California; Halt the AT&T Cross-Subsidies: Solve the Digital Divide with Fiber.

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This summary is a road-map to repair the dirt road, known as the Digital Divide, in every city and state. We were promised a supercar on the Information Superhighway and we ended up with a broken skateboard on a dirt road.

Introduction

NOTE: This is a summary of the Reply Comments filed by the IRREGULATORS.

In order to solve the Digital Divide by upgrading all of California to broadband capable of 100mbps download speed at affordable prices, as proposed by Governor Newsom, the State must address certain fundamental issues.

While we applaud comments from Electronic Frontier Foundation and others, our reply lays out a critical new path that focuses on halting billions of dollars in cross-subsidies, from AT&T’s state-based public telecommunications utility, AT&T California, and the AT&T subsidiaries. This overcharging should be immediately redirected to fund the deployment of very high speed fiber optic services to all citizens of California at affordable rates — and solve the Digital Divide, once and for all time.

And we are at the tipping point of the end game. The opening chart shows the true direction of what is happening. AT&T appears to be dismantling the entire state utility by privatizing publicly funded infrastructure, and using manipulated accounting, it is handing it over to the wireless company, that hasn’t been paying its fair share to use the networks. Worse, local service has been cross-subsidizing the other lines of business and paying expenses corporate expenses. And 5G? It is just another new technology bait-and-switch — it requires a fiber optic wire and isn’t as profitable once it has to pay all of the expenses. And with this FCC erasing the remaining laws and obligations on the wires, even shutting down net neutrality, the States are the last defenders of the Public.

The Issues that Need to be Investigated and Actions Taken

First, we believe there is massive cross-subsidizing leading to overcharging of the wired networks by AT&T, costing consumers $1.7–2.4 billion annually and that this money can be redirected to fund fiber optic broadband to all, not at 100 Mbps speed for downloads but 1Gbps in both directions, as well lower dramatically lower rates on all communications.

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Our analysis is based on the Verizon New York 2019 Annual Report and previous reports. Both California and New York use the same FCC accounting rules and thus the same formulas for allocating expenses, known as the “USOA”, Uniform System of Accounting, or sometimes called “ARMIS”.

Second, California needs to not just investigate but to take action to halt these cross-subsidies and use the new-found funding to fix the Digital Divide once and for all. There should be enough to upgrade all areas of the AT&T territory with fiber optics.

As stated in the 2013 Annual Digital Infrastructure and Video Competition Act of 2006 DIVCA Report, (we summarize):

  • The California PUC has not investigated AT&T’s cross-subsidization of services, even when the Office of Ratepayer Advocates (ORA) raised the matter years ago. The Commission claimed that the FCC’s accounting, known as ARMIS data, did not include data to determine if there were violations,
  • The Commission even claimed that it would be too “onerous” to do an audit, and worse, there has not been an audit done for decades because of the New Regulatory Framework, which was created in 1998, though there were audits that found overcharging during this period.

Third, the Governor needs to assess why AT&T was not held accountable for reneging on its statements made and obligations to deploy fiber optic services throughout California, starting in the 1990’s, for which it was granted multiple deregulatory concessions, such as “price caps”, were based on claims that California would be a fiber optic state.

By the year 2000, California should have had 5 million homes connected with fiber optics for video and data service, and spend $16 billion to do it.

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(We note the original total number of households in California was for 6 million, then down to 5.5 million, then moved to 5 million in this document.)

U-Verse Was a Bait-and-Switch.

AT&T also stated that U-Verse was based on using the existing telecommunications wires, meaning the legacy copper wires, to complete the service. The ‘fiber’ was to a location within the town that can be ½ mile from the customers’ homes. Ironically, AT&T told the public and the FCC that this was going to be a fiber optic connection.

AT&T, (formerly SBC) 2004 Annual Report

“Project Lightspeed In June 2004, we announced key advances in developing a network capable of delivering a new generation of integrated IP video, super-high-speed broadband and VoIP services to our residential and small-business customers, referred to as Project Lightspeed… “We anticipate that we will deploy approximately 38,800 miles of fiber, reaching approximately 18 million households by year-end 2007, and expect to spend approximately $4 billion over the next three years in deployment costs and $1 billion in customer-activation capital expenditures spread over 2006 and 2007.” (Emphasis added)

Fourth, Find the Dark Fiber and Let the Cities Light It Up.

