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New York State Attorney General New York, NY 10271
COMPLAINT
REQUEST TO COMPLETE AUDITS OF VERIZON NY, BASED ON FCC'S COMMERCIAL PROPERTY RECORD AUDITS OF THE BELL COMPANIES & GTE
Bruce Kushnick New Networks Institute 826 Broadway, suite 900 New York, NY 10003 http://www.newnetworks.com
Date :March 8th, 2001
Statement of Interest Reason for the Complaint Background 0f The Audits --- The Vaporware Scandals. 1) The Bells Claim the FCC's Audit is Flawed. 2) Regardless of the Bell Hype, The Audits Are Valid 3) If The Numbers Are Valid, Then Does It Effect Rates? Yes 4) The States Should Continue to do the Other Outstanding Audits. Conclusion New Networks Institute ("NNI") was founded in 1992. Its mission is to explore, on a totally independent basis, the impact of the break-up of AT&T and the creation of the Regional Bells Operating Companies ("RBOCs") on telephone subscribers in general and on the deployment of new and advanced telecommunications networks. Since that time, the NNI has conducted extensive research on these topics. Titled "The Future of the Information Age," this seven-year analysis consists of over 1,900 pages in 14 volumes, with over 910 exhibits, two computer databases, and data from more than 2,000 consumer interviews, (conducted independently through Fairfield Research). We have recently updated this research in the form of a new report, The Unauthorized Biography of the Baby Bells & Info-Scandal, published March 1999. NNI's research is independently funded from the sales of reports, books, and databases. No company, lobbying organization, trade association or political party had any input, either editorial or financial in this filing. Imagine the following --- a company's accounting books contain massive amounts of non-existent equipment --- Vaporware. The company not only, year after year, continues to depreciate this phantom phone technology, said phone company uses the phantom equipment as expenses to inflate the rate of every phone service, since phone service is supposed to be based on the network costs. And when said phone company books are revealed, the powers that be are considering to absolve the companies of all sin. No penalties, no charges of tax evasion, and no recompense to those who have been harmed through higher prices. As we will discuss herein, the FCC conducted audits ot the Bell phone companies and GTE, and it found $5 billion dollars of missing equipment and an additional $14 billion in 'unverififiable' assets. These audits represented on 1/4 of the possible audits that could be done. The FCC has decided not to act on the information, but they did not preclude the states from continuing to do these audits. In New York alone, we estimate that over $2.5 billion dollars of phone rates could be effected. The original Attorney General's Comments can be found at: http://newnetworks.com/spitzeretrieve.pdf Therefore, we are asking the New York Attorney General and the Public Service Commission to complete these audits, impose refunds as well as lower phone rates. Background 0f The Audits --- The Vaporware Scandals In 1994 and then again in 1998, the Federal Communications Commission (FCC) conducted a series of audits of the Bell companies' (and GTE) Commercial Property Records. In 1999, after pressure from various press media, the FCC released the findings, which showed that the Bells couldn't account for some $5 billion in missing equipment. To read our summary of the audits, see: http://newnetworks.com/fccaudit.html As stated by the FCC: (Further Notice Of Proposed Rulemaking, 99-117 et al, 4/3/2000, page 7) "We note that audits of the continuing property records (CPR) of the Regional Bell Operating Companies (RBOCs) are before the Commission, as are the results of a joint State-Federal audit of GTE's CPRs. The CPR audits found that, combined, these carriers could not account for approximately $5 billion of central office equipment." And this was only the tip of the iceberg. The Reports indicated that an additional $13.6 billion dollars of equipment was categorized as "No Assets Found" or "Unverifiable Assets". Therefore, the audit had a total of $18.6 billion dollars of questionable charges. In short, 19% of the Bells' total network surveyed was missing or couldn't be verified. (in the millions) (Not Counting Penalties and Interest) Ameritech (SBC) $2,145,610
Bell Atlantic
(Verizon) $3,317,018
BellSouth $1,920,761
NYNEX (Verizon) $2,558,057 Pac Bell (SBC) $2,925,505 SBC $2,216,603 US West (Qwest) $3,527,468 TOTAL $18,611,022 Source: FCC,
