2NDDISC.docx

1 BOISE, IDAHO, THURSDAY, JUNE 25, 1998, 9:30 A. M.
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4 COMMISSIONER NELSON: Good morning. We'll
5 come to order in this phase of Idaho Public Utilities
6 Commission Case GNR-T-97-14, in the matter of the
7 petition of the customers of the Fremont Telephone
8 Company to join the eastern Idaho extended service
9 calling area.
10 Before we begin, can we take the
11 appearances of the parties today? Am I missing
12 something? Mr. McClure.
13 MR. McCLURE: Thank you,
14 Commissioner Nelson. Ken McClure, Givens, Pursley, for
15 Fremont Telcom.
16 COMMISSIONER NELSON: Ms. Hobson.
17 MS. HOBSON: Mary S. Hobson from Stoel,
18 Rives appearing on behalf of U S WEST Communications.
19 COMMISSIONER NELSON: Thank you.
20 Mr. Howell.
21 MR. HOWELL: Don Howell, Deputy Attorney
22 General, on behalf of the Commission Staff.
23 COMMISSIONER NELSON: Thank you,
24 Mr. Howell. We also had Mr. Lowell Williams as an
25 intervenor, but I don't believe he's here today. Before
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CSB REPORTING COLLOQUY
Wilder, Idaho 83676
1 we take the testimony in this case, are there any
2 preliminary matters today?
3 MR. McCLURE: None that I'm aware of.
4 COMMISSIONER NELSON: All right and, of
5 course, the parties are aware, but just for the record,
6 why, there's been a stipulation filed in this case by the
7 parties and so with that understanding, we'll go ahead
8 and take the testimony and perhaps if we started with the
9 Company, Fremont Telcom, Mr. McClure.
10 MR. McCLURE: We'd be happy to. I'd like
11 to call Mr. John Bauchman.
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13 JOHN W. BAUCHMAN,
14 produced as a witness at the instance of the Fremont
15 Telcom Company, having been first duly sworn, was
16 examined and testified as follows:
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18 DIRECT EXAMINATION
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20 BY MR. McCLURE:
21 Q Mr. Bauchman, would you please state and
22 spell your name for the record?
23 A John Bauchman, B-a-u-c-h-m-a-n.
24 Q Are you the John Bauchman who has filed
25 prefiled testimony in this case?
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CSB REPORTING BAUCHMAN (Di)
Wilder, Idaho 83676 Fremont Telcom Co.
1 A Yes, I am.
2 Q If I were to ask you those same questions
3 today, would your answers be the same as they appear on
4 the prefiled testimony?
5 A Yes, they would.
6 MR. McCLURE: I would ask that the prefiled
7 testimony be spread upon the record as if read.
8 COMMISSIONER NELSON: Thank you. Without
9 objection, we will spread Mr. Bauchman's testimony on the
10 record as if it was read.
11 (The following prefiled testimony of
12 Mr. John Bauchman is spread upon the record.)
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CSB REPORTING BAUCHMAN (Di)
Wilder, Idaho 83676 Fremont Telcom Co.
1 Q PLEASE STATE YOUR NAME, POSITION AND
2 CURRENT BUSINESS ADDRESS.
3 A My name is John W. Bauchman. I am Vice
4 President and Chairman of Fremont Telcom Co. ("Fremont").
5 My business address is 110 East Main, St. Anthony, Idaho
6 83445.
7 Q DOES EXHIBIT NUMBER 1 CORRECTLY SET FORTH
8 YOUR EDUCATIONAL AND OCCUPATIONAL BACKGROUND?
9 A Yes, it does.
10 Q WHAT IS THE PURPOSE OF YOUR APPEARANCE
11 BEFORE THIS COMMISSION TODAY?
12 A As Vice President and Chairman of Fremont I
13 am appearing before you today to present testimony in
14 support of two-way Extended Area Service ("EAS") between
15 the Ashton, St. Anthony and Island Park exchanges served
16 by Fremont and the Southeastern Idaho EAS calling area of
17 U S WEST.
18 Q WOULD YOU PLEASE DESCRIBE YOUR ROLE IN THIS
19 FILING?
20 A I have participated with our consulting
21 firm GVNW, other members of Fremont's staff and the Idaho
22 Public Utilities Commission Staff in either reviewing,
23 preparing or causing to be prepared, the documents and
24 schedules that are a part of this filing. I have worked
25 personally with Ray Hendershot of GVNW to help prepare
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J. Bauchman, Di 2
Fremont Telcom Co.
1 this filing.
2 Q WHY DO YOU BELIEVE THAT TWO-WAY EAS SHOULD
3 BE IMPLEMENTED IN THESE AREAS?
4 A There is a great deal of community interest
5 and a large amount of telephone
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J. Bauchman, Di 2A
Fremont Telcom Co.
1 calling that occurs across Southeastern Idaho that
2 supports EAS from a policy perspective. Substantial
3 public interest exists for implementing two-way EAS for
4 Ashton, St. Anthony and Island Park for several reasons.
5 First, many of the business needs for individual
6 residents of these communities are located in the Idaho
7 Falls, Rexburg and Pocatello areas. Many businesses have
8 branches in the Idaho Falls, Rexburg and Pocatello areas.
9 Second, over the years many customers in these exchanges
10 have asked for EAS and are continuing to indicate that
11 this is a service they desire between the communities.
12 Third, during the past two decades recreational and
13 tourism activities have grown significantly, bringing
14 many citizens from the Idaho Falls and Pocatello areas
15 who own property in Fremont's service area. These
16 individuals often spend their weekends in Fremont's
17 service area and need to communicate with family and work
18 on a regular basis in the Idaho Falls and Pocatello
19 areas.
20 Q CAN YOU JUSTIFY EAS IMPLEMENTATION ON A
21 TRADITIONAL EAS APPROACH WHERE AT LEAST 50% OF THE
22 CUSTOMER BASE MAKES TWO OR MORE CALLS TO A GIVEN EXCHANGE
23 PER MONTH?
24 A Under this approach EAS cannot be justified
25 but many residents would have been included in this
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J. Bauchman, Di 3
Fremont Telcom Co.
1 calling area had it been retained by U S WEST. We are
2 dealing more with a market based need for EAS, rather
3 than a need for hospitals, schools, county seat, etc.
4 Q WHAT IS THE REVENUE IMPACT ON FREMONT IF IT
5 OFFERS TWO-WAY EAS?
6 A As explained in more detail in Ray
7 Hendershot's testimony, Fremont will lose
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J. Bauchman, Di 3A
Fremont Telcom Co.
1 interstate revenues, access charge revenues and billing
2 and collection revenues if EAS is implemented. These
3 losses must be recovered in some fashion. This will
4 require a combination of increased local rates and/or
5 funding from the Idaho Universal Service Fund. Our
6 intention is to insure that two-way EAS is revenue
7 neutral to Fremont. When I say revenue neutral, I mean
8 that Fremont will not lose revenue nor receive any
9 additional revenue from the implementation of this
10 service.
11 Q IF FREMONT WILL NOT RECEIVE ANY ADDITIONAL
12 REVENUE FROM THIS FILING, THEN WHY IS TWO-WAY EAS
13 IMPORTANT TO FREMONT AS A COMPANY?
14 A The implementation of two-way EAS is
15 important to Fremont because Fremont believes it is
16 important to its customers. Communication services are
17 becoming increasingly important to the average Idaho
18 citizen. Whatever services Fremont's customers require
19 to meet their communications needs are important to
20 Fremont. Also, as I stated earlier, Fremont's management
21 feels that two-way EAS will be good for the communities
22 as a whole.
23 Q DOES FREMONT HAVE ADEQUATE FACILITIES TO
24 IMPLEMENT TWO-WAY EAS?
25 A Fremont anticipates that EAS will cause
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J. Bauchman, Di 4
Fremont Telcom Co.
1 significantly more traffic within the new calling area
2 than currently exists. Our estimates of that traffic
3 have used a stimulation factor of 3 times, meaning that
4 when calls which now are toll calls become local calls
5 and the toll charges are removed we anticipate a
6 threefold increase in traffic on those routes. A 3 times
7 stimulation factor is conservative
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J. Bauchman, Di 4A
Fremont Telcom Co.
1 and may underestimate the actual increase in traffic
2 Fremont will experience as a consequence of EAS.
3 Accordingly, Fremont will need to upgrade its facilities
4 between Ashton and St. Anthony in order to accommodate
5 the increased traffic anticipated to result from EAS.
6 This can be accomplished either through installation of
7 fiber cable or through an upgrade of existing microwave
8 facilities. The cost of these plant additions is set
9 forth in Mr. Hendershot's testimony and will need to be
10 recovered either from Fremont's local rates or the Idaho
11 Universal Service Fund in order for EAS to be revenue
12 neutral to Fremont.
13 Q WHEN CAN IMPLEMENTATION OF EAS BE
14 ACCOMPLISHED?
15 A Within two months of approval by the
16 Commission.
17 Q WOULD YOU PLEASE SUMMARIZE YOUR TESTIMONY.
18 A In summary, Fremont feels that two-way EAS
19 should be implemented between Ashton, St. Anthony and
20 Island Park exchanges and the U S WEST Southeastern Idaho
21 calling area. Fremont believes that such implementation
22 is consistent with the public interest for the reasons
23 stated previously.
24 Q DOES THIS CONCLUDE YOUR TESTIMONY?
25 A Yes, it does.
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J. Bauchman, Di 5
Fremont Telcom Co.
1 (The following proceedings were had in
2 open hearing.)
3 COMMISSIONER NELSON: And he's available
4 for cross, is he?
5 MR. McCLURE: He is available.
6 COMMISSIONER NELSON: Thank you.
7 Ms. Hobson, do you have questions?
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9 CROSS-EXAMINATION
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11 BY MS. HOBSON:
12 Q Mr. Bauchman, referring you to page 4,
13 line 4 of your testimony, do you have that in front of
14 you?
15 A Let me grab it real quick, I'm sorry.
16 Yes.
17 Q You state there that your intention is to
18 ensure that two-way EAS is revenue neutral to Fremont; is
19 that correct?
20 A Yes.
21 Q So to the extent that your testimony and
22 the testimony of Mr. Hendershot references other rate
23 deficiencies and so on, those matters are to be taken up
24 in a subsequent proceeding; is that correct?
25 A That is correct.
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CSB REPORTING BAUCHMAN (X)
Wilder, Idaho 83676 Fremont Telcom Co.
1 MS. HOBSON: Thank you, Mr. Bauchman.
2 That's all I have.
3 COMMISSIONER NELSON: Thank you,
4 Ms. Hobson.
5 Mr. Howell.
6 MR. HOWELL: No questions.
7 COMMISSIONER NELSON: Are there any
8 questions from the Commission for Mr. Bauchman?
9 COMMISSIONER HANSEN: I don't have any.
10 COMMISSIONER NELSON: I don't have any, so,
11 Mr. Bauchman, we thank you for coming over today and
12 thank you for your testimony.
13 THE WITNESS: Okay, thank you.
14 (The witness left the stand.)
15 MR. McCLURE: I'd like to call next Mr. Ray
16 Hendershot.
17 COMMISSIONER NELSON: All right.
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CSB REPORTING BAUCHMAN (X)
Wilder, Idaho 83676 Fremont Telcom Co.
1 RAYMOND HENDERSHOT,
2 produced as a witness at the instance of the Fremont
3 Telcom Company, having been first duly sworn, was
4 examined and testified as follows:
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6 DIRECT EXAMINATION
7
8 BY MR. McCLURE:
9 Q Mr. Hendershot, would you please state and
10 spell your name for the record?
11 A Raymond A. Hendershot, H-e-n-d-e-r-s-h-o-t,
12 and I work for GVNW in Colorado Springs, Colorado, and
13 we're representing Fremont Telcom today.
14 Q Thank you, Mr. Hendershot. Have you filed
15 direct and supplemental testimony in this case?
16 A Yes, I have.
17 Q If I asked you the same questions today as
18 asked in that prefiled testimony, would your answers be
19 the same?
20 A Yes, they would.
21 MR. McCLURE: I'd ask that it be spread
22 upon the record as if read.
23 COMMISSIONER NELSON: Thank you. With no
24 objection, we'll spread Mr. Hendershot's direct testimony
25 on the record and mark Exhibits 1 through 6. Are we
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CSB REPORTING HENDERSHOT (Di)
Wilder, Idaho 83676 Fremont Telcom Co.
1 including your supplemental testimony at this time, too?
2 MR. McCLURE: Yes, I would like to do that
3 as well, if I may.
4 COMMISSIONER NELSON: And we will also
5 spread Mr. Hendershot's supplemental testimony which
6 consisted of six pages.
7 (The following prefiled direct and
8 supplemental testimony of Mr. Raymond Hendershot is
9 spread upon the record.)
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CSB REPORTING HENDERSHOT (Di)
Wilder, Idaho 83676 Fremont Telcom Co.
1 Q PLEASE STATE YOUR NAME AND BUSINESS
2 ADDRESS.
3 A My name is Raymond A. Hendershot. My
4 business address is 2270 LaMontana Way, P.O. Box 25969,
5 Colorado Springs, Colorado 80936.
6 Q BY WHOM ARE YOU EMPLOYED AND IN WHAT
7 CAPACITY?
8 A I am a Vice President for GVNW
9 Inc./Management ("GVNW").
10 Q PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND
11 AND WORK EXPERIENCE.
12 A I graduated from Brigham Young University
13 with a Bachelor's Degree in Accounting in 1972 and a
14 Master's Degree in Accounting in 1973. I received a CPA
15 Certificate from the State of Texas. Upon graduation, I
16 was employed by General Telephone and Electronics ("GTE")
17 where I served in a variety of positions within the
18 financial area of the company. In 1985, I joined GVNW.
19 GVNW provides a wide variety of management services
20 within the communications industry. My primary areas of
21 responsibility include the development of rates and
22 tariffs, preparation of toll cost separation studies and
23 depreciation rate studies, consulting on acquisitions and
24 sales of telephone properties, and providing various
25 other management services. I was promoted to my present
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R. Hendershot, Di 2
Wilder, Idaho 83676 Fremont Telcom Co.
1 position in July 1994.
2 Q HAVE YOU PREVIOUSLY TESTIFIED BEFORE ANY
3 REGULATORY COMMISSION?
4 A Yes. I have provided testimony on
5 telecommunications issues before the Idaho Public
6 Utilities Commission ("Commission") on numerous
7 occasions. I have also testified in various telephone
8 company filings and generic regulatory
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R. Hendershot, Di 2A
Wilder, Idaho 83676 Fremont Telcom Co.
