Verizon – NY, the major wireline phone service provider in New York State, for years has filed required Annual Reports with the Public Service Commission indicating it is losing money on its state regulated phone service. These claimed financial losses, along with the assertion that it would be deploying more fiber optic lines, were the predicate for past rate increases and pricing flexibility allowed by the Commission.This is chronicled in the recent Utility Project report, It’s All Interconnected, issued May 15, 2014. The report highlighted the need for closer examination of Verizon’s claimed losses.
In Verizon-NY’s 2013 Annual Report filed with the New York Public Service Commission on May 30, 2014, Verizon – NY indicated a major financial swing, from reported losses of $2.6 Billion in 2012 to a gain of nearly $1.3 Billion in 2013. The report shows the change is due to a huge reduction in reported operating expenses: it shows Operating Expenses are about $3.8 Billion less than the prior year, roughly half the total operating expenses of $7.6 Billion. This was the main driver for the bottom line showing the change from a reported “loss” of $2.6 Billion in 2012 to the 2013 net revenue of $1.3 Billion.
A 2013 PSC order indicates no audit was conducted of Verizon – NY’s reported large losses for 2011. The PSC stated,
“In its 2011 Annual Report to the Commission, Verizon reported an intrastate operating loss of approximately $1.5 billion and a negative 28.08% intrastate rate-of-return.
[Fn] 23 * * * * [Fn] 23 Verizon’s PSC Annual Report Schedule 10 Line 1 Column (b) and Line 3 Column (b), respectively. These figures have not been audited by Department Staff.”
CASE 10-C-0202 – Proceeding on Motion of the Commission to Consider the Adequacy of Verizon New York Inc.’s Service Quality Improvement Plan. ORDER RESOLVING PETITION AND REQUIRING FURTHER INVESTIGATION (Issued and Effective January 18, 2013), If Verizon’s return on equity for VZ-NY actually was -28% in 2011, and if its operating net revenues were really minus $2.6 Billion in 2012, it would appear to have been entitled by law to a temporary rate increase in those years, to the level of a 5% return on equity, pending a full review of revenues and expenses and fixing by the PSC of permanent rates, under PSL § 114:
“Said temporary rates so fixed, determined and prescribed shall be sufficient to provide a return of not less than five per centum upon the original cost, less accrued depreciation, of the physical property of said public utility company used and useful in the public service, and if the duly verified reports of said utility company to the commission do not show the original cost, less accrued depreciation, of said property, the commission may estimate said cost less depreciation and fix, determine and prescribe rates as hereinbefore provided.”
That Verizon did not file for rate relief and temporary rates with a claimed Return On Equity of -28%, when it has a statutory right to at least a 5% ROE pending review of its income and expenses, suggests a lack of confidence on its part that the reported billion dollar-plus losses would be supportable in a full PSC audit in a public rate case investigation.
There is little in the way of explanation in the 2013 financial report that would identify factual circumstances different in the profitable 2013 year from those in the claimed unprofitable years preceding it. The abrupt swing to profitability might be due to accounting changes. But the lack of an audit of claimed major losses in the prior years underscores the need for greater transparency and fuller PSC review. The review should not only examine the reasons for the sudden swing to profits, which might be due to arcane holding company, affiliate transaction, tax or pension accounting issues, but also the issues regarding cost and revenue allocations raised in the Utility Project report.