USWES310.docx

1 BOISE, IDAHO, MONDAY, MARCH 10, 1997, 9:30 A. M.
2
3
4 COMMISSIONER SMITH: Good morning, ladies
5 and gentlemen. This is the time and place set for a
6 hearing in the matter of the application of U S WEST
7 Communications, Inc. for authority to increase its rates
8 and charges for regulated Title 61 services, further
9 identified as Case No. USW-S-96-5.
10 I'd like to take the appearances of the
11 parties first, and there's quite a list here, so,
12 Ms. Hobson, may we begin with you?
13 MS. HOBSON: Thank you, Madam Chairman.
14 I'm Mary S. Hobson and I'd like to present John Alke from
15 Helena, Montana. We are representing U S WEST
16 Communications.
17 COMMISSIONER SMITH: Welcome, Mr. Alke.
18 MR. ALKE: Thank you.
19 COMMISSIONER SMITH: Mr. Ward.
20 MR. WARD: Conley Ward of the firm Givens,
21 Pursley and Huntley for the Idaho Telephone Association.
22 COMMISSIONER SMITH: Mr. Fothergill.
23 MR. FOTHERGILL: Al Fothergill for the
24 Idaho Citizens Coalition.
25 COMMISSIONER SMITH: Mr. Phillips.
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1 MR. PHILLIPS: Wendell Phillips for Idaho
2 Consumer Affairs.
3 COMMISSIONER SMITH: Mr. Donesley.
4 MR. DONESLEY: Brian Donesley with the
5 AARP. Our witness also present is Dr. Don Reading.
6 COMMISSIONER SMITH: Okay. Mr. Richards.
7 MR. RICHARDS: Madam Chairman, Woody
8 Richards on behalf of Century, TDS and Citizens Telephone
9 Company.
10 COMMISSIONER SMITH: Okay, Mr. Harwood.
11 MR. HARWOOD: Greg Harwood of the law firm
12 Davis Wright Tremaine on behalf of AT&T.
13 MR. KUTLER: And Keith Kutler, also on
14 behalf of AT&T, from Davis Wright Tremaine and Kutler is
15 spelled with a "K".
16 COMMISSIONER SMITH: I was just going to
17 ask. Thank you, Mr. Harwood and Mr. Kutler. Did I miss
18 someone back there? Yes.
19 MR. HORVATH: Tom Horvath, AARP, state
20 legislative committee, member of the utilities
21 subcommittee.
22 COMMISSIONER SMITH: All right, you belong
23 with Mr. Donesley.
24 And Mr. Howell.
25 MR. HOWELL: Donald Howell and Susan
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1 Hamlin, Deputy Attorney Generals, for the Commission
2 Staff.
3 COMMISSIONER SMITH: Is there anyone here
4 today representing intervenor MCI? How about intervenor
5 Northwest Payphone Association? How about the Idaho
6 Cable Telecommunications Association? How about GTE?
7 And intervenor David Hoffman?
8 Okay, are there any preliminary matters
9 that need to come before the Commission prior to the
10 taking up with U S WEST's case? Ms. Hobson.
11 MS. HOBSON: Yes, Madam Chair. U S WEST is
12 prepared this morning to present three of its witnesses;
13 that is, Barbara Wilson, Dallas Elder and Margie Wright.
14 Given the last minute settlement of a number of issues in
15 this case, I think we may have under-prepared the number
16 of witnesses for this morning or this day, although I
17 understand from Mr. Howell's letter we will be adjourning
18 early.
19 Tomorrow the remainder of U S WEST's direct
20 witnesses, Mr. Pete Cummings, Mr. Bill Easton, Ms. Mary
21 Owen and the always popular Jim Wozniak, will be
22 available to finish out that day.
23 I have an understanding from Staff and from
24 Mr. Harwood for AT&T that Mr. Easton's testimony in light
25 of the fact that he is testifying on an issue that has
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1 been settled between the Company and the Staff that
2 Mr. Easton will be allowed to present both his direct and
3 prefiled rebuttal testimony tomorrow. After that point,
4 I confess that at least in my mind the week gets a little
5 squishy as to how we will proceed.
6 The Commission's letter indicates that next
7 we will take up intervenor cases. I understand from
8 Mr. Harwood AT&T's witnesses will not be ready to appear
9 until Thursday with Mr. Howard Bell appearing Friday
10 afternoon. AARP may or may not be ready to proceed on
11 Wednesday, but it seems to me that we are likely going to
12 have some time during this week where we will be
13 addressing the Staff case.
14 Mr. Howell and I have discussed the fact
15 that data responses have not been completely filed yet on
16 behalf of Staff and they're not untimely. They're due
17 today and there was a problem all the way through with
18 U S WEST having the opportunity to get its data responses
19 and prepare; nonetheless, U S WEST is willing to and has
20 agreed to take, of course, the testimony of the
21 settlement witnesses Ms. Stockton and Mr. Schneider
22 whenever that's convenient.
23 U S WEST will be prepared to take
24 Mr. Lansing on Friday, Friday morning or whenever on
25 Friday that seems appropriate, and then in the following
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1 week, we have dates certain witnesses Faunce, U S WEST
2 rebuttal witnesses Barrington and Gobat on Monday and on
3 Wednesday the 19th we have Dr. Tom Power and Dr. Selwyn
4 and Susan Baldwin scheduled as dates certain witnesses,
5 so the question, I guess, remains when will we address
6 the remainder of the Staff witnesses.
7 It is U S WEST's preference at this point
8 that we address the rest of the Staff witnesses with the
9 exception of Mr. Hart and Ms. Cooper in the week
10 following, that is, the week of the 17th, although
11 U S WEST can be prepared to address Mr. Hart and
12 Ms. Cooper on Thursday or on Friday.
13 COMMISSIONER SMITH: All right, I think
14 I've got the picture.
15 Mr. Howell, did you have any comment or is
16 that your view of it, also?
17 MR. HOWELL: Madam Chairman, that is my
18 view. Just for scheduling purposes, I would give you the
19 Staff order of witnesses, but would say that we are
20 prepared to present our case during times available this
21 week given the holes in the schedule and, as Ms. Hobson
22 did indicate, the rather late settlement stipulation
23 between the Company and the Staff.
24 Our order of witnesses is Kathy Stockton,
25 Kent Schneider, Wayne Hart, Carol Cooper, we'll do
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1 Mr. Lansing on Friday morning, Bill Eastlake and Terri
2 Carlock and then we have time certain Dr. Selwyn and
3 Susan Baldwin for the 19th.
4 COMMISSIONER SMITH: So, Ms. Hobson, I
5 guess your point was you'd like to do Eastlake and
6 Carlock next week.
7 MS. HOBSON: That would be fine.
8 COMMISSIONER SMITH: All right, do any of
9 the other parties have comment regarding scheduling?
10 Mr. Donesley.
11 MR. DONESLEY: Yes. Chairman,
12 Commissioners, ladies and gentlemen, on behalf of AARP,
13 we're ready to proceed. We think this thing should be
14 expedited. Given especially what appears to be a
15 settlement on the horizon, it looks like we might be able
16 to condense the time rather than to prolong this. It's
17 been well put before the Commission in writing. Quite
18 simply, I think we're all ready to go and we'd like to
19 get this thing wrapped up and get it over with. It's
20 been quite a long time. There's been a lot of public
21 interest in this, a lot of political interest and on
22 behalf of the my clients, I would represent to the
23 Commission that we would urge expedition.
24 Thank you.
25 COMMISSIONER SMITH: Thank you,
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1 Mr. Donesley.
2 Mr. Richards, did you wish to be
3 recognized?
4 MR. RICHARDS: On a separate matter,
5 Madam Chairman, rather than the order of witnesses.
6 COMMISSIONER SMITH: This is the time.
7 MR. RICHARDS: Madam Chairman, then we
8 would request permission to be excused from participating
9 in the hearing. We'd waive our examination and
10 cross-examination rights, although we'd like to continue
11 to be a party to the proceeding.
12 COMMISSIONER SMITH: That would be just
13 fine with us and the cookies were delicious.
14 MR. RICHARDS: Thank you, Madam Chairman.
15 MR. WARD: Madam Chairman, I'd make the
16 same request.
17 COMMISSIONER SMITH: Mr. Ward, we'd also
18 grant the same request for you.
19 COMMISSIONER SMITH: Okay, Ms. Hobson.
20 MS. HOBSON: Madam Chairman, one more point
21 and with all due respect to Mr. Donesley's remarks, I
22 feel it is also necessary to point out that it's
23 U S WEST's expectation that not until beginning the week
24 of or beginning on the date of the 25th, Tuesday the
25 25th, would U S WEST be prepared to begin its rebuttal
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1 case. We expect, however, that given the settlement we
2 should be able to complete the U S WEST rebuttal case in
3 those three days allotted.
4 COMMISSIONER SMITH: I think that's how I
5 was viewing it, also.
6 MS. HOBSON: Thank you.
7 COMMISSIONER SMITH: We'll see how we go
8 from there. With nothing further, we're ready for your
9 first witness, Ms. Hobson.
10 MS. HOBSON: Excuse me, Madam Chairman,
11 U S WEST would like to make an opening statement.
12 COMMISSIONER SMITH: Absolutely.
13 MS. HOBSON: As I contemplated making this
14 opening statement, I tried to think about what it was
15 that brought us to this day. This is a case that in some
16 sense has been pending or at least looming since 1988
17 with the passage of the Telecom Act in Idaho of 1988.
18 That, of course, was the legislation that
19 allowed U S WEST and other companies, if they so chose,
20 to remove certain of its services from economic
21 regulation by this Commission and that, of course, is the
22 statute that created the Title 61/Title 62 split which is
23 the heart of much of the controversy that is in the
24 current case.
25 As part of that statute, the Idaho
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1 legislature passed a particular statute, Idaho Code
2 Section 61-622A, which provides that the Commission shall
3 establish procedures for allocation of costs between
4 telecommunication services provided pursuant to Title 61
5 and telecommunication services provided pursuant to Title
6 62.
7 The statute further provides that such
8 allocation shall reasonably reflect how joint-use
9 facilities are utilized, provide reasonable stability for
10 telephone corporations to do business planning and
11 pricing and minimize the cost of accounting and
12 recordkeeping to the extent possible.
13 That statute also goes on to authorize the
14 Commission to rely upon a gross allocator derived from
15 changes in relative revenues or expenses and that
16 language, of course, became the foundation of the revenue
17 sharing plan under which U S WEST operated from the
18 passage of the Act or from its election in 1989 until
19 relatively recently.
20 Under the revenue sharing plan, things ran
21 relatively smoothly in Idaho until, I would say, about
22 1994, at which time revenue sharing began to come under
23 attack from various quarters. At that point, the Staff
24 and the Commission had expressed concerns about certain
25 parts of the operation of the plan, would be competitors,
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1 such as cable providers, MCI and others, had expressed
2 concerns about the plan and, finally, U S WEST began
3 saying that the revenue sharing was getting to the point
4 where it was no longer feasible for U S WEST because of
5 the historic regulatory policies regarding, among others,
6 yellow page imputation and depreciation rates and so on
7 that were embodied in the operation of the plan.
8 These issues were all brewing in 1994 and
9 continued into 1995. To respond to these concerns,
10 U S WEST and the Staff worked together and came up with a
11 stipulated arrangement which would have modified the
12 revenue sharing plan to gradually increase rates over
13 three years, provided the Company met certain agreed-upon
14 service quality standards. That case, that stipulation
15 was pending in February 1996 when the Federal
16 Telecommunications Act passed and was signed into law,
17 and suddenly everyone's concerns about the regulatory
18 structure under which U S WEST operated in Idaho were put
19 into high gear.
20 MCI, as I recall, made a very strenuous
21 objection to the stipulated agreement with Staff to
22 modify the revenue sharing plan and after a short
23 continuance in that case, U S WEST determined to pull the
24 plan. The Company's position at that time was it was too
25 little too late in addressing the transition from the old
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1 regulatory policies of the past to the new era with a
2 full-blown competition that was being introduced with the
3 passage of the Telecommunications Act, the federal
4 Telecommunications Act; so, in short, although the
5 industry and the Commission were moving gradually toward
6 this day, the federal legislation threw everything into
7 high gear.
8 U S WEST and the Staff quickly at that
9 point turned their attention to addressing customer's
10 need for local calling areas, an issue that had been
11 pending in the state for a long time and simultaneously
12 as part of the stipulated agreement there, U S WEST
13 agreed to terminate the revenue sharing plan and to file
14 this rate case in order to tee up and address some of
15 these long-standing financial regulation issues which had
16 been submerged under the surface of the revenue sharing
17 plan.
18 That is a very short history of the kind of
19 financial regulation that U S WEST operations have had
20 over the past years that have led up to this day, but
21 that's only a small part of the overall picture. The
22 other very big part is the long history of cooperation
23 between the Commission and the Company which has yielded
24 a very fine telecommunications infrastructure for this
25 state and a number of other arrangements which have
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1 benefited Idaho customers, and please note that I do not
2 distinguish deliberately between Idaho Title 61 and 62
3 customers at this point.
4 The fact of the matter is most individuals
5 in Idaho are at one time or another customers of both
6 kinds of products and services. This long history of
7 cooperation traces itself through the OPUS projects which
8 brought single party service to all of Idaho, to Tech
9 Plus which brought digital switching to 52 of the tiniest
10 rural communities in Idaho, and to Tech II which upgraded
11 and improved local loops so that a large percentage of
12 customers in Idaho's rural and urban exchanges could
13 transmit at 9600 bits per second over basic 1FR and 1FB
14 lines.
15 Tech II also made basic infrastructure
16 available to provide for more sophisticated operations
17 and, yes, those kinds of applications could well be
18 Title 62 services, but the fact is that they are
19 telecommunications services which would likely have not
20 been available today in those small communities funded by
21 revenue sharing if it had not been for that program and I
22 submit it is very unlikely that they would be provided
23 tomorrow by a new competitor had it not been for the
24 Tech II program.
25 The history continues once again in 1995
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1 when the Commission used 1994 revenue sharing dollars to
2 fund analog switch changes for Burley, Declo and Jerome,
3 and this Commission and its Staff, I might add, have a
4 long and successful history of thinking outside the box
5 to produce great results for Idaho. In addition to these
6 major infrastructure plans, the Commission and Staff have
7 collaborated with the Company to create some of the
8 nation's largest local calling areas to better meet the
9 telecommunications needs of Idaho customers.
10 This includes access to the Internet,
11 something that in 1992 when we started developing the
12 Tech II plan none of us ever dreamed we would need and
13 the Commission further supported the innovative use of
14 the telecommunications infrastructure in Idaho by
15 dedicating a portion of the 1994 revenue sharing dollars
16 to the Idaho Council for Technology and Learning to
17 improve the communications capabilities of southern
18 Idaho's schools and libraries.
19 I bring all of this up because it is a
20 critical part of the context of this case. We are now in
21 the first major rate case for U S WEST in over 10 years.
22 It may or may not be the last rate case for U S WEST in
23 Idaho ever. It is an embedded cost case with an historic
24 test year. There are many of the usual rate case issues
25 relating to accounting adjustments, the cost of capital
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1 and so on and you are being asked to set rates for
2 customers that will pay for essential basic telephone
3 services and at the moment at least those services are
4 almost exclusively available from U S WEST, but we submit
5 it would be a very big mistake, and I hope you will
6 forgive me for saying so, to think that all you are
7 deciding today or this week or in these weeks is how much
8 customers will pay for basic local exchange service.
9 This Commission has for many years set
10 telecommunications policy in this state and it has done
11 that to a very great extent in U S WEST cases at various
12 times; so please don't be misled. You will be setting
13 policy here which will have a much more far-reaching
14 impact than whether basic residence customers will pay
15 more for service. Your decision, which we recognize you
16 take very seriously, will affect the future of
17 infrastructure investment in the state and the
18 availability of services for years to come.
19 Please also don't be misled into thinking
20 that with the passage of the Federal Act and the advent
21 of competition that your policy-making days are over,
22 very far from it. If and when effective competition is
23 available to all Idaho consumers, then we may not need a
24 Public Utilities Commission, but until that day, you will
25 have a very central role; so let me turn, then, to some
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1 of the big disputed issues in this case.
2 Originally there were four areas identified
3 by U S WEST witnesses, at least, that were the big issues
4 in the case. They were cost allocation, cost of capital,
5 capital recovery, that is, depreciation issues, and the
6 imputation of directory revenues. With the execution
7 last Friday of a settlement agreement, two of those four
8 issues, depreciation and yellow pages imputation, are
9 settled to the satisfaction of the Staff and the
10 Company.
11 Although that stipulation is not unanimous,
12 it does change, it seems to us, the focus from how those
13 issues should be resolved to whether or not the proposed
14 resolution is a reasonable one. We believe the record of
15 this case will clearly demonstrate that the resolution is
16 reasonable and that it provides a strong foundation for
17 the Company and for Title 61 customers to face the
18 changes that are coming to the industry.
19 This leaves, then, the major issues of cost
20 of capital and cost allocation. There are also a number
21 of less significant issues, at least from a policy, if
22 not a financial, standpoint, which I won't attempt to
23 summarize here, but let me talk for a minute about the
24 cost of capital.
25 This issue has two major features. First
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1 is the question of the cost of equity which is familiar
2 in most ratemaking proceedings. The Commission here will
3 be asked to resolve a dispute between conflicting expert
4 opinions, but, second, there is the component of the
5 service quality penalties subsumed in this issue.