1 proceedings before the Arizona Corporation Commission,
2 the Wisconsin Public Service Commission, and the Utah
3 Public Service Commission.
4 Q FOR WHOM ARE YOU APPEARING IN THIS
5 PROCEEDING?
6 A I am appearing on behalf of Fremont Telcom
7 Co. ("Fremont" or "Company") in this case.
8 Q WHAT IS THE PURPOSE OF YOUR TESTIMONY?
9 A My testimony supports the stipulation that
10 Fremont, the Staff and US WEST Communications, Inc.
11 ("USWC") have entered into regarding extended area
12 service ("EAS") for the customers of Fremont. I will
13 also explain the cost of providing EAS and the current
14 financial impact to the Company should it be required to
15 provide such service. My testimony includes a discussion
16 and exhibits regarding Fremont's current financial
17 condition. It also includes the calculation of a pro
18 forma revenue requirement for the Company.
19 STIPULATION
20 Q WOULD YOU PLEASE DESCRIBE THE STIPULATION
21 ENTERED INTO BETWEEN THE COMPANY, THE STAFF AND USWC?
22 A Customers in Fremont's service area filed a
23 petition with the Commission in July 1987 requesting
24 toll-free or extended area service between Fremont's
25 service area in Fremont County and USWC's eastern Idaho
102
R. Hendershot, Di 3
Wilder, Idaho 83676 Fremont Telcom Co.
1 calling region. Fremont serves the exchanges of Ashton,
2 Island Park and St. Anthony. By their stipulation the
3 parties have settled many of the issues typically raised
4 in EAS cases and have recommended that the Commission
5 grant the application for EAS. Fremont has agreed to use
6 a "3 times" (3x) stimulation factor and has
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R. Hendershot, Di 3A
Wilder, Idaho 83676 Fremont Telcom Co.
1 agreed to not seek rate relief or disbursements from the
2 Idaho Universal Service Fund ("IUSF") until the
3 Commission Staff completes an audit of the Company. The
4 Stipulation proposes to increase Fremont's monthly
5 residential and business local rates to $24.10 and $42.00
6 respectively. As a consequence of establishing EAS, the
7 parties recommend termination of the rate freeze to which
8 the Company agreed at the time of its purchase of the
9 USWC exchanges.
10 Q WOULD YOU PLEASE EXPLAIN WHAT YOU MEAN BY A
11 3 TIMES STIMULATION FACTOR?
12 A Customers currently incur a toll charge to
13 call other customers in the proposed EAS calling area.
14 With EAS these calls would become local calls. Because
15 the calls would become local and toll charges would be
16 removed, customers can be expected to call more
17 frequently and to communicate for a longer period of
18 time. What we mean by a 3 times stimulation is that the
19 current traffic or calling volume is expected to increase
20 300% as a result of EAS. Traffic stimulation projections
21 also play a role in estimating jurisdictional costs
22 shifts.
23 Q WOULD YOU PLEASE EXPLAIN WHY A 3 TIMES
24 STIMULATION FACTOR WAS USED INSTEAD OF SOME OTHER NUMBER?
25 A Prior experience and data from other cases
104
R. Hendershot, Di 4
Wilder, Idaho 83676 Fremont Telcom Co.
1 in which EAS has been granted substantiate stimulation
2 factors between 200% and 400%. The precise degree of
3 increased usage will differ in each case, depending on
4 each area's peculiar circumstances, and is affected by a
5 number of variables not readily ascertainable in advance.
6 A 3 times stimulation factor is an educated estimate
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R. Hendershot, Di 4A
Wilder, Idaho 83676 Fremont Telcom Co.
1 amply supported by results in other cases. In my
2 opinion, if anything, a 3 times stimulation factor is a
3 conservative estimate of the increased usage which should
4 be anticipated if EAS is implemented.
5 Q PLEASE EXPLAIN HOW THE PROPOSED LOCAL RATES
6 WERE DETERMINED?
7 A As I will explain in a moment, Fremont's
8 revenue requirement justifies local rates higher than
9 those proposed in the Stipulation. The proposed local
10 rates were set at a level which is expected to be 125% of
11 the statewide average, taking into consideration all of
12 the potential increases in local rates across the state.
13 The IUSF covers that portion of a company's allowed costs
14 which exceed 125% of the statewide average rate for all
15 local exchange companies. Accordingly it is better for
16 Fremont's customers for the Company to establish a rate
17 sufficient to cover most of the increased cost associated
18 with providing EAS and meet 125% of the statewide average
19 in one step instead of adjusting the local rate each time
20 a local exchange company across the state changes its
21 rates in the next few months. In addition, the proposed
22 rates come very close to covering the cost for this new
23 EAS calling area.
24 Q WILL THE IMPLEMENTATION OF EAS TERMINATE
25 THE COMPANY'S AGREEMENT NOT TO INCREASE ITS LOCAL RATES?
106
R. Hendershot, Di 5
Wilder, Idaho 83676 Fremont Telcom Co.
1 A Yes. When Fremont acquired these exchanges
2 from USWC it agreed not to seek an increase in its local
3 rates for three years. That period will not expire until
4 next year. One of the major consequences of granting the
5 request for EAS filed by Fremont's customers is the need
6 for the Company to increase its
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R. Hendershot, Di 5A
Wilder, Idaho 83676 Fremont Telcom Co.
1 local rates to cover the additional cost of providing
2 EAS. Clearly the implementation of EAS changes Fremont's
3 financial condition significantly. The Stipulation
4 recommends the termination of the Company's agreement not
5 to increase rates.
6 COST OF EXTENDED AREA SERVICE
7 Q HAVE YOU PREPARED ANY EXHIBITS CONCERNING
8 THE COST TO FREMONT OF PROVIDING THE REQUESTED EXTENDED
9 AREA SERVICE TO CUSTOMERS?
10 A Yes. I have prepared Exhibit 1, which
11 shows the costs to Fremont to provide EAS. Exhibit 1
12 summarizes my calculations of Fremont's incremental costs
13 to provide EAS. Line 1 of the exhibit shows a $131,698
14 reduction in interstate revenue. When intrastate toll
15 routes are converted to EAS, the local usage increases
16 significantly. The result is that costs shift from the
17 interstate to the state jurisdiction causing interstate
18 settlement revenue to decrease while the intrastate
19 revenue requirement increases. The $131,698 figure
20 incorporates the anticipated reduction in interstate
21 settlement revenue that will occur because of this shift.
22 For purposes of this estimate I have used a 3 times
23 stimulation factor for the reasons I explained
24 previously. Lines 2a and 2b of the exhibit show
25 reductions of $318,884 in intrastate access charges and
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R. Hendershot, Di 6
Wilder, Idaho 83676 Fremont Telcom Co.
1 $88,263 in billing and collection revenues. The $318,884
2 figure is simply the foregone access charge revenue
3 attributable to the routes which will be converted to
4 EAS. The $88,263 number is lost billing and collection
5 revenue from calls on the same route.
6 Q PLEASE EXPLAIN LINE 3 OF EXHIBIT NO. 1.
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R. Hendershot, Di 6A
Wilder, Idaho 83676 Fremont Telcom Co.
1 A This is an unusual cost item that requires
2 some explanation. As the Commission will recall, when
3 Fremont acquired the Ashton, Island Park and St. Anthony
4 exchanges from USWC, the acquisition was approved, in
5 part, based upon revenue Fremont was anticipated to
6 receive from access minutes then being billed by USWC.
7 Since Fremont has provided service to these exchanges,
8 the access minutes billed and recorded by Fremont have
9 been approximately 60% of the historical level
10 experienced by USWC. Fremont is unable to determine why
11 the actual minutes are so much lower than historical
12 levels. This figure represents the access minutes lost
13 by Fremont from the historical levels for telephone
14 traffic to the expanded EAS calling area. When Fremont
15 purchased these exchanges, it relied upon the data
16 provided by USWC. If the Commission grants EAS in this
17 case, it should allow Fremont to be compensated for this
18 lost revenue. This is an item addressed in the
19 stipulation that Fremont not seek further rate relief
20 until such time as the Staff completes an audit of the
21 Company's operations or when the Company can supply 1998
22 financial data.
23 Q PLEASE EXPLAIN LINES 4 AND 5 OF EXHIBIT
24 NO. 1.
25 A Line 4 represents the loss of intracompany
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R. Hendershot, Di 7
Wilder, Idaho 83676 Fremont Telcom Co.
1 toll revenue which Fremont today is billing to its
2 customers. These toll routes would be converted to EAS
3 and the toll revenue would be lost. The Company should
4 be allowed to recover this revenue as its loss is a
5 direct cost of implementing EAS. Likewise, line 5 shows
6 the loss the Company will experience when it no longer is
7 allowed to bill zone charges to its customers as agreed
8 in the Stipulation.
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R. Hendershot, Di 7A
Wilder, Idaho 83676 Fremont Telcom Co.
1 Q PLEASE EXPLAIN LINE 6 OF EXHIBIT NO. 1.
2 A This line calculates the revenue impact of
3 the plant additions which will be necessary for Fremont
4 to provide EAS. The $478,339 in plant additions consists
5 of the installation of microwave facilities between
6 Ashton and St. Anthony, since the current facilities are
7 insufficient to carry the increased traffic which EAS is
8 anticipated to cause. Upgrades also will be required to
9 the switch which will include translation cards, trunk
10 cards and installation labor.
11 Q PLEASE EXPLAIN LINE 7 OF EXHIBIT NO. 1.
12 A This line lists the estimated cost to
13 Fremont of consulting and legal costs occasioned by this
14 EAS case. The Company estimates $30,000 in total costs
15 and proposes to amortize it over three years.
16 Q WHAT IS FREMONT'S TOTAL REVENUE REQUIREMENT
17 ATTRIBUTABLE TO IMPLEMENTATION OF EXTENDED AREA SERVICE?
18 A Fremont's total local revenue requirement
19 will increase by $1,043,550 after the gross up for taxes.
20 Q WHAT REVENUES WOULD THE COMPANY RECEIVE
21 UNDER THE STIPULATION FOR PROVIDING EXTENDED AREA
22 SERVICE?
23 A I have prepared Exhibit 2, which shows the
24 local revenues before and after the proposed increase.
25 Column D indicates that the Company's local revenues are
112
R. Hendershot, Di 8
Wilder, Idaho 83676 Fremont Telcom Co.
1 anticipated to increase by $935,562 under the proposed
2 $24.10 and $42.00 rates. This amount has been carried
3 forward to Exhibit No. 1, line 11. As can be seen, the
4 anticipated revenue to be received from the
5 implementation of EAS will not cover the cost of
6 providing the service. Line 12 on Exhibit No. 1
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R. Hendershot, Di 8A
Wilder, Idaho 83676 Fremont Telcom Co.
1 shows a revenue deficiency of $107, 988. This shows that
2 the proposed rates do not cover the entire cost of EAS as
3 proposed in the Stipulation.
4 REVENUE REQUIREMENT
5 Q PLEASE DESCRIBE THE METHODOLOGY USED IN
6 CALCULATING FREMONT'S REVENUE DEFICIENCY.
7 A I have prepared Exhibits 3 through 6 which
8 comprise a simple set of calculations following the
9 pattern typically used by commercial local exchange
10 companies when filing with the Commission for rate
11 increases. The first step is to list 1997 booked plant
12 balances, expenses and revenues and then make pro forma
13 changes to these amounts. The resulting numbers reflect
14 balances as of the end of 1997. Revenues and expenses
15 are calculated, adjusted for pro forma changes, and then
16 separated between jurisdictions using the methodology
17 adopted by the Federal Communications Commission. A cost
18 of capital for the Company then is developed to determine
19 the appropriate earnings level for intrastate investment.
20 This rate of return is applied to the intrastate rate
21 base to determine a return in rate base. The estimated
22 net income from the end of period financial statement
23 then is subtracted from the return to determine a return
24 deficiency. The resulting shortfall is grossed up for
25 uncollectible accounts and taxes.
114
R. Hendershot, Di 9
Wilder, Idaho 83676 Fremont Telcom Co.
1 Q PLEASE DESCRIBE EXHIBIT NO. 3.
2 A Exhibit 3 identifies the year end 1997
3 plant and reserve balances and any adjustment made to
4 those plant balances. In this case the only adjustment
5 is inclusion of a 45 day working cash allowance. Columns
6 F and G divide the rate
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R. Hendershot, Di 9A
Wilder, Idaho 83676 Fremont Telcom Co.
1 base between the interstate and Idaho jurisdictions.
2 Q PLEASE DESCRIBE EXHIBIT 4, WHICH IS
3 ENTITLED "REVENUES AND EXPENSES."
4 A This schedule calculates the Company's net
5 income after income taxes. Lines 1 through 9 identify
6 the Company's 1997 revenues. Lines 11 through 26
7 identify the 1997 booked expenses. Columns E and F
8 separate the revenues and expenses between the interstate
9 and state jurisdictions.
10 Q WOULD YOU PLEASE EXPLAIN THE ADJUSTMENT TO
11 1997 EXPENSES SHOWN IN EXHIBIT 4, COLUMN C?
12 A Column C shows an increase of $10,000 in
13 corporate operations expenses for the cost of presenting
14 this case. This is based on a three year amortization of
15 a $30,000 total cost.
16 Q IS THIS A NORMAL PRO FORMA ADJUSTMENT?
17 A Yes. The Commission has accepted a three
18 year amortization of rate case expense costs for as long
19 as I can remember.
20 Q WOULD YOU PLEASE IDENTIFY EXHIBIT 5 AND
21 EXPLAIN ITS SIGNIFICANCE?
22 A Exhibit 5 calculates the cost of capital
23 for Fremont. The result is a weighted cost of capital
24 which is utilized in determining the allowable return for
25 the Company.
116
R. Hendershot, Di 10
Wilder, Idaho 83676 Fremont Telcom Co.
1 Q PLEASE EXPLAIN THE COMPONENTS OF THE
2 WEIGHTED COST OF CAPITAL.
3 A The cost of debt calculation is very
4 straight forward. The principal balance for
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R. Hendershot, Di 10A
Wilder, Idaho 83676 Fremont Telcom Co.
1 each of Fremont's six debt instruments is identified as
2 of year end 1997. A capital ratio is calculated for each
3 of the six loans. This ratio then is multiplied by the
4 interest rates of the debt instruments to produce the
5 weighted cost component for debt. Estimating the cost of
6 equity, on the other hand, involves a more subjective
7 judgment. In this case, Fremont proposes a 15.75% return
8 on equity.
9 Q HOW DID YOU ARRIVE AT A 15.75 PERCENT
10 EQUITY COST?
11 A I considered several factors. Fremont does
12 not have an authorized rate of return. I considered the
13 rate of return authorized for similar companies in the
14 state and used those rates of return as a guideline. I
15 also considered the losses ($1,626,760) the Company has
16 incurred since it began providing service. Considering
17 these factors, I used a return on equity of 15.75%. In
18 the recent USWC rate case, USWC estimated its cost of
19 equity at 12.5% to 13.1%. Fremont is a significantly
20 greater risk than USWC, therefore its return on equity
21 should be greater.
22 Q WHAT IS YOUR BASIS FOR THIS CONCLUSION?
23 A Fremont is the newest local exchange
24 company in the State of Idaho which is not a competitive
25 local exchange carrier. As a small, start-up company
118
R. Hendershot, Di 11
Wilder, Idaho 83676 Fremont Telcom Co.
