COMMISSION MCI TELECOMMUNICATIONS ) CORPORATION, ) Docket No. UT-970653 Complainant, ) ) Volume 1 vs. ) Pages 1 - 88 ) GTE NORTHWEST, INC., ) Respondent. ) ----------------------------- ) A hearing in the above matter was held on September 16, 1997 at 9:30 a.m. at 1300 South Evergreen Park Drive Southwest, Olympia, Washington, before Administrative Law Judge JOHN PRUSIA. The parties were present as follows: GTE NORTHWEST, INC., by JUDITH ENDEJAN, Attorney at Law, 4100 Two Union Square, 601 Union Street, Seattle, 98101-2380. MCI TELECOMMUNICATIONS CORPORATION, by CLYDE MACIVER, Attorney at Law, 4400 Two Union Square, 601 Union Street, Seattle, Washington 98101-2352. THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION STAFF, by MARY M. TENNYSON, Senior Assistant Attorney General, 1400 South Evergreen Park Drive Southwest, PO Box 40128, Olympia, Washington 98504-0128. AT&T, by GREGORY T. DIAMOND, Attorney at Law, 2600 Century Square, 1501 Fourth Avenue, Seattle, Washington 98101. Cheryl Macdonald, Court Reporter P R O C E E D I N G S JUDGE PRUSIA: Let's be on the record. The pre-hearing conference will please come to order. This is a pre-hearing conference in docket No. UT-970653. This is MCI Telecommunications Corporation vs. GTE Northwest, Inc. MCI filed its complaint on April 15, 1997, about five months ago. MCI complains that traditional rate of return regulation has resulted in GTE access rates which are unfair, unjust, unreasonable, inefficient and unjustly discriminatory, and which tend to oppress the complainant, to stifle competition and to create or encourage the creation of a monopoly in violation of RCW 80.36.110 and 80.36.140. The first RCW should be 80.04.110. MCI asked the Commission to order GTE to reduce its intrastate access charges to economic cost, which is equal to TSLRIC or TELRIC plus a reasonable portion of shared and common costs based on the Hatfield model. GTE filed a motion to dismiss on May 7, 1997 and MCI has filed a response to the motion. The Commission set this pre-hearing conference by notice served on August 25, 1997. Today's date is September 16, 1997. My name is John Prusia. I'm an administrative law judge with the Commission. As is indicated in the notice of pre-hearing conference, we'll be taking appearances considering any petitions to intervene, formulating issues, hearing argument on GTE's motion to dismiss. We'll also be dealing with discovery and other preliminary matters and setting a schedule for evidentiary hearings and briefing. I might first mention how the motion to dismiss fits into the process. After I hear the oral argument on the motion this morning the motion will be taken under advisement. I can't tell you for certain whether the order on the motion will be an ALJ order or a Commission order. This case was put into my in- box just last week. As far as I'm aware, this will be an ALJ-only case but I haven't been advised otherwise. It's possible that the commissioners will decide that they want to preside. Since the motion will be taken under advisement, we should assume for purposes of this pre-hearing conference that there will be hearings on the complaint, so we should set a schedule for hearings and briefing, that sort of thing. I think it might work best if we heard the oral argument on the motion, however, before we go ahead and set the schedule for the hearings, unless someone else has another suggestion, good reason for doing that. I will take appearances at this time beginning with the complainant MCI. MR. MACIVER: Thank you, Your Honor. My name is Clyde H. MacIver. I practice law with the law firm of Miller Nash. My address is 601 Union Street, 4400 Two Union Square, Seattle, Washington 98101, appearing on behalf of MCI Telecommunications Corporation. JUDGE PRUSIA: Thank you, Mr. MacIver. And for the respondent, GTE Northwest, Ms. Endejan. MS. ENDEJAN: Yes. Appearing for GTE Northwest is Judith A. Endejan. That's spelled E N D E J A N and I will be representing GTE Northwest in this docket. JUDGE PRUSIA: And could you give us your address. MS. ENDEJAN: Oh, I'm sorry. My address is the law firm of Williams Kastner and Gibbs, 601 Union Street, Seattle, Washington, 98101. That's Suite 4100. JUDGE PRUSIA: Thank you, Ms. Endejan. For Commission staff. MS. TENNYSON: Yes. I'm Mary M. Tennyson, senior assistant attorney general representing Commission staff. My address is 1400 South Evergreen Park Drive Southwest, Post Office Box 40128, Olympia, Washington 98504. JUDGE PRUSIA: Thank you, Ms. Tennyson. Do you know if public counsel will be appearing in this proceeding? MS. TENNYSON: As far as I know they will not. JUDGE PRUSIA: Okay. We have received one petition to intervene, which was filed yesterday, and so the first order of business, then, will be to consider the petitions. For the record have the other parties had an opportunity to