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Sorenson v. FCC & USA, No. 10-9536 (10th Cir.)

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Released: October 18, 2011

FILED

United States Court of Appeals

Tenth Circuit

Appellate Case: 10-9536 Document: 01018730555 Date Filed: 10/18/2011 Page: 1

October 18, 2011

PUBLISH

Elisabeth A. Shumaker

Clerk of Court

UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

SORENSON COMMUNICATIONS, INC.,
Petitioner,
v.
FEDERAL COMMUNICATIONS
COMMISSION; UNITED STATES OF
AMERICA,
Nos. 10-9536 & 10-9560
Respondents.
__________________________
VERIZON COMMUNICATIONS, INC.;
FRONTIER COMMUNICATIONS
CORPORATION; QWEST CORPORATION,
INC.; T-MOBILE USA, INC.; and CITIZENS
AGAINST GOVERNMENT WASTE,
Amici Curiae.

On Petition for Review From Decision of the

Federal Communications Commission

(FCC No. CG-03-123)
Christopher J. Wright (Timothy J. Simeone with him on the briefs) of Wiltshire &
Grannis LLP, Washington, DC, for Petitioner.
Joel Marcus, Counsel, Federal Communications Commission (Christine A.
Varney, Assistant Attorney General, Catherine G. O'Sullivan and Robert J.

Appellate Case: 10-9536 Document: 01018730555 Date Filed: 10/18/2011 Page: 2
Wiggers, Attorneys, United States Department of Justice; and Austin C. Schlick,
General Counsel, Peter Karanjia, Deputy General Counsel, Richard K. Welch
Deputy Associate General Counsel, Federal Communications Commission, with
him on the brief) Washington, DC, for Respondents.
Helgi C. Walker of Wiley Rein LLP, Washington, DC, on the briefs for
Communications Amici Curiae.
Jessica L. Ellsworth and Uta Oberdoerster of Hogan Lovells US LLP,
Washington, DC, on the brief for Amicus Citizens Against Government Waste.
Before

KELLY

,

SEYMOUR

and

HOLMES

, Circuit Judges.

SEYMOUR

, Circuit Judge.
Sorenson Communications, Inc. challenges the 2010-2011 rates set by the
Federal Communication Commission ("FCC" or "Commission") to compensate
Video Relay Service providers, including Sorenson. We deny the petition for
review because the Commission's order is consistent with its statutory mandate
and is not arbitrary or capricious.

I.

