USW326A.docx

1 BOISE, IDAHO, WEDNESDAY, MARCH 26, 1997, 1:30 P. M.
2
3
4 COMMISSIONER SMITH: Let's go back on the
5 record. I believe before our lunch break Ms. Ford had
6 concluded her examination of Ms. Owen and we're ready for
7 cross. Ms. Hamlin.
8 MS. HAMLIN: Thank you.
9
10 MARY S. OWEN,
11 produced as a rebuttal witness at the instance of
12 U S WEST Communications, Inc., having been previously
13 duly sworn, resumed the stand and was further examined
14 and testified as follows:
15
16 CROSS-EXAMINATION
17
18 BY MS. HAMLIN:
19 Q Is this loud enough? Can you hear me?
20 A Yes, I can hear you. Thank you.
21 Q Ms. Owen, when you spoke in your live
22 surrebuttal about delaying the use of the revenue sharing
23 funds, isn't it true that U S WEST is not paying interest
24 on the revenue sharing funds?
25 A I think you need to ask Ms. Wright that
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Wilder, Idaho 83676 U S WEST Communications
1 question. I'm not real familiar with that aspect of it.
2 Q Do you know what the Massachusetts
3 household income is and how it compares to the Idaho
4 income?
5 A I don't and I'm trying to think if that
6 data, I think that might be in the federal subscribership
7 study, but I don't have that with me.
8 Q Would you agree that the annual household
9 income for Massachusetts is higher than it is for Idaho?
10 A No, I wouldn't. I don't know that that's
11 true.
12 Q Would you agree with me, subject to check,
13 that Massachusetts is 18 percent higher?
14 MS. FORD: I'm going to object. I think
15 the question has been asked and answered and it's not
16 something that this witness can go and check today.
17 COMMISSIONER SMITH: Ms. Hamlin.
18 MS. HAMLIN: I have numbers from the Census
19 Bureau showing the annual income. I'd be more than happy
20 to show the witness.
21 COMMISSIONER SMITH: Ms. Ford, would you
22 object to the witness looking at the Census Bureau
23 report?
24 MS. FORD: Well, only to the extent that I
25 at this point haven't seen that report and have no way to
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1 validate that that's actually what it's from or whatever,
2 but, I mean, if the witness can identify it, I'm
3 certainly happy to have her look at it.
4 COMMISSIONER SMITH: Okay, let's have her
5 do that since she brought this up.
6 (Ms. Hamlin approached the witness.)
7 Q BY MS. HAMLIN: Could you read out loud for
8 me that paragraph that describes --
9 COMMISSIONER SMITH: Well, let's identify
10 what we're looking at first.
11 THE WITNESS: I have never seen this
12 before. It's not part of the FCC subscribership report,
13 which is what I use, so I don't know what the basis is of
14 this report. I would make the observation that it does
15 appear to be rather dated. It's '94 and '95, so even if
16 I knew where it came from, I don't think that --
17 COMMISSIONER SMITH: They only do censuses
18 every 10 years.
19 THE WITNESS: I know, but they do update
20 the subscribership report every quarter, so I've never
21 seen this and I don't know where it came from, so I
22 couldn't validate it.
23 Q BY MS. HAMLIN: Would you agree with me
24 that it does say it's from -- well, we'll withdraw the
25 question.
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1 COMMISSIONER SMITH: Thank you.
2 Q BY MS. HAMLIN: Ms. Owen, turning to
3 page 16 of your testimony, beginning on line 14 --
4 A I have it.
5 Q -- is it your testimony that the loss of
6 Title 62 revenues from long distance and switched access
7 service should be considered in deciding what rates to be
8 set for Title 61 service?
9 A No, and that's not really what I'm
10 discussing in this section of my testimony. In this
11 section of my testimony I'm talking about allocation of
12 costs that are caused by a customer subscribing to the
13 network should be borne at minimum in the proportion that
14 was recommended by Mr. Elder and Ms. Wright. I don't
15 believe in this section I address at all how much long
16 distance revenue will be lost.
17 I do make the observation that although new
18 competitors may purchase services through us via resale,
19 it doesn't mean we will get all of the other services, so
20 we're still incurring the cost of the line and we may get
21 none of the revenue from long distance, access or
22 vertical services.
23 Q Let's turn to page 28 of your testimony.
24 A Page 28 did you say?
25 Q Page 28.
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1 A Thank you.
2 Q You have referenced there the stipulated
3 EAS rate. Isn't it true that the Commission approved the
4 implementation of the EAS rate of $3.62 as an interim
5 rate?
6 A Yes.
7 Q Would you agree with me that in Boise the
8 EAS region has a total of 196,000 lines?
9 A I will agree to that, subject to check. I
10 didn't bring that data with me, but that sounds about
11 right.
12 Q Would you also agree in the Weiser exchange
13 there's about 5,000 lines, subject to check?
14 A Yes.
15 Q If a measured service customer in Boise can
16 call almost 200,000 lines for $.02 a minute, but a Weiser
17 customer can only reach 5,000 lines and must pay MTS,
18 doesn't a Boise customer receive greater value from
19 measured service than the Weiser customer?
20 MS. FORD: I'm going to object to this
21 being outside the scope of the rebuttal testimony of this
22 witness.
23 COMMISSIONER SMITH: Ms. Hamlin.
24 MS. HAMLIN: Ms. Owen has specifically
25 spoken on measured service and the price differential
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1 between outside the EAS region and inside the EAS region.
2 COMMISSIONER SMITH: Okay. I'm going to
3 allow the question.
4 THE WITNESS: I don't think you can make
5 that characterization because it depends entirely on each
6 individual's local calling patterns. For example, if I
7 live in Weiser and my family all lives in Weiser, I may
8 make just as many local calls as if I lived in Boise and
9 my mother lived in Oregon, so I think you can't say that
10 on a one-to-one basis. Certainly there is a difference
11 in the number of local calls available. That's why we
12 did recommend establishing two different rates, but the
13 other piece of it that I think you have to take into
14 consideration is the measured service rate that we're
15 proposing is significantly below that of the flat rate
16 and the issue is that does it cover its appropriate share
17 of the non-traffic sensitive costs and I think that's
18 what the issue is.
19 MS. HAMLIN: Permission to approach the
20 witness.
21 COMMISSIONER SMITH: Certainly.
22 (Ms. Hamlin distributing documents.)
23 MS. HAMLIN: I've handed you what has been
24 marked as Staff Exhibit 171, pages 1 through 6. Could
25 you please identify for the record what it is I just
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1 handed you?
2 A Various tariff sheets from the southern
3 Idaho services catalog.
4 Q That has been filed with the Commission?
5 You notice on the top it says accepted for filing?
6 A Yes, that is what it says.
7 Q Okay, and this is for U S WEST southern
8 Idaho?
9 A Yes.
10 Q Directing your attention on the first page
11 where it says directory service listings, if we go down
12 to where it says premium listings, additional listing,
13 each, could you read for me the monthly rate for
14 business?
15 A I can. I have nothing -- these are all
16 deregulated services, I believe, so I'm unsure what --
17 because the only listings issue that I'm aware of is
18 non-pub and non-list, so I'm unsure -- you want me to
19 read all of these? I'm not sure what you're asking me to
20 do or maybe why.
21 Q Would you agree --
22 A I guess I was thinking I don't have
23 anything in my testimony about these.
24 COMMISSIONER SMITH: Ms. Hamlin, it's your
25 turn to ask a question.
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1 Q BY MS. HAMLIN: Let's turn to the second
2 page. On page 2 where it says residence, if you follow
3 down with me where it says call forwarding, busy line
4 (expanded)[1] with a USOC code of FBJ with a monthly rate
5 of $.32, do you see where I am?
6 A No, I see FVJ $1.35. Did you say $.32?
7 Q Thirty-five.
8 A Under call forwarding, busy line
9 (expanded), okay, 35, yes, I see it.
10 Q Okay, turn to page 5 for me.
11 MS. FORD: I guess before this proceeds
12 much further, I am going to insert an objection as to the
13 relevance of this. I do believe, as the witness stated,
14 it goes beyond anything that's in her testimony.
15 COMMISSIONER SMITH: Ms. Hamlin.
16 MS. HAMLIN: Ms. Owen has testified to the
17 ratio between the business and the residential lines and
18 has asserted that Staff's ratios are arbitrary and I
19 would like to point out that various business and
20 residence ratios within U S WEST's own tariffs are
21 arbitrary, also.
22 MS. FORD: Well, I think there's a
23 difference between what's -- the relationship between
24 Title 61 services and Title 62 services and I don't
25 believe that this, these tariff pages or the items that
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1 are listed in it are relevant to this proceeding.
2 COMMISSIONER SMITH: Well, but it is
3 relevant given the Company's criticism of the Staff's
4 advocacy on this ratio in Title 61 to point out whether
5 similar ratios exist on the Title 62 side which have been
6 set by the Company itself. I think that is relevant and
7 we'll allow Ms. Hamlin to ask questions.
8 THE WITNESS: So could you repeat the
9 question for me, please?
10 Q BY MS. HAMLIN: Okay, if you turn to page 5
11 under the business section to call forwarding where it
12 says busy line (expanded)[1], that does have the same
13 USOC code, does it not, FBJ, as it did on page 2?
14 A Yes.
15 Q What is the price there for the business
16 side?
17 A $3.00.
18 Q Looking on page 2 again, right underneath
19 that where it says busy line (programmable)[1], ERB, what
20 is the price there?
21 A $1.85.
22 Q If you look on page 5 where it says busy
23 line (programmable) [1] with the USOC code ERB, what is
24 the price there?
25 A That is $8.00 and I might note that these
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1 are products that I do represent elsewhere and if you
2 want some information about why they're priced as they're
3 priced, I'd be happy to give that to you. It's not based
4 on ratio. It's based on specific marketing studies.
5 Q Do you agree with me nonetheless that the
6 ratio is bigger for business over residence?
7 A Well, considering the fact that we don't
8 price these based on a ratio, I'm not sure what you're
9 saying the ratio is. If you're saying the ratio of busy
10 line programmable call forwarding residence as it relates
11 to business, I mean, there's probably an arithmetic ratio
12 that you could come up with, but that is not how the
13 prices were determined. They were determined by very
14 specific marketing studies that we did with customers
15 that said what is your willingness to pay for these
16 various services, and to the extent that a lot of these,
17 like on the call forwarding, the ones you've actually
18 chosen to highlight, a lot of those are simply services
19 that have very low penetration levels for residence.
20 They are not as highly valued. The value rate that you
21 see assigned to business with the $8.00 rate is because
22 customers have demonstrated a willingness to pay that
23 rate, that there is no ratio that these prices were
24 predicated upon. It was based on marketing studies
25 actually conducted with customers.
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1 Q Were you here yesterday for Mr. Souba's
2 testimony?
3 A No, I hadn't gotten here quite yet. I had
4 hoped to be, but I wasn't.
5 Q Are you familiar with the Company's billing
6 credit practice between residential customers and
7 business customers?
8 MS. FORD: Again, I object. This is beyond
9 the scope of this witness' testimony.
10 COMMISSIONER SMITH: Ms. Hamlin.
11 MS. HAMLIN: Again, this goes to -- I'll
12 withdraw the question. I have no further questions.
13 COMMISSIONER SMITH: Mr. Harwood.
14 MR. HARWOOD: Thank you, Madam Chair.
15
16 CROSS-EXAMINATION
17
18 BY MR. HARWOOD:
19 Q Good afternoon, Ms. Owen.
20 A Good afternoon.
21 Q I believe in your live rebuttal prior to
22 the lunch hour that you stated that there is nothing
23 sacrosanct about historical pricing practices and that
24 this Commission should allow U S WEST to set prices "in
25 anticipation of the entry of competition in Idaho." Do
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1 you recall that statement?
2 A Yes, and that was part of the larger area
3 that I dealt with, that you look at cost first and then
4 you look at all the various marketing considerations as
5 well, yes, that's correct.
6 Q So wouldn't it be fair from that statement
7 that you believe the Commission should look forward to
8 the environment that will exist with competition present
9 in the telecommunications market here in Idaho?
10 A I think what I'm really asking the
11 Commission to do is to help create an environment that
12 will encourage competition in an economically sound and
13 rational manner, and part of that I believe is doing
14 pricing of the basic residential access line in a manner
15 that will encourage people to go to Weiser, Idaho, and
16 invest in facilities there so that the Idaho consumer can
17 have different options, different technologies available
18 to them. That's really what I'm asking the Commission to
19 look at.
20 Q Okay; so you would agree, though, that that
21 would force them to look forward to do that?
22 A I wouldn't say -- I think what it does is
23 it's a recognition that the telecommunications industry
24 is changing and to the extent that they can create an
25 environment that will encourage competition that would be
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1 looking not just forward but today as well.
2 Q Let's turn to page 4 of your rebuttal
3 testimony. I direct you to line 11 and 12 where you
4 reference that there are currently in excess of 150 long
5 distance providers in Idaho.
6 A Yes, I see that.
7 Q Do you know if all these 150 providers are
8 actually providing service here in Idaho?
9 A We have no way of verifying that. All we
10 have a way of providing is knowing if they have been,
11 have requested to provide here or have advertised.
12 Q Do you know whether or not a company such
13 as one of these 150 you reference here who files a price
14 list with this Commission -- strike that.
15 A Okay.
16 Q Again, though, back to these 150 companies,
17 do you know how many customers these 150 or so long
18 distance providers serve here in Idaho?
19 A To the extent that you'll find in my
20 proprietary data, which is my Exhibit No. 40A, I believe,
21 we do show market loss that we can measure and it's very
22 significant. Now, how many customers each provider has,
23 that certainly is proprietary information to each of
24 those companies and they will not, including AT&T,
25 provide us that information, so I have no way of -- I
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1 could ask you what AT&T has, but, no, I have no way of
2 knowing that data.
3 Q Do you know if once one of these companies
4 has filed a price list with the Commission if the
5 Commission takes any steps to require that company to
6 notify the Commission if they cease service in Idaho?
7 A I don't know.
8 Q If you could direct your attention to the
9 top of page 4 and specifically your testimony after
10 line 5 where you talk about the fact that competition,
11 telecommunications competition, exists in Idaho, do you
12 know whether all Title 61 customers can choose their
13 local provider right now?
14 A I'm sorry, if they can?
15 Q If they can.
16 A Well, to the extent that there are
17 alternatives such as wireless, yes, they can. Most
18 customers do choose wire line type, but, yes, they do
19 have the option of wireless.
20 Q But I'm talking about Title 61 services.
21 Can a Title 61 customer choose their Title 61 local
22 provider?
23 A Well, I think what you're asking, from a
24 wire line perspective, yes. What I'm saying is a
25 customer that might technically be Title 61 from the way
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1 we are regulated, they could choose to have their only
2 line a cellular phone, so to that extent they could have
3 an option, but then you get into is it really a Title 61
4 if that's their only service and I don't know from a
5 statutory what the definition would be in that
6 circumstance.
7 Q I think I can be more precise in my
8 question. Can all Title 61 customers in Idaho choose
9 their local exchange service provider?
10 A I think my answer would be the same.
11 Q Looking at the bottom of page 4, you talk
12 about long distance and private lines and intraLATA long
13 distance, isn't it true that all these services you
14 reference here are Title 62 services?
15 A Yes, it's true they're 62. A lot of the
16 providers of those 62 are ones --
17 Q Thank you. I just asked you if those were
18 Title 62.
19 A At this point, yes, they are.
20 Q Will you turn to page 5 of your rebuttal?
21 At the bottom of page 5, you talk about the 10XXX long
22 distance alternative?
23 A Yes, I have it.
24 Q Isn't it true that U S WEST still earns
25 revenues from these 10XXX calls through access charges?
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1 A It's entirely possible we do. Certainly to
2 the extent that such as in the case that I cited where we
3 lost the state contract, the reason we don't see access
4 on that is because they have a pipe that they are
5 bypassing our access originating network, so yes to some
6 extent and no to some extent. We don't necessarily still
7 get access revenues to the extent we did before.
8 Q Let's talk about that contract for a
9 minute. I believe you referenced that back on page 7 of
10 your rebuttal in the middle of that page.
11 A Yes, right.
12 Q And you cite there that the reason you lost
13 the contract was because the average rate per minute
14 which my client proposed, AT&T, was less than the
15 U S WEST imputed price floor.
16 A That's correct.
17 Q Is it your contention that U S WEST could
18 not have legally lowered its bid on that contract?
19 A I think you're asking a legal question. My
20 understanding is that we have an imputation methodology
21 that we must follow and to the extent that we followed
22 it, we determined that at that point in time we could not
23 go below whatever our bid was, which was higher than the
24 $.10 per minute, and we did further analysis and
25 determined the only way AT&T could have done that was by
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1 totally bypassing our switched access network.
2 Q So are you saying it's possible that you
3 could have lowered your bid on that contract?
4 MS. FORD: Objection, asked and answered.
5 MR. HARWOOD: I don't think I asked her
6 whether it was possible.
7 COMMISSIONER SMITH: Yeah, I don't think
8 it's been answered.
9 THE WITNESS: To the extent that the prices
10 were in effect, no, we couldn't have.
11 Q BY MR. HARWOOD: At the bottom of page 7,
12 you refer to an offering from a company called DimeLine.
13 A Yes.
14 Q And you say that this company provides
15 services through 10XXX dialing and their rate is $.10 per
16 minute?
17 A Correct.
18 Q All times of the day, all days of the
19 week. I believe you have attached that advertisement as
20 Exhibit 40B.
21 A That's correct.
22 Q Isn't it true that that offering from
23 DimeLine requires a $5.00 monthly access fee and calls
24 are also subject to a three-minute minimum per call?
25 A I know they do have an access fee. I'd
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1 have to read the ad again. I can't remember if they have
2 a three-minute.
3 Q I'd just direct your attention to page 1 of
4 that exhibit at the bottom, the double asterisks there.
5 A Yes, I see it. It's assessed per line and
6 a three-minute minimum per call, that's correct.
7 Q Page 11, line 20 of your rebuttal
8 testimony, you say that the Telecommunications Act
9 provides them, and you're referring to new entrants, the
10 opportunity to easily and inexpensively enter the local
11 market. Can you tell me if it's so easy and inexpensive
12 how come there's only a couple of new entrants actually
13 providing local exchange service here in Idaho?
14 MS. FORD: I'm going to object. It calls
15 for speculation on this witness' part as to why other
16 providers would or wouldn't provide service here.
17 COMMISSIONER SMITH: Mr. Harwood.
18 MR. HARWOOD: I'm just trying to get at why
19 she thinks it's easy and inexpensive.
20 COMMISSIONER SMITH: Well, why don't you
21 ask her that.
22 Q BY MR. HARWOOD: Why do you think it's so
23 easy and inexpensive under the Telecom Act to enter the
24 local market?
25 A I would kind of harken or liken it to what
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1 happens in the long distance arena and the number of
2 resellers we have available. I believe it's going to be
3 very easy once interconnection agreements are reached for
4 competitors to come in and do all of their competitive
5 offerings via resale. They don't require a great deal of
6 capital expenditures to provide resale and to the extent
7 that we already talked about the 150 long distance
8 providers, I think over time you're going to see that
9 same thing done via resale and I think that's why it's
10 going to be easily entered.
11 The interconnection arrangements take time,
12 as would be expected, but I think once those are
13 completed, then the activity will proliferate quite
14 quickly and there isn't much expense associated with
15 that.
16 Q Turn to the bottom of page 12 of your
17 rebuttal. On line 24, you refer to wholesale
18 alternatives and I'd ask you, what do you mean by that?
19 A Well, for example, you know, two, three
20 years ago, we were the primary provider of switched
21 access service in the U S WEST region. Certainly back
22 East, it would have been even further, but once
23 competitive access providers came on the scene, then they
24 offer now a viable alternative to our switched access.
25 As a matter of fact, AT&T has signed numerous contracts
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1 in numerous cities with Brooks Fiber to bypass the
2 U S WEST network, thereby avoiding switched access
3 charges from us. They are buying them now from Brooks
4 Fiber and that would be a very classic example of where
5 they would look at -- that's one of the wholesale
6 alternatives would be competitive access providers for
7 switched access.
8 Q Well, let me ask you what wholesale
9 alternatives exist to purchasers in Idaho.
10 A Now, we're talking here on what, again,
11 we're positioning and what I'm discussing here is we
12 already have two signed agreements in Idaho. We have
13 pending arbitration before this Commission and, again, as
14 soon as those arbitrations are completed or other
15 contracts are completed with other providers, they will
16 have those alternatives, so you have two today and you'll
17 have more in the very near future, and what those
18 alternatives are, you know, we will be the wholesale
19 provider, but then we have to look at is someone else, is
20 AT&T going to come in and build duplicate facilities in
21 certain areas to try to be an alternative to a McCloud
22 Telecommunications. We don't know what everyone is going
23 to do once they enter.
24 Q Can you give me an example of a wholesale
25 alternative that's available today?
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1 A You mean other than the switched access I
2 gave you, because I'm talking here generically about what
3 you look at with wholesale and retail pricing. I can
4 give you the fact that as alternatives, as customers or
5 competitors come in and want to purchase services from
6 U S WEST, it is the hope that there will be
7 alternatives. What they are today, no, I can't tell you.
8 Q Thank you. Let's go to page 15, middle of
9 that page, starting on line 15 which is in the middle of
10 that sentence, you state that the retail price of each
11 service must cover its costs but also be priced in a
12 rational relationship to its counterpart wholesale
13 product. Do you see that?
14 A Yes.
15 Q Isn't the wholesale price determined by
16 deducting the appropriate avoided cost discount from the
17 retail price?
18 A And I think what we're talking here is a
19 little bit different. When I wrote this testimony, my
20 intention here was to talk about wholesale as it relates
21 to selling services to new competitive entrants.
22 Certainly one piece of wholesale would be a retail price
23 minus avoided discounts; however, the other piece that
24 isn't included in your question is unbundled network
25 elements, so if I look at the wholesale price of
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1 unbundled network elements, if I were to recombine those
2 into the finished retail product, there should be some
3 kind of relationship in that wholesale pricing of the
4 unbundled pieces to the entirety of the retail service,
5 so there's two parts to wholesale there. It's both
6 wholesale discount off of the retail service, but what
7 I'm really talking here is more in relationship to the
8 various unbundled element piece parts.
9 Q Well, is this Commission being asked to
10 look at unbundled element prices or avoided costs in the
11 context of this proceeding?
12 A No, they are not.
13 Q On page 17 of your rebuttal, you again take
14 on the topic of facilities-based competition and make the
15 assertion I believe there that facilities-based
16 competition is true competition. You may not have made
17 the assertion that it's true competition there, but you
18 have previously testified to that in this case, haven't
19 you?
20 A I discussed that, yes.
21 Q Isn't it true that one of the primary
22 reasons U S WEST would prefer facilities-based
23 competition in Idaho as opposed to resale competition is
24 that facilities-based competition must exist in some form
25 before U S WEST is allowed into the interLATA long
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1 distance market?
2 MS. FORD: I'm going to object. It goes
3 beyond the scope of the testimony of this witness.
4 COMMISSIONER SMITH: Mr. Harwood.
5 MR. HARWOOD: On page 17, she talks about
6 facilities-based competition as being a prerequisite for
7 the entry of U S WEST into the interLATA long distance
8 market.
9 COMMISSIONER SMITH: I'll allow the
10 question.
11 THE WITNESS: Could you restate it for me,
12 please?
13 Q BY MR. HARWOOD: Certainly. I asked you if
14 one of the primary reasons U S WEST would prefer
15 facilities-based competition as opposed to resale
16 competition is because facilities-based competition must
17 exist in some form before U S WEST is allowed in the
18 interLATA long distance market.
19 A Thank you. I am not going to pretend that
20 I am an expert on the, I think it's, Part 271 rules which
21 allows us into interLATA competition. Fortunately,
22 that's not one of my areas of responsibilities, but my
23 understanding is that is one of the caveats. However, it
24 is also my understanding that there are some issues
25 around that, that if no one chooses to get into
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1 facilities-based, there might be some options, but to the
2 extent that I'm dealing with it in my testimony, I'm
3 simply saying that's one of the caveats and I think the
4 bigger issue is the options, the true options, it
5 provides to Idaho consumers, so from my perspective, no,
6 that's not why I want to encourage facilities-based
7 because I don't even have anything to do with the
8 interLATA entry. From my perspective, I have this down
9 in here because I think it's to the betterment of the
10 Idaho consumer.
11 Q But you wouldn't disagree that that could
12 be one of the reasons why the Company is particularly
13 interested in facilities-based competition as opposed to
14 resale competition?
15 A I don't think I can make that
16 determination. All I can do is tell you that when I
17 wrote this testimony what I was envisioning and I was
18 envisioning the benefits to the consumers and the fact
19 that my reading of the federal Telecommunications Act
20 wants to also encourage facilities-based competition and
21 that's where I'm coming from in this testimony.
22 Q Isn't it true that the federal
23 Telecommunications Act also wants to encourage resale
24 competition? It doesn't express a preference for either,
25 does it?
3620
CSB REPORTING OWEN (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 A My reading of the Telecommunications Act is
2 that yes, they felt that the biggest advantage was
3 facilities-based, but they allowed for resale as a
4 starting point to get to facilities-based.
5 MR. HARWOOD: That's all the questions I
6 have. Thank you, Madam Chair.
7 COMMISSIONER SMITH: Mr. Fothergill.
8 MR. FOTHERGILL: I have a few questions,
9 Madam Chair.
10
11 CROSS-EXAMINATION
12
13 BY MR. FOTHERGILL:
14 Q On page 4 of your live testimony, if you
15 could turn to that.
16 A I have it.
17 Q And the first question on that page was a
18 response to Dr. Power's testimony, direct testimony, as
19 provided here.
20 A Yes.
21 Q And is this not a question of what they
22 sometimes call elasticity of demand, that you're saying
23 the telephone service is relatively inelastic?
24 A Yes, I am saying it's relatively inelastic,
25 that's correct.
3621
CSB REPORTING OWEN (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 Q And you made an off-the-cuff remark that
2 people would -- under one study, the determination was
3 made in one study people disconnect their telephone
4 service before they disconnect their cable TV. Do you
5 remember that?
6 A Yes, I do.
7 Q That shows there is some elasticity in
8 telephone service; wouldn't you agree?
9 A You might say the opposite. Maybe there's
10 elasticity in cable TV. I'm not sure which one you would
11 say it would be.
12 Q Okay, either way, it does show that there's
13 less inelasticity in telephone service; would you not
14 agree?
15 A Well, I agree that telephone service is
16 fairly inelastic. I think we're saying the same thing,
17 but I'm getting confused the way you're wording it.
18 Q Okay, let's try it a different way.
19 A Okay.
20 Q Cigarettes and cocaine are thought to be
21 relatively inelastic, would you say telephone service is
22 more or less elastic than those kinds of things?
23 MS. FORD: I'm going to object.
24 MR. FOTHERGILL: You may.
25 MS. FORD: There's absolutely no foundation
3622
CSB REPORTING OWEN (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 for the statement about cigarettes or cocaine or this
2 witness' knowledge of those products as compared to
3 telephone service.
4 MR. FOTHERGILL: Well, we'll withdraw the
5 question. We'll go on.
6 COMMISSIONER SMITH: I think we got your
7 point, Mr. Fothergill.
8 MR. FOTHERGILL: I think we got it, yeah.
9 Q BY MR. FOTHERGILL: And you mentioned the
10 study done -- well, several studies that were done here,
11 Rutgers University, Chesapeake and Potomac Telephone
12 Company and the Massachusetts Public Service Commission
13 studies, research and I'm curious about this, what if
14 today you were asking for a, say, $100 raise instead of
15 just a doubling of the price, do you think that there
16 would be elasticity and people would -- the penetration
17 would be less in telephone service than it is now?
18 A Well, I think it's an unrealistic
19 question. I mean, the other piece that the FCC is
20 looking at is universal service funding support for areas
21 that are truly high cost and that has yet to be defined
22 what that means, is it $30.00 a month or whatever.
23 Certainly to the extent that you get up to a certain
24 level, then there is going to be an issue with
25 affordability. I don't think we're anywhere near that
3623
CSB REPORTING OWEN (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 level in this case.
2 Q Well, that's your opinion, but it is true
3 that at some level people are going to discontinue
4 telephone service because the price is high, is it not?
5 A If a high enough level was reached, and,
6 again, the studies that I'm finding, $20.00 is not that
7 level. It's something much higher than that.
8 Q Let's go the other way on it. If telephone
9 service was like air, if it was free, do you think there
10 would be an increase in the penetration levels of
11 telephone service?
12 A Actually, I don't. The data that I have
13 looked at and also the FCC issued an NPRM, a notice of
14 proposed rulemaking or, I can't remember, maybe it was a
15 notice of inquiry, they asked about how do we increase
16 penetration levels and a lot of the data that they got
17 acknowledged the fact that there is simply some customers
18 that do not want telephone service and there is some
19 customers because of not the basic rate but because of
20 long distance usage that could not afford telephone
21 service, and to that extent, I think there is a certain
22 number of customers that will never subscribe even if
23 your line was free, so I don't think you'd ever get
24 100 percent penetration.
25 Q Only one further question. Do you think
3624
CSB REPORTING OWEN (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 that the elasticity of demand may depend in some part on
2 income?
3 A For the residence basic exchange line, it
4 could. Certainly for long distance usage more so it
5 does.
6 MR. FOTHERGILL: Thank you very much.
7 Thank you, Madam Chair.
8 COMMISSIONER SMITH: Mr. Phillips.
9 MR. PHILLIPS: Yes, thank you,
10 Madam Chair.
11
12 CROSS-EXAMINATION
13
14 BY MR. PHILLIPS:
15 Q Ms. Owen, as I understand your testimony,
16 it's primarily based on the fact that there is or will be
17 some competition for telephone services.
18 A Well, that's part of it. I think what I'm
19 really saying in my testimony is, first, that the basic
20 line is below cost and to the extent that it's being
21 below cost sends the wrong signals about pricing to new
22 entrants that does affect your up and coming or emerging
23 competitive landscape, so it's really both pieces.
24 Q I presume you're talking about Title 61
25 service.
3625
CSB REPORTING OWEN (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 A Yes, I am.
2 Q In your written testimony, pages 2 through
3 about 10, you indicate some specific examples of what
4 competition is right now, as I understand it.
5 A That's correct.
6 Q From there on, you get into some areas that
7 I can't find any specificity in what you consider
8 competition. Could you help me on that?
9 A I'll try. Tell me if I'm not getting to
10 what you're asking me, because maybe it's because mine
11 was so nebulous you couldn't ask it any more specific.
12 The first part that you were referring to, I do talk
13 about competition and specifically Title 62 competition
14 and I talk about long distance and I talk about private
15 lines specifically.
16 I think what the issue is that those same
17 companies are multi-billion dollar companies who have
18 come out in the press and said they're going to take a
19 third of our market within the next three to five years
20 and, I mean, that's Robert Allen, the CEO of AT&T, coming
21 out and saying that. MCI Metro now is in most big cities
22 and I think what the competition is is you're going to
23 have those same players now going into the Title 61 arena
24 and I think initially it's going to be by a resale.
25 I don't think that you're going to see them
3626
CSB REPORTING OWEN (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 building facilities out to the residential consumer and I
2 think part of the reason they won't is it may not be
3 economically viable to do so when they can buy that
4 service at a much cheaper rate from us based on a retail
5 rate minus avoided discounts, and I think that's the
6 position that we need to look forward to is what it is we
7 want to encourage in Idaho.
8 We know what they're doing in Title 62. We
9 can anticipate what they're going to do in Title 61 and
10 what is it we think we need to do in order to bring the
11 best mix of facilities-based and resale competition to
12 the Idaho customer.
13 Q You indicate, then, that some other company
14 can come in and use your lines and undercut you in terms
15 of the price of your product?
16 A Well, it's not really undercutting that I'm
17 concerned about. It's really more the fact that they can
18 come in and use our service at a price that may be
19 significantly lower than what they would charge had they
20 been required to build their own facilities; so, in other
21 words, we're not encouraging them to come in and bring
22 the new technology that the Telecommunications Act wants
23 to bring.
24 We're not encouraging them to bring in new
25 and innovative services and products because they're
3627
CSB REPORTING OWEN (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 relying solely on our underlying infrastructure, so I
2 think we want to have them have that as an availability,
3 but I think we also want to encourage them to build some
4 of their own facilities, be it the switch, be it the
5 loop, be it the drop to the house, whatever it is,
6 because maybe they can come up with something that we
7 haven't come up with and I think that's what we're trying
8 to get to in the long term here.
9 Q So, in effect, you are saying, though, that
10 they could use some of your facilities and sell their
11 product at a less price than what you sell them for. To
12 me, that's what competition is.
13 A Well, they may or may not sell it. I don't
14 know what they're going to sell it. I mean, you'd have
15 to ask them that. I do know that in some jurisdictions
16 they offer a line is a line for $25.00, for example, in
17 Washington. They say, well, I don't care whether you're
18 a residence or a business, you can buy this for $25.00.
19 To the extent that they buy, let's say we have a line
20 rate of $12.00 and the avoided discount is $1.00, then
21 how they choose to price it or package it with whatever,
22 I can't tell you what they do. All I can do is try to
23 develop a landscape that will encourage them to do
24 something new and innovative.
25 Q In any event, you see this as something
3628
CSB REPORTING OWEN (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 that will happen in the future?
2 A Well, the future probably being this year.
3 I think competition will be here very shortly in Idaho on
4 a resale basis. I don't think it will be here unless we
5 do something to proactively encourage it on a facilities
6 basis.
7 MR. PHILLIPS: Okay, thank you very much.
8 THE WITNESS: You're welcome.
9 COMMISSIONER SMITH: Questions from the
10 Commission. Commissioner Hansen.
11 COMMISSIONER HANSEN: I have a couple.
12 COMMISSIONER SMITH: Commissioner Hansen.
13
14 EXAMINATION
15
16 BY COMMISSIONER HANSEN:
17 Q Ms. Owen, in response to page 4 of your
18 rebuttal, live rebuttal, today, in your response to a
19 question about Dr. Power's testimony, you stated there
20 that you strongly disagreed that an increase in price
21 would have an effect on the subscription level; is that
22 correct?
23 A Yes, at the price that we've proposed,
24 that's correct.
25 Q I guess one of the questions I'd have is do
3629
CSB REPORTING OWEN (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 you have any numbers from Massachusetts on what their
2 level of subscription was before their rate increase and
3 after, do we have anything in the record on that?
4 A We don't have it on the record. I do have
5 it and you need to understand that plus or minus half a
6 percentage they're saying is statistically not valid. In
7 1990, their penetration rate was 96 -- let me go back a
8 year. 1989, it was 97.1 percent and then it fluctuates
9 up and down from there. It actually went up some of the
10 time, but it ended up in 1994 at 96.5 and that's when
11 they issued their order that made the determination that
12 they could see no statistically significant change in
13 their subscribership levels, so there was about a half a
14 percentage point variation there.
15 Q Okay. Could you give me those numbers
16 again? So prior to the rate increase, did you say it was
17 96.5?
18 A No, I'm sorry. In 1989, the penetration
19 rate was 97.1 percent --
20 Q Okay.
21 A -- and the rate was $11.98, if you want
22 that, too.
23 Q Okay.
24 A In 1994, their penetration rate was 96.5
25 percent with a rate of 17.83, and in the intervening
3630
CSB REPORTING OWEN (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 years, it was real interesting, it fluctuated from
2 96.6 percent up to 96.9 percent and there were increases
3 during that time and the changes were just very
4 infinitesimal.
5 Q Now, the rate you have for 1994 at 96.5 at
6 the new rate, how long would that have been after the new
7 rate had been established? Would that have been a month
8 after or six months later or how long?
9 A I don't know exactly. I know the 96.5 is
10 the cumulative end-of-year summary and I believe they
11 were doing all their increases the first of the year, so
12 I think you have most of a year there; is that what
13 you're asking me?
14 Q Yes. I guess a follow-up question is,
15 wouldn't you think that upon a large increase, would you
16 think that you'd have a lot of subscribers drop off
17 immediately or would you see that as more of a gradual
18 process? As people couldn't afford it, they'd start
19 saying, well, you know, I guess I'd rather have apples
20 instead of a phone or milk or whatever and so do you see
21 it progressively dropping off or do you see an immediate
22 reaction the minute the rate -- that's what I'm trying to
23 find out.
24 A Right. I think if you saw a significant
25 change in penetration, you would see it fairly quickly.
3631
CSB REPORTING OWEN (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 Now, the Massachusetts Commission, the largest increase
2 was in the first year and it was about a $3.00 increase
3 and they saw -- there was no statistically significant
4 change in penetration level.
5 Q So Massachusetts didn't jump from 11.98 to
6 17.83 at one time?
7 A No, they didn't. They did do it graduated.
8 Q Do you think that would have made a
9 difference in the subscription level?
10 A It's hard to tell. Based on what those
11 other studies are telling me, which are the only studies
12 I have seen, I mean, I try to monitor that, those other
13 studies are telling me probably not. It would have been
14 more dependent upon what would have happened with long
15 distance prices rather than on this and in Idaho, we have
16 lowered those prices significantly, so my thought is when
17 you look at the total, I don't think it would. My best
18 judgment is it wouldn't.
19 Q Have you looked at any other states besides
20 Massachusetts that's had large increases that you could
21 compare to Massachusetts?
22 A We had increases in Wyoming and the last
23 study I looked at it, it did not look like there was any
24 negative impact from that. I'm trying to think if there
25 was any other state that I've looked at real recently.
3632
CSB REPORTING OWEN (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 That would probably be the other one I looked at most
2 recently and it did not appear to have any negative
3 impact either.
4 Q Okay, thank you. I have a question on
5 Exhibit, the revised exhibit, No. 30 that you handed out
6 just before lunch.
7 A Okay.
8 Q Do you have that?
9 A Yes, I do.
10 Q Under the unlimited where you start out
11 with the basic rate, I guess my question I have is
12 concerning the EAS amount included at 15.62 and in
13 Mr. Eastlake's Exhibit 164, which I can provide for you
14 if you'd like today, but in his workpapers there in
15 Exhibit 164, he projected the cost to be $1.35 for EAS,
16 and during our EAS public hearings when the public asked
17 us what the additional cost would be for EAS in their
18 area, it's my recollection that we told them that we
19 didn't know for sure, that we had a rate case coming and
20 it would be determined in that rate case what eventually
21 that rate would be; however, we indicated to them for the
22 time being that that rate would increase anywhere from
23 $3.62 to $5.08 or in that range.
24 A Right.
25 Q And that that would be the immediate rate
3633
CSB REPORTING OWEN (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 increase, but after the rate case, it could be entirely
2 different than that, we didn't know, and so as I look at
3 your numbers here and I look at Mr. Eastlake's, I can see
4 where he started from the ground level and he justified
5 the $1.35, and my question is where do you justify
6 starting at the 15.62? Where are your numbers?
7 If I wanted to compare your numbers and his
8 numbers, I'm curious what you have in yours and he
9 doesn't have in his that he's starting -- if I look at
10 $1.35, I guess I'd be looking at about 11.46 and you're
11 starting at 15.62 and I'd like to bridge those together.
12 Do you have in your testimony anywhere where I can see
13 how you built up to 15.62?
14 A Only to the extent that I did take the 3.62
15 that was used as an interim rate increase based on the
16 stipulation between Staff and U S WEST as the starting
17 point and the fact that customers seemed to think that
18 that starting point was reasonable for the amount of
19 calling that they were getting. Certainly, I can give
20 you more on why I started that, but your specific
21 question is, is it in my testimony and, no, I'm really
22 using what the Commission said was a starting point in
23 that Order, because the thing that's not in the rate case
24 that was in the EAS proceeding is the mandate that we're
25 losing long distance and so when we gave up, if you will,
3634
CSB REPORTING OWEN (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 that long distance revenue, part of the agreement with
2 Staff was the acknowledgment that we weren't getting back
3 100 percent of our revenue.
4 We compromised and we're moving the revenue
5 from 62 to 61, but not all of it, so I felt the 3.62 was
6 reasonable because otherwise you have no acknowledgment
7 that we agreed to get rid of Title 62 revenue and we did
8 it because we thought it was in the best interest of the
9 customers, so that's why I think that the 3.62 was a
10 reasonable starting point.
11 Q Did you acknowledge in that calculation
12 revenue sharing, also? I mean, you said you acknowledged
13 the loss of the toll revenue. Did you also look at the
14 gained revenue through revenue sharing that you no longer
15 would have to participate in in that 3.62?
16 A I'm not sure what -- I know in the revenue
17 sharing there were some gives and takes and providing for
18 some offsets to this, but I'm not sure what you're asking
19 me, I'm sorry.
20 MS. FORD: If I might, Commissioner Hansen,
21 I apologize for interrupting, but I was told from the
22 back that Margie Wright who will be on I think later
23 today will be able to walk through the calculation that
24 you're speaking about, so I just thought I'd throw that
25 out there since I was told from the back that she is
3635
CSB REPORTING OWEN (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 available later to talk about that.
2 COMMISSIONER HANSEN: That's fine.
3 Q BY COMMISSIONER HANSEN: Would you like to
4 continue on or should we let Margie Wright answer it?
5 A She would do better on the revenue sharing
6 portion of it. I can certainly talk about the
7 Title 62/Title 61 revenue shift, but not the revenue
8 sharing.
9 Q But this is your exhibit here.
10 A Yes.
11 Q And if I understand you correctly, and
12 probably I'll get a little bit more when Ms. Wright is on
13 the stand, but basically what you're saying here is you
14 just build it from that temporary adjustment or agreed
15 number with the Staff and you really haven't built it
16 from the base up; is that correct?
17 A That would be a true statement and, again,
18 I guess I would be concerned if there was no
19 acknowledgment of the revenue loss in Title 62 that we
20 took as part of that stipulation.
21 COMMISSIONER HANSEN: Thank you very much.
22 THE WITNESS: You're welcome.
23 COMMISSIONER SMITH: Commissioner Nelson.
24 COMMISSIONER NELSON: I do have a couple of
25 questions. Thank you.
3636
CSB REPORTING OWEN (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 EXAMINATION
2
3 BY COMMISSIONER NELSON:
4 Q Help me out, is there any difference
5 between the 1FB rate under Title 61 and under Title 62?
6 A Not at this time.
7 Q You've had the ability to set your own rate
8 under Title 62 for six or seven years, haven't you?
9 A Yes, we have.
10 Q Well, does that tell me that the Company
11 thinks that bus. to res. ratio is fine or does that speak
12 to the state of the competition in Idaho?
13 A It's a good question. The concern on the
14 Title 62 pricing of business basic exchange, and I think
15 we heard Mr. Wozniak talk about it very briefly
16 yesterday, but right now if we were to make different
17 pricing, for example, if I was to lower the price of the
18 Title 62 business line, it might then encourage customers
19 to have kind of -- I can't remember what Jim said -- odd
20 buying behavior, that they may then choose to purchase
21 six lines. They don't really need them, but maybe in
22 aggregate they're better off, so it may send the wrong
23 signals. That's reason No. 1, but reason No. 2 --
24 Q Wouldn't that be beneficial for the Company
25 if they ordered six lines instead of five?
3637
CSB REPORTING OWEN (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 A Well, not if you've lowered the prices on
2 the other side, so if you've lowered the prices on
3 Title 62, it may or may not, but the other thing is we've
4 been doing a lot of research focus groups with customers,
5 all sorts of different customer research on the business
6 side, because we don't really know yet where to price
7 it. We don't know if automatically, and I'll talk
8 Title 62 right now, we don't know if automatically all
9 new competitive entrants will price below us, so if we
10 made it $30.00, will they go to 29, if we make it 35,
11 will they go to 34.
12 And the other thing the research is showing
13 us is that on the business side, there are a lot of other
14 things that enter into the purchase decision. It's not
15 as much price on the larger business side. I am talking
16 six lines or better, so the answer is two-fold. No. 1,
17 we don't want to do odd pricing relationships between
18 Title 61 and Title 62 businesses, but I think more
19 importantly is we don't know where to put it yet. We're
20 still trying to figure that out.
21 Q Well, but you're making a recommendation
22 for Title 61, aren't you?
23 A I am making a recommendation for Title 61
24 primarily that residence come up and so that business
25 doesn't go up the same proportion, I am making that
3638
CSB REPORTING OWEN (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 recommendation, that's correct, because I don't think --
2 I think over time you may see those totally come
3 together. We're seeing that with some new competitive
4 entrants already.
5 Q So it would be fair to say for Title 61 you
6 just don't want to see the ratio get any further apart
7 than it is?
8 A That's correct, and I really think it needs
9 to come closer together. Actually, I don't think there
10 should be a ratio, but, yes, you're right.
11 Q You're all in favor of value-based pricing?
12 A Yeah. I prefer to call it market-based,
13 but, yes, I am. That's why we're doing all this customer
14 research is trying to figure out where we should price
15 things.
16 Q When you talk about allocations on page 16,
17 FCC's allocation of 25 percent to interstate, is it your
18 understanding that there was some sort of -- that was
19 something other than arbitrary on the part of the FCC?
20 A I don't know if it was arbitrary or not. I
21 know it's what we have and I know they are going to start
22 reexamining it, but I really don't think I know how it
23 originally got established at 25 percent.
24 Q What's the basis, then, for saying that any
25 additional allocation wouldn't be sustainable?
3639
CSB REPORTING OWEN (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 A If you're asking us to put more on the
2 interstate side or more on the Title 62 side?
3 Q Well, more anywhere. I get that that's
4 your testimony.
5 A Yeah, on the interstate side, I don't think
6 we can do anything until we know what the FCC does in
7 relationship to jurisdictions. They are opening a docket
8 to look at the whole issue around jurisdictional
9 separations, so until they do something, I think we're
10 kind of -- the 25 percent on an embedded basis I think
11 we're kind of stuck with. To the extent that you tried
12 to move more to the Title 62, I think you've got a
13 problem in that if you were to look at the total number
14 of lines in Idaho and possibly look at what their usage
15 is, I think it would be evident that they are causing the
16 bulk of those expenses to be incurred.
17 Now, the more you move over to Title 62, as
18 that is eroded through competition, through new
19 technology, I mean, it could be eroded in any way, I
20 don't know how you can expect any company, whether it's
21 U S WEST or GTE or anyone, to sustain their network
22 investments to keep the kind of quality network that we
23 have in Idaho today because there will be less money from
24 that pot, so if you allocated more than the 15 percent or
25 in aggregate 40 percent if you combine those two together
3640
CSB REPORTING OWEN (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 and that's not sustainable, which I don't believe it is
2 sustainable, then there is going to be less money from
3 that to reinvest into the network, so if I lose 50
4 percent of my toll market and I have only 5 million in
5 contribution, then I've only got 5 million from that
6 Title 62 to reinvest and who it impacts is the Title 61
7 customers.
8 Q Well, regardless of market share, all of
9 your services incur costs, don't they?
10 A Generally, that's true. Some, obviously,
11 incur a lot more than others.
12 Q So what are you saying here, that they
13 incur costs, but don't allocate any of the Title 61 costs
14 to Title 62?
15 A That's what I believe will happen over
16 time. I think we will be forced to that. I think the
17 costs that we're talking about are probably different. I
18 mean, we're talking about embedded costs in this docket
19 and when you look at the embedded costs of long distance
20 or switched access or custom calling features on a
21 stand-alone basis, they're very small. The big costs are
22 incurred with building the infrastructure and the
23 switching, so the more you allocate of that
24 infrastructure cost to those Title 62 services or
25 interstate jurisdiction, as that profit margin is eroded
3641
CSB REPORTING OWEN (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 in those Title 62, then that hunk of money that is there
2 as a contribution to help reinvest in the network is no
3 longer there.
4 Q So are you saying you want to cost Title 62
5 based on incremental costs and Title 61 on embedded
6 costs?
7 A No, in this docket we're looking at
8 embedded costs only and we're allocating based on a
9 60/40 split with the Title 61 taking 60 percent and
10 Title 62 taking 40 percent of the cost.
11 COMMISSIONER NELSON: Okay, thank you.
12 THE WITNESS: You're welcome.
13
14 EXAMINATION
15
16 BY COMMISSIONER SMITH:
17 Q Ms. Owen, could you just remind me what are
18 the rates for non-list and non-pub in Idaho?
19 A They are $4.00 for non-pub.
20 Q A month?
21 A A month, and non-list, I think they're
22 2.50.
23 Q And have you compared those rates with
24 other states and their rates?
25 A Yes, I have looked at the U S WEST region.
3642
CSB REPORTING OWEN (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 Q Could you tell me what the results of that
2 review were?
3 A There are several other states that have
4 the same $4.00 rate, Wyoming -- I have to look it up. I
5 can only remember so much of this stuff. Let's see,
6 northern Idaho, southern Idaho, Iowa, Wyoming, and then
7 Montana, Nebraska and New Mexico are all at $3.00.
8 Q Montana, Nebraska --
9 A And New Mexico.
10 Q -- and New Mexico. $3.00 for both?
11 A I'm sorry, $3.00 for non-published and,
12 well, non-list it varies from $1.50 to $2.00 for those
13 three states.
14 Q For non-list?
15 A Yes, the non-list.
16 Q Are there no charges in other states?
17 A No, all of the states have charges.
18 Q Okay.
19 A You want all of the states?
20 Q Sure.
21 A Oh, okay. Can I give them to you in
22 alphabetical order?
