Sorenson Communications, Inc. v. Federal Communications Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued March 17, 2014 Decided September 2, 2014
No. 13-1215
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
Christopher J. Wright argued the cause for petitioner.
With him on the briefs were John T. Nakahata and Mark D.
Davis. Timothy J. Simeone entered an appearance.
C. Grey Pash Jr., Counsel, Federal Communications
Commission, argued the cause for respondents. With him on
the brief were William J. Baer, Assistant Attorney General,
U.S. Department of Justice; Robert B. Nicholson and Robert
J. Wiggers, Attorneys; Jonathan B. Sallet, Acting General
Counsel, Federal Communications Commission; and Richard
K. Welch, Deputy Associate General Counsel. Jacob M.
Lewis, Associate General Counsel, Federal Communications
Commission, entered an appearance.
2
Roy T. Englert Jr. was on the brief for amicus curiae
National Association of the Deaf in support of petitioner.
Before: HENDERSON and MILLETT, Circuit Judges, and
GINSBURG, Senior Circuit Judge.
Opinion for the Court filed by Senior Circuit Judge
GINSBURG.
GINSBURG, Senior Circuit Judge: When a hearing- or
speech-impaired person wants to make a phone call, he can
choose among several services that will assist him in doing
so. One of these, video relay service (VRS), works much like
a video call that any caller might make using a digital
platform such as Skype or Apple FaceTime. The video call is
placed to an American Sign Language interpreter, employed
by the VRS provider, who then makes a standard voice call to
the video caller’s hearing recipient. The interpreter signs with
the caller via the visual connection and speaks with the
recipient via the voice connection, translating messages back
and forth.
The petitioner, Sorenson Communications, Inc., has been
the leading provider of VRS since the service began to gain
popularity about ten years ago. Like all providers of VRS,
Sorenson is paid by the minute at a rate set by the Federal
Communications Commission and paid by the Commission
from the Telecommunications Relay Services Fund. The per-
minute rate is supposed to approximate the cost incurred to
provide VRS, but in fact for much of the past decade the rate
has generated revenues well in excess of that cost. In order
more accurately to reflect cost until it could develop a new
approach to reimbursement, therefore, the Commission
lowered the per-minute rates first in its 2010 Rate Order and
again in its 2013 Rate Order, the latter of which is the subject
3
of Sorenson’s petition for review. Having incurred costs
under the pre-2010 rates that cannot be sustained under the
new rates, Sorenson complains that the new rates are too low
and, additionally, that the decremental rates it receives for
minutes in excess of 500,000 and of 1,000,000 unreasonably
favor its smaller, allegedly less efficient competitors.
Sorenson challenges the 2013 Rate Order as arbitrary and
capricious, in violation of the Administrative Procedure Act, 5
U.S.C. § 706(2)(a), but its challenge is problematic for two
principal reasons. First, it made nearly the same challenge to
the 2010 Rate Order and lost in the Tenth Circuit. Second, in
suggesting the Commission should be required to compensate
providers for certain additional costs, Sorenson largely fails to
demonstrate (or even to make a threshold showing) that the
costs are necessary to the provision of VRS; it instead
emphasizes that it did in fact incur those costs, discretionary
though they may be. Because the 2013 Rate Order is not
arbitrary and capricious for ignoring costs incurred
unnecessarily, even when the consequence for the provider
that incurred those costs might be ruinous, we find no fault
with the new rates.
In one respect, however, Sorenson has demonstrated that
additional consideration by the Commission is necessary:
Providing service under the more demanding speed-of-answer
requirement that the agency adopted as part of the 2013 Rate
Order likely entails additional labor costs, a prospect nowhere
addressed in the Order. We therefore vacate the new speed-
of-answer requirement and remand that portion of the Order
to the Commission to decide whether that requirement of
improved service justifies increasing the rate of compensation
concomitantly.
4
As for the tiered rates, we hold the Commission
adequately justified the 500,000- and 1,000,000-minute cut-
offs. As the agency explained, it was pursuing two goals –
setting rates to reflect economies of scale and transitioning the
industry from rate regulation to competitive bidding. Because
the task of balancing those goals is fairly within the discretion
of the agency, we defer to its decision concerning the tiered-
rate structure.
I. Background
Title IV of the Americans with Disabilities Act of 1990
(ADA) requires the Commission to make available
telecommunications relay services (TRS), of which VRS is
one, so that individuals with hearing or speech disabilities
may have telephone service that is “functionally equivalent”
to the voice system used by hearing individuals. 47 U.S.C.
§ 225. VRS users receive the enhanced service free of charge
and the Commission compensates providers from the TRS
Fund, which is financed by a tax the agency levies on the
revenues of interstate telecommunications services.
§ 225(d)(3)(B); 47 C.F.R. § 64.604(c)(5)(iii). The statute
directs the Commission to set compensation rates and
functional requirements for providers in order to
(1) “ensure that [TRS is] available, to the extent possible
and in the most efficient manner, to hearing-impaired
and speech-impaired individuals,” § 225(b)(1);
(2) “require that users of [TRS] 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,” § 225(d)(1)(D); and
5
(3) “not discourage or impair the development of
improved technology.” § 225(d)(2).
