|
America's Phone Customers Are Being Overcharged By Their Local Bell Companies About $200 Per Household In 2000. SUBTITLE: Bell Profits Violate Every State and Federal "Fair and Reasonable" Statute.
Presented
by:
Executive Findings Conclusions Introduction Companion Reports Part I Prices Are Supposed To Be
"Just And Reasonable" And The Bells' Profits Are
Neither "Just" Nor "Reasonable". Part II Overall Bell Profits Are
200+% Above America's Best Companies. Part III The Overwhelming Majority Of
Profits Comes From Local Telephone
Customers. Part IV State Information Also Shows
Customer Overcharging. Part V The Nitty-Gritty Profits From
Phone Charges Are Also Outrageous. Part VI Prices Should Have Declined,
Yet They Haven’t. Part VII Phonebill Charges vs Bell
Profits Disconnect: Did Verizon Lie to The NY
Times? Part VIIII Bogus Charges, Outrageous
Fees, and Harm to Competition. Part IX Total Overcharging In
2000 Part X Competition Has Helped
Verizon Increase Revenues And Profits. Part XI Prices to Competitors Are
Outrageous. Part XII Excess Profits Result From
the Bells’ Failure to Deliver on Their
Broadband Promises. Part XIII Are Ratepayers Funding
Non-Regulated Businesses? --- Illegal
Cross-Subsidization May Be Common. Part XIV How Much Do the Phone
Networks Really Cost? Part XV The Bells Failed to Roll out
the Promised Fiber-optic Broadband Services ---And
Kept the Money: The Largest "Bait and Switch" in
Telecom History. Conclusions EXECUTIVE FINDINGS SUMMARY
FACTS:
This report clearly demonstrates that the Bell monopoly profits from local phone customers are neither fair nor reasonable. This is harming customers and competitors. Therefore, acting in the public interest, Congress, the state commissions, the Attorney Generals' Offices, and the Federal Communications Commission (FCC) should:
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 customers' 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 are:
We estimate that each household is being overcharged about $200 per year in 2000. In other words, America paid an additional $17.1 billion for 2000. The Bells Used A Shell Game of Words and Regulations to Become So Profitable. The Bells, of course, will claim that they "lose money on local service" and that they need increases to their rates. During the creation of this report, Verizon requested a rate increase for local phone service in New York. They told the New York Times "Verizon Communications said yesterday that it would seek approval to raise local phone rates in New York State for the first time in a decade." and that "On the issue of rate increases, Verizon said yesterday that it had repeatedly reduced residential phone charges in New York in the 1990's" ("Verizon Will Seek a Rate Increase for Local New York Calls", 5/17/01) First, from the perspective of anyone paying a phonebill, most prices have not decreased. Taken directly from phonebills, we found that Inside Wire Maintenance went from $1.04 in 1999 to $2.10 in 2001, while the "Subscriber Line Charge" increased for every residential customer from $3.50 to $4.35 over the last year. (it goes to $5.00 July 1, 2001.) The Bells will try to convince you that this money shouldn't 'count', even though the profits still ends up in the Bells' coffers and the customer paid extra for "Local Service". As we will also highlight, prices should have fallen because there have been major staff cuts and limited new investment (as compared to revenues). Profits and charges on the local phonebills have increased, not decreased. The real secret is that there is a major disconnect between the Bells' claimed profits for state and federal regulators and their actual profits from customers. In fact, no single regulator examines all of the charges and therefore profits that come from the monopoly customer. Services have been declared deregulated, detarriffed, non-regulated, alternate regulated, competitive-priced, etc. All of these are simply a euphemism for a brilliant shell game, all in an effort to get more money out of the monopoly subscriber. The Bell can claim they need money in one document, even though their profits out-paced America's best companies. NNI is solidly behind capitalism and competition. Unfortunately, today the Bell companies are not competitive. They are monopolies who have harmed competitors through inflated rates and documented anti-competitive behavior. The Broadband Bait-and Switch So why were services deregulated when there is no competition? It is a little known fact that the Bells in virtually every state promised to give customers fiber-optic services to their homes and offices if only state laws were 'deregulated' --- meaning give the Bells more profits. Over half of America's homes, offices, schools, libraries, etc. were supposed to have very-high-speed broadband. (Not the inferior DSL over the same old copper wiring.) These plans clearly backfired and today America is still paying the price. We estimate that over $50 billion has been collected for broadband networks that were never built. NNI is calling on Congress for an immediate investigation into Bell profits and the failed new networks that they said they would deliver. There are also a host of customer and competitor issues this report brings up.
The rest of this report lays out the rest of our claims which are mostly based on the Bells' own annual reports and the recent Business Week 500 Corporate Scoreboard.
