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Qwest’s decision-making process and the economic reality of the
transactions.
d. Allocation of Incremental Costs to Qwest’s
Retained Assets
Qwest allocated only the direct costs of material and an
incremental portion of labor and indirect costs to its retained
conduits. With respect to the retained fiber, Qwest allocated
only the incremental costs of installing any additional conduits
and endlinks and the costs of the retained fiber and of splicing
and testing that fiber. Petitioners argue that the allocation of
these costs is consistent with the economic reality of the
transactions because these costs were the only additional costs
incurred by Qwest as a result of its decision to install
additional conduit or pull additional fiber. Further,
petitioners argue that the allocation also reflected Qwest’s
willingness to incur only an incremental risk by installing the
retained assets. Respondent does not contest that at least these
costs should be allocated to Qwest’s retained assets. However,
respondent questions how Qwest arrived at its incremental base
rate.
Before the years in issue, Qwest acted primarily as a
general contractor and subcontracted most of the construction
work out to third parties. Bids submitted by subcontractors to
install only one conduit, when compared to the bids to install
multiple conduits, indicated that the third-party subcontractors
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