20030319Ben Johnson Direct.pdf

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BEFORE THE
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IDAHO PUBLIC UTILITIES COI\IIMISSlQNi t.
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UTILItIES cm.\t-IISSION
IN THE MATTER OF THE APPLICATION
OF QWEST CORPORATION FOR
DEREGULATION OF BASIC LOCAL
EXCHANGE RATES IN ITS BOISE, NAMPA
CALDWELL, MERIDIAN , TWIN FALLS,
IDAHO FALLS, AND POCATELLO
EXCHANGES.
CASE NO. QWE-T -02-
DIRECT TESTIMONY OF BEN JOHNSON , Ph.
IDAHO PUBLIC UTILITIES COMMISSION
MARCH 19 , 2003
BEFORE THE IDAHO PUBLIC UTILITIES CO:MMISSION
Before Connnissioners:Dennis S. Hansen, President
Marsha H. Smith
Paul Kjellander
In the Matter of the Application
of Qwest Corporation for Price
Deregulation of Basic Local
Exchange Services
Case No. QWE-O2-
Direct Testimony
Ben Johnson, Ph.
on behalf of the
Idaho Public Utilities Commission
March 19, 2003
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T-O2-
Introduction
Would you please state your name and address?
Ben Johnson, 2252 Killearn Center Boulevard, Tallahassee, Florida 32309.
What is your present occupation?
I am a consulting economist and president of Ben Johnson Associates, Inc., an economic
research firm specializing in public utility regulation.
Have you prepared an appendix that describes your qualifications in regulatory and
utility economics?
Yes. Appendix A, attached to my testimony, will serve this purpose.
Can you briefly explain the corporate names and acronyms that you will be using in
your testimony?
Throughout my testimony, I will use the terms "Qwest" or "the Company" when referring
to Qwest Corporation, a subsidiary of Qwest Communications International, Inc.
What is your purpose in making your appearance at this hearing?
My fmn has been retained by the Staff of the Idaho Public Utilities Connnission ("the
Connnission ) to assist with Staff's participation in this proceeding. We have been asked
to analyze Qwest's Application for Price Deregulation of Basic Local Exchange Services
Application ) and determine whether the deregulation of local exchange rates sought by
Direct Testimony of Ben Johnson, Ph.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
Qwest in its Application is valid in light of statutory mandates. Specifically, I analyze
whether wireless services are functionally equivalent and comparably priced to Qwest's
wireline local exchange services.
Would you please explain how your testimony is organized, and briefly summarize
its major elements?
Yes. Following this introduction, my testimony has five sections. The first section
contains a brief discussion of the background of this proceeding. In the second section I
analyze whether services provided by wireless carriers are functionally equivalent to
those offered by Qwest. I discuss the concept of functional equivalency from an economic
perspective, and discuss the extent to which consumers can freely substitute wireless
services for wireline local exchange services. In the third section I discuss whether
wireless and wireline services are comparably priced in seven specific Idaho exchanges.
In this section, I outline the difficulties in making competitive pricing comparisons, given
structural differences in the typical pricing of wireless and wireline services, as well as
the fluid nature of the wireless market. In the fourth section I examine various aspects of
the Application from a public interest perspective. In the fifth and fmal section, I present
my conclusions and recommendations.
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No, QWE-T -02-
Background
Let's turn to the fIrst section of your testimony. Would you please start by outlining
the history of this proceeding?
Yes. Qwest filed its Application on December 17, 2002 pursuant to Idaho Code
g62-622(3)(b). Therein Qwest sought the deregulation of its local exchange rates in
seven southern Idaho exchanges: Boise, Caldwell, Idaho Falls, Meridian, Nampa
Pocatello and Twin Falls (the "seven exchanges ). The Company contends that wireless
carriers are effectively competing with it in these seven exchanges. It put forward five
main pieces of evidence in support ofthis claim: (1) the functionality of wireless service
(2) a comparison of wireless and Qwest price plans , (3) the number of wireless carriers
operating in the seven exchanges, (4) the exploding growth of wireless subscription in
Idaho and the increase in wireless substitution for wireline services, and (5) wireline
customers perceive wireless service to be a functionally equivalent, competitively priced
and reasonably available alternative to Qwest's wireline local exchange services in these
seven exchanges. (Application, pp, 6-8) The Company contends that rate deregulation in
the seven exchanges is in the public interest, because it would allow Qwest to better
respond to competitive forces. (Id., pp. 8-
Can you briefly discuss your understanding of the statutory framework which
governs this proceeding?
Yes. It is my understanding that, in order for the Connnission to approve the Company
Application under Idaho Code g62-622(3)(b), Qwest must demonstrate that effective
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
competition exists, as indicated by the fact that one or more competitive carriers are
offering "functionally equivalent" and "competitively priced" services to customers in the
seven exchanges. Specifically, the statute states the following.
The conmllssion shall cease regulating basic local exchange rates in a local
exchange calling area upon a showing by an incumbent telephone
corporation that effective competition exists for basic local exchange
service throughout the local exchange calling area. Effective competition
exists throughout a local exchange calling area when either
(a) Actual competition from a facilities-based competitor is
present for both residential and small business basic local
exchange customers; or
(b) There are functionally equivalent, competitively priced
local services reasonably available to both residential and
small business customers from a telephone corporation
unaffiliated with the incumbent telephone corporation,
The Conmllssion has dealt previously with a very similar Application. On July
, 1999, US West (now a part of Qwest) filed an Application pursuant to Idaho Code
g62-622(3) generally seeking deregulation of its basic local exchange rates in its Burley,
Idaho exchange. (Order No. 28369, p, 1) In its Order No. 28369 , ruled that Qwest had not
sufficiently demonstrated that effective competition, as outlined in the Code, was present
in the Burley exchange. (Id., p. 13) The Conmllssion pointed out that Idaho Code
g62-602(2) further clarifies the standards that must be met for it to be able to recognize
the presence of effective competition and, in turn, deregulate local exchange rates. Idaho
Code g62-602(2) provides as follows:
It is the intent of this legislature that effective competition
throughout a local exchange calling area will involve a significant
number of customers having both service provider and service
option choices and that actual competition means more than the
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
mere presence of a competitor. Instead, for there to be actual and
effective competition there needs to be substantive and meaningful
competition throughout the incumbent telephone corporation
local exchange calling area.
In the case of the Burley exchanges, the Conmllssion found that there was another carrier
operating in that exchange in competition with US West, but that the mere presence of
another carrier "does not demonstrate the existence of effective competition required by
the legislature in Section 62-622(3) for rates to be deregulated." (Id.
Can you briefly describe the direct testimony fIled by Qwest in this proceeding?
Yes. Testimony of Dr. Douglas Lincoln, Harry Shooshan, John Souba, and David Teitzel
was concurrently filed with the Application. In his testimony, Dr. Lincoln presents two
studies meant to show that (1) wireless and wireline services are comparably priced and
(2) that customers view these services as "functionally equivalent, competitively priced
and reasonably available alternative to Qwest's basic local exchange service in these
seven exchange areas," (Lincoln, p. 6) Regarding the first ofthese two studies, Dr.
Lincoln concludes the following.
First, one can conclude that wireless service providers have a
variety of service offerings to meet nearly everyone
telecommunications needs. These options all seem to represent
competitive choices for Qwest's basic local exchange service
customers, Second, it appears that the prices for wireless and basic
local exchange services, while not identical, are comparable.
Differences in prices can be explained based on the additional
functionality (including mobility) and the inclusion ofline features
or long-distance benefits in certain wireless packages. Wireless
service providers have clearly priced their services in a comparable
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
range with Qwest's basic local exchange service. (Id., pp. 15-16)
In his testimony, Mr. Shooshan undertakes an analysis of wireless competition for local
exchange services nationally and in the seven exchanges. He concludes that effective
competition exists both nationally and in these seven exchanges, that wireless service is
an effective substitute for wireline service, and the public benefits from a more
competitive Qwest. (Shooshan, pp. 4, 5, 16, 17) Regarding wireless substitution, Mr.
Shooshan finds
While noting studies that estimate that between 3% and 5% of
wireless subscribers have disconnected their wireline phone
significantly, the FCC describes the "growing evidence that
consumers are substituting wireless service for traditional wireline
communications," In its most recent assessment of the mobile
services market, the FCC acknowledges claims by wireline
telecommunications carriers that the numbers of access lines and of
minutes of use on their networks have decreased as a result of
increasing use of mobile services, Additionally, the FCC cites
studies that indicate all wireline communications (i,e" local and
long distance) are affected. Estimates suggest that 20% of
residential customers have replaced "some" wireline usage with
wireless usage, while 11 % have replaced a "significant
percentage." (Id., pp. 9-10)
Mr. Souba introduces the other Qwest witnesses, provides an overview of the history of
the issues involved in the case, and lays out functional equivalence and public interest
analyses. (Souba, pp. 4-23) He contends that wireless services are widely available to all
customers in the seven exchanges.
Unlike the Burley case, in which the Conmllssion indicated it
would be "difficult to foresee circumstances where competition
could be deemed effective and throughout the local exchange
Direct Testimony of Ben Johnson, Ph.D.
On behalf ofthe Idaho Public Utilities Commission, Case No. QWE-T -02-
calling area where less than half the customers have a choice of
provider" (Order No. 28369, page 12), the "service area" of
wireless providers tends to blanket the populated areas of the seven
exchanges reaching even areas where no land-based facilities exist
today. ... Essentially all residents and small businesses throughout
the seven exchanges have access to service from wireless
competitors as an alternative to Qwest's basic local exchange
service. (Id., pp. 14-15)
Finally, Mr, Teitzel expands on points made by Mr. Shooshan and Mr. Souba in their
testimonies. He describes various attributes of wireless and wireline services
emphasizing various similarities. (Teitzel, pp. 8, 22-25)
The following are service attributes of Qwest's basic local
exchange landline services that should be viewed as points of
reference in determining whether alternative services are
functionally equivalent: the ability to originate or receive a voice
telephone call at a fixed location, the ability to access operator
assistance (by dialing "0" or accessing directory assistance), the
ability to place and receive long distance voice calls, the ability to
contact emergency service providers and the ability to have the
customer s assigned telephone number and address listed in a
printed telephone directory. (Id., p. 8)
Mr. Teitzel also presents some evidence concerning wireless promotions in the seven
exchanges. (Id., pp. 25-26)
Following receipt of the Application, the Conmllssion issued a Notice of
Application and Notice of Right to Intervene on December 17 2002. The Conmllssion
notified parties to the case "that all proceedings in this case will be held pursuant to the
Conmllssion s jurisdiction under Title 61 of the Idaho Code and that the Conmllssion
may enter any fmal Order consistent with its authority under Title 61." (Notice, p. 2)
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
Parties were given 24 days from the date ofthe Notice to file petitions for intervention if
they so chose. (Id.
Finally, on February 7 2003 , the Conmllssion issued a Notice of Hearing and
Procedural Order which set filing and hearing dates. (Notice, p. 1) My testimony is
submitted in accordance with this schedule,
Functional Equivalency
Let's turn to the second section of your testimony. Would you please begin by
explaining your understanding of why functional equivalency is key to the
resolution of this proceeding?
Yes. Qwest filed their Application for deregulation oflocal exchange rates in the seven
exchanges pursuant to Idaho Code g62-622(3)(b), Recall that in order for the
Conmllssion to approve deregulation, the petitioning carrier must demonstrate that
there are functionally equivalent, competitively priced local
services reasonably available to both residential and small business
customers from a telephone corporation unaffiliated with the
incumbent telephone corporation, (g62-622(3)(b) emphasis added.
Qwest witnesses claim that wireless service is functionally equivalent to wireline service
at least in the seven exchanges, In this section, I will explain what I believe "functionally
equivalent" means in the context of effective competition, I will outline the functional
similarities and differences between wireless and wireline services , and I will respond to
the Company s claims that the two services are functionally equivalent.
Definition
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
Can you please explain your understanding of the phrase "functionally equivalent"?
Yes. This is best accomplished by carefully looking at the phrase s piece parts. First, the
word "functionally" is simply the adverb form of the word functional. Merriam- Webster
defmes functional as ", connected with, or being a function.
(http://www.m-w.com/cgi-binidictionary) It defines function as "the action for which a
person or thing is specially fitted or used or for which a thing exists: PURPOSE." (Id.
Second, equivalent is defined as "equal in force, amount, or value" or "corresponding or
virtually identical especially in effect or function. "
Having deEmed the components of the phrase, we can combine them to achieve an
overall definition. The word "functionally" indicates the active purpose for which an
object (service) exists or is used, The word "equivalent" indicates equality in force
amount, or value-suggesting that the two services are virtually identical with respect to
their function. Accordingly, for two services to be "functionally equivalent" these
services need to be virtually identical with respect to their functional attributes-those
characteristics of the service which relate directly to the purpose for which each service is
specially fitted or used.
How has Qwest attempted to meet the defmition of functionally equivalent?
Although four Qwest witnesses touch on the issue of functional equivalency in their
direct testimonies, none of these witnesses provide a detailed, comprehensive discussion
Direct Testimony of Ben Johnson, Ph.
On behalf ofthe Idaho Public Utilities Commission, Case No. QWE-T -02-
of this issue.
Dr. Lincoln suggests that wireless and wireline services are functionally
equivalent based on the results of a survey of 800 residential and business customers in
the seven exchanges. (Lincoln, p. 38) However, the survey did not directly ask customers
whether they considered wireless and wireline services to be functionally equivalent, nor
did it explore this issue indirectly, by probing deeply into consumer attitudes with respect
to these services.
Mr. Shooshan discusses functional equivalency as "line substitution" and "usage
substitution" without really analyzing the functions involved, or the extent to which these
functions are accomplished identically. (Shooshan, p, 5) Mr, Souba s testimony contains a
section titled "functionally equivalent service" and an allusion to "functionally equivalent
wireless communications services." However, his discussion is actually quite superficial
focusing on the presence of wireless competitors and growth in wireless lines, (Souba
, pp.
13-15) Finally, Mr. Teitzel argues that
multiple unaffiliated wireless providers now offer telephone
services that are certainly similar to and, in fact, have attributes not
available with to Qwest's voice grade landline service. (Teitzel
, p.
He outlines five service attributes that he feels should be the Conmllssion s standard for
determining that wireless and wireline services are functionally equivalent. (Id.
Substitution
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T-O2-
More than one Qwest witness has used substitutability as a proxy for functional
equivalency. Is this appropriate?
No, If two products are functionally equivalent, they will tend to be substitutable, But, it
is equally true that if two products are substitutable they mayor may not be functionally
equivalent. To see why this is true, consider first the example of two Hondas Accords
that are identical in every way except that one is dark blue and the other is light blue.
Clearly these alternatives are functionally identical, and thus substitutable. In contrast
consider a pickup truck and a sports car. Both are vehicles that can carry two people from
one place to another, but they clearly are 11Q.1; functionally equivalent. For some purposes a
pickup truck is ideal; for others , a sports car is ideal, While it may sometimes be possible
to substitute one for the other, that doesn t change the fact that there are important
functional differences. In evaluating whether or not these functional differences are
significant, it is worth noting that some people own both a pickup truck and a car. This
strongly suggests they are not equivalent-otherwise one or the other would be redundant
and people would rarely incur the added cost of owning both.
A similar factual situation exists with regard to wireless and wireline service,
Because of important functional differences, the vast majority of consumers do 11Q.1;
substitute wireless for wireline service or vice versa, Most people purchase both services
using their mobile phone in situations where it will function best and using their
conventional phone where it will function best. The very fact that so many people keep
both phones (if they can afford to double their expenditure on phone service) tends to
prove that these services are functionally different. Similarly, some people can afford, and
are willing to pay for, both a pickup truck and a car, but very few people own two cars
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T-O2-
that are functionally identical.
If the data revealed that 95% of all satellite TV customers disconnect their cable
television service upon subscribing to DirectTV or the Dish Network and vice versa, we
could reasonably conclude that satellite service and cable service are close substitutes.
However, that wouldn't necessarily mean they are functionally equivalent. There might
for example, be significant functional differences with respect to local programming
the reliability of the signal during rain storms.
Clearly, the mere existence of some degree of substitution is not sufficient to
demonstrate or infer functional equivalence, To the contrary, substitution and functional
equivalency are distinctly different concepts. Because of budget constraints, consumers
will sometimes substitute one item for a different item even though it has completely
different functional characteristics. For example, a family might decide not to vacation in
France this year, and instead decide to install a swimming pool. From a budgetary
perspective, and in terms of keeping the family happy during the summer, the new
swimming pool may be an adequate substitute for a European vacation, but these
alternatives are not functionally equivalent.
Unlike satellite and cable television services, the available evidence concerning
consumer substitution patterns strongly suggests that wireless and wireline services are
11Q.1; close substitutes, and this same evidence tends to prove the latter services are 11Q.1;
functionally equivalent. By Qwest's own admission, less than 10% of all wireless
customers disconnect their Qwest wireline service upon subscribing to a wireless service.
It is reasonable to infer that wireless and wireline services are not close substitutes, and
that they are 11Q.1; functionally equivalent from the perspective of most consumers. If the
Direct Testimony of Ben Johnson, Ph.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T-O2-
two services were functionally equivalent, they would tend to be redundant and thus most
people would decide it was a waste of money to pay for both services at the same time.
In any event, evidence concerning whether, or to what extent, wireless and
wireline services are substitutes (or complements) is not sufficient to determine whether
they are functionally equivalent for purposes of this proceeding. This is particularly clear
in this context, where the evidence (and the issue of functional equivalence) is a step
towards addressing the ultimate question of whether or not effective competition exists.
The mere existence of a limited degree of substitution cannot be sufficient to reach this
conclusion anymore than one can reasonably conclude that effective competition exists
for Boise swimming pool contractors merely because a small percentage of the people in
Boise would rather take a vacation in England than buy a new swimming pool if airline
ticket prices are low.
To adequately address the question of effective competition, Qwest needs to
demonstrate, among other things, that wireless and wireline services are "corresponding
or virtually identical" in the functions they perform (with respect to their intended use).
Qwest has instead set out to prove that some consumers can or do disconnect their
conventional phone and rely exclusively on their mobile phone. While this type oflimited
substitution may be feasible or necessary for some consumers (e,g. due to budget
constraints), it doesn t adequately address the question of functional equivalence.
Consumers can and do make trade-offs between all sorts of products and services that are
not functionally equivalent. A limited degree of substitution is clearly not sufficient to
infer functional equivalence, much less suggest that effective competition exists,
Direct Testimony of Ben Johnson, Ph.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
Would you please explain the concept of product substitution in the context of
standard economic theory?
Yes. One text define substitutes as
products that have a relation such that an increase in the price of
one will increase the demand for the other or a decrease in the price
of one will decrease the demand for the other. (Economics, Robert
B. Ekelund, Jr. and Robert D. Tollison, Little, Brown and
Company, 1986, p, 74)
A simple example of this concept would be apples and oranges. Many people like both
these fruits and they tend to purchase some of each. It is fair to primarily classify these
fruits as substitutes because, when the price of apples goes up, consumers tend to
decrease their consumption of apples and increase th~ir consumption of oranges,
Although they are substitutes, apples and oranges are not close substitutes, as indicated by
the fact that people tend to eat oranges (rather than apples) at breakfast, and they tend to
use apples (rather than oranges) when baking a pie.
The opposite concept in economics is that of complements, In the same text
Ekelund and Tollison define this concept as
products that have a relation such that an increase in the price of
one will decrease the demand for the other or a decrease in the
price of one will increase the demand for the other. (Id,
An example here would be peanut butter and jelly, Since many people like to consume
these products together on sandwiches, if the price for one increases, consumption of both
goods will typically decrease, If a poor crop leads to more expensive peanut butter, for
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T-O2-
example, consumers will tend to buy less jelly. Another good example of complements
are copier toner and paper.
In many cases, products have characteristics that allow them to be either
substitutes or complements-it is simply a matter of degree, If goods and services are
close complements, an increase in the price will typically lead to a decrease in the
consumption of the other. However, some degree of substitution may also be possible.
Similarly, goods may be close substitutes, but a decrease in the price of one product may
nevertheless lead particular consumers to reduce their consumption of the other product
under certain circumstances. Thus, it is more meaningful to think about these concepts as
matters of degree.
In this regard, it is helpful to remember that some goods and services may be
totally unrelated and thus it would be impossible to classify them as substitutes or
complements without careful empirical research. Consider, for example, the relationship
between eggs and gasoline. Fluctuations in the price of eggs will have virtually no
measurable impact on consumption of gasoline, and the reverse would also be true
except, perhaps, for what is referred to as an "income effect" (the impact of a price
change on the consumer s overall budget constraint),
Some products have characteristics that potentially would allow them to be
substitutes, but in practice they may accurately be classified as complements. For
example, from a consumer perspective, hamburger buns and hamburger meat are
complementary, I am not aware of any empirical studies evaluating the pricing
relationship between these two goods, but I suspect they would be appropriately classified
as complements. Thus , for example, an increase in the price of hamburger probably leads
Direct Testimony of Ben Johnson, Ph.
On behalf ofthe Idaho Public Utilities Commission, Case No. QWE-T -02-
to a decrease in the demand for hamburger buns, Of course, upon reflection one realizes
that it is possible to substitute one of these products for the other, at least under some
circumstances. For example, when planning a school picnic, ifthe price of hamburger
meat increases, it is possible to buy less meat and more buns, putting a smaller burger on
each bun. Some folks will eat more potato salad, others will eat an extra burger, but the
overall level of caloric consumption may be about the same-at lower cost than if larger
burgers were served. However, this situation is the exception to the general rule. More
typically, the limited degree of substitution that is possible between hamburger buns and
meat will be swamped by the complementary characteristics of these products.
How do wireless and wireline service relate to this discussion?
While a limited degree of substitution occurs in practice, these services are primarily
complementary to each other. Some consumers stop purchasing Qwest's service when
they obtain a mobile phone, but even these consumers don t necessarily consider these
services to be "close substitutes" nor do they necessarily think they are functionally
equivalent. Perhaps they want the functional advantages of a mobile telephone, they can
afford (or don t want to pay for) two telephones, and they can live without the functional
advantages of a wireline telephone.
In the more typical situation, a consumer will continue to use their wireline
telephone after they get a mobile phone. In fact, their total volume of calling may
increase, and there will be calls from their wireline phone to their mobile phone and vice
versa, For instance, they may start calling their spouse at home during their afternoon
commute-calls that did not occur before they obtained wireless service. Rather than
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
reducing the benefit of having a wireline phone at home, their mobile phone will serve a
complementary function, increasing the value of that phone. For instance, when shopping
for groceries they can call home to fmd out whether they need to buy more of a certain
item (or to obtain their spouse s opinion concerning which brand to buy).
Of course, it is also true that once a consumer purchases wireless service, they
may use their mobile phone for some conversations that would otherwise have occurred
using a conventional phone. Data analyzed by the FCC and presented by Mr. Shooshan
bears this out, though the frequency of this type of usage substitution is surprisingly
small. According to Yankee Group analyst Knox Bricken, just 20% of residential
customers use their mobile phone for "some" calls for which they would have otherwise
used a conventional phone. This implies that the vast majority of residential customers
never use their mobile phone for calls they can place using a conventional phone.
other words, most consumers only use mobile phone when they need to place a call while
traveling around-because of the usage fees associated with wireless calls, poorer sound
quality, physical discomfort, or other reasons.
Moreover, according to Mr. Bricken s datajust 11 % of residential customers have
replaced a "substantial number" of conventional phone calls with mobile phone calls.
the extreme, just 3 to 5% of wireless customers now use their wireless phone exclusively.
(Seventh Report, FCC 02-179, July 3 2002, p. 32) The lack of substitution in practice is
confirmed by the fact that although 45% of Americans now purchase wireless service
more than 90% of all Americans still have wireline service. (Id., pp. 31 , 32) It is evident
from these statistics that most consumers do not view wireless and wireline service as
close substitutes, much less functionally equivalent. To the contrary, these are largely
Direct Testimony of Ben Johnson, Ph.
On behalf ofthe Idaho Public Utilities Commission, Case No. QWE-T -02-
complementary services which are only substitutable to a limited degree under special
circumstances.
Don t the results of Dr. Lincoln's consumer research contradict this conclusion?
No they do not. For one thing, the data contained in Dr. Lincoln's study is much too
limited to be reliable. Dr. Lincoln arrived at his definition of functional equivalent from
his interpretation of a survey of
36 adults living in the Boise and Twin Falls areas. We asked these
individuals what the three terms used in the statute meant to them,
Each individual wrote down and then submitted their responses.
Dr. MacDonald and I next independently reviewed all 36 responses
to identify the most common interpretation of the key terms. After
considering our separate reviews, we arrived at agreement as to
how most of the respondents interpreted the statutory terms.
found that "functionally equivalent" means that one product could
serve as a substitute for another. Our respondents spoke about the
two products being able to "do the same thing," (Lincoln, p. 19)
This is certainly an unusual way of grappling with issues of statutory interpretation. The
survey results confmn that this small group of individuals had a good, intuitive grasp of
the concept of "functional equivalence." However, they weren t provided with nearly
enough information to allow them to be precise in their definition, or to provide much
insight into whether or not wireless and wireline services qualify as functionally
equivalent as this term is used in Idaho Code g62-622(3)(b). Nor is there any opportunity
to cross examine these individuals concerning their responses. For instance, we have no
way of knowing what these 36 individuals would say ifthey were confronted with the
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
example of a pickup truck and a sports car. If they were told two vehicles can be used to
drive from one end of town to the other, they might agree these vehicles can "do the same
thing." But, if they were told one of the vehicles was a pickup truck and the other was a
sports car, and the driver needs to carry a large quantity oflumber between the two
locations, they might agree that these two vehicles actually cannot do the same thing.
When dealing with a subtle issue like functional equivalency, the conclusion one
reaches may depend upon how much information one is provided and how carefully
relevant aspects of the issue are considered, According to Dr. Lincoln's interpretation of
this survey data, the respondents generally agreed that wireless and wireline service can
do the same thing." (Id.) But, that doesn t necessarily mean these services can do illl of
the same things, or that they can do them equally well-just as pickup trucks and cars can
sometimes " do the same thing" but not equally well.
The other survey data provided by Dr, Lincoln is also problematic, A group of
consumers were asked if they "could solely rely upon cell phone service for the purpose
of making and receiving local phone calls." (Id.) Half of residential users responded yes
they could, 40% responded in the negative, and 10% were undecided. Of the small
business customers, 31 % percent said they could solely rely on wireless while 65%
responded in the negative. (Id., pp. 28, 33)
There are two key problems with this survey, First, the results are skewed upward
because the question fails to consider whether consumers are willing to solely rely upon
wireless service, To use an example, I.!dlllid give up my mobile phone and rely solely on
wireline service, but I would rather not. The convenience of being able to make calls
while traveling around town more than outweighs the expense. Likewise, I get rid
Direct Testimony of Ben Johnson, Ph.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
of my wireline service but I'm not willing to-unless someone forces me to (e.g. by
drastically raising the price). By using the word "could" in the question, Dr. Lincoln
ensured that a large percentage of the respondents would answer in the
affirmative-regardless of how dissimilar these services might be. We can safely assume
that the great majority of the respondents who stated they give up their wireline
phone have not actually done so. Dr. Lincoln didn't ask enough questions to find out
these respondents haven t actually done so, despite the fact that they indicated they could
Just because a consumer could rely entirely on a mobile phone does not mean that
all of the same purposes would be fully and adequately served if they were to do so. For
example, one could exclusively rely on a bicycle, motorcycle or taxi services, but very
few people actually do so. Even if 50% of customers were to answer a survey that they
could" get rid of their car wouldn't mean the alternatives are functionally equivalent.
The fact that many customers "could" solely rely on taxis doesn t mean they would freely
choose to do so, or that taxi service is functionally equivalent to car ownership.
Dr. Lincoln s interpretation of his survey results is contradicted by the fact that so
few consumers today actually do solely rely on a cell phone. If wireless and wireline
service were functionally equivalent, we would see many more users eliminate one
service or the other. There would be no need to pay for both services, since wireline
service would be redundant and therefore a waste of money. Yet, according to data cited
by the FCC, only 3- 5% of telecommunications consumers use their mobile phone as their
only phone.
Further, I fmd it puzzling that Dr. Lincoln can conclude that wireless and wireline
services are functionally equivalent when over 40% of residential customers and 65% of
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T-O2-
small business customers say they could not solely rely on cell phone service. Even under
the ambiguous standard used by Dr. Lincoln ("could"), a very large number of residential
and business customers indicate they could not survive without their regular telephone.
These responses would not make sense unless these consumers perceive significant
functional differences between wireless and wireline services, For these customers, the
functional differences are sufficiently important and vivid that they don t consider these
services to be substitutable even as a possibility-much less something they would be
willing to do,
How does the economist's concept of product substitution relate to the economist'
concept of effective competition?
Usually, four conditions are considered sufficient to ensure that sellers will behave as
price takers " or effectively compete with each other, If anyone ofthese conditions is
absent, the prospects for effective competition are diminished or eliminated.
First, no one firm can have a dominant share of the market. If a firm engages in
price leadership, dominant firm pricing, or price discrimination, its behavior is
inconsistent with competitive behavior. Needless to say, this condition is violated in the
provision of any service where a fmns market share is considerably greater than that of
all its competitors combined,
Second, the products of the supplying fmns must be reasonably uniform (from the
perspective of the buyers in the market). If consumers view the product or service as
unique, the fmn will not need to behave as a "price taker. "
Third, the number of supplying firms must be large enough so that the total
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
amount supplied to the market cannot be restricted, It always is in the interest of suppliers
to limit the total amount supplied to the market, because by limiting supply, they can
charge a higher rate and earn greater returns (economic profits) than under the conditions
of competition,
Fourth, as noted in the criteria cited above, firms must be free to enter and exit the
market. If any fmn decides to produce the service, no substantial legal, financial, or other
barrier must stand in its way. Patents or trademarks (such as brand names) and other legal
barriers can preclude effective entry, making effective competition less likely.
The concept of product substitution pertains directly to the second criteria for
effective competition-the reasonable uniformity of competing products. To the extent
consumers perceive two products to have very similar attributes , and thus consider them
to be close substitutes, the availability of these alternatives will enhance the prospects for
effective competition.
Attributes
What attributes of Qwest's wireline services does the Company think should be
compared to wireless services, in order to determine whether these services are
functionally equivalent?
Qwest witness Teitze1lists the following attributes, which he recommends be used as
points of reference" when determining whether these services are functionally
equivalent: 1 )the ability to originate or receive a voice telephone call at a fIXed location;
2) the ability to access operator assistance (by dialing "0" or accessing directory
Direct Testimony of Ben Johnson, Ph.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T-O2-
assistance), 3); the ability to place and receive long distance voice calls; 4) the ability to
contact emergency service providers; and, 5) the ability to have the customer s assigned
telephone number and address listed in a printed telephone directory. (Teitzel Direct, p. 8)
Mr. Teitzel concludes that each of these attributes are "reasonable available" from
wireless service providers in the 7 exchanges.
Are there problems with the list of "attributes" provided by Mr. Teitzel?
Yes. First, there is some redundancy in this list. For example, the third item is really a
subset of the fIrst item. More importantly, the list is not sufficiently comprehensive or
detailed. Thus, it doesn t allow one to draw meaningful conclusions concerning whether
wireless and wireline services are functionally equivalent. Rather than limiting my
discussion to Mr. Teitzel's list , I will respond to his suggested attributes in the context of
a longer list of attributes and a broader discussion of the relative advantages of wireless
and wireline services.
Comparing these services on a more detailed basis may help the Conmllssion to
gain a better understanding of why so many consumers choose to pay for both services.
As well, I believe this detailed analysis confirms that these are not "functionally
equivalent". In fact, there are many functional differences between these services. The
importance of specific attributes, and the extent to which specific attributes represent
advantages or disadvantages can vary from customer to customer and, in some cases
from call to call.
What advantages does wireless service have over wireline services?
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
The primary advantage of wireless services is mobility; certainly this is its strongest
advantage over traditional wireline service. Wireline services can offer a limited amount
of mobility, For example, with cordless phones one can talk while roaming around one
house or yard, and possibly while walking short distances from one s property, Also, with
the use of extension phones , and/or through the use of call forwarding, one can place and
receive calls at other fixed locations, However, the mobility offered by wireline phones is
not equivalent to the mobility offered by wireless services. With a wireless phone, one
can make and receive calls on the same line from literally anywhere in the country, as
long as the location is close enough to a wireless tower or antenna. With wireless
services, one can make calls and be reached by acquaintances while traveling around
town, out of town, or across the country. Even within a single town or city, the mobility
provided by wireless services is far superior to that offered by wireline service.
Customers can place and receive calls while traveling around town and they can even
start a conversation in one location, continue talking while walking to their car, and can
then finish the call while driving to another location. This type of flexibility is only
offered by wireless services, and it largely explains why these services have grown so
popular. In this respect, wireline services are not functionally equivalent to wireless
servIces.
Are there other differences between wireline and wireless services that help explain
why relatively few consumers simply pick one or the other?
Yes. I have identified 10 key attributes of wire line services that distinguish them from
wireless services.
Direct Testimony of Ben Johnson, Ph.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
First, there are ergonomic differences between conventional and mobile phones.
Due to differences in the size and shape of the phone instrument, as well as the fact that
some mobile phones warm up during usage, people may find a conventional phone to be
more comfortable to use than a mobile phone, particularly during long phone calls , and
thus they will opt to use their wireline service whenever feasible.
Second, wireline services typically provide higher quality, more reliable
communication than wireless services. Calls placed over land lines are typically dropped
less often than calls placed over wireless facilities. Further, land line calls are less subject
to weather interference; they are not subject to structural interference; they are less
subject to congestion problems; they are less frequently subject to cross talk; and, they are
less frequently subject to static and poor sound quality. Because of these quality
differences , wireless services are not functionally equivalent to wireline services. Given a
choice between pulling a cell phone out of their pocket or walking across the room to use
a conventional phone, consumers will often choose the latter option because of these
quality differences.
Third, wireline services provide the ability to have multiple (extension) phones
share the same line and the same phone number. Most residential consumers have more
than one phone in their home. It is not uncommon to have a phone in the living room, the
kitchen, and every bedroom. Many small businesses also have multiple phones sharing a
single line. Functionally, wireless service is very different. Customers are typically
provided with a separate wireless account for each phone desired, although they can
share" the same package of minutes. Even if the minutes associated with a single
account are "shared", the consumer is required to pay substantial additional monthly fees
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
for each additional phone. Furthermore, each wireless phone will have a separate phone
number, which defeats one of the purposes of extension phones,
Fourth, wireline services allow multiple family members or employees to share
the same line. With multiple wireless phones, other parties need to dial different numbers
depending upon which family member or employee they are trying to reach. With
wireline service, a family or business can be reached at a single number, and anyone can
take the call from any location within the house or business. In contrast, with wireless
service multiple accounts and phone numbers are typically maintained. Whether this is an
advantage or disadvantage will depend on the context, but clearly there is a functional
difference in the way the two services are offered and used.
Fifth, wire line services allow consumers to reliably and conveniently access the
internet, and transmit large volumes of data at minimal cost. Although it is possible to
access the internet and transmit data through wireless facilities, it cannot be accomplished
with the same reliability, speed and ease associated with wireline services. If one wants to
access the internet through their wireless services, they must either use their mobile
phone or PDA, with their small screens and limited keypads, or combine technologies in
unusual ways. While wireless services are improving their capabilities, the speed at which
data can be transmitted over wireless services is typically slower than the speed at which
one can typically transmit data over land lines, and the user isn t necessarily given the
option of connecting to the internet service provider of their choice,
Sixth, wireline services allow consumers to conveniently and reliably transmit and
receive faxes. While it may be theoretically possible to transmit faxes using wireless
service, in practice consumers do not use mobile phones for this purpose. From the
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
perspective of most consumers, only wireline service offers the option of transmitting and
receiving paper FAXes,
Seventh, wireline services currently provide better access to emergency services
particularly E911 services. Although the FCC wants the wireless industry to develop and
implement technology which will allow the transmission of a wireless caller s location
and 10 digit phone number to emergency service operators, deployment of this
technology is not yet widely available.
Eighth, wireline service subscribers automatically have their phone number listed
in the telephone directory for free. Wireless subscribers have the option of having their
number listed, but they must pay an additional monthly fee. In practice, most consumers
do not opt to have their mobile number listed, and thus a major functional difference
exists. If another party wants to talk with a wireless subscriber, they cannot do so unless
they somehow discover, or are told, their mobile phone number.
Ninth, wireline service subscribers can keep (port) their phone numbers when they
change carriers, Wireless subscribers currently cannot port their numbers from carrier to
carrIer.
Tenth, there are safety concerns (real or perceived) associated with wireless
services that do not apply to wireline services. For example, there are concerns that
extensive hand-held mobile phone usage can cause brain cancer or other medical
complications. As well, many gasoline stations have warnings on their gas pumps
advising customers to leave their cell phones in their cars while fueling because of the
danger of sparks from the phone igniting fumes from the gas line or the automobile fuel
tank. Due to these warnings and concerns, some consumers may refuse to use a wireless
Direct Testimony of Ben Johnson, Ph.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T-O2-
phone, or they may try to avoid using one as much as possible.
Do these differences help explain why consumers use both wireline and wireless
services?
Yes. Because of these functional differences, wireline and wireless services are often used
for different purposes. As a result, most consumers who choose to purchase wireless
service also continue to purchase wireless service. Whether consumers perceive particular
differences to be significant advantages or disadvantages can vary, depending on their
respective tastes and preferences, as well as the particular purposes for which the service
will be used.
While apples and oranges may be substitutes, most families buy both types of
fruit, because they are so different. Much the same can be said for wireless and wireline
services, Consumers who want, and can afford, greater mobility will purchase a wireless
service, but that doesn t mean they necessarily stop using their wireline service.
