FCC Response to IRREGULATORS Legal Challenge: Let Them Eat Pie

Oct 3, 2019 NEWS: IRREGULATORS Podcasts: listen here and read about it here.

Oct 10, 2019 NEWS: 2019-1010-IRREGULATORS-v-FCC-Reply-Brief

By Bruce Kushnick, Sept 26, 2019 | Original Medium article here.

On September 12th, 2019, the FCC responded to the IRREGULATORS v FCC law suit filed with the Federal DC Court of Appeals. This case exposes one of the largest accounting scandals in American history and it impacts not only the price of almost all telecommunications services that you, your family, business and community use, but it details how the manipulation of the FCC’s accounting rules corrupted public policies.

Like that famous line, “Let them eat cake”, attributed to the infamous Marie Antoinette, (wife of King Louis XVI) which was supposedly uttered when she was told that there was hunger and no bread in France — the FCC’s rebuttal to our challenge is just as dismissive, claiming that every issue we brought up is ‘meritless’.

Here is what the FCC alleges about the IRREGULATORS brief:

“Petitioners’ Remaining Arguments Are Meritless”

“Petitioners Fail to Show a Concrete Injury Caused by the FCC’s Order”

“Petitioners make three additional arguments very briefly, but none have merit.”

“Costs to Consumers: first, [the IRREGULATORS] argue that maintaining the freeze harms consumers . . . in any case, it is without merit.”

Ironically, the FCC has never examined the impacts of their accounting rules on State-based Public Telecom Utility (SPTU) financials for the last 19 years. The FCC, therefore has no record of evidence upon which to rely. Instead of supplying any data or analysis to prove their points, the FCC has decided to double down and attack the IRREGULATORS’ right to file the case.

We Can Fix the Problem Now and You Can Help

Correct the misallocation of intrastate broadband construction funds that were illegally diverted by America’s largest Incumbetnt Local Exchange Carriers (ILECs) to their private wireless subsidiaries
Ensure that such violations of the 1996 Telecommunications Act (1996-TCA) Section 254(k) can never happen again
This 2019 lawsuit — Irregulators et al. v FCC — could settle the entire matter and close the Digital Divide. Learn more here.

We need your help today to ensure that the Irregulators v FCC Law Suit
will get argued in front of the DC Circuit Court of Appeals judges.

THE IRREGULATORS accepts tax-deductible contributions through its fiscal sponsor, Ecological Options Network — P.O. Box 1047, Bolinas, CA 94924. Nonprofit organization Federal tax ID: 54-2100414

Interestingly, Ars Technica calls attention to another appeal (one dealing media ownership rules) that the FCC just lost in the US Court of Appeals for the Third Circuit. The court stated in that ruling that the data and analysis presented by the FCC would “fail an introductory statistics class”.

The Third Circuit judges wrote:

“Even just focusing on the evidence…the FCC’s analysis is so insubstantial that it would receive a failing grade in any introductory statistics class.”

“Even if we could treat the use of these two data sets as reliable, the FCC’s statistical conclusions are woefully simplistic.”

“But in this case the reasoned explanation given by the Commission rested on faulty and insubstantial data.”

“The Commission does not really contest any of these deficiencies in its data or its analysis. Instead it argues that they are irrelevant.”

The IRREGULATORS v FCC case exposes a Federal Agency that continually quotes artificial, manipulated and deformed data which are based on the FCC’s own corrupted accounting rules — and these corrupted data have been used in almost every FCC proceeding from 2017 through 2019 — rendering all of these FCC Orders arbitrary and capricious.

Arbitrary — based on individual preference or convenience rather than by necessity or the intrinsic nature of something; ruling by unrestrained and often tyrannical authority
Capricious — describes events or policy changes that are sudden, impulsive, and not based on careful analysis

Accounting Manipulation Caused Massive Overcharges

The FCC’s accounting rules have been used to divide-up the expenses — charging these common costs to the different services that depend on the SPTU wired networks — wires which are maintained or controlled mostly by Incumbent Local Exchange Carriers (ILECs, such as AT&T, Verizon and CenturyLink). These are not just the existing copper wires, but the fiber optic wires that are used for

Business data services, (which includes “backhaul” and “Special Access”)
Wireless services for consumers businesses and competitors
“Nonregulated” services, which include FiOS video and VoIP,

Think of this as all the wires in your community — in the ground and on the poles — wires that extend to homes and offices for wireless or broadband. Each different service using the wires is supposed to be paying ‘common costs’, but over the last two decades the FCC accounting rules have been ‘frozen" at year 2000 percentages, which enabled ILECs to lump the majority of all expenses into one category, ‘Local Service’, which are the basic Plain Old Telephone services (POTS). This means that the other businesses, like Wireless, Business Data Services (BDS), or ‘Nonregulated’ services are only paying a disproportionately small fraction of these expenses.

The FCC “freezing” these accounting rules to reflect the year 2000 resulted in the FCC never examining the impacts of their own accounting rules on SPTU financials.

