BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION In the Matter of the Pricing ) Proceeding for Interconnection, ) DOCKET NO. UT-960369 Unbundled Elements, Transport and ) Termination, and Resale ) -----------------------------------) ) In the Matter of the Pricing ) Proceeding for Interconnection, ) DOCKET NO. UT-960370 Unbundled Elements, Transport and ) Termination, and Resale for ) U S WEST COMMUNICATIONS, INC. ) -----------------------------------) ) In the Matter of the Pricing ) Proceeding for Interconnection, ) DOCKET NO. UT-960371 Unbundled Elements, Transport and ) Termination, and Resale for ) VOLUME IV GTE NORTHWEST INCORPORATED ) Pages 48 - 86 -----------------------------------) A pre-hearing conference in the above matter was held at 11:00 a.m. on April 17, 1997, at 1300 South Evergreen Park Drive Southwest, Olympia, Washington before Chairman SHARON L. NELSON, Commissioners RICHARD HEMSTAD and WILLIAM R. GILLIS and Administrative Law Judge TERRENCE STAPLETON. The parties were present as follows: GTE NORTHWEST INCORPORATED by RICHARD E. POTTER, Associate General Counsel, 1800 41st Street, (5LE) Everett, Washington 98201 and JOHN WILLIAMS (via telephone), Attorney at Law, 3050 K Street NW, Suite 400, Washington D.C., 20007. Cheryl Macdonald, Court Reporter APPEARANCES (Cont'd.) U S WEST COMMUNICATIONS, INC., by LISA ANDERL, Attorney at Law, 1600 Bell Plaza, Room 3206, Seattle, Washington 98191. AT&T COMMUNICATIONS, by DANIEL WAGGONER and RANDY GAINER, Attorneys at Law, 2600 Century Square, 1501 Fourth Avenue, Seattle, Washington 98101 and SUSAN D. PROCTOR, (via telephone), Attorney at Law, 1875 Lawrence Street, Suite 1575, Denver, Colorado 80202. MCI COMMUNICATIONS, MCI METRO, TELECOMMUNICATIONS RESELLERS ASSOCIATION, and WORLDCOM, INC., by CLYDE H. MACIVER, Attorney at Law, 4400 Two Union Square, 601 Union Street, Seattle, Washington 98101. UNITED TELEPHONE COMPANY OF THE NORTHWEST, (via telephone) by SETH LUBIN, General Counsel, 902 Wasco Street, Hood River, Oregon 97031. WITA, (via telephone) by RICHARD A. FINNIGAN, Attorney at Law, 2405 Evergreen Park Drive SW, Suite B-1, Olympia, Washington 98501. THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION STAFF, by SHANNON E. SMITH, Assistant Attorney General, 1400 South Evergreen Park Drive Southwest, Olympia, Washington 98504-0128. FOR THE PUBLIC, (via telephone) by ROBERT F. MANIFOLD, Assistant Attorney General, 900 Fourth Avenue, Suite 2000, Seattle, Washington 98164. P R O C E E D I N G S JUDGE STAPLETON: Hearing will please come to order. This is a pre-hearing conference in docket No. UT-960369. We are convened in Olympia, Washington before Administrative Law Judge Terrence Stapleton and Commissioner William Gillis, Richard Hemstad and Chairman Sharon L. Nelson. Let's take appearances of the parties at this time beginning with U S WEST, please. MS. ANDERL: Thank you. Lisa Anderl, attorney appearing for U S WEST Communications, Inc., 1600 Seventh Avenue, Room 3206, Seattle, Washington 98191. MR. WAGGONER: Daniel Waggoner, appearing for AT&T Communications. My address is 1501 Fourth Avenue, Seattle, Washington 98105. MR. MACIVER: Clyde H. MacIver, appearing for MCI Telecommunications Corporation and MCImetro, 601, Union Street, Seattle, Washington 98101. MS. SMITH: Shannon Smith on behalf of Commission staff, 1400 South Evergreen Park Drive Southwest P.O. Box 40128, Olympia, Washington. JUDGE STAPLETON: For GTE. MR. POTTER: For GTE, Richard Potter, GTE Northwest, 1800 41st Street, Everett, Washington 98201, and also on the line who will argue the motion for us is John Williams. I will let him introduce himself. MR. WILLIAMS: I'm with the firm of Collier, Shannon, Rill & Scott, 3050 K Street, Washington D. C. JUDGE STAPLETON: For WITA. MR. FINNIGAN: Richard Finnigan. Address is 2401 Evergreen Park Drive Southwest, Suite B-1, Olympia, Washington. JUDGE STAPLETON: And the remainder on the line you're going to have to fend for yourself, please. MR. GAINER: Randy Gainer. I'm listening in on behalf of AT&T. JUDGE STAPLETON: Are there any other parties appearing? The first order of business will be the U S WEST motion to compel followed by the GTE motion to compel and then the AT&T motion to add additional witnesses. Ms. Anderl. MR. WAGGONER: Excuse me, Mr. Stapleton. You said the AT&T motion to add additional witnesses? JUDGE STAPLETON: No, I'm sorry. The U S WEST motion to add additional witnesses. Thank you. MS. ANDERL: Thank you. Good morning, Commissioners. We're here today on U S WEST's motion to compel discovery in this case. We've requested responses from AT&T to data requests and AT&T has objected to those. Those nine data requests were attached to my motion, and they concern AT&T's announced entry into the local exchange market with a fixed wireless loop technology. I will talk about that in a minute and why I think that that inquiry is very, very relevant to