IRREGULATORS Treasure Map, Part 2

Recover Billions of Dollars for Broadband in Your State

Adapted from an article by Bruce Kushnick, Feb 7, 2019 | Original Medium Article here.

  • First, read PART 1: Verizon-NY, Hiding a $5 Billion State Telecommunications Utility that No One Even Knows Exists.

  • Then return to PART 2: Recover Billions for Broadband in Your State

FOLLOW THE NUMBERS . . . FOLLOW THE MONEY

This treasure has been hidden deeply by the lawyers and accountants of Verizon, AT&T and the FCC. They have worked very hard to erase the history of what really happened, including the audit trail, but did not escape the sharp eyes of the IRREGULATORS.

Verizon-New York (Verizon-NY) is the only State Public Telecom Utility ('SPTU') still required to submit an annual report to its state. The FCC stopped publishing basic financial data in 2007 to cover all this up, and to cover up the real culprit — the FCC’s own accounting rules.

Recently, the acts of the FCC have attempted to steadily erase the remaining bits of the acounting trail and to absolve the Telecom Holding Cos. of massive wrong-doing — even more quickly. Let’s just start with the numbers presented:

DOWNLOAD: THE ACTUAL REPORT: Page 27 (the Treasure Map has been modified for clarity.)


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The image, above, is a marked up excerpt of the Verizon NY 2017 Annual Report, published in June, 2018

The Verizon-NY 2017 Annual Report shows the following (numbers are rounded):

Holding Co. Abused Regulated Local Service

1) Total Operating Revenue shows $5 billion in 2017.

2) Local Service had about $1.1 billion in revenues in 2017, which is based mainly on the aging copper wires known as “POTS”, short for “Plain Old Telephone Service”.

3) Local Service was charged $1.8 billion in Corporate Operations expenses, which includes executive pay and costs for the lawyers, lobbyists, corporate jets, and golf tournaments. These expenses have virtually nothing to do with Local Service.

4) Total Corporate Operations expense of $2.9 billion allocates 62% to Local Service. How did this happen?

5) Local Service was also charged $1.2 billion in construction and maintenance costs — even though elsewhere we found that Local Service only spent an estimated $100-$125 million. Where did the rest of that construction/maintenance money go?

6) Local Service, counting all expenses, lost $2.9 billion, in just NY, in just 2017 — but this, quite simply, is just not true.

Holding Co. Tax Dodge Benefitted the Unregulated Private Subsidiaries

7) Verizon didn’t Pay Taxes and Got Large Tax benefits. These losses made Verizon-NY show $2.5 billion in losses, which generated $943 million in tax benefits.

8) “Business Data Services”, sometimes called “Special Access” has about $2 billion of this $2.4 billion in “Access” fees. These are not special wires; they are mostly the existing copper and fiber optic wires, used for data or Wireless cell towers. However, these intrastate lines have been misclassified by Verizon as “interstate”.

9) The “Access” fees are more than double the Local Service revenues but only paid $600 million of the Construction expenses.

10) “Access” paid less than ½ of the Corporate Operations expense or Marketing costs, compared to Local Service.

11) “Nonregulated” is a bukcket for revenues that were once regulated or never regulated; they now include FiOS video and other services.

12) “Nonregulated” paid a fraction of the Corporate Operations Expenses and Marketing costs and paid less than Local Service for fiber optic builds.
Why? Where is the rest of that money?

The Rest of the 2017 Revenues

So, where did the other money come from — the other $12-15 Billion in revenues?


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Verizon, in New York, is bringing in an estimated $7-$10 billion in revenues from the other subsidiaries that are using the copper and fiber lines, but it appears that the subsidiaries are not paying market prices for the use of these lines. In fact, the majority of all expenses have been assigned to Local Service, which helped to raise Local Service rates 95% since 2006, claiming ‘losses’ that are artificial and not related to Local Service.

Locating & Returning The Treasure

The corrective plan is simple . . .

