IRREGULATORS v FCC Is Critical to America’s Broadband-Internet Future

On July 22nd, 2019, the IRREGULATORS v FCC moved forward with the filing of our initial brief.

The FCC has until September 5th, 2019 to respond.

SEE FACT SHEETS ON WIRELESS PRICING, TRIPLE PLAY PRICING, LOCAL SERVICE OVERCHARGING, CROSS-SUBSIDY INVESTMENTS IN INFRASTRUCTURE &IRREGULATORS v FCC IMPACTS AND ISSUES.

Counterpunch story about the IRREGULATORS and our case, June 7, 2019

“As the telecom warriors case proceeds against the FCC — and, by extension, the telecom trust — the nation will witness one of the grand court challenges of the 21stcentury. This contest might not have the glamour of cases involving abortion, immigrant rights or online content, but may — long term — have equally significant consequence. It will help fashion the nation’s telecom future.”

This legal challenge exposes one of the largest accounting scandals in American history. AT&T, Verizon and CenturyLink, with the help of the FCC, have been able to manipulate the FCC accounting rules, which directly impacts the price of every communications service you, your friends, family, and business pays for.

As we discuss, these companies also have made America communications some of the most expensive services in the world; We estimate the US Triple Play is being overcharged about $50–150 dollars a month compared to prices of the OECD-EU countries, while US “unlimited” wireless customers are being overcharged an estimated $50-$75.00 a month, not counting the fact that overseas, “unlimited” means 500–1000GB a month for real unlimited service, not some cap at 20–50GB.

But this is only part of the story. We uncovered a massive financial cross-subsidy scheme that has made the entire US wired public utility infrastructure appear unprofitable. This was used to raise rates, created the Digital Divide, by claiming it was not ‘profitable’ to upgrade rural areas and inner cities, and is now used as an excuse to shut off and dismantle these telecommunications state-based public utilities and hand them over to the wireless company as private property. It has been used as an excuse to kill off competition, claim Net Neutrality harms investments, and it has let the companies’ ISP subsidiaries to track our online use, follow us, and even sell this information.

And 5G Wireless is just the latest promise-them-anything technology scam that is not about giving America very high-speed services at reasonable rates, but a bait-and-switch to help remove all of the regulations and obligations of the wired utility networks. I’ll come back to this in a moment.

Background:

Over 5 year ago the IRREGULATORS formed as an independent consortium of senior telecom experts, analysts, forensic auditors, and lawyers who are former staffers from the FCC, state consumer advocate and Attorneys General Office, as well as telecom auditors and consultants. In fact, members of the group have been working together, in different configurations, as part of New Networks Institute, since 1999.

But it all started in earnest around 2012, when the Sandy Storm hit the East Coast. As the waters subsided, Verizon had decided it was going to just abandon the infrastructure that had been destroyed in Fire Island, NY and other parts of NY and New Jersey, and replace it with a seriously inferior wireless service, ‘VoiceLink’. We had also found that Verizon NY had published financial annual reports — but they didn’t make a lot of sense. In 2013, we called for investigations of Verizon NY’s financials, the primary telecommunications state utility of New York, which started in 2015 with the push from the “Connect NY Coalition” and the Communications Workers of America, (CWA); In July, 2018 there was a settlement. Estimated at $300-$500 million, Verizon NY is required to upgrade32,000 lines to fiber optics and repair and maintain the deteriorating copper networks in the other unupgraded areas.

However, along the way we uncovered that the federal FCC cost accounting rules had caused massive financial cross-subsidies; billions of Corporate Operations expenses are being charged to Local Service annually to make it appear unprofitable. At the same, Local Service actually funded the building of fiber optic networks for Verizon Wireless instead of building out upstate NY. Worse, Local Service, the basic utility service, had rate increases based on this mess. Also, Verizon NY was showing billions in losses attributed to Local Service, and this was used as an excuse to not build out the rural parts of the state utility, much less finish NY City’s contract for 100% of residential customers to have access for FiOS fiber to the home service by 2014.

