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1 BOISE, IDAHO, TUESDAY, MARCH 11, 1997, 1:15 P. M.
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4 COMMISSIONER SMITH: We'll go back on the
5 record now. Ms. Hobson.
6 MS. HOBSON: Thank you, Madam Chairman. I
7 just wanted -- I neglected this morning to introduce to
8 the Commission and to the parties another member of our
9 legal team. Kathy Ford from the U S WEST law department
10 is also appearing in this case on behalf of U S WEST
11 Communications.
12 COMMISSIONER SMITH: Any relation to
13 Laura?
14 MS. FORD: No.
15 COMMISSIONER SMITH: I just had to clear
16 that up.
17 Mr. Alke, are we ready for -- oh, I forgot
18 a question. I'm glad you're back; so I have one more
19 question and then we're going to do rebuttal; is that
20 your plan?
21 MR. ALKE: Yes, Madam Chair.
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599
CSB REPORTING COLLOQUY
Wilder, Idaho 83676
1 PETER C. CUMMINGS,
2 produced as a witness at the instance of U S WEST
3 Communications, Inc., having been previously duly sworn,
4 resumed the stand and was further examined and testified
5 as follows:
6
7 EXAMINATION
8
9 BY COMMISSIONER SMITH: (Continued)
10 Q Mr. Cummings, just prior to the break, I
11 forgot to ask one question. On your Exhibit 6, this
12 morning you discussed with Mr. Howell some changes in the
13 cost of debt that changed your calculation of your
14 overall rate of return --
15 A Yes.
16 Q -- but there didn't seem to be any
17 adjustment to your return on equity.
18 A That's correct.
19 Q Do you think there should have been to
20 recognize the reduced risk that Mr. Howell discussed
21 given the less uncertainty with the stipulation?
22 A The cost of equity that I presented is
23 based on the regulatory capital structure that I also
24 presented and what we stipulated to was that capital
25 structure. We also had a disagreement on the cost of
600
CSB REPORTING CUMMINGS (Com)
Wilder, Idaho 83676 U S WEST Communications
1 debt and we stipulated to a cost of debt which is lower
2 than what I had proposed in my testimony and recognizing
3 that there are puts and takes in the stipulation and that
4 more than just the cost of capital was at issue in the
5 stipulation, other things being equal, if I had to make
6 an assessment on what effect just this part of the
7 stipulation would have on my cost of capital testimony, I
8 would say that it would increase the risk because of the
9 lower debt cost.
10 COMMISSIONER SMITH: Okay, that's what I
11 was wondering.
12 Mr. Alke.
13 MR. ALKE: Madam Chair, at this time we
14 would recall obviously Mr. Cummings for the rebuttal if
15 no one has an objection.
16 COMMISSIONER SMITH: I assume that means
17 you have no redirect.
18 MR. ALKE: Yes, I have no redirect.
19 COMMISSIONER SMITH: And Mr. Cummings is
20 already sworn in, so you can proceed.
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601
CSB REPORTING CUMMINGS (Com)
Wilder, Idaho 83676 U S WEST Communications
1 DIRECT EXAMINATION
2
3 BY MR. ALKE:
4 Q Mr. Cummings, did you also cause to be
5 prefiled some rebuttal testimony?
6 A Yes, I did.
7 Q And would you provide a very brief
8 description of that rebuttal testimony?
9 A That rebuttal testimony is 29 or 30 pages,
10 plus two exhibits, 32A and 32B.
11 Q Mr. Cummings, if I were to ask you here
12 today under oath the same questions as are set forth in
13 that prefiled rebuttal testimony, would your answers be
14 the same, save and except for any changes or
15 modifications that you need to make at this time?
16 A Yes.
17 Q Are there any changes or modifications that
18 you need to make at this time?
19 A No.
20 MR. ALKE: Madam Chair, I offer
21 Exhibits 32A and 32B and I tender Mr. Cummings for
22 cross-examination.
23 COMMISSIONER SMITH: If there's no
24 objection, we will spread the prefiled rebuttal testimony
25 of Mr. Cummings upon the record as if it had been read
602
CSB REPORTING CUMMINGS (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 and admit Exhibits 32A and 32B. Hearing none, it is so
2 ordered.
3 (U S WEST Communications, Inc. Exhibit
4 Nos. 32A & 32B were admitted into evidence.)
5 (The following prefiled rebuttal
6 testimony of Mr. Peter Cummings is spread upon the
7 record.)
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603
CSB REPORTING CUMMINGS (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 IDENTIFICATION OF WITNESS
2
3 Q PLEASE STATE YOUR NAME, BUSINESS ADDRESS,
4 AND CURRENT POSITION.
5 A My name is Peter C. Cummings and my
6 business address is 1600 Bell Plaza, Seattle, Washington
7 98191. I am employed by U S WEST Communications, Inc.
8 (USWC) as Director - Finance and Economic Analysis.
9 Q DID YOU FILE DIRECT TESTIMONY IN THIS
10 DOCKET?
11 A Yes.
12
13 PURPOSE OF TESTIMONY
14
15 Q WHAT IS THE PURPOSE OF YOUR TESTIMONY?
16 A The purpose of my testimony is to comment
17 on the direct testimony of Ms. Terri Carlock and make a
18 recommendation to the Idaho Commission for a fair rate of
19 return on equity and total capital.
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604
Peter C. Cummings - Reb 1
U S WEST Communications, Inc.
1 COMPARABLE RISK VS. COMPARABLE EARNINGS
2
3 Q IS MS. CARLOCK'S STATEMENT THAT "THE
4 COMPARABLE EARNINGS METHOD FOR DETERMINING THE COST OF
5 EQUITY IS BASED ON THE PREMISE THAT A GIVEN INVESTMENT
6 SHOULD EARN ITS OPPORTUNITY COST" CORRECT?
7 A No. It is certainly true that the cost of
8 equity is an opportunity cost, but the comparable
9 earnings method has nothing to do with opportunity costs.
10 Q PLEASE EXPLAIN.
11 A Comparable earnings looks at historical
12 returns while investor opportunities are in the future.
13 Buying a stock today gives the investor no claim on past
14 dividends, cash flows, or returns. All that the investor
15 will receive is future cash flows (if any), and investors
16 price securities on the basis of expected returns, not
17 historical returns. Investors can only invest in the
18 future, not in history. The opportunity cost of equity
19 is the expected return on other investments of similar
20 risk, not the historical or achieved return on
21 investments of similar risk. The distinction is crucial.
22 The problem of
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605
Peter C. Cummings - Reb 2
U S WEST Communications, Inc.
1 estimating investors' expected returns cannot be assumed
2 away by reference to what was earned in the past. You
3 can't finance your new home at the mortgage rate of your
4 neighbor down the street who got his loan 10 years ago --
5 you have to pay the current rate.
6 Q WHAT DOES "COMPARABLE RISK" MEAN?
7 A Comparable risk refers to investment
8 choices available to investors that have approximately
9 equal risk. The return required by investors is directly
10 proportional to the risk of the investment, so
11 "comparable risk" investments define the "opportunity
12 cost of capital." Since all the investors' choices
13 depend on expected returns, the expected returns of
14 comparable risk companies define the opportunity cost of
15 capital. Ms. Carlock confuses "comparable earnings" with
16 "comparable risk". Comparable risk is the financially
17 correct paradigm for investment analysis. Comparable
18 Earnings is a meaningless construct for investors and has
19 no bearing on the cost of equity capital.
20 The "comparable earnings" confusion can be
21 eliminated and Ms. Carlock's statement about opportunity
22 costs can be corrected by focusing on expected returns as
23 follows:
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606
Peter C. Cummings - Reb 3
U S WEST Communications, Inc.
1 "In competitive markets, if the return earned
2 [expected] by a firm is not equal to the return
3 being earned [expected] on other investments of
4 similar risk, the flow of funds will be toward
5 those investments earning [expecting] the higher
6 returns. (Carlock, page 16, lines 3- 6)
7 Q IN HER COMPARABLE EARNINGS ANALYSIS,
8 MS. CARLOCK EXAMINES THE HISTORICAL RATES OF RETURN ON
9 COMMON EQUITY FOR INDUSTRIAL AND UTILITY COMPANIES. IS
10 RETURN ON COMMON EQUITY THE PROPER MEASURE FOR ANALYSIS?
11 A No. Return on Common Equity is an
12 accounting measure consisting of net income from the
13 income statement divided by the book value of common
14 equity on the balance sheet. This is not the return that
15 the investor receives. The investor receives cash
16 dividends (if any) plus appreciation in the market value
17 of the stock. The sum of these two is commonly referred
18 to as Total Return.
19 Q IS THERE A SIGNIFICANT DIFFERENCE BETWEEN
20 RETURN ON COMMON EQUITY AND TOTAL RETURN?
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607
Peter C. Cummings - Reb 4
U S WEST Communications, Inc.
1 A Yes. The following table contrasts the
2 Business Week All Industry Composite Return on Equity
3 (from Ms. Carlock's Exhibit 128, Schedule 4) with Total
4 Return on the Standard & Poor's 500 Stocks (from Ibbotson
5 Associates 1996 Yearbook, Market Results for 1926 to
6 1995).
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8 Year All Industry Return on Equity S&P 500 Total Return
9 1986 10.4% 18.5%
10 1987 11.6% 5.2%
11 1988 14.8% 16.8%
12 1989 13.2% 31.5%
13 1990 11.7% (3.2%)
14 1991 8.8% 30.6%
15 1992 10.0% 7.7%
16 1993 11.9% 10.0%
17 1994 15.9% 1.3%
18 1995 16.3% 37.4%
19 1986- 1995 Avg. 12.5% 15.6%
20 1991- 1995 Avg. 12.6% 17.4%
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608
Peter C. Cummings - Reb 5
U S WEST Communications, Inc.
1 There is more variation in Total Return and even
2 with several years of single digit returns and one year
3 of negative return, on average, the total returns are
4 greater than the book returns on common equity.
5 Q WHAT FACT PATTERN LEADS MS. CARLOCK TO
6 THE CONCLUSION THAT, "USING THE COMPARABLE EARNINGS
7 APPROACH, ... THE CURRENT COST OF EQUITY CAPITAL FOR
8 U S WEST IS IN THE RANGE OF 11.0% TO 12.0%?"
9 A There is no fact pattern presented that
10 leads to that conclusion. The 11.0% to 12.0% range is
11 only Ms. Carlock's opinion.
12 Q DOESN'T MS. CARLOCK JUSTIFY HER ESTIMATE
13 RANGE BY REFERENCE TO DATA?
14 A Ms. Carlock says that her recommendation is
15 developed by reviewing data from a number of sources.
16 This data is a melange of earned returns for electric and
17 gas companies, telephone companies, industrial companies,
18 consumer and producer price indexes, bond yields and
19 prime interest rates, Value Line safety ranks, betas, and
20 other financial statistics. This data can
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609
Peter C. Cummings - Reb 6
U S WEST Communications, Inc.
1 be interpreted to support a wide range of equity cost
2 recommendations, from 20% to 30% at the high end to less
3 than 10% at the low end.
4 Q HOW WOULD YOU INTERPRET THE COMPARABLE
5 EARNINGS DATA PRESENTED IN MS. CARLOCK'S TESTIMONY?
6 A Keeping in mind the infirmities of the
7 comparable earnings approach discussed earlier, I would
8 link Ms. Carlock's estimate of near future equity capital
9 returns for industrial companies of 13.5% to 15.0%
10 (Carlock testimony page 20) with quantitative risk
11 measures from her exhibit schedule 11. With a long term
12 risk free rate in the range of 6.5% to 7.0% and a beta of
13 1.0 (the market average), the implied equity market risk
14 premium range for industrial companies averages 7.5%.
15 Stated another way, Ms. Carlock's future expected equity
16 return for industrial companies is about 7.5% higher than
17 the yield on long term U.S. Treasury bonds.
18 We can adjust the expected equity returns for
19 industrial companies to account for the difference in
20 risk between the industrial companies and LEC telephone
21 companies including USWC. Ms. Carlock's Schedule 11
22 shows a Value Line safety rank of 1 and beta of .75 for
23 USWC. The other telephone companies with a safety rank
24 of 1 have an average beta of .82. Combining
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610
Peter C. Cummings - Reb 7
U S WEST Communications, Inc.
1 the long term risk free rate and market risk premium from
2 above with a beta range of .75 to .82 gives a direct
3 equity cost estimate for USWC and the group of telephone
4 companies in the range of 12.125% to 13.15%.
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6 6.5% + .75 (7.5%) = 12.125%
7 7.0% + .82 (7.5%) = 13.15%
8
9 RISK OF USWC RELATIVE TO OTHER COMPANIES
10
11 Q WHAT DOES MS. CARLOCK SAY ABOUT USWC'S
12 RISK?
13 A She makes several statements on the risk of
14 USWC.
15 "Competitive" risks are less for U S WEST than
for many telephone companies." (page 23)
16
"The demand for utility services of U S WEST and
17 other BOCs is relatively stable compared to that
of unregulated firms and even non BOC service
18 providers." (page 23)
19 "Under regulation, utilities are generally
allowed to recover through rates, reasonable,
20 prudent, and justifiable cost expenditures related
to regulated services." (page 23)
21
"Utilities in general are sheltered by regulation
22 for cost recovery risks on regulated services."
(page 23)
23
"U S WEST is less risky than an average telephone
24 company due to lower competitive risks and
regulatory risks." (page 26)
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611
Peter C. Cummings - Reb 8
U S WEST Communications, Inc.
1 Q IS THERE EVIDENCE PRESENTED TO SUPPORT
2 THESE STATEMENTS?
3 A No. The statements are generalities that
4 are unsupported by facts and data. There is no evidence
5 that competitive risks are less for U S WEST than for
6 other local exchange telephone companies. There is no
7 evidence on the demand for U S WEST services vis--vis
8 unregulated firms and other telephone service providers.
9 There is no evidence that utilities are allowed to
10 recover cost expenditures. In fact, the staff position
11 in this proceeding would deny USWC the recovery of a
12 significant portion of its cost expenditures. There is
13 no evidence that utilities in general are sheltered by
14 regulation for cost recovery risks on regulated services.
15 In fact, FCC and state regulatory initiatives following
16 the Telecommunications Act of 1996 demonstrate
17 significant cost recovery risk for USWC and other LECs.
18 There is no evidence that U S WEST is less risky than an
19 average telephone company.
20 Q WHAT IS THE EVIDENCE ON RECORD RELATED TO
21 THE RISK OF USWC VIS-A-VIS OTHER TELEPHONE COMPANIES?
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612
Peter C. Cummings - Reb 9
U S WEST Communications, Inc.
1 A There is hard data on the relative
2 riskiness of USWC in my testimony and in Ms. Carlock's
3 testimony. My direct testimony (page 75) shows a very
4 tight range of market required equity return estimates
5 for USWC, other telephone companies, and comparable risk
6 companies. The beta statistic which measures relative
7 risk is virtually identical for USWC and the other
8 telephone companies -- .80 for USWC and .79 for the
9 telephone group average.
10 In Ms. Carlock's Exhibit Schedule 11, the data
11 shows 11 telecommunications companies with a Value Line
12 safety rank of 1. Along with USWC are the major local
13 exchange carrier companies -- Ameritech, Bell Atlantic,
14 BellSouth, GTE, NYNEX, Pacific Telesis, and SBC
15 Communications. The average beta for this group of
16 companies is .82, not significantly different from my
17 beta estimate of .80 for USWC. The evidence on record
18 shows that USWC is comparable in risk to other local
19 exchange carrier companies.
20
21 DISCOUNTED CASH FLOW METHODOLOGY
22
23 Q WHAT ARE YOUR COMMENTS RELATIVE TO
24 MS. CARLOCK'S DISCOUNTED CASH FLOW (DCF) METHOD?
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613
Peter C. Cummings - Reb 10
U S WEST Communications, Inc.
1 A She has mathematical errors in the
2 compounded growth rate estimates (Schedule 12, page 2)
3 and in the adjustment to account for quarterly dividend
4 payments. Of greater importance, however, is that a very
5 low growth rate range gives her DCF analysis a
6 significant downward bias.
7 Q WHAT ARE THE MATHEMATICAL ERRORS?
8 A The compounded growth rates are calculated
9 incorrectly. It appears that Ms. Carlock added a % sign
10 when she should have subtracted 1.0 from each result:
11 Thus, for example, the growth in book value per share on
12 Schedule 12, page 2 shown as 1.07% should have been 7%.
13 For the quarterly dividend compounding adjustment to the
14 DCF model, Ms. Carlock mistakenly adjusts the growth
15 rate. The quarterly adjustment needs to be incorporated
16 into the dividend yield component of the DCF model, not
17 the expected growth component. While I have not been
18 able to replicate her adjustment to the growth rate, I
19 have shown the correct specification of the quarterly
20 dividend timing adjustment in Exhibit 32A. For the
21 November 20, 1996 analysis, Ms. Carlock's equity cost
22 estimates should be 10.98% to 11.49% vice 10.32% to
23 11.21% and for the May to October 1996 analysis, the
24 correct range is 10.79% to 11.30% vice 10.15% to 11.02%.
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614
Peter C. Cummings - Reb 11
U S WEST Communications, Inc.
1 Q PLEASE EXPLAIN WHY MS. CARLOCK'S ESTIMATED
2 GROWTH RATE OF 3.5% TO 4.0% GIVES A SIGNIFICANT DOWNWARD
3 BIAS TO HER DCF METHOD RESULTS.
4 A Ms. Carlock's growth rate estimates are
5 based on historical data for a short period of time and
6 the projection of one investment service (Value Line).
7 My direct testimony explains that a number of finance
8 studies have shown that the consensus long term earnings
9 forecast from investment analysts is a superior estimate
10 of investors growth rate expectations than any
11 extrapolation of historical growth. The reason why this
12 result holds is that investment analysts begin with
13 historical company and industry trends and take out
14 one-time and spurious effects and add additional
15 analysis. In short, they add value to the estimate
16 process. If they did not add value, there would be no
17 market for their services. Investors pay for investment
18 analysis and their investment actions reflect the
19 research by investment analysts. The consensus forecasts
20 compiled by I/B/E/S, the Institutional Brokers Estimate
21 System reflect the forecasts of all analysts covering
22 each company and industry, not just the work of a single
23 analyst as is the case with the Value Line Investment
24 Survey quoted by Ms. Carlock.
25 Q WHAT IS THE CONSENSUS EXPECTED GROWTH FOR
USWC?
615
Peter C. Cummings - Reb 12
U S WEST Communications, Inc.
1 A As shown in my direct testimony, the
2 consensus expected growth rate for USWC is 6.0%. This
3 compares to an average expected growth of 8.1% for other
4 local exchange telephone companies.
5 Q WHAT WOULD BE MS. CARLOCK'S DCF COST OF
6 EQUITY ESTIMATES FOR USWC BE USING THE ANALYSTS'
7 FORECASTED GROWTH OF 6.0%?
8 A Following the format of Carlock Schedule
9 12, page 1, the estimates are:
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11 November 20, 1996
Price $30.375 ks = 13.19%
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May-October 1996
13 Price $31.210 ks = 12.99%
14 52 Week Price Range as of October 31, 1996
15 High $37.500 ks = 11.82%
16 Low $27.250 ks = 14.01%
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18 These estimates which reflect the expectations of
19 investment analysts are significantly higher than the
20 estimates based on Ms. Carlock's historical and Value
21 Line growth rate estimates. These estimates do not
22 reflect the correct
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616
Peter C. Cummings - Reb 13
U S WEST Communications, Inc.
1 application of the quarterly dividend timing adjustment
2 discussed above. With the correct quarterly dividend
3 timing adjustment, the estimates are as follows (See also
4 Exhibit 32A):
5 November 20, 1996
Price $30.375 ks = 13.54%
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May-October 1996
7 Price $31.210 ks = 13.35%
8 52 Week Price Range as of October 31, 1996
9 High $37.500 ks = 12.08%
10 Low $27.250 ks = 14.43%
11
12 Q WHAT IS YOUR CONCLUSION ABOUT MS. CARLOCK'S
13 DCF ANALYSIS?
14 A With a properly specified expected growth
15 rate and correct application of the quarterly dividend
16 timing adjustment, the DCF estimate for USWC's cost of
17 equity capital over the May to October time period
18 selected by Ms. Carlock is 13.35%
19
20 CAPITAL ASSET PRICING MODEL
21
22 Q DOES MS. CARLOCK USE THE CAPITAL ASSET
23 PRICING MODEL (CAPM) TO ESTIMATE THE COST OF EQUITY
24 CAPITAL FOR USWC?
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617
Peter C. Cummings - Reb 14
U S WEST Communications, Inc.
1 A Ms. Carlock does not present a cost of
2 equity estimate based on the CAPM, but she does present
3 beta estimates for USWC and other companies and uses beta
4 in assessing the risk of USWC.
5 Q DOES MS. CARLOCK OFFER ANY ARGUMENTS TO
6 SUGGEST THAT THE CAPM SHOULD NOT BE USED TO ESTIMATE THE
7 COST OF EQUITY CAPITAL FOR USWC?
8 A No. Ms. Carlock presents no arguments
9 relative to the CAPM method in general or specifically
10 rebutting my use of the CAPM in estimating the cost of
11 equity for USWC.
12 Q WHAT IS YOUR CONCLUSION ABOUT THE USE OF
13 THE CAPM IN ESTIMATING THE COST OF EQUITY CAPITAL?
14 A The CAPM is a valuable tool in estimating
15 the cost of equity for a firm. I use the model in
16 conjunction with the DCF model and find that the CAPM
17 closely corroborates the DCF results.
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618
Peter C. Cummings - Reb 15
U S WEST Communications, Inc.
1 CAPITAL STRUCTURE
2
3 Q MS. CARLOCK CLAIMS THAT 62% DEBT/38% EQUITY
4 IS THE "ACTUAL CAPITAL STRUCTURE" FOR U S WEST
5 COMMUNICATIONS, INC. AS OF 12/31/95. IS THIS A TRUE
6 STATEMENT?
7 A No, it is not. Ms. Carlock claims that the
8 62% debt/38% equity is the capital structure as reflected
9 on financial statements used by investors and rating
10 agencies. On Exhibit 128, Schedule 14, she shows the
11 ratio of 62% long term debt and 38% common stock for
12 U S WEST Communications, Inc. as of year end 1995.
13 Reference to the Annual Report Form 10K for U S WEST
14 Communications, Inc shows the following balances of long
15 term debt and equity:
16 Amount ($ millions) Calculated %
17 Long term Debt 5,411 59.1%
18 Shareowners Equity 3,746 40.9%
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20 This information is also shown in the U S WEST
21 Communication Group Investor Handbook.
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619
Peter C. Cummings - Reb 16
U S WEST Communications, Inc.
1 Q IS THE CAPITAL STRUCTURE OF 59.1% DEBT/
2 40.9% EQUITY THE RIGHT CAPITAL STRUCTURE TO USE FOR
3 SETTING RATES IN IDAHO?
4 A No. The 59.1% debt/40.9% equity capital
5 structure is the financial reporting or SEC basis capital
6 structure for USWC. The right capital structure to use
7 for setting rates in Idaho is the regulatory reporting or
8 FCC basis capital structure for Idaho. The regulatory
9 reporting capital structure is directly related to the
10 rate base of assets used to provide telephone service in
11 Idaho. That capital structure, from my direct testimony,
12 is 44.4% debt/55.6% equity. The financial reporting
13 capital structure reflects large non-cash effects from
14 accounting changes such as post retirement benefits which
15 did not effect the rate base or assets or property used
16 to provide service in Idaho. Substitution of the
17 financial reporting capital structure for the regulatory
18 reporting capital structure would not provide USWC with
19 the opportunity to earn a fair return on the capital
20 employed to provide Idaho telephone service.
21 Q MS. CARLOCK SAYS THAT "THE RETURN ON EQUITY
22 RECOMMENDATION IS BASED ON MARKET REQUIRED RETURNS SO THE
23 CAPITAL STRUCTURE UTILIZED SHOULD BE BASED ON RATIOS
24 UTILIZED BY INVESTORS AND RATING AGENCIES." DOES THIS
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620
Peter C. Cummings - Reb 17
U S WEST Communications, Inc.
1 STATEMENT MEAN THAT A FINANCIAL REPORTING CAPITAL
2 STRUCTURE IS APPROPRIATE FOR RATEMAKING?
3 A No. Ms. Carlock's statement is misleading
4 in several ways. First, her return on equity
5 recommendation is not strictly based on market required
6 returns -- the comparable earnings approach is not a
7 market required return. Second, market required returns
8 are related to the market or economic value capital
9 structure, not either of the financial or regulatory book
10 value capital structures. I explain this in detail in
11 Exhibit No. 5 to my direct testimony and urge the
12 commission to review that information, because the
13 capital structure distinctions are very important, but
14 not always immediately obvious and the nomenclature
15 involved often adds complexity rather than clarity.
16 Exhibit No. 5 also explains why revenue requirements and
17 rates should be based on regulatory capital structures.
18 Q CAN YOU BRIEFLY SUMMARIZE WHY THE FINANCIAL
19 REPORTING CAPITAL STRUCTURE SHOULD NOT BE USED IN
20 RATEMAKEING?
21 A Under regulation, companies are allowed
22 recovery of operating expenses and allowed the
23 opportunity to earn a fair return on capital invested to
24 provide service. The capital invested to provide service
25 is in the assets
621
Peter C. Cummings - Reb 18
U S WEST Communications, Inc.
1 which comprise the rate base and that rate base has been
2 financed with a combination of debt and equity. The
3 regulatory accounting capital structure tracks that
4 combination of debt and equity used to finance the rate
5 base of assets. For Idaho, 44.4% of the rate base is
6 financed with debt, and 55.6% is financed with equity.
7 The accounting changes described in my direct
8 testimony resulted in large decreases to stockholders
9 equity accounts in USWC financial reports to investors.
10 The large decrease in financial book equity dramatically
11 increased the debt-to-total capital ratio (or debt ratio)
12 in USWC's reports to investors. The company's assets and
13 rate base were not affected by these accounting
14 transactions, and the net result of these accounting
15 changes and equity account writedowns is that the
16 financial reports to investors do not represent the
17 actual financing mix of debt and equity used to fund the
18 rate base.
19 If the financial reporting capital structure
20 (Ms. Carlock's 65% debt/38% equity or as corrected to
21 59.1% debt/40.9% equity) were used to set the return
22 allowed on the Idaho rate base, USWC could not earn a
23 fair return because that capital structure is not the
24 actual financing mix that was used to fund the rate base
25 in Idaho.
622
Peter C. Cummings - Reb 19
U S WEST Communications, Inc.
1 Q ARE INVESTORS AWARE OF THE DISTINCTIONS
2 BETWEEN FINANCIAL AND REGULATORY CAPITAL STRUCTURE?
3 A Yes. It is important to reiterate that
4 investors require returns on the economic or market value
5 of their investments and book value measures have no
6 place in determining a company's cost of capital.