23 Q Sure.
24 A Arizona -- let me see what the date of this
25 is -- I'm showing $1.80, but something sticks in my mind
3643
CSB REPORTING OWEN (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 that increased, but I don't have that, because we had a
2 proceeding down there and I think that went up, but for
3 our purposes, let's say $1.80, with the non-list at
4 $1.45. Colorado is at 2.20 -- I'll just give you non-pub
5 first and non-list second, how's that?
6 Q Okay.
7 A Colorado, 2.25 and $1.80, and then you know
8 northern and southern Idaho are $4.00 and 2.50. Iowa is
9 $4.00 and 2.50. Minnesota is 2.45 and $1.15. Montana is
10 $3.00 and $1.50. Nebraska is $3.00 and $2.00.
11 New Mexico is $3.00 and $1.50. North Dakota is 2.10 and
12 $1.00. Oregon is $.75 and $.50. South Dakota is $1.25
13 and .75. Utah is $1.95 and .95. Washington is .75 and
14 .50 and Wyoming is $4.00 and 2.50.
15 Q I guess since Commissioner Nelson got to
16 ask his question about an intrastate subscriber line
17 charge, I'll get to ask my next question, which is why
18 should non-list/non-pub be a regulated service?
19 A That's one I've never been asked before. I
20 don't know why it should. It seems to me it's totally
21 discretionary, so I'm not sure why it should be and I
22 don't know the history of why it was chosen to be in
23 Idaho.
24 Q Okay.
25 A Can I give you one other piece? I just
3644
CSB REPORTING OWEN (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 read my footnotes. On South Dakota, I gave you -- they
2 did have an increase and I should give you that. It was
3 effective in March of last year. Non-published is $3.00
4 and non-list is $2.00.
5 Q I guess I was interested also in your
6 Massachusetts information. Was the source of that the
7 FCC subscribership report that you mentioned?
8 A No, it was an actual Massachusetts order.
9 Oh, the data I gave you? I'm sorry, yes, the data I gave
10 you was, part of it was, from the Massachusetts
11 Commission and then part of it was data I extracted from
12 the FCC subscribership report, but then I took what the
13 commission said from an actual order that they issued
14 where they made that observation. I mean, I'm not making
15 that assumption. It was in a written order.
16 Q Is Massachusetts' population the same as
17 Idaho's?
18 A I would guess not. I would guess it's much
19 higher.
20 Q Is Massachusetts' geography the same as
21 Idaho's?
22 A I've never been there. I know it's got
23 water on one side. I don't know. I don't know if it has
24 mountains. I mean, I don't know if the Alleghenys go
25 there. I don't know what goes there.
3645
CSB REPORTING OWEN (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 Q Have you done a study to see whether
2 Massachusetts' economy is anything like Idaho's?
3 A No, I haven't. I would assume their cost
4 of living might be higher.
5 Q I don't want what you want to assume. I
6 just want what you know.
7 A I don't know anything about their economy.
8 Q Are Idaho's social services programs
9 anything like Massachusetts'?
10 A I don't know, don't know.
11 Q Are Idaho's telephone costs anything like
12 Massachusetts', do you know?
13 A Based on some studies that I've seen at the
14 federal level, the Idaho costs are probably higher to
15 provide the telephone service.
16 Q I was also interested in the studies you
17 mentioned, the Rutgers, the Field Research Corp., and the
18 Chesapeake and Potomac studies. Did you participate in
19 these studies?
20 A No, I simply got copies of them and read
21 them and then they were submitted, I believe, also at the
22 FCC level.
23 Q Do you know who paid for these studies?
24 A Obviously, Chesapeake and Potomac paid
25 someone to do their studies. I don't know who they
3646
CSB REPORTING OWEN (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 were. The Rutgers was funded by Bell Atlantic, but it
2 was done by two different doctors at Rutgers University,
3 project on information policy. Let me see if I know
4 Field Research. I'm not sure about Field Research. I
5 can't seem to put my hand on it. Okay, that one was by
6 Pac Bell and GTE.
7 Q Thank you. When you mentioned the fact
8 that it was your understanding that some people will
9 disconnect their telephone before they disconnect their
10 cable TV, I wasn't sure if this was an important pricing
11 principle that you wanted the Commission to consider when
12 it sets rates.
13 A No, I think all I was saying is that I
14 guess there's an issue of what's important to people and
15 the fact that you change a price of a particular service
16 may not be the driver of the customer's purchase decision
17 and I just found it amazing that some people thought
18 cable TV was more important than a telephone, not the
19 fact that they had to make that decision but the
20 different values people place.
21 Q And finally, you mentioned how Internet
22 providers have directories of people's addresses and
23 phone numbers and I'm wondering what was your personal
24 experience in developing these Internet directories.
25 A Well, I didn't develop them; is that what
3647
CSB REPORTING OWEN (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 you're asking me?
2 Q Well, you mentioned the way that Internet
3 providers went about creating directories for on-line
4 users and I was wondering if you had any personal
5 experience in that.
6 A No. The research I did internally is where
7 I got the information that they can either scan
8 electronically actual directories or buy lists from
9 directory companies to create those lists, but I
10 certainly haven't created them myself or been in direct
11 contact with a creator of them.
12 COMMISSIONER SMITH: Thank you. Any
13 redirect?
14 COMMISSIONER HANSEN: I have one more
15 question.
16 COMMISSIONER SMITH: Oh, sorry,
17 Commissioner Hansen wants one more shot.
18
19 EXAMINATION
20
21 BY COMMISSIONER HANSEN:
22 Q In response to an answer to
23 Commissioner Nelson, did I understand correctly if the
24 rates aren't adequate that U S WEST would not be able to
25 keep up with the proper level of investment in Idaho
3648
CSB REPORTING OWEN (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 that's needed; is that correct, is that what you stated?
2 A I think that could be a long-term fall-out,
3 yes.
4 Q My question, then, is if the rates were
5 favorable to U S WEST in Idaho, how would we be
6 guaranteed that we would receive the proper investment in
7 the state? Isn't it possible that that revenue could
8 flow to other states?
9 A Mr. Wozniak might have been better to
10 answer that, but let me try. It's my belief that because
11 we are still regulated as far as service quality rules,
12 those kinds of things go, that to the extent that
13 investment wasn't made, there are remedies before this
14 Commission, and our history has been such that we've put
15 a lot of money into Idaho, both voluntarily as well as we
16 heard Mr. Plummer talk today about replacing switches
17 with new digital switches. I mean, I don't know how I
18 would consider guarantee, but it's my belief that that
19 would occur and that there would be ways for you to
20 monitor that it would occur.
21 COMMISSIONER HANSEN: Thank you.
22 COMMISSIONER SMITH: Do you have redirect,
23 Ms. Ford?
24 MS. FORD: No, I do not.
25 (The witness left the stand.)
3649
CSB REPORTING OWEN (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 MS. FORD: I would just mention for the
2 record that the Staff attorney had used Exhibit 171 which
3 is the tariff pages and, according to our records, we
4 already had a Staff Exhibit 171.
5 COMMISSIONER SMITH: Did you want us to
6 have two 171's?
7 MS. HAMLIN: I'd be willing to call this
8 171A.
9 COMMISSIONER SMITH: I guess that would be
10 the easiest way for everyone to correct their papers, so
11 why don't we just put an "A" after this and then that
12 will be the easiest way to distinguish the two, so the
13 references here will be to 171A.
14 MS. HAMLIN: Staff moves to have it
15 admitted into the record.
16 COMMISSIONER SMITH: Is there any objection
17 to the admission of Exhibit 171A?
18 MS. FORD: No.
19 COMMISSIONER SMITH: It will be admitted.
20 Ms. Ford.
21 MS. FORD: I would just note that there is,
22 again, handwriting on the exhibit, at least that I was
23 handed, and I don't believe that was part of the actual
24 tariff. It was probably written in by a Staff member.
25 MS. HAMLIN: I will stipulate so.
3650
CSB REPORTING COLLOQUY
Wilder, Idaho 83676
1 COMMISSIONER SMITH: Okay.
2 (Staff Exhibit No. 171A was admitted
3 into evidence.)
4 MS. FORD: Just to check to make sure, I
5 believe I already offered 63 and revised 30 and they were
6 admitted, but in case my recollection was incorrect as to
7 what happened before lunch, I'll offer them again.
8 COMMISSIONER SMITH: I think you did and I
9 think we admitted them. Okay, let's take a ten-minute
10 break.
11 (Recess.)
12 COMMISSIONER SMITH: All right, let's go
13 back on the record. It looks like we're with
14 Ms. Hobson.
15 MS. HOBSON: U S WEST will call Dallas
16 Elder.
17
18
19
20
21
22
23
24
25
3651
CSB REPORTING COLLOQUY
Wilder, Idaho 83676
1 DALLAS R. ELDER,
2 produced as a rebuttal witness at the instance of
3 U S WEST Communications, Inc., having been previously
4 duly sworn, was further examined and testified as
5 follows:
6
7 DIRECT EXAMINATION
8
9 BY MS. HOBSON:
10 Q Mr. Elder, you've previously been
11 identified or identified yourself as the person that
12 prepared the U S WEST embedded cost studies in this
13 case. In connection with that work for U S WEST, did you
14 cause to be prepared or did you prepare and cause to have
15 filed with this Commission certain written testimony
16 consisting of 56 pages?
17 A You know, I think I might --
18 Q Do I have the wrong page?
19 A Well, either you do or I do because mine
20 shows 52.
21 Q I have 52 pages, too.
22 A Okay, 52 I would agree with.
23 Q It's a trick question, Mr. Elder.
24 A Okay.
25 Q I'm sorry. Was that testimony dated
3652
CSB REPORTING ELDER (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 January 28, 1997?
2 A Yes.
3 Q Do you have any corrections or changes to
4 make to that testimony at this time?
5 A I have one correction and it's on page 6 at
6 line 17. That line starts with the three words
7 "Commission orders which" and the following word is
8 "form" and I need to insert the word "all" between
9 "which" and "form" so that it reads "Commission orders
10 which all form...." That's the only correction I have.
11 Q With that correction, if I were to ask you
12 the same questions that are contained in your prefiled
13 written testimony, would your answers be the same?
14 A Yes.
15 Q Did you further in connection with your
16 employment at U S WEST prepare and cause to have filed
17 with your prefiled written testimony certain exhibits
18 labeled 44A, B, C, D and 44E?
19 A Yes.
20 Q Do you have any changes or corrections to
21 those exhibits?
22 A No.
23 MS. HOBSON: Madam Chair, at this point, I
24 would move that Mr. Elder's prefiled rebuttal testimony
25 be spread upon the record as if read and we offer the
3653
CSB REPORTING ELDER (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 exhibits, 44A through 44E.
2 COMMISSIONER SMITH: If there's no
3 objection, we will spread the prefiled testimony upon the
4 record and admit Exhibit 44, Schedules A through E.
5 (U S WEST Communications, Inc. Exhibit
6 Nos. 44A - 44E were admitted into evidence.)
7 (The following prefiled rebuttal
8 testimony of Mr. Dallas Elder is spread upon the record.)
9
10
11
12
13
14
15
16
17
18
19
20
21
22
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3654
CSB REPORTING ELDER (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 IDENTIFICATION OF WITNESS
2 Q. PLEASE STATE YOUR NAME AND BUSINESS
3 ADDRESS.
4 A. My name is Dallas R. Elder. My business
5 address is 1801 California Street, Denver, Colorado.
6 Q. HAVE YOU PREVIOUSLY FILED TESTIMONY IN THIS
7 DOCKET?
8 Q. Yes. I filed direct testimony on June 28,
9 1996.
10 PURPOSE OF REBUTTAL TESTIMONY
11 Q. WHAT IS THE PURPOSE OF YOUR REBUTTAL
12 TESTIMONY?
13 A. The purpose of my rebuttal testimony is to
14 address embedded cost issues brought forth in the direct
15 testimony of witnesses for the Idaho Public Utilities
16 Commission Staff (Staff), AT&T, AARP, and the Idaho
17 Citizens Coalition. First, I summarize U S WEST's cost
18 accounting allocation system (CAAS) and provide
19 justification for the use of CAAS to identify the
20 Title 61 rate base. Second, I discuss the allocation of
21 joint and common costs. Third, I discuss the use of
22 embedded cost studies or economic studies in this
23 proceeding. Fourth, I provide comments on Staff's cost
24 allocation critique of U S WEST's CAAS cost allocation
25 methods and show that CAAS is in concert with the cost
3655
DALLAS R. ELDER, RB 1
U S WEST COMMUNICATIONS, INC.
1 allocation principles set forth in the Idaho legislation.
2 Fifth, I provide an overview of the problems that I have
3 identified in the Staff's cost allocations and methods
4 used to determine Title 61 revenue requirement. Sixth, I
5 provide a detailed
6
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8
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12
13
14
15
16
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19
20
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22
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3656
DALLAS R. ELDER, RB 1A
U S WEST COMMUNICATIONS, INC.
1 analysis of the Staff's cost allocations including
2 evidence showing that Staff uses erroneous assumptions in
3 their methods and I show that these methods are not in
4 concert with the Idaho legislation. Due to the Staff's
5 errors, I recommend that the Commission reject the rate
6 base and expense allocations to Title 61 that Staff has
7 presented. Finally, I present the Title 61 impacts of
8 the establishment of the new EAS regions.
9 SUMMARY OF U S WEST'S COST ACCOUNTING ALLOCATION SYSTEM
10 (CAAS)
11 Q. PLEASE PROVIDE A SUMMARY DESCRIPTION OF
12 U S WEST'S CAAS.
13 A. CAAS is U S WEST's embedded cost accounting
14 allocation system. The system was developed to meet both
15 internal needs of the Company as well as external needs
16 in the regulatory environment. Internally, the Company
17 wanted to be able to examine the embedded costs of
18 services. Externally, U S WEST had various regulatory
19 requirements to provide embedded cost of service results.
20 The regulatory requirements included not only embedded
21 costs of service for general rate cases, but the need to
22 identify intrastate regulated and deregulated results of
23 operations.
24 During the initial development of CAAS, U S WEST
25 recognized that it would be costly to develop a cost
3657
DALLAS R. ELDER, RB 2
U S WEST COMMUNICATIONS, INC.
1 allocation system for each regulatory requirement in
2 fourteen different intrastate jurisdictions as well as
3 the internal needs of the Company. To avoid redundant
4 system development and on going maintenance of multiple
5 systems,
6
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9 /
10
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13
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3658
DALLAS R. ELDER, RB 2A
U S WEST COMMUNICATIONS, INC.
1 U S WEST analyzed the common parameters needed to meet
2 each of the requirements for embedded costs. It became
3 apparent during the analysis that a single system with
4 costs allocated to product families would meet the
5 individual requirements.
6 Product families were defined so that all products
7 of the Company would be mapped to a specific product
8 family. Each product family was defined to contain
9 similar products. CAAS was developed so that if a need
10 arose, after the initial identification of product
11 families that required further disaggregation of a
12 product family, the system would be able to meet this
13 requirement.
14 Q. DO THESE CAAS PARAMETERS MEET THE
15 REQUIREMENTS OF THE IDENTIFICATION OF TITLE 61 AND TITLE
16 62 REVENUES AND COSTS?
17 A. Yes. The Idaho legislation that
18 established the Title 61 and Title 62 definitions
19 occurred after the initial design of CAAS. The original
20 CAAS parameters allow U S WEST to identify the Title 61
21 and Title 62 revenues and costs. CAAS has nineteen
22 summarized product families. Thirteen of these
23 summarized product families are assigned
24 directly to Title 62. One product family, basic
25 residence service, is directly assigned to Title 61. The
3659
DALLAS R. ELDER, RB 3
U S WEST COMMUNICATIONS, INC.
1 direct assignment of the basic residence family
2 represents over seventy-five percent of the Title 61
3 operating expenses and over eighty percent of the Title
4 61 plant in service. Only five product families have to
5 be further disaggregated for an assignment to Title 61
6 and Title 62. Two of these product families, basic
7 business and PBX, represent most of the costs that need
8 to be disaggregated. These product families are split
9 between Title 61 and Title 62 based on the relative
10 number of access lines for each product family associated
11 with Title 61 and Title 62.
12
13
14 /
15
16 /
17
18 /
19
20
21
22
23
24
25
3660
DALLAS R. ELDER, RB 3A
U S WEST COMMUNICATIONS, INC.
1 Q. HAVE YOU PROVIDED A DETAILED DESCRIPTION OF
2 THE COST ALLOCATION METHODS USED IN CAAS?
3 A. Yes. In my direct testimony in the CAAS
4 OVERVIEW section, I provided an overview of the methods
5 used in CAAS. In the same section, I also pointed out
6 that U S WEST uses the results of CAAS to identify the
7 regulated and deregulated revenues and costs for other
8 state commission requirements using the same methods
9 outlined in U S WEST's cost manual. Method changes are
10 made to meet state specific requirements such as the
11 allocation of the local loop required by the Idaho
12 Commission and for specific disaggregation of product
13 families such as the Title 61 and Title 62 disaggregation
14 of basic business and PBX product families into Title 61
15 and Title 62 components.
16 Q. DO THE CAAS METHODS COMPLY WITH IDAHO CODE
17 61-622A?
18 A. Yes. In addressing cost allocations, the
19 Idaho Code 61-622A contains the following requirements:
20 "Such allocations shall reasonably reflect how
joint-use facilities are utilized, provide
21 reasonable stability for telephone corporations to
do business planning and pricing and minimize the
22 cost of accounting and record keeping to the
extent possible."
23
24 CAAS methods directly assign investments and
25 expenses where possible. Investments and expenses that
3661
DALLAS R. ELDER, RB 4
U S WEST COMMUNICATIONS, INC.
1 are not directly assignable are either joint-use
2 facilities or joint-use expenses. CAAS not only
3 "reasonably reflect(s) how joint-use facilities are
4 utilized," but reasonably reflects how joint-use expenses
5 are utilized, e.g., business office expenses, maintenance
6 expenses and other people related expenses. Common
7 overhead expenses are allocated in CAAS using the
8 relative assignment of total wages and salaries and
9 expenses assigned to product families. Common overhead
10 that can be viewed as
11
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17
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23
24
25
3662
DALLAS R. ELDER, RB 4A
U S WEST COMMUNICATIONS, INC.
1 joint-use expenses are assigned on historical regulatory
2 principles. I discuss these expenses later in my
3 testimony.
4 Q. HOW DOES THE USE OF CAAS FOR THE
5 IDENTIFICATION OF TITLE 61 AND TITLE 62 INVESTMENTS AND
6 EXPENSES "MINIMIZE THE COST OF ACCOUNTING AND RECORD
7 KEEPING" THAT IS STATED IN IDAHO CODE 61-622A?
8 A. The use of CAAS for the identification of
9 Title 61 and Title 62 investments and expenses minimizes
10 the cost of accounting and record keeping as follows:
11 1. CAAS is an existing system. The use of an
12 existing system keeps the costs to a minimum.
13 The alternative is to basically duplicate the
14 system.
15 2. CAAS utilizes existing data from Company
16 records, including chart of account data, FCC
17 Part 36 data and basic studies, FCC Part 64
18 data and associated special studies, and
19 U S WEST's functional accounting data.
20 Utilizing data at this level keeps the costs of
21 record keeping to a minimum.
22 3. Special studies have already been developed in
23 the CAAS methods to identify revenues, expenses
24 and investments that are not readily available
25 from Company records. The use of these studies
3663
DALLAS R. ELDER, RB 5
U S WEST COMMUNICATIONS, INC.
1 eliminates the duplication of like studies if
2 CAAS was not used.
3 4. The CAAS system is audited both on an internal
4 and external basis. Not only does the audit
5 assure the Commission of the controls and
6 procedures used in CAAS, but it minimizes
7 redundant audit costs that would be associated
8 with an independent system.
9
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3664
DALLAS R. ELDER, RB 5A
U S WEST COMMUNICATIONS, INC.
1 ALLOCATION OF JOINT AND COMMON COSTS
2 Q. DO YOU AGREE WITH MR. POWER'S EMBEDDED
3 COSTS STATEMENT: "THERE IS NO UNIQUE CORRECT ALLOCATION
4 TO WHICH ECONOMIC THEORY CAN GUIDE THE ANALYST1?"
5 A. No, just because there may not be any
6 economic theory to guide the analyst in conducting
7 embedded cost studies, it does not follow that embedded
8 cost allocation methods have no foundation. Most of the
9 economic testimony addressed the problem of allocation of
10 joint and common costs and concludes it can not be done.
11 This is not helpful because under Idaho law this
12 Commission has been charged with the responsibility of
13 allocating costs.
14 Q. WITH NO ECONOMIC THEORY GUIDELINES, WHAT
15 PARAMETERS CAN THE COMMISSION USE?
16 A. While there may not be an economic theory
17 that can be used in developing allocation methods, there
18 is a long history in the development of rate bases
19 between jurisdictions (state and interstate FCC Part 36
20 results) and several years of experience and methods used
21 to identify FCC Part 64 deregulated service costs, as
22 well as past Commission orders which all form a strong
23 foundation for cost allocation. There are three large
24 categories of joint and common costs. First there is the
25 local loop, second there are the switched network
3665
DALLAS R. ELDER, RB 6
U S WEST COMMUNICATIONS, INC.
1 facilities including both central office equipment and
2 inter-office facilities, and finally there are the common
3 overhead costs (common).
4 Q. PLEASE EXPLAIN THE LOCAL LOOP COSTS.
5
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25 1 Direct testimony of T.M. Powers, page 15, line 16.
3666
DALLAS R. ELDER, RB 6A
U S WEST COMMUNICATIONS, INC.
1 A. The local loop costs are the investments,
2 expenses and taxes associated with the connection of the
3 customer's premises to the central office. The primary
4 investment components are outside plant facilities, e.g.,
5 cables, conduit, poles, etc., and circuit central office
6 equipment, also referred to as transmission equipment,
7 e.g., subscriber pair gain equipment, repeaters.
8 Q. WHAT GUIDELINES HAVE BEEN SET FORTH FOR
9 ALLOCATION OF THE LOCAL LOOP?
10 A. FCC Part 36 specifies a 25% allocation of
11 the local loop to the interstate jurisdiction. The Idaho
12 Commission has ordered a 15% allocation of the local loop
13 to intrastate toll and switched access services (these
14 are Title 62 services). The remaining 60% is applicable
15 to local service.
16 Q. ARE THESE ALLOCATION FACTORS USED IN THE
17 CAAS RESULTS THAT YOU PROVIDED IN YOUR DIRECT TESTIMONY?
18 A. Yes. Since local service is contained in
19 both Title 61 and Title 62, these costs have to be
20 assigned between the two categories. In U S WEST's CAAS
21 study, this is accomplished by assigning the local loop
22 costs to services, e.g. residence, business, PBX, etc.,
23 using access lines weighted for different loop lengths.
24 The business and PBX services are apportioned between
25 Title 61 and Title 62 using access line quantity
3667
DALLAS R. ELDER, RB 7
U S WEST COMMUNICATIONS, INC.
1 relationships. All other local service product families
2 in CAAS are directly assigned to either Title 61 or Title
3 62. This method is in compliance with Idaho Code 61-662A
4 by reflecting how joint use facilities are utilized by
5 Title 61 and Title 62 services.
6
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3668
DALLAS R. ELDER, RB 7A
U S WEST COMMUNICATIONS, INC.
1 Q. DOES PART 64 REQUIRE AN ALLOCATION OF THE
2 LOCAL LOOP TO ENHANCED SERVICES?
3 A. No. There is no allocation of the local
4 loop to Part 64 enhanced services.
5 Q. PLEASE DESCRIBE THE SWITCHED NETWORK JOINT
6 USE FACILITIES.
7 A. Switched network joint use facilities are
8 comprised of two basic items. First, there are the
9 central office facilities that perform the switching
10 function of originating and terminating a call. Second,
11 there are the interoffice facilities that carry the calls
12 from one central office to the next. The primary
13 investments of interoffice facilities components are
14 outside plant facilities, e.g., cables, conduit, poles,
15 etc., and circuit central office equipment, also referred
16 to as transmission equipment, e.g. gain equipment and
17 repeaters.
18 Q. WHAT HISTORICAL GUIDELINES ARE AVAILABLE
19 FOR THE ASSIGNMENT OF THE SWITCHED NETWORK FACILITIES?
20 A. Part 36 has a long history of assigning
21 switched network facilities using the relationships of
22 usage statistics to determine the intrastate and
23 interstate rate base components.
24 Q. ARE USAGE STATISTICS USED IN THE U S WEST'S
25 COST ACCOUNTING ALLOCATION SYSTEM (CAAS)?
3669
DALLAS R. ELDER, RB 8
U S WEST COMMUNICATIONS, INC.
1 A. Yes. CAAS uses the same Part 36 usage
2 statistics to assign switched network facilities between
3 local, intrastate toll and feature group services. The
4 local category is further assigned to CAAS product
5 families, e.g., residence, business, PBX, Centrex/
6 Centron etc., using relationships of local usage
7 statistics. The residence
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3670
DALLAS R. ELDER, RB 8A
U S WEST COMMUNICATIONS, INC.
1 product family is directly assigned to Title 61, while
2 Centrex/Centron is directly assigned to Title 62. The
3 business and PBX categories are assigned to Title 61 and
4 Title 62 using relationships of access lines. This
5 allocation method is in compliance with Idaho Code
6 61-662A by reflecting how joint use facilities are
7 utilized by Title 61 and Title 62 services.
8 Q. WHAT GUIDELINES DOES PART 36 AND PART 64
9 PROVIDE IN THE HISTORICAL ASSIGNMENT OF COMMON COSTS?
10 A. Common costs in Part 36 and Part 64 are
11 assigned on previously assigned costs or wages and
12 salaries. These are the same items used in CAAS for
13 assigning common costs.
14 THE USE OF EMBEDDED COSTS OR ECONOMIC COSTS
15 Q. WHY ARE YOU ADDRESSING THE USE OF EMBEDDED
16 COSTS OR ECONOMIC COSTS IN THIS PROCEEDING?
17 A. Various witnesses have discussed whether
18 economic or embedded costs are the relevant costs to be
19 used in this proceeding. These discussions have clouded
20 the real issue in this proceeding. The witnesses have
21 discussed economic costs such as TSLRIC, the Hatfield
22 Model, and the Telecom Economic Cost Model. In their
23 discussions, they have generally portrayed that economic
24 costs are the relevant costs and that embedded costs
25 should not be used. In their discussions, they have
3671
DALLAS R. ELDER, RB 9
U S WEST COMMUNICATIONS, INC.
1 pointed out reasons why they believe the economic costs
2 are relevant when compared to the embedded costs. In all
3 of
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3672
DALLAS R. ELDER, RB 9A
U S WEST COMMUNICATIONS, INC.
1 this discussion, they have failed to recognize that
2 embedded costs must be used in this proceeding.
3 Q. WHY MUST EMBEDDED COSTS BE USED IN THIS
4 PROCEEDING?
5 A. Embedded costs are required in this
6 proceeding to identify the revenue requirement for the
7 Title 61 rate base. While I disagree with the Staff's
8 methods, Staff presents the embedded rate base results
9 for Title 61 services in the testimony of Mr. Sydney
10 Lansing. The Idaho Citizens Coalition recognized the
11 need for rate base identification2. None of the
12 witnesses for AT&T, AARP, and the Idaho Citizens
13 Coalition have presented any results or methods that
14 would allow the Commission to determine the Title 61 rate
15 base in this proceeding. Staff uses improper and
16 erroneous methods making their Title 61 results in the
17 proceeding suspect at best. U S WEST's CAAS results
18 presented in my direct testimony for the identification
19 of Title 61 revenues, expenses, taxes and investment and
20 used by U S WEST's witness Ms. Margaret Wright in
21 developing the revenue requirement are the only reliable
22 results for the Commission to use to make decisions in
23 this docket.
24 Q. DOES THE HATFIELD MODEL, PRESENTED BY
25 AT&T'S WITNESS SCOTT A. RADCLIFFE, PROVIDE THE RATE BASE
3673
DALLAS R. ELDER, RB 10
U S WEST COMMUNICATIONS, INC.
1 FOR TITLE 61 SERVICES?
2 A. No. The Hatfield Model was developed for
3 unbundled network costs and not for basic service in this
4 docket. The results presented by Mr. Radcliffe do not
5 even distinguish the difference between basic residence,
6 business or coin services.
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23 2 Direct testimony of T.M. Powers, page 17, line 18 "It
is correct that this Commission has to approve a
24 particular revenue target for basic telephone service for
that is the basis of the rates that will be adopted."
25
3674
DALLAS R. ELDER, RB 10A
U S WEST COMMUNICATIONS, INC.
1 Q. DOES THE TELECOM ECONOMIC COST MODEL,
2 PRESENTED BY DR. DON READING ON BEHALF OF AARP, PROVIDE
3 THE RATE BASE FOR TITLE 61 SERVICES?
4 A. No. The model only provides unit costs.
5 Q. ARE YOU SUGGESTING THAT THE ECONOMIC COSTS
6 DISCUSSED BY THE VARIOUS WITNESSES ARE NOT RELEVANT?
7 A. Yes. For identification of the rate base
8 to determine a revenue requirement, the economic costs
9 and the results provided by the various witnesses are not
10 relevant. Just as the embedded costs are relevant in
11 determining the rate base, the economic costs are
12 relevant as input to pricing decisions. The pricing
13 decisions are made after the revenue requirement is
14 determined to spread revenue requirement to the regulated
15 service prices.
16 Q. IF ECONOMIC COSTS ARE RELEVANT TO PRICING
17 DECISIONS, THEN WHY DID U S WEST NOT PROVIDE THESE COSTS
18 WITH ITS TESTIMONY?
19 A. There is a unique situation with Title 61
20 in southern Idaho that alleviates some of the need for
21 economic costs. Title 61 is comprised of so few
22 services, that the Commission in meeting the revenue
23 requirement with the repricing of services can do so with
24 the embedded cost information that has been presented by
25 U S WEST. The embedded costs, together with the
3675
DALLAS R. ELDER, RB 11
U S WEST COMMUNICATIONS, INC.
1 information presented in the testimony of the other
2 U S WEST's witnesses, provide sufficient information to
3 make informed decisions.
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3676
DALLAS R. ELDER, RB 11A
U S WEST COMMUNICATIONS, INC.
1 COMMENTS ON STAFF'S CRITIQUE OF CAAS
2 Q. DO YOU AGREE WITH MR. LANSING'S STATEMENT
3 "...THERE IS NO ATTEMPT AT ANY LEVEL TO DIRECTLY ASSIGN
4 COSTS OR EXPENSES TO TITLE 61 OR TITLE 62 SERVICES3?
5 A. No. Mr. Lansing's conclusion is based on
6 the fact that CAAS assigns to product families first and
7 then assigns product families to Title 61 and Title 62.
8 To claim that there are no direct assignments that have
9 final assignments to Title 61 and Title 62 is entirely
10 false. Some of the direct assignments to product
11 families may have had an adjustment to reflect the FCC
12 Part 36 interstate assignment, but the intrastate portion
13 is still a direct assignment. For example, investments
14 for equal access are direct assignments to the feature
15 group products with the FCC Part 36 principles applied to
16 identify the amount associated with intrastate and
17 interstate feature group product families. The
18 intrastate feature group product family is directly
19 assigned to the Title 62 grouping in the final process.
20 Due to the FCC Part 36 process, most expenses and
21 investments have FCC Part 36 principles applied to
22 identify the intrastate amount. Thus, there are
23 relatively few accounts that can be taken from the books
24 and directly assigned either to Title 61 and Title 62
25 without having the FCC Part 36 principles applied. Any
3677
DALLAS R. ELDER, RB 12
U S WEST COMMUNICATIONS, INC.
1 investment or expense identified in the CAAS manual that
2 has a direct assignment to a product family after
3 applying the FCC Part 36 and FCC Part 64 assignments, in
4 effect does have a direct assignment to Title 61 or Title
5 62 through the final direct assignment of product
6 families to Title 61 and Title 62 groupings.
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3678
DALLAS R. ELDER, RB 12A
U S WEST COMMUNICATIONS, INC.
1 Q. PLEASE COMMENT ON MR. LANSING'S STATEMENT:
2 "U S WEST'S COST ACCOUNTING ALLOCATION SYSTEM (CAAS)
3 NEITHER EXAMINES DOCUMENTS OF ORIGINAL ENTRY NOR DOES IT
4 EXAMINE DETAILED TRANSACTIONS TO DETERMINE A DIRECT
5 ASSIGNMENT TO TITLE 61 OR TITLE 62.4"
6 A. Mr. Lansing is not entirely correct in this
7 statement. While the methods in CAAS may not examine all
8 documents of original entry or detailed transactions for
9 direct assignment to Title 61 and Title 62, CAAS does
10 look at some detailed transactions for the assignment
11 process. For example, in the special study for
12 advertising, the study examines the dollars associated
13 with the various advertising campaigns and maps these
14 dollars to the product families. Advertising associated
15 with message toll service is assigned to the CAAS
16 intrastate toll product family. Again, in the final
17 process the intrastate toll product family is directly
18 assigned to Title 62. The CAAS methods have been
19 designed to look below the account level when it is
20 necessary to assign the expenses or investments to the
21 correct product family.
22 It is true, that CAAS does not examine every
23 document of original entry or transaction. Ms. Wright
24 testifies in her testimony, that U S WEST processes over
25 two hundred million transactions a year. CAAS processes
3679
DALLAS R. ELDER, RB 13
U S WEST COMMUNICATIONS, INC.
1 approximately fifteen hundred cost pools in the
2 allocation process. CAAS was developed at an initial
3 cost of over $15,000,000 over ten years ago. If a cost
4 allocation system was developed to allocate costs at the
5 transaction level, the development costs would not only
6 increase due to the
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24 3 Direct testimony of S Lansing, page 20, line 8.
4 Direct testimony of S Lansing, page 20, line 10.
25
3680
DALLAS R. ELDER, RB 13A
U S WEST COMMUNICATIONS, INC.
1 millions of transactions required for processing, but
2 would increase due to increases in wages and consultant
3 fees over the ten year period. This type of expenditure
4 is not in concert with Idaho Code 61-622A in minimizing
5 the cost of accounting and record keeping.
6 The CAAS process does not directly assign expenses
7 and investments to Title 61 and Title 62, but in fact
8 does direct assignments to product families taking into
9 consideration the impacts of the FCC Part 36 and Part 64
10 principles of cost assignment. Understanding these
11 concepts along with the fact that the final CAAS process
12 is to map product families to Title 61 and Title 62, it
13 is possible to identify the expenses and investments in
14 the CAAS manual that in effect have a direct assignment
15 to Title 61 and Title 62 groupings.
16 Q. STAFF IN MS. BALDWIN'S TESTIMONY STARTING
17 PAGE 18 AT LINE 18 IMPLIES THAT THE INFORMATION PROVIDED
18 BY U S WEST WAS NOT SUFFICIENT TO ENABLE A DETAILED
19 ANALYSIS AND UNDERSTANDING OF CAAS. DO YOU AGREE?
20 A. No. U S WEST provided to Staff
21 documentation that was sufficient to analyze the CAAS
22 process. Included in the process was the CAAS cost
23 manual, the CAAS formulas including the formula
24 components and results, output reports, methods as well
25 as allocation formulas and results in U S WEST's cost
3681
DALLAS R. ELDER, RB 14
U S WEST COMMUNICATIONS, INC.
1 accounting reporting system (CARS). While this is
2 summary of the documentation presented, this same
3 documentation has been presented to other U S WEST
4 commission Staff's and consultants. Other commission
5 staffs and consultants have been able to not only
6 undertake a comprehensive
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3682
DALLAS R. ELDER, RB 14A
U S WEST COMMUNICATIONS, INC.
1 review of the complete system, but some have even
2 duplicated the process in their own models. Thus, I
3 believe that Staff did have the tools with the
4 documentation that was provided to them to undertake a
5 detailed analyses.
6 Staff in Ms. Baldwin's testimony indicates that
7 they did not have access to U S WEST's special studies.
8 The fact is that U S WEST's cost manual in Section IV
9 provides a description of each special study with the
10 items that are used as inputs to the CAAS allocation
11 process. Included with the documentation provided to the
12 Staff were the actual values of the special study
13 results. During an on premise visit to Denver, U S WEST
14 provided access to the special studies to Mr. Lansing.
15 He was able to determine the voluminous nature of the
16 special studies and with a conference call to
17 Mr. Eastlake, it was agreed that U S WEST would not copy
18 all special studies, but would only provide any specific
19 special study that Staff may want to examine in depth.
20 When Ms. Baldwin visited Denver, U S WEST had set aside
21 two days to help Staff understand CAAS. The visit was
22 only for one day and at no time during the visit, did
23 Staff or Ms. Baldwin ask to review any of the special
24 studies.
25 Staff did have the opportunity to review any of
3683
DALLAS R. ELDER, RB 15
U S WEST COMMUNICATIONS, INC.
1 the special studies, and in fact had agreed that U S WEST
2 did not have to provide copies due to the voluminous
3 nature of the studies.
4 Q. HAS STAFF IN MS. BALDWIN'S TESTIMONY
5 CORRECTLY PORTRAYED THE CAAS SYSTEM ON PAGES 28 THROUGH
6 34?
7 A. No. While some portions of the pages are
8 correct, the overall result is a misrepresentation of the
9 CAAS process. The discussion on these pages implies that
10 CAAS
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25
3684
DALLAS R. ELDER, RB 15A
U S WEST COMMUNICATIONS, INC.
1 does not allocate costs at a detailed level and that the
2 only allocations between Title 61 and Title 62 are at the
3 income statement line level. This is a misrepresentation
4 of U S WEST's CAAS process. As I have testified earlier,
5 CAAS assigns costs at a detailed level of investments or
6 expenses as outlined in Section III of U S WEST's cost
7 manual. These levels of detail are at the account level,
8 the functional accounting level, or at the basic study
9 level of investments in the FCC Part 36 process.
10 After investments and costs have been assigned at
11 this level, in the CARS portion of the CAAS processing,
12 the Part 36 principles are applied to the intrastate
13 product families to obtain the intrastate results. This
14 is described in Section VI of U S WEST's cost manual.
15 This process takes place at the lowest level where there
16 is a common point of matching the data in CAAS with the
17 Part 36 data. These points are normally at a level that
18 is below the income statement level.
19 The income statement line item allocations
20 that occur to assign investments and costs between
21 Title 61 and Title 62 are only for those products that
22 contain both Title 61 and Title 62 services, e.g., basic
23 business and PBX services. For these two services, the
24 relative access lines are used to allocate between
25 Title 61 and Title 62. As I stated earlier, basic
3685
DALLAS R. ELDER, RB 16
U S WEST COMMUNICATIONS, INC.
1 residence service, which comprises over 75% of the
2 Title 61 expenses and over 80% of Title 61 investments,
3 is a direct assignment to Title 61 and does not have an
4 allocation based on the income statement line item level.
5 Q. STARTING ON PAGE 57 AT LINE 17, OF
6 MS. BALDWIN'S TESTIMONY, STAFF CONTENDS THAT CAAS IS
7 COMPLEX AND THAT COMPLEXITY SHOULD NOT BE CONFUSED WITH
8 ACCURACY, AND AT THE
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3686
DALLAS R. ELDER, RB 16A
U S WEST COMMUNICATIONS, INC.
1 SAME TIME PORTRAYS STAFF'S ALLOCATIONS AS A SIMPLE
2 APPROACH. PLEASE COMMENT.
3 A. By these statements, Staff implies that
4 CAAS is not accurate even though it is complex. I have
5 pointed out in my rebuttal testimony, that the levels
6 that CAAS allocates cost pools is in concert with Idaho
7 Code 61-662A. Because CAAS utilizes existing Company
8 data, it minimizes the cost of accounting and record
9 keeping as required by Idaho Code 61-662A.
10 While it may be true that Staff's simplified
11 approach may be cost effective, it has two short falls.
12 First, it does not reflect how joint-use facilities are
13 utilized which is a requirement of Idaho Code 61-662A.
14 Second, it is dependent on the CAAS results for some of
15 its allocations. It is strange that Staff criticizes the
16 CAAS results and model, but without it, their results
17 could not be produced.
18 I also find Staff's cost allocation
19 recommendations inconsistent. On one hand in
20 Ms. Baldwin's testimony, Staff is basically recommending
21 a simplified approach in the allocations of investments,
22 while on the other hand, in Mr. Lansing's testimony, the
23 Staff criticizes the CAAS process for not having examined
24 detailed transactions or documents of original entry to
25 the books. It is important to recognize that the
3687
DALLAS R. ELDER, RB 17
U S WEST COMMUNICATIONS, INC.
1 simplification of the allocation of investments has a
2 much greater impact on the identification of Title 61 and
3 Title 62 costs than does the examination of the detailed
4 records performed by the Staff. The reason for
5 investment having a greater impact is due to the
6 secondary costs such as maintenance, depreciation,
7 property taxes, and return that are dependent on the
8 allocation of investments.
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3688
DALLAS R. ELDER, RB 17A
U S WEST COMMUNICATIONS, INC.
1 COMMENTS ON STAFF'S METHODS AND ALLOCATIONS
2 Q. PLEASE COMMENT ON STAFF'S RECOMMENDATION IN
3 MS. BALDWIN'S TESTIMONY: "THE COMMISSION SHOULD ADOPT A
4 METHODOLOGY FOR ALLOCATING COMMON PLANT COSTS THAT BEST
5 REFLECTS THE UNDERLYING MOTIVATION FOR THE COMPANY'S
6 CAPITAL INVESTMENTS.5"
7 A. My interpretation of this recommendation
8 was that if the deployment of investment was solely for
9 the benefit of one group such as Title 62 services, that
10 the investment should be assigned to Title 62. If the
11 investment in question, is an investment that is used
12 exclusively for Title 62 services, I would agree with the
13 statement. However, Mr. Plummer in his testimony
14 discusses how U S WEST deploys investment. In his
15 testimony, he basically indicates that U S WEST deploys
16 investment that makes economic sense to all services.
17 Thus, for Staff to claim that investment is deployed by
18 the motivation of selling Title 62 services only is wrong
19 for joint-use facilities. Because most of the investment
20 is joint-use, the Idaho Code 61-622A requires the
21 allocations of the investment should be based on how the
22 joint-use facilities are utilized. Thus, allocation of
23 joint-use investments on motivation does not comply with
24 the utilization requirement of Idaho Code 61-662A.
25 Q. AT PAGES 20 AND 21 OF HIS TESTIMONY,
3689
DALLAS R. ELDER, RB 18
U S WEST COMMUNICATIONS, INC.
1 MR. LANSING REFERS TO WHAT HE ALLEGES TO BE A PRIOR
2 COMMISSION DECISION ON COST
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25 5 Direct testimony of S.M. Baldwin, page 3, line 5.
3690
DALLAS R. ELDER, RB 18A
U S WEST COMMUNICATIONS, INC.
1 ALLOCATION PRINCIPLES WHICH ARE CLAIMED TO APPLY HERE.
2 DO YOU HAVE ANY COMMENT?
3 A. Yes. Mr. Lansing creates the impression
4 that the three "principles" cited on page 21 reflect a
5 prior Commission decision on cost allocation methodology.
6 This is not accurate as the record in Case No. USW-S-94-3
7 reflects. Order No. 25826 did contain the three items
8 listed. U S WEST moved for reconsideration on this
9 portion of the order along with others. U S WEST argued
10 adoption of those "principles" on the record developed in
11 that case constituted an attempt to define policy and
12 determine key cost allocation issues without giving any
13 party (including U S WEST) the opportunity to provide
14 comment, testimony or to test the ideas presented through
15 cross examination. U S WEST requested a formal docket be
16 initiated to allow the Company a fair opportunity to
17 present its case on cost allocation.
18 Q. WAS THE COMPANY'S MOTION FOR
19 RECONSIDERATION GRANTED ON THIS POINT?
20 A. Technically no, but the relief requested by
21 the Company was granted. Order No. 25923 provided:
22 The Company's Petition for Reconsideration
concerning this issue is denied because its
23 opportunity to provide comment or testimony is in
the Sharing Plan review proceeding that is still
24 ongoing. Consequently, we find: U S WEST's
objection to the second and third principles is
25 premature. Because the issue of cost allocation
3691
DALLAS R. ELDER, RB 19
U S WEST COMMUNICATIONS, INC.
1 is to be examined in the Sharing Plan review,
U S WEST will have an opportunity to fully present
2 its views concerning our second and third
principles in that case. Therefore, we decline to
3 separately reconsider this issue.
4
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3692
DALLAS R. ELDER, RB 19A
U S WEST COMMUNICATIONS, INC.
1 Q. WAS THERE A SUBSEQUENT REVENUE SHARING PLAN
2 REVIEW IN WHICH THESE "PRINCIPLES" WERE LITIGATED AND
3 ADOPTED BY THE COMMISSION?
4 A. No. Instead there was a Stipulation with
5 the Staff that addresses other issues relating to Revenue
6 Sharing and provided that the Plan would terminate and
7 the Company would file this rate case.
8 Q. SO THIS RATE CASE IS THE PROMISED FORUM FOR
9 THE TESTING OF COST ALLOCATION PRINCIPLES?
10 A. Yes, that is right. Staff's attempt to use
11 them here as binding Commission rulings is premature and
12 inaccurate. This is the docket in which the Commission
13 will need to decide what principles in addition to the
14 guidance provided in Idaho Code 61-622A it will use to
15 resolve cost allocation disputes.
16 Q. WHAT OTHER AREAS DO YOU HAVE CONCERNS WITH
17 THE STAFF'S METHODS AND ALLOCATIONS?
18 A. I have analyzed Staff's exhibits and
19 workpapers and found erroneous assumptions or errors in
20 developing their Title 61 data. The following are the
21 areas of my concerns with the Staff's methods and
22 allocations:
23 * Staff has not reflected the difference of
24 the costs of the local loop for residence
25 and business in their allocation of the
3693
DALLAS R. ELDER, RB 20
U S WEST COMMUNICATIONS, INC.
1 local loop facilities. The net affect is
2 that Staff has under allocated investments
3 and costs to Title 61.
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3694
DALLAS R. ELDER, RB 20A
U S WEST COMMUNICATIONS, INC.
1 * Staff has made errors in their allocation
2 of spare plant allocations. These errors
3 include a misuse of access line growth
4 statistics as well as the calculation of
5 the investments associated with their spare
6 capacity. The net effect of this method is
7 that Staff has under allocated investments
8 and costs to Title 61.
9 * Staff has used allocation assumptions for
10 central office digital switches that do not
11 reflect how joint-use facilities are
12 utilized as required by Idaho Code 61-662A.
13 * Staff has inappropriately made uniform
14 system of account (USOA) direct assignments
15 that do not reflect how the facilities are
16 utilized.
17 * Staff's allocation of the local loop to
18 Title 62 for CLASS and Custom Calling
19 services does not follow historical cost
20 allocation principles. Title 62 has an 15%
21 allocation of the local loop as a result of
22 the Commission order.
23 * Throughout Staff's allocation methods, they
24 use a "composite allocator" in allocating
25 costs. Their use of a composite allocator
3695
DALLAS R. ELDER, RB 21
U S WEST COMMUNICATIONS, INC.
1 is wrong.
2 In the next section of my rebuttal testimony, I
3 provide a detailed analysis of Staff's allocations. The
4 detailed analysis points out the specific areas that I
5 addressed above in their calculations.
6 Q. PLEASE EXPLAIN YOUR TERM "COMPOSITE
7 ALLOCATOR" AND HOW THE STAFF IS WRONG IN USING THIS
8 ALLOCATION FACTOR.
9
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3696
DALLAS R. ELDER, RB 21A
U S WEST COMMUNICATIONS, INC.
1 A. In my testimony, I am using the term
2 "composite allocator" to represent an allocation factor
3 normally obtained by Staff from U S WEST CAAS results.
4 This factor represents relative assignment of the total
5 allocations between Title 61 and Title 62 services for
6 all cost pools that have been allocated in CAAS. The
7 problem with Staff's use of this factor is that Staff
8 routinely allocates a component of the CAAS composite
9 factor using their own assumptions to Title 61 and
10 Title 62 services. For the balance of specific cost
11 pools associated with the CAAS composite factor, Staff
12 uses the CAAS composite factor without any adjustment to
13 the composite factor for their own assignments. In most
14 instances, the use of this composite allocator results in
15 an under assignment to Title 61. The following table
16 portrays with numbers the impact of the use of a
17 composite allocator:
18 Assume for this example that the following data
19 was from CAAS.
20 COST POOL Amount Allocated To % Of Allocation To
TITLE 61 TITLE 62 TITLE 61 TITLE 62
21 A 10,000 7,000 58.82% 41.18%
B 2,000 1,000 66.67% 33.33%
22 Total
Composite 12,000 8,000 60.00% 40.00%
23 Factor
24 Assume that Staff in their methods chose to assign cost
pool A on a 50/50 basis, and used the CAAS Total
25 Composite Factor to allocate the balance, cost pool B.
3697
DALLAS R. ELDER, RB 22
U S WEST COMMUNICATIONS, INC.
1 The following would be Staff's results and the impacts on
cost pool B.
