WUTC Staff Testimony in USWC Rate Case Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS. A. My name is Maurice L. Twitchell. My business address is 1300 South Evergreen Park Drive Southwest, P.O. Box 47250, Olympia, Washington 98504. Q. BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY? A. I am employed by the Washington Utilities and Transportation Commission as a Program Manager/Consultant. Q. WHAT ARE YOUR EDUCATION AND EXPERIENCE QUALIFICATIONS? A. I am a graduate of Brigham Young University, holding a Bachelor of Science degree with a major in Accounting and a minor in Business Administration and Economics, having been graduated in June, 1970. I was employed by the Washington Utilities and Transportation Commission in September of 1970. While in the employment of the Commission, I have participated in or been in charge of several Staff studies and accounting examinations, including telephone cases involving U S WEST (Pacific TESTIMONY OF MAURICE L. TWITCHELL DOCKET NUMBER UT-970766 Northwest Bell Company), General Telephone Company of the Northwest, Inc., United Telephone Company of the Northwest, Pacific Telecom, Inc., and many of the other local exchange companies operating in this state. I have also participated in examinations of The Washington Water Power Company, Washington Natural Gas Company, Pacific Power & Light Company, and Puget Sound Power and Light Company. I have also participated in examinations of water and transportation companies. Q. WERE YOU INSTRUCTED TO MAKE AN ACCOUNTING EXAMINATION OF THE RESULTS OF OPERATIONS OF U S WEST COMMUNICATIONS, INC. (USWC OR COMPANY) IN DOCKET NUMBER UT-970766? A. Yes. Q. WHAT WAS THE SCOPE OF THE EXAMINATION? A. Staff has verified the results of operations for the twelve months ending December 31, 1996 and reviewed the exhibits, testimony, data requests and workpapers of the Company. The Commission staff and the Company agreed that the scope of the investigation would be limited to expedite the process. The agreed upon process was that the 1996 test period would be adjusted for all the adjustments as approved by the Commission in Docket UT-950200. The Company agreed to use the 9.367% rate of return found appropriate in Docket Number UT-950200. The Company’s original workpapers proposed a Revenue Requirement of $53,817,740. The Revenue Requirement of $53,817,740 was reduced to $23,700,611 by the adjustments discovered in the process of the review. The $30 million difference in Revenue Requirement is the result of a negotiated agreement with the greatest differences coming from nine (9) adjustments. The Revenue Requirement was increased by an additional $36,068,418 for the Depreciation Represcription found to be appropriate in Docket UT-951425. The Commission staff also agreed to an adjustment for Team and Merit Awards which increased the Revenue Requirement by $10,546,847. The total Revenue Requirement proposed by Commission staff and the Company is $70,315,876. Q. HAVE YOU PREPARED AN EXHIBIT LISTING THE ADJUSTMENTS AND THEIR EFFECTS ON NET OPERATING INCOME AND RATE BASE? A. Yes, Exhibit ___(MLT-1) entitled “U S WEST Communications; Washington Intrastate Operations; Twelve Months Ending Oct. 31, 1994 UT-950200; Twelve Months Ending Dec. 31, 1996 UT-970766". This exhibit lists all of the adjustments made by the Commission in the Fifteenth Supplemental Order UT-950200, page 70. This exhibit includes the spreadsheet from page 70 of the Order. I have added to that spreadsheet each of the adjustments made in this proceeding. This is to assist the Commission in comparing the results of UT-950200 with this case, Docket UT-970766. Q. CAN YOU EXPLAIN WHY NET OPERATING INCOME HAS DECREASED FROM THE UT-950200 TEST PERIOD TO THE PRESENT TEST PERIOD? A. Yes. On line 1 of Exhibit ____(MLT-1)the Net Operating Income - Per Books for this case is $10 million less than the Net Operating Income in Docket UT-950200. The primary reasons for this decrease in earnings can be seen on lines 7 and 30. Line 7, entitled “RMA #6 Depreciation Reserve” - is an adjustment to increase Net Operating Income by $30 million. This adjustment was the result of an overstated depreciation expense of $46 million per the Company books for the test year. The $46 million expense after taxes equates to $30 million Net Operating Income. Line 30 entitled “OOP #3 Account Reconciliation” - is an adjustment to increase Net Operating Income by $4.6 million. The 1996 Company books included $7.1 million of 1995 expenses. The $7.1 million expense after taxes equates to $4.6 million Net Operating Income. If these two adjustments had been booked to the appropriate