Why We Requested an Investigation of the Verizon NY 2019 Financial Annual Report.

GOAL: Halt the Cross-Subsidies: Wire the State with Fiber Optics & Lower Prices

TO SUM UP

• 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 America.
• On June 8th, 2020, Verizon filed a Motion to hide, (they call it ‘redact’), basic financial and business data.
• On June 30th, 2020, the IRREGULATORS filed comments to block Verizon NY’s Motion to redact information and we are now calling for investigations.

SEE: Part II: What Is Verizon Afraid of? REDACTED XXX Opens Pandora’s Box.

The current pandemic exposed that large parts of NY State, including rural areas and inner cities, were never upgraded to fiber optics, creating the Digital Divide. This was due, in large part, to the manipulation of the accounting as shown in the Verizon New York 2019 Annual Report.

We found that Verizon NY Local Service was overcharged an estimated $1.1-$1.6 billion, in just 2019. (This is the low number.) Nationwide, this equates to Local Service being overcharged in America an estimated $16-$23 billion in just 2019. (And this is only for expenses related to construction, marketing and corporate operations expenses.)

Moreover, this is not simply about the cost of local phone service, but it is also about the cost of all communications services, including fiber optic, wired networks or wireless based internet and broadband. And it is about the ‘have’ and the ‘have-nots’ — whether these services are available and are they affordable?

While there are those with a knee-jerk reaction that claim we should be focusing on something called “5G” or Wifi wireless, these services require a fiber optic wire and, as we demonstrate, they have been cross-subsidized at the expense of upgrading rural areas and inner cities and overcharging these communities as well.

EXAMINE THE FINANCIALS: We put together a Pop Quiz for Verizon New York 2019 Annual Report to go through the major issues and focus the financial discussion, as well as supplied the Answers, and we include a Summary and Analysis of the Verizon NY 2019 Annual Report.

We also include a new report: 15 Quotes: The Wireline-Wireless Bait-&-Switch Overcharged America and Caused the Digital Divide. which supplies direct statements from Verizon executives, as well as filings and orders by NY State and the NY Attorney General’s office that wireless services were subsidized by the wireline business, and moreover the wireline customers.

As we will discuss, we have requested that NY State not only, immediately restore the missing redacted data, but this has opened up Pandora’s Box. We have requested that these financial areas be audited and investigated.

More importantly, it is time to halt all cross-subsidies, which are evident on the financial pages, as well as other overcharging, and redirect the monies to be used to properly upgrade the State’s critical infrastructure to ALL of NY with fiber to the home, as well as lower all communications prices. Here is the money to do it, without government subsidies.

This is also a model for America as it appears that almost all states that are controlled by Verizon, AT&T and CenturyLink are using the same deformed FCC formulas, most of which are unaware of this fact.

On March 13th, 2020, IRREGULATORS v FCC was concluded and the DC Court of Appeals affirmed that the states are independent of the FCC rules and formulas and can stop this overcharging.

There are Still State-based Telecommunications Public Utilities.

Unknown to most, Verizon NY is the primary telecommunications public utility of New York State (which includes New York City), and it is just like other utilities, such as water or electricity. Moreover, the copper and most of the fiber wires for phone service or for FiOS, or the wires to the wireless cell sites, are all part of this state utility.

Over the last two decades there have been a series of financial maneuvers that have made the wired public state utilities into a cash machine for the other lines of business and it also has made Local Service and the wires appear unprofitable. The primary issue is that the FCC’s cost accounting formulas have become deformed and are still in use, and they now put the majority of all expenses into one category, Local Service.

In New York, the majority of Verizon’s utility construction budgets have been charged to Local Service, but has been used to build out the wireless networks. And the Corporate Operations expenses, which covers everything from the executive pay to lobbyists, lawyers or the corporate jets, are now primarily put into Local Service. In 2019, Local Service paid over $½ billion dollars, over 60% of the total charged to Verizon New York; in 2017, $1.8 billion was charged to Local Service. All of these actions made the wired phone networks appear unprofitable, which was used not only for rate increases, but also as an excuse to not upgrade much of New York State — creating the Digital Divide.