Using no data whatsoever, in Dec 2018, the FCC decided that that it would extend these frozen accounting rules for an additional six years (which was a compromise on the initial proposal to freeze the rules for another 15 years). This corrupted FCC accounting caused massive overcharging that we estimate is at least $50-$60 billion dollars annually.

By shifting billions of dollars of expenses into SPTU Local Service, these overcharges caused massive, artificial financial losses, enabling the ILECs to dodge billions in taxes.

Verizon-NY has allegedly "lost" over $2 billion annually from this shell game, while garnering billions in tax benefits.
These Verizon-NY losses were used to raise regulated phone rates multiple times.
Local phone customers, therefore, became de facto "investors" by funding the ILECS’ other lines of business, like Business Data Services and Wireless.

These FCC frozen accounting rules have also made nearly all telecom prices in America “unjust and unreasonable”:

America is paying 2 to 5 times more for our broadband/triple play than do overseas consumers.
America is paying 6 to 10 times more for our wireless services than do overseas consumers.
Due to reduced investment in Local Services, prices for Local Service should have been in steep decline over the last 20 years.
Rural areas got screwed by the FCC’s rules and are suffering from the Digital Divide.
This shell game made the SPTU networks appear unprofitable so the ILECs could claim that they didn’t have to properly upgrade their networks.

Since the ILECs never showed up in many markets to compete against the cable companies for broadband, there were no market forces to keep prices in check, especially when the ILECs can rely on made-up fees, and continuous price increases. Extending the accounting rules and not investigating/correcting the cross-subsidies continues this financial boondoggle.

The FCC’s 75% / 25% Rule

The FCC claims that there have been no harms from their accounting rules and that these rules have not enabled financial cross-subsidies from regulated services to unregulated services, as required by Section 254(k) of the 1996 Telecommunications Act (1996-Act). The FCC says that the rules are not even in use. The FCC states it acted to forbear price cap carriers (nearly all ILECs and CLECs), from needing to follow rules that are still on the books but no longer in use.

The FCC wrote in their response — in wonk-speak:

“For example, the Part 36 ‘loop costs’ category is allocated by a fixed allocator, with 25% of the loop costs to the interstate jurisdiction and 75% of the costs to the intrastate jurisdiction. See 47 C.F.R. § 36.154(c)”; (Emphasis added)

“This system offers several advantages. Because cost savings do not trigger reductions in the cap, the firm has a powerful profit incentive to reduce costs. Nor is there any reward for shifting costs from unregulated activities into regulated ones, for the higher costs will not produce higher legal ceiling prices.”; (Emphasis added)

What this actually says — in plain English pie-speak:

We all have paid for 75% of that apple pie, but we only got a 25% slice of the pie.
The FCC cost accounting rule now assigns 75% of the costs of the SPTU networks (‘loop costs’), to the (“intrastate”) local service, while 25% of the costs are assigned to all of the other (“interstate”) services.

That’s right. The entire telecommunications infrastructure in the US has a rule, still in use, that 75% of network expenses are paid by Local Service, cross-subsidizing all of the other services. This violates Section 254(k) of 1996-Act) — and the FCC has maintained an intentional blind eye towards this obvious violation for nearly 20 years. The rules has not been analyzed, changed or adjusted for decades, and as the other lines of business grew, this formula was never changed, ever.

The FCC claims, (we paraphrase):

Oh, this is just fine. There are no ‘rewards’ to the company for manipulating the accounting of the regulated state-based telecom utilities for decades to look unprofitable and to subsidize the companies’ other unregulated lines of business to enable the expansion of 4G/LTE — and now 4G + 5G networks.

Never mind. Don’t read that pesky language of Section 254(k):

“§ 254 (k) Subsidy of competitive services prohibited — A telecommunications carrier may not use services that are not competitive to subsidize services that are subject to competition. The Commission, with respect to interstate services, and the States, with respect to intrastate services, shall establish any necessary cost allocation rules, accounting safeguards, and guidelines to ensure that services included in the definition of universal service bear no more than a reasonable share of the joint and common costs of facilities used to provide those services.”

This is clear evidence of just how ignorant (or deceptive) the FCC has been regarding the basic facts of these frozen accounting rules. This also makes clear that the FCC made no effort to actually examine what the IRREGULATORS wrote and filed in various FCC proceedings over the last five years.

While we can also blame the state public utility commissions for the blind faith that the FCC has been on top of this and would never let their rules violate basic state and federal laws against cross-subsidies . . . billions of dollars per state were overcharged and will continue to be overcharged — if this statistically-corrupted cash machine is not fixed.

Construction Expenditures Are Based on the 75% / 25% Rule

This is another view of the financial manipulations, this time using the 2003 and 2018 Verizon-NY financial reports and examining the “Telecommunications Networks (“Plant”) in Service” by the different lines of business over the last 15 years. These are all of the wires in the SPTU, which include the fiber optic lines.

