COMMISSION In the Matter of the Pricing ) Proceeding for Interconnection, ) NO. UT-960369 Unbundled Elements, Transport and ) Termination, and Resale ) ----------------------------------) ) In the Matter of the Pricing ) Proceeding for Interconnection, ) 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, ) NO. UT-960371 Unbundled Elements, Transport and ) Termination, and Resale for ) VOLUME 16 GTE NORTHWEST INCORPORATED ) Pages 1735-2099 ----------------------------------) A hearing in the above matter was held at 8:45 a.m. on July 16, 1997, at 1300 South Evergreen Park Drive Southwest, Olympia, Washington before Commissioners SHARON NELSON, RICHARD HEMSTAD, and WILLIAM R. GILLIS and Administrative Law Judge TERRENCE STAPLETON. Also present was the Commission's economic advisor DAVID GABEL. The parties were present as follows: GTE NORTHWEST INCORPORATED by RICHARD E. POTTER, Associate General Counsel, 1800 41st Street, (5LE) Everett, Washington 98201. Lisa K. Nishikawa, CSR, RPR Court Reporter APPEARANCES (Cont'd.) U S WEST COMMUNICATIONS, INC., by LISA ANDERL, Attorney 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 and MARY E. STEELE, Attorneys 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 ROBERT W. NICHOLS, Attorney at Law, 2600 Broadway, Suite 200, Boulder, Colorado 80302. FRONTIER TELEMANAGEMENT and SHARED COMMUNICATION SERVICE, INC., by SARA SIEGLER MILLER, 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. TCG SEATTLE and NEXTLINK WASHINGTON, LLC, by GREGORY J. KOPTA, Attorney at Law, 2600 Century Square, 1501 Fourth Avenue, Seattle, WA 98101-1688. 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. THE PUBLIC, by ROBERT MANIFOLD, Assistant Attorney General, 900 Fourth Avenue, #2000, Seattle, WA 98164. I N D E X D C RD RC EXAM HARRIS 1754 1755 1804 1812 1800 1821 1822 PANEL: 1823 1830 2086 2098 2048 REYNOLDS, FREYE, BUCKLEY, SANTOS-RACH EXHIBIT MARKED ADMITTED 112 1739 1755 113 1739 1755 114 1739 1829 C-115 1739 116 1739 1829 117 1739 1829 C-118 1739 1829 119 1744 1829 120 1744 1829 121 1744 1829 122 1744 1829 123 1744 1829 124 1745 1757 125 1745 1757 126 1745 1757 C-127 1745 1866 128 1746 1866 C-129 1746 2048 130 1748 2011 131 1748 2011 C-132 1748 2011 133 1748 2011 C-134 1748 2011 135 1748 2011 136 1748 2011 C-137 1748 2011 C-138 1748 2011 C-139 1748 2011 C-140 1748 2011 C-141 1748 2011 C-142 1748 2048 143 1748 2048 144 1748 2011 Record Requisition No. 1 - Page 1940 P R O C E E D I N G S JUDGE STAPLETON: Let's be on the record. This is a continuation of the proceedings in Docket Numbers UT-960369, 960370, 960371. Today's date is Wednesday, July 16, 1997. We're convened in Olympia, Washington before Commissioners Sharon L. Nelson, Richard Hemstad, William R. Gillis, Administrative Law Judge Terrence Stapleton. We'll be marking exhibits for today's panel on the U S WEST cost models, and we'll begin that numbering now with exhibit for identification Exhibit Number 112, which is the direct testimony of Mark Reynolds. (Discussion off the record.) Exhibit 112 for identification is the direct testimony of Robert G. Harris and includes Exhibits 1 and 2 to that testimony. And Exhibit Number 113 will be the rebuttal testimony of Robert Harris, to which there are no exhibits or attachments. All right. Proceeding on to Exhibit Number 114 will be the direct testimony of Mark Reynolds including 11 exhibits, avoided cost discount calculation for Exhibit 11, seven appendices -- (Discussion off the record.) JUDGE STAPLETON: -- and the cost model. Exhibit Number C-115 for identification is the confidential cost study included in Mr. Reynolds' direct testimony. (Discussion off the record.) JUDGE STAPLETON: C-115 are multiple cost studies. I'll mark as Exhibit 116 a supplemental direct testimony of Mark Reynolds, including two exhibits. Marked for identification as Exhibit 117, the rebuttal testimony of Mark Reynolds, including Exhibits 3 through 9 to that testimony. I'm sorry. All right. (Discussion off the record.) JUDGE STAPLETON: We'll mark -- correction to the record. We'll mark Exhibit 117 as the rebuttal testimony of Mark Reynolds and it will include Exhibit MSR-5 and MSR-9. And I'll mark for identification as C-118 as a single exhibit MSR-3, MSR-4, MSR-6, MSR-7, and MSR-8. All right. Then are we at Richard Buckley? (Marked Exhibits Nos. 112, 113, 114, C-115, 116, 117, and C-118.) (Discussion