Ex._____ (TLS-Testimony) Docket No. UT-960323, 960326, 960337 Witness: Thomas L. Spinks. BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION In the Matter of ) ) DOCKET NO. UT-960323 MFS COMMUNICATIONS COMPANY, INC.’S ) ) Petition for Arbitration Pursuant to 47 U.S.C. ) §252(b) of the Interconnection Rates, Terms and ) Conditions with U S West Communications, Inc. ) __________________________________________) ) In the Matter of ) DOCKET NO. UT-960326 ) TCG SEATTLE ) ) Petition for Arbitration Pursuant to 47 U.S.C. ) §252(b) of the Telecommunications Act of 1996. ) __________________________________________) ) In the Matter of the Interconnection Agreement ) DOCKET NO. UT-960337 Between ) ) ELECTRIC LIGHTWAVE, INC. and ) U S WEST COMMUNICATIONS, INC. ) ) Pursuant to 47 U.S.C. §252. ) __________________________________________) DIRECT TESTIMONY of Thomas L. Spinks STAFF OF WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION MARCH 11, 1998 Q. PLEASE STATE YOUR NAME, EMPLOYER AND BUSINESS ADDRESS. A. My name is Thomas L. Spinks. I am employed by the Washington Utilities and Transportation Commission. My business address is P.O. Box 47250, Olympia, Washington 98504. Q. IN WHAT CAPACITY ARE YOU EMPLOYED? A. I am employed as a Regulatory Consultant. Q. HAVE YOU PREPARED A STATEMENT OF YOUR QUALIFICATIONS? A. Yes. A summary of my education and experience is provided as Ex.___(TLS-1). Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY? A. On February 26, 1998, the Commission issued a Notice to File Written Testimony in Dockets UT-960323, UT-960326, and UT-960337 addressing several issues. The purpose of my testimony is to discuss the distinction between obsolete and useful central office equipment (COE) and between declining utilization and spare capacity for growth, and to provide the Commission information regarding the role depreciation rates play in recovery of mandated equipment removal costs, as it pertains to the issue of collocation costs. Q. WHAT IS THE DISTINCTION BETWEEN OBSOLETE AND USEFUL COE? A. The terms “useful” and “obsolete” are not mutually exclusive. COE may or may not be useful in providing service. If it is not used and useful, then it must be retired from service. Firms typically have a mix of both “state- of-the-art” and “obsolete” equipment at any given point in time. There are two types of obsolescence, functional and economic. Functional obsolescence occurs when newer versions of equipment are introduced that are faster and/or have additional functionality. Economic obsolescence occurs when new equipment costs are lower than existing equipment costs for performing like and/or additional functions. Obsolete equipment may still be useful for providing service or acting as backup spare capacity in the event it is needed. In either case it would be considered “used and useful” for regulatory purposes. Also, it should be noted that under rate base - rate of return regulation, companies have incentives not to retire equipment in a timely fashion even though the obsolete equipment is no longer necessary to provide service. Staff has not conducted any investigation to determine whether any of U S WEST’s obsolete COE should be retired from service. Q. WHAT IS THE DISTINCTION BETWEEN DECLINING UTILIZATION AND SPARE CAPACITY FOR GROWTH? A. Generally, new equipment is sized to provide a certain amount of spare capacity for growth. Therefore, it is not necessary to keep the existing COE in service. This is particularly true for digital switches which are modular, meaning that growth modules can be quickly and easily added to provide additional capacity. In some cases though, a company may choose to keep existing analog switching equipment in service and provide additional capacity for growth with the newer digital technology. Under this scenario, the obsolete equipment is gradually phased out over time but does not function as backup or spare capacity. Q. WHAT ROLE DO DEPRECIATION RATES PLAY IN RECOVERY OF REMOVAL COSTS? A. Depreciation rates are developed to recognize and recover both the original cost of the investment and the net salvage value of the plant in question. In developing the plant account depreciation rate, the future net salvage value of the account is estimated based on both past and expected future costs. The past or historical net salvage value for each plant account is estimated by subtracting the historic cost of removal from the gross salvage amounts received, if any, for the retired plant. The amount of future net salvage (FNS) is expressed as a percent and included in the development of the depreciation rates in the formula where Depreciation Rate %. = (1 +/- %FNS -%Depreciation Reserve) / Remaining Life. Hence, currently approved depreciation rates include an adjustment to accruals for plant and equipment removal costs. Q. SHOULD THE COSTS OF EQUIPMENT