COMMISSION WASHINGTON UTILITIES AND ) TRANSPORTATION COMMISSION, ) Docket No. UT-970766 Complainant, ) Volume 12 ) Pages 769 - 950 vs. ) U S WEST COMMUNICATIONS, INC., ) Respondent. ) ----------------------------- ) A hearing in the above matter was held on December 12, 1997 at 9:05 pm. at 1300 South Evergreen Park Drive Southwest, Olympia, Washington, before Chairwoman ANNE LEVINSON, Commissioners RICHARD HEMSTAD, WILLIAM R. GILLIS and Administrative Law Judge C. ROBERT WALLIS. The parties were present as follows: U S WEST COMMUNICATIONS, INC. by LISA ANDERL and DOUGLAS OWENS, Attorneys at Law, 1600 7th Avenue, Room 3206, Seattle, Washington 98191. FOR THE PUBLIC, ROBERT F. MANIFOLD, Assistant Attorney General, 900 Fourth Avenue, Suite 2000, Seattle, Washington 98164. WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION STAFF, by GREGORY TRAUTMAN, Assistant Attorney General, 1400 South Evergreen Park Drive Southwest, Olympia, Washington 98054. AMERICAN ASSOCIATION OF RETIRED PERSONS, by RONALD L. ROSEMAN, Attorney at Law, 2011 14h Avenue East, Seattle, Washington 98112. Cheryl Macdonald, CSR Court Reporter APPEARANCES (Cont'd.) MCI, by ROGELIO PENA, Senior Attorney, 707 17th Street, Suite 3600, Denver, Colorado 80202 and CLYDE MACIVER, Attorney at Law, 4400 Two Union Square, 601 Union Street, Seattle, Washington 98101. TRACER, by ARTHUR BUTLER, Attorney at Law, 5450 Two Union Square, 601 Union Street, Seattle, Washington 98101. I N D E X WITNESS: DIRECT CROSS REDIRECT RECROSS EXAM TWITCHELL 772 774 806 807 798 817 BLACKMON 821 824 833 BROSCH 865 867 945 948 EXHIBITS: MARKED ADMITTED 95 869 105T, 106, 107 772 774 111T, 112, 113T, 114 820 822 121TC, 121A, 122 864 866 123 864 866 124 864 866 125C 864 866 126 864 866 127 864 128C 864 129 864 130 864 131C 864 132C 864 133C 864 134 864 867 135 864 867 136 864 867 137 864 867 138 864 867 139 864 140 864 141 949 949 P R O C E E D I N G S JUDGE WALLIS: Let us be on the record, please, for our Friday, December 12, 1997 session in the matter of Commission docket 970766. This morning the Commission staff is calling its witness Maurice Twitchell to the stand. In conjunction with Mr. Twitchell's appearance we have marked his prefiled testimony as 105T for identification, his Exhibit MLT-1, in intrastate operations '94 and '96 as Exhibit 106, and his attachment MLT-2, derivation of revenue requirement as Exhibit 107 for identification. (Marked Exhibits 105T, 106 and 107.) Whereupon, MAURICE TWITCHELL, having been first duly sworn, was called as a witness herein and was examined and testified as follows: JUDGE WALLIS: Mr. Trautman. DIRECT EXAMINATION BY MR. TRAUTMAN: Q. Good morning. A. Good morning. Q. Could you please give your name and business address for the record. A. Yes. My name is Maurice L. Twitchell. My business address is 1300 South Evergreen Park Drive Southwest, Post Office Box 47250, Olympia, Washington 98504. Q. And have you prepared the exhibits which are marked Exhibit 105T through 107? A. Yes, I did. Q. And were they prepared by you or under your supervision? A. Yes, they were. Q. Are they true and correct to the best of your knowledge? A. Yes, except for a change I would like to make to it. Q. And what is that that? A. Page 9, line 11. The following words need to be deleted "RSA No. 5 affiliated interest billing." That needs to be replaced with "C-6 Bellcore disallowance." And on line 14 the 0.8 needs to be deleted and replaced with 1.7. That's on line 9 -- I mean page 9, line 14. Q. And with that change to the testimony, if I were to ask you the questions in that testimony, would your answers today be the same? A. Yes, they would. MR. TRAUTMAN: Your Honor, I would move for the admission of Exhibits 105T through 107 and Mr. Twitchell is available for cross-examination. JUDGE WALLIS: Are there objections to the exhibits? Let the record show that there are no objections, and Exhibits 105T, 106 and 107 are received. (Admitted Exhibits 105T, 106 and 107.) JUDGE WALLIS: Is the company going to proceed first with this witness? MS. ANDERL: It would be our preference to follow public counsel's cross of this witness. JUDGE WALLIS: Mr. Manifold. MR. MANIFOLD: That's fine. CROSS-EXAMINATION BY MR. MANIFOLD: Q. Mr. Twitchell, in this case and in the process that led up to it did you get all of the usual rate case material from U S WEST? A. Yes and no. This rate case was a little different. In most rate cases we receive testimony and exhibits from the company explaining all of their adjustments along with the work papers. In this case there was no testimony and exhibits. We were provided the work papers and proceeded from there and then received all the information that would be received in a normal rate case. Q. There's been some testimony about whether this is a make whole case or not and what a make whole case is. I would like to ask you to -- first of all, do you think that this is a make whole case? A. It has a make whole adjustment in it but, no, it's not a make whole case. Q. And I want to try to get to substance not semantics here. Could you explain your understanding of the distinction, if any, between a general rate case and a make whole case and any other categories that fall in between? A. The best way I can explain that is to describe the different kind of rate cases that there are. The first kind of a rate case we usually see before this Commission in the last 27 years I've been here has been a full