IRREGULATORS to NY STATE: Halt the Verizon Wireless and Corporate Operations Subsidies: Get Back Billions Overcharged by Verizon, Now.
Across America, every city and every state is now attempting to figure out how to get their hands on a part of the hundreds of billions of dollars of state and federal government subsidies that have become available to “solve the Digital Divide”. Over the last 2 years it took a pandemic for the public to understand that America’s prices for services are out of control and large segments of the United States have been neglected and never got high speed broadband — especially fiber optic broadband services. And the blame is firmly on AT&T, Verizon and CenturyLink — the holding companies that control the majority of the state-based public telecommunications state utilities in America.
The political knee-jerk reaction, the current ‘common wisdom’, has been to throw government subsidies at the problem, even though history shows that it will never work. The companies will attempt to grab as much of the funding as possible to do as little work — if at all, while blocking anyone else from offering broadband in their territories, and thus inflating the prices of all services, from high-speed broadband to even wireless.
The NY State Public Service Commission,(“NYPSC”) like many other states, has asked a series of questions pertaining to broadband deployment, the internet and the Digital Divide:
“Public comment is invited concerning the availability, affordability, and adoption of residential and commercial broadband internet access services in the State of New York.”
The answer to this question should be: We have spoke or filed in NY State and city broadband proceedings for over 2 decades, and uncovered a fundamental flaw. Verizon NY is the primary state telecommunications public utility and is required to submit annual financial reports.
The State has been negligent and should have audited the Verizon NY Financial Annual Reports; it would have seen the massive cross-subsidy scheme underway and the manipulation of the accounting that has allowed Verizon to take the construction budgets of Verizon NY, the state telecommunications public utility, to illegally subsidize their wireless business. At the same time, it has been able to dump billions of corporate operations expenses into the utility, and specifically wired network expenses.
Should Local Service have paid $833 million for corporate jets, lawyers, lobbyists and executive pay that have nothing to do with Local Service? (Line 5, Column F of the chart above.) This helped to create this Digital Divide.
Had the State examined the situation properly it would have seen that rate increases were based on artificial losses created by this transfer, that this scheme has been to artificially create the Digital Divide — on purpose. This scheme left the entire state wired public utility networks to deteriorate over the last 2 decades, and customers have paid thousands of dollars — per customer — for a fiber optic future — that never showed up.
And this has occurred in every Verizon, AT&T and CenturyLink state — I.e., the 3 Holding companies that were the created through mergers instead of competition, who control most of America’s wired infrastructure, all acted as a cartel, and all did the exact same harmful actions over the last 2 decades.
How can there be a broadband proceeding in NY State were the State never mentions that there is a state-based telecommunications public utility — named Verizon NY, that it never delivered fiber optic services as stated, that it illegally transferred the utility construction budgets to fund wireless, or that the holding company, Verizon Communications, has illegally dumped billions of corporate expenses — from executive pay to corporate jets, into the expenses of ‘local service’. This, in turn, made the networks appear unprofitable so they could ‘harvest’ customers through 30 years of rate increases — instead of upgrading the state to fiber optics, and bringing in competition to lower rates.
The State asked about mapping broadband deployments? Why did the NYPSC allow for redacting basic information about the number of access lines in service in the Verizon NY 2020 Annual Report? And where are the maps of Verizon NY’s deployments, instead of the current maps that combine all of the carriers to hide what Verizon did — or more specifically did not do?
We addressed this issue this last year because former-Governor Cuomo claimed the State was covered, 98% with broadband, or the State relied on FCC data and this has been proven to be a national embarrassment.
“Availability”, “affordability” and “adaptation” are all just useless jargon and have all been manipulated by Verizon over the last 2 decades and the State has failed to ask the basic questions, much less audited the financial books.
New Networks Institute (NNI) and the IRREGULATORS submitted 2 comments with a cover letter on March 18th, 2022. Our research and analysis has been based on primary financial reports of Verizon NY, using the IRREGULATORS, a senior telecommunication consortium of analysts, forensic auditors and lawyers.
And we submit these with a library of 2 decades of filings, reports which focused on broadband in NY and Verizon NY, specifically — and which the State has mostly ignored.
And we’re talking about an enormous amount of overcharging.
Partial List of Overcharging and the Manipulation of the Accounting Formulas. We will address this in PART 2.
- Overcharging has been a continuous, calculated problem that neither the state nor the FCC has examined. Worse, the state has allowed “Harvesting” of basic service customers — continuous rate increases.
- Verizon Overcharged Local Service an Estimated $927 Million in Corporate Operations and Marketing Expenses, in just New York in 2020. It assigned expenses totaling 95% of Local Service revenues. NOTE: We estimate only $50 million of the $977 million ($833 million + $144 million) could be considered legitimate.
