V. Level of Competition in Telecommunications Markets

Since proposed policy reforms would limit or eliminate regulations developed to check the power of monopoly carriers, we must address whether we can rely on market forces, rather than command and control rules, to ensure that rates are "just and reasonable."206 The central factual issues in this proceeding concern whether new policies, technologies, and developments in telecommunications markets over the last eighteen years have limited the ability of incumbent carriers to exercise market power. Market power is the ability of a company to sustain prices at levels above those a market would produce by restraining the supply of telecommunications services to the market.

In this proceeding, we examine the following items when making our assessment of the ILECs' market power:

Factual findings on these issues will help guide us in our determination of whether and to what extent it is reasonable to change ILEC pricing rules and accompanying reporting, monitoring, and auditing regulations.

A. The Relevant Market for Competitive Analysis: Substitutability and Presence of Competitors

This section assesses what is the relevant market and what is its geographic extent. In particular, it looks at whether the communications services provided by cross-platform technologies are real substitutes for circuit-switched wireline services.

1. Positions of Parties

This section reviews the positions of the parties on the relevant market for our competitive analysis. Parties commenting on the proper scope of the market reviewed include the following: Verizon, AT&T, SureWest, Frontier, DRA, TURN, DOD/FEA, DisabRA, CPA, CCTA, Greenlining, and XO Communications (XO).

Verizon argues that the market for telecommunications services is the broad market for voice communications services, but any assessment of the level of competition should take place at the end-office level. The ILEC declares that under standard economic analysis, it is appropriate to consider four factors in analyzing competition:

· Which services compete with each other?

· Are those services available in the marketplace?

· Are there significant barriers to entry and expansion in the marketplace?

· What are the regulatory constraints and regulatory factors that have affected the pattern of competition that is observed in the marketplace?207

These factors guide Verizon's review of competition in the telecommunications marketplace.

Verizon contends that a competitive analysis should look not only at voice services that are perfect substitutes, but also at services that qualify as "reasonably good substitutes." 208 It explains that "[s]ubstitutable products serve to constrain one another's prices, because if one product were to experience a price increase, consumers would purchase other products that are reasonable substitutes."209 According to Verizon, evidence that a service qualifies as a reasonably good substitute includes whether "the services appear to serve the same or similar function from the customers' standpoint; customers view them as reasonably equivalent; and/or they are objectively similar from a technical standpoint. Other relevant evidence includes whether the services are sold in the same marketing channels, or whether competitors market their services as a substitute for one another."210

According to the FCC, the number of landlines in California has decreased by 1.57 million from end-of-year 2001 to June 2004, while during the same period, the number of wireless subscribers in California increased by 6.52 million. . . . While this inverse relationship between wireline and wireless customer growth in California does not, by itself, demonstrate direct substitution of wireless for wireline lines, it is consistent with findings of analysts and surveys that show significant wireless substitution for wireline access.212

Verizon also relies upon a series of customer surveys demonstrating a "significant growth in wireless-only households."213 For example, Verizon cites a Deutsch Bank study that finds: "that wireless growth accounted for about 47 percent of ILEC primary line residential landline losses (as measured relative to where ILEC residential primary lines would have been, after accounting for economic growth)."214 Verizon adds that California ILECs, including Verizon, have begun losing landline phone lines at a rate unprecedented since NRF was adopted.215

Verizon also considers VoIP services as competitors with its traditional telecommunications services. According to Verizon, some industry observers believe that VoIP is "an even bigger threat to the incumbent carriers going forward."216 The ILEC, in particular, deems cable companies "[a]mong the most important players in the VoIP arena."217 Citing a study by Deutsch Bank, Verizon concludes that "projections of cable telephony represent a growth rate of about 100 percent per year between 2004 and 2008, and nearly 25 million subscribers by 2013."218 Verizon adds that Cox has "more than 1.2 million residential telephony customers across 17 telephone markets, and that its telephone service is available to 6.5 million homes in those markets."219

Verizon argues that these market developments show that VoIP is a substitute for basic switched local telecommunications service. "In addition to providing a substitute for traditional phone service and features," Verizon observes that "standard VoIP offerings typically include a much richer and more flexible slate of features than does the traditional telephone network." 220 Examples of these features include the following: music or messaging on hold and unified messaging; multiple telephone lines (i.e., telephone numbers) on a single connection; and multiple area code assignments (which means that the user can implement his or her own foreign exchange service)."221

Verizon provides a market analysis for each wire center to determine the scope of this competition.222 Thus, although the ILEC claims to see a rather broad market including all voice communications services as competitors with traditional phone services, its actions suggest that it finds that appropriate competitive analysis requires the examination of specific geographic markets to determine whether other competitors are present.

AT&T urges the Commission to recognize that the relevant market is the broad market for communications services, and any consideration of competition in that market should include "all types of competitors, regardless of technological differences, in that market now and in the foreseeable future. . . ."223 California's largest ILEC reasons that consumers use combinations of mobile wireless, fixed wireless, cable services, Internet messaging, and voice services as alternatives to traditional wireline telephones.224 According to AT&T, there has been a "shift in technologies and consumer preferences"225 resulting from "the rapid emergence and growth of technological alternatives to wireline communications."226

Specifically, AT&T declares that there are ample substitutes for local service. AT&T characterizes Basic Local Exchange Service (BLES) as "the product of a regulatory definition created decades ago." 227 It then dismisses the significance of this definition: "In competitive markets, product configurations are not determined by regulatory definitions, but respond and evolve in response to customer demands."228

Concerning the issue of substitutes, AT&T argues that the "critical factor in determining whether services are competitive substitutes is whether they have the actual or potential ability to take significant amounts of business away from each other." 229 Dr. Robert Harris, testifying on behalf of AT&T, argued that competitors to wireline service include mobile wireless, cable, or VoIP:

[I]t is not necessary that cable, mobile wireless, fixed wireless, and VoIP providers compete directly in each and every market segment. Rather, the force of intermodal competition arises from the different economic attributes of the competing modes, one of which may have competitive advantages in some market segments, while another mode has a competitive advantage in some other market segments. The greatest benefits of intermodal competition come from dynamic changes, as modes strive to gain a competitive advantage or reduce a competitive disadvantage relative to other modes.230

AT&T concludes that "[e]ven if only a small percentage of customers actually shift their usage based on price changes, the fact that this shift occurs causes carriers to take this into account when setting prices, thereby constraining prices."231

AT&T adds that an analysis of competition that "include[s] evaluation of competitive alternatives for individual services and for discrete geographic subdivisions of the state" would produce "erroneous results."232 It reasons that the individual service approach "fails to properly consider intermodal services that function as substitutes," and "the majority of communications services are sold in bundles and not on a stand-alone basis."233 Concerning the extent of geographic analysis for our assessment, AT&T maintains that "it is not necessary to examine the market conditions individually in each separate geographic market because the conditions that give rise to contestability are the same in each: the successful implementation of the market-opening requirements of the Telecommunications Act."234

Finally, AT&T encourages the Commission to be "forward-looking":

Not only is it reasonably clear that established forms of intramodal and intermodal competition will grow, emerging forms of intermodal competition will blossom. For example, WiMax, a fixed wireless technology that extends the reach of high-speed stationary wireless service by miles, is being deployed now. Similarly, broadband service over power lines ("BPL") has been commercially deployed in some communities and is under trial in dozens of locations.235

AT&T argues that forward-looking regulation is prudent because "[w]hen changes are occurring rapidly and at an accelerating rate, as they are in the communications market, policies must be set on a forward-looking basis, not on historical data or a snapshot view of the market at the time of the proceeding, which could hinder on-going competition."236

SureWest and Frontier apply the standard of "reasonable interchangeability of use" to define the relevant markets that affect competition for wireline services.237 They maintain that "as long as some significant percentage of customers views a competing service as a substitute for traditional wireline service, this is sufficient to make the services substitutes from an economic standpoint."238 Accordingly, SureWest and Frontier assert that the relevant market includes CLEC, wireless, and VoIP services.239

Both SureWest and Frontier assert that they face significant intramodal and intermodal competition within this market. They note that while population is growing in their service territories, residential access line use is dropping.240 While "it is difficult to determine exactly which services customers are selecting in place of [SureWest's and Frontier's] wireline service," whether "wireless, . . VoIP, . . CLECs, or . . . another type of competitor, the customers are going somewhere and in significant numbers."241

Given "the presence of robust competition in nearby areas of the Sacramento metro areas" served by SBC,242 the mid-sized ILECs suggest that they should be afforded the same remedies applying to SBC. 243 In support of this position, they cite FCC and U.S. Appeals Court rulings in which "the existence of competition in one market is relevant to determining whether competition is impaired in a similar geographic market."244 SureWest and Frontier add that they should receive further consideration, because of "the size disparities between [them] and Comcast and SBC," their competitors. They observe that the FCC took comparative size into consideration in a recent decision that provided regulatory relief to a smaller ILEC service provider.245

SureWest also specifically addresses its own service area, "a largely suburban area in and around the cities of Roseville and Citrus Heights in the Sacramento Metropolitan area." The mid-sized ILEC states that "the physical and situational similarities between SureWest's service territory and the service territories served by the large ILECs" mean that competitive data offered AT&T's and Verizon's experts can readily be applied in the same manner to SureWest's circumstances.246 Alleged similarities between the larger ILECs and SureWest include serving "a largely suburban area" with "demographics and geographical characteristics that are no different than any of the surrounding SBC areas" and "no break in development between SBC's and SureWest's service territory."247

Frontier likewise emphasizes how it is similar to SBC and Verizon. Like the larger ILECs, Frontier points out that it "serves a number of different geographical areas," "the bulk of [its] access lines are in a non-rural area, the Elk Grove exchange" that "has demographics and geographical characteristics that are no different than any of the surrounding SBC areas."248 Frontier adds that it faces competition from "numerous wireless carriers, . . . a variety of stand-alone VoIP providers," "a number of CLECs," and "will soon face vigorous competition in the voice market from incumbent cable companies." In light of this competition, Frontier believes that "the competitive data offered by Dr. Aron and Dr. Harris can be readily applied to Frontier's circumstances in the same manner that these data can be applied to the larger ILECs."249

DRA focuses its discussion on what it calls "essential" services. DRA argues that "[t]he more `essential' the service, the greater DRA's concern about the effect of unwarranted price increases" for the sake of "universal service and public safety."250 Accordingly, DRA urges us to require a "high standard of proof that the existing degree of competition - not predicted, forecasted competition next year or the year after - will suffice to protect captive customers from unreasonable price hikes. Such proof should consist of hard evidence concerning the current level and direction of competition . . . from alternative services that are demonstrably comparable in `cost, quality and maturity' to . . . wireline basic exchange services."251

DRA maintains that it, along with other parties, has "presented substantial evidence showing that there is limited competition today for residential and single-line business basic exchange services."252 It argues that "competition for primary-line residential services and single-line business services is limited and, at best, is growing slowly or actually has declined over the past few months."253 DRA specifically highlights two ways in which it believes intermodal competition currently is lacking:

[I]ntermodal competitors may find it difficult or impossible to offer service throughout the ILECs' service territories (e.g., because of franchise limits for cable providers). Second . . . intermodal competitors offer services that consumers may not always view as being comparable to the wireline services they are taking.254

DRA criticizes the ILECs' evidence for being "very general[,] . . typically based on nationwide data," and "fail[ing] to address specific services."255 It adds that the ILECs' "heavy" reliance on "projections of increased competition" is inappropriate.256 DRA asserts that "[t]his evidence is simply too tenuous to justify eliminating price caps for these essential services either today or at some date certain two or three years hence."257

DRA's review of the "different mix of cable and wireless providers across the four ILECs' service territories" convinces it "that, at a minimum, each of these service territories should be treated as a separate geographic market." 258 Thus, it contends that the Commission should not justify any greater pricing flexibility for SureWest and Frontier based on the competitive analyses performed by AT&T and Verizon.259 DRA also counsels the Commission to avoid relying on data AT&T and Verizon presented on competition in other jurisdictions, because "at least with respect to facilities-based cable and wireless alternatives, . . . the competitive offerings in other states may differ significantly from those available today (or likely to be available in the near future) in California."260

TURN asserts that "the ILECs thoroughly dominate the local exchange market."261 It states that intermodal alternatives, such as wireless and VoIP, do not qualify as "competitive substitutes for wireline local exchange service."262

