UTILITIES AND TRANSPORTATION COMMISSION WASHINGTON UTILITIES AND ) DOCKET NO. UT-971140 TRANSPORTATION COMMISSION, ) ) VOLUME V Complainant, ) Pages 261-440 v. ) WASHINGTON EXCHANGE CARRIER ) ASSOCIATION, et al., ) Respondent. ) _____________________________) A hearing in the above matter was held on May 27, 1998, at 8:14 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: PATRICIA PARKER Direct Examination by Ms. Proctor 268 Cross-Examination by Mr. Snyder 272 Cross-Examination by Mr. Finnigan 333 Cross-Examination by Ms. Tennyson 342 Cross-Examination by Mr. Butler 343 Redirect Examination by Ms. Proctor 344 Recross-Examination by Mr. Finnigan 347 CHARLES M. KING, III Direct Examination by Mr. Finnigan 353 Cross-Examination by Ms. Tennyson 356 Redirect Examination by Mr. Finnigan 386 Direct Examination by Mr. Snyder 394 Cross-Examination by Ms. Tennyson 396 Redirect Examination by Mr. Snyder 400 Recross-Examination by Ms. Tennyson 403 THOMAS P. GORMAN Direct Examination by Mr. Finnigan 405 Cross-Examination by Ms. Tennyson 406 Redirect Examination by Mr. Finnigan 410 SANDRA HANSON Direct Examination by Mr. Finnigan 412 Cross-Examination by Ms. Tennyson 413 Redirect Examination by Mr. Finnigan 422 JANA MANTEROLA Direct Examination by Mr. Finnigan 427 Cross Examination by Ms. Tennyson 428 Redirect Examination by Mr. Finnigan 438 Examination by Chairwoman Levinson 440 ____________________________________________________ INDEX OF EXHIBITS ____________________________________________________ EXHIBIT: MARKED: ADMITTED: Number 45 268 333 Number C-46 268 333 Number C-47 268 333 Number 48 268 333 Number 49 268 333 Number C-50 268 333 Number 51 351 350 Number C-52 351 350 Number C-53 351 350 Number 54 351 350 Number 55 351 350 Number C-56 351 350 Number 57 351 350 Number C-58 351 350 Number C-59 351 350 Number C-60 352 * Number 61 352 * Number 62 352 * Number C-63 352 * Number C-64 352 * Number 65 353 * Number 66 393 390 Number C-67 393 390 Number C-68 393 390 Number 69 393 390 Number C-70 393 390 Number C-71 394 390 Number C-72 394 390 Number C-73 395 * Number C-74 395 * Number 75 404 * Number 76 404 * Number T-77 411 408 Number C-78 411 408 Number T-79 411 408 Number C-80 406 408 Number C-81 412 * Number C-82 412 * Number 83 412 * Number T-84 426 423 Number C-85 426 423 Number T-86 426 423 Number C-87 426 423 Number C-88 428 * Number 89 428 * *(Denotes exhibits not admitted this hearing day.) JUDGE STAPLETON: This hearing will please come to order. This is a continuation of the evidentiary hearing to the matter of the Washington Utilities and Transportation Commission, Complainant, versus Washington Exchange Carrier Association, et al., Respondents, in Docket Number UT-971140. Today's date is Wednesday, May the 27th. We're convened in Olympia, Washington, before Chairwoman Anne Levinson and Commissioners Richard Hemstad, William R. Gillis, and Administrative Law Judge Terrence Stapleton. As a procedural matter, the Commissioners and I met yesterday at the close of the hearings and reviewed the experience of Patricia Parker, and have decided that the same rationale attending the Commission's denial of the motion to strike Mr. Twitchell's testimony regarding corporate expense attends to Ms. Parker and her testimony, and therefore, will deny the motion to strike that testimony. That also impacts the AT&T motion to strike portions of WECA witnesses' testimony, and that motion is now moot and, therefore, need not be addressed. We have marked the testimony of the next witness, Patricia Parker, for AT&T, as follows. PP T-1, the direct testimony of Ms. Parker, filed April 10th, 1998, is marked for identification as Exhibit 45. And her attachment, PP C-A marked as Exhibit C-46; C-B marked as Exhibit C-47; Exhibit PP-C is Exhibit 48; PP-D, Exhibit 49; and PP-C-E is marked as Exhibit C-50. Will you please stand and raise your right hand? Whereupon, PATRICIA PARKER, having been first duly sworn by Judge Stapleton, was called as a witness herein and was examined and testified as follows: JUDGE STAPLETON: Thank you. Ms. Proctor. MS. PROCTOR: Thank you. D I R E C T E X A M I N A T I O N BY MS. PROCTOR: Q. Please state your name and address for the record. A. My name is Patricia A. Parker. My address is 1875 Lawrence, Eighth Floor, Denver, Colorado. Q. And by whom are you currently employed? A. AT&T. Q. And did you cause to be prepared and filed in this docket what have been marked as Exhibits 45, your direct testimony, and Exhibits C-46, C-47, 48, 49, and C-50? A. Yes. Q. And are they true and correct, to the best of your knowledge? A. Yes. MS. PROCTOR: We would move the admission of Exhibits 45 through C-50. JUDGE STAPLETON: Objections? MR. SNYDER: I would object, Your Honor, to the admission of Exhibit 49. There's no foundation been laid for that. There's no opportunity to cross-examine regarding the compilation of the numbers that are set forth in that exhibit. It's our understanding that, from the testimony, that that information was provided to Ms. Parker by third parties. There is no attestation to the accuracy of the information set forth therein. There's no ability to cross-examine with respect to it. There's no ability to cross-examine with respect to the completeness