1 obligated to serve all existing and potential customers
2 in its certificated territory, its business and financial
3 risks are far greater than a large, seasoned, multistate
4 corporation like USWC. Consequently, the market would
5 require a cost of equity far greater than USWC's.
6 Q IS THERE ANY OTHER WAY YOU CAN TEST THE
7 REASONABLENESS OF
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R. Hendershot, Di 11A
Wilder, Idaho 83676 Fremont Telcom Co.
1 A 15.75% RETURN OF EQUITY?
2 A Yes. The estimated cost of equity also can
3 be evaluated by considering the Times Interest Earned
4 Ratio ("TIER") it produces. Given the introduction of
5 competition in the local exchange business, lenders now
6 require a TIER of roughly 3.0 in order to approve
7 telephone company loan applications. A 15.75% return on
8 equity produces a TIER of 1.5 for Fremont, which is
9 significantly lower than what lenders expect for a
10 financially sound company.
11 Q DID YOU CONDUCT A FORMAL COST OF CAPITAL
12 STUDY TO ESTIMATE FREMONT'S COST OF EQUITY?
13 A No. I recognize that Commissioner Hansen
14 asked about this in another small company case.
15 Unfortunately, formal cost of capital studies are not
16 warranted in small telephone company cases. They cannot
17 be performed with an acceptable degree of accuracy and
18 their cost simply cannot be justified by the results
19 obtained. First, there is not enough public data to
20 conduct a comparable earnings test or discounted case
21 flow ("DCF") analysis. Second, even if the information
22 were available, it would not be reliable as small company
23 earnings are so volatile. Finally, the cost of such a
24 study could not be justified. A qualified cost of
25 capital expert typically charges $20,000 or more to
120
R. Hendershot, Di 12
Wilder, Idaho 83676 Fremont Telcom Co.
1 appear in a proceeding. Yet a 100 basis point variation
2 in Fremont's cost of equity produces only a $14,300
3 variance in the indicated return on rate base. In short,
4 there is not enough money involved to justify gathering
5 the detailed cost of capital information normally
6 required for larger utilities.
7 Q PLEASE DESCRIBE YOUR NEXT EXHIBIT.
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R. Hendershot, Di 12A
Wilder, Idaho 83676 Fremont Telcom Co.
1 A Exhibit No. 6 is a calculation of Fremont's
2 revenue deficiency prior to any rate adjustments. On
3 Line 1, this exhibit starts with the Idaho portion of the
4 total Company rate base as calculated in Exhibit 3. This
5 intrastate rate base then is multiplied by the cost of
6 capital calculated in Exhibit 5. The resulting revenue
7 (line 3) is the pre-tax return the Company should
8 realize, given its identified cost of capital. The net
9 utility income or revenues identified on Exhibit 4 (line
10 9 minus line 26 equals Exhibit 6, line 4) is a negative
11 value. Since it is negative, no reduction is made to the
12 return deficiency (line 3 equals line 5). The resulting
13 revenue deficiency then is grossed up for uncollectible
14 accounts and taxes (line 6). The final revenue
15 deficiency of $2,458,748 appears on line 7. This is the
16 amount which Fremont must be allowed to recover through
17 increased local rates, access charges or IUSF revenues.
18 Q IS FREMONT PROPOSING THAT ITS REVENUE
19 REQUIREMENT BE RECOVERED IN THIS EAS PROCEEDING?
20 A No. The Company merely wants the
21 Commission to be aware of its current revenue deficiency
22 and that the proposed increase in local rates for EAS
23 will not erase the Company's current revenue deficiency.
24 Q DOES THE COMPANY PLAN TO FILE A CASE IN THE
25 FUTURE BEFORE THE COMMISSION TO RECOVER THIS DEFICIENCY?
122
R. Hendershot, Di 13
Wilder, Idaho 83676 Fremont Telcom Co.
1 A No decision has been made at this time, but
2 considerations will be made following the Staff audit or
3 when the Company has 1998 audited financials.
4 Q DOES THAT CONCLUDE YOUR TESTIMONY?
5 A Yes, it does.
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R. Hendershot, Di 13A
Wilder, Idaho 83676 Fremont Telcom Co.
1 Q PLEASE STATE YOUR NAME AND BUSINESS
2 ADDRESS.
3 A My name is Raymond A. Hendershot. My
4 business address is 2270 LaMontana Way, P.O. Box 25969,
5 Colorado Springs, Colorado 80936.
6 Q ARE YOU THE SAME PERSON WHO PREVIOUSLY
7 FILED DIRECT TESTIMONY IN THIS CASE?
8 A Yes.
9 Q WHAT IS THE PURPOSE OF YOUR TESTIMONY?
10 A I wish to respond to Carolee Hall's
11 Supplemental Testimony filed in this case on behalf of
12 the Commission Staff. I believe she has misunderstood my
13 initial testimony in this case. This has resulted in
14 errors in her data, which cause the conclusions she draws
15 about Fremont Telcom to be inaccurate.
16 Q TO WHICH PORTIONS OF MS. HALL'S TESTIMONY
17 ARE YOU RESPONDING?
18 A I would like to comment on the following
19 issues: (1) depreciation rate for microwave facilities;
20 (2) installation of fiber facilities; (3) plant additions
21 for central office equipment ("COE"), (4) EAS regulatory
22 expenses; and (5) interstate shift in revenue
23 requirements.
24 Q MR. HENDERSHOT, COULD YOU PLEASE EXPRESS
25 YOUR CONCERNS ABOUT THE DEPRECIATION RATE FOR MICROWAVE
FACILITIES PROPOSED BY THE STAFF?
124
R. HENDERSHOT 2
Fremont Telcom Co.
1 A Yes. The rate that I used in my Exhibit 1
2 (line 6.b.1) was 20% for microwave facilities. This rate
3 was used because it was the depreciation rate approved
4 for the small independent companies as of January 1, 1996
5 in Case No. GNR-T-97-1 or Order No. 26788. Since a 20%
6 depreciation rate was approved for the other small
7 companies, Fremont believes it is the appropriate rate
8 for it to use. Referring to depreciation of microwave
9 equipment, Ms. Hall makes the statement that
10 "Historically, within southern Idaho, the appropriate
11 depreciation rate for this type of plant is 15 years."
12 She may have overlooked the Order approving a 20% rate or
13 5 year life for microwave equipment used by small
14 independent companies.
15 Q COULD YOU PLEASE EXPLAIN THE PLANS OF THE
16 COMPANY FOR INSTALLING FIBER VERSUS MICROWAVE EQUIPMENT?
17 A Yes. When the Company received a petition
18 for Extended Area Service ("EAS") to the Eastern Idaho
19 Calling Area (Pocatello and Idaho Falls calling areas)
20 the Company had its engineer estimate the cost to provide
21 the necessary facilities to accommodate EAS to this
22 expanded calling area. The engineer estimated a cost of
23 $445,000 for microwave and $707,000 for fiber. This
24 information was provided to the Commission Staff in
25 response to an interrogatory. The estimate for microwave
125
R. HENDERSHOT 3
Fremont Telcom Co.
1 equipment was used in financial projections, since it was
2 felt that this was the more conservative approach. Given
3 the differential in the depreciation lives for fiber and
4 microwave, Fremont determined that the economics would be
5 approximately equal if the Company installed fiber
6 instead
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R. HENDERSHOT 3A
Fremont Telcom Co.
1 of microwave. The cost of microwave used in the Company
2 Exhibit 1, therefore, should not be changed since the
3 annual cost of fiber would be about equal to the cost of
4 microwave and does not significantly change the cost. We
5 believe that the Company Exhibit 1 is correct for the
6 amounts used for plant additions for EAS.
7 Q WOULD YOU LIKE TO COMMENT ABOUT THE
8 ESTIMATE MADE BY FREMONT REGARDING THE COST FOR UPGRADES
9 TO CENTRAL OFFICE EQUIPMENT TO ACCOMMODATE THE EXPANDED
10 EAS CALLING AREA?
11 A Yes. Ms. Hall assumes that the new central
12 office switch installed by the Company this spring has
13 the capability to handle the EAS calling area. The new
14 switch was ordered before requirements for the EAS area
15 were known. The additional amount included in Exhibit 1
16 is the quote received from the manufacturer to
17 accommodate the additional traffic requirements for the
18 EAS calling area.
19 Q WOULD YOU PLEASE EXPLAIN WHY THE COMPANY
20 USED $30,000 IN ITS ESTIMATE FOR REGULATORY EXPENSES.
21 A Yes. The use of $30,000 as an estimate of
22 EAS regulatory expense is amply justified, as the Company
23 has incurred $27,500 to date for outside legal and
24 consulting fees. This amount does not include the cost
25 involved for either the public hearing or the technical
127
R. HENDERSHOT 4
Fremont Telcom Co.
1 hearing. In January of this year the Company went
2 through an extensive process at the Commission's request
3 concerning the
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R. HENDERSHOT 4A
Fremont Telcom Co.
1 implementation of EAS for the small, independent
2 companies. This required the Company (together with the
3 other small, independent companies) to develop and
4 provide data relative to EAS which ultimately was used by
5 the Staff and Commission in the Rockland Telephone
6 Company and Silver Star and Teton Telecom cases, which
7 served as the model or template for this case. Fremont's
8 share of those expenses properly should be included as a
9 regulatory cost in this case. The work and involvement
10 in that effort was the same as a stand alone case. When
11 the Company reached its own Stipulation with the Staff
12 regarding EAS to the Eastern Idaho calling area,
13 testimony and new exhibits had to be prepared. Both
14 public and technical hearings have been held in this
15 case. We now estimate that $33,000 to $35,000 will be
16 expended before this entire process is completed. It is
17 our belief that the use of $30,000 in the Company's
18 Exhibit 1 is correct.
19 Q MR. HENDERSHOT, YOU MENTIONED THAT YOU
20 WOULD LIKE TO COMMENT ABOUT THE SHIFT IN FREMONT'S
21 INTERSTATE REVENUE REQUIREMENT.
22 A Yes. To calculate the shift in Fremont's
23 interstate revenue requirement I ran a cost study using
24 the Federal Communications Commission ("FCC") Part 36
25 separations rules to develop a state revenue requirement
129
R. HENDERSHOT 5
Fremont Telcom Co.
1 with my proposed rate of return. I ran the cost study
2 before EAS and after EAS with the change due to a 3 times
3 stimulation factor as agreed in the stipulation. The
4 difference between the two was the change in state
5 revenue requirement. Ms. Hall has
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R. HENDERSHOT 5A
Fremont Telcom Co.
1 misunderstood how I developed the change in interstate
2 revenue requirement and, accordingly, has reduced my
3 interstate shift from an assumed interstate rate of
4 return to a state rate of return; her assumption is
5 incorrect. The interstate shift in revenue requirement
6 which is shown in the Company Exhibit 1 uses a state rate
7 of return and should not be reduced.
8 Q DO YOU HAVE ANY OTHER COMMENTS?
9 A Yes, I do. I recognize that Ms. Hall and I
10 have differences in our calculation of the cost of
11 capital, gross up for taxes and the loss of the access
12 revenue. We could spend a lot of time on these issues,
13 but this is not a rate case. My purpose in including
14 Exhibit 6 was to show that the Company has a rather large
15 revenue deficiency in its state revenue requirement. The
16 implementation of EAS by the Company and the generation
17 of new revenues using the rates agreed to in the
18 stipulation does not make up for the Company's revenue
19 deficiency. The stipulation provides for an audit by the
20 Staff. The remaining issues concerning the extent of
21 Fremont's deficiency in state revenue requirement
22 appropriately should be determined at that time. Once
23 the revenue deficiency has been determined, changes in
24 rates and sources of revenues, such as local, access and
25 state USF, can be determined. The Company is willing to
131
R. HENDERSHOT 6
Fremont Telcom Co.
1 work with the Staff to address these issues.
2 Q DOES THAT CONCLUDE YOUR TESTIMONY?
3 A Yes, it does.
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R. HENDERSHOT 6A
Fremont Telcom Co.
1 (The following proceedings were had in
2 open hearing.)
3 COMMISSIONER NELSON: And if Mr. Hendershot
4 is available for cross, why, we'll go to Ms. Hobson.
5 MS. HOBSON: Thank you.
6
7 CROSS-EXAMINATION
8
9 BY MS. HOBSON:
10 Q Good morning, Mr. Hendershot.
11 A Good morning.
12 Q Directing your attention to page 5 of your
13 testimony at lines 1 through 3, you're referring there to
14 the 3 times stimulation factor. Do you have that in
15 front of you?
16 A Mine doesn't have line numbers on it.
17 MR. McCLURE: Your direct?
18 (Mr. McClure approached the witness.)
19 THE WITNESS: Okay, yes, ma'am.
20 Q BY MS. HOBSON: Do you have that in front
21 of you?
22 A Yes, ma'am.
23 Q It's your testimony, is it not, that a
24 3 times stimulation factor is a conservative estimate of
25 stimulation?
133
CSB REPORTING HENDERSHOT (X)
Wilder, Idaho 83676 Fremont Telcom Co.
1 A We believe for the independents it is, yes.
2 Q And at page 4, line 16, you also make the
3 statement that the traffic stimulation projections play a
4 role in the estimates of jurisdictional cost shifts; is
5 that true?
6 A That's correct.
7 Q So if actual stimulation exceeds 3 times,
8 then cost calculations that are based upon a 3 times
9 stimulation factor would actually underestimate actual
10 costs, would they not?
11 A Yes.
12 Q At page 5 you indicate that local rates are
13 set at 125 percent of expected statewide average?
14 A Yes.
15 Q And that's under the -- that's the rate
16 under the stipulation, the 24.10 and the $42.00; is that
17 right?
18 A Yes.
19 Q What information do you have on the
20 statewide average right now?
21 A We don't have the current number, but this
22 is sufficiently high enough to cover the 125 percent.
23 Q It might exceed 125 percent, might it not?
24 A Yes. It does, in fact.
25 Q I wanted to talk with you just a little bit
134
CSB REPORTING HENDERSHOT (X)
Wilder, Idaho 83676 Fremont Telcom Co.
1 about your cost of the EAS reflected on Exhibit 1 of your
2 testimony.
3 A Okay.
4 MS. HOBSON: Exhibit 1 has been marked for
5 identification, has it?
6 COMMISSIONER NELSON: Yes, it has.
7 MS. HOBSON: Thank you.
8 Q BY MS. HOBSON: Directing your attention to
9 line 2.a, the amount there of $318,884, can you tell us
10 what the origin of that number is, please?
11 A Let me just look at one thing. What that
12 represents is current toll revenues from Fremont into
13 other areas, into these proposed EAS calling areas, and
14 those are the access revenues that come to the Company.
15 Those will be lost or converted into local calls through
16 the EAS.
17 Q So that is actual toll or, I'm sorry,
18 actual intrastate access revenue associated with the
19 calls that will be converted from toll to local?
