USW314M.docx

1 BOISE, IDAHO, FRIDAY, MARCH 14, 1997, 9:30 A. M.
2
3
4 COMMISSIONER SMITH: Good morning. We'll
5 take up again with our hearing. I believe, Mr. Howell,
6 we were ready for one of your witnesses.
7 MR. HOWELL: Thank you, Madam Chairman.
8 The Staff would call Syd Lansing to the stand.
9
10 SYDNEY LANSING,
11 produced as a witness at the instance of the Staff,
12 having been first duly sworn, was examined and testified
13 as follows:
14
15 DIRECT EXAMINATION
16
17 BY MR. HOWELL:
18 Q Would you state your name, please?
19 A Sydney Lansing.
20 Q And, Mr. Lansing, whom are you employed by
21 and in what capacity?
22 A I'm employed by the Idaho Public Utilities
23 Commission. I'm an auditor.
24 Q And are you the same Syd Lansing that has
25 prepared prefiled direct testimony on November the 26th
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1 of last year and surrebuttal testimony on February 26th
2 of this year?
3 A Yes, I am.
4 Q Do you have any changes or corrections to
5 that testimony?
6 A Not that I know of.
7 Q Are you -- did you also have prepared Staff
8 Exhibit 101 with several pages filed on November the
9 26th?
10 A Yes, I did.
11 Q Did you also have an opportunity to revise
12 that 101 on November -- excuse me, February the 26th of
13 year?
14 A Yes, I did.
15 Q And have you also had an occasion to
16 prepare a second revised Exhibit 101 dated yesterday?
17 A Yes, I did.
18 Q Did you also have an opportunity or an
19 occasion to prepare an Exhibit 157 in your rebuttal
20 testimony?
21 A Yes, that's the number. I thought it was
22 the wrong number for a minute, I'm sorry.
23 Q Do you have any changes or corrections to
24 your exhibits?
25 A Not that I'm aware of.
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1 Q And if I were to ask you the questions laid
2 out in your prefiled testimony, would your answers be the
3 same today?
4 A Yes, they would.
5 MR. HOWELL: Madam Chairman, with that, I
6 would move to spread Mr. Lansing's prefiled testimony
7 upon the record and to admit his exhibits.
8 COMMISSIONER SMITH: If there's no
9 objection, we will order the prefiled direct and
10 surrebuttal testimony of Mr. Lansing to be spread upon
11 the record as if read and we will admit Exhibit 101 with
12 the new revised page 1 of March 13th and Exhibit 157.
13 (Staff Exhibit Nos. 101 and 157 were
14 admitted into evidence.)
15 (The following prefiled direct and
16 surrebuttal testimony of Mr. Sydney Lansing is spread
17 upon the record.)
18
19
20
21
22
23
24
25
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1 Q. Please state your name and business address
2 for the record.
3 A. My name is Sydney Lansing. My business
4 address is 472 W. 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 Staff Auditor in the Accounting Section.
9 Q. Give a brief description of your
10 educational background and experience.
11 A. I graduated from San Jose State College,
12 California in 1958 with a B.A. degree in Business
13 Emphasis in Accounting. I was licensed to practice as a
14 Certified Public Accountant in 1960. I was employed as
15 an Auditor by Arthur Young and Company in San Francisco
16 and by Roland Crabtree, CPA in Riverside, California. I
17 was the partner in charge of audits in the firm of Purl
18 and Lansing in Riverside, California. I have been hired
19 several times to install accounting systems and I have
20 been the Controller of two different organizations. I
21 have attended many seminars, classes and courses
22 involving auditing, accounting and tax issues.
23 Q. What is the purpose of your testimony?
24 A. The purpose of my testimony is to discuss:
25 1. Plant-in-service
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1 2. Working capital
2 3. Uncollectibles
3 4. Cost allocation
4 5. Depreciation
5 6. Income taxes
6 7. Summarize Staff positions
7 SUMMARY
8 Q. Please summarize the revenue requested by
9 U S WEST and recommended by Staff.
10 A. The comparison of the Company's
11 recommendations and those of Staff at the Title 61 level
12 are as follows: (all of these amounts have "000" omitted)
13
Description U S WEST STAFF
14
Plant-in-service $327,028 $248,096
15
Other rate base (172,166) (168,266)
16
Total rate base 154,862 79,830
17
Overall rate of return 10.55% 8.66%
18
Revenue requirement 116,138 52,239
19
Total revenue 78,084 84,436
20
Revenue needed (excess) 38,054 (32,197)
21
22 Q. How did Staff present its financial
23 recommendations?
24 A. Staff Exhibit No. 101 details Staff's
25 position related to the various components of revenue
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1 requirement. There are several supporting schedules that
2 provide details of the adjustments, assignments, and
3 allocations related to the positions shown in Staff
4 Exhibit No. 101. Some of the supporting schedules were
5 prepared by me, while other supporting schedules were
6 prepared by other Staff members. The following is a list
7 of the supporting information:
8 Page 1 starts with U S WEST booked information at
9 the intrastate level and summarizes the adjustments
10 proposed by the Company to arrive at the totals proposed
11 by U S WEST (Columns a, b,& c). The next section
12 (Columns d & e) shows Staff's recommendations regarding
13 the direct assignment of rate base items, expense items,
14 and revenue items. After the direct assignment items,
15 Column f totals the amount of each rate base item, each
16 expense item, and each revenue item available for
17 allocation between Title 61 and Title 62. That
18 allocation is shown in Columns g & h. Column i totals
19 the Title 61 directly assigned items and the Title 61
20 allocated items to arrive at the total Title 61 amounts.
21 Column i, line 46 shows that U S WEST is earning in
22 excess of its authorized rate of return, as proposed by
23 Staff, by a total of $32.197 million.
24 Q. Please describe each of the other pages in
25 Staff Exhibit No. 101 and indicate which Staff member
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1 sponsors that page.
2 A. Page 2 was prepared by me to summarize the
3 adjustments to booked information presented by U S WEST
4 witness Ms. Wright.
5 Page 3 was prepared by me to summarize the
6 directly assigned rate base, expenses, and revenue items
7 as recommended by Staff members.
8 Page 4 was prepared by me to detail the
9 adjustments that I recommend to rate base. The totals
10 from page 4 are carried over to page 3 for inclusion in
11 that summary.
12 Page 5 was prepared by me to detail the
13 direct assignment of specific assets away from Title 61
14 assets. The totals on page 5 are carried over to page 4.
15 Page 6 was prepared by Staff witness Faunce
16 to detail the expenses from affiliated organizations that
17 should be directly assigned away from Title 61. The
18 totals of page 6 are carried over to page 3.
19 Page 7 was prepared by me based on the
20 recommendations of Staff witness Selwyn to calculate a
21 proper depreciation expense on a going forward basis.
22 The total of the recommended depreciation is carried
23 directly to page 1, line 30.
24 Page 8 was prepared by me to calculate an
25 Idaho State effective income tax rate.
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1 Page 9 was prepared by me to calculate an
2 income to revenue multiplier to be used on page 1, Column
3 i, line 13.
4 Page 10 was prepared by Staff witness
5 Eastlake to calculate the expenses associated with the
6 recently adopted EAS regions. The total of page 10 is
7 carried directly to page 1, line 28. Page 10 is
8 proprietary.
9 Page 11 was prepared by Staff witness
10 Stockton to detail direct assignments of expenses to both
11 Title 61 and Title 62. Additionally, page 11 shows an
12 imputation of revenue for telephone concessions. The
13 totals of page 11 are carried over to page 3.
14 Page 12 was prepared by Staff witness
15 Schneider to detail adjustments to the pension asset and
16 various expenses. The totals from page 12 are carried
17 over to page 3.
18 Q. Please describe the Company's case as filed.
19 A. U S WEST has proposed an increase in
20 revenue totaling $38.054 million (Company Exhibit No. 25,
21 page 1, Column f, line H). U S WEST's case is based upon
22 "actual" costs using a historic test year ended December
23 31, 1995. Staff agrees with using 1995 as the test year.
24 The Company filed financial information based on the
25 southern Idaho jurisdictional books as adjusted by Ms.
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1 Wright (Company Exhibit No. 25). The information is
2 changed by Ms. Wright from the jurisdictional books
3 through the intrastate information to show a rate base
4 and a related revenue requirement at the Title 61
5 allocation level. This two step calculation was
6 accomplished in the same calculation. Staff agrees with
7 the intrastate separations part of the calculation, but
8 not with the Title 61 allocation part of the calculation.
9 I present in Staff Exhibit No. 101, page 1, Column a, the
10 intrastate, separated account balances from U S WEST's
11 southern Idaho books. Therefore, I have removed the
12 disputed Title 61 allocation from U S WEST's
13 presentation, and I have left the non-controversial
14 federal separations, thus creating a starting point for
15 Staff adjustments and analysis.
16 Q. Please detail the various parts of
17 U S WEST's case and indicate Staff's reaction.
18 A. See below:
19 U S WEST PRESENTATION STAFF RESPONSE
20 Plant-in-service Staff does not agree
(See testimony, Lansing)
21
Materials and supplies Staff agrees
22 (See Working Capital
testimony, Lansing)
23
Cash Working Capital Staff agrees
24 (See Working Capital
testimony, Lansing)
25
Pension assets Staff does not agree
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1 (See testimony, Schneider)
2 Accumulated depreciation Staff agrees
(adjusted only for plant in
3 service adjustments)
4 Deferred Income Tax Staff agrees
(Adjusted only for plant
5 in service adjustments)
6 Customer deposits Staff agrees
7 Adjusted average rate base Staff agrees with method
8 Overall rate of return Staff does not agree
(See testimony, Carlock)
9
Return on equity Staff does not agree
10 (See testimony, Carlock)
11 Gross-up for taxes Staff does not agree
(See testimony, Lansing)
12
General expenses Staff does not agree
13 (See testimony, Lansing,
Faunce, Stockton, and
14 Schneider; also Staff
Exhibit No. 101, page 3)
15
EAS costs Staff does not agree
16 (See Testimony, Eastlake)
17 Depreciation Staff does not agree
(See testimony, Selwyn and
18 Lansing)
19 Income Taxes Staff does not agree
(See testimony, Lansing)
20
Allocation to Title 61 Staff does not agree
21 (See testimony, Baldwin,
Lansing, and Faunce)
22
Rate design Staff does not agree
23 (See testimony, Eastlake)
24
25
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1 Directory Revenue Staff does not agree
(See testimony, Selwyn and
2 Carlock)
3 Q. Please describe how Staff has presented its
4 case.
5 A. Each individual Staff member that
6 recommends an adjustment to U S WEST's case prepared
7 supporting documents. Those documents are included as
8 pages in Staff Exhibit No. 101 and summarized on page 1.
9 PLANT-IN-SERVICE
10 Q. How is plant-in-service presented in this
11 case?
12 A. The balance of the plant-in-service
13 accounts on U S WEST's MR books (original entry books)
14 totaled about $764.489 million at January 1, 1995 and
15 approximately $820.749 million at December 31, 1995.
16 U S WEST calculates an average plant-in-service each
17 month throughout the year and then an average of the
18 monthly averages at year end. U S WEST's calculation of
19 the year-end average of the monthly averages is about
20 $793.525 million for 1995. I agree that the average of
21 the monthly averages method is appropriate.
22 Q. What are the issues with plant-in-service
23 as reported on U S WEST's books?
24 A. There are three major issues. First, the
25 amount reported in the General Ledger for Idaho at
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1 December 31, 1995 is not consistent with the detailed
2 records of plant-in-service at the same date. Second,
3 the detailed records have a 1.89% error factor. Third,
4 there is fiber cable included in plant-in-service that is
5 not used and useful for Title 61 services.
6 A. General Ledger
7 Q. How do you know that the General Ledger
8 does not match the detailed records?
9 A. I have a copy of the detailed records for
10 southern Idaho and I also have a copy of the General
11 Ledger for southern Idaho as of December 31, 1995. The
12 detail records add to $799.779 million and the General
13 Ledger used by Ms. Wright has a balance of $829.451
14 million at the southern Idaho jurisdictional level. That
15 makes a difference of $29.672 million. The overall
16 separations factor for plant-in-service is 68.17%, which
17 means that the $29.672 million above is actually $20.227
18 million for the southern Idaho intrastate jurisdiction.
19 This $20.227 million adjustment to plant-in-service is
20 presented on line 3 of Staff Exhibit No. 101, page 4.
21 Q. Does the calculation of the adjustment to
22 plant-in-service take into consideration the average
23 plant-in-service not just the year-end plant-in-service?
24 A. The postings to plant-in-service during
25 1995 appear to be appropriate. Therefore, the difference
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1 between the subsidiary ledger and the General Ledger are
2 an accumulation over several years. That means that the
3 beginning balance, each monthly balance and the ending
4 balance have the same error. The calculation of the
5 average consistently carries the error, so the average
6 carries the same error factor.
7 Q. Does this affect accumulated depreciation
8 or depreciation expense?
9 A. Depreciation expense is calculated at the
10 balance of accounts in the General Ledger; therefore,
11 there has been excess depreciation recorded during 1995
12 and probably other years. Accumulated depreciation is
13 just the sum of depreciation recorded, so that account
14 carries the accumulated error factor.
15 I have calculated depreciation independently
16 from the General Ledger (Staff Exhibit No. 101, page 7)
17 so that this issue and others that will be discussed
18 later by me and by other Staff witnesses has been removed
19 from the revenue requirement. I adjusted accumulated
20 depreciation (Staff Exhibit No. 101, page 4) for the
21 amount of depreciation recorded for 1995. I did not
22 adjust accumulated depreciation for additional years for
23 two reasons. First, I have no knowledge of exactly how
24 long the error has been affecting the depreciation
25 expense. Second, adjusting previously recorded
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1 depreciation could be retroactive ratemaking.
2 B. Error Factor
3 Q. How did you ascertain that there is a 1.89%
4 error in the detail records for U S WEST's plant-in-
5 service?
6 A. I performed an audit of the plant-in-
7 service inventory on twenty-two different central offices
8 in the southern Idaho jurisdictional area. This
9 represents about one-third of all central offices and
10 20.45% of the plant-in-service in southern Idaho. In
11 each office I was accompanied by a U S WEST technical
12 person who was knowledgeable about the equipment. We had
13 a list for each location detailing the equipment that
14 should have been in service at that location. In almost
15 every location there was a difference between the actual
16 equipment in service and the detailed records of the
17 plant that should have been in service. I examined a
18 total inventory of plant-in-service of $163,530,900. Of
19 that amount I found that there was $3,085,657 in missing
20 equipment. Therefore, I concluded the error factor is
21 1.89%. The missing inventory was not confined to any
22 specific kind of assets or any specific location. The
23 errors appeared to be human errors of recording the
24 removal of assets no longer in service. It is
25 appropriate to reduce the plant-in-service amount
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1 recorded in the detailed records as booked by $15.116
2 million ($799,779,111 X 1.89%). The separations factor
3 for plant-in-service is 68.17%; therefore, the intrastate
4 adjustment amount is $10.304 million (Staff Exhibit No.
5 101, page 4).
6 Q. What other accounts does this adjustment to
7 plant-in-service affect?
8 A. A reduction in plant-in-service related to
9 removals has an impact on both the depreciation expense
10 account and the accumulated reserve for depreciation.
11 There is an impact on the expense account because there
12 is a lesser amount of assets on which to calculate
13 depreciation, and there is an impact on the accumulated
14 reserve account because the equipment should have been
15 removed from both the asset account and the accumulated
16 reserve at the same time for the same amount. These
17 adjustments to plant-in-service and accumulated
18 depreciation are shown on line 7 of Staff Exhibit No.
