the providers’ submitted costs to ensure that such costs are neither directly nor indirectly included in the costs submitted by the providers. D. Management and Administration of the Fund 1. The Interstate TRS Fund Advisory Council 83. In the Third TRS Report & Order, the Commission adopted the TRS cost recovery rules and appointed NECA as the interim Fund administrator.210 At the same time, the Commission created an “advisory committee” to monitor TRS cost recovery issues.211 The Commission stated that this committee would be a “safeguard” in view of comments noting that 204 Hands On Comments at 58-62; see also CSD Reply Comments at 13-16 (arguing that the costs of Certified Deaf Interpreters (CDIs) should be compensable in order to facilitate communication of deaf consumers with limited ASL skills); Joint Consumers Comments at 3 (addressing the need for CDIs), 205 Hands On Comments at 59 (citing 47 C.F.R. § 64.604(a)(iv)). 206 Id. at 60-61. 207 See VRS Interoperability Declaratory Ruling and FNPRM, 21 FCC Rcd at 5448, paras. 15-16 (noting practice of providers of distributing and installing VRS equipment at no cost to the consumer). 208 See 2006 MO&O, 21 FCC Rcd at 8071, para. 17. 209 Id. We note that the Fund administrator’s cost data form explicitly states that the cost of equipment given to, sold to, or used by relay callers is not compensable from the Fund. See Relay Services Data Request Instructions at 4 (included in the 2006 NECA Filing). 210 Telecommunications Relay Services and the Americans with Disabilities Act of 1990, Third Report and Order, CC Docket No. 90-571, 8 FCC Rcd 5300 (July 20, 1993) (Third TRS Report & Order). 211 Id., 8 FCC Rcd at 5301, para. 8. Federal Communications Commission FCC 07-186 39 NECA was associated with one specific industry group – local exchange carriers (LECs).212 Specifically, the Commission directed NECA to “establish a non-paid, voluntary advisory committee of persons from the hearing and speech disability community, TRS users (voice and text telephone), interstate service providers, state representatives, and TRS providers.” 213 The Commission further directed that each group select its own representative to the committee, and that the committee “meet at reasonable intervals (at least semi-annually) in order to monitor TRS cost recovery matters.”214 The Commission concluded that with “these additional safeguards in place, NECA is uniquely placed to effectuate timely and efficient implementation of the TRS Fund.”215 The Commission’s creation of this advisory committee – the TRS Advisory Council – is reflected in the TRS regulations.216 84. In June 2004, the Commission sought comment on several issues concerning the Advisory Council, including whether the Council was still necessary.217 The Commission also sought comment on ways in which the Council might play a more productive role in connection with the interstate TRS cost recovery scheme.218 In addition, the Commission sought comment on whether the composition of the Advisory Council should be changed or expanded to include parties that represent the TRS Fund or any other relevant interests not currently represented on the Council.219 In response to the FNRPM, nine comments and three reply comments were filed addressing this issue.220 Commenters generally support the role of the Advisory Council.221 85. We believe that the Advisory Council can continue to play an important role in the oversight of TRS. We recognize that, in the past, the Commission has directed the Council, along with the Fund administrator, to develop cost recovery guidelines for various forms of TRS.222 The Council has also played a role in the TRS Fund administrator’s annual proposal for 212 Id., 8 FCC Rcd at 5300-01, para. 5. 213 Id., 8 FCC Rcd at 5301, para. 8. 214 Id. 215 Id. 216 See 47 C.F.R. § 64.604(c)(5)(iii)(H). Consistent with the regulations, the Council has met twice a year to address matters concerning cost recovery and the Interstate TRS Fund. 217 2004 TRS Report and Order, 19 FCC Rcd at 12570-71, paras. 251-54. 218 Id., 19 FCC Rcd at 12571, para. 254. 219 Id., 19 FCC Rcd at 12571, para. 253. 220 Comments were filed by the California Public Utilities Commission (CPUC) (Oct. 18, 2004); CSD (Oct. 18, 2004); Hands On (Oct. 15, 2004); National Video Relay Service Coalition (VRS Coalition) (Oct. 18, 2004); Sprint (Oct. 18, 2004); Hamilton (Oct. 18, 2004); Interstate TRS Fund Advisory Council (Advisory Council) (Oct. 18, 2004); Verizon Telephone Companies (Verizon) (Oct. 18, 2004); Sorenson (Oct. 18, 2004). Reply comments were filed by CSD (Nov. 15, 2004), Hamilton (Nov. 16, 2004), and Hands On (Nov. 15, 2004). 221 See, e.g., CSD Comments at 37-38; Hands On Comments at 41; VRS Coalition Comments at 17; Sprint Comments at 15, 18. In its comments to the 2006 TRS Cost Recovery FNPRM, Hamilton notes that the TRS Advisory Council is currently underutilized as an oversight mechanism. Hamilton Comments at 12. 222 See, e.g., 2000 TRS Order, 15 FCC Rcd at 5155-56, paras. 32-33; Interstate TRS Fund Advisory Council, TRS Cost Recovery Recommendations, filed November 9, 2000; Interstate TRS Fund Advisory Council, IP Relay Cost Recovery Recommendations, filed October 9, 2002; Telecommunications Relay Services and Speech-to-Speech (continued…) Federal Communications Commission FCC 07-186 40 compensation rates for the various forms of TRS.223 In view of the adoption of the new MARS plan, we believe the Council can play a role in monitoring and reviewing the implementation of that methodology, and raising unforeseen issues that may arise. We also believe that, with the respect to VRS, the Council can play a role in identifying cost categories that may need to be more specifically defined to ensure that providers are compensated for their reasonable actual costs, and in the future address whether there is still a better cost recovery methodology for VRS. Finally, we believe the Council can address other matters as assigned by the Commission, including, for example, cost recovery issues related to the possible adoption of a numbering regime for VRS and implementation of a way in which VRS users can access emergency services. 2. Other Issues 86. As part of our oversight of the Fund, we anticipate additional and more comprehensive auditing of the providers. Sorenson suggests the implementation of better record-keeping practices, including automated electronic counting of minutes.224 The TRS regulations expressly contemplate that the Commission and the Fund administrator may audit recipients of support from the Interstate TRS Fund,225 and we intend to do so, including the review of underlying documentation supporting submitted cost and demand data, as well as minutes submitted for compensation. Only in this way can we ensure the integrity of Fund. 87. The 2006 TRS Cost Recovery FNPRM also sought comment on whether the providers’ cost and demand data should be made public.226 The Commission noted that some providers urge the Commission to provide greater transparency in the rate setting process.227 In response to this FNPRM, Verizon and Sorenson assert that making provider cost and demand data public would result in competitive harm.228 Hands On disagrees, asserting that Verizon and Sorenson have not offered any examples on “how they would suffer harm from an open, transparent process where cost and demand projections are available for public review and comment.”229 88. We agree that there should be more transparency to the rate setting process. We also realize, however, that the interest in transparency must be balanced against the providers’ (…continued from previous page) Services for Individuals with Hearing and Speech Disabilities, CC Docket No. 98-67, CG Docket No. 03-123, Order, 20 FCC Rcd 13195, at 13198, para. 9 (July 19, 2005) (proposing jurisdictional allocation methodology for inbound two-line captioned telephone calls). 