====================EXECUTIVE SUMMARY ====================
Idaho Attorneys General Offices
AND ON THE NEED TO INVESTIGATE US WEST'S FAILED DEPLOYMENT OF ADVANCED NETWORKS, TREATMENT OF COMPETITORS AND THE IMPACTS ON CUSTOMERS
Bruce A. Kushnick
NEW NETWORKS INSTITUTE
826 Broadway, Suite 900
New York, New York 10003
e-mail [email protected]
Boise, Idaho 83706
Dated: November 4th, 1999
With all the current talk about MediaOne, a spin-off of US West, (one of the original 7 Regional Bells), and US West's proposed merger with Qwest Communications, it is surprising that few regulators have questioned certain of US West's other recent maneuvers.
In hopes of breaking this silence, we are calling on the state Public Service Commissions and the Attorneys General offices in the 14 states where US West operates to immediately investigate the possibility that certain of US West's actions materially benefited the company's shareholders while illegally costing the company's customers a sum of money that is potentially very large.
We estimate that over $15 billion dollars is in question.
We realize that state regulations vary greatly and it is hard for us to determine which states have addressed these important issues. However, there are no major indications from US West's annual reports to indicate that adequate compensation has been paid to US West customers as a consequence of these maneuvers.
Also, we would like to stress that AT&T is blameless in any and all violations mentioned in this complaint regarding MediaOne. Our Complaint clearly shows that US West is responsible for these actions. As the authors have discussed in other writings, AT&T's purchase of MediaOne may in fact be aiding MediaOne's cable users and the future deployment of broadband services.
In 1995, US West split itself into two parts, US West Communications and US West Media Group. US West Communications retained the local phone companies while the Media Group received numerous cellular and cable television properties as well as the company's lucrative home directory business. In 1998, US West converted the Media Group into MediaOne, a separate and independent entity. During that same year, US West/MediaOne spun-off its cellular telephone business to AirTouch.
We call for an investigation because:
In addition to the similarities between the MediaOne deal and Pac Tel's spin-off of Airtouch, audits in California, Ohio and Wisconsin clearly demonstrate that the regional Bell companies used rate-payer monies to improperly fund enterprises as various as the development of the PCS telephone business and the Directory services. ("Audit of the Affiliate Interests of the Pacific Telesis Group, 1994" "Review of Affiliate Transactions at Ameritech Services Inc., May 95" National Association of Regulatory Utility Commissioners)
Pac Bell's audit stated that:
"Pac Bells Directory Research and development was funded by the general body of ratepayers",
while Ohio and Wisconsin's audit found that:
"Ameritech charged ratepayers for developing new products, from non-regulated data services and personal communications to video conferencing development."
With these precedents in mind, it is important to discover if US West's customers repaid any or all of the MediaOne debt, and if their monies were used to fund any or all of the products and services that were spun off.
These issues are being played against a backdrop of other problems and questionable actions, which make the possible case against US West appear to be even more compelling.
1) US West Failed To Deploy Advanced Networks In A Timely Fashion. By its own accounting, US West was supposed to provide almost 3 million households with 500 channel full motion video interactive services. The US West 1993 Annual Report states:
"In 1993 the company announced its intentions to build a 'broadband', interactive telecommunications network... US West anticipates converting 100,000 access lines to this technology by the end of 1994, and 500,000 access lines annually beginning in 1995."
This is not ADSL, the Bell's current "advanced network" service. What was promised instead was an interactive broadband fiber-optic based digital service about 700 times more powerful than ADSL. In Omaha, Nebraska, the case of Cottonwood vs US West clearly outlines how US West had promised over 500 digital channels, but instead rolled out cable services. In return for the promised network, US West received a number of accounting changes that were highly advantageous to the company. The network was never deployed. The advantageous accounting changes remain in place.
2) US West's Overall Profits are Outrageous---Why? US West's local phone service remains a monopoly and as such is supposed to produce profits that are "fair and reasonable", as are the services of all other utilities. However, US West has now become one of the most profitable companies in America..
A comparison of the earnings of US West Communications and the earnings of five well-known publicly traded companies, Nike, Exxon, McDonalds, Walt Disney, and Dow Jones, shows that US West outperformed the latter group by 155% in industry- standard return-on-equity, by 181% in earnings per share, and by 106% in net profit.
3) Outrageous Profits From Not Delivering Advanced Networks? It is a little known fact that most states gave the Bells massive financial incentives based on promised deployment of advanced network, as we document elsewhere. The issue of profits also begs a question--- were specific acquisitions made and services and products developed with monies that was supposed to be used in the construction of new networks?