off the record.) JUDGE STAPLETON: I will note for the record that there has been an errata sheet for the testimony of Mark Reynolds for both the -- for all three pieces of testimony: the direct testimony of January 10, the supplemental direct testimony of March 28, and the rebuttal testimony of April 25, 1997. Now, as to the other documents that are included in the errata sheet, Ms. Anderl, will you please explain on the record the nature of these. MS. ANDERL: What's been distributed with Mr. Reynolds' errata, which -- Mr. Reynolds' errata is a two-page document, and about halfways down the first page you'll see a notation that says "Appendix 1, Table 2, replace the local interconnection service page with the attached page." And that should be the third piece of paper that you all have in that errata bundle. It says "Revised" on it, and that's a part of his direct testimony. The numbers under the nonrecurring section were wrong in his testimony. They were right in the cost study that was filed underlying that testimony, and this errata simply now makes those nonrecurring numbers reflect the underlying and supporting cost study. JUDGE STAPLETON: And the cost study is filed to support the nonrecurring numbers which have been broken out on the chart, is that correct? MS. ANDERL: Right. And then the other documents that are attached are explained under the heading about two-thirds of the way down the first page of the errata where it says "Work papers" and where it says "Analog end office line port recurring study dated August 1996." We had filed originally in January analog end office line port recurring studies dated August 1996. Those turned out to be incorrect, and they were simply an earlier version. These replacement studies which are also dated August were simply a later version and should replace the filed ones. To the extent that there are any numbers in Mr. Reynolds' testimony from the studies, they are numbers from these new ones that you have. In other words, we had his testimony right; somebody simply grabbed the wrong August studies, filed the old ones. That's all the paper that we filed with the errata bundle. And then just a further clarification. Under "Work papers" where it says "Local interconnection service loop nonrecurring study," we had actually filed both a December and August 1996 study. And we just wanted to clarify that December study is the one upon which we're relying, and it supersedes the August study. The August studies were filed in error and are outdated. We can withdraw them or strike them, but we wanted it clear on the record, so we put it in his errata. MR. NICHOLS: May I ask if there are any documents in this errata package which are confidential or are they all nonconfidential? MS. ANDERL: The problem is the port studies are a mix of confidential and nonconfidential information, because there's an executive summary and some narrative which is, of course, not confidential, but then there are work papers and numbers which are confidential. And this is simply a part of Exhibit C-115 which we've already designated as a confidential exhibit. MR. MANIFOLD: Are you done? I have a couple questions. I think I find four cost studies in the errata packet. Is that what we should be having? I have an executive summary, local interconnection service, analog end office line port recurring costs, 1996, August 1996. And then I have work papers, section 6, line side port feature functionality, August 1996. MS. ANDERL: Yes. MR. MANIFOLD: And then an analog end office line port, August '96, and then a line side port functionality prescribed -- oh, I see. The last two are prescribed and the first ones are something else. MS. ANDERL: What you have is actually two studies: one on U S WEST's proposed economic basis, and the other on the Commission prescribed basis. And within each of those there's the executive summary and then all of the actual study and work papers. So there are only two studies, economic lives and prescribed lives. MR. MANIFOLD: Are we dealing with admission now or just identification? JUDGE STAPLETON: Identification. MS. ANDERL: The rest of these should be considerably simple. JUDGE STAPLETON: The record will note that there are in addition to errata sheets for Exhibit 114, 117 -- I'm sorry -- 114, 116, and 117, as previously noted, there are also cost studies for Exhibit