IRREGULATORS v FCC Moves Forward: We Won Round 1.

As Elton John might sing in the new bio-flick, “Rocketman”; “We’re Still Standing”.

We just won Round 1.

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.

Click for more about this case and the filings, reports we put on the record.

On June 3rd, 2019, the FCC decided to not attempt to challenge or block our standing request and we are moving to the next round, the “merits” phase: the presentation of briefs and the identification of supporting evidence.

We consider this to be one of the largest accounting scandals in American history, impacting all of your communications services and choices in multiple and harmful ways. Our investigation found that the FCC’s accounting rules have aided AT&T, Verizon Centurylink in unjustified rate increases, billions in tax dodging, the creation of the Digital Divide in rural areas and inner cities, as well as harms to competition or blocking competition. By not properly upgrading the networks to fiber optics, it allowed the cable companies to create made-up fees, do continual increases for broadband and internet, and lower the standards of customer services.

The deformed accounting even impacts all wireless services. Verizon has been diverting much of their wireless fiber buildouts to be charged to the state-based utilities and local phone customers. At the same time, Verizon Wireless isn’t paying market prices, which gives wireless obscene profit margins. Verizon then squeezes the competitors who rely on the Verizon networks as these other moves inflate the expenses the competitive wireless carriers have to pay. This, then, requires the competitors to keep their rates high to pay these inflated expenses. Verizon then sets their own wireless rates to match the inflated competitor rates. According to Rewheel, in 2019, America’s cost per gig is 6 times more than in Europe or of the members of the OCED.

However, the real issue is that AT&T et al. have captured the FCC and many of the state commissions. As we will discuss, the FCC has put forward almost 25–40 separate but interlocking actions with the current plan to ‘shut off the copper’, dismantle the state utilities and turn over the wires to the wireless company as private property for personal use. At the same time, they use the promise of new wireless technology, 5G, to get rid of the remaining obligations and regulations, including the rights of cities and states to control the wireless service deployments in our communities.

Counterpunch recently summarized the decade of investigation culminating in this case.

“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.”

The IRREGULATORS is a consortium of senior telecom analysts, forensic auditors and lawyers, many worked for government agencies including the FCC, state consumer advocate and Attorney General Offices. Members of the group have been working together, in different configurations, since 1999.

Tracking the Wires and the Different Lines of Business Using the Networks.

To sum up, this case is not just about the copper wires of the state utility but about all of the other services offered by the phone companies, such a Verizon, from fiber to the home FiOS or Verizon Wireless. And it is not about voice phone service, but about broadband and internet and all of the other communications services that go over the state-based infrastructure.

At the core is the infrastructure — the wires under your feet and all around you as you walk down your block or through your neighborhood. There are plenty of wires running everywhere, some on poles, some underground, and for the most part these belong to the utility — like Verizon New York.

Yet, we were told that there are no state telecommunications utilities left. And virtually no one knows that these utilities are NOT just the copper wires, but are also the fiber wires.

Two Pictures: Before and Revealed

Let’s use two pictures to illustrate the different services and then watch the flows of money. This first snapshot (taken with Google Maps) is of E79th Street in New York City. You can see a few telecommunications devices, like the pay phone on bottom left or the cell sites on the roofs of the buildings on the right.

But, in reality, there are wires to the ATM machines, or the WiFi hotspots or the local grocery store, or for the alarms in the stores… everywhere. And these are the wires to the wireless companies and competitors, most of them hidden from view.

Almost all of these different types of service — alarm services, backhaul, WiFi, or FiOS — are all part of the state-based telecommunications utility, but most of these lines have been hidden from view. Worse, they have been removed from the accounting of lines, so that 80% of all lines do not appear in the accounting of access lines. I.e.; the companies have been using deceptive accounting on the number of actual lines in service as well. Read our report on access line manipulation that was filed as part of this case.

FOLLOW THE MONEY: Buckets of Revenues & Expenses

Almost of the lines we mentioned are part of Verizon NY, the state telecommunications utility. (I note that there are fiber optic-based competitors in most big US cities, but most are focused on business customers.) However, where their revenues are booked and the expenses are paid, is at the crux of this case.

Verizon New York is the primary telecommunications utility in New York State and it has revenues of about $5 billion in revenues; Local Service was only 22% in 2017.

• Local Service — are the mostly copper-based, state-based phone line revenue, commonly called “POTS”, “Plain Old Telephone Service”.
• Nonregulated — are the FiOS video revenues, VoIP and Digital Voice revenues and other services.
• “Access” and “Special Access” — also called “Backhaul’ or “Business Data Services”, and they are both copper and fiber wires for ATM machines or wires to the cell sites.
• “Black Hole” — are revenues that were part of the state utility but without an explanation.
• Subsidiaries — are a large collection of other companies owned and/or controlled by Verizon Communications, Inc. including Verizon Online, Verizon Business and largely, Verizon Wireless.

