The Backdrop to America’s Fiber Optic Fiasco.

On March 28, 2002, the Pennsylvania Public Utility Commission wrote:

Verizon Pennsylvania 45Mbps Speeds to 100% of the territory

NOTE: This is Part II: Click for Part 1;

Click to Read our FCC Broadband Filing.

In 1994, Verizon PA (then-Pennsylvania Bell, a subsidiary of Bell Atlantic) was granted price caps and ‘deregulation’ of state regulations, giving Verizon major financial incentives to rewire the state with fiber optics for broadband services.

It just didn’t go as planned. However, the FCC never noticed. As we discussed in Part 1 and in our FCC filing, the FCC’s advanced network reports have been a long standing farce. The FCC never included any state-based broadband commitments, or that customers were charged multiple times for fiber optic upgrades that was supposed to replace the existing copper wires of the state telecommunications utility. Alongside this state-based data that was ignored, the FCC also never included impacts of the massive financial cross-subsidies that were created by the manipulation of the FCC accounting formulas that were used by the state utilities to divide up expenses between the different lines of business using this critical infrastructure. Instead, the formulas are set to put the majority of all expenses into the state utility to make it look unprofitable and as an excuse to not have to do any upgrades. As we will discuss, in this case, there was a bait and switch; the laws were adjusted so that wireless, at a speed of 1.5 Mbps could fulfill the obligations of 100% coverage — thus creating the Digital Divide.

1) Original Public Interest Objective: Affordable, Fiber Optic Broadband to Everyone.

In 1991, the Clinton-Gore presidential ticket detailed a plan called the “Information Superhighway”, which was to replace the aging copper wired utility telecommunications networks with fiber optic wires to the home.

In virtually every state, the incumbent phone companies, now AT&T, Verizon and CenturyLink, went to their state commissions and legislatures and had laws changed, from ‘rate-of-return’ to ‘price-caps’ or incentive regulations that gave the companies more profits (and tax breaks) to fund a buildout of the states they controlled.

The Telecommunications Act of 1996 was established to open these networks to direct competition, but it also had requirements under Section 706 to examine “the availability of advanced telecommunications capability to all Americans” and whether it was being done “in a reasonable and timely fashion”. If not, the Commission is directed to take immediate action by the “removal of barriers to infrastructure investment”, and the “promotion of competition in the telecommunications market”.

SEC. 706. ADVANCED TELECOMMUNICATIONS INCENTIVES

“(a) In General: The Commission and each State commission with regulatory jurisdiction over telecommunications services shall encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans (including, in particular, elementary and secondary schools and classrooms) by utilizing, in a manner consistent with the public interest, convenience, and necessity, price cap regulation, regulatory forbearance, measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.”

Cybertelecom has an extensive library of documents and supplies the basics of telecom law and policy, including Section 706.

2) The Section 706 Advanced Networks Reports Have been a 20-Year Farce.

“Farce”, according to Dictonary.com:

“A comic dramatic work using buffoonery and horseplay and typically including crude characterization and ludicrously improbable situations.”

In 1998, the first Section 706 proceeding started and it defined the speed of broadband as 200Kbps in 1 direction.

“For purposes of this Report, we define “broadband” as having the capability of supporting, in both the provider-to-consumer (downstream) and the consumer-to- provider (upstream) directions, a speed (in technical terms, “bandwidth”) in excess of 200 kilobits per second (kbps) in the last mile. This rate is approximately four times faster than the Internet access received through a standard phone line at 56 kbps. We have initially chosen 200 kbps because it is enough to provide the most popular forms of broadband — to change web pages as fast as one can flip through the pages of a book and to transmit full-motion video.”

Why did the FCC do this? Because Verizon and AT&T did not upgrade their networks to fiber optics as they had claimed they would do if the state laws were changed. So, the FCC set the bar so low that it would allow for DSL over the existing copper wires to count as broadband, even though it did not satisfy the definition of broadband:

“(1) Advanced telecommunications capability: The term ‘advanced telecommunications capability’ is defined, without regard to any transmission media or technology, as high-speed, switched, broadband telecommunications capability that enables users to originate and receive high-quality voice, data, graphics, and video telecommunications using any technology.”

Notice that the definition makes sure that the speed of service is fast in both directions, not what has become the US standard, currently set at 25Mbps down and only 3Mbps for uploads.

But, imagine our surprise now 2 decades ago to this speed-slap-in the face. Prior to the FCC’s release we had laid out, in vivid detail, that the state-based commitments for broadband and internet speed was 45 Mbps in both directions, and this was part of various state laws, as the opening quote points to.

Over the next two decades we also watched as the FCC ignored and failed to examine the state-based telecommunications utility broadband commitments, which also included the customer funding (read ‘investment’) via alternative regulations and price caps.

3) Two Examples of State-Based Fiber Optic Plans.

