IRREGULATORS v FCC: At Least 29 Ways We Were Harmed.

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Why is this case critical? You, your family, your friends, your business, your city, your state and America have been harmed and it is getting worse. The courts are one of the only options left.

On May 20th, 2019, the IRREGULATORS filed a series of separate affidavits, as well as a group summary, asking the US Court of Appeals, DC Circuit, to grant us ‘standing’, the right to take the FCC to court.

On June 3rd, 2019, the FCC will most likely file for the court to deny us the right to take this case. The FCC may be joined by the phone companies, AT&T, Verizon and CenturyLink, and the groups, individuals and associations, etc. that are funded by these companies.

The FCC ‘froze’ the federal accounting rules to reflect the year 2000–19 years ago, and never changed them. This has had the effect of putting the majority of all expenses into America’s wired state public telecommunications utilities, making them all appear ‘unprofitable’. At the same time, this gave AT&T, Verizon and Centurylink, the 3 mostly non-competing holding companies (the former Bell companies) that control the majority of all US wired infrastructure, the ability to use the state-based utilities as cash machines to fund all of their other subsidiaries, especially wireless. And, in December, 2018, the FCC extended this ‘freeze’ for an additional 6 years, with no audits or investigations. In fact, the FCC has not even acknowledged that there are state utilities or that their accounting rules have become deformed and harmful.

Take Verizon New Jersey, which is the state-based public telecommunications utility and it covers 95% of the Garden State. The copper wires of the original networks were supposed to be replaced with fiber optic wires multiple times; state laws were changed multiple times for this to happen, and customers paid billions for this to happen. Over the last decade, the construction budgets were diverted to pay for wireless or were used for Business Data Services, which are also called ‘backhaul’, (and these are copper and fiber wires for business ATM machines or competitors to use for wireless). The FCC’s accounting rules shifted most of the expenses to just the copper-wired “intrastate” customers to pay for (cross-subsidize) all of these other “Interstate” services. Over half the state was not upgraded, and this financial shell game made the state utility appear unprofitable as the revenues for wireless and for FiOS and the other businesses DID NOT pay market prices to use the networks. This also caused $½ billion annually in ‘losses’ and has been used as an excuse to raise rates continuously, get rid of regulations, and to close down the ‘copper network’ and any further obligations to offer wired service. And by 2015, the State claimed Verizon could substitute wireless at DSL (copper) speeds instead of upgrading to fiber optics capable of 1Gbps speeds. Moreover, this happened in most state utilities (with caveats).

Unfortunately, this has all been part of a massive multi-year, multi-state plan to finish the dismantling of the state utilities and hand over the networks to the wireless companies as private property — but get the wired customers to still pay extra for the construction and give the wireless company perks.

Working with Consumer Federation of America and others, the IRREGULATORS estimate that this financial shell game is costing America’s customers $50-$60 billion annually, not to mention the tens of billions per state in harms to economic growth.

NOTE: Most of our work has been based on Verizon New York as a model because it is required to publish a full annual report by New York State, which is the only state we know of that has this requirement. The FCC stopped publishing any financial reports in 2007.

Here is a List of Some of the Direct Harms & Issues. There are Plenty More.

Basic Utility Phone Customers Were Overcharged — Let’s be Specific.

1) Beginning in at least 2005, I and every other Verizon NY local user was overcharged for intrastate (in state services) and basic local service.

2) Starting in 2005, Verizon NY had multiple rate increases based on “massive deployment of fiber optics” and claimed “losses” from basic local service.

3) Verizon New York’s basic local service went up 84% from 2005–2009. The rate increases were artificial and should never have been assigned to Local Service because the funds were used to support the network and services dedicated to other purposes and endeavors. But these were only the increases for basic service. All other services, including ‘calling features’ or ‘inside wire maintenance’ had increases of 50–525%.

4) Using actual phone bills, we found that customers with service from 2005–2017 paid over $2,760.00 extra per line due directly to the rate increases established in 2005.

Manipulation of the Accounting Was Caused by the FCC’s Accounting Rules.

5) In 2012, I asked: Why did my current basic service local phone bill go up by more than $62.00 a month through repeated rate increases? I had basic local phone service, with a package of ‘add-on’ calling features, which included Call Waiting, Call Forwarding and Touchtone Service. I also had a ‘legacy’ inside wire charge. As an industry expert I knew that the calling package only had an internal cost of a few pennies, since 2000, and the inside wire had little or no operating costs as it had been put in the 1920s, never changed, and was fully depreciated.