20 A That's correct.
21 Q And is that for a particular period?
22 A Yes, it is.
23 Q Can you tell us what that period is?
24 A I can't remember exactly right off, but it
25 would be subject to check, I believe it was, like, about
135
CSB REPORTING HENDERSHOT (X)
Wilder, Idaho 83676 Fremont Telcom Co.
1 a four-month period.
2 Q Well, is that supposed to be the annual
3 number?
4 A That's an annualized number. It represents
5 12 months of activity.
6 Q I see, all right. Would that be 1997 data
7 to the best of your knowledge?
8 A Yes.
9 Q Thank you, and then looking at line 3 on
10 Exhibit 1, as I understand it, this is projected access
11 revenue that was not realized by Fremont; is that
12 correct?
13 A What that represents, and that's an issue
14 that will be we resolved at a later point in time, there
15 was -- when Fremont was acquiring these properties, there
16 was a level of activity from the previous owner on the
17 access revenues that they had and we made the assumption
18 that those access revenues were there and that those
19 revenues would continue. When Fremont acquired the
20 property and started to operate, there was a drop from
21 those previous historical levels and this represents
22 those numbers.
23 Q So is this the total drop from historical
24 levels to current levels?
25 A And what the projected historical growth
136
CSB REPORTING HENDERSHOT (X)
Wilder, Idaho 83676 Fremont Telcom Co.
1 was.
2 Q So it's a drop from historical levels
3 projected to have grown at historical rates?
4 A That's correct.
5 Q And is that loss or drop associated with
6 the routes that are being converted to EAS or is this all
7 access?
8 A That's for EAS, the routes converted to
9 EAS.
10 Q Do you have a similar total for other lost
11 revenues associated with other routes?
12 A No, I don't.
13 Q Is that something that you will be bringing
14 up in the audit/rate case that's to come?
15 A Well, I'm sure it will be something that
16 will be explored and examined at that point in time.
17 Q I'm not sure exactly where it is, but I
18 understood from reading Staff's testimony that there is
19 the expectation that Staff is going to work with Fremont
20 and perhaps other companies on that issue. Do you have
21 any understanding as to that investigation of Staff, what
22 that's going to look like?
23 A Well, I'm sure when they're auditing
24 they're going to look at the financial records, what was
25 the historical record for the Company and what is
137
CSB REPORTING HENDERSHOT (X)
Wilder, Idaho 83676 Fremont Telcom Co.
1 actually taking place and I'm not sure how the total
2 numbers will be developed and the total outcome of that,
3 but that will be an item that will be looked at, along
4 with many other items.
5 Q What I'm getting at is do you expect that
6 to be part of the audit process?
7 A Well, one of the things would be that we
8 would determine the revenue requirement and that would be
9 part of the deficiency.
10 Q Mr. Hendershot, if the Commission were to
11 determine that the amount contained on line 3 of
12 Exhibit 1 is not an appropriate cost for EAS, do you have
13 that assumption in mind, the Commission assumes that it
14 is not appropriate?
15 A I understand what you're saying, but that's
16 why the audit and the rate case is the appropriate place
17 to incorporate all those items.
18 Q Okay, but if the Commission were to make
19 that determination at this point in time, isn't it true
20 that that would reduce as a simple mathematical
21 proposition your incremental revenue requirement
22 reflected on Exhibit 1?
23 A That would reflect a change from these
24 numbers, but overall, the Company, the revenues that they
25 would obtain from this EAS calling area are still
138
CSB REPORTING HENDERSHOT (X)
Wilder, Idaho 83676 Fremont Telcom Co.
1 insufficient to meet the total Company's revenue
2 requirement that they're expecting.
3 Q I confess to being slightly confused by the
4 terms of the stipulation insofar as it relates to an
5 additional draw from the high cost fund associated with
6 EAS. Can you explain to me what Fremont's position is
7 with regard to a potential draw from the high cost fund
8 related strictly to EAS and not other revenue requirement
9 issues that are not in this case?
10 A What that additional draw from the USF
11 that's in there, we believe that there are costs there
12 that the Company would be entitled to and should have.
13 An example is we believe that there are valid numbers in
14 that line 3 on that loss of access revenues. Since
15 that's an item that can't be determined until one has
16 gone through and examined historical data, gone through
17 the audit and once that's determined, then, hopefully,
18 there can be some exploration and maybe some
19 determination of what happened, where it went, maybe
20 there was some loss of data, maybe there was some data
21 that wasn't reported, we don't know and that's to help
22 assist in covering that situation.
23 Q So is it your position, then, that it would
24 be premature for this Commission to make a decision one
25 way or the other on the amount contained on line 3?
139
CSB REPORTING HENDERSHOT (X)
Wilder, Idaho 83676 Fremont Telcom Co.
1 A I think the stipulation leaves it open that
2 nothing will be determined relative to state USF until
3 after the audit.
4 Q Thank you. Now, at page 8, line 3 of your
5 testimony -- well, do you have lined testimony now?
6 A I do.
7 Q You indicate there that you expect $478,339
8 in plant additions associated with this EAS; is that
9 right?
10 A That's correct.
11 Q Now, I didn't find precisely that number on
12 Exhibit 1. Can you explain what the discrepancy is?
13 A Well, and probably because I rounded the
14 numbers. If you look at line 6.1, the microwave,
15 445,000, and line 6.2, COE, and you add those together,
16 that is $478,000 right there, 445,000 plus the 33,000.
17 Q I can't find it because I didn't add those
18 two numbers together, in other words.
19 A Okay.
20 Q Okay, and again in the supplemental
21 testimony of Staff and I believe your supplemental
22 testimony, there was some discussion that this microwave
23 facility may not be the actual facility route that
24 Fremont chooses to employ; is that correct?
25 A That's not the technology because the fiber
140
CSB REPORTING HENDERSHOT (X)
Wilder, Idaho 83676 Fremont Telcom Co.
1 came in and it's a better technology and that's what the
2 Company is currently in the process of installing.
3 Q And do you have numbers that show what the
4 costs of using the fiber technology would be?
5 A I don't have those numbers, but they're in
6 the comparable range.
7 Q Now, also on page 8 at lines 6 and 7, you
8 make the statement, and I'm quoting, "Upgrades also will
9 be required to the switch which will include translation
10 cards, trunk cards and installation labor." Are those
11 upgrades reflected on Exhibit 1 as the $33,000 amount?
12 A Yes, ma'am.
13 Q And will those costs be incurred whether or
14 not you use the fiber facilities instead of the
15 microwave?
16 A Yes. They will be incurred if we have
17 extended area service approved by this Commission.
18 Q Looking at item -- let's see, where is
19 it -- item 4, line 4, the loss of intracompany toll
20 amounting to $53,177, do you see that?
21 A Yes.
22 Q That I take it is actual toll revenue that
23 will be lost to the conversion of the routes internal to
24 Fremont itself?
25 A That's correct.
141
CSB REPORTING HENDERSHOT (X)
Wilder, Idaho 83676 Fremont Telcom Co.
1 Q Now, is that an actual number of toll
2 revenue or is that an estimated number?
3 A That's an actual number.
4 Q Would you look at your Exhibit 4, line 6,
5 please?
6 A Yes.
7 Q Can you explain to me then why Exhibit 4,
8 line 6 shows toll revenues of a total of $39,866?
9 A And why that's different than that number
10 over there?
11 Q Yes.
12 A Okay, I'm trying to remember whether this
13 Exhibit 4 is historical and this data over here
14 represented a different period in line 4 on Exhibit 1.
15 This incorporates part of the data for 1998, so we have a
16 little bit of difference of the periods. Because of the
17 increase in access lines due to the facilities that the
18 Company has put in, there are additional customers in the
19 Island Park area and so we're talking about two different
20 time periods here.
21 Q So the information reflected on Exhibit 1,
22 is that then annualized, an annualized number?
23 A Well, it's a different time period and I
24 can't remember exactly, but it's, like, April to April;
25 whereas, the information in Exhibit 4 is January to
142
CSB REPORTING HENDERSHOT (X)
Wilder, Idaho 83676 Fremont Telcom Co.
1 December.
2 Q So that's January to December, 1997, on
3 Exhibit 4?
4 A Yes, ma'am.
5 Q Thank you. Okay, finally, Mr. Hendershot,
6 can you explain to me what Exhibit 6 is?
7 A What Exhibit 6 is, that goes through in
8 determining what the revenue deficiency is of the Company
9 that we believe and line 7 comes up with a total there in
10 deficiency in the Company's revenue requirement. We
11 believe it's 2,458,000 and the revenues that you get from
12 Exhibit 1 are only $935,000, so there's still a
13 deficiency for the Company, so the Company will not be
14 overearning, but overall, their total revenue
15 requirement, they're still deficient.
16 Q So if I correctly understand what you just
17 said, Exhibit 6 reflects the revenue deficiency that
18 would occur if Fremont were to implement EAS and not
19 receive any incremental local revenue; is that correct?
20 A If we were in a rate case, we would be
21 asking for line 7 on Exhibit 6.
22 Q Having implemented EAS?
23 A Yes.
24 Q And since -- well, since it's unlikely that
25 you're going to implement EAS without getting the
143
CSB REPORTING HENDERSHOT (X)
Wilder, Idaho 83676 Fremont Telcom Co.
1 $935,000 of local revenue, you would ordinarily expect
2 that to be subtracted here, is that correct, I mean so
3 that you would match your expenses with your revenues?
4 A There's a deficiency that the Company has
5 in its current situation. It's not earning what we
6 believe would be an authorized rate of return and this is
7 that deficiency. When you go through the EAS, there's
8 some contribution, but this is not the complete picture,
9 so this was just to illustrate that the Company is still
10 underearning.
11 Q Well, if I understand how these exhibits
12 interrelate, wouldn't you be asserting that the Company
13 is underearning to the tune of $1.5 million roughly even
14 after receiving these EAS revenues?
15 A Yes.
16 Q And does that number, that approximately
17 million-and-a-half, roughly compare to the $1.6 million
18 loss that is referred to in the testimony that the
19 Company has experienced so far?
20 A There's a close relationship, but I can't
21 say it's exact.
22 Q Well, the $1.6 million, can you tell me
23 what period of time that --
24 A That represents from the point of when they
25 started operating the Company until the end of 1997.
144
CSB REPORTING HENDERSHOT (X)
Wilder, Idaho 83676 Fremont Telcom Co.
1 Q And I'm sorry, I don't remember how long
2 that's been now, is that two years?
3 A Probably about 14 months.
4 MS. HOBSON: Fourteen months, okay. Thank
5 you. That's all I have.
6 COMMISSIONER NELSON: Thank you,
7 Ms. Hobson.
8 Mr. Howell?
9 MR. HOWELL: No questions.
10 COMMISSIONER NELSON: Questions from the
11 Commission?
12 COMMISSIONER HANSEN: I have a couple.
13
14 EXAMINATION
15
16 BY COMMISSIONER HANSEN:
17 Q Mr. Hendershot, just a couple of
18 questions. A little over two years ago when we were
19 having the sale case, didn't you present data there that
20 showed Fremont in an entirely different financial
21 projection than you now show?
22 A The two differences is, first of all,
23 Exhibit 1, line 3 is the loss of that access revenues,
24 which we built our revenues based upon historical data
25 which somehow we haven't obtained those revenue levels
145
CSB REPORTING HENDERSHOT (Com)
Wilder, Idaho 83676 Fremont Telcom Co.
1 and that's part of what the audit determination is going
2 to be. The second item is the interstate USF and that
3 hasn't come into effect yet. It's a two-year delay.
4 Q Okay. You did say that even if EAS rates
5 are approved that Fremont will still have a revenue
6 deficiency as you're projecting now?
7 A At this point in time, yes.
8 Q Do you see approval of EAS increasing or
9 decreasing the revenue deficiency of Fremont?
10 A The approval of EAS?
11 Q Uh-huh.
12 A I believe it will probably decrease it
13 some.
14 Q Do you have an idea how much?
15 A I haven't got any idea.
16 Q So in your mind, would you say that the
17 people of Fremont, the Fremont customers, would be
18 looking at really an increase now for EAS and then
19 another, say, fairly significant increase shortly after,
20 the Company could be filing another rate increase?
21 A Well, I think the EAS needs to go forward
22 and I think the customers in Fremont need to receive EAS
23 and on the rates that we have in the stipulation. Then
24 on determining that for a rate case when that occurs,
25 we've got to take into consideration, see if we can
146
CSB REPORTING HENDERSHOT (Com)
Wilder, Idaho 83676 Fremont Telcom Co.
1 identify what's happened to these lost access revenues.
2 Maybe they're out there and we haven't received them from
3 the recording company or, second, then we also have to
4 take into consideration there will be some federal USF,
5 so those things haven't been taken into consideration at
6 this point in time.
7 COMMISSIONER HANSEN: That's all I have.
8 COMMISSIONER NELSON: Okay, thank you.
9 Mr. McClure, do you have any redirect for
10 Mr. Hendershot?
11 MR. McCLURE: No redirect.
12 COMMISSIONER NELSON: Thank you,
13 Mr. Hendershot.
14 THE WITNESS: Thank you.
15 (The witness left the stand.)
16 COMMISSIONER NELSON: Does that complete
17 your witnesses, Mr. McClure?
18 MR. McCLURE: Thank you, yes, it does.
19 COMMISSIONER NELSON: Mr. Howell.
20 Excuse me, is Mr. Souba going to testify?
21 MS. HOBSON: Yes.
22 COMMISSIONER NELSON: Maybe we should go to
23 Mr. Souba or Ms. Hobson.
24 MS. HOBSON: U S WEST calls John Souba.
25
147
CSB REPORTING HENDERSHOT (Com)
Wilder, Idaho 83676 Fremont Telcom Co.
1 JOHN F. SOUBA,
2 produced as a witness at the instance of U S WEST, having
3 been first duly sworn, was examined and testified as
4 follows:
5
6 DIRECT EXAMINATION
7
8 BY MS. HOBSON:
9 Q Would you please state and spell your last
10 name for the record?
11 A Yes. My name is John middle initial "F"
12 Souba. My last name is spelled S-o-u-b-a.
13 Q What does the "F" stand for?
14 A Fredrick.
15 Q I did not know that. Where are you
16 employed and in what capacity?
17 A I'm employed by U S WEST, formerly referred
18 to as U S WEST Communications. I'm a regulatory affairs
19 manager.
20 Q And in connection with your duties as a
21 regulatory affairs manager, did you cause to prepare and
22 have filed in this case certain testimony?
23 A Yes, I did.
24 MS. HOBSON: Mr. Chairman, at this point
25 U S WEST must apologize to the Commission. Neither
148
CSB REPORTING SOUBA (Di)
Wilder, Idaho 83676 U S WEST
1 Mr. Souba nor I have copies of Mr. Souba's testimony that
2 have the required line designations, so we are very
3 sympathetic with Mr. Hendershot at this point. I don't
4 know, does the Commission's copy look like it comports
5 with the rules?