The differences between apples and oranges may range from highly significant to
relatively unimportant, depending on the tastes and preferences of each consumer as well
as the particular purpose for which the fruit will be used. The same can be said about
wireless and wireline services. Some customers' top priority may be mobility and giving
all their friends a single number where they can always be reached. In that case, they may
decide to save money be dropping their wireline service. Another consumer s top priority
may be quality and reliability of service, in which case they may not obtain a mobile
phone, or they may use it as little as feasible,
Finally, it should be noted that there are pricing differences that can influence
Direct Testimony of Ben Johnson, Ph.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
consumer purchasing decisions. Wireline services are typically priced on a flat fee
(unlimited usage) basis. Wireless services, on the other hand, are typically priced on a
usage basis, The more you use the phone, the higher your monthly bill. This difference in
pricing structure follows directly from differences in the underlying cost characteristics of
the two technologies. Wireless costs are primarily a function of the usage. A wireless
carrier incurs little, if any, additional cost with the addition of more phone "lines
(actually, just additional phone numbers). In contrast, wireline costs are primarily a
function of the number of access lines on their network. A wireline carrier incurs very
little additional cost as more phone calls are placed over its network.
Consistent with this underlying cost difference, the pricing structure of wireline
services typically allows users to pick up the phone as often as they want, and allows
them to talk as much as they want, without having to be concerned they might receive a
large bill at the end of the month. The limited number of package minutes available with
most wireless services, and the very high charges imposed on excess usage (typically in
the vicinity of 35 to 45 cents per minute) discourage customers from using their wireless
phone. This difference in billing risk gives consumers an incentive to keep and to
continue to use their wireline phone (rather than relying entirely on a wireless phone).
At pages 5 and 6 of his direct testimony, Mr. Shooshan claims that, to the extent
some consumers need Qwest's wireline service for use with internet access and fax
machines, this relates to "non-voice" services, and is therefore irrelevant to this
proceeding. Do you agree?
No. To begin with, I would point out that ordinary local exchange lines are routinely
Direct Testimony of Ben Johnson, Ph.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
used to place and receive fax transmissions, and to connect with internet access providers.
These types of transmissions take place using sounds that occur within the same
frequency range as the human voice, and thus the same line can be used for ordinary
conversations and fax and internet communications. When customers obtain an extra
phone line for their fax machine (or decide to occasionally use an existing line for this
purpose) they pay the tariffed basic local exchange rate. The same holds true for
customers who use their phone line to reach America Online or another internet access
provider. While it might be fair to characterize these uses as "data or 'non-voice" uses
they are fully relevant to this proceeding, contrary to Mr. Shooshan s assertion. Ifbasic
local exchange service is deregulated in this proceeding, and as a result Qwest increases
its basic local exchange rates, customers who depend on basic local service for fax
transmissions and internet access will be forced to pay the higher rates, Wireless service
does not provide a viable competitive alternative for these local exchange customers
since wireless service is not functionally equivalent to basic local exchange service in the
context of these types of phone calls.
Furthermore, as pointed out by Staff witness Wayne Hart, the term "basic local
exchange services" is used throughout Section g62-622, However, in subsection
g62-622(3)(b) (the section under which Qwest filed its application), the Legislature used
the broader term "local services , As discussed by Mr. Hart, in order to determine
whether two different services are functionally equivalent, one must consider both their
similarities and their differences. If the legislature wanted the Conmllssion to limit its
analysis to the use of tariffed services for two-way switched voice communications, it
could have clearly stated this. Given the overall purpose of this portion ofthe statute (a
Direct Testimony of Ben Johnson, Ph.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
determination of whether or not services should be deregulated because of the presence of
effective competition) it would be inappropriate to artificially exclude consideration of
those types of phone calls where the services being compared are not functionally
equivalent.
In your opinion, are wireless and wireline services functionally equivalent?
No. Wireless and wire1ine service are clearly not "corresponding or virtually identical"
with regard to their functional attributes, These differences largely explain why most
wireless customers continue to pay for wireline service-and why they would continue to
do so even if the price of wireline service were to increase substantially.
Competitive Pricing
Please turn to Section 3 of your testimony. Can you clarify your understanding of
Idaho Code ~ 62-622(3)(b) with respect to the phrase "competitively priced"
alternatives?
In order for a service to be deregulated under g 62-622(3)(b), Qwest must show that there
are "competitively priced" alternative services. While more than one interpretation of this
provision is possible, given the context (whether or not effective competition exists), I
interpret this language to mean that the alternative service must compete with the service
to be deregulated on the basis of price. In other words, the issue isn t whether the price of
the alternative service (e.g. wireless service) is determined by competitive market forces.
Rather, the issue is whether the price of wireless service and the price ofthe wireline
Direct Testimony of Ben Johnson, Ph.D.
On behalf ofthe Idaho Public Utilities Commission, Case No. QWE-T -02-
services that are the subject of this proceeding are similar enough, and viewed by market
participants as being closely related, so that one can conclude that the services in question
are "competitively priced.
The phrase "competitively priced" isn t specifically defined in the statute, From
my perspective as an economist, this phrase suggests that prices of the alternative services
aren t determined independently of each other; rather, providers are forced by competitive
pressures to keep their prices in close alignment with the prices set by providers of the
alternative services. As well, it suggests that the prices observed in the market are
relatively similar, indicating that customers who are using one alternative could choose
another alternative without experiencing a significant increase in the amount they pay for
the services in question.
Has the Company provided evidence that competitive pressures push wireless
providers to keep their prices closely aligned with the price of Qwest's wireline
services, or vice versa?
No. The Company has provided a small amount of data showing some recent examples of
wireless service rates. This data is not comprehensive, and it certainly isn t sufficient to
draw the conclusion that wireless and wireline prices are closely aligned due to
competitive market forces, Furthermore, the Company hasn t even taken the necessary
steps to meaningfully compare wireless and wireline prices from a consumer perspective.
These services typically have different pricing structures which makes it difficult to make
an "apples to apples" comparison between particular wireline services and particular
wireless offerings.
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
Can you elaborate on the differences between the pricing of wireless services and
wireline services?
The primary difference relates to usage. Most wireless services are priced on the basis of
usage. Wireless plans usually include a flat per month charge which entitles the customer
to a limited number of minutes per month. The wireless provider typically charges higher
rates for plans that include more minutes, and they impose substantial per-minute fees for
every minute in excess of the package allowance. Hence, wireless service costs some
customers a lot more than other customers, In fact, any given customer could pay widely
different amounts, depending upon the plan they select and the number of calls they place
and receive each month. On the other hand, most wireline local services are not usage
based. Customers can place an unlimited number of outgoing local calls, and they can
receive an unlimited number of incoming calls, without needing to select a particular
plan" and without running the risk of incurring additional per-minute charges.
Are there other pricing differences which make it difficult to compare wireless and
wireline services?
Yes. For example, most wireless services price incoming and outgoing calls the same. In
selecting a particular calling plan, the customer needs to consider both incoming and
outgoing calls. Furthermore, ifthe customer exceeds the allowed number of minutes
associated with their calling plan during a particular month, they will be charged
extra-regardless of whether the excess relates to calls they place or calls they receive
from others. Although there are some very minor exceptions, such as collect calls, most
wireline services do not impose any charge for incoming calls, and thus customers don
Direct Testimony of Ben Johnson, Ph.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
have to be concerned about how many calls they receive, regardless of whether the
incoming calls are local or long distance,
Another difference is that many wireless services treat at least some long distance
calls the same as local calls, Depending upon the particular wireless carrier and calling
plan, calls within some specified geographic area will be treated, for billing purposes, as
if they were placed across town, These geographic areas are typically larger than the local
exchange area used in pricing wireline services. It may include a large portion of the state
the entire state, a large portion of the country, or the entire country. On the other hand
with most wireline services, long distance calls are more expensive than local calls (local
calls are typically "free ). Similarly, most wireless services charge more for calls placed
during the day than for those placed at night or on the weekend. With the exception of
some long distance prices, most wireline prices do not distinguish between weekday and
night/weekend calls. Finally, the price of most wireless service plans include features like
Voice Mail and CallerID, regardless of whether the customer wants or uses the feature. In
sharp contrast, most wire line services charge a premium price for these features.
Customers who don t want these features can reduce their bill by avoiding them.
What is the significance of these differences in wireless and wireline pricing
characteristics?
These differences make it impossible to draw meaningful comparisons between wireless
and wireline prices in the highly simplified manner used by Qwest's witnesses. Instead, it
is necessary to consider a wide variety of different wireless pricing plans , and it is
Direct Testimony of Ben Johnson, Ph.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
necessary to analyze these prices from the perspective of a variety of different types of
customers. Even a comparison between a single wireless rate plan and a typical local
exchange rate will only be meaningful for a small group of customers with specified
usage characteristics.
To prepare a meaningful comparison between wireless prices and wireline prices
one must take into consideration both incoming and outgoing usage patterns. One must
assume the number of minutes that are used in an average month, as well as the number
that are used in a busy month (when the customer s usage peaks above its long term
norm), It also becomes necessary to consider what vertical features the customer likes to
use, and whether they are willing to pay a premium for the use of these features, Finally,
it is necessary to take into consideration the fact that customers don t necessarily have
enough information to select the least costly, or optimum wireless plan. Needless to say,
regardless of how carefully these factors are considered, they mayor may not be accurate
with respect to particular individuals. The comparison will be meaningless with respect to
customers with characteristics that are significantly different than those assumed.
Hasn t Qwest attempted to compare its prices to prices charged by wireless
providers in the 7 southern Idaho exchanges?
Yes. Staff Witness Wayne Hart provides a more detailed discussion ofthe Company
attempt to compare the price of wireless and wireline services. However, I offer the
following brief comments.
