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 12 GTE NORTHWEST INCORPORATED ) Pages 689 - 997 -----------------------------------) A hearing in the above matter was held at 9:10 a.m. on July 10, 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. Also present was the Commission's economic advisor DAVID GABEL. Cheryl Macdonald, CSR Court Reporter 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, MARK AUSTRIAN, and BRIAN FARLEY, Attorneys at Law, 3050 K Street NW, Suite 400, Washington D.C.. SPRINT COMMUNICATIONS COMPANY, L.P., by CAROL MATCHETT, Attorney at Law, 1850 Gateway Drive, Seventh Floor, San Mateo, California 94404-2467. U S WEST COMMUNICATIONS, INC., by EDWARD SHAW and LISA ANDERL, Attorneys at Law, 1600 Bell Plaza, Room 3206, Seattle, Washington 98191 and JOHN M. DEVANEY, Attorney at Law, 607 14th Street NW, Suite 800, Washington, D.C. 20005-2011. AT&T COMMUNICATIONS, by DANIEL WAGGONER, Attorney at Law, 2600 Century Square, 1501 Fourth Avenue, Seattle, Washington 98101 and SUSAN D. PROCTOR, Attorney at Law, 1875 Lawrence Street, Suite 1575, Denver, Colorado, 80202. MCI COMMUNICATIONS and MCImetro, by BROOKS HARLOW, Attorney at Law, 4400 Two Union Square, 601 Union Street, Seattle, Washington 98101 and ROBERT W. NICHOLS, Attorney at Law, 2060 Broadway, Suite 200, Boulder, Colorado 80302. FRONTIER TELEMANAGEMENT and SHARED COMMUNICATION SERVICE, INC., by SARA SIEGLER MILLER, (via bridge), Attorney at Law, 2000 NE 42nd, Suite 154, Portland, Oregon 97213. UNITED TELEPHONE COMPANY OF THE NORTHWEST and SPRINT CORPORATION, by SETH LUBIN, General Counsel/Secretary, 902 Wasco Street, Hood River, Oregon 97031. WITA, by RICHARD A. FINNIGAN, Attorney at Law, 2405 Evergreen Park Drive SW, Suite B-1, Olympia, Washington 98501. TRACER, by ARTHUR A. BUTLER, Attorney at Law, 601 Union Street, Suite 5450, Seattle, Washington 98101-2327. APPEARANCES (Cont'd.) THE WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION STAFF, by GREGORY J. TRAUTMAN and SHANNON E. SMITH, Assistant Attorneys General, 1400 South Evergreen Park Drive Southwest, Olympia, Washington 98504-0128. FOR THE PUBLIC, ROBERT MANIFOLD, Assistant Attorney General, 900 Fourth Avenue, Suite 2000, Seattle, Washington 98164. TCG SEATTTLE and NEXTLINK WASHINGTON, LLC by GREGORY KOPTA, Attorney at Law, 2600 Century Square, 1501 Fourth Avenue, Seattle, Washington 98101. I N D E X PANELS: CROSS REDIRECT RECROSS EXAM DUNCAN, ET AL., 697 952 958 928 710 963 726 965 766 822 876 CORNELL, ET AL., 730 749 762 KRUSE, ET AL., 975 994 995 977 982 990 EXHIBITS: MARKED ADMITTED 14 972 15 972 46 694 696 47 694 696 48 694 696 49 694 971 50 694 971 51 694 971 C-52 694 971 53 694 697 CC-54 694 697 55 694 973 56 694 973 57 694 973 58 694 973 59 694 973 60 694 61 757 761 62 974 974 63 974 975 P R O C E E D I N G S JUDGE STAPLETON: Let's be on the record, please. This is a continuation of the evidentiary proceedings in docket Nos. UT-960369, 960370 and 960371. It's Thursday, July 10. We're convened in Olympia, Washington before Commissioner Sharon L. Nelson, Richard Hemstad, William R. Gillis, and Administrative Law Judge Terrence Stapleton. Before we take the next panel I would read into the record the exhibits being presented through these witnesses. For identification the testimony of William Fitzsimmons adopted by Michael Carnall will be marked as Exhibit 46. Michael Carnall's rebuttal testimony will be marked as Exhibit 47 and supplemental direct of Mr. Carnall will be marked as Exhibit 48. Exhibit 49 is a one page exhibit introduced by AT&T. Exhibit Nos. 50, 51 and 52 are three exhibits proposed by MCI Communications. The rebuttal testimony of Frances J. Murphy has been marked as Exhibit No. 53. Exhibit No. 54 is the supplemental testimony of Mr. Murphy which has been marked as CC-54 which contains an errata sheet that also should be treated as part of the CC confidential designation. Exhibit No. 55 is an exhibit proposed by staff. Exhibit No. 56 is the direct testimony of Gregory Duncan. Mr. Duncan's rebuttal testimony has been marked as Exhibit 57, and his supplemental testimony has been marked as Exhibit No. 58. Staff has asked an exhibit to be marked for cross-examination of Mr. Reynolds which has been marked as No. 59, and AT&T has distributed an exhibit to be used in the cross-examination of Mr. Reynolds which has been marked as Exhibit No. 60. (Marked Exhibits 46 - 60.) JUDGE STAPLETON: Ms. Anderl. MS. ANDERL: Your Honor, just to let the parties know, with regard to Exhibit 51, which is a portion of a transcript from a Colorado proceeding, when that is going to be offered we would ask that additional pages be offered so that the section is complete, and we have those with us and an appropriate number of copies to distribute. I don't know if you want to handle that now or later. JUDGE STAPLETON: Let's do that at the end when we move the admission of all exhibits, please, and please remember to remind me because you know I will forget. MS. ANDERL: I will remind you. Whereupon, MARK REYNOLDS, MICHAEL CARNALL, FRANK MURPHY, GRGEGORY DUNCAN, having been first duly sworn, were called as witnesses herein and were examined and testified as follows: JUDGE STAPLETON: Mr. Devaney, Mr. Williams, would you like to prepare your witnesses. Ms. Anderl. MS. ANDERL: Your Honor, are we going to do an abbreviated identification of the testimony just rather than the whole formal -- JUDGE STAPLETON: No, I think just name and whatever minimum other -- and who they're representing and tender them if you would, please. MS. ANDERL: Mr. Reynolds, would you please state your name and business address for the record. MR. REYNOLDS: My name is Mark Reynolds on behalf of U S WEST Communications. My business address is 1600 Seventh Avenue, Seattle, Washington, 98191. MS. ANDERL: Dr. Carnall, will you please state your name, your employer and your business address for the record. MR. CARNALL: My name is Michael Carnall. I'm employed by Law and Economics Consulting Group, 2000 Powell Street, Suite 600, Emoryville, California 94706. MS. ANDERL: Your Honor, I would move the admission of Dr. Carnall's prefiled testimony identified as Exhibit 46, 47 and 48. As I understand it, we've agreed that Mr. Reynolds's testimony will be identified and admitted when he's on the stand next week and I would tender those witnesses for cross. JUDGE STAPLETON: Thank you. Those exhibits will be admitted into the record. (Admitted Exhibits 46 - 48.) MR. WILLIAMS: Good morning, Mr. Murphy, could you give us your name, address and affiliation. MR. MURPHY: Yes. My name is Frances J. Murphy. I work for Financial Strategies Group. My business address is 3 Cabot Place, Suite No. 7, Stoughton, Massachussetts, 02072. MR. WILLIAMS: Thank you. Dr. Duncan. MR. DUNCAN: My name is Gregory Michael Duncan. I work for National Economic Research Associates. My address is 777 South Figueroa Street, Suite 4200, Los Angeles, California, 90017. MR. WILLIAMS: And Mr. Murphy and Dr. Duncan, you're appearing here on behalf of GTE; is that correct? MR. MURPHY: That's correct. MR. DUNCAN: That's correct. MR. WILLIAMS: Your Honor, I would move the admission of premarked Exhibits 53 and 54 including with respect to 54 the confidential errata sheet and with respect to Dr. Duncan's testimony I moved the admission of Exhibits 56, 57 and 58. JUDGE STAPLETON: Thank you. Exhibit Nos. 53 and Exhibit No. CC-54, prefiled testimony of Mr. Murphy, will be admitted into the record and Exhibits 56, 57, and 58, prefiled testimony of Dr. Duncan, will be likewise admitted into the record. (Admitted Exhibits 53, CC-54, 56, 57 and 58.) MR. WILLIAMS: And I will pass the witnesses for cross-examination. JUDGE STAPLETON: Thank you. All right. Should we begin with Commission staff, please. MR. TRAUTMAN: I have a few questions for Mr. Reynolds. CROSS-EXAMINATION BY MR. TRAUTMAN: Q. Good morning. A. Morning. Q. One of the issues regarding the Hatfield model that you raise in your testimony concerns the fill factors; is that correct? A. That is correct. Q. Do you have your rebuttal testimony from April 25? A. I do. Q. And turning to page 25, and I believe this is the updated one with the -- I think you made some additional changes to it. On page 25 on lines 4 through 10 you state that 15 percent of feeder cable pairs are required for administrative, testing bad pairs and churn; is that correct? A. Yes. I believe I state that that's an approximation, that it actually can vary from 15 percent. Q. How does churn create a need for spare capacity? A. Churn creates a need for a spare capacity because, as you have turnover, the more rapid turnover you have of your plant without adequate overhead facilities you would be taking held orders to turn that plant over and turn it around in a timely fashion. So churn can impact the amount of fill that you