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To Read the Pennsylvania Complaint WORD Version of FCC Complaint with FootNotes
How Much Money Did the Bell Companies Collect From Customers for Broadband Networks They Will Never Receive? Teletruth Finds that the FCC's Broadband Analyses Are Seriously Flawed and Calls for a "Broadband True-Up", Not a "Customer Takings". Created by New Networks Institute for TeleTruth TeleTruth Bruce Kushnick, Chairman Executive Director, New Networks Institute 826 Broadway, suite 900 New York, New York, 10003
February 19th, 2003
Current Verizon Pennsylvania Broadband Commitments: "Verizon PA has committed to making 20% of its access lines in each of rural, suburban, and urban rate centers broadband capable within five days from the customer request date by end of year 1998; 50% by 2004; and 100% by 2015." The Washington Broadband Myth There is a myth going around Washington. It says that the Bell companies should be able to block competitors from using any new broadband networks, especially if they are upgraded based on fiber-optics. It is a myth because the actual fact is that the Bell companies promised, in most states, to roll out fiber-optic based services in exchange for massive financial incentives--- read inflated telephone rates, tax deductions and other perks. However, in virtually every state, the Bell companies never built these networks, though customers paid for these networks. And yet, the FCC is planning on giving a private company an asset that has been developed and paid for through ratepayer funding. It is a "Customer Takings", where the customer has been and continues to be a de-facto investor without any of the benefit. In fact, in the case of the Bells’ fiber-optic plans, the customer has been a de-facto victim. The rest of this document focuses on the flaws in the FCC’s data collection and analysis of broadband, including:
In the Publics’ Interest, Teletruth and its members are requesting that the FCC conduct with the States and the FTC and extensive "Broadband True-up" to ascertain the how much money customers and competitors have paid for fiber-based and DSL based network services. I would also like to call to your attention that New Networks Institute, joined by a number of other companies and citizens, filed a previous Petition on this topic in 1999, as well as Comments in the Advanced Networks study in 1998. Petition to the FCC to Investigate The Bell’s Failed Broadband Deployment, 1999 http://www.newnetworks.com/petitionfiled.html NNI Comments to the FCC on Advanced Networks reporting (known as "706") `1998 http://www.newnetworks.com/NNI_FCC_9-98.txt The FCC’s Broadband Analyses are Missing State Data and Analysis Section 706(b) of the Telecommunications Act of 1996 directs the Commission to "initiate a notice of inquiry concerning the availability of advanced telecommunications capability to all Americans." If "advanced telecommunications capability" is not being deployed "in a reasonable and timely fashion," the Commission is directed to "take immediate action to accelerate deployment of such capability." Its actions in this regard are to take two forms: the "remove[al] of barriers to infrastructure investment," and the "promot[ion of] competition in the telecommunications market." As we have previously pointed out, the FCC’s data in any of their published reports does not include any of the state information about Pennsylvania’s state broadband commitments, or any other state, such as California or Texas, or New York, or Massachusetts. However, there are thousands upon thousands of documents, statements made to the public and regulators, public service commission documents, comments, etc.
One Primary Example: Pennsylvania’s Failed Broadband Story NOTE: On February 19th,
2003 Teletruth filed a Complaint with the Pennsylvania
Public Utilities Commission. Our findings and the complaint
can be found at: Currently, the Pennsylvania Public Utility Commission (PUC) is holding Verizon accountable for the network upgrade commitments it made as part of its state Alternate Regulation. As stated in the previous quotes, by 2004, Verizon is supposed to have rewired 50% of the state, equally deployed in all rural, suburban and urban areas, with fiber-optics that can deliver a two-way broadband service at speeds of over 45 MPS to homes and offices. To repeat: "In view of Bell’s commitment to providing 45 Mbps for digital video transmission both upstream and downstream, we look forward to Bell’s providing this two-way digital video transmission at 45 Mbps." This is not ADSL, which is a mostly one-way service that goes over the 100 year-old copper phone networks. DSL also has distance limitations and can’t properly service rural areas without additional technology. And DSL services are 50-100 times slower than what was stated in these commitments. The Commission wrote: "It is apparent that DSL, as it currently exists today, (March 2002), is unable to provide the broadband availability of 45 Mbps both upstream and downstream that the Company voluntarily committed to and the Commission approved in 1995." Follow the Money Besides denying customers "true-broadband" services Teletruth believes that:
How the Bait-and-Switch Occurs In Pennsylvania, as with many other states, the Bell companies received Deregulation, sometimes called "Alternate Regulations" also known as "price caps". This deregulation essentially removed the older "rate-of-return": regulation that examined the companies’ profits, with "price caps", which kept the prices for some services stable for a number of years, or slowly increased per year. "Price Caps" generates increased profits because the phone networks’ costs keep decreasing through staff cuts, shrinking construction budgets and tax write-offs. Unfortunately, in Pennsylvania and other states, these changes increased profits and the companies never used these enormous sums for new construction. It should also be remembered that the Bells’ local phone services are still monopolies. They are not free-market companies, but utilities who have common carrier obligations because they have a captive customer base. Therefore, controlling the company’s returns on phone charges insures that the customer is not being gauged. Even competitors who use the wireline networks still pay fees to the Bell companies. New Networks Institute estimates that this same bait-and-switch scenario played out in virtually every state and has cost customers $70 billion in extra phone charges and tax write-offs for services they will never get.
