Exhibit       (TZ-Testimony)
BEFORE THE
WASHINGTON UTILITIES AND TRANSPORTATION COMMISSION

In the Matter of the Pricing  )  DOCKET NO. UT-960369
Proceeding for Interconnection,  )
Unbundled Elements, Transport and )
Termination, and Resale   )
. . . . . . . . . . . . . . . . . . . . . . . . . . .)
      )
In the Matter of the Pricing  )  DOCKET NO. UT-960370
Proceeding for Interconnection,  )
Unbundled Elements, Transport and )
Termination, and Resale for  )
U S WEST Communications, Inc. )
. . . . . . . . . . . . . . . . . . . . . . . . . . .)
      )
In the Matter of the Pricing  )  DOCKET NO. UT-960371
Proceeding for Interconnection,  )
Unbundled Elements, Transport and )
Termination, and Resale for GTE )
Northwest Incorporated   )
. . . . . . . . . . . . . . . . . . . . . . . . . . .)




REBUTTAL TESTIMONY OF DR. THOMAS M. ZEPP

Submitted on behalf of

TRACER



September 4, 1998

Page 1 - REBUTTAL TESTIMONY OF DR. THOMAS M. ZEPP
Q. PLEASE STATE YOUR NAME  AND BUSINESS ADDRESS.
A. My name is Thomas M. Zepp.   My business address is 1500 Liberty Street, 
S.E., Salem, Oregon, 97302.

Q. HAVE YOU FILED TESTIMONY IN THIS PROCEEDING?
A. Yes.  I filed testimony on behalf of TRACER on August 20, 1998.

Q. WHAT IS THE PURPOSE OF THIS TESTIMONY?
A. I respond to the August 20, 1998 testimony of WUTC witness Dr. Glenn 
Blackmon and rebut ex parte comments U S WEST made to the Commission's 
consultant regarding costs of 4-wire links during a September 1, 1998 phone 
call.

Q. HAVE YOU REVIEWED DR. BLACKMON'S TESTIMONY DATED AUGUST 20, 1998?
A. Yes.  Dr. Blackmon advocates that the Commission "should attempt to promote 
competition and greater customer choice among telecommunications services," and 
at the same time focus on "unbundling at prices that preserve the basic 
relationships between price and cost that exist in incumbents' retail rates."  
(Blackmon, August 20, 1998 testimony, at page 3). 

Q. COULD THE COMMISSION ACHIEVE THESE TWO GOALS AT THE SAME TIME IF IT BELIEVED 
THEY WERE APPROPRIATE?
A. No, they are not compatible.  The Commission cannot "protect" existing 
retail rate structures of incumbent LECs and at the same time attempt to 
promote competition and greater customer choice.  The Commission focus should 
be on setting UNE prices at forward-looking economic costs (not tied to 
embedded costs), as is required by the 1996 Telecommunications Act, and then 
not do anything that would delay the natural evolution of sustainable 
facilities-based competition.  That approach will encourage competition to 
develop when and where new entrants can do something more efficiently, and 
customers will be given choices that can be sustained in the longer term.

Q. AS YOU UNDERSTAND DR. BLACKMON'S PROPOSAL, IS IT AT ODDS WITH THE 
TELECOMMUNICATIONS ACT?
A. Yes, it is.  The 1996 Telecommunications Act specifically requires adoption 
of prices for interconnection and unbundled network elements which are based on 
costs ". . . determined without reference to rate-of-return or other rate-based 
proceedings."  Sect. 252(d)(1).  His proposal is at odds with the Act because 
he proposes that UNE prices be tied to rates that were set in rate of return 
proceedings.  The Congress has given the WUTC a duty to base prices of UNEs 
(and thus the markups to achieve those prices) on economic costs, instead of 
embedded costs. 

