FCC’s Response to IRREGULATORS Legal Challenge: Let Them Eat Pie.

bruce kushnick
Sep 26, 2019 · 11 min read

This picture of a delicious looking apple pie is going to anger you. We will come back to this in a moment.

On September 12th, 2019, the FCC responded to the IRREGULATORS v FCC law suit filed with the Federal DC Court of Appeals. This case exposes one of the largest accounting scandals in American history and it impacts not only the price of almost all communications services, you, your family, business and community use, but it details the manipulation of the FCC’s accounting rules that are creating corrupted public policies.

Like that famous line, “Let them eat cake”, attributed to the infamous Marie Antoinette, (wife of King Louis XVI) which was supposedly uttered when she was told that there was hunger and no bread in France — the FCC’s rebuttal to our challenge is just as dismissive, claiming that every issue we brought up is ‘meritless’. But this is only part of the story.

Here is what the FCC alleges about the IRREGULATORS brief:

  • “Petitioners’ Remaining Arguments Are Meritless”
  • Petitioners Fail to Show a Concrete Injury Caused by the FCC’s Order”
  • “Petitioners make three additional arguments very briefly, but none have merit.”
  • “Costs to Consumers. First, they argue that maintaining the freeze harms consumers…In any case, it is without merit.”

And it goes on and on. Ironically, the FCC has never examined the impacts of their accounting rules on state-based public utility financials for 19 years; it has no record of evidence to pull out and instead of supplying any data or analysis to prove their points, the FCC has decided to double down and attack our right to take this case, even though they had the opportunity to bring this up in June, 2019.

In fact, Ars Technica calls attention to another appeal the FCC just lost dealing with media ownership. The US Court of Appeals for the Third Circuit stated that the data and analysis presented by the FCC would fail an “introductory statistics class”. The court wrote:

  • “Even just focusing on the evidence…the FCC’s analysis is so insubstantial that it would receive a failing grade in any introductory statistics class.”
  • “Even if we could treat the use of these two data sets as reliable, the FCC’s statistical conclusions are woefully simplistic.”
  • “But in this case the reasoned explanation given by the Commission rested on faulty and insubstantial data.”
  • “The Commission does not really contest any of these deficiencies in its data or its analysis. Instead it argues that they are irrelevant.”

IRREGULATORS v FCC exposes an Agency that keeps quoting artificial, manipulated, deformed facts and statistics, which are based on the FCC’s own corrupted accounting rules, and these data have been used in almost every FCC proceeding.

Our response to the FCC’s jabberwocky response (i.e.; invented or meaningless language; nonsense), is due second week in October, 2019.

What Happened Is a Manipulation on a Grand Scale to Overcharge the Public.

The FCC’s accounting rules have been used to divide-up the expenses to be charged to the different services using these wired utility networks controlled mostly by AT&T, Verizon and CenturyLink. These are not just the existing copper wires, but the fiber optic wires that are used for Business Data Services, (which include “backhaul” and “Special Access”), that are used for wireless service as well as data services for businesses and competitors, and “Nonregulated” services, which are FiOS video and VoIP, among other services.

Think of this as all the wires in your community — in the ground and on the poles, and to the homes and offices, that have been put in over the last ½ century, or the upgrades and additions, even for wireless or broadband. And each different service using the wires is supposed to be paying ‘common costs’.

But over the last two decades the rules have become deformed and they now put the majority of all expenses into one category, ‘Local Service’, which are the basic phone services. At the same time, this means that the other lines of business, like wireless or Business Data Services, or ‘Nonregulated’ services are only paying a fraction of the expenses.

This occurred because the FCC “froze” these rules to reflect the year 2000, literally 19 years ago and the FCC has never examined the impacts their own rules had on the state-based utilities financials — ever. Using no data whatsoever, in December, 2018, the FCC decided that that it would extend these rules for an additional 6 years.

The FCC wrote:Petitioners Fail to Show a Concrete Injury Caused by the FCC’s Order”

This corrupted accounting, whether done by design or happenstance, has caused massive overcharging in many different ways. We estimate that it is at least $50-$60 billion dollars annually.

By shifting billions of dollars of expenses into the Local Service and the state utilities:

  • This expense dumping caused massive financial losses, which are artificial, and allowed the companies to dodge billions in taxes while getting tax benefits.
  • Verizon NY has lost over $2 billion annually from this shell game, while garnering billions in tax benefits.
  • These losses were used to raise rates multiple times, claiming there were losses. But it also had local phone customers become defacto investors by funding the companies’ other lines of business, like Business Data Services and wireless.