6 Staff has advocated that the Commission
7 adopt what Ms. Carlock describes in her testimony as the
8 extreme low end of the range Staff considers fair and
9 reasonable for the cost of equity. The basis for this
10 recommendation is Staff's advocacy that U S WEST's
11 quality of service is "unacceptable," or, as Mr. Hart put
12 it, "far from acceptable."
13 This brings up the first of many instances
14 where Staff's position in this case conflicts with
15 positions it has taken on the record in previous
16 proceedings or with positions that have been taken by
17 this Commission. Our evidence in this case will show
18 that U S WEST is now providing very good service. It
19 will show in fact that it has achieved service levels
20 which Staff has previously stipulated would justify a
21 $3.00 rate increase to residence customers in Idaho.
22 Nonetheless, Staff today is advocating that the Company
23 be financially penalized for the same service quality
24 level.
25 Moreover, a short time ago, Staff went on
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1 record as stating that service quality standards should
2 be addressed in a statewide docket involving all the
3 telecommunications carriers in the state. Now, in this
4 case, Staff advocates adoption of unique service quality
5 standards just for U S WEST and it further advocates that
6 the Company be required to meet those standards for 12
7 consecutive months, have a contested proceeding before it
8 can escape the service quality penalty advocated by the
9 Staff in its cost of equity testimony.
10 As I said, this is one of several areas
11 where the Staff has taken a position that is not only
12 unreasonable and punitive toward the Company but is
13 inconsistent with its own prior positions.
14 The second big area left for resolution in
15 this case, cost allocations. It would not be an
16 exaggeration to state that most of the issues remaining
17 to be decided in this case after the stipulation are cost
18 allocation issues. To put it in another perspective,
19 Staff's rate base in this case is roughly one-half of the
20 rate base presented by U S WEST and most of that
21 difference is in cost allocations, but lest you despair
22 that ultimately this case revolves around some very
23 complex allocation formulas, let me point out that for
24 the most part the issues that you will be deciding have a
25 very serious policy component and, once again, U S WEST
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1 believes its evidence will show that the Staff's position
2 on these policy points contradicts previous positions
3 that the Staff and the Commission have taken.
4 They contradict the spirit, if not the
5 letter, of prior orders of this Commission which deal
6 with some of the very same issues. For example, Staff's
7 consultant advocates that all digital switches placed
8 after 1989, except those funded with ratepayer funds
9 under the Tech Plus program, be entirely assigned to
10 Title 62. Since the Tech Plus switches are entirely
11 depreciated, that is, they have a zero value in the rate
12 base, this means that the Title 61 rate base presented by
13 Staff contains nothing at all for digital switching.
14 Staff consultant takes the same kind of
15 position with regard to the loop improvements made under
16 the Tech II program. Ms. Baldwin, Staff's consultant,
17 advocates that any fiber or any digital transmission
18 equipment such as that deployed under the Tech II program
19 to provide enhanced capabilities to the basic local loop,
20 including the ability to transmit at 9600 bits per
21 second, that any of those investments that weren't funded
22 by revenue sharing dollars be entirely excluded from the
23 Title 61 rate base.
24 Again, under the Staff's so-called
25 allocations, U S WEST would not be allowed to include in
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1 rate base the value of the digital equipment used to
2 provide basic local exchange service. Since the
3 Tech II -- excuse me. Since under Tech II the revenue
4 sharing plan funded investment is zero due to that
5 agreement, this is another example where Title 61
6 customers using those facilities will have nothing in
7 rate base included for that use.
8 Staff's consultant also advocates shifting
9 something around $40 million in rate base from Title 61
10 to 62 based upon assumptions as to what motivated the
11 investment rather than how the investment is actually
12 used. What all this and other less dramatic allocation
13 techniques used by the Staff's consultant come down to is
14 this: Idaho's Title 61 customers become second class
15 citizens with the only investments they're responsible
16 for paying for being old analog equipment, much of which
17 isn't even manufactured today.
18 It is a sure fire formula for a low 1FR
19 rate. In fact, one of the reasonableness tests here is
20 that Staff's allocation methodologies produce close to
21 the lowest, if not the lowest, 1FR rate in the entire
22 country, but it's also a sure fire formula for doing
23 something this Commission has fought with unparalleled
24 success for years; that is, it creates haves and
25 have-nots in the Idaho telecommunications market.
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1 As Ms. Baldwin puts succinctly in her
2 testimony, and I'm quoting, "Any network modernization
3 programs undertaken at the Company's initiative should be
4 allocated to Title 62." That's the Staff's position. If
5 U S WEST will not be permitted to recover investment in
6 superior technology provided to Title 61 customers, it
7 simply won't be able to make that investment. Eventually
8 only those fortunate "deregulated customers" who can be
9 charged prices that cover the costs of the technology
10 they're using will have access to it.
11 Now, there seems to be some kind of a myth
12 underlying the Staff's advocacy here and it runs
13 something like this: Since U S WEST supported the
14 Telecom Act of 1988 and promptly elected after its
15 passage to take advantage of its Title 62 freedoms that
16 it is now somehow appropriate to allocate as many costs
17 as possible to its deregulated operations. There is
18 something here that smacks of payback for becoming
19 deregulated.
20 Now, payback may be appropriate if U S WEST
21 had used the freedoms gained under Title 62 to the
22 detriment of Idaho customers, but there is no longer need
23 to speculate about whether that is the case. The
24 evidence is now in on how U S WEST has conducted its
25 Title 62 operations in Idaho. Since deregulation, since
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1 the passage of the Act in '88, the clawback provision of
2 that statute which permitted this Commission to
3 re-regulate any part of U S WEST's operations which it
4 found were not being conducted in a manner consistent
5 with the public interest has been invoked seriously only
6 once and that was recently in the Centrex grandfathering
7 case in which this Commission ultimately upheld
8 U S WEST's position.
9 Since deregulation, there has been no
10 Title 61 rate increase actually in longer than 10 years.
11 Title 62 prices for toll and access have been reduced.
12 In fact, no regulated, fully regulated, Idaho local
13 exchange company has such low access charges as
14 U S WEST. U S WEST has invested upwards of $450 million
15 in the Idaho infrastructure. It has absorbed $57 million
16 in increased depreciation expense, again without any
17 increase to regulated rates.
18 The Company has brought numerous new
19 products and services which are valued by Idaho
20 customers. The Company and the Commission have worked
21 together to bring major infrastructure improvements which
22 have improved the basic capabilities of the 1FR and the
23 1FB and they have once again worked together to bring the
24 largest local calling areas, nearly the largest local
25 calling areas in the country, to Idaho customers.
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1 This history and tradition is now
2 jeopardized by the narrow and punitive position taken by
3 Staff and its consultants in this case. Their approach
4 assumes only one issue is important to Idaho customers,
5 the price of basic local exchange service. It ignores
6 the fact that most customers depend on Title 61 and
7 Title 62 services. It ignores the impact on continuing
8 investment in Idaho in infrastructure which is at the
9 core of the telecommunications network.
10 It also ignores the fact that this
11 Commission has recently held a series of hearings across
12 the state which customers in great numbers have come out
13 in support of rate increases in connection with obtaining
14 expanded local calling areas and despite considerable
15 efforts to inform customers of the EAS proposal and its
16 intended rate increase, the Commission received a very
17 small number of customer comments that opposed EAS on the
18 grounds that customers did not want to pay more for local
19 service when they had EAS.
20 The EAS in-region rate set in that case was
21 $15.62. U S WEST's revenue requirement in this case
22 would bring that rate up now with the changes in the
23 stipulation, the U S WEST revenue requirement will bring
24 that rate up to just under $20.00. That appears to be a
25 big increase from the basic $12.00 rate that was
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1 established more than 10 years ago, but it reflects
2 multiple changes in the environment.
3 First, despite Staff's protestations to the
4 contrary, service today is being provided over a largely
5 digital network and improved local loop systems which
6 provide more capabilities to the 1FR and the 1FB than
7 ever before.
8 Second, customers are using service so much
9 more intensively. In the mid 1980s, basic service was
10 limited primarily to voice applications. Now, basic
11 users are routinely using their service for fax machines,
12 data transmission and for "getting on line." None of
13 that would have been possible with the technology which
14 the Staff advocates is all that is necessary for
15 Title 61.
16 Third, Idaho customers now or soon will
17 enjoy some of the largest local calling areas anywhere
18 and this greatly enhances the value of their basic 1FR
19 and 1FB service.
20 U S WEST's case is based upon cost
21 allocations which reflect how joint facilities are
22 utilized in Idaho. It has formed the basis, that is,
23 U S WEST cost allocations has formed the basis, of
24 financial reviews that Staff has conducted over the
25 years. It provides reasonable stability for the Company
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1 to do business planning and pricing and its use will
2 minimize the cost accounting and recordkeeping to the
3 extent possible. In short, the U S WEST cost allocation
4 methodology complies with the statutory requirements.
5 The approach offered by Staff ignores how
6 joint facilities are utilized. It imposes
7 extraordinarily burdensome new requirements for
8 accounting and recordkeeping and it plays havoc with
9 U S WEST's ability to plan and price services since it
10 literally disallows investment which has been made with
11 the Commission's blessing years ago to provide local
12 service.
13 Most importantly, however, Staff's approach
14 harms Idaho customers. It assumes the only factor that
15 is important is the price of service. It throws out
16 everything this Company and this Commission have worked
17 together until now to bring.
18 As I've said earlier, you will make
19 telecommunications policy in this case. U S WEST urges
20 you to carefully consider the evidence presented here and
21 look ahead to the impact on Idaho's future that your
22 decision will have. Just as in any endeavor, Idaho
23 customers will eventually get what they pay for. When a
24 bargain looks too good, the chances are it's a bum deal.
25 We urge you not to make a bum deal for Idaho.
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1 Thank you.
2 COMMISSIONER SMITH: Thank you,
3 Ms. Hobson.
4 Did any other party wish to make an opening
5 statement at this time? Mr. Howell.
6 MR. HOWELL: Madam Chairman, just briefly.
7 Friday the Commission Staff filed a prehearing memorandum
8 which I think adequately sets out the disputed and
9 settled or agreed issues in this case and I would
10 primarily stand upon that prehearing memorandum in part
11 for our opening statement.
12 I would note that the Company and the Staff
13 as you will hear I'm sure from their witnesses have
14 entered into at least a number of agreements following
15 our first settlement hearing which was held on
16 January the 15th. On February 21st, we filed a
17 stipulation and settlement of several affiliated interest
18 transactions, primarily concerning Staff witness Madonna
19 Faunce's testimony, and then as has been alluded to
20 already, the Staff and the Company were able to reach
21 settlement on a number of other issues that was embodied
22 in our settlement agreement filed also Friday that
23 involve a number of issues, so to that extent, at least
24 from the Staff's perspective, we have endeavored to
25 narrow the focus of those issues and the disputed issues
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1 in this case.
2 I would say that the disputed capital cost
3 issues, as Ms. Hobson has already pointed out, are
4 discussed on page 10 of our memorandum. We have settled
5 14 issues dealing with expenses reflected on page,
6 starting on page, 12 of our memorandum. The Staff does
7 take a number of issues and contrary or disputed issues
8 with the Company involving service quality. There are 16
9 service quality issues in dispute, beginning on page 19,
10 and a number of rate design issues beginning on page 24.
11 Finally, just briefly addressing the issue
12 of cost allocation, as we've indicated in our memorandum,
13 this is the Commission's first opportunity to examine the
14 issue of cost allocation and how costs from a jointly
15 used or common network should be apportioned or shared
16 between the 61 side of the network and customers and
17 services and the 62 side of the network with customers.
18 On page 10 of our prehearing memorandum, we
19 succinctly lay out the Company's position as far as how
20 much of the network they would allocate to Title 61 and I
21 would also point out that on page 10 and the preceding
22 pages the Staff presents not one but three possible
23 alternatives for the Commission to examine in regards to
24 cost allocation and the impact or the results of our cost
25 allocation are again shown on page 10 of our memorandum.
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1 Just briefly one point on cost allocation.
2 As we discuss on page 7 of our memorandum, it is the
3 Staff's position that the $45 million that the Commission
4 has directed to be spent for Tech Plus and Tech II
5 projects over the years that that money should be
6 allocated to the Title 61 rate base and we are emphatic
7 in many of our positions and our allocations are based on
8 that allocation and as will be presented by Staff witness
9 Baldwin's testimony and as also indicated in our
10 memorandum, we believe that that is fair, just and
11 reasonable.
12 With that, I would conclude my opening
13 remarks.
14 COMMISSIONER SMITH: Thank you,
15 Mr. Howell.
16 Anyone else? Mr. Donesley.
17 MR. DONESLEY: Madam Chairman,
18 Commissioners, thank you. On behalf of AARP, there are
19 128,000 AARP members in Idaho. That organization
20 represents approximately 40 percent of the persons aged
21 55 and older in Idaho and approximately 10 percent of the
22 total population of the state. My clients are extremely
23 interested in this case. We have a quite different view
24 than apparently does the Company.
25 I'll refer you to page 19 of Ms. Wilson's
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1 testimony, written testimony, in this case where the
2 statement is made that U S WEST is not insensitive to the
3 impacts of raising the residence basic local exchange
4 price, though the Company believes that those impacts are
5 often exaggerated when you consider customers in general,
6 whatever that is.
7 Madam Chairman, Commissioners, I believe
8 that the AARP represents certainly a large segment of
9 those customers in general and that in fact the cost of a
10 movie and snacks for four being $25.00 is a very odd and
11 a sad metaphor with respect to the potential hardships
12 for certain persons, retired persons, living on fixed
13 budgets in this state and that can very well fairly be
14 called a hardship in terms of an increase in rates.
15 Our case is a very high priority for the
16 organization, AARP. This doubling of the local service
17 rate called for in the proposal from the Company we
18 believe is extreme to the maximum. The issue of
19 universal access to telephone service, fair rates,
20 reasonable rate of recovery, I needn't advise you in that
21 regard as clearly you're much more expert than I.
22 On its face, though, this case needs to be
23 cooked down to some real basic issues of public policy
24 and representations and, if you will, the arrogance of
25 the representation of comparing telephone service to an
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1 isolated elderly person in a rural area whose only
2 lifeline may well be that telephone, comparing that to
3 the movie and snacks for four here I think misses the
4 point severely.
5 As this case proceeds, I think it will be
6 interesting to observe how the Company has adopted the
7 best of both worlds. Of course, we all do that as
8 advocates. I, however, don't have the advantage, nor do
9 my clients, of arguing -- accepting the best of both
10 worlds with respect to the embedded case and the
11 forward-looking economic models, TSLRIC kinds of models.
12 We're pretty simple on this end and that is if this is an
13 embedded case, then it's an embedded case. If it's some
14 future-looking economic model that's based on some
15 assumptions about competition, then those assumptions
16 have to be underpinned with facts and the Company simply
17 adopts the position that, gee whiz, we want shorter
18 depreciation rates that we need to compare and that it's
19 essential, in fact, as their testimony has been to
20 compare wholesale and retail rates.
21 It is essential if you're going to be
22 adopting both methodologies in trying to rationalize the
23 position of shortening depreciation rates while at the
24 same time denying that this is a future- or
25 forward-looking case and denying access, for example, to
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1 those AT&T records when those very same models are argued
2 by its experts. The methodologies, I believe, and the
3 arguments that are put forward do not necessarily support
4 the Company's case.
5 Ms. Wilson's testimony, Mr. Wozniak's
6 testimony, Mr. Easton's testimony is all about how this
7 regulatory scene is changing and how this case is
8 altering under Telecom 1996 to "significantly alter the
9 regulatory compact." That's Ms. Wilson's testimony.
10 Wozniak at 19 and 20, Easton at 2, 3 and 6, they
11 reiterate.
12 As this case develops, we believe that most
13 importantly to AARP's position will be and our best
14 witness may be Ms. Mary Owen who states that it's
15 imperative to review the interrelationship between
16 wholesale and retail. That's what they're suggesting.
17 There are other problems with that testimony. Inflation
18 at two to three percent per year, page 16 of her
19 testimony, can't possibly, reasonably justify it, the
20 local service costs that are being proposed here, and we
21 question what relevancy at any rate does inflation have
22 to either a regulated or competitive market given that
23 the reduction in price and cost of providing a service
24 appears to be the direction rather than an inflationary
25 cost consideration and in any case, that's not been
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1 addressed by the Company. We hope that it will be. We
2 doubt that it will be.
3 What is the relationship between
4 inflationary costs and established fixed costs subject to
5 economic recovery through such methods as depreciation,
6 traditional rate of return and traditional rate setting.
7 Likewise, what understanding do we have as to the
8 interrelationship between inflationary costs and a
9 competitive market given the unfolding of competition in
10 this arena.
11 We too represent some rural elderly
12 persons, members of our organization, AARP. We have
13 isolated rural customers. They are more disperse, that's
14 true. Ms. Owen at pages 12 and 13 discusses this, but
15 then the bald statement is made they cost more to serve.
16 Again, they may cost more to serve in an embedded case
17 where the hardware -- where we have experience with the
18 hardware, the costs and the depreciation of the
19 hardware.
20 The implication here is that rates will go
21 up in rural areas and we just heard that discussed in the
22 Company's opening statement and yet, we have AT&T in the
23 arbitration case apparently saying that they have a box
24 for wireless communications that is going to
25 substantially decrease -- that those technologies can
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1 diminish the price in rural areas, as well as in urban
2 areas as far as that goes.