Title IV of the Americans with Disabilities Act mandates that individuals
with hearing and speech disabilities have access to telecommunications relay
services ("TRS"). See 47 U.S.C. 225. TRS enables these individuals to access
a telephone system that is "functionally equivalent" to the voice telephone
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Appellate Case: 10-9536 Document: 01018730555 Date Filed: 10/18/2011 Page: 3
services used by the general population. Id. at 225(a)(3). That is, just as a
hearing person may pick up a phone to place a call, individuals with disabilities
may use TRS to communicate with hearing persons over the telephone system.
The Federal Communications Commission is responsible for ensuring TRS is
"available, to the extent possible and in the most efficient manner, to hearing-
impaired and speech-impaired individuals in the United States." Id. at
225(b)(1).
Video Relay Service ("VRS") is a type of TRS, "which enables a person
with a hearing disability to remotely communicate with a hearing person by
means of a video link and a communications assistant." Sorenson Commc'ns, Inc.
v. FCC, 567 F.3d 1215, 1218 (10th Cir. 2009). Using a broadband internet
connection and the video link, the VRS user is able to use sign language with a
communications assistant ("CA") who places an outgoing telephone call to a
hearing person. "During the call, the CA communicates in American Sign
Language . . . with the deaf person and by voice with the hearing person. As a
result, the conversation between the deaf and hearing end users flows in near real
time." Structure & Practices of the Video Relay Serv. (2010 NPR), 25 FCC Rcd.
6012, 3 at 6014 (2010); see also 47 C.F.R. 64.601(a)(26). FCC regulations
provide certain minimum standards that VRS providers must meet. Among these
requirements, VRS providers must operate every day, twenty-four hours a day,
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Appellate Case: 10-9536 Document: 01018730555 Date Filed: 10/18/2011 Page: 4
and must answer 80 percent of all calls within 120 seconds.1 47 C.F.R.
64.604(b)(2)(iii), (4)(i).
TRS customers do not pay to access the service. Instead, TRS providers
are compensated by the TRS Fund at a rate determined by the FCC. See 47
U.S.C. 225(d)(3)(B); 47 C.F.R. 64.604(c)(5)(iii)(E). "The TRS Fund is
financed by interstate telecommunications providers on the basis of interstate end-
user telecommunications revenues." Sorenson, 567 F.3d at 1219 (citing 47 C.F.R.
64.604(c)(5)(iii)(A)). TRS Fund payments are "designed to compensate TRS
providers for reasonable costs of providing interstate TRS . . . based on total
monthly interstate TRS minutes of use." 47 C.F.R. 64.604(c)(5)(iii)(E)
(emphasis added). The Commission has defined "reasonable costs" to be "those
direct and indirect costs necessary to provide the service consistent with . . . the
TRS mandatory minimum standards." Telecomms. Relay Servs. & Speech-to-
1 There are other forms of TRS. See generally 47 C.F.R. 64.601(a). For
example, traditional TRS uses a text telephone ("TTY") to provide service. The
TTY user places a call to the TRS center, and a CA places an outbound voice call
from the TRS center to the called party. "The CA serves as the link in the
conversation, converting all typed TTY messages from the TTY caller into voice
messages, and all voice messages from the called party into typed messages for
the TTY user." Telecomms. Relay Servs. & Speech-to-Speech Servs. for
Individuals with Hearing & Speech Disabilities
, (2000 Order), 15 FCC 5140, 2
at 5142 (2000); see also 47 C.F.R. 64.601(a)(22). IP Relay is another form of
TRS that allows users to communicate in text via the internet, rather than by
using a TTY and the telephone network. 47 C.F.R. 64.601(a)(13). These other
forms of TRS have mandatory minimum requirements that differ from those
governing VRS. See, e.g., id. 64.604(b), 64.605.
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Appellate Case: 10-9536 Document: 01018730555 Date Filed: 10/18/2011 Page: 5
Speech Servs. for Individuals with Hearing & Speech Disabilities (2004 Order),
19 FCC Rcd. 12475, 181 at 12543-44 (2004). Sorenson provides the largest
percent of VRS minutes and therefore receives a larger reimbursement from the
TRS Fund than any other VRS provider.
The TRS Fund is administered by the National Exchange Carrier
Association ("NECA"). Id. 8 at 12482. Providers submit their cost data to
NECA each year. See Telecomms. Relay Servs. & Speech-to-Speech Servs. for
Individuals with Hearing & Speech Disabilities (2007 Order), 22 FCC Rcd.
20140, 20165 n.170 (2007). NECA collects information only on the costs that the
FCC has deemed allowable as compensable costs for providing VRS. In a series
of prior orders, the FCC designated which costs incurred by VRS providers are
allowable and which costs are disallowed from compensation. Allowable costs
include, for example, labor costs, directly attributable overhead, startup expenses,
executive compensation, and an 11.25% fixed rate of return on investment. See
id. 49, 74, 76-79 at 20162, 20169-70; 2004 Order, 19 FCC Rcd. 181-82, 238
at 12544-45, 12566. Disallowed costs include a profit mark-up on expenses,
research and development costs for enhancements that exceed mandatory
minimum requirements, and the cost of providing videophones, software, and
technical assistance to VRS users. See 2007 Order, 22 FCC Rcd. 82 at 20170-
71; 2004 Order, 19 FCC Rcd. 179-81, 189-90 at 12543-44, 12547-48.
Until 2007, the Commission set VRS rates annually, which resulted in
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significant variation in compensation each year. See 2007 Order, 22 FCC Rcd.
5-6 at 20145. In 2007, the FCC adopted a three-tiered rate structure for
compensating VRS providers, with rates that declined as the number of minutes
per month increased. See id. 53 at 20163. Under the tiered approach, a
provider was compensated at the Tier 1 rate for its first 50,000 minutes of use
each month, at the Tier 2 rate for the next 450,000 minutes each month, and at the
Tier 3 rate for all minutes above 500,000 each month. Id. 67 at 20167. Under
this system, all providers were compensated at the same rate for the same number
of minutes each month. Id. 54 at 20163. The rates were set for three years,
with a 0.5 percent reduction in reimbursement each year, and were based on the
providers' projected costs and minutes of use. See id. 72 at 20168.
The 2007 Order's change in compensation was prompted by the
Commission's concern that VRS providers had been significantly
overcompensated because they received payments greatly exceeding their actual
costs. Id. 48 at 20161. The Commission believed tiered compensation would
promote competition and ensure that newer providers' costs were covered without
overcompensating the more established providers. Id. 53 at 20163.

II.