This Verizon (then-Bell Atlantic), press release from 1996 laid out the fiber optic plan to have 12 million homes and small businesses upgraded in cities, up and down the East Coast by the year 2000. This included Philadelphia, and it was tied to the state plans of New Jersey and Pennsylvania, as Bell Atlantic was the parent holding company to these two state utilities. However, Massachusetts, Rhode Island, Maryland and the District of Columbia all had fiber optic broadband plans that started circa 1992.

“The fiber-to-the-curb architecture that Bell Atlantic will build is the next step in the company’s ongoing, aggressive network modernization program. …Bell Atlantic plans to begin its network upgrade in Philadelphia and southeastern Pennsylvania later this year. The company plans to expand this Full Service Network deployment to other key markets over the next three years. Ultimately, Bell Atlantic expects to serve most of the 12 million homes and small businesses across the mid-Atlantic region with switched broadband networks.”

Also, in the Bell Atlantic Annual Reports, the company claimed they would be spending over $11 billion through 2000 to make this happen. The 1993 NYNEX Annual Report (which merged with Bell Atlantic) claimed there would be 1.5–2 million locations with fiber optics by 1996.

4) Verizon New Jersey’s Fiber Optic Failure

In 1993, the New Jersey Board of Public Utilities granted now-Verizon New Jersey, the state-based public telecommunications utility, ‘price caps’, which was ‘alternative regulations’ that would eventually give Verizon over $15 billion in customer overcharging and tax benefits through 2016 that were supposed to be used to have the entire territory upgraded to fiber optics. Called “Opportunity New Jersey”, by 2010, 100% of the entire Verizon New Jersey territory — rural, urban and suburban areas — were to be completed with a fiber optic upgrade, replacing the existing copper wires, and capable of 45Mbps in both directions.

To repeat, the excerpt in the opening of Part 1 is from the 1993 Order by the NJ Board of Public Utilities to start this fiber optic future — and the speed, in the law, was 45Mbps in both directions.

To say that Verizon was able to game the regulations and rewrite the law would be putting it mildly. In 2001, Verizon NJ claimed that it was on target and had 52% of their entire territory capable of 45Mbps in both directions, but this was just make-believe.

In 2014, Verizon NJ was able to convince the state regulators that wireless, at the speed of DSL, was an acceptable substitute for fiber-to-the-home that is capable of 1Gbps speeds (1000Mbps). Less than ½ of the state was properly upgraded, even though the company collected an estimated $15 billion by 2016. Worse, the excess charges, rate increases and tax benefits were never examined or removed; there were no refunds for not completing the original fiber optic agreement, much less penalties. We note that in the 2006-timeframe, Verizon NJ applied for a ‘system-wide’ franchise to offer FiOS over the fiber to the home wireline networks in various parts of New Jersey. There was no discussion of the previous commitments, and by 2013, during the renewal of this franchise, no one appeared to remember that the State was to be upgraded to fiber by 2010.

CLICK: New Jersey Fiber Optic Broadband Failure Resources

5) Opportunity Pennsylvania

In 1994, Verizon Pennsylvania (then-Pennsylvania Bell, a subsidiary of Bell Atlantic) was granted the ‘deregulation’ of state laws that essentially gave the Bell company financial incentives to rewire the state with fiber optics for broadband services.

NOTE: This plan, called “Opportunity Pennsylvania” was created by Deloitte & Touche and was used not only in New Jersey, but also cookie cut for AT&T Advantage Ohio, AT&T Indiana and AT&T Illinois.

As the opening quote details, on March 28, 2002, the PA Public Utility Commission laid out commitments that were for 45Mbps in both directions, to be deployed starting in 1994, with the requirement to complete the entire state territory of Verizon Pennsylvania by 2015 in rural, urban and suburban areas.

Why? Because, like New Jersey, these are state-based telecommunications utilities where the entire territory must get the benefits as all of the customers paid for these upgrades, and the rural areas expenses were factored into the revenues and expenses of the entire state-territory.

6) The Outcome: The Liberty Bell Is Cracked; Another State Was Harmed.

The Center for Rural Pennsylvania details how the speed of broadband in PA was changed along the way so that now, two cans and string, 26 years later, is considered high-speed. Here the speed wasn’t reset as ‘DSL’ but as 1.544Mbps in 1 direction, and to be delivered by wireline or wireless, and it is still the standard in 2020.

“PUC Chapter 30 regulations require companies to make broadband service available within 10 business days of a request at a speed equal to or greater than 1.544 megabits per second (Mbps) in the downstream direction and equal to or greater than 128 kilobits per second (Kbps) in the upstream direction.”

It continues that the current FCC standard of 25Mbps down isn’t available to 775,000 customers.

“According to one report, at least 775,000 Pennsylvania residents do not have access to 25Mbps connection speeds. But some experts, and even the FCC itself, believe that these figures may dramatically overstate the actual availability of broadband services.”