review the petition to intervene of AT&T? MR. MACIVER: (Nodding). JUDGE PRUSIA: Let the record reflect that they responded affirmatively. Let me ask you, Mr. Diamond, does AT&T intend to expand the issues in this proceeding? MR. DIAMOND: No, Your Honor, we do not. JUDGE PRUSIA: Is there any objection to the intervention of AT&T? MS. ENDEJAN: Your Honor, GTE does not object per se to AT&T participating in a proceeding to the extent that we are dealing with issues associated with access charge reform. As I will explain, we don't think this is the appropriate procedural vehicle to accomplish that. So that's our position as far as substantively where AT&T is coming from, and I guess having just been given a copy of the petition to intervene this morning, I would also request that AT&T be precluded from filing a response to our motion to dismiss which we're about to argue, or from commenting on that at this point because this is the first time that we've been made aware that AT&T was interested in this particular docket was yesterday. So, given those caveats I guess GTE would not object to AT&T's intervention. JUDGE PRUSIA: Mr. Diamond. MR. DIAMOND: Well, I guess my response would be to the extent that they don't object, I think that we should be able to participate in the proceedings in full and in their entirety as a co-complainant. We are seeking to, again, as Your Honor indicated, not to expand on any of the issues. We are second seeking simply to join in as a co-complainant and adopt the allegations of the complaint, and so we're really not interjecting anything new into the case. To sort of perhaps emphasize what's already been said in the motion, AT&T in terms of access charges is a very, very substantial customer. GTE probably may be first, might even be ahead of U S WEST in terms of that issue. So our interests in terms of substantive interests are quite substantial, so I think that our right to intervene, I believe, is clear on that basis to protect our interests in the case, and I don't think that GTE would be prejudiced in any manner. In terms of the motion to dismiss, obviously it's going to be heard this morning. We don't plan on filing a written response. We really in fact join with MCI in their response in that respect, but I certainly would like to have the opportunity -- to the extent that AT&T has something else to add other than what Mr. MacIver might say this morning with respect to the motion to dismiss, I certainly don't want to necessarily be precluded from doing that this morning. Otherwise, that's our position. JUDGE PRUSIA: Is there any other objection of any sort to the intervention of AT&T? MS. TENNYSON: Commission staff does not object. MR. MACIVER: MCI has no objection. JUDGE PRUSIA: Ms. Endejan, do you have anything to add to what you said previously? MS. ENDEJAN: No. I mean, as I said, we really don't object to AT&T's participation in an access reform docket. I guess I am a little troubled by AT&T's sort of the day before the pre-hearing conference stating that it basically wants to articulate perhaps an opinion on the motion to dismiss because this is the first we were aware that AT&T intended to assert itself into this docket. So, to the extent that AT&T joins in with what MCI may have said in its pleadings, I don't have a problem with that, but I just feel like I'm being caught sort of unawares if any new argument is going to be advanced by AT&T with respect to the motion to dismiss that I haven't been made aware of. So that's why I'm concerned. I just don't like the element of surprise here. MR. DIAMOND: Quite honestly, I don't have anything in my hip pocket ready to shoot, new arguments that MCI hasn't otherwise advanced, but to the extent that GTE might make some argument in response, I just don't want to be precluded, but if there's something that might be appropriate for me to say on behalf of AT&T that's what I'm going to say. Nothing new is going to come out of my hip pocket once we get going. MS. ENDEJAN: Okay. JUDGE PRUSIA: I will grant the motion to intervene. If something does come out of Mr. Diamond's hip pocket you may object at that point and I will entertain it. I'm going to assume that those of you who are here today are the contact persons for your entity and that anyone serving a document upon you or providing you with a copy of something that that will take care of service to your firm or your company. MR. DIAMOND: I just want to add one other name. Dan Waggoner of my firm of Davis Wright Tremaine other than myself. JUDGE PRUSIA: Generally we require that there will be one contact person and then you would have to make copies and give it to him rather than everyone having to worry about multiple people. MR. DIAMOND: I will be that person. JUDGE PRUSIA: Very well. Thank you. I note we have the fax numbers of everybody other than AT&T in the