When the FCC first recognized VRS as a form of TRS
eligible for reimbursement, see In re Telecomms. Relay Servs.
& Speech-to-Speech Servs. for Individuals with Hearing &
Speech Disabilities, Report & Order, 15 FCC Rcd. 5140,
5152-54, ¶¶ 21-27 (2000), video calling was “a specialized,
niche market requiring customized hardware and software, as
well as frequently unavailable broadband Internet access
service.” In re Structure & Practices of the Video Relay Serv.
Program, Telecomms. Relay Servs. & Speech-to-Speech
Servs. for Individuals with Hearing & Speech Disabilities,
Further Notice of Proposed Rulemaking, 26 FCC Rcd. 17367,
17380, ¶ 19 (2011) [hereinafter 2011 Notice]. As video
calling has proliferated generally, so has VRS; callers now
use over 10 million minutes of the service per month. See
Interstate TRS Fund Performance Status Report, Rolka Loube
Saltzer Associates (TRS Fund Administrator) (June 2014),
http://www.r-l-s-a.com/TRS/reports/2014-06TRSStatus.pdf
(last visited August 25, 2014). Despite video calling having
become “a mainstream, mass-market offering,” 2011 Notice
at ¶ 19, the market for VRS is highly concentrated and has
become only more so in recent years: Sorenson provides
about 80% of the VRS minutes logged every month, and its
two principal competitors each provide another five to ten
percent.
From the inception of VRS until 2007, the Commission
annually set compensation rates based upon the average of all
VRS providers’ projected costs, as reported to a fund
Administrator appointed by the agency. See In re Telecomms.
Relay Servs. & Speech-to-Speech Servs. for Individuals with
Hearing & Speech Disabilities, Report & Order, 19 FCC Rcd.
12475, 12487-90, ¶¶ 17-24 (2004) [hereinafter 2004 R&O].
6
During this period, the Commission developed a list of
compensable costs that has consistently included, for
example, directly attributable overhead, labor costs, executive
compensation, and an 11.25% rate of return on investment.
Telecomms. Relay Servs. & Speech–to–Speech Servs. for
Individuals with Hearing & Speech Disabilities, Report &
Order & Declaratory Ruling, 22 FCC Rcd. 20140, 20161,
¶ 49, 20168-70, ¶¶ 74-80 (2007) [hereinafter 2007 Order];
2004 R&O, 19 FCC Rcd. at 12544-45, ¶¶ 181-82, 12566,
¶ 238. The Commission also consistently refused to
compensate providers for a mark-up on expenses, the costs of
research and development for enhancements that exceed
mandatory minimum requirements, i.e., the baseline technical
and operational standards providers must meet, see 47 C.F.R.
§ 64.404(b), and the costs of providing videophones,
software, and technical assistance to VRS users. 2007 Order,
22 FCC Rcd. at 20161, ¶ 49, 20170, ¶ 82; 2004 R&O, 19 FCC
Rcd. at 12543-44, ¶¶ 179-81, 12547-48, ¶¶ 189-90; see also
In re Telecomms. Relay Servs. & Speech-to-Speech Servs. for
Individuals with Hearing & Speech Disabilities, Mem. Op. &
Order, 21 FCC Rcd. 8063, 8071-72, ¶¶ 17-19 (2006)
[hereinafter 2006 MO&O] (denying request to add categories
of compensable costs).
In 2007, the Commission sought to align reimbursement
with actual compensable costs more closely and so adopted a
three-year rate plan that included, for the first time, a tiered-
rate structure. 2007 Order, 22 FCC Rcd. at 20161, ¶ 48,
20163, ¶ 53. In order to reflect economies of scale, providers
were compensated at a lower per-minute rate for minutes in
excess of 50,000 per month, and at a still lower rate for
minutes in excess of 500,000 per month. Id. at 20167, ¶ 67.
In 2010, the Commission began a major effort to
overhaul VRS compensation and cut back on waste and fraud.
7
It issued a Notice of Inquiry in which it set forth problems
with per-minute compensation and posed open-ended
questions about a better methodology. See In re Structure &
Practices of the Video Relay Serv. Program, Notice of
Inquiry, 25 FCC Rcd. 8597 (2010). Pending this overhaul,
the Commission announced it would set interim rates based in
part upon actual historical costs instead of relying exclusively
upon the projected costs providers had been submitting. In re
Telecomms. Relay Servs. & Speech-to Speech Servs. for
Individuals with Hearing & Speech Disabilities, Order, 25
FCC Rcd. 8689, 8692-93, ¶ 6 (2010) [hereinafter 2010 Rate
Order].
The TRS Fund Administrator recommended blending the
projected and historical costs to ease the austerity of this new
methodology, and the Commission ultimately departed
upward even from that recommendation because it would
have entailed a sudden and significant diminution in revenues
for VRS providers. Id. at 8695-96, ¶ 12. For the 2009-2010
year, providers had received $6.70, $6.43, and $6.24 for
minutes in the three tiers respectively; the Administrator’s
proposal for 2010-2011 was $5.78, $6.03, and $3.90, and the
adopted rates were an average of the two, viz., $6.24, $6.23,
and $5.07. Id. at 8694, ¶ 8 tbl.1.