The FCC’s Broadband Analyses Missed the Fiber-optic Charges to Competitors. Based on our analysis, prices to competitors (known as "TELRIC") were also inflated based on non-existent upgrades of fiber-optics. The New York Public Service Commission based its prices on "100% fiber-optic feeder" (endpoints) in 1997, even though these upgrades never occurred. (It should be noted that DSL can not access fiber-optic endpoints today without special equipment.) (From NYPSC 97-14, page 10, CASES 95-C-0657, 94-C-0095, and 91-C-14) "We adopted New York Telephone's position and used, as an input, 100% fiber feeder. In doing so, we noted that this had been among the most highly contested issues in the proceeding and acknowledged the "incontrovertible evidence"1 that New York Telephone contemplated installing a broadband system and that fiber and associated equipment were needed for that system. We went on, however, to distinguish between that statement and the conclusion that New York Telephone was installing fiber solely or even primarily for the purpose of advancing its broadband plans." The obvious implication is that competitors have already paid for the right to use any upgrades. By ignoring this information, the FCC’s analysis is seriously flawed and needs to be redone before any new laws based on the data are crafted. There Overall Picture: There Are Various Levels Of Issues Our analysis of the process that has occurred resembles the following model:
The Bells Gamed the Regulatory System Based on interviews with former Bell staff, what we believe has happened and continues to happen is that the Bell companies ‘gamed’ the system. They had an internal team of staffers that presented a broadband package to each state commission, as well as spend millions of dollars on hundreds of lobbyists, advertising and expensive consultant reports and analyses. In the states tracked, we found that the Bell company out-spent the consumer advocate side about 30 to 1. Though the outcomes of each law was different, the pitch was essentially the same – remove regulation and we will deliver on the future of broadband. This strategy was deployed during the failed rollouts of ISDN as well. In all cases, the Bell had nothing to lose because the track record is that the commission (or the FCC) will either not hold them accountable for any contractual arrangement, or if they do, then they will of course claim that the market changed and, etc., etc. They know that the penalty will be nominal and the reward will be in the billions of dollars. And the similarities to our toaster analogy, the "pitch" was the Commercial Speech made to the public, the fiber-optic machine was the new networks, the contract and payments are the extra phone charges as part of the new PUC and FCC broadband laws and the bait-and-switch was the change from a fiber-optic promise to now ADSL over copper wiring.
The Pitch: Commercial Speech Issues --- From the Bells’ annual reports, press releases, public statements, the Bell companies made commitments to the public about their intentions to deliver fiber-optic broadband services. In almost all cases, these statements led to changes in state and federal laws that gave the Bell significant documented financial increases in profits. This brings up the basic question – Were the Bells’ statements made to the press and their shareholders fraudulent? If they could not build the networks that they were selling, didn’t they violate the Commercial speech laws? And unlike other instances, such as in a political speech where the person making the speech, if elected, can be later thrown out of office, what is the recourse for customers when a monopoly/utility makes statements that are either not true or misleading? The Public Service Commission (PUC) and State Legislation Laws --- There are 50 states and fifty different laws that were created. In some states, like Pennsylvania, the state laws included some accountability for the new profits/monies collected, while in other states, the state law was passed that didn’t require any specific commitment but had as its base a piece of state legislation for broadband, while in still other states, such as Louisiana or Oregon, the company was allowed to roll out DSL as the broadband requirement. Some states have laws that are nebulous and don’t address what was stated publicly at all. Commercial Speech and PUC Laws --- It is important to make a clarification. In every state the customer was never told anything but the phone company hype. They assumed that the laws were being changed based on the commercial speech made, and that assumption may or may not have ended up as the law. DSL Deployments Paid for by Customers --- As we point out in our Pennsylvania complaint, the Bell company created a $60 million dollar DSL division using what appears to be ratepayer funds. This is cross-subsidization and this happened in numerous other states where the promise of broadband deployment was later transposed to an inferior product. In some cases, such as in Ohio and other Ameritech states, the money that was supposed to used for a new broadband service was used, improperly, to cross-subsidize the creation of cable services. DSL Deployment Paid for by Customers Because of the PUC --- In some states, such as Oregon and Louisiana, the PUC has allowed the Bell companies to have customer funded financial incentives to roll out DSL. We consider this to be cross-subsidization as well because local phone customers are funding through higher rates a competitive, non-regulated long distance information service. However, in this case, it is also clear that if the FCC gives the monopoly exclusive rights to these networks, then the customer is doubly-harmed, because not only are they losing choice, but they are also funding networks that have now become private property without their common carrier status.