3 That's essentially the outline of what AARP
4 is going to be addressing in its direct as well as
5 cross-examination of the witnesses. I appreciated the
6 opportunity to at least outline that for you and that's
7 all I have to say at this juncture. Thank you very much.
8 COMMISSIONER SMITH: Thank you,
9 Mr. Donesley.
10 Anyone else wish to jump in? No?
11 Okay, with that, Ms. Hobson, we're ready
12 for your first witness.
13 MS. HOBSON: Thank you, Madam Chair.
14 U S WEST calls Barbara Wilson.
15
16 BARBARA L. WILSON,
17 produced as a witness at the instance of U S WEST
18 Communications, Inc., having been first duly sworn, was
19 examined and testified as follows:
20
21 DIRECT EXAMINATION
22
23 BY MS. HOBSON:
24 Q Would you please state and spell your name
25 for the record?
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CSB REPORTING WILSON (Di)
Wilder, Idaho 83676 U S WEST Communications
1 A Barbara, B-a-r-b-a-r-a, L. Wilson,
2 W-i-l-s-o-n.
3 Q And what is your business address?
4 A 999 Main Street, 11th floor, Boise, 83702.
5 Q And where are you employed and in what
6 capacity?
7 A I'm employed at U S WEST Communications as
8 Idaho vice president and also as regional vice president
9 for the northern region.
10 Q In your capacity as a state vice president
11 and as a regional vice president, did you prepare and
12 cause to have filed in this case certain written
13 testimony in the form of 34 pages?
14 A Yes.
15 Q And I believe that testimony was dated
16 June 28, 1996; is that correct?
17 A Yes.
18 Q Together with that testimony, did you also
19 cause to have filed -- prepared and have filed in this
20 case an exhibit numbered No. 24?
21 A Yes.
22 Q Consisting of a single page?
23 A Yes.
24 Q Do you have any corrections, deletions or
25 additions to make to that testimony or exhibit at this
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CSB REPORTING WILSON (Di)
Wilder, Idaho 83676 U S WEST Communications
1 time?
2 A The only correction is that my regional
3 duties have expanded by two states since this was
4 originally filed.
5 Q Would you like to for the record put the
6 names of those states on the record?
7 A That would be Utah and Oregon.
8 Q Ms. Wilson, if I were -- you have been
9 sworn, haven't you?
10 COMMISSIONER SMITH: Yes.
11 THE WITNESS: Yes.
12 MS. HOBSON: I missed that part.
13 THE WITNESS: I raised my hand and said I
14 do.
15 Q BY MS. HOBSON: Either you're sworn or you
16 are married, one of the two. If I were to ask you the
17 same questions that are contained in your prefiled
18 testimony today now that you are under oath, would your
19 answers be the same?
20 A Yes, they would.
21 MS. HOBSON: With that, Madam Chair, I
22 would spread Ms. Wilson's testimony on the record as if
23 read and I would offer Exhibit No. 24.
24 COMMISSIONER SMITH: If there's no
25 objection, we will spread the prefiled testimony upon the
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CSB REPORTING WILSON (Di)
Wilder, Idaho 83676 U S WEST Communications
1 record as if read and admit Exhibit 24.
2 MS. HOBSON: Thank you.
3 (U S WEST Communications, Inc. Exhibit
4 No 24 was admitted into evidence.)
5 (The following prefiled direct
6 testimony of Ms. Barbara Wilson is spread upon the
7 record.)
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CSB REPORTING WILSON (Di)
Wilder, Idaho 83676 U S WEST Communications
1 Q. PLEASE STATE YOUR NAME, ADDRESS AND
2 POSITION WITH U S WEST COMMUNICATIONS, INC.
3 A. My name is Barbara L. Wilson and my address
4 is 999 Main Street, Boise, Idaho. I am the Idaho Vice
5 President for U S WEST Communications,1 and regional
6 vice president of public policy for the Company's
7 northern region which encompasses the states of Idaho,
8 Montana, Wyoming, North Dakota, and South Dakota.
9 Q. PLEASE DESCRIBE THE SCOPE OF YOUR
10 RESPONSIBILITIES.
11 A. I have the responsibility for the Company's
12 regulatory, legislative and public policy initiatives in
13 Idaho and the other northern region states.
14 Q. PLEASE STATE THE PURPOSE OF YOUR TESTIMONY.
15 A. The purpose of my testimony is to begin a
16 dialogue with this Commission about the direction of
17 telecommunications at this pivotal time in the history of
18 the industry. In doing so, I will emphasize the urgency
19 of promptly addressing the issue of repricing local
20 service. To provide context for this discussion, I will
21 review the recent history of telecommunications in Idaho
22 and discuss how U S WEST and the Commission have worked
23 together in building the current infrastructure. I will
24 describe some of the major changes taking place in
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Barbara L. Wilson - Di 1
U S WEST Communications, Inc.
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23 1 For the sake of this testimony, all references to
U S WEST Communications, Inc. and U S WEST refer to
24 U S WEST Communications, Inc. and have no connection to
the U S WEST Media Group or its subsidiaries.
25
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Barbara L. Wilson - Di 1A
U S WEST Communications, Inc.
1 the industry which will affect Idaho operations and the
2 impact these changes will have on the need to reprice
3 services. I will discuss why it is critical to implement
4 improved capital recovery mechanisms to assure continued
5 future Company investment in Idaho and to protect the
6 state's most valuable telecommunications asset -- the
7 public switched network.
8 Q. BEFORE DESCRIBING THE RECENT HISTORY OF
9 REGULATION IN IDAHO, CAN YOU EXPLAIN THE URGENCY OF
10 ADDRESSING THE PRINCIPLE ISSUES IN THIS DOCKET?
11 A. The fundamental compact utilized to
12 regulate telecommunications has been completely altered
13 by the passage of the Telecommunications Act of 1996 by
14 Congress (the federal act). As a result, the historic
15 "social" pricing of local residence service must be
16 thoroughly re-examined and restructured in light of
17 economic principles. Use of unrealistic depreciation
18 lives and other methodologies which were possible in a
19 marketplace devoid of competition are no longer
20 sustainable. Now that the "marketplace devoid of
21 competition" has been jettisoned in favor of a fully
22 competitive local and interexchange market, the primary
23 rationale for uneconomic pricing has completely fallen.
24 This Commission must now address the issues of economic
25 pricing for local exchange service concurrent with the
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Barbara L. Wilson - Di 2
U S WEST Communications, Inc.
1 further opening of the marketplace to competition.
2 Unless the Commission undertakes contemporaneous and
3 rational repricing and improvement of capital recovery,
4 it will provide governmentally sanctioned market
5 advantage
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Barbara L. Wilson - Di 2A
U S WEST Communications, Inc.
1 to the competitors -- many of whom are multi-national
2 enterprises with resources greater than those of
3 U S WEST.
4 Q. YOU SEEM TO BE SAYING THAT THE ADVENT OF
5 COMPETITION IS FORCING PRICES UP. SHOULDN'T COMPETITION
6 HAVE EXACTLY THE OPPOSITE EFFECT?
7 A. This is a very common misconception. What
8 competition does is force price toward costs. In the
9 ordinary circumstance where prices are above cost, the
10 advent of competition means that prices will be forced
11 down. But, where the price has been kept artificially
12 below cost -- as here where prices have been regulated by
13 the Commission -- the introduction of competition means
14 that prices must change to reflect the cost of provision
15 of service.
16 Q. CAN'T THE COMMISSION SIMPLY LET THE
17 COMPETITIVE MARKETPLACE CURE THE PRICING PROBLEMS?
18 A. Theoretically it could but it would mean
19 that it would have to give up all authority to set prices
20 for services -- either wholesale or retail. The
21 Commission can "let the market take care of it" only by
22 relinquishing all price setting authority to the market.
23 Since the Commission has been granted jurisdiction over
24 the pricing of Title 61 services by the legislature, I
25 doubt if that would be possible without legislative
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Barbara L. Wilson - Di 3
U S WEST Communications, Inc.
1 action.
2 Q. WHAT ARE THE CONSEQUENCES IF THE COMMISSION
3 DOES NOT RESTRUCTURE LOCAL PRICES AT THIS TIME?
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Barbara L. Wilson - Di 3A
U S WEST Communications, Inc.
1 A. There are several undesirable consequences.
2 First, since the development of vibrant competition
3 depends on the economic conditions of the market,
4 uneconomic pricing decisions will inhibit the development
5 of true competition and hence, delay the benefits of
6 economic competition for Idaho customers. Second,
7 because competition, even in the best of circumstances,
8 will not develop simultaneously for all customers,
9 uneconomic pricing will shift the burdens to those with
10 the fewest choices and those with least ability to pay.
11 Furthermore, unless the current providers of local
12 service are permitted to recover their existing
13 investment and fund continued investment through the
14 prices they are allowed to charge, the network in Idaho
15 will suffer.
16 Before I discuss these issues in detail, however,
17 it is important to put this discussion in a proper
18 historic context.
19 HISTORY
20 Q. WHAT IS THE RECENT HISTORY OF REGULATION OF
21 U S WEST COMMUNICATIONS IN ITS SOUTHERN IDAHO TERRITORY?
22 A. Prior to divestiture in 1984, U S WEST
23 operated as a fully regulated telephone monopoly known as
24 The Mountain States Telephone and Telegraph Company
25 (Mountain Bell). The Company was fully regulated using
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Barbara L. Wilson - Di 4
U S WEST Communications, Inc.
1 rate of return regulation and had no competitors for most
2 of its services. The Commission set rates for all
3 services under state law and under what is known as "the
4 regulatory compact."
5 Q. WHAT IS THE REGULATORY COMPACT?
6 A. Traditional regulation was based on a
7 compact between government and the telephone service
8 provider: a state-ordered monopoly protected the
9 provider from competition, while the provider agreed to
10 provide certain public benefits, i.e., the provision of
11 ubiquitous service within its territory at rates set by
12 government. The state commission was required to set
13 prices that permitted the local exchange company an
14 opportunity to earn a reasonable return on its invested
15 capital, as well as the return of the capital that it was
16 required (and is still required) to invest to meet its
17 governmentally-imposed obligations.
18 Q. HOW WERE RATES FOR RESIDENTIAL LOCAL
19 EXCHANGE SERVICES PRICED UNDER THAT TRADITIONAL SCHEME?
20 A. A revenue requirement for the Company's
21 entire intrastate operations was established. Then this
22 revenue requirement was "spread" to the various services
23 offered by the Company. One of the key policies driving
24 rate design was the societal goal of achieving universal
25 service. In this context that meant getting as many
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Barbara L. Wilson - Di 5
U S WEST Communications, Inc.
1 people as possible on the network. To accommodate this
2 goal, residence service rates were judged reasonable by
3 the ability of the least able
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Barbara L. Wilson - Di 5A
U S WEST Communications, Inc.
1 to pay, not by the relationship to the costs of provision
2 of residence service to the price. Areas which presented
3 higher costs for the provision of service, e.g., sparsely
4 populated rural areas, were included under an umbrella of
5 average pricing, overlaid with value a of service model
6 which resulted in rural prices actually being set at a
7 lower level than prices in lower cost urban areas. The
8 revenue requirement was recovered through pricing of
9 other services such as toll, access and business services
10 with only a residual amount being attributed to residence
11 service. This method of pricing is sometimes called
12 "residual" pricing or "social pricing" because it was
13 established to achieve the social goal of universal
14 service.
15 Q. WHY WAS A PRICING METHODOLOGY WHICH WAS NOT
16 BASED ON COSTS APPROPRIATE AT THAT TIME?
17 A. While this approach was probably
18 inappropriate even then, it was sustainable because there
19 was little or no competition. As long as there was a
20 single provider of all telecommunications services, the
21 rate design for individual services was not critical
22 because the regulated company was kept whole for its
23 overall revenue requirement. Rational economic pricing
24 was not required because customers did not have the
25 opportunity to exercise economic choice between
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Barbara L. Wilson - Di 6
U S WEST Communications, Inc.
1 alternatives, and in addition, competitors could not
2 exploit uneconomic pricing.
3 Q. WERE THERE OTHER REGULATORY METHODS USED TO
4 KEEP RESIDENCE LOCAL SERVICE PRICES LOW?
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Barbara L. Wilson - Di 6A
U S WEST Communications, Inc.
1 A. Yes. The social pricing goal for local
2 residence service was furthered by the use of
3 unrealistically long depreciation lives and other methods
4 which slowed the recovery of capital investment. This
5 approach had the effect of reducing the revenue
6 requirement and, hence, the price of service. Again,
7 this was possible because the Company had little or no
8 competition and, hence, little risk that it would not
9 eventually recover the investment it was mandated to
10 make. Without competition the Company could control the
11 introduction of technology to match the extended lives
12 mandated by the Commission.
13 Q. HOW DID THE TELECOMMUNICATIONS ACT OF 1988
14 CHANGE THE INDUSTRY IN IDAHO?
15 A. When the Idaho legislature passed the
16 Telecommunications Act of 1988 it changed the rules for
17 how U S WEST and many new long distance providers could
18 operate and compete within the state and in the intraLATA
19 toll market. Local exchange companies had the option to
20 elect to remove services other than basic local exchange
21 service from economic regulation under Title 61 of the
22 Idaho Code.
23 To implement the Telecommunications Act of 1988,
24 U S WEST and the Commission adopted an alternative form
25 of regulation in 1989 known as the Revenue Sharing Plan.
97
Barbara L. Wilson - Di 7
U S WEST Communications, Inc.
1 With adoption of that Plan, all of U S WEST's southern
2 Idaho operations were opened to competition except basic
3 local residence and small business services,
4 non-published and non-listed directory services and local
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Barbara L. Wilson - Di 7A
U S WEST Communications, Inc.
1 coin telephone charges which remained subject to price
2 regulation under Title 61 of the Idaho Code.
3 Q. DID THE REVENUE SHARING PLAN ADDRESS ANY OF
4 THE LOCAL SERVICE PRICING ISSUES YOU HAVE DESCRIBED?
5 A. No. The Revenue Sharing Plan, since it
6 involved "sharing" of revenues between the Title 62 and
7 Title 61 operations, was really an alternative form of
8 regulation for the entire firm and met the statutory
9 requirements for a substitute for traditional cost
10 allocation. It was predicated on the assumption that
11 from an overall revenue requirement viewpoint, U S WEST's
12 Idaho operations (both Title 61 and Title 62) were
13 earning a reasonable rate of return and that any increase
14 in revenues measured on a "per line" basis would be
15 shared between Title 61 and Title 62. U S WEST was free
16 to set Title 62 prices but any overall increase in
17 revenues occasioned by U S WEST's pricing strategy was
18 "shared" with Title 61 customers at an approximate rate
19 of 40%.
20 The Revenue Sharing Plan did nothing to alter the
21 basic residual or social pricing of Title 61 services.
22 In fact, those services remained at roughly the same
23 prices throughout operation of the Plan, although the
24 Commission's decisions from time to time to return
25 sharing funds to customers through Title 61 credits,
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Barbara L. Wilson - Di 8
U S WEST Communications, Inc.
1 operated as an effective short term price reduction.
2 Q. WERE THERE BENEFITS TO IDAHO CUSTOMERS FROM
3 THE OPERATION OF THE REVENUE SHARING PLAN?
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Barbara L. Wilson - Di 8A
U S WEST Communications, Inc.
1 A. Absolutely. The agreement created a
2 sharing mechanism that between 1989 and the end of 1995
3 produced over $36 million, most of which the Commission
4 has already directed toward a number of purposes
5 benefitting U S WEST's customers. The Commission has
6 used these funds to target investments with matching
7 funds from U S WEST to assist in building and maintaining
8 Idaho's most valuable telecommunications asset. It has
9 distributed credits to various residential and small
10 business customers and it has provided funding for public
11 educational communications services which will benefit
12 over 50 public school districts and 60 public libraries
13 used by U S WEST customers. Given the economics of such
14 investments, it is unlikely that, absent the Revenue
15 Sharing Plan and the Commission's foresight, many of
16 these improvements would have been undertaken in some of
17 the less populated communities of southern Idaho.
18 Customers in communities such as American Falls,
19 Blackfoot, Caldwell, Eagle, Franklin, Gooding, Hagerman,
20 Idaho City, Jerome, Mountain Home, Payette, Rexburg, Star
21 and many other smaller Idaho communities are benefitting
22 from investments made in telecommunications
23 infrastructure during this period.
24 Q. WHY DO YOU CHARACTERIZE U S WEST'S SOUTHERN
25 IDAHO NETWORK AS "IDAHO'S MOST VALUABLE
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Barbara L. Wilson - Di 9
U S WEST Communications, Inc.
1 TELECOMMUNICATIONS ASSET?"
2 A. U S WEST's southern Idaho network is the
3 backbone for communications across this part of the
4 state. It provides the critical link between
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Barbara L. Wilson - Di 9A
U S WEST Communications, Inc.
1 all the other local exchange companies as well as access
2 to long distance services to customers in this part of
3 the state. It is the resource which allows for
4 connections for economic development growth, advancements
5 in health care and education, for business customers to
6 access sophisticated telecommunications services and for
7 the expansion of other telecommunications services in
8 this state.
9 Recent years have seen customer usage of the
10 network and the value customers derive from that network
11 usage accelerate. We are now seeing residential
12 customers order multiple lines to accommodate their
13 voice, FAX and computer needs. Internet usage has
14 exploded. The southern Idaho network has been, and will
15 continue for some time to be, an integral part of
16 customer's modern lives.