2
COST POOL Amount Allocated To % Of Allocation To
3 TITLE 61 TITLE 62 TITLE 61 TITLE 62
A 8,500 8,500 50.00% 50.00%
4 B 1,800 1,200 60.00% 40.00%
5
6 Clearly, the above illustration shows that Staff, in
7 using a composite allocator from CAAS for cost pool B
8 that has not been adjusted for their own allocations,
9 assigns additional amounts to Title 62 for cost pool B on
10 an erroneous basis, and thus reduces the allocation to
11 Title 61. It is important to point out, that this
12 simplified example shows the impacts of
13
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3698
DALLAS R. ELDER, RB 22A
U S WEST COMMUNICATIONS, INC.
1 the improper use of a composite factor for allocations.
2 In reality, what has been referred to as cost pool B in
3 this example, is routinely in Staff's allocation
4 procedures a residual value that is comprised of numerous
5 cost pools.
6 DETAILED ANALYSIS OF STAFF'S COST ALLOCATIONS
7 Q. HOW HAVE YOU ARRANGED YOU TESTIMONY TO
8 ADDRESS THE PROBLEMS THAT YOU HAVE UNCOVERED IN STAFF'S
9 ALLOCATIONS AND IDENTIFICATION OF TITLE 61 RATE BASE?
10 A. To the extent possible without being
11 redundant in my comments, my testimony follows the order
12 of the line numbers on Mr. Sydney Lansing's Exhibit
13 No. 101, page 1 of 12. Mr. Lansing's exhibit is a
14 summary of all Staff's allocations and assignments of
15 investments, expenses, taxes and revenues to Title 61 and
16 Title 62. It is important to point out, that my
17 testimony focuses on the methods and allocations to
18 Title 61 and Title 62 used by Staff. Other U S WEST
19 witnesses address the inappropriateness of what I would
20 classify as Staff adjustments.
21 AVERAGE PLANT IN SERVICE - GENERAL
22 Q. IS THE ALLOCATION BETWEEN TITLE 61 AND
23 TITLE 62 OF THE PLANT IN SERVICE A CRITICAL ITEM THAT
24 NEEDS TO BE ADDRESSED?
25
3699
DALLAS R. ELDER, RB 23
U S WEST COMMUNICATIONS, INC.
1 A. Yes. The allocation of plant in service
2 affects significant portions of Staff's allocations to
3 Title 61. It not only affects the rate base for the
4 calculation of the return component of the revenue
5 requirement, but the results are used in assigning
6 expenses and taxes to Title 61.
7 Q. HOW DID MR. LANSING DEVELOP LINE 1 ON
8 MR. LANSING'S EXHIBIT 101, PAGE 1?
9 A. Mr. Lansing started with the Idaho
10 intrastate average plant in service amounts as depicted
11 in column a of his exhibit. Mr. Lansing developed a
12 direct assignment in column e to Title 62, or as he has
13 labeled the column "Direct Assignment Not Title 61". In
14 my testimony, I will refer to the "Direct Assignment Not
15 Title 61" as Title 62. Column h, representing the
16 allocation to Title 61, was developed by Ms. Susan
17 Baldwin. The other columns for this line are calculated
18 using the two aforementioned items.
19 ANALYSIS OF MR. LANSING'S ADJUSTMENTS TO PLANT IN SERVICE
20 Q. DID YOU FIND ANY PROBLEM WITH MR. LANSING'S
21 DEVELOPMENT OF HIS DIRECT ASSIGNMENT OF $49,221,OOO TO
22 TITLE 62?
23 A. Yes, I did. I examined his Exhibit
24 No. 101, pages 4 and 5, to determine what his direct
25 assignments represented. The first two items on page 4,
3700
DALLAS R. ELDER, RB 24
U S WEST COMMUNICATIONS, INC.
1 are adjustments for the Subsidiary Ledger and Removals.
2 These items are addressed in detail by U S WEST witness
3 Ms. Wright. The next item on page 4, is his direct
4 assignment of $9.568 million
5
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3701
DALLAS R. ELDER, RB 24A
U S WEST COMMUNICATIONS, INC.
1 for plant accounts developed on his page 5. His fourth
2 adjustment is for $9.122 million for fiber that is unlit.
3 Q. WHAT COMMENTS DO YOU HAVE REGARDING
4 MR. LANSING'S EXHIBIT 101, PAGE 4 FOR THE INSUFFICIENT
5 RECORDING OF REMOVALS?
6 A. For his insufficient removal adjustment,
7 Mr. Lansing examined a significant number of offices to
8 match the central office investment inventory with the
9 books. Mr. Lansing did not sample all other plant
10 accounts. To apply a sample of central office inventory
11 to the whole universe of investments is a quantum leap of
12 a statistical sample of one class of plant investment to
13 be applied to all classes of plant investment. Without
14 having sampled each specific investment plant account,
15 all investment plant removal adjustments other than those
16 for central office equipment should be rejected.
17 Q. DID YOU FIND ANY ERRORS IN MR. LANSING'S
18 CALCULATION OF THE AMOUNT TO BE ADJUSTED FOR THE
19 REMOVALS?
20 A. Yes. On page 12 of Mr. Lansing's testimony
21 at lines 1 through 4, he shows that if the 1.89%
22 adjustment is applied to total plant in service
23 ($788,799,111) and adjusted to intrastate using a 68.17%
24 factor the results are his $10.304 million recommendation
25 of a direct assignment. Applying Mr. Lansing's 1.89%
3702
DALLAS R. ELDER, RB 25
U S WEST COMMUNICATIONS, INC.
1 adjustment to the intrastate plant in service of $547.549
2 million on line 1, column c of his Exhibit 101, page 1,
3 results in a calculation of $10.349 million. Obviously,
4 the two amounts do not agree. While this results in only
5 $44 thousand more to be used for his adjustment, it is a
6 consistency issue. If the adjustment is to be applied to
7 the plant in service on Mr.
8
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3703
DALLAS R. ELDER, RB 25A
U S WEST COMMUNICATIONS, INC.
1 Lansing's exhibit, then the calculation of the adjustment
2 should be consistent with the development of the plant in
3 service on his exhibit.
4 Q. DO YOU AGREE WITH MR. LANSING'S $9.568
5 MILLION DIRECT ASSIGNMENT TO TITLE 62 ADJUSTMENT AS A
6 RESULT OF DIRECT ASSIGNMENT BASED ON CHART OF ACCOUNT
7 DESCRIPTIONS?
8 A. No. Mr. Lansing has made major errors in
9 the development of this data. The following summarizes
10 the errors that I discovered:
11 * Plant accounts identified on the books as
12 Toll are not 100% Toll or Title 62 services
13 as identified by Mr. Lansing.
14 * Mr. Lansing used an inappropriate
15 separations factor to identify the
16 intrastate portion of the investment
17 accounts.
18 * Mr. Lansing incorrectly identifies Part 64
19 investments as an adjustment to rate base.
20 * Mr. Lansing incorrectly assigns coin
21 terminal equipment to Title 62.
22 Q. PLEASE EXPLAIN WHY THE TOLL PLANT ACCOUNTS
23 IDENTIFIED BY MR. LANSING ARE NOT 100% TITLE 62 SERVICE.
24 A. Mr. Lansing on page 5 of his exhibit 101
25 has included all plant accounts containing "Toll" in the
3704
DALLAS R. ELDER, RB 26
U S WEST COMMUNICATIONS, INC.
1 description as an item that is not Title 61 or in essence
2 is a Title 62 investment. Mr. Lansing used the account
3 description at face value without examining the
4 investments that are booked to the accounts. My Exhibit
5 44A contains a page out of U S WEST's "Field Accounting
6 Practice" that explains how investments are to be
7 classified for booking purposes. Paragraph 7.c. states:
8
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3705
DALLAS R. ELDER, RB 26A
U S WEST COMMUNICATIONS, INC.
1 "Cable (noncoaxial and nonmetallic) used for both
exchange and toll service should be classified
2 entirely as either exchange or toll, based on its
majority of conductors (noncoaxial-metallic,
3 nonmetallic-ribbons) provided for exchange or toll
service. The ultimate usage shall be considered
4 rather than the existing usage."
5 In summary, the classification of "Toll" cable or
6 "Exchange" cable can be a joint use by both services.
7 The account description is for accounting purposes only
8 and is not a description that can be used for cost
9 allocations. In cost allocations, the analyst has to
10 determine what is actually being booked to the accounts.
11 Mr. Lansing's direct assignment to Title 62 is wrong
12 because he failed to examine what investments were being
13 booked to the accounts. He did not identify the amounts
14 of the "Toll" cable accounts that were joint-use for
15 exchange and toll.
16 It is important to point out, that the joint use
17 accounting classification is at the time the investment
18 is placed, and that the classification does not change
19 over time. With the implementation of the EAS regions,
20 any of the existing interoffice facilities that may have
21 been classified as "Toll" will not change to "Exchange,"
22 even though usage will change and thus drive the proper
23 allocation to Title 61 and Title 62 in U S WEST's CAAS
24 process.
25 Q. HOW DOES U S WEST'S CAAS SYSTEM ACCOUNT FOR
3706
DALLAS R. ELDER, RB 27
U S WEST COMMUNICATIONS, INC.
1 THE JOINT USE OF CABLE BETWEEN EXCHANGE AND TOLL?
2 A. CAAS uses the basic studies from
3 Jurisdictional Separations that examines and classifies
4 all plant as to its use. For example, in the
5 Separations' basic studies, they use factors such as
6 usage to split a joint use cable facility between
7 exchange and toll. Mr. Lansing's direct assignment to
8 Title 62 creates a lower Title 61 end result that is not
9
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3707
DALLAS R. ELDER, RB 27A
U S WEST COMMUNICATIONS, INC.
1 justifiable. This inappropriate direct assignment is
2 used by Ms. Baldwin and is discussed later.
3 Q. WHY DO YOU SAY THAT MR. LANSING HAS USED
4 INAPPROPRIATE JURISDICTIONAL SEPARATION FACTORS?
5 A. Mr. Lansing, on Exhibit 101, page 5, uses a
6 composite intrastate factor of 68.17% for all of his
7 proposed book cost adjustments. Mr. Lansing does not
8 recognize that Jurisdictional Separations (Part 36) uses
9 a different separations factor by type of plant.
10 Therefore, when he is making an adjustment to specific
11 plant accounts, a composite factor is not appropriate.
12 He should have used data that reflects the Part 36
13 assignments. For example, terminal equipment accounts,
14 e.g. coin telephone equipment, are allocated to the
15 interstate based on the basic allocation factor (BAF)
16 that is 75% intrastate not the 68% that Mr. Lansing used.
17 The equal access investments are assigned using minutes
18 of use relationships associated with intrastate and
19 interstate Feature Group D.
20 Q. WHAT IS WRONG WITH MR. LANSING'S ADJUSTMENT
21 FOR PART 64 INVESTMENTS?
22 A. The starting point of Mr. Lansing's plant
23 in service (Exhibit 101, Line 1, Column a) does not
24 include Part 64 investments. Mr. Lansing on Exhibit 101,
25 page 5, is adjusting for Analog Alarm Services, Station
3708
DALLAS R. ELDER, RB 28
U S WEST COMMUNICATIONS, INC.
1 Apparatus Non Regulated, Terminal Equipment Non
2 Regulated, and Public Telephone Equipment - Inmate
3 Services. All of these items are FCC Part 64 accounts.
4 Mr. Lansing's adjustment for Part 64, is in effect
5 artificially and erroneously reducing the Title 61 rate
6 base. This is an error on Mr. Lansing's behalf and
7 should be removed from his adjustments. To support that
8 the Part
9
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3709
DALLAS R. ELDER, RB 28A
U S WEST COMMUNICATIONS, INC.
1 64 data is not in Mr. Lansing's starting data, my Exhibit
2 44B contains the 1990's report showing the separated
3 results of operations for southern Idaho. Column D on
4 the Exhibit contains the Part 64 deregulated services.
5 Mr. Lansing is using the plant in service in column G
6 which as depicted on my Exhibit 44B excludes column D.
7 Q. HAS MR. LANSING ERRORED IN MAKING THE
8 ADJUSTMENT FOR COIN TERMINAL EQUIPMENT?
9 A. Yes. Mr. Lansing's direct assignment of
10 the coin terminal is in error. The coin terminal
11 equipment is associated with coin service. The
12 allocation between Title 61 and Title 62 should be the
13 same as the local loop allocation and as I stated
14 earlier, the composite intrastate factor is not
15 appropriate.
16 Q. DOES CAAS ALLOCATE THE COIN TERMINAL
17 EQUIPMENT TO BOTH TITLE 61 AND TITLE 62?
18 A. Yes. CAAS treats the coin telephone
19 equipment the same way as the local loop. The interstate
20 allocation is 25% based on Part 36 principles, while the
21 intrastate portion has a 15% allocation to Title 62.
22 Q. WHAT COMMENTS DO YOU HAVE ON MR. LANSING'S
23 $9,122,000 FIBER ADJUSTMENT ON HIS EXHIBIT 101, PAGE 4.
24 A. Mr. Lansing's calculation of the "unlit
25 fiber", which he treats as investment not used and
3710
DALLAS R. ELDER, RB 29
U S WEST COMMUNICATIONS, INC.
1 useful, uses a faulty assumption in the development of
2 the investment amount. Mr. Lansing assumes that the cost
3 of fiber is equal for both working and unlit fiber on a
4 per unit basis. This assumption is not correct.
5 Therefore, the this adjustment is overstated and has the
6 impact of artificially and erroneously understating the
7 Title 61 rate
8
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3711
DALLAS R. ELDER, RB 29A
U S WEST COMMUNICATIONS, INC.
1 base. Detailed discussions on the difference in cost of
2 working and unlit fiber as well as support that the so
3 called unlit fiber is useful is addressed by U S WEST
4 witness, Mr. Harvey Plummer.
5 Q. HOW IS THE ALLOCATION TITLE 61 AMOUNT ON
6 LINE 1 OF MR. LANSING'S EXHIBIT 101 DEVELOPED?
7 A. Mr. Lansing obtained the Title 61 allocated
8 amount of $248.096 million from Ms. Baldwin's Exhibit
9 114, Schedule 14, page 1.
10 ANALYSIS OF MS. BALDWIN'S PLANT IN SERVICE ALLOCATIONS-
11 GENERAL
12 Q. DO YOU AGREE WITH MS. BALDWIN'S ASSIGNMENTS
13 OF INVESTMENTS TO TITLE 61 AND TITLE 62?
14 A. Absolutely not. After examining
15 Ms. Baldwin's testimony, exhibits and workpapers, I
16 conclude that the Title 61 results that she has
17 calculated are in error and that the resulting data used
18 on Mr. Lansing's Exhibit for Title 61 Plant in Service is
19 wrong. I found the following problems and errors in
20 examining Ms. Baldwin's testimony, exhibits and
21 workpapers:
22 * Data sources or calculations are not what
23 Ms. Baldwin represents.
24 * Ms. Baldwin uses composite allocation
25 factors inappropriately.
3712
DALLAS R. ELDER, RB 30
U S WEST COMMUNICATIONS, INC.
1 * Ms. Baldwin does not apply the Part 64 and
2 Part 36 process correctly.
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3713
DALLAS R. ELDER, RB 30A
U S WEST COMMUNICATIONS, INC.
1 * Ms. Baldwin's switching allocations are
2 inconsistent with Idaho Code 61-622A.
3 * Ms. Baldwin uses unsupported allocation
4 factors.
5 * Ms. Baldwin does not allocate Transmission
6 central office facilities to the Title 61
7 subscribers who use the facilities.
8 * Ms. Baldwin does not appear to understand
9 plant classifications in Part 36.
10 * Ms. Baldwin uses unsupported gross
11 allocation ratios.
12 * Ms. Baldwin implements Mr. Lansing's
13 adjustments inappropriately.
14 Examples of the above problems and errors with
15 Ms. Baldwin's are pointed out in my specific analysis of
16 her testimony, exhibits and workpapers.
17 Q. HOW IS YOUR TESTIMONY ARRANGED IN THE
18 ANALYSIS OF MS. BALDWIN'S PLANT ALLOCATIONS?
19 A. Ms. Baldwin's Exhibit No. 114, Schedule 14,
20 page 1 is a summary of all of her plant in service
21 allocations to Title 61 and Title 62. My testimony
22 addresses her methods associated with the lines on her
23 Exhibit No. 114, Schedule 14, page 1 in the following
24 order:
25 * line 8, Central Office Equipment
3714
DALLAS R. ELDER, RB 31
U S WEST COMMUNICATIONS, INC.
1 * line 11, Cable and Wire Facilities - CWF1
2 (local loop investment)
3 * lines 12 and 13, Cable and Wire
4 Facilities - CWF2, CWF2A, CWF3, and CWF4,
5 (these are interoffice facilities or
6 trunking facilities, outside plant, between
7 central offices)
8 * secondary investment lines 2,3,4,5,6,7,9,
9 and 15
10
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3715
DALLAS R. ELDER, RB 31A
U S WEST COMMUNICATIONS, INC.
1 * line 18 Other Adjustments to Plant
2 ANALYSIS OF MS. BALDWIN'S CENTRAL OFFICE EQUIPMENT
3 ALLOCATIONS
4 Q. PLEASE EXPLAIN YOUR ANALYSIS OF
5 MS. BALDWIN'S ALLOCATION OF CENTRAL OFFICE EQUIPMENT TO
6 TITLE 61 AND TITLE 62.
7 A. Per the note associated with line 8, on
8 Ms. Baldwin's Exhibit 114 Schedule 14, the source for the
9 central office equipment allocation is Baldwin Schedule
10 12, Exhibit 114. My analysis focused on the various
11 allocation methods on this schedule. My first
12 observation was that Ms. Baldwin's data on Schedule 10
13 does not correspond with the data used on Schedule 14.
14 The following is obtained from the Schedules:
15 Title 61 from Schedule 12 $104,398,800
Title 61 used on Schedule 14 $103,467,000
16 Difference $931,800
17 I found no reason or explanation for the reduction in
18 the amount allocated to Title 61. The impact of this
19 error is an arbitrary reduction in the Title 61 rate base
20 of $931,800.
21 Q. DO YOU AGREE WITH HOW MS. BALDWIN USES THE
22 INTRASTATE SEPARATIONS FACTOR AS DEVELOPED IN HER NOTE 2,
23 ON HER SCHEDULE 12?
24 A. No. Ms. Baldwin in note 2 of her Schedule
25 12 explains her development of a composite central office
3716
DALLAS R. ELDER, RB 32
U S WEST COMMUNICATIONS, INC.
1 equipment intrastate factor and applies it to specific
2 classes of central office equipment plant. The use of a
3 composite central office equipment allocation
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3717
DALLAS R. ELDER, RB 32A
U S WEST COMMUNICATIONS, INC.
1 to specific classes of central office equipment produces
2 incorrect Title 61 results. For example, subscriber pair
3 gain equipment has a 75% allocation to the intrastate
4 jurisdiction compared to Baldwin's composite central
5 office equipment 65% factor. For analog subscriber gain,
6 the intrastate portion should be $497,924 not the
7 $432,128 as Baldwin calculated. This is a $65,796
8 difference. When this amount is allocated to Title 61
9 and Title 62 (using Baldwin's methods per her note d)
10 there is an $40,110 understatement to Title 61 services.
11 For digital subscriber pair gain, the 75% factor
12 would produce an intrastate amount of $53,465,447
13 compared to Baldwin's calculation of $46,400,436. This
14 is a $7,065,011 intrastate understatement. Using a
15 composite of the three methods in Baldwin's note e, I
16 estimate the impact of this error is approximately a
17 $3,863,368 understatement to Title 61.
18 The important point here is that while Staff on
19 one hand testifies that U S WEST does not look at details
20 in its accounts for identification of Title 61 and
21 Title 62, Staff made gross assumptions by using high
22 level composite allocators to erroneously identify
23 account specific data, and ignores Part 36 applications.
24 Q. DID MS. BALDWIN ASSIGN OPERATOR SYSTEMS
25 CORRECTLY TO TITLE 61 AND TITLE 62?
3718
DALLAS R. ELDER, RB 33
U S WEST COMMUNICATIONS, INC.
1 No. While her central office equipment composite
2 factor for Operator Systems is approximately the same as
3 the Part 36 allocation, she has still allocated to
4 Title 61 and Title 62 in an inappropriate manner. Her
5 allocation is based on the composite allocation factor
6 relationship developed by U S WEST's CAAS/CARS processing
7 that is
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3719
DALLAS R. ELDER, RB 33A
U S WEST COMMUNICATIONS, INC.
1 61% to Title 61 per her note 3a. This is in contrast to
2 the CAAS/CARS allocation of this amount of 0% to Title 61
3 and 100% to Title 62. Again, this is another example of
4 the use of a composite allocator that is not applicable
5 when applying it to detailed accounts.
6 Q. PLEASE EXPLAIN YOUR ANALYSIS OF
7 MS. BALDWIN'S CENTRAL OFFICE PACKET SWITCHING ALLOCATION?
8 A. Ms. Baldwin assigns 65% of Packet Switching
9 to intrastate using her composite intrastate 65%
10 allocation. This is a 100% interstate category in the
11 CAAS assignment and is not part of the intrastate CAAS
12 data. Ms. Baldwin should have known this, by examining
13 the assignment in U S WEST's cost manual and the CARS
14 results. The manual shows that the assignment is to
15 packet switching, (DIGIPAC) and Part 64. Again, this is
16 another example of using a composite allocation factor
17 for intrastate and not account specific factors. Since
18 this amount of this investment allocated to intrastate
19 Idaho is actually zero, assigning $97,667 per note 3c is
20 not appropriate. This is a double assignment of dollars
21 away from Title 61. Again, it is recognized that not all
22 of the $97,667 is a reduction to Title 61 because if this
23 amount was not used, it would be in the other central
24 office equipment assignments. Therefore, the assignment
25 to Title 62 is greater than zero but less than the full
3720
DALLAS R. ELDER, RB 34
U S WEST COMMUNICATIONS, INC.
1 amount. This flaw points out that Ms. Baldwin did not
2 examine the CAAS data available to her, and she
3 misapplied the Part 36 and Part 64 process.
4 Q. WHAT DID YOUR ANALYSIS REVEAL ON
5 MS. BALDWIN'S ASSIGNMENT OF THE CENTRAL OFFICE DIGITAL
6 SWITCHING INVESTMENTS?
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3721
DALLAS R. ELDER, RB 34A
U S WEST COMMUNICATIONS, INC.
1 A. Ms. Baldwin assigns the central office
2 Digital Switch as follows (See her note 3b.)
3 1) All Tech Plus is direct to Title 61
4 2) All other is direct to Title 62
5 This methodology is based on Baldwin's erroneous
6 assumption that the assignment should be based on "the
7 allocation of cost should track the purpose for which the
8 cost was incurred" page 62 line 16. The problem is with
9 her broad interpretation of why the cost was incurred.
10 She assumes that all digital switches that U S WEST
11 placed, other than for TECH Plus, were for vertical
12 services and thus should be directly assigned to
13 Title 62. In addition, she assumes that the TECH Plus
14 investments were "paid" for by Title 61 Customers.
15 Therefore, she concludes the full amount should be
16 assigned to Title 61.
17 Q. DON'T YOU AGREE THAT TITLE 61 CUSTOMERS
18 SHOULD NOT HAVE TO PAY FOR ANY PART OF THE TECH PLUS
19 SWITCHES IN RATES?
20 A. Of course I do. My disagreement with
21 Ms. Baldwin is on her direct assignment to Title 61 of
22 the portion of the depreciation reserve that is
23 associated with the Tech Plus switches as well as the
24 Tech Plus investment. These direct assignments are not
25 necessary in order to honor the Company's agreement that
3722
DALLAS R. ELDER, RB 35
U S WEST COMMUNICATIONS, INC.
1 the Tech Plus investment would be "expensed" and kept out
2 of the rate base. Further, when she combines that direct
3 assignment with the direct assignment of the remainder of
4 the digital central office equipment to Title 62, the
5 result is an entirely unreasonable allocation of the
6 switching investment and related costs.
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3723
DALLAS R. ELDER, RB 35A
U S WEST COMMUNICATIONS, INC.
1 Q. PLEASE EXPLAIN HOW U S WEST TREATED THE
2 TECH PLUS INVESTMENT FOR PURPOSES OF THIS CASE.
3 A. As the Tech Plus investment was being made,
4 each time investment was booked an equal and offsetting
5 entry was made to the depreciation reserve. This
6 matching of investment with off setting depreciation
7 brings the actual dollar amount of the investment cost
8 for recovery purposes to zero on the intrastate books.
9 The result of this process is that none of the investment
10 for Tech Plus ends up in the rate base for Title 61. It
11 is fully depreciated.
12 Q. PLEASE EXPLAIN HOW THIS RELATES TO THE
13 ALLOCATION ISSUE.
14 A. The Tech Plus switches are part of the
15 common facilities that provide both Title 61 and Title 62
16 services. As such, the investment costs and the
17 associated depreciation costs of these and of all joint
18 use facilities must be allocated between Title 61 and
19 Title 62. This is required by Idaho Code 61-622A. The
20 fact that ratepayers paid for the Tech Plus investment
21 and the Company accounted for that benefit by fully
22 depreciating the investment when made, does not affect
23 how those assets should be allocated.
24 Q. IF THE INVESTMENT COSTS OF TECH PLUS ARE
25 ACTUALLY ZERO AS YOU HAVE TESTIFIED, WHY IS IT IMPORTANT
3724
DALLAS R. ELDER, RB 36
U S WEST COMMUNICATIONS, INC.
1 HOW THEY ARE ALLOCATED?
2 A. First, it is important to understand that
3 what is required here is to allocate the costs of the
4 joint-use facilities between Title 61 and Title 62. For
5 the purpose of cost allocation there is no justification
6 for treating the Tech Plus investments any differently
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3725
DALLAS R. ELDER, RB 36A
U S WEST COMMUNICATIONS, INC.
1 than any other joint-use facility. The Tech Plus
2 switches, just like all of the other digital switches in
3 southern Idaho, support Title 61 and Title 62 services.
4 Therefore what is being allocated is the digital central
5 office equipment, some of which has been depreciated. By
6 simply keeping the depreciation reserve tied to the
7 assets depreciated, ratepayers are protected from paying
8 in rates for investment they "paid for" under Tech Plus.
9 Second, maintenance and other investment related
10 expenses are assigned to Title 61 and Title 62 based upon
11 investment relationships. Unless the Tech Plus switches
12 are properly allocated, the other investment-related
13 expenses which flow from them will not be properly
14 allocated.
15 Q. YOU HAVE STATED THAT MS. BALDWIN'S APPROACH
16 HAS LED TO AN "ENTIRELY UNREASONABLE" ALLOCATION RESULT
17 FOR DIGITAL CENTRAL OFFICE EQUIPMENT. WHY DO YOU SAY
18 THAT?
19 A. The end result of her allocation process is
20 that no digital central office equipment investment cost
21 is included in Title 61 rate base. While this is a
22 reasonable result if you assumed that all customers in
23 Idaho were served by switches purchased with ratepayer
24 money, this is not the case in Idaho. In addition,
25 Ms. Baldwin excludes all digital central office equipment
3726
DALLAS R. ELDER, RB 37
U S WEST COMMUNICATIONS, INC.
1 that is not actual switches (such as digital pair gain
2 devices used to provision Title 61 services) and she
3 limits all investment-related expenses such as
4 maintenance to that relatively small portion that is
5 associated with the Tech Plus switches. In other words
6 she leaves out large portions of the costs associated
7 with providing Title 61 service in Idaho.
8
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3727
DALLAS R. ELDER, RB 37A
U S WEST COMMUNICATIONS, INC.
1 Q. WHAT COST ALLOCATION PRINCIPLES DOES
2 MS. BALDWIN USE TO JUSTIFY THIS RESULT?
3 A. She does not use cost allocation
4 principles. She makes a policy argument based upon
5 allegations as to U S WEST's motive for making the
6 investment in Idaho. Mr. Wozniak and Mr. Plummer speak
7 to the policy and motivation issues in their testimony.
8 I simply assert that from a cost causation standpoint
9 here is no justification for her result.
10 Q. PLEASE PROVIDE YOUR ANALYSIS OF
11 MS. BALDWIN'S ALLOCATIONS OF CENTRAL OFFICE TRANSMISSION
12 INVESTMENTS.
13 A. The definition of the central office
14 transmission equipment is the circuit equipment used for
15 pair gain, repeaters, etc. on the outside plant
16 facilities. Transmission central office assignments are
17 made by Ms. Baldwin on a four basis approach:
18 1) Per Baldwin note 3(d), all non-digital
19 transmission equipment is assigned using
20 the relationships of central office
21 assignments in U S WEST's CARS results.
22 Ms. Baldwin is allocating investment using
23 relationships that are not specific to the
24 investment that is being allocated. For
25 example, the Analog-Subscriber Pair Gain is
3728
DALLAS R. ELDER, RB 38
U S WEST COMMUNICATIONS, INC.
1 investment that is associated with the
2 local loop and should have the same
3 allocation to Title 61 and Title 62 that is
4 used for the local loop. By using a
5 composite central office equipment
6 assignment relationship from CARS,
7 Ms. Baldwin is using a faulty allocation
8 factor.
9
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3729
DALLAS R. ELDER, RB 38A
U S WEST COMMUNICATIONS, INC.
1 2) This allocation method suggests that
2 Ms. Baldwin does not understand the
3 telephone network investment and how it
4 works. This assignment error under assigns
5 investments to Title 61.
6 3) Per Baldwin note 3(e)(i.), 50% of Tech II
7 is assumed to be digital central office
8 transmission equipment and is allocated
9 directly to Title 61. The 50% is a number
10 that is "assumed6" with no support. The
11 assignment of Tech II directly to Title 61
12 recognizes that this investment is for
13 local loop. However, since local loop
14 investment are to be allocated on a 15%
15 basis to Title 62 per the Idaho Commission
16 Order, Ms Baldwin had failed to recognize
17 the Commission Order in her allocations.
18 3) Per Baldwin note 3(e)(ii.), all other
19 digital investment added after 1989 is
20 directly assigned to Title 62. Since
21 approximately half of this equipment is
22 subscriber pair gain, it follows that
23 Baldwin's assumptions do not recognize the
24 need for additional pair gain equipment for
25 new subscribers due to growth and demand
3730
DALLAS R. ELDER, RB 39
U S WEST COMMUNICATIONS, INC.
1 for local service. Title 61 has an
2 understatement with this allocation. Since
3 this is for subscriber pair gain, and most
4 subscribers on pair gain are residential
5 customers, there is no rationale for this
6 allocation. Detailed discussions on
7 subscriber pair gain equipment used for
8 Title 61 services are in U S WEST's witness
9 Mr. Harvey Plummer's testimony.
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17
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25 6 Direct testimony of S.M. Baldwin, page 49, line 13.
3731
DALLAS R. ELDER, RB 39A
U S WEST COMMUNICATIONS, INC.
1 4) Per Baldwin note (3)(e)(iii.), the balance
2 of the central office digital transmission
3 investment is assigned on U S WEST's CARS
4 allocation relationship for central office
5 equipment. Again, this portion of the
6 allocation is flawed because it is using a
7 composite allocator with no adjustment for
8 the assignments of the first two components
9 above. That is, the composite allocation
10 contains the assignments of the first two
11 allocation methods above. Applying this
12 composite allocation factor to an amount
13 that is less than the total without making
14 an adjustment for the first two
15 assignments, invalidates the use of a
16 composite allocator.
17 As with the Digital central office investment assignment,
18 this assignment methodology is in complete conflict with
19 the Idaho Code 61-662A that states "...allocations shall
20 reasonably reflect how joint-use facilities are
21 utilized."
22 Q. PLEASE COMMENT ON MS. BALDWIN'S WORKPAPER
23 FOR PROPRIETARY EXHIBIT 114, SCHEDULES 12 AND 13.
24 A. In examining Ms. Baldwin's workpaper, I
25 determined that she did not use the right intrastate
3732
DALLAS R. ELDER, RB 40
U S WEST COMMUNICATIONS, INC.
1 percentage in developing the intrastate portion of the
2 Tech II amounts nor the Digital subscriber pair gain
3 equipment. She again inappropriately used a composite
4 number and applied it to specific data. Her composite
5 intrastate factor was 65%. The subscriber gain equipment
6 and the Tech II investment which is for subscriber loop
7 as well, has a FCC Part 36 intrastate factor of 75%.
8 Therefore, in her allocations of the digital
9
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3733
DALLAS R. ELDER, RB 40A
U S WEST COMMUNICATIONS, INC.
1 subscriber gain equipment as well as the Tech II
2 investment, she has under allocated to Title 61.
3 ANALYSIS OF MS. BALDWIN'S OUTSIDE PLANT ALLOCATIONS
4 Q. RETURNING TO MS. BALDWIN'S SCHEDULE 14,
5 PAGE 1, HOW DID YOU ANALYZE THE ALLOCATIONS ON LINE 11?
6 A. Line 11 is for CWF1 which is the Part 36
7 acronym for the outside plant associated with the local
8 loop. The acronym stands for cable and wire facilities,
9 category 1. Per Ms. Baldwin's note 2, found on her
10 Schedule 14, page 2, the source for CWF1 is her schedule
11 12 of Exhibit 114. As can be seen on her exhibit, she
12 used a multiple process to allocate CWF1, the local loop.
13 The source for CWF1 is ALFI (U S WEST's CAAS investment
14 module). The CAAS investment in ALFI is on an
15 unseparated basis, that is, it includes both intrastate
16 and interstate investments. Ms. Baldwin uses the
17 relationship of the ALFI CWF1 to the total ALFI CWF7
18 investment as a ratio that she applies to intrastate CAAS
19 cable and wire investments to obtain a intrastate CWF1
20 investment. The assumption ignores that CWF1 is 75%
21 intrastate in FCC Part 36 processing and that the other
22 CWF categories are assigned in the FCC Part 36 process
23 either as direct assignment or a usage based allocator.
24 Using the 75% against the ALFI total state number
25 produces $273,486,680 not the $257,713,000 calculated by
3734
DALLAS R. ELDER, RB 41
U S WEST COMMUNICATIONS, INC.
1 Ms. Baldwin. Using Ms. Baldwin's own allocations for CWF
2 this has a net affect of under allocation to Title 61 of
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24 7 Total CWF includes both local loop outside plant, as
well as the outside plant used for inter office
25 facilities.
3735
DALLAS R. ELDER, RB 41A
U S WEST COMMUNICATIONS, INC.
1 $3,162,000. This is an example of Ms. Baldwin's lack of
2 understanding the FCC Part 36 process. Obviously, if she
3 understood the FCC Part 36 process, she would have used
4 an intrastate assignment of 75% for this category of
5 plant.
6 An allocation by Ms. Baldwin of 15% is assigned to
7 Title 62 representing the Commission Order allocation to
8 Toll and Switched Access.
9 An erroneous 5% factor is used by Ms. Baldwin to
10 assign loop investment to Title 62 for Custom calling and
11 CLASS services.
12 Q. WHY DO YOU LABEL THE 5% ALLOCATION TO TITLE
13 62 AS ERRONEOUS?
14 A. The allocation of the local loop to
15 enhanced services such as custom calling and CLASS
16 services does not have any historical foundation. As I
17 stated earlier, the FCC Part 64 process does not allocate
18 any part of the local loop to the FCC Part 64 enhanced
19 services. The FCC Part 36 procedures, historically, have
20 utilized some type of usage based allocator for the
21 allocation of the local loop. Thus, the FCC Part 36
22 procedures look at the allocation of the local loop to
23 the usage categories and not the enhanced services
24 categories. In the testimony of Ms. Susan Baldwin for
25 the Staff, she indicates that the reason for the
3736
DALLAS R. ELDER, RB 42
U S WEST COMMUNICATIONS, INC.
1 allocation to Title 62 is based solely "to reflect the
2 fact that the Company derives a substantial revenue
3 stream from these Title 62 services.8" The 5% factor is
4 picked out of the air. While Ms. Baldwin indicates in
5 her testimony that this allocation factor is less than
6 the ratio of revenues from central office and Class
7 features to the Company's total revenues, this does not
8 validate how the 5% was developed. The conclusion does
9 not justify the development of the 5% factor.
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3737
DALLAS R. ELDER, RB 42A
U S WEST COMMUNICATIONS, INC.
1 Q. DO YOU HAVE ANY OTHER COMMENTS ON THE
2 ALLOCATION OF THE LOCAL LOOP TO CUSTOM CALLING FEATURES?
3 A. Yes. It does not make sense for U S WEST
4 to have to allocate costs of the local loop to custom
5 calling services when these are costs that are not
6 associated with the product. For example, speed calling
7 in a competitor's equipment does not have to bear any of
8 the costs of U S WEST's local loop. If a competitor does
9 not have these costs associated with its products, then
10 U S WEST should not have these costs allocated to its
11 products on an arbitrary basis either.
12 Q. PLEASE CONTINUE WITH THE OTHER LOCAL LOOP
13 (CWF1) INVESTMENT ALLOCATIONS.
14 A. After making the aforementioned
15 allocations, Ms. Baldwin subtracts the assigned amounts
16 from the total CWF1 to identify what she labeled
17 "Preliminary intrastate non-Toll." This amount is
18 reduced using a fill factor of 61.3%. While I do not
19 agree that any adjustment is necessary for fill, the
20 development and use of the fill factor makes the same
21 faulty assumption that I addressed with Mr. Lansing's
22 unlit fiber adjustment. That is, the fill factor
23 adjustment assumes that the spare facilities are at the
24 same unit cost as the working facilities. Again, please
25 see Mr. Plummer's testimony that addresses the fact that
3738
DALLAS R. ELDER, RB 43
U S WEST COMMUNICATIONS, INC.
1 additional capacity can be added at a lower cost than
2 what is needed in the short run and that additional
3 capacity is added to meet the needs of the business.
4 Using the 61.3% fill factor adjustment understates costs
5 and investments to Title 61.
6 Q. HOW DOES MS. BALDWIN ALLOCATE THE FILL
7 FACTOR ADJUSTMENT?
8
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20
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25 8 Direct testimony of S.M. Baldwin, page 3, line 12.
3739
DALLAS R. ELDER, RB 43A
U S WEST COMMUNICATIONS, INC.
1 The 61% fill factor adjustment is then allocated
2 by Staff between Title 61 and Title 62 on access line
3 relationships. This allocation does not recognize that
4 the local loops for residence are longer than business
5 loops. Therefore, Staff has another under allocation to
6 the Title 61 rate base.
7 Ms. Baldwin uses a growth ratio of Title 61 access
8 lines to the growth ratio of Title 62 access lines to
9 allocate the spare capacity or the 61% fill factor
10 adjustment for the outside plant associated with the
11 local loop. While on the surface the rationale of
12 allocating spare on the ratio of growth rates sounds
13 reasonable (if one agreed that some adjustment was
14 necessary), the mathematical calculation does not make
15 sense. The following table illustrates that the use of
16 this growth ratio is absurd.
17 DATA FROM S.M. BALDWIN, EXHIBIT 113, SCHEDULE 2
18 Title 61 growth rate 1990 to 1995 4.3%
19 Title 62 growth rate 1990 to 1995 12.9%
20 a 1:3 ratio or 25% for Title 61 and 75% for Title 62
21 1990 1995 GROWTH % of TOTAL LINE
(number of lines) (GROWTH)
22 Title 61
access lines 303,554 374,419 70,865 82%
23
Title 62
24 access lines 18,711 34,345 15,634 18%
25
3740
DALLAS R. ELDER, RB 44
U S WEST COMMUNICATIONS, INC.
1 As depicted from the above data, if spare, the 61% fill
2 factor adjustment, was allocated on the growth ratio,
3 then 25% of the spare would be allocated to Title 61 for
4 82% of the actual total Title 61 and 62 growth. If
5 Ms. Baldwin wanted to reflect an allocation using growth,
6 then she should have assigned 82% of the spare to
7 Title 61 rather than the 25% that she calculated
8 erroneously. By using an erroneous allocation method,
9 Ms. Baldwin
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3741
DALLAS R. ELDER, RB 44A
U S WEST COMMUNICATIONS, INC.
1 has understated the Title 61 rate base plant in service
2 by approximately $48,000,000. It is important to point
3 out that in either case, the allocation factors are
4 assuming a loop is a loop and have not been adjusted to
5 reflect higher costs for longer residential loops. Thus,
6 the understatement of $48,000,000 to the Title 61 rate
7 base is even greater if these higher costs were factored
8 into the calculation.
9 Q. RETURNING TO MS. BALDWIN'S SCHEDULE 14,
10 PAGE 1, PLEASE PROVIDE YOUR ANALYSIS OF LINE 12.
11 A. For interoffice outside plant facilities
12 (CWF2, CWF2A, CWF3, CWF4), Ms. Baldwin directly assigns
13 $9,122,000 to Title 62 per Mr. Lansing's adjustment for
14 unlit fiber. The assumption that fiber is not part of
15 CWF 1, local loop, is erroneous. Fiber is used for local
16 loop facilities in the feeder outside plant.
17 Since the allocation of the balance of the
18 interoffice outside plant is different than the outside
19 plant associated with the local loop (CWF1), then the
20 allocation to Title 61 and Title 62 is incorrect. Said
21 another way, if Ms. Baldwin would have apportioned
22 Mr. Lansing's fiber adjustment between local loop and
23 interoffice facilities, her results would not be the same
24 because her allocations of the two types of plant are not
25 the same. Again, this is Staff's problem of using the
3742
DALLAS R. ELDER, RB 45
U S WEST COMMUNICATIONS, INC.
1 composite allocators.
2 Q. DID YOU UNCOVER ANY PROBLEMS WITH THE
3 ALLOCATIONS ON LINE 13 FOR THE INTER OFFICE OUTSIDE PLANT
4 FACILITIES?
5 A. Yes. The allocation of the balance of the
6 inter office outside plant uses the composite outside
7 plant CAAS allocation relationship. This is also an
8 error in the basic assumption that this is a reasonable
9 way to allocate between Title 61 and Title 62. Since
10
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3743
DALLAS R. ELDER, RB 45A
U S WEST COMMUNICATIONS, INC.
1 the local loop (CWF1) is the largest portion of the CAAS
2 total outside plant, the allocation of the balance of the
3 inter office outside components is distorted by the
4 weighting of the local loop (CWF1) allocation methods
5 used by Staff. Again, this is a composite allocator that
6 has not been adjusted for the fact that some of the costs
7 contained in the composite allocator have been removed
8 and allocated on another basis. Staff has again ignored
9 Idaho Code 61-662A that states "...allocations shall
10 reasonably reflect how joint-use facilities are
11 utilized."
12 ANALYSIS OF MS. BALDWIN'S SECONDARY INVESTMENT ALLOCATIONS
13 Q. ARE THERE ANY DEFICIENCIES IN THE WAY THAT
14 MS. BALDWIN HAS ALLOCATED THE SECONDARY INVESTMENTS?
15 A. Yes. Allocations of secondary plant
16 investment amounts, e.g., land, buildings, computers, and
17 motor vehicles, used the ratio of each specific plant
18 item to total outside plant and central office equipment
19 from CARS (see Baldwin's workpapers) and applied these
20 ratios to her results. Using her stated methods does not
21 produce her results. She is assigning approximately
22 $834,000 less to Title 61 than her methods would compute
23 out to be (see Exhibit 44C).
24 The problem with her basic assumption is that
25 U S WEST's CARS secondary investments are not assigned
3744
DALLAS R. ELDER, RB 46
U S WEST COMMUNICATIONS, INC.
1 just on primary investments. CARS and CAAS assign
2 secondary investments to products and then to Title 61
3 and Title 62 on several functions
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3745
DALLAS R. ELDER, RB 46A
U S WEST COMMUNICATIONS, INC.
1 (see cost manual pages in Exhibit 44D). Ms. Baldwin
2 ignores special study data and methods used in CAAS and
3 CARS.
4 Q. THE FINAL LINE ON MS. BALDWIN'S SCHEDULE
5 14, PAGE 1 IS LINE 18. DID YOU FIND ANY PROBLEMS WITH
6 THIS ALLOCATION?
7 A. Yes. This line represents the balance of
8 Mr. Lansing's direct assignments. As I previously
9 discussed, most of the $9,568,000 direct assignments are
10 wrong, so therefore, using Ms. Baldwin's adjustment
11 factor of 49% to this amount results in approximately a
12 decrease to Title 61 plant in service of $4,688,000.
13 ANALYSIS OF THE ALLOCATION OF INVESTMENT RELATED ITEMS-
14 LANSING EXHIBIT 101
15 Q. RETURNING TO MR. LANSING'S EXHIBIT 101,
16 PAGE 1, WHAT LINES ARE AFFECTED BY THE ALLOCATION OF
17 THE INVESTMENTS THAT YOU HAVE DISCUSSED THAT APPEAR ON
18 LINE 1?
19 A. Line 2 (Materials and Supplies), Line 3
20 (Cash Working Capital), Line 5 (Accumulated
21 Depreciation), Line 6 (Deferred Income Tax), Line 15
22 (Maintenance), Line 16 (Engineering Expense), Line 17
23 (Network Operations), Line 18 (Network Administration),
24 Line 25 (Property and Other Taxes), and Line 30
25 (Depreciation). The allocation between Title 61 and
3746
DALLAS R. ELDER, RB 47
U S WEST COMMUNICATIONS, INC.
1 Title 62 of each of these lines is distorted due to the
2 errors that I pointed out in the allocation of Plant in
3 Service. The Commission is presented with Staff results
4 that are hopelessly flawed.
5
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3747
DALLAS R. ELDER, RB 47A
U S WEST COMMUNICATIONS, INC.
1 Q. OTHER THAN THE PROBLEMS DUE TO THE
2 ASSIGNMENT OF INVESTMENTS THAT DISTORT THE ALLOCATIONS
3 BETWEEN TITLE 61 AND TITLE 62, ARE THERE ANY OTHER
4 PROBLEMS THAT YOU IDENTIFIED IN THE ASSIGNMENT OF
5 ACCUMULATED DEPRECIATION?
6 A. Yes. If the ($40,083,000) associated with
7 Tech Plus and Tech II is to be directly assigned to
8 Title 61 on Staff's assumption that the plant in service
9 should be offset by the TECH programs, then plant in
10 service should be adjusted for this amount prior to
11 applying the allocation factors using plant in service
12 relationships to the reserves subject to Title 61 and
13 Title 62. Since this was not done on Mr. Lansing's
14 worksheet, he has over allocated (double counted) to
15 Title 61 and has thus reduced the Title 61 rate base by
16 an additional $6,450,000. In addition to the actual
17 allocation problems, please refer to Ms. Wright's
18 testimony where she points out that the amounts for Tech
19 Plus and Tech II have been improperly identified by
20 Staff.
21 Q. PLEASE COMMENT ON MR. LANSING'S
22 ($15,153,000) ASSIGNMENT TO TITLE 62.
23 A. The ($15,153,000) direct assignment for the
24 reserves to Title 62 is from Mr. Lansing's adjustments
25 for plant in service. My comments on his adjustments for
3748
DALLAS R. ELDER, RB 48
U S WEST COMMUNICATIONS, INC.
1 plant in service adjustments are applicable here as well.
2 As with the plant in service adjustments, there is an
3 under assignment to Title 61.
4 Q. WHAT OTHER PROBLEMS DID YOU IDENTIFY WITH
5 THE ALLOCATION OF LINE 6, DEFERRED INCOME TAX?
6
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3749
DALLAS R. ELDER, RB 48A
U S WEST COMMUNICATIONS, INC.
1 A. The ($4,387,000) direct assignment to
2 Title 62 is developed by Mr. Lansing due to his plant in
3 service adjustments. Essentially because of the errors
4 that I previously discussed with Mr. Lansing's plant in
5 service adjustments, this amount is overstated and
6 therefore, reduces the rate base for Title 61.
7 Q. WHAT OTHER PROBLEMS DID YOU IDENTIFY WITH
8 THE ALLOCATION OF LINE 15, i.e., MAINTENANCE?
9 A. I determined that the adjustments by Staff
10 witness Ms. Stockton were in error. Ms. Stockton's
11 examination of the Chart of Accounts is wrong for
12 maintenance. She has a direct assignment to Title 62 of
13 $661,695. These dollars are Part 64 items and are not
14 part of the Intrastate dollars that Mr. Lansing is using.
15 Therefore, this is an erroneous adjustment. The effect
16 is an inappropriate reduction of expenses by $661,695 to
17 Title 61. This is another case where Staff has
18 demonstrated a misunderstanding of the Part 64 process as
19 it relates to the intrastate rate base adjustments.
20 ANALYSIS-CUSTOMER OPERATIONS AND CORPORATE EXPENSES
21 LANSING EXHIBIT 101
22 Q. DID YOU FIND ANY PROBLEMS WITH THE
23 ADJUSTMENTS FOR DIRECT ASSIGNMENTS TO TITLE 62 FOR
24 CUSTOMER OPERATIONS ON LINE 23?
25 A. Yes. In examining the testimony of
3750
DALLAS R. ELDER, RB 49
U S WEST COMMUNICATIONS, INC.
1 Ms. Faunce, on page 43 of her testimony at line 16,
2 she indicated that in her direct assignments to "not
3 Title 61" she included Part
4
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3751
DALLAS R. ELDER, RB 49A
U S WEST COMMUNICATIONS, INC.