6 COMMISSIONER NELSON: It doesn't to me.
7 MS. HOBSON: All right. Well, in that
8 case, we will submit an amended version of Mr. Souba's
9 testimony following the hearing that has the appropriate
10 page designations and I hope Mr. Souba will be able to
11 bear with any cross-examination that refers to -- well,
12 hopefully, we have the right page numbers, we just don't
13 have line numbers.
14 COMMISSIONER NELSON: Maybe without
15 objection, we can just go forward with the testimony that
16 we do have and see how important it becomes that we need
17 an additional copy.
18 MS. HOBSON: All right, thank you.
19 Q BY MS. HOBSON: Well, in addition to or
20 other than that change, do you have any other changes or
21 corrections to make to your testimony at this time?
22 A I do not.
23 Q If I were to ask you the same questions
24 that are contained in the prefiled testimony now that you
25 are under oath, would your answers be the same,
149
CSB REPORTING SOUBA (Di)
Wilder, Idaho 83676 U S WEST
1 Mr. Souba?
2 A Yes, they would.
3 Q On page 4 of your testimony, you indicate
4 there that the Commission has -- well, you were asked at
5 that point if or how the Commission should deal with
6 U S WEST's ongoing costs of providing EAS if the EAS here
7 should be ordered and you refer in your testimony to Case
8 No. USW-T-98-3. Have there been any developments in that
9 case that you should make the Commission aware of this
10 morning?
11 A Yes. At this time I can mention that we
12 have had months of discussion, numerous proposals offered
13 between the company and the Staff. There was a workshop
14 held yesterday with intervenors in this case and that has
15 led to a stipulation signed between U S WEST and the
16 Staff that will resolve if it is formally approved by the
17 Commission U S WEST's cost recovery in this EAS case,
18 several others that have already been granted, for
19 instance, the Silver Star and Teton cases, and numerous
20 cases that are currently docketed before the Commission.
21 Q So if the stipulation that you referred to
22 that was signed yesterday is adopted, it is your
23 intention that the terms of that stipulation will control
24 U S WEST's cost recovery in this case?
25 A Absolutely.
150
CSB REPORTING SOUBA (Di)
Wilder, Idaho 83676 U S WEST
1 MS. HOBSON: With that, Mr. Souba is
2 tendered for cross-examination.
3 COMMISSIONER NELSON: Okay. Well, first,
4 we'll spread Mr. Souba's direct testimony on the record
5 as if it was read.
6 (The following prefiled testimony of
7 Mr. John Souba is spread upon the record.)
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
151
CSB REPORTING SOUBA (Di)
Wilder, Idaho 83676 U S WEST
1 Q. PLEASE STATE YOUR NAME AND ADDRESS AND
2 POSITION WITH U S WEST COMMUNICATIONS.
3 A. My name is John Souba. My business address
4 is 999 Main Street, Boise, Idaho. I am a staff manager
5 in the Idaho Regulatory Affairs Department.
6 Q. PLEASE STATE YOUR BACKGROUND AND
7 QUALIFICATIONS.
8 A. I earned a B.A. degree in History/Economics
9 from Dartmouth College in 1975. Since joining U S WEST
10 in 1979, I have held a variety of management positions in
11 the Marketing organization dealing with major business
12 accounts. In February 1988, I joined the Idaho
13 Regulatory Affairs Department. My responsibilities
14 involve a variety of areas including docket coordination,
15 certain tariff and catalog filing responsibilities,
16 response and witnessing in Extended Area Service (EAS)
17 petitions and coordination of discovery and interrogatory
18 responses, among other tasks.
19 Q. HAVE YOU PREVIOUSLY TESTIFIED BEFORE THIS
20 COMMISSION?
21 A. Yes, I have testified in three EAS cases
22 involving Eden/Hazelton's petition to call Twin Falls in
23 1988, in Albion's petition to call Burley in 1990 and in
24 the current petitions from Silver Star and Teton
25 Communications exchanges to join the Eastern Idaho EAS
152
JOHN F. SOUBA - DI 1
U S WEST Communications
1 Region. I also testified in U S WEST's 1996 southern
2 Idaho general rate case.
3 Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY?
4 A. My testimony will discuss U S WEST's
5 support of the joint stipulation in this case which was
6 entered on May 7, 1998 and signed by attorneys
7 representing the Commission Staff, Fremont Telcom, Inc.
8 and U S WEST Communications, Inc. I will also provide
9 recommendations for how EAS expansion should be viewed in
10 light of the establishment of the three new EAS regions
11 in 1997 which surround Boise, Twin Falls and the
12 Pocatello/Idaho Falls areas.
13 Q. PLEASE DESCRIBE THE HISTORY OF THIS CASE.
14 A. This case was initiated from Commission
15 receipt of an EAS petition signed by 1,400 Fremont Telcom
16 customers on July 24, 1997. Fremont serves approximately
17 5,800
18
19 /
20
21 /
22
23 /
24
25
153
JOHN F. SOUBA - DI 1A
U S WEST Communications
1 customers in the three exchanges of Ashton, Island Park
2 and St. Anthony. The petition followed U S WEST's
3 creation, on May 23, 1997, of a large EAS region
4 encompassing the major exchanges of Rexburg, Idaho Falls,
5 Pocatello and Blackfoot along with numerous smaller
6 exchanges. The Fremont EAS petition requested EAS to
7 this new Eastern Idaho EAS Region.
8 Q. WHAT COMMUNITIES ARE INCLUDED IN THE
9 EASTERN IDAHO EAS REGION?
10 A. The Eastern Idaho EAS Region includes the
11 following exchanges: American Falls, Bancroft,
12 Blackfoot, Dayton, Downey, Firth, Franklin, Grace, Idaho
13 Falls, Inkom, Lava Hot Springs, Lewisville, McCammon,
14 Montpelier, Pocatello, Preston, Rexburg, Rigby, Ririe,
15 Riverside, Roberts, Shelley, Soda Springs and Thatcher.
16 The independent company exchanges of Paris, Arbon and
17 Rockland will join this region on July 31, 1998. Two
18 additional independent company exchanges, Irwin and
19 Wayan, are scheduled to join this region on August 7,
20 1998.
21 Q. WHAT IS U S WEST'S POSITION REGARDING
22 REQUESTS FOR EAS TO ONE OF THE NEW LOCAL CALLING REGIONS?
23 A. U S WEST believes that if the Commission
24 determines that there is a community of interest between
25 the exchanges which are named in the petition and the
154
JOHN F. SOUBA - DI 2
U S WEST Communications
1 public interest is served by granting expanded local
2 calling, the approval should extend to the entire
3 region-wide local calling area. U S WEST further
4 recommends that only two-way EAS be considered.
5 Q. DOES THE COMPANY BELIEVE THE COMMISSION
6 SHOULD CONSIDER GRANTING LESS THAN REGION-WIDE ACCESS IF
7 IT DEEMS EXPANDED LOCAL CALLING IS APPROPRIATE?
8 A. No, for two reasons. One, if the
9 Commission were to grant EAS only to a portion of the
10 region, it would invite EAS arbitrage. The Commission
11 has had to deal with this problem before when it decided
12 EAS bridging services are unlawful and ordered U S WEST
13 to file tariffs prohibiting this practice.
14
15
16 /
17
18 /
19
20 /
21
22
23
24
25
155
JOHN F. SOUBA - DI 2A
U S WEST Communications
1 Second, it is my opinion that it is just human
2 nature for petitioning customers to feel that if their
3 request for any community within the region meets the
4 Commissions standards for EAS, they should have the
5 "whole thing" like the rest of the communities in the
6 region. In this case the petitioners clearly requested
7 participation in the entire Eastern Idaho EAS Region.
8 Q. WON'T A REGION-WIDE APPROACH POTENTIALLY
9 COST MORE?
10 A. Yes. However, since it was appropriate
11 public policy to create a region-wide approach, it does
12 not seem inconsistent to apply the same policy for new
13 requests for EAS. It may prove out to cost less in the
14 long term if a single network design and response is
15 established at the initial request versus going back to
16 address additional community requests until all
17 communities within the regions feel they have local
18 calling parity.
19 Q. HAS U S WEST COMPLETED AN ANALYSIS OF THE
20 TRAFFIC PATTERNS FROM CALLS ORIGINATING IN THE U S WEST
21 EXCHANGES TO THE EXCHANGES SERVED BY FREMONT TELCOM?
22 A. No. However, the Company has, pursuant to
23 Staffs request, prepared and presented to Staff a
24 state-wide, U S WEST-originated toll study which was
25 based upon four months calling data from May-August 1997.
156
JOHN F. SOUBA - DI 3
U S WEST Communications
1 It is the Company's belief that Staff is basing its
2 support for granting EAS in this case, at least
3 partially, upon analysis of this calling data.
4 Q. IS U S WEST TAKING A FIRM POSITION ON
5 WHETHER A COMMUNITY OF INTEREST EXISTS BETWEEN THE
6 EASTERN IDAHO REGION AND FREMONT TELCOM'S EXCHANGES?
7 A. U S WEST takes no position on whether a
8 community of interest exists between the Fremont Telcom
9 exchanges and the Eastern Idaho EAS Region. The Company
10 is confident that the Commission will make a decision on
11 this issue which is in the public interest. U S WEST
12 supports the Stipulation it has signed in this case which
13 indicates that Fremont and the Staff are prepared to
14 testify that EAS is warranted. Should the Commission
15 grant the EAS request, U S WEST will cooperate fully in
16 implementing the Commission's decision.
17
18 /
19
20 /
21
22 /
23
24
25
157
JOHN F. SOUBA - DI 3A
U S WEST Communications
1 Q. SHOULD THE COMMISSION DECIDE THAT EAS
2 EXPANSION IS APPROPRIATE HOW DO YOU PROPOSE U S WEST BE
3 COMPENSATED FOR ITS CAPITAL EXPENSES ASSOCIATED WITH
4 IMPLEMENTING ANY OF THE NEW EAS ROUTES?
5 A. In Case No. USW-S-96-4 the Commission
6 adopted a stipulation between U S WEST and Staff which
7 called for using available revenue sharing funds to
8 compensate the Company for any new capital expenditures
9 required to implement the new EAS routes. The Company
10 believes this arrangement could be appropriate for
11 dealing with pending EAS cases since at this time
12 additional revenue sharing dollars are still available.
13 Q. HOW SHOULD THE COMMISSION DEAL WITH
14 U S WEST'S COMPENSATION FOR ITS ONGOING COSTS FROM
15 IMPLEMENTING EAS IN THIS CASE?
16 A. As stated in the Stipulation, Case
17 No. USW-T-98-3 has been opened to determine U S WEST's
18 EAS costs that will be used for this case, the Silver
19 Star/Teton cases, and future EAS cases involving
20 U S WEST's exchanges.
21 Q. ASSUMING EAS IS GRANTED HERE, WHEN WOULD
22 U S WEST BE PREPARED TO IMPLEMENT TOLL FREE CALLING?
23 A. The stipulation in this case anticipates
24 the Commission reaching a decision in the U S WEST EAS
25 compensation case prior to issuing a final order in this
158
JOHN F. SOUBA - DI 4
U S WEST Communications
1 case. In any event, the Company would not be able to
2 implement EAS prior to the scheduled implementation for
3 Silver Star in August, 1998.
4 Q. DOES U S WEST CONTINUE TO SUPPORT A SINGLE
5 ANNUAL INCREASE FOR U S WEST REGIONAL CUSTOMERS FROM ALL
6 EAS GRANTS DURING THE YEAR?
7 A. Yes. U S WEST does not wish to see
8 "deaveraging" of the "in-region" price for its local
9 service between the three EAS regions. We recommend,
10 therefore that the Commission adopt procedures to handle
11 EAS petitions affecting all of southern Idaho in an
12
13 /
14
15 /
16
17 /
18
19
20
21
22
23
24
25
159
JOHN F. SOUBA - DI 4A
U S WEST Communications
1 annual process. Once the year's impact of EAS costs is
2 known, the individual effects of each order could be
3 combined and one annual rate change. I will discuss this
4 annual process further a bit later in this testimony.
5 Q. DO YOU HAVE OTHER RECOMMENDATIONS REGARDING
6 THE BACKLOG OF PENDING EAS CASES?
7 A. Yes. In Case Nos. GNR-T-93-7 and
8 GNR-T-93-11 the Company recommended a process where the
9 Commission would group the pending petitions by the local
10 telephone company serving the petitioners and schedule
11 hearings accordingly. The hearings scheduled since the
12 combined case mentioned above appear to follow this
13 methodology. The Company appreciates the Commission's
14 efforts to continue to combine as many petitions as
15 practical and set hearings accordingly. This approach
16 should save the parties time and resources and allows the
17 Commission to better evaluate the total financial impact
18 of all pending petitions for each of the small rural
19 telephone companies before rendering its decision. The
20 Company believes it would also be helpful to establish
21 Commission rules or practices which set a time frame
22 annually for filing EAS petitions and a maximum time for
23 dealing with each year's petitions.
24 Q. YOU MENTION AN ANNUAL REVIEW. HOW WOULD
25 YOU PROPOSE THIS BE ACCOMPLISHED?
160
JOHN F. SOUBA - DI 5
U S WEST Communications
1 A. EAS petitions would be accepted during a
2 predetermined time period each year, combined by company
3 or region, and then docketed. Petitions filed after this
4 predetermined period would be held for docketing the next
5 year. I believe something similar to this could work for
6 Idaho as long as the public was given sufficient notice.
7 It might also be helpful for the Commission to establish
8 a set of rules or guidelines to provide guidance for all
9 parties interested in EAS proceedings.
10 Q. WOULD YOU PLEASE SUMMARIZE YOUR TESTIMONY?
11 A. Yes. U S WEST supports the stipulation
12 signed by the parties in the case. The Company supports
13 region-wide EAS grants on a two-way basis. The Company
14 expects the
15
16 /
17
18 /
19
20 /
21
22
23
24
25
161
JOHN F. SOUBA - DI 5A
U S WEST Communications
1 Staff, Fremont and the public witnesses at the June 2nd
2 hearing in Ashton to create the community of interest
3 record for this case.
4 U S WEST anticipates that its capital expenses for
5 EAS will be reimbursed from available Revenue Sharing
6 funds and its ongoing compensation for EAS costs to be
7 determined in USW-T-98-3. The Company will implement
8 this case following its current schedule of EAS
9 implementations. The Company would appreciate a period
10 of 14 days following the Commission's final order in this
11 case to prepare a formal implementation date.
12 The Company further recommends that the Commission
13 consider combining the pending EAS petitions by
14 originating company groupings and establish a single
15 annual case for each of these groups of petitions. The
16 Company supports a single annual rate increase to
17 customers in all three of its EAS regions from EAS
18 grantings during the year.
19 Q. DOES THIS CONCLUDE YOUR TESTIMONY?
20 A. Yes it does.
21
22
23
24
25
162
JOHN F. SOUBA - DI 6
U S WEST Communications
1 (The following proceedings were had in
2 open hearing.)
