State-by-state basis. Pennsylvania paid them $2.1B for fiber that never happened:
In 1994 Verizon (then Bell Atlantic) struck a landmark deal with the state of Pennsylvania. The deal provided Verizon with hefty financial incentives if they met certain broadband rollout criteria. It's estimated that those financial incentives over the years clock in somewhere around $2.1 billion dollars.
As part of that agreement, Bell Atlantic agreed to have 20% of the state broadband wired by 1998, and 50% by 2004. By 2015, broadband would be run throughout the state to the majority of Verizon's customers. It's important to note that this wasn't DSL they were talking about...but 45MB/s symmetrical fiber service right to the door of homes and businesses, ambitious and impractical for certain, but nonetheless included in the language of the agreement. [1]
Where does the $2 billion come from? It starts on page 4 of the document.
> Customers paid for a network they will never receive. We estimate that the Company received $2.1 billion from this deregulation, including an additional $1.5 billion in extra tax deductions the Company received from excessive write-offs of the still existing networks.
He gets into the real numbers starting on page 23.
The $2.1 billion is Kushnick's usual fabrication: pick a "rate of return" typical for regulated monopolies, and call all profits above that number post-deregulation as "money given to the telephone company."
Page 28+ gets into the tax angle. The basic premise of his argument is that Bell Atlantic took an unjustified accelerated depreciation on its copper phone network. He paints this as a scam: they took the write-off on the basis that they were going to replace it all with fiber, then failed to do so.
However, that wasn't actually the accounting justification for taking the write-offs.
> In such markets, the Company does not believe it can be assured that prices can be maintained at levels that will recover the net carrying amount of existing telephone plant and equipment, which has been depreciated over relatively long regulator-prescribed lives.
In other words, the accelerated depreciation was to compensate for the fact that once regulated prices were gone, the telephone plant would become less valuable. It was not predicated on replacing that plant with fiber.
At best we're talking about Bell Atlantic taking depreciation deductions faster than they should have. It's certainly not equivalent to Pennsylvania writing it a $2 billion check for fiber that was never delivered, or even giving them $2 billion in tax deductions for fiber that was never delivered. Maybe this accelerated depreciation was not proper. I'm not a tax expert. But neither is Bruce Kushnik.
In this one particular case, yes. But not that they did not receive indirect remuneration (rate concessions) in exchange for unfulfilled broadband promises, possibly far exceeding $2B. I'm not sure why my comment was downvoted, as the article in the Inquirer shows that such promises were indeed made by Bell Atlantic.
Let me add some current history. Verizon's entire FiOS network is based on a Title II, common carriage, telecommunications classification-- that's right, for those following Net Neutrality, while Verizon et al screams about Title II, their networks are ALL Title II.. why?
The scam is simple -- by using title II, they get to charge local phone customers rate increases to pay for the fiber optics. Verizon also dumps the construction budgets into the utility networks for its wires to the cell towers and even the 'special access wires' -- which are also classified as Title II. – Title II, then is a cash machine.
And Verizon never told the FCC, the courts, or the public about this.
But the revenues don’t go back to the utility—they appear to go into a “black hole” accounting…
In tracking Verizon New York, we found that there were actually statements made about raising rates for the ‘massive deployment of fiber optics’ in 2009, which was the third increase since 2006.
The increases, including the additional taxes, fees and surcharges (many of which are also either revenues to Verizon or ‘pass-through’ taxes that are on Verizon but charge customers), and the increases to all calling features, etc – came to about $4.5 billion extra since 2006.
However, the data – Verizon stopped publishing its SEC-based state reports in 2010, the FCC stopped publishing the data in 2007, but NY State required an annual report – but it only shows the revenues and expenses for the utility.
The ‘black hole’ funds were uncovered when comparing the state-based SEC reports with the State-filed annual reports; in just New York, in just 2009, there was an additional $2.7 billion in revenues – but no extra construction costs to this ‘black hole revenue.
Verizon then, shows losses in the utility, claiming the networks are uneconomical to upgrade. But the losses are created based on this flow money—the ‘affiliate’ companies, like Verizon Wireless or Verizon Online or Verizon Business, pay less than market prices and have the construction budgets dumped on the regulated side—lowering revenues and adding expenses and creating manipulated losses.
Verizon NY alone showed about $11 billion in losses, about 2 billion a year from 2008…about $5 billion in tax savings… Ie, Verizon New York paid no income taxes since 2008 or earlier.
This is happening in every Verizon state, and we assume AT&T as well but they aren’t required to supply basic data anymore. AT&T stopped publishing its SEC reports a decade ago or more, and most, if not all states, don’t require the level of financials needed to examine this flow of money.
