AT&T, Verizon, CenturyLink & the FCC, Created the Digital Divide — on Purpose.

• Did Verizon, AT&T, CenturyLink and the FCC deliberately and intentionally make the entire US state-based, telecommunications, wired utility networks appear unprofitable?
• Did they overcharge America $½ trillion or more?
• Did they create the Digital Divide and has this been used to restructure the America’s communications policies to help these companies against the public interest?

NOTE: We have documented our findings in a new research series (to be released over the next month) with 16 reports called “Digital Divide by Design”. (The first two have been filed with the FCC as part of ongoing proceedings.)

• REPORT 1: Did AT&T, Verizon, CenturyLink & the FCC Intentionally Make the Wired Utility Networks Look Unprofitable — Overcharging America at Least $½ Trillion? Did They Create the Digital Divide?
• REPORT 2: Verizon New York 2017 Annual Report: An Analysis of Cross-Subsidies and Customer Overcharging

We have all been told that the wired networks are unprofitable and that the companies need to ‘shut down the copper’ and move customers to a 5G wireless service. Moreover, the companies and the FCC claim that there are legacy regulations, obligations and arcane accounting rules that ‘burden’ investment, and are blocking America’s economic growth, jobs and ‘real competition’.

But, this common wisdom and the stories being told by AT&T, Verizon and CenturyLink, not to mention the FCC, have been manipulated, just like the cost accounting rules or even the accounting of the actual lines in service.

As we will discuss, the FCC created the “FREEZE”, a simple federal formula of the accounting rules that intentionally makes the local wired phone networks appear unprofitable, while all of the other lines of business that use these networks, from wireless or business data services, pay a fraction of the actual expenses or get major financial perks, making them be artificially very profitable.

Since 2001, this FCC FREEZE allowed the companies to claim that the rural areas were unprofitable and also receive billions per state in state and federal grants, high-cost funds, Universal Service Fund support and a host of other perks. At the same time, these ‘unprofits’ were used to raise rates, get changes to state and federal regulations, but also were responsible for a lack of direct competition while adding to excess charges for all services. And because the companies used the utilities for their wireless roll outs, they could inflate rates, and directly harm customers. Moreover, it also meant that the state utilities were showing billion in losses, resulting in major tax benefits to the companies and harming the state tax base. And, on top of this, the companies can claim that renting to competitors is unprofitable, that having to deal with “carrier of last resort” obligations or even fix broken lines is unprofitable and that keeping the unions to work on these lines is unprofitable. Shutting off these unprofitable wires and dismantling the state utilities to give the wireless companies the infrastructure as private property for personal use, is now underway — with the help of the FCC.

The Harms? All of your communications services have been inflated thousands of dollars; basic competition that use these networks have been slowly eliminated — making sure there is little choice of services. Whole areas of the US never got upgraded but customers paid multiple times thousands of dollars. Even Net Neutrality and privacy issues arise because a few companies have taken control of the basic US infrastructure for their own wireless, wireline, broadband and internet service and have been giving their own subsidiaries financial (and political) advantages.

And almost all of this occurred through one accounting slight-of-hand by just three non-competing (for wired broadband Internet) holding companies — AT&T, Verizon and CenturyLink, the original Bell companies who have captured the FCC.

They Created the Digital Divide, Nationwide, with Just a FREEZE of One Formula.

• In 2001, AT&T et al. got the FCC to “FREEZE” the percentage each of the different lines of business would pay that used the state wired telecommunications utility infrastructure to the year 2000 — and the FCC never adjusted this basic federal formula for 18 years, (which the FCC was required to examine annually). There have been no audits of the impacts of these rules — ever.

The year 2000 is like ancient history, before there was broadband. In fact, the Internet was mostly being delivered by 9,300 independent ISPs, using regular phone lines. It was this entrepreneurial group that brought America the World Wide Web, not the Bell companies. It was also before there were smart cell phones that handled data or streaming video, before Facebook or Twitter or…

And yet, the FREEZE is still in play and wreaking havoc in 2018, and the FCC wants to extend it for an additional 15 years! We’ll get to that in a moment.

• From 2004–2008, AT&T et al. filed to get rid the basic accounting rules — “forbear”, so that they were still on the books but not enforced. And they filed to keep this ‘freeze’ in place.
• In 2007, AT&T et al. also filed to get rid of the obligations to give the FCC any financial information by-state; in 2007, the FCC stopped publishing “Statistics of Common Carriers”, which started in 1939.

NOTE: Brendan Carr, the current FCC Commissioner, was one of Verizon’s attorneys in their 2007 forbearance petition.

• In 2017, under the new FCC Chairman and former Verizon attorney, Ajit Pai, and Brendan Carr (then General Counsel) now Commissioner, some of their first FCC proceedings were to eliminate most of the remaining cost accounting rules. Pai called it “weed whacking”.

