IRREGULATORS Take the FCC to Court Based on Verizon New York 2017 Annual Report. Billions Revealed in Cross-Subsidies Caused by the FCC’s Manipulated Accounting Rules. This is Happening Nationwide.
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.
PRESS: We created a by-the-numbers walk-through of the official Verizon New York 2017 Annual Report to spotlight some of the specific harms.
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, for the use of the infrastructure and services of the state telecommunications 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. 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.
IRREGULATORS v FCC — In December, 2018, the FCC decided to extend the FREEZE rules for 6 more years. 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. No other state we know of still publishes financial reports; 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. http://irregulators.org/our-work-reports-filings/
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. https://bit.ly/2O25OqQ
The Bottom Line: 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.)
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.
New Networks Institute (NNI) & the IRREGULATORS— just helped to get Verizon to install 10,000 fiber optic lines in Verizon New York’s unserved areas as well as get the needed repairs for the copper networks. — We estimate this to be about $300 million to $1/2 billion dollars over time.
Our research and calls for an investigation started in 2010, and our reports, filings and analytical approach helped to initiate and was used in the investigation.
We are mentioned in the decision and will be taking next steps on this as we filed to block this settlement agreement —it left out billions in cross-subsidies and customer overcharging.
We congratulate Communications Workers of America (CWA) and PULP, Public Utility Law Project, for their dogged persistence and putting our research and analysis to good use.
Press release -- https://on.ny.gov/2L1NccN
"PSC Approves Verizon Service Quality Improvement Plan — Telecommunications Company Agrees to Expand Broadband Service to 32,000 Customers, Helping to
Fulfill Governor Cuomo’s Goal to Expand Broadband Service in New York; Make Much-Needed Repairs to Existing Copper Service; Remove Unused Telephone Poles to Improve Safety —
"The Commission declines to follow New Networks Institute’s recommendations to reject the JP, continue investigating
Verizon’s financial practices, and require that wireline customers be reimbursed for the alleged improper cross-subsidization
of Verizon’s wireless affiliates. The Commission’s primary objectives in this proceeding were to investigate and evaluate
the quality of service Verizon is providing to its customers (Core and non-Core).
More particularly, this proceeding was commenced when changing circumstances called into question the Commission’s premise for
continuing Verizon’s service quality focus on Core customers. The Commission was concerned by Verizon’s announced plans to stop
expanding its fiber network beyond areas currently served. The Commission also pointed to data indicating fewer customers were leaving
Given these indications, and the fact that more than 2 million of Verizon’s current customers remain reliant on an aging copper network,
the Commission decided to examine whether changes to Verizon’s service quality oversight are necessary. The Commission recognized that this
investigation would inherently include an examination as to the state of the copper system and whether Verizon’s investment in its network has
been sufficient to provide adequate levels of service to consumers on regulated services. But, the Commission did not state any intention to
revisit rate-of-return regulation. The Commission did recognize an expectation that the Company will continue to invest in its New York regulated operations
as the Public Service Law unequivocally requires Verizon to provide adequate service. The Commission also made it clear
that it would take the necessary action under the Public Service Law to address shortcomings if the market fails
to provide Verizon an appropriate incentive to meet its statutory obligations. That said, the Commission has broad authority under the
Public Service Law to initiate further investigations if the circumstances so warrant.
The Commission focus has long been on ensuring compliance with minimum standards of service quality for customers lacking competitive
choice. The Commission has previously investigated claims that Verizon has not been adequately investing in its copper network. In that
context, the Commission has acknowledged that, in response to technological advances, the telecommunications landscape has changed
dramatically. The Commission has also recognized that, in evaluating Verizon’s performance, it must consider the extent to which investment in the legacy
copper network would be cost effective when that network is becoming competitively and technologically obsolete.