17 Q. DID THE IDAHO TELECOMMUNICATIONS ACT OF
18 1988 AND THE SUBSEQUENT REVENUE SHARING PLAN ADDRESS THE
19 TRANSITION TO A COMPETITIVE ENVIRONMENT?
20 A. Yes, to a degree. The Idaho
21 Telecommunications Act of 1988 provided for the economic
22 deregulation of those services most likely to be subject
23 to competition: toll, access and multi-line business
24 services, as well as discretionary vertical services.
25 Since the 1988 Act was implemented, the Company's long
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U S WEST Communications, Inc.
1 distance prices have been reduced a number of times.
2 Furthermore, prices for access services to other long
3 distance providers have been reduced by 60% since 1989.
4 Meanwhile, the Company invested $401.5 million
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U S WEST Communications, Inc.
1 between 1989 and 1995 in capital improvements to the
2 network including $14.4 million of Commission-directed
3 contributions from Revenue Sharing. These investments
4 have made advanced custom calling services, caller
5 identification, and voice messaging services available to
6 the majority of southern Idaho customers. Thus, the
7 legislation served its purposes well. But it did not
8 anticipate competition in all aspects of telephony and,
9 therefore, did not address the historic pricing problems
10 of basic local exchange service which will distort the
11 effects of competition if not addressed by the
12 Commission.
13 CHANGE IN THE INDUSTRY
14 Q. GIVEN ALL OF THE BENEFITS OF THE REVENUE
15 SHARING PLAN, WHY IS U S WEST NOW ASKING THE COMMISSION
16 TO PERFORM COST ALLOCATION AND RATE REGULATION FOR TITLE
17 61 SERVICES?
18 A. While the Revenue Sharing Plan has been
19 very beneficial over the years of its operation, it has
20 been apparent for some time that the Plan would have to
21 be modified or terminated in order to address a number of
22 issues raised by the transition to an increasingly
23 competitive marketplace. In Case No. USW-S-94-3 which
24 was initiated to review the operation of the Plan over
25 its first five years of operation, U S WEST began to
discuss the need for more realistic capital recovery
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Barbara L. Wilson - Di 11
U S WEST Communications, Inc.
1 and the restructure of local service prices to cover
2 costs. The Company and Staff attempted to deal to a
3 limited extent with some of these issues in the Joint
4 Motion for Acceptance of Regulatory Plan filed October 5,
5 1995 in Case No. USW-S-95-4. However, the passage of the
6 Telecommunications Act of 1996 by Congress demonstrated
7 to the Company that the very gradual restructure of
8 prices contemplated by that agreement was insufficient in
9 the accelerated current of change brought on by the new
10 federal law.
11 Q. PLEASE DESCRIBE HOW THE FEDERAL ACT IMPACTS
12 THE ISSUES YOU HAVE BEEN DISCUSSING.
13 A. The federal act is a response to the
14 technological and market trends that have been driving a
15 blending of the traditionally separate telephone, cable,
16 computer and entertainment businesses. The act compels
17 opening of local markets to competition and requires all
18 providers of local service to interconnect with one
19 another. The act eliminates the exclusive local
20 franchise and requires incumbents to resell services to
21 competitors. Indeed, according to Staff comments filed
22 in Case No. ATT-T-96-1 dated June 14, 1996, six companies
23 have already filed applications to become new local
24 service providers. In short, the federal act
25 significantly alters the regulatory compact.
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Barbara L. Wilson - Di 12
U S WEST Communications, Inc.
1 Q. HOW DO YOU RECOMMEND THE COMMISSION RESPOND
2 TO THIS CHANGE?
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Barbara L. Wilson - Di 12A
U S WEST Communications, Inc.
1 A. Up until now, the Commission's approach to
2 pricing of local service has been predicated on the fact
3 that there was only one local provider in each
4 certificated area. The Commission must now respond by
5 eliminating those features of its pricing policies which
6 placed a disproportionate burden of recovery of the
7 revenue requirement on business and other services. This
8 must be done so that companies, like U S WEST, which
9 have been the instruments of the success of the country's
10 prior telecommunications policy of achieving universal
11 service through government-regulated monopolies, can not
12 only continue to perform their obligations to serve but
13 can also continue to invest to meet expanding customer
14 needs and remain a viable participant in the
15 telecommunications market across Idaho.
16 WHAT NEEDS TO HAPPEN
17 Q. WHAT DO YOU RECOMMEND THE COMMISSION DO TO
18 REMEDY THE PRICING PROBLEMS THAT YOU HAVE DESCRIBED?
19 A. I realize that what we are asking is
20 difficult, but the Commission needs to accept the fact
21 that the historical approach to the pricing of local
22 service must end now. It is simply no longer possible to
23 price local service, particularly residence service,
24 without regard to cost and using unrealistic
25 depreciation.
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Barbara L. Wilson - Di 13
U S WEST Communications, Inc.
1 The case before the Commission demonstrates the
2 need for additional revenues for the Title 61 operations.
3 No one can realistically expect that the revenue
4 requirement should remain unchanged over the years since
5 the Commission last conducted a full rate case. Society
6 is demanding better telecommunications service, and
7 demanding services be widely and instantaneously
8 available. The extended recovery period mandated by the
9 Commission has created a significant obligation that must
10 be met now in order to restore the investment the Company
11 has used to serve past generations of ratepayers as well
12 as meet the investment demand that continues unabated
13 today. Title 61 customers can no longer expect to look
14 to Title 62 operations to support basic local services.
15 Q. ARE THERE SPECIFIC STEPS THAT NEED TO BE
16 TAKEN TO REDRESS THE ISSUES YOU HAVE RAISED?
17 A. Yes. As part of the repricing of local
18 service the capital recovery schedule of U S WEST must be
19 improved. The capital recovery mechanisms employed by
20 the Commission in the past were designed to reduce
21 expense, suppress revenue requirements and, hence, keep
22 prices low. In the monopoly environment, as I have
23 stated, such practices did not put the Company at
24 significant risk because the Commission could effectively
25 guarantee recovery in future rates. All that changes
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Barbara L. Wilson - Di 14
U S WEST Communications, Inc.
1 with the elimination of the exclusive franchise and the
2 introduction of local competition. U S WEST must now be
3 allowed to
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Barbara L. Wilson - Di 14A
U S WEST Communications, Inc.
1 depreciate its investments in a reasonable amount of
2 time, i.e. on schedules similar to those used by current
3 competitors and likely to be used by the new local
4 service providers. The marketplace, including U S WEST's
5 competitors, now controls the introduction of technology.
6 The Company must be able to recover its investment in a
7 manner comparable to the competitors in order to ensure
8 that it too can upgrade its technology to meet customer
9 needs and so as to not be placed at a competitive
10 disadvantage.
11 Further, that depreciation expense related to
12 Title 61 assets must be recovered in the prices set by
13 the Commission. Other U S WEST witnesses will testify in
14 this case as to the actual prices and levels needed.
15 However, I cannot overemphasize the importance of
16 allowing U S WEST to recover its investments through
17 adequate depreciation and pricing to continue its
18 investments in Idaho and to maintain and enhance this
19 modern telecommunications system we enjoy across the
20 state today.
21 Q. HASN'T CAPITAL RECOVERY BEEN ENTIRELY
22 WITHIN U S WEST'S DISCRETION UNDER THE REVENUE SHARING
23 PLAN?
24 A. Only to the extent U S WEST was able to
25 fund it through its Title 62 operations. Since 1989 the
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Barbara L. Wilson - Di 15
U S WEST Communications, Inc.
1 Company has increased its depreciation expense by $56.9
2 million. This additional expense was absorbed by the
3 Company without increasing its Title 61 local prices, and
4 in fact while substantially reducing prices for toll and
5 access on the Title 62 side. As Mr. Easton and other
6 U S WEST
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Barbara L. Wilson - Di 15A
U S WEST Communications, Inc.
1 witnesses will describe in their testimonies, U S WEST
2 must be allowed to change its depreciation levels for
3 rate making purposes and it must be allowed to recover
4 the expense associated with this change for Title 61
5 operations through increases to the price of basic local
6 service. Failure to allow the Company to implement these
7 changes will jeopardize the future of U S WEST in Idaho
8 and the continued investment needed to maintain Idaho's
9 most valuable telecommunications asset.
10 Q. YOU STATE THAT CHANGES MUST BE MADE IN THE
11 PRICING OF U S WEST SERVICES BECAUSE OF THE ADVENT OF
12 COMPETITION BUT HOW WILL HIGHER PRICES MAKE U S WEST MORE
13 COMPETITIVE?
14 A. I am not suggesting that U S WEST will be
15 in the better competitive position by charging higher
16 prices. What I am saying is competition drives prices
17 towards costs. For services priced below cost, that
18 means price increases; and for those priced above cost,
19 it means price decreases. Margie Wright and Dallas Elder
20 demonstrate that the current prices for Title 61 services
21 (primarily residential service) produce a negative
22 return. That means that the prices for Title 62 services
23 are required to recover that shortfall so that the total
24 enterprise is profitable, thus making those services
25 competitively -- and economically -- vulnerable. It also
113
Barbara L. Wilson - Di 16
U S WEST Communications, Inc.
1 means that if the prices for Title 61 services are raised
2 to cover the revenue requirement, U S WEST will be
3 positioned to
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Barbara L. Wilson - Di 16A
U S WEST Communications, Inc.
1 reduce the competitive vulnerability of those services
2 without unduly burdening the financial health and future
3 investments of the total enterprise in Idaho.
4 Another way to think of it is that higher prices
5 are necessary to enable U S WEST to recover the
6 investment it has made to provide the service under the
7 old model and they will fund the investment that must
8 continue to be made to meet customer needs. If U S WEST
9 is not permitted to increase its local residence prices,
10 then it will suffer as a business and it will be unable
11 to continue to invest, at least at the level that Idaho
12 has come to expect. I firmly believe that Idaho
13 customers will suffer if that occurs because the
14 investment competitors will be willing to make in Idaho
15 will be highly targeted. The relatively uniform
16 deployment of technology and services that Idaho has seen
17 in the past will not continue.
18 RESIDENCE PRICE INCREASE
19 Q. THE INCREASE IN THE RESIDENCE LOCAL SERVICE
20 PRICE THAT U S WEST IS SEEKING IN THIS CASE IS LARGE AS
21 COMPARED WITH PAST INCREASES. CAN YOU EXPLAIN WHY THIS
22 IS THE CASE?
23 A. As I said, there is a substantial
24 obligation that must be paid for past investment made in
25 the assets necessary to provide Title 61 services. While
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Barbara L. Wilson - Di 17
U S WEST Communications, Inc.
1 investment has continued at a very strong rate, Title 61
2 prices have remained frozen for many years. In fact,
3 prices for basic residential service are lower today than
4 they were ten years ago. These prices include touch-tone
5 dialing, trouble isolation service, universal one-party
6 service, modern electronic switching, and digital
7 interoffice connectivity. If the Company's prices for
8 basic residential service had merely kept pace with the
9 national Consumer Price Index since divestiture they
10 would be approximately $19 per month instead of the
11 $12.00 price Boise and other larger area customers pay
12 today.
13 Q. ARE THERE OTHER REASONS THAT IDAHO
14 CUSTOMERS MIGHT EXPECT TO PAY MORE FOR THEIR LOCAL
15 SERVICE?
16 A. Yes. U S WEST is one of the smallest
17 Regional Bell Operating Companies (RBOC) in terms of
18 access lines. In contrast, it serves the largest
19 geographic territory of any RBOC. U S WEST owns and
20 operates more local switches than any RBOC and serves
21 less than 50 access lines per square mile. Exhibit
22 No. 24 depicts the seven RBOCs and how they compare
23 regarding numbers of access lines served per square mile
24 of territory. Southern Idaho operations, after the
25 transfer of sale properties will serve approximately 31
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Barbara L. Wilson - Di 18
U S WEST Communications, Inc.
1 access lines per square mile. For example, U S WEST
2 invested $65.4 million in southern Idaho during 1995.
3 This equates to an average new investment of $160 for
4 each
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Barbara L. Wilson - Di 18A
U S WEST Communications, Inc.
1 of its 408,770 access lines. The other Regional Bell
2 Operating Companies spent an average of $110 per access
3 line in 1995.
4 It is reasonable to assume that with the density
5 per square mile being below the national average, that
6 the cost for providing service will be above the national
7 average. And with the price for residential service in
8 Idaho being below the national average it is reasonable
9 to assume that residential service is underpriced. The
10 testimony of Dallas Elder with regard to allocated cost
11 and Margaret Wright with regard to revenue requirement
12 validate these assumptions.
13 Q. HAS U S WEST CONSIDERED THE IMPACT OF THIS
14 LARGE INCREASE ON ITS TITLE 61 CUSTOMERS?
15 A. Yes. This is a concern to us. U S WEST is
16 not insensitive to the impacts of raising the residence
17 basic local exchange price, although it believes that
18 those impacts are often exaggerated when you consider
19 customers in general. The amount of the increase,
20 although perhaps surprising because of the years of
21 stable rates, will have a minimal impact on most
22 customers. If the cost of a movie and snacks for four is
23 $25, it seems that spending about the same amount for
24 basic monthly phone service cannot fairly be called a
25 hardship.
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Barbara L. Wilson - Di 19
U S WEST Communications, Inc.
1 However, we also realize that we serve low
2 income customers for whom this increase could prove to be
3 difficult.
4 That is why our proposal is to phase in the
5 increase in three roughly equal steps, over two years.
6 This approach will help customers adjust to higher
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Barbara L. Wilson - Di 19A
U S WEST Communications, Inc.
1 prices. They will not see the full increase until
2 calendar year 1999. Meanwhile, I believe they will
3 continue to see increased value in their service
4 particularly if the EAS expansion proposed by U S WEST
5 and Staff is approved and as more and more residence
6 customers use their service for FAX and computer
7 connectivity.
8 Q. ARE THERE ASSISTANCE PLANS AVAILABLE TO LOW
9 INCOME CUSTOMERS?
10 A. Currently we have the Idaho Telephone
11 Assistance Plan (ITAP) under which qualified customers
12 receive a waiver of the $3.50 federally imposed End User
13 Common Line Charge which is matched by a $3.50 credit
14 against the residence basic exchange rate funded through
15 a surcharge on business and residence access lines of the
16 providing company. Customers qualify for these discounts
17 if they meet an income standard defined in Idaho statute
18 and if they are age 60 or older.
19 Q. WILL ITAP BE AVAILABLE TO U S WEST
20 CUSTOMERS IN 1997?
21 A. That is our expectation. Although the
22 federal program which provided the means test contained
23 in the Idaho statute has been eliminated by Congress, we
24 are hopeful the Idaho legislature will act next session
25 to modify the statute and identify a workable
alternative.
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Barbara L. Wilson - Di 20
U S WEST Communications, Inc.
1 Q. ASSUMING ITAP CONTINUES, IS U S WEST
2 PROPOSING ANY MODIFICATIONS TO ITS OPERATION?
3 A. U S WEST is not proposing any modifications
4 to ITAP itself other than identification of an
5 alternative means test. However, U S WEST in this case
6 proposes that ITAP-qualified customers receive a discount
7 in addition to the $3.50 discount provided in the
8 program. We propose that the price for qualified
9 residence local exchange customers be $12.00 for
10 flat-rated service and $9.00 for measured service.
11 Q. WHAT IS AVAILABLE FOR CUSTOMERS WHO DO NOT
12 QUALIFY FOR ITAP BECAUSE THEY ARE UNDER AGE 60?
13 A. There are a couple of options. First,
14 local measured service is a low cost alternative to flat
15 rated service. As Mary Owen explains in her testimony,
16 U S WEST is now proposing that service include three (3)
17 hours of usage in the price. This service allows
18 customers to receive an unlimited amount of calls and to
19 place three (3) hours of local calls all for a price well
20 below the proposed residence flat rate. Many customers
21 could rationally choose this service as a means of
22 managing their telecommunications costs.
23 In addition as Ms. Owen discusses in her
24 testimony, U S WEST is willing to propose an additional
25 program for customers who are under age 60 but who
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Barbara L. Wilson - Di 21
U S WEST Communications, Inc.
1 otherwise qualify under the ITAP means test. The exact
2 details of this proposal will require development but the
3 concept is that these customers would
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Barbara L. Wilson - Di 21A
U S WEST Communications, Inc.
1 receive the same rate as ITAP customers. As Ms. Owen
2 states, however, U S WEST is willing to develop such a
3 program only if the Commission grants substantially all
4 of the price increase we are seeking here. This is
5 because, with the phase-in of the price increase, the
6 first increment should be at least three (3) dollars to
7 justify creation of a special program. The proposal is
8 also dependent, of course, on whether the Commission is
9 convinced there is a need for such an offering.
10 CONTRAST OF TODAY'S SITUATION WITH FULL COMPETITION
11 Q. YOU STATE THAT THE FEDERAL ACT "COMPLETELY
12 ALTERS THE REGULATORY COMPACT," BUT IS THAT COMPACT EVEN
13 RELEVANT IN A FULLY COMPETITIVE MARKET?
14 A. It may not be relevant in a "fully
15 competitive market," but we are not there yet. The
16 passage of the federal act deprives the incumbent
17 provider of the benefits of the compact, but it did
18 nothing to modify or relieve the old compact obligations
19 under which U S WEST's Title 61 business operates.
