Who Will Pay? You Will

A New York telecom analyst accuses the Baby Bells of massive overcharges and provides research to back his claims

The Baby Bells have been ringing up astronomical profits by bilking ratepayers out of billions of dollars, according to a telecom market analyst's new study.

Bruce Kushnick, president of New Networks Institute, recently released a 225-page analysis, "Regional Bell Earnings, Expenditures, and Profits," in which he accuses the Regional Bell Operating Companies of an eye-popping litany of abuses carried out under the apparently not-so-watchful eyes of regulators.

Kushnick said that 1984 marked the death of one national telecommunications monopoly -- the Bell System -- and the birth of a new one -- the seven RBOCs spread coast-to-coast.

"The bottom line is the RBOCs have been acting in concert," Kushnick said. "It's a de facto nationwide monopoly."

Kushnick, formerly a senior telecom analyst with Link Resources, founded the New York City-based New Networks Institute after a glance at some select reading matter set his alarm bells ringing.

"In 1992 I read my phone bill, and it was an epiphany that changed my life," said Kushnick. "We have been overcharged by a ridiculous amount of money."

In the report, the fourth in a series of five entitled "Ten Years Since Divestiture: The Future of the Information Age," Kushnick accuses the Baby Bells of overcharging ratepayers a whopping $75 billion since 1984.

Not surprisingly, Kushnick's assertions have raised some RBOC hackles. "We have the most regulated industry in America -- we can't raise or lower prices without permission, so it's just ludicrous to say we are overcharging," said Chris Collins, spokesman for the United States Telephone Association, a trade group representing local exchange carriers. "If Mr. Kushnick has evidence that we are overcharging, he ought to go to the district attorney -- put up or shut up."

Kushnick's research places the RBOCs among the nation's most profitable companies, paying dividends 100 percent higher than the Standard & Poors 100. His report attributes much of the Baby Bells' stellar success to regulated rate increases of telephone service it says has averaged 250 percent since their birth, while average costs for deregulated services such as wiring and installation exploded by an average 650 percent.

Conversely, the report states, the Baby Bells were often badly burned whenever they ventured outside the local phone business. For instance, the report claims the Bells collectively squandered $6.5 billion on computer leasing and another $300 million in information services.

Meanwhile, capital expenditure on infrastructure has been flat, he said, and is actually down 74 percent when the consumer price index is taken into account. The RBOCs have, however, collectively invested $19 billion overseas while slashing costs at home, according to the report.

The Baby Bells reduced their largest expense -- employees -- by jettisoning nearly 100,000 of them since the breakup of Ma Bell, he said, reducing the number of employees per line by 50 percent.

"If they cut employees and new construction has been down, why didn't prices go down?" Kushnick asks. "Prices went up for the exact same services."

Kushnick said regulators have allowed the RBOCs to redefine the term "basic service" four times since divestiture. Basic service has become synonymous with "unbundling" -- meaning that the phone companies now charge separately for each and every service they offer, he said.

He likened the scenario to ordering a $10 steak dinner in 1984 that included an appetizer, soup and dessert. That same dinner in 1994 cost $20, and appetizers, soup and dessert are all extra. "We are paying a lot more for a lot less," he said.

Although he accuses the RBOCs of a massive, ongoing rip-off, Kushnick lays the blame for the situation squarely on the shoulders of state and federal regulators.

The Bells, he said, are guarded by regulatory watch dogs that act more like lap dogs when it comes to monitoring their activities. For example, he charges, the FCC's statistics on the Bells are misleading, inaccurate and incomplete, rendering meaningful regulation all but impossible. "I found that FCC information is wrong across the board," he charged.

New Networks Institute filed a formal complaint with the FCC concerning their information on rates, overall industry statistics, their analysis of RBOC expenditures and profits, and the incompatibility of FCC data with state and phone company data.

In his report, Kushnick calls for an investigation of the FCC and other government agencies' collection techniques, as well as a freeze on further RBOC activity in non-telecommunications products and services until there is true local competition.

A February 1993 General Accounting Office report, "FCC's Oversight Efforts to Control Cross Subsidization," acknowledged the FCC's inability to effectively oversee RBOC activities.

According to the report, the FCC can only cover each of the 297 assigned audit areas once every 18 years, and on average, regularly audits only 16 of those areas necessary to assess RBOC compliance with FCC standards.

State public utility commissions, Kushnick said, are consistently outmaneuvered, outgunned and outspent by the Bells. "In many states they cannot adequately monitor the phone companies or protect the consumer," he said.