this proceeding, and why responses to those data requests should be compelled. The other issue that we have is whether or not AT&T and MCI should be required to produce witnesses to appear for deposition. The scope of the deposition that we've requested as clarified in our motion is that AT&T and MCI make a witness or witnesses available who are knowledgeable in the location of placement of and costs of the facilities that each of those carriers has in the state of Washington that are or may be used for the provision of local exchange service. Again, we feel that there couldn't be a more relevant inquiry and we are asking that the Commission order the parties to produce witnesses to address those issues. The data requests concern AT&T's announced entry into the local exchange market, at least in some regions of the country, with the provision of a fixed wireless loop technology. Clearly, from AT&T's press announcements and from AT&T's behavior over the past years acquiring these wireless licenses, AT&T has invested billions on the anticipation of entering the market in this manner. AT&T's benchmark, which it thinks it can beat in terms of the cost of providing this service, is announced at $1200 per customer. That's the figure that consultants have used, that's the figure that's been announced in the press. AT&T thinks it can come in under $1200 and on that basis feels that this is a competitive solution on a going forward basis. If that's true, that seriously calls into question any credibility that Hatfield might have in this docket to the extent that Hatfield is costing $500 for a local loop. And all we seek to do is to inquire into and behind AT&T's announcements, to ask AT&T to establish to us why, if Hatfield is right and you can do a copper fiber loop for $500, would they be pursuing a wireless alternative that they have touted as a least cost alternative because it comes in at under $1200. The data requests are attached to our motion. They're not burdensome, not extensive, they're very focused, there's only nine questions; some of them have more than one part but we feel that to the extent that costs of providing local service are an issue in this case, and to the extent that this Commission is being asked to adopt or re-adopt Hatfield, it is absolutely essential that we be able to test the credibility of that $500 number. Now, clearly, all of our results show that it's -- couldn't be more wrong, that it is a lot closer to twelve or $1500 to provide local service. I think AT&T very much fears that its responses to the data requests in this manner would validate that. I'm sensitive to the five minutes. I will just very briefly touch on the requests to make construction people available -- I think I've summarized it for you in our motion -- or local network people available who are knowledgeable about the new entrants' experience in terms of opportunities to share trench, what their trenching costs are. I don't think that those costs are going to vary whether you're a new entrant or an established provider. If you have to open a street in downtown Seattle here's what it's going to cost you, the city of Seattle doesn't care who you are. They're going to charge you the $200 or $250 a foot that it ends up costing to open a downtown street. And whether you're going to have an opportunity to share the costs of that trench are not going to matter whether you're an incumbent or a new entrant. Those are the types of issues that we seek to explore with AT&T and MCI. The Colorado Commission found that it was an extremely relevant inquiry and ordered the new entrants to produce witnesses who could talk to that. The whole issue in this case is whose cost studies are you going to adopt. Central to that is, are the assumptions that go into those cost studies reasonable. These depositions test the reasonableness of those assumptions, and I believe that it's absolutely essential that we be allowed to ask those questions from witnesses who have knowledge of that. Thank you. JUDGE STAPLETON: Mr. Waggoner. MR. WAGGONER: Yes. Addressing first the wireless issue, I think the difficulty here is that Ms. Anderl's mischaracterizing even her own attachments to her testimony. The quote is citing analysts' estimates of $1200 as the cost per household of wireless local loop service. Mr. Perry said we are definitely less than that. So the $1200 that is quoted is the existing analysts' estimate of wireless local loop service. Second of all, it's clear from the materials submitted by Ms. Anderl that this wireless loop technology has a far different kind of capacity. It is capable of carrying ISDN and so on, so I think the degree of comparability even based upon U S WEST's own submission is not there. More importantly, I think the issue is, are we going to go off into a long detour. I suspect the next issue is Teledesic and Iridium and what are the costs of Teledesic