DECLARATION OF DAVID G. TUCEK 1 BEFORE THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION In the Matter of the Pricing Proceeding for Interconnection, Unbundled Elements, Transport and Termination, and Resale ) ) ) ) ) DOCKET NO. UT-960369 In the Matter of the Pricing Proceeding for Interconnection, Unbundled Elements, Transport and Termination, and Resale for U S WEST COMMUNICATIONS, INC. ) ) ) ) ) DOCKET NO. UT-960370 In the Matter of the Pricing Proceeding for Interconnection, Unbundled Elements, Transport and Termination, and Resale for GTE NORTHWEST INCORPORATED ) ) ) ) ) DOCKET NO. UT-960371 DECLARATION OF DAVID G. TUCEK I, David G. Tucek, declare as follows: 1. I have prefiled testimony on behalf of GTE Northwest Incorporated ("GTE") in this matter concerning total service/total element long run incremental costing ("TSLRIC," "TELRIC") methodologies, models and inputs. 2. In support of GTE’s May 5, 1997 Motion for Reconsideration The Motion for Reconsideration concerns GTE’s April 15, 1997 Motion to Compel., the purpose of this declaration is to further explain why the information requested by GTE concerning AT&T’s recently announced fixed wireless local phone system is both relevant to this proceeding and is calculated to lead to the discovery of admissible evidence. This information was requested of AT&T in GTE data requests numbers 83 through 87, inclusive. 3. Data requests numbers 83, 84 and 85 all seek information related to AT&T’s decision to commit resources to the development of its fixed wireless technology, which is a clear substitute for GTE’s wireline technology, or local loop. In particular, these data requests ask for information, including the underlying rationale and supporting documentation, for the depreciation lives, the expected revenues, and the hurdle rate for the cost of capital used by AT&T to evaluate the wireless system’s financial viability as a substitute for wireline loops As discussed below, such viability would depend on a comparison of the cost of the proposed wireless loop and the cost of wireline loops -- both wireline loops newly constructed by AT&T and unbundled wireline loops obtained from incumbent local exchange carriers at prices that at least cover TELRIC. Therefore, AT&T’s business case analysis will contain real estimates of wireline local loop costs in which AT&T had enough confidence to base a decision to invest in the new wireless technology.. Data requests 86 and 87 seek information about the specific capabilities of the wireless technology. These requests are relevant to this proceeding for several reasons. 4. First, the information sought in these requests is expected to demonstrate that AT&T employs economic depreciation lives when making its own investment and pricing decisions. This is in direct contrast to the position taken by several of AT&T’s witnesses in this cost docket. For example, AT&T witness Klick has criticized GTE’s cost models for using economic depreciation lives, rather than Commission prescribed lives using traditional regulatory approaches. At the same time, Dr. Cornell urges this Commission to seek outcomes consistent with GTE’s, U S WEST’s and other carriers’ participation in an effectively competitive market. Clearly, if AT&T makes its own internal investment and pricing decisions on the basis of economic depreciation lives for a competing technology to be used to enter this same market, AT&T must advocate the use of economic depreciation lives for incumbent carriers as well. The information sought in request number 83 speaks directly to the issue of economic depreciation. 5. The information sought in request number 84 is also relevant to the issue of depreciation. The revenue generated by the new technology will be determined by AT&T’s pricing and by the penetration of the technology into the residential and business markets. Information on how AT&T reaches decisions in pricing the services provided via this competing technology may also be relevant in Phase 2 of this proceeding concerning pricing. The economic life of GTE’s existing assets is determined by the period of time over which the investment can be recovered. This is driven by the pace with which AT&T’s competing technology is adopted and introduced, which in turn will be determined by the prices charged and additional revenues to be gained or preserved. 6. Likewise, the information sought in requests 86 and 87 is designed to demonstrate that AT&T’s competing technology affords it the opportunity to focus its marketing efforts with a precision that is not available to wireline carriers -- in effect, AT&T’s new technology will apparently give it the capability to target not only specific neighborhoods, but also individual homes and businesses within those neighborhoods. This capability will impair the ability of wireline assets to generate the revenue necessary to recover their costs, and will also speed the adoption and introduction of the competing wireless technology. The rate at which this technology is introduced is also relevant to AT&T’s claims that GTE’s NRC study should be based on a non-manual, electronic process. The ability of GTE to recover the cost of developing such a system is dependent on how long a major new entrant such as AT&T will purchase unbundled network elements or GTE’s resale services. Additionally, AT&T’s facilities-based entry into the new market via this competing technology may well discourage other firms from entering at all. These facts could call for (a) suspension of development of electronic systems that would only have a short life at best or (b) an immediate or very rapid cost recovery mechanism for such systems. Both of these phenomena will provide evidence to support not only the use of economic depreciation lives in the calculation of TELRICs, but also the specific lives proposed by GTE. 7. These requests are also relevant to the issue of whether a risk-adjusted, forward-looking cost of capital must be used in calculating TELRICs. Specifically, data request 85 asks for the hurdle rate for the cost of capital used by AT&T in determining the competing technology’s financial viability, along with the rationale and supporting documentation that justifies this value. AT&T’s response should reveal that in making its own internal business decisions it evaluates projects on the basis of their risks and on the returns offered by other investments -- in short, that it utilizes a forward-looking, risk-adjusted cost of capital. Again, if AT&T makes its own internal decisions on the basis of a forward-looking, risk-adjusted cost of capital, AT&T must also support the use of such a cost of capital in calculating the incumbent carriers’ TELRICs. 