Halting these cross-subsidies and excessive expenses could be used to fix the Digital Divide and bring fiber optic services throughout the State.

But this shell game has other layers of harm. Alongside this, “Backhaul” (the wires that go to the cell sites and are used for broadband, which can also be the exact same wires used for phone service) have excessive profit margins, 55% EBITDA, (Earnings Before Income Taxes, Depreciation and Amortization) and this has inflated all prices for broadband and wireless in America. In fact, America’s wireless and broadband services are now 3–14 times more expensive than other countries worldwide.

Ironically, these profits of Backhaul are also being subsidized by local phone customers; adjusting these excessive profits would also lower America’s communications prices.

In short, we are at the tippling point of the end game as, with the help of the FCC, Verizon et al. have been dismantling the state utilities, moving customer-funded parts of the network to be declared private property for personal use, and stripping all obligations and regulations along the way. No other state we know of requires a public financial report anymore, and with this redacting in NY, the writing on the wall is clear; America needs to act before their state utilities no longer function and are declared private property.

SOME DETAILS

• First, we filed to stop the cover up, the “redacting” of basic information. Verizon NY is attempting to hide (“redact”) critical information. On June 8th, 2020, Verizon filed a Motion with the NY Public Service Commission to hide basic financial and business data and has left out some basic data.

§ 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 could allow competitors to lure Verizon’s executives.”

§ Less financial information means that the company can do more harm without inspection.

• We filed because the current pandemic has exposed that large parts of New York State, including rural areas, and even the inner cities, were never properly upgraded to fiber optics over the last 2 decades and don’t have affordable, very high speed services at home or at their business.

The opening map shows Verizon New York’s FiOS deployment, (which is based on Fiber-to-the-Premises, FTTP), as told by BroadbandNow. The orange areas are supposed to be households that should be able to get or have the service. Where’s the rest of fiber?

As we will see, while New York City is supposed to have been completed, there are major gaps that coincide with low income areas.

• We filed because we found that Verizon NY Local Service was overcharged an estimated $1.1 to $1.6 billion in just 2019. (This is the low number and only includes corporate operations expenses, cross-subsidies of the construction expenditures, and marketing expenses.)

IMPORTANT: There are 3 primary lines of business: “Local Service”, which are the basic mostly copper-based phone lines, “Backhaul”, which are also called “Special Access” or “Business Data Services”, and data services, which include the wires for cell sites, and “Nonregulated”, which are Verizon FIOS video and VoIP, among other services.

The Verizon New York 2019 Annual Report shows that the majority of ALL expenses somehow ended up being charged to Local Service.

MORE ABOUT THESE REVENUES AND EXPENSES

• “Marketing” expenses were charged 54% of the total, $205 million. There is no marketing for basic copper-based phone service.
• “Construction & Maintenance” paid $1.2 billion. Local Service actual expenses historically are $75–125 million; the rest is overcharging.
• “Corporate Operations” (executive pay to the corporate jets) was charged at 61%, over $½ billion dollars. In 2017, Local Service paid $1.8 billion.

This has been going on since 2001. Examining the last 5 years, 2015–2019, we found:

5 Years: 2015–2019

§ Local Service, over the last 5 years, was charged over an estimated $12.5 billion in Construction, Marketing and Corporate Operations expenses.

§ Historical expenses shows this is an overcharge of $10.8 billion.

§ If Local Service paid the percentage of expenses based on the percentage of revenues, than Local Service (at 21%) was overcharged $3.6 billion.