7 Investors are also aware, however, that book value is
8 important in the regulatory context where companies are
9 to have the opportunity to earn a fair return on assets
10 and capital employed to provide service. The book value
11 that is important to investors in this context is the
12 regulatory book value. In a rating commentary explaining
13 why SFAS 71 writedowns won't harm credit quality, Duff &
14 Phelps discusses the legitimacy of separate financial
15 statements for regulatory and financial purposes:
16 Most regulatory bodies recognize the legitimacy of
separate financial statements for regulatory
17 purposes versus financial reporting purposes. For
example, when several telephone companies took
18 substantial write-offs related to the adoption of
FAS 106 (accounting for post retirement benefit
19 obligations), state regulators allowed them to
maintain a different set of accounts for
20 regulatory purposes.
21 (Duff & Phelps, "Bell Writedowns Won't Harm Credit
Quality", Credit Decisions, September 5, 1994.)
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Peter C. Cummings - Reb 20
U S WEST Communications, Inc.
1 Standard & Poor's addressed the issue of the
2 divergence between financial reporting and regulatory
3 reporting capital structures nearly five years ago when
4 FAS-106 (Accounting for Post-Retirement Benefits)
5 resulted in large write-downs to financial reporting book
6 equity accounts for most U.S. corporations:
7 Regulators could opt, however, to create a
regulatory asset which would permit use of the
8 pre-FAS106 capital structure ratios for ratemaking
purposes. Failure of regulators to do so would
9 result in a reduction in cash flow as well as
earnings, since the weighted mix of common equity,
10 preferred equity, and debt is used to determine
the utility cost of capital revenue requirement.
11 A smaller equity component translates into a lower
weighted cost of capital (equity having the
12 highest cost) which results in a lower revenue
requirement. This unsupportive regulatory action
13 would depress all financial ratios, and would
likely have negative rating implications.
14
(Standard & Poor's CreditWeek, June 8, 1992,
15 page 57.)
16 Ms. Carlock's capital structure recommendation is
17 the unsupportive regulatory action that S&P warned
18 against. Her capital structure recommendation would deny
19 USWC the opportunity to earn a fair return on capital
20 invested to provide telephone service in Idaho.
21 Q WHAT CAPITAL STRUCTURE SHOULD BE USED IN
22 SETTING RATES?
23 A The Company's actual regulatory book value
24 capital structure, specifically that which reflects the
25 equity and debt financing used to provide telephone
624
Peter C. Cummings - Reb 21
U S WEST Communications, Inc.
1 service in Idaho should be used in setting rates. The
2 44.4% debt/55.6% equity capital structure from my direct
3 testimony is the capital allocated to Idaho which
4 consists of the embedded Mountain States Bell capital in
5 existence before the USWC telephone companies merger on
6 1/1/91 and post merger financing allocated to Idaho.
7 44.4% debt/55.6% equity is the capital structure that
8 should be used for setting rates.
9
10 COST OF DEBT
11
12 Q PLEASE COMMENT ON MS. CARLOCK'S 7.23%
13 EMBEDDED COST OF DEBT CALCULATION.
14 A The 7.23% cost of debt calculation has
15 serious flaws:
16
17 The cost is only the funded portion of long term
18 debt. The 7.23% cost does not include other long
19 term debt and capital leases which are properly
20 classified in long term debt. The 7.23% cost also
21 ignores short term debt which is a routine and
22 significant portion of USWC financing.
23
24
25
625
Peter C. Cummings - Reb 22
U S WEST Communications, Inc.
1 Interest expense was determined by multiplying
2 individual debt issue principal amounts by
3 individual issue nominal interest rates, not by
4 the effective interest rates. The interest
5 expense does not include amortization of discount,
6 premium, and issuance expenses.
7
8 Ms. Carlock's calculation is based on total USWC
9 debt, not the pre-merger/post-merger blend of debt
10 financing applicable to Southern Idaho.
11 Q WHAT IS THE CORRECT EMBEDDED COST OF DEBT
12 FOR IDAHO?
13 A The correct embedded cost of debt is 7.48%
14 as shown in Exhibit 8 of my direct testimony. Short term
15 debt (which includes the current year maturing portion of
16 long term debt) is 8.4% of USWC Idaho's debt financing
17 and should be included as debt in the capital structure.
18 If the Commission accepts Ms. Carlock's premise that only
19 funded long term debt and stockholders equity should be
20 considered in the capital structure, then the
21 capitalization applicable to Idaho would be (reference
22 Exhibit 8):
23
24 $(000) Interest Cost % of Capital
25 Funded Debt 145,072.1 10,871.5 7.49% 41.7%
626
Peter C. Cummings - Reb 23
U S WEST Communications, Inc.
1 Common Equity 202,954.3 13.0% 58.3%
2 Total Capital 348,026.4 10.70%
3
4 Q WHAT IS YOUR RECOMMENDATION ON THE COST OF
5 DEBT?
6 A My recommendation is that the Commission
7 adopt the 7.48% embedded cost of debt shown in my direct
8 testimony Exhibit 8. The analysis above shows that
9 Ms. Carlock has incorrectly calculated the embedded cost
10 of debt and that her exclusion of short term debt and
11 capital leases, carried to its logical conclusion would
12 actually increase the overall return and revenue
13 requirement.
14
15 SERVICE QUALITY ADJUSTMENT
16
17 Q WHAT IS STAFF'S RECOMMENDATION FOR A FAIR
18 RETURN ON EQUITY?
19 A Ms. Carlock recommends a range of 11.0% to
20 12.0% and says that her normal practice would be to make
21 a point estimate of 11.5%, but in this case, to recognize
22 service quality problems, she is recommending 11.0% as
23 the point estimate.
24
25
627
Peter C. Cummings - Reb 24
U S WEST Communications, Inc.
1 Q DOES MS. CARLOCK PRESENT ANY FACTS OR
2 EVIDENCE TO SUPPORT THE 50 BASIS POINTS (O.5%) REDUCTION
3 IN HER FAIR RETURN RECOMMENDATION.
4 A No. The 50 basis point adjustment appears
5 to be totally arbitrary. There is no evidence or fact
6 pattern presented to support the conclusion.
7 Q IS THE 50 BASIS POINT REDUCTION IN THE FAIR
8 RETURN RECOMMENDATION LINKED SOMEHOW TO SERVICE QUALITY
9 IMPROVEMENT OR IS IT SIMPLY A PENALTY?
10 A The reduction is simply a penalty. 50
11 basis points in the authorized return on equity capital
12 equates to nearly $800,000 in annual revenue requirement,
13 which effectively penalizes investors indefinitely and
14 does nothing to resolve service problems or provide
15 assistance to affected customers. Investors would
16 actually bear a double penalty because they are already
17 losing profitability due to USWC's higher expenses to
18 address service problems.
19 The ROE reduction will also hinder new investment
20 needed for long term solutions to service problems.
21
22
23
24
25
628
Peter C. Cummings - Reb 25
U S WEST Communications, Inc.
1 Q WHAT IS YOUR RECOMMENDATION?
2 A The Commission has an obligation to provide
3 rates that will provide a reasonable and fair rate of
4 return. The Commission should not compromise that
5 obligation by making any ad hoc reduction to its finding
6 of a fair return under the pretext that such a compromise
7 to the fair return obligation would in some (unspecified)
8 way ameliorate service problems experienced by USWC
9 customers. If the Commission desires to take action
10 related to service quality, it should do so directly in a
11 manner that benefits affected customers and facilitates
12 USWC's ability to provide quality service.
13
14 STAFF'S RECOMMENDATION WOULD DENY USWC A FAIR RETURN
15
16 Q HOW WOULD STAFF'S RECOMMENDATION DENY USWC
17 A FAIR RETURN?
18 A In addition to the 50 basis point reduction
19 in the fair return described above, Ms. Carlock's
20 recommendation denies USWC the opportunity for a fair
21 return because of the hypothetical capital structure
22 incorporated into her recommended overall return. By
23 using a debt to capital ratio of 62% instead
24
25
629
Peter C. Cummings - Reb 26
U S WEST Communications, Inc.
1 of 44.4%, Ms. Carlock is effectively converting a portion
2 of the required equity return into a debt return.
3 Q CAN YOU QUANTIFY HOW MS. CARLOCK'S
4 RECOMMENDATION DENIES USWC THE OPPORTUNITY TO EARN A FAIR
5 EQUITY RETURN?
6 A Yes. Ms. Carlock testifies that the point
7 estimate fair return on equity is 11.5%, but then she
8 reduces that to 11.0% and further, by using a debt ratio
9 of 62%, the shareholders would only have the opportunity
10 to earn a return of 9.80%. This is shown in the
11 following analysis:
12
13 Carlock's Recommendation (Exhibit 128, Schedule 14)
14 Composite Rate of
Component Ratio Cost Return
15
Debt 62% 7.23% 4.48%
16 Equity 38% 11.0% 4.18%
Total 100% 8.66%
17
Carlock's Recommendation With Idaho Regulatory
18 Capital Structure
19 Composite Rate of
Component Ratio Cost Return
20
Debt 44.4% 7.23% 3.21%
21 Equity 55.6% 11.0% 6.12%
Total 100% 9.33%
22
Actual Opportunity For Equity Return With Carlock's 8.66%
23 Overall Return
24
25
630
Peter C. Cummings - Reb 27
U S WEST Communications, Inc.
1 Composite Rate of
Component Ratio Cost Return
2
Debt 44.4% 7.23% 3.21%
3 Equity 55.6% 9.8% 5.45%
Total 100% 8.66%
4
5 What starts out as a fair return recommendation of
6 11.5% is, in actuality, a recommendation of 9.8%. 9.8%
7 is clearly well below any range of reasonable returns for
8 USWC.
9
10 STAFF'S RECOMMENDATION WOULD HARM USWC'S CREDIT QUALITY
11
12 Q HOW WILL MS. CARLOCK'S RECOMMENDATION HARM
13 USWC'S CREDIT QUALITY?
14 A I have prepared Exhibit 32B which shows the
15 pre-tax interest coverage associated with Ms. Carlock's
16 8.66% overall return. Interest coverage is an important
17 financial criterion used by the bond rating agencies to
18 assess company credit quality. The 2.53 times interest
19 coverage shown in Exhibit 32B is indicative of low credit
20 quality -- close to the dividing line between investment
21 grade debt and junk bonds. Exhibit 2 of my direct
22 testimony shows Standard & Poor's financial benchmarks
23 for utility companies. Interest
24
25
631
Peter C. Cummings - Reb 28
U S WEST Communications, Inc.
1 coverage of 2.53 times is indicative of a low BBB debt
2 rating, which is almost two ratings below USWC current
3 S&P rating of A+.
4 Q DOES THE 62% DEBT/38% EQUITY CAPITAL
5 STRUCTURE USED BY MS. CARLOCK CONTRIBUTE TO LOWER CREDIT
6 QUALITY?
7 A Yes. A 62% debt ratio is at the very
8 bottom of the debt ratio range for a BBB rating according
9 to S&P's financial benchmarks. The combination of
10 capital structure and low equity return in Ms. Carlock's
11 recommendation, if adopted by the Commission, would
12 result in very low credit quality for USWC and higher
13 borrowing costs.
14 Q YOU'VE ADDRESSED MS. CARLOCK'S RETURN AND
15 CAPITAL STRUCTURE RECOMMENDATIONS. WOULD OTHER STAFF
16 RECOMMENDATIONS HAVE AN IMPACT ON USWC'S CREDIT QUALITY
17 AS WELL?
18 A Taken in total, the staff position in this
19 case calls for a dramatic rate reduction with negative
20 impacts well beyond the issues specific to Ms. Carlock's
21 rate of return testimony. The above analysis shows that
22 USWC credit quality would decline to the very lowest
23 investment grade if Ms.
24
25
632
Peter C. Cummings - Reb 29
U S WEST Communications, Inc.
1 Carlock's recommendations are implemented. If additional
2 revenue requirement reductions proposed by staff are
3 implemented, USWC's credit quality will decline further
4 to junk bond quality (BB or lower).
5 In my opinion, such action would fail to meet the
6 standards outlined by Ms. Carlock for a fair and
7 reasonable return: (1) The financial Integrity or
8 Credit Maintenance Standard, (2) the Capital Attraction
9 Standard, and (3) the Comparable Earnings Standard. In
10 the context of the Bluefield supreme court decision, the
11 return resulting from the total staff recommendation
12 would fail to be:
13 reasonably sufficient to assure confidence in the
financial soundness of the utility and adequate,
14 under efficient and economical management, to
maintain and support its credit
15
16 and, in the context of the Hope decision, the return to
17 the equity owner would fail to be:
18 commensurate with returns on investments in other
enterprises having corresponding risks
19
and would fail to be:
20
sufficient to assure confidence in the financial
21 integrity of the enterprise, so as to maintain its
credit and to attract capital.
22
23
24 CONCLUSION
25
633
Peter C. Cummings - Reb 30
U S WEST Communications, Inc.
1 Q AFTER REVIEWING MS. CARLOCK'S TESTIMONY,
2 WHAT ARE YOUR OVERALL CONCLUSIONS?
3 A My conclusions are:
4
5 Ms. Carlock's recommendation is not well supported
6 by facts and data.
7
8 Her proposed equity and debt returns are biased
9 downward.
10
11 The capital structure selected does not match the
12 mix of equity and debt financing of assets used to
13 provide telephone service in Idaho.
14
15 Implementation of Ms. Carlock's recommendations
16 would deny USWC the opportunity to earn a fair
17 return and would harm the company's credit
18 quality.
19
20 Q WHAT IS YOUR RECOMMENDATION TO THE
21 COMMISSION?
22 A I recommend that the Commission authorize
23 an equity return of 13.0% and an overall return of
24 10.55%.
25
634
Peter C. Cummings - Reb 31
U S WEST Communications, Inc.
1 Q DOES THIS CONCLUDE YOUR TESTIMONY?
2 A Yes, it does.
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
635
Peter C. Cummings - Reb 32
U S WEST Communications, Inc.
1 (The following proceedings were had in
2 open hearing.)
3 COMMISSIONER SMITH: Mr. Howell, did you
4 have questions for Mr. Cummings on rebuttal?
5 MR. HOWELL: I have only a few.
6
7 CROSS-EXAMINATION
8
9 BY MR. HOWELL:
10 Q If I may, Mr. Cummings, on page 26 of your
11 rebuttal testimony, particularly at lines 9 through 11,
12 you state that if the Commission, and there you're
13 talking about the service quality adjustment, if the
14 Commission desires to take action related to service
15 quality, it should do so directly in a manner that
16 benefits affected customers and facilitates U S WEST's
17 ability to provide service quality.
18 If your testimony and I believe that it's
19 fair to characterize your testimony is objecting to the
20 service quality adjustment, what other ways does the
21 Commission have to take action if the Company is found to
22 be deficient in service quality?
23 A That's basically a policy issue and I don't
24 want to get too far away from my own testimony, but I
25 wanted to make the point that reducing the authorized
636
CSB REPORTING CUMMINGS (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 return for the Company in my view doesn't do anything to
2 fix service problems, nor does it in any way that I can
3 see help the customers who may be affected with service
4 problems and so my point is that, and maybe I'm
5 presuming, but my point is that I presume that the
6 Commission has other remedies available at its disposal
7 to address the issue of service quality besides a penalty
8 for the shareholders and an action that would reduce the
9 profitability of the corporation and reduce our ability
10 to attract capital and reduce the ability to invest in
11 network solutions that would be helpful to customers.
12 Q Can you tell the Commission what the
13 current stock price is for U S WEST Communications?
14 A It's 35-and-a-quarter.
15 Q And have -- looking or referring now to
16 your rebuttal Exhibit 32A, if you recalculated the DCF
17 results which appear on 32A with the current stock price
18 of 35-and-a-quarter and the revised growth rate of
19 four-and-a-half percent, have you made such a
20 calculation?
21 A No, I have not.
22 Q Would such a calculation be appropriate?
23 A It could be done. The purpose of this
24 exhibit was to take the data provided in Ms. Carlock's
25 testimony and make certain adjustments to it. That's why
637
CSB REPORTING CUMMINGS (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 the prices are as of the dates shown and I also used her
2 growth rates and the growth rate that I had in my
3 testimony.
4 MR. HOWELL: All right, thank you very
5 much. No further questions.
6 COMMISSIONER SMITH: Mr. Kutler.
7 MR. KUTLER: No questions.
8 DR. READING: No questions.
9 COMMISSIONER SMITH: Mr. Phillips?
10 MR. PHILLIPS: No questions.
11 MR. FOTHERGILL: No questions.
12 COMMISSIONER SMITH: How about from the
13 Commissioners?
14 COMMISSIONER NELSON: I have one question.
15 COMMISSIONER SMITH: Commissioner Nelson.
16
17 EXAMINATION
18
19 BY COMMISSIONER NELSON:
20 Q Mr. Cummings, just taking one facet of
21 Mr. Howell's last question --
22 A Yes.
23 Q -- with that growth rate moving over a
24 year's time, would you say that four-and-a-half percent
25 would be a good number to use?
638
CSB REPORTING CUMMINGS (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 A That's the current consensus estimate of
2 growth for U S WEST Communications. I'd offer the caveat
3 that I have in my testimony that I don't think it's good
4 financial practice just to look at one company or one
5 method and that's why I looked at two groups of companies
6 in addition to U S WEST Communications and looked at a
7 risk free rate plus a risk premium or capital asset
8 pricing model as well as a discounted cash flow
9 methodology. I wouldn't want to say forget everything
10 else and focus on this one number because that would be
11 inappropriate. At a minimum, you should also look at
12 what the expected growth for the rest of the industry is.
13 Q But the same theory that gave you six
14 percent a year ago gives you four-and-a-half percent now?
15 A That's right.
16 COMMISSIONER NELSON: Okay, thank you.
17 COMMISSIONER SMITH: Commissioner Hansen.
18
19 EXAMINATION
20
21 BY COMMISSIONER HANSEN:
22 Q Yes, I have a question in regards to
23 Mr. Howell's question on page 26. I was kind of
24 intrigued by your statement there, too. You felt like
25 that action should directly benefit the affected
639
CSB REPORTING CUMMINGS (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 customer. I guess my question would be to you, then
2 would you -- do you feel, then, that something like a
3 credit or a refund directly to the customer that could
4 document poor service, that's the way that you would
5 directly affect the customer or treat the customer for
6 poor service or I guess I'm just kind of curious of how
7 or what you meant by directly, having action directly in
8 a manner that benefited the affected customer?
9 A I'll try and explain better. Penalizing
10 the Company or penalizing the shareholders I don't see as
11 an effective method of improving service and I made the
12 point that I don't see that it does anything for the
13 customers. To your point, some kind of a credit would
14 directly affect the customers. Some kind of a program
15 which would target specific service problems and
16 initiatives to fix them would also be more directly
17 related to the customers.
18 A broad whack at the profitability of the
19 corporation in my view goes the other way. The Company
20 is already incurring larger than industry normal expenses
21 due to overtime to fix service problems and reducing the
22 authorized return for the corporation, other things being
23 equal, is going to reduce the amount of investment
24 available to provide service. I just don't see that as a
25 good way to fix service.
640
CSB REPORTING CUMMINGS (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 Now, as far as what is a good way to fix
2 service, my expertise doesn't go that far as to suggest
3 to you a wide range of initiatives. I've been trying to
4 make the point that I think that there are better ways or
5 better means at your disposal and your point of a
6 customer credit in my view would be a better way to do it
7 than this proposal.
8 Q So if I understand correctly, then, you
9 support the idea of a financial benefit directly to a
10 customer that's affected by poor service; is that right?
11 A Certainly, as an alternative to what's been
12 proposed in this case of an incremental reduction in the
13 authorized return. If I had to choose between those two
14 alternatives, I'd choose the former.
15 COMMISSIONER HANSEN: Thank you.
16
17 EXAMINATION
18
19 BY COMMISSIONER SMITH:
20 Q I just wanted to follow up. I think in our
21 past history with a different utility, not a telephone
22 company, the Commission gave, I think it was, a quarter
23 point on equity extra because of outstanding service. If
24 we set the equity number in this case at something that
25 we thought was appropriate and then gave what I'll call
641
CSB REPORTING CUMMINGS (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 the carrot and this much more comes if you do X, Y, Z and
2 meet these goals, do you think that's effective?
3 A I don't know. In numerical terms, by my
4 reckoning, it's about $800,000, the impact of what's been
5 proposed here, a 50 basis point decrease in the
6 authorized return. My proposal is I think there's better
7 ways to use $800,000 than in that negative sense, and I
8 don't know how that would correlate with your past
9 practice of awarding a bonus for management efficiency.
10 I don't know how you measured that or how you tracked
11 that and I'm not sure that the two situations are exactly
12 parallel.
13 Q Well, I think it was given for good
14 customer service --
15 A Right.
16 Q -- some recognition that the company had
17 gone out of its way to be customer friendly and
18 implemented ways in dealing with customers that were
19 effective in achieving those kinds of goals and in giving
20 good service.
21 A Was it a case, though, that it was -- there
22 was not a way to flow that benefit to the customers? It
23 seems like --
24 Q The customers got good service.
25 A The customers got good service and so you
642
CSB REPORTING CUMMINGS (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 rewarded the company with --
2 Q Going above and beyond.
3 A -- a slight increase in their authorized
4 return. I don't think that the reverse of that is as
5 effective as doing that --
6 Q All right.
7 A -- for the customers anyway.
8 COMMISSIONER SMITH: All right, thank you.
9 Mr. Alke.
10 MR. ALKE: I have no redirect, Madam Chair.
11 COMMISSIONER SMITH: Thank you for your
12 help, Mr. Cummings.
13 THE WITNESS: Thank you.
14 (The witness left the stand.)
15 COMMISSIONER SMITH: Ms. Hobson.
16 MS. HOBSON: Madam Chair, in discussions
17 just this afternoon with counsel, it appears to me that
18 we are still not in agreement or at least some of us
19 misunderstood what the Commission's pleasure is with
20 regard to the scheduling of witnesses. It is important
21 for the U S WEST group to understand that since, of
22 course, we have a lot of out-of-town witnesses, but we
23 also have attorneys from out of town that are trying to
24 organize their schedules and try to be prepared for their
25 parts of this task.
643
CSB REPORTING CUMMINGS (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 It was U S WEST's understanding that
2 witnesses, Staff witnesses, Terri Carlock and Bill
3 Eastlake were scheduled to be heard next week and not
4 this week and we need clarification on that point. We
5 also need to understand -- well, do we need to understand
6 anything else? I guess we need to understand when AARP's
7 witness is planning to appear.
8 COMMISSIONER SMITH: Can we just go off the
9 record?
10 (Off the record discussion.)
11 MS. HOBSON: U S WEST calls Mary Owen.
12
13 MARY S. OWEN,
14 produced as a witness at the instance of U S WEST
15 Communications, Inc., having been first duly sworn, was
16 examined and testified as follows:
17
18 DIRECT EXAMINATION
19
20 BY MS. HOBSON:
21 Q Would you please state and spell your last
22 name for the record?
23 A Yes. My name is Mary S. Owen, O-w-e-n.
24 Q What is your business address?
25 A 1600 7th Avenue, Room 2905, Seattle,
644
CSB REPORTING OWEN (Di)
Wilder, Idaho 83676 U S WEST Communications
1 Washington, 98191.
2 Q By whom are you employed and in what
3 capacity?
4 A I'm employed by U S WEST Communications as
5 director of product and market issues.
6 Q In connection with that employment, did you
7 prepare and cause to have filed in this docket certain
8 written direct testimony consisting of 27 pages dated
9 June 28, 1996?
10 A I did.
11 Q And did you also prepare and cause to have
12 filed in this case certain exhibits to that testimony
13 premarked as Exhibits 28, 29, 30 and 31?
14 A Yes.
15 Q Ms. Owen, do you have any corrections or
16 changes to that testimony to make at this time?
17 A I do. The first one is a very minor one.
18 You'll find on the bottom right-hand corner of all pages
19 my name is spelled "Oven" and it's really "Owen," and the
20 other one, a more substantive change, is on page 5,
21 line 4. There is a revenue number there of "50,000" and
22 it really should be "$81,210." Those are the only two
23 changes to my testimony.
24 Q With those changes in mind, if I were to
25 ask you the same questions that are contained in your
645
CSB REPORTING OWEN (Di)
Wilder, Idaho 83676 U S WEST Communications
1 prefiled testimony today as you are sitting there under
2 oath, would your answers be the same?
3 A Yes, they would.
4 Q Ms. Owen, your testimony in this case
5 was -- well, excuse me, before I do that, Madam Chair, we
6 would move that Ms. Owen's direct testimony be spread
7 upon the record as if read and offer Ms. Owen's exhibits
8 and then I have just a brief bit of additional direct.
9 COMMISSIONER SMITH: If there's no
10 objection, we will spread the prefiled testimony of
11 Ms. Owen upon the record as if it had been read and
12 admits Exhibits 28, 29, 30 and 31.
13 MS. HOBSON: Thank you.
14 (U S WEST Communications, Inc. Exhibit
15 Nos. 28 - 31 were admitted into evidence.)
16 (The following prefiled direct
17 testimony of Ms. Mary Owen is spread upon the record.)
18
19
20
21
22
23
24
25
646
CSB REPORTING OWEN (Di)
Wilder, Idaho 83676 U S WEST Communications
1 I. IDENTIFICATION OF WITNESS
2 Q. PLEASE STATE YOUR NAME, ADDRESS AND
3 POSITION WITH U S WEST COMMUNICATIONS, INC.
4 A. My name is Mary S. Owen. My business
5 address is Room 2905, Sixteen Hundred Bell Plaza,
6 Seattle, Washington. I am Director-Product and Market
7 Issues for U S WEST Communications, Inc.1 (U S WEST.)
8 Q. PLEASE DESCRIBE YOUR EDUCATIONAL
9 BACKGROUND.
10 A. My formal education includes a Bachelor of
11 Arts degree from Linfield College in McMinnville, Oregon,
12 where I graduated Magna Cum Laude. I then completed
13 graduate work at the University of Oregon in Eugene in
14 Public Address and Logic.
15 Q. WHAT IS YOUR COMPANY EXPERIENCE?
16 A. I have been employed for 24 years with
17 U S WEST (previously Pacific Northwest Bell) in various
18 capacities, including service representative, business
19 office supervisor, business office manager, staff manager
20 in outside plant engineering, line manager in
21 engineering, product manager, state market manager,
22 manager in public policy, and most recently
23 Director-Product and Market Issues.
24 Q. WHAT ARE YOUR MAJOR AREAS OF EXPERTISE?
25
647
Mary S. Owen, DI 1
U S WEST COMMUNICATIONS, INC.
1
2
3 /
4
5 /
6
7 /
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23 1 For the sake of this testimony, all references to
U S WEST Communications, Inc. and U S WEST refer to
24 U S WEST Communications, Inc. and have no connection to
the U S WEST Media Group or its subsidiaries.
25
648
Mary S. Owen, DI 1A
U S WEST COMMUNICATIONS, INC.
1 A. My major areas of expertise include Basic
2 Exchange, Extended Area Service (EAS), Directory
3 Assistance, long distance services and Universal Service
4 Funding.
5 Q. HAVE YOU PREVIOUSLY TESTIFIED BEFORE
6 TELECOMMUNICATIONS REGULATORY COMMISSIONS?
7 A. Yes, I have in various dockets in Oregon,
8 Washington, Idaho, Montana, Utah, South Dakota, Iowa,
9 Arizona, Wyoming, Colorado and New Mexico. I have also
10 testified before this Commission in the Albion, Bannock
11 County, and Whitebird EAS proceedings, the Upper
12 Valley/Bridge Communications EAS arbitrage case, the
13 statewide EAS docket GNR-T-93-13, and have filed
14 testimony in the EAS stipulation case, GNR-S-96-6.
