Californians Paid Billions Extra: The State Assembly Should Investigate AT&T’s Cross-Subsidies.

08/23/2017 03:57 am ET

Here is the first red flag:

  • The price of the basic AT&T California state utility phone service went up 138% from 2008-2016. Ancillary services went up 60%-525%.

The State claims that there is plenty of competition that should be lowering prices. And, based on the costs to offer basic phone service, prices should have been in steep decline. And yet there have been continuous rate increases since at least 2008.

I’ll return to this in a moment.

The 4G+1G Hype vs Investigating the Real Issues

The current California State Assembly is contemplating a new bill, SB-649, that is once again supposed to bring wondrous new technology if only we get rid of pesky regulations and preempt any zoning or customer challenges. It is based on “5G”, which doesn’t exist yet and whatever shows up will require a fiber optic wire and will have a range of a ‘small cell’, a city block or so.

One wireless expert put it this way—“5 comes after 4. We have 4G; we now have 4G+Hype.”

Instead of being conned yet again by the promise of a fabulous broadband future, California should start investigations and audits of the companies for overcharging local phone customers and cross-subsidizing the wireless company (a separate subsidiary) or the other subsidiaries of AT&T, with the state communications utility, AT&T California. And the Assembly should be examining the failure to deploy fiber optic broadband, even though customers have paid billions and billions over the last two decades.

I’ll address in another article how broadband has been used to get financial incentives for services that were never deployed or the companies delivered only a fraction of what was ‘promised’, with a lot of lip service. And note that the financial incentives are almost always done to bring more profits while removing basic obligations.

Read our excerpt of the history of fiber optic broadband in California, 1991-2005. By the year 2000, what is now AT&T California was to have 5.5 million homes upgraded to fiber optics and the company was to spend $16 billion.

  • The price of the basic AT&T California state utility phone service went up 138% from 2008-2016.

The modified chart above was taken from a report by the California Public Utility Commission (CPUC) and it shows that from April 2008 (using actual AT&T California bills) to 2016, the price of local, flat rate service went from $10.94 to $26.00, and this is just for the basic ‘dialtone’; it does not include the separate FCC Line Charge, or the taxes, fees and surcharges—which can add an additional 40+% to the total. And, this does not include basic ancillary services, which went up 60%-525% during this time, including unlisted numbers.

How is this possible if, as the State claims, there is competition? In fact, prices should have actually been in steep decline. With no major construction costs, cuts in staff, no advertising or promotion, and the fact that most of the copper networks have already fully depreciated (written off), how can the state utility service have continuous increases?

(Hint: There have been no audits in decades, no cost-based analyses, and the price of service has nothing to do with actual costs; the rate increases were created based on multiple ‘promises’ to bring California fiber optic broadband.)

Worse, customers have been ‘harvested’, which is when a company wants to get rid of a service (or has a captive audience) and forces them, through rate increases, to either scream ‘uncle’ and drop the service, or get gouged.

The new plan, which is attached to this new proposed 4G+Hype fairytale, is to just shut off the copper wires and force-march customers onto wireless, where, conveniently, the same company controls the wires that are used for the wireless networks, which were built, in large part, paid for by these customers.

Exposing the Massive Cross-Subsidies between AT&T California & Subsidiaries.

As we uncovered in New York, Verizon has been cross-subsidizing all of their other lines of business via raising basic residential and business services, which include ‘Business Data Services’, while the affiliate companies, like Verizon Wireless, pay a fraction of expenses as compared to competitors and are able to divert the wireline construction budgets to fund the wireless build outs. I.e.; local phone customers have been funding the wireless deployments via the wireline budget—billions of dollars are being diverted.

And this is important now because AT&T and Verizon’s plans are to ‘shut off the copper’ with the claim that 5G wireless will replace any fiber optic wire to the home deployment.

Unfortunately, like Verizon NY, AT&T California is the state utility for communications and it is being dismantled by the other AT&T subsidiaries. AT&T Mobility is not AT&T California, but it appears that the State has erased the 'bright' line of the state utility and the affiliate companies, allowing them to use the networks without fair compensation, while competitors pay retail. Also, AT&T and Verizon have admitted that most of the construction for wireless has come out of the wireline budgets.