would want to have on hand. Q. Did the company submit any data or other information in this proceeding that would indicate that 15 percent of feeder capacity is required for administrative, testing of bad pairs and churn? A. I believe that the response to the discovery request that you have marked as Exhibit 59 is responsive to the 85 percent fill level, which is an objective fill level, and it's usually considered that the 15 percent is for engineering and for bad pairs and for -- as an overhead for that type of inventory. Q. Do you have Exhibit 59 which is staff request 84? A. Yes, I do. Q. And the response to this data request, if you turn to, it would be the third page, on paragraph 4.04, operating fill, there it says that fill at relief is 85 to 88 percent if multiple designed, and 90 to 95 percent if spare pair designed; is that correct? A. That is correct. Q. Could you describe each of the two concepts that you refer to, multiple design and spare pair design and how each of them differ? A. I am not actually familiar with the differences between the two as is stated here. I do know that in my discussions with our engineering people that they use the 85 percent as a general objective fill number. However, they leave the discretion for the amount of fill that will be on any particular route to the discretion of the engineer that's actually designing that route. It could be that that route has unique circumstances, that there's a high amount of churn on that particular route, or it's a high growth route which would signify that you might want to put in more fill at the time of reinforcement or initial placement than would otherwise be necessary. These are general guidelines that were issued in the Bell system practices, and I think if you read the first sentence in 4.04 about the engineer must through his knowledge of the route use his discretion, I think that that's an important factor in this. Q. You said that somebody other than yourself has chosen 85 percent. Do you know why, why they chose 85 percent? A. My understanding is that 85 percent is pretty standard in the industry and it's fairly standard. I know that that is the standard that our engineering group uses, and I think it's based on the long standing experience and knowledge that we have in operating the network. Q. Which design does U S WEST use? A. Which design? Q. Yes, multiple or spare pair. A. I don't know. I think I just testified that I did not know the difference between those two. Q. So you don't know if they have chosen 85 percent because it's a multiple design? A. No, I don't. Q. Has the company done any studies to determine the amount or the percent of cable pairs it uses for administrative and testing purposes? A. I am not aware of any study, but I would imagine that our engineering group is constantly assessing what is required for administrative and breakage. I do know that we have done some studies in the past, and this is more around the effective fill that I testify that we use a 60 percent fill for our feeder. As we have done some bumping of that fill up towards 65 percent on an average basis, or 70 percent, we have found that there's a direct correlation with bumping that fill up with held orders, and so I don't know if that gets to the question you had at hand, but effectively we try to operate at a fill that will help us maintain the service and quality level that are expected in the state. Q. So, again, has the company -- I'm not sure I understood the answer. Has the company done studies, to your knowledge? A. My understanding and my opinion that I just expressed was based on some testimony by one of our design engineers, a man named Phil Williams, who indicated that we have done some analysis of what happens as we try to operate at higher fill levels in our feeder plant and that we have determined that there is a correlation to the held orders. Q. And has the company done studies to determine the amount of cable pairs it uses for churn or for bad pairs? A. I have not seen those studies, but I would imagine that we have. Q. Do bad pairs occur in fiberoptic feeder plant? A. I have heard our witnesses, our engineering witnesses, testify that you can have breakage and you can have bad pairs in fiber, and so based on their testimony I have heard that you can. Q. What percent of bad pairs would you get in fiber? A. I do not know. Q. Do you have any -- you have no idea