These rules have also made almost all prices in America “unjust and unreasonable” by controlling the prices of the underlying guts of America’s networks.

  • America is paying 2–5 times more for our broadband/triple play than overseas.
  • America is paying 6–10 times more for our wireless services than overseas.
  • Local Service prices should have been in steep decline. Period.
  • Rural areas got screwed by the FCC’s rules –This shell game made the utility networks appear unprofitable so the companies could claim that they didn’t have to properly upgrade their states. At the same time, this allowed all of the other services, like wireless, to get a free ride and use the construction budgets illegally.
  • The cable companies? Because Verizon et al. never showed up to compete (and some of the large cable companies cut a deal with Verizon for their wireless), these all-too-cozy relationships means there are no market forces to keep prices in check, especially when you can add made up fees, and have continuous price increases.

A concrete injury? Extending the rules and not investigating the cross-subsidies continues this financial boondoggle. — I.e.; We all get overcharged and it just gets worse.

The Apple Pie Response to the FCC — The 75%-25% Rule.

The FCC claims that there have been no harms from their rules and that these rules have not enabled massive financial cross-subsidies from regulated services to unregulated services. The FCC adds that the rules are not even in use. The FCC states that the rules have been ‘forborne’ on price cap carriers, (AT&T et al.), meaning that they are still on the books but not in use or required any longer.

However, the FCC wrote this in their response: First, this is the wonk-speak:

  • “For example, the Part 36 ‘loop costs’ category is allocated by a fixed allocator, with 25% of the loop costs to the interstate jurisdiction and 75% of the costs to the intrastate jurisdiction. See 47 C.F.R. § 36.154(c)”
  • “This system offers several advantages. Because cost savings do not trigger reductions in the cap, the firm has a powerful profit incentive to reduce costs. Nor is there any reward for shifting costs from unregulated activities into regulated ones, for the higher costs will not produce higher legal ceiling prices.” (Emphasis added.)

Returning to the Apple Pie Response, what this actually says: We all have paid for 75% of that apple pie, but we only got a 25% slice. In terms of the networks, the FCC cost accounting rule now assigns 75% of the costs of the state utility networks (‘loop costs’), to the (“intrastate”) local service, while 25% are assigned to all of the other (“interstate”) services. According to the FCC, these cost shifts really don’t matter.

That’s right. The entire telecommunications infrastructure in the US has a rule, still in use, that 75% of network expenses are put into Local Service, cross-subsidizing all of the other services. It has not been changed or adjusted for decades, and as the other lines of business grew, this formula was never changed, ever. And the FCC claims, (we paraphrase):

Oh, this is just fine. There are no ‘rewards’ to the company for manipulating the accounting of the state utilities for decades to look unprofitable and to subsidize the companies’ other lines of business.

These two statements demonstrate just how ignorant (or deceptive) the FCC is of the basic facts, making it clear that the FCC made no effort to actually examine what we wrote and filed over the last 5 years. And while we can also blame the state commissions for the blind faith that the FCC is on top of this and would never let their rules violate basic state and federal laws against cross-subsidies, billions of dollars per state were overcharged and will continue to be overcharged if this statistically-corrupted cash machine is not fixed, now.

Construction Expenditures Are Still Based on Using the 75–25% Rule.

The Apple Pie Response is actually part of the corrupted FCC rules. This is another view of the financial manipulations, this time using the 2003 and 2018 Verizon NY financial reports and examining the “Telecommunications Networks (“Plant”) in Service” by the different lines of business over the last 15 years. These are all of the wires in the state utility, which include the fiber optic services.

This is Impossible: After 15 years, 2003–2018, the ‘Nonregulated’ services and the ‘Business Data Services’ should have had the majority of the networks, certainly not Local Service. Again, these numbers prove that the FCC’s freeze is in place, that the Freeze caused billions per year in cross-subsidies, and that the FCC has been negligent for decades to address and fix these fundamental financials.

