COMMISSION THE WASHINGTON UTILITIES AND ) TRANSPORTATION COMMISSION, ) ) Complainant, ) ) DOCKET NO. UT-970766 vs. ) ) VOLUME 8 U S WEST COMMUNICATIONS, INC.,) ) Pages 334 - 403 Respondent. ) ------------------------------) A public hearing in the above matter was held on November 20, 1997, at 6:00 p.m. at 321 East Fifth Street, Port Angeles, Washington, before Administrative Law Judge TERRY STAPLETON, and Commissioners WILLIAM R. GILLIS and ANNE LEVINSON. The parties were present as follows: U S WEST COMMUNICATIONS, INC., by LISA A. ANDERL, Corporate Counsel, 1600 Seventh Avenue, Room 3206, Seattle, Washington, 98191; and THERESA JENSEN, speaker for U S WEST. THE PUBLIC, by SIMON J. FFITCH, Assistant Attorney General, 900 Fourth Avenue, Suite 2000, TB-14, Seattle, Washington, 98164-1012. THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION, by GREGORY J. TRAUTMAN, Assistant Attorney General, 1400 South Evergreen Park Drive Southwest, Olympia, Washington, 98504-0218; TOM SPANKS, Staff speaker. Joan E. Kinn, CCR Court Reporter P R O C E E D I N G S JUDGE STAPLETON: This is a public hearing in the matter of the Washington Utilities and Transportation Commission versus U S West Communications, Incorporated. We are convened in Port Angeles, Washington. Today's date is Thursday, November 20, 1997. Present at hearing are Chairwoman Anne Levinson, Commissioner Bill Gillis, and Presiding Officer Terrance Stapleton. Mr. Ffitch, will you please call your first witness. MR. FFITCH: Thank you, Your Honor. The first witness is Verl Hansen. Mr. Hansen, I'm going to -- you get to be the guinea pig. I have a couple of general comments about testifying. The court reporter is taking down the testimony for the Commission's records, so please be a little extra careful about speaking clearly and maybe a little slower than usual so the court reporter can pick it up. Also, please address your comments to the Commissioners. Although I will be asking you questions, please direct your comments to the Commissioners. They are the ones that are really here to -- this is your opportunity to speak directly to them. I'm very happy to hear what you have to say, but I invite you to direct your thoughts directly to the Commissioners. First of all, could you give your name and spell your last name for the record. MR. HANSEN: I'm Verl Hansen, spelled H-A-N-S-E-N. MR. FFITCH: And what city do you reside in? MR. HANSEN: Port Angeles. MR. FFITCH: And are you a resident or business customer? MR. HANSEN: I'm speaking for a business customer. I represent the Port Angeles Chamber of Commerce. MR. FFITCH: Very well. And that answers my next question, which is you're speaking on behalf of the customer, which is the Chamber of Commerce; is that correct? MR. HANSEN: Yes. MR. FFITCH: You may give your testimony then to the Commission. MR. HANSEN: To slow it down and to make it clear, I will read the letter that we have written, which you have, I have given to you. The Port Angeles Chamber of Commerce, who represents 385 businesses in our area, is keenly interested in the widespread availability of modern telecommunications in the Clallam County area. Telecommunications is an important tool for the expansion of existing businesses and attraction of new businesses to our area. We believe it is important that all providers of telecommunications be healthy financially so the needed investments can be made. We understand that the Washington Utilities Telephone Commission staff has completed a lengthy study of U S West financial returns and have concluded that increased revenues are necessary to permit U S West to earn at the rate already authorized by the Commission. We are not phone rate experts and thus don't wish to comment on specific rate proposals except to say that all users of telecommunications should share in the increase. I would like to add one more thing. They talked earlier about service. About three weeks ago at my residence, we were picking up other conversations on the phone. This was on a Friday evening. I called U S West. Not working myself on Saturday and Sunday, I didn't expect it, but Monday afternoon, I got a call that the problem was corrected. What was interesting was they could have just fixed it, but they took the time to call me to tell me that it was corrected and what the problem was, and I thought that was excellent service. Thank you. MR. FFITCH: Any questions from the Commission? MS. LEVINSON: Thank you. JUDGE STAPLETON: Thank you. MR. GILLIS: Thank you. JUDGE STAPLETON: Mr. Hansen, you read from a letter. Does Public Counsel have a copy of that letter? MR. HANSEN: Yes, I gave it to the staff out front. JUDGE STAPLETON: We'll make that a part of the