DRAFT
BEFORE THE
FEDERAL COMMUNICATIONS COMMISSION
WASHINGTON, D.C. 20554
In the Matter of / ))
Joint Application by SBC Communications Inc., / )
Southwestern Bell Telephone Company, and / )
Southwestern Bell Communications Services, / ) / CC Docket No. ______
Inc. d/b/a Southwestern Bell Long Distance for / )
Provision of In-Region, InterLATA Services in / )
Kansas and Oklahoma / )
1
AFFIDAVIT OF THOMAS G. RIES
1
STATE OF MISSOURI )
)
CITY OF ST. LOUIS )
TABLE OF CONTENTS
TELRIC AND AVOIDED COSTS FOR RESALE IN KANSAS AFFIDAVIT
SUBJECT
/ PARAGRAPHPROFESSIONAL EXPERIENCE AND EDUCATIONAL BACKGROUND / 3
PURPOSE OF AFFIDAVIT / 5
COST METHODOLOGY FOR NETWORK INTERCONNECTION, UNBUNDLED NETWORK ELEMENTS, LOCAL TRANSPORT AND TERMINATION, AND COLLOCATION / 7
WHOLESALE DISCOUNT RATES FOR RESALE SERVICES / 41
DISTRIBUTION OF SWBT MODELS AND COST STUDIES TO CLECS / 42
DESCRIPTION OF UNBUNDLED NETWORK ELEMENT COST STUDIES / ATTACHMENT A
KANSAS ARBITRATION COST STUDIES / ATTACHMENT B
I, Thomas G. Ries, being first duly sworn upon oath, do hereby depose and state as follows:
1. My name is Thomas G. Ries. I am Director – Cost Analysis and Regulatory at SBC Telecommunications Inc. My business address is One Bell Center, Room 38-C-03, St. Louis, Missouri 63101.
2. As Director-Cost Analysis and Regulatory I develop cost methods used to determine the costs incurred in providing Company services; supervise the production of cost studies; and analyze cost study results.
PROFESSIONAL EXPERIENCE AND EDUCATIONAL BACKGROUND
3. I began my career with Nevada Bell in September of 1978 in the Accounting department with the responsibility of preparing and analyzing financial reports. In 1981, I transferred to Central Office Equipment Engineering where I worked with the retirement and placement of central office switching projects. In 1986 I joined the Cost Studies organization. I have held various positions in Cost Studies from 1986 to present. In these positions, I was responsible for the production, maintenance, coordination, examination and support of cost studies, models, and the development of cost methodologies. From February 1995 through October 1996, I was the Rate Design witness for Nevada Bell’s most recent Rate Case. In June of 1997, I assumed my present position with SBC Telecommunications Inc. I am currently responsible for developing policy, methodology and witness support for all of the 13 SBC states. Those states include Arkansas, Kansas, Missouri, Oklahoma, Texas, Illinois, Michigan, Wisconsin, Ohio, Indiana, California, Nevada, and Connecticut.
4. In 1986 while working full time in Central Office Engineering, I earned a Bachelor of Science in Business Administration from the University of Nevada - Reno.
PURPOSE OF AFFIDAVIT
5. The purpose of my affidavit is to describe how SWBT developed forward-looking costs in support of its interconnection, unbundled network element and reciprocal compensation offerings in Kansas, consistent with Federal Communications Commission (“FCC”) rules and 47 U.S.C. § 271(c)(2)(B) of the Telecommunications Act of 1996 (“the Act”) as interpreted and applied by the Kansas Corporation Commission (“KCC”).
6. Specifically, my affidavit demonstrates that SWBT’s costs for unbundled network elements were developed in accordance with the Act, 47 U.S.C., and § 251(c)(3)(4)(6) and 252(d)(1). I will describe, in broad terms, the basis for these cost studies, and the methodology used to determine the costs for these elements. I also explain why the results reflect the forward-looking costs, as approved by the KCC, of providing those elements, not actual or embedded costs. Finally, I will discuss the cost studies supporting SWBT’s wholesale discount rate for resale services. To supplement my discussion, Attachment A to my affidavit is a document entitled Description of Unbundled Network Element Cost Studies. This document describes in significant detail the methodology that SWBT has utilized in preparing its initial studies in Kansas to determine the costs of providing unbundled network elements (loops and switching) inclusive of a description of study methods, models, input data, and results. Attachment B to my affidavit lists the forward-looking cost studies generally described in Attachment A, and was filed with the KCC to support the KCC’s determination of TELRIC and avoided/wholesale costs and rates.
