20030418Staff 2nd Resp - attach J -1 HAI report.pdf

HAI Report
WorldCom Comments
CC Docket 01-338
Attachment A
HAI Report
WorldCom Comments
CC Docket 01-338
The Technology and Economics
Of Cross-Platform Competition
In Local Telecommunications Markets
Richard A. Chandler
A. Daniel Kelley
David M. Nugent
HAI Consulting, Inc.
1355 S. Boulder Rd. #184
Louisville, Colorado 80027
April 4, 2002
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TABLE OF CONTENTS
I.INTRODUCTION AND EXECUTIVE SUMMARY...............................................1
II.COMPETITION AND MONOPOLY IN TELECOMMUNICATIONS.................7
III.SERVICE AND GEOGRAPHIC MARKETS......................................................10
IV.CURRENT COMPETITION METRICS...............................................................12
A.Market Share Analysis ..................................................................................12
B.Comparison to the Evolution of Long distance Competition ...................16
C.Conclusion.......................................................................................................19
V. CABLE TELEPHONY.............................................................................................20
A.Existing Cable Telephony Providers ...........................................................20
B.Cable Operator Investment Alternatives.....................................................24
C.The Promise of IP Telephony.......................................................................30
D.Cable Telephony as an Option for Businesses .........................................35
E.Conclusion.......................................................................................................37
VI.MOBILE AND PORTABLE WIRELESS TECHNOLOGIES...........................38
A.Wireless and Wireline Demand ...................................................................39
B.Wireless Network Capacity and Coverage.................................................40
C.Wireless Data Service for Wireline Replacement.....................................49
D.Wireless Industry Structure...........................................................................51
E.Conclusion.......................................................................................................51
VII.CLEC FIBER RING AND FIXED WIRELESS COMPETITION ..................52
A.The CLEC Business ......................................................................................52
B.Potential Fiber Ring Competition .................................................................54
C.CLECs Deploying Broadband Fixed Wireless Technology.....................63
D.The Implications of the CLEC Meltdown .....................................................65
E.Conclusion.......................................................................................................74
VIII.BROADBAND COMPETITION .......................................................................74
A.Broadband Competition ................................................................................75
B.Voice Over DSL Technology........................................................................80
IX.OLIGOPOLY IN LOCAL MARKETS..................................................................82
X.UNES ARE NECESSARY....................................................................................84
XI.UNBUNDLING AT ECONOMIC COST WILL NOT DETER EFFICIENT
FACILITIES CONSTRUCTION BY EITHER ILECS OR CLECS ..........................88
A.UNEs Do Not Reduce CLEC Incentives to Construct Facilities .............88
B.UNEs Do Not Reduce ILEC Incentives to Construct Facilities ...............90
C.Why Are ILECs Withholding UNEs from the Market?..............................97
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The Technology and Economics
of Cross-Platform Competition
in Local Telecommunications Markets
I.Introduction and Executive Summary
The Telecommunications Act of 1996 contains a complex blueprint for
building a new competitive infrastructure.1 The foundation for this new
infrastructure is local competition for both narrowband and broadband services.
The architects of the 1996 Act recognized that Incumbent Local Exchange
Carrier (“ILEC”) entry into long distance markets and other forms of deregulation
would be justified only if the ILECs’ monopoly local markets were opened to
competition. While it is far too early to throw out this competitive blueprint, it is
obvious that the high expectations at the time the Act passed have not yet been
met. As measured by the degree of local competition, it is apparent that the local
markets have not been opened.
The potential availability of alternative broadband platforms does not
change this conclusion. The broadband market is itself highly concentrated, with
many customers dependent on the ILECs. Few customers have more than two
realistic alternatives. Moreover, because voice over broadband is not yet a
commercial reality, even when a broadband alternative to the ILEC is available,
this does not create any new competition for voice service.

1 Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56, codified at 47 U.S.C.
§§ 151 et seq. (1996) (“1996 Act” or “Act”).
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To advance the goal of competitive local markets, the Act created several
mechanisms designed to create an environment where local competition could
develop. One the most fundamental of those mechanisms is the requirement
that incumbent monopoly local exchange carriers unbundle their networks in
order to allow nascent competitors access to the incumbents’ inherent
economies of density, connectivity and scale.2
Now, six years after the passage of the Act, the Federal Communications
Commission (“FCC” or “Commission”) is conducting a review of the way in which
competition has developed in order to determine whether or how the
procompetitive unbundling measures of the Act should be modified.3 The ILECs,
of course, argue that competition is already robust. They believe they should be
permitted to enter more long distance markets, to have additional services
deregulated and to be freed from the basic requirements of the Act, including the
fundamental requirement that they unbundle elements of their local networks for
use by competitors to provide narrowband and broadband services.
The ILECs are wrong, and their position is increasingly difficult to sustain
in the face of mounting evidence. As this Report shows, local exchange markets
are not competitive. At the end of 2001, competitors who owned facilities that
connect to end-user consumers controlled only about three percent of lines, and

2 47 U.S.C. 251(c)(3). See also, Implementation of the Local Competition Provisions of the
Telecommunications Act of 1996, CC Docket No. 96-98, CC Docket No. 96-98, First Report and
Order, 11 FCC Rcd. 15499 (1996) (“Local Competition Order”), para. 11.3 In the Matter of Review of the Section 251 Unbundling Obligations of Incumbent Local
Exchange Carriers, CC Docket No. 01-338, Implementation of the Local Competition Provisions
of the Telecommunications Act of 1996, CC Docket No. 96-98, Deployment of Wireline Services
Offering Advanced Telecommunications Capability, CC Docket No. 98-147, Notice of Proposed
Rulemaking, Released December 20, 2001 (“NPRM”).
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many of those competitors are facing a daunting economic future. Numerous
competitive firms failed in 2001. Many of the remaining firms are in financial
distress and are scaling back their expansion plans as a result.
This is a critical time for the future of a competitive local exchange market.
If the requirement to unbundle the ILEC local exchange network is eliminated or
scaled back at this time, before the foundation for local competition has been
laid, before viable local competition has developed, the result will be the total
collapse of the Act’s plans for a competitive local exchange infrastructure.
Some analysts argue that “cross-platform” competition from cable
television companies, wireless providers and fiber ring providers has brought
competition to local markets. But the facts are otherwise. Six years after
passage of the Act only a small number of residences and businesses actually
have a local telephone option through their cable provider. Wireless service has
not and cannot displace wireline telephone service to any significant extent, and
competitive local exchange carrier (“CLEC”) fiber rings do not and cannot provide
a cost-effective means for reaching customers in any but the most densely
populated areas. The vast majority of business customers, who are not served
by CLEC fiber, have no alternative for broadband service. Residential customers
have extremely limited choices, and in many cases, no choice of a broadband
supplier. This outcome is obviously not competitive.
The argument that “cross-platform” competition has brought, or soon will
bring, effective competition to local markets is not new. Hatfield Associates, Inc.
the predecessor of HAI Consulting, Inc. (“HAI”) has undertaken studies of cross-
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platform competition on two prior occasions. In “The Enduring Local Bottleneck,”
completed in 1994, Economics and Technology Inc. and HAI concluded that,
contrary to incumbent ILEC claims at the time, local competition was far from a
reality, and the technologies available to provide it were not ready for mass
deployment.4 In 1997 “Enduring Local Bottleneck II” focused on the consumer
and small business market and found that the business case for cable and
wireless alternatives for mass market voice service was not sufficiently robust to
justify ILEC claims about the immediacy of local competition.5 The passage of
time has demonstrated that the bottleneck may have cracked, but it has not
broken. The ELB assessments were correct. ILEC claims about the extent of
competition and the viability of alternative platforms for voice services were
simply wrong.
Broadband services and the Internet have undergone extensive
development since the ELB Reports were completed. That fact does not change
the basic industry dynamics. Large business customers rely on dedicated
circuits provided by ILECs, except in the densest geographical locations where
CLECs offer service over their own fiber rings. Even in these areas, many
business customers are in buildings that cannot be economically served by
CLECs. Many broadband customers must rely on ILEC digital subscriber line
(“DSL”) services because they do not yet have access to cable modems. Even
where both cable modems and DSL are available, customer choice is extremely

4 Economics and Technology, Inc. and Hatfield Associates, Inc., “The Enduring Local Bottleneck:
Monopoly Power and the Local Exchange Carriers,”1994 (“ELB I”).5 Hatfield Associates, Inc., “The Enduring Local Bottleneck II,” 1997 (“ELB II)”).
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Local Competition Rhetoric Versus Reality
Literally since their birth in 1984, the BOCs have been claiming that local competition is “just around the
corner.” Their assessments and predictions have been consistently wrong. Hatfield Associate/HAI
Consulting predictions about the development of local competition, which have relied on detailed
financial and technical analysis rather than massive searches for quotes from journalists or less than
disinterested businessmen, have been accurate. With proper application of public policy, the BOC
predictions will someday come true. But that day is not “just around the corner.”
Hatfield Associates/HAI Consulting Predictions have been correct:
“Competition is likely to increase for some significant components of local telecommunications
service over the next five to ten years under appropriate regulatory and market conditions.
However, the level and scope of competitive entry is unlikely to be sufficient to eliminate or
even significantly reduce the power of the BOCs. Additional time is required for effective and
sustainable local competition to emerge.”
Economics and Technology, Inc, and Hatfield Associates, Inc., “The
Enduring Local Bottleneck,” 1994, p. iii.
“As in the original Enduring local Bottleneck (‘ELB I’) released in 1994, the findings are that
competitive technologies are technologically viable. However, profitability is far in the future
and internal rates of return are relatively low, except in the most optimistic cases. As a result,
competition is likely to develop slowly, beginning with the more attractive markets. Residential
competition may never become ubiquitous. The conclusion is that regulators cannot assume
that widespread facilities competition is likely in the near term.”
Hatfield Associates, Inc., “The Enduring Local Bottleneck II,” 1997, p.
ii.
The ILEC track record on predicting local competition is abysmally poor:
“Local exchange competition, only recently considered to be economically impossible, is now
both imminent and inevitable.”
Peter W. Huber, Michael K. Kellog, and John Thorne, “The
Geodesic Network II: 1993 Report on Competition in the Telephone
Industry,” p. 2.1, quoting George C. Calhoun, Wireless Access andthe Local Telephone Network (1992).
“No one can seriously doubt the financial viability of CAPS [CLECs],” p. 21.
“If cable companies in the United States experienced comparable growth of cable telephone
service [in the UK], it would soon have some 45 percent of the U.S. local exchange telephone
market” p. 25
. . . U.S. cable-telco alliances are now preparing to invade each others’ regions.” p. 26.
. . . cellular architecture is inherently expandable, like an accordion. The capacity of all cellular
systems, including PCS, can be increased almost indefinitely by deploying additional cells and
thereby reusing already-allocated spectrum.” p. 34
“The Enduring Myth of the Local Bottleneck,” 1994, (unsigned, but
widely attributed to Peter W. Huber).
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limited because the competitive significance of satellite and fixed wireless
services is limited. The high prices of cable and DSL services force many
customers who would otherwise be interested in broadband to continue to rely on
ILEC dial-up lines. As a result, most consumers access the Internet through
ILEC-provided dial-up lines.
Many consumers for some time to come must rely on the ILEC platform to
satisfy both their local calling and Internet access needs. If these consumers are
to receive the benefits of competition, it will be necessary to open the ILEC
network by enforcing, and even broadening, the current unbundling and pricing
rules.
This Report provides an updated assessment of the development of post-
Act competition and the near term prospects for further facilities-based
competition from firms using alternative technology platforms. This assessment
of the potential for cross-platform competition in local telecommunications begins
in Section II by reviewing the characteristics of competition among technology
platforms. Section III defines various local service and geographic markets.
Section IV provides a review of the current state of competition in these markets.
Sections V through VII discuss the technology and economics of the alternative
platforms: cable, wireless and fiber rings. Section VIII analyzes broadband
deployment. Despite ILEC claims, broadband competition is limited. This
section also discusses the potential for intramodal competition through CLECs
using ILEC network elements to provide voice services over DSL.
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The finding of these sections is that none of the platforms provides
sufficient competition to limit the exercise of market power by the incumbents. At
least for the near future, the markets will remain highly concentrated with, at best,
an oligopoly structure that leaves consumers with limited choice. Section IX
discusses the inadequacy of an oligopoly structure to bring the full benefits of
competition to consumers.
The policy consequences of these conclusions are the subject of the
remainder of the paper. Section X explains why unbundled network elements
(“UNEs”) are necessary to provide consumers with some of the benefits of
competition. Unbundled loops, switching, transport and UNE platform will be
necessary if CLEC and interexchange carrier (“IXC”) competitors are to efficiently
serve their customers. The importance of access to elements of the ILEC
network to serve broadband will also be noted.
Finally, Section XI explains why unbundling will not discourage efficient
deployment of either ILEC or CLEC platforms. Competitors would prefer not to
be dependent on ILECs. They will build competitive facilities as market demand
and economics of facilities construction allow. ILECs will also build the facilities
needed to serve their customers and compete where viable competitors enter.
Total Element Long Run Incremental Cost (“TELRIC”) pricing adequately
compensates ILECs for the risk inherent in building facilities.
II.Competition and Monopoly in Telecommunications
The first step in this analysis is to specify the characteristics of competition
and monopoly and to relate those theoretical concepts to current
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telecommunications markets. The fundamental characteristic of competition is
the ability of consumers to choose among alternative suppliers. Given this
ability, each competitor has an incentive to price at reasonable levels, to provide
quality service, and to deploy new technology as innovation proceeds. A firm
with market power, in contrast, is able to restrict output, to otherwise limit the
options available to consumers, or to prevent innovative uses of its services
because consumers have a limited choice of suppliers.
The textbook economics model of competition generally assumes that
technology is known and that all actual or potential competitors have access to it
and can enter on a relatively modest scale.6 Any attempts by one competitor to
raise prices above cost or restrict options available to consumers will be quickly
thwarted by other (actual and potential) competitors.
The textbook competition model does not apply to local
telecommunications markets. Competitors cannot economically enter local
markets using the same copper loop technology currently deployed by the
incumbents. While the technology is known and widely available, substantial
economies of scale prohibit entrants from using the technology to serve
consumers.7
In areas with extremely high teledensities firms deploying fiber ring
technology can overcome the economies enjoyed by the incumbents. However,
this alternative technology platform exhibits high fixed costs per customer.
These high fixed costs limit the applicability of fiber ring technology to large

6 See, e.g., Hal R. Varian, Microeconomic Analysis, 3rd ed., Norton, New York 1992, pp. 215-221.
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business customers, or in some cases, multi-unit residential dwellings, in core
urban areas.
If there is to be widespread local competition for the mass market, the
competitors must use other technologies. Two potential mass market
technologies are considered here: cable telephony and wireless. In both cases,
existing competitors are serving related markets with technology that can be
adapted to serve local telephone markets. Having built networks that are
providing profitable services – cable television or mobile communications – these
competitors enjoy potential economies of scope that may allow them to
overcome the economies of scale enjoyed by the incumbents. However, as
shown below, such competition is far from imminent.
The development of the Internet and the rise of broadband markets may
provide another potential platform for at least partial local competition.
Competitors using the Internet Protocol (“IP”) may be able to compete with the
narrow-band offerings of the ILECs by deploying voice service over the ILEC
DSL services. The consumer will still have to, directly or indirectly, purchase a
local line from the ILEC. However, an independent DSL provider working with an
Internet service provider (“ISP”) could supply the consumer with access to long
distance services and vertical and ancillary services such as voice mail and the
custom calling features often purchased by local subscribers.

7 ILEC economies of scale are discussed below in Section VII.
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The task of the remainder of this report is to explore the ability of the
alternative technology platforms to bring competition to local telephone markets.
Those markets are described in the next Section.
III.Service and Geographic Markets
Markets that the Commission has previously identified in the LEC
Classification Order and in various merger proceedings are a useful starting point
for this analysis. 8 On the product market side, The Commission has properly
placed residential and small business services in the same local services market
and placed larger businesses in a separate market. Large businesses typically
require a different set of services than residential and small business customers.
The incumbents provide a number of services within these markets. In addition
to the traditional local switched service purchased by households and small
businesses, large businesses purchase alternative forms of dedicated access
such as high capacity T1, and higher capacity synchronous optical network
(“SONET”) services.
The development of the Internet has led to demand for broadband
transport services, typically supplied by the incumbent cable or telephone
operator but provided to retail consumers by ISPs. Broadband services

8 Regulatory Treatment of LEC Provisioning of Interexchange Services Originating in the LEC’s
Local Exchange Area, 12 FCC Rcd. 15756 (1997) (“LEC Classification Order”) at para. 26 (the
1992 Department of Justice and Federal Trade Commission Merger Guidelines provide the
proper analytical framework for defining relevant markets in order to assess market power).
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constitute a separate economic market that is of interest in this analysis as well.9
This point is discussed further in Section VIII below.
The geographic dimension of the market is also important. Consumers
require service at their fixed locations. The availability of a competitive
alternative in an adjacent community is not a substitute for the ILEC service
provided at the consumer’s residence. Therefore the geographic scope of local
markets can be quite narrow. For example, the Commission has found that each
point-to point market may constitute a separate geographic market.10
Even within a metropolitan area, there may be separate geographic
markets. Some large businesses will have no choice of suppliers while others,
for example those along a particular street where CLECs have laid fiber, may
have several choices. Defining a metropolitan market will not be useful in
answering the question of whether market power can be exercised. The CLEC
competitors serving some buildings in the city center have no effect on the ability
of the ILEC to exercise market power even in adjacent neighborhoods..
Some customers may require service at several locations within a
metropolitan area. For example, some large businesses require local networks
that link separate locations together. Serving these customers efficiently requires
a geographically diverse local network. Thus, even where a competitor has loop
facilities to serve one or more of such a customer’s locations, that competitor is

9 In the Matter of Applications for Consent to the Transfer of Control of Licenses and Section 214
Authorizations by Time Warner Inc. and America Online, Inc., Transferors, to AOL Time Warner
Inc., Transferee, CS Docket No 00-30, Memorandum Opinion and Order, FCC 01-12, Released
January 22, 2001 (“AOL/Time Warner Merger Order”), para. 56.10 Ibid., para 74.
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not necessarily in a position to supply the customer’s full local
telecommunications needs with its own facilities. Such a competitor cannot
adequately compete for the business of such a customer unless UNEs are
available at competitive prices.
In U.S. Department of Justice Merger Guidelines terms, a firm with a
monopoly over large portions of a metropolitan area can raise and maintain
prices for some time even though other firms may operate in some portions of
the same metropolitan area.11 The dominant firm may be able to raise and
maintain prices paid by customers that require connections throughout the area.
IV.Current Competition Metrics
This Section analyzes the level of current competition and compares the
development of local telephone competition with the evolution of long distance
competition. The conclusion is that local competition is still limited, and
progressing much more slowly than did long distance competition.
A.Market Share Analysis
According to the FCC, the CLEC share of the local telephone business
grew to 9 percent by mid-2000.12 However, this share is composed of both
“CLEC-owned” lines and lines acquired from ILECs (resale or UNE lines).13

11 “Horizontal Merger Guidelines,” U.S. Department of Justice and the Federal Trade
Commission, issued April 2, 1992 and revised April 8, 1997.12 FCC, “Local Telephone Competition: Status as of June 30, 2001,” Industry Analysis Division,
Common Carrier Bureau, released February 2002 (“Local Competition Report”), Table 1.13 Economists writing on behalf of the ILECs have used the growth of total CLEC lines to argue
that competition is robust. See, e.g., Robert W. Crandall, “An Assessment of the Competitive
Local Exchange Carriers Five Years After the Passage of the Telecommunications Act,” June
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Looking only at lines provisioned over their own loop facilities, CLEC market
share is only 3.3 percent, a moderate increase from the 2.9 percent share they
had at the end of 2000.14 See Figure IV.1.
Figure IV.1
CLEC/ILEC Owned Lines
0
50,000
100,000
150,000
200,000
CLEC-Owned ILEC-Owned
00
0

l
i
n
e
s
The growth trend for CLEC lines is also of interest. Recent FCC statistics
show that local competition is growing but at a decelerating rate. As shown in
Figure IV.2, CLECs added 3.4 million lines in the first half of 2000, 3.3 million
lines in the second half of 2000, and only 2.4 million lines in the first half of