Public Counsel exhibits in this case. Thank you for your testimony. MR. FFITCH: Don Johnson. MS. JOHNSON: We didn't sign up to talk. MR. FFITCH: That's fine. And by the way, as I go through this list, if you don't wish to testify, that's fine. There's no penalty. So even if you did sign up originally or if I mistakingly call out your name, just indicate that. I assume that was Gertrude Johnson that was just speaking. MS. JOHNSON: Yes. MR. FFITCH: Floyd Murray. MR. MURRAY: My name is Floyd Murray. I'm a resident of Port Angeles. I'm presently using a one line residential telephone. Any other information you would like? MR. FFITCH: Thank you, that's great. That's fine, thank you. You have anticipated my questions, except are you speaking on your own behalf or on an organization? MR. MURRAY: I'm sorry, my hearing is so bad, I can't understand. But anyway, I'm 74 years old, and even though my hearing is bad, my memory, compared to most people my age, is still very good. And I can remember being deceived in many, many situations, therefore, I'm very critical. And as I look through this background of the U S West proposal, I find a few questions. It says that Washington residents are dependent on fast, affordable, and reliable communications. That is probably very true that nearly all residents are. I feel that I am. And I am not dependent however on any improvements in this communication, the present improvements. A one line system is all I need and all I will ever hope to need. I feel that the people who want special type communications, multiple phones and so on, should pay for them. But the people who don't want them and don't use them should not be paying the development expenses of these gee whiz things that they will never use. For instance, we have caller ID, which probably turned out to be profitable for the communications companies, but in turn, they had to come out with caller ID canceling in order to counteract it. So here we have a good invention, and it has to be counteracted by another invention, and I don't think anybody needs it. But if somebody wants to use it, that's perfectly all right, as long as they pay for it, and everybody else isn't required to pay for it. So, therefore, I agree with the Public Counsel that there should be no change in the first line flat rates. The additional lines is discretionary. If people want additional lines, they should pay for them. If they want modem capability, they should pay for it. But the people who don't use it shouldn't have to pay for it. And U S West as a private corporation should not be involved in verifying the income of their customers. So whether or not the person's income is below a certain level should not enter into the situation. It's the services that they request and use that should be paid for. JUDGE STAPLETON: Mr. Murray, thank you for your testimony tonight. MR. FFITCH: Does Sabine Murray wish to testify? MS. MURRAY: No. MR. FFITCH: Jim Cammack. The witness after Mr. Cammack will be Bart Phillips, just so you can be prepared. Mr. Cammack, good evening. Will you state your name for the record, please. MR. CAMMACK: I'm Jim Cammack. I reside in Port Angeles, Washington. MR. FFITCH: Are you a residential or a business customer? MR. CAMMACK: I'm both. MR. FFITCH: Are you representing yourself or an organization tonight? MR. CAMMACK: I'm representing myself and my business. I own a pharmacy and home health care business here in Port Angeles. MR. FFITCH: Thank you. Go ahead and give your statement. MR. CAMMACK: Real briefly, I'm real high on Port Angeles. I'm a real big believer in that. And looking at these rate increases tonight, I would tend to disagree with the Public Counsel's suggestions that go along with some of the other rate increases, mainly due to the fact that today we're living in an ever changing world. I deal in health care. I don't know whether any of you have asthma or not in this town, in this particular community, but I brought with me tonight a little device. It's called an Airwatch. This little device is something we try to get children to use to measure how well their lungs are doing so they don't have asthma attacks and they don't end up in an ER room paying $600 for a visit. This little device, interestingly enough, the only way it works is after children have used it for a period of time, there's a happy little face that tells them when they're doing well, it has a little telephone plug, and you plug it into the telephone. It downloads to your doctor. It tells you how the child is doing. And these are the types of pieces of technology, that while the previous gentleman might speak for the fact that we don't need, are towards our quality of life. And in