and Iridium for local service. TELRIC is quite clear what it should be. This Commission has been quite clear about what it's doing in this area. It's interested in the costs of currently available technology that's commercially deployed. There is no suggestion that the AT&T fixed wireless loop, as much as we would prefer otherwise, is commercially available. The evidence is entirely clear that it has not even been beta tested yet. I thought it was particularly interesting that John Walter, the president of AT&T, characterized this as a communications medium for the 21st century. It's a ways away, unfortunately. Even setting that aside, we look at what U S WEST itself has. U S WEST claims to have a comparable wireless loop technology. A recent statement by a U S WEST Communications representative, Peter Manetti, head of the company's wireless division, is that, quote, U S WEST Communications is testing a technology similar to AT&T's that would bypass its own copper-based network and plans full scale trials within the next three months. But what we learn when we talk to U S WEST's own cost witnesses is that they haven't even included U S WEST's own wireless loop technology in their own cost studies. We learned this just the other day from Mr. Reynolds, the witness for U S WEST in this case. So U S WEST itself even though it has this own comparable experimental, untested, not commercially deployed wireless loop technology has not bothered to include it in its own cost studies, and for this fishing expedition to begin into anything about AT&T's wireless loop technology is a substantial diversion that has nothing to do with this case at all. I think it would open a pandora's box and I think we would spend an awful lot of time wasting a lot of energy. The key here is what is the technology that is available today. This technology is not available today. It has not been commercially deployed. It has not been tested. Even in the materials that Ms. Anderl submitted, there are statements that AT&T at this point does not know the issue of cost at this point. So this is an experimental technology. It's not appropriate for consideration in this case, and I think it's simply a fishing expedition by U S WEST to obtain information for other purposes and other proceedings. This is a methodology case, and I think everybody tends to forget that in these discovery requests, and I see no relevance in terms of methodology to this. Now, in terms of the deposition for construction plans, I think, again, it's not AT&T's possible, maybe someday, local network that's at issue here. It's the network of U S WEST which is available across a broad range of services and a broad geographic region. We're looking at a scorched node approach to that, and what if anything AT&T has based on any existing entry into Washington state is not relevant at all. And finally, there really is nothing there for U S WEST to learn about, and we told them that, and so I view this as largely a waste of energy, and I am not at all clear why we've even been through this process on the construction issue. COMMISSIONER HEMSTAD: When you say nothing there anyway, you mean a witness would say we don't have any information? MR. WAGGONER: That's correct. COMMISSIONER HEMSTAD: What is your response to the assertion that the Colorado Commission found this, this second request, to be relevant? MR. WAGGONER: Well, there's no question that the Colorado Commission said that to the extent that AT&T had knowledge of local construction costs that it experienced in Colorado that it should produce those. There haven't been any produced because as far as I know there aren't any. COMMISSIONER HEMSTAD: But your representation is that any AT&T would say Washington would have no such information? MR. WAGGONER: That's correct. And we're prepared to put Mr. Gaiman on the stand to say that now if anybody needs to know that, but I don't think it's relevant either. JUDGE STAPLETON: I assume, Ms. Anderl, your comments about the deposition of MCI's witnesses is the same as AT&T's and we'll just ask Mr. MacIver to respond and give you a couple of minutes for rebuttal. MS. ANDERL: Yes. I intended to cover both AT&T and MCI in my deposition argument. JUDGE STAPLETON: Mr. MacIver. MR. MACIVER: Thank you. I think the basic inquiry the Commission has to decide here is whether the information sought -- I'm addressing my remarks now just to the deposition. We don't have any pending other discovery dispute with U S WEST, but whether the information sought in this deposition as described in their notice advanced the Commission's inquiry regarding establishing the pricing the elements of local exchange service that U S WEST as the monopoly provider of local exchange service has been mandated to make available to new entrants who do not have a ubiquitous network in place in the state of Washington. It is basically my understanding that