15 II. PURPOSE OF TESTIMONY
16 Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY?
17 A. The purpose of my testimony is to explain
18 in detail the proposals for price changes U S WEST is
19 requesting in this docket. I explain why these changes
20 are appropriate in light of the Title 61 revenue
21 requirement and changes in the telecommunications
22 industry. Additionally, I explain why the U S WEST
23 proposals are in the long term best interests of the
24 Idaho customers.
25
649
Mary S. Owen, DI 2
U S WEST COMMUNICATIONS, INC.
1 III. OVERVIEW OF CHANGES
2 Q. PLEASE PROVIDE AN OVERVIEW OF THE U S WEST
3 PRICE CHANGES.
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650
Mary S. Owen, DI 2A
U S WEST COMMUNICATIONS, INC.
1 A. Certainly. The following are the changes
2 U S WEST is proposing:
3 * Simplify both the residence and business
4 local measured service usage charges by
5 eliminating the intra-and inter-exchange
6 differences.
7 * Enhance residence measured service to
8 include three hours of local usage.
9 * Consolidate Rate Groups 1, 2 and 3 for both
10 residence and business services.
11 * Increase the price of residential and some
12 access lines.
13 * Simplify residence non-recurring charge
14 structure and slightly raise the basic
15 charge.
16 * Restructure residence and business Vacation
17 Rate service.
18 IV. SIMPLIFICATION OF LOCAL USAGE CHARGES
19 Q. WHAT IS MEASURED SERVICE?
20 A. Measured service is a local service option
21 which has local usage charges applicable for all outgoing
22 local calls.
23 Q. WHAT IS THE CURRENT STRUCTURE FOR MEASURED
24 USAGE FOR BUSINESS AND RESIDENCE CUSTOMERS?
25 A. The structure of the usage charges for
651
Mary S. Owen, DI 3
U S WEST COMMUNICATIONS, INC.
1 measured customers is currently broken into
2 intra-exchange ($.02 per minute) and inter-exchange ($.03
3 per minute). In addition, there are discounts available
4 for evening, weekend, and night calls.
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652
Mary S. Owen, DI 3A
U S WEST COMMUNICATIONS, INC.
1 Q. WHAT IS THE PRICE CHANGE U S WEST IS
2 PROPOSING FOR THIS SERVICE?
3 A. U S WEST is proposing that all local usage
4 be priced at $.03 per minute. This proposal eliminates
5 the intra-and inter-exchange differentiation, and the
6 time of day discounts. Additionally, U S WEST recommends
7 the inclusion of a 3 hour usage allowance to the measured
8 service offering for residential customers. This means
9 that residential measured service customers will not be
10 billed for local usage unless they exceed the three hours
11 or 180 minutes which will be included as part of the
12 monthly measured service price.
13 As a part of the overall restructure of basic
14 exchange access line prices we are also recommending an
15 increase to the basic monthly rate. The access line
16 rates will be discussed in the following sections.
17 Q. WHY IS THIS PRICING CHANGE APPROPRIATE?
18 A. The change to a single rate for the usage
19 component of this service is one step towards simplifying
20 our rate structure. It is easier for a customer to
21 understand a single $.03 per minute charge and the
22 customer no longer has to determine whether the call they
23 are making is within their exchange or to some other
24 exchange. It is our belief that the proposal outlined
25 above accomplishes the simplification that customers
want.
653
Mary S. Owen, DI 4
U S WEST COMMUNICATIONS, INC.
1 Q. WHAT IS THE REVENUE IMPACT OF THESE
2 PROPOSED CHANGES?
3 A. The change in the per minute price creates
4 a revenue increase of $81,210 for business and a decrease
5 of $108,632 for residence. The decrease in residence
6 revenues associated with this change occurs because of
7 the inclusion of the three hours of calling in the basic
8 monthly price. The impact of the increase to the basic
9 monthly price is captured in my discussion of the other
10 residence line increases, which occurs later in this
11 testimony.
12 V. CONSOLIDATION OF RATE GROUPS 1, 2 AND 3
13 Q. PLEASE EXPLAIN WHAT DETERMINES WHICH PRICES
14 IDAHO CUSTOMERS PAY FOR BASIC EXCHANGE SERVICES.
15 A. Certainly. First, the customer makes the
16 choice of either flat or measured service. This choice
17 should be dependent upon whether they use their telephone
18 line for a large number of outgoing local calls, or
19 simply as an occasional convenience service. The higher
20 the amount of outgoing local usage customers need, the
21 more sense it makes for them to choose flat rated
22 service. Conversely, a low use customer benefits most
23 from measured service and will then pay for his/her few
24 outgoing local calls on a per minute basis. There are no
25 additional charges for incoming calls.
654
Mary S. Owen, DI 5
U S WEST COMMUNICATIONS, INC.
1 Next, once this choice has been made, the physical
2 exchange within which the customer resides determines
3 which Rate Group is appropriate. Today the rate
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655
Mary S. Owen, DI 5A
U S WEST COMMUNICATIONS, INC.
1 groups are determined by the number of exchange access
2 lines available for a customer to call locally.
3 Q. SPECIFICALLY, HOW ARE BASIC EXCHANGE
4 SERVICE RATES STRUCTURED IN IDAHO TODAY?
5 A. There are currently three rate groups in
6 effect in Idaho today. They are Rate Groups 1, 2, and 3.
7 These are effective for both business and residence
8 customers and are based on the total number of lines
9 available for customers in an exchange to call. For
10 example, those customers residing in the Boise exchange
11 are in Rate Group 3 because they can call more than
12 30,001 lines on a local basis.
13 Q. WHAT ARE THE CURRENT RESIDENCE AND BUSINESS
14 PRICES IN EACH RATE GROUP?
15 A. These prices are reflected in the following
16 table:
17
18 RATE GROUP LOCAL LINES RES. PRICE BUS. PRICE
19
20 1 1 - 5,000 $10.11 $26.02
21 2 5,001 - 30,000 $11.01 $28.49
22 3 30,001 - + $12.00 $31.10
23
24 Q. WHAT CHANGES REGARDING THE CURRENT RATE
25 GROUP STRUCTURE IS U S WEST RECOMMENDING IN THIS CASE?
656
Mary S. Owen, DI 6
U S WEST COMMUNICATIONS, INC.
1 A. U S WEST recommends the consolidation of
2 the current Rate Groups 1, 2 and 3, into a single
3 statewide rate. Exhibit 28 displays the proposed
4 statewide
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657
Mary S. Owen, DI 6A
U S WEST COMMUNICATIONS, INC.
1 business rates. The residence rate proposal will be
2 discussed in the following section of this testimony.
3 Q. WHY IS THE CONSOLIDATION OF THESE RATE
4 GROUPS APPROPRIATE AT THIS TIME?
5 A. It is important that U S WEST begin the
6 restructure and simplification of its prices so that they
7 are both easier for customers to understand and come
8 closer to meeting a more simplified structure which we
9 believe the new competitive entrants will use. Customers
10 want simplified, easy to understand pricing, and
11 U S WEST's rate simplification is designed to meet those
12 needs. We are proposing to consolidate rate groups 1 and
13 2 into the rate group 3 level in an effort to help local
14 service prices recover the revenue requirement.
15 VI. RESIDENCE AND BUSINESS PRICE PROPOSAL
16 Q. WHAT IS INCLUDED WHEN WE DISCUSS RESIDENCE
17 BASIC EXCHANGE SERVICE?
18 A. Residence basic exchange service includes
19 these components: the dial tone line and its associated
20 usage, touchtone, trouble isolation and a white page
21 listing.
22 The dial tone line is the portion of the service
23 which provides a subscriber access to the outside world.
24 It is the true "connection" of the telephone to our
25 central office and hence to other customers and
businesses.
658
Mary S. Owen, DI 7
U S WEST COMMUNICATIONS, INC.
1 Unlimited local usage is included in the basic exchange
2 line price for all flat rated services. Residence
3 customers who subscribe to measured service, assuming the
4 Commission approves the measured service proposal, will
5 pay a charge on a per-minute-of-use basis, once the three
6 hour usage allowance is exceeded.
7 The basic monthly rate also includes touchtone
8 service which enables customers to use a push button
9 telephone. In addition, Idaho customers enjoy the
10 benefits of trouble isolation service. This service
11 enables U S WEST to isolate the source of telephone
12 problems regardless of whether the problem is in the
13 Company's network or on the customer's side of the
14 network interface. The final element is a listing in the
15 white pages of the U S WEST Direct telephone book.
16 Q. IS U S WEST PROPOSING AN INCREASE TO THE
17 BASIC EXCHANGE PRICE FOR RESIDENTIAL CUSTOMERS?
18 A. Yes, it is. U S WEST is proposing
19 increases for all residence access lines in order to
20 recover the revenue requirement identified in
21 Ms. Wright's testimony.
22 Q. WHAT IS THE PRICE INCREASE THAT IS BEING
23 PROPOSED?
24 A. U S WEST is proposing a $22.50 statewide
25 price for a residence flat rated line (unlimited calling)
659
Mary S. Owen, DI 8
U S WEST COMMUNICATIONS, INC.
1 and a $15.50 a statewide average price for residence
2 measured service (three hours usage included).
3 Q. WHAT IS THE REVENUE IMPACT OF THIS PRICE
4 INCREASE?
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660
Mary S. Owen, DI 8A
U S WEST COMMUNICATIONS, INC.
1 A. The impact is a revenue increase of is
2 approximately $38.2 million for residence and business
3 customers.
4 Q. DOES U S WEST PROPOSE TO PHASE IN THIS RATE
5 INCREASE?
6 A. Yes it does. U S WEST proposes that the
7 price increase occur in three separate steps for
8 residence customers. The first increase would occur
9 within thirty to sixty days of receipt of the final order
10 in this case. The second increase would occur one year
11 later and the final increase would occur one year after
12 that. Exhibit 29 identifies the proposed residential
13 prices for each phase. The business rate changes will
14 occur in the first two steps.
15 Q. WHY IS A PHASED STEP APPROACH APPROPRIATE
16 FOR THIS COMMISSION TO ADOPT IN THIS CASE?
17 A. U S WEST recognizes the significance of the
18 proposed price increase. In view of that, the Company
19 believes it is appropriate to phase these prices in over
20 time, which will allow customers a chance to adjust to
21 the higher prices. In addition, the Company believes the
22 phased approach will allow the Commission an opportunity
23 to decide the best means of distributing any available
24 Revenue Sharing funds to help ease this transition.
25 Q. HOW MIGHT REVENUE SHARING FUNDS BE USED IN
661
Mary S. Owen, DI 9
U S WEST COMMUNICATIONS, INC.
1 THIS CASE?
2 A. The EAS stipulation that we have entered
3 with the Staff contemplates the use of all available
4 Revenue Sharing dollars as credits against the stipulated
5 price increases associated with EAS. However, those
6 increases will not apply until EAS is actually
7 implemented. It is possible that
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662
Mary S. Owen, DI 9A
U S WEST COMMUNICATIONS, INC.
1 not all of the Revenue Sharing money will be used as
2 credits before the Commission enters its order in this
3 case setting new prices for Title 61 services. If that
4 occurs, then the Commission will have Revenue Sharing
5 funds at its disposal which it could use to further
6 mitigate the immediate impacts of the price increases
7 that are proposed here.
8 Q. WHY IS SUCH A PRICE INCREASE JUSTIFIED?
9 A. First, the price increase is justified
10 because of the revenue requirement identified in this
11 case for Title 61 services. There are a very limited
12 number of Title 61 services available to address the
13 revenue requirement. Mr. Dallas Elder testifies that
14 residential services account for 83% of the total Title
15 61 access lines and the majority of the Title 61
16 operating costs. Therefore, any revenue requirement will
17 fall primarily to these residential services.
18 Second, there is a significant pricing disparity
19 between residential and business service even though they
20 are fundamentally the same service. Given the lack of
21 cost justification for the price differential, it is
22 logical to assume these prices should be brought closer
23 together. Imposing the revenue requirement on
24 residential service will, in fact, move them closer
25 together.
663
Mary S. Owen, DI 10
U S WEST COMMUNICATIONS, INC.
1 Third, it is important to recognize that U S WEST
2 has continued to make investments in Idaho over the past
3 several years while residential prices have remained
4 stable. The impacts of these investments as well as the
5 effects of inflation on the Company's operating costs
6 over time needs to be reflected in the Company's prices.
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664
Mary S. Owen, DI 10A
U S WEST COMMUNICATIONS, INC.
1 Q. PLEASE DISCUSS EACH OF THESE ISSUES IN MORE
2 DETAIL.
3 A. Certainly. The first issue highlights the
4 data provided by Mr. Dallas Elder and Ms. Margie Wright
5 which demonstrates a revenue requirement for Title 61
6 services. In other words, the current prices for these
7 services do not recover the costs of provision. As noted
8 earlier, there are very few services still considered
9 Title 61 services in Idaho. They are residence basic
10 exchange, business basic exchange under 6 lines, privacy
11 listings, and local operator surcharges. Of these
12 services, the residential basic exchange line accounts
13 for 83% of the access lines regulated under Title 61.
14 Obviously, when the residential line represents the vast
15 majority of Title 61 services, it is also the primary
16 source for recovery of the revenue requirement. Although
17 U S WEST recommends some small changes in other areas,
18 the majority of the revenue requirement should be spread
19 to the residential access line.
20 Q. YOUR NEXT REASON DEALT WITH THE VARIANCE IN
21 PRICES BETWEEN A RESIDENTIAL AND A BUSINESS LINE. WHAT
22 ARE THOSE RESPECTIVE PRICES TODAY?
23 A. The current price for a residential access
24 line in Boise is $12.00 and for a business access line is
25 $31.10. The difference in these prices is $19.10.
665
Mary S. Owen, DI 11
U S WEST COMMUNICATIONS, INC.
1 Q. IS SUCH A LARGE PRICE DISPARITY REASONABLE?
2 A. No. We know that the costs to provide a
3 business line are less than those to provide a residence
4 line because businesses tend to be found in
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666
Mary S. Owen, DI 11A
U S WEST COMMUNICATIONS, INC.
1 high density areas that tend to be closer to the central
2 office and thus have shorter loops. Both of these
3 circumstances result in the average business line being
4 less costly to provide than the average residence line.
5 In addition, as competition enters the market in the
6 local exchange arena, it will become more and more
7 difficult to differentiate and monitor residence/business
8 line pricing differentials. Large price disparities
9 encourage arbitrage situations, which are unfair to
10 U S WEST and other customers who comply with tariff
11 provisions.
12 Q. DO YOU HAVE ANY OTHER OBSERVATIONS ABOUT
13 THIS BUSINESS/RESIDENCE PRICING DISPARITY?
14 A. Yes. As alternative local service
15 providers enter the marketplace they are pricing their
16 business service below that of U S WEST. One's first
17 reaction is usually: "So what, isn't that what
18 competition is all about?" However, it is necessary to
19 ask the question: "Why do we see new entrants in
20 business markets and not in residence markets?". The
21 high concentration of access lines and high U S WEST
22 prices for business services create a market opportunity
23 for competitors and creates a risk for Idaho's residence
24 customers.
25 Q. WHY DO YOU BELIEVE THIS WILL CREATE A RISK
667
Mary S. Owen, DI 12
U S WEST COMMUNICATIONS, INC.
1 FOR IDAHO'S RESIDENCE CUSTOMERS?
2 A. As competition enters the local market,
3 that new entrants will target pockets of highly
4 concentrated lines, and will ignore the more disperse,
5 expensive to serve residential customers.
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668
Mary S. Owen, DI 12A
U S WEST COMMUNICATIONS, INC.
1 Q. WHAT MIGHT THIS MEAN FOR THE MANY RURAL
2 COMMUNITIES IN IDAHO?
3 A. I believe there will be few, if any,
4 choices for Idaho's rural customers for competitive,
5 facilities-based telecommunications providers. This is
6 due to the fact that these communities are less densely
7 populated and hence more costly to serve.
8 Q. WHAT IS THE URGENCY FOR INCREASING THE
9 RESIDENTIAL LINE PRICE?
10 A. As Ms. Wilson testifies, the regulatory
11 model under which residence service prices were kept
12 artificially low to encourage universal service no longer
13 applies. The competitive forces that U S WEST now faces
14 for the first time in the local exchange market make it
15 impossible for the Company to continue with
16 business-as-usual. In Idaho this means that the Title 61
17 rate base and revenue requirement must be identified and
18 prices set which will allow the recovery of that revenue
19 requirement. While this change requires increases to the
20 residence price, this is necessary to assure that
21 U S WEST can continue to provide services to Idaho
22 customers and to assure that true, facilities-based
23 competition develops so that the benefits of competition
24 can be experienced by more than just the most
25 economically attractive customers.
669
Mary S. Owen, DI 13
U S WEST COMMUNICATIONS, INC.
1 Q. WHY IS THE DEVELOPMENT OF FACILITIES-BASED
2 COMPETITION IMPORTANT TO IDAHO AND ITS CUSTOMERS?
3 A. Before this question can be answered, it is
4 important to understand how competition will enter Idaho.
5 It will not begin ubiquitously
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670
Mary S. Owen, DI 13A
U S WEST COMMUNICATIONS, INC.
1 across the state or across all classes of customers.
2 Because of this fact, pricing decisions by the Commission
3 can enhance or retard the progress of "true" competition.
4 True competition will generally begin where there
5 is a concentration of high usage customers such that the
6 anticipated revenues greatly exceed the underlying costs.
7 That usually means business customers in downtown areas
8 or industrial and business parks will be targeted by new
9 entrants. There is no reason to believe that this
10 pattern will not hold true in Idaho.
11 True competition will not develop in those areas
12 and for those customers whose prices do not cover their
13 underlying service costs. That usually means rural areas
14 and residential customers.
15 If the Idaho Commission intends for the benefits
16 of competition to occur for the greatest number of
17 customers, it must eliminate the pricing barriers to
18 competition.
19 Q. YOU MAKE REFERENCE TO "TRUE" COMPETITION.
20 PLEASE EXPLAIN HOW YOU ARE USING THAT TERM.
21 A. Facilities-based competition is "true"
22 competition where two or more competitors sell their
23 product and/or service based on economic efficiency.
24 Such efficiency can occur through self-provisioning.
25 Resale of services alone does not promote such
671
Mary S. Owen, DI 14
U S WEST COMMUNICATIONS, INC.
1 efficiency. It is in the best interests of Idaho
2 customers for this Commission to aid in the establishment
3 of truly
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672
Mary S. Owen, DI 14A
U S WEST COMMUNICATIONS, INC.
1 competitive alternatives. Such alternatives will have
2 long term benefits in more choices, more efficient
3 prices, and continued innovation in new technology. For
4 all these reasons, the price of the residential line
5 needs to increase to be more reflective of the costs to
6 provision the network and, through such pricing,
7 encourage other competitors to also provide
8 facilities-based service.
9 In contrast, resellers are primarily packagers.
10 They provide the appearance of choice but, at the end of
11 the day, the local service provided by the reseller is
12 the same local service provided by the incumbent local
13 exchange carrier. Where there are merely resellers in
14 the local service market, there is no ability for the
15 customer to differentiate between competitors based upon
16 technology, service quality or other services.
17 There is also a difference for the community in
18 general between facilities-based competitors and
19 resellers. A facility-based competitor provides new
20 investment, new tax base and new jobs, while the reseller
21 provider simply shifts existing revenues from the
22 incumbent to the reseller adding little, if anything, to
23 the community.
24 Q. THE THIRD AREA YOU IDENTIFIED AS A BASIS
25 FOR INCREASING THE RESIDENCE PRICE WAS THE INCREASED
673
Mary S. Owen, DI 15
U S WEST COMMUNICATIONS, INC.
1 INVESTMENT AND THE ASSOCIATED INFLATION WHICH HAVE
2 OCCURRED SINCE THE LAST RATE INCREASE. PLEASE EXPLAIN.
3 A. The last increase in the residential line
4 price in Idaho, occurred in February, 1986. That was
5 over ten years ago. During that same period,
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674
Mary S. Owen, DI 15A
U S WEST COMMUNICATIONS, INC.
1 U S WEST has invested nearly half a billion dollars to
2 meet the demands of growth and expanding customer
3 expectations for service in southern Idaho. It is not
4 surprising, that there is an unmet revenue requirement
5 when rates have not changed in more than a decade.
6 Since the last rate increase, the rate of
7 inflation has averaged 2 to 3% per year. If the
8 residential access line price kept pace with the Consumer
9 Price Index, the current price of the line would be
10 approximately $19.00 today. Therefore the combined
11 effects of investment and inflation fully warrant the
12 requested price increase.
13 VII. LOW PRICE ALTERNATIVES
14 Q. IS U S WEST PROPOSING ANY LOW PRICE
15 ALTERNATIVES FOR CUSTOMERS?
16 A. Yes. U S WEST offers measured service and
17 will continue to provide that as a low cost option for
18 customers. As previously mentioned, U S WEST is
19 improving this service offering for residence customers
20 by adding a three hour usage allowance to the service.
21 Additionally, U S WEST offers Limited Service that allows
22 customers to control their phone bill by preventing long
23 distance calls. Depending on their needs, some telephone
24 customers will find that the new Measured Service or
25 Limited Service offerings will meet their needs while
keeping the price tag within their means.
675
Mary S. Owen, DI 16
U S WEST COMMUNICATIONS, INC.
1 Q. IS U S WEST PROPOSING ANY OTHER LOW COST
2 ALTERNATIVES?
3 A. Yes. U S WEST will continue to offer a
4 reduced price to customers qualifying under the Idaho
5 Telephone Assistance Plan (ITAP).
6 Q. UNDER THE U S WEST PROPOSAL, WHAT WILL THE
7 NEW PRICE FOR ITAP CUSTOMERS BE?
8 A. For customers who purchase flat rated
9 service, the rate will be discounted from $22.50 to
10 $12.00. For ITAP customers subscribing to measured
11 service, the price will be discounted from $15.50 to
12 $9.00, including three hours of usage. The ITAP rate
13 increase will occur over the proposed three phases.
14 Q. HOW DOES U S WEST PROPOSE TO FUND THIS ITAP
15 DISCOUNT?
16 A. The first $3.50 is funded by the existing
17 ITAP surcharge. We are not proposing a change to that
18 surcharge. The remaining gap is funded by spreading the
19 revenue requirement to other services.
20 Q. IS U S WEST PROPOSING ANY ADDITIONAL
21 CHANGES TO THE ITAP?
22 A. Yes. In the context of the legislative
23 process, U S WEST will support the identification of
24 another means test to replace the Low Income Energy
25 Assistance Program, which has been eliminated by
Congress.
676
Mary S. Owen, DI 17
U S WEST COMMUNICATIONS, INC.
1 Q. DOES U S WEST PROPOSE ANY OTHER
2 ALTERNATIVES FOR LOW INCOME PERSONS WHO DON'T QUALIFY FOR
3 ITAP BECAUSE THEY ARE UNDER AGE 60?
4 A. Yes. Assuming that the Commission grants
5 the rate increase requested here, U S WEST will work with
6 the Commission to create a program which parallels ITAP
7 for customers who meet the ITAP low-income standard but
8 don't meet the age 60 requirement.
9 Q. PLEASE EXPLAIN U S WEST'S PROPOSAL.
10 A. The proposal is based upon the assumption
11 that the U S WEST revenue requirement is accepted by the
12 Commission and funded as proposed. Under that scenario
13 U S WEST is willing to make the ITAP prices of $9.00 and
14 $12.00 available to all customers who qualify under the
15 then applicable statutory means standard regardless of
16 age. U S WEST proposes that we work with the Commission
17 staff to sort out the details of how an administratively
18 simple process for identification of low income customers
19 can be achieved. Issues include qualification by an
20 impartial government agency, annual qualification of
21 individuals, identification of administrative expenses,
22 and necessary adjustments to Title 61 rates to fund the
23 program. Additionally if the Commission wants to seek
24 expansion of the federally sanctioned ITAP plan to the U
25 S WEST proposal, the Company will work with the
677
Mary S. Owen, DI 18
U S WEST COMMUNICATIONS, INC.
1 Commission in submitting such a request to the FCC.
2 Q. ALTHOUGH U S WEST IS PLEDGING ITS
3 WILLINGNESS TO CREATE A PLAN WHICH ADDRESSES THE NEEDS OF
4 LOW INCOME, UNDER
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678
Mary S. Owen, DI 18A
U S WEST COMMUNICATIONS, INC.
1 AGE 60 SUBSCRIBERS, HAS THE INCREASED COST FOR THIS PLAN
2 BEEN REFLECTED IN THE RATE DESIGN PRESENTED IN THIS CASE.
3 A. No. The additional cost for this future
4 plan will need to be addressed at the point where
5 qualification standards and estimated of potential
6 participants are known.
7 Q. WHY DO YOU CONDITION THIS PROPOSAL ON THE
8 COMMISSION SUBSTANTIALLY GRANTING ALL THE REQUESTED PRICE
9 INCREASE?
10 A. Because of the phased in approach that we
11 are recommending, the largest increase a customer will
12 experience in the first year is $5.39 for flat rated rate
13 group 1 residence service. Rate group 3 customers will
14 only see a $3.50 rate increase for flat rated service.
15 We believe that any substantially smaller increases, do
16 not justify the creation of a special program to maintain
17 universal service.
18 Q. IS U S WEST PROPOSING THIS LOW INCOME
19 PROGRAM AS A PERMANENT CHANGE?
20 A. No. The creation of programs to assist low
21 income individuals is truly a policy issue for the FCC,
22 state legislators, this Commission and the industry.
23 Therefore U S WEST would establish this program until the
24 1998 legislative session. At that time, U S WEST
25 believes the issue of explicit support for universal
679
Mary S. Owen, DI 19
U S WEST COMMUNICATIONS, INC.
1 service including the continuation of the Idaho Universal
2 Service Fund for high cost providers and supports for low
3 income customers should be the topic of legislative
4 debate and resolution.
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680
Mary S. Owen, DI 19A
U S WEST COMMUNICATIONS, INC.
1 U S WEST expects to advocate that support programs
2 for low income customers should be funded by all industry
3 participants and be made available regardless of
4 customers' choice of local exchange provider. The
5 legislature will have the opportunity to articulate the
6 state's policy on these issues at that point. Following
7 the 1998 session, in July, U S WEST would discontinue the
8 proposed plan and institute the plans approved by the
9 legislature.
10 Q. WON'T THERE BE SOME CUSTOMERS WHO WILL FEEL
11 THEY CANNOT AFFORD THE HIGHER PRICE?
12 A. Yes. For this reason, the Company has
13 identified four alternatives directed toward those
14 customers who may feel they need help in maintaining or
15 controlling their telephone service costs. As previously
16 indicated, these programs are measured service, Limited
17 Service, Idaho Telephone Assistance Plan and the
18 Company's proposal to implement a program similar to ITAP
19 for customers under age 60.
20 U S WEST has a tradition of working with the Idaho
21 Commission in developing excellence in telecommunications
22 for Idaho subscribers. The Company wishes to continue in
23 the spirit of cooperation in developing end user programs
24 to help maintain a very high level of telephone
25 subscribership in Idaho and pledges to work with the
681
Mary S. Owen, DI 20
U S WEST COMMUNICATIONS, INC.
