980619.docx

Q.Please state your name and business address.
A.My name is Carolee Hall and my business address is 472 West Washington Street, Boise, Idaho 83702.
Q.Are you the same Carolee Hall who previously filed direct testimony in this proceeding?
A.Yes, I am.
Q.What is the purpose of your supplemental testimony?
A.I am filing testimony to address certain issues presented in testimony received from Mr. Ray Hendershot, consultant for Fremont.  Staff has some concerns about several revenue requirement issues presented by the Company.  Our concerns reflect the differences between Staff’s and the Company’s calculations that will affect the revenue requirement, and ultimately impact the subsequent audit results.  Staff continues to recommend approval of the EAS and adoption of the Stipulation.
Q.What issues are you going to address from Mr. Hendershot’s testimony?
A.I will comment on six issues.  They are:
1.Loss of Access Revenues of $212,589
(Mr. Hendershot’s Exhibit 1, line 4,
and testimony, page 7, lines 1-15).
2.The depreciation rate for EAS
facilities (Mr. Hendershot’s Exhibit 1,
line 6).
3.Cost of Capital (Mr. Hendershot’s
testimony, pages 11-12).
4.Gross-up for income taxes methodology
(Mr. Hendershot’s Exhibit 1, line 9).
5.EAS Regulatory Expenses (Mr.
Hendershot’s Exhibit 1, line 7).
6.Fremont’s proposed multi-line business
rates (letter from Fremont to
Commissioner Smith dated June 10,
1998).
Q.Let us begin with item number 1.  What are you concerned about in the calculation of the Loss of Access Revenues shown in Mr. Hendershot’s Exhibit 1, line 3?
A.When Fremont purchased the Ashton, Island Park and St. Anthony exchanges from U S WEST in 1996, Fremont based its “future revenue” streams on historical and projected access minutes from U S WEST.  In February 1998, Fremont turned up its new switch and began carrying its own traffic.  As Mr. Hendershot explains on page 7 of his direct testimony, the Company’s actual revenues from access minutes is approximately 60% of the projected revenues.  Consequently, Fremont seeks compensation for this decrease.  While Fremont cannot determine the exact cause of the decrease in its access revenues, it has included an additional $212,589 as part of its net revenue deficiency for EAS.
Q.Are not lost access revenues part of the costs associated with EAS?
A.Yes.  Fremont should be compensated for its actual, and accountable, lost minutes associated with the implementation of EAS.  The lost access revenue associated with EAS is $318,884.  However, Staff does not support the recovery of $212,589 of anticipated, but unrealized, access revenue.
Q.Has Staff agreed to look at the unrealized access minute issue?
A.Yes.  Staff agrees with Fremont that unrealized access minutes requires closer examination and resolution.
Q.Moving to item number 2, what are the concerns with the depreciation rates?
A.First, Fremont has suggested that it is installing fiber, not a microwave.  This will have an appreciable change in the revenue requirement as a result of EAS.  Mr. Hendershot is using a five-year depreciation rate on the microwave.  Historically, within southern Idaho, the appropriate depreciation rate for this type of plant is 15 years.  I have calculated the annual depreciation expense for the microwave to be $31,905 using the appropriate 15-year rate (Staff’s Exhibit No. 101).  Mr. Hendershot calculated an annual depreciation expense of $92,368 (Hendershot Exhibit 1), which results in a difference of $60,463 between Staff and Mr. Hendershot’s calculations.
Second, if Fremont wishes to install fiber, I strongly support that decision.  This would be an appropriate business decision that would reflect a forward-looking proactive Company plan.  However, there is no indication of any revenue requirement for this type of plant facilities presented in the exhibits or in testimony.  Using an estimate provided by the Company in response to Staff’s production request, I have calculated the annual depreciation expense for fiber to be $35,344.  Even with fiber, depreciated over the appropriate 20 years, the annual depreciation expense is $57,024 less than Mr. Hendershot’s proposed depreciation expense for microwave and central office equipment (COE).
Q.You mention that Mr. Hendershot included COE in his calculation of plant additions for EAS.  Did you include COE?
