USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
ORAL ARGUMENT NOT SCHEDULED
Page 1 of 94
NO. 13-1215
IN THE
UNITED STATES COURT OF APPEALS
FOR THE DISTRICT OF COLUMBIA CIRCUIT
_________________________________
SORENSON COMMUNICATIONS, INC.,
Petitioner,
v.
FEDERAL COMMUNICATIONS COMMISSION and
UNITED STATES OF AMERICA,
Respondents.
_________________________________
On Petition for Review of an Order of the
Federal Communications Commission
PROOF BRIEF OF PETITIONER
SORENSON COMMUNICATIONS, INC.
Christopher J. Wright
John T. Nakahata
Mark D. Davis
WILTSHIRE & GRANNIS, LLP
1200 18th Street, N.W., Suite 1200
Washington, D.C. 20036
Telephone: (202) 730-1300
[email protected]
October 25, 2013
Counsel for Petitioner
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 2 of 94
CERTIFICATE AS TO PARTIES, RULINGS, AND RELATED CASES
Pursuant to D.C. Circuit Rule 28(a)(1), Sorenson Communications, Inc.,
hereby submits the following statement of the parties, rulings under review, and
related cases.
A.
PARTIES.
Parties Before This Court
The Petitioner in this case is Sorenson Communications, Inc. The
Respondents in this case are the Federal Communications Commission and the
United States of America. The National Association of the Deaf is an amicus
curiae in support of Sorenson.
B.
RULINGS UNDER REVIEW.
Sorenson Communications, Inc., seeks review of following order of the
Federal Communications Commission: Structure and Practices of the Video Relay
Service Program; Telecommunications Relay Services and Speech-to-Speech
Services for Individuals with Hearing and Speech Disabilities, CG Docket Nos.
10-51 & 03-123, Report and Order and Further Notice of Proposed Rulemaking,
28 FCC Rcd. 8618 (rel. Jun. 10, 2013) (JA____).
i
USCA Case #13-1215
C.
Document #1463284
Filed: 10/25/2013
Page 3 of 94
RELATED CASES.
This case has not previously been before this Court or any other court.
There are no related cases currently pending in this Court or any other court of
which counsel are aware.
October 25, 2013
/s/ Christopher J. Wright
ii
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 4 of 94
CORPORATE DISCLOSURE STATEMENT
Sorenson Communications, Inc., is a wholly owned subsidiary of SCI
Holdings, Inc., which is wholly owned by Sorenson Holdings, Inc., which in turn is
wholly owned by Sorenson Communications Holdings, LLC. No publicly held
corporation owns 10 percent or more of the stock of Sorenson Communications
Holdings, LLC.
October 25, 2013
/s/ Christopher J. Wright
iii
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 5 of 94
TABLE OF CONTENTS
Certificate As to Parties, Rulings, and Related Cases ............................................... i Corporate Disclosure Statement .............................................................................. iii Table of Contents ..................................................................................................... iv Table of Authorities ................................................................................................. vi Glossary......................................................................................................................x Jurisdiction .................................................................................................................1 Statutes and Regulations ............................................................................................1 Statement of Issues.....................................................................................................1 Statement of Facts ......................................................................................................2 Summary of Argument.............................................................................................20 Standing....................................................................................................................24 Standard of Review ..................................................................................................24 Argument..................................................................................................................26 I. The FCC Acted Arbitrarily and Capriciously in Adopting Rates Below the
Actual Cost of Providing VRS. .....................................................................26 A. The FCC Failed to Consider the Evidence that Its Rates Would
Degrade VRS in the Short Run and Drive Every Provider Out of
Business or Into Bankruptcy in the Long Run. ...................................28 B. The FCC’s Rate Methodology Was Irrational. ...................................36 C. The FCC Ignored Reality by Ordering Providers Simultaneously to
Reduce Costs and to Implement Costly New Speed-of-Answer
Requirements. ......................................................................................52 iv
USCA Case #13-1215
D. II. Document #1463284
Filed: 10/25/2013
Page 6 of 94
It Was Arbitrary and Capricious for the FCC to Ignore the Cumulative
Effect of Rate Cuts. .............................................................................55 It Was Arbitrary and Capricious to Retain a Tiered Rate System. ...............57 A. The Record Did Not Support the Commission’s Speculation That
Sorenson Was More Efficient Because of Economies of Scale. ........59 B. The Record Did Not Support the Commission’s Speculation About
Lock-In. ...............................................................................................61 C. The Commission Had No Justification for Abrogating Its Statutory
Duty to Ensure that VRS Is Provided “In the Most Efficient
Manner.” ..............................................................................................65 Conclusion ...............................................................................................................66 Statutory Addendum ...............................................................................................A1 Certificate of Compliance Certificate of Service v
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 7 of 94
TABLE OF AUTHORITIES
Page(s)
Cases
*Action on Smoking & Health v. C.A.B.,
699 F.2d 1209 (D.C. Cir. 1983) ...................................................................25, 28, 36
Allentown Mack Sales & Serv. v. NLRB,
522 U.S. 359 (1998) .................................................................................................25
Comcast Corp. v. FCC,
579 F.3d 1 (D.C. Cir. 2009) .....................................................................................28
Farmers Union Cent. Exch., Inc. v. FERC,
734 F.2d 1486 (D.C. Cir. 1984) .........................................................................25, 26
*Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto Ins. Co.,
463 U.S. 29 (1983) ...................................................................................................25
New York PSC v. FERC,
813 F.2d 448 (D.C. Cir. 1987) .................................................................................26
Permian Basin Area Rate Cases,
390 U.S. 747 (1968) .................................................................................................26
*Rodway v. U.S. Dep’t of Agric.,
514 F.2d 809 (D.C. Cir. 1975) ...........................................................................25, 27
Sorenson Communications, Inc. v. FCC,
567 F.3d 1215 (10th Cir. 2009) ............................................................................... 8
Sorenson Communications, Inc. v. FCC,
659 F.3d 1035 (10th Cir. 2011) .........................................................................11, 42
Texas PUC v. FCC,
265 F.3d 313 (5th Cir. 2001) ...................................................................................26
vi
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 8 of 94
Statutes, Regulations, & Rules
5 U.S.C. §706 ...........................................................................................................25
28 U.S.C. §2342 ...................................................................................................... 1
28 U.S.C. §2344 ....................................................................................................... 1
*47 U.S.C. §225 ............................................ 1, 4-5, 12, 23, 26, 36, 46, 48-49, 52, 65
47 U.S.C. §402 ........................................................................................................ 1
47 U.S.C. §405 ......................................................................................................... 1
47 C.F.R. §1.103 ...................................................................................................... 1
47 C.F.R. §64.604 ..........................................................................................9, 26, 54
47 C.F.R. §64.611 ....................................................................................................12
Administrative Materials
Represcribing the Authorized Rate of Return for Interstate Services of Local
Exchange Carriers,Order,
5 FCC Rcd. 7507 (1990) ..........................................................................................44
Telecommunications Relay Services and Speech-to-Speech Services for Individuals
with Hearing and Speech Disabilities, Report and Order and Further Notice of
Proposed Rulemaking,
15 FCC Rcd. 5166 (2000) (2000 TRS Order)......................................................x, 53
Telecommunications Relay Services and Speech-to-Speech Services for Individuals
with Hearing and Speech Disabilities and Americans with Disabilities Act of 1990,
Second Report and Order, Order on Reconsideration, and Notice of Proposed
Rulemaking,
18 FCC Rcd. 12,379 (2003) (2003 Improved TRS Order) .................................... x, 5
vii
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 9 of 94
Telecommunications Relay Services and Speech-to-Speech Services for Individuals
with Hearing and Speech Disabilities, Order,
18 FCC Rcd.12,823 (2003) (2003 Rate Order) ..................................................... x, 7
Telecommunications Relay Services and Speech-to-Speech Services For
Individuals With Hearing and Speech Disabilities, Report and Order, Order on
Reconsideration, and Further Notice of Proposed Rulemaking,
19 FCC Rcd. 12,475 (2004) (2004 R&O) ................................................x, 5, 7, 8, 38
Telecommunications Relay Services and Speech-to-Speech Services for Individuals
with Hearing and Speech Disabilities, Order,
20 FCC Rcd. 12,237 (2005) (2005 Rate Order) .................................................xi, 10
Telecommunications Relay Services and Speech-to-Speech Services for Individuals
with Hearing and Speech Disabilities, Report and Order,
20 FCC Rcd. 13,165 (2005) (2005 Report and Order) ......................................xi, 54
Telecommunications Relay Services and Speech-to-Speech Services for Individuals
with Hearing and Speech Disabilities, Declaratory Ruling,
20 FCC Rcd. 1466 (2005) (2005 Declaratory Ruling) .......................................xi, 12
Telecommunications Relay Services and Speech-to-Speech Services for Individuals
with Hearing and Speech Disabilities and Misuse of Internet Protocol (IP) Relay
Service And Video Relay Service, Further Notice of Proposed Rulemaking,
21 FCC Rcd. 5478 (2006) (2006 FNPRM) ...........................................................xi, 6
Telecommunications Relay Services and Speech-to-Speech Services for Individuals
with Hearing and Speech Disabilities, Memorandum Opinion and Order,
21 FCC Rcd. 8063 (2006) (2006 Review Order) ........................................... xi, 8, 46
Individuals with Hearing and Speech Disabilities, Report and Order and
Declaratory Ruling,
22 FCC Rcd. 20,140 (2007) (2007 Report and Order) ............................ xii, 2, 3, 10
Telecommunications Relay Services and Speech-to-Speech Services for Individuals
with Hearing and Speech Disabilities, #911 Requirements for IP-Enabled Service
Providers, Second Report and Order and Order on Reconsideration,
24 FCC Rcd. 791 (2008) (2008 Reconsideration Order) ..................... xii, 12, 62, 64
viii
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 10 of 94
Telecommunications Relay Services and Speech-to-Speech Services for Individuals
with Hearing and Speech Disabilities, Order,
24 FCC Rcd. 8628 (2009) (2009 Rate Order) .................................................. xii, 10
Structure & Practices of the Video Relay Service Program,
25 FCC Rcd. 8597 (2010) (2010 NOI) .................................................. xii, 13, 46-50
Telecommunications Relay Services and Speech-to Speech Services for Individuals
with Hearing and Speech Disabilities, Order,
25 FCC Rcd. 8689 (2010) (2010 Rate Order) ........................................ xii, 3, 11, 47
Telecommunications Relay Services and Speech-to-Speech Services for Individuals
with Hearing and Speech Disabilities, Further Notice of Proposed Rulemaking,
26 FCC Rcd. 17,367 (2011) (2011 FNPRM) .................................. xii, 14, 19, 47, 59
Structure and Practices of the Video Relay Service Program; Telecommunications
Relay Services and Speech-to-Speech Services for Individuals With Hearing and
Speech Disabilities, Final Rule,
78 Fed Reg. 40,582 (2013) .......................................................................................1
*Authorities principally relied upon are marked with an asterisk.
ix
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 11 of 94
GLOSSARY
2000 TRS Order
Telecommunications Relay Services
and Speech-to-Speech Services for
Individuals with Hearing and Speech
Disabilities, CC Docket No. 98-67,
Report and Order, 15 FCC Rcd. 5140
(2000).
2003 Improved TRS Order
Telecommunications Relay Services
and Speech-to-Speech Services for
Individuals with Hearing and Speech
Disabilities and Americans with
Disabilities Act of 1990, CC Docket
No. 98-67, Second Report and Order,
Order on Reconsideration, and Notice
of Proposed Rulemaking, 18 FCC Rcd.
12,379 (2003).
2003 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. 12,823 (2003).
2004 R&O
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. 12,475
(2004).
x
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 12 of 94
2005 Declaratory Ruling
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 (2005).
2005 Rate Order
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, Order, 20 FCC
Rcd. 12,237 (2005).
2005 Report and Order
Telecommunications Relay Services
and Speech-to-Speech Services for
Individuals with Hearing and Speech
Disabilities, CG Docket No. 03-123,
CC Docket No. 98-67, Report and
Order, 20 FCC Rcd. 13,165 (2005).
2006 FNPRM
Telecommunications Relay Services
and Speech-to-Speech Services for
Individuals with Hearing and Speech
Disabilities and Misuse of Internet
Protocol (IP) Relay Service And Video
Relay Service, CG Docket No. 03-123,
Further Notice of Proposed
Rulemaking, 21 FCC Rcd. 5478
(2006).
2006 Review Order
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 (2006).
xi
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 13 of 94
2007 Report and Order
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, 22 FCC Rcd. 20,140 (2007).
2008 Reconsideration Order
Telecommunications Relay Services
and Speech-to-Speech Services for
Individuals with Hearing and Speech
Disabilities, E911 Requirements for IPEnabled Service Providers, CG Docket
No. 03-123, CC Docket No. 98-67,
WC Docket No. 05-196, Second
Report and Order and Order on
Reconsideration, 24 FCC Rcd. 791
(2008).
2009 Rate Order
Telecommunications Relay Services
and Speech-to-Speech Services for
Individuals with Hearing and Speech
Disabilities, CG Docket No. 03-123,
Order, 24 FCC Rcd. 8628 (2009).
2010 NOI
Structure & Practices of the Video
Relay Service Program, CG Docket
No. 10-51, Notice of Inquiry, 25 FCC
Rcd. 8597 (2010).
2010 Rate Order
Telecommunications Relay Services
and Speech-to-Speech Services for
Individuals with Hearing and Speech
Disabilities, CG Docket No. 03-123,
Order, 25 FCC Rcd. 8689 (2010).
2011 FNPRM
Structure and Practices of the Video
Relay Service Program and
Telecommunications Relay Services
and Speech-to-Speech Services for
Individuals with Hearing and Speech
xii
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 14 of 94
Disabilities, CG Docket No. 03-123,
Further Notice of Proposed
Rulemaking, 26 FCC Rcd. 17,367
(2011).
2013 TRS Rate Order
Telecommunications Relay Services
and Speech-to-Speech Services for
Individuals with Hearing and Speech
Disabilities, Structure and Practices of
the Video Relay Service Program,
Order, CG Docket Nos. 03-123 & 1051, 28 FCC Rcd. 9219 (2013).