In NY, Verizon also has revenues from these subsidiaries including Verizon Wireless, Verizon Online, Verizon Business and the “Black Hole”, as well as many other subsidiaries. We estimate that Verizon has $7-$10 billion in revenues from these other lines of business; a total estimated at $12-$15 billion. (There is no accounting of the total revenues for Verizon in NY that we are aware of.)

And it is impossible to tell which expenses are being maneuvered to be covered by the cross-subsidies of Local Service.

The FCC Cost Accounting Shell Game

• The FCC’s rules are supposed to divide up the expenses so that the majority of expenses would never, ever be diverted into the Local Service regulated business that did not create the expenses.
• It is against multiple state and federal laws to have the regulated state-based local service utility ratepayer pay the expenses of nonregulated subsidiaries.
• The FCC’s accounting rules were set to mimic the year 2000, so that the percentages each service paid in expenses would be continued.
• The FCC has not examined the rules or their impacts on the state utilities or examined anything pertaining to the state-based companies for 19 years. In fact, the FCC never acknowledges that there are state utilities.
• Yet, the FCC’s decision was to extend this financial shell game 6 more years.

How do we know that the rules are manipulated? The Verizon NY Annual Reports

The Verizon NY 2017 Annual Report is a full state-based telecommunications utility annual report, which is required by the NY Public Service Commission. Let’s use examples of the Corporate Operations Expenses and Construction to show just how mangled the expenses being applied by the FCC’s rules have become.

Corporate Operations Expense

• Corporate Operations Expenses are a collection of expenses that cover executive pay, corporate jets, golf tournaments, lawyers and lobbyists, etc.
• Local Service was charged $1.8 billion in Corporate Operations expense, 61% of the total, and this is the exact same formula set to the year 2000 by the Freeze.
• In the next exhibit, we see that the Corporate Operations expenses are not being fairly distributed based on revenue; they all use the freeze.
• And since the freeze froze the percentages, Local Service has paid 60+% of this expense, almost unwavering, for 2 decades. Thus, we see a straight line for the percentage of this expense for almost a decade.
• When compared to the other lines of business, Access Services (Special Access) brought in around 48% of the revenues and Nonregulated had 29%, but compared to revenues they are paying a fraction of this expense.
• With only 22% revenues in 2017, this means that Local Service is paying for the expenses for these other lines of business. Moreover, this one expense makes Local Service unprofitable.

If Nonregulated is only paying 10% of Corporate Operations but shows 29% in revenues, then why is Local Service paying 61% with revenues of only 22%?

Construction and Maintenance put into Local Service.

• Verizon NY Local Service only had $1.1 billion in revenues but was charged $1.2 billion in construction and maintenance, even though Verizon NY spent about $100 million on the copper networks.

Cross-Subsidizing the Other Lines of Business with the Utility Construction Budgets.

In response to an inquiry by the New York State Public Service Commission and the NY Attorney General’s Office about capital investment, Verizon stated that in 2011 the company spent over $1 billion. The Attorney General claims this is misleading, as the money has been shifted to fund Verizon Wireless and FiOS TV:

“Verizon New York’s claim of making over a “billion dollars” in 2011 capital investments to its landline network is misleading. In fact, roughly three-quarters of the money was invested in providing transport facilities to serve wireless cell sites and its FiOS offering. Wireless carriers, including Verizon’s affiliate Verizon Wireless, directly compete with landline telephone service and the company’s FiOS is primarily a video and Internet broadband offering.

“Therefore, only a fraction of the company’s capital program is dedicated to supporting and upgrading its landline telephone service.”

There is a long list of caveats to these findings, but based on the New York State Attorney General’s analysis, these findings are a red flag.

We knew the attack was coming.

The Trump-FCC-AT&T-Et Al. Plan: The Insidious “Wheel of Mis-Fortune”.

We uncovered that the FCC, with the help of AT&T et al., have created a series of interconnected proposed rules, regulations and actions. Unfortunately, we, the public, are now facing at least 20–40+ different cuts into the public interest, (depending on how you count). Killing off Net Neutrality is just one of the many planned harms.

While none of this is new, it is now a sped up, concealed, heavily funded and very well coordinated plan, aided by the ability of the companies to control the FCC’s votes.

Primary Goals: AT&T and Verizon plan to be wireless-only entertainment companies. To get there the plan is to:

• Shut off the retail wired networks and force customers onto more expensive wireless in the home and office.
• Privatize the majority of the current wireline networks as “Business Data Services” for wireless and block competitors.
• Get rid of all obligations and constraints, from financial accounting to Net Neutrality or privacy.
• Use the FCC, the government, not market forces, to push through the plan.

Thus, each of these goals have specific FCC proceedings designed to move a slice of the agenda until the companies get their way with little or no consideration of the customers, municipalities, etc.

Conclusion: We couldn’t let them get away with this wholesale removal of all regulations and obligations on AT&T, Verizon and Centurylink. Moreover, it is time for a course correction. We need to stop the hemorrhaging of questionable transfers of billions of dollars to the companies’ other subsidiaries — now.

Click for more about this case and the filings, reports we put on the record.