Posted on by pmg

FCC Accounting Rules Are Frozen to the Year 2000 — Why?

Then, in Dec 2018, the FCC voted to extend this Accounting “FREEZE” until 2024 — without any audits or investigations. Again . . . we need to know why.

Adapted from an article by Bruce Kushnick, Feb 28, 2019 | Original Medium article here.

In the year 2000, before there was high-speed streaming or broadband on cell phones, the FCC, influenced by lobbyists from AT&T, Verizon and CenturyLink, froze the accounting rules that determine the percentage of expenses that each separate telecom line of business (POTS, DSL, Broadband, Special Access, Wireless and others) would pay for the use of the shared Wireline infrastructure (both copper and fiber optic wires).

Most do not know that there are still State Public Telecommunications Utility companies (SPTUs), such as Verizon-NY and AT&T-CA, or Centurylink-CO. Most, including our legislators and regulators, have been told that these SPTUs represent just the aging, switched, legacy copper lines, for Plain-Old-Telephone Service (POTS) or landlines.

But This Old, Tired Story is Simply Not True

In the state of New York, Verizon-NY also includes the fiber optic wires for “FiOS”, the fiber to the home service, the fiber for the backhaul used by Verizon Wireless (and other Wireless Carriers), and even the wires, copper and fiber, for Business Data Services — collectively, the Title II-regulated Wireline infrastructure.

  • In 2000, Local Service, the basic copper phone lines, brought in 65% of the revenues for Verizon-NY

  • In 2000, Local Service also paid 65% of the expenses of Verizon-NY

That made sense — back in the year 2000.

But, now let's fast-forward to 2017:

  • In 2017, Local Service brought in 21% of the revenues for Verizon-NY, about $1.1 billion in revenues

  • But, in 2017, Local Service paid 62% of the expenses of Verizon-NY Corporate Operations expenses, about $1.8 billion, to cover the costs of the lawyers, lobbyists, and executive pay. How can this be?

  • Answer: The FCC Accounting ‘FREEZE’. Local Service has paid 65% of all expenses for 19 years — irrespective of Local Service revenues, creating artificial losses and huge tax benefits for Telecom companies for nearly two decades.

The Fraud Extends to Misclassifying Intra-State Items as Inter-State

  • In 2017, Verizon-NY reported that the other $4 billion in revenues are classified as Inter-State services and these services are paying a fraction of the total expenses that they should. How can this be?

  • Answer: The FCC Accounting ‘FREEZE’, again.

Billions of Dollars Per State Are at Stake

So, this is not about the price of the copper wires, but about all of your telecommunications and informtion services — including Wireline Broadband, Internet and Wireless services. This is also about the steeply-rising prices of the Cable-TV Co. triple play offers, since there there is no effective competition that might lower rates. Most importantly, this is about those who have been not been upgraded from copper to fiber — those who got screwed.

This also is NOT just about New York — every state uses these same FCC FREEZE accounting rules. This fraud is occurring in every state.

This massive financial shell game, then, has been due to a lack of audits or investigations into why America’s primary cost accounting rules has been manipulated by the FCC for 19 years.

In December 2018, the FCC decided to extend the FREEZE 6 more years, until 2024. Why? The FCC claimed that it could not come up with a way to reform the rules. Really? A simple calculator, and a dose of honesty, would help.

Thus, still in 2019, the Local Service expense percentages are still based on the year 2000 percentages, which now means that the STPU Wireline networks are paying the majority of all Telecom expenses. The IRREGULATORS are planning to appeal this recent FCC order. We have been working on this for years.

Let's Break This Down

1. The IRREGULATORS believes that this FCC Accounting FREEZE was implemented by the FCC to make the entire US wired infrastructure appear unprofitable — on purpose.

Around 2000, Verizon, Centurylink and AT&T were taking over most of the wired infrastructure in America, utility-by-utility, and by freezing one federal formula at the FCC, these three, mostly non-competing companies could effectively (and deviously) control the Wireline networks across entire US.

These are the original “Bell” Operating companies that married their own siblings or ate the other incumbent local phone companies, (STPUs) and even devoured many of the largest long distance companies and competitors.


img

We believe that Verizon, Centurylink, AT&T and the FCC knew that that this FCC accounting FREEZE would make the Title II-regulated STPUs pay the majority of all expenses and appear unprofitable while the private Wireless and other subsidiaries would appear extremely profitable.

This story exposes one of the largest financial accounting scandals in American history and impacts all Wireline and Wireless phone, Broadband, Internet and even cable TV/video services. The core of this deception is chilling.