CLICK: Verizon Pennsylvania’s Failure to Upgrade PA with Fiber Optic Services; the Bait-and-Switch Resources

TO SUM UP: Verizon New Jersey and Verizon Pennsylvania

• Verizon NJ and Verizon PA are state-based telecommunications utilities.
• There was supposed to be full coverage of fiber optic wired upgrades, replacing the copper wires to all customers who were in the utility franchise area.
• The speed was 45Mbps.
• The speed was to be delivered in both directions.
• It was not like a DSL connection where the speed is only fast in 1 direction.
• These Commitments started in 1992–1994 but were still in place in 2014–2015 in both states.
• No Section 706 report in any year ever examined these state-based price capped regulatory models and Verizon’s utter failure to deliver.

Thus, in both states, while the actual speed of the original commitments was 45Mbps in both directions (and in NJ it is in law; in PA it was in all testimony by Verizon) somehow, Verizon was able to slice away the rights of cities and population to deliver seriously inferior services — not even on a wireline networks but as wireless, with its obvious limitations of what was already paid for.

Had the FCC actually done its job, it would have told Congress and the Public about the state-based fiber optic plans and whether they were being deployed in a ‘timely fashion’ — but that never happened.

7) The FCC Failed to Examine the Financial ‘Investments’ that Were State-Based on Price-Caps and the Failure of this Regulatory Model.

The FCC has an Obligation to:

“encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans by utilizing… price cap regulation, regulatory forbearance, measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.”

What happens when these regulatory mechanisms fail to do what they were supposed to be doing — bringing 100% of the state a fiber optic upgrade? And where is any analysis of how the investments were corrupted so that local phone customers have been overcharged thousands of dollars extra for networks they never received?

“Price caps” and alternative regulations that were applied in New Jersey and Pennsylvania didn’t work and the FCC never investigated anything about any state-based regulatory plan or that there were even state utilities.

What exactly was the plan? To repeat, the old copper wiring, (sometimes known as the “Public Switched Telephone Networks” (PSTN)) was going to be replaced with a fiber optic wire. The existing copper wire, that was mandated by the Telecommunications Act of 1934 and the updated 1996 Act, guaranteed that everyone could receive service — and in the state of New Jersey that was going to become fiber optic-based broadband, as standard.

The New Jersey Alternative Regulation Plan made this clear: The phone line for voice was to be a fiber optic landline for video and data.

“NJ BELL’S PLAN FOR AN ALTERNATIVE FORM OF REGULATION MAY 21, 1992 — NJ Bell’s plan declares that its approval by the Board would provide the foundation for NJ Bell’s acceleration of an information age network in New Jersey and was referred to by NJ Bell as ‘Opportunity New Jersey’… Opportunity New Jersey would …accelerate the transformation of NJ Bell’s public switched network, which today transports voiceband services (voice, facsimile and low-speed data), to a public switched network, which transports video and high-speed data services in addition to voiceband services.”

Moreover, according to the Order, $1.5 billion was to be spent from 1992–1999 to do these upgrades; that amount being increased one-half billion dollars before the law was finally passed in 1993.

8) A version of this alternative ‘price cap’ plan was used in almost every state in America (with caveats). Only a few states ever went back and tried to removed the plan or asked for the money back, that we know of.

Economics & Technology wrote a report about Opportunity New Jersey and how the company failed to invest, but at the same time, it had more profits due to cuts in expenses and new regulatory freedoms. Thus, the only opportunity was to Verizon-New Jersey Bell, not the customers.

“The state’s current regulation system, which was authorized by the New Jersey legislature in its 1992 Telecommunications Act, offers now-Verizon New Jersey (Bell Atlantic-New Jersey, Inc. (BA-NJ)) expanded pricing flexibility and the opportunity for significantly increased earnings in exchange for a commitment by BA-NJ to substantially increase its level of investment in New Jersey’s telecommunications infrastructure under the so-called ‘Opportunity New Jersey’ (ONJ) Plan.

“In the five years following the Board of Public Utilities’ adoption of the ONJ Plan, BA-NJ has enjoyed major financial benefits even though it has not increased its investment as promised and has opposed competition at every turn. The increased pricing and earnings flexibility coupled with reduced investment and continued monopoly pricing practices has enabled BA-NJ’s profits to soar under alternative regulation. Consumers clearly have suffered under the ONJ Plan from unnecessarily inflated prices for many services, and have received few benefits in the form of new services and increased competitive choices.”

All of these actions were done a decade before Verizon’s Fiber to the Home, used for FiOS, was deployed by Verizon or AT&T announced U-Verse.

We use these examples because nothing changed over the next 2 decades. This failure to examine the root cause of the Digital Divide clearly shows that there is no institutional memory and the FCC has never examined the state-based fiber optic-based broadband replacement of the existing copper-based utility aging wire, even though customers have been the de facto investors for decades.

