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Is Verizon Wireless 'Profit Pumping,' Dumping Expenses Into the Wireline Networks? Time to Investigate

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New Report Leads to a Call for an Investigation of Verizon New York and Verizon's affiliates including Verizon Wireless and "Verizon Services."

On Sept. 13, 2013, Common Cause-NY, Communications Workers of America (District 1), Consumer Union and the Fire Island Association filed comments calling for an investigation into the influence of the wireless company over the wireline state-based networks provided Verizon New York.

"We assert that there is evidence that the reported losses are substantially the result of misallocation of revenues and expenses as between the landline and wireless systems. The evidence is strong enough to require the Commission to consider it, and seek such additional information as will prove or disprove the existence of systematic and intentional misallocation by the Company, with consequences for customers/ratepayers of both systems, the tax payments due to federal, state and local jurisdictions, and policy decisions made by the Commission."

In our first The Huffington Post blog post, "Please Sir May I have Another," we discussed our 2012 report pertaining to Verizon's affiliate transactions in five states. Verizon New York and the other companies, including Verizon New Jersey, Pennsylvania, Massachusetts and Rhode Island, deliver the wired state utilities networks, commonly referred to as the PSTN (public switched telephone networks); an affiliate, in this case, are other Verizon companies that supply services to these companies, such as Verizon Online, which provides Internet service, or Verizon Wireless (which is a joint Venture with Vodafone called "Cellco") among a host of others.

To the customer, it is all one big blur -- isn't everything just Verizon? Truth is, Verizon has "subsidiaries" and each has taken over a slice of the business. However, as we found, it would appear that each is now taking a slice out of the customer's pocket book, while Verizon Wireless appears to be in control of the companies' agenda -- including the wires.

This new New Networks' report, "Verizon Wireless and the Other Verizon Affiliate Companies Are Harming Verizon New York's (The State -based Utility) Customers & the State," focuses specifically on just New York and it relies mostly on Verizon's own SEC-state based quarterly and annual reports. As the name suggests, it is not a pretty picture.

And we are glad that others are now calling for an investigation.

Don't Look Behind the Curtain

Our curiosity was piqued when we decided to figure out how Verizon New York was able to get the New York State Public Service Commission (NYPSC) to raise basic "POTS," (plain old telephone service) rates on residential customers in 2009. The State gave the rate increase, claiming it was for massive investments in the deployment of fiber optics and that the company was in need of financial relief. In just 2010, for example, Verizon New York's fourth quarter 2010 SEC filed report showed a loss of $2.2 billion (and created an income tax benefit of $716 million). I wondered -- isn't Verizon's FiOS profitable?

The more we dug, the uglier it got. It appears that Verizon has been able to essentially game the regulatory system. The losses for 2010 appear to be caused, not particularly by a loss of "POTS" phone customers, which was one claim, but by all of the Verizon affiliate companies, such as Verizon Online, Verizon Wireless, or Verizon Services.

  • It appears Verizon Wireless is shortchanging the state utility by paying less than what other wireless competitors pay for services.
  • Verizon Wireless appears to be dumping some of their construction budgets into the utility.
  • Some of the other affiliates, such as Verizon Services, have turned the local phone utilities into a garbage pail of expenses -- everything from executive pay to foundation grants may have been dumped.

NOTE: We quote 2010 data because that was the last year Verizon published state-based financial reports, while the FCC stopped publishing basic data in 2007.

The consequences of these actions are many. First, these maneuvers make the wireline companies look unprofitable while it "gooses" the wireless profits. But the real kicker is the double-whammy on customers. Verizon gets doubly paid back because customers got hit with a rate increase (which is still being applied to bills), while using these losses caused by the wireless networks or Verizon's other affiliates aids Verizon in getting its policy goals as well -- i.e., Verizon walks around claiming it is "losing money" on the wires so it can call for shutting down all of the wires and replacing them with wireless -- which is Verizon's corporate policy.

Lowell McAdams, Verizon's chairman and CEO and former CEO of Verizon Wireless, stated on June 21, 2012, that Verizon plans to "cut the copper" -- and force customers onto wireless: "In other areas that are more rural and more sparsely populated, we have got (wireless) LTE 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."

And we've seen this play out after the Sandy storm, when Verizon decided to start implementing its new plan. Fire Island, N.Y., and other parts of New York and New Jersey were the first wave of Verizon's corporate strategy. Verizon refused to fix the wires and instead forced customers onto an inferior wireless service, Voice Link, which is a 1990s-styled cell phone device that can't handle basic regular phone service data applications like dial-up Internet or even alarm circuits.

Closing the wires helps many of Verizon's favored policies. It closes all obligations as wireless is not regulated for, say, "quality of service." Closing the wires also removes the unions -- who are tied to the wires. And customers can't even sue the wireless company for malfeasance because it is a "contract," which is sacrosanct according to the Supreme Court as opposed to a telecommunications tariff, which has obligations.

And let us not forget the Verizon-cable deal to sell cable bundles with Verizon Wireless services wherever Verizon doesn't upgrade or shuts off the copper. The customers have one choice -- the cable company's cable, broadband, Internet or "wired phone."

Let's examine this dark underbelly.

New York: Verizon Wireless and Verizon Affiliates Are Out to Get You

Verizon Wireless Construction Expenses Appear to be Dumped into the Wireline Network Expenses.

