I. INTRODUCTION, SUMMARY AND CONCLUSIONS Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. A. My name is Thomas M. Zepp. My business address is 1500 Liberty Street, S.E., Salem, Oregon, 97302. Q. WHAT IS YOUR PROFESSION AND BACKGROUND? A. I am an economist and Vice President of Utility Resources, Inc., a consulting firm. I received my Ph.D. in Economics from the University of Florida. Prior to jointly establishing URI in 1985, I (1) was a consultant at Zinder Companies, (2) was a senior economist on the staff of the Oregon Public Utility Commissioner and (3) taught business and economics courses at three different colleges and universities. I have been deposed or testified on various topics before regulatory commissions, courts and legislative committees in eighteen states, before two Canadian regulatory authorities and before four Federal agencies. I have prepared many economic studies and analyses of telecommunication issues and services. This experience includes estimates of the incremental costs of providing several types of local and interoffice telecommunications services, negotiations of cost-based pricing of E-911 services, analyses of the competitive status of private line services, determination of proper depreciation rates, estimates of costs of capital facing several different telecommunications companies and examination of ways to establish efficient pricing of interconnection services. Q. HAVE YOU BEEN INVOLVED IN REGULATORY PROCEEDINGS IN WASHINGTON IN THE PAST? A. Yes. I testified in a large number of telecommunications cases to include UT-970766, UT-960369, et. al., UT-950200; UT-941464, et. al.; UT-930957, et. al.; UT-911488, et. al.; UE-911008; UT-901029; UT-89-2698-F; U-88-2417-F; U-87-796 and U-85-52; and U-86-40 on behalf of the Washington State Department of Information Services, the Washington Telecommunications Ratepayers Association for Cost-based and Equitable Rates ("TRACER"), the City of Bellevue, VIACOM Cable, Enhanced TeleManagement, Inc. and MCI. I also represented the Washington State Department of Community Development Emergency Management Office in its negotiations with telecommunications companies regarding E-911 rates and have testified before the Washington legislature on behalf of TRACER. I have also testified in recent arbitrations and cost dockets on behalf of AT&T Communications and MCIMetro Transmission Access Services. Exhibit___(TZ-1) provides a more complete resume of my past professional activities. Q. PLEASE STATE THE PURPOSE OF THIS TESTIMONY AND OUTLINE YOUR TESTIMONY? A. TRACER has asked me to address proper costing principles, policy considerations, and pricing of lines in high cost areas. I discuss those principles, policy considerations, and recommendations in Section II of my testimony. In Section III, I distinguish between two demand concepts and explain why it is appropriate to compute costs in this proceeding that are consistent with the practice of outside plant engineers who place loop distribution facilities to meet ultimate demand instead of current demand. I explain why it is important to make certain that the costs to provide service (in the numerator of the cost per unit calculation) is consistent with the units in the denominator of that calculation. In Section IV, I explain how these concepts should be applied to modify the HAI Model ("HM") to make cost estimates by wire center. In Section V, I discuss the basis for my modifications of the HM to reflect actual cost savings available to local exchange companies ("LECs") from deferred taxes and not paying for net salvage costs until they occur. I discuss revenue benchmarks in Section VI. In Section VII, I present the results of combining the revised cost estimates made with the HM with revenue benchmarks to compute universal service funds ("USF"). Finally, in Section VIII of my testimony I explain how my calculations follow or are extensions of the guidelines the Commission has provided. Q. PLEASE STATE THE MAJOR CONCLUSIONS THAT YOU HAVE REACHED? A. My conclusions are as follows: 1. The Commission should adopt the sum of the TELRICs for elements required to provide basic exchange service, which include forward-looking retail costs, as the measure of costs in this proceeding. 2. TELRIC estimates should have the numerator (the total costs of providing the element) consistent with the denominator (number of units the costs are designed to provide), otherwise the matching principal is violated. 3. There is no difference in a correct estimate of the long run incremental cost per unit of the first line to a location and the long run incremental cost per unit of all other lines to the same location. Any analysis which shows there is such a difference is flawed, either because it is in part a short-run analysis, or because such a analysis ignores that, if such a categorization were to be modeled, some of those costs must be shared; thus, the analysis is not a TELRIC analysis. 4. Outside plant engineers design distribution plant to serve ultimate demand in distribution areas. It is appropriate to construct economic cost studies to reflect that engineering practice. 