Q. AT PAGES 8-9. DR. BLACKMON PRESENTS TESTIMONY THAT ANTICIPATED YOUR 
ANSWER.   HE SAYS THE ACT ALLOWS THE WUTC TO TIE THE PRICES OF UNES TO 
RESALE/WHOLESALE PRICES. DO YOU HAVE A RESPONSE ?
A. Yes.  Dr. Blackmon refers to Sec.. 252(d)(1)(A)(ii) which requires prices 
for interconnection and network element charges to be nondiscriminatory. This 
section of the Act establishes duties in the pricing of elements, not retail 
rates.  Thus, this section of the Act does not support the pricing parity Dr. 
Blackmon proposes. 
 The specific subsection he refers to says the Commission has the duty not to 
establish different prices for the same UNEs that have the same cost.  It has 
nothing to do with the relationship of retail/resale/wholesale prices and UNE 
prices.  To avoid discrimination in the pricing of the UNEs, this section would 
preclude the Commission from setting different prices for UNEs with the same 
costs.  Even without the requirement of the Act, the incumbent LEC may not know 
how the UNE will be used by the CLEC and the CLEC should certainly not be 
required to disclose competitively sensitive information about how it plans to 
use that UNE. 

Q. HAS DR. BLACKMON MADE SUCH A PROPOSAL?
A. Yes.  At page 15 of his testimony, he proposes that if the GTE unbundled 
loop UNE is provided to residential customers, competitors would be charged 
$31, but if that same UNE is provided to business customers, the competitor 
would be charged $68.17.  This proposal is inconsistent with the duties 
Congress has given the Commission in Section 252.  This section would not only 
preclude charging different amounts for the same UNE (to avoid discrimination), 
but gives specific direction that the price (i.e., costs plus markup) not be 
tied to rate base rate of return regulation. Thus Section 252 is inconsistent 
with Dr. Blackmon's proposal to tie UNE prices to comparable retail/resale/ 
wholesale prices, even if there were a difference in retail rates.  Contrary to 
the proposal Dr. Blackmon makes, section 252(d)(1)(A)(2) requires that the 
Commission not establish more than one UNE price for the same element if that 
element has the same cost.    

Q. SHOULD THE COMMISSION SET PRICES FOR UNEs THAT ARE NO LOWER THAN TELRIC, AS 
DR. BLACKMON PROPOSES AT PAGE 3?
A. It depends upon how "TELRIC" is defined.   Prices for UNEs should be set 
exactly equal to the best available measure of forward-looking economic costs, 
where the forward-looking economic cost is defined to be the sum of TELRIC and 
a measure of forward-looking common costs       In the unadjusted costs 
estimated with Hatfield Model, the TELRIC is the full forward-looking economic 
cost. This is true because the 10.4% variable support factor is included in 
those "TELRIC" estimates and the variable support factor is the best available 
measure of forward-looking common costs.  . Setting a price equal to the full 
forward-looking economic cost is fully compensatory to an incumbent LEC.  Such 
a price includes a normal profit and is the maximum price that a firm in a 
competitive industry could expect to receive.  The price allowed by the 
Commission should be set no higher. 

Q. HOW DOES YOUR DISCUSSION OF COST FIT IN WITH A CLAIM THAT A MARKUP IS NEEDED 
TO RECOVER COMMON COSTS EXPECTED WHEN THERE ARE "ECONOMIES OF SCOPE" WITH THE 
PROVISION OF TELECOMMUNICATION SERVICES?
A. Economies of scope are achieved when common plant is used to provide several 
types of services.  Those who argue that there must be a markup to recover 
economies of scope recognize that the long run incremental cost of providing 
each of those services will not reflect all of the costs of providing the 
combination of services.  That concept does not apply when the costs of 
elements are determined instead of the cost of services.  This is one of the 
many benefits of computing the costs of elements and not the cost of services.  
When U S WEST, for example, used to compute Average Service Incremental Costs 
(“ASICs”, a form of long run incremental costs), there, indeed, were shared 
costs among services resulting from economies of scope.  But with TELRIC 
estimates, the full forward-looking economic cost of the element is derived 
once the common costs are included, and the economies of scope become direct 
costs of elements instead of shared costs of services.  There is no need for a 
markup to recover shared or joint costs resulting from economies of scope, 
because the costs of concern have already been included as direct costs of the 
elements.