correspondence we've received. I don't see your fax number here so can you give us the fax number? MR. DIAMOND: Judge, I will be more than happy to give it to you. JUDGE PRUSIA: In these proceedings we tend to need the fax. MR. DIAMOND: The fax for Davis Wright Tremaine in Seattle is area code 206-628-7699. JUDGE PRUSIA: Thank you. And for all of you, if your fax number changes during these proceedings, please advise the Commission as quickly as possible. I guess now we should move to the oral argument on the motion to dismiss. First, I want to advise you that I don't have an extensive telecommunications background, and my understanding of what access charges are and how they work is pretty thin. Because of the Commission's ex parte rules, I can't ask Commission staff to explain access rules to me and there are no in-house experts I can talk to, so I'm going to be pretty much dependent upon the parties to help educate me about what access charges are. And so before you start your formal presentations, and since it's GTE's motion to dismiss, right? MS. ENDEJAN: Correct. JUDGE PRUSIA: You would go first. I would like to ask someone to volunteer to sort of give me a crash course, very short one, on what access charges are, if anyone feels that they would -- MS. ENDEJAN: I would be happy to take a stab at it. JUDGE PRUSIA: Sure. MS. ENDEJAN: And I'm sure if I mischaracterize something other counsel here -- JUDGE PRUSIA: It will be helpful if other counsel could add anything that they feel that you've left out or misstated or anything. MS. ENDEJAN: Well, maybe I will go back in time to the time of divestiture, which was when AT&T and the regional Bell operating companies were split up by order of Judge Green. You're familiar with that historical event. JUDGE PRUSIA: Yeah. MS. ENDEJAN: So what we then had was a telecommunications structure by and large where we had two distinct providers of telecommunications services, and I'm just saying two because it's simple to think of it as long distance providers such as AT&T and MCI and local exchange companies such as GTE and U S WEST and the regional Bell operating companies. And a system was put in place in the 1980s which provided compensation to the local exchange companies for originating and terminating long distance telephone calls that were handled by the interexchange carriers, because each of these carriers had their own distinct universe, as it were. The long distance providers provided telephone call capabilities between distant points, and then the local exchange companies handled what you might want to consider your local calling. Originating charges were charges associated with what the local exchange company incurred to hand off a call that -- say you want to call your mother in New York. You pick up your phone and you would dial her number. It would go through the telephone company's central office switch. There would be a certain number of functions that would be associated with handing that call off to, say, AT&T. And then AT&T would carry that call across country and would deposit it in a central office switch of NYNEX in New York City, which would then route it to your mother. That would be the terminating end; originating, terminating. And there are costs associated with both ends of that call as there are costs associated with transporting the call by the long distance provider. So what developed at both the state and national level was a charge which -- again, I'm trying to simplify this -- would be known as access charges that the long distance providers would pay to the local exchange companies for the beginning and end functions of those calls. So that's in a nutshell what an access charge is, and it is designed to help local exchange companies recover the costs associated with completing and starting long distance calls. Now, built into the access charge, and this is a subject of considerable dispute, and something that is an ongoing litigation in many dockets right now, is the fact that a certain degree of the charge paid by a long distance providers was above the cost of providing -- above the cost that the local exchange company actually incurred to handle the call. And that subsidy was sort of part and parcel of kind of the larger picture of how a local exchange company, which back then was a monopoly, was usually the sole local exchange provider in its service area, how the local exchange company was to recover all of its company-wide costs or revenue requirement, and that cost recovery was generally split between what the company would get for handling local calls, what the company would get for providing access to the interexchange carriers like AT&T and MCI, and then what the companies might get for handling their own what we call local or intraLATA toll. And for a variety of social policy reasons, again -- and this is a subject