3 COMMISSIONER NELSON: And then we'll go to
4 Mr. Howell.
5 MR. HOWELL: Thank you, Mr. Chairman.
6
7 CROSS-EXAMINATION
8
9 BY MR. HOWELL:
10 Q Mr. Souba, given those developments that
11 you just commented on in the 98-3 case, can you give the
12 Commission any idea assuming that that case were
13 successfully completed and the stipulation that you
14 referenced was actually adopted by the Commission, when
15 could the customers of Fremont expect to receive EAS?
16 A The standard answer, Mr. Howell, is that
17 the Company would appreciate having a 14-day window to
18 respond to the Commission once the EAS is granted in this
19 case to determine the actual cutover date for
20 implementing EAS, and so with current EAS cutovers
21 scheduled through the first part of August, we wouldn't
22 anticipate that the company would be prepared to actually
23 grant EAS in this case until following those already
24 scheduled cutovers.
25 Q Would it in your estimation be cost
163
CSB REPORTING SOUBA (X)
Wilder, Idaho 83676 U S WEST
1 effective for the Commission or for the company to
2 consider making the changes necessary if Fremont's EAS
3 case is granted, making those switch changes that you're
4 doing already as part of the other EAS cases to make the
5 Fremont changes at the same time?
6 A Yes, there are some economies of scale.
7 The company has already taken that approach given that
8 there were two different dates of implementation for the
9 Irwin and Wayan exchanges and then following that the
10 Commission approval of Driggs, Victor and Tetonia and all
11 of those are scheduled for August 7th. If we had a very
12 rapid Commission order in this case, there is a chance
13 that we could also include these exchanges on that same
14 cut date, but I'm unable to make that commitment not
15 knowing exactly when the approval in this case will
16 occur.
17 Q But I take it if the Commission were
18 inclined to approve this EAS, you would recommend that
19 they do so expeditiously?
20 A Very much so.
21 MR. HOWELL: I have no further questions.
22 Thank you, Mr. Chairman.
23 COMMISSIONER NELSON: Thank you,
24 Mr. Howell.
25 Mr. McClure?
164
CSB REPORTING SOUBA (X)
Wilder, Idaho 83676 U S WEST
1 MR. McCLURE: We have no questions.
2 COMMISSIONER NELSON: Questions from the
3 Commission?
4 Any redirect, Ms. Hobson?
5 MS. HOBSON: No, no redirect.
6 COMMISSIONER NELSON: All right, thank you,
7 Mr. Souba.
8 (The witness left the stand.)
9 COMMISSIONER NELSON: If that completes
10 U S WEST's case, then we'll go to Mr. Howell.
11 MR. HOWELL: Thank you, Mr. Chairman. The
12 Staff would call Carolee Hall.
13
14 CAROLEE HALL,
15 produced as a witness at the instance of the Staff,
16 having been first duly sworn, was examined and testified
17 as follows:
18
19 DIRECT EXAMINATION
20
21 BY MR. HOWELL:
22 Q Could you state your name and spell your
23 last for the record, please?
24 A Carolee Hall, H-a-l-l.
25 Q And whom are you employed by and in what
165
CSB REPORTING HALL (Di)
Wilder, Idaho 83676 Staff
1 capacity?
2 A I'm employed with the Commission as a
3 telecommunications analyst.
4 Q Are you the same Carolee Hall that had
5 occasion to prepare direct testimony dated May 18th and
6 supplemental testimony dated June 19th?
7 A I am.
8 Q Did you also prepare or have cause to
9 prepare exhibits marked 101 and 102?
10 A I did.
11 Q If I were to ask you the questions set out
12 in your testimony, would your answers be the same today?
13 A Yes, they would.
14 Q Do you have any changes or corrections to
15 your testimony or exhibits?
16 A No, I do not.
17 MR. HOWELL: With that, Mr. Chairman, I
18 would move that Ms. Hall's testimony be spread upon the
19 record and Exhibits 101 and 102 marked.
20 COMMISSIONER NELSON: Thank you. Without
21 objection, why, it will be so ordered.
22 (The following prefiled direct and
23 supplemental testimony of Ms. Carolee Hall is spread upon
24 the record.)
25
166
CSB REPORTING HALL (Di)
Wilder, Idaho 83676 Staff
1 Q. Please state your name and business address.
2 A. My name is Carolee Hall and my business
3 address is 472 West Washington Street, Boise, Idaho
4 83702.
5 Q. By whom are you employed and in what
6 capacity?
7 A. I am a Telecommunications Analyst employed
8 by the Idaho Public Utilities Commission.
9 Q. Please describe your work experience and
10 educational background.
11 A. I have been employed with the Commission
12 since April 1997. I have completed a Regulatory Studies
13 program offered through NARUC.
14 Before coming to work for the Commission, I
15 worked as a Financial Manager for a competitive long
16 distance provider. In 1993, I graduated from Boise State
17 University with a B.B.A. in Finance.
18 Q. Have you previously presented testimony
19 before this Commission?
20 A. Yes, I have presented technical testimony on
21 previous EAS cases.
22 Q. What is the purpose of your testimony?
23 A. I am filing testimony in support of the
24 stipulation and settlement agreement reached by Fremont
25 Telcom (Fremont or Company), the Commission Staff, and
167
GNR-T-97-14 Hall (Di) 1
05/18/98 Staff
1 U S WEST Communications, Inc. (U S WEST). The parties
2 filed the Stipulation and Settlement Agreement in
3 response to a petition from customers of Fremont Telcom
4 requesting extended area service (EAS). Fremont Telcom
5 serves approximately 5,800 customers in Ashton, Island
6 Park, Teton and St. Anthony area. In June 1997, the
7 Commission assigned Case No. GNR-T-97-14 to consider the
8 reasonableness of establishing EAS routes between the
9 communities in Fremont County and the communities in the
10 U S WEST eastern Idaho EAS region.
11 Q. What towns or communities are the
12 petitioners requesting to call in the U S WEST eastern
13 Idaho EAS calling regions?
14 A. The Fremont customers are requesting
15 inclusion into the U S WEST eastern Idaho local calling
16 area approved by this Commission. Towns included in this
17 EAS calling area are: American Falls, Bancroft,
18 Blackfoot, Dayton, Downey, Firth, Franklin, Grace, Idaho
19 Falls, Inkom, Lava Hot Springs, Lewisville-Menan,
20 McCammon, Montpelier, Pocatello, Preston, Rexburg, Rigby,
21 Ririe, Riverside, Roberts, Shelly, Soda Springs and
22 Thatcher.
23 Q. Have there been other communities recently
24 added to the eastern Idaho EAS region?
25 A. Yes. Through other EAS petitions and the
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1 approval of those petitions by this Commission, the
2 eastern Idaho calling region has expanded to include
3 Arbon, Rockland, Paris, Irwin and Wayan. Currently, the
4 Commission is considering the inclusion of the Teton
5 Telecom region that includes the communities of Driggs,
6 Victor and Tetonia.
7 Q. What exchanges are included in Fremont
8 Telcom's service area?
9 A. The exchanges within Fremont's service area
10 are Ashton, Island Park, and St. Anthony, including a
11 wire center in Teton. The service area encompasses
12 Fremont County and a small area in Madison County.
13 Q. What issues will you address within your
14 testimony?
15 A. I will respond first to the community of
16 interest factors as set forth in Commission Order
17 No. 26311, which established guidelines to follow when
18 evaluating EAS petitions. I will then address the issues
19 contained in the Stipulation.
20 COMMUNITY OF INTEREST STANDARDS
21 Q. What are the criteria that the Commission
22 established for EAS as set forth in Order No. 26311?
23 A. According to the Order, calling volume and
24 calling distribution are among many primary and secondary
25 factors to be used when evaluating EAS calling areas. To
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1 find whether a community of interest exists to support
2 EAS, the primary factors, besides the calling data, are
3 as follows:
4 1. geographic proximity (distance
between exchanges);
5
2. The presence of geographic or
6 other physical barriers
(mountains, rivers, valleys)
7 between exchanges;
8 3. County seat relationship (are both
exchanges in the same county);
9
4. The relationship to school
10 districts (do both exchanges share
the same school district);
11
5. The proximity to medical
12 facilities and services;
13 6. The willingness of customers to
pay increased rates.
14
Order No. 26311, page 9.
15
16 Q. Please explain calling volume and calling
17 distribution.
18 A. Call volume is simply the average number of
19 calls per line made each month from the home exchange to
20 the requested exchange. Call distribution shows how many
21 lines had 0 calls, 1 call, 2 calls, 3 calls, etc.
22 Q. Were you able to do an analysis of calling
23 volumes and calling distributions?
24 A. Fremont is a new company and has had its
25 new switch operational since February 23, 1998. The call
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1 data that the Company presented to Staff for analysis was
2 derived from U S WEST. As part of the purchase agreement
3 between U S WEST and Fremont, U S WEST agreed to carry
4 Fremont's toll traffic until Fremont upgraded the switch.
5 Q. Did you look at the calling data provided to
6 identify a community of interest?
7 A. Yes. For the St. Anthony exchange, my
8 analysis shows a community of interest for calling into
9 Idaho Falls. St. Anthony customers had 5.5 calls per
10 month, per line to Idaho Falls. It is important to note
11 that St. Anthony already has EAS into Rexburg.
12 The Island Park data showed 8.2 calls per
13 line, per month to Idaho Falls; 4.4 to Rexburg and 2.7 to
14 Pocatello. Anytime an Island Park customer makes a call
15 outside the Island Park exchange, it is a toll call.
16 From Island Park to Ashton (approx. 27 miles), the call
17 data showed 1.8 calls per line, per month and 2 calls per
18 line, per month were made to St. Anthony (approx. 44
19 miles away).
20 Ashton call data showed a similar community
21 of interest for calling into Idaho Falls, Pocatello and
22 Rexburg with 4.5, 3.6 and 6.7 calls per line, per month,
23 respectively.
24 Q. What did the calling distribution for Ashton
25 suggest with respect to the monthly calls per line per
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1 month?
2 A. Ashton to Idaho Falls showed that 52% of the
3 Fremont customers made no calls, while 26% made five or
4 more calls each month. Ashton to Rexburg showed that 44%
5 of Fremont's customers made no calls and 26% made five or
6 more. This clearly suggested a division that showed a
7 community of interest for calling into the U S WEST
8 region.
9 Q. What was the calling distribution for St.
10 Anthony into Idaho Falls?
11 A. This distribution showed that 38% of St.
12 Anthony customers made no calls to Idaho Falls, while 29%
13 made five or more.
14 Q. Did you review any calling distributions for
15 Island Park?
16 A. Yes, but the calling data used in the
17 analysis is for April, May and June. Island Park is a
18 recreational area that caters to snowmobilers in the
19 winter and summer activities after May. The calling
20 period that Fremont provided would be for an "off" time
21 for the Island Park area. However, for the calling route
22 from Island Park to Idaho Falls, the calling data showed
23 that on average 63% of the customers made no calls and
24 16% made five or more calls. Island Park to Rexburg
25 showed that 85% made no calls and 3% made five or more.
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1 If the calling data had been for three months, during one
2 of the peak seasons, I believe that the percentages would
3 have been different.
4 Q. Based on the call data, what would your
5 recommendation be for EAS into the eastern Idaho U S WEST
6 region?
7 A. The data provided showed a reasonable
8 interest in the Fremont exchanges for calling Idaho
9 Falls, Rexburg, and Pocatello. I recommend EAS calling
10 for all three Fremont exchanges into the eastern Idaho
11 region. I especially support toll relief for the Island
12 Park customers.
13 Q. Addressing the geographic proximity
14 (distance between exchanges) and the presence of
15 geographic or other physical barriers (mountains, rivers,
16 valleys) as set out in Commission Order No. 26311, what
17 were your findings?
18 A. St. Anthony, Teton and Ashton are all
19 located within approximately a 27-mile wide area east of
20 Rexburg. Rexburg is in the U S WEST eastern Idaho EAS
21 region. U S WEST, Teton Telecom and Mud Lake Telephone
22 Cooperative surround Fremont.
23 Q. Are the petitioners served by Fremont Telcom
24 represented by the same county seat?
25 A. Yes, St. Anthony is the county seat for
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1 Fremont County.
2 Q. What are the school arrangements among the
3 communities within Fremont County?
4 A. St. Anthony is a self-sufficient school
5 district with grade schools, middle schools and a high
6 school. Students from Teton, Parker and Chester attend
7 middle school and high school in St. Anthony.
8 Ashton also has all twelve grades. Students
9 from the Island Park area attend school in Ashton.
10 Q. Another factor established by the Commission
11 for consideration when evaluating EAS is the proximity to
12 medical facilities and services. What did your analysis
13 of this show?
14 A. Ambulance/EMT services are available in the
15 Island Park/Macks Inn, Ashton and St. Anthony areas.
16 There are no hospitals in Fremont County, but there are
17 some medical clinics. If further medical or hospital
18 care is needed, the people of Fremont County must seek
19 medical care in Rexburg or Idaho Falls located in
20 U S WEST's eastern Idaho EAS region.
21 Q. Would you please explain that portion of
22 Commission Order No. 26311 that refers to the willingness
23 of customers to pay increased rates and how it relates to
24 this EAS evaluation?
25 A. The willingness of customers to pay
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1 increased rates for expanded local calling is a very
2 important item and has become a hotly debated issue in
3 some recent EAS cases. EAS is not a "free" calling plan.
4 The traditional EAS structure requires that all customers
5 pay a reasonable amount for the opportunity to call a
6 larger region. The Stipulation looked at the costs
7 associated with the extended area and distributed those
8 costs over all the customers within the Fremont Telcom
9 region. The result is that each customer pays a portion
10 for the extended calling area.
11 EAS COSTS
12 Q. What cost factors are evaluated when
13 determining the feasibility of EAS for an independent
14 telephone company?
15 A. Fremont, like the other independent Local
16 Exchange Companies (LECs), is a Title 61 fully regulated
17 company. This Commission fully regulates the services
18 offered by the Company and has an obligation to ensure
19 that the Company has an opportunity to earn its
20 authorized rate of return. To the extent that the
21 implementation of EAS creates an increase in costs or a
22 loss of revenue, resulting in the Company earning below
23 its authorized rate of return, the Commission has an
24 obligation to allow the Company to increase rates to
25 offset the increased costs or recapture lost revenues.
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1 Q. What are the rates that Fremont proposed and
2 Staff agreed to in the Settlement Agreement?
3 A. To recover its costs associated with EAS,
4 Fremont proposed to increase monthly basic service rates
5 for residential customers to $24.10 and $42.00 for
6 business service. To mitigate the increase in basic
7 monthly rates we agreed upon two rate changes.
8 First, we agreed to eliminate the $1.59
9 monthly rural zone charge imposed on approximately 3,000
10 rural Fremont customers.
11 Second, we agreed to an optional calling
12 plan called Measured Service for residential customers.
13 The proposed rates for Measured Service are $16.00 per
14 month with 90 free minutes of local calling. For every
15 minute in excess of the 90 minutes, the rate is $.03 per
16 minute. From a practical standpoint, this means that a
17 Measured Service customer may use up to six hours of
18 local calling before reaching the $24.10 flat basic rate
19 for unlimited calling.