2013 VRS Rate Order
Structure and Practices of the Video
Relay Service, Telecommunications
Relay Services and Speech-to-Speech
Services for Individuals with Hearing
and Speech Disabilities, CG Docket
Nos. 10-51 & 03-123, Report and
Order and Further Notice of Proposed
Rulemaking, 28 FCC Rcd. 8618
(2013).
ADA
Americans with Disabilities Act, P.L.
101-36, 104 Stat. 327 (1990).
APA
Administrative Procedure Act, 5
U.S.C. § 701, et seq.
Commission
Federal Communications Commission.
CSDVRS
CSDVRS, LLC, a provider of video
relay service.
FCC
Federal Communications Commission.
Order
See 2013 VRS Rate Order.
RLSA
Rolka Loube Saltzer Associates, the
TRS Fund Administrator.
xiii
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 15 of 94
TRS
Telecommunications relay service.
VRS
Video relay service.
ZVRS
CSDVRS, LLC.
xiv
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 16 of 94
JURISDICTION
This case is before the Court on Sorenson’s challenge to a final order of the
Federal Communications Commission establishing compensation for video relay
service under 47 U.S.C. §225 (“the Order”) (JA____). The order was released on
June 10, 2013, and the FCC published notice of the Order in the Federal Register
on July 5, 2013. See 78 Fed. Reg. 40,582. Sorenson Communications, Inc., filed a
timely petition for review on July 11, 2013. See 28 U.S.C. §2344; 47 U.S.C.
§405(a); 47 C.F.R. §§1.103(b), 1.4(b). This Court has jurisdiction under 47 U.S.C.
§402(a) and 28 U.S.C. §§2342(1) and 2344.
STATUTES AND REGULATIONS
Pertinent statutes and regulations are reproduced in the Addendum to this
brief.
STATEMENT OF ISSUES
1. Whether the FCC acted arbitrarily and capriciously and contrary to law by
adopting VRS compensation rates that were lower than the rates at which any
provider can provide service.
2. Whether the FCC acted arbitrarily and capriciously and contrary to law in
retaining a tiered compensation system under which more efficient providers are
penalized by receiving lower rates than smaller providers.
1
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 17 of 94
STATEMENT OF FACTS
Video relay service (“VRS”) allows deaf individuals to communicate by
telephone with hearing individuals.1 In a VRS call, the deaf individual
communicates with an interpreter over a broadband video connection using sign
language, and the interpreter simultaneously interprets and communicates with the
hearing individual by telephone.2 VRS providers are compensated from the
Telecommunications Relay Service (“TRS”) Fund established by the Federal
Communications Commission (“FCC”), which collects payments primarily from
telephone companies.
The FCC has always compensated VRS providers on a per-minute basis, but
the rates have varied considerably, as have the rate-setting methodologies. From
2000 to 2007, the FCC adopted rates annually ostensibly using a form of cost-ofservice regulation—frequently with express upward modifications. Rates were as
high as $17.04 per minute in 2002-03 and stood at $6.64 in 2007.3 Beginning in
2007, the FCC used a price-cap methodology to adjust rates, and that method was
1
Order ¶3 (JA____).
2
Id. ¶4 (JA____).
3
See 2007 Report and Order, 22 FCC Rcd. at 20,145 ¶6; id. 20,161 ¶50; see also
Relay Services’ Reimbursement Rate, Contribution Factor and Fund Size,
http://www.r-l-s-a.com/TRS/RELAYRATESHISTORY.pdf.
2
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 18 of 94
in place until 2010.4 The FCC also adopted a tiered rate structure in 2007, in
which providers were compensated at one rate for their first 50,000 minutes of
service per month, a lower rate for their next 450,000 minutes of service, and a still
lower rate for additional minutes.5 The rates for all tiers during this three-year
period ranged between $6 and $7 per minute.6 In 2010, the FCC cut the rate for
“Tier III” minutes (minutes of service above 500,000 per month) from $6.24 to
$5.07, while the rates for Tiers I and II remained above $6.7 Petitioner Sorenson
Communications is the largest VRS provider and receives the vast majority of its
compensation at the Tier III rate, while other providers receive a much smaller
proportion of their compensation at that rate.
In the 2013 VRS Rate Order at issue here, the FCC announced its intention
to make two fundamental and desirable changes to its method of establishing VRS
rates: (1) moving to a market-based approach to setting rates and (2) abandoning
the current tiered rate structure.8 But the FCC decided not to implement either step
until some undetermined time after July 2017.9 Instead, the FCC established a
4
Order ¶183 n.478 (JA____).
5
See 2007 Report and Order, 22 FCC Rcd. at 20,140 ¶2.
6
2010 Rate Order, 25 FCC Rcd. at 8694 ¶9.
7
Id. 8694 ¶8.
8
Order ¶10 (JA____).
9
Id. ¶¶200, 215 (JA____, JA____).
3
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 19 of 94
declining schedule of rates for 2013 to 2017 under which the tiered rate structure
remains in effect and rates will ultimately target cost-of-service levels. Under this
approach, rates decline steeply—ending at $4.06 for Tiers I and II and to $3.49 for
Tier III.10 Only at some point after 2017 will the FCC shift to a market-based
methodology to establish a unitary rate. The FCC established those rates over the
objection of all VRS providers that they threaten to bankrupt the entire industry;
despite evidence that rate cuts of that magnitude will inevitably impair service to
deaf individuals; and despite Sorenson’s showing that the rates are especially
unfair to it. See infra, I.A.
1. Statutory background. Title IV of the Americans with Disabilities Act
of 1990 (“ADA”) added Section 225, 47 U.S.C. §225, to the Communications Act.
That provision addresses the needs of individuals who are “deaf, hard of hearing,
deaf-blind, or who ha[ve] a speech disability.” Id. §225(a)(3). Section 225(a)(3)
defines “telecommunications relay services” (“TRS”) as services that are
“functionally equivalent” to the services available to “hearing individual[s].” Id.
§§225(a)(3) and (b)(1). It further instructs the FCC to “ensure” that TRS is
“available, to the extent possible and in the most efficient manner, to hearingimpaired . . . individuals in the United States.” Id. §225(b)(1). In addition, the
10
Id. ¶215, Table 2 (JA____).
4
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 20 of 94
FCC is required to ensure that its regulations “do not discourage or impair the
development of improved technology.” Id. §225(d)(2). Section 225(c) also
requires every “common carrier providing voice transmission services” to provide
TRS in compliance with the FCC’s regulations, and Section 225(d)(1)(D) provides
that users are to “pay rates no greater than the rates paid for functionally equivalent
voice communications services.”
Section 225 is a civil-rights statute, like the other provisions of the ADA.
The FCC has explained that Section 225 is “an accommodation . . . for persons
with disabilities” that “places the obligation on carriers providing voice telephone
services to also offer TRS to, in effect, remedy the discriminatory effects of a
telephone system inaccessible to persons with disabilities.”11 VRS is the form of
TRS that provides the most functionally equivalent communications service for
people who use sign language. VRS allows a deaf person to communicate using
sign language (a language distinct from English or any other spoken language12)
with an interpreter who speaks by telephone to the hearing party to the call.
VRS is often described as a life-changing technology that has provided a
critical means by which deaf Americans may communicate with their families and
friends and that also permits them to hold jobs that previously were not open to
11
2004 R&O, 19 FCC Rcd. at 12,543 ¶179.
12
2003 Improved TRS Order, 18 FCC Rcd. at 12,435 ¶112.
5
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 21 of 94
them on account of their inability to use telephone service. For example, I. King
Jordan, the first deaf President of Gallaudet University, recently stated, “I do not
exaggerate when I say that VRS has changed my life.”13 He explained: “I use it
every day to make telephone calls from my home, my office and my tablet
computer. In the years before VRS, I had to depend on others to make calls for
me.” He added that telecommunications relay services allow deaf people “to speak
with our children or grandchildren, make dinner reservations, rent a car or question
the accuracy of a bill, but they are most important in emergencies.
Misunderstanding while making a 911 call in an emergency could lead to
tragedy.”14
VRS service began in 2002 and grew slowly until 2003.15 Sorenson entered
the market in 2003 with an advanced videophone that, unlike other videophones,
was designed specifically for deaf users.16 Sorenson provided its videophone to
13
I. King Jordan, Ensuring Access to Phone Service Guaranteed Under the ADA,
THE HILL’S CONGRESS BLOG (Oct. 10, 2013), http://thehill.com/blogs/congressblog/healthcare/327617-ensuring-access-to-phone-service-guaranteed-underthe-ada.
14
Id. See also Letters of Thousands of Consumers Filed In CG Docket Nos. 03123 & 10-51, e.g. 01-28-2013 Letter of Gail Kallos (JA____).
15
2006 FNPRM, 21 FCC Rcd. at 5480 n.15.
16
See Katz 03-30-2012 Decl., 10-11 ¶15 (JA____-JA____).
6
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 22 of 94
users without charge, and the number of users then grew rapidly.17 Minutes of
service per month exceeded one million for the first time in 2004 and grew to
approximately eight million per month in 2009.18 Since 2009, the number of VRS
minutes has grown much more slowly to a current total of about nine million
minutes per month, indicating that the large majority of deaf or speech-disabled
American Sign Language users in areas with broadband service now likely have
VRS.19
2. VRS rates. The FCC established VRS compensation rates annually from
2000 to 2007 using a modified form of cost-of-service regulation. The
compensation rate varied wildly from 2000 to 2003, sometimes changing more
than once a year.20 For example, in 2001 the rate moved from $5.54 to $7.45 to
$9.61.21 From July 2002 to June 2003, the rate was $17.04.22 It then went down to
$7.75, which was retroactively increased to $8.85 in September 2003.23
17
Id.
18
See id. 12 ¶18; TRS Administrator’s 12-2009 Status Report,
http://www.r-l-s-a.com/TRS/reports/1209octdataTRSstatus.pdf.
19
See, e.g., TRS Administrator’s Fund Status Reports, http://www.r-l-sa.com/TRS/Reports.htm.
20
See Relay Services’ Reimbursement Rate, Contribution Factor and Fund Size,
http://www.r-l-s-a.com/TRS/RELAYRATESHISTORY.pdf.
21
See 2003 Rate Order, 18 FCC Rcd. at 12,830 ¶18 n.52.
22
Id.
23
See 2004 R&O, 19 FCC Rcd. at 12,549 ¶193, id. 12,569 ¶247.
7
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 23 of 94
The details of this system changed frequently from 2000 to 2007, but in that
era VRS providers reported their costs of providing service to the TRS
Administrator and projected their costs of providing service for the next year.
The FCC developed a list of “allowable” costs during this period, and the
FCC’s TRS Administrator collected information on those costs and recommended
rates based on those costs. VRS providers regularly complained that the list of
allowable costs was incomplete.24 But providers have always been free to spend
their money any way they choose. See Sorenson Communications, Inc. v. FCC,
567 F.3d 1215, 1222 (10th Cir. 2009). So even if, for example, the FCC did not
include the costs of providing equipment or paying interest among the allowable
costs, a provider could nevertheless provide equipment without charge or borrow
money and remain profitable as long as it could cover those costs under the perminute compensation it received.
In 2004, the FCC decided not to allow VRS providers to earn any margin on
expenses, but only on capital plant.25 The FCC noted that Congress had required
telephone companies to provide TRS to remedy the discrimination inherent in
voice communications and concluded that they should do so by providing the
24
See 2006 Review Order, 21 FCC Rcd. at 8071 ¶17.
25
See 2004 R&O, 19 FCC Rcd. at 12,542-45 ¶¶177-82.
8
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 24 of 94
service at cost, without any mark up.26 The FCC further decided that it did not
matter whether a VRS provider was a telephone company; it still was not entitled
to any profit.27 The FCC instead concluded that providers ought to be able to
obtain only an 11.25% return on their capital investments, borrowing the 11.25%
figure from the amount that monopoly telephone companies subject to rate-ofreturn regulation were allowed.28 Because VRS is labor-intensive rather than
capital intensive, an 11.25% rate of return on capital investment translates to a
mark up on allowable costs of less than 2%.29
Under this system, the Administrator annually proposed a rate based on the
list of allowable costs that included an allowance for an 11.25% rate of return on
capital investments. But no regulation required the FCC to adopt the rate proposed
by the Administrator—the FCC is required only to select a “reasonable” rate, 47
C.F.R. §64.604(c)(5)(iii)(E)(1)—and the FCC sometimes declined to adopt the
proposed rate in the face of arguments that it was unreasonably low even if it
accurately implemented the methodology adopted by the FCC. For example, in
May 2005 the Administrator proposed a rate of $5.92 and the FCC adopted a rate
26
Id. 12,543-44 ¶181.
27
Id. 12,544-45 ¶182.
28
Id.
29
See Sorenson 11-14-2012 Comments 11 (JA____); see also RLSA 05-01-2013
Report 20.
9
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 25 of 94
of $6.64, which it then retained for two more years. In raising the rate, the FCC
departed from the methodology it had articulated a year earlier by focusing on the
median rather than mean rate in order to protect higher-cost providers.30
In response to the constant disputes about how to calculate the rate, the FCC
adopted a price-cap system that was in place from 2007 to 2010. By 2007,
Sorenson had a large market share and the FCC made clear that it wanted to adopt
a tiered rate system rather than establish a single rate in order to prop up smaller
providers. Reluctantly, Sorenson joined two other providers in proposing tiered
rates. The proposed rates for 2007 were $6.77, $6.50, and $6.30.31 The FCC
adopted those rates, which were adjusted annually according to a formula adopted
in 2007 and stood at $6.70, $6.44, and $6.24 in 2009-2010.32 Although Sorenson
made clear in 2007 that it objected to the use of a tiered rate structure, it went
along with the proposal because it provided rate stability, severed the calculation of
rates from the FCC’s incomplete list of allowable costs, and provided the
possibility for Sorenson to earn a reasonable profit by becoming more efficient. In
30
2005 Rate Order, 20 FCC Rcd. 12,237 ¶¶1-2; id. 12,246 ¶25.
31
See 2007 Report and Order, 22 FCC Rcd. at 20,167 ¶67.