19 101, page 4.
20 C. Fiber Not Used and Useful
21 Q. Are all the fiber cable assets recorded in
22 plant-in-service actually in service?
23 A. Not really. U S WEST Communications ARMIS
24 Operating Data Report states that, related to cable and
25 wire facilities for Idaho, there are 123,280 km fiber
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1 deployed but only 12,766 km fiber is lit, i.e., used and
2 useful for telecommunications services. Therefore, only
3 10.355% of the fiber cable is used and useful. The rest
4 is plant held for future use (89.645%).
5 Q. What does "used and useful" mean?
6 A. Charles F. Phillips, the author of The
7 Regulation Of Public Utilities Theory And Practice (1988
8 edition at 325) defined the phrase as follows:
9 Under traditional ratemaking
principles, public utilities are
10 entitled to recover "prudent"
investments when they become "used
11 and useful."...For decades, "used
and useful" referred to needed
12 capacity; that is, a determination
as to whether a plant was actually
13 used in service and was useful in
providing service. If not, or if
14 any expenditures were imprudent,
all or any part of the investment
15 in plant would be excluded from
rate base.
16
17 Phillips continues stating that some
18 standards of economic desirability may also be included
19 in a more modern definition of used and useful.
20 For Title 61 purposes there is no question
21 that current plant-in-service does not need the 89% of
22 additional fiber. For additional information please see
23 Susan Baldwin's testimony regarding excess capacity.
24 Previously this Commission has prevented assets from
25 inclusion in rate base for not being used and useful
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1 (Order Nos. 26588, 20267, 22186 and 22347). Therefore, I
2 recommend that about 89.645% of the plant recorded as
3 fiber be considered plant held for future use and
4 excluded from rate base.
5 Q. What is the amount of plant held for future
6 use?
7 A. The Summary Extract Report for Idaho-South
8 lists the following field reporting codes for plant
9 accounts: field reporting code 85C at $9.592 million,
10 field reporting code 845C at $4.616 million, field
11 reporting code 852C at $0.115 million, and field
12 reporting code 862C at $0.108 million all of which add to
13 a total of $14.431 million. Therefore, there is a total
14 of $12.937 million not used and useful before separations
15 ($14.431 million X 89.645%) and $9.122 million (Staff
16 Exhibit No. 101 page 4, line 10) not used and useful
17 after separations ($12.937 X 70.51%) at the southern
18 Idaho intrastate jurisdiction level.
19 WORKING CAPITAL
20 Q. How is working capital presented in this
21 case by Company witness Margaret J. Wright?
22 A. There are three parts to working capital
23 presented by Ms. Wright:
24 1. Materials and supplies presented as a
25 separate item in the calculation of rate base with an
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1 intrastate Idaho amount of $2.247 million.
2 2. Interest needed to carry short-term
3 construction work in process - presented as adjustment 5
4 in "Commission Adjustments" in Company Exhibit No. 25,
5 page 13, line 1, totaling $4.238 million but amounting to
6 $3.773 million at the intrastate southern Idaho level.
7 3. Cash working capital - presented as a
8 separate negative amount in the calculation of rate base
9 amounting to ($2.071 million) at the intrastate Idaho
10 level.
11 Q. Please discuss the Company's working
12 capital presentation by Ms. Wright.
13 A. Working capital represents the Company's
14 investment in short-term assets such as materials and
15 supplies and cash to meet current obligations. This
16 Commission has traditionally required that working
17 capital be calculated using the Balance Sheet method. In
18 this methodology all of the parts of working capital are
19 included in one calculation, and all of the parts must be
20 present in the Balance Sheet at the time of the
21 calculation. In this case the Balance Sheet method of
22 calculation is impractical, because U S WEST does not
23 prepare a Balance Sheet that is state specific for
24 southern Idaho. Therefore, all items on the Balance
25 Sheet of U S WEST Communications, Inc. (the regulated
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1 telephone company) must be allocated in some way to
2 southern Idaho at the intrastate level before the working
3 capital calculation. Ms. Wright chose to separate the
4 various parts of working capital and present each part
5 individually. The third part of Ms. Wright's
6 presentation of working capital, working cash, was
7 calculated utilizing a lead/lag study. That approach,
8 because the other parts had already been removed from the
9 calculation and stated separately, calculated a negative
10 amount for intrastate Idaho of ($2.071 million).
11 Q. How much working capital is included in rate
12 base as presented by Ms. Wright (Company Exhibit No. 25,
13 page 11)?
14 A. At the intrastate southern Idaho level the
15 total is $3.949 million.
16 Q. Do you agree with the working capital
17 amount presented by Ms. Wright?
18 A. The approach is slightly irregular, but I
19 agree with the result.
20 Q. Please discuss the additional parts of rate
21 base.
22 A. Pension Assets were included in the Company's
23 calculation of rate base as an adjustment proposed by Ms.
24 Wright. Staff disagrees with this addition to rate base
25 and the issue is discussed in detail by Staff witness
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1 Schneider.
2 Accumulated depreciation is a component of
3 rate base. With the exception of the specific
4 adjustments presented by Staff in Exhibit No. 101, page
5 1, line 5, Column e, Staff agrees with the Company's
6 presentation of accumulated depreciation.
7 Deferred Income Tax is also a component of
8 rate base where Staff agrees with the Company regarding
9 the amount. I adjusted Deferred Income Tax by 9%,
10 because that is the ratio of adjustments that I recommend
11 related to plant-in-service. It is possible that
12 Internal Revenue Service normalization rules require this
13 adjustment.
14 Customer Deposits are also a part of rate
15 base. Staff agrees that the amount of the deposits is
16 correct. Staff would prefer the Company directly assign
17 to Title 61 and Title 62, the amount of the deposit
18 related to each type of service. However, customer
19 deposits are recorded by customer not the type of
20 services that the customer receives. Any given customer
21 could and probably does receive both Title 61 and Title
22 62 services; therefore, allocation of this part of rate
23 base is necessary.
24 Adjust Average Rate Base (at Staff Exhibit
25 No. 101, page 1, line 8) is an accumulation of
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1 adjustments proposed by Ms. Wright that affect several
2 parts of rate base not specifically identified by
3 account. Staff agrees with those adjustments.
4 Q. What is the difference between the rate
5 base proposed by U S WEST and that proposed by Staff?
6 A. U S WEST proposes a rate base of $242.962
7 million at the southern Idaho intrastate level (Staff
8 Exhibit No. 101, page 1, Column -c-, line 9). Staff
9 proposes adjustments that net to $57.351 million to
10 arrive at a proposed rate base of $185.611 million before
11 allocation to Title 61 and Title 62.
12 Q. What is the difference between the
13 Company's proposed rate base for Title 61 and that
14 proposed by Staff?
15 A. U S WEST proposes a southern Idaho Title 61
16 rate base of $154.862 million (see Company Exhibit No.
17 25, page 1 from testimony of Ms. Wright). Staff proposes
18 a southern Idaho Title 61 rate base of $79.830 million.
19 The difference is Staff adjustments and the difference
20 between the allocation methodology proposed by U S WEST
21 and that proposed by Staff.
22 Q. Do you agree with the reported revenues as
23 presented by U S WEST?
24 A. Yes, I do for the amounts booked. I
25 performed audit procedures on the 1995 revenue as part of
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1 this case and as a part of the revenue sharing case.
2 U S WEST presents the revenue for this case at those
3 amounts.
4 COST ALLOCATION - See Baldwin testimony for additional
5 information.
6 Q. What are the issues surrounding cost
7 allocation?
8 A. In this case there are two levels of
9 allocation of great importance: first, the assignment of
10 costs, expenses, and revenues to the southern Idaho
11 jurisdiction, and second, after the amounts related to
12 the southern Idaho jurisdiction have been established,
13 the assignment of costs, expenses, and revenues between
14 deregulated items and services related to Title 61 and
15 Title 62 services. Staff witnesses Faunce, Schneider and
16 Stockton have addressed the reasonableness of costs
17 assigned and allocated to Idaho operations and have
18 identified costs that should be directly assigned to or
19 away from Title 61 services. Staff witness Baldwin
20 addresses the allocation of joint and common costs
21 between Title 61 and Title 62 services.
22 Q. What problems did you find in the Company's
23 assignment of costs to Idaho?
24 A. U S WEST does not try to make direct
25 assignment of the southern Idaho specific costs or
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1 expenses from any associated company except BRI. While
2 at BRI some costs are directed to the responsible state,
3 all other affiliates do not directly assign. Advanced
4 Technologies, U S WEST, Inc., and a separate allocation
5 from U S WEST, Inc. Legal Services do not attempt to
6 directly assign costs to specific states.
7 Additionally, this assignment issue is
8 compounded because, there is no attempt at any level to
9 directly assign costs or expenses to Title 61 or Title 62
10 services. U S WEST's Cost Accounting Allocation System
11 (CAAS) neither examines documents of original entry nor
12 does it examine detailed transactions to determine a
13 direct assignment to Title 61 or Title 62. The only
14 direct assignment related to expenses is assigned because
15 the account holding the expenses is Title 62 by
16 definition. That means, if the total account is not a
17 Title 62 account, there is no attempt to directly assign
18 expenses.
19 Q. Is revenue allocated the same way?
20 A. No, revenue is not allocated, but, is
21 directly assigned as billed.
22 Q. Has this Commission said anything about the
23 cost allocation methodology to be utilized in making cost
24 allocations between Title 61 and Title 62 costs?
25 A. Yes, although U S WEST has asked for
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1 reconsideration (but was denied) the Commission said in
2 Order No. 25826 at page 10 and carried over to page 11:
3
The following criteria or principles
4 should be followed in an allocation
method:
5
1) Title 62 services must not be
6 subsidized by Title 61 services,
pursuant to I.C. 62-613.
7
2) Title 62 services must be assigned
8 a reasonable portion of the common and
joint network costs as well as general
9 overhead costs.
10 3) Direct cost assignment must be used
when facilities or other operating
11 expenses are clearly necessary for only
Title 61 or Title 62 services; when the
12 level of costs is escalated beyond what
is necessary for Title 61 services alone,
13 the additional cost should be directly
allocated to Title 62.
14
15 Q. In your audit did you review the Company's
16 cost allocation manuals?
17 A. Yes, I did.
18 Q. What do they prescribe?
19 A. U S WEST has a cost allocation manual titled
20 "U S WEST COMMUNICATIONS ACCOUNTING SEGREGATION MANUAL."
21 That manual Section 1, page 1 states:
22
The manual assigns cost using the
23 following casual or beneficial
relationships espoused by the Cost
24 Accounting Standards Board (CASB):
25
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1 1. Direct identification of costs
with final cost objectives is required
2 when the beneficial or casual relation-
ship is clear and exclusive and the
3 amount is readily measurable.
4 Additionally, U S WEST has a manual designed
5 to allocate costs to the various jurisdictions titled
6 "U S WEST COMMUNICATIONS JURISDICTIONAL ALLOCATION
7 MANUAL." Section 1, page 1 of this manual states:
8
USWC first assigns costs directly to
9 states that cause those costs when
the benefit received is clear and
10 exclusive.
11
12 Q. Does U S WEST actually make direct
13 assignment of costs to the various state jurisdictions?
14 A. No, it does not. The IPUC Audit Staff
15 discovered that many of the expenses that appeared to
16 require direct assignment instead of a general allocation
17 were not directly assigned to the state jurisdiction that
18 required the work. Specifically, the Audit Staff was
19 concerned about legal expenses for sales of exchanges in
20 Arizona, Colorado, Minnesota, North Dakota, and
21 Washington states. These expenses are extra ordinary and
22 should be associated with the gain on the sale of the
23 exchanges. The Audit Staff discovered many other costs
24 that should have been directly assigned but were not,
25 such as a Utah PSC investigation into Utah Telephone. As
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1 a result, Staff asked questions about the direct
2 assignment requirements of the cost allocation manuals.
3 In response to Production Request No. 196, U S WEST
4 responded:
5
Most legal expenses are incurred
6 on behalf of the whole corporation,
and are therefore allocated to all
7 of the states through a headquarters
prorate. Some legal work is done on
8 behalf of specific states throughout
the region. These legal expenses are
9 also allocated to all of the states
through a headquarters prorate since
10 extensive tracking would be required
to specifically bill each state.
11
...The company does not directly
12 assign many of its expenses at a state
specific basis.
13
14 Q. Is it important that U S WEST follow its
15 cost allocation manual and the Commission's criteria?
16 A. There are several reasons why U S WEST
17 should be required to directly assign costs:
18 (1) Idaho customers should not be expected
19 to pay for any costs that should be directly assigned to
20 another jurisdiction;
21 (2) Cost allocations that do not follow the
22 manual are an open invitation to create a result as
23 opposed to achieving a fair allocation;
24 (3) Customers have a right to expect that
25 their regulated utilities follow accepted procedures
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1 related to costs that those customers are expected to
2 cover in rates, and
3 (4) Idaho Code has unique Title 61/62
4 features where Title 62 costs and services are not
5 economically regulated.
6 Staff has found toll services, access
7 charges, custom calling features, billing and collection,
8 and directory assistance costs that should have been
9 directly assigned to Title 62 rather than allocated to
10 both Title 61 and Title 62. Failure to identify and
11 directly assign costs at the affiliate, headquarters, or
12 corporate level is compounded at the jurisdictional
13 level. Once costs lose their identity it becomes very
14 difficult to correctly allocate them between Title 61 and
15 Title 62 services.
16 DEPRECIATION
17 Q. Have you incorporated the recommendations
18 of Staff witness Selwyn in your calculation of revenue
19 requirement?
20 A. Yes, I have. Mr. Selwyn's recommendations
21 are summarized on Staff Exhibit No. 101, page 7. They
22 result in a reduction in depreciation expense at the
23 southern Idaho intrastate level of $23.853 million (Staff
24 Exhibit No. 101, page 1, Column -e-, line 30).
25 Additionally, Ms. Baldwin allocates $14.065 million of
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1 depreciation expense to Title 62 services to arrive at
2 depreciation expense related to Title 61 services of
3 $13.514 million.
4 INCOME TAXES AND GROSS UP
5 Q. Did you calculate an effective Idaho income
6 tax rate for inclusion in calculating the gross-up factor
7 for income taxes?
8 A. Yes, I did. Staff Exhibit No. 101, page 8,
9 details the calculation of an effective tax rate for
10 Idaho state income tax.
11 Q. Why is an effective income tax rate
12 necessary instead of the 8% statutory rate?
13 A. There are two different methods of
14 allocating the net income to Idaho, one for income tax
15 purposes and another for regulatory purposes. For income
16 tax calculation purposes the allocation is at 1.929% as
17 calculated on the actual income tax return. The overall
18 allocation to Idaho for regulatory purposes I calculate
19 to be 2.51%. Both allocations start from the same amount
20 at the total Communications company level, but at the
21 state level the amount of net income will be different.
22 Therefore, the amount subject to the 8% statutory tax
23 rate is less than the amount subject to regulatory
24 "taxation." I calculate that the ratio of the actual
25 tax to the regulatory taxable income yields an effective
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1 Idaho state income tax rate of 6.1482%.
2 Q. Has the Commission considered the issue of
3 the difference of the statutory tax rate versus the
4 effective tax rate?
5 A. Yes, in Order No. 22369, page 8, the
6 Commission said:
7 This Commission has no authority
to set tax rates or enter compacts
8 with other States concerning
taxation of multi-state corporations.
9 It is not claiming to do so in this
or any other Orders. What it is
10 claiming, however, is the ability
to recognize as a mater of fact that
11 state income tax liabilities of
multi-state companies on embedded
12 or increased revenues authorized
by this Commission differ from
13 the 8% Idaho statutory rate as a
result of the multi-state tax compact.