Testifying on behalf of TURN, Dr. Trevor Roycroft contended that "evaluation of the potential for consumers to substitute requires a determination of the economic characteristics of products or services."263 Roycroft then proceeded to list characteristics he deemed relevant to substitutability. He noted that the characteristics of "basic local exchange service" (BLES) include "affordable monthly prices," "unlimited local calling," E911 availability, number portability, fax/ISP access, and independence from the power grid.264 Another important feature, according to Roycroft, is "availability on a stand-alone basis," in that "the consumer is not required to purchase or utilize a broadband connection when purchasing BLES, nor are they required to purchase video programming." He added that "the customer is not required to enter into a long-term contract when purchasing BLES, [and] there are no penalties for early termination, month-to-month service is available."265 Roycroft also provided a table to illustrate the "lack of comparability associated with many aspects of CLEC and intermodal alternatives."266

Roycroft further urged the Commission to consider the "regulatory treatment of vertical features," i.e., services that are added on top of BLES.267 He explained that features such as 976/900 blocking, control over white-page listings, caller ID blocking, and call trace "can play an important privacy protection or public safety role" and "deserve special consideration in any regulation plan."268 In general, however, Roycroft conceded that most features, "by playing a complementary role with BLES, do not provide the same critical public interest role as BLES itself" and so merit greater pricing flexibility.269

Concerning telecommunications markets, DOD/FEA follows the FCC's regulatory categories and discusses both the "mass" and "enterprise" markets as they apply in the California setting. While it believes that the ILECs "face increased service competition,"270 DOD/FEA considers cable the "principal" and "only effective competitor to the ILECs in the mass market for the foreseeable future." 271 DOD/FEA anticipates that "both the ILECs and the cable companies [will] compete . . . using both circuit switched and Voice over Internet Protocol . . . technologies."272 The market, under this projection, will be that of a duopoly. DOD/FEA cautions, "[w]hile duopolies provide a choice to consumers, they do not create an effective restraint on prices."273

Nevertheless, DOD/FEA considers the enterprise market "to be reasonably competitive in most areas now."274 DOD/FEA suggests that "[t]he multi-billion dollar SBC/AT&T and Verizon/MCI mergers in fact appear to be largely driven by the desire to capture enterprise market customers."275

DOD/FEA adds that it thinks that Broadband over Power Lines (BPL) technology "does appear to have the potential for providing a third transmission path."276 But DOD/FEA states the caveat that "it will be some years" before BPL is a viable third party competitor.277

DisabRA "believes that the record supports DRA and TURN's arguments that the ILECs continue to enjoy significant market control."278 It is primarily concerned, however, with the market for persons with disabilities and limits its discussion accordingly.

DisabRA asserts that "the largest wireline providers face very little competition in their provision of services to Californians with disabilities."279 According to DisabRA, service providers, as a result, are "unwilling to offer accessible or disability-related services and products to Californians with disabilities because they perceive the disability market as unattractive."280

DisabRA argues that basic wireline service is highly desirable to disabled users and other services cannot substitute for it. Testifying on behalf of DisabRA, Dmitri Belser states that individuals with disabilities "tend to be very reliant on the network."281 He explains that unlike "many of the newer technologies, basic wireline service is generally physically accessible, particularly with adaptive equipment." 282 Belser adds that basic wireline service, as compared to other alternatives, is "more affordable and reliable."283 ILECs, according to Belser, are also preferred by many disabled customers because they provide large print bills284 and superior customer service.285

California Payphone Association (CPA) is principally concerned with the market for pay telephones. CPA argues that a pay telephone "serves essential communications needs."286 It notes that some pay telephones are "`many customers' lifeline to the world,' serving as the means for making 911 calls and for communicating in cases of power outages and other emergencies."287

CPA declares that competition in this payphone market is "limited."288 It explains that pay telephones are most likely to be of continuing importance in rural communities or low-income and minority neighborhoods,289 and these "typical pay telephone locations are not likely to be sought after or served by the ILECs' facilities-based competitors."290

CCTA does not focus in detail on the scope of market competition, but observes that "in many ways, incumbents already fully compete for customers. . . ." 291 It points out that ILECs offer "bundles of services that include phone, wireless phone, Internet and video services, and they have full pricing flexibility for their VoIP products, their wireless products, their Internet and video services, and their competitive phone-related services like long distance, voice mail, PBX trunks, centrex and a host of business and data services."292

Greenlining is primarily concerned with issues relating to low-income, small business, and limited English markets. It asserts that "lack of information on [these] markets coupled with these groups' traditional vulnerability in the telecommunications market, [makes it] safe to conclude that these three groups are disadvantaged and should be provided the appropriate protections."293

In particular, Greenlining maintains that "it is clear that the needs of low-income, small business, and limited Spanish speakers were not specifically documented, analyzed, or commented on by any of the experts and embarrassingly ignored."294 It notes AT&T and Verizon witnesses did not perform a competition analysis in these markets.295 Greenlining adds that "[i]t is difficult if not impossible to do a proper analysis of competition" due to the complexity of ownership structure in the market, in which "`one substitute that challenges the traditional phone carriers is actually owned by the traditional phone carriers.'"296

XO focuses on the high speed services. It asserts that "[a]lternative providers do not even approach having the ability to provide high speed telecommunications services throughout any local exchange market in California":

Intermodal forms of competition also do not provide any effective restraint on the ILECs' pricing, at least of services at speeds of DSl and above. Cable television companies do not offer such services and generally limit the services that they provide to residential, rather than business, customers located in their cable franchise service area. Wireless high speed services similarly are not available at the speeds and quality of landline services, particularly the services used by medium and large business customers. 297

In contrast, XO observes that "the ILECs can offer such services virtually to each and every requesting customer in their entire local exchange territory."298

2. Discussion: Voice Services Constitute a Single Product, but Market Analysis Must Address Geography

Verizon's logical analysis provides the Commission with a sensible guide for examining the California telecommunications marketplace. Applying this systematic analysis, it is clear that the telecommunications market encompasses telecommunications broadly. Market participants include CLECs, cable companies, VoIP, and wireless service providers.

The evidence provided by Verizon on the changing pattern of telecommunications use in California - such as the decrease in landline phone access lines (1.57 million lines) coupled with the fourfold higher increase in mobile phone lines (6.52 million) as publicly reported by the FCC - suggests that landline and mobile services are substitutes, and not mere complements. If two services are complements, one would see their use rise and fall together. Instead, we see the use of wireless services rising rapidly while the use of wireline service falls. Survey data provided by Verizon, particularly those surveys of customers who have "cut the cord,"299 also indicate that many customers consider mobile and landline telephony to be close substitutes in a competitive market.

Similarly, VoIP service qualifies as another substitute voice service that may offer service with more features and functionalities at a given price point than traditional circuit switched voice communications services. In particular, VoIP provided by cable telephone companies is a near-perfect substitute for circuit-switched wireline service.

We find that the historic practice of defining each telecommunications service as constituting a separate "market" is no longer relevant in today's technologically diverse telecommunications environment. Concepts like "Basic Local Exchange Service," "long distance service," "call waiting service," "call forwarding service," and "pay phone service," make little sense in an era dominated by telecommunications sold through bundled services.300 Wireless telephone service, for example, treats all national calls the same; includes call-waiting and voice-mail as part of the basic package; and provides communications services along all major highways that were once the sole province of pay telephone providers. The market analysis presented by AT&T's witnesses further convinces us that there is real and active competition from new, competing technological platforms.

In contrast, TURN urges the Commission to create separate markets for telecommunications services by seeking to find an attribute of a service that disqualifies it from being a "substitute" for another service. For example, it argues that VoIP cannot be deemed a substitute for local service, because the user needs a broadband connection in order to access VoIP service. We find that this analysis is flawed. It ignores that broadband connections are becoming increasingly available, and more and more Californians possess these connections.301 Thus for a large portion of the market, VoIP is indeed a competitive service. Our market definition should take into account such technological developments in the dynamic telecommunications marketplace.

Additionally a service need not be identical to provide a competitive substitute. For example, we see that ballpoint pens, fountain pens, roller pens, and pencils all serve as writing instruments in the marketplace today. While no one pen or pencil is a perfect substitute for another, they often compete in serving a customer's need for a writing instrument. Similarly, a landline telephone, a wireless telephone, and a VoIP telephone all may compete to serve a consumer's need for voice communications.

We also find no compelling reason to segment the market further by user characteristics, such as income or use characteristics (e.g., business or residential use, or level of use). In particular, there is no persuasive evidence that the patterns of use by low-income customers differ from other customers, or that competition in telecommunications markets will not benefit low-income customers. Likewise, concerning the type and level of use, this decision focuses on the retail services used at the lowest level of services. If we find that markets are open and competitive at these levels, then the same result follows for greater levels of use. We need not parse apart our market analysis to account for individual users' behavior.302

We recognize, however, that it is important to examine geographic markets. A substitute provides competitive discipline in a market segment only to the extent that it is available, and there is little dispute among the parties on this point. Even AT&T, which argues that the Telecommunications Act of 1996 makes a geographic granular analysis unnecessary, effectively acknowledges that geographic markets must be considered. AT&T bases its market-definition argument on the ubiquity of the FCC's scheme for opening telecommunications markets. The FCC scheme would not be effective if it did not operate in each geographic area.

R.06-05-028 will address further issues related to use by low-income and disabled customers. We acknowledge that landline telephones and services for disabled individuals are tightly coupled: Telecommunications services used by the disabled community are tied to landline phone service, because public policy programs were conceived during the telephone monopoly era. But since reforms to such programs will be addressed directly in R.06-05-028, we hold that R.06-05-028 is the appropriate venue for considering the needs of that the disabled community. Moreover, as competition expands consumer choice, all consumers, including both the low-income and the disabled, benefit if public needs are examined directly and protected from withdrawal of services.

B. Analysis of Market Power

This section assesses whether the California market for telecommunications services is sufficiently competitive to enable California to replace current ILEC price regulations with a reliance on competitive market forces. In analyzing the level of competition in ILEC markets, this decision will describe the position of the different parties concerning the competition to ILECs provided by CLECs, wireless carriers, VoIP providers, and cable companies. We then describe the overall assessments of market power provided by parties. We note that in some cases a party's market power assessment follows from its analysis of cross-platform competition, while in other cases the market power assessment is based on an overall assessment of market conditions. The discussion section concludes by addressing the general question of whether ILECs continue to have market power in the telecommunications market.

1. Position of Parties on Competition from CLECs

This section discusses competition to ILECs provided by CLECs. Parties commenting on this topic include the following: Verizon, AT&T, SureWest, Frontier, DRA, TURN, DOD/FEA, DisabRA, and XO.

Before we describe these parties' positions, however, we hold that it is important that we review the regulatory backdrop to the comments. A brief review of prior state and federal regulatory developments is useful for both understanding and weighing various parties' arguments.

This review of regulatory developments necessarily begins with the enactment of the Telecommunications Act of 1996.303 This Act, as we noted previously, sought to open local telecommunications markets to competition, and it expanded the ability of competitors to access ILECs' networks when providing local service. According to the FCC, the Act intended to increase competition through encouraging three types of entry: resale; investment in and ownership of full facilities; and leasing of unbundled network elements (UNEs).304 The FCC describes these various types of entry as follows:

[1] Total service resale requires the least initial capital investment, but is limited to reselling the incumbent LEC products with little opportunity to vary the products other than through improved customer service and bundling additional products with resold local service.

[2] Full ownership of facilities, on the other hand, allows the competitive LEC to totally engineer its own network, giving maximum control and flexibility but requiring the most capital investment.

[3] Leasing some parts of the network as UNEs, such as unbundled loops, can be accomplished at a lower initial capital investment than full facilities ownership and provides greater flexibility to develop services than does resale, but it may result in less network flexibility to add new services than does full facilities ownership.305

Leasing of UNEs, third in the list above, soon became a particularly popular form of competitive entry.

Two specific UNEs, UNE-L and UNE-P, deserve special mention because of their market impact and importance to this proceeding. UNE-L, also known as "UNE Loop," consists of the loop from the central office to the customer's premise.308 The purchase of a UNE-L by a competitive carrier enables the competitive carrier to reach a customer and serve the customer on its network. UNE-P, also known as "UNE-Platform," consists of a combination of the loop, port, and switching services of the ILEC. The purchase of the UNE-P enabled the competitive carrier to serve the customer with minimal network investment.

