FCC: Kill Net Neutrality, Block Cities and States from Telecom, Privatize Publicly Funded Utility Networks, and Give Billions to the Telcos with 5G Gifts

On Oct. 27th, 2020, the FCC will hold a meeting to vote on a series of agenda items with the intent to fulfill the goals listed in the headline above. We present 7 charts and excerpts to refute all of these actions with evidence, demonstrating that there are structural flaws in every proceeding. (We will come back the significance of Chart 1 in a moment.)

Chart 1: The FCC is Wrong: Verizon’s Fiber Optic FiOS Networks Are “Title II”.

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To say this another way, the FCC’s October Meeting has goals: to finally kill off Net Neutrality, to give more government funding for wireless at very slow speeds and bandwidth caps, even though the telecoms never built out their promised wireline fiber to the premises (FTTP) services, to halt the ability of state and local control by governments and regulators to determine what happens in the public rights of way in their cities, towns and counties, and to continue to increase privatizing the publicly funded wireline networks and block competitors from using these networks.

At the same time, the FCC and the telcos have been super-hyping 5G wireless. Yet, the FCC never examined how the wireless services are being cross-subsidized, using the construction budgets of the wireline utility networks, and ultimately, and ironically, overcharging local phone wired customers and leaving America with a widening Digital Divide.

The FCC has over 4 items of interest. The most infamous is the Kill Net Neutrality order that claims that “Title II” is ‘burdensome’ and deters investment that is “supported by substantial evidence”.

“In the Restoring Internet Freedom Order, the Commission ‘eliminated burdensome regulation that stifles innovation and deters investment’ and predicted that ‘this light-touch information service framework will promote investment and innovation.’ The Mozilla court affirmed this finding, concluding that our position as to the economic benefits of reclassification away from public-utility style regulations was ‘supported by substantial evidence’.”

It is easy to make statements like this when someone doesn’t examine the actual evidence or they are trying to bias the outcomes, in this case, in favor of the telcos. And this FCC regulatory agency is captured by AT&T, Verizon et al.; Chairman Pai worked as a Verizon attorney and Commissioner Carr worked as a lawyer for Verizon, and the CTIA, the wireless association. And considering the collection of actions underway, they are no longer working for the public.

Benton Institute did a good write up of the current situation and what is Title I and 2.

Structural Flaw in Every Proceeding

In fact, there is a large wrinkle. All of the FCC proceedings, including all of the ones being voted on, have structural flaws and this is based on a failure to examine and acknowledge key facts. The opening, Chart 1, shows that Verizon’s fiber to the premises, FTTP, networks that are used for FiOS, the cable TV service, are classified as Title II, and are part of the ‘existing’ state, telecommunications public utility. This was done so that Verizon could charge local phone customers for the network upgrades.

The FCC has never acknowledged that there are state-based public telecommunications utilities or that there were commitments for upgrades to fiber optics, which didn’t happen. Moreover, state laws were changed to give the companies more money for construction, which did happen, known as “price caps”. The FCC also fails to take into account the harms caused by the FCC’s cost accounting formulas, (also known as “ARMIS” or “USOA”) which we will highlight. Worse, as we will show, Title II is used as the investment mechanism to charge local phone customers and cross-subsidize the other lines of business; it has made customers ‘defacto investors’, yet another point the FCC never examined, acknowledged or wants to deal with.

We present 7 charts and excerpts to show that the FCC has been negligent and failed to examine basic fundamental facts that impact every FCC decision.

  • Chart 1: FCC is Wrong: Verizon’s Fiber Optic FiOS Networks Are “Title II”.
  • Chart 2: Verizon’s Entire FiOS Deployment Is Based on Title II Fiber Optic Networks.
  • Chart 3: The FTTP Wires Are Title II and part of the State Telecommunications Utility.
  • Chart 4: Customers Paid Rate Increases for these Fiber Optic Deployments, Multiple Times.
  • Chart 5: Local Phone Customers Paid the Majority of the Construction Expenses.
  • Chart 6: The Verizon New York 2019 Annual Report Shows Massive Cross-Subsidies Impacting Every FCC Proceeding.
  • Chart 7: Wireline Networks Subsidized the Wireless Networks — as Title II.