14 Furthermore, this commission is
entitled in its fact finding to
15 establish rates in recognition
of this fact and is not required by
16 the multi-state tax compact, the
State Tax Commission or any other
17 tax law to recognize taxes that are
not as a matter of fact actually paid.
18
19 Q. After you have calculated the Idaho State
20 effective income tax rate, how do you use it?
21 A. I use that Idaho State effective tax rate
22 in the calculation of the gross-up factor (Staff Exhibit
23 No. 101, page 9, line 3).
24 Q. What is the purpose of the gross-up factor?
25 A. The gross-up factor calculates how much the
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1 gross revenue must be in order for the utility to collect
2 and keep its authorized return after paying income taxes.
3 For ease of presentation it is more convenient to
4 calculate a gross up that includes both Idaho State and
5 Federal income taxes than it is to make separate
6 calculations for each of the components. Therefore, I
7 calculate the gross-up factor to be 1.6392 (Staff Exhibit
8 No. 101, page 9, line 11).
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
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1 Q. Please state your name and business address
2 for the record.
3 A. My name is Sydney Lansing. My business
4 address is 472 W. 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 Staff Auditor in the Accounting Section.
9 Q. Are you the same Sydney Lansing who
10 previously filed direct testimony in this proceeding?
11 A. Yes, I am.
12 Q. What is the purpose of your testimony in
13 this surrebuttal presentation?
14 A. The purpose of my testimony is to present
15 revised Exhibit No. 101 with all of its pages. Pages 1,
16 3, 4, 6, 8, 9, 10, and 12 have been revised; pages 2, 5,
17 7, and 11 are the same as in direct testimony; page 13 is
18 new to this surrebuttal testimony. I will also sponsor
19 new Exhibit No. 157 which shows portions of Table 1-A
20 from the 1995 FCC ARMIS Report related to Outside Plant
21 Statistics, particularly showing total fiber optic cable
22 and fiber optic cable in use. Additionally, I will
23 discuss issues raised by U S WEST witnesses Wright,
24 Elder, and Plummer in their rebuttal testimony. In
25 particular, I will address settlement issues; plant in
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1 service and related adjustments, state effective income
2 tax rate, gross-up factor, and cost allocation.
3 SETTLEMENT ISSUES RELATED TO EXHIBIT NO. 101, PAGE 1
4 Q. What agreements were reached at the
5 settlement conference on January 15, 1997 that affect
6 Exhibit No. 101?
7 A. The Staff and U S WEST agreed to change the
8 Company's miscellaneous revenues as shown on lines 42 and
9 43 of Exhibit No. 101 by $10.234 million. Rent
10 compensation was originally excluded as a contra revenue.
11 Staff also agreed in principal that three
12 accounts (Capital Leases, Leasehold Improvements, and
13 Intangibles) as well as the true-up to plant in service,
14 were omitted from the Staff's rate base when comparing
15 the General Ledger to the Subsidiary Ledger. Staff
16 agreed to audit the three accounts and the true-up in
17 Seattle on January 23 - 24, 1997. All of the information
18 necessary to complete the audit was not available, so a
19 subsequent audit in Denver was performed on February 3 -
20 6, 1997.
21 CAPITAL LEASES, LEASEHOLD IMPROVEMENTS, AND INTANGIBLES
22 Q. Based on your audits, what do you recommend
23 with respect to Capital Leases, Leasehold Improvements,
24 and Intangibles?
25 A. I recommend that each of the accounts be
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1 included in the rate base as follows. (Each amount is
2 reported here at the intrastate level with "000"
3 omitted):
4 Capital Leases - Buildings $4,263
Allocated between Title 61 and Title 62.
5
Capital Leases - Software $5,495
6 Directly assigned to Title 62.
7 Leasehold Improvements $3,676
Allocated between Title 61 and Title 62.
8
Intangible Assets $ 42
9 Allocated between Title 61 and Title 62.
10 It is my understanding that U S WEST agrees
11 with these amounts, but not my assignment of the software
12 to Title 62. The appropriate allocation of the other
13 three items is left to Staff witness Baldwin.
14 Q. Why do you recommend that the Capital Leases
15 related to the software be directly assigned to Title 62?
16 A. Despite the two audits and many audit
17 requests, U S WEST has been unable to provide any
18 meaningful information about the purpose or function of
19 the software directly related to the capitalized leases.
20 Most of the software should be part of the central office
21 switch operation. (I was provided a list of the features
22 on a switch, but no designation about which features came
23 with the switch and which features were "add-ons" and
24 supplied as part of the leases). However, my discussion
25 with asset accounting people in Seattle led me to believe
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1 that the features covered by the capitalized leases were
2 Custom Local Area Signaling Services (CLASS) services,
3 i.e., Call-forwarding, Caller identification, Automatic
4 callback, Automatic recall, Calling number delivery,
5 Customer originated trace, Distinctive ringing/call
6 waiting, Selective call forwarding, Selective call
7 rejection. Clearly these features all supply Title 62
8 services. Given this information and the failure of the
9 Company to satisfactorily demonstrate the functions of
10 the software leases, I assigned these capital leases to
11 Title 62.
12 AMORTIZATION OF CAPITAL LEASES, LEASEHOLD IMPROVEMENTS,
13 AND INTANGIBLES
14 Q. What other adjustments must be made to
15 properly account for Capital Leases, Leasehold
16 Improvements, and Intangibles?
17 A. Amortization of each account should be
18 included in the calculation of a Title 61 revenue
19 requirement. I include amortization expense related to
20 these accounts on line 33 of Revised Exhibit No. 101 as
21 follows. All amounts are at the Intrastate level with
22 "000" omitted:
23 Capital Leases - Buildings $ 182
Allocated between Title 61 and Title 62.
24
Capital Leases - Software $1,333
25 Direct assignment to Title 62.
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1 Leasehold Improvements $ 108
Allocated between Title 61 and Title 62.
2
Intangibles $ 2
3 Allocated between Title 61 and Title 62.
4 DELAYED ADJUSTMENT TO ASSET SUBSIDIARY LEDGER FROM
5 GENERAL LEDGER
6 Q. What did your audit of the true-up to plant
7 in service reveal?
8 A. There are three issues: 1) Changing the
9 overhead allocation factors on a retrospective basis
10 rather than a prospective basis; 2) Increasing the rate
11 base at the subsidiary ledger level nine months after the
12 close of the year; and 3) including fiber plant as an
13 increase to rate base. U S WEST posted an increase in
14 the Subsidiary Ledger in September 1996 as an adjustment
15 to 1995 Plant in Service amounting to $6,328,848 before
16 separations. The "true-up" occurs only because U S WEST
17 changes the overhead allocation factors for construction
18 projects after the close of the year. (U S WEST calls
19 these adjustments RUC adjustments.) This procedure
20 increases the plant in service at the subsidiary ledger
21 level for the 1995 test year nine months after the year
22 has ended. The proper way to change allocation factors
23 is to change on a prospective basis, not on a
24 retrospective basis.
25 Q. Doesn't U S WEST make the same type of
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1 adjustment every year?
2 A. In production request number 281, I asked
3 for "the entries that adjusted the sub ledger during the
4 year 1995 that related to the year 1994." The answer
5 provided by U S WEST did not answer the question. U S
6 WEST answered: "There were no entries to adjust the
7 subsidiary record during 1996 that related to the RUC
8 adjustment for 1995 because the adjustment did not effect
9 the ledger." I have not been able to get any meaningful
10 information about the continuity of the procedure.
11 Q. What do you recommend related to the 1996
12 true-up for 1995?
13 A. In my Direct testimony I removed from rate
14 base the total difference between the General Ledger and
15 the subsidiary ledger. I have agreed to include capital
16 leases, leasehold improvements, and intangibles in rate
17 base subject to Title 61 and Title 62 allocation.
18 However, I disagree with changing the overhead allocation
19 factor on a retrospective basis and I disagree with
20 increasing the cost of the individual assets after the
21 year end. Therefore, I have left as a reduction to Plant
22 in Service the amount remaining from the adjustment
23 reported in my Direct testimony, $4,314,375 ($6,328,848 X
24 68.17%) (Exhibit No. 101, page 4, line 3).
25 Q. You also noted that as part of the "true-up"
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1 issue there is an issue related to fiber cable. What
2 influence does that have on your recommendation?
3 A. About $3.3 million of the $6.3 million was
4 posted to fiber accounts. If any of the "true-up"
5 adjustment had been proper, I would have recommended that
6 about 90% of the $3.3 million adjustment be placed in a
7 "plant held for future use account."
8 FIBER - LIT VS. DARK
9 Q. Did you investigate Company witness
10 Plummer's statement on page 21 of his rebuttal testimony
11 (lines 14-17): "Finally, the actual amount of lit fiber
12 as a percentage of total fiber as reported in the 1994
13 ARMIS Report was determined to be in error. The use of
14 actual "lit" fiber rates for Idaho tell a much different
15 story than the erroneous information upon which Staff has
16 relied."?
17 A. Yes, I did. I was surprised to learn for
18 the first time of the U S WEST ARMIS error when I read
19 Mr. Plummer's statement. The implication of his
20 statement is that if the proper 1994 amounts are known,
21 one could assume there is a much larger percentage of
22 fiber lit in the 1995 test year than I claimed in my
23 direct testimony. However, my review of the corrected
24 "Automated Reporting Management Information System"
25 (ARMIS) Report for 1994 revealed that the amount of lit
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02/26/97 Staff
1 fiber at the end of 1994 was about 11.94% calculated as
2 13,485 Km of fiber lit out of a total of 112,902 Km of
3 fiber. The original ARMIS Report for 1994 stated the
4 amount of lit fiber to be 9.89% calculated as 13,485 Km
5 of fiber lit out of a total of 136,281 Km of fiber.
6 Q. Did the 1994 error (2.05 percentage points)
7 have any influence on the 1995 ARMIS report.
8 A. No. The error was confined to 1994.
9 Q. How did you calculate the amount of lit
10 fiber in 1995?
11 A. I received the information about the 1995
12 ARMIS report from U S WEST as a result of Audit Request
13 No. 18A. The audit request asked for a "List by General
14 Location showing the total number of fiber lines
15 installed and of that total the number of lines lit.
16 (Idaho South only)." U S WEST provided to me, as an
17 answer to that request, a copy of Table 1-A of Section
18 43-08 of the FCC ARMIS Report. That information states
19 that there was 123,280 Km of fiber in 1995 in Idaho. The
20 report also states of that amount 12,766 Km of fiber was
21 lit. (Exhibit No. 157). See the Idaho row, columns (r)
22 and (s). That works out to 10.355% of fiber that was lit
23 Consequently, I stated that only 10.355% of lit fiber was
24 used and useful. The remaining balance (89.645%) was
25 properly classified as plant held for future use.
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USW-S-96-5 LANSING (Surr) 8
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1 (Direct, page 13).
2 Q. Has the Company updated its 1995 ARMIS
3 Report?
4 A. No. In response to Audit Request No. 167
5 U S WEST stated: "There are no efforts in progress to
6 find additional errors in the ARMIS Table IA for 1995..."
7 Since U S WEST filed rebuttal testimony I
8 have attempted to verify the statement made by Mr.
9 Plummer in his rebuttal testimony at page 5, line 12,
10 where he states "As of January 7, 1997 the percent fill
11 (or amount of "lit" fiber as a percentage of "total"
12 fiber) was 43% for the state of Idaho." From the
13 documents provided in response to audit and production
14 requests, I found that the calculation related to Mr.
15 Plummer's 43% was not based on the same data as was
16 previously provided to me about lit and dark fiber from
17 the ARMIS Report. The original information (stated as Km
18 of fiber that came from a financial information data
19 base) was based on the information necessary to file an
20 FCC ARMIS Report related to lit and dark fiber. The
21 documentation provided to justify Mr. Plummer's statement
22 in his rebuttal testimony about the 43% fiber fill
23 referred to strands of fiber that came from an
24 engineering data base with no relationship to the
25 financial information. Distance does not relate to
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1 strands. I was not allowed to discuss this issue with an
2 engineer or any person responsible for the records in
3 order for us to work out the differences. For comparison
4 there is only a 17% fiber fill in all of U S WEST's
5 territory according to the ARMIS Report for 1995. (See
6 Exhibit No. 157).
7 Q. What do you recommend with respect to the
8 fiber plant in service?
9 A. I recommend that the Commission reject Mr.
10 Plummer's assertion for four reasons: 1) Mr. Plummer's
11 43% calculation is not comparable to financial data
12 related to the ARMIS report; 2) Mr. Plummer's 43% is not
13 related to average plant in service for the 1995 test
14 year; 3) The Company has neither changed the 1995 ARMIS
15 report nor supplied comparable data to calculate the 1995
16 lit fiber; and 4) None of the unlit dark fiber is used
17 and useful, and should be recorded in Plant Held for
18 Future Use, a normal account in the telephone world as
19 evidenced by a special account in the USOA (account
20 2002). Consequently, I have not changed my
21 recommendation. About 10% of the fiber should be
22 included in plant in service and about 90% of the fiber
23 should be considered plant held for future use, because
24 it is not currently used and useful.
25
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1 1.89% ERROR FACTOR
2 Q. Does Ms. Wright accept your adjustment for
3 a 1.89% error factor?
4 A. Partially. Ms. Wright says: "Mr. Lansing
5 is partially correct in his adjustment for unrecorded
6 retirements." (Rebuttal page 29). Ms. Wright makes a
7 distinction between accounts that I examined in my field
8 audit and those accounts that were not directly examined.
9 This distinction creates two issues:
10 1) Should only the accounts related to
central office equipment (that I
11 directly examined) be adjusted, or
should all of the accounts (including
12 buried plant accounts) be adjusted?
13 2) Were the errors discovered in the
accounts, related only to delayed
14 paperwork in reporting retirements, or
are there other human errors as well?
15
16 Q. U S WEST witnesses contend that your error
17 factor is unreliable (Elder, rebuttal, page 25) because
18 you did not use a 100% sample of the accounts. Do you
19 agree?
20 A. I disagree. I found an error factor in
21 every location and in every account that I examined,
22 leading me to believe that the error factor is widespread
23 and related to normal human errors, i.e., losing
24 paperwork or not recording proper information on the
25 paperwork, all for a variety of reasons.
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1 Q. Ms. Wright says in rebuttal testimony page
2 30, line 3: "USWC does not experience the retirement to
3 its other assets as it does to its central office
4 equipment ..." Do you agree?
5 A. No, I disagree. The actual retirements
6 from Account 2211, analog electronic switching, is a
7 little over $43 million for the period 1986 through 1996,
8 a total of 11 years. That averages to be about $3.9
9 million per year. For comparison, the actual retirements
10 for Account 2232, circuit equipment, is over $53 million
11 for the same period and that averages to about $4.8
12 million per year. For comparison, Account 2423, buried
13 cable (metallic portion only), had retirements for the
14 same 11 years in excess of $33 million with an annual
15 average of about $3 million. Clearly, U S WEST does have
16 retirements, similar in magnitude, from outside plant
17 accounts and to suggest that there is no error factor in
18 those accounts is wrong.
19 Q. What is involved with the delayed paperwork
20 for retirements and the other human errors?