1 Commission to help customers understand the need of these
2 price increases and the availability of programs for
3 customers who need financial assistance.
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682
Mary S. Owen, DI 20A
U S WEST COMMUNICATIONS, INC.
1 VIII. PENDING EAS PROPOSAL
2 Q. ARE THERE ANY OTHER ISSUES THAT MAY IMPACT
3 THE RATE DESIGN YOU RECOMMENDED?
4 A. Yes. As the Commission is aware, in Docket
5 No. USW-S-96-4, U S WEST has proposed four new EAS
6 regions. The proposed revenue requirement and rate
7 structure in this filing, do not reflect implementation
8 of the four EAS regions.
9 Q. IF THE EAS REGIONS ARE APPROVED, WHAT WOULD
10 THE IMPACT BE ON THE REVENUE REQUIREMENT AND RATE DESIGN?
11 A. As stated in Ms. Wright's testimony, the
12 revenue requirement is reduced by approximately $6
13 million, if the EAS regions are approved. This is due to
14 the increase in Title 61 local service revenues provided
15 in the U S WEST/Staff stipulation. The rate design
16 presented in the present docket would then change to
17 accommodate the smaller revenue requirement and the
18 recognition of the benefits of the creation of EAS
19 regions.
20 Q. IF THIS COMMISSION APPROVES THE
21 ESTABLISHMENT OF THE FOUR EAS REGIONS, HOW WOULD THE RATE
22 GROUP CONSOLIDATION RECOMMENDATION BE MODIFIED?
23 A. If the Commission approves the four EAS
24 regions, U S WEST recommends establishing 2 rate groups
25 instead of one. Those groups would consist of one rate
683
Mary S. Owen, DI 21
U S WEST COMMUNICATIONS, INC.
1 group which would include all exchanges that are part of
2 the
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684
Mary S. Owen, DI 21A
U S WEST COMMUNICATIONS, INC.
1 newly created EAS regions. The other rate group would
2 consist of exchanges that are not part of an EAS region.
3 Q. WHY WOULD APPROVAL OF EAS REGIONS CHANGE
4 YOUR RATE GROUP CONSOLIDATION RECOMMENDATION?
5 A. U S WEST feels it is appropriate to
6 recognize the value of the EAS regions in the rate design
7 where the new regions are being implemented in roughly
8 the same time-frame as this rate case is being
9 considered. Customers in an EAS region will receive
10 increased local service calling areas. As such, it is
11 appropriate to establish two rate groups to reflect this
12 difference in the geographic size and benefits of the
13 larger calling areas.
14 These regions also reflect the economic
15 inter-relationships found between the various exchanges.
16 The remaining exchanges may have a small amount of EAS
17 but certainly not of the magnitude found in the new EAS
18 regions. Because of this, it is appropriate to recognize
19 the value of the EAS regions. Coupling this significant
20 difference between the exchanges with the need to
21 simplify our price structure, argues that two rate groups
22 are the appropriate means of recognizing the value of
23 establishing EAS regions.
24 Q. IS YOUR RECOMMENDATION TO CONSOLIDATE THE
25 RATE GROUPS INTO EITHER ONE OR TWO DEPEND UPON WHETHER
685
Mary S. Owen, DI 22
U S WEST COMMUNICATIONS, INC.
1 THE COMMISSION APPROVES THE EAS REGIONS?
2 A. Yes. If the EAS regions are approved, the
3 proposed rate structure would consist of two rate groups,
4 as displayed in Exhibit 30 for residence
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686
Mary S. Owen, DI 22A
U S WEST COMMUNICATIONS, INC.
1 customers and Exhibit 31 for business customers.
2 However, if the EAS regions are not approved, U S WEST
3 recommends single rate group, statewide prices for
4 residence and business customers.
5 IX. RESIDENCE NON-RECURRING CHARGES
6 Q. YOUR NEXT AREA DEALS WITH NON-RECURRING
7 INSTALLATION CHARGES. WHAT ARE THESE CHARGES?
8 A. U S WEST assesses a non-recurring, or
9 one-time charge to a customer for the installation of a
10 residential access line.
11 Q. WHAT IS THE CURRENT STRUCTURE OF THESE
12 CHARGES?
13 A. The current non-recurring charge (NRC)
14 structure and price is $30.00 for each access line
15 installed.
16 Q. WHAT IS U S WEST PROPOSING TO CHANGE WITHIN
17 THIS EXISTING CHARGE STRUCTURE?
18 A. U S WEST is proposing to simplify this
19 structure and to raise the initial NRC price.
20 Q. WHAT IS THE NEW PRICE AND STRUCTURE GOING
21 TO LOOK LIKE?
22 A. I recommend the price be increased from $30
23 per line to $31.00 regardless of the number of lines
24 ordered.
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687
Mary S. Owen, DI 23
U S WEST COMMUNICATIONS, INC.
1 Q. PLEASE GIVE AN EXAMPLE OF HOW THIS PRICE
2 MIGHT AFFECT AN IDAHO CUSTOMER.
3 A. Certainly. Currently, if a new customer
4 orders two lines in Boise, the current charge will be
5 $60, or 2x$30. However, under the new proposed
6 structure, the new charge will only be $31 for both
7 lines. Today, if a customer orders only one line, the
8 NRC is $30. Under the new proposal, the non-recurring
9 charge increases by $1.
10 Q. WHY IS THIS NEW STRUCTURE APPROPRIATE?
11 A. As mentioned earlier, we know that it is
12 imperative that U S WEST make its price structures simple
13 and easy to understand. We can accomplish the goal of
14 simplifying the price structure, and thereby meet
15 customer needs.
16 Q. WHAT IS THE REVENUE IMPACT OF THIS CHANGE?
17 A. This change has an annual negative revenue
18 impact of $140,822.
19 X. VACATION RATE SERVICE
20 Q. YOUR FINAL PROPOSAL DEALS WITH CHANGING THE
21 VACATION RATE SERVICE. WHAT IS THIS SERVICE?
22 A. The service, also known as suspend and
23 restore service, allows customers to temporarily suspend
24 all or a part of their local service.
25 Q. WHEN MIGHT A CUSTOMER REQUEST SUCH SERVICE?
688
Mary S. Owen, DI 24
U S WEST COMMUNICATIONS, INC.
1 A. Most often customers request this service
2 when they leave a residence or business for an extended
3 period of time. For example, a customer has a cabin near
4 Idaho City and plans to close it for the winter. Instead
5 of totally disconnecting the service, the customer may
6 request vacation service. This service retains the
7 telephone number and allows the customer to avoid the
8 full charges of completely disconnecting and reconnecting
9 the service.
10 Q. WHAT IS THE CURRENT CHARGE STRUCTURE FOR
11 THIS SERVICE?
12 A. There are three aspects to the current
13 charge structure. First, there is a discount of 50% of
14 the monthly price of the customer's service. Second,
15 there is a one-time NRC to suspend the service. This
16 price is $20 for residence and $25.50 for business.
17 Finally, there is a one-time NRC for restoring the
18 service of $20 for residence and $25.50 for business.
19 Q. WHAT PRICE AND STRUCTURE CHANGE DO YOU
20 RECOMMEND FOR THIS SERVICE?
21 A. U S WEST recommends that this price
22 structure be simplified. First, I recommend the
23 elimination of the NRC for suspending the service.
24 Second, establish a flat $10 per line per month price for
25 residence and $15 per line per month price for business.
689
Mary S. Owen, DI 25
U S WEST COMMUNICATIONS, INC.
1 This price replaces the current price structure which
2 charges 50% of the customer's local services bill.
3 Third, I recommend changing the NRC for restoral of
4 service to $15 for residence and
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690
Mary S. Owen, DI 25A
U S WEST COMMUNICATIONS, INC.
1 $30 for business. This change would be implemented as
2 soon as appropriate programming changes are made
3 following Commission approval.
4 Q. WHY IS THIS NEW PRICE STRUCTURE
5 APPROPRIATE?
6 A. This price structure greatly simplifies the
7 price and is therefore, easier for customers to
8 understand. Additionally, the reduced prices will make
9 this a more viable service offering. It will not be
10 necessary for customers to disconnect and re-establish
11 central office features in order to reduce their monthly
12 vacation service charges. This is a win/win for the
13 customers and the Company.
14 Q. WHAT IS THE REVENUE IMPACT FOR THIS
15 RESTRUCTURE?
16 A. The revenue impact is a negative $19,301
17 for residence service and a negative $4,239 for business
18 service.
19 XI. SUMMARY OF TESTIMONY
20 Q. PLEASE SUMMARIZE YOUR TESTIMONY.
21 A. My testimony details the price changes
22 which meet the revenue requirement identified by
23 Ms. Margie Wright and addresses the cost/price
24 discrepancies identified by Mr. Elder. U S WEST proposes
25 phasing in the residence increases over three steps for
691
Mary S. Owen, DI 26
U S WEST COMMUNICATIONS, INC.
1 residence customers and two steps for business customer.
2 This will allow customers time to adjust to the changes
3 and for the Commission to explore alternatives for the
4 use of any undistributed Revenue Sharing
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692
Mary S. Owen, DI 26A
U S WEST COMMUNICATIONS, INC.
1 funds. In addition, U S WEST has proposed enhancing the
2 Idaho Telephone Assistance Plan to keep the price low for
3 qualified customers and has proposed creating a new
4 program for low income customers who do not meet the ITAP
5 age requirement. U S WEST is also continuing to offer
6 measured service and enhancing the service for residence
7 customers with a new three hour call allowance. Finally
8 U S WEST has recommended changes to other services which
9 help simplify the price structures and make them easier
10 for customers to understand. U S WEST believes that the
11 proposals for pricing which satisfy the Company's revenue
12 requirements are reasonable and in the long term best
13 interests of the customers of Idaho. We ask, therefore,
14 for the Commission to approve their implementation.
15 Q. DOES THIS CONCLUDE YOUR TESTIMONY?
16 A. Yes, it does.
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693
Mary S. Owen, DI 27
U S WEST COMMUNICATIONS, INC.
1 (The following proceedings were had in
2 open hearing.)
3
4 DIRECT EXAMINATION
5
6 BY MS. HOBSON: (Continued)
7 Q Ms. Owen, in light of the fact that there
8 have been various settlement agreements and changes in
9 the U S WEST's revenue requirement, have you made
10 calculations at this point as to what the impacted --
11 well, what the impact of those changes is on the rate
12 proposal that you would be making in this case?
13 A Yes, I do, and I need to preface it that
14 it's kind of a moving target, but I think I'm within,
15 like, five cents or so of what it would be and the rates
16 I'm giving you would be the total rate. It includes the
17 $3.62 rate for those in region with the EAS increment.
18 The in region, like for Boise, would be 20.01. That
19 number should go down some. It will be below $20.00
20 based on Ms. Wright's updated revenue requirement that's
21 now 15.509 million and my numbers were predicated on a
22 15.6 something, so anyway, it's around $20.00 right now,
23 it's 20.01, and it probably would come down a few
24 pennies. Outside of region the rate that we would
25 recommend is $16.39.
694
CSB REPORTING OWEN (Di)
Wilder, Idaho 83676 U S WEST Communications
1 Q Excuse me, Ms. Owen, I believe the Chair
2 has --
3 COMMISSIONER SMITH: I'm just clarifying.
4 If I wanted to write these rates on one of these
5 exhibits, which one would you recommend? Which page
6 should I be looking at?
7 THE WITNESS: I would say probably
8 Exhibit 30 and we can use that as the -- because the
9 advantage to 30 is it does come up with two rate groups.
10 It has one in region and one out of region, so if you
11 look at the first line where it says "Unlimited," Rate
12 Group 1 and 2 would be combined, so your top line you
13 could even use where it says "Out of Region", your
14 Phase 1, I guess this is the easiest way to do it, it
15 would be a $3.00 increase, so -- let me make sure that
16 I'm agreeing with the spread sheet that I have here -- so
17 it would be a $3.00 and -- yeah, $3.00 increase, so where
18 it says 15.07, it would now be 15, and Phase 2 would be a
19 $1.39 increase, so that would make it 16.39, and then
20 there would be no Phase 3 and then if you -- you could
21 just use the second, just the in region would end up
22 being the same for everybody.
23 Phase 1 in region would be, again, a $3.00
24 increase, so it would be 18.62 and then the Phase 2
25 increase would make it 20.01, and the measured service,
695
CSB REPORTING OWEN (Di)
Wilder, Idaho 83676 U S WEST Communications
1 if you go down to the next one, measured service, the out
2 of region would become 8.13 in Phase 1 and the out of
3 region measured service would be 8.52 in Phase 2, and
4 then -- am I going too fast?
5 MS. HAMLIN: Could you say that second part
6 again?
7 THE WITNESS: Yeah, the out of region,
8 Phase 2, the increase is only $.39 is so it becomes 8.52,
9 and then measured service in region would be 9.13 in
10 Phase 1 and in Phase 2 it would be 10.52.
11 Q BY MR. HOBSON: And for all of these
12 there's no Phase 3?
13 A And for all of these there's no Phase 3
14 and, again, I think when we finish doing everything, it
15 will come down a few pennies, but this is give or take
16 $.10. I'd say it's pretty darn close.
17 Q Are you also prepared at this point to give
18 us the ITAP and measured ITAP?
19 A I can. Okay, the ITAP would be, let's see,
20 out of region, Phase 1, this is flat, right, okay, flat
21 ITAP, it's labeled as "Unlimited," would be 11.46 in
22 Phase 1 and it would be $12.00 in Phase 2, and in region
23 unlimited ITAP is $12.00 in both phases; so the unlimited
24 actually does go down for ITAP customers, and -- well,
25 oh, I see, it's because of the rate group
696
CSB REPORTING OWEN (Di)
Wilder, Idaho 83676 U S WEST Communications
1 consolidation, never mind, so it would be $12.00. They
2 would have no phases there, just the first one.
3 Measured ITAP out of region would go to
4 4.59 in Phase 1 and 5.02 in Phase 2 and, again, no
5 Phase 3, and in region ITAP Phase 1 would be 5.59 and
6 Phase 2 would be 7.02.
7 Q Ms. Owen, you're going to appear in the
8 rebuttal case for U S WEST?
9 A Yes.
10 Q Could you commit to by that phase of the
11 case actually having an exhibit that reflects these
12 corrected numbers?
13 A Yes, I can.
14 Q And again, am I understanding you correctly
15 that one of the slight revenue requirement changes that
16 has affected your calculations occurred yesterday?
17 A Yes. I was going to say there is one other
18 thing, I don't know if now is the right time to mention
19 it, that would affect the calculation and although this
20 is part of my rebuttal, I did agree with Mr. Eastlake
21 that -- we agreed on the measured service restructure
22 where on residence, they'd now have 180 minutes of
23 calling that would be part of their rate and that every
24 minute after that, the U S WEST original proposal was
25 $.03 per minute and Mr. Eastlake was more comfortable
697
CSB REPORTING OWEN (Di)
Wilder, Idaho 83676 U S WEST Communications
1 with $.02 per minute and so in my rebuttal, I said I can
2 certainly do that and I can agree with that, so it would
3 mean the residence customer would experience -- that
4 chose measured service would even have a lower aggregated
5 rate, but it does then put a few more pennies back on the
6 flat customers and I will provide that impact as well at
7 the same time so the Commission can look at it that way
8 as well.
9 Q And also in the interests of making this
10 direct phase of the case a little more useful, did you
11 also reach an agreement with Staff on the restructuring
12 of the installation charges?
13 A Yes, we did. In my original proposal, I
14 had recommended a restructure of the installation charge
15 for residential basic exchange as it related to
16 additional lines and subsequent to that, I did agree,
17 again in my rebuttal testimony, to withdraw that
18 proposal. Those were the only changes.
19 MR. HOBSON: With that, Madam Chair, we
20 would tender Ms. Owen for cross-examination.
21 COMMISSIONER SMITH: Okay.
22 Mr. Howell, do you have questions for
23 Ms. Owen?
24 MR. HOWELL: My colleague does.
25 COMMISSIONER SMITH: Ms. Hamlin.
698
CSB REPORTING OWEN (Di)
Wilder, Idaho 83676 U S WEST Communications
1 CROSS-EXAMINATION
2
3 BY MS. HAMLIN:
4 Q Good afternoon, Ms. Owen.
5 A Good afternoon.
6 Q My name is Susan Hamlin. I'm a Deputy
7 Attorney General for the Commission Staff. First, I want
8 to ask you a clarification question. On page 5, you had
9 corrected the revenue number on line 4.
10 A Correct.
11 Q Does this reflect the EAS number or what
12 does this reflect?
13 A The original error -- the original figure
14 was a ball park figure that I just failed to correct at
15 the time we presented the final proposal, so it really
16 had nothing to do with the EAS. It was just I didn't
17 update it when I finalized my testimony.
18 Q Is it based on the EAS regions or the
19 measured?
20 A No, this is the per minute price only.
21 Q Okay. On page 12 of your testimony, you
22 state that alternative service providers entering the
23 marketplace are pricing business services below
24 U S WEST. Are there any Title 61 alternative providers
25 in Idaho today?
699
CSB REPORTING OWEN (X)
Wilder, Idaho 83676 U S WEST Communications
1 A I can't speak specifically for Idaho. To
2 the extent that someone may go in and try to go into a
3 shopping mall or something like that, we are seeing in
4 other states title -- well, what in another state would
5 also be Title 61, if they are in a dense area, they are
6 targeted by the competitors. Certainly, if they're a
7 stand-alone business out by themselves, they are not
8 being targeted, but if they were in a mini-mall, if you
9 will, or in a high rise building, they would be targeted.
10 Q But to your knowledge, there is not any in
11 Idaho today?
12 A I'm not aware of one one way or the other.
13 Q On page 7 of your testimony, you speak of
14 resellers in the term of repackagers. Is it your opinion
15 that resellers do not represent true competition?
16 A I think resellers represent competition and
17 I think the resellers represent businesses that have
18 pricing flexibility that can choose to enter and exit the
19 market and can act like you would in a truly competitive
20 marketplace. In my testimony, I deal with true
21 competition in a different perspective, although
22 certainly complimentary. I think one of the things that
23 we want to see happen and what most commissions have
24 wanted to see happen is that there is also
25 facilities-based competition.
700
CSB REPORTING OWEN (X)
Wilder, Idaho 83676 U S WEST Communications
1 We heard a discussion earlier today with
2 Mr. Cummings about can everyone truly keep up with the
3 demand for installing new lines and I think that's a very
4 legitimate question and the issue is if we're the only
5 facilities-based provider, can we in fact do that, so I
6 think the other piece of true competition is the
7 encouragement of an economically-based, facilities-type
8 competitor where it helps not only meet that pent-up
9 demand, if you will, but as well it provides other
10 benefits with tax base, increased jobs, et cetera.
11 Q On page 14 of your testimony, you stated on
12 line 21 that facilities-based competition is true
13 competition.
14 A Yes, I have it.
15 Q Based on what you just said a moment ago,
16 do you still hold that opinion?
17 A I certainly believe that in order for
18 competition in the telecommunications to occur, I think
19 it's going to occur initially on resale; however -- and I
20 think that the resale is going to drive some behaviors
21 that everyone in that market should be able to follow,
22 but to the extent that we want competition that is based
23 on economic efficiency, I think you need facilities-based
24 and I do discuss that in that section on the economic
25 efficiency concerns.
701
CSB REPORTING OWEN (X)
Wilder, Idaho 83676 U S WEST Communications
1 Q On page 8 of your testimony, you state that
2 local service providers or local service provided by
3 resellers is the same as local service provided by
4 incumbent LECs. Now, isn't it possible that a reseller
5 could buy up or add additional services to that what an
6 incumbent LEC is going to be offering?
7 A It's possible. When I talk about a
8 reseller, I really envision someone that is truly buying
9 the entirety of the service from the underlying carrier.
10 Certainly, if a competitor comes in and buys piece parts
11 of unbundled elements and perhaps provides their own
12 switching, that's different, but resale, I think they
13 generally buy most of our own products, but they may do
14 things like sell smart telephone sets that have speed
15 calling embedded in them, and if you're going beyond
16 that, I don't know what all they can offer if we're
17 providing the network, the switching, the underlying
18 services, such as directory assistance and operator
19 services, so I'm unsure what exactly you're thinking of.
20 Certainly, they could provide sets, but I'm not sure what
21 else they would have.
22 Q So in other words, they're not limited to
23 the specific service that they purchase from the
24 incumbent LECs, they could offer additional services?
25 A If there is a way to do it and still be a
702
CSB REPORTING OWEN (X)
Wilder, Idaho 83676 U S WEST Communications
1 reseller rather than a rebundler they could, yes.
2 Q Now, in your testimony, you have indicated
3 that the Company has made significant investment in
4 Idaho's plant over the last decade.
5 A That's correct.
6 Q Isn't it true that a substantial amount of
7 that investment was directed by the Commission in Tech
8 Plus and Tech II projects?
9 A That question would probably be better
10 asked of Mr. Wozniak.
11 Q Isn't it also true that U S WEST has made
12 significant reductions in expenses such as in the area of
13 work force over the past decade?
14 A I'm really not the right person to ask
15 that. I'm sorry.
16 Q Well, on page 19, you speak of the ITAP and
17 just for clarification purposes, at what 1FR rate do you
18 believe that the ITAP rate is no longer justified?
19 A Boy, that's a loaded question, isn't it?
20 It really is going to depend a lot upon a couple of
21 factors. No. 1, it's going to depend upon what the FCC
22 does in their universal service docket, so when we talk
23 about an ITAP rate, if you're talking about the net rate
24 that a customer would see, I guess I don't have in mind a
25 hard and fast number.
703
CSB REPORTING OWEN (X)
Wilder, Idaho 83676 U S WEST Communications
1 One of the problems, if you will, that I
2 envision in Idaho is that it's limited only to elderly,
3 60 and over, and I think that needs to be broadened, and
4 I guess I would want before I -- I'm sitting here, you
5 know, not knowing even what the income level needs to be,
6 it would be very difficult for me to say, well, it should
7 be $12.00, it should be 15. I don't have enough data
8 before me to tell you what that number should be in
9 Idaho.
10 MS. HAMLIN: I have no further questions.
11 COMMISSIONER SMITH: Thank you.
12 Mr. Harwood.
13 MR. HARWOOD: Thank you, Madam Chair.
14
15 CROSS-EXAMINATION
16
17 BY MR. HARWOOD:
18 Q Good afternoon, Ms. Owen.
19 A Good afternoon.
20 Q I'd like to direct you to your testimony at
21 page 17 and again continuing on the thought of the ITAP,
22 I-T-A-P, you indicate there on line 9 of page 17 that the
23 rate will be discounted from 22.50 to $12.00.
24 A Yes.
25 Q Is the $12.00 rate enough to cover
704
CSB REPORTING OWEN (X)
Wilder, Idaho 83676 U S WEST Communications
1 U S WEST's cost of providing residential service?
2 A No, it is not.
3 Q Will U S WEST's flat rated ITAP service be
4 made available for resale?
5 A You're asking me kind of a tough question
6 because a lot of the ITAP, we self-fund some of the ITAP
7 here, so to the extent that we self-fund, I would say
8 that if someone else purchased that from us, they would
9 have to self-fund that same difference. I'm not sure why
10 we would self-fund a customer of AT&T.
11 Now, with that caveat, Mr. Wozniak was
12 involved in the arbitration, I don't know if it came up
13 there, but as a person looking at it rationally, to the
14 extent we self-fund, I don't believe that we should
15 self-fund someone else's customers, although if there's a
16 3.50 discount for the end user common line charge, then
17 that would be available to anybody as long as it comes
18 from a universal fund.
19 Q Do you have any idea of what the amount of
20 your so-called self-funding is?
21 A I don't have it right in front of me. We
22 could go back to the -- let me see if I brought what
23 the -- I have some data on the telephone assistance plan
24 if you'll just bear with me a minute, Mr. Harwood. They
25 get the 3.50 discount of end user common line charge from
705
CSB REPORTING OWEN (X)
Wilder, Idaho 83676 U S WEST Communications
1 the federal as long as that's matched from the local. I
2 didn't bring up -- I thought I had the specific in Idaho,
3 so to the extent that it's 3.50 below the flat rated
4 service, any difference we are funding.
5 Q Okay.
6 A So without doing the math, hopefully that
7 helps.
8 Q You also indicate on line 10 there on
9 page 17 that measured ITAP service will be discounted
10 from 15.50 to $9.00. I assume your answer regarding
11 U S WEST's ability to cover costs is the same as in my
12 prior question?
13 A Yes, it is.
14 Q And is your answer on the availability of
15 that service for resale the same?
16 A Yes, it is.
17 Q I'd like to direct your attention to
18 pages 21 and 22 of your direct testimony and you
19 generally discuss U S WEST's EAS proposals and in there
20 you talk about forming two rate groups?
21 A Yes.
22 Q One would be for customers in newly-created
23 EAS regions and one for those not in new EAS regions?
24 A Well, those in EAS regions and those
25 outside of an EAS region, that would be correct.
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CSB REPORTING OWEN (X)
Wilder, Idaho 83676 U S WEST Communications
1 Q On page 22, lines 6 through 11, you talk
2 about the rationale for creating this two tier rate
3 structure, if you will.
4 A Yes.
5 Q And in there, you say that it's to
6 recognize the extra value to consumers in EAS regions?
7 A Yes.
8 Q Has U S WEST provided any cost evidence in
9 this case that supports your proposal on this issue?
10 A The EAS case was fully litigated in a
11 stand-alone docket, so any cost data that was applicable
12 was given to the Commission at that time. The costs and
13 prices that we now have in here are based on the embedded
14 costs as we are presenting in this case.
15 Q But isn't it fair to say that the figures
16 that you've used here also include some sort of value
17 judgment as to what this service is worth?
18 A Certainly, to the extent that we had in the
19 rate -- excuse me, in the EAS rate design piece,
20 certainly, we looked at that in the context of the entire
21 revenue requirement as presented by Ms. Wright, so to the
22 value judgment, yes, there was a value judgment involved
23 in that the customers in region were receiving a heck of
24 a lot more availability of local calling than those from
25 without, so we did try to put a differential between
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1 those two rates to recognize that.
2 Q Thank you. Turning to pages 23 and 24 of
3 your direct testimony, you discuss your proposed changes
4 to non-recurring charges.
5 A Yes.
6 Q And on page 24, line 15, you state that the
7 revenue impact of these proposals is a negative 140,000
8 and change?
9 A Yes.
10 Q Has this number changed at all as a result
11 of the Staff and U S WEST stipulation?
12 A Certainly not as a result of the
13 Staff/U S WEST stipulation, but it's changed because I've
14 totally withdrawn this proposal.
15 MR. HARWOOD: Okay. That's all the
16 questions I have. Thank you.
17 COMMISSIONER SMITH: Thank you,
18 Mr. Harwood.
19 Mr. Donesley.
20 MR. DONESLEY: Thank you, Madam Chairman,
21 Commissioners.
22
23
24
25
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1 CROSS-EXAMINATION
2
3 BY MR. DONESLEY:
4 Q Ms. Owen, my name is Brian Donesley and I
5 represent the AARP. Good afternoon.