20 U S WEST is still obligated to provide service at rates
21 set by this Commission. The federal act leaves it to the
22 states to decide how and when those regulated company
23 obligations are changed or eliminated. So long as this
24 state and this Commission impose those obligations, the
25 Commission must approve prices that permit local
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Barbara L. Wilson - Di 22
U S WEST Communications, Inc.
1 exchange companies an opportunity to earn a reasonable
2 return on their invested capital, as well as, the return
3 of the capital that they invested to meet
4 governmentally-imposed obligations. Neither Congress,
5 the FCC nor the state has the legal right to unilaterally
6 declare the compact ended and then to ignore their part
7 of the bargain with regard to the historical investments
8 and current prices of the Company. It is our
9 expectation, of course, that this case will give the
10 state the opportunity to redress this situation and it
11 will not be necessary to test the Company's legal rights.
12 Q. HOW DO YOU DISTINGUISH THE SITUATION OF
13 TODAY WHERE THE FEDERAL ACT HAS PASSED MANDATING
14 COMPETITION IN ALL PHASES OF THE MARKET AND "FULL
15 COMPETITION?"
16 A. That is best understood if you look at how
17 U S WEST and other local exchange companies (LECs) are
18 situated today as compared to how they would operate in a
19 fully competitive environment:
20 1. Competitive businesses select their
21 customers and set their own prices. LECs today
22 and for the next several years, will likely have
23 an obligation to serve all residential and small
24 business customers within their historical
25 franchise area at regulated prices.
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Barbara L. Wilson - Di 23
U S WEST Communications, Inc.
1 2. Competitive businesses price to particular
2 markets, focusing on customers' differing
3 perceptions of value and, making use of
4 information
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Barbara L. Wilson - Di 23A
U S WEST Communications, Inc.
1 regarding cost differentials. LECs are required
2 to charge average prices (regardless of costs) in
3 furtherance of universal service.
4 3. Competitive businesses charge a range of
5 prices for the same service in order to maximize
6 revenues. LECs are subject to nondiscrimination
7 requirements.
8 4. Competitive businesses choose the level of
9 service they will offer on the basis of customer
10 expectations, cost/benefit trade-offs and analysis
11 of the service levels of their competitors. LECs
12 are expected to provide service that meets
13 regulatory standards developed in a monopoly
14 environment. Requirements which are often highly
15 detailed and can be very expensive to attain.
16 Competitive businesses suffer in the marketplace
17 if they provide poor service but, unlike LECs, do
18 not face regulatory penalties in the event of
19 noncompliance with service standards.
20 5. Competitive businesses determine their own
21 depreciation rates on the basis of conditions in
22 their operating environments, including customer
23 demands, the nature of their competition,
24 available technology and likely technological
25 innovation. LEC's depreciation practices are
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U S WEST Communications, Inc.
1 regulated, frequently bear little resemblance to
2 those of their competitors, and are often managed
3 by regulators so as to minimize pressure on local
4 prices.
5 6. Competitive businesses sell services below
6 cost only when they choose to do so, usually as a
7 tie-in (e.g., razors and blades) or as a special
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Barbara L. Wilson - Di 24A
U S WEST Communications, Inc.
1 one time offer to attract customers. LEC's face
2 the substantial possibility that the federal
3 mandate for resale to competitors, overlaid on the
4 historic pricing practices which have kept
5 residence rates artificially low, will require
6 them to resell services below their cost of
7 production for an indefinite period.
8 The extent to which any of these or similar
9 requirements will be imposed on new entrants into the
10 local exchange market remains to be seen. My point is
11 that none of these requirements which still impact
12 U S WEST's Title 61 operations would apply in a truly
13 competitive market. Their continued application to
14 U S WEST simply underscores the fact that along with the
15 continuing obligations of the regulatory compact for
16 incumbents, must go the continuing governmental
17 obligations regarding just, reasonable and
18 nonconfiscatory rates.
19 CONSEQUENCES OF NOT ADDRESSING PRICING ISSUES
20 Q. SHOULDN'T THE COMMISSION BE FOCUSING ON
21 IMPLEMENTATION OF THE COMPETITIVE MANDATE CONTAINED IN
22 THE FEDERAL ACT RATHER THAN TRYING TO UNWIND THE RESIDUAL
23 EFFECTS OF THE OLD SYSTEMS?
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Barbara L. Wilson - Di 25
U S WEST Communications, Inc.
1 A. No, implementing the federal mandate first
2 requires redressing the effects of the old system. If,
3 for instance, the Commission continues to price local
4 service based upon social goals instead of actual costs,
5 it will delay the introduction of the full competition in
6 the residence local exchange market. This is because
7 U S WEST is offering facilities-based service below its
8 cost now. Other competitors, using roughly similar
9 technology, can not be expected to come in and build
10 facilities to compete on an ubiquitous basis for local
11 customers unless they can charge prices which cover the
12 cost of the investment they make. This is borne out by
13 the fact that to this point the only facilities-based
14 competition to arise in local markets has focused on high
15 density, low cost core business districts.
16 Q. BUT DOESN'T THE FEDERAL ACT CONTEMPLATE
17 COMPETITION IN THE FORM OF RESALE?
18 A. Yes, certainly. My point is, however, if
19 residence customers are going to reap the real benefits
20 of competition -- i.e., meaningful choices, alternative
21 networks, innovative technology and truly competitive
22 prices forcing maximum efficiencies, the residence
23 customers are going to have to have more choice than
24 simply a competitor reselling the incumbent's service
25 with the competitor's brand on it.
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Barbara L. Wilson - Di 26
U S WEST Communications, Inc.
1 Q. ARE THERE OTHER CONSEQUENCES TO TITLE 61
2 CUSTOMERS IF PRICING IS NOT BASED ON ECONOMIC PRINCIPLES?
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Barbara L. Wilson - Di 26A
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1 A. Yes. Unless the Commission acts now to
2 begin redressing the pricing inequities I have described,
3 there is a substantial chance that those Idaho customers
4 with the least choice and perhaps the greatest dependence
5 on the public switched network will face higher and
6 higher prices in the future. This is because, as
7 competition develops, those customers which are the most
8 cost effective to serve and those that offer the greatest
9 financial returns will be the target of competitive
10 efforts. To the extent these efforts are effective, and
11 some of them certainly will be, it will mean the loss of
12 revenues which support the highest cost and lower revenue
13 generating customers. U S WEST will have no choice but
14 to return to the Commission seeking additional increases
15 to cover the costs of the service to its remaining high
16 cost, lower revenue producing customers. This is a
17 particularly serious problem for the customers in our
18 more rural exchanges.
19 Q. ARE YOU SUGGESTING THAT CAPTIVE CUSTOMERS
20 ARE GOING TO HAVE TO PAY FOR COMPETITIVE LOSSES IN THE
21 FUTURE TO KEEP U S WEST WHOLE?
22 A. No, not at all. What I am saying is that
23 under the rate design that U S WEST is offering here
24 there are still built-in supports for high cost
25 customers. They come in several forms: First,
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U S WEST Communications, Inc.
1 maintenance of relatively high rates for business
2 services despite the fact, as Dallas Elder explains in
3 his testimony, there is little cost basis for the
4 business/residence differential, means business customers
5 will continue to make a greater contribution to the total
6 cost recovery. Second,
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1 U S WEST is still proposing average statewide prices for
2 residential and business service which means those with
3 the lower costs (e.g., generally urban areas) contribute
4 to the recovery of the higher network costs of others
5 (e.g., rural, sparsely populated areas). And, U S WEST
6 is suggesting lower rates for low income customers under
7 a proposal in which the remaining customers fund the
8 support through slightly higher average prices on an
9 interim basis until this issue is addressed by the
10 legislature. If this Commission adopts U S WEST's
11 pricing proposal, then these sources will be available to
12 help fund the necessary cost recovery. If the Commission
13 waits and does not adequately address these critical
14 pricing issues now, the unrecovered costs will continue
15 to mount but the customer base to cover them will likely
16 erode.
17 Q. WON'T HIGHER LOCAL RATES ACTUALLY SPEED UP
18 COMPETITION AND DRIVE CUSTOMERS TO COMPETITORS?
19 A. It is only supposition at this point that
20 competition will bring lower price alternatives for basic
21 residence service. Remember, the economic principle is
22 that competition will drive prices toward costs. That
23 does not necessarily mean the trend will be downward. At
24 this point, as I have mentioned previously, it is
25 unlikely in my opinion that, unless there is a new
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1 technology breakthrough, anyone will come in and build
2 new facilities on a ubiquitous basis to serve residential
3 customers, even in our largest exchanges, and offer
4 service on those facilities at a price less than that
5 which we are seeking in this case. In saying
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1 this, I mean to contrast building a new television
2 network to carry voice or data because the cost of that
3 network does not need to be recovered from telephone
4 customers.
5 Q. ISN'T COMPETITION IN THE FORM OF RESALE A
6 MORE LIKELY SCENARIO?
7 A. Yes, but competition in the local market on
8 a resale basis is not driven by market place conditions
9 to the same extent as facilities based competition.
10 Under the federal act this Commission and/or the FCC, not
11 the market, will establish the rate under which the
12 incumbent's services will be available for resale.
13 Although that rate will be a cost to the resale firm, it
14 has nothing to do with the efficiencies of the resale
15 operation. The price at which the reseller will provide
16 local exchange services must cover the costs of provision
17 which include the "wholesale price" of the underlying
18 service provided by the incumbent, together with the
19 actual costs of the resale firm incurs in marketing,
20 billing and collections, customer service and so on.
21 There is absolutely no reason why resale prices should
22 drive down the price of basic local service as a
23 stand-alone product below the costs of the incumbent in
24 providing the physical facilities. These costs include
25 the actual costs of the network and reasonable capital
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1 recovery. The only basis for competition in pricing in a
2 resale scenario should be the costs incurred in marketing
3 and dealing with the end user customers. Such
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1 costs make up a very small part of U S WEST's cost
2 structure for Title 61 services, and therefore, do not
3 provide a lot of room for competitive cost cutting.
4 Q. IS THERE ANY OTHER SCENARIO UNDER WHICH YOU
5 FORESEE LOCAL RESIDENCE CUSTOMERS SEEING SUBSTANTIALLY
6 LOWER PRICES FOR LOCAL SERVICE AS A RESULT OF
7 COMPETITION?
8 A. I think it is possible that you will see
9 local service packaged with other higher margin services
10 such as toll or cable entertainment services and
11 advertised as a low cost local product even though the
12 price tag for the total package would likely exceed the
13 price for local service we are proposing here. For
14 example, a cable television provider might offer
15 flat-rated local calling for $10 if the customer also
16 buys certain other services from the cable company. This
17 approach could offer an attractive alternative to the
18 customer who also wants the packaged services and is
19 willing to pay the full price tag for the package. A
20 packaged approach, however, would not offer a low cost
21 alternative to customers who only want local service.
22 The customer who is truly a Title 61 customer will not
23 have lower price alternatives that I can foresee.
24 Q. WILL U S WEST BE OFFERING PACKAGES OF THE
25 KIND YOU DESCRIBE?
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1 A. Although U S WEST would like to address the
2 needs of customers who desire packaged services, this is
3 problematic for U S WEST because this is
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Barbara L. Wilson - Di 30A
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1 one of those areas where regulated Title 61 companies
2 differ from competitive businesses. Nondiscrimination
3 provisions in statute have been historically interpreted
4 to prohibit the discount of the recurring charges of
5 regulated services for promotions and for purposes of
6 packaging. We believe this is an area that requires
7 modification.
8 Q. WHAT OTHER EFFECTS DO YOU FORESEE IF THIS
9 COMMISSION DOES NOT ADDRESS THESE PRICING ISSUES IN THIS
10 DOCKET?
11 A. Capital demands in U S WEST could become
12 severe due to the continuing demands to meet service
13 obligations and the new costs which will be incurred to
14 implement the federal act's mandates. The earnings
15 opportunities within a state will play a major role in
16 future investment decisions. If the Commission wants to
17 see this state's network continue to grow and thrive, it
18 must understand this reality. Historically this
19 Commission has maintained a vision of nurturing the
20 public switched network in both rural and urban areas
21 which has reaped significant benefits for Idaho. In
22 order to maintain that vision in the future, the
23 Commission must now turn its attention to these critical
24 pricing issues.
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1 FULL COMPETITION
2 Q. YOU HAVE FOCUSED ON THE IMPACT OF
3 COMPETITION ON THE TRADITIONAL REGULATORY COMPACT AND THE
4 ISSUES THAT RAISES. GOING FORWARD, HOWEVER, HOW DO YOU
5 SEE COMPETITION EFFECTING IDAHO'S TELECOMMUNICATIONS
6 CUSTOMERS?
7 A. Assuming the transition is managed
8 appropriately competition will be good for Idaho. Many
9 customers will benefit through greater choice, reduced
10 prices for many services and greater innovation in
11 technology. Traditional providers and new entrants will
12 benefit from market opportunities previously foreclosed
13 to them. Eventually competition will spell the end of
14 pervasive regulation allowing providers to decide what
15 services to offer to which customers and how to price
16 those services.
17 Q. DO YOU HAVE ANY OTHER OBSERVATIONS ABOUT
18 THE DEVELOPMENT OF FULL COMPETITION?
19 A. I have several notes of caution. First,
20 competition will not benefit all customers equally. Not
21 all customers will have choices and competitive
22 investments will be highly targeted. Impacts on rural
23 customers should remain a central concern to the
24 Commission
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Barbara L. Wilson - Di 32
U S WEST Communications, Inc.
1 Second, this Commission should not be led
2 to confuse full competition and the situation we
3 presently have. Local exchange companies today remain
4 economically regulated with service obligations not
5 shared by any competitors. Competition cannot be
6 effectively implemented without addressing the effects of
7 the old system and defining new rules.
8 Third, what is good for competitors is not
9 necessarily good for customers. Competition does not
10 mean that customers are artificially transferred from one
11 company to another by an intervening entity that
12 handicaps one player. Competition does not mean that one
13 player's investment decisions are mandated, while its
14 investment recovery is artificially constrained.
15 Customers will not be benefitted if investment is
16 curtailed and only the most desirable customers have
17 options. Regulation must be balanced and cannot close
18 its eyes to the baggage that remains from decades of its
19 application.
20 SUMMARY
21 Q. WOULD YOU PLEASE SUMMARIZE YOUR TESTIMONY?
22 A. Yes. The U S WEST network is Idaho's most
23 valuable telecommunications asset. It has flourished
24 from U S WEST and Commission cooperation and shared
25 visions for the benefit of Idaho. This network can
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1 continue to provide the services and economic base so
2 important to Idaho citizens
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1 and businesses. However, it will require continued new
2 investments and continued maintenance to meet customers'
3 evolving expectations. This can only happen if the
4 Commission recognizes its obligation to U S WEST and
5 allows it to implement equitable capital recovery
6 mechanisms and move the price of basic residential
7 service to recover the Company's revenue requirement.
8 The Commission must actively redress the
9 effects of the old model while it formulates new rules
10 for implementation of fair competition. Only if prices
11 are moved above their costs will true facilities-based
12 competition come to Idaho and the benefits envisioned by
13 the new federal telecommunications policy delivered.
14 I am confident this Commission will make
15 the correct and far-sighted decision that will ensure
16 that Idaho customers will have the benefit of an
17 economically viable U S WEST presence in Idaho, while at
18 the same time, offering an opportunity for new entrants
19 to bring the benefits of alternative services at
20 competitive prices to Idaho customers.
21 Q. DOES THIS CONCLUDE YOUR TESTIMONY?
22 A. Yes.
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1 (The following proceedings were had in
2 open hearing.)
3 MS. HOBSON: Ms. Wilson is tendered for
4 cross-examination.
5 COMMISSIONER SMITH: Mr. Ward, did you wish
6 to be called upon in this or passed over?
7 MR. WARD: No, Madam Chairman. I'll raise
8 my hand if I do.
9 COMMISSIONER SMITH: All right, thanks.
10 Mr. Howell, questions?
11 MR. HOWELL: Yes, ma'am, thank you.
12
13 CROSS-EXAMINATION
14
15 BY MR. HOWELL:
16 Q Good morning, Ms. Wilson.
17 A Good morning, Mr. Howell.
18 Q In going over your testimony, would it be a
19 fair representation to say or characterize your testimony
20 as addressing the need for U S WEST to get ready to meet
21 local competition in Idaho?
22 A That could be a characterization of the
23 testimony. I don't believe that's the one I would use.
24 Q What would you use?
25 A I would say that the testimony talks about
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1 the history of where we've come. It talks about
2 historical pricing mechanisms that were used for years to
3 achieve what I would refer to as societal pricing or the
4 objective of universal service and how those things,
5 while they were probably never appropriate in the true
6 sense of the word in the old regime, in the old
7 environment, they were able to be maintained. You're
8 counting words. Excuse me, you distracted me with your
9 finger counting. They were never intended to be
10 maintained and that as the world changes, we need to make
11 adjustments and have services cover the costs that they
12 have in providing those services.
13 Q I was actually counting months and the
14 reason for that is in the nine months since you filed
15 your original testimony, do you know how many
16 competitors, local competitors, have entered the local
17 exchange market as your competitor?
18 A I know that we have two signed agreements
19 with two different individuals and they have filed
20 applications and that we also are in the process of
21 arbitration with another and as I recall in a Staff
22 testimony that there were others who had filed for CLEC
23 status.