year, the 1996 earnings would have shown an improvement over the UT-950200 test year earnings. Q. CAN YOU ALSO EXPLAIN WHY THE RATE BASE HAS DECREASED? A. Yes. On line 1 of Exhibit ____(MLT-1)the Rate Base -Per Books for this case is $46 million less than the Rate Base in Docket UT-950200. The primary reasons for this decrease in Rate Base are included on lines 7 and 51. Line 7, entitled “RMA #6 Depreciation Reserve” -is an adjustment to increase Rate Base by $165 million. This adjustment was the result of correcting the booking of FCC-approved Equal Life Group (ELG) depreciation rates for Interstate Results of Operations. The ELG depreciation rates had not been approved by this Commission for Intrastate purposes. The booking of ELG depreciation rates reduced the Intrastate Rate Base by $165 million. Line 51, entitled “SA #3 Jurisdictional Separations” -portrays an adjustment to the Rate Base in UT-950200 which reduced the Rate Base by $35 million. The change in the Jurisdictional Separations Factors have already been reflected on the Books of the Company for the test period in the current case. Q. WILL YOU LIST THE NINE (9) ADJUSTMENTS TO THIS CASE THAT CAUSED THE MAJORITY OF THE DIFFERENCE BETWEEN THE COMPANY ORIGINAL PROVIDED ADJUSTMENTS AND THE NEGOTIATED RESULTS? A. The nine (9) adjustments are as follows: 1) SA #9 Regulatory Fee & Uncollectibles - the uncollectible expense as a percentage of revenues is used in calculating the conversion factor multiplier. The conversion factor multiplier in Docket UT-950200 included an uncollectible expense as a percentage of revenues of 1.179%. The Company booked in 1996 an uncollectible expense of $19 million. This $19 million uncollectible expense per books is 2.001% of revenues. After reviewing the history of the uncollectible account the Commission staff and Company agreed to an uncollectible expense of $13 million as fair, just and reasonable for this case. This uncollectible expense of $13 million stated as a percentage of revenues is 1.346%. This adjustment decreased the Revenue Requirement by $6.0 million. 2) OOP #3 Account Reconciliation - the Commission staff and Company agreed that the Company had booked $7.1 million of 1995 expenses in 1996 in error. The Net Operating Income effect of this error after taxes is $4.6 million. This adjustment decreased the Revenue Requirement by $7.1 million. 3) RSA #15 Property Taxes - The Commission staff and Company agreed that property taxes accrued on the 1996 books overstated the expense by $0.9 million. We also agreed that the Federal Income Taxes had been calculated incorrectly. The correction of the income taxes account for the change in Rate Base as well as a portion of the change to the Net Operating Income. Making the adjustments for these corrections decreased the Revenue Requirement by $2.9 million. 4) RSA #16 Flow Through Tax - this adjustment removed System X Deferred Tax of $2.6 million as directed in UT-950200. It also corrected for the amount of Deferred Taxes that needed to be deducted from the Rate Base. This adjustment decreased the Revenue Requirement by $5.5 million. 5) SA #1 Yellow Pages - the Company originally calculated the Net Operating Income effect of the Yellow Page adjustment to be $53.7 million. The Commission staff and Company now agree that the amount should be $55.3 million to be consistent with the UT-950200 Order. This adjustment decreased the Revenue Requirement by $2.4 million. 6) SA #3 Jurisdictional Separations - the Company originally adjusted the test year to end of period jurisdictional separation factors as directed in the UT-950200 Order. The Commission Staff and Company agree this adjustment should not be made because the change in the factors are reflected per the 1996 books. In UT-950200 this adjustment was made because there was a major change in the factors in the latter part of 1994. In UT-970766, the difference between the end of year factors and test year factors is normal and does not constitute a major change in the factors. This adjustment decreased the Revenue Requirement by $2.3 million. 7) RSA #18 Storm and Flood Damage Normalized - is an adjustment negotiated by the Commission Staff and the Company to adjust the cost for Storm and Flood Damage to a level which will likely be experienced in the future. The Net Operating Income effect of this adjustment is $0.7 million. By applying the conversion factor multiplier to the $0.7 million Net Operating Income amount, this adjustment decreased the Revenue Requirement by $1.1 million. 