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 17 GTE NORTHWEST INCORPORATED ) Pages 2100 - 2396 -----------------------------------) A hearing in the above matter was held at 8:00 a.m. on July 17, 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 and the Commission's accounting advisor MERTON LOTT. 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.. 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 MARY E. STEELE, 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, 2600 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 and SIMON FFITCH, Assistant Attorneys General, 900 Fourth Avenue, Suite 2000, Seattle, Washington 98164. I N D E X WITNESSES: DIRECT CROSS RED REC EXAM STRAIN 2105 2106 2146 DUNKEL 2161 2164 2285 2265 PETTI 2308 2310 2301 2390 EXHIBITS: MARKED ADMITTED 145 2105 2162 146 2105 2162 147 2105 2162 148 2105 2162 149 2105 2162 150 2105 2162 151 2105 2162 152 2161 2308 C-153 2161 2308 C-154 2161 2308 155 2161 2308 156 2291 2396 157 2308 2396 158 2308 2396 159 2308 2396 160 2145 2162 161 2291 2294 P R O C E E D I N G S JUDGE STAPLETON: Let's be on the record. This is a continuation in the matter of the pricing proceeding for interconnection, unbundled elements, transport and termination and resale in docket Nos. UT-960369, 960370, 960371. Today's date is Thursday, July 17, 1997. We're convened in Olympia, Washington before commissioners Sharon L. Nelson, Richard Hemstad, William R. Gillis, and Administrative Law Judge Terrence Stapleton. I will enter exhibits for the next witness into the record at this time for identification. Exhibit 145 is the direct testimony of Paula Strain dated March 27, 1997 and includes PMS-2, Example of Effect on Margin And return. Exhibit C-146 for identification is PMS-1 Comparison of Embedded Avoided Cost Models. Exhibit 147 is rebuttal of testimony of Paula Strain dated April 4, 1997. Exhibit C-148 for identification is the revised PMS-3 exhibit, GTE Avoided Cost Study. Exhibit C-149 PMS-4, U S WEST Washington Avoided Discount Calculation. Exhibit 150 for identification is PMS-5 U S WEST Washington Avoided Cost Discount Calculation, and Exhibit 151 is a supplemental rebuttal testimony of Ms. Strain dated May 16, 1997. (Marked Exhibits 145 - 151.) Whereupon, PAULA STRAIN, having been first duly sworn, was called as a witness herein and was examined and testified as follows: JUDGE STAPLETON: Mr. Trautman, would you qualify your witness, please. DIRECT EXAMINATION BY MR. TRAUTMAN: Q. Good morning, Ms. Strain. Have you filed for this proceeding Exhibit 145 which is the direct testimony of Paula Strain dated March 27, 1997 including revised pages 6 and 11 filed April 22, 1997 and including PMS-2? A. Yes, I have. Q. And have you filed Exhibit C-146 which is Exhibit PMS-1, Comparison of Embedded Avoided Cost Models? A. Yes. Q. Have you filed Exhibit 147, the rebuttal testimony of Paula Strain? A. Yes. Q. Have you filed Exhibit C-148 through C-150 which are Exhibits PMS-3 through PMS-5? A. Yes. Q. Did you file Exhibit 151 which is the supplemental testimony -- supplemental rebuttal testimony of Paula Strain? A. Yes. Q. And were these exhibit filed -- prepared by you or under your supervision? A. Yes, they were. MR. TRAUTMAN: The witness is available for cross-examination. JUDGE STAPLETON: Thank you. Mr. Manifold? MR. MANIFOLD: Yes. No questions. JUDGE STAPLETON: Questions for AT&T, Ms. Steele? CROSS-EXAMINATION BY MS. STEELE: Q. Good morning, Ms. Strain. A. Good morning. Q. I don't think we've met before. I'm Mary Steele representing AT&T. Now, you have essentially recalculated the avoided cost discount for U S WEST and GTE using the studies proposed by U S WEST and GTE; is that correct? A. Yes. Q. And now you've used -- in calculating the U S WEST discount you have used the embedded avoided cost study filed by U S WEST; is that correct? A. Yes, I did. Q. Now, U S WEST filed a different TSLRIC-based study; is that right? A. Yes, it did. Q. And why did you not use that particular study in calculating the discount? A. Well, in my initial direct testimony I discussed the fact that it's my belief that the avoided discount model should be based on embedded cost because that's what the rates that will be discounted are based on. Q. Now, are you aware that the U S WEST study you have used in recalculating U S WEST discount also uses certain factors that were -- that come out of the TSLRIC study? A. Yes. I know that they used those same avoidable cost factors for different accounts. Q. Now, Mr. Dunkel has filed testimony indicating the importance of using publicly available data in performing an avoided cost discount calculation. Do you recall reading that testimony? A. Yes. Q. Do you agree with him? A. To the extent possible I think it is important to use publicly available data, but I don't know that it's always possible when doing studies that are based on company-specific accounts and avoidable cost percentages. Q. And in fact both the U S WEST study and the GTE study that you have used make use of data that is not publicly available; is that correct? A. Yes. Q. In fact, a lot of that data is proprietary to