Sorenson petitioned the U.S. Court of Appeals for the
Tenth Circuit for review of the 2010 Rate Order, claiming it
violated both the ADA and the APA. See Sorenson
Commc’ns, Inc. v. FCC, 659 F.3d 1035 (2011). There it
challenged both the tiered-rate structure and the particular
rates, but the Tenth Circuit upheld the 2010 Rate Order in
both respects. Id. at 1038.
Continuing its overhaul effort, in 2011 the Commission
issued a Further Notice of Proposed Rulemaking, in which it
8
called for comments on several proposals, including the
institution of a per-user rate methodology and the elimination
of the tiered-rate structure. 2011 Notice, 26 FCC Rcd. at
17394, ¶ 53, 17396, ¶ 59, 17418, ¶ 141. Sorenson and the
other providers responded with comments on these proposals
and with suggestions of their own.
In 2013 the Commission struck out in a new direction,
announcing its intention to set compensation rates through
competitive bidding among VRS providers. See In re
Structure & Practices of the Video Relay Serv. Program,
Telecomms. Relay Servs. & Speech-to-Speech Servs. for
Individuals with Hearing & Speech Disabilities, Report &
Order & Further Notice of Proposed Rulemaking, 28 FCC
Rcd. 8618, 8661, ¶ 107, 8706-07, ¶ 217 (2013) [hereinafter
2013 Rate Order]. Because three years had elapsed since last
setting VRS rates, however, the Commission also set a new
“transitional rate plan” for 2013-2017 in order to bring per-
minute rates still closer to historical compensable costs. Id. at
8694, ¶ 188, 8702-04, ¶¶ 209, 212.
The plan set the TRS Fund Administrator’s rate
recommendation, which was based upon updated historical
cost data, as the goal at the end of a “glide path.” Id. at 8704,
¶ 212. The rates are to be adjusted downward every six
months, starting at $5.98, $4.82, and $4.82 in 2013 and
ending at $4.06, $4.06, and $3.49 in 2017. See id. at 8705,
¶ 215 tbl.2. Additionally, the plan adopted a new tier
structure in order better to reflect evidence of the minimum
efficient scale for providing VRS. See id. at 8698-702,
¶¶ 197-208. Tier II minutes now start at 500,000 and Tier III
minutes start at 1,000,000. It also reduced the difference in
the per-minute rates between tiers. Id. at 8702, ¶ 208 tbl.1.
9
Sorenson petitioned this court for review of the 2013
Rate Order. As in its Tenth Circuit case against the 2010 Rate
Order, it challenges both the tiered-rate structure and the rates
themselves.
II. Analysis
We address first the preclusive effect of the Tenth
Circuit’s resolution of Sorenson’s challenges to the 2010 Rate
Order. We then turn to the merits of Sorenson’s challenges
unique to the 2013 Rate Order.
A. Issue Preclusion
The Commission asks us to dismiss Sorenson’s entire
petition for review on the ground it is precluded by the Tenth
Circuit’s decision denying the Company’s challenge to the
2010 Rate Order, which raised the same issues with respect to
the same ratemaking methodology as does the present
petition. According to the Commission, it is immaterial that
the present challenge is to a distinct rate order, whereas
Sorenson argues the doctrine of issue preclusion is entirely
inapplicable to the rates adopted in the 2013 Rate Order.
The doctrine of issue preclusion bars “‘successive
litigation of an issue of fact or law actually litigated and
resolved in a valid court determination essential to the prior
judgment,’ even if the issue recurs in the context of a different
claim.” Taylor v. Sturgell, 553 U.S. 880, 892 (2008) (quoting
New Hampshire v. Maine, 532 U.S. 742, 748-49 (2001)). As
applied to a challenge to agency action, this court has
consistently held a petitioner may not relitigate an agency’s
“standards and procedures ... prior to each application”
thereof. W. Coal Traffic League v. ICC, 735 F.2d 1408, 1410
(1984); accord Nat'l Classification Comm. v. United States,
10
765 F.2d 164, 169-70 (1985). Therefore, in order to avoid
issue preclusion, a petitioner bringing a successive challenge
to the application of an established ratemaking methodology
that the agency did not reconsider (or change) must show
circumstances have changed in a way that required the agency
to reconsider (or to change) it. Cf. Tesoro Alaska Petroleum
Co. v. FERC, 234 F.3d 1286, 1290 (D.C. Cir. 2000) (in an
adjudicatory proceeding, agency may preclude repeat
argument that a rate is unreasonable unless the challenger
presents “new evidence” or demonstrates “changed
circumstances”); W. Coal Traffic League, 735 F.2d at 1410
(where rulemaking is “standard-setting, not standard-
implementing, in character,” issue preclusion will not bar a
challenge to an agency’s “renewed consideration” of an
existing standard it ultimately decides to retain). This
application of the doctrine is consistent with Commissioner v.
Sunnen, 333 U.S. 591 (1948), where the Supreme Court
explained that a party could be collaterally estopped from
relitigating the judicial determination of a tax issue it had
raised and lost with respect to a prior tax year, but warned that
“where the situation is vitally altered between the time of the
first judgment and the second, the prior determination is not
conclusive.” Id. at 599-600.
