Free Press Proposes Broadband Infrastructure Bailout of $44 Billion --- (More Taxes to Give Wealthy Companies that Failed to Build Out Their Networks.)

 

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There has been a call for ‘stimulus packages’ to help with our current economic crisis and new infrastructure initiatives, such as the upgrading of roads and bridges, are on the top of the list.  There are also a number of groups who care about broadband infrastructure and want their billions as well. The arguments – more jobs, better productivity, etc, may be well intentioned, but the unasked question is:  Who should pay for it and who should built it?

 

While we agree that America needs to have a national broadband infrastructure initiative, we are against the current plans by many, including Free Press, who wants to raise taxes and give a $44 billion dollar bailout to the very companies who are responsible for America’s broadband infrastructure crisis. There are multiple reasons why we’re against this.

 

Free Press Report: “Down Payment on Our Digital Future: Stimulus Policies for the 21st-Century Economy, “a comprehensive set of proposals that would deploy a forward-looking national broadband infrastructure.” http://www.freepress.net/node/46686

 

Free Press does seem to get some of the major issues, such as the fact that America is 15th in broadband or that we should have open, competitive networks.  Yet, Free Press and others simply miss the major point --- raising everyone’s taxes -- to bail out the same companies that failed to properly upgrade America’s essential infrastructure is simply the wrong approach, Also, Free Press has excluded items that need to be discussed, including true accountability and even a discussion of how we ended up becoming a 3rd world broadband power.

 

A.   Free Press does not mention AT&T, Verizon Qwest or the cable companies, even though they were the care takers of America telecommunications and broadband networks. AT&T now controls 22 states – from California to Connecticut and Illinois, Texas and Florida.  Today, AT&T has less than one million upgraded homes even though AT&T claimed it would have 19 million homes completed by 2007, then 2008. (And that number didn’t include the addition of BellSouth, which added 12 states.)  So, if AT&T doesn’t roll out broadband, it could impact about ½ of the US. How can you omit the fact of who currently controls America critical infrastructure?

 

B.  Free Press doesn’t examine the $280 billion the telecom’s have already collected and which continues to be collected. Today, there is a defacto broadband tax being applied to all phone services. Over a decade ago, the phone companies made commitments to rewire the country state-by-state. In virtually every AT&T and Verizon state, the company should have been completing rewiring of the states by 2010 as they have already received and continue to receive billions per state in tax incentives or higher phone rates. And while Free Press focuses some of its interest on rural areas, in many states, the deployment should have been the entire state, --- rural, urban and suburban areas equally. What was to be delivered was not DSL over the old copper wiring, but fiber optic services capable of 45mpbs in both directions.

 

While many would simply like to slip this inconvenient fact of massive wrongdoing  and failed promises under the bus so that we can put a ‘positive’ spin on the future, the data is factual. For example, here’s a page from the NJ state law giving a timeline through 2010, showing that 100% should be completed with 45mbps service by 2010.

http://www.newnetworks.com/nj45mbpspar1.htm  

 

In virtually every state, the state commissions never got refunds for the failed deployments and never lowered the extra profits being given to the phone company to be used for upgrades to the networks. – and this happened in IL, MA, NJ, CA, IA, TX, OH, WI, PA, CT, and  MD, to name a few.

 

Instead, of questioning the incumbent phone companies, Free Press wants to have Congress give $44 billion out, much of the money going to the VERY companies that didn’t deploy previously, but pocketed the money.

 

C.  Free Press claims it wants open networks and competition but doesn’t address AT&T or Verizon’s closed networks.

 

Today, Verizon has an upgraded service called FiOS and AT&T’s is creating U-Verse.  These networks are closed to competition. The customer can not choose to use independent ISPs, for example. Worse, whatever is being built is being funded illegally via cross-subsidization of local phone rates – i.e., it is taking the money that was to be used to upgrade the utility and doing with it what they want, where they want.

 

If Free Press cares about open networks, it will take a lot more than a ‘stimulus package’; it will take the rewriting of various laws that were changed by a rogue FCC that erased the rights of competitors to use the networks including offering competitive DSL services via line sharing or offering competitive local service via wholesale rates.

 

D.   Free Press wants to raise taxes by hundreds of dollars to pay for this bail out.

 

Free Press’s plan is to have major increases to the current Universal Service system, which today is an out of control slush fund. See our report: http://www.teletruth.org/USFReport.htm

 

Ionary Consulting just did a description of some of the current problems with the USF,

http://www.tmcnet.com/voip/ip-communications/articles/47692-universal-service-uncle-sams-blank-check.htm

 

Free Press wants to raise the Universal Service to create:

 

  • Broadband Infrastructure Fund for “unserved” areas. -- ($15 billion over 3 years)
  • Universal Service Mobility Infrastructure Fund ($5 billion over 3 years)
  • Increases to Erate and Lifeline (Total Cost: $5.8 billion)

 

That’s a $26 billion dollar tax increase over a 3 year period. The USF fund is currently an 11.4% tax on all ‘interstate’ services”, which raised about $7 billion in 2007 – This would more than double, if not triple the taxes paid today per year.