Entry into local carrier phone markets via UNE-P proved to be especially controversial. UNE-P largely displaced both resale and network investment:

Competitive LECs' purchase of total service resale has declined from a peak of almost 5.4 million lines in 2000 to below 3.5 million lines by mid-2002. Over the same time period, total access lines served by UNE-Loops (UNE-L) and UNE-P combinations have grown from about 1.5 million to about 11.5 million. UNE-L grew from 1 million to 4 million lines. UNE-P lines grew from less than half a million to almost 7.5 million. These UNE-L and UNE-P represent approximately 6.9 percent of BOC [Bell Operating Companies] access lines. Competitive LECs provide service to about 16-20 percent of all access lines in the BOC territories: 26-33 percent of business access and about 9 percent of residential access lines. Considering all modes of entry, competitive LEC lines probably exceed 10 percent of BOC lines in most states. The BOCs at present serve 87 percent of all incumbent LEC access lines while the "independent" incumbent LECs serve the balance.309

ILECs complained that UNE-P's forced "resale" strategy gave competitors a deep discount.

Various parties appealed the FCC's Triennial Review Order (TRO),310 which established UNE rules pursuant to the Telecommunications Act of 1996, and these parties found relief in the D.C. Circuit Court's decision in USTA II.311 Issued on March 2, 2004, the USTA II decision "vacated and remanded the nationwide impairment finding for mass market switching."312 That is, the Court held that the FCC had not provided a sufficient rationale for its finding that competition by new entrants would be "impaired" throughout the nation if entrants lacked continued availability of switching, the key element of UNE-P.

As a consequence of the USTA II decision, the FCC decided to "revisit the unbundling obligations associated with several elements in a manner consistent with the USTA II decision and other controlling precedents."313 In particular, based on the Court guidance, the FCC sought to determine when specific network elements "should be subject to unbundling under the revised [impairment] standard."314 Under the revised impairment standard, the FCC had to "weigh the costs of unbundling and to examine whether the costs faced by competitive providers were due to natural monopoly characteristics or to the difficulties facing new entrants in all industries."315

The resulting Triennial Review Remand Order (TRRO) adopted a reduced number of unbundling requirements that it found necessary in order to avoid the impairment of local market competition.316 Based on its analysis and new understanding of "impairment," the TRRO terminated the availability of UNE-P by removing "local circuit switching" from the list of network elements that ILECs must unbundle at TELRIC prices.317 The FCC reasoned that multiple factors substantially mitigated the TRO's prior concerns about circuit switching impairment:

[C]ompetitive LECs not only have deployed a significant, growing number of their own switches, often using new, more efficient technologies such as packet switches, but also that they are able to use those switches to serve the mass market in many areas, and that similar deployment is possible in other geographic markets. Additionally, we find that the BOCs have made significant improvements in their hot cut processes that should better situate them to perform larger volumes of hot cuts ("batch hot cuts") to the extent necessary.

Moreover, "regardless of any limited potential impairment requesting carriers may still face," the FCC held that "continued availability of unbundled mass market switching would impose significant costs in the form of decreased investment incentives. . . ."318

The TRRO, however, did not modify the regulation that require that ILECs make available UNE-L to all competitors. It held that failing to provide access to UNE-L would impair competition. The prices for the UNE-L in California are set by this Commission at prices based on TELRIC studies of California-specific costs.319

In light of the TRRO decision and the analysis it relied upon, a central question for this proceeding is whether California can rely on the revised national unbundling scheme, which this Commission has implemented in the state, to check the market power of ILECs, or whether California should continue to impose additional regulations to protect California consumers from the market power of the carriers. Our following review of the position of parties demonstrates a significant dispute among parties over whether the federal program is sufficiently restricting ILEC market power. We nevertheless find that there is adequate evidence in the record to decide this matter at this time.

Verizon argues that existing CLECs provide substantial competition for customers throughout Verizon's service territory. Although a formula links a wholesale price paid by resellers to an ILEC's resale price, Verizon maintains that "resold services nevertheless provide some competitive discipline on ILECs":

Losing a customer to a reseller damages an ILEC in a more subtle and long-term sense than the short-run direct effect on revenues. Resellers can use resale as part of a larger strategy to migrate customers to their own facilities and/or to provide customers with a bundle of many telecommunications services. Once the ILEC loses the customer relationship to the reseller, the reseller can easily migrate the customer to its own facilities or to [Unbundled Network Element]-based provision when the facilities are ready.320

There are "CLECs serving 10,000 or more lines in 74 percent of 501 ZIP codes overlapping Verizon wire centers in California ("Verizon-area ZIP codes")."321

AT&T declares that "[e]ven if intermodal competition were not flourishing, which of course it is, the availability of these legally mandated means for competitors to enter and expand in the communications market constrain any market participant's ability to sustain prices above a competitive level."324

AT&T argues that legislative and regulatory action has dramatically reduced "the cost and risk of entry for competitors that can . . . choose among entry strategies - i.e., building facilities (based on a variety of technology platforms), leasing parts of the ILEC's network at regulated rates, or simply reselling existing retail services at economically efficient rates. . . ."325 AT&T notes that "[s]ome CLECs target particular interests, such as Spanish-speaking customers or low income customers,"326 and "[o]ther CLECs are primarily wholesale providers, offering services such as private line, fiber capacity, collocation, and network management to other carriers."327 AT&T adds that "[s]ince 1996, CLECs have invested $75 billion in communications infrastructure, which positions them to compete not only for voice services, but also for broadband, data services, and VoIP."328

AT&T asserts that "the FCC's elimination of the UNE-P does not materially affect the ability of CLECs to compete."329 AT&T maintains that "the FCC's determination to eliminate the UNE-P was based on the fact that CLECs are not impaired without mass market switching and UNE-P. In other words, an efficient CLEC can enter economically."330 It also observes that the FCC's Local Competition Report, issued in July 2005, "shows strong recent growth in both intermodal (coaxial cable) and intramodal fully facilities-based CLEC lines."331

SureWest asserts that CLEC competition is substantial in its territory. It notes a significant increase in trunks interconnected between SureWest and CLECs; the presence of 14 CLECs including AT&T, Verizon, XO, and Comcast; and the fact that cable providers Comcast and Starstream already pass nearly all homes in the area.332

Frontier claims that it faces significant competition from CLECs too. Disputing DRA's contention that "`Frontier was never required to provide UNE-P,'" Frontier replies that "[w]hile it is true that CLECs have not chosen to provide service in Frontier's territory using UNE-P, it is incorrect to say that Frontier was not subject to UNE-P requirements."333 Frontier adds that "CLECs elected to compete in Frontier's territory through other channels" and that it has faced significant line losses to SureWest TeleVideo in Elk Grove.334

DRA asserts that "there is little wireline-to-wireline competition today in California, and little reason to expect that type of competition to grow."335 As evidence, DRA notes that "[t]otal service resale failed in California in 1997 after competitors entered the local market via resale, then quickly retreated,"336 and that "many of the customers originally served via UNE-P have returned to SBC and Verizon" because of changes in court and FCC rulings.337

DRA does not recognize Cox's circuit-switched cable telephony offerings as viable competition either. Although it states that cable telephony is "reasonably comparable to the ILECs' basic exchange services,"338 DRA maintains that cable telephony service "is expected to begin to fade away as the availability of VoIP services increases" as "Cox is in the process of migrating from circuit-switched cable telephony to VoIP.339 DRA concludes that "the ILECs entirely dominate the provision of wireline and circuit-switched telephony."340

TURN rebuts mid-sized SureWest's and Frontier's claims that they face significant wireline competition. With respect to SureWest, TURN asserts that the company has "faced minimal CLEC entry since 1996."341 TURN argues that SureWest "does not have a single competitor using a UNE loop or UNE-P in its territory, and there are approximately five customers purchasing resale service."342 TURN adds that the "minimal competition" SureWest faces in the business market has not led to a lost of business lines for SureWest"; instead, TURN notes "increases in business lines for SureWest from 2004-2005."343 With respect to Frontier, TURN argues that the company "maintains a pure monopoly position in the overwhelming majority of its wire centers."344 TURN states that Frontier's "switched access lines increased from 2003-2004," and while its switched access lines "declined slightly" in 2004-2005, TURN notes that "there were substantial increases in Frontier's broadband connections."345

While acknowledging that "Verizon has faced greater competitive entry than Frontier and SureWest," TURN asserts that Verizon nevertheless "continues to dominate the provision of local exchange service within its California service area" and "does not face effective competition for its price-regulated wireline local exchange service."346 As supporting evidence, TURN cites pre-MCI-merger HHI values of 7,875 and post-merger values of 8,412 for the residential market.347 TURN adds that over 90% of Verizon's wire centers "have minimal or zero facilities-based CLEC competition for residential customers, with over 50% of these wire centers having no facilities-based competition at all."348

Finally, TURN argues that AT&T "retains an overwhelming market share for both the residential and small business market segments."349 To reinforce this claim, TURN observes HHI values of 7,067 and 5,170 respectively pre-AT&T-merger, and 7,999 and 6,347 post-merger.350

DOD/FEA does not consider CLECs to be "effective" competitors. It cites several reasons for this lack of competition: (i) recent court and FCC decision that ended the availability of UNE-Platform rates;"351 (ii) the AT&T/SBC and MCI/Verizon mergers; and (iii) the fact that "CLECs using UNE-LOOP . . . or resale strategies have not had significant success."352

DisabRA argues that there is a lack of "intra-modal" competition for disabled users.353 It explains that "the disability-related services, products and support that the ILECs provide, particularly AT&T, are far superior to those provided by the CLECs and smaller providers."354 Specifically, DisabRA notes that AT&T provides large print bill service, disability-specific customer service, and a "long list" of "accessibility services" that other competitors fail to provide.355 DisabRA adds that "of all the individual consumers with disabilities whose stories were documented in the comments of DisabRA's Outreach Coordinator, . . not a single one of them purchased their telecommunications services from a non-ILEC."356

XO asserts that there "are no geographic markets in which any ILEC faces significant competition in the provision of wholesale services to competitors and other carriers."357 XO points out that CLECs' networks "do not even approach the scope and ubiquity of ILEC networks,"358 and even "under the FCC's allegedly more targeted approach of requiring the existence of a minimum number of collocators as a prerequisite to special access pricing flexibility, the ILECs have consistently raised prices . . . where competition was supposed to exist."359

2. Position of Parties on Competition from Wireless

This section describes arguments relating to competition from wireless carriers. Parties commenting on this topic include the following: Verizon, AT&T, SureWest, DRA, TURN, DOD/FEA, DisabRA, Greenlining, and CSBRT/CSBA.

Verizon argues that "[t]he record shows that wireless is leading this intermodal assault on incumbents in California, with wireless cannibalization being the `key killer' of primary consumer lines."360 Verizon observes that there has been an inverse relationship between the number of wireline customers and the number of wireless customers: Verizon states that in California the number of landline phones decreased by 1.57 million from year-end 2001-2004, while the number of wireless subscribers increased by 6.52 million.361

More to the point, Verizon states "that wireless substitution accounts for approximately half of ILEC primary residential wireline losses, as wireless providers improve the reach of their networks and customers exhibit a growing willingness to `cut the cord.'"362 Verizon further references a number of studies that describe the negative impact of wireless on the wireline market. These studies include one by Loomis and Swann that finds that five percent of telephone customers are "cutting the cord,"363 a study by the Census Bureau (2004), and a study by In-Stat/MDR (2004).364 Verizon adds that a report by Sprint indicates that twenty-two percent of Sprint's wireless customers use their wireless phone as their primary phone.365

Verizon's future projections similarly show a slow but increasing shift from wireline to wireless technologies. It cites surveys showing that nine percent of adults use wireless service exclusively, with thirty-nine percent of wireline customers "very" or "somewhat" likely to abandon wireline phone service within two years.366 Verizon cites another study that estimates that nearly thirty percent of wireless subscribers will not have a landline by 2008.367

AT&T considers wireless service to be a substitute for wireline service. The ILEC presents significant further evidence that demonstrates that consumers are substituting wireless service for wireline service, in terms of total dollars spent and cord cutting:

The number of wireless subscribers has surpassed wireline end user switched access lines, and American households spend more today on mobile wireless service than on traditional wireline local and long distance service combined. . . .368

[O]ne recent survey revealed that nine percent of adults use wireless service exclusively, an additional five percent are "seriously considering" abandoning wireline service, and almost half are considering it. Further, even as many customers are choosing to use wireless service exclusively, many more customers are choosing to own both wireline and wireless phones and shift their usage between them in response to price changes. . . . 369

AT&T adds that "[w]ithin five years, it is estimated that 20 percent of all mobile wireless users will have discontinued wireline service."370 All told, this market evidence leads AT&T to conclude that the "complete substitution of wireless for wireline service is unnecessary to impose strong market discipline on wireline pricing."371

AT&T declares that "[s]mall and mid-sized businesses . . . rely heavily on mobile wireless service" too.372 The large ILEC cites a recent survey that found that "78 percent of small business owners use mobile wireless services and three-fourths of these consider mobile service to be `essential' or `important' to their business operations."373

SureWest asserts that it directly competes with nine wireless telephone carriers. including Sprint/Nextel, T-Mobile, Verizon Wireless, Cingular, and Metro PCS.374 SureWest notes that some wireless and VoIP plans, which are currently available in its service area, are competitively priced with SureWest's basic residential access line service.375 Thus, SureWest views wireless as a competing technology.

