Cooked Books: Verizon NY’s Local Service Was Charged $1.8 Billion for Corporate Operations Expenses in Just 2017. Why?

IRREGULATORS v FCC is Critical: This is Example 1: The FCC’s Cooked Books and the Corporate Operations Expense

Learn more about the IRREGULATORS v FCC and how you can help.

The IRREGULATORS and others are taking the FCC to court, not only to expose the “cooked books” of AT&T, Verizon and CenturyLink caused by the FCC’s corrupted accounting rules, but to have the court force the FCC to admit to the issues and then deal with the ramifications.

Here is just one example: The excessive dumping of Corporate Operations expenses into the state public utilities was caused by the deformities of the FCC’s federal cost accounting rules. (We use Verizon NY’s 2017 Annual Report, published June 2018.)

QUESTION: In the chart above, why the hell did Verizon NY Local Service, in 2017, pay $1.8 billion in Corporate Operations expense? (NOTE: This is 61% of the total paid by Verizon NY.) Local Service are the revenues from the basic, copper-based utility “landlines”, and they generated $1.1 billion in 2017. The Corporate Operations expense should have only been a few hundred million dollars, at best. Instead, Local Service was overcharged an estimated $1.5 billion or more, making it appear unprofitable. Over the last decade, this caused a series of harms, including financial losses that saved billions on taxes, while the alleged losses were actually used to raise local rates multiple times. It also was used to claim that Local Service and the wired networks were unprofitable to upgrade, especially in the rural areas, creating the Digital Divide.

This happened in every state in differing ways, but they all have one thing in common; the FCC rules are federal and they are to blame.

What are Corporate Operations Expenses?

Corporate Operations expenses are now an out-of-control-corporate-garbage-pail-slush-fund which includes the lobbyists and lawyers fighting to get rid of Net Neutrality or to raise rates or to get deregulation to remove all customer rights — your rights. It includes everything from executive pay and the corporate jets to the lobbyists who are pushing to ‘shut down the copper’ and force 5G deployments. And it appears that this is also used for ‘foundation’ grant money given to politicians to help push through harmful legislation created by ALEC, the American Legislative Exchange Council, and to capture the FCC.

We wrote about this in 2015: “Did Rate Increases on Verizon N.Y.’s Basic Phone Service Pay for the Use of the Corporate Jet by Verizon’s CEO?”

Why should you care? Besides being overcharged, if we stop these manipulative practices, there are billions per state to do proper upgrades of the wireline utilities to fiber optics, making sure that the schools are wired, and finally solving the Digital Divide, not to mention lowering rates, and even possible refunds. And, as we wrote elsewhere, 5G Wireless is simply a con to remove all of the remaining regulations and obligations on the wires and to dismantle the utilities, then to hand over the publicly-funded networks to the wireless company as private property. In fact, 5G is not profitable once the cross-subsidies are removed.

Verizon New York Is a State-based Telecommunications Utility.

Most people don’t know that there are still state telecommunications utilities left, from AT&T California to CenturyLink Colorado or Verizon New Jersey.

Verizon NY is the primary, New York State based telecommunications utility, with $5 billion in revenues, in just 2017, as told by the Verizon New York 2017 Annual Report, published in June 2018. The revenues and expenses of the services that use the networks are put into three primary categories:

• “Local Service”, are the basic copper phone lines.
• “Access” services, include the Business Data Services and the wires to the cell sites, sometimes called “backhaul”,
• “Nonregulated”, are the revenues from FiOS video and Digital Voice, among other services.

See for Yourself: Verizon New York 2017 Annual Report; we also included a by-the-numbers walk-through of the revenues and expenses.

Unaccounted for Subsidiary Revenues: Please note that there is an additional, estimated $7-$10 billion in revenues in just New York from Verizon’s subsidiaries, including Verizon Wireless, Verizon Online and Verizon Business, among others, that all use these networks. There is no state or federal breakouts of these revenues or expenses.

To Answer the Opening Question: As the opening chart shows, in 2017, Local Service represented 22% of revenues; Access was 47% and Nonregulated revenues were 31%. But Local Service paid the majority of Corporate Operations, 61%, while the Nonregulated services paid only 10% of this expense, and Access, which had double the revenue, paid ½ of what Local Service paid.

