USW312M.docx

1 BOISE, IDAHO, WEDNESDAY, MARCH 12, 1997, 9:15 A. M.
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4 COMMISSIONER SMITH: Good morning, ladies
5 and gentlemen. We'll take up again with our hearing.
6 Ms. Hobson, as I recall, you completed your
7 direct case yesterday.
8 MS. HOBSON: That is correct.
9 COMMISSIONER SMITH: So we're ready to move
10 on to Mr. Donesley's witness.
11 MR. DONESLEY: Thank you, Madam Chair.
12 Commissioners, ladies and gentlemen.
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14 DON READING,
15 produced as a witness at the instance of the American
16 Association of Retired Persons, having been first duly
17 sworn, was examined and testified as follows:
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19 DIRECT EXAMINATION
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21 BY MR. DONESLEY:
22 Q Would you state your name?
23 A Don Reading, R-e-a-d-i-n-g.
24 Q Dr. Reading, where are you employed?
25 A Ben Johnson Associates; home office,
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CSB REPORTING READING (Di)
Wilder, Idaho 83676 AARP
1 Tallahassee, Florida; Boise address, 1227 El Pelar.
2 Q Dr. Reading, have you been retained for
3 purposes of this hearing and for these proceedings before
4 the Commission?
5 A Yes.
6 Q By whom?
7 A AARP.
8 Q In what capacity?
9 A As a consultant for this rate proceeding.
10 Q Are you being paid?
11 A I was going to say part of it so far, yes.
12 I anticipate the rest.
13 Q Hopefully, anyway.
14 A Yes.
15 Q Oh, good. Have you submitted prefiled
16 testimony on behalf of the intervenor AARP?
17 A Yes.
18 Q Have you reviewed that prefiled testimony
19 to determine whether any additions or corrections are
20 required or necessary?
21 A Yes, and I have made a copy of those
22 corrections and they should be on everyone's desk.
23 Q Likewise, have you provided a copy on the
24 desk of each Commissioner as well as Commission Staff?
25 A Yes.
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Wilder, Idaho 83676 AARP
1 Q And the Commission secretary?
2 A Yes, and intervenors and court reporter.
3 Q Could you briefly, please, describe what
4 those additions and corrections are?
5 A They are both letter and numerical changes
6 that are, I would say, clerical and do not change the
7 results.
8 Q Given those additions or corrections, if
9 the same questions were posed to you as you responded to
10 in your prefiled testimony today as when that testimony
11 was prefiled, would your answers be the same?
12 A Yes.
13 Q I'll note that there are exhibits attached
14 to the prefiled testimony. Those exhibits, were they
15 prepared by you or under your direction?
16 A Yes.
17 Q Are you familiar with those exhibits?
18 A Yes.
19 Q They are exhibits, they're denominated 901
20 and schedules attached?
21 A Yes.
22 Q Are there any additions or corrections to
23 those exhibits?
24 A No.
25 MR. DONESLEY: Madam Chair, I would move
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Wilder, Idaho 83676 AARP
1 that the prefiled testimony be admitted and spread on the
2 record.
3 COMMISSIONER SMITH: Without objection, it
4 is so ordered.
5 (The following prefiled direct
6 testimony of Dr. Don Reading is spread upon the record.)
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1 Introduction
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3 Q Would you please state your name and
4 address?
5 A Don Reading, 1227 El Pelar Drive, Boise,
6 Idaho 83702.
7 Q Have you prepared an appendix that
8 describes your qualifications in regulatory and utility
9 economics?
10 A Yes. Appendix A, attached to my testimony,
11 will serve this purpose.
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1 Q Have you prepared an exhibit in support of
2 your testimony?
3 A Yes, Exhibit 901, (DR-1), consisting of 11
4 schedules, is attached to my testimony. These schedules
5 were prepared under my supervision and are true and
6 correct to the best of my knowledge.
7 Q What is your purpose in making your
8 appearance at this hearing?
9 A Our firm has been retained by the American
10 Association of Retired Persons (AARP) to prepare and
11 present evidence in this proceeding regarding the
12 proposed local exchange residence service rate increases
13 filed by U S WEST Communications, Inc. in Idaho (USWC,
14 the Company) in this docket. Specifically, we have been
15 retained to analyze the Company's testimony and
16 supporting documentation and to develop recommendations
17 concerning the Company's proposal.
18 My testimony has six main sections. In the first
19 section I briefly sketch the background of this
20 investigation and state the major points at issue. In
21 section two I examine the Companies approach in this
22 proceeding and discuss how it is at odds with how costs
23 and rates should be determined in an environment of
24 transition to competition. In section three, I describe
25 the differences between economic costs and embedded
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1 costs. Section four contains an explanation of basic
2 exchange service and describes how the costs local loop
3 should be allocated. In section five, I briefly explain
4 the basics of Telecom Economic Cost Model developed by
5 Ben Johnson Associates, Inc. Attached to my testimony is
6 a document that explains the model in more detail.
7 Finally, in the sixth section, I present the results of
8 my cost studies and make my recommendations.
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1 Q Please turn to the first section of your
2 testimony. Would you please begin by briefly sketching
3 the background of this proceeding?
4 A Certainly. U S WEST (USWC, the Company)
5 requested the Idaho Public Utilities Commission approve
6 an increase in rates of more than $38 million. The major
7 impact is to fall on Title 61 customers, especially
8 residential end-users whose rates are proposed to
9 increase by up to 121% -- from $10.17 to $22.50 --
10 between now and mid-1999. Some business rates would also
11 increase if the Commission approved USWC's request, with
12 an increase of 19% for business customers in the
13 Company's most rural areas.
14 With the passage of the Telecommunications Act of
15 1988 by the Idaho legislature, local exchange companies
16 (LECs) in the state were given the opportunity to remove
17 from economic regulation all services except Title 61
18 services -- residential basic local exchange service,
19 businesses with five lines or less, non-listed and
20 non-published directory service, and coin telephones.
21 Intrastate toll, network access, yellow pages, with basic
22 business service of six or more lines -- Title 62 --
23 being exempted from economic regulation. At the time,
24 this legislation put Idaho in the forefront among states
25 in the deregulation of telecommunication services. In
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1 1989, USWC elected to be regulated under the Title 61/62
2 statute. No other LEC in the state has selected this
3 regulatory option.
4 In 1989 the Commission and the Company also
5 entered into an alternative form of regulation termed the
6 Revenue Sharing Plan. Under this plan, the Company's
7 revenues (both from Title 61 and Title 62) above the
8 then-current level of earnings would be `shared' between
9 the two Titles. For Title 61 customers this amounted to
10 about 40% of the estimated excess earnings. This
11 arrangement has produced more than $36 million over the
12 past six years. The Commission has elected to use some
13 of these `shared' revenues as rebates to customers, and
14 some
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1 for targeted capital projects. As was the case of the
2 states 1988 Act, this alternative regulatory approach was
3 one of the first in the country.
4 Q Could you please briefly describe the case
5 filed by U S WEST?
6 A Yes. In the context of the Title 61/62
7 statute this is a traditional embedded cost rate case.
8 According to the Company,
9 ... this case asks the Commission to exercise its
traditional ratesetting authority with one major
10 variation. This is the first time that the
Commission has ever been called upon to set rates
11 of U S's Title 61 operations on a stand alone
basis. [USWC, Wright, Direct, p. 8.]
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13 In support of its filing the Company has presented
14 cost-of-capital and accounting testimony allocating costs
15 between Title 61 and Title 62. USWC has also advocated
16 shorter depreciation schedules because,
17 Unrealistically slow capital recovery practices,
which were acceptable in the monopoly environment,
18 have no place in a competitive environment.
[USWC, Easton, Direct, p. 6.]
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20 The Company has not had a general rate case in
21 Idaho since 1984. Meanwhile, at both the state and the
22 federal level there has been a sea of change in
23 regulation. In those intervening dozen years the state
24 legislature passed the Telecommunications Act of 1988,
25 the Revenue Sharing Plan was implemented, video and other
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1 markets have opened to competitive entry by the LECs, and
2 the federal Telecommunications Act of 1996 (Telecom 96)
3 was enacted. The significant changes that occurred in
4 regulation permeates the USWC testimony filed in this
5 case. For example Company witness Wilson, when
6 discussing Telecom 96 states,
7 The act compels opening of local markets to
competition and requires all providers of local
8 service to interconnect with one another. The act
eliminates the exclusive franchise and requires
9 incumbents to resell services to competitors.
Indeed, according to Staff comments filed in
10 Case No. ATT-T-96-
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1 1 dated June 14, 1996, six companies have already
filed applications to become new local service
2 providers. In short, the federal act
significantly alters the regulatory compact.
3 [USWC, Wilson, Direct, p. 12.]
4 Q Do you see a conflict between the
5 `traditional' case filed by U S WEST in this Docket and
6 the current state of the telecommunications industry,
7 both in Idaho and nationally?
8 A Yes. The Company purports to want a new
9 approach -- to embrace the changes that the new laws
10 require:
11 On February 8, 1996, the telecommunication
environment changed significantly for our nation
12 and for Idaho -- it's now time for this Commission
to also change outdated, past practices and find
13 new approaches for ensuring its vision of a
modern, widely-available telecommunications
14 infrastructure for all Idahoans. [USWC, Wozniak,
Direct, p. 19.]
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16 This is a fine statement of principle. But the Company's
17 filing makes clear that in this proceeding what USWC
18 means by a "new approach" has nothing to do with the
19 Telecommunications Act of 1996 and everything to do with
20 shifting recovery of its claimed embedded costs of
21 service and other components of its historic revenue
22 requirement onto its most captive residential
23 subscribers. This is not new at all; it is an old, tired
24 and discredited approach.
25 In fact, USWC's entire filing seems an attempt to
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1 wrap old ideas in new language -- as if, by sprinkling
2 its testimony with phrases like "economic costs" and
3 "forward-looking" and "competitive", it could convince
4 the Commission that its proposal is cutting-edge, when it
5 is anything but that. It is ironic the Company is now
6 asking the Commission to approve rates based on a
7 traditional revenue-requirement, rate-of-return approach
8 in a state that has been a leader in moving away from
9 traditional regulation in telecommunications since 1988.
10 Q What are the major logical inconsistencies
11 in the Company's proposal?
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1 A There are at least four such
2 inconsistencies. First, USWC claims it is "not making a
3 reasonable return on its economically regulated
4 operations in Idaho," and needs "to formally establish
5 the allocation of costs" between Title 61 and Title 62
6 operations." [Wozniak 2]. Yet the system it wants to
7 discard is the very justification for its claimed right
8 to "a reasonable return." That is, the "social pricing"
9 that USWC wants abandoned is as integral to the status
10 quo as USWC's "right" to earn a specified return on its
11 "rate base." If USWC insists on keeping the high
12 profits of its deregulated operations away from
13 regulatory scrutiny, it likewise must accept the fact
14 that the regulated parts of its operations do not, and
15 cannot be expected to, cover all of the costs of its
16 network, including those network costs that have
17 historically been recovered from unregulated services.
18 The balance between costs and revenues
19 historically was established for the Company's total
20 operations, not for just a part of them. While the
21 legislature and the Commission have endeavored to
22 distinguish between regulated and unregulated services,
23 this was never intended to be an excuse for allowing the
24 Company to gouge its captive customers. As I will show
25 in presenting cost study results, the revenues from its
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1 Title 61 services are sufficient to cover the economic
2 costs of these services and provide a contribution to its
3 joint and common costs.
4 Second, USWC acknowledges that the Revenue Sharing
5 Plan "has worked well for both the Company and its
6 customers in Idaho for the past several years." [Id.] It
7 also acknowledges that without raising prices over the
8 last decade, it has been able to construct a network that
9 "is among the country's best" and that "by year's end
10 will have custom calling features available to nearly
11 95%" of USWC's customer base [Id. 20, 21.]. Despite this
12 success, the Company now claims it must double local
13 exchange rates on residence customers and shorten its
14 depreciation lives in order to provide for future
15 investment.
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1 Third, USWC claims that the current system
2 provides "hidden, implicit subsidies [for] residential
3 local service prices" that will block the development of
4 facilities-based local competition. [Id., 17.] Yet, even
5 if one were to accept USWC's cost figures (which I do
6 not), the Company's proposed rate structure does not
7 eliminate these alleged subsidies, nor make them
8 explicit; rather, it simply changes the picture, so that
9 rates of certain subscribers in Rate Groups 2 and 3 would
10 be set far above cost in order to support the higher
11 costs of service to certain customers in Rate Group 1.
12 The Company acknowledges this in Ms. Wilson's testimony
13 [p. 28].
14 Fourth, the Company's rationale for doubling
15 residential prices is to encourage competition as
16 mandated by the Telecommunications Act of 1996; yet,
17 USWC's embedded cost approach ignores provisions of
18 Telecom 96, which require forward looking economic
19 pricing. Furthermore, the Company's proposals ignore
20 language in Telecom 96 which prohibits recovering more
21 than a reasonable share of common costs from services
22 which are supposed to be universal (such as basic
23 residence service).
24 What the Company is asking the Commission is
25 really not a break from traditional ratemaking -- as the
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1 filing in this case clearly shows. Rather, the Company
2 is asking is the Commission to take a long step backwards
3 and to go down a path which repeatedly has been rejected
4 by this Commission and other regulators -- by drastically
5 increasing basic local exchange rates. The Commission
6 should reject this proposal and insist that U S WEST
7 submit new cost studies and pricing proposals, based on
8 documented and verifiable forward-looking, economic
9 costing principles, which are consistent with the
10 requirements of Telecom 96 and make sense for a
11 deregulated environment.
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1 U S WEST Rate Case Approach and Competition
2 Q Dr. Reading, why do you disagree with the
3 Company's attempt to separate Title 61 and Title 62
4 service costs?
5 A The embedded cost approach that the Company
6 wants to use "just one more time" was historically based
7 on the assumption that a firm would have an opportunity
8 to earn sufficient revenues from all of its services to
9 recover all of its costs. The return on rate base was
10 developed while looking at the firm's entire
11 operations -- realizing that embedded costs are not
12 recorded on the books in a way that allows regulators
13 precisely to distinguish between the different categories
14 of services.
15 Distinguishing between Title 61 and Title 62
16 services should not turn local exchange service into a
17 "stand-alone" operation, as the Company claims, nor
18 should it force local customers to pay dramatically
19 higher rates. Instead, it should allow the Company
20 flexibility to price competitive services according to
21 market conditions. The profit-sharing plan was a way of
22 ensuring that a local exchange would NOT be stand-alone,
23 and to ensure that local exchange customers would
24 continue to benefit from the economies of scale and other
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1 unregulated and regulated operations on a single network.
2 Local exchange should not be expected to stand alone, or
3 cover to the entirety of the network costs, any more than
4 the unregulated services should expected to stand alone,
5 or cover the entirety of the network costs.
6 If there are high cost areas/low income customers
7 whose services cannot be priced at cost without hurting
8 subscribership, the subsidies for these areas/customers
9 need to be (1) targeted and, (2) funded by all users.
10 What the Company proposes is to hand the local subscriber
11 base the full bill for maintaining universal service,
12 even though all services benefit from it. This is wrong.
13 It should also be noted the Joint Board has just issued
14 its high cost fund recommendations.
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1 Hence these recent federal actions need to be factored
2 into decisions dealing with high cost support.
3 I can agree with USWC that prices need to be
4 reconciled to costs; but this does not mean that the
5 Company can have it both ways -- recovering embedded
6 costs of the network through monopoly pricing of Title 61
7 services, while enjoying the high profit margins of the
8 competitive services that are made possible by that same
9 network. The Company says that it has put lots of money
10 into upgrades. The Company also claims that Idaho's
11 network is state of the art. If that is so, then USWC
12 certainly has a leg up on any potential facilities-based
13 competitor and should be able to hold its own. These
14 accomplishments were achieved under the existing prices,
15 and they certainly do not provide justification for
16 monopoly-profit pricing of basic local exchange services.
17 Q The Company talks about the need for
18 accelerated depreciation rates to help it face a
19 competitive market place. Is this legitimate?
20 A Yes and no. The case filed by U S WEST in
21 this docket is a mixture of forward looking costing aimed
22 at helping the Company deal with competition and backward
23 looking embedded costing. This mixing of apples and
24 oranges in the filing ends up making fruit salad. For
25 example, on the one hand, the Company stresses the need
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1 for depreciation schedules to be consistent with the
2 "coming changes" in telecommunications.
3 In order for U S WEST to compete effectively in
the new environment brought about by the Act and
4 to continue to invest in a state of the art
telecommunications network, the Company must be
5 allowed to use depreciation lives and practices
which keep pace with the current and coming
6 changes in the industry. [USWC, Easton Direct,
pp. 2, 3.]
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8 On the other hand, the Company is asking the
9 Commission to look backward and to allocate embedded
10 costs between Title 61 and Title 62,
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1 For the first time since the passage of the
Telecommunications Act of 1988, this Commission is
2 being asked to decide the appropriate method for
allocating costs between Title 61 and Title 62
3 operations. [USWC, Wozniak Direct, p. 8.]
4 And this shall probably be the last time this
5 allocation would be done. As discussed later in this
6 testimony, Telecom 96 mandates the use of forward-looking
7 pricing of network elements, not based on rate-of-return
8 or rate-based proceedings. What the Commission is
9 presented with in this docket is a procedure that sets
10 prices based on costs that are a mixture of assumed
11 future circumstances and past investment decisions. What
12 the Commission should be looking at is a consistent set
13 of cost and pricing approaches that will move the state
14 forward into a competitive marketplace. To do otherwise
15 could create a system of mismatches to produce
16 inefficient investment and price decisions by
17 telecommunications providers be they incumbents or
18 competitors.
19 It should be noted that on November 11 of this
20 year AT&T filed for arbitration with USWC. [USW-T-96-15;
21 ATT-T-96-2] This means the Commission will become
22 involved in a docket necessitating dealing with economic
23 and forward looking costs of USWC's network. Hence, the
24 Commission will be required to look simultaneously at
25 embedded costs in one docket, while at the same time
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1 examining economic costs for the same company in another
2 docket. This is an overlapping and irrational approach.
3 Q But doesn't Telecom 96 deal with the
4 pricing of wholesale services and interconnection
5 elements by the incumbent, not the retail price changes
6 requested by the Company?
7 A Yes. But the two are linked. While
8 consumers will not pay these rates directly, they will be
9 affected indirectly. At the risk of oversimplifying,
10 lower wholesale and unbundled element rates generally
11 will be beneficial for competing carriers and the
12 consuming public, reducing barriers to entry and driving
13 down retail prices.
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1 However, if the rates are set too low, this could
2 discourage competitors from installing their own network
3 facilities. And it could financially weaken the
4 incumbent LECs, thereby jeopardizing service quality and
5 reliability.
6 In contrast, if wholesale prices and unbundled
7 element rates are set at relatively high levels, barriers
8 to entry will remain relatively high, the evolution
9 towards increased competition will be slowed, the
10 incumbent local exchange carriers will tend to be
11 shielded from downward pricing pressures, and the public
12 will be slower to gain the benefits of effective
13 competition. I do not mean to suggest, however, that
14 lower wholesale prices and unbundled rates are always
15 better for consumers, regardless of how low the price is
16 set. To the contrary, if carrier-to-carrier rates are
17 set at very low levels, new entrants will have little
18 incentive to invest in their own network facilities.
19 Under these circumstances, competitive activity in the
20 retail portion of the market may be intense, but the
21 scope and extent of this activity shall be somewhat
22 limited, if none of the new entrants replace their own
23 facilities for those of the incumbent LEC's network.
24 Some incumbent LECs have complained that the
25 carrier-to-carrier pricing provisions of Telecom 96 go
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1 too far, making entry too easy and endangering their
2 existing revenues and profits. However, it should be
3 remembered that Congress also broke down barriers to
4 entry by the incumbent LECs into interLATA long distance
5 and other markets. While some aspects of the new law may
6 create problems for the incumbent LECS, other aspects
7 create tremendous opportunities for them.
8 The Company's approach to this case ignores the
9 careful balancing act and pro-competitive approach
10 adopted by Congress. USWC asks the Commission to boost
11 the Company's revenues and profits drastically by
12 increasing its local exchange rates, without offsetting
13 recognition of the increased revenues and market
14 opportunities which benefit the Company in other markets.
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1 A recently released study by The National
2 Regulatory Research Institute (NRRI) discusses the need
3 to maintain an overall perspective and the advantages of
4 taking a "hands off" approach to requests like those made
5 by the Company in this proceeding:
6 It would be contrary to the intent of Congress to
provide financial assistance in the form of
7 increased retail rates for existing
telecommunications services, in order to
8 compensate the LECs for having to sell unbundled
network elements at rates that are below the
9 embedded cost of production. If retail rates are
increased, and if the commissions are to keep the
10 regulatory process symmetrical, they will have to
reduce the retail prices when the LECs make a
11 profit in their new markets. This would be a
regulatory nightmare. Rather than becoming
12 entangled in a debate over the magnitude of the
losses and wins of these different markets, the
13 commissions should reject any proposition to
rebalance the rates in order to provide
14 compensations for prices at cost.
[Competition-Enhancing Costing and Pricing
15 Standards for Telecommunications Interconnection,
NRRI, David Gabel, Ph.D. September, 1996,
16 pp. 26,27.]
17 Q The NRRI study advises commissions to
18 reject the "rebalancing" of rates. Is USWC asking the
19 Commission to rebalance rates in Idaho?
20 A Yes. It wants to drastically increase
21 Title 61 rates. "Rebalancing," as used by the Regional
22 Bell Operating Companies (RBOCs), typically means
23 increasing basic local exchange rates and lowering
24 switched access or toll rates. In Idaho, toll rates are
25 not regulated. Therefore the Company does not need
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1 permission to lower these rates, if it finds this
2 preferable. However, USWC is asking the Commission to
3 "restructure local prices" to bring about dramatically
4 higher residence rates. The essence of the argument is
5 the same as that supporting rebalancing proposals in most
6 jurisdictions. While competition will undoubtedly
7 increase as a result of the 1996 Telecommunications Act,
8 there is no way to know how market forces will affect
9 historic rate relationships. In my view, it is not
10 appropriate for the Commission to engage in a
11 `restructure' of basic local exchange rates prior to the
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1 entry of new carriers, and the opportunity to see how
2 competitors approach the joint cost recovery problem.
3 While I would not be surprised to see substantial
4 downward pressure on some business rates, this does not
5 mean that residential rates will be immune to competitive
6 pressures, or that they should increase.
7 Q In her testimony for U S WEST, Ms. Mary S.
8 Owen refers to facilities-based competition as "true"
9 competition and says that "mere" resellers add "little,
10 if anything, to the community." [DI, p. 15.] Do you
11 agree?
12 A No. And neither apparently did Congress
13 when it passed the Telecommunications Act, which
14 stimulates local exchange competition in three distinct
15 ways. One of these is by mandating interconnection of
16 competing facilities-based carriers; but the other two
17 ways are through competitive carrier resale of the
18 existing services of incumbent carriers (by mandating a
19 wholesale discount) and through creation of competing
20 services out of unbundled service elements of the
21 incumbent carriers (by mandating extensive unbundling at
22 regulated prices). That is, two of the three ways
23 Congress has provided for local service competition
24 invite the entry of resellers. Congress required
25 incumbent local exchange carriers like USWC to sell to
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1 resellers. And it prohibited the incumbent carriers from
2 engaging in behavior which would maintain or erect
3 barriers to entry by resellers.
4 Clearly, high prices of unbundled elements are a
5 barrier to the competitive entry of resellers. And where
6 the incumbent carrier has no facilities-based competition
7 (as USWC notes it has none), this means the incumbent
8 carrier will continue to enjoy a monopoly. If USWC
9 manages to get its local exchange prices doubled, it will
10 reap monopoly profits.
11 Q But won't such high rates encourage the
12 building of competing facilities, as USWC claims?
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1 A Perhaps, if potential competitors believe
2 such high prices will last. However, potential entrants
3 will realize that Idaho prices have moved well above the
4 level in other jurisdictions, and they will be skeptical
5 about making massive investments in facilities based upon
6 what could be a short term pricing anomaly. In fact, I
7 suspect that within a few years the price of local
8 service will have descended back towards economic cost,
9 in any case. Despite the best efforts of LECs like USWC
10 to keep their local monopolies, they are going to have to
11 unbundle their facilities to conform to the Telecom Act,1
12 and the prices they will be allowed to charge will
13 probably be based on economic costs, not allocated
14 embedded costs. According to Section 252(d) (1) of the
15 Act, "the just and reasonable rate for network elements:
16 (A) shall be--
`(i) based on the cost (determined without
17 reference to a rate-of-return or other
rate-based proceeding) of providing the
18 interconnection or network element
(whichever is applicable), and
19 `(ii) nondiscriminatory, and
`(B) may include a reasonable profit.
20
21 Despite what USWC's witnesses say, the Company
22 does not appear eager to engage in competition. Rather,
23 it seems to be setting the stage for maximizing its short
24 run profits during the transition to a more competitive
25 market. If Idaho
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19 1 251(c)(3) UNBUNDLED ACCESS - The duty to provide,
to any requesting telecommunications carrier for the
20 provision of a telecommunications service,
nondiscriminatory access to network elements on an
21 unbundled basis at any technically feasible point on
rates, terms, and conditions that are just, reasonable,
22 and nondiscriminatory in accordance with the terms and
conditions of the agreement and the requirements of this
23 section and section 252. An incumbent local exchange
carrier shall provide such unbundled network elements in
24 a manner that allows requesting carriers to combine such
elements in order to provide such telecommunications
25 service.
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1 local ratepayers are to enjoy the benefits of competition
2 in the short run, that competition will have to be
3 provided by resellers. To the extent the Company's
4 proposals will increase both its retail rates and its
5 wholesale resale rates, there is nothing about these
6 proposals which will encourage such entry. To the extent
7 the Company's proposals create a monopoly pricing
8 umbrella, which will increase its overall revenue level,
9 angering many customers, and make it easier for new
10 entrants to undercut the new, higher, rate levels. I
11 concede these proposals could stimulate some additional
12 competitive entry. However, I do not think this would be
13 in the long run public interest. And it is not in the
14 short run interests of those customers who will be forced
15 to pay much higher rates until competition intensifies.
16 The Commission must not be misled on this point.
17
18 Economic Costs vs. Embedded Costs
19 Q Please turn to the third section of your
20 testimony. Could you comment on the importance of
21 "economic costing" in pricing the network?
22 A Certainly. Virtually all parties,
23 including USWC, agree that prices must be based on
24 economic costs to assure a complete transition to an
25 effectively competitive marketplace. According to the
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1 Company,
2 Now that the "marketplace devoid of competition"
has been jettisoned in favor of a fully
3 competitive local and interexchange market, the
primary rationale for uneconomic pricing has
4 completely fallen. This Commission must now
address the issues of economic pricing for local
5 exchange service concurrent with the further
opening of the marketplace to competition.
6 [USWC, Wilson Direct, p. 2.]
7 I agree that this is what the Commission should do.
8 However, while advocating "economic pricing", what the
9 Company is actually proposing in this case is not based
10 upon economic costs. Nor is it based upon a sound
11 interpretation of
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1 economic theory. To an economist, economic costing and
2 pricing involves the type of analysis presented later in
3 this testimony.
4 The September 1996 NRRI study distinguishes
5 economic costs from embedded or historical costs:
6 First, in cases before both the Federal
Communications Commission (FCC) and state public
7 utilities commissions, parties have argued over
the merits of basing rates on incremental
8 (economic) costs versus embedded (historical),
fully distributed costs. [Competition-Enhancing
9 Costing and Pricing Standards for
Telecommunications Interconnection, NRRI, p. 1.]
10 And,
The notion of the embedded cost of service has
11 less and less meaning in today's evolving
telecommunication markets. [Ibid., p. 15.]
12
13 The NRRI report is consistent with the widely held
14 view that state commissions should move away from
15 embedded cost allocation approaches and use economic or
16 incremental costing methods instead. If this is done in
17 this proceeding, as I recommend, the Company's rate
18 increases should be rejected, since they are not
19 justified by the available data concerning economic
20 costs.
21 Q Please explain the term "economic cost, as
22 contrasted with "embedded cost."
23 A Accountants are concerned primarily with
24 the proper recording and measuring of historical costs
25 based upon a uniform set of rules. The data, recorded in
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Don Reading, Di 16
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1 the books and records of a firm, are referred to as
2 "accounting" or "embedded" costs. Economists, on the
3 other hand, have developed a comprehensive set of
4 theories concerning cost, which they use to describe,
5 explain and predict the behavior of firms and individuals
6 (e.g., consumers).
7 While embedded costs -- the accountant's measure
8 of cost -- are quite practical, readily available, and
9 fairly consistent from firm to firm, the economist's
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1 idea of cost is more useful in analyzing the critical
2 decisions made by management and government.
3 In some telecommunications jurisdictions, the
4 linkage between embedded cost and telephone rates has at
5 times been very direct and near-absolute: the embedded
6 costs were allocated to various service categories, and
7 this largely determined the rates charged. At least in
8 recent years, however, most jurisdictions have followed
9 procedures in which the linkage is less direct and more
10 flexible. Embedded costs remain important, but they
11 largely influence or control the overall revenue level,
12 without necessarily controlling the rates charged for
13 specific items. A variety of information is used in
14 determining specific rates, including economic cost
15 estimates.
16 For instance, the target revenue stream is often
17 determined by embedded rate of return data and then
18 divided between the various service categories on the
19 basis of historic rate relationships, value of service
20 patterns, relative levels of economic cost, and other
21 considerations. Many jurisdictions rely increasingly on
22 some form of estimated economic cost (e.g., long run
23 incremental cost), but regulators have typically allowed
24 a mark-up, or contribution, above cost, to give the
25 carrier an opportunity to earn a fair rate of return on
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Don Reading, Di 17
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1 its embedded investment.
2 Recently, the form of economic cost gaining the
3 most popularity is TSLRIC, or total service long run
4 incremental cost. As explained at length in Appendix B,
5 "Costing Definitions," TSLRIC is defined as a firm's
6 long-run total cost of producing all its goods and
7 services, except the service in question, subtracted from
8 the firm's long-run total cost of producing all its goods
9 and services, including the service in question. In
10 effect, it measures the difference between producing a
11 service and not producing it. This is particularly
12 relevant when evaluating claims that, in the aggregate, a
13 service is "subsidized" by other services produced by the
14 same firm.
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1 Q Does TSLRIC approximate allocated embedded
2 cost?
3 A No. There are many factors contributing to
4 the gap between total embedded cost and TSLRIC, including
5 the impact of changing technology and the fact that long
6 run cost calculations involve a higher degree of
7 optimization or efficiency than can generally be achieved
8 in actual practice.
9 However, the most important factor explaining the
10 gap between TSLRIC and embedded total costs is the manner
11 in which certain joint and common costs are treated in
12 TSLRIC calculations. Where network elements are required
13 for multiple telecom services, the cost of these elements
14 may not be reflected in the TSLRIC calculations for any
15 single service. As the FCC explains:
16 676. Certain types of costs arise from the
production of multiple products or services. We
17 use the term "joint costs" to refer to costs
incurred when two or more outputs are produced in
18 fixed proportion by the same production process
(i.e., when one product is produced, a second
19 product is generated by the same production
process at no additional cost). [FCC, CC Docket
20 No. 96-98; CC Docket No. 95-185, Implementation of
the Local Competition Provisions in the
21 Telecommunications Act of 1996, August 8, 1996.]
22 Since the second product is generated at no
23 additional joint cost, and TSLRIC only focuses on the
24 additional cost of each product, the joint cost does not
25 appear in the TSLRIC amount. Stated differently, if the
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Don Reading, Di 18
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1 cost of a particular network element remains the same
2 regardless of whether or not any particular telecom
3 service is produced using that element, the cost of that
4 element will not be reflected in the TSLRIC of the
5 individual services. In mathematical terms the cost of
6 the element drops away from the TSLRIC calculations, and
7 thus the TSLRIC of each individual service will exclude
8 the cost of that element.
9 A large gap between TSLRIC and price is typical
10 for most telecom services. For instance, when the TSLRIC
11 concept is applied to a service like Call Waiting, the
12 estimated cost is likely to be just a few pennies per
13 month. Similarly,
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Don Reading, Di 18A
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1 when the TSLRIC concept is applied to switched access,
2 the same pattern exists: the TSLRIC amount is a small
3 fraction of the established price.
4 Although TSLRIC calculations for individual
5 services do not include the full amount of joint and
6 common (shared) costs that are incurred by the firm, this
7 does not mean these costs cannot be recovered from
8 customers. To the contrary, regulators have generally
9 allowed recovery of joint and common costs when setting
10 the tariffed rates. Whether by allowing a substantial
11 mark-up above TSLRIC, by setting prices on the basis of
12 cost allocation procedures, or by using some other
13 procedure to reconcile rates with the overall embedded
14 revenue requirement, regulators have historically given
15 carriers an opportunity to recover their joint and common
16 costs. While the pattern of joint and common cost
17 recovery under competitive conditions may differ, the
18 overall result is similar to that achieved under
19 regulation: joint and common costs are typically
20 recovered from all services or products that require or
21 benefit from these costs.
22 Under competitive conditions, an efficient firm
23 has an opportunity in the long run to recover its total
24 costs, including its joint and common costs. The extent
25 to which the joint and common costs are recovered through
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Don Reading, Di 19
AARP
1 the prices charged for particular services, or recovered
2 from particular groups of consumers, will not be uniform,
3 however. Instead, this pattern of cost recovery will be
4 heavily influenced by demand conditions, including
5 relative levels of perceived value, the extent to which
6 close substitutes exist for particular products or
7 services, and the price of those alternatives.
8 Q Are the Company's cost studies in this
9 proceeding based on economic costs?
10 A No. In response to Staff's Production
11 Request 037 that asks for copies of any forward-looking
12 cost studies (e.g., TSLRIC or TELRIC) performed for the
13 Company's Southern Idaho operations, USWC replied,
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1 The Company objects to this interrogatory on the
grounds that it seeks information which is not
2 calculated to lead to evidence that is relevant in
this embedded-cost rate case.... The Company is
3 providing with this response its fully
distributed, embedded cost study results for 1FR
4 and 1FB service in Southern Idaho. These results
are confidential and were derived using the Cost
5 Accounting Allocation System (CAAS) which develops
the Title 61 costs for Southern Idaho which are
6 the basis of the Company's advocacy in this rate
case. [Response to Staff's First Production
7 Request, Request No. 037, Respondent and witness
Dallas Elder.]
8
9 Therefore, it is clear that the Company is making
10 one last attempt to convince the Commission to
11 drastically increase basic residential exchange rates
12 based on allocated embedded cost methods. These methods
13 have not been used for the Company in Idaho in the last
14 dozen years. And they have not been accepted by the
15 Commission as providing a valid argument for setting the
16 highest possible rates for its most captive customers, as
17 the Company proposes here. This approach is becoming
18 irrelevant for today's telecommunications markets, and
19 should not be endorsed in this proceeding. As explained
20 below, the results of a forward-looking economic analysis
21 of the costs of providing local service demonstrate that
22 local service is covering its direct, incremental costs
23 and is generating a substantial contribution to joint and
24 common costs.
25
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Don Reading, Di 20
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1 Basic Local Exchange Service
2 Q Please turn to the fourth section of your
3 testimony. Could you please define "basic local exchange
4 service"?
5 A Certainly. Basic local exchange service
6 allows customers to communicate within a specified local
7 calling area by placing and receiving calls that
8 originate and terminate within that defined geographic
9 area. The portion of the LEC's total costs that are most
10 properly and exclusively attributed to basic local
11 exchange service
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Don Reading, Di 20A
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1 are the usage costs associated with local calling
2 volumes. These costs primarily consist of the usage
3 sensitive, central office switching costs and the costs
4 of interoffice trunking or transport, which is required
5 to handle calls from one part of the local exchange to
6 another. In addition, there are certain other minor
7 costs that can also be directly attributed to basic local
8 exchange service, including the cost of billing and
9 collecting the rates charged for this service.
10 Q Dr. Reading, do you believe that the cost
11 of the loop, drop wire, line card, and channel connection
12 are part of the incremental cost of basic local exchange
13 service?
14 A No. While these costs are necessary in
15 order to provide basic local exchange service, they are
16 equally necessary for the provision of toll, access, and
17 custom calling service. In terms of economic theory,
18 these are joint or shared costs of the entire family of
19 services that require use of these facilities; they are
20 not part of the incremental cost of any single service
21 within this family of services.
22 Disputes over the appropriate definition and
23 treatment of these joint costs lie at the heart of the
24 longstanding dispute concerning whether, or to what
25 extent, basic local exchange service is "subsidized" by
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Don Reading, Di 21
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1 other services. Most incumbent LECs include the entire
2 amount of these joint costs in their local exchange cost
3 estimates. However, this procedure is not valid, and the
4 resulting total cannot be compared meaningfully to the
5 revenues derived from local exchange service. Nor can it
6 be used to draw valid conclusions concerning subsidies.
7 LECs have many revenue sources that depend upon,
8 and are available to help recover, the joint costs of the
9 loop, drop wire, line card, and channel connection.
10 Hence, these joint costs cannot meaningfully be compared
11 with the revenues associated with local exchange service
12 alone. Nor can they appropriately
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Don Reading, Di 21A
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1 be included in an estimate of the total service long run
2 incremental cost (TSLRIC) of basic local exchange
3 service.
4 The facilities that are used in providing access
5 lines also are required for -- and used by -- other
6 services that the Company provides, including interstate
7 switched access, intrastate switched access, intrastate
8 toll and custom calling. The poles, cable, drop wire,
9 line card and channel connection are required equally for
10 the provision of these other services.
11 Historically, economists, regulators and others
12 have recognized that one of the crucial components, or
13 intermediate products, used to provide toll, local and
14 other services is an access line. That access line is
15 available jointly to serve toll and local markets.
16 Unless congestion is present, there is no trade-off
17 between the two purposes. In other words, when an
18 additional access line is installed, it simultaneously
19 increases the intermediate output (access) available to
20 both toll and local markets (as well as the market for
21 other services, such as custom calling).
22 Even if a line is intended strictly for local
23 calls, it can also be used to place and receive toll
24 calls, and vice versa. In this situation, access is
25 analogous to cattle feed in the production of beef and
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Don Reading, Di 22
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1 leather coats. Even if feed is strictly intended to
2 increase the amount of available beef, it concurrently
3 increases the amount of hides that are available. Of
4 course, because an intermediate product is involved,
5 there is no assurance that quantities of the final
6 products will be produced in exact proportion to the
7 quantities of inputs.
8 In other words, an increase in cattle feed will
9 not necessarily increase the number of leather coats that
10 are produced, if the hides are thrown away and never
11 converted into coats. Similarly, the addition of another
12 access line will not automatically increase the number of
13 toll or local calls. Nor will the volume of the final
14 products (completed calls to various locations) increase
15 in strict proportion to the addition of another access
16 line. There is nothing startling, however, about this
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Don Reading, Di 22A
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1 situation. In a similar way, hamburger production does
2 not vary precisely with the number of leather coats.
3 The confusion can be eliminated by further
4 disaggregation. Simply stated, completed toll calls
5 typically involve three or more intermediate steps: use
6 of two access lines, one or more switches and one or more
7 interoffice trunks. In turn, some of these components
8 can be used only for local purposes, some only for toll,
9 and others for both purposes. Because of congestion,
10 switching and trunking typically involve either direct
11 costs (when the item is dedicated to one market or the
12 other) or common costs (when the item is shared but
13 increased use in one market displaces use in the other
14 market). The access line is obviously either a joint or
15 a common cost, since it serves both markets. In the
16 typical situation where the line is not highly congested
17 and use in one market does not preclude use in the other
18 market, it can be viewed most accurately as a joint cost.
19 More specifically, the provision of an access line
20 yields at least two joint products: access to customers
21 within the same locality (local access); and access to
22 customers within other cities (toll access). Because the
23 latter form of access is provided via toll carriers, one
24 may think of the access line as providing access to local
25 and toll networks. Of course, since communication is
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Don Reading, Di 23
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1 generally two-way, we also may say that two other joint
2 products are provided, as well: access to the customer
3 installing the line for other customers within the same
4 locality; and access to that customer for toll carriers
5 and their customers.
6 Sometimes it is argued that "access" (or access
7 lines) can be viewed as a separate product, thus
8 "solving" the joint cost problem. However, even if we
9 were to accept this notion as valid (which I do not), it
10 does not solve the pricing problem or change the
11 fundamental nature of the situation. To the contrary,
12 the product thereby defined is an intermediate product
13 ultimately used in two or more markets, and the joint
14 characteristics do not simply disappear. Similarly, if
15 one
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Don Reading, Di 23A
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1 defines the product being produced from cattle feed as
2 "cattle," this doesn't change the fact that cattle feed
3 is a joint cost that impacts both the beef and leather
4 markets. Nor does it change the fact that the cost of
5 the cattle feed (or the cost of the intermediate product
6 called "cattle") is ultimately borne by purchasers of
7 both beef and leather.
8 "Access" is provided to other lines situated
9 within the same city, but it is simultaneously provided
10 to toll carriers with points of presence in that city.
11 Via their facilities, "access" is provided in both
12 directions to millions of lines located in hundreds of
13 other cities around the state, nation and planet. There
14 is no reason to assume that the entire cost of a
15 particular access line should be borne entirely by the
16 customer directly connected to that line, since "access"
17 functions in both directions. It provides valuable
18 benefits to both the local market and within the long
19 distance market.
20 There is no economic reason to assume the entire
21 cost of the access line should be recovered through the
22 price of local service, from the particular customer who
23 requests installation of the line. Rather, it is
24 appropriate to recover the cost from all of the
25 beneficiaries of that line -- including the other local
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Don Reading, Di 24
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1 customers in that city and the toll carriers that are
2 interconnected to the new line, whether directly or
3 indirectly.
4 Q Have other jurisdictions followed this
5 approach with regard to analyzing and recovering the
6 joint cost of access lines?
7 A Yes. For example, on April 11, 1996, the
8 Washington Utilities and Transportation Commission issued
9 an order rejecting proposed tariff changes by U.S. West.
10 [Commission Decision and Order Rejecting Tariff
11 Revisions, Docket No. UT-950200.] In analyzing various
12 cost studies submitted in that proceeding, the Commission
13 found as follows:
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Don Reading, Di 24A
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1 [T]he cost of the local loop is not appropriately
included in the incremental cost of local exchange
2 service. The local loop facilities are required
for nearly every service provided by the Company
3 to a customer. Neither local service nor in-state
long distance service nor interstate long distance
4 nor vertical features can reach a customer without
the local loop. Should USWC cease to provide any
5 one of these services, its need for a local loop
to provide the remaining services would remain.
6 The cost of the local loop, therefore, is not
incremental to any one service. It is a shared
7 cost that should be recovered in the rates, but no
one service is responsible for that recovery.
8 USWC's presentation that the local loop is
appropriately and necessarily an element of the
9 cost of local exchange service, made through the
testimony of witness Farrow, is not credible in
10 light of the purposes of a long run incremental
cost study and is inconsistent with accepted
11 economic theory regarding such studies.
[Order, p. 78]
12
13 Similarly, on June 1, 1993, the Colorado Public
14 Utilities Commission adopted a set of rules regarding the
15 costing and pricing of telephone services. [Statement of
16 Adoption of Rules, Docket No. 92R-596T]. In the rules,
17 the Colorado Commission discusses access loops, and
18 states as follows:
19 The access loop is not a separate service but
rather is an input necessary for the provision of
20 many telecommunications services. As such, costs
associated with the access loop will not appear in
21 the total service long run incremental cost of any
single service requiring the access loop but will
22 appear as part of the total service long run
incremental cost of the entire group of services
23 requiring the loop. Consequently, price must be
set so that the sum of the revenues from all
24 services requiring the access loop covers not only
the sum of the total service long run incremental
25 costs for the individual services but also the
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Don Reading, Di 25
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1 shared cost of the loop. Finally, regarding the
computation of stand alone costs, since each
2 service in this group requires the access loop,
the entire cost of the loop will appear in the
3 stand alone cost for each of these services.
[Order, p. 12].
4
5 Q The Company has said that it needs to price
6 local services in a way that makes support for universal
7 service explicit, rather than built-in subsidies. Do you
8 agree?
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Don Reading, Di 25A
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1 A Absolutely. It is vital for the
2 development of competition that prices for services and
3 elements reflect their costs, and that any support needed
4 to maintain universal service levels of subscribership be
5 overt and targeted. I have no quarrel with the Company's
6 basic proposition. Undoubtedly, there are some rural
7 areas of the state where costs are extremely high, and it
8 would be difficult or impossible for customers in these
9 areas to cover the costs of serving them without any help
10 from other parts of the state. What I quarrel with is
11 the Company's claim that it is furthering this goal by
12 doubling the price of local exchange residence service
13 across its entire southern Idaho service territory.
14 As my cost study results show, the vast majority
15 of residence subscribers are more than paying their own
16 way now. The "subsidy" claims are an old fiction,
17 nothing more. Furthermore, the statewide averaged rates
18 proposed by the Company do not eliminate support for
19 high-cost area subscribers; they simply relieve the Title
20 62 services of any responsibility for the high cost of
21 network facilities in these areas and dump all of these
22 costs onto the residents of Boise, Idaho Falls and other
23 urban areas.
24 Q Could you please explain what you mean by
25 the "old fiction" that residence service rates are
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Don Reading, Di 26
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1 subsidized?
2 A Yes. The Company has maintained that
3 residence service rates have been consistently priced
4 below cost, while toll rates have been held high, so they
5 could provide a subsidy. However the pseudo-economic
6 reasoning supporting this argument has been repeatedly
7 rejected, because it is fundamentally unsound. Consider,
8 for instance, the Idaho Commission's reaction to the
9 Company's argument that toll was subsidizing local
10 exchange service in 1983:
11 Moreover we find that the basic economic
rationale advanced in support of CALC charges is
12 fundamentally flawed. During the past few years
AT&T has been relatively successful at recruiting
13 various professional economists to vouch for the
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1 company's contention that access charges are imply
a justifiable method of eliminating a "subsidy" of
2 local exchange service by toll customers. These
economists have reworked the argument rejected by
3 the Supreme Court in Smith v. Illinois into a
consider ably more sophisticated modern version,
4 but when carefully analyzed the theory deserves no
more success than it received a half century ago.
5 [Idaho Public Utilities Commission, Order 18528,
Dec. 1983, p. 13.]
6
7 Recently the Washington Commission rejected this same
8 basic reasoning by USWC:
9 B. Are Residential Rates Priced Below Cost?
Contending that residential rates are
10 heavily subsidized, USWC proposed more than
doubling residential rates over 4 years, and
11 charging rural ratepayers significantly more than
urban ratepayers. In the final year of the USWC
12 proposal, urban ratepayers would pay $21.85 per
month for service and rural ratepayers $26.35.
13 The current statewide average rate for the service
is $10.50.
14 USWC's own cost data -- which supports the
cost study relied on by the Commission -- shows
15 that the incremental cost of local service is less
than $5 per month. Even if the entire incremental
16 cost of the "loop" -- the facilities needed for
the connection between the central office and the
17 consumer's telephone which also carry long
distance and specialized services, such as voice
18 mail, as well as local service -- is allocated to
the local ratepayer the price covers that cost.
19 There simply is no local service subsidy.
[Washington Utilities and Transportation
20 Commission, Docket No. UT-950200, Fifteenth
Supplemental Order, April 1996.]
21
22 Q Have you provided any cost estimates which
23 include the access line or local loop?