whatsoever how many bad pairs would be in fiber? A. You mean percentage-wise -- Q. Correct. A. -- in the network? I guess I don't understand your question maybe as relevant to a time frame. Is this like in a given year how many bad pairs we have with respect to fiber? Q. Well, you said -- A. It seems to me that would be part of the same question you asked earlier is have I seen studies addressing what percent bad pair we have or what percent breakage, and I think I related to you that I had not seen studies. I think that they probably exist. I have not seen them. Q. Is fiberoptic technology the forward-looking technology for feeder plant? A. It can be depending on the length of the feeder. There's an economic break point when fiber becomes more cost-effective than copper. So copper still is a forward-looking technology given the distance. Q. Turning to page 26 of your rebuttal testimony. On lines 13 through 15 you state -- this is a quote -- "fill calculations should be based on the economic break even point between the initial cost of deploying spare capacity versus the amount of reinforcement that would be required over the planning period at various fill assumptions." Do you see that? A. Yes, I do. Q. How would one determine the amount of reinforcement that would be required over the planning period? A. I think you could do that based on past records of the company to try to determine exactly what the rehab and reinforcement jobs are costing you as opposed to placing the facilities up front. In fact, in my initial round of testimony I believe that I include as one of the exhibits a comparison for distribution plant of that type of analysis where we show that the cost of initial placement of facilities, at least on a distribution plant perspective, are only 5 percent of the subsequent reinforcement costs. And so to the extent that you expect that type of demand or churn or need for those additional pairs, you're really better off, given that break point, putting that plant in at initial placement rather than having to reinforce. Q. Does U S WEST make fill calculations based on the economic break even point that you discuss in that testimony? A. U S WEST -- I think I testified a minute ago U S WEST has more than the economic break points to worry about. Certainly that is a consideration, and I think we tried to balance putting in plant at initial placement as opposed to reinforcement, but we also have responsibilities to provide service in a timely manner, and as I testified earlier, as we bump up our fill and try to operate on less inventory we have noticed that there's a direct correlation to the increase in held orders. Q. Does the break even point analysis that you discuss result from any existing network specification guidelines issued by Bellcore? A. I don't know that one would necessarily require the other. You have a number of operating parameters that you're trying to deal with. I think I've mentioned two important ones. One is the cost break even. The other one is providing service in a reasonable manner. We operate within both those constraints, and so both those would be taken into account by the planning engineers. To the extent that the former has to do with Bell system practices or U S WEST practices, whatever you want to call them, engineering practices, I'm sure those are taken into account as another component in deciding the fills that we operate at. Q. So is that a yes or a no? A. I think it's a compound question, to the extent that that is a component in our decision process. I'm not trying to be difficult. I'm just trying to say that there are additional considerations that we take into account other than strictly the guidelines. There's the cost issue and there's also our obligations to provide service in a timely manner. JUDGE STAPLETON: Before you proceed, gentlemen, Mr. Reynolds, were you here during the cross-examination of the previous panel? MR. REYNOLDS: Yes. JUDGE STAPLETON: Then you are aware that the way we attempt to answer questions, if they're susceptible to a yes or no answer, do so up front, and then you have the opportunity to clarify that or expound upon it that point. Q. Could you turn now to your supplemental direct testimony and that was filed on March 28 of 1997. And turning to page 6, at line 21 you begin a discussion of the Hatfield switch cost estimate, and it appears from this discussion that the company's