What Is Verizon Afraid of? REDACTED XXX Opens Pandora’s Box.

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SEE PART 1: Why We Requested an Investigation of the Verizon NY 2019 Financial Annual Report

§ On June 8th, 2020, the Verizon NY 2019 Annual Report was released. It is the freshest data of a state-based telecommunications public utility in the US.

§ On June 8th, 2020, Verizon NY filed a Motion with the NY Public Service Commission to hide, (they call it ‘redact’), basic financial and business data, and their reasoning is, of course, sound:

§ Verizon claimed it was redacting the info because it was an: “Unwarranted invasion of personal privacy”

§ Verizon also claims that if it supplies the information pertaining to the compensation of the executives listed, “The compensation information in Schedule 3 could allow competitors to lure Verizon’s executives.”

The excerpt above is from the Verizon New York 2017 Annual Report for Schedule 3: “Officers & Directors (including compensation)”, (pages 8 and 9). In examining the previous years, even though the current request for redacting was for the 2019 Annual Report, (published in June, 2020), we uncovered that the information had already been redacted in previous years.

NOTE: An important twist came when we realized that the current NY Public Service Commissioner, Tracey Edwards, was listed and surrounded by her previous work associates in the Verizon NY 2017 Annual Report, published June 2018. Appointed in June 2019 by Governor Cuomo, we have asked that she recuse herself from any proceedings with Verizon and telecommunications due to obvious conflicts-of-interest.

  • On June 30th, 2020, the IRREGULATORS filed comments to block Verizon NY’s Motion and we are now calling for investigations.

Opening Up Pandora’s Box

There were 3 main areas of information that were redacted:

  • Schedule 3: OFFICERS & DIRECTORS, (including Compensation)
  • Schedule 8: IMPORTANT CHANGES DURING THE YEAR, which includes residential and business rate increases.
  • Schedule 61: ACCESS LINES IN SERVICE

The IRREGULATORS are now requesting:

· The information that was redacted in these pages (known as a “schedule”) should be immediately restored and made public.

· ALL of the information about each information category and the flows of money attached to it needs to be laid out for the public to examine.

· We want an explanation of the massive financial cross-subsidy scheme that is evident by just examining the basic financial annual report.

· We want a halt to all cross-subsidies — leading to a redirection of these funds to build out NY State with fiber optics, as well as lower prices, immediately.

1) Schedule 61: ACCESS LINES IN SERVICE

§ We Want an Accounting of ALL Access Lines, Fiber and Copper, that are in Use, Known as “Lit” or Not in Use, Known as “Dark”.

Verizon has continually told everyone that they are ‘losing lines’, and in one category, basic phone lines, that has been true. But upon closer inspection, the information they presented has always been a fairytale, just a fraction of all lines.

Redacting the basic phone lines in service just shows that the trendline is to remove all basic information a slice at a time. And, as we pointed out, the excuses of removing this information are absurd and in fact, not even true.

This is an industry-wide practice that AT&T, Verizon and CenturyLink, with the FCC and even the state commissions, have used for the last decade+. If there were actual competitors that had some market power, this practice would have been stopped a decade ago.

This excerpt of the Verizon NY 2019 Annual Report, page 163, shows this redacted page, Schedule 61.

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The previous year, the Verizon NY 2018 Annual Report, Schedule 61 showed that there were 1.9 million access lines at the beginning of the year and ending with 1.65 million access lines in service, in just New York State. And this was without the “Single Line Business” accounts, marked here as “Not Available”.

Weren’t we told that no one is using these mostly copper-based phone lines?

Verizon also claims that this chart had:

“Confidentially, geographically disaggregated market data”

This is just not true. While there have been different geographic areas listed, as you can see under the “Division of Territory”, this information has been redacted, and it has been like this for at least the last 5 years, and only the totals have been given.

NOTE: Even more troubling, a September 2019 Verizon filing with NY State (Verizon Service Quality Report, Case 19-C-0286) claimed it had 1.8 million basic voice-only access lines in New York, directly contradicting what was in the Annual Report.

