To understand Verizon's financial shell game see: The Book of Broken Promises: $400 Billion Broadband Scandal and Free the Net.
Verizon New York's Annual Report for 2014 has just come out and it is a page turner. Let me start with some facts and then answer two questions -- How did Verizon New York lose billions in 2014? Isn't FiOS, Verizon's fiber optic service, profitable?
Note: In the last article, we detailed major holes in Verizon's New York City and New York State's deployment of fiber optic upgrades, known as FiOS. Here's why.
- Verizon New York lost $2.58 billion in just 2014; and that's just New York State.
- Verizon New York lost $12.5 billion over the last five years, 2010-2014, with a $1.28 billion income tax benefit -- and paid no income taxes since 2004. (There are some questions about 2013).
- Verizon charged local service customers -- including seniors and low income families, about $752.00 extra on just basic local phone service (counting taxes, fees and surcharges, some of which are also revenues to Verizon).
- The State granted this largess based on "massive deployment of fiber optics" and "losses", starting in 2006.
- There has been a massive dumping of expenses into the "Local Service" accounting that makes Local Service look "unprofitable".
- These multi-billion dollar expenses include corporate lobbying and lawyers, to possibly executive pay and foundation grant money.
- In fact, "Local Service" accounting for regular copper-based wireline phone service paid 173 percent more in expenses than all of the other areas.
- Moreover, the construction budgets for the "massive deployment of fiber optics" were diverted to pay for the companies' other construction needs, including Verizon Wireless' fiber optic wires to the cell towers.
- This also means that Verizon's services, like Verizon FiOS TV, or "special access" business services aren't paying "market prices" and are getting a free ride or reduced costs.
- Because of this shell game, only 46-59 percent of New York City has been upgraded to fiber optics, even though the franchise called for 100 percent by July 2014. Only 42-51 percent of the rest of New York State has been upgraded.
- 80 percent of the New York State municipalities will not be upgraded in parts or not at all.
- 100 percent of phone customers were hit with multiple rate increases for "massive deployment of fiber optics" but 50 percent will never get what they paid for.
- The wired phone networks, including local service, are profitable when the flows of money are recalculated to remove the cross-subsidies, expense dumping and other financial games.
- In fact, Local Service over-paid about $1.7 billion in just one year, 2014, while Verizon's other services that use the wired networks, including business services like "special access", under-paid at least by $1.3 billion.
This is happening, to varying degrees, in every Verizon state and most likely All AT&T states --and it is time to stop this chicanery.
Summary
There is a massive financial shell game afoot to use public funding of a utility to fund Verizon's other "subsidiary" companies. It has harmed customers and NY State by allowing Verizon's other subsidiaries and services, like Verizon Wireless, or FiOS TV, or "special access" business networks, to dump their expenses into the State utility and the financial accounting for "Local Service", thus creating massive losses for basic wireline services. This is then are used to raise rates, to stop building out the fiber optic broadband networks because they are "uneconomical" and to show the need to "shut off" the "unprofitable" networks and force customers onto Verizon Wireless. And the kicker is the company's losses are then used to not pay income taxes and the losses are a tax benefit to the corporate parent, Verizon Communications.
However, recalculating this financial shell game reveals that the wired networks are profitable and there is enough money to start upgrading New York State -- but the "will" to actually hold Verizon accountable, audit the books, enforce the basic laws and penalize the company for its financial chicanery is what's missing, The NY Public Service Commission, the State Attorney General's Office and even New York City or the Governor's office could have all investigated by now. Instead, the regulators and politicians just keep giving the same company that has been manipulating their books, overcharging customers, and not upgrading their networks, more money.
I repeat: This is happening in every Verizon state and most likely All AT&T states -- And it is time to stop this chicanery.
I can hear someone in the back saying -- But everything is going wireless? Besides the fact that very High-speed Internet or cable TV isn't going to be coming via wireless (especially at reasonable prices), every cell phone call, sent photo or video that is picked up by WiFi or hot spot or cell site connection goes back to a wire -- and guess who controls that wire, including the costs to all that use the wire, including the competitive cell phone companies...
Discussion
Verizon New York is a Utility that Controls Critical Communications Infrastructure. It is NOT an "ISP" or a Cable Service.
Verizon New York is the state telecommunications utility, which are the wires into homes and offices, and schools and libraries, etc., and today, and while many believe it is still mostly based on copper wires that could have been put in over the last 100 years, all of the fiber optic networks are being constructed as part of this Public utility network, including FiOS.
As a utility, it is based on "Title II" telecommunications regulations as set by the Communications Act of 1934. "Title II" has been all the rage as the FCC's Open Internet Order declared that broadband and Internet were now classified as "Title II". But, the utility has always been Title II, something the phone companies have been attempting to erase for a decade-plus, or use to their advantage when it suits them.
NOTE: We previously filed a perjury case against Verizon with the FCC as Verizon claims that Title II harms investment. These financials prove that Title II is Verizon's primary investment vehicle -- and phone customers have been forced into being defacto investors.
Verizon New York also receives perks for running the state utility. It receives the use of the public rights-of-way, in the past it had guaranteed profits (but still has rate increases to compensate the company), and it has a monopoly on the use of the wire (I.e., Verizon doesn't have to share this network to let competitors offer High-speed Internet (ISP) service or cable service, and controls critical infrastructure as a monopoly provider.)