223 At the same time, we note that the Council did not file comments in response to the 2006 TRS Cost Recovery FNPRM, which, as this Order reflects, raised the fundamental and comprehensive cost recovery issues. 224 See Sorenson Comments at 60. 225 47 C.F.R. § 64.604(c)(5)(iii)(H). 226 2006 TRS Cost Recovery NPRM, 21 FCC Rcd at 8397, paras. 43-44. 227 Id. (citing comments of Hamilton and Hands On). 228 See Verizon Comments at 14; Verizon Reply Comments at 10; Sorenson Comments at 62-65 (but supporting making data available in an aggregated form that would protect commercially sensitive information). 229 Hands On Reply Comments at 6. Federal Communications Commission FCC 07-186 41 interest in the confidentiality of their cost and demand data, an interest reflected in our rules.230 We believe that the use of MARS plan will add transparency for the determination of the traditional TRS, STS, captioned telephone service, and IP CTS rates. As noted above, we anticipate listing the state rates used in calculating the MARS rates (without identifying the states involved), and also setting forth the final calculation that divides total costs by total minutes to determine the rate.231 Moreover, because there are no cost adjustments to provider specific data in the determination of these rates, transparency concerns cannot be significant. With respect to VRS, we believe that the adoption of tiered rates, as raised below in the FNPRM, will also largely eliminate these concerns. To the extent we adopt a different cost recovery methodology, however, we will continue to keep providers’ submitted cost and demand data confidential, as provided in our rules, except when appropriate in the aggregate or in a way that does not disclose provider specific data. IV. DECLARATORY RULING 89. In this Declaratory Ruling, we clarify that providers may not offer consumers financial or other incentives, directly or indirectly, to make TRS calls. We set forth in greater detail the kinds of incentives that are impermissible under our rules, and also address the improper use of customer call records or databases. 90. In January 2005, the Consumer & Governmental Affairs Bureau (CGB) released the 2005 Financial Incentives Declaratory Ruling, which addressed a VRS provider’s consumer reward program that was based on call minutes.232 The item concluded that “any program that involves the use of any type of financial incentives to encourage or reward a consumer for placing a TRS call” violates Section 225.233 The item reasoned that “[t]he fact that any TRS reward or incentive program has the effect of enticing TRS consumers to make TRS calls that they would not otherwise make, which allows the provider to receive additional payments from the Fund, and results in ‘payments’ to consumers for using the service, puts such programs in violation of Section 225.”234 The item explained that the obligation placed on TRS providers is to be available to handle calls consumers choose to make, when they choose to make them, and that “[b]ecause the Fund, and not the consumer, pays for the cost of the TRS call, such financial incentives are tantamount to enticing consumers to make calls that they might not ordinarily make.”235 The item concluded that, effective March 1, 2005, “any TRS provider offering such 230 See 47 C.F.R. § 64.604(c)(iii)(5)(I) (addressing confidential treatment of providers’ cost and demand data). We recognize that there is some tension between the notion that because VRS (and other forms of TRS) are presently entirely compensated from the Fund, the providers’ financial data should be public, and the notion that because this has become a competitive business, by for-profit entrepreneurial companies, such companies should be entitled to keep their financial data confidential. 231 See supra note 109. 232 Telecommunications Relay Services and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities, CC Docket No. 98-67, CG Docket No. 03-123, Declaratory Ruling, 20 FCC Rcd 1466 (Jan. 26, 2005) (2005 Financial Incentives Declaratory Ruling). 233 2005 Financial Incentives Declaratory Ruling, 20 FCC Rcd at 1466, para 1. 234 Id., 20 FCC Rcd at 1469, para. 8. 235 Id. The item added that in these circumstances, “TRS is no longer simply ... [a means] for persons with certain disabilities [to access the telephone system], but an opportunity for their financial gain.” Id. Federal Communications Commission FCC 07-186 42 incentives for the use of any of the forms of TRS will be ineligible for compensation from the Interstate TRS Fund.”236 91. Also in January 2005, CGB released a Public Notice addressing impermissible VRS marketing practices.237 This item stated, among other things, that “[t]he TRS rules do not require a consumer to choose or use only one VRS (or TRS) provider,” and that a “consumer may use one of several VRS providers available on the Internet or through VRS service hardware that attaches to a television.”238 In addition, it noted that apparently “some providers use their customer database to contact prior users of their service and suggest, urge, or tell them to make more VRS calls.”239 The item concluded that: [t]his marketing practice constitutes an improper use of information obtained from consumers using the service, is inconsistent with the notion of functional equivalency, and may constitute a fraud on the Interstate TRS Fund because the Fund, and not the consumer, pays for the cost of the VRS call. As we have noted, the purpose of TRS is to allow persons with certain disabilities to use the telephone system. Entities electing to offer VRS (or other forms of TRS) should not be contacting users of their service and asking or telling them to make TRS calls. Rather, the provider must be available to handle the calls that consumers choose to make. For this reason as well, VRS providers may not require consumers to make TRS calls, impose on consumers minimum usage requirements, or offer any type of financial incentive for consumers to place TRS calls.240 236 Id., 20 FCC Rcd at 1469-70, para. 9; see also Telecommunications Relay Services and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities, CG Docket No. 03-123, Order, 20 FCC Rcd 12503 (July 28, 2005) (concluding that offering free or discount long distance service to TRS consumers constitutes an impermissible financial incentive, and that programs “directed at giving the consumer an incentive to make a TRS call in the first place ... are prohibited”). 237 Federal Communications Commission Clarifies that Certain Telecommunications Relay Services (TRS) Marketing and Call Handling Practices are Improper and Reminds that Video Relay Service (VRS) May Not be Used as a Video Remote Interpreting Service, CC Docket No. 98-67, CG Docket No. 03-123, Public Notice, 20 FCC Rcd 1471 (Jan. 26, 2005) (2005 TRS Marketing Practices PN). 238 Id., 20 FCC Rcd at 1473. Further, in the VRS Interoperability Declaratory Ruling and FNPRM, the Commission concluded that “consistent with functional equivalency, all VRS consumers must be able to place a VRS call through any of the VRS providers’ service, and all VRS providers must be able to receive calls from, and make calls to, any VRS consumer. Therefore, a provider may not block calls so that VRS equipment cannot be used with other providers’ service. In addition, a provider may not take other steps that restrict a consumer’s unfettered access to other providers’ service. This includes the practice of providing degraded service quality to consumers using VRS equipment or service with another provider’s service.” VRS Interoperability Declaratory Ruling and FNPRM, 21 FCC Rcd at 5456, para. 34. 