4) Did US West Write-off a Network it Never Replaced And Take Over $3 Billion Dollars in Deductions? In 1998, New Networks Institute filed a complaint with the Criminal Justice Division of the Internal Revenue Service (IRS), against all of the Bell companies, including US West. Our finding was that US West and the other Bells took over $21 billion dollars in write-offs, claiming they were replacing the older copper wiring with new fiber-optic wiring. The wiring was never replaced, though we contend the Bells took the deductions.
US West's total one-time deduction was $3,123,000,000.00.
In November 1999, NNI refiled this complaint with additional information that supports our original claim.
5) Customer Services Issues Numerous Public Utilities Commissions, including those in New York and Ohio, have found a drop in the Bells' performance of customer services, i.e. everything from answering inquiries to making sure that customers receive installations and repairs in a timely fashion. Caused mainly through massive staff cuts to save money, these problems continue today. In May, 1999, the Colorado Public Service Commission issued this formal notice:
"PUC staff outlined possible violations of Commission rules concerning repair response time, the number of allowable customer trouble reports, speed of answering calls to the company's business offices and the provision of timely service."
6) Anti-Competitive Behavior and Sub-Standard Customer Services being provided to Internet Service and local phone competitors. In recent testimony before a Congressional hearing on Rural Telecommunications, (9/9/99) numerous Internet Service Providers and competitive local exchange companies (CLECs) testified that US West had created a series of roadblocks to competition, including failure to deliver on service orders and the use of anti-competitive practices to lure customers away from smaller internet providers. More recently, 10/13/99, the USISPA (United States Internet Service Providers Association) held a press conference and members from Washington, Arizona, New Mexico, Wyoming, and Utah all told horror stories about US West's behavior. (For more info go to http://www.usispa.org)
NNI independently documented the problems through interviews and a survey of Internet providers. The problems are widespread and need immediate attention.
7) Executive Compensation. There are a number of issues surrounding executive compensation for various affiliate transactions. In the transactions surrounding Directory, certain of the company's top executives received substantial holdings of stock and substantial stock options, in return for which no services were performed--except the moving about of the company's directory services in an opportunistic fashion that appears to have been designed to further the personal enrichment of the relevant executives. We believe that, at best, a major conflict of interest may have occurred. For example, at the end of the complex but puzzling maneuvers involving the Directory business, Messers Lillis and McCormick received a dividend of 1.5 million shares. In addition, Mr. McCormick received 212,230 stock options. The customers, whose monies were presumably used to develop the directory services, received nothing. At no point can we discover any services that Messers Lillis and McCormick performed to earn this reward. Indeed, a suspicion is raised that the maneuvers were performed precisely so that Messers Lillis and McCormick would receive this reward, and for no other reason. We ask that this be investigated.
Last, Mr. McCormick received $19 million in severance pay. In view of the constraints on profits and executive compensation under which US West, a monopoly business, is supposed to operate-but under which it does not appear to operate-we ask what possible justification exists for the payment of this staggering sum.
We believe that investigations will show that US West's business practices have rewarded the company's shareholders and executives while costing its customers considerable monies and failing to serve the public interest.
About the Complainants
New Networks Institute ("NNI") was founded in 1992. Its mission is to explore, on a totally independent basis, the impact of the break-up of AT&T and the creation of the Regional Bell Operating Companies ("RBOCs") on both the telephone subscribers and on the deployment of new and advanced telecommunications networks. Since that time, the NNI has conducted extensive research on these topics. Titled "The Future of the Information Age," this seven-year analysis consists of over 1,900 pages in 14 volumes, with over 910 exhibits, two computer databases, and data from more than 2,000 consumer interviews conducted independently through Fairfield Research. We have recently updated this research in the form of a book, The Unauthorized Biography of the Baby Bells & Info-Scandal, published March 1999. NNI's research is independently funded from the sales of books, reports and databases. No company, lobbying organization, trade association or political party had any input, either editorial or financial.
LJ Davis is an internationally-known writer, novelist and reporter whose work has appeared in publications as various as the New York Times and Harper's Magazine. His books include Bad Money, 1981; Aristotle and Christina, 1986; and more recently, The Billionaire Shell Game, 1998, which tells the story of the failed deployment of advanced telecommunications networks. His numerous awards include "Gerald Loeb", 1984; "Champion-Tuck", 1986; and "National Magazine", 1986. LJ Davis is a landowner in Idaho, a US West state.