Verizon Accounting Scandal

March 19, 2018 By Bruce Kushnick, New Networks Institute, Executive Director; Original article here

Verizon’s Proposed Settlement in New York Covers Up One of the Largest, Nationwide, Accounting Scandals in American History.

The following financial information is taken directly from Verizon New York’s 2016 Annual Report, published in June 2017.

A. Key Findings

We address the settlement in Section D, below.

Using the Verizon-New York 2016 Annual Report and other financial reports, we found:

• Low Income Families are Defacto Investors, without the Benefits: Low income families, seniors, rural customers and everyone else got hit with multiple rate increases  — 84% on basic service and 50%-250% on ancillary services — in New York State since 2006–2016. Verizon and the State claimed the increases were for “massive deployment of fiber optics” and losses. The losses were artificially created and the massive fiber deployment was mostly shifted to Wireless services.
• Customer Overcharging: We estimate that in NY State customers paid an additional $1,000–1,500 per line, from 2006 to 2016, for basic service (and an ancillary service) as built into rates are these construction perks and compensation for losses, and the dumping of billions of dollars annually of expenses created by the Verizon’s subsidiaries.
• $2.8+ Billion in Wireless Cross-Subsidies: In 2010–2013 Verizon New York paid the construction expenditures for 5,515 cell sites to be built at a cost estimated to be $2.8 billion — and according to Verizon’s own press statements, this came out of the wireline construction budgets. This is instead of building out FTTP: Fiber to the Premises. (Note: these expenses were just for these four years. It has continued, but it would require an audit of the most current financials.)
• Wireless Underpayments for Network Use: In 2016 in New York, we estimate that Verizon Wireless generated $6.5-$7.5 billion in revenue, which is not part of Verizon-New York, the State Public Telecom Utility. Verizon-New York’s 2016 Annual Report shows that “Cellco Partners”, (Verizon Wireless is a DBA) only paid $69 million to Verizon New York for use of its Public Utility Wireline networks and any construction. Based on interrogatories of the investigation, there appears to be an entire cesspool of fractional payments by Verizon.

B. Re-Engineering the Numbers

Without full audits it is impossible to know the extent of the cross-subsidies and how to re-adjust what Local Service or all of the other services using the wires should be paying, but we can observe the following. Based on data from the Verizon-NY 2016 Annual Report, New Networks wrote a report and analysis.

• Local Service, which is based mainly on the existing copper-wire POTS, plain-old telephone service networks, brought in 23% of the revenue but is paying 57% of all expenses.
• Local Service was charged $1.4 billion in construction and maintenance. Verizon-NY actually spent less than a few hundred million dollars, at best, on the copper-based networks.
• Local Service paid 60% of Corporate Operations expense, $733 million, for the corporate jets, the lawyers and executive pay and anything else they could think of.
• $166 Million for Marketing? When is the last time you saw an advertisement for a copper-based, phone service in any state?
• Local Service lost $2.1 billion in just New York, in just 2016, because of this shell game. These and previous losses have been used as an excuse to further rate increases to local rates.

This list doesn’t account for the other subsidiaries NOT paying market prices for the use of the networks, not paying construction and other expenses that would be incurred if the Verizon subsidiaries were treated as other competitors, or if they were paying their fair share of the corporate and marketing expenses.

Local Service has been overcharged by $2–3 billion dollars per year

• Local Service Is Profitable: Fixing these cross-subsidies, then, and making Local Service be set based on actual costs and not fictional losses or funding of other subsidiaries, Local Service was always profitable.
• Customers Have Been Harvested: Local Service prices should never have had continuous increases for the last 20 years. Prices should have been in steep decline.
• All “Business Data Services” And Other Critical Services Have Been Overcharged: Forcing Verizon Wireless and the other Verizon subsidiaries to operate fairly and pay what all other competitors pay for the use of the Wireline networks and construction would lower all competitors’ Wireless, Internet and broadband costs and would lower rates for residential and business customers.
• Construction For Fiber to the Premises (FTTP) Should Have Been Completed: The cross-subsidies to build out the Wireless subsidiaries’ businesses should never have been allowed.
• Billions In Tax Revenues From Verizon Have Been Manipulated: How did Verizon New York continuously lose over $1 billion a year or more for the last 5 years (not counting special items)?
• We were lied to . . . and this has been happening in every State — involving Verizon, AT&T, Century Link and others

