FCC’s Accounting Rules Set to the Year 2000; 19 Years Ago. Then the FCC Extends this “Freeze” until 2024 — without Any Audits or Investigations.

19 years ago, before there was high-speed streaming or broadband on cell phones, the FCC, with the help of what is now AT&T, Verizon and CenturyLink, ‘froze’ the accounting rules that determine how much each line of business would pay to use the wired infrastructure, setting the rules to reflect the year 2000.

Now, most of you reading this do not know that there are still state-based telecommunications utilities, such as Verizon New York and AT&T California, or Centurylink Colorado. And most have been told that these are just the aging, legacy copper networks, sometimes called landlines.

But this is not true. In the state of New York, Verizon New York also includes the fiber optic wires for “FiOS”, the fiber to the home service, as well as the wires for Verizon Wireless, and even the wires, copper and fiber, for Business Data Services — the wired infrastructure.

In 2000, Local Service, the basic copper phone lines, brought in 65% of the revenues for Verizon New York and it paid 65% of the expenses; by 2017, Local Service is about 21% of the revenues, about $1.1 billion in revenue, but in 2017 paid 62% of the “Corporate Operations” expense, about $1.8 billion, for the lawyers, lobbyists, and executive pay. How can this be? The ‘FREEZE’. It paid 65% for 19 years, while the revenues went down, making one category, Local Service artificially lose money.

In 2017, Verizon New York had $5 billion in revenues and this other approximately, $4 billion, (not counting local-state-based service) are classified as ‘interstate services’ and they are paying a fraction of the total expenses– and this is due to this FREEZE.

So, this is not about the price of the copper wires, but about all of your communications services — including wireless and broadband and internet. This is also about the price of the cable triple play as there is no competition to lower rates. This is also about those who has been not been upgraded in the state — who got screwed. Billions of dollars per state are at stake.

This is NOT just about New York, either, as every state uses these FCC based, federal rules.

This massive financial shell game, then, has been caused due to no audits, no investigations and having America’s primary cost accounting rules manipulated by the FCC for 19 years. In December 2018, the FCC decided to extend the freeze 6 more years, until 2024 as the FCC claimed that it could not come up with a way to reform the rules. Thus, in 2019, the expenses are all based on the year 2000, which now means that the basic wired networks are paying the majority of all expenses.

The IRREGULATORS are planning to appeal the most recent decision for multiple reasons and we’ve been working on this for years.

More Detail

1) We believe that this ‘freeze’ was done by design to make the entire US wired infrastructure appear unprofitable on purpose.

Around this time, post 2000, Verizon, Centurylink and AT&T would have taken over most of the wired infrastructure in America, utility-by-utility, and by freezing one federal formula at the FCC, these 3, mostly non-competing companies could elegantly (and deviously) control the entire US with essentially a flick of a switch.

These are the original “Bell” companies that married their own siblings (an act against g-d) or ate the other incumbent local phone companies, (state-based utilities) and even devoured many of the largest long distance companies and competitors.

We believe that they knew, (with the FCC), that that this freeze would make the state utilities pay the majority of all expenses and appear unprofitable while wireless, etc., became extremely profitable.

This story exposes one of the largest financial accounting scandals in American history and impacts all wireline and wireless phone, broadband, Internet and even cable TV/video services. However, the core of this deception is so bizarre that no one would believe it if it was detailed in some thriller about financial chicanery.

  • The prices of all services you are paying are inflated. The prices of all wireless services have extreme profit margins and this shell game has made America’s wireless services some of the most expensive in the world, as the profits are not used to lower service costs.
  • This freeze diverted the utility construction budgets to be used by the wireless companies as well as not pay market prices for using the networks.
  • This manipulation allowed for the companies to charge local phone customers to build out their wireless networks via rate increases.
  • 5G Wireless is a basic bait-and-switch. Does anyone believe that a wireless network that requires a fiber optic wire every block or 2 is being done to help America, when this wire, in region, is being paid by the utility to save on expenses and get rid of the unions?
  • It made the building and construction in rural areas look unprofitable, claiming they needed additional government funds while creating the Digital Divide.
  • Without serious competition, there are no serious choices; this left the cable company to create made up fees and allowed for continuous rate increases.
  • It saved the companies billion per year, creating artificial losses that were used to generate major tax benefits.