32
See 2009 Rate Order, 24 FCC Rcd. at 8634 ¶18.
10
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 26 of 94
2010, the FCC responded by reducing the rates for Tiers I and II somewhat—to
$6.24 and $6.23 respectively—and by slashing the Tier III rate to $5.07.33
Sorenson challenged the rate cut in the Tenth Circuit. The court upheld the
FCC’s 2010 Rate Order, emphasizing that it was “an interim, one-year VRS rate
plan” that was to be in effect while the FCC considered fundamental reform of its
VRS rate system. Sorenson Communications, Inc. v. FCC, 659 F.3d 1035, 1040
(10th Cir. 2011). The court held that “the FCC is entitled to substantial deference
when adopting interim rates,” id. at 1046, and mentioned more than 25 times that
the rates at issue were “interim” rates.
3. Other Regulatory Matters. Before turning to the Order at issue, four
other features of the regulation of VRS bear note. First, telephone companies are
not required to provide VRS, and no telephone company has done so since AT&T
and Sprint left the market after the FCC cut rates in 2010.34 But the FCC requires
telephone companies to pay for VRS through payments to the TRS Fund.
Second, under the FCC’s regulatory regime VRS users must purchase a
broadband Internet connection to use the service, and VRS providers may not
33
2010 Rate Order, 25 FCC Rcd. at 8694 ¶8.
34
See Sorenson 03-09-2012 Comments 38-39 (JA____-JA____); Katz 11-142012 Declaration 34-35 ¶62 (JA____-JA____).
11
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 27 of 94
subsidize that purchase.35 The cost of a broadband connection is roughly
comparable to the cost of basic telephone service, so any additional expense would
make the payments of VRS users higher than the rates for equivalent voice
communications services, contrary to Section 225(d)(1)(D).36 Videophones are
much more expensive than telephones; although the FCC does not consider the
cost of subsidizing videophones to be an allowable cost, unlike broadband, the
FCC has not prohibited VRS providers from subsidizing videophone costs.37
Third, unlike local telephone companies, VRS providers compete with each
other for all users across the country and any VRS user is able to select another
VRS provider as the user’s “default provider.” See 47 C.F.R. §64.611(a). In
addition, the FCC requires providers to allow users to “dial around.”38 Therefore,
for example, a user who selects Sorenson as her default provider may nevertheless
use Sorenson’s competitors, Purple or CSDVRS, on any call, and that company
rather than Sorenson will obtain the resulting compensation.
Fourth, almost all service is currently provided by three VRS providers. The
amounts vary from month to month, but all but a few percent or minutes are
35
2005 Declaratory Ruling, 20 FCC Rcd. 1466-67 ¶¶1-2 (banning “Brown Bag
Rewards Program” that subsidized TRS users’ Internet connection).
36
Sorenson 11-14-2012 Comments 9, 36 (JA____, JA____).
37
Order ¶¶193-94 (JA____-JA____).
38
2008 Reconsideration Order, 24 FCC Rcd. at 823 ¶70.
12
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 28 of 94
provided by Sorenson and two other providers—CSDVRS and Purple. Purple
estimates that it and CSDVRS (also known as ZVRS) each serve 5 to 10 percent of
monthly minutes.39 There are three other certified providers, including one
Spanish-language provider, but they provide very small amounts of service.40
4. The Proceedings that Led to the Order. In the proceedings that led to
the 2013 VRS Rate Order, the FCC promised to take a fresh look at VRS
regulation—including by revisiting the validity of its cost-of-service
methodology.41 Sorenson argued that the FCC should adopt a market-based
approach to setting rates and abandon the use of a cost-of-service approach.42
Sorenson emphasized that rate proposals resulting from the use of the list of
allowable costs would lead to unsustainable rates that would bankrupt all
providers.43 Sorenson also argued for the adoption of a unitary rate structure.44
39
Purple 03-08-2012 Comments 8 n.11 (JA____).
40
See RLSA 05-01-2013 Report 22 n.41 (JA____).
41
See Order ¶5 (JA____); 2010 NOI, 25 FCC Rcd. at 8598 ¶1, 8616-17 ¶¶65-68.
42
Sorenson 11-14-2012 Comments 37-43 (JA____-JA____); Sorenson 03-092012 Comments 37-45 (JA____-JA____); Sorenson 03-30-2012 Reply
Comments 39-41 (JA____-JA____).
43
Sorenson 03-30-2012 Reply Comments 35-37 (JA____-JA____); Sorenson 1114-2012 Comments 6-36 (JA____-JA____).
44
Sorenson 03-30-2012 Reply Comments 37-39 (JA____-JA____); Sorenson 1114-2012 Comments 18-25 (JA____-JA____); Sorenson 11-29-2013 Reply
Comments 22-37 (JA____-JA____).
13
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 29 of 94
Sorenson submitted extensive comments and four expert declarations from
Professor Michael Katz supporting those proposals.45 Professor Katz explained in
considerable detail the well-known flaws of cost-of-service regulation—which
stifles innovation and promotes inefficiency, and therefore has been abandoned by
regulators generally and by the FCC in almost all other areas in which it regulates.
Instead of cost-of-service regulation, he recommended the use of price caps.46
With respect to tiers, Professor Katz agreed with the FCC’s conclusion in the
2011 FNPRM that “‘the tiered rate structure supports an unnecessarily inefficient
market structure, and apparently provides insufficient incentive for VRS providers
to achieve minimal efficient scale.’”47 He also explained that, contrary to the
claims of other providers, economies of scale in the provision of VRS are very
limited.48 Moreover, Professor Katz concluded that the use of tiered rates did not
make sense in any event—the FCC should encourage inefficient providers to
become more efficient rather than reward them with higher rates.49
45
Katz 03-09-2012 Decl. (JA____); Katz 03-30-2012 Decl. (JA____); Katz 1114-2012 Decl. (JA____); Katz 11-29-2012 Decl. (JA____).
46
Katz 03-09-2012 Decl., ¶¶56-63 (JA____-JA____).
47
Id. 3 (JA____) (quoting 2011 FNPRM, 26 FCC Rcd. at 17,418 ¶141).
48
Id. ¶¶25-55 (JA____-JA____).
49
Id. ¶55 (JA____).
14
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 30 of 94
Professor Katz also explained that there was no merit to the other providers’
claims that tiers are warranted because users are “locked in” to Sorenson.50 He
pointed out that users have no sunk investment in Sorenson’s equipment and that
complaints that users prefer Sorenson’s equipment amount to arguing “that a
consumer is locked-in to a particular restaurant because he really likes the
service.”51 And he noted that the consumer groups reported that the FCC’s dialaround rules work well, so that users are able to use Sorenson’s equipment and
other providers’ interpreters.52
With respect to rate levels, the VRS providers all agreed that they could not
provide service at the rates resulting from the Administrator’s list of allowable
costs. Sorenson emphasized that its actual costs of providing service, as
documented by the auditor of the FCC’s Inspector General, came to nearly $5 per
minute of service.53 The other providers and commenters agreed that the proposed
rates were untenable.54
50
Katz 03-30-2012 Decl., ¶¶22-29 (JA____-JA____).
51
Id. ¶¶23, 25 (JA____).
52
Id. ¶29 (JA____).
53
Sorenson 11-29-2012 Comments 10 (JA____).
54
E.g. CSDVRS 11-14-2012 Comments 13-14 (JA____-JA____); Purple 11-142012 Comments 12 (JA____); Comments of Telecommunications for the Deaf
and Hard of Hearing et al. 11-14-2012 Comments 7 (“Consumer Groups”)
(JA____).
15
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 31 of 94
Sorenson’s specific proposal was that the FCC should adopt a price cap
initialized at the lower of $5.14 or the price resulting from an auction.55 The $5.14
proposal resulted from the “blended rate” paid to Sorenson under the tiered rate
system from 2010 to 2013,56 which represented the lowest rate at which any
company had ever provided VRS and allowed Sorenson to cover its costs while
earning a very modest margin.57 The auction proposal is theoretically sounder in
terms of representing a true market rate,58 but Sorenson knew the FCC would be
unlikely to adopt it because it would result in a rate higher than $5.14.59 For
example, if the FCC wanted to ensure that at least three VRS providers survived,
the rate would represent the costs of the fourth most efficient provider,60 a figure
that likely would exceed $6.
5. The 2013 VRS Rate Order. In its Order, the FCC stated that it intends
to “set VRS compensation rates based largely if not entirely on competitively
established pricing, i.e., prices set through a competitive bidding process.”61 It also
55
Sorenson 11-14-2012 Comments 37, 43-44 (JA____, JA____-JA____).
56
Id. 26 (JA____).
57
Id. 26-27, 40 (JA____-JA____, JA____).
58
Id. 38 (JA____).
59
Id. 38-40 (JA____-JA____).
60
Id.
61
Order ¶188 (JA____).
16
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 32 of 94
stated that it anticipates “the complete elimination of rate tiers.”62 But the FCC
established rates for 2013 through June 2017 that decline sharply, based on the
application of the FCC’s list of allowable costs rather than a market-based
mechanism, and retain a tiered structure.
The rates for Tiers I and II decrease from $6.24 and $6.23 to $4.06 from
2013 to 2017, and the rate for Tier III decreases from $5.07 to $3.49.63 The FCC
also adjusted the “tier boundaries,” so that Tier I covers the first 500,000 minutes
of service each month and Tier II covers the next 500,000 minutes of service. The
result of those adjustments is that no provider other than Sorenson will receive any
substantial amount of compensation at the Tier III rate unless it substantially
increases the number of minutes of service it provides.
The FCC completely ignored the many filings in the record explaining that
the rates calculated using the list of allowable costs were unreasonably low and
below every provider’s actual cost of providing service. Sorenson pinpointed the
rate that would make its situation “unsustainable,”64 but the Order decreases rates
below that level without acknowledging the problem.
62
Id. ¶199 (JA____).
63
Id. ¶215, Table 2 (JA____).
64
Sorenson 05-02-2013 Ex Parte 2 (JA____).
17
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 33 of 94
One sentence in the Order addressed financing costs, saying that the FCC
refused to “reimburse VRS providers for all capital costs they have chosen to
incur—such as high levels of debt—where there is no reason to believe those costs
are necessary to the provision of reimbursable services.”65 The FCC did not
address Sorenson’s showing that its debt level is typical of communications
companies. 66 Nor did the FCC address the evidence showing that Sorenson’s cost
of providing service is lower than that of any other provider even if Sorenson’s
interest costs are included.67
The FCC did not attempt to defend the reasonableness of the 11.25% rate of
return it adopted, but declined to use another approach “[i]n the absence of
immediately implementable alternative proposals.”68 The FCC did not address
Sorenson’s immediately implementable proposal to adopt a price cap initialized at
$5.14,69 which is the lowest rate at which VRS had been provided and which
65
Order ¶195 (JA____).
66
See Sorenson 11-14-2012 Comments 40-43 (JA____-JA____); Sorenson 07-112012 Ex Parte, Attachment (last page) (JA____) (leverage of various
communications and technology companies); Sorenson 06-29-2012 Ex Parte
Ex. A (JA____) (Sorenson’s first quarter 2012 total net leverage).
67
E.g. Sorenson 03-09-2012 Comments 36 (JA____); see also Sorenson 11-142012 Comments 39 (JA____); Turner 11-14-2012 Report 13 ¶17 (JA____).
68
Order ¶196 (JA____).
69
Sorenson 11-14-2012 Comments 40 (JA____).
18
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 34 of 94
allows Sorenson to obtain only a modest margin on its costs, or to conduct an
auction in the near future.
Similarly, the FCC briefly addressed videophone costs, but without saying
how it would be functionally equivalent to require VRS users to pay hundreds of
dollars for videophone equipment when telephones cost a fraction of that amount.
Instead, the FCC reiterated prior refusals to consider equipment costs to be
allowable and attempted to explain away a prior FCC proposal suggesting that
$650 every two years would be an appropriate amount to subsidize equipment
costs.70
Although providers had unanimously explained that a rate cut would
necessarily impair their efforts to provide quality service, the FCC tightened its
speed-of-answer rules. The FCC had previously required providers to answer 80%
of calls within 120 seconds, measured on a monthly basis. It changed that rule to
require that 85% of calls be answered within 30 seconds, measured on a daily basis
and sought comment on further moving the standard to 10 seconds, measured
daily.71
With respect to tiers, the FCC concluded that there was no “valid reason
why the TRS Fund should support indefinitely VRS operations that are
70
Order ¶¶193-94 (JA____-JA____); 2011 FNPRM, 26 FCC Rcd. at 17,456.
71
Order ¶¶135, 265 (JA____; JA____).
19
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 35 of 94
substantially less efficient,” but that “it is worth tolerating some degree of
additional inefficiency in the short term, in order to maximize the opportunity for
successful participation of multiple efficient providers in the future.”72 The
Commission explained that it feared that providing compensation to all providers
at the same level “could lead to a one-firm industry prior to the implementation of
structural reforms.”73
The “structural reforms” the FCC referenced are its plan to develop a system
that would allow for the creation of companies that provide interpretation only
because an FCC contractor would provide all components of video relay service.74
The multiple proposals necessary to implement this scheme appear to be badly
flawed, but are so skeletal that they are not ripe for review. But what is ripe for
review are the rates that will be paid while the FCC pursues its structural reform
plan.
SUMMARY OF ARGUMENT
I. The rates established in the 2013 VRS Rate Order are unreasonably low.
They are so low that none of the three VRS providers with any substantial number
of minutes of service will be able to cover their actual cost of providing service
72
Order ¶¶198, 200 (JA____).
73
Id. ¶204 (JA____).
74
See id. ¶8 (JA____).
20
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 36 of 94
long before the rates decline in 2017 to $4.06 per minute for a provider’s first
million minutes of service per month and $3.49 for additional minutes. The FCC
does not dispute the providers’ showings that their actual costs of providing service
far exceed those rates, but instead refuses to include many of the actual costs
incurred by Sorenson and other VRS providers on its list of “allowable” costs—
while often misleadingly referring to its list of allowable costs as providers’
“actual” costs. In addition, the FCC’s rates are based on a methodology that limits
VRS providers to earning less than two percent margin on their allowable costs.
