Verizon's Empire City Subway subsidiary should owe New York City at least $262 million. But New York City's Department of Information Technology and Telecommunications (DoITT) would have to insist on the point, and it hasn't.
The number comes from a devastating report issued by then-comptroller John Liu in 2010. Liu was a good comptroller whose political career ended in a fundraising scandal when he ran for NYC mayor.
At issue in the report is the city's contract with the owner of the ducts under the streets. The contract dates back to 1891. The only online copy of the contract (that I know of) is in a scanned book that is available here.
The Blizzard of 1888
The date of the contract is no accident. It was the solution to the political and economic problems caused by the blizzard of 1888. From March 11 through March 14, winds reached 45 miles per hour, 22 inches of snow fell on the city, and temperatures dropped to 9 degrees F. There were no subways at the time, and the elevated lines were overwhelmed, according to contemporary accounts. Milk deliveries failed, newspapers were unavailable, and power lines went down. Downed electrical power lines electrocuted people in the streets. People may not have known about the danger because electrical power was new. Edison's first electrical generating station had been recently turned on in 1882, located on Manhattan's Pearl Street.
The devastation was real. You can see one photo here (courtesy of CUNY). There are great photos of Brooklyn in this Google search. More photos of snowbound Manhattan in this Google search.
The cost of repair was so high that the city of Brooklyn decided to give up its independence and become part of New York (historians also credit the building of the Brooklyn Bridge in 1883). The city eventually decided to make a contract with Empire City Subway, whose job was to build the underground tunnels for power lines.
Power companies resisted the change (as evidenced by this court case from 1914, in which a power company is fighting the enforcement of a law passed in 1884, which had required all power lines to be underground). Power companies resisted the change because it was cheaper and still is cheaper to build power lines above ground instead of underground. Above-ground lines are also less safe, which is why, today, you find them mostly in poor and rural areas (as I noted in a diary yesterday).
The Contract
The contract is unlike any contract that any honest city government would sign today because it is perpetual. It never ends. Most governments today sign contracts for a limited period of time, even if they tend to renew those contracts with little or no oversight (see, for one of many examples, Snowden scandal, vetting contractors). Furthermore, Verizon pays a penny per mile to use city streets.
The contract is also unlike any contract that a contractor would sign today because it gives ALL of the profits over 10 percent to the city. It may be a surprise: U.S. governments once thought that there should be a limit to the profits of government contractors. Verizon deals with this problem by ensuring that Empire City Subway never makes a profit over 10 percent. John Liu said that DoITT should have investigated Verizon's accounting and that DoITT should have allowed Empire City Subway a rate increase. According to Liu's report, Empire City Subway has not raised its prices since 1986.
According to the report, almost 80 percent of Empire City Subway's revenue comes from Verizon. So if Empire City Subway raised its rates, Verizon would pay more to its subsidiary, and the subsidiary would pay the resulting profits to the city. It's easy to see why Verizon resists complying with the contract.
The report says that if DoITT allowed Empire City its rate increases and also if DoITT actually examined the accounting, Empire City Subway would have paid off an accumulated deficit and would owe New York City $262 million, as of 2010. It's now four years later. After four years of inaction, the amount that Empire City Subway owes the city should actually be higher.
So the question now is, will the new mayor, Bill de Blasio, be willing to challenge Verizon on this issue?
He's focused on another issue: the fact that Verizon promised to deliver fiber to all of New York City and is behind schedule. The promise was part of a deal in which the city gave Verizon a citywide cable franchise, which means that the phone company obtained permission to provide lucrative cable services in exchange for a promise to wire the whole city. As Public Advocate, de Blasio attacked Verizon for falling behind. He's continued the fight as mayor. But so far, with little to show for it. It's not his fault: Verizon stopped deploying FiOS nationwide in 2010. Still, de Blasio might get something done on the FiOS issue (I wrote a diary on de Blasio's FiOS fight yesterday).
De Blasio should ask DoITT to investigate Empire City Subway in order to determine whether Empire City Subway is complying with the 1891 contract. Verizon is getting the benefits of an ancient contract without paying the price for it.