If the actual expenses were calculated to offer local service at just and reasonable rates, and the other subsidiaries were paying market prices to use the networks, then:

This next chart is taken directly from the FCC’s last financial reports of the state-based utilities and it shows that 71% of construction expenses were put into “Local Service”. I.e.; this is a list of AT&T, Verizon and CenturyLink state utilities and it shows that all of the companies dumped about the same amount of construction expenses into “Local Service” (intrastate) as compared “Access”, which are interstate services, and this includes “Business Data Services” (also known as Special Access).

Thus, what New Networks uncovered with detailed financials from Verizon in New York is almost certainly going on in every AT&T and CenturyLink state.

C. The Rest of the Story

As of March 19th, 2018, there is a proposed settlement on the table between Verizon-NY and the NY Public Service Commission and parties, including Communications Workers of America, CWA, to stop a current investigation.

The first part examined the deterioration of Verizon’s infrastructure and this settlement would fix some of the network issues. However, this settlement will cover up completely the second and most important issue:

There has been an ongoing, massive financial shell game of cross-subsidies between Verizon-NY and the other Verizon subsidiaries, like Verizon Wireless, and it is part of one of the largest, nationwide, accounting scandals in American history.

As one of the consultants for the investigation wrote:

“There are strong indications that Verizon-New York, and its parent Verizon Communications, engage in practices which misallocate expenses and revenues to the detriment of the regulated New York operations.”

Here is What this Settlement Leaves Out: Billions in Cross-Subsidies in Just One State.

Verizon-NY is the state-based telecommunications utility serving the majority of NY State and it is a wholly owned subsidiary of the holding company, Verizon Communications. While most people believe that the state utility is just the existing copper wires offering local voice phone service, there is a mix of copper and fiber wires that are used by Verizon Wireless, Verizon Online, (Internet and broadband), and Verizon Business and other subsidiaries, which are each separate companies of Verizon Communications and are “affiliates” to Verizon-New York. For example, almost all Wireless Call, Internet and Video data transmit to/from a cell site, but that cell site transfers data to/from the back-end servers over a fiber optic Wires. Even Verizon’s Fiber-to-the-Premises, FTTP, that were put in for FiOS are part of the state utility. And, of course, most of Verizon’s subsidiaries are using these wires as well as competitors offering services, not to mention business and residential customers.

Yet, as mentioned, by 2017, somehow, the majority of all expenses are being charged specifically to the copper based “Local Service”, “POTS”, plain old telephone service, lines. For example, Verizon has not been maintaining the copper networks, but somehow Local Service was charged $1.45 billion in construction and maintenance expenses (known as “Specific and Non-Specific Plant”). Worse, “Local Service” was charged $723 million in “Corporate Operations” expense; expenses for the corporate jets, as well as lobbyists and lawyers.

And all of this shell game has been done to make the copper networks look unprofitable. Local Service had a loss of $2.1 billion in just 2016, in just New York . . . and Verizon NY did not pay most taxes.

Some Background

In 2010, New Networks Institute worked with other analysts, lawyers and auditors to examine Verizon-New York’a and the other Verizon states’ financial accounting based on Verizon’s financial reports, transcripts and filings, FCC-collected financial data, and other financial sources.

Over the last 8 years, New Networks uncovered a massive financial shell game that has cost local phone and business customers billions of dollars in overcharging per state; it has blocked cities from being upgraded, or even having the state utility networks and infrastructure maintained. It created the ‘Digital Divide’, and it has allowed Verizon to use the state utility wired customers as a cash machine for the company’s other lines of business. In fact, the majority of all fiber optic deployments and wireless networks were built, not to benefit the customers who paid extra, but for the parent company’s profits.