As an initial matter, the Order is unlawful under the Administrative
Procedure Act (“APA”) because the FCC failed to adequately respond to
submissions by the parties to the proceeding concerning the effects of the rate cuts.
Sorenson provided detailed evidence to the FCC showing that rate cuts of the sort
proposed (and now adopted) would lead to insolvency and, indeed, seem designed
to result in bankruptcy. Sorenson also explained that the FCC’s apparent belief
that a Sorenson bankruptcy would not harm VRS users was a fantasy. The two
other significant VRS providers similarly showed that they cannot provide service
at the rate levels that were proposed and adopted. The FCC failed to acknowledge
and respond to arguments on the record—a particularly stark example of arbitraryand-capricious decisionmaking.
21
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 37 of 94
The FCC purported to allow providers to earn a reasonable profit, but failed
to do so. The Order simply re-adopted the 11.25% return on capital used by the
FCC to set rates for the capital-intensive Bell telephone companies more than two
decades ago when they operated as monopolies. But VRS is a highly competitive,
labor-intensive business, unlike capital-intensive telephone service, and an 11.25%
rate of return based on a VRS provider’s capital investments amounts to less than a
2 % margin on the VRS provider’s allowable costs. Again, the FCC failed entirely
to consider or address these criticisms in the record and its failure to do so was
arbitrary and capricious.
While setting an effective margin of less than 2%, the FCC also effectively
prohibited VRS providers from borrowing money by dismissing consideration of
the “high levels of debt” that providers “have chosen to incur.”75 However,
businesses regularly borrow money and Sorenson provided evidence showing that
its debt costs were similar to those of many other communications companies. The
FCC nevertheless declined to include debt payments among its list of allowable
costs without attempting to explain why it is unreasonable for businesses to borrow
money or why it appeared to think Sorenson’s debt was unreasonably high.
75
Order ¶195 (JA____).
22
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 38 of 94
Among the other particular deficiencies in the FCC’s list of allowable costs
is its failure to include the costs of providing videophones and similar equipment to
consumers. Videophones cost hundreds of dollars, much more than standard
telephones. Establishing a system under which VRS users must pay for their
videophones is contrary to Congress’s instruction in Section 225(d)(1)(D) that
users may not be charged more than is charged for functionally equivalent services.
And nothing is more likely to discourage the development of improved technology,
contrary to the instruction in Section 225(d)(2), than a rule providing that a
population of disabled individuals who on average earn substantially less than the
general population must pay for expensive equipment themselves, without any
subsidy.
Sorenson showed that one certain result of the lower rates would be longer
wait times before VRS interpreters are available to persons seeking to make VRS
calls. The FCC responded by lowering its speed-of-answer requirement to 30
seconds, 85 percent of the time, measured on a daily basis.76 It is completely
unrealistic for the FCC to think that it can order a rate cut in the labor-intensive
VRS industry and prevent the near-certain adverse effect of longer wait times by
ordering that they not occur. In addition, this rule change amounts to an additional
76
Order ¶135 (JA____).
23
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 39 of 94
rate cut because providers cannot meet this standard at current rate levels every day
(although they could meet the standard if it were measured on a monthly rather
than daily basis) and providers receive no compensation for days on which they do
not meet the mandatory minimum standards.
II. The Order is particularly unfair to Sorenson on account of the
continuation of the tiered rate structure. Although the FCC concluded—
correctly—that tiered rates are inefficient and should be eliminated, the rates
established in the Order do not converge and remain far apart even after 2016.
The Tier I and Tier II rates will be set at $4.82 in July of 2016. Although Sorenson
believes that a rate of $4.82 is unreasonably low, Sorenson is unlikely to become
insolvent at that rate level without scheduled additional reductions. But the Tier III
rate levels established in Table 2—$3.87 in 2016, on the way down to $3.49 in
2017—are another matter. At the least, the Tier III rate should remain at $4.82 as
long as that is the Tier II rate.
STANDING
The Order substantially injures Sorenson because it unreasonably reduces
the compensation that Sorenson will receive for providing video relay service.
STANDARD OF REVIEW
Under the Administrative Procedure Act, this Court must set aside the
FCC’s actions if they are “arbitrary, capricious, an abuse of discretion, or
24
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 40 of 94
otherwise not in accordance with law.” 5 U.S.C. §706(2)(a). Under this standard,
the Court must conduct a “‘searching and careful’ inquiry into the record in order
to assure itself that the agency has examined the relevant data and articulated a
reasoned explanation for its action including a ‘rational connection between the
facts found and the choice made.’” Farmers Union Cent. Exch., Inc. v. FERC, 734
F.2d 1486, 1499 (D.C. Cir. 1984) (footnote omitted). Agency action must be set
aside as arbitrary and capricious if the agency “relied on factors which Congress
has not intended it to consider, entirely failed to consider an important aspect of the
problem, offered an explanation for its decision that runs counter to the evidence
before the agency, or is so implausible that it could not be ascribed to a difference
in view or the product of agency expertise.” Motor Vehicle Mfrs. Ass’n v. State
Farm Mut. Auto Ins. Co., 463 U.S. 29, 43 (1983). It also must be set aside if the
agency fails to “respond in a reasoned manner to the comments received, to
explain how [it] resolved any significant problems raised by the comments, and to
show how that resolution led [the agency] to the ultimate rule.” Rodway v. U.S.
Dep’t of Agric., 514 F.2d 809, 817 (D.C. Cir. 1975); accord Action on Smoking &
Health v. C.A.B., 699 F.2d 1209, 1216 supplemented, 713 F.2d 795 (D.C. Cir.
1983). This standard is often referred to as the “requirement of reasoned
decisionmaking.” See, e.g., Allentown Mack Sales & Serv. v. NLRB, 522 U.S. 359,
374 (1998).
25
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 41 of 94
In a ratemaking proceeding, the agency’s “determinations regarding rates of
return, definitions of rate bases, and other technical aspects of ratemaking are
entitled to considerable deference.” See New York PSC v. FERC, 813 F.2d 448,
451 (D.C. Cir. 1987) (citing Permian Basin Area Rate Cases, 390 U.S. 747, 76667 (1968)). At the same time, however, a Court may not limit itself to examining
the agency’s “ratemaking result”; rather, “on review [it] must ensure that ‘each of
the order’s essential elements is supported by substantial evidence.” New York
PSC, 813 F.2d at 465 n.27 (quoting Permian Basin, 390 U.S. at 792). The agency
must, in other words, show a rational basis for “how it derived” the essential
elements that went into its rate, Texas PUC v. FCC, 265 F.3d 313, 329 (5th Cir.
2001), and for its ratemaking methodology. See Farmers Union Cent. Exch., Inc.,
734 F.2d at 1490 (holding that the agency failed “to offer a reasoned explanation in
support of its own chosen ratemaking methodology”).
ARGUMENT
I.
THE FCC ACTED ARBITRARILY AND CAPRICIOUSLY IN
ADOPTING RATES BELOW THE ACTUAL COST OF PROVIDING
VRS.
The FCC’s fundamental task in establishing rates for VRS was to ensure that
VRS providers are compensated for the “costs caused by interstate
telecommunications relay services,” 47 U.S.C. §225(d)(3)(B)—a mandate that the
FCC has interpreted to require that rates be “reasonable.” See 47 C.F.R.
26
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 42 of 94
§64.604(c)(5)(iii)(E)(1). The Order failed at this basic task. Providers
unanimously told the FCC that the rates it had proposed were unsustainable and
that, if adopted, they would lead either to the bankruptcy or exit of every provider
in the industry.77 Commenters also showed the FCC why its rate methodology had
led to this unsustainable result. Among other things, the FCC had failed to
consider all the real-world costs of providing VRS, had failed to allow providers to
earn any return on labor, and had failed to calculate an appropriate rate of return on
capital.
The Commission’s response to these serious objections was to ignore
them.78 The FCC did not even acknowledge, for example, providers’ assertions
that the rates it had proposed were completely unsustainable. And it did not
seriously address commenters’ myriad objections to the rate methodology itself.
The Administrative Procedure Act demands more. The FCC had a statutory duty
to “respond in a reasoned manner to the comments received, to explain how [it]
resolved any significant problems raised by the comments, and to show how that
resolution led [the Commission] to the ultimate rule.” Rodway, 514 F.2d at817;
77
See, e.g., Sorenson 11-29-2012 Reply Comments 15-21 (JA____-JA____).
78
Notably, the Commission ignored similar objections to its compensation
methodology for another form of TRS known as IP Relay. This has caused four
of the six providers of IP Relay service—including Sorenson—to leave the
market, and it is not clear that the remaining two providers will continue to
offer service. See Sorenson 08-19-2013 Comments 2 (JA____).
27
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 43 of 94
accord Action on Smoking & Health, 699 F.2d at1216. The Commission did not
do so.
As a result of these deficiencies, the Court should vacate the rule. The Court
has “not hesitated to vacate a rule when the agency has not responded to empirical
data or to an argument inconsistent with its conclusion.” Comcast Corp. v. FCC,
579 F.3d 1, 8 (D.C. Cir. 2009). As shown in detail below, the Commission’s
dereliction in this case was egregious—the Commission ignored evidence, failed to
respond to numerous objections, and failed to explain how its decision could
possibly be consistent with its statutory obligations. And vacatur is unlikely to
disrupt the existing regulatory regime. Indeed, in this case, failure to vacate would
likely disrupt the existing regulatory regime because it may well result in the
collapse of the VRS industry. See id. at 9 (vacating award after considering the
seriousness of the rule’s deficiencies and the likelihood that vacatur would disrupt
the agency’s regulatory program). Thus, the Order should be vacated.
A.
The FCC Failed to Consider the Evidence that Its Rates Would
Degrade VRS in the Short Run and Drive Every Provider Out of
Business or Into Bankruptcy in the Long Run.
The rates adopted by the Commission were based largely on two identical
proposals filed by the TRS Fund Administrator. In these proposals, the
Administrator argued that the Commission should adopt “cost based rates” that
would ostensibly decline over three years before reaching providers’ actual cost of
28
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 44 of 94
providing service.79 The Fund Administrator claimed that providers’ “weighted
average cost” of providing VRS service from 2010-2012 had been $3.396 per
minute—a figure that, importantly, included some but not all of providers’ actual
costs of providing service—and recommended that the Commission reduce VRS
rates to that level over approximately three years, with rates immediately falling to
$5.2877 for the first 500,000 minutes of service and $4.5099 for all subsequent
minutes.80
In the proceedings that led to the 2013 Rate Order, providers unanimously
told the FCC that these rates were unworkable. Although providers pointed out
numerous flaws with the Administrator’s methodology, the fundamental flaw was
simple—the rates proposed by the Administrator were below the cost at which any
provider could offer reasonable service,81 and it was impossible to reduce costs to
anywhere near the rates proposed by the Administrator.82 In short, providers
explained that “the rate recommendation on which the PN seeks comment supplies
79
RLSA 10-15-2012 Report 5-6 (JA____-JA____); RLSA 05-01-2013 Report 21
(JA____) (renewing prior proposal).
80
RLSA 10-15-2012 Report 5-6 (JA____-JA____).
81
See Sorenson 11-14-2012 Comments 13-14 (JA____-JA____); Sorenson 05-102013 Ex Parte 2 (JA____); Sorenson 05-31-2013 Comments 10 (JA____).
82
Sorenson 07-11-2012 Ex Parte, Attachment 11-18 (JA____-JA____).
29
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 45 of 94
no commercially viable basis for providing VRS” and warned that the proposal
would lead to a collapse of the VRS industry.83
Sorenson—whose costs are lower than any other provider84—warned that
the proposed rates would not allow it to cover its financing costs, much less to
cover its capital costs or earn a reasonable profit.85 And Sorenson further warned
that if it were “placed into bankruptcy by its inability to pay its financing costs,” it
would likely be forced to cut basic services, including customer service, outreach
to unserved users, and technological development.86
The other providers—who estimated their costs to be about 70 percent
higher than Sorenson’s87—only confirmed these conclusions. CSDVRS, for
example, wrote that the Administrator’s proposal reflected such a “minimal rate of
return” that “most providers would never be able to attract future investors, nor be
able to operate at a competitive level and will simply leave the industry.”88 And
CSDVRS plainly counted itself among the providers that would be obliged to
83
Sorenson 11-14-2012 Comments 2-3, 6 (JA____); Sorenson 11-29-2012 Reply
Comments at 21 (JA____); Sorenson 05-10-2013 Ex Parte 2 (JA____);
Sorenson 05-31-2013 Comments 6-7, 10 (JA____-JA____, JA____).
84
Sorenson 11-29-2012 Reply Comments 10 (JA____).
85
Sorenson 11-14-2012 Comments 14 (JA____).
86
Id. 15 (JA____); see also Sorenson 11-29-2012 Reply Comments 12-15
(JA____-JA____).
87
Turner 11-14-2012 Report 11 ¶17 (JA____).
88
CSDVRS 11-14-2012 Comments 13-14 (JA____-JA____).
30
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 46 of 94
“leave the industry” if the Administrator’s proposed rates were adopted: “The
overall weighted average calculated cost by [the Administrator] of $3.396 is
significantly lower than ZVRS’ cost.”89 Purple, too, told the FCC that it could not
operate at the proposed rates: “[T]he TRS Fund Administrator’s rate proposal will
have the effect of decreasing rates for non-dominant VRS providers to such an
extent that they will be forced out of business . . . .”90 Convo Communications,
LLC (“Convo”) observed that “[n]o business can withstand sudden and repeated
double-digit percentage decreases in their operating revenue,” and noted it would
be impossible “to reduce costs in an orderly manner quickly enough to offset the
type of revenue reductions that would result from [the Administrator’s] proposed
rates.”91
The reason was simple—the costs upon which the Administrator had based
its proposal were only a subset of the real-world costs of providing service and
arbitrarily excluded unavoidable real-world costs such as “engineering costs,
unreportable depreciation costs for expensive equipment without which most
consumers could not use VRS services, costs to acquire ten-digit numbers, actual
89
CSDVRS 11-14-2012 Comments 3 (JA____); see also CSDVRS 05-31-2013
Comments 3-5 (JA____-JA____).