A.Yes, I did.  However, question the extent that the COE will need upgrading since it is a new switch.  Realizing that to convert from toll to toll-free calling requires some hardware and software revisions, I question $33,000.  Fremont recently turned up its new switch in February 1998.  Fremont used the switch allowance from the sale of the exchanges to purchase the switch.  For my calculation in Exhibit No. 101, I did include the $33,000 for COE upgrade that Mr. Hendershot claimed Fremont would need for the new microwave.  However, I included it in the total plant addition for depreciation purposes.
Q.What is your opinion of the 15.75% return on equity recommendation?
A.I agree with Mr. Hendershot that Fremont does not have an authorized rate of return.  This has, and does, create certain complexities when attempting to do any financial analysis of the Company.  However, I believe the 15.75% recommended return on equity is too high.  Determining the exact return on equity for Fremont is beyond the scope of this EAS case and does not affect Staff’s recommendation to approve EAS.  This issue along with other issues will be more fully examined when Staff conducts its audit of the Company in July 1998.  Mr. Hendershot suggests that Fremont’s return on equity should be higher than U S WEST’s.  U S WEST was authorized a return on equity of 11.2%, Order No. 27100, Case No. USW-S-96-5, dated August 12, 1997.  For this EAS case, Staff has used a 12.5% return on equity.
Q.Did you compare the difference between using 15.75% and 12.5% for the return on equity?  What was the change in return on rate base?
A.Yes, I did.  In my calculation, I used a weighted cost of capital of 8.88% based on a 12.5% return on equity and Fremont’s reported debt.  I calculated the return on rate base to be $631,821, a decrease of $45,652 from the return calculated by Mr. Hendershot.  See Staff’s Exhibit No. 102.  This decreases Fremont’s revenue requirement for this EAS case.
Q.Moving on to item number 4, what is your concern with respect to the gross-up for income taxes?
A.To calculate the gross-up for income taxes in Mr. Hendershot’s Exhibit 1, line 9, he has taken the total plant additions for EAS, applied a weighted cost of capital (9.45%) to arrive at a return on equipment of $45,203.  This calculation included the weighted cost of debt plus the weighted cost of equity.  He then used that value to obtain the gross-up for income taxes, which he calculated to be $74,819.  In doing this, he has grossed-up the interest on the debt and the return on equity.
The appropriate methodology is to gross-up only that portion associated with equity because the interest is tax deductible and only the equity piece will be taxed.
Q.Did you calculate the gross-up for income taxes using the appropriate methodology?
A.Yes.  However, my calculation will be significantly different from Mr. Hendershot’s because I used the 12.5% return on equity instead of 15.75%.  For the microwave investment, I calculated the gross-up for taxes to be $18,191.
Q.Please explain your concern with the fifth issue - EAS Regulatory Expenses.
A.As Mr. Hendershot testified on page 2, he has provided testimony for many telephone cases in the past.  He has recently presented testimony for EAS cases for some of the smaller Idaho independent local exchange companies.  Until this filing his “EAS Regulatory Expense”, or consulting fees, have been between $15,000 and $20,000.  He is assessing Fremont $30,000 for this case.  I would like a breakdown of what these fees represent before accepting a $30,000 expense at face value.  For purposes of calculating an EAS revenue requirement, I used the $30,000 figure.
Q.Do you have an exhibit showing the EAS revenue requirement associated with implementing EAS?
A.Yes, in Staff’s Exhibit No. 101, I have done a side-by-side comparison of the Company’s Exhibit 1 and Staff’s calculations.  On most issues we agree; however, as shown on line 4, I have removed the additional lost, or more accurately, unrealized access revenue for reasons stated earlier in my testimony.
Line 7 shows a difference of $88,737 between the Company and Staff.  This result is based on the adjustment to the calculation of return on equity, depreciation rates and the methodology used to calculate the gross-up for income taxes.  The net change in the total EAS revenue requirement is the combination of lines 4 and 7, with the exception of $29,950 (line 1).
Staff has adjusted the interstate shift from Mr. Hendershot’s $131,698 to $101,748.  This was done to reflect the different overall rates of return in the interstate and intrastate jurisdictions.  Mr. Hendershot in his workpapers calculated interstate revenues using a 11.25% rate of return.  Staff applied Mr. Hendershot’s rate of return of 9.45% as he used in his testimony for this adjustment.  If this were a rate case, however, Staff would have applied a rate of return of 8.81% to set an overall rate of return for ratemaking purposes for Fremont.