2001 (“Crandall”), p. 4. The problem is that the most robust growth in lines is coming from the
UNEs that their clients want to eliminate.14 Ibid. Data for the FCC’s Local Competition Report are collected through a semi-annual
survey. The results for mid-year 2001 were released in February 2002. The FCC reports 5.8
million CLEC owned lines as of June 2001. The total number of lines in the market was 192
million, resulting in only a 3.0 percent share for competitors owning their own “last mile” facilities.
See Local Competition Report, table 3 and 4. There is a bias in the FCC’s survey that may lead
to an understatement of both ILEC and CLEC lines. A firm is required to respond only if it has
10,000 or more lines in a state. However, it is difficult to determine the direction of the bias. The
FCC notes that, “ . . .the reporting ILECs account for about 98% of all ILEC lines.” [fn. 5 at p. 2]
The question then is whether CLEC lines are under reported to a greater extent. It seems likely
that the survey responses include most of the CLEC facilities lines. Larger CLECs are more likely
to own facilities connecting end users. Constructing facilities to connect end-users is a capital
intensive business and the larger CLECs are more likely to be doing it. Moreover, the FCC notes
that, “ . . .24 CLEC reports were from carriers that had fewer than 10,000 lines in a particular
state and were thus voluntary.” [fn. 6 at p. 3] The Commission also suggests that some CLECs
may have reported lines as being owned even though they did not provide the “last mile.” [fn. 3 at
pp. 1-2]
CLEC Share = 3.3%
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2001.15 The second half of 2001 data are not available. However, given the
financial problems of the CLECs in this period (discussed in Section VII.D below),
this deceleration in growth likely continued.
Figure IV.2
CLEC-Owned Line Growth
0
200
400
600
800
1000
1200
1400
12/99-6/00 6/00-12/00 12/00-6/01
00
0

l
i
n
e
s
Most CLEC-owned facilities serve larger businesses. As Figure IV.3
shows, only one third of the CLEC-owned lines are provided by cable
companies.16 The bulk of the remaining owned-facilities lines are undoubtedly
provided to large business customers over the fiber ring platform.17

15 Derived from Local Competition Report, Table 1.16 See, Local Competition Report, Table 5.17 As discussed in Section VI.B, there are undoubtedly some customers that have replaced their
local fixed lines with mobile service. However, the numbers are small due to the inherent
limitations of wireless service. Moreover, wireless capacity is simply inadequate to support
significant traffic that is currently carried on fixed networks.
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Figure IV.3
CLEC-owned Lines by Type
0
1000
2000
3000
4000
5000
Fixed Wireless Cable Fiber
00
0

L
i
n
e
s
There is one category of lines that is showing impressive growth. As
shown in Figure IV.4, UNEs with switching, which represent the UNE platform
(“UNE-P”), increased by 68 percent from December 2000 to June 2001, while
stand-alone UNE loops increased by only 30 percent. This likely reflects the
successful introduction of UNE-P competition in Texas and New York.18

18 Local Competition Report, Table 4.
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Figure IV.4
UNE Line Growth
0
1000
2000
3000
4000
5000
Dec-
99
Jun-
00
Dec-
00
Jun-
01
00
0

L
i
n
e
s
UNEs Without
Switching
UNEs With
Switching
Of course, market share is not the only metric on which the presence of
competition can be judged. The competitive significance of the CLECs can also
be illustrated by looking at the capability of their networks to serve additional
customers. This metric is discussed in the sections dealing with the cable,
wireless and fiber loop platforms below. The basic conclusion that the extent of
local competition is limited does not change.
B.Comparison to the Evolution of Long distance Competition
The growth of local competition might also be compared to the way
competition developed in the long distance industry. As noted above, six years
after passage of the 1996 Act, competitors have about three percent of the lines.
Long distance competition was much greater six years after competition in the
long distance market began.
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It is difficult to date the commencement of long distance competition. Toll
service competition began in approximately 1978 with the Execunet Decisions,19
but long distance competitors were not put on an equal footing with AT&T until
equal access conversions began in 1984. Nevertheless, by the end of 1984, six
years after the Execunet II Decision, and at the very beginning of the equal
access conversion process, AT&T had lost nearly 20 percent of the toll market
based on minutes.20
Competitors made rapid gains after equal access conversions began in
earnest. By 1990, six years after Divestiture, competitors had captured about 37
percent of the toll market based on minutes and 25 percent based on lines.21
These results are shown in Table IV.1.
Table IV.1
Local Versus Long Distance Competition
Market Share – Lines Market Share –
Minutes
IXCs -- Execunet
plus six years
n/a 20%
IXCs -- Equal Access
plus six years
25%37%
CLECs -- 96 Act
plus six years
3.3%n/a
Another way to gauge the relative extent of competition is by observing
pricing performance. Inflation-adjusted long distance rates have fallen by
approximately 80 percent since 1983, the year prior to Divestiture. ILEC rates

19 MCI v. FCC, 561 F.2d 365 (D.C. Cir. 1977) (“Execunet I”) and MCI v. FCC, 580 F.2d 590 (D.C.
Cir. 1978) (“Execunet II”).20 See, FCC, “Long Distance Market Shares Fourth Quarter 1998”, Industry Analysis Division,
Common Carrier Bureau, March 1999 (“IXC Market Share Report”), Table 1.1, pp. 1-2, and
Appendix 1, Chart A1.1, p. 29.21 Ibid., Table 2.2.
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are essentially unchanged over the same period.22 The cost of electronic
components, including switching and multiplexing equipment, all significant
components of ILEC networks, have plummeted since 1983. However,
consumers of ILEC services have not shared in the benefits of those cost
reductions.
It is important to note that long distance competitors were able to grow
rapidly in large part due to the Commission’s resale policies. Competitors were
able, over AT&T’s objections, to “fill out” their networks by reselling AT&T private-
line or wide area telecommunications services (“WATS”).
As shown in Figure IV.5, AT&T’s IXC competitors could originate traffic
from off-network locations using AT&T private-lines and offer ubiquitous
terminations through WATS resale while their own networks were being
completed. For example, an IXC could establish a point of presence (“POP”) in
local access transport area (“LATA”) 1 and originate calls from its customers
using an AT&T private-line to carry the call to LATA 2 where the IXC had already
built transmission facilities. If the call was destined for LATA 4, where the IXC
had no network, and had not yet established a POP, the call could be completed
over an AT&T WATS line. In this way the IXC could sign up customers in
advance of constructing its own facilities, as well as offer customers ubiquitous
terminations. In terms of the 1996 Act, the WATS line filled the role of
interconnection while the private-line filled the role of a UNE. The result was the

22 See, Declaration of Lee L. Selwyn, In the Matter of Application by Verizon New Jersey, Inc., for
Authorizxation to Provide In-Region, InterLATA Service in NewJersey, CC Docket No. 01-347,
February 28, 2002, p. 25.
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development of a vigorously competitive long distance market. Today
competitors have established POPs in, and built facilities to, virtually all of the
200 plus LATAs in the United States.
Figure IV.5
IXC Resale
LATA 2
IXC POP 2
LATA 3
IXC POP 3
LATA 4
IXC Network
AT&T Network
LATA 1
WATS Line
IXC POP 1
Even today the degree of competition in the long distance market is
enhanced by the fact that smaller carriers are able to extend their networks
through buying capacity from, or reselling the services of, the larger carriers.
Competition in the long distance market has evolved to the point that the larger
competitors willingly sell capacity to smaller carriers, knowing that in the
competitive environment they face others will do so if they do not.
C.Conclusion
There is little local competition today. Fiber carriers have made some
inroads into the large business market in limited (but important) geographic
niches. However, the rate of growth of facilities competition is slowing
dramatically. Residential and small business competition is minimal. Moreover,
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as discussed below in Section VII.B, there are significant numbers of large
business customers that do not and will not have alternatives available. The
following sections demonstrate that significant competition from these alternative
technology platforms is at least several years away.
V. Cable Telephony
This section examines the current cable telephony landscape and the
prospects for the future development of cable telephony service offerings. The
discussion of cable telephony is divided into four sections. Cable telephony
providers are identified in Section A. While these providers are making
significant inroads in some service areas, their national impact is limited. The
business considerations that explain the low cable penetration are discussed in
Section B. As discussed in Section C, the business calculation could change
when IP voice telephony is implemented. However, that technology is not yet
ready for commercial deployment. Finally, as discussed in Section D, cable
telephony is not an adequate substitute for the local services purchased by larger
businesses. In sum, the overall conclusion of this section is that development
and implementation of cable telephony technologies does not yet represent a
significant competitive threat to ILEC networks.
A.Existing Cable Telephony Providers
In June of 2001, the cable industry served approximately 1.9 million
access lines, which yields a penetration of 1.6 percent among residential and
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single line business customers.23 In other words, cable telephony is providing
only 1.9 million of the roughly 118 million residential and small business access
lines in the U.S. A comparison of cable telephony lines to other local lines is
shown in Figure V.1.24 The cable industry provides service to almost no large
business customers and its share of the small business and residential local
access market is insignificant.
Figure V.1
Cable Telephony Market Share
-
20
40
60
80
100
120
140
Cable Telephony Other
Li
n
e
s

(
m
i
l
l
i
o
n
s
)

23 Local Competition Report, Table 5.24 Estimated residential and single line business lines as of June 2001. These lines are
estimated by adjusting year 2000 data from FCC ARMIS Report 43-08 for all reporting local
exchange carriers one year forward based on the historical trend for the same data series
between 1999 and 2000. This number is then added to the estimated number of cable telephony
lines in service to arrive at the total residential and small business line estimate.
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The two largest cable telephony providers offering service today are AT&T
Broadband and Cox Communications. AT&T provides 63 percent of cable
telephony service, or about one million subscribers.25 Cox serves the second
largest number of subscribers, about 500,000, or 31 percent.26 Cablevision and
a few other cable operators with limited telephony service offerings serve the
remaining 6 percent of cable telephony subscribers. Cable operators
representing roughly 65 percent of the industry are not aggressively marketing
telephone services.27
Figure V.2
Cable Telephony Providers
AT&T Broadband
63%
Cox
31%
Other
6%

25 AT&T News Release, “AT&T Announces Fourth-Quarter Earnings,” January 30, 2002 “AT&T
News Release, 1/30/02”), http://www.att.com/press, viewed March 13, 2002.26 Cox Press Release, “Cox Communications Announces Fourth Quarter Financial Results for
2001,” February 12, 2002 (“Cox Press Release, 2/12/02”). http://www.cox.com/PressRoom,
viewed March 13, 2002.27 AT&T and Cox serve 35 million of the roughly 99 million cable television homes passed. AT&T
Form 10-Q For the quarterly period ended September 30, 2001. Cox Communications Inc.,
“Consolidated Historical and Pro Forma Statements of Operations,” For the quarter ended
September 30, 2001. Available at: http://www.cox.com/PressRoom/Q3%202001%20Earnings%
20Release.asp, viewed March 14, 2002. National Cable Telecommunications Association
(“NCTA”), “Cable and Telecommunications Industry Overview 2001,” p. 16, table entitled, “Cable
Industry Facts-At-A-Glance (December 2001),” referencing Paul Kagan Associates, Inc. as
source for “Homes Passed by Cable” data.
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HAI Consulting, Inc.23
Even when a cable company is marketing cable telephony service, many
of its customers do not have access to the service. Network upgrades do not
render all homes “telephony-ready.” Cox is the oldest, most aggressive and
most successful provider of cable telephony service in the US. Their fraction of
telephony-ready homes passed to total homes passed likely represents a
reasonable upper bound for the percentage of plant any larger operator might
have supporting telephony services. As of September 30, 2001, Cox reported
approximately 3.1 million telephony-ready homes out of 9.9 million total homes
passed, for a penetration of 32 percent.28 Applying this percentage to AT&T’s
total homes passed, and adding a gross up for the other cable telephony
providers yields 11.7 million telephony-ready homes, or approximately 11.3
percent of the 103 million telephone households across the U.S. See Figure V.3.
Figure V.3
Cable Telephony Availability
Eligible
11%
Not Eligible
89%

28 Ibid., Cox Communications Inc., “Consolidated Historical and Pro Forma Statements of
Operations,” For the quarter ended September 30, 2001.
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Of course, availability and penetration are much higher in particular cable
telephony serving areas. The purpose of this exercise is to demonstrate the level
of competition offered by cable telephony providers on a nationwide basis, and it
shows that impact to date is minimal and will likely remain so for some time to
come.
Cable telephony offers competition to the incumbent local exchange
carriers only on a limited basis. The cable telephony competition that does exist
is concentrated in certain service areas, and thus leaves a significant portion of
residences and small businesses without a competitive local exchange offering
from their cable television provider. The explanation for this low penetration is
provided in the next section, which examines the business considerations cable
operators face when they decide whether to invest in cable telephony.
B.Cable Operator Investment Alternatives
Investment in telephony by cable operators has been inhibited by a
number of factors, including competing revenue opportunities, uncertainty over
potential revenue and technological uncertainty. The factors identified in this
section, which include network upgrade costs, the potential for competitive
response from incumbent carriers, broadband and wireless substitution, and the
perception of better returns on cable provision of digital television (“DTV”) and
broadband data investments show that significant risk is associated with cable
telephony investment.29 These issues are discussed in Sections 1 and 2. The

29 HAI identified and quantified these risks in ELB II.
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additional uncertainty caused by the potential for superior IP telephony
technology to become available in a few years is discussed in Section C.
1.Competing Investment Alternatives
Although numerous multiple system operators (“MSOs”) have proceeded
with the expensive network rebuilds or upgrades that add capacity and two-way
capability to their systems, many operators are not aggressively pursuing
telephony. Instead, most MSOs are using their upgraded networks to offer DTV
and broadband Internet access, also called cable modem service. Examining the
relative penetration levels of these services emphasizes this point, as shown in
Figure V.4.
Figure V.4
Advanced Service Penetration, June 200130
0
2
4
6
8
10
12
14
DTV Broadband Internet (cable
modem)
Telephony
Su
b
s
c
r
i
b
e
r
s

(
m
i
l
l
i
o
n
s
)

30 In the Matter of Annual Assessment of the Status of Competition in the Market for the Delivery
of Video Programming, CS Docket No. 01-129, Eighth Annual Report, Released Jan 14, 2002
(“8th Annual Video Programming Report ”), pp. 19-28 and HAI estimates. Telephony penetration
estimate, year-end 2001. Cox “ended 2001 with nearly half a million telephone customers…,”
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HAI Consulting, Inc.26
There are several reasons why MSOs are more interested in DTV and
cable modem service than primary line telephone service. In the mid-late 1990’s
many MSOs experimented with cable telephony by offering service trials. The
high incremental cost of service provision, the promise of forthcoming
technologies that would reduce cost and simplify operations, and the perception
of better revenue opportunities through other advanced services led most MSOs
to shelve their circuit switched telephony rollout plans.31 Cox Communications
was one of the few exceptions.
Additionally, MSOs saw revenue opportunities in other lines of business,
such as DTV and broadband Internet access. Compared to telephony, these
services are less costly to deploy, there are fewer competitors, and there was
significant pent-up demand for high-speed data. Furthermore, DTV and
broadband Internet did not require the same level of plant integrity as telephony,
since the average customer was tolerant of occasional service outages for
television and residential data services. Table V.1, which is based on cable
industry estimates, shows the incremental costs of adding the various services
beyond the cost of the basic network upgrades.

Cox Press Release, 2/12/02. At the end of 2001, “AT&T Broadband had more than 1.0 million
broadband telephony customers…”, AT&T News Release, 1/30/02.31 In the mid-late 1990’s Time Warner Cable, the nation’s second largest MSO, had planned to
offer circuit switched cable telephony to its subscribers. Those plans never became a reality
outside of a few trial communities. Today, Time Warner Communications is experimenting with
IP telephony as a “second line” service. Other large MSOs, such as Charter Communications are
also testing IP telephony systems in lieu of offering circuit switched telephony, which could be
deployed today. See, CED Magazine, “Cable Telephony: Ready to Take Off,” May 1997; and
Time Warner Cable Press Release, “Time Warner Cable Expands Internet Telephone Test to
Rochester Road Runner Customers,” January 31, 2001.
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Table V.1
Per Subscriber Incremental Cost of Service Provision32
Service Incremental Cost Includes
Digital Television $250 Set top converter and
Installation
Broadband Internet $160 Cable Modem, Cable
Modem Termination System,
Installation
Telephony $500+Customer Interface Unit,
Host Digital Terminal,
Installation, Backhaul to
Switch
These costs are in addition to the expensive rebuild or upgrades for the
networks on which these services ride. Upgrades typically increase the channel
capacity of the cable network and often include the activation of a return path, to
allow two-way communications. Upgrades may also include the addition of
equipment that will allow the cable operator to power customer premises
equipment through the cable network. This equipment insures that cable
telephony subscribers will not lose telephone service during power outages. The
cost of such upgrades vary depending on the condition of existing plant, but
typically range from $150-$350 per home passed. The cable industry has
invested billions in upgrading plant in recent years.33 But the alternative,
providing advanced services over a cable system that has not been upgraded, if
possible at all, requires even more investment.

32 Incremental cost of adding service to a network that has been upgraded to support these
services. In the case of telephony, this necessarily implies two-way active plant. Although an
activated return path is not required for broadband Internet or DTV service, both services are
typically deployed on such plant. Presentation by Greg Braden, AT&T EVP, Broadband Services
at the University of Colorado, Boulder, November 27, 2001, and HAI estimates. (“Braden
Presentation”)33 See, NCTA, “Cable & Telecommunications Industry Overview 2001.”
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2.Pressure on Telephone Revenue
Current pressures on local telephone service revenue may also affect a
cable operator’s decision to offer a telephony product. These pressures come
from several sources including ILEC ability to lower the price of certain services,
competition from wireless service providers, declining long distance prices, and
the impact of broadband data on second line take rates.
Cable operators who offer telephony services typically price their services
ten to twenty percent below the incumbent. The savings are greater for
customers with more expensive telephone service. For example, in Denver,
Colorado, Qwest offers unlimited local calling with a basket of enhanced features
for $32.95. A comparable service package from AT&T Broadband is priced at
$27.50, a savings of 17 percent.34 A basic local service package from Qwest,
with no enhanced features is priced at $14.92 with a $35 installation charge.
AT&T Broadband’s basic local service is $14.00 with free installation, a monthly
savings of 6 percent. This pricing strategy suggests that AT&T Broadband is
pursuing mainly those subscribers who purchase high-margin vertical features.
Table V.2– Local Service Pricing
Service Qwest AT&T Broadband Savings
Unlimited Local $32.95 $27.50 17%
Unlimited Local with
Feature Pack
$14.92 $14.00 6%

34 AT&T “Basic Local Only” plus the “Multi-Feature Pack,” https://securebb.att.com:
443/services/pricing/PricingTelephonyDetail, viewed March 13, 2002. Qwest “CustomChoice”
value package, http://www.qwest.com/pcat/for_home/product, viewed March 13, 2002. Both
AT&T and Qwest rates are quoted for residential services.
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Business cases predicated on such pricing strategies may leave cable
operators in a vulnerable position. Should competition from cable operators
develop to any significant extent, the incumbent could lower prices for vertical
services, thereby counteracting the financial incentive offered by a competing
cable telephony service provider. The ILECs have this option because the price
of vertical features far exceeds the cost of provision.35 In addition, it is likely that
the incumbents could lower the price of basic local telephone service in certain
geographic locations in response to a lower-priced offering from a cable
telephony operator. The results of local telephone economic cost models
suggest that the ILECs could substantially lower the price of their local service
offerings in many areas.36
Another threat to the revenue-generating capacity of a cable operator’s
telephony product stems from reduced demand for second line demand.
Significant numbers of households are replacing second lines with either wireless
phones or broadband Internet access.37 Selling second lines is highly profitable
for a cable operator because the incremental cost of adding a second line to an
existing subscriber is low relative to the prices generally charged. The reduced
demand for second lines can have a substantial negative effect on the business
case for providing telephony in a cable system.

