UTILITIES AND TRANSPORTATION COMMISSION WASHINGTON UTILITIES AND ) DOCKET NO. UT-971140 TRANSPORTATION COMMISSION, ) ) VOLUME IV Complainant, ) Pages 28-260 v. ) WASHINGTON EXCHANGE CARRIER ) ASSOCIATION, et al., ) Respondent. ) _____________________________) A hearing in the above matter was held on May 26, 1998, at 9:43 a.m., at 1300 Evergreen Park Drive Southwest, Olympia, Washington, before Administrative Law Judge TERRENCE STAPLETON. The Commissioners present were ANNE LEVINSON, Chairwoman, RICHARD HEMSTAD, and WILLIAM R. GILLIS. Barbara L. Spurbeck, CCR Court Reporter The parties were present as follows: WASHINGTON EXCHANGE CARRIER ASSOCIATION, et al., by Richard A. Finnigan, Attorney at Law, 2405 Evergreen Park Drive, S.W., Suite B-3, Olympia, Washington, 98502. US WEST COMMUNICATIONS, INC., by Peter Butler, Attorney at Law, 1600 Seventh Avenue, Room 3206, Seattle, Washington 98191. THE COMMISSION, by Mary M. Tennyson, Assistant Attorney General, 1400 South Evergreen Park Drive, S.W., Olympia, Washington 98504-1220. RSS-COMPANIES, by ROBERT S. SNYDER, Attorney at Law, 1000 Second Avenue, 30th Floor, Seattle, Washington, 98104. SPRINT/UNITED TELEPHONE COMPANY OF NW, by ANN WILKINSON, Attorney at Law, 330 South Valley View Boulevard, Las Vegas, Nevada, 89107. AT&T, by SUSAN PROCTOR, Attorney at Law, 1875 Lawrence Street, Denver, Colorado, 80202. ____________________________________________________ INDEX OF WITNESSES ____________________________________________________ WITNESS: PAGE: ROBERT A. SMITH Direct Examination by Mr. Finnigan 90 Cross-Examination by Ms. Tennyson 91 Redirect Examination by Mr. Finnigan 124 Examination by Judge Stapleton 127 Recross-Examination by Mr. Snyder 130 CRAIG PHILLIPS Direct Examination by Mr. Finnigan 131 Cross-Examination by Ms. Tennyson 134 Cross-Examination by Ms. Wilkinson 157 Examination by Judge Stapleton 158 Examination by Commissioner Hemstad 161 Cross-Examination (Continuing) by Ms. Tennyson 163 Redirect Examination by Mr. Finnigan 165 Recross-Examination by Ms. Proctor 168 KENNETH T. BURCHETT Direct Examination by Mr. Finnigan 171 Cross-Examination by Ms. Tennyson 173 Cross-Examination by Mr. Butler 179 Cross-Examination by Mr. Snyder 183 ROBERT A. SMITH Direct Examination by Mr. Finnigan 185 Cross-Examination by Ms. Tennyson 186 Cross-Examination by Ms. Proctor 225 Cross-Examination by Mr. Butler 233 Redirect Examination by Mr. Finnigan 237 Recross-Examination by Ms. Tennyson 246 Redirect Examination by Mr. Finnigan 253 Recross-Examination by Ms. Proctor 256 ____________________________________________________ INDEX OF EXHIBITS ____________________________________________________ EXHIBIT: MARKED: ADMITTED: Number 1 83 91 Number C-2 83 91 Number 3 83 91 Number 4 83 91 Number 5 83 91 Number 6 83 91 Number 7 83 91 Number 8 83 91 Number 9 84 134 Number C-10 84 134 Number 11 84 134 Number 12 84 134 Number 13 84 134 Number C-14 85 134 Number 15 85 134 Number 16 85 134 Number C-17 85 134 Number C-18 85 134 Number 20 85 134 Number C-21 85 134 Number C-22 86 * Number 23 86 * Number 24 87 * Number 25 87 * Number 26 87 * Number 27 87 * Number C-28 88 * Number 29 88 * Number 30 88 * Number 31 89 * Number 32 89 * Number 33 89 * Number 34 89 * Number 35 89 * Number 36 89 * Number C-37 89 * Number C-38 89 * Number 39 172 173 Number 40 185 185 Number C-41 185 185 Number C-42 186 257 Number 43 186 257 Number 44 186 257 (* Denotes exhibits not admitted this hearing day.) JUDGE STAPLETON: Let's be on the record, please. We are convened for a series of evidentiary hearings in the matter of the Washington Utilities and Transportation Commission, Complainant, versus Washington Exchange Carrier Association and others, Respondents, in Docket Number UT-971140. We are convened at 9:30 a.m. on Tuesday, May 26th, 1998, in Olympia, Washington, before Chairwoman Anne Levinson, Commissioner Richard Hemstad, Commissioner William R. Gillis, and Administrative Law Judge Terrence Stapleton. At this point in time, I will take appearances, please, from the Association and others. MR. FINNIGAN: Appearing on behalf of the Washington Exchange Carrier Association, my name is Richard A. Finnigan. My address is 2405 Evergreen Park Drive, S.W., Suite B-3, Olympia, Washington, 98502. I'm also appearing on behalf of several intervening companies. Do you want me to name them? JUDGE STAPLETON: No, just previously designated. MR. FINNIGAN: As previously designated as the RAF Companies. JUDGE STAPLETON: Thank you. For Commission Staff, please? MS. TENNYSON: My name is Mary M. Tennyson, I'm Senior Assistant Attorney General, appearing on behalf of