8) RSA #19 Right To Use Fees - is an adjustment negotiated by the Commission Staff and the Company to adjust the cost of Right to Use Fees to a level which is likely to be experienced in the future. This adjustment decreased the Revenue Requirement by $1 million after applying the conversion factor. 9) RSA #5 Affiliated Interest Billing adjustment -includes an amount to provide a benefit to Washington customers for the sale of Bellcore. This adjustment decreased the Revenue Requirement by $0.8 million. Q. TO THE BEST OF YOUR KNOWLEDGE HAVE YOU PRESENTED THIS CASE, DOCKET NUMBER UT-970766, CONSISTENT WITH THE ORDER IN DOCKET NUMBER UT-950200? A. Yes. The only adjustment that I am aware of which is not consistent with the order in UT-950200 is the adjustment entitled “C-16 Interest Synchronization”. This adjustment in UT-950200 used a Rate Base and weighted cost of debt different from what was used in calculating the derivation of the Revenue Requirement. In making this adjustment, I used the Rate Base and weighted cost of debt consistent with the rest of the case and the calculation of the derivation of the Revenue Requirement. The Net Operating Income effect of this adjustment for Docket Number UT-970766 is $565,053 while the Net Operating Income effect of this adjustment for Docket Number UT-950200 was $4,925,548. Q. HAVE YOU PREPARED AN EXHIBIT FOR THE DERIVATION OF REVENUE REQUIREMENT IN THIS CASE? A. Yes. Exhibit ____(MLT-2) entitled “US WEST Communications; Washington Intrastate Operations; twelve Months Ending December 31, 1996; Derivation of Revenue Requirement”. The exhibit is taken from page 77 of the Fifteenth Supplemental Order in Docket Number UT-950200. This exhibit has the information from that Order plus the derivation of Revenue Requirement in this Docket Number UT-970766. The only differences in the calculation are the 1996 test year and the change in the Conversion Factor Multiplier. The change in the Conversion Factor Multiplier is caused by the increase in the Uncollectible Expense Adjustment SA #9. I explained the reason for this change earlier in my testimony. Q. YOU HAVE TESTIFIED THAT EARNINGS IN 1996 IMPROVED OVER THE UT-950200 TEST PERIOD. IN LIGHT OF THAT FACT, CAN YOU EXPLAIN WHY YOU ARE RECOMMENDING A $23.7 MILLION INCREASE IN REVENUE REQUIREMENT? A. Yes. If the 1996 earnings had not improved over the UT-950200 test period the increase in Revenue requirement would have been more than the $23.7 million. Additional Pro forma adjustments to 1996 Results of Operations and the changes in circumstances from 1994 to 1996 account for the increase in Revenue Requirement. Q. WILL YOU DISCUSS THE MAJOR DIFFERENCES IN CIRCUMSTANCES ACCOUNTING FOR THE INCREASED REVENUE REQUIREMENT? A. The five major differences between the 1994 and 1996 test periods are as follows: 1) The proforma wage and salary adjustments account for $10 million of the increased Operating Revenue Requirement. The sum of the Net Operating Income effect of the two wage and salaries adjustments PFA #1 and PFA #2 ($3.6 million plus $2.7 million equals $6.3 million) times the conversion factor of 1.568135 equals $10 million of Operating Revenue Requirement ($6.3 times 1.568135 equals $10 million). 2) The adjustment entitled; “C-16 Interest Synchronization” accounts for $6.8 million of the increased Operating Revenue Requirement. The $6.8 million is calculated by taking the Net Operating Income difference between the amounts shown on Exhibit___MLT-1, line 62) for both cases of $4.3 million ($4.9 million less $0.6 million), and then applying the conversion factor to this Net Operating Income amount ($4.3 times 1.568135 equals $6.8). I explained earlier the differences in calculating this adjustment for both test periods. 3) Using 20/20 hindsight, the adjustment entitled; “PFA #9 Restructuring Adjustment” appears to have been overstated in the UT-950200 case. This accounts for $7.6 million of the increased Operating Revenue Requirement. The $7.6 million is calculated by comparing the two test period adjustments. The Revenue Requirement is then calculated using the conversion factor and Rate of Return. 4) The adjustment entitled; “RSA #16 Flowthrough Tax Restatement” was disputed by the Company and appears to have been overstated. 5) The adjustment entitled; “C-1 Recurring Revenue” also appears to have been overstated in the UT-950200 case. Revenues should be adjusted only if the revenues are growing faster than expenses and rate base. This fact was not established. These five major adjustments along with the additional adjustments listed on my Exhibit___(MLT-1) provide the details to explain the $23.7 million increase in Revenue Requirement. Q. DOES THAT CONCLUDE YOUR TESTIMONY? A. Yes.