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HomeMy WebLinkAboutUSW311A.docx                 1        BOISE, IDAHO, TUESDAY, MARCH 11, 1997, 1:15 P. M.           2           3           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.          22          23          24          25                                           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.          21          22          23          24          25                                           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.)           8           9          10          11          12          13          14          15          16          17          18          19          20          21          22          23          24          25                                           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.          20          21          22          23          24          25                                           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          23          24          25                                           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:          24          25                                           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?          21          22          23          24          25                                           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).           7           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%          21          22          23          24          25                                           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          21          22          23          24          25                                           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          25                                           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%.           5           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)        25                                           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?          22          23          24          25                                           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?          25                                           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%.          25                                           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:          10          11            November 20, 1996                             Price               $30.375   ks   =   13.19%        12                      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%          17          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          23          24          25                                           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%         6                      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?          25                                           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.          18          19          20          21          22          23          24          25                                           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%          19          20            This information is also shown in the U S WEST          21     Communication Group Investor Handbook.          22          23          24          25                                           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          25                                           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.)        22          23          24          25                                           623                                                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.           4           5     /           6           7     /           8           9     /          10          11          12          13          14          15          16          17          18          19          20          21          22          23          24          25                                           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.           5           6     /           7           8     /           9          10     /          11          12          13          14          15          16          17          18          19          20          21          22          23          24          25                                           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           4           5     /           6           7     /           8           9     /          10          11          12          13          14          15          16          17          18          19          20          21          22          23          24          25                                           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           5           6     /           7           8     /           9          10     /          11          12          13          14          15          16          17          18          19          20          21          22          23          24          25                                           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?           5           6     /           7           8     /           9          10     /          11          12          13          14          15          16          17          18          19          20          21          22          23          24          25                                           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           8           9     /          10          11     /          12          13     /          14          15          16          17          18          19          20          21          22          23          24          25                                           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.           7           8     /           9          10     /          11          12     /          13          14          15          16          17          18          19          20          21          22          23          24          25                                           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           5           6     /           7           8     /           9          10     /          11          12          13          14          15          16          17          18          19          20          21          22          23          24          25                                           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.           6           7     /           8           9     /          10          11     /          12          13          14          15          16          17          18          19          20          21          22          23          24          25                                           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           6           7     /           8           9     /          10          11     /          12          13          14          15          16          17          18          19          20          21          22          23          24          25                                           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           4           5     /           6           7     /           8           9     /          10          11          12          13          14          15          16          17          18          19          20          21          22          23          24          25                                           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,           6           7     /           8           9     /          10          11     /          12          13          14          15          16          17          18          19          20          21          22          23          24          25                                           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           5           6     /           7           8     /           9          10     /          11          12          13          14          15          16          17          18          19          20          21          22          23          24          25                                           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.           5           6     /           7           8     /           9          10     /          11          12          13          14          15          16          17          18          19          20          21          22          23          24          25                                           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.           4           5     /           6           7     /           8           9     /          10          11          12          13          14          15          16          17          18          19          20          21          22          23          24          25                                           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           3           4     /           5           6     /           7           8     /           9          10          11          12          13          14          15          16          17          18          19          20          21          22          23          24          25                                           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           5           6     /           7           8     /           9          10     /          11          12          13          14          15          16          17          18          19          20          21          22          23          24          25                                           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.          25                                           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           5           6     /           7           8     /           9          10     /          11          12          13          14          15          16          17          18          19          20          21          22          23          24          25                                           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           5           6     /           7           8     /           9          10     /          11          12          13          14          15          16          17          18          19          20          21          22          23          24          25                                           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.          17          18          19          20          21          22          23          24          25                                           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.                                           