35 Vertical features, such as distinctive ringing, call waiting, and three-way calling are typically
included in the software bundle provided by the switch vendor. In addition, switch capacity today
is not processor limited; rather switches run out of capacity when their ports are exhausted.
Because vertical features are included in the switch software bundle, and today’s switches are
not processor limited, the cost of providing vertical features is minimal.36 See, HAI local exchange proxy cost model, "HAI Model, Release 5.0a,” filed with the FCC on
February 16, 1998 (“HAI Cost Proxy Model”). Release 5.0a is available from the International
Transcription Service, Washington, D.C.
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Finally, given the recent reductions in long distance pricing and usage,
potential net revenue generated via the resale of long distance service and
through access charges is falling. This will have a negative impact on the
revenue generated by a cable telephony service offering.
Each of these factors – the potential for targeted ILEC competitive
responses, reduced second line demand, and falling long distance margins –
reduce the incentive of a cable operator to invest in cable telephony.
C.The Promise of IP Telephony
Today, all commercially deployed cable telephony is provisioned on
circuit-switched networks, which involves dedicating a certain portion of the cable
television network to the carriage of voice conversations, and routing calls
through conventional switching equipment. Internet Protocol (IP) technology can
also be used to carry voice over cable networks.
Some observers believe that this approach, known as IP telephony, or
Voice over IP (“VoIP”). is more appealing than circuit switched telephony
because it is possible to leverage the investment in equipment at the subscriber
location among multiple services and to utilize bandwidth on the network more
efficiently.38 However, despite many years of development the technology is still
not ready for deployment. To date there are no serious commercial
implementations of cable IP telephony service. Cable operators that wish to

37 JP Morgan, “Telecom Services 2001,” November 2, 2001, pp. 41-42.38 In an IP telephony implementation, cable modem and telephony functions may be integrated in
a single subscriber device. Because the underlying data transport is shared between telephony
and data services, economies of scope can be realized.
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provide local telephone service over their networks today must use circuit
switched technology. All of the existing commercially deployed primary
telephone lines serviced by cable companies are implemented on circuit
switched equipment.
The lack of commercially available IP telephony technology leaves cable
operators with a dilemma. They can either deploy circuit switched telephony
today, or wait for IP telephony in the future. This dilemma has contributed to the
decision by cable operators to focus their efforts on services other than cable
telephony.
The following sections discuss the reasons why commercially-deployable
IP telephony is not currently available. The technical issues holding IP telephony
back revolve around the availability of certified and thoroughly tested equipment
supporting IP telephony and the underlying data networks IP telephony systems
require. Additional issues affecting the deployment of IP telephony include the
need to train staff and deploy hardware in the field.
Even when it becomes available, IP telephony may not be the panacea
that some claim. The costs of operating an IP telephony system may not be
significantly lower than those of circuit switched networks; this may influence the
investment decisions of the MSOs considering telephony rollouts. Finally, IP
telephony service is subject to the same pressures on revenue as circuit
switched telephony described in the previous section.
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1.Definition of IP Telephony
IP telephony is the digitization and packetization of voice signals such that
they may be carried on a variety of underlying physical data networks. In
addition, there are a number of ancillary functions that are necessary to support
IP telephony, including signaling, switching, security, provisioning, billing and
network management. In the context of this paper, IP telephony represents an
alternative to circuit switched primary line voice technology that is implemented
over high-speed, high quality of service, two-way active cable plant.
2.Status of IP Telephony Technology
The most promising IP telephony technology for cable operators is defined
in CableLabs PacketCable specifications. According to CableLabs,
the basic PacketCable architecture defines what is known as
“softswitch” architecture for voice-over-IP. The core set of
PacketCable specifications describe how to move the basic
functions that are typically consolidated on a single, expensive
Class 5 central office switch onto several general-purpose servers,
which leads to a low-cost, highly flexible, scalable, distributed
architecture.39
It is likely that PacketCable will be the technology of choice for MSOs wishing to
offer IP-based primary line telephone services. To date, no equipment has been
certified. However, CableLabs has announced plans to certify PacketCable
equipment in 2002. Any certification must be followed by, or completed in
concurrence with, lab and field trials of the equipment.

39 CableLabs, Packetcable Project Primer, http://www.packetcable.com/packetcableprimer.html,
viewed March 14, 2002.
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Packetcable telephony systems presume an underlying data network
based on DOCSIS 1.1 cable modems.40 Compared to DOCSIS 1.0, with 193
modems certified over a period of several years, DOCSIS 1.1 is in its infancy.
There have been some problems with “. . . the stability of underlying DOCSIS 1.1
access networks, which provide the quality of service (QoS) capabilities,
including bandwidth and latency guarantees, required to offer voice over IP.”41
These issues must be addressed before IP telephony can be offered
commercially.
PacketCable and DOCSIS 1.1 represent the most likely technologies for
the implementation of IP telephony over cable networks. Equipment built to
these standards will undergo certification and testing programs in 2002, but will
be available for initial commercial deployment in 2003, at the earliest. Progress
is much slower than cable companies expected, even a few years ago.42
Therefore, cable operators interested in using IP telephony as the foundation of
their telephone service offering must wait.43

40 CableLabs, Press release, “CableLabs Certifies 7 more DOCSIS 1.1 Modems, Continuing
Cable Data Advances,” December 20, 2001.41 Kinetic Strategies, Inc., “Vendors Push Cable VoIP Integration,” Cable Datacom News,
December 1, 2001.42 This point is emphasized by a 1998 article in Cable Datacom News, which states, “AT&T plans
to deploy cable telephony services in three phases. The company will quickly launch circuit
switched cable telephony I several TCI markets. By late 1999, AT&T expects to start deploying
its IP telephony platform to bypass ILECs. The final step is to link AT&T’s local cable IP
telephony networks with the company’s national packet telecom network, which is now under
development, to offer end-to-end IP voice services.” “AT&T Outlines Cable Telephony Strategy
Three Phase Plan Calls for Migration from Circuit Switched Deployments to Pure Packet
Telephony,” Cable Datacom News, August 1998.43 As is typical with any new technology, a number of cable operators are conducting trials of IP
telephony equipment. Some of these trials use equipment that may eventually be certified by
CableLabs. This does not change the conclusion regarding the timing of IP telephony
deployments as a primary access line service.
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3.IP Telephony Offers Minimal Operational Savings
Although IP telephony may offer certain advantages over circuit-switched
telephony, it appears that from an operational perspective an IP telephony
network will be about as costly and involved as circuit switched telephony. Both
technologies require many of the same functions, such as installation,
provisioning, order processing, network monitoring and management, long
distance interconnection, E911 service, billing, and repair.44 In addition,
significant technical expertise is required to implement and operate either
technology, so learning curves and staff training requirements are similar.
Even after thoroughly tested and proven IP telephony equipment does
become available, cable operators may decide not to offer primary line telephone
service. The costs associated with operating IP-based and circuit switched cable
telephony systems are comparable and the same revenue pressure described
previously for circuit switched cable telephony service will apply. The point is,
even when IP telephony does arrive, it may not be the “silver bullet” that the
cable industry had hoped for; it may represent no less financial risk to the cable
operators than circuit switched telephony.
4.The Role of Circuit Switched Telephony
Today, circuit switched technology is the only viable alternative for cable
operators seeking to offer primary line telephone service in direct competition

44 Braden Presentation.
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with an incumbent local exchange carrier. This fact is widely recognized
throughout the industry, and by the FCC.45
However, since many operators such as Time Warner, Charter and
others, including AT&T Broadband, have been waiting for IP telephony to
become commercially available, it is unlikely that any significant investment in
cable circuit switched telephony will be made in the immediate future.46
D.Cable Telephony as an Option for Businesses
Cable television systems do not have the capacity to serve large numbers
of business customers requiring DS-1 and higher-speed services. The reason is
that, while upgraded cable systems are built with substantial capacity, the bulk of
the network was built for broadcast services. Thus even upgraded networks
have much more downstream (from cable operator to subscriber) capacity than
upstream (from subscriber to cable operator) capacity. Furthermore, cable
systems are generally built to share bandwidth among a large number of
subscribers, so the upstream capacity, on a per subscriber basis, tends to be
limited. Finally, due to technical limitations of the network, the bandwidth
efficiency, expressed as bits per second per Hertz of bandwidth, in the upstream
path is considerably lower than in the downstream. This means that cable
operators realize lower upstream data rates than downstream data rates, per unit

45 8th Annual Video Programming Report, p.5.46 “The promise of IP telephony has a lot of operators sitting on the sidelines while the engineers
at CableLabs work on certifying the first DOCSIS 1.1 equipment (modems and CMTSs) that is
absolutely essential to any IP telephony implementation on cable’s HFC networks.” CED
Magazine, “Cable telephony sending mixed signals,” April 2001.
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of spectrum. In sum, upstream bandwidth in a cable television network is at a
premium.
Traditional private-line T-carrier circuits are dedicated to a single user and
offer symmetrical capacity. Unfortunately, the cable network does not lend itself
to the provision of this kind of service. Offering dedicated services of this nature
would quickly exhaust the upstream capacity of even an upgraded cable network.
Dedicated circuits, like those discussed above, are much different than the
broadband Internet access service now supported by many cable systems.
Broadband Internet service supports relatively infrequent high-speed bursts of
data to and from subscribers. Internet users typically transmit or receive data a
small fraction of the time. Traditionally, the “bursty” nature of typical Internet
transmissions allows cable capacity to be shared by a number of users, and no
capacity is dedicated to any given user.
In addition to sharing bandwidth among many concurrent users, cable
modem systems were developed under the presumption of asymmetrical data
streams. Asymmetric systems work well for most Internet users since the
average user consumes much more data than they transmit. An asymmetric
system may even work well for a large business, but only for the provision of
Internet service. In fact Time Warner offers RoadRunner Internet access to large
businesses in a number of locations throughout the country, but it does not sell
dedicated point-to-point carrier grade connections; presumably for the reasons
discussed above.
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Cable systems were for the most part built to serve residential and
suburban areas. Even in those places where cable service is available in a
central business district (“CBD”), it has historically been unsuitable for high-
capacity business use because of its lack of reliability in comparison with
telephone service. Cable television service is not critical to public safety and has
not been subject to the availability requirements placed on tariffed telephone
service by state regulators.
Upgraded cable networks may be suitable for the provision of Internet
access to even large businesses, but the shared nature of the cable network, and
its limited upstream bandwidth make it unsuitable for the provision of symmetric,
dedicated, private-line services.47
E.Conclusion
Only a small number of residences and businesses actually have a local
access option through their cable provider today. Where these options do exist
the de facto technology is circuit switched cable telephony. While IP telephony
holds promise for the future deployment of local telephone service over cable
networks, the systems supporting this technology are in their infancy. As a
result, commercially available IP telephony in the local exchange is not currently
available.

47 The development of IP telephony technology does not change this conclusion. While IP
telephony provided over CATV networks may someday provide a viable alternative to circuit
switched business telephone services, it will not support the kind of dedicated network facilities
discussed in this section.
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For all of the reasons discussed in this section, it is premature to make
policy decisions on the presumption that telephony through cable systems will
become a pervasive or effectively competitive offering.
VI.Mobile and Portable Wireless Technologies
There are several independent reasons why wireless technologies
developed for cellular and personal communications services cannot be used to
displace wireline telephone service to any significant extent. First, demand for
mobile and portable wireless service continues to expand at a high rate, and
existing and planned technologies cannot serve both this demand and any
significant fraction of wireline demand. Section A demonstrates this fact with a
detailed technical capacity analysis. Numerous current news articles discussing
deteriorating service quality for mobile and portable wireless subscribers are
further evidence of this problem.
A second problem is that wireless suffers from coverage and quality
problems. Wireless coverage is marginal or inadequate inside many buildings,
including offices as well as homes. There are as well many outdoor coverage
“holes,” even in urban areas, in which signal levels are barely adequate. Indoor
coverage in such areas is essentially useless. The only way of improving
coverage involves adding significant numbers of cell sites in heavily populated
areas, a process which is enormously expensive and which often faces virulent
community opposition.
Digital wireless voice quality is lower than corresponding wireline voice
quality, because wireless systems require low-bit-rate voice encoding techniques
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to use the assigned spectrum efficiently. Such coding techniques do not provide
voice quality on a par with that offered by the higher-bit-rate techniques used in
the wireline network.
Finally, current and next-generation digital cellular and PCS technologies
support only relatively low data rates that are inadequate for web browsing and
other Internet related applications. This will inhibit some customers from giving
up their wireline for wireless service.
Various fixed wireless technologies, which compete directly with the
CLECs building fiber rings, are discussed in Section VII.
A.Wireless and Wireline Demand
Average per-subscriber wireline telephone use, expressed either as
minutes per use per month or in telephone traffic terms, has historically been
much greater than wireless usage. For purposes of network capacity analysis, it
is most useful to consider wireless and wireline usage in traffic engineering
terms. A common assumption has been that wireless subscribers generate one-
fifth of the busy-hour traffic that the typical wireline subscriber generates in the
busy hour. Appendix A demonstrates that, although this ratio has decreased
somewhat, a wireline subscriber still generates about three times the busy-hour
traffic of a wireless subscriber. Reductions in the effective price per minute of
wireless service, coupled with widely-available bulk calling plans, have
contributed to this increase in wireless usage.
Nonetheless, the average wireline subscriber still generates much more
local traffic than the wireless user, and wireline per-subscriber usage is growing
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as well.48 The net result is that, in terms of traffic alone, a wireline user requires
three times the network capacity resource of a wireless subscriber.
B.Wireless Network Capacity and Coverage
Wireless service quality today is notoriously poor in many markets, a fact
that has been widely reported in the general press.49 Wireless carriers are to a
large degree victims of their own marketing success and have had much difficulty
in providing facilities to meet increasing demand.
1.Technical Limitations and Business Considerations
A wireless network’s service quality depends on two critical factors: there
must be sufficient resources (radios) equipped in each cell site to serve
subscriber demand in that cell, and there must be a sufficient number of cell sites
located properly to ensure adequate signal strength, or “radio coverage,” within
the service area, both outdoors and within buildings.
A cell site represents a significant investment, often exceeding a million
dollars for a site with large towers. Due to the limited coverage areas of cells in
built-up areas, wireless carriers usually cannot rely on conventional commercial
transmitter sites, such as those located on geographical prominences in a
metropolitan area, for a significant amount of their coverage. That is, many cells
are required so those on geographical prominences can only provide partial
coverage. They must also lease or purchase many other sites around a

48 See, e.g., FCC, “Trends in Telephone Service,” Industry Analysis Division, Common Carrier
Bureau, August 2001 (“Trends in Telephone Service”), table 11.2, p. 11-4.49 See, e.g., Jeffrey Selingo, “Complaints skyrocket along with cellphone use,” The New York
Times, reprinted in The Denver Post, February 18, 2002, p. 1E.
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coverage area, construct masts for antennas that may be anywhere from a few
tens of feet to well over a hundred feet in height, construct a hut or small building
to contain radio and backhaul transmission equipment, buy and install this
equipment, and arrange for backhaul transport to connect the cell site to the
switched network via a wireless switching center.
This process also involves obtaining local approval for the site itself, which
can be very difficult and time consuming. Municipalities quite often object to the
presence of such facilities for esthetic reasons, and, more recently, out of
concern for perceived biological hazards caused by the non-ionizing radiation
generated by the cell-site radio equipment.50
Cell sites cannot contain arbitrarily large numbers of radios, both for
engineering reasons and because the carrier has a limited amount of spectrum
available under its license to serve subscribers. Practical technical limitations
prevent cell sites from being configured with enough radios to exhaust the
carrier’s assigned spectrum. Many cell sites, particularly in urban areas, are thus
out of capacity and simply do not have the ability to serve additional mobile and
portable users, certainly not the high number of additional users that would result
if wireline users began switching to wireless in substantial numbers. Appendix B
discusses these capacity limitations in greater detail.
It makes no sense from a business standpoint for wireless carriers to
attempt to displace wireline telephone service. As is discussed in Appendix A,
wireline subscribers served by wireless networks require considerably more of
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the network resources per subscriber than do mobile/portable wireless users,
and wireline per-subscriber traffic continues to increase.
As discussed above, and in Appendix A, the traffic generated by a wireline
subscriber is about three times that of a mobile/portable wireless user. One
wireline subscriber who shifts to wireless thus displaces an average of three
mobile/portable subscribers. According to the Cellular Telecommunications and
Internet Association (“CTIA”), the average local wireless service bill as of June
2001, was $45.56. Assuming fixed capacity in the wireless system, the
opportunity cost to the wireless carrier is significant. The FCC reports that, in
2000, the average per-subscriber monthly telecommunications expenditure was
$35.51 Under the assumption that this value is increasing at the rate of one dollar
per month annually, the corresponding value for June, 2001, is about $36.50.
The opportunity cost to the carrier per fixed wireless subscriber is therefore about
$100 per month. 52

50 Whether the hazards are real or imagined remain to be proved. The perception, however, is
quite real.51 Trends in Telephone Service,, Table 3.2, p. 3-4. This value also presumably includes intra-
LATA toll charges, as it represents average monthly payments made to ILECs and CLECs. We
will, however, conservatively assume that intra-LATA charges are not included.52 There will of course be cells with excess capacity, particularly in low density areas. In these
cases the opportunity cost will be much lower. The ability to exploit such capacity is likely limited
to less densely populated areas.
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Figure VI.1
Wireless Opportunity Cost
$-
$10.00
$20.00
$30.00
$40.00
$50.00
Wireless Revenue Wireline Revenue
Wireless carriers are now striving to find ways of better serving their
current demand and are finding few alternatives, much less alternatives that
would allow them to expand significantly. As one analyst has noted:
There is little new wireless spectrum set to become available in the
near future. The outline set by former President Clinton has fallen
by the wayside, and spectrum in the 1710-1850 MHz and 2500-
2690 MHz bands seems farther away from being available now
than it was a year ago. The PCS reauction (Nextwave) issue has
yet to be resolved, and the 700 MHz spectrum scheduled to be
auctioned this year has a variety of flaws, in our view.53
Once suitable spectrum is reallocated, it is a certainty that the spectrum licenses
themselves will be very expensive for wireless carriers.
Beyond the cost of the new licenses, enormous investments will be
required for new infrastructure and subscriber equipment compatible with the
new frequencies. It is not likely that wireless carriers would even attempt to
attract large numbers of wireline subscribers in the face of the financial pressures

53 Kevin Roe, et al., “US Wireless Telecom 2002: The Odds Are Better; Place Your Bets,”, ABN-
AMRO, February 7, 2002, p. 12.
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that inevitably will underlie the introduction of third generation (“3G”) technology
in new spectrum.54
The opportunity cost concern is also the probable reason why papers and
articles discussing the need for additional spectrum to accommodate expanded
3G system capacity do not address significant degrees of displacement of
wireline telephone service by wireless systems. The President’s Council of
Economic Advisers (“CEA”), for example, published a report in 2000 on the
economic benefits of 3G wireless technology.55 This report contains no mention
of such displacement of service. It does include a revenue analysis with revenue
expressed per megahertz of allocated bandwidth and uses that value to estimate
the service revenues that would flow from an increased spectrum allocation. The
CEA’s analysis and conclusions would be much less sanguine if significant
wireline displacement were anticipated and the corresponding opportunity cost
factored into the study.
2.Coverage and Quality issues
A wireless subscriber may receive wireless service in a home or office by
just employing his or her handheld wireless phone or by using a specialized
wireless device, such as those made by Telular Corporation, which is specifically
designed for fixed use.56

54 See Tim Kridel, “3G: Accidents Will Happen,” The Net Economy, June 25, 2001, for a
discussion of this and related issues.55 The Council of Economic Advisers, “The Economic Impact of Third-Generation Wireless
Technology,” October, 2000.56 Telular Corporation, Dial Tone and Data for the Wireless World, Products, http://www.telular.
com/products, viewed March 14, 2002.
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In the first case, in which subscribers simply use their portable wireless
phones as wireline replacements, indoor radio coverage is obviously critical. It
is, however, all too often either marginal or inadequate, even in urban and
suburban areas. There has been considerable press coverage of the
inadequacies of wireless service, including poor signal strength in cities.57
Furthermore, even if a usable signal exists in a certain location in a house or
office building, other locations, especially basements and lower floors and areas
away from windows, will likely not exhibit adequate signal strength, so users
must stand or sit in very specific locations in order to maintain acceptable voice
quality (or worse, to maintain the wireless connection). This effect is well-known
to anyone who has attempted to use a wireless phone indoors.58
Even outdoor coverage is often spotty in urban areas, particularly in
densely-populated central business districts among tall buildings. Coverage is
better on the upper floors of tall buildings than it is in lower floors and at street
level, and signal strengths further deteriorate progressively as they travel farther
into building interiors.59 Again, any wireless subscriber with a handheld wireless
phone is well-acquainted with the common need to wander around the typical
office building in an attempt to find a location with sufficient radio signal strength
to conduct a voice conversation of adequate quality.

