Opportunity New Jersey:
A Broadband Failure that Cost Customers Billions.
(from the "Unauthorized Bio of the Baby Bells")
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Verizon is seeking to enter Long Distance. Instead, the comnpany should be investigated for how they ended up charging customers billions of dollars for a fiber-optic future they never received. Demand a "Broadband True-Up".
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In the early 1990's New Jersey Bell came up with a plan titled "Opportunity New Jersey", that promised a dazzling new Digital Future. by rewiring the state with fiber-optics to customers' homes, offices, schools and libraries. Through massive Bell lobbying efforts, the local Bell monopoly was able to change state laws --- Deregulate ---- to give the local monopoly more money. This excess profit was supposed to be used for new construction, but ended up in the local phone company's coffers and costing New Jersey customers billions of dollars.
Anyone examining their phonebills should realize there's something wrong.. Verizon New Jersey still charges for Touchtone service --- a service that cost $0 to offer. And Verizon profit margin are 250% above the Business Week 500, even though the company would have you beleive that local service "loses money."
This is also a tale of a failure of the regulators to control Bell profits or monitor Bell's technology deployment promises. Instead of allowing them into long distance, every customer should be asking -- what happened to my fiber-optic future --- and where's all the money?
What Happened to the Info Bahn in New Jersey?
According to a brief filed by the New Jersey's consumer advocate (Division of the Ratepayer Advocate) with the New Jersey Board of Regulatory Commissioners (BRC), NJ's state utility commission, on March 21, 1997: (76)
So much for the promise of the Info Bahn. Before delving into the telecom muck and how the Bell has prospered by not fulfilling promises and thus overcharging customers, let's go back to 1991, when New Jersey Bell presented a new plan created by Deloitte & Touche to move New Jersey into the future.
Background
In March of 1991, the findings of a report written by Deloitte & Touche on behalf of New Jersey Bell were presented to politicians and government regulators, from the Governor on down. Dubbed "Opportunity New Jersey", it stated that New Jersey needed to implement "policies that encourage development of an advanced telecommunication infrastructure." In fact, the study stated, this was essential for New Jersey's future. (77)
And this rhetoric was also repeated by the phone company. For example, Alfred C. Koepee, Vice President of New Jersey Bell, said the plan was New Jersey's future, building new networks to create jobs. (78)
According to an article by Rick Linsk titled "All the Right Connections, ÷ New Jersey Bell and the Wiring of a Regulatory Bonanza", from The New Jersey Reporter, the entire series of events that led up to the passage of Opportunity New Jersey by the state legislature and endorsed by the state utility commission, was one of the most masterful lobbying jobs in the state's history. According to Rick Linsk:
"When the dust had settled, the Bell had spent $640,000 on lobbying, a huge sum by New Jersey standards. For comparisons sake, Bell spent $79,079 the year before." (Note: This figure does not include the Deloitte & Touche study.)
Others, such as Nancy Becker of the New Jersey Cable Association, believed that even the Deloitte & Touche study, at a cost of $1.2 million dollars, was nothing more than a lobbying document. (80)
According to Linsk, other critics made it clear that the Board of Regulatory Commissioners, (BRC), specifically Edward Salmon, Chairman, was perceived as "too tight" with the Bell company. (81)
In May of 1993, the New Jersey Commission officially implemented Opportunity New Jersey.
The Outcome ÷ Opportunity for the Bell
According to the NJ Advocate, the original rate-of-return regulation was replaced by Opportunity New Jersey, an alternate regulation plan based primarily on the promise of "greatly accelerated deployment of advanced technologies... approximately $1.5 billion dollars above current expenditures." (82)
In fact, according to the Advocate, the Bell company only spent $79 million dollars, not the $1.5 billion promised. (83)
More to the point, the actual dollars spent on construction dropped below normal levels. (84)
And how has Bell Atlantic prospered from the plan? ÷ Almost one billion dollars of excess profits, and a return on equity almost twice what a regulated monopoly should be making. (85)
During this period:
- "BA-NJ paid out an additional $954.8 million in dividends* over what was projected in 1992" (1992-1995)
- "the Company is earning a return on equity in excess of 21%, well above the average New Jersey State utility rate of return (11.25%) and substantially higher than any rate of return authorized by the Board in recent memory."
