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Will the FCC Stop Verizon & AT&T's Manipulation of Financial Accounting & Special Access (BDS) Overcharges?

  • Consumer Federation of America (CFA) report "Special Problem of Special Access"
  • Highlights: New Network Institute's (NNI) Financial Analysis on Special Access
  • CFA Press Release, Joined by NNI

I'll return to these items in a moment.

Background

On April 28th, 2016, the FCC started the process to take actions to fix the broken $40 billion special access market, now called "Broadband Data Services" (BDS).

As we discussed in our 'primer', special access services are NOT special, but are based on basic, aging copper, as well as fiber optic wires that are part of the state utility networks and are mostly provided and controlled by the incumbent phone companies--AT&T, Verizon and Centurylink. And these are the wires that go to the cell sites for wireless calls or are used by businesses for broadband.

And special access issues have been dragging on and on and on. The original complaint was filed, after years of abuse, by the previous incarnation of AT&T, against the "Bells", who are now AT&T, Verizon and Centurylink--way back in 2002. The Table of Contents listed these two items.

2016-04-29-1461901556-5630562-ATT2002complaintspecial.png

And if you want crazy...? In the FCC news release for the upcoming new order and request for comments, the Agency said that some of the prices are 'unjust' and there are 'illegal terms' in the offerings to competitors and customers which need to be removed.

"The item includes an Order resolving an investigation of existing special access tariffs filed by... AT&T, Verizon, CenturyLink and Frontier. The Order finds that certain terms and conditions of these tariffs were unjust and unreasonable, and had the effect of decreasing facilities-based competition and inhibiting the transition to new technologies. These companies will be required to withdraw the illegal terms of these tariffs and file new tariffs within 60 days of release of the Order."

So, AT&T finally got a partial decision 14+ years later against, well, AT&T. Moreover, this is far from settled as the FCC will most likely be taken to court over this decision.

But the real question is (and to return to the opening):

Will the FCC Stop Verizon & AT&T's Manipulation of Financial Accounting & Special Access (BDS) Overcharges?

Consumer Federation of America (CFA), joined by New Networks Institute (NNI), put out a release to discuss the issues tied to the FCC's announcement, below, which I slightly tweaked for this article.

Washington D.C.--The Federal Communications Commission (FCC) has declared that the absence of competition for Special Access services has resulted in pricing abuse by the dominant local telephone companies who have a virtual monopoly over these services. After fifteen years of obvious abuse, this is a step in right direction.

However, the FCC has decided to address only a small part of the problem (contract terms and conditions that impede competition), while it tries to figure out exactly how bad the pricing abuse is and how future abuse can be controlled in the large part of the market where competition is not likely to be possible and sustainable.

"Banning anticompetitive contract terms may improve the prospects for new entrants, where market conditions will support competition, but that will take time and there are many markets that will remain monopolized," Mark Cooper, CFA's Director of Research said. "After seeing the confidential data selectively and partially interpreted and misinterpreted, CFA went in search of detailed "official" data that could shed more light on special access costs and revenues. This is particularly urgent now, since the FCC is about to try to figure out how to regulate rates in situations where there is little competition and no cost data. We think the New Networks Institute (NNI) data is a good place to start."

"The New Networks Institute's estimate of access charges, based on accounting data reported to a state regulator, was very close to the total that the FCC had estimated, and CFA had used in our earlier analysis," Cooper added, "Since their data has a great deal of detail behind it, it provides a platform for getting behind the numbers that has been absent since the FCC stopped collecting data."

"Over the last 6 years, we have uncovered public but unexamined financial data about the state utilities, such as Verizon New York," Bruce Kushnick, founder of NNI. "Our analysis sheds important light on the problems. The manipulation of the accounting for costs, glimpses of which could be seen in the last few years of data the FCC did collect, has continued. As a result, the current level of abuse is massive."

"We found that the majority of expenses were diverted to 'Local Service', while the Verizon affiliate companies were able to a) dump expenses into the local service part of the state utility financial accounting, b) not pay market prices that other competitors pay, and c) use this massive financial shell game to claim that the local networks are unprofitable to invent policy justification to 'shut off the copper', 'migrate customers to more expensive services, including data capped wireless, and use this to create obscene profits in special access services.

"As the attached examples from data filed in this proceeding show, the FCC created a large part of the problem fifteen years ago, when it "froze" the productivity factor to reflect the year 2000 (in a space where technology was driving massive improvements in efficiency) and undermined its own ability to size the problem when it gave up data collection and analysis."

"When a wireline phone customer pays for monthly service, low income families, small businesses, or any other customer, should not be paying the expenses to run broadband and data wires, known as special access, to a Verizon cell site," Cooper added. "And it shouldn't be supporting massive profits for other special access services, where the majority of expenses somehow end up being used to claim the company needs rate increases. Subsidizing these services with money from captive, local ratepayers is not only unfair, it is illegal under federal and state laws that prohibit such cross subsidies."

"While some have taken a stab at sizing the problem, they were forced to do so by analyzing cost and revenue trends at a very high level of aggregation. We have actual micro level data to make the case much stronger," Kushnick added.

"While the FCC tackles special access, there has been no mention of how it plans to fix the cross-subsidies where low income families, small business have paid the majority of expenses -- which was created by FCC's own 'Big Freeze Accounting'."

"The local phone companies have been shifting costs onto captive local intrastate ratepayers and taking profits in their unregulated and interstate services," Cooper, concluded. "Because the rate of profit on special access services is astronomical, the FCC can arrive at "just and reasonable" rates by both lowering the price of special access and correcting the misallocation of costs to local service."

"We look forward to helping the FCC achieve an effective solution, giving the relief to captive customers that they truly deserve, and creating the conditions for competition where it might be able to flourish."

Returning to the opening links:

The first link is to the CFA report, "Special Problem of Special Access" which found $150 billion in customer overcharging and economic harms over the last 5 years; this research dovetails with the New Networks Institute findings. The NNI 'Highlights' supplies a few details of the massive financial manipulations and cross-subsidies we found by examining Verizon, some of which we have discussed in previous articles. However, these problems are national in scope and similar, if not identical, to the practices in the AT&T and CenturyLink controlled states as the FCC's Big Freeze are federal rules. And the final link is to the official CFA press release we just highlighted.

  • Consumer Federation of America (CFA) report "Special Problem of Special Access"
  • Highlights: New Network Institute's (NNI) Financial Analysis on Special Access
  • CFA Press Release, Joined by NNI

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