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BEFORE THE
--- A "BAIT & SWITCH" TELETRUTH REQUESTS A "BROADBAND
TRUE-UP", REFUNDS, AND PLACING THE FIBER-OPTIC NETWORKS UP
FOR COMPETITIVE BIDDING. Created by New Networks Institute for TeleTruth
Bruce Kushnick, Chairman Executive Director, New Networks Institute 826 Broadway, suite 900 New York, New York, 10003
December 20th, 2002
Preface Why this Complaint it Critical Now. EXECUTIVE SUMMARY: The Verizon Commitment and Outcome Bell Broadband Background 1.2 How Did They Get Away With This Scam? They "Gamed" the System. 2.0 Background To The Penn. Fiber Campaign And The Bell's Legal Requirement 2.1 The Bell Promised Fiber-Optic Services To Get Deregulation 2.2 The Deal And The Law 2.3 The Commitments 2.4 This is NOT DSL--- SPEED and Coverage are the Issues 2.5 The Need For Speed --- and the Two Broadbands 2.6 The Commitment to Roll out Universal Networks Means ALL Customers -- Including Rural Customers. 2.7 Did The Bell Know It Wasn't Going To Be Able To Build The Network? 2.8 Why There Should be a Full Audit -- The Recent Audit of Pac Bell 3.0 The Outcome Of The Pennsylvania Law --- 1993-1997 4.0 The Teletruth Analysis 4.1 Holding Pennsylvania Accountable For Their Statements 4.2 Overall Growth In Lines And Minutes Of Use 4.3 Overcharging by the Numbers 4.4 Massive Staff Cuts 4.5 Massive Write-Offs 4.6 Overall Depreciation ---- More Disinvesting 4.7 "Construction In Progress" Shows Little Progress 4.8 The Yellow Page Business Should Never Have Been Deregulated 4.8.1 Directory Competition Does NOT Lower Prices 4.9 Major Expenses Which Need To Be Excluded From The Analysis 4.10 Who Paid For ADSL Roll Out? Customers Or Shareholders? 5.0 Competition Issues Appendix 1 State Regulation, Based On Verizon-Pa Annual Report, 2002 Appendix 2 Bell Atlantic GTE Merger Expenses Appendix 3 Bell Atlantic Nynex Merger Expenses Appendix 4 Overcharging By The Number Appendix 5 Calculation: Excessive Depreciation Endnotes
The Verizon Pennsylvania Commitment and Outcome In 1994, Verizon Pennsylvania (then Pennsylvania Bell a subsidiary of Bell Atlantic) was granted the 'deregulation' of state laws that essentially gave the Bell company financial incentives to rewire the state with fiber optics for broadband services The Commitments "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." What is being promised is the replacement of the older copper wiring with a new, fiber-optic service that has speeds of 45 mbs in both directions. This is 50-100 times the current ADSL service, which goes over the 100-year-old copper wiring and is a mostly one-way product. The agreement also requires Verizon-PA to wire both rural as well as urban areas---- 20% by 1998, 50% by 2004. Today, there are no homes with this wiring or that delivers the speed. On March 28, 2002, the Pennsylvania Public Utility Commission rejected Verizon Pennsylvania's compliance with the state Alternate Regulation plan, stating that the Bell company had not satisfied it's legal obligations to supply broadband services at 45Mbs. "…this Commission has a legal obligation to reject Verizon PA’s 2000 Update and require it to submit a new update specifying its plans to satisfy its legal obligation to provide a modernized network with broadband capability of at least 45 Mbps upstream and downstream, to be available within five days from the customer request date." TeleTruth and its members applaud the actions by the Pennsylvania Commission, and await their continued analysis of the failure of Verizon, PA to deploy broadband. However, our position is that this situation warrants additional investigations into the possible fraudulent acts by Verizon, among other claims. We believe:
Conduct a Broadband "True-Up": Step one: We are requesting a complete audit of the Bell's books to determine exactly what happened to the monies collected through deregulation. While we have used due diligence in going through the annual reports, these are closer to works of fiction than documents to be relied on for minute analysis.