24 A Yes. To assist the Commission in
25 evaluating the cost of basic local exchange service and
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Don Reading, Di 27
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1 the significance of this joint cost issue, I provide
2 three sets of schedules. The first set, examining the
3 direct cost of basic local exchange service, excludes all
4 joint costs, including loops costs. This is the
5 preferred approach, for reasons just explained. The
6 other two sets of schedules reflect alternative
7 approaches to the treatment of joint costs. One
8 alternative allocates 50% of the joint costs to basic
9 local service; the other includes 100% of loop costs, in
10 the context of an analysis of the entire family of
11 services which benefit from the joint
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1 costs. Each of these alternative approaches is discussed
2 in section 4 of my testimony, when I present the
3 cost/revenue results.
4 Q Do your cost estimates allow for common
5 costs?
6 A Yes. While the model is not designed to
7 analyze common costs in detail, it provides for a
8 percentage allowance. For illustrative purposes I have
9 assumed that common costs are equal to 10% of the other
10 (direct and joint) costs.
11
12 The Telecom Economic Cost Model
13 Q Turning to the fifth section of your
14 testimony, would you please briefly describe the Telecom
15 Economic Cost Model?
16 A Yes. Appendix B contains a description of
17 the BJA Telecom Economic Cost Model, a computer model
18 used to estimate the long run costs associated with the
19 construction and operation of a telecommunications
20 network. In this proceeding, I used the model to develop
21 cost estimates for 60 individual USWC wire centers in
22 Southern Idaho. The recently sold exchange wire centers
23 were removed from the data base. The cost model output
24 data have been summarized and grouped into direct, joint,
25 and common (overhead) costs per line per wire center.
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Don Reading, Di 28
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1 The direct costs include traffic-sensitive local
2 switching and trunking costs. The joint costs include
3 feeder and distribution costs, customer premises
4 termination costs and non-traffic sensitive end office
5 costs. An allowance for common costs is included by
6 using a 10 percent factor, applied to the sum of the
7 direct and/or joint costs.
8 Provided are summary tables that aggregate the
9 wire center-specific data into four density categories
10 and also for the state as a whole. Density is defined in
11 terms of the number of households per square mile within
12 the geographic area served by each wire center.
13
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19
20
21
22
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24
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1 Q How have you dealt with the joint access
2 line and local loop costs in your model runs for this
3 proceeding?
4 A To assist the Commission in evaluating the
5 cost of basic local exchange service and in understanding
6 the significance of this joint cost issue, I prepared two
7 types of cost estimates. The first type involves the
8 direct cost of basic local exchange service. The other
9 type provides the joint costs of the family of switched
10 services -- including those covered by Title 61 and those
11 covered by Title 62.
12 Q Do your cost estimates allow for common
13 costs?
14 A Our model is not designed to analyze common
15 costs in detail. However, for illustrative purposes I
16 have included an allowance for common costs equal to 10%
17 of the other (direct and joint) costs in certain portions
18 of my exhibits.
19 Q What are the sources of your data?
20 A Used were output tables from the Benchmark
21 Cost Model 2 (BCM2") study which was recently submitted
22 by US West and Sprint to the FCC -- minus the data for
23 the exchanges which were recently sold by the Company.
24 The BCM2 output files contain estimated loop lengths
25 associated with each wire center in the country, derived
935
Don Reading, Di 29
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1 from publicly available census data concerning the
2 location of businesses and households, combined with
3 publicly available data concerning the location of each
4 wire center. In other jurisdictions, where we have been
5 able to compare LEC-supplied loop lengths with BCM2
6 estimates, we have found that the BCM2 estimates are
7 highly correlated with the LEC data.
8 Output data from BCM2 are provided at the Census
9 Block Group (CBG) level; we aggregated to the wire center
10 level in order to use the data in the Telecom Economic
11 Cost Model. We subtotaled various data, including the
12 number of households per CBG, lines served per CBG,
13 average loop length per CBG and
14
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20
21
22
23
24
25
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1 the geographic area within each CBG, in order to
2 aggregate the data for each wire center. Weighted
3 average loop lengths were computed by summing the product
4 of average loop length per CBG and total lines served per
5 CBG, then dividing by the sum of the total lines served.
6 BCM2 output tables were utilized in developing the
7 number of business and residential loops within each wire
8 center. The BCM2 data set was selected for two reasons:
9 the BCM2 data was public information, and the BCM2 data
10 was disaggregated within each wire center in a manner
11 consistent with the BCM2 loop length data.
12 In running the model for this proceeding, we also
13 relied upon input data from the Federal Communications
14 (FCC) Automated Reporting Information System (ARMIS)
15 reports. We used this source in evaluating the
16 percentage of outside plant which is underground and the
17 ratio of single to other business lines. A uniform
18 assumption of 10% aerial plant was used for US West,
19 which is lower than the national embedded average and
20 close to the Idaho embedded average.
21 Q Would you please list the different
22 incremental cost estimates that you calculated?
23 A First, the total cost of a network designed
24 to serve only business customers is compared with the
25 total cost of a network designed to serve both business
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Don Reading, Di 30
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1 and residential customers, thereby deriving the
2 incremental cost of adding residential customers to an
3 all-business network. This represents the TSLRIC of
4 residential service, which is presented on a per unit
5 basis. This analysis includes an estimate of the
6 incremental cost of adding residential loops to a network
7 which would otherwise only serve business customers.
8 Second, we compared the total cost of a network
9 designed to serve only residential customers with the
10 analogous cost of a network designed to serve both
11
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15
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17
18
19
20
21
22
23
24
25
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1 business and residential customers, thereby deriving the
2 TSLRIC of adding business customers to an all-residential
3 network. Again, the results are presented on a per unit
4 basis, for ease of comparison.
5 Q The cost study results are shown on
6 schedules 1-6 of your exhibit. Would you explain the
7 significance of schedules 7-11?
8 A Yes. These schedules contain printouts of
9 pages from the Telecom Economic Cost Model, demonstrating
10 how the model appears on screen. In addition, these
11 pages contain key assumptions used in developing these
12 studies. I am presenting them here for the Commission's
13 convenience and as an aid to understanding Appendix C.
14
15 Cost Study Results
16 Q Please turn to the sixth section of your
17 testimony, in which you present the results of your cost
18 studies. Would you begin by explaining what these cost
19 study results are intended to show?
20 A Yes. They are intended to show the
21 estimated costs of the various network configurations
22 discussed in the previous section, in order to test the
23 reasonableness (or lack of it) of USWC's claims regarding
24 its costs of service and its purported need for rate
25 relief and local service price restructuring in the face
939
Don Reading, Di 31
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1 of competition. For instance, if the data show that
2 basic local residential service is priced below its
3 economic cost and receives a subsidy from other services,
4 the Company's rationale for its rate restructuring would
5 tend to be supported, and USWC's new rate structure might
6 then have some merit. However, the economic cost results
7 show exactly the opposite. The current revenues from
8 basic local exchange service
9
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15
16
17
18
19
20
21
22
23
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25
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1 exceed the relevant economic costs by a wide margin,
2 generating a substantial contribution towards the
3 Company's joint and common costs.
4
5 The four tables in this section present summary
6 results of the following:
7 Table 1: TSLRIC of basic local services
8 Table 2: Cost/revenue comparisons, pure
9 TSLRIC approach
10 Table 3: Cost/revenue comparisons,
11 allocated joint costs
12 Table 4: Cost/revenue comparisons, multiple
13 services
14
15 Q Would you please explain the format of your
16 cost study results?
17 A Yes. As I noted earlier, the Telecom
18 Economic Cost Model has been utilized in conjunction with
19 data for 60 individual wire centers in Southern Idaho.
20 However, to avoid losing sight of the key issues in a sea
21 of different numbers, cost estimates are presented in a
22 summary format. For this purpose, the 60 wire centers
23 are grouped into density cells, based upon the number of
24 households per square mile in the geographic area served
25 by each wire center.
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Don Reading, Di 32
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1 Q Could you please summarize the TSLRIC
2 results for the direct costs of basic local service?
3 A Yes. Table 1 below summarizes these
4 results. As shown, our TSLRIC direct cost estimates do
5 not vary to any significant degree across density cells.
6 This is consistent with our simplifying assumption that
7 the calling characteristics differ between businesses and
8 residences, but do not vary by density. While some
9 variations in calling patterns undoubtedly exist across
10 the state, I am confident that the basic conclusions
11 drawn later in my testimony would not be significantly
12 altered if a more detailed analysis were developed. In
13 lower density areas, where there are fewer people to call
14 within the local exchange, the direct costs might be a
15
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21
22
23
24
25
942
Don Reading, Di 32A
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1 bit lower than shown in my exhibit. Conversely, in the
2 Boise metropolitan area, where the calling scope is much
3 larger, calling volumes are probably above average.
4 However, this would not cause the costs to increase
5 enough to substantially change my conclusions.
6
7 Table 1
8
TSLRIC, Basic Local Service
9 (monthly, per line)
10 Density Density Density Density
<5 5-200 201-650 651-850 Overall
11
Residential $1.11 $1.08 $1.06 $1.05 $1.07
12
Business $2.64 $2.57 $2.55 $2.53 $2.56
13
14
15 Q Why are these costs so low?
16 A The TSLRIC of basic local service actually
17 is very low, when the costs of the local loop are
18 correctly classified as a joint cost of all switched
19 services. While the resulting basic local exchange cost
20 figures (less than $1.50 per month for most residential
21 customers) are far below the existing tariffed rates,
22 this is not surprising. Nor is it an anomaly. A very
23 large gap between TSLRIC and price is typical for most
24 telecom services. For instance, when the TSLRIC concept
25 is applied to a service like Call Waiting, the estimated
943
Don Reading, Di 33
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1 cost is likely to be just a few pennies per month.
2 Similarly, when the TSLRIC concept is applied to switched
3 access, the same pattern exists: the TSLRIC amount is a
4 small fraction of the established price.
5 Although TSLRIC calculations for individual
6 services do not include the full amount of joint and
7 common (shared) costs incurred by the firm, this does not
8 mean these costs cannot be recovered from customers. To
9 the contrary, regulators have generally allowed recovery
10 of joint and common costs when setting the
11
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18
19
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22
23
24
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1 tariffed rates. Whether by allowing a substantial
2 mark-up above TSLRIC, by setting prices on the basis of
3 cost allocation procedures, or by using some other
4 procedure to reconcile rates with the overall embedded
5 revenue requirement, regulators have historically have
6 given carriers an opportunity to recover their joint and
7 common costs. While the pattern of joint and common cost
8 recovery under competitive conditions may differ, the
9 overall result is similar to that achieved under
10 regulation: joint and common costs typically are
11 recovered from all services or products that require or
12 benefit from these costs.
13 Under competitive conditions, an efficient firm
14 opportunities in the long run to recover its total costs,
15 including its joint and common costs. The extent to
16 which the joint and common costs are recovered through
17 the prices charged for particular services, or recovered
18 from particular groups of consumers, will not be uniform,
19 however. Instead, this pattern of cost recovery will be
20 heavily influenced by demand conditions, including
21 relative levels of perceived value, the extent to which
22 close substitutes exist for particular products or
23 services and the price of those alternatives.
24 Q USWC claims that residential basic local
25 exchange service is not paying its way and hence those
945
Don Reading, Di 34
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1 rates need to be more than doubled. Is this true?
2 A No. For U S WEST's residential customers as
3 a class, the existing basic local exchange rate, together
4 with the FCC's subscriber line charge, covers the total
5 service long-run incremental cost of basic local exchange
6 service and generates a substantial contribution to joint
7 and common costs.
8 In order to provide the Commission with detailed
9 information concerning the revenue to cost relationships
10 and the related question of whether and to what extent
11 subsidies exist under the current rate structure, I have
12 prepared a series of different analyses comparing costs
13 with revenues. I studied each density cell using
14
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16
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18
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20
21
22
23
24
25
946
Don Reading, Di 34A
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1 three different approaches to joint costs and two
2 different TSLRIC studies (focusing on different
3 increments). These approaches differ primarily in how
4 joint and common costs are treated.
5
6 (1) A "pure" TSLRIC approach: This analysis
7 excludes joint costs. To the extent direct
8 revenues exceed direct costs, this analysis
9 measures the surplus that is available as a
10 contribution to joint and common costs.
11 (2) An "allocation" approach: This analysis
12 includes an allocated share of joint costs
13 (using an allocation factor of 50%).
14 (3) A "multiple service" approach: This
15 analysis includes 100% of the joint costs,
16 together with the revenues and direct costs
17 of the entire family of switched services,
18 as well as certain other closely related
19 services.
20
21 Comparisons were prepared for both definitions of
22 TSLRIC discussed earlier in my testimony: i.e., the
23 incremental cost of adding residential customers to a
24 network that would otherwise include just business
25 customers and the incremental cost of adding business
947
Don Reading, Di 35
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1 customers to a network that would otherwise include just
2 residential customers. Schedule 6 shows the results of
3 these revenue/cost comparisons.
4 Q Would you please summarize the results of
5 your revenue to cost comparisons using a "pure" TSLRIC
6 analysis, and tell us whether a subsidy exists?
7 A As economists use the term, subsidies are
8 relatively rare. Unless the direct TSLRIC is less than
9 the corresponding revenues, the service is not being
10 "subsidized" as economists use this terminology. Page 1
11 of schedule 6 shows this
12
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16
17 /
18
19
20
21
22
23
24
25
948
Don Reading, Di 35A
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1 analysis, in which the revenues derived from basic local
2 exchange service are compared with the direct costs of
3 this service, including an allowance for the portion of
4 common costs directly attributable to this service. As
5 shown, the revenues from basic local service consistently
6 exceed the direct cost, leaving a substantial margin of
7 contribution toward joint and common costs. This is true
8 regardless of the density cell, or the increment being
9 studied. For easy reference, I have summarized the
10 overall statewide revenue, cost and contribution
11 estimates in Table 2 below. As shown below and in
12 Schedule 6, in absolute dollars per line the contribution
13 generated by business customers is greater than the
14 contribution generated by residential customers.
15 Nevertheless, each category generates substantial
16 contributions, and neither category receives any
17 subsidies from the other.
18 Table 2
Cost/Revenue Comparisons, Basic Local Exchange Services
19 (monthly, per line)
20 Local Local
Direct Direct Common
21 Revenues Costs Costs Contribution
22 TSLRIC of
Residential $12.00 $1.07 $0.11 $10.82
23 Service
24 TSLRIC of
Business $31.16 $2.56 $0.26 $28.35
25 Service
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Don Reading, Di 36
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1 Q The above approach excludes joint costs
2 from the cost of basic local exchange service. Is this
3 approach supported by economic theory?
4 A Yes. The approach is fully consistent with
5 economic theory. An analysis of the costs and revenues
6 from basic local exchange service should ideally exclude
7 joint costs in their entirety. Pricing in accordance
8 with economic theory does not involve allocations of
9 joint costs. Rather, each service should be priced in
10 excess
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Don Reading, Di 36A
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1 of its direct costs and make a contribution towards the
2 joint and common costs. According to economic theory,
3 the magnitude of this contribution will tend to vary
4 depending upon differences in perceived value and other
5 aspects of demand conditions.
6 Q You have provided an analysis which
7 includes an allocation of joint costs. What is the
8 purpose of this portion of your exhibit?
9 A Some regulatory Commission's are not
10 comfortable with this "pure" economic approach (or want
11 also to look at the issue from another perspective).
12 Accordingly, they sometimes request studies in which a
13 reasonable share of the loop costs are allocated to basic
14 local exchange service).2 For this reason, a second
15 approach is present, in which 50% of loop costs is
16 allocated to basic local exchange service.
17 Under an allocation approach, the pivotal question
18 involves the appropriate share of joint costs to be
19 allocated to basic exchange service. The results I am
20 presenting use a flat percentage allocator of 50% of
21 these joint costs to basic service. This is consistent
22 with an assumption that 25% of the joint costs are
23 allocated to the interstate long distance category and
24 that the remaining fraction is allocated to intraLATA
25 toll, intrastate interLATA switched access, custom
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1 calling and miscellaneous other services.
2
3 /
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6
7 /
8
9
10
11
12
13
14
15
16
17 2 For example, on August 31, 1995, the Pennsylvania
Public Utility Commission, in a proceeding to update the
18 state's universal service policies stated: "We agree with
the PTA and the OCA that local loop costs are joint or
19 shared costs since the local loop is jointly utilized to
provide a wide array of telecommunications services,
20 among which are basic universal service." [Order, Docket
No. I-00940035, at 12]. Having accepting this
21 theoretical point, and having conceded that joint costs
should be excluded from a TSLRIC analysis to "be
22 consistent with the economic theory underlying the
TS-LRIC methodology," the Pennsylvania Commission
23 nevertheless concluded that for its purposes it wanted to
view cost studies which "include at least a significant
24 portion of costs associated with local loops."
[Id. at 13].
25
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Don Reading, Di 37A
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1 Q Would you please provide a further
2 explanation of your 50% allocation factor?
3 A Yes. As I have said, joint costs are
4 required for the provision of local exchange, custom
5 calling, switched access, toll and other services. There
6 is no universally accepted method of allocating these
7 costs, and differences in the allocation percentage or
8 method can result in very significant differences in the
9 cost study results. For that reason, I believe that, to
10 the extent the Commission wants to review a basic local
11 exchange cost study that includes a share of joint costs,
12 the Commission is best served by a relatively simply
13 allocation approach that is also fully stable. Clearly,
14 a uniform 50% factor meets both criteria.
15 This allocation is consistent with that made by
16 the Idaho Public Utilities Commission in its December,
17 1985 Order that stated,
18 IT IS HEREBY ORDERED that NTS costs of the local
telephone corporations in Idaho be allocated 50%
19 to local exchange services and 25% to intrastate
toll with the recognition that 25% of them are
20 assigned to interstate toll services. [Idaho
Public Utilities Commission, Order No. 20182, Case
21 No. U-1500-153, p. 12.]
22
23 In 1988, Order No. 21949, the Commission reduced
24 the fraction of USWC's NTS costs allocated to intrastate
25 toll to 15%. [Idaho Public Utilities Commission, Order
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Don Reading, Di 38
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1 No. 21949, Case No. MTB-T-88-3, p. 3.] However, it did
2 not increase the 50% factor applicable to local exchange.
3 This 50% factor is similar to the percentage
4 allocation that would be assigned to basic local service
5 under other, more sophisticated allocation approaches
6 sometimes used by regulators, such as revenue-based
7 methods, usage-based methods and direct cost-based
8 methods. For example, in Docket No. U-85-23, the
9 Washington Commission recently assigned loop costs 25% to
10 interstate toll, 16.95% to intrastate toll, and 58.05% to
11 all local services (including custom calling
12
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17 /
18
19
20
21
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23
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25
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Don Reading, Di 38A
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1 and other optional services). [See reference in WUTC
2 Order in Docket No. UT-950200, p. 79.]
3 Q Would you please explain the calculations
4 that show the cost/revenue relationships when 50% of
5 joint costs are allocated to basic local exchange?
6 A In this analysis, shown on page 2 of
7 Schedule 6, the revenues again are derived entirely from
8 the components of basic local service. These revenues
9 (column a) are compared with the direct costs of
10 providing this level of service (column b), 50% of the
11 joint costs, including the local loop (column c), and an
12 allowance for common costs equal to 10% of the
13 aforementioned direct and joint costs (column d). The
14 overall statewide results using the "allocation" approach
15 are summarized in table 3 below. The first line
16 corresponds to residential service as a whole and the
17 second to business service as a whole.
18 Table 3
Cost/Revenue Comparisons Including 50% of Joint Costs
19 (monthly, per line)
20 Local Local
Direct Direct Joint Common
21 Revenues Costs Costs Costs Contribution
22 TSLRIC of
Residential $12.00 $1.07 $9.03 $1.01 $ .90
23 Service
24 TSLRIC of
Business $31.16 $2.56 $4.70 $0.73 $23.18
25 Service
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Don Reading, Di 39
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1 For the overall residential class, the average
2 revenues per line are $12.00, excluding any zone charges
3 or line extension charges. From this amount, direct
4 costs of $1.07 are subtracted, along with an allocated
5 share of the joint costs and an allowance for common
6 costs, leaving a small surplus of $.90. Stated another
7 way,
8
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17
18
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21
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23
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Don Reading, Di 39A
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1 for the average residential customer the direct costs,
2 plus an allocated share of the joint costs and an
3 allowance for common costs total to $11.10 per month, is
4 a little below the current average rate paid by most
5 residential customers (excluding the FCC Subscriber Line
6 Charge (SLC) of $3.50). Residential rates in the most
7 urban areas (Group 3 cities like Boise, Idaho Falls, and
8 Pocatello) are slightly above this average, with a
9 current monthly price of $12.06. Rate Group 2
10 residential customers (cities like Blackfoot, Ketchum,
11 and Twin Falls) pay $11.45 per month. Only residential
12 customers in Group 1 (cities like American Falls,
13 Preston, and Weiser) pay substantially less, $10.72 per
14 month. Thus, instead of being "subsidized", as alleged
15 by US West, on average the typical residential basic
16 local exchange customer in Southern Idaho provides more
17 than enough revenue to cover their direct costs and an
18 allocated share of the joint costs.
19 Q Besides the "pure" TSLRIC approach and the
20 joint cost allocation approach, have you used a third
21 approach in which you consider all of the joint costs?
22 A Yes. Since joint and common costs are a
23 substantial fraction of a local exchange carrier's
24 overall costs, it is useful to analyze these costs from a
25 variety of different perspectives. One approach is to
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Don Reading, Di 40
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1 look at an incremental group of customers and ask the
2 question: What incremental revenues will the firm
3 generate, if it serves this group of customers? These
4 incremental revenues would then be matched with the
5 incremental costs that are required to serve that group
6 of customers.
7 I have not attempted to analyze all of these
8 incremental revenue streams in complete detail. Nor have
9 I analyzed them on a wire center by wire center basis.
10 The expected revenue stream could vary depending upon the
11 demographic and other characteristics of each wire center
12 and the group of incremental customers studied. For
13 instance, in some locations the local calling scope is
14 very small, and customers are required to place an
15 intraLATA toll call in order to reach their
16
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23
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Don Reading, Di 40A
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1 employers, major retailers, the nearest hospital and the
2 like. In such locations, the carrier may anticipate a
3 higher volume of intraLATA toll revenues than in a wire
4 center where the local calling area encompasses most of
5 the customers' immediate daily needs.
6 While I recognize this diversity exists, the data
7 needed to analyze these patterns in detail were not
8 readily available. Therefore, I have followed a
9 simplified approach in this proceeding. I have estimated
10 an average level of revenues that may reasonably be
11 anticipated when a typical business or residential
12 customer is added to the network, and I have used this
13 revenue level on a uniform basis for all wire centers.
14 Included in this estimate are ancillary revenue
15 sources on page 3 of schedule 6 in a separate column
16 labeled "Other Direct Revenues." My estimate of the
17 corresponding direct costs is included in the column
18 labeled "Other Direct Costs." By including these columns
19 on page 3 of schedule 6, along with the direct costs and
20 revenues associated with basic local service, provided is
21 a comprehensive picture of the various revenues and costs
22 that a carrier may anticipate as it expands its network
23 to include an incremental group of customers.
24 The column labeled "Contribution or Subsidy" shows
25 the extent to which these incremental customers may be
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Don Reading, Di 41
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1 expected to generate incremental revenues sufficient to
2 cover their incremental costs, including all of the joint
3 costs of the loops that connect them to the network, and
4 an allowance of 10% toward common costs. To the extent a
5 positive figure is shown in the final column, the
6 customer is generating an additional contribution towards
7 the firm's common costs. The overall statewide portion
8 of this analysis is summarized in Table 4 below.
9
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1
2
3
4 (Table included in hard copy of transcript.)
5
6
7
8
9 Q Dr. Reading, could you relate the results
10 of your cost model to the retail rate increase requested
11 by USWC in this docket?
12 A Certainly. As explained in the beginning
13 of my testimony, in order for competition to develop in
14 telecommunications markets in Idaho, rates should be
15 reasonably consistent with costs of providing those
16 services. This is a point on which all parties agree.
17 The disagreement comes in defining and interpreting those
18 costs. The results of the above analysis clearly show
19 that Title 61 rates need not be raised at this time.
20 Forward-looking costing analyses consistent with the
21 federal Telecommunications Act of 1996 show that
22 residential and business retail local rates are making a
23 significant contribution above the economic cost of
24 providing these services.
25 In the very near future the Commission will need
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Don Reading, Di 42
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1 to determine rates and conditions for entrants to the
2 local telephone market. U S WEST's end-use retail rates
3 will need to be consistent with the costs charged for the
4 unbundled network. This Commission has been consistent
5 in rejecting the fiction that local end-use rates are
6 "subsidized" by other services. Economic costing,
7 presented here, has again reaffirmed that conclusion. In
8 fact what these cost studies indicate is that a rate
9 reduction may well be appropriate, rather than the
10 doubling of residential rates as
11
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17
18
19
20
21
22
23
24 3 Includes $3.50 federal subscriber line charge.
When all costs are considered, so should all revenues.
25
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Don Reading, Di 42A
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1 advocated by the Company. The Commission should reject
2 the Company's request and proceed with a process of
3 determining the costs of the network in order to
4 implement competition in Idaho. A restructure of local
5 rates is unnecessary at this time and would be a step
6 backward in the process of transforming Idaho's
7 telecommunications market from monopoly to competition.
8 Q Does this complete your direct testimony,
9 which was prefiled on November 26, 1996 in this docket?
10 A Yes, it does.
11
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Don Reading, Di 43
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1 (The following proceedings were had in
2 open hearing.)
3
4 DIRECT EXAMINATION
5
6 BY MR. DONESLEY: (Continued)
7 Q Dr. Reading, are there any changes to your
8 testimony for the record today?
9 A No.
10 Q Dr. Reading, could you briefly summarize
11 your testimony, give us a nutshell version?
12 A Certainly. Without getting into the
13 details of the modeling and what I did, the thrust, the
14 major thrust, of my testimony is that Idaho has had a
15 history of being a sort of leader and on the cutting edge
16 of telecommunications deregulation, one of the earlier
17 states to have a state deregulation, one of the earlier
18 states to enter into revenue sharing, an alternative kind
19 of regulatory scheme, and I think it's time that the
20 state take the next step and that is to move into the
21 deregulation that is consistent with the
22 Telecommunications Act of 1996, and it hasn't been
23 mentioned, but it's certainly pervasive here in the
24 Hearing Room and that is the bill that has passed the
25 House in the state legislature and seems is going to pass
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1 the Senate and become law that will lead us into the next
2 stage of telecommunications deregulation, and so the rate
3 case that we have before us that's filed by the Company
4 here seems to me a significant step backwards into an old
5 embedded kind of ratemaking that rather than moving us
6 forward would tend to slow the process and disrupt the
7 process, and so the thrust of my testimony is that we
8 should be looking at models that are consistent with all
9 of the other kinds of things that are occurring, for
10 instance, the arbitration with AT&T and U S WEST, so that
11 the Commission has a vehicle to keep those things lined
12 up as we go forward.
13 MR. DONESLEY: Thank you, Dr. Reading.
14 Madam Chair, I'll tender this witness for
15 questions.
16 COMMISSIONER SMITH: Okay. Ms. Hobson.
17 MS. HOBSON: Ms. Ford.
18 COMMISSIONER SMITH: Ms. Ford.
19
20 CROSS-EXAMINATION
21
22 BY MS. FORD:
23 Q Good morning, Dr. Reading.
24 A Good morning.
25 Q Dr. Reading, can you just tell me briefly
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1 what the process was for your hire by the AARP, if you
2 know?
3 A Oh, sure. As many of these things are sort
4 of happenstance, I was doing some other regulatory work,
5 happened to be in the documents room of the PUC, ran into
6 Brian, asked him what he was doing. He said he was
7 looking at the filing of U S WEST. We talked for a few
8 minutes. I said I had no clients, would he like to hear
9 what my view of the world was in this case. I talked to
10 him for about 10 minutes and without being rude, I saw
11 his eyes kind of glaze over and fold up the stuff and say
12 I think we'll be back in touch with you.
13 The next day, Susan Weinstock from AARP
14 from Washington, D.C. called me and said that she heard
15 that I may be interested in working this case and from
16 there a contract was signed and I became a participant in
17 this case.
18 Q Do you know how many AARP members there are
19 in Idaho?
20 A As I remember, there's 100 and -- about
21 130,000, 127,000, I think. As I remember, it's about 40
22 percent of those people over 55 and about 10 percent of
23 the population.
24 Q Do you know whether or not AARP took a poll
25 of these members in Idaho to determine what their
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1 position would be on this rate case?
2 A I have no idea if they took a poll. Before
3 we went forward with the contract, both Mr. Donesley and
4 I met with the governing board of AARP and discussed the
5 issues and what the testimony was about and that board --
6 a contract ensued, so certainly, the governing board
7 approved it.
8 Q And you don't know whether or not the
9 governing board actually contacted its members to
10 determine what their position would be?
11 A No idea. One assumes they would have the
12 general feel of their membership or they wouldn't be on
13 the board long.
14 Q Does AARP charge its members dues, if you
15 know?
16 A You pay an X up front. Being my age, I'm
17 sure you haven't gotten letters yet, but being my age, I
18 get letters and you pay, like, $45.00 and it's lifetime
19 or five years or ten years or something, so there are
20 dues, yes.
21 Q So it's a one-time due as far as you know?
22 A Well, it's for quite awhile, I think five
23 years or whatever. I can't remember. I'd have to look.
24 It's cheaper to buy the longer haul, so that's what you
25 do. You get discounts on rates, hotels, cars. Sometimes
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1 it's bait and switch, but sometimes you can save money.
2 Q Now, as I understand your testimony, you
3 are representing that the AARP is opposed to a rate
4 increase for residential service; correct?
5 A In this case, yes.
6 Q Is that based, to your knowledge, on AARP
7 members' general inability to afford a rate increase?
8 A Some could, some couldn't.
9 Q Do you know how many members of the AARP in
10 Idaho are eligible under the current ITAP program?
11 A No, I do not.
12 Q Do you know how many are currently
13 utilizing the ITAP program?
14 A I do not.
15 Q Does the AARP encourage its customers to
16 utilize the ITAP program?
17 A I cannot answer that directly. They
18 certainly work with their low income customers. In our
19 meetings with the AARP board, there was certainly a lot
20 of, I would say, maybe passionate interest in keeping
21 rates down for rural low income. I mean, that was a
22 message loud and clear we got from the board, that that
23 was a concern they had.
24 Q But you don't know how many of the 100 and
25 some thousand members would fit into that category?
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1 A No idea.
2 Q Would AARP support the proposed expansion
3 of the ITAP program as set forth in U S WEST's proposal?
4 A I can't answer specifically. I honestly
5 believe I would be on safe ground in saying that the AARP
6 would support those programs that would help low
7 income/fixed income individuals. Whether they would take
8 the step that as a public policy that should be extended
9 to those under 60, I can't really answer. They would
10 certainly agree it should go to 55 because that's where
11 their membership is. My experience with AARP is that
12 while on all policy issues I don't necessarily agree with
13 them that they're generally a good public policy kind of
14 organization.
15 Q Incidentally, getting back to the dues
16 issue, do you know whether or not AARP has ever raised
17 its dues?
18 A How do I know?
19 Q Have they since you've become a member?
20 A I don't keep track of that. One would
21 certainly think that they may raise their dues. Well, I
22 won't anticipate. Well, I will a minute. I can't keep
23 my mouth shut on that as an economist. Inflation
24 certainly impacts costs -- pardon me, inflation certainly
25 impacts costs, but it depends on the particular
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1 industry. If you'd like to discuss the
2 telecommunications industry, your witnesses here have
3 talked about how costs of switches have gone down and I
4 would be happy to discuss how the cost of
5 telecommunications services has decreased over time.
6 Q All right, I'll bite. Isn't it true,
7 Dr. Reading, that in fact the primary driver of costs in
8 the telecommunications industry is labor?
9 A We could quibble over primary. Certainly,
10 labor is an important factor and if we're looking at the
11 costs, we can look at labor in two ways: One is what are
12 the individual costs for engineers, pole climbers,
13 clerical. You also have to look at the total amount and
14 companies like U S WEST as well as other RBOCs have been
15 very happy to have their PR departments tell us how
16 they're cutting employees and reducing their wage costs
17 to become competitive, so I think there's a certain
18 amount of trade-off there.
19 Q But when you talk about telecommunications
20 being a declining cost industry, certainly that's not
21 true across the board?
22 A Oh, certainly not across the board, but
23 many important components it is. That was -- you know,
24 the price cap wars dealt with that issue.
25 Q So technology might get cheaper, but in
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1 fact, labor costs, replacement costs, et cetera might
2 actually go up over time?
3 A Very possible.
4 Q Now, you said in your brief summary that
5 the gist of your testimony was that -- I think to
6 summarize is that this Commission should go forward using
7 forward-looking studies rather than the historical
8 embedded type of studies that it has used in the past?
9 A Absolutely.
10 Q You would agree, wouldn't you, that prices
11 for services must accurately reflect the costs of those
12 services as a general rule?
13 A As a general rule and as we move into
14 deregulation, the market will start to do that.
15 Q And as an economist, you would agree,
16 wouldn't you, that it's important to remove subsidies,
17 explicit and implicit?
18 A As I stated in my testimony, I think that
19 as we move into deregulation, we should remove implicit
20 subsidies. There are a myriad of public policy reasons
21 in telecommunications as well as any other kind of
22 enterprise that subsidies in an explicit sense make
23 sense. Society makes all kinds of decisions to subsidize
24 all kinds of various groups for a variety of reasons.
25 Q Now, the forward looking -- the study that
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1 you submitted in this case is a forward-looking study in
2 your opinion?
3 A Yes.
4 Q And that's called the Telecom Economic Cost
5 Model?
6 A Yes, developed by Ben Johnson Associates.
7 Q How long have you worked for Ben Johnson
8 Associates?
9 A That's the hardest question you've asked so
10 far. 1986, I think, 10 years.
11 Q And you participated in the development of
12 that model?
13 A Yes, I did. I was not the major individual
14 in charge of the development. I worked on various
15 subsections of it.
16 Q Incidentally, is ITAP an example of an
17 explicit subsidy?
18 A Yes.
19 Q In your opinion, is the Telecom Economic
20 Cost Model a state specific cost model?
21 A I'll answer that in two ways. In its
22 construction, it is state specific in that you can input
23 those individual components for an individual state. It
24 has in it a variety of sort of national default
25 variables, so since it's constructed on a
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1 wire-center-by-wire-center basis, it has components that
2 you can enter all kinds of state specific numbers. For
3 this particular case, some state specific, some national.
4 Q Okay. As I understand the model, there are
5 actually hundreds of inputs that can be changed by a user
6 of the model to make them more state specific; would that
7 be true?
8 A Correct.
9 Q And, in fact, if the user of the model
10 doesn't do anything but run it, it will use automatically
11 the default inputs?
12 A Absolutely, yes.
13 Q And as I understand those default inputs,
14 those are based on yourself and Dr. Johnson's experience
15 in the industry over many years?
16 A And also on the engineering side, we have
17 used Power Engineering which is a Hailey firm and they
18 have their telecommunications engineering folks here in
19 town and so when we look at, for instance, something like
20 the interfaces and the costs of putting fiber in and
21 those kind of selection of the switches that we would use
22 in those kinds of cases, we've worked with Power
23 Engineering, so in addition to the firm, Dr. Johnson and
24 myself, some others in Tallahassee, we've also used an
25 engineering firm.
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1 Q So as I understand it, if you don't change
2 anything in the model, running it for a wire center in
3 Idaho would produce the same result as running it for a
4 wire center in New York; would that be fair if you didn't
5 change anything?
6 A If you didn't change those particular
7 defaults, and let me explain a little more about how the
8 model works. That's true for those inputs that we're
9 just discussing here. In addition, it uses the BCPM
10 which is supported by U S WEST and has been filed at the
11 FCC. It uses the census block group data that deal with
12 population, households, number of lines, lengths of
13 loops, those kinds of variables, and then assigns those
14 to the individual wire center.
15 In addition, those census block groups
16 contain lots of, for want of a better word, geographic
17 data, slopes, water table, those kinds of things, that is
18 an input, so to that extent, it is very Idaho specific in
19 that base data that we use is input from U S WEST.
20 What we're finding in using those is that
21 there would need to be probably some ground truthing to
22 be done and I don't want to get too detailed about
23 forward-looking costs. I mean, I would be happy to if
24 you want to go there, but there are many critics of Ben
25 Johnson's model, along with BCPM and the Hatfield Model,
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1 that the distribution of customers within those census
2 block groups tends to disadvantage states like Vermont,
3 New Hampshire, Maine, Florida where those customers are
4 dispersed. It tends to underestimate the costs of the
5 loops there.
6 For states like Idaho, it tends to
7 overestimate the costs of the loops because, and I could
8 use an example that I pulled out and looked at a wire
9 center for Idaho City, BC --
10 Q Let me just interrupt here because I think
11 we're getting much more detailed than I had intended.
12 A Oh, all right.
13 Q I just wanted to get a feel for out of the
14 hundreds of inputs that are available to be changed in
15 your model to make it more state specific, how many did
16 you actually change for Idaho?
17 A I would have to go count. Some changed for
18 Idaho, some didn't. I will fully admit that a
19 significant number are the default numbers that we have
20 that we use in other states, yes.
21 Q And those would be the same numbers
22 that you would use, for instance, in a wire center in
23 New York?
24 A For those defaults, right, sure.
25 Q And it would be fair to say, wouldn't it,
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1 that actually a majority of the inputs were not changed
2 for your run in Idaho?
3 A Sure, and in answering that, I would add
4 that if the Commission accepted my recommendations and
5 basically said an embedded rate case is not the way we
6 want to go, made that major policy decision, U S WEST,
7 you go out there and you bring us back a forward-looking
8 rate case, I would hope that I could find a client in
9 Idaho that would be willing to pay to do the kind of
10 ground truthing and the kinds of changing of things like
11 labor rates, installation rates and also go wire center
12 for wire center and look at places like Idaho City where
13 they would be better, so I will full well admit that for
14 this particular case that that kind of care was not
15 taken.
16 Would that change my conclusions that I
17 think a rate increase is inappropriate, not cost
18 justified, I would say if I change those for Idaho
19 specific, I don't believe so. I think, if anything, the
20 numbers that we have used would tend to make the costs
21 too high and I would be glad to tick those off.
22 Q As I understand your results in your
23 forward looking-model, in your opinion, it costs less
24 than $2.00 to install a loop in Idaho; is that true --
25 for 1FR service? I apologize, I stated that
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1 incorrectly.
2 A For a network that is already in existence
3 to serve business customers, yes.
4 MS. FORD: That's all I have.
5 COMMISSIONER SMITH: Mr. Kutler, do you
6 have questions for Dr. Reading?
7 MR. KUTLER: No questions.
8 COMMISSIONER SMITH: Mr. Howell?
9 Ms. Hamlin.
10 MS. HAMLIN: Thank you.
11
12 CROSS-EXAMINATION
13
14 BY MS. HAMLIN:
15 Q Good morning, Dr. Reading. In the
16 beginning of your testimony, you spend a great time
17 talking about potential competitors and the impact it
18 will have on the pricing scheme. Do you believe that the
19 local market for Title 61 customers has competition
20 today?
21 A No, and as Company witnesses have stated
22 here, there is none at the present time. Let me take one
23 second and as an economist, I can't back off.
24 Mr. Fothergill asked a question on competition. I tend
25 to adhere and as an economist strongly support
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1 Dr. Fothergill's -- Dr. Fothergill, sorry, Al. You said
2 it like you had a doctorate -- definition of competition,
3 not that as represented by the witnesses for U S WEST, so
4 when I talk about competition, I talk about Al
5 Fothergill's and mine, not what the Company has described
6 as competition. Now, with that caveat, could you reask
7 the question?
8 Q What is your definition of competition?
9 A The one that Mr. Fothergill used. That's
10 when there were many buyers and sellers and no individual
11 buyer or seller could affect the cost of the product.
12 It's as a producer of the service, you're a price taker,
13 not a price maker, and I certainly don't see that in
14 telecommunications now.
15 I think that when it occurs, if and when it
16 occurs all over Idaho, it will be sometime in the
17 future. I think that the major competition will occur in
18 the commercial and business sector first and will last
19 tend to occur many years down the road in the residential
20 market. I tend, and I can't remember exactly, I think
21 it's Dr. Lehr's testimony for AT&T, I would tend to agree
22 with his view that he describes in his testimony of how
23 competition will unfold.
24 Q On page 26 of your testimony, you state
25 that there are some rural areas of the state where costs
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1 are extremely high and there would be some difficulty or
2 impossibility for customers in this area to cover the
3 costs of serving them without help from other parts of
4 the state. You further state that the majority of the
5 residence subscribers are paying more than their own
6 way. What do you mean by that?
7 A If you look at the results of my study, at
8 the end of those tables, there's a thing called
9 contribution and that is the amount of revenue received
10 over cost, and so to that extent, they would be more than
11 paying their own way. I might add that Staff's case,
12 while I haven't looked at it in detail, even after the
13 stipulation, it's still recommending a decrease based on
14 embedded costs that would tend to support that, also, so
15 I think that both a forward-looking model and an embedded
16 model says the same thing.
17 Q Do you think there's actions or policies
18 that the Commission could implement to ensure that rural
19 customers receive similar service and competitive
20 opportunities as urban customers?
21 A Certainly, and that's the kind of, if
22 necessary, the kind of, explicit subsidies that I was
23 talking about with U S WEST and that is -- you know, back
24 up a minute and when I was here kind of stories -- that
25 for a state like Idaho, the provision of
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1 telecommunications service has such important
2 implications for the whole economy and the ability of
3 citizens, especially in our rural areas, to participate
4 in the economy and have the ability to continue to have
5 economic development, I think it's essential that those
6 customers be able to have reasonably-priced, good
7 telecommunications service.
8 There's also a lot of evidence that it's
9 cost effective for a state in a state policy sense in
10 that the delivery of state services necessary is also a
11 lot cheaper if you have good telecommunications service,
12 and as I pointed out in my testimony, and U S WEST is,
13 and I think properly, happy to kind of crow about, that
14 is, we have a very good telecommunications system in
15 Idaho right now. What I would hate to see is that it be
16 mispriced to the extent that many customers cannot
17 participate in the telecommunications future.
18 Q Looking to page 21 of your testimony, you
19 seem to be saying that you believe most of the
20 incremental costs of basic local exchange service are
21 actually joint costs. You also point out that most LECs
22 include the entire amount of joint costs in their
23 estimates of local exchange costs. Do you think this is
24 true of U S WEST?
25 A Yeah. As you remember, we had a little
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1 shoot-out that we did not win in our ability to look at
2 what was going on in the arbitration case where the
3 Company filed TSLRIC or TELRIC, I'm not sure, kinds of
4 studies. I've seen what the Company has filed in
5 Wyoming. I didn't have proprietary in Washington, but if
6 you read the Washington order, it looks consistent
7 what was filed in Wyoming that I did see. If you
8 read the production requests of the kinds of
9 TSLRIC/TELRIC forward-looking that were filed with staff
10 discovery -- okay, I wanted to give that background
11 before I answer -- the real battle that we would get into
12 if we would have the kind of rate case that I advocate we
13 should be having instead of the kind of rate case that we
14 are having, those are the kinds of decisions that would
15 be made.
16 Historically, where U S WEST as well as
17 other RBOCs in my mind have gone wrong is how they take
18 the price of the loop and dump it all on end users and
19 assume that they should pay the full freight with that
20 rather than the joint services described in my testimony;
21 so given that, I'm guessing that's what U S WEST would
22 do.
23 Q But you mention the Washington case and on
24 page 25, you quote the Washington Utilities Commission
25 when it stated: "The cost of the local loop is not
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1 appropriately included in the incremental cost of local
2 exchange service." And further, U S WEST's presentation
3 that the local loop is necessarily an element of the
4 local exchange service is not credible. Do you think
5 this finding is directly applicable to this case?
6 A It looks -- the results of what we did look
7 strikingly similar to what they found and certainly I --
8 the Washington Commission in my mind got it right
9 philosophically. The numbers that fell out, as I
10 remember, the Washington Commission mandated $10.50
11 rates, so, yes, it looks like the same kinds of studies
12 come to the same kind of rate.
13 Q Do you agree with Staff's recommendation
14 that Title 62 funds used for Tech Plus which is digital
15 switches and Tech II for local switches ought to be
16 directly assigned to the Title 61?
17 A I guess --
18 MS. FORD: I'm going to insert an objection
19 here. This is really starting to be a line of friendly
20 cross-examination between the Staff and Mr. Reading and I
21 don't believe it's appropriate. These parties are not
22 diametrically opposed in what they're advocating here and
23 we simply have Staff reasserting Mr. Reading's testimony
24 and Mr. Reading agreeing with it again.
25 COMMISSIONER SMITH: Ms. Hamlin.
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1 MS. HAMLIN: Commissioner, Staff is not
2 sure what Mr. Reading is advocating on these positions.
3 That's why I'm asking.
4 COMMISSIONER SMITH: I'll allow the
5 question as to his opinion and I guess if you could
6 relate it to how it would work in his model or something
7 in his testimony, I'd be more comfortable with it.
8 MS. FORD: Could I ask that the question be
9 restated because I think it was a misstatement of the
10 position to begin with?
11 COMMISSIONER SMITH: All right.
12 Ms. Hamlin, do you want to try again?
13 MS. HAMLIN: I'll sure try.
14 Q BY MS. HAMLIN: Do you agree with Staff
15 that Title 62 funds used for Tech Plus and Tech II ought
16 to be directly assigned to Title 61?
17 A I can't answer the specifics of how those
18 assignments were made. I can say philosophically and as
19 an individual that does this for a living that when
20 revenue sharing funds are used for technological
21 upgrades, I think the Company's testimony is correct that
22 when it spends money and upgrades certain things, those
23 affect Title 61 customers. When Title 61 revenue sharing
24 money is used to upgrade switches, that certainly helps
25 and impacts Title 62 customers, so the particulars how it
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1 is assigned, I don't know, but the fact that it shouldn't
2 all be dumped on one because it would be a joint service
3 that would help both 61 and 62 I'd with agree with.
4 Q Looking at the fact that you did use a
5 forward-looking modeling, if you take these theoretical
6 considerations aside, are you able to support Staff's
7 rate reduction in this case?
8 MS. FORD: Again, I object to the friendly
9 cross-examination.
10 COMMISSIONER SMITH: I think I'm going to
11 allow that question. It's asking for his opinion whether
12 he supports the Staff's case or not.
13 THE WITNESS: I cannot support the specific
14 number. Certainly, the forward-looking model that we run
15 indicates that certainly there is no price increase
16 necessary and I would, you know, generally philosophical,
17 my gut level tells me there probably ought to be a
18 decrease.
19 Q BY MS. HAMLIN: If the Commission adopts
20 the embedded cost test period, do you believe it is
21 appropriate to use forward-looking studies to check the
22 reasonableness of those rates?
23 A Absolutely, and more. In fact, my position
24 is that we shouldn't even be looking at embedded, so at a
25 minimum, they should use forward looking to double-check
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1 that, yes.
2 MS. HAMLIN: Thank you. I have no further
3 questions.
4 COMMISSIONER SMITH: Mr. Fothergill.
5 MR. FOTHERGILL: Yes, ma'am, I have a few
6 questions.
7
8 CROSS-EXAMINATION
9
10 BY MR. FOTHERGILL:
11 Q On page 4, lines 4 through 9, you quote
12 from the U S WEST testimony in which embedded cost
13 ratemaking is described as traditional. As I remember,
14 it was traditional, was it not, for many years?
15 A That's how we were both weaned and brought
16 up in this, Al, yes.
17 Q And my recollection is that it wasn't until
18 the PURPA hearings where the Commission adopted an
19 incremental cost pricing mechanism.
20 COMMISSIONER SMITH: Mr. Fothergill, could
21 you see if your mike is working?
22 MR. FOTHERGILL: It probably is. Maybe I'm
23 not talking loud enough.
24 COMMISSIONER SMITH: Thank you.
25 Q BY MR. FOTHERGILL: Is that correct, that
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1 there was at that time?
2 A That's the first I saw. You know, the
3 PURPA hearings were about a lot more than just
4 cogeneration. There were all kinds of incremental
5 price-making studies, investigations done, yes.
6 Q As I read your testimony, it seemed to me
7 we really could not have adopted the cost/pricing system
8 that you're advocating until we had computers and became
9 very much more sophisticated in that technology.
10 A Yeah, computers certainly make it much more
11 feasible and usable.
12 Q So now we can use the right stuff as
13 opposed to the old traditional way?
14 A It is much better. I'm not sure it
15 couldn't get even better, but, yeah, a lot more of the
16 right stuff.
17 Q On page 6, lines 7 through 11, you talk
18 about the -- and also on page 9, you talk about the --
19 high profits of the Company's deregulated operations.
20 What evidence do you have that they have high profits?
21 A When I wrote that I was thinking mostly of
22 the fact that when revenue sharing, the revenue sharing
23 scheme has occurred that the Title 61 customers have
24 gotten positive amounts.
25 Q On page 8, you mention the Joint Board
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1 having issued its high cost fund recommendations. I
2 don't know what the Joint Board is and if you could tell
3 us that and also tell what those recommendations are, I'd
4 appreciate that.
5 A Okay, I won't go into detail and I don't
6 know all the recommendations. As part of the
7 Telecommunications Act and deregulation that we're going
8 through, the FCC and the state commissions often put
9 together what are known as joint boards, and I would have
10 to yield to the Commissioners to know the exact makeup,
11 but they contain board members from individual states and
12 FCC members and they come up with recommendations about
13 various activities.
14 The one I'm most familiar with is Alaska
15 where I did some work on pricing there. The universal
16 service recommendations that are coming down are a
17 mechanism that the Joint Board is grappling with to
18 develop a nationwide universal service fund that will
19 support -- that will take funds from those areas where it
20 is relatively inexpensive to provide telecommunications
21 services and use it to keep prices down in those areas
22 where it's relatively expensive and Commissioner Smith
23 when you mentioned it looked skyward. They're in
24 midstream battles over that.
25 Q I see; so we're not there yet?
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1 A No, we're not there yet.
2 Q On page 10, line 6, you say the Telecom 96
3 mandates the use of forward-looking pricing --
4 A Right.
5 Q -- and not based on rate of return. Is the
6 Company's proposed use of embedded cost at lodge with
7 this law?
8 MS. FORD: I'm going to object. It calls
9 for a legal conclusion.
10 MR. FOTHERGILL: Well, I don't know --
11 MS. FORD: And it also misquotes his
12 testimony, I believe.
13 MR. FOTHERGILL: I'm looking at his
14 testimony page 10, line 6.
15 MS. FORD: Well, his testimony is specific
16 to network elements and what the Act requires with
17 respect to network elements, not with respect to retail
18 services.
19 MR. FOTHERGILL: That would be fine.
20 COMMISSIONER SMITH: Perhaps Dr. Reading
21 can explain to Mr. Fothergill the difference between
22 network elements --
23 MR. FOTHERGILL: I can read the testimony.
24 COMMISSIONER SMITH: -- and retail
25 services.
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Wilder, Idaho 83676 AARP
1 THE WITNESS: Over objections of the
2 Company, thank you for that question, Mr. Fothergill. I
3 think there's some confusion on that point. In
4 Mr. Wozniak's testimony, he was asked whether the Act
5 mandated forward-looking costs. He indicated that, no,
6 it didn't. What the Telecom Act does, as quoted
7 elsewhere in my testimony and I believe also in some of
8 AT&T's testimony, is that forward-looking models be used
9 not based on rate of return, and I can't remember what
10 the other term is that's in my testimony, for
11 interconnection and that's what's going on in the
12 arbitration case.
13 My problem with, in my mind, that that is
14 mandated in the law, not the state interconnection order,
15 but in the Telecom law, is pertinent to what's going on
16 here and it is, in my mind, the major problem of what's
17 going on here, and let me use just one example that has
18 come up in the course of the Company's case and that is
19 the treatment of the depreciation reserve.
20 As was clear and, again, you know, I
21 haven't had a chance to see what's going on in the
22 arbitration case, but as is clear from cross-examination
23 from AT&T and the response of the U S WEST witnesses, the
24 depreciation reserve is part of the cost that the Company
25 has included to impact either their unbundled elements or
989
CSB REPORTING READING (X)
Wilder, Idaho 83676 AARP
1 their wholesale rates. In this case over here, the
2 depreciation reserve in the stipulation has been
3 stipulated away.
4 On cross-examination, Mr. Wozniak indicated
5 well, gosh, we're going to have to maybe rethink what's
6 going on in the arbitration case. That's the whole
7 problem I've got with what's going on here and that is, I
8 don't see a vehicle that the Commission has to be able to
9 look at what's going on in the arbitration case and
10 whether depreciation reserve is included or not included,
11 that there is that obvious overlap in this case and
12 what's going on there, and so to the extent that the law
13 mandates that retail rates be set by forward-looking cost
14 methods, no, that it mandates that interconnection be set
15 by forward-looking costs, yes.
16 As Mr. Owen's rebuttal testimony says, I
17 think I counted in her testimony --
18 MS. FORD: Again, I'm going to insert an
19 objection here. I don't believe we've gotten to
20 Ms. Owen's rebuttal testimony yet.
21 COMMISSIONER SMITH: I think, Dr. Reading,
22 that your explanation so far has been adequate.
23 THE WITNESS: The Chair says shut up,
24 Dr. Reading, I will.
25 COMMISSIONER SMITH: Next question.
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Wilder, Idaho 83676 AARP
1 Q BY MR. FOTHERGILL: On page 12, line 1, you
2 mention a recently released study by The National
3 Regulatory Research Institute, NRRI, and I don't know
4 what that is. Maybe you could enlighten me on that and
5 whatever its significance is.
6 A Okay, NRRI is sort of the research wing of
7 NARUC. It's housed at Ohio State University. It does
8 all kinds of studies. Many of those PURPA studies that
9 you talked about earlier came out of NRRI. This
10 particular study is by Dr. Gabel of Queens College and I
11 was using it as a quote because he was saying what,
12 again, is the essence of my testimony and that is as we
13 move forward, we should use forward-looking models, not
14 only in interconnection but also in setting retail rates.
15 Q Thank you. On page 16, line 26, and
16 actually elsewhere in your testimony, page 1 of
17 Appendix B and throughout, you talk about economic theory
18 and I'm getting confused in this just as I was about
19 competition, so we have a theory of costs, economic
20 theory of costs, we have an economic theory, we have a
21 set of economic theories, and I'm wondering about maybe
22 we could talk about a theory, so many times I hear,
23 especially from lawyers, well, that's just a theory or
24 that's a mere theory, meaning it's a guess or a wish or a
25 dream or some wild aspiration, and as I understand here,
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CSB REPORTING READING (X)
Wilder, Idaho 83676 AARP
1 you're talking about a more technical and substantive
2 meaning of the word "theory"; is that correct?
3 A Right. As we move into deregulation, we
4 need to step from the old embedded kinds of cost making
5 into the forward-looking kinds of costs as a transition
6 step. Then eventually theory won't matter, the market
7 will matter and so that the methodologies and theories
8 that I'm talking about here are the ones that are
9 necessary to move us so that the market will eventually
10 make those decisions.
11 Q Well, as a school boy, I remember reading
12 about theories and there was this theory of relativity
13 and the universal theory of gases and the general theory
14 of elements and valences and those theories had
15 significance in the sense that they described the run of
16 the facts as they were then known and they also provided
17 guidance for further research. Now, are you using the
18 word "theory" in that way or should we change some of
19 this to reflect more nearly what is meant by your
20 discussion of a set of theories?
21 A I'm not sure I fully understand your
22 question. Economists look at how the market works and
23 develop their theories from that and what I'm advocating
24 here are those economic costs which the market reveals
25 and, therefore, we should be moving to set prices both at
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CSB REPORTING READING (X)
Wilder, Idaho 83676 AARP
1 the retail level as in this case and the unbundled
2 elements in the arbitration based on those economic costs
3 that will occur once the market is deregulated, so, to
4 me, it's real. To me, it's like the scientists doing
5 whatever they do to the gases and developing the theory
6 of this is what happens.
7 Q They reflect the facts of the case --
8 A Yes.
9 Q -- as we know them?
10 A Yes.
11 Q Thank you. On page 17, line 20, you
12 mention recently the form of economic cost gaining the
13 most popularity is total service long run incremental
14 cost and the most important factor, you note that the
15 most important factor, explaining the gap between total
16 service long run incremental cost and embedded cost
17 analysis is the treatment of joint and common costs.
18 A Yes.
19 Q Isn't it reasonable to assume that in
20 circumstances of partial deregulation, which we've had
21 here since 1988, that a reasonable company would try to
22 shift much of its joint and common costs to the regulated
23 part of its customer base?
24 A I'll back up and from an economist's point
25 of view, it is natural for firms to try to collect
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Wilder, Idaho 83676 AARP
1 revenue from those places where it faces the least
2 competition and can extract those revenues. That's
3 pretty natural.
4 Q Is it only the joint and common costs that
5 account for the wide disparity between the findings from
6 your model for a residential rate decrease, providing a
7 residential rate decrease, and the Company's that an
8 increase is needed?
9 A What my model shows, and I didn't take the
10 further step of refining it and trying to quantify what
11 the decrease would be, what I did was run a set of models
12 that indicated that no matter how you cut it, there was a
13 positive contribution. The profit margin is included in
14 there. Admittedly, I used 10 percent common costs. They
15 may well have to be higher, but the end result was that
16 the services, the revenues collected from the services,
17 exceeded their costs with a reasonable amount of joint,
18 common and profit included and they still exceeded it.
19 MR. FOTHERGILL: Thank you, Dr. Reading.
20 That's all the questions I have and I thank
21 you, Madam Chair.
22 COMMISSIONER SMITH: Mr. Phillips.
23 MR. PHILLIPS: Madam Chair, Dr. Reading, I
24 don't think I can add anything to what Al said. I agree
25 100 percent what information he's elucidated and I
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Wilder, Idaho 83676 AARP
1 appreciate it. Thank you.
2 COMMISSIONER SMITH: Thank you.
3 Questions from the Commission?
4 COMMISSIONER NELSON: I don't have any.
5 Thank you.
6 COMMISSIONER SMITH: I just have a couple.
7
8 EXAMINATION
9
10 BY COMMISSIONER SMITH:
11 Q Dr. Reading, I heard your model mentioned
12 when I was at the NARUC winter meetings, and I guess the
13 reason for this question is because one of the concerns I
14 heard about it was that in a sense it was not practical.
15 It was -- it needed so much information that it would be
16 difficult for someone who really wanted to use it to be
17 able to use it and that's a very big concern when you're
18 a state regulatory agency trying to choose the right way
19 of calculating costs. You have to have something that
20 gets you reasonably close to what you think on a policy
21 level is the right answer, but you have to be able to use
22 it in a way that it's practical and it's not burdensome
23 to do, because a model that will give you the exactly
24 right answer is totally useless if it takes you five
25 years to make it work, so I'm just wondering when you
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CSB REPORTING READING (Com)
Wilder, Idaho 83676 AARP
1 said if we chose to go your way, then we should direct
2 the Company to get the right information and put in and
3 that sounds like a pretty big job, so I'm wondering how
4 practical would that be and how long it would take.
5 A All right, let me answer it two ways. I
6 tend to agree with the criticism of the Ben Johnson
7 model. It's equally applicable to the Hatfield and BCPM
8 based on what the FCC is attempting to do in the
9 universal service docket and that is use it as a template
10 or a proxy for the whole country to determine the size of
11 the universal service pie and also to use it on where it
12 comes from and goes to. That would take inputting data
13 that would be reasonable for all parts of the country
14 with all their different uniquenesses, so I think in that
15 context, that's true.
16 In the context of a state proceeding like
17 Idaho where we have 60 wire centers, I would agree with
18 the implied criticism of the U S WEST questions and that
19 is that the model didn't contain enough Idaho specific
20 data. On a state-by-state basis, I think the model is
21 usable and I do not agree with that criticism that
22 there's too many inputs. I would think that for a
23 service territory like U S WEST that it is definitely
24 feasible to look at the uniquenesses of what the wage
25 rates are, what the installation costs are, you know, the
996
CSB REPORTING READING (Com)
Wilder, Idaho 83676 AARP
1 urban areas, non-urban areas and do ground truthing in
2 looking at it, so I think as the study area that we're
3 looking at gets smaller and smaller that it is really
4 built to determine costs based on that, so I agree with
5 do the whole country, do it all at once and be fair to
6 everybody, that is a problem. Using it in this context I
7 don't see as a problem.
8 Q Do you have a time estimate on how long it
9 would take?
10 A I'm talking months, a few months,
11 because -- this sounds pejorative given the battles that
12 are going on -- it would depend on the availability that
13 the telephone company that is being studied would have
14 the kind of data the model needed, how available that
15 would be. If that is readily available, then it's a
16 shorter time frame. If that needs to be either estimated
17 or surveyed or it would take the company some time to get
18 it, it would be longer, but certainly within a few months
19 time frame it could be done.
20 Q Okay; so you just stated, if I heard you
21 correctly, that you didn't take the next step which would
22 be to calculate and recommend a rate?
23 A Correct.
24 Q You didn't do that?
25 A No, I did not.
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Wilder, Idaho 83676 AARP
1 Q And there wouldn't be any practical way
2 of -- I was trying to look at your exhibits and see if
3 you could find a rate here, but there wouldn't really be
4 any practical way to do that?
5 A Not as it's currently presented. I might
6 add that that step could certainly be taken.
7 COMMISSIONER SMITH: All right, that's all
8 I have.
9 Redirect, Mr. Donesley?
10 MR. DONESLEY: No redirect, thank you.
11 COMMISSIONER SMITH: Thank you,
12 Dr. Reading.
13 THE WITNESS: Thank you.
14 (The witness left the stand.)
15 COMMISSIONER SMITH: Do you have other
16 witnesses, Mr. Donesley?
17 MR. DONESLEY: We have no other witnesses.
18 We rest our case.
19 COMMISSIONER SMITH: Thank you.
20 It looks like we're going to Mr. Howell
21 next.
22 MR. HOWELL: Madam Chairman, just briefly.
23 The Staff in its case is prepared to present 10
24 witnesses, and just to give you a line-up about who might
25 be sponsoring some information in particular, we
998
CSB REPORTING READING (Com)
Wilder, Idaho 83676 AARP
1 anticipate now having concluded the Company's case that
2 we will be in a position tomorrow to furnish the
3 Commission and the parties a revised Exhibit 101 from the
4 Staff which would show our current and proposed and
5 recommended revenue requirement in this case. There's
6 still one issue that we are attempting to resolve, but if
7 we're on schedule, we will hope to have that Exhibit 101
8 on Thursday.
9 The Staff also anticipates that witnesses
10 Stockton, Schneider and Carlock will sponsor the second
11 stipulation which has been identified and admitted, I
12 believe, as Exhibit 153 and Stockton and Schneider will
13 discuss their issues contained within that stipulation
14 and settlement. I have a correction. I guess the second
15 stipulation is Exhibit 48. The first stipulation is
16 Exhibit 153 and that's contained in Madonna Faunce's
17 testimony, but again getting back to the second
18 stipulation, which is 48, Stockton and Schneider will
19 sponsor their issues contained in that settlement and
20 Staff witness Carlock will cover the rest, the remainder
21 of those, and with that, Staff is prepared to call Kathy
22 Stockton to the stand.
23
24
25
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CSB REPORTING COLLOQUY
Wilder, Idaho 83676
1 KATHLEEN L. STOCKTON,
2 produced as a witness at the instance of the Staff,
3 having been first duly sworn, was examined and testified
4 as follows:
5
6 DIRECT EXAMINATION
7
8 BY MS. HAMLIN:
9 Q Would you please state your name and spell
10 your last name for the record?
11 A My name is Kathy Stockton. My last name is
12 spelled S-t-o-c-k-t-o-n.
13 Q And by whom are you employed and in what
14 capacity?
15 A I'm employed by the Idaho Public Utilities
16 Commission as an auditor.
17 COMMISSIONER SMITH: Kathy, you're going to
18 have to pull the mike to you. Thank you.
19 Q BY MS. HAMLIN: Are you the same person
20 that filed 25 pages of direct testimony and sponsored
21 page 11 of Staff Lansing's Exhibit 101 filed on
22 November 26th, 1996?
23 A Yes.
24 Q Are you also the same person that prefiled
25 18 pages of surrebuttal testimony with no exhibits on
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CSB REPORTING STOCKTON (Di)
Wilder, Idaho 83676 Staff
1 February 23rd, 1997?
2 A Yes.
3 Q Are there any changes to your testimony?
4 A No.
5 Q If I were to ask you the same questions
6 today, would your answers be the same?
7 A Yes.
8 MS. HAMLIN: With that, Madam Chairman, I
9 ask that the prefiled direct testimony and surrebuttal
10 testimony be spread upon the record.
11 COMMISSIONER SMITH: If there is no
12 objection, it is so ordered.
13 (The following prefiled direct and
14 surrebuttal testimony of Ms. Kathy Stockton is spread
15 upon the record.)
16
17
18
19
20
21
22
23
24
25
1001
CSB REPORTING STOCKTON (Di)
Wilder, Idaho 83676 Staff
1 Q. Please state your name and business address?
2 A. My name is Kathleen L. Stockton. My
3 business address is 472 West Washington Street, Boise,
4 Idaho.
5 Q. By whom are you employed and in what
6 capacity?
7 A. I am employed as an Auditor by the Idaho
8 Public Utilities Commission.
9 Q. Please describe your educational background
10 and professional experience.
11 A. I received my B.B.A. degree majoring in
12 Accounting from Boise State University in December 1992.
13 Following graduation I was employed by the Idaho State
14 Tax Commission as a Tax Enforcement Technician. In my
15 capacity as a Tax Enforcement Technician, I performed
16 desk audits on individual state income tax returns. I
17 was promoted to Tax Auditor, and after meeting the
18 underfill requirements, was promoted to Senior Tax
19 Auditor. In my capacity as an auditor, I performed
20 audits on Special Fuel and Motor Fuel Tax returns,
21 International Fuels Tax Agreement Returns and Special
22 Fuel User tax returns. I accepted employment with the
23 Idaho Public Utilities Commission (IPUC; Staff) in July
24 of 1995. I attended the National Association of
25 Regulated Utilities Commissioners Annual Regulatory
1002
USW-S-96-5 STOCKTON (Di) 1
11/26/96 Staff
1 Studies program at Michigan State University in the
2 summer of 1996. I have testified previously in Capital
3 Waters rate case, Case No. CAP-W-95-1.
4 Q. What is the purpose of your testimony in
5 this case?
6 A. I will present the results of my examination
7 of certain expenses and Company true-ups for the 1995
8 test year. Specifically, I recommend the acceptance of
9 six of the true-ups in U S WEST Communications, Inc.
10 (U S WEST; Company) witness Margaret Wright's pre-filed
11 testimony. I propose an adjustment to revenues to impute
12 revenues lost due to employee telephone service
13 concessions. I also recommend Staff adjustments to
14 operating expenses, including an adjustment for expenses
15 associated with the President's Club held in 1995 for the
16 employees nominated in 1994, an adjustment for expenses
17 that are for Title 62 services, an adjustment for direct
18 assignment to Title 62 and Title 61 services, and an
19 adjustment for sales and advertising expenses.
20 Q. Have you prepared any exhibits or schedules
21 in this case?
22 A. Yes. I prepared page 11 to Staff witness
23 Lansing's Exhibit No. 101.
24 Q. Have you performed an independent review
25 and analysis of U S WEST's expenses in preparation for
1003
USW-S-96-5 STOCKTON (Di) 2
11/26/96 Staff
1 your testimony?
2 A. Yes, I reviewed the information provided in
3 response to the Staff's audit requests, field audit
4 requests, and production requests. I reviewed the books
5 and records of U S WEST that were provided for the Audit
6 Staff, including the year-end trial balance and the
7 general ledger for both U S WEST Communications, Inc. and
8 southern Idaho. I performed as detailed an examination
9 of the 1995 Operating Expenses as I was able to, given
10 the size and nature of the various accounting systems
11 employed by U S WEST.
12 COMPANY TRUE-UPS
13 Q. Did you audit all the true-ups that Company
14 witness Margaret Wright lists in her testimony?
15 A. No. I audited only six of the true-ups.
16 Q. Where do the true-ups come from?
17 A. The true-ups I audited are in the "Out of
18 Period Adjustments" section of Ms. Wright's direct
19 testimony, beginning on page 24. The true-ups are
20 described on pages 26 through 29 of Ms. Wright's
21 testimony.
22 Q. What are your findings?
23 A. Staff finds that the following six true-ups
24 are acceptable as presented:
25
1004
USW-S-96-5 STOCKTON (Di) 3
11/26/96 Staff
1 1. 1994 Incentive Award True-up
(Adjustment 10, Exhibit No. 25, pg. 6)
2
2. Health Care Reserve True-up (Adjustment
3 11, Exhibit No. 25, pg. 6)
4 3. Accident & Damage Reserve Reversal
(Adjustment 12, Exhibit No. 25, pg. 6)
5
4. 1994 Property Tax True-up (Adjustment
6 14, Exhibit No. 25, pg. 7)
7 5. Pre- 1991 Custom Work Write-Off
(Adjustment 15, Exhibit No. 25, pg. 7)
8
6. 1994 AT&T Rebate True-up (Adjustment
9 17, Exhibit No. 25, pg. 7)
10 TELEPHONE CONCESSIONS
11 Q. Please explain Staff's adjustment of
12 operating revenues for telephone concessions.
13 A. The adjustment of $234,036, as an imputation
14 to increase operating revenues, is to account for
15 telephone concessions offered to employees and retirees
16 of U S WEST. This adjustment imputes revenue that
17 U S WEST has foregone due to telephone service
18 concessions. Telephone concessions are free or reduced
19 rates for employees and retirees of U S WEST for basic
20 local telephone service, toll services, and other Title
21 62 services. I include the Title 61 revenues to properly
22 match the expenses associated with the employee telephone
23 service concessions included in the test-year results of
24 operations. This adjustment is shown in Exhibit No. 101,
25 pg. 11.
1005
USW-S-96-5 STOCKTON (Di) 4
11/26/96 Staff
1 Q. Please explain U S WEST's policy regarding
2 telephone service concessions.
3 A. U S WEST Communications, Inc., Regional
4 Policy and Procedures "RPP 1207 - Telephone Concession
5 Plan" manual was received in response to Staff Audit
6 Request 41. The manual details the telephone service
7 concessions available to active and retired employees,
8 honoraries and advisors.
9 In general, all active eligible employees
10 living in a U S WEST Communications service area receive
11 the concession. The amount of the concession, i.e., free
12 or reduced (by 50%) basic local telephone service, toll
13 service, and other Title 62 services, varies depending
14 upon the length of employment for current employees, when
15 the employee retired, and under what plan, for retirees.
16 If the individual is an employee with less
17 than 30 years of service, the telephone concession
18 consists of a 50% credit for monthly local service and
19 intraLATA long-distance services. If the individual is
20 an employee with 30 or more years of service, then the
21 concession is 100% of monthly local service and intraLATA
22 toll.
23 For retired employees, the concession
24 depends on when they retired. The concession is
25 generally 100% local service, plus either 100% intraLATA
1006
USW-S-96-5 STOCKTON (Di) 5
11/26/96 Staff
1 toll, or a $25 or $35 credit for intraLATA toll.
2 Specific eligibility is dictated by the plan that was in
3 place at the time of retirement.
4 Honoraries (retired members of the Board of
5 Directors) and Advisors (current members of the State
6 Executive Boards) are also eligible for concession
7 treatment at various percentages depending on when they
8 serve(d) and the region they serve(d).
9 The telephone concession plan is not limited
10 to basic local service and intraLATA toll. There are
11 other features, exclusions and limitations as well.
12 However, the free or reduced local exchange service is
13 the Title 61 service that Staff concentrated on.
14 Q. Please explain how you calculated the
15 concession adjustment.
16 A. In response to Audit Request No. 41,
17 U S WEST supplied Staff with the amount of expense
18 allocated to southern Idaho by reason of a concession in
19 telephone service for the year 1995. The southern Idaho
20 intrastate expense as a result of the telephone
21 concession policy is $38,824. During 1995 there were
22 2,167 southern Idaho individuals receiving telephone
23 service concessions. The revenues not billed associated
24 with those customers is $468,326. These revenues include
25 Title 61 revenues from basic local service, Title 62
1007
USW-S-96-5 STOCKTON (Di) 6
11/26/96 Staff
1 revenues from intraLATA toll, and other Title 62 services
2 offered in the telephone concession plan.
3 Staff did not receive the information
4 necessary to divide the foregone revenues of $486,326
5 into Title 61 and Title 62 services. Consequently, Staff
6 estimated Title 61 revenues assuming half of the
7 customers receive a 50% concession and the other half
8 receive 100% concession for local service. Using $12 as
9 the average price for monthly local service in southern
10 Idaho, and applying the above concession percentage, I
11 arrived at an average of $9.00 per month. Multiplying
12 this amount by the number of individuals for 12 months
13 produced $234,036 in revenues foregone due to local
14 service concessions. This estimate is conservative
15 because it does not take into account any revenues
16 relating to other Title 61 services that are also
17 available to concession employees such as a free
18 additional line, non-published or non-listed telephone
19 number, etc.
20 Q. Was telephone service concessions an issue
21 in the last general rate case for U S WEST?
22 A. Yes, telephone service concessions was an
23 issue that was considered in the last general telephone
24 rate case which was filed by U S WEST's predecessor,
25 Mountain Bell, in Case No. U-1000-63 in 1982. Commission
1008
USW-S-96-5 STOCKTON (Di) 7
11/26/96 Staff
1 Order No. 18188, page 37, addresses telephone service
2 concessions by stating:
3 The Commission finds that any toll
concessions enjoyed by Company
4 employees ought to be removed by
January 1, 1984. After divestiture,
5 toll concessions will, for the first
time, become an actual out-of-pocket
6 expense because the existing affiliation
between AT&T and Mountain Bell will be
7 dissolved. We do not forbid the Company
from providing such concessions but will
8 not allow them as a reasonable expense.
The ratepayers should not be in the
9 position of paying toll carriers for
employee toll calls.
10
We further direct that the Company
11 either include in its tariff or file
with the Commission a statement of the
12 concessions enjoyed by its employees
so that this information is available
13 to the public. We will allow the
provision of free local service as a
14 concession, but point out that such
concessions may hurt the Company from
15 a customer relations point of view.
16 U S WEST, formerly Mountain Bell, has failed to follow
17 the directive of the Commission stated in Order No.
18 18188. Employee concessions were not included in its
19 filed tariff. While Staff was supplied with a copy of
20 the Company's policy, "Telephone Concession Plan", in
21 response to Audit Request 41, Staff was unable to find a
22 statement that had been formally filed with the
23 Commission so that it would be available to the public.
24 Q. What is your recommendation?
25 A. Staff recommends imputing southern Idaho
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USW-S-96-5 STOCKTON (Di) 8
11/26/96 Staff
1 revenues of $234,036. U S WEST chose to ignore the
2 Commission directive after the last rate increase
3 request. This imputation adjustment also matches
4 revenues with the expenses associated with the employee
5 telephone service concessions. Therefore, including the
6 associated revenues is appropriate.
7 PRESIDENT'S CLUB
8 Q. On Exhibit No. 101, pg. 11, you have also
9 made an adjustment to 1995 test-year expenses for the
10 President's Club. Please explain what the President's
11 Club is.
12 A. The President's Club is a form of employee
13 recognition, similar in character to a bonus or incentive
14 award. It is an event that is designed to recognize
15 U S WEST employees that have made distinguished
16 contributions to the Company and their specific
17 organizations. The criteria for participation varies
18 between organizations, but ultimately, the achievements
19 of the individual employees are being recognized.
20 According to the response to Audit Request 84, "winners
21 were selected who demonstrated the highest level of
22 performance in overall contribution to the objectives of
23 their organization, e.g., revenue generation, customer
24 service, and leadership." There were 2,248 employees of
25 U S WEST Communications in the 1994 President's Club held
1010
USW-S-96-5 STOCKTON (Di) 9
11/26/96 Staff
1 in 1995. The total cost to U S WEST Communications was
2 $5,190,162.
3 Q. Was President's Club data supplied for
4 southern Idaho?
5 A. Staff did not receive a dollar amount
6 specifically prorated to Idaho. Because this is an
7 expense that comes from U S WEST Communications and is
8 prorated back to all the jurisdictions through the
9 allocation process, the President's Club expenses charged
10 to Idaho would be indistinguishable in the Idaho expense
11 accounts. Idaho's portion would be buried in the
12 U S WEST Communications amounts allocated to southern
13 Idaho. Therefore, I calculated the Idaho-specific
14 allocation amount using the overall expense percentage of
15 2.51% multiplied by the total President's Club cost to
16 U S WEST Communications of $5,190,162 for an adjustment
17 of $130,273 before separations; at the Idaho intrastate
18 level the adjustment is $90,409.
19 Q. Why has Staff proposed this adjustment?
20 A. This expense should be disallowed as a
21 Title 61 expense because the Company has not demonstrated
22 it to be beneficial to Title 61 customers. It does not
23 appear to be a necessary expense for providing basic
24 local telephone service. Including expenses for this
25 type of incentive program implies that the customers are
1011
USW-S-96-5 STOCKTON (Di) 10
11/26/96 Staff
1 only entitled to a level of management that is merely
2 adequate, and that the customer must pay an additional
3 amount to motivate the utility to perform economically,
4 efficiently, and with a high degree of quality and
5 customer satisfaction. In addition, Title 61 rates are
6 set by the Commission; it is unlikely that selling more
7 Title 61 services would generate sufficient revenue to be
8 recognized. Revenue generation is not a benchmark that
9 outwardly indicates a positive benefit to the Title 61
10 customer. The benefits to the customer of the effects of
11 positive leadership are not easily quantified.
12 Staff has made several attempts to discern
13 the nature of the qualifications necessary to be
14 nominated to the President's Club. U S WEST asserted in
15 response to Staff Audit Request 208 that to provide the
16 documentation necessary to make a determination as to the
17 appropriateness of the expenses incurred for the
18 President's Club "would not lead to relevant evidence in
19 this proceeding."
20 Staff has eliminated the cost of the
21 President's Club because no records were provided that
22 verified the need for these expenses or their value to
23 the Title 61 customer. Staff was not able to view the
24 supporting documentation and evidence associated with the
25 1994 President's Club. U S WEST has failed to show that
1012
USW-S-96-5 STOCKTON (Di) 11
11/26/96 Staff
1 the expenses associated with the President's Club benefit
2 the Title 61 customers of southern Idaho. Therefore,
3 Staff adjustment to expenses for the President's Club
4 removes a total of $90,409 at the Idaho intrastate level.
5 CHART OF ACCOUNTS
6 Q. Exhibit No. 101, pg. 11, details the direct
7 assignment of expenses that are not Title 61 expenses
8 under the heading "Chart of Accounts." Please provide a
9 definition of, and a source for "Chart of Accounts."
10 A. The Chart of Accounts is a listing of all
11 the accounts and sub-accounts used in an accounting
12 system. The Chart of Accounts used is from "Part 32 -
13 Uniform System of Accounts for Telecommunications
14 Companies." This accounting system is required by the
15 Federal Communications Commission for telecommunications
16 companies. An accounting system generally consists of a
17 chart of accounts, various sub-systems, sub-accounts and
18 subsidiary records. An accounting system is used by a
19 company to provide the necessary financial information to
20 users, and to meet their legal and other
21 responsibilities. An account is a specific element or
22 area of a chart of accounts used to record, classify and
23 accumulate similar financial transactions as a result of
24 the Company's operations. The Uniform System of Accounts
25 is a financial accounting system which reports the
1013
USW-S-96-5 STOCKTON (Di) 12
11/26/96 Staff
1 results of operational and financial events in a manner
2 which enables both management and regulators to assess
3 the results of operation for a specified period. The FCC
4 Uniform System of Accounts provides a general description
5 of the kinds of transactions that make up each account in
6 the Chart of Accounts.
7 Q. How did you arrive at the "Chart of
8 Accounts" adjustment?
9 A. I arrived at this adjustment by making a
10 detailed examination of the Chart of Accounts for
11 U S WEST for southern Idaho operations. I examined all
12 the expense account and sub-account categories. Using
13 the ending balance of the Idaho F.R. (Jurisdictional)
14 books for the 6000-series and 7000-series accounts that
15 are above the line, I created a schedule of all 6000 and
16 7000 accounts, with all the sub-accounts that had dollar
17 amounts in them at the end of the year corresponding to
18 southern Idaho intrastate operations. I examined each
19 sub-account title and categorized each sub-account as
20 either a Title 61, Title 62, or a combination of Title 61
21 and Title 62. I made an adjustment for each sub-account
22 that had an account title that indicated it was not a
23 Title 61 expense or a combination expense. For example,
24 I removed the balances from sub-accounts such as "Voice
25 Messaging - other expenses", "Cellular Expense," "Coin
1014
USW-S-96-5 STOCKTON (Di) 13
11/26/96 Staff
1 Operated Expense," "Inmate Services - Expense," and
2 "Access Expense - Intrastate."
3 Q. Why is it appropriate to adjust for
4 expenses that are not Title 61 or combination expenses?
5 A. The 1995 test-year revenues are Title 61
6 revenues only. It is appropriate to match these revenues
7 with the Title 61 expenses; removing the Title 62
8 expenses allows for an appropriate matching of revenues
9 with expenses.
10 Q. What is the amount of the adjustment
11 associated with your examination of the Chart of
12 Accounts?
13 A. The adjustment to expenses as a result of
14 my examination of the Chart of Accounts is $9,827,635.
15 DOCUMENTS OF ORIGINATING ENTRY
16 Q. You also make an adjustment as a result of
17 your examination of documents of originating entry. How
18 is this adjustment different from the "Chart of Accounts"
19 adjustment?
20 A. The "Chart of Accounts" adjustment is made
21 by examining the title of the accounts with positive
22 ending balances for the operating and other expense
23 accounts. No specific journal entries were examined.
24 Staff was auditing specifically for accounts and sub-
25 accounts that have titles that are for expenses for
1015
USW-S-96-5 STOCKTON (Di) 14
11/26/96 Staff
1 services that are not Title 61 services. The Uniform
2 System of Accounts does not distinguish between Title 61
3 expenses and Title 62 expenses. The split between
4 Title 61 and Title 62 services is unique to Idaho and is
5 not addressed at the federal level, therefore, the USOA
6 Chart of Accounts is not designed to distinguish between
7 a Title 61 expense and a Title 62 expense. The
8 examination of the actual journal entries that make up
9 the balances in the accounts resulted in a separate
10 adjustment within each account examined. The "Chart of
11 Accounts" adjustment removed the total amount of the
12 account balance for accounts that were not for Title 61
13 services.
14 Q. What authority does the Commission have
15 over the Company's accounting?
16 A. The Idaho Public Utilities Commission is
17 authorized by Title 61, Section 524 to establish a system
18 of accounts for the public utilities under its
19 jurisdiction. The IPUC has done so with Rule 103 (IDAPA
20 31.12.01.103). Rule 103 states: "The Commission adopts
21 by reference the Uniform System of Accounts for Class A
22 and B Telephone Utilities contained in the Code of
23 Federal Regulations, Title 47, Part 32,...All Class A
24 and B telephone corporations subject to the regulatory
25 authority of the Idaho Public Utilities Commission are
1016
USW-S-96-5 STOCKTON (Di) 15
11/26/96 Staff
1 required to maintain their regulatory books according to
2 the system of accounts adopted by this rule."
3 Q. In the Federal Communications Commission
4 (FCC) Part 32 - Uniform System of Accounts, 32.12(b)
5 "Records", it states: "The company's financial records
6 shall be kept with sufficient particularity to show fully
7 the facts pertaining to all entries in these accounts.
8 The detail records shall be filed in such manner as to be
9 readily accessible for examination by representatives of
10 this [FCC] Commission." Did you examine every document
11 of originating entry for all the operating expense
12 accounts included in the test year?
13 A. No. Due to U S WEST's insistence that to
14 produce any source documents for any accounts at all
15 would be voluminous and burdensome, a compromise was
16 reached whereby I would examine documents of original
17 entry for a one-month period for ten expense accounts.
18 I would not be examining all entries in the ten accounts,
19 only the documents of original entry for a sub-account of
20 each of the ten accounts.
21 Q. Which accounts were examined and for what
22 months?
23 A. The ten sub-accounts that were examined are:
24 1. 6124.19 for the month of November 1995
2. 6512.199 for the month of April 1995
25 3. 6722.9 for the month of February 1995
4. 6611.9 for the month of June 1995
1017
USW-S-96-5 STOCKTON (Di) 16
11/26/96 Staff
1 5. 6612.9 for the month of November 1995
6. 6613.9 for the month of December 1995
2 7. 6724.9 for the month of March 1995
8. 7160.2 for the month of December 1995
3 9. 6728.99 for the month of July 1995
10. 6723.9 for the month of April 1995
4
5 Q. Please describe your audit procedures.
6 A. Upon receiving a copy of each sub-account's
7 journal entries for the chosen month, I was again asked
8 to compromise on the number of documents that I would be
9 able to look at. I selected journal entries from the
10 specified month of the southern Idaho ledger, as well as
11 the U S WEST Communications ledger for each sub-account.
12 I will refer to the U S WEST journal entries as
13 "Headquarters" since that is how the accounting system
14 at U S WEST distinguishes their journal entries from the
15 jurisdictional accounts, such as the southern Idaho
16 ledger, which is referred to in the accounting system as
17 "Idaho." It is appropriate to look at journal entries
18 from Headquarters because all Headquarters' expenses are
19 prorated out to the jurisdictions.
20 From the initial listing of over 14,000
21 journal entries selected, a sample of 206 was selected
22 for examination. Staff received some of the originating
23 entry documentation for these 206 journal entries. Of
24 the 206, documentation for five journal entries could not
25 be located. An analysis of the journal entries was
1018
USW-S-96-5 STOCKTON (Di) 17
11/26/96 Staff
1 performed by sub-account.
2 Staff categorized the journal entries
3 as either being a Title 61 expense, a Title 62 expense, a
4 restructuring or re-engineering expense, or a combination
5 Title 61/Title 62 expense. The term "re-engineering"
6 refers to the 1993 Restructuring Plan used by U S WEST in
7 their re-engineering efforts. (Please refer to the
8 testimony of Staff witness Schneider for an examination
9 of the re-engineering efforts undertaken by U S WEST.)
10 The entries were separated into Idaho-specific entries
11 and Headquarters entries.
12 Q. Did the documents examined contain
13 sufficient support for the expenses?
14 A. No. U S WEST did not satisfactorily respond
15 to Staff's audit requests. Staff Audit Request No. 127
16 was the final request in a series of requests submitted
17 in an attempt to acquire the necessary source documents.
18 The Staff asked for, as a minimum, for each journal
19 entry: the source document, the invoice, the
20 authorization for payment, and the journal entry for the
21 posting. In many instances, only the journal entry was
22 provided. Oftentimes, the invoice and the authorization
23 for payment was provided, but rarely the source document
24 that initiated the transaction. A monthly statement with
25 "for services rendered" is not an appropriate response to
1019
USW-S-96-5 STOCKTON (Di) 18
11/26/96 Staff
1 Staff's request. However, many of the documents
2 supporting the journal entry selected were just such a
3 response. If a company had been hired to do consulting
4 work culminating in product "Z" and the monthly billing
5 was for "contracted services", only the monthly billing
6 was provided. In most cases, no documentation that would
7 serve to verify the necessity of the expenses, or the
8 nature of the expenses so that it could be determined if
9 they had been properly booked, was provided in the
10 response to Audit Request 127. Many of the expenses had,
11 in reality, no supporting documentation, and it would
12 have been appropriate to make an adjustment to eliminate
13 all of the journal entries with no supporting
14 documentation.
15 Q. What was your general intent when examining
16 the documents of original entry for the journal entries?
17 A. The intent of my examination of the various
18 invoices, authorization for payment, and any other
19 documentation was threefold. First, I wanted to
20 determine that the entry was properly classified and
21 booked to the proper account using the Uniform System of
22 Accounts. Second, was to determine if direct assignment,
23 as the cost allocation policy specifies to be done when
24 it is possible to do so, was in fact being done.
25 Finally, I wanted to determine which category each entry
1020
USW-S-96-5 STOCKTON (Di) 19
11/26/96 Staff
1 fell into: Title 61, Title 62, re-engineering, or
2 combination Title 61/Title 62.
3 Q. Did you remove the Idaho-specific Title 62
4 entries?
5 A. Yes. It is appropriate to remove those
6 amounts that can be specifically identified as Title 62
7 expenses. These items could have and should have been
8 directly assigned to Title 62. U S WEST has not shown
9 Staff that they are directly assigning expenses as called
10 for in its Cost Accounting Policy. From the limited
11 exposure to actual documents of originating entry, it is
12 apparent that many expenses could have been directly
13 charged to the jurisdictions that benefit from them.
14 Instead, they are put in the allocation pools and
15 prorated back to all the jurisdictions. For example, one
16 journal entry (Serial Number 180) consisted of four
17 invoices for payment for application software. Each
18 invoice is for a separate location. This journal entry
19 was paid by U S WEST Communications and prorated to all
20 jurisdictions when it should have been directly charged
21 to only the jurisdictions that would use the application
22 software at each location. Because each location has a
23 separate bill, it is possible to directly assign the
24 costs to the jurisdictions that use the application
25 software at that particular location. Another journal
1021
USW-S-96-5 STOCKTON (Di) 20
11/26/96 Staff
1 entry (Serial Number 202) is for labor and expenses for
2 installation of computer support hardware, orientation
3 and training for five separate invoices. Each invoice
4 corresponds to a separate work order and location. This
5 journal entry amount was allocated from Headquarters and
6 should have been directly assigned to each work location
7 and the costs directly assigned to the jurisdictions
8 utilizing the services of the work locations. Each
9 location had a separate billing and invoice; direct
10 assignment was possible. Yet another example of a cost
11 being put into the allocation pools when it could be
12 directly assigned involves marketing efforts in specific
13 jurisdictions. Serial Numbers 84, 185, 95, 97, 87, 88,
14 93, and 94 pertain to expenses that have been put into
15 the allocation pools when the invoice states at which
16 jurisdictions the marketing efforts were targeted. These
17 expenses could have been directly assigned to the
18 jurisdictions benefiting from the marketing efforts.
19 Instead, the expenses were charged to Headquarters and
20 prorated out to all jurisdictions through the allocation
21 pools.
22 Q. What is your adjustment as a result of your
23 analysis of the information provided by U S WEST in their
24 response to Staff Audit Request No. 127?
25 A. The resulting adjustment to southern Idaho
1022
USW-S-96-5 STOCKTON (Di) 21
11/26/96 Staff
1 operating expenses is $857,352 and is summarized on
2 Exhibit No. 101, pg. 11. While source documents for
3 expenses that go into the allocation pools from
4 Headquarters were examined, I made no adjustments to the
5 Headquarters accounts. The allowance or disallowance of
6 the Headquarter's entries are discussed in Staff witness
7 Faunce's testimony. The purpose of my audit was to
8 distinguish between, and directly assign, southern Idaho
9 expenses to either Title 61 or Title 62 services.
10 Q. What would the adjustment have been if the
11 approach had been to apply a percentage of Title 62
12 expenses based on the sample and project the percentage
13 to each account sampled or to all expenses above the
14 line?
15 A. Taking the total dollar amount that I found
16 to be related Idaho-specific Title 62 services, and
17 dividing the dollar amount that I found to be
18 Idaho-specific, results in 55.5% of the total sample
19 dollars related to Title 62 services. If I had used for
20 the adjustment, the total of all sampled account year-end
21 balances on an Idaho intrastate basis of $15,376,838,
22 then the adjustment would be $8,535,348.
23 ADVERTISING EXPENSES
24 Q. Finally, did you also make an adjustment to
25 advertising expenses?
1023
USW-S-96-5 STOCKTON (Di) 22
11/26/96 Staff
1 A. Yes. I adjusted the advertising expenses
2 in Accounts 6613 and 6722, as shown on Exhibit No. 101,
3 pg. 11.
4 Q. What types of advertising does U S WEST
5 include in their Operating Expenses?
6 A. U S WEST includes four types of advertising:
7 Promotional (Product) Advertising, Informational
8 Advertising, Image (Corporate Brand) Advertising, and
9 Other General Advertising.
10 Q. Why did you make the adjustment for
11 advertising expenses?
12 A. I made the adjustment because the
13 Commission has historically disallowed advertising
14 expenses that are promotional and corporate advertising.
15 These types of expenses are not appropriate for
16 ratemaking. In U S WEST's last rate case (No. U-1000-63)
17 corporate image advertising expenses were excluded from
18 operating expenses because the Commission found very
19 little, if any, benefit flowing to the customers from
20 this type of advertising. To exclude promotional and
21 corporate image advertising is consistent with the
22 long-held Commission practice of not allowing promotional
23 advertising. Promotional advertising generally does not
24 benefit or educate customers. Promotional, corporate,
25 and image advertising should be below-the-line expenses
1024
USW-S-96-5 STOCKTON (Di) 23
11/26/96 Staff
1 and borne by the shareholders. This type of advertising
2 does not provide any known or measurable benefit to Idaho
3 Title 61 customers. The advertising adjustment is
4 consistent with previous Commission decisions in that the
5 expense of image, promotional, and corporate advertising
6 that relates primarily to shareholders should not be
7 charged to customers.
8 Q. How did you arrive at the advertising
9 adjustment amount?
10 A. I arrived at the amount using Company-
11 supplied information in response to Staff Audit Requests
12 76, 135, 204, 206, and 207. U S WEST identified the
13 amounts in the four advertising categories by account
14 number. U S WEST supplied Staff with the amount of each
15 type of advertising by the amount allocated from U S WEST
16 Communications, Inc. and the amount directly charged to
17 Idaho.
18 Q. Was all of the advertising in Accounts 6613
19 and 6722 included in Staff's advertising adjustment?
20 A. No. The amount in the Informational
21 Advertising was not included in the adjustment.
22 Informational advertising is beneficial to the Title 61
23 customers. The amount in the Other General Advertising
24 was not included in the advertising adjustment. The
25 advertising included in this account is also beneficial
1025
USW-S-96-5 STOCKTON (Di) 24
11/26/96 Staff
1 to Title 61 customers.
2 Q. What is the total amount of the Staff
3 advertising adjustment?
4 A. The total Staff advertising adjustment is
5 $784,630 and is found on Exhibit No. 101, pg. 11.
6 Q. Does this conclude your direct testimony?
7 A. Yes.
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
1026
USW-S-96-5 STOCKTON (Di) 25
11/26/96 Staff
1 Q. Please state your name and business address?
2 A. My name is Kathleen L. Stockton. My
3 business address is 472 West Washington Street, Boise,
4 Idaho.
5 Q. By whom are you employed and in what
6 capacity?
7 A. I am employed as an Auditor by the Idaho
8 Public Utilities Commission.
9 Q. Are you the same Kathleen L. Stockton who
10 previously filed direct testimony in this proceeding?
11 A. Yes, I am.
12 Q. What is the purpose of this surrebuttal
13 testimony?
14 A. The purpose of my surrebuttal testimony is
15 to respond to U S WEST witness Wright's rebuttal
16 testimony pertaining to the following adjustments:
17 Telephone Concessions, President's Club, Chart of
18 Accounts, Documents of Originating Entry, and
19 Advertising.
20 TELEPHONE CONCESSIONS
21 Q. In the last general rate case (Case
22 No. U-1000-63), how were telephone concessions handled,
23 and what specific guidelines were given in Order
24 No. 18188?
25 A. Order No. 18188 gave Mountain Bell, now
1027
USW-S-96-5 STOCKTON (Surr) 1
02/23/97 Staff
1 U S WEST, specific guidelines to follow with respect to
2 the provision of free local service as a concession for
3 employees and retirees. The Company was directed to
4 either include in its tariff or file with the Commission
5 a statement of the concessions enjoyed by its employees
6 so that this information is available to the public.
7 Q. Did U S WEST follow the Commission's
8 directive given in Order No. 18188?
9 A. No tariff or statement of the concessions
10 enjoyed by its employees and retirees could be located,
11 or any evidence that such a tariff or statement had been
12 filed.
13 Q. What objection does the Company have
14 regarding the imputation of revenues for telephone
15 concessions?
16 A. The Company contends that to impute
17 revenues for telephone concessions is a punishment for
18 not following prior Commission Order No. 18188. Company
19 witness Wright, on page 47, line 18, states, "It is not
20 appropriate to punish the Company for a minor oversight."
21 Q. Did the Company object to the amount of the
22 imputed revenues, or the way in which they were
23 calculated?
24 A. No. The rebuttal testimony was silent on
25 the subject of the amount of the revenue imputation, as
1028
USW-S-96-5 STOCKTON (Surr) 2
02/23/97 Staff
1 well as the calculation method of the revenue imputation.
2 Q. Please explain the reasons for imputing
3 revenues for employee and retiree telephone concessions.
4 A. I included a revenue imputation to match
5 the expenses included in the revenue requirement. When
6 recording transaction data, an accountant follows certain
7 fundamental principles. The principles relate to how
8 assets, liabilities, revenues, and expenses are to be
9 identified, measured, recorded and reported. One of
10 those principles is the "Matching Principle." This key
11 approach, in recognizing expenses, is to "let the expense
12 follow the revenues." U S WEST has not included any
13 revenues to justify the inclusion of the expenses. Staff
14 proposes to match the benefits (revenues) with the
15 appropriate costs (expenses).
16 Q. Is it reasonable for U S WEST to provide
17 extra benefits or bonuses to employees or retirees of
18 that Company?
19 A. Not for its regulated activities. Basic
20 local telephone service is viewed as a necessity. As
21 such, the expenses necessary to provide reliable
22 telephone service are those that are included for
23 ratemaking purposes. I included imputed revenues because
24 the concession service represents an expense that is
25 unnecessary for the provision of reliable utility
1029
USW-S-96-5 STOCKTON (Surr) 3
02/23/97 Staff
1 service. Including this revenue offsets the expenses
2 incurred for the telephone concessions. Therefore, Title
3 61 customers will not be paying expenses that are not
4 necessary to provide reliable Title 61 services.
5 Telephone concessions should not be charged to Title 61
6 customers.
7 Q. Should the telephone concessions be viewed
8 as part of the compensation package?
9 A. No. The telephone concessions are not
10 recorded as compensation expense by U S WEST.
11 Q. Are you recommending that telephone
12 concessions be eliminated?
13 Q. No. I am not advocating that they be
14 eliminated, rather that the expenses included in the
15 Title 61 revenue requirement be matched with the
16 inclusion of the appropriate amount of revenues to offset
17 those expenses. Revenues are imputed to offset the
18 expenses of the telephone concessions. Doing so properly
19 matches the benefits (revenues) with the costs (expenses).
20 PRESIDENT'S CLUB
21 Q. Why have you recommended that the expenses
22 for the President's Club not be allocated to the Title 61
23 revenue requirement for ratemaking purposes?
24 A. I have recommended that the southern Idaho
25 Intrastate portion of the expenses for the 1994
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USW-S-96-5 STOCKTON (Surr) 4
02/23/97 Staff
1 President's Club, held in 1995, be disallowed because
2 U S WEST has failed to show that the President's Club is
3 beneficial to Title 61 customers, and that the expenses
4 for the President's Club are necessary for the provision
5 of basic local telephone service.
6 Q. What is the President's Club as it has been
7 characterized to you?
8 A. The President's Club is a recognition event
9 that singles out individuals whose performance has
10 exceeded certain benchmarks. This recognition event is
11 not unlike a paid vacation. It is held in a resort
12 setting, with daily events and meetings scheduled, but
13 the meetings are short, and are not the primary purpose
14 of the President's Club. The event gives the outward
15 appearance of an all-expense-paid vacation for the
16 employee and spouse, of about a week in duration. It is
17 my opinion that an all-expense paid vacation for a
18 Company employee is not directly beneficial to Title 61
19 customers. I suspect that the performance benchmarks
20 have significantly more to do with enhancing shareholder
21 value than they have to do with enhancing services for
22 Title 61 customers. However, U S WEST has not provided
23 the records and documents supporting the accounting
24 entries to verify the expenses, or the benefit of the
25 President's Club to Title 61 customers. Consequently, I
1031
USW-S-96-5 STOCKTON (Surr) 5
02/23/97 Staff
1 have eliminated the expenses attributed to the
2 President's Club.
3 Q. What was U S WEST's response to your
4 recommendation that the expenses for the President's Club
5 not be included in the Title 61 revenue requirement
6 calculation?
7 A. U S WEST continues to assert that the
8 President's Club expenses should be included in the Title
9 61 revenue requirement calculation. The Company says
10 that the President's Club is a form of employee
11 recognition. It does not justify the need for the
12 expenses or their benefit to Title 61 customers.
13 Q. Did you examine sufficient records to
14 verify the expenses of the President's Club?
15 A. No. I attempted to audit these records
16 while in Denver, and subsequently, but the documents were
17 not available. The records provided were not sufficient
18 to verify the expenses of the President's Club.
19 Q. Did Staff attempt to determine the benefit
20 of the President's Club to Title 61 customers?
21 A. Yes, but the information provided was not
22 for the President's Club.
23 Q. Company witness Wright states in her
24 rebuttal testimony on page 48, line 19, that "This
25 recognition is not given to any performance above an
1032
USW-S-96-5 STOCKTON (Surr) 6
02/23/97 Staff
1 adequate performance level as portrayed by the Staff."
2 Did the Staff make this statement?
3 A. No. I did not imply or portray that the
4 recognition was given to any employee who performed above
5 average. What I did say is that Title 61 customers
6 should not have to pay a premium for any performance
7 above adequate. My adjustment to expenses, at the Idaho
8 intrastate level, is $90,409. Including expenses such as
9 those for the President's Club in the Title 61 revenue
10 requirement calculation implies that the customer can
11 expect only an adequate level of performance, and that to
12 motivate the Company to perform economically,
13 efficiently, and with a high degree of quality and
14 customer satisfaction, the customer must pay an
15 additional premium over the compensation package already
16 included in the Title 61 revenue requirement calculation.
17 CHART OF ACCOUNTS
18 Q. What is the `Chart of Accounts' adjustment,
19 and what are the issues surrounding this adjustment?
20 A. My adjustment called `Chart of Accounts' is
21 from my examination of the 6000-series and 7000-series
22 expense accounts from the Uniform System of Accounts
23 (USOA) that are included above the line. I examined each
24 expense sub-account title and categorized each sub-
25 account as either a Title 61, Title 62, or combination
1033
USW-S-96-5 STOCKTON (Surr) 7
02/23/97 Staff
1 (both Title 61 and Title 62) expense. Those accounts
2 that I categorized as Title 62, I directly assigned to
3 Title 62. Title 61 accounts are directly assigned to the
4 Title 61 revenue requirement, and the combination
5 accounts are allocated between Title 61 and Title 62
6 based on the allocation factors developed by Staff
7 witness Baldwin.
8 Q. According to U S WEST, you have a basic
9 flaw in your analysis. What is this basic flaw,
10 according to U S WEST?
11 A. U S WEST asserts that there is a basic flaw
12 in my analysis of the Chart of Accounts because I am
13 attempting to assign costs, which are identified at a
14 total state level for allocation to Title 61 and 62.
15 This arises from a mischaracterization of my starting
16 point.
17 Q. What is the starting point for your Chart
18 of Accounts adjustment?
19 A. My starting point is the FR (Financial
20 Report) books, specifically, the U S WEST Communications,
21 Inc., FR Basis Area Ledger, Idaho.
22 Q. Why did you start at the FR books?
23 A. I started at the FR books because the FR
24 books were readily available, subject to audit, and I
25 could trace all sub-accounts back to this set of books.
1034
USW-S-96-5 STOCKTON (Surr) 8
02/23/97 Staff
1 The FR books, adjusted for closing and post-closing
2 entries can be tied back to Company witness Elder's
3 Exhibit 44B. Company witness Wright's revenue
4 requirement numbers are Title 61 intrastate numbers that
5 are not auditable.
6 Q. Company witness Wright, in her rebuttal
7 testimony, page 50, line 8, states that you persist in
8 removing costs which are not included in intrastate
9 results. Could you please explain?
10 A. Yes. Company witness Wright's Title 61
11 numbers may exclude some of these same numbers but this
12 cannot be verified for most accounts. As I stated
13 before, Ms. Wright's numbers start at the Title 61 level
14 after these adjustments have been made, but we are unable
15 to directly identify the adjustments by account since Ms.
16 Wright completed three steps in one process. My
17 adjustment starts before the three steps that Ms. Wright
18 combined. My adjustment starts at the FR books prior to
19 removing the federal regulated amounts and the Idaho
20 off-book adjustments. It is also prior to the
21 interstate/intrastate separations. I adjust the FR
22 sub-account balances using the appropriate intrastate
23 percentages to arrive at the Idaho intrastate Title 62
24 amounts that should be excluded.
25 Q. Does the Uniform System of Accounts (USOA)
1035
USW-S-96-5 STOCKTON (Surr) 9
02/23/97 Staff
1 preclude the Commission from examining individual
2 postings to an account to determine proper Idaho
3 regulatory treatment of the various entries?
4 A. No. This Commission adopted by IDAPA
5 31.12.01.103 the UNIFORM SYSTEM OF ACCOUNTS FOR TELEPHONE
6 UTILITIES. Rule 103 states in part - "The accounts
7 adopted by reference are adopted for convenience of
8 establishing uniform systems of accounts only and do not
9 bind the Commission in any manner to any particular
10 ratemaking treatment of items in those accounts."
11 Company witness Wright in her discussion of
12 the Chart of Accounts (page 49 through 51 of her rebuttal
13 testimony) indicates that the USOA is not designed to
14 distinguish between Title 61 and Title 62. It is true
15 that the USOA is not designed to distinguish between
16 Title 61 and Title 62. The USOA makes requirements for
17 the federal jurisdiction, but is silent about any
18 specific requirements of a state jurisdiction. This
19 Commission recognizes that the USOA is not designed
20 specifically for Idaho. Therefore, the Commission has
21 made provisions in Rule 103 to examine the accounts for
22 content and establish the proper Idaho ratemaking
23 treatment for whatever the content may be. U S WEST did
24 not allow me to examine the accounts for content,
25 therefore, I made my adjustment based on the Uniform
1036
USW-S-96-5 STOCKTON (Surr) 10
02/23/97 Staff
1 System of Accounts, disallowing those expenses that are
2 not Title 61 and allocating the amounts that are a
3 combination of Title 61 and Title 62 expenses. I found
4 no amounts that were totally Title 61 expenses in the
5 accounts I adjusted.
6 DOCUMENTS OF ORIGINATING ENTRY
7 Q. What specifically did U S WEST say in
8 rebuttal to your direct assignment of Title 61 and Title
9 62 expenses in your adjustment titled `Documents of
10 Originating Entry'?
11 A. Company witness Wright maintains that I
12 unfairly criticized the Company in my statement that the
13 documents provided in response to my data requests
14 relating to documents of originating entry were
15 unsatisfactory.
16 Q. Why is it important to see the documents of
17 originating entry?
18 A. As I previously stated in my direct
19 testimony on page 19, it is important to see original
20 documents to verify the reasonableness of expenses, the
21 accuracy of entries, and the benefits to the Title 61
22 customers. Another reason for examining the documents of
23 original entry is to determine if direct assignment is
24 taking place.
25 Q. Is it reasonable to expect that direct
1037
USW-S-96-5 STOCKTON (Surr) 11
02/23/97 Staff
1 assignment of costs is possible?
2 A Yes, and beginning at the federal
3 jurisdiction, telephone utilities are required to
4 directly assign costs whenever possible. U S WEST has
5 not shown that it is impossible to directly assign costs
6 when it is appropriate and reasonable to do so.
7 Q. Company witness Wright states on page 54 of
8 her rebuttal testimony that "it would not be a simple
9 matter to modify journal entries to reflect direct
10 assignment to Title 61 services." Company witness Wright
11 also states that "Title 61 is a classification of service
12 which is unique to the State of Idaho. The classifica-
13 tion has no relevance in the other thirteen states in
14 which we do business." Are `Title 61' services unique to
15 Idaho?
16 A. Yes and no. Yes, no other state has a
17 classification of service SPECIFICALLY called "Title 61."
18 However, at least two states in U S WEST's territory do
19 have a classification of service extremely similar to the
20 types of services under the blanket name of "Title 61."
21 Those two states are North Dakota and Minnesota.
22 Q. What does North Dakota call its similar
23 "Title 61" services?
24 A. North Dakota has a similar basic local
25 service category which they refer to as "essential
1038
USW-S-96-5 STOCKTON (Surr) 12
02/23/97 Staff
1 service." They also have a statutory mechanism for non-
2 essential services. The North Dakota statute, Chapter
3 49-21-01 defines essential telecommunications service as
4 "service that is necessary for switched access to
5 interexchange telecommunications companies and necessary
6 for two-way switched communications for both residential
7 and business service within a local exchange area."
8 Q. What does Minnesota call its similar "Title
9 61" services?
10 A. Chapter 237 of the Minnesota Statutes allows
11 for an elective system of regulation which allows for
12 telecommunications services to be classified into three
13 possible categories: non-competitive, subject to emerging
14 competition, and subject to effective competition. In
15 Docket No. P-421/EM-89-694, U S WEST Communications, the
16 Minnesota Department of Public Service, and the other
17 parties of record, reached an agreement which determined
18 a classification of either "non-competitive" or "subject
19 to emerging competition" for each of U S WEST
20 Communication's services under Minnesota Statute 237.59
21 (1994). The classifications in North Dakota and
22 Minnesota show that the bifurcation of services into two
23 or more classifications is not unique to Idaho.
24 ADVERTISING
25 Q. Has Image and Corporate advertising
1039
USW-S-96-5 STOCKTON (Surr) 13
02/23/97 Staff
1 traditionally been allowed in the revenue requirement for
2 utilities?
3 A. No. The Commission has held that this type
4 of advertising is not beneficial to ratepayers or
5 customers of public utilities in Idaho.
6 Q. In the last general rate case for U S WEST
7 (formerly Mountain Bell), how were advertising expenses
8 handled?
9 A. Advertising expenses other than
10 informational advertising were to be paid by the
11 shareholders, and not the ratepayers or customers.
12 Q. Why is U S WEST now asking that image and
13 corporate brand advertising be allocated to the Title 61
14 revenue requirement?
15 A. U S WEST asserts that it is time for the
16 Idaho Public Utilities Commission to change its
17 historical position on advertising due to the advent of
18 competition. U S WEST maintains that it will be
19 necessary for Title 61 customers to now pay for this type
20 of advertising that traditionally had been disallowed for
21 ratemaking purposes. U S WEST asserts that it must now
22 advertise to "attract and retain" Title 61 customers and
23 therefore, these expenses traditionally disallowed should
24 now be allowed for ratemaking.
25 Q. Should promotional, image and corporate
1040
USW-S-96-5 STOCKTON (Surr) 14
02/23/97 Staff
1 advertising be included in the Title 61 revenue
2 requirement?
3 A. This type of advertising should be
4 disallowed in Title 61 rates, as it traditionally has.
5 While it is true that the telecommunications industry is
6 entering a new age, competition is not present in Idaho
7 at this time, as Staff witness Lee Selwyn testifies.
8 Therefore, there is no reason for still captive Title 61
9 customers to begin paying for advertising that has
10 historically been disallowed for ratemaking because no
11 benefits accrue to Title 61 customers from this kind of
12 expense.
13 Q. Have you examined advertising from the 1995
14 test year?
15 A. Yes. In Staff Production Request No. 398, I
16 asked the Company to provide copies or make available in
17 Boise all 1995 advertising efforts designed specifically
18 "to attract and retain" Title 61 customers. U S WEST
19 has provided Staff the opportunity to examine and view
20 these advertising efforts from the 1995 test year.
21 Q. What have you concluded as a result of your
22 examination of the advertising materials provided in
23 response to Staff Production Request No. 398?
24 A. I have concluded that the advertising I saw
25 was not specifically designed to attract and retain
1041
USW-S-96-5 STOCKTON (Surr) 15
02/23/97 Staff
1 Title 61 customers. While there were three
2 advertisements for additional lines, a Title 61 service,
3 the majority of the video, print and radio advertising I
4 examined was designed to sell Title 62 services,
5 primarily services offered through U S WEST's "Home
6 Office Consultant." Such services include, for example,
7 Voice Messaging, Paging, Caller ID, Caller Services,
8 Forwarding Services, and Enhanced Fax Services. Although
9 these advertisements might indirectly attract and retain
10 Title 61 customers, the primary goal of this marketing
11 effort is to sell additional, primarily Title 62,
12 services to residential and small business customers. It
13 appears that the marketing strategy to "attract and
14 retain" Title 61 customers is to sell them Title 62
15 services.
16 Q. Is it appropriate to include these expenses
17 in the test year Title 61 revenue requirement?
18 A. No. Including expenses of this nature,
19 where the products and goals are enhancing and selling
20 Title 62 services, is inappropriate. The Title 61
21 revenue requirement should include only Title 61 revenues
22 and expenses. To include these advertising expenses
23 would be including Title 62 expenses, meaning that the
24 Title 61 customer is subsidizing Title 62 services.
25 Q. You had the opportunity to view two videos
1042
USW-S-96-5 STOCKTON (Surr) 16
02/23/97 Staff
1 that are an example of corporate image advertising.
2 Should this type of advertising expense be included in
3 the Title 61 revenue requirement?
4 A. Corporate image advertising has
5 traditionally been disallowed for ratemaking purposes.
6 It has not been shown that this type of advertising is
7 necessary for the provision of Title 61 services. The
8 theme of the two videos that I viewed was
9 "Dependability." These two videos did not specifically
10 mention Title 61 services, but stressed that U S WEST was
11 dependable, with phrases like "service that works, no
12 matter what service you have," "always there for you,"
13 "cause you're all depending on us," "with products and
14 services you've come to depend on," and "count on our
15 ability of dependability." This type of advertising
16 expense is not necessary for the provision of basic local
17 telephone service, and should continue to be excluded
18 from the Title 61 revenue requirement.
19 Q. Company witness Wright states in her
20 rebuttal testimony on page 58, beginning at line 3, "It
21 is simply not realistic that USWC will operate
22 successfully in a competitive environment unless it too
23 makes effective use of advertising." Are you advocating
24 that U S WEST not be allowed to advertise in this manner?
25 A. I am not advocating that U S WEST should not
1043
USW-S-96-5 STOCKTON (Surr) 17
02/23/97 Staff
1 be allowed to advertise. In Idaho, U S WEST may charge
2 the costs of the advertising to three places: Title 61
3 for the Title 61 products and services, Title 62 for
4 Title 62 products and services, and to the shareholders
5 as is reasonable. I am not taking the position that
6 U S WEST should not be allowed to advertise, rather that
7 U S WEST match the advertising expenses with the proper
8 revenue source.
9 Q. Does this conclude your surrebuttal
10 testimony in this proceeding?
11 A. Yes, it does.
12
13
14
15
16
17
18
19
20
21
22
23
24
25
1044
USW-S-96-5 STOCKTON (Surr) 18
02/23/97 Staff
1 (The following proceedings were had in
2 open hearing.)
3 MS. HAMLIN: And with the permission of the
4 Chairman, I have few questions concerning the second
5 stipulation.
6 COMMISSIONER SMITH: Please proceed.
7
8 DIRECT EXAMINATION
9
10 BY MS. HAMLIN: (Continued)
11 Q Are you familiar with the second
12 stipulation between the Company and Staff entered into on
13 March 7th, 1997, which has previously been identified by
14 U S WEST witness Wright as Exhibit No. 48?
15 A Yes.
16 Q What issues in the settlement have you
17 addressed previously in your prefiled direct and
18 surrebuttal testimony?
19 A As already described in Exhibit 48, I
20 previously addressed the following four expense issues:
21 President's Club, chart of accounts, documents of
22 originating entry, advertising, and I also discussed one
23 revenue issue, telephone concessions.
24 Q Are there any remaining issues in your
25 prefiled direct testimony or rebuttal testimony?
1045
CSB REPORTING STOCKTON (Di)
Wilder, Idaho 83676 Staff
1 A No.
2 Q What was your initial position on the
3 President's Club adjustment?
4 A I proposed the disallowance of $90,409 of
5 Idaho intrastate expenses for the President's Club
6 recognition event because U S WEST did not provide the
7 information to determine whether the expenses benefited
8 the Title 61 customers.
9 Q And what was the result of the settlement
10 and stipulation as it pertains to your adjustment for the
11 President's Club?
12 A The Staff agreed to settle this issue with
13 the Company by splitting the difference. The Company
14 will reduce Title 61 expenses in this case by $23,000 and
15 Staff will increase its Title 61 expenses by a
16 corresponding amount.
17 Q Okay. Now, what was your adjustment for
18 the chart of accounts to expenses?
19 A The chart of accounts adjustment was an
20 adjustment based on the Uniform System of Accounts that
21 started at the financial report basis area ledger for
22 Idaho. The purpose of this adjustment was to remove
23 account balances that are solely Title 62 expenses. I
24 recommended a chart of accounts adjustment of $9,827,635
25 at the intrastate level.
1046
CSB REPORTING STOCKTON (Di)
Wilder, Idaho 83676 Staff
1 Q And what was the result of the settlement
2 conference as it pertains to your chart of accounts
3 adjustment?
4 A Staff and U S WEST agreed to settle this
5 issue after the Company provided the Staff with more
6 detailed information. Upon examining the detailed
7 information provided, I was able to determine that
8 Title 62 accounts had indeed been removed from the
9 Title 61 revenue requirement. This removed about
10 $9.7 million from the dispute. The parties then agreed
11 to split the remaining Title 61 difference of $44,000.
12 The Company will reduce its Title 61 expenses by $22,000
13 and the Staff will increase its Title 61 expenses by an
14 equal amount.
15 Q What was your document of original entry
16 adjustment to expenses?
17 A After I examined 206 documents of
18 originating entry, I proposed a direct assignment to
19 Title 62 of $857,352 and a direct assignment to Title 61
20 of $17,754 at the intrastate level.
21 Q And what was the result of the settlement
22 conference which pertains to your documents of original
23 adjustment?
24 A At the March 4th conference, Staff and the
25 Company agreed to settle this adjustment. Staff and the
1047
CSB REPORTING STOCKTON (Di)
Wilder, Idaho 83676 Staff
1 Company are splitting the total Title 61 difference of
2 $468,000. The Company will decrease its Title 61
3 expenses by $234,000 and Staff will increase Title 61
4 expenses by an equal amount.
5 Q What was your adjustment for advertising
6 expenses?
7 A I proposed an adjustment to expenses of
8 $784,630 at the intrastate level to eliminate those
9 expenses associated with image and corporate
10 advertising. These advertising expenses have
11 historically been disallowed by the Commission because
12 they provide no direct benefit to the Title 61 customer.
13 It has not been shown that these expenses are necessary
14 for the provision of basic local telephone service.
15 Q And what argument did the Company make in
16 favor of now including these expenses?
17 A The Company argued that this type of
18 advertising expense should now be allowed due to
19 competition.
20 Q And as the result of this settlement
21 conference, how did that pertain to your advertising
22 adjustment?
23 A Staff has agreed to settle this issue with
24 the Company by splitting the difference of $267,000 of
25 advertising expense. The Company will reduce its
1048
CSB REPORTING STOCKTON (Di)
Wilder, Idaho 83676 Staff
1 Title 61 expenses by $134,000 and the Staff will make a
2 corresponding adjustment to increase Title 61 expenses.
3 Q Could you please describe your telephone
4 concessions adjustment to revenue in your prefiled
5 testimony?
6 A In my direct and surrebuttal testimony, I
7 imputed telephone concessions revenue to Title 61 in the
8 amount of $234,036 to match the expenses related to
9 telephone concessions for employees and retirees.
10 Q What is the result of the settlement
11 conference as it pertains to telephone concessions?
12 A At the settlement conference, the Staff and
13 the Company agreed to settle this issue by splitting the
14 difference between the Staff and the Company's Title 61
15 allocation. The Company will increase Title 61 revenues
16 by $117,000 and the Staff will reduce Title 61 revenues
17 by an equal amount.
18 Q Now, with regard to the five issues, do you
19 find the settlement conference and stipulation to be
20 reasonable?
21 A Yes. My five issues are part of a large
22 and encompassing settlement of more than 18 disputed
23 issues. The second settlement allowed the Staff and the
24 Company to better understand each other's case. In at
25 least one issue, additional information permitted the
1049
CSB REPORTING STOCKTON (Di)
Wilder, Idaho 83676 Staff
1 Staff to correctly adjust its position. Given the
2 strength of the Staff's and the Company's advocacy on
3 each issue, and the value of the collective issues, Staff
4 believes a settlement of these issues is reasonable and
5 in the public interest.
6 MS. HAMLIN: With that, Madam Chair, I
7 offer my witness for cross-examination.
8 COMMISSIONER SMITH: Mr. Kutler or
9 Mr. Harwood, do you have questions?
10 MR. KUTLER: Just a few. Thank you.
11
12 CROSS-EXAMINATION
13
14 BY MR. KUTLER:
15 Q Good morning, Ms. Stockton. On the
16 advertising settlement, I may have missed it, did you say
17 what the amount was that you were agreeing to?
18 A Yes. We're splitting $267,000 at the
19 Title 61 level.
20 Q Okay, and you said the reason that Staff
21 had agreed to allow that was related to competition; is
22 that right?
23 A No, it was part of the settlement
24 agreement.
25 Q Well, clarify for me, what does competition
1050
CSB REPORTING STOCKTON (X)
Wilder, Idaho 83676 Staff
1 have to do with the settlement of this issue?
2 A Competition was the argument used by the
3 Company for including those expenses in their Title 61
4 revenue requirement.
5 Q So Staff doesn't necessarily buy that
6 argument; is that right?
7 A Not necessarily, no.
8 Q But for purposes of settling this, Staff
9 agreed to go along with that?
10 A Yeah, that was one issue of 18 that were
11 settled.
12 Q And what's the test year in this case?
13 A 1995.
14 MR. KUTLER: No further questions.
15 COMMISSIONER SMITH: Mr. Fothergill?
16 MR. FOTHERGILL: No questions.
17 COMMISSIONER SMITH: Mr. Phillips.
18 MR. PHILLIPS: Thank you, Madam Chairman.
19
20 CROSS-EXAMINATION
21
22 BY MR. PHILLIPS:
23 Q Ms. Stockton, what I was interested in, I
24 didn't do the math as this went by, how much was added to
25 the expense of 61 and how much was added to the expense
1051
CSB REPORTING STOCKTON (X)
Wilder, Idaho 83676 Staff
1 of 62? How much was recognized as revenue from the two
2 groups? Could you do the math for me?
3 A Okay, are you asking --
4 Q On the, what, five different --
5 A Okay. The difference that was split for
6 the telephone concessions, the imputed revenue, that was
7 $117,000 both ways. The Company increased theirs by
8 $117,000 and we decreased ours by 117. For the
9 President's Club adjustment, I believe that was $23,000
10 both ways; $22,000 for the chart of accounts adjustment;
11 $234,000 for the documents of original entry; and then
12 $134,000 for the advertising.
13 Q That doesn't give me what I was asking, at
14 least I don't understand it as having done so. I was
15 interested in the 61 account, how much cost was added to
16 the 61 account and how much revenue was recognized in the
17 61 account.
18 A Okay, the total adjustment amounts to a
19 little over a half million, $530,000. Of that, 117 is a
20 decrease on the Staff side, $117,000 in revenues, and
21 then an increase in expenses, the difference between the
22 530,000 and the 117.
23 MR. PHILLIPS: Thank you, Ms. Stockton.
24 Thank you. That's all my questions.
25 COMMISSIONER SMITH: Ms. Ford?
1052
CSB REPORTING STOCKTON (X)
Wilder, Idaho 83676 Staff
1 Ms. Hobson.
2
3 CROSS-EXAMINATION
4
5 BY MS. HOBSON:
6 Q Ms. Stockton, just a couple of questions.
7 Mr. Kutler asked you if you "bought" the U S WEST
8 argument on competition and advertising in order to reach
9 the settlement. Do you remember that line of questions?
10 A Yes.
11 Q Isn't it true, Ms. Stockton, that in fact
12 what the Staff agreed to do was, if you will, split the
13 difference between the Staff position and the Company
14 position on that particular item?
15 A Yes.
16 Q And that was done in the spirit of
17 compromise and not because either U S WEST agreed with
18 Staff position or Staff agreed with U S WEST position; is
19 that true?
20 A That's my understanding.
21 Q And in the questions that you just answered
22 regarding the overall change in position, the overall
23 change in position that you just identified as pertaining
24 to the five adjustments that we're talking about was an
25 adjustment to the Staff's advocacy in this case; isn't
1053
CSB REPORTING STOCKTON (X)
Wilder, Idaho 83676 Staff
1 that true?
2 A I think so. I'm not quite sure I
3 understand your question.
4 Q Let me try again. When Mr. Phillips asked
5 you what the overall change of these five stipulated
6 items made in the case, in the Title 61 case, the answer
7 you gave pertaining to a decrease in revenue and an
8 increase in expense pertained to the Staff's case; isn't
9 that true?
10 A Right.
11 Q Isn't it also true that because of the
12 stipulation there was a decrease of an equal size in
13 U S WEST's advocated expenses?
14 A Right.
15 Q And there was also a recognition of
16 increased revenue on U S WEST's side, an equal and
17 opposite amount to the decrease in the revenue Staff
18 recognized?
19 A Yes, that's my understanding.
20 Q In other words, the two parties moved
21 toward meeting with this settlement, moved towards zero,
22 if you will?
23 A Right.
24 MS. HOBSON: Thank you. That's all I have.
25 COMMISSIONER SMITH: Questions from the
1054
CSB REPORTING STOCKTON (X)
Wilder, Idaho 83676 Staff
1 Commission.
2 COMMISSIONER HANSEN: I have one.
3 COMMISSIONER SMITH: Commissioner Hansen.
4
5 EXAMINATION
6
7 BY COMMISSIONER HANSEN:
8 Q I guess I'm just kind of curious, if the
9 Staff had taken an earlier position on these five
10 adjustments and now all of a sudden you change your mind
11 and agree to splitting the difference, I'm curious how
12 you can say that you feel that this is reasonable and in
13 the public's best interest. I guess my question is,
14 didn't you just give away half the farm for the public?
15 A I suppose you could look at it that way,
16 but ultimately we don't -- I mean, this settlement, it's
17 my understanding it isn't binding on your decision. It
18 was a way for the Staff and the Company to settle some
19 issues between us.
20 Q Do you feel, then, that if you hadn't of
21 settled it, it was brought up yesterday by U S WEST, I
22 believe, kind of paraphrasing what they said, but I
23 believe it was Ms. Wright that said that they settled
24 because they didn't want to take the risk of winning or
25 losing on some of these cases, is that the logic of the
1055
CSB REPORTING STOCKTON (Com)
Wilder, Idaho 83676 Staff
1 Staff's position, too, that you were worried about losing
2 and thought it was in the best interest to split the
3 difference?
4 A I think on my issues probably, because you
5 don't know what will ultimately happen, I'm just going on
6 what could happen, I think that's -- that's a bad
7 answer. I think it's kind of a way, yeah, of sort of
8 hedging your bet. We could win some and lose some, and I
9 would think that we would feel -- the Staff would
10 probably say, well, we've won more than we've lost by
11 doing this and the Company would probably feel the same
12 way, kind of a win-win.
13 Q So is that why you feel it's in the best
14 interest of the public that you came to an agreement of
15 splitting these differences?
16 A I'm not sure.
17 COMMISSIONER HANSEN: Thank you.
18 THE WITNESS: I don't believe I said it was
19 in the best interest of the public.
20 COMMISSIONER SMITH: Commissioner Nelson.
21 COMMISSIONER NELSON: Thank you.
22
23
24
25
1056
CSB REPORTING STOCKTON (Com)
Wilder, Idaho 83676 Staff
1 EXAMINATION
2
3 BY COMMISSIONER NELSON:
4 Q I had one question on the chart of
5 accounts. We kind of glossed over 9,750,000. That's a
6 total intrastate number. Does your Title 61 revenue
7 requirement move by the portion of that that's in
8 Title 61?
9 A Do you have a specific adjustment?
10 Q It says here Staff witness Stockton
11 recommended a chart of accounts adjustment of 9,827,000
12 at the intrastate level. If you take 44,000 out of that,
13 there's still 9,700,000 and quite a bit that you didn't
14 talk about.
15 A Right. When we got with the Company, we
16 got more information and they had also removed all but
17 $66,000 and then what was left was the $66,000. They did
18 their Title 61/62 allocation and that's where the $44,000
19 figure comes from, so I initially took out that
20 9.8 million and they did, also, except for the 44 or the
21 $66,000.
22 Q I guess my question was, was the Title 61
23 portion of this originally in the Staff's case, part of
24 your recommended 32 million decrease in revenue
25 requirement?
1057
CSB REPORTING STOCKTON (Com)
Wilder, Idaho 83676 Staff
1 A Well, those were removed before.
2 Q Before, so it wasn't part of your original
3 case?
4 A That's correct. We had removed those and
5 they had, too.
6 COMMISSIONER NELSON: All right, thank
7 you. That was my question.
8 COMMISSIONER SMITH: Redirect, Ms. Hamlin.
9 MS. HAMLIN: Just two quick questions.
10
11 REDIRECT EXAMINATION
12
13 BY MS. HAMLIN:
14 Q Isn't it true that Ms. Carlock is going to
15 address the overall reasonableness of this stipulation?
16 A Yes.
17 Q And isn't it also true that Staff does
18 believe that the stipulation is in the public interest?
19 A Yes.
20 MS. HAMLIN: No further questions.
21 COMMISSIONER SMITH: Thank you.
22 (The witness left the stand.)
23 COMMISSIONER SMITH: Let's take our morning
24 break for about 15 minutes.
25 (Recess.)
1058
CSB REPORTING STOCKTON (Di)
Wilder, Idaho 83676 Staff
1 COMMISSIONER SMITH: All right, are we with
2 Ms. Hamlin or Mr. Howell?
3 MR. HOWELL: Mr. Howell.
4 COMMISSIONER SMITH: All right,
5 Mr. Howell.
6 MR. HOWELL: Staff would call its next
7 witness Kent Schneider.
8
9 KENT SCHNEIDER,
10 produced as a witness at the instance of the Staff,
11 having been first duly sworn, was examined and testified
12 as follows:
13
14 DIRECT EXAMINATION
15
16 BY MR. HOWELL:
17 Q Mr. Schneider, would you state your full
18 name and spell your last for the record, please?
19 A My name is Kent Schneider. My last name is
20 spelled S-c-h-n-e-i-d-e-r.
21 Q And whom are you employed by and in what
22 capacity?
23 A I'm employed by the Idaho Public Utilities
24 Commission as an auditor.
25 Q And are you the same Kent Schneider that
1059
CSB REPORTING SCHNEIDER (Di)
Wilder, Idaho 83676 Staff
1 has prefiled 19 pages of direct testimony and
2 Exhibits 107 through 111 in direct and page 12 of Staff
3 witness Lansing's Exhibit 101 on November 26th of last
4 year?
5 A Yes.
6 Q And did you also have cause to prefile
7 35 pages of surrebuttal testimony and sponsor exhibits
8 138 through 148 on February the 21st of this year?
9 A Yes.
10 Q Do you have any changes to your testimony?
11 A Yes. On page 2 of my direct testimony, the
12 amount for the pension asset should be 18,018,000 instead
13 of the 27,670,000 shown, and on page 4 of my direct
14 testimony, the amount at line 5 should be 9,506,000
15 rather than the 13,835,000 shown.
16 COMMISSIONER NELSON: What was the first
17 page, Mr. Schneider?
18 THE WITNESS: Page 2, where I'm kind of
19 summarizing everything, and that should be 18,018,000.
20 COMMISSIONER NELSON: Thank you.
21 MS. HOBSON: What was the line?
22 COMMISSIONER SMITH: Say it one more time,
23 Mr. Schneider.
24 THE WITNESS: Okay. On page 2, the amount
25 for the pension asset, I didn't exactly put a line
1060
CSB REPORTING SCHNEIDER (Di)
Wilder, Idaho 83676 Staff
1 down --
2 COMMISSIONER SMITH: Is that line 14?
3 THE WITNESS: That sounds reasonable --
4 should be 18,018 instead of the 27,670 that's shown, and
5 then on page 4 on line 5, the number should be 9,506 or
6 9,560,000 [sic] rather than 13,835 or 13,835,000.
7 COMMISSIONER SMITH: Is it 560,000 or
8 506,000?
9 THE WITNESS: 506, pardon me.
10 Q BY MR. HOWELL: And what was the reason for
11 these changes?
12 A I used Idaho total dollars rather than
13 intrastate southern Idaho dollars and this correction
14 reflects the proper intrastate numbers, intrastate
15 southern Idaho amounts.
16 Q And if I were to ask you the questions set
17 out in your direct and surrebuttal testimony, would your
18 answers be the same with those two corrections noted?
19 A Yes.
20 MR. HOWELL: With that, Madam Chairman, I
21 would move that his direct and surrebuttal testimony be
22 spread upon the record as if read and his exhibits be
23 admitted.
24 COMMISSIONER SMITH: If there is no
25 objection, we will spread the prefiled direct and
1061
CSB REPORTING SCHNEIDER (Di)
Wilder, Idaho 83676 Staff
1 rebuttal testimony of Mr. Schneider upon the record as if
2 read and admit Exhibits 107 through 111 and 138 through
3 148.
4 (Staff Exhibit Nos. 107 - 111 &
5 138 - 148 were admitted into evidence.)
6 (The following prefiled direct and
7 surrebuttal testimony of Mr. Kent Schneider is spread
8 upon the record.)
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
1062
CSB REPORTING SCHNEIDER (Di)
Wilder, Idaho 83676 Staff
1 Q. Please state your name and business address.
2 A. My name is Kent Schneider. My business
3 address is 472 West Washington Street, Boise, Idaho.
4 Q. By whom are you employed and in what
5 capacity?
6 A. I am employed by the Idaho Public Utilities
7 Commission. My title is Auditor.
8 Q. Please describe your educational background
9 and professional experience.
10 A. I graduated with honors from the University
11 of Missouri in May 1972, with a B.S.B.A. Degree in
12 Accounting. I am a Certified Public Accountant, a
13 Certified Internal Auditor, and a Certified Bank Auditor.
14 I have attended the annual regulatory studies program
15 sponsored by the National Association of Regulatory
16 Utilities Commissioners (NARUC) at Michigan State
17 University in August 1996. I worked for Arthur Andersen
18 & Co. from 1972 until 1981, performing external audits
19 and consulting projects for a wide variety of companies
20 and government entities while based in St. Louis,
21 Missouri, Salt Lake City, Utah, and Boise, Idaho. From
22 1981 until 1996 I was the Director of Internal Control
23 for West One Bancorp. In July 1996 I joined the Idaho
24 Public Utilities Commission (IPUC).
25
1063
USW-S-96-5 SCHNEIDER (Di) 1
11/26/96 Staff
1 Q. What is the purpose of your testimony in
2 this proceeding?
3 A. The purpose of my testimony is to address
4 the following issues:
5 1) Employee Benefits
6 a. Pension Accounting
7 b. Post-Retirement Benefits
8 c. Compensated Absences Accounting
9 2) The Restructuring Plan and its Effect
10 on Employee Related Expenses
11 3) Reasonableness of Lease Expense
12 Adjustments proposed based on my
13 testimony are:
14 Pension Asset Reduction of
Rate Base $18,018,000
15
Transition Benefit Obligation
16 Expense Reduction $ 396,541
17 Curtailment Loss Amortization
Expense Reduction $ 1,139,399
18
Compensated Absences Amortization
19 of Expense $ 203,179
20 Amortization of Restructuring &
(re-engineering) Expense
21 included in test period $ 4,486,150
22 Employee Layoff Expense Reduction
(less: amortization of expected
23 future restructuring costs $ 5,977,500
24 Excessive Lease Charges to be
Removed $ 172,857
25 Total Expenses $12,375,626
1064
USW-S-96-5 SCHNEIDER (Di) 2
11/26/96 Staff
1 Q. Will you use abbreviations in your
2 testimony?
3 A. Yes. I will use the following
4 abbreviations in my testimony:
5 USWC - U S WEST Communications, Inc.
6 SFAS - Statement of Financial Accounting
Standards
7
PBOP - Post-Retirement Benefits Other than
8 Pensions
9 TBO - Transition Benefit Obligation
10 Also, for the purpose of this testimony,
11 "The Restructuring Plan" used by USWC is a
12 re-engineering effort. Therefore, the terms
13 restructuring and re-engineering are interchangeable.
14 Q. Are you sponsoring any exhibits to accompany
15 your testimony?
16 A. Yes, I am sponsoring Exhibit Nos. 107-111
17 which display my adjustments to the rate base and revenue
18 requirements for the test year 1995. I would like to
19 note that all of my adjustments reflect southern Idaho
20 intrastate amounts before allocation to Title 61
21 (regulated) or Title 62 (unregulated) services. A
22 summary of my adjustments are reflected on Staff witness
23 Lansing'S Exhibit No. 101, p. 12.
24
25
1065
USW-S-96-5 SCHNEIDER (Di) 3
11/26/96 Staff
1 PENSION RATE BASE ADJUSTMENT
2 Q. What issue do you have concerning pension
3 accounting?
4 A. In Company witness Margaret Wright's
5 Adjustment 21, a Pension Asset of $9,506,000 is added to
6 the southern Idaho rate base. In her testimony on page
7 31, item 3.21: Pension Asset, Ms. Wright states that;
8 "U S WEST booked a pension expense equal to the
9 company's cash contribution to its pension fund.... For
10 U S WEST, contributions to the fund have exceeded pension
11 expense accruals, therefore an asset has been created."
12 Since the expenses for the contributions to the pension
13 fund were included in rates paid by the customers, and
14 since the fund assets have performed well, as most
15 investments have during the last decade, the customers
16 have been responsible for the creation of this asset. In
17 the last full rate case in 1984, Case No. U-1000-63,
18 pension expense was included as an undisputed expense as
19 part of the revenue requirement. The Revenue Sharing
20 Plan did not reflect any expense credits in the revenue
21 sharing calculations for pensions. Therefore, I propose
22 that this asset be a reduction to the rate base on the
23 basis that this asset is a ratepayer-contributed asset.
24 Q. Should this Pension Asset be attributed to
25 customers?
1066
USW-S-96-5 SCHNEIDER (Di) 4
11/26/96 Staff
1 A. Since customers have historically funded
2 pension expenses through rates, and particularly since no
3 expense relief was provided to customers under the
4 Revenue Sharing Plan the asset should be considered as a
5 customer-provided asset (See Exhibit No. 107). If
6 considered as a customer-provided asset in rate base, the
7 rate base would be reduced by this customer contribution.
8 POST-RETIREMENT BENEFITS
9 Q. Of the issues concerning employee benefits,
10 would you explain and summarize post-retirement benefits?
11 A. In years prior to the release of SFAS 106 -
12 "Employers' Accounting for Post-Retirement Benefits Other
13 than Pensions" by the Financial Accounting Standards
14 Board, most companies including USWC, recognized the
15 costs of providing post-retirement medical, life
16 insurance and other miscellaneous benefits when they were
17 paid. This was known as the pay-as-you-go method. In
18 1990, SFAS 106 was released, requiring these PBOPs to be
19 recognized on the accrual basis the same way as pensions
20 are. It was effective on January 1, 1992.
21 To aid in the transition to the accrual
22 method, SFAS 106 allowed the accumulated PBOP expense and
23 liability that would be created at the start of the
24 accounting change, which is called the Transition Benefit
25 Obligation (TBO), to be amortized over a period of up to
1067
USW-S-96-5 SCHNEIDER (Di) 5
11/26/96 Staff
1 twenty years. Starting January 1, 1992, USWC has been,
2 for regulatory purposes, amortizing its TBO over 17.3
3 years, due to actuarial studies done at that time.
4 USWC's 1995 results of operations include both current
5 PBOP expenses and the TBO amortization.
6 Q. Are there other SFAS 106 adjustments?
7 A. Yes. SFAS 106 also provides for accounting
8 for curtailments. Curtailments involve events that
9 either (1) significantly reduce the expected years of
10 future service of active plan participants or (2)
11 eliminate the accrual of defined benefits for some or all
12 of the future services of a significant number of active
13 plan participants. In 1995, USWC recorded a curtailment
14 loss of $1,210,611 due to the number of employees who had
15 been terminated.
16 a. TBO Amortization
17 Q. Please explain your adjustments proposed
18 for post-retirement benefits other than pensions.
19 A. For calculation of the PBOP-TBO
20 amortization, the Company used 17.3 years as the
21 estimated average service lives remaining of its active
22 employees in 1992 when the amortization of the TBO was
23 started. In 1993 a special "re-engineering" charge of
24 $880 million was taken by USWC to reflect its plan to
25 eliminate 10,000 employees by December 31, 1997. The
1068
USW-S-96-5 SCHNEIDER (Di) 6
11/26/96 Staff
1 elimination of this many employees would create doubt
2 about the continued accuracy of the actuarial
3 assumptions. Therefore, I propose that 20 years rather
4 than 17.3 years be used for the amortization of the TBO
5 for ratemaking purposes. This is allowed by SFAS 106 and
6 is recommended when a more accurate amortization period
7 cannot be determined. The effect of the elimination of
8 10,000 employees on the amortization period cannot be
9 determined. Therefore a more conservative 20-year
10 amortization period would be best, in my opinion. The
11 effect of this change of amortization periods in the 1995
12 test year would be a $396,541 reduction in TBO
13 amortization expense.
14 b. Curtailment Loss Amortization
15 Q. Do you agree with USWC's SFAS 106
16 curtailment loss adjustment?
17 A. No. Rather than record a rare if not
18 unique event in the test year, I propose two possible
19 alternative treatments. First, because this could be
20 considered as a one-time non-recurring expense, the
21 entire amount could be removed from the test year.
22 Alternatively, because USWC is not quite half finished
23 with its re-engineering efforts another adjustment may be
24 required in 1997 or 1998, when the Restructuring Plan is
25 complete and its effects are known and measurable.