DRA argues that "for many customers wireless service is not a substitute for wireline service."376 DRA asserts that "mobile wireless service is not actually competition at all, but is instead merely a different ILEC service that the ILECs market to customers, often using the same personnel and provided over some of the same facilities as their wireline services."377 According to DRA, AT&T admitted as recently as December 2005 that "it [wa]s not aware of any evidence showing that wireless service is a substitute for wireline service."378

DRA also rebuts claims of competition in the business service market. DRA notes that "the ILECs' evidence rarely addresses intermodal competition from wireless services for business services at all,"379 and alleges that a Verizon witness agreed "that wireless phones are not a close substitute for wireline phones for most small businesses."380

TURN argues that wireless service is a complement, rather than a substitute to, local exchange service.381 TURN cites a study "showing that cord cutting activity was slowing over time, and which found that cord cutters are not representative of the total population of telecommunications users, but . . . are young and in a low income bracket."382 It also notes two additional studies - one that reveals "evidence regarding the relationship between wireline and wireless service," and another that concludes that "wireless service does not impose a pricing constraint on ILEC market power."383

According to TURN, there are a number of "compelling reasons as to why very few customers have actually cut the cord."384 TURN states that wireless plans "bill for usage for both incoming and outgoing calls," their "ergonomics . . . are not suitable for all portions of the population, . . . such as the elderly or those with physical disabilities," and wireline use "is necessary for a variety of complementary technologies, including home security systems, satellite television systems, and digital video recorders."385 TURN also asserts that wireless telephones "do not provide a reasonable means of Internet access."386 Given these considerations, TURN concludes that wireless service is "currently a poor substitute for local exchange service."387

Moreover, TURN contends that ILECs overstate the competitive impact of the small percentage of wireline customers who have migrated over to wireless-only service.388 TURN notes that "ILECs such as Verizon, SBC and SureWest have wireless affiliates and are well positioned in the wireless market."389 For example, TURN observes that in SureWest territory "over a five-year period, very few subscribers ported wireline numbers to wireless," but that "[o]f these, the vast majority of business customers and a majority of residential customers ported their wireline numbers to SureWest's wireless affiliate."390

DOD/FEA does not consider wireless effective competition, since "only a small percent of end users have found it appropriate to `cut the cord' and rely on wireless for their basic service needs."391

DisabRA asserts there is a lack of intermodal competition, because "many of the potential alternatives to wireline service that are available to some Californians are simply not real choices for many Californians with disabilities."392 It declares that "adaptive equipment only works with wireline service"393: "`[A]ll equipment installed by DDTP [the Deaf and Disabled Telecommunications Program] is only compatible with standard, land-line telephone equipment.'"394 According to DisabRA, "alternative services are not accessible," because of the reach and dexterity problems of certain disabled citizens,395 as well as poor design and marketing by providers.396 DisabRA adds that "wireline service provides greater security" for those with increased dependence on emergency medical service. 397 It alleges that "E-911 . . . comes standard with wireline phones, but is not available with either VoIP or wireless."398 Finally, DisabRA contends that "alternative services and adaptive devices are prohibitively expensive," because people with disabilities have disproportionately low incomes399, "services . . . are not covered under the state's DDTTP program,"400 and adaptive equipment is expensive.401

Greenlining states that wireless may play a dual role for consumers. On the one hand, Greenling argues that wireless service can be a complement to landline service: Because of E911, fax service, broadband service, "maintain[ing] an alarm system," and "clearer reception and more reliable service than a cellular phone," "[c]ommon sense indicates that people won't give up their landline unless they have to."402 On the other hand, Greenlining declares that wireless service also can be a substitute to landline service: "[P]eople who cannot afford a home and, as renters, move more frequently, `find' cell phone service cheaper and easier than the installation costs and inconvenience of obtaining landline service with every move."403

According to Greenlining, most people, however, would prefer for their wireless service to be merely a complement to wireline service. Greenlining asserts that substitution typically is forced: "Personal experience tells us that people who are cutting the cord are often forced to because of unfavorable financial situations and if given the money and a more stable living arrangement, they would also choose a landline."404 Greenling fears that "[t]his situation will be aggravated if new regulation results in increased wireline prices for low-income users. . . ." 405 It urges the Commission "to avert forced substitution and insure the safety and technologic inclusion of low-income consumers."406

CSBRT/CSBA asserts that "[a]s prices for wireless services drop and the level of wireless services improves, consumers are substituting wireless service for local exchange and long distance service from traditional wireline carriers."407 It cites an FCC report that includes statistics on the increased usage of wireless, and the decreased usage of wireline:

23 percent of voice minutes in 2003 were wireless, up from 7 percent in 2000. . . . [The] effects [of mobile telephone] include a decrease in the number of residential access lines, a drop in long distance revenues, and a decline in payphone profits. In 2003 these trends continued, with the four largest LECS losing 4 percent of their access lines, and wireline long distance voice revenues declining further. One analyst stated that "wireless cannibalization remains a key driver of access line erosion."408

CSBRT/CSBA notes that the wireline market in the United States, as compared to other countries, is particularly ripe for wireless competition: "Wireless minutes of use per subscriber in the U.S. are already 3.7x higher than in Europe, providing evidence that wireless is much more of a full voice replacement.409 Additionally, CSBRT/CSBA states that it expects for the competitive advantage of wireless service to increase, as wireless service providers further cut prices and improve their service quality.410

3. Position of Parties on Competition from VoIP and Cable, Including Cable VoIP

This section discusses competition from VoIP and cable services, including cable VoIP. Parties commenting on this topic include the following: Verizon, AT&T, DRA, TURN, and CSBRT/CSBA.

Verizon declares that "[t]he record shows that VoIP poses an even greater threat to ILECs because its going-forward growth projections are nothing short of staggering."411 Stating that VoIP already provides cross-platform competition, Verizon documents the extensive services provided by VoIP providers today, as well as the estimates by industry analysts of its growth potential.412

Verizon explains that this potential growth is driven by the widespread availability of broadband. In support of this assertion, it cites this Commission's own analysis, which shows that broadband is available in one hundred percent of all California ZIP codes, and that eighty-seven percent of the ZIP codes are served by two or more broadband providers.413 Verizon adds that the FCC has documented the increase in broadband access too:

According to the FCC, from June 2000 to June 2004, California's broadband market expanded by fully 416%, growing from 900,000 to just over 4.69 million broadband lines. In fact, California has the most broadband subscribers of any state in the nation, with almost as many broadband subscribers as the two states (New York and Florida) with second and third highest levels of broadband subscription combined.414

Verizon's own expert produced an analysis that found that "one or more VoIP providers (not including Verizon's VoiceWing service) [are] offering local (NPA) telephone numbers associated with every Verizon wire center except one."415

In particular, Verizon argues that cable television companies pose a significant threat to its wireline business. The ILEC reviews a round-up of cable data from around the country that documents cable's rapid growth in telephony markets.416 For example, a Berstein Research study estimates "that by the end of 2006, 64% of U.S. households will have the option of purchasing VoIP telephony service from their cable companies. . . ."417 Verizon notes that Cox already has achieved "a 40% telephony penetration in Orange County, California."418

According to Verizon, cable companies face relatively low barriers to entry when joining the telephony market:

For a cable provider to offer telephony requires little additional sunk cost once the network has been enabled for broadband, an upgrade that almost every MSO in California has already performed, according to the Commission's 2005 Broadband Report. Indeed, that report showed that cable plant is nearly ubiquitous in California, with cable providers passing approximately 97% of households with television service in California.419

Verizon references testimony and studies that observe that cable telephony is one of the "easiest products cable MSOs can add to their product base," with the incremental cost of deploying telephony services estimated at less than $300 per household, and the operating break-even point below $20 per month."420 Verizon states that Cox need only expend $267 per household to add a VoIP customer.421

AT&T contends that "VoIP services are an increasingly significant competitive alternative to traditional wireline services."422 The ILEC reminds the Commission that, as with wireless, "the appropriate question is not whether VoIP and traditional wireline services are identical, but whether some customers would shift from one to the other if prices changed."423 Moreover, AT&T asserts that Cox and other cable companies already provide many of the features some parties allege are limited to wireline service, and "in this competitive market, [more services] would be offered by other VoIP providers if consumers demanded them."424

Like Verizon, AT&T notes that VoIP growth is being fueled by increased access to and usage of broadband. AT&T cites a recent Commission report that notes "over 90 percent of households in California have access to broadband service today and over 35 percent of households currently subscribe to cable modem or DSL."425 AT&T further references estimates that "within just three years, over 60 percent of California households will have broadband service,"426 and that "by the end of next year, nearly two-thirds of households in the U.S. will have the option to purchase VoIP service from their cable company."427 AT&T explains that "because VoIP is significantly less costly to deploy and maintain than circuit-switched telephony, VoIP offerings are exerting downward pressure on voice service prices."428

While considering it a "somewhat more difficult call," DRA nevertheless concludes that VoIP services should not be included in the relevant market.429 DRA explains that statistics from the E911 database are evidence that "there is relatively little cable-based VoIP competition in California today,"430 and "cable-based VoIP may be missing entirely in some markets."431 DRA also notes that "regulatory or other changes . . . might . . . lead to failure of this mode of competition."432 Alternatively, even "if this specific option flourishes," DRA states that competition from VoIP alone may not exert significant pressure on wireline service prices.433 DRA contends that VoIP's entry in the voice market may merely "result in a duopoly telecommunications market . . . that may continue to require some regulatory oversight."434

DRA is particularly unimpressed by stand-alone VoIP services, such as Vonage, that are not affiliated with a broadband service provider. It argues that these services "are even less comparable to the ILECs' wireline basic exchange services."435 DRA reasons that "the FCC excluded such services from the product market definition for mass-market (residential and small business) basic exchange services in its two recent merger decisions,"436 and the ILECs' "own affiliates have been relatively unsuccessful in providing stand-alone VoIP."437

TURN contends that "cable telephone service providers . . . have made minimal inroads into the local exchange markets served by SBC, Verizon, SureWest and Frontier."438 It declares that "circuit-switched (and any VoIP) lines provided by Cox in California have been accounted for in the competition analysis undertaken by TURN and DRA/ORA," and this analysis indicates the ILECs retain high market concentration.439 In contrast, TURN alleges that the ILECs fail to "offer any evidence whatsoever about the actual extent of [VoIP] competition in California."440

CSBRT/CSBA declares that broadband access allows consumers to "substitute Voice over Internet Protocol (VoIP) services for traditional local exchange and inter-exchange services,"441 and current developments indicate that more and more consumers will switch to VoIP:

On May 10, 2005, Cisco Systems, as part of its most recent earnings statement, reported that its Lynsys Division shipped one million VoIP ports to the consumer market in six months. These products, bundled with a VoIP service, enable customers to make phone calls using their broadband connection. One analyst forecasts that VoIP by cable operators "will eventually take upwards of 20% market share of primary residential access lines." 442

CSBRT/CSBA adds that many consumers already have access to technology necessary to support VoIP usage: "As of mid-2004, the FCC reports that there are over 4.6 million DSL, coaxial and other high speed lines (over 200 kilobits per second in one direction) in California with the number of high speed lines increasing by over 35% a year."443

4. Positions of Parties on ILEC Market Power

This section discusses the summary statements of parties on whether ILECs have market power and should therefore continue to be constrained by pricing regulations. Parties commenting on this topic include the following: Verizon, AT&T, DRA, TURN, DisabRA, CPA, Greenlining, and Cox.

