5G Wireless, the IP Transition and Broadband Data Services Impacted by Cross-Subsidies

New Networks Institute (NNI) today filed comments with the FCC in a cluster of active proceedings that are all tied at the hip --Special Access (Broadband Data Services), the IP Transition (and the discontinuance of copper-based services), and 5G fixed wireless.

NOTE: 5G wireless, if and when it ever shows up, will require the use of the 'special access' networks, while the IP Transition has been designed to remove any regulatory obstacles to move (push) customers onto wireless.

These comments are focused on the new financial information from Verizon NY for 2015, which is the state-based, incumbent utility telecommunications provider that controls critical infrastructure. But all of the incumbent phone companies (AT&T and CenturyLink) have been using the same accounting and business practices, it would appear.

Also, on June 28th, 2016, Consumer Federation of America (CFA) and NNI filed joint comments in the FCC's special access proceeding, detailing massive overcharging of customers and over-the-top profit margins--for what are essentially copper-wire-based (TDM) utility services.

Simply put,
  • There are massive cross-subsidies between and among Verizon's 'local utility networks' and Verizon's other lines of business, which includes special access and wireless.
  • Special Access is very profitable because it is paying a fraction of the expenses, uses the utility networks and can overcharge customers and competitors that use these networks.
  • The majority of expenses were disproportionately allocated into the local phone networks' accounting, making them appear 'unprofitable'.
  • Verizon has also been able to fund the wires to the cell towers, (and this will include 5G), via the local wireline construction budgets, as well as paying a fraction of what competitors pay for access; this lowered revenues as well as raised expenses of the local networks.
  • Massive manipulation of the accounting of access lines. While Verizon points to a 'loss in lines', special access has grown 79% in revenues since 2007--but none of the special access lines, even the copper-TDM lines, have been counted.
  • In New York, there were multiple rate increases based on 'massive deployment of fiber optics' and 'losses'. The deployment was diverted to fund wireless and the losses were artificial, subsidizing other lines of business.
  • The 'IP Transition' claims no one is using the copper networks and that the networks are unprofitable--Special access uses the copper networks and are very profitable.
  • The IP Transition claims access lines are declining--but the accounting ignores the majority of copper lines in service.
  • 5G requires fiber optics and special access, which will increase the local wired networks; but the problem is that wires are being funded via local phone customers and the wireline utility, not Verizon Wireless.

These financial machinations have had and will have multiple harms.

Customer Overcharging
  • Low income families pay extra fees for services, including rate increases, and are in areas that are less likely to be properly upgraded and maintained, much less 5G'd.
  • All users of 'special access' services pay inflated rates.
  • Competitors pay retail while Verizon's affiliates receive major discounts or a free ride.
  • CFA has found $75 billion in customer overcharging and an additional $75 billion in economic harms for the last 5 years. We believe this is the low number.
Lack of Broadband
  • Cities and communities, especially in more rural areas, did not get properly upgraded because the capital expenditures were diverted to other lines of business.
Industries Harmed
  • The alarm industry is a target because 70% of the alarm industry is based on reliable copper networks. Shutting the copper and replacing it with wireless has a massive cost to the independent security companies.
  • The wireless small cell "DAS" competitors and others are blocked from using any new 'fiber build outs' - even if paid for by local phone customers.
  • All competitors that rely on using these networks--from those who use the copper networks and are restricted from the fiber optic services, to wireless companies paying multiples for the same service, need to have this properly resolved.

Unfortunately, the FCC asked about pricing of special access, and there is a proposed set of principles put forth by Verizon and INCOMPAS, the association of competitors. Sadly, the discussions center around creating pricing that is based on mathematical 'X' factor productivity models. It can't work:

There is no mathematical model that accounts for cross-subsidies or underpayments; the special access business is paying a fraction of the expenses that are used in the models.

I.e.; the cross-subsidies described here-in, based on the financial reports, are more accurate and need to be dealt with vs a mathematical model. We believe Verizon has agreed to this deal with INCOMPAS so that it stops any requests for actual 'cost data', and keeps the cross-subsidies intact and hidden from view.

The Primary Findings

1) Special Access Size of Market: Nationwide, TDM Special Access is Estimated at $29 Billion in 2015; the Total is $48 Billion. In May 2014, our report "It's All Interconnected" found that the mostly copper-based TDM services were a $23.4 billion market in 2013, and that there was another financial cache of special access on other Verizon state-based reports that would bring the total to $45 billion for the year 2013.

17 months later, the FCC confirmed our findings, providing virtually identical market sizing, but the FCC's analysis is based on the FCC's own data collection. Using our same methodology, we updated the information to 2015.

Also, since 2007, Verizon NY special access TDM revenues have grown 79%.

2) Verizon NY's Access Services had a 53% Profit Margin in 2015.
Verizon's Special Access services pay a fraction of every expense charged to "Local Service"--including capx and maintenance, even though these are part of the state utility networks and Title II.
3) Special Access Overcharging: We Estimate that Nationwide, about $21 Billion has been Overcharged in 2015. In separate investigations, using different sources of information, CFA's 'macro' analysis, published in April 2016, shows that special access is being overcharged about $20 billion annually; this matched our 'micro' analysis.
4) RED FLAG: Local Service Paid $1.5 Billion in Network Costs in 2015 - There are No Serious Network Costs. Simply put, the numbers show that Local Service, which is based on the aging copper networks, paid the majority of network expenses and double what the special access line of business paid--and Local Service paid the majority of all expenses, which created massive financial losses.
5) Verizon Wireless has Verizon Wireline Build the Wires Used for Wireless. Verizon corporate has made it clear that the Wireless company did not pay for most of the capx to build its wireline networks-- this means that billions in capx, per state, was diverted away from wiring cities.
6) There has been a Manipulation of the Accounting of Access Lines. In 2007 there were 47 million access lines listed in the FCC's "Statistics of Common Carriers" for just Verizon New York; about 40 million were special access. With a 79% increase in revenues since 2007, there could be over 80 million total lines (and equivalents) in just New York.
7) The FCC has provided 'zero' actual lines in service and has not supplied basic, updated data from its 2007 data collection.
8) There are a Number of Financial 'Buckets' of Revenues for Special Access. We uncovered that there are multiple revenues for special access, where some areas are not paying common costs or that the affiliate companies may only be paying a fraction of the expenses to use the networks.

This information is part of a six year investigation, which includes special access services. We call it Fixing Telecom: