Verizon and the rest of the country's biggest Internet service providers joined forces this month to argue that so-called "common carrier" regulations for utilities shouldn't be applied to broadband. Such rules would force the ISPs to innovate less and spend less money than they do today on network upgrades, they argue.

Yet Verizon obtains a variety of perks from the government for its FiOS Internet service by using public utility rules to its advantage, a new report drawing on public documents says.

This isn’t a new practice and it isn’t illegal, but it could become part of the debate over network neutrality rules and the transition from heavily regulated landline phone networks to Internet-based voice service.

“It's the secret that's been hiding in plain sight,” said Harold Feld, senior VP of consumer advocacy group Public Knowledge and an expert on the FCC and telecommunications. “At the exact moment that these guys are complaining about how awful Title II is, they are trying to enjoy all the privileges of Title II on the regulated side.”

“There's nothing illegal about it,” Feld, who wasn’t involved in writing the report, told Ars. However, “as a political point this is very useful.”

The FCC classifies broadband (such as FiOS) as an information service under Title I of the Communications Act, resulting in less strict rules than the ones applied to common carrier services (such as the traditional phone system) under Title II. But since both services are delivered over the same wire, Verizon FiOS is able to reap the benefits of utility regulation without the downsides.

Verizon checks its privileges, finds them quite nice

The US has long applied common carrier status to the telephone network, providing justification for universal service obligations that guarantee affordable phone service to all Americans and other rules that promote competition and consumer choice. In exchange, phone companies are granted certain kinds of legal immunity, easements over private property and public rights of way, pole attachment rights, access to the phone number system, and the right to interconnect with other networks.

The report by telecom analyst Bruce Kushnick says the following:

FiOS Rides over a “Title II”, Common Carriage, Telecommunications Network. Verizon’s FiOS TV, phone, Internet and broadband service products ride over a Fiber-to-the-Premises (FTTP) network.

This FTTP network, as stated in the Verizon New York City FiOS TV franchise, is categorized as a “Title II”, common carriage, telecommunications service, as opposed to a ‘Title VI” (cable TV service) or a “Title I” (“information” service). These “Titles” refer to the Telecommunications Act of 1996 and they are critical as to whether and how the services are regulated.

This classification of FTTP as a Title II service appears to be in every Verizon FiOS TV cable franchise nationwide.

“FiOS” is not the fiber optic wire; it is a brand name of a Verizon product that uses the FTTP networks.

Verizon invokes its powers as a telephone corporation under the NY Transportation Corporations Law to install fiber optic wire over private property, or use the public rights-of-way.

Kushnick points to a New Jersey franchise agreement which states, "The construction of Verizon NJ’s fiber-to-the-premises FTTP network (the FTTP network) is being performed under the authority of Title II of the Communications Act of 1934 and under the appropriate state telecommunications authority granted to Verizon NJ."

"Verizon New York City’s current cable franchise, as well as the franchises for other Verizon franchises in other states, from DC to New Jersey—all detail that at the core of Verizon’s cable, Internet, and broadband networks is a 'Title II', common carriage, telecommunications service," Kushnick wrote. "And it appears this was done for two reasons—it gets all of the powers of the utility, including the rights-of-way that are part of the telecommunications utility service, but it also may charge the copper-based POTS [plain old telephone service] utility customers for the development and deployment of FiOS."

Verizon's New York division also obtained tax benefits, although it still lost money. "Over the last five years, Verizon NY showed over $11 billion in losses, about $2.1 billion annually, with an income tax benefit of $1 billion that is used by Verizon Communications, the parent holding company, to offset its tax liabilities," Kushnick wrote. "This also means Verizon New York paid no taxes, even though the company had $7.2 billion in revenues in 2010, the last year the information was available."

Verizon Communications itself has been profitable, and yet "New York’s residential POTS customers, who use the aging copper wires, [are] paying rate increases for the development and deployment of FiOS—a cable, phone, broadband and Internet service," Kushnick wrote.

The Verge has a good analysis of the report.

“We will ask the FCC to open the networks”

Kushnick wrote the report for the Public Utility Law Project of New York. The group will lobby the FCC to take action, he told Ars.

“The companies' affiliates have acted together and have taken control of the customer-funded wires and networks, which are Title II, in multiple ways that allow the company to control both the end-user connection—speed, access, and use of the Internet—as well as the competitor side of attaching to the wire and delivering services to the end users,” Kushnick wrote in an e-mail. “We will be asking for the FCC to open the networks to all forms of competition because customers paid for it and they are Title II, and because the affiliate companies have created a bottleneck that controls the wires and blocks competitors.”

Verizon and the FCC did not provide responses to Ars’ requests for comment.

Feld noted that it's common for transmission paths to include multiple services governed by different sets of regulations.

"You have a bunch of different services that go over the same wire," he said. "This is true for wireless also. When you buy your wireless mobile device, what you're buying is a Title II service for voice, probably a Title II service for the text, although the FCC has never really classified it one way or the other... and the data part is Title I."

"The wireless carriers are all big on using this Title II stuff when it comes to things like getting the FCC to preempt states on tower siting and... the use of phone numbers and mandatory interconnections with landline [networks] and all that good stuff," he said.

Cable companies like Comcast are "offering you a cable service, Title VI, over the line that also brings you broadband, which is Title I, and their phone service which is unclassified because it's Voice over IP (VoIP)."

Verizon's phone services are even more complicated. Although traditional landlines typically ride over copper networks, Verizon can also provide Title II phone services over fiber. In these cases, Verizon says that "phone service is still provided by our conventional switched network, not over the Internet. We’re simply changing the infrastructure over which their service is delivered from copper to our more reliable, all-fiber network."

That fiber network also carries traffic for VoIP, which the FCC has never classified as either Title I or Title II. With AT&T and Verizon asking the FCC for permission to shut off the Public Switched Telephone Network by 2020, the regulatory status of VoIP is going to come under increased scrutiny.

One question for the phone transition is whether phone companies get to "keep all the good stuff about being a phone provider... while not having any of the attendant responsibilities that come with it," Feld said.

The potential of the FCC classifying broadband as a common carrier service is also being widely debated, because it could let the FCC impose stronger net neutrality rules on ISPs. As we mentioned, ISPs have railed against this possibility.

Verizon's use of Title II to its advantage "highlights that these providers are speaking out of both sides of their mouths," Feld said. "They say, 'oh you can't do Title II for broadband because that would be heavy-handed, burdensome regulation and would destroy investment.' You're over here at the FCC saying, 'you can't treat this as Title II' and you're in New Jersey saying, 'you must treat it as Title II.'"

The treatment of cellular voice calls (or "Commercial Mobile Radio Service") as Title II (albeit with fewer regulations than landline phone service) proves the regulations aren't an investment killer, he said.

"It is nonsense to say that Title II is this terrible, horrible thing that kills investment," Feld said. "As the wireless industry never gets tired of telling me, there's nothing more dynamic and [full of] investment wonderfulness than wireless, where they spend billions of dollars on licenses alone in order to provide a Title II service."