21 A. Beth Reiman of the Asset Accounting Group
22 for U S WEST informed me that her group made a
23 concentrated effort to gather asset retirement paperwork
24 that had been delayed for some reason. As a result of
25 that effort, U S WEST booked about $4.4 million in
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1 delayed retirements during 1996 (see Wright, rebuttal,
2 page 30). That is, of course, proper. However, delayed
3 paper flow is not the only reason for a mismatch between
4 booked assets and the actual assets in service. There
5 are other human errors, e.g., the individual recording
6 the retirement does not record all of the removed
7 equipment on the retirement documentation, or no
8 retirement documentation was created. If either of these
9 actions occur, finding the delayed paperwork would not
10 solve the problem. Additionally, booking an entry in
11 1996 does not create an appropriate plant in service
12 amount for a 1995 test year and an adjustment is still
13 required for whatever portion of that $4.4 million
14 occurred in 1995.
15 Ms. Wright says that there is no reason to
16 adjust the 1995 test year because the asset and the
17 accumulated depreciation would be changed by the same
18 amount (rebuttal testimony page 29, lines 10-13).
19 However, there are other factors related to a revenue
20 requirement than just the asset account and the
21 accumulated depreciation account. Both the deferred
22 income tax account and the depreciation expense account
23 are affected.
24 Q. What do you recommend with respect to the
25 error factor related to plant in service?
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1 A. I recommend that the adjustment as
2 originally provided in my direct testimony be accepted as
3 reported on Exhibit No. 101. The same adjustment is
4 presented on the revised Exhibit No. 101 as part of this
5 surrebuttal presentation.
6 EAS ADJUSTMENTS
7 Q. Has Staff made any pro forma adjustments
8 for implementation of EAS?
9 A. I have made adjustments for EAS at lines 10
10 and 30 of Exhibit No. 101, page 1. The calculations of
11 those amounts are presented on Exhibit No. 101, page 10.
12 Discussion of this adjustment is found in Mr. Eastlake's
13 surrebuttal testimony at pages 4-5.
14 GROSS-UP FACTOR AND EFFECTIVE STATE INCOME TAX RATE
15 Q. U S WEST witness Wright (rebuttal testimony
16 page 33, lines 4-8) indicates that there has been a
17 change in the Income Tax Rate utilized by U S WEST in its
18 gross-up factor. Instead of utilizing the Idaho
19 statutory rate of 8%, the new rate is calculated to be
20 6.594% as compared to your calculation of 6.1729%. Did
21 you verify this?
22 A. I intended to audit this calculation in
23 Denver the week of February 3, 1997, but was not allowed
24 to talk to anyone that could provide the necessary detail
25 to support the number used in the calculation. Ms.
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1 Wright did provide a work paper that showed the
2 calculation.
3 The problems with Ms. Wright's calculation
4 are these: 1) There is an apportionment factor to Idaho
5 (1.72381%) that should come from the multi-state
6 allocation formula calculated on the Idaho state income
7 tax return. I was shown what was purported to be a
8 theoretical Idaho income tax return for USWC that had a
9 calculated apportionment factor of 2.5556%. I also
10 looked at what was purported to be a copy of the actual
11 1995 tax return filed in Idaho. That return calculated
12 the multi-state apportionment factor to be 2.0213%. I
13 will utilize 2.0213% in the first step in calculating the
14 effective Idaho income tax rate.
15 2) There are also amounts contained in Ms.
16 Wright's work paper for the second step of the
17 calculation that are identified as the "Actual Taxable
18 Income (In Millions)" for "Idaho South" and "USWC". The
19 amounts utilized in the second step should not be the
20 ratio of income tax, but should be the ratio of net
21 income between USWC and southern Idaho at the regulated
22 jurisdictional financial statement level. For further
23 explanation of reasons for this calculation see my direct
24 testimony in this case at pages 25-26.
25 Q. What do you recommend with respect to the
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1 Idaho effective tax rate?
2 A. I have prepared a revised Exhibit No. 101,
3 page 8, using the apportionment factor from the actual
4 income tax return filed in Idaho for the 1995 taxable
5 year in the first step of the calculation. That
6 apportionment factor is 2.0213%. Additionally, I
7 included as the amount for the second step in my
8 calculation, the ratio of USWC income and expenses to
9 southern Idaho income and expenses (2.6196%). That ratio
10 is calculated utilizing the MR books for USWC and the JR
11 books for southern Idaho. The effective Idaho income tax
12 rate for 1995 I calculate to be 6.1729% (see revised
13 Exhibit No. 101, page 8).
14 Q. What are the issues involving the
15 calculation of the gross-up factor?
16 A. U S WEST witness Wright in her rebuttal
17 testimony (page 32, line 4) changes two numbers that have
18 an influence on the gross-up factor, also known as the
19 income-to-revenue multiplier. I have been unable to
20 audit the new numbers, but because they both together
21 have a small influence on the final revenue requirement,
22 I have not challenged either number. Therefore, there is
23 only one difference between the gross-up factor as
24 presented in rebuttal testimony by U S WEST witness
25 Wright, and the gross-up factor that I present in Exhibit
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1 No. 101, page 9. The difference is the influence of the
2 Idaho effective income tax rate (presented in Exhibit
3 No. 101, page 8 and discussed above). Ms. Wright
4 recommends an Idaho effective income tax rate of 6.594%
5 (rebuttal testimony page 33, line 7) and I recommend an
6 Idaho effective income tax rate of 6.1729% (see
7 calculation at revised Exhibit No. 101, page 8). This
8 difference changes the gross-up factor recommended by Ms.
9 Wright (1.6722) as compared to my recommendation of
10 1.6663 (see calculation at revised Exhibit No. 101,
11 page 9).
12 Q. Ms. Wright criticizes your calculation and
13 application of the gross-up factor at page 31 of her
14 rebuttal testimony. Why don't you use the embedded
15 income tax expense as discussed in her testimony?
16 A. I would very much like to utilize the same
17 methodology as Ms. Wright, but I cannot. Ms. Wright
18 starts with income tax expense as booked at the total
19 state level. Then she makes a one step adjustment that
20 calculates three things at once: 1)FCC part 64
21 deregulated amounts; 2) FCC part 36 interstate
22 separations amounts; and 3) The allocation between Idaho
23 Title 61 and Title 62. As discussed in my direct
24 testimony at page 6, I agree with the separations
25 calculations of Ms. Wright's calculation, but I disagree
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USW-S-96-5 LANSING (Surr) 17
02/26/97 Staff
1 with the Title 61 vs. Title 62 allocation. Therefore, I
2 am unable to start at the same place as Ms. Wright. I
3 have taken a different approach to include the embedded
4 income tax expense in the calculation of the gross-up
5 factor related to the final income tax expense.
6 Q. U S WEST requests an increase in revenue
7 and Staff recommends a decrease in revenue. Does this
8 affect the gross-up factor?
9 A. Yes. The gross-up-factor is affected
10 differently by the effective tax rate depending on
11 whether the revenue requirement: 1) increases as is
12 recommended by U S WEST; or 2) decreases as is
13 recommended by Staff.
14 Q. Please discuss the effective tax rate as
15 part of the gross-up factor when the revenue requirement
16 increases.
17 A. There are, embedded in the booked income tax
18 expense accounts, at least two credits that reduce the
19 income tax expense below the 35% statutory rate. General
20 business credits that occur almost every year and the
21 amortization of Investment Tax Credits (ITC) that occur
22 every year. These ITC credits are amortized over the
23 life of the asset that created the ITC. Additionally,
24 the flow through of certain book-tax-timing differences
25 can either reduce or increase the booked income tax
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USW-S-96-5 LANSING (Surr) 18
02/26/97 Staff
1 expense. Therefore, the real income tax expense as
2 booked is less than the 35% statutory rate. The result is
3 an embedded tax cost at an effective income tax rate. If
4 revenue increases, this results in an increased
5 requirement for income tax expense. The proper gross-up
6 factor should produce the income tax that will be paid on
7 the additional revenue. In this case the federal income
8 tax rate that will be paid on all additional revenue will
9 be at the statutory rate of 35%. Therefore, all
10 increases of revenue from the booked amount for 1995
11 should be grossed up at the 1.6663 rate which is
12 calculated utilizing the 35% statutory rate for federal
13 income tax. (Exhibit No. 101, page 9.)
14 Q. Is there a difference in the proper
15 gross-up factor if the revenue requirement decreases as
16 is recommended by Staff?
17 A. Yes, there is a difference. Because there
18 will be no additional income tax to be paid, the gross-up
19 factor should be calculated at the marginal income tax
20 rate that is embedded in the booked income tax expense.
21 Customers are entitled to the benefit of that embedded
22 reduced tax rate up to the amount of the revenue that
23 produced the embedded tax. Thus, as the revenue
24 decreases the income tax related to that decrease should
25 be at the embedded tax rate. The practical effect of
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USW-S-96-5 LANSING (Surr) 19
02/26/97 Staff
1 utilizing an embedded tax rate is that the embedded
2 income tax expense is allocated between Title 61 and
3 Title 62. Each group then receives some benefit from the
4 lower effective income tax rate.
5 The effective USWC income tax rate for 1995
6 is 30.84%. I calculated that embedded income tax rate at
7 the intrastate level from the U S WEST fully distributed
8 cost study provided from Audit Request No. 17-D. Using
9 the effective tax rate instead of the statutory tax rate,
10 I have calculated the gross-up factor for Staff's reduced
11 revenue requirement at 1.5661. See page 13 of Revised
12 Exhibit No. 101.
13 COST ALLOCATION
14 Q. What part of cost allocation are you
15 discussing?
16 A. I will discuss the direct assignment of
17 costs, including positions taken by recognized
18 authorities in the cost allocation field. Specifically,
19 1) Cost Accounting Standards Board (CASB); 2) FCC Part 64
20 requirements.
21 Q. In support of the Company's use of
22 allocations, Ms. Wright quotes from the Cost Accounting
23 Standards Board (CASB) Standard 403 (beginning on line
24 13, page 11 of her rebuttal testimony). Are you familiar
25 with that standard?
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USW-S-96-5 LANSING (Surr) 20
02/26/97 Staff
1 A. Yes, I am. Ms. Wright quotes from Section
2 403-50 (c)(1). This section applies to residual expenses
3 required to be allocated pursuant to Section 403-40.
4 Section 403-40 makes it clear that expenses should be
5 directly assigned to the maximum extent practical and
6 only residual amounts allocated using general allocation
7 factors.
8 9904.403-40 Fundamental requirement.
9 (a)(1) Home office expenses shall be
allocated on the basis of the
10 beneficial or causal relationship
between supporting and receiving
11 activities. Such expenses shall be
allocated directly to segments to
12 the maximum extent practical.
Expenses not directly allocated, if
13 significant in amount and in
relation to total home office
14 expenses, shall be grouped in
logical and homogeneous expense
15 pools and allocated pursuant to
paragraph (b) of this subsection.
16
17 Q. Ms. Wright also refers to an FCC decision
18 approving the use of general allocators. Does the FCC
19 language persuade you to change your position on this
20 issue?
21 A. No, it does not. Here again Ms. Wright
22 quotes language referring to common cost pool
23 allocation after direct assignment should have been
24 accomplished. In fact the Code of Federal
25 Regulations, Title 47, Section 64.901 makes it clear
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USW-S-96-5 LANSING (Surr) 21
02/26/97 Staff
1 that costs must be directly assigned whenever
2 possible.
3 Allocation of costs.
4 (a) Carriers required to separate
their regulated costs from
5 unregulated costs shall use the
attributable cost method of cost
6 allocation for such purpose.
7 (b) In assigning or allocating costs
to regulated and nonregulated
8 activities, carriers shall follow
the principles described herein...
9
(2) Costs shall be directly assigned to
10 either regulated or nonregulated
activities whenever possible.
11
(3) Costs which cannot be directly
12 assigned to either regulated or
nonregulated activities will be
13 described as common costs. ... Each
cost category shall be allocated between
14 regulated and nonregulated activities in
accordance with the following hierarchy:
15
(i) Whenever possible, common cost
16 categories are to be allocated based
upon direct analysis of the origin
17 of the cost themselves.
18 (ii) When direct analysis is not
possible, common cost categories
19 shall be allocated based on an
indirect, cost-causative linkage to
20 another cost category. ...
21 (iii) When neither direct nor
indirect measures or of cost
22 allocation can be found, the cost
category shall be allocated based
23 on a general allocator..."
(Emphasis added.)
24
25
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USW-S-96-5 LANSING (Surr) 22
02/26/97 Staff
1 My purpose in addressing direct
2 assignment, as compared to the appropriate allocation
3 of joint and common costs discussed by Staff witness
4 Baldwin, is to stress the importance of direct
5 assignment in the several allocation processes that
6 precede the operation of CAAS. As I pointed out in my
7 direct testimony, costs lose their identity as they
8 move through the series of cost allocations that occur
9 before CAAS, making it impossible for CAAS to
10 correctly assign costs without examining the basic
11 characteristics of each cost as presented in documents
12 of original entry. To correct for this shortcoming in
13 the Company's process, Staff witnesses Faunce,
14 Schneider, and Stockton have identified costs that
15 should not be included in cost pools allocated in part
16 to Title 61 services, and Staff witness Baldwin has
17 allocated the remaining cost pools between Title 61
18 and Title 62.
19 Q. Does this conclude your surrebuttal
20 testimony in this proceeding?
21 A. Yes, it does.
22
23
24
25
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USW-S-96-5 LANSING (Surr) 23
02/26/97 Staff
1 (The following proceedings were had in
2 open hearing.)
3 MR. HOWELL: One or two more questions.
4 COMMISSIONER SMITH: Okay, Mr. Howell.
5
6 DIRECT EXAMINATION
7
8 BY MR. HOWELL: (Continued)
9 Q Mr. Lansing, did you and the Company, by
10 that I mean U S WEST, have an opportunity to discuss the
11 calculation of the effective tax rate as it is used and
12 the gross-up factor in this case?
13 A Yes, I did.
14 Q And have you and the Company reached an
15 understanding as to what the effective tax rate should be
16 and what the gross-up factor should be?
17 A Yes, we have.
18 Q And in simple terms -- well, why don't you
19 state for the Commission's benefit what the effective tax
20 rate is if revenues were to increase in this case and
21 also what the effective tax rate is if revenues were to
22 decrease in this case.
23 A Yes, sir, I will. In calculating a revenue
24 requirement in this case, U S WEST and Staff agree that
25 in case of a positive revenue requirement to use the
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1 effective tax rate of 6.594 percent and a gross-up factor
2 of 1.6722.
3 In the case of a negative revenue
4 requirement to use a state effective tax rate of
5 6.1729 percent and a gross-up factor of 1.5661.
6 Q And did the Company and the Staff reach
7 this agreement on Wednesday of this week?
8 A Yes.
9 MR. HOWELL: With that, Madam Chairman, I
10 have no further questions and would tender the witness
11 for cross.
12 COMMISSIONER SMITH: Mr. Alke.
13 MR. ALKE: Thank you, Madam Chair.
14
15 CROSS-EXAMINATION
16
17 BY MR. ALKE:
18 Q Good morning, Mr. Lansing.
19 A Good morning.
20 Q I have a few housekeeping questions first.
21 I wonder if you would turn to your revised Exhibit 101,
22 the March 13th revision.
23 A I have it.
24 Q Would you please look at your line 7 under
25 the settlement agreement Column E where you have a figure
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1 for deferred income tax of 6.208 million? Would you tell
2 me how you calculated that and what the data inputs were?
3 A The data inputs came from several
4 settlement adjustments. I'm going to have to go to
5 workpapers behind them. I'll be happy to do that.
6 Q Could you do that, please?
7 A There are two inputs that make that up;
8 depreciation expense and pension asset -- not expense,
9 but depreciation and pension asset.
10 Q And what are the dollar figures
11 attributable to those two inputs?