1. Compensable expenses
Pursuant to these principles, we hold Sorenson’s
challenge to the Commission’s list of compensable expenses
is precluded. More specifically, Sorenson argues the rates
should be calculated to reimburse its costs for providing users
with video equipment, training users, porting phone numbers,
and “raising and servicing [debt] capital.” With regard to all
these expenses, however, Sorenson is merely attempting to
relitigate an application of the standard it challenged in its
petition for review of the 2010 Rate Order. See Sorenson,
11
659 F.3d at 1046 (“In [Sorenson’s] view, [the
Administrator’s] proposed rates are badly flawed because
they do not reflect Sorenson's actual costs of providing
services”); 2013 Rate Order, 28 FCC Rcd. at 8695-98,
¶¶ 191-96 (approving the same compensable costs as had the
previous order and addressing questions raised about the
categories in the 2011 Notice).
The Tenth Circuit rejected Sorenson’s challenge to the
Commission's current list of compensable costs, holding the
agency had neither violated the ADA nor failed the arbitrary-
and-capricious test of the APA. 659 F.3d at 1043-45; id. at
1046-47. Sorenson points to no new evidence or changed
circumstances suggesting the Commission was required to
expand its list of compensable costs.
Sorenson does argue two features of the 2013 Rate Order
make the Commission’s application of the list of compensable
costs different from its application in the 2010 Rate Order,
thus suggesting the Tenth Circuit did not actually decide the
issues Sorenson is raising now. First, the 2013 Rate Order
includes a provision directing and funding a neutral third
party to develop a “VRS access technology reference
platform” that will operate as a software application and be
“useable on commonly available off the shelf equipment and
operating systems.” 2013 Rate Order, 28 FCC Rcd. at 8644-
45, ¶¶ 53-55. According to Sorenson, this provision suggests
the Commission has a new interpretation of its statutory
mandate that makes giving video equipment to users free of
charge a necessary cost. But see id. at 8696, ¶ 193 (reiterating
the agency’s consistent position, see, e.g., 2006 MO&O, 21
FCC Rcd. at 8071, ¶ 17, that providers may be compensated
only for “the providers’ expenses in making the service
available and not the customer’s costs of receiving the
equipment”).
12
On the contrary, developing a common platform for off-
the-shelf equipment and operating systems will make
provider-funded video equipment even less relevant to the
provision of VRS and will give users an experience more
closely akin to that of hearing telecommunications customers,
who buy their equipment off the shelf. See 2011 Notice, FCC
Rcd. at 17380, ¶ 19 (“Indeed, currently available commercial
video technology can provide closer functional equivalence,
may be less costly, and is likely to improve at a faster pace
than the custom devices supplied exclusively by VRS
providers”). Therefore, the Tenth Circuit’s determination the
statute does not require that “VRS users receive free
equipment,” only that they “pay no higher rates for calls than
others pay for traditional phone services,” is preclusive.
Sorenson, 659 F.3d at 1044.
Second, Sorenson points out that the 2013 Rate Order
sets rates for four years (until 2017), whereas the 2010 Rate
Order set rates for one year (although the Commission later
renewed those rates for two more years, i.e., until 2013).
Therefore, Sorenson argues, the Tenth Circuit could not have
resolved any issue with regard to a four-year rate plan because
the rates it reviewed were “interim” in nature and the Tenth
Circuit upheld the rates on the premise that the Commission
soon would revisit its ratemaking methodology.
Sorenson’s focus upon the respective timeframes of the
2010 and 2013 Rate Orders is misplaced. Because the agency
is transitioning to a new ratemaking methodology, the 2013
Rate Order is “interim” in the precise way the 2010 Rate
Order was when the Tenth Circuit reviewed it. See Sorenson,
659 F.3d at 1046 n.6 (relying upon the Commission’s
“intention that the new rates be temporary while it totally
reevaluates VRS compensation”). Nor has anything of
significance changed over the years between the two Orders;
13
both adopt per-minute rates based upon the same long-
standing list of compensable costs. Therefore, Sorenson’s
challenge to the compensable expenses is precluded by our
sister circuit’s holding that “the categories of compensable
costs in [the] proposed rates are the same categories that were
compensable when the agency reimbursed on the basis of
providers’ projected costs. … Particularly given this
consistent position on allowable costs, the Commission
provided a sufficient explanation for declining to change the
categories of allowed costs during the interim period.”
Sorenson, 659 F.3d at 1046-47.
2. Other issues
Contrary to the Commission’s contention, none of
Sorenson’s four other challenges to the 2013 Rate Order is
precluded. First, Sorenson challenges the levels at which the
Commission set rates of return on labor and on capital
investments. Although these levels are the same in the 2013
and 2010 Rate Orders, perusal of its briefs in the earlier case
makes clear that Sorenson did not challenge those rates before
the Tenth Circuit and so they have not been “actually litigated
and resolved” by a court.
