BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION In the matter of the Cost Proceeding for Interconnection, Unbundling Elements, Transport and Termination, and Resale ) ) ) ) Docket UT-960369 Reply Testimony of Tony DiTirro On Behalf of MCI Telecommunications Corporation April 25, 1997 WITNESS QUALIFICATIONS Q. PLEASE STATE YOUR NAME, BUSINESS ADDRESS AND BY WHOM ARE YOU EMPLOYED. A. My name is Anthony J. DiTirro. My business address is 201 Spear Street, 9th Floor, San Francisco, California. I am employed by MCI Telecommunications Corporation (“MCI”) as a Regulatory Manager. Q. DID YOU FILE DIRECT TESTIMONY IN THIS PROCEEDING? A. Yes, I did. Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY? A. The purpose of my testimony is to reply to the Direct testimony of US WEST (USWC) witnesses Mark S. Reynolds, Edwin J. Freye and D.M. Gude, GTE witness Donald C. Eachus, William Dunkel on behalf of the Public Counsel Section of the Office of Attorney General, Washington Utilities and Transportation Commission (Commission) witness Paula M. Strain and AT&T witness Julie S. Dodds. Q. PLEASE EXPLAIN WHAT CRITERIA YOU BELIEVE SHOULD BE FOLLOWED TO DEVELOP A VALID AVOIDED COST DISCOUNT. A. The most obvious criteria is that the avoided cost study must comply with the Federal Telecommunications Act of 1996 (the "Act"). Section 252(d)(3) of the Act makes it clear that: a State commission shall determine wholesale rates on the basis of retail rates charged to subscribers for the telecommunications service requested, excluding the portion thereof attributable to any marketing, billing, collection, and other costs that will be avoided by the local exchange carrier. I believe that this requires the avoided cost calculation to be based on those same costs employed to set the retail rates. Consequently, a top-down study using accounting data used to set the ILEC’s rates is the appropriate costing methodology. I believe that a correctly devised avoided cost study eliminates all the retailing costs which are avoided when the ILEC wholesales services. Anything short of this saddles the new entrants with duplicative retailing costs, creating an anticompetitive price squeeze for these new entrants. I believe that a proper avoided cost study will identify both direct and indirect avoided costs. Clearly, as direct costs fall because of the avoidance of these costs indirect costs should fall as well. And last, but certainly not least, a valid avoided costs study should be verifiable and well documented. MCI’ avoided cost study meets all these criteria and results in a reasonable avoided costs discount of 23.71 percent for USWC and 18.11 percent for GTE in Washington. Q. DO USWC’S AND GTE’S AVOIDED COSTS STUDIES MEET THESE CRITERIA? A. No. In fact, USWC’s TSLRIC avoided cost study, as proposed by USWC witness Reynolds, fails to meet any of these criteria. USWC incorrectly uses forward looking costs on a bottom-up basis. Consequently, USWC uses costs that are different than those costs and costing methodologies used to set the rates to which the discount will be applied, in direct violation of the Act and the FCC Order. USWC does not eliminate all the costs avoided when wholesaling services and USWC proposes to add back costs it allegedly incurs in wholesaling. USWC fails to properly identify avoided indirect costs. Finally and most importantly, USWC’s TSLRIC avoided cost study is not verifiable or adequately documented. Consequently, the Commission cannot rely on USWC’s TSLRIC avoided cost study to set the avoided costs discount for Washington. I will not devote any additional discussion to USWC’s TSLRIC avoided cost study because of its obvious conflict with the Act and the Federal Communications Commissions Local Competition First Report and Order, CC Docket No. 96-98 ("FCC Order"). The remainder of my discussion of USWC avoided cost proposals will address its embedded avoided cost study. USWC has also filed am embedded avoided cost study. I believe USWC has finally realized that its TSLRIC study, which has been consistently rejected in every jurisdiction in which it was filed, is not an acceptable avoided cost study. In reaction to the continual rejection of this model, USWC has now developed an embedded avoided cost model submitted by USWC witness Gude. USWC’s Embedded Avoided Cost Study also fails to meet all the requirements of the Act and the FCC Order and, in fact, suffers from some of the identical fatal flaws plaguing its TSLRIC model, as I will discuss in more detail below. GTE’s cost study also fails to meet these criteria on the basis that its definition of avoided costs allows the ILEC to leave retailing costs in the study. Moreover, GTE’s “workcenter" scheme is totally unverifiable. Finally GTE employs an avoided cost discount calculation which is aimed at ensuring its revenue requirement rather than determining an accurate avoided cost discount, similar to USWC. Q. PLEASE EXPLAIN THE PROBLEMS YOU FIND IN USWC’S EMBEDDED AVOIDED COST STUDY. USWC bases its study on five self-proclaimed principles upon which it based its embedded avoided cost model. However, upon review, these so-called principles are nothing more than procedures which: permit manipulation, prevent verification, and result in unreliable and anticompetitive avoided cost discounts. Ironically USWC’s first principle is: “Employ a simple approach which reflects the FCC directives of identifying Avoided Direct and Indirect cost components for services subject to resale.” USWC even fails to comply with its own principles. USWC’s plan is anything but simple considering its use of forward-looking economic cost factors applied to historic costs with its various inconsistent and unverifiable data sources. Q. PLEASE EXPLAIN THE FLAWS YOU SEE IN USWC’S EMBEDDED AVOIDED COST MODEL. A. USWC’s study improperly mixes embedded and future costs in the study by employing TSLRIC factors to determine avoided cost percentages for marketing and service accounts. USWC readily admits that its avoided cost factors used to determine the amount of avoided embedded costs are derived from the same TSLRIC study sponsored by Mr. Reynolds. However, USWC never even attempts to prove that TSLRIC avoided factors have any relevance in calculating the appropriate portion of avoided embedded costs. TSLRIC costs are determined through a bottom-up study of forward-looking economic costs. Embedded costs are determined using a top-down study of historic accounting costs. Given the widely differing source of data, it would seem incumbent upon USWC to prove the efficacy of this approach. Yet, USWC fails to do so. Ms. Gude fails to support the notion that avoided cost factors determined in a TSLRIC environment bear any relevance to avoided costs in an embedded cost environment. To the contrary, logic tells us that these relationships should be quite different. A TSLRIC study is based on forward-looking costs which would include newer technology and, hopefully, greater efficiencies. An embedded cost study is based on historic costs which were incurred in a monopoly/rate or return of environment. It is nonsensical to suggest that these disparate costing methodologies are, somehow, homogeneous enough to allow factors developed in one to be used in the other. Q. PLEASE EXPLAIN THE PROBLEMS YOU FIND IN THE DENOMINATOR USWC USES TO CALCULATE THE AVOIDED COSTS DISCOUNT. A. USWC improperly inflates the denominator employed in calculating both the avoided cost discount and the indirect avoided cost factor. Capital costs should not be included in the denominator study when using expenses as the denominator because these capital costs are already included in the rate currently charged for these services. Since the avoided cost discount will be applied to these rates, USWC’s use of capital costs in the denominator of the avoided cost calculation will create a double accounting for these costs. USWC includes these costs because it produces a constant dollar profit level. I believe that USWC is attempting to retain its revenue requirement through classic monopolistic rate making. USWC’s inclusion of capital costs in the total costs used in the denominator negatively impacts both the overall avoided cost discount and the indirect avoided cost factor. For example, exclusion of capital costs and the Interarea Rent Compensation from the denominator in calculating the indirect avoided cost percentage presented on Exhibit DMG-1.1 of Ms. Gude’s testimony raises the composite indirect percentage from 9.98 percent to 13.77 percent. This is due to not only USWC’s inclusion of capital costs but USWC’s misclassification of a portion of these costs as direct costs. This correction to the indirect factor alone raises the final composite avoided costs discount from 10.98 percent to 11.94 percent. Removing Capital Costs and Interarea Rent Compensation from the avoided cost discount calculation also has a significant impact on the final discount. Again, in Exhibit DMG-1.1, the adjusted avoided costs, determined using the 13.77 percent indirect factor, in the numerator should be divided by the Total Expenses, not the Total Costs currently used by USWC which includes capital costs and Interarea Rent Compensation. The correction raises the final avoided cost discount to 15.04 percent. With this example it is easy to see that USWC’s inclusion of capital costs understates the avoided cost discount by over 4 percent! This type of manipulation of the costing data is the primary reason MCI continues to support a more simplified methodology which is completely verifiable and resistant to such anticompetitive manipulation. Q. PLEASE EXPLAIN THE PROBLEMS YOU FIND IN USWC’S TREATMENT OF CUSTOMER SERVICE AVOIDED COSTS. A. I believe that USWC presumes that it will continue to process orders for its resale customers instead of providing the automated OSS interfaces which would allow the reseller to process its own orders as the FCC ordered. Consequently USWC grossly understates the avoided costs it identifies for customer services. If such an approach is adopted USWC will be rewarded for its inefficiency and resellers and resale competition will be harmed by this approach. Q. PLEASE EXPLAIN THE FLAWS