Cost Methodology for Network Interconnection, Unbundled Network Elements, Local Transport and Termination, and Collocation
7. 47 U.S.C. § 252(d)(1) requires that prices for interconnection and unbundled network elements be “based on the cost” of providing these elements, products and services, and “may include a reasonable profit.” The FCC’s First Report and Order in CC Docket No. 96-98 prescribed a methodology for identifying the costs on which these prices should be based. See First Report and Order, Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, 11 FCC Rcd 15,499 (1999) (“Local Competition Order”). The FCC’s methodology is the sum of the total element long run incremental cost (“TELRIC”) and a reasonable allocation of forward-looking common cost. In a general investigation of SWBT’s costs to determine prices for UNEs and interconnection, the KCC found that “inputs consistent with the TELRIC [Total Element Long Run Incremental Cost] methodology should be adopted.” Order Setting Inputs for Cost Studies, Joint Application of Sprint Company, L.P., et al for the Commission to Open a Generic Proceeding on Southwestern Bell Telephone Company’s Rates for Interconnection, Unbundled Elements, Transport and Termination, and Resale, Docket No. 97-SCCC-149-GIT, ¶ 12 (KCC Nov. 16, 1998) (“Nov. 16 Cost Studies Order”). In describing TELRIC- based pricing methodology, the FCC stated “[a]dopting a pricing methodology based on forward-looking, economic costs best replicates, to the extent possible, the conditions of a competitive market.” Local Competition Order, 15 FCC Rcd at 15,846, ¶ 679. Additionally, in the same docket, in its Order dated February 19, 1999, at paragraph 72, the KCC stated: “Thus, based on the record presented in this case, the Commission finds the prices contained herein are based on TELRIC cost of UNEs and interconnection and are just and reasonable.” Final Order Establishing SWBT’s Prices for Interconnection and UNEs, Joint Application of Sprint Communications Company, L.P., et al for the Commission to Open a Generic Proceeding on Southwestern Bell Telephone Company’s Rates for Interconnection, Unbundled Elements, Transport and Termination, and Resale, Docket No. 97-SCCC-149-GIT, ¶ 72 (KCC Feb. 19, 1999) (“Final Order”).
8. 47 U.S.C. § 252(d)(2)(A)(i) requires that the charges for local transport and termination recover the “costs” of transporting and terminating “calls that originate on the network facilities of the other carrier.” The FCC’s Local Competition Order, at paragraph 1056, specified these costs were to be determined in the same manner as the costs for network interconnection, unbundled network elements, and collocation. Local Competition Order, 11 FCC Rcd at 16,024 ¶ 1056.
9. After passage of the Act, and in anticipation of the FCC’s pricing regulations, SWBT performed cost studies to determine the forward-looking economic costs of providing services to Competitive Local Exchange Carriers (“CLECs”). Following the issuance of the FCC’s Local Competition Order and its accompanying regulations on August 8, 1996, SWBT revised its studies to ensure that they conformed both with the rules and policies of the KCC, and the rules and principles enunciated in the FCC’s order. The resultant studies were filed with the KCC in late 1996 in the Sprint arbitration. The KCC approved interconnection rates in the Sprint arbitration as complying with Sections 251 and 252, but at Sprint’s request established a generic proceeding to further examine SWBT’s costs. SWBT again filed the cost studies that were filed in the Sprint arbitration in the subsequent AT&T arbitration, as well as some additional cost studies that had been completed in the interim. Again, the KCC approved rates in conformance with Section 251 and 252, but determined that rates were subject to change based on the outcome of the generic cost proceeding. Phase 1 hearings on the generic cost docket were held in April, 1997, in which SWBT proposed the use of all current SWBT cost models. On December 22, 1997, the KCC issued an Order, Docket 97-SCCC-149-GIT, adopting SWBT models for purposes of unbundled network elements (“UNEs”) cost development and determining prices for interconnection and UNEs. See Order Choosing Cost Methodology and Suggesting Procedural Schedule, Joint Application of Sprint Communications Company, L.P., et al for the Commission to Open a Generic Proceeding on Southwestern Telephone Company’s Rates for Interconnection, Unbundled Elements, Transport and Termination, and Resale, Docket No. 97-SCCC-149-GIT (KCC Dec. 19, 1997) (“Dec. 19 Cost Methodology Order”).
10. On November 8, 1996, at the request of Sprint Communications L.P., the KCC opened a generic investigation into costing methodologies for unbundled network elements. Following parties’ comments and hearings, the KCC accepted SWBT’s studies as the basis for developing costs for unbundled network elements. See Dec. 19 Cost Methodology Order. Those studies developed for SWBT’s unbundled network elements are forward-looking long run incremental cost studies considering the total quantity of the facilities as required by former 47 C.F.R. § 51.505(b). See Attachment A, §1.3.