This new financial shell game started to pick up speed after the networks were closed to competition around 2005.
So, on top of the original ‘commitments’ and the extra money that’s been collected since the 1990’s, as no state ever went back and got the money or refunds to even stopped the excess profits, this new financial-game puts the original overcharging customers as a very low number as it doesn’t account for the steriod-based, Title II, cash machine.
First, I have a new book which details the state materials. “The Book of Broken Promises” and goes through 2014, and covers most of the state commitments to deploy fiber optic broadband, monies collected and the failure to deliver and goes through 2014.
http://newnetworks.com/bookofbrokenpromises.htm
This PA, stuff is from 2003, and you got most of this discussion wrong. – Guess you work for the phone company…
>The $2.1 billion is Kushnick's usual fabrication: pick a "rate of return" typical for <regulated monopolies, and call all profits above that number post-deregulation as <"money given to the telephone company."
I didn’t pick the rate of return. Duh- It was based on the current returns that were allowable under state law, and I used the PA numbers—as told by the state-based Bell of PA (now Verizon PA) SEC filings.
The changes in state law happened in every state (though with varying commitments) – such as Verizon states -- PA, NJ, MA, and other states, IL, OH, etc. -- and they were ALL based on direct commitments to rewire parts, if not the entire states as well as schools, depending on the state.
In PA, the original commitment were 100% completed by 2015, (though the commitments were changed over time.) in NJ it is 100% completed by 2010—with fiber 45 Mbps in both directions.
In PA we filed a complaint which said – state laws were changed specifically based on the commitments to upgrade the state utility plant, which was copper, with fiber. It removed the old ‘rate of return’ for new ‘alternative regulation’, that speeded up the write offs of the networks, and no longer examined the profits of a state utility – which had a monopoly on that wire—with the goal to use this extra money for the deployment plan called Opportunity PA.
The profits overall, went from 12%-14%, which was standard in almost every Bell state to about 30% after the new law took effect. In PA it went from 13% then jumped to 30% by 1998. -- But they didn’t deploy the fiber – nor replace the wire. And these numbers were in the SEC-annual reports.
You didn’t bother noting the chart on page 23 outlining the extra profits—directly tied to deploy fiber optics.
And PA and NJ had a timeline of deployment to upgrade to fiber and 45 Mbps—and it didn’t happen. An analyst we quote said:
“As we approach the end of 1998 a point by which BA-PA is supposed to have broadband available throughout 20% of its rural, urban and suburban areas there is no sign of any broadband service being offered to Pennsylvania's residential customers."
And the PA state commission wrote:
“When the Commission accepted Bell's proposal, that proposal became binding on the Company. Any modifications or deviations from a 45 Mbps two way interactive network must be approved by this agency, since such would constitute a modification to the June 28, 1994 Opinion and Order which ruled on the Company's original Petition and Plan.”
You write:
>In other words, the accelerated depreciation was to compensate for the fact that once >regulated prices were gone, the telephone plant would become less valuable. It was not >predicated on replacing that plant with fiber.
Wrong… it was to replace the copper wires in the state utility. You obviously didn’t read the documents. This is the language in the New Jersey Bell (Verizon NJ) annual report, 1994, for a $1.013 billion deduction – for the “company’s technology deployment plan” — It was a one-time deduction which every phone company took, called FAS 71, and it says:
"The Company's determination that it was no longer eligible for continued application of the accounting required by Statement No. 71. It was based on the belief that the convergence of competition, technological change (including the Company's technology deployment plans).
And the result is a tax savings of about ½ billion dollars in NJ —from this one change.
And this is on top of ‘accelerated’ depreciation, which was also set by the state commissions to help speed up the deployment to fiber optics—which didn’t show from 1993-2005. – i.e., the company gets more tax deductions per year and didn’t replace the copper.
We documented this in our first book, 1999, Foreword by Dr. Bob Metcalfe, (co-inventor of Ethernet) who went through all the stats. And it was ALL for the commitment to replace the copper wires with fiber.
By around 2009- in NJ we calculated that Verizon NJ collected about 15 billion.
And you’re apologist for the companies deceiving the public and the state commissions and getting billions extra in tax perks and excess profits – which are monies that directly impact customers’ bottom line.
Law changed – extra money garnered – nothing built, (1993-2005) but to you that’s just fine.
And this PA stuff is from 2002-2003, before we uncovered the entire story about Verizon and AT&T financial manipulations—and it was low number.
Anyone interested in knowing the real history about broadband and fiber should do the fact checking themselves – the new book has detailed footnotes and links.