Through this shell game, Verizon has been able to seriously inflate the costs for ALL services, including your wireless services as your call or video ends up going to a cell site, and most of these sites are attached to the underlying, state-based utility wires. Unfortunately, there are multiple, simultaneous financial manipulations underway as parts of the utility are also being privatized, allowing these essential network services, such as ‘business data services’, to achieve obscene profits as they, too, dump expenses into the state “local service” side of the business.

This is going on in every Verizon state as well as in all AT&T and Centurylink states — based on the last available data from the FCC. These utilities are still mostly monopolies of the state telecommunications infrastructure, both for Wireline and Wireless service, regardless of the hype and misdirection.

No other company came and replaced the copper wires or did full deployments of fiber optics. Verizon Wireless even has an agreement with the cable companies to bundle their wireless service where they did not upgrade to FiOS. The secret is  —  the Verizon Wireless got the fiber optic wires to the cell sites paid for by the Wireline state utility budgets.

FCC’s Weed Whacking of the Cost Accounting Rules

These cross-subsidies have been based on the FCC’s continued failure to examine their own cost accounting rules for the last 18 years. In fact, the FCC is currently attempting to erase the rules to cover-up this accounting scandal. Chairman Pai calls this “weed whacking”.

In 2001, the FCC changed the rules so that they would allocate the expenses of each line of business based on the year 2000, and this was never changed. At the time, Local Service was 65% of the revenues and it paid 65% of the expenses; by 2016, Local Service is only 23% of the revenues but still paying about 60% of all expenses. And the FCC has never audited the impacts of their distorted rules  — ever.

Unfortunately, the FCC has been and will continue to make a series of harmful decisions — from the Net Neutrality decision to the ‘shut off the copper’ plan or to ‘preempt states’ rights  plan — all  based on this shell game. While the FCC will claim that the rules were “forebeared” (and not in effect), the Verizon-New York financials prove that to not be true.

D. Verizon-New York Proposed Settlement Agreement

We believe that the Verizon New York proposed settlement agreement has been designed to avoid a public evidentiary hearing and to avoid the public discovery of the cross-subsidies of the state utility and Verizon’s other subsidiaries &mdash and to hide the shell game in place to charge local phone customers billions to benefit Verizon’s other subsidiaries.

The Good Part of the Proposed Settlement

The proposed settlement fixes some parts of the Wireline networks that have been left to deteriorate, called the “Plant Pride Program”: it adds 11,000 fiber optic lines and it gets rid of 64,000 broken poles over four years.

According to the US Census and Verizon territory coverage, Verizon-New York covers about 9 million households and businesses so these additional fiber deployments are just chump change. We still support this effort, considering the extensive rot that has occurred in every Verizon state, but it is clearly covering-up the most egregious issues that directly impact all Verizon customers.

Therefore, this settlement is a gift to Verizon more than it is a fix of what is really broken.

The FCC’s Collusion With Verizon Et Al. Over Accounting Rules Must Be Challenged

None of these cross-subsidies can be fixed without taking on the FCC’s current cost accounting rule “weed whacking”. These Federal rules impacts the state-utility accounting. Our research shows that the FCC rules are are very much in effect and are doing damage daily. Erasing the FCC rules just erases the audit trail and immortalizes the FCC’s adverese impacts in perpetuity.

The press coverage has not addressed the failure of this proposed agreement to examine the financial shell game in place, but has merely focused on only what is being proposed.

• Verizon agrees to fix failing broadband networks to settle investigation Verizon will fix NY copper lines and potentially upgrade more than 30,000 homes. Ars Technica, March 2018
• Verizon Forced to Repair Broadband Infrastructure It Has Literally Let Fall Apart A new settlement requires Verizon to replace bad cable, defective equipment, and faulty back-up batteries — and to take down 64,000 double telephone poles or pole stumps, Motherboard, March 2018
• Verizon, CWA settle NY copper network dispute, agree on repairs, improvements, Fierce Telecom, March 2018

New Networks’ summary of the current Verizon New York proposed settlement process was published in August 2017: Verizon-NY in Multi-Billion Dollar Settlement Tangle, Underway in NY State, Huffington Post, August, 2017