• We Filed because of the Wireless Overcharge in Just Verizon New York, 2019. In just 2019, of the $1.2 billion in construction budgets that were charged to Local Service; we estimate over $1 billion was diverted to build the wired networks used for wireless, but there is no payments from the subsidiary to cover this and multiple documents lay out that the wireless construction budgets were being paid via the wireline networks.
• Over the last 5 years, the utility construction budgets were improperly diverted and used for wireless, which underpaid an estimated $5.3 billion from 2015–2019.
• We filed to expose that these maneuvers caused local rates to have continuous increases. Basic phone rates had multiple rate increases that were based on “massive deployment of fiber optics” in NY State, as well as losses, which were artificially created but used as an excuse to not properly upgrade and maintain NY City and NY State. Meanwhile, the fiber optic budgets which were supposed to upgrade NY State with fiber to the home were used to do the wireless networks.
• We filed because of the massive holes in deployments for FiOS and broadband in New York City in low income areas — and the diversion of the state utility construction budgets. Verizon NY also has a contract with NYC to have 100% of the City upgraded to fiber optics, which was to be completed by July 2014. This is a map from a NYC Report showing fiber availability, cross-referenced with low income areas. Green is bad, in this case.

• In 2017, Verizon was taken to court by NYC because it had not fulfilled the obligations. Verizon has claimed it will be doing wireless, but this diversion of the construction has now been exposed — it created the Digital Divide.
• We filed because America’s telecom prices are 3–14 times more than other countries, world-wide — Investigate Backhaul. “Backhaul”, (sometimes called “Special Access” or “Business Data Services”), are the wired guts of the telecom infrastructure of the state utility. It uses the same copper and fiber optic wires as phone service but are mainly ‘data services’; Banks use them for ATM machines and wireless carriers use the wires for the small cell 5G wireless sites as most wireless requires a fiber optic wire to work.

America’s wireless and broadband prices are excessive because the profit margins of the wireline backhaul networks are inflated and therefore the bottom-price to competitors sets what is the bottom-line price for America. But, these Backhaul profits are also because this line of business is only paying a fraction of expenses, but it is dumping the bulk of expenses into Local Service.

Verizon, AT&T and CenturyLink control the state utilities and they all appear to be using these FCC deformed formulas, which would mean that the practices mentioned for New York should be similar, if not identical, to keep the underlying wires at inflated rates, especially to competitors.

• FACT: Verizon NY 2019 Annual Report shows that Backhaul has EBITDA profits of 55%; Local Service lost $1.9 billion.
• America’s wireless and broadband services are now 3–14 times more expensive than other countries worldwide.
• We Filed to Stop the Knee-Jerk Reaction; Stop Wireless and 5G Cross-Subsidies. This financial shell game has been going on for 2 decades and yet suddenly, due to the Covid-19 pandemic, we have the government and public, who want to solve the newly-exposed Digital Divide overnight. This means that America will continue to not examine and fix these core issues but instead offer knee-jerk reactions to roll out wireless and WiFi. The FCC is throwing billions to do wireless yet, ironically, there has been no mention or examination that wireless is not profitable once the costs of the fiber optic wires required for these services are incorporated; it is like giving a heart attack patient some aspirin and a band-aid, vs fixing the underlying problems.
• New Funding for Fiber Optic Broadband: Halt the Subsidies: We filed because the Verizon NY Annual Reports expose billions of dollars in a financial cross-subsidy scheme that needs to be halted and the money be redirected to bring fiber optic broadband to the home and businesses, especially in low income and rural areas and even in the inner cities.
• We filed to make others aware that there are billions per state that are being overcharged, as the accounting formulas being used were identical, based on the last FCC data.

Nationwide Estimates, 2019

§ Local Service category paid an estimated $28 billion in these 3 expense areas.

§ Should have paid between $4.9 billion to $12.3 billion.

§ Overcharged $15.6 to $22.9 billion dollars in just 2019.

This is based on only three primary expense areas: corporate operations, marketing and construction and maintenance overcharges and not the other areas of interest, such as rate inflation due to the excessive profit margins of Backhaul.

• We filed because New York and the other states can halt these cross-subsidies. On March 13th, 2020, IRREGULATORS v FCC was concluded and the DC Court of Appeals affirmed that the states are independent of the FCC and can stop this overcharging.

§ We Are Requesting that the State Get Verizon to Supply: (Partial List)

o 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”.

o 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.

o Full accounting of all construction and maintenance, especially what is charged to Local Service.

SEE: Part II: What Is Verizon Afraid of? REDACTED XXX Opens Pandora’s Box.