Q. HOW DOES YOUR DISCUSSION OF COSTS FIT IN WITH THE COSTS THE COMMISSION FOUND 
IN PHASE 1?
A. The costs found in Phase 1 must be less than the full forward-looking 
economic costs of elements if they must be marked up.  Also, with respect to 
Dr. Blackmon's testimony at page 3, line 13, the costs he has in mind must be 
less than the full forward-looking economic costs of the UNEs.

Q. AT PAGE 3, LINE 15, DR. BLACKMON STATES THAT THE SUM OF PRICES FOR ALL UNES 
THAT CONSTITUTE A FINISHED SERVICE SHOULD NOT EXCEED THE RESALE OR THE 
WHOLESALE PRICE OF THE FINISHED SERVICE.  DO YOU AGREE?
A. No, I do not.  His proposal is in conflict with Section 252(d)(1) of the Act 
and his "test" is inappropriate.  The prices for UNEs for a finished service 
could be above or below the prices for retail, resale, and wholesale services.

Q. AT PAGE 4 DR. BLACKMON STATES THAT ROUGH PARITY BETWEEN UNE PRICES AND 
RESALE/WHOLESALE PRICES SHOULD BE REQUIRED TO PROMOTE FAIRNESS TO CUSTOMERS, 
FAIR COMPETITION AND EFFICIENT INCENTIVES.  DO YOU AGREE?
A. No.  His proposal would not benefit customers and would not create efficient 
incentives to invest.
 As to investment incentives, each UNE price should be set equal to the best 
available measure of forward-looking economic cost.  The WUTC should adopt a 
uniform markup to the costs adopted in Phase 1 which provides the best measure 
of that full forward-looking economic cost. When the UNE price is set at full 
economic cost, it will encourage efficient investment by encouraging new 
entrants to provide facility-based competition where it is economic to do so.  
Under Dr. Blackmon's proposal, prices would be tied to embedded costs.  Thus, 
inefficient entry may be encouraged or efficient entry discouraged.
 As to benefits to customers, his proposal is in conflict not only with the 
1996 Telecommunications Act but with the Washington statutory requirement that 
the WUTC to encourage diversity in supply.  RCW 80.36.300.  Customers will 
benefit from sustainable entry of new competitors, not by the WUTC protecting 
the existing rate structures and the status quo by tying UNE prices to revenue 
requirements.

Q. SHOULD THE COMMISSION GIVE INCUMBENTS FLEXIBILITY TO SET WHATEVER MARKUP 
THEY WANT?
A. Absolutely not, for at least two reasons.  First, profit-maximizing 
incumbent LECs should not be allowed to markup UNEs by different margins to 
take advantage of differing price elasticities.  This would be an exercise of 
monopoly power the Commission should constrain.  Permitting incumbent LECs to 
markup UNE prices more when they face price inelastic demands would give them 
higher profits in the sales of elements and in sales in geographic areas where 
they have the greatest monopoly power and, in turn, would allow them to compete 
unfairly in the areas where they face competitive pressure.  These higher 
profits would allow the incumbent to be inefficient and have lower markups in 
competitive areas where they face price elastic demands.
 Second, there is an AT&T/MCI study that shows as the size of the firm 
increases (decreases) the forward-looking economic common costs increase 
(decrease).  Based on that study, the same -- not variable --markup is 
appropriate.  With the fixed percentage markup, as more (less) of a certain UNE 
is sold, the common costs increase (decrease).  This change in variable support 
costs (common cost) would occur no matter which UNE is demanded and, thus, 
there should be no difference in markup applied to the UNEs.      