TeleTruth is Recommending:
1.0 Bell Broadband Background Starting in 1991, Verizon (then Bell Atlantic and NYNEX) made outrageous claims that they would rewire America with a fiber-optic wiring plan that would herald in a new era --- A Digital Information Superhighway Future. Bell Atlantic 1993 Annual Report "We expect Bell Atlantic's enhanced network will be ready to serve 8.75 million homes by the end of the year 2000. By the end of 1998, we plan to wire the top 20 markets… These investments will help establish Bell Atlantic as a world leader in what is clearly the high growth opportunity for the 1990's and beyond." NYNEX, 1993 Annual Report "We're prepared to install between 1.5 and 2 million fiber-optic lines through 1996 to begin building our portion of the Information Superhighway." In fact, in Bell Atlantic's 1993 Annual Report, the company announced they were the "leaders" of the Info Bahn, and that they would be spending $11 billion dollars. "First, we announced our intention to lead the country in the deployment of the information highway... We will spend $11 billion over the next five years to rapidly build full-service networks capable of providing these services within the Bell Atlantic Region." Working with Deloitte & Touche and a group of very high-paid consultants, Bell Atlantic created a series of reports commonly known as "Opportunity New Jersey" and "Opportunity Pennsylvania", that laid out a plan of how this fiber-optic future would change the economy-- not to mention people's lives. According to Opportunity New Jersey, the plan stated broadband was: • "Essential for New Jersey to achieve the level of employment and job This same traveling circus approach also happened in the NYNEX states, where in Massachusetts, NYNEX promised to deploy 330,000 households by 1995. (Testimony from Alternate Regulation 94-50) "(In Massachusetts, NYNEX will) deploy a fiber-based broadband network, with initial deployment to approximately 330,000 access lines, by year-end 1995." The Bell companies also petitioned and then sued the FCC to allow them to offer everything from cable services to healthcare services. "On July 8, 1994, NYNEX filed two (Section 214) applications for authority to provide video dialtone service in certain areas of Massachusetts and Rhode Island. The application to provide video dialtone service in Massachusetts proposes a system that will pass approximately 334,000 homes and businesses." Verizon wasn't the only company to make outlandish promises. All of the other Bells made similar claims ------ Pac Bell stated Pacific Telesis 1993 Annual Report: "Using a combination of fiber optics and coaxial cable, Pacific Bell expects to provide broadband services to more than 1.5 million homes by the end of 1996, 5 million homes by the end of the decade." In fact, in the state of California, Pac Bell actually wired some streets in various cities, only to have SBC (who bought Pac Bell) completely stop all construction and sell off the assets -- and in some cases rip up the streets and remove the fiber wiring. For a chronological history of the California failed deployment see this timeline created by the San Diego Tribune. http://www.newnetworks.com/tauzinfactsheet9.htm In every case, the Bell was only going to do these wonderful plans if they were 'deregulated" by the state. And in all of these cases, deregulation was the removal of regulations that examined and kept monopoly the profits in check, in exchange for "price-caps', where the price of service is frozen for a few years or is granted small increases. NOTE: If you freeze the price of a service, and the costs keep going down, then the profits keep going up. The outcome in most states could be summarized by the Comments made by the New Jersey Ratepayer Advocate: New Jersey Public Advocate about NJ Bell Atlantic, (4/97) "…low income and residential customers have paid for the fiber-optic lines every month but have not yet benefited." To read an analysis by the Ratepayer
Advocate on the New Jersey failure to deploy, see: And for a more complete analysis of the failed deployments and the customer funding involved see "How the Bells Stole America's Digital Future", published by NetAction: http://www.netaction.org/broadband/bells/ NNI estimates that by the end of 2002, customers were overcharged $70 billion for fiber-optic services they will never receive. But the impact of not doing the wiring doesn't just mean that the customer loses, both in terms of not having next generation products and services, or paying more for local phone service. This entire process helped to create the entire Tech Sector crash, especially effecting the hardware vendors and fiber-optic companies who were betting on the Bells' services. For example, on July 15, 1996, Bell Atlantic cut a deal with Lucent