706                 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                                           707                 CSB REPORTING                       OWEN (X)               Wilder, Idaho  83676                U S WEST Communications                 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                                           708                 CSB REPORTING                       OWEN (X)               Wilder, Idaho  83676                U S WEST Communications                 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                                           709                 CSB REPORTING                       OWEN (X)               Wilder, Idaho  83676                U S WEST Communications                 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,                                           710                 CSB REPORTING                       OWEN (X)               Wilder, Idaho  83676                U S WEST Communications                 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                                           711                 CSB REPORTING                       OWEN (X)               Wilder, Idaho  83676                U S WEST Communications                 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                                           712                 CSB REPORTING                       OWEN (X)               Wilder, Idaho  83676                U S WEST Communications                 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                                           713                 CSB REPORTING                       OWEN (X)               Wilder, Idaho  83676                U S WEST Communications                 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.                                           714                 CSB REPORTING                       OWEN (X)               Wilder, Idaho  83676                U S WEST Communications                 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                                           715                 CSB REPORTING                       OWEN (X)               Wilder, Idaho  83676                U S WEST Communications                 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                                           716                 CSB REPORTING                       OWEN (X)               Wilder, Idaho  83676                U S WEST Communications                 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                                           717                 CSB REPORTING                       OWEN (X)               Wilder, Idaho  83676                U S WEST Communications                 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                                           718                 CSB REPORTING                       OWEN (X)               Wilder, Idaho  83676                U S WEST Communications                 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.                                           719                 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                                           720                 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                                           721                 CSB REPORTING                       OWEN (X)               Wilder, Idaho  83676                U S WEST Communications                 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                                           722                 CSB REPORTING                       OWEN (X)               Wilder, Idaho  83676                U S WEST Communications                 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                                           723                 CSB REPORTING                       OWEN (X)               Wilder, Idaho  83676                U S WEST Communications                 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.                                           724                 CSB REPORTING                       OWEN (X)               Wilder, Idaho  83676                U S WEST Communications                 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.                                           725                 CSB REPORTING                       OWEN (X)               Wilder, Idaho  83676                U S WEST Communications                 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                                           726                 CSB REPORTING                       OWEN (X)               Wilder, Idaho  83676                U S WEST Communications                 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?                                           727                 CSB REPORTING                       OWEN (X)               Wilder, Idaho  83676                U S WEST Communications                 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.                                           728                 CSB REPORTING                       OWEN (X)               Wilder, Idaho  83676                U S WEST Communications                 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                                           729                 CSB REPORTING                       OWEN (X)               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                                           730                 CSB REPORTING                       OWEN (X)               Wilder, Idaho  83676                U S WEST Communications                 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,                                           731                 CSB REPORTING                       OWEN (X)               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                                           732                 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                                           733                 CSB REPORTING                       OWEN (X)               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                                           734                 CSB REPORTING                       OWEN (X)               Wilder, Idaho  83676                U S WEST Communications                 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                                           735                 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?                                           736                 CSB REPORTING                       OWEN (X)               Wilder, Idaho  83676                U S WEST Communications                 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.                                           737                 CSB REPORTING                       OWEN (Com)               Wilder, Idaho  83676                U S WEST Communications                 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                                           738                 CSB REPORTING                       OWEN (Com)               Wilder, Idaho  83676                U S WEST Communications                 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                                           739                 CSB REPORTING                       OWEN (Com)               Wilder, Idaho  83676                U S WEST Communications                 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.                                           740                 CSB REPORTING                       OWEN (Com)               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?                                           741                 CSB REPORTING                       OWEN (Com)               Wilder, Idaho  83676                U S WEST Communications                 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                                           742                 CSB REPORTING                       OWEN (Com)               Wilder, Idaho  83676                U S WEST Communications                 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                                           743                 CSB REPORTING                       OWEN (Com)               Wilder, Idaho  83676                U S WEST Communications                 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?                                           744                 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                                           745                 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                                           746                 CSB REPORTING                       OWEN (Com)               Wilder, Idaho  83676                U S WEST Communications                 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,                                           747                 CSB REPORTING                       OWEN (Com)               Wilder, Idaho  83676                U S WEST Communications                 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                                           748                 CSB REPORTING                       OWEN (Com)               Wilder, Idaho  83676                U S WEST Communications                 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.                                           749                 CSB REPORTING                       OWEN (Com)               Wilder, Idaho  83676                U S WEST Communications                 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?                                           750                 CSB REPORTING                       OWEN (Com)               Wilder, Idaho  83676                U S WEST Communications                 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.                                           751                 CSB REPORTING                       OWEN (Com)               Wilder, Idaho  83676                U S WEST Communications                 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                                           810                 CSB REPORTING                       WOZNIAK (X)               Wilder, Idaho  83676                U S WEST Communications                 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                                           811                 CSB REPORTING                       WOZNIAK (X)               Wilder, Idaho  83676                U S WEST Communications                 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                                           812                 CSB REPORTING                       WOZNIAK (X)               Wilder, Idaho  83676                U S WEST Communications                 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                                           813                 CSB REPORTING                       WOZNIAK (X)               Wilder, Idaho  83676                U S WEST Communications                 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                                           814                 CSB REPORTING                       WOZNIAK (X)               Wilder, Idaho  83676                U S WEST Communications                 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                                           815                 CSB REPORTING                       WOZNIAK (X)               Wilder, Idaho  83676                U S WEST Communications                 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?                                           816                 CSB REPORTING                       WOZNIAK (X)               Wilder, Idaho  83676                U S WEST Communications                 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                                           817                 CSB REPORTING                       WOZNIAK (X)               Wilder, Idaho  83676                U S WEST Communications                 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                                           818                 CSB REPORTING                       WOZNIAK (Com)               Wilder, Idaho  83676                U S WEST Communications                 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.)          17          18          19          20          21          22          23          24          25                                           819                 CSB REPORTING                       WOZNIAK (Com)               Wilder, Idaho  83676                U S WEST Communications