The FCC’s Proceedings

All of these proceedings being voted on by the FCC at its October 27th Meeting have the same flaws, but they also have the FCC’s manipulation of common words like ‘freedom’ and ‘modernizing’ or ‘streamlining’, which are now a shameful collection of antonyms, making the words now mean something totally different — (We added the subplot-definitions below.)

These proceedings each have reports and fact sheets to read

  • The Restoring Internet Freedom Order Remand — (is really Kill Net Neutrality)
  • Modernizing Unbundling and Resale Requirements — (is to privatize the publicly funded wires and block competitors from using them)
  • Establishing a 5G Fund for Rural America — (Gives government gifts based on questionable maps so the telcos can buildout inferior wireless networks instead of examining that many areas in America should have already been wired. Worse, wireless requires a fiber optic wire to work. The old adage is “There is no wireless without wireline infrastructure”.)
  • Streamlining State and Local Approval of Certain Wireless Structure Modifications — (means constraining rights of way management rights of cities, towns, counties and states to question wireless build out of their infrastructure and fixtures; as well as the time these government entities have to examine the issue based on a shortened ‘shotclock’.)

Lets Go Through the Data:

Chart 2: Verizon’s Entire FiOS Deployment Is Based on Title II Fiber Optic Networks

The opening Chart featured an excerpt from the current Verizon Pennsylvania FiOS franchise agreement for Pittsburgh PA, clearing stating that the FTTP, fiber to the premises, are classified as Title II, and are part of the existing public telecommunications utilities.

To reinforce this fact that Verizon used Title II in the other states, these next excerpts are from the Verizon D.C. franchise agreement of 2007. At the top, Verizon claimed that in 2007 it had 12 states with Fiber-to-the-Premises, FTTP, covering 835 jurisdictions. Then, notice that Verizon actually calls the construction “Title II FTTP”.

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Chart 3: The FTTP Wires Are Title II and Thus Part of the State Telecom Public Utility

To reinforce this issue from the state commission side, in a 2005 proceeding at the NY Public Service Commission, (NYPSC) Verizon claimed the networks were Title II, telecommunications, and that it only needed to be classified as a cable service, ‘Title VI’, once the company was offering cable TV service. The conclusion of NYPSC was that Verizon’s FTTP networks are telecommunications services (and, as stated in these other examples, classified as Title II.)

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This means that the FTTP networks are built first, and then cable service is provided, which rides over these networks, and not the other way around.

Chart 4: Customers Paid Rate Increases for these Fiber Optic Deployments, Multiple Times.

In June 2009, the NY Public Service Commission (NYPSC) granted Verizon NY the third rate increase for residential “POTS”, “Plain Old Telephone Service”, since 2005. The NYPSC press release explained that the rate increase was due to “massive deployment of fiber optics” — FiOS.

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This 2009 increase was the 3rd since 2005, adding 84% to the basic rates of all phone customers, including low income families, rural areas, small businesses — everyone. This was on top of the increases on all other ancillary services, which started in 1995, from inside wire maintenance to non-listed numbers.

Chart 5: Local Phone Customers Paid the Majority of the Construction Expenses

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This was taken directly from the Verizon NY 2019 Annual Report, published June 8th, 2020 and it shows Verizon NY’s basic infrastructure, (which covers about 90% of NY State, and is the primary public telecommunication utility) — all of the poles, the wires on the poles and in the ground, the wires to buildings, to cell sites, even the fiber optic wires for FIOS, are all in this one picture. (There is no published information about the number of lines or revenues Verizon has in New York from the various subsidiaries.)

There are different services that use these wires. There are the copper wires that are used for phone service (“Local Service”, Column F). “Nonregulated” (Column C) includes revenues for FiOS video and services that were previously regulated. “Backhaul”, (Column G) are the wires, the gut of the networks, and these are ‘data lines’ used for ATM machines, or backhaul wires to the cell sites, or wires used by competitors.

