The Other Set of ‘Cooked’ Financial Accounting Books Used by AT&T, Verizon & CenturyLink that Created the Digital Divide.
To the pundits, experts, activists, lawyers, politicians, regulators, reporters, my friends, et al.; as we sit here discussing the government subsidies to ‘fix the Digital Divide’ via the Biden infrastructure plan and planned state broadband funding gifts, I must call your attention to the other set of financial books that have been and are still in use by Verizon, AT&T and CenturyLink — which you probably never examined or even knew that they existed.
This excerpt is from the Verizon New York 2020 Annual Report, which was published May 27th, 2021. Verizon NY is the largest state-based telecommunications public utility in New York State, and it is hiding in plain sight. Click to read the Verizon NY Annual Report as well as the IRREGULATORS’ analysis. And this annual report is based on the “USOA”, “Uniform System of Accounting” rules, and it directly contradicts what most have been saying about the broadband investments in the US.
NOTE: This is NOT the same financial report of the holding company, Verizon Communications, Inc., but a separate state-based financial report representing the revenues and profits of the state telecommunications public utility. And, to add to the confusion, most reading this do not know that there are still state telecommunications public utilities left in America or worse, they do not know that these are NOT just the copper-based wires used for phone service but include the fiber optic wires for broadband, including FiOS, as well as the fiber optic wires used by wireless that connect the cell sites.
If you take out a map of the coverage of Verizon New York, a) you can’t find a separate map easily, b) Verizon NY covers 90%+ of the State, including New York City, c) except for the cable company and other small competitive providers in some cities, no other wired telecommunications company showed up to wire NY State with copper, much less fiber over the last 50 years.
The Biden plan never mentions that there are state utilities, or that there are holding companies, such as AT&T, which currently controls 21 state utilities, while Verizon controls the East Coast from Massachusetts to Virginia, (a part of Connecticut, and D.C.). Nor does it even acknowledge that these utilities cover most of America, state-by-state — especially “unserved” areas that were never properly upgraded to offer high speed broadband.
And it is clear that most are clueless about all of these specifics; they keep calling these companies “ISPs”, “Internet Service Providers”, instead of “incumbent wireline telecommunications state public utilities”. The ISP service is actually a separate subsidiary of each holding company that offers internet service, such as Verizon Online. Moreover, it is supposed to be renting the state wired facilities in order to use these wired networks to offer Internet service.
Show Us the Money & the ‘Cooked Books’ vs Knee-Jerk Solutions
Assuming you know how to read a chart with basic financial information— How is it possible that Local Service, which had revenues of about $1 billion, (Column F, Line 1), mainly derived from the basic copper-based phone service, was charged, (Column F, Line 5), $833 million dollars in just New York, in just 2020, for Corporate Operations — which includes expenses for the lawyers, the lobbyists, executive pay and the corporate jets? This represents over 60% of this one expense being charged to Verizon NY by the holding company. Why should the majority of these expenses be put into one class of service, Local Service, while the other categories are paying a fraction of this expense?
Worse, tracking the Construction expenses of the state utility, Local Service was charged $1.1 billion in Construction expenses, (Column F, Line 2). How is this possible when the copper wires are no longer being maintained or upgraded and it is no longer even being offered as a service and available everywhere?
Way back in 2012, the NY Attorney General found that 75% of these construction funds were being diverted to fund the fiber optic construction for the wireless networks, and for the Verizon cable service FiOS, (the FiOS deployments were halted around 2012). However, it is now clear that this money should have been used to upgrade the rural and the inner city areas — which never happened, even though state laws have been changed to charge phone customers for upgrades to fiber optics, multiple times, starting in 2005 in NY.
But this is only part of the problem. If you stare at this financial excerpt, you will see that there are other lines of business, such as “Business Data Services” (BDS), (Column G, Line 1) which brings in almost double the revenues but it is paying ½ of the expenses for Construction (Column G, Line 2). Also called “Backhaul”, or “Middle Mile”, or even “Special Access”, these are data lines that are used by banks for ATM machines and the wires to the cell sites.