The terms of the JP will implement specific improvements in Verizon’s system that will directly improve the
service quality deficiencies that led to the commencement of this proceeding. In light of all this, we disagree with New
Network’s recommendation to reject the Joint Proposal. The terms of the JP should result in service quality improvements
that promote the public interest. Moreover, with regard to other commenters’ complaints about Verizon’s maintenance of its copper network and being forced onto more expensive
wireless and fiber networks, the Commission notes that Verizon is required to offer its tariff services and tariffed-based rates regardless of the type of network delivering the telephone call.
Notwithstanding the foregoing, the Commission has long recognized the benefits and resiliency of the fiber network over the older vintage copper network a
nd we note here that the JP will further that goal.
Finally, in the Commission’s Initiating Order, we raised the question of whether “Verizon’s service quality processes and programs pertaining
to all the Company’s regulated customers” are sufficient “to determine if modification of Verizon’s revised SQIP is warranted.”
In light of the JP’s terms and conditions being approved herein, the Commission does not believe any changes are required at this time.
AT&T, Verizon, Comcast and Charter Got $58.8 Billion in Tax Benefits: We Want Lower Rates — Now!
Here is a chart you might want to start screaming about. Prices are no longer just and reasonable. There is no effort being made to lower prices, even though just these four companies, AT&T, Verizon, Comcast and Charter (Spectrum) garnered $58.8 billion in tax benefits.
The “2016” and “2017” columns supply the “net income” as of the end of December 2017 and they include the “earnings per share”, “EPS”. The next columns are the increases from 2016 to 2017 and the “tax benefit” column is what the companies are reporting. For example, AT&T’s 4th Quarter result had the net income rise from $2.4 billion to $19 billion, and the total tax benefit was $20 billion while the diluted earnings per share went from $.39 to $3.08, increases of about 690%.
NOTE: We still have to wait for the companies to put out their annual reports as there can be differences. And some companies, like Centurylink, (the incumbent phone company for western states like Wyoming, Colorado and North Dakota, still hadn’t posted their 4th quarter results as of this writing.) Also, the earnings per share and other factors will vary based on the number of available stock shares, number of shareholders, etc.)
Historically, when an incumbent telecommunications company had a major financial windfall, the regulators would make sure that prices would be lowered, especially when there is little competition to lower them. In fact, in New York, Verizon was granted major rate increases of basic phone service starting in 2005, in part because the company was reporting major losses.
But there are no plans to ‘lower rates’ here. The FCC, of course, doesn’t care to lower cable TV, broadband, internet, or phone prices on their friends, the phone and cable companies — commonly called “ISPS”.
Yet, based on the companies’ financials, the changes in the tax laws for just these 4 companies helped to deliver a mind-boggling tax benefit of $58.8 billion dollars. Maybe if this new found cash was to be used for something useful, like building out infrastructure or bringing in serious competition to lower prices, then these windfall profits could be justified.
But this is not the case. The money appears to be going mostly to shareholders with massive earnings per share benefits — i.e.; take the money and run. And wouldn’t you know it, those who benefit the most are the largest shareholders — the management of Verizon, AT&T, et al.
AT&T Claims 2017 has been a Remarkable Year because of the “Major Policy Achievements”.
America’s consumers and businesses are under attack, not only from outrageous tax breaks to already rich corporations, commonly known as the so-called ISPs, but they are being doubly assisted by the FCC.
And AT&T et al. are, of course, laughing all the way to the bank due to the current Trump and FCC tax and regulatory policies.
Randall Stephenson, AT&T’s CEO, told investors in the company’s 4th Quarter 2017 earnings presentation — it’s a remarkable year because of the “major policy achievements”.
“I just want to take a moment and reflect on 2017 because by any measure, 2017 was a remarkable year. It’s remarkable for our country, for our industry where we operate, and for AT&T. And it’s been a long time since we’ve seen so many, what I would call, major public policy achievements compressed into a single year like we saw last year. And we’re calling these achievements because the combined impact from these is going to be growth. It’s going to be growth in U. S. investment and jobs and in wages. And all of this began early in 2017, as regulations across all industries were being rationalized.”