1 64 items. Again, this is another case where Staff has
2 shown a misunderstanding of the impacts of Part 64 on the
3 rate base. The intrastate customer operations amounts
4 that Mr. Lansing is starting with on his exhibit does not
5 include Part 64. By identifying Part 64 data, Ms. Faunce
6 has made erroneous adjustments to Title 61.
7 Mr. Lansing assigns the amount subject to Title 61
8 and Title 62 using the relationships for customer
9 operations in CARS. This is another example of the use
10 of a composite allocation factor that is wrong.
11 Ms. Wright addresses in her testimony the
12 inappropriateness of Staff's direct assignments to "not
13 Title 61."
14 Q. DO YOU HAVE ANY COMMENTS ON STAFF'S
15 ALLOCATION OF CORPORATE OPERATIONS ON LINE 23 OF
16 MR. LANSING'S EXHIBIT NO. 101?
17 A. Yes. Staff has made direct assignments
18 for the "not Title 61" column. These are used to adjust
19 the amount available for Title 61 and Title 62
20 allocations. Staff has not made any adjustment to their
21 direct assignments reflecting the impacts of the FCC Part
22 64 process. Therefore, the use of the CAAS composite
23 corporate operation factor has the same problems that I
24 have addressed with the use of a composite allocation
25 factor.
3752
DALLAS R. ELDER, RB 50
U S WEST COMMUNICATIONS, INC.
1 While Ms. Wright addresses some of the specifics
2 of Staff's direct assignments to Title 62, it is
3 important to point out two additional concerns that I
4 have with Staff's methods. First, corporate operations
5 represent general overhead costs that U S WEST incurs.
6 As I testified earlier, general overhead costs have
7 historically in the FCC Part 36 and FCC Part 64 processes
8 have been allocated on general allocation factors. This
9 is the method used in CAAS and is in concert with Idaho
10 Code 61-662A.
11
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3753
DALLAS R. ELDER, RB 50A
U S WEST COMMUNICATIONS, INC.
1 Second, Staff has looked at detailed transactions
2 in developing some of their assignments to Title 62. I
3 have previously testified that the requirement of
4 detailed analyses of transactions is not in concert with
5 Idaho Code 61-662A in keeping the accounting and record
6 keeping of the allocation system to a minimum cost.
7 U S WEST'S ADJUSTMENTS TO TITLE 61 FOR EAS REGIONS
8 Q. HAVE YOU IDENTIFIED THE TITLE 61 IMPACTS OF
9 THE IMPLEMENTATION OF THE EAS REGIONS?
10 A. Yes. Exhibit 44E contains the additional
11 Title 61 revenues and costs associated with the EAS
12 regions.
13 Q. BRIEFLY EXPLAIN HOW YOU IDENTIFIED THE
14 TITLE 61 EAS REGION IMPACTS?
15 A. The Title 61 EAS region impacts were
16 developed by using new separations investment data that
17 had been adjusted for the additional investment required
18 for the EAS regions, as well as for the changes in usage
19 statistics for exchange and intrastate toll. Revenues
20 were also adjusted for the change in revenues from toll
21 to local. Running the CAAS and CARS models with this new
22 data, the difference between the original results is
23 attributable to the EAS regions. The Title 61 results on
24 my Exhibit 44E reflect this difference.
25
3754
DALLAS R. ELDER, RB 51
U S WEST COMMUNICATIONS, INC.
1 RECOMMENDATIONS
2 Q. PRIOR TO PROVIDING YOUR RECOMMENDATIONS,
3 ARE THE RESULTS THAT STAFF PROVIDED FOR TITLE 61
4 REASONABLE?
5 A. No. Ms. Wright in her rebuttal testimony
6 has provided an analysis of the impacts on basic
7 residential service rates if the Staff's Title 61 costs
8 were used. Her analysis points out that the adjustments
9 that would be required for basic residential rates are
10 not reasonable.
11 Q. WHAT ARE YOUR RECOMMENDATIONS FOR THE
12 COMMISSION?
13 A. I recommend that the Commission reject the
14 Staff's calculation of the Title 61 rate base. I
15 provided testimony that shows that the Staff's
16 calculation of the Title 61 rate base contains numerous
17 flaws in the allocation of investments, expenses and
18 taxes to Title 61 and Title 62. If the Commission adopts
19 the Staff's results it would be adopting methods that are
20 totally in conflict with the Idaho Code 61-662A. In
21 addition, as I pointed out in my testimony, there are
22 numerous calculation errors that make the results
23 presented by Staff invalid.
24 I recommend that the Commission adopt the Title 61
25 results presented in my direct testimony and as adjusted
3755
DALLAS R. ELDER, RB 52
U S WEST COMMUNICATIONS, INC.
1 in my rebuttal testimony for the establishment of the EAS
2 regions. These results are used by U S WEST witness
3 Ms. Margie Wright in developing the rate base and revenue
4 requirement in this case.
5 Q. DOES THIS CONCLUDE YOUR REBUTTAL TESTIMONY?
6 A. Yes, it does.
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3756
DALLAS R. ELDER, RB 52A
U S WEST COMMUNICATIONS, INC.
1 (The following proceedings were had in
2 open hearing.)
3
4 DIRECT EXAMINATION
5
6 BY MS. HOBSON: (Continued)
7 Q Mr. Elder, do you have a copy of U S WEST
8 Exhibit 64?
9 A I believe that's the --
10 Q Also known as the cost manual?
11 A Yes, I do.
12 Q Would you please just identify that exhibit
13 for the record?
14 A U S WEST's cost manual, Exhibit 64, is a
15 document that we have, I believe, presented or provided
16 to the Commission. It was also provided to the rest of
17 the parties through the discovery process and it is the
18 cost manual that I refer to in numerous places throughout
19 both my direct and my rebuttal testimony. It is the cost
20 manual for CAAS that does our cost allocations.
21 Q And U S WEST Exhibit 64 contains
22 proprietary information, does it not?
23 A Yes, it does.
24 MS. HOBSON: Madam Chair, we would like to
25 do some relatively brief live surrebuttal at this point.
3757
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Wilder, Idaho 83676 U S WEST Communications
1 Q BY MS. HOBSON: Mr. Elder, is central
2 office equipment the kind of thing that can be directly
3 assigned to Title 61 or 62 services?
4 A Generally speaking, no. Most of the
5 investment that's associated with central office
6 equipment is investment that is jointly used; that is,
7 the investments are used to provide both Title 61 and
8 Title 62 services as well as even the interstate
9 services. The identification of the intrastate amount of
10 the central office equipment as a result of the Part 36
11 and Part 64 process and then the intrastate portions of
12 those facilities, then, are further allocated between
13 Title 61 and Title 62 based on the usage associated with
14 those services.
15 Q With regard to outside plant investments,
16 can those investments be directly assigned to Title 61 or
17 Title 62?
18 A Again, generally speaking, I would say that
19 the answer again is no, even for outside plant
20 facilities. The majority of the investment associated
21 with outside plant are associated with the local loop,
22 and as with the central office equipment investments,
23 these loop investments are the result of the Part 36
24 applications in order to get down to the intrastate
25 portion, so it's also gone through an allocation process
3758
CSB REPORTING ELDER (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 to get to the intrastate piece and then, of course, the
2 intrastate local loop investments are allocated then
3 between Title 61 and 62 to those services to meet the
4 past Commission's order of the 15 percent as well as the
5 loops that are associated with Title 61 and 62 services.
6 Q Is labor expense similar to the investments
7 that you've just discussed in that it consists largely of
8 joint expense for the provision of Title 61 and 62?
9 A Yes. Labor expenses are primarily a joint
10 cost, also, if you look at them from kind of a global
11 perspective. For example, maintenance expenses
12 associated with outside plant or central office equipment
13 are joint in nature when that maintenance is being
14 performed. Another example would be the business office
15 expenses and customer operations. A service order that
16 is taken by a service rep can include both Title 61 and
17 Title 62 services and expenses like maintenance, then,
18 would follow the investment, while expenses like the
19 business office, we do special studies that determine
20 what portion of the time is spent on Title 61 products
21 versus Title 62 products in order to be able to allocate
22 that joint expense.
23 Q Now, Staff in its surrebuttal case purports
24 to make a number of direct assignments to Title 62. Do
25 you agree that those Staff adjustments are direct
3759
CSB REPORTING ELDER (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 assignments?
2 A No, I do not. In looking at my examination
3 of Staff's results that they have presented, they portray
4 what is called an assignment and I think my
5 interpretation is that that's called a direct assignment
6 versus what they are allocating. In my examination of
7 the plant facilities that they have in their column that
8 they're calling assigned really are not directly
9 assigned. All of those costs are basically allocated
10 costs.
11 Ms. Baldwin, I think last week, even had a
12 discussion with Mr. Alke regarding that, but there was
13 one other item that I wanted to mention on top of that
14 and that is that part of those direct assignments are the
15 adjustments that Mr. Lansing was making saying that those
16 therefore are a direct assignment because they're not
17 Title 61 and I submit that those are really allocations,
18 too.
19 If you look at the process on how those
20 costs flow to Title 62 in the model that Staff has put
21 together, they essentially, for example, assign the 15
22 percent or actually allocate the 15 percent of the local
23 loop to Title 62. Part of that local loop investment is
24 some of the adjustments that Mr. Lansing is making for
25 his subsidiary records and the general ledger adjustments
3760
CSB REPORTING ELDER (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 and I think the other adjustment was an adjustment for
2 removals, but anyhow, those are based on a percent
3 distribution in his analysis and so, therefore, there has
4 to be an adjustment made even with his direct assignment
5 that he says is direct to Title 62 because some of that
6 investment has already been allocated via the allocation
7 of that local loop, so even those direct assignments to
8 me when you look at the model are allocated and they're
9 not direct.
10 The only dollar that I saw that really
11 could be looked at as a direct assignment, which wasn't
12 even included in the numbers that I examined, were the
13 dollars associated with operator services and those in
14 fact were directly assigned.
15 Q CAAS has been criticized for allocating the
16 Tech Plus and Tech II investments between Title 61 and
17 Title 62 for purposes of cost allocations in this case.
18 Does the U S WEST allocation of these programs mean
19 somehow that Title 61 customers are paying twice for
20 those investments?
21 A Now, that's a big misunderstanding. Those
22 investments were fully depreciated when they were
23 installed. To allocate them now does not affect the
24 investment to be included in the rate base, it is still
25 zero, but it does have a huge impact on how secondary
3761
CSB REPORTING ELDER (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 costs are to be allocated. Under the allocations
2 recommended by Staff, all of the costs of maintenance,
3 repair, taxes, et cetera which follow investment
4 allocations both under the Staff as well as U S WEST's
5 allocations will be assigned to Title 61 even those
6 investments are used to provide both Title 61 and 62
7 services.
8 Q Now, to clarify, Mr. Elder, are you
9 suggesting that the Staff's allocations actually allocate
10 too much to Title 61?
11 A Only to the extent that the Staff
12 allocates all of the Tech Plus and Tech II investments to
13 Title 61. In Ms. Baldwin's words, I think in her
14 testimony, she said that since the "quid pro quo" for
15 that "direct assignment" allocations is that the
16 remaining digital switching, transmission and fiber is to
17 be excluded from 61, this more than offsets the
18 allocation or the overallocation to Title 61, so she's
19 assuming that there's a balance between those two.
20 Q What is the effect of Ms. Baldwin's
21 allocations of digital investment to Title 62 on the
22 secondary costs that you were discussing?
23 A The effect of allocating all digital
24 investment which was not part of the Tech Plus or Tech II
25 is that all of the secondary costs for maintenance,
3762
CSB REPORTING ELDER (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 repair, depreciation, property taxes as well as the
2 return on the primary investment is allocated to
3 Title 62; in other words, under her allocation scheme,
4 Title 61 customers not only escape paying for any portion
5 of the digital switching and other primary investments
6 she targets, but they also avoid covering any of the
7 maintenance, property taxes and other materials,
8 supplies, cash working capital, depreciation expense
9 associated with that investment which are actually
10 serving the Title 61 customers. Her allocation scheme
11 certainly produces low rates for Title 61 customers, but
12 it does not by any stretch reflect the actual costs of
13 providing Title 61 services.
14 Q Does the allocation of primary investment
15 affect other investment allocations?
16 A Yes. It affects what we call secondary
17 investments. These include land, buildings, motor
18 vehicles, computers and other equipment.
19 Q Are Ms. Baldwin's allocations of secondary
20 investments flawed?
21 A Yes. Ms. Baldwin's secondary investment
22 assignments are based on the CARS relationship of
23 secondary investments to central office equipment and
24 outside plant investments. This assignment produces two
25 basic flaws. First, the gross overallocation of spare
3763
CSB REPORTING ELDER (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 outside plant to Title 62 assigns disproportionately
2 amounts of secondary investments to Title 62.
3 Second, the assignment of secondary
4 investments in CAAS and CARS is not based entirely on the
5 assignments of these primary investments, but is also
6 based on expense allocations such as maintenance,
7 customer operations and corporate operations.
8 Q In the surrebuttal testimony, Staff offered
9 two alternatives for consideration for the treatment of
10 the Tech Plus and Tech II investments. Could you please
11 comment on those alternatives?
12 A Yes. The first alternative is that the
13 Commission allocate the Tech Plus and Tech II investments
14 between Title 61 and Title 62 as proposed by U S WEST,
15 but that all of the depreciation associated with those
16 assets be directly assigned to reduce the Title 61 rate
17 base. This alternative retains the Baldwin
18 recommendation that all other digital switches be
19 allocated to Title 62. The effect of this alternative is
20 that it alleviates the problem I've identified with the
21 secondary costs associated with Tech Plus investment, but
22 it further reduces Title 61 rate base because there is
23 not a match between accumulated depreciation reserves and
24 the associated investment.
25 Q What is your reaction to the second of
3764
CSB REPORTING ELDER (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 Ms. Baldwin's alternatives?
2 A The second alternative is only very
3 tentatively offered by Staff because it proposes to
4 allocate all of the switches based on U S WEST's
5 methodology. It persists, however, in that the
6 recommendation that all of the depreciation reserve
7 associated with the Tech program be assigned to
8 Title 61. While U S WEST certainly supports the switch
9 allocations contained in this alternative because it
10 correctly allocates primary and secondary investments and
11 costs, however, the depreciation reserve treatment is
12 unacceptable for the reasons I've just stated.
13 Q Staff in their surrebuttal testimony and
14 you in your direct testimony allocate a portion of the
15 local loop to Title 62 based on the 15 percent ordered by
16 the Commission in a prior order. Do you believe that
17 that allocation method is appropriate in this case?
18 A No. While the 15 percent allocation is
19 based on a previous Commission order, it does not reflect
20 how the loop is actually utilized. While the 15 percent
21 was following the past Commission order by Staff and
22 U S WEST, the Commission should revise its past order. I
23 recommend that the Commission allocate the local loop to
24 Title 62 switched access and toll services using
25 subscriber line usage for local, toll and switched access
3765
CSB REPORTING ELDER (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 services. By using subscriber line usage, when Title 62
2 services such as toll are moved to Title 61 services with
3 the implementation of EAS, the allocation factor is
4 adjusted through the usage factor.
5 MR. HOWELL: Madam Chairman.
6 COMMISSIONER SMITH: Mr. Howell.
7 MR. HOWELL: We're going to lodge an
8 objection at this point in time. I believe that the
9 testimony at this point recommending that the Commission
10 allocate the local loop on the 62 side by using
11 subscriber line usage is a material change in the
12 Company's initial application filed in June of 1996. In
13 this witness' preliminary testimony, he stated on page 13
14 of his direct testimony that U S WEST only supports SLU
15 as an alternative to the Commission's 15 percent
16 allocation methodology.
17 Now, if I understand what he just said,
18 he is recommending that the Commission eliminate the
19 15 percent and actually move to the SLU instead of an
20 alternative as he initially recommended. As recently as
21 in his rebuttal testimony on page 39, he said, however,
22 since local loop investments are to be allocated on a
23 15 percent basis to Title 62 per the Idaho Commission
24 Order and then goes on to describe Ms. Baldwin's
25 recommendation. I believe that if this is a material
3766
CSB REPORTING ELDER (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 change in the Company's position that it is extremely
2 prejudicial at this late hour and that the Company should
3 have advised the parties in this case that it was
4 materially changing its position.
5 COMMISSIONER SMITH: Ms. Hobson.
6 MS. HOBSON: Madam Chair, this, as
7 Mr. Howell points out, is something that Mr. Elder
8 brought up originally in his direct testimony that the
9 SLU factor was a utilization factor. We are rebutting
10 extensive testimony offered by Staff that utilization of
11 the local loop should be the basis for an additional
12 15 percent allocator. Mr. Elder is attempting to
13 demonstrate that the 15 percent allocator already
14 provided by this Commission which he states applies to --
15 I'm sorry, additional 5 percent allocation for other
16 uses. He is attempting to show that the 15 percent
17 allocator currently assigned to Title 62 in the form of
18 toll and access more than covers actual usage of Title 62
19 and if we're permitted to continue with this, we will
20 provide a foundation for that.
21 There have been many, many changes. As
22 early as this morning, we have one more copy of
23 Exhibit 101. I mean, the parties, their positions have
24 been evolving. I would further point out that in a data
25 response provided to Staff in the last round, U S WEST
3767
CSB REPORTING ELDER (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 did spell out this position. I regret to say I did not
2 expect this objection, so I'm not prepared to tell you
3 precisely which one, but Staff was advised in a data
4 response that U S WEST was taking the position that this
5 allocation if it is going to be limited strictly to toll
6 and access needs to go to the SLU factor and that needs
7 to be considered in the question of whether additional
8 allocators are appropriate.
9 COMMISSIONER SMITH: Any response,
10 Mr. Howell?
11 MR. HOWELL: Well, again looking at the
12 words that the witness just read, I recommend that the
13 Commission allocate the local loop using subscriber line
14 usage, is a material change from the Company's position.
15 Originally, and I will concede, that the Company offered
16 that as an alternative, but this witness in the filing of
17 the original case and including his testimony in the
18 Company's case, "No, I used the 15 percent allocator only
19 because it was the latest Commission order on the
20 subject."
21 Now, the actual data response that's at
22 issue, which I would be happy to identify, asks
23 Mr. Elder -- well, notes that he describes several
24 problems with using the Commission's flat 15 percent
25 allocation and it then asks how would adopting the
3768
CSB REPORTING ELDER (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 U S WEST proposed SLU basis for allocating the loop
2 affect the percentage of the allocation categories. He
3 just indicated that. Now, there has not been -- this was
4 in -- the answer to that production request would not
5 have notified or noticed up that there was going to be a
6 material change in the Company's position.
7 MS. HOBSON: Madam Chair.
8 COMMISSIONER SMITH: Ms. Hobson.
9 MS. HOBSON: I would further observe that
10 the EAS order in this case which substantially changed
11 the actual usage for intrastate toll and access came out
12 after the original filing. I am unaware frankly of any
13 procedural requirement that the Company cannot alter a
14 position, particularly when that position has been
15 revealed in data responses to Staff any time during this
16 hearing.
17 If necessary, I suppose we could go back
18 and attempt to have Mr. Elder change his testimony as a
19 formality, but I believe the Company is entitled to
20 present its case on this point and this is a material
21 response to the Staff's continual position in rebuttal
22 that utilization of the local loop should require
23 additional allocations to Title 62.
24 COMMISSIONER SMITH: Mr. Howell, I'm going
25 to allow this to continue. I guess your remedy if you
3769
CSB REPORTING ELDER (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 feel you've somehow been surprised is to request more
2 time to prepare to cross-examine.
3 Okay, Ms. Hobson.
4 Q BY MS. HOBSON: Mr. Elder, do you have what
5 has been marked as U S WEST Exhibit 65?
6 A I do.
7 (Documents being distributed.)
8 MR. HOWELL: Madam Chairman.
9 COMMISSIONER SMITH: Mr. Howell.
10 MR. HOWELL: I'd note for the record that
11 here we have an exhibit which having not seen before I
12 would assume is going to discuss the Company's proposed
13 allocation. Now, again --
14 MS. HOBSON: Mr. Howell, maybe you should
15 look at the exhibit.
16 MR. HOWELL: Well, again -- well, I'll wait
17 for the foundation on the exhibit.
18 Q BY MS. HOBSON: Mr. Elder, you've been
19 handed what has been previously marked as U S WEST
20 Exhibit No. 65. Could you please identify what that is
21 for the record?
22 A Yes. This document contains the Commission
23 Order of the 15 percent. It shows what the actual SLU
24 factor would be to the toll and switched access services
25 based on the SLU before EAS and it also shows what that
3770
CSB REPORTING ELDER (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 SLU factor would be after the establishment of EAS.
2 Q Mr. Elder, what is the source of the SLU
3 information that is used on Exhibit 65?
4 A The source is the U S WEST CAAS/CARS driver
5 data input.
6 Q And who prepared Exhibit 65?
7 A I did.
8 MS. HOBSON: Madam Chair, at this point
9 U S WEST would offer Exhibit No. 65.
10 COMMISSIONER SMITH: Any objection to the
11 admission of Exhibit 65?
12 MR. HOWELL: I will renew my objection,
13 especially directed to the admission of this exhibit.
14 Again, even if we were to look at past production
15 requests, the production requests never allowed or never
16 revealed that there was a SLU calculation after the
17 implementation of EAS. There has been no examination of
18 the underlying data for this document. There's been no
19 divulging of this document until today and I would
20 continue to renew my objection that this is a prejudicial
21 change and a material change in the application of the
22 Company that they originally filed in June of 1996.
23 COMMISSIONER SMITH: Ms. Hobson.
24 MS. HOBSON: Madam Chair, the source of the
25 data is the U S WEST CAAS and CARS driver files as
3771
CSB REPORTING ELDER (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 Mr. Elder has indicated. That information has been
2 available to Staff throughout this case as indicated in
3 the data response and there have been innumerable data
4 responses in following up to earlier responses. There
5 have been on-site audits. Staff has had ample
6 opportunity to look at SLU data if they considered that
7 relevant and we simply think that this is information
8 that's contained in U S WEST's files that the Staff can
9 audit at an additional point if they need to look at it,
10 but it's just in the books and records of the Company.
11 COMMISSIONER SMITH: We'll be at ease for a
12 few moments.
13 (Off the record discussion.)
14 COMMISSIONER SMITH: The Commission is
15 going to overrule Mr. Howell's objection and admit
16 Exhibit 65.
17 (U S WEST Communications, Inc. Exhibit
18 No. 65 was admitted into evidence.)
19 Q BY MS. HOBSON: Mr. Elder, what is the
20 actual subscriber line usage compared to the 15 percent
21 allocation factor?
22 A Before EAS, SLU was at an 8 percent factor
23 to be allocated to Title 62 for the switched access/toll
24 services and after the EAS establishment, the SLU factor
25 would be at 6 percent to those two services.
3772
CSB REPORTING ELDER (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 Q Staff in their surrebuttal testimony
2 allocates 5 percent of the local loop to Title 62 based
3 upon their recommendation of an allocation to CLASS and
4 custom calling services. Is that an appropriate
5 allocation in your estimation?
6 A No. First, it is not based on utilization
7 of the local loop, and second, Staff's method is
8 effectively a form of reregulation of Title 62 services.
9 Q Please explain why the 5 percent allocation
10 of the local loop to CLASS and custom calling services
11 does not follow utilization.
12 A This explanation is best viewed from a
13 stand-alone cost perspective. With local, toll and
14 switched access services, the local loop used in
15 conjunction with either local, toll or switched access
16 services provides a complete service in originating or
17 terminating a call. CLASS and custom calling services do
18 not provide a stand-alone service. These services are
19 used in conjunction with call origination and termination
20 of local toll or switched access calls. These services
21 are no different than other services that the customer
22 has that transmits or receives communications during a
23 call.
24 Examples of other services that a customer
25 may use are home extension telephones, answering
3773
CSB REPORTING ELDER (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 machines, fax machines and computers for using and
2 accessing the Internet. The only difference is that
3 U S WEST's services reside at the central office rather
4 than at the customer's premises.
5 Q Please explain why you have called the
6 Staff's proposed 5 percent allocation of the local loop
7 to CLASS and custom calling features basically a form of
8 reregulation of a Title 62 service.
9 A Ms. Baldwin in her testimony used the
10 historical fact that CLASS and custom calling services
11 provide large contributions as justification of an
12 allocation of the local loop to these services. Using
13 contribution as a basis to allocate costs reduces the
14 Title 62 contribution and thus effectively is a
15 reregulation of Title 62 services based on contribution.
16 Furthermore, this allocation method does
17 not follow historical cost allocations. The FCC in its
18 Part 64 regulated and deregulated process does not
19 allocate the local loop to deregulated enhanced services,
20 for example, voice messaging.
21 Finally, it is important to note that CLASS
22 and custom calling services actually save Title 61
23 customers costs. For example, popular custom calling
24 services such as call waiting and three-way calling can
25 alternatively be provided by subscribing to an additional
3774
CSB REPORTING ELDER (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 line and using a two-line telephone set with bridging
2 capabilities. In this example, by subscribing to the
3 U S WEST's custom calling services, Title 61 customers
4 have already benefited by not having to pay for an
5 additional local loop.
6 Q In their surrebuttal testimony, did Staff
7 correct all of the allocation errors that you pointed out
8 in your rebuttal testimony?
9 A No. The following items were addressed in
10 my rebuttal testimony and are still errors contained in
11 Staff's revised cost allocations in their surrebuttal
12 testimony: Staff still did not implement a deaveraged
13 loop length in allocations of the local loop.
14 Staff still uses a spare capacity
15 allocation using a ratio of 3 to 1, with three times
16 greater allocation to Title 62. This allocation is based
17 upon an improper use of growth rates rather than actual
18 growth.
19 Staff still makes erroneous adjustments for
20 the Uniform System of Account classifications.
21 Staff still uses some composite, and I use
22 that in quotes because I defined that in my rebuttal
23 testimony, "composite allocation" factors that I
24 discussed in that testimony.
25 Staff still allocates subscriber pair gain
3775
CSB REPORTING ELDER (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 in a manner that does not follow the 15 percent
2 allocation factor, and Staff did not correct for all
3 Part 36 allocations.
4 Q Anything else?
5 A Well, right now I think that I just for
6 some reason am missing a page, at least the numbering
7 sequence is not the same. I will conclude with what I
8 have on my last page here which is a statement that
9 indicates that Ms. Baldwin did correct, what I pointed
10 out in my rebuttal testimony, an error in her spreadsheet
11 on the secondary allocations, but as I discussed earlier
12 today, her secondary allocations are still flawed.
13 MS. HOBSON: At this point, Mr. Elder is
14 available for cross-examination.
15 COMMISSIONER SMITH: Okay. Mr. Howell.
16
17 CROSS-EXAMINATION
18
19 BY MR. HOWELL:
20 Q Mr. Elder, how much of the local loop cost
21 is assigned by CAAS to Title 62 services for residential
22 customers?
23 A Fifteen percent. Now, let me clarify that
24 one time. Okay, I unfortunately use the word "CAAS" as a
25 global terminology for our total process. If one is
3776
CSB REPORTING ELDER (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 looking at CAAS now as being two components, that being
2 the CAAS processing component and the CARS processing
3 component, I would have to revise my answer to say that
4 within the CAAS processing component itself, there is no
5 allocation. In the CARS processing, which is the final
6 step, there is a 15 percent allocation.
7 Q Do you have Ms. Baldwin's Exhibit 114?
8 A I think so. Do you have a copy there?
9 Q I have it.
10 (Mr. Howell approached the witness.)
11 THE WITNESS: It may be faster.
12 Q BY MR. HOWELL: On page 2 of Exhibit 114,
13 schedule 2, which would be the second page that I've
14 handed you --
15 A Right.
16 Q -- do you see the amount of total plant in
17 service in the far right-hand bottom corner?
18 A Yes, I do.
19 Q And is that, to the best of your knowledge,
20 the Company's proposed allocation for total plant in
21 service in this case?
22 A I don't believe so on the final analysis.
23 Q Are you checking?
24 A Well, I wanted to just verify this number.
25 Q Sure.
3777
CSB REPORTING ELDER (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 A It says the CARS report -- well, I can
2 answer that right now because it does say that it comes
3 from the CARS report and I would say at that point in
4 time, subject to check, that that is the CARS report.
5 That is not the final allocation, because in my testimony
6 I provided the results of CARS as well as the impacts for
7 the removal of sale of exchanges in the CARS process, so,
8 therefore, this does not represent that final
9 distribution after the sale of the exchanges.
10 MR. HOWELL: Can I approach the witness?
11 COMMISSIONER SMITH: Certainly.
12 (Mr. Howell approached the witness.)
13 Q BY MR. HOWELL: I'm handing you what's been
14 identified as the Company's answer to Staff Audit Request
15 114B. Do you recognize that document?
16 A I recognize the document, but I don't have
17 the Staff audit request to say whether or not that this
18 in fact is the response to that audit request.
19 Q Did you prepare the answer that you see
20 before you?
21 A I don't know. I don't even see the
22 question before me.
23 Q Well, while we're waiting to get that,
24 would the number reflected on the last page of that
25 answer to an audit request be the same number as on
3778
CSB REPORTING ELDER (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 Ms. Baldwin's Exhibit 114, schedule 2, page 2?
2 A I don't know because you asked me if the
3 number on the audit request, I haven't seen the audit
4 request to know whether or not this was the answer to the
5 audit request.
6 MR. HOWELL: Can we go off the record?
7 COMMISSIONER SMITH: Yes, let's be at ease
8 for a few moments.
9 (Off the record.)
10 (Mr. Howell approached the witness.)
11 THE WITNESS: Okay.
12 Q BY MR. HOWELL: Was that prepared under
13 your direction or by you?
14 A The response to the question was, yes.
15 Q Correct, and did you have an opportunity to
16 check to see whether the total plant in service on your
17 response to Audit Request 114B is the same as page 2,
18 schedule 2 of Exhibit 114?
19 A Those numbers are correct, but can I have
20 that audit request back, please? I just want to clarify
21 something which is what I was clarifying earlier why I
22 wanted to see the audit request. The audit request
23 specifically asked for CARS report, section F printout,
24 which is essentially what we're looking at here, and
25 as I said earlier, CARS, section F printout are the
3779
CSB REPORTING ELDER (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 Title 61/62 results prior to the sale of exchanges,
2 because you had asked me earlier whether or not these
3 numbers were the final numbers and I said no, they are
4 not the final numbers because they did not have the sale
5 of exchanges removed.
6 Q But for purposes of our discussion, those
7 numbers are identical on the answer to the Audit
8 Request 114B and the total Idaho intrastate plant in
9 service on page 2, schedule 2 of Exhibit 114?
10 A I only examined that one number. I would
11 say that one number is correct. That was all you pointed
12 out to me to examine.
13 Q That's all I want to start with, just the
14 one number.
15 A Okay.
16 Q I guess I would next direct your attention
17 still on that page 2 of Exhibit 114, schedule 2 to the
18 cable and wire facilities on a total Idaho intrastate
19 basis. Do you see that amount?
20 A I see cable and wire facilities. Which
21 column were you referring to, please?
22 Q Column A-C, total Idaho intrastate.
23 A I have that number.
24 Q Is the cable and wire facilities commonly
25 referred to as local loop?
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1 A No, cable and wire facilities are comprised
2 of the local loop and interoffice facilities, so it is
3 compromised of primarily two components.
4 Q Does the cable and wire facilities roughly
5 represent approximately half of the total plant in
6 service at the bottom of that column?
7 A Looking at the numbers that are on the
8 page, I would agree with that, roughly half.
9 Q Okay, I've also furnished you what's been
10 identified as Exhibit 114, schedule 7. If you'd turn to
11 page 2, column X, what is the total revenue derived from
12 central office features, including CLASS services?
13 A On schedule 7, page 2 did you say?
14 Q Yes, sir.
15 A And which column were we in?
16 Q Column X at the bottom.
17 A Okay, and the question is what are the
18 revenues on that line?
19 Q Yes, sir, on line 7.
20 A 12.8 million.
21 Q And these pages represent revenues,
22 proposed intrastate revenues, do they not?
23 A I think they represent actual revenues.
24 Q Well, it represents proposed allocation or
25 the Company's proposed allocation of intrastate revenues?
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1 A Yes, in that sense I would agree.
2 Q Okay. And turning back to schedule 2 --
3 A Excuse me a minute.
4 Q Sure.
5 A On the prior exhibit, it showed that the
6 source was coming from CARS and when I was on that final
7 exhibit, when I said that those revenues would be the
8 proposed allocations, I was basing my answer on the fact
9 that I had expected to see at the bottom of this exhibit
10 as well that it was source from CARS. I don't see that
11 sourcing on there, but, subject to check that that's what
12 this is portrayed, then I would agree with you.
13 Q Would you turn to page 1 of schedule 7? Do
14 you see the source note there?
15 A Yes.
16 Q And that schedule 7 is a two-page schedule
17 of Exhibit 114?
18 A There are two pages on that schedule, yes.
19 Q All right. Turning back to Exhibit 114,
20 schedule 2, page 2, and directing your attention to
21 column X, would the plant associated with CLASS and
22 custom calling features be included in this column?
23 A In column X, yes.
24 Q And how much of the cable and wire
25 facilities in column X are allocated under the Company's
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Wilder, Idaho 83676 U S WEST Communications
1 CAAS system to custom calling features?
2 A To that particular product, none.
3 Q Isn't it true that the CAAS and custom
4 calling revenues are growing at a rapid rate?
5 MS. HOBSON: I'm going to object to the
6 question. I think Mr. Howell has confused a cost
7 allocation methodology and a service.
8 COMMISSIONER SMITH: Mr. Howell.
9 MR. HOWELL: Well, I was not confusing. I
10 asked the witness if the revenues from CAAS and custom
11 calling features were growing at a -- CLASS features and
12 custom calling features were growing.
13 MS. HOBSON: That's a proper question.
14 COMMISSIONER SMITH: All right.
15 MS. HOBSON: As rephrased.
16 Q BY MR. HOWELL: Mr. Elder, what was your
17 answer to that question? Do you need it repeated?
18 A I would like to have the full question
19 after that clarification, please.
20 Q Sure. Isn't it true that the CLASS and
21 custom calling revenues are growing strongly?
22 A I don't know because I don't know what
23 "strongly" means. I think that I have seen increases in
24 those revenues, but I don't know how you're defining
25 "strongly."
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1 Q Would you believe that the word "strongly"
2 might be a 50 percent increase in revenues from one year
3 to the next?
4 A I don't know. It's your terminology. I'm
5 just agreeing with you that I believe what I have
6 observed that they are increasing, if I can use
7 increasing and substitute that for growing.
8 MR. HOWELL: May I approach the witness?
9 (Mr. Howell approached the witness.)
10 Q BY MR. HOWELL: I'm handing you what has
11 been admitted as Exhibit 157, schedule 5, page 3 of 3,
12 which portrays the custom calling and CLASS service
13 revenue -- I'm sorry, 159 is the exhibit. Would you
14 agree with me that the increase in revenues from 1994 to
15 1995 would be approximately 50 percent?
16 A From '94 to '95 for which service? For
17 both CLASS and custom calling?
18 Q Correct.
19 A For the total of those two services, I
20 would say it's somewhat under 50 percent from one year to
21 the next, '94 to '95. I'm not using a calculator. I'm
22 just eyeballing it there.
23 Q Sure. Would you agree with me that it
24 represents approximately 10 percent of all intrastate
25 revenues?
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1 A What represents 10 percent?
2 Q The revenues from CLASS and custom calling
3 features.
4 A No.
5 Q What is the percent?
6 A According to this exhibit, this exhibit is
7 showing that the total revenues for CLASS and custom
8 calling divided by total intrastate revenues is about
9 7 percent, 7.3 percent.
10 Q Thank you. Mr. Elder, isn't it
11 unreasonable to allocate no plant in service for cable
12 and wire facilities attributable to CLASS and custom
13 calling services?
14 A I don't think it's reasonable to allocate
15 that. I think I discussed that in my earlier discussion
16 that we put on on live surrebuttal. Those services are
17 no different than some of the services that a customer
18 has at their premise and those services actually have no
19 allocation of the local loop. Our CLASS and custom
20 calling services are no different. They just reside at
21 the central office.
22 The cost of that local loop -- maybe I
23 should back up. The local loop is used to make a call,
24 whether that be local or toll, or to receive a call.
25 Most of these services are overlays that occur at the
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1 time that that processing of the call is already in
2 process and so, therefore, the transmission of that data,
3 again, is no different than a fax machine that you
4 transmit data, the answering machine that's receiving
5 data. It just resides at the central office rather than
6 at your home, so I believe a zero allocation of the local
7 loop for those services is a proper assignment of being
8 nothing.
9 Q Would you agree with me that those services
10 are using the local loop?
11 A Data is being transmitted over that local
12 loop, but it's being transmitted over the local loop at
13 the time that a call is in the process of being either
14 originated or terminated. It's not going over that local
15 loop without that call processing occurring.
16 Q Moving on to another area, probably
17 thankfully for everyone, isn't it true that the Company
18 has calculated the rate base shift which would occur if
19 the Commission implemented the Staff's proposal to assign
20 5 percent of the local loop to Title 62 custom calling
21 and CLASS services?
22 A I'm sorry, but I got lost in the middle of
23 that long question. Can you maybe either break it up or
24 rephrase it for me, please?
25 Q Sure. Let me try to shorten it up for
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1 you.
2 A Thank you.
3 Q Have you or someone with the Company
4 calculated the shift that would occur if the Commission
5 adopted the Staff's position and assigned 5 percent of
6 the local loop to Title 62 custom calling and CLASS
7 services?
8 A What that impact is on the revenue
9 requirement; is that the question?
10 Q On rate base.
11 A On rate base. What the impact is on the
12 rate base being defined as the investment, then, so that
13 we're talking about the same item here?
14 Q Correct.
15 A I'm sure that it's been calculated. You
16 know, even looking at the numbers in front of me, it
17 could be calculated because we already know what that
18 local loop investment is and you can calculate the
19 5 percent, if that's what you're saying, is just take
20 that 5 percent. I think even in the workpapers that I
21 saw in Ms. Baldwin's testimony, or if it wasn't in hers,
22 it was her workpapers or Mr. Lansing's, it portrays what
23 that investment is that you're shifting because of the
24 5 percent allocation, so it's no secret. It's out there.
25 Q Didn't the Company make such a calculation
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1 in response to Production Request 477?
2 A I am not familiar right now with that
3 particular document. If you could show it to me, then
4 I'll be glad to answer.
5 (Mr. Howell approached the witness.)
6 THE WITNESS: This is the total 477?
7 Q BY MR. HOWELL: Yes.
8 A Okay, I'm familiar with this now. Now,
9 let's go back to the basic question.
10 Q Maybe to shorten this up again, would you
11 accept, subject to check, that the shift in rate base
12 would be about, approximately $20 million?
13 A I don't know how that was calculated. I
14 don't know how you're coming up with the $20 million
15 shift, unless that's the subtraction from the output of
16 those results compared to the output of the results that
17 you have in front of me and if that's true, I can compare
18 those two numbers.
19 Q Well, doesn't 477 represent a request by
20 the Staff for the Company to run the CAAS system in an
21 attempt to determine what that shift would be by
22 substituting the 15 percent allocator for a 20 percent
23 allocator and then examining the shift?
24 A I don't believe I read in the discovery
25 question that the answer was to examine that shift. The
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1 discovery question requested U S WEST to run the data to
2 produce the results. I didn't read any what you're
3 portraying there as an analysis as an answer to the
4 discovery question.
5 Q Well, maybe I could put it succinctly.
6 What is the answer that is contained in this discovery
7 answer?
8 MS. HOBSON: Do you want him to read it?
9 THE WITNESS: The results of -- the results
10 contained in the response to that interrogatory are the
11 results of the CARS processing using the additional
12 5 percent allocation to Title 62 services as requested by
13 Staff and run by U S WEST in their model to produce
14 results with that additional 5 percent allocation, that's
15 how I read that discovery question there, and so all it
16 is is results-oriented. It's not analytical-oriented.
17 Q BY MR. HOWELL: So from this answer to the
18 production request, could you agree with me that the
19 shift is approximately $20 million?
20 MS. HOBSON: I'm going to object to the
21 question. I think we've lost the tenor of the shift of
22 what.
23 COMMISSIONER SMITH: Oh, I think it's still
24 understood.
25 MS. HOBSON: Well, Madam Chair, with all
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1 due respect, this data request asks for CAAS to be
2 rerun. As Mr. Elder testified in his live surrebuttal
3 testimony, there are many factors besides total plant in
4 service. I was understanding Mr. Howell's context to be
5 total plant in service rather than all of the secondary
6 and other investment costs, but I'm not clear any more
7 what the context is.
8 COMMISSIONER SMITH: Mr. Howell.
9 Q BY MR. HOWELL: Let me ask this a little
10 differently, Mr. Elder. Have you calculated what the
11 shift would be to total plant in service with the
12 5 percent being allocated, 5 percent of local loop being
13 allocated, to Title 62 custom calling and CLASS services?
14 A No, I did not personally calculate that
15 change. Under my direction, the answer to that
16 interrogatory was run, but I never subtracted the
17 original results from the results that you handed me on
18 that interrogatory to determine what that difference is.
19 I think that's really what the whole question is. If you
20 want to give me -- and I'm assuming that what we have
21 here since it's CARS, this is the original results and it
22 gives the Title 62, if you want to give me back the
23 interrogatory, we can read into the record the two
24 numbers and if you want me to, I can subtract them and I
25 believe that's what you're looking for and until I have
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1 those two numbers, I can't agree with you on what you
2 were saying with the $20 million shift. I mean, the data
3 is right here. It's that clear. I'll be glad to help
4 you with it, but --
5 MR. HOWELL: Maybe we could go off the
6 record while Mr. Elder looks through the data.
7 COMMISSIONER SMITH: All right, let's be at
8 ease for a few minutes.
9 (Off the record.)
10 COMMISSIONER SMITH: Let's go back on the
11 record. Mr. Howell. Do you want to explain that we're
12 abandoning your previous question and moving on?
13 MR. HOWELL: Yes, Madam Chairman. I'll go
14 on to another area. Maybe we'll have more success with
15 this one.
16 Q BY MR. HOWELL: Mr. Elder, would you agree
17 with me that if you do not directly assign Tech Plus and
18 Tech II amounts in the area of approximately 45 million
19 that was calculated by Ms. Wright, are you agreeing that
20 that's an appropriate calculated amount for the amount of
21 Title 61 Tech II and Tech Plus rate base amounts?
22 A That number sounds familiar with what I
23 reviewed in Ms. Baldwin's testimony. I don't know how
24 that compares to Ms. Wright's number. I also would not
25 classify it necessarily as a Title 61 number. If you're
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1 saying that the $45 million represents, subject to check,
2 those dollars associated with the Tech programs, we can
3 use that as a starting point.
4 Q All right. Well, let me ask you this: No
5 matter how one would directly assign the Tech Plus and
6 Tech II monies, doesn't the mere assignment of a large
7 amount like that have an impact on service allocators?
8 A I don't know what service allocators are.
9 Q Plant in service allocators.
10 A Oh, plant in service allocators. Are you
11 referring to that as being those secondary assignments
12 that I discussed earlier when you say plant allocators?
13 Q Well, wouldn't a shift in a rate base of --
14 wouldn't allocations of 45 million in a 528 million total
15 plant in service cause shifts in the secondary allocators
16 that you discussed earlier?
17 A Yes. No matter how they're allocated,
18 they're certainly going to shift those expenses.
19 Q And doesn't a change in the plant
20 allocation factors impact the deferred income tax and
21 depreciation expenses?
22 A Yes, those are some of the secondary items
23 that follow investments.
24 Q Isn't it true, Mr. Elder, that the Federal
25 Communications Commission requires that costs be directly
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1 assigned to either regulated or nonregulated activities
2 whenever possible?
3 A In the Part 64 process, yes.
4 Q And that would be Part 64.901?
5 A I don't recall the specific reference.
6 Q We'll do an easy one. Please turn to your
7 Exhibit 63, to section 1.
8 COMMISSIONER SMITH: Did you mean to say
9 63?
10 MR. HOWELL: 64, I'm sorry.
11 COMMISSIONER SMITH: Thank you.
12 MR. HOWELL: It's late in the day, I
13 apologize.
14 Q BY MR. HOWELL: On section 1, page 1, could
15 you read Roman Numeral III. A. 1.? It's the Arabic 1 at
16 the bottom of that page.
17 A "Direct identification of costs with final
18 cost objectives is required when the beneficial or causal
19 relationship is clear and exclusive and the amount is
20 readily measurable."
21 Q And isn't it true that that is a cost
22 assignment principle of the Company's CAAS system?
23 A It is one of the CASB, Cost Accounting
24 Standards Board, principles that we are using in our
25 manual as one of our hierarchial assignment principles.
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1 Q Isn't it true that the sentence you just
2 read out of the CAAS manual is more narrowly drawn than
3 the FCC's requirement on direct assignment?
4 A More narrowly in CAAS versus Part 64; is
5 that what the question is?
6 MR. HOWELL: May I approach the witness?
7 COMMISSIONER SMITH: Yes.
8 (Mr. Howell approached the witness.)
9 Q BY MR. HOWELL: Do you recognize the text
10 on that paper?
11 A Which portion of the text on here?
12 Q Well, isn't that the FCC's Part 64 cost
13 allocation rules?
14 A I don't know looking at this page. It's an
15 excerpt from something, but I'm not that familiar with
16 the Part 64 rules to know whether this was taken out of
17 the rules or not.
18 COMMISSIONER SMITH: Are we waiting for a
19 question or an answer?
20 MR. HOWELL: I'm waiting for a reference
21 material, if I can have a moment.
22 COMMISSIONER SMITH: Okay.
23 (Pause in proceedings.)
24 Q BY MR. HOWELL: Mr. Elder, do you recognize
25 this publication?
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1 A I have never read this publication, but I
2 know that it says it's the Code of Federal Regulations on
3 the cover.
4 Q And is not Part 64 contained within that
5 Code of Federal Regulations as promulgated by the Federal
6 Communications Commission?
7 A I'll accept that, subject to check, because
8 I've never read this and I don't think we want to stay
9 all day reading this thing.
10 MR. HOWELL: Correct, and I guess for
11 speed, I'd ask the Commission to take judicial notice of
12 Part 64.
13 COMMISSIONER SMITH: Official notice.
14 MR. HOWELL: Official notice.
15 COMMISSIONER SMITH: That we can do,
16 Mr. Howell. Just Part 47 or all of it?
17 MR. HOWELL: No, this is Part 64.901, B,
18 2.
19 Q BY MR. HOWELL: Would you read where the
20 arrow is?
21 A "Costs shall be directly assigned to either
22 regulated or nonregulated activities whenever possible."
23 Q And again returning to your Exhibit 64,
24 No. 1, isn't No. 1 more exclusive in its terminology than
25 the passage you just read in that it requires an
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1 exclusive relationship?
2 A That is a CASB principle that you had me
3 read earlier and if you look in the manual and go further
4 on, on page 2 of the manual it says, "These CASB
5 principles were incorporated into the manual utilizing
6 the following cost assignment principles. Costs are
7 directly assigned to specific products or services
8 wherever practicable." I believe that is very similar to
9 what the FCC rule is saying.
10 Q Were you present when Ms. Barrington
11 testified last week?
12 A No.
13 Q Isn't it true that when neither direct nor
14 indirect measures of cost allocation can be found that
15 the cost pool shall be allocated based upon a general
16 allocator computed by using the ratio of all expenses
17 directly assigned or attributed to regulated and
18 nonregulated activities?
19 A That sounds like wording that may be again
20 in the Part 64 manual, but if you want to reference that
21 point, that's not anything that I think that's in our
22 cost manual.
23 Q Well, I'm asking if you agree isn't it
24 true.
25 A I think that there are, you know, several
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1 ways that you can allocate what would be common costs
2 that you're defining there. To say that what you're
3 saying there is true from the standpoint that it's
4 absolutely the only way, I don't agree with that.
5 Q Let me ask you in relationship to the CAAS
6 process, then. Is it true that when neither direct nor
7 indirect measures of cost allocation can be found that
8 the cost pool allocators are developed based upon the
9 general allocations computed by using all of the expenses
10 directly assigned or attributed?
11 A It's two-fold. It's not only that, but in
12 CAAS, we segregate those common overheads into two
13 components, those that are wage-related and those that
14 are what I would call almost expense-related. We
15 actually have two general allocators, so there's not a
16 single allocator in CAAS. There's a two-fold common
17 overhead allocator.
18 (Pause in proceedings.)
19 MR. HOWELL: May I approach the witness?
20 COMMISSIONER SMITH: Yes.
21 (Mr. Howell approached the witness.)
22 Q BY MR. HOWELL: Mr. Elder, I'm handing you
23 what's been admitted as Staff Exhibit 162, and I would
24 direct your attention specifically to page 3, and for the
25 record, I've also handed you what's been admitted as
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1 Staff Exhibit 173 and 174. These are Bellcore research
2 projects. Do you recognize pages 3, 4, 5 and 6 of
3 Exhibit 162?
4 A They are familiar to me only in the sense
5 that they appear to be excerpts from the Part 64 CAM.