blown rate case where the company comes in and presents testimony and exhibits, the burden of proof is on them. The staff reviews all the issues. Every issue is litigated and the Commission makes a decision. We do have other procedures -- Q. Excuse me. May I interrupt occasionally, just stop you there? A. Sure. Q. Every issue -- would you say that every issue is available for litigation, often some of the issues are resolved during the course of the examination and taken off the table? A. That's a different type that I'm going to distinguish between, so you're right. The next one is a make whole, and a make whole case is basically very similar to what we did in this case with depreciation represcription where the company comes in and they show that they've had a three-way meeting with the FCC and the state and themselves. The staff and the company agrees on the amount of the depreciation and the Commission allows them to put those rates into effect without reviewing the results and operations of the company. That's called a make whole case. Another type of issue that comes before the Commission is called interim rate relief, and interim rate relief is where a company is in financial dire need. They have very strict criteria which they have to meet where they can receive rate relief immediately. Otherwise they will be harmed financially. The last type of rate case that I'm familiar with is the type of rate case that I feel this is, and that is a stipulated rate case. In 1984 we had a stipulated rate case with U S WEST where we stipulated that we would accept the return on equity and the capital structure but not the cost of debt. Therefore we didn't have to hire expert witnesses to litigate the rate of return. This case, to my understanding, the way I was instructed, is a stipulated rate case. Because of the circumstances we were under with the '95 rate case, which had just been completed, and the company had filed in the course for a stay and received that, to go forward with a full blown rate case would have made it very confusing because we had not received what the courts had decided in the last case, and so in order to make this case easier to track from what happened in the last rate case, what's happening in the courts and what happens in this case, it was decided by the company and the staff that we would call this a stipulated case where we would follow as closely as we could with the '95 case. That is, every adjustment made in the '95 case would be made using the same logic, the same policy as the Commission found appropriate in that order. That did not limit the staff from reviewing the results of operations and making any other adjustments that were deemed necessary. Q. Is the make whole that you described the same or similar to a single issue rate case? A. That's basically what it is, yes, where you just don't look at the rate of return and other items. Q. It could be as to any particular item. You pick one -- you mentioned depreciation? A. That's just one. Another would be come in and the FCC dictates a tax change and so you implement that without having a full blown rate case. Q. Am I correct that with a single issue rate case one would normally look to make sure that adjusting that one issue didn't result in significant under or over-earnings because other things had changed since the last time rates were set? A. Not necessarily. In the past, for instance, in depreciation, the company is allowed to book the depreciation, and they go on the books immediately. They don't always get rate relief for it until such time as they're going to have a rate case, but if it doesn't appear there would be a rate case for a period, the Commission could give them rates to offset that depreciation. Q. So under these definitions would you say that public counsel had stipulated to a make whole increase by agreeing to the depreciation rate relief? A. I believe public counsel was a party to the depreciation order, and since all parties were in agreement upon that order, to my knowledge, yes, that would be a make whole issue. Q. You referenced there being specific standards for the interim rate relief. Are there any particular standards that you're aware of for either the make whole single issue rate type case or the stipulated approach? A. No, not to my knowledge. It's basically that the company and the staff have agreed that we wouldn't litigate that issue. Therefore, we eliminated a lot of the controversy in the hearing room. Q. Would another example of a stipulated case be the '89 complaint case by the Commission against this company which resulted in the AFOR in which there was a stipulation between the company and staff and public counsel? A. I believe that the AFOR itself was a stipulation, that they took the '89 rate case. They came up with all the adjustments that were made in that case and then going forward for the life of the AFOR, those same adjustments and no other adjustments were allowed to be looked at in that case, but that was part of the stipulation, that they would only look at those items. Q. There's been some testimony on the distinctions or the different words at least, I think distinctions, between normalizing and disallowing as accounting terms. Could you explain your understanding of those terms? A. I don't know if they're accounting terms but they're definitely ratemaking terms. In ratemaking disallowance is anything that the company spends as an