20 Q. Has there been any settlement reached
21 concerning vacation rates?
22 A. Yes, the Company and Staff agreed that the
23 vacation rate would be at 50% of the local service rate
24 for non-measured residential or business service.
25 Q. Do the low income customers have
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1 alternatives to the $24.10 or $16.00 monthly rate?
2 A. Yes. The 1988 Idaho Legislature enacted the
3 Idaho Telecommunications Assistance Program (ITAP), Idaho
4 Code 56-901 et seq., for eligible low-income customers.
5 In March 1998, the Legislature amended the existing
6 program so that qualified low-income customers could be
7 provided a $10.50 per month credit toward their phone
8 bills. This will lower the monthly residential phone
9 bill to $13.60 per month once they implement the program
10 this summer. The Department of Health and Welfare must
11 promulgate new income-based eligibility standards to
12 implement ITAP.
13 Besides the $10.50 credit for the flat
14 $24.10 rate, customers may use this credit for Fremont's
15 measured service plan. The measured service rate is
16 $16.00 per month with 90 free minutes of local calling.
17 With the ITAP credit applied to the measured service
18 rate, a customer's monthly bill would be $5.50.
19 Q. Did Staff analyze the proposed rates?
20 A. Yes. Staff analyzed the proposed rates and
21 compared them with the costs associated with the
22 expansion of facilities needed to carry out EAS and the
23 revenue shortfalls. Overall, Staff determined that
24 Fremont's proposed rates were reasonable for the
25 customers and the Company alike. The rates would
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1 generate enough revenue to offset the EAS costs, but not
2 place the Company into an over-earning position.
3 Q. If Fremont were to experience an unforseen
4 revenue shortfall with the implementation of EAS, what
5 would the Company need to do to protect the customers
6 from another rate increase?
7 A. Fremont should not experience a revenue
8 shortfall because of EAS. The Stipulation contemplates
9 that Fremont may seek to recover a significant and
10 unforseen revenue shortfall caused by a significant
11 buy-up of Measured Service, federal or state legislation
12 or regulatory actions unrelated to this docket. Revenue
13 recovery, of course, would be subject to Commission
14 approval.
15 Q. What is the Idaho USF and how does it
16 relate to Fremont?
17 A. The Idaho USF is a high cost fund created
18 to help companies in high cost areas maintain affordable
19 phone rates. Because Fremont is a new company and agreed
20 to a rate freeze as part of the sale agreement, it has
21 not been eligible for disbursements from the USF fund.
22 Q. Part of the Stipulation may allow Fremont
23 disbursements from the Idaho USF, what explicitly is
24 required of the Company for this to occur?
25 A. Staff has agreed that following an audit of
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1 the Company's 1997 annual report or when the Company has
2 1998 financials available, whichever occurs first,
3 Fremont may seek funding from the existing USF if
4 necessary. Although, the Commission has expressed
5 reluctance in past orders that USF revenues be used to
6 defray EAS costs, the parties agreed that Fremont may
7 apply for up to $108,000 in annual revenues from the USF.
8 These revenues will increase the Company's overall
9 revenues, but will not reach the projected revenue
10 requirement of the Company.
11 Q. Will the proposed rates increase again in
12 the future?
13 A. The Stipulation states that a full test
14 year be in place and audited by Staff before Fremont is
15 eligible to come before the Commission and seek further
16 rate relief, unless federal or state legislation or
17 regulatory actions substantially reduce Fremont's
18 revenues not related to this case.
19 Q. What were other issues settled in the
20 Stipulation and Agreement between Fremont and Staff?
21 A. The stipulation and settlement process grew
22 out of the parties' desire to efficiently and reasonably
23 meet the growing demand for EAS from customers. Fremont
24 customers wanted EAS calling into the eastern Idaho
25 calling region. Other factors included in the settlement
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1 are a Stimulation Factor, Idaho USF Disbursement, Basic
2 and Measured Service rates and implementation.
3 Q. What is the stimulation factor and how does
4 it pertain to EAS?
5 A. A stimulation factor of "3 times" (3x) rate
6 was found appropriate by the Commission in prior EAS
7 cases. This rate establishes how much calling volume
8 will increase because of toll calling becoming toll-free
9 calling. An increase in calling volume often requires an
10 increase in plant capacity to ease the increased calling
11 volume. I have applied the 3x stimulation factor in
12 evaluating Fremont's revenue requirement for EAS.
13 Q. Please recap your testimony in support of
14 EAS.
15 A. I recommend that EAS into the eastern Idaho
16 region be approved. The proposed elimination of the
17 monthly zone charges and the increase in rates for basic
18 residential service to $24.10 and $42.00 for business
19 customers is reasonable. The Measured Service rate of
20 $16.00 per month with 90 free minutes of local calling is
21 an alternative option to the flat rate of $24.10. The
22 Measured Service plan includes a rate of $.03 per minute
23 for those minutes in excess of 90 minutes. The Measured
24 Service plan is fair and gives the customer a choice. I
25 believe the Company is being sensitive to the customers
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1 within Fremont Telcom area and are attempting to meet
2 their requests that they have voiced through the petition
3 filings at the Commission. I believe that agreeing to a
4 capped USF draw, subject to an audit, is reasonable.
5 Q. Does this conclude your direct testimony in
6 support of the Stipulation in this proceeding?
7 A. Yes, it does.
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
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1 Q. Please state your name and business address.
2 A. My name is Carolee Hall and my business
3 address is 472 West Washington Street, Boise, Idaho
4 83702.
5 Q. Are you the same Carolee Hall who
6 previously filed direct testimony in this proceeding?
7 A. Yes, I am.
8 Q. What is the purpose of your supplemental
9 testimony?
10 A. I am filing testimony to address certain
11 issues presented in testimony received from Mr. Ray
12 Hendershot, consultant for Fremont. Staff has some
13 concerns about several revenue requirement issues
14 presented by the Company. Our concerns reflect the
15 differences between Staff's and the Company's
16 calculations that will affect the revenue requirement,
17 and ultimately impact the subsequent audit results.
18 Staff continues to recommend approval of the EAS and
19 adoption of the Stipulation.
20 Q. What issues are you going to address from
21 Mr. Hendershot's testimony?
22 A. I will comment on six issues. They are:
23 1. Loss of Access Revenues of $212,589
(Mr. Hendershot's Exhibit 1, line 4,
24 and testimony, page 7, lines 1-15).
25 2. The depreciation rate for EAS
facilities (Mr. Hendershot's Exhibit 1,
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1 line 6).
2 3. Cost of Capital (Mr. Hendershot's
testimony, pages 11-12).
3
4. Gross-up for income taxes methodology
4 (Mr. Hendershot's Exhibit 1, line 9).
5 5. EAS Regulatory Expenses (Mr.
Hendershot's Exhibit 1, line 7).
6
6. Fremont's proposed multi-line business
7 rates (letter from Fremont to
Commissioner Smith dated June 10,
8 1998).
9 Q. Let us begin with item number 1. What are
10 you concerned about in the calculation of the Loss of
11 Access Revenues shown in Mr. Hendershot's Exhibit 1,
12 line 3?
13 A. When Fremont purchased the Ashton, Island
14 Park and St. Anthony exchanges from U S WEST in 1996,
15 Fremont based its "future revenue" streams on historical
16 and projected access minutes from U S WEST. In February
17 1998, Fremont turned up its new switch and began carrying
18 its own traffic. As Mr. Hendershot explains on page 7 of
19 his direct testimony, the Company's actual revenues from
20 access minutes is approximately 60% of the projected
21 revenues. Consequently, Fremont seeks compensation for
22 this decrease. While Fremont cannot determine the exact
23 cause of the decrease in its access revenues, it has
24 included an additional $212,589 as part of its net
25 revenue deficiency for EAS.
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1 Q. Are not lost access revenues part of the
2 costs associated with EAS?
3 A. Yes. Fremont should be compensated for its
4 actual, and accountable, lost minutes associated with the
5 implementation of EAS. The lost access revenue
6 associated with EAS is $318,884. However, Staff does not
7 support the recovery of $212,589 of anticipated, but
8 unrealized, access revenue.
9 Q. Has Staff agreed to look at the unrealized
10 access minute issue?
11 A. Yes. Staff agrees with Fremont that
12 unrealized access minutes requires closer examination and
13 resolution.
14 Q. Moving to item number 2, what are the
15 concerns with the depreciation rates?
16 A. First, Fremont has suggested that it is
17 installing fiber, not a microwave. This will have an
18 appreciable change in the revenue requirement as a result
19 of EAS. Mr. Hendershot is using a five-year depreciation
20 rate on the microwave. Historically, within southern
21 Idaho, the appropriate depreciation rate for this type of
22 plant is 15 years. I have calculated the annual
23 depreciation expense for the microwave to be $31,905
24 using the appropriate 15-year rate (Staff's Exhibit
25 No. 101). Mr. Hendershot calculated an annual
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GNR-T-97-14 HALL (SUPP) 3
06/19/98 Staff
1 depreciation expense of $92,368 (Hendershot Exhibit 1),
2 which results in a difference of $60,463 between Staff
3 and Mr. Hendershot's calculations.
4 Second, if Fremont wishes to install fiber,
5 I strongly support that decision. This would be an
6 appropriate business decision that would reflect a
7 forward-looking proactive Company plan. However, there
8 is no indication of any revenue requirement for this type
9 of plant facilities presented in the exhibits or in
10 testimony. Using an estimate provided by the Company in
11 response to Staff's production request, I have calculated
12 the annual depreciation expense for fiber to be $35,344.
13 Even with fiber, depreciated over the appropriate 20
14 years, the annual depreciation expense is $57,024 less
15 than Mr. Hendershot's proposed depreciation expense for
16 microwave and central office equipment (COE).
17 Q. You mention that Mr. Hendershot included COE
18 in his calculation of plant additions for EAS. Did you
19 include COE?
20 A. Yes, I did. However, question the extent
21 that the COE will need upgrading since it is a new
22 switch. Realizing that to convert from toll to toll-free
23 calling requires some hardware and software revisions, I
24 question $33,000. Fremont recently turned up its new
25 switch in February 1998. Fremont used the switch
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GNR-T-97-14 HALL (SUPP) 4
06/19/98 Staff
1 allowance from the sale of the exchanges to purchase the
2 switch. For my calculation in Exhibit No. 101, I did
3 include the $33,000 for COE upgrade that Mr. Hendershot
4 claimed Fremont would need for the new microwave.
5 However, I included it in the total plant addition for
6 depreciation purposes.
7 Q. What is your opinion of the 15.75% return
8 on equity recommendation?
9 A. I agree with Mr. Hendershot that Fremont
10 does not have an authorized rate of return. This has,
11 and does, create certain complexities when attempting to
12 do any financial analysis of the Company. However, I
13 believe the 15.75% recommended return on equity is too
14 high. Determining the exact return on equity for Fremont
15 is beyond the scope of this EAS case and does not affect
16 Staff's recommendation to approve EAS. This issue along
17 with other issues will be more fully examined when Staff
18 conducts its audit of the Company in July 1998. Mr.
19 Hendershot suggests that Fremont's return on equity
20 should be higher than U S WEST's. U S WEST was
21 authorized a return on equity of 11.2%, Order No. 27100,
22 Case No. USW-S-96-5, dated August 12, 1997. For this EAS
23 case, Staff has used a 12.5% return on equity.
24 Q. Did you compare the difference between using
25 15.75% and 12.5% for the return on equity? What was the
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GNR-T-97-14 HALL (SUPP) 5
06/19/98 Staff
1 change in return on rate base?
2 A. Yes, I did. In my calculation, I used a
3 weighted cost of capital of 8.88% based on a 12.5% return
4 on equity and Fremont's reported debt. I calculated the
5 return on rate base to be $631,821, a decrease of $45,652
6 from the return calculated by Mr. Hendershot. See
7 Staff's Exhibit No. 102. This decreases Fremont's
8 revenue requirement for this EAS case.
9 Q. Moving on to item number 4, what is your
10 concern with respect to the gross-up for income taxes?
11 A. To calculate the gross-up for income taxes
12 in Mr. Hendershot's Exhibit 1, line 9, he has taken the
13 total plant additions for EAS, applied a weighted cost of
14 capital (9.45%) to arrive at a return on equipment of
15 $45,203. This calculation included the weighted cost of
16 debt plus the weighted cost of equity. He then used that
17 value to obtain the gross-up for income taxes, which he
18 calculated to be $74,819. In doing this, he has
19 grossed-up the interest on the debt and the return on
20 equity.
21 The appropriate methodology is to gross-up
22 only that portion associated with equity because the
23 interest is tax deductible and only the equity piece will
24 be taxed.
25 Q. Did you calculate the gross-up for income
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GNR-T-97-14 HALL (SUPP) 6
06/19/98 Staff
1 taxes using the appropriate methodology?
2 A. Yes. However, my calculation will be
3 significantly different from Mr. Hendershot's because I
4 used the 12.5% return on equity instead of 15.75%. For
5 the microwave investment, I calculated the gross-up for
6 taxes to be $18,191.
7 Q. Please explain your concern with the fifth
8 issue - EAS Regulatory Expenses.
9 A. As Mr. Hendershot testified on page 2, he
10 has provided testimony for many telephone cases in the
11 past. He has recently presented testimony for EAS cases
12 for some of the smaller Idaho independent local exchange
13 companies. Until this filing his "EAS Regulatory
14 Expense", or consulting fees, have been between $15,000
15 and $20,000. He is assessing Fremont $30,000 for this
16 case. I would like a breakdown of what these fees
17 represent before accepting a $30,000 expense at face
18 value. For purposes of calculating an EAS revenue
19 requirement, I used the $30,000 figure.
20 Q. Do you have an exhibit showing the EAS
21 revenue requirement associated with implementing EAS?
22 A. Yes, in Staff's Exhibit No. 101, I have done
23 a side-by-side comparison of the Company's Exhibit 1 and
24 Staff's calculations. On most issues we agree; however,
25 as shown on line 4, I have removed the additional lost,
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GNR-T-97-14 HALL (SUPP) 7
06/19/98 Staff
1 or more accurately, unrealized access revenue for reasons
2 stated earlier in my testimony.
3 Line 7 shows a difference of $88,737 between
4 the Company and Staff. This result is based on the
5 adjustment to the calculation of return on equity,
6 depreciation rates and the methodology used to calculate
7 the gross-up for income taxes. The net change in the
8 total EAS revenue requirement is the combination of lines
9 4 and 7, with the exception of $29,950 (line 1).
10 Staff has adjusted the interstate shift from
11 Mr. Hendershot's $131,698 to $101,748. This was done to
12 reflect the different overall rates of return in the
13 interstate and intrastate jurisdictions. Mr. Hendershot
14 in his workpapers calculated interstate revenues using
15 a 11.25% rate of return. Staff applied Mr. Hendershot's
16 rate of return of 9.45% as he used in his testimony for
17 this adjustment. If this were a rate case, however,
18 Staff would have applied a rate of return of 8.81% to set
19 an overall rate of return for ratemaking purposes for
20 Fremont.
21 Q. Did you look at the incremental revenue as
22 a result of the EAS?