IN USWC TREATMENT OF MARKETING EXPENSES. A. USWC has understated the amount marketing expenses, particularly product management expenses, classified as avoided in its analysis. USWC’s determination of avoided product management costs was determined by analyzing forward looking costs and then applying the avoided factor to historic cost, clearly an "apples to oranges” calculation. Q. CAN USWC’S AVOIDED COST MODEL BE ADJUSTED TO RESULT IN A REASONABLE RESULT? A. No, I do not believe so. Much of the source data used by USWC is unverifiable. The avoided cost factors taken from its ill-conceived TSLRIC study are unusable with historical data. Consequently, the Commission should reject any consideration of USWC’s avoided cost methodology. Q. PLEASE EXPLAIN THE PROBLEMS YOU SEE WITH USWC’S CRITICISMS OF MCI’S ORIGINAL AVOIDED COST STUDY. A. Ms. Gude spends a good deal of her testimony critiquing MCI’s and AT&T’s avoided cost studies proposed in the arbitration proceedings late last year. In reality, Ms. Gude is not merely critiquing MCI’s study but, instead, attempts to adjust MCI’s study to make it more like USWC’s study. In doing Ms. Gude reaffirms the flaws MCI has identified in USWC’s embedded avoided cost study. Moreover, Ms. Gude’s proposed adjustments to MCI’s study reveal USWC’s intentions to assure itself it will not loose profits as a result of resale competition. USWC’s most glaring error in adjusting MCI’s study is its use of revenues in the denominator for the avoided costs discount calculation. At first glimpse, MCI found it strange that USWC would include revenues in the denominator when it states that it uses total costs as the denominator in its own avoided cost studies. However, it became apparent that the use of revenue as a denominator was USWC’s attempt to introduce capital costs into MCI’s study. MCI believes this approach interjects a revenue requirement aspect to MCI’s study which is totally inappropriate. MCI chose to use expenses as the most accurate measure of the portion of the ILEC’s operations attributable to retailing. Since MCI looks only at expenses for avoided costs, we believe only expenses should be included in the denominator for the determination of the appropriate avoided cost discount. It should be remembered that this process is not intended to set rates. The rates for services subject to resale have already been set and those rates already have a return element intended to recover capital costs. This process is intended to established a percentage which represents the portion of the ILECs retail operations which can be avoided when wholesaling services. Study methods often use a variety of factors for such determinations. For example, one could attempt to use headcount to measure retail operations, counting employees performing retail tasks. In such an example, it would be clearly inappropriate to interject irrelevant data such a the companies rate of return for the determination of the portion of the company attributable to retailing. For this same reason, if expenses are the medium for this calculation only expenses should be used for the determination of an accurate avoided cost discount. However, USWC has a different view of the avoided cost discount calculation. USWC is less concerned about an accurate avoided cost discount and more interested in assuring that it will enjoy the same dollars in profit no matter whether it wholesales or retails its services. In fact, if USWC were over earning during the period its revenue was measured, USWC’s use of revenues to adjust MCI’s study would then interject the ILEC’s over earnings into the avoided cost discount calculation. The result of USWC’s “revenue adjustment” is to lower the MCI’s avoided cost discount by 3.25 percent. Q. DOES USWC’S USE OF REVENUES IN THE DENOMINATOR CAUSE ANY OTHER PROBLEMS? A. Yes. In adjustment 11 on DMG-9, Ms. Gude eliminates $40 million in directly avoided Other Customer Service costs from the numerator, while it only eliminates $31 million in revenues from the numerator. While this inconsistency has only a quarter of a percent effect on the over all result, it demonstrates that USWC’s attempt to use revenues in MCI’s study is inconsistent and inaccurate. Q. WHAT OTHER PROBLEMS HAVE YOU ENCOUNTERED IN USWC’S ADJUSTMENTS TO MCI’S STUDY? A. USWC inconsistently applies adjustments to MCI’s study, For example, USWC proposes to exclude accounts 6621 and 6622, operator service and directory assistance, on the basis that these services will be separately provided and should not be part of this calculation. Yet, as USWC knows, MCI’s study does contain intrastate access costs. Since USWC professes to possess the data necessary to eliminate intrastate access costs from MCI’s study, we can only imagine that USWC chose to ignore this adjustment while continuing its advocacy of elimination of operator service and DA because this inconsistency works to its advantage. Finally, USWC proposes to apply a 75 percent avoided cost factor to marketing expenses in MCI’s study, while it uses a nearly 88 percent factor in its own study. Since MCI uses