12 A Depreciation is 2546 and the pension asset
13 is 3662.
14 Q Similarly, would you look on the same
15 Column E on line 17 under maintenance and tell me how you
16 calculated the 5.984 figure on line 17 under Column E and
17 tell me what the data inputs were?
18 A Restructuring from Kent Schneider's
19 testimony was 745.
20 Q Point 745 million?
21 A No, 7,745,000. Subtract from that 1761,
22 once again from Kent Schneider's adjustments to the
23 settlements.
24 Q Would you please turn to page -- actually,
25 it's Exhibit 4, 101 of your revised testimony?
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1 COMMISSIONER SMITH: Exhibit 101, page 4?
2 MR. ALKE: Exhibit 101, page 4.
3 THE WITNESS: I have it.
4 Q BY MR. ALKE: On line 14, you have an entry
5 of 143,072,000 and it's entitled, "Assignment Title 62
6 Baldwin"?
7 A Yes, sir.
8 Q Can you tell me how you computed that
9 number and what your data inputs were?
10 A I did not compute the number. The data
11 input came from Ms. Baldwin.
12 Q That was a number she just gave you;
13 correct?
14 A Yes, sir.
15 Q Mr. Lansing, would you agree that the FCC
16 prescribed books are sometimes referred to as the MR
17 books?
18 A I think that's fair, yeah.
19 Q And would you agree that to move from what
20 we call the MR books to the Idaho jurisdictional books,
21 or the JR books, we make certain adjustments so that we
22 reflect the specifics of, for example,
23 Commission-required adjustments?
24 A Yes, I agree.
25 Q Okay, and so to the extent that there is a
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Wilder, Idaho 83676 Staff
1 Commission adjustment reflected in the move from MR books
2 to JR books, would you agree that if you then adjusted JR
3 books to reflect a Commission adjustment that would be a
4 double counting of that Commission adjustment?
5 A If that occurred, yes, sir, it would.
6 Q Would you please look again at your revised
7 Exhibit 101? Look in the column adjustment to rate base,
8 line 9. Under Column B, you have a figure of $34 million
9 there, roughly.
10 A Yes.
11 Q Would you explain to me how you calculated
12 that $34 million?
13 A Those came from Margie Wright's testimony,
14 in her direct testimony, and the major piece of it, and I
15 can't remember all the pieces, if you want me to, I'll
16 spend the time to go get them, but the major piece is the
17 sale of exchanges.
18 Q Now, you have a page 2 of 12 exhibit as
19 part of your prefiled testimony, do you not?
20 A Page 2 of 12?
21 Q Right.
22 A Yes, sir, I do.
23 Q Of your Exhibit 101?
24 A Yes.
25 Q Okay. Now, on your page 2 of 12, the left
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1 most column is entitled, "U S WEST Commission
2 Adjustments"?
3 A That's true.
4 Q Those would be the adjustments U S WEST
5 made, would it not, to move from the MR books to the JR
6 books?
7 A I'm not convinced that's true. It could
8 be, but I'm not convinced it's true.
9 Q You see on your page 2 of 12 the entry for
10 adjust average rate base of 5,746,000 under U S WEST
11 Commission adjustments?
12 A I see the number, yes.
13 Q Wasn't that number in fact deducted by
14 U S WEST in moving from MR books to JR books?
15 A Perhaps. I don't want to admit it now. I
16 don't know that yet.
17 Q But if it was, you would agree, then, that
18 to reflect it as a change in your Column B would be a
19 double adjustment?
20 A Yes, I would.
21 Q Okay, thank you very much. One last number
22 I need you to clarify for me. Would you look again on
23 revised Exhibit 101, page 1, your entry under
24 depreciation, line 32 under Idaho JR, do you see the
25 entry of 36.425 million?
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Wilder, Idaho 83676 Staff
1 A Lead me there again. I'm sorry, I got
2 lost.
3 Q Look at line 32 under Column A on page 1 of
4 your Exhibit 101. Do you see where you have an entry of
5 36.425 million?
6 A Yes.
7 Q I couldn't tie that number to either the MR
8 or the JR number, so I need you to tell me how you
9 calculated that number.
10 A I'm going to have to go back to workpapers.
11 Q Could you do so, please?
12 A Yeah. It's going to take a little.
13 COMMISSIONER SMITH: We'll be at ease.
14 (Pause in proceedings.)
15 COMMISSIONER SMITH: We'll go back on the
16 record.
17 THE WITNESS: You asked me about the
18 depreciation number on my Exhibit 101; is that correct,
19 sir?
20 Q Yes, Mr. Lansing.
21 A That number comes from account 6561 from
22 the trial balance at the JR level with an application --
23 and by the way, it has 6563 and 6564 added to it and
24 6565, then a depreciation separations factor of 68.34
25 percent. That comes from the 1990s detailed report,
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Wilder, Idaho 83676 Staff
1 version 5.02, provided to me as Audit Request No. 6,
2 Attachment A.
3 Q Will you agree, Mr. Lansing, that the entry
4 at the MR book level for depreciation and amortization is
5 not 36.425 million but 37.89 million?
6 A After separations?
7 Q Yes, after separations.
8 A I won't agree without knowing how we get
9 there. If there is an error here, I will be happy to fix
10 it, but I don't know that there is.
11 Q The last question I need to ask, then, will
12 you agree that the entry for depreciation and
13 amortization at the JR book level is 38.591 million and
14 not 36.425 million?
15 A Once again, it's the same answer. If you
16 can show it to me and it's right, I'll agree to change
17 it.
18 Q Mr. Lansing, will you agree that with the
19 exception of your belief that U S WEST did not correctly
20 record the expenses from BRI, Advanced Technologies and
21 Bellcore that you believe U S WEST maintained its books
22 and records in accordance with the Uniform System of
23 Accounts?
24 A Yes, I think I could agree there.
25 Q And will you also agree that U S WEST
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Wilder, Idaho 83676 Staff
1 correctly separated interstate and intrastate operating
2 results in accordance with this Commission's rules?
3 A Yes.
4 Q And I believe you'll also agree, will you
5 not, that the vast majority of plant in service in the
6 State of Idaho is a joint or common facility between
7 Title 61 and Title 62 services?
8 A Vast majority?
9 Q Vast majority.
10 A Whatever that means, yeah, I guess so.
11 Q For example, the central office buildings,
12 they don't just serve Title 61 or Title 62, they serve
13 both Title 61 and Title 62, don't they?
14 A I suppose so.
15 Q And the switches inside the central office
16 buildings, they don't just serve Title 61 or Title 62,
17 they serve both Title 61 and Title 62, don't they?
18 A We want to be a little careful here. I can
19 take you over and show you a switch over here at the
20 Boise main that serves just Micron, but I don't want to
21 get down that path too far.
22 Q Mr. Lansing, you'll agree that the loop,
23 the connection between the customer and the central
24 office facility, that's a joint and common facility,
25 isn't it?
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Wilder, Idaho 83676 Staff
1 MR. HOWELL: Madam Chairman, I'm going to
2 object to the question. I believe that particular
3 question is outside the scope of his testimony.
4 COMMISSIONER SMITH: Mr. Alke.
5 MR. ALKE: Ms. Chairman, this witness is
6 the witness who sponsors the allocations between Title 61
7 and Title 62. If you look at his Exhibit 101, the entire
8 exhibit is prepared as an allocation of Title 61 and
9 Title 62, both expenses and plant. If this witness can't
10 allocate and isn't capable of allocating between Title 61
11 and Title 62, then an awful lot of his testimony would
12 have to be stricken from the record.
13 COMMISSIONER SMITH: Mr. Howell.
14 MR. HOWELL: Madam Chairman, the Staff's
15 witness for cost allocation in the plants specifically
16 through these allocations is Staff witness Baldwin who
17 will be available later in the week. Mr. Lansing's
18 Exhibit 101 is the consolidated representation of the
19 Staff's positions. As indicated on several of the pages
20 behind his page 1 of Exhibit 101, those pages have been
21 created and are sponsored by other individuals. As he
22 had already admitted to Mr. Alke earlier, Ms. Baldwin did
23 give him some of these numbers that do find their way on
24 to Exhibit 101.
25 COMMISSIONER SMITH: Mr. Alke, go ahead. I
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Wilder, Idaho 83676 Staff
1 mean, it seems to me that this is an accounting witness
2 that much like one of U S WEST's accounting witnesses
3 took numbers from sponsors of technical topics and issues
4 and that probably you are getting beyond the scope of
5 what this witness' testimony is intended to portray.
6 MR. ALKE: I need clarification. What is
7 the Chair's ruling, then, Madam Chair?
8 COMMISSIONER SMITH: I think when you ask
9 your allocation questions, if you're talking about their
10 correctness, you need to go to the witness that will
11 sponsor them and that is Ms. Baldwin. To the extent that
12 you want to clarify which numbers are his and which are
13 Ms. Baldwin's or someone else's, then you should do
14 that.
15 MR. ALKE: May I at least inquire of the
16 witness of the allocations which he himself proposed?
17 COMMISSIONER SMITH: Certainly.
18 Q BY MR. ALKE: Mr. Lansing, will you agree
19 that the Staff witnesses in this case are sharply
20 critical of U S WEST for allocating between Title 61 and
21 Title 62 instead of directly assigning between Title 61
22 and Title 62?
23 A Yes, sir, and I'm one of them.
24 Q And in fact, isn't it true that you purport
25 to assign directly to Title 62 -- excuse me, strike
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Wilder, Idaho 83676 Staff
1 that. You purport to assign directly 41 percent of the
2 entire plant in service to either Title 61 or Title 62 on
3 your Exhibit 101?
4 A I didn't work the math. I -- go ahead.
5 Q Let me work the math for you.
6 A Okay.
7 Q You have a total plant in service of
8 $547 million, don't you?
9 A Yes.
10 Q And you purport to directly assign to
11 Title 61 on your Exhibit 101 $45 million in plant, and
12 you purport to directly assign to Title 62 $176 million
13 in plant. The sum of those two numbers is 41 percent of
14 the 547 total plant in service in the State of Idaho,
15 isn't it?
16 A I will accept your math on that.
17 Q I want you to describe for me just in
18 layman's terms the 41 percent of a plant in service in
19 the State of Idaho that you don't think is joint and
20 common.
21 MR. HOWELL: I'm going to object to the
22 question again, Madam Chairman. I think it calls for a
23 conclusion outside this witness' direct or surrebuttal
24 testimony.
25 COMMISSIONER SMITH: I'm going to overrule
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1 the objection, Mr. Howell. Mr. Lansing, answer.
2 THE WITNESS: I did not make that
3 assignment. Susan Baldwin did.
4 Q BY MR. ALKE: Well, let's turn to your
5 page 4 of 101. Now, you have five adjustments on page 4,
6 do you not, and those five adjustments make up the
7 $176 million figure that's assigned directly to Title 62
8 in Column G of your page 1, Exhibit 101?
9 A Yes.
10 Q So according to your Exhibit 101, by
11 including numbers in this total that equals 176,380,
12 you're in fact trying to suggest that you're directly
13 assigning that plant to Title 62?
14 A Yes, at least as not Title 61.
15 Q Now, that's key, isn't it, Mr. Lansing? In
16 fact, let's look at the first adjustment on Exhibit 101,
17 page 4. You're deducting 4.3 million because the general
18 ledger and the subsidiary ledger do not agree; correct?
19 A Yes.
20 Q You're not assigning anything directly to
21 62. That's a flat-out rate base disallowance that you're
22 proposing, isn't it?
23 A On that one, that is true.
24 Q Let's look at the next one. You've got a
25 $10.3 million adjustment for error factor of 1.89 percent
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Wilder, Idaho 83676 Staff
1 in the subsidiary ledger. You're not proposing to
2 directly assign that to 62. That's a flat-out rate base
3 disallowance, isn't it?
4 A Yes.
5 Q And similarly, the 9.1 million adjustment
6 you propose to remove fiber, that's not a direct
7 allocation to Title 62. That's a flat-out rate base
8 adjustment disallowance, isn't it?
9 A I would consider that a reclassification
10 under the rules of Part 32.
11 Q You're proposing to disallow $9.1 million
12 in fiber as not being used and useful, aren't you?
13 A You're twisting the words there a little
14 bit. I think it ought to be classified as plant held for
15 future use.
16 Q Let's come at it another way. If this
17 Commission regulated both Title 61 and Title 62 services,
18 you wouldn't be proposing that Title 62 services bear any
19 portion of that number, would you? You're proposing a
20 total disallowance of rate base of $9.1 million for
21 fiber.
22 A Plant held for future use is not part of
23 rate base if that's the way you want to consider it.
24 Q And my original question is you're not
25 really saying you're directly assigning $9.1 million of
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1 plant to Title 62, you're proposing a flat-out rate base
2 disallowance of $9.1 million?
3 A Okay.
4 Q Let's look at the $143 million figure that
5 comes over from Ms. Baldwin. That's not a direct
6 assignment either, is it?
7 A I have no idea.
8 Q Isn't it true that the $143 million figure
9 from Ms. Baldwin in fact is simply her allocation
10 methodology of common plant?
11 A I don't know how she did it. I think I
12 could speculate, just like anybody else, but I don't know
13 how she did it.
14 Q You know of your own knowledge as the
15 senior auditor in this case, don't you, that she is
16 proposing to allocate all digital transmission investment
17 after 1989 to Title 62?
18 MR. HOWELL: I'm going to object again to
19 the question. It's beyond the scope of this witness'
20 testimony.
21 COMMISSIONER SMITH: I think the witness
22 can state whether or not that's his understanding, if he
23 knows.
24 THE WITNESS: As a matter of actual fact, I
25 have not talked to Ms. Baldwin about that issue. I have
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1 heard rumor, but I feel real uncomfortable about saying I
2 know that.
3 Q BY MR. ALKE: It's reflected right in the
4 footnotes and explanations of Ms. Baldwin's testimony,
5 isn't it?
6 A Yeah, I believe it is.
7 MR. ALKE: Can I have a moment,
8 Madam Chair?
9 COMMISSIONER SMITH: Sure.
10 (Pause in proceedings.)
11 Q BY MR. ALKE: Mr. Lansing, right in her
12 footnotes on Exhibit 114, Ms. Baldwin states, does she
13 not, under Footnote 3 that investment in digital
14 transmission equipment is allocated based on the
15 following three principles: Sub (i) the remaining
16 investment amount is -- excuse me, all other investment
17 in digital transmission equipment since 1989 is allocated
18 to Title 62. That's just simply flat out stated in her
19 footnotes, isn't it?
20 A I don't have it here. I assume you read it
21 correctly.
22 Q Okay, and you can certainly refer to it if
23 you'd like, and she also states, does she not, right in
24 her footnotes that investments in the digital switches to
25 the extent it wasn't funded with Title 61 funds she's
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1 going to allocate 100 percent to Title 62?
2 MR. HOWELL: Madam Chairman, again I would
3 renew my objection. This is now cross-examination for an
4 exhibit that has not been admitted yet into the record
5 and it is an exhibit sponsored by a Staff witness which
6 is yet to be presented. I'm not going to quibble the
7 accuracy of what a footnote says, but, again, conclusions
8 or impressions to be derived from this exhibit I think
9 are beyond the scope of Mr. Lansing's testimony.