- "net earnings have increased by $85 million, its cost of debt has declined substantially resulting in an annual savings of $22 million in interest expense."
NOTE: *Dividends, in this case, are the monies that New Jersey Bell paid to Bell Atlantic, the holding company.
The Other Dark Secrets to Opportunity New Jersey
Besides the obvious overcharging of customers, the Advocate in two other documents, one discussing the Bell Atlantic/NYNEX merger, and the second being the Advocate's annual report, (86) clearly showed that Bell Atlantic/New Jersey business practices were filled with problems. They ranged from the company's customer service provisioning, or the price of ISDN service, to low-telephone subscribership due to non-existent low income options.
Customer Service Provisioning: According to the Advocate, numerous customer services, from meeting appointments to even properly answering directory assistance calls, have all had a decrease in the standard measurements of good service. (87)
"BA-NJ's performance in the following categories was lower in the year ending September 1996 than in 1993, 1994 and 1995:
(1) percentage of service order provisioning completed within 5 working days;
(2) percentage of service order provisioning appointments met; and
(3) percentage of directory assistance calls answered within 10 seconds."
Lack of Low-Income Options: New Jersey has had a steady decline in the number of telephone subscribing households, and the Advocate believes that this can be attributed, in part, to the fact that the state had not implemented proper low income options. (88)
"In 1995, New Jersey was identified as the only state that experienced a statistically significant decrease in residential penetration, and in 1996, New Jersey was only one of three states (plus the District of Columbia) to have experienced a decrease in subscribership.
"Although New Jersey's annual average penetration rate rose slightly from 92.3% in 1995 to 93.6% in 1996, the fact still remains that New Jersey has experienced a declining subscribership for the past several years, and that, despite the increase reflected in the most recent monitoring report, we continue to fall below the national average."
ISDN Rates: According to the Advocate, BA-NJ's ISDN rates are "excessive" and this is stifling deployment of ISDN. (89)
"The Advocate argues that Bell's proposed residential ISDN rates are excessive and will stifle deployment and expansion of this valuable technology...Bell's proposed revised tariff submitted to the Board on April 19, 1996, offers residential ISDN service in New Jersey for prices ranging from $23.50 to $249 per month, with full bandwidth usage charges of $0.04/minute from 7 a.m. to 7 p.m. and $0.02/minute from 7 p.m. to 7 a.m. Over the ensuing four months, the Ratepayer Advocate and Bell attempted to negotiate a settlement to set mutually acceptable rates, but Bell did not propose an ISDN pricing structure which the Ratepayer Advocate could support. "
"Fatally Flawed" Research ÷ Another Deloitte & Touche Study
The Advocate also discussed a new survey prepared for Bell Atlantic by Deloitte & Touche, stating that it was "fatally flawed". The survey attempted to "demonstrate the importance of telecommunications to business in terms of their operations, efficiency and competitiveness and how their usage of advanced technologies has dramatically increased.". (90)
Reviewing the methodology and findings clearly shows just how flawed this self-serving study is. First, probably only 2-5% of business users use ISDN services today, not 75%-100%. Worse, Bell Atlantic created the list to be surveyed, knowing full well these were heavy users of new technologies. According to the Advocate: (92)
Advocate Solutions ÷ A slap on the wrist would have been nice.
While the Advocate has tried to help subscribers, a recent agreement between the phone company and the regulators pertaining to Opportunity New Jersey clearly demonstrates just how broken the regulatory system is.
As just outlined, the Advocate found that Bell Atlantic had not delivered on the Opportunity New Jersey Plan. There was no interactive services nor any massive fiber-optic deployment. More to the point, almost $1 billion dollars of excess dividend profits was accrued by the Bell company from 1992-1995.
Yet the agreement made between the Bell company and the state clearly shows that the regulators are either unwilling or unable to step up to the plate. Here's the details.