We’ll address the New York findings and how they appear to be mostly identical to AT&T in California in an upcoming article.

And we will also address those who will say: but what about ‘sunken costs’ or the fact that there has been a major decrease of customers using wireline networks so, of course, the prices go up, or …?

Blame the Companies More than the Commission?

All of the blame should not be placed solely on the Commission. For example, AT&T Mobility has decided to take the regulators to court over any data collection they do not want exposed.

Law360 writes, May 5, 2016:

“AT&T Mobility, along with local phone and wireless carriers, called on a California federal court Thursday to block a state regulator from compelling the turnover of subscriber data for a review on competition in the telecommunications market, arguing it violates their commercial privacy interests.
“The 20-page suit against the California Public Utilities Commission including its president, four commissioners and an assigned administrative law judge, protests having to turn over what the carriers allege is competitively sensitive data in a manner that conflicts with federally mandated confidentiality protections set by the Federal Communications Commission.”

In examining the record in California, the Commission failed to keep those who were harming the public interest in check.

Here are a few red flags:

  • The price of the basic AT&T California state utility phone service went up 138% from 2008-2016.

Returning to the opening, here’s the problem: if there is competition, then prices go down. Period. In fact, the CA Public Utility Commission recently stated that competition lowers prices.

“Our decision was based on the economic theory that increased competition would drive rates close to cost, thus a competitive market could act in place of traditional rate regulation.”

And the State has an obligation to make sure rates are just and reasonable.

“We undertake this investigation mindful of our obligation, pursuant to Public Utilities Code § 451, to ensure just and reasonable rates, terms and conditions of service. Accordingly, we request data and comment on these issues as an exercise in good government, and in light of our promise to monitor and inform ourselves about the State’s telecommunications infrastructure. This data-driven approach does not reflect an intent to regulate where the Commission lacks regulatory authority.”

Unfortunately, prices are not just and reasonable and the State doesn’t have a data-driven approach.

  • The Price of AT&T’s Utility Phone Services Are Not Listed on the AT&T Site.

We tried to find the current price of AT&T’s local service or even the pricing for ancillary services on the AT&T site; they were not part of description of the services or could be found through searches on the site. We found a basic pricing guide on the CPUC site.

  • The Price for Every Ancillary Service Went Up.

The price of every ancillary service went up, from Call Waiting, which went up 240%, to unlisted numbers, which went up 525% (a fact that was also uncovered by the LA Times in 2016.)

  • Ancillary Features’ Pricing has Nothing to Do with Actual Costs.

The dirty secret of these ancillary services is that they are pure profit. In 1999, the now-AT&T-Bellsouth company was required by the Florida state commission to supply the ‘costs’ of these services and in 1999, Call Waiting cost less than a penny to offer while Caller ID ‘Deluxe’ had a cost of $.22 cents.

There are lots of caveats, but in 2016, with the current price of $10.99 for just Call Waiting – it is 98% profit or, relating back to the BellSouth chart, that’s 134,000% percent comparing the cost of offering the service compared to the charge on the bill.

  • 411 Directory Up 1891%

Then we have “411”, Directory Assistance, which has also had major increases over time. In 1984, local service was a bundled offering which came with unlimited directory assistance as well as the ‘inside wire’ and the actual phone. Over the years the company removed the ‘unlimited’ directory offering, then removed any free calls, and kept raising the rates so now 1 directory call costs $2.29 per call. In 2004, AT&T-California still had 3 free calls and then cost $.46 each. For these four calls (3 free + 1), by 2016 it would have increased 1891%.

Profits: Over the last decade, with the addition of technology, Directory Assistance now costs $.10-$.25 cents per call to offer– about 90+% profit. However, AT&T and Verizon also have the valuable 411 networks throughout their territories that were grandfathered for their own private use—for free.

(Note: In the current world of wireless, 411 is also integrated, but this line of business generates a host of other revenues, from info about the location being searched, the database of phone numbers, and the households and persons attached to them. These are just some of the uses for this information and are all part of this line of business.)

  • Taxes, Fees and Surcharges Increased

There are a host of taxes, fees and surcharges that are applied to the bill, many of which track with the charges being paid. Thus, a rate increase of 138% means that the taxes that are assessed on the charges follow suit. I’ll come back to this in another article.