239 2005 TRS Marketing Practices PN, 20 FCC Rcd at 1473. 240 Id. (internal footnotes omitted). The item also “question[ed] whether there are any circumstances in which it is appropriate for a TRS provider to contact or call a prior user of their service,” given that “the role of the provider is to make available a service to consumers ... under the ADA when a consumer may choose to use that service.” Id. Federal Communications Commission FCC 07-186 43 92. Notwithstanding the 2005 Financial Incentives Declaratory Ruling and the 2005 TRS Marketing Practices PN, we continue to discover that TRS providers – particularly VRS and IP Relay providers – offer financial and other incentives for consumers to use their service to make relay calls.241 We therefore reaffirm the 2005 Financial Incentives Declaratory Ruling and the 2005 TRS Marketing Practices PN, and reiterate that providers seeking compensation from the Fund may not offer consumers financial or other tangible incentives, either directly or indirectly, to make relay calls. Such incentives include sweepstake giveaways (e.g., the relay user earns chances to win a prize with each call made), sponsorships tied to service usage, charitable contributions by a provider based on calls made,242 charitable contributions or other gifts or payments by a provider based on failure to meet specific performance standards (e.g., if a call is not answered within a specific period of time, a contribution will be made to a third party organization), and offering financial incentives or rewards to register with the provider, add the provider to the consumer’s speed dial list, or to become a provider’s “VIP” customer. 93. We emphasize that a financial incentive program is not permissible even in circumstances where the benefit goes to a third party, rather than the consumer making the call, or the program is tied to the consumer giving the provider feedback about the quality of the call. Even when the benefit goes to a third party, the program has the intent and the effect of rewarding consumers for making relay calls, as well as giving consumers an incentive to make relay calls that they might not otherwise make. Likewise, tying a reward to making calls and responding with feedback about the call does not change the fact that consumers are given an incentive to make calls they might not otherwise make. Providers seeking feedback on the quality of their service can readily do so without offering call incentives. 94. Further, impermissible marketing and incentive practices include calling a consumer and requiring, requesting, or suggesting that the consumer make VRS calls.243 This rule also applies in the context of providers that choose to give VRS (or TRS) equipment to consumers. Providers that give consumers relay equipment cannot condition the ongoing use or possession of the equipment, or the receipt of different or upgraded equipment, on the consumer making relay calls through its service or the service of any other provider. In other words, providers cannot give consumers equipment as part of outreach efforts or for other purposes, and then require that the equipment be relinquished if the consumer fails to maintain a certain call volume. Not only do such practices likely require the impermissible use of the providers’ call database, and the impermissible monitoring of consumers’ calls, they also constitute impermissible financial incentives. In these circumstances, the consumers’ ongoing receipt of a financial benefit – free equipment – is conditioned on the use of the equipment to make relay calls, calls that the Fund, and not the consumer, pays for. Therefore, the consumer may be 241 These programs are generally set forth on the providers’ websites. 242 For example, a promotion where a provider will make a donation to a specific deaf organization each time a consumer makes a call through its service. Such a promotion also suggests that the provider is being overcompensated, since the provider is willing to give away some of the money it earns with each call. 243 2005 TRS Marketing Practices PN at 3. We continue to receive anecdotal evidence of VRS providers calling VRS consumes and noting, e.g., that the consumer has not made many calls and urging the consumer to make more calls. Federal Communications Commission FCC 07-186 44 placed in the position of having to return the equipment, or foregoing receiving upgraded equipment, because the consumer has not made a sufficient number of relay calls.244 95. Finally, apart from attempting to generate additional calls that can be billed to the Fund, providers also may not use a consumer or call database to contact TRS users for lobbying or any other purpose. The Commission has made clear not only in the 2005 TRS Marketing Practices PN, but also in the 2000 TRS Order, that TRS customer profile information cannot be used for any purpose other than handling relay calls.245 Therefore, for example, a provider may not contact its customers, by an automated message, postcards, or otherwise, to inform them about pending TRS compensation issues and urge them to contact the Commission about the compensation rates. Similarly, as noted above, a provider may not use call data to monitor the TRS use by its customers (or the customers of other providers) and to determine whether they are making a sufficient number of calls to warrant further benefits from the provider. 96. In sum, because the obligation placed on TRS providers is to be available to handle calls consumers choose to make, when they choose to make them, i.e., to be the “dial tone” for a consumer that uses relay to call to a voice telephone user, and because consumers do not pay for this service but rather providers are compensated pursuant to Title IV of the ADA, providers may not offer relay users financial and similar incentives, directly or indirectly, to use their service. Likewise, they may not use consumer or call data to contact TRS users or to in any way attempt to affect or influence, directly or indirectly, their use of relay service. Because, as suggested above, we recognize that incentive programs can be structured in limitless ways, we will continue to carefully monitor the provision of service and equipment in this regard. Providers offering such programs or otherwise taking action that has the effect of providing consumers incentives to make relay calls, or misusing customer information, will be ineligible for compensation from the Fund.246 Further, such providers may also be subject to other actions for violations of our rules. 244 We recognize that the effect of this rule, coupled with the interoperability rule, is that if a provider chooses to give consumers equipment, once the equipment is given the provider does not have control over the extent to which it is used to make relay calls, or even if it used at all. Again, this conclusion is compelled by the very nature of TRS and the role of relay providers offering the “dial tone” for consumers to make “telephone” calls if and when they choose to make them. Moreover, consumer handsets, and certainly personal computer-like devices, have never been included as part of TRS support funded pursuant to Section 225. Of course, providers might require the return of their equipment if they decide to no longer offer relay service (or to no longer seek compensation for it from the Fund), seek the return of all equipment given to consumers, or seek the return of the equipment for reasons not related to number or nature of relay calls made. 245 2000 TRS Order, 15 FCC Rcd at 5175, para. 83. 