a 10 percent safety margin. The contribution factor is based on the ratio between total expected TRS Fund expenses and interstate end-user telecommunications revenues. 44 12. Making these calculations, NECA determined that the total Fund size requirement – i.e., the amount that would be necessary to compensate providers for providing all eligible TRS services for the period of July 2005 through June 2006 – would be $413,337,460." NECA then divided that number by the total 2004 common carrier end user revenues ($78.2 billion) to arrive at a contribution factor of 0.00528." NECA then submitted all of its data to the Commission for approval or modification. 46 B. Commenters 47 13. On April 28, 2005, the Commission released a Public Notice requesting comment on NECA's filing." Ten comments and six reply comments were filed." In general, comments are directed at the proposed VRS rate, whether IP Relay and traditional TRS should be compensated at different rates," and the size of the Interstate TRS Fund and how it is funded." We address the comments below. 50 14. We have reviewed the 2005 NECA Filing, as well as the underlying cost data and the comments that were filed. Based on this review, we approve NECA's proposed compensation rate of $1.579 per minute for STS. We conclude, however, that the compensation rates for traditional TRS and IP Relay should reflect the cost and demand data unique to those services, and that, therefore, it is no longer appropriate to compensate these services at a single rate that reflects the combined projected costs 44 2005 NECA Filing at Ex. 4. Id. This amount includes the actual costs of providing TRS, NECA's administrative costs, and a 10 percent safety margin, less interest income on retained funds. See id. 46 Id. 47 See 47 C.F.R. §§ 64.604(c)(5)(iii)(E), (H). As we have noted, NECA states that if the Commission adopts separate compensation rates for traditional TRS and IP Relay, the effect on the total Fund size requirement would be negligible and the carrier contribution factor of 0.00528 would be the same. 2005 NECA Filing at 21 n.40. 48 National Exchange Carrier Association (NECA) Submits the Payment Formula and Fund Size Estimate for Interstate Telecommunications Relay Services (TRS) Fund for July 2005 through June 2006, Public Notice, CC Docket No. 98-67, DA 05-1175 (April 28, 2005) (2005 TRS Rate PN). 49 Comments were filed by Hands On Video Relay Services, Inc. (Hands On) (May 12, 2005); MCI, Inc. (MCI) 50 See generally Hands On Comments, CSD Comments, TDI/DHHCAN Comments, Hands On Reply Comments, CSD Reply Comments (proposed VRS rate is unfairly low); see also Sorenson Reply Comments. 51 Compare MCI Comments, Nordia Comments, Hamilton Comments, and MCI Reply Comments (rates for IP Relay and traditional TRS should remain the same), with Sprint Comments, Ultratec Comments, and CSD Reply Comments (Commission should adopt separate rates). 52 See generally Telco Group Comments (addressing payments into fund based on international revenues); AT&T Comments (asserting that projected size of Fund is too large and addressing related issues); Hands On Reply Comments; CSD Reply Comments; Verizon Reply Comments; NECA Reply Comments. and minutes of use. Accordingly, as reflected in NECA's filing, we adopt a compensation rate of $1.440 per minute for traditional TRS, and a compensation rate of $1.278 per minute for IP Relay. With respect to VRS, we reject NECA's proposed rate and, as explained below, we adopt a rate of $6.644 per minute, reflecting the median rate of the rates of the seven providers that submitted VRS cost and demand data. Accordingly, we adopt a total Fund size of $441,493,869 and a carrier contribution factor of 0.00564. 53 54 15. We conclude that STS shall be compensated at $1.579 per minute for interstate STS for the 2005-2006 Fund year, as recommended by NECA. As we have noted above, this rate was determined by dividing the providers' total projected interstate costs of $309,680 by the providers' total projected interstate minutes of 198,860. We have reviewed NECA's proposed rate and its analysis of the relevant underlying data. We find that NECA's calculations with respect to this service are reasonable. Accordingly, the Interstate TRS Fund will pay $1.579 per minute for eligible interstate STS for the period of July 2005 through June 2006. B. Compensation Rate for Traditional TRS and IP Relay 1. Separate Rates for Traditional TRS and IP Relay 16. Given the cost disparity between traditional TRS and IP Relay," we conclude that these services should be compensated at separate rates based on the cost and demand projections specific to each service. We do not believe that it is fair or reasonable to use a combined rate ($1.312) that overcompensates IP Relay providers (by $0.034 per minute) and under-compensates traditional TRS providers (by $0.128 per minute). 