Game of Phones: How Verizon is Gaming the FCC and Its Customers

As reported by The Verge: Tomorrow, the FCC starts deciding the future of the internet. It’s an emotional, controversial, drawn-out battle that has been building for years, pitting some of the biggest internet providers in the world against the government, American citizens, and virtually every denizen of the web.

At issue is how (or if) the FCC will protect the internet’s openness, free of special treatment and data “fast lanes” offered to the highest bidders. And while Verizon, Comcast, AT&T, and others have been clamoring to prevent heavy regulation from being considered this week, it turns out that communications providers have actually been working the system for years, using exactly this kind of regulation to their advantage. In fact, strict FCC rules have helped Verizon build a largelyunregulated network — a network that’s valued in the tens of billions of dollars.

Today New York’s Public Utility Law Project (PULP) published a report, authored by New Networks, which contains previously unseen documents. It demonstrates how Verizon deliberately moves back and forth between regulatory regimes, classifying its infrastructure either like a heavily regulated telephone network or a deregulated information service depending on its needs. The chicanery has allowed Verizon to raise telephone rates, all the while missing commitments for high-speed internet deployment.

It’s a mess — and, by all appearances, it’s completely legal.

UNBUNDLING THE RULES
Communication regulation is a century-old notion, spurred by the early 20th century’s dominance of AT&T in telephony (and RCA in radio). The concept was simple enough: in exchange for an effective monopoly over a medium that was quickly becoming vitally important, AT&T was subject to a unique level of government oversight. These regulations were eventually organized into the Communications Act of 1934 — a set of laws that dictated American communications policy virtually unchanged for over 60 years.

In submitting to regulation, AT&T was designated a "common carrier" — in broad terms, an organization that will deliver something from anyone to anyone else — under a critical section of the Communications Act called Title II. When the Communications Act was updated in 1996, it appeared that broadband internet providers might fall under the same strict rules, but after a series of hearings, the FCC ultimately ruled in 2002 that cable modems were "information services," a far less restrictive designation. In 2005, it ruled that DSL fell into the same category; today, effectively all internet connections are beyond the reach of Title II.

In the early years of home broadband, before the nightmare that now rests on the FCC’s desk, deregulation seemed to be a fruitful strategy: communications companies pumped billions into constructing new high-speed internet networks. Verizon negotiated an agreement to wire the entire state of New Jersey, promising every citizen in its territory would have access to high-speed internet by 2010. In New York, things were done more locally; New York City, for example, struck a deal with Verizon to get broadband to all five boroughs by this year. A similar process played out in states and cities across the US.

When Verizon talked about this broadband infrastructure with local regulators, however, it made clear it would lay the fiber for its next-generation network as a "common carrier pursuant to Title II of the Communications Act of 1934." In other words, Verizon was making a move that, at a glance, seems counterintuitive: it asked for more regulation by building its fiber network under the same tight rules as the old telephone lines.

CARRIER CHAMELEON
Why would Verizon — which, like all big telecom companies, is generally averse to government regulation — make a point of repeatedly noting that its fiber network fell under the same strict rules as the telephone system?

There are two reasons. First, Title II designation gives carriers broad power to compel other utilities — power, water, and so on — to give them access to existing infrastructure for a federally controlled price, which makes it simpler and more cost-effective for cables to be run. And that infrastructure adds up: poles, ducts, conduits running beneath roads, the list goes on. Second, Title II gave Verizon a unique opportunity to justify boosting telephone rates in discussions with regulators, arguing that these phone calls would run over the same fiber used by FiOS, Verizon’s home internet service. According to PULP’s report, Verizon raised traditional wired telephone rates in New York some 84 percent between 2006 and 2009, blessed by regulators in return for its "massive investment in fiber optics."

