New Networks Institute   ==========DRAFT=============           America's Phone Customers are Being Overcharged by Their Local Bell Companies---- About $200 per Household in 2000.         Presented by: New Networks Institute 826 Broadway, suite 900 New York, NY 10003 212-777-5418 http://wwww.newnetworks.com         Table of Contents   Executive Summary Introduction Part I: Overall Bell Profits are 200+% above America's Best Companies. Part II: The Overwhelming Majority of Profits Comes from the Local Telephone Customer. Part III The State information Also Shows Customer Overcharging Part IV The Nitty Gritty Profits from Phone Charges is also Outrageous. Part V: Total Overcharging 2000 Part VI Prices are supposed to be "Just and Reasonable" and The Bells' Profits Are Neither "Just" Nor "Reasonable" Part VII How Did They Get All This Money And Why Should America Investigate These Profits?   EXECUTIVE FINDINGS Summary: We estimate that every US household was overcharged about $200 dollars in 2000 by their local Bell monopoly. We estimate that the Bell companies (including GTE) are making some $17.2 billion dollars over 'fair and reasonable' earnings We are calling on Congress to investigate why phone profits are no longer "Just, Fair and Reasonable" We are calling on Congress to explain how the Bells' failed broadband promises garnered them an extra $50 billion dollars---all from the pennies, nickels, dimes & quarters of extra customer phonebill charges. FACTS: Overall Bell Profits are 200+% Above America's Best Companies. The Business Week Corporate Scoreboard, (2/26/01) ranked the top 25 American companies for revenues and profits. The first 9 companies, which included Exxon, Ford, GM, Wall-Mart and IBM had an average profit margin of 6%. The Bell companies had overall profit margins 170% above the Top 9 companies, 256% compared to the Business Week 500, and 212% compared to other Utilities. The Bell Overcharging Is A Violation Of Every State And Regional "Fair And Reasonable" Statute. From the Telecom Act of 1996 to state constitutions, the Bell companies charges are supposed to reasonable. Profit margins of 200% above America's best companies is not reasonable. The Majority Of Bell Profits Comes From Their Monopoly Customer, Not From Other Businesses., Bell South. Wireline and Directory was 73% of total revenue but over 95% of all profits. In fact, the Wireline and Directory business has paid for almost all of the other endeavors, including International sales. Some Bell Products Have Profit Margins Approaching 50,000% The Florida Commission found the profit margin on Bell South's Call Waiting feature to be 48,680%. Caller ID, which cost the customer $7.50 per month, had a 3,264% profit margin. Over $50 Billion Has been Overcharged in the Name of Broadband Networks. The Bells received massive financial incentives to rewire America with fiber-optics. None of these plans were fulfilled, yet the Bells collected an estimated $50 billion in excess fees. See: "How the Bells Stole America's Digital Future": http://www.netaction.org/broadband/bells/ Introduction Summary: We estimate that every US household is being overcharged about $200 dollars a year by their local Bell monopoly. We are calling on Congress to investigate why phone profits are no longer "Just, Fair and Reasonable". Dear Customer, You are owed money… As members of Congress attempt to create new legislation that would give your local Bell company more of your money under the guise of building "Broadband" networks, it is clear that Congress should instead be investigating these companies for their outrageous, obscene and uncontrolled profits. The Bell companies are still monopolies, they control the wiring into customer's homes and offices and their services are supposed to be "fair and reasonable". However, with profit margins 250% above the recently released Business Week 500 and over 200% above their utility brethren, the questions Congress should be exploring: How did the local monopoly phone companies become the most profitable companies in America? Why are they being given new financial incentives when their profits are obscene? Why is Congress, the FCC and the states allowing this to go on, when they have failed time and again to deliver on their promises? It is a little known fact that the Bell in virtually every state promised to give customer fiber-optic services to their homes and offices if only state laws were 'deregulated' --- meaning give the Bells more profits. These plans clearly backfired and today America is paying the price. We estimate that $200 is being overcharged per home per year. We also estimate that over "$50 billion dollars has been collected for advanced networks that never showed up. NNI is calling on Congress for an immediate investigation into Bell profits, and the failed new networks that they said they would deliver. The rest of this report lays out the rest of our claims ---- and it is all based on the Bell's own annual reports and the recently released Business Week 500 Corporate Scoreboard. Part I: Overall Bell Profits are 200+% above America's Best Companies. The exhibit