  • Where are the billions in construction for the Nonregulated services, including FiOS? How the hell could it be almost ‘flat’ for 15 years — at a measly 3%?
  • Why didn’t the “Business Data Services”, which are now more than double the revenues of Local Service, not show up over these years?
  • And since there was no serious upgrade or maintenance of the basic, existing copper-based networks, it is now clear that for 15 years Local Service was illegally funding all of these other lines of business.

And yes, this was caused by the FCC’s cost accounting rules — mostly the 75–25% rule.

The Rules are Federal — We All Got Screwed.

The FCC’s response to the IRREGULATOR challenge complains that we focused on Verizon NY. This was done because it is the only state still requiring a published, full financial report — based on the original accounting and using the FCC’s accounting rules.

This next chart details the last data from the FCC in 2007, highlighting the AT&T, Verizon and CenturyLink state-based utility phone companies. All of the state utilities were dumping a massive amount of Corporate Operations expenses into Local Service. In this chart, “Access” includes the Business Data Services; in this year, Nonregulated payments were negligible.

Corporate Operations expenses are an expense garbage-pail that covers executive pay, the corporate jets, golf tournaments, the lobbyists and lawyers who are attempting to kill off Net Neutrality or push through legislation to get rid of any remaining regulations or obligations.

On average, 72% of this one expense was put into Local Service while only 28% was paid by the Business Data Services. We note that since this time, the total Corporate Operations doubled or tripled, depending on the state, but, as shown in NY, the percentages applied to each line of business never changed.

NOTE: Verizon NY Local Service was charged $1.8 billion dollars in 2017, but Local Service only had $1.1 billion in revenues. This is 61% of the total and, yes, this percentage was set by the FCC accounting rules to reflect the year 2000 and was never changed — for 19 years.

Incompetence or Corporate Regulatory Capture, or Both

FCC Chairman Ajit Pai, in an interview in 2017, revealed that his staff never examined the FCC’s accounting rules or the impacts they were having.

Re/Code: “In the early days, you had said that you wanted to take a weed-whacker to remove the rules that are holding back investment. What did you mean by that?

Pai: “What I had in mind were some of the regulations that we’ve had on the books for a while that stand in the way of investment in networks. Our Part 32 accounting rules — exceedingly boring, I recognize — but just the fact that companies have to maintain two different sets of books, literally one for their business and one for the FCC’s purposes, and the FCC hadn’t relied on any of that paperwork in years. I asked our staff, ‘When was the last time you looked at these reports?’ They said, ‘Pretty much never’.”

The FCC claims that these rules have been erased and no longer apply — they’ve been ‘forborne’, i.e.; still on the books but not enforceable. But, what Pai and the FCC do not mention is that this relaxing of the rules was supposed to be about “Us”, the public.

“The Commission is required to forbear from any statutory provision or regulation if it determines that (1) enforcement of the regulation is not necessary to ensure that charges and practices are just, reasonable, and not unjustly or unreasonably discriminatory; (2) enforcement of the regulation is not necessary to protect consumers; and (3) forbearance is consistent with the public interest.”

The Structural Flaw in All of the FCC’s Decisions. The FCC has never examined the investments that are being paid by local phone customers, or that the majority of the construction is coming out of the state utilities, not investors. In fact, every FCC decision is based on the methodology, the analyses, and financial reporting that EXCLUDES 75% of the construction, excludes the fact that the expenses to the state wired infrastructure are artificial and do not relate to offering Local Service, or that all of the FCC’s policies are, in fact, using the rules that have been erased.

We are at the tipping point of the end game. The FCC’s plan, or should we say the plan of Verizon, AT&T et al. is to make the entire wired US infrastructure appear unprofitable so they can ‘shut off the copper’, but more importantly remove all regulations and obligations on these wires. This will let them substitute wireless — because it makes more money as it doesn’t pay most expenses. So, over the last decade they have been dismantling the utilities and handing over these publicly-funded networks to the companies as private property for private use.

IRREGULATORS v FCC exposes this financial shell game to protect the public interest and the role of the FCC and AT&T, Verizon and Centurylink in this financial manipulation.

Response: Sorry, FCC, Americans Want All the Pie We Paid For

We want what you want. If we paid for the pie, we also get to eat what we paid for. We do not want to give free food to the corporations. Yet, with the help of the FCC, they are literally taking the food out of our mouths for their own benefit. This gluttony caused the Digital Divide and overcharged us — and it needs to stop now, regardless of the outcome of this case.

Note: The enticing picture of the apple pie is from Market Street.

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