C-115 errata sheets. All right. I marked as exhibit for identification Exhibit 119 the direct testimony of Richard Buckley, and as Exhibit 120, the rebuttal testimony of Richard Buckley which includes an errata sheet. For identification, Exhibit 121 is the direct testimony of Edwin Freye, including one exhibit. Exhibit 122 is the direct testimony of Geraldine Santos-Rach, including one exhibit. Exhibit 123 is the rebuttal testimony of Geraldine Santos-Rach. Is that everyone for this panel? (Marked Exhibits Nos. 119, 120, 121, 122 and 123.) MS. ANDERL: Yes. All the direct exhibits, anyway. JUDGE STAPLETON: Okay. Reynolds, Buckley, Freye, Santos-Rach will be the four-person panel, and we'll bring Dr. Harris in individually initially? MS. ANDERL: (Nods head.) JUDGE STAPLETON: Moving on to cross exhibits, for identification as Exhibit 124 is the staff single-page exhibit which appears to be data request 08-0110 in one page. Exhibit 125, staff exhibit in two pages, is data request 08-0109. And Exhibit 126, multi-page document entitled Loop Dreams: The Price of Connection for Local Service Competition. (Marked Exhibits Nos. 124, 125 and 126.) MR. MANIFOLD: Excuse me, your Honor. Could I just note on my copy at least of 124 it's one page, but it's on both sides. JUDGE STAPLETON: Yes. I was just talking about the number of sheets so you didn't look for stapled or covered documents. Exhibit 127, in easy-to-identify blue paper, is the public counsel exhibit data request 020028. I'm sorry. Does that need to be marked confidential? MR. MANIFOLD: Yes. MS. ANDERL: Yes. JUDGE STAPLETON: That would be exhibit for identification C-127. And I assume, Mr. Trautman, I didn't miss anything by way of confidentiality. (Marked Exhibit No. C-127.) MR. TRAUTMAN: Right. JUDGE STAPLETON: Your other exhibit, Mr. Manifold, is not -- MR. MANIFOLD: Is not confidential. JUDGE STAPLETON: Exhibit 128 for identification is public counsel exhibit which is data request 020066. There is a multi-page document consisting of several data requests and responses from Tracer. The top pages Tracer is 020033 and that will be marked as Exhibit 129 for identification. I'm sorry. That will be C-129 for identification. Now, is that everyone's cross exhibits except for AT&T and AT&T/MCI? Okay. I'll need some help here, Mr. Waggoner, making sure I don't miss any confidential exhibits. (Marked Exhibits Nos. 128 and C-129.) MR. WAGGONER: All right. Beginning at the top, we have the deposition of Genie Cervarich, which would be premarked as Exhibit 130, including the estimates of copper cable 1996. We don't need to mark that as a separate exhibit. The next exhibit in order would be the deposition of Fran Gough, which would be Exhibit 131. The only thing in that deposition that is confidential is the Bain report, which is Exhibit 4 to that deposition. So that would need to be marked as C-132. Moving on to the next document, this is just an illustrative exhibit called the RLCAP Simplified Flow Chart. That's not confidential. That's 133. Then is a document entitled Nonrecurring Cost Study Backup. That is confidential. That's C-134. Next is a document which is the U S WEST Form 10-K for 1996. That is not confidential and, therefore, can be Exhibit 135. Next is part of a pole attachment agreement -- or buried facilities agreement, excuse me, between U S WEST and some other parties. And that is Exhibit 136. Next is a confidential document which is actually -- next is the response to Iowa data request 294, which I believe is confidential. Is that correct, Ms. Anderl? MS. ANDERL: I did not get a copy of that. MR. WAGGONER: That will be C-137. Next is another confidential document, which is a growth NALA. And the exhibit list is incorrect. It's 12-31-95 to 12-31-96. That would be C-138. Next is response data request number 26 in Washington state. That's confidential. That's C-139. Next, a confidential data response number 53 in Minnesota, C-140. Response to data request number 56 in Minnesota which is confidential, at least the attachment. Probably easier to make it C-141. And then last, another confidential data response, C-142. I believe Mr. Nichols has a few additional. (Marked Exhibits Nos. 130, 131, C-132, 133, C-134, 135, 136, C-137, C-138, C-139, C-140, C-141 and C-142.) JUDGE STAPLETON: Are either of the two exhibits you distributed, Mr. Nichols, confidential? MR. NICHOLS: Neither of them, my understanding. JUDGE STAPLETON: All right. Then Exhibit 143 will be MCI bench request 010084. And Exhibit 144 will be a document from the Colorado Public Utility Commission, Docket Number 96S-331T. Okay. Let's be off. (Marked Exhibits Nos. 143 and 144.) (Discussion off the record.) JUDGE STAPLETON: All right. For the record, we have made an amendment to marking of U S WEST's testimony, and Tables 1 and 2 in Appendix 1 of Mark Reynolds' direct testimony will be made a part of the confidential exhibit marked for identification as C-115. Let's take a five-minute breather to get everybody organized with their materials. (Recess.) JUDGE STAPLETON: Let's be on the record. Before we begin with the cross-examination of Dr. Harris, the bench wanted to explore again with the parties the subject that was discussed on Saturday morning. And I'll ask Dr. Gabel to lead us through that. MR. GABEL: The bench request, I was imagining maybe it could proceed in the following steps. On Saturday morning there was a discussion about the extent to which GTE and U S WEST had data that shows the distribution of loops for their different wire centers. When this issue was raised, both United and AT&T/MCI raised their concern that if loop distribution data was only provided for a typical wire center, that some of the richness of the BCPM and the Hatfield model would be lost. So what I would hope that GTE and AT&T would do is they would indicate to United and AT&T's model developers what kind of information is available, at what level of granularities. I think what would be quite useful is if the LECs, GTE and U S WEST, had loop distribution data by wire center and are they willing, you know, and can that information be provided to the model developers. And we're hoping that information could -- not the information, but a description of the availability of information be provided today to the model developers. And then in turn the model developers, since they are not here, would get back to us no later than Friday morning with a description of what would be done with the data, how would the data be used within their models. And the reason I suggest that that be done is because also during our discussion on Saturday, GTE and U S WEST expressed an interest in knowing how the data would be used within the two models. So to summarize, I would like to suggest three steps here. The first step would be that GTE and U S WEST indicate to the Hatfield and BCPM group what information is available, what level of granularity. I think what's most important, based upon the comments that were made on Saturday, is is there loop distribution data available by wire center, if possible provide that in writing so that that information could be faxed to the model developers this evening, and then no later than Friday morning the model developers respond with something in writing which they could provide a copy to the bench and to GTE and Sprint where the model developers indicate how that data would be used. JUDGE STAPLETON: And I believe in addition to the granularity of the wire center, we also asked how broadly both GTE and U S WEST had samples across their territory in Washington by loop. And perhaps we left it on Saturday that the companies would check on that. And I'm wondering if either U S WEST or GTE has anything now to tell us about the extent of what they have been able to learn about whether or not that information is available. MS. ANDERL: Your Honor, may I? JUDGE STAPLETON: Please, Ms. Anderl. MS. ANDERL: U S WEST provided, in response to a data request to public counsel, data request set number two, request number 0061, information with regard to the distance density and line count on a per wire center basis for the entire state of Washington. It is not a sample. It is an entire survey. And it's, as you can see, probably 40 or 50 pages long. Everybody in this proceeding already has a copy of that if they requested that they be served with, you know, data request responses. The only people who don't have it now are the bench, and we would be happy to provide you with a copy of that. But I think that is what information should be conveyed, initially at least, to the Hatfield and BCPM modelers. Then perhaps they can get back to us. MR. WAGGONER: As a courtesy, maybe you could make additional copies available. MS. ANDERL: You bet. We'll do that on the lunch hour, if that's all right, and get it out this afternoon. JUDGE STAPLETON: Actually, the Commission would be happy to overnight this from the building here to whoever you designate for BCPM and Hatfield to receive that tomorrow morning, and then we can hear back perhaps at least some initial kind of response through the two attorneys here about their reactions to that level of detail that might be available. MR. POTTER: Your Honor, Richard Potter for GTE Northwest. I apologize. I didn't realize we were going to take this up at the moment and I didn't talk to our experts to get the update. I'll try to do that at noon and get back to you. I do recall that we had a similar data request, but I need to double-check on that. JUDGE STAPLETON: All right. Thank you. Yeah, if you could identify any document and if the people you talk to need to fax anything in to you once you have cleared that, we can overnight that material with the U S WEST material then. Did you want to take a look at that data request, Mr. Waggoner, before it goes off? MR. WAGGONER: Yes, I would like to see that. JUDGE STAPLETON: Okay. Lisa, can I get some assistants to copy that for you? MS. ANDERL: If you want to start making copies here right now, we'll provide it for you -- we have it in the room -- otherwise, we'll make copies at lunch. JUDGE STAPLETON: Why don't we go ahead and get the copies now, run it back to you, and people can come up to you at the first break or whatever and get copies of that. Then if Dr. Harris has not become disparaged and left the room, can he please come forward. Whereupon, ROBERT G. HARRIS, having been first duly sworn, was called as a witness herein and was examined and testified as follows: JUDGE STAPLETON: Ms. Anderl, will you qualify your witness, please. DIRECT EXAMINATION BY MS. ANDERL: Q. Will you please state your name and business address for the record, Dr. Harris. A. Robert G. Harris, 2000 Powell Street, P O W E L L, Suite 600, Emeryville, E M E R Y V I L L E, California, 94608. Q. With what company are you associated? A. The Law & Economics Consulting Group. Q. Are you appearing today on behalf of U S WEST? A. Yes. Q. Did you file direct and rebuttal testimony in this proceeding? A. Yes. MS. ANDERL: Your Honor, I would move Dr. Harris's testimony into the record and tender the witness for cross. JUDGE STAPLETON: Thank you. Exhibits 112 and 113 for identification will be entered into the record. And we'll begin with Mr. Trautman from Commission staff. (Admitted Exhibits Nos. 112 and 113.) CROSS-EXAMINATION BY MR. TRAUTMAN: Q. Good morning, Dr. Harris. A. Good morning. Q. I'm Greg Trautman, assistant attorney general representing Commission staff. I would like to start by turning to page 65 of your direct testimony, which is Exhibit 112. And turning to the last paragraph, that states that "Because U S WEST's embedded costs represent actual expenses incurred to provide local telephone service, they provide one data point for helping to determine if U S WEST's cost models are reasonable." Do you see that? A. Yes. Q. And would you accept subject to check that Mr. Reynolds testified at pages 2 and 7 of his direct testimony in Exhibit 114 that the cost of a loop for U S WEST ranges between 24 and $36? A. Yes. Q. And at page 67 of your testimony in footnote 47, in an example you used a statewide cost of $36.20 for a loop? A. Yes. Q. Could you turn to what's been marked as Exhibit 126. I believe it's over on the witness table to your left. It's entitled Loop Dreams. MS. ANDERL: Mr. Trautman, I don't know if anyone marked those with exhibit numbers. I know I did not. Q. That's been marked as Exhibit 126. Do you see that? A. Yes. Q. Would you accept subject to check, or you can check by looking at the first page, this was an exhibit that was sponsored by U S WEST in docket 950200, which was the recent rate case, and it was admitted into the record at the request of U S WEST? Would you accept that subject to check? A. Yes. Q. And turning to the last page of that exhibit, there are tables of the embedded cost per loops according to this study. And as you see under Washington for U S WEST, it states the monthly embedded cost per loop without overheads is $11.77 and with overheads is $16.87. Do you see that? A. Yes. Q. How does this validate U S WEST's stated cost per loop of 24 to $36? A. It doesn't. MR. TRAUTMAN: I have no further questions. We move for admission later or -- JUDGE STAPLETON: You know, since there are so many of these, why don't we go ahead and move as each counsel completes their examination. 