for a six and a half your contract to deliver fiber-optic services. "Bell Atlantic Corp. has selected Lucent Technologies Inc. [NYSE: LU] as a supplier of key network components for Bell Atlantic's initial Full Service Network deployment in the mid-Atlantic region. Bell Atlantic's investment under the contract could reach several hundred million dollars over a six-and-one-half-year period." And what was the contract dedicated to -- The Pennsylvania promise of fiber-optics to homes and small businesses --- 12 million homes…starting with Pittsburgh and Philadelphia. "The fiber-to-the-curb architecture that Bell Atlantic will build is the next step in the company's ongoing, aggressive network modernization program… With a contract extending through the year 2003, Lucent's fortunes were tied to the Bell's promises and commitments --- and anyone who has seen the collapse of the Tech Sector knows that Lucent and other fiber-optic companies like Corning, have not faired well. For a report by New Networks Institute on the impact the Bell's failed deployments had on the tech sector see: http://www.newnetworks.com/fiberopitcfiasco.htm 1.2 How Did They Get Away With This Scam? They "Gamed" the System. It is our belief that the Bell company, Verizon, knew full well that they could not build the networks that they were purporting to deliver and they decided to "game" the Commissions. As with other commissions, Verizon was probably thinking that their statements and promises would never be fully questioned or if they were taken to task, then there would be a nominal fine. They would walk away with billions of extra money and new freedoms. Also, Verizon outspent the other side -- advertising, consultants, campaign contributions, shear legal talent, research --- about 30 to one was the NNI estimation based on 10 years of tracking. It is also true that the Internet explosion of the 1996-1999 timeframe had customers happy with their new toy --- the email and web-browsers brought to us by the thousands of new Internet companies and Internet Service Providers, and so, the industry never noticed that other commitments were not being met. Unfortunately, Pennsylvania is not an isolated event occurring in only one state--- it has proven to that the Bells were in collusion to block their real intentions from ever being known. However, it is important to note that Pennsylvania is one of the only states that has held the Bells accountable for their actions, in both these current proceedings as well as the order and opinion by the Penn. Public Service Commission. Some states, such as Ohio, New Jersey, and have made more noise but are not questioning the basic misrepresentation to the state -- of its consequences. In many states, such as Massachusetts, the line between the promises and commitments made to the public through thousands of statements, were never fully held accountable in the state commission Order. To read a Complaint filed by members of TeleTruth against Verizon Massachusetts for their failure to roll out their promised fiber-optic services see: http://newnetworks.com/Masscomplaintsummary.html Most importantly, in the year 2002, three is still no true broadband deployment in the US. The DSL rollout has proven to be a nightmare, and right now most of the competitors are on life-support, mostly caused through the Bell companies' improper treatment of customer services. As we point out in our Preface, both the FCC and Congress are contemplating actions that not only reward the Bells with new financial incentives, but it also makes customers pay double for networks they will never receive. And it is clear that customers are also the principle de-facto-investors of the Bell DSL product. 2.0 Background to the Pennsylvania Fiber Campaign, and the Bells' Legal Requirements. 2.1 The Bell Promised Fiber-optic Services to Get Deregulation. Verizon (Bell Atlantic) made thousands of public statements, from press releases and statements made in the press, to even documents presented to the Public Service Commissions that they would rewire Pennsylvania, and numerous other states, including New Jersey, DC, (Rhode Island, and Massachusetts) with a fiber-optic service that would replace the old copper wiring. So there is no doubt, we've included the following list -- just a small portion of the stories that surrounded the Bell Atlantic fiber plans of New Jersey and Pennsylvania. PA Senate OKs Fiber Optics Bill, June 24, 1993, Philadelphia Daily News Pa. Legislature Compromises On Fiber-Optics Bill The Measure Calls For The State To Be Wired By 2015. June 25, 1993, Philadelphia Inquirer N.J. Bell Rewiring Approved By State About 56 Million Miles Of Wire Will Be Replaced With Fiber-Optic Cable, December 23, 1992, Page S01, Philadelphia Inquirer Fiber-Optic Tv Coming To N.J. November 