246 Section 225 defines TRS as “telephone transmission services” provided to an individual who has a hearing or speech disability “in a manner that is functionally equivalent” to those services offered to persons without such disabilities. 47 U.S.C. § 225(a)(3). Because we have determined that financial incentive programs violate the functional equivalency requirement, providers engaging in these programs are no longer providing TRS within the meaning of the statute. Therefore, because it would be technically impossible to separate a providers’ legitimate relay calls from those made merely as the result of an impermissible incentive, we conclude that providers offering such programs will be ineligible for any compensation from the Fund. Federal Communications Commission FCC 07-186 45 V. CONCLUSION 97. In this Order, we adopt new cost recovery methodologies for the various forms of TRS. First, for interstate traditional TRS, interstate STS, interstate CTS, and interstate and intrastate IP CTS we adopt a cost recovery methodology based on the MARS plan, which averages state intrastate compensation rates. Second, for IP Relay we adopt a cost recovery methodology based on price caps. Finally, with respect to VRS, we adopt a cost recovery methodology based on tiered rates corresponding to monthly minutes of use. The VRS and IP Relay rates shall be set for three years, subject to certain annual adjustments. We also adopt new compensation rates for the various forms of TRS pursuant to the new cost recovery methodologies. The Commission is taking these actions to ensure that providers of these services receive compensation that more accurately reflects their reasonable actual costs. Finally, the Declaratory Ruling clarifies that TRS providers seeking compensation from the Fund may not offer consumers financial or other tangible incentives, either directly or indirectly, to make relay calls. VI. PROCEDURAL MATTERS A. Final Regulatory Flexibility Analysis 98. As required by the Regulatory Flexibility Act of 1980, as amended (RFA),247 the Commission as prepared a Final Regulatory Flexibility Analysis (FRFA) of the possible significant economic impact on small entities of the policies and rules addressed in this item. The FRFA is set forth in Appendix G. B. Paperwork Reduction Act Analysis 99. This document contains new information collection requirements subject to the Paperwork Reduction Act of 1995 (PRA), Public Law 104-13. It will be submitted to the Office of Management and Budget (OMB) for review under Section 3507(d) of the PRA. OMB, the general public, and other Federal agencies are invited to comment on the new information collection requirements contained in this proceeding. 100. In addition, we note that pursuant to the Small Business Paperwork Relief Act of 2002, Public Law 107-198,248 we previously sought specific comment on how we might “further reduce the information collection burden for small business concerns with fewer than 25 employees.” 101. In this present document, we have assessed the effects of imposing the provision of rate data on the states and the providers of interstate traditional TRS, interstate STS, and interstate captioned telephone service, and find that there is no increased administrative burden on businesses with fewer than 25 employees. We recognize that the required rate data is presently available with the states and the providers of interstate traditional TRS, interstate STS, and interstate captioned telephone service, thereby no additional step is required to produce such 247 The RFA, see § 5 U.S.C. S 601 et. seq., has been amended by the Contract With America Advancement Act of 1996, Pub. L. No. 104-121, 110 Stat. 847 (1996) (CWAAA). Title II of the CWAAA is the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA). 248 See 44 U.S.C. § 3506(c)(4). Federal Communications Commission FCC 07-186 46 data. We therefore believe that the provision of the rate data does not increase an administrative burden on businesses. C. Congressional Review Act 102. The Commission will send a copy of this Report and Order in a report to be sent to Congress and the Government Accountability Office pursuant to the Congressional Review Act.249 D. Materials in Accessible Formats 103. To request materials in accessible formats (such as Braille, large print, electronic files, or audio format), send an e-mail to fcc504@fcc.gov or call the Consumer & Governmental Affairs Bureau at (202) 418-0530 (voice) or (202) 418-0432 (TTY). This Report and Order can also be downloaded in Word and Portable Document Formats (PDF) at http://www.fcc.gov/cgb.dro. VII. ORDERING CLAUSES 104. Accordingly, IT IS ORDERED that, pursuant to Sections 1, 2, and 225 of the Communications Act of 1934, as amended, 47 U.S.C. §§ 151, 152, and 225, this Order IS ADOPTED. 249 See 5 U.S.C. § 801(a)(1)(A). Federal Communications Commission FCC 07-186 47 105. IT IS FURTHER ORDERED that an annual compensation rate shall apply to interstate traditional TRS and interstate STS based on the MARS plan and the intrastate traditional TRS and STS rate(s) paid by the states, as provided herein. 106. IT IS FURTHER ORDERED that an annual compensation rate shall apply to interstate CTS and interstate and intrastate IP CTS based on the MARS plan and the intrastate CTS rate paid by the states, as provided herein. 107. IT IS FURTHER ORDERED that a compensation rate shall apply to interstate and intrastate IP Relay based on price caps, and that the rate shall be set for three-year periods, subject to adjustment, beginning with the 2007-2008 Fund year, as provided herein. 108. IT IS FURTHER ORDERED that tiered compensation rates shall apply to interstate and intrastate VRS based on minutes of use, and that the rates shall be set for three- year periods, subject to adjustment, beginning with the 2007-2008 Fund year, as provided herein. 109. IT IS FURTHER ORDERED that, effective on the first day of the month following the effective date of this Order, the following per-minute compensation rates shall apply, as provided herein: for interstate traditional TRS: $1.592; for interstate STS: $2.723; for interstate CTS and interstate and intrastate IP CTS: $1.629; for interstate and intrastate IP Relay: $1.293; and for interstate and intrastate VRS: (1) for the first 50,000 monthly minutes: $6.77; (2) for monthly minutes between 50,001 and 500,000: $6.50; and (3) for monthly minutes above 500,000: $6.30. 110. IT IS FURTHER ORDERED that the amendment to section 64.604 of the Commission's rules, as set forth in Appendix H, IS ADOPTED, effective upon approval by OMB approval of such requirements. The Commission will publish a document in the Federal Register announcing the effective date of the amended rule. 111. IT IS FURTHER ORDERED that this Order SHALL BE EFFECTIVE 30 days after publication in the Federal Register, except information collection requirements subject to the Paperwork Reduction Act SHALL BECOME EFFECTIVE upon OMB approval of such requirements. The Commission will publish a document in the Federal Register announcing the effective date of these requirements. 