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 perminute 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 speedof-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 cutoffs. 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 tieredrate 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 tieredrate 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 perminute 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 standardimplementing, 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 arbitraryand-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 offthe-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 longstanding 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 abovementioned 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 noncompensable 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-ofanswer 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-ofanswer 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-ofanswer 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-ofanswer 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-ofanswer 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 speedof-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 speedof-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.