REMOVAL BE INCLUDED IN CHARGES FOR COLLOCATION? A. No. Since customer’s rates have been recently adjusted in Docket UT-970766 and the costs of removing equipment are included in depreciation rates, allowing the company to charge such costs in collocation tariffs would result in double recovery of the removal expense. Q. WHAT IF EQUIPMENT REMOVAL COSTS IN A PARTICULAR LOCATION EXCEED THE REMOVAL COSTS PROVIDED FOR IN THE DEPRECIATION RATE CALCULATION? A. The cost of removal amount included in the depreciation rate calculation is an average figure based on actual experience which included both removal of equipment with a low cost and removal of equipment with a high cost. Hence, the average removal cost used in the depreciation rate calculation contemplates occasions where high costs are experienced for the removal of plant. Q. DO YOU HAVE ANY EXAMPLES SHOWING THE MAGNITUDE OF HISTORIC EQUIPMENT REMOVAL COST? A. Yes. Exhibit__(TLS-2) shows removal costs charged to the depreciation reserve for analog switch and analog circuit equipment accounts. Q. WHY ARE REMOVAL COSTS INCLUDED IN DEPRECIATION RATES? A. The Code of Federal Regulations (CFR) 47CFR Part 32.31(c) requires companies to account for removal costs in depreciation and states: “At the time of retirement of depreciable operating telecommunications plant, this account shall be charged with the original cost of the property retired plus the cost of removal and credited with the salvage value and any insurance proceeds recovered.” (Emphasis added) Q. SOME OF EQUIPMENT IN QUESTION HAS NOT BEEN RETIRED. SHOULD THIS BE OF CONCERN TO THE COMMISSION? A. No. The property in question, if not fully retired already, has been in service many years and is used only in a minimal way to provide service or as a backup. Thus the removal costs associated with the specific plant have likely been fully recovered. Generally, full recovery of a specific item of plant cannot be determined because the use of vintage group averaging relies on some property being in service longer than the average, while some property retires before the average life is reached. The use of the average cost of removal in the depreciation rate development ensures full recovery on an overall basis. Q. HOW SHOULD THE COSTS OF MOVING LIVE CIRCUITS OFF THE EQUIPMENT TO BE RETIRED BE TREATED? A. Staff’s view is that such costs would be an ordinary operating expense of the company and not specifically recoverable as a cost of collocation. The reasoning for this position is that the company has to retire the equipment eventually and must incur and bear the costs of doing so in the normal course of business. A mandate to remove this obsolete equipment earlier than the company otherwise planned should not act to shift the cost responsibility to another party. Decisions made by company management regarding when to retire equipment do not and should not determine cost responsibility for the retirement. Indeed, due to economic incentives of regulated companies to overstate investment, there is a question whether such equipment is truly performing a necessary function to begin with, or whether such equipment is redundant and unnecessary. Q. AS A POLICY MATTER, SHOULD THE COMMISSION ASSIGN THE COSTS OF REMOVAL TO COLLOCATORS? A. No. While the costs for equipment removal could be narrowly viewed as being “caused” by the collocation request, staff recommends that the Commission take a broader view of the retirement process and recognize that 1) costs are already being recovered in rates generally; 2) the amount of removal cost, as shown in Ex.__(TLS-2) is generally de minimis per dollar of equipment retired; and 3) placing the specific removal costs on collocators unnecessarily raises the cost of market entry to potential competitors and results in double recovery of the expense for the company. Q. DOES THIS COMPLETE YOUR TESTIMONY? A. Yes.CERTIFICATE OF SERVICE Docket No. UT-960323, UT-960326, UT-960337 I certify this day that I served a copy of the foregoing Direct Testimony of Thomas L. Spinks and Certificate of Service upon the parties listed below. DATED this 11th day of March, 1998. ___________________________ KRISTA L. LINLEY Sherilyn Peterson Perkins Coie 411 108th Ave., N.E., Ste. 1800 Bellevue, WA 98004-5584 Douglas G. Bonner Swidler & Berlin 3000 K Street NW Suite 300 Washington, D.C. Gregory J. Kopta Davis Wright Tremaine 2600 Century Square 1501 Fourth Avenue Seattle, WA 98101-1688 Brooks Harlow James Jordan Miller Nash Weiner 4400 Two Union Square Seattle, WA 98101-2352 Ellen Deutsch Electric Lightwave, Inc. 8100 NE Parkway Drive Suite 150 Vancouver, WA 98662 Tim Peters Electric Lightwave 8100 NE Parkway Drive Suite 140 Vancouver, WA 98662 Lisa Anderl US West, Inc. 1600 7th Avenue Room 3208 Seattle, WA 98191 Antony R. Petrilla Swidler & Berlin 3000 K Street NW Suite 300 Washington, D.C. 20007-5116