- Verizon NY Local Service was overcharged an estimated $1.02 billion in 2020 due to the construction and maintenance budget put into Local Service that it used for its Wireless Network.
- Verizon Wireless “Cellco Partners”, we estimate, owes over $1 billion annually, in construction and payments for the right-of-way it has been getting in violation of the law for the last decade. Verizon NY’s diversion of funds to wireless meant that entire parts of NY State were not upgraded — causing the Digital Divide.
- Verizon NY shows losses of over $2 billion a year for the last decade, saving hundreds of millions of dollars in taxes annually. All of these were caused by the dumping of the corporate expenses, the failure of the wireless company to pay for use of the construction budgets and rights-of-way.
What the States Must Do
The IRREGULATORS believe it is time to halt the cross-subsidies and to use the money Verizon NY collected from its customers to deliver on the promise of a fiber optic future — with no government subsidies needed.
- We demand the State start immediate investigations of Verizon NY’s financial cross-subsidies and the illegal subsidizing of the wireless business, and the misallocation of billions in corporate operations expenses.
- We demand that the Governor’s Office and Attorney General investigate the NY State Public Service Commission for negligence, and Verizon for fraud and the manipulation of the financial accounting.
- We have submitted primary analyses using Verizon New York Annual Reports, which detailed these cross-subsidies, over the last decade, using experts, auditors and lawyers — at our own expense — and they were ignored.
- There have been no audits of the Verizon NY’s books for 2 decades and no ‘rate cases’, even with 100% rate increases.
IN SHORT: WE WANT THESE SUBSIDIES HALTED IMMEDIATELY. WE WANT ALL OF THE MONEY THAT WAS SUBSIDIZED BACK TO BE USED TO WIRE NY STATE AND NO GOVERNMENT SUBSIDIES.
NY State should not be allowed to repeat the mistakes of the past. History tells us:
- The Digital Divide cannot be fixed with government subsidies; they will just be captured by Verizon, (and nationwide with AT&T and CenturyLink (Lumen Technologies) the Bell holding companies that have merged to control America’s critical wired infrastructure — which is also used for wireless).
- There is No Institutional Memory — and this current NY State broadband proceeding runs the risk of compounding the felony if more money is thrown at the bad actor, Verizon NY.
- Start Proceedings for a Just Result — Separate Verizon from the networks they let to deteriorate. By 2010, America was supposed have been a fiber optic nation. Verizon et al, multiple times, charged customers for upgrades to the utility plant — and took the money for their other lines of business.
- States have Jurisdiction Over Broadband; ‘Common Wisdom’ claims that the states do not have control of the broadband infrastructure — and they are just wrong. As we will discuss, the fiber optic wires have been charged to local phone ‘intrastate’ customers, the cross-subsidies have these regulated services illegally subsidizing the fiber — and worse even the fiber that is being built for wireless. Also, we show that the fiber optic wires are Title II, and thus part of the state utility as defined by the State.
- The IRREGULATORS vs FCC case was taken to ‘free’ the state commissions from the FCC’s powers over the corrupted accounting that is in place.
CONCLUSION: Verizon et al.’s ability to game the regulatory system has to stop now.
Not a single dollar of the new government subsidies for broadband infrastructure should be given out to Big Telecom, especially AT&T and Verizon. They have failed repeatedly to deliver on their fiber optic broadband commitments in every state for the last three decades. Until now they have not been held accountable or regulated effectively. To give them billions more to deploy broadband to unserved and underserved areas will almost certainly have a similar unhappy ending. These giants do not want to build fiber; their strategy since 2011 has been to secure an all wireless future using bait and switch tactics. We have done our best to expose their malfeasance and the ongoing illegal cross-subsidies of the wireless networks. If the responsible state authorities don’t heed our warning, they will surely end up with egg on their faces. These companies created the Digital Divide; they are not honest actors who can be relied upon to close the Digital Divide.
Comments Summarized: PART 1 and PART 2
PART 1: SOME BASIC FACTS THAT HAVE BEEN IGNORED
- FACT: Almost all of Verizon’s fiber optic deployments to date are part of the existing state public utility. Verizon has classified them as “Title II”, common carrier networks, and claims that they are an upgrade of the existing telecommunication networks, thus giving them the ability to get rate increases, as well as the advantage of use of the rights-of-way and other perks.
- FACT: Verizon has claimed Title II harms investment. The quote below proves Title II is, in fact, the investment mechanism.
- FACT: In 2005–2009, Verizon NY was granted rate increases for a ‘massive deployment of fiber optics’ and losses.
- FACT: Verizon halted the fiber optic deployment in NY State — but the State did not adjust rates to reflect that.
- FACT: Illegal diverting of the construction budgets to Cellco Partners, the wireless subsidiary, has been going on for over a decade.