5. Per unit costs of loops will be overstated if the costs of loop distribution facilities designed to meet ultimate demand are divided by current demand. 6. If only current demand is to be served, or in the future the loop supplier expects to serve fewer loops than are served today, then loop plant costs should assume only enough plant is placed to meet objective fills, otherwise costs are not minimized. 7. TRACER recommends that the Commission determine the level of USF subsidies based on cost data computed at the wire center level. 8. TRACER recommends that the USF provide subsidies to the first residential line and the first business line at each location. Such a policy recommendation is consistent with the basis for universal service support derived from a consideration of economic externalities all customers of the public switched network receive from being able to call more locations. 9. TRACER recommends that version 5.0a of the HAI Model, as I have adjusted it, be used to compute USF costs. Adjustments recommended by TRACER include (1) an adjustment to incorporate the benefits of deferred taxes, (2) recognition of net salvage costs/benefits when they are expected to occur, and (3) an adjustment to match the costs in the numerators of the TELRIC calculations with the denominators. 10. The third adjustment requires that costs of the distribution plant being placed by the cost proxy model to meet ultimate demand be divided by a weighted average of the number of loops a cost minimizing outside plant engineer would anticipate will be served during the useful life of the distribution facilities. 11. The estimates of universal service fund subsidies presented here are preliminary only, because TRACER did not receive responses to data requests from U S WEST, GTE, and Sprint in time to prepare this testimony. 12. Assuming a revenue benchmark of $31 for residential lines and $51 for business lines, a preliminary estimate of the USF requirement for the exchanges now served by U S WEST, GTE, and Sprint is $33,268,320, if only one residential and one business line per location are supported. 13. Assuming a revenue benchmark of $31 for residential lines and $51 for business lines, a preliminary estimate of the USF requirement for the exchanges now served by U S WEST, GTE, and Sprint is $37,191,638, if all lines in those exchanges are supported. II. PRINCIPLES, POLICY CONSIDERATIONS AND RECOMMENDATIONS Q. WHAT COST PRINCIPLE SHOULD BE ADOPTED TO DETERMINE THE COSTS IN THIS USF PROCEEDING? A. Costs should be based on the Total Element Long Run Incremental Costs ("TELRIC") of the Unbundled Network Elements ("UNEs") and the forward-looking retail costs required to provide residential and business services in the various wire centers now served by U S WEST, GTE and Sprint. The TELRIC concept has been thoroughly discussed and evaluated in several cases before this Commission in the last two years. Under this cost concept, the long run incremental per unit costs are determined by an analysis of the cost to serve the total demand for the various network elements. This is the appropriate method to determine costs in a USF proceeding. I have used version 5.0a of the HAI Model ("HM") to compute the proxy costs. To avoid understating the full economic costs in high cost areas, I have included the default value of 10.4% for variable support costs. Those variable support costs are often called "common costs" by other parties. Q. DO CONCERNS ABOUT WHETHER TO SUBSIDIZE ONE LINE OR ALL LINES ENTER INTO THE DETERMINATION OF AN APPROPRIATE COST METHODOLOGY? A. No. The costs are determined first, and then a decision must be made as to whether to subsidize primary lines or all lines in high cost areas. If costs for only first lines are determined when the total demand for service is larger, at least three problems invalidate the usefulness of such cost estimates. First, it would require a major revision in the cost proxy models to compute shared and directly attributed costs instead of TELRICs. Because, on average, more than one loop is demanded per residence and business location, the bulk of the loop costs would have to be classified as shared costs and, thus, could not be attributed to either loop. The cost proxy models do not compute shared and directly attributable costs, and, thus, the models would have to be revised substantially to provide relevant measures of shared and directly attributable costs. Without the establishment of the shared costs, a cost estimate with the cost proxy models would require an arbitrary allocation of shared costs only to first lines. Second, if the additional loops are considered incremental to the first loop and not part of the long run demand, the cost estimates are short run and not long run costs. A proper long run cost model would determine the least cost way of providing all loops. Third, from the supplier's point of view, if more than one loop is demanded, one loop cannot be distinguished from the other, and, thus, there is no unique determination of the cost of either loop. Only if the long run cost of the total demand is modeled -- as