a 90 percent factor in its study this would appear reasonable in comparison to USWC’s 88 percent factor. I believe the Commission should disregard USWC’s attempts to adjust MCI’s study due to its inclusion of capital costs, incorrect calculation of the indirect avoided cost factor and its inconsistent application of avoided cost factor for marketing costs. Q. PLEASE EXPLAIN THE PROBLEMS YOU SEE WITH GTE’S AVOIDED COST STUDY. A. I find FIVE major flaws in the GTE Avoided Cost Study. First, GTE has developed the costs using workcenters and total company operations financial data and apparently identified costs at a subaccount level through a complicated allocation process. Consequently, it is impossible to track which costs are identified as avoided and whether these total company figures relate, in any way, GTE’s costs in Washington. Second, GTE’s development of directly avoided costs is based on its misconception that it will provide resold services to its wholesale customers in much the same manner than it provides retail services. Consequently, GTE grossly understates the directly avoided costs in its study. Third, GTE incorrectly calculates its indirectly avoided costs by using total expenses in the numerator. The error is twofold. First, GTE should only include direct expenses in the calculation of the indirect factor. It is mathematically incorrect to include indirect expenses in the denominator for the determination of indirectly avoided expenses. This approach inappropriately inflates the denominator in that calculation resulting in a understated indirect avoided factor. It also appears that GTE included direct expenses in the denominator which were excluded for the determination of the directly avoided costs. If these expenses were excluded from the direct avoided cost analysis they must be excluded from the calculation of the indirect factor. Fourth, GTE uses revenues in the denominator for the determination of the final avoided costs discount. This approach greatly inflates the denominator resulting in a understated avoided cost discount. The problems with GTE’s cost study are the result of an overall misconception on the part of GTE of the avoided cost concept expounded in the Act in the FCC Order. GTE clearly believes that its wholesaling efforts are an additive to its retail operations and any costs it additionally incurs in wholesaling its services should be added back to determine the avoided costs discount, including the lost contribution from services it assumes it will no longer sell to customers who migrate to resold services. This is clearly contrary to the Act and the FCC Order. The Act state that: a State Commission shall determine wholesale rates on the basis of retail rates charged to subscribers for the telecommunications requested, excluding the portion thereof attributable to any marketing, billing, collection, and other costs that will be avoided by the local exchange carrier. Section 252 (c)(3). (highlight added) GTE, on the other hand, admits that it will continue to include retail costs in its wholesale prices because it continues to incur these costs. However, GTE fails to verify whether these continuing costs are incurred for retail or wholesale operations. Q. PLEASE EXPLAIN THE FLAWS IN GTE’S DETERMINATION OF DIRECT EXPENSES. A. GTE apparently believes it will provide its wholesale services to its reseller customers much the same way it provides its retail services to ratepayers. This misconception causes GTE to attribute expenses to wholesaling operations merely because these expenses are still incurred for retailing operations. A prime example of this problem is the Product Management Account 6611. GTE believes that only 1.76 percent of these costs are avoided when wholesaling services. Mr. Eachus explains that; “Product management expenses are generally not avoided, since product planning, product development and product roll out activities, which account for the preponderance of expanses recorded in this account, are required regardless of whether the products are offered at retail or wholesale." I disagree. First, the types of activities defined by Mr. Eachus, product planning and development, appear to be start up costs which should not be assigned to recurring rates in the first place. Moreover, the costs which are identified in the USOA description of this account that it includes; costs incurred in performing administrative activities related to marketing products and services. This includes competitive analysis, product and service identification and specification, test market planning, demand forecasting, product life cycle analysis, pricing analysis, and identification and establishment of distribution channels. These are clearly retailing costs which should be, for the most part avoided when wholesaling services. GTE’s study only proposes to avoid 65 percent of sales costs in account 6612. MCI is at a loss to understand what significant selling expenses GTE will incur when MCI has already come to GTE to request these services. Clearly, GTE will not need to attract MCI to its door nor will it