Sorenson’s other three challenges concern features
unique to the 2013 Rate Order and therefore could not have
been resolved in the Tenth Circuit case. Sorenson challenges
the “end result” of the Order, Fed. Power Comm'n v. Hope
Natural Gas Co., 320 U.S. 591, 603 (1944) (first adopting the
“end result” criterion), claiming it will cause VRS providers
to go out of business and hence will disrupt service to
hearing- and speech-impaired individuals. This alleged
problem clearly is unique to the 2013 Rate Order; the Tenth
Circuit specifically said Sorenson, in its challenge to the 2010
Rate Order, did “not contend that under the interim VRS rates
14
it, or any other provider, will be unable to serve any customer
who requests service.” 659 F.3d at 1043. Likewise, Sorenson
is not precluded from arguing the rate is too low to cover
providers’ costs of complying with the requirement that they
answer 85% of calls within 30 seconds, measured daily,
because that speed of answer was newly imposed by the 2013
Rate Order. Cf. id. (“Sorenson does not claim that it will be
unable to satisfy the mandatory 80/120 speed-of-answer
requirement under the interim rates”).
Finally, Sorenson challenges the new tiered-rate structure
in the 2013 Rate Order. The Tenth Circuit, although it upheld
the tiered-rate structure in the 2010 Rate Order, id. at 1048-
50, could not have resolved Sorenson’s challenge to the
tiered-rate structure in the 2013 Rate Order because the
Commission adopted a new “configuration” for the tiers,
raising the cut-offs and reducing the differences between tiers,
as a step toward realization of its plan to institute competitive
bidding among firms in the future. See 2013 Rate Order, 28
FCC Rcd. at 8698-702, ¶¶ 197-208. Moreover, Sorenson
argues the tiered rates are arbitrary and capricious in light of
“new evidence” and a “changed circumstance,” respectively:
The Commission maintained a tiered-rate structure even as it
acknowledged new evidence about minimum efficient scale
and concluded that tiered rates were inefficient.
We turn next to address the merits of the four above-
mentioned issues.
B. Rate of Return
Sorenson argues the Commission’s interim ratemaking
methodology “virtually guarantees that providers will be
unable to earn a reasonable rate of return” because it allows
for an 11.25% rate of return on physical capital but no return
15
on labor, which is “the primary thing [providers] sell.”
According to Sorenson, this limitation, which originated with
monopoly telephone companies, is inappropriate and hence
arbitrary and capricious as applied to the labor- rather than
capital-intensive VRS industry. The reasonableness of the
rates, it maintains, should be judged on the profit margin as a
percentage of its total cost, which it shows is likely to be less
than 2% under the agency’s interim methodology.
1. Denial of a return on labor costs
As the Commission has explained more than once, a
provider of VRS is entitled to compensation only for the
reasonable costs of providing VRS. 2013 Rate Order, 28
FCC Rcd. at 8692, ¶ 181; see also 47 U.S.C. § 225(d)(3)(B)
(the TRS Fund shall reimburse only the “costs caused by
interstate telecommunications relay services”); In re
Telecomms. Relay Servs. & Speech-to-Speech Servs. for
Individuals with Hearing & Speech Disabilities, Report &
Order, Order on Reconsideration, and Further Notice of
Proposed Rulemaking, 19 FCC Rcd. 12475, 12543-44, ¶ 181
(2004) [hereinafter 2004 Order] (reasonable costs are ‘‘those
direct and indirect costs necessary to provide the service’’).
Therefore, the Commission acts directly in accordance with
its statutory mandate by setting rates to compensate providers
for their actual labor costs. Wages are the costs of hiring
labor, just as interest and dividends are the cost of hiring
capital. A “return” on labor costs in addition to revenues
sufficient to cover the wages themselves would in effect
increase the Company’s compensation above what is
necessary for the provision of VRS. See 2007 Order, 22 FCC
Rcd. at 20161, ¶ 49 (“[T]he ‘reasonable’ costs of providing
service for which providers are entitled to compensation do
not include profit or a mark-up on expenses”). Therefore,
Sorenson has not met its burden of showing the agency’s
16
decision to provide for recovery of labor costs as an expense
was arbitrary or capricious. See generally 1 ALFRED E. KAHN,
THE ECONOMICS OF REGULATION: PRINCIPLES AND
INSTITUTIONS 26-54 (1970) (discussing the proper
compensation for operating costs versus capital outlays).
2. Sufficiency of the return on capital
Sorenson next argues that it was arbitrary and capricious
for the Commission to set the rate of return on capital at
11.25%, which rate it borrowed 20 years ago from its
regulation of monopoly telephone companies. Although there
are, of course, many differences between the traditional
telephone business and VRS, that alone is not cause to vacate
the rate of return. “Even assuming [the agency] made
missteps ... , the burden is on petitioners to demonstrate that
[the agency’s] ultimate conclusions are unreasonable.” Nat’l
Petrochemical & Refiners Ass’n v. EPA, 287 F.3d 1130, 1146
(D.C. Cir. 2002).
Sorenson advances two specific reasons for deeming the
11.25% rate of return unreasonable: (1) when spread over all
costs, the rate yields a gross profit margin of less than 2%,
and (2) the rate is too low to attract necessary capital to the
VRS business. The first argument has no merit whatsoever;
the second is simply unproven.
