How Did Verizon NY, the State Utility, Lose $2.6 Billion in Just 2017? The FCC’s “Zombie” Rules.
Welcome to one of the largest accounting scandals in American history… happening now in every state and thanks to the FCC’s neglect for 18 years.
Read the Full Report (filed with the NY Commission, June 6th, 2018)
- How did Verizon NY, the state utility, lose $2.6 billion dollars in 2017?
- Why was “Local Service” charged $1.8 billion for Corporate Operations expense, which are payments for executive pay, lawyers, lobbyists and the corporate jets?
- What are the FCC-State “Zombie” Rules?
- And how do the findings about Verizon New York impact all wireline and wireless customers in all states, as well as all proceedings at the FCC?
On May 31st, 2018, the Verizon NY 2017 Annual Report was released. While Verizon hides the fact that there still are state utilities, it also doesn’t mention that it includes both the copper-based phone wires as well as the fiber optic wires for Verizon’s FiOS and Verizon Wireless services, and all of the other Verizon subsidiaries in the State.
New Networks Institute (NNI) and the IRREGULATORS created this new report as a summary and analysis which is part of our series on Verizon NY’s financial and business activities that started in 2012.
Why this Matters: On March 2nd, 2018 a settlement was proposed between Verizon NY, the state-telecommunications utility, and the NY Public Service Commission (NYPSC) and parties to end an investigation that started in 2016, but was, in part, based on our research. This investigation had two parts:
§ Part 1: Verizon has left the copper-based utility networks to deteriorate and there has been a lack of upgrades to broadband or maintenance of the existing networks.
§ Part II: There has been massive financial shell game between the state utility, Verizon NY and the other Verizon subsidiaries, especially Verizon Wireless.
While there are some basic fixes to the neglected infrastructure, Part II has been eliminated from this proposed settlement.
We filed to halt this settlement and now request new investigations based on the findings and our analysis of the Verizon NY 2017 Annual Report. These findings impact All communications customers in NY, but unfortunately these financial machinations have occurred in every state and also are directly related to the FCC’s current proceedings.
A Massive Financial Shell Game, with the Help of the FCC.
Verizon New York, and all of the state utilities of Verizon, have manipulated the accounting so that they can make all of the existing copper wires look unprofitable, and at the same time divert billions to fund Verizon’s other lines of business. These cross-subsidies are based on the FCC’s Cost Accounting Rules which have become distorted and now dump the majority of all expenses into the Local Service; this is because the rules were set to reflect how expenses were allocated in the year 2000–18 years ago. However, they have turned into Zombie rules — where these accounting rules were essentially erased a decade ago but are still in use, leaving a trail of customer harms that have occurred.
This has happened on a massive scale and in every state, as far as we can tell. Every FCC proceeding decision or those that are progress are impacted by the findings — And the customers have been harmed with overcharging, harms to competition, harms to broadband deployment, the creation of the Digital Divide, — a very long list of impacts in multiple ways.
We will focus on the flows of money, using the Verizon NY 2017 Annual Report and cover the implications and specific harms in an upcoming report.
Verizon’s Revenues and Expenses Are Divided into Three Primary Areas.
· “Local Service” — are mostly the regular copper-based phone lines, commonly known as “POTS”, Plain Old Telephone Service, and are ‘intrastate’ services.
· “Access” — are mainly “Business Data Services” (BDS) also called “Special Access” services, and are business lines used for ATM machines or the wires to cell sites, including services to competitors.
· “Nonregulated” — are items that were previously or never regulated and it can include DSL or parts of FiOS, and they, too, are part of and use the state utility wires.
Follow the Money
- Revenues & Expenses: Verizon NY Claimed $2.6 Billion in Losses in 2017.
Using the first chart, at the end of 2017, Verizon NY had revenues of almost $5 billion but had expenses of $7.6 billion, creating “Net Operating Revenue” losses of $2.6 billion. Local Service represented all of the losses with $2.9 billion. This also gave Verizon multiple tax benefits, not to mention multiple political benefits in public policies, deregulation, etc.
And, as we pointed out elsewhere, Verizon NY didn’t pay most taxes: Verizon NY showed losses of $15.7 billion from 2010–2016, with a tax benefit of $7.2 billion dollars.
This exhibit supplies the percentages of the revenues and expenses paid by these three categories, which will be detailed in this report. For example, Local Service brought in 21.6% of the revenues but is paying 53% of all expenses, and 61% of “Corporate Operations” expenses, explained below (see the report for full details). I.e.; Local Service has become the cash machine for these other lines of business and is losing billions by having expenses charged to Local Service that should never have been allowed.
Manipulation of the Financial Accounting Created Massive Cross-Subsidies
Local Service has been funding/cross-subsidizing all of these other lines of business.
- Local Service brought in only $1.1 billion, 21.62% of the Verizon NY revenues, but had $4 billion in expenses.
- Local Service paid $1.8 billion in “Corporate Operations” expenses, 61% of the total, which are the charges for lawyers, executive pay, etc.
- Local Service paid 53% of all expenses.
- Local Service is paying the 68% of all “Customer Operations” and 54% of “Marketing and Advertising”.
In other words, Verizon New York’s Local Service, as compared to revenues, paid 164% in Corporate Operations, 108% in construction and 373% in total expenses compared to the Local Service revenues.