8. These data requests are also calculated to lead to the discovery of relevant and admissible evidence in addition to that noted above. The requests encompass the estimates AT&T makes for the cost and economic life of a local wireline loop. For example, the economic life of AT&T’s competing technologyy must reflect AT&T’s determination of the cost of the existing wireline technology. Likewise, AT&T’s determination of its hurdle rate for the cost of capital should reflect the risk inherent in introducing a new technology -- one key determinant of this risk is AT&T’s own assessment of what the investment cost of a local wireline loop actually is. This information is of critical importance to one of the central issues facing the Commission in this proceeding, namely, the selection of a costing methodology for the TELRIC of a local wireline loop. One way to validate a model is to compare its results to alternative estimates. In my rebuttal testimony (pages 17 through 20), I provide this Commission with two such alternative estimates; in its testimony, U S WEST has presented a third. Provided AT&T answers these data requests fully, and produces the underlying rationale and supporting documentation, AT&T’ s own assessment of the investment cost of a local wireline loop will provide a fourth As pointed out in GTE’s Motion to Compel, AT&T’s estimate of the forward looking investment cost of a wireline local loop is something greater than $1000, because AT&T announced that its wireless system would cost $1000 per household and that such an amount is less than a comparable wireline solution. I am informed that during argument on the motion to compel AT&T’s counsel asserted that AT&T’s wireless system would provide different capacity than a wireline local loop. While there are several kinds of wireline loops, each providing various capacities, the cost of an unbundled 2-wire loop is a fundamental starting point for all. AT&T’s argument and assertions on a motion should not be taken as fact; GTE should be allowed to explore this critical issue in discovery.. Moreover, while AT&T might be expected to disagree with U S WEST’s and GTE’s alternative estimates, this fourth alternative should, from AT&T’s perspective, be unimpeachable. This estimate should be particularly valuable in assessing the validity of AT&T’s Hatfield model, since AT&T has enough faith in the estimate to commit substantial resources to the development and testing of a new technology. Consequently, the Commission and all parties in this proceeding have a keen and vital interest in this information. I declare under penalty of perjury pursuant to the laws of the state of Washington that the foregoing is true and correct to the best of my knowledge. Date: David G. Tucek1 WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION In the Matter of the Pricing Proceeding for Interconnection, Unbundled Elements, Transport and Termination, and Resale ) ) ) ) ) DOCKET NO. UT-960369 In the Matter of the Pricing Proceeding for Interconnection, Unbundled Elements, Transport and Termination, and Resale for U S WEST COMMUNICATIONS, INC. ) ) ) ) ) DOCKET NO. UT-960370 In the Matter of the Pricing Proceeding for Interconnection, Unbundled Elements, Transport and Termination, and Resale for GTE NORTHWEST INCORPORATED ) ) ) ) ) DOCKET NO. UT-960371 DECLARATION OF FRANCIS J. MURPHY I, Francis J. Murphy, declare as follows: 1. My name is Francis J. Murphy. I am a consultant working for Financial Strategies Group (FSG) on behalf of their client, GTE Northwest Inc, as an expert network operations manager and service cost analyst. I filed testimony in this proceeding relative to the Hatfield Model, Version 3.1, sponsored by AT&T and MCI, on April 25, 1997. My testimony adopted an Engineering Critique of the Hatfield Model, Version 3.1. I directed, coordinated and participated in the conduct of this analysis of the model. 2. Earlier this year, I performed a similar function on behalf of Pacific Bell relative to the Hatfield Model Version 2.2.2. This Model was sponsored by AT&T and MCI in the California Public Utilities Commission’s (CPUC) Open Access Network Architecture Development (OANAD) proceeding. I filed a Declaration in that proceeding relative to my analysis of the 2.2.2 version of the model. I also filed a Supplemental Declaration dated April 15, 1997 in that proceeding based on responses to Pacific Bell Data Requests provided by AT&T. I understand that a redacted copy of that Declaration has been provided to the WUTC. My investigation in the OANAD proceedings has conclusively demonstrated that AT&T’s internal, business planning assessment of the incremental costs of certain network components were significantly higher than the costs for identical network components modeled by Hatfield. I found that the values used by Hatfield for comparable network components, design criteria, route to air ratios, expense levels, etc. were systematically biased in a significantly downward direction. 