Companion Reports Since 1992, New Networks Institute (NNI) has been publishing research on how the break-up of AT&T and the creation of the Bell companies have impacted customers. For a bibliography see:
http://www.newnetworks.com/biblio.html REPORT 1: Broadband and Overcharging: "How the Bells Stole America's Digital Future" http://www.netaction.org/broadband/bells/ In the mid 1990's, the Bell companies made promises to the customers and state regulators that they would rewire neighborhoods, schools, libraries and government agencies with a fiber-optic broadband network. By the year 2001, over half of America was supposed to be using a fiber-optic based broadband network. Though none of it exists today, state laws were "deregulated" to give the Bell companies more money for this construction. Unfortunately, it is now clear that the Bell companies couldn't build such a network and abandoned plans, but, for the most part, did not return the excess profits to their customers. We estimate that over $50 billion dollars was garnered through unfulfilled promises to customers and this overcharging has helped to make the Bell some of the most profitable companies in America. REPORT 2: Phone Bill Overcharging: "The Real Truth in Billing: Customer Phonebills Held Hostage", subtitle ---"Dear Congress: Here's a Phonebill--- Now Tell Me the Profits." In our current report we clearly show that profits are not just and reasonable. This companion report deals with the second part of the problem ---the actual charges on phonebills and the profits from them. Today, NO REGULATOR EXAMININES ALL THE VARIOUS CHARGES ON THE PHONEBILL FOR PROFITS. As we have shown, some phone charges have a 50,000% profit margin. Therefore, we are calling on Congress and regulators to explain --- If the Bells have become some of the most profitable companies in America from phonebill charges, why is nothing being done to stop Bell overcharging? This report will be released Mid-June 2001. Competitor Issues: To read our summary of the Bell caused problems with competition and broadband deployment see these two Boardwatch Magazine articles: "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
Part I Prices Are Supposed To Be "Just And Reasonable" And The Bells' Profits Are Neither "Just" Nor "Reasonable" NNI believes that the Bells are currently in violation of every state and federal telecom statute, not to mention state constitutions. The Bells are still monopolies, and there is no proof, court case, or any other research that shows that there is local phone competition of residential customers widely being used, or even available. Therefore, regardless of whatever current law the Bell companies would like to use, there is ample proof that the Bell companies' profits are out of line with a monopoly. The Bells profits are supposed to be regulated and this is because monopolies have an undue control over the captive customers. They have guaranteed customers--- meaning guaranteed income and profits. Conversely, companies with competition do not have the luxury of a guaranteed return. Competition drives prices lower, profits lower, and can, if you do not react, put you out of business. That is the reason that there are public "utility" commissions --- to be the public's watchdog over the affairs of the monopoly-utility providers. It is also the reason why every state and federal law has specific safeguards pertaining to the profits of the utilities, commonly known as "Fair and Reasonable" statutes. For example, the primary law in telecommunications is the Telecom Act of 1934 (as amended in 1996). It states that the purpose of the Act is: "...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." (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..." 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." 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.'" 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 II 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). It ranked the top 25 American companies for revenues and profits. As you can clearly see, the first 9 companies had total revenues of $1.2 trillion and an average profit margin of 6%. These included: EXXON, Ford, GM, GE, Wall-Mart, Enron, Citicorp, AT&T and IBM. We have also included the "All Industry" category, which is the composite of the entire Business Week Scoreboard, as well as the "Utilities" which are the brethren of the Bells that 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 still be regulated monopolies, whose profits are supposed to be constrained because they have captive customers? Source: Business Week, 2/26/01 (in the millions) 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)
% of
Profits Compared to
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. Source: Business Week, 2/26/01 Return On
Equity Compared to
Bell Total Top 9 22.0% 25% All Industry 15.8% 74% Utiilities 12.3% 124% Bell 27.6% Verizon 31.3% BellSouth 25.0% SBC 26.4% Avg. 27.6% Part III 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 their businesses. The Bell is a large holding company and it includes thousands of companies, including the monopoly wireline customers, to wireless, international, yellow and white page directories, etc. Its dealings can also include massive charges for purchasing other companies, merger costs, gains and losses from the sale of businesses, real estate dealings, etc. A closer look at these numbers reveals, however, that the wireline part of the Bells, i.e.; the revenues from local monopoly phone customers, is not only funding most, if not all of the other activities, but the wireline profits margins make them, as a class, 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 businesses (the original bell monopoly revenue from local phone customers) was 73% of the total revenue but over 92% of all profits. In fact, the Wireline and Directory businesses have paid for almost all of the other endeavors, including International sales. (Directory is mainly comprised of the white and Yellow Pages) (in the thousands) (Source: 4thQ 2000) Exhibit NNI, 2001 Revenue % of