 

The report claims that programs should be “following the money” with proper accountability  to giving the taxpayers some comfort. – that’s just ain’t going to happen. Two things; First, this week, the FCC Commissioners’ Copps and Adelstein in a dissenting view wrote about the FCC’s wholesale removal of reporting requirements by the phone companies – so there’s no way to actual track expenditures.

 

“Today, the Commission takes another step in the dismantling of its financial reporting requirements for incumbent telecommunications providers.  As we detailed in our joint statement of earlier this year, more transparency and increased accountability, not less, are essential to any plan to put the country’s economy on sounder footing. The Commission has ample authority and the ability to engage in a careful and transparent analysis of our financial reporting requirements and to develop revisions where appropriate.  Regrettably, the Commission instead is moving towards the wholesale jettisoning of these safeguards.  Given the importance of the telecommunications sector to the broader economy, this Commission should be on heightened alert to avoid complacency and the similar mistakes made in the financial and housing markets.  (Petition of Qwest Corporation for Forbearance from Enforcement of the Commission’s ARMIS and 492A Reporting Requirements Pursuant to 47 U.S.C. § 160(c), et al)

 

And every part of this fund is ‘at risk’ today. A report this week by the FCC Inspector General found that a program is at risk if the erroneous payment rate exceeds 2.5% or $10 million. The erroneous payment rate for the Schools and Libraries Program is estimated to be 13.8%, or $232.7 million dollars.  In another report, the FCC Inspector General, found the worst area of ‘erroneous payments’ to be the High Cost fund.  In 2006 it had an error rate of 23% for $970 million dollars.

 

E.  Each part of the plan pertaining to USF issues, such as Lifeline or Erate, is flawed.

 

Free Press wants to increase the Lifeline program to include broadband, which is currently a program that is supposed to supply phone service to low-income families.

 

“The fund will subsidize up 50 percent of the cost of broadband Internet access installation, up to $100. This amount may also be used to subsidize the cost of an Internet access device, including subsidizing the interest payments on a qualifying loan for such device. --- The fund will also provide a monthly subsidy to offset the cost of broadband Internet access service, up to $10 per month”

 

Free Press doesn’t seem to understand that the current Lifeline is broken. Only 30% of those eligible get Lifeline. Had Free Press actually examined the Lifeline program, as we did by surveying actual phone bills, it is clear that the discounts for phone service do not cover actual phone calls or basic services like call waiting or inside wiring. So, the average Lifeline customer can spend almost as much as regular phone service, which, for many, is too expensive.

 

If anyone offered Lifeline customers broadband, the customers would never be able to pay for the phone service as well as the broadband service, not to mention all of the increases to taxes being proposed, even with steep discounts.

 

F.  The largest Amount is going to “underserved areas”.

 

Free Press wants to spend $15 billion  in 3 years to go to “underserved” areas, mostly in rural areas.  This is a giveaway to already rich, unaudited companies.

 

Who builds it? Well, it’s most likely going to go to the phone companies.  Besides AT&T and Verizon, (though they service some rural areas), there are many smaller rural carriers, who, in many cases, are living off of the current Universal Service High Cost fund, even though their companies can have  returns on profits (*EBITDA) of over 50%. This makes them some of the most profitable companies in America.   Why do they need everyone, including seniors and low-income families to give these companies more tax money?

 

And then there’s the shear waste. Ionary Consulting, in the previously linked article, discussed the USF fund and USAC, the organization that manages the process. --- or doesn’t. Here’s one story of $150,000 per line.  

 

“USAC does not waste precious ratepayer time doing cost-benefit assessments of its HCF recipients’ projects. It does audit them to be sure that the money was spent on allowable projects, but that doesn’t mean that projects must be sensible. Take, for instance, Border to Border Communications, the telephone company in rural Zapata County, Texas. ATT Southwestern Bell is the ILEC in Zapata city, and they don’t get any HCF in Texas. Border to Border has the surrounding countryside, with about 150 phone lines in all spread across 850 square miles. They originally used rural radio systems to provide voice service. Their affiliated ISP also put up a countywide WiFi network, but that wasn’t USF-eligible. Border to Border got a $23 million loan (about $150,000 per line!) from the Rural Utilities Service in 2003 to install a fiber optic network. This is paid back by USF to the tune of $164 thousand per month. That’s over a thousand dollars per line per month.”