of debate amongst everybody in the industry -- local rates were kept low to promote universal service, and in order to, in a sense, to provide sufficient subsidies to the local exchange companies, various charges, little elements of the charges, were added to access charges to in effect allow the local exchange companies to make up their needed revenue requirement. So in Washington state, in 1985, in a generic docket that was U-85-23, which grew out of I believe a tariff filing which was then Pacific Northwest Bell, is now U S WEST, the Commission figured out a methodology for determining access charges that U S WEST and GTE could assess on the interexchange companies on an intrastate basis, and that methodology and decision was pretty much based upon what we would view as historic costs or a different method of looking at costs than what we have now. So we're going to flash forward ten years, and what has happened in the past ten years is pretty enormous in the telecommunications industry, and in the past two or three years alone in Washington state two big events of legal significance occurred. The first was Washington Supreme Court decision which said that U S WEST and GTE were not the, quote, sole and exclusive franchise holders for local exchange service in their areas and that others could compete in their areas, and that decision was bolstered by the passage of the Federal Telecommunications Act of 1996 which in effect opened all telecommunications markets to competition. So, we've gone from a monopoly or sole provider environment in the '80s to now we're transitioning into a fully competitive environment in the middle of the 1990s. In the '80s, principles that evolved over many decades that are associated with traditional rate of return sort of regulation were kind of the guideposts. Now, we're in the process of in a sense crafting new rules of the game, and restructuring everything to deal with the issues associated with universal service, to deal with the issues of rate rebalancing, and to deal with issues of access charge reform. So where we're at now is a situation where access charges, carriers claim, are inappropriately set above costs and that the subsidy should be shifted out of those charges, and I guess that's sort of how -- and from the local exchange carrier standpoint, GTE believes that this whole industry basically needs a comprehensive reworking because the principles that applied under traditional rate of return regulation are no longer applicable. We just don't think it should be done on a piecemeal basis. You can't poke part of the balloon on one end without popping it out on the other end. JUDGE PRUSIA: Now you're getting into your argument. MS. ENDEJAN: Right, I'm getting into my argument. So access charges basically compensate the carrier, or compensate the local exchange companies for long distance calling, and I don't know. Did I misrepresent the state of history? MR. MACIVER: I don't think so. In its simplest form every long distance call needs to originate form and it needs to terminate somewhere, and the calls always originate in a local service area of some local exchange company, so interexchange carriers, which are called IXCs, have what they call POPs which is points of presence. Say on a call from Bellingham, Washington to Vancouver, Washington MCI might have a POP near the Bellingham exchange, which is a switch, and a POP down near Vancouver, and so if you lived in Bellingham and you pick up the phone and call someone in Vancouver your call would first go over the local exchange company's network from your home to the point of presence of the long distance carrier nearest your home central office there and then it would -- and that's the origination part that the local exchange company provides, and they charge an access charge for that. Then it's carried by the long distance company from their point of presence up by Bellingham down to Vancouver on its lines and then again it's handed over to the LEC at that end of the call for termination. Goes then from -- to the home of that person and they charge terminating access for that. So really in its purest, simplest form access charges are the services provided by the local telephone company to originate and terminate long distance calls that are carried by the long distance carriers between them. In the extremes, same would be true from here to New York. Some local company in New York would be the terminating end of the call to New York and GTE would originate the call if it happened in its territory. IXCs are extremely concerned about access charges because they are, in MCI's case, approximately 40 percent of their cost of doing business. 