Rev. Net
Income Percent Wireline $18,351
64% $ 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 8% 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 from 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 IV The State Information Also Shows Customer Overcharging If the overall Bell portrait reveals that flow of profits is coming directly from the monopoly telephone subscribers, some specific state information shows that the state returns on equity have gotten totally out of hand. Take the case of the information supplied for Ameritech in 1999, the Bell company that merged into SBC. Ameritech covered Michigan, Illinois, Ohio, Indiana, and Wisconsin. The state's return on equity was totally outrageous. According to the FCC's ARMIS 4302 report: Michigan 48.9% Illinois 45.8% Ohio 34.1% Indiana 40.6% Wisconsin 38.4% Ameritech avg. 41.6% These state returns also mimics more closely the monopoly customer "return-on-equity" because this information is primarily is generated from the local telecom customers, not the other revenue areas, such as international deals. More to the point, it is clear that something is very wrong when the monopolies' returns have risen so high. The historical return on equity for the Bells was 10-13%. (NOTE: 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.ilcct.org
Part V The Nitty-Gritty Profits From Phone Charges Are Also Outrageous. 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. (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.") 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 $0.2230
$7.28 3,263% 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 advertising from regulation and those revenues no longer subsidize other phone service costs. However, prices and profits remain high because there is not enough competition to keep prices in check. Company Operating Income
Margin Bell Atlantic
(Verizon) 52.7% US West 52.9% SBC 45.4% Source: 4th Q1999 SEC
filings. PART VI Prices Should Have Declined, Yet They Haven’t (From "How the Bells Stole America's Digital Future") Determining Bell profits is challenging, since the financial information provided by the Bells is presented in such a way that it is difficult to get a handle on expenses or revenues. But there should be no doubt that prices should have declined significantly. One of the least talked about aspects of the holding company consolidation of the Bells is the massive staff cuts that have effected all service offerings. Since the Bells were created in 1984, over 275,000 workers and managers have been laid off or retired. This has had a significant impact on the companies’ abilities to keep up with new orders, and new competitors. Here is one example: "Employees-per-line" is a standard measurement used to indicate staffing levels in the telephone industry. Between 1984 and 1999, Bell Atlantic (including NYNEX) has cut employees-per-line by 53%. On average, staffing in departments associated with customer phone service have been cut by more than 50%, as indicated in the following exhibit., taken directly from Bell Annual Reports. Employees-per-line 1984 1999 Percent
Reduced BellAtlantic/NYNEX(now
Verizon) 61.0 28.8 53% Pacific
Telesis(now
SBC) 63.0 27.0 57%* US West
(now
Qwest) 61.0 27.3 54% The staffing cuts have resulted in huge financial savings for the companies. NYNEX, (which covers New York and New England, and which is now part of Verizon), cut nearly 16,200 positions between 1994 and 1997 and anticipated annual savings of a whopping $1.7 billion once the restructuring was completed. The quote below, from the NYNEX 10Q, 3rd Quarter Report, 1996, clearly shows the savings and staff cuts during 1996. It should also be noted that these savings were not applied to deductions in the price of services to customers: "Since the inception of process re-engineering and the special pension enhancement program in 1994, approximately 11,900 employees (to date) have accepted the retirement incentives. On an annualized basis, this will equate to an average reduction in wages and benefits of approximately $650 million."…
The chart above highlights the drop in employees as compared to the increases in overall Bell revenues -- 150% since their inception in 1984. As a result of these staff cuts, there have been definite and documented drops in the quality of service. US West, Ameritech, Bell Atlantic and Pacific Bell have all been investigated and ordered to pay penalties by state regulators. There are also hundreds of complaints from competitors. With fewer people to handle more work, this isn’t surprising. PART VII The Phonebill Charges vs Bell Profits Disconnect: Did Verizon Lie to The New York Times? During the creation of this report, Verizon requested a rate increase for local phone service in New York. They told the New York Times "Verizon Communications said yesterday that it would seek approval to raise local phone rates in New York State for the first time in a decade." and that "On the issue of rate increases, Verizon said yesterday that it had repeatedly reduced residential phone charges in New York in the 1990's" ("Verizon Will Seek a Rate Increase for Local New York Calls", 5/17/01) First, from the perspective of anyone paying a phonebill, prices have not decreased. Taken directly from phonebills, we found, for example, that Inside Wire Maintenance went from $1.07 in 1999 to $2.10 in 2001, while the "Subscriber Line Charge" increased for every residential customer from $3.50 to $4.35 over the last year. (It again goes up July 1, 2001.) Second lines also went from $3.50 to now $7.00, while Business lines also increased from $6.000 to as high as $9.20. The Bells will try to convince you that this money shouldn't 'count', even though the profits still ends up in the Bells' coffers and the customer paid extra for "Local Service". 1999 2000 2001 July 2001 Inside Wire