the Commission Staff. My address is 1400 South Evergreen Park Drive, S.W., Olympia, Washington, 98504-0128. JUDGE STAPLETON: Thank you. For Intervenors AT&T. MR. GAYMAN: Your Honor, I'm filling in for our attorney, who will be arriving late. The appearance should be Susan Proctor, P-r-o-c-t-o-r, 1875 Lawrence Street, 15th Floor, Denver, Colorado, 80202. Telephone number 303-298-6164. E-mail address is SProctor -- JUDGE STAPLETON: That's all right. I think we already have that in the record. I'm sorry. Just name and address is sufficient for now. All right. For Intervenor Sprint/United Telephone. MS. WILKINSON: Yes, Your Honor. My name is Ann Wilkinson. My address is 330 South Valley View Boulevard, Las Vegas, Nevada, 89107, and my phone number is area code 702-244-7759. JUDGE STAPLETON: And I believe we do now have an e-mail address for you, do we not? MS. WILKINSON: Yes, we do. Would you like me to put that on the record? JUDGE STAPLETON: Yes, please put that on the record. MS. WILKINSON: My e-mail address is Ann.Wilkinson@mail.sprint.com. JUDGE STAPLETON: Great, thank you. Is this your first appearance before the WUTC? MS. WILKINSON: Yes, it is. JUDGE STAPLETON: Welcome. MS. WILKINSON: Thank you. JUDGE STAPLETON: All right. For Intervenor US West. MR. BUTLER: Peter Butler, 1600 Seventh Avenue, Room 3206, Seattle, Washington, 98191. Phone number is 206-343-4000. JUDGE STAPLETON: Thank you. For the denominated companies RSS? MR. SNYDER: Yes, appearing on behalf of those companies denominated as the RSS companies in this proceeding, I am Robert S. Snyder, S-n-y-d-e-r. My address is 1000 Second Avenue, 30th Floor, Seattle, Washington, 98104. JUDGE STAPLETON: Thank you. Is GTE appearing today? MR. FINNIGAN: Mr. Potter indicated to me on Friday that he would be waiving cross, but would like to reserve the opportunity to submit a brief, if he feels that's appropriate. The same is true for Mr. Pena, on behalf of MCI. I have no objection to their being allowed to submit a brief, though they're waiving cross. JUDGE STAPLETON: Does anyone else have a comment to make on the non-appearance for purposes of cross, but for purposes of filing a brief in this proceeding? All right. Hearing nothing, we will waive their appearance at the evidentiary hearings and permit them to file a post-hearing brief, if that is their desire. All right. Let's be off the record for a moment. (Discussion off the record.) JUDGE STAPLETON: Let's be back on the record. At this time, we will hear the oral argument on the motion to strike the testimony and exhibits of Maurice L. Twitchell, filed by the Washington Exchange Carrier Association, and the denominated RAF and RSS companies. I'll ask you to limit yourself to five minutes. Mr. Finnigan. MR. FINNIGAN: Thank you. Pursuant to your instruction, obviously I will not repeat the arguments that were contained in the written submittals, although I'll summarize the reply that I filed this morning. The argument on this motion boils down to whether or not it is appropriate for this type of filing, the WECA filing, to be done on a projected test year. And we've set forth the reasons why we believe that's appropriate, pointing to the language in U-85-23, 18th Supplemental Order, pointing to the Washington Universal Service Fund Administration Agreement, which has been specifically approved by Commission order and by contract, then the Commission-approved contract calls for the use of those projected cost data and minutes of use. I also pointed out the fact that the order in the '96 case, which set this filing in motion, called for the companies to file 1997 data with the Commission for examination in this proceeding. We believe that that is the appropriate approach to take. We believe that reverting to a 1996 historical test period, as offered by Commission Staff, contradicts that direction and introduces a level of regulatory lag that penalizes the companies for making prudent and wise investments in the state of Washington to serve customers in rural areas of the state. This morning I filed a reply to the Commission Staff response that was filed on Friday. There's two points that I make in that reply. The first is Staff points to the Commission's rule on access filings, which is WAC 480-80-047(2), and implies that because the rule says that, and this is a quote, "The tariffs shall reflect usage and cost data of the previous year," that that means that it's supposed to be done on a historical test period basis. It doesn't say that. It doesn't say you use a historical test period. What it says is the tariffs shall reflect usage and cost data