the company; is that right? A. Yes. It is available, though, in hearings such as this. Q. Now, you've also used the GTE model and you've made a number of revisions to the GTE model in doing that calculation; is that right? A. Yes, I did. Q. In fact, it doesn't really look like the GTE model any more, does it? A. Oh, I think it's in the same typeface. Q. Now, did you review the cost accounting data used by GTE in doing their model? A. I reviewed information that was supplied to me in the data request which documented the basis for the work from assignments. Q. And it's true, is it not, that GTE personnel in doing these work center assignments used some subjective analysis as to what costs could be avoided? A. It appeared to me that the work from cost assignments that were used were the basis of judgment of some of the employees who work in the section that do that sort of work. And then those work center assignments where costs were put into various work centers were used in the avoided cost calculations. Q. Did you get all of the information that you would have liked to have seen from GTE as to how they did their cost assignments? A. I got all the information that I had time to review in preparing my testimony. Q. And that information that you received was company-wide information rather than Washington specific; is that correct? A. Yes, it was. Q. And would you view it as being more appropriate to have information that is specific to this state in doing an avoided cost calculation for this state? A. Well, for a company like GTE which has national regional responsibility centers where its functions are performed in states other than Washington, I don't think it would be -- it would make sense to try and use state-specific information for an avoided cost study. I mean, they don't perform some of these functions in this state at all. They're performed in other states because that's where the regional responsibility center is located. I don't know that their accounting system tries to split things out among the 20-some-odd states that they operate in. But what I did do in my model was to modify the numbers that the avoided cost discount were applied to so that they were state ARMIS accounting data. Q. Now, some of the adjustments that you made to models, there are some commonalities in how you did the adjustments; is that correct? A. Yes. Q. I would like to go through some of those commonalities, and these would be applied to both the GTE model and the U S WEST model. Now, both AT&T in their model and GTE in its model looked at total state costs in determining what costs might be avoided; is that correct? A. U S WEST model did not do that. Q. I think I said the AT&T model and the GTE model. A. Oh, I'm sorry. Yes. They both use total state. Q. And what you have recommended is that instead we use only the intrastate jurisdictionally separated costs; is that right? A. Yes. Q. Now, it's possible, is it not, that some portion of total state costs that are assigned to the interstate jurisdiction might actually be avoided in the resale environment; is that right? A. That could be, but what I was trying to do here was find a wholesale discount that would be applied to state, intrastate rates. Q. For example, there might be some marketing costs or other costs that are assigned to the interstate jurisdiction but that would be avoided if a service was resold? A. If a service was resold on an intrastate basis? Q. On an intrastate basis, yes. A. I'm assuming that it wouldn't be. Q. Do you know whether that's the case? A. No. Q. And if in fact it is the case that there are some costs in the interstate jurisdiction which might be avoided, would -- the ILEC would in fact be better off by reselling a service, would it not? A. Yes. There might also be costs that go the other way, too. Q. I would also like to look at the issue of nonrecurring costs. Now, you have pulled those out of your analysis; is that right? A. Yes. Q. And you don't consider either nonrecurring revenues or nonrecurring costs in your analysis; is that correct? A. That's correct. Q. And for U S WEST that has the effect of decreasing discounts; is that right? A. Yes, it does. Q. Now, were you here yesterday when Mr. Reynolds was testifying? A. For part of it. Q. At one point he told us yesterday that in some circumstances for U S WEST the nonrecurring revenues don't cover the nonrecurring costs. Were you here when he testified to that effect? A. No. Q. If in fact we accept that as a hypothetical for now that in some cases for U S WEST nonrecurring revenues do not cover nonrecurring costs -- can you accept that for a moment? A. As a hypothetical, sure. Q. In that case U S WEST would need to recover its -- some portion of its nonrecurring costs in its recurring revenues; is that correct? A. If it were to be revenue neutral, yes. Q. In that case would it not be appropriate to consider the nonrecurring costs when determining the discount that's going to be taken from the recurring rates that are going to be recovering some of these costs? A. Well, I think nonrecurring charges have to be dealt with somehow and discounts