  • The prices of all services you are paying are inflated. The prices of all wireless services have extreme profit margins and this shell game has made America’s wireless services some of the most expensive in the world, as the profits are not used to lower service costs.

  • The FCC Accounting FREEZE diverted the SPTU construction budgets to build out the 3G/4G — and now the 5G — Wireless networks.

  • In addition, the private Wireless subsidiaries do not pay market prices for using the STPU Wireline networks for backhaul (which is 95% of the entire network).

  • This FCC Accounting FREEZE allowed the Telecoms to charge STPU local phone customers exorbitant rates to finance the build out their private Wireless networks — via unchecked and unjustified monthly rate increases.

  • 5G Wireless is another Telecom bait-and-switch scam. This hype-driven Race to 5G is just a real estate grab in the public rights-of-way to densify 4G antennas everywhere, using cheap, non-union labor. Decades from now, there will be just enough 5G sprinkled around in certain neighborhoods, venues and stadiums for whiz-bang headlines.

  • Nothing in this Race to 5G closes the Digital Divide, which the Telecoms created on purpose — to maximize their profits.

  • Without serious competition, the Cable-TV Cos. are free to create made-up fees and raise their rates, as high as they can. America is getting ripped off and the FCC is aiding and abetting this whole program.

  • The FCC Accounting FREEZE saved the Telecom companies billions of dollars per year, creating artificial losses that were used to generate major tax benefits.

2. The Current FCC Regime, Under Pai and Brendan Carr, Was Created to Remove the Rest of the Regulations.

Where is John Oliver when we need him now? Right from the start of his chairmanship, Ajit Pai claimed that he would use a weed-whacker to remove the accounting rules. John Oliver pointed this out in his Net Neutrality II show.

And in May, 2017, in an interview with Re/Code, Pai gave more details:

“Re/Code: “In the early days, you had said that you wanted to take a weed-whacker to remove the rules that are holding back investment. What did you mean by that?

Pai: “What I had in mind were some of the regulations that we’ve had on the books for a while that stand in the way of investment in networks. Our Part 32 accounting rules — exceedingly boring, I recognize — but just the fact that companies have to maintain two different sets of books, literally one for their business and one for the FCC’s purposes, and the FCC hadn’t relied on any of that paperwork in years. I asked our staff, ‘When was the last time you looked at these reports?’ They said, ‘Pretty much never.’ We wanted to relieve some of those. Those are the kinds of regulations I had in mind because I want every dollar that a company has to be spent on building out networks, not on paperwork or regulatory requirements that aren’t relevant in 2017, whatever relevance they might’ve had back in 1934 or 1996 or 2015 or whatever.” (Emphasis added.)

In fact, the FCC was wasting no time in whacking those weeds, as there have been at least four separate proceedings, to erase any remaining FCC rules or obligations on the companies, AT&T, Verizon and CenturyLink, who control the state utilities as well as the essential infrastructure for wireless.

Not only is it clear that the staff never examined the accounting, but there is no recognition that the rules, as is, are still in use and that they help the companies invest.

Captured FCC? In 2007, Brendan Carr was one of the attorneys for Verizon who fought to get rid of any obligations to follow these rules.

Carr never made that clear in his testimony to become commissioner. Carr, who first became the FCC General Counsel, is now an FCC Commissioner and serves on the FCC’s joint board for accounting. In other words, the rules he helped to erase for Verizon as Verizon’s lawyer, is now being completely erased.

3. The Proof of Massive Financial Corruption: The Verizon New York 2017 Annual Report Shows Billions of Dollars at Stake

In a previous article, the IRREGULATORS detailed just how corrupt the Telecom accounting has become and how it totally distorted Verizon’s financials in New York.


img

The annotated image, above, is an excerpt from the Verizon NY 2017 Annual Report:

  1. Verizon New York brought in $5 billion in revenues.

  2. Local Service, in New York, brought in $1.1 billion revenues but . . .

  3. Was charged $1.8 billion in Corporate Operations expenses

  4. Verizon-NY overall, paid $3 billion in Corporate Operations expenses

  5. Local Service was charged $1.2 billion in construction and maintenance expenses.

  6. These two items helped to create losses of $2.9 billion

  7. This results in an overall tax benefit of $948 million for Verizon in New York.

The $1.8 billion of Corporate Operations expenses charged to Local Service was due directly to the FCC accounting FREEZE. The FREEZE is shoving 60+% of Corporate Operations expense into Local Service from this one bizarre, distorted accounting formula set to reflect the year 2000.

According to other documents we have, this money is most likely cross-subsidizing the Wireless business — illegally.