24 Q And by "CLEC," what do you mean by CLEC?
25 A Certified local exchange carrier. I don't
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1 recall the exact number.
2 Q Would you accept, subject to check, that
3 the Commission has approved three certificates for
4 Title 61 local service?
5 A Yes.
6 Q And that it also has 12 or, excuse me,
7 eight pending applications for local certification to
8 provide Title 61 services?
9 A Yes, because I assume you have the correct
10 data.
11 Q Thank you, I do. On page 4 of your
12 testimony, you use the term "true competition." Would
13 you explain what you mean by true competition?
14 A Yes, in a true competitive environment,
15 what you have is all of the players in that environment
16 have the opportunity to act as rational businesses and be
17 able to pick and choose customers. They have the ability
18 to decide where and when they will invest. They have the
19 ability to decide at what prices and what type of
20 packaging of services they will offer to their customers
21 and they do not have government-mandated requirements for
22 them and, hopefully, in a true competitive environment,
23 if it's a good marketplace, you have multiple people who
24 are making actual physical investments to bring new
25 capabilities to customers.
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1 Q Is one of the characteristics of true
2 competition that your competitors are facilities-based?
3 A There's a variety of ways in which people
4 could provide true competition. If you look at a totally
5 unregulated world, in some cases, I believe the long
6 distance market, for example, in southern Idaho is
7 considered extremely competitive. Some of the
8 competitors provide their own facilities, but a large
9 number of the 150 people or so who provide services do so
10 over resold facilities of other carriers, so it's a
11 common issue in telecommunications but not a requirement.
12 Q So, again, I guess what I'm getting at is
13 to try to narrow down your definition and your use of the
14 term "true competition." Do you believe for true
15 competition there must be facilities-based competitors?
16 A I believe for true competition that all
17 providers of services must have total market freedom in
18 that environment.
19 Q Let me try this another way. Would you
20 disagree with your witness Mary Owen where she says on
21 page 14 that facilities-based competition is true
22 competition?
23 A I don't have Mary Owen's testimony in front
24 of me and I would prefer to read the context of the
25 question and answer before answering, if you would like
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1 to provide that.
2 MR. HOWELL: May I approach the witness?
3 COMMISSIONER SMITH: Certainly.
4 (Mr. Howell approached the witness.)
5 Q BY MR. HOWELL: If I could have you look at
6 line 11 and 20 of Mary Owen's direct testimony.
7 MS. HOBSON: What's the line reference
8 again?
9 MR. HOWELL: She has it.
10 THE WITNESS: Page 14, 11, and I believe
11 you said 20?
12 Q BY MR. HOWELL: Yes, ma'am.
13 A Twenty is the end of a question.
14 Q Then the next line. Particularly directing
15 your attention to line 21, do you have that line in front
16 of you?
17 A Yes, I do.
18 Q Would you disagree with her assessment in
19 your own mind when you use the term "true competition"
20 that true competition should be facilities-based
21 competition?
22 A I would not disagree that her statement is
23 accurate. I would agree that my statement has a broader
24 context in the freedom of a corporation to make
25 independent business decisions which is an expansion of
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Wilder, Idaho 83676 U S WEST Communications
1 what she said.
2 Q Thank you. On the bottom of your page 2
3 and the top of page 3, you mention that many of your
4 competitors are "multi-national enterprises with
5 resources greater than those of U S WEST." Can you
6 identify for the Commission whether any of the -- other
7 than AT&T -- whether any of the other remaining 10
8 companies have resources as great as U S WEST?
9 A MCI with the merger of Bell -- with British
10 Telecom would be in that category and I would -- I don't
11 have data with me on all that information, but I think
12 it's critical that you would look at U S WEST
13 Communications separate from U S WEST, the parent
14 corporation.
15 Q Would you accept, subject to check, that
16 MCI has not asked the Commission for a Title 61
17 certificate?
18 A Yes, because I assume you have accurate
19 data.
20 Q And that you cannot be a competitor until
21 you have a Title 61 certificate to provide local service?
22 A Well, you cannot be a competitor in
23 Title 61 services. People have been able to be a
24 Title 62 competitor for local service for quite some time
25 and if you provide it to a business customer, like
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1 apartments as there are in Boise, you are able to provide
2 those services without a certificate.
3 Q Isn't it true that a residential customer
4 currently residing in Boise cannot acquire wire line
5 service from anyone else other than U S WEST?
6 A It's my understanding, and it would be
7 subject to check, that there is an apartment complex in
8 Boise that offers local residential service to their
9 customers. I forget the name, but we could have that
10 verified. The reason I know is I've gotten a Caller ID
11 complaint from a customer from that.
12 Q And isn't that customer reselling your
13 services or that competitor?
14 A I would assume so, but they are providing
15 residential service to customers, which I believe was
16 your question or my understanding of it.
17 Q Is there competition for Title 62 local
18 service in Idaho currently?
19 A There is competition for Title 62, not
20 probably in the normal sense of a local exchange number,
21 but there is competition in the sense of buying a large
22 pipe to have significant numbers of volume of customer
23 traffic going over it.
24 Q Would you describe that level of
25 competition for Title 62 local service as significant?
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1 A I don't have any data with which to put a
2 number on it, and one of the unique aspects of that
3 competitive environment is there's no way for us to know
4 if a customer has facilities or T-1 facilities, if
5 they've gotten them other than from us or if they've
6 bought those services through us or their carrier has
7 bought them through us what they're using that traffic
8 for.
9 Q On page 8 of your testimony, you describe
10 generally the operation of the revenue sharing plan. On
11 lines 15 and 16, you indicate that the plan did nothing
12 to alter the basic residential pricing of Title 61
13 services. Isn't it true that at the time the plan was
14 approved that the Commission Staff and U S WEST
15 contemplated that a need for revenue caused by a revenue
16 deficiency would be recovered through a monthly surcharge
17 on Title 61 customer rates?
18 A I don't know.
19 Q Would you accept that question, subject to
20 check?
21 A Well, I --
22 MS. HOBSON: I'm going to object. That's
23 not the kind of question I believe that the witness has
24 the capability to check. She's indicated she doesn't
25 know.
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1 COMMISSIONER SMITH: Mr. Howell.
2 MR. HOWELL: I'll move on to my next
3 question.
4 COMMISSIONER SMITH: Thank you.
5 Q BY MR. HOWELL: On the bottom of page 10,
6 you indicate that the Company has invested more than
7 $400 million in network improvements between the years
8 1989 and 1995. On page 11, line 2, you indicate that
9 14.4 million of the 400 million capital improvements was
10 "Commission-directed contributions from revenue
11 sharing." Is that 14.4 million that you reference the
12 Title 61 contribution to the Tech II program?
13 A Yes, that's the Tech Plus II.
14 Q And if we were to scrutinize the
15 $400 million a little closer, isn't it true that roughly
16 100 million or 25 percent of that amount represented
17 network improvements ordered by the Commission in the
18 Tech Plus and Tech II programs?
19 A The data that I have seen on the Tech Plus
20 amount is about 40 something. It was in the mid 40's, as
21 I recall. It was not close to the $100 million that
22 you're citing.
23 Q Would you accept Margie Wright's testimony
24 on page 19 of her direct that the Tech II contribution
25 was about 53 million?
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Wilder, Idaho 83676 U S WEST Communications
1 A The Tech II contribution by who?
2 Q The Company, what the Company was ordered
3 to spend on Tech II.
4 MS. HOBSON: I'm going to object to the
5 question. I believe you have tied this line of
6 questioning to the witness' statement in her testimony
7 between the years 1989 and 1995. I think you're asking
8 her now to check something that is data not necessarily
9 related to those years.
10 COMMISSIONER SMITH: Mr. Howell.
11 MR. HOWELL: Madam Chairman, Tech II is
12 directly within those years. I believe it's 1991, '92
13 and '93.
14 MS. HOBSON: Excuse me, Mr. Howell, I
15 believe you were talking about Tech Plus.
16 MR. HOWELL: At the time if I said
17 Tech Plus, I apologize. My question about the 53 million
18 was directed specifically to Tech II.
19 COMMISSIONER SMITH: So you still have an
20 objection? Should we ask Mr. Howell to reformulate his
21 questions so maybe we can all get the thread of it this
22 time? Try one more time, please.
23 Q BY MR. HOWELL: Would you disagree that
24 roughly $100 million of the $400 million was money
25 directed by the Commission to be spent for the Tech Plus
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Wilder, Idaho 83676 U S WEST Communications
1 and Tech II programs?
2 A I would disagree until I see the dollars
3 about how you calculate that because I've never seen
4 dollars presented that way. I can tell you updated types
5 of numbers, but only as it relates to this.
6 Q Well, let me ask you this question: Isn't
7 it true that under the Tech II program, the Company was
8 required to roughly match its investment $2.00 to the
9 Title 61 contribution of $1.00?
10 A Right, there was an agreement that we would
11 be doing, and it was a roughly, I can't recall the exact
12 figure, a one-and-a-half or two times one or whatever the
13 number was match, that is correct.
14 Q And isn't it true that that is your
15 testimony in the U S WEST-S-92-1 case?
16 A I do not have a copy of my testimony in
17 front of me and if you would like to share that testimony
18 with me, I'd be happy to verify that it's mine.
19 (Mr. Howell distributing documents.)
20 Q BY MR. HOWELL: Would you read the cover of
21 the document I just handed you?
22 A Yes. "Direct Testimony of Barbara L.
23 Wilson, U S WEST Communications, Inc., June 10, 1992," my
24 prior opportunity in this chair.
25 Q And if you were to turn page 7 of that
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Wilder, Idaho 83676 U S WEST Communications
1 testimony that I've just handed you, particularly
2 referring to line 18 --
3 COMMISSIONER SMITH: You mean page 2 of
4 this document which is labeled page 7?
5 MR. HOWELL: Yes, ma'am.
6 THE WITNESS: Yes.
7 Q BY MR. HOWELL: Would you agree with me
8 that your testimony -- well, read your testimony
9 beginning on line 17.
10 A "The Staff indicated that the Company would
11 need to be prepared to commit to invest its funds at a
12 ratio of $2.00 for every $1.00 of reinvested revenue
13 sharing funds."
14 Q And roughly, was that the Company's
15 contribution, two to one?
16 A That's my recollection. I don't have the
17 exact data in front of me.
18 Q On page 11, lines 1 through 5, you list
19 some of the new services available from the Company's
20 capital investments.
21 A I apologize, what line on what page?
22 Q Page 11, the first four lines.
23 A Okay, thank you.
24 Q Isn't it true that none of those services
25 are Title 61 services?
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Wilder, Idaho 83676 U S WEST Communications
1 A That is a true statement.
2 Q On page 13 of your testimony, line 20, you
3 indicate that one of the issues that the Commission needs
4 to address in this case is unrealistic depreciation.
5 Recognizing, of course, that your testimony was filed in
6 June of '96, doesn't the second stipulation entered into
7 between the Company and the Staff resolve your concerns
8 about depreciation?
9 A The stipulation that was signed on Friday
10 does.
11 Q On page 14, you talk about steps needed to
12 be taken to redress issues raised in your testimony.
13 Would you agree that the elimination of exclusive
14 franchises for local service in Idaho does not in and of
15 itself make competition a reality?
16 A Yes.
17 Q On page 18, you indicate at the top of the
18 page that Title 61 prices include "digital interoffice
19 connectivity," and that particular term is used on
20 line 5. What do you mean by that term?
21 A The approach we've taken to providing basic
22 local service in our network over the last several years,
23 including what we did with Tech Plus, is to continue to
24 take digital carrier capabilities closer and further into
25 the network. The analogy I would use is like moving the
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Wilder, Idaho 83676 U S WEST Communications
1 wall of the central office closer to customers.
2 If you recall our Tech Plus II, that was
3 one of our objectives in getting the ability of our
4 customers to have a higher data speed and those sorts of
5 things was to, in effect, get digital out further and so
6 as you put more capabilities in the network for digital
7 carriers, that moves that wall out, so to speak, and it
8 provides digital facilities over which voice
9 communications or users who use their home line for other
10 services go over.
11 Q Maybe directing your attention to the use
12 of the word "interoffice," what did you mean by
13 interoffice? Is that term synonymous with interexchange?
14 A Interoffice is generally between two
15 central office facilities, much like we have in our EAS
16 calling areas today.
17 Q And other than EAS arrangements,
18 interoffice transmissions would not be Title 61 services,
19 would they?
20 A That's not correct. Voice traffic carries
21 over all of our facilities, many of which are interoffice
22 facilities unless the user is only talking to someone in
23 their same central office.
24 Q On the bottom of page 21, you discuss the
25 possibility of U S WEST creating an additional program
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Wilder, Idaho 83676 U S WEST Communications
1 for customers who might otherwise qualify for the ITAP,
2 that's I-T-A-P, but are not 60 years of age and older.
3 Could you explain to the Commission how such a program
4 would be implemented?
5 A Our intent here is that we provide a fair
6 variety of services for customers on either fixed or low
7 income; the ITAP, there's measured service alternatives.
8 An issue that historically has been with ITAP is that it
9 is needs-based, but it is for people 60 and over. Our
10 thought in this would be, and we didn't have a formal
11 proposal, but a thought to work with the Staff to say it
12 may be determined to be in the best interests to come up
13 with a similar program, take the costs of that program,
14 figure out on the needs basis how many individuals would
15 be involved and then put a surcharge or spread a slightly
16 higher rate to all Title 61 customers to help pay for
17 that service for those people who might not be able to
18 make the needs test or the age test on ITAP and that we
19 would be willing to work with the Staff on that sort of
20 an approach if it was deemed a worthwhile thing from the
21 Commission's standpoint.
22 Q On page 22 at the top, you put a condition,
23 it sounds like, on this newly-created ITAP issue that the
24 Company must receive substantially all of the price
25 increase we are seeking. Would the Company be willing to
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1 institute or discuss the institution of such a program if
2 your rates were to move to the $15.00 level for 1FR?
3 A With the EAS regions?
4 Q Yes, ma'am.
5 A No.
6 Q What rate would be the Company's threshold?
7 A I don't have a rate in mind, but I think
8 what we have here is an issue that when you look at the
9 15.62 that many customers testified to, that's an
10 additional value of 3.62 from EAS. I look at this
11 starting from the $12.00 where our customers were and
12 modified with the stipulation, as our counselor mentioned
13 in her earlier comments, what we're looking at is an
14 increase of roughly $4.00 and some cents. We don't have
15 the exact calculations done now which would be our new
16 revenue requirement.
17 Particularly since that stipulation
18 provides a $1.00 credit for one year, I think it would be
19 appropriate that we get a significant amount of that
20 increase before we would look at this type of a program,
21 and Staff needs to understand that my view of the
22 starting point is $15.62, which is with the EAS regions,
23 not that we gave up $12 million in toll for free and that
24 we're starting at the $12.00, which is a difference of
25 opinion.
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1 Q As you say, a difference of opinion. On
2 page 27 and 28, you discuss or your counsel asked you
3 whether captive customers are going to have to pay for
4 competitive losses in the future to keep U S WEST whole.
5 What do you think the term "captive customer" means to
6 you?
7 A My understanding of the intention of that
8 is a residential customer who does not have other service
9 alternative choices readily available to them.
10 Q And would it be fair to characterize a
11 possible captive customer as possibly being or more
12 likely than not being a rural customer?
13 A I believe that would be a fair
14 characterization.
15 Q Your answer on page -- on line 16 and 17 to
16 that question on page 27 talks about built-in supports
17 for high-cost customers. Is it your opinion that captive
18 customers are high-cost customers?
19 A I don't think you can make that direct
20 analogy. The intent of that is to say that if we were
21 filing a pure financially-based-in-all-aspects rate case,
22 we would recommend that rural customers would be paying
23 higher than urban customers because our cost to serve is
24 higher for rural than for urban. I don't believe that's
25 in the best interests of the State of Idaho or our
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1 customers, so what we are filing for is an averaged
2 rate.
3 If you're in a region, now I'll speak in
4 EAS terms, if you're in a region, it's one rate for
5 everybody. If you're out of region, it's another rate.
6 It is a density and it is a length from the central
7 office and those sorts of things that determines cost
8 factors.
9 Q On pages 23 and 24, you describe the
10 differences between what I would characterize as normal
11 competitive markets and markets such as in Idaho when a
12 LEC moves from full regulation to a more competitive
13 issue. Isn't it true that one of the normal -- in a
14 normal competitive market one company does not start with
15 100 percent of the market share, in this instance, for
16 example, Title 61 services?
17 A I believe there are some high-tech markets
18 where you probably did have someone starting out at close
19 to 100 percent share in the computers and software and
20 those sorts of things, so I cannot totally agree with
21 your statement. Also, in a totally competitive market,
22 you don't have government mandates.
23 Q And speaking of government mandates, on
24 page 24, line 10 or line 9, you discuss that LECs are
25 expected to provide service that meets regulatory
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1 standards developed in a monopoly environment. What kind
2 of standards are you talking about there?
3 A Service quality standards. Things like the
4 out of service over 24 rules and regulations for service.
5 Q Does the Company or are there more service
6 quality standards other than the one you just mentioned?
7 A There's a statute standard and I don't
8 recall the correct term. I believe it's adequate service
9 and I suspect there's some case law associated with that,
10 but I don't know.
11 Q And other than those two items, are there
12 any other service quality standards?
13 A I'm not aware of any, but Mr. Souba is our
14 service quality witness, not myself.