have to be developed somehow for those, but my testimony went to the fact that the nonrecurring charges that would be incurred in a resale environment are likely to be so different than the nonrecurring charges that are in people's tariffs today that would otherwise be subject to discounts that it wouldn't make sense to use an overall discount to discount tariff charges that really aren't applicable to resale operations. But I think, you know, since I wrote my testimony we've had workshops on OSS and some other things occur that raise questions in my mind about whether there are going to be nonrecurring charges for resale that make sense any time in the near future. So I guess my testimony would be that I think that the avoided cost discount ought to -- there ought to be some way to look at nonrecurring charges, but I think they're so different than what's in the embedded cost right now that it may not make sense to look at them in terms of an overall wholesale discount for other rates. Q. I just have one other issue that I want to go into with you, and that's the issue of the costs that would be incurred in a wholesale environment. You have expressed some concern with the AT&T study based upon the fact that there is not a recognition in that study of new costs that might be associated with the wholesale environment; is that correct? A. Would you direct me to what page in my testimony I did that? Q. Well, I probably could if I took a minute, but let me see if I can refresh your recollection. For things like product management where the AT&T study has a zero -- I'm sorry -- 100 percent avoided costs. Do you recall that? A. Yes. Q. And you've expressed some concern with that; is that correct? A. Yes. Q. Now, have you reviewed the sensitivity runs that AT&T has done on its model which includes an allowance for some of the wholesale costs that might be occurred? A. I would have to ask you to direct me to a document. Has there been a document entered in? Q. I believe that there are attachments to Ms. Dodd's testimony. A. Which? Q. Do you recall reviewing? A. I don't recall something by the name of the document that you've referred to, but I may have reviewed it without recognizing that it had that name. MS. STEELE: That's all I have for you. Thank you. JUDGE STAPLETON: Mr. Harlow, are you on behalf of MCI? MR. HARLOW: Thank you, Your Honor. CROSS-EXAMINATION BY MR. HARLOW: Q. Good morning, Ms. Strain. I'm sure you know who I represent. For the record I'm representing MCI this morning. A. Good morning. Q. I would like you to have in front of you Exhibit -- was part of 145 PMS-2 is how it was premarked. A. Okay. Q. And as I understand the pertinence of this exhibit it was to compare the effect -- hypothetical -- compare the effect on rate of return when using revenues in the denominator and calculating an avoided cost discount versus using expenses in the denominator? A. Yes, that's correct. Q. And I assume that one of the assumptions in this hypothetical is that there would be no change in the rate base as a result of the resale? A. That is correct. Q. Would you believe that over the long-term there might in fact be a change in rate base of a company that became 50 percent wholesale, 50 percent resale -- 50 percent retail, excuse me? A. I don't know whether it would have or not. Q. Is that possible? A. I think if they're selling resale they would have the same facilities. They would still be building facilities, so right off the top of my head I would say no, it doesn't -- I wouldn't think it would. Q. To the extent some of the retail sales people have, let's say, desk top computers, assume those would be in the rate base? A. Well, I think those would probably be under general support facilities, which is an indirect cost. Q. But eventually they would go out of the rate base if a large portion of those computers were no longer needed for retail operations? A. Right, but I think the company would still own them. Q. But eventually they would go out of the rate base? A. Well, computers churn. I mean, computers have a short life. Therefore, they do go in and out of rate base but I don't think they would go -- I don't think that the company's overall rate base would be reduced solely because the marketing support computers were used for resale rather than for retail. Q. Well, I'm positing the hypothetical where they are no longer needed because a large amount of the retail personnel are gone now because the company has become, in your example, 50 percent wholesale. In that case you wouldn't expect the company to replace those computers as they were used up and went out of rate base, were you? A. If they reduced their employees then they wouldn't have the computers. Q. As I understand kind of the bottom line of your hypothetical in PMS-2 is that it shows that there's a lower rate of return on rate base when you divide by expenses rather than by revenues; is that correct? A. Just refreshing myself. I haven't looked at this schedule in some time. Q. Under method 1 -- first of all, let me back up and help you. Method 1, as I understand it, would be the method that you advocate