Outcome: How Much Money was Collected? When all is said and done, what was the customer’s contribution to the Bells broadband deployments? How much did customers, who may never want any of these services, pay in the form of higher rates? And is the customer entitled to refunds? How much money did the state and federal government lose because of reduced tax rates, tax write-offs and other perks? Put the Next Generation of Broadband up for Bid? If the Bells have not fulfilled the state commitments, then, as we suggest in our Pennsylvania complaint, the state should be able to find another company to build the fiber-based networks. Policy and Data Issues for the FCC Expecting the Bell companies to fulfill any new broadband plan is a pipe dream. The FCC’s data is so flawed that the agency does not have a true picture of how the Bells were able to "game" the state and federal system and never build what was stated in the annual reports, press releases and thousands of statements to the public. Holding the Bells accountable for their Commercial speech is something that the FCC has ignored in every report. Not once did the FCC mention the fact that the Bells’ promised networks extended for over a decade. Verizon PA's promises extend through 2015, while Pac Bell said they'd have 6 million households wired by 2000. In this case, your 1999 report should have at least focused on the issue of Bell commercial speech obligations. The FCC Must Stop its Split-Brain Analysis of Broadband. While the FCC deals with Federal telecom issues, DSL, after being reconsidered to be a long-distance Information service, is now under the FCC’s jurisdiction. However, based on the data presented, it is also clear that there is a combined need to investigate these issues with the states because the FCC alone does not control the DSL deployment issues when customer-funding is being done through state law. Money Issues – The FCC Should Avoid a "Customer Takings" If the FCC decides to give the Bells exclusive rights to customer-paid-for networks, then the FCC will be in violation of basic customers' rights of "fair and reasonable" statutes of the Telecom Act as well as every state law. The cash contribution of the customer through higher phone rates will make the charges on the phone bill "unfair", because the customer gets no benefit from their funding and it is cross subsidization, since the regulated monopoly subscriber is paying for a non-regulated long distance information service. Lack of Vision and Dumbing Down Broadband --- The Pennsylvania Commission is holding the Bells accountable for 45MPS in both directions to rural, urban and suburban areas. A decade ago, when broadband was discussed, the speed of broadband was always 45 Mps or higher. For example, even Newton's Telecom Dictionary defines "Broadband" as a service with a speed of 45 mps. "Bandwidth of 45 Mbps or greater is consistent with the definition of "broadband" in Newton’s Telecom Dictionary (17th Edition, February 2001) ("Broadband ---A transmission facility providing bandwidth greater than 45 Mbps (T3). Broadband systems generally are fiber optic in nature."). In a political move, the FCC decided to redefine Broadband to 200K in both directions. "For purposes of this Report, we define "broadband" as having the capability of supporting, in both the provider-to-consumer (downstream) and the consumer-to-provider (upstream) directions, a speed (in technical terms, "bandwidth") in excess of 200 kilobits per second (kbps) in the last mile. This rate is approximately four times faster than the Internet access received through a standard phone line at 56 kbps. We have initially chosen 200 kbps because it is enough to provide the most popular forms of broadband -- to change web pages as fast as one can flip through the pages of a book and to transmit full-motion video." According to the latest report from the FCC published in July 2003, there were only 5.8 million "advanced services" lines going to homes and small businesses. In the quote below the term "high-speed" is something slower than 200K in both directions and therefore the FCC had to create a new definition, "advanced" services --- which is still at the very low end of ‘true broadband". "About 5.8 million of the 12.8 million high-speed lines were advanced services lines that provide services at speeds exceeding 200 kilobits per second (kbps) in both directions, and served residential and small business subscribers." This, of course, blocks some of the Bells’ ADSL from entering the definition of broadband. The FCC's report significantly boosted the current broadband subscriber statistics, but it is a hollow endorsement because it leaves the country with the old copper wiring as our future. What the FCC has down is lower the bar of America’s Digital Future. Instead of investigating the broadband plans funded by customers, plans to deploy fiber-based broadband, it is now relegating our future to be a slow, jerky, high-cost service over the monopoly controlled old-copper wiring. TAKE ACTION: Conduct a Broadband "True-Up": Working with the states, we are requesting a complete audit of the Bells’ books to determine exactly what happened to the monies collected through deregulation.
Back Up Documentation We call your attention to work of Economics and Technology that has documented, independent of New Networks Institute, the Pennsylvania failed deployment and subsequent customer overcharging. http://www.econtech.com (registration is required) We have documented this same failed deployment throughout the US: See:
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