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New Reports Expose Verizon NY's Financial Shell Game and the State Commission's Role

02/22/2016 02:04 am ET | Updated Feb 22, 2016

This week, the NY State Public Service Commission (NYPSC) is holding a technical conference with the purpose of discussing their 2015 report "Staff Assessment of Telecommunications Services", and to address the mostly ignored Connect NY Coalition Petition, which was filed in July 2014 and called for a series of investigations.

NOTE: Some sections of the Petition rely on data from our previous reports, including "It's All Interconnected", published by the Public Utility Law Project, (PULP) in May 2014. This report was filed by PULP in the current proceeding as well.

The State sent out an agenda and claims that this event is designed to "help the Commission and the State Legislature identify areas where there may be market failures or opportunities to advance the public interest".

This week, New Networks Institute (NNI) filed two reports from our new series, 'Fixing Telecommunications', with the State, which provides significant enhancements to our previous work and directly relates to these NY State proceedings; the reports focus on Verizon NY's financial accounting and are mainly based on Verizon NY's own annual reports. Moreover, the new reports directly contradict the NY PSC's findings and calls for new audits and investigations.

Click to see the new and previous reports.

While this is about Verizon and New York, this is playing out across America, and every state is going through similar, if not almost identical 'assessments'-- but the subplot appears to be to use it to allow the incumbent, in this case Verizon NY, to get rid of basic regulations and obligations.

Overview

First, foremost and ironically significant, the NYPSC neglected to make the most important point in their report or statements -- Verizon NY is the state-based telecommunications 'utility', like water, power, or even public roads, and has had a franchise since 1896 to offer telecommunication services. In fact, except for a passing reference, the term 'utility' is no where to be found. Commonly known as the "Public Switched Telephone Network", PSTN, Verizon NY, the incumbent utility, however, is not like any other telecom companies in New York as it controls the critical telecom infrastructure -- the wires, and it gets financial perks, such as utility rights of way, to be the caretaker of the State's broadband future (or lack thereof).

And it is the job of the New York State Public ("utility") Commission to supply oversight and protect the Public Interest. (It is also known as "New York State Department of Public Service").

"The primary mission of the New York State Department of Public Service is to ensure affordable, safe, secure, and reliable access to electric, gas, steam, telecommunications, and water services for New York State's residential and business consumers, while protecting the natural environment."

Unfortunately, the system is broken. Here is a summary of the Verizon-NY State broadband time line. Click for full details.

  • In 2004, Verizon announced FiOS, the cable TV and broadband Internet service.
  • In 2005, Verizon claimed that the fiber optic wire it uses for FiOS was nothing more than an enhancement and part of the state telecommunications utility -- and the State agreed.
  • In 2006, the State granted Verizon 'deregulation' to essentially raise rates due to 'massive deployment of fiber optics' (FiOS) and 'losses';
  • By 2009, Verizon had gotten three rate increases on local phone customers -- over 84% in extra phone charges, which helped to force many to drop their phone line and use wireless. (This is known as 'Harvesting", i.e.; raise rates until the customer revolts and leaves or is gouged.)
  • In 2010, Verizon announced it was done with the FiOS fiber optic deployments.
  • By 2012, Verizon announced it would 'shut off the copper'.
  • In 2013, Verizon decided to force some customers harmed by the Sandy Storm onto their more expensive and inferior wireless services, including VoiceLink or Jet Pack (expensive broadband as compared to DSL)--Fire Island revolted.

Mobile First -- Subplot: Wires Last.

In 2010, Verizon started changing senior management to become a 'mobile-first' company. In fact, many of the staff were from Verizon Wireless (and its predecessors and other wireless companies). The Wireless company has not only taken control of the state utility, but was able to get Verizon NY, the wired company, to charge local phone customers to fund some, if not most of the fiber optic wires to the wireless cell towers, as part of the sleazy dealings listed above.

To sum up, Verizon's plan has been to:

  • Build out the wires-to-the-cell sites as part of the state-wired utility.
  • Dump the majority of expenses into Local Service to make it look unprofitable.
  • Claim Local Service is unprofitable to get rid of regulations and to 'shut off the copper'.
  • Claim the Local Service networks are unprofitable to get more rate increases, which 'harvests' customers and pushes them onto wireless.
  • Create a separate, hidden wired network, (which includes "special access", broadband and data services) which is a monopoly, but uses the same copper wires or the new fiber wires of the PSTN.
  • In areas where Verizon does not upgrade, they have a deal with the cable company to bundle their wireless service.
  • Give the Verizon affiliates and subsidiaries financial benefits that harm competition while increasing the 'unprofitable-ness' of Local Service.