- FACT: The accounting used by Verizon has been manipulated to do these cross-subsidies and use Local Service as a cash machine.
- FACT: These actions created the Digital Divide.
- FACT: Almost all of Verizon’s fiber optic deployments to date are part of the existing state public utility and was put in as “Title II”, common carrier networks.
The State has not once examined this issue, even when we have been urging the NYPSC and the FCC to investigate Verizon’s shoddy manipulations for over 2 decades.
- FACT: Verizon has claimed Title II harms investment, which is directly contradictory to what is in the Verizon franchise agreements.
This second excerpt is from Verizon’s Open Internet Comments, July 15, 2014
“Imposing a Title II common carriage regime on broadband providers would be a radical change in course that would only chill, not spur innovation. Title II is a regulatory dinosaur, crafted eighty years ago — and based on 19th-Century laws regulating railroads — to address the one-wire world of rotary telephones.”
- FACT: In 2005–2009, Verizon was granted rate increases for a “massive deployment of fiber optics” and to compensate the company for the artificial losses it manufactured.
Massive deployment of fiber was for the FTTP, fiber to the premises of FiOS. As we will discuss, the losses were artificial.
- FACT: Verizon halted the fiber optic deployment in NY State — but did not adjust rates to reflect that.
Verizon’s former CFO, Fran Shammo, Verizon Communications Inc. announced at an investor event in 2011 that their planned fiber optic build out, known as FiOS, was completed and that there were no fiber buildout plans for about 6.5 million households in their state service areas.
“I think that we are very, very satisfied with the portfolio at this point. I can’t say that we are actively trying to divest of anything at this point in time. I would say that from a homes passed perspective as we continue with FiOS, we will continue to pass the 18 million homes. We will have about 6 million to 7 million we won’t pass at this point. It doesn’t mean that we will never pass them. But I think we owe it to our investors at this point to return the investment on where we have put into the ground from a FiOS perspective. Now, having said that, I think that with the wireless, with LTE, I think it brings a lot more opportunity of how we bundle these products to offer the outside of the FiOS footprint and some innovative things that we can do around LTE, along with the wireline products to create some very specialized bundles for these customers. So, at this point we are not looking to divest anymore.”
- Customers paid for the upgrades for ‘massive deployment’ and this, in and of itself, was illegal if Verizon claims these networks were Title II.
- Customers in rural areas never got use of upgraded networks but paid for it.
§ FACT: Illegal diverting the construction budgets used by Cellco Partners, the wireless subsidiary,
Shut Off the Copper, Force-March Customers to Wireless
These quotes were the start; the rest of this marketing campaign played out throughout the rest of the decade.
“Cut the copper off,” Lowell McAdam, Chairman and CEO of Verizon Communications, speaking at the Guggenheim Securities Symposium, June 21, 2012
“And then in other areas that are more rural and more sparsely populated, we have got LTE [Verizon Wireless] built that will handle all of those services, and so we are going to cut the copper off there. We are going to do it over wireless. So, I am going to be really shrinking the amount of copper we have out there, and then I can focus the investment on that to improve the performance of it.”
Verizon did not make this decision because wireless is a superior technology to fiber. It did so to earn more profits by reducing labor and other costs. The interests of the public did not enter into the equation. Verizon’s message to the public has been that 5G and wireless would replace the wired networks; to the investors it is — get rid of ‘labor intensive’ activities and lower costs.
“So if you think about it if I can get we than say a 1000 meters of a business and I give them a router, a basic router that has a 5G service inside it and I’m up and operating immediately, I mean, think about the difference for the carrier in the cost structure; half of our cost to establish high speed data whether it’s consumer business is inside the four walls of the business. ‘Once you go wireless, you don’t have to run co-ax, you don’t have to do any of those high labor intensive activities and so you light up service overnight. So then you get into how much capacity do you want and you can — the pricing models can change dramatically’.”
PART 2: FOLLOW THE MONEY
Verizon, with the help of AT&T, and CenturyLink (Lumen Technologies), created the Digital Divide on purpose. And we will prove it, using the Verizon NY 2020 Annual Report which details billions that can be used to solve the Digital Divide in NY, with no government subsidies.
You want to see illegal, egregious acts hiding in plain sight? In just NY, in just 2020
- Verizon Local phone service was charged $833 million in Corporate Operations expense, over 61%, (Line 5, Column f) From corporate jets to executive pay, virtually none of these expenses are to offer wired phone service; these expenses are probably NOT even generated in NY State.
- Verizon Local Service was charged $1.1 billion in construction expenses and maintenance. There is virtually no construction for the copper wires? (Line 2, Column F)
- Why has NY State allowed overcharging of almost $2 billion dollars? (See our previous analysis of Verizon NY Corporate Operations for 2017. Moreover, it is clear that billions of dollars of the utility construction budget have been primarily charged to the Local Service line of business.)