As we explained in relation to labor costs, and as the
Commission has been explaining since its 2004 Order, 19
FCC Rcd. at 12543-44, ¶¶ 178-81, the agency is not required
to compensate providers for anything more than the
reasonable costs of providing VRS, which include the cost of
hiring the necessary capital. A provider’s accounting profit
margin as a percentage of its total costs is of no moment
whatsoever.
17
In contrast, if Sorenson is correct that the 11.25% rate of
return is too low to attract the capital necessary to operate a
VRS business, then it should prevail in its quest for a higher
rate. Cf. Jersey Cent. Power & Light Co. v. FERC, 810 F.2d
1168, 1178 (D.C. Cir. 1987) (en banc) (“[T]he reviewing
court ‘must determine’ whether the Commission’s rate order
may reasonably be expected to ‘maintain financial integrity’
and ‘attract necessary capital.’” (quoting In re Permian Basin
Area Rate Cases, 390 U.S. 747, 792 (1968))). Sorenson
raised this issue before the agency by arguing VRS presents a
“significantly different risk profile to the capital markets”
than does a conventional telephone company. It pointed out
the VRS industry is competitive rather than monopolistic, the
firms are smaller, and the regulatory risk is greater because
VRS providers receive nearly all their revenue not from a
large number of customers but from a single source, viz., the
TRS Fund.
Although these differences do suggest a telephone
company’s rate of return is not an obvious proxy for
reimbursing a provider of VRS, we cannot conclude the
Commission’s admittedly flawed* basis for selecting a rate
leads to an arbitrary and capricious result because there is no
evidence in the record to suggest Sorenson or any other
provider actually has had trouble raising the necessary capital
under the long-standing 11.25% rate regime. Because the
Commission is required to raise the allowable rate of return
only if presented with evidence the current rate is insufficient
to attract capital, Sorenson did not carry its burden of proof
*
The Commission acknowledges the rate of return is based upon a
flawed analogy; in its view, however, the rate is too high because
capital is less expensive than it was 20 years ago. See FCC Br. 40
(citing proceedings to lower the authorized rate of return as part of
a comprehensive reform of the Universal Service Fund).
18
before the agency. Cf. Tesoro, 234 F.3d at 1290 (suggesting a
ratemaking agency is required to revisit whether its existing
ratemaking methodology is reasonable only when presented
with new evidence or changed circumstances). Therefore, we
defer to the Commission’s judgment that its long-standing
11.25% rate of return provides an adequate, and thus
reasonable, approach to setting per-minute rates while
transitioning to a new methodology.
C. End Result of the Rates
Sorenson next challenges the 2013 Rate Order as
arbitrary and capricious because the Commission did not
respond to its evidence that the end result of the rates would
be to “drive every provider out of business or into
bankruptcy,” degrading service and violating the statutory
mandate requiring service be made “available, to the extent
possible,” 47 U.S.C. § 225(b)(1). Sorenson’s challenge to the
end result of the rates is distinct from its challenge to the
component parts of the agency’s ratemaking methodology,
see Jersey Cent., 810 F.2d at 1177 (“In examining the end
result of the rate order, ... a court cannot affirm simply
because each of the component decisions of that order, taken
in isolation, was permissible; it must be the case ‘that they do
not together produce arbitrary or unreasonable
consequences’” (quoting and adding emphasis to Permian
Basin, 390 U.S. at 800)); Sorenson, however, fails to establish
the end result of this Rate Order is arbitrary or unreasonable.
It is not unreasonable for the Commission to allow a provider
to go bankrupt if that provider has incurred costs far in excess
of what is necessary.
Sorenson points out that comments before the agency by
all the major providers indicated “no provider could offer
service at the rates proposed by the Administrator,” but the
19
comments to which it refers are inapposite to Sorenson’s
claim because they addressed the rates proposed by the
Administrator,* not the higher rates and “glide path” actually
adopted by the Commission. Perhaps that is why the other
providers, which did not incur the same level of non-
compensable costs, are not petitioning for review of the 2013
Rate Order. In any event, the Commission explained why it
would not cover all of a provider’s actual costs even if the
result were to bankrupt the company. In the Order under
review it reasoned that it would be “irresponsible and contrary
to our mandate to ensure the efficient provision of TRS ... 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 necessary to
the provision of reimbursable services.” 2013 Rate Order, 28
FCC Rcd. at 8697, ¶195. The agency was even more explicit
about the prospect of bankruptcy in the Notice that preceded
the Order:
*
See, e.g., Comments of CSDRVS, LLC, Docket Nos. 10-51 & 03-
123, 2-3 (May 31, 2013) (J.A. 825-26) (discussing “The RLSA
Rate Proposal”); Comments of Purple Commc’ns., Inc., Docket
Nos. 10-51 & 03-123, 12 (Nov. 14, 2012) (J.A. 624) (discussing
“TRS Fund Administrator’s Rate Proposal”); Comments of Convo
Commc’ns., Inc., Docket Nos. 10-51 & 03-123, 5-6 (Nov. 14,
2012) (J.A. 552-53) (discussing “The VRS Rates Proposed by
RLSA”); Ex Parte Notice of CSDVRS, LLC, Docket Nos. 10-51 &
30-123 (Oct. 25, 2012) (objecting to “compensation rates if they are
at all similar to what Rolka Loube Saltzer Associates (“RLSA”) has
proposed); Comments of Hancock, Jahn, Lee & Puckett, LLC d/b/a
Communication Axcess Ability Group (CAAG), Docket Nos. 10-
51 & 03-123, 5-7 (Nov. 15, 2012) (discussing “RLSA’s Rate
Proposals”).