Now comes the part that is unbelievable. We’ve all been told that no one is using the copper-based local phone services anymore — and yet, here, in this official Verizon financial report, it shows that of construction work that is being carried out in 2019 (‘work in progress’), Local Service is paying 73.5% of the total — a whopping $720 million dollars. HOW CAN THAT BE TRUE? *(Historically, Local Service spends $75-$125 million for construction and maintenance of the copper wires.)

There’s more to this magic trick. Line 1 shows a total of $31 billion “Networks in Service”, and yet the Nonregulated category that includes FiOS video only paid 3.3% of the entire network expenses over the last decades — -about a measly billion dollars. FiOS started in 2005; where’s all the money that Verizon said they spent? But the flipside is that Local Service has been the primary investor in the networks as it shows $19 billion in Network in Service — i.e., 62% of the networks were funded and maintained by only one line of business — Local Service — while the other lines of business, which use the networks, are paying back a fraction to build the infrastructure or the other expenses.

Chart 6: The Verizon New York 2019 Annual Report Shows Massive Cross-Subsidies, Impacting Every FCC Proceeding

Who Paid for the Networks? Local Phone Customers were Overcharged.

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

Verizon 2019 New York, Revenues and Expenses, by Category

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READ THE FULL REPORT

Above is an excerpt from the Verizon NY 2019 Annual Report which was published on June 8th, 2020, and it shows the revenues and expenses for the year 2019. Just like any business, the expenses are divided up into different categories, such as Marketing, that are allocated to the different lines of business.

Too complicated to explain here, and using a different viewpoint from the previous chart, what we find is that Local Service, which is one of three major lines of business, is paying the majority of all expenses, and that the nonregulated and backhaul are paying a fraction, and this is not just for construction expenditures, but for corporate operations expenses — all expenses.

In this chart, it shows that Local Service is paying the largest amount of the construction and maintenance, 43% in total, which is over $1.2 billion (Line 3F) dollars. Local Service only had $864 million in revenues (Line 2F); this created a loss. But, then, what is this construction budget paying for?

Unfortunately, every line item has issues. Why is Local Service being charged $507 million (Line 5F) in Corporate Operations expenses, over 60% of the total, when the Nonregulated column, with FiOS, only shows $85 million? (Line 5C)

The FCC Accounting Rules Are Deformed: The FCC Should Put a Warning Label On Using Manipulated Accounting Formulas.

The reason why Local Service paid 60+% in Corporate Operations expenses is due to the use of the FCC cost accounting formulas, which are supposed to allocate the expenses to not harm the basic service customers — and it backfired. The FCC has not examined their own rules which are literally set to the year 2000 — for 20 years. Local Service was 65% of revenues in the year 2000 and it paid 65% of expenses. In 2019, Local Service is 21% of revenues but still paying 60+% of expenses as the formula, — the percentage of the expense that Local Service will pay, has been ‘frozen’ for 2 decades.

Backhaul Price Inflation: America Is being Hyper-Overcharged.

There is one important point: The profit margin for Backhaul, as shown in the Verizon NY 2019 Annual Report, is 55%. (EBITDA). These wires are the data lines that go to the cell sites and are used by competitors. Because AT&T and Verizon control this critical infrastructure, they can keep the price of services that use these copper and fiber optic wires inflated. More importantly, a look at the chart shows that Backhaul is paying a fraction of the construction expenses as compared to Local Service, but it has twice the revenue.

These cross-subsidies impact every aspect of America’s communications, America’s wireless prices are 10–20 times more expensive than the European Union, (where ‘unlimited’ actually means no caps or slowdowns), and yet the FCC’s plan is to privatize these publicly funded networks and limit competitors’ ability to use the networks, securing inflated rates for America.

Chart 7: The Wireline Networks Subsidize the Wireless Networks — as Title II

In 2012, Fran Shammo, former Verizon CFO, told investors that the wireless company’s construction expenses have been charged to the wireline business.

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Most of the items on this agenda have been in and out of court over the previous decade+; we are expecting the same thing to happen.

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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