In 1994, Verizon (then Bell Atlantic) made a deal with the phone customers in the state. In exchange for deregulation that gave the phone company more profits as well as other financial perks, the company committed to creating a fiber-based network that could deliver two-way services at 45MPS to customers’ home and offices in rural, urban and suburban areas. By 2004, 50% of the state is supposed to be wired.

“Our complaint centers around the basic fact — It’s 2004 and we now know that Verizon couldn’t build the networks when they made their contractual arrangement with the citizens of PA in 1994. In fact, every current statement made by Verizon clearly shows that they are only now, in 2004, starting ‘test’ deployments. We estimate that every household has paid $1135 for a network they will never receive — and we believe customers are entitled to the money back and any new networks should be put up for bid” said Bruce Kushnick, Chairman, Teletruth.

Here’s an example of a fraudulent act from a normal, though identical business environment. — A state contracts a company to build a new highway system for $3.9 billion and sets timeframes, goals and specifications. The contractor doesn’t deliver. Wouldn’t the state sue the contractor for breach of contract? This is no different. And what would happen if the contractor, instead of using concrete, simply put in another sub-standard dirt road? Wouldn’t the state take the company to court for a “bait-and-switch”?

In the Pennsylvania case, unlike a state funded project paid for by taxes, Verizon, a monopoly, utility and public company was able to charge customers higher rates for local phone services, garnering more money through excess profits and other financial perks.

“The other difference between this case of highway construction fraud and the failed fiber optic Info-Highway is simple — The Bells have been able to have lobbying and political support to cover over an obvious breach of contract with the citizens of Pennsylvania” adds Kushnick.

The Complaint notes that DSL is not a replacement for a fiber-based service. DSL is mostly one-way, doesn’t reach most rural areas and it is approximately 50-100 times slower than what was promised as the minimum speed. — It’s like comparing a Ferrari on the Info-bahn to a skateboard on a dirt road.

It can’t simply be blamed on the regulators for not previously noticing the problems with deployment since Verizon has continually hyped the regulators and the public. For example, a press release from Bell Atlantic, July 1996, announced a 6 and 1/2 year contract with Lucent Technologies. It was based on an agreement for fiber-optic equipment that was going to be used for its fiber-to-the-curb rollout in Pennsylvania — in 1997. http://www.newnetworks.com/Verizon96pressrelease.html

The complaint also points out that prices for local phone service should be continually falling. During 2000-2003, the major expenses were dramatically cut —construction was cut 62%, while staff was cut 29%. Meanwhile, dividends to Verizon from the state are way up, 131%, though revenues decreased only 8%. However, these revenues don’t account for the profits Verizon made for DSL, long distance, Directory or other services in Pennsylvania to the same customers. Also, in 1994, Verizon took a $1.2 billion tax write-off of the old copper networks, claiming they were replacing these networks with fiber — a deduction that shouldn’t have been allowed to occur.

If the money didn’t go back to the customers or was used to build in the network, where’s all the profits going? From 2000-2003, Verizon wrote-off over $26 billion, about $10 billion from overseas losses. Meanwhile, from 1999 through 2001, the top 6 Verizon executives got over $193 million in salaries and $424 million to over one billion dollars in estimated stock options and other perks.

The money has also gone to fund, possibly illegally cross-subsidize, other Verizon businesses. Our analysis found at least $60 million dollars was spent on DSL services, instead of building the fiber-optic services. Based on our upcoming phonebill report, it also looks like local phone service is paying for other non-related services, like the roll out of long distance or wireless services as well.

And what about the recent announcement by Verizon that it was increasing its broadband spending $3 billion dollars in the next two years? Verizon didn’t tell anyone that there’s been a massive cut in expenditures on wireline services since 2000, from $12.1 billion in 2000 to $6.8 billion in 2003—– a drop of $5.3 billion dollars or 44%. These new expenditures won’t even cover over the cuts of the last few years. More to the point, according to Verizon, new construction in 2004 will be “essentially flat”, and so they won’t be spending a great deal more on fiber optic broadband.

Collusion? It is now also clear that this same bait-and-switch occurred in numerous Bell Atlantic and NYNEX states, including New Jersey, Maryland, and even Massachusetts. Did the parent companies go to each state with the same faulty plan?

Other sources about the PA fiber deployment show similar findings. According to testimony by Economics & Technology, Verizon, PA made approximately $4 billion dollars in excess profits and other perks. Thus, independently, two research firms found a similar pattern of overcharging.

Teletruth is calling for a series of investigations to answer some basic questions:

• How profitable is local wireline phone service?
• Did local phone service fund the development of other products?
• How much did Chapter 30 cost customers as compared to the original rate-of-return analysis?
• Could Verizon build the networks that they had been contracted to build at the time of the commitments or not?
• When did Bell of PA, or New Jersey Bell or any other Bell Atlantic or NYNEX state know that the fiber networks couldn’t be built? Was the same plan used to deceive multiple states?
• Did the company use false and misleading statements about a fiber optic deployment to change state laws?

Immediate Refunds After these analyses, the state should implement refunds to customers as well as put the state’s next generation networks up for bid.

“It may be time to revisit the state’s original ‘structural separation’ plan, to separate the parent company, Verizon, from the control and future of these networks,” Kushnick adds.

For more information ..

Teletruth is a leading customer alliance dedicated to protecting customers’ broadband and telecom rights. Teletruth is a member of the FCC’s Consumer Advisory Committee and has active public interest complaints pertaining telecom and broadband issues with the SEC, IRS, FCC, numerous state commissions, and has helped to initiate class action suits. Teletruth offers free phone bill analysis and audits to businesses and government agencies through LTC Consulting, a phonebill auditing firm. Through New Networks Institute, a market research firm, Teletruth publishes research on the broadband and telecommunications markets. Teletruth is independent of any phone company, association, political party or lobbying group.