need to convince MCI to buy its services over its competitors. GTE is the “only game in town” in its territory. Consequently MCI would expect nearly 100 percent of these costs to be avoided. Likewise, GTE only identifies 43 percent of customer services expenses as avoided. Again, I suspect that GTE is employing its misguided presumption that if it incurs these costs in the retail environment it also incur these costs when wholesaling, although the detail explanation of the actual workcenter avoided cost identification process is missing from Mr. Eachus’ testimony and exhibits. I will discuss the problems with this lack of detail below. However, in his testimony Mr. Eachus does explain that service ordering avoided costs were determined on the basis that GTE has failed to develop the automated OSS interfaces which would allow the reseller to process its orders directly into the GTE systems similar to the methods available to GTE itself for its own retail products. This results in the reseller paying these costs twice because GTE has failed to provide it with equitable treatment. The result of this approach will require a reseller to incur its own order processing costs for inputting services orders as well the ILEC’s duplicative order entry costs, while GTE enjoys the automated OSS interfaces denied its competitors. This is clearly anticompetitive and discriminatory and, as such, is an impediment to resale competition in violation of the Act and the FCC Order. GTE explains that billing and collection costs will be avoided but then it adds back some amount to its study for the costs it believes will be incurred. GTE fails to explain where these costs came from or how they were determined. This is another example of the lack of adequate documentation of GTE’s study. Finally, GTE proposes to remove access expenses from account 6623 on the basis that these costs are for services not for resale. However, GTE leaves access costs in its denominator for the determination of its indirect avoided cost factor as will be discussed below. This is just another inconsistency in GTE’s study. Q. PLEASE EXPLAIN THE ERROR IN GTE’S DETERMINATION OF THE INDIRECT AVOIDED COST FACTOR. A. GTE employs an inflated denominator in its determination of the indirect avoided cost factor which results in a grossly understated indirect factor and, thus, a grossly understates indirect avoided costs. GTE incorrectly includes indirect expenses and excluded services in the denominator when calculating the indirect factor. Specifically, GTE includes general support expenses and corporate operations expenses in the denominator. Since these are the costs to which the factor will be applied, it is mathematically incorrect to include these costs in the calculation of the that factor. GTE also includes access, call completion, and all of numbering services costs in the denominator even though all access costs and call completion costs and the majority of numbering services costs were excluded from the identification of directly avoided costs. I would note that I believe that the access expenses identified on Mr. Eachus’ Attachment 1A page 3 of 5 are only a small portion of the total access expenses which should be removed from this calculation because the relevant access revenue which GTE removes from the denominator in its avoided costs calculation on page 1 of 5 of the same Attachment 1A are more than ten times larger than the access expenses. Once these limited corrections are applied to GTE’s indirect avoided cost factor calculation, and even when applying the corrected denominator to GTE's grossly understated direct avoided expenses, the resulting indirect factor is adjusted from 6.7 percent to 10.1 percent. This adjustment alone would raise the avoided cost discount from 12.87 percent to 14.03 percent even using GTE’s understated directly avoided costs and its overstated revenue-based denominator. Q. PLEASE EXPLAIN HOW GTE’S USE OF REVENUE IN THE DENOMINATOR OF THE AVOIDED COST DISCOUNT IMPACTS THE RESULTS. A. GTE’s use of revenue greatly inflates the denominator which results in an understated avoided cost discount. GTE as well as MCI and the FCC chose to use expenses as the vehicle to determine the percentage of the ILECs operations which are attributable to retail activities. Given that expenses are the vehicle for this measurement in the numerator of the calculation it is mathematically incorrect to use revenues in the denominator. In fact, the result of using revenues is to assure the ILEC the same absolute profits in wholesaling services as it received when it retailed those same services. It is important to remember that this process is not intended to set new rates but, instead, will establish an avoided cost discount which will be applied to existing rates. Since these existing rates already have a return embedded in them, GTE’s use of revenues which would include its return would double count these costs in its determination of an avoided cost discount. In fact, if GTE were overearning during the period from which the revenues were taken, GTE’s avoided cost discount