112. IT IS FURTHER ORDERED that the Commission's Consumer and Governmental Affairs Bureau, Reference Information Center, SHALL SEND a copy of this Order, including the Regulatory Flexibility Analysis, to the Chief Counsel for Advocacy of the Small Business Administration. FEDERAL COMMUNICATIONS COMMISSION Marlene H. Dortch Secretary Federal Communications Commission FCC 07-186 48 APPENDIX A List of Commenters Comments: Bob Segalman Communication Access Center for the Deaf and Hard of Hearing, Communication Service for the Deaf, Inc., GoAmerica, Inc., Hands On Video Relay Services, Inc., Snap Telecommunications, Inc., Sorenson Communications, Inc., and Sprint Nextel Corporation (Joint Providers) Hamilton Relay, Inc. Hands On Video Relay Services, Inc. Florida Pubic Service Commission Sorenson Communications, Inc. Sprint Nextel Corporation Telecommunications for the Deaf and Hard of Hearing, Inc., Association of Late-Deafened Adults, Inc., National Association of the Deaf, Deaf and Hard of Hearing Consumer Advocacy Network, California Coalition of Agencies Serving the Deaf and Hard of Hearing, and Hearing Loss Association of America (Joint Consumers) Verizon Individual Comments: Individual comments can be found in CG Docket No. 03-123 at: http://fccweb01w/prod/ecfs/s_a/. Individual comments were filed through identical postcards on July 20, 2006. Reply Comments: AT&T Inc. Communication Service for the Deaf, Inc. Hands On Video Relay Services, Inc. Hamilton Relay, Inc. Sorenson Communications, Inc. Telecommunications for the Deaf and Hard of Hearing, Inc., Association of Late-Deafened Adults, Inc., National Association of the Deaf, Deaf and Hard of Hearing Consumer Advocacy Network, California Association of Agencies Serving the Deaf and Hard of Hearing, and Hearing Loss Association of America (Joint Consumers) Ultratec, Inc. Federal Communications Commission FCC 07-186 49 Verizon Federal Communications Commission FCC 07-186 50 APPENDIX B Collection of State Data from Certified State Programs and Providers Traditional TRS and STS Data For the particular calendar year as indicated in the request for data, states and traditional TRS providers shall provide the information set forth below (data below provided as an example). The total session and conversation minutes should include the total intrastate minutes for traditional TRS (including Spanish traditional TRS) and STS. If STS is compensated at a different rate, so indicate and include the session and conversation minutes for STS separately, as indicated below. If the state rate does not include other costs paid to the provider in connection with the provision of intrastate traditional TRS, the state and/or provider shall so indicate and set forth the total amount of such additional costs paid during the calendar year and the nature of the cost, as indicated below. SAMPLE ANALYSIS State Per-Minute Based on Session (SM) Total Intrastate Total Intrastate Compensation or Conversation Conversation Session Rate Minutes (CM) Minutes Minutes [“W”] $1.20 CM 300,000 420,000 [“X”] $0.90 SM 500,000 700,000 [“Y”] $1.15 (trad. TRS) CM 400,000 540,000 $1.25 (STS) CM 25,000 35,000 [“Z”] $1.10 CM 800,000 1,100,000 [$100,000 additional costs not included in the rate for the calendar year for traditional TRS and STS – explain nature of costs] Notes: 1. If a particular state does not maintain conversation minutes (e.g., because is compensates the provider on the basis of session minutes), the state shall so indicate. Federal Communications Commission FCC 07-186 51 2. States and providers should indicate the extent to which the submitted information should be considered confidential. 3. States and providers of captioned telephone service shall separately submit this data for intrastate captioned telephone service, as set forth in the Order. Federal Communications Commission FCC 07-186 52 APPENDIX C Calculating Total Dollars for All States for MARS Calculation Using the data collected pursuant to Appendix B from the states and the providers, the Fund administrator or Commission will multiply each state’s traditional TRS rate by the number of either intrastate session minutes or intrastate conversation minutes, whichever the state rate is based upon (as indicated in bold below). The total amount for each state will then be totaled, including other costs not reflected in the rate. This number becomes the numerator in the final calculation that determines the rate. SAMPLE ANALYSIS State Per-Minute SM Total Intrastate Total Intrastate Total Compensation or CM CM SM Dollars Rate [“W”] $1.20 CM 300,000 420,000 $360,000 [“X”] $0.90 SM 500,000 700,000 $630,000 [“Y”] $1.15 (trad. TRS) CM 400,000 540,000 $460,000 $1.25 (STS) CM 25,000 35,000 $31,250 [“Z”] $1.10 CM 800,000 1,100,000 $880,000 Other costs not reflected in rate: $100,000 $2,461,250 Federal Communications Commission FCC 07-186 53 Notes: 1. List includes all states for which data will be included in rate calculation. 2. A separate calculation will be made for captioned telephone service. APPENDIX D Final MARS Rate Calculation To determine the final MARS rate to be applied to interstate conversation minutes, the total dollar amount for all the states (total of last column of Appendix B) is divided by the total intrastate conversation minutes for all the states (even if some states do not base their rate on conversation minutes). SAMPLE ANALYSIS State Total Intrastate Total Dollars CM (from Appendix B) [“W”] 300,000 $360,000 [“X"] 500,000 $630,000 [“Y”] 400,000 $460,000 25,000 $31,250 [“Z”] 800,000 $880,000 $100,000 2,025,000 $2,461,250 Final Rate Calculation: $2,461,250 divided by 2,025,000 = $1.215 Federal Communications Commission FCC 07-186 54 Notes: 1. List includes all states whose data is going to be included in the calculation. 2. A separate calculation will be made for captioned telephone service. Federal Communications Commission FCC 07-186 55 APPENDIX E TRS and STS Intrastate Rate Data for 2006 Per-Minute Conversation or Rate Session Minutes State X $ 0.270 Session State X $ 0.730 Session State X $ 0.740 Session State X $ 0.740 Session State X $ 0.750 Session State X $ 0.750 Session State X $ 0.760 Session State X $ 0.800 Session State X $ 0.820 Session State X $ 0.850 Session State X $ 0.850 Session State X $ 0.860 Session State X $ 0.875 Session State X $ 0.890 Session State X $ 0.890 Session State X $ 0.890 Session State X $ 0.895 Session State X $ 0.900 Session State X $ 0.915 Session State X $ 0.918 Session State X $ 0.930 Session State X $ 0.930 Session State X $ 0.940 Session State X $ 0.940 Session State X $ 0.960 Session State X $ 1.040 Session State X $ 1.070 Session State X $ 1.085 Session State X $ 1.130 Session State X $ 1.241 Session State X $ 1.340 Session State X $ 1.450 Session State X $ 1.900 Session State X $ 2.250 Session Federal Communications Commission FCC 07-186 56 State X $ 2.500 Session State X $ 1.060 Conversation State X $ 1.090 Conversation State X $ 1.100 Conversation State X $ 1.170 Conversation State X $ 1.210 Conversation State X $ 1.240 Conversation State X $ 1.240 Conversation State X $ 1.260 Conversation State X $ 1.295 Conversation State X $ 1.310 Conversation State X $ 1.350 Conversation State X $ 1.390 Conversation State X $ 1.400 Conversation State X $ 1.406 Conversation State X $ 1.420 Conversation State X $ 1.720 Conversation State X $ 1.890 Conversation * There are 52 entities listed, because one state changed providers and therefore rates, mid-year, and Puerto Rico is included. Federal Communications Commission FCC 07-186 57 APPENDIX F Captioned Telephone Service Intrastate Rate Data for 2006 Per-Minute Conversation Rate or Session Minutes State X $ 1.320 Session State X $ 1.320 Session State X $ 1.350 Session State X $ 1.370 Session State X $ 1.400 Session State X $ 1.400 Session State X $ 1.400 Session State X $ 1.400 Session State X $ 1.400 Session State X $ 1.430 Session State X $ 1.440 Session State X $ 1.440 Session State X $ 1.450 Session State X $ 1.450 Session State X $ 1.450 Session State X $ 1.450 Session State X $ 1.450 Session State X $ 1.450 Session State X $ 1.450 Session State X $ 1.520 Session State X $ 1.650 Session State X $ 1.700 Session State X $ 1.820 Session State X $ 1.900 Session State X $ 1.290 Conversation State X $ 1.390 Conversation State X $ 1.400 Conversation State X $ 1.400 Conversation State X $ 1.430 Conversation State X $ 1.450 Conversation State X $ 1.450 Conversation Federal Communications Commission FCC 07-186 58 State X $ 1.450 Conversation State X $ 1.450 Conversation State X $ 1.500 Conversation State X $ 1.500 Conversation State X $ 1.560 Conversation State X $ 1.610 Conversation State X $ 1.640 Conversation State X $ 1.650 Conversation Federal Communications Commission FCC 07-186 59 APPENDIX G Final Regulatory Flexibility Certification 113. The Regulatory Flexibility Act of 1980, as amended (RFA),250 requires that a regulatory flexibility analysis be prepared for rulemaking proceedings, unless the agency certifies that "the rule will not, if promulgated, have a significant economic impact on a substantial number of small entities."251 The RFA generally defines "small entity" as having the same meaning as the terms "small business," "small organization," and "small governmental jurisdiction."252 In addition, the term "small business" has the same meaning as the term "small business concern" under the Small Business Act.253 A small business concern is one which: (1) is independently owned and operated; (2) is not dominant in its field of operation; and (3) satisfies any additional criteria established by the Small Business Administration (SBA).254 114. This Report and Order addresses issues related to cost recovery methodologies for various forms of TRS. This Report and Order adopts a single cost recovery methodology based on the “MARS” plan for interstate traditional TRS, interstate STS, interstate captioned telephone service and interstate and intrastate IP captioned telephone service (IP CTS).255 Beginning with the 2007-2008 Fund year, a single MARS rate will be calculated and will apply to interstate traditional TRS and interstate STS, interstate captioned telephone service, and IP CTS. Because states generally negotiate and pay separate rates for captioned telephone service, a separate MARS rate will be calculated and will apply to interstate captioned telephone service. 250 See 5 U.S.C. § 603. The RFA, see 5 U.S.C. § 601-612, has been amended by the Small Business Regulatory Enforcement Fairness Act of 1996, (SBREFA) Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996). 251 5 U.S.C. § 605(b). 252 5 U.S.C. § 601(6). 253 5 U.S.C. § 601(3) (incorporating by reference the definition of "small business concern" in Small Business Act, 15 U.S.C. S § 632). Pursuant to 5 U.S.C. § 601(3), the statutory definition of a small business applies "unless an agency, after consultation with the Office of Advocacy of the Small Business Administration and after opportunity for public comment, establishes one or more definitions of such term which are appropriate to the activities of the agency and publishes such definition(s) in the Federal Register." 254 Small Business Act, § 15 U.S.C. S 632. 255 Hamilton Relay, Inc (Hamilton) raised this proposal, which would base the compensation rate paid by the Fund on the average of the intrastate TRS rates paid by the states, in its petition for reconsideration of the 2004 TRS Report & Order. Hamilton Relay Service, Inc., Petition for Reconsideration (filed Oct. 1, 2004) (Hamilton Petition); see also Hamilton Reply to comments filed in response to its petition for reconsideration (filed Nov. 30, 2004). Hamilton also raised this issue in its application for review of the 2004 Bureau TRS Rate Order, which adopted the compensation rates for the various forms of TRS for the 2004-2005 Fund year. See Telecommunications Relay Services and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities, CC Docket No. 98-67, Order, 19 FCC Rcd 12224 (June 30, 2004) (2004 Bureau TRS Rate Order), modified by Telecommunications Relay Services and Speech-to Speech Services for Individuals with Hearing and Speech Disabilities, CC Docket No. 98-67, Order, 19 FCC Rcd 24981 (Dec. 30, 2004) (Modified 2004 Bureau TRS Order). Federal Communications Commission FCC 07-186 60 As noted below, the MARS plan methodology will not apply to IP Relay, and thus the Commission will adopt a separate cost recovery methodology for that service.256 115. The Commission concludes that the MARS methodology, 257 as proposed, cannot be applied to IP Relay because there are no state rates for these services. The Commission, therefore, continues to use a cost recovery methodology for IP Relay based on the providers’ projected demand and cost data that reasonably compensates the providers for the provision of IP Relay service. The Commission also concludes that adopting the proposed price cap plan for IP Relay that will encourage IP Relay providers to become more efficient in providing the service. The Commission believes that the price cap plan for IP Relay will not have a significant economic impact on a substantial number of small businesses. 116. The Commission concludes that adoption of the MARS plan for Interstate Traditional TRS, Interstate STS, Interstate CTS, and IP CTS for setting the rate eliminates the need to file the much more voluminous cost and demand data that providers presently must submit under the current cost recovery methodology to the Fund administrator. The Commission, therefore, concludes that the effect of the adoption of the MARS plan would be to lessen the reporting burden on small businesses. Accordingly, the Commission does not believe that these actions will have a significant economic impact on a substantial number of small businesses. 117. The Commission further believes that the decision to set a standard for how “reasonable” costs should be compensable under the present cost recovery methodology for all forms of TRS, as well as a standard for what “reasonable” costs should include, will provide guidance for the providers, and therefore, benefits small businesses in two ways. This includes setting a standard for whether, and to what extent, marketing and outreach expenses, overhead costs, and executive compensation are compensable from the Fund,. First, it provides predictability, and secondly, it eliminates uncertainties with whether the costs submitted would be compensable or not. Eliminating uncertainties will lessen the reporting burden on small businesses. The Commission therefore concludes that the requirements of the Report and Order will not have a significant economic impact on a substantial number of small entities. 118. The Commission expressed concern, based on comparisons of VRS providers’ cost and demand projections with their actual historical data, that some VRS providers have received compensation significantly in excess of their actual costs.258 The Commission has also 256 See supra paras. 39-46. 257 Hamilton Relay, Inc. (Hamilton) raised this proposal, which would base the compensation rate paid by the Fund on the average of the intrastate TRS rates paid by the states, in its petition for reconsideration of the 2004 TRS Report & Order. Hamilton Relay Service, Inc., Petition for Reconsideration (filed Oct. 1, 2004) (Hamilton Petition); see also Hamilton Reply to comments filed in response to its petition for reconsideration (filed Nov. 30, 2004). Hamilton also raised this issue in its application for review of the 2004 Bureau TRS Rate Order, which adopted the compensation rates for the various forms of TRS for the 2004-2005 Fund year. See Telecommunications Relay Services and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities, CC Docket No. 98-67, Order, 19 FCC Rcd 12224 (June 30, 2004) (2004 Bureau TRS Rate Order), modified by Telecommunications Relay Services and Speech-to Speech Services for Individuals with Hearing and Speech Disabilities, CC Docket No. 98-67, Order, 19 FCC Rcd 24981 (Dec. 30, 2004) (Modified 2004 Bureau TRS Order). 