uswt9915.jwc.doc

Q. Please state your name and business address.
A. My name is Joseph W. Cusick and my business address is 472 W. Washington, Boise, ID 83702.
Q. By whom and in what capacity are you employed?
A. I am employed by the Idaho Public Utilities Commission as the Telecommunications Section Supervisor.
Q. Please describe your work experience and educational background.
A. I am a retired employee of U S WEST Communications. I began my career with New Jersey Bell in 1964 as a draftsman. Following four years in the US Navy, I worked as a Central Office Technician for New Jersey Bell and U S WEST Communications. As a Central Office Technician, I was responsible for repair and maintenance of central office switching equipment.
In 1978, I joined the Regulatory Affairs Department of U S WEST Communications in Idaho and worked there until my retirement in 1990. While in Regulatory Affairs I worked on a wide range of regulatory issues including rate cases, EAS petitions, tariff filings, pricing and cost analysis, and product and service implementation.
In 1992, I joined the Idaho Public Utilities Commission as a Telecommunications Analyst. Since joining the Commission I have submitted testimony in numerous cases involving a wide range of issues. In 1996 I assumed the position of Telecommunication Section Supervisor.
I graduated from Idaho State University in 1978 with a BBA in Finance and Management.
Q. Have you previously testified before this commission?
A. Yes, I have testified numerous times over the past seven years.
Q. What is the purpose of your testimony in this case?
A. The purpose of my testimony is to present the Staff’s view concerning U S WEST Communications, Inc.’s (U S WEST; Company) Application for economic deregulation in the Burley exchange. My testimony will focus on a realistic view of U S WEST’s need for deregulation in the Burley exchange, the question of whether or not U S WEST has met the requirements of Idaho Code § 62-622(3), and an assessment of the factors that should be considered when evaluating the need for deregulation.
Q. Before you get to a discussion of the merits of the Application, is there any framework you would like to set?
A. Yes there is. While my discussion will provide a realistic look at the implications of economic
deregulation in the Burley exchange, it should not detract from the fundamental question in this case: has
U S WEST met the requirements of § 62-622(3) and the legislative intent as expressed in § 62-602? My discussion on the implications of this case are put forth in response to U S WEST’s testimony and in an attempt to place this case in perspective. However, I believe it is very important to keep the ultimate question in focus.
Q. What do you mean by a realistic view of
U S WEST’s need for deregulation?
A. Currently, U S WEST in southern Idaho is rate regulated only in its provision of basic exchange service, that is, residence service and businesses with five lines or less. All other services U S WEST provides, such as custom calling and CLASS features, MTS, and all advanced services, such as digital subscribe lines (DSL), are not price regulated. There are not any significant restrictions on the Company’s ability to package these services with basic exchange service. Therefore, the only thing the Company gains through this process is pricing flexibility for its basic exchange items.
Looking at the example that Mr. Wozniak presented in Exhibit No. 9, page 1 of his Direct Testimony, it shows that the basic monthly rate for Project Mutual Telephone (PMT) residential customers is $12.00 versus the current price of $12.67 for U S WEST (these prices were raised $1.13 per month on June 30, 1999 in Case No. USW-T-99-6). This difference in local exchange rates is minimal compared to the difference in custom calling and CLASS rates between the two companies, yet U S WEST has complete pricing freedom to reduce these rates if it feels a need to compete on a price basis.
For business customers with more than five lines, U S WEST has, since 1989, had pricing flexibility to compete with PMT. To my knowledge, U S WEST has not used any of that pricing flexibility to compete in the Burley exchange.
Q. Are there services that U S WEST does not offer now that it could if it were deregulated?
A. No. To the extent there are services that
U S WEST cannot provide in competition with PMT, that would not change with deregulation. Specifically,
U S WEST is prohibited from providing interLATA services and video services, although PMT can offer those services to its customers as part of a package with basic exchange services. Project Mutual derives a competitive advantage from its ability to package these services along with basic service. The provision of those services is beyond the scope of this case and will not be addressed here.
In addition, U S WEST does not offer many of the vertical services such as voice mail and distinctive ringing that are in high demand by consumers throughout other U S WEST exchanges and are offered by Project Mutual. Offering these services would put the Company in a better position to compete in the Burley exchange. The decision of whether or not to offer these non-regulated services is entirely within U S WEST’s control.
Finally, Project Mutual’s local presence in the Burley area gives it an additional advantage over
U S WEST for many customers. For many people, buying locally is yet another competitive advantage for Project Mutual.
Q. When you speak of deregulation, do you mean complete deregulation?
A. No, what I am really talking about is economic deregulation. The Company would continue to be subject to regulation with respect to quality and availability of local exchange service, credit and collection policies and practices, and dispute resolution and would be required to file price lists for the services it offers. These requirements are spelled out in § 62-622(5). When I speak of deregulation in this testimony, I am only addressing the policy of economic deregulation.
Q. What about the ability of U S WEST to provide advanced services in a deregulated environment?
A. As I mentioned earlier, U S WEST is rate regulated only in its provision of basic service. There is nothing to prevent the Company from investing in and providing advanced services such as high speed data to its customers in Burley at whatever rates it chooses and packaging these services with its basic service.
Q. What then is the advantage to U S WEST of being economically deregulated in Burley?
A. In my opinion, the advantage is more symbolic than substantive. If the Company has not used the broad pricing freedoms it currently has, I don’t know how it would use the pricing freedoms for which it has applied.
Q. What risks do you see in granting U S WEST economic deregulation?
A. I see very little to be gained or lost in deregulating. Customers could benefit from reduced rates, but I don’t foresee U S WEST aggressively lowering its residential or business local exchange rates to compete with Project Mutual. To be practical, U S WEST’s residential rate is only $.67 higher than PMT’s and
U S WEST’s business rate is actually $1.32 lower than PMT’s current business rate. It has been U S WEST’s long-standing position that its residential rate is already priced below its cost. If the Company needs to compete on price, it would seem to make more sense for the Company to lower rates on services where it is currently realizing larger profit margins, such as custom calling and CLASS services. In fact, lowering its residential rate too far below its current price might be viewed as anti-competitive.
This view is supported by U S WEST in its request for pricing freedom in Montana as mentioned by Mr. Wozniak in his Direct Testimony. In Montana, the Company did not request flexible pricing for residential exchange service. As stated in the order by the Montana Public Service Commission, Order No. 5998d,
Mr. Hayhurst (a U S WEST witness)
also explained why U S WEST did not
seek flexible pricing for residential
exchange access. In his judgement,
the relevant cost already exceeds the
current price; therefore, any price
decrease would exacerbate the current
subsidy.

