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Wednesday, December 3, 2008

More FCC Support Fund Follies
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sleuth.jpgThe Federal Communication Commission's Office of the Inspector General has been busy of late with performance audits of various telecommunications service support funds overseen by the agency. As I wrote earlier this week, on the day before the long Thanksgiving Day weekend, a News Release was issued by the FCC announcing that the Inspector General had released the preliminary results of its statistical analyses of audits of the Universal Service Fund's "High Cost" program. The results strongly suggest that adequate FCC oversight of the High Cost program has been lacking of late.

On Monday, the OIG released its Semi-Annual Report to Congress, discussing the full range of audit activities conducted from April 1, 2008 to September 30, 2008. Thus we learn that in addition to the loss of nearly $1 billion in erroneous overpayments to the High Cost program, another fund the FCC is ultimately responsible for, the "Telecommunications Relay Service" (TRS) Fund, which provides funds for a variety of telephone transmission services for those with hearing and speech disabilities, also appears to be at risk for substantial overpayments due to the lack of adequate controls.

Since 1993, according to the FCC's website, the Commission's rules have required that each common carrier providing voice transmission services provide TRS throughout its service area. All providers of interstate telecommunications services contribute to the TRS Fund, and TRS providers recover the costs of providing interstate services from the Fund on a minutes-of-use basis. Intrastate TRS funding is generally administered by the states, although some intrastate TRS offerings are supported by the interstate TRS Fund. The current TRS Fund Administrator is the National Exchange Carrier Association (NECA). Although NECA directly manages the Fund, the FCC sets the Fund size and carrier contribution factor annually and is ultimately responsible for Fund oversight.

When the TRS Fund started, it disbursed about $31 million, growing to over $38 million by 1999. Since 1999, the OIG report states that the TRS Fund has increased approximately 50-80% each year, to reach $637 million for the Fund's fiscal year from July, 2007 to June, 2008. The size of the fund for the current fiscal year is $850 million, a 26% increase over the previous fiscal year. That is, in roughly ten years the TRS Fund has ballooned from $38 million to $850 million! What, if any, other communications service has seen 50-80% growth in costs per year?

A recent CNN article sheds some light on the recent up-tick in TRS costs:

Phone communication for the deaf has been possible since the 1960s, but for many years it was a laborious and little-used process involving teletype machines. In 1995 a new technology called video relay services (VRS) arrived. A deaf person with a video camera would place a video call to a sign-language interpreter, who then called a hearing person.
VRS became a big business in 2002, when the FCC began collecting a monthly fee from phone users to pay for VRS cameras and interpreters (you may have noticed the charge on your telecom bill).
That fund now collects $800 million a year - and has spawned a flurry of VRS startups. The change has been revolutionary.

Interestingly, the article states that in 2000, the first commercial VRS device -- a specialized video camera that worked with most PCs or TVs -- "was given free to deaf people, enabling video relay conversations for anyone with a fast broadband connection," by its developer, a "giant video company" that "currently claims 70% of the VRS market." Newer entrants, such as the company featured in the CNN article "saw room for a new type of technology company," one that "could tap into federal funding that would cover most operating costs." This company's plan included "providing better VRS services, recruiting top interpreters, and offering above-market wages. The FCC pays VRS providers about $6 a minute [$376.11 per hour] for calls, but the meter starts ticking only once the interpreter connects both callers. So Viable invested in speedy servers and software that would get the VRS sessions up and running as fast as possible." The company also produced a $699 video conferencing device incorporating a camera and screen "into a sleek, portable, Wi-Fi-enabled unit with very few buttons." One cannot help but note that the meteoric growth in the size of the TRS Fund from 2000 to 2008 seems to coincide with the decision to support the provision of video relay technologies through TRS funding.

And yet, as the ever-understated OIG makes clear, internal reporting, cost standards and cost controls appear to have gone missing from the TRS Fund program.

The worked (sic) performed . . . found that TRS providers' processes for accumulating and reporting minutes of services provided and related costs were not always adequate. This resulted in some TRS providers being paid for unallowable minutes of service from the TRS Fund.
The audit work also concluded that methodologies used by TRS providers for accumulating and reporting minutes of services provided and related costs were not uniform. The increased risk that unreasonable, unallowable, unnecessary and inaccurate costs were considered in the rate used to reimburse providers from the TRS fund. These risks could result in rapid cost growth and require higher funding rates. (emphasis added)

Translation: The TRS rate base is "at risk" of containing unreasonable, unallowable, unnecessary and inaccurate costs due to irregular and inadequate controls. That is, waste, fraud and abuse may have added to the fantabulous growth of the TRS Fund over the last ten years, but we really can't tell yet because recipient internal controls are lacking. Although frustratingly sparse in additional specifics about oversight and management of the TRS program, the OIG report does provide a few intriguing details.

First, approximately 15 percent of TRS payments made between 2006 and 2007 went to just seven service providers (the subjects of the performance audits). An eighth provider had been targeted but the audit could not be completed "because that provider did not supply . . . information that validated the accuracy of the TRS costs and minutes of service billed to, and received from the TRS fund by that provider." Thus, a small sub-set of providers may account for a large percentage of the cost increases and at least one of them was either uncooperative or incapable of supplying the requested information to the auditors.

Second, the OIG report singled out one specific form of TRS as likely to have been overpaid: video relay services. It appears that the current compensable hourly rate for VRS is $376.11 (out of a maximum of $404.17). Yet the median rate of pay for a VRS interpreter is only $17.79 per hour, leaving "approximately $385.32 or more of gross margin per reportable hour to cover the other costs associated with the provision of VRS telecommunication services. The other cost associated with VRS discussed in the OIG report is broadband service. Significantly, the report states that "the hourly margin, when compared with the costs of broadband services, suggests that the FCC needs to look much more closely into the allowable expenses and the capital costs that underlie the cost projections that VRS providers submit to the FCC in setting the rates that VRS providers receive per allowable minute of reported service." Wow! That is $385 or more of "gross margin" for a service whose hourly ASL interpreter rates are less than $18! That's quite a business to be in.

In fairness, the OIG report indicates that NECA "has taken steps to strengthen oversight of the TRS Fund." "Management initiated a broad examination into ways for improving the management, administration, and oversight of the TRS Fund and should consider adopting additional, and more effective, cost controls." But as with the Universal Service Fund, ultimate responsibility for oversight of the TRS Fund rests with the FCC. As this report indicates, the agency appears to have significantly failed to exercise the oversight needed to protect telecommunications consumers, and has therefore failed to execute its statutory obligation under Section 1 of the Communications Act to ensure the availability of "communication service with adequate facilities at reasonable charges . . . ." It is very encouraging to see that the agency's Inspector General is on the case, but that is no substitute for doing the job right in the first place. Once again, it is worth asking if any or all of these telecommunications service support programs should continue to be administered by the FCC, and any comprehensive FCC reform effort should seriously consider this matter.

posted by Barbara Esbin @ 4:19 PM | Communications , The FCC

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