57 See, Selingo, supra. note 49.58 The predominant means of signal propagation for wireless systems in built-up areas is
scattering and not line-of-sight transmission. The communications “channel” in this case is a
variety of paths between the transmitter and receiver, each of which typically consists of a series
of reflections from buildings and other large objects. The individual paths are independently
corrupted, and the received signal strength can only be predicted using statistical methods.59 Theodore S. Rappaport, Wireless Communications Principles and Practice, Second Edition,
Prentice-Hall PTR, Upper Saddle River, NJ 2002, p 166.
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Despite these problems, it is clear that there is, and will continue to be,
some small fraction of subscribers who use wireless phones exclusively. A
recent trade news article indicates that 1.7 percent of U.S. households use
wireless phones in place of landline service.60 One can easily imagine that
members of certain classes of subscriber such as young singles living alone
might rely exclusively on their wireless phones for all their telephone service.
(and whose home wireline service usage is likely considerably lower than, say,
that of a typical family). This presupposes, though, that these subscribers live in
areas in which wireless coverage is adequate even inside their homes. As was
discussed earlier, wireless coverage continues to be substandard even in many
urban and suburban areas, and it is difficult and expensive for carriers to improve
it.
A few wireless carriers encourage potential subscribers to use their
wireless service in place of wireline telephone service. Cricket Communications,
for example, offers a prepaid, flat rate, local-only wireless service in a number of
markets, and Cricket television commercials (directed primarily at the young
singles market noted above) exhort prospective subscribers to use the Cricket
service as their primary telephone service at home. Cricket’s approach is to
convince potential customers that their wireless service can be affordable,
particularly if the subscriber can do away with his or her existing wireline
telephone service. Cricket’s service is very basic and does not include bundled

60 Cellular Telecommunications and Internet Association web site, “Study Finds More Consumers
Pulling the Plug on Fixed-Line Phones,” January 30, 2002, http://www.wow-com.com/news/daily-
news/pub_view.cfm.
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vertical features or toll service, although these are available for additional
charges.
In the second case, a subscriber may use a “fixed” wireless telephone with
an integrated antenna. Such a phone operates in an identical fashion to a
wireline telephone (it generates dial tone, the user dials using a normal keypad,
etc.), and the phone contains circuitry to interface the common telephone
functions with the integrated wireless components. Another option is a fixed
wireless terminal that has a standard RJ-11 telephone jack and allows the
subscriber to connect a common wireline telephone or fax machine. Either of
these devices can be used with an external antenna mounted directly on the
device and which likely offers slightly improved performance over the antenna
integrated into typical handheld wireless phones. These units also can be used
with higher-gain antennas mounted outdoors and connected to the unit via
coaxial cable.
The use of an external antenna can improve the signal delivered to the
wireless phone. These antennas typically have higher gain than those on
portable units (meaning they intercept more of the power transmitted by the
wireless cell-site transmitter and are thus “directional”) and also avoid the
building penetration problem. They also require mounting in a suitable location,
possibly on a mast, and the connection between the antenna and the fixed
wireless phone must be protected from lightning strikes. Deployment of external
antennas invariably requires professional installation. Because such antennas
are directional, they must be pointed in the correct direction and suitably attached
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to the building structure. This increases the per-subscriber investment on the
part of the carrier, thus increasing the opportunity cost.
There are at least two recent and pertinent examples of failed attempts to
replace wireline service with wireless service using dedicated networks. AT&T,
over the past several years (and before it spun off its wireless operation), spent
heavily ($1.3 billion) on Project Angel, a new wireless technology expressly
designed for fixed voice and data service.61 AT&T’s motivation was the
development of a wireless service to complement its cable telephony service in
order to expand its options for serving end users directly, thereby avoiding
access charges and the costs and aggravation of attempting to lease loops from
ILECs. After several years of development, AT&T finally introduced its fixed
wireless service in Fort Worth in 2000, with plans to expand to 1.5 million
subscribers by the end of 2000 and 10 million by the end of the following year.62
They only made it to about 47,000 total subscribers.
In a clear statement of its lack of interest in the fixed market, AT&T
Wireless, once it was spun off by its parent in July, 2001, wasted little time in
unloading the Project Angel technology, associated staff, and the few subscribers
actually served by the fixed system. It sold the Project Angel assets to Netro
Corporation for $16 million in cash plus stock. Netro has equipped a number of
fixed wireless networks internationally, most typically in areas such as Eastern

61 AT&T Wireless News Release, January 29, 2002. AT&T goes on to say in this release that it
“intended to exit the fixed wireless business.”62 John Borland, CNET News, March 22, 2000.
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Europe that do not have extensive and well-maintained wireline communications
networks.63
Ionica is another prominent example of a company that based its business
plan on its hopes of displacing wireline telephone subscribers with a fixed
wireless service. The UK-based company developed a sophisticated fixed
wireless technology to compete with British Telecom for fixed voice and data
services. Its business plan was apparently based on a modest penetration of the
UK market of seven percent (about 2.8 million subscribers), but the company
failed in 1998 with a total subscribership of about 62,000. Analysts blamed
technical and financial problems for the failure.64
C.Wireless Data Service for Wireline Replacement
An increasing share of landline usage is for data applications. However,
new mobile wireless data services are not a significant threat to displace this
landline usage. Second-generation wireless systems can support only modest
data rates, typically about 10 kbps. The improved radio transmission
technologies classified as 2.5G systems can support rates of several tens of
kilobits per second per subscriber (for 2.5G code division multiple access, or
“CDMA,” about 64 kbps per subscriber), which are comparable to the rates
achievable with a current voiceband dialup modem on a wireline connection.

63 http://www.netro-corp.com/netroframelayoutnnpc.html64 Chiyo Robertson, “Ionica collapses as white knight bails out,” October 30,2000, at
http://news.zdnet.co.uk, and “Ionica lays off 600 employees,” November 2, 1998, at
http://news.bbc.co.uk.
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These increased per-subscriber data rates, however, come at the expense of
dedicated additional radio resources to a single user.65
Third-generation wireless systems will offer data rates exceeding 144
kbps, even for high-mobility traffic. This value, in fact, is a threshold number
often used to define, at least in part, a 3G technology. Corresponding rates for
pedestrian and “indoor” users, such as a person in an airport lounge with a radio
modem connected to a laptop computer, range up to 2.4 Mbps or so.
What is often misunderstood about these rates is that they represent an
overall radio channel data rate, and the channel is shared among many
subscribers using packet radio techniques. The average per-subscriber rates are
much lower, probably between 50 kbps and 100 kbps, depending on the number
of subscribers and their usage characteristics.
This fact, coupled with the radio coverage and capacity issues discussed
earlier, suggests that wireless systems, even using the latest available
technology, are unsuitable for supporting a large number of displaced wireline
data users. Displacement of significant numbers of asymmetric DSL (“ADSL”)
subscribers is very unlikely, both from a capacity and service quality point of
view. Furthermore, such business-oriented wirelines services as high-bit rate
DSL (“HDSL”) and g.shdsl cannot be supported in any quantity by wireless

65 Even higher per-subscriber rates can be made available with 2.5G technology, but this
inevitably requires dedicating extra radio capacity to a single user, thus displacing several voice
channels. With 2.5G GSM techniques, for example, a single user effective rate of about 384 kbps
can be achieved, but at the cost of dedicating eight time slots, or voice channels, to that user.
Similar reassignment of radio capacity is required to obtain 2.5G CDMA per-subscriber rates of
about 64 kbps.
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systems because of the requirement for dedicated capacity in the radio system
and because of quality of service concerns.66
D.Wireless Industry Structure
The current structure of the mobile wireless industry provides another
basis for skepticism that this platform will challenge the ILEC monopoly. Many of
the largest wireless carriers are owned by ILECs. These firms do not have an
incentive to engineer their systems and market their services to provide a direct
substitute for landline networks. The control over the wireless industry by the
ILECs may grow as the FCC eliminates its wireless spectrum cap.
E.Conclusion
While wireless provides an adequate substitute for ILEC fixed narrowband
services for a limited subset of consumers, this platform is not in a position to
limit the exercise of ILEC market power. There is insufficient capacity for
wireless services to discipline ILEC pricing. Quality is lower along a number of
dimensions. Wireless does not support Internet access even at the rates
available from narrowband connections. Finally, the wireless industry is
increasingly controlled by ILECs.

66 Also known as G.991.2, g.shdsl, is an international standard for symmetric DSL (“SDSL”)
developed by the International Telecommunications Union (“ITU”). G.shdsl specifies a technique
for sending and receiving high-speed symmetrical data streams over a single pair of copper wires
at rates between 192 kbps and 2.31 Mbps.
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VII.CLEC Fiber Ring and Fixed Wireless Competition
Fiber ring technology provided by CLECs is the oldest local exchange
competition platform.67 These CLECs install fiber optic lines in urban areas using
a ring architecture. They are then able to provide customers in certain buildings
near the rings with a variety of services from switched local telephony to DS-3s.
Certain fixed wireless operators have attempted to compete along with the fiber
carriers by providing high-capacity links primarily in business districts. Some
background and history of the fiber ring business is provided in Section A.
Section B describes the steps needed for CLEC fiber carriers to expand. Section
C discusses the fixed wireless CLECs. The implications of recent CLEC financial
problems are discussed in Section D. Section E provides the conclusions.
A.The CLEC Business
Competitive Access Providers (“CAPs”) were, in essence, the first CLECs.
CAPs provided point-to-point telecommunications services over fiber rings in
major markets starting in the years following the breakup of AT&T. Initially CAPs
were created to take advantage of an opportunity to provide high capacity
(fractional T1 and higher rate) services among large corporate customer
locations and access to IXC POPs. They offered these services at rates that
were lower than equivalent special access service tariffs offered by the ILECs,
but still offered the CLECs positive margins. CAPs also provided redundant
connectivity to create highly fault-tolerant customer service networks.
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Even prior to the 1996 Act, CAPs had installed end office switches in
larger markets and were providing switched and dedicated interexchange access
services to large business customers. In jurisdictions where it was allowed, the
CAPs also provided switched local services. Following the passage of the Act,
many CAPs became CLECs. They applied for state certification to become local
exchange carriers and installed switches in almost all markets where they
operated fiber facilities. The new CLECs negotiated interconnection agreements
with ILECs and expanded their fiber rings to interconnect with multiple ILEC wire
centers (and tandems) in core business districts. Access to ILEC wire centers
facilitated a strategy of swifter market entry using unbundled loops to connect to
customers pending fiber ring expansion and/or negotiating and constructing
building access.
CLECs that started out as CAPs have evolved beyond providing dial tone
and dedicated circuits. Many have acquired or started ISP operations, and are
also providing web hosting and web site development services. Most resell long
distance service and many of them have constructed their own intercity fiber
networks. These facilities-based CLECs continue to focus almost exclusively on
business customers, although a few carriers, such as RCN, have targeted multi-
unit residential dwellings in major urban areas. The recent CLEC financial
difficulties are discusses in Section C below.

67 The potential for new types of CLECs that would use fixed wireless technology was identified
in the late 1980’s. However, these alternative CLECs have achieved de minimus stature as
competitors to the ILECs, for reasons discussed in Section VII.
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B.Potential Fiber Ring Competition
The CLEC fiber ring platforms consist of the fiber optic transmission
medium and associated structure, appropriate multiplexing nodes from which
spurs can emanate towards individual customer premises, switches that
establish connections between originating and terminating customers, and an
interoffice network to connect the switches to each other.
Typical CLEC facilities networks are illustrated in Figure VII.1. The bulk of
the investment is in the core urban areas or CBDs of larger cities. As shown by
the dotted lines in the Figure, the CLEC networks may reach many buildings
within a CBD, but are unlikely to reach all of them. The CLEC networks may
extend to one or more outlying business districts, but are unlikely to reach all of
them. CLEC networks will not serve large portions of the metropolitan area. For
example, WorldCom reports that even in the wire centers where it has fiber
facilities (or has contracts with other CLECs who have built facilities), the vast
majority of its high-capacity customers are in buildings that are reached only by
ILEC facilities.68 There will, of course, be significant numbers of wire centers in
the surrounding metropolitan area where no CLEC has facilities, but where
nevertheless high-capacity customers will be located.

68 In the Matter of Review of the Section 251 Unbundling Obligations of Incumbent Local
Exchange Carriers, CC Docket No. 01-338, Declaration of Peter H. Reynolds on Behalf of
WorldCom, Inc. ("Reynolds confidential ex parte") (filed under protective order, April 4, 2002).
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Figure VII.1
CLEC Presence
CBD
LATA
CBD
CLEC Fiber Ring
Outlying Business
Center #1
Outlying Business
Center #3
Outlying Business
Center #2
The CLEC fiber platform will never be able to challenge the ubiquity of the
ILEC network. This can be demonstrated in two ways. First, the process of
expanding these networks to serve new buildings or new areas is described.
Second, the source of ILEC economies of scale is described and the magnitude
of those economies is measured. Finally, in Section 3, the extent of fiber ring
capacity measured by buildings reached is discussed.
1.CLEC Entry and Expansion
The fiber ring platform cannot provide significant additional competition to
the ILECs because it is uneconomic to serve customers unless density is high.
This can be illustrated by describing the steps necessary to extend fiber ring
network platforms to serve new customers. To add a location to its network, the
following steps are necessary:
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1) A spur must be constructed from the ring to the customer location. Building a
spur in an urban area can cost between $72-$105 per foot.69 If the customer
is a block away (about 500 feet) this will cost between $36,000 and $52,500.
If the customer requires route redundancy, the costs rise accordingly. If the
customer is located several blocks from the ring, it generally makes sense to
serve the customer only if there is justification to extend the ring itself, which
is a multimillion dollar project.70 The costs of constructing network outside of
the CBD may be smaller per foot, but the distance required to reach each
additional customer is generally greater.
2) The customer’s building must be entered and connections made to the
appropriate terminal equipment, located in an appropriately conditioned
space, which provides circuits of the bandwidth required by the customers in
the building. Building access requires negotiations with the building owner.
In most cases, building owners require compensation for the right to enter the
building, the floor space required to install circuit equipment within the
building and the use of riser conduit.
3) Building-related investment is required for preparing space, arranging power
connections, installing equipment bays, and routing cables. There will be
recurring costs for leasing the space and for power that may be supplied by
the building owner. The DS-1 circuit equipment investment runs

69 In the Matter of Federal State Board on Universal Service, CC Docket No. 96-45, Forward
Looking Mechanism for High-Cost Support for Non-Rural LECs, CC Docket No. 96-45, Further
Notice of Proposed Rulemaking, FCC Document No. 99-120, released May 28, 1999 (“FNPRM”).
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approximately $5,000 per DS-1. The investment for DS-3 circuit equipment
may be in excess of $30,000.71 Depending on a range of variables, including
the amount of space required, the extent of the physical preparation,
prevailing building lease rates, and power costs, the total investment in
building space, including initial investment and the NPV of recurring costs,
could exceed $100,000.
These costs are not inconsequential. For example, if there is only
demand for a small number of voice grade or T1 lines in a given building, or the
building is located too far from the CLEC fiber ring, it may not be economical to
build the facilities to serve customers in that building at all. The per-line cost of
the terminal equipment, the ring extension, the building costs, or any combination
of these, may be too high. If one assumes annual revenue per DS-1 of
approximately $6,000, it will obviously be uneconomic to serve customers in
buildings where there is limited DS-1 demand. According to WorldCom, a CLEC
will not even consider expanding its network to a building unless the revenue
equivalent of multiple DS-3s can be generated.72 This means that even in
densely populated urban areas a significant number of customers do not now
have, and will not in the near future have, alternatives to the ILEC.
Figure VII.2 shows the relationship between revenue, cost and density for
the fiber ring platform. It is obvious that rings will not be built to serve medium

70 See Declaration of Edwin A. Fleming, In the Matter of Implementation of the Local Competition
Provisions of the Telecommunications Act of 1996, CC Docket No. 96-98, June 11, 2001
(“Fleming Declaration”) para. 10.71 These costs are consistent with those used in the HAI Cost Proxy Model.72 Fleming Declaration, para. 10.
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density business or residential areas. The revenue side of the expansion
equation reinforces the difficulty of serving less dense areas with this technology.
Revenue per square mile obviously falls as density falls (assuming businesses
are concentrated in high density areas). Revenue for business customers is
much higher because local services are provided at business rates and business
customers may need dedicated circuits and data services.73
Figure VII.2
CLEC Revenue Cost Relationships
Low Density Medium Density High Density
Revenue per line
Cost per line
This analysis also applies when ILEC wire centers are considered as the
locations to which CLECs might want to extend their networks. CLECs obviously
have connected their own fiber to many ILEC wire centers. However, the cost of
adding additional ILEC wire centers to their networks is significant. CLECs
connect to a limited number of ILEC central offices.74 WorldCom estimates that
the cost of extending its local network to an additional ILEC wire center is at least
one million dollars, even if the wire center is close to WorldCom’s network. Costs

73 Moreover, the necessarily limited geographic scope of CLEC offerings makes mass marketing
of service difficult. If CLECs have loop facilities in geographically limited areas within a marketing
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rise if the wire center is several miles from the WorldCom network.75 Given these
large costs, it is simply not viable for CLECs to build to all ILEC wire centers.
The route must be relatively short and the traffic density must be relatively high.
For example, WorldCom reports that only approximately five percent of the ILEC
central offices generate sufficient traffic to justify construction of transport
facilities to reach them.76
These high costs of fiber ring expansion help to explain why CLECs must
rely on ILEC provided facilities to serve their customers even in dense urban
areas. While it may be true that the majority of high-capacity lines are in the
areas served by CLECs, there will be significant demand in other areas as well.
The “urban sprawl” common in many cities results in businesses being
located throughout a large urban area. This will include branches of businesses
whose main location is in the CBD or other areas of concentrated demand where
the CLECs do own loop facilities. For example, a large bank or retail operation
will have outlets throughout the city. In order to provide local service or a local
data network to these customers as a “full service” provider, a CLEC must be
able to provide them a citywide network. A CLEC can do so economically only if
it can serve the locations outside the CBD by purchasing UNEs from the ILEC.
Without the ability to do so, the CLEC ability to compete will be impaired.

region, it is expensive to use mass media to advertise.74 Reynolds confidential ex parte" para. 13.75 Fleming Declaration, para. 8.76 Reynolds confidential ex parte, para. 12.
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2.ILEC Economies of Scale
The ILECs have already constructed ubiquitous networks that are being
used to provide both narrowband and high-capacity services. As a result, the
ILECs enjoy significant economies of scale and scope. Foremost among the
barriers to entry and expansion that must be overcome by the CLECs are the
significant sunk costs that they must incur to provide service that are described
above.
Simply put, construction of competitive CLEC loop facilities in less dense
geographic portions of cities is not viable. Economies of scale in local networks
suggest that for the foreseeable future the ILECs will be the sole supplier of both
low and high-capacity services in many geographic areas, including geographic
areas that contain high-capacity customer locations.
The source of these economies is easy to explain. The basic telephone
company infrastructure consisting of poles, conduit and underground plant that
support both voice grade and high-capacity loops is, within a large range,
invariant to the number of circuits provided. Investment in these infrastructure
items accounts for a high proportion of the total cost of the network. For
example, in the HAI Cost Proxy Model, infrastructure (trenching, poles, conduit,
and manholes) typically accounts for more than a third of total loop investment.
Essentially, a CLEC must make all of these sunk investments to serve the first
customer.
High capacity transport is also subject to significant economies of scale
due to the need to make large sunk investments in infrastructure. Moreover, the
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ILEC has the advantage of being able, in many cases, to share interoffice
transport and loop feeder facilities. The ILEC transport networks carry
substantial traffic, all of which produces revenue to defray the fixed costs of
construction. CLECs will only be able to justify construction of such facilities on
the most highly trafficked routes. Moreover, the ILECs are able to avoid
transporting traffic that originates and terminates in the same office. The CLEC
will have many fewer “offices;” therefore, it must transport a higher portion of its
traffic.
Finally, the ubiquity of the ILEC networks allows for construction of a more
efficient transport network. As Figure VII.3 shows, a CLEC wishing to expand its
transport network from three to four nodes will have to construct two links to the
fourth node to ensure path redundancy. But having done so, one of the links
connecting the existing three nodes becomes superfluous. The ILEC do not
have this problem because given their existing customer base, with established
traffic patterns, they are in a better position to construct the efficient sized plant
and network to serve their customers. The CLECs, on the other hand, face a
great deal of uncertainty with respect to the quantity and geographic distribution
of demand.
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Figure VII.3
Transport Economies
B
E
A
D
C
CLEC Ring, Stage 1
E
A
D
C
B
CLEC Ring, Stage 2
Dr. Mark T. Bryant quantified the economies inherent in providing local
services in a study presented in the UNE Remand Proceeding.77 Dr. Bryant
used the HAI model to estimate the costs per line of serving customers with a
ubiquitous network when the serving carrier serves only a fraction of the market.
Dr. Bryant found that in New York, “in dollar terms, the CLEC cost disadvantage
ranges from $2,300 per line per month in the most rural areas, to $43 per line per
month in the most dense areas at the five percent penetration level.”78 Similar
results were obtained for transport costs, with the cost disadvantage higher for
low competitive penetration, but disappearing more rapidly as market share
increased.