“Verizon is the largest incumbent local exchange carrier (ILEC) in New York State serving approximately 1.8 million voice-only access lines across all its central office switches. Although Verizon is still New York’s largest ILEC, its customer base continues to decline. Verizon currently serves approximately 32% of the access lines it served ten years ago. For the twelve months ending June 30, 2019, Verizon lost approximately 211,813 (or 10.2%) of its voice-only access lines.” (Emphasis added)

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I.E.: The year 2018 ends with 1.65 million lines, while in September 2019 there are 1.8 million lines. Moreover, if we count the 211,813 lines lost there were — 2,011,813 lines in the middle of 2018; this means that the starting number for 2018, of 1.9 million lines was made up.

It seems that publishing the actual numbers would ruin Verizon’s storyline if reported.

Missing Lines

Going through the report reveals that the majority of access lines, copper or fiber, were never supplied and there is no way of understanding this from the information in Schedule 61. This schedule appears to be tied only to one revenue classification “Local Service”, and all of the rest — the majority of lines — are tied to other lines of business and are missing.

As the quote states, these are “voice-only” lines, leaving basic data lines like DSL out of the accounting. In fact:

  • “Backhaul”, as discussed in Part 1 of this analysis, had $1.9 billion in revenues but shows ZERO lines listed.
  • Verizon’s fiber optic FiOS lines and other fiber optic lines show ZERO lines.
  • Verizon’s DSL has ZERO lines.
  • Verizon’s data lines with packages have zero lines.

To confuse this more, in 2007, the last year the FCC published state-based financial and business data, suddenly America lost 41 million fiber optic lines.

The FCC also used to supply all of the access lines in service in every state utility in their “Statistics of Communications Common Carriers”, (which had started in 1939). The last available information was for the year 2007 and Verizon NY showed 47 million total access lines for the year 2007.

In short, by manipulating the accounting of lines, the company has made claims that no one is using the wires, that they are not part of the state utility and thus, it is ‘unprofitable’ to do upgrades.

We wrote an entire report about the manipulation of access line accounting.

Access Lines Did NOT Decrease in Toto.

Another way of examining the scale of the missing access lines is to examine the revenues. This chart shows the revenues for the three different lines of business — Local Service, Backhaul and Nonregulated Services. Local Service revenues were in steep decline, yet the business shifted and the other areas all had major increases in revenues and thus had to have increases in the number of access lines.

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We Want a Full Accounting of the “Dark Fiber” Lines

There is no accounting of one important category known as “Dark Fiber”, the fiber optic wires that were installed over the last 2 decades but were never put into use. According to the last FCC report, the majority of fiber optic lines were ‘dark’. Where are they? Why weren’t they put into use?

Why Is the Number of Access Lines Critical to Untangle the Tangled Web?

SUBPLOT A: Deceptive Accounting Was Used to Create Harmful Public Policies.

  • The manipulation of the accounting of access lines has been used to claim that the networks were ‘unprofitable’ and that the entire state territory did not have to be upgraded.
  • It was used to get rate increases, as well as cutting of staff, claiming that there was a drop in access lines.
  • It has been used to save on tax payments as well as using the state utility perks, like rights-of-way.

SUBPLOT B: Cities are clueless that there is a state-based telecommunications utility or that they are part of this utility.

  • Many cities are attempting to do work-arounds — and have been trying to raise money to upgrade their city with an ‘overbuild’, instead of claiming what is in the ground, beneath their feet.
  • New York City’s Master Internet Plan to have high-speed broadband access to all, never mentions that the City is part of the state utility, or about the Verizon NY annual reports.
  • We argue that it is time to assess whether the wires that were funded via the local phone customers and have been dark should be claimed for the cities to use.

SUBPLOT C: Follow the Money

Who paid for the installation and maintenance of the line, and which the revenue bucket is getting the money?

As we discussed elsewhere, the expenses for the fiber optic installations appear to come mainly from the Local Service category. This has made Local Service unprofitable while creating major profit margins for Backhaul and wireless.

And this has turned into a game of ‘3-Card Monty’, where the company, using the FCC’s accounting formulas, could use the basic phone category to dump expenses, which would include the construction for new access lines, but the revenues ended up not going back to the Local Service category.

Thus, we are not only calling for ALL access lines but the revenues and expenses that flow from these lines. And the most egregious version of this is the line of business called Backhaul.

2) Full Accounting of All Construction and Maintenance, Especially what is Charged to Local Service.

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”.)

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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?