“Dark fiber” refers to fiber optic wires that have laid in the ground or on the poles but is not in use. Sometimes it is referred to as ‘not lit’, as compared to the fiber that is ‘lit’ and is in use. This dark fiber could have been installed throughout a town that never received services over the wires, even over the last few decades.

AT&T California, (Pacific Bell) had 81% of their fiber optic network NOT LIT and NOT IN USE, according to the FCC’s Statistics of Communications Common Carriers, as of December 2007. At this time there were 2.9 million miles of fiber optic wires in California; 2.4 million miles were NOT TURNED ON.

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Where is all of the dark fiber? What has happened since 2007?

  • As we pointed out elsewhere, AT&T, all of AT&T in 21 states and around the globe, claims to have had “over 1.1 million global route miles of fiber” in 2018. — Where did all the fiber optic lines go?
  • We are requesting that a full accounting of ALL copper and fiber optic wires, regardless of the classification, be supplied to the public and this would include the Backhaul and business data services, Special Access, U-verse, DSL, as well as basic copper phone service. And it would include all wires laid for wireless to the small cells, etc
  • We are also requesting that every wire be related to the capital budget that was used to build the networks — As we found in New York, the wires to the cell sites are placed into the wired network budgets; AT&T stated that most of the wireless was funded via the wireline networks.

Fifth, the State needs to go back and fix the data collection and analysis, where AT&T and the other providers are not even mentioned in the Annual Report to the Governor.

Worse, this information has to be presented in aggregate form:

“Pub. Util. Code § 914.3 directs the CPUC to submit to the Governor and the Legislature a report that includes, based on year-end data, on an aggregate basis, the information submitted by SVF holders pursuant to subdivision (b) of § 5960.”

The Emperor has No Clothes

AT&T is now treated more like “Voldemort”, the Harry Potter nemesis that is referred to as, “You know who” or “He who must not be named”. AT&T is the state’s largest public telecommunications utility and yet the existence of the utility is a fact that is never discussed. And AT&T is not even mentioned or singled out in the Governor’s plan. The company has been able to have the State reports, like DIVCA annual reports, not mention or examine or supply and deliver specific information about AT&T; it is only aggregated data. And yet the State is attempting to figure out why it has a massive Digital Divide problem and whole areas of the State were never upgraded.

Sixth, Investigate the “Unserved Areas” and Payments to AT&T

Investigate the unserved areas — how much money did AT&T get to upgrade areas of its own state utility?

The AT&T-BellSouth merger was supposed to have 100% of their territories in 21 states upgraded to handle the FCC’s minimum broadband speed level, which was only 200Kbps, and completed by the year 2007.

There should not even be any unserved areas in AT&T California territory, or the total 21 states AT&T controls, and yet there were massive holes in deployment and there are statements made by AT&T after 2007 indicating that 25%, or 15 million households did not not get upgraded.

This impacts not only the CAF funding, but the USF funding, the high cost funds, and other monies given to AT&T including California Advanced Services Fund, etc.

I.e.; how many times and different ways did AT&T get paid to bring broadband to rural areas or inner cities that are part of their state-based put utility territories?

Seventh, the companies have been mainly serving the wealthy areas, and this is a social injustice and caused the Digital Divide.

A Haas Institute study had a number of disturbing findings about California.

“Rural California is left behind by AT&T. In 14 largely rural counties, virtually no household has access to AT&T broadband at the FCC’s 25/3 Mbps speed and one-third or more households are underserved without access to AT&T broadband at 6/1.5 Mbps.”

A California Public Utilities Commission report states,

“AT&T’s investments in fiber upgrades have tended to favor higher-income communities, such that wire centers that serve areas with the lowest household incomes are also characterized by the poorest service quality.”

Eighth, The Price for Local Service Is No Longer Just and Reasonable.

In 2016, New Networks examined the price of basic service in California, and compared it to our historical analysis over the last 2+ decades.

  • The price of the basic AT&T California state utility phone service went up 143% from 2004–2016.
  • The price of every ancillary service went up, from Call Waiting, which went up 240%, to unlisted numbers, which went up 525% (a fact that was also uncovered by the LA Times in 2016.)
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The price of Local Service should have been in steep decline. There have been major staff cuts, the construction budgets were diverted to other lines of business, the copper networks were already written off — so how can Local Service have continuous rate increases?