In 2010, as the three-year rates from the 2007 Order were set to expire, the
FCC began a broad reexamination of VRS compensation and rates. See Structure
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& Practices of the Video Relay Serv. Program (2010 VRS NOI), 25 FCC Rcd.
8597 (2010). The FCC also adopted an interim, one-year VRS rate plan to be in
effect while it considered reforming VRS compensation. Telecomms. Relay Servs.
& Speech-to-Speech Servs. for Individuals with Hearing & Speech Disabilities
(2010 Order), 25 FCC Rcd. 8689, 2 at 8690 (2010). Based on the providers'
cost data collected by NECA, the Commission again found "a substantial
disparity" between the providers' actual costs for providing VRS and the
projected costs which had been used to calculate compensation rates. Id. 9 at
8694. The data provided "substantial evidence that providers are receiving far
more in compensation than it costs them to provide service." Id. 12 at 8695.
The Commission explained that the interim rates were adopted to "balance" the
goals of ensuring that VRS providers recovered only the reasonable costs they
incur while ensuring quality and sufficient VRS service during the interim period.
Id. 2 at 8690.
The 2010-2011 interim rates implemented by the Commission were
calculated using two figures: (1) NECA's proposed per-minute rates, based on the
actual historical costs providers incurred in providing VRS, and (2) the 2009-
2010 rates, which were based on providers' projected costs. Id. 6 at 8692.
NECA's suggested rates were significantly lower than the rates established by the
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Appellate Case: 10-9536 Document: 01018730555 Date Filed: 10/18/2011 Page: 8
2007 Order.2 The Commission found NECA's proposed rates "reasonable and
supported by record evidence," id. 13 at 8696, and "that NECA's use of
providers' actual, historical costs in proposing VRS rates provides a valuable
point of reference for setting VRS rates," id. 9 at 8694. It expressed concern,
however, that the NECA rates would reduce providers' compensation so
significantly. Id. 12 at 8695. Accordingly, "in light of concerns expressed by
providers and users, and to ensure sufficient, quality service for users while the
Commission considers broad reform," it declined to adopt the NECA proposed
rates. Id. 6 at 8692-93. Instead, it averaged those proposed rates with the 2009-
2010 fiscal year rates. See id. The result was an interim rate plan that retained
the tiered structure of the 2007 Order, but reduced rates to $6.24 per minute in
Tier 1, $6.23 in Tier 2, and $5.07 in Tier 3.3 Id. at 8694 tbl.1.
Sorenson asked the FCC to stay the 2010 Order, but this request was
denied. See Telecomms. Relay Servs. & Speech-to-Speech Servs. for Individuals
2 For the 2009-2010 fiscal year, providers received $6.70 per minute in Tier
1, $6.43 per minute in Tier 2, and $6.24 per minute in Tier 3. Under NECA's
proposal, providers would receive $5.78 per minute in Tier 1, $6.03 in Tier 2, and
$3.90 in Tier 3. 2010 Order, 25 FCC Rcd. at 8694 tbl.1.
3 On June 30, 2011, the FCC announced that the 2010-2011 interim VRS
rates will continue to be in effect, on an interim basis, until the Commission
completes its reevaluation of VRS compensation. Sorenson supported the
extension of the current VRS rates, subject to the outcome of this appeal.
Telecomms. Relay Servs. & Speech-to-Speech Servs. for Individuals with Hearing
& Speech Disabilities
(2011 Order), FCC No. 11-104, 2011 WL 2596905, 23-
24 & n.73 at 10 (June 30, 2011).
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Appellate Case: 10-9536 Document: 01018730555 Date Filed: 10/18/2011 Page: 9
with Hearing & Speech Disabilities (2010 Order Denying Stay Motion), 25 FCC
Rcd. 9115 (2010). Sorenson also sought a stay of the 2010-2011 interim rates
from this Court. We denied the motion, concluding that Sorenson failed to show
it was likely to succeed on the merits or that the public would best be served by
the issuance of a stay. We now consider the merits of Sorenson's petition for
review.4

III.