6 MR. HOWELL: And for the benefit of the
7 Commission and the other parties today, when I was asking
8 Ms. Barrington questions about how cost pools and
9 projects were allocated, she deferred to Mr. Elder for
10 questions dealing with the CAM and the CAAS manual.
11 Q BY MR. HOWELL: Mr. Elder, if I could have
12 you first look at Staff Exhibit 174, although it's on
13 white paper for you, it is a proprietary document, it is
14 Bellcore project 5W1100 that's previously been admitted
15 into evidence, and would you accept, subject to check,
16 that that project was placed in account 6535? And I'd be
17 happy to show you the documents if you want to check it.
18 A I'll accept it, subject to check.
19 Q And if I were to have you turn to page 3 of
20 Exhibit 162, you'll see the cost categories or the cost
21 pools for that account 6535, engineering expense. Do you
22 see those cost pools?
23 A Yes.
24 Q Now, assume for a moment that the subject
25 of this project which is embodied in Staff Exhibit 174 is
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1 neither a Title 61 service or product and is also not a
2 Title 62 service or product. For purposes of Idaho, it
3 is a totally unregulated service. Could you explain to
4 the Commission how this product would enter the cost
5 pools in cost pool 6535?
6 MS. HOBSON: Madam Chair, could we have a
7 clarification that the service that's being spoken of is
8 not account 6535, but rather Bellcore project 5W1100?
9 MR. HOWELL: With that, I would even
10 venture that it's a research project dealing with PCS.
11 I'd be happy to stipulate.
12 COMMISSIONER SMITH: Well, now you've made
13 me very confused, Mr. Howell. I thought your question
14 was that this research project had been assigned to 6535.
15 MR. HOWELL: Yes, ma'am, it is assigned --
16 COMMISSIONER SMITH: What I hear Ms. Hobson
17 saying is she doesn't want you to refer to it in terms of
18 this USOA account, so I'm very confused. Is that your
19 statement, Ms. Hobson? I mean, how can we talk about
20 this if the question is, this research project, whatever
21 its number is, has been assigned to USOA account 6535 and
22 how does it fall in the pools, if we don't refer to 6535,
23 how can we ask this question?
24 MS. HOBSON: What my concern was was that
25 there was an assumption or a hypothetical put to the
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1 witness to assume that something was neither Title 61 nor
2 62 and I want it to be clear that the only thing that is
3 Title 61 or 62 is a service, not an engineering expense
4 account. I mean, I'm afraid we're back to the problem of
5 what is deregulated costs or services.
6 COMMISSIONER SMITH: Mr. Howell.
7 MR. HOWELL: Well, I guess for purposes of
8 my question, I will allow us to go ahead and say that we
9 are looking at a PCS project and it has been assigned by
10 the Company to account 6535 and I'd like to know in
11 which cost pool it would end up if we were to look at
12 account 6535.
13 COMMISSIONER SMITH: Okay, Mr. Elder, do
14 you have that question in mind?
15 THE WITNESS: I have the question in mind.
16 COMMISSIONER SMITH: Okay, good.
17 THE WITNESS: If it was an FCC Part 64
18 dereg service, it would end up in the 6535 direct
19 nonregulated. If it is not a Part 64 deregulated
20 service, it would end up in the 6535 other.
21 Q BY MR. HOWELL: And Mr. Elder, do you know
22 of your own knowledge whether PCS is a Part 64?
23 A I do not know of my own knowledge.
24 Q Can we assume, can we not, that it must not
25 be a Part 64 if in fact the costs for this project were
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1 allocated to Title 61 via account 6535?
2 MS. HOBSON: Madam Chair.
3 THE WITNESS: I can't make that assumption.
4 Q BY MR. HOWELL: Can you describe -- can you
5 explain to me how a cost from this project was assigned
6 for Title 61 service if in fact it was a Part 64?
7 MS. HOBSON: Madam Chair, I'm going to
8 object to the question. The witness indicated he was not
9 present when Ms. Barrington was testifying, however, the
10 rest of us were and I believe that there was a continuing
11 debate, not debate, a continuing effort on her part to
12 reject the notion that this project's costs or any of
13 these project costs were assigned to Title 61.
14 COMMISSIONER SMITH: Mr. Howell.
15 Q BY MR. HOWELL: Mr. Elder, did this project
16 find its way into the cost pool?
17 A Which cost pool and which assumption now?
18 You keep having me assume things and I'm telling you I
19 don't know which cost pool this is in and you had me make
20 certain assumptions and so, therefore, in order to relate
21 that to CAAS, we have to continue with those same
22 assumptions.
23 MR. HOWELL: May I approach the witness?
24 COMMISSIONER SMITH: Yes.
25 (Mr. Howell approached the witness.)
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1 Q BY MR. HOWELL: Mr. Elder, this is a -- do
2 you see in the left-hand corner the project number we
3 were just speaking about, 5W1100?
4 COMMISSIONER SMITH: Which exhibit are you
5 on now, Mr. Howell?
6 MR. HOWELL: I'm not on an exhibit.
7 Q BY MR. HOWELL: And what does the document
8 say at the top of the page?
9 A 1995 U S WEST ATMBCR project charges.
10 Q And if we were to look at project 5W1100,
11 what account would it be charged to?
12 A 6535.
13 Q And how much of that account or what is the
14 allocator of that cost pool in the right-hand column?
15 A I don't know. I didn't put this document
16 together, so I don't know what that allocator is.
17 Q What number is there in that blank?
18 MS. HOBSON: Madam Chair, I'm going to
19 object. The record is going to be incomprehensible at
20 this point since this document is not identified and the
21 witness is now being asked to just simply pick numbers
22 off of it when he says he's not familiar with it.
23 COMMISSIONER SMITH: Mr. Howell.
24 MR. HOWELL: Madam Chairman, I'm trying not
25 to use up more exhibits. It is an exhibit that was
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1 offered by the Company in response to the charges charged
2 by the AT and Bellcore projects and what I've asked
3 Mr. Elder is to look at the column entitled 62/61
4 percentage and read the percentage off from that column.
5 COMMISSIONER SMITH: Ms. Hobson.
6 MS. HOBSON: Well, Mr. Howell -- I mean,
7 I'm sorry, Madam Chair, I understood Mr. Howell to say
8 previously this was not an exhibit, now I believe he just
9 said it was and I don't have any way of authenticating
10 for myself what it is that what we're talking about, let
11 alone to decide whether this witness is qualified to
12 testify on this point.
13 MR. HOWELL: I'm only using a couple of
14 pages off a 60-page item. That's why I didn't want to
15 label this.
16 COMMISSIONER SMITH: Couldn't you identify
17 what you are taking these two pages from?
18 MR. HOWELL: I'd be happy to. I've handed
19 Mr. Elder page 30 of 33 of a document entitled "1995
20 U S WEST AT and Bellcore Project Charges" which the
21 Company provided in response to Staff Audit Request 194.
22 Q BY MR. HOWELL: Mr. Elder, again at the
23 project that we had marked 5W1100, can you read for the
24 Commission the percentage of Title 61/62 allocation?
25 A I can read the percentage that's there, but
3803
CSB REPORTING ELDER (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 there's only a single percentage and it says Title 61/62,
2 so I don't know whether it's a 61 percent or a 62
3 percent. I can read the percentage, but --
4 Q What is the percentage?
5 A The percentage is 64.5417.
6 Q Thank you. Mr. Elder, can you explain to
7 the Commission once the projects or how did the projects
8 receive charges to account code numbers or how are they
9 assigned to accounts?
10 A I don't know. That was something that
11 maybe Ms. Barrington could have answered. I start off
12 with the dollars once they're on the books, so I'm
13 assuming that proper accounting principles have occurred
14 up to that point in time.
15 Q Is it part of your responsibilities that
16 once the account codes are assigned, then they are
17 allocated to cost pools such as on page 3 of Exhibit 162?
18 A Once they are assigned to the cost pools in
19 the cost manual?
20 Q Correct.
21 A What was the question?
22 Q My question is once the account number has
23 been assigned to a project, does it then automatically
24 flow through to the cost pools as indicated on page 3 of
25 162?
3804
CSB REPORTING ELDER (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 A Let me answer it this way.
2 Q Please.
3 A All expenses of the firm and investments
4 that are recorded in either the USOA or within our
5 functional accounting database, which is almost like a
6 subaccount of some of the USOAs, that is my starting
7 point, so when you're talking about a project, however
8 that project gets booked to any of those particular cost
9 pools, that is my starting point.
10 Q Could you turn to page 28 of your rebuttal
11 testimony?
12 A I'm there.
13 Q On the top or at the top of that page, you
14 take issue with Mr. Lansing's use of a composite
15 intrastate factor and you say the appropriate factor on,
16 for instance, line 11 is 75 percent intrastate. Can you
17 explain how you calculated the 75 percent intrastate?
18 A Most telephone equipment, when I'm talking
19 about coin, gets the basic allocation factor, which by
20 definition is 25 percent interstate and 75 intrastate.
21 Q So the 75 percent is merely the remainder
22 after you take the 25 percent interstate?
23 A To obtain the intrastate amount, that's
24 correct.
25 (Documents being distributed.)
3805
CSB REPORTING ELDER (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 Q BY MR. HOWELL: Mr. Elder, you've been
2 handed what's been marked Staff Exhibit No. 182 which is
3 the Company's response to Staff Audit Request 6 and
4 purports to be a detailed investment report. Do you
5 recognize those documents after the first page?
6 A I recognize portions of these documents,
7 but I believe these are documents that probably
8 Ms. Wright is probably more familiar with than I am.
9 Q Let me ask you a question about page 2
10 of 9. If you can't answer it, then we'll save it for
11 Ms. Wright. If you look at account 2311, station
12 apparatus, under column D --
13 A Yes.
14 Q -- intrastate operations?
15 A Yes.
16 Q How is it possible to have a negative
17 account balance in that account?
18 A I don't know. If you're looking at account
19 balances, I certainly would ask Ms. Wright on that.
20 Q All right. Are you familiar with
21 intrastate separations factors?
22 A Not in the sense that I'm thinking of it of
23 intrastate. I normally think of separations factors as
24 being -- intrastate/interstate factors as being a dual
25 term.
3806
CSB REPORTING ELDER (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 Q Well, if we were to look at, for instance,
2 account 2351, public telephone terminal equipment, isn't
3 the figure in the far right-hand column a separations
4 factor?
5 A I don't know. Like I said, I'm not totally
6 familiar with these documents. That factor is certainly
7 the factor that is different -- the 68 percent that I
8 quoted in my testimony Mr. Lansing used is different than
9 the 75 that I'm using, so like I said, I'm not that
10 familiar with all the columns on this document on how it
11 was developed.
12 In fact, if you look at the top of the
13 column, I can look at it from a mathematical attribute.
14 On that particular column, the row that we were looking
15 at, the public telephone equipment, it starts off with a
16 number in the far left that appears to be total and then
17 it's got a year to date that's dereg which would be the
18 Part 64. There's also a column that is in column C which
19 gives an interstate piece and then an intrastate piece
20 and then there's a mathematical division, just looking at
21 this, of how that 68 percent is being derived.
22 The 68 percent is different from the 75
23 percent that I'm talking about because this is total
24 station apparatus. Coin is only a portion of that, so
25 the 68 percent that's being developed on this worksheet
3807
CSB REPORTING ELDER (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 is a composite number and is not in fact an individual
2 factor that would be used in Part 36 for coin.
3 Q Well, doesn't that explain partly, then,
4 the difference between your use of the 75 percent
5 intrastate factor and the factors Mr. Lansing uses which
6 you address on page 28 of your rebuttal?
7 A I would say that it appears to be that this
8 is the source of the data that Mr. Lansing may have used
9 for that 68 percent since the two match. The concern
10 that I have in my testimony is still valid in the fact
11 that coin has a 75 percent allocation. He is really
12 using what I talked about earlier today that I've
13 addressed in my testimony, a composite allocator, so he's
14 using a composite allocator here as opposed to an account
15 specific allocator to the interstate.
16 Q Well, on page 28, you say that he's using
17 an inappropriate jurisdictional separations factor.
18 Could you read the request on the front cover of that
19 document?
20 A Okay.
21 Q Could you read it out loud, please?
22 A The request is "What is the
23 inter/intrastate separations factor related to each
24 account in the trial balance from Request No. 5.
25 Response: See attachment A for the detail report for
3808
CSB REPORTING ELDER (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 Idaho-South for 1995, which provides the intrastate
2 percents for the accounts requested." And I don't know
3 what the Request No. 5 was, but, again, if this is in
4 concert with that particular request, the response is in
5 fact responsive to that request. It's just not at the
6 detailed amount of where Part 36 is allocating. That's
7 the whole point here that I am saying.
8 Q Do you have in your possession what the
9 actual jurisdictional separations allocation factors are?
10 A Not in my possession, no.
11 Q Where would those or where would that data
12 be maintained?
13 A I believe that we can probably get ahold of
14 a lot of those separations Part 36 factors from either
15 our group in Denver or Omaha. I specifically work
16 closely with some of those people up on 15 and we should
17 be able to get those factors for you.
18 Q During 1995, how many audits did Coopers &
19 Lybrand conduct for U S WEST?
20 A I don't know.
21 Q Didn't Coopers & Lybrand conduct an audit
22 of the Company's cost allocation manual?
23 A That is true, but you asked how many audits
24 did Coopers do of U S WEST. I don't know outside of my
25 own involvement with Coopers with CAAS and some of the
3809
CSB REPORTING ELDER (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 Part 64 special studies. Beyond that, I don't know how
2 many audits Coopers has conducted because I'm not part of
3 those audits.
4 Q Now, earlier in this hearing I was asking,
5 and I think I may have even asked you, about audit
6 adjusting entries from the Coopers & Lybrand workpapers,
7 did you have an opportunity subsequent or at some time in
8 the last three weeks to review the Coopers & Lybrand
9 workpapers?
10 A I went over to the Coopers & Lybrand's
11 offices here in Boise shortly after you had asked that
12 question when I was here on my direct testimony and I
13 looked at their workpapers for this $9 million that you
14 had kind of hit me with on the stand there because I had
15 not heard of that as was associated with the CAAS audit,
16 and the audit papers that I reviewed that Coopers had in
17 their office were not audit papers that were associated
18 with CAAS.
19 Q Can you tell me how long the CAAS system
20 has been in operation?
21 A Let me answer it this way: CAAS is part of
22 U S WEST's embedded costs. It has changed names over the
23 years. I would say that the last major revision, and
24 when I say "major revision," when we went to the multiple
25 categories that we had, started back in approximately
3810
CSB REPORTING ELDER (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 1986, so it's over 10 years old now, but prior to that,
2 there were earlier, what I would call, embedded costs
3 that somewhat were part of the foundation of what CAAS is
4 built upon, so it's not like CAAS started on a particular
5 day, but if you asked me for that date, I would say that
6 probably in its general structure and format today it's
7 been around for about 10 years.
8 Q Does the CAAS system allocate the expenses
9 and revenues necessary to determine U S WEST's common
10 line revenue?
11 A That question is multiple in the fact that
12 you asked me does CAAS allocate the costs and expenses to
13 determine the U S WEST common line revenue and I'm
14 confused with that in the fact that I'm going to say no,
15 because that thing is a real mixture, I think, in your
16 question in the fact that we allocate costs, we allocate
17 expenses and in many instances we directly assign
18 revenues, so you have to answer each component of your
19 question on an individual basis.
20 Q Let me break it down, then. Is the CAAS
21 system used to determine common line revenues, and more
22 particularly a common line revenue pool?
23 A Well, right now I'm having a problem with
24 what common line is. Common line can have many
25 connotations and I'm not so certain right now that we're
3811
CSB REPORTING ELDER (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 both on the same wavelength of what common line is.
2 (Pause in proceedings.)
3 MR. HOWELL: No further questions.
4 COMMISSIONER SMITH: Mr. Harwood, do you
5 have questions?
6 MR. HARWOOD: I'm happy to inform the
7 Commission I do not.
8 COMMISSIONER SMITH: Do the Commissioners
9 have questions?
10 COMMISSIONER HANSEN: I have quite a few.
11 COMMISSIONER SMITH: Are you sure?
12 COMMISSIONER HANSEN: I have no questions.
13 COMMISSIONER NELSON: I'm a tax
14 accountant. I don't have any questions.
15 COMMISSIONER SMITH: I just have one. Do
16 you have questions?
17 COMMISSIONER HANSEN: No.
18
19 EXAMINATION
20
21 BY COMMISSIONER SMITH:
22 Q Mr. Elder, it appears that you've been
23 doing this for quite some time.
24 A Yes.
25 Q And that you may even remember back to the
3812
CSB REPORTING ELDER (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 FCC when it started its Docket 80-286?
2 A That number vaguely sounds familiar, but
3 I'm not sure if I can put a name with it.
4 Q I think it's the docket that brought us the
5 subscriber line charge and the 25 percent allocation to
6 the interstate, and in that docket, I remember the
7 arguments and, in fact, I have a button that said SPF to
8 SLU by '92.
9 A I remember the term.
10 Q But as we all know, since we have 25
11 percent, the FCC didn't pick SLU, so I was thinking that
12 there probably must have been public policy reasons why a
13 regulatory agency would pick a fixed allocator like a
14 25 percent or a 15 percent as opposed to a usage
15 allocator. Do you have any thoughts on that?
16 A Let me go back to the SLU factor on the
17 interstate. Even though it's fixed at 25 percent, I
18 think it can be viewed that it's fixed at 25 percent and
19 never went to SLU, but I think to a certain extent
20 internally the way that the FCC approached their pricing,
21 they somewhat effectively did the same thing, because the
22 25 percent is not totally imposed upon, what I would
23 call, the toll services on the interstate side, which
24 there it's only the switched access.
25 If we're looking at intrastate, it's toll
3813
CSB REPORTING ELDER (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 plus switched accessed, so if we can kind of use toll as
2 global to mean switched access and toll, the 25 percent
3 that's allocated at the interstate really has two
4 components. There's the end user charge which is in fact
5 a flat charge and then there's the piece that's picked up
6 by the carrier through the carrier common line, so, in
7 essence, what the FCC did is they didn't reduce the 25
8 percent any further, but then they started collecting it
9 on two bases, and in many instances when you look at that
10 two-fold prong there, the equivalent to almost a SLU is
11 picked up in the carrier common line and the difference
12 between that and the 25 is being picked up by the end
13 user charge and it just didn't further shift more costs
14 back to the intrastate is what happened and if you carry
15 that and you ask me about my thoughts, that concept back
16 to the intrastate as far as the fixed allocator is
17 concerned there, when the Commission is looking at it on
18 an intrastate side, it really doesn't in my opinion make
19 sense to say, well, I'm going to have a fixed allocator,
20 whether that be 15 or whether that be 25, and I'm going
21 to bifurcate it and I'm going to impose a portion of this
22 based on SLU to the toll services and then I'll collect
23 that difference and I'll get that from the end user
24 charge similar to what's happening at the FCC.
25 It doesn't make sense, I think, because the
3814
CSB REPORTING ELDER (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 customer on the intrastate side is really effectively the
2 same customer and I think it produces much customer
3 confusion at that point in time, and so if you look at
4 even the 15 percent allocator that we presently have in
5 Idaho right now, moving to a SLU allocator would not make
6 sense then to say, well, let's just take the 15 percent
7 and we'll do the equivalent of SLU, keep it there, we'll
8 add a difference on as an intrastate end user charge, you
9 know, just move it over there.
10 The customer looks at it as an end user
11 charge, too, so if you're trying to mirror or at least
12 kind of picture what's happening with that 25 percent at
13 the interstate, it is the two components. Right now the
14 15 percent is the single component which is imposed upon
15 the toll and switched access.
16 Q So while the FCC had an intrastate
17 jurisdiction that it could shift costs to, the Idaho
18 Commission doesn't have anything it can shifts costs to.
19 A Well, I think that that's partially true in
20 what you're saying, but I think that the FCC while they
21 were -- there was a two-fold thing, I think, that
22 occurred with that 25 percent because if you were a
23 jurisdiction that had the old SPF, we were talking about
24 SPF to SLU, okay, so the old SPF, which was the
25 subscriber plant factor that used to allocate that local
3815
CSB REPORTING ELDER (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 loop to the interstate, if it was above 25 percent, and
2 we're really starting to talk some of this history here,
3 but there was a phase-down, if you were at 30 percent or
4 something like that, there was a phase-down that took you
5 from 30 to the 25, and what happened effectively there is
6 the FCC was placing revenue requirement shifts back to
7 the intrastate side.
8 As far as the end user charge, I'm not so
9 certain I would necessarily view the end user charge as
10 shifting that to the intrastate side. They're just
11 shifting the collection of it to the end user. Whether
12 or not the end user is an intrastate end user or an
13 interstate user, I mean, that could be debated, but, in
14 essence, they didn't really shifts costs. They just
15 shifted the recovery to that customer, but they did that
16 29 percent down to 25.
17 COMMISSIONER SMITH: Okay, thank you.
18 Ms. Hobson.
19 MS. HOBSON: I don't have any redirect.
20 COMMISSIONER SMITH: Okay, thank you,
21 Mr. Elder.
22 THE WITNESS: Thank you, and I have some
23 papers up here for you.
24 MR. HOWELL: Good.
25 (The witness left the stand.)
3816
CSB REPORTING ELDER (Com-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 MR. ALKE: If it makes any difference,
2 Madam Chair, I have no live rebuttal for Ms. Wright. All
3 we are going to do is put her up for cross-examination on
4 her rebuttal testimony.
5 COMMISSIONER SMITH: Let's go off the
6 record for a minute.
7 (Off the record discussion.)
8 COMMISSIONER SMITH: All right, let's go
9 back on the record.
10 MR. ALKE: U S WEST recalls Margie Wright.
11
12 MARGARET J. WRIGHT,
13 produced as a rebuttal witness at the instance of
14 U S WEST Communications, Inc., having been previously
15 duly sworn, was further examined and testified as
16 follows:
17
18 DIRECT EXAMINATION
19
20 BY MR. ALKE:
21 Q Ms. Wright, are you the same Margie Wright
22 who caused to be filed on January 28th, 1997, certain
23 rebuttal testimony consisting of 99 pages of testimony
24 together with Exhibits 43A through J?
25 A Yes.
3817
CSB REPORTING WRIGHT (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 Q If I were to ask you today under oath the
2 same questions as are set forth in that prefiled rebuttal
3 testimony, would your answers be the same save and except
4 for any changes or modifications that you need to make at
5 this time?
6 A Yes.
7 Q Are there any changes or modifications you
8 need to make at this time?
9 A Yes, I do have a few minor changes. On
10 page 16, line 7, after the words "$207 million," I would
11 like to include "over the last five years."
12 Q Are there any other changes you need to
13 make?
14 A Yes. On page 24, line 6, that should state
15 "using Staff separations." Page 29 --
16 COMMISSIONER SMITH: What was that?
17 THE WITNESS: I'm sorry, that is page 24,
18 line 6. In paren it says, "using Company separations."
19 That should say "using Staff separations." Page 29,
20 line 3, the number "1.89" should have a percentage after
21 it. Page 54, line 4, near the very end right before it
22 says "#185," there should be a period. Page 73, line 10,
23 I excluded -- at the end of "government," I dropped off
24 the phrase that should have said "therefore, all related
25 expenses should be assigned to Title 62 services."
3818
CSB REPORTING WRIGHT (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 Q BY MR. ALKE: Does that conclude your
2 changes?
3 A Yes, it does.
4 Q Ms. Wright, would you please examine what
5 has been marked as U S WEST proposed Exhibit No. 66 and
6 formally identify and describe that document for the
7 record?
8 A This is the rolldown of the revenue
9 requirement with a summary page and detail of all of the
10 expenses and rate base items.
11 Q Okay, and why don't you just explain
12 briefly the minor changes between proposed Exhibit No. 66
13 and the last revised rolldown which you submitted into
14 evidence when you were on the stand the first time.
15 A Yes. My last exhibit had a revenue
16 requirement of 15,509,000. I made a minor $13,000
17 adjustment and that was Part 64 adjustments that Maggie
18 Barrington agreed that should be removed and so that
19 reduced the revenue requirement by 13,000. I have also
20 added a deferred tax adjustment to my delayed retirement
21 adjustment that increases the revenue requirement by
22 42,000 and, therefore, brings the revenue requirement now
23 to 15,538,000.
24 MR. ALKE: Madam Chair, at this time I
25 offer Ms. Wright for cross-examination and I move the
3819
CSB REPORTING WRIGHT (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 introduction of Exhibits 43A through J together with
2 Exhibit 66.
3 COMMISSIONER SMITH: If there is no
4 objection, it is so ordered.
5 (U S WEST Communications, Inc. Exhibit
6 Nos. 43A-J and 66 were admitted into evidence.)
7 (The following prefiled rebuttal
8 testimony of Ms. Margaret Wright is spread upon the
9 record.)
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
3820
CSB REPORTING WRIGHT (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 SECTION 1: INTRODUCTION AND PURPOSE
2
3 Q PLEASE STATE YOUR NAME, ADDRESS AND
4 POSITION WITH U S WEST COMMUNICATIONS, INC.
5 A My name is Margaret J. Wright. My title is
6 State Finance Director at U S WEST Communications, Inc.
7 ("USWC"). My address is 1600 Seventh Avenue, Room 3002,
8 Seattle, Washington 98191.
9
10 Q ARE YOU THE SAME MARGARET WRIGHT THAT
11 SUBMITTED DIRECT TESTIMONY IN THIS DOCKET?
12 A Yes, I am. I submitted Direct Testimony
13 dated June 28, 1996. My position and responsibilities at
14 USWC and my educational and professional experience were
15 described in that testimony.
16
17 Q PLEASE STATE THE PURPOSE OF THIS REBUTTAL
18 TESTIMONY.
19 A The purpose is to respond to the testimony
20 of the Idaho Public Utilities Commission ("IPUC") Staff
21 proposed Title 61 revenue requirement to reduce rates by
22 $28 million by presenting evidence refuting the Staff's
23 allocations to Title 61.
24
25
3821
MARGARET J. WRIGHT, REB 1
U S WEST COMMUNICATIONS, INC.
1 Q PLEASE IDENTIFY THE USWC WITNESSES.
2 A The following lists the issues and the USWC
3 witnesses that will testify.
4
5
Issue USWC Witnesses
6 Policy Wozniak
Rate Design Owen
7 Quality of Service Souba
Adjustment for EAS order Wright
8 Cost allocations Elder/Wright/Ilett
Plummer/Barrington
9 Plant in service adjustments Plummer/Elder/Wright
Pension Asset Wright
10 State Effective Income Tax Rate Wright
Gross up factor Wright
11 SFAS 106 Wright
Curtailment Loss Wright
12 Compensated Absences Wright
Restructuring/Reengineering Inouye/Plummer/Jones
13 Employee Reductions Inouye
Excessive Lease Charges Wright
14 Telephone Concessions Wright
President's Club Wright
15 Chart of Accounts Wright
Documents of Originating Entry Wright
16 Advertising Expenses Wright
Affiliated Interest Expenses Wright/Barrington
17 Compensation Issues Wright/Gobat
Depreciation Easton/Wright
18 Rate of Return Cummings
Capital Structure Cummings
19 Yellow Pages Koehler-Christensen
20
21
22
23
24
25
3822
MARGARET J. WRIGHT, REB 2
U S WEST COMMUNICATIONS, INC.
1 Q HAVE YOU REVISED THE COMPANY'S REVENUE
2 REQUIREMENT?
3 A Yes, I have. The revised revenue
4 requirement is $28.3 million. Revisions were made to
5 incorporate the IPUC order in Case No. USW-S-96-4 dated
6 November 1, 1996 for the implementation of three EAS
7 regions and other miscellaneous adjustments. This
8 revenue requirement is based on the Company's test year
9 construction. See exhibit 43A.
10 Q PLEASE DESCRIBE HOW YOUR TESTIMONY IS
11 ORGANIZED.
12 A Section 1 is this introduction and
13 statement of purpose. Section 2 gives an overview of
14 USWC's response. Section 3 describes how the Company has
15 constructed its Title 61 revenue requirement through the
16 Part 32, Part 36, Part 64 processes and the Cost
17 Accounting Allocation System (CAAS). This is contrasted
18 with the Staff approach. Section 4 discusses USWC's
19 allocation methodologies versus the Staff's allocation
20 methodologies. Section 5 presents cash flow. Section 6
21 addresses specific Staff and USWC proposed allocations,
22 adjustments and imputations.
23 SECTION 2: OVERVIEW OF USWC'S RESPONSE
24
25 Q PLEASE SUMMARIZE STAFF'S CASE.
3823
MARGARET J. WRIGHT, REB 3
U S WEST COMMUNICATIONS, INC.
1 A The Staff has developed a revenue
2 requirement that includes a large directory imputation to
3 Title 61, depreciation rates which cost back to 1988
4 prescribed lives, and
5
6 /
7
8 /
9
10 /
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
3824
MARGARET J. WRIGHT, REB 3A
U S WEST COMMUNICATIONS, INC.
1 reflects penalties for quality of service levels.
2 Staff's revenue requirement is based upon so-called
3 "direct" assignment of large amounts of Title 61 expenses
4 and investment to Title 62.
5 Q WHAT ISSUES SHOULD BE DECIDED?
6 A The major issues to decide in this case are
7 allocations between Title 61 and Title 62, capital
8 recovery, cost of capital, and whether directory
9 imputations are appropriate to Title 61 services. USWC
10 believes quality of service issues are not appropriate in
11 this docket.
12 Q PLEASE SUMMARIZE COMPANY'S CASE.
13 A The Company will show that the Staff does
14 not have a systematic approach to cost allocation which
15 produces reasonable results, that the directory
16 imputation is not appropriate in today's competitive
17 environment, that taking depreciation rates back to 1988
18 prescribed lives is totally inappropriate and that the
19 proposed penalties for quality of service levels is not
20 justified based on the Company's actual service levels.
21
22 SECTION 3: TEST YEAR
23
24 Q PLEASE DESCRIBE HOW THE USWC HAS CALCULATED
25 ITS TITLE 61 REVENUE REQUIREMENT.
3825
MARGARET J. WRIGHT, REB 4
U S WEST COMMUNICATIONS, INC.
1 A USWC has followed Part 32 (Federal
2 Communication Commission [FCC] Uniform System of
3 Accounts) accounting as approved by this Commission,
4 Part 36 (FCC
5
6 /
7
8 /
9
10 /
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
3826
MARGARET J. WRIGHT, REB 4A
U S WEST COMMUNICATIONS, INC.
1 separation process between interstate and intrastate) and
2 Part 64 (FCC process to separate out FCC deregulated
3 products and services prior to the separation process) to
4 develop its Title 61 revenue requirement. USWC starts
5 with its southern Idaho intrastate results of operations
6 for the year 1995 from the separations process, including
7 the removal of FCC deregulated products and services and
8 then allocates those results between Title 61 and Title
9 62 through CAAS.
10 Q HAS THE STAFF CALCULATED ITS TITLE 61
11 REVENUE REQUIREMENT IN THE SAME MANNER?
12 A No. There is significant disagreement
13 between the USWC and the Staff on the test year
14 intrastate results of operations, FCC deregulated results
15 of operations, and Title 61 versus Title 62 results of
16 operation. The Staff frequently departs from Part 36 and
17 Part 64 to develop their Title 61 revenue requirement.
18 Q PLEASE DEFINE THE FCC PART 64 RULES AS
19 ORDERED IN THE FCC'S CC DOCKET NO. 86-111.
20 A FCC Part 64 rules are designed specifically
21 for the apportionment and transfer of costs between
22 regulated and unregulated activities.
23 Q PLEASE DISCUSS THE COMPANY'S IMPLEMENTATION
24 AND ADHERENCE TO THE FCC PART 64 RULES.
25 A In response to the FCC CC Docket No.
3827
MARGARET J. WRIGHT, REB 5
U S WEST COMMUNICATIONS, INC.
1 86-111, USWC filed its Cost Allocation Manual (CAM) on
2 September 1, 1987 with the FCC and subsequently gained
3 approval of that document. The CAM is updated quarterly.
4 Furthermore, the manual describes
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3828
MARGARET J. WRIGHT, REB 5A
U S WEST COMMUNICATIONS, INC.
1 nonregulated activities, sets forth corporate affiliates,
2 provides comments concerning transactions with
3 affiliates, and prescribes the basis by which USWC
4 accounts for transactions with affiliates.
5 Q WHAT DOES THE CAM STATE WITH RESPECT TO
6 AFFILIATE TRANSACTIONS THAT INVOLVE THE PROVISION OF
7 SERVICES TO THE REGULATED UTILITY BY THE UNREGULATED
8 AFFILIATE?
9 A The CAM states that in the case of
10 services, the affiliate transaction should be recorded in
11 the carrier's accounts at the "prevailing price held out
12 to the general public" ("the prevailing company price"),
13 if available, or, if no prevailing company price is
14 available, the cost of the service should be allocated
15 between the Regulated carrier and the Nonregulated
16 affiliate according to the fully distributed cost
17 allocation standards. Under either condition, the
18 prevailing company price or the fully distributed cost
19 method, the CAM, which is fully implemented and adhered
20 to by USWC, addresses the important cross-subsidy issue.
21 The Part 64 process disincents the regulated utility from
22 accepting inappropriate charges from the unregulated
23 affiliates because the regulated utility can only record
24 the unregulated firm's "prevailing company price" or
25 "fully distributed cost" on its regulated books of
3829
MARGARET J. WRIGHT, REB 6
U S WEST COMMUNICATIONS, INC.
1 account. More importantly, the process prevents the
2 regulated utility from passing inappropriate affiliated
3 charges on to the ratepayer.
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3830
MARGARET J. WRIGHT, REB 6A
U S WEST COMMUNICATIONS, INC.
1 Furthermore, the CAM calls for an annual audit, by
2 an outside auditor, of affiliated accounting and pricing
3 methods where transactions have occurred between the
4 unregulated affiliate and the regulated utility. The
5 1995 annual audit, the most recent audit, was performed
6 by Coopers and Lybrand, in conjunction with USWC and its
7 affiliates, and was found to be in compliance with the
8 CAM.
9 Q IS IT POSSIBLE THAT USWC COULD MAKE AN
10 ERROR ON CODING AN INDIVIDUAL TRANSACTION IN ITS PART 64
11 PROCESS?
12 A Yes. There is always the possibility of
13 human error, however, these errors can be made both
14 directions which could be to the benefit of ratepayers or
15 to the detriment of ratepayers. As stated above, the
16 external audits required by the FCC confirm that the
17 Company is in overall compliance with Part 64 FCC
18 allocation requirements.
19 Q HAS USWC AGREED TO CORRECT ANY SPECIFIC
20 PART 64 AMOUNT NOT PROPERLY DEDUCTED FROM THE SOUTHERN
21 IDAHO INTRASTATE RESULTS OPERATIONS AND FROM TITLE 61
22 IDENTIFIED BY THE STAFF?
23 A Yes. The USWC has agreed to correct any
24 specific Part 64 amount identified by the Staff that has
25 not been properly deducted from the southern Idaho
3831
MARGARET J. WRIGHT, REB 7
U S WEST COMMUNICATIONS, INC.
1 intrastate results of operations and from Title 61.
2 Staff has only identified one specific item for Advanced
3 Technologies (AT) that they claim was not properly
4 identified as Part 64. This AT Project No. 10465TP is a
5 project for a relationship marketing trial. Relationship
6 marketing can apply to any product and therefore was
7 classified as a common cost
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3832
MARGARET J. WRIGHT, REB 7A
U S WEST COMMUNICATIONS, INC.
1 allocated to deregulated products (Part 64), interstate
2 (Part 36) and intrastate results of operations. It is
3 not a purely Part 64 expense.
4
5 SECTION 4: ALLOCATIONS
6 Q PLEASE DESCRIBE HOW USWC HAS CALCULATED ITS
7 TITLE 61 REVENUE REQUIREMENT.
8 A As stated above, USWC starts with its
9 southern Idaho intrastate results of operations and then
10 allocates those results between Title 61 and Title 62
11 using CAAS. Mr. Dallas Elder describes this process in
12 detail in his direct and rebuttal testimony.
13 Q DOES CAAS ADHERE TO COST ACCOUNTING
14 PRINCIPLES SIMILAR TO THOSE REQUIRED BY THE FCC PART 64
15 RULES?
16 A Yes. CAAS follows a Accounting Segregation
17 Manual which has cost accounting principles similar to
18 the FCC Cost Accounting Manual. It is filed annually in
19 three USWC states and is audited annually by an external
20 auditor as a requirement of the Colorado Commission.
21 Q WHAT ARE THE STAFF'S CRITICISMS OF USWC'S
22 ALLOCATIONS BETWEEN TITLE 61 AND TITLE 62?
23 A The Staff states in their testimony that
24 USWC should directly assign more investment and expenses
25 between Title 61 and Title 62.
3833
MARGARET J. WRIGHT, REB 8
U S WEST COMMUNICATIONS, INC.
1 Q DOES USWC AGREE?
2 A No. The current regulatory separation
3 processes (Part 64 and Part 36) do not allow direct
4 assignment to Title 61 and Title 62. First of all, plant
5 in service investment is directly assigned to state but
6 must be separated between intrastate and interstate
7 through the Part 36 separation process after Part 64
8 investments have been removed. Second USWC assigns
9 approximately 62% of its expenses directly to state and
10 then allocates the rest of its expenses through
11 headquarters prorates or centralized prorates. These
12 expenses must also be separated between intrastate and
13 interstate through the Part 36 separation process after
14 Part 64 expenses have been removed.
15 Q WHY DOES USWC ALLOCATE RATHER THAN DIRECTLY
16 ASSIGN APPROXIMATELY 38% OF ITS EXPENSES TO SPECIFIC
17 STATES?
18 A USWC operates on a multi-jurisdictional
19 basis for most of its headquarters operations in order to
20 achieve operational efficiencies. Direct assignments are
21 made to a state for investments that reside in that
22 state. Since USWC is a capital intensive company many
23 expenses directly relate to investment i.e. network
24 operations, maintenance, depreciation, property taxes,
25 etc. The headquarters-type expenses are allocated to
3834
MARGARET J. WRIGHT, REB 9
U S WEST COMMUNICATIONS, INC.
1 southern Idaho based on its size to the rest of USWC.
2 Approximately 2.75% of USWC headquarters-type of expenses
3 are allocated to southern Idaho. To keep this in
4 perspective the following is a chart showing how much of
5 USWC's 1995 headquarters type expenses are allocated to
6 southern Idaho total state, FCC deregulated, intrastate,
7 and Title 61 on an MR basis (JR results were not
8 available for this breakdown):
9
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16
17
18
19
20
21
22
23
24
25
3835
MARGARET J. WRIGHT, REB 9A
U S WEST COMMUNICATIONS, INC.
1 Year 1995 Total Direct Allocated
2 $millions Expenses Expenses Expenses
3 Total USWC $ 7,882 $ 5,227 67% $ 2,605 33%
4 Southern Idaho $ 196 $ 122 62% $ 74 38%
5 FCC Part 64 $ 9 $ 5 56% $ 4 44%
6 Intrastate $ 138 $ 84 61% $ 54 39%
7 Title 61 $ 68
8 Title 61 as a percent
9 of Total USWC 0.9%
10 Q ARE THERE ANY REFERENCES IN ACCOUNTING AND
11 FINANCIAL LITERATURE THAT DISCUSS ALLOCATIONS OF
12 HEADQUARTERS TYPE EXPENSES?
13 A Yes. The use of size-based allocation
14 factors is well recognized with American industry and in
15 the academic literature. The basic processes and
16 methodologies used with American business to distribute
17 costs clearly indicate that the use of a proportional
18 cost allocation method is necessary and appropriate.
19 Several excerpts are provided below indicating the
20 comments of the Securities and Exchange Commission (SEC),
21 Cost Accounting Standards Board(CASB), and Federal
22 Communications Commission (FCC).
23 In Staff Accounting Bulletin No. 55 the SEC noted:
24
25 The staff expects any expenses clearly applicable
3836
MARGARET J. WRIGHT, REB 10
U S WEST COMMUNICATIONS, INC.
1 to the subsidiary to be reflected in its income
statement. However, the staff understands that in
2 some situations a reasonable method of allocating
common expenses to the subsidiary (e.g.,
3 incremental
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25
3837
MARGARET J. WRIGHT, REB 10A
U S WEST COMMUNICATIONS, INC.
1 or proportional cost allocation) must
be chosen because specific identification of
2 expenses is not practicable.
3
4 This statement clearly recognizes that, when
5 allocating common expenses (e.g., parent company costs),
6 the use of an allocator that is predicated on a
7 proportional relationship between and among costs, cost
8 causation, beneficiaries, and benefits. Thus, under SEC
9 reporting requirements, American industry is compelled to
10 use such factors that reasonably reflect the relationship
11 between entities, cost causation, and benefits and
12 satisfy financial and disclosure needs while maintaining
13 administrative efficiency.
14
15 The CASB has also commented on this issue in Standard
16 403:
17 Where residual expenses are required to be
allocated pursuant to Section 403.40(c) (2), the
18 three factor formula described below must be used.
This formula considered is to result in
19 appropriate allocation of the residual expenses of
home offices. It takes into account three broad
20 areas of management concern: the employees of the
organization, the business volume, and the capital
21 invested in the organization. The percentage of
the residual expenses to be allocated to any
22 segment pursuant to the three-factor formula is
the arithmetical average of the following three
23 percentages for the period:
24 (i) The percentage of the segment's total
payroll dollars to the total payroll
25 dollars of all segments.
3838
MARGARET J. WRIGHT, REB 11
U S WEST COMMUNICATIONS, INC.
1 (ii) The percentage of the segment's
operating revenue to the total operating
2 revenue to the total operating revenue of
all segments. For this purpose, the
3 operating revenue of all segment shall
include amounts charge to other segments
4
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25
3839
MARGARET J. WRIGHT, REB 11A
U S WEST COMMUNICATIONS, INC.
1 and shall be reduced by other segments for
purchases.
2
(iii) The percentage of the average net
3 book value of the sum of the segments'
tangible capital assets plus inventories to
4 the total average net book value of such
assets of all segments. Property held
5 primarily for leasing to others shall be
excluded from the computation. The average
6 net book value shall be the average of the
net book value at the beginning of the
7 organization's fiscal year and the net book
value at the end of the year.
8
9 The CASB has also applied this approach and theory in its
10 other standards.
11 In Docket No. 86-111, FCC recognized that for many
12 cost categories, no cost-causation allocation factor
13 would be available. In those cases, it was determined
14 that an overall allocation factor must be used even
15 though no specific relationship could be demonstrated.
16 The FCC commented on this matter as follows:
17 156. C. General allocator. We have decided to
depart from the general allocator proposed in the
18 NPRM, and to adopt a single-factor allocator based
on total company expense. The allocator is to be
19 computed by using the ratio of all expenses
directly assigned or attributed to regulated and
20 nonregulated activities, and applying that ratio
to residual cost. We believe that this general
21 allocator is responsive to a majority of the
comments we have received on this issue, and will
22 provide a reasonable method for allocating
residual costs.
23
24 Thus, the major authoritative bodies referenced
25 above all recognize that, when direct assignment is not
3840
MARGARET J. WRIGHT, REB 12
U S WEST COMMUNICATIONS, INC.
1 possible, there will not be any more directly
2 identifiable basis for allocation than a size-based
3 factor.
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3841
MARGARET J. WRIGHT, REB 12A
U S WEST COMMUNICATIONS, INC.
1 Q HAS THE STAFF DEVELOPED A COMPREHENSIVE
2 ALLOCATION SYSTEM TO ALLOCATE EXPENSES BETWEEN TITLE 61
3 AND TITLE 62?
4 A No. The Staff has not developed a
5 comprehensive allocation system according to any cost
6 accounting system that I am aware of in my years of
7 study. In comparison CAAS has been in existence for 10
8 years at USWC to determine costs on a fully embedded
9 basis at a product specific level. CAAS was developed at
10 a cost of over $15 million and has been thoroughly
11 reviewed by external auditors.
12 Q DOES THE STAFF HAVE A SYSTEMATIC APPROACH
13 TO COST ALLOCATIONS?
14 A No. Not only did the Staff selectively
15 review transactions but they arbitrarily used limited
16 information to make broad scale allocations away from
17 Title 61 which are not based upon any meaningful analyses
18 of USWC's expenses as the testimonies of Mr. Elder,
19 Ms. Barrington and Mr. Plummer point out. Staff's
20 allocations eliminate Title 61 costs as well as upset the
21 remaining allocation mix.
22 Q WHAT KIND OF RATES DOES STAFF'S ARBITRARY
23 ALLOCATIONS PRODUCE?
24 A The Staff's revenue requirement, developed
25 using its arbitrary cost allocations combined with their
3842
MARGARET J. WRIGHT, REB 13
U S WEST COMMUNICATIONS, INC.
1 rate design proposal, produces a 1FR rate of $6.43 and a
2 1FB rate of $16.66 both lower than any 1FR or 1FB
3 (unlimited local usage) rate in the country. If all of
4 their proposed revenue reduction were applied to the 1FR
5 rate it would produce a 1FR rate of $3.33 which is
6 incomprehensible. The $6.43 1FR rate would
7
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3843
MARGARET J. WRIGHT, REB 13A
U S WEST COMMUNICATIONS, INC.
1 bring the 1FR rate below 1958 levels and be 36% lower
2 that the lowest 1FR rate in the country today. The 1958
3 1FR in southern Idaho was set at $7.40. If you adjust
4 for inflation an equivalent 1FR in 1995 dollars would be
5 $39.08. The rate requested by the USWC in this case is
6 well below this adjusted rate. See exhibits 43B and 43C.
7 It is obvious that Staff's arbitrary cost allocations are
8 unreasonable.
9
10 SECTION 5: CASH FLOW ANALYSIS
11
12 Q WHY ARE YOU INTRODUCING CASH FLOW ANALYSIS?
13 A Cash flow is becoming increasingly
14 important, not only to utilities, but to all industries
15 as a measure of financial health and viability. A
16 company can be reporting positive net income, yet be in
17 dire financial straits because of inadequate cash flow.
18 The primary generator of cash for USWC is revenue. The
19 cash flow analysis shows the degradation in cash flow to
20 intrastate Idaho operations that would result if the
21 Commission were to adopt the Staff recommendations.
22 Q PLEASE EXPLAIN YOUR CASH FLOW STATEMENT.
23 A I have prepared Exhibit 43D, which is a
24 statement of simplified cash flow on Idaho intrastate
25 operations. The Company's primary source of cash is the
3844
MARGARET J. WRIGHT, REB 14
U S WEST COMMUNICATIONS, INC.
1 amount of cash left over from its revenues after paying
2 for its operating expenses, which are shown on the line
3 entitled Net Operating Income. To this I have added back
4 depreciation, which is the major operational expense that
5 does not represent current cash expenditures.
6
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13
14
15
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3845
MARGARET J. WRIGHT, REB 14A
U S WEST COMMUNICATIONS, INC.
1 From that I have deducted major items that must be
2 satisfied from the remaining cash. They include the cash
3 portion of income taxes, construction expenditures,
4 interest expense, and dividends. The bottom line is a
5 representation of the net cash flow after these
6 expenditures.
7 Q YOU SAID "REPRESENTATION," WHAT DO YOU
8 MEAN?
9 A This is a simplified cash flow. There are
10 many small differences between this representation and a
11 complete and detailed statement of cash flows; most of
12 them having to do with timing issues. However, this
13 simplified format is easier to understand and provides an
14 adequate representation of the major cash flow elements.
15 Q WHAT DO THESE RESULTS SHOW?
16 A Idaho intrastate cash flows have been
17 negative for several years in large part because of large
18 capital expenditures made for growth in Idaho. From 1991
19 to 1995 construction expenditures have increased from
20 $26.6 million in 1991 and $38.5 million in 1992 to an
21 average of $47.4 million over the period of 1993 through
22 1995, or an average of $41.4 million per year over the
23 five year period. This has led to negative cash flow on
24 an intrastate basis in all years except 1991. The
25 majority of capital expenditures have been funded from
3846
MARGARET J. WRIGHT, REB 15
U S WEST COMMUNICATIONS, INC.
1 the cash flow generated in the state. At the same time,
2 the Company's intrastate operating cash flow has remained
3 essentially flat at approximately $70 million per year.
4 Essentially, declines in Net Operating Income have been
5 almost exactly offset by increases in depreciation
6 expense, yielding this flat operating cash flow.
7
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14
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3847
MARGARET J. WRIGHT, REB 15A
U S WEST COMMUNICATIONS, INC.
1 The net revenue impact that would be caused by
2 staff's proposal makes this cash flow trend dramatically
3 worse and threatens this funding source. For example,
4 the negative $7.1 million in intrastate cash flow in 1995
5 would be reduced to a negative $35.6 million if the
6 results of Staff's proposal was applied to 1995 net cash
7 flows; a fivefold decrease in cash flow. See Exhibit
8 43E.
9 Q WHAT CONCLUSION DO YOU DRAW FROM THIS
10 ANALYSIS?
11 A On an intrastate basis, the Company has
12 invested a total of $207 million over the last five years
13 and spends $30+ million per year maintaining and
14 operating its plant in Idaho. In order to continue to
15 invest in the Idaho operations, the Company must maintain
16 an adequate interest coverage. The most commonly cited
17 measure is times interest earned, or Net Operating Income
18 (pre-tax) divided by interest expense. This is the
19 commonly accepted measure of the amount that operating
20 income can decline and still cover interest charges.