of the previous year. That's precisely what a projected test year does. It bases the estimates, the projections for the usage and cost data on the information provided in the previous year. That is exactly how each tariff has been developed by WECA on a year-by-year basis since 1988. There's only been one year, 1987, there's only been one year in which a tariff wasn't filed, but every other year there has been a filing. And in each case, it was done exactly that way, in conformance with this rule, using the prior year's cost data and usage to project into the test year on projected demand units and revenue requirement basis. The second item I want to address is that, in the reply, Staff says that -- and again, this is a quote, "In this case, as Staff analysis shows that the companies are over-earning on the access charges," and then it goes to argue that that's a reason that they needed to go back and look at a '96 historical test year. There is no evidence in this record on over-earnings. There is evidence on what the company's revenue requirements is or should be. There is an illustrative exhibit, and it's not substantive evidence, it's an illustrative exhibit, which Staff uses to imply that there may be an excess revenue requirement. That's not earnings; that's a revenue requirement. There's no evidence that the companies actually received revenue at the levels of the revenue requirement. There's a major difference between trying to project out what the inappropriate -- or trying to establish what an appropriate revenue requirement is and coming in and saying that the company has excess earnings. Earnings aren't on this record. I will, and I do make this representation as attorney for WECA, in the filed requirements for the WECA pool for 1997, for the 1997 revenue requirement, the pool did not recover 100 percent of the revenue requirement. There was an under-recovery. So it's not in the record, either, but Staff's brought that up, so I thought it would be appropriate to put that forward. From our viewpoint, not only hasn't there been excess earnings; there's been under-recovery. We think it is appropriate, taking all of the facts into consideration, to strike that portion of Staff's testimony that relies on use of a 1996 historical test period, and the case can go forward from there. JUDGE STAPLETON: Thank you. Ms. Tennyson. COMMISSIONER HEMSTAD: Could I ask a question? JUDGE STAPLETON: Certainly. COMMISSIONER HEMSTAD: What is your response to the assertions from Staff that WECA did not provide the necessary permission so that the Staff could do the analysis and calculations that are required? MR. FINNIGAN: We believe that the companies did provide substantial and complete support. As you can see in the rebuttal testimony from each of the witnesses, they identified the types of information that they made available to Staff for those responses. We have a box of what constitutes the company's responses to data requests, both formal and informal, that was available to Staff to make a review. They provided the same type, and in fact, more information supporting this return or this revenue requirement, this filing, than has been provided to Staff in the past, and Staff has found that it is able to make recommendations as to whether or not to approve or not approve the filing in the past. So it's tough to understand why this year, suddenly the same quantity and quality of information was characterized as woefully inadequate. We, in fact, I think, provided a very complete picture of the intrastate filing, the support for the revenue requirement contained in this tariff filing, and Staff had the opportunity to review that information and make a determination. I believe Staff wanted to go beyond the scope of this filing and look at other issues, and therefore, wanted the other types of information that were, in fact, provided. COMMISSIONER HEMSTAD: Why couldn't Staff make copies of materials and review and analyze them in the Staff offices or receive the originals and review them in a time frame that, at least in Staff's perspective, that would be appropriate? MR. FINNIGAN: The information that they reviewed on the interstates -- first, two responses. One, on the intrastate material that's provided, before the case was actually convened, they were provided an opportunity to review that material at a third -- at a neutral location where they could review and examine that material. That's pursuant to an arrangement that's set forth, essentially, in the Commission's Rules, and it was based on negotiations between the company and the Commission several