is required in a proper TELRIC study -- would the ambiguity in estimates of costs be eliminated by establishing the same per element cost for each loop in total demand. I discuss this further in Section VIII of my testimony in response to WUTC guideline #2. Q. WHAT IS TRACER'S POLICY PROPOSAL REGARDING THE LOOPS TO BE SUBSIDIZED AND PRICES WHICH SHOULD BE SET? A. TRACER proposes that only primary residential lines and primary business lines be subsidized. The original justification for universal service support by other ratepayers was recognition that customers in lower cost areas receive a benefit by being able to call others in high cost areas. These so-called "externalities" justified charging prices in excess of cost to business customers and residential customers in low cost areas to reduce the potential prices that had to be charged in high cost areas. The subsidized prices in higher cost areas encouraged greater penetration. Q. DOES MORE THAN ONE LINE PER LOCATION HAVE TO BE SUBSIDIZED TO ALLOW OTHERS IN THE NETWORK TO PLACE CALLS TO THAT LOCATION? A. No. If three families are living in one apartment or sixteen college students were living in one house, an individual living at each of those locations could be reached if only one line provided service to the location. Subsidization of additional lines would not provide any significant additional universal service benefit. Q. WHAT RETAIL PRICES SHOULD THE WUTC AUTHORIZE THE INCUMBENT LECS TO CHARGE FOR PRIMARY LINES? A. TRACER recommends that the WUTC authorize the incumbent LECs to charge local service retail prices for primary lines that do not exceed the prices that are charged today. Q. HOW ABOUT PRICES FOR ADDITIONAL LINES? A. TRACER recommends that there be no immediate change in the local service retail prices charged for additional lines that do not receive any explicit subsidies except to the extent that the Commission establishes surcharges on all lines to fund all or part of the USF. Additional lines should pay such surcharges. TRACER agrees with the FCC when it said: Although Congress said in the Act that "support should be explicit" (emphasis added), it did not provide that support shall be explicit. Congress's decision to say "should" instead of "shall" is especially pertinent in light of Congress's repeated use of "shall" in the 1996 Act. Moreover, in the Act's legislative history, Congress qualified its intention that "support mechanisms should be explicit, rather than implicit," with the phrase "[t]o the extent possible." Thus, Congress recognized that the conversion of the existing web of implicit subsidies to a system of explicit support would be a difficult task that probably could not be accomplished immediately. As explained below, we conclude that a process that eliminates implicit subsidies from access charges over time is warranted primarily for three reasons. First, we simply do not have the tools to identify the existing subsidies precisely at this time. Second, we prefer to rely on the market rather than regulation to identify implicit support because we are more confident of the market's ability to do so accurately. Third, even if we were more confident of our ability to identify all of the existing implicit support mechanisms at this time, eliminating them all at once might have an inequitable impact on the incumbent local exchange carriers. . . . We find that the Act does not require, nor did Congress intend, that we immediately institute a vast set of wide-ranging pricing rules applicable to interstate and intrastate services provided by incumbent LECs that would have enormously disruptive effects on both ratepayers as well as the affected LECs. (Emphasis added). TRACER does not recommend elimination of the intricate web of implicit subsidies at this time, and, thus, recommends that the additional lines in high cost areas continue to be priced at current levels, except for any systemwide surcharges imposed on all lines. The Commission should allow the existing rates to continue to be charged until it determines that further retail rate deaveraging of switched services is appropriate and what it already has ordered is encouraging competition to emerge and universal service to continue. III. DEMAND CONCEPTS AND COSTING METHODOLOGIES QQ. DO YOU HAVE ANY PRELIMINARY OBSERVATIONS ABOUT HOW COSTS PER UNIT SHOULD BE COMPUTED? A. Yes. Correct estimates of TELRICs should have the numerator (the total increment of costs required to provide the element of concern) consistent with the denominator (the demand for the element to be provided with those facilities). Q. DO YOU HAVE ANY OTHER PRELIMINARY COMMENTS? A. Yes. Loop costs dominate the retail costs of service in high cost areas. For that reason, I focus on those loop costs in my testimony. In this section of my testimony I explain why it is appropriate to adopt an estimate of the "average" future demand for loops, if the cost proxy model places facilities to serve the ultimate expected demand in distribution areas. I also note that if demand units are limited to current demand for service, objective fill must be used to determine costs