6) While it took through 2018 to unravel the answer to these and other questions through the Verizon NY Annual Reports, we now can directly track these harms. They were all attributable to the FCC cost accounting and separations rules that are still used in Verizon New York.

7) I was harmed because the price of local service should have been in steep decline and I could have kept the land line. The overcharging above is only for the extra charged added to the customer bill for basic service when the state issued price increases based on “losses” or “massive deployment of fiber optics”.

8) This is a national problem because these harms flow directly from the FCC accounting and separations rules. From Verizon New Jersey to AT&T California, since 2004, Local rates have gone up by 120+%, largely based on claims of “losses” (calculated using separated costs).

Some Important Facts:

9) The FCC claimed in their Marketplace report that in 2017 there were 55 million copper-based local phone lines in America and an additional 64 million ‘VoIP” lines, which can also be using the copper wires, such as AT&T’s U-Verse, or the fiber wires for ‘Digital Voice” from Verizon or coax cable from the cable companies — for a total of 119 million landlines in service. The FCC writes:

“Of these combined 119 million fixed retail voice telephone service subscriptions, 53% were residential connections, and 47% were business connections.”

10) The FCC and USTelecom, the telco association, have continually presented claims that only 11% still use wire-based phonelines but this is to manipulate the accounting of the lines for harmful public policies. USTelecom’s current petition:

“In residential markets, only 11 percent of U.S. households are projected to have an ILEC switched voice line by the end of this year.”

  • (Only a lawyer would know how many deceptive slight of-hand caveats are in this sentence.)

11) The Verizon New York 2017 Annual Report shows that there were 1.9 million copper basic phone lines in 2017, but in further investigation, this was only tied to Local Service revenues, which was $1.1 billion. There is an additional $4 billion in services that show zero lines. — i.e.; 80% of the lines are missing.

12) According to the FCC, quoting ‘experts’, it only cost $45-$50 a year to maintain a copper wire. One has to wonder how a state utility could charge over $60.00 a month for a basic service line as this would mean that it has a profit margin of $55.00 a month.

13) Broadband Mapping is only part of the problem. Microsoft and others have complained about the mapping of broadband in America. We submitted a complete report to the FCC on the manipulation of access lines that are part of the manipulation of the financial accounting.

Overcharged on Taxes; Verizon Saved Billions in Just New York.

14) I was harmed because the state tax assessments I had to pay would have been less and state and city services lost tax revenues for economic growth. Verizon New York Local Service reported $2.9 billion in losses, but due to profits in other areas, Verizon New York was able to claim $2.5 billion in losses for tax purposes. Verizon New York reported losses of over $2 billion (with a few caveats) each of the last 10 years. Their artificial losses reduced their tax contributions, and this required all other state citizens to make up the difference.

15) I was harmed because the other ‘taxes, fees, and surcharges’ were all increased due to these losses and rate increases. One has only to examine an actual telecommunications bill to see a host of made up fees, or taxes and surcharges that are tied to the retail services purchased by the end user.

16) I was harmed because I pay Universal Service Fund pass-throughs, and the monies go to carriers that still use separations. Thus even though I am in a “price cap” area I am forced to support rate of return carriers throughout the country.

Billions in Corporate Operations Expenses Dumped into Local Service.

17) One of the most egregious added expenses are the ‘Corporate Operations’ expenses, a slush fund for the corporate jets, golf tournaments, executive pay, and the lawyers and lobbyists who are attempting to kill Net Neutrality, remove your privacy, block municipalities from offering competitive services… and now help their other lines of business, from AOL to Time Warner.

18) Verizon NY Local Service paid $1.8 billion in Corporate Operations expenses in just 2017, which is 61% of the total of about $3 billion. Verizon New York Local Service had revenues of $1.1 billion, and this one charge caused at least $700 million to $1.7 billion in losses.

19) There is no information pertaining to whether these expenses are in-state or are international expenses, and they certainly do not relate to the local service utility customers. However, these losses were part of the rate increases and they can easily be tracked back to the losses that were quoted and were used for rate increases over the last decade.

20) “61% of the Total for 19 Years”. Just to show how the FCC’s accounting rules tie to these financial malformities, in 2000, Local Service was charged 65% of the total for Corporate Operations, and, as we tracked, the percentage of the total paid by Local Service was always 60–62%… for 19 years.

21) The other lines of business were cross-subsidized; the nonregulated FiOS and the other nonregulated had more revenues than Local Service but paid only 10% of Corporate Operations; Business Data Services, which had double the revenues, paid ½ of the Corporate Operations expense.

No Serious Competition: Independent ISPs Were Forced Off The Networks.

