This is probably one of the most bizarre cases you ever heard of. Unbelievably, the FCC, (with the help of AT&T, Verizon and Centurylink) ‘froze’ the cost accounting rules that are supposed to divide up the expenses of the different lines of business that use the state-based telecommunications infrastructure, the state-based utilities, to reflect the year 2000 –19 years ago.
AT&T et al. figured out that they could use these FCC rules, (which no one has a clue exists), to put the majority of all expenses into local service and it made the entire wired telecommunications networks in America appear to be unprofitable. At the same time, all of the other subsidiaries and lines of business using the same networks got a free ride.
Most people don’t know that there are still state utilities, like Verizon NY or MA or AT&T California. Moreover, no one knows that these utilities are not just the copper wires but appear to be almost all of wires within the state; copper and fiber. And this scheme diverted billions of dollars of construction budgets per state to pay for the FiOS video, fiber to the home service, or AT&T’s U-Verse, as well as the wires used for the wireless networks, even the special access wires, also known as “back haul” or business data service
And, if you want sneaky? Verizon was able to convince the state commissions to not only grant rate increases to fund these fiber networks, but they allowed Verizon to claim that these were “Title II”, common carrier, and part of the existing state utility! This quote is from a Verizon franchise for FiOS; this language is almost identical in every state.
This is the same “Title II” that is part of the Net Neutrality battle, but this has been ignored. Verizon, elsewhere, has claimed that Title II harmed investment; here it shows that Title II was used to charge local customers for broadband upgrades using the state utility construction budgets.
In December 2018, the FCC extended this freeze for 6 more years, through 2024. Unbelievably, for almost 2 decades the FCC never audited the books. But what is most surprising is — this has been going on for almost 2 decades and it has been completely under the radar.
This Freeze:
- Created the Digital Divide. In almost every state, Verizon et al. had agreements, which started in the 1990’s, to upgrade their entire state territory; rural, urban and suburban areas were to be done equally. In fact, in most states, the state laws were changed to charge local phone customers rate increases for this work. Instead, the companies left much of the rural areas to deteriorate claiming they were ‘unprofitable’; even many of the inner-cities weren’t upgraded, especially in low income areas. But this was just part of this artificial financial shell game.
- Customers were Overcharged Billions of Dollars for Wireless. This is not chump change. With this cross-subsidy scheme, local phone customers in most states were illegally charged billions to pay for the build outs of fiber optic networks that are used for wireless. On top of this, the Wireless service has been paying a fraction of the market prices and expenses that it should be paying for using the utility networks.
- Tax Benefits from Artificial Losses. With local wired networks paying the majority of expenses — (even though the costs were not incurred to offer the service), the companies lost billions a year, and these were used by the companies for tax benefits.
- Shut Off the Copper; Dismantle the State Utilities. Making the local service networks appear unprofitable is now used as part of the claim that the companies should be allowed to ‘shut off the copper’ and force-march customers onto wireless (because it makes them more money). And to help AT&T et al., the FCC’s current plan is to dismantle the utilities, handing them over to the wireless company as private property for private use. This is done in conjunction with ALEC, the American Legislative Exchange Council, who creates model legislation (paid for by AT&T et al.) to work in concert with the FCC’s plan.
How do we know all this? We know where the skeletons are buried and we MUST appeal the FCC’s plans, as it impacts every AT&T, Verizon and Centurylink state.
First, We Have Hard-Core, Irrefutable Evidence:
- The Verizon NY 2017 Annual Report was published June 2018 — and supplies the full financials of the state-based telecommunications utility.
- In July 2018 there was a settlement of Verizon NY with the NY Public Service Commission which ended an investigation that started in 2015. Estimated at $300-$500 million, and based in part on our work, Verizon NY is required to upgrade 32,000 lines to fiber optics and maintain the existing copper networks.
Second, What We Found in New York is Obscene — Billions in Cross-Subsidies, Tax Dodging and Customer Overcharging.
- From 2005–2017, local phone customers were overcharged an estimated $2,700.00 per line due to rate increases using artificial losses and cross-subsidized expenses.
- Verizon Wireless diverted the utility construction budgets to do the fiber to the cell sites. From 2010–2012, Verizon Wireless appears to have underpaid Verizon New York, the state utility, $2.8 billion for construction.
- Verizon NY Local Service was charged $1.8 billion for Corporate Operations expense, 62% of the total, in just 2017, due the freeze. These are the expenses for the corporate jets, executive pay and lawyers.
- Verizon New York shows losses of over $2 billion a year for almost a decade, with billions in tax benefits.
Third, This Happened in Every State. NY is the only state that still requires a full annual report that we know of. The FCC, in order to hide these financial maneuvers, stopped publishing any data in 2007, but all of these manipulations are federal and matched Verizon NY.
Fourth, 5G Is a Bait and Switch. This is just another play to remove all regulations, preempt state laws and charge more money. Anyone who thinks that these companies are going to put in fiber optics for a small cell wireless service, with a range of 1–2 city blocks — is delusional. Moreover, in-region, it appears that these wires are being cross-subsidized and charged to local phone customers via the utility construction budgets.
Fifth, If We Stop the Cross-Subsidies, the Money Can be used to Help Cities and Customers. The Freeze has harmed every aspect of communications and this and related cases will hopefully slow down and even reverse the FCC decisions — and lower prices for customers.
Sixth, We Found a Structural Flaw in Every FCC Decision. Ironically, the FCC has left out everything dealing with state-based issues for decades. The FCC does not even acknowledge that there are state-based utilities, and the FCC never examined how their own rules were harming America, or the broadband commitments that were made as part of the state utility. We wrote a separate report about this flaw.
If the IRREGULATORS don’t take this appeal now and expose the corruption of the accounting now — i.e., it made the AT&T, Verizon and CenturyLink utilities artificially unprofitable for public policy manipulations, it will be harder to reverse the FCC’s decisions later.
The IRREGULATORS are an independent consortium of senior telecom experts, analysts, forensic auditors, and lawyers who are former staffers from the FCC, state advocate and Attorneys General Office, as well as telecom auditors and consultants.
