Dear Gov. Newsom: Get the Money Back to Fix the Digital Divide.

Do Not Sign the Industry-Based Wireless Legislation; Follow the Money.

This picture could be worth over $1–2 billion dollars annually to the state of California from AT&T California (sometimes called “Pac Bell”) if the CA annual financial report matches what is been happening with Verizon NY. As is plainly shown, there are massive financial cross-subsidies revealed in these manipulated financial books. (This is an excerpt from the Verizon NY 2020 Annual Report published May 27th, 2021.)

We wrote two previous letters:

1) Letter 1 addresses the 2 corporate-sponsored wireless legislation (SB 556 and AB 537), that should not be signed into law because they do not solve the Digital Divide and they help AT&T et al.; they are self-serving and created with the help of the American Legislative Exchange Council, ALEC, it appears. And we supply a brief history of the failed fiber optic deployments in CA by Pacific Bell/AT&T California.

2) Letter 2 focuses on the failed fiber optic deployments in California that were all the rage in the 1990’s, including the plans to have San Diego CA, fully upgraded to fiber optics by the year 2010. By 2000, 5.5 million homes should have been upgraded and $16 billion was supposed to have been spent — never happened.

Here we say: “Follow the Money”. How do we pay for fiber optic broadband infrastructure to all, at reasonable rates?

We detail what is mostly hiding in plain sight and lost or unknown due to institutional amnesia, it appears. Verizon NY is NY State’s primary state-based telecommunications public utility, just like AT&T California. This article is the summary of some of the revenues and expenses from Verizon NY, which you will find matches the AT&T California financial reports. Unfortunately, the AT&T CA Annual Reports are not available to the public, it would seem, only the work done by the CPUC and released, unredacted, in January, 2021.

And anyone who has ever read a financial spreadsheet of revenues and expenses, in glancing at the numbers in the opening graphic, will most likely start laughing or crying. How can Local Service, which are the revenues from the basic copper-based phone service, be paying $833 million dollars in Corporate Operations expenses? (Line 5, Column f) in just NY, in just 2020? Worse, $1.1 billion in construction and maintenance has been charged to the Local Service line of business, yet these networks are not being upgraded. (Line 2, Column f). In fact, there are plans to ‘shut off the copper’ which have been around for the last decade.

With revenue for Local Service of only $1 billion, this accounting has been manipulated to put the majority of Corporate Operations expenses, and the construction expenses, into the regulated Local Service classification while the other unregulated lines of business listed are getting a free ride.

This Financial Shell Game is the Digital Divide; These financial machinations have been used to NOT upgrade whole areas of NY State, as well as California, and the billions in construction funds that were intended to maintain the copper infrastructure and to upgrade the network to a fiber optic infrastructure, were illegally diverted to fund the affiliated wireless infrastructure and the other lines of the media content businesses and foreign telecom investments. This Financial Shell Game has been used for multiple rate increases based on claims that the copper infrastructure was losing money, as well as used as an excuse to cut staff and move the business to wireless. In NY, this has meant leaving rural areas and low-income urban areas with no serious broadband competition and slow DSL service. Moving the billions back to build out the high-speed, fiber optic wired infrastructure — should be the next step.

YES, these financials of Verizon NY should match AT&T California — they use identical deformed accounting formulas.

On May 27th, 2021, the Verizon NY 2020 Annual Report was published — and it is important because it is based on the exact same accounting formulas that AT&T California is using — the FCC Cost Accounting rules known as the “USOA”, “Uniform System of Accounting”. And, as we will discuss, the formulas that allocate the expenses to the different lines of business have been manipulated to make one line of business, Local Service, pay the majority of expenses, — while the other lines of business, such as FiOS or DSL or the VoIP service, not to mention business data services, “BDS”, or especially wireless, are paying a fraction of the expenses that they should be.

On October 26th, 2020, the IRREGULATORS filed comments with the CPUC and the Broadband Council. We estimate that there is $1.7-$2.4 billion in potential overcharging annually of Local Service, by AT&T, the primary state telecommunications public utility.

This money should be redirected to build out the fiber optic networks, which can be used by municipalities or as open access networks — — not controlled by AT&T.

Let’s just start with a few items in the Verizon NY Annual Report, and the basis of the presentation. There are 3 major lines of business in these financials using the copper and fiber wires:

• “Nonregulated”, (Column C) which are the FiOS video, and VoIP (digital voice), or services that were once regulated.
• “Local Service”, (Column F) the revenues from the ‘regulated’ the basic copper-based phone service.
• “Access” (Column G) or sometimes called “Business Data Services”, (“BDS”) or “backhaul”, which are the wires to the cell sites or used by banks providing data services.