1999 To put these statistics and terms in perspective, the FCC found all the Regional Bell Operating Companies (RBOCs) had massive problems with their records that were supposed to be available, based on FCC rules. In the case of BellSouth, 29% of the information required was missing, couldn't be found or had serious errors. "252,700 of 859,800 records under review, or 29 percent of the reviewed records, contained serious errors." And what is a serious error? The FCC wrote of Bell Atlantic's audit, that 24% of items either couldn't be matched with the FCC records, or the equipment simply wasn't there: "Specifically, in our audit of a random sample of 1,152 line-items from Bell Atlantic's (CPR for Hard-wired) Equipment, we found that 24.1 percent of the records that we sampled contained substantial deficiencies and did not comply with the Commission's rules. Of these deficient records, 12.5 percent described equipment that could not be found by the auditors or by company representatives ("not found" equipment). The remaining 11.6 percent could not be verified with certainty because the equipment shown to the auditors could not be matched to the record in some important respect such as location or description." It should also be noted that these audits represented only 1/4 of the equipment and network components that could have been audits. In 2000, after a number of Comment periods (of which NNI was one of the commentors: (See:http://www.newnetworks.com/Reply_Comments_of_New_Netwo.pdf the FCC issued a ruling that they would not pursue the findings of these audits, but would not stop the states from continuing to do so. (Second Report And Order In CC Docket No. 99-137 And Order In CC Docket No. 99-117 And AAD File No. 98-26, Adopted: November 1, 2000. Page 9) 12. "In light of these recent reform measures, which in large part are only beginning to get underway, and the fact that the CPR audits were conducted prior to our implementation of these various reforms, we now decide not to pursue further investigation into the CPR audits and close the proceeding with regard to whether the CPRs reflected assets that were not purchased or used by the RBOCs in accordance with our rules. Further, we note that although we have made no decision concerning the findings stated in the CPR audits, we recognize that further investigation into the CPR audit matter will require a great deal of time and effort, and could prove to be a lengthy and costly proceeding for all participants. We wish to make clear, however, that our decision in this order does not preclude the states from investigating relevant state issues raised by the CPR audits." (emphasis added) Therefore, we are calling on the Attorney General and the Public Service commission to continue this work. As we will show, these agencies already commented on the validity of the FCC's audit findings. We estimate that the total monies involved could by over $2.5 billion dollars, (the amount of intrastate rates effected if all of the audits were conducted) not counting any penalties, fines or the lowering of phone service prices. Addressing The Issues 1) The Bells Claim the FCC's Audit is Flawed. The Comments presented by the Bells have reached a new height of arrogance. Not only do they deny any wrong doing, but they insist the FCC's data is flawed and that even if the data is correct, the findings don't apply to them or phone rates. As SBC put it (Reply Comments of SBC Communications LECs 10/25/99, Docket Number, 99-117) "SBC LEC's previous filings, the SBC LECs show that because of serious problems with the way these audits were designed and conducted, the results are highly imprecise and unreliable." Worse, even if the audits were correct, SBC claims that the findings wouldn't apply to them or the rates: "In any event, even ignoring the serious flaws in the audit results, they should not have any impact on the rates under price cap regulation and cannot be extrapolated to prior periods." (Reply Comments of SBC Communications LECs 10/25/99, Docket Number, 99-117) 2) Regardless of the Bell Hype, The Audits Are Valid Except for the Bell companies comments, the majority of opinion is that these audits are both valid and competently done. The New York State Attorney General's office found the audits to be credible and thorough. (CC Docket No. 99-l 17 Comments in Response to April 6, 1999 Notice of Inquiry: ASD File No. 99-22, Audit of Continuing Property Records of the NYNEX Telephone Operating Companies Also Known As Bell Atlantic North, page 5) "Because the audit appears to have been carried out with thoroughness and rigor and because its recommendations and conclusions have a very significant potential impact on New York residential and business phone customers, we urge the FCC to order that NYNEX/Bell Atlantic North show cause why the conclusions reached and the recommendations made by the ASD auditors