22) No competitive alternatives to Verizon. In 2012, the Verizon New York state-based utility local phone service stopped working. I and my family had used the same service since 1966. When I called Verizon customer service (using a pay phone), I was told that I should switch to FiOS, which had recently been installed in my building. When I asked if I could use my then-current Internet Service Provider, a small, independent ISP called Bway.net, I was told no: my only choice was Verizon Online. The so-called replacement of the existing state utility services blocked my ability to use Verizon’s competitors for other services like Internet.

23) I was harmed to because the FCC’s accounting rules have never examined the common costs and allocations of the nonregulated services being cross-subsidized by Local Service. Verizon’s FiOS fiber to the home service was declared part of the Verizon New York state-based utility as an extension of the existing infrastructure, and this was done with the fiber being classified as “Title II” in 2005. Moreover, the VOIP service sold by Verizon, ‘Digital Voice”, is also being cross-subsidized and the accounting of this as a phoneline — as it is a substitute for the copper-based wired phone line — is not counted as a line.

24) I was harmed because there is an anti-competitive market-lock for high speed broadband. Considering the alternatives, I thought that the Time Warner Triple Play, advertised as $89.99 for phone, cable TV, broadband and internet, would be a substitute; it was clear that this was just a bait-and-switch pricing scheme that all of the companies have adopted. My basic triple play is now over $207.00 a month, with no premium channels, no second set top box, etc. While I had thought that there would be increases over the years, it was not made clear that it would end up being over 130% above the original advertised price. Verizon uses the exact same deceptive pricing model, from the ‘promotional’ price to the added fees.

Wireless Overcharging and Obscene Profits

Important Facts:

25) In April 2019, Rewheel Research published its updated facts on the price of wireless worldwide, focusing on the OCED and EU28 markets.

§ “Median broadband mobile gigabyte prices in the US are 6 times higher that OECD markets and 10 times higher than the EU28.

§ As the chart points out, for just $30 Euros, ($34.00) at least 13 countries have services where ‘unlimited’ means ‘unlimited’ and the US is at the bottom of rung on pricing.

§ In the US, “unlimited” is now a euphemism for only 25+ Gigs, then the speed cuts out so the customer can’t use most of the applications, like 4K streaming.

  • These numbers from Rewheel are actually much worse for the US customers as the European markets usually only have a ‘VAT’ tax, while Rewheel information does not include all of the additional taxes, fees and surcharges and is based on the advertised price.

26) I and New York State were harmed because the “massive deployment of fiber optics”, which was supposed to be building a fiber optic future for the state and New York City, was diverted around 2010 to fund the wires that are used by wireless. This meant that the fiber optic to the home networks construction expenses had been diverted, even though there had been rate increases to fund this construction.

27) I was also harmed because all cell service providers that are not Verizon pay more than Verizon for the same service. The financial reports discussed above show that Verizon’s wireless affiliate pays a fraction of what Sprint does to use the same network services; moreover, the AT&T payments to Verizon New York also appeared to be questionable. Verizon controls the majority of the critical infrastructure, and through cross-subsidies from basic local service it also manipulates and discriminates charges to its wireless affiliate vis-a-vis other wireless providers.

28) The next generation of the telco strategy — 5G Vaporware. “5G” is the newest iteration of the telcos’ continuing strategy to fleece local ratepayers and obtain undue competitive advantage. Verizon and all the other telcos, including price cap and rate of return carriers, intend to continue and accelerate “investment” in fiber and other high-bandwidth transmission that it will charge to Local but use for something else. This time it is “5G.” Small cell 5G will use the same fiber networks that are currently used mostly for unregulated endeavors like FiOS, but even more will be required because the “small cell” architecture requires more transceivers that must have broadband for backhaul. The cycle will repeat and the harms will compound if the freeze continues because the costs Verizon incurs to support its wireless operations will be mostly allocated to “local” under separations rules. Local will be artificially burdened with even more costs, and the accounting will show even higher losses even though local would in fact turn a profit if proper allocations were employed.

29) End the harm and prevent even more harm. If these cross-subsidies are ended intrastate and local rates would no longer be required to subsidize other services. Local rates could be reduced, costs would better align with the services that incur those costs, and society would benefit because incentives, risks and returns would begin to match. The only way to do that is by ending the freeze. If the freeze is not ended then local ratepayers will continue to be burdened far beyond what is appropriate and the burden will be even further increased due to new costs to support 5G that will be inappropriately charged to local.

I write this before dawn on June 3rd, 2019 and await the FCC’s response to our affidavits for standing.

Click to read the affidavits for standing or more about the case.

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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