17, 1992, Page 27, Philadelphia Daily News Bell Clears A Hurdle In Quest To Offer Video A Judge Overturned Part Of A Federal Law. Now Bell Atlantic Will Try Offering Video Services Regionwide. July 28, 1993, Page 19, Philadelphia Daily News A Fiber Field Of Dreams The Switch In The Way Phone Signals Are Sent Promises Not Only Faster Transmission, But Also Bright New Ideas For Using The Technology June 2, 1993, Page A01, Philadelphia Inquirer Phone Bill Goes To House The Pa. Measure Would Limit Rate Increases And Require A Fiber-Optic Network By 2015.May 24, 1993, Page S01, Philadelphia Inquirer N.J. Bell Will Alter Its Fiber-Optic Plans A Subsidiary Will Run The Network. Newspapers Wanted A Guarantee That They Would Have Access To It. February 7, 1993, Page A06, Philadelphia Inquirer Working Together To Build A Highway For Information A Fiber Optic Network Could Move 25 Trillion Bits Of Information A Second. Today's Rate? 100 Million Bits. January 18, 1993, Page C01, Philadelphia Inquirer The call for broadband -- then called the Information Superhighway, was also being hyped by the Bell companies nationally, and so the climate was such that there was little doubt this new technology was a national imperative. 2.2 The Deal and the Law In 1993, the state Pennsylvania's legislature created a new series of regulations, added to the existing Public Utility Code, which essentially created a law to accelerate broadband in the state. " (1) Maintain universal telecommunications service at affordable rates while encouraging the accelerated deployment of a universally available, state-of-the-art, interactive, public-switched broadband telecommunications network in rural, suburban and urban areas, including deployment of broadband facilities in or adjacent to the public rights-of-way abutting public schools, including the administrative offices supporting public schools; industrial parks; and health care facilities, as defined in the act of July 19, 1979 (P.L. 130, No. 48), known as the Health Care Facilities Act. " Chapter 30 also lays out the basic requirements for the distribution to be both rural and urban" "(2) Each local exchange telecommunications company shall reasonably balance deployment of its broadband network between rural, urban and suburban areas within its service territory." In exchange for this broadband plan, the Bell would petition and receive "Deregulation."--- herein called "alternative form of regulation". "(A) PETITION.-- When a local exchange telecommunications company seeks to be regulated under an alternative form of regulation, it shall submit to the commission a petition requesting the alternative form of regulation. In the petition, the company shall submit its proposal and supporting data for an alternative form of regulation. The law goes into details about how the regulation is applied. This is how Verizon characterizes their plan. It essentially states that the prices for services are "capped", meaning that the prices have been frozen, but that the regulator no longer examines the profits as they were able to do under the older form of regulation -- 'rate-of-return', which required the Bell to give money back if the profits went too high. "The plan provides for a pure price cap plan with no sharing of earnings with customers and replaces rate base, rate of return regulation. Competitive services, including toll, directory advertising, billing services, Centrex service, paging, speed calling, repeat calling, and HiCap (high capacity private line) and business services provided to larger customers are price deregulated. All noncompetitive services are price regulated. Also, this law defined some services as competitive, such as "Directory Adverting", which means that the Bell could charge what it wanted to. (Directory Services are the yellow pages and directory assistance, and on average, the Bell companies have a 57% profit margin on these services, making it one of the most porfitable in America. 2.3 The Commitments In the Executive Summary we included just a few quotes on the various commitments made in the final state Order. They are for fiber-optic wiring which essentially replaces the older copper wiring, and this new service will have speeds of 45Mps in both directions. 20% of the state, both rural and urban customers, will have service by 1998, 50% by 2004. And This is NOT DSL "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." 