Meanwhile, the “Nonregulated” services, (Column C), is a category that includes Verizon’s FiOS video and VOIP phone service — and even though it brought in more revenues than Local Service, it is paying a fraction of ALL expenses — Why?
In the end, this shell game has been in play for over 2 decades and though it varies by year, Verizon NY has shown $1–2 billion dollars in losses, annually, with massive tax benefits being generated, and all generated by Local Service losses which are clearly not being created by Local Service but by the dumping of non-related expenses into Local Service.
Welcome to the Digital Divide. The other consequences of this shell game have been to a) raise rates over 100% by claiming losses, b) claim that it is not profitable to upgrade the rural areas, c) use this as an excuse for major staff cuts, and d) cross-subsidize the wireless business so that it has obscene profits, especially since it doesn’t pay for large parts of the Construction budgets.
How can anyone who claims that they care about closing the Digital Divide and is throwing around numbers pertaining to investment, not want to start calling for investigations? It appears that they, and pretty much anyone we talk to, may be suffering from “institutional amnesia”.
‘Institutional Amnesia’ — is when the history of what happened in the state pertaining to commitments for high speed fiber optic broadband have become more myth, or when state and federal laws and regulations that held these commitments are forgotten. But it is also the rewriting of the history to the point where ‘common wisdom’ has been given so much erroneous miss-information for so long that everyone is quoting a made-up fiction written by the phone and cable companies to help their own public policy direction or financial position.
The Verizon NY Annual Report uses the “USOA”, “Uniform System of Accounting” rules, which are supposed to allocate the expenses to the different lines of business so that the other services, like FiOS or Backhaul, would not be ‘cross-subsidized’ — i.e., exactly what you see here, where the nonregulated services are paying a fraction of the expenses or that Local Service has been funding the fiber optic build outs of the wireless subsidiary.
In 2007–2008, Verizon et al. filed with the FCC to remove these USOA accounting rules, claiming they were a ‘burden’, but what Verizon never mentioned was that it never stopped using the USOA and worse, the rules were corrupted and subsidizing the other businesses.
Halt the Cross-Subsidies: Fund Fiber Optic Broadband and Lower Prices.
Simply Put: Halting the $833 million dollars in Corporate Operations that are being charged to Verizon NY Local Service, and redirecting the $1.1 billion in Construction back to the state utility, as well as making the other lines of business, (like the ISP service), pay market prices — would supply more than enough funding to upgrade NY State.
Second, since these wires were NOT funded by investors but through rate increases, then the current and future networks should all be “Open Access”, opened to all forms of competition and this should be a priority to help lower rates. We don’t need new regulations; we need the market to function and not be controlled by a few companies that have monopolies over the wires, as they impact ALL services, not just phone service.
And halting the cross-subsidies is an imperative. Wireless 5G in-region is not profitable once it has to pay for the construction expenses, and it certainly isn’t a substitute for a fiber optic connection.
Now multiply all of this by every state in America. Every state telecommunications public utility we examined, such as AT&T California or Verizon Pennsylvania or CenturyLink Oregon, appears to be still using the exact same corrupted “USOA” formulas as these rules were ‘federal’. However, most states have been hiding the utility financial books from the public; they should be made public, like New York.
In 2007, the FCC stopped publishing “The Statistic of Common Communications Carriers”, which supplied the financial information for each major state telecommunications utility and had started in 1939. Reinstating the data collection and investigating the corruption and use of the USOA accounting would help to correct the blatant negligence of the regulatory-captured agency.
In short, the gross financial results visible in this excerpt were created by Verizon, not us, and this should be like reading the RIOT ACT to those who actually care about fiber optic broadband to everyone — rural, urban, suburban areas — at reasonable rates.
And to those suffering from ‘institutional amnesia’ who have never examined just how we ended up with this mess — it’s not your fault; but it is time to get involved to undo this wrong.