15 MR. HOWELL: Madam Chairman, I have no
16 further questions. Thank you.
17 COMMISSIONER SMITH: Thank you,
18 Mr. Howell. Perfect timing for a 10-minute morning
19 recess. We'll be back at 11:00.
20 (Recess.)
21 COMMISSIONER SMITH: Mr. Harwood, do you
22 have any questions for Ms. Wilson?
23 MR. HARWOOD: Yes, Madam Chair.
24
25
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1 CROSS-EXAMINATION
2
3 BY MR. HARWOOD:
4 Q Good morning, Ms. Wilson.
5 A Good morning.
6 Q I just have a couple of questions for you
7 and I'd like to try to recall your discussion with
8 Mr. Howell regarding the presence of local competitors in
9 southern Idaho. Do you recall that discourse that you
10 had?
11 A Yes.
12 Q And if I can characterize your statement in
13 response to his question in that area is that there are
14 some CLECs that are now providing or now authorized to
15 provide local exchange service in Idaho.
16 A Yes.
17 Q Do you recall your statement? I'd like to
18 ask you how many of these newly-certificated CLECs are
19 actually providing local exchange service in the southern
20 part of the state.
21 A I don't know.
22 Q Do you also recall your conversation with
23 Mr. Howell regarding the averaging of rates, that you
24 propose a single statewide average rate?
25 A We propose two different rates, one for in
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1 region for EAS and one for out of region, but they would
2 be averaged.
3 Q You would agree, would you not, that with
4 these averaged rates that urban customers will generally
5 subsidize rural customers?
6 A Yes.
7 Q Okay. Wouldn't it also follow, then, that
8 a reseller of local service in an urban area would also
9 be subsidizing rural customers?
10 A That depends on what happens in the
11 arbitrations which are a different case dealing with
12 resale rates and what will be established.
13 MR. HARWOOD: That's all the questions I
14 have.
15 COMMISSIONER SMITH: Thank you,
16 Mr. Harwood.
17 Mr. Donesley.
18 MR. DONESLEY: Thank you, Madam Chair,
19 Commissioners.
20
21
22
23
24
25
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1 CROSS-EXAMINATION
2
3 BY MR. DONESLEY:
4 Q Ms. Wilson, good morning.
5 A Good morning.
6 Q Is it true that the Company is claiming
7 that it wants a forward-looking, shorter depreciation
8 schedule because we're about to enter into a new
9 competitive market?
10 A No. What the Company is requesting is a
11 depreciation schedule that reflects the appropriate
12 depreciation for today's world.
13 Q Could you please explain what you mean by
14 "today's world"?
15 A The existing conditions in the
16 telecommunications environment today.
17 Q And those conditions are changing?
18 A Yes, and you will see that U S WEST has
19 over the past many years in three-way FCC meetings
20 continued to advocate shorter lives for a long history.
21 Q Those conditions are changing in terms of
22 competition; is that correct?
23 A They're changing in a variety of ways.
24 Competition and the advent of competition is just one of
25 those, but there are numerous ways in which they're
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1 changing; technology changes, marketplace, customer
2 demand changes. There's a variety of issues that are
3 changing our environment.
4 Q Am I correct in assuming that the Company
5 hopes to retain full recovery by way of depreciation for
6 old technologies and past investment?
7 A The Company feels it has a legal right to
8 recover the past investments we've made to provide our
9 governmentally-mandated responsibilities.
10 Q Governmentally-mandated responsibilities,
11 there's just a smidgen of profit interest promoted in
12 that I would expect; is that reasonable?
13 A There's an authorized -- if you look at
14 statutes, and I could not correctly say this, but one of
15 the obligations in the old compact was that the regulated
16 utility was allowed to earn a fair return; hence, being
17 able to attract capital to invest in the networks,
18 whether it be electrical or telephone.
19 Q At page 10 of your testimony, you state
20 that the Company invested $401.5 million in the years
21 between 1989 and 1995 in capital improvements. I believe
22 that counsel for Staff inquired and it was determined
23 that part of that was revenue sharing as has been stated
24 there; nevertheless, my question is, what portion of that
25 $401.5 million invested over those six years was in
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1 anticipation of competition in the marketplace at the
2 time that the investment was made?
3 A I would say none, because what we do with
4 our investment is we don't look at, you know, is this a
5 61 or a 62. We look at growth, we look at market
6 demands, what new products and services do customers
7 want, and the investment was made under that type of a
8 priority. Does an old switch need to be changed out
9 because the maintenance is too expensive. There's a
10 variety of issues that we look at as a corporation.
11 Q Your testimony, then, is that the Company
12 has no prospective look at its marketing or rather only
13 reacts ad hoc or immediately to immediate needs; is that
14 what --
15 A That would be a very erroneous
16 characterization of my statement or at least my intent of
17 my statement.
18 Q Isn't it true that the Company knew that
19 competition was coming, predicted that that was the
20 result and invested appropriately with an eye toward
21 competition?
22 A It is true that the Company knew there were
23 competitive alternatives. We had activated those
24 ourselves by selecting 61 and 62 services. It is also
25 true that we've continued to invest to meet the
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1 increasing needs and demand of our customers across all
2 of Idaho.
3 Q As a layman, my impression is, and please
4 correct me if I'm wrong, but isn't it accurate that the
5 competitive advantage for U S WEST in the local service
6 market in Idaho is a result or a function of its capital
7 investment in this market?
8 A I don't consider being forced to sell a
9 service below its cost a competitive advantage as a
10 business.
11 Q If U S WEST were to invest and to
12 capitalize on a -- to the extent that they invest and
13 capitalize in hardware in Idaho, to that extent, any
14 competitor would have to address not having that same
15 hardware in place in Idaho and, hence, would have a
16 higher entry cost; is that correct?
17 A It depends on the technology and how a
18 competitor would choose to enter. A competitor has the
19 right to resell any parts of my retail services minus
20 avoided cost. They have the right to buy piece parts or
21 they have the right if there is newer, improved
22 technology over what we have in the ground to put in
23 their new technology, so they have a variety of choices
24 as a business.
25 Q Do they have the right to recapture their
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1 investment by way of depreciation as the Company is
2 asking to be allowed to do at a quicker rate here before
3 this Commission today?
4 A They have the right to set whatever
5 depreciation schedules they choose based on their
6 business plans.
7 Q And based upon their own assets?
8 A Based upon -- yes.
9 Q They're not allowed to recover for U S WEST
10 assets?
11 A That would be highly unusual accounting
12 practices.
13 Q Is it not true that new technologies may
14 arise to abandon the existing technology and hence the
15 existing investment?
16 A There's always the advent of new
17 technologies, but a total abandoning I would find
18 slightly hard to believe.
19 Q At page 12 of your testimony, you reference
20 the Telecommunications Act of 1996 and make the statement
21 that the Act significantly alters the regulatory
22 compact. Could you please explain what you meant by
23 that?
24 A Yes, the Telecommunications Act of '96 by
25 changing the old paradigm of monopoly franchised areas
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1 and probably the most critical aspect is that in the new
2 world, U S WEST is subject to reselling portions of its
3 network and offering its network to competitors. I think
4 the issue here that keeps being brought up is this
5 competition issue and, gee, it really isn't here yet,
6 which I'm anticipating behind your question.
7 I think the issue is that for years
8 Title 62 services have provided a support mechanism to
9 Title 61 services. Those services have been competitive
10 for quite a long time. The record of U S WEST's behavior
11 will show we consider those competitive by the amount of
12 decreases we've done in toll and access charges over the
13 life of the revenue sharing plan, and if you'd look at
14 that support mechanism can no longer be allowed to occur
15 where Title 62 services are providing an artificial
16 support, what needs to occur is Title 61 must pay for the
17 cost of providing that service. It becomes even more
18 critical when those same Title 61 services must be sold
19 to your competitors and allow them to use that service.
20 Q Ms. Wilson, when will we finally get away
21 from these embedded rate cases and develop models that
22 reasonably address what is an opening of competition in
23 the marketplace?
24 A Well, I am hopeful that if we have a good
25 outcome from this rate case and we get a fair cost of
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1 recovery on the Title 61, I would hope that we wouldn't
2 have this opportunity again in Idaho in the future.
3 Q Which is to say this may be the last of
4 these embedded cases?
5 A I am cautiously optimistic.
6 Q What if U S WEST doesn't get what it wants
7 today, will we be looking at another embedded case?
8 A I don't think it's appropriate to forecast,
9 because I would have to look and see what the ultimate
10 order of the Commission is and their rationale before any
11 decisions are made what steps we would take next.
12 Q Putting aside whether U S WEST gets what it
13 wants in this rate case, what other criteria should be
14 evaluated with respect to what models are used; that is,
15 an embedded case versus some other kind of prospective,
16 competitive-based model or methodology for determining
17 rate setting?
18 A The law of the state.
19 Q And specifically what are you talking
20 about?
21 A The existing statutes and laws that dictate
22 what type of a revenue requirement process you operate
23 under.
24 Q And from that, I assume that you mean that
25 there is no existing statutory authority vested in the
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1 Commission to do other than an embedded case?
2 A I'm not leaping to any conclusions other
3 than it is the current method under which our Title 61
4 services, our rate of return, rate base are regulated;
5 hence, the reason we're here with this type of case, and
6 I would note it also, I believe, is a more reasonable
7 case because what we're talking about are actual
8 expenditures we've made, not whatever someone's
9 forward-looking guesstimate of the future is. These are
10 actual dollars that we have expended on behalf of our
11 customers that we're talking about.
12 Q These actual expenditures you seem to
13 characterize as being made in a vacuum. Were they not
14 expended in contemplation of having your vested
15 competitive advantage in the marketplace preserved and
16 paid for by the ratepayers knowing that Telecom '96 or
17 something like it was about to happen to your industry?
18 A I take offense to your comments of vacuum
19 and I believe that's a serious mischaracterization of us
20 looking at marketplace demands, future customer demands,
21 technology and what our customers are asking for.
22 MR. DONESLEY: I have nothing further.
23 Thank you.
24 COMMISSIONER SMITH: Thank you,
25 Mr. Donesley.
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1 MR. FOTHERGILL: No questions from us.
2 COMMISSIONER SMITH: Mr. Phillips.
3 MR. PHILLIPS: Yes. Thank you,
4 Madam Chairman.
5
6 CROSS-EXAMINATION
7
8 BY MR. PHILLIPS:
9 Q Ms. Wilson, I was interested in your
10 definition of when true competition exists. Does it
11 exist in your mind when somebody is capable of providing
12 additional competition to individual users or do you feel
13 it should not be considered competition until a definite
14 number of users using those lines are then available?
15 A I believe the conversation I had with
16 Mr. Howell as it related to true competition was dealing
17 with a truly competitive environment where all parties
18 have entry and exit abilities, ability to set prices,
19 offer product service packages, et cetera. There are
20 tests and other issues as it relates to when can
21 corporations become economically deregulated, which means
22 the prices that they set can be deregulated, and I
23 believe in those cases that the presence of reasonable
24 alternatives for customers is the criteria that should be
25 used, not how many of them have chosen to purchase those
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1 products or services, but they're readily available to
2 the market.
3 Q Thank you. Do you distinguish between the
4 existing telephone operation company and those who will
5 be competing with it?
6 A I'm sorry, I don't understand your
7 question.
8 Q The competition exists for the local
9 telephone company as soon as somebody announces it is
10 capable of furnishing service to other users.
11 A I believe that -- again, I'm anticipating
12 your question as local service.
13 Q Yes.
14 A -- that local competition exists when it is
15 readily available for offer to customers, not just
16 someone saying I'm going to do it. I think they need to
17 actually make it readily available. That's a personal
18 definition.
19 Q But not have actually signed up any users
20 for that service.
21 A I think it's very inappropriate to try and
22 look at how successful or unsuccessful people should be.
23 It should be at the availability, readily available
24 options for customers.
25 Q And that would apply to the existing
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1 telephone company as well as those who intend to compete
2 with it?
3 A I'm sorry, I don't understand the comments
4 with the -- could you rephrase it? I don't understand
5 your question.
6 Q In this case U S WEST, would it be
7 considered in a competition situation, competitive
8 situation, as soon as somebody else announces that they
9 have or that have actually signed up but not provided
10 service to other users? Have I confused you?
11 A For what types of services?
12 Q Local access lines.
13 A Okay. You know, I am assuming that a
14 competitor will not have people signed up if their
15 delivery date is two years from now, so I have not
16 thought about it in very precise terms, but I think that
17 it's a readily available for offer. They would be
18 advertising it to the marketplace. They would say here's
19 our price, here's what we're going to give you for it,
20 come in and sign up. I believe that that is the prospect
21 and we can deliver the service if you want it, not sign
22 up now and I'll see you in 10 years.
23 Q At that point, then, you would consider the
24 present provider as having met competition or having
25 become involved in a competitive situation; therefore,
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1 they would no longer be subject to rate regulation by the
2 Commission?
3 A That would thoroughly depend upon what
4 types of laws the corporation is under. Under today's
5 laws, there would have to be actions, et cetera. Under
6 other forms of legislation that are being considered in
7 the state, the only way a corporation gets out of that
8 economic deregulation is by petitioning to the Commission
9 and the Commission making a ruling on it. It's not an
10 automatic.
11 Q I understand now there are eight or ten
12 such companies that have submitted their case to the
13 Commission and have been approved for providing service.
14 Does that then create competition?
15 A Again, if I understand what your question
16 is, that creates the opportunity for competition. My
17 view of a competitive test for when economic deregulation
18 should be considered is there are readily available
19 services for offer to customers that could be readily
20 delivered for those customers, not just the fact someone
21 has been certified. The concern is that people may
22 choose to just go around and get certified in a bunch of
23 places and they have no intention of making the
24 investment or really entering in the marketplace, so that
25 would be the distinction I would draw.
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1 MR. PHILLIPS: Thank you very much.
2 COMMISSIONER SMITH: Questions from the
3 Commission. Commissioner Nelson.
4 COMMISSIONER NELSON: Thank you, just
5 briefly.
6
7 EXAMINATION
8
9 BY COMMISSIONER NELSON:
10 Q This isn't addressed in any extent in your
11 testimony, but since you're the Idaho vice president, I
12 wanted to ask you, if you were the person with authority
13 in Idaho to address and resolve service quality problems,
14 does the maintenance and provisioning budget fall under
15 you in your auspices?
16 A No. We handle -- the installation and
17 maintenance for our Company is handled on a matrix
18 basis. It is within the financial results, you look at
19 the Idaho operations, but the budget accountability is
20 with a counterpart of mine who is the vice president of
21 network technologies.
22 Q Who is that?
23 A Bob Knowling and formerly under Tom
24 Bystricki [phonetic]. If it's installation and
25 maintenance, Harvey Plummer has it for engineering.
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1 Q And Mr. Plummer is going to testify later.
2 These other people, are they located in Denver?
3 A Yes.
4 Q And then Mr. Schneider works for them; is
5 that the correct name?
6 A Right, and Mr. Schneider, who you folks
7 have met, has taken a new assignment. Dale Wocicki who
8 is the director in charge of the State of Idaho for
9 installation and maintenance remains in that capacity and
10 right down the hall from my office.
11 Q So then you would agree that you are not
12 the person with authority in Idaho to address and resolve
13 service quality problems?
14 A I am not the person that has the budget
15 dollars in my personal budget. I take ownership for
16 anything that happens within the boundaries of Idaho and
17 believe I have a fairly decent track record of going back
18 to the corporation for issues that I think are important,
19 so I would take ownership and responsibility, but
20 technically, the budget is not in my physical budget.
21 Q Well, I ask that because it's going to be
22 an issue later in the case, as you know, and I was trying
23 to get a definition of what your authority is in that
24 area.
25 A I view myself as accountable for anything
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1 that happens within the state boundaries of the State of
2 Idaho, to represent the Company in those, and sometimes I
3 have to go chat with one of my peers about what I think
4 needs to occur and they might have the physical budget
5 dollars.
6 COMMISSIONER NELSON: Okay, thank you.
7 That's all I have.
8 COMMISSIONER SMITH: Commissioner Hansen.
9 COMMISSIONER HANSEN: Thank you.
10
11 EXAMINATION
12
13 BY COMMISSIONER HANSEN:
14 Q Just to follow up on Commissioner Nelson's
15 question, do you feel the past service quality problems
16 that U S WEST has faced, do you think they're pretty much
17 solved now, that the services are now acceptable to the
18 public that you serve?
19 A I feel that they are in many cases far
20 beyond acceptable. I think that we have done a very good
21 job of getting a handle on the exceptional growth that we
22 have. That doesn't mean that, you know, everyone can't
23 find their favorite example of something where we did not
24 meet the customer's expectation, but I think if you look
25 at the results we provided the Commission for our
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1 internal service indicators for last year, we were
2 meeting or exceeding nine out of the twelve.
3 Our held orders were down significantly,
4 below the 100 that we had talked about. Our
5 out-of-service situation had significantly improved and
6 as I told Mr. Souba after reading his testimony, I
7 disagreed with his characterization that our service is
8 now just adequate. I believe it is darn good service to
9 the bulk of our customers and the bulk of every situation
10 that we're at. Is there room for improvement? Yes,
11 there always is.
12 Q Why does U S WEST believe that quality of
13 service issues are not appropriate for consideration in
14 this rate case? As I read through some of the testimony,
15 I find that seems to be U S WEST's position and I guess
16 to me it's a little contrary to a year ago with the
17 particular case that we had before us, a service quality
18 case, where I was under the understanding that U S WEST
19 was proposing that they would have a rate increase tied
20 to service quality improvements, that each year it would
21 increase depending if they met certain standards, why
22 would you have a change of heart now?