1069
USW-S-96-5 SCHNEIDER (Di) 7
11/26/96 Staff
1 Therefore I propose that the amount incurred in 1995 be
2 amortized over the remaining 17 years the TBO is to be
3 amortized. The first option would eliminate $1,210,611
4 from 1995 expenses for ratemaking purposes. The second
5 option would allow one-seventeenth of the curtailment
6 loss to be recorded in 1995, or $71,212, reducing
7 expenses by $1,139,399. Staff suggests that the second
8 option be accepted since it would also provide the
9 amortization mechanism if future curtailment losses are
10 incurred and would have little impact on the test year.
11 COMPENSATED ABSENCES
12 Q. Please explain Compensated Absences
13 Accounting and what your concern is with U S WEST's
14 method of accounting.
15 A. Compensated absences represent any time the
16 employee has earned that the employee will be away from
17 work and still be paid as if the employee was at work.
18 Examples of compensated absences include vacation, sick
19 leave and personal leave. To qualify for accrual
20 accounting, the compensated absence earned would have to
21 be owed to the employee even if the employee terminated
22 employment. According to SFAS 43 - Accounting for
23 Compensated Absences, compensated absences are to be
24 expensed as earned rather than when paid. There was a
25 catch-up entry required at the time of the accounting
1070
USW-S-96-5 SCHNEIDER (Di) 8
11/26/96 Staff
1 change for all past earned compensated absences that had
2 not been paid and had not been recorded as a liability.
3 The FCC adopted a ten-year phase-in period
4 for the catch-up entry where USWC can phase in the
5 expense impact over ten years.
6 Effective January 1, 1988, a deferred charge
7 was established by USWC for the compensated absence
8 catch-up expense, along with a deferred credit related to
9 the liability. These amounts are being amortized to
10 expense on a straight-line basis over the ten-year period
11 from January 1, 1988 to December 31, 1997.
12 I agree completely with this accounting
13 treatment and the ten-year amortization period is fair
14 and reasonable. However, this amortization of the
15 catch-up entry is a one-time event, the effect of this
16 amortization is known and measurable, and the
17 amortization of the catch-up amount will be nearly
18 complete when this rate case will become final.
19 Therefore, to properly reflect the 1995 test year for
20 setting rates on a proforma basis the catch-up
21 amortization expense of $203,179 should not be included
22 in 1995 expenses for ratemaking purposes.
23 THE RESTRUCTURING PLAN
24 Q. Please explain the USWC Restructuring Plan.
25 A. There have actually been two re-engineering
1071
USW-S-96-5 SCHNEIDER (Di) 9
11/26/96 Staff
1 plans in the last five years, one started in 1991 and
2 another, called the "Restructuring Plan," started in
3 1993. These two plans overlap. In the 1993 USWC
4 Financial Statements, Footnote 4: Restructuring Charges,
5 the following comment was made:
6 The Company's 1991 restructuring
plan was established to partially
7 offset the effects of future wage,
salary and benefit increases. The
8 plan will result in a work-force
reduction of approximately 6,000
9 employees, of which approximately
5,000 employees have left the
10 Company as of December 31, 1993.
The 1991 restructuring charge was
11 $240 [million], of which
$56 [million] is unused at
12 December 31, 1993.
13 In the 1995 USWC Financial Statements, in Footnote 4:
14 Restructuring Charge, the following comments were made:
15 The Communications Group's 1993
results reflected an $880 [million]
16 Restructuring charge (pretax).
The related restructuring plan (the
17 "Restructuring Plan") is designed to
provide faster, more responsive
18 customer services while reducing the
costs of providing these services.
19 As part of the Restructuring Plan,
the Communications Group is
20 developing new systems and enhanced
system functionality that will enable
21 it to monitor networks to reduce the
risk of service interruptions, activate
22 telephone service on demand, rapidly
design and engineer new products and
23 services for customers, and centralize
its service centers. The Communications
24 Group has consolidated its 560 customer
service centers into 26 centers in 10
25 cities and plans on reducing its work
force by approximately 10,000 employees.
1072
USW-S-96-5 SCHNEIDER (Di) 10
11/26/96 Staff
1 In the 1995 USWC Management's Discussion and Analysis of
2 Financial Condition and Results of Operations on page C-
3 6, the following comments were made:
4
5 The Restructuring Plan is expected to be
substantially completed by the end of
6 1997. Implementation of the Restructuring
Plan has been impacted by growth in the
7 business and related service issues,
new business opportunities, revisions
8 to system delivery schedules and
productivity issues caused by the
9 major rearrangement of resources
due to restructuring. These
10 issues will continue to affect the
timing of employee separations.
11
12 Therefore, with 52,864* employees as of December 31,
13 1990, the Company developed two consecutive restructuring
14 plans to reduce the workforce by 15,000 or 28.4% by
15 enhancing systems and consolidating operations.
16 (* Source: 1990 U S WEST Fact Book and Statistical
17 Summary, page 7.)
18 As of December 31, 1995, $349 million
19 remains in the restructuring reserve of the original
20 $1,120 million allocated (31.2%), and of the original
21 15,000 employees planned to be laid off, 5,495 (36.6%)
22 are planned to be laid off in 1996 and 1997.
23 Q. Please explain your concerns and your
24 proposed adjustment to expenses incurred in 1995 to
25 implement the restructuring plans.
A. In the July 29, 1996 Telephony article
1073
USW-S-96-5 SCHNEIDER (Di) 11
11/26/96 Staff
1 titled "MCI complaint blasts U S WEST credibility"
2 Lynn Hilderbrand, Vice President of service delivery
3
4 /
5
6 /
7
8 /
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
1074
USW-S-96-5 SCHNEIDER (Di) 11A
11/26/96 Staff
1 at U S WEST said,
2 U S WEST admits that a problem
exists, which it blames on
3 enormous growth in its service
area coupled with its failed re-
4 engineering efforts during the
last two years. The telco threw
5 itself into a comprehensive system
overhaul in 1994 and 1995 but put
6 its plans on hold indefinitely when
it began running into serious ser-
7 vice glitches. Things we thought
we could automate and streamline
8 turned out to be much more compli-
cated and expensive than we thought.
9
10 Service quality issues have been raised in
11 recent rate cases in Arizona, Utah, Washington and Oregon
12 as well as in this rate case. Service quality in this
13 rate case is addressed by Staff witnesses Hart and
14 Cooper. Idaho already addressed one aspect of service
15 quality in Case No. USW-S-95-8.
16 Employee related costs from C-17 of
17 U S WEST Communications Group Combined Statement of
18 Operations for 1995 and C-16 for 1993 are as follows:
19 Table I
%Increase
20 from
1991 $2,729 previous yr.
21 1992 $2,862 4.9%
1993 $3,068 7.2%
22 1994 $3,215 4.8%
1995 $3,314 3.9%
23
24 Therefore, with the continuing system
25 complications and inadequacies, and the continuing
1075
USW-S-96-5 SCHNEIDER (Di) 12
11/26/96 Staff
1 employee-related cost increases, the planned benefits of
2 the Restructuring Plan of reduced costs and improved
3 customer service have not been realized as of
4 December 31, 1995. Because the Restructuring Plan
5 expenses of $4,866,356 allocated to Idaho have not
6 resulted in benefits in the test year but will be
7 realized over a number of years once the Restructuring
8 Plan is complete, these expenses should be amortized over
9 a period of at least fifteen years to more closely relate
10 the expenses to the benefits to be received (See Exhibit
11 No. 108). Since this rate case will be settled in 1997
12 and the Restructuring Plan is to be completed in 1997, an
13 amortization starting in the test year would seem
14 reasonable. Therefore, using a fifteen-year amortization
15 of $380,205 (See Exhibit No. 108) would result in an
16 adjustment in the test year of $4,486,150 ($4,866,356 -
17 $380,205).
18 An alternative would be to simply disallow
19 the entire $4,866,356 Restructuring Plan expenses in the
20 test year since they are not beneficial to the southern
21 Idaho intrastate customers. The amount I propose does
22 not reflect any re-engineering expenses provided by the
23 other affiliates: BRI, Bellcore, or Advanced
24 Technologies since these expenses will be addressed in
25 Staff witness Faunce's testimony.
1076
USW-S-96-5 SCHNEIDER (Di) 13
11/26/96 Staff
1 Q. What is the issue regarding the re-
2 engineering effect on Employee Related Expenses?
3 A. As noted above, in 1993 USWC recorded an
4 $880 million restructuring charge to reflect a
5 restructuring plan that was intended to enable the
6 Company to operate more effectively and efficiently.
7 The Restructuring Plan is expected to be complete by the
8 end of 1997.
9 As of December 31, 1995, 5,495 employees
10 were yet to be laid off. In its estimate of future
11 savings in 1993, USWC estimated employee related expenses
12 of $50,000 for each employee would be saved. By using
13 USWC published financial information from its 1993 and
14 1995 financial reports to shareholders, I determined that
15 savings for the average employee had increased to
16 slightly more than $65,000 by December 31, 1995 (See
17 Exhibit No. 109).
18 Since the remaining employees to be laid
19 off will be gone by year-end 1997, the year in which the
20 rate case will be finally resolved, I believe that this
21 significant subsequent event should be included in the
22 test year to best reflect the rates on a proforma basis.
23 This is a known and measurable effect that is
24 conservative since it doesn't include other aspects such
25 as lease expense reductions and other less measurable
1077
USW-S-96-5 SCHNEIDER (Di) 14
11/26/96 Staff
1 intangibles related to employee reductions.
2 Using my recommended estimate of savings
3 for each employee laid off, the total southern Idaho
4 intrastate employee-related expense reduction for the
5 test year would be $6,390,944. Using USWC's more
6 conservative estimate of savings for each employee, the
7 total expense reduction in the test year would be
8 $4,888,734.
9 Q. Wouldn't there be additional expenses to be
10 incurred to enable these savings to be realized?
11 A. Yes. As of December 31, 1995, the balance
12 in the restructure reserve account was $348,537,927. The
13 southern Idaho intrastate amount of expense yet to be
14 incurred could be calculated as follows:
15 $348,537,927 x 2.51% x 70.89% = $6,201,671
16 This would be a one-time expense (in 1996 and 1997) that
17 should result in the permanent projected annual savings
18 of $6,390,944 once the Restructuring Plan is complete.
19 Q. As we have seen in Table I on page 11 of
20 your testimony, employee-related expenses have continued
21 to increase from 1993 through 1995 even though
22 restructuring expenses have been incurred and nearly two-
23 thirds of the employees planned to be laid off have been
24 laid off. Why should we anticipate an annual expense
25 savings once the Restructuring Plan is complete? Also,
1078
USW-S-96-5 SCHNEIDER (Di) 15
11/26/96 Staff
1 why should the expenses yet to be incurred be given any
2 consideration?
3 A. Once the Restructuring Plan is complete the
4 enhanced systems and the consolidation of operations
5 called for in the plan will be operating effectively and
6 the Restructuring Plan goal of improved service should be
7 achieved. This would enable the savings planned from the
8 layoffs in 1996 and 1997 to be achieved. As noted in
9 Exhibit No. 109, the savings from the 1996 and 1997
10 layoffs are known and measurable. Since USWC will reap
11 these benefits so soon after the conclusion of the rate
12 case, I believe they should be included. However, I
13 realize that further expenditures must be incurred to
14 receive the benefits expected. Therefore, I propose that
15 the expenses be amortized over a period of at least
16 fifteen years. The resultant benefit in the test year
17 would be: $6,390,944 - ($6,201,671 divided by 15) =
18 $5,977,500
19 LEASE EXPENSE
20 Q. What is your issue concerning
21 reasonableness of lease rates?
22 A. In 1984, U S WEST Communications, Inc.
23 (USWC) leased approximately 600,000 square feet of the
24 building located at 1801 California in Denver, Colorado.
25 The net lease for this space was $12.50/sq ft per year on
average for ten years.
1079
USW-S-96-5 SCHNEIDER (Di) 16
11/26/96 Staff
1 In 1986, U S WEST, Inc. decided to enter the
2 real estate market. Through a separate subsidiary, Beta
3 West, many properties were purchased and then leased,
4 including the building at 1801 California. At this time
5 USWC's lease did not change. In 1991, U S WEST, Inc.
6 decided to get out of the real estate market and sold,
7 through sale and lease-back arrangements, several
8 properties, including the building at 1801 California.
9 By this time USWC was leasing 905,475 square feet of the
10 building or approximately three-fourths of the available
11 rentable space.
12 Upon the sale to an out-of-state
13 corporation, not affiliated with any U S WEST company,
14 the original lease for the building at 1801 California
15 was voided and a new lease was established requiring an
16 average net lease cost of $18.24/sq ft per year on
17 average for 20.5 years. Therefore, the financial venture
18 of U S WEST, Inc. into and then out of the real estate
19 business had a significantly negative impact on USWC and
20 ultimately its customers.
21 In September 1996, I verified that leasable
22 space in the building at 1801 California and at a
23 comparable prime "A" class building across the street
24 from 1801 California, First Interstate Tower North, were
25 available for $18.00/sq ft gross, including $6.40 of
1080
USW-S-96-5 SCHNEIDER (Di) 17
11/26/96 Staff
1 operating costs per square foot. Therefore the net lease
2 rate for these properties would be $11.60/sq ft. The net
3 lease rate of $11.60/sq ft is less than the comparable
4 net lease rate of $12.50/sq ft in 1984. This comparison
5 was made to verify that the information shown on
6 Exhibit No. 110 accurately shows that lease rates
7 required in 1994 and 1995, when the original lease
8 would have had to be renewed, would still be about the
9 same as the original net lease rate of $12.50/sq ft.
10 Exhibit No. 110 reflects the "gross" lease rates for
11 class "A" property in the Central Business Core. The
12 difference between a gross rate and a net rate on a lease
13 is that their gross rate includes: property taxes;
14 utilities; and maintenance, management and operating
15 expenses. The net lease rate excludes these costs. The
16 gross lease rates shown on Proprietary Exhibit No. 111
17 for class "A" property would have to be reduced by the
18 costs noted above, which as of January 1, 1992 were
19 $6.27/sq ft for 1801 California, but could range from
20 $4.00 to $7.00/sq ft depending on the property.
21 Proprietary Exhibit No. 111 provides an extract of a
22 lease for a floor at 1801 California starting in January
23 1992 and lasting until January 2002. The average net
24 lease rate for this floor is $12.40/sq ft.
25
1081
USW-S-96-5 SCHNEIDER (Di) 18
11/26/96 Staff
1 Therefore, due to actions of other U S WEST
2 affiliates in unregulated activities, Idaho customers
3 were harmed since USWC was charged additional expenses of
4 $5,197,427 [($18.24 - $12.50) x 905,475 sq. ft.] for each
5 year since 1991 when the new lease was signed including
6 1995 through 2011.
7 Idaho's Intrastate portion would be
8 $172,857, (5,197,427 x .0251 x .7547).
9 Q. Does this conclude your direct testimony in
10 this proceeding?
11 A. Yes, it does.
12
13
14
15
16
17
18
19
20
21
22
23
24
25
1082
USW-S-96-5 SCHNEIDER (Di) 19
11/26/96 Staff
1 Q. Please state your name and address for the
2 record.
3 A. My name is Kent Schneider and my business
4 address is 472 West Washington Street, Boise, Idaho.
5 Q. By whom are you employed and in what
6 capacity?
7 A. I am employed by the Idaho Public Utilities
8 Commission as an Auditor.
9 Q. Are you the same Kent Schneider who
10 previously filed Direct Testimony in this proceeding?
11 A. Yes, I am.
12 Q. What is the purpose of this Surrebuttal
13 Testimony?
14 A. The purpose is to respond to the Rebuttal
15 Testimony of U S WEST Communications, Inc. witnesses
16 regarding my Direct Testimony and my Deposed Testimony on
17 the following proposed adjustments:
18 PENSION ASSET
19 1801 CALIFORNIA LEASE EXPENSE
20 COMPENSATED ABSENCES
21 CURTAILMENT LOSSES
22 TRANSITION BENEFIT OBLIGATION AMORTIZATION
23 RESTRUCTURING CHARGES AND EMPLOYEE REDUCTION
24 BENEFITS
25
1083
USW-S-96-5 SCHNEIDER (Surr) 1
02/21/97 Staff
1 PENSION ASSET
2 Q. Do you agree with Ms. Wright's Rebuttal
3 Testimony page 34, lines 18 through 21 that Staff ignored
4 the fact that 1FR rates were reset in 1989 in reaching
5 its conclusion that the Pension Asset was supplied by
6 customers?
7 A. No. Exhibit No. 141 shows Staff's decision
8 memorandum based on a preliminary investigation into
9 U S WEST's Idaho earnings as part of Case No. MTB-T-88-7.
10 In this investigation, 1987's "actual" results were used
11 as the starting point for this investigation. The last
12 four pages of this exhibit represent a spread sheet with
13 Columns "a" through "e" being the actual Company results
14 for 1987 and adjustments proposed by the Company. In the
15 line item "net pensions and benefits" there does not
16 appear to be a credit for pensions proposed. Nor does
17 there appear any discussion of implementing SFAS-87.
18 The Commission's Final Order No. 22738 in
19 Case No. MTB-T-88-7 reflects the revenue reductions
20 agreed to by the Company and the Staff that totaled about
21 $8.5 million. There was no reconciliation between the
22 revenue reductions and expense reductions. The final
23 order addressed the rationale as to why the rate case
24 investigation was stopped and the revenue adjustments
25 were accepted. There is no mention of pension benefits.
(See Exhibit No. 142.)
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1 Exhibit No. 143 is USWC witness Wozniak's
2 Direct Testimony in Case No. MTB-T-88-13 concerning the
3 proposed Revenue Sharing Plan and Staff's preliminary
4 rate case findings. His testimony does not mention
5 pension benefits. Pension accounting was probably not
6 discussed because the Staff did not raise the issue of
7 the accounting change associated with SFAS-87.
8 I did not ignore the 1989 review in
9 anticipation of development of the Revenue Sharing Plan.
10 There is no evidence in Order No. 22738 that the Pension
11 Asset or any pension credits were considered when the
12 Commission adjusted rates at the time the Revenue Sharing
13 Plan was implemented.
14 Q. Have other jurisdictions disallowed the
15 Pension Asset from rate base?
16 A. Yes. Arizona, Illinois (GTE), Missouri
17 (United Telephone Company), Texas (Central Telephone
18 Company of Texas), and Utah. It appears that the reason
19 the Pension Asset is allowed in rate base in Washington
20 and Oregon is related to prior stipulations where pension
21 credits were allowed as reductions in rates in prior
22 years.
23 Q. On page 36, lines 8-11 of Ms. Wright's
24 Rebuttal Testimony she states "The rate base should
25 include a pension asset to reflect the fact that pension
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1 credits have been recorded in U S WEST's regulated books
2 of accounts with no corresponding decrease in the pension
3 fund." Do you agree with this statement?
4 A. No. While pension credits may have been
5 recorded in U S WEST's regulated books of accounts with
6 no corresponding decrease in the pension fund, this has
7 been due to accounting entries. Unless rate relief has
8 been granted due to these credits, the ratepayers have
9 not benefited from these accounting entries. The pension
10 fund was created by cash contributions that equaled the
11 expenses charged to ratepayers and recovered in rates
12 over the years. No shareholder contributions have been
13 required.
14 Q. On page 36, lines 11-15 of Ms. Wright's
15 Rebuttal Testimony she further states not allowing the
16 Pension Asset in rate base "...creates a situation where
17 the customer benefits from the cash in the pension fund
18 in the form of lower expenses in the future from the
19 earnings on these funds while the shareholder is not
20 allowed to earn on the cash left in the pension fund. It
21 is only fair and equitable for the shareholder to be
22 allowed to earn on the pension asset that was created by
23 these pension credits." Do you agree with this
24 statement?
25
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1 A. The statement that the customer benefits
2 from the cash in the pension fund in the form of lower
3 expenses in the future is true. However, this is only
4 fair considering the overfunding is due to customer
5 overpayments in the past. The earnings of the fund were
6 made possible by the customer-contributed funds being
7 available to invest, not shareholder funds.
8 Another consideration concerning who will
9 benefit in the future by the overfunding of pension
10 expense relates to the direction of U S WEST toward
11 unregulated activities. The pension fund was not split
12 between Communications and Media when the recapital-
13 ization occurred. If Inc.'s entry into cable, interLATA
14 long distance and other nonregulated activities continues
15 to outpace the growth of regulated activities, pension
16 benefits for personnel hired for these activities will be
17 funded by the pension fund created by ratepayers.
18 Therefore, it is not fair or equitable to
19 allow shareholders to earn on an asset contributed by the
20 ratepayers. (See Exhibit No. 144.)
21 Q. Do you agree with Ms. Wright's contention
22 that accumulated deferred taxes related to the Pension
23 Asset should be excluded if the asset is excluded.
24 A. I agree in theory that the accumulated
25 deferred taxes related to the pension asset should be
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1 reflected. Sufficient information to calculate the
2 associated number was not available. If USWC provides
3 the calculation with workpapers, Staff will review it
4 prior to the hearing.
5 Q. Do you agree with Ms. Wright's contention
6 that "an unjustified...benefit...is that the ratepayer
7 will have lower rates in this case by having the pension
8 asset which is not currently included in rate base
9 deducted from the rate base"?
10 A. No. This pension asset is a ratepayer-
11 contributed asset. This asset, as noted above, will
12 benefit the shareholders as deregulation progresses and
13 U S WEST expands its activities in nonregulated areas. A
14 return on this ratepayer contribution by reducing rate
15 base by the amount of the pension asset is not a penalty
16 to the shareholder but a fair return to the ratepayer.
17 1801 CALIFORNIA LEASE EXPENSE
18 Q. On pages 45 and 46 of Ms. Wright's Rebuttal
19 Testimony she argues that the Arthur Andersen independent
20 third party study supports the lease rates paid by USWC
21 for 1801 California Street in Denver. Do you agree?
22 A. No. This study was used by USWC in the
23 Arizona rate case Docket No. E-1051-93-183 Decision No.
24 58927 dated January 3, 1995. In this Arizona case, the
25 Company used the Arthur Andersen study to refute the
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1 Arizona staff-commissioned Real Estate Investigation
2 Report performed by an independent team of five real
3 estate analysts headed by Thomas Irvine. (This report
4 has come to be referred to as "The Irvine Report".) In
5 its decision the Arizona Commission did not adopt either
6 report in its entirety as the preparers of the two
7 studies were not available for cross examination.
8 A compromise decision disallowing half of the amount
9 recommended by the Irvine study was entered in the
10 Arizona case. Docket No. E-1051-93-183, Decision No.
11 58927 (85780) PUR4th Jan 3 (1995) (See an excerpt from
12 the case in Exhibit No. 138.)
13 Q. What did your review determine?
14 A. The fair rate, determined prior to the sale
15 and leaseback arrangement was determined by the Irvine
16 study to be $12.50 per square foot. This rate was
17 reinforced by the Oregon study developing a fair rate at
18 $12.46 per square foot. I used the Irvine rate as being
19 more conservative. For the current lease rate I used
20 $18.24 per square foot because the Irvine study, the
21 Arthur Andersen study, and the Oregon staff study all
22 agreed to this rate. This rate was also referenced in
23 USWC witness Wright's Rebuttal Testimony on page 44. The
24 difference between the two rates times the total square
25 footage leased was factored to Idaho-South using Company
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1 allocation factors to develop my adjustment.
2 Q. The Arthur Andersen study went a step
3 further and removed parking garage estimated revenues
4 from the lease rate to develop a lower lease rate of
5 $17.11 per square foot. Did you consider this?
6 A. Yes. In my opinion the operating revenue
7 from the parking garage should be used to offset the
8 operating costs of the leased property, not to lower the
9 net lease rate. For example, if the garage was closed
10 for repairs or renovation to develop extra spaces, the
11 net lease rate would continue and the revenue would be
12 reduced or eliminated. Therefore the $18.24 rate best
13 reflects the "net" lease rate.
14 Q. Have other state Commissions examined these
15 studies?
16 A. Yes. These two independent studies were
17 recently reviewed by the Oregon PUC staff in its review
18 of the reasonableness of lease rates. In the Oregon case
19 U S WEST argued the square-foot rate should be set at
20 $17.11 while the staff argued it should be $12.46. The
21 Oregon's PUC Order No. 96-179 entered July 16, 1996
22 concluded that the proper lease rate for 1801 California
23 should be $12.46 per square foot. Without actual data
24 for a build-to-suit analysis or more detailed explanation
25 of the assumptions underlying growth rate estimates, the
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1 Commission couldn't confirm the reliability of the
2 Company's lease rate analysis. The Commission recognized
3 the limitations in Staff's proposed lease rate of $12.46,
4 but, this rate reflected the last arm's-length
5 transaction regarding this property. (See Exhibit No.
6 139, pages 10-12.)
7 Q. In Ms. Wright's Rebuttal Testimony on
8 page 44 she states "Staff is ignoring three critical
9 components of lease comparability: the term of the lease
10 (number of years); the size of the square footage; and
11 the time frame when the lease arrangement is being
12 negotiated." Are you ignoring these factors?
13 A. Not at all. My point in my Direct Testimony
14 was that the time frame when the lease was renegotiated
15 was a factor in the unreasonableness of the lease rates.
16 The price paid by the buyer to U S WEST required a
17 lease-back of the amount and duration by USWC to make the
18 purchase price reasonable. As noted above both the
19 Irvine study and the Oregon staff study found that the
20 lease rate was unreasonable, and that the $12.46 per
21 square foot found by Oregon or the $12.50 per square foot
22 noted in the Irvine study is the reasonable rate.
23 a. Term and size
24 Ms. Wright in her Rebuttal Testimony on
25 lines 9 and 10 of page 44 acknowledges that a three to
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02/21/97 Staff
1 five-year lease is the most common in the market. The
2 lease that USWC had before the sale and lease-back
3 transaction was for 600,000 square feet for ten years at
4 $12.50 per square foot, according to the Irvine study.
5 Had the sale and lease-back transaction not occurred,
6 USWC would have had to negotiate a lease in 1994. My
7 Exhibit No. 110 shows that while the "A" class leasing
8 market had improved, the square-footage rate increase was
9 minor. My proprietary Exhibit No. 111 (Direct Testimony)
10 shows that a smaller square foot space at 1801 California
11 was leased for only $12.40 per square foot in 1994.
12 b. Sale and lease-back unusual duration
13 The duration of the lease executed by USWC
14 upon the sale and leaseback was 20.5 years. This is very
15 atypical of the lease market and significantly reduced
16 the Company's flexibility just as it was planning to
17 start laying off significant numbers of personnel.
18 c. The lease rate and length of the lease agreement.
19 Immediately prior to the sale and lease-back
20 agreement, USWC was leasing this same amount of space for
21 $12.50 per square foot. In this situation the parent
22 company caused USWC to change from leasing from an
23 affiliate to acquiring a longer term lease from a third
24 party, after the parent company sold the building to that
25 third party, they increased the rent per square foot USWC
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02/21/97 Staff
1 had to pay. Because of this change I believe, as I have
2 stated before, that the affiliate transactions
3 were not to the benefit of USWC and Title 61 ratepayers
4 should not be disadvantaged.
5 The study provided by Arthur Andersen has
6 not met the burden of proof required to show that this
7 affiliate transaction is reasonable. My original
8 adjustment is reasonable and necessary.
9 COMPENSATED ABSENCES
10 Q. On pages 41 through 43 of Ms. Wright's
11 Rebuttal Testimony, she uses examples of pending
12 accounting changes that may occur in the period between
13 1995 (the test year) and 1997 (the year in which rates
14 based on the test year will become effective) that could
15 offset the ending of the five-year amortization of the
16 catch-up expense calculated at the time of the change in
17 accounting for compensated absences. Do you agree with
18 this argument?
19 A. No. This is comparing a possible future
20 event not yet analyzed and accepted by the Idaho
21 Commission to a one-time event that has already occurred
22 and the amortization of which is nearly complete. I
23 believe that proforma rate setting allows for those
24 events that have occurred and have been accepted, or at
25 least are known and measurable rather than for those
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02/21/97 Staff
1 events that may or may not occur.
2 CURTAILMENT LOSS
3 Q. In Ms. Wright's Rebuttal Testimony
4 concerning your amortization of the curtailment loss
5 associated with the remaining portion of the twenty-year
6 amortization of the transition benefit obligation (TBO)
7 for the Post-retirement Benefits Other than Pensions
8 (PBOPs), she made two points:
9 (1) That "Adjustments should be made on
10 their appropriateness or their inappropriateness in the
11 test period." and (2) that "Staff admits that curtailment
12 losses will probably occur in 1996 and 1997 and that they
13 may occur in the future." Do you agree with these two
14 points?
15 A. I agree with her first point, but not the
16 second point. In my Direct Testimony on pages 7 and 8, I
17 stated:
18 Rather than record a rare if not
unique event in the test year, I
19 propose two possible alternative
treatments. First, because this
20 could be considered as a one-time
non-recurring expense, the entire
21 amount could be removed from the
test year. Alternatively, because
22 USWC is not quite half finished
with its re-engineering efforts
23 another adjustment may be required
in 1997 or 1998, when the Restruc-
24 turing Plan is complete and its
effects are known and measurable....
25
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02/21/97 Staff
1 Staff suggests that the second
option be accepted since it would
2 also provide the amortiza-
tion mechanism if future curtailment
3 losses are incurred and would have
little impact on the test year.
4 (Emphasis added.)
5 I was referring in the last sentence of the
6 quote above to the possible need for an adjustment in
7 1997 or 1998. Therefore, due to the uniqueness or
8 extreme rarity of these events this curtailment loss
9 cannot be considered an ongoing event.
10 Also, in the Washington UTC Order issued in
11 April 1996, the Washington Commission eliminated
12 Washington's portion of U S WEST's 1995 curtailment loss.
13 (See Exhibit No. 140, pages 40-41.)
14 TRANSITION BENEFIT OBLIGATION AMORTIZATION
15 Q. The issue you present concerning SFAS 106
16 is that the amortization period for the transition
17 benefit obligation should be increased from 17.3 years as
18 calculated by the Company to 20 years. In her Rebuttal
19 Testimony, Ms. Wright states that once established at
20 17.3 years SFAS 106 does not allow for changes to the
21 amortization period. Who is right?
22 A. Perhaps I should clarify my position.
23 U S WEST Communications established a 17.3-year
24 amortization. Since the Company was not obligated to
25 consult with or acquire Commission approval when SFAS 106
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USW-S-96-5 SCHNEIDER (Surr) 13
02/21/97 Staff
1 was adopted, this is the first opportunity that this
2 Commission has had to review this amortization period for
3 regulatory purposes.
4 According to SFAS 106 paragraph 112 "If
5 delayed recognition is elected, the transition obligation
6 or asset shall be amortized on a straight-line basis over
7 the average remaining service period of active plan
8 participants, except that...if the average service period
9 is less than 20 years, the employer may elect to use a
10 20-year period ,...." (Emphasis added.) Obviously, the
11 longer amortization period benefits the ratepayers, as
12 noted in my adjustment.
13 I proposed to use the longer amortization
14 period for ratemaking purposes instead of the Company's
15 calculated period. The uncertainty of the significant
16 events occurring during and soon after the calculation
17 was made were further justifications on my part for using
18 the allowed, 20-year amortization.
19 In the Case No. WWP-G-92-2, this Commission
20 authorized a 20-year TBO amortization period (Order No.
21 24673, page 1). Also, in Case No. IPC-E-94-5, the
22 Commission authorized a 20-year TBO amortization period
23 (Order No. 25880, pages 9-10).
24 RESTRUCTURING CHARGES AND EMPLOYEE REDUCTION BENEFITS
25 Q. In his Rebuttal Testimony USWC witness
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02/21/97 Staff
1 Inouye focuses on the contention that the Restructuring
2 Plan expenses are ongoing and are therefore ordinary
3 business expenses to be included in the year they are
4 incurred. Do you agree with this contention?
5 A. No. USWC was asked to justify the
6 accounting treatment utilized to record expenses for the
7 Restructuring Plan on the Company's financial statements
8 for SEC and shareholder reporting. The Company's
9 response in Staff Audit Request STFO5-361 was:
10 The 1993 Restructuring Reserve:
When USWC recorded its restructuring
11 charge, research of accounting liter-
ature and prevailing practice showed
12 that prevailing accounting practice
was to accrue the cost of restruc-
13 turing at the appropriate measurement
date.
14
However, the accounting literature
15 did not definitively address account-
ing for corporate restructurings.
16 The SEC staff addressed restructuring
charges when it issued SAB 67 in 1989.
17 SAB 67 states:
18 Facts: The staff had noted a recent
increase in the number of registrants
19 recording what are commonly referred
to as "restructuring charges." While
20 the events or transactions triggering
the recognition of such provisions vary,
21 they typically result from the consoli-
dation and/or relocation of operations
22 the abandonment of operations or produc-
tive or other long-lived assets. The
23 components of these charges also vary,
but generally include the reduction in
24 the carrying value of long-lived assets
and provisions for the termination and
25 relocations of operations and employees.
1097
USW-S-96-5 SCHNEIDER (Surr) 15
02/21/97 Staff
1 While SAB 67 addressed only the financial
reporting of restructuring charges on the
2 income statement, that is, restructuring
charges must be reported as a component of
3 continuing operations, USWC restructuring
actions are consistent with both the words
4 and the spirit of SAB 67.
5 Because the accounting literature did not
definitively address accounting for cor-
6 porate restructurings, USWC looked to
prevailing accounting practice and an
7 analogy to APB (Accounting Principles
Board) 30 to record its restructuring
8 charge. In 1993, over 400 companies
included charges for corporate restruc-
9 turing actions. The practice of recog-
nizing the financial effect of major
10 corporate restructuring was a wide-
spread and commonly accepted account-
11 ing practice in the United States.
12 Analogies to APB 30 fit the comprehensive
nature of a restructuring plan. Although
13 APB 30 applies directly to dispositions of
a segment, its concepts are also appropriate
14 for corporate restructurings. Dispositions
are the result of management's decision to
15 refocus its business. So too, is a cor-
porate restructuring the result of manage-
16 ment's decision to refocus its business.
17 APB 30 requires a company to record the
impact of a disposition on...
18
...the date on which the management having
19 authority to approve the action commits
itself to a formal plan to dispose of a
20 segment of the business...
21 On September 16, 1993, the Board of Direc-
tors of U S WEST, Inc. committed USWC to a
22 formal plan to restructure USWC's business.
23 As a result, USWC reflected a charge of $880
million in its financial statements.
24
APB 30 also provided guidance in determining
25 what types of costs to include in a restruc-
turing. Paragraph 16 of APB states:
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USW-S-96-5 SCHNEIDER (Surr) 16
02/21/97 Staff
1 ...costs, and expense which (a) are clearly
a direct result of the decision to dispose
2 of the segment and (b) are clearly not the
adjustments of carrying amounts or costs,
3 or expenses that should have been recognized
on a going-concern basis prior to the meas-
4 urement date should be included in the gain
or loss on disposal.
5
6 The title to APB 30 is "Reporting the
7 Results of Operations-Reporting the Effects of Disposal
8 of a Segment of a Business, and Extraordinary, Unusual,
9 and Infrequently Occurring Events and Transactions."
10 The Company is treating the 1993
11 Restructuring Plan like a disposal of a business segment.
12 Also in the reference to SAB 67 the "restructuring
13 charges" typically result from the consolidation and/or
14 relocation of operations. The components of the
15 restructuring charges generally include provisions for
16 the termination and relocation of operations and
17 employees.
18 The consolidation of 560 customer service
19 centers into 26 centers in 10 cities and the reduction of
20 its work force by approximately 10,000 employees, as
21 noted in my Direct Testimony on page 10, is a one-time
22 event that will not recur. By its scope and purpose this
23 is a rare if not unique event. It definitely is not
24 business as usual as USWC witness Inouye would like to
25 portray.
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USW-S-96-5 SCHNEIDER (Surr) 17
02/21/97 Staff
1 While a plan of this magnitude could not be
2 accomplished in one year (it was originally planned to
3 start in 1994 and ultimately planned to be completed by
4 the end of 1997) it was management's intent, based on
5 their justifications for the accounting treatment in
6 their financial statements, as noted above, that this is
7 a significant and rare event.
8 Q. USWC witness Inouye's claims that Staff did
9 not give consideration to predictions by industry
10 analysts that USWC would have to do further
11 restructuring, streamlining and systems development
12 (lines 7-9, page 4 Inouye Rebuttal Testimony). Please
13 explain the level of consideration given to this
14 information?
15 A. I reviewed the information but adhered to
16 my position that restructuring costs did not belong in
17 the test year, but should be amortized over a reasonable
18 future period, for several reasons. First, my proposed
19 adjustment deals with a business event that Company
20 management considers of significant size and rarity to
21 record for financial purposes as a one-time expense.
22 Second, my proposed adjustment deals with the effects of
23 this particular restructuring plan on the test year.
24 Future predicted events are too vague to be measurable or
25 even known to occur at this point in time. Third, I was
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USW-S-96-5 SCHNEIDER (Surr) 18
02/21/97 Staff
1 aware that USWC doesn't have any future plans for
2 restructuring like the one announced by management in
3 1993. Staff Production Request No. 360 asks if any
4 restructuring plans of the type announced in 1993 were
5 being planned. As of February 12, 1997 the answer, in
6 short, was no. Fourth, the trade articles dealing with
7 what is going to happen in the telephone industry and
8 when they may occur are not always consistent. For
9 example, in USWC witness Inouye's Exhibit No. 33d, page 2
10 of Morgan Stanley's comments, dated January 16, 1996,
11 Morgan Stanley states the following:
12 In fact, cost cutting is not as easy
as it sounds. U S WEST, for one, can
13 attest to this. U S WEST embarked
on a cost reduction plan two years
14 ago in which it consolidated service
operating centers and reduced its
15 work force by nearly 4,000 of the
planned reductions. The result was
16 an inability to meet customer demand,
an erosion in service quality, and
17 significant fines from regulators.
Reducing work force as competition is
18 increasing is nearly counterintuitive.
19 Fifth, the magnitude of the effort
20 undertaken in 1993 may never be experienced again.
21 U S WEST claims that on-going system improvements, cost
22 reduction efforts and streamlining will continue. This
23 is consistent with all businesses trying to stay up with
24 if not ahead of their competition. These efforts will
25 most likely be different than what has occurred in 1994
1101
USW-S-96-5 SCHNEIDER (Surr) 19
02/21/97 Staff
1 and 1995.
2 Q. Do you agree with USWC witness Inouye's
3 comparison made between one-time customer charges
4 referred to as being non-recurring and the non-recurring
5 restructuring expenses? (Inouye Rebuttal Testimony
6 pages 4-5.)
7 A. No. This argument is trying to show how
8 regulatory records and accounting records bookkeep for
9 different activities. While he focuses on the term "non-
10 recurring, both the accounting records and the
11 regulatory records account for one-time customer charges
12 the same way, as on-going business revenue. However, the
13 Restructuring Plan created in 1993 is accounted for on
14 the financial books because of the rarity and magnitude
15 of this plan as a one-time expense and associated
16 reserve. To include these restructuring expenses in the
17 test year for setting rates when benefits are planned to
18 be recognized after the test year is unfair to Title 61
19 customers. These restructuring expenses are not normal,
20 recurring operating expenses and they should be amortized
21 over a period of time when benefits from the plan are
22 experienced.
23 Q. Do you agree with USWC witness Inouye's
24 claim that restructuring and employee severance expenses
25 have well established historical trends and thus are
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USW-S-96-5 SCHNEIDER (Surr) 20
02/21/97 Staff
1 on-going business expenses? (See Inouye Rebuttal
2 Testimony, pages 6-8.)
3 A. No. First, Mr. Inouye's reference to USWC
4 Rebuttal witness Plummer implies that Mr. Plummer will
5 provide new insight to the discussion of significant
6 restructuring projects, such as the Restructuring Plan,
7 as compared to on-going reengineering, streamlining, and
8 computer hardware and software enhancements. Mr.
9 Plummer's Rebuttal Testimony does not provide this
10 additional information. Second, Mr. Inouye presents
11 separate tables for paid exits, and total personnel, then
12 states on page 8 that the change in total personnel each
13 year does not equal the paid exits primarily because of
14 new hires. This is misleading. Staff Exhibit No. 145,
15 which reflects the Staff analysis based on the tables
16 presented in Inouye's Rebuttal Testimony reveals that
17 another very significant factor affecting separations is
18 personnel leaving without being paid to leave.
19 Significant changes in personnel can be
20 attributed to management intervention. For example, the
21 decrease in 1990 relates to an early retirement program
22 in which approximately 4000 employees elected to retire
23 effective February 28, 1990. The lump sum pension
24 benefits to retiring managers reduced the pension plan
25 assets by $642 million according to footnote 10 to the
1103
USW-S-96-5 SCHNEIDER (Surr) 21
02/21/97 Staff
1 U S WEST audited financial statements for 1990. In 1992
2 and 1993 management's announced personnel reduction plan
3 was in effect, and 5000 of the 6000 planned personnel
4 cuts were accomplished. In 1993, the Restructuring Plan
5 was announced and in 1994 over 2000 additional employees
6 left.
7 On page 7 of Inouye's Rebuttal Testimony he
8 states "In particular, there was nothing abnormal in 1995
9 as compared to other years." However, as can be seen
10 from my Exhibit No. 145 several abnormal events occurred
11 in 1995: The total number of USWC personnel went up 443
12 compared to a three year trend of personnel decreases of
13 over 2000; the new hires were the highest they had seen
14 in the eight years analyzed, more than double the average
15 for the prior seven years; and the new hires were more
16 than three times the number needed to replace the unpaid
17 exits. Therefore, as far as 1995 is concerned I believe
18 that the quote from Morgan Stanley on pages 18-19 above
19 reflects what happened after the restructuring plan
20 started in 1994 and service problems developed. This
21 caused U S WEST to rehire personnel until the problems
22 were under control.
23 Q. Do you agree with USWC Rebuttal witness
24 Inouye's depiction that U S WEST has had an evolutionary
25 history of redesigning computerized systems and
1104
USW-S-96-5 SCHNEIDER (Surr) 22
02/21/97 Staff
1 developing new systems.
2 A. Yes, but this evolution has occurred in
3 nearly all service industries, increasing productivity
4 and decreasing "back-office" costs. This evolutionary
5 change from manual to more and more sophisticated
6 computerized systems has little or nothing to do with the
7 special Restructuring Plan commenced in 1994. As Inouye
8 stated on page 10 of his testimony, 38% of the total
9 expense for the current restructure expense is for
10 computer systems. This 38% represents $360 million of
11 the total 1993 reserve. The amounts charged against this
12 reserve were $118 in 1994 and $129 in 1995. Comparing
13 these expenditures against the total systems development
14 expense for 1994 and 1995 of $472 and $464 shows that the
15 Restructuring Plan expenses for computers was about 25%
16 of total computer expenses for these years. (See page
17 11, line 18 of Inouye's Rebuttal Testimony.) The source
18 for the restructuring expenses for computers is
19 management's discussion and analysis of the activity
20 affecting the restructuring reserve on page C-9 of
21 U S WEST, Inc.'s 10-K Report. Obviously, in dealing with
22 the Restructuring Charge we are not talking about the
23 on-going, evolutionary improvement to the computer
24 systems.
25
1105
USW-S-96-5 SCHNEIDER (Surr) 23
02/21/97 Staff
1 Again, the issue is whether the expenses of
2 a particular project, the Restructuring Plan, should be
3 allowed in the test year when the offsetting economic
4 benefits are going to be received in the future.
5 Q. Have other states addressed this issue?
6 A. Yes, in the Utah rate case Docket No. 95-
7 049-05 dated November 27, 1995 (UT.PSC*11/27/95*[75348]-
8 PUR4th-*U S WEST Communications, Inc.) the re-engineering
9 costs incurred in 1994 were deferred and amortized over
10 five years to match the expenses to when the ratepayers
11 will at least begin to receive the benefits. (See
12 Exhibit No. 146, page 30.) In the Washington UTC
13 decision in Docket No. UT-950200 (See Exhibit No. 147,
14 page 40.) the costs were eliminated from the test year.
15 In the Oregon rate case, the case is not final, but the
16 PUC Staff's Opening Brief states the Restructuring
17 Program expenses contained in the test year should be
18 eliminated from the rate case (Exhibit No. 148).
19 Q. USWC witness Inouye claims Staff is not
20 aware of the economic benefits planned for the
21 Restructuring Plan and has not provided evidence that the
22 benefits have not been obtained. Do you agree?
23 A. No. The 1993 U S WEST, Inc. Annual Report
24 and 10-K Report talk mostly about the Restructuring
25 Charges. The 1993 10-K Report states:
1106
USW-S-96-5 SCHNEIDER (Surr) 24
02/21/97 Staff
1 Restructuring. On September 17, 1993,
U S WEST announced that U S WEST
2 Communications would implement a plan
(the "Restructuring Plan") designed to
3 provide faster, more responsive customer
services while reducing the costs of
4 providing these services. Pursuant to
the Restructuring Plan, U S WEST
5 Communications will develop new systems
that will enable it to monitor networks to
6 reduce the risk of service interruptions,
activate telephone service on demand,
7 provide automated inventory systems and
centralize its service centers so that
8 customers can have their telecommunica-
tions needs resolved with one phone call.
9 U S WEST Communications will also gradually
reduce its work force by approximately 8000
10 employees by the end of 1996 (in addition
to a remaining reduction of 1000 employees
11 pursuant to a restructuring plan announced
in 1991) and consolidate the operations of
12 its existing 560 customer centers into 26
customer centers in ten cities. U S WEST
13 expects cost reductions will be realized as
these components of the Restructuring plan
14 are implemented. In connection with the
Restructuring Plan, U S WEST recognized a
15 pretax restructuring charge of $1 billion,
the components of which are described under
16 "Costs and Expenses" in Management's
Discussion and Analysis of Financial
17 Condition and Results of Operations on page
17 of the 1993 Annual Report, which is
18 incorporated by reference herein.
19 On page 17 of the 1993 Annual Report, the
20 Company savings were: "The 1993 restructuring plan is
21 estimated to reduce cumulative total employee and related
22 costs by approximately $525 (million) during the next
23 three years, starting in 1994. These savings are
24 expected to be largely offset by higher employee salaries
25 and wages for the remainder of the work force."
1107
USW-S-96-5 SCHNEIDER (Surr) 25
02/21/97 Staff
1 However, this original plan was revised to
2 include an additional 1000 employee paid departures when
3 1000 employees planned to be relocated decided to be paid
4 to leave instead. Mathematically, if the original 9000
5 employees leaving could have justified a savings of $525
6 million, 10,000 employees leaving would generate $583
7 million in planned savings. In reality, it doesn't
8 matter what the exact estimated savings were going to be.
9 The important factor is that the savings were going to
10 come from reducing employee and related costs. Expenses
11 were going to be incurred to obtain these savings. After
12 the inception of the original plan, the completion date
13 was delayed a year and the 1000 paid departures were
14 added to the plan.
15 Q. USWC witness Inouye states that Staff's
16 evidence does not prove that the planned expense benefit
17 was not achieved or that no benefit was achieved. Do you
18 agree?
19 A. Of course not. First, I believe the burden
20 of proof is USWC's to show a special project's expenses
21 benefit to the ratepayers. However, Exhibit No. 145
22 reflects that the employee and related costs savings
23 could not have been achieved when the plan was to reduce
24 the number of employees and the change was an addition of
25 personnel. I provided USWC Exhibit No. 145 in Production
1108
USW-S-96-5 SCHNEIDER (Surr) 26
02/21/97 Staff
1 Requests STF05-360 and STF05-361 and asked them to
2 explain the apparent net additional exits without pay
3 (column 6), the apparent net increase in total employees,
4 and the significant increase in new hires in 1995. USWC
5 objected to the questions, provided data that did not tie
6 into Inouye's originally provided data and were otherwise
7 largely nonresponsive. Therefore, I believe I have shown
8 that the economic benefits planned could not have been
9 achieved in 1995 and, in conjunction with Staff witnesses
10 Hart and Cooper, have shown that customer service has
11 suffered in 1994 and 1995.