77 In the Matter of Implementation of the Local Competition Provisions of the
Telecommunications Act of 1996, CC Docket 96-98, Comments of MCI WorldCom, Tab 3,
Declaration. of Mark T. Bryant, May 26, 1999 (“Bryant Declaration”), paras. 2-20 (describing the
economies of scale to which all loop, transport and switching unbundled network elements are
subject).78 Ibid., para 28.
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Figure VII.4
CLEC Loop Cost Disadvantage

Cost
Density
30% penetration
5% penetration
$10 per line per month
$43 per line per month
This, of course, explains why CLECs have chosen to concentrate their
investment where telecommunications demand is most dense – the central
business districts and some outlying business centers within large cities. Only in
these areas are there a sufficient number of potential customers for loop
services, including high-capacity loops, to justify the sunk costs of building the
necessary infrastructure to serve them.
C.CLECs Deploying Broadband Fixed Wireless Technology
A number of CLECs have attempted to compete using fixed wireless
technology. Service providers using the digital electronic message service
(“DEMS”) and local multipoint distribution services (“LMDS”) spectrum are
reviewed here. In theory, these wireless systems avoid some of the expansion
problems faced by fiber rings. However, this technology suffers from several
independent limitations. These limitations help to explain why the fixed wireless
market share discussed in Section IV above is so small.
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Microwave systems operating at frequencies of 18 GHz and higher are
very susceptible to fading caused by rain, and the severity of the fading
increases with increased operating frequency. The overall effect of the fading is
to reduce the effective operating range of the system, so that such microwave
systems generally are not usable at ranges of more than a couple of miles if high
availability is to be maintained.
Even with reduced range, these systems are still liable to endure rain
fades. Reducing the range does decrease the likelihood of such fades, but they
still may occur, particularly in areas prone to occasional high-rainfall-rate storms.
As a result, businesses are often wary of such microwave service for critical
applications (which arguably include any requirement for high-speed
connections) and may be attracted to it only as a backup measure for more
reliable service.
Microwave systems also require suitable locations on buildings for
mounting antennas. Rooftop access can be expensive and difficult to negotiate;
particularly since the need to locate cellular and PCS antennas on buildings in
urban areas has made roof space especially valuable to building owners. Some
microwave systems are designed to operate through window glass, so that a
microwave terminal can be placed in an office and pointed at the other terminal
forming the link. In order for this arrangement to work, however, there must be
an office window in microwave line-of-sight of the remote terminal, and the office
must be available to the customer. Even if acceptable building roof space is
available, it can be difficult to establish line-of-sight paths to potential customers
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in a variety of locations. Existing estimates suggest that only around 60 percent
of potential customer locations have suitable line-of-sight paths available to
DEMS and LMDS hub sites.79
Point-to-point microwave systems operating in these bands and at even
higher frequencies are thus unlikely in the near term to offer serious competition
to cable-based broadband transmission systems operated by ILECs. Companies
such as Teligent (DEMS) and Winstar (LMDS), are, as of this writing, in
bankruptcy. Teligent is selling off its assets.80 Winstar’s new owner reports that
it “gets no more than 1% of telecom spending in the buildings it serves.”81
Other wireless approaches have been discussed. For example, free-
space optical systems for high-capacity digital communications have been
available for decades, but they generally apply to specialized needs and none
has yet been an unqualified commercial success. Multichannel multipoint
distribution service (“MMDS”)/ instructional television fixed service (“ITFS”), and
Industrial, Scientific, and Medical (“ISM”) are being used primarily for broadband
Internet applications and so are discussed in Section VIII.
D.The Implications of the CLEC Meltdown
Many of the CLECs that entered local markets after passage of the 1996
now find themselves in severe financial distress. Dozens of CLECs have

79 Ken Monro, “The Promise of the U-NII Bands – Making Sense of the Wireless WAN
Confusion,” Broadband Wireless Online, Vol. 2, No. 09, October, 2001.80 See Venture Asset Group to Manage Sale of Teligent Central Offices, January 24, 2002 Press
Release, viewed at http://biz.yahoo.com/prnews/020124/sfth009_1.html. Winstar’s assets have
been purchased by IDT.81 Reported in Neil Weinberg and Michael Maiello, “Malone Clone,” Forbes, April 15, 2002, p. 82.
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declared bankruptcy and many others have reduced their planned investments in
competitive networks.
There are numerous possible explanations for these events. Some
competitors have blamed the recent downturn in their prospects on the lack of
cooperation from the incumbent monopolists.82 In a paper on behalf of USTA,
Robert W. Crandall provides an alternative hypothesis. He argues “. . . that a
company’s choice of business strategy has been the most important determinant
of its success or downfall.” 83 The implication is that some competitors have
adopted “winning” strategies. Dr. Crandall believes these “winners” will bring
more competition to the market.
If Dr. Crandall’s hypothesis is accepted, then policymakers need not worry
about the current round of business failures. They can be confident that the
stage has been set for market developments to bring competitive alternatives to
consumers, as the Act intended, so long as the current regulatory environment
remains unchanged. Although individual competitors may be falling by the
wayside, the competitive process may still be healthy.
Dr. Crandall’s hypothesis is not correct. The firms he studied in June
2001 to demonstrate the viability of facilities competition are now in serious
financial trouble. Even more problematic is the fact that successful
implementation of the CLEC strategies that he endorses will still leave most
consumers without competitive alternatives.

82 See Shawn Young, “Covad, One of Last DSL Competitors, Blames Troubles on Bell Tactics,”
The Wall Street Journal, August 9, 2001, p. B1.
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Dr. Crandall claims that competitors must build loop facilities to be
successful. However, as described above, the CLEC business model simply will
not result in the construction of loop facilities to serve residential and small
business markets. As discussed in this Report, the potential competitive
alternatives for these sectors are UNEs, resale, cable telephony, and wireless.
Even Dr. Crandall admits that cable telephony has achieved only modest
market penetration. As discussed elsewhere in this Report, wireless and Internet
voice have a set of their own problems to overcome. It appears that successful
implementation of UNE and resale competition is required if the vast majority of
consumers are to have a choice of carriers. Dr. Crandall’s own case studies and
econometric analysis demonstrate that these strategies are not working in the
current market and regulatory environment. Therefore, a regulatory response is
required.
1.The Telecom Collapse
One possible interpretation of the collapse is that it is due to a classic
emerging industry “shakeout.” There is no question that the CLEC business was
due for such a shakeout. Such shakeouts are a normal part of the competitive
process in emerging markets. Entrants adopt alternative strategies and the ones
who both adopt the correct strategy and are well-managed succeed. Others go
bankrupt or are acquired.
The shakeout theory is consistent with Dr. Crandall’s argument that
mismanagement or normal competitive activity is responsible for the demise of

83 Robert W. Crandall, “An Assessment of the Competitive Local Exchange Carriers Five Years
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competitors. However, the existence of healthy competition at the end of the
telecom collapse is essential to the hypothesis that poor management decisions
and not some other factor such as incumbent behavior or inadequate regulation
were responsible for the demise of numerous individual firms.
Dr. Crandall believes that he has identified firms that will succeed and
provide the necessary competition. The Sections below demonstrate that his
analysis of the winners was premature. Moreover, the claim by the ILECs and
Dr. Crandall that the Act is working under current regulatory policies, despite the
collapse of many of the individual competitors, requires both successful survivors
and competition across all or most local geographic and service markets. The
evidence shows that, absent UNE competition, most consumers will be left
behind even if many currently configured CLECs survive.
2.CLEC Survivors
As noted above, Dr. Crandall believes that mass scale mismanagement
was the principal cause of the telecom collapse, while at least some of the
competitors blame the incumbents, public policy, or both. Dr. Crandall attempts
to make his case for the ILECs by identifying a set of firms that appear to have
survived the collapse with solid future prospects. The three firms singled out by
Dr. Crandall are Time Warner Telecom (“TWT”), McLeodUSA, and Allegiance.
A more detailed, and updated, look at Crandall’s three poster children for
competition demonstrates that there is something more fundamental about the
telecom collapse than simply bad management or a normal shakeout. Each of

After the Passage of the Telecommunications Act,” June 2001 (“Crandall”), p. 4.
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the three firms find themselves with dramatically reduced valuations since Dr.
Crandall presented his analysis, both in absolute terms and relative to the overall
stock market. In fact, McLeod has filed for bankruptcy and is selling assets.84
Between June 1, 2001 and September 10, 2001 McLeod, TWT and Allegiance
lost respectively 100 percent, 53 percent and 34 percent of their market value.
The S&P 500 lost 13 percent of its value in this period. Since September 11 the
major stock market indices have recovered the post-attack losses while the
shares of these three companies show extended declines, with the shares of
TWT and Allegiance down by 71 and 67 percent, respectively.
Table VII.1
Competition Poster Children
Loss in value From 52-
week high
From 6/1/ 01 Between 6/1/01
and 9/1/01
After 9/10/01
MCLD 100.0%100.0%94.7%100.0%
TWTC 89.0%84.4%53.1%66.8%
ALGX 69.4%80.4%33.6%70.5%
These reduced valuations go hand in hand with the reduced business
prospects the companies face. Since Crandall’s June 2001 paper was written,
TWT’s fortunes appear to have taken a dramatic downward turn. On August 7,
2001, Reuters reported that “shares of Time Warner Telecom, Inc. fell almost 9
percent on Tuesday, a day after the telecommunications company posted a 55
percent decline in second-quarter earnings and cautioned that customer
bankruptcies and economic weakness may dampen revenues through the end of

84 “McLeodUSA Reaches Agreement with Bondholder Committee,” McLeod press release,
January 31, 2002, http://www.mcleodusa.com/html/ir, viewed March 13, 2002. “. . . [T]he
company today has filed a pre-negotiated plan of reorganization through a Chapter 11 bankruptcy
petition filed in the United States Bankruptcy Court for the District of Delaware.”
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the year.”85 The same article noted that one analyst reported “Time Warner
Telecom’s second-quarter additions of new customers and buildings connected
to its network ‘were below historical trends’ . . .”86 As a result, of these problems,
the company cut its capital spending plans by almost 10 percent. Even before
declaring bankruptcy, McLeod announced that it will “ . . suspend network
buildout outside the firm’s 25-state service area . . .” and substantially reduce
capital spending.87
Allegiance distinguishes itself from the other two carriers in that its stock is
off by “only” 80 percent since Dr. Crandall studied it. In downgrading the stock
based on management’s reduced revenue estimates, Dain Rauscher Wessels
noted that “the 2002 reduction is only partially explained by the events of
September 11, and that weakening fundamentals in the form of lower sequential
line growth and/or slower data-related growth may also be factored into
management’s cautious guidance.”88
As this review shows, the firms Dr. Crandall has identified are suffering
along with the rest of the CLEC community. This raises the following question:
How have these and other survivor firms avoided or delayed collapse and why
did they appear stronger than their peers did in June? One answer appears to
be that in each case these firms benefited from the timing of their capital
financing.

85 “Time Warner Telecom Shares Fall 9 Percent,” Rueters, August 7, 2001.86 Ibid.87 “McLeodUSA Cuts Back Spending Plans, May Sell Assets To Stretch Funding” TR Daily,
August 2, 2001.
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Each of these firms was able to finance their operations at or near the
peak of the NASDAQ bubble. For example, in February of 2000 Allegiance
raised almost $750 million with a common stock offering at $70 per share
(compared to a current price of $3).89 Similarly, Time Warner Telecom
completed a sale of $483.9 million in common stock at a share price of $74.44 in
January of 2001. Finally, McLeod raised 750 million dollars on a January 2001
sale of notes.90 This timing was either fortunate or prescient for the firms, but
their good fortune is likely a one-time event.
Diversification provides another possible answer for the delay in the
devaluation of these firms. Allegiance has a significant web hosting, Internet
access and high-speed data business. According to McLeod’s year 2000 Annual
Report, the firm derived only six percent of its revenue from local exchange
services, down from 11 percent in 1998.91
In addition to analyzing these individual case studies, Dr. Crandall
performed regression analyses intended to identify the characteristics of
successful firms. He concluded that there is “. . . very strong evidence that
CLECs are best able to produce revenue growth by building their own networks

88 Dain Rauscher Wessels, “Reducing Revenue Estimates; Downgrading to Neutral,” September
27, 2001.89 See. “Allegiance Telecom Underwriters Exercise Over-Allotment Option to Purchase 803,109
Shares of Common Stock” Allegiance Press Release, February 29, 2000,
http://www.algx.com/about_allegiance/in_the_news/news_archive/2000/over_allotment.jsp. .
Current stock price as of March 14, 2002, http://www.Reuters.com/quote.jhtml?ticker =ALGX.90 See, Securities Exchange Commission (SEC”), EDGAR Database, McLeod USA Inc., SEC
Form 10-Q, August 14, 2001, p. 16, http://www.sec.gov/cgi-bin/srch-edgar.91 McLeodUSA, Inc., “Annual Report and Form 10k, Year 2000”, p. 42, http://www.mcleodusa.
com/media/ir/2000annualreport, viewed March 13, 2002.
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or significant parts of their own networks.”92 However, many of the firms that are
now in Chapter 11 proceedings also owned their own facilities. Winstar and
Teligent were building fixed wireless networks using their own facilities. ICG, a
fiber carrier just now emerging from Chapter 11, builds local fiber networks.
Other carriers who build local fiber such as XO Communications are in severe
financial distress.93 Having facilities does not appear to be a sufficient condition
for success.
In summary, even the well-managed CLECs identified by Dr. Crandall are
in financial difficulty. As Dr. Crandall would surely agree, the financial health of
individual competitors is only interesting to the extent it affects the state of
competition. In this case, there is reason for alarm. Local telecommunications
competition, particularly the facilities based competition that Dr. Crandall
endorses, requires investment. Investment can only be made by firms that can
attract capital. Many CLECs have run out of capital, and the remaining CLECs
are cutting back their expansion plans.
The fact that even the CLECs that Dr. Crandall identified in June as being
successful are cutting back their expansion plans and will have a difficult time
raising new equity in the current environment suggests that, at a minimum,
competition will develop more slowly than anticipated. It is possible that these
competitors will cease to grow altogether. The service disruptions that have

92 Crandall, p. 4.93 See, SEC, EDGAR Database, XO Communications, SEC Form 8k, December 13, 2001, p. 5,
“On December 13, 2001, XO Communications, Inc. ("XO") announced that it had requested to
voluntary delist its stock from the NASDAQ National Market.” http://www.sec.gov/cgi-bin/srch-
edgar.
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occurred as a result of the CLEC failures that have already occurred will make it
more difficult for CLECs to expand in the future as customers will become more
risk averse. Moreover, the current economic slowdown is affecting all
telecommunications firms, but is likely to have the greatest impact on the newer
entrants.
Dr. Crandall argues that the silver lining in CLEC bankruptcies is that other
CLECs will be able to acquire assets at bargain basement prices. This is true to
the extent the investment is not sunk. However, much of the investment may in
fact be sunk and unrecoverable. One of the most important assets of these firms
is human capital. To the extent their precarious financial condition or the need to
reduce staff has caused employees to leave, their ability to compete is
correspondingly reduced.
Nevertheless, Dr. Crandall is correct that switches may be re-deployed
and fiber added to the networks of the survivors at low cost. Firms that are able
to emerge from bankruptcy will be able to compete with reduced debt burdens.
The problem, however, is there was already substantial redundant fiber and
switching capacity. Most of the CLECs that have built actual transmission
facilities have built them in core urban areas. Several carriers have installed fiber
running down K Street in Washington DC. For one of the carriers to acquire the
fiber of another at low cost does nothing to bring more competition to those
portions of the Washington suburbs where competitive fiber has not yet been
installed. One key to expanding local competition is, of course, to extend
networks to customers that do not already have competitive alternatives.
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E.Conclusion
It is becoming more and more apparent that local competition for the vast
majority of customers must come from something other than the traditional CLEC
model. The fiber rings that CLECs construct do not provide a cost-effective
means for reaching customers in areas with lower line densities. The residential
and business customers that populate these areas spend less on
telecommunications. At the same time, it costs more to serve them because
economies of scale in transmission are not available. This higher cost makes it
very unlikely that competitors will build or extend fiber rings to serve customers
outside of areas with large concentrations of business lines.94
VIII.Broadband Competition
Consumers are increasingly adopting broadband technology. This
Section describes current competitive conditions in the broadband market.
Although the cable industry has been successful in providing broadband services
to its customers, broadband markets are far from being classified as competitive.
Many customers depend on the ILEC broadband DSL services.
An important consideration is that CLECs may be able to use the ILEC
DSL platform to offer a substitute for traditional narrowband voice service. ADSL
and other forms of DSL (e.g., g.shdsl) can support packetized voice (voice over
Asynchronous Transfer Mode (“ATM”), typically). This means that with a local
interconnection agreement, the ISP providing broadband service to consumers
can engage in intramodal competition by providing its customers local service as
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well as the high profit vertical and ancillary services provided by the ILEC such
as voice mail and custom calling features.
Appropriate UNEs at acceptable rates that allow CLECs to provide
broadband DSL services must, of course, be available both to provide
consumers with enhanced competitive broadband options and to perhaps allow
intramodal voice competition in the future.
Section A discusses competition in the broadband market while Section B
describes how DSL-based services that compete with the ILEC local services
can be provisioned.
A.Broadband Competition95
There is very little broadband service competition today. DSL services
provided over the ILEC network are often the only broadband alternative
available to residential and small business consumers. In those areas where
cable modem services are also available, the result is a duopoly. In those
extremely limited cases where both fixed wireless Internet and cable modem
service are available, consumers are limited to only three choices. As discussed
below, satellite services are an inferior option for most consumers. The
implication is that ILECs will not be forced by competition to open their
broadband networks to CLECs for the purpose of providing a DSL substitute for
the ILEC narrowband voice services.