57 17. NECA proposes a compensation rate of $1.312 applicable to both traditional TRS and IP 56 Relay. The Public Notice seeking comment on NECA's filing, however, specifically sought comment on whether the Commission should adopt separate compensation rates for traditional TRS and IP Relay." Three parties support a single compensation rate for both services; three parties support separate compensation rates. 18. We note that the issue of whether separate compensation rates should be adopted for traditional TRS and IP Relay was initially raised in the FNPRM in the 2004 TRS Report & Order. 58 In the FNPRM, the Commission observed that although the Interstate TRS Fund administrator requests and analyzes separate data for the costs of providing IP Relay and traditional TRS, the services are compensated at the same per-minute rate." The Commission also recognized that "the cost of providing 53 The compensation rates for STS and VRS, and the fund size and carrier contribution factor, shall be effective upon the release of this Order. Because this Order adopts a new rule that requires separate compensation rates for traditional TRS and IP Relay, the compensation rates for traditional TRS and IP Relay shall be effective upon publication of this Order in the Federal Register, rather than simply upon release of this Order. Until such time, providers of traditional TRS and IP Relay shall be compensated at the 2004-2005 rate of $1.398. 54 Id. at Ex. ID. 55 See 2005 NECA Filing at 13 n.21 (reflecting an 11 percent disparity between the average cost of providing traditional TRS and IP Relay). IP Relay may be less than the cost of providing traditional TRS,” and therefore "providers of IP Relay 60 The may be over-compensated, and providers of traditional TRS may be under-compensated." Commission therefore sought comment on whether to adopt separate compensation rates for IP Relay and traditional TRS." Four parties filed comments in response to this issue. All commenters to the FNPRM asserted that the cost differences for providing these services are not significant, and therefore that they should continue to be compensated at the same rate. 63 66 19. MCI, Nordia, and Hamilton assert that the Commission should continue to use the same compensation rate for traditional TRS and IP Relay.62 MCI and Hamilton assert that the costs of providing these services are generally similar. Sprint, Ultratec and CSD, on the other hand, urge the Commission to adopt separate compensation rates for these services. They maintain that compensating these services at the same rate is no longer warranted.65 Sprint notes that the average per-minute cost of traditional TRS is significantly more than for IP Relay, and asserts that this is because many mandatory minimum standards are waived for IP Relay and IP Relay providers avoid access charges. Sprint argues that unless the rates are separate, IP Relay providers "will continue to receive a windfall” while traditional TRS providers "will continue to lose money on every traditional TRS minute carried.» Ultratec similarly asserts that the combined rate fails to compensate traditional TRS providers for their reasonable costs, and that separate rates should be adopted that reflect the average actual costs associated with each of these services.68 CSD also asserts that so long as the costs for providing each of these services differ, "it makes little sense to use a single rate for their reimbursement.' 20. 1969 70 We conclude that traditional TRS and IP Relay should be compensated at separate rates based on the cost and demand projections specific to these services. NECA's filing indicates that IP Relay costs are approximately 11 percent less than traditional TRS." As NECA indicates, for the 20052006 Fund year, the average per-minute cost for IP Relay is $0.162 less than the average per-minute cost of traditional TRS." We do not believe that it is fair or reasonable to use a combined rate ($1.312) that over-compensates IP Relay providers (by $0.034 per minute) and under-compensates traditional TRS 60 Id. 61 Id. 62 63 MCI Comments at 2-5; Nordia Comments at 1-3; Hamilton Comments at 4. See MCI Comments at 3-5; Hamilton Comments at 4; MCI Reply Comments at 4. MCI suggests that to the extent the costs of providing traditional TRS may be higher, it is likely because of inefficiencies, and the Commission should not reward inefficient providers. MCI Reply Comments at 7. 