12 Q. USWC witness Inouye states that by using
13 USWC Group's audited financial data; that data also
14 includes unregulated subsidiaries and deregulated
15 operations, (i.e., total Company data) as opposed to
16 Idaho. Do you agree?
17 A. Only to a limited extent. Of all the
18 affiliates in the USWC Group, telephone operations is by
19 far the largest, page C-4 of the 1995 10-K Report, states
20 that, "Approximately 97 percent of the revenues of the
21 Communications Group are attributable to the operations
22 of U S WEST Communications, Inc.," the telephone
23 operations.
24 Q. USWC witness Inouye states in his Rebuttal
25 Testimony that the data that Staff used cannot determine
1109
USW-S-96-5 SCHNEIDER (Surr) 27
02/21/97 Staff
1 if restructuring benefits were achieved because (a) the
2 expense attributed to contract workers was included in
3 the data, (b) the effects of pay increases and increased
4 payroll taxes were included in the data and (c) Employee
5 increases were included in the data yet were due to
6 growth and new business opportunities. Do you agree?
7 A. No. I will address each factor in order:
8 (a) Inouye states that over time the Company has
9 increased its reliance on contract workers. That may be
10 true, but in the Company's 1995 10-K Report in footnote
11 (2) on page C-7 the Company stated, "A significant number
12 of the employee reductions originally scheduled for 1996
13 will be delayed while the Communication Group focuses on
14 overtime and contract-labor expenses." (Emphasis added.)
15 This statement was repeated in the Company's March 31,
16 1996 10-Q Report on page 21. Obviously management was
17 not satisfied with these expenses increasing in 1995 and
18 was willing to delay the employee reductions called for
19 in the Restructuring Plan to address contract labor
20 issues. This supports why these costs should be included
21 in my adjustment relating to the restructuring costs and
22 potential benefits.
23 (b) In Staff Production Request No.
24 STF05-363 I asked:
25
1110
USW-S-96-5 SCHNEIDER (Surr) 28
02/21/97 Staff
1 In the 1993 Form 10-K, page 11 the last
two sentences on that page state: "The"
2 restructuring plan is estimated to reduce
total employee and related costs by
3 approximately $525 (million) during the
next three years, starting in 1994. These
4 savings are expected to be largely offset
by higher employee salaries and wages for
5 the remainder of the work force."
(underline added) Did management ignore
6 growth and other business opportunities in
this statement? What does the Company mean
7 when it uses the term "largely offset"?
8 USWC objected to these questions and was generally
9 unresponsive. As an alternative calculation for the
10 savings to be realized if the Company's 1993 estimate of
11 $50,000 per employee savings were used above, and that
12 this savings only included salaries as I was told:
13 $50,000 salary
+ $11,250 22.5% benefit load used by the Company
14 in 1994 and 1995
$61,250 x 1.055 salary increase in 1994=
15 $64,619 x 1.055 salary increase in 1995=
$68,817 Employee costs to be saved in 1996
16
17 Therefore, personnel costs to be saved in 1996 would be
18 at least $68,817 per employee terminated including
19 benefits and salary increases. However, this calculation
20 has flaws tied to lower-salaried staff replacing higher-
21 salaried employees who leave and numerous other factors.
22 Nonetheless, it provides a rough estimate of the validity
23 of the amounts I have used in my testimony.
24 (c) The employee increases due to growth
25 and new business were previously addressed on page 18.
1111
USW-S-96-5 SCHNEIDER (Surr) 29
02/21/97 Staff
1 Q. USWC witness Inouye asserts that the
2 Restructuring Plan expenses incurred since 1992 have
3 produced benefits in 1995 which have exceeded expenses.
4 Do you agree with this analysis?
5 A. No. The 1991 "Restructuring Charge" Plan
6 dealt largely with U S WEST Inc.'s departure from the
7 real estate market. Of the $915 million pretax charge
8 taken as a restructuring charge, $675 million dealt with
9 projected losses associated with exiting the real estate
10 business and the write-off of certain intangible assets.
11 The remaining $240 million charge related to workforce
12 reductions of 6000 personnel of USWC. (Source: page
13 A-24 of USW Inc.'s 1991 10-K Report.) On page 25 of
14 USWC's 1992 10-K Report "Approximately $160.0 million of
15 the reserve is unused at December 31, 1992. Total
16 workforce reductions attributable to both restructuring
17 and attrition was approximately 2300 employees."
18 On Exhibit No. 145, Inouye's total net
19 employee reduction for 1992 is shown as 2523 or 4063
20 depending on whether the offsetting effect of new hires
21 is considered. The 10% or 77% difference undermines
22 Inouye's Rebuttal Testimony which is unaudited versus the
23 10-K Report financial statements which are audited.
24 My earlier Direct and Deposed Testimony
25 references to prior restructuring efforts was to provide
1112
USW-S-96-5 SCHNEIDER (Surr) 30
02/21/97 Staff
1 perspective and some of the history leading to, and
2 including, the 1993 Restructuring Plan. However, the
3 1993 Restructuring Plan is a unique event, separate from
4 on-going operations and prior restructuring efforts. The
5 expenses of the 1991 employee reduction plan ceased when
6 the 1993 Restructuring plan was started in 1994. Staff
7 has never indicated that the employee reduction efforts
8 of the 1991 plan were not successful. However, to use
9 the benefits of one restructuring plan (the 1991 Plan) to
10 offset the expenses of another restructuring plan which
11 is quite unique (the 1993 Plan) is misleading and
12 inappropriate. In the test year, we are dealing only
13 with whether the expense incurred in the test year of the
14 1993 Restructuring Plan, which is not expected to be
15 completed until 1997, should be included in the test
16 year. Inouye's attempts to portray this unique project
17 as an on-going effort are inaccurate, inappropriate and
18 misleading.
19 Q. USWC witness Inouye refers to USWC witness
20 Jones' testimony as evidence that Title 61 ratepayers
21 have benefited from restructuring and resystemization.
22 Do you agree?
23 A. It would appear that customer access to the
24 service center has improved due to the changes mentioned
25 by witness Jones. Ms. Jones does not distinguish between
1113
USW-S-96-5 SCHNEIDER (Surr) 31
02/21/97 Staff
1 changes due to on-going re-engineering efforts and
2 changes related to the Restructuring Plan. Jones also
3 mentions further changes that are yet to be completed.
4 These future expenses are not separated between the
5 Restructuring plan and on-going re-engineering efforts.
6 Customer service issues will be discussed by Staff
7 witnesses Hart and Cooper.
8 Q. USWC witness Inouye states that the
9 appropriate ratemaking principle is to establish rates
10 which reflect the on-going level of expenses. He then
11 uses a simplified example of Staff's proposed
12 amortization of expenses incurred in 1995 for the 1993
13 Restructuring Plan as to why the amortization would not
14 be fair. Do you agree?
15 A. No. In steps (3) and (4) of his example on
16 pages 22 and 23 Inouye states that the regulators
17 amortize the disallowed expense over 15 years and then
18 during the period rates are in effect only a 15th of the
19 revenue is allowed to cover the expense but the expense
20 continues to be incurred during the period. This is not
21 an accurate depiction of the 1993 restructuring
22 adjustment proposed by Staff. Simply, the expenses of
23 the Restructuring Plan are going to end soon after new
24 rates come into effect, so the amortization of the 1995
25 expenses will not be layered on top of continuing
1114
USW-S-96-5 SCHNEIDER (Surr) 32
02/21/97 Staff
1 expenses. Inouye continues to combine "one-time"
2 expenses with "on-going expenses".
3 Q. USWC witness Inouye contends his Exhibit
4 USW/38g depicting the historical trend of expense per
5 access line depicts a relatively consistent expense level
6 per access line and that the proposed Staff expense per
7 line is so far off of this consistent historical trend it
8 must be distortive. Is this reasonable?
9 A. If the Company's cost-cutting efforts have
10 only enabled management to keep costs increasing at only
11 the growth rates of access lines, this graph would fairly
12 depict the historical trend. Unfortunately, this graph
13 has not been audited so its accuracy has not been able to
14 be verified. I understand that one of the primary
15 allocation factors for expenses to the states is
16 the number of access lines. Therefore as access lines
17 increase in the state the allocated expense would also
18 increase. Perhaps a better graph to use would be USWC in
19 total. The graph at Exhibit No. USW/38g should not be
20 given much weight.
21 Q. USWC witness Inouye states that in
22 determining the amortization period that your Direct
23 Testimony and your deposed testimony are contradictory.
24 Do you agree?
25
1115
USW-S-96-5 SCHNEIDER (Surr) 33
02/21/97 Staff
1 A. No. In my Direct Testimony I presented two
2 alternatives for treatment of the one-time restructuring
3 expense incurred in the test year but which would not
4 yield benefits in the test year because of temporary
5 service problems encountered. One approach would be to
6 disallow the expenses as one-time expenses not resulting
7 in benefits in the test year. The other approach is to
8 match the one-time expenses incurred with the future
9 benefits to be received to best depict the on-going
10 operations. As mentioned above the expenses are "one-
11 time," not to be incurred again. The benefits are
12 annual, to be received every year once the employees are
13 terminated and their salaries and related costs are not
14 to be incurred again. Ignoring growth and salary
15 increases for the remaining employees, an annual benefit
16 could be theoretically assumed to last forever offset by
17 a one-time expense. However, this theoretical "annual
18 benefit forever" yields an infinite amortization period,
19 which is illogical and would result in the write-off of
20 the one-time expense in the test year, because the
21 amortization amount would be infinitely small.
22 Therefore, I elected to use the time between rate cases
23 rounded up to 15 years. My explanation of this reasoning
24 in my deposition may have been misconstrued.
25 Q. USWC witness Inouye contends that Staff's
1116
USW-S-96-5 SCHNEIDER (Surr) 34
02/21/97 Staff
1 post year adjustment for workforce reductions distorts
2 the test year. Do you agree?
3 A. No. Rolling the future benefits expected
4 to be received annually from the one-time expense of the
5 1993 Restructuring Plan into the test year is a
6 continuation of the reasoning behind amortizing the
7 restructuring expense into the future. The Restructuring
8 Plan is a one-time unique event with significant future
9 benefits. These benefits should start being received
10 soon after the test year, through 1997 and beyond. To
11 best reflect the on-going activities appropriately for
12 the test year these benefits should be included.
13 Inouye's continued concern about growth, salary
14 increases, and other business opportunities are normal
15 on-going business activities and shouldn't be considered
16 when dealing with this one-time event. I believe that by
17 amortizing the one-time expense and including the
18 offsetting benefit planned to be achieved is proper test
19 year accounting.
20 Q. Does this conclude your Surrebuttal
21 Testimony in this proceeding?
22 A. Yes, it does.
23
24
25
1117
USW-S-96-5 SCHNEIDER (Surr) 35
02/21/97 Staff
1 (The following proceedings were had in
2 open hearing.)
3 MR. HOWELL: And, Madam Chairman, again as
4 I indicated earlier, Mr. Schneider is sponsoring part of
5 the second stipulation and settlement and I thought I
6 would just ask him a few questions about that.
7
8 DIRECT EXAMINATION
9
10 BY MR. HOWELL: (Continued)
11 Q Mr. Schneider, are you familiar with what
12 has been admitted as Exhibit 48 in this case?
13 A Yes, I am.
14 Q And what issues in the settlement have you
15 addressed previously in your prefiled direct and
16 surrebuttal testimony?
17 A As already described in Exhibit 48, I
18 previously addressed the following seven issues: a rate
19 base issue related to pension asset; and revenue
20 requirement issues of restructuring; employee reductions;
21 and then medical benefits, which is the term used in
22 Exhibit 48, but that includes a transition benefit
23 obligation; and the curtailment loss amortization; and
24 the sixth item is compensated absences; and the seventh
25 item is lease rates, particularly related to 1801
1118
CSB REPORTING SCHNEIDER (Di)
Wilder, Idaho 83676 Staff
1 California Street in Denver, Colorado.
2 Q With those issues being encompassed in the
3 second settlement and stipulation, are there any
4 remaining issues in your prefiled direct or surrebuttal
5 testimony that have not been addressed in this
6 stipulation?
7 A No.
8 Q Could you explain briefly the pension asset
9 adjustment and how you proposed to treat it originally?
10 A Initially, U S WEST witness Wright proposed
11 an adjustment to record, for regulatory purposes, a
12 pension asset of $9,431,000 in rate base. I asserted
13 that the pension asset was funded by the ratepayers and,
14 consequently, should be assigned to ratepayers, not to
15 the shareholders. Therefore, I proposed an adjustment of
16 18,862,000 to reflect the pension asset as a
17 ratepayer-contributed asset and a reduction of rate base.
18 Q And how was that pension asset addressed in
19 the settlement?
20 A At the March 4th, '97 settlement
21 conference, we agreed that the pension asset be included
22 neither as an addition nor as a reduction to rate base;
23 therefore, it would be just zero. The change in
24 allocators from the EAS shift results in an asset removal
25 of a slightly different amount of 9,506,000. The Staff
1119
CSB REPORTING SCHNEIDER (Di)
Wilder, Idaho 83676 Staff
1 adjustment adds 9,431,000 to rate base to eliminate the
2 reduction made by Staff, so to make things clear,
3 U S WEST is reducing their rate base requirement further
4 than we're increasing our rate base requirement, if that
5 helps.
6 Q And turning to the restructuring issue,
7 what was the Company's restructuring plan that you
8 addressed in your testimony?
9 A The Company started a four-year
10 restructuring plan in 1994 for which they took an
11 $880 million charge in 1993. The offsetting reserve for
12 financial accounting purposes was used to record the
13 expenses as they occurred through this four-year period
14 until the restructuring plan was to be completed. For
15 regulatory purposes, the expenses were charged to
16 ordinary operations. Idaho South intrastate expenses for
17 1995 totaled approximately $4,866,000.
18 Q And what was your adjustment for the
19 restructuring plan expense?
20 A I proposed that rather than record these
21 expenses in the test year, it would be better to amortize
22 these expenses over 15 years because the expenses in 1994
23 and 1995 have exceeded the economic benefits that had
24 been received by the end of 1995. This proposal resulted
25 in a reduction in revenue requirement of 4,542,000.
1120
CSB REPORTING SCHNEIDER (Di)
Wilder, Idaho 83676 Staff
1 Q And how was this issue settled?
2 A At the March 4th conference, this
3 adjustment was settled, along with the employee layoff
4 expense reduction.
5 Q And what was the primary economic benefit
6 of the restructuring plan regarding employee layoff
7 reductions?
8 A Excuse me, could you ask that again?
9 Q Sure. What was the primary economic
10 benefit of the restructuring plan as it related to
11 employee layoff expense reduction?
12 A It was the elimination of 10,000 personnel
13 over the four-year period as service centers were reduced
14 from 560 to 26 and computer systems were developed or
15 enhanced to enable these employee reductions to occur.
16 As of December 31, 1995, 5,495 employees were still to be
17 terminated.
18 Q And how did the parties settle this
19 amortization and the employee layoff expense issue you
20 just addressed?
21 A The Staff and U S WEST agreed to settle the
22 issues of amortization of restructuring expense and
23 employee layoff reductions following the March 4th, 1997,
24 settlement conference. For this case, the Idaho
25 intrastate expenses included in the test year will be
1121
CSB REPORTING SCHNEIDER (Di)
Wilder, Idaho 83676 Staff
1 reduced by 4,866,000. This settlement effectively
2 removes the expense from the test year so additional
3 benefits from employee reductions do not need to be made.
4 Q Turning next to your transition benefit
5 obligation, what was your adjustment for that item?
6 A I propose an adjustment of 397,000 at the
7 intrastate Idaho South level to revise the transition
8 benefit obligation amortization period for the
9 implementation of SFAS, statement of financial accounting
10 standards, No. 106, employers' accounting for
11 post-retirement benefits other than pensions.
12 Q What did you base your proposal on?
13 A The Company was using an actuarially
14 determined 17.3-year amortization period. I proposed a
15 20-year amortization period for regulatory purposes since
16 this longer period was allowable by the new accounting
17 standard and had been used by the IPUC in other cases
18 related to this issue.
19 Q And how was this issue settled between
20 U S WEST and the Staff?
21 A Both the transition benefit obligation --
22 well, the transition benefit obligation was settled in
23 connection with the curtailment loss amortization.
24 Q Well, describe for the Commission what your
25 curtailment loss adjustment was.
1122
CSB REPORTING SCHNEIDER (Di)
Wilder, Idaho 83676 Staff
1 A Okay. The Company recorded a curtailment
2 loss in '95 in relation to a number of terminations that
3 had occurred in prior years. The curtailment loss was
4 the impact of these terminations on the accounting for
5 post-retirement benefits other than pensions that would
6 be measured in 1995. A curtailment loss is a rare if not
7 unique event and I proposed for regulatory purposes that
8 rather than record this event in 1995 only, it would be
9 better to amortize this curtailment loss over the same
10 period as the transition benefit obligation that I just
11 mentioned. This proposal resulted in a reduction of
12 intrastate Idaho South revenue requirement of 1,139,000.
13 Q And again addressing both the TBO and the
14 curtailment loss, how were those issues settled?
15 A At the March 4th conference, my TBO and
16 curtailment loss adjustments were accepted by the Company
17 in the settlement, provided that the Company is not
18 required to fund the reserve account for FAS 106 for
19 regulatory purposes. By this compromise, the offsetting
20 reduction in fund asset earnings resulted in a net
21 expense reduction by U S WEST of $8,000 at the Title 61
22 level.
23 Q In addressing just the TBO and the
24 curtailment loss, why are those adjustments as settled
25 reasonable to ratepayers?
1123
CSB REPORTING SCHNEIDER (Di)
Wilder, Idaho 83676 Staff
1 A The ratepayers will benefit from the
2 adjustments that I had proposed in TBO and curtailment
3 loss and the Company will not have any funding
4 requirement, so both the public and the Company benefit
5 from this compromise.
6 Q Moving next to the issue of compensated
7 absences as indicated on page 5 of Exhibit 48, what was
8 your adjustment in that area?
9 A Okay. First, I'd like to explain,
10 compensated absences represent any time an employee has
11 earned that the employee will be away from work and still
12 be paid as if the employee was at work, such as vacation,
13 sick leave and personal leave. To qualify for accrual
14 accounting, the compensated absence earned would have to
15 be owed to the employee even if the employee terminated
16 employment. According to statement of financial
17 accounting standards No. 43, accounting for compensated
18 absences, compensated absences are to be expensed as
19 earned rather than when paid. There was a catch-up entry
20 required at the time of the accounting change for all
21 past earned compensated absences that had not been paid
22 and not been recorded as a liability.
23 Q What did the --
24 A Excuse me.
25 Q Did that finish your answer?
1124
CSB REPORTING SCHNEIDER (Di)
Wilder, Idaho 83676 Staff
1 A I'd like to go a little bit further into
2 that the FCC adopted a 10-year phase-in period for the
3 catch-up of the adjustment. When you first transition
4 into the accrual basis, there is a catch-up requirement
5 and that catch-up is to basically catch up all employees
6 that had been owed this up to that given date and had not
7 yet earned it, so that catch-up period was 10 years to
8 amortize that catch-up entry, and effective January 1,
9 1988, a deferred charge was established by U S WEST for
10 the compensated absence catch-up expense, along with a
11 deferred credit related to the liability. These amounts
12 are being amortized to expense on a straight-line basis
13 over a 10-year period from January 1988 to December 31,
14 1997.
15 Q And with that background, what was your
16 proposed adjustment for compensated absences?
17 A I proposed an adjustment of 203,000 at the
18 intrastate Idaho South level because this amortization of
19 the catch up-entry is a one-time event, the effect of
20 this amortization is known and measurable, and the
21 amortization of the catch-up amount will be nearly
22 complete when the rate case will become final. It will
23 end at December 31, '97, will be the end of the
24 amortization period. Therefore, to properly reflect the
25 1995 test year for setting rates on a pro forma basis,
1125
CSB REPORTING SCHNEIDER (Di)
Wilder, Idaho 83676 Staff
1 the catch-up amortization expense of 203,000 should not
2 be included in '95 expenses for ratemaking purposes.
3 Q And how did the Staff and U S WEST settle
4 this issue?
5 A This was a 50-50 split resulting --
6 reducing the Company's revenue requirement by 51,000 at
7 the Title 61 level and a corresponding increase to the
8 Staff's revenue requirement.
9 Q Moving next to the lease at 1801
10 California, which is again reflected on or addressed on
11 page 5 of the stipulation, Exhibit 48, what was your
12 adjustment for the lease of 1801 California Street in
13 Denver?
14 A Well, I argued that the lease at 1801
15 California was excessive and a reduction in the
16 intrastate Idaho South revenue requirement of 173,000 was
17 required to correct for this.
18 Q And what was the basis that you proposed
19 for this adjustment?
20 A This proposal was based on studies
21 performed for the Arizona PUC Staff by the Irvine Group,
22 I think the Commission may be aware of the Irvine Group
23 study, by Arthur Andersen & Company for U S WEST's
24 position and by the Oregon PUC Staff.
25 Q And how was this issue settled between the
1126
CSB REPORTING SCHNEIDER (Di)
Wilder, Idaho 83676 Staff
1 Company and the Staff?
2 A Due to the small dollar amount involved,
3 this issue was settled with a 50-50 split resulting in a
4 net adjustment of 43,000 at the Title 61 level as a
5 reduction of U S WEST's revenue requirement and a
6 corresponding increase in the Staff's Title 61 revenue
7 requirement. We split that one.
8 Q Now, addressing all of your issues
9 collectively, is it your opinion that the settlement of
10 the issues as contained in the stipulation are just and
11 reasonable?
12 A Yes. My seven issues are part of a large
13 and encompassing settlement of 18 issues that were
14 disputed. The second settlement that we've been
15 discussing allowed the Staff and the Company to better
16 understand each other's case. In at least one issue,
17 additional information, such as a pension asset
18 adjustment, I wasn't aware that I had taken the wrong
19 number until they pointed that out to me in the
20 settlement conference, permitted the Staff to correctly
21 adjust its position. Given the strength of the Staff's
22 and the Company's advocacy on each issue, and the value
23 of the collective issues taken as a whole, I believe that
24 the settlement of these issues is reasonable and in the
25 public interest.
1127
CSB REPORTING SCHNEIDER (Di)
Wilder, Idaho 83676 Staff
1 Q And, Mr. Schneider, have you calculated the
2 revenue requirement effect of your seven issues on a
3 Title 61 basis?
4 A Yes. The total effect is 3,621,000 of a
5 reduction of revenue requirement by the Company and an
6 increase in revenue requirement by the Staff.
7 Q And isn't the starting point for that
8 adjustment based on the Staff's case?
9 A Yes.
10 MR. HOWELL: I thank the Chair for its
11 indulgence and with that, Mr. Schneider is available for
12 cross.
13 COMMISSIONER SMITH: Thank you.
14 Mr. Fothergill, do you have questions?
15 MR. FOTHERGILL: I have no questions,
16 Madam Chair.
17 MR. PHILLIPS: I have no questions. Thank
18 you.
19 MR. HARWOOD: No questions.
20 COMMISSIONER SMITH: No questions from
21 AT&T? How about U S WEST?
22 MS. HOBSON: No questions.
23 COMMISSIONER SMITH: How about from the
24 Commission?
25 COMMISSIONER HANSEN: No questions.
1128
CSB REPORTING SCHNEIDER (Di)
Wilder, Idaho 83676 Staff
1 COMMISSIONER SMITH: Commissioner Nelson.
2 COMMISSIONER NELSON: No, not for me. I
3 think that Mr. Schneider has done a good job of
4 explaining his settlement.
5 COMMISSIONER SMITH: Okay; therefore, there
6 is no redirect.
7 Thank you, Mr. Schneider.
8 THE WITNESS: Thank you.
9 (The witness left the stand.)
10
11 WAYNE HART,
12 produced as a witness at the instance of the Staff,
13 having been first duly sworn, was examined and testified
14 as follows:
15
16 DIRECT EXAMINATION
17
18 BY MS. HAMLIN:
19 Q Would you please state your name and spell
20 your last name for the record?
21 A My name is Wayne Hart. Last name is
22 spelled H-a-r-t.
23 Q And with whom are you employed and in what
24 capacity?
25 A I'm employed by the Idaho Public Utilities
1129
CSB REPORTING HART (Di)
Wilder, Idaho 83676 Staff
1 Commission as a telecommunications analyst.
2 Q Are you the same person that filed prefiled
3 direct testimony on November 26th of 62 pages with
4 exhibits numbered 182 [sic] through 126?
5 A What were the exhibit numbers again?
6 Q Sorry, 118 through 126.
7 A Yes.
8 Q And you're also the same person who filed
9 surrebuttal testimony on February 21st, 1997, consisting
10 of 24 pages, including revised Exhibits 120, Schedule 3,
11 and 122, Schedule 1 through 5?
12 A Yes.
13 Q Do you have any changes to your testimony?
14 A No.
15 Q If I were to ask you these questions today,
16 would your answers be the same?
17 A Yes.
18 MS. HAMLIN: With that, Madam Chairman, I
19 ask that the prefiled direct testimony and referenced
20 exhibits be spread upon the record as if read.
21 COMMISSIONER SMITH: If there's no
22 objection, we will spread the prefiled direct and
23 surrebuttal testimony of Mr. Hart and admit Exhibits 118
24 through 126.
25
1130
CSB REPORTING HART (Di)
Wilder, Idaho 83676 Staff
1 (Staff Exhibit Nos. 118 - 126 were
2 admitted into evidence.)
3 (The following prefiled direct and
4 surrebuttal testimony of Mr. Wayne Hart is spread upon
5 the record.)
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
1131
CSB REPORTING HART (Di)
Wilder, Idaho 83676 Staff
1 Q. Please state your name and address.
2 A. My name is Wayne Hart. My business address
3 is 472 West Washington, Boise, Idaho.
4 Q. By whom are you employed, and in what
5 capacity?
6 A. I am employed by the Idaho Public Utilities
7 Commission (IPUC; Commission; Staff) as a Utilities
8 Compliance Investigator in the Consumer Assistance
9 Section.
10 Q. What is your educational background?
11 A. I received a Master's Degree in
12 Bacteriology from the University of Wisconsin in Madison,
13 Wisconsin, and a Bachelor's Degree in Biological Sciences
14 from Indiana University in Bloomington, Indiana.
15 Q. Please outline your experience that is
16 relevant to your testimony?
17 A. I have served as a Utilities Compliance
18 Investigator since May of 1994, and have handled nearly
19 2500 complaints, comments and inquiries, with over 1500
20 of those involving telecommunications issues, since
21 joining the IPUC Staff. I served on the Staff team that
22 performed a service quality audit of U S WEST in 1995 and
23 1996 for Case No. USW-S-95-4.
24 Q. Have you previously testified before this
25 Commission?
1132
USW-S-96-5 HART (Di) 1
11/26/96 Staff
1 A. Yes. I presented testimony in Idaho Power's
2 general rate case in 1995, and served as a consultant to
3 an intervenor on solar water heating in 1980.
4 Q. What issues will you be addressing in your
5 testimony?
6 A. I will address U S WEST Communications,
7 Inc.'s (U S WEST; USW; Company) performance with respect
8 to service quality, held orders and other customer
9 service issues and the adequacy of the efforts the
10 Company has undertaken to improve its performance. Staff
11 witness Carol Cooper will also address a number of
12 Company performance issues in her testimony.
13 I will then recommend the disallowance of
14 certain expenditures the Company has incurred as a result
15 of a lack of adequate service quality, changes in the
16 Company's Service Guarantee Program, and recognition of
17 the Company's record of poor customer relations and
18 service quality in its authorized return on equity until
19 performance reaches an acceptable level. I will
20 recommend interim performance standards that the Company
21 should be required to meet.
22 I recommend that the Company's Toll
23 Restriction service be considered a Title 61 service and
24 that the Company's recurring fees for providing this
25 service be discontinued. I will recommend that the
1133
USW-S-96-5 HART (Di) 2
11/26/96 Staff
1 Company either update the maps upon which it bases the
2 Zone Connection charges or stop collecting such charges.
3 I will also recommend that the Company
4 revise the language of the tariff regarding special
5 construction charges, as well as the sections for
6 measured service, to reduce the potential for inequitable
7 applications of these tariffs.
8 Q. Are you sponsoring any exhibits in this
9 case?
10 A. Yes. I am sponsoring Exhibit Nos. 118-126
11 as part of my testimony.
12 CUSTOMER RELATIONS
13 Q. Please describe the method by which you
14 gauge regulated utilities' performance in the area of
15 customer relations.
16 A. The primary means by which the Commission
17 Staff is able to assess utility customer relations is
18 through analysis of complaints, inquiries, and comments
19 made by regulated utilities' customers to the
20 Commission's Consumer Assistance Staff. The Staff
21 analyzes its investigatory records to get both a
22 statistical and substantive picture of what problems
23 customers are having, what is causing those problems, how
24 or whether those problems are being resolved, and what
25 could be done to prevent similar problems from recurring
1134
USW-S-96-5 HART (Di) 3
11/26/96 Staff
1 in the future. Complaints, inquiries and comments are
2 categorized and coded to facilitate retrieval and
3 information gathered in the course of investigating and
4 resolving a dispute or providing a response is analyzed.
5 Q. How do you determine whether the number of
6 complaints, comments or inquiries are significant?
7 A. We look for trends, as well as compare the
8 number received by one utility with the number received
9 by other utilities. If a particular utility is
10 experiencing an increase in the number of complaints in a
11 particular area, then the mere fact that it is increasing
12 is important information. It is even more revealing if
13 one utility is going up and other utilities are not.
14 Q. Can you really compare the performance of a
15 telephone company with that of an electric company?
16 A. On an overall level, yes. While there are
17 differences, there are a substantial number of
18 similarities that make such a comparison valid. While
19 such comparisons should not be used as the only
20 evaluation tool, they do provide useful information, and
21 Staffs experience has been that such comparisons are a
22 reliable indicator of a utility's overall performance.
23 Q. Your analysis is of "complaints, comments
24 and inquiries" received by the Consumer Assistance Staff.
25 Could you explain what these include?
1135
USW-S-96-5 HART (Di) 4
11/26/96 Staff
1 A. These include consumers who contact the
2 Commission with either a complaint about a utility's
3 performance in some manner, a comment about something the
4 utility has done or proposed to do, or an inquiry about
5 some aspect of a utility's operation. In general, Staff
6 divides these contacts into two groups: 1) complaints
7 that require further investigation and analysis, which
8 typically involves contacting the utility for additional
9 information, and 2) comments that document information
10 provided by the consumer and inquiries that can be
11 answered by providing the consumer with information.
12 Although an inquiry may involve limited research in order
13 to answer a consumer's question, investigated complaints
14 involve in-depth investigations and analysis. The calls,
15 letters and other contacts made by consumers expressing
16 an opinion about this rate case would be an example of a
17 comment.
18 For ease of reference, I will refer to the
19 combination of complaints, comments and inquiries as
20 "consumer contacts". Investigated complaints will be
21 referred to as "complaints" or "investigations".
22 Q. Do these numbers represent every consumer
23 who contacts the IPUC?
24 A. No, consumers who contact the IPUC are asked
25 if they have contacted the utility about their concerns
1136
USW-S-96-5 HART (Di) 5
11/26/96 Staff
1 first. Those who indicate they have not done so are
2 referred back to the utility, to provide the utility an
3 opportunity to resolve the customer's concern before they
4 talk with an investigator.
5 Q. Comments and inquiries are obviously
6 treated differently from complaints. Are the number of
7 comments and inquiries also an indicator of a company's
8 performance?
9 A. Yes, when viewed as a whole, especially on
10 a comparative basis, the total number of consumer
11 contacts can provide very useful information. This total
12 number tracks very closely with other indicators of
13 performance, and the experience of the Commission Staff,
14 as well as staff at other commissions, has been that it
15 is a reliable tool for indicating overall performance.
16 Although I would agree that some individual
17 comments or inquiries may not be indicative of a
18 utility's performance, many of the consumer contacts that
19 would be considered a comment are expressions of concern
20 about a utility's actions or policies, which can be a
21 very good indicator of performance.
22 For example Staff Exhibit No. 118,
23 Schedule 1, documents the problems encountered by a
24 customer from Meridian who experienced delays and a major
25 hassle in obtaining phone service upon moving to a new
1137
USW-S-96-5 HART (Di) 6
11/26/96 Staff
1 location. The customer simply wanted the IPUC to know
2 the trouble some customers had to go through to get
3 service from U S WEST. Because the customer's service
4 was working properly by the time Staff was able to return
5 the call, and Staff was already familiar with the
6 circumstances which caused the delay, no further
7 investigation was necessary. However, this customer's
8 call is an indication that the Company was not providing
9 service in a timely manner.
10 Q. Do consumers who contact the Commission
11 represent the bulk of customers who have experienced
12 problems with a utility?
13 A. No. Although consumers who call the IPUC
14 provide valuable insight into customers' interactions
15 with utilities, those who take the extra effort to
16 contact the Commission represent only a fraction of the
17 total universe of problems encountered by customers.
18 For example, based upon the data provided
19 to the Commission in a briefing by U S WEST on October 9,
20 1996, almost 12,000 customers in southern Idaho
21 experienced a delay in the installation of their phone
22 line in the first eight months of 1996. However, the
23 IPUC only received 146 calls from U S WEST customers
24 indicating they were experiencing such a delay during
25 those same eight months.
1138
USW-S-96-5 HART (Di) 7
11/26/96 Staff
1 Q. Do you have other evidence that supports
2 the claim that the number of customers who call the IPUC
3 about problems is only a fraction of those experiencing
4 the problem?
5 A. Yes. There have been a number of studies
6 which indicate that only a small percentage of those who
7 experience a problem with utility service will complain
8 about it to the utility, and only a portion of those will
9 take it further and report it to a third party, such as
10 the Commission. Staff Exhibit No. 119 shows that of all
11 those consumers who experience a problem, only a portion
12 of them will perceive, or be aware of the problem. This
13 group can be divided into those who will not be motivated
14 enough to take any further action, and those that are so
15 motivated that they take a personal action. Of those
16 motivated enough to take an action, a portion will take
17 the action of calling the utility. The group that calls
18 the utility will be further divided into those who are
19 satisfied by the utilities' action or response, and those
20 who are not satisfied. Of those who are not satisfied,
21 only a portion will be motivated enough to contact a
22 third party such as the IPUC.
23 A study prepared by Theodore Barry and
24 Associates/SMB Associates found that more than 20% of a
25 utility's customer base will encounter a problem during a
1139
USW-S-96-5 HART (Di) 8
11/26/96 Staff
1 year. For one midwestern telephone company, more than
2 45% of those who had a problem did not complain to
3 anyone. The study estimated that only 5% of those who
4 experience a problem make the effort to complain to a
5 utility executive (as opposed to front line employees) or
6 the utility regulatory commission.
7 The complaints received by the Commission
8 from customers of United Water of Idaho who were
9 experiencing water quality problems follows this pattern
10 very closely. United Water has indicated that 9 of its
11 52 wells have high levels of iron, the main source of the
12 problem, and these wells are the primary source of water
13 for a large, multi-block area. Staff estimates that the
14 number of customers living in this area would be well
15 into the thousands. The Company reported they had been
16 contacted by 37 customers in the past year who expressed
17 concerns about their water quality, and in the same time
18 period the Consumer Staff was contacted by only 4
19 customers about this problem.
20 Q. Does Staff track any other indicators of U S
21 WEST's customer service performance?
22 A. Yes. There are a number of different ways
23 of examining the consumer contact data that provides more
24 direct information about a company's performance. One is
25 the number of consumer contacts that is actually followed
1140
USW-S-96-5 HART (Di) 9
11/26/96 Staff
1 up by Staff with an investigation. Typically, in such
2 cases, the consumer has indicated a specific concern or
3 complaint and the investigator will obtain detailed
4 information about the specific incident or issue from the
5 consumer. The investigator will then contact the utility
6 to get its side of the story. If the matter is still
7 pending, the investigator will serve as a mediator to try
8 and resolve the customer's concerns.
9 A second approach is to look at the number
10 of instances where there is a change in the utility's
11 position or approach to a customer's concern after the
12 consumer has contacted the Commission.
13 In addition, Staff can examine the number
14 of investigations regarding specific issues, such as a
15 delay in providing service (which Staff refers to as a
16 held order), or repair delays or other instances of
17 impaired service. I will be presenting an analysis of
18 these indicators. Staff witness Cooper will discuss
19 investigations regarding billing and credit problems
20 experienced by consumers. The number of investigations
21 for each of these specific issues is a direct indicator
22 of a Company's service quality performance.
23 Q. Does the Company provide data that can be
24 used to evaluate performance?
25 A. The Company's Basic Service Measurement
1141
USW-S-96-5 HART (Di) 10
11/26/96 Staff
1 (BSM) Report, which is now provided to the Commission on
2 a monthly basis, includes eight specific measurements of
3 the Company's ability to provide and maintain service.
4 These eight measurements include missed commitments for
5 both repair and installations, installation and repair
6 intervals, held orders, and business office and repair
7 office access.
8 The Company also reports on their
9 performance with respect to restoring service outages per
10 Customer Service Rule 503, IDAPA 31.41.01.503. This rule
11 requires telephone utilities to generally restore a
12 service outage within 24 hours of the time the outage is
13 reported to them. Utilities are to meet this requirement
14 90% of the time.
15 Q. Have you analyzed the complaints, comments
16 and inquiries regarding U S WEST?
17 A. Yes. For this particular case (USW-S-96-5),
18 I have examined the total number of consumer contacts and
19 the total number of investigations. I then focused on
20 U S WEST's performance with respect to installation and
21 held order issues, as well as repair and other service
22 outage or impairment issues. I also looked at the
23 relationship that the problems in this area have with
24 other related customer service issues. Because this case
25 only pertains to U S WEST's southern Idaho service
1142
USW-S-96-5 HART (Di) 11
11/26/96 Staff
1 territory, records involving U S WEST's northern Idaho
2 customers have been excluded from the analysis.
3 Q. What were the results of your analysis?
4 A. Consumer contacts concerning U S WEST have
5 reached an unprecedented level. The Company's
6 performance has deteriorated especially rapidly in the
7 past two years and is clearly worse than the other major
8 utilities in Idaho.
9 Schedule 1 of Staff Exhibit No. 120 shows
10 the total number of complaints, comments and inquiries
11 received by the IPUC Staff regarding U S WEST from the
12 years 1987 through the third quarter of 1996. As this
13 graph clearly shows, the number of customer contacts
14 remained relatively stable from 1987 through 1994, with
15 the exception of a spike in 1991 that is related to a
16 controversial Caller-ID proposal. The gradual increase
17 from 1987 through 1994 is approximately double the net
18 increase in the number of lines the Company reported.
19 However, the number increases dramatically from 1994 to
20 1995, rising more than 85% in that one year. The
21 increase continues between 1995 and 1996, rising an
22 additional 55%, for a two-year gain of more than 185%. I
23 have calculated an annual number for 1996, as I have in
24 all the graphs I will present, based upon the numbers
25 from January 1 through September 30, 1996.
1143
USW-S-96-5 HART (Di) 12
11/26/96 Staff
1 As can be seen in Schedule 2 of Staff
2 Exhibit No. 120, which includes this same type of
3 information for other major utilities serving Idaho
4 customers, the increase from 1987 through 1994 for
5 U S WEST is similar to the increases other utilities were
6 also experiencing. However, in 1995, the number for
7 U S WEST increased dramatically more than it did for the
8 others, and based upon the number received through
9 September 1996, they will reach even higher levels this
10 year.
11 Q. What issues did the consumers whose
12 complaints were investigated raise?
13 A. Schedule 3 of Staff Exhibit No. 120
14 provides more detailed information on the number and
15 subject matter of the complaints received during the past
16 five years.
17 The red band at the bottom of each bar is
18 for held order investigations. The blue band above it is
19 for service or repair-related investigations. While
20 there have been increases in other categories as well,
21 these two account for the majority of the overall
22 increase.
23 Q. What were the results of your examination
24 of the number of investigations conducted by Staff?
25 A. Staff Exhibit No. 120, Schedule 4 shows that
1144
USW-S-96-5 HART (Di) 13
11/26/96 Staff
1 the number of investigations of U S WEST required to be
2 conducted by Staff has also increased at an alarming rate
3 in the past two years. The general shape of the line
4 representing the investigations conducted on U S WEST is
5 very similar to that for the total consumer contacts as
6 shown in Staff Exhibit No. 120, Schedule 2, and confirms
7 that the Company's performance has deteriorated rapidly
8 in the past two years, and is clearly worse than the
9 other major utilities in Idaho.
10 Q. U S WEST serves more customers than the
11 other utilities. Could that explain the differences?
12 A. Staff Exhibit No. 120, Schedule 5 shows the
13 results when the size of the utility is taken into
14 account by looking at the number of investigated
15 complaints per thousand access lines or gas/electric
16 meters. The drastic increase in the number of
17 investigations is also evident when examined this way as
18 well. From 1994 on, U S WEST had the highest number of
19 investigations of all major utilities, with 1996
20 complaint levels projected to exceed 2.5 complaints per
21 access line, a full percentage point above that of the
22 next highest utility, Idaho Power.
23 I limited the report to the larger
24 utilities, as their size tends to dampen the effects of
25 specific or random events, which might not be indicative
1145
USW-S-96-5 HART (Di) 14
11/26/96 Staff
1 of overall performance. In terms of the number of access
2 lines, U S WEST is the largest utility shown on this
3 graph. That size, plus the continuous nature of the
4 increase, would indicate that this upward trend in
5 complaint levels is a very valid indicator of a decline
6 in service quality.
7 Q. Is this a trend that other utilities are
8 also experiencing?
9 A. No. While there has been somewhat of an
10 increase for most of the other utilities, none of them
11 has experienced anything like that of U S WEST, in terms
12 of the severity of the amount and rate of the increase,
13 or the extended duration of the problems.
14 Q. How does U S WEST compare with other
15 providers of local exchange telephone service?
16 A. GTE, the only other local exchange company
17 (LEC) with a significant number of Idaho customers, is
18 also shown on Staff Exhibit No. 120, Schedule 6. The
19 increase in the number of investigations for U S WEST has
20 clearly out-paced that for GTE in the last few years,
21 even when evaluated on a per 1000 lines basis. The
22 comparison is even more revealing when one considers that
23 many of the GTE investigations concern problems that
24 occurred when GTE implemented their Local Calling Plan,
25 and a single error - a mailing that contained erroneous
1146
USW-S-96-5 HART (Di) 15
11/26/96 Staff
1 information - led to many of the GTE investigations in
2 1995 and 1996.
3 Q. Could the increase in 1995 and 1996 be
4 attributed to comments received about the major cases the
5 Company has had before this Commission, such as this rate
6 case and the Extended Area Service cases, such as
7 USW-S-96-4.
8 A. While it is true that customers' case-
9 related comments account for some of the increase in
10 total consumer contacts shown in Schedule 1 of Staff
11 Exhibit No. 120, such comments would not increase the
12 number of investigations. As indicated earlier, case-
13 related comments would not be coded as an investigation
14 unless the customer also complained about a specific
15 problem with the Company.
16 Q. What information is provided by an
17 examination of the instances where the Company's position
18 is reversed or modified after a consumer contacts the
19 Commission?
20 A. Schedule 7 of Staff Exhibit No. 120 shows a
21 comparison of the numbers of instances for each company
22 where there was a change or modification after the
23 consumer contacted the Commission. This data shows the
24 same drastic increase for U S WEST in the past two years.
25 Again, none of the other utilities experienced such an
1147
USW-S-96-5 HART (Di) 16
11/26/96 Staff
1 increase. The rapidly rising levels clearly indicate
2 that U S WEST is having difficulty meeting its customers'
3 needs and expectations.
4 Q. Are there any other indicators in the
5 Consumer Assistance data that would provide information
6 on the overall service quality that U S WEST provides its
7 customers?
8 A. Yes. The data includes an indication of
9 whether the customer mentioned or complained about rude
10 or inappropriate comments or treatment from the customer
11 service representatives of a company. Schedule 8 of
12 Staff Exhibit No. 120 shows that the number of
13 investigations in which consumers identified such
14 behavior in their discussions with Consumer Assistance
15 Staff. As can be seen, the number of such instances for
16 U S WEST began to increase dramatically in 1994, and in
17 1996 is more than double that of 1995. Current levels
18 are nearly three times higher than those of any of the
19 other major utilities.
20 Q. To what do you attribute this increase?
21 A. This is an indication that the Company's
22 representatives are either new and not experienced in
23 dealing with customers, or are stretched beyond their
24 limits by the sheer number and type of problems they are
25 expected to handle.
1148
USW-S-96-5 HART (Di) 17
11/26/96 Staff
1 Q. The Company has maintained that the
2 increase in the number of held order and service quality
3 problems is due to the explosive growth that the Company
4 has incurred. Does this explain the problem?
5 A. No. As shown in the top graph of Schedule
6 9 of Staff Exhibit No. 120, U S WEST's growth, on a
7 percentage basis, has not been significantly different
8 than that of the other major utilities in Idaho, and in
9 many cases has actually been less. Yet the other
10 utilities have not experienced such a drastic increase in
11 the numbers of investigations, especially with regard to
12 held orders and repair issues, which are shown on the
13 bottom graph.
14 Of particular importance is the experience
15 of GTE. From 1990 to 1995, GTE saw a 41% aggregate
16 increase in the number of residential and business access
17 lines in the GTE exchanges in northern Idaho. Over the
18 same period, the number of lines in U S WEST's exchanges
19 only increased by 23%. When one looks at the most recent
20 years, U S WEST showed an increase of only 5%, to GTE's
21 6%, in the number of lines from 1994 to 1995. From 1993
22 to 1994, the difference is even more striking, with GTE
23 growing at 14%, while U S WEST only increased by 6%.
24 Q. Does the Company have a responsibility to
25 accurately forecast growth?
1149
USW-S-96-5 HART (Di) 18
11/26/96 Staff
1 A. Yes. Even if U S WEST were experiencing
2 explosive growth, it would not be a satisfactory
3 explanation for the service quality problems.
4 Forecasting growth is one of the fundamental and normal
5 functions of any utility. If a company is not accurately
6 predicting growth, then it is not performing its
7 responsibilities adequately.
8 I do not mean to imply that a company must
9 be perfect. It is expected that a company may experience
10 a temporary problem matching its labor force or inventory
11 of supplies to customer demand from time to time.
12 However, as shown in the bottom graph of Schedule 9 of
13 Staff Exhibit No. 120, the number of delayed service and
14 service quality investigations for U S WEST has gone up
15 every year since 1991, the first year such records were
16 kept. Failure to address a known problem over a
17 five-year period does not constitute an adequate or even
18 reasonable response.
19 Q. The Company also maintains that the nature
20 of telephone service is unique, and that given the
21 rapidly growing number of installation and service orders
22 that it must complete, the number of problems is not out
23 of line. Do you agree with this?
24 A. No. First of all, to the extent that
25 telephone service is different from other utility
1150
USW-S-96-5 HART (Di) 19
11/26/96 Staff
1 service, then we should be seeing the same rapid increase
2 in the number of problems with GTE, and possibly more,
3 since GTE's growth has actually been greater. We are not
4 seeing anything like that.