23 A. Yes. Line 11 of Staff's Exhibit No. 101
24 shows $937,583. Mr. Hendershot showed $935,562, a
25 negligible difference of $2,021.
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GNR-T-97-14 HALL (SUPP) 8
06/19/98 Staff
1 Q. Is there a difference between Staff and Mr.
2 Hendershot's net revenue deficiency as a result of EAS?
3 A. Yes, Mr. Hendershot believes that even
4 after the EAS rate increases, the Company will experience
5 an overall revenue shortfall as a result of EAS
6 implementation of $107,988. Staff, on the other hand,
7 after adjusting Mr. Hendershot's calculations, calculated
8 an annual increase in revenue above EAS costs to be
9 $225,307. However, based on Staff's initial review,
10 Fremont will not be overearning. As mentioned in Mr.
11 Hendershot's testimony, the Company claims it has
12 incurred a loss of $1,626,760 since it began providing
13 service in 1997. While Staff's audit may not agree with
14 this exact amount, it is unlikely it will show
15 overearnings.
16 Q. Please address item number 6, a discount
17 for multi-line business rates.
18 A. In May, Staff, Fremont and U S WEST agreed
19 that monthly business rates should be set at $42.00. On
20 June 10, 1998, Commissioner Smith received a facsimile
21 from Fremont proposing to discount the local monthly
22 business rates for businesses with two or more lines.
23 Under this proposal, if a business has two to four lines,
24 that business would be assessed $37.00 per line for each
25 line in addition to its primary line charge of $42.00.
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06/19/98 Staff
1 Those businesses with five or more lines would pay $32.00
2 per line for each additional line over the primary line
3 charge.
4 Q. Did Fremont provide a projected revenue
5 impact study and cost analysis with this proposal?
6 A. Fremont has not provided Staff with any cost
7 data that represents Fremont's actual cost of providing
8 business service. They did provide a brief calculation
9 of the revenue impact based on the number of customers
10 with two lines, three lines, four lines, etc. and the
11 applicable discount it wishes to extend to businesses in
12 Fremont County. Fremont estimates that its annual
13 revenue reduction as a result of this repricing would be
14 $28,320.
15 Q. Do you support this proposed discount for
16 multi-line businesses?
17 A. I may support some sort of discount, but do
18 not support a discount at two lines. I believe the
19 Company needs to examine its costs associated with
20 providing business service and find an appropriate
21 breaking point for the number of lines to discount.
22 Q. Do you have other concerns with the proposed
23 discount?
24 A. Yes. Fremont is requesting that the Idaho
25 Universal Service Fund (USF) be used to offset the
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06/19/98 Staff
1 revenue shortfall that would result through its actions
2 to discount multi-line businesses. I believe that any
3 USF disbursements should be determined after Staff
4 completes its audit of the Company's actual financial
5 data and operations. Furthermore, I do not support
6 subsidizing the discounting of multi-line businesses with
7 USF funds. USF funds are provided by Idaho customers and
8 are designed to support single-line residence and
9 business services to keep these services at reasonable
10 levels.
11 Q. Do you foresee any other problems with the
12 multi-line business rate?
13 A. Yes. I believe that Fremont is creating a
14 precarious situation that should be corrected before
15 implementation. Why should a two-line business receive a
16 discount on the second line when a two-line residence
17 does not receive the same consideration?
18 I appreciate Fremont's attempt at
19 accommodating the multi-line businesses. However, I
20 recommend that the discount not be offered until the
21 Company provides Staff with appropriate cost data to
22 support or refute any revenue impact on the Company.
23 I believe the business rate, that all
24 parties have stipulated and agreed to, is reasonable and
25 small businesses which use telecommunications services in
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06/19/98 Staff
1 their business may take advantage of the expanded or
2 enlarged local calling areas at affordable and
3 predictable local rates. As a result of the EAS toll
4 free calling region, many small businesses will lower
5 their overall phone bills (an important basic cost of
6 doing business) and can probably expand their customer
7 base. The EAS should be an overall (composite) benefit
8 to businesses.
9 Q. Please summarize your testimony with respect
10 to EAS.
11 A. I recommend and support EAS into the eastern
12 Idaho region. The proposed elimination of the monthly
13 rural zone charges and the increase in rates for basic
14 residential service to $24.10 and $42.00 for business
15 customers is reasonable. The measured service rate
16 of $16.00 per month with 90 free minutes of local calling
17 is an alternative option to the flat residential rate
18 of $24.10. The calculation of the Company's actual
19 revenue requirement, and possible distribution from the
20 Idaho USF, will be determined as a result of Staff's
21 audit.
22 Q. Does this conclude your supplemental
23 testimony in this proceeding?
24 A. Yes, it does.
25
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06/19/98 Staff
1 (The following proceedings were had in
2 open hearing.)
3 MR. HOWELL: And Ms. Hall is available for
4 cross.
5 COMMISSIONER NELSON: Thank you.
6 Ms. Hobson, do you have questions?
7 MS. HOBSON: Thank you.
8
9 CROSS-EXAMINATION
10
11 BY MS. HOBSON:
12 Q Ms. Hall, on page 1 of your testimony, you
13 reference subsequent audit results and there's been a
14 considerable discussion in the prefiled testimony and
15 this morning about the audit. Has the Staff begun an
16 audit of Fremont?
17 A The Staff has prepared and presented to
18 Fremont some preliminary audit requests and Fremont has
19 responded to those.
20 Q Has an audit report been prepared by Staff
21 at this point?
22 A Not yet at this point.
23 Q When do you anticipate that the audit will
24 be completed for Fremont?
25 A Staff is scheduled to do the audit, to
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1 perform the audit, July 20th through the 24th, I
2 believe. The completion date I don't know.
3 Q When you say scheduled to do the audit, are
4 you talking about an on-site visit --
5 A Yes, I am.
6 Q -- to the Fremont Company? And I
7 understood you to say, then, you're not sure when the
8 actual audit report will be completed and filed with the
9 Commission?
10 A I don't have that, no.
11 Q At page 3, line 9 of your testimony, you
12 indicate that Staff has agreed to look into the
13 unrealized access minutes issue.
14 MR. HOWELL: Mr. Chairman, could I ask
15 which testimony we're talking about?
16 MS. HOBSON: I'm sorry, Ms. Hall's direct
17 testimony. Actually, it must be her supplemental
18 testimony now that I look at it. I'm sorry.
19 MR. HOWELL: Could I have the line cite
20 again?
21 MS. HOBSON: Page 3, line 9.
22 Q BY MS. HOBSON: Do you have it? Are you
23 with me?
24 A I'm there.
25 Q Okay. You have agreed or you state there
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1 that Staff has agreed to look into the unrealized access
2 minute revenue issue?
3 A Yes.
4 Q Can you explain to me what your
5 understanding of that Staff investigation is going to be?
6 A We need to determine, Staff has discussed
7 this with the Company, we need to determine how much is
8 dial-around, how much is not being captured, perhaps.
9 We're not certain what exactly that is and until we can
10 get into it and investigate it, we've just decided to set
11 that aside and address it at another time.
12 Q Are you familiar with the term PIU?
13 A Yes, I am.
14 Q Do you anticipate doing a PIU study?
15 A Yes, we do.
16 Q Will that study be limited to Fremont or
17 will that cover southern Idaho LECs in general?
18 A We want to look at all of the independents
19 and see just exactly what is going on, so I guess we
20 would be looking at all of them.
21 Q But that's going to be limited to
22 independents, you're not going to include us not so
23 independent companies; is that right?
24 A Not to my -- I don't know.
25 Q Facilities upgrades, according to
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Wilder, Idaho 83676 Staff
1 Mr. Hendershot's Exhibit 1, are part of their incremental
2 revenue requirement for the provision of EAS; is that
3 correct?
4 A That's correct.
5 Q And I take it that Staff agrees that that
6 is as it should be?
7 A Yes, we did.
8 Q But I was somewhat confused by the
9 testimony and I heard Mr. Hendershot this morning testify
10 that he believed that the Company was now going to be
11 going with fiber instead of microwave; is that your
12 understanding?
13 A That is my understanding.
14 Q Has Staff made a determination as to what
15 the cost of the microwave facilities -- I'm sorry, as to
16 what the cost of the fiber facilities will be for the
17 upgrade for EAS?
18 A The Staff estimated based on the responses
19 that the Company provided through production requests
20 when we started investigating EAS and it was an estimate
21 by an engineer who had provided that cost to the Company
22 and Staff looked at it, it was approximately 700,000, but
23 that's the last we had heard about it.
24 Q So are you satisfied that Mr. Hendershot's
25 Exhibit 1 fairly characterizes the upgrade costs even
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CSB REPORTING HALL (X)
Wilder, Idaho 83676 Staff
1 though the facilities, the technology may be different,
2 the costs are fairly represented in Exhibit 1?
3 A Yes, if they were going to upgrade the
4 microwave, it would be. I'm not sure what they're doing,
5 that's where we're going to do the audit as well and look
6 at what is in fact going in up there.
7 Q So part of the Staff's on-site audit will
8 involve looking at the technology that is being placed up
9 there?
10 A Yes.
11 Q Does the Staff have other plans as to how
12 it is going to keep track of what upgrade costs are
13 incurred by Fremont other than simply visiting the site
14 during the time period you stated?
15 A In the audit, Staff, the scope of the audit
16 will be to determine what a rate of return will be for
17 the Company. Depreciation rates, my understanding is to
18 look at the upgrades that have taken place since the sale
19 and that sort of thing, so that is what we will be
20 looking at.
21 Q To the extent that Fremont hasn't completed
22 their work up there, is Staff going to follow up on what
23 has been done for the EAS upgrades, assuming they haven't
24 completed it by the time Staff visits the site?
25 A Yes, we'd follow up.
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Wilder, Idaho 83676 Staff
1 Q Are you familiar at all with the process
2 whereby U S WEST's EAS upgrades have been audited and
3 reviewed by Staff?
4 A No, I'm not familiar with that.
5 Q Directing your attention to your
6 Exhibit 101, you appear to conclude that the rate
7 increase as stipulated to between the Staff and the
8 Company will exceed Fremont's incremental revenue
9 requirement for EAS by $225,307; is that correct?
10 A That's correct.
11 Q Isn't that over 20 percent of the total
12 increase?
13 A Well, Staff needs to look at -- the
14 discrepancy in those two numbers are part of where Staff
15 has removed the 212,000 in lost access revenue. That's
16 still, as we've discussed, pending. Also, the 29,900 --
17 well, the 29,000 for the interstate shift, that's going
18 to be looked at in the audit. I just basically wanted to
19 point out that there is a difference in what, kind of a
20 recap of where we're going at the Commission level for
21 Fremont.
22 Q Well, Staff has stipulated, has it not,
23 that the rates contained in the stipulation, that is, the
24 $24.00 and $42.00 for business customers, that those
25 rates are reasonable?
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Wilder, Idaho 83676 Staff
1 A Correct.
2 Q And so I guess my question to you is how
3 does Staff feel that those rates are appropriate given
4 your Exhibit 101?
5 A Those rates as stipulated will be, Staff
6 has felt that they are appropriate and once again, that's
7 another reason we are going to perform an audit on
8 Fremont to take a look at their overall rate of return
9 and their revenue requirement.
10 Q Are you convinced based upon what you've
11 seen through the audit requests so far that there is an
12 additional revenue requirement beyond the incremental EAS
13 revenue requirement?
14 A Yes, I am.
15 MS. HOBSON: Thank you. That's all I
16 have.
17 COMMISSIONER NELSON: Thank you.
18 Mr. McClure?
19 MR. McCLURE: We have no questions.
20 COMMISSIONER NELSON: Thank you. Do we
21 have questions from the Commission?
22 COMMISSIONER HANSEN: I have none.
23 COMMISSIONER NELSON: I have one.
24
25
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Wilder, Idaho 83676 Staff
1 EXAMINATION
2
3 BY COMMISSIONER NELSON:
4 Q Ms. Hall, by your testimony here today, you
5 didn't mean to imply that the Staff was going to limit
6 its audit to certain areas, did you?
7 A The audit of --
8 Q The audit of Fremont Telcom.
9 A Oh, no.
10 Q You're not really involved with developing
11 the audit plan, are you?
12 A No, I'm not. I'm just accompanying.
13 COMMISSIONER NELSON: Okay, thank you.
14 Any redirect, Mr. Howell?
15 MR. HOWELL: No redirect, Mr. Chairman.
16 COMMISSIONER NELSON: Thank you. Ms. Hall,
17 thank you for your testimony.
18 THE WITNESS: Thank you.
19 (The witness left the stand.)
20 COMMISSIONER NELSON: Do we have any other
21 matters to -- does that complete your case, Mr. Howell?
22 MR. HOWELL: Yes, it does and I'd move for
23 the admission of Staff Exhibit 101 and 102.
24 COMMISSIONER NELSON: Thank you. Without
25 objection, so ordered and we would also admit Exhibits 1
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CSB REPORTING HALL (Com)
Wilder, Idaho 83676 Staff
1 through 6.
2 (All exhibits previously marked for
3 identification were admitted into evidence.)
4 COMMISSIONER NELSON: Do we have anything
5 else that we need to take care of today?
6 MS. HOBSON: Mr. Chairman, what is the
7 Commission's pleasure on the supplemental U S WEST
8 testimony, do you care, line number issue?
9 COMMISSIONER NELSON: Unless there's an
10 objection or a desire by one of the parties to have an
11 additional filing, I think we should just let this
12 testimony stand as it is.
13 MS. HOBSON: Thank you.
14 COMMISSIONER NELSON: Okay, if there's
15 nothing further, why, I'd like to thank you all for your
16 attention today and this concludes the hearing in the
17 technical portion of this case and, hopefully, the
18 Commission can issue a decision forthwith. We'll
19 certainly be with you as soon as we can. If there's
20 nothing further, we're adjourned. Thank you.
21 (The Hearing adjourned at 10:20 a.m.)
22
23
24
25
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CSB REPORTING COLLOQUY
Wilder, Idaho 83676
1 AUTHENTICATION
2
3
4 This is to certify that the foregoing
5 proceedings held in the matter of the petition of
6 customers of the Fremont Telcom Company to join the
7 U S WEST Communications, Inc. eastern Idaho regional
8 calling area, commencing at 9:30 a.m., on Thursday,
9 June 25, 1998, at the Commission Hearing Room, 472 West
10 Washington, Boise, Idaho, is a true and correct
11 transcript of said proceedings and the original thereof
12 for the file of the Commission.
13 Accuracy of all prefiled testimony as
14 originally submitted to the Reporter and incorporated
15 herein at the direction of the Commission is the sole
16 responsibility of the submitting parties.
17
18
19
20
CONSTANCE S. BUCY
21 Certified Shorthand Reporter #187
22
23
24
25
203
CSB REPORTING AUTHENTICATION
Wilder, Idaho 83676