40 percent of their revenues are paid to local exchange companies in access. So as Judith acknowledged, it's a big issue, these access charges between carriers, but in its purest form that's what it is. It's the origination services or the termination services of a local exchange company. JUDGE PRUSIA: Well, in the last week I have been trying to read up on it and understand it and this conforms with my understanding so far. I do have a number of questions that I'm going to want to ask. First I want to hear your argument and then I will ask the questions and they may be somewhat repetitious of what you say, but repetition may help me at this point, and also if my questions reveal a misunderstanding of how all of this works, feel free to correct the questions and maybe restate them and assist me in that way. So let's hear the argument first. It's GTE's motion so let's hear from GTE. MS. ENDEJAN: Thank you. GTE filed a motion to dismiss the MCI complaint on May 7, and in a nutshell GTE's primary opposition to this is that the complaint does not state a claim against GTE. Rather, the complaint states a request for relief at a policy making level to be generically applied to everyone in the local exchange community. Specifically, as MCI has acknowledged in its response to our motion to dismiss, the complaint must state a claim on which the Commission may grant relief, and the MCI complaint doesn't do that. Under RCW 80.04.110, a complaint -- and I will quote from the statute because it's important -- must "set forth any act or thing done or omitted to be done by any public service corporation in violation or claimed to be in violation of any provision of law or any order or rule of the Commission." If you review the complaint, the complaint does not say anywhere that GTE violated any order of this Commission or any statute. If you go through the paragraphs in the complaint which recite the factual basis for the complaint, what you see is that MCI's real complaint is with the impact of, quote, traditional rate of return regulation. And MCI is not claiming that it's GTE's, quote, design or purpose that -- to keep its access rates at an unlawful rate. The second major point in this area is that GTE's access rates are lawful. They have been reviewed and approved by this Commission in the tariffs on file with this Commission. The Commission went through a very lengthy access charge proceeding in the '80s, as I described previously, and developed a system for setting access charges. GTE at all times has complied with every order of this Commission on access charges. So, in essence, MCI is saying -- it's not saying that GTE has violated the law, which is what is the proper basis for a complaint. MCI is saying, I don't like the law. I want the law to change. I want a different policy in place to deal with access charge reform, and this is the interesting point. GTE doesn't necessarily disagree with MCI that access charge reform is appropriate. As a matter of fact, GTE agrees that access charge reform is appropriate. It just does not agree that this is the appropriate procedural vehicle to do it. If you look through Washington administrative law and procedure, there are many options available to a party that wants to seek relief from an established Commission order. There are petitions to modify previous decisions. There are petitions for rulemaking. There are petitions for adjudicative proceedings or, more appropriately -- and I didn't know if you were aware of this but I wanted to bring to your attention a petition that was filed by AT&T. It was filed on August 8 and it does not -- or if it has a docket number the file or the copy that I have does not bear it, so I apologize for not -- MS. TENNYSON: It does have a docket number. MS. ENDEJAN: Could you give me that, please. MS. TENNYSON: Looking for it. MR. DIAMOND: UT-970325. MS. TENNYSON: That's correct. JUDGE PRUSIA: No, I was not aware of that. MS. ENDEJAN: Well, this is a very interesting petition because it lays out, we think, a more appropriate procedural forum for resolving the whole issue of access charge reform. Because, as we've stated in our motion, you can't do this piece part. You can't do this by singling out one telecommunications company like GTE to accomplish what's really in effect full scale reform of the access charge issue. GTE views access charge reform as -- like the FCC did, as part of kind of a trilogy. A comprehensive regulatory process where you have to look at the impact, how are you going to fund universal service in this state if you eliminate important subsidies that come to the carrier of last resort, which is typically the local exchange provider like GTE or U S WEST, if you don't -- if you remove the subsidies they get from access charges or toll rates. You have to find some other mechanism to deal with it. How are you going to take a company that has been subject to traditional rate of return regulation into a fully competitive environment without some form of comprehensive rate rebalancing