Verizon NY 2019 Annual Report: Start Investigations in NY and Every State in America.

NOTE: Corporate Operations covers the executive pay, the hired lobbyists and lawyers, and even the costs of maintaining the corporate jets. How many different ways was New York and America harmed by the manipulation of these and the other expenses?

On June 8th, 2020, the Verizon New York 2019 Annual Report was released. It is the freshest data of a state-based telecommunications public utility in the US. In fact, no other state we know of, much less the FCC, still requires the publishing of these financial reports. (The last FCC report was based on the year 2007).

Like water, or gas or electric, Verizon Communications, Inc., the holding company, has the franchise to offer and maintain the telecommunications critical infrastructure in multiple states, with the goal — in exchange for many financial perks, the company has obligations to serve their entire service area. In most states, laws were in fact changed, starting in the 1990’s, to replace the existing copper wires with fiber optic wires because they have a lot more capacity to deliver very high speed broadband.

But, over the last decade, the companies, with the help of the FCC, had manipulated the FCC financial accounting formulas to artificially make their entire state appear unprofitable so that they could dismantle the utilities and not upgrade their territories to fiber optics, even though customers paid for it. Instead, over the last decade, Verizon and AT&T decided to give most of what is built to the wireless company — essentially for free, as private property — not because wireless to the home is better but because it makes the company more money.

IRREGULATORS v FCC: Starting in 2015, we requested that the FCC investigate how their accounting formulas, that are still in use by the state utilities to allocate expenses, have become corrupted, and to clean up this mess. We ended up having to take the FCC to court. In March, 2020, the DC Court of Appeals gave us the decision we wanted — the States are now independent and do NOT have to apply the deformed rules and they can stop the massive financial cross-subsidies.

Corporate Social Injustice: The opening chart shows that over $1.8 billion dollars annually of “Corporate Operations” expenses was put into the Verizon New York local utility network expenses. Worse, Local Service somehow ended up paying the majority, over 60%+ of the total, every year, which caused the networks to appear unprofitable. At the same time, the other lines of business, such as the Nonregulated or Access, (sometimes called “Business Data Services”, “backhaul” or “Special Access”) pay a fraction of these expenses, which artificially make them obscenely profitable.

Fixing these cross-subsidies and halting the dumping of Corporate expenses will lower all communications costs, from broadband and Internet to wired and even wireless services; there is even enough to have the rural areas and inner cities upgraded to fiber to the home — finally. And these actions help to close the Digital Divide, unlike the current FCC rhetoric to use inferior wireless services that still require a wire to work.

Moreover, this means that 5G is not profitable once these subsidies are removed.

Impacts All States, All FCC Proceedings: The deformed FCC’s accounting formulas used in these Verizon NY Annual Reports are federal in scope; they have been used in every state. Every FCC and state proceeding we know of has never fixed their data and analysis to reflect actual financial reports — including the state-based telecommunications utilities, such as Verizon NY. So, all state ‘price caps’ have used manipulated (fraudulent?) accounting and numbers to create harmful public policies.

Show Me the Money: First, the Real Basics

The state utilities are not just the copper wires but all of the wires that are owned or used by Verizon in the State, including the fiber optic wires that are used for FiOS or most of the company’s wireless service. And the financial accounting is based on 3 primary categories:

• “Local Service” revenues are mostly from the copper-based phone services and these are classified as “intra-state”, meaning “in-state” services.
• “Access” services, which are also known as “Backhaul” or “Business Data Services”, (“BDS”) or even “Special Access”, are not special; they are just copper or fiber wire services used for business as well as the wireless 5G networks — and they are classified as “interstate”.
• “Nonregulated” can be FiOS video or VOIP calling, or other services, and they can be classified as ‘interstate’ or an “information” service.
• NOTE: It is way too complicated to discuss how these classifications work, but one can always trust that they benefit Verizon et al. vs the public interest.

REVENUES

Verizon New York has been a $4–5 billion dollar state-based, telecommunications public utility. Over the last 7 years, Verizon NY had, on average, $4.7 billion in revenues, with “Access”, (BDS) bringing in 47%, while Local Service was only 23%.