94 See, ELB II.95 This Section draws on the Declaration of A. Daniel Kelley, filed with the FCC on behalf of
WorldCom, In the Matter of Review of Regulatory Requirements for Incumbent LEC Broadband
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The first step is to evaluate the various technologies used to provide
broadband services. Several technology platforms are being used to provide
broadband service. Broadband service facilities are currently supplied by ILECs
using DSL, cable companies using cable modems on upgraded cable plant, fixed
wireless companies using MMDS/ITFS and ISM spectrum, as well as satellite
providers. Each of these platforms is arguably in the relevant broadband service
market.
Other technology platforms should not be included in the market. Mobile
wireless companies do not currently supply broadband access and will not do so
in the next few years. Firms providing fiber to the home (“FTTH”) service, which
are essentially cable overbuilders, have an insignificant market presence today.96
Gigabit wireless technology using ‘pencil-beam’ waves in the upper millimeter-
wave bands (frequency spectrum above 70 GHz) shows promise,97 but
commercial deployment awaits Commission action on spectrum licensing.
Not all of the technology platforms included on the supply-side of the
market are equal. Each technology has different quality and speed
characteristics and each faces different economic challenges. Both satellite
broadband and fixed wireless services face severe limitations.
Satellite service is available to consumers with generally southern
exposure; i.e., no hills, trees, buildings, etc. in line of sight to the satellite. While

Telecommunications Services, CC Docket No. 01-337, March 1, 2002. (“Kelley Broadband
Declaration”)96 These firms may also be having difficulty raising capital. See Steve Caulk, “Cable Firm
Ceased Building,” Rocky Mountain News, March 6, 2002.
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there are currently two choices of satellite provider in many parts of the country,
the service is significantly more expensive than either cable or DSL. Typical
monthly rates are $75.00 for a service that provides downloads at 400-500kbps
and upload at 128kbps. This service is thus priced higher and provides lower
quality than the other broadband services. A $40.00 per month service is also
available, but that requires upload through a separate dial-up telephone line at
whatever modem speed is available over a switched telephone network
connection.98
Costs of satellite installation are about $500-$525 for equipment and $200
for installation. The equipment, once purchased, belongs to the customer, but it
can only be used for the satellite service for which it was purchased. In other
words, the equipment is not interchangeable between satellite service providers.
If the customer no longer wants the service, or wants to switch providers, he or
she is stuck with the equipment. Professional installation is required, and a
three-week wait for installation is typical. The high cost and delay associated
with installation constitutes a significant barrier for most consumers.
These problems are reflected in the results of a recent survey conducted
by PC World Magazine. PC World Reports that “the runt of the broadband litter
has always been satellite. Characterized by difficult, expensive installations,
notoriously poor service, and suspect performance, the service meant for anyone

97 See, Request for Amendment of the Commission’s Rules for the Point-to-Point Use of the
71.0-76.0 GHz and 81.0-86.0 GHz bands, Petition of Loea Communications, RM-10288.98 See Brad Grimes, “Ditch Your Dial-Up,” PC World, February 2002.
http://www.pcworld.com/features/article/0,aid,73865,pg,3,00.asp, viewed February 27, 2002 for a
discussion of broadband service features and prices.
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who can't get cable or DSL has ceased to be a serious option.”99 In conclusion, it
appears that satellite broadband is at best an alternative suited mainly for
customers in rural areas or other areas where no other broadband alternative is
available.100
While fixed wireless shows promise, it too faces significant limitations.
Fixed broadband wireless systems, operating primarily in MMDS/ITFS and ISM
spectrum, offer Internet access and other broadband data services to customers
in selected markets. Such markets typically include businesses in large to
medium cities and residential/business users in smaller markets. For reasons
discussed earlier, these systems do not have the capacity to serve large fractions
of the broadband demand in medium to large markets. Furthermore, current
equipment used in these frequency bands requires line-of-sight paths between
the system hub location and subscriber locations, thus further restricting the
market they can serve. The implication is that the maximum penetration of fixed
wireless services in larger markets will be limited to five to ten percent.
This upper bound on fixed wireless penetration obviously limits the
competitive significance of the service. For these reasons operators of such
systems, including WorldCom, view their service as being complementary to DSL
service instead of being in direct competition. While WorldCom continues to
market and operate its business-oriented MMDS/ITFS broadband service, Sprint

99 Ibid.100 Also see Jerry A. Hausman, J. Gregory Sidak, and Hal J. Singer, “Residential Demand for
Broadband Telecommunications and Consumer Access to Unaffiliated Internet Content
Providers,” Yale Journal on Regulation, Winter 2001, pp. 129-173. (“Hausman, Sidak and
Singer”), at p. 153.
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has ceased marketing its service, which it originally marketed to residential as
well as business users. Hybrid Networks, a prominent manufacturer of radio
equipment designed to support broadband data transmission in these frequency
bands, announced that it will cease operations at the end of April, 2002.101
So-called “Wi-fi” wireless local area networks (“LANs”) have recently
received publicity.102 These networks are based on the Institute of Electrical and
Electronics Engineers (“IEEE”) 802.11b standard and operate in the 2.45 GHz
ISM band. Wi-fi systems, sometimes referred to as “wireless Ethernet” (because
part of the standard has its roots in the Ethernet standard IEEE 802.3), usually
are intrapremises systems. Such systems may be intended for public or private
use. A private corporation, for example, may use an 802.11b network within a
building as a wired LAN replacement.
Public wireless LANs are becoming more common, with Starbucks coffee
shops being possibly the most visible of companies using 802.11b to provide
customers access to the Internet while they patronize Starbucks shops. In the
Starbucks example, the wireless LAN exists to support wireless connections to
an “access point” that connects to a wireline broadband facility such as an ADSL
connection. The private network case also requires similar access points to
allow LAN users access to other networks. In either case, the wireless LAN just
replaces premises wiring and does not represent a fixed wireless bypass of an
ILEC’s network. Their attractiveness is in their relative ease of installation, which

101 "Hybrid Networks to close doors in April,"www.rcrnews.com, March 29, 2002.
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requires minimal cabling, as well as the fact that they are unlicensed systems
operating under Part 15 of the FCC’s rules.103
There are also a few examples of 802.11b systems used for metropolitan
area networks. These systems have limited capacity per hub location, typically
around 1600 subscribers assuming an eight-sector hub and 256 kbps service
used for Internet access with no quality of service guarantees. Even with a
coverage radius of one or two miles,104 this limited capacity cannot begin to
support significant penetration of the fixed broadband market. Furthermore,
these systems (along with those used as indoor LANs) have the fundamental
drawback that subscribers have no recourse under the Commission’s rules when
they suffer interference. This fact, in conjunction with the increasing volume of
unlicensed communications equipment, including cordless telephones and
wireless LANs, generally makes these bands unsuitable for “carrier-grade”
communications services, including voice and data, for significant numbers of
subscribers.
B.Voice Over DSL Technology
Broadband competition is important in its own right and public policy
should be designed to encourage it, at both the wholesale and the retail level.
Another possible consumer benefit is the potential for CLECs to use the ILEC

102 See, e.g., Amy Harmon, “Good (or Unwitting) Neighbors Make for Good Internet Access,” and
John Markoff, “The Corner Internet Network vs. the Cellular Giants,” both in the New York Times,
March 4, 2002, p C1.103 47 C.F.R. §15 (2001).104 The area covered by a Part 15 system is necessarily small because of the low-power
transmitter required by the rules. In contrast, an MMDS-based system can support a much larger
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broadband DSL platform to compete with in traditional local service markets.
This potential form of intramodal competition may provide an additional incentive
for ILECs to frustrate the unbundling of their broadband facilities.
Most ADSL service implementations are ATM-based. The subscriber
modem is connected to a digital subscriber line access multiplexer (“DSLAM”)
located in the wire center, in the case of an all-copper loop, or in an ADSL-
compatible digital loop carrier (“DLC”) remote terminal (“RT”). The DSLAM in
turn is located at the edge of an ATM network.
Appendix C contains a discussion of the various service classes that ATM
supports and gives examples of the kinds of applications that the service classes
can support. The Appendix also shows that ILECs, in their DLC-based DSL
wholesale offerings, typically allow CLECs access to only the most basic ATM
service class, which is suitable only for casual Web browsing and email access.
The ILECs are, obviously enough, free to offer whatever class of service
they choose for their own services, while withholding these from potential
competitors. While CLECs are restricted from offering anything but the most
basic ATM-based data transmission services, the ILECs can support packetized
voice and video, streaming video, and other advanced services with associated
quality of service guarantees.

coverage area, with a nominal radius of thirty miles or more, given suitable local terrain and
antenna siting.
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IX.Oligopoly in Local Markets105
Even in those cases where the consumer has a competitive alternative, in
the form of cable, for example, the underlying competition is not likely to be
robust. That is, the carriers are likely to have significant market power. The
inadequacy of a facilities duopoly for ensuring consumer choice can be
demonstrated in several ways. As a theoretical matter, duopoly is much more
likely to lead to monopoly behavior. Game theory models show that when
markets are occupied by a relatively small number of competitors, performance
can suffer. In many models a competitive result requires several carriers to be in
the market. The price-cost margin in the standard Cournot model of oligopoly
interaction is inversely related to the number of competitors.106 In other words, a
duopoly in the broadband service market is not likely to perform competitively.
Game theory models typically assume that the competitors recognize their
interdependence, but do not explicitly coordinate their behavior. This means that
the resulting prices, while higher than the competitive level, may fall short of the
monopoly profit maximizing level. By learning how to coordinate their actions,
oligopoly firms may be able to raise prices above the Cournot level.
A number of factors facilitate the necessary coordination. The basic
requirement, of course, is small numbers. In addition, if prices are visible to all
the competitors, then cheating on any tacit agreement will be detected and
therefore less likely to occur. Similarly, if the firms compete with one another in

105 See Kelley Broadband Declaration.106 See, e.g., W. Kip Viscusi, John M. Vernon and Joseph E. Harrington , Jr., Economics of
Regulation and Antitrust, Third ed., MIT Press, Cambridge, MA 2000, p. 108.
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multiple markets, then they will be less likely to compete aggressively in any one
of them due to the risk of retaliation.107 Each of these facilitating factors is
present in the local exchange business. Prices are well known to all competitors.
Even without tariffs, the mass-market nature of the services generally requires
standardized offerings. ILECs, cable companies and wireless providers are
interconnected through multiple market contacts.
Among the harshest critics of oligopoly performance are the ILECs. They
have been complaining about performance in the long distance market for years,
sponsoring studies allegedly showing that this market performs poorly because it
is concentrated.108 Many disagree with their empirical assessment. The long
distance market has dozens of competitors in a nation-wide market. Entry
barriers are relatively low and prices have fallen substantially. However, the
economic theory underlying these ILEC claims is correct. As Professor
Hausman concludes, oligopoly facilitates coordinated interaction among
competitors.109 Given the high barriers to entry and the small number of
competitors in local service markets, unregulated oligopoly, and particularly

107 See, e.g., F. M. Scherer and David Ross, Industrial Market Structure and Economic
Performance, 3rd ed., Houghton Mifflin, Boston 1990, p. 315.108 See Testimony of Jerry A. Hausman, on behalf of Pacific Bell (u 1001) May 19, 2000, Before
the Public Utilities Commission of the State of California, in re request of MCI Worldcom, Inc. and
Sprint Corporation for Approval to Transfer Control of Sprint Corporation's California Operating
Subsidiaries to MCI WorldCom, Inc. Application No. 99-12-012, p. 12. (“Hausman California
Testimony”). See also, Application by New York Telephone Company (d/b/a Bell Atlantic – New
York), Bell Atlantic Communications, Inc., NYNEX Long Distance Company, and Bell Atlantic
Global Networks, Inc., for Authorization to Provide In-Region, InterLATA Services in New York,
Declaration of Paul W. MacAvoy in Support of Bell Atlantic’s Petition to Provide In-Region,
InterLATA Telecommunications Services, CC Docket 99-295, September 1999.109 See Hausman California Testimony, p. 12. Hausman points out that “the industrial
organization literature has explored how, with only two firms, detection of cheating from an
agreement is simplified.” Citing, A. Jacquemin and M.E. Slade, “Cartels, Collusion, and
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duopoly performance by the ILECs and cable companies, can be expected to be
poor.
There is empirical evidence from another telecommunications market that
a duopoly does not provide competitive performance. Incumbent cellular
providers, of which there were originally a maximum of two in each service
market, argued that prices were competitive prior to entry by PCS carriers.
However, pricing information collected by the FCC shows that prices declined
over 50 percent in the five years since PCS entry began in 1995.110 As the
Yankee Group reported, “the rollout of PCS service encouraged the cellular
carriers to speed conversion to digital, reduce prices, and offer more services.”111
It is reasonable to infer that the increase in competition when the market
increased from two to as many as six or seven carriers was dramatic. There
would be less concern about a duopoly of facilities-based providers of local
services if competitors could rely on nondiscriminatory access to unbundled
network elements to provide service to their customers.
X.UNEs Are Necessary
From an economic perspective, the ILEC network should be unbundled
when doing so provides an opportunity to materially improve consumer welfare.
Unbundling can improve consumer welfare by allowing competition for features

Horizontal Merger,” in R. Schmalensee & R. Willig, Handbook of Industrial Organization, Elsevier
Science Pub. Co., New York 1989, Chapter 7.110 Before the FCC, In the Matter of Annual Report and Analysis of Competitive Market
Conditions With Respect to Commercial Mobile Service, FCC Document 00-289, Fifth Report, 15
FCC Rcd. 17660 (2000).111 See Mark Lowenstein and Adam Zawel, “The Impact of PCS Service on U.S. Wireless
Pricing,” Yankee Group, September 2, 1999, p. 66.
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and functions as well as by allowing cost competition for those elements of the
service that the CLEC provides itself (e.g., customer service and billing).
Moreover, unbundling will allow the CLECs to put together packages of local,
long distance and broadband services that differ in materially ways from those
that an integrated ILEC would offer. Of course, if only the ILEC can offer such
packages, the ability of CLECs and IXCs to compete for significant classes of
customer business would be reduced, with likely consequent reductions in
consumer welfare. Finally, as discussed elsewhere, since unbundled elements
are a complement to CLEC facilities-based services, offering unbundled
elements can reduce barriers to entry and stimulate competition.
Refusal by the ILECs to unbundle would be consistent with improving
consumer welfare only in two cases. First, if there are sufficient alternative
competitive local service platforms to provide consumers with an array of
choices, then unbundling would be unnecessary.112 Second, if the ILEC could
demonstrate that unbundling entails costs that exceed the benefits of added
choice, then unbundling would not be required under a consumer welfare test.
Sections V-VIII above demonstrate that competitive options are not sufficiently
robust to make unbundling unnecessary. ILEC efforts to document costs that
exceed the benefits of unbundling have been unpersuasive to regulators. The
argument that unbundling deters efficient investment, and thus would harm
consumer welfare is discussed below in Section XI.

112 As discussed elsewhere, if there were sufficient alternative local platforms it would be likely
that ILECs would voluntarily unbundle in order to compete more effectively with the competitors
who owned their own loop facilities.
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The legal standard for unbundling under the 1996 Act and court rulings
may differ from the economic standard just discussed. Under the Act an element
should be unbundled if CLEC ability to offer a service would be materially
impaired.113 Without delving into the legal details, it appears that the legal and
the economic standards discussed above are consistent.
CLECs desiring to provide competitive services would be much less
effective in doing so without access to UNEs. Consider a new firm formed for the
purpose of offering local services that is not affiliated with any incumbent. Cable
and wireless links to the consumer are generally not available or do not provide
the capacity or the quality necessary to provide consumers with adequate
alternatives to the incumbent’s services. Therefore, the ability of the CLEC to
compete would be impaired if it did not have access to UNEs. With such access,
the new entrant CLEC could offer bundled or unbundled service packages to
consumers, perhaps with the intention of building its own facilities where
economic.
Defining the particular elements that must be unbundled is beyond the
scope of this Report. In general, UNEs that a CLEC needs to provide traditional
narrowband services, broadband service for Internet access, and high-capacity
services for large business customers are required. The case for unbundled
loops is obvious given the major barriers to CLEC entry in all but the densest
zones, and the difficulty of expanding even within these zones. The discussion in

113 47 U.S.C. §§ 251(d)(2)(A) and (d)(2)(B). See also, In the Matter of Implementation of the
Local Competition Provisions of the Telecommunications Act of 1996, CC Docket No. 96-98,
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Section VII shows that even the transport function exhibits substantial economies
of scale. A recent Z-Tel analysis shows that the Commission’s existing
restriction on unbundled switching has reduced competition.114 None of the
markets in which these elements are offered is sufficiently competitive to allow an
efficient wholesale market to operate. The brief history of the post-1996 Act
period conclusively demonstrates that the ILECs will not provide the necessary
UNEs to CLECs without intervention by regulators.
This fact alone demonstrates that claims that these facilities are abundant
and virtually ubiquitously available are false. If the facilities competition and low
barriers to entry and expansion that the Petitioners allege were real, then the
ILECs would be anxious to make unbundled network elements available at
economic cost to CLECs in order to generate demand on their own networks.
Since they do not, and there are not sufficient viable alternatives to guarantee
consumers a competitive result, unbundling is required.
The need to unbundle high capacity lines for use by CLECs is the only
area where there might be any controversy. But even in this case, using the
example of serving a large bank with branch offices throughout the city it was
demonstrated in Section VII that unbundling is required.
As the demand for high-speed data services grows, and high-capacity
demand is growing across the board, including in areas that the CLEC networks
currently do not serve, the availability of high-capacity UNEs can help overcome

Third Report and Order and Fourth Further Notice of Proposed Rulemaking, 15 FCC Rcd. 3696
(1999) (“UNE Remand Order”), para. 15.
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the substantial barriers to expansion. If traffic can be added to network at an
efficient cost through UNEs, it is more likely that the network will be built in the
first place.
XI.Unbundling At Economic Cost Will Not Deter Efficient
Facilities Construction by Either ILECs or CLECs
ILECs and others have argued that unbundling and TELRIC pricing will
deter investment by both ILECs and CLECs. Section A addresses the incentives
that CLECs have to build facilities when UNEs are available. Section B deals
with ILEC incentives to build new facilities when they are subject to the UNE
provisioning and pricing rules. The fact that ILECs do not want to provide
facilities even though they would receive an economic return is explained in
Section C.
A.UNEs Do Not Reduce CLEC Incentives to Construct Facilities
ILECs have suggested that making UNEs available reduces CLEC
incentives to construct their own facilities. If true, this could delay the onset of full
facilities-based competition. The ILEC argument is incorrect. Withdrawal or
overpricing of UNEs will not encourage the CLECs to build facilities that they
would otherwise not build. Simply put, if it is not economic to enter by
constructing facilities, then the CLECs will not enter. Only if UNE prices are set
below economic cost would CLECs have an incentive to postpone otherwise
efficient construction of new facilities.

114 See “An Empirical Exploration of the Unbundled Local Switching Restriction,” Z-Tel Public
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It should also be noted that artificially high UNE prices would not induce
entry, even if the CLECs can produce services at a cost in between the ILECs’
TELRIC costs and the artificially high UNE prices. It would be foolhardy for the
CLECs to do so because they would anticipate that the ILECs would lower prices
in response to entry, and cause them to lose money.
Withdrawing UNEs would actually have the effect of reducing CLEC
investment. ILEC UNEs are in some cases a complement to CLEC facilities, in
effect allowing CLECs to obtain the benefits of ILEC economies where the
CLECs cannot efficiently construct their own facilities. In some cases, only by
combining unbundled ILEC facilities with their own, can the CLEC achieve the
economies needed for successful entry. Denying CLECs the opportunity to use
this complementary input only reduces the incentive and ability of CLECs to
invest in their own facilities.
It must be remembered that facilities construction by competitors is not
desired for its own sake. The investment enhances consumer welfare only if the
competitor is ultimately as or more efficient than the incumbent. If the presence
of substantial economies of scale dictate that there be only one supplier, then
entry by a second facilities-based firm will generally not add to consumer
welfare.115
Firms might enter in the face of substantial incumbent economies of scale
in some circumstances. For example, if the firm believes that it has other

Policy paper No. 3, November 2001.
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advantages that can compensate for its higher costs, or if it expects to achieve its
own economies over time, it will enter anyway. But pricing UNEs above costs or
withdrawing them from the market (the equivalent of an infinite price) will not
change this calculation.
B.UNEs Do Not Reduce ILEC Incentives to Construct Facilities116
The ILECs argue that being forced to make UNEs available at economic
cost reduces their incentives to invest in new facilities. Three related arguments
are advanced. First, the ILECs argue that TELRIC prices are inherently
inappropriate. That is, they are incapable of sending the right signals to the
market, either because it is too difficult to estimate them properly or because the
concept itself is flawed. Second, they argue that investment in facilities will be
stranded once CLECs build their own facilities, leaving ILECs with unrecovered
investments. Third, they argue that forcing the ILEC to sell the facilities
incorporating new technology at TELRIC prices denies them the opportunity to
be compensated for the risk they have taken. Each of these arguments are
discussed below, beginning with the allegation that TELRIC is inherently flawed.