to allow everybody to have a fair and competitive start in this new environment. It is unfortunate that just by virtue of -- it's the nature of the beast, the regulatory process sometimes doesn't accomplish things as quickly as the market participants would want, but that doesn't remove the need or the desire to make sure that if you're adopting important public policy that you do it in a coordinated and proper manner. So, GTE really would urge the Commission to dismiss the MCI complaint and instead open some form of a generic docket that will reopen U-85-23 and completely re-examine the question of how access charges are to be structured in Washington state. GTE does not necessarily agree with every statement contained in the AT&T petition in docket UT-970325, but it certainly represents a more appropriate procedural vehicle to challenge local exchange company's access charges which, as we sit here today, are lawful and appropriate under existing Washington law. Therefore, if these charges are lawful and appropriate under existing Washington law, the MCI complaint doesn't state a claim for relief. The Commission in its rules under WAC 480-09-400 sub 5 sub C allows the Commission to "decide not to conduct an adjudicative proceeding and furnish the applicant with a brief statement of its reasons for doing so." A formal complaint under that same rule is designated an adjudicative proceeding. So, therefore, I think the Commission has the authority to issue a ruling to MCI denying them the relief in this forum that they're seeking in this complaint, recognizing that MCI may be able to avail itself in a more appropriate procedural vehicle such as a petition to reopen U-85-23. I think that the only real problem procedurally GTE might have with AT&T's request is I think they're asking for an investigation and fact-finding proceeding which might be limited to a paper record, and we have some concerns about the Commission's rules that govern treatment of confidential material such as cost studies, and we also have some concerns about whether we might not have some discovery problems with that. So I think inevitably we're heading down the path toward some form of an evidentiary adjudicative proceeding on the issue of access charges, but just not in this docket involving this complaint. I also wanted to bring to your attention the fact that this summer the Commission had a several week long hearing on an investigation into the generic costs that local exchange companies are to use for purposes of calculating the prices for their network components, and in that proceeding, in the generic cost docket proceeding, the Commission was presented with the Hatfield model. I did not participate personally in that proceeding, but I understand that it's in the briefing phase right now, and it seems that a large portion of MCI's requested relief here is to get the Commission to force a cost approach on GTE, meaning the Hatfield model, which the Commission is currently reviewing in another docket, so it really wouldn't make sense just from an administrative standpoint to reopen that can of worms in this docket when the Commission will rule upon it in the generic cost docket which will either reject, accept or approve of MCI's contentions on the Hatfield model. So if you really look at the MCI complaint what you have to come away with is the impression that, well, okay, MCI, you don't like the access charges that you're paying, you claim they're too high. You claim that that's as a result of -- and I am referring to most of the paragraphs of the complaint, which place the blame on traditional rate of return regulation. Well, that may be fine and good. MCI can make all the policy arguments it wants against traditional rate of return regulation, but what it can't do is claim that GTE has violated the law when it hasn't. This is not the vehicle to change the law. This is not the vehicle to change the policy. So we urge the Commission to dismiss this complaint and get about the business of access charge reform but in a more appropriate manner which will examine the serious policy implications of access charge reform in connection with all of the other matters that it has to deal with in the area of telecommunications policy such as universal service. You know, the FCC didn't look at access charge reform in a vacuum. The FCC in a national level made it very clear that it was looking at the rules that are appropriate for implementing the Telecommunications Act of 1996 were a trilogy and the trilogy involved, the first one, setting the interconnection rates and establishing proper costing and pricing methodologies, and I won't even go into that. That's -- JUDGE PRUSIA: I'm more familiar with that part of it than I am with the access parts. MS. ENDEJAN: Then the other two components of it really deal with issues associated with