years ago as to what would be an appropriate mechanism to allow Staff access prior to the case being convened and a protective order being put in place and the need to keep a level of confidentiality about this information. So they were given that opportunity, which exists in the Commission Rule, and they took that opportunity. The second part, on the interstate studies, we didn't believe they were appropriate to be provided in this case. They were not essential to the issues in this case. However, pursuant to Staff's motion to compel, an agreement was reached, a compromise was reached that they felt was acceptable, that they would review that information at the neutral location. And even after that agreement was reached, we even went further and said, okay, they found that inconvenient. They asked, Can we take the studies back with us and look at them back in our offices. And although that was beyond what was agreed to, we said, Fine, you can do that, but we're concerned that we need to maintain the level of confidentiality related to that information. So pick them up when you're on your way into work, take them, carry them through the day, and bring them back. That's fine, if that's what you want to do. So we were trying to make accommodations pursuant to what Staff had agreed to as part of their motion to compel. They apparently found that satisfactory, because they dropped their motion to compel. They didn't pursue it any further. So that's on the interstate. Going back again to the intrastate, once the Commission -- once this proceeding was commenced and a discovery -- the discovery rule was invoked and a confidentiality order was in place, I think all of the companies, but certainly the vast majority of the companies, provided intrastate study directly to the Commission for use on the Commission premises, in response to -- I believe it was Data Request Number Two. COMMISSIONER HEMSTAD: So I take it it's your position there is no basis for the Staff complaint about inability to get access on a timely basis to information? MR. FINNIGAN: Yes, that is my position. JUDGE STAPLETON: Any other questions of Mr. Finnigan at the moment? All right. Ms. Tennyson. MS. TENNYSON: Thank you. MR. SNYDER: Excuse me. We had joined in this motion, and I wondered if I may speak to it? JUDGE STAPLETON: Mr. Snyder, I believe the motion was only signed by Mr. Finnigan, was it not? I understood that he would represent the Association and the individual companies. I believe the points -- MR. FINNIGAN: I think it was signed by Mr. Snyder by me, pursuant to a telephonic authorization. JUDGE STAPLETON: All right, Mr. Snyder. I'll give you three minutes. MR. SNYDER: Thank you very much. I'd like to respond to two pieces of this. The first is the issue that has been raised by Commissioner Hemstad as to the adequacy of the data that was provided. I'd like to comment on a couple of aspects of that. Number one, prior to the commencement of the formal proceeding in this, the reason the information was made available in Olympia at a third party location was to obviate the need for Staff to travel to the company premises that are scattered around the state. It was for Staff's convenience that we use that kind of a mechanism, and it has been used for years, and used satisfactorily. The information was originally provided on a voluntary basis, starting in August, in response to Commission Staff informal request. So far as I know, there was no complaint by the Staff of the adequacy of the information that was provided. Substantially the same questions were repeated again in November as formal data requests, prior to the entry of a prehearing order authorizing the invocation of the discovery rule. Again, there was no indication that the information that was being supplied was inadequate. There was, then, the motion to compel very late in the process. A settlement of that was reached. In essence, to try to change test years, which is what the Staff is trying to do, to me sounds as though it is a sanctioned failure to make discovery, and yet no discovery order was entered requiring discovery. The motion was withdrawn. So to impose what is tantamount to a sanction by the change in test years, since our entire test year is based on '97, would be undue sanction in this case. The other aspect of the motion upon which I would like to comment is the second portion of it, which was in the alternative, to strike those portions of Mr. Twitchell's testimony that are directed to corporate operations expense. I didn't want to lose sight of that portion of the motion, but just, in the