We first address Sorenson's contention that the 2010 Order violates 47
U.S.C. 225. We will then turn to its claim that the 2010 Order is arbitrary and
capricious in violation of the Administrative Procedure Act ("APA").
A. STATUTORY CLAIMS
By enacting 225, Congress directed the FCC to ensure the availability of
nationwide access to "functionally equivalent" TRS, "to the extent possible and in
the most efficient manner, to hearing-impaired and speech-impaired individuals in
4 We make permanent the orders entered between October 4 and December
13, 2010, which provisionally sealed the parties' briefs and a portion of the joint
appendix. The submissions will remained sealed. These materials were filed
under seal to protect confidential information relating to Sorenson's finances and
business practices. In this opinion, we do not divulge any information that was
treated as confidential by the parties, unless it was previously publicly disclosed
by the FCC.
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the United States." 47 U.S.C. 225(a)(3), (b)(1).5 The FCC was also directed to
ensure its regulations "encourage . . . the use of existing technology and do not
discourage or impair the development of improved technology." Id. 225(d)(2).
Sorenson asserts the reimbursement rates set by the FCC's 2010 Order are so low
that the result violates each of these statutory requirements.
Where, as here, Congress has delegated lawmaking authority to an agency,
"we review the agency's statutory interpretation promulgated in the exercise of
that authority under the two steps set out in Chevron U.S.A. v. NRDC, 467 U.S.
837 (1984)." Qwest Corp. v. FCC, 258 F.3d 1191, 1199 (10th Cir. 2001) (citing
United States v. Mead Corp., 533 U.S. 218 (2001)). If the statute is clear, "that is
the end of the matter; for the court, as well as the agency, must give effect to the
unambiguously expressed intent of Congress." Chevron, 467 U.S. 842-43. If the
statute is silent or ambiguous, we must apply the agency's interpretation if it "is
based on a permissible construction of the statute." Id. at 843.
1. Functionally Equivalent
Sorenson claims the interim VRS rates violate 225's goal of providing
access to "functionally equivalent" service to the hearing and speech impaired.
According to Sorenson, the increased wait times that may result from the lower
5 As part of the Commission's duties under this statute, Congress directed it
to enact regulations that established functional requirements for TRS and set
minimum standards for TRS providers. See 47 U.S.C. 225(d)(1)(A)-(B).
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rates will compromise the functional equivalence required of VRS. Of course,
that all depends on what Congress meant by "functionally equivalent."
Section 225 does not define "functionally equivalent" and therefore leaves
the definition to the FCC. See Chevron, 467 U.S. at 843-44; Nat'l Cable &
Telecomms. Ass'n v. Brand X Internet Servs., 545 U.S. 967, 980 (2005)
("[A]mbiguities in statutes within an agency's jurisdiction to administer are
delegations of authority to the agency to fill the statutory gap in a reasonable
fashion."). Consistent with this authority, the FCC has determined that
"functional equivalency is met when the service complies with the mandatory
minimum standards applicable to the specific service." 2004 Order, 19 FCC Rcd.
189 at 12548. In adopting this approach, the Commission explained it was
ensuring that the TRS Fund would not become "an unbounded source of funding
for enhancements that go beyond these standards, but which a particular provider
nevertheless wishes to adopt." Id.
The FCC recognizes that the speed at which a VRS user is able to reach a
CA and place a call is a fundamental component of ensuring functional
equivalence. See, e.g., Telecomms. Relay Servs. & Speech-to-Speech Servs. for
Individuals with Hearing & Speech Disabilities (2005 Order), 20 FCC Rcd.
13165, 17 at 13174 (2005). In this spirit, and consistent with its statutory
mandate to establish the functional requirements for TRS, see 47 U.S.C.
225(d)(1)(A), the FCC established mandatory minimums for VRS service which
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are unchallenged in this appeal. This regulation requires VRS providers to
"answer 80% of all calls within 120 seconds." 47 C.F.R. 64.604(b)(2)(iii).
Notably, Sorenson does not claim that it will be unable to satisfy the
mandatory 80/120 speed-of-answer requirement under the interim rates. Instead,
it only claims that its average wait times may increase from ten seconds to twenty
seconds. See 2010 Order Denying Stay Motion, 25 FCC Rcd. 12 at 9118. Even
under Sorenson's doomsday scenario, its increased wait times fall well-below the
120-second threshold set by the FCC for functional equivalence. Sorenson has
failed to show the FCC's interpretation of "functionally equivalent" is
impermissible under the statute. Consequently, it has not established that the
interim rates violate the functional equivalence requirement of 225.
2. Availability Mandate
Sorenson also contends the 2010 Order violates the statute's requirement
that TRS be "available, to the extent possible" to hearing and speech impaired
individuals in the United States. 47 U.S.C. 225(b)(1). Sorenson argues the
2010 Order violates this availability mandate because the lower interim rates will
undermine its ability to serve its current users and will prevent additional training
and outreach to extend VRS to even more hearing and speech impaired
individuals. We are not persuaded.
Sorenson exaggerates the impact of the FCC's temporary rate reduction and
fails to undermine the Commission's determination that service availability will
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remain adequate during the interim period. In the 2010 Order, the Commission
justified its departure from NECA's proposed rates by emphasizing its goal of
"ensur[ing] sufficient, quality service for users while the Commission considers
broad [rate] reform." 2010 Order, 25 FCC Rcd. 6 at 8693. While Sorenson
asserts its wait times for service could possibly double under the interim VRS
rates, it does not claim that it will be unable to meet the mandatory minimum
requirements for VRS, including answering 80 percent of calls within 120
