Verizon NY 2017 Annual Report Reveals Billions in Cross-Subsidies Caused by the FCC’s Accounting Rules. This is Happening Nationwide.

Verizon NY 2017 Annual Report

(We created a by-the-numbers walk-through of some the official Verizon New York 2017 Annual Report to spotlight some of the specific harms.)

Why is the IRREGULATORS taking the FCC to court based on the Verizon NY financial annual reports? What happened in your state?

On June 3rd, 2019, the IRREGULATORS won Round 1, the right to take the FCC to court over their cost accounting rules. However, the case relies on the Verizon New York financial annual reports, (the latest published May 30th, 2019). It is one of the largest accounting scandals in American history and it impacts all telecommunications in the United States — and all FCC decisions and proceedings, and almost all state decisions that relied on the FCC’s work.

The FCC’s rules were supposed to divide up the expenses that are to be paid by the different lines of business, such as Verizon Wireless or Verizon Online, (or the fiber optic-based FiOS, or the services known as ‘backhaul’, sometimes called “Business Data Services”) for the use of the infrastructure and services of the state telecommunications public utility — Verizon New York.

Unfortunately, the rules became corrupted and the expenses to be paid are set, “frozen”, to reflect the year 2000, 19 years ago — Yes, literally 19 years ago. Worse, the FCC has never audited or examined how their corrupted rules created billions per-state in corrupted accounting financials— always favoring AT&T, Verizon and CenturyLink, the three holding companies that control most of the wired state public utilities.

Using the Verizon New York annual reports, we prove that the rules are still in use and they now divert the majority of all expenses into Local Service, the basic POTS, phone service category. This has caused billions of dollars annually to be misallocated by charging phone customers excessive Corporate Operations expenses, everything from the corporate jets and golf tournaments to executive pay. It also diverted the construction budgets to pay for the wireless deployments. And Verizon was able to create losses that were used not only for rate increases, but to avoid paying billions in taxes. Ultimately, Verizon claims it is not profitable to upgrade rural or low income areas and is now planning a bait-and-switch, claiming 5G wireless will fix everything.

How crazy does it get?

• Verizon NY 2017 Local Service was charged $1.8 billion, 61%, of Corporate Operations expense, making it unprofitable. Local Service had revenues of $1.1 billion. (“61%” is based entirely on the FCC’s FREEZE and it has been this way for 2 decades.)
• Taxes: The Verizon NY 2017 Annual Report showed losses of $2.6 billion and a tax benefit of over $900 million. Verizon NY has shown losses of over $2 billion a year for almost the last decade, (with caveats).
• Construction: Local Service paid the majority, $1.2 billion, in construction and maintenance, but only an estimated hundred million was attributed to the copper wires.
• The NY Attorney General’s Office in 2012 found 75% of the utility construction budgets were being diverted to wireless or FiOS video services. This is instead of upgrading the NYC and NY State infrastructure.
• Rates Increases of Over 100%: Since 2005, every wireline customer paid over $3,000 a line based on increases granted using artificial losses, through 2018.
• It Created the Digital Divide by claiming areas of the state utility were unprofitable, when, in reality, there was enough money to have been doing continuous upgrades. In fact, rates should have been in steep decline.
• This happened in every state because the FCC rules are federal. The last available data in 2007 matched in every state-based utility.
• Customer overcharging, nationwide, is estimated to be $50–60 billion annually, based on what is happening in New York.

Don’t take our word for how corrupt the state telecommunications utility accounting has become. We created a by-the-numbers walk-through of the official Verizon New York 2017 Annual Report to spotlight some of the specific harms. This is not the Verizon Communications, Inc. holding company; it is a complete set of financials for a state-based telecommunications utility. The FCC stopped publishing this information in 2007 to cover over this audit trail. No other state we know of has a public financial report of the state telecommunications utility; this includes AT&T-California, or CenturyLink-Colorado, or AT&T-Illinois, or Verizon-Pennsylvania.

Go Find Out Yourself: If you are a reporter, a group trying to get fiber optic broadband, or to stop the latest tech-vaporware and wireless 5G substitution, or a politician or regulator who actually cares about your state — go ask the State Commission for the financial annual report of the primary state-based telecommunications utility. Then, send them a copy of the Verizon NY 2017 Annual Report — and then get their reaction.

Expect them to say: “Oh, it’s too onerous for us to collect that financial information anymore; it’s legacy regulations from the 1930’s and it’s been removed; the FCC’s accounting rules have been ‘forborne’ (erased); there are no cross-subsidies; prices are ‘just and reasonable’, (even if they went up 100+%); 5G will solve everything… “

IRREGULATORS v FCC — In December, 2018, the FCC decided to extend the FREEZE rules for 6 more years, of course without any audit or investigation of the previous almost 2 decades of neglect. We could not let this stand and get worse. We have the actual financial books as well as the expertise to figure out what happened, but it has taken almost a decade of investigation to understand this accounting puzzle. And, as we just mentioned, no other state we know of still publishes financial reports and the FCC stopped publishing the financials in 2007. We filed 18 separate reports and comments in this proceeding (Docket 80–286) to document our claims since 2015, which the FCC has mostly ignored.

Settlement with Verizon NY and the NY Public Service Commission, July 2018: Our analysis and methodology was used in an investigation of Verizon New York that started in 2015 and was settled in July 2018. Estimated at $300-$500 million, 32,000 lines of fiber optics will be deployed in unserved areas and the existing networks will be maintained. But this settlement did not go far enough to fix the existing problems or deal with the FCC’s corrupted accounting.

The Bottom Line: Time to Get Back the Money. No one knows or understands that the FCC’s rules have become corrupted over the last 2 decades, that they actually control the state-utility accounting and that they are still in use, nationwide. Stopping the Corporate Operations expenses, the cross-subsidies of the other Verizon lines of business with the state telecommunications utility, especially wireless, and making them pay market prices, will immediately lower rates on all services — not just basic phone service, and could bring billions back to do full upgrades of the telecommunication wired infrastructure. Cleaning up this long standing financial shell game also solves some of the Digital Divide concerns and could even create financial support as part of any settlement.

5G is not profitable once the cross-subsidies for wireless are removed. 5G is nothing more than another technology promise-them-anything bait-and-switch to get rid of state and federal regulations at the FCC and in state legislatures. (This is on top of the health concerns of putting a microwave antenna, always on, on a lamppost directly outside someone’s bedroom window.)

To Repeat: This is a Nationwide Problem: These are federal rules that have been manipulated by the FCC, either by negligence or design. Thus, all states, not only in the Verizon service area, but in the AT&T and CenturyLink territories, have the same financial issues that need to be fixed immediately.

Taking the FCC to court is the first step in this direction.

IRREGULATORS is an independent consortium of retired and semi-retired senior telecom experts, analysts, forensic auditors, and lawyers who are former staffers from the FCC, state advocate and Attorneys General Office, as well as telecom auditors and consultants.