Worse, this was not just about NY State, but about all of America. It took us years to figure it out, even with a team of experts, but we uncovered that the FCC’s cost accounting rules have become deformed. They had been ‘frozen’, literally, so that the expenses of the utility would be divided up based on the year 2000, when Local Service was the majority of revenues. But, these rules are still being applied to ALL of the state public utility networks’ accounting controlled by three holding companies — AT&T, Verizon and Centurylink — and now they make America’s entire wireline infrastructure appear unprofitable by putting the majority of all expenses into Local Service.

How crazy does this get? In 2017, Verizon NY’s Local Service, which had revenues of $1.1 billion, was charged $1.8 billion in Corporate Operations expense, which are the corporate jets, the golf tournaments, the executive pay and the lawyers and lobbyists attempting to kill off Net Neutrality. This amount was 62% of the total amount charged to Verizon NY, and this one expense made Local Service unprofitable. But the crazy part is that this percentage of this expense being applied to just Local Service was set based on the FCC cost accounting rules, which are, like we just mentioned, frozen to match the year 2000–19 years ago, and it was never changed or audited… Really.

I.e.: In 2000, Local Service was the majority of revenues, 65% of the total, and it paid 65% of the expenses. In 2018, Local Service was only 22% of the total revenues of Verizon NY, but it still pays 62% of the expense for corporate operations — How can this be? — the deformed cost accounting rules.

This Harmed Almost All Communications Services, including Yours.

IRREGULATORS v FCC impacts everyone reading this as all of these financial deformities are keeping virtually all prices for all services inflated — hundreds of dollars a month extra. Worse, it also created the Digital Divide in that whole areas of the US were never properly upgraded, even though most customers — you — paid thousands of dollars for upgrades that were supposed to happen in your state and delivered by AT&T, Verizon and Centurylink.

VERY IMPORTANT: How did they get away with it? Answer: Most people do not know that the holding companies that control the wireline state public utility networks control America’s wireless networks.

• Wireless Is a Wired Service. Your wireless services do NOT go into the ‘ether’ or to some satellite; your call or data first goes to a hot-spot or cell site, then travels the rest of the way over a fiber optic wire.
• The state-based utility wires are the guts of all services — wireless, wireline, fiber optics and copper. AT&T, Verizon and Centurylink control the wired state utility networks, including the “Business Data Services”, sometimes called “backhaul”, which are the wires, the guts of the networks, but they are also the basis of wireless in America.
• They Got Rid of the “U” Word: The companies have been able to use every method of obfuscation to claim that the telecommunications utilities no longer exist. They even took the name of the state utility off of the actual state-based utility phone bills.

But, one of the reasons we took this case:

• There is a Structural Flaw in Every FCC Decision: The FCC never examined the state-based financial reports, the broadband commitments made on the state level or that the local phone customers have been illegally funding all of the companies’ other lines of business — like wireless. The state utility networks are “Intrastate”, state-based, and thus Local Service revenues are “intrastate”, but the intrastate customers have been charged thousands of dollars, per customer, to fund the “interstate” services, which include Wireless.
• VIRTUALLY NO ONE IS AWARE OF THIS FINANCIAL SHELL GAME. It took us years, working as a team, to unravel just how many different ways this structural flaw has impacted the Public Interest. But, we believe that the companies’ lawyers are well aware of this and use it repeatedly to help the companies prevail over the unknowing public.

Comparing the US Communications with Other Countries.

Here are just some of the different types of overcharging on wireless, the Triple Play and local services. (We tie this story to some of the previous articles detailing the harms.) From the outside, while you may know in your gut that something has been manipulated — we have the proof.

(We note that, of course, there are caveats as each country has its own peculiarities and the reports and public data have conflicts, and some countries have a different standard of living, etc. However, the differences in the pricing are too overwhelming to ignore.)

Triple Play: (Click for more detail.)

§ The price of a Triple Play in the 41 OECD-EU countries averaged about $45 dollars, but in many countries you can get a Triple Play for as little as $15.00. In the US, where the companies not only have created an ongoing ‘promotional price’, which doesn’t include 20–35% of the made up fees, etc., when it ends there is a price increase of over 100%; the Triple Play can end up at over $200.00 An overcharge of $50-$150 a month from the OECD-EU average.