or accuracy of the transcription and compilation of the numbers set forth in that exhibit. In short, the information contained in it is multiple layers of hearsay, and we do not have an adequate opportunity for cross-examination with respect to the data upon which Ms. Parker relies in that exhibit. JUDGE STAPLETON: Ms. Proctor. MS. PROCTOR: I thought that was the basis of the motion that had just been denied. And we've addressed the fact that this is data filed by NECA. It is filed with the FCC ultimately. It is publicly available. That's how we obtained it. It is submitted by the various companies, including those companies who are involved in this case. It is submitted by the companies under certification to the FCC that it is correct and it is the basis for calculation and disbursing of the Federal High Cost Fund. So there's obviously no basis for their claim that there's no foundation, no reliability to the information, and no availability of the information. It's the company's own data. MR. SNYDER: Your Honor, the testimony at page 10, lines 10 through 13 -- actually, lines 10 through 11, the only foundation for this testimony, if it can be called foundation, it says, Using the underlying cost detail filed by the companies for their universal service fund 1997 submission of 1996 study results with NECA. I compare there's no evidence in the record this information has been filed anywhere, other than submitted to NECA. There's no basis on how this came into the possession of this witness. I understand we have some representations by Counsel, but we don't have anything in the record as to where this information came from or whether the numbers represent the numbers the company supplied or overrides of the information that NECA may have made to the information, nor, again, the issues of the completeness of the compilation. JUDGE STAPLETON: Ms. Proctor, are you prepared to address some of those issues through the laying the foundation of this witness at this time? MS. PROCTOR: Well, again, I thought that was addressed in their motion to strike. I thought that was the basis of -- one of the bases of the motion to strike, was that there was no foundation for the material upon which Ms. Parker, as an expert witness, relied. And we addressed it in there, in our response to the motion, because, first of all, it is obviously the type of material upon which experts, such as the FCC and Mr. Twitchell, have indeed relied, and it is appropriate for them to do so. Secondly, it would be admissible as the admission of a party opponent. The material is publicly available. If the companies had questions about the material, Ms. Parker's testimony has been on file since April 10th. Obviously, discovery was the appropriate way to inquire into the material. We obtained it electronically. It is filed, as the exhibit to our motion shows, by NECA with the FCC, and it is those electronic files from which Ms. Parker obtained the data. MR. SNYDER: Your Honor, could the witness perhaps address these matters, rather than Counsel, if that is, in fact, the case? I don't hear that this is foundation of an evidentiary nature. Again, it's Counsel. JUDGE STAPLETON: All right. Let's begin with cross-examination of this witness. You can explore your questions on foundation of this document at that time, and we'll reserve the motion to admit the exhibits into the record until completion of that cross. C R O S S E X A M I N A T I O N BY MR. SNYDER: Q. Good morning, Ms. Parker. Let us start, then, with the subject that we were just discussing. Do you have before you a copy of what has been marked as Exhibit 49? A. Yes. Q. Could you please identify for us the source of the information that is set forth in that exhibit? A. The source of that information is data that the companies are required to file with NECA, as a result of FCC Rules, that is used in the calculation for the Federal High Cost Fund. AT&T has been receiving this information electronically since about 1988, so we have the data from '88 until the data that you see here. So we have been tracking not only the corporate overheads, line counts, but other types of expenses that are filed, including, but not limited to corporate overhead, corporate -- Q. Excuse me. Could I just ask that you confine your answer to the question that I asked, which is where did the information come from? A. It comes from the electronic files that are filed with NECA, which are Lotus 1,2,3 files. Q. And how did you obtain it? A. I received it through our corporate offices in New Jersey. Q. So you did not yourself obtain this information directly? A. We get it through an organization like everyone else. I think it's called ITS. Q. Well, again, let me ask my question, please. Did you obtain this information from ITS? A. No. Q. Do you know who did obtain it from ITS? A. We get a normal distribution, have for years. It goes directly into a group, and I can give you some names, if you'd like. Q. This is a group within AT&T? A. That is correct. Q. So it passes through this group within AT&T, and is that a group in New Jersey, in your headquarters offices? A. That's correct. Q. Okay. And then how is it transmitted to you? A. Electronically. Q. By whom? A. The people