consistent with the level of demand. Q. WHAT IS THE CORRECT DEMAND CONCEPT TO USE TO ESTIMATE LOOP COSTS IN A SCORCHED NODE COST ANALYSIS? A. In a "scorched node" cost analysis, the analyst estimates the minimum costs of providing loops if all telecommunications facilities were scorched but the existing nodes (central office locations) in the network remained. Inputs in the HM can be set to compute the costs which would be incurred to meet two alternative specifications of demand in such a scorched node scenario. The alternative concepts are as follows: Concept No. 1: Use the cost model to minimize the cost of providing the plant necessary to serve only the demand for an element that exists today. Concept No. 2: Use the cost model to minimize the cost of providing the plant necessary to serve demand expected during the life of the facilities being place. Sometimes this is called the ultimate demand. Q. WHICH OF THESE CONCEPTS HAS U S WEST ADVOCATED TO ESTIMATE THE COST OF DISTRIBUTION PLANT? A. The second concept. U S WEST has stated in the past, and continues to state in recent testimony in Minnesota and North Dakota, that the second concept is the proper costing concept. In Minnesota, U S WEST's outside plant engineer Mark D. Schmidt states that: distribution networks . . . are planned and designed to accommodate the known requirements for customers over the foreseeable future. Typically distribution cables are buried and U S WEST sizes these cables to accommodate the foreseeable growth so that it doesn't have to re-dig in neighborhoods to place additional cables. This engineering method both avoids the cost to place the additional facilities and the irritation to customers who would otherwise have their yards and landscaping disturbed by this subsequent construction. Supplemental Direct, Docket No. P-442 et. al., dated October 20, 1997. In North Dakota, Mr. Schmidt also pointed out that: U S WEST's distribution networks are sized for the "ultimate" demand of its customers. . . U S WEST realized that its two cable pairs per household design would not enable its customers to receive all the services that they desired then and into the future. Consequently, U S WEST changed its distribution sizing policy to provide three pairs per home. Direct Testimony, Case No. PU-314-97-12, December 22, 1997. In effect, U S WEST models the cost of meeting the ultimate demand for service in a distribution area and has decided that it now needs, on average, more than two pairs per household to provide service U S WEST expects will be demanded in the future. Q. WILL PLACING FACILITIES TO MEET THE CURRENT AS WELL AS EXPECTED FUTURE DEMAND IN DISTRIBUTION AREAS BE COST JUSTIFIED? A. It depends. By placing enough capacity to serve ultimate demand in distribution areas, potential costs of reinforcing cable are reduced. To be cost justified, the present value of the ongoing costs of investing in larger copper cables than are needed today must be more than offset by the present value of expected savings in placement costs. Given the relatively large costs of placing distribution facilities, outside plant ("OSP") engineers usually conclude that placing the extra plant is cost justified, and, thus, the second demand concept is consistent with what OSP engineers actually do. Costs based on that concept, however, require a proper matching of the numerator (costs to meet the ultimate demand) with the denominator (a level of demand expected in the future which is consistent with the facilities being placed). Q. ARE THERE ANY SITUATIONS WHEN THE TWO DEMAND CONCEPTS WOULD BE THE SAME? A. Yes. In the situation where no growth is expected, today's demand would be the same as the expected future demand. Q. HOW WOULD COSTS BE MINIMIZED IN SUCH A SITUATION? A. If no growth is expected, costs would be minimized by placing no more plant than is necessary to achieve an objective fill factor. For loop plant, this would be a target fill factor of 85% or higher fill factor. The other 15% would be kept available for broken pairs, for administrative purposes, and for uncertainty with respect to growth. Even if no growth is expected, the future demand would be uncertain. Therefore, it would be appropriate to retain some spare capacity for uncertainty associated with the current level of service. Q. HAVE YOU SEEN ANALYSES WITH THE COST PROXY MODELS IN WHICH IT IS ASSUMED THAT FACILITIES ARE BEING PLACED TO SERVE ONLY CURRENT DEMAND? A. Yes. In most analyses of the costs of UNEs or costs used in USF proceedings that I have seen, the models have been used to determine the cost of serving only current demand. Q. IF SUCH AN ASSUMPTION IS MADE, WHAT FILL FACTORS SHOULD BE ADOPTED IN THE ANALYSES? A. The analysis should adopt objective fill factors. If fill factors any smaller than the appropriate objective fill factors are assumed, the cost of serving the current demand will not be minimized. From another perspective, it can be seen that this is the correct fill factor concept in that it permits the LEC to provide service at minimum costs to current customers, if there was no additional growth. There is no need to