5 Furthermore, I don't accept the argument
6 that the difference between telephone service and other
7 utilities' services would lead necessarily to these kinds
8 of problems. I would argue that it should work the other
9 way. Typically, telephone companies do not need to visit
10 the customer's premises on each change or new connection
11 order, unlike what other utilities must do when they must
12 read meters and connect or disconnect service for
13 customers. While there is no doubt that the programming
14 changes necessary to process telephone service orders are
15 voluminous, they do not usually require resource-
16 intensive field work.
17 To the extent that telephone companies are
18 different, it is U S WEST's responsibility as a public
19 utility to understand that difference, and to maintain
20 sufficient resources and staff to implement the kinds of
21 procedures and systems and do whatever it takes to
22 address those differences.
23 U S WEST has had more than five years with
24 this same level of growth and it should have been able to
25 figure out how to meet the demands it poses on a
1151
USW-S-96-5 HART (Di) 20
11/26/96 Staff
1 telephone company well before now. It is the Company's
2 responsibility to plan for growth, and to the extent that
3 they have failed to do so, they should be held
4 accountable.
5 INSTALLATION OF SERVICE AND HELD ORDERS
6 Q. What problems have occurred with respect to
7 installation of service?
8 A. There has been a significant rise in the
9 number of investigations of held orders or delayed
10 service installations. As shown in Schedule 10 of Staff
11 Exhibit No. 120, the number of held order investigations
12 increased dramatically in 1995, and although the pace
13 seems to have slackened off a little in 1996, it
14 continued to increase. U S WEST's current levels are
15 more than five times higher than those the Company
16 experienced in 1991, and on a per 1000 line basis, at
17 least ten times higher than GTE or any of the other
18 utilities. I should point out that prior to 1991, Staff
19 did not collect specific held order data; such
20 investigations were limited in number and random in
21 occurrence. By 1991, the number of U S WEST held order
22 investigations had increased significantly, and appeared
23 to be consistent enough that Staff believed it
24 appropriate to collect specific data.
25
1152
USW-S-96-5 HART (Di) 21
11/26/96 Staff
1 Q. What specific types of problems associated
2 with their delayed installations did customers report?
3 A. Problems include the Company's failure to:
4 promptly provide service; promptly advise the customer of
5 potential delays in getting new service in areas where no
6 facilities are available; advise the customer of the
7 status of a held order; keep an appointment if a premises
8 visit is required, and return calls to customers that
9 left messages on the voice mail for the held order group
10 or engineers.
11 Q. Are these problems occurring only in
12 previously unserved areas?
13 A. They are occurring in new construction
14 areas as well as existing neighborhoods, although growth
15 does play a significant role in the installation
16 backlogs. An analysis of the investigations conducted in
17 the first three quarters of 1995, when held orders were
18 at their peak, showed that approximately two-thirds of
19 the investigations of delayed service installation
20 involved new construction. The percentage of delayed
21 service investigations from new construction has declined
22 somewhat since then, dropping to approximately 40% of the
23 total delayed installation investigations in the third
24 quarter of 1996.
25 In the first three quarters of 1995, roughly
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1 one-third of the delays in both existing neighborhoods
2 and new developments were due to lack of available
3 facilities; another third were caused by defective
4 outside plant that required repair before service could
5 be provided; and the remaining third were caused by a
6 shortage of installation personnel in the field,
7 engineering backlogs and central office problems. In the
8 year since that time, outside plant problems continue to
9 account for slightly more than two-thirds of the delays,
10 with manpower shortages identified as the problem in
11 approximately 18% of the investigations.
12 Q. Has the Company been aware of this held
13 order problem for some time, or is it of recent origin?
14 A. As indicated earlier, Staff began recording
15 held order information in 1991, partially in response to
16 the increase in U S WEST held order investigations. Staff
17 held a number of informal discussions with U S WEST
18 representatives at that time about the number of held
19 orders, and were assured that this was a temporary
20 problem and that the Company was taking steps to correct
21 the situation.
22 Staff expressed concerns about the potential
23 to exacerbate held order problems in response to the
24 Company's requests to conduct promotions for second
25 residential lines in 1991 and 1992. The Company's
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1 representatives responded that they would make sure this
2 would not happen. However, the Company conducted such a
3 promotion late in 1995 and Staff conducted at least two
4 investigations concerning secondary lines that became
5 held orders due to lack of facilities.
6 Staff Exhibit No. 121, a letter dated
7 May 14, 1993 from John Souba of U S WEST to Eileen Benner
8 of the Commission Staff, identifies steps the Company was
9 taking to resolve the held order problems. Late in 1993,
10 based upon evidence that the instances of delayed
11 installations and other service and repair related
12 problems were not decreasing as U S WEST had promised,
13 but were actually increasing, Staff held a series of
14 meetings with officials from U S WEST to share
15 information that might help the Company get a better
16 understanding of the problems and any insight into the
17 problems that Staff might have obtained from their
18 investigations.
19 With the number of U S WEST investigations
20 continuing to rise, the Commission in December of 1994,
21 proposed standards for service quality and financial
22 penalties if the Company failed to meet them. (Order
23 No. 25826). U S WEST petitioned for reconsideration and
24 in Order No. 25923 issued in March 1995, the Commission
25 opened Case No. USW-S-95-2, specifically to examine the
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1 issue of service quality standards. In June 1996, in
2 Order No. 26476, the Commission acknowledged that
3 U S WEST had indicated that it would be filing this rate
4 case, noting that several of those submitting comments
5 had indicated that the rate case was the appropriate
6 vehicle for addressing service quality issues. The
7 Commission subsequently closed Case No. USW-S-95-2.
8 The Company has been well aware of the
9 growing numbers of delayed installations and other
10 service quality problems for at least five years, yet the
11 numbers, both in terms of actual numbers of customers
12 experiencing delayed installations, and the numbers of
13 investigations conducted by the IPUC Staff, remain at
14 unprecedented levels.
15 Q. Is there a difference of opinion between
16 Staff and the Company about what constitutes a "held
17 order"?
18 A. Yes. The Staff considers any delayed
19 service installation a held order, regardless of the
20 reason for the delay. Staff has chosen this definition
21 because customers are not concerned about why the Company
22 is unable to provide the requested service in a timely
23 manner; their concern is about the delay itself.
24 U S WEST only considers those orders that are delayed
25 because of a lack of facilities to be held orders.
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1 Q. Does this difference in definition make a
2 significant difference in the numbers you are discussing
3 today?
4 A. My analysis of the investigations conducted
5 from October 1995 through September 1996 indicated that
6 more than 15% of the complaints regarding delays in
7 installation would not have been considered held orders
8 by U S WEST because the reason for the delay was lack of
9 available outside plant technicians rather than lack of
10 facilities. In the first three quarters of 1995, 5% of
11 the delayed installation investigations were attributed
12 to manpower shortages, so we are seeing a three-fold
13 increase in customers contacting the Commission about
14 delays caused by lack of manpower as opposed to lack of
15 facilities. Affected customers experienced delays of up
16 to three weeks even though facilities were available.
17 The data provided by U S WEST in response
18 to a question about missed commitments includes
19 information on 5,217 residential orders over a ten month
20 period for which U S WEST failed to install by the due
21 date. Of these orders, 1,158 were given a due date more
22 than 7 days out, 342 a due date more than 14 days out,
23 and 110 a due date in excess of 21 days out.
24 The Company's own reports provide the best
25 indication of the scope of the problem. According to the
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1 information provided by U S WEST in their Basic Service
2 Measurements (BSM) reports for the first eight months of
3 1996, nearly 50% of all requests by businesses and nearly
4 30% of residential orders for new service, moves or
5 changes were not installed within U S WEST's target
6 interval (two days) for installation of service. That
7 means nearly 12,000 orders were not installed in a timely
8 manner.
9 Staff Exhibit No. 118, Schedule 2 is the
10 investigation report for a customer in Mountain Home
11 whose order was delayed for two weeks simply because the
12 Company did not have a technician available to complete
13 the job. The U S WEST representative responding to
14 Staffs inquiry indicated in her reply that this was the
15 normal waiting time for customers placing orders in
16 Mountain Home at that time. In a number of locations,
17 Sun Valley/Hailey, Meridian, Eagle, Star, and Mountain
18 Home, every customer who requested service was forced to
19 wait up to two and as much as three weeks for service to
20 be installed during the busier times of the year, even if
21 all facilities were available.
22 Q. Has the Company made any improvements?
23 A. U S WEST is improving in the area of
24 notifying customers of delays prior to the promised
25 installation date. In 1994 and the early months of 1995,
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1 almost every U S WEST customer contacting the Commission
2 about a held order indicated they were not warned that
3 their service might not be installed as promised. The
4 Company now tries to identify such problems in advance,
5 using a procedure they call "Facility Checker". This
6 process has helped. Only 40% of those contacting the
7 Commission in the latter part of 1995 and the first three
8 quarters of 1996 specifically indicated they had not been
9 warned of the problems at the time of placing the service
10 order or at some point in advance of the original
11 installation due date. In most of the instances where
12 the customer was not warned, the facilities problem was
13 not discovered until the technician went into the field
14 to perform the installation.
15 Q. What have the BSM reports shown for
16 installations?
17 A. In general, the BSM reports show the Company
18 has been unable to meet many of its own internal targets
19 for service installations. The Company's target is to
20 install service within two days of the order date 91.5%
21 of the time for both business and residential customers.
22 As shown in Schedule 1 of Staff Exhibit No. 122, as of
23 the end of September 1996, the Company had missed its
24 own internal target for completing the installation on
25 the promised day every single month for business
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1 customers, and five of nine months for residential
2 customers.
3 The Company's target for "Appointments
4 Offered", which is an indication of how many customers
5 are offered an install date within the standard two-day
6 interval is 80%. Schedule 2 of Staff Exhibit No. 122,
7 indicates U S WEST failed to meet its own standard during
8 any month for businesses, and met it only two of the nine
9 months for residential orders.
10 The Company reported a total of 89 held
11 orders as of September 30, with 35 of those having been
12 held for over 30 days. However, as a snapshot view of a
13 single date, those numbers fail to represent the actual
14 numbers of customers who are impacted by the Company's
15 inability to install service in a timely manner. The
16 Company reported a total of 83 held orders as of June 30,
17 yet information provided to Staff on the number of
18 credits provided under its Service Guarantee Plan
19 indicates that the orders of 408 customers were held in
20 June.
21 Based upon data provided to the Commission
22 by U S WEST during a briefing in October, the Company had
23 a total of 35,289 "Fielded Installs", through August
24 1996. If one apportions those between business and
25 residential using the percentage of the total residential
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1 and business lines in the 1995 Annual Report to the
2 Commission (approximately 25% business and 75%
3 residential), and uses the percentages of "Appointments
4 Offered" in the September 9, 1996 BSM report, then it
5 appears that the Company had failed to install over 4000
6 business lines and more than 7,700 residential orders
7 within the standard two-day interval in the first eight
8 months of 1996.
9 REPAIR
10 Q. What did your analysis of the investigation
11 data show for repair issues?
12 A. Schedule 11 of Staff Exhibit No. 120, shows
13 that the number of investigations of U S WEST for service
14 problems of all kinds increased drastically in 1995.
15 Although the number of investigations have declined
16 slightly in 1996, they remain at levels well above the
17 Company's historical levels, as well as the levels for
18 other utilities, including GTE. The spike in 1995 for
19 Utah Power represents a number of customers served by the
20 same feeder line experiencing numerous momentary outages.
21 The Company reconfigured the conductors along a stretch
22 of the line which appears to have corrected the problem.
23 A single event or source problem such as this is
24 considerably different than the widespread problems that
25 we see with U S WEST.
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1 Service outages, instances where the
2 customer either has no dial tone, or service is impaired
3 such that it is not usable, make up the majority of the
4 service related investigations. Schedule 12 of Staff
5 Exhibit No. 120, shows that the number of investigations
6 of service outages also increased dramatically in 1995,
7 rising to levels nearly four times higher than that of
8 GTE. There has been a decline in 1996, but the number
9 remains well above normal, more than three times higher
10 than that of GTE.
11 The Company has worked hard to address
12 violations of the Commission's rule regarding service
13 outages in order to eliminate the penalties imposed by
14 Commission Order No. 26303 issued in Case No. USW-N-95-2/
15 USW-S-95-8. That order required the Company to submit a
16 civil penalty of $5,000 for each month it failed to meet
17 the 90% standard in southern Idaho for restoration of
18 service as required by Rule 503. The Company was to pay
19 the penalty every month until it had met the 90%
20 requirement for at least three consecutive months. The
21 Company's effort to eliminate those penalties is probably
22 reflected in the decline in this category in 1996.
23 Q. What concerns have there been with respect
24 to repair of service?
25 A. Problems include the Company's failure to:
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1 restore service within 24 hours, fix a service problem
2 the first time it is reported by the customer, and keep
3 an appointment if a technician must visit a customer's
4 premises. Staff's analysis of service-related
5 investigations indicates that more than 50% of the
6 service quality complaints involved repeat trips by
7 U S WEST in order to get the problem resolved.
8 While many of these complaints concerned
9 trouble that was intermittent in nature, making the
10 problem hard to identify and fix, many were simple
11 problems that didn't get fixed the first time. Some
12 involved second and third lines that the Company failed
13 to fix when primary line service was repaired. In most
14 of these cases involving secondary lines, U S WEST
15 explained the omission to the investigator by noting that
16 the repair ticket did not mention problems with
17 additional lines, although the complainant frequently
18 indicated to the investigator that the information had
19 been provided at the time the outage was reported.
20 Q. What does the Company's BSM reports
21 indicate with regard to repair issues?
22 A. The Company reports significant improvement
23 in 1995, stating that it has been able to meet its own
24 internal goals for most of the months in 1996.
25 The Company's goal for "Missed Commitments"
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1 is to complete repairs by the time promised to the
2 customer at least 90% of the time. As shown in Schedule
3 3 of Staff Exhibit No. 122, after missing this goal in
4 January for residential repairs, it managed to meet the
5 goal for all the remaining months of 1996 through
6 October. Business repairs have the same "Missed
7 Commitment" goal, and the Company has been able to meet
8 that goal five of the nine months, with the year to date
9 average at just over 90%.
10 For "Appointments Offered", the Company's
11 internal goal is to agree to fix the problem 75% of the
12 time that same day if reported by 1:00 P.M., and those
13 reported after 1:00 P.M. are to be repaired the next
14 business day. For business repairs, the Company has met
15 their internal 75% goal in every month through October
16 1996 except January, and the year-to-date level is at
17 77.7% (See Schedule 4 of Staff Exhibit No. 122). For
18 residential repairs, the Company has met their goal
19 during 1996 except January, June and July, with the
20 year-to-date level at 76.0% at the end of September.
21 24-HOUR OUT OF SERVICE
22 Q. Has the Company continued to meet the
23 Commission's Rule 503, which requires that utilities
24 restore service within 24 hours after it has been
25 reported at least 90% of the time?
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1 A. Using the Company's method for measuring
2 compliance with this rule, which excludes what the
3 Company defines as "extenuating circumstances", they met
4 it four times in a row from February through May. It
5 dropped to 89% in June, rose to 91% in July, 92% in
6 August, and was at 93% in September.
7 However, using the method for determining
8 compliance preferred by Staff, which would include those
9 outages which the Company defines as "extenuating
10 circumstances", the Company has failed to meet the
11 requirements in any month in 1995 or 1996.
12 Q. What is the difference between Staff's and
13 the Company's methods of determining compliance and why
14 should the Commission use Staff's calculation method?
15 A. The Staff's method would include all
16 outages of Title 61 services reported by customers. The
17 Company's method excludes those outages the Company
18 defines as extenuating circumstances. The Company
19 defines any outage that involves customer-owned
20 equipment, those where the service technician claims they
21 are unable to obtain access to complete the repair, those
22 caused by the customer or third parties, such as a cable
23 cut by a contractor or those caused by a natural
24 disaster, such as widespread flooding, forest fires, etc.
25 as an "extenuating circumstance". By excluding these
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1 cases, the total number of out-of-service conditions is
2 reduced, which typically makes the percentage restored
3 within 24 hours higher.
4 Staff contends that such "extenuating
5 circumstances" were recognized and taken into
6 consideration in setting the percentage required for
7 compliance when the rule was established, and that to
8 allow them to be excluded from the calculation amounts to
9 double counting. The Company's method of determining
10 compliance dilutes the requirements of the rule below
11 levels of service that consumers deserve to be provided.
12 The Company's preferred method also allows it to exclude
13 instances where the Company is unable to obtain access
14 because it failed to keep an appointment with a customer.
15 16% of the held order and service related investigations
16 analyzed involved a situation where the Company did not
17 keep a scheduled repair appointment. "No-shows" remain a
18 frequent source of customer frustration in 1996. Missed
19 appointments are particularly irksome to residential
20 customers who often must take time off work to wait for a
21 repair technician that fails to appear.
22 Q. Is Staff satisfied that the Company's
23 procedures for measuring and reporting performance is
24 accurate?
25 A. Staff conducted a performance audit of the
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11/26/96 Staff
1 Company's information gathering and reporting procedures
2 for the BSM reports that were proposed for use in
3 determining progress in improving service quality in Case
4 No. USW-S-95-4. A copy of the Executive Summary of
5 Staff's report from that audit is attached as Staff
6 Exhibit No. 123.
7 Although Staff found the Company's
8 reporting procedures and measurement criteria to be a
9 reasonable indicator of the Company's performance, Staff
10 noted a number of exceptions and deficiencies. Staff
11 recommends that either these deficiencies be corrected,
12 or the performance goals or standards used in determining
13 whether the Company's service is acceptable should be
14 adjusted (increased) if the Company's reporting
15 procedures and measurement criteria were to be used.
16 Q. Are there other concerns dealing with
17 either held orders or repair issues?
18 A. Nearly 30% of the service quality and held
19 order investigations revealed a discrepancy between
20 information provided by the complainant and that reported
21 by U S WEST. The discrepancies included: whether or
22 when the customer notified the Company of the problem;
23 the number of calls the customer made to report a problem
24 before it was fixed; and incorrect or incomplete records
25 of customer-provided information. Staff was unable to
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1 determine a reason for such discrepancies during the
2 performance audit, and they remain a source of concern.
3 ACCESSIBILITY
4 Q. Please describe the Company's performance
5 with respect to accessibility.
6 A. The ability of customers to promptly reach
7 someone who can address their concerns when they contact
8 the Company by telephone is an area where the Company has
9 made significant progress. Based upon the Company's BSM
10 reports, shown in Schedule 5 of Staff Exhibit No. 122, at
11 the beginning of 1995, less than 80% of callers to
12 U S WEST's business offices, and only 70% of callers to a
13 repair office were able to have their calls answered
14 within 20 seconds. The BSM report for September 1996
15 shows nearly 90% of callers to the business offices were
16 able to reach a live person in less than 20 seconds, with
17 the average over the nine months of 1996 at 88% for
18 businesses, and 93% for callers to residential business
19 offices. On the repair side, the numbers for September
20 are both a fraction less than 85%, with the average for
21 the year to date just above 88%.
22 Q. Does Staff have concerns with the manner in
23 which the access measurements in the BSM report are
24 compiled?
25 A. Yes. The access measurements in the BSM
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11/26/96 Staff
1 report only include calls to repair centers and business
2 offices. They do not include calls to other facilities
3 that customers may call, such as credit management
4 centers, Spanish-speaking centers, and those call centers
5 operated by contractors.
6 Q. Would including the calls to these centers
7 result in the Company failing to meet its internal BSM
8 goals?
9 A. I do not know. During Staff's audit of USW
10 last year, Staff was provided with information that
11 indicated the number of calls to these excluded
12 facilities was considerably smaller than the calls to the
13 repair and business offices. However, that data also
14 indicated that access to the Credit Management Center was
15 significantly worse than most other USW centers, with
16 less than 60% of the calls answered in less than 20
17 seconds. Including the access results for these calls
18 would have only reduced the total measurement by a few
19 percentage points, so it is possible that the improvement
20 at the business and repair offices would have been
21 sufficient to compensate for the poor access results for
22 these facilities.
23 Staff requested access information from all
24 U S WEST facilities, but this information was not
25 provided in the format requested for our analysis, and
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11/26/96 Staff
1 the information we did receive was not provided in
2 sufficient time to be analyzed for this testimony.
3 During the performance audit, Staff was
4 informed that U S WEST was increasing its use of outside
5 contractors to handle routine calls from customers, such
6 as requests for duplicate bills, and that the Company
7 utilized two firms for such services at that time.
8 However, the information U S WEST provided in response to
9 Staff's production request on the access rates for calls
10 handled by contract firms indicated that only one firm
11 responded to incoming calls, and the access data
12 pertaining to that firm was not available in the format
13 Staff desired. The audit team was assured that such data
14 was available in the desired format during the audit.
15 Q. Do the number of consumer contacts to the
16 IPUC about access show a similar improvement?
17 A. We do not track access as a separate item,
18 so it is not an issue that can be quantified easily. A
19 significant number of investigations contain references
20 to being placed on hold or about a difficulty in getting
21 through to anyone at U S WEST. Nearly 15% of the
22 investigations regarding held orders and service quality
23 include references to some form of difficulty in reaching
24 a person who could address their concerns.
25 The nature of the problems that customers
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11/26/96 Staff
1 have reported seems to have changed over the past year.
2 In 1995, nearly 20% of the held order and service quality
3 investigations included references to busy signals, long
4 hold times and disconnections while customers worked
5 their way through U S WEST's automated voice response
6 unit.
7 However, the investigations from October
8 1995 through September 1996, seldom mention these
9 problems, which is consistent with the improvement
10 identified in the BSM reports. Instead, they identify
11 problems the customers had incurred after they have
12 reached a person. Some of the callers reported being
13 placed on hold after reaching a U S WEST representative,
14 and being left on hold for extended periods, often more
15 than 15 minutes, while the representative looked for
16 additional information or discussed issues with someone
17 else. This was especially noticeable in the
18 investigations dealing with credit or billing issues.
19 This type of "hold" would not be included in the access
20 records. It is one of many indications that U S WEST
21 service representatives are not familiar with the systems
22 or the information they use in responding to questions.
23 It did not appear to be a common practice
24 to provide customers whose order had been held with a
25 phone number for the held order group in 1995, but such a
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USW-S-96-5 HART (Di) 40
11/26/96 Staff
1 number was often provided in 1996. The effort to provide
2 consumers with a more direct point of contact for
3 information on their delayed orders is a positive change,
4 but based upon consumer complaints, it has become a
5 source for access problems.
6 More than 10% of the customers contacting
7 the IPUC about delayed service indicated they had left
8 messages with the Held Order Group, but that no one had
9 returned their calls. In some cases, the customer
10 claimed to have left multiple messages, and had not
11 received a response in more than a week.
12 An additional 5% of the held order
13 investigations included other access problem allegations.
14 In many of these cases, customers indicated the person
15 who returned their calls could not provide them with any
16 information about their order, other than it was being
17 held due to a lack of facilities. Customers deserve to
18 be given at least some estimation of the typical time
19 frame for instances with circumstances similar to theirs.
20 Q. Have customers expressed any concerns about
21 the automated voice response unit?
22 A. Many customers are frustrated with the
23 complex and lengthy automated Voice Response Unit (VRU)
24 system that U S WEST uses to route calls to specific call
25 centers. Customers complained about the difficulty in
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11/26/96 Staff
1 determining which of the recorded options to select and
2 the lengthy, multi-layered option tree. U S WEST has
3 changed the pre-recorded messages for their general
4 business 800 number, and that seems to have helped
5 considerably in reducing the confusion about the options,
6 but customers still complain about the time it takes to
7 get to a representative.
8 U S WEST does not begin the clock, in terms
9 of timing whether a call is answered within 20 seconds,
10 until a call exits the VRU. Depending upon which options
11 are selected, callers may listen to options and sub-
12 options for more than a minute before that occurs. If
13 the timing began at the time of the first ring, which,
14 from the consumer's viewpoint is the more appropriate
15 point, very few, if any, of U S WEST's customer's calls
16 would be considered "answered" within 20 seconds.
17 Q. Do the improvements in access and repair
18 and the stabilizing of the number of held order
19 investigations indicate that the Company has solved its
20 customer service problems?
21 A. No. The Company might be able to
22 legitimately claim the rate of decline has slowed, but
23 the level of service it is currently providing is far
24 from acceptable. It is like the medical patient whose
25 hemorrhaging has stopped, but whose overall condition
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11/26/96 Staff
1 remains critical.
2 Schedule 13 of Staff Exhibit No. 120 shows
3 the number of investigations by month. There is
4 considerable variation from month to month, making it
5 very difficult to identify trends. This same degree of
6 variation was evident in the Company's BSM reports. The
7 peak months for 1996 were not as high as the peak months
8 in 1995, but even the lowest months for 1996 are well
9 above the highest months from just a few years ago.
10 Service levels would need to improve to the same levels
11 provided by other companies today, and that provided by
12 this Company prior to 1991, and remain at those levels
13 long enough to make sure it is not just a cyclic
14 variation, in order for the problem to be declared
15 solved.
16 Q. What general conclusions about the
17 Company's overall quality of service do you draw from all
18 of this information?
19 A. I believe this information demonstrates
20 that U S WEST is experiencing serious customer service
21 problems in their southern Idaho service area, and it has
22 failed to implement sufficient measures to resolve those
23 problems. The level of service currently being provided
24 by U S WEST is not acceptable.
25 Q. What do you propose that the Commission do
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11/26/96 Staff
1 to encourage the Company to improve its service quality
2 performance?
3 A. Staff recommends that U S WEST's poor
4 service performance be reflected by the Commission
5 selecting a lower return on equity (ROE) within the
6 reasonable range of returns. Staff witness Terri Carlock
7 discusses ROE in her testimony.
8 SERVICE QUALITY STANDARDS
9 Q. How do you propose the Company demonstrate
10 that it has returned service to an acceptable level?
11 A. Since the Commission has not established
12 service quality standards for the industry as a whole,
13 Staff proposes that the Commission use the service
14 quality standards recommended by the Regional Oversight
15 Committee (ROC)(Staff Exhibit No. 124), including Staff
16 recommendations for the state-specific variables, as
17 evidence that U S WEST's service quality has reached an
18 acceptable level, until the Commission adopts standards
19 that would apply to all local telephone service providers
20 in the state.
21 Q. Why do you recommend the ROC standards be
22 used as a determination that the Company is providing
23 quality service until the Commission has established
24 statewide standards?
25 A. These standards were developed through a
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USW-S-96-5 HART (Di) 44
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1 consensus process that involved input from commissions
2 and staff from all of the states in which U S WEST
3 provides service. They were developed to represent the
4 quality of service that consumers had come to expect
5 prior to the re-engineering efforts of the Company. It
6 represents performance levels that are achievable. It
7 has had the most thorough review by professionals within
8 the telecommunications field of any of the possible
9 standards of which Staff is aware.
10 Q. For how long would the Company be expected
11 to maintain service that meets or exceeds these standards
12 before they would be allowed to petition to have its
13 return on equity increased?
14 A. Staff recommends a full year. The demand
15 for the services that are proposed for measurement varies
16 considerably throughout the year, and experience has
17 shown that the Company can meet the requirements in the
18 slow months, and then fall behind again in the months
19 with higher demand. A full year of meeting the
20 requirements would more clearly demonstrate whether
21 performance is acceptable.
22 Q. Would the Company need to meet all the
23 criteria in the ROC standards to have its return
24 increased?
25 A. Yes. There is no reason consumers requiring
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11/26/96 Staff
1 one service should suffer reduced performance compared to
2 those requiring a different service. It is not
3 reasonable to accept any performance that is below the
4 levels identified in the ROC standards for any of the
5 items being measured.
6 Q. Why did you reject the Base Service
7 Measurement criteria included in Staff and Company's
8 Joint Motion for Acceptance of Regulatory Plan proposed,
9 and then withdrawn, in Case No. USW-S-95-4?
10 A. Those criteria do not identify a single
11 level of service that would be acceptable as a minimum,
12 but rather included a range of service levels and a
13 scoring system that recognized multiple levels of
14 improvement over a period of years. They were an
15 appropriate vehicle for promoting and recognizing
16 progress, which was the objective of those criteria, but
17 not for determining when the problem is resolved.
18 In addition, Staff agreed to those
19 measurements as part of an alternative regulation plan.
20 When viewed as an independent item, Staff does not
21 consider the criteria, or the information used to verify
22 compliance, to be acceptable.
23 Because these criteria are recommended for
24 use on an interim basis, until industry-wide standards
25 can be adopted by the Commission, I believe it is
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11/26/96 Staff
1 appropriate to require the Company to meet or exceed
2 standards that have been determined by telecommunications
3 experts in the 14 states served by U S WEST to be
4 reasonable and achievable.
5 Q. Does Staff have other recommendations for
6 dealing with the service quality issues?
7 A. Yes. In conjunction with development of a
8 new alternative regulation plan with Staff in Case No.
9 USW-S-95-4, the Company voluntarily implemented a
10 "Service Guarantee Program" that provides incentives to
11 consumers who have been negatively impacted by the
12 Company's failure to provide or restore service in a
13 timely manner. As a voluntary program, the Company can
14 alter or discontinue the program at any time.
15 For the most part, this program has been a
16 positive means of recognizing and mitigating the
17 inconvenience and damage customers incur because of the
18 Company's failures. Staff recommends that this program,
19 as modified with the suggestions below, be made mandatory
20 by the Commission.
21 Q. What shortcomings does the current program
22 have?
23 A. The option of a cellular phone voucher is
24 not provided until the order has been held for at least
25 30 days. The amount of the voucher, $105 for the first
1178
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11/26/96 Staff
1 month and $75 for subsequent months, does not cover the
2 typical consumer's costs. For most consumers, it is too
3 little too late.
4 The program U S WEST has implemented in New
5 Mexico provides the option of a cellular voucher after an
6 order has been held for five days, instead of 30 days,
7 and the amount of the voucher is $200 for the first month
8 and $150 for all subsequent months.
9 In Utah, Montana and most recently,
10 Washington, the Company provides the customer with
11 cellular service or a "loaner" cellular phone rather than
12 a voucher. The Company sought bids from cellular
13 providers, and the company submitting the winning bid
14 provides the cellular service. The customer pays the
15 normal U S WEST service charges, and U S WEST pays the
16 bill for the cellular phone usage.
17 Staff recommends that either a cellular
18 voucher in the amount of $200 for the first month and
19 $150 for each subsequent month or a cellular "loaner"
20 program similar to that in effect in Montana and Utah be
21 provided to the customer if primary line service is not
22 provided within seven days of the date that service is
23 ordered, which would be five days from the date service
24 would be installed if the Company met the standard two-
25 day interval, or is delayed five days from the date that
1179
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11/26/96 Staff
1 the customer requests service be provided. A date
2 accepted by the customer because that is the earliest
3 date offered by the Company would not be considered a
4 customer requested date.
5 In addition, the option of voice messaging
6 service is not included in the voluntary program, but it
7 is provided in other states, and was included in the
8 program Staff accepted in Staff and Company's Joint
9 Motion for Acceptance of Regulatory Plan proposed in Case
10 No. USW-S-95-4. Voice messaging service is especially
11 important in areas where cellular service is not
12 available. Staff recommends this option be included in
13 Idaho.
14 For those customers who do not want
15 cellular service or do not live in areas where cellular
16 service is not available, the voluntary program provides
17 a credit equal to the recurring charge for basic service
18 for each month the service is not provided. This is not
19 sufficient. In New Mexico this has been increased to
20 twice the recurring charge, which comes closer to
21 compensating the customer for the inconvenience and
22 trouble of delayed service, and Staff recommends that
23 this level be required in Idaho as well. This credit
24 would be provided to all customers except those receiving
25 the cellular option. It would apply to both primary and
1180
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11/26/96 Staff
1 additional lines.
2 In addition, the voluntary program does not
3 provide any customer with any alternatives until the
4 order has been held for facilities for five days. Staff
5 recommends that the telephone number, directory listing,
6 remote call forwarding, and a toll calling card be
7 provided as soon as the order is delayed beyond the two-
8 day service interval, rather than waiting till it has
9 been held for facilities for five days. Credit for the
10 installation charges and voice messaging service should
11 be provided if service is not provided on the due date or
12 within seven days of the date the service was ordered if
13 the customer is not offered a due date within seven days
14 of the date the service is ordered.
15 The voluntary program only applies to orders
16 for primary service. Orders for second or additional
17 lines are not covered. Staff believes such an exclusion
18 is only appropriate for the cellular voucher or "loaner"
19 options. Staff recommends that all of the other credits
20 and compensations provided in the Service Guarantee
21 Program be applied to all orders for service, regardless
22 of whether the service is for primary or additional
23 lines.
24 A comparison of the current voluntary
25 program with Staff recommendations for the Service
1181
USW-S-96-5 HART (Di) 50
11/26/96 Staff
1 Guarantee Program is attached as Staff Exhibit No. 125.
2 Q. Does Staff have a recommendation for Title
3 62 customers?
4 A. Title 62 customers are also entitled to
5 quality service, and based upon the information obtained
6 from Title 62 customers that have contacted the
7 Commission, as well as information provided by the
8 Company, Title 62 customers have shared in the
9 inconvenience, frustration and problems caused by
10 deterioration of U S WEST's service quality.
11 However, Staff does not intend to present
12 arguments for jurisdiction in this issue for Title 62
13 customers at this time, and simply recommends that the
14 Commission encourage the Company to adopt a voluntary
15 service guarantee program for those customers.
16 Q. Does Staff recommend any changes regarding
17 the Service Guarantee Program for repair-related
18 problems?
19 A. Under the voluntary program now in place,
20 compensation is available under three circumstances:
21 failure to fix the problem the first time; missed repair
22 appointments; and trouble occurring within a specific
23 period of time after installation of service.
24 However, when the program was initially
25 described to the Commission, the customer was only
1182
USW-S-96-5 HART (Di) 51
11/26/96 Staff
1 required to call U S WEST and notify them of the missed
2 commitment to repair or install service or failure to fix
3 the problem in order to receive a credit. However, when
4 the program was implemented, the Company modified this to
5 require the customer to specifically request the credit
6 in order to receive it. In spite of repeated assurances
7 to Staff from the Company that this would not be the
8 case, the investigation records contain numerous
9 instances where credits for missed repair commitments
10 were not provided until Staff requested that such credits
11 be provided to the customer. The credits are clearly not
12 being provided as the Commission understood. The credit
13 should be provided automatically to any customer who
14 experiences a missed commitment or failure to repair,
15 whether or not the customer calls to request the credit.
16 Credits should be provided automatically to every
17 customer who experiences a missed commitment regardless
18 of whether they call to report the missed commitment.
19 Credits to customers who experience repeat repair visits
20 could be limited to those who report that the problem has
21 not been fixed.
22 Q. Is compliance with Commission Rule 503
23 IDAPA 31.41.01.503.01(b) also a part of both the current
24 and recommended program?
25 A. Yes, it is. Although USW is already
1183
USW-S-96-5 HART (Di) 52
11/26/96 Staff
1 required to comply with this part of Commission Rule 503,
2 the standards and associated customer credits contained
3 in this rule were incorporated into the Service Guarantee
4 Program.
5 Q. Are the credit amounts provided under the
6 Service Guarantee Program reasonable?
7 A. The amounts provided in the Company's
8 voluntary program are within the range of reasonableness,
9 with the $10.00 residential customer credit for missed
10 installation and repair commitments, repeat repair
11 problems, or repair problems shortly after installation
12 being at the low end of that range. Staff recommends
13 that the amount be increased to $20 for the residential
14 credits, which would be one-half of the credit provided
15 to business customers.
16 Q. Are there other actions that you propose?
17 A. Yes, based upon information provided to
18 Staff by U S WEST, the Company failed to collect $72,578
19 in revenues for the monthly service charges from those
20 orders that involved missed commitments in the 10 months
21 from November 1995 through August 1996. The Company
22 would have collected this amount if the services had been
23 installed within the normal two-day interval. Staff
24 recommends that the revenues for the 1995 test year be
25 increased by $90,723 of imputed revenue, to adjust for
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USW-S-96-5 HART (Di) 53
11/26/96 Staff
1 this lost revenue. This amount was determined by
2 annualizing the 10 month value. ($72,578 divided by 10,
3 then multiplied by 12).
4 In addition, in response to a request from
5 Staff, the Company indicated it had provided, in
6 accordance with the Service Guarantee Program, credits
7 for both the non-recurring installation charges and the
8 recurring charges for basic local service in November and
9 December 1995. Staff recommends that the costs of these
10 credits, which Staff calculate to be $20,944, be imputed
11 to Title 61 revenue. Staff Exhibit No. 101, presented by
12 Staff witness Lansing, includes both of these
13 adjustments.
14 These expenses are not normal business
15 expenses, and would not have been necessary had the
16 Company provided the requested service in a timely and
17 appropriate manner. Title 61 customers should not bear
18 the costs of programs made necessary by the Company's
19 failure to provide adequate service.
20 In addition, the Company should be directed
21 to account for all future expenses and credits provided
22 under the service guarantee program, or any successor
23 program, in such a way that the costs for such a program
24 can be readily determined.
25
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USW-S-96-5 HART (Di) 54
11/26/96 Staff
1 Q. Does Staff have recommendations about other
2 elements of the Company's tariff?
3 A. Yes. Staff believes that the toll
4 restriction service currently provided by the Company as
5 a Title 62 service, (Section 10.4.4 of the Exchange and
6 Network Services Catalog) is a variation of the blocking
7 services provided as a Title 61 service at the time the
8 Company elected to be partially deregulated. (See Staff
9 Exhibit No. 126). Therefore, Staff recommends that this
10 service be included in the Title 61 tariff.
11 Staff opposes the collection of a recurring
12 fee for this service. Toll restricted service is
13 typically chosen by consumers as an alternative to paying
14 a deposit. Many customers choosing this option are on
15 limited incomes and simply making the monthly payment is
16 a real burden. To impose a relatively high ($2.00)
17 recurring fee that cannot be supported by the costs the
18 Company incurs to provide this service only increases
19 this burden.
20 Staff recommends that a non-recurring,
21 Service and Equipment charge of $6.00 be imposed at the
22 establishment of Toll Restriction, but that no recurring
23 fee be imposed.
24 ZONE CONNECTION CHARGES/MAPS
25 Q. What are you recommending with regard to the
1186
USW-S-96-5 HART (Di) 55
11/26/96 Staff
1 rural zone connection charges?
2 A. Although the recurring zone charges were
3 eliminated in Case No. USW-S-96-4, a non-recurring
4 charge, called the Zone Connection Charge is still
5 imposed at the time of the initial installation of
6 service for customers outside of the Base Rate Area.
7 Staff understands the rationale for this fee, and does
8 not necessarily oppose such charges for installations
9 that actually are more expensive to provide.
10 However, the zone maps have not been updated
11 in a number of years. Many are more than a decade old.
12 There have been numerous changes in that time, and many
13 of the areas that are indicated as rural and outside of
14 the Base Rate Area, and, therefore, subject to additional
15 zone charges at the time of installation, are now within
16 the urban areas. The Columbia Village development
17 southeast of Boise is an example of such an area.
18 Q. Have the outdated maps led to problems?
19 A. Staff is aware of isolated instances where
20 zone connection charges have not been collected from all
21 residents of the same subdivision equitably, with some
22 customers being under-charged, while others were charged
23 the appropriate fees. Outdated maps tend to enhance the
24 probability of such occurrences. The Company claimed it
25 did not collect, and therefore could not provide without
1187
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11/26/96 Staff
1 performing an expensive and time-consuming special study,
2 the information Staff requested in order to fully
3 investigate this issue.
4 Staff made an informal inquiry of the
5 Company about updating the zone maps, and the Company's
6 response was that updating the maps would be time-
7 consuming and expensive, and so was not worth the effort.
8 Staff believes that collecting zone connection charges
9 based upon out-of-date maps leads to inequalities and
10 discriminatory practices, and is not acceptable. Staff
11 recommends that the Company be directed to either update
12 the maps, or stop collecting the zone connection charges.
13 As an alternative, the Company could
14 propose a variable hook-up charge which is based upon the
15 distance to the nearest feeder. Such a charge would be
16 similar to the hook-up fees now charged by a number of
17 utilities in Idaho. It is a concept with which most
18 customers are familiar, and distributes the costs of
19 rural service more equitably among new customers.
20 SPECIAL CONSTRUCTION CHARGES
21 Q. Are there other charges that Staff suspects
22 are not being imposed equitably?
23 A. An increasing number of the investigations
24 contain references to special construction charges that
25 have been imposed in accordance with the provisions of
1188
USW-S-96-5 HART (Di) 57
11/26/96 Staff
1 the Basic Local Exchanges Tariff, Section 4, Paragraph
2 Nos. 4.6.A and C for southern Idaho. This section allows
3 the Company to impose additional fees at the time of
4 installation to address "unusual conditions".
5 Customers have indicated that they are
6 being required to pay such charges now under the same
7 circumstances that they did not incur such charges in the
8 past. Staff was not aware of the Company imposing such
9 charges until recently. Based upon the Company's
10 response to Staff's request for such information, the
11 amount collected from such charges went from $56,208 in
12 1995, to over $120,357 January through August 1996.
13 It appears that the Company is imposing
14 such charges on an increasing basis, and may not be doing
15 so in an equitable manner. The Company has not
16 established clear and consistent guidelines for imposing
17 such fees and the actual wording of the tariff leaves an
18 immense amount of room for interpretation.
19 Staff recommends that the Company be
20 directed to amend this tariff section to establish clear
21 and consistent guidelines for collecting such charges.
22 Q. What are your recommendations for measured
23 service?
24 A. As a result of one of our investigations,
25 U S WEST informed Staff that it was not enforcing the
1189
USW-S-96-5 HART (Di) 58
11/26/96 Staff
1 tariff restrictions against a customer receiving both
2 measured and flat rate service at the same residence or
3 place of business. Company officials indicated that
4 determining whether a location was a single place of
5 business became so complex that the tariff restriction
6 was nearly impossible to enforce.
7 Staff understands the administrative
8 difficulties of enforcing the restrictions on mixing
9 measured and flat rate services, however, if the Company
10 finds a tariff provision to be unworkable, the Company
11 should amend the tariff rather than simply ignore it.
12 Staff recommends that the Company immediately change the
13 existing Tariff language to eliminate the restriction
14 against mixing flat and measured rates.
15 Q. Why was a restriction against mixing flat
16 and measured service put in the tariff?
17 A. The Company was concerned that customers
18 would use measured service lines for incoming,
19 traffic-intensive purposes. Outgoing traffic could then
20 be directed over flat rate lines. This application can
21 place a much higher than average load on the network, and
22 if paid for at measured service rates, at well below
23 average costs to the user. Although these concerns are
24 still legitimate, the inability of the Company to enforce
25 the tariff language makes it obsolete. The Company
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USW-S-96-5 HART (Di) 59
11/26/96 Staff
1 should be encouraged to think of other ways to address
2 this issue.
3 Q. Could you summarize the recommendations in
4 your testimony?
5 A. Based upon the service quality issues I
6 discuss, Staff witness Carlock recommends that the return
7 on equity used in the determination of the Company's
8 revenue requirement be adjusted to reflect U S WEST's
9 poor performance. This reduction would be in effect
10 until the Company has met or exceeded each of the minimum
11 service quality standards proposed by the ROC
12 (or standards adopted by the Commission for all providers
13 of local exchange service) for at least a full year.
14 Staff further recommends that the Service
15 Guarantee Program be modified and made mandatory. The
16 modified program would require the Company to provide all
17 customers requesting primary or secondary lines who do
18 not have service within two days of the date service is
19 ordered, with a reserved telephone number, a directory
20 listing, and, where appropriate, a toll calling card. In
21 addition, customers who do not have service within seven
22 days of the date service was ordered would be offered
23 voice messaging service and a credit equal to two times
24 the recurring monthly charge for the service that was
25 ordered. For those customers experiencing a delay in
1191
USW-S-96-5 HART (Di) 60
11/26/96 Staff
1 installation of primary service, the choice of a cellular
2 phone alternative could be substituted for the credit of
3 twice the basic monthly service fee. The cellular
4 alternative could be either a "loaner" cellular phone,
5 with air time paid by the Company, or a voucher of $200
6 for the first month, and $150 for all subsequent months.
7 For all orders in which the Company fails
8 to install the service by the commitment date, the
9 Company would provide a credit for the installation
10 charge. In addition, for each commitment date missed by
11 the Company, the customer would receive a credit in the
12 amount of $20 for residences and $40 for businesses.
13 The Company would automatically provide a
14 credit in the amount of $20 for residences and $40 for
15 businesses for each missed repair commitment, and/or each
16 repeat visit for the same type of problem.
17 I recommend the Company's 1995 test-year
18 revenues would be increased by $90,723 of imputed revenue
19 to account for revenues the Company would have collected
20 if delayed orders had been installed in a timely manner.
21 Likewise, $20,944 in credits provided in 1995 under the
22 Service Guarantee Program would be removed from the
23 authorized expenses.
24 I recommend Toll Restriction service
25 currently provided as a Title 62 service be reclassified
1192
USW-S-96-5 HART (Di) 61
11/26/96 Staff
1 as a Title 61 service, and the monthly recurring charges
2 for providing this service be eliminated. The Company
3 would be authorized to collect a non-recurring charge of
4 $6 at the time the service is installed.
5 I recommend the Company be required to
6 either update its rural zone maps or stop collecting
7 rural zone connection fees.
8 I recommend the Company be required to
9 revise the tariff section providing for special
10 construction charges to establish clear and consistent
11 guidelines for collecting such charges.
12 I recommend that the tariff provision
13 prohibiting mixing flat rate and measured service be
14 eliminated
15 Q. Does this conclude your direct testimony in
16 this proceeding?
17 A. Yes, it does.
18
19
20
21
22
23
24
25
1193
USW-S-96-5 HART (Di) 62
11/26/96 Staff
1 Q. Please state your name and address for the
2 record.
3 A. My name is Wayne Hart and my business
4 address is 472 West Washington Street, Boise, Idaho.
5 Q. By whom are you employed and in what
6 capacity?
7 A. I am employed by the Idaho Public Utilities
8 Commission as a Telecommunications Analyst.
9 Q. Are you the same Wayne Hart who previously
10 filed Direct Testimony in this proceeding?
11 A. Yes, I am.
12 Q. What is the purpose of this Surrebuttal
13 Testimony?
14 A. I address issues raised by U S WEST witness
15 John Souba in his Rebuttal Testimony regarding service
16 quality, zone connection charges and toll-restricted
17 services.
18 I. SERVICE QUALITY
19 Q. Mr. Souba claimed in his Rebuttal Testimony
20 that the Company's service is improving and that things
21 are not as bad as you indicated in your Direct Testimony.
22 Do you agree with the conclusions drawn by Mr. Souba?
23 A. No. I believe that the evidence presented
24 in my Direct Testimony, as well as the updated
25 information in my Revised Schedule 3 of Exhibit No. 120
1194
USW-S-96-5 HART (Surr) 1
02/21/97 Staff
1 clearly demonstrates that the overall service quality of
2 U S WEST has deteriorated and that it will need to
3 improve significantly before it will be at levels
4 acceptable to the public and this Commission.
5 Q. On page 10 of his Rebuttal Testimony, Mr.
6 Souba claimed that the number of complaints cited in your
7 Direct Testimony represents only 1/4 of 1% of all
8 customers. Is this enough to be of concern to the
9 Commission?
10 A. It certainly is. As I indicated in my
11 Direct Testimony, complaints that reach a third party,
12 such as the Commission, are only the tip of the iceberg.
13 For every customer who makes the extra effort to contact
14 the Commission about a problem, there are many more
15 customers experiencing the same problem. Moreover, as
16 explained more fully by Staff witness Cooper in her
17 Surrebuttal Testimony, the Commission's complaint numbers
18 understate the incidence of problems. It is also
19 important to note that customers from throughout the
20 Company's service area are contacting the Commission
21 about a wide range of problems.