approach would include its excess earnings in the rates charged to its competitors. MCI’s approach, on the other hand, assures the ILEC the same margin on those services. I submit that this is a very reasonable outcome. One could argue that ILECs should not expect the same margin when wholesaling as when retailing. It is not possible to perform a comparable calculation using expenses because MCI cannot determine the amounts of expenses for excluded services such as access which need to be deducted from total expenses in the denominator because GTE excluded these expenses from its determination of the numerator. Q. DO YOU FIND ANY OTHER PROBLEMS WITH GTE’S AVOIDED COST STUDY? A. GTE’s proposed avoided cost study is insufficient in describing the specific procedures used in determining the avoided cost factors on a workcenter basis. GTE fails to explain account by account how its study has determined whether a cost is avoided or not. Consequently, GTE’s study is inadequately documented. Because of the major flaws in GTEs study methods, its lack of documentation, GTE’s Avoided Cost Study cannot be used as the basis for adopting an avoided cost discount for GTE’s resold service. Instead, the Commission should adopt MCI’s avoided cost study and the resulting avoided cost discount of 18.11 percent as the only reasonable avoided cost discount for GTE in Washington. Q. DO YOU AGREE WITH THE RECOMMENDATIONS OF PUBLIC COUNSEL WITNESS WILLIAM DUNKEL? A. I agree with some of his recommendations but disagree with his position on the denominator to be used. I am surprised that Mr. Dunkel would fall into the trap of using revenues as the denominator given his position on the calculation of the indirect factor. Mr. Dunkel clearly believes that direct expenses should be used in the denominator for the determination of the indirect avoided cost factor. MCI agrees and has modified its cost study from its original filing in the arbitration proceeding. For the same mathematical reasons expenses should be used in the denominator of the avoided cost calculation. This is due to the fact that this process does not set a new rate but is applied to existing rates which are the basis of revenues. The use of revenues allows the ILEC to embed its return in the avoided cost calculation when that return is already included in the rates to which the discount will be applied. Moreover, it is just bad math to use revenues unless the differences between expenses and revenues are properly accounted for as done by AT&T. The purpose on this calculation is to determine the percentage of the ILEC’s operations which are attributable to retailing. If expenses are used to identify the avoided costs and thus the numerator, expenses must be used in the denominator. For example, if revenues for an ILEC are $100, expenses are $80 dollars and avoided expenses are $20 the question becomes what is the avoided cost percentage. Mr. Dunkel believes it is 20 percent or 20 over 100. But this is mathematically incorrect since the $20 in expenses were taken from a universe of $80 in expenses. Consequently the portion of the ILEC’s operations attributable to retailing is 25 percent or 20 over 80. The results of Mr. Dunkel’s approach would be as follows: Retail Discount Wholesale Revenues $100 20% $80 Expenses $80 $60 Profits $20 $20 Margin 20% 25% Mr. Dunkel’s approach attempts to ensure the ILEC enjoys the same profits whether wholesales or retails and grant it an increased profit margin. MCI believe this is rate making from a revenue requirement perspective and not an accurate determination of the avoided cost discount. I would note that Mr. Dunkel suggests that only GTE and AT&T use revenues in their avoided cost calculations. However, USWC’s inclusion of capital costs has the effect of using revenues as the denominator. Q. DO YOU AGREE WITH THE RECOMMENDATIONS OF STAFF WITNESS PAULA STRAIN? A. I agree with the majority of Ms. Strain’s recommendations. However, Ms. Strain, similar to Mr. Dunkel, expresses the same revenue requirement mind set regarding the calculation of the avoided cost discount. In attempting to ensure the ILEC’s revenue requirement, Ms. Strain is willing to accept a mathematically incorrect avoided cost discount. Referring to my example above, Ms Strain seems willing to accept that the avoided cost discount is 20 percent when, clearly, 25 percent of the companies operations are attributable to retailing. Ms. Strain presumes that the existing revenues reflect the ILEC's prescribed rate of return with no factual basis for this presumption. Again, should the ILEC be overearning at the time its revenues are measured, Ms. Strain's approach would embed those overearnings in the avoided cost discount. In reality, the ILECs earnings can only be measures after the discounts are applied. Only then should the Commission attempt to adjust revenues to meet that ROR. However, that adjustment should be made to rates not the avoided cost discount as Ms. Strain suggests. Q. DO YOU AGREE WITH AT&T’S AVOIDED COST MODEL? A. Yes. Generally, I agree with the methodology employed by AT&T in c