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T-O2-
Qwest witness Lincoln presents a study in which he compares wireless and
wireline prices. The study was intended to "identify the degree to which prices and
features were comparable , (Lincoln Direct, p. 6) Dr. Lincoln compares Qwest's local
exchange prices to 3 different wireless calling plans. Dr, Lincoln labels these plans
Economy
, "
Standard" and "Premium . (Id., p. 13) As explained by Dr. Lincoln
The first service package is aimed at customers who use the phone
infrequently, who require few, if any, line features and who wish to
minimize their communications expenditure. ... The second service
package is tailored for those customers who do not need a large amount of
conversation time, but do require more conversation time than they can
obtain with the economy plan, These customers also do not require or do
not wish to pay extra for line features. ... The third service package is
designed for those customers who are heavy users of telecommunications
services. They require a large amount of conversation time. They also
value many of the line features designed to improve the efficiency and
convenience oftelephone usage. (Id., pp. 14, 15)
From this greatly oversimplified comparative analysis, Dr, Lincoln draws the following
conclusion:
(I)t appears that the prices for wireless and basic local exchange services
while not identical, are comparable. Differences in prices can be explained
based on the additional functionality (including mobility) and the inclusion
ofline features or long-distance benefits in certain wireless packages. (Id.
pp. 15-16)
To the extent some wireless services are comparably priced, or cheaper than, some
wireline services , this isn t sufficient to conclude that wireless service is competitively
priced with the services included in Qwest's request. Even if some customers could
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
substitute wireless service for their wireline service without experiencing a significant
increase in their monthly bill, this doesn t mean that all customers could do so, or that
most customers perceive wireless services to be an affordable alternative to Qwest's local
exchange service. To the contrary, many customers may place or receive so many calls
wireless service would be much more costly. Other customers may be risk averse, and
unwilling to switch from a flat rated service to one that can vary with usage-especially if
their usage fluctuates from month to month, and thus it is difficult to predict how much
their monthly bill will be (unless they select an extremely costly plan that includes a very
large package of minutes).
To the extent wireless prices have been declining, isn t it possible that they will be
competitively priced with wireline service in the future?
This is certainly a possibility, since some wireless prices have been declining. However
there are indications that this downward trend has slowed, and there is no basis for
assuming that wireless prices will eventually decline below the level of Qwest's local
exchange rates. Regardless of whether wireless prices decline further, flatten out, or
increase, wireless prices may continue to be determined independently of wire line prices.
There is no evidence that wireless providers have been forced by competitive pressures to
keep their prices in close alignment with the Qwest's wire line prices (or vice versa), and
there is no reason to assume this will happen in the future. Although the total cost
some wireless services may currently be below the total cost of using Qwest's local
exchange services for some customers, this is only true for some customers. For other
customers, wireless service doesn t provide a viable alternative (even aside from all the
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
functional differences) because they use the phone too much, and thus they would
experience a significant increase in the amount they pay for telephone service. In any
event, differences in wireless and wireline pricing structures will continue to make it
difficult for customers (or the Conmllssion) to meaningfully compare the two types of
serVIces,
Aren t some wireless providers beginning to price their services in a manner more
comparable to wireline pricing?
As noted by Qwest witness Shooshan, at least one wireless provider operating in Idaho is
currently experimenting with an "unlimited minutes" pricing plan. (See, Shooshan Direct
p. 6) Leap Wireless, through its Cricket subsidiaries , is marketing "Comfortable
Wireless
. "
With this service, customers can make unlimited calls in their local service
area - and receive calls from anywhere in the world - for as low as just $32.99 a month
plus tax . (http://leapwireless.com/bindex.htrn1; obtained March 11 , 2003) However, this
remains an anomaly-a pricing approach that has not been copied by other, better
established wireless carriers, In fact, Leap Wireless ' business plan, which is based
primarily on its "unlimited minutes" pricing plan, is largely unproven.
Is there any indication that Leap Wireless' business plan may not be successful?
Yes. Although I have not performed an in-depth analysis of this company s financial
condition, it is clear that Leap Wireless is struggling to meet its debt obligations. In May,
2002, Leap began cutting jobs in order to improve its cash position. (Leap Wireless
Comes Tumbling Down, Telephony, September 9 2002, obtained from
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
http://currentissue.telephonyonline,com/ar/telecom leap_wireless comes/) A few months
later, Leap announced slowing subscriber growth, and lowered future growth estimates,
(Id.) By September 30 2002, the company was in default on vendor credit facilities
totaling approximately $1.5 billion, (See
http://news.moneycentral.msn.com/tickerlsigdev.asp?Symbol=US%3aL WIN) In April
2002, Leap s shares were trading in the $10-11 range. By July, 2002, Leap s shares were
trading for less than $1. On December 11 , 2002, the company announced that it had been
delisted by NASDAQ. (Id.) Leap s shares are now trading for approximately $0.13.
Some have suggested that Leap s unusual pricing strategy has contributed to its
fmancial difficulties-which could be one reason why other carriers have declined to
follow its lead in pricing wireless services more like wireline services.
The company has little room to maneuver, though, in part because its
all-you-can-talk pricing plans. Restricting coverage within the city limits
of any given market initially yielded cost savings on infrastructure
licenses, marketing and distribution. Leap s cost per gross add, however
increased in the second quarter to $316 from $246 in the fIrst quarter
because of higher marketing expenses, lower customer additions , price
competition and fraud. Meanwhile, Leap s churn runs higher than the 3%
industry average. Indeed, many question whether Leap s business plan
conceived when wireless competition was less fierce is still applicable,
(Leap Wireless Comes Tumbling Down, Telephony, September 9 2002)
Public Interest Analysis
Please turn to Section 4 of your testimony. How should the Commission proceed
under Idaho Code ~ 62-622(3)(b)?
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T-O2-
The Idaho legislature has left the appropriate interpretation of the terms "functionally
equivalent" and "competitively priced" to the Conmllssion s judgment. Given the
ambiguities involved, I believe the Conmllssion should proceed cautiously and should not
reclassify services prematurely. Qwest has been operating under a regulated monopoly
structure for nearly a century. While there has been a strong trend towards increased
competition, this trend is still in its infancy-particularly in local exchange markets.
Despite the best efforts of the Idaho legislature, this Conmllssion, the U.
Congress, and the Federal Communications Conmllssion (FCC), local competition has
been slow to emerge, Much uncertainty remains concerning how competitive local
exchange markets will become, The Conmllssion should not assume that wireless carriers
are providing effective competition merely because some people use mobile phones to
place calls they previously would have placed using Qwest's local exchange service, nor
should it assume that the trend towards increased competition will continue unabated. If
the Conmllssion were to grant Qwest's application, to my knowledge, it would be the fIrst
state conmllssion to deregulate local exchange services on the basis of wireless
competition,
Are there important considerations the Commission should keep in mind when
evaluating Qwest's application?
Yes. There certainly has been an increased demand for and reliance upon wireless
services. At the end of2001 , the FCC estimated a national penetration rate for wireless
services of 45%. (Annual Report and Analysis of Competitive Market Conditions With
Respect to Commercial Mobile Services, Seventh Report, July 3 2002, p. 20) However
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
according to reports cited by the FCC, at the end of2001 , only 3-5% of these wireless
customers had eliminated their land line. (Id., p. 32) In other words, only 1.4% to 2.3% of
the nation had eliminated their land line in favor of wireless services by the end of 200
(3-5% times 45% equals 1.4-3%) These statistics indicate that a few customers treat
wireless and wireline services as substitutes, but most treat them as complementary
products.
More than half of all households still do not have a mobile phone. Of those
households that do subscribe to a wireless services, the vast majority have less than one
cell phone per household member, Thus, it is not surprising that an extremely high
percentage of all households still depend upon their land line for most of their phone
calls. A small minority of all households have replaced traditional wireline service with
wireless service, but that does not demonstrate these two services are functionally
equivalent. To the contrary, the lack of more widespread substitution strongly suggests
that they are 11Q.1; good substitutes, because they differ in so many important ways.
The significance of these differences varies from attribute to attribute, and from
customer to customer, Clearly, for most customers these wireless and wireline services
are no more functionally equivalent than apples and oranges, peanut butter and jelly, or
pickup trucks and sports cars. Many customers could survive without one or the other
these alternatives, but that doesn t mean they are functionally equivalent, or that one
effectively competes with the other.
Due to functional differences, competition in the wireless market doesn
necessarily spill over to the wireline market-any more than airline competition spills over
to the market for swimming pool contractors. If the Conmllssion were to grant Qwest'
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T-O2-
request in this proceeding, most customers would be placed at the mercy of Qwest'
monopoly power, forced to pay whatever rates it elects to impose. Some customers might
abandon their land lines in protest, or due to budget constraints, but that would be true
even if wireless service did not exist. At this early stage in the evolution towards a more
competitive market, the Conmllssion continues to have an important role in protecting
captive customers from monopoly power.
Would your opinion change if the evidence showed that more and more customers
were dropping their land lines in favor of wireless services?
Not necessarily. Even if the majority of customers were willing to "cut the cord", that
wouldn't necessarily confirm that these services are functionally equivalent-any more
than an increase in the popularity of pickup trucks proves they are now equivalent to cars.
To the extent functional differences remain between these two services, and a substantial
number of customers would not freely abandon their wire line service because they
perceive it to be redundant to their wireless service, Qwest will continue to have
substantial monopoly power in this market segment, and it would not be subject to
effective competition due to wireless offerings. When evaluating Qwest's application, the
Conmllssion must consider the interests of all customers, not just those for whom
functional differences are not important. Rather than focusing on those customers who
would rather own a pickup truck than a car, one must also consider the extent to which
functional differences exist that are important to a significant fraction of the overall
market.
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
Why should the Commission be concerned about those customers who do not
consider the services to be equivalent?
Even if this segment ofthe market were to dwindle in size (e.g. due to changing
perceptions or improving technology), it will remain important because Qwest will retain
monopoly power over these customers, for whom functional differences are significant.
This segment of the market will be unable or unwilling to abandon their land line, and
therefore Qwest will be able to charge higher rates, extracting monopoly profits from this
market segment.
Has Qwest indicated whether it intends to raise any rates if its application is
granted?