Maintenance $1.04 $1.49 $2.10 Subscriber Line
Charge (SLC) $3.50 $3.50 $4.35 $5.00 SLC Second Lines
(residential) $3.50 $.607 $7.00 SLC Business $6.00 up to $9.20 To see the FCC's own description of this charge see: http://www.fcc.gov/cib/consumerfacts/SLC061500.html As we also highlighted elsewhere, prices should have fallen because there have been major staff cuts and limited new investment (as compared to revenues). Profits and charges on the local phonebills have increased, not decreased. However, it is not simply the price of a service that matters but the profits from that service. Verizon also claims that their profit margins were only 4% in New York, and in other regions it was 10%. -" its net revenue divided by its rate base - is 4 percent in New York, compared with an average of over 10 percent in other states where the company operates." However, in Part 1 of this report, the information from Business Week showed that Verizon's profit margin for the company was a whopping 17%, about 200% above most American companies--- and that included expenses for all of its companies. Sources: New York Times, Business Week,2001 Verizon-New York profits
4% Business Week Scoreboard for
Verizon 17% Business Week Scoreboard 500
4% In Part IX of this report we quote Verizon's Annual Report for 2000 which shows that the "Operating Cash Flow Margin" for 'Domestic Telecom" was 43.4% for 2000, up from 43.2% in 1999. This means that New York, which is a major source of Verizon revenue, is not losing money by any means. Years Ended December 31, 2000, Results of Operations-Adjusted (Dollars in millions) 1999 2000 Operating Cash Flow
Margin 43.2% 43.4% In fact, with these various statistics in direct contradiction to Verizon's statements it is clear that something is very wrong. Verizon is asking for increases even though its overall results (and the increases to services in 2000) all point to Verizon either not telling the truth or else manipulating their statistics in such a way as to mislead the public. The real secret is that there is a major disconnect between the Bells' claimed profits for state and federal regulators and their actual profits from customers. In fact, no single regulator examines all of the charges and therefore profits that come from the monopoly customer. Services have been declared deregulated, detarriffed, non-regulated, alternate regulated, competitive-priced, etc. All of these are simply a euphemism for a brilliant shell game, all in an effort to get more money out of the monopoly subscriber. The Bell can claim they need money in one document, even though their profits out-paced America's best companies. We will revisit these issues in the companion report "The Real Truth in Billing".
PART VIII Bogus Charges, Outrageous Fees, and Harm to Competition. Bell profits are not only a money issue, but also a fair and reasonable issue from the perspective of the customer services that make up local phone service. And while Call Waiting, etc. may have outrageous overall profits, there is a darker side to phonebill charges --- outrageous fees and harm to competitors who would supply cheaper/better services. How sick does the situation get? A recent email clearly shows that there are some cases that that defy any possible rational, except that "the Bells can get away with it". Take the case below of a woman moving in New York City, from one part of the East side to another, who just wanted to keep her phone number when she moved. According to Verizon's staffers, if the customer wanted to keep her number she would be prohibitively charged a ludicrous $558 to start, as well as $96 a month, not counting other charges.
The reader might be interested to know that on customer phonebills there is a "portability" charge, which is paid monthly on the assumption that it lets a customer keep their phone number if they use a competitive provider at the same location. Also, from the email, we find that even though a competitor, MCI, had offered to solve some of the problems, Verizon's databases were inaccurate and Verizon tried to stop her from leaving, thus stopping competition from helping this customer. Here is an excerpt of the email. To read the entire email see: APPENDIX 2 "Well, here goes: In early March I called Verizon to arrange for my current phone # to be switched to my new apt by the end of the month, once I moved. Verizon checked my new address & advised me that since I was not moving within my zip code, that I could not keep my number. I then asked them why do I pay for number portability, monthly, if the number is not portable; Verizon's reply is that the number is portable within a zip code, not if you move out of the zip; even though I'm moving 20 blocks. I then asked Jewel Gaddy (customer service rep, Verizon), if I could keep my # if I was willing to pay a fee & what would that fee be. She said that I would be able to keep the # for a fee, but she did not know what the fee would be. She said that a Verizon "troubleshooter" would call me with the details. Approx. 2 days later the "troubleshooter" called & left me a message, telling me that they would move the number for a one time fee of $558.00 and a monthly charge of $96.04 (every month for each month I use the #). For more about portability issues http://www.newnetworks.com/NewPortabilityPetition.htm Part IX 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 per 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.) However, this per household charge does not include the further examinations such as how much money has been overcharged in the past, a recalculation of the mundane and obscure accounting issues including depreciation and amortization rates, charges for unnecessary expenses, "vaporware" charges, and a host of other issues.