Verizon concludes that it no longer possesses market power that would warrant continuation of current pricing regulations:

Based on a broad range of Commission and FCC reports, government surveys, industry publications, financial analyst reports, competitive forecasts, and econometric studies, the record provides substantial evidence showing the ease with which intermodal competitors can continue to enter the market and constrain prices going forward. This analysis is consistent across all types of intermodal providers - wireless, VoIP, and cable.444

More specifically, Verizon provides maps of the presence of CLECs, wireless, and cable providers of telephony service throughout Verizon's territory. These maps demonstrate what Verizon calls the ubiquitous availability of CLEC, cable, and wireless alternatives in Verizon's California service territory.445

Verizon cites recent findings by the FCC and the California Commission as further evidence of the importance of intermodal competition.446 In particular, Verizon notes that "[i]n the Verizon-MCI and SBC-AT&T merger orders, the FCC concluded that facilities-based VoIP services "clearly fall within the relevant service market for local services."447 Verizon also notes that "[t]he FCC found that the same was true for wireless, to the extent that customers rely on it as a complete substitute for wireline service, adding `intermodal competition between wireless and wireline service will likely increase in the near term.'"448

AT&T likewise maintains that competition is present in all voice markets. Specifically, Harris, testifying on behalf of AT&T, criticizes the idea that "a consumer gets the benefits from competition only if that individual is offered and takes advantage of several competitive choices."449 Harris asserts that this characterization "is just plain wrong," because "competition at the margins (i.e. competition for small groups of customers) can provide widespread benefits to consumers, even to those who do not have the options."450

AT&T declares that its position regarding the presence of intermodal competition is substantiated by the "intensive antitrust review and regulatory scrutiny" of the SBC/AT&T merger.451 AT&T explains that the reviews of the merger included "extensive discovery into the very same communications markets that are the subject of this proceeding,"452 and the U.S. Department of Justice (DOJ), California Attorney General (AG), FCC, and this Commission each found the use of HHI to be of "little value" to these reviews.453 AT&T adds that the DOJ subsequently "concluded that the transaction will not harm competition and will likely benefit consumers, due to existing competition, emerging technologies [and] the changing regulatory environment.'"454 According to AT&T, the California AG supported this conclusion too.455

DRA claims that "the most recent available data" indicates that AT&T's and Verizon's dominance in the market for basic exchange services "is increasing."456 According to DRA, market share data reveal that "SBC's dominance of intrastate telecommunications services is rapidly extending from basic local exchange services into wireless, long-distance and even Internet access services,"457 and "Verizon's market shares generally are either constant or increasing."458 DRA cites HHI numbers, using Verizon and AT&T data, as evidence that residential service and basic exchange business service markets are "highly concentrated."459 DRA also relies upon "wallet share" data from third-party vendor TNS Telecoms to show that SBC and Verizon - even in an "extremely overbroad market definition" including local, long distance, wireless, cable, and Internet - control a substantial share of the market.460

DRA also questions whether new intermodal competition will place any material pricing pressure on the ILECs. It maintains that much of current "substitution is the result of the ILECs' deliberate efforts to market and co-market their own wireless services,"461 so "it is premature to conclude that the ultimate result will be increased competition as opposed to merely an equally concentrated market made up of different services."462 DRA further argues that "even when total `cord-cutting' occurs, . . . it is concentrated among younger customers who might not otherwise subscribe to phone service at all, or in the past, would have shared one line in a household with multiple occupants."463

Finally, even assuming intermodal competition exists and exerts significant pressure on the ILECs, DRA still voices doubts whether the Commission should make changes to its price regulations. DRA explains that "to the extent that the ILECs have shown they are suffering any loss to competition, they have not shown that anything about the current regulatory framework is driving that loss.464 DRA adds that "as heavy users switch in even greater numbers to bundles and higher-end services such as DSL . . . it will become a greater and greater temptation for the ILECs to maximize profit by shifting maintenance and other resources away from basic switched service customers."465

TURN maintains that ILECs continue to have significant market power. With respect to SureWest and Verizon, TURN states that its analysis found that "market concentration little changed from the pre-1996 period, with virtual monopoly conditions persisting in most wire centers."466 TURN asserts that Frontier "maintains a pure monopoly position in the overwhelming majority of its wire centers,"467 and that AT&T "retains an overwhelming market share for both the residential and small business market segments."468

TURN's analysis of market competition, however, relies on its conclusion that the relevant market only includes wireline circuit switched telecommunications services.469 Based on this determination, TURN relies on a HHI analysis of the narrow wireline telecommunications service.

DisabRA expresses concern that the disabled market will not invite competition, because it is perceived to be an "unattractive sub-market:"

[B]ecause of the difficulty in marketing to people with a range of disabilities, and because many people with disabilities are low income, providers may ignore this market in order to pursue market segments that are seen as more lucrative.470

Testifying on behalf of DisabRA, Dmitri Belser adds that "many service providers in California have been unwilling to offer accessible and disability-related services and products because of their perceptions, right or wrong, about the disability market."471

CPA agrees with "the very experienced and highly qualified economists representing a cross-section of interests - DRA, SBC and DOD" who state that "typical pay telephone locations are not likely to be sought after or served by the ILECs' facilities-based competitors."472 CPA explains that since "payphone lines are rarely concentrated"473 and are typically "located on the premises of a gasoline station, a corner grocery, a neighborhood restaurant, or another small business,"474 the lack of "proximity of such small businesses to a larger business customer that is a target for a competitor's investment in `overbuilding' the ILEC's investment" makes competition unlikely.475 It adds that pay telephones are important to rural areas and low-income and minority neighborhoods,476 all places where competition is likely to develop more slowly than other areas.477

Greenlining concludes that AT&T and Verizon "completely dominate their respective markets."478 According to Greenlining, the ILECs' market capitalization of over $90 billion each supports this conclusion.479 Greenlining adds that AT&T and Verizon "have and will be able to maintain their dominance due to knowledge of consumers' demands, a well-established corporate infrastructure, strategic marketing techniques, and smart business decisions - such as mergers and buyouts of competition."480 Greenlining asserts that the ILECs "have successfully been able to parlay landline losses into broadband and wireless profits due to the strengths of their respective corporations."481

Cox states that the ILECs' "arguments do not support the claims of losses due to `intermodal' competition from other companies."482 It questions the applicability of ILECs' studies to California, because "much of their `evidence' on line losses was national in scope, not focused at all on California."483 But even assuming the ILECs are losing lines, Cox doubts the importance of these losses, since by "the ILECs' candid admissions . . . much of the line losses . . . were . . . conversions of their own customers from traditional landline services to other forms of service still provided by them."484 Cox suggests that losses "are offset by gains by the ILECs in DSL lines and wireless lines."485 Evidence offered in support of this conclusion includes the following: an AT&T customer briefing,486 Harris's testimony that AT&T's "decline in residential access lines was, in fact, being more than offset by [its] increase in broadband access lines,"487 and Taylor's testimony that "losses in access lines were, in large number, losses to broadband and wireless services."488

5. Discussion: ILECs Do Not Possess Market Power that Warrants Continuation of Current Regulations

Our review of the extensive record in this proceeding convinces us that Verizon, SBC, SureWest, and Frontier lack the ability to limit the supply of telecommunications services in telecommunications markets, and therefore lack the market power needed to sustain prices above the levels that a competitive market would produce. We find that this result holds throughout their service territories and for both business and residential services.

Verizon takes the most direct approach in presenting its case. First, Verizon detailed how the FCC's ubiquitous unbundling regulatory strategy has led to the widespread entry of CLECS into local markets and, by ensuring provision of a reasonably priced UNE-L, makes all markets subject to unbundling requirements contestable. Second, Verizon demonstrated how advanced technologies act as close substitutes to wireline services. Verizon reviewed the impact this cross-platform competition is having on the sale of telecommunications services. Finally, Verizon documented the presence of competitive suppliers throughout its entire service territory.

Verizon appropriately began by discussing the federal unbundling scheme, which was implemented over multiple years by the FCC and this Commission and remains in place today. Verizon described the unbundling strategy as follows:

The mandated sharing of the incumbent's network, via resale and unbundling, enables competitors to use the incumbent's facilities in competition with the incumbent, while being able to profitably charge a price equal to regulated wholesale price of the unbundled network elements plus a competitively determined cost for marketing and customer service.489

Verizon argued that these obligations imposed on incumbents, if satisfied, "render retail regulation unnecessary and redundant."490

Although the existence of this regulatory policy alone assures that we do not need the level of price regulation adopted eighteen years ago when competition was not present, Verizon also successfully demonstrated that this program has led to the actual entry of competitors into telecommunications markets. Verizon produced evidence that CLECs are present in zip codes that represent ninety percent of the total households in Verizon's service territory.491 The presence of these CLECs, along the continued provision of UNE-L at wholesale prices set by this Commission, makes it possible for CLECS to contest any market in which Verizon attempts to raise prices above just and reasonable levels. We find this cumulative evidence to be persuasive.

We agree that the build out of wireless carriers' networks since this Commission's last major telecommunications regulatory review eighteen years ago has made wireless technologies a close substitute for landline services. This evidence is a significant factor in this decision.

Verizon next builds upon its prior arguments by presenting a map that shows the ubiquitous competitive presence of wireless carriers, CLEC wireline carriers, and cable service providers present within its service territory.499 This testimony, which documents the presence of cross-platform competitors throughout the entire Verizon service territory in California, is uncontroverted.

In summary, Verizon has developed a record in this proceeding that demonstrates that policy, technology, and market developments prevent it from exercising market power in its California service territories. The extensive presence of competitors in Verizon's service territory and the ease of expanding service by both wireless and VoIP carriers makes it clear that Verizon could not limit the supply of telecommunications services provided in any part of its California service territories and thereby cannot sustain above-market prices.

AT&T's showing likewise demonstrated that policy and technology limit its market power. Like Verizon, AT&T states that under Sections 251(c) and 252(d) of the Telecom Act of 1996, it must "provide unbundled network elements (UNEs) at cost-based rates, resell retail services at an avoided cost discount, and interconnect with competitors' networks using cost-based reciprocal interconnection charges."500 This Commission has spent countless hours in fulfilling the state duties required to implement these sections of the Telecommunications Act of 1996.501 As a result, the Commission is intimately familiar with this regulatory program, and our experience is consistent with both ILECs' characterization of the unbundling regime.

AT&T, like Verizon, also detailed the growth of wireless and VoIP services. AT&T documented that alternative technologies have provided realistic alternatives to wireline telecommunications service: "[D]uring the period 2000-2004, SBC California lost almost 19 percent of its residential switched access lines, including a loss of over 21 percent of its non-lifeline primary residential switched access lines. During the same period, SBC California lost almost 23 percent of its business switched access lines."502 Testifying on behalf of AT&T, Harris provided further evidence that shows wireless, even when purchased in addition to a wireline connection, places competitive pressure on landline services:

[A]t least occasionally, almost three fourths of wireless subscribers use a wireless phone instead of a wireline phone for long distance calls, and 65 percent do so for local calls. The same study also finds that 39 percent of wireline phones users are "very" or "somewhat" likely to abandon their wireline service within two years.503

Thus, AT&T demonstrated that wireless technology already exercises a competitive check on AT&T's provision of telecommunications services.

While AT&T does not follow Verizon's lead and demonstrate the ubiquitous presence of competitors throughout its service territory, AT&T nonetheless has convincingly demonstrated that competitive forces limit market power. In particular, AT&T's central argument - that the unbundling scheme makes the provision of telecommunications services by competitors possible in every wire center throughout its service territory - is compelling.

We find that arguments of other parties that contend there is little competition and that the incumbent carriers retain market power are unpersuasive. These contrary arguments are not supported by the weight of the substantial record evidence, including the evidence that these parties themselves marshaled.

DRA's evidence that a CLEC entry strategy based on UNE-P failed does not support its conclusion that an ILEC could sustain an above-market price increase. A loss of UNE-P is irrelevant to whether an ILEC can increase its prices. UNE-P never provided real incentives for true facilities-based competition, so its demise will not have a negative impact on the level of competition in the telecommunications market.