addition to that, I feel that Port Angeles as a rural area is often overlooked, and I would like to see some of the increased services here so that we can attract some of the clean air industries to our particular area so that we have more fiberoptics and things of that nature. So speaking on behalf of the Counsel, not against you, sir, but for the Commission's rate increase, thank you. JUDGE STAPLETON: Thank you, Mr. Cammack, for coming out tonight. Thank you for your testimony. MR. CAMMACK: You bet. MR. FFITCH: Mr. Phillips. MR. PHILLIPS: I'm Bart Phillips, P-H-I-L-L-I-P-S. I'm here representing the Clallam County Economic Development Council here in Port Angeles. We have many telecommunications and lines, multiple lines, FAX, modems. I would like to make a couple of comments. The Economic Development Council is a private non-profit corporation. We represent the business community and are interested in jobs here in the community. We consider telecommunications infrastructure to be as important, if not more important, than sewer, water, or roads these days, and we believe it's going to be the foundation of the new economy, especially that which is here in Clallam County. Having equal or superior telecommunications capabilities in the rural areas I think is very important for us to be able to compete in the business environment today, and especially if the County is going to transition from a resource based economy that we have enjoyed and will continue to enjoy for the next hundred years as the previous hundred. We are not prepared to comment on the specifics of the rate case. We're not utility rate experts, and we will defer to staff. We know a lot of work has gone into that, and we're not going to superimpose our judgment on that. We do acknowledge as businesses that it's more expensive to serve rural areas. I mean we do acknowledge that it's going to take more money to improve the infrastructure here. We do also believe that our economic health here is intertwined with U S West and their health of their business. There must be a continued incentive on behalf of the company to continue to invest in rural areas, be that regulatory or be that financial. I will say that U S West has entertained a willingness to work with us to try to improve the telecommunications infrastructure out here and work with service issues, and they have been willing to listen to our aspirations of what we would like to see happen here in the county as far as growing businesses, and I expect that that will continue. And coming to your decision on this rate case, I would hope you would take into account the objectives of organizations and what they think they need here to build the economy. MR. GILLIS: I have one question, sir. You indicated that U S West has worked with you in helping you with your own aspirations. Could you give us a couple of examples of what they have done? MR. PHILLIPS: We have an interest in recruiting a call center for inbound customer service operations, and we have a couple of facilities we think are ideal for big bucks retail, and they worked with us to define what it's going to take to get telecommunications there. Is it adequate today, and can we market it, and can we service the customer there, and then also how long will it take to upgrade the level of specifications so we can go out there and tell the client if they come, you can have this within a certain period of time, something an incoming recruiting company needs to know, when they're going to be able to get service installed. So they have been responsive when we asked the questions. MR. GILLIS: Thank you. MR. FFITCH: Thank you. The next witness is Bill Roberds. And after that will be Allan Horrocks. Mr. Roberds, will you give your name and spell your last name for the record, please. MR. ROBERDS: My name is Bill Roberds, R-O-B-E-R-D-S. MR. FFITCH: Thank you. And where do you reside? MR. ROBERDS: 54 West Misty Lane, Port Angeles. MR. FFITCH: And are you testifying as a residential or business customer? MR. ROBERDS: Both. MR. FFITCH: And on behalf of yourself or an organization? MR. ROBERDS: On behalf of myself. MR. FFITCH: Thank you. Go ahead and give your testimony. MR. ROBERDS: Well, I would like to urge the Commission to grant this rate increase, and I would like to thank you, all the Commissioners and the staff, for taking the time to come up to Port Angeles in the first place. I know it's a long trip, and I really appreciate your taking an interest in our local community here. I'm afraid that a lot of lobbyists and special interest groups up along the I-5 corridor where there's lots of communications will have an effect on our technical growth here. There is no opportunity