alternative, that's a secondary position. And that is that the evidence upon which Mr. Twitchell seeks to rely for his entire analysis for corporate operations expense not only is not part of the record, but has not been authenticated in any way. For purposes of this record, it is multiple-layered hearsay, with no opportunity by the Companies to cross-examine the source data in any way or its compilation. It was compiled by third parties, allegedly, and we have no opportunity to examine it for completeness. So I want to simply note the pendency of that motion, as well, and urge that, at a minimum, Commission strike that portion of Mr. Twitchell's testimony noted in the motion directed to corporate operations expense and his Exhibit MLT C-6, which is based upon that analysis for which there is no basis whatsoever in the record and for which he has not been qualified as an expert. Thank you. JUDGE STAPLETON: Thank you, Mr. Snyder. MS. TENNYSON: Thank you. In responding to the arguments made by Mr. Finnigan, I think he mischaracterizes several aspects of Mr. Twitchell's testimony. Mr. Twitchell, in his testimony, doesn't criticize the companies' use of a projected test year, per se, and as is pointed out by Commissioner Hemstad's question, the problem is Staff did attempt to analyze the data that the companies provided and additional data Staff requested, and was not able to, from the studies provided, to properly audit or verify the projected figures that the Staff was provided by the companies. So therefore, Staff felt they needed to go to something more concrete, and then went to 1996 actual figures in order to do that. Those are proper matters for the companies and WECA to inquire into on cross-examination of Mr. Twitchell. They have had an opportunity in their rebuttal to reply to that, whereas Staff does not have an opportunity to provide rebuttal testimony at this point. Again, the statement in the response about the companies over-earning is not used as a justification for using a historical test year, but for a reason why Staff would -- felt it needed to use an alternative analysis rather than just rejecting the filing or just criticizing the filing. Throughout this case, we have had the struggle between the companies and Staff with what Staff needed to properly audit this case. The companies said, You've never asked for it before. Well, Staff, in each case, has an opportunity to decide what information it wants to review and to review the data that's provided and determine whether the Staff feels it has been properly supported. In this case, in reviewing the data that was provided, the studies that were provided, Mr. Twitchell did not feel that they provided the information that was necessary in order to properly verify the figures to audit the companies. Essentially, the companies said, We gave you what we think you need, and refused to go any further. Staff doesn't think it received what it needed, wanted to present the Commissioners with an alternative analysis and came up with that analysis, wanted to use solid numbers, use actual figures from 1996, and attempted to make adjustments, as appropriate, to bring it up, the information from the 1997 filings, to use that information to make it an appropriate comparison with the 1997 test year. COMMISSIONER HEMSTAD: Ms. Tennyson, may I ask a question? MS. TENNYSON: Certainly. COMMISSIONER HEMSTAD: Did the motion to compel raise those issues? And in the settlement of that matter, why wasn't that satisfactory? MS. TENNYSON: The motion to compel did raise those issues. I personally was not present when that was argued and the settlement was reached. I was on vacation and another individual handled it, so I -- and I don't have a precise knowledge of exactly how -- I didn't participate in those negotiations, as to why it was settled. It was a matter that was of concern to Staff, and it is my understanding that the companies -- primarily, the motion to compel said, We want everything we asked for, which included the interstate data, as well as the intrastate data. As laid out in my response to the motion, the Staff felt that the proper approach that they needed to verify was to go from total company, to take out the interstate data, and then look at intrastate. What we were given in all the studies, the initial responses, was the total Washington operations, and then jumping just to the intrastate data, with no way to say, Does this all add up to 100 or does it add up to 80 or does it add up to 150. The Staff felt that that was necessary in order to audit that. Reviewing the data, basically, we withdrew the