Title II also requires that the company can not "interfere" with what's carried over the wires, (known as "common carriage") and it has to make sure that everyone receives phone service, that repairs are done on a timely basis and that prices are "fair and reasonable", though some of these regulations have been "erased", "forebeared", or "relaxed" in favor of the company over the last decade.
And starting in the 1990s, in every Verizon and AT&T state there were plans to replace this aging copper wire with a fiber optic wire, though each state has different laws and regulations to give the phone companies more money via rate increases and tax perks to pay for this fiber optic upgrade. In some states, like New Jersey or Pennsylvania, the Verizon state-based companies made commitments to have 100 percent of their territories upgraded to fiber optics and capable of speeds of 45 Mbps in both directions. Verizon New Jersey was to be completed 100 percent by 2010; Verizon Pennsylvania should have 100 percent broadband deployment by the end of 2015.
In New York, Verizon got out of the requirements to have fiber optics deployed in the 1990s, (though they announced plans) but in 2006, Verizon went to NY State and was able to secure multiple rate increases, claiming it was for "massive deployment of fiber optics" -- with brand name, FiOS and "losses".
Over the last decade there has been a massive financial and regulatory shell game.
First, Verizon goes to the New York State Public Service Commission around 2005 and claims that FiOS is a "telecommunications" service, "Title II". and that it is an extension of the utility networks. This allows Verizon to get rate increases on basic service phone customers to start to fund and roll out their FTTP, fiber-to-the-premises networks used by FiOS TV, the cable service.
But instead of upgrading the utility, Verizon decides to divert the funding from these rate increases and the construction budgets to Verizon's other subsidiaries, including the Verizon Wireless', which gets what appears to be a free ride on the costs of installing the wires to the cell towers. Verizon's "special access" wires, sometimes called "backhaul", which are wires in the network that handle the calls, videos and content of the competitive cell phone providers or the content companies, like Netflix, pays a fraction of the expenses as compared to Local Service, while Verizon's own services using these networks appears to be paying below market prices.
In fact, the New York State Attorney General's Office pointed out that 75 percent of the billion dollar budget to upgrade and maintain the utility networks in 2011 was being diverted to fund the construction of these other lines of business.
So, besides diverting the construction budgets that should have been used to upgrade the state utility, Verizon has also been able to dump the majority of expenses for "special access" or even most of the corporate expenses, including lawyers, and lobbying firms into the "Local Service" accounting, making it look unprofitable.
And the consequence has been that while Verizon did start to do FiOS fiber optic deployments in 2006, by 2012 the company left the majority of New York State unfinished. And it now claims it has stopped its deployment, except for where there are remaining contracts.
This shell game gets more complicated -- Verizon's plan has been to "shut off the copper", claiming it is uneconomical to upgrade. After the Sandy Storm, the plan has been to not upgrade or even fix the copper wires but to force customers onto more expensive wireless plans. At the same time, Verizon uses the losses to continually raise rates, claiming local service is losing money; this is commonly known as "harvesting", which hits low income families, seniors and rural areas that depend on these networks, the hardest. But it also helps to drive customers to get rid of their wired phone lines -- the lines that were never upgraded.
This manipulation of the books doesn't stop there. In previous reports we uncovered "black hole revenues" which only showed up when comparing different sets of financial books for Verizon New York. There was the investor-based SEC filed financial reports for Verizon NY, (which stopped being published in 2010), the State-required financial annual reports, and the FCC's phone company financials known as ARMIS (which stopped being made public in 2007).
All of the revenues that Verizon New York or Verizon's subsidiaries makes that are "Internet Protocol"-based ("IP") appear to be in a separate "Black Hole" financial bucket that goes to corporate and doesn't pay for most, if any, of the construction or maintenance of the public networks, and there were no details about this "black hole" revenue. In 2009, this was about $2.7 billion extra of revenue that showed up on the SEC-investor books, but not on the State-filed financials and cross-referenced the "Black Hole" revenues was paying no construction expenditures and was profitable; meanwhile, Verizon New York, the utility, lost a few billion.
Manipulating the revenues into this "black hole" financial bucket, diverting the construction budgets to other lines of business, dumping expenses into the costs of local service, and giving the affiliate companies a free financial ride, all shortchanged the NY State utility revenues and dramatically increased expenses, which created the massive financial losses.
In 2014, Verizon New York showed losses of $2.5 billion -- that's just for one year. For the last five years, Verizon New York lost $12.5 billion, and has paid no income taxes for at least a decade because of these losses, (though there is a question about 2013).
But, since almost all of these expenses some how ended up in the "Local Service" accounting, it makes local service looks "uneconomical". This allows the company to use this as the excuse to "shut off the copper" and raise rates, and get more deregulation.
"Reverse Engineering" this shell game -- asking what would happen if all of these cross-subsidies and financial games were stopped and the other parts of the business paid their fair share -- we found that local service and the networks would be profitable, and build outs in areas that have been neglected, could be started.
There is still a lot that we don't know which will require audits and legal actions to stop these cross-subsidies and other acts of manipulation.
But it is clear leaving this mess is no longer acceptable.
Next week, New Networks Institute will be publishing a report detailing the basic financial findings and outing the shell game.
Think you could now answer the question -- "How did Verizon New York lose billions in 2014? Isn't FiOS, Verizon's fiber optic service, profitable?"