2) The Current FCC Regime, Under Pai and Brendan Carr, Was Created to Remove the Rest of the Regulations.

Where is John Oliver when we need him now? Right from the start of his chairmanship, Ajit Pai claimed that he would use a weed-whacker to remove the accounting rules. John Oliver pointed this out in his Net Neutrality II show.

And in May, 2017, in an interview with Re/Code, Pai gave more details:

“Re/Code: “In the early days, you had said that you wanted to take a weed-whacker to remove the rules that are holding back investment. What did you mean by that?

Pai: “What I had in mind were some of the regulations that we’ve had on the books for a while that stand in the way of investment in networks. Our Part 32 accounting rules — exceedingly boring, I recognize — but just the fact that companies have to maintain two different sets of books, literally one for their business and one for the FCC’s purposes, and the FCC hadn’t relied on any of that paperwork in years. I asked our staff, ‘When was the last time you looked at these reports?’ They said, ‘Pretty much never.’ We wanted to relieve some of those. Those are the kinds of regulations I had in mind because I want every dollar that a company has to be spent on building out networks, not on paperwork or regulatory requirements that aren’t relevant in 2017, whatever relevance they might’ve had back in 1934 or 1996 or 2015 or whatever.” (Emphasis added.)

In fact, the FCC was wasting no time in whacking those weeds, as there have been at least four separate proceedings, to erase any remaining FCC rules or obligations on the companies, AT&T, Verizon and CenturyLink, who control the state utilities as well as the essential infrastructure for wireless.

Not only is it clear that the staff never examined the accounting, but there is no recognition that the rules, as is, are still in use and that they help the companies invest.

Captured FCC? In 2007, Brendan Carr was one of the attorneys for Verizon who fought to get rid of any obligations to follow these rules. Carr never made this clear in his testimony to become commissioner. And, in 2017, Carr first became the FCC General Counsel and is now Commissioner and on the FCC’s joint board for accounting. I.e.; the rules he helped to erase for Verizon as Verizon’s lawyer, is now being completed as part of a board in charge of the rules while he is a commissioner.

3) The Proof of Massive Financial Corruption: The Verizon New York 2017 Annual Report Shows Billions of Dollars at Stake

In a previous article we detailed just how corrupt the accounting has become and how it totally distorted Verizon’s financials.

§ IRREGULATOR Treasure Map: Billions for Broadband in Your State and Refunds on Your Communications Bills.

To summarize, this is an excerpt from the Verizon NY 2017 Annual Report: 1) Verizon New York brought in $5 billion in revenues. 2) Local Service, in New York, brought in $1.1 billion revenues but was charged 3) $1.8 billion in Corporate Operations expenses (and 4, Verizon NY overall, paid $3 billion). 5) Local Service was also charged $1.2 billion in construction and maintenance expenses. These 2 items helped to create 6) losses of $2.9 billion and an 7) overall tax benefit of $948 million for Verizon in just New York.

The $1.8 billion was created due directly to the freeze and it is putting 60+% of Corporate Operations into Local Service from this bizarre distorted formula set to reflect the year 2000. And, according to other documents, this money is most likely cross-subsidizing the wireless business — illegally.

4) The FCC Decision’s to ‘Extend the Freeze’.