Q. DR. BLACKMON STATES THERE IS A PROBLEM WITH REQUIRING THE INCUMBENT LECS TO 
PRICE UNBUNDLED LOOPS AT OR NEAR INCREMENTAL COST.  IS HE CORRECT? 
A. It depends on the measure of incremental cost.  If the Commission adopted 
measures of ASICs (as discussed above), there would, indeed, be a gap between 
the measure of incremental cost and full economic costs. But markups above the 
costs adopted in Phase 1 should be no more than 10.4%.  I do not know the 
weights the Commission gave to the various cost models presented in Phase 1 and 
considered in adopting those costs. In the case of the Hatfield (now HAI) 
Model, only a 10.4% mark up is required to obtain the full forward-looking 
economic cost.  In the case of the RLCAP model, only a 4.05% is required to 
obtain the comparable measure of full forward-looking economic cost which U S 
WEST called its Fully-Allocated Cost.  Mr. Montgomery has pointed out that the 
costs ultimately chosen by the Commission may not need to be marked up further 
to obtain a reasonable measure of forward-looking economic costs. All of these 
considerations indicate that whatever markup is chosen, to be consistent with 
the costs adopted in Phase 1 and a goal of pricing UNEs at prices required by 
Sect. 252, the markup should not exceed 10.4 percent.  My specific 
recommendation is that if Mr. Montgomery's interpretation of the Commissions 
costs is wrong, the Commission should adopt the 4.05% markup.


Q. AT PAGE 7, DR. BLACKMON COMMENTS ABOUT LECS BEING ALLOWED TO COLLECT A 
SUBSTANTIAL PORTION OF THEIR COMMON COSTS IN UNE LOOP PRICES.  DO YOU HAVE A 
COMMENT?
A. Yes.  There should be the same markup on all elements and loops should not 
be marked up more or less than other UNEs.  For the same reasons the FCC found 
that LECs should not be allowed to take advantage of differences in price 
elasticities when they prices UNEs, the incumbent LECs should not be allowed to 
mark up loops which are expected to face price inelastic demands more than they 
markup other UNEs.   Allowing them to do so would allow them to exercise 
monopoly power to the detriment of the public.

Q. AT PAGE 20, DR. BLACKMON RECOMMENDS THAT GTE'S PROPOSED LOOP UNBUNDLING 
CHARGES BE REJECTED.  DO YOU AGREE?
A. Yes.  To the extent that there is "cost to separate loops" at the central 
office, it should be spread to all loops and not to just the competitors who 
buy the loops which have been separated.   Had GTE adopted some other way of 
terminating loops at the central office, it may have increased other costs but 
eliminated the "separating costs".  Dr. Blackmon's proposal is appropriate 
because GTE and other incumbent LECs have control over the design of their 
networks and thus can design them to create such costs to disadvantage new 
entrants.  The Commission should not allow the incumbents to charge such 
"separating costs".

Q. AT PAGE 27, DR. BLACKMON PROPOSES THAT COMPANIES ESTABLISH CAPACITY CHARGES 
FOR RECIPROCAL COMPENSATION. DO YOU AGREE?
A. Yes.  I agree with Dr. Blackmon's proposal.  It is cost-based and 
appropriate.

Q. DO YOU AGREE WITH DR. BLACKMON'S CONCLUSION THAT A SPECIFIC "TRACKER 
MECHANISM" TO RECOVER TRANSITION COSTS IS INAPPROPRIATE?
A. Yes.  U S WEST may well have incurred some costs to establish an efficient 
operational support system but those costs may be more than offset by 
cost-savings which will be provided when more efficient OSSs are put in place.  
I also agree with Dr. Blackmon that it is inappropriate to impose such costs on 
competitors and not also on itself.

EX PARTE PHONE CALL REBUTTAL
Q. DID YOU LISTEN TO THE EX PARTE PHONE CALL BETWEEN US WEST AND THE 
COMMISSION'S CONSULTANT ON SEPTEMBER 1, 1998?
A. Yes.

Q. WERE YOU ALLOWED TO PARTICIPATE IN THAT CALL BY ASKING QUESTIONS OR POINTING 
OUT ERRORS IN THE PRESENTATION THAT U S WEST WAS MAKING TO THE COMMISSION'S 
CONSULTANT?
A. No, I was not.

Q. DO YOU HAVE ANY REBUTTAL TO THE U S WEST PRESENTATION THAT WAS MADE TO THE 
COMMISSION DURING THAT TELEPHONE CALL?
A. Yes, I have rebuttal of both the 4-wire cost study being discussed and the 
cost of demuxing.  In response to the 4-wire cost study presented by U S WEST, 
I conclude it is not TELRIC, is flawed, and should be disregarded.  U S WEST 
has not conducted a TELRIC analysis of the cost of 4-wire circuits, but, 
instead, has assumed the costs of 4-wire circuits (save for some minor 
differences in demuxing cost) are double the cost of 2-wire circuits.  This 
assumption is both inconsistent with the TELRIC study of 4-wire circuits I 
presented in my August 20, 1998 testimony and is inconsistent with cost 
assumptions the Commission has relied upon to determine the costs of 2-wire 
UNEs earlier in this proceeding.

Q. HOW IS THE ASSUMPTION THAT 4-WIRE COSTS ARE DOUBLE THE COST OF 2-WIRE UNEs 
INCONSISTENT WITH EARLIER DETERMINATIONS OF 2-WIRE COSTS MADE BY THIS 
COMMISSION?
A. The Commission believed that 4-wire loops, other than special access lines, 
were modeled as two 2-wire circuits when they were not.  At para. 14 of the 9th 
Order, the Commission reported that “The count of the number of working pairs 
would include the number of working pairs used to provide four-wire loop 
services”  This statement is factually incorrect. The 4-wire services other 
than special access lines were modeled as one pair, not two 2-wire circuits.  
Thus, the loop counts are counts of loops and not counts of pairs.  This fact 
has important ramifications about the assignment of placement costs:  Placement 
costs were assigned to loops not to pairs.
 In both the 8th and the 9th Orders, the Commission made the following 
statement: “The unit cost of production is the total cost divided by total 
demand.” (8th order, par 178, 9th Order, par 16).  The total demand in the cost 
proxy models and, thus, the total demand relied upon to compute unit costs was 
in units of loops, not pairs.  The unit cost of production, then, is total 
cost/loops not total costs/pairs as the Commission was led to believe.  The 
4-wire circuit cost would have to be larger to reflect the additional pairs of 
copper (when copper is used to provide service) and different DLC cards (when 
fiber is used), but the same amount of placement cost would be assigned to each 
loop--be it a 2-wire or a 4-wire loop.
 This fact alone shows that doubling 2-wire costs (other than demuxing costs) 
to determine the 4-wire link cost is inconsistent with the 2-wire link UNE 
costs the Commission found to be reasonable.
 During the September 1, 1998 telephone call, this fundamental flaw in the 
4-wire cost model was not addressed, because no party other than U S WEST was 
invited to present their views to the Commission.