64 Sprint Comments at 2-3; Ultratec Comments at 1-4; CSD Reply Comments at 4-5. 65 Although in its comments to the 2004 TRS Report & Order's FNPRM Sprint stated that the two services should be compensated at the same rate, in its subsequent comments in response to the Public Notice Sprint asserts that "given the cost differentials in providing traditional TRS and [IP Relay] service, a merged rate can no longer be justified." Sprint Comments at 1. 66 Sprint Comments at 2-3. 67 Sprint Comment at 3. 68 Ultratec Comments at 3-4. 69 CSD Reply Comments at 4. 70 See 2005 NECA Filing at 13 n.21. " Id. (noting that the average rate for IP Relay ($1.278) is $0.162 (which is approximately 11 percent) less than the average cost of traditional TRS ($1.440)). 72 providers (by $0.128 per minute)." As described below, we therefore adopt separate rates for traditional TRS and IP Relay, and instruct NECA to calculate and propose separate rates for these services in the future.' 73 21. We conclude that traditional TRS shall be compensated at $1.440 per minute. This is consistent with NECA's calculation based on the providers' projected cost and demand specific to traditional TRS." This rate is determined by dividing the providers' total projected interstate costs for traditional TRS of $68,084,670 by the providers' total projected interstate minutes of traditional TRS of 47,948,559, and applying the 1.4 percent rate of return for an allowance for working capital to the resulting average cost per minute.” We have reviewed NECA's rate and its analysis of the relevant underlying data particular to traditional TRS. We find that NECA's calculations with respect to this service are reasonable. Therefore, we adopt a compensation rate for eligible traditional TRS calls of $1.440 per minute for the period of July 2005 through June 2006." 22. 76 We conclude that IP Relay shall be compensated at $1.278 per minute. This is consistent with NECA's calculation based on the providers' projected cost and demand specific to IP Relay." This rate is determined by dividing the providers' total projected costs for IP Relay of $230,866,685 by the provider's total projected minutes of IP Relay of 183,164,118, and applying the 1.4 percent rate of return for an allowance for working capital to the resulting average cost per minute." We have reviewed NECA's proposed rate and its analysis of the relevant underlying data particular to IP Relay. We find that NECA's calculations with respect to this service are reasonable. Therefore, we adopt a compensation rate for eligible traditional IP Relay calls of $1.278 per minute for the period of July 2005 through June 72 We also agree with CSD that the dispositive consideration is not whether adopting separate rates would reduce the size of the Interstate TRS Fund, but rather whether a particular rate compensates providers for the reasonable costs of providing the service. See CSD Reply Comments at 4-5. As an immediate matter, NECA indicates that the adoption of the separate rates for traditional TRS and IP Relay would have no material effect on the size of the fund. See para. 5, supra. However, because the growth of IP Relay will likely outpace the growth of traditional TRS, see 2005 NECA Filing at Exs. 2 (2A of 6) & 2 (2B of 6), over the long term adopting separate rates will likely lead to a decrease in the size of the Fund. 73 In its comments, Hamilton urges the Commission to reject a "rate of return" cost recovery methodology for traditional TRS and IP Relay and instead adopt its "MARS" plan, which it proposed in its petition for reconsideration of the 2004 TRS Report & Order. Hamilton Comments at 2-3. Under the MARS plan, the interstate TRS rate would be calculated based on an average of the intrastate TRS rates paid by the states. Hamilton requests that the Commission seek comment on the MARS plan when it adopts the 2005-2006 TRS rates. Hamilton Comments at 2. MCI also states that the Commission should adopt the MARS plan. MCI Comments at 5-6; MCI Reply Comments at 7-8. AT&T also urges the Commission to consider adopting this plan. AT&T Comments at 7 n.10. We will raise the issue of adopting the MARS plan in a future notice of proposed rulemaking. See also NECA Reply Comments at 9 (although the Commission may determine that such an approach is warranted in the future, it is outside the scope of this proceeding). 