Local Service pricing is one of multiple issues. AT&T et al. controls the wires to the cell sites, and, with Verizon, they control the pricing of wireless service as well as the data usage a customer receives.

Moreover, because there is no competition from AT&T for high speed broadband, the cable companies have been able to not only charge what they want but add multiple fees that should never be have been added to the customer’s bills, especially on the Triple play services.

Worse, America’s prices are 10–20 times more expensive than most other countries overseas. It is because the companies took control of the infrastructure with no oversight that we are paying multiples compared to countries overseas. And it is specifically the ‘backhaul’, the wires to the cell sites, that have been allowed to have 50+% profit margins, making sure that America’s prices are also inflated.

If the State cares about ‘affordable pricing’, it should now be based on actual costs to offer the service, not some smoke screen for — You know who…

Ninth, Price caps did not work and AT&T appears to be cross-subsidizing the other lines of business and overcharging customers in different ways, just like New York.

We think the numbers in California will show massive overcharging based on the allocation of expenses for construction and corporate operations as shown in the FCC’s ARMIS Report of 2007 for Verizon New York and AT&T California.

This chart shows that both companies are using the FCC’s cost accounting formulas and this puts the majority of expenses into “local service”, (which are the basic phone service revenues), averaging 71% of the total expenses for construction and corporate operations, while the ‘backhaul’ category, which are the data lines, including the wire to the cell sites, or wires to competitors, is only paying 29%. (See the details in the full filing.)

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Besides the injustice to dumping the expenses, as is visible, both California AT&T and Verizon NY had almost identical allocation of expenses.

Fast Forward to 2019: Local Service Overcharging in New York

This next chart shows the “network in service”, i.e., the entire state-based wired telecommunications utility infrastructure for the last few decades, taken directly from the Verizon NY 2019 Annual Report, published, June 8th, 2020 and it is divided into the different lines of business. Somehow, the networks have been charged mostly to the copper wire-based Local Service.

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For the last 2 decades, Local Service paid 62%, on average, with the total network being $31 billion (not counting the write offs). “Nonregulated” which represents FiOS video and VOIP, only paid about $1 billion, or 3.3%.

And for those who like the actual numbers:

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Local Phone Customers have been the Defacto Investors using Title II

This shows the local phone customers have been paying the majority of these expenses, yet it makes no sense because the copper-based phone networks have been in disrepair, and only a fraction of this money was used to upgrade and maintain the state utility. Thus, these expenditures detail that the construction has been spent to pay for some other line of business, such as wireless.

SEE: Solve the Digital Divide by Halting Billions in Cross-Subsidies: Verizon NY 2019 Annual Report

Tenth, We Freed the State’s Rights to Go After the Cross-Subsidies and Overcharging.

Finally, the IRREGULATORS v FCC was decided in March 2020 and the DC Court of Appeals confirmed that the states no longer have to use these formulas and are independent of the FCC. The State, therefore, can immediately halt the cross-subsidies for immediate funding and create new accounting rules that are based on cost-causers to lower rates, among other actions.

California appears to have created barriers via legislation on the State Commission which needs to be removed, or remove the word “public”, from the name “Public Utility Commission”.

Conclusion

Prices are now out of control and the recently announced plan by AT&T to eliminate DSL service is further evidence of their failure to provide the service they have promised year after year. Moreover, they are being aided and abetted by the FCC to substitute a sham 5G service that will use the fiber in the ground, both currently lit and unlit, to provide a service that will never meet the broadband needs now openly visible due to the Pandemic.

This service must be a connectivity service that is ubiquitous, asynchronous and high-speed to enable all Californians with the ability to work from home, school from home and receive telehealth services from home.

Once the subsidies and monies are realigned, the State now has a new path to fix these long standing corporate abuses. Government subsidies can halt, prices should immediately be lowered and revitalizing the state with fiber optic broadband, not some wireless kludge that is not profitable when AT&T has to pay for using the networks that customers-funded.

Who are the IRREGULATORS?

Written by

New Networks Institute,Executive Director, & Founding Member, IRREGULATORS; Telecom analyst for 38 years, and I have been playing the piano for 63 years.

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