that are involved in -- a gentleman called Fred Hedmark, and another woman called Anna Brutza. Q. And are they the people who themselves obtained it from the ITS? A. Yes. Q. You know that they are the ones who obtained it, or is there someone else? A. Well, are you saying the one that receives the actual file? No. Q. Yes, I'm trying to follow the chain of custody of these files. Someone at AT&T, I presume, from your testimony, received the information from ITS; is that correct? A. That's correct. Q. Is it the same person who received it that forwarded the files to you? A. I don't know that. MS. PROCTOR: Your Honor, I'm going to object. AT&T is obviously a corporation. Ms. Parker is appearing here as an employee of AT&T. She has testified that AT&T obtained the data from ITS, and I think that establishes any custody chain. You do not have to -- JUDGE STAPLETON: Do you have any questions in this regard, Mr. Snyder? MR. SNYDER: Well, I think I asked my question, Your Honor. I think there's a problem with the -- let me ask a related question that may clarify. Q. This is an electronic file, is it not, Ms. Parker? A. That's correct. Q. Is it subject to electronic manipulation? I don't necessarily mean improper, but manipulation? A. Certainly. Q. Do you know whether the data was modified in any respect prior to the file being forwarded to you, either as to format or in any other respect? A. Not that I'm aware of, no. Q. But do you know one way or the other whether it was manipulated or not? A. No, I don't. JUDGE STAPLETON: Do you have other questions you want to ask about the foundation of this document or her use of this document? Q. Once the information was received by you, was it altered by you in any fashion? A. Certainly. Not the actual numbers. The file that we have is quite large, and AT&T, for obvious reasons, keeps the file intact, because it's a trend. And there are a variety of information in this file and it -- which includes various things like investment associated with operator systems, everything that is associated with the NECA filing, so it's a very large file. And to sort this, I stripped the rest of the data away and then do the sort. MR. SNYDER: Those are the only questions I have directed to foundation, Your Honor. JUDGE STAPLETON: Thank you. Please continue. MR. SNYDER: I'll proceed now. Q. Ms. Parker, if I could ask you to turn to page three of your testimony, at lines 16 and 17. You there have the statement referring to -- MS. PROCTOR: I'm sorry, which page, Mr. Snyder? MR. SNYDER: Page three, lines 16 and 17. MS. PROCTOR: Thank you. Q. The sentence there reads, These charges are assessed to interexchange carriers, (IXCs), and these costs are then recovered through the prices the IXCs charge Washington consumers. Do you see that language? A. That's correct. Q. And the charges to which you're referring are the WECA charges that are at issue in this proceeding; is that correct? A. That's correct. Q. Is it your testimony that if the WECA proposed rates are approved in this proceeding, AT&T will increase its rates to Washington consumers? A. I think AT&T prices its services based on what the market is doing at the time. Right now, we have a price per minute of about 10 cents a minute, so from a toll standpoint, it's about 10 cents a minute. From an access standpoint and from an underlying cost standpoint, a toll minute takes two access minutes. So the charges would be whatever the unit cost here times two, in general. And so what you have is not only these charges, which is the CCLC and the universal service fund charge, but you also have to add in local switches and transport. So in order for us -- the 10 cents to cover the charge that WECA charges in total, all elements, that you would have to have a total rate of something less than five cents a minute for each minute of access. Q. But you do blend your costs across the state of Washington, do you not? A. That's correct. Q. And WECA charges are not the only charges that go into the cost profile of your blended rates in the state of Washington; is that correct? A. Yes. Q. Now, let me return to my question. A. Okay. Q. My question is if these rates are approved, will AT&T raise its prices to consumers in the state of Washington? Is that your testimony? A. Again, I'd have to go back to we're -- we would be matching the 10 cents a minute. There are other plans out there that are at six and five, so whether or not we would raise it would be depending on the competitive pressure. Q. So the answer is you may increase rates to consumers and you may not? A. That's correct. Q. All right. Now, conversely, if WECA's rates resulting from this proceeding were to be reduced, let's just take, for example, if Mr. Twitchell's adjustments were all to be accepted by the Commission as proposed, that would result, would it not, in a reduction to the current WECA rates? A. That's correct. Q. Would AT&T flow those reductions through immediately to Washington consumers? And that's a yes or no question, please. MS. PROCTOR: Not necessarily. I object. MR. SNYDER: Well, she may -- JUDGE STAPLETON: Please don't do this. The procedure we generally follow here, and I'll repeat it for your information, since you don't