NOTE: These are NOT all of the revenues Verizon receives in NY State. We estimated in 2017 that there is an additional $7–10 billion from Verizon Wireless, Business and Online services; however, the majority of all expenses appears to be charged to the wired state utility.

EXPENSES

All telecommunications utility companies have a few basic, primary expenses, which includes the “Corporate Operations” and the “Construction & Maintenance” expenses of the networks (including staff).

But no independent company would survive if their financials were this distorted.

• “Corporate Operations”, is a garbage-pail category that includes everything from the executive pay, the lobbyists, lawyers, and corporate jets — and much, much more.

The opening chart is a model using 2003–2019 financial reports and it shows just how screwed up the accounting has become. On the left it shows that “Local Service” was always charged 61% of the total while “Nonregulated” service only paid 10% and “Access” was at 29%. And if you want to see just how bizarre this gets, this next exhibit supplies the percentage of the Corporate Operations expenses since 2010, by line of business. Notice a pattern?

This means that even as Local Service revenues declined, there was no change in how much of this expense would be applied. And these percentages are proof that the FCC’s deformed accounting formulas have been in place as there is no reason why Local Service should be paying 61% of the Corporate Operations expense.

Though it varies by year, in 2019, Local Service was charged over $½ billion for Corporate Operations (which was again, 61% of the total). (However, there appears to be a major discrepancy as Verizon NY was charged $2.7 billion, but this does not appear in the summary of expenses and there is no explanation.) In 2017, Local Service was assessed $1.8 billion (61%) against revenue of just $1.1 billion. Considering that Local Service should be paying an estimated $200–300 million, all of this points to hundreds of millions of dollars of excess charges on Local Service.

• Construction and Maintenance Overcharging

From 2003–2019, Local Service, the aging copper networks, paid the majority of all construction and maintenance expenses — 49% of the total, on average, while all of the other areas, such as backhaul or even FiOS, paid only a fraction, even though Local Service was only 20–25% of the total revenues.

In 2019, Local Service was charged $1.2 billion in Construction and Maintenance, which was 43% of the total. But, in the actual expenditures for “network under construction” Local Service is paying 73.5% of the total amount. (NOTE: These expenses can also be known as “Plant” and “Non-Specific Plant”.)

If Local Service only had about $100-$125 million actually spent on the copper networks, where the hell did the additional $1.1 billion go?

Profits, Losses and Special Excess: (Backhaul and Business Data Services)

Let’s end with the final insult. Because the majority of all expenses are being diverted to Local Service while the other lines of business are essentially getting a free ride, Local Service shows major losses, while services, especially the Business Data Services, have obscene profits. And each of these actions has a harmful consequence.

Local Service in 2019 had revenues of $864 million and showed a loss of $1.9 billion, which gave a ‘tax benefit’ for Verizon Communications.

At the same time, the Access (Backhaul, BDS) was very profitable with a 55% EBITDA (Earnings Before Income Taxes, Depreciation and Amortization). Historically, these services would have a profit margin of 11.25%. On top of this, as we show in other research, these Access service revenues are only a fraction of the total. Verizon has other subsidiaries in New York which also offer BDS but they, too, also appear to be paying a fraction of the expenses. We estimated that Verizon’s BDS-Access services could have profit margins reaching 60–85%.

The Impacts? ALL service prices in the US have been seriously inflated. It is the reason America has been paying 2–10 times more than the rest of the world. And it helped to create the Digital Divide as many of the low income families are being priced out of having high-speed internet at just and reasonable rates.

But it is the comparison of Local Service and Access that should be at the center of an investigation. The column on the right shows just how corrupted the FCC accounting formulas have become. By putting the majority of expenses into Local Service, while Access has 125% more revenue than Local Service, Local Service ended up with almost double the expenses. Thus, Access shows $½ billion in “Net Operating Revenues” against Local Service showing losses of $1.9 billion.

This is the first in a series of articles; New Networks Institute and the IRREGULATORS will be publishing a full report and analysis of the overcharging of America and a plan on what States should do to fix this mess.