  • Data Driven Customer Harvesting

Worth repeating: ‘Harvesting’ is when a company wants customers to leave a service and so they increase the costs until the customer screams ’uncle’ or is gouged.

In California, it is now clear that the price to customers for local service and all of the ancillary services violate basic ‘just and reasonable’ statutes—as all of this is made up. There is no ‘data-driven’ analysis, there are no audits, no investigations to ascertain the actual costs involved in offering the service, much less the profits being accrued or the cross-subsidies of the other lines of business. Prices continue to rise because “We’re the phone company”. (We note that California advocacy groups, especially, TURN, have worked to keep rates from increasing for years.)

Here are excerpts from various California Public Utility Commission reports and filings listing some of the reasons for not doing a full audit of the accounting.

Problem 1: It’s just too difficult to actually figure out the cost of the traditional basic phone service.

“Given the services offered by the incumbent service providers today, it would be difficult for the Commission to attempt to assess utility cost to provide traditional basic telephone service.”

Problem 2: The “Digital Infrastructure and Video Competition Act of 2006” does not allow for cross-subsidies; it is in the law. But, because there just isn’t sufficient data available, the State voted against the California Advocate’s Office (ORA) for an investigation.

“The DIVCA (The Digital Infrastructure and Video Competition Act of 2006) prohibits state-issued video franchise holders that provide stand‐alone, residential, primary line, basic telephone services from increasing the rate they charge customers for this service to finance the cost of deploying a network to provide video service.
“However, current state and federal industry reporting requirements do not provide sufficient information for Staff to definitively determine on an empirical basis whether such cross subsidization does, or does not exist. A pending Proposed Decision still subject to Commission adoption rejects ORA’s request that the Commission commence an investigation.”

Problem 3: AT&T may have raised rates beyond the allowable amount, but there hasn’t been an audit in decades and it would actually require ‘onerous’ work.

“The fact that AT&T raised rates for basic service beyond the levels authorized in D. 08-09-042 or that Verizon may do so in the future does not prove or disprove that residential basic services are cross subsidizing a network used to provide video service.
“To make this determination significant analysis is required. Revenues For residential basic service, video service and other services that use the shared network to provide video service would need to be compared to their respective costs. The Commission would need to audit those costs to ensure they have been accurately assigned to each service. Such an audit would be onerous as it would require the Commission to perform a cost of service analysis, which has not been performed in decades, since the Commission Adopted its New Regulatory Framework and established price caps to replace cost of service regulation.”

On November 12th, 2015, the CPUC opened an investigation of competition and pricing.

“The time seems ripe for us to ask whether competition is delivering the dependable, high-quality telecommunications services that are vital to California’s people and economy. We find this investigation particularly timely as the Commission sharpens its focus on the safety and reliability of the State’s essential infrastructure. We note that New York has recently embarked on a similar review of its telecommunications markets.”

And what do you know—it points to the NY Public Service Commission assessment, which we participated in. (The CPUC did not mention the investigation of Verizon NY, however.)

And on July 13, 2017, the CPUC decided that there was no need for any further investigations.

Conclusion: Here are questions the State Assembly should be answering, with facts.

  • How much money did customers pay AT&T for the upgrades of the wired networks to fiber optics – that never happened?
  • How much money did customers pay so that AT&T could cross-subsidize the wired utility budgets to build the cell sites for the wireless company?
  • If there is competition today, how did basic local service have continuous increases of 138% in basic rates from 2008 to 2016?
  • Why has the California State Assembly not investigated the cross-subsidies, the failure to deliver fiber optic broadband and charge local phone customers major rate increases of the wired state utility copper-based wires?
  • Why has State not stepped in to clean up this mess?
  • Is Local Service profitable when the expenses that are being incurred to offer the service are examined?
  • Have customers been overcharged fees built into rates for ‘incentives’ to build out network upgrades?
  • Were there any refunds, penalties, lowering of rates, etc., when the networks were not upgraded?
  • How much of the 5G deployments will be indirectly charged to the wireline networks and local phone customers?

More to come:

Part 2: California Fiber Optics, Mergers Conditions, Government Funding and More Questions.

Part 3: The Verizon New York Investigation and AT&T California

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