seconds. See 47 C.F.R. 64.604(b)(2)(iii). More importantly, Sorenson does not
contend that under the interim VRS rates it, or any other provider, will be unable
to serve any customer who requests service. As a result, Sorenson has not shown
that the "availability" of VRS will be impaired by the interim rates.
Nor does the availability mandate require anything more. Despite
Sorenson's suggestions to the contrary, the mandate does not entitle Sorenson to
compensation for whatever VRS-related service it would like to provide to its
current or potential customers. Instead, the FCC has sensibly adopted an
approach that compensates only the reasonable costs of providing access to VRS,
by limiting compensation to certain "allowable costs." See 2010 Order, 25 FCC
Rcd. 10 at 8694 ("We are therefore compelled . . . to ensure that providers
recover only the reasonable costs caused by their provision of VRS."); 2004
Order, 19 FCC Rcd. 181 at 12543-44 ("[W]e believe `reasonable costs' must be
construed to be those direct and indirect costs necessary to provide the service
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Appellate Case: 10-9536 Document: 01018730555 Date Filed: 10/18/2011 Page: 14
consistent with all applicable regulations . . . i.e., the TRS mandatory minimum
standards."). Certainly if the FCC were to offer VRS providers an unlimited
amount of money, then more interpreters could be hired and more videophones
could be given away for free; in turn, it is possible that more users would adopt
VRS and wait times would improve. But it is folly to suggest that 225 requires
VRS to operate at any cost or entitles VRS providers to unlimited compensation.
See 2004 Order, 19 FCC Rcd. 197 at 12551. Instead, the statute requires VRS
to be made "available, to the extent possible and in the most efficient manner," to
the individuals who would benefit from it. 47 U.S.C. 225(b)(1).
Significantly, the categories of compensable expenses were not changed by
the 2010 Order. See 2010 Order, 25 FCC Rcd. 15 at 8697. Thus, even though
Sorenson worries that "outreach and training" will be sacrificed under the interim
rates, such costs were not compensated under earlier rate plans. In a series of
unchallenged orders, the FCC excluded from reimbursement a number of
expenses, including the cost of the video equipment that some providers chose to
provide free to their users. See, e.g., 2007 Order, 22 FCC Rcd. 82 at 20170-71.
In any event, the suggestion that the statute is violated by Sorenson's inability to
provide free phones to new users has no merit. The statute only requires that
VRS be made "available" and that users pay no higher rates for calls than others
pay for traditional phone services. See 47 U.S.C. 225(d)(1)(D). It does not also
require that VRS users receive free equipment and training.
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3. Efficiency Mandate
Third, Sorenson claims the interim VRS rates undermine 225's
requirement that TRS operate in an "efficient manner." See id. Specifically,
Sorenson complains that the Commission misinterprets the word "efficient" by
emphasizing how much money from the TRS Fund is spent on VRS, rather than
encouraging VRS providers to lower their own costs and operate in a more
efficient manner. The Commission urges us not to consider this argument
because Sorenson did not give it an opportunity to consider the issue in the
administrative process.
The filing of a reconsideration petition to the Commission is "a condition
precedent to judicial review . . . where the party seeking such review . . . relies on
questions of fact or law upon which the Commission . . . has been afforded no
opportunity to pass." 47 U.S.C. 405(a). Sorenson did not file a petition for
reconsideration, so we must determine whether the FCC was otherwise given an
opportunity to pass on the issue.
Sorenson did raise concerns to the Commission that tiered rates discourage
providers from operating efficiently by rewarding smaller, inefficient providers
with higher rates. In its comments to the Commission, however, Sorenson never
made the argument it makes here: that the FCC's focus on the amount paid to
providers from the TRS Fund is an unreasonable construction of 225's
efficiency mandate. Although "an appellate court may `consider the same basic
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argument [as raised before the FCC] in a more polished and imaginative form,'"
Sorenson, 567 F.3d at 1227 (quoting Sprint-Nextel Corp. v. FCC, 524 F.3d 253,
257 (D.C. Cir. 2008)) (alteration in original), Sorenson's "basic" argument was
not raised before the FCC. As a result, Sorenson has not preserved this argument
for judicial review.
4. Development of New Technology
Sorenson's final statutory argument is that the interim rates undermine
225's goal of "not discourag[ing] or impair[ing] the development of improved
technology." 47 U.S.C. 225(d)(2). Sorenson claims the interim rates violate
this provision because they do not compensate providers for the cost of customer
equipment, such as videophones, which discourages the deployment of new
technology. Again, Sorenson's argument fails to persuade us.
As we have already discussed, providing free customer equipment was not
an allowable cost for compensation from the TRS Fund even under earlier Orders.
See, e.g., 2007 Order, 22 FCC Rcd. 82 at 20170 ("Because some providers
appear to continue the practice of giving video equipment to consumers and
installing it at no cost to the consumer, we also reiterate that [these] costs . . . are
not compensable from the Fund."); Telecomms. Relay Servs. & Speech-to-Speech
Servs. for Individuals with Hearing and Speech Disabilities (2006 Order), 21
FCC Rcd. 8063, 17 at 8071 (2006) ("Compensable expenses . . . do not include
expenses for customer premises equipment . . . or installation of the equipment or
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any necessary software."). Instead, the FCC has determined that the cost of
videophones supplied to customers is not a recoverable expense because
"compensable expenses must be the providers' expenses in making the service
available and not the customer's costs of receiving the service." 2006 Order, 21
FCC Rcd. 17 at 8071.
Such disallowances do not violate the statute. Just as users of traditional