The downside risk of deregulation is that
U S WEST could cover its competitive losses by raising its rates for those customers within the local calling area who have no choice of service providers. U S WEST estimates only 30% of the Burley exchange customers have an option to choose PMT as their basic service provider. I believe there is very little risk that U S WEST would raise its rates because of the signals that would send to both the customers and the Commission as to how U S WEST would use its regulatory freedoms in the future.
Q. What are the risks if the Commission fails to deregulate U S WEST when it should?
A. If the Commission does not deregulate
U S WEST when it should, then it has left the Company at a competitive disadvantage and would probably have caused the Company to lose customers and market share needlessly. From the customers’ point of view, delay may cost them the opportunity to enjoy the introduction of new services and reduced prices that increased competition could bring. There is a much greater risk of this happening if the Company were fully regulated and did not have the broad pricing flexibility that U S WEST currently enjoys.
Q. If you believe there is little risk in granting U S WEST this economic deregulation, should the Commission simply grant it?
A. The standards laid out in § 62-622(3) are the basis on which U S WEST’s Application must be judged. This means that for U S WEST to be granted economic deregulation there must be effective competition for basic local exchange service throughout the local exchange calling area.
Q. Does such competition exist today?
A. In my opinion, it does not. However, this is a difficult determination to make and contains a certain amount of subjectivity. The basis for my determination goes back to the very reasons for regulation.
Regulation is a substitute for competition. It is an imperfect substitute, but without competition, a necessary one. Its purpose is to protect consumers from companies that may take advantage of a monopoly position by charging excessive rates or providing an inferior grade of service. In addition, regulation helps ensure that rural, high-cost areas have service available at reasonable, affordable rates.
The legislature passed § 62-622(3) in recognition of the fact that once competition is present throughout an exchange, it affords customers sufficient protection. Therefore, regulation is no longer necessary. The assessment of the Application must then focus on whether or not competition is present throughout the exchange and whether competitive forces are sufficient to protect customers.
Q. What competitive forces are present in the Burley exchange?
A. One of the difficulties in this case is in assessing the degree of competitive inroads in the Burley exchange. Competitive local exchange providers view their activities such as cable placement, expansion plans, market forecasts, and market share as propriety, and that is certainly understandable. However, without this information, the extent of competition is difficult to gauge.
Certainly Project Mutual is a growing presence in the exchange. As stated in Mr. Wozniak’s Testimony, PMT by now should provide an alternative choice to almost 30% of the Burley exchange. Although this shows inroads by PMT, it also shows that today, seven out of ten Burley customers are served in a monopoly environment and have no choice of a wireline service provider. Even the most liberal reading of the statute would make it difficult to interpret this as effective competition throughout the local exchange.
I must point out that 30% is a U S WEST estimate. Although I agree with U S WEST as to the areas that are served by PMT, I believe that these areas represent less than the 30% estimated by the Company.
Q. Do wireless services represent effective competition for basic exchange service?
A. While wireless service continues to grow and is becoming a more important part of the tele-
communications service mix, it is not a realistic alternative to wireline basic exchange service in Burley. While Mr. Wozniak extols the competitive aspects of wireless service, I do not believe it meets the definition set forth in the statutes. The definition of effective competition contained in
§ 62-622(3)(b) is that:
There are functionally equivalent,
competitively priced local services
reasonably available to both residential
and small business customers from a
telephone corporation unaffiliated with
the incumbent telephone corporation.