below is taken directly from the Business Week Corporate Scoreboard, (2/26/01) which ranked the top 25 American companies for revenues and profits. As you can clearly see, the first 9 companies had revenues of $1.2 trillion and an average profit margin of 6% This included, Exxon, Ford, GM, Wall-Mart and IBM. We have also included "All Industry", which is the composite of the entire Business Week Scoreboard, as well as "Utilities", which are the brethren of the Bells who supply power to America. The Bell companies (Qwest was not included in the Business Week roundup) had profit margins 170% above the Top 9 companies, 256% compared to the "All Industry" and 212% compared to the Utilities. How is this possible if the Bell companies are supposed to be still be regulated monopolies --- and whose profits are supposed to be constrained because they have a captive audience? Bell Company and Business Week 500 Revenues and Profits, 2000 Source: Business Week, 2/26/01 (in the millions)   Top 9 Companies   Company and Rank   Revenues   Profits   Profit Margin   1   Exxon   $ 210,607   $ 15,990   8%   2   Wall-mart   $ 186,167   $ 6,207   3%   3   General Motors   $ 184,632   $ 4,452   2%   4   Ford Motor   $ 170,064   $ 5,410   3%   5   General Electric   $ 129,853   $ 12,735   10%   6   Citicorp   $ 111,826   $ 13,519   12%   7   Enron   $ 100,789   $ 979   1%   8   IBM   $ 88,396   $ 8,093   9%   9   AT&T   $ 65,981   $ 3,181   5%   Total Top 9   $1,248,315   $ 70,566   6%   Bell Companies   10   Verizon   $ 64,707   $ 10,810   17%   BellSouth   $ 26,151   $ 4,220   16%   14   SBC   $ 51,476   $ 7,967   15%       Bell Company and Business Week 500 Revenues and Profits, 2000 Source: Business Week, 2/26/01 (in the millions)   % profits   Compared Bell   Total Top 9   6%   170%   All Industry   4%   256%   Utilities   5%   212% Bell   16% These excessive profits also show up as part of the return-on-equity, another standard measurement. The chart below gives the returns for the Top 9, All Industry and Utilities, and the findings is that the Bell outperformed all of these companies, --- with the most significant finding being that the Bell companies' return is 125% above other utilities ---- and about 125% above where a regulated entity is supposed to be.   Bell Company and BusinessWeek 500 Return on Equity, 2000   Source: Business Week, 2/26/01   Return on Equity   Bell Comparison   Total Top 9   22.0%   25%   All Industry   15.8%   74%   Utilities   12.3%   124%   Bell   27.6%   Verizon   31.3%   BellSouth   25.0%   SBC   26.4%   Avg.   27.6% Part II: The Overwhelming Majority of Profits Comes from the Local Telephone Customer. The numbers presented in the first part show the overall health of the Bells for all of its businesses. This includes everything from their wireline customers, to wireless, international, directory, etc. It also can include massive charges for purchasing of other companies, merger costs, gains and losses from the sales of businesses, real estate dealings, etc. A closer look at these numbers reveals however that the wireline part of the company--- i.e., the revenues from local phone customers, is not only funding most, if not all of the other activities, but that its profits margins make them, as a class, probably some of the most profitable companies in America. The Exhibit below highlights the revenues and Net Income of Bell South. From the results we can see that the Wireline and Directory business (the business for local phone customers) was 73% of total revenue but over 95% of all profits. In fact, the Wireline and Directory business has paid for almost all of the other endeavors, including International sales. (Directory is mainly the white and Yellow Pages) BellSouth Revenues & Net Income (4thQ 2000) Revenue % of Rev. Net Income Percent Wireline $ 18,351 65% $ 3,503 84% Directory $ 2,200 8% $ 637 15% International $ 2,810 10% $ (170) -4% Other $ 838 3% $ (139) -3% Wireless $ 4,219 15% $ 357 9% Total $ 28,418 100% $ 4,188 100% The other Bell companies have a similar break-out of the profit centers of the company. It is clear that the overwhelming majority of Bell profits/ net income is coming, not from the various new businesses, such as the overseas markets, but with the basic local phone services and directories used by local phone customers. Therefore, the overwhelming profits displayed in our first example are clearly coming from the phone subscribers' charges on their local phone bills.   