telephone service do not receive their telephones for free, 225 does not require
that VRS users receive free videophones. Instead, the statute only mandates that
TRS users "pay rates no greater than the rates paid" for voice telephone service
"with respect to such factors as the duration of the call, the time of day, and the
distance" of the call. 47 U.S.C. 225(d)(1)(D). Notably, some VRS providers do
not provide free phones to their users, and users must pay for their own
broadband internet connections in order to use VRS. Sorenson of course may
provide free phones to its VRS users, but nothing in the statute requires it to be
compensated for that expense. The 2010 Order does not violate 225 by its
refusal to treat such expenses as "reasonable" costs of providing VRS.
Despite Sorenson's claims to the contrary, the interim VRS rates adopted
by the FCC in the 2010 Order are consistent with Congress's mandate under 47
U.S.C. 225. The FCC has discretion to balance the objectives of 225 when
they conflict, and the interim rates reflect a reasonable balance of these
competing objectives. Cf. Qwest, 258 F.3d at 1200 (noting Commission's
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"discretion to balance the principles in [ 254(b)] against one another when they
conflict"); Rural Cellular Assoc. v. FCC, 588 F.3d 1095, 1103 (D.C. Cir. 2009)
(similar).
B. APA CLAIMS
Sorenson also claims the 2010 Order is arbitrary and capricious in violation
of the Administrative Procedure Act. First, it argues the ratemaking method was
irrational because NECA's proposed rates are unreliable and were nevertheless
averaged by the Commission with the prior rates. Second, it contends the tiered
structure is irrational.
Under the APA, we review the FCC's 2010 Order to determine whether it
is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance
with the law." 5 U.S.C. 706(2)(A); see also Qwest, 258 F.3d at 1198. To
comply with the APA, "the agency must examine the relevant data and articulate
a satisfactory explanation for its action including a rational connection between
the facts found and the choice made." Motor Vehicles Mfrs. Ass'n v. State Farm
Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). Agency action is arbitrary and
capricious if:
the agency has 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
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expertise.
Id. "An agency's action is entitled to a presumption of validity, and the burden is
upon the petitioner to establish the action is arbitrary or capricious." Sorenson,
567 F.3d at 1221.
We are particularly deferential when reviewing ratemaking orders because
"agency ratemaking is far from an exact science and involves policy
determinations in which the agency is acknowledged to have expertise." Qwest,
258 F.3d at 1206 (quoting Sw. Bell Tel. Co. v. FCC, 168 F.3d 1344, 1352 (D.C.
Cir. 1999)) (internal quotation marks omitted). Moreover, the FCC is entitled to
substantial deference when adopting interim rates.6 See, e.g., Rural Cellular, 588
F.3d at 1105 ("This court has . . . acknowledged the FCC should be given
`substantial deference' when acting to impose interim regulations."); Alenco
Commc'ns, Inc. v. FCC, 201 F.3d 608, 616 (5th Cir. 2000) ("Because the
6 Sorenson disputes the FCC's characterization of the rates as "interim."
As it points out, the Commission set VRS rates annually prior to 2007. See 2010
Order
, 25 FCC Rcd. at 8693 n.28; 2007 Order, 22 FCC Rcd. 5-6 at 20144-45.
In Sorenson's view, the FCC's decision to set a one-year rate once again for
2010-2011 is insufficient to warrant the increased deference that accompanies
interim rates. We disagree. The Commission made clear in the 2010 Order its
intention that the new rates be temporary while it totally reevaluates VRS
compensation. See 2010 Order, 25 FCC Rcd. 12 at 8695 ("We intend to
consider fully in a separate public proceeding . . . the most appropriate way to
calculate and set future rates. In the meantime, however, we decline to perpetuate
the large discrepancy between actual costs and provider compensation . . . .").
That review process is currently underway. See 2011 Order, FCC No. 11-104
5-7 at 3-4. We therefore extend the deference owed to the FCC when it
engages in interim ratemaking.
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provisions under review are merely transitional, our review is especially
deferential.").
1. NECA Data
Sorenson raises two arguments in challenging the "methodology" used by
the FCC to develop the interim rates. Its first argument focuses on the use of
NECA's proposed rates in the rate calculation. In its view, NECA's proposed
rates are badly flawed because they do not reflect Sorenson's actual costs of
providing services, which Sorenson deems to include the videophones and
technical assistance it provides at no charge to its users, as well as its tax and
debt service payments. Sorenson claims the FCC's reliance on NECA's rates was
arbitrary and capricious because the Commission failed to explain why these
additional costs are excluded from compensation and ignored the actual costs
Sorenson incurs to provide VRS.
The FCC explained in its 2010 Order that it is seeking comment on and
reevaluating categories of compensable costs during this interim period. See 2010
Order, 25 FCC Rcd. 7 at 8693. In the meantime, however, it "sought to find a
reasonable balance between the past rates based on projections that consistently
overstate true costs and overcompensate VRS providers, and the NECA-proposed
rates based on actual costs . . . ." Id. 12 at 8695. Furthermore, as the
Commission explained, the categories of compensable costs in NECA's proposed
rates are the same categories that were compensable when the agency reimbursed
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Appellate Case: 10-9536 Document: 01018730555 Date Filed: 10/18/2011 Page: 21
on the basis of providers' projected costs. Id. 15 at 8697. The Commission has
been consistent in its view that providers may only recover the reasonable costs of
providing a level of service that complies with the minimum standards for VRS.
See id. 10 at 8694; 2004 Order, 19 FCC Rcd. 181 at 12543-44. 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.
Moreover, although Sorenson complains generally that NECA's proposed