Part X Competition Has Helped Verizon Increase Revenues And Profits. In the real world of capitalism, where competition is supposed to rule, companies that have competitors usually lose market share as well as have declines in profits or revenues. With the Bell companies, it is clear that competition has actually helped the Bell companies, or at least has had no recognizable impact. The exhibit below shows Verizon's revenues and profits for 1999 and 2000, based on the Verizon 2000 Annual Report. It is clear from virtually all indicators that local service revenues are up, not down as would be expected from competitive impact and there has been a steady increase in both revenues as well as profits. Years Ended December 31, 2000, Results of Operations-Adjusted (Dollars in millions) OPERATING
REVENUES 2000 1999 1998 Local services
$
21,368 $
20,600 $
19,960 Network Access
services $
13,142 $
12,827 $12,434 Long distance
services $ 3,153
$ 3,183
$
3,288 Other services
$5,680
$ 5,113
$4,713 TOTAL DOMESTIC
TELECOM $43,343
$
41,723 $40,395 OPERATING
EPENSES Operations and
support $
24,537 $
23,691 $23,449 Depreciation and
amortization $ 8,752
$8,200
$
7,711 TOTAL EXPENSES
$33,289
$31,891
$31,160 OPERATING NCOME
$
10,054 $ 9,832
$
9,235 ADJUSTED NET INCOME
$ 5,135
$ 5,020
$
4,750 Operating Cash Flow
Margin 43.4% 43.2% In fact, according to Verizon, there has been a considerable increase, 20%, in the number of total lines, as well as an increase in the minutes customers stay on the phone (or use the Internet) 2000 1999 Increase in
2000 Access minutes of
use (in millions) 280,379 268,958 4.2% Total lines: voice
grade equivalents (000) 108,833 90,716 20.0% Part XI Prices to
Competitors are Outrageous First, when a competitor wants to compete, they are forced to use some part of the Bell network to complete the call, or they are reselling some of the Bell services which run over parts of the Bell networks. For example, even a competitive DSL provider must purchase a second line from the Bell or use the current Bell network. From the previous data, it is clear that, ironically, competitors have helped to increase the number of Bell lines sold. If this were not the case, the number of Bell lines would have decreased. Secondly, the prices to competitors for the use of the network, central offices and other charges are prohibitive from offering a competitive product. Imagine trying to compete with the Bell company, but when you add up all of the Bell charges that are supposed to be discounted, you find that the costs are above the retail prices being charged by the local monopoly. This has been documented many times in numerous states. Most recently, in the case of Verizon/Massachusetts' application to offer long distance, MCI recently stated that the costs to them were so over-priced they couldn't compete. (Declaration of Victoria Harper, Vice President and CFO of the MCI Group, FCC Docket CC No. 01-09, 4/25/01 at 15.) "Because of Verizon's above-cost UNE rates, Worldcom cannot make a profit by offering local service in Massachusetts. To the contrary, Worldcom would lose money on every customer to whom it sold service. WorldCom has calculated that if it charged local customers the same rate that Verizon charges, the amount of money it would pay for UNEs would almost equal the amount it collects from the customer, without even accounting for the significant internal costs associated with billing, customer services, sales/acquisition costs, and bad debt. The negligible "gross margin" (after accounting for the high UNE costs and internal costs) would leave WorldCom (or any other CLEC) losing a substantial amount of money for each customer it served." This predatory pricing structure has also hit the Internet Providers trying to resell DSL services. In Kentucky, the PSC found that BellSouth's pricing for DSL to Internet Providers was discriminatory, see: http://www.iglou.com, Also, NNI filed a Complaint with the Public Service Commission in New York, demonstrating that for every sale of a DSL line by a competitive ISP, the company would lose money. See: http://newnetworks.com/baadslscrewisp.htm
Part XII Excess Profits Result From the Bells’ Failure to Deliver on Their Broadband Promises Much of the Bells’ excess profits are a result of having mislead the public into believing that the companies needed financial incentives to deploy broadband networks. In Massachusetts, for example, NYNEX (now Verizon) specifically stated that it would be deploying 330,000 lines of full motion video services to the public by 1995, if only state laws were changed to give the company more money to be used for new construction. Similar promises were made to regulators in other New England states, such as Rhode Island, which subsequently came under Verizon’s control. The state laws were changed, but the broadband networks were never built. The result, as detailed in the companies’ annual earnings reports to the FCC, was that Verizon greatly benefited from alternative regulation throughout New England. Dividends paid to Verizon shareholders doubled from $424 million in 1994 to a whopping $845 million in 1998. Moreover, Verizon (New England Telephone) vastly increased its deductions based on the depreciation of its copper wire network, garnering nearly $90 million more by 1998 in the states formerly served by New England Telephone, including Massachusetts. All of these states were subject to some form of alternative regulation. (Note: Unfortunately, the information supplied by the FCC for 1999 does not match previous years because the "Directory" business, which was included in previous years, was removed from the calculations. However, the information supplied for 1999 showed that depreciation was $1, 043, a $181 million increase,) Dividends and Depreciation Expenses, 1994 and 1998 (In the millions) 1994 1998 Change Bell Atlantic