Part III The State Information Also Shows Customer Overcharging If the overall company portrait is one that shows the flow of profits coming directly from the telephone subscribers, some state information about the returns show that the state profits have gotten totally out of hand. Take the case of the information supplied for Ameritech in 1999, the Bell company that was merged into SBC. The state's returns (according to the FCC ARMIS 4302 report)  Ameritech's 1999 Return on Equity Results, 1999 Michigan 48.9% Illinois 45.8% Ohio 34.1% Indiana 40.6% Wisconsin 38.4% Ameritech avg. 41.6% It is clear that something is very wrong when the monopolies' returns have risen so high. The historical returns on the Bells was 10-13% returns. (These state figures are not available for all states. BellSouth and Southwestern do not give state by state analysis. ) To read a recent report about the state of Illinois, see: http://www.icct.org   Part IV The Nitty Gritty Profits from Phone Charges is also Outrageous. Some Bell Products Have Profit Margins Approaching 50,000% The Bells' business model is also revealed through a closer look at the profit margins of specific telephone company product offerings. The exhibit below highlights findings from a Florida Public Service Commission report comparing the actual cost of various calling features to the price paid by subscribers. The Florida Commission found the profit margin on Bell South's Call Waiting feature to be 48,680%. Caller ID, which cost the customer $7.50 per month, had a 3,264% profit margin.   Revenue, Expense & Profit Margin for Selected BellSouth Calling Features 1999 Price Cost Profit Percentage Call Waiting $4.00 $0.0082 $3.99 48,680% Call Forwarding $4.00 $0.0362 $3.96 10,950% Caller ID $7.50 $2.2230 $7.28 3,263% Source: "Report of the Florida Public Service Commission on the Relationships Among the Costs and Charges Associated with providing Basic Local Service, Intrastate Access and other Service by the Local Exchange Companies in Compliance with Chapter 98-277, Section (2) 1 Laws of Florida, February 19, 1999." Many states, including New Jersey, Rhode Island and Massachusetts, still charge for Touch-tone service. But this service costs the Bells absolutely nothing because it was incorporated into network upgrades that were completed in the 1980s in order to provide customers with equal access to long distance companies. In fact, the Bells would incur an expense to offer old-fashioned rotary dialing service. Excess profits are also common with directory services. The price for a directory listing in the Yellow Pages was traditionally kept above normal returns primarily because revenue was supposed to subsidize other costs of phone service. But many states have freed directory listings from regulation and those revenues no longer subsidize other phone service costs. Prices and profits remain high, however, because there is not enough competition to keep prices in check.   Business Margins for Directory Publishing in 1999 Company Operating Income Margin Bell Atlantic 52.7% US West 52.9% SBC 45.4% Source: 4th Quarter 1999 SEC filings.   Part V: Total Overcharging 2000   We estimate that the Bell companies (including GTE and accounting for Qwest) are making some $17.2 billion dollars over 'fair and reasonable' earnings--- about $200 dollars a household. The Bells are monopolies, pure and simple, under all state and federal statutes. That means that profits are supposed to be 'fair and reasonable". We do not consider companies that are making 212% above their utility brethren, or 256% above the Business Week 500 fair and reasonable. Therefore, we estimate that $17.2 Billion dollars of profits was overcharged ---- and we estimate that this comes to an average of $200 per household in overcharging. (see Appendix One for methodology.) Part VI Prices are supposed to be "Just and Reasonable" and The Bells' Profits Are Neither "Just" Nor "Reasonable" The purpose of the Communications Act of 1934 (as amended in 1996) was: "...to make available, so far as possible, to all the people of the United States, without discrimination on the basis of race, color, religion, national origin, or sex, a rapid, efficient, Nation-wide, and world-wide wire and radio-communications service with adequate facilities at reasonable charges..."[55] [Emphasis added.] The Act also specifically assigned to the FCC responsibility to investigate and report any overcharges or unreasonable price increases: "The Commission ... shall report to the Congress whether any such transactions... may result in any undue or unreasonable increase in charges or in the maintenance of undue or unreasonable charges for such service..."[56] And the more recently enacted Telecommunications Act of 1996 clearly states: "...Consumer Protection: The Commission and the States should ensure that universal service is available at rates that are just, reasonable, and affordable."[57] The "just" and "reasonable" standard has also been imposed on state regulators. For example, in a 1993 decision regarding New Jersey Bell's application for an alternative form of regulation, the New Jersey Board of Public Utilities wrote: "[T]he Legislature declared that it is the policy of the State to, among other things, 'ensure that customers pay only reasonable charges for local exchange telecommunications service...' N.J.S.A.48:2-21.16(a)(2). To this end the Act permits the board to approve a plan for an alternate form of regulation if it finds that the plan, among other things, 'will produce just and reasonable rates for telecommunications services.'"