“We need a long-term predictability on the rules of the Internet and on customer privacy. So, we’re calling for an Internet Bill of Rights and you can expect us to take a leadership role on this as the discussion progresses.”
As we pointed out, in a single year, the FCC decided to make massive changes, which are part of a wish list created by AT&T.
§ Get rid of Net Neutrality
§ Get rid of basic privacy laws
§ Help to kill off competition
§ Help to close down the existing copper infrastructure, even in areas where there are no substitutes.
§ Force-march customers onto wireless service
§ Privatize publicly funded infrastructure.
We call this litany of regulatory mayhem “The Wheel of Misfortune”. And the idea that AT&T wants an “Internet Bill of Rights” is ludicrous. One has to remember that the FCC named the removal of Net Neutrality the “Restoring Internet Freedom Order”.
In fact, Trump has decided to make the FCC a toxic waste dump by having telco and cable company consultants lead the transition team. Trump then appointed former Verizon attorney Ajit Pai to be chairman, and Brendan Carr was made a commissioner; he is a former lawyer at Wiley Rein, who worked for Verizon, AT&T, and the wireless association, CTIA and the phone association, USTA, for years.
Verizon Benefits from All of this are Also Worth Noting.
Talk about financial gifts, Verizon writes that it had a $16.8 billion dollar, one-time earnings increase — and instead of actually building out areas with fiber optics that were neglected, the company has decided to give the money to the shareholders, with an additional $4.10 per share.
“As Verizon noted in an 8-K filing on Jan. 17, the federal Tax Cuts and Jobs Act also resulted in a one-time, after-tax increase to earnings provisionally estimated to be approximately $16.8 billion, or $4.10 per share. This is primarily related to the re-measurement of the company’s net deferred tax liabilities at the new corporate income tax rate.
“The cumulative net impact from these items, after tax, was approximately $15.2 billion, or $3.71 per share, in fourth-quarter 2017.
I note that elsewhere, according to Verizon, this increase was $4.56 in earnings per share (EPS), compared with $1.10 in 4Q 2016–315% more.
Verizon is also adding $100 million to the Verizon Foundation, from the current $200 million to $300 million over the next two years — which, as we documented, has been used as a slush fund to give to politicians in their districts for pet projects.
But who is the largest beneficiary of this largesse? Well, Chairman Lowell McAdam who had 1.5 million shares of stock in 2016 (the last published accounting) so this tax benefit per share will make him an additional $6.1 million. Who knows what else is in the convoluted executive pay schemes which will be listed in the Verizon 2017 annual proxy statements.
The Net Neutrality Decision Claims that “Title II Harms Investment”. This Conclusion is Based on Manipulated Data
These year-end financial reports also highlight something else: The FCC has been manipulating the story that Title II harms investment.
This is Comcast’s capital expenditures for 2015–2017.
Our most significant recurring investing activity has been capital expenditures in our Cable Communications segment, and we expect that this will continue in the future. The table below summarizes the capital expenditures we incurred in our Cable Communications segment in 2017, 2016 and 2015.”
This shows that there were only increases in the total from 2015 through 2017, from $7 billion to $7.9 billion. Where’s the ‘impact’ of Title II?
And this is Verizon’s overall capital expenditures. The numbers are going up, not down as well.
These ‘overall’ numbers directly contradict the FCC’s claims. The FCC quotes multiple garbage-pail analyses, such as Hal Singer’s Broadband survey, which takes the entire holding companies’ capital expenditures of Verizon, AT&T and Comcast, then calls all of these “ISP” investments.
“91. Comparisons of ISP investment before and after the Title II Order suggest that reclassification has discouraged investment. Performing such a comparison, economist Hal Singer concluded that ISP investment by major ISPs fell by 5.6 percent between 2014 and 2016.
“Singer attempted to account for a few significant factors unrelated to Title II that might affect investment, by subtracting some investments that are clearly not affected by the regulatory change (such as the accounting treatment of Sprint’s telephone handsets, AT&T’s investments in Mexico, and DirecTV investments following its acquisition by AT&T in the middle of this period).”