Each of these services — broadband, internet, phone and cable service — are priced in the US at multiples of these other countries because there is no competition to drive down prices in cable or high-speed broadband. AT&T, Verizon and Centurylink never showed up in most of their territories, leaving the cable company to just keep increasing charges and making up fees. They also own and control the underlying infrastructure, which has obscene profits because the expenses were put into basic Local Service. And now the cable and phone companies (ISPS) all use the same deceptive bait and switch marketing, the same added made up fees, etc.

Wireless: (Click for more detail.)

The price for an unlimited wireless service that is not unlimited, is worse.

• Everyone knows that America’s “unlimited” plans are not unlimited at all; the average service costs about $90.00 or more counting the taxes, fees and surcharges, but after 25–50GB, the 4G service speed goes to a crawl. Worse, the low-end customers can pay $40-$60 or more for 2–8GB a month.
• It costs about $17.00 for an equivalent wireless service overseas, (OECD-EU countries) and for $40 bucks you can get unlimited service in many countries, meaning 500–1000GB a month. And there are deals where you can get this for under $20.00 This means that the price per GB in the US for unlimited is about $2.50, while in these other countries it can be $.10-$.15 cents.

With wireless, Verizon, AT&T and Centurylink control the underlying infrastructure, so they can keep the guts of the networks, known as backhaul, inflated at multiples, or have the local phone customers subsidize the construction, or make sure that the competitors pay multiples for access to these networks.

Local Service: Read the Full Report:

But, those who have really been hosed have been the basic phone customer, who may not have options. Using this deceptive math created by the FCC accounting rules, Verizon et al. went to their state commissions and got rate increases over and over. In New York, based on actual bills, the price of local service is about $60, and the increases were based on the accounting rules — because they made Local Service unprofitable — on purpose.

The price for a basic utility phone service should have been in steep decline and cost about $10-$15 a month.

§ In 2006–2009, Verizon NY was granted multiple rate increases of 84%, and some add-on services were 50–250% increases.

§ Overcharging: We estimate Verizon NY local phone customers were overcharged $3100.00 per line from 2006–2018.

§ Nationwide, multiple states we examined had increases of over 100% to basic rates since 2006. No state has examined the rate increases or done an ‘audit’ of the accounting. We expect the same overcharging is occurring nationwide.

§ AT&T California had increases of 143% for flat rate local service and 273% for measured local service, from 2004–2017.

§ Nationwide, this would come to an estimated $91 billion in overcharging from rate increases since 2006–2017.

How Many Customers Are Impacted?

The Accounting of the Wired Access Lines has Been Manipulated.

While we all keep hearing that everyone dropped their ‘landline’, according to the FCC there are still 119 million customers with wired phone services.

§ 55 million customers have a basic landline from mostly AT&T, Verizon and CenturyLink. These are also known as “POTS”, Plain Old Telephone Service.

§ But, there are 119 million total customers with a ‘wired’ service, which can be the VOIP/digital voice from the cable companies — or AT&T’s U-verse, which is also a copper-to the home broadband service that is using the existing utility wires.

The FCC has hidden and downplays these facts at every turn. The FCC quoted AT&T discussing the ‘loss’ of lines.

“Retail POTS subscriptions have declined to the point that less than 17% of households purchase switched-access voice service from an ILEC, and these services will only continue to decline.”

Deceptive to the core, is this statement. It is only ‘residential’, it is only voice calling and something called ‘switch access’ — i.e., the 55 million lines in America are POTS.

But this still leaves out 80% of the actual wired lines in service. The Verizon NY Annual Report shows that the company had about $5 billion in revenues, yet the only accounting of lines are only the lines providing the copper-based wired landline Local Service, which had about $1 billion in revenues. The other $4 billion in revenues for FiOS, VOIP, or the Business Data Services (which use both the copper and fiber optic lines) have ZERO access lines presented in the annual reports. And the quote above from AT&T is therefore deceptive and used to shape public policies.