Indeed, some parties even suggest that the elimination of UNE-P may lead to increased competition in the telecommunications market, which would further limit ILECs' market power. In the En Banc hearing, the Commission learned from the witness Hazlett that, in his view, the unbundling strategy pursued by the FCC not only failed in providing a competitive alternative, but it also discouraged investment in facilities that compete with ILECs in the provision of telecommunications services.508 In the evidentiary portion of this proceeding, Aron filed testimony on behalf of Verizon that makes similar points.509 Aron explained that UNE-P was "severely underpriced" relative to ILECs' actual costs,510 that this pricing led to "a ravaging of the incentive to invest in facilities,"511 and that "where retail prices are low relative to cost or even below cost, competition is discouraged."512 Aron's testimony is uncontroverted.

HHI values cited by TURN and DRA also provide no helpful information for our assessment of ILEC market power. As noted above, TURN and DRA have calculated HHIs based on their narrow definition of the telecommunications market (excluding all wireless services) and argue that high values of the HHI that they calculate indicate that this market is highly concentrated.513 They then conclude that the incumbents have market power.514

This reliance on HHI calculations, however, is neither legally nor economically justified. Substantial legal precedent discusses the dangers of relying on market share as a measure of competition in regulated markets.515 Such dangers are well recognized by the courts, the FCC, and this Commission. For example, in dismissing a claim that a cellular phone company with a one hundred percent share of the wholesale market exercised market power, the Ninth Circuit stated:

"Blind reliance upon market share, divorced from commercial reality, [can] give a misleading picture of a firm's actual ability to control prices or exclude competition. . . ." Reliance on statistical market share in cases involving regulated industries is at best a tricky enterprise and is downright folly where, as here, the predominant market share is the result of regulation. In such cases, the court should focus directly on the regulated firm's ability to control prices or exclude competition. 516

In its 1996 order declaring that the long distance carrier AT&T was non-dominant, the FCC agreed that "it is well-established that market share, by itself, is not the sole determining factor of whether a firm possesses market power":

Other factors, such as demand and supply elasticities, conditions of entry and other market conditions, must be examined to determine whether a particular firm exercises market power in the relevant market. As [the FCC] noted in the First Interexchange Competition Order, "[m]arket share alone is not necessarily a reliable measure of competition, particularly in markets with high supply and demand elasticities."517

Similarly, this Commission, in analyzing the merger of Verizon and MCI, held that it agreed with the Advisory Opinion that HHI analysis "does not provide relevant insight into the dynamics of this market, and is not needed to perform a competitive analysis."518 Thus, legal precedent indicates that HHIs are not needed for our analysis of whether a company can sustain prices above market.

From an economic standpoint, the market share analysis provided by TURN and DRA is meaningless for evaluating market power in the telecommunications market. Market share tests are inherently backward looking and not good predictors of future developments, particularly in a rapidly changing industry like telecommunication. Technological changes are occurring rapidly and are impacting the market for traditional telephone service. For example, U.S. VoIP subscribership had reached 2.7 million in mid-2005 - a six-fold increase from the prior year - and is expected to continue to grow rapidly.519 In addition, wireless carriers now compete in offering voice communications services.520 DRA's and TURN's market share analyses do not reflect these developments. Indeed, their HHI figures completely exclude any consideration of competition from wireless or VoIP providers. Thus, both the rapid changing technological environment and the overly narrow market definition combine to make the HHI figures calculated by TURN and DRA meaningless for our analysis of the market situation.

The assertions of TURN and DRA that wireless services complement wireline services are not supported by the evidence. When services are complements, then the increased use of one service leads to the increased use of the other. Thus, if the arguments of TURN and DRA that wireline and wireless services are complements were true, we would expect that the increasing use of wireless phones would lead to an increasing use of wireline phones. However, by all measures presented in the evidence, the increasing use of wireless services is correlated with decreasing use of wireline services.521 Neither TURN nor DRA addresses these facts that are inconsistent with their principal arguments. If wireline and wireless are indeed complements, TURN and DRA should be documenting increases in the use of wireline service, yet they are instead arguing that the decreases are small. The treatment of wireless is particularly critical to the arguments of TURN and DRA, and the exclusion of wireless from HHI leads to inflated values.

With respect to VoIP, DRA states that "the ILECs themselves do not really consider this mode a viable form of long-term competition and that their own affiliates have been relatively unsuccessful in providing stand-alone VoIP."522 Our review of the record evidence cited by DRA does not lead to the same finding. While we see that ILECs so far have not been successful in their VoIP offerings,523 we find no record support for the proposition that ILECs do not consider stand-alone VoIP a viable form of long-term competition. In fact, as chronicled previously, Verizon and AT&T submitted testimony stating that they consider VoIP to be a substantial long term competitor.

Concerning the comments of other parties, we are not persuaded by Cox's argument that we should not view the local market as competitive, because ILEC line losses largely resulted from DSL conversion, not intermodal competition.524 We find that the testimony of Aron, Verizon's witness, convincingly demonstrated that VoIP has tremendous growth potential, due to the explosive growth rate of 416% in the California broadband market between 2000 and 2004 to 4.69 million broadband lines.525 The summary statement that specifically predicts that "[o]ver the next five years, we project the Bells will lose at least as many lines to VoIP as they have lost to UNE-P over the previous five years - but those lost to VoIP will generate zero revenue for the Bells and, therefore, have far worse margin implications" comports with our own view of this market.526

The testimony of XO, unfortunately, focused on a special access service not considered in this phase of the proceeding.

Greenlining's arguments suggesting that wireless service may be a complement to wireline service for some customers and a substitute for others are clearly true.527 For our analysis here, however, what is critical is the net effect, and we find that the record evidence as a whole convincingly shows that wireless service overall is a substitute for wireline service.

DisabRA made a showing based on the assumption that the services used by their disabled constituents are special and differ from the mass market communication services.528 We agree with this assessment, but that showing is not critical to our inquiry in this more generic proceeding. The special services used by the disabled community instead are being addressed in a separate rulemaking proceeding, which looks at the public policy programs targeted at both the LifeLine and disabled communities.529

CPA argued that voice services connecting pay telephones are share the characteristic of those traditional landline services proposed for special pricing protections, such as basic residential and business services.530 Yet the decline in pay telephone use, largely as a result of ubiquity of wireless services, demonstrates that it is indeed subject to competitive forces that make price controls unnecessary. Moreover, other remedies for pay telephone providers are available, and will continue to be available, under our regulatory regime. If pay telephone companies face a "price squeeze" for inputs that they need, they may have cause for complaint. We note that wholesale services are not part of this proceeding.

DOD/FEA's arguments largely lament the demise of the UNE-P.531 The demise of the UNE-P resulted from a FCC strategy, and as we discussed above, this demise does not materially affect our assessment of ILEC market power.

In addition to the comments and testimony directly discussed, we have reviewed the entire record on this matter and conclude that Verizon, SBC, SureWest, and Frontier lack market power in their service territories. We, therefore, conclude that price regulation is no longer needed to ensure that prices are just and reasonable.

Finally, recognizing public controversy associated with this proceeding, we briefly discuss what we do not need to demonstrate to establish a lack of market power. First, we do not need to find that a telecommunications market is "perfectly competitive." No market is perfectly competitive, but many markets are disciplined by threats of entry and the availability of close substitutes, which check the pricing power of market participants.

206 Cal. Pub. Util. Code §451.

207 Declaration of Dr. Debra J. Aron at ¶ 35 (May 31, 2006) (testifying on behalf of Verizon) (hereinafter "Aron Opening Comments").

208 Id. at ¶ 39.

209 Id.

210 Id. at ¶ 45.

211 Id. at ¶ 51

212 Id. at ¶ 62.

213 Id. at ¶ 63.

214 Id. at ¶ 64.

215 Id. at ¶ 67.

216 Id. at ¶ 73.

217 Id. at ¶ 76.

218 Id. at ¶ 78.

219 Id. at ¶ 80.

220 Id. at ¶ 96.

221 Id.

222 See Id. at ¶ 105 and Table 6 (proprietary).

223 Pacific Bell Opening Brief at 10.

224 Id. at 11 (citing Harris Opening Comments at 11).

225 Id.

226 Id. at 10.

227 Id. at 12 (citing Taylor Reply Comments at 5 and Harris Reply Comments at 6, 10).

228 Id. (citing Taylor Reply Comments at 5 and Harris Reply Comments at 6,10).

229 Id. at 12 (citing Harris Reply Comments at 14-15).

230 Harris Reply Comments at 24.

231 Pacific Bell Opening Brief at 14 (citing Harris Opening Comments at 12-13; Taylor Opening Comments at 5, 23-24).

232 Id. at 19.

233 Id.

234 Taylor Opening Comments at 11.

235 Pacific Bell Opening Brief at 15 (citing Harris Opening Comments 34).

236 Id.

237 Id.

238 SureWest Opening Brief at 5 (citing Harris Opening Comments at 10-12); Citizens Opening Brief at 4 (citing Harris Opening Comments at 10-12).

239 SureWest Opening Brief at 6 (citing Aron Opening Comments at 32); Citizens Opening Brief at 5 (citing Aron Opening Comments at 32).

240 SureWest Opening Brief at 15 (citing SureWest Opening Comments at 9); Citizens Opening Brief at 11-12 (citing Citizens Reply Comments at 9).

241 SureWest Opening Brief at 16; Citizens Opening Brief at 12-13.

242 SureWest Opening Brief at 14; Citizens Opening Brief at 10-11.

243 SureWest Opening Brief at 13-14 (citing FCC Triennial Review Remand Order at 43,45 and U.S. Telecom Association v. FCC, 359 F. 3d. 554 (D.C. Cir 2004)); Citizens Opening Brief at 10-11 (citing FCC Triennial Review Remand Order at 43,45 and U.S. Telecom Association v. FCC, 359 F. 3d. 554 (D.C. Cir 2004)).

244 SureWest Opening Brief at 13-14 (citing FCC Triennial Review Remand Order at 43,45 and U.S. Telecom Association v. FCC, 359 F. 3d. 554 (D.C. Cir 2004)); Citizens Opening Brief at 10-11 (citing FCC Triennial Review Remand Order at 43,45 and U.S. Telecom Association v. FCC, 359 F. 3d. 554 (D.C. Cir 2004)).

245 SureWest Opening Brief at 14-15 (citing FCC WC Docket No. 04-223 at ¶23); Citizens Opening Brief at 11 (citing FCC WC Docket No. 04-223 at ¶23).

246 SureWest Opening Brief at 11.

247 Id. at 10.

248 Citizens Opening Brief at 8.

249 Id. at 8-9.

250 DRA Opening Brief at 17-18.

251 Id. at 18 (citing Triennial Review Order, 18 FCC Rcd at 17295, ¶97 and 499 n. 1549).

252 Id. (citing DRA Reply Comments at 24-92; Exhibits 1-9; Roycroft Opening Comments; Roycroft Reply Comments).

253 Id. at 20.

254 Id. at 22.

255 Id. at 27 (citing 2 Tr. at 239-240; 3 Tr. at 478, 509).

256 Id. at 19.

257 Id. at 19-20.

258 Id. at 22-23.

259 Id.

260 Id. at 22-23.

261 TURN Opening Brief at 4.

262 Id.

263 Roycroft Opening Comments at ¶38.

264 Id.

265 Id.

266 Id. at ¶39 (referring to Table 2).

267 Id. at ¶ 40.

268 Id. at ¶ 41.

269 Id. at ¶ 40.

270 DOD/FEA Opening Brief at 4 (citing Pacific Bell Opening Comments at 108; Verizon Opening Comments at 4; SureWest Opening Comments at 2; Citizens Opening Comments at 4).

271 Id. at 6.

272 Id.

273 Id. at 7.

274 Id.

275 Id.

276 Id.

277 Id. (citing DOD/FEA Opening Comments at 4; Broadband Deployment in California, California Public Utilities Commission at 30-32 (May 5, 2005)).