 

And now we should give these companies billions more?

 

G. The Proposed Free Press  tax breaks – Free Press wants to give  “Accelerated Depreciation for Broadband Infrastructure Investment ($1.5 billion over 3 years)”

 

Depreciation is the ability to write off your equipment, and accelerated depreciation means the company can write it off faster and  save a bundle on paying taxes.

 

In 1993-1995, Verizon, AT&T et al took $27 billion dollars in ‘accelerated depreciation’ tax savings for broadband investment and had their annual depreciation schedules changed so dramatically that in many years the companies wrote off more than they put into infrastructure. These seem to be illegal deductions, because the copper wiring that was supposed to be upgraded to fiber wasn’t– savings the billions in taxes.

 

Accelerated depreciation did not result in building out the networks.

 

Free Press also wants to give tax credits to competitors.  This is seriously problematic. First, why is Free Press not saying ---- FiOS and U-Verse are closed networks and should be open. Secondly, the proposal calls for tax credits to help competitors, of which there are few, if any, left. But the overriding problem is -- laws would have to be changed because a competitor still has to connect to other incumbents who, historically, do not have to sell to competitors anymore based on bad FCC decisions.  Giving financial tax credits to companies who could not compete, will certainly limit the ability of any competitor to raise capital to compete.

 

Conclusion: Really Following ALL of the Money and Real Accountability is Needed.

 

If ubiquitous, high-speed broadband is a national goal that is believed to spur on the economy, then there are other areas to get funding to pay for this goal without taxation.

 

Some areas to investigate:

 

1.         Under the merger conditions that created the new AT&T (the merger of SBC-AT&T-and then BellSouth) AT&T was required to offer $10 DSL to customers in their 22 states at a speed of 200K in one direction, the definition of broadband by the FCC.   If you want rapid deployment of cheap broadband, make AT&T complete it’s promises to sell low cost broadband, which we can prove was never done and did not cover 100% of AT&T’s territories. If done, broadband is deployed and AT&T might have to hire back some of the thousands of people it just let go.

 

2.         Audit the books:  

 

  • Fix the Errors of the USF – The FCC had over $970 million in erroneous payments in  a
  • sample of the High Cost fund.  There’s a billion dollars in money that could have been put to good use without raising taxes.
  •  
  • Did you know that AT&T and Verizon have taken billions in write off of networks that
  • are still in use? The tax deductions of $27 billion are in question – back taxes alone would be over $10 billion, not counting penalties.
  •  
  • Did you know that when you pay your current phone bills, there’s a remaining defacto
  • broadband tax built into current rates that has been accruing since the 1990’s? – That should yields billions annually.
  •  
  • Remove the subsidies going to Verizon’s FiOS and U-Verse from local rates –The
  • subsidies come from  the fact that Verizon’s FiOS is being funded through local phone rates, and the other services, such as DSL and long distance do not pay their fare share in marketing and other expenses --- That would yield billions annually.
  •  

3. .Make the USF ‘Needs’ Based.

 

If you want to cut out billions of current USF payments, simply change the rules to make companies show a financial need  -- i.e., losing money, to offer local service before they can get subsidies. That should yield a few billion annually.

 

4. Reopen All Networks to All Competitors.

 

AT&T and Verizon’s  networks were closed by bad changes to laws by the FCC. If Free Press wants to lower prices and have competition to built out the networks, then open the networks.

 

This would also have an added advantage of stopping any Net Neutrality problems. If someone is being blocked, the customer can simply leave and go to another service provider. Today, they are locked into local, long distance, DSL/broadband, and  ISP connectivity by one provider who can therefore control the entire customer service channels.

 

These are just some of the questions that a report on building our broadband networks should have been required to have addressed.

 

In short, instead of paying a new “Down Payment on Our Digital Future”,  America  shouldn’t be taxed and charged twice or  more times for network services.  We should instead ask – We gave you $280 billion and counting – Why are we 15th in the world in broadband? Where’s all the money?

 

We shouldn’t throw money at companies that failed to deploy. We should not be subsidizing wealthy companies who had the money to supply broadband but chose not to. We should question why Verizon FiOS and AT&T’s U-Verse are now closed networks being funded by phone customers, and we should not simply tax customers hundreds of dollars when the previous policies failed to hold anyone accountable and why the current programs need revamping.

 

And if anyone is going to be bailed out, maybe it should be us, the customers. Maybe we should be getting a refund for the failure to deploy, a refund for not supplying us with service we paid for…

 

By not confronting the major players, AT&T and Verizon, and instead asking Congress to give $44 billion, Free Press simply seems to not care about accountability or even fixing the primary issues.