rates are too low, it offers no reason to question the accuracy of NECA's
computation of the allowable costs incurred by VRS providers. Nor does it
undermine the FCC's determination that NECA's proposed rates were "reasonable
and supported by the record evidence," 2010 Order, 25 FCC Rcd. 13 at 8696.
As a result, Sorenson has failed to show that reliance on NECA's proposed rates
was arbitrary and capricious.7
7 Sorenson claims the Commission failed to reference or respond to the
audited report of its actual costs that it submitted. Although the Commission did
not address the specific figures submitted in the audited report, this is not
surprising. The Commission has a policy, urged by VRS providers including
Sorenson, of keeping providers' submitted cost data confidential. See 2007
Order
, 22 FCC Rcd. 88 at 20173; cf. 47 C.F.R. 64.604(c)(5)(iii)(I) (requiring
NECA to keep data obtained from providers confidential). Sorenson submitted its
audit report with a request that it be treated confidentially. It is therefore
reasonable that the Commission did not directly respond to Sorenson's claimed
actual costs for providing VRS. The Commission did, however, address
providers' general comments claiming that NECA's data did not include all of the
(continued...)
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Appellate Case: 10-9536 Document: 01018730555 Date Filed: 10/18/2011 Page: 22
Sorenson contends NECA's rates are irrational for an additional reason.
Under NECA's proposed rates, providers are given a working capital allowance of
1.6%, which is paid on a rolling basis every thirty days. But each reimbursement
is made approximately sixty-five days after the specific cost submission. This
delay, Sorenson claims, renders NECA's rates unreasonable because the
allowance assumes a repayment schedule that is not actually implemented. In the
2010 Order, the Commission explained that because the working capital
allowance is paid monthly on a per-minute basis, "it does not substantially matter
whether the lag time from a specific cost submission is thirty days or sixty-five
days." Id. at 8692 n.23. Sorenson asserts that the Commission's explanation is
unreasonable, but offers no support for its claim that VRS providers are
negatively affected by the delay. Merely asserting that the Commission's actions
are unreasonable does not make it so.
Sorenson's second challenge to the Commission's ratemaking methodology
addresses the Commission's decision to average NECA's proposed rates with the
2009-2010 reimbursement rates. Sorenson claims that by averaging the two rates,
the Commission acted arbitrarily and capriciously because the 2009-2010 rates
7(...continued)
true costs of providing VRS. See 2010 Order, 25 FCC Rcd. 11, 15 at 8685,
8697. Because the Commission reviewed the relevant data and provided a
satisfactory explanation of its action, this was sufficient. See Motor Vehicle Mfrs.
Ass'n
, 463 U.S. at 43.
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Appellate Case: 10-9536 Document: 01018730555 Date Filed: 10/18/2011 Page: 23
were the result of a price cap regime, while NECA's proposed rates were based
on some providers' historical costs. In Sorenson's view, it was irrational to
average these two "fundamentally different" ways of calculating the costs of
VRS. Aplt. Br. at 49.
We are not convinced the 2009-2010 rates and the NECA proposed rates
are as fundamentally different as Sorenson would like us to believe. Both were
efforts to calculate the actual costs of providing VRS services, and both treated
the same categories of costs as reimbursable. See 2010 Order, 25 FCC Rcd. 15
at 8697. The Commission readily admits rates in the 2007 Order were based on
providers' projected costs, while NECA's rates are based on providers' historical
costs. Id. 6 at 8692; 2007 Order, 22 FCC Rcd. 47 at 20160-61. But this is
insufficient to render the interim rates arbitrary and capricious. "As long as the
Commission makes a reasonable selection from the available alternatives, its
selection of [ratemaking] methods will be upheld even if the court thinks that a
different decision would have been more reasonable or desirable." Sw. Bell Tel.
Co., 168 F.3d at 1352 (alteration and internal quotation marks omitted).
In light of our determination that the Commission provided adequate
justification for its reliance on NECA's proposed rates, we are similarly
unpersuaded by Sorenson's argument regarding the FCC's method of averaging
NECA's proposed rates with the previous rates. Contrary to Sorenson's claims,
the Commission provided a satisfactory explanation for why it chose the midpoint
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Appellate Case: 10-9536 Document: 01018730555 Date Filed: 10/18/2011 Page: 24
between NECA's proposed rates and the prior rates. It explained that earlier
compensation levels had resulted in significant overcompensation for VRS
providers. See 2010 Order, 25 FCC Rcd. 9, 20 at 8694, 8698. As a result of
this overcompensation, it could "no longer justify basing VRS compensation rates
only on projected costs." Id. 10 at 8695. While the Commission found NECA's
proposed rates "reasonable and supported by record evidence," id. 13 at 8696, it
was concerned that adopting NECA's rates would cause a "significant and sudden
cut to providers' compensation." Id. 12 at 8695. In an effort to ameliorate that
problem, the Commission "sought to find a reasonable balance" between past
rates that overcompensated providers and NECA's rates, so it selected the
midpoint between the two. Id.
Courts have previously upheld ratemaking methodologies that relied on the
average or midpoint of two sets of numbers. See, e.g., Am. Pub. Commc'ns
Council v. FCC, 215 F.3d 51, 58 (D.C. Cir. 2000) (holding that where it was
reasonable to rely on figures used, the use of midpoint between two figures was
not arbitrary); Pub. Serv. Comm'n v. FERC, 397 F.3d 1004, 1010-11 (D.C. Cir.
2005) (finding use of midpoint consistent with agency's rationale and not
arbitrary and capricious). Given the Commission's dual purposes of moving
reimbursement rates closer to actual costs while avoiding a too onerous cut to
providers, we hold it was reasonable to use the midpoint between the existing