expense which is determined not to help provide service to the customer. Therefore, the expense is disallowed and booked what we call below the line. Otherwise, it is booked after net operating income. A typical expense of that type would be political campaigning. We don't feel that it's proper for the ratepayer to be charged for political activities. Therefore, any expenses associated with that are disallowed or booked below the line so they're not in the ratemaking formula. Q. Charitable contributions would be another example of that? A. Absolutely. There are other things. If you look on the income statement of the company there's all kinds of nonoperating expenses and revenues that are disallowed. For instance, if the company was involved in selling televisions we wouldn't allow that as a telephone operating expense and it would be disallowed. So it's any kind of expense the company is involved in which is not deemed part of providing service to the customer, telephone service. The other term I think you wanted -- Q. Normalization. A. Normalization, usually the term refers to a tax deferred normalization. It is also sometimes referred to in different adjustments, and the reason for that, you try and take an adjustment and make it normal rather than abnormal. An example of this back in the '70s we were having rate cases every three years. Company would come in and they would have a million dollar expense for the rate case. If they booked that in the test period they would get a million dollars going forward every year thereafter, but they would only have that expense every three years. Therefore we would amortize it over three years so that by the time they came in for rate setting next time they had been able to recoup all those expenses but they hadn't been able to recoup the total amount for three different years. And so normalize is trying to show what the expense would be under normal conditions so they don't over or under-collect. Q. In making -- are what are called restating and proforma adjustments types of normalizing adjustments or are those sometimes used as a substitution? A. A restating actual adjustment is never a normalization adjustment. Restating actual restates the books the way they should have been stated so you have a place to start with before you do proforma. Proforma adjustments make adjustments for known and measurable changes which are not offset by other factors. A type of proforma adjustment would be a normalization adjustment. Like I said, the rate case expense, it's a legitimate expense. You wouldn't want to leave the whole thing in so you proform it in what the effect would be over a normal period of time. Q. Have you done electric utility cases during your time here? A. Yes, I have. Q. This will be brief. Is it common -- well, there's a lot of hydroelectric power in this state and for these utilities here, right? A. That's correct. Q. And is a typical issue in an electric rate case to determine how to normalize what weather adjustments need to be made for the fact that while it seems to rain all the time it actually varies from year to year or stream flows vary from year to year so you try to pick a typical number of years for stream flow analysis and how much water is behind the dams? A. And it's also the temperature because if you have a rate case where the temperature is very warm the company's revenues will be very low and if you set rates on that and the next year it's very cold they will over-earn, and so you try and take a history. In fact, when I did it we would take history back to the first part of the century and take a look at what weather has been doing. You would then figure out what the average weather is, compare that to the test year and adjust the weather in the test year of the stream flow for what would be a normal year so if it was warmer next year they would make a return, but there's always the risk. There's no guarantee. Q. Have you ever considered that sort of analysis to consist of expanding the test year to be from the turn of the century onward? A. Absolutely not. Q. Did you make -- you made and are sponsoring in this case adjustments to uncollectibles, storm damage and rent compensation. Would those three be examples of normalizing type adjustments? Let me start with this: Are those disallowances? A. No, they're not disallowances. You said uncollectibles? Q. Yes. Uncollectibles, storm and damage and rent compensation? A. Okay. Uncollectibles, the problem I had with uncollectibles that in the last case, the uncollectibles rate was much lower than it was in this case, and because of the stipulation that we would have everything remain constant, as I looked at uncollectibles, the company had a tremendous increase in uncollectibles that was different from the last rate case. I took a look at those expenses to see if there was a reason for a pro forma judgment on. There definitely was a spike in the test year for uncollectibles. I then took a look -- in fact I called the company up and discussed it with them because I was quite disturbed. It sounded like a $7 million increase in uncollectible expense which was tremendous, about an 80 percent increase. They told me that other companies were experiencing the same kind of increase. I went and looked at General and United and TU, and I found that they also had a spike, but in the next year it went back down from what it had been the previous year, and so I knew