90
Purple 11-14-2012 Comments 12 (JA____); see also Turner 11-14-2012 Report
5-6 ¶8 (JA____-JA____).
91
Convo 11-14-2012 Comments 6 (JA____).
31
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 47 of 94
financing costs, and income taxes.”92 Sorenson explained that “[p]retending that
VRS providers’ real-world costs do not exist cannot make them go away—it only
results in a rate unmoored from reality.”93 Moreover, Sorenson explained that
although Sorenson’s costs were the lowest in the entire industry, the
Administrator’s proposal was “far below the costs that Sorenson (and every other
competitor) actually incur.”94 Indeed, Sorenson’s explained that its average cost
per minute, as confirmed by the FCC Inspector General’s independent auditor,95
was about $596—without any profit margin—which was far above the rates
proposed by the Administrator.97
92
Sorenson 11-14-2012 Comments 8 (JA____).
93
Id. 10 (JA____).
94
Id.
95
See Performance Audit Report of Sorenson Communications, Inc.’s Video
Relay Service of the Telecommunications Relay Service Fund Conducted for
the Federal Communications Commission Office of Inspector General For the
Year Ending December 31, 2011 at 2, available at http://transition.fcc.
gov/oig/Sorenson_Audit_Report_09272012_Redacted.pdf (“SCI costs that were
and were not included in the RSDR for the year ending December 31, 2011
were supported by adequate documentation.”); see also Sorenson 11-14-2012
Reply Comments 8 (JA____).
96
Sorenson 11-14-2012 Comments 14 (JA____); see also Sorenson 06-07-2012
Ex Parte, Attachment 6 (JA____); Sorenson 05-22-2013 Ex Parte, Attachment 1
(showing 2013 cost per-minute projection) (JA____); Sorenson 07-11-2012 Ex
Parte, Attachment 10 (showing per-minute cost) (JA____).
97
See Sorenson 05-02-2013 Ex Parte 2 (noting the effects of a $4.37 rate)
(JA____).
32
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 48 of 94
Providers were not alone in their assessment. One interpreter organization
told the Commission that “[t]here wouldn’t be many or any VRS provider[s] that
could sustain [their] organization with rate cuts, reduction of consumers, and/or
services” if the FCC’s proposals went into effect.98 Similarly, a large coalition of
consumer groups warned the Commission that setting rates below cost would be
disastrous: “[i]f the reimbursement rate is set below-cost . . . the Consumer Groups
can apply common sense to what will happen”—“service quality will diminish,
service improvements that bring consumers closer to functional equivalency will
not be made, consumer choice will be reduced” and the “VRS program will fail to
meet the ADA mandate that all consumers have access to functionally equivalent
communications services.”99 Thus, the Consumer Groups warned the Commission
that it must evaluate and explain how the proposed rates would affect consumers
before adopting them.100
The rate cuts so obviously placed “all VRS providers on a path to
insolvency” that Sorenson found it “difficult to avoid the conclusion that those
proposals were designed to result in bankruptcies—perhaps in the hope that
bankruptcies could simply and neatly eliminate VRS providers’ debt, thereby
98
National Alliance of Black Interpreters 11-14-2012 Comments 2 (JA____).
99
Consumer Groups 11-14-2012 Comments 7 (JA____).
100
Id. 8 (JA____).
33
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 49 of 94
reducing their costs going forward with little or no disruption or harm to
consumers.”101 But Sorenson explained that forcing any provider—and
particularly Sorenson, as the largest provider—into bankruptcy could harm VRS
consumers by causing service disruptions,102 interpreter shortages,103 increased
wait times for VRS callers,104 decreased research and development to improve
important features such as interoperability of different providers’ videophones,105
and decreased customer support and training.106 Moreover, Sorenson noted that
even if it attempted to reorganize, rather than liquidate, through bankruptcy, that
might well be impossible if a critical mass of employees sought more stable
employment elsewhere.107 Accordingly, Sorenson noted, “the net result of driving
Sorenson and others into reorganization could well be the collapse of the business,
101
Sorenson 11-29-2012 Reply Comments 15 (JA____); see also Sorenson 11-142012 Comments 14-15 (JA____-JA____); Sorenson 07-11-2012 Ex Parte,
Attachment 19 (JA____).
102
Sorenson 11-29-2012 Reply Comments 14-15 (JA____-JA____); Sorenson 1114-2012 Comments 42.
103
Sorenson 11-29-2012 Reply Comments 15-17 (JA____-JA____).
104
Id.
105
Id.
106
Id. 17-18 (JA____-JA____).
107
Id. 19 (JA____).
34
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 50 of 94
driven primarily by an exodus of interpreters, but amplified by the traditional
problems of bankruptcy.”108
The FCC’s response to this chorus of objections was to bury its head in the
sand. It concluded in a single sentence that the Administrator’s “methodology and
its use of projected and actual cost information submitted by the providers
(certified under penalty of perjury to be true and correct) were reasonable,”109 and
it ultimately adopted rates that reach levels close to those proposed by the
Administrator—and well below the rates at which any provider claimed to be able
to operate. Making matters worse, the Commission made clear that if providers
somehow managed to reduce their costs in response to the new rates, it would
implement further rate cuts, thereby ensuring that no provider would be
profitable.110
By ignoring these serious and fundamental objections to its rates, the
Commission engaged in [arbitrary-and-capricious decisionmaking.] The
Commission had a duty to “respond in a reasoned manner to the comments
received, to explain how the agency resolved any significant problems raised by
the comments, and to show how that resolution led the agency to the ultimate
108
Id. 21 (JA____).
109
Order ¶211 (JA____).
110
Id. ¶216 (JA____).
35
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 51 of 94
rule.” Action on Smoking & Health v. C.A.B., 699 F.2d at 1216. It simply did not
do so. It failed to respond to the numerous comments explaining that no provider
could offer service at the rates proposed by the Administrator. It failed to respond
to the comments explaining that the rates would lead to bankruptcy or mass
exodus. It did not respond to the comments explaining that such a situation would
necessarily harm consumers and violate the Commission’s statutory duties to
ensure that VRS is “available” at costs no greater than those paid by hearing users.
47 U.S.C. §225(b)(1), (d)(1)(D). It did not explain whether it (a) doubts that
Sorenson and other providers will go into bankruptcy under the rates it adopted, (b)
thinks Sorenson and other providers will go bankrupt but that the bankruptcy will
not harm VRS users, or (c) simply does not care whether VRS users will be
harmed. Nor is there a reasonable likelihood that the FCC could offer a
justification for any of these three conclusions. The record evidence was
uncontradicted that the proposed rates would lead to mass exodus or provider
reorganization and that this result would harm VRS users. Such a failure to
respond to comments pointing out fundamental flaws with the Order is the epitome
of arbitrary-and-capricious decisionmaking.
B.
The FCC’s Rate Methodology Was Irrational.
The reason that rates ended up below the real-world cost of providing
service traces back to several fundamental errors in the Commission’s rate-setting
36
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 52 of 94
methodology—errors that providers pointed out in the proceedings that led to the
Order. Among other things, commenters pointed out that the Commission’s rate
methodology did not allow providers any profit on labor—the primary item sold in
the provision of VRS—thereby ensuring that providers earned a margin of less
than 2% (and in some cases less than 1%) on their “allowable costs.” Making
matters worse, the allowable costs that the Commission used as the basis for
setting rates were woefully incomplete and excluded numerous costs that were
necessary in order to provide service. These two problems guaranteed that any
rates generated through the Commission’s ratemaking procedure would be
inadequate.
Once again, however, the Commission largely ignored these fundamental
problems. It did not explain why it believed it was reasonable to expect providers
to offer a labor-intensive service without providing for any return on providers’
investment in that labor, nor did it explain how providers could be expected to
continue offering service when the costs used to set rates were incomplete. This
failure to respond to the serious objections was arbitrary and capricious.
1.
The Commission Failed to Account for Differences Between
a Capital-Intensive and a Labor-Intensive Industry.
The first problem with the FCC’s rate methodology is that it does not allow
providers to earn any margin on the primary thing they sell—labor. The Order
appears to acknowledge that providers are entitled to earn a profit, but it does so by
37
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 53 of 94
borrowing the classic rate-of-return formula it last applied to monopoly telephone
companies in 1990. Under that formula, a provider earns an 11.25% rate of return
on investments in physical capital but not on other investments or expenses such as
the labor of its employees.111 While this method may be appropriate for industries
dominated by large investments in physical capital, providers explained that this
methodology made absolutely no sense for industries such as VRS, which require
less capital investment and where labor accounts for as much as two-thirds of
expenses.112 In fact, as Sorenson explained to the FCC, applying the rate-of-return
formula to VRS makes as much sense as saying that the owner of a plumbing
service can earn a return solely on the value of trucks and tools but not on the skills
of its plumbers113 or saying that a law firm can earn a margin on the value of its
desks and computers but not on the services provided by its lawyers.114 Because
plumbing businesses, law firms, and VRS providers are all in the business of
selling labor, such an approach virtually guarantees that providers will be unable to
earn a reasonable return.
111
See Order ¶¶188, 195-96 (JA____, JA____-JA____); see also 2004 R&O, 19
FCC Rcd. at 12,544-45 ¶182 .
112
See Sorenson 03-09-2012 Comments 39 (JA____); see also CSDVRS 11-142012 Comments 13 (JA____); Turner 11-14-2012 Report 30 ¶50 (JA____).
113
See Sorenson 03-09-2012 Comments 39-40 (JA____-JA____).
114
See id. 40 (JA____).
38
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 54 of 94
The Administrator’s own calculations confirmed this problem. According to
the industry-wide data provided by the Administrator, an 11.25% rate of return on
physical capital translated into an average “[r]eturn on investment” of about three
to five cents per minute.115 Using simple arithmetic, that translates to an actual
margin of less than 2%, as shown in the chart below:
Return on
Investment116
Allowable
Cost117
Allowable
Cost Less
Return
Return as a
Margin118
2011
$.0581
2012
$.045
2013
$.0393
2014
$.0323
$3.2477
$3.0929
$3.3894
$3.7102
$3.1896
$3.0479
$3.3501
$3.6779
1.82%
1.48%
1.17%
.88%
In the proceedings before the FCC, providers made no secret of this
fundamental flaw with the FCC’s ratemaking methodology. As already
mentioned, Sorenson repeatedly told the Commission that “there is no rational
basis for calculating VRS compensation using a traditional rate-of-return formula
and the 11.25-percent cost of capital prescribed for local exchange carriers in
115
See, e.g., Sorenson 11-29-2012 Reply Comments at 9-10 (JA____-JA____);
Turner 11-14-2012 Report 33 ¶56 (JA____).
116
RLSA 05-01-2013 Report 20 (JA____).
117
Id. This is labeled “[t]otal [c]ost” in the RLSA report.
118
This was calculated by dividing Row 1 by Row 3.
39
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 55 of 94
1990,”119 and the Commission’s own former chief economist told the Commission
that if the Commission did not allow a return on “the full range of investments by
the firm—not just investment in physical capital—” then providers would “very
likely degrade the quality of their services in the short run and exit the industry in
the long run.”120 These comments were echoed by numerous others,121 who
similarly argued that such a low return would mean that “most providers would
never be able to attract future investors, nor be able to operate at a competitive
level and will simply leave the industry.”122
Once again, however, the Commission simply ignored these problems.
Although it briefly acknowledged that some providers had argued that a 11.25%
rate of return “does not adequately compensate VRS providers for their capital
119
Sorenson 03-09-2012 Comments 45 (JA____); accord, 43-46 (JA____JA____); accord Sorenson 11-14-2012 Comments 10-11 (JA____-JA____);
Sorenson 11-29-2012 Reply Comments 4 (JA____); 09-17-2012 Ex Parte,
Attachment 8 (JA____); Sorenson 11-13-2012 Ex Parte 1 (JA____); Katz 0330-2012 Decl. ¶¶60-65 (JA____-JA____); Sorenson 05-10-2013 Ex Parte 2
(JA____); Sorenson 05-20-2013 Ex Parte 1 (JA____); Sorenson 05-31-2013
Comments 9 (JA____).
120
Katz 03-09-2013 Decl. ¶78 (JA____).
121
See, e.g., CSDVRS 11-14-2012 Comments 12-13 (JA____); Purple 11-14-2012
Comments 18 (JA____); Turner 11-14-2012 Report 34 ¶57, 38 ¶65 (JA____,
JA____).
122
CSDVRS 11-14-2012 Comments 14 (JA____).
40
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 56 of 94
costs,”123 it chose not to address the more fundamental problem that its
methodology did not provide an adequate return on non-capital costs, such as
labor.
2.
The Commission Failed to Provide a Reasoned Explanation
for Using a 11.25% Rate of Return on Capital Investment.
A second fundamental problem with the Commission’s rate methodology is
that the Commission failed to provide any reasoned explanation for the 11.25%
rate of return it allowed for physical capital. In 2004, the Commission simply
borrowed that number from the return it adopted in 1990 for monopoly telephone
providers. Yet numerous commenters pointed out that this rate was set more than
20 years ago for an entirely different industry and that there was no evidence that
this was an appropriate rate for VRS.124 As Sorenson explained, the 11.25% rate
was “based on the capital costs and structure of the Regional Bell Companies”
from 1990, and there was no evidence that the costs of capital for VRS providers
were similar to those of ILECs in 1990, and there were many reasons to think that
the costs of capital would be different. First, unlike the ILECs, which in 1990
123
Order ¶195 (JA____).
124
See Sorenson 03-09-2012 Comments 41-45 (JA____-JA____); see also
Sorenson 11-29-2012 Reply Comments 8-9 (JA____); Consumer Groups 1114-2012 Comments 26 (JA____); ASL Service Holdings’ 11-14-2012
Comments 13 (JA____); CSDVRS 11-14-2012 Comments 13 (JA____); Purple
11-14-2012 Comments 18 (JA____).