it's the LEC's costs, the incumbent LEC's costs and prices, that are truly at issue as to scope and scale, not the new entrants' costs, whatever they may be. MCI does have a very small amount of facilities in place in the Seattle area. That's one difference between MCI and U S WEST, but it is a very small amount. We would object strenuously to having to discuss in this record with the issues that are pending before the Commission in this record all future plans for entry into the market in this state, and we urge the Commission to exercise its discretion, which indeed it has in this matter, to balance the inequities of forcing disclosure of highly proprietary future plans for entry with the benefits, if any, that would be bestowed upon the Commission in this record by delving into the minimal costs that MCI has incurred to date in the Seattle area. It's the balancing equities which I think is important; and number two, even more important is, is it worth it to this Commission to start out on a whole new tangent now to be exploring through additional hearings, additional testimony, additional discovery the costs any new entrant may have or may plan to incur in this state in addition to the costs of the incumbent LEC's ubiquitous network, because we're opening up a whole new field of inquiry here and where it would stop I'm not sure, but is opening up that field of inquiry truly going to advance the issues that this Commission has before it and make it worth the effort. And that is something that you as commissioners and Judge Stapleton will have to decide. We certainly don't believe it's relevant to your inquiry. If it has any probative value it's very remote, and balancing that against the additional time it would take in this case and against the invasion of highly proprietary information, we think the scales tip in favor of not allowing this inquiry. JUDGE STAPLETON: Thank you. Ms. Anderl. MS. ANDERL: Briefly, in response to Mr. Waggoner's claim that U S WEST claims a similar technology on the wireless issue which isn't even included in our cost studies. That's true, and in the deposition of Mark Reynolds two days ago Mr. Reynolds explained that the reason why we don't include that in our cost studies is we have not been able to identify it as a least cost alternative on a forward looking basis. That's very, very different from what AT&T claims, and that's why it is relevant in this inquiry, not as to what U S WEST has been able to do with the wireless technology but that AT&T does claim it as a least cost alternative, which, as I said, I just find mind boggling if Hatfield is right. The issue with regard to persons knowledgeable in the placement and costs of facilities that are being used to provide local exchange service or which might be available for local exchange service, we understand that the new entrants are very, very sensitive about their entry plans. I think anybody in a competitive industry would be. We're not seeking to do any improper discovery as to what their entry plans are. We know that MCI, for example, has fiber on one or more switches in the Seattle area. We would like to inquire as to how often they had an opportunity to share supporting structures to place those facilities, how often they've had to use different methods such as trenching, plowing, boring. All of those are assumptions that are of different values in both the Hatfield study and the U S WEST studies. We're looking for what are the most reasonable assumptions on a going forward basis, and I can't imagine anything that would help us determine the answer to that question more clearly than what the new entrants are incurring today and on a forward looking basis to get into the streets to place new facilities, to buy switches that provide local service. All of those assumptions have been called into question in both of these studies as to what's reasonable, and we believe that the new entrants' actual experience, as U S WEST's actual experience, is highly relevant. COMMISSIONER HEMSTAD: Well, assume as a hypothetical that the new entrants' costs are double those of U S WEST. How will that be used then in the costing procedure? MS. ANDERL: Well, to the extent that -- let's say U S WEST's costs are $100 for something and the new entrants have a $200 cost for the same item. I think what we can use that for is as a check of reasonableness for a Hatfield assumption of, say, $20 for the same cost. We have Hatfield assumptions on trenching and sharing supporting structures for facilities that are, from U S WEST's view, very, very unreasonable, say, that we get to share trenches very large proportion of the time or all the time in certain circumstances. And I think that we will find, to check the reasonableness of that assumption, that U S WEST's actual experience is you don't get to share trenches, MCI's actual experience is you don't get to share trenches, and on