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2020-2021 Rate and Demand

Forecasts

April 3, 2020

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Road Map MARS-Based Services • Rate Development Process • Current vs Proposed Rates/Demand • Demand Trends

IP CTS • Cost Trends • Demand Trend

Video Relay Service • Cost Trends • Demand Trends • Rate Alternatives

Fund Requirement

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MARS-Based Rate Calculation The multi-state average rate structure (MARS) calculation considers all intrastate minutes generated by each state and the costs associated with these minutes, along with the other allowable costs paid to providers to generate a de facto rate based on average costs. The MARS services are TRS/TTY, STS, and CTS.

States fall into one of three categories: per-minute paid on intrastate conversation minutes, per-minute paid on intrastate session minutes, and flat rate states where a contract is negotiated between states and the provider to pay a (usually monthly) flat fee, regardless of minutes generated.

For per-minute states, the per-minute rates are multiplied by the corresponding minute totals, session or conversation, to get the costs for each state.

Flat rate states are considered to have their costs allocated to the services based on the conversation minutes of each service divided by the total number of conversation minutes of all three services, unless otherwise allocated by the state or provider.

The costs of providing each service are summed and used in the next step of the rate calculation. TRS/TTY and STS minutes are summed together as are their costs. This is due to the $1.131 per minute outreach kicker added to the TRS/TTY costs to come up with the STS rate. CTS is calculated separately.

Any additional allowable costs not attributed to providing service, such as outreach, are then added to the total cost of providing service, calculated above. These new totals for each service are then divided by the service’s total conversation minutes to come up with a de facto rate for the service.

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MARS TRS/TTY & STS Done Together Total Intrastate Payments per Minute Compensation

$16,281,802.82

Other Costs Paid To Providers $873,149.08

Total Intrastate Conversation Minutes 4,682,494.21

Per Minute Rate for Traditional TRS $3.6636

Per Minute Speech to Speech Outreach Additive

$1.131

Per Minute Rate for Speech to Speech $4.7946

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MARS CTS Done Separately Total Intrastate Payments per Minute Compensation

$25,961,785.55

Other Costs Paid to Providers $1,307,766.54

Total Intrastate Conversation Minutes 9,510,976.16

Per Minute Rate for Caption Telephone Services

$2.8672

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The chart above shows the projected demand along with the calculated rates from the 2020 Annual Data Request on the right-hand side. The data from last year’s data collection is on the left as contrast. The demand for all three services has declined by about 9% for TRS, 18% for STS, and about 23% for CTS. The rates for each service have increased about 15% for TRS, 12% for STS, and just over 20% for CTS. Overall, the fund requirement has increased from $11.1 million last year to $11.7 million for the coming year.

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This chart shows the declining demand for TRS service. The numbers are in minutes of service generated each month. The actual demand has steadily dropped from about 300,000 minutes in July 2013 down to just over 120,000 minutes of TRS in January of 2020. The projections from the providers extend to June 2021, and that trend line is leveling off just above 100,000 minutes per month.

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The STS historical demand seems wildly varying, until you account for the very small scale of the service. The minutes have historically averaged about 11,500 minutes per month, bouncing between 14,000 and 8,000 monthly minutes. The projections maintain that flat average at about 11,500 minutes per month.

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Like the other MARS services (non-IP based), CTS has also been historically declining. There were over 800,000 CTS minutes in early 2013. The demand has been steadily declining to the current average of around 250,000 monthly minutes at the end of 2019. The projections have the service continuing to decline through the next program year, ending at about 170,000 minutes in June of 2021.

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IP CTS Per Minute Costs by Category

The table above displays the average per minute costs for ALL PROVIDERS, broken into applicable cost categories. It is made up of two years of actual data, and two years of projections. Individual provider costs cannot be broken out due to the sensitive and confidential nature of the data. All we can provide is aggregates. The cost category with the greatest increase is the Other category. This is made up primarily of subcontractor costs and software investments. The only cost category that is decreasing from 2018 to 2021 is the non-CA Relay Center Costs. The industry average is more than supported with the current rate of $1.58 per minute, even with the FCC recommended 7.5%-12.5% operating margin window that we averaged to 10% included in the cost.

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This chart is a graphical representation of the table on the previous slide. It shows the breakdown of IP CTS Costs by Category across the years 2018-2021. The largest cost category is the Other category referenced above as the category with the greatest increase across the years.

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Budget Year 2020-2021 Profit and Operating Margins Based on Order

Rate of $1.58

The Budget Year of 2020-2021 spans from May 2020-April 2021. Based on the projected demand, with the current rate of $1.58, ALL PROVIDERS as one provider will earn a 26% operating margin. This is above the FCC recommended 7.5%-12.5% operating margin.

