Q. Please state your name and business address.
A. Michael A. Dean, Maryland Public Service Commission, 6 St. Paul Street, Baltimore, Maryland 21202-6806.
Q. What is your educational background?
A. I have a Bachelor of Science from the U.S. Naval Academy (1979) with a major in OperationsAnalysis. I have also completed graduate courses in accounting and finance, and the public utility depreciation program B course taught by Depreciation Programs, Inc.
Q. Please describe your professional background.
A. I have been a depreciation engineer at the Maryland PSC since 1994. Previously I was a lead engineer and licensing department supervisor at a nuclear power plant.
Q. Are you a licensed engineer?
A. I am a licensed engineer in Maryland and Nebraska.
Q. Have you previously testified before this Commission?
A. I have filed testimony regarding depreciation in Case No. 8687 Phases I and II (Columbia Gas), 8707 (Chesapeake Utilities), and 8725 (proposed Baltimore Gas and Electric (BGE) and Potomac Electric Power merger), and participated in settlement discussions in Case No. 8485 (BGE), 8642 (Chesapeake Utilities), and 8718 (Delmarva Power and Light).
Q. What is the purpose of your testimony?
A. My testimony recommends that currently approved asset service lives be used in determining the rates for interconnection and unbundled network elements.
Q: What asset lives should be used in determining costs in this proceeding?
A: The basis for determining the asset lives to be applied in interconnection and unbundled network element rates should be the asset lives associated with the current intrastate depreciation rates approved in 1995 for Bell Atlantic - Mayland.1 These lives (and remaining life depreciation rates for comparison purposes) are listed in the table below:
|
|
|
|
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Digital Switching Equipment |
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7.4% |
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Circuit Equipment - Digital - Non-Sonet |
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10.5% |
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Circuit Equipment - Digital - Sonet |
|
10.5% |
|
Aerial Cable - Metallic |
|
6.3% |
|
Underground Cable - Metallic |
|
4.0% |
|
Buried Cable - Metallic |
|
6.9% |
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Fiber (Nonmetallic Cable) |
|
|
Q: How were these account asset lives determined?
A: These account asset lives were determined by agreement following review by the Federal Communications Commission (FCC) of Bell Atlantic - Maryland's depreciation study submitted on November 10, 1994,2 and forecasts of company equipment additions and retirements. The intrastate asset lives approved by the Maryland PSC were consistent with the interstate lives approved by the FCC.3 The listed depreciation rates were adjusted for account depreciation reserve balances using the remaining life technique, which allocates the net account balance over the remaining life of assets in that account.
Q: Why should the account asset lives, for purposes of determining rates in this proceeding, not be reduced for current plant or for new equipment installed in the future?
A: Bell Atlantic - Marylandproposes that new plant be assigned even shorter lives to account for the affects of competition and anticipated industry wide equipment replacement programs. However, existing depreciation rates, and hence estimated asset lives, were established with technological obsolescence4 and competition5 in mind. Data reflecting the anticipated replacement of Bell Atlantic - Maryland plant was used to develop these rates. Bell Atlantic - Maryland should not be permitted to adjust estimated asset lives that will be reflected in rates chargeable to their competitors' customers by arguing that plant generally is being replaced faster in the industry, when the existing Bell Atlantic - Maryland asset lives are based upon Bell Atlantic - Maryland forecast replacement rates in Maryland.6 In addition, allowing Bell Atlantic - Maryland accelerated recovery of future plant investments from their competitor firms' customers would remove the incentive for the company to efficiently plan system upgrades which are based upon their own actual future customer needs, and could result in excessive overbuilding.
In particular, the Commission should carefully consider Bell Atlantic - Maryland's arguments that shorter asset lives for future investments need to be reflected in the pricing of rates for interconnection and unbundled network elements to account for investments that are stranded as competing networks are built out.7 Acceptance of these arguments may result in insulating a portion of Bell Atlantic - Maryland's future investments from competition by guaranteeing recovery of this investment.
Q: Should asset lives used in this proceeding be shortened to reflect past under-recovery of investment or future non-recovery due to loss of customers to competitors?
A: No. The PSC for the last several years has allowed Bell Atlantic - Maryland to book intrastate remaining life depreciation rates consistent with interstate depreciation rates. The use of remaining life depreciation rates since 19858 has allowed recovery of past under-recovery resulting from changes in asset life and salvage estimates and for unanticipated removal of plant from service. As such, Maryland has not arbitrarily restricted the recovery of investment beyond that which could be anticipated at the time of approval by any party. Also, increasing the rates for interconnection and unbundled elements offered to competitors would interfere with the development of efficient competition, and is not the proper remedy for any past under-depreciation. Full recovery of embedded costs is no longer guaranteed through the state regulatory process.9
Q. Does this complete your testimony?
A. Yes.
1. The current depreciation rates were approved at the June 14, 1995, PSC Administrative Meeting. See letter Allen M. Freifeld to Daniel P. Gahagan, of 6/2/95, Re: Bell Atlantic - Maryland Depreciation Rates (TE-1053) M.L. No. 47644.
2. 1995 Depreciation Rate Study, Bell Atlantic - Maryland, Inc., November 10, 1994, (TE-1053, ML No. 47644).
3. FCC approval of the resulting remaining life Bell Atlantic - Maryland interstate depreciation rates is noted in In the Matter of Revised Percentages of Depreciation Pursuant to the Communications Act of 1934, 11 FCCR 12,327 (FCC 96-22).
4. Depreciation is defined as the loss, not restored by current maintenance, which is due to all the factors causing the ultimate retirement of the property. These factors embrace wear and tear, decay, inadequacy and obsolescence. PSC v. BGE, 273 Md. 357, 371 n. 4, 329 A.2d 691 (1974), quoting Lindheimer v. Illinois Bell Tele. Co., 292 U.S. 151, 167 (1934). FCC rates also reflect technological obsolescence. Louisiana PSC v. FCC, 476 U.S. 355, 365 (1986) (depreciation of telephone company assets is a function of wear and tear or technological obsolescence). See also the general discussion on the use of Technology Displacement Analysis in calculating depreciation rates in Bell Atlantic's - Maryland 1995 Depreciation Rate Study, Introduction pages 31-34.
5. See the general discussion of the effect of competition in the local market for telecommunications services, including the approval of competitors by the Maryland PSC, in Bell Atlantic - Maryland's 1995 Depreciation Rate Study, Introduction pages 2-3, and 12-20.
6. To use a higher depreciation rate or lower service life in this proceeding, the burden is upon Bell Atlantic - Maryland to demonstrate that its capital plans are consistent with these higher rates. PSC Law § 84.(b). Using industry technology replacement characteristics does not demonstrate that Bell Atlantic - Maryland is even planning to upgrade its network at that rate.
7. See, for example, Direct Testimony of Lawrence Vanston, January 10, 1997, p. 17, recommending a fifteen rather than twenty year life for nonmetallic (fiber) cable.
8. See Re Chesapeake and Potomac Tel. Co. of Md., 76 MD PSC 238, 263 (1985) (Case No. 7816).
9. The FCC
position is that full embedded cost recovery should not be achieved
through interconnection and unbundled element rates. See In the
Matter of Implementation of the Local Competition Provisions in the
Telecommunications Act
of 1996, 11 FCCR 15,858-9 (FCC 96-325), § 706.