[58] [Emphasis added.] While the terms "just" and "reasonable" are admittedly imbued with some measure of ambiguity, the sheer magnitude of Bell profits and the tactics employed to garner those profits are unjustifiable. Part VII How Did They Get All This Money And Why Should America Investigate These Profits? Over the last decade NNI has researched the Bell companies revenues, profits, expenditure on foreign countries' telecommunications (and real estate), the Bells state Alternate Regulations and the promises made publicly by the Bells to give America advanced networks. To see our bibliography see: http://www.newnetworks.com/biblio.html ADVANCED NETWORK BROKEN PROMISES: In the case of Advanced network rollout, the story is not good. In the mid-1990's (right before the final passing of the Telecom Act) the Bells companies had convinced regulators they needed a great deal more profits ---- to be used to build a wonderous fiber-optic info-highway. Half of America was supposed to be rewired (replacing the old copper wiring) by the year 2000. It is now clear that the Bell companies couldn't build such a network, and abandoned plans, but not returning the excess profits to their customers. We estimate that over $50 billion dollars was garnered through unfulfilled promises to customers. To read a detailed analysis of the situation see: "How the Bells Stole America's Digital Future": http://www.netaction.org/broadband/bells/ PHONEBILL CHARGES: The second part of the problem has to do with the actual charges on phonebills --- and the profits from them. Today, NO REGULATOR EXAMININES THE VARIOUS CHARGES ON THE PHONEBILL FOR PROFITS. As we have shown, some phone charges have a 50,000% profit margin. NNI will be releasing a report "The Real Truth in Billing" in April 2001, which goes into detail about the excessive and too numerous phone charges. COMPETITIVE HARM: Thirdly, the Bell company is not only harming competitors, they are also using these excess profits to roll out ADSL services….. to read our summary of the problems with competition and Broadband Deployment see: "The Bell Monopolies are Killing DSL, Broadband and Competition", parts 1 and 2 http://www.ispworld.com/bw/jan01/Tales_Baby_Bells.htm http://www.ispworld.com/bw/feb01/Tales_Baby_Bells.htm APPENDIX ONE: The Methodology. Starting in 1992, NNI has published reports or updated our research on Bell revenues and profits --- and overcharging, A lengthy discussion of this process was summarized in "The Unauthorized Bio of the Baby Bells and Info-Scandal". It included issues including depreciation and amortization, dividend to customers, costs-vs revenues models, and a host of other information. For example, we contested the sale of BellCore, which was a research company owned by the Bell companies and then sold off. Customers were only supposed to fund a part of the $1 billion dollar annual budget because the charges were only to reflect work fone for the 'regulated' customers. However, the company had charged customers for the entire amount annually, even though less than half of the work was for regulated customers…. And even kept whatever profits was made. Therefore, we included the added expenses--- about $500 million annually, which as part of our overcharging model. (This figure was low, as we didn't include the profit paid to the Bell, which would have added an additional charges. (On the sale, we argued that customers were defacto investors and should have been compensated. One state, New York, charged the Bell i some $20 million dollars at the time of the sale, recognizing our findings as valid.) In this report, we used a number of criteria, but the easiest explanation that can be easily understood is as follows. We believe that the Bell profit margins should be lower than companies with competition --the idea is that their customer base can not make a choice and therefore, like the various state and federal laws, the issue is "fair and reasonable' fees ---and therefore their profits reflect their overall monopoly behavior. Secondly we also showed that the overwhelming majority of profits comes from the local phone customer. So, using the profit margin laid out in our first two exhibits, we calculated The overcharging comes to approximately $17.2 million dollars (this figure includes Qwest and GTE) The Bells having profit margins 200+ above utilities and the Business week 500 and the top 9 companies. (We use 200% instead of the avg. of 212% for simplicity. There are approximately 103 million US Households (source: World Almanac, 2000) We estimate that there are some 85 million households with Bell (GTE) phone service. (about 7% of US households don’t have phone service.) Therefore, regularizing the earnings to be like the other companies, we find that each household is being overcharged approximately $200 annually as compared to the returns a monopoly should be charging. This figure does not include Depreciation and amortization or a host of other issues that NNI has identified, including the "Vaporware" charges, questionable expenses being charged to customers….. a litany of issues. Also, without audits that we've requested, there is no way of knowing how many charges to customers (and therefore profits) are being added to phonebills. To see our other issues with overcharging see http://www.newnetworks.com