This is a two-pronged test: the service must be both functionally equivalent and competitively priced. I agree with Mr. Wozniak that this does not mean the services need be priced identically (Supp. p.16 L 5), however, they should be comparable.
Q. Have you looked at the wireless services to determine if they are functionally equivalent?
A. In Mr. Wozniak’s Supplemental Direct Testimony on pages 14 and 15, he talks about the criteria for the services to be functionally equivalent. For the most part, I agree with him. The exception is the provision of emergency services, in particular the E911 service which is provided in Burley. Although a cell phone user can call emergency services, the ability of the emergency services to determine the physical location of the cell phone is limited. This is true even if the cell phone is at a stationary location. This problem has received a great deal of national attention and final resolution of this issue has yet to be reached. In this case, wireline service has a functional advantage over wireless service.
Q. Are wireline and wireless services competitively priced?
A. They clearly are not. Let me address the plans mentioned in Mr. Wozniak’s testimony as an example. On page 12 of his Supplemental Direct Testimony, starting at line 21, he cites AT&T’s Family Plan, which offers unlimited local calling between up to five family members at no charge. To sign up for this plan, the first family member must sign up for the $49.99 plan and additional members may sign up at $24.99 each. This means that for a family of five, the fixed monthly rate would be approximately $150. In addition, the free calling between family members applies only in the Treasure Valley and is not available in the Burley area.
The AirTouch plan does offer a rate of $29.99, but additional minutes over the allotment cost $.30 per minute. This is significantly higher than
U S WEST’s measured usage rate of $.02 for additional minutes. Also, as with all wireless plans, they are measured in nature and should be compared to the rates
U S WEST charges for measured service. In Burley,
U S WEST’s residential measured service rate is $7.93 per month which includes 180 minutes of use with additional use billed at $.02 per minute. Also, the minutes of use for U S WEST’s measured service are for originating minutes only as contrasted to wireless service that counts both originating and terminating minutes against a customer’s allotment.
The Alert plan is actually an AirTouch plan that offers 400 minutes of use for $39.95 per month. Additional minutes are billed at $.30 per minute. Again, this plan should be compared to U S WEST’s current measured service plan keeping in mind that cellular bills for incoming as well as outgoing minutes.
Q. What wireless plans do Burley customers currently have?
A. There are only two cellular providers currently operating in the Burley area. The plans offered by these companies are similar to the AirTouch plans and start at the $30 per month range and higher.
Q. In summary then, does wireless service in the Burley area offer effective competition?
A. No. Although wireless service is used as an additional service by many, and offers alternatives for some customers, it does not serve as effective competition for basic exchange service in the Burley exchange. In some areas, wireless service might have a value in providing a price cap on wireline service to the extent that at some price customers will choose to switch over to cellular service. In Burley, however, the lack of cellular competition and its high cost makes that crossover point too high to be a legitimate check on the rates of the incumbent provider.
Another point must also be considered. In my opinion, competition between wireless providers in the Burley area is less developed when compared to other areas served by U S WEST, making it that much less competitive with wireline services. Therefore, if wireless service is found to represent effective competition in Burley, then virtually all exchanges served by U S WEST must also be subject to effective competition. This is certainly true for U S WEST’s larger exchanges and those along the I-84/I-15 corridor.
Q. Have you examined the impact deregulation would have on public interest as required in Idaho Code
§ 62-602?
A. The legislative intent as expressed in
§ 62-602(3) states that:
It is the further intent of the
legislature that the commission,
in its deliberation of deregulation
of the incumbent telephone corporations,
will examine the impact such deregulation
will have on the public interest in
accordance with the general grant of
authority given to the commission by the
legislature . . .