And this was made possible by a two things: the State's utter failure to actually audit the company's financials, even when there were rate increases. The NYPSC never did any rate case or investigation into cross-subsidies for at least a decade.

But more importantly, the FCC created a series of accounting rules in 2001, which we dubbed the "Big Freeze", that 'froze' the calculations of how to apply expenses to match the year 2000 -- 16 year ago, and the consequence was to allow Verizon (and all of the other phone companies in every state), to dump the overwhelming majority of Verizon's expenses into only Local Service -- which made Local Service look very unprofitable while essentially giving the other Verizon subsidiaries a free ride, at the expense of all competition.

And the Big Freeze, with the State's "light touch regulation", allowed Verizon to manipulate the accounting of the State utility, as well as the agenda.

There are a host of bad things that came out from all of this.

Instead of wiring the cities, Verizon ignored or didn't finish the majority of New York State's municipalities, leaving major gaps, including in New York City.

Verizon New York did not pay income taxes and created massive losses that are used to make public policy decisions to raise rates or shut off copper customers.

Starting in 2009, Verizon NY showed losses with an average of $2.3 billion a year and a resulting 'income tax benefit' of $1.1 billion. For this six year period, 2009-2014, Verizon NY lost $13.63 billion and had an income tax benefit of $6.34 billion.

As the new NNI reports show, each wired phone customer paid $1000.00-1500.00 or more, extra, for a fiber optic service that most will never get.

In fact, the price of local service should have been in steep decline because the actual expenses were slashed. (I.e., it was fully depreciated so, except for maintenance and staff, there are no serious costs. The company also slashed staff so those expenses were reduced as well.)

And the special access networks, which are nothing more than business broadband and data services, are mostly based on copper, and yet have been removed from any discussion of the copper networks' shut off or the profits from the networks.

The FCC recently detailed that the majority of Special Access was 'mostly copper-based', and was over $24 billion nationwide. In New York, Verizon's Special Access was over $1.8 billion in revenue in 2014 and is larger than local phone service revenues.

Hidden Networks? There are 0 access lines reported for this $1.8 billion or even the nationwide $24 billion, even though they use the identical, legacy copper wires that have been in place for decades. Using the FCC data, and the Verizon NY revenues, there are an estimated 65 million 'total access lines' as defined by the FCC's last analysis of Verizon New York.

Meanwhile, the State proclaims there is competition. Unfortunately, competition requires that prices go down, not up continuously. With three rate increases and increases to every service, the State seems to have forgotten to mention these facts. And since Verizon controls the physical wires, it controls telecommunications, wireline and even wireless, to end customers or even when a competitor is renting the networks to compete.

The NYPSC either has no clue, or worse, it has been captured. Their assessment report is an attempt to hide the actual harms to the State, customers and cities that are not and will get wired with fiber optics. And the actions of the State should now be questions, especially based on actual data we present.

What Should Happen Next?

Read the first two reports from Fixing Telecommunications, first.

The reports from Fixing Telecommunications are an enhancement and extension of the data that was used in the Connect New York Coalition petition for an investigation. These reports show that the Petition was an appetizer to what really needs to be done to fix telecommunications.

New Networks Institute, established in 1992, is now a consortium of telecommunications experts, analysts, forensic auditors and lawyers.

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Coming up -- PART II Summary Report:

Exposing Verizon NY's Financial Shell Game & the NYPSC's Role

This section is designed to give a quick sketch of some of the issues with the State report and exposing the current financial shell game. (See the Reports for details.)

1) The State report manipulated the costs of services to customers.
2) Customers were overcharged based on "massive deployment of fiber optics" and manipulated losses.
3) $200 Million or $8.5 billion? Verizon manipulated the utility construction budgets.
4) Where did all the money go? It cross-subsidized wireless and FiOS, a cable service.
5) The FCC's "Big Freeze" created cross-subsidies.
6) Outrageous expense dumping of 'Corporate Operations' in Local Service.
7) The State and Verizon manipulated the accounting of access lines.
8) Verizon New York FiOS deployment only passed 45%-62%.

Click to read the Letter with the Summary report.

We'll be putting out more about this over the next two weeks.

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