Local Service was overcharged and is paying $1.8 billion, 61% of the total expense , because the federal FCC cost accounting rules were frozen to reflect the year 2000, and this was never changed…really.

IRREGULATORS v FCC: Exposing the Telco Cooked Books Based on the FCC’s Accounting Rules, known as the “FREEZE”.

The FCC’s rules have been manipulated and were ‘frozen’, set to mimic the year 2000–19 years ago. These rules are supposed to divide up the expenses, making sure that the different lines of business pay their fair share. Instead, the rules now put the majority of all expenses into the Local Service category, making it appear unprofitable, while the utility and its customers end up funding the other lines of business. The FCC has done no audits or investigations of the harms it has caused.

And just to piss you off: In December, 2018, the FCC extended this ‘freeze’ for 6 more years, until 2024, extending the harms. It is one of the reasons to expose this shell game.

(NOTE: Since 2015, New Networks Institute and the IRREGULATORS have filed multiple comments and reports calling for an investigation of the harms caused by deformed accounting rules. The FCC ignored whatever we filed. The Court is one of the only avenues left to get the FCC to ‘do the right thing’ and clean up this two decade old mess.)

Thus, Corporate Operations expenses are divided up based on the percentages used in the year 2000. In 2000, Local Service had 65% of the revenues and paid 65% of this expense. But as Local Service revenues decreased because of the “freeze”, for the next 19 years it has always paid over 60%, even if it created losses and overcharging. And since this is a federal rule, Corporate Operations expenses are being overcharged in every state.

In a previous report we plotted the Verizon NY Local Service revenues and the Corporate Operations expenses, starting in 2003, then adding 2017 for this article. This chart shows that the percentage of ‘Corporate Operations’ remained flat from 2003 through 2017, while Local Service went from 65% of the revenues to 22%.

Note: The drop in Local Service revenues are only for one category — the copper-based phone service lines. The manipulation of the accounting rules also manipulated the accounting of access lines and the revenues for these services. All ‘migrations’ to Verizon’s fiber-based VoIP service are not counted, or any other copper-based service which can include Business Data Services, or alarm circuits, ATM machines, DSL, or wireless hot-spots, or even lines rented to competitors or Verizon’s other subsidiaries. These revenues would have been shifted to the other categories or to subsidiaries outside of the utility accounting.

Is This Happening in Your State? Of Course.

The FCC stopped publishing state-based financial data in the year 2007. This is the last data about the state utilities and the Corporate Operations expenses. If you go down the columns you see that every state utility had been using the FCC accounting rules and that, on average, 72% of this expense was put into the Local Service category. We also note that since 2007, this expense doubled in Verizon New York and we assume that this pattern happened in every state. Comparisons using data in other states, including data obtained from FOIL requests in 2012–2014, shows it to be true.

The FCC will claim that the rules were ‘forborne’ i.e.; the rules are still on the books but not in use or enforced. This is not true. They were used during the investigation and settlement of Verizon New York by the NY Public Service Commission, from 2015 to July, 2018. And they are the basis of the Verizon NY 2017 Annual Report. Yet, the FCC has never audited or examined how their rules have become corrupted or the harms it caused.

IRREGULATORS v FCC asks the Court to make the FCC deal with our findings, which use the Verizon New York Annual Reports — i.e., the phone company’s own financial reports.

PART II: IRREGULATORS v FCC: Example 2: The FCC, AT&T et al. Manipulated Cost Accounting Rules that Harmed America.

SUMMARY

The dumping of Corporate Operations expenses into the state utility budgets is only one of many harms caused by the FCC’s accounting rules. Dumping the majority of Marketing & Advertising expenses into Local Service or diverting the Construction & Maintenance budgets to be used by the other lines of business not only made America’s state-by-state wired infrastructure appear unprofitable, but this, in turn, caused an avalanche of harms.

The Harms? From AT&T, Verizon and CenturyLink’s tax dodging, failure to properly upgrade the cities, diverting billions of construction budgets to wireless, creating rate increases based on artificial expenses, creating the Digital Divide, dumping billions of Corporate Operations expenses into the state-based utilities, or even inflating wireless costs, these are just some of the harms that were enabled by the FCC’s negligence and the states’ complicity.

PART 3: IRREGULATORS v FCC: Example 3: 5G Wireless? Short the Stock and Question the “Forward Looking Statements”?*