adopt a lower fill factor to serve the current customers. Thus, any extra plant being placed (by adopting smaller fill factors) is caused by future expected demand, not current demand. Q. HAS THE WUTC ADOPTED OBJECTIVE FILL FACTORS TO COMPUTE LONG RUN INCREMENTAL COSTS IN PAST CASES? A. Yes, it has. In a number of past WUTC cases this criterion was found to be appropriate. Based on my understanding of past findings by the Commission, I did not address the issue of appropriate fill factors in Docket UT-960369, et. al.. I expect other parties also did not address the fill factor issue, because they, too, thought the Commission had already recognized that objective fill factors should be used to determine long run incremental costs to meet current demand, and, thus, saw no need to revisit the issue. As I have explained above, in the special case where cost of only current demand is modeled, objective fill factors should be adopted. That is not inconsistent with findings of the Commission in its 8th Order in Docket UT-960369, et. al.. It is clear the Commission recognized that growth in demand must in some way be recognized if more plant is being placed today than is required to serve current demand. The analysis I develop here expands on that basic finding to recognize, however, that it is not just a matter of fill factors, but a need to match the numerator (cost) and denominator (lines) of the calculations being made. Q. ARE THERE SITUATIONS WHERE IT IS APPROPRIATE TO ADOPT FILL FACTORS LESS THAN OBJECTIVE FILL FACTORS? A. Yes, if the analyst wants to recognize that plant is placed to meet future as well as current demand. In that case it is appropriate to adopt a smaller fill factor, if growth in loops is recognized in the denominator of the cost calculation. Here, again, the objective fill factor would be a relevant consideration in the cost estimate, but the cost calculation would assume that objective fill would be achieved at some time in the future. Thus, on average, during the life of the plant a fill factor less than the objective fill would be derived. If, however, the cost object is computation of the lowest cost of meeting the current demand, objective fills must be assumed. Any smaller fill factors force the cost proxy model to place more plant than is required to meet today's demand, and there would be a matching problem between the costs computed and the demands which could be served with the loops constructed. Q. DOES THE DEFAULT VERSION OF THE HAI MODEL HAVE A PROPER MATCH OF THE NUMERATOR AND DENOMINATOR WHEN IT COMPUTES DISTRIBUTION COSTS? A. No. The default fill factors in the HAI Model place more plant than is required to serve current demand at least cost. If only current demand is to be recognized in the denominator of the cost calculation, less plant could be placed, and demand could still be served. Q. WOULD RUNNING A COST PROXY MODEL WITH OBJECTIVE FILL FACTORS ADDRESS THE CONCEPTUAL ISSUE YOU RAISED ? A. No. That choice does not address the issue of which demand concept is the basis for actual decisions being made by OSP engineers when they construct distribution plant. Running the cost proxy model with objective fill factors does not recognize that OSP engineers build plant to serve ultimate demand, not just current demand. The appropriate analysis is one that determines a cost proxy for what OSP engineers actually do. In such an analysis it is appropriate to recognize that OSP engineers take into account potential positive line growth in distribution areas and the expected life of the facilities being placed. The cost minimizing engineer would take objective fill into account but place facilities such that objective fill is not expected to be reached until the end of the life of the facilities being placed. Q. WHEN SHOULD COST ESTIMATES BE BASED ON OBJECTIVE FILL FACTORS? A. If the Commission determines that it wants cost estimates to be limited to the costs to serve known current demands, those cost estimates should be based on objective fill factors. If not, costs of serving just the current demand are not minimized. Unfortunately, though this approach appears to provide some comfort in that it ties the costs to "actual" known demands, it overstates relevant TELRICs and, thus, the need for universal service support. If indeed OSP engineers believe it is less costly to build to meet ultimate demand, the relevant costs are those that reflect the cost to meet demand not just today but also in the future. Q. WHY DO YOU CONCLUDE THAT ULTIMATE DEMAND SHOULD BE RECOGNIZED IN COMPUTING LOOP COSTS? A. Costs should be based upon what outside plant engineers say they do when they place outside plant. The issue is what do telecommunications companies actually do when they place plant, and what is the best cost proxy for what they actually do. Based upon a number of discussions I have had with outside plant engineers over the last two years, as well as the comments of Mr. Schmidt which are quoted above, I understand that OSP engineers look beyond current demand. More realistic estimates of distribution costs are made if the analyst not only recognizes