Q27. WHAT ARE YOUR CONCLUSIONS ABOUT FILL FACTORS?

A27. In the abstract world of modeling, ceteris paribus, higher utilization rates translate into lower average costs since the cost numerator is divided by a higher divisor of usage. But in the real world, spare capacity is a legitimate cost that is driven in part by technology constraints. Spare capacity can be used in lieu of other resources, and it therefore eliminates these other costs. Therefore, the firm should be permitted to recover those costs in its UNE prices. A model that uses hypothetical fill factors of the sort not found in the real world will result in (1) unattainably low costs and (2) a network that is not sufficiently flexible to address real-world risk and uncertainty.¹⁵

Q28. DR. ARON, PLEASE ADDRESS THE ISSUE OF STRANDED PLANT.

A28. Among the key inputs into the TELRIC cost analysis are the assumptions about the depreciation lives of the network assets. Competition and technological change can reduce the economic lives of network assets, and these impacts should be accommodated in the depreciation lives that are used in the TELRIC model. I understand that Pacific Bell uses the same depreciation lives in its forward-looking TELRIC model that the company uses for financial reporting purposes of its actual, embedded assets. I understand that Dr. Vanston has reviewed the Pacific Bell proposal and found that the proposed lives are consistent with what he calls the "projection lives," which reflect the total expected lives of existing assets or (in other of Dr. Vanston's terminology) the average age of existing assets (or classes) plus the average remaining life of that asset.

The projection life is a very conservative assumption under the FCC's TELRIC terminology. The reason is that under the TELRIC-based pricing methodology, one would consider the effect of using the most up-to-date available technology. That is, one would evaluate the anticipated life of a hypothetical network that is installed today. I understand Dr. Vanston's expert opinion to be that technological change affects new and old assets alike. The average remaining life concept, therefore, is theoretically more consistent with the FCC's hypothetical network assumption than is the projection life concept.

To see this, consider an example. Suppose the driving force determining the economic longevity of copper loops is the anticipated displacement of copper by fiber in, say, the year 2005. (To make the example very simple, I am supposing, counterfactually, that all displacement would happen in one year; but the conceptual point is the same.) This would mean that the average remaining life on existing copper would be three years as of the year 2002. The projection lives, however, would take into account the embedded life of the existing assets. If the embedded plant has been in place for, on average, 10 years, then the projection life for this plant would be (roughly) 13 years. This is the asset life concept that is reflected in Pacific Bell's depreciation life assumptions used to develop its proposed UNE prices. Nevertheless, if a hypothetical firm were to install the network today, any copper placed in that network would be displaced in three years, not 13. Accordingly, any copper installed would have to have the opportunity to recover its costs over the three-year time period to be an economical investment. A 13-year life would neither create the correct signals for investment, nor, strictly speaking, fully reflect the FCC's hypothetical network assumption. Hence, the projection lives utilized by Pacific Bell to develop its proposed UNE prices actually are highly conservative, which will result, all else the same, in underestimating Pacific Bell's and TELRIC costs, as they arguably do not fully reflect the risks of stranded plant in the network associated with the FCC's hypothetical network assumption.

Q29. DOES THIS CONCLUDE YOUR DIRECT TESTIMONY?

A29. Yes, it does.

[SIGNATURE PAGE FOLLOWS.]

I declare under penalty of perjury that the foregoing is true and correct.

Executed at ____________________, this 17^th day of October 2002.

_____________________________

Debra J. Aron

CERTIFICATE OF SERVICE

I certify that I have by mail this day served a true copy of the original attached Administrative Law Judge's Ruling on Joint Applicants' and SBC Pacific's Motions to Strike on all parties of record in this proceeding or their attorneys of record.

Dated May 21, 2003, at San Francisco, California.

/s/ ELIZABETH LEWIS

Elizabeth Lewis

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¹⁵ If one uses an unrealistically high fill factor, then one must account for other costs imposed as a result of reduced flexibility.