21 Based on my Exhibit 43D, interest coverage for Idaho
22 intrastate has declined from 5.9 in 1991 to 3.5 in 1995.
23 Adoption of the Staff's proposal and its devastating
24 fivefold decrease in cash flow would reduce this coverage
25 to a negative 1.7 (see Exhibit 43E).
3848
MARGARET J. WRIGHT, REB 16
U S WEST COMMUNICATIONS, INC.
1 Q WHAT IS THE LIKELY EFFECT OF THIS TYPE OF
2 REVENUE REDUCTION ON THE COMPANY'S ABILITY TO ATTRACT
3 CAPITAL?
4 A It would limit the Company's ability to
5 attract the capital necessary to invest in expansion and
6 replacement of the telephone network. Since cash flow
7 and interest coverage from Idaho operations would
8 dramatically decline, the Company would be
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22
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24
25
3849
MARGARET J. WRIGHT, REB 16A
U S WEST COMMUNICATIONS, INC.
1 significantly restricted in its ability to reinvest cash
2 into the Idaho operations and cover its fixed charges.
3
4 SECTION 6: TEST YEAR ADJUSTMENTS AND ALLOCATIONS
5
6 Q PLEASE DESCRIBE THE PURPOSE OF THIS
7 SECTION.
8 A In this section I provide evidence as to
9 the test year adjustments and allocations Staff and USWC
10 do not agree on. I hope to provide succinct statements
11 of the issues placed before the Commission and the
12 evidence USWC provides.
13
14 Q HOW IS THIS SECTION ORGANIZED?
15 A I have organized this section on the same
16 basis as the IPUC Staff witnesses have presented their
17 adjustments or allocations. The following is a list of
18 issues that I will be addressing in this section.
19
20
21 Bill Eastlake
Adjustment for EAS order
22
Syd Lansing
23 Depreciation
TECH PLUS and TECH II
24 General Ledger versus Subsidiary records
Error factor for retirements
25
3850
MARGARET J. WRIGHT, REB 17
U S WEST COMMUNICATIONS, INC.
1 State Effective Income Tax Rate
Gross up factor
2 Miscellaneous Revenues
3 Kent Schnieder
Pension Asset
4 SFAS 106
Curtailment Loss
5 Compensated Absences
Excessive Lease Charges
6
Kathy Stockton
7 Telephone Concessions
President's Club
8 Chart of Accounts
Documents of Originating Entry
9 Advertising Expenses
10 MaDonna Faunce
Affiliated Interest Expenses
11 Business Resources
Advanced Technologies
12 Management Information Services
USW Marketing Group
13 USW Communications Services
USW Federal Services
14 U S WEST, Inc.
Compensation Issues
15
16 ADJUSTMENT FOR EAS ORDER NO. 26672
17
18 Q ARE THE ADJUSTMENTS FOR THE APPROVAL OF
19 THREE EXTENDED AREA SERVICE AREAS (EAS) IN CASE NO.
20 USW-S-94-4, ORDER NO. 26672 A REVISION TO THE TITLE 61
21 REVENUE REQUIREMENT AS PRESENTED IN YOUR DIRECT
22 TESTIMONY?
23
24
25
3851
MARGARET J. WRIGHT, REB 18
U S WEST COMMUNICATIONS, INC.
1 A Yes. The order was issued on November 1,
2 1996 by the IPUC which was well after I had filed my
3 direct testimony in this case.
4 Q PLEASE DESCRIBE THE COMPANY'S PROFORMA
5 ADJUSTMENT FOR EAS.
6 A The USWC has made two proforma adjustments.
7 Adjustment No. 27 includes an increase in local service
8 revenues as ordered in the EAS order, as well as the
9 effect on the intrastate separation factors of the
10 increased usage levels due to changes in calling from
11 toll to local and the resulting call stimulation.
12 Separation impacts were calculated using the same
13 processes used to determine the actual
14 interstate/intrastate cost separation. The resulting
15 amounts were then processed through CAAS to determine the
16 Title 61 portion.
17 Adjustment No. 28 includes increases in expenses
18 and investment necessary to support the generation of EAS
19 revenues. USWC included the offset of $1.5 million from
20 Revenue Sharing funds, provided in the order, in
21 calculating the amount of investment required to provide
22 EAS facilities in 1997. The impact on depreciation
23 expense, maintenance costs and taxes were also included
24 in the adjustment. The resulting intrastate amounts were
25 allocated to Title 61 based on CAAS factors. Details of
3852
MARGARET J. WRIGHT, REB 19
U S WEST COMMUNICATIONS, INC.
1 these adjustments and supporting documentation are
2 included in my workpapers.
3 Q WHAT IS THE EFFECT ON THE TITLE 61 REVENUE
4 REQUIREMENT OF INCLUDING THE IMPLEMENTATION OF THE
5 APPROVED EAS REGIONS?
6
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3853
MARGARET J. WRIGHT, REB 19A
U S WEST COMMUNICATIONS, INC.
1 A These adjustments have an effect of
2 decreasing the Title 61 revenue requirement by
3 $5.4 million.
4 Q WHY DOES THE EAS IMPLEMENTATION CAUSE A
5 DECREASE TO THE TITLE 61 REVENUE REQUIREMENT?
6 A The effect of the Stipulation and
7 Settlement between the Staff and USWC for implementing
8 EAS regions includes an increase to Title 61 local
9 service net revenues of $10.2 million. Since the
10 additional EAS expense and investment and the changes in
11 allocations to Title 61 do not offset the new local
12 service revenues, there is a decrease in the revenue
13 requirement.
14 Q PLEASE SUMMARIZE THE STAFF'S TESTIMONY ON
15 THE EAS ORDER.
16 A The Staff has made two adjustments for the
17 implementation of EAS. First the Staff states that to
18 the extent the Company incurs investment costs above the
19 $1.5 million in Revenue Sharing funds, they are to be
20 included in the Company's rate base. Second, the Staff
21 allows $1.8 million of switching costs that shift to
22 local expenses associated with the change in calling from
23 toll to local and the resulting call stimulation. The
24 Staff has calculated these costs based on the Company's
25 TELRIC study.
3854
MARGARET J. WRIGHT, REB 20
U S WEST COMMUNICATIONS, INC.
1 Q DOES STAFF'S ADJUSTMENT FULLY CAPTURE THE
2 EFFECT OF IMPLEMENTING EAS?
3 A No. The Staff has made three major errors
4 in its calculations. First the Staff has omitted the
5 impact on Title 61 revenues worth approximately $10.2
6 million. Second
7
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20
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3855
MARGARET J. WRIGHT, REB 20A
U S WEST COMMUNICATIONS, INC.
1 the Staff has omitted the impact on the separation
2 process (Part 36) which results in costs shifting to
3 intrastate. Third the Staff has attempted to use a
4 pricing mechanism (TELRIC) to calculate costs. The use
5 of TELRIC is totally inappropriate in determining
6 embedded costs which is the basis of the development of
7 the Title 61 revenue requirement in this case.
8
9 DEPRECIATION EXPENSE
10
11 Q PLEASE SUMMARIZE THE STAFF'S DEPRECIATION
12 CALCULATIONS.
13 A The Staff has made numerous adjustments to
14 the Company's 1995 booked intrastate depreciation expense
15 and has rejected all USWC rate case adjustments to
16 depreciation expense.
17 Q PLEASE EXPLAIN HOW STAFF MADE ITS
18 CALCULATIONS.
19 A Staff started with JR Intrastate results of
20 operations. JR includes intrastate MR results plus
21 off-book adjustments that reflect differences between FCC
22 and state orders e.g. different depreciation rates.
23 Mr. Lansing then added USWC's Commission adjustments,
24 rate case accounting adjustments, and rate case proforma
25 adjustments to the intrastate results of operations. The
3856
MARGARET J. WRIGHT, REB 21
U S WEST COMMUNICATIONS, INC.
1 sum of those are purported to be USWC proposed southern
2 Idaho intrastate totals (See Mr. Lansing's testimony,
3 p.3, lines 8 through 11 & Exhibit 101, page 1, Col. A, B
4 & C).
5
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12
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25
3857
MARGARET J. WRIGHT, REB 21A
U S WEST COMMUNICATIONS, INC.
1 Q PLEASE COMPARE STAFF'S CALCULATIONS TO
2 USWC'S CALCULATIONS FOR TITLE 61 DEPRECIATION EXPENSE.
3 A The following chart identifies the
4 differences between USWC'S Title 61 depreciation expense
5 of $31.4 million (excluding EAS) and Staff's calculation
6 of $13.5 million or a difference of $17.9 million:
7
8 Depreciation Expense
Summary of Differences (Staff vs USWEST):
9 (Millions) Total
State Intra Title 61
10 Proforma Adj #18 -
Capital Recovery NA (16.859) (10.500)
11
Use of 1988 Rates
12 & 1/1/96 Investment (9.750) (6.510) (8.007)
13 Direct Assign Not Title
61 Plant Adjustment (0.547) (0.373) (0.183)
14
General Ledger versus
15 Subsidiary Records (2.519) (1.625) (1.012)
16 1.89% TPIS Inventory
Adjustment (0.842) (0.562) (0.276)
17
Rural Sales 1.355 0.950 0.988
18
Commission Adjustments NA 0.700 1.102
19
Accounting Adjustments NA (0.049) (0.030)
20
TOTAL DIFFERENCE (17.918)
21
22 Q PLEASE EXPLAIN THE DIFFERENCES BETWEEN
23 STAFF'S CALCULATIONS AND USWC'S.
24 A Staff made the following adjustments to
25 their calculations and assumptions:
3858
MARGARET J. WRIGHT, REB 22
U S WEST COMMUNICATIONS, INC.
1 1. Commission adjustments are added in twice since
2 they are already included in the JR intrastate starting
3 point. This action overstates the Staff proposed
4 intrastate
5
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11
12
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14
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3859
MARGARET J. WRIGHT, REB 22A
U S WEST COMMUNICATIONS, INC.
1 depreciation expense by $0.7 million which equals the
2 off-book amount already in the JR intrastate results.
3 2. On an Intrastate basis, U S WEST's Pro Forma
4 adjustments are $16.859 million for Capital Recovery and
5 ($2.191) million for Rural Sales, which add to $14.668
6 million. Mr. Lansing shows $14.561 which understates
7 intrastate depreciation expense by $.107 million.
8 3. The Rural Sales adjustment is separately
9 calculated in developing Mr. Lansing's depreciation
10 expense and is also added in as part of USWC Pro Forma
11 # 19 for Rural Sales in Mr. Lansing's Exhibit 101, Page
12 1, Col. B. This results in double counting an adjustment
13 and overstates depreciation expense by $1.0 million on a
14 Title 61 basis.
15 4. In calculating the rural sales adjustment
16 Mr. Lansing incorrectly adjusted total investment on an
17 intrastate ($33.860 million) basis rather than on a total
18 state ($49.670 million) basis.
19 5. Intrastate Title 61 depreciation expense is
20 calculated using 1988 FCC rates rather than using state
21 authorized rates. See Mr. Easton's testimony for a
22 discussion of why this is inappropriate.
23 6. Mr. Lansing claims that the amount reported in the
24 General Ledger for Idaho at December 31, 1995 is not
25 consistent with the detailed records of plant-in-service.
3860
MARGARET J. WRIGHT, REB 23
U S WEST COMMUNICATIONS, INC.
1 This adjustment reduces rate base and depreciation
2 expense. This understates Title 61 depreciation expense
3 by $1.0 million (using Company separations and Title 61
4
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8
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10
11
12
13
14
15
16
17
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3861
MARGARET J. WRIGHT, REB 23A
U S WEST COMMUNICATIONS, INC.
1 factors). This discrepancy between Staff and Company
2 calculations is discussed in more detail below.
3 7. Mr. Lansing asserts that the detailed records for
4 plant-in-service have a 1.89% error factor. This
5 adjustment reduces rate base and depreciation expense.
6 This understates Title 61 by $0.276 million (using Staff
7 separations and Title 61 factors). This issue is
8 discussed below.
9 Q ARE THERE OTHER MINOR ERRORS NOT LISTED
10 ABOVE?
11 A Yes.
12 Q DOES STAFF DIRECTLY ASSIGN ALL COMMISSION
13 ORDERED ADJUSTMENTS, ACCOUNTING ADJUSTMENTS AND PROFORMA
14 ADJUSTMENTS TO TITLE 62?
15 A Yes.
16 Q IS IT APPROPRIATE FOR MR. LANSING TO
17 ALLOCATE ALL PREVIOUSLY ORDERED COMMISSION ADJUSTMENTS TO
18 TITLE 62?
19 A No. The Commission ordered adjustments
20 impact both Title 61 and Title 62 since differences
21 between FCC accounting and state specific adjustments
22 e.g. depreciation rates, would impact all depreciation
23 expenses associated with intrastate plant-in-service.
24 Q PLEASE EXPLAIN COMMISSION ADJUSTMENTS.
25
3862
MARGARET J. WRIGHT, REB 24
U S WEST COMMUNICATIONS, INC.
1 A Commission adjustments are adjustments to
2 the test period previously ordered by the IPUC that
3 differ from FCC Part 32 Accounting and are accounted for
4 as state specific adjustments.
5 Q WHAT COMMISSION ADJUSTMENTS HAS THE COMPANY
6 INCLUDED IN THIS RATE CASE?
7 A As explained in my direct testimony the
8 Commission adjustments that I included in my revenue
9 requirement are: 1) an adjustment to the depreciation
10 reserve for differences in depreciation lives and methods
11 used by the Federal Communications Commission (FCC) and
12 the IPUC over time, 2) TECH PLUS, 3) TECH II,
13 4) flow-through of non-property related taxes, 5) an
14 adjustment for the allowance of short-term AFUDC
15 (capitalizes interest costs for short term telephone
16 plant under construction) and 6) a small adjustment for
17 SFAS 106 (post retirement benefits other than pensions).
18 Q WHAT IS THE IMPACT OF THIS OMISSION?
19 A Mr. Lansing's omission of commission
20 ordered adjustments overstates depreciation expense by
21 $1.1 million on a Title 61 basis.
22 Q IS IT APPROPRIATE FOR MR. LANSING TO
23 ALLOCATE ALL ACCOUNTING ADJUSTMENTS MADE IN THE RATE CASE
24 TO TITLE 62?
25 A No. Accounting adjustments that I included
3863
MARGARET J. WRIGHT, REB 25
U S WEST COMMUNICATIONS, INC.
1 in my revenue requirement such as out of period
2 adjustments would also impact both Title 61 and Title 62.
3
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5
6 /
7
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9
10
11
12
13
14
15
16
17
18
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21
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25
3864
MARGARET J. WRIGHT, REB 25A
U S WEST COMMUNICATIONS, INC.
1 Q IS IT APPROPRIATE FOR MR. LANSING TO
2 ALLOCATE ALL PROFORMA ADJUSTMENTS TO TITLE 62?
3 A No. The allocation of all proforma
4 adjustments to Title 62 (excluding the adjustment for
5 rural sales which Mr. Lansing has removed twice) is
6 addressed by Mr. Easton.
7
8 TECH PLUS AND TECH II
9
10 Q PLEASE SUMMARIZE THE STAFF'S TECH PLUS AND
11 TECH II ADJUSTMENTS.
12 A Staff has directly assigned to Title 61 a
13 depreciation reserve associated with TECH PLUS and TECH
14 II which reduces the rate base by $40 million.
15 Q IS THE AMOUNT OF THE STAFF'S ADJUSTMENT
16 CORRECT?
17 A No. The amount for TECH PLUS and TECH II
18 was calculated incorrectly by Ms. Baldwin. Ms. Baldwin
19 has calculated an amount of $40,083,000 in her testimony
20 versus the amount of $45,606,038 that was provided to the
21 Staff in response to Data Request No. 85A and in formally
22 filed reports. See Exhibit 43F for a comparison of this
23 calculation. Also see Mr. Elder's testimony on the
24 proper assignment of TECH PLUS and TECH II investment.
25 Q DO YOU AGREE THAT TECH PLUS AND TECH II
3865
MARGARET J. WRIGHT, REB 26
U S WEST COMMUNICATIONS, INC.
1 INVESTMENT SHOULD BE FULLY DEPRECIATED ON THE COMPANY'S
2 INTRASTATE BOOKS?
3
4 /
5
6 /
7
8 /
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
3866
MARGARET J. WRIGHT, REB 26A
U S WEST COMMUNICATIONS, INC.
1 A Yes. TECH PLUS and TECH II have always
2 been recorded at a zero net book value on the Company's
3 intrastate books per Commission orders and have been
4 recorded by the Company at a zero net book value for
5 Title 61 in this rate case.
6
7 GENERAL LEDGER VERSUS SUBSIDIARY RECORDS
8
9 Q PLEASE SUMMARIZE THE STAFF'S TESTIMONY
10 REGARDING THE GENERAL LEDGER VERSUS THE SUBSIDIARY
11 RECORD.
12 A Staff claims that the amount reported in
13 the General Ledger for Idaho at December 31, 1995 is not
14 consistent with the detailed records of plant-in-service
15 at the same date and therefore has made an adjustment to
16 reduce the rate base. Staff asserts that the detail
17 records add to $799.779 million and the General Ledger
18 used by USWC has a balance of $829.451 million at the
19 southern Idaho jurisdictional level. That discrepancy
20 amounted to $29.672 million on a total state basis and
21 $20.227 million for the southern Idaho intrastate
22 jurisdiction. Staff advocated that $20.22 million be
23 removed from the rate base. Staff also adjusted the
24 depreciation expense and the accumulated depreciation
25 reserve associated with this adjustment.
3867
MARGARET J. WRIGHT, REB 27
U S WEST COMMUNICATIONS, INC.
1 Q IS THE ADJUSTMENT APPROPRIATE?
2 A No. The Staff omitted certain subsidiary
3 records relating to capital leases, leasehold
4 improvements, and off book records associated with AFUDC.
5 If those accounts are
6
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8
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10
11 /
12
13
14
15
16
17
18
19
20
21
22
23
24
25
3868
MARGARET J. WRIGHT, REB 27A
U S WEST COMMUNICATIONS, INC.
1 included the subsidiary records do balance to the general
2 ledger. Therefore the Staff adjustment is not
3 appropriate.
4 Q HAS THIS PARTICULAR ADJUSTMENT BEEN THE
5 SUBJECT OF EXTENSIVE DISCUSSION BETWEEN STAFF AND USWC?
6 A Yes, in fact recently Staff member Sydney
7 Lansing visited USWC's Seattle offices and performed
8 additional audit work to confirm USWC's position that in
9 fact the general ledger and the subsidiary records do
10 agree.
11 Q DO YOU HAVE AN UNDERSTANDING AS TO WHETHER
12 STAFF INTENDED TO CHANGE THE RECOMMENDED ADJUSTMENT?
13 A It is my understanding that Staff intends
14 to address this issue in its "surrebuttal" testimony.
15
16 ERROR FACTOR FOR RETIREMENTS
17
18 Q PLEASE SUMMARIZE THE STAFF'S TESTIMONY.
19 A Staff asserts that the detailed records for
20 plant-in-service have a 1.89% error factor. Mr. Lansing
21 performed an audit of the plant-in-service inventory on
22 twenty-two different central offices in the southern
23 Idaho jurisdictional area which represents about
24 one-third of all central offices in southern Idaho.
25 Mr. Lansing examined a total inventory of
3869
MARGARET J. WRIGHT, REB 28
U S WEST COMMUNICATIONS, INC.
1 plant-in-service of $163,530,900. Of that amount he
2 found $3,085,657 in retirements that had not yet been
3 properly recorded. Therefore, Mr. Lansing
4
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6
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8
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10
11
12
13
14
15
16
17
18
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20
21
22
23
24
25
3870
MARGARET J. WRIGHT, REB 28A
U S WEST COMMUNICATIONS, INC.
1 concluded the error factor was 1.89% and made an
2 adjustment to reduce the plant-in-service amount recorded
3 in the detailed records as booked by $15.116 million
4 ($799,779,111 X 1.89%) or $10.304 million on an
5 intrastate basis. Mr. Lansing also made an adjustment
6 for the associated depreciation expense account and the
7 accumulated reserve for depreciation.
8 Q IS THE STAFF'S ADJUSTMENT FOR AN ERROR
9 FACTOR IN RETIREMENTS APPROPRIATE TO MAKE?
10 A Mr. Lansing is partially correct in his
11 adjustment for unrecorded retirements. USWC did discover
12 unrecorded retirements in its central office accounts in
13 1996 and has made the appropriate delayed retirements in
14 1996. USWC has not made any adjustment to their
15 calculations for a Title 61 revenue requirement since
16 both the plant-in-service and the depreciation reserve
17 are reduced by the same amount causing no impact to the
18 rate base.
19 Q SHOULD THE ADJUSTMENT FOR DELAYED
20 RETIREMENTS BE MADE FOR ALL PLANT-IN-SERVICE ACCOUNTS AS
21 ADVOCATED BY MR. LANSING?
22 A No. First of all, Mr. Lansing did not
23 audit all of USWC's plant-in-service. As stated in his
24 testimony, Mr. Lansing "performed an audit of the
25 plant-in-service inventory on twenty-two different
3871
MARGARET J. WRIGHT, REB 29
U S WEST COMMUNICATIONS, INC.
1 central offices in the southern Idaho jurisdictional
2 area." Mr. Lansing did not audit any other assets. For
3 Mr. Lansing to arbitrarily apply the same error factor to
4 all plant-in-service based on no evidence is not
5 appropriate.
6
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8
9 /
10
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12
13
14
15
16
17
18
19
20
21
22
23
24
25
3872
MARGARET J. WRIGHT, REB 29A
U S WEST COMMUNICATIONS, INC.
1 Second, USWC has not experienced the same level of
2 problems with unrecorded retirements in its plant
3 accounts that do no contain central office equipment.
4 Since USWC does not experience the retirement to its
5 other assets as it does to its central office equipment
6 these delayed retirements seldom occur. Outside plant
7 which is approximately 50% of USWC plant-in-service
8 consisting mostly of aerial cable, underground cable and
9 buried cable is infrequently retired. Therefore to make
10 a blanket 1.89% adjustment to all plant-in-service as
11 Staff has proposed is not justified.
12 Q WHAT ADJUSTMENT FOR DELAYED RETIREMENT DID
13 USWC MAKE ON THEIR BOOKS IN 1996 FOR SOUTHERN IDAHO?
14 A The adjustment made by the Company on their
15 books in 1996 for delayed retirements in southern Idaho
16 on a total state basis was $4.4 million.
17 Q SHOULD THE ADJUSTMENT FOR DELAYED
18 RETIREMENTS ALSO IMPACT DEPRECIATION EXPENSE?
19 A No. The way the Staff has made a
20 depreciation adjustment associated with these retirements
21 is not correct since they have not considered the
22 corresponding impact on depreciation rates. This is
23 addressed in Mr. Easton's rebuttal testimony.
24 GROSS UP FACTOR
25 Q PLEASE DEFINE A "GROSS UP FACTOR."
3873
MARGARET J. WRIGHT, REB 30
U S WEST COMMUNICATIONS, INC.
1 A In simple terms a gross up factor is used
2 to take into accord the effect of taxes in developing a
3 revenue requirement. Another term for gross up factor is
4 a revenue multiplier. For example, if a company requires
5 $10 million for a return on its rate base, it will need
6 to gross up $10 million to cover the taxes it will pay on
7 those revenues.
8 Q PLEASE SUMMARIZE THE STAFF'S TESTIMONY.
9 A The Staff did not provide any explanation
10 of support for the use of its method versus the company's
11 method in their direct testimony.
12 Q HOW DID MR LANSING DETERMINE HIS GROSS UP
13 FACTOR?
14 A It appears that his presentation has some
15 errors in methodology. Mr. Lansing's method ignores tax
16 issues which fall outside the normal "tax on net of
17 revenues less expense." USWC has included its booked
18 taxes in the 1995 test period. These booked taxes
19 include permanent differences between tax income and book
20 income, primarily for meals and entertainment expense.
21 Also, rate differentials and tax credits cause changes in
22 tax amounts.
23 Q HAS USWC MADE ANY CHANGES IN ITS GROSS-UP
24 FACTOR COMPARED TO THEIR DIRECT TESTIMONY?
25 A Yes. USWC found that it had an incorrect
3874
MARGARET J. WRIGHT, REB 31
U S WEST COMMUNICATIONS, INC.
1 reference in its spreadsheet calculation for determining
2 the uncollectible and gross receipts tax rates for use in
3 calculating its gross-up factor.
4
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11
12
13
14
15
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18
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21
22
23
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25
3875
MARGARET J. WRIGHT, REB 31A
U S WEST COMMUNICATIONS, INC.
1 Q HAS USWC MADE THIS ADJUSTMENT TO ITS
2 GROSS-UP FACTOR AND TO ITS TITLE 61 REVENUE REQUIREMENT?
3 A Yes. The rates for uncollectibles and
4 gross receipts tax used in the calculation of the
5 gross-up factor have been changed from .7497% and .4997%
6 to .9001% to .5999%, respectively.
7 Q WHAT IS THE IMPACT ON TITLE 61 REVENUE
8 REQUIREMENT?
9 A This correction increases the Title 61
10 revenue requirement by $97,000.
11 Q HAS USWC MADE ANY CHANGES TO ITS TAXES IN
12 THE 1995 RESULTS OF OPERATIONS COMPARED TO ITS DIRECT
13 TESTIMONY?
14 A Yes. USWC has used actual taxes booked in
15 1995 versus applying statutory rates to net operating
16 income before taxes.
17 Q WHAT IS THE IMPACT OF THIS CHANGE ON THE
18 TITLE 61 REVENUE REQUIREMENT?
19 A This correction decreases the Title 61
20 revenue requirement by approximately $4 million.
21
22 STATE EFFECTIVE INCOME TAX RATE
23
24 Q PLEASE SUMMARIZE THE STAFF'S USE OF A STATE
25 EFFECTIVE INCOME TAX RATE.
3876
MARGARET J. WRIGHT, REB 32
U S WEST COMMUNICATIONS, INC.
1 A The Staff has proposed the use of a state
2 income tax rate which is based on the multistate compact.
3 While USWC agrees in principle, it has determined that
4 the proper rate is 6.594%, based on USWC's intrastate tax
5 information.
6 Q HAS USWC MADE THIS ADJUSTMENT TO THEIR
7 STATE EFFECTIVE TAX RATE AND TO THEIR TITLE 61 REVENUE
8 REQUIREMENT?
9 A Yes. USWC has changed its state income tax
10 rate from the statutory rate of 8% to an effective state
11 tax rate of 6.594%. This compares to Staff's state
12 effective tax rate of 6.1482%.
13 Q WHAT IS THE IMPACT ON TITLE 61 REVENUE
14 REQUIREMENT?
15 A This correction decreases the Title 61
16 revenue requirement by $584 thousand.
17
18 MISCELLANEOUS REVENUES
19
20 Q PLEASE SUMMARIZE THE STAFF'S CALCULATION OF
21 MISCELLANEOUS REVENUES.
22 A The Staff did not provide any explanation
23 for using a different amount for miscellaneous revenues
24 in its calculations of intrastate results of operations.
25 Q WHAT DID THE STAFF OMIT?
3877
MARGARET J. WRIGHT, REB 33
U S WEST COMMUNICATIONS, INC.
1 A The Staff omitted all miscellaneous
2 revenues associated with rent compensation.
3
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7
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9
10
11
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25
3878
MARGARET J. WRIGHT, REB 33A
U S WEST COMMUNICATIONS, INC.
1 Q HAS THE STAFF SUBSEQUENTLY AGREED TO MAKE
2 THIS ADJUSTMENT IN THEIR TITLE 61 REVENUE REQUIREMENT?
3 A Yes.
4
5 PENSION ASSET
6
7 Q PLEASE SUMMARIZE THE STAFF'S TESTIMONY ON
8 THE PENSION ASSET.
9 A The Staff asserts that since the expenses
10 for the contributions to the pension fund were included
11 in rates paid by the customers, and since the fund assets
12 have performed well, the customers have been responsible
13 for the creation of the pension asset. He also states
14 that in the last full rate case in 1984, Case No.
15 U-1000-63, pension expense was included as an undisputed
16 expense as part of the revenue requirement and that the
17 Revenue Sharing Plan did not reflect any expense credits
18 in the revenue sharing calculations for pensions. Staff
19 proposes that the pension asset be considered as a
20 customer-provided asset in the rate base and the rate
21 base should be reduced by this customer contribution.
22 Q HAS STAFF IGNORED THE FACT THAT 1FR RATES
23 WERE RESET IN 1989?
24 A Yes. Rates were reduced in 1989 based on a
25 stipulation that included a review of USWC results of
operations.
3879
MARGARET J. WRIGHT, REB 34
U S WEST COMMUNICATIONS, INC.
1 Q DID SOUTHERN IDAHO RESULTS OF OPERATIONS IN
2 THAT REVIEW INCLUDE PENSIONS CREDITS?
3 A Yes. USWC implemented SFAS 87 in 1987 and
4 began booking credits to pension expense in that year and
5 the associated pension asset. A complete review of SFAS
6 87 accounting is included in my workpapers.
7 Q HAVE OTHER JURISDICTIONS ADDRESSED THIS
8 ADJUSTMENT?
9 A Yes. I am aware of eight jurisdictions
10 where the pension asset has been added to the rate base.
11 The Federal Communications Commission in its December 17,
12 1989 order in Docket No. 86-497, adopted the same
13 approach as is being proposed by U S WEST in this
14 proceeding. The Colorado Public Utility commission has
15 adopted the same approach in its Docket No. 905-544T and
16 the Washington Utility and Transportation commission in
17 Docket No. UT-950200. Other states that are currently
18 including a pension asset in their rate base are
19 Minnesota, New Mexico, Wyoming, Kansas and Missouri.
20 Also the Oregon Public Utility Commission Staff has
21 recently filed supplemental testimony in support of
22 including the pension asset in USWC's Oregon rate base.
23 Q HAS USWC BEEN UNDER A REVENUE SHARING PLAN
24 IN OREGON OVER APPROXIMATELY THE SAME PERIOD AS USWC WAS
25 UNDER A REVENUE SHARING PLAN IN SOUTHERN IDAHO?
3880
MARGARET J. WRIGHT, REB 35
U S WEST COMMUNICATIONS, INC.
1 A Yes. However, the Oregon Commission Staff
2 does not use this as a reason to deduct the pension asset
3 from the rate base. In fact as mentioned above they are
4 recommending that the pension asset be added to the rate
5 base.
6 Q PLEASE EXPLAIN WHY THE COMMISSION SHOULD
7 INCLUDE THE PENSION ASSET IN THE RATE BASE IN SOUTHERN
8 IDAHO.
9 A The pension asset is not currently in the
10 rate base so the shareholder is not receiving a return on
11 that asset. The Staff is proposing to deduct it from
12 rate base which is exactly opposite of the adjustment
13 that should be made. The rate base should include a
14 pension asset to reflect the fact that pension credits
15 have been recorded in U S WEST's regulated books of
16 accounts with no corresponding decrease in the pension
17 fund. This creates a situation where the customer
18 benefits from the cash in the pension fund in the form of
19 lower expenses in the future from the earnings on these
20 funds while the shareholder is not allowed to earn on the
21 cash left in the pension fund. It is only fair and
22 equitable for the shareholder to be allowed to earn on
23 the pension asset that was created by these pension
24 credits.
25 Q IF THE COMMISSION DOES NOT ALLOW THE
3881
MARGARET J. WRIGHT, REB 36
U S WEST COMMUNICATIONS, INC.
1 PENSION ASSET IN THE RATE BASE, SHOULD THE COMMISSION
2 ALSO EXCLUDE THE ACCUMULATED DEFERRED TAXES CREATED BY
3 THE PENSION ASSET FROM THE RATE BASE?
4 A Yes. One of the standard manifestations of
5 consistent application of accounting principles in
6 ratemaking is that assets and their associated deferred
7 taxes are treated
8
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23
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3882
MARGARET J. WRIGHT, REB 36A
U S WEST COMMUNICATIONS, INC.
1 the same for purposes of inclusion or exclusion from rate
2 base. Therefore, if the pension asset is excluded from
3 the rate base the equitable application of accounting
4 principles to ratemaking dictates that the deferred taxes
5 also be excluded from the rate base.
6 Q DOES THE STAFF'S RECOMMENDATION IN THIS
7 CASE GIVE THE RATEPAYER MULTIPLE RECOVERY UNDER BASIC
8 RATE MAKING PRINCIPLES?
9 A Yes. First it gives the ratepayer the
10 benefit of not having to include any pension expense in
11 rates in this case. Second it gives the ratepayer the
12 benefit of lower rates in the future due to the pension
13 asset continuing to earn interest in the pension fund.
14 Both of these benefits are appropriate and will be
15 retained under USWC's proposal.
16 However, an unjustified third benefit of Staff's
17 approach is that the ratepayer will have lower rates in
18 this case by having the pension asset which is not
19 currently included in rate base deducted from the rate
20 base.
21 Q IS THIS MULTIPLE RECOVERY FOR THE RATEPAYER
22 FAIR AND EQUITABLE TO THE SHAREHOLDER?
23 A No. The accounting principles that rate of
24 return regulation were founded on were never designed to
25 penalize companies in this manner.
3883
MARGARET J. WRIGHT, REB 37
U S WEST COMMUNICATIONS, INC.
1 STATEMENT OF FINANCIAL ACCOUNTING STANDARD No. 106
2 ("SFAS 106")
3
4 Q WHAT IS USWC'S POSITION IN REGARD TO THE
5 AMORTIZATION OF THE TRANSITION BENEFIT OBLIGATION FOR
6 SFAS 106?
7 A The Company's is using a 17.3 years
8 amortization of the TBO associated with the
9 implementation of SFAS 106 based on the average service
10 life of its employees.
11 Q PLEASE SUMMARIZE THE STAFF'S TESTIMONY SFAS
12 106.
13 A Staff argues for a 20 year amortization
14 period for the transition benefit obligation (TBO) versus
15 the Company's actual 17.3 years for the average service
16 life of its employees. Staff states that the elimination
17 of 10,000 employees brings into question the continued
18 accuracy of the actuarial assumptions.
19 Q DOES MR. SCHNEIDER HAVE ANY FOUNDATION FOR
20 MAKING THIS CHANGE IN THE AMORTIZATION PERIOD?
21 A No. Any concern regarding the actuarial
22 assumptions is totally unfounded because the actuarial
23 assumptions are reviewed as of January 1st of each year
24 and are revised as needed to take into account current
25 changes in economic conditions and actual prior year OPEB
3884
MARGARET J. WRIGHT, REB 38
U S WEST COMMUNICATIONS, INC.
1 impacts such as employee termination's made in the prior
2 year.
3 Q IS MR. SCHNEIDER CORRECT IN STATING THAT
4 SFAS 106 ALLOWS YOU TO CHANGE AMORTIZATION PERIODS WHEN A
5 MORE ACCURATE AMORTIZATION PERIOD CANNOT BE DETERMINED?
6
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13
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16
17
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19
20
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22
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24
25
3885
MARGARET J. WRIGHT, REB 38A
U S WEST COMMUNICATIONS, INC.
1 A No. This is an incorrect statement. SFAS
2 106 paragraph 112 addresses the TBO amortization period,
3 and there is no provision to extend the amortization
4 period once an amortization period has been selected.
5 Q IS MR. SCHNEIDER INACCURATE IN STATING THAT
6 "... A MORE ACCURATE AMORTIZATION PERIOD CANNOT BE
7 DETERMINED"?
8 A Yes. As of 1/1/92, USWC's SFAS 106
9 implementation date, USWC's actuarial firm, Towers
10 Perrin, determined that the average remaining service
11 life of USWC's active plan participants was 17.3 years.
12 Since 1992, Towers Perrin has recalculated the average
13 remaining service life of USWC's active plan participants
14 and for 1995 and 1996 it is now 17.1 years. Therefore,
15 USWC can determine an accurate amortization period and
16 that amortization period would be lower than the original
17 17.3 years calculated at the implementation date. Thus
18 there is no justifiable reason whatsoever to increase the
19 amortization period to 20 years.
20 Q IS MR. SCHNEIDER CORRECT IN STATING THAT
21 THE EFFECT OF THE ELIMINATION OF 10,000 EMPLOYEES ON THE
22 AMORTIZATION PERIOD CANNOT BE DETERMINED AND THEREFORE A
23 MORE CONSERVATIVE 20-YEAR AMORTIZATION PERIOD WOULD BE
24 BEST IN THEIR OPINION?
25 A No. USWC's total expected loss of 10,000
3886
MARGARET J. WRIGHT, REB 39
U S WEST COMMUNICATIONS, INC.
1 employees causes a Curtailment Loss which, by SFAS 106
2 definition, is an event that significantly reduces the
3 expected years of future service of active plan
4 participants. Therefore by its very definition a
5 Curtailment Loss results in a lower average remaining
6 service life, or TBO
7
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9
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11
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13
14
15
16
17
18
19
20
21
22
23
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3887
MARGARET J. WRIGHT, REB 39A
U S WEST COMMUNICATIONS, INC.
1 amortization period, not a larger (e.g. 20 year)
2 amortization period. Additionally, SFAS 106 accounting
3 for a curtailment results in early acceleration of the
4 TBO amortization expense but it does not change the TBO
5 amortization period.
6 Q HAS MR. SCHNEIDER PRESENTED ANY VALID
7 ARGUMENTS TO CHANGE THE AMORTIZATION PERIOD TO 20 YEARS
8 OR HAS STAFF REFERENCED ANY SFAS 106 RULES TO SUPPORT ANY
9 OF THEIR STATEMENTS?
10 A No. USWC is in full compliance with SFAS
11 106 Accounting and FCC rules in recording all OPEB costs,
12 which includes the TBO amortization and the curtailment
13 Loss, therefore the TBO amortization period should remain
14 at 17.3 years.
15
16 CURTAILMENT LOSS
17
18 Q PLEASE SUMMARIZE THE STAFF'S TESTIMONY.
19 A Staff states that since USWC is not quite
20 half finished with its re-engineering efforts another
21 curtailment adjustment may be required in 1997 or 1998,
22 when the Restructuring Plan is complete and its effects
23 are known and measurable. Therefore, Staff proposes that
24 the amount incurred in 1995 be amortized over the
25 remaining 17 years of the TBO rather than being
3888
MARGARET J. WRIGHT, REB 40
U S WEST COMMUNICATIONS, INC.
1 eliminated. Staff's adjustment would allow
2 one-seventeenth of the curtailment loss to be recorded in
3 1995, or $71,212, reducing
4
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6
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10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
3889
MARGARET J. WRIGHT, REB 40A
U S WEST COMMUNICATIONS, INC.
1 expenses by $1,139,399. Staff has made this proposal
2 since it would also provide the amortization mechanism if
3 future curtailment losses are incurred and would have
4 little impact on the test year.
5 Q DOES STAFF ESTABLISH ANY FOUNDATION TO MAKE
6 THIS CURTAILMENT LOSS ADJUSTMENT?
7 A No. Staff admits that curtailment losses
8 will probably occur in 1996 and 1997 and that they may
9 occur in the future. If that is the case then these are
10 ongoing expenses that should be included in the test
11 period.
12 Q IS THE STATEMENT THAT MR. SCHNEIDER MAKES
13 "THAT IT WOULD HAVE LITTLE IMPACT ON THE TEST PERIOD" A
14 JUSTIFICATION FOR ANY ADJUSTMENT?
15 A No. Adjustments are not made based on
16 whether they have small or large impacts on the test
17 period. Adjustments should be made on their
18 appropriateness or their inappropriateness in the test
19 period.
20
21 COMPENSATED ABSENCES
22
23 Q PLEASE EXPLAIN COMPENSATED ABSENCES
24 ACCOUNTING.
25 A Compensated absences represent any "time"
3890
MARGARET J. WRIGHT, REB 41
U S WEST COMMUNICATIONS, INC.
1 the employee has earned that the employee will be away
2 from work and still be paid as if the employee was at
3 work.
4
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3891
MARGARET J. WRIGHT, REB 41A
U S WEST COMMUNICATIONS, INC.
1 According to SFAS 43, Accounting for compensated
2 Absences, compensated absences are to be expensed as
3 earned rather than when paid. There was a catch-up entry
4 required at the time of the accounting change for all
5 past earned compensated absences that had not been paid
6 and had not been recorded as a liability.
7 Q PLEASE SUMMARIZE THE STAFF'S TESTIMONY.
8 A Staff states the amortization of the
9 catch-up entry is a one-time event, the effect of this
10 amortization is known and measurable, and the
11 amortization of the catch-up amount will be nearly
12 complete when this rate case will become final.
13 Therefore, to properly reflect the 1995 test year for
14 setting rates on a proforma basis the catch-up
15 amortization expense of $203,179 should not be included
16 in 1995 expenses for ratemaking purposes.
17 Q DOES THE USWC AGREE WITH THIS STAFF
18 ADJUSTMENT?
19 A No. Staff has advanced to 1998 to make
20 this adjustment without considering other changes that
21 will occur three years out from the test period.
22 Q DO YOU HAVE AN EXAMPLE OF ANOTHER
23 ADJUSTMENT THAT SHOULD BE INCLUDED IF THE STAFF WAS
24 ALLOWED TO MAKE ITS ADJUSTMENT FOR COMPENSATED ABSENCES?
25 A Yes. For example, in March, 1994, the
3892
MARGARET J. WRIGHT, REB 42
U S WEST COMMUNICATIONS, INC.
1 United States Telephone Association (USTA) filed a
2 Petition to increase the current expensing limit from
3 $500 to $2000. In May, 1995, the FCC released a Notice
4 of Proposed Rulemaking, Docket 95-60, that would
5
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7
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11
12
13
14
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17
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21
22
23
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25
3893
MARGARET J. WRIGHT, REB 42A
U S WEST COMMUNICATIONS, INC.
1 raise expense limits for support assets such as tools and
2 furniture from $500 to $750. USWC expects a ruling
3 consistent with the USTA expense limit amount within the
4 next several months.
5 This will create a catch-up entry to recognize the
6 expense limit change similar to the accrual change for
7 compensated absences. The yearly amortization of
8 $203,000 for compensated absences will, therefore,
9 potentially be replaced by an amortization for this
10 expense change worth $191,000 annually, over the
11 remaining life of the assets. In fact, some overlap
12 could occur with portions of both amortizations
13 recognized in the same calendar year.
14 For the Staff to chose to eliminate an
15 amortization that is dropping off in 1998 and not to add
16 a similar amortization that appears imminent is
17 inappropriate and does not preserve the integrity of the
18 test period.
19
20 EXCESSIVE LEASE CHARGE
21
22 Q PLEASE SUMMARIZE THE STAFF'S TESTIMONY.
23 A Staff has made an adjustment for USWC's
24 lease rates for the 1801 California Building in Denver,
25 Colorado claiming that the rates are not reasonable.
3894
MARGARET J. WRIGHT, REB 43
U S WEST COMMUNICATIONS, INC.
1 Q PLEASE EXPLAIN WHY THE $18.00 GROSS RATE
2 FOR SPACE QUOTED BY STAFF IS NOT A VALID COMPARISON TO
3 USWC'S LEASE RATE FOR 1801 CALIFORNIA?
4 A Staff is ignoring three critical components
5 of lease comparability: The term of the lease (number of
6 years); the size of the square footage; and the
7 timeframe when the lease arrangement is being negotiated.
8 Ignoring these components makes his comparisons invalid.
9 Q PLEASE EXPLAIN THESE COMPONENTS.
10 A First the lease rate of $18 that being
11 quoted is generally for a 3 to 5 year lease. Leases of
12 this length are the most common in the market. Those
13 leases would include anticipated market changes through
14 about the year 2000. The Denver market is recovering and
15 lease rates have been increasing as indicated by the
16 Staff. On the other hand, USWC's lease does not expire
17 until 2012, so the USWC lease rate has included 12
18 additional years of anticipated lease rate increases.
19 Because of GAAP accounting rules, USWC averages all of
20 the yearly lease payments for the entire 20.5 years into
21 an average amount that it books each year called the net
22 effective rate. Therefore, the USWC net effective rate
23 of $18.24 includes all future rate increases through the
24 year 2012. It is not surprising that USWC's guaranteed
25 lease rate through 2012 is higher than a guaranteed rate
3895
MARGARET J. WRIGHT, REB 44
U S WEST COMMUNICATIONS, INC.
1 that only covers through the year 2000. This is
2 analogous to fixed rate mortgages where the longer the
3 term, the higher the rate because future inflation must
4 be factored into the cost.
5
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9
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11
12
13
14
15
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18
19
20
21
22
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3896
MARGARET J. WRIGHT, REB 44A
U S WEST COMMUNICATIONS, INC.
1 Second, the leases included in the $18 rate are
2 typical sizes, ranging from less than one floor to
3 several floors. A lease as large as USWC's, nearly
4 1 million square feet, is completely atypical in the
5 market and therefore has its own unique market pricing.
6 USWC's lease cannot be compared to other leases a
7 fraction of the size that have a totally different set of
8 market conditions as to supply and demand.
9 Q IS STAFF'S COMPARISON OF USWC'S LEASE TO A
10 THIRD PARTY LEASE VALID?
11 A No. The Staff has erred again in comparing
12 transactions that are not alike. The third party lease
13 is for 10 years, whereas the USWC lease is for 20.5
14 years; and the third party lease is for only 19,000
15 square feet compared to almost 1 million square feet for
16 USWC. A tenant looking for just a floor of space may
17 have many options and therefore faces market conditions
18 that are very different than USWC who needed about 40
19 times that much space.
20 Q HOW SHOULD THE COMMISSION EVALUATE THE
21 REASONABLENESS OF USWC'S LEASE?
22 A In order to evaluate the reasonableness of
23 USWC's affiliated lease arrangements USWC engaged Arthur
24 Andersen to undertake an independent third party study
25 which evaluated each lease rate compared to the options
3897
MARGARET J. WRIGHT, REB 45
U S WEST COMMUNICATIONS, INC.
1 available to USWC at the time the lease was entered into.
2 In 1991, there were no other buildings large enough for
3 USWC to move into. Therefore, USWC's options were to
4 either build a new building, or to stay at 1801 and keep
5 renewing the old lease, or enter into a new 20.5 year
6
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11 /
12
13
14
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17
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19
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25
3898
MARGARET J. WRIGHT, REB 45A
U S WEST COMMUNICATIONS, INC.
1 lease. All of these options were analyzed and the
2 results showed that the new lease was the least costly
3 alternative. This analysis shows that USWC prudently
4 chose the least costly alternative given the limited
5 options available for the amount of space. This analysis
6 correctly compares the cost for the same size space, for
7 the same length of term, and taking place at the time the
8 1801 decision was being made. Therefore, the Arthur
9 Andersen study is a much more valid comparison than that
10 made by the Staff. The Arthur Anderson study is included
11 in my workpapers.
12
13 TELEPHONE CONCESSIONS
14
15 Q PLEASE SUMMARIZE THE STAFF'S TESTIMONY ON
16 TELEPHONE CONCESSIONS.
17 A The Staff imputes $234,036 on an intrastate
18 basis, to increase intrastate operating revenues, to
19 account for telephone concessions offered to employees
20 and retirees of U S WEST. Telephone concessions are free
21 or reduced rates for employees and retirees of U S WEST
22 for basic local telephone service, toll services, and
23 other Title 62 services. Staff asserts there is a
24 mismatch between Title 61 revenues and expenses
25 associated with the employee telephone service
3899
MARGARET J. WRIGHT, REB 46
U S WEST COMMUNICATIONS, INC.
1 concessions included in the test-year results of
2 operations.
3
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9
10
11
12
13
14
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17
18
19
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21
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25
3900
MARGARET J. WRIGHT, REB 46A
U S WEST COMMUNICATIONS, INC.
1 Q HOW WERE TELEPHONE CONCESSIONS HANDLED IN
2 THE LAST GENERAL RATE CASE FOR USWC?
3 A Order No. 18188 in Case No. U-1000-63
4 stated that any toll concessions enjoyed by company
5 employees ought to be removed by January 1, 1984. After
6 divestiture, toll concessions would, for the first time,
7 become an actual out-of-pocket expense. The order
8 further directed the company to either include in its
9 tariff or file with the Commission a statement of the
10 concessions enjoyed by its employees so that this
11 information is available to the public. The order did
12 allow the provision of free local service as a
13 concession, but pointed out that such concessions may
14 hurt the company from a customer relations point of
15 view." There was no imputation requirement.
16 Q DO YOU AGREE WITH STAFF THAT USWC HAS
17 FAILED TO FOLLOW THE COMMISSION ORDER?
18 A I agree the Company appears to have failed
19 to comply with the Commission's directive to file this
20 information for public access.
21 Q DO YOU AGREE WITH STAFF THAT SINCE USWC HAS
22 NOT FILED CONCESSIONS IN TARIFFS THAT REVENUES SHOULD BE
23 IMPUTED?
24 A No. This is an oversight by the company
25 which has not concerned the Staff or its customers for
3901
MARGARET J. WRIGHT, REB 47
U S WEST COMMUNICATIONS, INC.
