Judges Focus on Role of Competition in VRS Rate Structure,(May 7, 2018)
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Monday, May 7, 2018

Judges Focus on Role of Competition in VRS Rate Structure,(May 7, 2018)

In an oral argument this morning regarding the rate structure established by the FCC in 2017 for reimbursing providers of video relay service (VRS), federal appeals court judges kept returning to the issue of whether the FCC had changed its approach to the relationship between VRS competition and the statutory mandate for communications service for deaf individuals to be “functionally equivalent” to services for hearing individuals.

In the 2017 order in CG dockets 10-51 and 03-123, the FCC decided to maintain a “tiered” rate structure under which smaller VRS providers that generate relatively few minutes of service would compensated at a higher per-minute rate than larger providers, to reflect the higher costs of operating on a smaller scale. In a 2013 order, the FCC had adopted a four-year “glide path” of gradually decreasing rates that it hoped could lead to a unitary rate, or single rate structure.

“This expectation was, in turn, based on the assumption that structural reforms, such as effective interoperability and portability standards and the establishment of a neutral routing platform would generate a ‘more competition-friendly environment’ for small providers. There was also an expectation that, pending the completion of such structural reforms, the temporary continuation of a tiered rate structure would both encourage improvements in efficiency and ensure that smaller providers ‘have a reasonable opportunity to compete effectively during the transition and to achieve or maintain the necessary scale to compete effectively after structural reforms are implemented,’” the FCC said in its 2017 order.

However, it concluded in 2017 that those expectations had been overly optimistic, and decided to continue the tiered rate structure for another four years.

Sorenson, the largest VRS provider, had proposed that the FCC adopt a unitary rate in 2017, but the Commission said that doing so would generate windfall profits for Sorenson while “inevitably eliminat[ing] two of the four existing VRS competitors. A single rate could not be set high enough to allow a third provider to remain in the market without raising TRS [Telecommunications Relay Service] Fund expenditures and allowing the windfall profits for lower-cost providers to achieve astronomical levels.”

During oral arguments this morning before U.S. Court of Appeals for the District of Columbia Circuit in “Sorenson Communications LLC v. FCC” (case 17-1198), Donald Verrilli Jr., attorney for Sorenson, said the FCC was “trying to fix” problems with the tiered-rate structure by redefining “functional equivalence” to include the idea of maintaining competition.

Circuit Judge Patricia A. Millett asked “what if” the FCC determined that “in the long term” a monopoly market structure wouldn’t preserve functional equivalence. She also noted the FCC’s argument that Sorenson’s suggested unitary rate would produce a windfall for the company.

Mr. Verrilli said that the FCC made that judgment based on a proposed rate that would have included R&D costs, but the Commission disallowed such costs.

Circuit Judge Cornelia T.L. Pillard asked whether the unitary rate would support service by “anyone” if the R&D cost-recovery component were excluded.

Mr. Verrilli said, “We believe so,” but he added that it would not support the two smallest VRS providers, which he said each account for less than 3% of the market. However, he added, “they’ve been in the market a long time,” suggesting that they have already been accorded adequate opportunity to increase market share.

As for the overall rate structure, he said that Sorenson’s proposal creates an incentive for providers to get more efficient, while the FCC’s approach “does the opposite.”

Judge Pillard suggested that the FCC was trying to create a competitive incentive for providers to improve service over time, in the same way that services for hearing individuals improve over time.

Mr. Verrilli said that by requiring functional equivalence, the statute has the concept of improving VRS “built into it,” and thus no additional competitive incentive is needed.

Circuit Judge Thomas B. Griffith, who presided over the argument, suggested that the FCC had made the judgment that the desired service improvements “will be better achieved through competition.”

Mr. Verrilli noted the FCC’s separate decision not to directly support the R&D cost of innovation in the rate structure, implying that this precludes using the overall rate structure to try to bolster competition.

Judge Pillard said that there is “a technical engine [required] to produce functional equivalence.”

She asked Mr. Verrilli what the competitive structure of the VRS market is, and whether the subscriber base is growing. Later she raised the same issue with other parties’ attorneys.

Mr. Verrilli said he thought the market was “relatively stable.”

Judge Millett suggest that the FCC is concerned that if the rate structure drives competitors out of the market, the remaining monopoly provider would have “very little incentive to increase efficiency.”

FCC attorney C. Grey Pash Jr. said that the Commission has stated that functional equivalence is not a static concept.

Judge Millett responded, “The FCC has said time and again that it won’t look at [functional equivalence] from a consumer perspective,” but rather that it would look at it from the “technical” standpoint of service providers. She suggested that trying to preserve competition would be looking at the issue from the consumer perspective.

Judge Pillard asked if Mr. Pash could provide “examples that would substantiate that competition is important to improve” VRS with respect to the mandatory service requirements established by the FCC. She accepted his discussion of “speed of answer” as one such example.

Judge Millett distinguished between viewing competition as important to improving service and viewing competition as important in itself, “because [competitive markets are] what people are non-deaf have.” The latter, she said, “seems perfectly sensible,” yet it is not consistent with previous FCC decisions which looked at service providers and not consumers, she said.

Judge Griffith asked why the court should defer to the FCC’s predictive judgments regarding the likely outcomes of unitary versus tiered rate structures “when they got it so wrong in 2013?”

The judges questioned Anthony Kaye, attorney for separate petitioner Video Relay Services Consumer Association, regarding his client’s standing — specifically, they wanted to know whether VRSCA really is a member association. They asked whether the 10,000 “members” claimed by VRSCA pay dues, fill out applications to join, are able to vote on the association’s leadership, or have any role in deciding which positions the organization will advocate. Other than saying that members “communicate” with the executive director about their opinions on policy issues, Mr. Kaye generally responded no to those queries.

Asked about how VRSCA is funded, Mr. Kaye acknowledged that Sorenson provides “substantial” funding and that the executive director also provides funding, but could not respond to the judges’ queries as to whether any other parties contribute funding.

The judges also questioned whether the executive director, who for the purposes of the petition was the association member claiming to be aggrieved by the FCC’s action, actually had made any claims of being directly injured in a way that the court could address. Instead, Judge Millett said, the executive director said that “she thinks the law is being violated.”

Judge Pillard again raised the issue of whether VRS is a growing market. Mr. Kaye said that many people don’t use VRS,” adding that broadband is needed for VRS. Judge Pillard noted that the FCC has made broadband service eligible for Lifeline support, but Mr. Kaye said that the financial support provided by the federal Lifeline program is insufficient to make the level of broadband needed to support VRS affordable for some potential VRS users.

Jeffrey Rosen, appearing on behalf of Convo Communications and the other smaller VRS providers, said through an interpreter that if the courts grant Sorenson’s petition, the smaller providers will be forced out of business.

Judge Millett asked on what basis the smaller providers would be able to survive if the FCC moves to a unitary rate in 2020.

Mr. Rosen said that solving the interoperability issue, which involves the inability of some users of Sorenson-issued equipment to communicate with VRS users who have non-Sorenson equipment, would be helpful. He noted that FCC contractor Mitre Corp. is expected to conduct the first interoperability test in two weeks.

However, Mr. Rosen also said that the rate is “the barrier” to competition.

Judge Pillard raised her question about the potential for market expansion. “There are still a lot of consumers who are underrepresented in VRS,” Mr. Rosen said. —Lynn Stanton, lynn.stanton@wolterskluwer.com

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