2.4 This is NOT DSL--- SPEED and Coverage are the Issues. It is clear that the Pennsylvania Commission realized that there is a bait-and-switch going on and that what was promised was a Ferrari on the info-bahn and what the state is getting is a skateboard on a dirt road. Here's the commissions reasoning -- DSL is too slow and doesn't even qualify for the definition of broadband, nor does it replace Verizon's obligations. "In Verizon PA's 2000 Update, the Company also states that DSL is a broadband service consistent with its NMP. There are several reasons why we believe that Verizon PA’s current DSL offering is not a broadband service consistent with its NMP. And the Bell company also thought that ADSL was an inferior product. They were replacing the copper wiring so that the state would not lag behind others. They called ADSL and interim solution and defined it as "the most bandwidth-limited section of the network." Here's a excerpt from the Commission on the topic. "It should be noted that the evidence the Company introduced in support of its NMP in 1994 established clearly that modernizing the network meant, among other things, replacing the existing copper distribution system with fiber. The Company’s direct testimony asserted that its NMP was consistent with the "moderate infrastructure acceleration scenario" described in the Commission’s Pennsylvania Telecommunications Infrastructure Study released by Deloitte and Touche and DRI/McGraw Hill in 1993. (Bell statement 1.0, at 7.) Verizon PA placed the study into evidence in its rebuttal testimony. (Bell statement 9.0.) The study makes clear that one of the assumptions underlying all of the acceleration scenarios was deployment of a fiber distribution system. (Vol. I, at 1-96; Vol. IV, at XII-1-XII-19.) In fact, the study indicated that of all the technology changes needed for a broadband capable network, deployment of fiber in the feeder and distribution systems was the change that would lag behind the others if the Commonwealth did not adopt a strategy to accelerate deployment. (Vol. IV, at XII-25, XII-27.) The study described the copper distribution system as "the most bandwidth-limited section of the network." (Vol. IV, at IX-18.) Finally, it described ADSL technology as a "potential interim solution" to allow higher bandwidth services pending construction of a fiber distribution system. " This issue of speed is complicated. Back in 1993-1995, when broadband was discussed, the speed was 45 Mps. 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: According to the FCC's most recent findings, only 4.3 million homes have broadband services that pass the simple test of providing speeds over 200K in both directions. These services are either offered through cable companies, or over the 100 year old copper phone networks. "About 4.3 million of the 7.1 million high-speed lines provided services at speeds of over200 kilobits per second (kbps) in both directions."
Therefore, the FCC's report can significantly boost the current broadband subscribership, but it is a hollow endorsement because it leaves the county on an old copper wiring. 2.5 The Need For Speed --- and the Two Broadbands. The more bandwidth you have, the more bandwidth you will use is the classical technology analysis. But it is also the more information that can be carried into customers homes and offices. For example, anyone who uses the Internet with a 56K modem and has tried to download large music files, or a movie of TV or DVD-like quality simply can't do it--- it takes multiple hours because movies or even a MPG music files take up enormous amounts of 'bandwidth'. Conversely, if you make your own movie and want to send it to friends --- upload the movie ---- it will also take hours and its most likely easier to give it to them on a VCR cassette or CD. And that’s not taking into account the slowness of most customers who use the old copper networks. The actual speed of the service can be very, very, slow. Many customers in more suburban areas are getting speed of only 14.4K as their fastest connection. As the State Commission rightly identifies ---what we have here are two broadbands --- The first is dependent on the copper wiring, which will never be able to get to 45 MBS -- enough for sending and receiving movies, and the second is the use of fiber-optic wiring, that can be continuously upgraded to faster speed services as they are developed --- and it’s slow speeds are 50 times faster than today’s ADSL. 2.6 The Commitment to Roll out Universal Networks Means ALL Customers -- Including Rural Customers. There are many Congressmen concerned with the rural deployment of broadband and considering the Bells, they should be. The Pennsylvania law addressed rural concerns when it made rural customers' rights to be on the same par as urban and suburban customers. The law did not make any extra financial incentive necessary for Universal access to Broadband. "Chapter 30 requires that a LEC make available its broadband network universally. Section 3002 defines universal broadband availability as "access to broadband service by each bona fide telephone customer of a local exchange telecommunications company within five days after a request for broadband service is received by any telecommunications company." 