1 almost 10 years. It is not appropriate to punish the
2 company for a minor oversight. As stated in the
3 Commission's last rate case order, "We will allow the
4 provision of free local service as a concession."
5
6 /
7
8 /
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10 /
11
12
13
14
15
16
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18
19
20
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22
23
24
25
3902
MARGARET J. WRIGHT, REB 47A
U S WEST COMMUNICATIONS, INC.
1 PRESIDENT'S CLUB
2 Q PLEASE SUMMARIZE THE STAFF'S TESTIMONY.
3 A Staff has eliminated the cost of the
4 President's Club because Staff asserts no records were
5 provided that verified the need for these expenses or
6 their value to the Title 61 customer. Therefore, Staff
7 makes an adjustment to remove a total of $90,409 at the
8 Idaho intrastate expense level.
9 Q DOES STAFF PROVIDE ANY RATIONALE?
10 A Staff Witness Stockton states that
11 including expenses for this type of incentive program
12 implies that the customers are only entitled to a level
13 of management that is merely adequate, and that the
14 customer must pay an additional amount to motivate the
15 utility to perform economically, efficiently, and with a
16 high degree of quality and customer satisfaction.
17 Q DO YOU AGREE WITH THIS ASSESSMENT?
18 A No. The President's Club is a form of
19 employee recognition designed to recognize U S WEST
20 employees that have made distinguished contributions to
21 the company and their specific organizations. Winners
22 are selected who demonstrated the highest level of
23 performance in overall contribution to the objectives of
24 their organization. This recognition is not given to any
25 performance above an adequate performance level as
3903
MARGARET J. WRIGHT, REB 48
U S WEST COMMUNICATIONS, INC.
1 portrayed by the Staff. Many employees are rated
2 outstanding for their performance for a year but don't go
3 to President's Club. Out of 47,909 employees in 1994
4 only 2,248 were nominated to go to President's Club or
5 less than 5%. Employees recognized for President's Club
6 go way beyond excellence in performing their jobs.
7
8 CHART OF ACCOUNTS
9 Q PLEASE DEFINE CHART OF ACCOUNTS.
10 A The Chart of Accounts is a listing of all
11 the accounts and sub-accounts in "Part 32 - uniform
12 system of Accounts for telecommunications companies."
13 This accounting system is required by the Federal
14 Communications Commission for telecommunications
15 companies. The FCC Uniform System of Accounts provides a
16 general description of the kinds of transactions that
17 make up each account in the Chart of Accounts.
18 Q PLEASE SUMMARIZE THE STAFF'S TESTIMONY ON
19 CHART OF ACCOUNTS.
20 A Staff made an adjustment for each
21 sub-account that had an account title that Staff believed
22 was not a Title 61 expense or a combination expense. For
23 example, Staff removed the balances from sub-accounts
24 such as "Voice Messaging - other expenses," "Cellular
25 Expense," "Coin Operated Expense," "Inmate Services -
Expense," and
3904
MARGARET J. WRIGHT, REB 49
U S WEST COMMUNICATIONS, INC.
1 "Access Expense - Intrastate." Staff's adjustment
2 reduces intrastate expense by $9,827,635.
3 Q WHAT ERRORS HAS MS. STOCKTON MADE IN HER
4 METHODOLOGY?
5 A Ms. Stockton along with other Staff
6 witnesses have a basic flaw in their analysis. They are
7 attempting to assign costs, which are identified at a
8 total state level for separations to Title 61 and 62,
9 which can only be done at the intrastate level.
10 Mr. Lansing indicates in his testimony that he agrees
11 with USWC's intrastate starting point (Lansing Direct,
12 page 6), yet Ms. Stockton and other Staff witnesses
13 persist in "removing" costs which are not included in
14 intrastate results.
15 Staff witnesses, seem to confuse Title 62 with
16 other types of costs which are not even part of southern
17 Idaho intrastate rate base and expenses. On page 13, Ms.
18 Stockton indicates that she has removed amounts for Voice
19 Messaging which is clearly a Part 64 nonregulated
20 product. As such, it would have been removed prior to
21 separation of costs between intrastate and interstate,
22 and would not have been in the intrastate costs which are
23 subject to allocation to Title 61 or 62. Ms. Stockton
24 does not address how other related Part 64 costs would be
25 identified and removed. The same processes apply to
3905
MARGARET J. WRIGHT, REB 50
U S WEST COMMUNICATIONS, INC.
1 Interstate Billing and Collecting. $611,839 of the
2 $682,781 which she identified (excluding Account 6540) as
3 "Not Title 61" is clearly Part 64 or Interstate Billing
4 and Collecting expense and was already removed from
5 intrastate results before she "removed" them.
6
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12
13
14
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18
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25
3906
MARGARET J. WRIGHT, REB 50A
U S WEST COMMUNICATIONS, INC.
1 Ms. Stockton identifies some costs as "Not Title
2 61," apparently because they were coin-related. However,
3 since local calling charge revenues from coin phones are
4 Title 61, expenses associated with these revenues should
5 also be Title 61. The amount of $66,520 should be
6 allocated between Title 61 and 62, as it is in USWC's
7 CAAS system.
8 Ms. Stockton found that $9,144,854 of Account
9 6540, Access Expense, should be excluded as "Not Title
10 61." This is one of the few accounts which can be
11 assigned in total in such a way. However, USWC's CAAS
12 system also directly assigns this amount to Title 62.
13 Q IN HER OWN TESTIMONY ON PAGE 15, MS.
14 STOCKTON CLEARLY STATES "THE USOA CHART OF ACCOUNTS IS
15 NOT DESIGNED TO DISTINGUISH BETWEEN A TITLE 61 EXPENSE
16 AND TITLE 62 EXPENSE." IS SHE CORRECT?
17 A Yes, yet she proceeds to attempt that very
18 undertaking.
19
20 DOCUMENTS OF ORIGINATING ENTRY
21
22 Q PLEASE SUMMARIZE THE STAFF'S TESTIMONY ON
23 DOCUMENTS OF ORIGINATING ENTRY.
24
25
3907
MARGARET J. WRIGHT, REB 51
U S WEST COMMUNICATIONS, INC.
1 A An analysis of selected journal entries was
2 performed by Staff in an attempt to categorize them as
3 either being a Title 61 expense, a Title 62 expense, a
4 restructuring or re-engineering expense, or a combination
5 Title 61/Title 62 expense. Staff asserts that the
6 documents examined did not contain sufficient support for
7 the expenses. Therefore, Staff made an adjustment to
8 southern Idaho operating expenses for $857,352 to
9 directly assign expenses to Title 62 services.
10 Q MS. STOCKTON INDICATES ON PAGE 18 THAT
11 USWC'S RESPONSE TO HER REQUEST WAS UNSATISFACTORY. IS
12 THIS VALID?
13 A Ms. Stockton did indeed make a series of
14 requests for data which she later agreed to pare back.
15 Original Staff Data Request No. 110A would have required
16 documentation for literally millions of accounting
17 entries. Similarly Staff Data Request No. 127 would have
18 required documentation for 14,212 accounting entries.
19 Staff Data Requests Nos. 86A and 116 would have required
20 an additional 1,400 accounting entries. USWC negotiated
21 with Ms. Stockton to reduce the massive volume of
22 materials she was requesting.
23 Q MS. STOCKTON STATES ON PAGE 18 OF HER
24 TESTIMONY THAT THE SUPPORT FOR ACCOUNTING ENTRIES
25 PROVIDED TO HER WAS NOT ADEQUATE IN MANY INSTANCES. IS
3908
MARGARET J. WRIGHT, REB 52
U S WEST COMMUNICATIONS, INC.
1 THIS A FAIR CRITICISM?
2 A No. Our accounting systems are designed to
3 provide the extensive documentation required by
4 government, regulatory, and accounting rules. Certain
5 accounting feeder systems automatically consolidate
6 numerous discrete items (such as the purchase of
7
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9
10 /
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12 /
13
14
15
16
17
18
19
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21
22
23
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25
3909
MARGARET J. WRIGHT, REB 52A
U S WEST COMMUNICATIONS, INC.
1 paper clips) into single accounting entries (such as
2 office supplies expense). USWC expended a great deal of
3 effort in searching out and providing the response to her
4 requests.
5 For example, Ms. Stockton felt that a monthly
6 statement "for services rendered" was not adequate
7 support. However, such a statement, combined with the
8 required signatures of two USWC employees attesting to
9 the correctness and appropriateness of the expense, is in
10 fact the Company's documentation which it uses to conduct
11 its business.
12 Q MS. STOCKTON INDICATES THAT MANY EXPENSES
13 COULD HAVE BEEN DIRECTLY CHARGED TO STATES RATHER THAN
14 BEING ALLOCATED TO ALL STATES. IS SHE CORRECT?
15 A Ms. Stockton's position ignores the need to
16 design accounting systems in a reasonable and cost
17 effective manner. Direct assignments are much harder to
18 do than suggested by Ms. Stockton. She provides an
19 example of Serial number 180, which is for application
20 software at four physical locations. She assumes that
21 the physical location of the software determines the
22 states to which it should be assumed. This is grossly
23 untrue. This charge was for payment processing software
24 for the four centers which process payments for all of
25 USWC. It would be highly inappropriate to only assign
3910
MARGARET J. WRIGHT, REB 53
U S WEST COMMUNICATIONS, INC.
1 costs to the four states in which these centers are
2 located. Further, where the work location supports
3 multiple states, direct assignment is not possible, and
4 an allocation
5
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3911
MARGARET J. WRIGHT, REB 53A
U S WEST COMMUNICATIONS, INC.
1 must be performed, either by the individual preparing the
2 accounting entry form, or by USWC's accounting system.
3 On page 20, Ms. Stockton lists several serial
4 numbers which should have been charged directly to
5 states. Of these, #93 and #94 were charged to states.
6 #185 was charged partially to headquarters and partially
7 to Idaho by the signing employee, based on knowledge of
8 the transaction.
9 Q WOULD YOU PLEASE RESPOND TO THE ALLEGATION
10 OF STAFF THAT IT SHOULD BE A SIMPLE MATTER FOR USWC TO
11 MODIFY ITS JOURNAL ENTRIES TO REFLECT ASSIGNMENT TO TITLE
12 61 OR OTHER SERVICES?
13 A Contrary to the belief of Staff, it would
14 not be a simple matter to modify journal entries to
15 reflect direct assignment to Title 61 services. As I
16 stated earlier, USWC processes approximately 200 million
17 transactions a year in its fourteen state service
18 territory. Title 61 is a classification of service which
19 is unique to the State of Idaho. The classification has
20 no relevance in the other thirteen states in which we do
21 business. To reflect direct assignments to Title 61 at
22 the transaction level would require the addition of an
23 added field in the journal entries. USWC would not only
24 have to modify all input systems as well as its entire
25 accounting system to add the field, but train personnel
3912
MARGARET J. WRIGHT, REB 54
U S WEST COMMUNICATIONS, INC.
1 to use the new field. That would be a huge expense, one
2 which could not be justified by the end result.
3 Q WHY DO YOU SAY IT COULD NOT BE JUSTIFIED BY
4 THE END RESULT?
5
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3913
MARGARET J. WRIGHT, REB 54A
U S WEST COMMUNICATIONS, INC.
1 A The only application of the change to the
2 accounting system would be to attempt direct assignment
3 of all USWC expenses to either Title 61 or other
4 services, at the transaction level, a process which would
5 have no relevance outside of the state of Idaho.
6 Moreover, it would in no way insure that the cost of
7 Title 61 service could be established by direct
8 assignment. A significant portion of the expenses
9 incurred by USWC will always be for joint and common
10 costs, whether those expenses are assigned or apportioned
11 at the transaction or account levels. A huge number of
12 journal entries could not be directly assigned to Title
13 61, or any other service. They would have to be
14 allocated, just as they are today, under CAAS.
15 Q DOES MS. STOCKTON HAVE A BASIC FLAW IN HER
16 ANALYSIS?
17 A Yes. She is attempting to assign costs,
18 which are identified at a total state level, to
19 categories of Title 61 and 62, which can only be done at
20 the intrastate level. This mismatch, even when attempts
21 at adjustments are made, creates misleading and incorrect
22 results. Ms. Stockton states on page 20 of her testimony
23 that she intended to categorize transactions in Title 61,
24 Title 62, re-engineering, and combination Title 61/62.
25 These categories are not mutually exclusive, since
3914
MARGARET J. WRIGHT, REB 55
U S WEST COMMUNICATIONS, INC.
1 re-engineering costs could be in any of the other
2 categories. Re-engineering must be addressed as a
3 separate issue, and care must be taken to avoid
4 double-counting. Ms. Stockton states on page 20 that
5 USWC has not shown that expenses are directly assigned to
6 Title 61. Mr. Elder's testimony and responses have
7 consistently shown that expenses are directly assigned
8 wherever it is practical to do so. Staff may be confused
9 by USWC's two step
10
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12
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14
15 /
16
17
18
19
20
21
22
23
24
25
3915
MARGARET J. WRIGHT, REB 55A
U S WEST COMMUNICATIONS, INC.
1 process of directly assigning costs to products and then
2 directly assigning products to Title 61 and 62.
3 Q MS. STOCKTON SPECULATES ON PAGE 22 OF HER
4 TESTIMONY ABOUT THE POTENTIAL ADJUSTMENT IF HER SAMPLE
5 WERE TO BE PROJECTED TO ALL TRANSACTIONS. IS THERE ANY
6 VALIDITY TO THIS PROJECTED ANALYSIS?
7 A Ms. Stockton provided no testimony relating
8 to the statistical validity of her analysis, or its
9 applicability to all USWC's transactions. From an
10 analysis of her work it does not appear that her results
11 have any predictive applicability whatsoever, and
12 constitute a somewhat random "spot-check" of 206 of an
13 estimated 200 million USWC transactions in 1995.
14
15 ADVERTISING EXPENSES
16
17 Q PLEASE SUMMARIZE THE STAFF'S TESTIMONY AS
18 IT RELATES TO ADVERTISING EXPENSES.
19 A Staff has recommended a disallowance of
20 $784,630 on an intrastate basis of advertising expense
21 based on an historical disallowance by the Commission for
22 promotional and corporate advertising expenses for
23 ratemaking purposes. Staff states
24
25
3916
MARGARET J. WRIGHT, REB 56
U S WEST COMMUNICATIONS, INC.
1 that his type of advertising does not provide any known
2 or measurable benefit to Idaho Title 61 customers.
3 Q IS THE COMMISSION'S HISTORICAL APPROACH TO
4 ADVERTISING EXPENSE APPROPRIATE IN THIS CASE?
5 A No. Historically, the Commission was
6 inclined to view promotional or corporate image
7 advertising as unnecessary because of the monopoly status
8 of the regulated Company. A distinction was drawn
9 between promotional or corporate image advertising on the
10 one hand, and "informational" advertising on the other.
11 "Informational" advertising was normally included as an
12 allowable expense for ratemaking because it imparted
13 information to ratepayers and was therefore considered
14 directly beneficial to them.
15 Q SHOULDN'T THIS STANDARD OF RATEPAYER
16 BENEFIT STILL CONTROL WHETHER ADVERTISING EXPENSE IS
17 INCLUDED IN RATES?
18 A Not in the same way. With the passage of
19 the federal act and the opening of all markets to
20 competition, the Commission must change the way it views
21 this particular expense. Instead of trying to determine
22 if customers are measurably benefited, the Commission
23 must instead inquire whether the expense is a reasonable
24 and necessary expense of operating a telecommunications
25 company in today's environment.
3917
MARGARET J. WRIGHT, REB 57
U S WEST COMMUNICATIONS, INC.
1 USWC must now compete to attract and retain
2 customers, even Title 61 customers. Advertising is one
3 of the primary ways competing companies attempt to
4
5 /
6
7 /
8
9 /
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
3918
MARGARET J. WRIGHT, REB 57A
U S WEST COMMUNICATIONS, INC.
1 communicate with customers. Several of USWC's chief
2 competitors in the local markets e.g., AT&T and MCI,
3 already have very strong positions with customers based,
4 in part, upon their tremendous advertising campaigns. It
5 is simply not realistic that USWC will operate
6 successfully in a competitive environment unless it too
7 makes effective use of advertising.
8 Q IS USWC SUGGESTING THAT THE FULL AMOUNT
9 DISALLOWED BY STAFF SHOULD BE INCLUDED IN TITLE 61 RATES?
10 A Not at all. Staff's disallowance is based
11 upon USWC's intrastate expense before it is split between
12 Title 61 and Title 62. Under CAAS only approximately 33%
13 is allocated to Title 61 based on special studies.
14
15 AFFILIATED INTEREST EXPENSE
16
17 Q DOES THE STAFF CHALLENGE THE REASONABLENESS
18 OF USWC'S TRANSACTIONS WITH AFFILIATES?
19 A No, except for some minor exceptions.
20 Rather, Staff concentrates on how expenses created in
21 affiliate transactions are to be allocated.
22 Q PLEASE PROVIDE AN OVERVIEW OF THE ISSUES
23 RAISED BY STAFF OVER THE USWC TRANSACTIONS WITH ITS
24 AFFILIATES.
25
3919
MARGARET J. WRIGHT, REB 58
U S WEST COMMUNICATIONS, INC.
1 A With the exception of some of the charges
2 from BRI, Inc., Staff does not contend that USWC has
3 incurred unreasonable expenses as a result of its
4 affiliate transactions. What it contends is that the
5 USWC affiliates failed to directly assign their charges
6 to Title 61 or other services. Staff spent a substantial
7 amount of time auditing the books and records of the USWC
8 affiliates, and apparently expected to find in its audit
9 the direct assignment of the affiliates' charges to
10 specific USWC services. Staff has attempted its own
11 direct assignment and allocation of the affiliate
12 charges, based upon its limited audit of the affiliates'
13 books and records.
14 Q WAS IT REASONABLE FOR THE STAFF TO EXPECT
15 TO FIND EITHER A DIRECT ASSIGNMENT OR AN ALLOCATION OF
16 THE AFFILIATES CHARGES IN THEIR BOOKS AND RECORDS?
17 A No it was not. The USWC affiliates are not
18 regulated companies, do not use the USOA, and neither
19 assign or allocate the cost of their products or services
20 to the various telephone services provided by USWC. If
21 USWC purchased computer software from a third party
22 vendor, it would not receive a bill from that vendor
23 which specified the USWC services for which it was being
24 provided. USWC would receive a simple invoice, and upon
25 payment of the invoice, a journal entry would be made to
3920
MARGARET J. WRIGHT, REB 59
U S WEST COMMUNICATIONS, INC.
1 record the transaction. Once that journal entry was
2 made, it would be processed through the USWC accounting
3 system, and assigned or allocated under CAAS. Any
4 affiliate transaction would be accounted for in the
5 identical fashion. The Staff has no reasonable basis for
6 contending that the accounting should be different, or
7 that the
8
9 /
10
11 /
12
13 /
14
15
16
17
18
19
20
21
22
23
24
25
3921
MARGARET J. WRIGHT, REB 59A
U S WEST COMMUNICATIONS, INC.
1 unregulated affiliate should somehow perform assignments
2 or allocations to Title 61 services in the state of
3 Idaho. I address separately below the Staff's attempt to
4 directly assign affiliate charges based on the records to
5 the affiliates.
6
7 BUSINESS RESOURCES INC. (BRI)
8 Q ON PAGE 27, LINES 8-10, MS. FAUNCE STATES
9 THAT USWC WAS UNABLE TO IDENTIFY ANY SERVICES FROM BRI
10 THAT RELATED TO PART 64, TITLE 62, TOLL ACCESS AND ONLY
11 MINIMAL RE-ENGINEERING COST. PLEASE COMMENT.
12 A It is important to note that Ms. Faunce
13 states that USWC cannot identify any services from BRI,
14 not that USWC cannot identify any costs from BRI. This
15 is because BRI does not have a specific service for Part
16 64, or a specific service for Title 62 items. BRI has
17 functional services, such as contracting, purchasing,
18 warehousing, and transportation, which include all
19 products and services used by USWC. However, USWC does
20 identify the costs that should be assigned to each
21 category suggested by Ms. Faunce as follows. First, the
22 Part 64 costs have already been removed from the numbers
23 used by Ms. Faunce as shown on Ms. Faunce's own
24 worksheet, "Analysis of Business Resources." Ms. Faunce
25 shows the third column to be "Idaho intrastate FCC
3922
MARGARET J. WRIGHT, REB 60
U S WEST COMMUNICATIONS, INC.
1 regulated." This means that the deregulated costs, known
2 as Part 64, have already been removed.
3 Second, regarding the Title 62 and toll access
4 costs, Ms. Faunce is aware that USWC uses CAAS to
5 identify and assign Title 62 costs by account. The CAAS
6 system was used by USWC in this case to assign the BRI
7 costs to Title 62 and Title 61. Therefore, Title 62 and
8 toll access costs have been identified. Third, BRI only
9 identifies minimal reengineering costs because the work
10 that BRI performs is only related to reengineering in one
11 instance-real estate services associated with employee
12 moves due to reengineering.
13 Q DOES MS. FAUNCE PROVIDE ANY ADDITIONAL
14 EVIDENCE THAT BRI IS PERFORMING REENGINEERING WORK THAT
15 HAS NOT BEEN IDENTIFIED?
16 A No. On page 27, lines 20-23, Ms. Faunce
17 mentions the Bellcore (BC) and U S WEST Advanced
18 Technologies (USWAT) work, and that systems development
19 was a key issue. However, she does not show how this
20 relates to her assumption that the work at BRI also
21 increased. Ms. Faunce provided no testimony to prove
22 that BRI has increased its costs due to reengineering
23 done at BC or USWAT.
24 Q ON PAGE 27, MS. FAUNCE ALSO STATES THAT
25 REPAIR OF COIN TELEPHONES IS A CLEAR TITLE 62 SERVICE.
IS THIS TRUE?
3923
MARGARET J. WRIGHT, REB 61
U S WEST COMMUNICATIONS, INC.
1 A No, Ms. Faunce is not correct. As I stated
2 previously in my testimony, since local coin revenues are
3 Title 61 there should be expenses and investment
4 allocated to Title 61 as well as to Title 62.
5 Q ON PAGE 28, LINES 11-12, MS. FAUNCE SAYS
6 THAT THERE WAS NO DIRECT ASSIGNMENT OF COSTS FOR EITHER
7 NON-REGULATED OR TITLE 61 SERVICES. AND ON LINES 22-23,
8 SHE SAYS THAT THERE IS NO COST DIRECTLY ASSIGNED TO THESE
9 SERVICES (TITLE 62) FROM BRI. PLEASE EXPLAIN WHY THESE
10 COSTS ARE NOT DIRECTLY ASSIGNED.
11 A Again, it is important to note that
12 Ms. Faunce says only that the costs were not directly
13 assigned, she does not say that those costs have not been
14 correctly identified. As explained above, USWC has
15 identified each type of cost listed by Ms. Faunce, but
16 they are identified through studies and systems, and are
17 not directly assigned. The reason that they are not
18 directly assigned is due to the costly and burdensome
19 nature of directly assigning each cost as it is incurred.
20 USWC believes that it is much more cost effective to use
21 our current procedures and that the additional costs to
22 be born by the ratepayers in identifying each cost would
23 not yield results that were materially different from the
24 current results.
25 Q IS STAFF'S APPROACH TO ALLOCATION, I.E.,
THE USE OF AN ARBITRARY 50% MORE ACCURATE THAN CAAS?
3924
MARGARET J. WRIGHT, REB 62
U S WEST COMMUNICATIONS, INC.
1 A No. The systems and studies used by USWC
2 are certainly much more accurate than an arbitrary 50%
3 assignment applied after selective "direct" allocations.
4 Q WHY WERE ONLY 4.6% OF THE BRI CHARGES MADE
5 TO THE MEDIA GROUP AS COMPARED TO 85% TO USWC?
6 A BRI's services, except for two contracting
7 services, are all usage based. They are billed to each
8 entity that used the services according to the actual
9 usage i.e. hours, square footage, items purchased, block
10 hours, etc. The Media Group simply used much less of
11 BRI's services than USWC did in 1995, which is why they
12 were billed less.
13 Q PLEASE ADDRESS THE ADJUSTMENT MADE BY
14 MS. FAUNCE FOR LEGAL COSTS AT BRI.
15 A BRI incurs legal costs from U S WEST, Inc.
16 for legal work that is performed. BRI treats the legal
17 costs as a corporate overhead and bills those costs as an
18 overhead loading on the BRI services. Therefore, since
19 Idaho was billed a portion of BRI's total overhead it was
20 billed for BRI legal costs. Ms. Faunce has evaluated the
21 legal matters and associated costs that were billed to
22 BRI and determined that 54.5% of those BRI legal costs
23 should not have been billed to Idaho.
24 Q DO YOU AGREE WITH THIS ADJUSTMENT?
25 A No. Here again, Ms. Faunce has removed
3925
MARGARET J. WRIGHT, REB 63
U S WEST COMMUNICATIONS, INC.
1 many costs that should be considered general corporate
2 overheads at BRI and should be paid for by all customers.
3 For
4
5 /
6
7 /
8
9 /
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
3926
MARGARET J. WRIGHT, REB 63A
U S WEST COMMUNICATIONS, INC.
1 example, she has removed legal matters associated with
2 antitrust, bankruptcy, contracting, copyrights, corporate
3 governance, intellectual property, MFJ compliance,
4 purchase/sales of real estate, subpoena advice, and
5 numerous litigation cases. There is no rationale as to
6 why legal matters such as these, which are necessary
7 costs for corporations to function, should not be billed
8 to all of the states that use the BRI services.
9 Therefore, Ms. Faunce's adjustment has no merit.
10
11 FLIGHT OPERATIONS
12
13 Q PLEASE SUMMARIZE THE STAFF'S TESTIMONY FOR
14 FLIGHT OPERATIONS.
15 A Ms. Faunce has gone through the flight logs
16 and identified a portion of the flights that she
17 considers appropriate as having value to Idaho Title
18 61/62. Basically, she has disallowed flights for civic
19 events such as the officers speaking to organizations or
20 belonging to outside boards, internal board meetings,
21 travel associated with employee recognition events such
22 as Presidents Club, customer meetings and various other
23 purposes. She then calculates her estimate of what the
24 commercial cost would have been for those same flights
25 (at an arbitrary cost of $500 per ticket) and allocates
3927
MARGARET J. WRIGHT, REB 64
U S WEST COMMUNICATIONS, INC.
1 this "commercial" cost to Idaho intrastate. The
2 adjustment she makes is the difference between her
3 estimated "commercial" cost for the flights that she
4 determined have
5
6 /
7
8 /
9
10 /
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
3928
MARGARET J. WRIGHT, REB 64A
U S WEST COMMUNICATIONS, INC.
1 value, compared to what USWC actually booked for flight
2 expense. This would reduce flight costs by $163,814 on a
3 southern Idaho intrastate basis.
4 Q WHY IS HER ANALYSIS OF THE FLIGHTS THAT DO
5 NOT BENEFIT TITLE 61 CUSTOMERS INAPPROPRIATE?
6 A First of all, she disallows costs where
7 USWC is performing its corporate responsibility such as
8 serving on outside boards and providing guest speakers.
9 She is therefore suggesting Title 61 customers have no
10 responsibility to support the communities where we do
11 business or participate in civic activities.
12 Secondly, she is disallowing flights associated
13 with employee recognition, even for employees who work in
14 Home and Personal services and Network Technology
15 Services, i.e., the areas most closely associated with
16 Title 61. These employees directly serve the Title 61
17 customers and yet Ms. Faunce is removing the costs
18 associated with rewarding these employees for performance
19 that is above and beyond what is expected in performing
20 their job duties.
21 Thirdly, Ms. Faunce is removing costs associated
22 with legitimate business purposes such as the Operations
23 Team Meeting for succession planning, Cost Benchmarking
24 - Ford (Motor Company), LSP (Local Service Provider)
25 staff meetings, CWA/Hapka meeting (company meeting with
3929
MARGARET J. WRIGHT, REB 65
U S WEST COMMUNICATIONS, INC.
1 Union representatives), Bystrzycki (network vice
2 president) meeting with Bellcore, CFO Interview, Speaker
3 at Finance Trainee Conference, Orientation with Senior
4 Home and Personal Services, meeting with the Bain
5 Consulting Group and many others. There is no rationale
6 as to why
7
8 /
9
10 /
11
12 /
13
14
15
16
17
18
19
20
21
22
23
24
25
3930
MARGARET J. WRIGHT, REB 65A
U S WEST COMMUNICATIONS, INC.
1 these costs would have been excluded. The flights that
2 deal with Title 62 issues are removed by the Company
3 through the CAAS Title 61/Title 62 allocation process.
4 Q IS THE ADJUSTMENT APPROPRIATE THAT
5 MS. FAUNCE MADE TO EQUATE THE COST OF CORPORATE FLIGHTS
6 TO COMMERCIAL FLIGHTS?
7 A No. The corporate aircraft services are
8 not meant to be a substitute for commercial flights.
9 Very few USWC employees use the corporate aircraft - most
10 do use commercial flights. Corporate aircraft are used
11 to move company officers between destinations in an
12 effort to maximize the productivity of the officer.
13 After reviewing the flight logs, Ms. Faunce is aware of
14 the extensive travel that these officers must undertake.
15 Corporate aircraft have the following benefits:
16 Flexibility - Access to 6,000 airports compared to 500
17 commercial airports. Also able to change destinations at
18 any time.
19 Productivity - Private, secure environment free
20 from interruptions.
21 Efficiency - Eliminates delays, baggage problems,
22 prolonged check-in, parking, wait times and often weather
23 related problems.
24 Enhanced safety and security - Personal security
25 is enhanced as well as safety associated with the
3931
MARGARET J. WRIGHT, REB 66
U S WEST COMMUNICATIONS, INC.
1 knowledge of the maintenance performed and familiarity
2 with the flight crew.
3
4 /
5
6 /
7
8 /
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
3932
MARGARET J. WRIGHT, REB 66A
U S WEST COMMUNICATIONS, INC.
1 Emergency Responsiveness - USWC can respond to
2 emergency situations 24 hours a day, seven days a week.
3 Avoided costs for hotels and meals - Without the
4 flexibility of the corporate aircraft, the officer's
5 travels would often encompass additional days and/or
6 hours of travel which would result in increased travel
7 expenses such as hotels and meals.
8 Ms. Faunce has ignored all of these
9 non-quantifiable factors and has focused only on the cost
10 issue. Title 61 customers receive benefits from the USWC
11 officers moving efficiently and rapidly around its 14
12 state territory and various other cities in the United
13 States in order to conduct the business of USWC.
14 Therefore, there should be no adjustment made to the USWC
15 flight costs.
16
17 BRI RETURN COMPONENT
18
19 Q WHAT IS USWC'S POSITION REGARDING THE ROR
20 ADJUSTMENT SUGGESTED BY MS. FAUNCE ON PAGE 31 OF HER
21 TESTIMONY?
22 A USWC will not dispute an adjustment to use
23 the Idaho authorized ROI in the BRI billings. However,
24 USWC does not agree with Ms. Faunce's calculations for
25 two primary reasons:
3933
MARGARET J. WRIGHT, REB 67
U S WEST COMMUNICATIONS, INC.
1 1) The ROI cost that is allocated to USWC as a component
2 of BRI's fully distributed cost does not include the
3 assets associated with credit card (Delta), property
4
5 /
6
7 /
8
9 /
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
3934
MARGARET J. WRIGHT, REB 67A
U S WEST COMMUNICATIONS, INC.
1 management, or furniture (which is addressed below), as
2 well as the enhanced services assets that were removed.
3 Therefore, Ms. Faunce's asset base is too high.
4 2) The $13 million that Ms. Faunce shows for actual ROR
5 earned in 1995 should be $5,157,421. This amount is the
6 total ROI that BRI included in its billings for FDC
7 services including a true-up in February 1996. USWC
8 would calculate the adjustment as follows:
9 Total BRI ROI in fully distributed costs $5,157,421
10 Percent to USWC .85
11 USWC ROI paid at 15.78% $4,383,808
12 Reduction to reduce ROI to 11.41% .28
13 Adjustment to USWC BRI expenses $1,227,466
14 Adjustment to Idaho Intrastate $ 23,830
15 Therefore the total ROI adjustment for BRI is
16 $23,830 instead of the $128,952 proposed by Ms. Faunce.
17
18 ADVANCED TECHNOLOGIES
19
20 Q DOES STAFF MAKE AN ADJUSTMENT FOR A
21 REDUCTION OF 118 CENTRAL DEPARTMENT EMPLOYEES AT U S WEST
22 ADVANCED
23
24
25
3935
MARGARET J. WRIGHT, REB 68
U S WEST COMMUNICATIONS, INC.
1 TECHNOLOGIES (AT) IN CONJUNCTION WITH A TRANSFER OF
2 FUNCTIONS FROM AT TO USWC IN 1995?
3 A Yes.
4 Q IS THIS AN APPROPRIATE ADJUSTMENT?
5 A No. Most of these employees left the
6 business in early 1995 so most of their expense savings
7 would have already been incorporated in the charges from
8 AT to USWC in 1995. Of the 118 employees that left AT in
9 1995, 11 left the AT payroll on May 3, 98 left on June 7
10 and 9 left September 13. Based on an average salary of
11 $76,000 there was $4.9 million worth of savings already
12 included in 1995 results. This would equate to $134,750
13 in savings to total state southern Idaho and $94,000 on
14 an intrastate basis versus the $173,744 proposed by the
15 Staff. USWC would be willing to make an intrastate
16 adjustment of $79,744 and $39,872 on a Title 61 basis.
17
18 MANAGEMENT INFORMATION SERVICES
19
20 Q WHAT IS THE BASIS FOR STAFF'S ADJUSTMENT TO
21 THE MANAGEMENT INFORMATION SYSTEM (MIS) COSTS?
22 A Staff claims that the MIS function was
23 moved in 1995 and the employees transferred to either the
24 USWC payroll or to the USWMRG payroll. Staff claims the
25 costs for
3936
MARGARET J. WRIGHT, REB 69
U S WEST COMMUNICATIONS, INC.
1 those employees who transferred to USWMRG should be
2 eliminated from the 1995 test period.
3 Q IS STAFF'S ADJUSTMENT BASED ON THE CORRECT
4 ASSUMPTIONS?
5 A No. Ms. Faunce has reached the incorrect
6 conclusion that USWC would receive a 60% cost reduction
7 for these services and only pay for the people
8 transferred onto USWC's payroll. The functions
9 previously used by USWC that were transferred to USWMRG
10 will continue to be used by USWC. USWC made payments to
11 MRG of $4.8 million in 1996 for those applications such
12 as network services, facilities maintenance and data
13 center utility services. Ms. Faunce's adjustment to
14 eliminate the costs for those employees who transferred
15 to USWMRG does not capture the Company's actual cost.
16
17 USW MARKETING GROUP
18
19 Q PLEASE SUMMARIZE THE STAFF'S TESTIMONY FOR
20 USW MARKETING GROUP.
21 A After examination of the advertising
22 purchased in the yellow pages by USWC, Ms. Faunce
23 determined the main purpose of this advertising is not
24 informational as to Title 61 but promotional as to Title
25 62 services. She has, therefore, directly assigned the
3937
MARGARET J. WRIGHT, REB 70
U S WEST COMMUNICATIONS, INC.
1 total yellow page cost for advertising of $32,742 to
2 Title 62 services at a southern Idaho intrastate level.
3 Q IS MS. FAUNCE MAKING AN ARBITRARY DECISION
4 THAT THE COMPANY DOES NOT NEED THIS TYPE OF INFORMATIONAL
5 ADVERTISING FOR TITLE 61 SERVICES?
6 A Yes. It is obvious from her exhibit that
7 there is both Title 61 and Title 62 services are
8 advertised on the page and therefore this should be a
9 common cost to be allocated between Title 61 and Title
10 62.
11
12 USW COMMUNICATIONS SERVICES
13
14 Q WAS MS. FAUNCE ACCURATE IN HER ASSESSMENT
15 OF SERVICES PROVIDED BY U S WEST COMMUNICATIONS SERVICES
16 (CS) TO U S WEST COMMUNICATIONS?
17 A No. Ms. Faunce indicates, on page 17 of
18 her testimony, that CS manages 911 databases when, in
19 fact, U S WEST Communications' Business & Government
20 Services market unit manages the 911 data bases. The
21 data administration and support services associated with
22 the 911 databases are billed to CS and recognized as
23 revenue to USWC.
24
25
3938
MARGARET J. WRIGHT, REB 71
U S WEST COMMUNICATIONS, INC.
1 Q WERE THERE ANY OTHER ERRORS IN MS. FAUNCE'S
2 TESTIMONY REGARDING THE SERVICES CS PROVIDES TO USWC?
3 A Yes. On page 17, Ms. Faunce states that CS
4 installs customer premises equipment. Once again, her
5 understanding of the relationship and the services CS
6 provides is misstated. U S WEST Communications'
7 technicians install customer premise equipment and bills
8 CS for this service. This is not an affiliate expense,
9 but a revenue to USWC.
10 Q WHAT IS YOUR RESPONSE TO MS. FAUNCE'S
11 PROPOSED DISALLOWANCE ASSOCIATED WITH CHARGES FROM
12 U S WEST COMMUNICATIONS SERVICES?
13 A Ms. Faunce has clearly misunderstood the
14 relationship between U S WEST Communications and U S WEST
15 Communications Services. She has improperly defined
16 recommended disallowances on affiliate services that
17 resulted in revenues to USWC and not expenses.
18 Q WHAT ARE THE SERVICES CS PROVIDES TO USWC?
19 A U S WEST Communications Services markets
20 network services. Moreover, they provide a wide range of
21 related functions in addition to the marketing activity,
22 including sales planning, sales support, and customer
23 account servicing. An important service that CS also
24 provides to USWC is the management of the existing
25 customer
3939
MARGARET J. WRIGHT, REB 72
U S WEST COMMUNICATIONS, INC.
1 base, which includes those activities undertaken to
2 ensure continuation and growth of existing services and
3 associated revenues.
4 Q SHOULD THE EXPENSES ASSOCIATED WITH THE
5 PROVISION OF THESE SERVICES BE DISALLOWED?
6 A Absolutely not. Marketing, and related
7 functions, are legitimate business expenses which USWC
8 would incur whether or not the employees are within USWC
9 or at CS.
10 Q WHAT IS MS. FAUNCE'S RATIONALE FOR
11 RECOMMENDING 100% DISALLOWANCE OF THESE EXPENSES?
12 A Ms. Faunce believes that because CS
13 employees market network services to businesses and
14 government, therefore, all related expenses should be
15 assigned to Title 62 services. It is my position,
16 however, that since Idaho assigns a customer with 5 or
17 fewer business lines to Title 61, that these expenses
18 should be assigned accordingly.
19
20 USW FEDERAL SERVICES
21 Q WHAT IS MS. FAUNCE'S RECOMMENDATION FOR
22 EXPENSES ASSOCIATED WITH U S WEST FEDERAL SERVICES (FS)?
23 A Ms. Faunce's recommendation is to disallow
24 100% of the expenses associated with the services FS
25 provides to USW.
3940
MARGARET J. WRIGHT, REB 73
U S WEST COMMUNICATIONS, INC.
1 Q HOW DOES USWC ASSIGN CS AND FS COSTS
2 BETWEEN TITLE 61 AND TITLE 62?
3 A The costs are allocated through CAAS, which
4 assigns business service relationships to products and
5 services. The sales function is assigned to "basic
6 business products" within the CAAS system and then
7 allocated between Title 61 or Title 62.
8
9 U S WEST, INC.
10
11 Q PLEASE BRIEFLY EXPLAIN WHAT U S WEST, INC.
12 IS AND HOW THE COMPANY HAS TREATED THE INC. EXPENSES IN
13 THIS CASE.
14 A U S WEST, Inc. ("Inc.") is the parent
15 company of U S WEST Communications, Inc. as well as of
16 the other affiliated corporate companies that are part of
17 the corporate family. Among services provided by Inc. to
18 its affiliates (including USWC) are corporate finance and
19 accounting, human resources, legal services, public
20 policy and public relations.
21 Expenses generated at the Inc. level are treated
22 as headquarters expenses and distributed among the
23 affiliated companies. Please see Section 4 of my
24 testimony.
25 USWC in turn allocates the Inc. costs among the
3941
MARGARET J. WRIGHT, REB 74
U S WEST COMMUNICATIONS, INC.
1 states. The separations process, then allocates these
2 costs between the intrastate and interstate
3 jurisdictions.
4
5 /
6
7 /
8
9 /
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
3942
MARGARET J. WRIGHT, REB 74A
U S WEST COMMUNICATIONS, INC.
1 For purposes of this jurisdiction, CAAS is used to then
2 allocate the Idaho intrastate portion of these expenses
3 between Title 61 and Title 62.
4 The following chart summarizes this process:
5
1995 USWI CHARGES AS ALLOCATED TO TITLE 61
6
HEADQUARTERS AS A % AS A %
7 COSTS OF USWI OF USWC
USWI TOTAL $125,493,331
8
CHARGED TO USWC $85,027,514 67.8%
9
USWC CHARGES TO $70,756,131 56.4%
10 EXPENSE
11 CHARGED TO S. $1,946,501 1.6% 2.75%
IDAHO STATE
12
PART 64 COSTS TO ($117,773)
13 BE REMOVED
14 INTERSTATE COSTS TO ($451,207)
BE REMOVED
15
TOTAL IDAHO $1,377,521 1.1% 1.95%
16 INTRASTATE
17 TITLE 62 COSTS ($688,761)
TO BE REMOVED**
18
IDAHO INTRASTATE $688,760 .5% .97%
19 TITLE 61 COSTS
20 *Remaining USWC costs booked below the line
**Assumed to be 50% overall
21
22
23
24 Q WHAT IS THE APPROXIMATE PERCENTAGE OF TOTAL
25 U S WEST, INC. EXPENSES THAT ARE ALLOCATED BY USWC TO
3943
MARGARET J. WRIGHT, REB 75
U S WEST COMMUNICATIONS, INC.
1 TITLE 61?
2 A It is approximately one-half of one
3 percent.
4 Q HOW DID STAFF TREAT INC. EXPENSES IN THIS
5 CASE?
6 A Staff used the allocation to the Idaho
7 intrastate jurisdiction as a starting point. Ms. Faunce
8 at pages 34 to 36 of her testimony describes how she
9 approached allocation of Inc. expenses between Title 61
10 and Title 62. She explains that she looked at three
11
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13
14 /
15
16 /
17
18
19
20
21
22
23
24
25
3944
MARGARET J. WRIGHT, REB 75A
U S WEST COMMUNICATIONS, INC.
1 sources of information as a basis for her allocation of
2 "executive, shareholder and finance expenses": the
3 "Executive and Board Member Compensation" information in
4 the 1996 Proxy Statement, the minutes of meetings of the
5 U S WEST, Inc. Board of Directors and the flight logs
6 relating to corporate aircraft. She then concludes:
7 ... In management's efforts to increase
shareholders value the entire focus is on
8 financing the purchase and/or development of new
lines of business and introduction of new service.
9 Therefore, Staff believes that only 7% of the
executive, shareholder and finance expenses
10 allocated to USWC from Inc. should be attributed
to the southern Idaho intrastate operations for
11 allocation to Title 61/62 services.
12 Faunce, p. 35, l. 23-25 and p. 36, ll. 1-5
13 Q PLEASE PUT THIS CONCLUSION IN PERSPECTIVE
14 BY COMPARING IT WITH THE INTRASTATE RESULTS.
15 A As I stated above, Idaho is allocated 2.75%
16 of USWC's portion of Inc. costs which is then separated
17 between the intrastate and interstate jurisdiction
18 leaving 1.95% allocated to Idaho intrastate to split
19 between Title 61 and Title 62. The intrastate amount for
20 "executive, shareholder and finance" expense is $453,534.
21 Ms. Faunce disallows 93% of that amount leaving only
22 $31,747 to be allocated between Title 61 and Title 62.
23 Q HOW DOES MS. FAUNCE PROPOSE TO ALLOCATE THE
24 REMAINING AMOUNT?
25 A I am uncertain, but I believe that Staff
uses the CAAS model to allocate the remaining amount.
3945
MARGARET J. WRIGHT, REB 76
U S WEST COMMUNICATIONS, INC.
1 Q IS MS. FAUNCE JUSTIFIED IN ALLOWING ONLY 7%
2 OF THE EXPENSE IN THE EXECUTIVE, SHAREHOLDER AND FINANCE
3 SERVICES TO BE ALLOCATED BETWEEN TITLE 61 AND TITLE 62?
4 A No. There are two fallacies in the
5 proposed adjustment recommended by Ms. Faunce. First of
6 all, she is using inappropriate sources to estimate the
7 time spent on the executive, shareholder and finance
8 services. The minutes of the Board of Directors are
9 maintained at a very high level and do not discuss the
10 day to day operations that the Inc. employees are
11 engaging in. Similarly the flight logs only show the
12 flights of certain U S WEST officers who chose to use the
13 corporate aircraft. The corporate aircraft are used by a
14 very small percentage of Inc. employees and can in no way
15 be used as a reasonable estimation of the total amount of
16 time Inc. employees spend on USWC issues.
17 Finally relying on general descriptions of the
18 compensation plans for U S WEST Inc. executives and
19 outside Directors is a patently unreasonable source of
20 information regarding the value of the services provided
21 by Inc. to USWC. At the end of 1995 there were over 800
22 employees at Inc. Less than 3% of these people are
23 "executives." Ms. Faunce's approach applies equally to
24 the U S WEST, Inc. President (who attended Board
25 Meetings, used the corporate aircraft and was compensated
3946
MARGARET J. WRIGHT, REB 77
U S WEST COMMUNICATIONS, INC.
1 as an executive) and the support staff who did none of
2 those things. In addition, in using executive
3 compensation as a basis for allocation, Ms. Faunce, like
4 Ms. Baldwin in the plant investment area, attempts to
5 rely solely on her perception of the "motivation" of
6
7 /
8
9 /
10
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12
13
14
15
16
17
18
19
20
21
22
23
24
25
3947
MARGARET J. WRIGHT, REB 77A
U S WEST COMMUNICATIONS, INC.
1 the Inc. employees rather than on making a realistic
2 assessment of the work they actually perform.
3 Secondly, Ms. Faunce has taken her 7% estimate
4 based on Board of Director minutes and flight logs, and
5 applied that to a host of diverse functions that are
6 included in the executive, shareholder and finance
7 categories. For example, she applied the 7% estimate to
8 corporate accounting. This group prepares SEC filings as
9 well as annual and monthly financial reports that are
10 required of corporations. She also applied the 7%
11 allowance to employee relocation services which are
12 necessary due to Company-initiated relocations, and to
13 the Vice President of Human Resources who oversees all HR
14 functions. Applying a blanket 7% allowance of these
15 expenses is arbitrary particularly when applied to the
16 wide variety of functions included. Ms. Faunce has not
17 examined the specific work done within the broad
18 categories of executive, shareholder and finance, and
19 therefore has recommended a disallowance that is
20 inappropriate.
21 Q DID MS. FAUNCE APPLY THE 93% DISALLOWANCE
22 TO ALL U S WEST, INC. EXPENSES?
23 A No. She completely disallowed expenses in
24 several areas. She also took a different approach to the
25 Internal Audit Group and the Law Department. I have
3948
MARGARET J. WRIGHT, REB 78
U S WEST COMMUNICATIONS, INC.
1 summarized the Inc. disallowances on Exhibit 43G.
2 Q WHY DID MS. FAUNCE DISALLOW SOME OF THE
3 COSTS ASSOCIATED WITH THE INTERNAL AUDIT FUNCTIONS?
4
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6
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8
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10
11
12
13
14
15
16
17
18
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3949
MARGARET J. WRIGHT, REB 78A
U S WEST COMMUNICATIONS, INC.
1 A After reviewing an audit list and some
2 audit reports she apparently concluded that many of the
3 audits did not benefit Title 61 and therefore "directly
4 assigned" them to Title 62. However, many of the audits
5 disallowed are clearly associated with Title 61 services.
6 For example, she rejected an audit of the Remittance
7 Process Center which handles all customer payments.
8 Several audits disallowed were related to the new billing
9 system for USWC. Exhibit 43H summarizes the audit
10 information.
11 Q PLEASE EXPLAIN THE APPLIED RESEARCH COSTS
12 FROM U S WEST, INC. THAT MS. FAUNCE HAS COMPLETELY
13 DISALLOWED.
14 A Ms. Faunce states that these costs were
15 disallowed for the same reasons as research costs were
16 disallowed for U S West Advanced Technologies and
17 Bellcore. Although USWC disagrees with her treatment of
18 Advanced Technologies and Bellcore expenses, there is
19 another problem with these particular research costs.
20 The work done at U S WEST, Inc. is totally different than
21 that performed at the other affiliates. The applied
22 research work being done at Inc. relates to developing
23 employee tests and employee selection procedures used for
24 screening applicants. Virtually all of the work done in
25 this group is for USWC. If this service were not
3950
MARGARET J. WRIGHT, REB 79
U S WEST COMMUNICATIONS, INC.
1 provided by Inc. USWC would need to perform the service
2 for itself and would incur similar expense. Therefore,
3 the complete disallowance of this expense is not
4 justified. Instead, the costs should be allocated
5 between Title 61 and Title 62.