regularly appear before the Commission. A witness is allowed to answer a question yes, no, or maybe, and may explain their answer as appropriate. MR. SNYDER: I'm sorry, that's what I was going to explain. THE WITNESS: I'll answer two ways. If the sum of all of the access elements exceeds the 10 cents, we probably wouldn't consider lowering the price. The upshot of that is that we just lose less money on those toll routes. I think that is probably true for any IXC or, for that matter, US West. I mean, I was in -- I can't remember what case here in Washington -- actually, it was the GTE toll case. US West actually benefited from getting out of that market because the access charges were more than the revenues that they gained. MR. SNYDER: Your Honor, may I have a response to my question? I have still not received an answer to the question as to -- JUDGE STAPLETON: Perhaps if you would -- MS. PROCTOR: Objection. The witness stated she would answer in two ways, and she did. MR. SNYDER: She's offering the explanation without giving the answer. Do we have an answer whether they will pass this through to consumers? If there's an embellishment or explanation that she would then like to add, that's fine, but I'd like to have an answer to the question, if I may, Your Honor. JUDGE STAPLETON: All right. Ask the question again, please. Q. If the adjustments proposed by Mr. Twitchell were to be adopted by this Commission in their entirety and WECA rates reduced accordingly, would AT&T pass those reductions through immediately to Washington consumers? A. I don't know, because I don't know what the financial impact is on toll out of those areas. Q. Thank you. If I may direct your attention to page four, lines 12 and 13, please, you -- 12 through 14, I beg your pardon. You there state, There are various factors that are then used to allocate the portions of revenue requirement to the interstate jurisdiction. The remaining revenue requirement is to be recovered from the intrastate jurisdiction. Do you see that portion of your testimony? A. Yes. Q. You would agree, would you not, that there are differences in the rate base components that are allowable between the interstate jurisdiction and the intrastate jurisdiction? A. Yes. Q. Would you agree that there are differences between the types of expenses that are allowable in the interstate jurisdiction and that are allowable in the intrastate jurisdiction? A. Yes. Q. Can you properly determine an intrastate revenue requirement in this state by simply taking unseparated numbers and subtracting the interstate revenue requirement without making adjustments for those differences in rate base and expenses? A. I'm sorry, say that again. Q. Can you determine a proper intrastate revenue requirement for the state of Washington by subtracting from total revenue requirements determined on an interstate basis the portion of those revenue requirements that is in the interstate jurisdiction? A. Yes. I would say yes. Q. Notwithstanding the differences in rate base and notwithstanding the differences in expenses that are allowable? A. Well, yes. I mean, it's done all the time. I mean, what is allowed on the interstate side -- and it doesn't matter which incumbent LEC it is, whether it be US West or GTE, the FCC allows certain things. A lot of state commissions -- each state Commission has their own things that are allowable and not allowable. Q. Doesn't that require, then, that you run a separate and distinct intrastate study, perhaps starting with the same Part 32 numbers, but using the rate base composition and the allowable expenses that are recognized in the intrastate jurisdiction for rate-making purposes? A. I don't see why that's absolutely necessary. Q. Isn't that the common way it is done, however, is that you run a separate study using intrastate rate base components and intrastate adjustment to get your expenses to an intrastate rate-making basis? A. I'm trying to think how the US West rate case was run. Q. Well, you review a large number of independent companies, do you not? A. Oh, yes. Q. Isn't that the common way that independent telephone companies perform their cost studies? A. No, I would say not. In fact, the ones I'm most used to is where you get a full jurisdictional, which means you see the interstate, the intrastate access and local piece, and then you see the pro forma adjustments to take the stuff that is allowed out of the interstate -- or take the stuff that's allowed in the interstate and take it out of the intrastate. So it's almost a pro forma adjustment, and then you run with the numbers. Q. Is it your testimony that you can determine an interstate -- an entire company revenue requirement using interstate rate base and interstate expenses and then simply subtract the portion of that that's assigned to the interstate jurisdiction and come up with an accurate intrastate revenue requirement? A. Subtract just the interstate? Q. Subtract just the interstate? A. I would say, in the case -- what you'd have to do -- say, for instance, I know of one state that doesn't allow lobbying expenses. You would take all of the lobbying expenses out, not just interstate. Q. And then you would have to rerun the study, would you not, with