74 2005 NECA Filing at 13 n.21, Exs. 1A & IC. 75 76 Id. at Ex. IC. The compensation rate for traditional TRS shall be effective upon publication of this Order in the Federal Register. Until such time, providers of traditional TRS shall be compensated at the 2004-2005 rate of $1.398. 2006.79 C. 23. Compensation Rate for Video Relay Service (VRS) We conclude that VRS shall be compensated at $6.644 per minute. NECA indicates that its proposed rate of $5.924 per minute appears to be driven by the costs and demand data of one provider, and that if the data from this provider was excluded the rate would be $7.061.0 NECA also notes that the Council expressed concern over the proposed rate and the effect one provider had on the rate, and that there are several open issues with respect to VRS service that might affect the rate. Accordingly, NECA suggests that the Commission may wish to explore alternatives to the traditional rate calculation for VRS.82 No commenter filed comments in support of NECA's proposed rate. 24. 81 In response to NECA's filing, several commenters urge the Commission to reject the proposed VRS rate of $5.924 and adopt a higher alternative rate that is more representative of the majority of the providers' costs in providing this service. Hands On, CSD, and TDI/DHHCAN assert that the proposed rate is skewed artificially low because there is currently no speed of answer or interoperability requirement, resulting in higher costs to those providers that do provide a faster speed of answer and interoperable service. TDI/DHHCAN also asserts that NECA's proposed compensation rate may result in a reduction of the availability of the service, which would be contrary to the functional equivalency requirements of the ADA. Hands On and CSD further assert that the proposed rate would adversely affect service quality. 85 83 25. Hands On proposes several alternative ways to calculate the VRS rate. These alternatives include: a weighted average that excludes the dominant provider, which results in a rate of $7.061; the median cost rate of all of the providers that submitted data, which results in a rate of $6.644; a weighted average that excludes the data of the high cost and low cost providers, which results in a rate of approximately $7.00; and a non-weighted average that includes all providers, which results in a rate of $7.325.7 Hands On asserts that “[a]ny of these alternative rate calculations would be appropriate for the Commission to adopt on an interim basis pending action on outstanding [issues], including . . . answer 79 The compensation rate for IP Relay shall be effective upon publication of this Order in the Federal Register. Until such time, providers of IP Relay shall be compensated at the 2004-2005 rate of $1.398. 80 Id. at 17 n.32; see para. 9, supra. 81 31 Id. at 17 n.32, 21. These issues are speed of answer and interoperability. See note 39, supra. 82 Id. at 17 n.32. 83 Hands On Comments at ii-iii, 2-8; CSD Comments at 1-6; TDI/DHHCAN Comments at 2-4; Hands On Reply Comments at 1-4; CSD Reply Comments at 1-4. 84 TDI/DHHCAN Comments at 3. 85 Hands On Reply Comments at 1-4; CSD Reply Comments at 1-4. CSD also asserts that the proposed rate will reduce competition because the non-dominant providers will be forced to reduce the quality of their service and therefore will be even less able to compete with the dominant provider. CSD Reply Comments at 2-3. 86 This is the alternative rate proposed in NECA's filing. See 2005 NECA Filing at 17 n.32. Hands On Comments at 10-13. In Hands On's view, the "most appropriate methodology is the use the weighted average method, but with the elimination of the low and high cost providers' estimates. Id. at 13. CSD also proposes alternative VRS rate calculations that exclude the dominant provider's data, use a non-weighted average of all providers' data, or tie the VRS compensation rate to service levels. CSD Comments at 6-8; see also CSD Reply Comments at 1-4. CSD suggests that one of these alternatives could be implemented on an interim basis until the Commission adopts service level standards (e.g., speed of answer). CSD Comments at 6; see also CSD Reply Comments at 3. TDI/DHHCAN proposes that the Commission adopt the rate of $7.061 that is derived by excluding the data of the largest provider. TDV/DHHCAN Comments at 6. |