Pop Quiz: Can You Answer Basic Questions About the Verizon NY 2019 Annual Report?

Please Download the Verizon NY 2019 Annual Report; Go to Page 25.

Want to know why there is a Digital Divide or how to fund a fiber optic-to the-home future, even in rural areas, without government subsidies and handouts?

The IRREGULATORS present this Verizon NY 2019 Annual Report Pop Quiz, with a few simple questions, focusing mainly on this very fresh financial information, published on June 8th, 2020. Verizon NY is, of course, NY State’s (including NY City) primary public telecommunications utility, just like other state-based utilities, such as water, gas or electric. This excerpt is from page 25 (in the PDF reader), and was simplified for this discussion.

What Happened in Your State? The financial books use formulas and those formulas are federal and historically under the jurisdiction of the FCC. While NY is the only state that requires full public financial reports, that we know of, the last FCC data showed all of states were using these calculations.

Let’s Follow the Money: The Basics in the Era of the Pandemic

Virtually no one knows that there are still state telecommunications utilities in every state and virtually no one has actually examined the financial books — the revenues and expenses. Yet, it is now more critical and relevant than ever because the pandemic has exposed that there are massive holes in broadband deployment, mostly impacting low income urban areas as well as many rural areas.

Moreover, these networks are not just based on copper wires but most of the fiber optic wires, which includes the FiOS, the Fiber to the Premises wires, as well as the fiber going to the cell sites or to the ATM machines, are part of the state telecommunications utility.

But, also unknown is the fact that over the last 2 decades, these public telecom utilities are being dismantled — and it has been done through the manipulation of FCC’s federal accounting formulas that divide up the costs to the different lines of business. The last available data from the FCC was for the year 2007.

• On June 8th, 2020, Verizon also filed a Motion with the NY Public Service Commission to hide, they call it ‘redact’), basic financial and business data.
• On June 30th, 2020, the IRREGULATORS filed comments to block Verizon NY’s Motion and are now calling for an investigation.
• Alongside this, on March 13th, 2020, our challenge of the FCC, IRREGULATORS v FCC, was a win for the American public. The DC Court of Appeals made it clear that the states are now independent to devise a new set of accounting requirements and not use the FCC’s formulas.

The 5G Wireless & WiFi Knee Jerk Reaction: The immediacy of solving the newly-exposed Digital Divide — and the uncertain future of being stuck at home — has now generated knee-jerk reactions to roll out wireless and WiFi even though these statements never mention or examine that wireless requires fiber optic wires and it is not profitable once the costs of the fiber optic wires required for these services are incorporated; it is like giving a heart attack patient some aspirin and a band-aid, vs fixing the underlying problems.

We will give a summary the financial report and then 6 short questions, followed by links to the answers.

Summary: The State Telecommunications Utility Financial Reports.

Using Page 25, (the opening chart is an excerpt taken directly from the report, though modified a bit for simplicity; we also removed columns that would add confusion.)

(Line Items are Numbered)

1) Verizon NY and the state telecommunications utilities have traditionally used 3 primary lines of business, which were established as part of the FCC’s “USOA”, “Uniform System of Accounts”. Going back to the opening chart:

• “Local Service”: (“NY State”, Column F) are the “intrastate” revenues. These are mainly the copper based residential and business local phone service.
• “Backhaul”: (“Other”, Column G) are also called “Special Access” and “Business Data Services”. These can be the wires to the bank ATM machines and data services or, they can be the fiber optic wires to the cell sites and 5G.
• “Nonregulated” services is a catchall for VOIP or FiOS video, and other services that were never regulated.
• Our reports cover all of the financials for all categories, in detail.

Highlights of the Findings:

2) Total Operating Revenues: Verizon NY had $4.1 billion in revenues, with “Backhaul” having the majority at $1.9 billion, and Local Service at $864 million.

NOTE: Local Service is 21% of Revenues: Backhaul was 48%; Nonregulated 31%.

3) Construction & Maintenance (“Plant” and “Plant Non-Specific”) show that Local Service was charged $1.2 billion, while Backhaul only paid $606 million.

• (Expenses to maintain the existing wired network or to upgrade them to fiber.)

4) Marketing: Local Service paid 54% of this expense, $205 million; Verizon stopped selling Local Service in many parts of the country. Nonregulated paid less than 15%, but that is FiOS?

• (Expenses incurred with the selling of products and services.)

5) Corporate Operations Expense: Local Service is paying $507 million in Corporate Operations expenses, 61% of the total, while Backhaul paid only $243 million, and 29%. (Nonregulated is only paying 10%.)

• (Everything from executive pay to lawyers and lobbyists, or the corporate jets.)

6) Net Operating Revenues: Backhaul has $528 million in profits while Local Service shows a loss of $1.9 billion.

• (These are the “profits” left over after most of the expenses have been paid.)

7) Profit Margin: Backhaul’s “EBITDA”, “Earnings Before Taxes, Depreciation and Amortization” is 55% — (Calculated from ‘Column G’, “Subtotal” divided by “Revenues”.)

Important: Additional Revenues: Verizon, in New York, has an additional estimated $7-$10 billion in revenues which do not appear in these financial reports. However, the expenses for much of this revenue from Verizon Wireless, Verizon Online or Verizon Business appear to be contained within these expenses.

Questions: (Q1, Q2, etc.)

• Question 1: If Local Service are revenues mainly from the copper-based phone lines, which have been barely maintained, why did it pay $1.2 billion in Construction & Maintenance expenses in just 2019.
• Question 2: If Backhaul is 48% of revenues, more than double the revenues of Local Service, how did it pay ½ of what Local Service paid for construction and maintenance?
• Question 3: If Local Service is only 21% of revenues why is it paying 61%, or over $½ billion, of Corporate Operations expense?
• Why is Local Service paying 54% of Marketing, $205 million, when the company no longer advertises the service?
• Question 4: How much of the Verizon NY construction budgets, especially those charged to Local Service, were diverted to build-out the wireless networks?
• Question 5: How did Backhaul end up with EBITDA (Earnings Before Income Taxes, Depreciation & Amortization) profits of 55%, while Local Service lost $1.9 billion?
• Question 6: If Local Service expenses were reset to pay actual expenses incurred, how much of Local Service, in just 2019, based on just these factors, was overcharged and could be used to solve the Digital Divide and bring fiber optic services to the entire state?

A) No change

A) $965 million dollars

B) $1.6 billion dollars

C) There needs to be an audit

D) These FCC legacy formulas do not matter (whatever that means?)

We Will Also Answer:

• Question: Are the Verizon NY financials for 2019 indicative of what happened over the last 5 years?
• Question: Are these financial reports similar to the financial results in the other Verizon states, or AT&T and CenturyLink states?
• Question: How does IRREGULATORS v FCC relate to these findings and what can cities, states and citizens do about it?

Click for Background and Answers to the Questions