Fran Shammo, Verizon's EVP and CFO stated that the wireline construction budgets have been diverted to charge wireline customers for the Wireless companies' construction needs.

"The fact of the matter is Wireline capital -- and I won't get the number but it's pretty substantial -- is being spent on the Wireline side of the house to support the Wireless growth. So the IP backbone, the data transmission, fiber to the cell that is all on the Wireline books but it's all being built for the Wireless Company."

Simply put: Wireline POTS customer may have been charged to develop and build the Verizon Wireless's networks -- saving the company potentially billions.

And this tie of wireline expenditures being used for wireless construction also appears in almost every Verizon New York press release. In 2011, Verizon claimed it spent $1.5 billion in New York on wireline investments, but it includes the accelerated deployment of fiber optic links to 1,848 cell sites.

"Verizon Invested More Than $1.5 Billion in New York's Wireline Communications, IT Infrastructure in 2011." "Accelerated deployment of fiber-optic links to wireless carriers' cell sites throughout New York as these carriers expand their infrastructure to meet ever-growing demand for wireless broadband and advanced 4G services. In 2011, Verizon deployed fiber optics to connect 1,848 of these sites in the state."

Did the state raise rates of local POTS phone customers for "fiber optic investments" that were instead used by the wireless company? Were these expenses part of the expenses that caused the massive losses that were then used as an excuse to raise rates?

Wholesale Dumping of "Verizon Services" Expenses to Make the Wires Look Less Profitable

Then we have Verizon Services, the group of companies that supply services to Verizon New York but dump billions of dollars of expenses into the state-based wired company. And it is a kitchen sink of expenses.

Verizon New York's 4th Quarter 2010 state-based SEC report states:

"We have contractual arrangements with Verizon Services for the provision of various centralized services. These services are divided into two broad categories. The first category is comprised of network related services which generally benefit only Verizon's operating telephone subsidiaries. These services include marketing, sales, legal, accounting, finance, data processing, materials management, procurement, labor relations, and staff support for various network operations. The second category is comprised of overhead and support services which generally benefit all subsidiaries of Verizon. Such services include corporate governance, corporate finance, external affairs, legal, media relations, employee communications, corporate advertising, human resources, treasury, and rent expenses associated with the rental of facilities and equipment. Costs may be either directly assigned to one subsidiary or allocated to more than one subsidiary based on functional reviews of the work performed."

Translated into English, this most likely means that Verizon Services dumps everything, from lobbying, monies for the Verizon Foundation, executive pay, travel and a host of other charges that have nothing to do with the cost of actually offering phone service. Prior to massive deregulation, virtually none of these expenses would have been allowed to be considered as a factor in a local rate adjustment

In 2010 and 2009 Verizon Services charged Verizon New York $3.7 billion. If we compare the total revenue of VNY for these years with Verizon services, Verizon Services were 25 percent -- i.e., the company revenues were $15 billion for 2009-10 and Verizon Services charged Verizon 25 percent, or $3.7 billion (with rounding). However, from 1995 to 2002, the Verizon Services expense was only 16 percent of revenues for Verizon New York and the company was also profitable including the addition of this expense. In fact, in most years VNY paid a dividend back to corporate. So, it raises the question -- if Verizon New York is "losing money," is Verizon Services one of the reasons why?

Did Verizon Wireless Cause the Chronic Wireline Customer Service Issues?

Were the chronic wired problems that led to the decision to not fix the wires and put customers onto wireless really the failure of the company to properly maintain and upgrade the networks over the last decade -- and to shift the budgets to wireless?

Before Sandy, the New York State Attorney General's Office petitioned the state commission to investigate the ever eroding quality of customer service caused by a lack of proper maintenance, staff cuts and a disregard of the wires in general.

On April, 25, 2012, the New York Attorney General's Office petitioned the NY State PSC because of massive quality of service declines.

"Despite receiving this substantial deregulation of its service quality requirements, Verizon nevertheless failed to meet four repair service measurements in 2011, the first year of the (new quality of service) plan. Moreover, by limiting the scope of Verizon's performance measurements to the 8% of all New York customers defined as Core, the Commission allowed the company to provide below standard service to 92% of its customers with impunity."

And the Attorney General warned that Verizon didn't care about the wires and was shifting its focus to wireless.

"Rather than meet its obligations to provide wireline telephone customers with minimally adequate telephone service, Verizon is continuing to drastically reduce its workforce with the result that the company cannot meet its customers' repair needs in a timely manner. Verizon's management has demonstrated that it is unwilling to compete to retain its wireline customer base, and instead is entirely focused on expanding its wireless business affiliate."

The Investigation

Common Cause-NY, Communications Workers of America, (District 1) Consumer Union and the Fire Island Association have called an investigation into the cross-subsidies in New York, as well as make public the data requests in the Fire Island-Voice Link proceeding that the State had requested since the beginning of the inquiry. Verizon had filed requesting to shut off the wires used for phone and DSL service on Fire Island. Recently, Verizon backed off and is now wiring the community, but there is no word about all of the other customers that had problems after Sandy and were put on Voice Link wireless (including Mantoloking New Jersey).

On Oct. 16, 2013, Verizon replied. I paraphrase: We will give the state and the commenters squat. Here is one of their responses: a totally redacted 331-page document.

New Networks has put up some reading materials.