41
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 57 of 94
operated as local monopolists, Sorenson has numerous competitors.125 Second,
“VRS providers, both individually and collectively, are nowhere near the size and
scale of the Regional Bell Companies—and none are integrated with large
common carriers—and thus present a significantly different risk profile to the
capital markets.”126 Third, VRS providers draw all—or nearly all—of their
revenues from the interstate TRS Fund and thus face a concentrated regulatory risk
that a Regional Bell Company, with rates set by regulators in each state plus the
FCC, did not face.127
The FCC’s response to this argument was that “the 11.25% rate of return to
TRS compensation rates is a longstanding practice that was affirmed by a federal
court of appeals.”128 But noting that a practice is “longstanding” does not make it
correct. Nor can the FCC justify this completely arbitrary rate of return by relying
on the 2011 Tenth Circuit decision cited by the Order. See Sorenson
Communications, Inc., v. FCC, 659 F.3d 1035, 1045, 1046-48 (10th Cir. 2011). In
that case, the Tenth Circuit said nothing about whether 11.25% or some other rate
was the appropriate return on capital for the VRS industry and affirmed the FCC’s
125
See Sorenson 03-09-2012 Comments 44 (JA____).
126
Id.
127
See id.
128
Order ¶196 (JA____).
42
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 58 of 94
prior ratemaking decision largely on the ground that the rates in that order were
merely “interim” rates and that the FCC was “seeking comment on and
reevaluating categories of compensable costs during this interim period.” Id. at
1046. In short, the FCC has failed to articulate any connection between the
11.25% rate it adopted and the evidence in the record.
3.
The Commission Improperly Excluded Providers’
Reasonable Costs.
A third problem with the Commission’s rate methodology was that it relied
on an unreasonably incomplete subset of providers’ actual costs of providing
service129 even while claiming that it was moving rates “closer to actual cost.”130
By ignoring many of the actual costs that providers must incur to provide service,
the Commission ensured that the rates it adopted would not live up to its professed
goal of aligning rates with costs. Providers repeatedly brought this problem to the
FCC’s attention, but the Commission once again largely failed to respond to these
arguments or even to acknowledge the problem.
Debt. One of the largest costs ignored by the Commission was the cost of
borrowing money. But as Sorenson explained to the Commission, borrowing
money is a necessary—and reasonable—way for a private company to raise
129
See, e.g., Sorenson 03-30-2012 Reply Comments 40-41 (JA____-JA____).
130
Order ¶188 (JA____).
43
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 59 of 94
capital. Indeed, there are essentially two ways for a company to raise capital—by
incurring debt or by issuing equity. But because it is “extremely difficult” for a
private company “to raise capital by issuing equity because there is no public
market for the company’s shares,”131 private companies such as Sorenson
commonly rely on borrowing in order to raise the capital necessary to run their
businesses. Such borrowing does not raise a private company’s cost of capital
above the costs of a comparable company that does not borrow money: “If
anything, converting equity to debt reduces a firm’s overall weighted average cost
of capital because equity generally costs more than debt,” as the FCC’s own prior
orders have found.132
The Commission nevertheless refused to consider the costs of borrowing as
one of the “actual” costs of offering VRS, explaining in a single sentence that: “it
would be irresponsible and contrary to our mandate to ensure the efficient
provision of TRS and to preserve the integrity of the TRS Fund, to simply
reimburse VRS providers for all capital costs they have chosen to incur—such as
high levels of debt—where there is no reason to believe that those costs are
131
Sorenson 03-09-2012 Comments 36 (JA____).
132
Id. (citing Represcribing the Authorized Rate of Return for Interstate Services
of Local Exchange Carriers, Order, 5 FCC Rcd. 7507 (1990)).
44
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 60 of 94
necessary to the provision of reimbursable services.”133 The FCC did not explain
why it believed—contrary to the undisputed record evidence—that borrowing was
not a legitimate way to obtain the capital necessary to run a VRS business, nor did
it respond to the evidence that borrowing was the most cost-effective way for a
private company like Sorenson to obtain capital. More troubling still, the FCC
failed to offer any justification for its bizarre assertion that VRS providers had
“chosen to incur . . . high levels of debt.” On the contrary, Sorenson presented
evidence that its leverage ratio was consistent with that of other technology and
communications companies.134
In short, the Commission appears to have hoped that it could lower VRS
rates simply by “wishing away” legitimate costs of obtaining capital. The
Commission failed to explain why a VRS provider, unlike any other company,
should be unable to borrow money and ignored the record evidence demonstrating
that Sorenson’s leverage was typical of the communications industry. That was
arbitrary and capricious.
Equipment. A second major deficiency in the FCC’s list of allowable costs
is that it did not include the costs or providing videophones and similar equipment
133
Order ¶195 (JA____).
134
See Sorenson 07-11-2012 Ex Parte 22 (JA____) (showing leverage of various
communications and technology companies); Sorenson 06-29-2012 Ex Parte,
Exhibit A (JA____) (showing Sorenson’s first quarter 2012 total net leverage).
45
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 61 of 94
to consumers. As the FCC has previously recognized, VRS involves three
components: “videophone equipment, video communications service, and ASL
relay interpreter service.”135 Without each of these components, a deaf user would
be unable to place a call, a result that would violate the Commission’s statutory
duty to “ensure . . . that interstate telecommunications relay services are available,
to the extent possible and in the most efficient manner, to hearing-impaired and
speech-impaired individuals in the United States.” 47 U.S.C. §225(b)(1). As a
result, providers argued that the Commission should consider VRS providers’ costs
of providing their customers with equipment to be one of the actual costs of
providing service.136
The Commission had historically rejected this argument under the theory
that providers may be compensated only for “the providers’ expenses in making
the service available and not the customer’s costs of receiving the service.”137 Yet
in 2010—when providers told the Commission that it had made a serious mistake
in that conclusion—the Commission promised to reconsider its position on the
compensability of videophones and sought comment on “the appropriate treatment
135
2010 NOI, 25 FCC Rcd. at 8608 ¶32.
136
See Sorenson 03-30-2012 Comments 40-41 (JA____-JA____); CSDVRS 1114-2012 Comments 10, 20 (JA____, JA____).
137
2006 Review Order at 8071 ¶17.
46
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 62 of 94
of videophone and related equipment costs.”138 There, it recognized that “all VRS
users obtain their videophone equipment from VRS providers” and asked
commenters to “compare the cost and quality of different videophones with the
cost and quality of different voice telephones.” The Commission also specifically
asked whether it should “create a program to create direct user subsidies for the
provision of videophones,” and proposed to reimburse providers for the cost of
videophones at a rate of $650 per user every two years.139
The record before the Commission established a number of important facts,
which demonstrated that providing users with videophones was a necessary
expense of offering video relay service. First, “[v]ideo equipment is an integral
part of VRS without which there would be no service.”140 Second, unlike the
telephones used by hearing users, which can be purchased for a nominal cost, the
equipment needed for VRS is expensive—even a “steeply discounted” phone can
cost more than $800.141 Third, deaf and hard of hearing users generally cannot
138
See 2010 Rate Order, 25 FCC Rcd. at 8693 ¶7 (citing 2010 NOI, 25 FCC Rcd.
at 8604 ¶21).
139
2010 NOI, 25 FCC Rcd. at 8604 ¶21; see also 2011 FNPRM, 26 FCC Rcd.
17,367, App. C. ¶15.
140
AT&T 08-18-2010 Comments 10 (JA____); accord Consumer Groups 08-182010 Comments 11 (JA____); see CSDVRS 08-18-2010 Comments 22-23
(JA____-JA____).
141
Sorenson 11-14-2012 Comments 9 (JA____).
47
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 63 of 94
afford to purchase—and will not purchase—the equipment necessary to use
VRS.142 As a group of associations representing deaf consumers told the FCC,
“Because many people who are deaf, hard of hearing, deaf-blind and speechdisabled are unemployed or underemployed, they cannot afford expensive VRS
equipment. As a result, lack of affordable equipment substantially limits the
ability of people to use VRS.”143 Fourth, consumers universally obtain their VRS
equipment from VRS providers,144—at significant expense to the provider.
Based on these facts, commenters argued that the cost of providing
videophones was one of the necessary “costs caused by interstate
telecommunications relay services,” 47 U.S.C. §225(d)(3)(B), which the
Commission had a statutory duty to fund from the iTRS fund. They also argued
that the Commission had a statutory duty to provide a mechanism for providers to
recover these costs as part of its statutory duty to “ensure that interstate and
intrastate telecommunications relay services are available, to the extent possible
and in the most efficient manner, to hearing-impaired and speech-impaired
individuals in the United States.” 47 U.S.C. §225(b)(1).
142
Id. 8-9 (JA____-JA____).
143
Consumer Groups 08-18-2010 Comments 11 (JA____).
144
2010 NOI, 25 FCC Rcd. at 8604 ¶21.
48
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 64 of 94
In response, the FCC took a confused and contradictory approach. On the
one hand, it announced that it intended to use money from the TRS Fund to
develop a software product that will compete with the videophones and software
distributed by providers,145 implicitly acknowledging that VRS-access technology
is an expense appropriately compensated from the TRS Fund. Yet the Commission
also refused to reimburse providers for such expenses, stating that the “expenses
for which providers are compensated ‘must be the providers’ expenses in making
the service available and not the customer’s costs of receiving the equipment.’”146
As an initial matter, the record conclusively demonstrated that providers
typically bear the cost of videophones.147 It appears, therefore, that what the FCC
meant was that VRS users, rather than providers, should pay for the cost of
videophones even though that is not currently what happens. But the FCC did not
explain how that conclusion could be reconciled with its statutory obligation to
ensure that VRS is “available, to the extent possible” to deaf, hard-of-hearing, and
speech-impaired Americans, 47 U.S.C. §225(b)(1), or to ensure that VRS users pay
no more than hearing users pay for phone service, 47 U.S.C. §225(d)(1)(D).
145
Order ¶¶55-56 (JA____-JA____).
146
Id. ¶193 (JA____).
147
2010 NOI, 25 FCC Rcd. at 8604 ¶21; Consumer Groups 08-18-2010 Comments
11 (JA____).
49
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 65 of 94
If the FCC had actually considered these issues, it could have reached only
one conclusion. First, requiring users to purchase expensive videophones would
drastically limit the availability of VRS.148 Second, VRS users already must
purchase broadband Internet in order to access VRS, an expense that
approximately equals the cost a hearing user would pay for landline telephone
service.149 If VRS users also had to purchase expensive videophone equipment,
they would necessarily pay more for VRS than hearing users pay for telephone
service.
The FCC appears to have entirely missed this fundamental aspect of the
problem. The Commission did not acknowledge the uncontradicted evidence that
deaf consumers cannot afford to purchase their own video equipment. Nor did it
explain how it expected its conclusion to affect the availability of VRS to those
who need it. It is not clear, for example, whether (a) the FCC believes, despite the
uncontradicted evidence to the contrary, that deaf users can afford expensive video
equipment and wants them to pay for it as part of service, even though this will
mean that VRS costs more than voice telephone service; (b) the FCC believes that
VRS users cannot afford expensive video equipment but expects providers to
continue giving it away, even though the FCC’s revised compensation system will
148
Consumer Groups 08-18-2010 Comments 11 (JA____).
149
See 2010 NOI, 25 FCC Rcd. at 8599 ¶7.
50
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 66 of 94
make that impossible; or (c) the FCC believes that its mandate will reduce the
availability of VRS and does not care. In short, the FCC has failed to show how its
approach to videophones is consistent with its statutory duties.
Other Expenses. The interest and equipment expenses excluded by the FCC
are only two examples of the many actual costs that the FCC ignored.
Commenters pointed out numerous other actual “costs caused by” VRS, including
(but not limited to) the following:
 costs related to teaching customers how to use the equipment necessary to
access VRS;
 costs of porting ten-digit telephone numbers as required by the FCC;
 costs associated with raising and servicing capital; and
 actual working-capital requirements due to the time it takes for the TRS Fund
Administrator to pay compensation.150
The Commission failed even to acknowledge these arguments—much less to
explain how providers are expected to provide service without any compensation
for these fundamental functions. As with the numerous other failings, this was
arbitrary and capricious.
150
Sorenson 03-09-2012 Comments 40-41 (JA____-JA____).
51
USCA Case #13-1215
C.
Document #1463284
Filed: 10/25/2013
Page 67 of 94
The FCC Ignored Reality by Ordering Providers Simultaneously
to Reduce Costs and to Implement Costly New Speed-of-Answer
Requirements.
Sorenson warned the FCC that the rates proposed by the Administrator
would lead to “severe degradations in the quality of service provided” to VRS
users as providers pursued every possible way to reduce costs.151 One particular
concern was that the decreased rates would cause longer wait times for VRS users
seeking to place a telephone call. Sorenson noted that “speed-of-answer is directly
affected by compensation levels”152 and reminded the FCC that in 2010, when the
Commission had last cut rates, Sorenson had been forced to fire employees, which
increased wait times.153 It warned that “any further rate cut necessarily will have
additional negative effects on service.”154
Sorenson further warned the FCC that forcing providers to increase wait
times in this way violated the Commission’s statutory duty to ensure that VRS
users receive service that is “functionally equivalent” to the service received by
hearing users.155 See 47 U.S.C. §225(a)(3). That was because, as the Commission
151
Sorenson 11-14-2012 Comments 28 (JA____).
152
Sorenson 03-30-2012 Comments 49 (JA____).
153
Sorenson 03-09-2012 Comments 35 (JA____); Sorenson 07-11-2012 Ex Parte,
Attachment 8 (JA____);
154
Sorenson 11-14-2012 Comments 28 (JA____).
155
Id. 28-30 (JA____-JA____).