Dividends $424 $845 Doubled Depreciation
Expenses $862 $952 $90 million
increase According to the Massachusetts Alternate Regulation Plan, depreciation expenses of $100 million per year for five years were supposed to be related to NYNEX’s installation and deployment of the fiber optic network. But NYNEX didn’t spend the $500 million, as promised, to deploy fiber. So while revenues increased 15% between 1994 and 1998, expenses only increased by 6%. As a result, Operating Income (revenues minus expenses) rose 56%. Revenues, Expenses, and Income, 1994 Through 1998 1994 1995 1996 1997 1998 Increase Total
Revenues
(in
billions) $4.1 $4.2 $4.6 $4.5 $4.7 15% Operating
Expenses (in billions) $3.3 $3.3 $3.3 $3.4 $3.5 6% Operating Income
(in millions) $790 $905 $1,299 $1,096 $1,230 56% Since the 1980s, the Bells have been working to convince regulators to "cap" the price that the companies can charge for regulated services. Referred to as "price caps" in many states, this type of alternate regulation was touted as a good deal for customers, because it would limit price increases. But it was actually a ruse. Costs have been declining steadily in the telephone industry, so the real effect of "price caps" was to keep prices up while the network costs declined. "Price caps" were also supposed to give the Bells more freedom to invest extra profits in building advanced networks. We will return to this issue later in this report. For a detailed report on what happened in Massachusetts see our Complaint to the Mass. State public service commission. http://newnetworks.com/Masscomplaintsummary.html
Part XIII Are Ratepayers Funding Non-Regulated Businesses? --- Illegal Cross-Subsidization May Be Common. It is supposed to be illegal to have regulated monopoly customers pay for services they may never use or want. In the name of "Broadband" however, this seems to be beside the point. For example, DSL service is supposed to be deregulated and a competitive product and therefore, the Bell shareholders, not the customers, are supposed to fund DSL deployment. However, many states, including Louisiana, have decided to let DSL deployments be funded through state alternate regulations---i.e., customers. According to an article by the Associated Press, (Louisiana PSC orders BellSouth to add high-tech systems, (4/21/00)). BellSouth agreed to dedicate money for implementing DSL. "$140 million will be dedicated to implementing advanced technology, including BellSouth’s version of digital subscriber line, or DSL, in homes and businesses". The state Commission's rational for this action was that the state will fall behind if these services aren’t delivered. The article stated: "We don’t want telephone customers in Louisiana to fall behind the times in having technology in the home," commissioner Don Owen of Shreveport told The Times of Shreveport on Wednesday". BellSouth was pleased with this decision. "We commend the commission. We think it’s a pro-consumer approach," BellSouth's Kevin McCotter said. "There is a high level of demand for high-speed Internet access. From an economic development perspective, this type of broadband technology is the information infrastructure that businesses require to compete. Information is a commodity. Speed is the competitive advantage." However, there are serious problems with this 'scheme' First, DSL is a non-regulated service and is therefore supposed to be funded by the BellSouth shareholders, not the customers. This is not part of local residential service and therefore, customers who may never use the service are paying for it. Also, considering BellSouth's profit margins, customers should have received lower prices or even refunds. Ironically, ALL customers will be paying retail prices for DSL, even though they were the primary investors. Secondly, it places all competitors at a distinct disadvantage because the services they buy from BellSouth are inflated with additional costs. But more to the point, the customer funding gives the Bell company an enormous advantage. Also, if there is "a high level of demand", as BellSouth states, then why does BellSouth need additional financial support? We bring this matter up because Congress is considering new legislation to give the Bells even more financial incentives to deploy broadband, regardless of the amounts they already received.