258 See supra para. 48. Federal Communications Commission FCC 07-186 61 observed that providers’ demand forecasts for VRS generally have been lower than actual demand, resulting in overcompensation to providers for completed minutes under the current per-minute cost recovery scheme.259 119. The Commission, therefore, adopts three compensation rate tiers for VRS. These tiers are intended to reflect likely cost differentials between small providers; mid-level providers who are established but who do not hold a dominant market share; and large, dominant providers who are in the best position to achieve cost synergies. As a general matter, the three-tiered approach is based on market data reflecting the number of monthly minutes submitted to NECA by the various providers. The data reflects that the newer providers generally provide less than 100,000 minutes per month; that other, more established providers (with the exception of the dominant provider) generally provide monthly minutes ranging in the low hundreds of thousands; and that the dominant provider provides minutes ranging in the millions. The Commission, therefore, believes that using three tiers is appropriate to ensure both that, in furtherance of promoting competition, the newer providers will cover their costs, and the larger and more established providers are not overcompensated due to economies of scale. 120. By adopting a tiered approach, as set forth above, providers that handle a relatively small number of minutes and therefore have relatively higher per-minute costs will receive compensation on a monthly basis that will likely more accurately correlate to their actual costs. Conversely, providers that handle a larger number of minutes, and that therefore have lower per-minute costs, will also receive compensation on a monthly basis that likely more accurately correlates to their actual costs. Furthermore, the Commission concludes that under such a tiered approach, all providers will be compensated on a “cascading” basis, such that providers will be compensated at the same rate for the minutes falling within a specific tier. In other words, all providers will be compensated at the highest rate for those minutes falling within the first tier; at the middle rate for those minutes falling within the middle tier, and at the lower rate for all additional minutes. The Commission believes that using tiered rates, rather than a single, weighted average rate, will more fairly compensate all providers for their reasonable actual costs of providing service. Since fair compensation will benefit all provides equally, imposing no separate and adverse impact on smaller entities, the Commission further concludes that its tiered rates will not have a significant economic impact on a substantial number of small entities. 121. Because the Commission recognizes that potential STS users are not being made aware of the availability of STS, the Commission adds an additional amount to the STS compensation rate for outreach efforts. The Commission also requires that STS providers file a report annually with NECA and the Commission on their specific outreach efforts directly attributable to the additional support for STS outreach. Since STS providers will be compensated an additional amount for outreach, the Commission concludes that requiring STS providers to file an annual report will not have a significant economic impact on a substantial number of small entities. 122. Finally, in order to be compensated for the costs of providing TRS, the providers are required to meet the applicable TRS mandatory minimum standards as required in Section 259 Id. Federal Communications Commission FCC 07-186 62 64.604.260 Reasonable costs of compliance with this Report and Order are compensable from the Fund. Thus, because the providers will recoup the costs of compliance within a reasonable period, the Commission asserts that the providers will not be detrimentally burdened. Therefore, the Commission certifies that the requirements of the Report and Order will not have a significant economic impact on a substantial number of small entities. 123. The Commission also notes that, with specific regard to the issue of whether a substantial number of small entities will be affected, of the 13 providers affected by the ruling adopted herein, there are only three small entities that will be affected by our action. The SBA has developed a small business size standard for Wired Telecommunications Carriers, which consists of all such firms having 1,500 or fewer employees.261 Currently, thirteen providers are providing various forms of TRS and being compensated from the Interstate TRS Fund: Ameritech; AT&T Corp.; CapTel, Inc.; Communication Access Center for the Deaf and Hard of Hearing, Inc.; GoAmerica; Hamilton Relay, Inc.; Hands On; Healinc; Nordia Inc.; Snap Telecommunications, Inc; Sorenson; Sprint and Verizon. The Commission notes that 3 of 13 providers noted above are small entities under the SBA’s small business size standard. Because three of the affected providers will be promptly compensated within a reasonable period for complying with this Report and Order, the Commission concludes that the number of small entities affected by our decision in this Order is not substantial. 124. Therefore, for all of the reasons stated above, the Commission certifies that the requirements of this Report and Order will not have a significant economic impact on these small entities. 125. The Commission will send a copy of the Report and Order, including a copy of this Final Regulatory Flexibility Certification, in a report to Congress pursuant to the 260See generally 47 C.F.R. § 64.604(c)(5)(iii)(E). 261 13 C.F.R. § 121.201, NAICS code 517110. According to Census Bureau data for 1997, there were 2,225 firms in this category which operated for the entire year. U.S. Census Bureau, 1997 Economic Census, Subject Series: Information, “Establishment and Firm Size (Including Legal Form of Organization),” Table 5, NAICS code 513310 (issued Oct. 2000). Of this total, 2,201 firms had employment of 999 or fewer employees, and an additional 24 firms had employment of 1,000 employees or more. Thus, under this size standard, the majority of firms can be considered small. (The census data do not provide a more precise estimate of the number of firms that have employment of 1,500 or fewer employees; the largest category provided is “Firms with 1,000 employees or more.”) Federal Communications Commission FCC 07-186 63 Congressional Review Act.262 In addition, the Report and Order and this final certification will be sent to the Chief Counsel for Advocacy of the SBA, and will be published in the Federal Register.263 262 See 5 U.S.C. § 801(a)(1)(A). 263 See 5 U.S.C. § 605(b). Federal Communications Commission FCC 07-186 64 APPENDIX H Final Rule Changes The Commission amends 47 C.F.R. Part 64 subpart F as follows: PART 64 – MISCELLANEOUS RULES RELATING TO COMMON CARRIERS 1. The authority citation for part 64 continues to read as follows: Authority: 47 U.S.C. 154, 254 (k); secs. 403 (b)(2)(B), (c), Public Law 104-104, 110 Stat. 56. Interpret or apply 47 U.S.C. 201, 218, 222, 225, 226, 228, and 254 (k) unless otherwise noted. 