Q. CAN YOU PROVIDE AN EXAMPLE OF WHY THE TELRIC OF A 4-WIRE LINK IS LESS THAN 
DOUBLE THE TELRIC OF A 2-WIRE LINK THAT YOU WOULD LIKE TO HAVE PRESENTED TO THE 
COMMISSION DURING THE PHONE CALL?
A. Yes.  I would have liked to have presented the following example:  
 Say a business is moving to a new site that is now nothing but bare land.  The 
least cost method of providing distribution facilities will provide a measure 
of the TELRIC of the distribution facilities, because the incumbent LEC has no 
sunk costs and would seek to provide service in the least cost way.  The 
business has the choice of ordering 37 2-wire trunks to operate one type of PBX 
system, or ordering 37 4-wire trunks to operate a different, more sophisticated 
PBX system and take service from a CLEC.  U S WEST sells the links to the CLEC, 
which pays U S WEST TELRIC plus a reasonable markup.   For the example, I would 
ask U S WEST to assume that an CLEC or a successor will continue to buy either 
the 2-wire or 4-wire links during the useful life of the distribution plant 
being placed.  
 The issue is:  Wouldn't U S WEST incur approximately the same placement costs 
to provide the 2-wire service with a 50 pair distribution cable as it would 
incur to provide the 4-wire service with a 100 pair distribution cable and 
still have the same fill factor?  Why wouldn't the estimate of the cost 
difference be the difference in  TELRIC costs of providing 2-wire and 4-wire 
links?

Q. IF YOU HAD BEEN GIVEN THE SAME OPPORTUNITY TO DISCUSS 4-WIRE COSTS WITH THE 
COMMISSION THAT WAS GIVEN TO U S WEST IN ITS EX PARTE TELEPHONE CALLS, WHAT 
WOULD YOU TELL THE COMMISSION?
A. I would first note that the Commission recognized in its 9th Order that it 
had to attempt to construct a 4-wire cost estimate from the “limitations of 
existing models” (9th Order, para. 16).  Those models were designed to compute 
TELRICs for 2-wire links, not for 4-wire links.  There was no TELRIC study of 
4-wire link costs submitted in Phase 1, and, thus, the Commission was left with 
a difficult task.   This difficulty has been intensified by the Commission not 
having the benefit of other parties commenting on the August 5th 4-wire cost 
study submitted by U S WEST and discussing ramifications of U S WEST's response 
to Bench Request No 102.  Particularly with respect to Bench Request 102, U S 
WEST admitted that it provisions 4-wire links with different facilities than 
2-wire links.  Thus (a) doubling the facilities used to provide 2-wire links 
does not give useful information about 4-wire costs, and (b) the 4-wire links 
and 2-wire links are, in fact, different unbundled network elements.

Q. DID ANY INFORMATION ABOUT BENCH REQUEST 102 COME UP DURING THE TELEPHONE 
CALL THAT YOU WOULD LIKE TO ASK QUESTIONS ABOUT?
A. Yes.  Mr. Buckley stated that someone had gathered the data on the 4-wire 
card costs reported in BR 102 and that those costs did not reflect the 
economies being received by U S WEST when it bought DLC cards used to provide 
2-wire services.  This suggests that discounts expected if many cards are 
purchased and the vendor discounts that U S WEST would receive if a TELRIC 
study for 4-wire services were conducted may not be reflected in the $300 card 
costs reported in BR 102.  The card costs should be the ones which reflect all 
the discounts that could be expected if the entire network were being rebuilt, 
and not costs for buying a few DLC cards off the shelf.  I was not given an 
opportunity to point this out to the Commission's consultant or ask Mr. Buckley 
about the basis for those card prices.

Q. DID YOU HAVE ANY CONCERNS ABOUT THE COSTS OF DEMUXING THAT U S WEST 
REPRESENTED TO COMMISSION?
A. Yes.  The Commission's consultant asked the question about why there are no 
specific costs identified in the field for demuxing loops to the DS0 level but 
that U S WEST proposes such demuxing costs be identified at the central office 
end of the loop.  At both ends of the links, U S WEST brings the loop down from 
some high capacity level of transport to the DS0 level and hands off the 
circuit at a specific address.  But only at the end office does U S WEST claim 
the demuxing cost should be identified and charged to competitors.  For the 
same reasons discussed above with respect to my position that GTE's proposed 
loop unbundling charges be rejected, the cost for demuxing proposed by U S WEST 
should also be rejected.
Q. DOES THIS COMPLETE YOUR REBUTTAL TESTIMONY?
A. Yes.