115 Entry by firms reselling the monopolist’s services or using its network elements facilities could
provide consumer welfare benefits by giving consumers additional choices and the benefit of
retail competition.116 These issues are discussed by William J. Baumol, “Response to the NTIA Request for
Information on Broadband.” (Baumol Paper”) See, U.S. Department of Commerce, National
Telecommunications and Information Administration (“NTIA”), Notice, Request for Comments on
Deployment of Broadband Networks and Advanced Telecommunications, Docket No.
011109273-1273-01, November 14, 2001 (“NTIA Broadband Deployment Request”).
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1.TELRIC Is an Appropriate Costing Concept
TELRIC is designed to compensate the ILEC for the economic cost of
building and operating new facilities– as the Commission found in the Local
Competition Order.117
The pricing principles underlying TELRIC are unassailable. In competitive
markets, prices are based on economic cost, and implicitly on the investment and
expenses that an efficient new entrant using modern technology would incur.118
Higher prices would induce entry and lower prices would induce exit. Some
telephone companies in the U.S. have criticized TELRIC because it does not rely
on the existing telephone company infrastructure to compute costs. However, in
a competitive market the existing infrastructure of any particular competitor is
irrelevant to the pricing calculus. As discussed above, prices in a competitive
market are based on the most efficient technology and practices. In other words,
whatever technology was deployed or when or at what cost it was deployed do
not affect prices in competitive markets. By advocating the measurement of
costs using their existing network configurations, the ILECs are attempting to find
ways to recover their embedded costs. If the FCC were to accept this, it would
be putting the interest of a particular competitor ahead of the interests of
competition.119

117 Local Competition Order, para. 685.118 Companies in the competitive U.S. long distance market have written off billions of dollars in
investments as technology has progressed from analog microwave to digital microwave to and
through several generations of fiber optic transmission technology.119 If the ILECs insist on setting prices based on their actual network, then they should compute a
Long Run Incremental Cost (“LRIC”). This LRIC cost must be lower than TELRIC or else the
ILECs would have already scrapped their entire network.
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The ILECs can hardly oppose the application of economic pricing
principles to regulatory pricing decisions. ILECs have historically advocated
incremental cost pricing for services subject to competition and specifically
rejected pricing based on embedded costs.120
Finally, if anything, as actually implemented, the TELRIC prices are
conservatively high. TELRIC, as implemented by the FCC takes existing
telephone company wire center locations as given. Thus, the modeled network
is not as efficient as it could be. The TELRIC Models used by the states to
estimate UNE prices are conservative in other ways as well. The states have
generally, and in many cases inappropriately, adopted input cost assumptions
that are too high or have otherwise approved UNE rates well above true TELRIC
levels.
2.Stranded Plant Is Not A Real World Problem for the ILECs
Network unbundling is unlikely to produce stranded plant. To be stranded,
an investment in an asset must be sunk. Switching capacity and electronics
obviously can be reused or resold even if demand for other elements of the
network declines. As a matter of first impression, loops appear to fit into the
category of sunk costs. However, in reality, most loop plant is shared by
numerous customers. Most feeder and distribution investment is common to all
the loops provided. The wire pair serving a particular customer can be
reallocated to another customer if the first customer’s business is lost to a
competitor. Only the drop and NID are unique to a particular customer.

120 See Baumol Paper, p. 10. (Citing Federal and State decisions discussing BOC positions.)
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However, even if that particular customer is lost to a competitor, the investment
does not become worthless. It is an asset that can later be used to compete for
the business of that customer or a new customer at that location at a later time.
It is also important to note that overall ILEC local network demand is
unlikely to decline. The market is growing and experience with competition
around the world demonstrates that incumbents typically do not lose actual
business. Competitors generally take a larger share of incremental business.
This is similar to experience in the long distance business. From the introduction
of switched competition in 1978 to 1999, AT&T lost market share but continued
to grow in absolute size.121 With growing demand, switching, transport and most
loop plant will not be stranded by losses of incremental business to competitors.
If ILECs are concerned about stranded plant, they should encourage
entrants to use UNEs. If cross-platform competition is the threat they allege,
then one way to compete is to unbundle and allow CLEC competitors to market
network elements for them. A related point is that increasing prices to reflect an
alleged options risk may be counter-productive for an incumbent because the
resulting higher interconnection charges may simply accelerate the investment
by competitors in networks of their own.
The ILECs also forget the fact that technological change can increase the
value of existing assets. Digital switching made ILEC investments more valuable
because it enabled the offering of high margin vertical and ancillary services such

121 See Trends in Telephone Service, Table 10.7, p. 10-13.
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as voice mail and custom calling features. Similarly, the demand for broadband
connections has increased the value of embedded networks in recent years.
Finally, TELRIC rates include a return to capital that includes a risk factor
and allow for the depreciation of investments. Thus the TELRIC tool is
sufficiently flexible to account for the risks that the ILECs say they have. The
weighted average cost of capital estimated by traditional means already reflects
the introduction of competition and the advance of technology. These factors
have been in the market for many years.122 The ILECs have simply failed to
marshal the evidence to convince regulators that rate should be higher. Instead,
they have chosen to fight the concept.
3.Unbundling Is Consistent With Innovation Incentives
The argument that unbundling at TELRIC prices will deter ILEC innovation
was made most recently by Alfred Kahn and Timothy Tardiff, in the context of
broadband services. They maintain that “the more innovative the investments
contemplated, the greater the uncertainties, both technological and commercial,
the greater the risks, the more important is the prospect of the investor’s
exclusive enjoyment of the fruits of the ventures that turn out successfully.”123 As
a matter of pure economic theory they are, of course, correct. Where the
argument breaks down is in the application of the theory to the facts.

122 It should also be noted that the cost of capital in the models being used to produce TELRIC
rates for UNEs has typically remained in the 10 to 12 percent range even though interest rates,
which are a significant component of the cost of capital have fallen substantially in recent years.123 Declaration of Alfred E. Kahn and Timothy J. Tardiff, December 18, 2001, submitted to NTIA,
para. 14.
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The ILECs did not pioneer the type of broadband service that Dr. Kahn
and Mr. Tardiff are discussing. The Internet, the development of which is driving
the demand for broadband services, has evolved independently of the ILECs.
The market position enjoyed by the cable companies demonstrates that they
were in fact the leaders in taking the risks in deploying broadband services.
Moreover, in terms of DSL, it was the CLECs who made the initial investments
and took large investment risks in doing so. The ILECs have been followers.
Now that the demand has been proven, largely due to the investments of others,
they wish to prevent the original risk takers from using their networks.
It is also important to note that much of the technology risk inherent in
deploying new ILEC telecommunications services has already been borne by the
equipment manufacturers. ILECs are responsible for few innovations. They
have depended on a competitive equipment market to come up with new process
or service innovations.
The amount of the risk that ILECs must take in incurring capital
expenditures to implement DSL is also questionable. On ordinary copper loops,
the additional investment is both moderate and scalable. Where DLC systems
are being used by the ILEC, operational cost savings can justify much of the cost
of necessary network upgrades. In other words, ILECs have the incentives to
make much of the investment whether or not they provide broadband services.
The investments that are specific to broadband are again modest and scalable.
It should also be noted that many of the revenues from new services are
from services that are not regulated. Rapid deployment of broadband will allow
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ILECs to compete for the substantial unregulated revenue streams generated by
ISPs and other firms serving broadband users. The ISP function includes
arranging for consumer access to the Internet through local links. The ISP bills
consumers for the connection and provides customer support functions. The ISP
may also provide content and services such as customized web pages, web
hosting, e-mail server provision, e-mail roaming, IP addresses (static or
dynamic), access to domain name search and registration, browser and search
engines, antispam software tools, Instant Messaging, streaming audio and video
feeds, public radio station broadcasts, community bulletin boards and other local
content, and technical seminars and workshops. The ILECs are free to make
market returns on these services, but only if they make the investments
necessary to allow consumers to have reasonably priced broadband service.
Finally, the ILECs’ stated reluctance to roll out DSL services more rapidly,
including DLC rollout, is hard to reconcile with their claims that the broadband
market is competitive. By slowing the rollout of DSL plant, the ILECs are leaving
the market open for cable.
In general, the unbundling requirements in the 1996 Act did not deter ILEC
investment. Indeed, as the chart below shows, ILECs actually increased their
investment activity after the Act passed. It is possible that much of this
investment was due to the desire to provide broadband services in competition
with cable companies and the data local exchange carriers (“DLECs”).
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Figure XI.1
Total BOC Plant Additions
-
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
9,000,000
10,000,000
1991 1992 1993 1 9 9 4 1 9 9 5 1 9 9 6 1997 1998 1999 2 0 0 0
SBC (excl SNET)
Verizon (excl GTE)
BellSouth
Q w e s t
C.Why Are ILECs Withholding UNEs from the Market?
If UNE rates provide the ILECs with a compensatory return, then why do
the ILECs resist providing the services? The answer appears to be that the
ILECs are withholding facilities not because UNEs are below the ILECs
economic cost. They are withholding facilities because the UNE price is below
the ILEC opportunity cost.
ILECs continue to earn substantial profits on their legacy lines of business.
New technology, including DSL provided over their facilities by CLECs may be
perceived as a threat to existing revenue streams. One example is T1 rates.
T1s are provided over ordinary copper loops (and DLC) using DSL technology.
The ILECs charge high rates for these services. For example, in Illinois, a five
mile DS-1 circuit will cost $316 per month.124 Making the constituent parts

124 Based on Zone 2 and a five year term commitment.
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available for resale through unbundling will put these high returns at risk. The
ability of ISPs or CLECs to use unbundled broadband elements and resold DSL
services to compete for high margin local service customers using voice over
DSL, as discussed in Section VIII, will also result in arbitrage.
This is, of course, exactly what unbundling and resale policies are
supposed to do. Unbundling and resale applied to AT&T’s long distance service
in the early days of long distance competition led to significant changes in
AT&T’s rate structure, and significant benefits to consumers.
So the answer is that ILECs resist UNEs not because they cannot earn a
competitive return on them, but because they risk losing a monopoly return on
their existing services.
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Appendix A – Traffic Demand Estimates
According to the Cellular Telecommunications and Internet Association (“CTIA”),
the average duration of a completed wireless call as of June, 2001, is 2.62
minutes1 and average monthly usage is about 422 minutes/month.2 Using a
conservative assumption of twenty-two days per month and a 70% call
completion fraction (i.e., 70% of all call attempts result in a completed call) and a
further assumption that 10% of daily traffic falls in the busy hour, an average
wireless offered traffic load per subscriber is computed as SHOWN IN Table
A.1:3
Table A.1
Wireless Offered Load per Subscriber
Average completed calls/month = 422 minutes/month ¸ 2.62 minutes/completed call
= 161 completed calls/month
Average completed calls/day = 161 completed calls/month ¸ 30.4 days/month
= 5.3 completed calls/day
Average completed calls/busy hour = 5.3 completed calls/day ´ 0.1
= 0.53 completed calls/busy hour
Average call attempts/busy hour = 0.732 completed calls/busy hour
¸ 0.7 completed calls/call attempt
= 0.76 call attempts/busy hour
Average offered traffic/sub = 0.76 call attempts/BH ´ 2.62 min/call ´ 60 s/min
¸ 100 s/CCS
= 1.19 CCS, or about 1.2 CCS.

1 Cellular Telecommunications and Internet Association (CTIA), “CTIA’s Semi-Annual Wireless
Industry Survey Results – June 1985 to June 2001,” (“CTIA Survey”), available at
http://www.wow-com.com/industry/stats/surveys/. Although more recent estimates of penetration
are available, CTIA’s June, 2001, numbers are used for consistency.2 See, e.g., Jeffrey Selingo, “Complaints skyrocket along with cellphone use,” The New York
Times, reprinted in The Denver Post, February 18, 2002.
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In comparison, typical wireline telephone per-subscriber offered loads range from
around 3 CCS to 10 CCS or more, depending on whether the service is business
or residential, and what features the subscriber has selected. For example, the
Call Waiting feature (which inserts a tone into the called party’s end of an active
telephone call to let the subscriber know another call is waiting) can increase the
per-subscriber traffic by a factor of two to four or so. Business lines typically
exhibit higher offered loads than do residential lines.4 This is assuming an
average (business and residential) offered load per wireline subscriber of about
3.6 CCS, which is three times the conservatively-estimated 1.2 CCS per wireless
user.

3 See, e.g., Telcordia Technologies, LSSGR: Traffic Capacity and Environment, GR-517-CORE,
Issue 1, December, 1998, for discussions of telephone subscriber traffic characteristics.4 Ibid., p 6-8.
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Appendix B – Wireless Network Capacity
As of June, 2001, there were about 118 million cellular and personal
communications service (“PCS”)1 subscribers in the U.S. served by about
114,000 cell sites.2 The average number of subscribers per cell is thus just over
1,000. Obviously, there is a wide variance in the actual number of subscribers
per cell. Many rural cells will serve very few subscribers, and urban cells will
serve considerably more than the nationwide average. In rural Western areas,
for example, there are cells that only cover major highways to serve roamers,
and there may be no, or very few, “permanent” subscribers residing in the cell
coverage area. For the purposes of this capacity analysis, however, 1,000
subscribers per cell is assumed. This is a very optimistic approach, as it leads to
significant underestimates of the cell capacity required in urban areas just to
serve existing wireless subscribers. The analysis will show that, even in this
optimistic case, wireless systems cannot come close to serving both wireless and
wireline demand in areas with urban and even suburban subscriber densities.
The following discussion of wireless network capacity is based on code
division multiple access (“CDMA”) radio technology as it is used in existing U.S.
cellular and PCS systems. CDMA is used in our examples as it generally has
somewhat greater capacity for a given amount of spectrum than competing

1 In this section, the term “wireless” is used to refer to both cellular and personal communications
mobile and portable service offered by service providers classified as Commercial Mobile Radio
Service (“CMRS”) system operators.2 CTIA survey.
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technologies. It is, however, considerably more complex to analyze than are
more conventional technologies.
All cellular and PCS technologies are designed to reuse frequencies in a
serving area to attempt to maximize the use of the available spectrum.
“Conventional” (time division multiple access (“TDMA”) and analog cellular)
systems require significant physical separation between cochannel cells (cells
using the same radio channels). CDMA systems can reuse frequencies in
adjacent cells and even within a cell when cells are divided into angular sectors
(see Figure B-1). This ability to reuse frequencies in adjacent cell coverage
areas is the principal reason for CDMA’s capacity advantage over other
technologies.
The capacity of a CDMA system, considered at the cell level, is difficult to
estimate and depends on many parameters, including the amount of spectrum
(number of radios) employed, the coding rate used for the digital voice coder, the
number of sectors into which the cell is divided, cell transmitter power, and a
number of others. In CDMA, subscribers occupy the same spectrum
simultaneously, as opposed to, say, TDMA, in which each subscriber is assigned
a time slot on a specified frequency channel for the duration of the call. Active
CDMA subscribers thus generate mutual interference, and it is this interference
which ultimately limits the performance and capacity of the system.3 As shown in

3 Note that there is generally no precise limit to the capacity of a CDMA system. Each active
user generates interference for all other active users. As usage increases in a cell (and in
surrounding cells), the interference level increases for all users, and signal quality can deteriorate
to unacceptable levels, causing users to terminate their calls. This is analogous to a number of
people trying to converse in a crowded room, in which all talkers share common (acoustic)
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Figure B.2, interference is generated by users within a cell as well as by users in
other cells. As user activity varies among cells, the effective capacity of a given
cell will change. The capacity of a given cell will increase as activity in adjacent
cells decreases and produces less interference; conversely, increased activity in
adjacent cells will lower the useful capacity of the given cell. Also, the effective
coverage area of the cell increases as average interference from adjacent cell
decreases, leading to a well-known characteristic of CDMA systems often
referred to as cell “breathing.”
Using typical assumptions for the various system parameters as outlined
in the previous paragraph, we estimate that a CDMA system will support about
seventeen active users per radio. Under standard Erlang B assumptions, this
corresponds to a per-radio traffic capacity of 384 CCS,4 which can support about
320 users under our assumption of 1.2 CCS per mobile/portable subscriber. For
our average cell demand of 1,000 users, four radios are required in an
omnidirectional cell, leaving an excess capacity of 336 CCS for fixed users, or
about 93 fixed users at 3.6 CCS/user.
If more than about four radios are required in a cell, carriers subdivide the
cell into sectors, each of which is equipped with radios and antennas separate
from those in other sectors. The most common approach is to equip three

spectrum simultaneously, and the interference from other conversations causes people to leave
the room to carry on their conversations elsewhere.4 This assumes two percent blocking at the radio channel level, a typical design value for
wireless systems. This is, of course, twice the overall blocking level one normally associates with
wireline telephone service.
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sectors. 5 In estimating the capacity of a CDMA sectored cell in which radio
channels are reused in each sector, one generally applies a sectorization
efficiency factor of 0.85, so that the capacity of the entire three-sector cell is 3 x
0.85) or 2.55 times the capacity of a single sector.
Technical and economic considerations limit the number of radios in a
sector to about four. For a three-sector cell, the maximum capacity is thus 384
CCS/radio x 4 radios/sector x 2.55, or 3916 CCS. This capacity can serve 1,000
mobile/portable users and about 750 fixed subscribers.6 If the cell has a nominal
coverage radius of 1 km (0.62 miles), the wireline subscriber density capacity is
only 620 subscribers/square mile, which is far below even what could normally
be considered a suburban subscriber density. It is important to keep in mind that
these values are based on severely optimistic assumptions regarding wireline
subscriber traffic, existing wireless subscribers per cell in urban and suburban
areas, and other factors.
Even with these optimistic assumptions, existing wireless systems cannot
even approach the levels of capacity required to serve significant fractions of
wireline users. If it is supposed that each of six wireless service providers in a

5 Although equipment vendors normally offer six-sector cell designs, they are rarely used as they
are expensive and quite difficult to install and support.6 As noted elsewhere, the capacity estimates used in this report are based on a 9600 bps voice
coding rate (known as Rate Set I), which provides voice quality that is apparently acceptable for
mobile and portable use but is substandard in comparison with the overall voice quality of wireline
voice service which uses a different class of voice coding techniques which usually operate at 64
kbps. The U.S. CDMA standards allow for a 14.4 kbps voice coder (Rate Set II) which offers
voice quality that is somewhat better than that provided by the Rate Set I coder but which is still
inferior to current wireline quality. If the radios added to each cell site to serve fixed users used
the 14.4 kbps voice coders to attempt to meet subscriber expectations of voice quality, the
number of active users per sector per radio becomes eleven instead of the seventeen used in the
initial analysis. Note that this analysis is particularly conservative because, to the best of our
knowledge, Rate Set I is not generally used in commercial service.
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HAI Consulting, Inc.5
market assign as much capacity as possible in each cell to serve mobile/portable
users and fixed users for only switched voice service, and that each uses cells
with a nominal coverage radius of one kilometer (which assumes an absurdly
dense arrangement of cell sites, given that six service providers are involved),
the total supported fixed subscriber density is 6 x 620, or 3720 per square mile.
This is a typical suburban subdivision density and does not come close to urban
densities. It is especially important to note that this density could be served only
if all carriers were to equip the practical maximum number of radios in a cell to
serve relatively high-usage and equally relatively low-revenue fixed subscribers.
The preceding analysis assumed a nominal cell coverage radius of 1 km.
The served subscriber density will obviously increase if the cell radius is smaller,
and, in the absurd limit, one could claim (and some have)7 that arbitrarily large
subscriber densities could be served by continuing to reduce the average cell
coverage radius. This ignores a number of economic and technical realities,
including the difficulties in obtaining suitable real estate for cells in densely-
populated areas, obtaining zoning and environmental approval for antenna
masts, leasing or constructing backhaul facilities to connect cell sites with the
wireless switching center controlling the wireless network, as well as solving the
myriad technical problems arising from the need to pack a large number of radio
carriers in a single cell, many of which become intractable at short cell spacings.