23 A I think the major issue that really changed
24 that picture is that it was too small of a step forward
25 and we believe that service quality standards should be
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1 set more to the marketplace than set by a regulatory
2 body, that those service quality standards should be
3 ubiquitous to the industry, not to any one participation
4 and I would encourage the Commission to look at focusing
5 more on in the new environment how consumers will be
6 treated from things like deposit standards, do they get
7 their deposits back, what I would call kind of the
8 consumer sorts of things of a multi-vendor environment.
9 I think we have also as our service quality
10 witnesses demonstrate, we have demonstrated that we have
11 improved our service considerably, have taken care of a
12 lot of the growth issues. The concern I have about
13 service quality being a part of this case is that I
14 believe the corporation should be able to get cost
15 recovery for the cost of the service. What Staff's
16 proposal is is that a fair return for us be in effect
17 dinged for the quality of service that we're providing.
18 If there's concern on quality of service, I
19 believe it is appropriately addressed in quality of
20 service dockets, things like the out of service
21 proceeding, et cetera. It has nothing to do with the
22 fact that basically a fair return should be provided to a
23 corporation that has a governmentally-mandated obligation
24 to serve customers.
25 Q One other question. Do you feel that once
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1 true competition is implemented in Idaho, do you feel
2 that U S WEST will still be the principal company that
3 will be responsible for service quality or mainly the
4 only company that will be responsible for service
5 quality? Even in a competitive environment, if they're
6 using your facilities, won't you still maintain or have
7 that responsibility?
8 A I think, Commissioner Hansen, it depends on
9 how people enter and in what way they enter the
10 marketplace for providing those services. If someone
11 buys services over my facilities, what's generally talked
12 about in some of the arbitrations is we have an
13 obligation to provide anyone who resells our services the
14 same quality of service that we provide our own
15 customers.
16 If they want to contract with us to provide
17 a different level of service and they want to make that a
18 different, market differentiator for them, the Company
19 would be willing to entertain specific contractual
20 obligations for that, but I believe that customers are
21 really going to look at a lot of things when they decide
22 who they want to buy services from and most of the trend
23 is going towards the packaging of services, so it will be
24 multiple services in a package that I believe is going to
25 be how most customers will be making alternative choices.
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1 Q This is my last question, but one other
2 question I had is in this rate case, it looks like the
3 residential customer is taking the big hit of the lion's
4 share of it and you kind of address that in your
5 testimony about the residential customer. In your
6 opinion, is the business customer presently subsidizing
7 the residential customer? I know you talked a little bit
8 just recently about the 62 title subsidizing the 61, but
9 in your opinion for the past several years, has the
10 business customer been subsidizing the residential
11 customer in the rate design?
12 A Yes, and a lot longer than the past several
13 years. I think that's one of those that goes back to the
14 long-ago pricing. My favorite analogy for groups now is
15 take the local dry cleaner and the residential home that
16 might have children who like to use the Internet. One of
17 them is probably downtown a few blocks from our central
18 office. People call to say is my cleaning ready or not.
19 One of them is probably quite a ways out in a suburban
20 area and someone might get on the phone about five hours
21 a night to do Internet sorts of things. There's a vast
22 difference.
23 Basically, it's the facilities and the loop
24 length and all that type of stuff that make it up and we
25 have historically had about a two-and-a-half times
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1 differential that business users pay instead of
2 residential users which was in my mind a direct subsidy
3 of residential customers by business users.
4 Q Do you see the residential rates eventually
5 being higher than the business rates then?
6 A No, I think you have in some cases, and it
7 depends on what happens in the marketplace with different
8 areas, but I think you have basically the same type of
9 facility. You have different value uses that someone
10 might put on it, but I think in some cases I can envision
11 way out in time that you might have a line is a line rate
12 for people and here's kind of what the rate is and if you
13 call yourself a business or a residence, it might be
14 immaterial.
15 I mean, that's not a
16 too-far-out-in-the-future type of thought, but over time,
17 I definitely believe business rates need to continue to
18 reflect their costs, just like residential rates need to
19 continue to reflect theirs, which is they need to move up
20 to cover the cost of providing that type of service.
21 COMMISSIONER HANSEN: Thank you. That's
22 all I have.
23 COMMISSIONER SMITH: You caused me to have
24 to look up the definition.
25
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CSB REPORTING WILSON (Com)
Wilder, Idaho 83676 U S WEST Communications
1 EXAMINATION
2
3 BY COMMISSIONER SMITH:
4 Q I guess I'm still stuck on the dry
5 cleaner/Internet service scenario and I'm trying to
6 figure out what is the difference that you see, because
7 to my mind those are both Title 62, because Title 61 is
8 the provision of the access line with the associated
9 transmission of two-way interactive switched voice.
10 A Okay, I guess I see them as both Title 61
11 because when a customer buys a residential line from me,
12 that's why I find it problematic what's a 61 versus a 62.
13 Q All right; so the dry cleaner would be --
14 A A small business.
15 Q -- assuming he has five lines or fewer --
16 A Right.
17 Q -- he's a 61 customer?
18 A Right, and the residential would be --
19 generally speaking, a dry cleaner is probably closer to
20 our central office facilities.
21 Q I understand that, but if it's being used
22 for Internet access, that's not a voice service, is it?
23 A No, but I guess when I provide a
24 residential line to a customer, I don't put something on
25 there that says, oops, you're a 61, I'm going to block
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CSB REPORTING WILSON (Com)
Wilder, Idaho 83676 U S WEST Communications
1 your line so that no data transmission can go over it,
2 and the reality is that large numbers of Title 61
3 residential lines carry large amounts of data
4 communications over them on a dial-up basis today.
5 Q Which gets me to my real questions that I
6 had when I came in --
7 A Okay.
8 Q -- and that is how we have defined what is
9 basic local exchange service in Idaho and whether or not
10 the definitions that we have are sustainable.
11 A Which is probably more the way I naively
12 look at this sort of thing. We have 61 and 62 for how we
13 allocate costs and everything, but when a customer calls
14 up my office and says why don't you have Caller ID in X,
15 Twin Falls, that was after we implemented it, I don't
16 think about, gee, you're a Title 61, you shouldn't care.
17 I mean, I think customers want access and availability to
18 services. Customers want to be able to do things.
19 It's almost ironic that when we and the
20 Commission did Tech Plus II, we said we wanted people to
21 be able to go 9600 bits per second, large numbers, to be
22 able to access data. Now many customers are buying 28.8
23 modems and, you know, if you told them they had to go
24 9600 on the residential line, we would both be getting a
25 lot of calls from them. Technically, they're just buying
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CSB REPORTING WILSON (Com)
Wilder, Idaho 83676 U S WEST Communications
1 a Title 61 line, so I would agree, I find it --
2 Q So what's the solution? I guess I'm
3 thinking of going forward and wondering, we've worked
4 with the definition that we have. I noted in proposed
5 legislation that wasn't the definition of some of the
6 drafts and so I'm just wondering going forward how do we
7 address this problem which I think is kind of
8 demonstrating the whole difficulty with doing cost
9 allocations in this case. Any suggestions or thoughts?
10 A I honestly hadn't thought about it from a
11 code standpoint. Again, I think I'd probably think about
12 it too simplistically that customers want basic service
13 and that one --
14 Q I think all customers want all services.
15 A Right, and I think what they believe is
16 that their definition of basic service includes I don't
17 know if I want to buy all that stuff, but I sure want the
18 opportunity to buy all that stuff and I want the
19 opportunity to go faster and if I happen to live in
20 Weiser, I don't want to not have the same opportunities
21 as someone that lives in Boise and so I think from a
22 customer perspective, that's what they want.
23 That's one of the reasons why I find the
24 Staff's position troubling. It would say that Title 61
25 customers kind of want a rotary dial phone they can just
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CSB REPORTING WILSON (Com)
Wilder, Idaho 83676 U S WEST Communications
1 talk on and at least I don't talk to very many of those
2 types of customers and I don't believe that's what --
3 U S WEST and the Commission has set out a vision of not
4 creating haves and have-nots, having a good network for
5 folks, et cetera, so I guess the only solution,
6 Commissioner Smith, would be to say basic service is a
7 phone capable of doing this and none of us really know
8 what the customer is going to do with that line after we
9 sell it to them, they might do other stuff, but at least
10 at a minimum it provides voice grade, et cetera, but just
11 kind of acknowledge there's other uses they'll put on
12 that.
13 Q I noticed some of the suggestions were to
14 reduce the number of lines and have it not be all
15 residence, but maybe just those with two lines or fewer
16 be res. or bus., residence or business, so do you think
17 that gets at the problem? And I guess you can think
18 about it in terms of also I'm wondering, it seems at the
19 same time that the Telecommunications Act of '96 included
20 more, or the FCC did, included something more, in their
21 definition of basic service than we have, like 911.
22 A Right, which we coincidentally have. We
23 just don't have it in the code.
24 Q It seems like we've got competing aspects
25 of pushing on this definition both directions.
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CSB REPORTING WILSON (Com)
Wilder, Idaho 83676 U S WEST Communications
1 A Well, and I think one of the issues is to
2 probably not try and have a crystal ball. Back in 1984
3 there was -- you didn't have trouble isolation here and
4 you didn't have touchtone. You paid, what was it, $.59 a
5 person if you wanted touchtone. In some states today
6 they still have party line service. I don't believe in
7 Idaho's view of basic service if we wanted to go back to
8 party line, take touchtone out, that probably would not
9 be viewed as basic service, so I don't know if we can
10 ever craft statutory language that keeps up with where
11 customers go, and not having thought about this in
12 advance, I would think that we're better off saying, you
13 know, you can do this and then recognize there will be
14 other services and unless it becomes a problem, such as a
15 new provider doesn't want to provide 911 access, then I
16 would think that would be an issue that we would need to
17 address because I do happen to think access to 911 is
18 mentally to me kind of a part of basic service that
19 customers should expect, at least here in Idaho.
20 Q Another question, on page 20 of your
21 testimony, you're talking about ITAP and is the federal
22 program you refer to on line 17, was that the LIHEAP, the
23 low income heating energy assistance program?
24 A Right, and I as understand contrary to when
25 this was filed that it's now okay funding through '97. I
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CSB REPORTING WILSON (Com)
Wilder, Idaho 83676 U S WEST Communications
1 do think it's an issue we need to think about how we as
2 an industry work on universal service for the '98
3 legislation, though, in case it goes away again or is
4 threatened to.
5 Q Well, and I agree and I think it's an issue
6 that I've worked on several times over the years and I
7 know the Company has worked on it, too, in trying to get
8 the age restriction removed and recognizing that there's
9 good public policy to give it to people who need it that
10 are under the age of 60, and I guess it's somewhat
11 troubling, if I understand your testimony correctly, that
12 the Company wouldn't be willing to work towards that goal
13 with a 15.62 rate, you'd have to have something closer to
14 20. Did I get that right?
15 A Yes, that's a fair characterization to my
16 response to Mr. Howell. I would say that my response to
17 Mr. Howell was probably more driven by trying to send a
18 signal that I think it's inappropriate to forget about
19 the EAS deal and that there is need to move -- I think
20 we've got good -- you know, throw out all the Title 61/62
21 cost allocation and just use kind of common sense what's
22 happened, what type of service do our customers have.
23 Even though the CPI is under attack, what would the
24 service rate be if the CPI was there. It would be about
25 18-$19.00 from 1984 where there was no touchtone, no
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CSB REPORTING WILSON (Com)
Wilder, Idaho 83676 U S WEST Communications
1 trouble isolation, all those sorts of things, so I
2 suspect my response was more driven by the need to send
3 that signal.
4 U S WEST is not unwilling to still look at
5 this. We would still be willing to look at it prior to
6 universal service or it could be that we might be better
7 off given the slipped timing of this to look at shall we
8 try and figure out what would be the range of solutions
9 that might be appropriate for universal service
10 legislation or should we put the energy into an interim
11 step prior to that and that's probably the rational
12 response that's appropriate.
13 Q So let me see if I'm coming away with the
14 right impression. I do understand the Company's advocacy
15 with respect to the starting point and the differences
16 between you and the Staff, so regardless of how that
17 turns out, is the Company willing to work on the LIHEAP
18 sort of issue after the conclusion of the case?
19 A Yes.
20 Q All right. Just for clarification on
21 page 21, when you're talking about the rates there on
22 lines 6 and 7 --
23 A Yes.
24 Q -- $12.00 and $9.00, that's before you add
25 the $3.50 subscriber line charge?
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CSB REPORTING WILSON (Com)
Wilder, Idaho 83676 U S WEST Communications
1 A Yes, and these rates will all need to be
2 adjusted and we didn't get a chance to do them. This was
3 when there was about an overall request of around $8.00
4 or so over the EAS increment. We're now down to a four
5 and twenty cent-type change, so it would all be changed.
6 Q I understand the need for those changes. I
7 just wanted to clarify that you would also have the
8 3.50. Of course, these are --
9 A Unless the subscriber -- if you're ITAP,
10 then you don't have that and you get the other dollar
11 matched, so that's why today some of our customers if
12 they have measured service, it's like $2.69 that they pay
13 for local service if they qualify.
14 Q Oh, finally, I had one other -- on the
15 bottom of page 27, you were discussing Mr. Elder's
16 testimony and the lack of a cost basis for the
17 differential between business and residential rates and I
18 guess what this jogged in my mind was the fact that
19 included in this rate case was the complaint of a citizen
20 about the amount he's paying for his non-pub/non-list and
21 it seemed to me as I went through the testimony that the
22 Company didn't propose to reduce that charge.
23 A I believe that's correct, that we do not
24 propose a reduction.
25 Q And I assume that there probably isn't a
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CSB REPORTING WILSON (Com)
Wilder, Idaho 83676 U S WEST Communications
1 cost basis for that position, so there must be a policy
2 reason and since you're the policy witness, I wanted to
3 know what's the policy reason for keeping
4 non-list/non-pub at $4.00.
5 A I believe there is both a cost basis
6 because it requires separate handling for that account,
7 separate handling and scrubbing from lists which we're
8 required to provide to other companies and services,
9 directory assistance, so there is a cost basis --
10 Q Let's just explore that first. I'm sorry
11 to interrupt, so is that scrubbing process and special
12 handling something that just happens one time, for
13 example, when they sign up for service and want it
14 non-list or non-pub or if they call later on and say they
15 want it non-list/non-pub?
16 A Commissioner Smith, I can't tell you what
17 the steps are. I know that we update those lists all the
18 time. I assume there's some verification to make sure we
19 haven't screwed up, but I really am not in the right
20 position to know.
21 Q It occurred to me that it could be just a
22 one-time deal where a non-recurring charge would be
23 appropriate, but I didn't know about the ongoing
24 maintenance costs.
25 A I feel certain that one of our cost
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CSB REPORTING WILSON (Com)
Wilder, Idaho 83676 U S WEST Communications
1 witnesses will be able to give you that answer.
2 Q I feel certain they will, too.
3 A From a policy standpoint, it is a
4 value-added service that we're offering to customers that
5 is a service that they desire for their own personal
6 reasons and does have a value to it, so I think in a
7 marketing context, it's not unlike other services that
8 are priced based upon adding value, not necessarily based
9 upon the cost, like Windows 95 or whatever.
10 Q But you see the confusion I'm having now is
11 in all other respects, the Company seems to be rejecting
12 the concept of value service pricing.
13 A For Title 61.
14 Q And isn't that what this is?
15 A Well, what we are -- yeah, I mean, I
16 understand the confusion because I think now you've got
17 me confused, but the Title 61 is based on -- I mean,
18 frankly, I think if we were doing it on value of service
19 and I offered, you know, said, Marsha, well, you might
20 want your residential line taken out, but for most
21 customers if I said, you know, hey, we're in a shortage
22 of lines and I'll give you 20 bucks a month for your
23 line, I bet there wouldn't be a whole lot of people that
24 would say, yeah, I'm willing to sell my line and not have
25 any phone service for 20 bucks a month. Now, people who
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CSB REPORTING WILSON (Com)
Wilder, Idaho 83676 U S WEST Communications
1 maybe get calls at home that they don't want might be
2 willing to, so I suspect I'm better off letting our
3 witnesses in that area try and provide your answers.
4 Q But as a policy matter, then, value of
5 service pricing is inappropriate to distinguish
6 residential from business, but not inappropriate to price
7 non-list/non-pub?
8 A I think as a proposition, basic service
9 should be based on cost, that other additional features
10 or functionality looking at value pricing is an
11 appropriate thing to consider would be how I would phrase
12 it.
13 COMMISSIONER SMITH: That's all I have.
14 Thanks.
15 Do you have redirect, Ms. Hobson?
16 MS. HOBSON: No redirect.
17 COMMISSIONER SMITH: We thank you for your
18 testimony.
19 THE WITNESS: Thank you.
20 (The witness left the stand.)
21 COMMISSIONER SMITH: All right, it being
22 10 to 12:00, the Chair decides it's time for lunch. How
23 about if we come back at 1:15 and I'd like all parties to
24 know that the Commission does have to appear at the
25 Statehouse today and so we will be adjourning right
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CSB REPORTING WILSON (Com)
Wilder, Idaho 83676 U S WEST Communications
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CSB REPORTING COLLOQUY
Wilder, Idaho 83676