During the past decade, he said, many states adopted what is known as "alternative regulation," deregulating certain Baby Bell activities like call-waiting and call-forwarding, in the hopes they would use the windfall to upgrade their networks to make them infobahn-ready.

Instead, Kushnick said, alternative regulation allowed the Bells to consistently jack up the price for a plethora of services and divert the profits to lobbying efforts, shareholder dividends and overseas investments. What the Bells have spent on infrastructure, he charges, has come out of regulated ratepayer revenues, strengthening the Bells' dominant status against future competitors that lack access to a regulated revenue stream.

"State laws allow them to build networks we pay for and they own, which is completely anti-competitive," he said.

Kushnick's report also cites a study conducted by the Michigan Public Service Commission done after that state's first year of alternative regulation.

While the PUC found that deregulation of non-basic service coupled with the pricing freedom for toll and access service "permitted Michigan Bell to prosper financially," network construction programs were sharply curtailed and Michigan Bell's workforce was "appreciably reduced."

The commission also found Michigan Bell somewhat less than forthcoming about its business activities. The commission's report said Michigan Bell hid behind the Freedom of Information Act on many issues and refused to divulge basic information such as the installed base of products, earnings and profits.

"Of the 141 items of information requested, Michigan Bell claimed exemption from providing answers to 81," the study said. "Michigan Bell also asked for Freedom of Information protection on 26 other items, thus limiting their usefulness for the report," the commission reported.

"When a publicly regulated utility is required by law to reveal necessary information and refuses to do so, the only people who can be blamed are those not enforcing the law," said a telecom analyst who asked not to be identified.

The analyst said Kushnick's accusations are on the money -- "He's right" -- and commented on the immense and inappropriate clout RBOCs wield at the state level.

State regulators, according to the analyst, have been accommodating the Baby Bells for years because of the extreme pressure exerted by politicians to protect their largest campaign contributors.

"Who else pays for state campaigns? It's the power and phone companies and the biggest contributors are the RBOCs," said the analyst. "It's frightening that they have had so much political power for so long because they are getting away with bloody murder."

Kushnick said the Baby Bell's ability to obfuscate their numbers, bill ratepayers for the cost of securing advantages over future rivals, and their history of obstructing potential competitors bodes ill for the future of local competition.

Cable companies, for instance, will have to rewire homes and lack the extensive and expensive switching network the Bells operate. Full interconnection between RBOCs and future competitors, either long distance or alternative access carriers, he said, is also years away, for technical and business reasons. "Believe me, they will have their long-distance businesses up and running the day they are ready to offer full interconnection." Nevertheless, Kushnick said, the much-hyped telecom war between the local and long-distance companies, which he described as "the very wealthy fighting the very rich," misses the point. "This is beyond a turf war between long distance and the Bells, it's about a third party, the subscribers," he said. "The problem is it's us against them, and based on the way things are going, we will lose."

Kushnick's voice not the only bell ringing

While Bruce Kushnick may appear to be a lone gadfly intent on tarnishing the Baby Bells, he is not alone. In February, the Consumer Federation of America released an analysis of Baby Bell finances by Mark Cooper, the organization's director of research, who leveled a number of charges at the RBOCs.

Cooper's report, "Milking the Monopoly: Excess Earnings and Diversification of the Baby Bells Since Divestiture," estimated total Bell overcharges at $35 billion.

Since 1986, Cooper said, the Baby Bells have paid $35 billion in dividends, invested $13 billion in non-telco activities and invested only $1 billion back in the public switched network. As profits catapulted, capital spending as a percentage of cash flow declined from more than 80 percent in 1984 to approximately 65 percent a decade later. "These funds have not been plowed back into the telephone network," Cooper said. "Instead, massive resources have been diverted out of the industry." In his report, Cooper compared the earnings and capital structure of the Bells to other infotechs they will be competing against and found the RBOCs' return on equity "significantly exceeds" that of future competitors.

Cooper's report also focused on the advantage the Bells have over other competitors, their ability to use their regulated monopoly status to gain unfair advantages over competitors who operate solely in the open market.

"The Baby Bells carry over 80 percent debt in their unregulated subsidiaries, without paying a penalty in the cost of borrowing, by leveraging the monopoly ratepayer cash flow to underwrite the debt of non-telephone subsidies," Cooper writes. "This ability to leverage ratepayers gives the Baby Bells an immense advantage over the other firms in the information age industries, who must carry much more equity at risk." Cooper said his findings raise concerns about the future of the infobahn - or more specifically, about who will control the infobahn's tollbooths.

"The fact we see a Baby Bell at the center of each of the megafirms emerging in the information age has little to do with technology and a great deal to do with this current and future cash flow," Cooper said.

--Jorgen Wouters

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