U S WEST did little in its testimony to specify how deregulation would enhance the public interest or at least not detract from it. However, going back to my previous points, it is difficult to see how the public interest can be served by having 70% of the Burley customers captive to a deregulated monopoly provider. In addition, the Company has done little to provide a quid pro quo for this risk, such as guaranteeing the deployment of advanced services such as voice messaging, distinctive ringing, and digital subscriber line.
Q. Do you have any suggestions on how the Commission can judge when effective competition does exist?
A. As I stated in the beginning of my testimony, this is a subjective evaluation. While I believe that it is difficult to quantify exact targets that a company must meet to qualify for economic deregulation under this statute, I also believe that the Commission should set some guidelines that an applicant can use.
I believe the percentage of customers who have a choice of competitive providers is the most important factor to consider. To that extent, I believe the language of the statute, particularly the legislative intent as expressed in § 62-602(2), is instructive. In that section, the legislature stated that actual competition means more than the mere presence of a competitor and that for there to be actual and effective competition, there needs to be substantive and meaningful competition throughout the incumbent telephone corporation's local exchange calling area.
I interpret this to be a high standard set by the legislature. I believe that effective competition should be available to a majority of the customers in an exchange before the Commission should take a request for deregulation under consideration.
The speed with which deployment may be made is a factor that must be considered. If technology allows a service to be deployed rapidly throughout an area, such as the development of more affordable wireless service, or introduction of local service over the existing cable TV system, this should be taken into consideration when assessing how soon an area should be deregulated.
Finally, the applicant must do a thorough job in specifying how the public interest would be served by the granting of economic deregulation. Specificity is important. The applicant should be able to tell the Commission what advanced services customers will gain access to and when these services will be deployed. If the public interest will be served by a reduction in rates, the applicant should also indicate to the Commission how these rate reductions would be implemented and how long they would be effective.
Q. Do you have any suggestions concerning how this process should work?
A. Yes. I would encourage the Commission to implement an expedited process for these applications similar to the process endorsed by this Commission for examination of a Section 271 filing. The Commission should require that all applications be complete when filed and that additional information be used only to substantiate claims in the initial applications.
Discovery should be done on an expedited basis and the entire process, from the initial application to the Commission Order, should be accomplished within a 90-day window. This would allow all parties sufficient opportunity to examine the issues in the application and provide the applicant prompt resolution, enabling the company to quickly respond to competitive pressures.
Q. If the Commission were to grant U S WEST’s Application, what other factors would the Commission consider?
A. The Burley exchange is currently part of
U S WEST’s rate base and economic deregulation would reduce the Company’s rate base and could have an impact on revenue requirement. In its simplest form, the question is: does the loss of rate base and expenses cancel out the loss of revenues from the Burley exchange or is there an increase or decrease in U S WEST’s revenue requirement for the remaining exchanges?
The Commission must also determine the non-economic regulatory requirements as stated in
§ 62-622(5). That section states:
The commission shall determine the
noneconomic regulatory requirements
for all telephone corporations providing
basic local exchange service, including,
but not limited to, such matters as
service quality standards, provision of
access to carriers providing message
telecommunications service, filing of
price lists, customer notice and customer
relation rules.

Q. Please summarize your testimony and your recommendation.
A. I have tried to present to the Commission a realistic view of the implications of economic deregulation in the Burley exchange and to point out the largely symbolic nature of this proceeding. In addition, I have attempted to define the issues that must be addressed in future filings. Finally, I have addressed the question of whether or not effective competition exists in the Burley exchange. My conclusion is that effective competition does not exist and that U S WEST’s Application should be denied.
Q. Does that conclude your testimony?
A. Yes, it does.

USW-T-99-15 CUSICK, J (Di) 1
11/24/99 STAFF

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