22 In addition, my Direct Testimony focused on
23 trends and comparisons with past performance and that of
24 other utilities. When the number of consumers contacting
25 the Commission about a company or a specific problem
1195
USW-S-96-5 HART (Surr) 2
02/21/97 Staff
1 doubles in two years, as it has with U S WEST, that is a
2 clear indication that something is wrong. When that
3 number, on a per-customer basis, is nearly two or three
4 times higher than other utilities, especially other
5 telephone utilities, the evidence is overwhelming.
6 There has been a fairly steady pattern of
7 increase. The pattern of increasing complaints indicates
8 severe problems that pervade nearly all of the Company's
9 operations.
10 II. COMMISSION COMPLAINTS
11 Q. Mr. Souba implies on pages 4 and 5 that
12 complaints are not indicative of Company performance. Do
13 you agree?
14 A. No. Complaints do not materialize out of
15 thin air. They represent real customers with real
16 concerns. Customers contacting the PUC are not only
17 dissatisfied with the Company's original action or
18 inaction. The Commission does not accept complaints from
19 customers unless they indicate they have already
20 attempted to resolve their dispute directly with the
21 company involved. Complaints filed with the Commission
22 also represent the failure of a company to respond to
23 customer complaints in a satisfactory manner. If Mr.
24 Souba's comments accurately represent the views of
25 U S WEST, then the Company does not view customer
1196
USW-S-96-5 HART (Surr) 3
02/21/97 Staff
1 complaints, particularly those filed with the Commission,
2 as presenting opportunities for the Company to improve
3 its performance and prevent similar problems from
4 occurring in the future. Failure to fix the problem
5 dooms the Company to repeat its mistakes, causing more
6 complaints.
7 Q. On page 10 of his Rebuttal Testimony, Mr.
8 Souba claimed that all the negative publicity about the
9 Company's problems has increased customer expectations,
10 and that is the reason more customers are contacting the
11 Commission. Do you believe this has any merit?
12 A. To the extent that customers were unaware
13 that they could contact the Commission about a problem,
14 the publicity may have made them aware of that option,
15 and may have caused some customers to contact the
16 Commission who might otherwise not have done so.
17 However, I believe that customers' expectations were
18 lowered, not raised, as a result of the negative
19 publicity as well as the inevitable sharing of personal
20 stories about actual experiences with U S WEST.
21 For example, for most Idaho telephone
22 utilities, and for U S WEST prior to 1992, customers call
23 the Commission if their service has been delayed by a
24 couple of days. Now, many U S WEST customers do not
25 contact the Commission until their orders have been
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USW-S-96-5 HART (Surr) 4
02/21/97 Staff
1 delayed for weeks and sometimes months. U S WEST
2 customers with held orders often comment that they were
3 aware of the Company's problems and therefore placed
4 their order for service well in advance of the desired
5 installation date, yet the Company still could not meet
6 their needs. Customers who might have called the
7 Commission about a delay of a few days now realize this
8 is not unusual for U S WEST. I believe the net impact of
9 all the publicity has been a reduction in the number of
10 calls the Commission might otherwise have received.
11 Q. The Company claims that things are
12 improving. Does your evidence support such a
13 conclusion?
14 A. No. The number of complaints continued to
15 rise in 1996, including the fourth quarter. As one can
16 tell from looking at the Revised Schedule 3 of Exhibit
17 No. 120, the overall number of investigated complaints
18 continued to increase in 1996. In particular, there were
19 increases in held orders, billing and disconnection
20 related investigations.
21 Q. On page 6, Mr. Souba claims that the growth
22 in the number of lines the Company serves is responsible
23 for the growth in the number of complaints. Is this an
24 adequate explanation.
25 A. No. As I indicated in my Direct Testimony,
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USW-S-96-5 HART (Surr) 5
02/21/97 Staff
1 the growth in complaints has been significantly greater
2 than the growth in the number of lines in the Company's
3 Southern Idaho service territory. In addition, if that
4 assertion was valid, we would have seen a similar growth
5 in the number of complaints for GTE, which actually
6 realized a greater percentage growth in the number of
7 lines than did U S WEST. However, GTE did not have a
8 similar increase in complaints.
9 III. U S WEST's BASIC SERVICE MEASUREMENTS (BSMs)
10 Q. On page 14, Mr. Souba maintains that the
11 Company's improvement in the overall score of the BSM
12 matrix proposed in Case No. USW-S-95-4 demonstrates that
13 the Company is improving. Do you agree?
14 A. No. As I indicated in my Direct Testimony,
15 I have significant concerns about the BSM criteria, both
16 in terms of how it measures performance, and the level
17 that the Company claims is adequate.
18 As can be seen by the Revised Schedules 1
19 through 5 of Staff Exhibit No. 122, which have been
20 updated to include the data provided by the Company for
21 the last three months of 1996, the variation from month
22 to month or season to season for most of these indicators
23 is just too great to allow for definitive conclusions.
24 If one looks at the last two months of 1996, every
25 indicator except for held orders and provisioning
1199
USW-S-96-5 HART (Surr) 6
02/21/97 Staff
1 commitments is headed in the wrong direction.
2 There have been improvements in some areas.
3 When examined on an annual basis, it is clear that held
4 orders did not climb as high during the busy months of
5 1996 as they did in 1995, and the number was lower at the
6 end of 1996 than at any other time in the two-year span.
7 The data for repair commitments kept is generally better
8 for 1996 than in 1995.
9 For other areas, there is no evidence of
10 improvement. The data for provisioning or installation
11 appointments offered shows a continuing decline. One
12 possible explanation for this decline is that the Company
13 is meeting its out-of-service repair requirements by
14 deferring installations.
15 Q. On pages 12 through 14 of his Rebuttal
16 Testimony, Mr. Souba refers to the matrix that was
17 developed in Case No. USW-S-96-4 and indicates that the
18 Company achieved an overall score of 90.5 for October.
19 Does that not show that the Company has made significant
20 progress in addressing service quality concerns?
21 A. No. Individual scores can be very
22 misleading. For example, while the Company did not
23 provide sufficient data to allow me to calculate an exact
24 score, my estimate of the score for December is 71, which
25 is about the same as the June 1995 score reported by
1200
USW-S-96-5 HART (Surr) 7
02/21/97 Staff
1 Mr. Souba on page 13. One needs to look at more than one
2 month's score to determine a trend.
3 Calculation of an annual average for 1996
4 shows there has been some improvement over 1995, but it
5 is far from the rosy picture painted by Mr. Souba. I
6 calculate a score of only 82 for the annual average for
7 1996, which is still well below the targets identified in
8 the settlement proposed in that case.
9 Q. What concerns do you have about the
10 Company's BSM criteria?
11 A. They are vulnerable to manipulation and
12 inaccuracy. For example, the held order number is a
13 snapshot of the number of held orders as of the last day
14 of the month. It is possible, and even likely when
15 employee performance is evaluated by these same criteria,
16 that employees might concentrate their efforts on
17 reducing held orders during the last few days of the
18 month. This would result in a count on the one day the
19 snapshot is taken that is not reflective of the month as
20 a whole. During the rest of the month, a priority could
21 be given to completing repairs within the 24-hour
22 deadline in order to meet the requirements of Rule 503.
23 Just as we all tend to focus more on
24 deadlines, any measuring criteria that focuses on a
25 single point in a month is likely not to be
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USW-S-96-5 HART (Surr) 8
02/21/97 Staff
1 representative of the month as a whole. This is
2 especially important when the other criteria are measured
3 on an average basis, as it encourages an artificial focus
4 on one problem in one time frame and then another problem
5 in another time frame, rather than a balanced approach
6 throughout the month.
7 Q. What about the other BSM criteria?
8 A. I identified specific concerns about the
9 access data and commitments-kept criteria in my Direct
10 Testimony, and the Staff's Audit report identified
11 concerns with other measurements.
12 Q. What are your concerns about the specific
13 goals or target levels identified by the Company's BSMs.
14 A. I believe they are too low, especially with
15 the deficiencies in the manner in which they are
16 measured. The Company could be meeting all of its BSMs
17 and still be providing service that is not acceptable.
18 Q. What about Mr. Souba's claim on page 4 and
19 again on page 22, that the BSMs are based upon customer
20 surveys and therefore "customer driven"?
21 A. That claim requires a bit of a leap in
22 logic. Based on its research, the Company simply
23 developed statements about what customers wanted. Those
24 statements, as identified in the Company's response to
25 Staff Production Request No. 431 are:
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USW-S-96-5 HART (Surr) 9
02/21/97 Staff
1 1) Make it fast and easy for me to
reach someone who can help.
2
2) Do what you say you are going to
3 do, when you say you'll do it.
4 3) Give me telephone service that
doesn't fail, and
5
4) In those rare situations when there
6 is a problem, fix it fast.
7 The BSMs are measurement criteria developed
8 internally by the Company, using some of the same sources
9 of data as the ROC criteria. For example, both ROC and
10 the BSMs have criteria for the number of held orders.
11 The difference is how many held orders represents
12 acceptable service. Mr. Souba's inference that consumers
13 had any role in defining the number of held orders the
14 Company claims is acceptable is not supported by the
15 evidence the Company has provided.
16 Because the ROC criteria is based upon input
17 from the Consumer Staff from the Commission's from all 14
18 states, staff who work with consumers on a daily basis,
19 it is probably a more "external, customer driven"
20 indicator of the level of service consumers would
21 consider to be adequate.
22 Q. On page 13 of his Rebuttal Testimony, Mr.
23 Souba cites testimony of Staff in Case USW-S-95-4 in
24 support of the BSMs. Is that an accurate representation
25 of the Staff's position on the BSMs as an indicator of
1203
USW-S-96-5 HART (Surr) 10
02/21/97 Staff
1 overall customer service quality?
2 A. No. Those comments are quoted out of
3 context. Staff witness Miller, on page 6 of her Direct
4 Testimony, identified Staff's concerns about the BSMs and
5 explained that Staff had agreed to their use in that case
6 as part of the give and take of a compromise.
7 Q. Are you satisfied that the
service quality standards
8 that have been accepted by
U S WEST in this case consti-
9 tute outstanding service
quality?
10
A. Frankly, I am not. I would
11 have preferred the standards
developed by the U S WEST
12 Regional Oversight Committee
(ROC). The ROC standards
13 more closely represent the
high quality of service the
14 Company's customers had come
to rely upon in the past. Un-
15 fortunately, I think it is un-
likely the Company would be
16 able to attain those standards
in the short term given the
17 current level of performance.
I expect the Company will begin
18 the improvement process under
the plan. I hope it will con-
19 tinue to improve beyond the
limited term of the plan.
20
21 It is clear that Staff witness Miller
22 viewed the service quality levels identified in the Plan
23 as a beginning and a step in the right direction for the
24 Company, but not an indication of satisfactory service
25 quality.
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USW-S-96-5 HART (Surr) 11
02/21/97 Staff
1 IV. PAST PERFORMANCE/FUTURE RATES
2 Q. On pages 3 and 4 of his Rebuttal Testimony,
3 Mr. Souba indicated that because the ratemaking process
4 establishes rates that will be in effect in the future,
5 it is inappropriate to consider past service quality
6 performance. Do you agree?
7 A. No. There is ample precedent for
8 recognizing past performance in the establishment of
9 rates that will apply to the future at this Commission
10 and other State Commissions as well. Even Mr. Souba
11 agrees on page 33, lines 1 through 3, that the Commission
12 has the authority to recognize past performance in the
13 ratemaking process.
14 V. PERFORMANCE JUDGED SOLELY ON RULE VIOLATIONS
15 Q. On page 9, Mr. Souba claims that since the
16 Company is currently in compliance with Rule 503, which
17 deals with service quality, the adjustment in the rate of
18 return that you recommended is unjustified. Do you
19 agree?
20 A. No. Judging the Company's overall
21 performance by a single criterion would be inappropriate.
22 Doing so would provide incentive for the Company to
23 direct its resources to that one area of measurement and
24 ignore all other areas.
25 Q. Mr. Souba implies that the Commission cannot
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USW-S-96-5 HART (Surr) 12
02/21/97 Staff
1 judge the Company's performance without the use of
2 uniform performance standards applicable to all
3 telecommunications utilities. Do you agree?
4 A. No. The absence of such explicit criteria
5 does not mean that the Commission is prohibited from
6 judging what may reasonably be expected of a utility.
7 The Commission historically has considered performance
8 along with other factors in determining the appropriate
9 rate of return for utilities.
10 This Commission did not confine itself to
11 rule violations as criteria for measuring customer
12 service when it recognized both poor and good customer
13 service in previous cases.
14 Q. In a number of locations in his Rebuttal
15 Testimony, Mr. Souba referred to the adjustment in the
16 allowed rate of return as a penalty. Is this accurate?
17 A. No, particularly in the context in which he
18 uses it on page 5, where he refers to violations of rules
19 that have been adopted by the Commission. In selecting a
20 rate of return on equity that is at the lower end of the
21 reasonable range of returns, the Commission is simply
22 recognizing that the Company's service needs improvement.
23 VI. IMPOSING ROC STANDARDS ON U S WEST
24 Q. Mr. Souba objects to your recommendation
25 regarding the ROC standards, claiming that it is unfair
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USW-S-96-5 HART (Surr) 13
02/21/97 Staff
1 to impose such standards on U S WEST and not the other
2 local exchange carriers. Is this an accurate portrayal
3 of your recommendation?
4 A. No. I am not recommending the imposition
5 of standards solely on U S WEST. I recommend that the
6 criteria contained in the ROC standards be used as the
7 measuring stick for determining when the Company's
8 service quality has improved sufficiently that the rate
9 of return should be reviewed.
10 Q. On page 23 of his Rebuttal Testimony, Mr.
11 Souba indicates that your recommendations that the
12 Company meet the ROC criteria for twelve consecutive
13 months in order to have the rate of return reviewed would
14 put the Company in a position where it would "fall victim
15 to snow storms, flooding, earthquakes, and other natural
16 consequences of being resident in the northwest United
17 States." Is this your intent?
18 A. No. Language that recognizes such "acts of
19 God" and other circumstances outside of the Company's
20 control, similar to that included in Rule 305, should be
21 included.
22 VII. SERVICE GUARANTEE PROGRAM
23 Q. Mr. Souba indicated the Company would agree
24 to significant changes to the Company's Service Guarantee
25 Plan. Please discuss those changes.
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USW-S-96-5 HART (Surr) 14
02/21/97 Staff
1 A. Yes, the Company did agree to significant
2 changes in the Service Guarantee Plan, which the Staff is
3 pleased to recognize. The amount of the cellular voucher
4 will be increased to $200 for the first month, and $150
5 for all subsequent months. Customers would qualify for
6 the voucher after their order has been held for five
7 instead of thirty days. In addition, the Company would
8 provide Voice Messaging Service, which was not provided
9 before, as well as the telephone number, directory
10 listing, remote call forwarding and a toll calling card
11 as soon as the order is delayed for facilities beyond the
12 normal two-day service interval. For customers living in
13 areas where cellular service is not available, the
14 Company will provide a credit of two times the recurring
15 monthly charge for local exchange service for each month
16 the order is delayed for facilities.
17 Staff agrees with these changes and points
18 out that even though U S WEST has agreed to make these
19 changes, their insistence that the program remain
20 voluntary provides them with the ability to change any of
21 these elements at any time in the future if it chooses to
22 do so.
23 Q. Do you accept the Company's position that
24 the Service Guarantee Plan only apply to primary lines?
25 A. No. The Company refuses to extend the
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USW-S-96-5 HART (Surr) 15
02/21/97 Staff
1 Service Guarantee Plan to secondary lines, indicating
2 that since such customers already have communication
3 capability, "plan features would be far less useful" and
4 "make little sense". I agree that for the cellular
5 options, which are considerably more costly for the
6 Company to provide, such an exclusion has merit.
7 However, for the other elements of the Service Guarantee
8 Plan, Staff does not believe an exclusion of secondary
9 lines is appropriate. Customers whose secondary lines
10 are delayed experience many of the same problems and
11 inconveniences as those whose primary lines are delayed.
12 This is especially true for small businesses, that have
13 made a business decision to add extra lines because of
14 the financial value to the business of such lines.
15 Delays in providing these lines often mean lost revenues,
16 as well as decreased productivity. All of the elements
17 of the Service Guarantee Program, except the cellular
18 options, should be extended to secondary lines as well.
19 Q. Does Staff believe a cellular loaner option
20 is still appropriate?
21 A. Staff believes that the option of a cellular
22 loaner program would be advantageous to many consumers.
23 Handing consumers whose order for primary service has
24 been held for facilities for five days a cellular
25 telephone that they can use until service is provided is
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USW-S-96-5 HART (Surr) 16
02/21/97 Staff
1 simple and insulates the customer from the bureaucracy of
2 the voucher option. Experience in those states in which
3 the Company provides this option has shown that the
4 overwhelming majority of customers prefer this option.
5 Consumers in Washington, Utah and Montana have this
6 option. I believe it should be available to Idaho
7 consumers as well.
8 Q. Does the Company's expansion of the
9 recurring charge credits address all of your concerns in
10 this area?
11 A. No. The Company agreed to provide a credit
12 of two times the monthly recurring charge for those
13 customers living in areas where cellular service is not
14 available, but limits this credit to only one times the
15 monthly recurring charge if cellular service is available
16 if the customer chooses not to take the cellular voucher.
17 Staff believes this credit should be doubled for all
18 customers who do not take the cellular option, regardless
19 of the reason. Nearly all providers of cellular service
20 require that customers have a major credit card. In
21 addition, many require customers to sign long-term
22 contracts. Several customers with held orders have told
23 Staff that they are not able to take advantage of the
24 cellular program because of these requirements. They
25 should not be denied full compensation for their held
1210
USW-S-96-5 HART (Surr) 17
02/21/97 Staff
1 order because of these requirements.
2 Q. Are the Company's claims regarding the
3 automatic provision of repair credits sufficient
4 justification for limiting these credits to those that
5 request them?
6 A. No. The Company does not provide customers
7 who experience a repeat repair or missed repair
8 commitment with a credit unless the customer calls the
9 Company and specifically asks for this credit. The
10 Company claims that its process of providing such credits
11 is a labor intensive, manual process, and that providing
12 this credit automatically would involve a major expense.
13 This explanation contradicts the information provided to
14 Staff during the performance audit for Case No.
15 USW-S-95-4. Staff was told that a listing of customers
16 that qualify for these credits could be generated
17 automatically.
18 In response to Staff's Production Request
19 No. 44, the Company did not deny that such a list could
20 be easily obtained, and claimed that "very expensive
21 programming could be developed to automatically credit
22 repair customers through use of LMOS data to create
23 billing credits by interfacing with the billing system".
24 I do not believe customers should be forced
25 to jump through burdensome hoops in order to receive
1211
USW-S-96-5 HART (Surr) 18
02/21/97 Staff
1 credits for which they are eligible simply because
2 U S WEST's LMOS system cannot easily communicate with its
3 billing system. Eligible customers should not have to
4 take the extra step of requesting a credit in order to
5 receive one. The details of the process the Company uses
6 to provide such credits, and whether it is fully
7 computerized would be the Company's decision.
8 The Company has indicated that it can easily
9 identify the eligible customers. I recommend that the
10 Commission require that these credits be provided to all
11 eligible customers without requiring those customers to
12 specifically request them.
13 Q. Do you still recommend a doubling of the
14 residential customer credits?
15 A. Yes. The Company indicated that it is not
16 providing this amount in any other state, and saw no
17 reason to do so in Idaho. Staff believes that the $10
18 credit is simply inadequate compensation for the
19 inconvenience and hassle such customers experience.
20 Since the Company does not give the customer a time frame
21 of less than four hours for repair or installation
22 appointments, this is the minimum amount of time a
23 customer would devote to an appointment the Company
24 failed to keep. Twenty dollars would not even compensate
25 the customer for this time at minimum wage. While not
1212
USW-S-96-5 HART (Surr) 19
02/21/97 Staff
1 every missed commitment involves a no-show, too many of
2 them do. The customer deserves at least this much.
3 VIII. TOLL-RESTRICTED SERVICE
4 Q. On page 28, Mr. Souba claims that toll
5 restriction is not "two way interactive communication"
6 and is therefore not a Title 61 service. Do you agree
7 with this conclusion?
8 A. No. Toll-restriction is a condition that
9 prohibits out-bound calls from reaching the toll carrier.
10 If the Commission has jurisdiction over two-way
11 communications as a whole, then it surely has
12 jurisdiction over a telecommunication service that
13 permits or prohibits the "whole." In addition, the
14 Commission has exercised jurisdiction over 900/976 toll
15 blocking as a Title 61 service since U S WEST exercised
16 its notice to remove non-basic services to Title 62 in
17 March 1989. Order No. 22416 lists generic services that
18 remain subject to Title 61 regulation including:
19 7. Blocking access to 976 and 900
numbers (blocking all or none of
20 intra- and interstate information
services). Order No. 22416 at 7;
21 Staff Exhibit No. 126
22 Q. Has the Commission "approved" toll-
23 restricted service as a Title 62 service?
24 A. No. A Title 62 price list containing toll
25 restriction was "accepted for filing" as part of a pilot
1213
USW-S-96-5 HART (Surr) 20
02/21/97 Staff
1 program that allowed the Company to use commercial credit
2 screens. As the Commission stated in the Upper Valley
3 case (Case No. GNR-T-94-1), accepting Title 62 "price
4 lists for filing is a ministerial function that should
5 not and does not imply Commission approval of the service
6 or rates. The fact that our Staff accepted for filing
7 Upper Valley's price list neither explicitly or
8 implicitly indicates that we had previously approved of
9 Upper Valley's [service]." Order No. 25933 (Emphasis
10 added)
11 Q. Is the $20 one-time charge identified by
12 Mr. Souba for this service realistic?
13 A. I do not believe so. In response to
14 Staff's Production Request No. 444, the Company indicated
15 that the actual costs of providing this service are
16 approximately $5 to connect and $5 to disconnect, and
17 estimated an approximate cost of $0.50 per month for
18 on-going monthly expenses. The Company failed to
19 identify what, if any, services were provided to justify
20 the monthly expenses.
21 Q. Has the Federal-State Joint Board on
22 Universal Service made any recommendations on this issue?
23 A. Yes, in the Recommended Decision released on
24 November 8, 1996, the Joint Board recommended that "toll
25 blocking be provided without charge to low income
1214
USW-S-96-5 HART (Surr) 21
02/21/97 Staff
1 subscribers." (Footnote 197, page 37)
2 IX. ZONE CONNECTION CHARGES
3 Q. Do you agree with Mr. Souba's assertion on
4 page 30 of his Rebuttal Testimony that the only factor
5 that influences the cost of serving rural customers is
6 the distance to the central office?
7 A. No. That is clearly inaccurate, as the
8 Company admitted in their response to Staff's Production
9 Request No. 445, which stated:
10 These costs, for individual customers,
would be influenced by the loop
11 characteristics to reach the customer
(for example: one may be direct fed by
12 copper cable and the other served by
fiber to a hub location and then copper
13 distribution cable to the home) and the
type of service central office (one may
14 be a fifteen year old analog switch and
the other a one year old digital switch).
15
Density is a factor in the design of the
16 feeder to reach different sized clusters
of customers. Trenching cost is fixed
17 regardless of what size or type of cable
is placed in the trench. The material
18 cost for the type, gauge and size of
cable is variable based upon the density
19 of the lines which are projected in the
area to be served.
20
Trunk lines, which presumably would feed
21 a pair gain device, can reduce costs to
serve concentrations of customers,
22 particularly when reinforcing lines to a
particular area. By multiplexing exist-
23 ing lines and placement of a pair gain
device the Company can avoid expensive
24 trenching costs for additional feeder
cable all the way back to the central
25 office.
1215
USW-S-96-5 HART (Surr) 22
02/21/97 Staff
1 In response to Staff Production Request No.
2 446, the Company indicated the criteria for determining
3 whether an area is a Suburban Rate Area, in which new
4 customers would not be subject to a Zone Connection
5 Charge, was:
6 SRA - Suburban rate areas are
contiguous to the base rate
7 area and encompass population
concentration that are greater
8 than rural areas, but less
than the base rate area in terms
9 of density.
10 The Company's response also acknowledged
11 that a "generic base rate area review has not been
12 completed in over 10 years".
13 With the high rate of growth that a number
14 of the Company's witnesses have identified, it is clear
15 that there have been substantial changes in the
16 "population concentration" in many locations in many of
17 the exchanges served by the Company. The criteria used
18 by the Company to distinguish between areas in which a
19 customer would be subject to zone connection charges is
20 far from precise and involves considerable judgement.
21 When the data upon which that judgement is based is as
22 out of date as the Company has acknowledged, such
23 decisions can no longer be supported. New customers in
24 new subdivisions will be charged zone connection fees
25 that are no longer appropriate. I recommend that the
1216
USW-S-96-5 HART (Surr) 23
02/21/97 Staff
1 Company be required to update the zone maps if it wishes
2 to continue to impose such charges.
3 Q. Does this conclude your Surrebuttal
4 Testimony in this proceeding?
5 A. Yes, it does.
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
1217
USW-S-96-5 HART (Surr) 24
02/21/97 Staff
1 (The following proceedings were had in
2 open hearing.)
3 COMMISSIONER SMITH: I'm in doubt as to
4 what the status of something attached to his surrebuttal
5 called "Workpapers" is. Are we supposed to give this an
6 exhibit number or are we supposed to ignore it?
7 MS. HAMLIN: Commissioner, that was
8 inadvertently filed with the Commission.
9 COMMISSIONER SMITH: So strike that from
10 our books?
11 MS. HAMLIN: You can ignore that.
12 COMMISSIONER SMITH: Thank you.
13 MS. HAMLIN: With that, I offer Mr. Hart up
14 for cross-examination.
15 COMMISSIONER SMITH: All right. Any
16 questions, Mr. Harwood or Mr. Kutler?
17 MR. KUTLER: No questions.
18 COMMISSIONER SMITH: Mr. Phillips.
19 MR. PHILLIPS: No questions.
20 COMMISSIONER SMITH: Ms. Hobson.
21 MS. HOBSON: Madam Chairman, I do have
22 substantial cross for this witness that I will not be
23 able to complete before lunch. If you would like me to
24 start in, I'm ready to do that.
25 COMMISSIONER SMITH: Yes. Why don't we
1218
CSB REPORTING HART
Wilder, Idaho 83676 Staff
1 start and then we can break for lunch and come back,
2 unless you object.
3 MS. HOBSON: I don't object. I just wanted
4 to warn you.
5 COMMISSIONER SMITH: That's fine. We have
6 all day.
7
8 CROSS-EXAMINATION
9
10 BY MS. HOBSON:
11 Q Mr. Hart, as a general proposition, your
12 testimony about service quality presented in this case is
13 based upon your experience with customer contacts and
14 complaints; isn't that correct?
15 A Yes.
16 MS. HOBSON: Would you please hand the
17 witness the exhibits and pass them out?
18 Mr. Hart, you're being handed several
19 pieces of paper right now and I will in the course of
20 this cross-examination ask you to identify those, but
21 while they're being handed out to the rest of the
22 parties, you can go ahead and begin reviewing them.
23 (Documents being distributed.)
24 Q BY MS. HOBSON: Mr. Hart, you've been
25 handed what has previously been marked as U S WEST
1219
CSB REPORTING HART (X)
Wilder, Idaho 83676 Staff
1 Exhibits 50 and 51. I recognize you've been handed other
2 things as well.
3 COMMISSIONER SMITH: The pieces of paper I
4 have don't have exhibit numbers, so if you just want to
5 tell us which is which, we can add it on.
6 MS. HOBSON: Okay. The document entitled,
7 "U S WEST - Southern Idaho, Complaints/Comments/Inquiries,
8 Table 2R" is U S WEST Exhibit 50 and has been marked by
9 the court reporter and Table 3R is Exhibit 51.
10 COMMISSIONER SMITH: All right. We will
11 mark those documents as Exhibits 50 and 51.
12 (U S WEST Communications, Inc. Exhibit
13 Nos. 50 and 51 were marked for identification.)
14 Q BY MS. HOBSON: Mr. Hart, can you identify
15 those documents? And I will advise you that these are
16 charts we believe were provided by Staff in response to
17 Data Request No. 156 of U S WEST; is that correct?
18 A Yes. I can't verify that they're the exact
19 numbers, but I did prepare tables that look a lot like
20 that, so I'm assuming they are those.
21 Q Thank you. Mr. Hart, these exhibits that
22 you've been handed, in the fourth column down for the
23 years 1995 and '96, there has been a total written on the
24 chart, handwritten on the chart. Do you see those
25 numbers?
1220
CSB REPORTING HART (X)
Wilder, Idaho 83676 Staff
1 A Yes.
2 Q Those numbers were not on the Staff's data
3 response; isn't that correct?
4 A The handwritten numbers were not.
5 Q Okay, would you accept, subject to check,
6 that those are simple mathematical additions of the four
7 numbers that appear immediately above those totals?
8 A Subject to check, I would.
9 Q Thank you. Now, these exhibits provide
10 summaries of the tallies of customer contacts and
11 complaints and investigations that were conducted by
12 Staff; isn't that true?
13 A Yes.
14 Q And one of the points of your testimony is
15 that not all customers with a problem actually end up
16 complaining to the Commission Staff; isn't that true?
17 A Yes.
18 Q I direct your attention to page 8, line 10
19 of your testimony. Do you have that reference?
20 A Yes.
21 Q There you make the statement, "Staff
22 Exhibit No. 119 shows that of all those consumers who
23 experience a problem, only a portion of them will
24 perceive, or be aware of the problem." Is that your
25 testimony?
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CSB REPORTING HART (X)
Wilder, Idaho 83676 Staff
1 A Yes.
2 Q Does it follow from that that a large
3 portion of customers don't perceive or are not aware that
4 they have a problem?
5 A I think that will depend a little bit upon
6 the nature of the problem. I think that there can be
7 billing problems that customers may experience, that they
8 don't look at their bills close enough to know that they
9 have a problem. If they were expecting an order to be
10 delivered, service to be provided on a certain day, it's
11 a little more obvious that it wasn't provided, so I think
12 it depends a little bit on the nature of the problem, but
13 I think that in general there will be a population that
14 will experience a problem and will not notice it, will
15 not be aware of it.
16 Q And I'd like to limit the discussion right
17 now to what I would characterize as network facilities,
18 operational problems of that kind as opposed to billing
19 disputes and so on. Can we do that for purposes of this
20 discussion?
21 A Okay. Using that as an example, there
22 would be people who would have phone service that would
23 go out that would not know that it had gone out. Maybe
24 the Company would be aware of it because of other
25 neighbors who had also gone out. They would fix it
1222
CSB REPORTING HART (X)
Wilder, Idaho 83676 Staff
1 because of their complaint and the one customer would
2 never know it went out.
3 Q Are you suggesting that the Commission
4 should regulate service quality and potentially penalize
5 U S WEST based upon problems, and that is network
6 facilities-type problems, that customers aren't even
7 aware of?
8 A No, I'm not suggesting that they should
9 penalize them based on the problems that customers aren't
10 aware of. What I'm using that as an example to show is
11 that the universe of those who experience a problem is
12 much greater than those who actually contact the
13 Commission, and this is a table from a scientific study
14 that identified and showed the steps in complaint
15 handling and complaint resolution and identified that
16 there is a significant population or portion of those
17 people who experience a problem who don't really know it.
18 Q But you agree with me, do you not, that for
19 purposes of exacting penalties from a utility that you're
20 not concerned about those customers that have apparently
21 had in some sense a network facilities problem but been
22 unaware of it?
23 A No, I won't say I'm not concerned. Any
24 time that a customer experiences a problem, that should
25 be of concern to both the Company and the Commission.
1223
CSB REPORTING HART (X)
Wilder, Idaho 83676 Staff
1 Q Well, I'm not trying to quibble with you,
2 but are you saying the customer experiences a problem,
3 but he's not aware of it?
4 A Certainly, if the customer experiences a
5 problem, they don't need to be aware of it to have
6 experienced the problem. If their service has been out,
7 then that's a problem.
8 Q So to bring it down to brass tacks, you
9 would suggest that U S WEST needs to be penalized even if
10 the service problems that its customers, in your word,
11 "experience" do not actually affect how they use the
12 service?
13 MS. HAMLIN: I'll have to object to this.
14 I don't think it's clear what Ms. Hobson is referring to
15 when she says "penalize."
16 COMMISSIONER SMITH: Ms. Hobson.
17 MS. HOBSON: I believe that the word
18 penalize is common ordinary English usage and I'm asking
19 a hypothetical question, if you will, at this point.
20 COMMISSIONER SMITH: I'll overrule the
21 objection.
22 THE WITNESS: Staff has proposed an
23 adjustment in the return on equity and as long as you
24 don't use it in the legal context of a penalty, I can
25 understand where my counsel was coming from. If the only
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CSB REPORTING HART (X)
Wilder, Idaho 83676 Staff
1 evidence of a problem were to be the unexperienced
2 problems, then one might be more inclined to ignore them,
3 but we have considerable evidence that problems are out
4 there, there were people that did experience them and did
5 call us. We used this as evidence that they do not
6 represent the entire population of those who experienced
7 it. That's the reason for citing that evidence.
8 Q BY MS. HOBSON: I understand that point,
9 Mr. Hart. My question is, do you believe that the
10 Commission should penalize in a general sense of the word
11 U S WEST for service problems that the customers
12 themselves do not -- that do not affect the way the
13 customers themselves are able to use their service?
14 A That's not the situation we're in, so I
15 don't think it's relevant.
16 Q Well, Mr. Hart, I'm asking you, I'm
17 exploring with you the basis for your opinions and so I'm
18 asking you a question that may or may not reflect the
19 status of the facts in this case as you perceive it, but
20 I believe that U S WEST is entitled to understand the
21 basis for your opinions.
22 MS. HAMLIN: I'll have to object to this.
23 I think it's been asked and answered at this point.
24 COMMISSIONER SMITH: Well, it's certainly
25 been asked.
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1 MS. HOBSON: It's U S WEST's position that
2 it has not been answered.
3 COMMISSIONER SMITH: Do you want to try one
4 more time, Mr. Hart?
5 THE WITNESS: I think that the existence of
6 customers who may not have noticed or may not have been
7 aware that they had a problem is a fact that the
8 Commission needs to be aware of when they analyze the
9 information from those customers who did notice it.
10 That's the point I'm making in the testimony.
11 Q BY MS. HOBSON: Well, Mr. Hart, let's talk
12 about delays for a minute. On page 10 of your direct
13 testimony at line 14, you characterize delays in
14 providing service as held orders; is that correct?
15 A I indicate that when Staff categorizes
16 complaints, we categorize any delay as a held order. We
17 do not distinguish between those that are held for
18 facilities and those that are held for manpower reasons,
19 so when one analyzes the complaint information that the
20 Staff has, it includes those that are held for facilities
21 as well as those that are held for manpower reasons.
22 Q Or for any other reason, don't you?
23 A Yes.
24 Q All right. On page 25 of your direct
25 testimony at line 18, you make the statement, "The Staff
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1 considers any delayed service installation a held order,
2 regardless of the reason for the delay."
3 A That's correct.
4 Q That's Staff's position, is it not?
5 A Uh-huh.
6 Q So is it also Staff's position that when
7 U S WEST does not provide service to a customer within a
8 certain interval, in fact, the two-day interval that the
9 Company itself has established as a target for its
10 internal provisioning purposes, that that is a held order
11 even if the service is put in on the third day?
12 A I think it depends on what the definition
13 is being used for. Staff understands that when you're
14 looking at the Company's measurements, their BSMs,
15 their definition of held orders is different than ours.
16 Staff -- if that customer were to call us on the third
17 day, we would categorize that complaint as a held order.
18 Q And I am inquiring about what Staff's
19 position is in these questions if that helps you get more
20 directly to the answers. In fact, as we just pointed
21 out, you have said that Staff considers any delay in
22 installation to be a held order.
23 A Yes.
24 Q And so that would include the hypothetical
25 example that I've just given you of -- well, first of
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Wilder, Idaho 83676 Staff
1 all, let me say this. I'm sorry, strike that. There is
2 a two-day interval standard for putting in new service
3 that you use in your testimony to analyze U S WEST's
4 provisioning quality; isn't that true?
5 A Yes.
6 Q And that two-day standard was developed by
7 U S WEST as an internal measurement of its own progress
8 in meeting customer provisions; isn't that true?
9 A That's true.
10 Q It's not a two-day interval that is
11 embodied in any Commission rule or regulation at this
12 point; isn't that true?
13 A That's true.
14 Q Now, when you say that any delay beyond the
15 two-day interval would constitute a held order in the
16 Staff's mind, would that include cases where the customer
17 requests or agrees to a longer -- requests or agrees to a
18 longer interval?
19 A I would say that in those cases where a
20 customer requests it, it's unlikely that they would call
21 us and complain about the fact that it wasn't there yet,
22 so we wouldn't know about it. On those cases where the
23 Company only offers them a day that is beyond that
24 two-day interval, we have had customers contact us and we
25 do log those as held order complaints.
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1 Q So the customer that calls U S WEST and
2 says I would like to have a new line installed next week
3 and, furthermore, let's assume that the Company complies
4 with that request and puts that order in when requested,
5 you wouldn't consider that a held order situation?
6 A I guess I would say that it would be
7 unlikely that that customer would call and complain, so
8 there would be no reason for us to categorize it.
9 Q And the reason that the customer wouldn't
10 so categorize it, I assume, is because the customer did
11 not perceive --
12 A A problem.
13 Q -- he had a problem; correct?
14 A (The witness nodded his head up and down.)
15 Q Now, if the customer calls U S WEST and
16 says I would like a new line as soon as you can get one
17 in and U S WEST says that will be three days from today,
18 do you assume that that customer has a held order
19 problem?
20 A There again, we wouldn't have a reason to
21 categorize it unless the customer called us. If they
22 call us, then one would assume they are displeased with
23 that and, therefore, it would be categorized as a held
24 order. They would have considered it a delay. We let
25 the customer basically make that decision.
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1 Q Now, hypothetically, if a customer were to
2 call you and say I have a complaint, I called U S WEST
3 and I told them I wanted a new line and they said they
4 can't get it in for two days and I want it this
5 afternoon, now, would you log that as a held order?
6 A In that case, we would explain to them the
7 two-day interval and explain that that was standard
8 service.
9 Q All right.
10 A It would probably be categorized as a held
11 order in our system, but we would probably categorize it
12 as an inquiry as opposed to a complaint.
13 Q Okay, directing your attention over to
14 U S WEST Exhibit 50 --
15 MS. HAMLIN: May I ask a question real
16 quick? Ms. Hobson, what interrogatories did you
17 reference on these tables? I did not catch that
18 earlier.
19 MS. HOBSON: 156.
20 MS. HAMLIN: Thank you.
21 Q BY MS. HOBSON: Looking at your first
22 column there, "Held orders," under my hypothetical
23 example, the customer that called in and said I called
24 U S WEST this morning and wanted a line in this afternoon
25 and they couldn't or wouldn't give it to me that fast,
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Wilder, Idaho 83676 Staff
1 would that complaint be logged in your
2 complaints/comments/inquiries?
3 A Yes, that would have been logged in our
4 system and it would have been in the held order category.
5 Q But it would not have been under that
6 hypothetical scenario logged in your investigated
7 complaint held order category shown on Exhibit 51; is
8 that correct?
9 A Yes.
10 Q Because the Staff wouldn't investigate that
11 complaint?
12 A That's correct.
13 Q Okay. I'd like to direct your attention
14 to page 7, line 10 your testimony. I'm sorry, page 7,
15 line 18 of your testimony.
16 A I'm there.
17 Q And you state there, "Based upon the data
18 provided to the Commission in a briefing by U S WEST on
19 October 9, 1996, almost 12,000 customers in southern
20 Idaho experienced a delay in the installation of their
21 phone line in the first eight months of 1996." Is that
22 your testimony?
23 A Yes, it is.
24 Q Now, you don't consider all of those 12,000
25 delays to be an indication of a held order situation;
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1 isn't that true?
2 A There would be some of those would have
3 been customer-requested delays.
4 Q Well, U S WEST propounded a data request on
5 this particular 12,000 customer number, did they not?
6 A Yes.
7 Q And do you recall what Staff's response to
8 that was as to what the basis for the 12,000 number was?
9 MS. HAMLIN: Could we get a reference for
10 that data request, please?
11 MS. HOBSON: I believe it's the U S WEST
12 data request, second data request, Response No. 4.
13 Q BY MS. HOBSON: Do you need to refer to
14 that data response to be able to tell us how that number
15 was --
16 A I mean, I can tell you in general how I
17 came up with the number.
18 Q Why don't you go ahead and tell us in
19 general how you came up with that number.
20 A There was a handout from a briefing that
21 the Company made for the Commissioners that had an
22 identification of the number of fields it installs that
23 the Company had made during the first eight months of the
24 year, and I don't remember exactly what that was, 35,000
25 or something like that. I took that number and based on
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Wilder, Idaho 83676 Staff
1 the information they had provided on their basic service
2 measurement category of appointments offered which
3 indicated those which had been installed within the
4 two-day period, I could determine those that weren't
5 installed in the two-day period and used that percentage
6 to calculate the number that had not been installed
7 within the two-day period, so those are the numbers I
8 used.
9 Q And that's how you developed the 12,000
10 customer number?
11 A Yes.
12 Q Now, you are aware, are you not, that
13 U S WEST's basic service measurement for meeting the
14 two-day interval does not exclude those customers that
15 have asked for or agreed to a later date; isn't that
16 true?
17 A That's true.
18 Q So that 12,000 number would have to be
19 corrected in order to be accurate to determine how many
20 customers actually requested a two-day interval?
21 A And it was my understanding that U S WEST
22 could not provide the information to do that.
23 Q Do you have an understanding as to whether
24 U S WEST can provide that information?
25 A They were -- we had a data request, I don't
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1 know which number it was, but we did ask whether you had
2 the capability of doing so and I think your response was
3 no.
4 Q The foundation of that question was, in
5 fact your experience with auditing the U S WEST basic
6 service measurement process, didn't you become aware in
7 that process that U S WEST has continually maintained
8 that its provisioning interval numbers cannot be purified
9 to exclude those in which customers have requested later
10 due dates?
11 A I was aware that, and during that audit,
12 yes, that information was made available to us.
13 Q Isn't it also true that your 12,000 number
14 includes both Title 61 and Title 62 business and
15 residence service?
16 A Yeah, it probably does.
17 Q Now, you go on in your testimony on page 7
18 to say, "The IPUC only received 146 calls from U S WEST
19 customers indicating they were experiencing such a delay
20 during those same eight months," and I wanted you to
21 direct me on U S WEST Exhibit 50 and 51 to tell me where
22 those 146 calls are shown.
23 A They would be a portion of the 1996
24 column. This is only eight months of 1996. The table
25 you have in front of you is 12 months.
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1 Q And they would be in the held order
2 category on the '96 column?
3 A Yes.
4 Q Would they be on Table 3R, that is,
5 Exhibit 51, or Table 2R, Exhibit 50?
6 A I don't recall whether I was using total or
7 investigations only when I came up with that number.
8 Since I say "calls," I'm assuming I used totals.
9 Q So they would probably most likely be
10 reflected on Exhibit 50, complaints/comments/inquiries?
11 A Yes.
12 Q In fact, Exhibit 50 shows year-end '96
13 numbers; isn't that true?
14 A Yes.
15 Q So your held order number of complaints,
16 comments and inquiries for 1996, the total was 189?
17 A Yes.
18 Q And this discussion here captures 146 of
19 those 189; is that right?
20 A Yes.
21 Q Now, Staff is recommending the adoption of
22 the so-called ROC service quality standards contained in
23 Exhibit 124 in this docket; isn't that true?
24 A We're recommending that the criteria
25 contained in the ROC standards be used as the measuring
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1 stick to determine when the Company's return on equity
2 could be reviewed again.
3 Q Okay, and isn't it true that the ROC
4 standard measuring stick limits the held order category
5 to facilities-based issues?
6 A Yes, it does.
7 Q So Staff's position with regard to held
8 orders in this case is actually different than the
9 measuring stick that it advocates the Commission use
10 going forward; isn't that true?
11 A In terms of how we record complaints, it
12 would be different. In terms of how we would measure
13 whether the Company could have their return on equity
14 reviewed, we would follow the ROC criteria definition.
15 Q So are you saying that if the Commission
16 were to accept your recommendation and use the ROC
17 service quality standards for measurement of the
18 Company's service quality for purposes of determining
19 whether the rate of return needs to be revised that the
20 Staff would persist in using a different standard to
21 analyze the Company's service quality problems going
22 forward?
23 A I'm saying that for the purposes of coding
24 complaints, we would continue to use the any delay would
25 be a held order. For the purposes of measuring the
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Wilder, Idaho 83676 Staff
1 Company's performance and whether it had improved to a
2 level that they could have their return on equity
3 reviewed, we would use the definitions contained in the
4 ROC criteria.
5 Q I'm puzzled by that because, as I read your
6 testimony, I believed it to be your position that the
7 service that -- that the evidence of complaints and
8 customer inquiries and comments was the best evidence
9 available as to the Company's service quality.
10 A I think it is. I think that the
11 distinction between those two definitions is important to
12 keep in mind as you analyze them, but it doesn't
13 necessarily mean that you have to adopt the same
14 definition for different purposes.
15 My understanding is the reason why the ROC
16 criteria includes the definition it does is so that the
17 Company can provide the information, that's the
18 definition the Company uses, and it was at the Company's
19 insistence, my understanding is, that, hey, this is the
20 way we keep the data, this is the way we can report it,
21 that's why the ROC criteria used that definition. If
22 that's the way the information is available, that's the
23 most appropriate way to measure it.
24 Staff is still concerned that just -- the
25 reason why a customer's order is held is basically
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1 immaterial to us as to whether, you know, is a customer
2 satisfied or dissatisfied, and the reason why it's
3 immaterial is we start to investigate a complaint, so we
4 log them as one -- we lump them together. We recognize
5 that the ROC criteria as well as the BSM criteria has a
6 different measurement in terms of appointments offered
7 which will catch those that we would categorize as held
8 orders but you would not and so there's another
9 measurement that will catch those other customers.
10 Q Well, are you suggesting that if the
11 Commission were to adopt your proposal that we are now
12 going to have two sets of books on held order accounts;
13 one relating to the ROC standard, which is a
14 facilities-based standard, and another based upon the
15 Staff's characterization of what it believes is a better
16 measure of held orders?
17 A What I'm saying is complaints will continue
18 to be coded in the way they have been and that we will
19 keep complaints and that database following the same
20 definition we have. The information on held orders that
21 the Company provides would continue to be provided in the
22 manner it is now using the Company's definition.
23 Q What would be the purpose of the Staff,
24 again assuming the Commission were to use your approach
25 advocated in this case, what would be the purpose of the
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1 Staff keeping a different set of data?
2 A Consistency with historical data would be a
3 very good purpose, but I'm not sure that there's a
4 necessity to change.
5 Q Well, I think U S WEST would agree with you
6 there. Isn't it true that the ROC standards are also
7 limited to cases where customers do not request a later
8 date for their service installation?
9 A Subject to check, I think that language is
10 included in the ROC definition.
11 Q Okay, directing your attention now to
12 page 12 of your direct testimony --
13 COMMISSIONER SMITH: Ms. Hobson, would this
14 be a good time for lunch or shall we continue?
15 MS. HOBSON: It's an excellent time for
16 lunch.
17 COMMISSIONER SMITH: Okay. How about
18 1:15?
19 MS. HOBSON: We can do 1:15.
20 (Noon recess.)
21
22
23
24
25
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