278 DisabRA Opening Brief at 3.

279 Id. at 11-12.

280 Id.

281 Id. at Attachment 2, 2.

282 Id. at Attachment 2, 4.

283 Id. at Attachment 2, 5.

284 Id. at Attachment 2, 2.

285 Id.

286 CPA Opening Brief at 7.

287 Id. (citing Murray Testimony, 5 Tr. at 857).

288 Id. at 1.

289 Id. at 4-5.

290 Id. at 7.

291 CCTA Opening Brief at 2 (citing 4 Tr. at 578).

292 CCTA Opening Brief at 2 (citing 4 Tr. at 578).

293 Greenlining Opening Brief at 9-10.

294 Id. at 5.

295 Id. at 3 (citing Harris Testimony, 2 Tr. at 296-303); Id. (citing Taylor Testimony, 3 Tr. at 509-512).

296 Id. at 6 (citing En Banc Tr. at 59).

297 Opening Comments of XO Communications Services at 7 (May 31, 2005).

298 Id.

299 By "cutting the cord," we refer to users who give up their landline phone service entirely and instead rely only on another telecommunications voice service ,such as a wireless, VoIP, or other technology.

300 "Bundling" refers to the so called "triple play" sale of voice, data, and video in one package for a single price by major communications market participants, including telephone companies, cable providers, satellite service providers, wireless companies, BPL providers, and others.

301 See, for example, Ex. 40, Aron Opening Declaration at ¶ 26 citing "High-Speed Services for Internet Access: Status as of June 30, 2004," FCC Industry Analysis and Technology Division - Wireline Competition Bureau, December 2004, Table 8.

302 We note that we take the special needs of low-income and disabled Californians to heart and that we have opened at special rulemaking, R.06-05-028 to address the issues associated with these communities. We refuse, however, to marginalize these communities by considering them so different from other consumers so as to constitute a completely separate market.

303 Telecommunications Act of 1996, 47 USCS §§ 151.

304 Review of the Section 251 Unbundling Obligations of Incumbent Local Exchange Carriers; Implementation of the Local Competition Provisions of the Telecommunications Act of 1996; Deployment of Wireline Services Offering Advanced Telecommunications Capability, CC Docket Nos. 01-338, 96-98, 98-147, Report and Order and Order on Remand and Further Notice of Proposed Rulemaking, 18 FCC Rcd 16978, 17145, ¶ 36 (2003) (Triennial Review Order, or TRO), corrected by Errata, 18 FCC Rcd 19020 (2003) (Triennial Review Order Errata), vacated and remanded in part, affirmed in part, United States Telecom Ass'n v. FCC, 359 F.3d 554 (D.C. Cir. 2004) (USTA II) cert. denied, 125 S.Ct. 313, 316, 345 (2004).

305 TRO ¶. 36 (footnotes omitted).

306 In the Matter of Unbundled Access to Network Elements; Review of Section 251 Unbundling Obligation of Incumbent Local Exchange Carriers, WC Docket No. 04-313, CC Docket No. 01-338, Order on Remand, 20 F.C.C. Rcd. 2533, FCC 04-290 (rel. Feb. 4, 2005) (TRRO).

307 Implementation of the Local Competition Provisions in the Telecommunications Act of 1996; Interconnection between Local Exchange Carriers and Commercial Mobile Radio Service Providers, CC Docket Nos. 96-98, 95-185, First Report and Order, 11 FCC Rcd 15499, at 15812-72, paras. 618-740 (1996) (Local Competition Order), aff'd in part and vacated in part sub nom. Competitive Telecommunications Ass'n v. FCC, 117 F.3d 1068 (8th Cir. 1997) and Iowa Utils. Bd. v. FCC, 120 F.3d 753 (8th Cir. 1997), aff'd in part and remanded, AT&T v. Iowa Utils. Bd., 525 U.S. 366 (1999) (Iowa Utils. Bd.), on remand, Iowa Utils. Bd. v. FCC, 219 F.3d 744 (8th Cir. 2000), reversed in part sub nom. Verizon Communications Inc. v. FCC, 535 U.S. 467 (2002) (Verizon), Order on Reconsideration, 11 FCC Rcd 13042 (1996), Second Order on Reconsideration, 11 FCC Rcd 19738 (1996), Third Order on Reconsideration and Further Notice of Proposed Rulemaking, 12 FCC Rcd 12460 (1997), further recons. pending. at 15812-72, paras. 618-740.

308 Historically, the major bottleneck to local phone competition was seen as the ILEC's control of "the last mile" between the central office to the customer's home.

309 TRO ¶ 41, footnotes omitted.

310 See USTA II, 359 F.3d at 564-76. .

311 USTA II, 359 F.3d at 564-76.

312 TRRO ¶ 13.

313 TRRO ¶ 29.

314 TRRO ¶ 7, footnote omitted.

315 TRRO para 8.

316 TRRO cited in footnote above.

317 TRRO, p. 5

318 TRRO para 199.

319 These stem from the Local Competition Order, cited above.

320 Aron Opening Comments at ¶ 53.

321 Verizon Opening Brief at 8.

322 Aron Opening Comments at ¶ 57.

323 Aron Reply Comments at ¶ 74.

324 Pacific Bell Opening Brief at 16 (citing Taylor Opening Comments at 17-18).

325 Id.

326 Id. at 36 (citing Aron Testimony in 4 Tr. at 673-74).

327 Id. at 36 (citing Harris Opening Comments at 16).

328 Id. at 36 (citing Harris Opening Comments at 14).

329 Pacific Bell Reply Brief at 25.

330 Id. (citing Taylor Opening Comments at 19-21).

331 Id. (citing Taylor Reply Comments at 30-31).

332 SureWest Opening Brief at 17-18 (citing SureWest Opening Comments at 4-5; Opinion Approving Comcast CPCN Application, D.05-12-031. When a cable company "passes" a home, it stands ready to commence service to that home if the homeowner agrees to purchase its services.

333 Citizens Opening Brief at 6 (citing DRA Reply Comments at 80).

334 Id. (citing Exhibit 4).

335 DRA Opening Brief at 20.

336 Id. (citing 2 Tr. at 244-247).

337 Id. (citing 2 Tr. at 248-250).

338 Id. at 23.

339 Id. at 23 (citing 2 Tr. at 261-263).

340 Id. at 21 (citing DRA Reply Comments at 55-59, 78-81; Roycroft Opening Comments at 6).

341 TURN Opening Brief at 8 (citing 4 Tr. at 710).

342 Id. (citing 5 Tr. at 749, 757).

343 Id. (citing Exhibit 51-C).

344 Id. (citing Roycroft Reply Comments at ¶12-15).

345 Id. (citing 4 Tr. at 710).

346 Id. at 9.

347 Id. (citing Roycroft Reply Comments (proprietary) at ¶22-23).

348 Id. at 10 (citing Roycroft Reply Comments (proprietary)).

349 Id. (citing Roycroft Opening Comments at ¶67).

350 Id. (citing Roycroft Reply Comments at ¶30).

351 DOD/FEA Opening Brief at 5-6 (citing DOD/FEA Opening Comments at 3..

352 Id. at 6, citing DOD/FEA Opening Comments at 4.

353 DisabRA Opening Brief at 12-13.

354 Id. at 13.

355 Id. (citing Id. at Attachment 2, 2-3).

356 Id. at 14 (citing Id. at Attachment 3, ¶10-16).

357 XO Opening Comments at 5.

358 Id.

359 Id. at 9.

360 Verizon Opening Brief at 10.

361 Aron Opening Comments at ¶ 62 (citing Local Telephone Competition: Status as of June 30, 2004, Federal Communications Commission, Industry Analysis and Technology Division Wireline Competition Bureau, December 2004, downloaded from http://www.fcc.gov/Bureaus/Common_Carrier/Reports/FCC-State_Link/IAD/lcom1204.pdf, Tables 8 (CLEC Lines), 9 (ILEC lines), and 13 (wireless)).

362 Verizon Opening Brief at 10 (emphasis in original) (citing Aron Reply Comments at ¶ 72).

363 Aron Reply Comments at ¶ 22 (citing David G. Loomis, and Christopher M. Swann, Intermodal Competition in Local Telecommunications Markets, Information Economics and Policy, Vol. 17 (2005)).

364 Aron Opening Comments at ¶ 63 (citing Clyde Tucker et al., Household Telephone Service and Usage Patterns in the U.S. in 2004, Bureau of Labor Statistics at Table A, 4); In-Stat/MDR, Cutting the Cord: Consumer Profiles and Carrier Strategies for Wireless Substitution, 2004.

365 Aron Reply Comments at ¶¶ 27, 118 (citing Yuki Noguchi, Sprint Prepares to Cut the Cord, Washington Post, June 6, 2005).

366 Harris Reply Comments at 16 (citing Nearly One in Ten U.S. Adults Use Wireless Phones Exclusively and Landline Displacement Expected to Grow, Harris Interactive, June 27, 2005; Consumers and Communications Technologies: Current and Future Use, Harris Interactive, prepared for the National Consumers' League, June 29, 2005).

367 Aron Opening Comments at ¶ 63 (citing Clyde Tucker et al., Household Telephone Service and Usage Patterns in the U.S. in 2004, Bureau of Labor Statistics at Table A, 4); In-Stat/MDR, Cutting the Cord: Consumer Profiles and Carrier Strategies for Wireless Substitution, 2004.

368 Pacific Bell Opening Brief at 25-26 (citing Harris Opening Comments at 18).

369 Id. at 13-14 (citing Harris Opening Comments at 19-23; Harris Reply Comments at 16).

370 Id. at 27 (citing Harris Opening Comments at 22-23).

371 Id. at 13-14.

372 Id. at 28.

373 Id. at 28 (citing Harris Opening Comments at 23).

374 SureWest Opening Brief at 18-19.

375 Id. at 19.

376 DRA Opening Brief at 25 (citing 3 Tr. at 521-522).

377 Id. at 26 (citing ORA Reply Comments at 28-30).

378 Id. at 25 (citing Exhibits 11 and 12).

379 Id. at 26.

380 Id. at 26 (citing ORA Reply Comments at 30; Exhibit 1, A.05-02-027, SBC Response to TURN 11-41 Public.pdf).

381 TURN Opening Brief at 12. In support of this argument, TURN states that AT&T expert Harris "agrees that wireless is currently a complement to local exchange service, not a substitute." TURN Opening Brief at 14, citing RT. 326. This assertion, however, seems to be an overstatement. Harris, in fact, states the following: "When a customer increases use of wireless, the customer is not necessarily replacing minutes of use in the home. . . . If that family decided to spend more on telecommunications services, this could be due to the family actually buying additional services instead of substituting." Id. at 14 (citing 2 Tr. at 332-334).

382 Id. at 13 (citing 4 Tr. at 674; Roycroft Reply Comments at ¶ 73).

383 Id. at 13 (citing Roycroft Opening Comments at ¶ 132).

384 Id. at 14.

385 Id. at 14-15 (citing Roycroft Opening Comments at ¶114; Exhibit 44).

386 Id. at 15.

387 Id. at 14.

388 Id. at 13 (citing Aron Opening Comments at ¶ 67).

389 Id. at 13 (citing Roycroft Reply Comments at ¶ 62; Roycroft Opening Comments at ¶123-126).

390 Id. at 8-9 (citing Roycroft Reply Comments at ¶19).

391 DOD/FEA Opening Brief at 6 (citing DOD/FEA Opening Comments at 4).

392 DisabRA Opening Brief at 14.

393 DisabRA Opening Brief at 15 (citing Id. at Attachment 3, ¶ 6).

394 Id. (citing Id. at Attachment 3, ¶ 6).

395 Id. at 15-16 (citing Id. at Attachment 3, ¶16).

396 Id. at 15 (citing Id. at Attachment 2, 10 and 13).

397 Id. at 17 (citing Id. at Attachment 2, 3-4).

398 Id. (citing Id. at Attachment 2, 3-4).

399 Id. at 19 (citing Id. at Attachment 2, 4).

400 Id. (citing WS-3 Tr. at 253).

401 Id.

402 Greenlining Opening Brief at 8.

403 Id.

404 Id. at 8-9.

405 Id. at 13.

406 Id.

407 CSBRT/CSBA Opening Comments at 2.

408 Id. (citing Implementation of Omnibus Budget Reconciliation Act of 1993, Annual Report and Analysis of Competitive Market Conditions With Respect to Commercial Mobile Services (CMRS), Ninth Report (2004) at 89).

409 Id. at 3-4 (citing Frank Governali, et al., Neutral Views Retained for North American Telcos, Goldman Sachs, (January 12, 2005) at 5).

410 Id. at 3-4 (citing Frank Governali, et al., Neutral Views Retained for North American Telcos, Goldman Sachs, (January 12, 2005) at 5).