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Tariff Year 2020-2021 Profit and Operating Margins Based on Order

Rate of $1.58

There are only slight differences when switching to the Tariff Year that coincides with the July 2020-June 2021 program year. The operating margin drops only slightly to 25% for the industry as a single provider.

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The chart above shows the historical growth of IP CTS from January 2015 through January 2020. The minutes start around 15 million in July of 2015. There is a steady increase to over 40 million minutes at the end of calendar year 2020. The orange line shows that the providers’ projections were relatively accurate until the beginning of 2019 where the projections began outpacing the actual demand by almost 10 million minutes. The reason for the sharp decline in the orange trend line is due to this correction to realign with the actual demand numbers. The projections are predicting average demand of 40-45 million monthly IP CTS minutes for Program Year 2020-2021.

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Video Relay Service: Current Tiers and Rates

The tier and rate structure for VRS is geared towards allowing newer and smaller providers a higher rate of compensation for minutes serviced. Providers that service under 500,000 minutes monthly receive the Emergent rate of $5.29 for each minute serviced. Providers servicing over 500,000 minutes per month are subject to tiers I, II, and III, based on total monthly minutes. The first 1,000,000 minutes are compensated at $4.82. The next 1,500,000 minutes are compensated at $3.97 per minute. All minutes past the first 2,500,000 (1m at $4.82, next 1.5m at $3.97) are compensated at $2.63 per minute.

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VRS Per Minute Costs by Category

The table above displays the average per minute costs for ALL PROVIDERS, broken into applicable cost categories. It is made up of two years of actual data, and two years of projections. Individual provider costs cannot be broken out due to the sensitive and confidential nature of the data. All we can provide is aggregates. The cost category with the greatest increase is the Indirect category. This is made up primarily of administrative costs and research and development investments. The only cost categories decreasing from 2018 to 2021 are the non-CA Relay Center Costs and Depreciation. All, but tier III, support the industry costs even with the 7.5%-12.5% operating margin window that we averaged to 10% included in the cost.

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The chart above is a graphical representation of the costs by category from the previous slide. The CA costs are by far the largest of the cost categories.

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Although there is wide disparity month to month with VRS, the trend is going ever so slightly upwards. The average monthly minutes in January 2017 were approximately 10.8 million. The average at the end of 2019 was about 11.2 million. There is not a dramatic increase, but it does seem to be increasing, nonetheless.

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VRS Budget Year 2020-2021: Profits and Operating Margin

The budget year covers the period May 2020-April 2021. This table shows the aggregation of the VRS revenues, expenses, profit, and operating margin as if the industry were a single provider. We cannot provide the individual company data due to the sensitive confidential nature of the data. With the profit divided by the expenses, we can see that the industry as a whole would be making a 24.5% operating margin.

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VRS Tariff Year 2020-2021: Profits and Operating Margin

This table shows the aggregation for the Tariff Year, from July 2020-June 2021. We cannot provide the individual company data due to the sensitive confidential nature of the data. With the profit divided by the expenses, we can see that the industry as a whole would be making a 24% operating margin over this time. This is not much different from the budget year in the last slide.

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VRS Revenue and Demand

This table shows the total demand and revenue of VRS from May 2019-April 2020. As most of the data is actual demand and revenue, this is very close to real numbers. Only February, March, and April of 2020 are projections. This is another aggregation of the industry due to the sensitive and confidential nature of the individual company data. The total demand is 134,698,891 minutes, and that generates $468,160,254 across all four tiers.

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TRS Budget Year Fund Requirement Budget Item Prior Year Current Year

MARS-Based Services $11.1M $11,574,196 IP CTS $912.9M $817,612,480 IP Relay $9.993M $11,226,521 VRS $481.7M $468,160,254 Other Admin $28.215M $28,973,040 Other 2 Month Reserve $245.7M $219,632,512 2020-2021 Total Fund Estimate $1.69B $1,557,179,004 2020-2021 Fund Size $1.42B $1,234,446,004

This shows all the budget items that need to be taken into account in order to accurately set the fund size for each program year. The larger pieces of the budget have decreased from last year, mainly due to projections that were overly optimistic.

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TRS Budget Year Fund Requirement; IP CTS Excluded

Budget Item Current Year 2020-2021 Total Fund Estimate $602,420,111 Estimated Year End Balance ($124,854,528) Investment Income ($0) due to Treasury Conversion 2020-2021 Fund Size $477,565,583 Prior Year

Contribution Base $50,876,678,778 $50,521,118 Contribution Factor 0.02883 0.00945

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TRS Budget Year Fund Requirement; IP CTS Included

Budget Item Current Year 2020-2021 Total Fund Estimate $921,758,893 Estimated Year End Balance ($197,878,472) Investment Income ($0) due to Treasury Conversion 2020-2021 Fund Size $756,880,421 Prior Year

Contribution Base N/A $122,188,039,448 Contribution Factor N/A 0.00619