And Singer manipulates the details of AT&T’s numbers as well, which gooses the entire calculation to show a larger decline. As we just showed, Comcast had increases every year and Verizon’s overall capx also increased.
But, as we pointed out elsewhere, using the base holding companies’ capx total are useless — and there are better data, which we presented, based on state broadband expenditures that the FCC ignored.
We bring this up because what we have is an out of control FCC that is helping to feed the telco-cable gluttony by manipulating the basic data about construction expenditures to create harmful public policies, like getting rid of Net Neutrality.
Next Step: Lower Prices Immediately.
Then we have Charter, which includes Spectrum, formerly Time Warner Cable.
Let’s examine why America should be getting rate reductions immediately.
Charter had a $9.3 billion tax benefit gift, and its net income increased 2048% from $454 million to $9.6 billion and the earnings per share went up 2247%.
“A special note regarding phone taxes: Government agencies have found phone bills to be an effective way to assess and collect taxes because most people receive one. Those taxes may subsidize various services at the federal, state and local levels (e.g., emergency services, telecommunications services for schools, libraries, health care facilities, etc.). Charter and other companies offering phone service collect the required taxes as part of the total phone bill and send the appropriate amounts back to the taxing agency.
Unfortunately, most of this is deceptive. The charges below, like the “Broadcast TV Surcharge” or the “Business License Fee” are NOT government agency taxes, but made up fees or are charges on the company that they pass through.
Fees / Surcharges
Broadcast TV Surcharge “Federal law allows local U.S. broadcast television stations (i.e. affiliates of networks such as CBS, NBC, ABC, Fox, etc.) to negotiate with cable and satellite providers in order to obtain “consent” to carry their broadcast signals (Cable Television Consumer Protection and Competition Act of 1992).
Business License Fee “This is a fee or tax assessed on Charter for doing business in your state or locality”.
And some of these are downright despicable and should be removed immediately, regardless of anything else — Secure Connection Fee? Really?
“Secure Connection Fee
“Charter devotes considerable resources to the development and implementation of measures designed to ensure that the connection between a Spectrum receiver (or any other authorized device) and the Spectrum network is secure and that subscribers receive through the connection all of the services they are lawfully authorized to receive.”
REFUNDS AND LOWER PRICES DEMANDED — $20-$40 PER MONTH.
If Charter got an additional $9.3 billion in tax benefit, how come this nickel, dime and quartering of customers with questionable charges is not on the table to be removed, or have these tax benefits used to lower the overall costs to customers for all services?
Here’s What We Suggest:
Charter had about 25.6 million residential customers who get cable, internet, broadband or voice and some combination.
This comes to $363 dollars extra per customer in this benefit, with caveats.
Why shouldn’t we split the difference and get $181.50 back in lower rates — isn’t that reasonable? With an average of $107.00 per month (as different customers have different services and bundles), then there should be a $15.00 decrease, about 14% across the board.
But these per month revenues does not appear to include all of these extra charges, many bogus, and thus this average quoted in the 4th Quarter 2017 report has little reflection on the total bill.
“Monthly residential revenue per residential customer is calculated as total residential video, Internet and voice annual revenue divided by twelve divided by average residential customer relationships during the respective year.”
NOTE: Thus, there is an additional $10.00-$25.00 a month that may also need to be eliminated. Charter never discloses the total actual average charges on bills that a customer pays per month.
Thus, adding the made up fees and surcharges, of the $117-$132.00 a month, we should have a drop of $25-$40.00 a month — not counting the reduction in actual taxes being applied to all of these costs.
And this is just Charter. Comcast, Verizon and AT&T should also be lowering rates 15%-30% and getting rid of all of these made up fees.
Where’s the FCC’s analysis to lower rates? Where’s the FCC’s discussion of bringing in direct competition to lower rates?
Here’s a list of Charter Fees/Surcharges (if charged) — from their web site.