here for a lot of competition, and so we're kind of relying on U S West to provide that for us here. Governor Locke recently spoke here in Port Angeles about having two separate Washingtons here or two separate societies. I agree with the Governor on that, and I realize that one of the best ways that we can help narrow that gap is with some good communications here and some money spent in our community to do this. U S West would like to upgrade these plants, and I don't think without the money and the resources, they will do so. Building and maintaining these telephone lines is very expensive. It's complex, requires a lot more today than it used to before. I don't think that the people designing this thing back in the 20's or whenever it started had any idea what was going to happen today or in the future with telecommunications. So it's really rough to get this stuff installed, and it costs money like everything else nowadays. Things are going up. It costs money. And I think it's important that they be allowed to invest here in this area to keep up with our demands that we need for the future. Thank you. JUDGE STAPLETON: Mr. Roberds, thank you for your testimony. MR. FFITCH: Mr. Horrocks, Allan Horrocks. The next witness after that will be William Henry, Senior. Could you give your name and spell your last name, please. MR. HORROCKS: My name is Allan Horrocks, H-O-R-R-O-C-K-S. MR. FFITCH: And where do you reside? MR. HORROCKS: I reside here in Port Angeles. MR. FFITCH: And residence or business customer? MR. HORROCKS: Residence. MR. FFITCH: All right. MR. HORROCKS: Speaking for myself. MR. FFITCH: Thank you. MR. HORROCKS: I find the request of U S West to be unconscionable, and further, it's totally inconceivable of the utilities staff to propose any rate increases. I find it hard to understand how the Utilities Commission can judge the adequacy of the rates and service levels. Here they are saying that U S West is in desperate need of rate increase, yet this is a company whose sales have reached record levels over the last three years. In 1994, their revenue was $10.9 billion. In 1995, $11.7 billion, and in 1996, $12.9 billion. As you would expect, earnings from operations have been recorded at record levels over the same time period. 1994 at $2.5 billion, 1995 at $2.6 billion, and 1996, $2.85 billion, very significant. Earnings as a percent of revenues over those years averaged 23%. Even when other income and expenses and provision for taxes and extraordinary items were factored in, that income exceeds the $1.1 billion level. 1997 revenue and income is on a pace to exceed the levels set in 1996. Revenue is up 4.3% in the first nine months, and income from operations are up 7.8%. Income before extraordinary items and the effective changes in accounting are up 11.7% so far this year. It is interesting to note that revenues from local service is up 5.9%, revenue from intrastate access is up 9.4%, and revenue from interstate access is up 6.5%. These figures do not portray a company who is in desperate need of a rate change. I think their financial position shows a company that's in very good condition. This extreme growth rate shows a significant improvement in productivity and the results of them selling off many unprofitable telemarkets. The company currently serves as 10 of the nation's 15 fastest growing markets, and significant additional revenue and income will accrue to them through this growth period and will allow them to invest in much needed technology increases. I am truly concerned that if the $70.3 million rate increase is granted that it will be used to fund their activities in unrelated fields, such as the cellular market and cable television market, and not be used to improve services in the state, much less in Clallam County. I think that rather than a rate increase, the rate payers in this state should share in the profitability which they have contributed and overall rates reduced for all classes of users. The $37 million, if it is going to be approved for depreciation, should be funded out of the decrease in basic rates. I think that maybe our way of second rates are archaic. For example, we have a computer company that our local servers here, even in Clallam County, you can sign up for use of a computer, go on line for a flat $20 rate. You can talk anywhere in the world as long as you want as much as you want. And why we get into this detail level of justifying rate increase is unbelievable to me. Thank you. MR. FFITCH: Mr. Horrocks, can I just ask for the source of the numbers. You have obviously done some research. MR. HORROCKS: I went on line, went to the U S West Web page, and I got a copy of my letter here wit