major concern with the Hatfield estimate is that the cost is lower than either the U S WEST or the FCC proxy cost estimate; is that correct? A. That's the initial concern. I think when you first look at a cost you look at it for reasonableness, and I think that's what that question and answer is relating to is the reasonableness. Q. Do you know how the FCC developed its proxy switch cost estimate? A. My understanding was -- is -- that the FCC looked at some national data that was afforded it through -- I'm trying to remember the name of the study, but I believe they looked at national data to come up with an average switching cost across the nation for ILECs and RBOCs. Q. Turning to page 7 of the same testimony. On line 18 you state that the Hatfield model does not "accurately predict" U S WEST's end office switch costs; is that correct? A. That is correct. Q. What do you mean by "accurately predict"? A. It uses no information, no specific information about the costs of U S WEST switches in the state of Washington. Specifically, it does not use our vendor prices nor does it use our discount, and so I don't see any way that their algorithm can arrive at a specific switch cost for U S WEST. Q. If the Hatfield model, for example, were to predict a cost of $90 per line and the actual cost was $93 per line, would you consider that estimate to be inaccurate? A. I would suggest that it would be a coincidence. Q. So would that be a yes or no? A. I don't think I can answer either yes or no. I don't think that the accuracy of the model can be determined by a coincidental determination that might or might not equal a U S WEST cost if it used completely different means to come to the same conclusion. Q. So if it were close or very close to the number you would assume it was coincidental? A. Understanding what Hatfield used as its input, going back to my prior answer, yes, I would assume that it's coincidental because they did not start with U S WEST switch costs nor vendor discounts. Q. On the same page, page 7 on line 21 of your supplemental direct testimony, you indicate that U S WEST has not had the time to fully investigate the switch cost issue; is that correct? A. That is correct, other than understanding what the Hatfield model does with the algorithm where they receive the inputs to the algorithm and the final conclusion that they reach. U S WEST has not done extensive research. We have evaluated GTE's testimony and believe that GTE goes into quite a bit more depth, and so I would defer questions to GTE, and I think we would stand behind what GTE has done in this manner. Q. Have you examined U S WEST's responses to the bench requests regarding the vendor discounts for switches? A. Yes. Q. And would you agree that U S WEST receives sizable discounts for switches? A. I don't know that I could testify to that. Q. So you're saying you don't know? A. No. I'm saying that I have seen it. I don't know that I can testify -- MR. DEVANEY: I think there are some confidentiality concerns that are arising here and that's what the witness's pause relates to. MR. REYNOLDS: Yes. A. Maybe I can shortcut. If you mean sizable with respect to list price, I would concur. If you mean sizable with respect to what other similarly sized firms receive, I can't answer that. I have not seen their data. I would imagine it would be similar, though. Q. The question was intended with the former meaning. A. Okay. MR. TRAUTMAN: That's all the questions I have for Mr. Reynolds. Should we move for the admission of the exhibits later? JUDGE STAPLETON: We'll do it at the end of the panel. MR. TRAUTMAN: And Ms. Smith will have some questions for the other panel members. JUDGE STAPLETON: Do you want to do those now, Ms. Smith? MS. SMITH: Sure. CROSS-EXAMINATION BY MS. SMITH: Q. Like to begin with Mr. Duncan, please. A. Morning. Q. Morning. My name is Shannon Smith and I'm representing Commission staff. First, do you have your rebuttal testimony before you? And you have attached to that an exhibit entitled Algorithm MCI Errors in the Hatfield Model which is a supplemental to another report titled Economic evaluation of the Hatfield Model Release 3.1. A. Yes. Are you talking about the updated -- the economic and algorithmic Errors in the updated Hatfield model, release 3.1? Q. The one I have is the one dated April 25, 1997 appended to your rebuttal testimony, and actually my question refers to