Qwest has conceded this is a possibility. Qwest witness Souba explains that the Company
is seeking the same pricing freedom for local services that it gained for other services in
1989 (Souba Direct Testimony, pp. 10-12) Mr. Souba explains that after services were
deregulated in 1989 , access and long distance prices were lowered. However
, "
(p)rices
for other services, including line features and certain data transport services, were
increased over time to meet competitive offerings or to help cover their provisioning
costs. (Id., p. 11) When asked whether local exchange prices could increase if it were
giving pricing freedom, Mr. Souba states:
Yes, of course that is possible. Certainly in an open market, prices move
up or down depending on a variety of factors, As I stated before, and as
supported by Dr. Lincoln, I believe wireless competition limits the amount
Qwest could raise its prices without risking significant loss of customers.
It is equally possible that some prices may be decreased in order to
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
respond to competitive market forces. (Souba Direct Testimony, pp. 19-
20)
Mr. Souba further states:
The current competitive environment will not allow Qwest to charge
excessive" rates for local exchange services without a significant risk of
losing large numbers of customers to wireless providers. (Souba Direct
Testimony, p. 17)
Do you agree that wireless competition will prevent Qwest from charging
excessive" rates?
No. Admittedly, some customers may react in the manner Mr, Souba suggests-those who
are indifferent to the functional differences between these two services. For instance
some aren t particularly concerned about sound quality and reliability, they don t send or
receive large amounts of data or faxes, they don t care about access to E911 services and
they don t want or need to have multiple family members share the same phone line. For
these customers, the obvious response to an increase in basic exchange rates would be to
abandon their land line and rely exclusively on wireless service. For most other
customers, wireless service doesn t provide much relief from Qwest's monopoly power,
Hasn t Qwest provided data which shows that customers are using wireless phones
for calls that would otherwise be carried over a wireline network?
Qwest witness Shooshan cites an FCC Report for the assertion that
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
Estimates suggest that 20% of residential customers have replaced "some
wireline usage with wireless usage, while 11 % have replaced a "significant
percentage, (Id,
These statistics are merely estimates developed by one analyst, and were not
independently verified by the FCc. In any event, the statistics do not demonstrate that
wireless services is functionally equivalent to wireline local exchange services. First, it is
not clear what portion of the "replaced" wireline usage was actually long distance, and
what portion was local usage. Given current pricing patterns in the wireless and long
distance industries, I would not be surprised if a substantial portion of this usage
substitution has been at the expense oflong distance carriers like AT&T and Worldcom
rather than local exchange carriers like Qwest. Second, there is a drastic distinction
between occasionally using one s wireless phone in lieu ofthe wireline phone, and
completely eliminating wireline services in favor of wireless services. For example, one
may make a wireless call on the way home from work rather than waiting to use the
wireline home phone. This sort of usage substitution won t significantly impact Qwest's
profitability, nor does it significantly affect its monopoly power. Usage reductions can
modestly reduce Qwest's revenues (e.g. through reductions in access and long distance
minutes) but it also will modestly reduce Qwest's costs (e,g. through reductions in
switching and transport investments and expenses). Regardless of whether this sort of
usage substitution has a net positive or negative impact on Qwest's bottom line, it is
unlikely to be significant. Furthermore, usage substitution doesn t imply functional
equivalency, Occasional usage of a pickup truck instead of a car does not demonstrate
that cars and trucks are functionally equivalent. Someone who owns both a truck and a
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
car may occasionally use their truck to go somewhere where they previously would have
driven in their car, That sort of usage substitution doesn t indicate the two vehicles are
functionally equivalent.
Qwest has limited its application to seven Idaho exchanges. Should the Commission
also be concerned about customers in the rest of Qwest's Idaho service territory?
Yes. As explained earlier, Staff does not believe wireless services in the seven exchanges
are "functionally equivalent" to or "competitively priced" with Qwest's local services. If
the Conmllssion were to disagree, and therefore were to reclassify these services as
competitive" it would set a precedent that will quickly affect customers in other
exchanges , as well, If a "competitive" classification is upheld for these seven exchanges
on the basis of wireless "competition , on what basis will the Conmllssion be able to
refuse a "competitive" classification for the rest of the Company s exchanges, including
those where the quality and reliability of wireless service is poor, and fewer wireless
carriers offer service?
If the Conmllssion accepts a weak standard of functional "equivalency" in this
proceeding, it will not be easy for the Conmllssion to draw future distinctions on the basis
of subtle (yet significant) differences in wireless service quality or competitive intensity.
If the Company can gain freedom from regulatory control in these seven exchanges, it
will be very difficult, if not impossible, to deny similar requests for deregulation in other
exchanges , even if the competitive pressures exerted by wireless carriers in those
locations are extremely weak, (e.g. due to poor quality service).
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
Recommendations
Would it be appropriate to grant Qwest's application at this time?
No, In my opinion, the evidence does not justify the relief Qwest has requested because
reclassification would not be in the public interest. For certain customers, wireless
services may offer a viable alternative to Qwest's wireline local exchange services.
However, for many customers (perhaps most), wireless services are not a functionally
equivalent alternative to wireline services, Moreover, it would not be in the public
interest to grant the application because it would allow Qwest to increase prices, and to
engage in discriminatory pricing tactics that would adversely affect its captive
customers-particularly those who prefer wire1ine service for at least some of their calling.
Given the functional differences between wireless and wireline services , and the limited
willingness of many customers to substitute one service for the other, it would be a
mistake to deregulate local exchange services on the basis of wireless competition.
Qwest has indicated that it is seeking greater freedom to compete. If the
Commission decides to reject Qwest's application, are there other steps which could
be taken to provide Qwest with greater freedom to respond to competitive market
forces?
Yes. There are many other ways the Conmllssion can provide Qwest with increased
freedom to compete, For example, Qwest could request the Conmllssion set maximum
rates for local exchange service provided to residential and small business customers in
these seven exchanges , pursuant to g62-622(1). Once the Conmllssion sets maximum
Direct Testimony of Ben Johnson, Ph.D.
On behalf of the Idaho Public Utilities Commission, Case No. QWE-T -02-
rates:
Changes to tariffs or price lists that are for nonrecurring services and that
are quoted directly to the customer when an order for service is placed, or
changes that result in price reductions or new service offerings, shall be
effective immediately upon filing with the conmllssion and no other notice
shall be required. (g62-622(1)(e), I.
Other changes become effective ten days after giving notice to the Conmllssion and
effective customers. (Id.) g62-622(1) could be used to provide Qwest with increased
competitive pricing freedom.
The Company purports to be seeking increased pricing flexibility in order to
respond to competitive pressures, To the extent competition is intensifying, Qwest may
legitimately need greater freedom to reduce its prices, to provide promotional discounts
and to "package" various combinations of services in creative ways. However, this sort of
pricing and marketing flexibility can be accommodated within the framework of g62-
622(1). While this provision provides 10 days notice of Qwest's pricing changes, that
should be oflittle concern unless the Company wants to exploit its monopoly power. To
provide the Company with greater flexibility to respond to wireless competition there is
no need to grant its application. This can be accommodated within the structure of g62-
622(1).
Does this complete your direct testimony, which was prefIled on March 19t\ 2003?
Yes, it does.
Appendix A, Direct Testimony of Ben Johnson, Ph.
On Behalf of the Idaho Public Utilities Commission, Case No. QWE- T -02-
Appendix A
Qualifications
What is your present occupation?
I am a consulting economist and President of Ben Johnson Associates, IndY, a fmn of
Present Occupation
economic and analytic consultants specializing in the area of public utility regulation.
Educational Background
What is your educational background?
I graduated with honors from the University of South Florida with a Bachelor of Arts
degree in Economics in March 1974. I earned a Master of Science degree in
Economics at Florida State University in September 1977. The title of my Master
Thesis is a "A Critique of Economic Theory as Applied to the Regulated Finn." Finally,
I graduated from Florida State University in April 1982 with the Ph.D. degree in
Economics. The title of my doctoral dissertation is "Executive Compensation, Size
Profit, and Cost in the Electric Utility Industry.
Clients
What types of clients employ your firm?
Much of our work is perfonned on behalf of public agencies at every level of
government involved in utility regulation. These agencies include state regulatory
commissions, public counsels, attorneys general, and local governments, among others.
Appendix A, Direct Testimony of Ben Johnson, Ph,
On Behalf of the Idaho Public Utilities Commission, Case No. QWE- T -02-
Weare also employed by various private organizations and finns, both regulated and
unregulated. The diversity of our clientele is illustrated below.
RegulatOl)' Commissions
Alabama Public Service Commission-Public Staff for Utility Consumer Protection
Alaska Public Utilities Commission
Arizona Corporation Commission
Arkansas Public Service Commission
Connecticut Department of Public Utility Control
District of Columbia Public Service Commission
Idaho Public Utilities Commission
Idaho State Tax Commission
Iowa Department of Revenue and Finance
Kansas State Corporation Commission
Maine Public Utilities Commission
Minnesota Department of Public Service
Missouri Public Service Commission
National Association of State Utility Consumer Advocates
Nevada Public Service Commission
New Hampshire Public Utilities Commission
North Carolina Utilities Commission-Public Staff
Oklahoma Corporation Commission
Ontario Ministry of Culture and Communications
Staff of the Delaware Public Service Commission
Staff of the Georgia Public Service Commission
Texas Public Utilities Commission
Virginia State Corporation Commission
Washington Utilities and Transportation Commission
West Virginia Public Service Commission-Division of Consumer Advocate
Wisconsin Public Service Commission
Appendix A, Direct Testimony of Ben Johnson, Ph,
On Behalf of the Idaho Public Utilities Commission, Case No. QWE- T -02-
Wyoming Public Service Commission
Public Counsels
Arizona Residential Utility Consumers Office
Colorado Office of Consumer Counsel
Colorado Office of Consumer Services
Connecticut Consumer Counsel
District of Columbia Office of People s Counsel
Florida Public Counsel
Georgia Consumers' Utility Counsel
Hawaii Division of Consumer Advocacy
Illinois Small Business Utility Advocate Office
Indiana Office of the Utility Consumer Counselor
Iowa Consumer Advocate
Maryland Office of People s Counsel
Minnesota Office of Consumer Services
Missouri Public Counsel
New Hampshire Consumer Counsel
Ohio Consumer Counsel
Pennsylvania Office of Consumer Advocate
Utah Department of Business Regulation-Committee of Consumer Services
Attorneys General
Arkansas Attorney General
Florida Attorney General-Antitrust Division
Idaho Attorney General
Kentucky Attorney General
Michigan Attorney General
Minnesota Attorney General
Appendix A, Direct Testimony of Ben Johnson, Ph.