3. I attempted, during the conduct of my analysis of the Hatfield Model on Pacific’s behalf, to validate certain of the Hatfield inputs, values and assumptions by comparing them with the actual experiences and/or expectations of AT&T and MCI in operating their own networks. This is a relevant and worthwhile exercise for a number of reasons. First, as demonstrated by the Hatfield Model 3.1 Inputs Portfolio, Hatfield has relied on the experiences, judgements, and subjective opinions of its sponsors for many of its assumptions and/or inputs. These assumptions and inputs should be tested and compared with the sponsor’s actual costs, operating assumptions, and inputs. Second, although they currently operate in different market segments, the IXCs (e.g. AT&T and MCI) and the ILECs (e.g. GTE and Pacific Bell), in many cases utilize exactly the same communications equipment and facilities. They operate in exactly the same jurisdictions and geographical areas (e.g. Washington and California). They face exactly the same obstacles and challenges (e.g. degree of difficulty in achieving the most efficient and advantageous route to air ratios for outside plant facility routes, service levels attainable vis a vis the amount of traffic they expect to be carried over a switched trunk or through a switch without excess blockage being experienced by their subscribers, the expense levels experienced in maintaining their switches, the amount of spare switch and/or facility capacity required to maintain acceptable service levels and provisioning intervals, etc.). 4. Additionally, numerous Hatfield inputs assumptions are taken directly from AT&T’s “A Study of AT&T’s Competitors’ Capacity to Absorb Rapid Demand Growth” and from “An Updated Study of AT&T’s Competitors’ Capacity to Absorb Rapid Demand Growth”. Specifically, all of the SS7 Signaling values contained in Hatfield originate from these sources, most of the tandem switch values and assumptions originate from these sources and some of the overall ILEC traffic characteristics originate from these studies. These two studies focus solely and exclusively on interexchange carrier costs, including costs that AT&T expects it’s Hatfield co-sponsor MCI to incur. It is thus perfectly clear that Hatfield and it’s sponsors recognize that there are numerous instances where IXCs and ILECs employ identical network components, incur identical costs, and face identical challenges in delivering efficient and effective telecommunications services even though they happen to presently serve differing market segments. 5. The WUTC’s order precluding discovery denies this Commission the opportunity to make meaningful and objective comparisons between values, assumptions, designs, etc. that AT&T and MCI realistically believe they will face in their own network and what Hatfield purports GTE will be able to accomplish in comparable portions of its network when it comes to providing unbundled network elements to the Hatfield sponsors in Washington. 6. Through my experience in the OANAD proceeding I have learned that AT&T owns and operates an internal costing model known as the Transport Incremental Cost Model (TICM). This model was the source of much of the comparable network data described above. It would be valuable to the WUTC and to the parties to this proceeding in objectively evaluating the usefulness and more importantly the veracity of the Hatfield Model to understand the comparable values contained in or able to be derived from TICM versus those that are contained in Hatfield. The entire TICM model should be made available to GTE and to the WUTC for just that purpose. At a minimum, AT&T should be compelled to disclose the following values for its own network as derived from TICM: 1. The route to air ratio for interoffice facilities (IOF) in Washington 2. The number and frequency (%) of IOF fiber routes that lack either diverse protection routing or ring architecture. 3. The actual number of minutes of use per month, per DS0 level switched access trunk 4. The investment per DS0 level trunk port 5. The investment per installed OC-48 ADM multiplexer (equipped with 48 DS3s and equipped with 12 DS3s) 6. The investment per installed foot of fiber 7. The tandem common equipment investment 8. The switch installation multiplier 9. The power investment per switch 10. The cost of construction per square foot of a wire center building 11. The land price per square foot of land that contains switch buildings 12. The busy hour fraction of daily usage 13. The annual to daily usage reduction factor 14. The installed terminal multiplexer investment per OC3 (84 DS1s and per 7 DS1s) 15. IOF wire center EF&I fully loaded labor rate per hour in Washington 16. Optical Distribution Panel cost to connect 24 fibers to the transmission equipment 17. EF&I units (see B110 of Hatfield Inputs Portfolio) 18. Installed cost of an OC-48 regenerator 19. IOF fiber optic regenerator spacing, miles 20. TICM assumption of the average length of entrance facilities in Washington 7. The identification of these values would best serve the WUTC and the parties if they were provided as Washington specific values. Should the WUTC decide that this avenue of discovery is appropriate, AT&T will likely argue that these requests are “overly broad and burdensome”. Through my experience in the OANAD proceeding and my exposure to the TICM model I have learned that the model contains a subsystem which is capable of producing results that are accurate to within plus or minus 5% of the overall system “within minutes”. I urge the WUTC to take advantage of the availability of the information contained in TICM to assure an accurate and objective evaluation of the Hatfield Model by the parties and the Commission in this proceeding. I declare under penalty of perjury pursuant to the laws of the State of Washington that the foregoing is true and correct to the best of my knowledge. Date: ___________________ _____________________ Francis J. Murphy