- LEARN THE DETAILS: DOWNLOAD the Verizon NY 2020 Annual Report (Spreadsheet), and the IRREGULATORS Analysis and “How to Read the Report — Walk-through”.
PS: The Challenge: We call your bluff. All those who claim that they want to get government subsidies for broadband needs to understand the true financials — How much money are wired customers being overcharged today and the flows of money that have been illegally diverted and are charged to the state utility billions extra to fund wireless and NOT build out rural areas, as well as keep prices inflated due to no competition. They created the Digital Divide on purpose. — Prove us wrong.
But I use wireless? No, you don’t. First, as you will read, the fiber optic wires are required to deliver wireless, which are attached to the cell sites, and that wire should have gone to residential and business in all parts of NY state. Second, we are addressing ‘fixed wireless’ — instead of fiber optic upgrades Verizon et al pulled a bait and switch, claiming wireless was a substitute.
What is the Verizon New York 2020 Annual Report? (Hidden in Plain Sight). In June 2021, the Verizon NY 2020 Annual Report was published. Verizon NY is the primary state telecommunications public utility and New York is the only state we know of that requires and makes public a financial annual report for the state-based public utility.
Moreover, every Verizon, AT&T, and CenturyLink state has been Punked. This financial report is based on manipulated accounting and every state is using identical financial that created “Cooked Books”.
Read the Bibliography and see our 30+ filings and testimony in front the NY State Public Service Commission and other NY agencies. They were informed every year since we uncovered the fraudulent accounting, using a team of experts, telecom auditors, and lawyers. The state has been negligent in examining our claims, but also the financial books that the Agency has been receiving for at least the last 3 decades.
MASSIVE FINANCIAL CHICANERY — BY THE NUMBERS
The Manipulation of the Accounting Created the Digital Divide
The State public telecommunications utility network infrastructure is not just the aging copper wires but are also all of the fiber optic wires for FiOS and even for wireless. And there are 3 primary lines of business; ‘Backhaul’, the Business Data Services for wireless and banks, etc; ‘Nonregulated’, which is FiOS and VoIP, and ‘Local Service’, based on the copper wires.
But, over the last 2 decades, Local Service has been used by Verizon to illegally fund the company’s other lines of business — instead of replacing the existing copper wires with fiber optics of the utility.
Thus, they took billions of dollars of expenses and charged the utility, especially local service. This made the entire infrastructure appear unprofitable; it was used to raise rates, it was used to cut staff and it was used to avoid taxes, Why is it paying?
- Local Service was charged $833 million, 61%, in Corporate Operations expense, which is 81% of the Local Service revenues. — These include the $1,200 an hour lawyers, the corporate jets and executive pay — and is NOT part of Local Service or even an expense generated in NY State.
- Local Service was charged $144 million in Marketing expenses, 54% of the total — Verizon no longer markets basic phone service.
- Local Service was charged $1.3 billion in Construction & Maintenance, yet it spent only an estimated $18-$47 million for maintaining and upgrading the copper networks. Where did the $1+ billion in overcharging go?
Overcharging: A Partial List: To read (Also part of the cover letter.)
- Local Service was Overcharged an Estimated $925 Million in Corporate Operations and Marketing Expenses, in Just New York, in Just 2020. These 2 expenses were 95% as compared to Local Service revenues. We estimate only $50 million of the $977 million ($833 million +$144 million) could be considered legitimate.
- Verizon NY Local Service was Overcharged an Estimated $1.02 Billion due to the Construction and Maintenance Expenses Put into Local Service.
- Tax Avoidance and Rate Increases based on artificial losses, underpayments from all of the Verizon affiliates and lines of business — needs to be investigated and halted.
- Verizon NY shows losses of over $2 billion a year for the last decade, saving hundreds of millions of dollars in taxes. All of these were caused by the dumping of the corporate expenses, the failure of the wireless company to pay for use of the construction budgets and rights-of-way.
- Verizon Wireless “Cellco Partners” we estimate, owes over $1 billion in construction and payments for the right-of-way it has been using illegally for the last decade. Verizon illegally transference meant that entire parts of NY state were not upgraded — causing the Digital Divide.
- 30 Years of Rate Increases and Harvesting: How is it possible that basic local phone service had increases for 30 years when there has been claims of competition? — and the harvesting of customers when prices were supposed to be ‘just and reasonable.
- SUMMARY: In short, for just these few basic expense areas, Verizon NY Local Service was overcharged almost $1.9 billion dollars in 2020, and this does not include the other areas we identified.
- DOWNLOAD the Verizon NY 2020 Annual Report (Spreadsheet), IRREGULATORS “How to Read the Report — Walk-through”.