20
If ... some providers are not able to manage their
businesses, gain scale, or support their existing capital
structures during a transition period, they will likely have
to change their current business plans. ... We ... will not
act to preserve any particular competitor. We do not
believe that any provider has an inherent entitlement to
receive compensation from the Fund, and so do not
regard as the goal the protection of VRS providers who
are high cost and/or uncompetitive.
2011 Notice, 26 FCC Rcd. at 17399, ¶ 66.
Sorenson’s costs were particularly high for two reasons.
First, it was saddled with the debt it had incurred to finance a
leveraged buyout. (A private equity firm, having acquired the
Company, then caused it to incur substantial debt in order to
fund a dividend to its new owner.) See In re Telecomms.
Relay Servs. & Speech-to-Speech Servs. for Individuals with
Hearing & Speech Disabilities, Order Denying Stay Motion,
25 FCC Rcd. 9115, 9121, ¶ 21 (2010). In addition, Sorenson
purchased and then gave users videophones free of charge in
order to encourage their use of its service, but the cost of that
equipment was not and never had been deemed compensable
by the Commission. See id. at 9120, ¶ 16. The reasons for
Sorenson’s financial hardship, therefore, are precisely the
reasons the Commission had rightly warned were insufficient
justification for raising rates. Moreover, Sorenson is wrong
to equate bankruptcy with an inability to provide reasonable
service; the Commission did not have before it any evidence
that Sorenson’s service would be degraded if its debt
obligations were reduced or restructured as equity in a
bankruptcy proceeding. Nor does Sorenson give us any
reason to believe insolvency would cause a provider to exit
the market so long as the reasonable costs of continuing to
21
provide service, including an appropriate return on equity and
wages sufficient to attract labor, remain fully recoverable.
D. Speed-of-Answer Requirement
Sorenson’s penultimate challenge is to the new speed-of-
answer requirement, with which it claims it cannot comply at
the per-minute rates set by the Order. In response to the
Commission’s call for comments about whether to tighten this
requirement, see 2011 Notice, 26 FCC Rcd. at 17405, ¶ 87
(“[S]hould the speed of answer requirements set forth in [47
C.F.R. §] 64.604(b)(2) be modified?”), Sorenson explained
that a faster speed of answer meant a higher cost of service.
Reply Comments of Sorenson, Commc’ns., Inc., Docket Nos.
10-51 & 03-123, 49 (Mar. 30, 2012) (J.A. 410) (“speed-of-
answer is directly affected by compensation levels”).
Because the Commission did not specify the metric it was
considering, however, Sorenson did not have occasion to state
whether or by how much its labor cost would increase if it
were required to answer 85% of all calls within 30 seconds,
measured daily (as the Commission went on to require) rather
than 80% of all calls within 120 seconds, measured monthly
(as it had been required to and was doing).
The Commission adopted this more demanding speed-of-
answer requirement based in part upon the explicit premise
that it would not increase labor costs over the historical costs
upon which the rates in the 2013 Rate Order are based,
contrary to the general relationship suggested by Sorenson
and without citing any evidence to dispel that suggestion. See
2013 Rate Order, 28 FCC Rcd. at 8671-72, ¶¶ 137 & 139
(“[T]his action will set a new standard for VRS provider
performance without additional cost to providers or the TRS
Fund”). Even if the Commission was correct in saying “[t]he
record indicates that VRS providers already achieve a speed
22
of answer of 30 seconds for the majority of VRS calls,” id. at
8671, ¶ 137 – an assertion for which we have found no
support – that says nothing about the cost of achieving the 30-
second speed of answer 85% of the time, measured daily.
Indeed, counsel for the Commission conceded at oral
argument that, to the extent it adopted the new standard on the
premise that providers were already meeting that standard
measured daily, the agency was mistaken. Oral Arg. R.
29:40-30:05.
The Commission argues this challenge to the speed-of-
answer requirement is not ripe for judicial review because
Sorenson “never presented [it] to the Commission.” We have
held, however, an issue is ripe for review pursuant to section
405(a) of the Communications Act of 1934, 47 U.S.C.
§ 405(a), if the Commission had an “opportunity to pass”
upon the question of fact or law raised in the petition; the
party need not have raised the precise argument before the
agency. See Time Warner Entm’t Co. v. FCC, 144 F.3d 75,
79 (D.C. Cir. 1998). Because the Commission had before it
comments that suggested costs would go up under an
enhanced metric for speed of answer, and because it reached
the opposite conclusion on that very issue, the Commission
had and indeed took the opportunity to pass upon the
question. Therefore, Sorenson’s challenge is ripe for judicial
review.