6 Q PLEASE DISCUSS THE LOBBYING EXPENSE
7 DISALLOWANCE MADE BY MS. FAUNCE.
8
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10
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12
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14
15
16
17
18
19
20
21
22
23
24
25
3951
MARGARET J. WRIGHT, REB 79A
U S WEST COMMUNICATIONS, INC.
1 A Ms. Faunce has disallowed the costs for two
2 Responsibility Codes, 411000 and 415000 totalling $57,194
3 on an intrastate basis as lobbying expenses. In fact,
4 these expenses were booked below the line by USWC and
5 therefore are not included in the Idaho expenses.
6 Ms. Faunce would not have been aware of this "below the
7 line" expense treatment, however, due to an error in the
8 information she was given to help her interpret the
9 accounting treatment of these costs. Nonetheless,
10 $57,194 of Staff's disallowance to Inc. costs should be
11 disregarded because the expenses to which it is intended
12 to apply are not contained in Idaho intrastate expenses.
13 The remaining costs Ms. Faunce identifies as
14 lobbying are for the "Delaware Regulatory group" which is
15 a group of internal employees who represent USWC and
16 other U S WEST affiliates at the FCC. This group
17 performs roughly the same function as the Idaho state
18 public policy employees perform at the Idaho Commission.
19 Among the issues managed by this group are the
20 interconnection docket, depreciation (3-way
21 represcription meetings), tariffs, approvals for sale of
22 rural exchanges, Part 64 audits, ARMIS reports, Form M
23 reports and the Cost Assignment Manual (CAM). These
24 activities at the FCC impact intrastate service including
25 basic local exchange services. Disallowance of these
3952
MARGARET J. WRIGHT, REB 80
U S WEST COMMUNICATIONS, INC.
1 costs is not appropriate. Rather the intrastate portion
2 should be allocated between Title 61 and Title 62.
3 Q PLEASE EXPLAIN WHY THE LEADERSHIP
4 CONFERENCE EXPENSES THAT MS. FAUNCE ADDRESSES ON PAGE 37
5 OF HER TESTIMONY ARE APPROPRIATE TO BE CHARGED TO IDAHO
6 RATEPAYERS.
7
8 /
9
10 /
11
12 /
13
14
15
16
17
18
19
20
21
22
23
24
25
3953
MARGARET J. WRIGHT, REB 80A
U S WEST COMMUNICATIONS, INC.
1 A The Leadership Conference is a meeting
2 conducted to honor and recognize outstanding achievement
3 and leadership throughout the U S WEST family of
4 companies. Ms. Faunce has mischaracterized the purpose,
5 theme and accomplishments of the Leadership Conference.
6 In the two and one-half days (normally 20 work hours) of
7 the 1995 Leadership Conference, the group spent
8 approximately 14 hours on subjects that apply to U S WEST
9 as a whole including leadership awards and recognition of
10 outstanding quality teams. Four hours were spent on
11 specific USWC issues, including efforts to focus on
12 customers on a state specific basis. One hour was spent
13 on other affiliate topics. Therefore, of the 20 hours of
14 work conducted, 19 hours related either directly or
15 partially to USWC operations. One-half day (4 hours) was
16 spent in recreation as a reward for employees. One-half
17 of the attendees were from USWC. The cost of this
18 conference is a legitimate business expense that should
19 be charged to both Title 61 and Title 62 Idaho
20 ratepayers.
21 Q DO YOU AGREE THAT THE DISALLOWANCE FOR
22 WORKFORCE MANAGEMENT SHOWN ON PAGE 38 OF MS. FAUNCE'S
23 TESTIMONY IS APPROPRIATELY IDENTIFIED AS "REENGINEERING"
24 AND THEREFORE SUBJECT TO STAFF'S AMORTIZATION?
25 A No, I do not. This group has been active
3954
MARGARET J. WRIGHT, REB 80A
U S WEST COMMUNICATIONS, INC.
1 since 1988 and its operations are ongoing. Workforce
2 Management reviews business cases, provides advice and
3 guidelines, and monitors all cases where management jobs
4 are eliminated to insure compliance with
5
6 /
7
8 /
9
10 /
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
3955
MARGARET J. WRIGHT, REB 81A
U S WEST COMMUNICATIONS, INC.
1 corporate policies and legal requirements. This group's
2 scope is broader than any one downsizing initiative and
3 its services are still used by USWC today.
4 Q WHY IS THE ADJUSTMENT FOR THE REWARDS AND
5 RECOGNITION EXPENSE IDENTIFIED ON PAGE 38 OF MS. FAUNCE'S
6 TESTIMONY INAPPROPRIATE?
7 A First of all, this expense is for the Human
8 Resources function that develops, designs and administers
9 management, sales and executive compensation plans. This
10 expense does not include the actual payouts for employee
11 rewards or recognition. This group managed all salary,
12 bonus and special recognition programs for all U S WEST
13 affiliates, including USWC. There were no comparable
14 functions at USWC in the test year. Therefore, if USWC
15 did not purchase this function from Inc., USWC would need
16 to provide the service for itself.
17 Once again, complete disallowance of this portion
18 of U S WEST, Inc. Costs is not appropriate. The
19 intrastate Idaho portion should be allocated between
20 Title 61 and Title 62.
21 Q WHY IS THE ADJUSTMENT THAT MS. FAUNCE
22 REMOVED FOR "IMAGE" COSTS AT INC. INAPPROPRIATE?
23 A Ms. Faunce has included many varied
24 activities under the broad category of "image" including
25 public policy, corporate strategy and public relations.
3956
MARGARET J. WRIGHT, REB 82
U S WEST COMMUNICATIONS, INC.
1 She concludes:
2 These expenses do not benefit Title 61 service in
the state of Idaho. Faunce, p. 39, ll. 7-8.
3
4
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6
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8
9 /
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
3957
MARGARET J. WRIGHT, REB 82A
U S WEST COMMUNICATIONS, INC.
1 As with Ms. Faunce's disallowance of most
2 advertising expense, Ms. Faunce uses a standard,
3 "benefit" to Title 61 service, which is not entirely
4 applicable in this area. As USWC moves into a fully
5 competitive environment expenses incurred to enhance
6 corporate image and, hence, create a favorable impression
7 in the minds of customers are necessary business
8 expenses. Such expenses cannot be disallowed simply
9 because the Commission Staff does not find them
10 "beneficial."
11 In addition, with regard to these particular
12 expenses, Ms. Faunce has overlooked the benefits which do
13 apply to Title 61 services. For example, this
14 disallowance includes media relations and public
15 relations management. This group monitors the media and
16 serves as a liaison between U S WEST and the news media
17 on all issues. This is a group that would provide
18 information in case of damages caused by storms, floods,
19 and other issues involving USWC. Another group
20 Ms. Faunce disallowed under the label "image" is public
21 policy which supports all U S WEST entities in state and
22 federal regulatory issues. Another area included in
23 "image" is corporate strategy which allows for efficient
24 allocation of resources and provides focus to the
25 U S WEST, Inc. subsidiaries including USWC. Corporate
3958
MARGARET J. WRIGHT, REB 83
U S WEST COMMUNICATIONS, INC.
1 strategy benefits all subsidiaries in that each is
2 integrated into the company-wide strategic direction.
3 All of the above activities are reasonable business
4 expenses that benefit all customers, and therefore should
5 be allocated to both Title 61 and Title 62 customers.
6
7 /
8
9 /
10
11 /
12
13
14
15
16
17
18
19
20
21
22
23
24
25
3959
MARGARET J. WRIGHT, REB 83A
U S WEST COMMUNICATIONS, INC.
1 Q PLEASE EXPLAIN THE DUES AND MEMBERSHIPS
2 THAT WERE DISALLOWED BY MS. FAUNCE.
3 A This intrastate Idaho total amount of this
4 expense is $596. U S WEST, Inc. incurred dues and
5 memberships that should be allocated between Title 61 and
6 Title 62 for the following five organizations:
7 Conference Board - Peer group meetings to discuss
8 critical common concerns confronting management
9 today. Several USWC employees sit on committees,
10 attend meetings and are sent results of surveys.
11 National Foundation for Aids - Helps educate
12 employees on how to cope with AIDS in the
13 workplace.
14 Alliance for Public Technology - Non-profit
15 organization whose goal is equitable and
16 affordable access to communications technologies
17 and services. APT language regarding universal
18 service was included in the House and Senate
19 legislation.
20 Council of Better Business Bureaus - Administers
21 programs that foster truth and accuracy in
22 advertising and provides background reports on
23 business firms.
24 Committee for Economic Development - Provides
25 nonpartisan, balanced approach to important
economic issues.
3960
MARGARET J. WRIGHT, REB 84
U S WEST COMMUNICATIONS, INC.
1 All of the entities listed above are beneficial and
2 useful to USWC. It is appropriate for Title 61 and Title
3 62 customers to provide modest support for the existence
4 of the organizations which promote the general welfare
5 and provide direct benefits to USWC.
6 As an aside, approximately $17 of the Idaho
7 intrastate charges for memberships and dues are for the
8 Conference of Southwest Foundations which should have
9 been charged to the U S WEST Foundation. USWC agrees
10 these costs should have been removed but I have not made
11 an adjustment to reflect this error due to the de minimis
12 amount of the charge.
13 Q PLEASE EXPLAIN WHY MS. FAUNCE DISALLOWED
14 THE EXPENSES SHE IDENTIFIED AS "SUBSIDIARY TAX".
15 A When asked this question in data requests,
16 Staff replied: "There is no subsidiary tax in Idaho
17 therefore, Idaho ratepayers should not be paying this
18 tax." Staff response to USWC Data Request Number 111.
19 Q IS THIS A PROPER BASIS FOR DISALLOWANCE OF
20 THIS AMOUNT?
21 A No. I believe Ms. Faunce has misunderstood
22 this expense. It is not actually a tax. Rather it is a
23 functional work group at U S WEST, Inc. that helps
24 subsidiaries, including USWC, resolve tax issues. In
25 1995, two and one-half employees in this group were
3961
MARGARET J. WRIGHT, REB 85
U S WEST COMMUNICATIONS, INC.
1 dedicated to USWC to provide systems development for the
2 preparation of USWC's sales and gross receipts tax
3 returns and administer the USWC database. The group also
4 provided computer support to the U S WEST, Inc. tax
5 group.
6
7 /
8
9 /
10
11 /
12
13
14
15
16
17
18
19
20
21
22
23
24
25
3962
MARGARET J. WRIGHT, REB 85A
U S WEST COMMUNICATIONS, INC.
1 The Subsidiary Tax group provided valuable
2 services to USWC in the test year. The intrastate Idaho
3 expense in the amount of $16,377 should be allocated
4 between Title 61 and Title 62.
5
6 LEGAL COSTS
7
8 Q PLEASE EXPLAIN HOW STAFF HAS APPROACHED THE
9 LEGAL COSTS WHICH ARE INCLUDED IN THE IDAHO INTRASTATE
10 NUMBERS.
11 A There are two major pieces to the USWC
12 legal costs: general corporate overhead legal expense
13 and legal expenses which are considered directly incurred
14 at the USWC level. The U S WEST Law Department is part
15 of Inc. All legal work supplied in-house is performed by
16 Inc. employees. During a portion of 1995, both Mary
17 Hobson and Carol Wren were on the Inc. payroll.
18 Q HOW DID MS. FAUNCE RECOMMEND THE CORPORATE
19 OVERHEAD PIECE BE HANDLED?
20 A Of the entire amount attributed to the
21 Idaho intrastate jurisdiction, i.e., $225,375 Ms. Faunce
22 recommended disallowance of $203,878. The remaining
23 amount ($21,497) she would agree should be allocated
24 between Title 61 and Title 62.
25 Q WHAT IS MS. FAUNCE'S REASON FOR MAKING THIS
ADJUSTMENT?
3963
MARGARET J. WRIGHT, REB 86
U S WEST COMMUNICATIONS, INC.
1 A I conclude from her testimony that she did
2 this on the basis of her review of "all legal cases" and
3 her impression of how the Executive Vice President and
4 Chief Legal officer spends his time. (Faunce (Di) p. 40,
5 l. 25 through p. 41, l. 17)
6 Q IS THIS AN APPROPRIATE BASIS FOR THAT
7 DISALLOWANCE?
8 A No. Ms. Faunce appears to believe that all
9 legal expenses are incurred in filed "cases." She
10 totally overlooks the fact that USWC as a corporate
11 entity has overhead legal expenses which involve
12 corporate governance, SEC compliance, employment law and
13 human resources tax issues, copyright and intellectual
14 property issues and a myriad of other legal concerns.
15 These are reasonable and necessary business expenses
16 which simply cannot be avoided in today's complex
17 society. Even if Ms. Faunce cannot tie these expenses
18 directly to some Title 61 "benefit" it is nonetheless
19 necessary that the Company's business expenses be covered
20 in the rates it charges its customers.
21 Q HOW ARE THE LEGAL EXPENSES WHICH ARE
22 CHARGED DIRECTLY TO USWC IN TURN CHARGED TO THE STATES IN
23 USWC'S ACCOUNTING SYSTEM?
24 A USWC uses a headquarters prorate to assign
25 all legal expenses. Therefore, Idaho is charged with
3964
MARGARET J. WRIGHT, REB 87
U S WEST COMMUNICATIONS, INC.
1 about 2.75% of the total USWC legal expense.
2 Q IS MS. FAUNCE SATISFIED WITH THIS APPROACH?
3 A No, she is not. One of her chief concerns
4 appears to be that legal expenses are not assigned
5 directly to states. Hence, as a result of her review of
6 cases she observes, "a
7
8 /
9
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11
12 /
13
14
15
16
17
18
19
20
21
22
23
24
25
3965
MARGARET J. WRIGHT, REB 87A
U S WEST COMMUNICATIONS, INC.
1 one line or one word description ... in some cases was
2 very informative such as `rate case Utah' or `service
3 problems Arizona'." Faunce (Di) p. 42, ll. 10-12. She
4 uses this as a basis for disallowing large portions of
5 legal expense.
6 Q ISN'T IT A VALID CRITICISM THAT IDAHO
7 CUSTOMERS SHOULDN'T HAVE TO PAY FOR LEGAL EXPENSES WHICH
8 ARE SPECIFIC TO ANOTHER STATE?
9 A If you were to take that view you have to
10 admit Idaho customers should have to pay Idaho-specific
11 expenses. This is really an issue of how one looks at
12 allocations. As we know, Staff would prefer to see a
13 great deal more "direct" assignment of costs, but the
14 real question is, would such direct assignment actually
15 produce a better result?
16 Q HAS USWC CONDUCTED ANY FURTHER ANALYSIS OF
17 THIS QUESTION AS IT RELATES TO LEGAL EXPENSES?
18 A Yes. In response to Ms. Faunce's testimony
19 we attempted to assign legal expenses on a state specific
20 basis where possible. The public policy, or state
21 regulatory, portion of the legal expense is the only area
22 that has information as to the legal matters that pertain
23 to each specific state. Since public policy was about
24 $8 million of the total $20 million of direct legal
25 expense, their portion of the total legal costs is
3966
MARGARET J. WRIGHT, REB 88
U S WEST COMMUNICATIONS, INC.
1 significant. Our analysis which is shown in my Exhibit
2 43I shows that of the amount of legal expenses which
3 could be directly assigned to states, Idaho-related work
4 comprised 3.40% of the total. Under our allocation
5 system, only 2.75% would be included in southern Idaho
6 state expense. Therefore, using a headquarters prorate
7 is a reasonable
8
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10
11 /
12
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14
15
16
17
18
19
20
21
22
23
24
25
3967
MARGARET J. WRIGHT, REB 88A
U S WEST COMMUNICATIONS, INC.
1 and far less costly alternative to tracking each legal
2 matter and charging them directly to the states.
3 Q ARE ALL LEGAL EXPENSES WHICH ARE DIRECTLY
4 INCURRED BY USWC CAPABLE OF BEING ASSIGNED ON A
5 STATE-SPECIFIC BASIS?
6 A No. Once again, many legal expenses are
7 not state specific and are allocated across the USWC
8 jurisdictions on the same basis as the corporate
9 overheads.
10 Q PLEASE COMMENT ON THE LEGAL COSTS
11 ALLOCATIONS METHODOLOGY PROPOSED BY MS. FAUNCE.
12 A Here again, Ms. Faunce is proposing that a
13 very detailed analysis be done on each legal expense to
14 directly assign it to Title 61/Title 62, in lieu of using
15 the reasonable allocation procedures in place at USWC.
16 On page 43, Ms. Faunce says that she reviewed 5,875 legal
17 cases. USWC does not believe that the time and effort
18 USWC would need to spend annually to review details about
19 each legal matter to be able to directly assign each one
20 would be beneficial. The Title 61 customers would need
21 to bear the full cost of the tracking of these expenses,
22 and this cost would most likely far outweigh the
23 benefits.
24 In addition, the "direct" allocation methodology
25 used by Ms. Faunce to assign the costs to Idaho does not
3968
MARGARET J. WRIGHT, REB 89
U S WEST COMMUNICATIONS, INC.
1 yield accurate results. In one of her workpapers, she
2 lists all of the legal matters and identifies the ones
3 she believes should be allocated to
4
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10
11
12
13
14
15
16
17
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20
21
22
23
24
25
3969
MARGARET J. WRIGHT, REB 89A
U S WEST COMMUNICATIONS, INC.
1 Idaho. The following are just a few examples of costs
2 that she concludes should have no Idaho allocation:
3 Sizing/staffing
4 Sales Support
5 Copyrights
6 Intellectual Property
7 Executive Employment Matters
8 Business Basic Exchange Service
9 Sales Procedures/Operations
10 Contracting (Consultant Agreements)
11 Numerous litigation cases
12 There is nothing in the title of these expense categories
13 to indicate why these charges are not even partially
14 applicable to Idaho. There does not appear to be a
15 rational basis for excluding costs of these kinds from
16 partial allocation to Title 61.
17 Q PLEASE SUMMARIZE THE IMPACT OF MS. FAUNCE'S
18 DISALLOWANCES OF LEGAL EXPENSES.
19 A She disallows 90% of the legal expenses in
20 the general overhead category and 76% of the legal
21 expense directly attributed to USWC. The remaining
22 minute amount she agrees to allocate between Title 61 and
23 Title 62.
24
25
3970
MARGARET J. WRIGHT, REB 90
U S WEST COMMUNICATIONS, INC.
1 Q PLEASE EXPLAIN THE DOUBLE COUNTING THAT YOU
2 HAVE DISCOVERED INCLUDED IN MS. FAUNCE'S ANALYSIS OF
3 U S WEST, INC.
4 A The double counting has occurred because
5 Ms. Faunce has proposed reductions of up to 100% of
6 various U S WEST, Inc. Responsibility Codes. These
7 Responsibility Code costs include all Inc. costs charged
8 to that function including wages, salaries, bonuses,
9 incentive pay, travel expenses and all other costs.
10 Ms. Faunce has then separately proposed an adjustment for
11 the Inc. team performance award, bonus, short term
12 incentive payments and long term incentive payments. By
13 doing this she is removing the various reward payments
14 twice -- once by removing the Responsibility Code costs
15 and then again under her compensation adjustments.
16 Q HAS USWC CALCULATED THE IMPACT OF THE
17 DOUBLE COUNTING?
18 A Yes, we have. The Idaho intrastate amount
19 that has been removed twice is $27,066. This amount
20 needs to be added back to the total USWC expenses
21 regardless of any other adjustments that occur.
22
23 COMPENSATION
24
25 Q PLEASE SUMMARIZE COMMISSION STAFF WITNESS
3971
MARGARET J. WRIGHT, REB 91
U S WEST COMMUNICATIONS, INC.
1 FAUNCE'S DIRECT TESTIMONY REGARDING INCENTIVE
2 COMPENSATION.
3
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6 /
7
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9
10
11
12
13
14
15
16
17
18
19
20
21
22
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24
25
3972
MARGARET J. WRIGHT, REB 91A
U S WEST COMMUNICATIONS, INC.
1 A The following is a schedule that identifies
2 Ms. Faunce's proposals regarding incentive compensation
3 including the page reference to her direct testimony, the
4 type of incentive compensation, the entity paying the
5 compensation, and the percentage she proposes be assigned
6 away from Title 61.
7
Type of Proposed%
8 Direct Testimony Incentive Entity Paying Assigned
Page Number Compensation the Compensation to Title 62
9
38 Recognition rewards USWI 80%
10 49 Team Performance Awards USWC 80%
49 Short Term Incentive USWC 80%
11 50 Team Awards BRI 27%
50 Team Awards USWI 80%
12 51 Merit Awards USWI 80%
51 Executive Incentive Pay USWI 7%
13 remaining
14 Q WHAT IS THE BASIS FOR MS FAUNCE'S PROPOSED
15 ASSIGNMENT OF THESE COSTS AWAY FROM TITLE 61?
16 A Ms. Faunce's basic argument is that
17 incentive pay tied to earnings, cash flow, and/or
18 strategic goals should be either a direct 62 assignment
19 or the responsibility of shareholders.
20 Q DO YOU AGREE WITH MS. FAUNCE?
21 A No. On a very superficial level
22 Ms. Faunce's argument to assign away from Title 61
23 employee pay that is contingent on earnings, cash flow,
24 and strategic objectives can be appealing. However, it
25 doesn't stand up to scrutiny because it lacks any sound
3973
MARGARET J. WRIGHT, REB 92
U S WEST COMMUNICATIONS, INC.
1 foundation. The lack of foundation is twofold. First,
2 the argument mistakenly assumes that incentive pay should
3 not follow base pay. Second, it mistakenly assumes that
4 improvement in earnings, cash flow, and the achievement
5 of strategic goals only benefit Title 62 customers or
6 shareholders.
7 Q WHY DO YOU DISAGREE WITH MS. FAUNCE'S
8 ARGUMENT TO ASSIGN INCENTIVE PAY TO TITLE 62 EVEN THOUGH
9 THE ASSOCIATED BASE PAY IS ASSIGNED TO TITLE 61?
10 A The underlying basis for allocating costs
11 between Title 61 and Title 62 is that expenditures that
12 further the provision of Title 61 services should be
13 assigned to those services and expenditures that further
14 the provision of Title 62 services should be assigned to
15 those services. In other words, equity requires that
16 customers of Title 61 services should pay the full cost
17 of work performed to provide the service they receive and
18 should not be allowed to push off that cost onto other
19 services or leave it for shareholders to bear.
20 Ms. Faunce has not tried to show that the work done by
21 employees providing Title 61 services actually furthered
22 the provision of Title 62 services. Nor would she be
23 able to.
24 For example, if an employee who spends the
25 majority of his day maintaining Title 61 service, then
3974
MARGARET J. WRIGHT, REB 93
U S WEST COMMUNICATIONS, INC.
1 equity and fairness require that the employee's
2 compensation for that day, including salary, benefits,
3 pension cost, workers compensation cost, employment
4 taxes, and incentive compensation should be allocated
5 predominantly to Title 61 because that is the full cost
6 of the service the employee has provided. There
7
8 /
9
10 /
11
12 /
13
14
15
16
17
18
19
20
21
22
23
24
25
3975
MARGARET J. WRIGHT, REB 93A
U S WEST COMMUNICATIONS, INC.
1 is no rational basis for suggesting that somehow some of
2 the work the employee has performed to provide Title 61
3 service that day migrates over and provides Title 62
4 service simply because Ms. Faunce interprets the
5 descriptions of the incentive pay program as motivating
6 some different behavior.
7 Q ISN'T MS. FAUNCE'S CONCERN THAT THE
8 INCENTIVE PROGRAMS REALLY BENEFIT SHAREHOLDERS?
9 A That is what she testified to but the
10 argument that some portion of the employee's Title 61
11 work benefits shareholders is, if anything, even weaker.
12 The only way the work an employee does for Title 61
13 services could benefit a shareholder is if the
14 shareholder happens to be a customer of Title 61
15 services. Otherwise a shareholder gets absolutely no
16 direct benefit from a Title 61 employee. The only
17 benefit the shareholder gets is the revenue that the
18 Title 61 customers provide. That revenue is reduced by
19 the cost of employee compensation, including incentive
20 compensation. The notion that shareholders benefit from
21 a cost is irrational.
22 So equity and fairness require that Ms. Faunce's
23 proposal be rejected as unsound because it ignores
24 whether or not the work employees perform furthers the
25 provision of Title 61 services. To require the cost of
3976
MARGARET J. WRIGHT, REB 94
U S WEST COMMUNICATIONS, INC.
1 Title 61 services to be borne by Title 62 or shareholders
2 is to unjustly enrich Title 61 customers by pushing off
3 costs of the services they buy onto others.
4
5 /
6
7 /
8
9 /
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
3977
MARGARET J. WRIGHT, REB 94A
U S WEST COMMUNICATIONS, INC.
1 Q DOES MS. FAUNCE'S ARGUMENT ASSUME THAT
2 IMPROVEMENTS IN EARNINGS, CASH FLOW, AND THE ACHIEVEMENT
3 OF STRATEGIC GOALS ONLY BENEFIT TITLE 62 CUSTOMERS OR
4 SHAREHOLDERS?
5 A Yes. Ms. Faunce's direct testimony states
6 on page 48:
7 If the Company is trying to improve shareholder
position by increasing profits above the Return on
8 Equity authorized by the Commission, I believe
this would be in direct opposition to the best
9 interests of the Title 61 customers. Therefore, I
believe the Bonuses and Team awards based on
10 earnings cash flow and/or strategic goals are
either a direct Title 62 assignment or the
11 responsibility of shareholders.
12
13 This conclusion is mistaken because it ignores the fact
14 in a cost of service regulated environment, ratepayers
15 are also the beneficiaries of improvements in financial
16 performance and attainment of strategic goals. In short
17 form, here is how it works:
18 * Incentive compensation is used to motivate
19 employees to, among other things, improve
20 financial performance and accomplish
21 strategic objectives.
22 * Employees cause improvements in financial
23 performance by improving efficiency. They
24 improve efficiency by innovating to cut
25 costs and improve productivity.
3978
MARGARET J. WRIGHT, REB 95
U S WEST COMMUNICATIONS, INC.
1 * Improvement in financial performance is the
2 yard stick that measures the tangible
3 results of reduced
4
5 /
6
7 /
8
9 /
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
3979
MARGARET J. WRIGHT, REB 95A
U S WEST COMMUNICATIONS, INC.
1 costs and increased
2 productivity. If financial performance
3 doesn't improve, then the results have not
4 been achieved. The math is simple. If
5 costs go down, earnings go up. If cash is
6 spent more wisely, cash flow improves. So
7 financial improvement is the inevitable
8 result of productivity, cost reduction and
9 cash preservation improvements.
10 * Cash flow improvements benefit ratepayers
11 by lowering the cost of capital because
12 investors base the price they require for
13 their capital on the cash flows of the
14 enterprise.
15 * The shareholder of a cost-of-service-
16 regulated business only gets the benefit of
17 the financial improvement temporarily --
18 during the period of regulatory lag. Once
19 the financial improvement occurs, it
20 becomes part of an historical test period
21 and reduces revenue requirement derived
22 from that test period. So the productivity
23 improvements inure to the benefit of
24 ratepayers in the form of higher test year
25 earnings that lower revenue
3980
MARGARET J. WRIGHT, REB 96
U S WEST COMMUNICATIONS, INC.
1 requirement and, thereby support lower
2 rates for services. Exhibit 43J is a long
3 form illustration that demonstrates
4 mathematically the process by which the
5 benefit of improved performance inures to
6 ratepayers.
7 Q BUT WHAT IF RATES DON'T CHANGE? HAS THE
8 RATEPAYER RECEIVED THE BENEFIT OF THE IMPROVED FINANCIAL
9 PERFORMANCE?
10 A Yes. Whether the rates change or not is
11 determined by a multitude of factors, not just financial
12 improvement or cost of capital reductions brought about
13 by productivity and cash flow improvements. So
14 regardless of whether the test year results cause rates
15 to go up, down, or stay the same, the rate lowering
16 effect of financial performance improvements motivated by
17 incentive compensation is included in rates. Even if
18 there is no rate case for a given test year, the benefits
19 inure to ratepayers because the absence of a rate case
20 merely indicates that other factors obviated the need for
21 a case.
22 Q SHOULD TITLE 61 RATEPAYERS BEAR THE COST OF
23 INCENTIVE COMPENSATION PAID TO SUPPORT STRATEGIC
24 OBJECTIVES?
25 A Unless the attainment of strategic
3981
MARGARET J. WRIGHT, REB 97
U S WEST COMMUNICATIONS, INC.
1 objectives in contrary to the interests of Title 61
2 ratepayers, there is no valid reason why Title 61
3 ratepayers should be allowed to avoid their
4 responsibility to pay the cost of work performed to
5 provide them service. Ms. Faunce supports her argument
6 by asserting that she has shown that the Company's
7
8 /
9
10 /
11
12 /
13
14
15
16
17
18
19
20
21
22
23
24
25
3982
MARGARET J. WRIGHT, REB 97A
U S WEST COMMUNICATIONS, INC.
1 strategic plan emphasizes Part 64 (unregulated) and Title
2 62 products and services. There are many strategic
3 initiatives included in the Company's incentive
4 compensation plans that directly support Title 61
5 services in Idaho including provisioning timeliness,
6 maintenance timeliness and held orders. Consequently,
7 Ms. Faunce has unfairly categorized all strategic
8 objectives as contrary to the interests of Title 61
9 ratepayers.
10 Q DON'T FINANCIAL INCENTIVES MOTIVATE
11 EMPLOYEES TO HARM SERVICE QUALITY BY CUTTING COSTS?
12 A There is no question that this can happen
13 if a plan is not properly balanced. The testimony of
14 Mr. Gobat, a certified expert in incentive compensation,
15 states that a proper incentive compensation plan must
16 have both financial criteria and service and quality
17 criteria.
18 The financial criteria motivate employees to
19 improve efficiency by cutting costs and conserving cash.
20 The service and quality criteria motivate employees to
21 avoid cutting costs or conserving cash in a way that
22 would harm service and quality.
23 The service and quality criteria motivate
24 employees to provide high quality service. The financial
25 criteria motivate employees to avoid unnecessary costs
3983
MARGARET J. WRIGHT, REB 98
U S WEST COMMUNICATIONS, INC.
1 and cash expenditures in pursuit of service and quality
2 goals.
3 So service and quality goals and financial goals
4 balance each other and keep each other in check. And, as
5 Mr. Gobat's testimony states, the incentive compensation
6 plans of the vast majority of businesses similarly
7 situated to USWC include both
8
9 /
10
11 /
12
13 /
14
15
16
17
18
19
20
21
22
23
24
25
3984
MARGARET J. WRIGHT, REB 98A
U S WEST COMMUNICATIONS, INC.
1 financial and service quality criteria in their incentive
2 compensation plans, just as USWC's plan does.
3 Q WHAT DO YOU CONCLUDE ABOUT MS. FAUNCE'S
4 PROPOSALS TO ASSIGN VARIOUS AMOUNTS OF RECOGNITION
5 REWARDS, TEAM PERFORMANCE AWARDS, SHORT TERM INCENTIVE,
6 MERIT AWARDS, AND EXECUTIVE PAY TO PART 62 OR
7 SHAREHOLDERS?
8 A Ms. Faunce's proposal is unjust because it
9 attempts to push off the costs of work performed for
10 Title 61 customers onto Title 62 services or
11 shareholders. It also is ill conceived because it is
12 contrary to the Title 61 customers' interest in
13 motivating USWC employees to reduce revenue requirement
14 by being as efficient as possible, spending cash
15 judiciously and achieving strategic objectives that
16 support the provision of Title 61 services.
17 Q DOES THIS CONCLUDE YOUR TESTIMONY
18 A Yes, it does.
19
20
21
22
23
24
25
3985
MARGARET J. WRIGHT, REB 99
U S WEST COMMUNICATIONS, INC.
1 (The following proceedings were had in
2 open hearing.)
3 COMMISSIONER SMITH: Mr. Howell, do you
4 have questions?
5 MR. HOWELL: Yes, ma'am.
6
7 CROSS-EXAMINATION
8
9 BY MR. HOWELL:
10 Q Ms. Wright, on page 29 of your rebuttal,
11 beginning on line 8, you mention that you partially agree
12 with Staff witness Lansing concerning his 1.89 percent
13 adjustment for plant in service. Were you present when
14 Ms. Reiman testified yesterday?
15 A Yes, I was.
16 Q And would you agree with me that she
17 indicated or calculated that that portion of the
18 Company's agreement, and it's only a portion of the
19 agreement, that the central office equipment accounts
20 that the Company agrees with Mr. Lansing is approximately
21 4.4 million?
22 A Yes.
23 Q Have you made an adjustment that reflects
24 these retirements?
25 A Yes, I have. That's now adjustment No. 20
3986
CSB REPORTING WRIGHT (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 in my workpapers and in my exhibit.
2 Q In your Exhibit 66?
3 A Yes.
4 Q What page?
5 A The expense portion is on page 9 of 22 and
6 the actual rate base adjustment is on 20 of 22.
7 Q Could you just explain why if we look at
8 the column C, adjustment 20, it's zeros instead of some
9 number that might reflect 4.4 million?
10 A Are you now on page 20 of 22, because this
11 is really a rate base adjustment?
12 (Pause in proceedings.)
13 Q BY MR. HOWELL: And your adjustment on
14 page 20 of 22 is an intrastate adjustment or Title 61
15 adjustment?
16 A That's a Title 61 adjustment.
17 Q And that the 4.4 million adjustment
18 mentioned by Ms. Reiman yesterday was an intrastate
19 adjustment?
20 A That's correct.
21 Q Yesterday Ms. Reiman testified that the
22 capitalized leases for switched software for the sold
23 exchanges should be removed. Did you also make an
24 adjustment on your Exhibit 66 to reflect the removal of
25 the sold exchanges and the capitalized leases that went
3987
CSB REPORTING WRIGHT (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 with those exchanges?
2 A I do have a pro forma for the rural sales
3 adjustment.
4 Q And does that pro forma include the 24,795
5 on an intrastate basis?
6 A For --
7 Q For the removal of the capitalized leases.
8 A No, it does not.
9 Q Did you have an opportunity yesterday to
10 examine the tape or documents concerning capitalized
11 leases?
12 A Yes, I did get a copy and the additions are
13 correct to the best of my knowledge.
14 Q And have you made an adjustment to your or
15 reflected on Exhibit 66 which would assign 3.55 million
16 in software leases to Title 62?
17 A No, I have not.
18 Q Would such an adjustment be appropriate?
19 A Again, I think you need to look at the
20 overall allocations of the capitalized leases within the
21 CAAS system and look at how each -- the total portion is
22 allocated versus picking out specific items.
23 Q You're not able to add any additional
24 information concerning the use of the capitalized leases
25 other than what Ms. Reiman testified to yesterday?
3988
CSB REPORTING WRIGHT (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 A No, I do not.
2 Q This morning I was asking Mr. Plummer
3 whether defective pairs should be retired from plant in
4 service. What do you think?
5 A I don't know.
6 Q All right. On page 68 and continuing on
7 page 69 of your rebuttal, you discuss an adjustment of
8 $39,872 for Title 61 expenses for AT employee savings.
9 Have you made such an adjustment in your Exhibit 66?
10 A I believe this is part of our settlement
11 agreement and it was adjusted according to the settlement
12 agreement.
13 Q Now, in general, you sponsored U S WEST
14 Exhibit 48 which was the second stipulation and
15 settlement between the Staff and the Company?
16 A Yes.
17 Q And just as a housekeeping matter, doesn't
18 or aren't many of the issues settled in the second
19 stipulation also discussed in your rebuttal testimony?
20 A That is correct.
21 Q And so the settlement would supersede some
22 of the issues or those issues in your testimony, your
23 rebuttal testimony?
24 A Yes.
25 Q Over the last several days, and I think
3989
CSB REPORTING WRIGHT (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 when Mr. Alke was asking Mr. Lansing questions, there was
2 an issue arose that discussed the removal of four
3 accounts reflected on page 5 of Mr. Lansing's
4 Exhibit 101. Those four accounts were analog alarm
5 services, station apparatus nonregulated, terminal
6 equipment nonregulated, and inmate pay phones. Do you
7 agree that those accounts should be removed from Staff
8 Exhibit 101 and page 5?
9 A Yes, I do.
10 Q And to the best of your knowledge, have
11 those entries been removed from Exhibit 101 and page 5?
12 A I have seen a revised draft of that page.
13 Q And that revised draft was furnished to you
14 this morning?
15 A Either this morning or last night.
16 Q Were you present when Mr. Lansing indicated
17 that the Staff and the Company agreed on the calculation
18 of the gross-up factor and the effective state tax rate?
19 A Yes, I was.
20 Q And are you in agreement that those two
21 items are settled between the Staff and the Company?
22 A Yes.
23 Q Would you agree that joint costs should be
24 allocated over services that use joint facilities?
25 MR. ALKE: Objection, Your Honor. This is
3990
CSB REPORTING WRIGHT (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 not our cost allocation witness.
2 COMMISSIONER SMITH: Mr. Howell.
3 MR. HOWELL: Beginning on page 8 of this
4 witness' rebuttal testimony, continuing all the way
5 through page 14, is a lengthy discussion of cost
6 allocation.
7 COMMISSIONER SMITH: I'll allow the
8 question.
9 THE WITNESS: Would you please repeat it?
10 Q BY MR. HOWELL: I'd be pleased to. Would
11 you agree that joint costs should be allocated over
12 services that use those joint facilities?
13 A From a general accounting standpoint, yes.
14 Q Would you agree that Idaho has a unique
15 regulatory structure where only the basic local exchange
16 services or Title 61 services are price regulated by the
17 Commission?
18 A I believe they're unique in the sense of
19 U S WEST. I'm not sure about regulation in states
20 throughout the country. There may be similar situations.
21 Q Well, focusing on just the 14 U S WEST
22 states, isn't it possible that a product family with
23 costs assigned in CAAS may be regulated in some states
24 and deregulated in others?
25 A When you see a cost pool within CAAS, I
3991
CSB REPORTING WRIGHT (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 can't distinguish that in relationship to other states.
2 Q On page 7, 8 and 13, you reference audits
3 conducted on CAAS performed by the firm Coopers &
4 Lybrand. Have you reviewed the auditor workpapers of the
5 most recent audit performed by Coopers & Lybrand?
6 A Which audit?
7 Q The 1995 or '96 audit.
8 A Was this of the Part 64 of CAAS or our
9 financial statements?
10 Q Part 64 CAAS.
11 A No, I have not reviewed those papers.
12 Q Has Coopers & Lybrand conducted an audit at
13 the Title 61 or Title 62 level?
14 A No.
15 Q In your Exhibit 43D, you discuss cash
16 flow. Isn't it true that interest coverages are
17 generally determined based upon interest and cash flow
18 from operations?
19 A Yes.
20 Q Have you been handed what's marked as Staff
21 Exhibit 187?
22 A Yes, I have a copy.
23 (Documents being distributed.)
24 Q BY MR. HOWELL: Would you accept that the
25 numbers contained or the data contained on that exhibit
3992
CSB REPORTING WRIGHT (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 are derived from Staff Exhibit 101, page 1, and from your
2 Exhibit 49?
3 A Yes.
4 Q Looking at this exhibit, isn't it true that
5 the Staff's interest coverage produces a similar result
6 when calculated as shown on that exhibit?
7 A That's what the calculations show.
8 Q Is the range 3.8 to 3.9 an acceptable
9 interest coverage ratio for an investment grade telephone
10 company?
11 (Pause in proceedings.)
12 THE WITNESS: I'm not absolutely sure of
13 that number, but as stated in my testimony, our interest
14 coverage for Idaho intrastate has declined from a 5.9
15 times in 1991 to a 3.5 in 1995.
16 Q BY MR. HOWELL: On page 7 of your rebuttal
17 testimony, specifically in lines 3 through 5, you discuss
18 the 1995 annual audit performed by Coopers & Lybrand and
19 you state that the audit or that the annual audit was
20 found to be in compliance with the CAM.
21 A Yes.
22 Q Are you aware of any prior FCC proceeding
23 where they have issued a show cause order to U S WEST
24 regarding their U S WEST calculation of the common
25 carrier line pool?
3993
CSB REPORTING WRIGHT (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 A I know that the FCC does audits regularly
2 and I'm not sure exactly of the particular one you're
3 talking about.
4 Q Are you aware of an FCC show cause order?
5 A Dated when?
6 Q Dated March 3rd, 1995, where the FCC
7 ordered U S WEST to show cause why it shouldn't be held
8 liable for internal accounting errors in regards to the
9 common carrier line revenue pool.
10 A I have to tell you I've heard about it, but
11 I've been on the periphery and I know none of the details
12 of it.
13 Q I'm handing you the Staff's last exhibit,
14 what's been marked as Staff Exhibit 186.
15 (Documents being distributed.)
16 Q BY MR. HOWELL: This document purports to
17 be a Consent Decree Order issued by the Federal
18 Communications Commission on November 1 of 1996. Do you
19 have any knowledge or awareness that the commission has
20 issued such a consent decree order?
21 MR. ALKE: Madam Chair, I'm going to
22 object. The relevance of the common line pool to cost
23 allocations of this state is non-existent. It is
24 completely irrelevant to the purpose of this Commission's
25 proceeding and it will not lead, examination in this area
3994
CSB REPORTING WRIGHT (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 will not lead, to any discoverable -- excuse me, any
2 relevant materials. This virtually has nothing to do
3 with this proceeding or any issue that's before the
4 Commission in this proceeding.
5 COMMISSIONER SMITH: Mr. Howell.
6 MR. HOWELL: I think it goes to the weight
7 of the evidence. The various witnesses in this
8 particular case have commented on the accuracy of the
9 Coopers & Lybrand report in that that auditing firm
10 reports that CAAS has been found to be in compliance. I
11 had asked Mr. Elder earlier if the CAAS was in fact the
12 allocation system which calculated the common carrier
13 line pool. He did indicate that the CAAS system was in
14 operation during the time when this audit was performed
15 pursuant to an FCC directive.
16 MR. ALKE: Madam Chair, he indicated that
17 he and Mr. Howell were not on the same wavelength when
18 they were discussing Mr. Howell's questions on the common
19 line. CAAS has nothing to do, and no witness from
20 U S WEST ever contended that CAAS has anything to do,
21 with working on the NECA pools. This is a completely
22 irrelevant line of inquiry. It has no relevance. It has
23 indeed no connection with any issue which is before this
24 Commission in this proceeding.
25 COMMISSIONER SMITH: Mr. Howell, I'm having
3995
CSB REPORTING WRIGHT (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 trouble seeing the connection.
2 MR. HOWELL: The connection that I'm trying
3 to portray is the fact that there have been in the past
4 problems or errors with how the CAAS operates and this is
5 an example of one of the errors in internal accounting
6 for the CAAS operation.
7 MR. ALKE: Madam Chair, this document has
8 nothing whatsoever in the world to do with CAAS. That is
9 simply the assertion of Staff. It is unsupported and no
10 witness in this proceeding for U S WEST has given any
11 indication or testimony that CAAS is used in the NECA
12 pools. This has nothing to do with CAAS. CAAS has --
13 you know, you have reams and reams of testimony before
14 you describing the CAAS as the accounting model used to
15 separate reg and dereg products. The NECA pools have
16 nothing to do with separating reg and dereg products.
17 COMMISSIONER SMITH: Mr. Howell, it appears
18 to me that he's probably correct, unless you can point me
19 to somewhere in the record.
20 (Pause in proceedings.)
21 MR. HOWELL: Madam Chairman, one of the
22 findings by the FCC auditing firm of Ernst and Young in
23 the actual order to show cause --
24 MR. ALKE: Madam Chair, before he reads
25 anything into the record, I ask for a ruling as to
3996
CSB REPORTING WRIGHT (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 whether any portion of this document is relevant. I
2 believe it is irrelevant and I think Counsel is simply
3 going to try to read an excerpt into the record before
4 the Chair rules that in fact the document is irrelevant,
5 so I ask for a ruling from the Chair that this document
6 is irrelevant and any inquiries surrounding this document
7 is irrelevant.
8 COMMISSIONER SMITH: Mr. Howell, we're
9 still trying to figure out the connection between this
10 and our case.
11 MR. HOWELL: Would the Chair like me to
12 mark a document for review and then we can argue about
13 that document?
14 COMMISSIONER SMITH: Another document?
15 MR. HOWELL: The other document I'm
16 speaking is the actual show cause and, again, I'm not
17 trying to enter this on the record, but there is a
18 description of the CAAS manual as being in violation as
19 it relates to the common carrier line pool.
20 COMMISSIONER SMITH: I guess if you think
21 you can show me that this is relevant, you better do
22 that; otherwise, it's not going to be allowed.
23 (Pause in proceedings.)
24 MR. HOWELL: Can we go off the record?
25 COMMISSIONER SMITH: Yes.
3997
CSB REPORTING WRIGHT (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 (Off the record.)
2 (Documents being distributed.)
3 COMMISSIONER SMITH: Okay, we can go back
4 on the record. Thank you.
5 MR. HOWELL: Given the cursory review of
6 two additional documents, the Staff would withdraw Staff
7 Exhibits 188, 186, as well as 180 and we move the
8 admission of all other documents.
9 COMMISSIONER SMITH: If there's no
10 objection, so ordered.
11 MR. HOWELL: And the Staff has no further
12 questions for this witness.
13 COMMISSIONER SMITH: I do appreciate being
14 enlightened on Part 36, Part 64 and CAAS.
15 Do you have any questions, Mr. Harwood?
16 MR. HARWOOD: No questions.
17 COMMISSIONER SMITH: Do we have any
18 questions from the Commissioners?
19 COMMISSIONER NELSON: I don't. Thank you.
20 COMMISSIONER SMITH: Any redirect?
21 MR. ALKE: One question.
22
23
24
25
3998
CSB REPORTING WRIGHT (X-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 REDIRECT EXAMINATION
2
3 BY MR. ALKE:
4 Q Would you please refer, Ms. Wright, to
5 Staff Exhibit 187, the left-hand column where the Staff
6 calculates an interest coverage of 3.9 under the Staff's
7 recommendation? Do you see the rate base figure of
8 88 million used for Title 61 which generated that
9 3.9 million -- excuse me, which generated that 3.9 times
10 interest coverage?
11 A Yes, I do.
12 Q In your opinion, is that a fair
13 representation of the original cost depreciated of the
14 plant in service used to provide service to the Title 61
15 customer?
16 A No, it's not.
17 MR. ALKE: I have no further questions,
18 Madam Chair.
19 COMMISSIONER SMITH: Thank you, Mr. Alke.
20 Thank you, Ms. Wright.
21 (The witness left the stand.)
22 COMMISSIONER SMITH: I believe that brings
23 us to the end of everything, and as I understand it, no
24 party wishes to make closing arguments or statements.
25 MR. HOWELL: Madam Chair.
3999
CSB REPORTING WRIGHT (Di-Reb)
Wilder, Idaho 83676 U S WEST Communications
1 COMMISSIONER SMITH: Mr. Howell.
2 MR. HOWELL: It's the Staff's understanding
3 that the Commission would leave to the parties to fix a
4 new briefing schedule.
5 COMMISSIONER SMITH: Yes, I understand that
6 because the availability of the transcript cannot be
7 precisely known at this moment in time that it's possible
8 adjustments to the briefing schedule may be needed and
9 the Commission will be flexible to fit the needs of the
10 parties in doing what's necessary for briefing, reminding
11 them that briefs should be used for outstanding legal
12 issues is primarily their purpose, as I understand it.
13 In order that we not neglect any exhibits
14 that may have previously been identified but not
15 admitted, we will admit all exhibits previously
16 identified, with the exception of No. 55, No. 180,
17 No. 188 and 186. Everything else that's been identified
18 will be admitted into the record.
19 (All exhibits previously marked for
20 identification, with the exception of Exhibit Nos. 55,
21 180, 186 & 188, are admitted into evidence.)
22 COMMISSIONER SMITH: Are there any other
23 matters that the Commission needs to take up before
24 adjourning tonight's hearing? We thank you all for your
25 patience and participation in what's been, as far as I
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1 know, the longest hearing that this Commission has
2 undertaken, at least in my memory and we're glad to be at
3 the end.
4 Oh, that's right, we have public hearings,
5 Connie reminds me, so we'll see you all, and maybe not
6 all of you, in Idaho Falls, Pocatello and Twin Falls and
7 that concludes our hearing and we will adjourn.
8 (The Hearing adjourned at 6:15 p.m.)
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1 AUTHENTICATION
2
3
4 This is to certify that the foregoing
5 proceedings held in the matter of the application of
6 U S WEST Communications, Inc. for authority to increase
7 its rates and charges for regulated Title 61 services,
8 commencing at 9:30 a.m., on Monday, March 10, and
9 continuing through Wednesday, March 26, 1997, at the
10 Commission Hearing Room, 472 West Washington, Boise,
11 Idaho, is a true and correct transcript of said
12 proceedings and the original thereof for the file of the
13 Commission.
14 Accuracy of all prefiled testimony as
15 originally submitted to the Reporter and incorporated
16 herein at the direction of the Commission is the sole
17 responsibility of the submitting parties.
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CONSTANCE S. BUCY
22 Certified Shorthand Reporter #187
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CAROLE A. WALDEN
25 Certified Shorthand Reporter #71
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