Q.Did you look at the incremental revenue as a result of the EAS?
A.Yes.  Line 11 of Staff’s Exhibit No. 101 shows $937,583.  Mr. Hendershot showed $935,562, a negligible difference of $2,021.
Q.Is there a difference between Staff and Mr. Hendershot’s net revenue deficiency as a result of EAS?
A.Yes, Mr. Hendershot believes that even after the EAS rate increases, the Company will experience an overall revenue shortfall as a result of EAS implementation of $107,988.  Staff, on the other hand, after adjusting Mr. Hendershot’s calculations, calculated an annual increase in revenue above EAS costs to be $225,307.  However, based on Staff’s initial review, Fremont will not be overearning.  As mentioned in Mr. Hendershot’s testimony, the Company claims it has incurred a loss of $1,626,760 since it began providing service in 1997. While Staff’s audit may not agree with this exact amount, it is unlikely it will show overearnings.
Q.Please address item number 6, a discount for multi-line business rates.
A.In May, Staff, Fremont and U S WEST agreed that monthly business rates should be set at $42.00.  On June 10, 1998, Commissioner Smith received a facsimile from Fremont proposing to discount the local monthly business rates for businesses with two or more lines.  Under this proposal, if a business has two to four lines, that business would be assessed $37.00 per line for each line in addition to its primary line charge of $42.00.  Those businesses with five or more lines would pay $32.00 per line for each additional line over the primary line charge.
Q.Did Fremont provide a projected revenue impact study and cost analysis with this proposal?
A.Fremont has not provided Staff with any cost data that represents Fremont’s actual cost of providing business service.  They did provide a brief calculation of the revenue impact based on the number of customers with two lines, three lines, four lines, etc. and the applicable discount it wishes to extend to businesses in Fremont County.  Fremont estimates that its annual revenue reduction as a result of this repricing would be $28,320.
Q.Do you support this proposed discount for multi-line businesses?
A.I may support some sort of discount, but do not support a discount at two lines.  I believe the Company needs to examine it’s costs associated with providing business service and find an appropriate breaking point for the number of lines to discount.
Q.Do you have other concerns with the proposed discount?
A.Yes.  Fremont is requesting that the Idaho Universal Service Fund (USF) be used to offset the revenue shortfall that would result through its actions to discount multi-line businesses.  I believe that any USF disbursements should be determined after Staff completes its audit of the Company’s actual financial data and operations.  Furthermore, I do not support subsidizing the discounting of multi-line businesses with USF funds.  USF funds are provided by Idaho customers and are designed to support single-line residence and business services to keep these services at reasonable levels.
Q.Do you foresee any other problems with the multi-line business rate?
A.Yes.  I believe that Fremont is creating a precarious situation that should be corrected before implementation.  Why should a two-line business receive a discount on the second line when a two-line residence does not receive the same consideration?
I appreciate Fremont’s attempt at accommodating the multi-line businesses.  However, I recommend that the discount not be offered until the Company provides Staff with appropriate cost data to support or refute any revenue impact on the Company.
I believe the business rate, that all parties have stipulated and agreed to, is reasonable and small businesses which use telecommunications services in their business may take advantage of the expanded or enlarged local calling areas at affordable and predictable local rates.  As a result of the EAS toll free calling region, many small businesses will lower their overall phone bills (an important basic cost of doing business) and can probably expand their customer base.  The EAS should be an overall (composite) benefit to businesses.
Q.Please summarize your testimony with respect to EAS.
A.I recommend and support EAS into the eastern Idaho region.  The proposed elimination of the monthly rural zone charges and the increase in rates for basic residential service to $24.10 and $42.00 for business customers is reasonable.  The measured service rate of $16.00 per month with 90 free minutes of local calling is an alternative option to the flat residential rate of $24.10.  The calculation of the Company’s actual revenue requirement, and possible distribution from the Idaho USF, will be determined as a result of Staff’s audit.
Q.Does this conclude your supplemental testimony in this proceeding?
A.Yes, it does.