Verizon NY has been cross-subsidizing Verizon’s wireless fiber optic networks — without payments back to the utility. This has meant that cities that should have been upgraded over the last decade weren’t, especially rural areas. And this has happened in at least every Verizon state, but most probably all states, including the AT&T and CenturyLink controlled states.

3) Backhaul has a 55% EBITDA; These Profits Need Investigation.

Backhaul are the wires and services, sometimes called “Special Access”, or “Business Data Services”. In the previous chart we showed that in 2017 Backhaul had increased over 103% since 2003 adding an additional billion dollars, for a total of $1.9 billion in revenues, in just Verizon NY, for just 1 year.

In Part 1, we discussed that in 2019, Verizon NY backhaul had a 55% EBITDA, profits. How is it possible that one part of Verizon NY, the public telecommunications utility, has an excessive profit margin while, at the same time, using the exact same wires, Local Service and the state utility lost over $1.9 billion dollars?

We put together a short analysis of the Verizon NY 2019 Annual Report backhaul profits.

A close inspection showed that Backhaul’s profits are created based on overcharging Local Service with expenses that should have never been put into Local Service. Backhaul is paying less than ½ of the construction and maintenance as Local Service but it has double the revenues. Moreover, it is paying ½ of the Corporate Operations expense.

And to tie this back to Schedule 61 and the redacted accounting of access lines, we see Zero lines have been supplied in this annual report, redacted or nor.

Why should you care about Backhaul?

Backhaul makes America’s prices for wireless and broadband some of the most expensive in the world. The price of America’s wireless and broadband services are now 3–14 times more expensive than other countries worldwide and the Digital Divide, at its core, is that low income families can’t afford our broadband and wireless services.

Thus, it is not only a failure to supply an accurate accounting of the access lines but also about the profits (and the manipulation of the profits) that needs investigation.

4) Full Accounting of Corporate Operations Expenses, including Executive Compensation.

§ We request a full accounting of executive pay and every cent that has been put into the Corporate Operations expense category and charged to Verizon NY and specifically, Local Service.

With $½ billion in Corporate Operations expenses being charged to Local Service in just New York, in just 2019, we request an audit to determine whether the salaries and perks of all of the 18 executives listed in the 2019 Annual Report (or the 12 executives that were listed in the 2017 Annual report) have been dumped into Local Service expenses.

But it gets worse because in 2017, Local Service was charged $1.8 billion in Corporate Operations expense, and Verizon New York paid a whopping $3 billion in 2017.

The secret here is that 61% of the total of this one expense category has been put into Local Service for 2 decades, based on the deformed FCC expense formulas — which never should have happened and nothing was ever adjusted for 2 decades.

Moreover, Local Service and thus Verizon NY has been losing almost $2 billion annually, in large part from Corporate Operations and the diverting of the construction budgets for wireless and the other lines of business. In 2005–2009, there were multiple rate increases on basic service directly attributable to these expenses.

  • Is Verizon NY charging local phone customers for — the executive pay of the 12 executives in the 2017 Annual Report we highlighted in the first chart or the 18 executives in the 2019 Annual Report?
  • Is Verizon NY charging local phone customers for — say lobbyists, lawyers, the corporate jets, the golf tournaments, etc.
  • Were the Corporate Operations expenses to blame for the multiple rate increases or did these expenses create the massive losses which ended up giving Verizon tax benefits?
  • Verizon has been throwing foundation grant money at non-profits, think tanks, astroturf groups, and more recently millions to groups that have been talking about ‘social justice’. We want an accounting of how much of the Corporate Operations expenses are part of this slush fund.

5) Schedule 8. IMPORTANT CHANGES DURING THE YEAR is a collection of items including a listing of the “intrastate” rate increases for Business Toll and Term plans, which have been ‘redacted”.

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NOTE: Attempting to find these documents online with matching dates was futile.)

We do not even know what else has been redacted to detail what has been omitted. With these rate increases, we want to know, now, based on what we just presented, whether they are justified or just made up.

  • Are the financials manipulated and the other lines of business getting a free ride?
  • Moreover, were these term plans increased due to a) claims of line losses, b) Corporate Operations expenses that were improperly charged to the network services, c) who knows what else?

New Networks Institute,Executive Director, & Founding Member, IRREGULATORS; Telecom analyst for 38 years, and I have been playing the piano for 63 years.

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