10 COMMISSIONER SMITH: Mr. Alke.
11 MR. ALKE: Again, Madam Chair, the actual
12 allocation in this docket is actually a joint product of
13 Mr. Lansing and Ms. Baldwin. If you look at
14 Mr. Lansing's exhibits, for example, if you look at his
15 page 4, the one we're talking about, he brings over a
16 number of $143 million from Ms. Baldwin. If you then go
17 to Ms. Baldwin's exhibit, she then incorporates
18 adjustments back from Mr. Lansing on her Exhibit 3c of
19 159. They jointly prepared the allocation of costs and
20 his allocation of costs is critical to his calculation of
21 the revenue requirement in this case. I'll be honest, I
22 can't understand how he could not be familiar, this
23 witness, and knowledgeable about the allocations and
24 prepare the revenue requirement that's being presented to
25 the Commission.
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1 COMMISSIONER SMITH: Well, Mr. Alke, it
2 seems to me it's certainly appropriate to discuss with
3 him as you have the allocations and adjustments that he's
4 proposing and then you should discuss with Ms. Baldwin
5 the numbers that she's proposing.
6 Q BY MR. ALKE: Isn't it true, Mr. Lansing,
7 that the real choice in this case isn't between U S WEST
8 allocations and direct assignments, but the U S WEST
9 allocations and the allocations that have been proposed
10 by the Staff?
11 MR. HOWELL: I'm going to object,
12 Madam Chairman. It's again beyond the scope of his
13 testimony. His testimony is on page 4 of Exhibit 101
14 that he is the witness who has prepared the first four
15 adjustments on lines 2, 6, 11, but he has not prepared
16 the line 14 adjustment which flows from Ms. Baldwin.
17 COMMISSIONER SMITH: I don't think that was
18 the question, Mr. Howell.
19 MR. HOWELL: Well, it's calling for a large
20 conclusion. If you would total up his four adjustments,
21 it's roughly $24 million and yet, this witness is asked
22 to make a conclusion about the overall cost allocation
23 methodology advocated by the Staff.
24 COMMISSIONER SMITH: Mr. Alke.
25 MR. ALKE: Again, Madam Chair, this witness
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1 is the person who brings together all of the allocations,
2 both the ones he did and the one Ms. Baldwin did, and
3 he's the one who computes the revenue requirement from
4 those allocations. I think he has to be familiar with
5 what really is the issue, direct assignment versus
6 allocation.
7 He specifically has testified in the body
8 of his testimony, Mr. Lansing personally has testified,
9 one of the reasons he doesn't like CAAS is because it
10 doesn't do enough direct assignment, so I don't see how
11 he can't be competent to answer that question.
12 COMMISSIONER SMITH: I'm going to overrule
13 the objection.
14 Mr. Lansing, do you remember the question?
15 THE WITNESS: No, I don't. I got lost
16 along the way.
17 Q BY MR. ALKE: Isn't it true, Mr. Lansing,
18 that the real choice in this case isn't between
19 U S WEST's cost allocations and direct assignment, but
20 between U S WEST's cost allocation methodology and the
21 Staff's cost allocation methodology?
22 A I suppose you could characterize it that
23 way. I do not. I look at the idea is that direct
24 assignment must occur first. If you have any allocation
25 system at all, direct assignment has to occur first.
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1 After that, regardless of the size of the common pool,
2 the common pool gets allocated in some manner.
3 Q Let me be clear, then. You're contending
4 that if the Staff chooses to allocate 100 percent of
5 common plant such as digital transmission since 1989 that
6 that magically becomes direct assignment because you
7 choose to allocate 100 percent of common and joint plant?
8 A I don't think I said that.
9 Q Okay, I need your response, then. Is the
10 Staff contending that simply because it makes a judgment
11 to allocate 100 percent of some category of equipment to
12 Title 62 that because it makes a judgment to allocate
13 100 percent that that is the same as direct assignment?
14 MR. HOWELL: Madam Chairman, I'm going to
15 object again to the question. I think the question ought
16 to be directed to the witness, not to the Staff. If
17 Mr. Lansing knows of his own volition based on his
18 testimony, then I believe that answer would be
19 appropriate, but it's calling for --
20 COMMISSIONER SMITH: I'll overrule your
21 objection, Mr. Howell.
22 THE WITNESS: I get caught up in the --
23 Q BY MR. ALKE: Do you want me to ask it
24 again?
25 A Please do.
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1 Q Is the Staff contending that because it
2 decides to exercise a judgment that it will allocate
3 100 percent of a particular category of plant to Title 62
4 that that somehow transforms that to a "direct
5 assignment"?
6 A The simple answer is of course not. The
7 real deal is it isn't any more a direct assignment when
8 you make one of those judgments than when the CAAS system
9 did it. If it's a lump, it's a lump. If you could
10 make -- and needs to be common pool allocated. If it is
11 possible to direct assign, you must do that first. I
12 don't say should. CASB and all the rest of those
13 outfits, cost allocation directives, say you make direct
14 assignment first.
15 Q Mr. Lansing, you will agree, I assume, that
16 the U S WEST allocations are developed in large part
17 through its cost allocation accounting system or CAAS?
18 A I'm sorry, I missed the question.
19 Q You will agree, will you not, that
20 U S WEST's allocations in this case are developed in
21 large part through its cost allocation system or CAAS?
22 A Yes.
23 Q And you will also agree that some of the
24 Staff witnesses are sharply critical of CAAS in this
25 proceeding?
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1 A Yes.
2 Q Now, you performed, did you not, two
3 reviews of the USWC revenue sharing plan in your role as
4 senior auditor for the Commission?
5 A Yes, I did. I was part of the team.
6 Q And as part of those reviews, you estimated
7 the rate of return that you believe U S WEST was earning
8 on its Title 61 services?
9 A Yes.
10 Q Okay, and to do that, you not only had to
11 review the Title 61 revenues, did you not, but the costs
12 as allocated by CAAS?
13 A Yes.
14 Q And you actually reviewed the CAAS system,
15 didn't you, as part of your reviews of the revenue
16 sharing plan?
17 A Yes, I did.
18 Q And during your audit of the revenue
19 sharing plan, Mr. Elder satisfactorily answered all your
20 questions regarding CAAS, didn't he?
21 A Mr. Elder did his very best to explain to
22 me how it worked. I have had the same criticism of what
23 that is from the very first time I saw it.
24 Q Let me ask you that specific question
25 again, Mr. Lansing. Isn't it true that during your audit
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1 of the revenue sharing plan, Mr. Elder satisfactorily
2 answered your questions regarding CAAS?
3 A You're not going to let me qualify that at
4 all?
5 Q No. I want you to answer the question,
6 please.
7 A I think it requires a little
8 qualification. It's mostly yes.
9 Q Now, you recall I deposed you on
10 January 7th of this year, didn't I?
11 A Yes, you did.
12 Q And that deposition was under oath, wasn't
13 it?
14 A Yes, sir.
15 MR. ALKE: May I approach the witness,
16 Madam Chair?
17 COMMISSIONER SMITH: Certainly.
18 (Mr. Alke approached the witness.)
19 Q BY MR. ALKE: Mr. Lansing, I'm going to
20 read you a question I asked you in the deposition and I
21 want you to read your answer.
22 MR. HOWELL: Madam Chairman, could we have
23 the page cite so the rest of us can follow along?
24 MR. ALKE: Page 39, 40, beginning on
25 line 23.
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1 Q BY MR. ALKE: "Question: Did he answer all
2 your questions satisfactorily in those prior dockets
3 about the CAAS system?"
4 A I answered, "Oh, I think so, sure."
5 Q Now, isn't it true, Mr. Lansing, that after
6 the Staff completed its 1995 audit of the revenue sharing
7 plan, it was only modestly critical of CAAS?
8 A Are you saying the 1995 report that used a
9 1992 test year? I want to make sure we're talking about
10 the same thing. What year are we talking about?
11 Q Let's discuss the Idaho Docket USW-S-95-4.
12 Let's talk about that docket, okay?
13 A All right.
14 Q You're familiar with the docket?
15 A At least partially, yes.
16 Q Let me reask my question. Isn't it true
17 that after the Staff completed the 1995 audit of the
18 revenue sharing plan, it was only modestly critical of
19 CAAS?
20 A The Staff was critical of CAAS. "Modestly"
21 or some other adjective I feel a little uncomfortable
22 with.
23 Q Isn't it true that Ms. Stephanie Miller
24 prefiled testimony in that docket which states, and I
25 quote, "The Company, on the other hand, uses a fairly
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1 detailed method it calls CAAS, cost accounting allocation
2 system. While the Staff does not agree totally with the
3 CAAS mechanics or results, we believe that the average of
4 the results from the current CAAS allocations and using
5 gross revenues provides a reasonable estimation of
6 Title 61 and Title 62 services"?
7 MR. HOWELL: Madam Chairman, I'm going to
8 object. As Mr. Alke mentioned, I believe that that
9 testimony had been prefiled. That case was subsequently
10 withdrawn on a motion by U S WEST. That testimony was
11 never actually entered into the record because this
12 Commission in Order 26395 vacated the hearing and, in
13 fact, subsequently granted the motion of U S WEST to
14 withdraw at the time a joint proposal by the Company and
15 the Staff to implement a replacement for revenue sharing,
16 and I think it's inappropriate to ask this witness about
17 testimony filed by another witness in a case where
18 testimony wasn't actually entered into the record and not
19 by this witness.
20 COMMISSIONER SMITH: Mr. Alke, it seems to
21 me somewhat misleading to use that testimony which was in
22 a proceeding where there was a joint proposal between the
23 Company and the Staff as to an entirely different matter
24 than the rate case and I'd appreciate your comments.
25 MR. ALKE: Madam Chair, a critical issue in
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1 this case is the Staff's criticism of CAAS accounting,
2 and in my earlier cross, I specifically asked
3 Mr. Lansing, I said, isn't it true that the Staff is
4 sharply critical of CAAS and, of course, he says yes. I
5 believe that when this Commission Staff prepares written
6 testimony, an official document, and files it with the
7 Commission that that official document, we have to
8 assume, is truthful and above board and in that official
9 document, if that official document is, in effect,
10 directly contrary to the position taken by the Staff in
11 this proceeding, I believe it's an admission against
12 interest.
13 How can the Staff one case ago say CAAS is
14 not too bad and now in this case say it's terrible and
15 are we supposed to just then assume that they didn't
16 really say it wasn't too bad in the prior proceeding? I
17 truly believe it is an admission against interest and
18 it's a powerful admission against interest.
19 COMMISSIONER SMITH: Well, I guess perhaps
20 CAAS could be not too bad for one purpose and not
21 acceptable for another.
22 MR. ALKE: They could certainly try to
23 cross-examine on that basis, but in terms of my question,
24 I believe that's an appropriate question, Madam Chair.
25 COMMISSIONER SMITH: Let's go off the
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1 record.
2 (Off the record discussion.)
3 COMMISSIONER SMITH: Mr. Howell, I'm going
4 to overrule the objection and allow Mr. Alke to proceed.
5 MR. HOWELL: Madam Chairman, then, for the
6 record, I would, of course, renew my objection and ask
7 the Commission that if we get into extensive
8 cross-examination about another witness' testimony in a
9 prior case that the Commission take judicial notice of
10 all the documents and orders and filings in that
11 particular case rather than rely on the characterization
12 done through questioning.
13 COMMISSIONER SMITH: Yes, the Commission is
14 well aware that this testimony was never presented in a
15 hearing and never cross-examined and that there are other
16 orders and documents. If we need to, we'll take official
17 notice of the orders in that case.
18 Mr. Alke. And the record will note your
19 continuing objection.
20 Q BY MR. ALKE: Mr. Lansing, you will agree,
21 will you not, that in the prior revenue sharing case
22 Ms. Stephanie Miller caused to be filed with this
23 Commission direct testimony which stated, and I quote,
24 "The Company, on the other hand, uses a fairly detailed
25 method it calls CAAS, cost accounting allocation system.
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1 While the Staff does not agree totally with the CAAS
2 mechanics or results, we believe that the average of the
3 results from the current CAAS allocations and using gross
4 revenues provides a reasonable estimation of Title 61 and
5 Title 62 services"?
6 A I believe that's no doubt an accurate
7 reading of Ms. Miller's testimony.
8 Q Mr. Lansing, will you agree that there is a
9 difference between how a telephone company such as
10 U S WEST tracks its investment in central office
11 equipment and in outside plant?
12 A I don't know. Let's ask that question
13 again. Let's make sure.
14 Q Under the Uniform System of Accounts,
15 central office equipment is recorded and tracked on the
16 basis of actual cost, isn't it?
17 A It's supposed to be, yes.
18 Q And under the Uniform System of Accounts,
19 outside plant is tracked on the basis of average cost,
20 isn't it?
21 A I think you're making that too broad.
22 Q Okay. Let's come at it a little bit
23 differently. Isn't it true that when a telephone company
24 retires central office equipment the actual cost standard
25 in the Uniform System of Accounts requires it to identify
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1 the specific piece of equipment being retired and to
2 track that specific piece of equipment through the
3 company's continuing property record?
4 A Yes.
5 Q And isn't it true that when a telephone
6 company retires outside plant, such as a mile of buried
7 cable, it simply multiplies the amount of buried cable it
8 removed from the ground by the appropriate, what is
9 called, retirement unit cost or RUC?
10 A Yes, that's okay.
11 Q Okay. Now, in this case, you propose to
12 reduce plant in service by $4.314 million to adjust out
13 what you believe to be an improper retroactive adjustment
14 to the retirement unit costs calculated for 1995.
15 A Yes.
16 Q Now, you will agree, will you not, that the
17 retirement unit costs, or RUCs as you talk about them in
18 your testimony, are simply -- it's just a unit cost
19 calculation, isn't it?
20 A Yes.
21 Q Now, you'll also agree, will you not, that
22 the plant in service in this rate case is taken directly
23 from the Company's general ledger?
24 A That's what the Company filed. I'm not
25 convinced that it should be that way.
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1 Q But you will agree that the Company's plant
2 in service in this case is taken directly from the
3 general ledger?
4 A Yes.
5 Q Now, retirement unit costs, they're not
6 part of the general ledger, are they?
7 A We're not talking the same language here.
8 Why aren't they?
9 Q Isn't it true, Mr. Lansing, that retirement
10 unit costs are simply part of the subsidiary records to
11 be used when outside plant is retired?
12 A It's a side record. It's still based on
13 the general ledger. I don't think I'm going to agree
14 that it is entirely outside of anything.
15 Q The Company doesn't have an entry in plant
16 in service called retirement unit costs, does it?
17 A No, it doesn't.
18 Q Okay, retirement unit costs are literally a
19 number that is used to calculate the value for average
20 plant when outside plant is retired; isn't that true?
21 A Yes.
22 Q Okay, and since that's true, RUCs,
23 retirement unit costs, that's not part of the general
24 ledger, that's just the subsidiary records used when
25 outside plant is retired?
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1 A Sure, but it's supposed to be calculated
2 based on what's actually there in the general ledger.
3 Q You will agree, will you not, that
4 retirement unit costs, or RUCs, cannot be calculated for
5 1995 until all of the costs of the construction projects
6 done in 1995 are booked and analyzed?
7 A No, I don't think so. You post the books
8 when you create that job cost. You post them based on
9 historic RUCs. They go into the records. They get
10 turned up as plant in service, then reviewed. If there's
11 a disparity between costs actually recorded on a job
12 cost, your people call them job estimates, if there's a
13 disparity between those two from the budgeted amount,
14 they are reviewed to see why. Then in the end they are
15 examined and posted to the books for plant in service.
16 There's a lot of review that goes on here as you go along
17 all year long.
18 Q Are you suggesting, Mr. Lansing, that
19 U S WEST can calculate the retirement unit costs for
20 buried fiber cable for 1995 before it's completed the
21 1995 construction year?
22 A I'm suggesting they can do it every month
23 if they want to.