4. The FCC Decision’s to ‘Extend the FREEZE’

  • The FCC will claims that the accounting rules are not in use and have already been erased — they lied. The cost accounting rules were used in the settlement of Verizon NY and NY State in July 2018.

  • In fact, the rules have turned into Zombie Rules. The impacts can be seen in the distortions of the financials in the Verizon NY 2017 Annual Report. The numbers presented in Annual Report are based on the accounting rules. Unless the FCC can show exactly how Verizon NY would lose these billions of dollars via some other accounting, it is clear that Verizon did not redo the rules once they were ‘erased’ and are zombie rules; like the Walking Dead, and are still harming us.

  • The rules have been ‘forborne’, erased, etc.? No, they have not. The FCC contends that their recent decision does not include local exchange carriers subject to price cap regulation, and yet the following is the opening of Appendix 1, which clearly discusses ‘price cap’ companies.



img

5. The 2017-2018 FCC Decisions Share One Structural Flaw: They Failed to Include Analysis of State-Based, ‘Intrastate’ . . . Anything

Starting in 2017, the FCC put out a bombardment of over 30+ inter-related proceedings, each designed to slice-and-dice the American public interest; and these were all then sliced up into 5–15 separate actions.

Thus, the shut-off-the-copper proceeding was designed so that it allowed for a substitution of the copper wires with wireless, even if it is not the same quality, but the FCC did this in multiple steps so that each would be an addition to the previous harms caused.

In reviewing all of the 2017-2018 FCC Proceedings, there is a fatal flaw — the FCC never acknowledged that

  1. There are State Public Telecom Utilities (SPTUs)

  2. SPTUs are ‘intra-state’ based,

  3. SPTUs made ‘broadband’ installation commitments in each state

  4. Local phone customer rates were used as ‘investments’ to fund broadband’ installation commitments

For Broadband ‘investment’ . . .

  • The FCC left out all references to state-based investments or that the wireless networks’ investment are actually based on wireline local phone customers and rate increases.

  • The FCC will claims that it only examines ‘interstate’ services, revenues, etc. This is pure garbage as the Verizon New York annual reports show that the ‘broadband’ investment is mostly state-based, yet the FCC never acknowledges this in any their 2017-2018 proceedings, including in the FCC's ‘investment’ analysis in the proceeding to remove Net Neutrality regulations.

Using the Verizon New York Annual Report data, we can challenge every FCC proceeding as the FCC never examined a litany of items, from the manipulation of the accounting of access lines, to the percentages of expenses paid by the non-utility companies to use the networks.

FCC's Intention Was to NOT fix or examine the Accounting Rules' Direct Harms

This same phrase has appeared in some form since 2000 — “until comprehensive reform could be achieved”. The FCC had 19 years and seven different proceedings to fix their accounting rules, or more importantly, to examine the impacts of the rules since 2000. Nothing got done — on purpose.

The "until comprehensive reform could be achieved” Time Line

  • 2000: “On July 21, 2000, the Joint Board issued its 2000 Separations Recommended Decision, recommending that, until comprehensive reform could be achieved, the Commission should freeze the expenses.

  • 2001: “The Commission ordered that the freeze would be in effect for a five-year period beginning July 1, 2001, or until the Commission completed comprehensive separations reform, whichever came first.

  • 2006: “On May 16, 2006, in the “2006 Separations Freeze Extension and Further Notice”, the Commission extended the freeze for three years or until comprehensive reform could be completed, whichever came first. The Commission concluded that extending the freeze would provide stability to LECs pending further Commission action to reform the… rules, and that more time was needed to study comprehensive reform. The freeze was subsequently extended by one year in 2009, 2010, and 2011 and by two years in 2012.”

  • 2010: “March 30, 2010, the State Members of the Joint Board released a proposal for interim and comprehensive separations reform . . . On September 24, 2010, the Joint Board held a meeting with consumer groups, industry representatives, and state regulators to discuss interim and comprehensive reform…“

  • 2011: “In addition, in 2011, the Commission comprehensively reformed the universal service and inter-carrier compensation systems and proposed additional reforms. The Joint Board is considering the impact of the reforms proposed by the USF/ICC Transformation Order and any subsequent changes on its analysis of the various approaches to separations reform.”

  • 2014–2017: “On March 27, 2014, the Commission sought comment on extending the freeze once more. We extend through June 30, 2017…. We conclude that extending the freeze will provide stability to carriers that must comply with the Commission’s jurisdictional separations rules while the Joint Board continues its analysis of the jurisdictional separations process."

Help us solve these problems.