How Did Verizon NY, the State Utility, Lose $2.6 Billion in Just 2017? The FCC’s “Zombie” Rules.

Verizon New York 2017 Annual Report Revenues, Expenses and Losses, by Category.

EXECUTIVE SUMMARY

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?
  • Revenues & Expenses: Verizon NY Claimed $2.6 Billion in Losses in 2017.
  • 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”.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.

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bruce kushnick

bruce kushnick

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