7 The Enduring Myth of the Local Bottleneck, 1994, p 34 (unattributed). The author of this
document states that “. . . cellular architecture is inherently expandable, like an accordion. The
capacity of all cellular systems, including PCS, can be increased almost indefinitely by deploying
additional cells and thereby reusing already-allocated spectrum.” This statement reflects an
acute lack of understanding of cellular radio technology and its practical limitations.
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HAI Consulting, Inc.6
Initial forms of third generation (“3G”) radio technology now being
introduced by some carriers will not likely improve capacity to allow significant
degrees of wireline service replacement. These new technologies are in fact not
intended to do any such thing. The 1xRTT CDMA technology that is now in early
phases of commercial deployment includes improved voice processing
techniques that can increase voice capacity in a single 1.25 MHz carrier by up to
a factor of two. 1xRTT also provides high-speed (144 kbps) packet data in the
same carrier space. It is easy to misinterpret the advertised benefits of this
technology: It does not simultaneously double voice capacity and add high-bit-
rate packet data. The improved voice capacity is intended to serve existing voice
demand with less of the carrier capacity than was previously required, thus
making “room” for the new packet data capability. It should also be noted that
the high-speed data signal is shared among many users using multiple-access
techniques and thus must not be viewed as an average bit rate available to each
subscriber. The actual average rate supported per user will be much less than
the peak rate of 144 kbps, and probably in the range of a few tens of kilobits per
second.
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HAI Consulting, Inc.1
Appendix C – ATM service classes and functions
The Asynchronous Transfer Mode (“ATM”) standards define a range of
service categories. The lowest level of service, and that usually supported in
common asymmetric digital subscriber line (“ADSL”) implementations, is known
as Unspecified Bit Rate (“UBR”). This is sometimes known as a “best-effort”
service and carries with it no service quality guarantees. UBR cells carry the
lowest priority in an ATM network. Thus, for example, the effective data
transmission rate and the delays packets encounter as they travel through the
network can and will vary, and the underlying service provider, makes no
guarantee regarding the variation of either rate or delay. UBR is useful for
applications such as casual Internet access in which variable cell delays are not
critical and which do not require quality of service guarantees. It is unsuitable for
packet voice, video, circuit emulation (such as DS-1 service) or other more
sophisticated applications.
Other ATM service categories include, for example, real-time Variable Bit
Rate (“rt-VBR”), which is designed to support such services as packet-switched
voice communications. Voice service is particularly sensitive to end-to-end
delays in transmission as well as to variations in the end-to-end delay.
Excessive delay can lead to “echoes” over a circuit which can be disorienting if
the delay is sufficiently long, and unacceptable variations in delay can lead to
difficulties in reconstructing the analog signal at the destination. The rt-VBR
service category is designed to support such delay-sensitive applications and
carries with it service guarantees that ensure a suitable quality of service for
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them. ATM, in combination with ADSL and other forms of DSL, can thus readily
support packet voice and other advanced services in addition to the relatively
simple Internet access. If, for example, an incumbent local exchange carrier
(“ILEC”) were to make rt-VBR available to competitive local exchange carriers
(“CLECs”) under suitable rate elements (which would necessarily specify the
ATM quality of service parameters required for these higher-level service
classes), competitors could offer high-quality packetized voice service over DSL
connections. A competitor could also offer advanced video services using ATM
service categories with guaranteed quality of service levels.
ATM is a connection-oriented fast packet switching technology and
requires a logical association, or virtual channel, between the endpoints of the
connection. The term “virtual” is key in this context. Once the virtual channel is
established, the network then knows to send all packets generated at one end
point to the other end point in the virtual connection. The virtual circuit is just the
association of the endpoints of the connection and does not imply anything about
network capacity. All packet switching systems make capacity available only on
demand. Thus, there is no capacity dedicated to the virtual connection as there
is in the physical connection in the circuit-switched case. The most common
implementation of ATM virtual channels is the permanent virtual channel (“PVC”).
A PVC must be administered; that is, it is set up and removed by a network
administrator using a suitable operations support service (“OSS”) terminal. A
PVC is generally established over a long period, typically months or even years,
hence the adjective “permanent.” The PVC is the basis for the “always on”
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feature often mentioned in conjunction with ADSL service. Because the virtual
circuit is permanently assigned, the user does not have to invoke a call setup
procedure each time the user wants to communicate with, for example, his or her
Internet service provider. Because bandwidth is not dedicated to the PVC, the
permanent nature of the virtual connection does not reduce overall network
capacity when the user is idle.
ATM also allows for virtual path connections. A virtual path contains a
number of virtual channels; a Permanent Virtual Path (“PVP”), for example, can
contain several PVCs. PVPs are useful for managing resources. If an ILEC has
made PVP connections available to a CLEC, a CLEC can lease PVPs, with
associated service categories, and then administer its own PVCs within the PVPs
to facilitate serving its subscribers without relying on the underlying carrier for
PVC provisioning for individual users.
ILECs, however, have chosen to restrict the ATM service class available
on DLC-based ADSL to the lowest, UBR, which by definition has no quality of
service guarantees and which is not suitable for end-user services beyond such
basic ones as email access and Web browsing. They similarly do not offer
PVPs on DLC-based ADSL, thus requiring CLECs to rely entirely on ILEC
provisioning and service order processes. SBC Communications, Inc. (SBC”),
for example, launched Project Pronto in 2000 in an attempt to upgrade DLC
systems in SBC’s BOC subsidiaries to support ADSL. In the announcement
process, SBC made much of their plans for allowing CLEC access to their DLC-
based ADSL services.
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But what was to be made available to the CLECs under Project Pronto
was quite modest: UBR service and single PVCs, with an explicit exclusion of
PVPs.1 Qwest has a similarly restrictive DLC-based ADSL service that also
offers only UBR to CLECs, with no PVP capability associated with the ADSL
service.2

1 For a representative SBC Project Pronto service description for CLECs, see “New Product
Announcement Wholesale Broadband Service – California,” CLECC00-138, Pacific Bell, May 24,
2000, with specific restrictions concerning ATM class of service and PVPs at p 10, section 9.6.2 “Qwest DSL Services,” Qwest Communications International, Inc., Technical Publication
77392, Issue I, September, 2001.
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HAI Consulting, Inc.1
HAI Consulting, Inc.
Statement of Qualifications
General Qualifications
HAI Consulting, Inc. (formerly Hatfield Associates, Inc.) is an interdisciplinary
consulting and research firm serving a wide range of clients with stakes in the
telecommunications field. Hatfield Associates was founded in February, 1982. With the
departure of Dale Hatfield to the FCC in 1997, the remaining associates formed HAI
Consulting, Inc. HAI and Hatfield Associates have provided consulting and educational
services in nearly all aspects of the present and future telecommunications infrastructure,
including local exchange networks, cable television systems, competitive access
networks, land mobile and personal communications, long haul terrestrial and satellite
communications, data communications, and customer premises equipment.
Principals of the firm include consultants with graduate degrees and decades of senior
level experience in engineering, economics, business, and policy/regulation. HAI's
services include, among others, regulatory filings and policy studies, engineering studies,
expert testimony, market research, economic studies and cost modeling, "due diligence"
support, business planning, education and system development. The firm has substantive
experience in international telecommunication matters. Consulting and educational
services are performed for private and public sector clients in Australia, Canada, Mexico,
Chile, New Zealand and several countries in Central and Eastern Europe.
Examples of recent consulting assignments include:
· Development of a widely used cost model to estimate the investments and expenses
associated with the provision of local exchange and exchange access and
interconnection services;
· Analyzing the potential for competitive entry into the local exchange
telecommunications business, presented in papers entitled "The Enduring Local
Bottleneck: Monopoly Power and the Local Exchange Carriers" and "The Enduring
Local Bottleneck II";
· Testifying in state proceedings on various aspects of competitive entry into local
exchange and exchange access services, and on state mechanisms to fund universal
service;
· Developing an economic and engineering analysis of the potential of broadband
deployment and the role it will play in the national economy, presented in a paper
entitled “Economics and Technology of Broadband Deployment.”
· Assessing the technological and economic merits of various telephone companies'
plans for offering video dialtone services;
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HAI Consulting, Inc.2
· Modeling the cost of telephone service in Mexico;
· Testifying and filing written testimony in proceedings before the Canadian Radio-
telephone and Telecommunications Commission on local telephone competition,
interconnection, collocation and number portability;
· Representing clients in U.S. state commission-sponsored negotiations to resolve local
interconnection and number portability issues;
· Developing a vision statement dealing with the future of cable television networks in
providing telecommunications and enhanced video services;
· Authoring the "Telecommunications Technology" and "Utility Applications of
Telecommunications" chapters, describing utility opportunities in
telecommunications, of a major telecommunications report for the Electric Power
Research Institute;
· Analyzing telecommunications opportunities, costs, and modes of entry for several
major electric utilities, leading in one case to a decision by the utility to deploy a
backbone fiber optics network and partner with other entities in the provision of
Personal Communications Services;
· Developing material on telecommunications technology for inclusion in a report on
international telecommunications prepared by the Office of Technology Assessment
of the U.S. Congress;
· Analyzing trends in telecommunications architectures and technologies for a major
computer company;
· Providing tactical advice and computer network support for a client bidding in the
FCC auction of 900 MHz Specialized Mobile Radio licenses;
· Assisting a client in the preparation of comments in an FCC proceeding dealing with
the future of the private land mobile radio services;
· Assessing opportunities for the branches of the U.S. Military to consolidate their use
of wireless communications;
· Providing analyses for an investment firm contemplating a major investment in a
paging company; and
· Providing telecommunications education to countries in Central and Eastern Europe.
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HAI Consulting, Inc.3
Richard A. Chandler
Senior Vice President
Richard A. Chandler is a senior vice president with HAI Consulting, Inc.,
where he performs a range of consulting services for clients, including evaluation
of various communication technologies to address specific user requirements,
review of large corporate network structures and operations, as well as the
evaluation of the suitability of new products for particular markets. Among other
assignments as a consultant, he has developed the technical plan for a proposed
wireless-based telecommunications system to provide basic internal telephone
service as well as international connectivity to the populace of a developing
nation. He has worked with a Korean international carrier in the development of
the technical and operating plan for a proposed Korean PCS network. Other
contracts have involved the development of regional and nationwide
architectures for mobile data networks and evaluation of voice compression and
automated conferencing systems to support both internal and external
investment decisions. He has worked extensively in the wireless communication
area, studying Personal Communications Network architectural issues, including
radio segment structures, backhaul networks, and interconnection issues for
several clients. Most recently, Mr. Chandler has developed sophisticated
telecommunications network models for use in determining the costs of
telephone service, including local and toll; he has been the principal developer of
the Hatfield and HAI Models commissioned by MCI WorldCom and AT&T Corp.
for use at the state and national levels in supporting interconnection and
universal service filings. He has also written numerous affidavits and
declarations dealing with various telecommunications technologies in several
regulatory and court proceedings.
Before joining Hatfield Associates (now HAI Consulting, Inc.) in 1986, Mr.
Chandler joined Skylink Corporation as Vice President Network Engineering.
While at Skylink, Mr. Chandler developed the ground system control and
switching architecture and user terminal requirements for the proposed Skylink
network. He developed a distributed control structure which allowed for the
decentralization of system intelligence, enabling the simultaneous operation of
multiple independent subnetworks. He also developed a packet switching
mechanism for the network which enables hundreds of interactive users to share
a single radio channel for data transmission. He worked jointly with mobile radio
and satellite earth station manufacturers to develop preliminary ground terminal
and user terminal functional requirements and technical specifications.
Mr. Chandler joined the AT&T marketing organization in 1981, where he
initially was a product manager for data switching and adjunct processor
enhancements for existing PBX products. In this capacity, he was responsible
for coordinating design, development, and manufacturing efforts, developing
business case inputs for product pricing, and coordinating training and
advertising for the new products. In another assignment within this organization,
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HAI Consulting, Inc.4
he developed product strategies for advanced data switching technologies,
including adjunct packet switches for customer data. He also headed a group
furnishing technical support regarding product architecture and features to the
AT&T field sales force and providing customer requirements to the development
and product management organizations.
In 1977, Mr. Chandler joined Bell Telephone Laboratories, where he
participated in exploratory studies of new PBX systems for AT&T. These
investigations included the review of various switching system architectures and
control structures for next-generation private branch exchanges. He designed
and developed segments of a laboratory model of a new PBX and coordinated
designs and interfaces for the production version of the new machine. He also
studied design approaches and circuit modifications to enhance the reliability of
new switching systems. In another significant assignment, he worked on packet
switching techniques to be applied to a multi-processor control structure, and he
participated in the development of specific packet switch designs to be applied as
an adjunct to the circuit-switched network fabric for the purpose of switching user
terminal-to-host and host-to-host data traffic.
From 1972 to 1977, Mr. Chandler was an electronic engineer with the
Institute for Telecommunication Sciences, a telecommunications research
organization within the U.S. Department of Commerce. While at ITS, he
performed microwave propagation studies for atmospheric paths in the 60 GHz
region, and he developed experiments for studies of space-to-earth paths at 20
GHz and 30 GHz. He also designed experiments and associated
instrumentation for availability studies of short atmospheric optical paths in the
near infrared. In addition, he participated in and coauthored an extensive review
of existing and future cable television technology. He managed a project for the
U. S. Department of Transportation for the evaluation of the applicability of
tracking radar techniques to vehicular braking systems, and he managed a
consulting contract with the National Oceanic and Atmospheric Administration for
the technical evaluation of various commercial microwave positioning systems
used in hydrographic surveying.
Mr. Chandler received B.S. and M.S. degrees in electrical engineering
from the University of Missouri and an M.B.A. from the University of Denver. He
pursued additional graduate work in electrical engineering at the University of
Colorado. He serves as an adjunct faculty member at the University of Colorado
and the University of Denver and teaches graduate-level courses in
telecommunications technology, including wireless and cellular communications
and digital switching and transmission.
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HAI Consulting, Inc.5
A. Daniel Kelley
Senior Vice President
Dr. Kelley specializes in economics and public policy analysis for long
distance, competitive local exchange, mobile communications, and cable
television clients. Since joining HAI in 1990, he has been involved in antitrust
and regulatory investigations that address cost allocation, cross subsidy, and
dominant firm pricing. He has authored or co-authored papers submitted in the
Federal Communications Commission's Video Dialtone, Advanced Intelligent
Network, and Cable Rate Regulation proceedings. In addition, he has advised
clients on the Computer III, Open Network Architecture, Access Transport
Competition, Price Cap, and Local Interconnection proceedings. Dr. Kelley has
provided expert testimony on competition, cross subsidy, interconnection and
universal service issues before the Federal Communications Commission and
the California, Colorado, Connecticut, Florida, Georgia, Hawaii, Maryland,
Massachusetts, Michigan, Oregon, New Jersey, and New York Public Utility
Commissions.
His international experience includes advising the governments of Chile
and Hungary on competition and privatization and advising private U.S.
corporations on competition and interconnection issues in Mexico and New
Zealand. Dr. Kelley has participated in State Department sponsored seminars
and University level instructional courses in the Czech Republic, Hungary,
Poland, the Slovak Republic and Slovenia.
Prior to joining HAI in 1990, Dr. Kelley was Director of Regulatory Policy at
MCI Communications Corporation. At MCI he was responsible for developing
and implementing public policy positions on the entire spectrum of regulatory and
legislative issues facing the company. Matters in which he was involved included
the MFJ Triennial Review, Congressional Hearings on lifting the Bell Operating
Company Line of Business restrictions, Tariff 12, Dominant Carrier Regulation,
Local Exchange Carrier Price Caps, and Open Network Architecture. He also
managed an interdisciplinary group of economists, engineers and lawyers
engaged in analyzing AT&T and local telephone company tariffs.
Dr. Kelley was Senior Economist and Project Manager with ICF, Inc., a
Washington, D.C. public policy consulting firm, from 1982-1984. His
telecommunications and antitrust projects included analysis of the competitive
effects of AT&T's long distance rate structures, forecasting long distance
telephone rates, analysis of the FCC's Financial Interest and Syndication Rules,
and competitive analysis of mergers, acquisitions and business practices in a
variety of industries.
From January 1978 to September 1982, Dr. Kelley was with the Federal
Communications Commission. At the FCC he served as Special Assistant to
Chairman Charles D. Ferris. As Special Assistant, he advised the Chairman on
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HAI Consulting, Inc.6
proposed regulatory changes in the broadcasting, cable television and telephone
industries, analyzed legislation and drafted Congressional testimony, and
coordinated Bureau and Office efforts on major common carrier matters such as
the Second Computer Inquiry and the Competitive Carrier Rulemaking. He also
held Senior Economist positions in the Office of Plans and Policy and the
Common Carrier Bureau.
Dr. Kelley was a staff economist with the Antitrust Division, U.S.
Department of Justice, from September 1972 to January 1978. At the Justice
Department he analyzed competitive effects of mergers and business practices
in the cable television, broadcasting, motion picture, newspaper and telephone
industries. As a member of the economic staff of U.S. v. AT&T, he was
responsible for analyzing proposals for restructuring of the Bell System.
Dr. Kelley received a Ph.D. in Economics from the University of Oregon in
1976, with fields of specialization in Industrial Organization, Public Finance and
Monetary Theory. He also holds an M.A. in Economics from the University of
Oregon and a B.A. in Economics from the University of Colorado. He has
published numerous articles on telecommunications economics and public policy
and regularly participates as a speaker at academic and industry conferences.
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HAI Consulting, Inc.7
David M. Nugent
Associate
Mr. Nugent participates in a wide range of HAI consulting projects. He
specializes in quantitative analysis and complex cost modeling related to these
projects. Since joining HAI, Mr. Nugent has played an active role in the
development of the HAI Model. Recently, he was responsible for the
development and implementation of an algorithm that computes efficient ring
systems from a data set consisting of known wire center locations. This
algorithm was incorporated into the HAI Model 5.0, where it is used to compute
interoffice network facility distances. Outside of development work, Mr. Nugent
has used the HAI Model to conduct a number of specialized analyses for a
variety of clients.
In addition to his experience with the HAI Model, Mr. Nugent co-authored
an engineering-economic analysis addressing the potential for facilities-based
competition in the local exchange market. This analysis considered cable
telephony and wireless local loops as alternative local access technologies. Mr.
Nugent focused on the cable telephony portions of the study where he evaluated
the status of existing cable systems, the cost of network upgrades, cable
telephony revenue opportunities, and the availability of cable telephony
equipment.
Mr. Nugent participated in an evaluation of Local Multipoint Distribution
Service (LMDS) as a broadband access technology. Although this analysis
considered the regulatory and economic aspects of LMDS, Mr. Nugent’s
responsibilities revolved around the technology of LMDS, where he examined
system capacity, hardware, and the cost associated with the network buildout.
Mr. Nugent has played key roles in a number of additional projects
including the estimation of damages in several class action lawsuits. Mr. Nugent
also participated in the FCC's simultaneous multiple round auction for the sale of
900 MHz spectrum. His responsibilities included the configuration of a remote
bidding system and the design of auction analysis and tracking tools.
Before joining Hatfield Associates, Mr. Nugent was a programmer/analyst
with American Electric Power. At AEP he was responsible for drafting
specifications and coding data acquisition systems used in support of a nuclear
generating facility. The majority of Mr. Nugent's time was devoted to writing
specifications for real-time plant monitoring systems.
Mr. Nugent is a Summa Cum Laude graduate of Ohio University and holds
a B.S. degree in Computer Science. He also holds an M.S. degree in
Telecommunications from the University of Colorado.