11. The KCC then initiated proceedings to determine the appropriate inputs to be used in SWBT’s models. In February 1998, a two-day workshop was conducted by SWBT. The workshop included an overview and comparison of telecommunications costing methodologies, (embedded, fully distributed, direct, incremental, and total element long run incremental). SWBT personnel led discussions on cost factors and labor costs, how they are developed and applied in SWBT forward-looking cost studies, unbundled network elements, definitions and network configurations, and specific cost studies (unbundled local switching, loop, and dedicated transport). Subsequent workshops were held on February 25th, with SWBT responding to questions and answers; and on February 26th, with AT&T conducting a workshop, presenting its concerns regarding SWBT’s models, inputs and studies.
12. These studies reflect efficient technology that is currently available, and existing wire center locations as required by 47 C.F.R. § 51.505(b)(1). For example, the Switching studies reflect forward-looking digital switch technology for Host and Remote switches at existing wire center locations. Local loop studies utilize forward-looking digital loop carrier technology, and interoffice transport uses SONET technology.
13. In the SWBT TELRIC studies investigated by the KCC, productivity improvements are included through the use of forward-looking efficient technology and operating expenses, which form the basis for the cost development. Productivity gains occur as a result of the deployment and utilization of efficient forward-looking technology in place of older less efficient technology. The improvement in productivity realized is “flash cut” into the study by assuming all old technology has been replaced by efficient forward-looking technology. Thus, the full expected gains in productivity are reflected in the study by inclusion of most efficient technology substitutions. The KCC recognized the need to address anticipated productivity gains. Rather than develop a specific productivity factor, the KCC ordered the removal of inflation.
14. To comply with paragraph 682 of the FCC’s Local Competition Order to attribute costs to specific elements to the greatest extent possible, SWBT measured actual space requirements in a sample of central offices reflecting forward-looking efficient technologies, workforce deployment and spare part levels. Local Competition Order, 11 FCC Rcd at 15,847-48, ¶ 682. The final results of this review showed that almost 90% of the sample central office space is currently in use. Less than 13 percent was available for growth. SWBT’s field studies confirm that SWBT’s building space is productively utilized. No adjustment to building floor space was needed to adequately represent any different efficiency utilization. The KCC approved this approach, confirmed by its decision on issue No AA-0001 of the KCC’s November 16, 1998 Order. Nov. 16 Cost Studies Order at A-6-7.
15. The FCC’s First Report and Order, paragraph 682 provides for deriving per-unit costs “by dividing total costs associated with the element by a reasonable projection of the actual usage of the element.” Local Competition Order, 11 FCC Rcd at 15,847-48, ¶682. SWBT studies used current “fills,” or utilization levels, actually experienced in SWBT’s forward-looking efficient network, because there are contradictory indications of how competition might affect existing fill. One view is that CLECs will offer new services that will stimulate demand for resold services or unbundled elements and, therefore, fill will increase. Another view is that facility-based competitors will take current SWBT customers off of SWBT’s network, which will reduce fill. In addition, there is the hybrid scenario in which a CLEC will establish a presence in local markets through resale and then migrate to a facilities-based system. In the absence of any actual projections from CLECs, SWBT used the current patterns of plant utilization, which do include the most current impact of competition in the SWBT network, as representative of going-forward conditions until other data become available which might indicate how those established patterns should be adjusted. These current fills are an accurate projection of future fills during the anticipated lives of the interconnection contracts (which is the time horizon the KCC determined to be relevant in its Phase 1 Order) that SWBT has negotiated to date, the longest of which is three years. See Attachment A, §2.2. The final studies adopted by the KCC used fill factors to reflect an efficient provider per the KCC ordered input changes.
16. The forward-looking cost of capital used in SWBT studies reflected a conservative estimate of the risk characteristics of the increasingly competitive environment SWBT will confront in the coming months. The cost of capital was 10.0%. This KCC ordered cost of capital is well below the authorized interstate level, despite increased business and financial risk due to competition. This cost of capital complies with 47 C.F.R §51.505(b)(2). The KCC found that:
The inclusion of a 10% cost of capital provides SWBT a reasonable profit as discussed in the November 16, 1998 Order (at pages A-40 and 41 of Attachment A to that Order) and is supported by the evidence. The findings which the Commission made result in appropriate calculation of costs, and fair and reasonable rates which allow SWBT a reasonable profit, to which it is entitled under the Telecommunications Act of 1996.
Order on Reconsideration, Joint Application of Sprint Communications Company, L.P., et al for the Commission to Open a Generic Proceeding on Southwestern Bell Telephone Company’s Rates for Interconnection, Unbundled Elements, Transport and Termination, and Resale, Docket No. 97-SCCC-149-GIT, ¶ 50 (KCC Sept. 17, 1999).