- Access (including “Special Access”) had revenues of $2.4 billion, 47% of Verizon NY total revenues but paid a fraction of the expenses.
- Access paid only 29% of Corporation Operations and 27% of all expenses. I.e.; Access was more than double the revenues but paid ½ of what Local Service paid.
- Note: BDS was almost $2 billion of the revenues, 84% of Access.
- “Nonregulated” revenues were $1.5 billion, $½ billion more than Local Service but paid a fraction of almost all costs as compared to Local Service.
- While Nonregulated was 30% of revenues as compared to 21.6% for Local Service, (and is about 30% more revenue), Local Service paid 238% more in Marketing expenses, 750% more Customer Operations, 510% more Corporate Operations expense and 165% in overall expenses.
These Cross Subsidies are Created by the FCC Cost Accounting Rules
- The rules that place the expenses into each line of business are based on the year 2000 and the FCC hasn’t examined the rules for 17 years, when they were ‘frozen’ in 2001.
Zombie Rules Are Now in Place.
- Like the walking dead, the idea that there are rules that were supposedly ‘erased’ a decade ago but are still in use and no regulator has bothered to examine these massive financial cross-subsidies is an obvious red flag.
- The rules were ‘forborne’ starting around 2007, meaning that there are no longer enforced. Yet, it appears that New York and other states, as well as the incumbent utility companies, appear to still use them — creating these subsidies.
Corporate Operations Expense: and the FCC’s Freeze & Zombie Rules, 2003- 2017
- How were these numbers generated? They are based on the FCC’s corrupted cost accounting rules that are still in use.
- In a previous report we had this example. In 2003, Local Service was 65% of revenues and paid 65% of expenses. By 2014, Local Service was only 27.6% of revenues but still paid a whopping 60.4% of revenues. And in 2017, Local Service is only 21.6% of revenues, but the FCC freeze has Local Service being charged 60.6% of Corporate Operations expense.
- This pattern of declining revenues for Local Service while the expenses are ‘frozen’ to the year 2000 is identical year after year. And there is one explanation — the FCC and states failed to examine and fix these overcharges.
Verizon Wireless Free Ride (“Cellco Partners”) and Verizon NY
- In 2016, we estimated that Verizon’s wireless networks in New York State generated $6.5-$7.5 billion in revenue.
- The Verizon NY 2017 Report shows that “Cellco Partners” (Verizon Wireless is a D/B/A), only paid $106 million to Verizon NY for use of the networks. Moreover, it appears that there were no payments that should have been paid for the wireless network construction — which now includes the fiber optic wires that were supposed to be used for FiOS, but can now be wires to the wireless cell sites.
- In previous reports we highlighted how, from 2010–2012, Verizon New York appears to have paid $2.8 billion for the construction of cell sites for Verizon Wireless, using the state utility as a cash machine. At the same time, not only were customers charged for these networks, but the claim was that the local phone networks were unprofitable to continue to upgrade or maintain and the construction budgets were diverted to wireless instead of upgrading cities.
Getting to Cost-Causers; Local Service was Overcharged $3.7 Billion in 2017 — Local Service is Profitable.
- The expenses that were paid by Local Service are mostly artificial and created by the FCC’s mal-formed cost accounting rules, which are still in use, regardless of what the FCC claims.
According to the FCC, it only costs $45–50 per home passed per year to maintain and keep the copper networks. Verizon New York showed 1.9 million basic copper access lines, so if the FCC is correct, then the expenses should only be $95 million a year. The implications of this FCC statement are staggering.
If Local Service was based on actual expenses:
- We estimate that Local Service was overcharged $3.7 Billion in 2017.
- We estimate that Local Service has been and is profitable if the actual expenses were calculated.
Local Service, the copper based networks, only spent approximately $75-$125 million on construction and maintenance in 2017 and the rest went to pay for other lines of business. There was no Marketing or advertising for “POTS” service, and Corporate Operations expense should never be charged to a business when the other lines of business, from FiOS to special access, are creating all these costs.
Moreover, wireless service, online service and other non-utility services are clearly being subsidized by Local Service as told by these financials and other documentation in the 2017 financial report.
Conclusion: Halting the cross-subsidies and making the affiliate companies pay market prices would generate enough revenue to build out the State of New York with fiber optics and could supply lower prices, open infrastructure for competitors and choice.
Manipulating the Access Line Accounting
- Verizon New York claims line losses, ending 2017 with 1.9 million access lines. However, as we pointed out, this represents only the copper-based, voice phone service, and leaves out most of the other access lines, such as FiOS, VOIP lines, Special Access lines, etc.
- Simply Math: Verizon Shows No Access Lines for $4 Billion Dollars. Based purely on total revenues of Verizon NY, if Local Service, which had 1.9 million lines and revenues of $1 billion is revenues at the end of 2017, then all of Verizon NY, which showed approximately $5 billion in revenues, could have approximately 7–8 million lines that are not being counted, giving Verizon NY a total of 9–10 million lines.
CONCLUSION: Verizon has used these claimed access line losses tied to these claimed financial losses to create harmful public policies. This 2017 financial report, released May 31, 2018, presents a picture of a state utility out of control and that needs investigation and immediate fixing.