52
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 68 of 94
had previously recognized, the time that it takes a VRS user to reach an interpreter
is analogous to the time in which a telephone user obtains a dialtone.156 Forcing a
customer to endure long wait times before placing a telephone call is inconsistent
with the statutory requirement of functional equivalence.157
The Commission responded by simultaneously lowering rates and lowering
its speed-of-answer requirement to 30 seconds, 85 percent of the time, measured
on a daily basis.158 The Commission acknowledged that long wait times would
violate the statutory requirement of functional equivalence, but it reasoned that
“VRS providers already are largely achieving this standard at current CA staffing
levels” and concluded that the providers could therefore meet the new standard
“without additional cost.”159
This conclusion had no support in the record. As a threshold matter, there
was no evidence that providers could meet a 30-second speed-of-answer
requirement measured daily—much less that they were already doing so. The
Commission’s existing speed-of-answer requirement required providers to measure
their speed of answer on a monthly basis, which gave providers leeway to offset
156
2000 TRS Order, 15 FCC Rcd. at 5165-66 ¶60.
157
Order ¶136 (JA____).
158
Id. ¶135 (JA____).
159
Id. ¶¶136-37 (JA____-JA____).
53
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 69 of 94
days with higher wait times against days with shorter wait times.160 But there was
no basis for the Commission to conclude that providers were already meeting—
much less that they could meet—a 30-second standard, measured daily. Indeed,
had the Commission actually proposed to measure speed of answer on a daily basis
before adopting the requirement, providers would have told the Commission that
they do not currently meet such a standard and that it would be difficult if not
impossible to do so.161 Moreover, given that providers receive compensation only
on the days when they meet the new speed-of-answer requirement, the new
standard is effectively a further rate cut, which is particularly egregious given that
the new rates were already unsustainable. See 47 C.F.R. §64.604 (c)(5)(iii)(E)(4)
(providers are eligible for compensation only if they meet “the mandatory
minimum standards,” including speed of answer as outlined in §64.604(b)(2)).
In any event, even if providers had already been meeting a 30-second
requirement, measured daily, the Commission ignored a second fundamental
160
See 2005 Report and Order, 20 FCC Rcd. at 13,175-76 ¶19.
161
See Sorenson 08-30-2013 Comments 46, 48-51(JA____, JA____-JA____).
Note that before adopting the 30-second daily requirement, the Commission had
proposed to adopt a 120 second requirement, measured monthly, and the
comments of both the providers and consumer groups supported a monthly
requirement. See Sorenson 03-30-2012 Reply Comments 48 (JA____).
54
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 70 of 94
fact—that “speed-of-answer is directly affected by compensation levels.”162
Sorenson clearly explained that “if the Commission adopts a lower speed-ofanswer minimum standard, it must maintain a compensation level that enables
VRS providers to meet that requirement, as well as all other mandatory minimum
standards and discretionary quality-of-service enhancements.”163 The Commission
simply ignored this basic reality. It did not explain how providers could be
expected to cut costs while simultaneously implementing expensive new speed-ofanswer requirements. The Commission’s new speed-of-answer requirements
amount to an effort to squeeze blood from a turnip.
D.
It Was Arbitrary and Capricious for the FCC to Ignore the
Cumulative Effect of Rate Cuts.
After the FCC’s 2010 rate cuts, AT&T and Sprint, the only remaining
telephone companies providing VRS, left the market. Only three providers with
any significant number of users remain. Sorenson told the FCC that before it again
cut rates, it should consider the effects of its actions on the ability of the remaining
providers to innovate and otherwise improve service. But the FCC slashed the rate
levels, established a speed-of-answer rule that will effectively further lower the
compensation level, provided for a pitifully low rate of return on an unreasonably
162
Sorenson 03-30-2012 Reply Comments 49 (JA____); see also Sorenson 07-112012 Ex Parte 11 (JA____).
163
Sorenson 03-30-2012 Reply Comments 49 (JA____).
55
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 71 of 94
limited list of allowable costs, and effectively prohibited providers from borrowing
money. Those steps are individually unreasonable, but it was also unreasonable
for the FCC to consider their cumulative effect on providers’ ability to improve
service.
As mentioned already, VRS rates declined from $17.04 per minute in 2002
to $6.64 in 2007. Sorenson explained that the FCC’s 2010 rate cuts—which
slashed the rates Sorenson earns on most of its minutes by another 18 percent to
$5.07 while cutting the rates for other providers by only about 3.5 percent to 6.9
percent—had left it in a precarious situation.164 The 2010 rate cuts drastically
reduced Sorenson’s annual revenue and forced Sorenson to slash its costs and
margins in many ways that Sorenson detailed in confidential filings with the
FCC.165 While these cuts were marginally viable in the short run, they have
jeopardized both the future of Sorenson and the future of VRS in the long run.
Sorenson therefore warned the Commission that “Sorenson could not survive
another substantial rate cut.”166 The Commission completely ignored, however, the
overall impact of its successive rate cuts on providers’ ability to improve service.
This was arbitrary and capricious.
164
See Sorenson 07-11-2012 Ex Parte, Attachment 7 (JA____).
165
E.g. id.
166
Id. 6 (JA____).
56
USCA Case #13-1215
II.
Document #1463284
Filed: 10/25/2013
Page 72 of 94
IT WAS ARBITRARY AND CAPRICIOUS TO RETAIN A TIERED
RATE SYSTEM.
The FCC concluded that the tiered rate structure is inefficient and should be
eliminated.167 That was correct—as the FCC explained, “No party . . . has
presented a valid reason why the TRS Fund should support indefinitely VRS
operations that are substantially less efficient.”168 Yet despite reaching this correct
conclusion, the Order preserves the tiered rate system at least through 2017—and
even by 2017, the tiers do not converge. This decision results in a particular
inequity to Sorenson—because Sorenson will likely be the only provider with any
significant number of Tier III minutes,169 Sorenson will be compensated at rates
lower than those paid to any other provider.
The FCC’s justification for keeping tiers through at least 2017 was that
“eliminating the rate tiers immediately could force out some of the smallest
remaining providers, unnecessarily constricting the service choices available to
VRS consumers during the period prior to the implementation of structural
reforms.”170 By waiting at least four years to eliminate tiers, the FCC speculated
that these smaller providers might “grow sufficiently to reach a more efficient
167
See Order ¶¶5, 197-99. (JA____, JA____-JA____).
168
Id. ¶198 (JA____).
169
See id. ¶204 (JA____) (absent tiers, “the rate reductions we mandate today
could lead to a one-firm industry”).
170
Id. ¶200 (JA____).
57
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 73 of 94
scale under more hospitable conditions.”171 Although the Commission did not
explicitly explain how this was supposed to happen, it seems to have assumed (1)
that Sorenson’s competitors are less efficient than Sorenson simply because they
are smaller; and (2) that Sorenson’s competitors are smaller because of certain
“technical barriers to interoperability and portability” that have undermined their
ability to compete. As explained below, however, the evidence before the FCC
strongly contradicted both assumptions. The FCC completely ignored this
evidence, which showed that there was no justification for maintaining a tiered rate
system.
In any event, the FCC also determined the number of minutes that would fall
in each tier without regard for Sorenson’s evidence showing that any economies of
scale would be exhausted at 250,000 minutes. Although the Commission had
previously conceded that “it is not obvious” that the current boundaries between
tiers “reflect[ed] the actual reduction in the cost of providing VRS at different
minute volumes or, indeed, does much more than reduce the efficiency of the Fund
by providing ongoing support for numerous high-cost, subscale providers,” it
nevertheless increased the number of minutes in Tiers I and II without making any
effort to determine whether its new boundaries actually correspond to thresholds at
171
Id.
58
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 74 of 94
which providers would achieve economies of scale in the real world.172 This was
arbitrary and capricious.
A.
The Record Did Not Support the Commission’s Speculation That
Sorenson Was More Efficient Because of Economies of Scale.
The evidence before the Commission demonstrated that it was irrational to
retain a tiered compensation system.173 Professor Michael Katz provided expert
testimony showing that any economies of scale in providing VRS are minor and
disappear at a relatively small number of minutes of service—about 250,000 per
month out of the approximately 10 million minutes of service provided in a typical
month.174 As Professor Katz explained, interpreter and call-center costs account
for two-thirds of the total allowable costs in the VRS industry, and both categories
“vary in proportion to a VRS provider’s number of minutes of service.”175
Moreover, “[o]ther significant costs are also likely to scale with the volume.”176
The most significant source of any economies of scale in VRS come from
what are known as “queuing efficiencies”—which allow larger providers to take
advantage of statistical averaging to smooth out the variations in call volumes.
172
2011 FNPRM, 26 FCC Rcd. at 17,475.
173
Sorenson 11-14-2012 Comments 19-25.
174
See Katz 03-09-2012 Decl. 18-37 ¶¶25-53 (JA____-JA____).
175
Id. 19 ¶26 (JA____).
176
Id.
59
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 75 of 94
“This smoothing allows them to utilize interpreters efficiently while maintaining
competitive levels of service.”177 Yet as Professor Katz explained, a company
providing 250,000 minutes per month—or less than three percent market share—
would achieve 95.4 percent of the maximal feasible VRS efficiency.178 Moreover,
“[t]he implied economies of scale related to queuing efficiencies are just one
percent once providers reach the scale achieved by Purple and ZVRS.”179
No other commenter seriously challenged this analysis. Although Purple
Communications submitted a purported economic analysis by Steven E. Turner, an
“expert” with an MBA and a Bachelor’s degree in electrical engineering,180 that
analysis did not seriously challenge Professor Katz’s conclusion. Mr. Turner’s
analysis merely begged the question—assuming that since smaller providers such
as Purple and CSDVRS are less efficient than Sorenson, these lower efficiencies
are caused by economies of scale.181 Mr. Turner also claimed that “total industry
per-minute indirect costs dropped 11.3% between 2010 and 2012 as volumes
increased by 8.7%.”182 From these numbers, Mr. Turner simply assumed a causal
177
Id. 21 ¶29 (JA____).
178
Id. 25-26 ¶35 (JA____-JA____).
179
Id.
180
Turner 11-14-2012 Report 3 ¶2 (JA____).
181
See id. 6-9 ¶¶10-15 (JA____-JA____).
182
Id.12-13 ¶22 (JA____-JA____).
60
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 76 of 94
relationship.183 Moreover, for reasons explained by Professor Katz, this
assumption was inconsistent with Mr. Turner’s own data.184 The more likely
reason that costs dropped after 2010 was because the FCC’s Draconian 2010 rate
cuts forced providers to decrease their quality of service.185
In any event, the FCC’s own data showed that Mr. Turner’s claims were
wrong. Contrary to Mr. Turner’s predictions, the average per-minute costs of the
smallest providers (Tier I providers) were actually lower than the per-minute costs
of many of the larger providers (Tier II providers).186 In short, there was no good
reason even to speculate that providers like Purple and CSDVRS would become
more efficient simply by virtue of becoming bigger.
B.
The Record Did Not Support the Commission’s Speculation
About Lock-In.
The record also did not support the Commission’s speculation that
“technical barriers to interoperability and portability, as well as other limitations,
continue to inhibit the full development of competition.”187 On the contrary,
while some providers had for years made unsupported assertions that users were
183
See Katz 11-29-2012 Decl. 16 ¶22 (JA____).
184
Id.16-19 ¶¶22-26 (JA____-JA____).
185
Id.19 ¶26 (JA____).
186
Order ¶206 n.539 (JA____).
187
Id. ¶200 (JA____).
61
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 77 of 94
“locked in” to using Sorenson as a provider, Sorenson submitted an economic
analysis demonstrating that this was not true.188
The Commission did not make clear what “technical barriers to
interoperability” it believed were preventing smaller providers from competing. In
the context of VRS, videophones typically need to interoperate with another
provider’s system only if the user attempts to “dial around” his or her default
provider and use a different provider for a single call. The evidence in the record
demonstrated, however, that the dial-around process worked well. Consumer
groups told the FCC that its dial-around rules were working well and that “VRS
users can make and receive calls through any VRS provider.”189
It may be that the Commission was referring to the interoperability of
videophones for point-to-point calls—non-VRS calls in which one phone connects
directly to another phone over the Internet and for which providers receive no
compensation.190 Once again, however, the record did not support a conclusion
that there were ongoing “technical barriers to interoperability” that would prevent
smaller providers from competing. On the contrary, the record evidence
demonstrated that Sorenson’s newest videophone—the ntouch VP—could
188
See Katz 03-30-2012 Decl. 9-18 ¶¶13-29 (JA____-JA____).
189
Consumer Groups 03-09-2012 Comments 41 (JA____); see also Katz 03-302012 Decl. 18 ¶29 (JA____).
190
2008 Reconsideration Order, 24 FCC Rcd. at 820 ¶65.
62
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 78 of 94
successfully place point-to-point calls to every other major phone on the market.191
Similarly, the phones supplied by every other major provider were able to place
point-to-point calls to the ntouch VP, although users of other devices (including
other Sorenson devices) were not able to leave videomail (i.e., answering machine)
messages for ntouch users. And while it is true that every provider’s older phones
and their software products suffer from varying degrees of compatibility issues,
there was no basis for concluding that these issues were preventing smaller
providers from competing. If anything, the evidence suggested that consumers
concerned about interoperability would solve those issues by maintaining accounts
with multiple VRS providers. As one commenter explained, “It is currently
impossible for a private party or a business to operate only one ten-digit number
and be assured that they are reachable by every other caller, no matter whether deaf
or hearing.”192 But of course, that means more business for smaller providers, not
less, and it does not imply that users are unable to use the VRS provider of their
choice.
The Commission’s speculation about problems with “portability” was
similarly contradicted by the record. As Professor Katz explained in his reply
191
See Technology Access Program at Gallaudet University 08-09-2012 Ex Parte,
Spreadsheet with Interoperability Results (JA____).
192
Id.
63
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 79 of 94
comments, some commenters had asserted—once again with no real support—that
users are “locked in” to Sorenson because Sorenson offers beneficial features that
consumers would not want to give up if they switched to providers that do not
offer these features.193 For example, if a Sorenson user ports to a competitor, that
user will no longer be able to take advantage of Sorenson’s SignMail feature,
which is Sorenson’s innovative videomail technology, just as a voice telephone
user cannot use Verizon voicemail if he switches to AT&T.194 But the fact that
users may stay with Sorenson because they like its product better than the product
offered by competitors is not lock-in; it is simply competition on the merits.195
Indeed, the FCC has previously made this point in the context of VRS, where it has
held that providers have no duty to ensure that a videophone’s “enhanced features
(e.g., missed call list, speed dial list) can be used by the consumer if the consumer
ports his or her number to a new default provider and uses the CPE with the new
default provider.”196 In that context, the FCC held that “[p]roviders may offer such
features on a competitive basis, which will encourage innovation and
193
See Katz 03-30-2012 Decl. 9-14 ¶¶13-21 (JA____-JA____).