Of course, telephone service isn’t the real reason Verizon has spent billions on fiber: landlines have long been a dying business, expedited on their trip to the grave by the smartphone revolution of the past decade. Rather, the fiber was laid to carry data — the very data Verizon doesn’t want subject to Title II regulation. It’s for FiOS in the home and for wireless backhaul, the backbone that connects cellular towers (including Verizon Wireless’ own) to the internet.
And as landline telephones lose ground to newer, better, and faster technologies, the folks left on these copper wires disproportionately skew toward low-income populations and the elderly — the demographics least likely to be able to take advantage of broadband. Yet it was their rate increases that were being used to subsidize the investment in Verizon’s fiber network. The PULP report estimates these rate increases have generated $4.4 billion in additional revenue for Verizon in New York alone, money that’s funneled directly from a Title II service to an array of services that currently lie beyond Title II’s reach.

It’s a tactic that isn’t illegal, and Verizon itself has made no particular effort to hide it. Speaking at an investor conference in 2012, Verizon CFO Fran Shammo spelled it out: "…the fact of the matter is Wireline capital — and I won’t get the number but it’s pretty substantial — is being spent on the Wireline side of the house to support the Wireless growth. So the IP backbone, the data transmission, fiber to the cell, that is all on the Wireline books but it’s all being built for the Wireless Company."
Asked about the use of the common carrier designation, a Verizon spokesman told The Verge that for the purposes of constructing the network, it relied on the authority it had by offering Title II telephone services, but that the services it offers over that fiber — voice, cable, and high speed internet — are each legally distinct for purposes of deciding regulatory status.

HAVING IT BOTH WAYS
Still, the tactic strikes many as hypocritical. "The network has to be built as a common carrier network, because there is no way to get that infrastructure in place without it," says Earl Comstock, a lawyer at Eckert Seamans specializing in net neutrality who helped draft the Telecommunications Act of 1996. "Verizon knows it needs to offer just enough basic voice services on its fiber to claim that designation. But it doesn’t live up to those promises when it’s done building it out."
The regulatory flip-flop might be easier to justify if Verizon did indeed wire every home with fiber; in New Jersey, for instance, it had committed to delivering 45Mbps internet service to its entire territory by 2010. But numerous reports suggest Verizon hasn’t come even close to reaching its goals. In the state, which has 3.2 million households, Verizon said in March its fiber-to-the-home deployment has "passed 2.1 million premises," a number that means even less than two-thirds of homes may actually be connected. To close the gap, Verizon has leaned on its own LTE service where fiber hasn’t reached, even though it’s far slower than a wired fiber connection and is subject to data caps.

With broadband internet’s anemic competitive landscape, this lack of regulatory accountability becomes even more troubling. According to a 2012 FCC report, roughly 27 percent of US households had only one choice to get a wired connection of 6Mbps or greater. Uncompetitive markets are the ripest for regulation; the dominant players in those markets, of course, would disagree. And while we wait to see whether the FCC will move to bring the internet under Title II to codify it as the public utility that is has become, Verizon and others are playing a regulatory shell game, spinning in and out of Title II rules at their leisure.

"The last 15 years have been pretty much great for everyone; it is AT&T, Verizon, and Comcast who want to break from current patterns and impose a de-facto tax on the rest of the internet economy, starting with internet video," says Tim Wu, a professor at Columbia specializing in communication networks, in a conversation with The Verge. "To do that, the FCC needs the authority to ban degradation, fast lanes, and other ways of imposing a tax on the internet economy; the clearest source of such authority is Title II of the Telecom Act. It shows how obvious it is that broadband has become a utility, when, if your reporting is correct, Verizon itself sees it that way."

This comes to a head on Thursday, when the FCC is set to unveil the draft of its proposal for new rules that govern regulation (or non-regulation) of the internet. "If the FCC fails, and allows the [fast lane] tax to be imposed, every business on the internet will pay more to the carriers, ultimately raising the costs to consumers, and making it harder to start something new," says Wu. "Nothing about that world is good for anyone."

Among other options, a full-on move to Title II regulation for the internet will be on the FCC’s menu this week. Considering how Verizon has leaned on Title II to build and finance its broadband network, the right move seems clear to some. "To expect that you can come in and use public infrastructure and funds to build a network and then be free of any regulation is absurd," says John Bergmayer, a senior staff attorney at advocacy group Public Knowledge. "When Verizon itself is describing these activities as a Title II common carrier, how can the FCC look at broadband internet and continue acting as though it's not a telecommunication network?"