6 A Good afternoon.
7 Q At page 10 of your testimony, you discuss
8 at lines 15 through 19 the pricing disparity between
9 residential and business service. You state that they
10 are fundamentally the same service and you state that
11 there's a lack of cost justification for the price
12 differential.
13 A Correct.
14 Q What are your thoughts with regard to the
15 concept of value of service pricing with respect to
16 commercial usage of telephone service?
17 A I think that the -- when we talk of value
18 of service pricing, I'm going to assume you mean
19 market-based pricing; in other words, you look at the
20 market and what rates are customers willing or not
21 willing to pay for a certain service and to the extent
22 that you look at value on an access line, I think there
23 is less and less differentiation between residence and
24 business on the value that a customer receives.
25 For example, if I work at home, I use that
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1 home phone line for access to my company's Internet. I
2 use it for receiving and sending faxes and a small
3 business may actually use their line less than I do as a
4 residential customer and so to then equate a value, how
5 do you put more value on it, I think for the Title 61
6 services we're talking about here, it's extremely
7 difficult to say there is a significant two-and-a-half
8 times more value that a small business customer receives
9 out of that line than a residential customer receives, so
10 I think that line is blurring. I don't think you have it
11 any more.
12 Q Do you have any data or studies that would
13 support what the market would define with respect to what
14 would be reasonable competitive rates in the commercial
15 with respect to local usage?
16 A We do have some, I wouldn't say they're
17 studies, per se, we have some market intelligence, if you
18 will, of what new competitive entrants are charging in
19 other localities. For example, in Washington, we have
20 competitors that are not differentiating at all between
21 residence and business service. They say this is your
22 line, this is your rate, use it for what you want to use
23 it. The rate I'm thinking of, and I apologize, I can't
24 remember the specific competitor's name, but they're
25 charging a flat $25.00 whether you're a residence,
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1 whether you're a business, this is it, and to that
2 extent, we're seeing even the new entrants having more of
3 a blurring of differentiating between residence and
4 business when they're providing the service over their
5 own facilities.
6 Q And the key difference would be which
7 provider owned the facilities with respect to where to
8 allocate the costs most efficiently with respect to
9 benefit to the company?
10 A Well, I believe that new competitors don't
11 allocate costs like we're doing in this docket. I think
12 competitors are assigning all of the costs caused by the
13 line to the line and to the extent that they provide
14 their own facilities, generally they're in the highly
15 dense, very close to the central office basis.
16 Q Is it your expectation that competition
17 will first arise in the commercial sector, then later, if
18 at all, in the residential market?
19 A And the question is probably best answered
20 that I think facilities-based competition will first come
21 to the high dense, a lot of profitability margin business
22 customer arena and to those customers on the residential
23 side that are very high telecommunications users. On the
24 resale side, however, I think you will see entrants
25 immediately through resale to both residence and business
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1 if new entrants feel they can in fact make a profit,
2 extract a profit, with those customers, so I think you're
3 going to see them both. I think how they're going to
4 enter may be different.
5 Q Is the answer that you expect to see more
6 competition in the commercial sector before we see the
7 competition in the residential?
8 A To the extent that we already have
9 competition in the commercial or business sector, yes,
10 but once resale is up and running, then I think it will
11 be much more diverse.
12 Q Now, you've discussed facilities
13 competition and I'm something of a layman at this;
14 nevertheless, I think what you're referring to is, for
15 example, U S WEST's situation where the hardware is owned
16 by the Company, U S WEST, the competition is going to
17 come in and won't necessarily have the hardware in place,
18 the switches, the wires, what have you; is that what you
19 mean by that?
20 A Generally, that's true and I think our
21 biggest concern is facilities-based is taking all of the
22 vast network that's in the ground or above aerially, the
23 cables, the wires, the fiber optics. We would like to
24 see the competition come in and invest in that same kind
25 of building of a network and, yes, that's what I'm
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1 talking about. The switch we think we'll see much more
2 quickly, but the loop part, the plant we don't think we
3 will see as quickly.
4 Q I believe you testified earlier with
5 respect to Staff questioning that true competition as
6 you've defined it in your testimony is possible,
7 nevertheless, even with a reseller market rather than a
8 facilities market with respect to potential competition
9 coming in; was that your testimony?
10 A My testimony is competition can take a
11 couple different avenues. Competition you can have via
12 resale in that there will be different packaging of
13 services. There may be piece parts of the service that
14 someone, they'll give you a telephone set, if you will,
15 if you'll buy the service from them. That's certainly a
16 form of competition and they have the ability to go into
17 whatever markets they want, they have the ability to exit
18 whatever markets they want, and they have the ability to
19 price at whatever level they so choose.
20 Another avenue of competition is the people
21 that build their own facilities. We initially saw that
22 in the competitive access providers arena, those people
23 that want to get the really high volume traffic from
24 AT&T. They are building and have been building for years
25 their own facilities. Now we're seeing it expand out to
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1 areas like the large businesses and where we would like
2 to see it go further is out to those less densely
3 populated areas that are further from a central office
4 and that are much more expensive to build, so you've
5 really got two kinds of competition that you're looking
6 at.
7 Q As a practical matter, the Idaho market or
8 the southwest Idaho market is a relatively small market
9 on a national scheme as these things go; would you agree
10 with that?
11 A Yes.
12 Q As a result, the profitability of that
13 investment of building or duplicating the U S WEST
14 facilities would likely be as a practical matter, again,
15 somewhat less desirable to potential competitors than to
16 enter into a reseller market scheme; is that accurate?
17 A You'd really almost need to ask a new
18 entrant. There are some that are entering some of the
19 smaller areas, whether it's a Boise, whether it's an
20 Albuquerque, a Santa Fe, they are entering some of the
21 smaller, what we would view as smaller, markets compared
22 to back East, like New York City, and your profit margin
23 is going to depend upon what they can provide that
24 service for and at what rate, so the margin may be less,
25 it may be greater, it's going to depend individually.
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1 Q Does it make sense that to the extent that
2 we allocate costs to the residential from the commercial
3 and to the extent that we abandon this value of service
4 pricing concept and go to a flat rate as between
5 residential and commercial, thereby shifting costs to
6 commercial [sic], what we're doing is making it more
7 pricey, more expensive, less attractive to competition in
8 Idaho and that market?
9 A No, that's absolutely incorrect. What is
10 happening is, No. 1, any time you allocate, there's going
11 to be arguments on what do you allocate and who do you
12 allocate it to. Based on reality, we know that the
13 average residential customer loop, which is the most
14 expensive part of providing service to a residential
15 customer, is it's longer than a business and that it's
16 not in as densely populated an area as a business, so to
17 the extent that today a business is allocated the same
18 amount of cost as a residence is allocated, it sends the
19 wrong economic signals to the new entrants because it's
20 saying the cost is the same for these two and it's simply
21 not, so what they can do, "they" being the new entrant,
22 they can go into the high dense areas, the ones close to
23 the central office, and build a fiber optic loop and then
24 totally ignore those customers that are out farther
25 because they don't think they can get their investment
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1 back from those longer loop, less dense customers and so
2 the way you're structured today actually sends more
3 incorrect signals to the new entrants than if you were to
4 have a better cost/price alignment between those
5 services.
6 Now, to the extent that a product is priced
7 above its cost, we still definitely use market-based
8 pricing, and I think you're calling it value of service.
9 I equate that to historically us deciding what the value
10 is rather than the customer deciding and I think on a
11 forward-going basis we do use market-based pricing on
12 what are the competitors doing, how are they pricing the
13 service, how are they packaging the service and what is
14 the customer willing to pay. We certainly have not
15 abandoned that and, as a matter of fact, hope to do even
16 more and more of that in the future.
17 Q So it's your testimony that these people
18 who want to come into Idaho to market this product are
19 misled by the pricing differential between residential
20 and commercial presently, they don't understand what the
21 dynamic is or how the pricing structures occur?
22 A It's a disincentive. I think a better
23 characterization of what I said is it's a disincentive to
24 them to go out into the residential arena. For example,
25 if it costs me $25.00 to install a line for a residential
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1 service out in Nampa and my price as U S WEST is only
2 $20.00 or $15.00, then is it going to make sense for a
3 competitor to come in and say, well, I'll provide that
4 service to you for $25.00, the customer is not going to
5 take it.
6 They would be more incented to go into
7 resale depending upon what the resale rate is and use
8 that exclusively, but in the business area where it's
9 high dense, low cost, they would probably be money ahead
10 to put in a fiber optic cable to a building, use the
11 distribution that's there or put their own distribution
12 in and they're money ahead because our business rates are
13 priced too high in relationship to the cost of the
14 investment, so what you're doing is you're driving
15 competitive behavior that is not predicated upon the
16 actual cost to provide the service and that's what is the
17 thing that we need to look at when we look at a rate
18 design proposal.
19 Q When we raise the cost to the consumer of
20 the residential service given the fact that U S WEST is
21 dominant, to say the least, in that market, in this
22 market, when we're raising the cost, are we not creating
23 disincentives to competition in that sector?
24 A No, adamantly no, we are not. We are
25 actually starting to send the right signals to both
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1 customers when we raise their price and say this is what
2 it truly costs us to provide you that service. At the
3 same time, if competitors can say, well, okay, it costs
4 me $25.00 to install that line and by golly, I can charge
5 $25.00 and still be competitive with U S WEST, it incents
6 that competitor to now go in with their own facilities
7 and compete for that customer.
8 Q Isn't it more likely that those new
9 entrants to the market will compete in the commercial
10 sector which you have now cut your price on, thereby,
11 again, discouraging competition?
12 A I'm not sure I understood your question.
13 Q In moving the costs from the commercial to
14 the residential or in reallocating those costs, if you
15 will, are you not diminishing the Company's exposure or
16 diminishing the Company's costs, thereby making it more
17 competitive to the people who are coming in, thereby
18 discouraging competition in the commercial sector while
19 U S WEST has already asserted its dominance again in the
20 residential sector and upped the price to play in that
21 game?
22 A No. I think you're not understanding the
23 dynamics of the competitive environment. Certainly, to
24 the extent that there's a high margin involved between
25 the price a business pays and the cost they incur to
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1 provide that service, the bigger the margin, the greater
2 the incentive to enter the field. If there's no margin
3 to enter the field, they won't enter it. When you bring
4 business prices down, you're sending the signals to the
5 competitors that, hey, we want to be competitive, we're
6 still covering all our costs, there still is a margin
7 involved in there and let's all play on the same level
8 playing field rather than requiring a business to in
9 essence help pay for the cost of the residential
10 customer.
11 I think the concern that I have in the way
12 you characterize the question is that we're shifting
13 costs. We're not shifting costs at all. We're looking
14 at what the costs are and who should pay for those costs
15 incurred. The way it's structured today, business is
16 paying a disproportionate share of the total costs
17 incurred by the Company. The business is not causing the
18 costs that they're paying for. The residential user is
19 causing the costs that they're paying for.
20 83 percent of the lines in Title 61 are
21 residential customers. They are not business customers,
22 so your predicate is wrong. The costs are not changing.
23 The only thing that's changing is we're recommending a
24 closer alignment, but we're not bringing or even
25 recommending we bring business and residence together.
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CSB REPORTING OWEN (X)
Wilder, Idaho 83676 U S WEST Communications
1 We're just saying a two-and-a-half times differential
2 between business and residence is simply not
3 appropriate. It sends the wrong economic signals. It's
4 not based on the right cost data and it doesn't really
5 encourage anyone to get out and build facilities to the
6 residential end user, so we're just taking one small step
7 here. We're not mirroring the rates. We're just trying
8 to get to a more rational pricing proposal.
9 Q It sounds like tough love.
10 A I wouldn't characterize it that way.
11 Q Just more thing, please. At page 16,
12 you're discussing the consumer price index, you describe
13 inflation at two to three percent per year.
14 A That's correct.
15 Q What relevancy does the consumer price
16 index have to either a regulated or a competitive market
17 given the prognosis which we've discussed here with other
18 witnesses that there may be a reduction in price and cost
19 of delivering the service based upon changes in
20 technologies and other market dynamics?
21 A The rate of inflation is relevant in that
22 all we're saying is that there have been gives and takes
23 in the telecommunications industry on what it costs to do
24 things. Switching costs have gone down, installation
25 costs of cable and wire have gone up, because as we
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CSB REPORTING OWEN (X)
Wilder, Idaho 83676 U S WEST Communications
1 become more and more developed, every time you have to go
2 in with a reinforcement, it costs more money to tear up a
3 street, redo the street, put the landscaping in, and to
4 the extent that there has been inflation, Idaho customers
5 have been very fortunate. They have not had a rate
6 increase in their basic residential line rate in over
7 10 years and to say inflation is not relevant simply is
8 inappropriate to me.
9 We have to look at if we had simply kept up
10 with inflation, all of the factors that go into the
11 inflation index, we are saying that just a simple overlay
12 you'd be looking at a rate of $19.00 and I think it's
13 definitely relevant. I think you have to look at what's
14 happened to the various piece parts, whether it's
15 material, whether it's labor, whatever it is. I mean,
16 labor alone has gone up probably more than the two to
17 three percent per year, so I'm not sure what you're
18 asking me.
19 I'm certainly not an expert like
20 Mr. Cummings or Mr. Easton is, but rationality tells me
21 that if there's been a rate of inflation and our costs
22 reflect some of that inflation, then why shouldn't others
23 such as the Idaho consumer also have to look at that in
24 their rates. I know in my other utility bills I have had
25 significant rate increases, so my answer is I think it is
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1 relevant and I think it's appropriate to overlay that.
2 MR. DONESLEY: Thank you very much. I have
3 no further questions of this witness.
4 COMMISSIONER SMITH: Thank you,
5 Mr. Donesley.
6 Mr. Phillips.
7 MR. PHILLIPS: Yes, thank you,
8 Madam Chair.
9
10 CROSS-EXAMINATION
11
12 BY MR. PHILLIPS:
13 Q Ms. Owen, what I'd like to talk about a
14 little bit or ask you about is the allocation of costs
15 between residential and commercial services. What caused
16 all of the technological improvement in the system that
17 has cost the Company considerable amounts of money? Has
18 it been the residential customer, demands of the
19 residential customer, or primarily voice carriage is all
20 that most of them are concerned about? Has that caused
21 some of the increase?
22 A Yes, definitely. Customers want faster
23 response time, for example, that you receive from the
24 switches. The customer demand, we have gone from simple
25 things like 10 years ago touchtone, for example, they're
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1 used to be a separate item associated with that, and I'll
2 tell you, like, for speed dialing, people now that can
3 dial 911 just with the flick of three buttons on their
4 phone, it has been driven by all customers, but it
5 certainly has been driven by residential customers as
6 well.
7 Q Now, a voice carrier can only go so fast,
8 your voice can't go more than a certain speed, I presume,
9 between the caller and the receiver?
10 A Unless you talk really fast.
11 Q Therefore, I question the fact that all of
12 this is occasioned by demand of the voice user of the
13 telephone system.
14 A Well, and I think one of the things you
15 can't lose sight of is that we've invested, like, half a
16 billion dollars in Idaho and I understand what your
17 question is, but a lot of that has simply been to
18 reinforce existing plant, it's been to meet the demand of
19 the growth that we've had here, and certainly to the
20 extent we do look at the economics involved and right now
21 it's cheaper for us to put fiber optics in than it is
22 copper in many instances.
23 We heard Mr. Easton earlier today talking
24 about we have fiber optics between central offices and
25 that's because of the volume of calls. It's much cheaper
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CSB REPORTING OWEN (X)
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1 to put fiber optics in than put in cable after cable
2 after cable of copper, so it's cheaper and it's better
3 service, and then as we replace feeder cable, you're
4 going to run into the same thing. The bigger the cable,
5 fiber optics make more sense, so when you say, well,
6 you're getting better service, you are getting better
7 service, you have more options.
8 Some customers use those other options,
9 some do not, and we have to build to what the economics
10 dictate we build to, as well as what customers, residence
11 as well as business, are asking us to do and the
12 work-at-home market has grown in leaps and bounds and the
13 last estimate I saw is that 35 percent of your people
14 work at home, at least some part of the time, so you've
15 got 35 percent of that residential market that may have
16 faxes, modems or use that home phone for business work,
17 so you have to build your facilities for all of those.
18 It's not just everybody wants digital service. What they
19 want is the ability to pick up the phone and get whatever
20 service they need at that time.
21 Q Let me tell you about my situation. I'm on
22 a coaxial cable now on my telephone. Somebody, U S WEST
23 run a fiber optic line right down in front of my place
24 from a business area that's six or seven blocks this way
25 to a business area that's six or seven blocks that way.
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1 What do you think demanded that additional cable?
2 A It could have been flat out just the need
3 for growth further out. The cables that come out of the
4 central office, you used to be able to go, like, to 4200
5 pair of cable with one cable, but now a fiber optic can
6 have hundreds of times more than that with a cable this
7 size and so it could be feeding a business area, it could
8 be the first leg in going from a central office out to an
9 interface point that then feeds all residential
10 customers.
11 I mean, I don't know exactly your
12 particular one, but it can as just as easily be a
13 long-term feed for residence as it could for business.
14 It could be interoffice facilities that allow you to make
15 long distance calls. I mean, all I can do is speculate,
16 but it would have been the economically right choice for
17 us to have made. The engineers actually do cost studies
18 to determine what makes the most sense and fiber optic
19 may mean if we install fiber optic today, we will not
20 have to reinforce that section for 10 years. If I
21 install copper, they may need to reinforce it next year,
22 so there's economic considerations that are looked at all
23 the time.
24 Q Really what demanded the change probably
25 was commercial.
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1 A No, I don't agree with that. I can't agree
2 with that.
3 Q As far as I know, there's not a single
4 residential telephone hooked up to that fiber optic cable
5 or line that runs through there.
6 A And there wouldn't be a direct connection,
7 but you have to understand that it depends on what that
8 optic cable is serving and the only thing we're dealing
9 with in this case is the amount of investment that has
10 occurred and on an embedded basis for the Title 61
11 people, so if that cable was 100 percent devoted to a
12 large business, then Mr. Elder, although he doesn't do it
13 on that specific of a basis, there is network that is
14 associated with the large businesses that are in the
15 Title 62 arena. It's not all being asked to be recovered
16 from people in this docket, the Title 61 customers.
17 MR. PHILLIPS: We probably won't agree, but
18 thank you anyway.
19 THE WITNESS: You're welcome.
20 COMMISSIONER SMITH: Mr. Fothergill.
21 MR. FOTHERGILL: Yes, ma'am, I have a few
22 questions.
23
24
25
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1 CROSS-EXAMINATION
2
3 BY MR. FOTHERGILL:
4 Q Good afternoon, Ms. Owen.
5 A Hello.
6 Q On page 2 of your testimony, if I can find
7 it, on line 20, you say as part of your purpose in this
8 is to explain why the U S WEST proposals are in the
9 long-term best interests of Idaho customers. Is it your
10 position that competition, however defined, and I've
11 heard a lot of them in here, is a long term -- is in the
12 long-term best interests of Idaho customers?
13 A Yes.
14 Q And is that a goal of this Company?
15 A Yes.
16 Q And on page 7, line 9 --
17 A I'm sorry, line 9?
18 Q Yes, ma'am.
19 A Thank you.
20 Q -- you say that, and I'm paraphrasing,
21 customers want simplified, easy to understand pricing and
22 U S WEST's rate simplification is designed to meet that
23 need. Do you think a near doubling of the rates will
24 provide simplified, easy to understand pricing to the
25 residential customers?
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1 A I think doubling of the rates is certainly
2 not part of the simplification. I don't think doubling
3 the rates has one way or the other an impact on the
4 simplification. The simplification I'm talking about
5 here is consolidating the rate groups into in region and
6 out of region which is much simpler and making the
7 measured service much simpler so that people, residential
8 customers, don't pay for their first 180 minutes of use
9 and with the new proposals we're not -- I think doubling
10 the rates is no longer true because the revenue
11 requirement has gone down significantly as well.
12 Q On page 12, line 14, we're talking about
13 new entrants in business markets and not in residential
14 markets, and is it your testimony we'll likely see new
15 entrants into -- this is following Mr. Donesley's
16 queries -- new entrants into residential service if the
17 rates are increased and as I recall you said yes, you did
18 think that?
19 A I think there's a greater likelihood, yes.
20 Q Is that one of the objectives of the
21 U S WEST pricing policy?
22 A To increase the ability -- U S WEST's
23 pricing policy is to send the correct economic signals to
24 the customers within the context of the revenue
25 requirement in this case.
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1 Q Is it a goal of the Company to increase
2 competition in that area, however defined?
3 A It's certainly a goal of the Company that
4 competition knows where it's reasonable to come in and
5 for us to have the flexibility to meet those competitive
6 pressures. I mean, I'm not going to sit here and say,
7 well, we want to lose customers.
8 Q I wondered about that.
9 A We want to retain our customers, but we
10 want to retain them in an area that gives us the ability
11 to remain competitive with those new entrants, whether
12 it's in flexibility in pricing or whatever it is and a
13 big piece of that is that the rates that we charge cover
14 the costs of that unique service.
15 Q Now, following on a question I believe
16 brought by the Deputy Attorney General, Ms. Hamlin, on
17 page 13, line 12 and others, too, you talk about the
18 competitive forces that U S WEST now faces make it
19 impossible for the Company to continue with business as
20 usual, and are there any competitive forces at all with
21 respect to residential provision of service?
22 A Yes, there are. You have the competition
23 of resale that we already talked about extensively and
24 the ability to price that in a manner that's totally
25 flexible. You have competition. We just heard
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Wilder, Idaho 83676 U S WEST Communications
1 announcements from AT&T last week of combining PCS,
2 personal communications services, with mobile or cellular
3 service and make it available for others. There's --
4 Q Let me stop you a moment. Just thinking of
5 my own residential service, I haven't received any calls
6 from competitors. I wonder where they are.
7 A My suspicion is that as the various
8 arbitration proposals are ruled upon that -- and,
9 obviously, the decision to enter a market is not ours.
10 The decision to enter that market is the new competitive
11 entrants.
12 Q But you do not now have competitive
13 entrants; is that not true?
14 A We do have competitive entrants on the
15 business side. To the extent that someone chooses to use
16 some alternative technology like cellular or wireless,
17 you do have, but to the extent that we have
18 facilities-based, no, we do not and until the resale
19 provisions are ordered by this Commission, we don't have
20 resale, that's correct.
21 Q And on page 17 or page 13, line 17, what is
22 meant by "true, facilities-based competition"? I'm so
23 mixed up in this competition. When I went to school,
24 which was a heck of a long time ago, competition meant so
25 many buyers and sellers of the same product in the same
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1 market that no one could influence price by its own
2 efforts. Now you've got two companies are competition,
3 true competition by your definition. I question the
4 whole thing because it -- we used call that duopoly and
5 if you had three or four, it was poly poly. Now, I'm
6 just wondering what is your -- the true definition, the
7 real definition of competition as you see it?
8 A I believe that competition is where a
9 company can come in and offer alternatives to the
10 customer. In Idaho, we already have two approved
11 contracts of companies that want to provide
12 telecommunications service and we have approximately 20
13 other providers who have filed for certification and six
14 wireless providers that have asked for certification and
15 so you're looking at 26 alternative providers who feel
16 they have some services to offer a variety of customers
17 in Idaho and I think competition is, therefore, the
18 ability to come in, offer customers choices, offer
19 customers alternatives in whatever manner they deem is
20 appropriate or makes economic sense to each individual
21 company and I think that will vary from company to
22 company on what manner they enter the market and what
23 customers they target.
24 Q I thank you. I have another question.
25 Let's see what page I'm at, I don't want to fool you,
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Wilder, Idaho 83676 U S WEST Communications
1 though, page 15, line 14, you talk about the advantage of
2 facilities-based competition and other intervenors have
3 asked about this and the thing that most alarms me about
4 your definition is the idea that we might have several
5 telephone companies putting up telephone poles on my
6 street. Now, is that what you're thinking about, the
7 infrastructure that provides telephone service to all
8 residential and business customers, that that could be
9 duplicated or replicated a number of times and what do
10 you think city hall would do about that?
11 A It's my belief that what you're depicting
12 is one of the things that was envisioned in the
13 Telecommunications Act. There are specific provisions
14 within the Act that allows for joint pole use, for
15 example, and it did want -- the legislature did want to
16 encourage facilities-based competition. Now, whether
17 that would mean duplicating poles and networks, I think,
18 yes, to some extent.
19 I think it also hoped to encourage new
20 technologies, like PCS service where they can go in and
21 target blocks of customers, if you will, but certainly, I
22 think one of the things it envisioned was
23 facilities-based competition in whatever form those
24 facilities took.
25 Q Do you think duplication of that
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CSB REPORTING OWEN (X)
Wilder, Idaho 83676 U S WEST Communications
1 infrastructure would be considered efficient?
2 A That's kind of a tough question. You know,
3 we originally became regulated and a lot of states
4 granted franchises because they didn't want the
5 duplication, but now it looks like the Congress believes
6 that with competition and with encouraging
7 facilities-based it will create economic efficiencies
8 through innovative technologies. I think that's the
9 long-term goal. Whether or not it will be realized, your
10 guess is as good as mine.
11 Q On page 15, Ms. Owen, line 6 --
12 A Fifteen?
13 Q Yeah. Maybe I've got it wrong, just a
14 minute.
15 A Because my line 6 is blank. Are you trying
16 to tell me something?
17 Q Mine's not too good either. Let me just
18 ask the question. Regardless of where it is, you'll
19 understand it.
20 A Okay.
21 Q It's regarding the CPI which an intervenor
22 has already asked about and you testify that the CPI is a
23 partial warrant, and I'm paraphrasing your testimony, for
24 the residential price increased requested by the Company,
25 and isn't it true that prices of some items go up and
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Wilder, Idaho 83676 U S WEST Communications
1 others go down all the time?
2 A Yes, it certainly is.
3 Q There is no representative price for any
4 particular commodity that consistently goes up, is there?
5 A Not that I'm aware of. I think it does
6 fluctuate.
7 Q Yeah, and there is no necessary
8 relationship between the CPI and telephone service?
9 A Well, I don't know that that's really true
10 to the extent that we've seen everything go up. I mean,
11 whether it's the price of bread, whether it's milk,
12 whether it's eggs, whether it's the price of a movie,
13 it's gone up over the last 10 years. My daughter goes to
14 college next year and I'll tell you, it's certainly gone
15 up in 10 years, so when you look at the general price of
16 everything, it has increased over the last 10 years. I
17 don't --
18 Q Isn't it also --
19 A -- care what it is.
20 Q Excuse me, I didn't mean to interrupt you.
21 Isn't it also true that other prices have gone down, such
22 as we have in this valley a large interest in chips and
23 Micron produces chips and the price of those chips has
24 plummeted in the last couple of years? Now, we didn't
25 anticipate that, Micron didn't anticipate that, but
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1 that's what happened.
2 A Well, and certainly to the extent that
3 there is something -- it's kind of like the price of a
4 VCR has gone down. I mean, there are some of those, but
5 your basic commodities, if you will, I think have
6 generally increased.
7 Q I have one further question and I don't
8 have a page number for it, but the reference is the
9 ITAP --
10 A Okay.
11 Q -- on which you testified. I wondered, a
12 question was brought to you and your response was we
13 don't know how to identify people who might be eligible
14 for ITAP that are under 60 years old.