To reverse the decades of Telecom fraud by compelling the Telecom Holding Companies to do the following:

  1. Undergo a full accounting audit of operations from 1994 through 2019
  2. Identify all misallocated revenues and expenses and ill-gotten tax benefits
  3. Define the lump sum of cross-subsidies and ill-gotten benefits as the Transfer Amount
  4. Spin off each SPTU as its own company, independent from the (former-parent) Telecom Holding Companies
  5. Assign ownership and maintenance of all legacy copper and fiber optic lines to the SPTU
  6. Fund each SPTU with the identified Transfer Amount
  7. Direct the SPTUs to complete the original Fiber Optic to Homes (FTTH) installations
  8. Ensure that the SPTUS charge consistent, market-based, non-discriminatory fees for the use of their copper and Fiber lines — i.e. no special prices for any former Holding Company or Wireless company.

This plan will stop and correct the massive cross-subsidies that have been caused by the FCC’s deformed cost accounting rules.

Target I: Corporate Operations Expense Overcharges

Why was $1.8 billion charged to Local Service for Corporate Operations, in New York, in just 2017?

  • Local Service only had $1.1 billion in revenues. This represented 62% of the total of $3 billion for Corporate Operations Expense.

  • This one expense item, that was diverted into Local Service, made Local Service unprofitable.

As mentioned, these are the basic phone lines known as POTS, Plain Old Telephone Service. How did Local Service end up paying $1.8 billion in Corporate Operations expenses?

Target II: Construction Overcharges

Local Service was charged $1.2 billion for construction and maintenance, when only about $100-$125 million was spent on the copper networks. In fact, Local Service was charged more than either Access services or the Non-regulated services.

  • Where did the other $1.1 billion dollars go?

  • Why was it charged to Local Service?

Target III: Taxes

Local Service lost $2.9 billion, and Verizon-NY paid no income or other taxes as a result. Verizon-NY realised almost $1 billion in tax benefits.

Target IV: Regulated Wireline to Unregulated Wireless Cross-Subsidies

Verizon Wireless was able to use the wireline construction budgets to fund the wires required for their wireless cell sites. From 2010–2012, it appears Verizon was able to have almost $3 billion, in just New York State, that was used for the wireless company instead of the state utility customers. At the same time, other documents show that Verizon Wireless paid a fraction of the expenses other companies paid for use of the networks in Access fees.

The Wireless company should be required to pay back these funds and pay market prices for use of the PSTU's wireline networks — and the pay back the local phone customers that were charged for the construction and deprived of upgraded and properly maintained services.

Target V: FCC Cost Accounting Rules

Take the FCC to court over their cost accounting rules that created this financial shell game.

It is hard to believe but the FCC’s rules that determine how much each Telecom subsidiary should pay for use of the PSTU wireline infrastructure were locked to a calculation that was pegged to business conditions in the year 2000.

  • In 2000, Local Service was 65% of the state utility revenues and, therefore it paid 65% of the expenses.

  • In 2017, Local Service was only 21.6% of the state utility revenues and yet it paid 62% of the expenses — $1.8 billion — as shown on item 4 in the walk-through analysis, above.

The FCC never examined the impacts their rules had and so, over 19 years Local Service continued to pay around 65% of the expenses. Just to demonstrate how brain-dead (or corrupt) this FCC has been, in 2018, the FCC majority proposed to keep this ‘freeze’ in place for an additional 15 years; after we filed to investigate, the FCC lowered it to just 6 years.

Conclusions

You just walked though the 2017 financials for Verizon-NY, the only state utility we know of that is required to submit an annual financial report.

  1. Your state needs to complete investigations of the financials of your state's PSTU. Unfortunately, these cross-subsidies were federal and set by the FCC. What happened in your state most likely looks exactly like these financial manipulations with Verizon-NY.

  2. Leaving the current situation intact means that the next generation of telecommunications services and the public welfare are in serious jeopardy. Leaving this situation, as is, is not an option.

Coming Soon . . .

  • Treasure Map, Part 3: One Key to the Treasure — Find the Hidden Lines.

  • Treasure Map, Part 4: Verizon, AT&T, CenturyLink, Frontier and FCC have Manipulated Access Line Accounting in all States and in America.