We pointed this out to the Commission in every Section 706 proceeding from 1998–2010, and then again in 2017.

9) IRREGULATORS v FCC

We took this challenge of the FCC to expose the massive financial cross-subsidies that are in place today and that have been used to create a revised history of broadband in America.

We now believe that Congress should investigate the FCC’s accounting scandal and how it has distorted ALL broadband and internet deployments, created the Digital Divide and now is pushing a bait-and-switch with Wireless 5G.

TO REPEAT:

• The FCC has never acknowledged that there are public state telecommunications utilities in America.
• The FCC never examined the financial books of these utilities.
• The FCC has never examined how their own financial formulas (which were set to reflect the year 2000), are still in use and have become distorted.
• The FCC has never examined how their own financial formulas now put the majority of all expenses into the state public utility ‘local service’ category, making the entire US critical infrastructure appear unprofitable.
• The FCC has never examined the cross-subsidies between and among the wireline, state-based utility and the Wireless separate subsidiary. This includes billions of dollars — per state — being illegally diverted to fund the construction budgets of the wireless networks build outs.
• The FCC has never examined the financial books of the only state we know of that still is requires a financial report of the state utilities, — in this case, Verizon NY.
• The FCC has never examined how Verizon’s Fiber to the Home, FTTH, used for FiOS, has been illegally funded via local rate increases and it is classified as a ‘Title II’, Common Carrier service — i.e., the ‘investment’ was being an overcharge to the local phone rates.
• The FCC never examined the violations of the ‘forbearance’ agreements with AT&T, Verizon or CenturyLink, which freed the companies from specific regulations and obligations in book-keeping. Nor did the FCC examine how the companies failed to disclose how their regulated networks were improperly subsidizing the non-regulated networks.

10) Two primary examples that impact every FCC and state decision that rely on the formulas of the FCC’s accounting rules.

This is an excerpt from the Verizon NY 2017 Annual Report detailing the major revenues and expenses. Click for a walk-through of the numbers.

• Verizon NY Local Service had $1.1 billion in revenue, about 21% in 2017, and the total revenues of Verizon NY were about $5 billion. These are mostly the copper wires, sometimes called “POTS” lines, “Plain Old Telephone Service”.

1) Construction Budgets Are Manipulated: Going down the Local Service column we find that (Number 5), $1.65 billion was charged in Construction and Maintenance, yet this should have only been about $100 million as the company stopped upgrading the copper years ago… an overcharge of over $1.5 billion.

2) Corporate Operations Expense Dumping (Number 3). Notice the $1.8 billion dollar charge in the Local Service column. This represents over 61% of the total of Corporate Operations… it should be about $200 million, thus an overcharge of $1.6 billion. (This is a garbage pail of expenses which includes everything from the executive pay and corporate jets to the lobbyists, lawyers and corporate astroturf pushing 5G.)

IMPORTANT: These 2 expense items were manipulated by the FCC cost accounting rules being frozen to the year 2000.

Thus, in just New York and just for 2017 there is almost $ 3 billion in charges being put against local service that shouldn’t be there. They are subsidizing the other lines of business, such as “Business Data Services” or even FiOS that are not paying the proper corporate operations or even the construction expenses.

But, where is this $1.1 billion for construction going? According to the NY AG’s 2011 filing, 75% of the utility construction was being used for wireless and FiOS. The FiOS deployment stopped in most Verizon areas by 2012.

11) NATIONWIDE HARMS: Corporate Operations Expenses Matches in All States.

In the end, Verizon NY is not an anomaly since it is relying on the FCC’s federal cost accounting formulas. Truth is — the accounting formulas appear to continue to be applied, as they were never removed and the accounting was never changed.

This chart shows that the Corporate Operations expenses being applied to the state utility were virtually identical in the percentage being applied to Local Service in 2007, the last available data from the FCC.

12) The final insult to injury: Cities don’t know what has occurred or that they are part of a state utility so they are creating a new model of more overcharging to fund an inferior future based on 5G.

On January 7th, 2020, NYC Mayor De Blasio’s Administration Released Internet Master Plan for the City’s Broadband Future. Mayor Bill de Blasio stated:

“Every New Yorker deserves access to affordable, high-speed internet. However, the private market solution to broadband service continues to leave out too many New Yorkers. With the Internet Master Plan, we are giving notice to corporations that the days of creating a digital divide in our city are over.”

The press release includes experts, pundits, politicians and those who are part of the NYC government. While they are passionate about solving the Digital Divide, most appear to not know that there is still a state-based telecommunications public utility, Verizon NY, that it covers both NY State, (as well as NYC), and virtually no one knows that the public utility is required to publish an annual financial report, which is never mentioned in this Internet Master Plan.