24 Q The unit cost is calculated on an annual
25 basis, isn't it, for purposes of maintaining the
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1 subsidiary records so that plant in service, outside
2 plant in service, when it's retired can be retired at the
3 average unit cost of the appropriate year?
4 A That's what they say they want to do.
5 Q Now, when you originally audited outside
6 plant in this case, you wanted to go beyond the general
7 ledger to the subsidiary records; correct?
8 A Yes, sir.
9 Q And you were initially given the total
10 outside plant dollars for 1995 and the RUCs, or the
11 revenue adjustment costs, for 1994; correct -- excuse me,
12 retirement unit costs for 1994?
13 A I feel better now.
14 Q Thank you.
15 A Can you start that again, please?
16 Q You bet. I screwed that question up big
17 time. You were initially given the outside plant dollars
18 for 1995 and the 1994 retirement unit costs, weren't you?
19 A That's what Beth Reiman said she gave me,
20 yes.
21 Q You were later given the 1995 retirement
22 unit costs after they were calculated?
23 A That's true.
24 Q And it is the difference between the 1994
25 retirement unit costs and the 1995 retirement unit costs
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1 which you claim is an improper retroactive true-up of
2 construction overheads?
3 A That's true.
4 Q Now, you will agree, will you not, that the
5 1995 retirement unit costs have no impact on the total
6 dollar amount of plant in service until outside plant
7 with a 1995 vintage is actually retired?
8 A I'm sorry, say that again.
9 Q You will agree, will you not, that 1995
10 retirement unit costs have no impact on the total dollar
11 amount of plant in service until outside plant with a
12 1995 vintage is retired?
13 A We've got to try that again, because
14 somehow you're not saying something I think ought to
15 happen here.
16 Q You don't use the retirement unit cost
17 until you take the plant out of service; isn't that true?
18 A Yes.
19 Q Now, you propose a second adjustment to
20 plant in service of 10.304 million to adjust for a
21 1.89 percent error factor that you discovered in auditing
22 the plant retirement records for central office
23 equipment?
24 A Yes.
25 Q And U S WEST agrees with that portion of
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1 your adjustment as it relates to central office equipment
2 in large part, doesn't it?
3 A I have been told they do, yes.
4 Q The remaining dispute, isn't it true,
5 relates to whether your error factor should be applied to
6 the other plant accounts, such as outside plant, land or
7 buildings?
8 A Yes.
9 Q Now, you only audited the central office
10 equipment accounts; correct?
11 A That's true.
12 Q And the retirement of central office
13 equipment because of the actual cost standard requires
14 U S WEST to identify the specific piece of equipment
15 being retired and to track that piece of equipment
16 through the continuing property records?
17 A Yes.
18 Q Now, you knew because of the amount of work
19 and the number of people involved in complying with the
20 actual cost standard that you would probably be able to
21 find mistakes in the retirement records for the central
22 office equipment accounts?
23 A You told me why I know that. There's quite
24 a little bit more reason why I know that than what you
25 just listed.
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1 Q Now, answer my question, please. You knew
2 before you ever audited the central office equipment
3 accounts that you would find errors and omissions in the
4 recording of retirements of central office equipment?
5 A Sure.
6 Q And you weren't at all surprised to find
7 errors in recording the retirements of central office
8 equipment, were you?
9 A No, sir.
10 Q Now, you didn't audit the retirements of
11 outside plant, but you reduced the dollar amount of
12 outside plant by the identical 1.89 percent error factor
13 you found in central office equipment?
14 A That is true.
15 Q And you didn't audit the retirements of
16 land or buildings, but you reduced the dollar amount of
17 land and buildings by the 1.89 percent error factor you
18 found in central office equipment retirements?
19 A Yes.
20 Q In fact, I could go through every account
21 and your answer would be the same, wouldn't it, every
22 plant account?
23 A Every plant account.
24 Q Now, in fact, though, when a telephone
25 company retires outside plant, it doesn't have to locate
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1 the specific item of equipment and does not have to track
2 it through the continuing property record system, does
3 it?
4 A It has to identify the length of the cable
5 and a general location of it. It does have to identify
6 it.
7 Q Isn't it true, Mr. Lansing, that when
8 outside plant is retired all the Company does is
9 determine the amount of plant retired and multiply it by
10 the appropriate retirement unit costs for that year?
11 A It's not by year. The retirement unit cost
12 associates to a year. The amount of outside plant that
13 is retired associates itself with a particular job, not
14 for the whole year.
15 Q Okay, but I'm U S WEST, I go out and I pull
16 a mile of cable out of the ground. I don't have to
17 identify the work orders, the job orders, for that mile
18 of cable and the specific construction costs for that
19 mile of cable, do I?
20 A If you were going to pull it out of the
21 ground?
22 Q I just pull it out of the ground and I
23 multiply it by the retirement unit costs for the
24 appropriate year, don't I?
25 A For the year that it was put in.
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1 Q Now, outside plant --
2 A Wait, I'm sorry. You don't do that, by the
3 way.
4 Q Outside plant is more than half of the
5 total plant in service in the State of Idaho, isn't it?
6 A I haven't run the numbers. I've always
7 considered roughly 50 percent.
8 Q Now, in your rebuttal testimony, you
9 attempt to suggest that because the dollar amounts of
10 plant being retired in these various accounts are
11 approximately the same, that must mean there's the same
12 error factors in the plant accounts?
13 A I believe it carries over, yes, sir.
14 Q Now, isn't it true that in your testimony
15 you identified that for buried cable metalic, account
16 2423, there was $3 million a year on average that was
17 retired? I believe it's page 12 of your rebuttal
18 testimony.
19 A And which account are we talking about?
20 Q 2423.
21 A Uh-huh.
22 Q You said over the last 11 years on average
23 $3 million was retired per year?
24 A Yes, sir.
25 Q Isn't it true that because there's
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1 $250 million of value in buried cable metalic that that
2 $3 million a year is only 1.19 percent?
3 A I think I better start doing some math.
4 Q I have a calculator. The famous words
5 will you accept, subject to check, that $3 million is
6 1.19 percent of the total buried cable in account 2423?
7 And, really, you don't have to trust my math. I'll give
8 you a calculator, if you'd like.
9 A I need the trial balance, also.
10 Q Why don't you look at page -- you've
11 actually got it in one of your exhibits. Look at page 7
12 of 12 of your Exhibit 101.
13 A I have it.
14 Q It's about a third of the way down. You
15 have account 2423, buried cable metalic, $250 million.
16 A Yes.
17 Q Okay, and, again, will you agree,
18 subject to check, that the $3 million of average
19 retirements that you identified in buried cable metalic
20 is only 1.19 percent of the total amount of buried cable
21 metalic that's in the ground?
22 A Fine.
23 Q So your error factor assumes that there's
24 greater error than the total amount of plant retired;
25 isn't that true?
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1 A The total amount retired in any given one
2 year. They don't retire it. There's always a retirement
3 during the year. When you retire outside plant or those
4 buried cables you're talking about, you told me they were
5 out digging it up and pulling it out of the ground and
6 that doesn't happen. They just cap it off at each end.
7 Q Would you please refer to your Exhibit 101,
8 page 5?
9 A Yes, sir.
10 Q Now, those are the accounts which you
11 personally attempted to directly assign to Title 62; is
12 that not correct?
13 A That is correct.
14 Q Now, isn't it true that each of the
15 categories in your listing, for example, underground
16 cable, metalic - toll, that that category describes the
17 predominant use of the plant in that account and not the
18 total or sole use of the plant in that account?
19 A Those are the postings required by the
20 USOA. I believe that the USOA requires predominance for
21 their definitions.
22 Q And so because the USOA requires
23 predominance, that doesn't mean that all of the dollars
24 in underground cable, metalic are used strictly for toll,
25 does it?
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1 A I think that's a fair assumption.
2 Q Why did you subtract on Exhibit 101,
3 page 5, all of the plant accounts relating to coin?
4 A I had a real tough time figuring out that
5 Part 64 stuff was actually removed from there. We had a
6 production request on that a few days ago where I
7 detailed the answer. I'll read it to you if you wish,
8 but the bottom line is you just can't do that.
9 Q Well, isn't coin revenues in Idaho, part of
10 the coin revenues, Title 61?
11 A Part of them.
12 Q Okay; so all of the plant for coin can't
13 possibly be just Title 62?
14 A Okay.
15 Q Now, will you look at the last four entries
16 on that page, the ones analog alarm services, station
17 apparatus, do you see those four entries that are
18 four-digit numbers beginning with a "9"?
19 A Yes.
20 Q Now, those are the federally deregulated
21 Part 64 products, aren't they?
22 A Yes.
23 Q And, in fact, isn't federally deregulated
24 Part 64 products' costs and revenues deducted before or
25 as the first step of the separations process?
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1 A It's supposed to be.
2 Q Okay; so why do you believe that these
3 federally deregulated products are reflected in
4 U S WEST's cost of service in Idaho in this proceeding?
5 A Would you look at the 1990s detailed
6 report? It came to me from Audit Request No. 6,
7 Attachment A. If you'll look down there --
8 Q Do you want to wait a moment?
9 A Oh, I'm sorry.
10 Q Do you want to give that again,
11 Mr. Lansing, give the reference again?
12 A Audit Request No. 6.
13 Q This is audit request, not --
14 A That's correct. It's Audit Request No. 6.
15 You call it STF0006 and it's Attachment A. I have a copy
16 of it.
17 Q That's okay. We'll mosey along. That's my
18 fault. I should have brought that.
19 A Look at account 2311.
20 Q I don't have that.
21 Could I have a moment, Madam Chair?
22 COMMISSIONER SMITH: Certainly.
23 (Pause in proceedings.)
24 Q BY MR. ALKE: Why don't you just explain
25 using the data request that you referred to why you have
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1 included in your Exhibit 101, page 5, the four accounts
2 that are for Part 64 deregulated service.
3 A The major problem is I am not convinced --
4 at the time I produced this, I was not convinced, and
5 still am not, that the Part 64 items were all removed. I
6 have some very curious entries on that Audit Request
7 No. 6. For example, that account No. 2311 indicates that
8 at the total, they had some $47 million and -- I'm sorry,
9 I said that wrong. It was $47,000 -- and they removed
10 for Part 64 some $110,000, leaving a negative balance in
11 an asset account and that's just not possible. It is not
12 correct.
13 Now, let me back up here a little bit. If
14 somebody can get with us and with me and we can come up
15 with what the real, proper numbers ought to be, I have no
16 problem making them come out that way.
17 Q Mr. Lansing, you propose in this proceeding
18 to disallow 90 percent of U S WEST's investment in fiber
19 optic cable as not being used and useful.
20 A Close to that number, yes, sir.
21 Q Okay, and you're basing that proposal upon
22 information you derive from the 1995 ARMIS, A-R-M-I-S,
23 report?
24 A Yes, sir.
25 Q And you did your number by saying, well,
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1 the ARMIS report shows 12,766 kilometers of lit cable and
2 there's 123,280 kilometers as being recorded in Idaho?
3 A I can't remember the numbers you just
4 read. Let me tell you the numbers I used. From the
5 1995 ARMIS report, there is a reported total fiber
6 kilometers deployed, lit and dark, 123,280, and
7 kilometers of fiber equipped, lit, 12,766. That turns
8 out to be 10.355 percent of the total.
9 Q Will you agree, Mr. Lansing, that the data
10 in the ARMIS report does not, does not, mean that only
11 10 percent of the fiber optic cables in Idaho are in use
12 in 1995?
13 A Are you making a distinction between fiber
14 optic cables and kilometers of fiber?
15 Q Yes, I am.
16 A Fiber optic cables, as I understand it
17 after a lot of trouble, which I was not allowed to go
18 find out what was true or not, are captured on an
19 engineering basis for database. They are not the same as
20 the financial records that are kept in financial
21 databases. I guess I can say they're not the same and in
22 answer to one of my audit requests, I was told they
23 should not be compared. I'll show you that one if you're
24 interested.
25 Q Actually, I'm really not, but let me come
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1 at it another way. Isn't it true that -- let's come at
2 it another way. Let's use a hypothetical example. Isn't
3 it true that if I install, say, 10 miles of cable, fiber
4 optic cable, between two central offices in the Boise
5 area and I have 24-strand fiber optic cable and I have
6 only four strands actually used the first year, isn't it
7 true under that hypothetical the data I am required to
8 report under ARMIS says I have 200 miles of unlit fiber?
9 A You said four of them were lit?
10 Q Ten-mile lengths of cable, 24 strands, four
11 strands lit in the very first year. Under ARMIS, I have
12 200 miles of unlit fiber optic cable, don't I?
13 A At the same time, you have 40 miles of lit
14 cable, lit fiber optic.
15 Q On a 10-mile length of cable under my
16 example under ARMIS reporting, I have 200 miles of unlit
17 fiber optic cable; correct?
18 A Yes.
19 Q And U S WEST is required to report the
20 ARMIS data in the fashion that we've just discussed,
21 isn't it? That's required by FCC order.
22 A I want to hedge here a little bit. I don't
23 think so because I got one of your audit request
24 responses that said the engineering department decided
25 they weren't going to do that and they were going to
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1 report it some other way from the engineering data the
2 next year.
3 Q Isn't it true, Mr. Lansing, that the FCC in
4 its order in Docket FCC Report 43-08 specifically states
5 that, and I quote, "Under total fiber kilometers
6 deployed, lit and dark, total deployed fiber measurement
7 calculated as the weighted sum of the number of optical
8 fibers in the sheath for each cable multiplied by the
9 associated sheath kilometers", that's right out of the
10 FCC order, isn't it?
11 A I have read that at one time or another. I
12 presume you read it correctly now, even though I don't
13 have it in front of me here.
14 Q You will agree your adjustment does not
15 even address the economics of cable sizing?
16 A That's true, it does not.
17 Q Would you agree that U S WEST is obligated
18 to plan in advance for the reasonably anticipated demands
19 of its customers?
20 A Well, I'm not much of a policy witness, but
21 I presume that sort of thing should happen.
22 Q That's what we call the obligation to
23 serve, isn't it?
24 A Out of my world.
25 Q In fact, that's kind of an issue in this
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1 case, isn't it?
2 A I don't know, is it?
3 Q You'll agree that U S WEST must have plant
4 in service to meet the reasonably anticipated needs of
5 its future customers?
6 A I guess so. You're out of my world here.
7 Q Mr. Lansing, will you agree that your
8 adjustment to disallow $9.122 million of fiber optic
9 cable or 90 percent of the fiber optic cable in Idaho
10 literally proposes to punish U S WEST in 1997 and future
11 years for having more fiber strands in place in 1995 than
12 the amount exactly needed to provide service in 1995?
13 A Oh, I don't think so. 1995 is our test
14 year. What happens in our test year is supposed to be
15 somewhat controlling. There's nothing wrong with putting
16 fiber or anything else into plant held for future use and
17 two years later having it in there and doing whatever it
18 is you're going to do to increase rates or whatever else
19 is going to happen.
20 Q So your proposal to this Commission is
21 literally to punish U S WEST for having in place today in
22 1997 more facilities than needed to provide service two
23 years ago?
24 A How does putting something in plant held
25 for future use punish U S WEST? No, sir, I won't agree
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1 there. That's a proper USOA Part 32 accounting technique
2 and that's the way it's supposed to be done.
3 Q You don't think deducting the fiber optic
4 cable investment from rate base and disallowing either a
5 return of or a return on that investment is a financial
6 punishment to U S WEST?
7 MR. HOWELL: Madam Chairman, I'm going to
8 object. I think the question has been asked and
9 answered.