15 A I wouldn't say we don't how to identify.
16 We don't know which is the best way to identify maybe
17 would be a better way to have stated it.
18 Q U S WEST covers a large number of states,
19 not just Idaho.
20 A Right, 14.
21 Q And I wonder what other jurisdictions do.
22 They must have the same problem come before them and I
23 wonder how they fall in this.
24 A There's quite a variety of what happens.
25 We actually have two states that don't have any ITAP
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CSB REPORTING OWEN (X)
Wilder, Idaho 83676 U S WEST Communications
1 program. For example, Nebraska has absolutely no ITAP
2 funding and so all of their customers pay a rate that is
3 the standard rate. There is no discount, and the other
4 one that doesn't have any is Iowa and yet, they have two
5 of the highest penetration levels in U S WEST's
6 territory.
7 Other states, four of the states have food
8 stamps as eligibility criteria. A couple of the other
9 states, I'm thinking of Arizona specifically, only gives
10 telephone assistance to senior citizens, so there's a
11 wide variety out there. Some are tied to food stamps,
12 some are tied to aid to dependent children. There's a
13 plethora of plans and there's all sorts of eligibility
14 requirements out there.
15 MR. FOTHERGILL: Thank you very kindly. I
16 appreciate your responses.
17 THE WITNESS: You're welcome.
18 COMMISSIONER SMITH: I think we're going to
19 take our afternoon recess. We'll take 15 minutes because
20 that's how long it will take me to write down everything
21 I know of that's at or below the price it was 10 years
22 ago.
23 (Recess.)
24 COMMISSIONER SMITH: Do the Commissioners
25 have any questions?
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1 COMMISSIONER NELSON: Yes, I do. Thank
2 you.
3 COMMISSIONER SMITH: Commissioner Nelson.
4
5 EXAMINATION
6
7 BY COMMISSIONER NELSON:
8 Q On your new proposal for measured service,
9 maybe you could just justify this inclusion of three
10 hours of calling time in the rate for me. I didn't see
11 much in there on that.
12 A The reason we've gone to that for the
13 residential customer is it kind of, like, mirrors the
14 best of both worlds. Most customers that 180 minutes
15 covers what their average local monthly usage is and
16 customers expressed dissatisfaction with us that they had
17 to really monitor each and every call before that and so
18 they really liked the idea that all they had to do was
19 monitor how many minutes they'd been on the phone. They
20 didn't have to monitor when they made the calls or that
21 kind of thing, so it was just a method to simplify the
22 rate and give them a certain amount of usage on a flat
23 rated basis, so it was really responding to residential
24 customer needs because we're only doing it on the
25 residence side, not the business.
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1 Q Well, I guess that surprises me because I
2 thought the whole motivation for taking measured service
3 was to get a lower rate and that most of the people who
4 chose that option weren't doing a lot of calling and so
5 the fact that you included three hours, three hours seems
6 like a long time to me, but I'd be real surprised if I
7 spent an hour-and-a-half on the phone a month.
8 A Well, it's kind of interesting because when
9 you look at some of the usage characteristics, there's a
10 lot of customers that make more than three hours,
11 residential customers.
12 Q Measured service customers?
13 A Measured service residential customers.
14 Q Are you saying I'd be surprised how much
15 time I really spend on the phone?
16 A You might be, yes, indeed, you might, so it
17 really was an attempt to try to give them the best of
18 both worlds, the lower rate and a flat amount of usage up
19 to a certain limit that met an average measured
20 customer's needs.
21 Q What did you go through to determine that
22 three hours of included calling was the amount to use?
23 A We did some usage studies of those
24 customers to see what looked like a reasonable amount and
25 the 180 minutes is higher than the average, but then it
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1 would cover those unusual circumstances. We actually,
2 let me see if I have it here, we've got some actual data
3 on --
4 Q Actual data?
5 A Scary, isn't it?
6 COMMISSIONER SMITH: As opposed to the
7 made-up stuff.
8 THE WITNESS: As opposed to made-up stuff,
9 yes, this is actual, but we had, like, 2,500 measured
10 service customers that would exceed the three-hour
11 limit. I thought that was a lot.
12 Q BY COMMISSIONER NELSON: In Boise?
13 A In Idaho, this is Idaho specific, so that's
14 a lot.
15 Q Because everyone in Boise thinks Boise is
16 Idaho.
17 A Right, I know. That's why I had to correct
18 it, so, no, it's all of Idaho.
19 COMMISSIONER NELSON: Thank you.
20 THE WITNESS: You're welcome.
21 COMMISSIONER SMITH: Commissioner Hansen.
22
23
24
25
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1 EXAMINATION
2
3 BY COMMISSIONER HANSEN:
4 Q Well, I might have missed the first part of
5 that question that Commissioner Nelson asked, but you're
6 saying -- what customer are you referring to when you're
7 talking about this average customer? Is this all the
8 customers or just customers that were on this
9 experimental measured program or what?
10 A What we did was we looked at existing
11 measured service customers in Idaho and we actually have
12 done it, looked at it, for almost all of our 14 states
13 and this plan is up and running in a lot of them. I
14 don't remember exactly how many, but we've instituted
15 it -- we are attempting to institute it all over our
16 14-state region to have a flat block of calling as part
17 of the measured package.
18 Q Do you feel it would be more attractive if
19 the minutes were, say, doubled to 360 minutes where it
20 would be 12 minutes a day, do you think that would give
21 people more of a choice? To me, it seems like it would
22 limit a lot of people that maybe really don't make that
23 many calls a day, but six minutes, you know, you could
24 call the doctor's office and be on hold for six minutes
25 before you got the nurse.
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Wilder, Idaho 83676 U S WEST Communications
1 A Well, that's true. Your problem is at some
2 point you need to differentiate between really flat
3 service and measured service, so as you increase that
4 amount of free calling or non-billable minutes of use, as
5 you increase that, you become -- get closer and closer to
6 really needing to charge the same service as if it was
7 flat rated, so the 180 minutes looked like a reasonable
8 point where you still have customers that still should be
9 taking measured service because it would make economic
10 sense to do so rather than to take flat, but yet then
11 give them some of the benefits, so it is a balancing act,
12 certainly, and I think if you went to, like, double that,
13 to 360 or something, you may be getting awfully close to
14 almost having flat rated service.
15 Q I see. I guess one area that has been
16 mentioned several times and by you previously is that
17 U S WEST hasn't had a rate case or a rate increase for
18 over 10 years.
19 A Right.
20 Q And I guess this is one thing I have a hard
21 time understanding is why you would wait 10 years to come
22 before the Commission with a rate case. Did this just
23 happen all at once or would you say five years back or
24 when did you first realize that you had a problem in your
25 rate structure that it wasn't paying its way?
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1 A I can give you my personal experience.
2 I've been representing residence basic exchange for
3 probably, I hate to date myself, but I'd say five or six
4 years and when I first assumed this responsibility, we
5 were at that time really looking at cost/price
6 relationships and so company-wide, I'd say we were moving
7 away from the historical residually-based pricing. You
8 know, you'd come up with a revenue requirement and you'd
9 put it on everything until you had to finally put some on
10 residence, that's how we used to do it. It was called
11 the residually-based pricing rather than pricing based on
12 an analysis of the cost, and some of that was done for
13 public policy reasons.
14 You know, years ago we didn't have really
15 high penetration rates, we wanted to encourage people to
16 subscribe to service and that was one of the methods that
17 we could do it because we could then overprice, if you
18 will, some other services to make up the difference of
19 the actual cost, and I would say five or six years ago we
20 began recognizing that things were changing. Certainly,
21 we could see competition in the interLATA long distance
22 market and we started seeing competitive access providers
23 as early as five years ago who were coming in and taking
24 the access revenues for the really high volume routes and
25 that was another high contribution area for us, so it's
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1 kind of like a wake-up call and we said, well, we've
2 really got to start looking at where are we incurring the
3 costs, what are those costs and how should we recover
4 them.
5 Now, Idaho specific, I can't remember when
6 we signed up for the revenue sharing plan, but part of
7 that, I think we had a rate case right before we went
8 into it and then at that point in time we had a revenue
9 sharing plan that gave us the opportunity to earn at a
10 level that we deemed appropriate with Commission
11 oversight and this rate case is kind of an outcome, I
12 would say, of that. Now, to give the specific Idaho
13 history, Jim Wozniak could help with that more, but mine
14 is kind of a more global perspective.
15 Q Okay, I guess let me just try this on and
16 see if this is kind of a similar situation. Let's say,
17 for an example, I owned a gas station and I was selling
18 diesel and regular gasoline and oil and all these
19 different products and I was making a pretty good profit
20 off of the diesel and the oil and different things and
21 all of a sudden -- and I was the only service station in
22 town and all of a sudden I heard that another service
23 station was moving in and they could sell regular, that's
24 all they could sell, and so I'd take a look and say,
25 well, what is this regular gasoline costing me in
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1 allocating the cost and all of a sudden I'd say, I've got
2 to double the cost of my regular gas. I don't have to
3 worry about diesel and I don't have to oil, I'm not going
4 to count those profits any more because I've just got
5 this one product that's going to be competitive, so I've
6 got to double that cost in order to survive. I guess the
7 question that I'm kind of leading to, is it because you
8 have to allocate your costs different now that all of a
9 sudden you need this drastic increase in rates or I
10 shouldn't say drastic, but, I mean, you know, you're
11 looking if you double rates, that's a pretty healthy
12 amount, is that the reason is because of allocating your
13 costs different?
14 I guess, you know, you talk about revenue
15 sharing and I know that's ended and I know the dollars
16 that were involved there, but this seems to be a lot
17 bigger than just ending revenue sharing and so my
18 question, I guess, is really are we just loading this
19 whole thing on one customer, that's the residential
20 customer, to pay that particular share where in the past
21 it was kind of allocated to a larger number of people and
22 similar to the gas station that had a lot of different
23 products and now we just zero in on one, is that the
24 reason why we need this right now and at the magnitude
25 that you're asking for?
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CSB REPORTING OWEN (Com)
Wilder, Idaho 83676 U S WEST Communications
1 A Let me give you kind of a circular answer
2 because I think there are a couple of different questions
3 you had in there, so tell me when I'm done if I didn't
4 answer what you're asking me.
5 Q I probably have four or five.
6 A Or you might have had four or five. I was
7 trying to catch them all. First of all, the rate today
8 is about $12.00 in Boise and then assuming that the EAS,
9 if we include the 3.62 for EAS, you're up to 15.62, so
10 now we're down to, like, only a 4.50 increase, so
11 certainly, to the extent that we've lowered the revenue
12 requirement in the case and we're building upon the EAS
13 that this Commission ruled on that the rate increase is
14 really fairly, it's a heck of a lot smaller, it's about a
15 25 percent increase rather than a doubling, but why are
16 we doing it.
17 My understanding of the revenue requirement
18 piece is that the allocation of those costs that we're
19 talking about, we're really not changing them from our
20 last case. My understanding is we had 15 percent to toll
21 and we had 25 percent to the interstate jurisdiction and
22 I believe it's very similar in what we're proposing in
23 this case, so we haven't done anything dramatic to the
24 allocation in this case, but what I think you do see
25 happening, and Idaho is unique the way that we are
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CSB REPORTING OWEN (Com)
Wilder, Idaho 83676 U S WEST Communications
1 regulated, it's the only state we have quite this same
2 type of regulation, but I think as a general rule, we are
3 seeing significant declines in the revenue for some of
4 those Title 62 services and we're not trying to recover
5 that revenue from the Title 61 services, but the reality
6 is that the more you allocate to Title 62, you are making
7 a basic supposition that we will continue to have a
8 sustainable amount of revenue there and that's simply not
9 true.
10 In the intraLATA toll market and Idaho
11 specific, we have already sustained significant market
12 share loss, and what that means is that if we try to
13 allocate an even higher amount of network costs to long
14 distance, I can't sustain that from a competitive
15 environment. I can't sustain a $.20 a minute rate or a
16 $.25 a minute rate in long distance and still win
17 customers, and so to the extent that you have Title 61
18 services and their revenues are being eroded, we talked
19 earlier about the large business customers, that's what's
20 going to be targeted first, long distance is going to be
21 targeted and certainly access to the extent that there
22 are big access routes, they're going to be targeted and
23 so what you have is you have a balancing of what makes
24 sense to allocate to what service and I think in this
25 proposal, I thought we had a pretty moderate proposal in
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CSB REPORTING OWEN (Com)
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1 what we proposed to allocate.
2 If it was mine to do and we didn't have the
3 same regulatory structure here, I would say that every
4 service should cover their own costs. I wouldn't
5 allocate anything of the loop to long distance or access
6 or anything else, but we are here and we tried to bring a
7 moderate proposal and I think really what it reflects is
8 the amount of investment that we've actually incurred
9 here, so I think that you have to, although we're really
10 only talking Title 61, I think there has to be an
11 implicit understanding that Title 62 revenue is going to
12 go away over time, at least to some extent, and I have
13 long distance as one of my products as well and Idaho has
14 one of the largest intraLATA market share losses in our
15 14-state region and we just lost the State of Idaho long
16 distance contract because we could not match the MCI
17 price of $.10 a minute for long distance, that's below
18 our imputed price for us, so we just couldn't even
19 compete and I think you're going to see more of that, so
20 it's kind of a long answer. Hopefully, it responds to
21 what you're asking me.
22 Q Very good. Just to clarify, did I hear you
23 correctly, then, it's a result of allocating the
24 different expenses and revenues that really has brought
25 about the rate increase at this time; is that correct,
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CSB REPORTING OWEN (Com)
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1 then?
2 A Well, I don't know if you want to say the
3 allocation is what brought about the increase. The
4 amount of money we've invested in Idaho certainly is a
5 primary driver in what has brought it about, because I am
6 doing my rate design based on the revenue requirement for
7 the Title 61 services, and my point about the allocation
8 is that the allocation I think we're doing here that
9 Ms. Wright and Mr. Elder presented is a very reasonable
10 one and if I had my druthers, I'd allocate more, which I
11 don't think Staff would like, but I'm just saying I think
12 the allocation the way it's presented is reasonable.
13 It's about a 60 percent to Title 61 and 40 percent to
14 Title 62 and I don't think much greater allocation than
15 that is sustainable.
16 Q One other question I have and this is on a
17 different subject, but you talked about competition in
18 the rural areas a little bit and a question I've had for
19 some time and just hadn't got it answered is do you see
20 the rural, less populated areas that were included in the
21 EAS regions, do you see that they will have a competitive
22 advantage that those rural areas not included in the EAS
23 would not have? I guess I'm just -- I've just had this
24 question if you're a small rural area and you're tied to
25 a larger area such as Pocatello or Idaho Falls and those
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CSB REPORTING OWEN (Com)
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1 areas or Boise, will that give you the opportunity to
2 participate in competition more than a rural area that's
3 still served by U S WEST that may not be included in an
4 expanded area calling?
5 A Right, and that's a good question. It's
6 kind of a tough one to answer. I'll speculate because I
7 don't know what AT&T or MCI Metro or whoever will do.
8 It's my belief that I think they'll come in on a resale
9 basis and offer service to those customers whether or not
10 they're in a Boise EAS region or whether they're a
11 stand-alone exchange that doesn't have the opportunity to
12 call a great many other exchanges.
13 I do think that some of the smaller
14 resellers, the smaller companies will focus more on those
15 in the EAS region, I suspect, but I do think, again, in
16 either scenario it's more likely it will be on a resale
17 basis rather than on a facilities basis.
18 Q So you do think there's a slight advantage
19 for those that are included in the larger calling areas?
20 A I think there might be. Again, I'm
21 speculating, but from an administrative point of view, it
22 might be easier for a small company to administer an EAS
23 area rather than some individual exchanges.
24 COMMISSIONER HANSEN: Thank you. That's
25 all the questions I have.
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1 EXAMINATION
2
3 BY COMMISSIONER SMITH:
4 Q Ms. Owen, if I heard you correctly earlier,
5 you made a statement to the effect that 35 percent of
6 residential customers work at home at some time or
7 another?
8 A That was something I read.
9 Q That was my question, is that Idaho based?
10 Is that U S WEST Idaho LATA based?
11 A National.
12 Q And you don't even remember where you read
13 it?
14 A I think I read it in PC World or something
15 like that, but I can't cite you the source.
16 Q So maybe it was PC World subscribers.
17 A I didn't think so, but it was a national
18 number. It wasn't an Idaho number.
19 Q As I say, it's surprising. I mean, just in
20 my circle of acquaintances, I wouldn't think it was
21 anywhere near that high. In your conversation with
22 Commissioner Hansen, I want to be sure I understand, is
23 it your belief that cost allocation should be made on the
24 basis of whether or not you can have sustained revenue
25 streams?
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1 A No.
2 Q Okay, and when you mentioned that you
3 couldn't compete for the State of Idaho contract because
4 you couldn't meet the price, it was below your imputed
5 price floor, is your imputed price floor based on the
6 access charges that are set by U S WEST Communications
7 itself?
8 A Yes, they are and then we impute over those
9 floors, that is correct.
10 Q Okay.
11 A In order to meet that contract, we would
12 have had to reduce all access prices in anticipation and
13 still not knowing if you're going to get the contract, so
14 the issue was really imputation. The issue was not cost
15 in that case, if that makes sense.
16 Q Well, it was a rate that U S WEST set for
17 itself that caused the imputed price.
18 A Yes, that made the imputed price what it
19 was, that's correct.
20 Q On page 18 of your testimony, you're
21 talking about the ITAP proposal and I know you're not an
22 attorney so I don't want to ask a legal question, but I'm
23 just curious whether anyone discussed with you whether
24 the Company's proposal would require a change in the
25 Idaho statute.
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CSB REPORTING OWEN (Com)
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1 A It's my understanding that we said we would
2 be willing to do this until we could have some kind of
3 joint proposal before the legislature in 1998; so in
4 other words, we would do some self-funding, if you would,
5 over and above the current ITAP and then, yes, we would
6 go to the legislature with a joint proposal.
7 Q You don't think they'd care that we just
8 kind of ignored what they had and did our own little
9 thing?
10 A That's my understanding, yeah, we could for
11 that temporary period of time. Is that what you're
12 asking me?
13 Q Yes.
14 A No one told me I should be concerned from a
15 legal perspective, how is that?
16 COMMISSIONER SMITH: That's good.
17 Do we have redirect, Ms. Hobson?
18 MS. HOBSON: No redirect.
19 COMMISSIONER SMITH: Thank you for your
20 help, Ms. Owen.
21 THE WITNESS: Thank you.
22 (The witness left the stand.)
23 COMMISSIONER SMITH: Ms. Hobson.
24 MS. HOBSON: U S WEST calls Jim Wozniak.
25
752
CSB REPORTING OWEN (Com)
Wilder, Idaho 83676 U S WEST Communications
1 JAMES E. WOZNIAK,
2 produced as a witness at the instance of U S WEST
3 Communications, Inc., having been first duly sworn, was
4 examined and testified as 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 My name is James E. Wozniak. My last name
12 is spelled W-o-z-n-i-a-k.
13 Q What is your business address?
14 A My business address is 999 Main Street in
15 Boise.
16 Q Where are you employed and in what
17 capacity?
18 A I'm employed by U S WEST Communications as
19 the director of regulatory affairs for Idaho.
20 Q Mr. Wozniak, in connection with that
21 employment, did you cause to have filed with this
22 Commission, prepare and cause to have filed with this
23 Commission, certain written testimony consisting of
24 21 pages dated June 28, 1996?
25 A Yes, I did.
753
CSB REPORTING WOZNIAK (Di)
Wilder, Idaho 83676 U S WEST Communications
1 Q Mr. Wozniak, am I correct that there were
2 no exhibits that accompanied that testimony?
3 A That's correct.
4 Q Do you have any corrections, changes,
5 deletions to make to that testimony at this time?
6 A I do not.
7 Q Mr. Wozniak, you've been sworn by the
8 Commission, if I were to ask you the questions contained
9 in that prefiled written testimony today, would your
10 answers be the same?
11 A They would.
12 MS. HOBSON: With that, Madam Chair, we
13 would ask that Mr. Wozniak's direct testimony be spread
14 upon the record as if read and will tender Mr. Wozniak
15 for cross-examination.
16 COMMISSIONER SMITH: If there's no
17 objection, it is so ordered.
18 (The following prefiled direct
19 testimony of Mr. James Wozniak is spread upon the
20 record.)
21
22
23
24
25
754
CSB REPORTING WOZNIAK (Di)
Wilder, Idaho 83676 U S WEST Communications
1 Q. PLEASE STATE YOUR NAME, ADDRESS AND
2 POSITION WITH U S WEST COMMUNICATIONS.
3 A. My name is James E. Wozniak. I am the
4 Idaho Director -- Regulatory Affairs for U S WEST
5 Communications, Inc.1 My office is located at 999 Main
6 Street, Boise, Idaho.
7 Q. PLEASE STATE YOUR BACKGROUND AND
8 QUALIFICATIONS.
9 A. I received a B.A. degree in General
10 Business from Boise State University in 1970 and a
11 Master's degree in Business Administration from the
12 University of Denver in 1971. I joined U S WEST
13 Communications' marketing department in Boise in August,
14 1973. I later moved to Idaho Falls, Idaho, and managed
15 the Idaho National Engineering Labratory account until
16 1979. I then worked in U S WEST Communications'
17 corporate marketing department in Denver, Colorado. In
18 1980, I returned to Boise to become the District Manager
19 of residential services. In August, 1983, I assumed my
20 present position of Regulatory Affairs Director for
21 Idaho.
22 Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY IN
23 THIS CASE?
24 A. I will explain why I believe the increase
25 to residential local exchange prices and the
755
JAMES E. WOZNIAK - DI 1
U S WEST Communications, Inc.
1 establishment of depreciation schedules consistent with
2 today's telecommunications environment is critical to the
3 maintenance and future development of Idaho's public
4 switched network. I will highlight why I believe the
5 Commission, in making its decisions in this case, should
6 depart from historic pricing
7
8 /
9
10 /
11
12 /
13
14
15
16
17
18
19
20
21
22
23 1 For the sake of this testimony, all references to
U S WEST Communications and U S WEST refer to
24 U S WEST Communications, Inc. and have no connection to
the U S WEST Media Group or its subsidiaries.
25
756
JAMES E. WOZNIAK - DI 1A
U S WEST Communications, Inc.
1 and depreciation practices if it is to ensure the
2 continued growth of modern networks and service offerings
3 in the largely rural state of Idaho.
4
5 Q. WHY HAS U S WEST CHOSEN TO FILE THIS
6 GENERAL RATE CASE NOW?
7 A. The Company is not making a reasonable
8 return on its economically regulated operations in Idaho.
9 Although the Revenue Sharing Plan has worked well for
10 both the Company and its customers in Idaho for the past
11 several years, it was developed at a time which did not
12 contemplate the new operating environment we have today.
13 It is now necessary to formally establish the allocation
14 of costs between its economically regulated and
15 deregulated operations in Idaho.
16
17 Q. WHAT IS THE NEW OPERATING ENVIRONMENT?
18 With the passage of the Telecommunications
19 Act of 1996 the rules which govern this industry have
20 changed. Those historic rules provided for a quid pro
21 quo arrangement in which telecommunication companies
22 agreed to provide "universal service" through social
23 pricing of basic residential service, in exchange for a
24 "monopoly" in the local exchange market. Such social
25 pricing of basic residential service can only exist in a
757
JAMES E. WOZNIAK - DI 2
U S WEST Communications, Inc.
1 monopoly market because the incumbent local exchange
2 provider could charge higher prices for other services
3 (primarily business, toll and access services) in order
4 to accommodate lower prices for basic residential
5 service -- a concept embodied in the historical practice
6 of residual pricing by most regulatory commissions prior
7 to the introduction of competition.
8
9 /
10
11 /
12
13 /
14
15
16
17
18
19
20
21
22
23
24
25
758
JAMES E. WOZNIAK - DI 2A
U S WEST Communications, Inc.
1 The exchange of universal service for a
2 monopoly market has been ended by the Telecommunications
3 Act of 1996, which opens local exchange markets to
4 competition. The historical, but uneconomic, practice of
5 pricing business, toll and access services in order to
6 support lower basic residential service prices can no
7 longer be sustained.
8 The Commission, in deciding this case,
9 should acknowledge the significance of this change and
10 make some difficult, but necessary decisions which will
11 assist U S WEST, its customers and the rest of the
12 industry to move from yesterday's operating environment
13 to a dramatically different way of doing business. The
14 Commission's decisions in this case will play a vital
15 role in determining the future of telecommunications in
16 the rural state of Idaho.
17
18 Q. YOU DESCRIBED THE HISTORICAL PRICING
19 PRACTICES AS BEING SUSTAINABLE ONLY IN A "MONOPOLY"
20 MARKET, BUT HASN'T MUCH OF THE TELECOMMUNICATIONS MARKET
21 IN U S WEST'S SERVING AREA BEEN OPEN TO COMPETITION IN
22 IDAHO?
23 A. Yes, it has. U S WEST made an election
24 under Idaho's telecommunications provisions to
25 economically deregulate most services other than basic
759
JAMES E. WOZNIAK - DI 3
U S WEST Communications, Inc.
1 residential and small business service and thus opened
2 those other, Title 62, services to competition. While
3 the market for intrastate toll, network access and basic
4 business service (for customers with six or more lines)
5 was opened in 1989, no other provider has yet entered the
6 local service market and historic pricing practices
7 continued to be relatively sustainable.
8
9 /
10
11 /
12
13 /
14
15
16
17
18
19
20
21
22
23
24
25
760
JAMES E. WOZNIAK - DI 3A
U S WEST Communications, Inc.
1 More recently, even prior to the passage of
2 the federal act, we have seen a more aggressive pursuit
3 of intrastate toll by other interexchange carriers, and
4 the appearance of alternative local transport providers.
5 Today there are approximately 150 long-distance companies
6 actively providing some level of service in Idaho. The
7 passage of the federal act only hastened competition and
8 the need to address historical pricing practices.
9
10 Q. WHAT DO YOU SEE THEN AS THE FUNDAMENTAL
11 ISSUES WHICH MUST BE ADDRESSED BY THE COMMISSION IN THIS
12 CASE?
13 A. I see those issues as being pricing,
14 capital recovery and the elimination of implicit
15 subsidies.
16
17 THE PRICING ISSUE
18
19 Q. HOW HAVE PRICES FOR LOCAL SERVICE BEEN
20 ESTABLISHED IN THE PAST?
21 A. In the design of rates as part of a general
22 rate case, local residential service prices have
23 typically been residually priced; that is, all other
24 services have been priced first to recover as much of the
25 revenue requirement as possible. Then the residual
761
JAMES E. WOZNIAK - DI 4
U S WEST Communications, Inc.
1 revenue requirement was met through adjusting the local
2 service prices. As a matter of past practices for
3 U S WEST in Idaho, business local service prices were
4 priced at about 2.5 times the residential local service
5 price even though it is essentially the same service.
6 Through this practice, residential prices have been kept
7 artificially low in support of Universal Service goals.
8 The problem we face
9
10 /
11
12 /
13
14 /
15
16
17
18
19
20
21
22
23
24
25
762
JAMES E. WOZNIAK - DI 4A
U S WEST Communications, Inc.