NOTE: In July 2018, the FCC announced that it was going to keep the FREEZE in place for 15 more years, until 2033 — and there is a current proceeding to put this in place.

• Zombie Rules: The FCC will claim that the rules have been ‘forborne’ and are no longer in use. The companies will claim that they were following the rules and did nothing wrong. Like the walking dead, as we show with Verizon New York’s financial reports and other documents, the rules are in use and causing serious financial harms.

The Digital Divide by Design

But here is the kicker — This FREEZE intentionally makes America’s state wired utilities appear unprofitable as it assigns all of the expenses to the Local Service category while the other lines of business pay a fraction of the expenses, and they are all being cross-subsidized by Local Service.

The State Broadband Utilities Are the Infrastructure for Wireless, Broadband, etc.

By 2007, there were only 3 primary Bell holding companies left — Verizon, AT&T and CenturyLink, and they had to agree to keep this FREEZE in place since 2001, as they controlled the wired state utilities. Each of these holding companies is really a collection of the former Bell companies and state utilities, created by mergers with their siblings. They now control, state-by-state, the utilities that are their infrastructure in their territories, unless they sold off the properties. Verizon sold Maine, New Hampshire and Verizon to Fairpoint and AT&T sold SNET (Connecticut) to Frontier.

• Verizon controls the East Coast from Verizon Massachusetts, (including Verizon New York, Verizon Pennsylvania, Verizon New Jersey, Verizon DC, etc.), down to Verizon Virginia.
• AT&T controls 21 state utilities including AT&T California or AT&T Illinois.
• CenturyLink controls the western states, including Washington, North Dakota, and Colorado.

And these are utilities, like water or electricity. They are NOT ISPs or wireless or cable companies alone.

Follow the Money and Wires

By 2007, these were not simply the copper wires, but ALL of the wires of their ‘broadband’, online, wireless service in the state — I.e., Verizon’s FiOS uses fiber optic wires that are actually part of the state utility, and the construction was paid for as an extension of the existing utility. Even the Verizon Wireless networks were built state-by-state using the wireline state utility construction budgets and has not been paying for any of the primary common cost expenses.

Thus, with one simple freeze of a federal rule the entire US was impacted. And it was done by only three mostly, non-competing holding companies made up of a collection of state utilities. And, as one group, they were able to create the Digital Divide by making all of their state utilities appear unprofitable all at once, while funding all of their other lines of business.

Who Would Know? It has taken years to uncover this basic plot as it requires forensic auditors, lawyers, and the financial reports from Verizon NY, as the other states appear to not publish the state utility financials.

They Knew: We believe that AT&T Verizon and CenturyLink, and their associations, and their lawyers and experts, all knew by 2004 about the impacts the FREEZE was having on the state wired utilities. They are very smart people. They had teams of accountants and lawyers and used their various associations to reinforce this plan.

They did nothing about it for 18 years, but used it to garner trillions in every possible financial perk, regulatory favor and political twist and turn.

Now in Question: Every filing and statement made about the state wired utilities being unprofitable is now in question. Moreover, what we found about the accounting rules is at the core of every FCC proceeding — past, present and future.

We Know What Happened.

We have documented this “Digital Divide by Design” in 16 new research reports and our recent FCC filings, but this is accompanied by a decade of research and actual financial reports from Verizon New York, one state utility. We now believe that there is at least another $½ trillion of overcharging that has been created through a financial manipulation of the FCC’s cost accounting rules.

One has only to examine actual financial data from one of the state utilities. We created a separate report relying on the Verizon 2017 Annual Report and previous reports, published June 2018.

• REPORT 2: Verizon New York 2017 Annual Report: An Analysis of Cross-Subsidies and Customer Overcharging

Verizon New York’s report showed a number of disturbing things.

• Verizon NY, the state utility, had revenues of $5 billion but showed losses of $2.6 billion.
• Local Service, the basic copper wire-based phone service, had revenues of $1.1 billion, about 22% of the total, but showed losses of $2.9 billion, which created the overall losses and then some.
• According to the filing, Verizon New York still has 1.9 million basic phone lines in service. This is a fraction of the total lines in use.
• Local Service paid $1.8 billion in Corporate Operations expense, which was 60% of the total paid by Verizon NY — creating a loss of $700 million.

How did this happen? An example: In 2003, Local Service was 65% of revenues and paid 65% of expenses. In 2017, Local Service was only 21.6% of revenues, but the FCC’s FREEZE had Local Service being charged 60.6% of Corporate Operations expense. And this was documented in the 2017 Annual Report. I.e.; Local Service, based on the revenue, was overcharged every year for this one expense, which is identical as a percentage in 2003 or 2010, or 2017 — FROZEN.