This is Impossible: In the 15 years, from 2003 to 2018, the ‘Nonregulated’ services and the ‘Business Data Services’ should have paid the majority of the networks costs, — certainly not Local Service. These numbers prove that the FCC’s Accounting Rules Freeze caused billions of dollars per year in cross-subsidies, and that the FCC has been negligent for decades in not addressing and fixing these fundamental financial problems.

Where are the billions in construction for the Nonregulated services, including FiOS? How the hell could it be almost ‘flat’ for 15 years — at a measly 3%?
Why didn’t the “Business Data Services”, which are now more than double the revenues of Local Service, not pay their share of the costs over these years?
Since there was no serious upgrade or maintenance of the basic, existing copper-based networks, it is now clear that for 15 years Local Service was illegally funding the ILEC’s other lines of business.

This illegal accounting scandal was aided and abetted by the FCC’s cost accounting rules — mostly the 75–25% rule.

The FCC Accounting Rules are Federal . . . So We All Got Screwed

The FCC’s response to the IRREGULATORS’ challenge complains that we focused on Verizon-NY. This was done because it is the only state still requiring a published, full financial report — based on the original accounting and using the FCC’s accounting rules.

This next chart details the last data from the FCC in 2007, highlighting the AT&T, Verizon and CenturyLink state-based public telecom utility companies. All of the state utilities were dumping a massive amount of Corporate Operations expenses into Local Service. In this chart, “Access” includes he Business Data Services; in this year, Nonregulated payments of the costs were negligible.

Corporate Operations expenses are an expense bucket that covers executive pay, the corporate jets, golf tournaments, the lobbyists and lawyers who are attempting to kill off Net Neutrality or push through legislation to get rid of any remaining regulations or obligations.

On average, 72% of Corporate Operations expenses were put into Local Service while only 28% were paid by the Business Data Services. We note that since this time, the total Corporate Operations doubled or tripled, depending on the state, but, as shown in NY, the percentages applied to each line of business never changed.

NOTE: Verizon NY Local Service was charged $1.8 billion dollars in 2017, but Local Service only had $1.1 billion in revenues. This is 61% of the total and, yes, this percentage was set by the FCC accounting rules to reflect the year 2000 and was never changed — for 19 years.

Incompetence and Corporate Regulatory Capture

FCC Chairman Ajit Pai, in a Re/Code interview in 2017, revealed that his staff never examined the FCC’s accounting rules or the impacts they were having.

“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’.”

The FCC claims that these rules have been erased and no longer apply — they’ve been ‘forborne’, i.e.; still on the books but not enforceable. But, what Pai and the FCC do not mention is that this relaxing of the rules was supposed to be about the public interest, not just the interests of Big Telecom.

From 47 U.S. Code § 160:

(a) Regulatory flexibility. Notwithstanding section 332(c)(1)(A) of this title, the Commission shall forbear from applying any regulation or any provision of this chapter to a telecommunications carrier or telecommunications service, or class of telecommunications carriers or telecommunications services, in any or some of its or their geographic markets, if the Commission determines that—

   (1) enforcement of such regulation or provision is not necessary to ensure that the charges, practices, classifications, or regulations by, for, or in connection with that telecommunications carrier or telecommunications service are just and reasonable and are not unjustly or unreasonably discriminatory;

   (2) enforcement of such regulation or provision is not necessary for the protection of consumers; and

   (3) forbearance from applying such provision or regulation is consistent with the public interest.

The Structural Flaw in the FCC’s 2017-2019 Orders

The FCC has never examined the investments that are being paid by local phone customers, or that the vast majority of the construction costs for the "common use" intrastate networks are being paid by the state-based public telecom utilities.

In fact, nearly every FCC Order from 2017 through 2019 is based on a methodology, analysis, and financial reporting that

Excludes 75% of the construction costs,
Excludes the fact that the expenses to the state wired infrastructure are artificial and do not relate to offering Local Service
Does not recognize that the fact that these 2017-2019 FCC’s Orders are, in fact, relying on the very FCC rules that have presumably been erased

We are now at the tipping point of the end game.

The FCC’s plan, or should we say the plan of Verizon, AT&T et al., is to make the entire wired US infrastructure appear unprofitable so they can ‘shut off the copper’, but more importantly remove all regulations and obligations on these wires.

This will let them substitute Wireless — because it makes them more money as the unregulated Wireless lines of business does not even pay their own expenses. So, over the last decade Verizon, AT&T et al., have been dismantling the state-based public telecom utilities and handing over these publicly-funded network assets to the companies as private property for private use.

IRREGULATORS v FCC exposes this financial shell game to protect the public interest and the role of the FCC and AT&T, Verizon and Centurylink in this financial corruption.

Sorry, FCC, Americans Want All the Pie We Paid For

If we paid for the pie, we also get to eat what we paid for. We do not want to give free food to AT&T, Verizon and Centurylink. Yet, with the help of the FCC, these billion dollar companies are literally taking the food out of our mouths for their own benefit. This gluttony caused the Digital Divide and overcharged us all — and it needs to stop now.

Note: The enticing picture of the apple pie is from Market Street.