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Appellate Case: 10-9536 Document: 01018730555 Date Filed: 10/18/2011 Page: 25
rates and the actual costs NECA determined.8 Averaging the two rates is certainly
not the only method the Commission could have employed. But the Commission
provided a sufficient explanation for the action it chose. Under our deferential
review, that is all that is required. See Sw. Bell Tel. Co., 168 F.3d at 1352.
2. Tiered-Rate Structure
Sorenson also challenges the FCC's decision to retain a three-tiered rate
structure in the interim period. The Commission explained that NECA's data
supported its conclusion that the tiered structure was a "workable, reliable way to
account for the different costs incurred by carriers based on their size and volume
of TRS minutes relayed." 2010 Order, 25 FCC Rcd. 17 at 8697. It also found
that the rationale set forth in its 2007 Order for adopting a tiered structure
remained applicable because smaller providers generally have higher costs than
larger providers. It finally noted there was a lack of evidence supporting
departure from the existing tiered rate structure, but explained it was continuing
to reevaluate the use of tiered rates during the interim period. Id.
Sorenson first challenges the evidence supporting the tiered rate structure.
It reasserts its criticisms of the NECA data, which we have already addressed. In
8 Sorenson also contends the rates adopted by the Commission were
arbitrary and capricious because, it says, the Commission falsely stated that the
Tier 3 rate fell within the range of rates proposed by providers. The Commission
asserts this issue was not previously raised and therefore cannot be considered on
appeal. Sorenson does not refute the Commission's assertion, and we therefore
do not consider Sorenson's argument. See 47 U.S.C. 405(a).
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Appellate Case: 10-9536 Document: 01018730555 Date Filed: 10/18/2011 Page: 26
addition, Sorenson contends NECA's proposed rates actually undermine the
rationale behind the tiered rate structure because NECA concluded that Tier 1
minutes cost less than Tier 2 minutes. It also claims the FCC ignored Sorenson's
evidence that economies of scale are inapplicable to VRS.
Despite Sorenson's contention that a tiered rate structure is inappropriate
for VRS, the Commission had ample evidence to support its conclusion to the
contrary. NECA's data showed a substantial disparity between the costs incurred
by Tier 1 and 2 providers and Tier 3 providers. See id. at 8694 tbl.1. This data
comports with the FCC's finding that "[t]he rationale for adopting the tiers in the
2007 TRS Rate Methodology Order remains applicable; that is, providers with a
relatively small number of minutes generally have higher costs." Id. 17 at 8697.
Moreover, although a number of commenters recommended restructuring
the tiers in various fashions, Sorenson was the only provider to challenge the tier
structure itself. See id. 16 at 8697; see also 2010 Order Denying Stay Motion,
25 FCC Rcd. 15 at 9119-20. The Commission considered the comments
Sorenson submitted. See 2010 Order, 25 FCC Rcd. at 8691 n.17 (listing among
the comments received by the Commission "Sorenson Reply Comments (May 21,
2010)).
Even Sorenson's own evidence fails to contradict the Commission's
determination that "providers with a relatively small number of minutes generally
have higher costs" than providers with a large number of minutes, id. 17 at
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Appellate Case: 10-9536 Document: 01018730555 Date Filed: 10/18/2011 Page: 27
8697-98. Instead, Sorenson simply disputes the reason for the cost disparities. In
Sorenson's view, its costs are lower because it is more efficient than other VRS
providers, not necessarily because economies of scale allow it to operate at lower
costs. Given NECA's data and the comments from various providers seeking to
retain some type of tiered rate structure, however, there is sufficient evidence in
the record to support the FCC's determination that tiered rates continue to be
workable and reliable during the interim period. The FCC's explanation for
maintaining the tiered rate structure is sufficient.
We easily dispense with Sorenson's two final challenges to the tiered
structure. It claims the tiered rates are arbitrary and capricious because they
compensate Sorenson differently than other providers. We agree with the
Commission that this misrepresents the tiered rate structure. That structure
actually treats all providers equally. They all receive the Tier 1 rate for their first
50,000 minutes per month, the Tier 2 rate for the next 450,000 minutes per
month, and the Tier 3 rate for all minutes above 500,000. See 2007 Order, 22
FCC Rcd. 54 at 20163 ("[U]nder the tiered approach, all providers would be
compensated on a `cascading' basis, such that providers would be compensated at
the same rate for the minutes falling within a specific tier."). That the bulk of
Sorenson's minutes fall within Tier 3 does not mean Sorenson is treated
differently than other providers.
Sorenson also argues that if it is able to provide service at a lower rate than
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Appellate Case: 10-9536 Document: 01018730555 Date Filed: 10/18/2011 Page: 28
other providers, it is unreasonable for the FCC to choose to pay other providers
more. However, the tiered rates are consistent with the Commission's stated goal
of ensuring that providers' compensation becomes more closely aligned with their
actual costs. See 2010 Order, 25 FCC Rcd. 6 at 8692-93. For smaller providers
with higher relative costs, compensation in Tiers 1 and 2 more closely aligns with
their costs of providing services. For a large provider like Sorenson, which has
lower average costs, the Tier 3 rate helps to ensure Sorenson is not
overcompensated for providing VRS. Sorenson's argument on this point is
without merit.
Having examined the relevant data and articulated a reasoned explanation
for its interim rates, the Commission's order is not arbitrary or capricious.

IV.

Because the 2010 Order's interim rate plan for VRS neither violates 47
U.S.C. 225 nor is an arbitrary and capricious exercise of the FCC's authority,
we

DENY

Sorenson's petition for review.
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