The FCC will claim that:

  • The rules are not in use and have already been erased — they lied. The cost accounting rules were used in the settlement of Verizon NY and NY State in July 2018.
  • They have turned into Zombie Rules. The impacts can be seen in the distortions of the financials in the Verizon NY 2017 Annual Report. The numbers presented in Annual Report are based on the accounting rules. Unless the FCC can show exactly how Verizon NY would lose these billions of dollars via some other accounting, it is clear that Verizon did not redo the rules once they were ‘erased’ and are zombie rules; like the Walking Dead, who are still harming us.
  • The rules have been ‘forborne’, erased, etc.? Not. The FCC contends that their recent decision does not include “local exchange carriers subject to price cap regulation”, and yet this is the opening of Appendix 1, which is clearly discussing ‘price cap’ companies.

5) The FCC’s Decisions All have a Structural Flaw: It Failed to Include Any State-Based, ‘Intrastate’, Anything.

Starting in 2017, the FCC put out a bombardment of over 25 inter-related proceedings, each designed to slice-and-dice the American public interest; and these were all then sliced up to have 5–15 separate actions. Thus, the shut-off-the-copper proceeding was designed so that it allowed for a substitution of the copper wires with wireless, even if it is not the same quality, but it did this in multiple steps so that each would be an addition to the previous harms caused.

But, in going through all of them, there is a flaw — the FCC never acknowledged that there are state utilities, that they are ‘intra-state’ based, that there were ‘broadband’ commitments in each state and that the local phone customer rates were used as ‘investments’ to fund these commitments, among other issues.

In the case of ‘investment’

§ The FCC left out all references to state-based investments or that the wireless networks’ investment are actually based on wireline local phone customers and rate increases.

§ The FCC will also make claims that it only examines ‘interstate’ services, revenues, etc. This is pure garbage as the Verizon New York annual reports show that the ‘broadband’ investment is mostly state-based, yet the FCC never acknowledges this in any proceeding, such as ‘investment’ in Net Neutrality.

Using the Verizon New York Annual Report data, we can challenge every FCC proceeding as they never examined a litany of items, from the manipulation of the accounting of access lines, to the percentages of expenses paid by the non-utility companies to use the networks.

6) This same phrase has appeared in some form since 2000 — until comprehensive reform could be achieved”.

The FCC had 19 years and seven different proceedings to close up any matter of fixing their accounting rules, or more importantly, examining the impacts of the rules since 2000. This clearly shows an intention by the FCC to NOT fix or examine the rule’s direct harms.

Time Line:

  • 2000: “On July 21, 2000, the Joint Board issued its 2000 Separations Recommended Decision, recommending that, until comprehensive reform could be achieved, the Commission should freeze the expenses.
  • 2001: “The Commission ordered that the freeze would be in effect for a five-year period beginning July 1, 2001, or until the Commission completed comprehensive separations reform, whichever came first.
  • 2006: “On May 16, 2006, in the “2006 Separations Freeze Extension and Further Notice”, the Commission extended the freeze for three years or until comprehensive reform could be completed, whichever came first. The Commission concluded that extending the freeze would provide stability to LECs pending further Commission action to reform the… rules, and that more time was needed to study comprehensive reform. The freeze was subsequently extended by one year in 2009, 2010, and 2011 and by two years in 2012.”
  • 2010: “March 30, 2010, the State Members of the Joint Board released a proposal for interim and comprehensive separations reform… On September 24, 2010, the Joint Board held a meeting with consumer groups, industry representatives, and state regulators to discuss interim and comprehensive reform…
  • 2011: “In addition, in 2011, the Commission comprehensively reformed the universal service and intercarrier compensation systems and proposed additional reforms. The Joint Board is considering the impact of the reforms proposed by the USF/ICC Transformation Order and any subsequent changes on its analysis of the various approaches to separations reform.”
  • 2014–2017: “On March 27, 2014, the Commission sought comment on extending the freeze once more. We extend through June 30, 2017…. We conclude that extending the freeze will provide stability to carriers that must comply with the Commission’s jurisdictional separations rules while the Joint Board continues its analysis of the jurisdictional separations process.

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