Part XIV How Much
Do the Phone Networks Really Cost? The costs of phone service are based on the costs of the network, and if the wiring has not been replaced in this neighborhood, why are customers being charged retail prices for service? And if the wiring is so old, hasn't it been 'written-off' and the deductions taken? Anecdotal stories aside, there are a host of other issues about the costs of the networks, either to customers or to competitors, which directly effects the price of services--- as well as the Bell profits. Some critical issues --- How many times have customers paid for the same wiring? Was it written-off more than once? How has it effected rates? Other related issues:
How much do the networks really cost and how has it effected rates and profits? Part XIV The Bells Failed to Roll out the Promised Fiber- optic Broadband Services ---And Kept the Money: The Largest "Bait and Switch" in Telecom History. By 2000, half of America should have been rewired with a fiber-optic network by the Bell companies. State laws were changed to give the Bells more money for construction. None of this work was done though America was charged over $50 billion dollars in extra phonebill charges--- excess profits. In our previous model for Massachusetts, we demonstrated how Verizon (NYNEX), using promises to roll out a fiber-optic network was able to garner more profits. However, it is a little known fact that starting in the early 1990's, all of the Bells made promises to customers and state regulators that they would rewire their states with fiber optics, delivering an incredible array of new very high- speed broadband services---100 times faster than current Bell advanced network, ADSL. (ADSL is an inferior product that is based on the older copper wiring and has numerous documented problems since the Bell companies never properly upgraded their copper-based networks.) Using these promises, the Bells were able to change (deregulate) state and federal laws, which gave them more profits to be used for new construction. The construction never happened, and we estimate that customers have already paid over $50 billion in extra charges on America' telephone bills and it continues today unabated. It is the one of the primary reasons the Bells are so profitable in 2001. To read our companion report, "How the
Bells Stole America's Digital Future" see: To read a compilation of Bell statements "Bells Greatest Broadband Failures": http://www.newnetworks.com/bellbroadbandfailures.html To read a case history of what happened in Massachusetts see: http://newnetworks.com/Masscomplaintsummary.html http://www.newnetworks.com/chapter4.html For example, in 1997, the NJ Public Advocate wrote 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." Bell Atlantic/Pennsylvania Bell's (now Verizon) 1998 Annual Report stated that 20% of the entire state was supposed to be rewired with "universal broadband". "The Pennsylvania Plan requires deployment of a universal broadband network, which must be completed in phases: 20% by 1998... Deployment must be reasonably balanced among urban, suburban and rural areas." These quotes are troubling not only because of the obvious false and misleading statements made by the Bell companies about their fiber-based plans. Congress is currently discussing numerous new bills to give the Bell companies more financial incentives to roll out DSL and broadband, even though history clearly demonstrates that the Bell companies already received massive amounts of customer largesse for the broadband promises. There are also proposed new laws to incentivize the local phone companies to roll out services in underserved areas, even though in many states the promises made, such as in the Pennsylvania, were to not show favoritism between rural and urban areas. Or take this quote from Ameritech Ohio, which stated that it would have all schools, libraries, etc. wired by 2000. (Ohio Alternate Regulation Plan, September 20, 1994) "21. INFRASTRUCTURE COMMITMENTS The Company's infrastructure commitment in this Plan shall consist of the commitment to deploy, within five years of the effective date of the Plan and within the Company's existing service territory, broadband two-way fully interactive high quality distance learning capabilities to all state chartered high schools including vocational, technical schools, colleges and universities; deploy broadband facilities to all hospitals, libraries, county jails and state, county and federal court buildings…" Besides the obvious --- that customers never got what they paid for, the other problem all of these plans bring up is -- of the current profits, how much of that was supposed to be targeted for this new construction? There is still another question, which we will return to in the companion report "The Real Truth In Billing". Today, on every phonebill, there are added charges, known as the E-Rate, for the school and library funds. If the Bells' original obligations were to wire schools, etc. have customers been paying twice? Also, though the schools, etc, get discounts, these discounts are from the Bells' inflated business retail rates. This report clearly demonstrates that the Bell monopoly profits from local phone customers are neither fair nor reasonable. This is harming customers and competitors. Therefore, acting in the public interest, Congress, the state commissions, the Attorney Generals' Offices, and the Federal Communications Commission (FCC) should:
APPENDIX ONE: The Methodology. (in the millions) Revenues Profits %
Profits 6% Over
6% 5% Over 5% Verizon $ 64,707
$ 10,810
17% $ 3,882 $ 6,928 $ 3,235 $ 7,575 BellSouth $ 26,151
$ 4,220 16% $ 1,569 $ 2,651 $ 1,308 $ 2,912 SBC $ 51,476
$ 7,967 15% $ 3,089 $ 4,878 $ 2,574 $ 5,393 $142,334
$ 22,997
16% $ 8,540 $14,457 $ 7,117 $15,880 Avg.
Bell $ 17,792
$ 2,875 $ 1,068 $ 1,807 $ 890 $ 1,985 Total $160,126
$ 25,872
$ 9,608 $16,264 $ 8,006 $17,865 Total Annual
Overcharging, 2000 Per Household
Starting in 1992, NNI has published reports or updated our research on Bell revenues, profits and overcharging. In previous reports we used a number of criteria to analyze overcharging. The analysis above is the "simple" analysis It is based on the taking information directly from a reputable source, Business Week, and doing overall comparisons of the Bell companies as compared to other American corporations. The Bells are supposed to be regulated monopolies, and therefore, the Bells' profit margins should be lower than companies with competition. The fundamental "fair and reasonable" laws were created because these companies are utilities and customers do not have significant choices. Therefore, like the various state and federal laws, the issue is "fair and reasonable" fees --- profits should reflect the Bells overall monopoly behavior. However, for this model, we adjusted Bell profits margins to be somewhat higher than the other companies--- about 5.5%, so as to soften critic's complaints. The exhibit above details the Bells' (including Qwest and GTE) total revenues and profits, and then uses the profit margins of 6% and 5% as the standard (based on the Business Week's Scoreboard which had "Utilities" having a 5%, profit margin, "All Industry" having a 4% profit margin and the Top 9 companies being at 6%. Therefore, profits "Over 6%" and "Over 5%" are considered to be overcharging. Averaging the two percentages, representing a 5.5% profit margin, the total overcharging comes to $17.1 (The "average Bell" was the total of original Bell companies, divided by 7, which included GTE. This number was used for Qwest, which was not included in the Scoreboard) With GTE, there are now 8 original Bells.) We can use this calculation because we previously demonstrated that the overwhelming majority of profits comes from the local phone customer. Also, there are approximately 103 million US households (source: World Almanac, 2000). We estimate that there are approximately 85 million households with Bell (GTE) phone service. (About 7% of US households don't have phone service.) Therefore, normalizing 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. We admit there are a number of caveats to this simple analysis.