that basis how can we assume -- at least we can question the reasonableness of the Hatfield assumption that you do when nobody in the real world, incumbent or new entrant, has experienced that. We think it's just very much a question of impeaching the assumptions of the Hatfield model. We agree that the costs that are at issue are U S WEST's costs. COMMISSIONER HEMSTAD: What if you have a half a dozen new entrants in some circumstances and all have different costs? MS. ANDERL: Well, again, I think that those are all worthwhile data points to have to test the reasonableness of the assumptions that are being used in the studies. That concludes my remarks. Thank you. JUDGE STAPLETON: Any other questions, Commissioners? CHAIRMAN NELSON: No. JUDGE STAPLETON: All right. Mr. Potter. MR. POTTER: Yes. Mr. Williams is going to argue GTE's motion. JUDGE STAPLETON: Mr. Williams. MR. WILLIAMS: Thank you. My name is John Williams and I will be addressing GTE's motion to compel the production of the AT&T cost model which is known as TICM, and that stands for total incremental cost model. Now, following up on conversation that we just heard, the arguments seem to be, and AT&T argues this in the response to our motion that I just received, the point they're making is that the only relevant costs here are not AT&T's costs. The only relevant costs are the local exchange carrier's costs and, the Commission is aware, we agree with that. We think GTE's costs should be used in any cost proceeding or pricing proceeding. What has happened, however, in this proceeding is that AT&T has introduced the Hatfield model. The Hatfield model is not based upon GTE's costs. It is based upon the costs of a hypothetical ILEC on a forward looking basis, and what the Hatfield proponents have done is to scour the literature and the available data to determine what is an appropriate cost that we should be using in the future, and they have drawn data points from a number of different sources. Parenthetically, yesterday they released in this case something called the Hatfield model release input portfolio that I understand they're now calling HIPS, a new acronym, and this HIPS portfolio indicates precisely what documents they are relying upon for their assumptions, and they go to a number of different places. They use vendor prices. They've gone out, asked what vendors charge now to install poles, for example, or the cost of cable. They go to different sources. They use a New Hampshire incremental cost study from 1993. They use some specific Bell data. They use some information from a McGraw Hill study -- hello -- from McGraw Hill study on actual switching costs. They also use, of particular relevance for this argument, AT&T's own capacity study. They are using that capacity study for AT&T in order to determine such things as signaling costs, tandem costs, trunk ports, so the Hatfield model is relying upon AT&T specific data. Now, it has come to our attention that the TICM model has data in there and costs in there that are inconsistent with the costs being used in the Hatfield model, and we have introduced the affidavit of Frank Murphy of our experts in this case who has some familiarity with the TICM model and has compared a few of the inputs of the TICM model to the Hatfield model inputs and has concluded that the Hatfield model inputs are significantly lower than the inputs and the assumptions that AT&T is using itself to look at forward looking costs. Now, we think that that inconsistency is significant, and we believe that we are entitled to probe that further to find out what else is in TICM and how it is inconsistent and impeaches the Hatfield model that AT&T and MCI are relying upon. Thank you. JUDGE STAPLETON: Mr. Waggoner. MR. WAGGONER: Yes. I think the problem with Mr. Williams's argument is that he sort of glosses over the fact that the TICM model is about the long distance network whereas the Hatfield model is about the local network, and certainly I don't disagree that Mr. Williams wants to ask questions about the capacity study relied upon in the Hatfield model. That's fine, but that's certainly no basis to provide GTE with sort of carte blanche discovery into a model that is about the long distance network. I think in GTE's motions they're both wrong legally and they misunderstand the facts. In terms of whether I would offer any particularly different arguments on the fixed wireless issue which is also in GTE's motion, I would not. I think the problem here, though, is that everybody is sort of missing the point about what we're doing here. As I understand this case, it's a case about methodology, what is the appropriate methodology to use in measuring the incumbent local exchange carrier's network costs under the Telecommunications Act of 1996. And I think unfortunately what's happening here is that GTE is essentially viewing a bunch of different cases around the country