194
Id. 17 ¶26 (JA____).
195
Id. 16-17 ¶25 (JA____-JA____).
196
2008 Reconsideration Order, 24 FCC Rcd. at 820 ¶63.
64
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 80 of 94
competition.”197 The same is true here, and the FCC provided no reasoned
explanation for departing from this conclusion.
C.
The Commission Had No Justification for Abrogating Its
Statutory Duty to Ensure that VRS Is Provided “In the Most
Efficient Manner.”
In short, the Commission’s vague references to economies of scale and
problems involving interoperability and lock-in were contradicted by the record,
and the Commission failed to respond to Sorenson’s arguments demonstrating why
these were incorrect. Absent such a reasoned analysis, the Commission had no
justification for abrogating its statutory duty to ensure that VRS is provided “in the
most efficient manner.” 47 U.S.C. §225(b).
197
Id.
65
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 81 of 94
CONCLUSION
For these reasons, the Court should vacate the Order.
Dated: October 25, 2013
Respectfully submitted,
/s/ Christopher J. Wright
Christopher J. Wright
John T. Nakahata
Mark D. Davis
WILTSHIRE & GRANNIS LLP
1200 Eighteenth St., NW, Suite 1200
Washington, D.C. 20036
Telephone: (202) 730-1300
Counsel for Petitioner
66
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 82 of 94
STATUTORY ADDENDUM
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 83 of 94
TABLE OF CONTENTS
47 U.S.C. §225 ........................................................................................................ A1
47 C.F.R. §64.604 ................................................................................................... A6
47 C.F.R. §64.611 ................................................................................................... A9
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 84 of 94
47 U.S.C.A. § 225
United States Code Annotated
Title 47. Telegraphs, Telephones, and Radiotelegraphs
Chapter 5. Wire or Radio Communication
Subchapter II. Common Carriers
Part I. Common Carrier Regulation
§ 225. Telecommunications services for hearing-impaired and speechimpaired individuals
(a) Definitions
As used in this section-(1) Common carrier or carrier
The term “common carrier” or “carrier” includes any common carrier engaged in
interstate communication by wire or radio as defined in section 153 of this title and
any common carrier engaged in intrastate communication by wire or radio,
notwithstandingsections 152(b) and 221(b) of this title.
(2) TDD
The term “TDD” means a Telecommunications Device for the Deaf, which is a
machine that employs graphic communication in the transmission of coded signals
through a wire or radio communication system.
(3) Telecommunications relay services
The term “telecommunications relay services” means telephone transmission
services that provide the ability for an individual who is deaf, hard of hearing,
deaf-blind, or who has a speech disability to engage in communication by wire or
radio with one or more individuals, in a manner that is functionally equivalent to
the ability of a hearing individual who does not have a speech disability to
communicate using voice communication services by wire or radio.
(b) Availability of telecommunications relay services
(1) In general In order to carry out the purposes established under section 151 of
this title, to make available to all individuals in the United States a rapid, efficient
nationwide communication service, and to increase the utility of the telephone
system of the Nation, the Commission shall ensure that interstate and intrastate
telecommunications relay services are available, to the extent possible and in the
A1
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 85 of 94
most efficient manner, to hearing-impaired and speech-impaired individuals in the
United States.
(2) Use of general authority and remedies
For the purposes of administering and enforcing the provisions of this section and
the regulations prescribed thereunder, the Commission shall have the same
authority, power, and functions with respect to common carriers engaged in
intrastate communication as the Commission has in administering and enforcing
the provisions of this subchapter with respect to any common carrier engaged in
interstate communication. Any violation of this section by any common carrier
engaged in intrastate communication shall be subject to the same remedies,
penalties, and procedures as are applicable to a violation of this chapter by a
common carrier engaged in interstate communication.
(c) Provision of services
Each common carrier providing telephone voice transmission services shall, not
later than 3 years after July 26, 1990, provide in compliance with the regulations
prescribed under this section, throughout the area in which it offers service,
telecommunications relay services, individually, through designees, through a
competitively selected vendor, or in concert with other carriers. A common carrier
shall be considered to be in compliance with such regulations-(1) with respect to intrastate telecommunications relay services in any State that
does not have a certified program under subsection (f) of this section and with
respect to interstate telecommunications relay services, if such common carrier (or
other entity through which the carrier is providing such relay services) is in
compliance with the Commission's regulations under subsection (d) of this section;
or
(2) with respect to intrastate telecommunications relay services in any State that
has a certified program under subsection (f) of this section for such State, if such
common carrier (or other entity through which the carrier is providing such relay
services) is in compliance with the program certified under subsection (f) of this
section for such State.
(d) Regulations
A2
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 86 of 94
(1) In general
The Commission shall, not later than 1 year after July 26, 1990, prescribe
regulations to implement this section, including regulations that-(A) establish functional requirements, guidelines, and operations procedures for
telecommunications relay services;
(B) establish minimum standards that shall be met in carrying out subsection (c) of
this section;
(C) require that telecommunications relay services operate every day for 24 hours
per day;
(D) require that users of telecommunications relay services pay rates no 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;
(E) prohibit relay operators from failing to fulfill the obligations of common
carriers by refusing calls or limiting the length of calls that use telecommunications
relay services;
(F) prohibit relay operators from disclosing the content of any relayed conversation
and from keeping records of the content of any such conversation beyond the
duration of the call; and
(G) prohibit relay operators from intentionally altering a relayed conversation.
(2) Technology
The Commission shall ensure that regulations prescribed to implement this section
encourage, consistent with section 157(a) of this title, the use of existing
technology and do not discourage or impair the development of improved
technology.
(3) Jurisdictional separation of costs
(A) In general Consistent with the provisions of section 410 of this title, the
Commission shall prescribe regulations governing the jurisdictional separation of
costs for the services provided pursuant to this section.
A3
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 87 of 94
(B) Recovering costs
Such regulations shall generally provide that costs caused by interstate
telecommunications relay services shall be recovered from all subscribers for every
interstate service and costs caused by intrastate telecommunications relay services
shall be recovered from the intrastate jurisdiction. In a State that has a certified
program under subsection (f) of this section, a State commission shall permit a
common carrier to recover the costs incurred in providing intrastate
telecommunications relay services by a method consistent with the requirements of
this section.
(e) Enforcement
(1) In general
Subject to subsections (f) and (g) of this section, the Commission shall enforce this
section.
(2) Complaint
The Commission shall resolve, by final order, a complaint alleging a violation of
this section within 180 days after the date such complaint is filed.
(f) Certification
(1) State documentation
Any State desiring to establish a State program under this section shall submit
documentation to the Commission that describes the program of such State for
implementing intrastate telecommunications relay services and the procedures and
remedies available for enforcing any requirements imposed by the State program.
(2) Requirements for certification
After review of such documentation, the Commission shall certify the State
program if the Commission determines that-(A) the program makes available to hearing-impaired and speech-impaired
individuals, either directly, through designees, through a competitively selected
vendor, or through regulation of intrastate common carriers, intrastate
telecommunications relay services in such State in a manner that meets or exceeds
the requirements of regulations prescribed by the Commission under subsection (d)
of this section; and
A4
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 88 of 94
(B) the program makes available adequate procedures and remedies for enforcing
the requirements of the State program.
(3) Method of funding
Except as provided in subsection (d) of this section, the Commission shall not
refuse to certify a State program based solely on the method such State will
implement for funding intrastate telecommunication relay services.
(4) Suspension or revocation of certification
The Commission may suspend or revoke such certification if, after notice and
opportunity for hearing, the Commission determines that such certification is no
longer warranted. In a State whose program has been suspended or revoked, the
Commission shall take such steps as may be necessary, consistent with this section,
to ensure continuity of telecommunications relay services.
(g) Complaint
(1) Referral of complaint
If a complaint to the Commission alleges a violation of this section with respect to
intrastate telecommunications relay services within a State and certification of the
program of such State under subsection (f) of this section is in effect, the
Commission shall refer such complaint to such State.
(2) Jurisdiction of Commission
After referring a complaint to a State under paragraph (1), the Commission shall
exercise jurisdiction over such complaint only if-(A) final action under such State program has not been taken on such complaint by
such State-(i) within 180 days after the complaint is filed with such State; or
(ii) within a shorter period as prescribed by the regulations of such State; or
(B) the Commission determines that such State program is no longer qualified for
certification under subsection (f) of this section.
A5
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 89 of 94
47 C.F.R. § 64.604
Code of Federal Regulations
Title 47. Telecommunication
Chapter I. Federal Communications Commission
Subchapter B. Common Carrier Services
Part 64. Miscellaneous Rules Relating to Common Carriers
Subpart F. Telecommunications Relay Services and Related Customer
Premises Equipment for Persons with Disabilities
§ 64.604 Mandatory minimum standards.
***
(b) Technical standards-(2) Speed of answer.
(i) TRS providers shall ensure adequate TRS facility staffing to provide callers
with efficient access under projected calling volumes, so that the probability of a
busy response due to CA unavailability shall be functionally equivalent to what a
voice caller would experience in attempting to reach a party through the voice
telephone network.
(ii) TRS facilities shall, except during network failure, answer 85% of all calls
within 10 seconds by any method which results in the caller's call immediately
being placed, not put in a queue or on hold. The ten seconds begins at the time the
call is delivered to the TRS facility's network. A TRS facility shall ensure that
adequate network facilities shall be used in conjunction with TRS so that under
projected calling volume the probability of a busy response due to loop trunk
congestion shall be functionally equivalent to what a voice caller would experience
in attempting to reach a party through the voice telephone network.
(A) The call is considered delivered when the TRS facility's equipment accepts the
call from the local exchange carrier (LEC) and the public switched network
actually delivers the call to the TRS facility.
(B) Abandoned calls shall be included in the speed-of-answer calculation.
A6
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 90 of 94
(C) A TRS provider's compliance with this rule shall be measured on a daily basis.
(D) The system shall be designed to a P.01 standard.
(E) A LEC shall provide the call attempt rates and the rates of calls blocked
between the LEC and the TRS facility to relay administrators and TRS providers
upon request.
(iii) Speed of answer requirements for VRS providers.
(A) Speed of answer requirements for VRS providers are phased-in as follows:
(1) By January 1, 2007, VRS providers must answer 80% of all VRS calls within
120 seconds, measured on a monthly basis;
(2) By January 1, 2014, VRS providers must answer 85% of all VRS calls within
60 seconds, measured on a daily basis; and
(3) By July 1, 2014, VRS providers must answer 85% of all VRS calls within 30
seconds, measured on a daily basis. Abandoned calls shall be included in the VRS
speed of answer calculation.
(B) VRS CA service providers must meet the speed of answer requirements for
VRS providers as measured from the time a VRS call reaches facilities operated by
the VRS CA service provider.
***
(c) Functional standards--
***
(5) Jurisdictional separation of costs--
***
A7
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 91 of 94
(iii) Telecommunications Relay Services Fund. Effective July 26, 1993, an
Interstate Cost Recovery Plan, hereinafter referred to as the TRS Fund, shall be
administered by an entity selected by the Commission (administrator). The initial
administrator, for an interim period, will be the National Exchange Carrier
Association, Inc.
***
(E) Payments to TRS providers.
(1) TRS Fund payments shall be distributed to TRS providers based on formulas
approved or modified by the Commission. The administrator shall file schedules of
payment formulas with the Commission. Such formulas shall be designed to
compensate TRS providers for reasonable costs of providing interstate TRS, and
shall be subject to Commission approval. Such formulas shall be based on total
monthly interstate TRS minutes of use. The formulas should appropriately
compensate interstate providers for the provision of TRS, whether intrastate or
interstate.
***
(4) The administrator shall establish procedures to verify payment claims, and
may suspend or delay payments to a TRS provider if the TRS provider fails to
provide adequate verification of payment upon reasonable request, or if directed by
the Commission to do so. The TRS Fund administrator shall make payments only
to eligible TRS providers operating pursuant to the mandatory minimum standards
as required in this section, and after disbursements to the administrator for
reasonable expenses incurred by it in connection with TRS Fund administration.
TRS providers receiving payments shall file a form prescribed by the
administrator. The administrator shall fashion a form that is consistent with 47
CFR parts 32 and 36 procedures reasonably tailored to meet the needs of TRS
providers.
A8
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 92 of 94
47 C.F.R. § 64.611
Code of Federal Regulations
Title 47. Telecommunication
Chapter I. Federal Communications Commission
Subchapter B. Common Carrier Services
Part 64. Miscellaneous Rules Relating to Common Carriers
Subpart F. Telecommunications Relay Services and Related Customer
Premises Equipment for Persons with Disabilities
§ 64.611 Internet–Based TRS Registration.
(a) Default Provider Registration. Every provider of VRS or IP Relay must, no
later than December 31, 2008, provide users with the capability to register with
that VRS or IP Relay provider as a “default provider. . . .”
A9
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 93 of 94
CERTIFICATE OF COMPLIANCE
Type-Volume Limitation:
Pursuant to Federal Rule of Appellate Procedure 32(a)(7)(C), I hereby
certify that this brief contains 13,942 words, excluding the parts of the brief
exempted by Federal Rule of Appellate Procedure 32(a)(7)(B)(iii).
Typeface
I further certify that this brief complies with the typeface requirements of
Federal Rule of Appellate Procedure 32(a)(5) and the type style requirements of
Federal Rule of Appellate Procedure 32(a)(6) because this brief has been prepared
in a proportionally spaced typeface using Microsoft Word 2007 in 14 point, Times
New Roman.
Dated: October 25, 2013
/s/ Christopher J. Wright
USCA Case #13-1215
Document #1463284
Filed: 10/25/2013
Page 94 of 94
CERTIFICATE OF SERVICE
I certify that on October 25, 2013, the foregoing document was served on all
parties or their counsel of record through the CM/ECF system.
/s/ Christopher J. Wright