the initial report that I believe was dated March 28 appended to your direct testimony. A. Okay, I have this in front of me. This is Algorithmic Errors in the Hatfield Model Release 3.1 dated April 25. Q. And is that a supplement to another report that was entitled Economic Evaluation of the Hatfield Model Release 3.1? A. Yes. Q. On whose behalf was the initial report undertaken? A. Which report? Q. The initial report, the March 28, 1997 report, and that's the one appended to your direct testimony. A. The Economic Evaluation of the Hatfield Model? Q. Yes. A. I would say this was done for GTE. Q. What was the stated purpose of examining the Hatfield model for the initial report? A. Maybe I could ask a question and clarify. Is there something in here that we stated that you want me to address or what do I -- why was it we wrote the paper? Q. Why was it you wrote the paper. A. We were trying to see whether or not the Hatfield model could be used as a basis for estimating TELRICs. Q. Was your firm asked to evaluate any other cost model? A. I can't answer the question for the whole firm because there are different practices within the firm and different people have different clients. I was not asked to evaluate any other models. Q. Do you know whether or not anyone else in your firm was? A. Having to do with estimating TELRICs for unbundled elements or just cost models in general? Q. Dealing with unbundled elements. A. I honestly don't know the answer to that question. Q. How did your firm come to produce the supplemental report, the one entitled Algorithmic Errors in the Hatfield Model? A. I guess I would describe it as a putting together of two different trains of thought, an economic analysis with an algorithmic analysis of detailed cell by cell description of what was going on and then trying to put them into a more compact form than having them spread all over the place. Q. If you had examined other cost models, and I understand that your testimony is that you have not, but if you had examined other cost models and found that the other cost models used the same problems as you identified with the Hatfield model, would you conclude that the other models also were unacceptable? A. The answer is it depends. If the other models had been externally validated, that is, if you found when you ran those models that they give estimates of TELRIC that were close to estimates that people knew and had confidence in over a wide range of inputs, then I would say those models could be made better if they -- let me stop. Let's say the presumption is that they all fail, so let's say they all fail internal validity tests. If you do the external validity tests and the model passes the external validity test, meaning that when you put the inputs in, you get close to the correct output -- correct meaning a TELRIC that you have confidence in so that you can use the model to quickly estimate TELRICs -- I believe that's the point of doing these models is to -- rather than having to do a cost study every time you want to open up an area for competition you want to have a model that quickly gives you accurate TELRIC estimates. So if you have a model that gives you accurate TELRIC estimates and it fails some of these tests, then what I would say is, look, you can make that model better by rebuilding it so it passes the test, and I would encourage them to do that. If no model was externally validated, that is, if nobody could show that their TELRICs were correct, and the other models failed the internal validity test as well, I would say, look, those models are bad, too, and you have to start over again. But it's the external validity that's the key thing. I think people forget that. It's the external validity that is the key thing. Can you accurately use the model to predict TELRICs? It's just like flying an airplane. It's one thing to say you can walk in the airplane and it might fly. It's quite another thing to fly it from one place to another and say, okay, I have confidence it will get me there. And my argument with the Hatfield model is that latter has never been done. Plane has been sitting on the ground, you can walk through it. Nobody knows whether or not it gets you to the right place. When I look at the internal workings I say, gosh, this doesn't look like a motor I've ever seen, I don't think it's going to work. This doesn't look like a plane I've ever seen, I don't th