124, 125 and 126, objections? Hearing none, Exhibits 124, 125 and 126 will be admitted into the record. Mr. Manifold? (Admitted Exhibits Nos. 124, 125, 126.) CROSS-EXAMINATION BY MR. MANIFOLD: Q. Good morning, Dr. Harris. Rob Manifold, representing public counsel. A. Good morning. Q. Why are facilities-based competitors important? This is a point you touch on in your testimony. If you want a reference, I'll give it to you, but I didn't figure you need it. A. No, I'm just trying to begin to organize my answer rather than just start running off at the mouth. Facilities-based competitors are important for several reasons. First of all, new entrants are not restricted in the same technological sense that an incumbent telephone company is. That's true in any industry. A new entrant has a possibility for buying all of the latest and best available technology. Any existing firm must -- any existing company in whatever business must deal with the fact that it already has lots of facilities, and even if there is a better technology available, it takes some time for it to be economic to replace an existing plant. Let's say there's a better way to manufacture airplanes today. Over time, surely Boeing as the leading manufacturer is going to adopt that new technology, but at any given point Boeing does not have the best available technology because it can't possibly replace all of its plant every year with whatever happens to be the best available technology. A new entrant coming into the business can't do that. It turns out in that industry there aren't any new entrants because there's just unimaginable-scale entry barriers that is causing a consolidation of the industry to probably two world players. But in any other industry, in computers, in semiconductors, new entrants are often a source of innovation by adopting new technologies. Secondly, they are important because they provide a source of price competition both in retail markets and in wholesale markets. Q. Excuse me -- let me interrupt -- but I wanted you to focus not just on the importance of competition but the importance of competitors being facilities-based as opposed to resellers. A. Yes. And that's what I mean to say, that facilities-based competitors compete in two markets. They compete not only in the retail market when they sell to end users, they also compete in the wholesale market. AT&T and MCI, for example, have both signed contracts with several different CLECs, new entrants, to buy their facilities rather than buying, in those cases, the facilities of the incumbent LEC. If the CLEC had not invested in any facilities, there would be no option to buy except from the incumbent carrier. And third, facilities-based competitors may be able to offer services because they have -- different networks deploy different technologies. So just the idea of variety. Not everybody builds exactly the same thing. What we observe in competitive markets is different manufacturers decide to make their product somewhat differently. So having facilities-based carriers is going to allow for more variation in the product and service offerings than would merely entry through the purchase of unbundled elements from the incumbent LEC or through the resell of the incumbent LEC services. Q. How much facilities does -- we often use the word "facilities-based." How much facilities does someone need to have in order to be a, quote, facilities-based provider? Presumably someone, for instance, who buys 90 percent unbundled network elements and provide the other ten percent, does that make them a facility? You know how much? A. I don't know that there's a single numerical threshold. I believe a sort of market test when the company can go to market, go to customers, and say some important way "Part of the service I'm offering to you I'm offering to you with my own facilities, rather than merely reselling someone else's." Whatever that market test is, that probably varies across customers. In some cases a customer may care little about the extent of the network. All they need to do is move a lot of traffic between two offices, and if that incumbent has some f