current demand, but also the potential for growth in distribution areas and the expected life of the facilities being placed, as well as limitations on the use of such plant that are placed by objective fill considerations. Q. WHAT ARE THE ECONOMIC IMPLICATIONS OF OSP ENGINEERS SAYING THEY PLACE DISTRIBUTION PLANT TO SERVE ULTIMATE DEMAND INSTEAD OF PLACE JUST ENOUGH PLANT TO MEET CURRENT DEMAND? A. It implies that OSP engineers expect the savings in cost per line generated by placing plant today to meet ultimate demand (expected to be obtained from economies of scale and not having to reinforce the distribution network) are larger than the additional carrying costs The carrying costs are the cost of money and other capital related costs of holding assets (extra loops) that are not currently producing revenues. of placing more plant today than is needed to meet current demand. If this were not true, an efficient telecommunications company would place just enough plant to meet current demand and then reinforce that plant at later dates as demand grows. Q. WHAT IS THE IMPACT ON COST ESTIMATES IF COSTS TO MEET ULTIMATE DEMAND GO INTO THE COST PROXY MODEL BUT ALL OF THOSE COSTS ARE ATTRIBUTED TO CURRENT RATEPAYERS? A. The impact is today's ratepayers and competitors pay for loops that are planned to be used to provide service to future customers and future competitors. With this mismatch of costs and demand units, as the demand increases in the future, incumbent LECs would collect more revenue than the costs to provide the distribution facilities. Q. HOW DID YOU COMBINE INFORMATION ABOUT FUTURE AS WELL AS CURRENT DEMAND TO COMPUTE THE APPROPRIATE LOOP PRICE? A. I have used the HAI Model to make my calculations. In effect, I compute the numerator of the cost per unit calculations based on facilities placed to meet ultimate demand implied by the BCPM. For the denominator of the cost per unit calculation, I compute a conservative measure of the levelized present value of the demand for loops expected in various years in the future. This levelized present value of demand is, in effect, a conservative measure of the "average" demand which matches the cost of facilities with expected utilization of those facilities. Q. HOW CAN THE HAI MODEL BE REVISED TO COMPUTE LOOP COSTS THAT WOULD OCCUR IF PLANT IS PLACED TO MEET ULTIMATE DEMAND INSTEAD OF DEMAND AT THE TIME LOOPS ARE SCORCHED? A. If one accepts the initial fill factors in BCPM as a basis to compute the amount of plant required to meet ultimate demand, such a calculation could be made. The HAI Model can be easily adjusted to place that much plant in distribution areas for each wire center by adjusting the target fill factors. These target fill factors vary slightly for the three LECs because there are slight differences in BCPM inputs. Conceptually, however, the same approach is used to compute each set of costs. The cost of the plant placed to meet ultimate demand that is determined by the HAI Model would then be divided by an appropriate average of the number of loops served tomorrow as well as today. These calculations assume the incumbent LECs earn normal profits on loop plant not yet producing revenues. Those higher costs are offset by the economies of scale that the LECs are expected to achieve when placing loop plant to serve ultimate demand. Q. HAVE YOU ADDRESSED THIS ISSUE IN PAST CASES? A. Yes, but in an informal way. In U S WEST's UNE loop cost model, there are two distribution models used to determine costs for residential customers located in areas with small and large lots, respectively. U S WEST assumes it will place three pairs per household/customer in those distribution areas, but divides those plant costs by current demand. This calculation produces a mismatch of the numerator (costs to meet ultimate demand) and the denominator (current demand). Current demand is generally less than the ultimate demand the facilities in the numerator are designed to serve. In the past, I have noted that if it makes sense to place three pairs per customer, it is reasonable to assume that on average, half of them will be demanded during the life of the plant. The calculations I make here are similar but are based upon plant placement costs implied by BCPM for all services. Q. HAVE REGULATORY COMMISSIONS ADDRESSED THIS ISSUE? A. Yes. The Oregon Public Utility Commission ("OPUC") has addressed this issue in Order 97-145 by adopting a measure of the average demand for the distribution facilities that are being placed as the denominator of the cost per unit calculation, instead of the demand at the time the facilities were scorched and replaced. The OPUC Staff and U S WEST reached a stipulation in which it was agreed to use the average feeder fill factor as a surrogate for the average distribution fill factor. The stipulation adopted by U S WEST and Staff, and accepted by the OPUC, recognizes that the distribution plant being placed is going to be used to provide more service in distribution areas than is currently demanded. Both the method I propose and the one adopted by the OPUC provide a better match of the numerator and