Turning to the substance of that challenge, we need
hardly do more than note that the Commission is, by its own
interpretation of the ADA, required to reimburse providers for
all costs necessarily incurred to meet the mandatory minimum
standards established by the agency, see 2004 Order, 19 FCC
Rcd. at 12543-44, ¶ 181, of which speed-of-answer is one, see
47 C.F.R. § 64.604(b)(2)(iii). By adopting the new speed-of-
answer metric without evidence of the cost to comply with it,
23
the Commission acted arbitrarily and capriciously. See
Permian Basin, 390 U.S. at 792 (“[E]ach of the order’s
essential elements [must be] supported by substantial
evidence”). Moreover, because the only evidence before the
Commission was Sorenson’s submission indicating costs go
up when standards of service go up, the new metric fails the
“requirement of reasoned decisionmaking.” Allentown Mack
Sales & Serv., Inc. v. NLRB, 522 U.S. 359, 374 (1998);
accord Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto
Ins. Co., 463 U.S. 29, 43 (1983) (a decision is arbitrary and
capricious if the agency “offered an explanation for its
decision that runs counter to the evidence before the agency”).
Sorenson asks us to remedy this error by vacating the
new rates in the 2013 Rate Order. We think it more
appropriate for two reasons instead to vacate the new speed-
of-answer requirement. First, it is the less disruptive course,
more precisely tailored to the problem with the Order. Cf.
Owner-Operator Indep. Drivers Ass’n v. Fed. Motor Carrier
Safety Admin., 494 F.3d 188, 212 (D.C. Cir. 2007) (vacating
only the offending parts of a rule despite petitioner’s request
for vacatur of the whole). Second, we think the Commission,
in expressing its understanding that it could adopt the new
requirement without adding to costs, implied that its priority
was to keep rates down, not to force the quality of service up;
i.e., it wanted what it thought was a free lunch, leaving us in
doubt whether it wanted the lunch if it was not free. On
remand, the Commission is free, of course, to renew its
consideration of the tradeoff: It may adhere to the status quo
ante, reinstate the requirement we vacate today, or impose a
different standard, as long as it bases its decision upon
evidence of the required labor costs and adjusts the rates in
the 2013 Rate Order to reflect any increase over the historical
costs upon which they were based.
24
E. Tiered-Rate Structure
Finally, Sorenson contends the tiered-rate structure is
arbitrary and capricious for two distinct reasons. First, it
argues, having tiered rates is inherently contrary to the
Commission’s stated position that they are inefficient and
should be eliminated. 2013 Rate Order, 28 FCC Rcd. at
8698, ¶ 198 (the TRS Fund should not “support indefinitely
VRS operations that are substantially less efficient”); see also
2011 Notice, 26 FCC Rcd. at 17418, ¶ 141 (the “tiered rate
structure supports an unnecessarily inefficient market
structure, and apparently provides insufficient incentive for
VRS providers to achieve minimal efficient scale”). As we
see it, however, the decision to retain the tiers while
transitioning to a competitive-bidding scheme is not
inconsistent with the Commission’s stated position. The
agency made clear in the 2013 Rate Order that it still plans to
eliminate the per-minute rate methodology and that its
critique of tiered rates guided its planning for the interim.
2013 Rate Order, 28 FCC Rcd. at 8702, ¶ 205. It raised the
cut-offs between the tiers immediately and will reduce over
time the gap between the highest and lowest tiered rates,
which adjustments increase the incentive to achieve minimum
efficient scale, consistent with the concerns it expressed in the
2011 Notice. See id. at 8698, ¶ 198.
Second, Sorenson challenges the specific cut-off levels
demarcating the new tiers, arguing they are not optimal for
achieving the Commission’s stated goal of supporting smaller
providers until they grow to an efficient scale and are able to
compete effectively. At its core, this objection is no more
than a quibble over the precise cut-off that would be most
efficient in the short term, and is certainly not significant
enough to impugn the agency’s transitional methodology,
which is explicitly aimed at achieving efficiency in the long
25
run. See id. at 8699, ¶ 200 (“We conclude 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, in
the more competition-friendly environment that we expect to
result from our structural reforms”). As we have noted before
with regard to ratemaking, “[t]he relevant question is whether
the agency’s numbers are within a zone of reasonableness, not
whether its numbers are precisely right.” WorldCom, Inc. v.
FCC, 238 F.3d 449, 462 (D.C. Cir. 2001) (quotation marks
omitted). Because the Commission relied upon evidence in
the record that supports its conclusions about minimum
efficient scale, see, e.g., 2013 Rate Order, 28 FCC Rcd. at
8699-700, ¶¶ 202-03, we are satisfied the cut-offs are within
the zone of reasonableness and we defer to the agency’s
judgment about how best to achieve a smooth transition to
competitive bidding.
III. Conclusion
For the foregoing reasons, we vacate only the new speed-
of-answer requirement prescribed in ¶¶ 135-39 of the 2013
Rate Order. 28 FCC Rcd. at 8671-72. We remand that
portion of the Order to the Commission to consider whether
an enhanced speed-of-answer requirement will increase
providers’ costs and, if so, whether having faster service is
worth the concomitant increase in rates. Pending further
action by the Commission, this decision will have the effect
of reinstating the requirement that 80% of VRS calls be
answered within 120 seconds, measured on a monthly basis.
See id. at 8671, ¶ 135.
So ordered.