In fact, in 2017, because of the FREEZE, Verizon New York’s Local Service paid the majority of all expenses while ALL of the other services using the networks paid a fraction of all of the costs. Verizon Wireless, Verizon Online, Verizon Business, Verizon’s Business Data Services or Verizon’s FiOS are all using the construction budgets of the state utility and other parts of the utility but are not paying market prices.

Our separate report details how the FREEZE works and shows the cross-subsidies of Local Service and the other lines of business, but uses Verizon New York financial annual reports. As we show, in 2007, the last data from the FCC shows that all of the other AT&T and CenturyLink state utilities match the Verizon New York cost allocations as these are ‘federal’ rules.

Making the State Wired Utilities Appear Unprofitable Intentionally; The Implications Are Staggering.

• Rural areas of the state utility were intentionally declared unprofitable. In state after state, there are ‘unserved’ areas, which can be in rural areas as well as urban areas.
• Construction budgets were illegally diverted to build out the companies’ wireless networks (Almost all wireless cell sites and 5G require a wire.) In NY, Verizon was able to divert $2.8 billion to the wireless company from 2010–2012 alone.
• Local Service had multiple rate increases in most states claiming it was ‘unprofitable’. Verizon New York had rate increases of 95% overall, while basic rates in AT&T California went up 143%-273%, while the add-on services had increases of 50%-525% since 2005.
• In New York, Verizon received multiple rate increases for “massive deployment of fiber optics” and ‘losses’. Since 2006, Local Service customers paid over $2760.00 extra per line. These losses are artificial and the fiber optic deployment was moved to build out the wireless networks.
• Nationwide, these ‘unjust’ rate increases added over an estimated $91 billion to the costs of service since 2006.
• Local Service prices should have been in steep decline. These are just the additional fees from increases. The copper wires were ‘written off’, the staff was cut, and when is the last time you saw an ad for basic phone service?
• Low income families, seniors, rural customers, small businesses, etc., have been illegally funding the other lines of business and being charged rate increases.
• Tax Benefits: Verizon New York showed losses of $23 billion, with tax benefits of $10.3 billion since 2006.
• Government Subsidies: From Universal Service Fund payments and high-cost funds, to state and federal broadband grants — all claiming that the companies needed extra money — if the losses are artificial, then most of these multi-billion dollar payments are in question
• We estimate $1/2 trillion in cross-subsidies. This is the low number and it represents the additional expenses that were charged to the Local Service and wired networks to make these services unprofitable. At the same time, then, these are the estimated expenses that were diverted instead of being charged to the other lines of business.
• All communications services are inflated. Because the basic infrastructure, including the Business Data Services, had inflated profits, there has been a ripple effect. We estimate that this alone inflated rates over $20 billion annually on all services, including wireless, online, and all competitor services, as they rent these lines at inflated rates.
• No Competition to Lower Prices. Because there has been no serious competition on any level, the prices, even on the Triple Play or broadband offered by the cable companies, have all had continuous rate increases.

But there is a large collection of other reasons the companies did this.

• It gets rid of the unions as there are less ‘utility’ lines and wireless is not as unionized.
• They can ‘shut off the copper’, claiming the wires are unprofitable.
• They can move customers onto wireless — because it makes them more money.
• They can get rid of regulations like ‘carrier of last resort’ — i.e., the obligation to supply service.
• They can get rid of the oversight of the state utility by erasing that it exists.
• They can dismantle the customer-funded networks and move the assets to become private property for personal use.

The General Motors Streetcar Conspiracy vs Digital Divide by Design

Was This Intentional? After explaining the findings to an analyst friend, he said:

“This entire story appears to have played out just like the General Motors Streetcar Conspiracy — where the company bought up ‘light rail’ networks to shut them off so that they could sell more buses.”

Wikipedia writes:

“The General Motors streetcar conspiracy refers to convictions of General Motors (GM) and other companies for monopolizing the sale of buses and supplies to National City Lines (NCL) and its subsidiaries, and to allegations that this was part of a deliberate plot to purchase and dismantle streetcar systems in many cities in the United States as an attempt to monopolize surface transportation.”

In this case, the light rails (like the copper wires) were made unprofitable so that they could be replaced with buses (mobile phones) and to sell more gasoline (broadband and internet priced by the gig).

In this case, all it took was a flick of a switch. In 2001, the FCC ‘froze’ one basic federal formula so that the expenses would be divided up between the different lines of business using the networks to reflect the year 2000–18 years ago, but always diverting the majority of expenses to make the wired networks appear unprofitable.

All of America’s utilities in all states were impacted as these are federal rules — so this was done by 3 mostly non-competing Bell holding companies that control the critical infrastructure and have captured the FCC.

We will be highlighting a great deal more of what we have uncovered in our new series: “Digital Divide by Design”.