Sometimes You Get Left Holding the Bag

What we had found is one of the largest accounting scandals in American history. At first we thought that the Democrat FCC would address what we uncovered, but they are part of the problem.

However, the Trump Administration turned the FCC from what was a murky swamp into a toxic dump. It blatantly allowed the FCC to be captured, from the transition team run by Verizon consultants or groups funded by the telcos, to the appointment of a new chairman, Ajit Pai, who is a former Verizon attorney. In order to create a voting block, Brendan Carr was added as a commissioner; he previously worked for Verizon to get rid of the accounting rules in 2007, as well as worked for the CTIA, the wireless association, to sue the City of San Francisco over wireless issues. The third Republican, FCC Commissioner Michael O’Reilly, is a good friend of the American Legislative Exchange Council (ALEC), an organization that writes model legislation to help their funders, AT&T et al. In fact, the current FCC 5G plan is an ALEC-based state plan modified to harm the states and cities’ rights over wireless.

Unfortunately, since this current FCC started there has been at least 30 separate but interlocking proceedings with the goals — remove all of the remaining regulations and obligations on the wired networks, then dismantle the publicly funded state utilities and take the fiber optic wires and hand them over to the wireless company as private property — because it makes them more money.

And to repeat: 5G is just an extension of this scam as it is a wireless-tech that can’t work because it requires fiber optics every block or two. Its goal is to get rid of the remaining wired obligations and regulations, then do a mea culpa and claim 4G-ish-5G is good enough.

Every FCC Decision Is Based on this Accounting Shell Game.

In the end, IRREGULATORS v FCC exposes a massive structural flaw in every FCC decision that needs investigation and fixing. The FCC has ignored all state-based, intrastate investment, broadband commitments, as well as the customer funding of fiber optic broadband they never received — for decades. It also exposes how the FCC’s distorted accounting has been manipulated to dump the expenses into one category, Local Service.

Exposing it all by using the financial reports of Verizon NY, needed to happen. We could not let the entire US wired, public utility infrastructure be handed over the a few companies as private property for personal use while overcharging customers.

We estimate that the overcharging of America caused in large part by the FCC’s negligence and accounting rules is $50–60 billion annually. And this has been going on, in earnest, for over a decade.

We are at the tipping point of the end game. The calculated manipulation of the financial books are deep and widespread and unknown, even to those who should know better. This case exposes the FCC and the federal accounting rules so that the States can act to also clean up this mess. What should happen next?

IRREGULATORS v FCC takes a stand to not let the companies and the FCC get away with this the complete removal of the public telecommunications utilities.

Solution: IRREGULATORS Treasure Map

This case is only part of the solution. What needs to happen? Follow the Money:

• Stop all of the cross-subsidies.
• Require the companies’ subsidiaries to pay market prices.
• Separate the wires from these companies.
• Make them pay back to those who have been harmed.
• Stop all of the corporate operations expense dumping.
• Start on a new regulatory framework where state-and-federal rules do not allow the companies to play both sides.
• Clean out the FCC of conflicts of interest.
• Use the billions per state to have the fiber optic infrastructure we paid for finally delivered in communities, cities and states throughout the US.

Finally, this is about capitalism at its worst. America’s entire communications services — wireline, wireless, cable, broadband, internet, phone and even satellite, have been captured by a few holding companies that are working in concert to overcharge America and not deliver on commitments made, both in contract and in public speech. And there has been a break-down of the proper oversight, with a total lack of accountability and enforcement of these covenants with America. The markets no longer function to keep these few companies in check and it shows at every level, from the prices we pay to the failure of these few companies to properly upgrade and maintain the US infrastructure to make us Number 1 in the world.

More about IRREGULATORS v FCC

FREE DOWNLOAD: “The Book of Broken Promises: $400 Billion Broadband Scandal and Free the Net”, is the third book in a trilogy that started in 1998, and it documents the gory details of the failure of AT&T, Verizon and Centurylink to properly maintain and upgrade the state utilities to deliver fiber optic broadband to ALL of America.