66 Pa. C.S. §3002. We also believe that, under Chapter 30, universal broadband availability excludes the notion of broadband services being offered at a level beyond the reasonable economic reach of the majority of a LEC’s customers." (Emphasis added) 2.7 When Did The Bell Know It Wasn't Going To Be Able To Build The Network? There is ample proof that Bell Atlantic/Verizon knew it wasn't going to build (or even could build) their plans as promised. The first sure sign of this was the fact that Bell Atlantic wrote the FCC stating they were pulling 'reevaluating' some of their plans. These statements were made against the backdrop of the Bell filing in Pennsylvania committing to the fiber-optic plan. "Bell has taken recent action before the FCC which clearly brings into question whether the Company has a plan for accelerated modernization of its network. With respect to its video dialtone construction applications submitted to the FCC for its review and approval, the Company originally sought permission to construct a HFC network as the platform. However, the FCC applications were voluntarily suspended by the Company in May of this year. (1994) Yet, the direct nexus between the pending 214 applications and the Company's NMP filed before this agency is not developed. The Company's official transmittal to the FCC stated that "In the months since the applications were filed, however, significant technological and other developments have occurred which caused us to reevaluate our plans. Until this reevaluation is completed, we request that you hold these applications in abeyance." In a related story from the Boston Globe from April, 1995, it's clear that the public was being told that 'broadband plans were being slowed in Philadelphia and Pittsburgh "It will take years before the technology becomes widespread, though, and the phone companies have been pushing back their timetables. Just this week, Bell Atlantic asked the federal government to withdraw its application to deliver fiber-coaxial - or so called broadband - services to as many as 3 million homes in Philadelphia, Pittsburgh and nearby centers. It said it wants to reconsider its technology strategy. In another article dated earlier, Feb. 27, 1995, the writer speculates that "Bell Atlantic is keeping it's options open to deploy cable services by wireless. "Bell Atlantic is one of the more aggressive Bell companies in the cable industry, Baring said, adding that the CAI loan appears to be an attempt by Bell Atlantic to keep all its options open for future cable TV services. While the wireless cable industry was abuse over the CAI loan, Baring said Bell Atlantic has invested huge sums of money in other areas, such as its plans to construct a nationwide interactive network worth $5 billion. However, one thing is clear -- the Bell of PA Commission was firm that the proposal for 45mbs was binding contract". "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." 3.0 The Outcome of the Pennsylvania Plan --- 1993-1997 We'd first like to present findings from a study that was done on the track record of Pennsylvania plan created In 1998, by Economics and Technology, a highly respected research and consulting firm. We will be presenting updated information in the next section. This scathing, but accurate review of the Opportunity Pennsylvania plan. clearly showed that the Bell company made excessive profits, failed to increase investment in the state's telecommunications network, did not meet its commitments for fiber-optics in 1998, and "has actually extracted capital out of Pennsylvania for use elsewhere.". "Having made its commitment and been granted its alternative regulation reward, Pennsylvania's largest local telephone company Bell Atlantic-Pennsylvania (BA-PA) has paid more attention to escaping from, rather than fulfilling, the terms of its promised upgrade. This study demonstrates that, despite strong financial performance and earnings growth in Pennsylvania, as well as a generous and flexible regulatory framework, BA-PA has failed to increase investment in the state's telecommunications network and, in fact, has actually extracted capital out of Pennsylvania for use elsewhere. At the same time, BA-PA has been extremely successful in protecting its monopoly from competitive encroachment. Without the discipline of actual, effective competition, the incumbent has been permitted to charge excessive prices and earn excessive profits, while confronting no business incentive to undertake new investment in Pennsylvania. 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." To read this report go to http://www.econtech.com (registration required).
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