10 COMMISSIONER SMITH: Sustained.
11 Q BY MR. ALKE: Mr. Lansing, will you agree
12 that in the plant accounts for fiber optic cable there
13 are substantially more costs recorded than simply the
14 price charged for the cable by the manufacturer?
15 A Sure.
16 Q Labor costs of installing the cable, that's
17 reflected in those accounts, isn't it?
18 A Yes.
19 Q Equipment costs used to bury the cable,
20 that's reflected in those plant accounts, isn't it?
21 A Yes, sir.
22 Q In fact, under the Uniform System of
23 Accounts, all counts of trenching, burial and material
24 such as asphalt, that's actually recorded as part of the
25 cost of the fiber optic cable in those accounts; isn't
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1 that true?
2 A Yes.
3 Q And so your proposal is to disallow from
4 rate base 90 percent of the costs U S WEST has incurred
5 in the State of Idaho in burying its fiber optic cable?
6 A Disallow, are we going to go through this
7 disallow versus put in plant held for future use? The
8 rules for plant held for future use do not penalize
9 U S WEST.
10 Q Let me rephrase the question. You will
11 agree, will you not, that your proposal to disallow
12 90 percent of the dollars in the buried fiber cable
13 accounts has the effect of deducting from rate base
14 90 percent of all the costs U S WEST incurred in burying
15 fiber optic cable in the State of Idaho?
16 A Yes.
17 Q And isn't it true that regardless of
18 whether that was a 24-strand, a 12-strand or an 8-strand
19 fiber optic cable, U S WEST is going to incur those
20 burial costs, isn't it?
21 A Yes.
22 MR. ALKE: I have no further questions,
23 Madam Chair.
24 COMMISSIONER SMITH: Thank you, Mr. Alke.
25 Let's take about a 15-minute break.
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1 (Recess.)
2 COMMISSIONER SMITH: Okay, let's go back on
3 the record.
4 Mr. Fothergill, do you have questions for
5 Mr. Lansing?
6 MR. FOTHERGILL: I only have one question.
7
8 CROSS-EXAMINATION
9
10 BY MR. FOTHERGILL:
11 Q I'm wondering in the case of a new power
12 plant, electric power plant, if it is built, but only,
13 say, 10 or 15 or 25 percent is used in a particular year,
14 how do we account for that, Mr. Lansing?
15 A This Commission several years ago had a
16 similar situation with Idaho Power and they made
17 accounting adjustments so that there was a depreciation
18 adjustment that allowed only a percentage of what would
19 be normal depreciation to be charged against ratepayers
20 in the early part of the operation of the system and a
21 larger amount when the plant came fully on line later.
22 Q Would it be possible to do a similar thing
23 with the cable that we're talking about, the fiber?
24 A Yes, sir, it sure would.
25 MR. FOTHERGILL: Thank you, very much.
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1 COMMISSIONER SMITH: Mr. Harwood.
2 MR. HARWOOD: No questions.
3 COMMISSIONER SMITH: Do we have questions
4 from the Commissioners?
5 COMMISSIONER NELSON: I have a couple.
6 COMMISSIONER SMITH: Commissioner Nelson.
7
8 EXAMINATION
9
10 BY COMMISSIONER NELSON:
11 Q Mr. Lansing, my questions are on this plant
12 held for future use, and maybe I could keep it to the
13 telephone industry a little more. Of course, when you
14 put in a new switch, you put in that switch planning for
15 a certain amount of growth in an area or you put in --
16 you build in excess capacity, I assume.
17 A I'm sure that's true.
18 Q Would you disallow that part of the
19 capacity that wasn't used? Let's say you put in a switch
20 in '95 that allowed for 20 percent growth and '95 is the
21 test year, would you put 20 percent of that switch in
22 plant held for future use?
23 A Commissioner, it doesn't work quite like
24 that. What happens is the switch has the capacity, but
25 the things that make that other capacity work are not
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1 installed until later, the slide-in, plug-in pieces of
2 the switch that hook up lines, the software things that
3 go on the side to make them work. There is a certain
4 amount of excess capacity sitting right there all the
5 time, but the full capacity of the switch is not -- its
6 full potential is not there until you get close to where
7 you need to go out and bring it in to maintain a safety
8 factor on the switch capacity, so in fact it gets
9 increased over time. You can't do that with buried
10 cable.
11 Q Isn't the major part of the expense,
12 though, incurred up front?
13 A Sure, yes.
14 Q But you wouldn't make an adjustment for
15 that?
16 A I think I probably would not. I think I'd
17 have a tough time figuring out how much.
18 Q Wouldn't you expect that if the Company
19 were putting in a buried cable that they would incur --
20 because you incur so much trenching and laying expense
21 whether the cable is four-pair or 24-pair that you would
22 put in an oversized cable when you put it in?
23 A I would think you would. I have problems
24 with this 90 percent/10 percent thing in that category,
25 however.
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1 Q Okay, if it was 90/10 the other way, would
2 you have the same problem?
3 A No, not at all.
4 Q So it's more a matter of degrees?
5 A Yes, sir.
6 Q And, of course, you said you asked for some
7 engineering reports that weren't made available to you to
8 see if there was another method of calculating that
9 percentage --
10 A Yes, I did.
11 Q -- or was that the reason you asked for the
12 other reports?
13 A The reason I asked was because it came out
14 in some rebuttal testimony that I have read that U S WEST
15 criticized my 10 percent thing and I wanted to see if
16 their records were accurate and could I reach some sort
17 of an accommodation here.
18 Q Did you get any explanation from the
19 Company as to why it was such a large factor of unused
20 cable at the time it was put in?
21 A No, sir, I haven't.
22 Q Were there any other accounts where you
23 made significant adjustments for plant held for future
24 use?
25 A No, none.
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1 Q So this is the controversial one --
2 A Yes.
3 Q -- buried cable. Okay, thank you.
4 A You're welcome.
5 COMMISSIONER SMITH: Commissioner Hansen.
6
7 EXAMINATION
8
9 BY COMMISSIONER HANSEN:
10 Q I just have one and it's more of a general
11 question, Mr. Lansing, but as a result of your auditing,
12 did you notice a high degree of overtime costs in the
13 area of labor expense or did you look at that area?
14 A I did look to some extent and, to be
15 truthful, that was not high on our priority list. We did
16 look at labor costs. U S WEST did in fact have what I
17 think most people would consider some fairly heavy duty
18 overtime, particularly in construction periods and
19 particularly when we could identify there was a bad storm
20 or some such thing as that. They have had overtime. I'm
21 having trouble figuring out how much is too much.
22 COMMISSIONER HANSEN: Okay, thank you.
23 That's all I have.
24
25
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1 EXAMINATION
2
3 BY COMMISSIONER SMITH:
4 Q Okay, Mr. Lansing, just one because I'm not
5 an accountant, thankfully, so what I'm trying to
6 understand is this big dispute and it seems to me to be a
7 difference of how you perceive this and the Company seems
8 to be perceiving your adjustment on the fiber as a
9 disallowance; whereas, you seem to say that if you put it
10 in an account called plant held for future use which was
11 designed for this purpose, that is not a disallowance but
12 merely appropriate accounting. Have I got this correctly
13 in mind?
14 A Yes, you do.
15 COMMISSIONER SMITH: That's it.
16 Mr. Howell.
17
18 REDIRECT EXAMINATION
19
20 BY MR. HOWELL:
21 Q Mr. Lansing, Mr. Alke walked you through
22 some housekeeping issues on your Exhibit 101,
23 specifically referencing line 32 of your Exhibit 101,
24 page 1, of 3/13. Do you remember those questions?
25 A Yes, I do.
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1 Q And I believe if you could look at your
2 Exhibit 101, page 1, filed with your direct testimony on
3 11/26 and specifically look at line 30, do you have that
4 in front of you?
5 A Yes, I do.
6 Q What is the amount on line 30 which is
7 entitled "Depreciation" in Column A which is the JR
8 intrastate book?
9 A 38.592.
10 Q All right, and you would agree with me that
11 that number does not appear on your most recent revision
12 of 101, does it?
13 A No, it does not.
14 Q Looking at your most recent Exhibit 101
15 dated 3/13, depreciation on Column A is denoted or
16 depicted on line 32, is it not?
17 A Yes, it is.
18 Q And line 33 is amortization?
19 A That's true.
20 Q Is it fair that at least initially a large
21 part of the difference between 38.592 million in
22 depreciation noted on your initial exhibit filed
23 November 26th and the difference between your current
24 exhibit, 3/13, line 32, depreciation, is the fact that
25 your initial exhibit included amortization?
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1 A Yes, it did.
2 Q So, in other words, in your initial
3 exhibit, you did not break out depreciation and
4 amortization as you did in your most recent exhibit?
5 A That's correct.
6 Q Let's turn for a moment to the central
7 office adjustment that you made for the 1.89 central
8 office. Did the Company make any adjustments to its
9 central office accounts to reflect the 1.89 error factor
10 that you found?
11 A No.
12 Q Is it your understanding that the
13 Commission agreed at least with a partial -- that the
14 Company agreed at least with a partial portion of your
15 adjustment and that is in relation to the accounts you
16 actually audited?
17 A Yes.
18 Q And isn't it true that your adjustment to
19 buried cable isn't solely based on the dollar amount but
20 the retirement process used for both inside and outside
21 plant?
22 A Yes.
23 Q Now, turning to the issue of the fiber,
24 when you reclassified approximately 90 percent of the
25 fiber accounts to plant held for future use, isn't it
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1 true that the Company will be allowed to recover that
2 expense and cost when it is no longer considered excess
3 or, in other words, when it is actually deployed for
4 customer use?
5 A Certainly.
6 Q And isn't the Company allowed to recover a
7 carrying charge for plant held for future use?
8 A Yes. Numbers, amounts carried in plant
9 held for future use have a carrying charge, very similar
10 to allowance used for funds during construction and they
11 get to record this continually until it becomes plant
12 held for future use -- not plant held for future use but
13 plant in use.
14 Q And isn't the reason that you took
15 particular interest in the 1995 ARMIS report was the fact
16 that it is --
17 MR. ALKE: Madam Chair, at this time I'm
18 going to object. These are all leading questions and I
19 would really rather hear Mr. Lansing testify than
20 Mr. Howell. This is direct testimony.
21 COMMISSIONER SMITH: Mr. Howell.
22 MR. HOWELL: I'll rephrase the question.
23 COMMISSIONER SMITH: Thank you.
24 Q BY MR. HOWELL: Mr. Lansing, why did you
25 use the 1995 ARMIS report?
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1 A I asked the question how much plant was,
2 fiber plant was, lit and how much was dark in an Audit
3 Request 18 and I got the answer as a response as 18A and
4 they referred me to the ARMIS report and gave me a copy
5 of it.
6 Q What test year are we employing in this
7 case?
8 A 1995.
9 Q When was the first time you were aware that
10 the Company took exception to your fiber adjustment?
11 A When I read rebuttal testimony.
12 Q And following that, did you have an
13 opportunity to conduct an audit to try to find out more
14 data about this adjustment?
15 A Yes, sir, I was in Denver February the 3rd
16 through the 6th.
17 Q And while you were in Denver, did you
18 submit audit requests?
19 A Yes, I did.
20 Q And wasn't one of those audit requests
21 No. 160?
22 A Yes, sir, it was.
23 Q And reminding you that the response is
24 confidential, what was your Audit Request 160?
25 A My question was, "I want to see the
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1 engineering records that support the amounts recorded on
2 the ARMIS Report 43-08, Table 1A, specific attention
3 related to fiber in southern Idaho. The intent is to
4 audit the detail of fiber in use and the fiber not lit as
5 at December 31, 1995, and January 7th, 1997."
6 Q And in response to this audit request and
7 other audit requests, what did the Company say about
8 updating the 1995 ARMIS?
9 A The Company said that the 1995 ARMIS report
10 was not going to be updated. They had no plans to update
11 it.
12 Q And referring again to the response on
13 attachment or for Audit Request 160, what information did
14 the Company provide to you in response to your request
15 for engineering reports as of December 31, '95?
16 A They wouldn't let me see them. The
17 confidential statement that I have here answered the
18 question and the parts of it that might be considered
19 confidential I won't read. I don't want anybody to think
20 I'm trying to go around on this confidentiality stuff.
21 The statement is made, "By making the appropriate
22 adjustments, Idaho's end of 1995 utilization would
23 reflect 23 percent."
24 Q Did the Company provide you with any
25 reports to document that calculation?
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1 A No.
2 Q And it's true, is it not, that the
3 Company still contests the 23 percent or, in other
4 words, that the Company contends it should be greater
5 than 23 percent?
6 A Yes, they still contend it should be
7 greater than that.
8 Q And your problem with using the 43 percent
9 as of January 7, 1997, is what?
10 A Our test year is 1995. We need to have
11 reasons to move from that.
12 Q All right. Let's turn finally to your
13 audits of revenue sharing. Mr. Lansing, when you were
14 auditing revenue sharing during its seven years of
15 operation, were you looking at costs or were you looking
16 at revenues?
17 A Revenues.
18 Q You did have occasion over some of those
19 audits, did you not, to occasionally look at how the
20 Company calculated its costs?
21 A That's true.
22 Q Is it a fair characterization of your
23 testimony and the Staff position in those audits --
24 MR. ALKE: Objection, leading question,
25 before he even finishes it.
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1 MR. HOWELL: I'll rephrase.
2 Q BY MR. HOWELL: Did the Staff accept the
3 Company's CAAS manuals?
4 A No.
5 Q When the Staff was performing its audits,
6 what was it attempting to do?
7 A Make a determination if revenue sharing was
8 a fair way of going about what needed to be done.
9 Q Did you have occasion to be part of a Staff
10 team that conducted an audit of the Company's 1992 test
11 year?
12 A Yes, I did.
13 Q And you were a member of the Staff that
14 compiled a report dated May 25, 1994?
15 A Yes, sir.
16 MR. HOWELL: May I approach the witness?
17 COMMISSIONER SMITH: Certainly.
18 (Mr. Howell approached the witness.)
19 Q BY MR. HOWELL: On page 22 of that report,
20 would you read to yourself the highlighted portion? For
21 the record, why don't you read it out loud.
22 MR. ALKE: Could I have a reference again,
23 please?
24 MR. HOWELL: Page 22.
25 THE WITNESS: U S WEST Communications,
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1 Inc.'s Idaho South report of earnings investigation, test
2 year 1992, Idaho Public Utilities Commission, May 25,
3 1994. It's labeled as Attachment A and it's page 22.
4 Q BY MR. HOWELL: Would you read the
5 highlighted or marked portion?
6 A "Staff takes exception to this manual's
7 claim that it `reflects the use of cost causation and
8 equitable assignment' through `the fairest and most
9 logical apportionment', Staff believes the manual can be
10 used to determine a Title 62 cost floor."
11 Q In that report, were you comparing the
12 operation of the Company's CAAS manual with your
13 calculation of a rate of return?
14 A Yes, I did.
15 Q And in your opinion, in that Staff report,
16 did Staff accept the operation of the CAAS manual for
17 costs?
18 A No, it did not. I recommended, and other
19 people accepted, changes to the cost allocation system
20 for our determination if revenue sharing was fair.
21 MR. HOWELL: I have no further questions,
22 Madam Chairman.
23 COMMISSIONER SMITH: Thank you for your
24 help, Mr. Lansing.
25 THE WITNESS: Thank you.
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1 (The witness left the stand.)
2 COMMISSIONER SMITH: It looks like we
3 finished what we came here today to do. Let's go off the
4 record.
5 (Off the record discussion.)
6 COMMISSIONER SMITH: We'll close today's
7 hearing and reconvene at 9:15 on Monday.
8 (The Hearing recessed at 11:40 a.m.)
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