A press release from the New Jersey Advocate titled "New Jersey Consumer to See $176 Million in Benefits from Bell Atlantic Agreement with Ratepayer Advocate and BPU" was released on April 21, 1997. (93) And though the rhetoric says that schools will be wired and low income residents can receive discounted rates for phone service...
...the details reveal that the rewards are mostly handwaving. There are virtually no quarantees of any monies returning to subscribers. The release states: (94)
- "establish a "Lifeline" fund for eligible low-income New Jersey residents, which will provide a credit of up to $7.00 per month/customer, with an estimated total value of $18 million";
- "forego seeking rate increases through 1999 that could have totaled $28 million; and",
- "use best faith efforts to achieve a net job gain of 800 full-time employees in New Jersey by the end of 1997."
What's wrong with this picture? All of the savings and new service promises are based on 'conditional' phrases: "use its best efforts to get jobs", "offer a credit up to", and forgo rate increases that "could have totaled $28 million". There is not one concrete dollar. From a legal standpoint, if the company spends only $2 dollars it qualifies as an "up to" amount.
Meanwhile, customers are paying hard money, by having to pay excessive prices, and therefore Bell profits, while all that's been agreed upon is soft money ÷ there is no cash, no refunds, and even no legal promises.
More to the point, in 1997, New Jersey Bell still charged for Touchtone Service, and its Toll call prices were still some of the highest in the country. Also, the company's returns were 100% higher than a utility should be earning.
And then there's the amount of excess ÷ almost $1 billion dollars of excess profits. This means that customers paid over $300+ million a year in excess dividends, and yet this agreement calls for nothing more than a 'value of $176 million in benefits" with no payback for over $1 billion dollars and no reductions of $300 million annually!.
To put this into perspective: New Jersey had approximately 5.4 million phonelines at the end of 1995, so the overcharging comes to approximately $175 per line (counting interest) for just those three years.
The author's position is that the Bell company should have been re-regulated, all of the monies accrued that were not spent on the fiber-optic service provision should have been returned, penalties should have been imposed, including interest, and prices should have been slashed to the appropriate level of a company who's regulated rate-of-return should be 11%; i.e., a utility rate , not the current 21%+.
In this case we fault, not the Advocate, though they may have been able to get more concessions from the Bells, but the New Jersey Board of Regulatory Commissioners for not adequately protecting the public interests.
Oh-Oh, Another Billion Owed? What About Massive Network Write-offs?
The Advocate found that Bell Atlantic-NJ dividends were excessive and that the return on equity had doubled, but there was another billion dollars of extra profits that they didn't include. It was accrued from a massive network write-off, based on a change in accounting, a change that was implemented because of Opportunity New Jersey.
In Chapter 18 we detail "depreciation", a business accounting term that describes how a company writes-off its construction expenses, and we explain that by accelerating the write-offs the Bell companies were garnering billions in basically free cash. This cash was supposed to be used specifically to build the fiber-optic highway, but virtually nothing was ever built.
More to the point of our story, in examining the 1994 Bell Atlantic-New Jersey Annual Report, we find that with the implementation of Opportunity New Jersey, the telephone company changed its accounting principles and took additional write-offs, adding over $1 billion in free money. This accounting's obscure name is "FAS 71", for Financial Accounting Standard 71.
What Should Happen Next? "Demand a Broadband True-Up."
Every customer should demand a "Broadband True-Up" that accounts for:
- All monies collected to date in the name of broadband by state,
- All other monies collected in the name of the wiring of schools, libraries, government agencies, etc. --- this should include all state plans as well as the E-Rate, Universal Services, or additional state 'school-wiring' taxes and surcharges.
- The amount of money actually spent in that state for regulated and non-regulated construction. --- I.e.; the amount customers paid vs the amount the phone company shareholders paid.
- All monies collected and paid for by the state for the DSL rollouts (some states are allowing the basic service rates to include the costs of rolling out DSL, which is illegal in that it allows the monopoly to fund the 'non-regulated' services through every phone customer.)
- The difference between the amount of money collected from ratepayers and what customers received for that money
- The changes to state and federal laws that gave the Bells extra monies for broadband should be redone in light of these findings.