On Behalf of the Idaho Public Utilities Commission, Case No. QWE- T -02-
Nevada Attorney General's Office of Advocate for Customers of Public Utilities
South Carolina Attorney General
Utah Attorney General
Virginia Attorney General
Washington Attorney General
Local Governments
City of Austin, TX
City of Corpus Christi, TX
City of Dallas, TX
City ofEl Paso, TX
City of Galveston, TX
City of Norfolk, VA
City of Phoenix, AZ
City of Richmond, VA
City of San Antonio, TX
City of Tucson, AZ
County of Augusta, V A
County of Henrico, V A
County of York, VA
Town of Ashland, V A
Town of Blacksburg, VA
Town of Pecos City, TX
Other Government Agencies
Canada-Department of Communications
Hillsborough County Property Appraiser
Provincial Governments of Canada
Appendix A, Direct Testimony of Ben Johnson, Ph.
On Behalf of the Idaho Public Utilities Commission, Case No. QWE-O2-
Sarasota County Property Appraiser
State of Florida-Department of General Services
United States Department of Justice-Antitrust Division
Utah State Tax Commission
Regulated Finns
Alabama Power Company
Americall LDC, Inc.
BC Rail
Communi Group
Florida Association of Concerned Telephone Companies, Inc.
LDDS Communications, Inc.
LouisianalMississippi Resellers Association
Madison County Telephone Company
Montana Power Company
Mountain View Telephone Company
Nevada Power Company
Network I, Inc.
North Carolina Long Distance Association
Northern Lights Public Utility
Otter Tail Power Company
Pan-Alberta Gas, Ltd.
Resort Village Utility, Inc.
South Carolina Long Distance Association
Stanton Telephone
Teleconnect Company
Tennessee Resellers' Association
Westel Telecommunications
Yelcot Telephone Company, Inc.
Appendix A, Direct Testimony of Ben Johnson, Ph.
On Behalf of the Idaho Public Utilities Commission, Case No, QWE- T -02-
Other Private Organizations
Arizona Center for Law in the Public Interest
Black United Fund of New Jersey
Casco Bank and Trust
Coalition of Boise Water Customers
Colorado Energy Advocacy Office
East Maine Medical Center
Georgia Legal Services Program
Harris Corporation
Helca Mining Company
Idaho Small Timber Companies
Independent Energy Producers ofIdaho
Interstate Securities Corporation
R. Simplot Company
Merrill Trust Company
MICRON Semiconductor, Inc.
Native American Rights Fund
PenBay Memorial Hospital
Rosebud Enterprises, Inc.
Skokomish Indian Tribe
State Fann Insurance Company
Twin Falls Canal Company
World Center for Birds of Prey
Prior Experience
Before becoming a consultant, what was your employment experience?
From August 1975 to September 1977, I held the position of Senior Utility Analyst
with Office of Public CoilllSel in Florida, From September 1974 until August 1975, I
Appendix A, Direct Testimony of Ben Johnson, Ph.
On Behalf of the Idaho Public Utilities Commission, Case No. QWE-O2-
held the position of Economic Analyst with the same office. Prior to that time, I was
employed by the law fmn of Holland and Knight as a corporate legal assistant.
In how many formal utility regulatory proceedings have you been involved?
As a result of my experience with the Florida Public Counsel and my work as a
consulting economist, I have been actively involved in approximately 400 different
fonnal regulatory proceedings concerning electric, telephone, natural gas, railroad, and
water and sewer utilities.
Have you done any independent research and analysis in the field of regulatory
economics?
Yes, I have undertaken extensive research and analysis of various aspects of utility
regulation. Many of the resulting reports were prepared for the internal use of the
Florida Public Counsel. Others were prepared for use by the staff of the Florida
Legislature and for submission to the Arizona Corporation Commission, the Florida
Public Service Commission, the Canadian Department of Communications, and the
Provincial Governments of Canada, among others, In addition, as I already mentioned
my Master s thesis concerned the theory of the regulated fmn.
Have you testified previously as an expert witness in the area of public utility
regulation?
Yes, I have provided expert testimony on more than 250 occasions in proceedings
before state courts, federal courts, and regulatory commissions throughout the United
States and in Canada. I have presented or have pending expert testimony before 35
state commissions, the Interstate Commerce Commission, the Federal Communications
Appendix A, Direct Testimony of Ben Johnson, Ph.
On Behalf of the Idaho Public Utilities Commission, Case No, QWE- T -02-
Commission, the District of Columbia Public Service Commission, the Alberta, Canada
Public Utilities Board, and the Ontario Ministry of Culture and Communication,
What types of companies have you analyzed?
My work has involved more than 425 different telephone companies, covering the
entire spectrum ITom AT&T Communications to Stanton Telephone, and more than 55
different electric utilities ranging in size ITom Texas Utilities Company to Savannah
Electric and Power Company. I have also analyzed more than 30 other regulated finns
including water, sewer, natural gas, and railroad companies.
Teaching and Publications
Have you ever lectured on the subject of regulatory economics?
Yes, I have lectured to undergraduate classes in economics at Florida State University
on various subjects related to public utility regulation and economic theory, I have also
addressed conferences and seminars sponsored by such institutions as the National
Association of Regulatory Utility Commissioners (NARUC), the Marquette University
College of Business Administration, the Utah Division of Public Utilities and the
University of Utah, the Competitive Telecommunications Association (COMPTEL), the
Intemational Association of Assessing Officers (IAAO), the Michigan State University
Institute of Public Utilities, the National Association of State Utility Consumer
Advocates (NASUCA), the Rural Electrification Administration (REA), North Carolina
State University, and the National Society of Rate ofRetum Analysts.
Appendix A, Direct Testimony of Ben Johnson, Ph.
On Behalf of the Idaho Public Utilities Commission, Case No. QWE- T -02-
Have you published any articles concerning public utility regulation?
Yes, I have authored or co-authored the following articles and comments:
Attrition: A Problern for Public Utilities-Comment." Public Utilities Fortnightly,
March 2, 1978 , pp. 32-33.
The Attrition Problem: Underlying Causes and Regulatory Solutions.Public Utilities
Fortnightly, March 2, 1978, pp. 17-20.
The Dilemma in MDdng Competition with Regulation.Public Utilities Fortnightly,
February 15, 1979, pp, 15-19.
Cost Allocations: Limits, Problems, and Alternatives.Public Utilities Fortnightly,
December 4, 1980, pp. 33-36.
AT&T is Wrong.The New York Times February 13, 1982, p. 19.
Deregulation and Divestiture in a Changing Telecommunications Industry," with
Sharon D. Thomas. Public Utilities Fortnightly, October 14, 1982, pp. 17-22.
Is the Debt-Equity Spread Always Positive?" Public Utilities Fortnightly,
November 25, 1982, pp. 7-
Working Capital: An Evaluation of Alternative Approaches,Electric Rate-Making,
December 1982/January 1983, pp. 36-39.
Appendix A, Direct Testimony of Ben Johnson, Ph.
On Behalf of the Idaho Public Utilities Commission, Case No, QWE-O2-
The Staggers Rail Act of 1980: Deregulation Gone Awry," with Sharon D. Thomas.
West Virginia Law Review Coal Issue 1983, pp. 725-738.
Bypassing the FCC: An Alternative Approach to Access Charges.Public Utilities
Fortnightly, March 7, 1985, pp, 18-23,
On the Results of the Telephone Network's Demise-Comment " with Sharon D,
Thomas. Public Utilities Fortnightly, May 1 , 1986, pp. 6-
Universal Local Access Service Tariffs: An Alternative Approach to Access
Charges," In Public Utility Regulation in an Environment of Change edited by
Patrick C. Mann and Harry M. Trebing, pp. 63-75. Proceedings of the Institute of
Public Utilities Seventeenth Annual Conference. East Lansing, Michigan: Michigan
State University Public Utilities Institute, 1987.
With E. Ray Canterbery. Review of The Economics of Telecommunications: Theory
and Policy by John T. Wenders. Southern Economic Journal 54.2 (October 1987).
The Marginal Costs of Subscriber Loops " A Paper Published in the Proceedings of
the Symposia on Marginal Cost Techniques for Telephone Services. The National
Regulatory Research Institute, July 15-, 1990 and August 12-, 1990.
With E. Ray Canterbery and Don Reading. "Cost Savings from Nuclear Regulatory
Refonn: An Econometric Mode1." Southern Economic Journal January 1996.
Appendix A, Direct Testimony of Ben Johnson, Ph.
On Behalf of the Idaho Public Utilities Commission, Case No. QWE- T -02-
Professional Memberships
Do you belong to any professional societies?
Yes. I am a member of the American Economic Association.
CERTIFICATE OF SERVICE
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SERVED THE FOREGOING DIRECT TESTIMONY OF BEN JOHNSON, Ph.D., IN
CASE NO. QWE-02-, BY MAILING A COpy THEREOF, POSTAGE PREPAID
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