Click for a short summary of the financial report and a by-the-numbers explanation, as well as links to the Verizon NY 2020 Annual Report and our analysis.

Do AT&T CA’s financial reports match Verizon NY and do the manipulated accounting formulas match? Yes.

1) Both Verizon NY and AT&T California are state-based telecommunications public utilities hiding in plain sight. Through institutional amnesia, no one we spoke to knows that there are still state telecom utilities, or that the wires are put in and classified as Title II services.

2) Same Accounting: They both rely on the corrupted USOA accounting — even though they filed with the FCC to stop this practice in 2007. (In fact, Brendan Carr, now an FCC Commissioner, was one of Verizon’s attorneys in these proceedings.)

3) Same Accounting Manipulations via a ‘Freeze’ — The accounting formulas that allocate the expenses were frozen by the FCC to match the year 2000 and were never changed over the last 2 decades — nor any adjustments. In 2000, Local Service was 65% of the revenues and it paid 65% of the expenses — by 2021, Local Service was 20–24% of the total revenues but it still is paying almost 60% of the expenses.

4) The last data from the FCC on construction expenditures matched. Throughout America, the local service classification was charged, on average, over 71% of the total construction expenses in 2007, while “BDS” only paid 29%.

The last FCC data collected was for the year 2007. Using “Construction and Maintenance”, (known as “specific” and “nonspecific” “Plant”) we compare AT&T California and Verizon New York. (We also added Verizon-GTE, which was sold to Frontier); the national average we found for 2007; 71% of expenses for construction were put into Local Service, not Access Services.

This is ludicrous as it should have been the other way around, especially in 2020; there has been no serious construction of the copper networks for a decade.

We note that there are different sections of the annual report tells a more detailed story.

5) The expenses for Construction were charged to Local Service but were not spent on the networks. And here is the problem — All of AT&T California is one big sink-hole of cross-subsidies.

The California PUC found:

“Over the full 2010–2017 period, less than 1% of all AT&T capital spending on network plant additions, just under $47 million, was for outside plant rehabilitation projects.

“Extraordinarily small portions of AT&T California’s Plant Additions and Maintenance expenditures have been directed at legacy POTS (Plain Old Telephone Service) services over the 2013–2017 period.”

Yes, this says that AT&T CA spent under $50 million to maintain and repair the basic entire network in California for 8 years. The CA PUC information stops in 2017.

And this is almost identical to Verizon NY, where the expenses that were charged to Local Service were NOT used to upgrade the network. In Verizon NY, overall, local service used only $41 million for 2020, and averaged only $30 million a year on the construction.

This means that on the opening chart, the $1.1 billion in construction and maintenance is overcharged over $1 billion, is most likely being used illegally by Verizon’s wireless subsidiary,

6) The Kicker to the Allocation of Construction Expenses — An Almost Two Decade Model.

This next chart is taken directly from the Verizon NY 2003 and 2020 Annual Reports and it shows that since 2003, virtually 60+ of the construction was charged to Local Service, while the “construction in progress” in NY had 73% put into Local Service.

Just look at the summary of the ‘Networks in Service’ for the years 2003 and 2020, and the percentage of the expenses by line of business, and the ‘under construction’ for 2020.

What this shows is that for almost 2 decades, the entire state wired infrastructure was charged to Local Service; Nonregulated, including FiOS, has been getting a free ride, while BDS, with about double the revenues, is paying ½ of what Local Service paid. And in 2020, Local Service paid a whopping 73% but it did not go to do construction and maintenance.

NOTE: The differences with the opening chart is that the networks have different types of copper and fiber and they are classified in different ways.

Halting these illegal cross-subsidies to the other lines of business would insure that those funds that should have been used for fixing the Digital Divide now be used to deliver what was ignored over the last decade.

As we noted, AT&T CA stated that the wireless networks were being subsidized by the wireline networks. But these entire financial reports are a collection of shell games.

And most important, based on the CPUC Network exam report, these cross-subsidies appear to be identical.

7) Corporate Operations Expense has also been Manipulated

Using the FCC’s last financial report, this chart shows that Local Service was charged 72% of corporate expenses, on average for America, and that AT&T CA allocated 75% of the total; Verizon NY was charged 68%, but — the total amount actually varies by year.

In short, what we have uncovered is the ongoing cross-subsidy of Verizon NY and Verizon’s other lines of business, including wireless, and halting this illegal flow of money could result in billions of dollars that should/could be used to properly upgrade the entire state with fiber optics.

We assume the same applies to AT&T California.

The proposed corporate-funded wireless legislation has been pushed via these cross-subsidies as well and the corporate expenses are obviously the same monies used to influence politicians and fund lobbyists and even ALEC.

With billions of dollars per year that could restructure the future in California, we hope you take our analyses seriously and implement our findings and recommendations.