1 today as we move into the multi-provider market, however,
2 is that these low prices will not support the investment
3 necessary to provide the service.
4 The Idaho Commission has done a commendable
5 job under historic, rate-of-return regulation and the
6 Revenue Sharing Plan in helping build one of the nations
7 best telecommunications infrastructures. However, in the
8 new environment, past pricing practices will not suffice.
9 Smaller, less populous communities will attract less
10 investment and rural customers will have fewer choices.
11 Those higher priced business, toll and access services
12 providing financial support to residential service will
13 be increasingly subject to competitive attack, and their
14 contribution to residential service will continue to
15 erode. The provision of alternative fiber networks by
16 Idaho Power Company to major Boise business customers is
17 a good example of this.
18 Residential service prices must begin to
19 cover more of its provisioning costs. Otherwise,
20 competitive, facilities-based choices will flow initially
21 only to those residential customers who are heavy users
22 of communications and who are the least costly to serve.
23
24 Q. WHAT COMPETITIVE INVESTMENT INCENTIVES DO
25 YOU BELIEVE ARE CREATED BY THESE PAST PRICING PRACTICES?
763
JAMES E. WOZNIAK - DI 5
U S WEST Communications, Inc.
1 A. Competitive investment will occur first
2 where the opportunity for profits is greatest -- in
3 general, where there is the greatest concentration of
4 high volume customers, accessible through the least
5 amount of investment. This will likely be in the
6 business market in Idaho's largest communities. The
7 result will be downward pressure on business local
8 service prices and reduced contribution from
9
10 /
11
12 /
13
14 /
15
16
17
18
19
20
21
22
23
24
25
764
JAMES E. WOZNIAK - DI 5A
U S WEST Communications, Inc.
1 these services. Residential and small business customers
2 in smaller Idaho communities where facilities-based
3 competition is less likely will face increased prices as
4 this occurs.
5
6 Q. WHAT SHOULD BE DONE TO LOCAL PRICES IN THIS
7 CASE?
8 A. In the near-term, prices for residence
9 local service must move toward covering the costs of the
10 service with some contribution to joint and common costs
11 as well as a profit contribution. For business service,
12 this means prices will probably remain stable or move
13 somewhat lower.
14 Q. BUT DOESN'T COMPETITION RESULT IN LOWER
15 PRICES?
16 A. Not necessarily. If prices are
17 substantially above cost -- a likelihood in most
18 unregulated markets -- competition will drive prices
19 downward toward their costs. But where prices are
20 substantially below cost -- a phenomena that is not
21 unusual for some services in regulated markets --
22 competition will drive prices upward toward their costs.
23 One only has to contrast the unregulated computer market
24 with the previously regulated airlines market.
25 At one time, IBM was the initial, pervasive
765
JAMES E. WOZNIAK - DI 6
U S WEST Communications, Inc.
1 participant in the computer market. It was able to
2 command premium prices for its computers. The entry of
3 Apple, Compaq, Texas Instruments and a host of other
4 computer providers resulted in a vibrant, competitive
5 market which drove prices downward toward costs and
6 introduced technological change. Products improved and
7 costs were reduced. It is a textbook example of a
8 competitive market.
9 In contrast, the airline industry was
10 heavily regulated in the areas of prices, serving
11 territory, operating rules and entry and exit. In an
12 effort to broaden
13
14 /
15
16 /
17
18 /
19
20
21
22
23
24
25
766
JAMES E. WOZNIAK - DI 6A
U S WEST Communications, Inc.
1 the availability of airline service to many parts of the
2 country, the government engaged in "social" pricing.
3 Heavily traveled, low-cost routes were overpriced in
4 order to "subsidize" lightly traveled, high-cost routes.
5 When the airline industry was deregulated and competition
6 was introduced, prices moved toward costs. The prices
7 went down on the heavily traveled, low-cost routes and
8 the prices increased on the lightly traveled, high-cost
9 routes. While this may seem unfair to rural customers,
10 the same phenomenon is likely to occur in the
11 telecommunications market as the new federal policies are
12 implemented.
13 Unlike the airlines industry which was
14 economically deregulated, state commissions continue to
15 regulate the incumbent local exchange providers in the
16 telecommunications industry. The decisions of the
17 commissions should now begin to reflect the competitive
18 marketplace. Reluctance to accept the new competitive
19 model would only exacerbate the eventual impact of moving
20 to competitive market pricing.
21 Prices in a competitive environment must
22 reflect three pricing realities. They must cover the
23 cost of providing the service, they must reflect
24 competitive conditions and, finally, they must reflect
25 the customers' willingness to pay based on the value they
767
JAMES E. WOZNIAK - DI 7
U S WEST Communications, Inc.
1 attach to the service. In this docket, the Company is
2 asking the Commission to take the first necessary step in
3 transitioning this industry to the new environment by
4 moving residential prices closer to their costs.
5 Q. MR. WOZNIAK, WHAT ARE THE "COSTS" IN THIS
6 DOCKET UPON WHICH YOU BELIEVE PRICES MUST BE ESTABLISHED?
7 A. Those costs are the Title 61 operational
8 costs which have been identified by Mr. Elder through use
9 of the Cost Accounting Allocation System
10
11 /
12
13 /
14
15 /
16
17
18
19
20
21
22
23
24
25
768
JAMES E. WOZNIAK - DI 7A
U S WEST Communications, Inc.
1 (CAAS) study. For the first time since the passage of
2 the Telecommunications Act of 1988, this Commission is
3 being asked to decide the appropriate method for
4 allocating costs between Title 61 and Title 62
5 operations. Based upon its findings in this case, the
6 Commission needs to price Title 61 services, basically
7 local service for residential and small business
8 customers, to recover those operational costs.
9
10 Q. WHAT FACTORS MAKE PRICING IN THIS CASE
11 DIFFERENT FROM PAST RATE CASES?
12 A. Passage of the federal legislation requires
13 this Commission to consider the long-term impacts of its
14 pricing decisions in light of that legislation.
15 Competition will not occur ubiquitously nor
16 simultaneously in all of Idaho. The recent federal
17 legislation exempted rural markets served by incumbents
18 and mandated prompt resolution of federal universal
19 service funding to support high-cost service areas. But
20 rural markets are just as vulnerable if U S WEST is the
21 incumbent provider. Loss of high-margin markets without
22 concurrent adjustments to residential local prices would
23 deny U S WEST the funds necessary to continue its
24 historical level of investment in rural Idaho
25 communities. Pricing of local service must then provide
769
JAMES E. WOZNIAK - DI 8
U S WEST Communications, Inc.
1 sufficient funds to continue necessary investments to
2 provide service.
3 Q. ARE THERE OTHER FACTORS WHICH ALSO MAKE
4 PRICING IN THIS CASE UNIQUE WHEN COMPARED TO PAST RATE
5 CASES?
6 A. In this rate case, there are far fewer
7 services over which revenue recovery may be realized. In
8 the past, it was not unusual to recover as much revenue
9 as possible from toll, business and other optional
10 services first before residually pricing residential
11 local service. The docket before us narrows the
12
13 /
14
15 /
16
17 /
18
19
20
21
22
23
24
25
770
JAMES E. WOZNIAK - DI 8A
U S WEST Communications, Inc.
1 options for recovering the revenues U S WEST needs to
2 remain viable in Idaho. The Company is recommending the
3 majority of its needed revenues be recovered through
4 increases to residential local service. Increases on
5 some small business services are achieved through rate
6 group consolidation and through slight increases to
7 business measured service.
8
9 Q. WHY IS THAT PRICING DESIGN NECESSARY FROM
10 YOUR VIEWPOINT?
11 A. The Title 61 basket of services is
12 comprised primarily of residence and small business local
13 service, while these services are essentially the same,
14 they are priced dramatically differently. Business
15 service is priced about 2.5 times higher than residence
16 service. There are some differences in the cost of
17 providing these services, residential loop facilities
18 tend to be longer and business usage tends to be higher
19 during certain hours, but essentially they are
20 technologically very similar.
21 Recognizing the technological similarity
22 between these services, one must conclude that either one
23 of the services is over-priced or one of the services is
24 under-priced. Since the Company has a positive revenue
25 requirement in this case, there is no opportunity to
771
JAMES E. WOZNIAK - DI 9
U S WEST Communications, Inc.
1 reduce the over-priced business service, therefore, one
2 must conclude that residential service is underpriced and
3 the revenue requirement must be spread primarily to that
4 under-priced service. Company witness Owen provides
5 additional support in her testimony for this approach.
6
7 Q. THE SECOND PRICING REALITY YOU MENTIONED
8 WAS THAT PRICES MUST REFLECT COMPETITIVE CONDITIONS. HOW
9 CAN U S WEST
10
11 /
12
13 /
14
15 /
16
17
18
19
20
21
22
23
24
25
772
JAMES E. WOZNIAK - DI 9A
U S WEST Communications, Inc.
1 JUSTIFY ASKING THIS COMMISSION FOR GUARANTEED EARNINGS
2 BASED ON PRICES ESTABLISHED BY THE COMMISSION RATHER THAN
3 THROUGH COMPETITIVE MARKET FORCES?
4 A. The Company is not seeking a "guarantee".
5 Further, although the direction is toward a fully
6 competitive market, that is not the situation we have in
7 Idaho today.
8 In a fully competitive telecommunications
9 market, prices would have to cover relevant economic
10 costs and would reflect the market value of the service.
11 The Company would be free to determine its own pricing,
12 its market entry and exit strategies and its
13 depreciation schedules. So long as this Commission
14 mandates the provision of service -- including service to
15 competitors -- and controls U S WEST's prices, the
16 Company is entitled to a reasonable opportunity to
17 recover its cost of providing service and to earn a
18 reasonable profit.
19 Q. WHAT DO YOU UNDERSTAND TO BE THE
20 OBLIGATIONS OF THIS COMMISSION AND OF U S WEST WITH
21 REGARD TO THE SETTING OF PRICES DURING THIS
22 "TRANSITIONAL" PERIOD PRIOR TO THE DEVELOPMENT OF A
23 ROBUST, FULLY COMPETITIVE MARKETPLACE?
24 A. Until a truly competitive marketplace
25 exists, there are different requirements imposed upon the
773
JAMES E. WOZNIAK - DI 10
U S WEST Communications, Inc.
1 regulator and U S WEST. In the first instance, the
2 regulator is obligated to establish prices for services
3 which recover all actual costs including a reasonable
4 profit. Absent fully competitive conditions, the
5 reasonable contribution to profit should be a uniform or
6 average mark-up to the actual costs; in this docket that
7 mark-up would be the cost of capital.
8
9 /
10
11 /
12
13 /
14
15
16
17
18
19
20
21
22
23
24
25
774
JAMES E. WOZNIAK - DI 10A
U S WEST Communications, Inc.
1 This requirement is consistent with
2 government's constitutional obligation to provide just
3 compensation for the use of the U S WEST's property. So
4 long as the regulator obligates U S WEST to invest for
5 the provision of service to the public and also controls
6 the pricing of that service, the regulator is obligated
7 to ensure that the Company recovers its costs, including
8 a return on its investment. The introduction of
9 competition into the local exchange market has done
10 nothing to change that obligation.
11
12 Q. AND WHAT IS THE OBLIGATION OF U S WEST WITH
13 REGARD TO SETTING PRICES DURING THIS TRANSITION PERIOD?
14 A. The Company is obligated, where permitted
15 by the regulator, to price services at or above their
16 relevant costs so as to avoid anti-competitive conduct.
17
18 Q. THE THIRD PRICING REALITY YOU MENTIONED WAS
19 FOR PRICES TO REFLECT CUSTOMERS' WILLINGNESS TO PAY BASED
20 ON PERCEIVED VALUE. DO WE YET KNOW, FROM A MARKET
21 PERSPECTIVE, WHAT THAT LEVEL REALLY IS?
22 A. No. A "market" in the true sense of the
23 word has not existed for basic local exchange service.
24 In fact, in my opinion, many residential customers really
25 don't know exactly how much they pay for local service.
775
JAMES E. WOZNIAK - DI 11
U S WEST Communications, Inc.
1 They tend to view their billings for local, intra-Lata
2 toll, inter-Lata toll, surcharges, taxes and optional
3 services as one amount. Absent choices they have not had
4 the opportunity or the necessity to indicate their
5 willingness to pay.
6
7 /
8
9 /
10
11 /
12
13
14
15
16
17
18
19
20
21
22
23
24
25
776
JAMES E. WOZNIAK - DI 11A
U S WEST Communications, Inc.
1 As market forces begin to work in the local
2 exchange arena, customers will be faced with more choices
3 and options which will be priced to cover relevant
4 economic costs. It is then that customers will decide
5 their willingness to pay based on their perceived value
6 of local telecommunications service.
7
8 Q. ARE YOU SUGGESTING THE COMMISSION ABANDON
9 UNIVERSAL SERVICE GOALS IN ORDER TO ALLOW THE MARKET TO
10 ESTABLISH A "WILLINGNESS TO PAY"?
11 A. Of course not. The Commission will
12 continue to have an important role in maintaining
13 universally available, affordable service to high-cost
14 areas and to those who are economically disadvantaged.
15 But I think the design of that effort, like most other
16 aspects of this industry, must change with the times. It
17 must focus upon truly high-cost areas and on those
18 customers who are most at risk of losing service.
19 The present, "broad-brush" approach which
20 holds residential local service prices artificially low
21 for all customers, regardless of their ability or
22 willingness to pay, will only frustrate efforts by new
23 entrants to enter a highly subsidized market and will
24 prevent consumers from casting their "dollar votes".
25 Clearly there are those individuals who
777
JAMES E. WOZNIAK - DI 12
U S WEST Communications, Inc.
1 need assistance either through subsidized pricing or
2 through availability of lower-priced options in order to
3 retain their service. However, I find it difficult to
4 believe that the majority of residential subscribers
5 wouldn't equate the value of one month's unlimited local
6 telephone service to that of having a nice dinner, to a
7 months worth of electronic home entertainment, or to the
8 cost of taking the family to a movie. I believe this
9 majority of customers can afford to pay compensatory
10 prices for local service and will still find
11
12 /
13
14 /
15
16 /
17
18
19
20
21
22
23
24
25
778
JAMES E. WOZNIAK - DI 12A
U S WEST Communications, Inc.
1 value in the transaction --- they will not need to be
2 "protected" in an environment where they can choose
3 among alternate providers. It is this majority of
4 customers who will establish the market value of the
5 service. For those who need continued support, the
6 current system of supports should be refined to be more
7 efficient, more targeted and to be competitively-neutral
8 to all providers.
9 U S WEST has recognized its responsibility
10 for the maintenance of universal service through two
11 pricing alternatives discussed by Ms. Owen -- a measured
12 option for low volume users, and a subsidized rate for
13 those most in need of assistance. It is our hope that
14 this latter option will become the focal point for future
15 legislation which will provide direct, explicit funding
16 from all service providers for the maintenance of this
17 service rather than requiring the Company to support it
18 through internal pricing mechanisms.
19
20 THE ISSUE OF CAPITAL RECOVERY
21
22 Q. THE SECOND FUNDAMENTAL ISSUE WHICH YOU
23 MENTIONED IN THIS CASE IS THAT OF CAPITAL RECOVERY. WHY
24 IS THIS A SIGNIFICANT TRANSITIONAL ISSUE?
25 A. Because the "rules" for this industry have
779
JAMES E. WOZNIAK - DI 13
U S WEST Communications, Inc.
1 changed significantly and because, in a rural state like
2 Idaho, this is a critical financial component which any
3 company, including U S WEST, must consider in making
4 future investment decisions.
5 Unlike in the past single-provider
6 environment, the Commission's ability to assure
7 investment recovery from a "captive" customer base over
8 an
9
10 /
11
12 /
13
14 /
15
16
17
18
19
20
21
22
23
24
25
780
JAMES E. WOZNIAK - DI 13A
U S WEST Communications, Inc.
1 extended period of time based upon negotiated asset lives
2 is not compatible with a competitive, multi-provider
3 market. In addition, as Mr. Easton demonstrates on page
4 11 of his testimony, the Company's depreciation lives are
5 not competitive with those of existing, financially
6 strong telecommunications providers now seeking to enter
7 the local exchange market. Today's depreciation rates,
8 therefore, will not allow the Company to recover its
9 present or future investment on a competitive basis.
10 This means the Company will not be able to reinvest as
11 quickly in new infrastructure or new services to meet the
12 competition.
13 U S WEST will, of course, compete
14 vigorously in the lucrative business markets where
15 facilities-based competition is most likely to occur, but
16 for those smaller, less lucrative markets, it will be
17 difficult to justify significant new investment which
18 takes years to recover let alone to earn a reasonable
19 return on that investment.
20 It is particularly for customers in the
21 smaller communities, which constitute a large percentage
22 of the customer base, that the Idaho Commission needs to
23 implement a more realistic capital recovery program for
24 U S WEST in Idaho. Without this change these customers
25 will be faced with fewer choices and a less advanced
781
JAMES E. WOZNIAK - DI 14
U S WEST Communications, Inc.
1 network --- they may eventually become the "have nots".
2
3 Q. WHAT'S WRONG WITH THE CURRENTLY PRESCRIBED
4 DEPRECIATION LEVELS FOR U S WEST IN IDAHO?
5 A. They simply do not reflect the shorter
6 lives used by competitors for the existing asset base.
7 This is particularly critical given the rapid advancement
8 of technology and the change to a competitive market.
9
10 /
11
12 /
13
14 /
15
16
17
18
19
20
21
22
23
24
25
782
JAMES E. WOZNIAK - DI 14A
U S WEST Communications, Inc.
1 In his testimony, Mr. Easton speaks at
2 length about another serious problem he refers to as a
3 depreciation reserve deficiency. This is basically a
4 shortfall in depreciation; an under recovery of today's
5 embedded network investment. If this issue is not
6 rectified in this case, it will create for U S WEST a
7 competitive hardship in the future and jeopardize its
8 ability to continue to invest in Idaho's public switched
9 network.
10 In effect, failure to fully recover today's
11 technology investment in current prices requires the
12 Company to recover both today's under-recovered
13 investment along with any new investment in future prices
14 paid by future customers. This may be sustainable in a
15 single-provider market, but in a multi-provider market,
16 customers with choices will not tolerate this
17 "generational subsidy" and will most likely switch to
18 another provider where the price/value relationship is
19 more attractive. Those future customers in small
20 communities who may not have a choice of provider will be
21 stuck paying for both current as well as past investment.
22 With a smaller base of future customers, that burden will
23 be greater than if the Commission acts now to eliminate
24 this generational subsidy.
25
783
JAMES E. WOZNIAK - DI 15
U S WEST Communications, Inc.
1 Q. HASN'T U S WEST BEEN ABLE TO ESTABLISH ITS
2 OWN DEPRECIATION LEVELS UNDER THE REVENUE SHARING PLAN?
3 A. The Commission has allowed the Company to
4 increase its depreciation expense so long as it does not
5 expect its Title 61 services to fund any additional
6 expense beyond that which was authorized in its 1985
7 represcription case. The net effect of this has been
8 that Title 62 revenues have funded the additional expense
9 which, in turn, has benefited Title 61 services. As
10 pointed out in Ms. Wright's
11
12 /
13
14 /
15
16 /
17
18
19
20
21
22
23
24
25
784
JAMES E. WOZNIAK - DI 15A
U S WEST Communications, Inc.
1 testimony in Exhibit No. 26, the Company has increased
2 its depreciation expense by approximately $57M since 1991
3 and has funded this effort without seeking Title 61 price
4 increases. For this same five year period since 1991,
5 the Company's portion of revenues from the Sharing Plan
6 has totaled $48M. In other words, the Company has booked
7 $9M more in depreciation than it has realized through the
8 Sharing Plan.
9 The point of this is that, although the
10 Sharing Plan did not require Title 61 services to fund
11 any of this increased expense, neither did it require the
12 Company to implement this additional expense. As a
13 result of doing so, however, Title 61 services will
14 benefit because of the reduction in rate base created by
15 the expense bookings. As shown in Ms. Wright's Exhibit
16 No. 27, the Title 61 rate base has been reduced by almost
17 $21M as a result of the Company's efforts to rectify its
18 capital recovery problem. This has clearly been a
19 Sharing Plan benefit for users of Title 61 services.
20 This practice, however, cannot continue in the face of a
21 competitive, multi-provider market. Going forward, all
22 services must be priced to reflect reasonable,
23 competitive capital recovery schedules if U S WEST is to
24 remain a viable provider of telecommunications services
25 in Idaho.
785
JAMES E. WOZNIAK - DI 16
U S WEST Communications, Inc.
1 ELIMINATION OF IMPLICIT SUBSIDIES
2
3 Q. THE THIRD FUNDAMENTAL ISSUE YOU MENTIONED
4 WAS THE ELIMINATION OF IMPLICIT SUBSIDIES. WHY DO YOU
5 SEE THIS AS BEING A CRITICAL ISSUE IN THIS CASE?
6 A. Mixing subsidy pricing in a competitive
7 environment is like mixing oil and water --- it can't be
8 done. Although this practice was sustainable in a
9 single-
10
11 /
12
13 /
14
15 /
16
17
18
19
20
21
22
23
24
25
786
JAMES E. WOZNIAK - DI 16A
U S WEST Communications, Inc.
1 provider environment where customers simply paid the
2 prices established through regulation, it is not
3 sustainable in a market where customers have choices and
4 where providers work overtime to serve profitable market
5 "niches".
6 It's really no secret where the money and
7 the opportunity, given rational business decisions, is in
8 the telecommunications market --- its in sophisticated
9 business and data services, its in long-distance and
10 access services and its in densely populated cities where
11 thousands of customers can be served using the newest of
12 advanced technologies. It is not in the rural, less
13 populated "voice" markets where customers are expensive
14 to serve.
15 Because of its smaller size and rural
16 nature, Idaho is not a prime target for major investment
17 by facilities-based providers. If this Commission
18 continues the practice of maintaining artificially low
19 residential rates through implicit subsidies, there will
20 be no incentive for other providers to build alternative
21 networks to serve residential customers. It will simply
22 be in their economic best interest to resell or "rebrand"
23 U S WEST's network at prices being subsidized by
24 U S WEST's customers. I therefore believe that unless
25 hidden, implicit subsidies are removed from residential
787
JAMES E. WOZNIAK - DI 17
U S WEST Communications, Inc.
1 local service prices, competition in most of Idaho's
2 communities will initially be limited to artificial
3 competition in the form of reselling or "rebranding" of
4 U S WEST's facilities. These customers' choices will be
5 limited to which provider's name they want on their bill,
6 but the underlying service will continue to be delivered
7 through the incumbent provider's network.
8
9 /
10
11 /
12
13 /
14
15
16
17
18
19
20
21
22
23
24
25
788
JAMES E. WOZNIAK - DI 17A
U S WEST Communications, Inc.
1 Q. WHY IS THE DEVELOPMENT OF GENUINE,
2 FACILITIES-BASED COMPETITION IMPORTANT TO IDAHO'S
3 TELECOMMUNICATIONS FUTURE?
4 A. Because it is the foundation of providing
5 customers with real alternatives and true choices. For
6 genuine competition to exist, providers must be able to
7 differentiate their products not only on price, but also
8 on features and functionality.
9 Q. WHAT DOES THE DEVELOPMENT OF
10 FACILITIES-BASED COMPETITION HAVE TO DO WITH THE
11 ELIMINATION OF IMPLICIT SUBSIDIES ON A GOING-FORWARD
12 BASIS?
13 A. As new, facilities-based competitors
14 consider entering the market they will make sound
15 business investment decisions. That is, they will
16 initially target the sophisticated, more densely
17 populated Idaho communities; they will "niche" those
18 markets because that is where the opportunity is.
19 Because these markets provide funding for implicit
20 subsidies, the contribution toward covering U S WEST's
21 overall Title 61 operating costs will shrink. In turn,
22 this will put upward pressure on prices in the smaller,
23 less attractive markets. Customers in these areas may
24 see higher prices and fewer real choices since
25 facilities-based providers will not initially see
789
JAMES E. WOZNIAK - DI 18
U S WEST Communications, Inc.
1 opportunity in these communities.
2 The Company will compete with these
3 providers in these niche markets by countering with new
4 services and by meeting lower service prices. The
5 implicit subsidies flowing from those services with high
6 profit margins will dry up. The subsidy "burden" will be
7 lifted from these services through the process of
8 competition. Eventually, the market will drive subsidy
9 funding to an explicit basis. I
10
11 /
12
13 /
14
15 /
16
17
18
19
20
21
22
23
24
25
790
JAMES E. WOZNIAK - DI 18A
U S WEST Communications, Inc.
1 encourage this Commission to take decisive action in this
2 case to manage that process to the benefit of all
3 Idahoans.
4
5 Q. WHAT ACTION DO YOU RECOMMEND THIS
6 COMMISSION TAKE NOW TO ENSURE A ROBUST TELECOMMUNICATIONS
7 MARKET FOR ALL IDAHOANS IN THE FUTURE?
8 A. The Commission should consider development
9 of an explicit, targeted and competitively neutral method
10 of fully funding Universal Service if it is to continue
11 to ensure high levels of subscribership to those who may
12 not otherwise be able to afford or maintain service.
13 Also, the reliance on implicit subsidies
14 such as the imputation of millions of dollars worth of
15 advertising revenues --- revenues from a highly
16 competitive, non telecommunications service --- which
17 creates artificially low residential local service prices
18 should be eliminated. While there has certainly been a
19 history of relying on these advertising revenues during
20 the single-provider era, and although it is
21 understandably difficult for the regulator to walk away
22 from this practice, its continuance, nevertheless,
23 represents a significant obstacle to the development of
24 genuine, facilities-based competition in Idaho.
25 The Commission can avoid this situation by
791
JAMES E. WOZNIAK - DI 19
U S WEST Communications, Inc.
1 eliminating implicit subsidies in pricing and by
2 establishing competitively-neutral, explicit Universal
3 Service support mechanisms. On February 8, 1996, the
4 telecommunications environment changed significantly for
5 our nation and for Idaho --- its now time for this
6 Commission to also change outdated, past practices and
7 find new approaches for ensuring its vision of a modern,
8 widely-available telecommunications
9
10 /
11
12 /
13
14 /
15
16
17
18
19
20
21
22
23
24
25
792
JAMES E. WOZNIAK - DI 19A
U S WEST Communications, Inc.
1 infrastructure for all Idahoans This is a critical first
2 step in laying the foundation for continued excellence in
3 Idaho telecommunications.
4
5 CONCLUSION
6
7 Q. MR. WOZNIAK, WILL YOU PLEASE SUMMARIZE YOUR
8 TESTIMONY?
9 A. Yes. This general rate case, coming on the
10 heels of federal legislation which has forever changed
11 the provision of telecommunications services in Idaho and
12 our nation, is one of the most important and difficult
13 U S WEST cases this Commission will decide. While there
14 will obviously be other major cases for the Company in
15 Idaho, it is in this case that the Company asks the
16 Commission to address some of the most basic,
17 long-standing and fundamental issues. Those fundamental
18 issues include compensatory pricing for residential local
19 service to cover costs and to permit true,
20 facilities-based competition; the establishment of
21 capital recovery practices which will support continued
22 investment in a healthy public network available to all
23 Idahoans; and the elimination of discriminatory, implicit
24 subsidies which are incompatible with a multi-provider
25 market.