2. Section 64.604 is amended by amending paragraph (c)(5)(iii)(C) to read as follows: § 64.604 Mandatory minimum standards. ***** (c) *** (5) *** (iii) *** (C) Data Collection from TRS Providers. TRS Providers shall provide the administrator with true and adequate data and other historical, projected and state rate related information reasonably requested by the administrator necessary to determine TRS fund revenue requirements and payments. TRS providers shall provide the administrator with the following: total TRS minutes of use, total interstate TRS minutes of use, total TRS operating expenses and total TRS investment in general accordance with part 32 of the Communications Act, and other historical or projected information reasonably requested by the administrator for purposes of computing payments and revenue requirements. The administrator and the Commission shall have the authority to examine, verify and audit data received from TRS providers as necessary to assure the accuracy and integrity of fund payments. ***** Federal Communications Commission FCC 07-186 65 STATEMENT OF CHAIRMAN KEVIN J. MARTIN Re: Telecommunications Relay Services and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities, CG Docket No. 03-123 The Commission has taken a number of important actions relating to Telecommunications Relay Services (TRS), all of which have been aimed at fulfilling our statutory goal of ensuring that every person has equal access to this nation’s communications services. The Order we adopt will help to achieve the goals of the Americans with Disabilities Act. We are well aware that there are many Americans with hearing or speech disabilities that depend on TRS services for their daily communication needs. The Fund has seen dramatic growth over the past few years as more and more individuals with disabilities tap into all the benefits that these services offer. The Commission remains committed to improving the quality of life for individuals with disabilities by ensuring that they have the same access to communication technologies as people without such disabilities. To this end we will continue to take all necessary actions to ensure that the TRS program, upon which they rely, is operated as efficiently and effectively as possible. Federal Communications Commission FCC 07-186 66 STATEMENT OF COMMISSIONER MICHAEL J. COPPS Re: Telecommunications Relay Services and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities, CG Docket No. 03-123. A cornerstone of the Americans with Disabilities Act is to ensure that persons with disabilities can access the tools they need to lead prosperous, productive and fulfilling lives. With this as a guiding principle, it continues to be essential that the Commission ensure that the deaf, hard of hearing and those with speech disabilities receive the communications services they are entitled to, that providers are fairly compensated for their services, and that the Commission be able to effectively administer the program. In July of last year we sought comment from consumers and providers on how best to build a rate reimbursement system that serves consumers well and fairly compensates providers. At the time I said we must not find ourselves unable to meet the challenge upon the completion of the rulemaking. I am pleased to say that after essential input from members of the disabilities community and service providers, along with the hard work of Commission staff, we are hopefully putting the Telecommunications Relay Services rate reimbursement system on a solid footing for the future to best serve the deaf, hard of hearing and speech impaired consumers. In particular, the Commission adopts new rate recovery methodologies for the variety of services available to the disabilities community. The adoption of the Multi-state Average Rate Structure Plan for a number of services is expected to simplify the rate process while setting more predictable, fair, and reasonable rates. For Video Relay Services, the Commission adopts tiered compensation rates based on call volume. In doing so the Commission encourages competition for services while recognizing that there are efficiencies when larger providers have achieved economies of scale. In the case of Speech-to-Speech services, I am particularly pleased that the Commission directs additional funding be used for outreach to this underserved community. Further, the Commission remains committed to doing ongoing audits and oversight and therefore requires providers to submit detailed information to allow for ongoing reviews of the integrity of these reimbursement programs. The benefits of the new reimbursement system are certainly promising but the Commission will need to monitor it closely to ensure that it is working as intended. It remains essential that going forward all of the stakeholders affected by these new rules, particularly members of the disabilities community, provide us with their input on where it is working well and where any adjustments are needed. We stand ready to address any unforeseen consequences as these rules are implemented. I want to thank Chairman Martin for his willingness to work closely with us to reach such a favorable outcome. My thanks also go out to the Bureau, particularly Cathy Seidel and the Disability Rights Office, for working tirelessly not only on this item but also on the Commission’s obligations to the disabilities community. Federal Communications Commission FCC 07-186 67 STATEMENT OF COMMISSIONER JONATHAN S. ADELSTEIN Re: Telecommunications Relay Services and Speech-to-Speech Services for Individuals with Hearing and Speech Disabilities, CG Docket No. 03-123. The services supported by the Telecommunications Relay Service (TRS) Fund provide vital connections for millions of Americans with hearing and speech disabilities. As communications technologies continue to play a greater role in all of our lives, relay services are an increasingly important tool. They help the disability community harness the power of our rapidly-evolving communications networks and, more broadly, they help us as a nation to take advantage of our collective strength. Even as use of revolutionary technologies like Video Relay Service (VRS), Internet Protocol (IP) Relay, and IP Captioned Telephone Service has surged, the Commission’s compensation rate-setting process for our relay services has presented a variety of open questions and controversy among providers and consumers. The message was clear from providers and consumers alike that the Commission needed to improve its administration of the Fund and to increase awareness of these critical services, so I am pleased that we tackle these issues in earnest here. I commend the Chairman, my colleagues, and the Consumer and Governmental Affairs Bureau for their collective efforts to improve our management of the fund through this Order. The changes adopted here are supported by both consumers and providers, and should provide a more reasonable, transparent, and predictable process in future years. I am also pleased that we provide specific compensation for outreach regarding emerging services, like Speech-to-Speech relay services, in this Order. Finally, I am also pleased that we affirm our commitment to the TRS Advisory Council, and that we enlist the Council’s assistance in monitoring and reviewing the new methodologies implemented here. We must always be mindful of the Americans with Disabilities Act’s (ADA) requirement that telecommunications services for those with hearing and speech disabilities be “functionally equivalent” to those services provided to hearing individuals, which serves as a continuing challenge for us to improve the program. I look forward to working with my colleagues, our CGB staff, members of the TRS Advisory Council, and the many members of the disabilities community on these issues as we move forward.