as sort of one case, and they're ignoring the fact that some of those cases may be on setting specific prices at particular points in time. This is a case about methodology and it's a case about the methodology that's appropriate to use in measuring the costs of GTE's local network or U S WEST's local network. Contrary to what GTE says, the Hatfield model is not based on a future hypothetical network, which is what GTE claims at page 2. It is a scorched node type of model but it uses the technology that is available today. It uses it to create a local network, not a long distance network, and certainly GTE is entitled to inquire about the Hatfield model, but to turn that into a broad ranging inquiry into AT&T's very proprietary long distance costs at a time when GTE is now directly competing with AT&T in that market is, I think, highly improper. It's a distraction and a detour for this Commission, and I think it's a misuse of this Commission's process. First of all, let me comment that GTE clearly did not understand what happened in California. We submitted an affidavit from Michael Hurst that rebuts GTE's claim that the California Commission has already ordered this disclosure. Second of all, if you look at GTE's materials you will see that they've already had the opportunity to obtain information on trenching costs of AT&T through FCC forms. I don't think those are relevant. Those are trenching costs for the long distance network. To the extent they want them they've got them. Different kinds of switches. All sorts of different things between these two networks. I think GTE is basically just on a fishing expedition here and they should not be allowed to continue that. That's all. JUDGE STAPLETON: Mr. Williams, did you want a minute or two of rebuttal? MR. WILLIAMS: Yes, thank you. First of all, we are certainly not on a fishing expedition. This model is directly -- the TICM model is directly relevant to a number of different aspects both of a long distance carrier and a local exchange company. You don't have some sort of magical hand-off where the local carrier stops and the long distance carrier takes over. There are areas of overlap, and we have identified them in Mr. Murphy's affidavit which shows the inconsistency in signaling, tandem trunk ports. They have those things. We have those things. We have certain costs, they have certain costs, and Hatfield has a third set of costs, and we think that the higher AT&T assumed costs than actual costs are directly relevant to impeach the inputs used in the Hatfield model. They are black and white differences, and that is information that the Commission should be aware of. Secondly, Mr. Waggoner indicates this is a methodology case and we don't disagree. That's another reason that we want to see the TICM model so we can determine that methodology with respect to these areas of overlap. (Inaudible) not only what the switch maintenance factors are and the incremental -- we want to show two types of things. One, the inconsistency in the cost assumptions. For example, the actual switch maintenance factors are different in TICM than in the Hatfield model. Those are areas where they both have values and they're inconsistent. Similarly, with respect to their investment per trunk termination costs, they are just different in the TICM model and in the Hatfield model. We wanted some inputs, but we also want to show that the methodology used by AT&T in practice and the forward looking Hatfield model are also different. Those two points. Thank you. MR. WAGGONER: I'm sorry, can I just ask a point of inquiry which is, Mr. Williams, where is this Murphy affidavit you're referring to? MR. WILLIAMS: Dan, I'm sorry. It was filed either yesterday or this morning. It was filed this morning and it should have been faxed to your office. MR. POTTER: This is Richard. It was faxed out this morning to Dan's office right after we faxed it to the Commission. MR. WAGGONER: Well, since I was on my way to the Commission I don't have the availability of that document. Furthermore, Your Honor, I think given the extraordinarily short time period in which we had to reply to this at all, I think it's -- that affidavit should be disregarded by the Commission given the fact that GTE did not even have the courtesy to file it with the initial motion. MR. WILLIAMS: Well, it wasn't filed because we didn't have it. We just received it. It was something filed in California and it wasn't until Mr. Waggoner raised the issue of the California (inaudible) proceeding that we thought it would be appropriate to show the actual inconsistencies between the Hatfield model and the TICM model. JUDGE STAPLETON: I'm going to disregard the supplemental filing made by GTE this morning as untimely and not filed pursuant to prior agreement of the bench. Ms. Smith, did you have anything to add to either of your responses to the U S WEST or GTE motion? MS.