793
JAMES E. WOZNIAK - DI 20
U S WEST Communications, Inc.
1 Since 1984, prices for residential local
2 service have been relatively stable --- they are among
3 the lowest in the nation despite the fact that, in Idaho,
4 this service includes touch tone signaling, access to
5 basic custom calling features, trouble isolation and, for
6 most customers, the ability to transmit data at a rate of
7 at least 9600 bits per second. The network in Idaho is
8 among the country's best. It is characterized by digital
9 switching, fiber optic transmission and the use of
10 digital
11
12 /
13
14 /
15
16 /
17
18
19
20
21
22
23
24
25
794
JAMES E. WOZNIAK - DI 20A
U S WEST Communications, Inc.
1 carrier systems capable of automatic trouble detection
2 and correction. U S WEST has introduced exciting new
3 services that our customers want to Idaho including Voice
4 Messaging, Caller ID and Frame Relay. By year's end,
5 will have custom calling features available to nearly 95%
6 of our customer base. These services are here not
7 because Idaho represents the Company's largest market,
8 but because we've had a healthy business environment and
9 because the Idaho Commission has had the vision and the
10 courage to explore new alternatives for Idaho.
11 There are several underlying questions
12 before this Commission in this general rate case. Will
13 Idaho's telecommunications infrastructure continue to be
14 among the best in our nation? Will we continue to foster
15 an environment where new services and modern
16 infrastructures are available to all customers regardless
17 of where they live? Can we continue to avoid the
18 distinction between the "haves" and "have nots". The
19 Commission's decisions in this case will be instrumental
20 in answering these questions.
21
22 Q. DOES THIS CONCLUDE YOUR TESTIMONY?
23 A. Yes.
24
25
795
JAMES E. WOZNIAK - DI 21
U S WEST Communications, Inc.
1 (The following proceedings were had in
2 open hearing.)
3 COMMISSIONER SMITH: And Mr. Howell returns
4 just in time. Oh, I'm sorry, Susan. Ms. Hamlin, sorry.
5 MS. HAMLIN: Thank you.
6
7 CROSS-EXAMINATION
8
9 BY MS. HAMLIN:
10 Q Good afternoon, Mr. Wozniak.
11 A Good afternoon.
12 Q Mr. Wozniak, do you believe that there is
13 competition for Title 61 basic local service in
14 residential and small business markets in Idaho today?
15 A I think there's some competition in the
16 form of wireless-type services. I'm also aware that
17 there have been two competitive local exchange providers
18 that have been certified, Western Wireless and Citizens,
19 by this Commission and that we have negotiated agreements
20 with them. What their activities might be, I don't know.
21 Q To your knowledge, are there any
22 facilities-based providers currently providing Title 62
23 basic service in Idaho today in U S WEST's territory?
24 A I know that a firm called GST has put some
25 fiber optic investment in the downtown Boise area and has
796
CSB REPORTING WOZNIAK (X)
Wilder, Idaho 83676 U S WEST Communications
1 had a number of announcements or meetings talking about
2 provisioning of local service, but, again, I don't know
3 of any specific customers.
4 Q Does GST have an interconnection agreement
5 with U S WEST currently?
6 A At this point we do not, no.
7 Q So it's true that residential customers in
8 Idaho cannot acquire wire line services from anyone other
9 than U S WEST in U S WEST's territory?
10 A At this moment in time, I believe that's
11 true.
12 Q On page 5 of your direct testimony, you
13 discuss how rural and small communities will not be the
14 area of attack for competition. In fact, on page 5,
15 line 20 through 23, you state that you believe
16 high-priced business customers will be targeted when
17 competition begins. Do you see where I'm referring to?
18 A Yes, I was on my rebuttal, I'm sorry.
19 Page 5, line 20, yes, I see that.
20 Q Would it be more accurate to say that the
21 Company is actually preparing for competition to its
22 Title 62 business customers?
23 A I don't think that you can necessarily
24 limit it to that. My impression, although I'm not a cost
25 expert, in listening to a lot of discussion about cost
797
CSB REPORTING WOZNIAK (X)
Wilder, Idaho 83676 U S WEST Communications
1 studies lately is that some of the most influential
2 inputs to costs and, therefore, the economics of
3 provisioning services, is density and so I think that
4 whether you have a Title 62 business community or whether
5 you have a very densely populated residential community,
6 particularly one that might be influential and buy a lot
7 of vertical services and place a lot of toll, I think
8 that a facilities investment could go to either one of
9 those kinds of communities.
10 Q Let me try this another way. Do you expect
11 competition to happen to residential customers or
12 business customers with five lines or fewer in the rural
13 areas of Idaho?
14 A Excuse me, was it competition or
15 facilities-based competition? Would you repeat the
16 question, please? I'm sorry.
17 Q Well, maybe I need to clarify. What is
18 your definition of "competition"? We have Mary Owen
19 stating at one point in her testimony that true
20 competition was facilities-based. How are you defining
21 competition?
22 A I think we have had a lot of discussion
23 today and yesterday on competition. I think you can look
24 at competition both from the eye of the consumer as well
25 as the provider. From a consumer's perspective, I think
798
CSB REPORTING WOZNIAK (X)
Wilder, Idaho 83676 U S WEST Communications
1 you have competition when you have a viable alternative
2 available to the consumer. That would be my definition
3 of competition from the purchaser's perspective.
4 From a provider's perspective, I think you
5 also may have competition when you have viable
6 alternatives, but I think you have greater benefits of
7 competition when that competition is based on facilities,
8 different facilities, or facilities-based as opposed to
9 simply resale.
10 Q Do you expect facilities-based competition
11 to be competing for residential or small business
12 customers with five lines or fewer in Idaho in the rural
13 areas?
14 A I think in the rural areas we're going to
15 see resale as a predominant form of competition.
16 Q Okay. On page 5 of your testimony, your
17 direct testimony, you reference Idaho Power as an example
18 of an alternative provider of fiber networks to major
19 businesses in Boise. Now, I assume when you're talking
20 about the Idaho Power case or Idaho Power, you're
21 referring to the dark fiber case that this Commission has
22 considered in the past?
23 A Yes, that's true.
24 Q Are you aware that the Commission issued a
25 declaratory order in the dark fiber case that Idaho Power
799
CSB REPORTING WOZNIAK (X)
Wilder, Idaho 83676 U S WEST Communications
1 was not a telecommunications provider?
2 A I believe that's true.
3 Q And when the Commission solicited comments
4 in these cases, did U S WEST oppose Idaho Power supplying
5 the dark fiber?
6 A No, U S WEST didn't oppose that,
7 Ms. Hamlin. The purpose of that sentence in that
8 particular answer is to indicate that U S WEST no longer
9 has an exclusive franchise on providing high speed data
10 and private line circuits that are sought by businesses,
11 services which have high margins in which we have
12 traditionally relied upon to support the operations of
13 the Company. Lots of people can provide fiber these
14 days, including Idaho Power, and that was the only
15 purpose of that sentence.
16 Q So you're not implying that the leasing of
17 dark fiber constitutes competition in the sense of
18 telecommunications competition?
19 A I think it constitutes competition, yes, in
20 terms of the fact that I think Albertson's was one of the
21 customers, they had a choice, they could come to us, they
22 could go to Idaho Power, they could attempt to build it
23 themselves, so to me that's competition.
24 Q But not competition for Title 61 services?
25 A I don't know how the fiber circuits were
800
CSB REPORTING WOZNIAK (X)
Wilder, Idaho 83676 U S WEST Communications
1 used. I assume they were probably for Title 62 services.
2 Q Now, throughout the course of the last two
3 days you have been deferred to by many witnesses on the
4 Tech II --
5 A I've heard that.
6 Q -- and various programs. Let me begin with
7 page 16 of your testimony. On page 16 of your testimony,
8 you talk about the elimination of implicit subsidies.
9 A Correct.
10 Q If the Company is concerned about implicit
11 subsidies, is it reasonable for Title 61 customers to
12 subsidize Title 62 customers?
13 A The Company doesn't believe that's
14 happening.
15 Q If Title 61 funds were used to improve the
16 network in Tech Plus and Tech II projects, shouldn't
17 Title 61 customers receive a benefit or a value of those
18 services?
19 A I think so.
20 Q Isn't it also true that in the last 10
21 years the Commission has ordered expenditures of over
22 $120 million in Tech Plus and Tech II?
23 A With strong support from U S WEST and with
24 a variety of sources of funding, that's true.
25 Q And wasn't one of the reasons for these
801
CSB REPORTING WOZNIAK (X)
Wilder, Idaho 83676 U S WEST Communications
1 expenditures was to perform new services to enhance
2 existing services?
3 A I think that was part of it, yes.
4 Q In fact, didn't some of these services
5 include distance learning, network interconnection, video
6 arrangement, video conferencing and medical imaging?
7 A I think those services may have been some
8 of the intended products of the investment, yes.
9 Q And aren't these services Title 62
10 services?
11 A They could be depending upon who provides
12 them. If U S WEST provides them, they would be, yes.
13 Q Finally, Mr. Wozniak, I'd like to turn to
14 page 11 of your testimony where you state the Company is
15 obligated to price services at or above relative costs to
16 avoid anti-competitive conduct. On that same page, you
17 also suggest that residential customers do not know
18 exactly the level that they are paying for local service
19 today. Do you see where I'm referencing?
20 A Uh-huh.
21 Q Do you believe that your proposal of almost
22 doubling the residential rates will raise awareness of
23 the residential customer?
24 A First of all, Ms. Hamlin, we view our
25 proposal as being about a 25 percent increase from the
802
CSB REPORTING WOZNIAK (X)
Wilder, Idaho 83676 U S WEST Communications
1 15.62 to the approximate $20.00 rate. No, I don't so
2 much think it's the price changes that we're talking
3 about that are going to bring awareness to customers
4 about how much they pay for things. I really think
5 that's going to be the product of the growth and advent
6 of competition and as people begin to realize they have
7 choices and begin to make selections of providers based
8 on those choices, including the price they pay.
9 MS. HAMLIN: I have no further questions.
10 COMMISSIONER SMITH: Mr. Harwood.
11 MR. HARWOOD: Thank you, Madam Chair.
12
13 CROSS-EXAMINATION
14
15 BY MR. HARWOOD:
16 Q Good afternoon, Mr. Wozniak.
17 A Good afternoon, Mr. Harwood.
18 Q You spoke with Ms. Hamlin regarding the
19 topic of competition and specifically the benefits of
20 competition to consumers versus providers. Do you recall
21 that?
22 A Yes, I do.
23 Q And I believe you stated that providers
24 benefit from facilities-based competition as opposed to
25 resale. Can you explain to me why that is?
803
CSB REPORTING WOZNIAK (X)
Wilder, Idaho 83676 U S WEST Communications
1 A I don't think that's exactly what I said.
2 I said it was my view that from a provider's perspective
3 that if provision, competitive provision, is based upon
4 facilities competition as opposed to pure resale that the
5 benefits are greater because you wind up with true
6 product differentiation based on differing technologies
7 or different assembly of the product. I think you bring
8 additional jobs and tax base to the State of Idaho, so I
9 think the benefits of a facilities-based competition are
10 greater than the benefits that you receive just simply
11 from resale.
12 Q How is that of benefit to the provider,
13 though? That's what I'm having a hard time
14 understanding.
15 A Well, the benefit to the provider, and one
16 of the biggest issues that we debated in the AT&T
17 arbitration case was the issue that we're concerned about
18 called sham unbundling, the benefit to the provider, I
19 suppose, is that -- one thing we're very concerned about
20 is that we don't want providers to be able to come into
21 the market and have the ability to arbitrage between a
22 resale price based on wholesale discounts or a resale
23 price based on the fictitious rebundling of unbundled
24 elements, so the benefit to the provider would be, in
25 this case if it were AT&T would be, a selection between
804
CSB REPORTING WOZNIAK (X)
Wilder, Idaho 83676 U S WEST Communications
1 two resale formulas, if you will, always picking the
2 lower of the two.
3 Q But it's true, is it not, that the
4 Commission is not charged with pricing unbundled elements
5 in this proceeding, is it?
6 A In this proceeding, that's true.
7 Q Also in your discussion with Ms. Hamlin,
8 you referenced the Citizens interconnection agreement.
9 A Correct.
10 Q Do you recall that? To your knowledge,
11 does the Citizens agreement provide for a discount on the
12 retail rate for residential customers?
13 A Mr. Harwood, I can't recall what the
14 provision is on that in that particular agreement.
15 Q Is it possible that there is no discount?
16 A I would say that's probably likely since
17 that's U S WEST's advocacy.
18 Q Do you believe that Citizens assuming no
19 discount can be a competitive reseller of residential
20 services?
21 A I certainly do.
22 Q Can you explain how?
23 A I certainly do. U S WEST's position is
24 that there should be no double discount or no additional
25 discount on a service that's already priced below cost.
805
CSB REPORTING WOZNIAK (X)
Wilder, Idaho 83676 U S WEST Communications
1 Citizens has the opportunity to do just what U S WEST is
2 able to do in terms of remaining a viable provider of
3 services and that is that Citizens will have the ability
4 to package or resell high margin services, the custom
5 calling-type services, CLASS services, particularly toll
6 services, on those accounts, so that's where the margins
7 are and I imagine that's how they will do it.
8 Q What happens if the price goes above your
9 cost of providing that service?
10 A If the price of --
11 Q If the price you charge Citizens goes above
12 your cost, what happens? Do they still not get any
13 discount?
14 A That wouldn't happen. In this case, we're
15 asking for about a $20.00 1FR rate and our embedded cost
16 on the 1FR is about 21.91, so I don't think there's a
17 likelihood that that would happen.
18 Q Turning to your direct testimony, I refer
19 you to page 14, I should say 13 and 14 where you're
20 talking about the issue of capital recovery, and on
21 page 14, lines 14 through 15, you talk about customers in
22 smaller communities constituting a large percentage of
23 U S WEST's customer base?
24 A Right.
25 Q What do you consider a smaller community
806
CSB REPORTING WOZNIAK (X)
Wilder, Idaho 83676 U S WEST Communications
1 for purposes of this discussion?
2 A Well, I was thinking about the number of
3 exchanges we have left in Idaho or that we serve in
4 Idaho. We've got approximately 50 exchanges and when you
5 take out Idaho Falls, Pocatello, Twin Falls, Boise,
6 Nampa, and Caldwell, there are probably about 40 of them
7 that would in my judgment be considered small.
8 Q Okay; so you're really talking about
9 exchanges here, not communities?
10 A That's the way I sized up my views on the
11 exchanges. Communities, 10,000 or less, perhaps. I
12 didn't really have a specific number.
13 Q So can you estimate for me as a percentage
14 how many U S WEST customers are in these smaller
15 communities or exchanges?
16 A As a percentage, I can't tell you, no.
17 Q Can you take a stab at it or an estimate?
18 A I wouldn't be able to do that, no.
19 Q So how can you say that it constitutes a
20 large percentage?
21 A Well, I guess I was thinking more of
22 exchanges instead of communities, really, when I made
23 that statement, the 40 of the 50, really.
24 Q But you don't have an estimate either on
25 exchanges?
807
CSB REPORTING WOZNIAK (X)
Wilder, Idaho 83676 U S WEST Communications
1 A Pardon me?
2 Q You don't have an estimate on percentage of
3 small exchanges either?
4 A I didn't make a calculation on that, no.
5 Roughly, it's about 40 out of our 50 exchanges are
6 small.
7 Q Turning to the issue of embedded costs and
8 U S WEST's cost study in this case, is it your testimony
9 that Title 61 rates have to be based on embedded costs?
10 A That's my position in this case, yes.
11 Q And you are familiar with U S WEST's
12 arbitration with AT&T; correct?
13 A That's correct.
14 Q And you testified in that proceeding?
15 A I did.
16 Q And didn't U S WEST present a
17 forward-looking cost study in that case?
18 A Yes, we did.
19 Q And U S WEST made pricing recommendations
20 based on that forward-looking study?
21 A That's true.
22 Q And U S WEST did that because the Federal
23 Act required that you do that?
24 A I don't believe the Federal Act had any
25 language relating to the type of methodology that should
808
CSB REPORTING WOZNIAK (X)
Wilder, Idaho 83676 U S WEST Communications
1 be used. It was the FCC's order, I believe, that did
2 that. I would point out, Mr. Harwood, that that
3 proceeding dealt with the pricing of interconnection
4 elements as opposed to retail services that we're talking
5 about in this proceeding.
6 Q Wasn't the loop one of the elements that we
7 were talking about in that proceeding?
8 A The unbundled loop, that's correct.
9 Q And doesn't the loop make up part of your
10 ability at least to provide residential service?
11 A It makes up a very large part of it.
12 Q Would it be fair to say that in that
13 U S WEST/AT&T arbitration that your pricing
14 recommendations in that case were designed to recover all
15 of your actual costs?
16 A Yes, that's true.
17 Q So isn't it fair to say that U S WEST could
18 have used such a forward-looking study in this case such
19 as TSLRIC or TELRIC as well to cover its actual costs?
20 MS. HOBSON: I'm going to object to the
21 question. I think it calls for a legal conclusion.
22 COMMISSIONER SMITH: Mr. Harwood?
23 MR. HARWOOD: I'm just asking him whether
24 or not they had the ability to use that same study in
25 this case.
809
CSB REPORTING WOZNIAK (X)
Wilder, Idaho 83676 U S WEST Communications
1 MS. HOBSON: Insofar as the question speaks
2 only to the physical ability and not the legal ability,
3 we would withdraw the objection.
4 COMMISSIONER SMITH: Thank you. Please
5 proceed, Mr. Harwood.
6 Q BY MR. HARWOOD: Did I get an answer to the
7 question?
8 A You certainly could do that, Mr. Harwood.
9 What you would wind up, though, with is a price much
10 higher than what U S WEST is asking for here because
11 those forward-looking costs are unseparated. In this
12 case, we've allocated 25 percent to the interstate,
13 15 percent to toll. The loop price alone advocated by
14 the FCC or at least a proxy was $20.17 just for the loop
15 alone. In that AT&T case, U S WEST's loop price was
16 $38.97 unseparated, so that approach would produce a much
17 higher price than what we're asking for in this case.
18 Q Let me direct you to page 15 of your direct
19 testimony and there you're generally talking about the
20 depreciation reserve deficiency. Have you found that
21 reference?
22 A Is there a particular line, Mr. Harwood?
23 Q I just wanted to get you to the area.
24 A Okay, I'm here, page 15.
25 Q Do you understand that U S WEST and the
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1 Staff have reached a settlement on the issue of reserve
2 deficiency in this case?
3 A I do.
4 Q Are you familiar with the settlement
5 language on this issue?
6 A I am.
7 Q Can you briefly tell me what that
8 settlement language is? And if you've got it in front of
9 you, I might ask you to just read the last paragraph on
10 page 3.
11 A "It is expressly understood that this
12 agreement, if adopted by the Commission, will represent a
13 complete and total settlement of the Company's claim to a
14 Title 61 reserve deficiency based upon historic
15 regulatory depreciation policy."
16 Q My question to you is, is it your
17 understanding that based on this language that U S WEST
18 is agreeing not to pursue recovery of Title 61
19 depreciation reserve deficiency in any future proceeding?
20 A Mr. Harwood, if this stipulation is
21 accepted by the Commission, U S WEST will fulfill its
22 obligation pursuant to the stipulation in terms of the
23 booking of the $11.4 million of Title 61 reserve
24 deficiency and the additional 7 million of Title 62
25 reserve deficiency and we would not be asking for reserve
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1 deficiency in any future general rate cases. With regard
2 to any arbitration cases, I think if the Commission
3 accepts this stipulation, we would have to revisit that
4 at that point.
5 Q So your answer is that this language only
6 limits you to seeking Title 61 deficiency in future rate
7 cases?
8 A No. I'd say my answer was if the
9 stipulation is adopted by the Commission, which certainly
10 changes the Company's reserve deficiency for both
11 Title 61 and 62 given the bookings to 62, that we would
12 have to revisit any questions of reserve deficiency in an
13 arbitration case. I'm just not in a position to make any
14 further commitments right now on that.
15 Q So are you saying that there would still be
16 an opportunity, then, for you to seek this depreciation
17 reserve deficiency in an arbitration proceeding?
18 A I would say the likelihood of that, if the
19 Commission accepts the stipulation as filed, since there
20 wouldn't be any reserve deficiency would be greatly
21 diminished.
22 Q Isn't it true that you were able to recover
23 some reserve deficiency in your agreement with Western
24 Wireless?
25 A There was a recovery approved pursuant to a
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1 finding in this case. How much or whether we've actually
2 billed that increment, I really don't know that yet.
3 Q Let's assume for a moment that you're able
4 to recover some or all of this reserve deficiency from a
5 CLEC in a future arbitration proceeding. Couldn't this
6 result in a double recovery of the deficiency?
7 MS. HOBSON: Madam Chair, I'm going to have
8 to object to this line of questioning since it is causing
9 the witness to have to engage in speculation about future
10 arbitration situations which are not before this
11 Commission and are not part of the testimony presented in
12 this case.
13 COMMISSIONER SMITH: Mr. Harwood.
14 MR. HARWOOD: I just asked him to give me a
15 response based on a simple assumption.
16 COMMISSIONER SMITH: Ms. Hobson, I'm going
17 to overrule the objection and allow the witness to
18 answer.
19 Q BY MR. HARWOOD: Would you like me to
20 restate that again?
21 A I think I've got it, Mr. Harwood. U S WEST
22 is not interested in a double recovery. Indeed, if the
23 Commission accepts this stipulation as filed by the
24 parties and to the extent we have collected any of that
25 reserve deficiency from Western Wireless, I would expect
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1 we would be refunding those monies and we would not be
2 collecting any further from them pursuant to the
3 stipulation.
4 Q So based on that statement, would it be
5 U S WEST's position, then, that it would only seek
6 recovery of Title 62 reserve deficiency in arbitrations
7 under the Act assuming that this stipulation is approved
8 by the Commission?
9 A Could you repeat that one more time,
10 please?
11 Q I'm asking you based on your statement just
12 a moment ago whether or not it would be your position,
13 then, that you would only be entitled to recover Title 62
14 reserve deficiency in future arbitrations under the
15 Federal Act?
16 A My testimony really was we would revisit
17 the issue. I think the stipulation renders the recovery
18 problem moot if it's accepted by this Commission for this
19 jurisdiction.
20 Q Thank you. Continuing on the topic of the
21 reserve deficiency, I want to talk about U S WEST's ICAM
22 filing. Would it also be your understanding that based
23 on the stipulated language with Staff and if the
24 Commission approved that language that U S WEST would not
25 be able to seek any depreciation reserve deficiency in
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1 the ICAM proceeding currently pending before the
2 Commission?
3 MS. HOBSON: I'm going to object to this
4 question. It's outside the scope of the witness' direct
5 testimony and, furthermore, no foundation has been laid
6 that this witness even has familiarity with that
7 particular docket, unlike the arbitration.
8 COMMISSIONER SMITH: Mr. Harwood.
9 Q BY MR. HARWOOD: Are you familiar with
10 U S WEST's ICAM application?
11 A I'm familiar with the filing that we made,
12 yes. I don't believe a lot of the costs that were
13 referred to in the ICAM filing have been fully
14 identified, nor am I aware that the Company's position on
15 those have been completely fine-tuned.
16 Q Do you know if you're seeking a
17 depreciation reserve deficiency recovery in that case?
18 A I don't know.
19 MR. HARWOOD: That's all the questions I
20 have. Thank you, Mr. Wozniak.
21 COMMISSIONER SMITH: Thank you.
22 Mr. Donesley.
23 MR. DONESLEY: Thank you, Madam Chairman.
24
25
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1 CROSS-EXAMINATION
2
3 BY MR. DONESLEY:
4 Q Mr. Wozniak, good morning or good
5 afternoon.
6 A Good afternoon.
7 Q You mentioned the TSLRIC forward-looking
8 analysis or model throughout your testimony. I'll note
9 that you reference new pricing strategies and you urge
10 the Commission to adopt new methodologies for evaluating
11 these kinds of problems in deregulation that we're facing
12 in terms of making policy decisions and setting rates.
13 Has the Company in this specific case, that is, that
14 which brings us here today, done a forward-looking or a
15 TSLRIC-type analysis?
16 A For point of clarification, Counselor, did
17 I mention TSLRIC in my direct testimony in particular?
18 Q Yes, you did.
19 A Could you give me a reference on that,
20 please?
21 Q Oh, I'm sorry, you just did from the
22 stand. I was listening to your testimony from the
23 stand.
24 A I was looking for a page and line number,
25 I'm sorry. Could you repeat the question, please?
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1 Q Yeah, has the Company done a TSLRIC-type
2 analysis for this case presently before us?
3 A No.
4 Q You said that such an analysis would result
5 in an increase in prices if one were done. Upon what do
6 you base that conclusion?
7 A I base that conclusion on previous TSLRIC
8 studies that I have seen over the years as well as the
9 TELRIC studies that were conducted for the arbitration
10 case.
11 Q You've seen Dr. Reading's testimony in this
12 case, have you not?
13 A I have looked at it, yes.
14 Q You're aware that he did a forward-looking
15 analysis, TSLRIC-type analysis, and you're familiar with
16 the results of his analysis?
17 A I am aware that he did that. I frankly
18 didn't pay a whole lot of attention to it because I just
19 felt like it didn't apply to the case that we've got
20 before us.
21 Q Can you distinguish or justify your opinion
22 that a TSLRIC analysis would raise prices with
23 Dr. Reading's conclusions that no increase in price at
24 all would be justified under such an analysis?
25 A I wouldn't want to make any comments based
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1 on Dr. Reading's conclusions.
2 MR. DONESLEY: That's all the questions I
3 have. Thank you, sir. Thank you.
4 COMMISSIONER SMITH: Mr. Phillips.
5 MR. PHILLIPS: I have no questions.
6 COMMISSIONER SMITH: Mr. Fothergill.
7 MR. FOTHERGILL: No questions.
8 COMMISSIONER SMITH: From the Commission.
9 COMMISSIONER NELSON: Nor do I. Thank
10 you.
11 COMMISSIONER SMITH: Just one, Jim.
12
13 EXAMINATION
14
15 BY COMMISSIONER SMITH:
16 Q Earlier today it was testified that you
17 still have analog switches in Idaho, but the witness
18 wasn't able to tell us where. Do you want to tell us
19 where?
20 A Let me try. I believe we have five analog
21 switches left in Idaho. One of them happens to be in
22 Lewiston.
23 Q Oh, so that's not down here.
24 A That's not down here. We have one in
25 Nampa, one in Caldwell, we've got one in Idaho Falls, I
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1 believe, and one in Pocatello.
2 Q These will still be in place after the EAS
3 is implemented?
4 A Yes, they will.
5 COMMISSIONER SMITH: Redirect?
6 MS. HOBSON: No redirect.
7 COMMISSIONER SMITH: Thank you,
8 Mr. Wozniak.
9 (The witness left the stand.)
10 COMMISSIONER SMITH: Okay, let's go off the
11 record for a minute.
12 (Off the record discussion.)
13 COMMISSIONER SMITH: We will recess until
14 7:00 o'clock tonight. Let's take up tomorrow morning at
15 9:15.
16 (The Hearing recessed at 4:15 p.m.)
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