A More Detailed Analysis: Local service overcharging can come in many forms. In our previous study "Bell Revenues, Expenditures and Profits", sold through Phillips Business Inc., 1994, we used another much more complicated analysis of Bell overcharging, which included dividends, depreciation and amortization, and a host of other factors. For example, we contested the sale of BellCore, which was the 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 done 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. The Bells even kept whatever profits were made. And since the price of Bellcore was added to every customer, the current price of service in virtually every state (except New York and possibly a few other states) still includes the Bellcore expenses --- even today. Therefore, in our original models we included the added expenses. Much of this material was summarized in "The Unauthorized Bio of the Baby Bells". Also, over the last decade, NNI has requested numerous audits and without them, 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
APPENDIX 2: EMAIL ABOUT PORTABILITY Well, here goes: In early March I called Verizon to arrange for my current phone # to be switched to my new apt by the end of the month, once I moved. Verizon checked my new address & advised me that since I was not moving within my zip code, that I could not keep my number. I then asked them why do I pay for number portability, monthly, if the number is not portable; Verizon's reply is that the number is portable within a zip code, not if you move out of the zip; even though I'm moving 20 blocks. I then asked Jewel Gaddy (customer service rep, Verizon), if I could keep my # if I was willing to pay a fee & what would that fee be. She said that I would be able to keep the # for a fee, but she did not know what the fee would be. She said that a Verizon "troubleshooter" would call me with the details. Approx. 2 days later the "troubleshooter" called & left me a message, telling me that they would move the number for a one time fee of $558.00 and a monthly charge of $96.04 (every month for each month I use the #). The next day I called MCI and asked them about # portability, they too said that since I was moving out of my zip code, that I could not keep the #, not even for a fee. I then told them that the only reason I wanted to keep my # was because I wanted a 212 number, and I had already been told by Verizon that "all new numbers were 646; if I wanted a 212 I would have to be wait listed, and it may take over 1 year to get a 212 #, I would have to call periodically to see if new 212 numbers became available". I told MCI that I would like to become their customer if they could give me a "212" #. They placed me on hold to check if any were available; 3 minutes later they came back & said "yes, we can give you a 212 # , it can be activated within the next 2wks, you'll have to call back 1 week before, so we can advise you the date service will be available". They told me my new # would be 212 396-9154, so I signed up with MCI in mid-March, expecting that my new # would be activated by the end of March when i moved. Approx. an hour after I signed up with MCI, I received a voice message from the Verizon customer service rep; Jewel Gaddy, "Ms.Moore, I was just notified that you left Verizon for MCI, please call me when you get this, we can talk about reducing the fees for keeping your # . Please call back to talk about this". I did not call Jewel Gaddy back. On March 21 (I week before I moved), I called MCI to find out when the line would be activated. The customer service rep said "we are having trouble activating 'cause we can not verify your address, so please repeat your new address", well I repeated the exact info they had in their system, they then ask if "I could be incorrect in my new address & that maybe my address is on the border of another city & it may be listed in another city" I tried rationally explaining that I lived on Manhattan Island & that the building I'm moving to does NOT border another city/town. Well, they needed to contact Verizon & recheck, 'cause Verizon was telling them that my address did not exist. The next day, they were still telling me that the 20 story building I was moving to, did not exist. They told me that they always have trouble with "212" numbers in NY and they can't give me the # until Verizon verifies my address. I should call back in a few days to recheck. Now it's the end of March & I'm living at the address ("that does not exist") without a phone. So, I hung up with MCI and called Verizon. I told the Verizon rep the whole story of how I became an MCI customer, only because they had promised me a "212 #" & now they were not delivering on their promise & how they could not find my address in their computer system and that I'm living without a phone, and all i really want is a NYC # that begins with "212", and if they could give me one I would return to Verizon. Verizon said that they do occasionally have 212 #'s and they thought it was typical that MCI could not find my building; "since MCI is in Arizona, they are not familiar with NYC, like Verizon is". They put me on hold to check if they had a 212 # available for me; and they had one available for me (what luck!!!), so I re-signed with Verizon & service would be activated with in 36hrs!!! and it was. I've had service since April 4th at 3:30pm. Well, that's the whole story. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