that excluded, because it would affect such things as GFF? A. I'm trying to think. You know, I'd have to say no, and I say that because a lot of things -- and I base it, again, on US West, the way US West does a rate case, to get to their revenue requirement needs or whatever, their standard separations factors, either before or post, after the adjustments, they don't change them. So it's one of those that it's just -- they file for a case, and whatever happens on the disallowance basis, when they true it up to get to their revenue requirement they need, then they use the same separation factors. Q. At page four, lines 23 and 24, you state that 25 percent of the loop revenue requirement is allocated to the interstate jurisdiction. Do you see that? A. That's correct. Q. In fact, is not more than 25 percent assigned -- of the loop revenue requirement assigned to the interstate jurisdiction by virtue of the additional expense assignment made for universal service fund purposes? A. You're correct. Q. And at the time that the U-85-23 Order was entered by this Commission, the 18th Supplemental Order in U-85-23, is it not true that that additional expense assignment was assigned to and recovered through the interstate carrier common line access charges, interstate carrier common line access charges? MS. PROCTOR: Mr. Snyder, could I ask if you have a date for when that order was entered? MR. SNYDER: I think official notice has been taken of the order. MS. PROCTOR: That doesn't help. MR. SNYDER: Just a moment. The service date on the face page reads December 30, 1986. THE WITNESS: And if I can repeat the question that you asked. You asked if the universal service funds on the federal side were recovered through the CCLC at that time; is that correct? Q. Yes. A. I cannot answer that question, simply because I started looking at separations in Part 32 accounting and part -- the new parts. I don't -- I'm not well versed on what happened prior to that. Q. And when was that? A. Well, the FCC changed their rules in 1987, '88, so this had to have been something that was probably, I don't know, Part 67 and Part 31. Q. If I were to ask you, when you started in 1987 or 1988 in separations, was the universal service fund amount at the interstate level recovered through the carrier, the interstate carrier common line access charge? A. I'd have to say yes. There may be some modifications. That's why I'm kind of hesitating. They made some modifications in later years. So yes, I'd have to say yes. Q. Were you present in the room for Mr. Burchett's testimony yesterday? A. Yes. Q. Are the modifications to which you are referring the modifications that he mentioned that he identified as having been made in 1989? A. That was about the time frame. Q. At page five, lines six and seven, you talk about the -- I beg your pardon. You talk about the DEM weighting factor. You refer to it as being a factor of three. Do you see that? A. That's correct. Q. You say it varies by size of company, but for small ILECs, the weighting is three. What is the size criterion for companies to which the three times weighting applies? A. Ten-thousand lines or less. Q. At page six, footnote three, you are discussing your Exhibit Number C-46, am I correct? A. That's correct. Q. I'd like to ask you, you there state that in the case of Kalama and Hood Canal, the results are higher, indicating over-recovery in the interstate jurisdiction. Do you see that language? A. That's correct. Q. And by higher, you mean higher than 25 percent? A. Yes. Q. Is there any other possible explanation for why those percentages for certain companies might exceed 25 percent, other than your hypothesis of over-recovery? A. There's possibly two, and -- actually three. These numbers I got out of the files that the companies provided, which was the NECA filings for 1996, and we went over to an office in Denver to look at these files. And so we were pulling numbers off these sheets, and we had a very short time frame to do it. So the first one, there could be an error. The second is error on our part or there could have been an error in the file. The third and last is when the companies went from an allocator, I will call SPF, years ago, to the allocator which is 25 percent today -- Q. Are you referring to the interstate allocator? A. That's correct. There were rules in place that they were supposed to phase down -- well, some companies phased up to the 25 percent, some companies phased down to the 25 percent, but in some cases, when the phase was too great, the FCC allowed them to phase it in over a longer period of time, and that could be another possible reason. Q. Am I correct that you, in fact, do not know whether the two companies you name in the footnote, Hood Canal and Kalama, in fact experienced any over-recovery? A. No, I do not. Q. Now, if I could turn, then, to Exhibit C-46 for a moment, please. And I'd like to focus your attention in particular on the column labeled NTS. Could you describe for us how these numbers were calculated? And by that, I mean, I presume, since it is expressed as a percentage, a particular number or group of numbers was divided by some other number or group of numbers; am I correct? A. That's correct.