should not be adopted." And they stand by the work, refuting the Bell's findings. (Page 6) "Although NYNEX/Bell Atlantic North criticizes the ASD's (Accounting Safeguard Division of the FCC) sampling methodology and statistical analyses at some length, the company's arguments are unconvincing." And regardless of all the name calling by the Bells, another New York regulator, The New York State Public Service Commission independently found identical problems with the Bells' records and missing equipment. (Comments, New York State Public Service Commission, 9/13/99, Page 2) "First, we preliminarily agree with the Common Carrier Bureau's finding that certain central office equipment in Bell Atlantic-New York (BA-NY's) CPR does not exist in the BA-NY's inventory. Upon further examination the weakness appears to be one associated with inadequate recordkeeping. BA-NY did not record retirements, location changes and did not maintain the underlying cost support." 3) If The Numbers Are Valid, Then Does It Effect Rates? Yes. The New York Attorney General was very clear about the impacts on customers --- the price of service is based on the capital investments. The AG's office suggests that $631 million in rates could be effected, accounting for a $1.2 billion dollar write-off. "The New York State Attorney General is an advocate on behalf of New York State's residential and small business utility ratepayers, before both the FCC and the New York State `Public Service Commission ("NYPSC"). The interest of New York consumers in the FCC's audit of NYNEX/Bell Atlantic North's continuing property records is manifest. Approximately half of NYNEX/Bell Atlantic North's reported costs represent capital investment recorded in the continuing property records. The FCC and the NYSPSC use these cost figures to set NYNEX/Bell Atlantic North's rates. The audit shows that NYNEX/Bell Atlantic North's costs are inflated. New York State telephone customers, both commercial and residential, are adversely affected if the various charges which comprise their rates are inflated because of overstated capital investment figures. In rough terms, as much as $631 million of NYNEX/Bell Atlantic North's New York intrastate rate base could be affected by a potential $1.18 billion write-off of NYNEX/Bell Atlantic North's capital investment accounts recommended by the auditors. This estimate is based upon the fact that New York Telephone Company represents approximately two-thirds of NYNEX/Bell Atlantic North's operations and about 80% of this is contained in the intrastate jurisdiction. Thus, the auditors' findings, if adopted by the FCC, could lead to significant adjustments in the intrastate and interstate rates paid by New York businesses and residents." 4) The States Should Continue to do the Other Outstanding Audits. The General Services Administration was very clear that the audits should be continued. Their Comments state that even though there are plans to simply let the Bells 'amortize' the bells' investment, even if these monies are non-recoverable, (meaning that they are written-off and are not recovered for the public) the General Services Administration argues that there are other 'financial books' (as distinct from regulatory books, which are different) that need investigation. (Comments of the General Services Administration, 99-117, April 14th, 2000) "The Commission seeks comments on whether an account treatment that result in a non-recoverable amortization of a substantial portion of a carriers investment providers a legitimate basis to terminate the CPR audits. Also, the GSA states that only ¼ of the network has been examined and the rest may also have serious problems. "Secondly, audits were only performed on what should be the easiest plan to keep track of: hard-wired central office equipment. Such equipment only represents about a quarter of the ILEC gross plant investment. The overstatement of portable plug-ins and outside plant facilities may be even greater. " This was echoed by the New York Attorney General's office who recommended that the FCC continue to do the audits for the 75% of the equipment that wasn't examined yet. (Page 5) "The New York Attorney General's office also recommends that the FCC direct the ASD to perform similar audits of the RBOCs' Plug-m Cards and Outside Plant equipment property records to determine if further adjustments to the company's capital accounts are warranted, or that the Commission select one or more independent auditing firms to do so, with the expense borne by Bell Atlantic." Conclusion The New York and Attorney's General has already commented on the need for the audits. It is now time for the state to:
Bruce Kushnick, Executive Director, New Networks Institute |