motion. The companies had substantial concerns about the confidentiality of the data as regards the Intervenors and the other companies being allowed to look at the data, the interstate data. And basically, as an accommodation, we did then agree to ask for that information separately and review it separately, as opposed to in the motion to compel. In terms of the reference to over-earnings, the Staff in this case has recommended a decrease in the CCL rates as a result of what the Staff believes is an over-earning, and that is why that matter is relevant; not that the companies are over-earning. In general, we're saying because we believe that the Staff testimony shows an over-earning situation, that the CCL rate should be reduced. In terms of Mr. Snyder's reference that the companies provided the information early on in the process for review at a neutral location, and that was just the intrastate information, and as I believe is set out in Mr. Twitchell's direct testimony, Staff's understanding was that they could make notes from that data, but not to even enter it into their computer, which makes it pretty ineffective for them to review and to record. Overall, we've had a difficult time with getting the information and having it be reviewed in an efficient way. Some of the data that -- some of the responses to data requests that we received -- Staff's testimony was due in April, and some of the data response that we received didn't come in -- some supplemental responses came in April 6th, some of them came in in March. Things have been coming in piecemeal, and Staff needed to proceed with an approach where it could come up with a recommendation for the Commissioners. Again, Staff didn't feel it was appropriate just to criticize the filing and say, No, it's not supported, because then that leaves the companies at a higher rate of return for the CCL aspect of the revenues, and we didn't feel it would be a responsible approach to take. As for the corporate analysis, basically, averages referring to mass data, mega net averages, or median figures to compare others is a commonly used way of looking at data in lots of fields. As noted in my response to the motion, Mr. Twitchell has been working for this Commission for in excess of 20 years, he has done a lot of review of companies. Other Staff have, in other filings, made adjustments to the corporate salaries and expenses, as well. If we need an expert on every minor part of the companies' earnings or every part of their operations in order to make adjustments, then we need to have specialized experts in every field. Mr. Twitchell has substantial experience in reviewing corporate operations in general and telephone company operations. And we believe it is appropriate to allow his testimony on that to be presented. Again, questions about data, about reliability of data, can be brought out on cross-examination. If the companies feel it's not appropriate to rely on, they can bring that out in the way they ask their questions. Thank you. JUDGE STAPLETON: Any other questions for Ms. Tennyson or Mr. Finnigan at this time? Ms. Tennyson, in your response, you go to some length to describe the Staff's need for total company Washington state operations, and the three-piece parts that you believe Staff needed to have adequate information to audit in order to verify that the three-piece parts of interstate toll, intrastate toll, and local added up to 100 percent. Do you still contest that you were not provided with the complete information in order to audit each of those three components of the total state Washington operations in order to verify that, between the three, they do not exceed 100 percent of the revenue requirement? MS. TENNYSON: Yes. JUDGE STAPLETON: Mr. Finnigan, did you want to have a moment to wrap up or rebut? MR. FINNIGAN: Just briefly. One of the things that I want to call to your attention is that the data requests that the companies responded to fully and without -- let me back up. Those data requests that were related to the intrastate information, the companies provided Staff with the information they needed to -- or the responses that the Staff were seeking on those issues. It was the question about the interstate data where most of the conflict came into play. Staff did not seek, as far as I'm aware, any additional information related to the intrastate filing. That's what we believe is before you today. It began when it brought that motion to compel to focus on interstate data that we didn't believe was appropriate to start with, but agreed to let them look at, as a matter of accommoda