411 Verizon Opening Brief at 12.

412 Id. at 13.

413 Id. at 12 (citing Aron Opening Comments at ¶ 99).

414 Id. at 13 (emphasis in original).

415 Id. (emphasis in original) (citing Aron Opening Comments at ¶ 102; Aron Reply Comments at ¶ 59).

416 Id. at 17-18.

417 Aron Reply Comments at ¶ 72 (citing Craig Moffett et al., Quarterly VoIP Monitor: How High is Up for Cable VoIP?, Bernstein Research Call, March 24, 2005; Harris Opening Comments at 27 (citing same)).

418 Aron Reply Comments at ¶ 65 (citing Cox Brings Telephone to Five New Markets in '05, Cox Communications Press Release, March 8, 2005).

419 Verizon Opening Brief at 15 (citing Aron Reply Comments at ¶ 114).

420 Id. at 16 (citing Aron Reply Comments at ¶ 71).

421 Aron Reply Comments at ¶ 72 (citing Voice over Internet Protocol: Ready for Prime Time, Cox Communications' Successful Deployment of VoIP, Cox Communications white paper, May 2004, at 11).

422 Pacific Bell Opening Brief at 14 (citing Harris Opening Comments at 25-28; Harris Reply Comments at 18-22).

423 Pacific Bell Opening Brief at 14 (citing Taylor Reply Comments at 12-13).

424 Harris Reply Comments at 20-21 (citing Cox website, accessed 8/19/2005, available at www.cox.com; Whitepaper: Voice over Internet Protocol: Ready for Prime Time, Cox Communications, May, 2004; Comcast website, accessed 8/19/2005, available at www.comcast.com; Time Warner Cable website, accessed 8/16/2005, available at www.timewarnercable.com).

425 Id. at 18 (citing Broadband Deployment in California, CPUC (May 5, 2005) at 7).

426 Id. at 18 (citing Harris Opening Comments at 52).

427 Id. at 18-19 (citing Harris Opening Comments at 27).

428 Id. at 20.

429 DRA Opening Brief at 23.

430 Id. (citing ORA Reply Comments at 22, 31, 45).

431 Id. at 24 (citing ORA Reply Comments at 34-35).

432 Id. (citing ORA Reply Comments at 32).

433 Id. (citing ORA Reply Comments at 32).

434 Id. (citing ORA Reply Comments at 32).

435 Id. at 25 (citing ORA Reply Comments at 36-38).

436 Id. at 24-25 (citing FCC SBC/AT&T Merger Order, ¶88; FCC Verizon/MCI Merger Order, ¶89).

437 Id. at 25 (citing DRA Reply Comments, at 36-38).

438 TURN Opening Brief at 18.

439 Id.

440 Id. (citing Aron Opening Comments at ¶83-84).

441 CSBRT/CSBA Opening Brief at 4 (citing CISCO Systems Reports Third Quarter Earnings, May 10, 2005 at http://newsroom.cisco.com/dlls/2005/fin_051005.html?CMP=ILC-001; Linksys Ships Over One Million Voice Over IP Ports to the Consumer Market in Less Than 6 Months, May 10, 2005 at http://www.linksys.com/press/press.asp?prid=199&cyear=2005; Frank Governali, et al., Neutral Views Retained for North American Telcos, Goldman Sachs, (Jan 12, 2005) at 4).

442 Id. (citing CISCO Systems Reports Third Quarter Earnings, May 10, 2005 at http://newsroom.cisco.com/dlls/2005/fin_051005.html?CMP=ILC-001; Linksys Ships Over One Million Voice Over IP Ports to the Consumer Market in Less Than 6 Months, May 10, 2005 at http://www.linksys.com/press/press.asp?prid=199&cyear=2005; Frank Governali, et al., Neutral Views Retained for North American Telcos, Goldman Sachs, (Jan 12, 2005) at 4).

443 Id. (citing High Speed Access for Internet Access: Status as of June 30, 2004, FCC Industry Analysis and Technology Division, Wireline Competition Bureau (December 2004) at Table 8).

444 Verizon, Opening Brief at 10.

445 Id. at 8.

446 Id. at 18. Verizon cites the Commission "Intermodal competition, principally from cable, wireless, and ... VoIP[,] is intensifying in the mass market in California. Intermodal alternatives have displaced and are continuing to apply competitive price pressure on and continuing to displace a significant amount of traditional wireline service and usage." D.05-11-029 (Nov. 18, 2005), Finding of Fact 25 at p. 121; see also D.05-11-028 (Nov. 18, 2005), Finding of Fact 22 at p. 104.]

447 Id. (citing FCC 05-184 (Verizon-MCI Merger Order), WC Docket No. 05-75, Rel. Nov. 17, 2005 at ¶¶ 87, 90-91; FCC 05-183 (SBC-AT&T Order), WC Docket No. 05-65, Rel. Nov. 17, 2005 at ¶¶ 87, 89-90).

448 Id. at 19 (citing FCC 05-184 (Verizon-MCI Merger Order), WC Docket No. 05-75, Rel. Nov. 17, 2005 at ¶¶ 87, 90-91; FCC 05-183 (SBC-AT&T Order), WC Docket No. 05-65, Rel. Nov. 17, 2005 at ¶¶ 87, 89-90).

449 Harris Opening Comments at 12.

450 Id. at 12.

451 Pacific Bell Opening Brief at 36.

452 Id. at 36.

453 AT&T Opening Brief, at 37.

454 Id.

455 Id.

456 DRA Opening Brief at 28 (citing ORA Reply Comments at 55-56, 78-84).

457 Id. at 28-29 (citing Exhibit 17; Exhibit 1).

458 Id. at 30 (citing Exhibit 57C).

459 Id. at 29 (citing ORA Reply Comments at 57).

460 Id. at 34-35 (citing ORA Reply Comments at 48; Exhibit 1 thereto at SBC-CA Response to ORA 2-6, RROIR 000605-6; Exhibit 62C, at 104; Exhibit 62C, at 4).

461 Id. at 38 (citing ORA Reply Comments at 29-30, 51-52 and 78).

462 Id. at 41.

463 Id. at 37-38 (citing ORA Reply Comments at 27).

464 Id. at 41 (citing 2 Tr. at 357-359).

465 DRA Opening Brief at 37.

466 TURN Opening Brief at 7 (citing Roycroft Reply Comments at ¶¶14, 17, 20, & 31).

467 Id. at 8 (citing Roycroft Reply Comments at ¶12-15).

468 Id. at 10 (citing Roycroft Opening Comments at ¶36).

469 Id. at 7 (citing Roycroft Reply Comments at ¶¶14, 17, 20, & 31).

470 DisabRA Opening Brief at Attachment 2, 5.

471 Id. at 20 (citing Id. at Attachment 2, 5).

472 CPA Opening Brief at 7.

473 Id. at 6.

474 Id. at 5 (citing Murray Testimony in 5 Tr. at 856).

475 Id. at 5-6 (citing Harris Testimony in 2 Tr. 253-260, 3 Tr. 471-472).

476 Id. at 5 (citing Murray Testimony in 5 Tr. 856).

477 Id. at 5 (citing Murray Testimony in 5 Tr. 856).

478 Greenlining Opening Brief at 10 (citing The New York Times, Huge Phone Deal Seeks To Thwart Smaller Rivals, (March 6, 2006)).

479 Id. (citing The New York Times, Huge Phone Deal Seeks To Thwart Smaller Rivals, (March 6, 2006)).

480 Id.

481 Id. (citing Exhibit 47; SBC's "Earning Releases" for 1st, 2nd, 3rd, and 4th Quarters of 2005 available on SBC's website).

482 Cox Opening Brief at 9.

483 Id. at 8.

484 Id.

485 Id. at 9 (citing 3 Tr. at 495-496).

486 Id. (citing Exhibit 10).

487 Id. (citing 2 Tr. at 348).

488 Id. (citing 3 Tr. at 495-496).

489 Aron Opening Comments at ¶ 166.

490 Aron Opening Comments at ¶ 166.

491 Aron Reply Comments at ¶ 58, directly cited above.

492 Verizon Opening Brief at 10 (citing Aron Reply Comments at ¶ 92).

493 Id. (emphasis in original) (citing Aron Reply Declaration at ¶ 72).

494 VoIP E911 Order, 20 FCC Rcd at 10266. We further note that pending federal legislative proposals would require VoIP providers to contribute to the Universal Service Fund in a manner that is similar to the wireless carriers and other telecommunications providers.

495 Verizon Opening Brief at 13 (citing Aron Opening Comments at ¶ 26).

496 Id.

497 Id. (emphasis in original) (citing Aron Opening Comments at ¶ 102; Aron Reply Comments at ¶ 59).

498 Id. at 16 (citing Aron Reply Comments at ¶ 71).

499 Aron Reply Comments at 39.

500 Pacific Bell Opening Brief at 16 (citing Taylor Opening Comments at 16-17).

501 For example, this Commission recently completed the tasks of pricing unbundled network elements that these carriers must make available to any company seeking to enter its market.

502 Pacific Bell Opening Brief at 61.

503 Pacific Bell Opening Brief at 28 (citing Harris Reply Comments at 16).

504 Harris Reply Comments at 18-19.

505 Id. at 18 (citing "Broadband Deployment in California," CPUC, at 7 (May 5, 2005)).

506 CSBRT/CSBA Opening Comments at 2 (citing Implementation of Omnibus Budget Reconciliation Act of 1993, Annual Report and Analysis of Competitive Market Conditions With Respect to Commercial Mobile Services (CMRS), Ninth Report (2004) at 89).

507 See DRA Opening Brief, p. 20 ; TURN Opening Brief, p. 9. Note that TURN's HHI calculations ignore competition from wireless carriers.

508 See En Banc Transcript in R.05-04-005 June 27, 2005, TR pp. 31-55

509 Aron Opening Comments at ¶ 60.

510 Id. at ¶ 56.

511 Id. at ¶ 56.

512 Id. at ¶ 59.

513 DRA Opening Brief, p. 20; TURN Opening Brief, p. 9;

514 Id.

515 See generally In the Matters of Petition for Forbearance of the Verizon Telephone Companies for Forbearance Pursuant to 47 U.S.C. § 160 (c), WC Docket No. 01-338; SBC Communications Inc.'s Petition for Forbearance Under 47 U.S.C. § 160 (c), WC Docket No. 03-235; Qwest Communications International Inc. Petition for Forbearance Under 47 U.S.C. § 160 (c), WC Docket No. 03-260; BellSouthTelecommunications Inc. Petition for Forbearance Under 47 U.S.C. § 160 (c), WC Docket No. 04-48; Memorandum and Opinion and Order, Released October 27, 2004 ("Section 271 Forbearance Order"), ¶ 22, n. 66; United States v. General Dynamics Corp., 415 U.S. 486, 498 (1974) (market share is imperfect measure of competitive constraints and must be examined in light of access to alternative supplies); Time Warner Entertainment Co. v. FCC, 240 F.3d 1126, 1134 (D.C. Cir. 2001) (stating, in discussing competition to cable systems, that "normally a company's ability to exercise market power depends not only on its share of the market, but also on the elasticities of supply and demand, which in turn are determined by the availability of competition"); Motion of AT&T Corp. to be Reclassified as a Non-Dominant Carrier, Order, 11 FCC Rcd 3271, 3308, ¶ 68 (1995) ("market share alone is not necessarily a reliable measure of competition, particularly in markets with high supply and demand elasticities") (quoting Competition in the Interstate Interexchange Marketplace, CC Docket No. 90-132, Order, 6 FCC Rcd 5880, 5890, ¶ 51 (1991)).

516 Metro Mobile CTS, Inc. v. New Vector Communications, 892 F.2d 62, 63 (9th Cir. 1989).

517 Id.

518 Decision 05-11-029, at 5/2

519 Aron Reply Comments at ¶ 40

520 Aron Reply Comments at ¶44.

521 Id.

522 DRA Opening Brief at 25.

523 Id.

524 Cox Opening Brief, at. 8-10

525 Verizon Opening Brief at 13.

526 Verizon Opening Brief, at 15, citing citing Jeffrey Helpern, and Shing Yin, "U.S. Wireline: Access Line and DSL Trends Take a Turn for the Worse, with Seasonality Only Partly to Blame," Bernstein Research Call, August 12, 2005, p. 1.

527 See Greenling Opening Brief at 7-9.

528 DisabRA Opening Brief at 1.

529 R.06-05-028.

530 CPA Opening Brief at 9.

531 DOD/FEA Opening Brief at 5.

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