NOTICE ********************************************************* NOTICE ********************************************************* This document was originally prepared in Word Perfect. If the original document contained-- * Footnotes * Boldface & Italics --this information is missing in this version The document format (spacing, margins, tabs, etc.) is changed too. If you need the complete document, download the Word Perfect version. For information about downloading documents (FTP) see file pnmc5021. File pnmc5021 (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ***************************************************************** ******** $// R&O, Calif. PUC, Petn for CMRS Rate Reg'n, PR Dkt. 94-105, FCC 95-195 //$ $/ 300.332 Mobile services /$ $/ 20.13 State petitions for authority to regulate rates /$ FCC 95-195 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. In the Matter of ) ) Petition of the People of the ) PR Docket No. 94-105 State of California and the Public ) Utilities Commission of the State ) of California To Retain Regulatory ) Authority over Intrastate Cellular ) Service Rates ) Report and Order Adopted: May 5, 1995; Released: May 19, 1995 By the Commission: Commissioner Chong not participating. I. INTRODUCTION 1. On August 8, 1994, the Public Utilities Commission of the State of California (hereinafter ``California'' or ``CPUC''), on behalf of that State, petitioned us to retain state regulatory authority over the rates for intrastate commercial mobile radio services (``CMRS''). Eighteen parties filed pleadings opposing the petition, and four parties filed pleadings supporting it. By this action, we deny the Petition because it fails to satisfy the statutory standard Congress established for extending state regulatory authority over CMRS rates. II. BACKGROUND 2. In 1993, Congress amended the Communications Act (``Act'') to revise fundamentally the statutory system of licensing and regulating wireless (i.e., radio) telecommunications services. Among other things, Congress: (1) established new classifications of ``commercial'' and ``private'' mobile radio services (``CMRS'' and ``PMRS,'' respectively) in order to enable similar wireless services to be regulated symmetrically in ways that promote marketplace competition; (2) reallocated up to 200 megahertz of spectrum from government to private use so as to expand opportunities for innovative utilization of spectrum by the private sector; and (3) authorized competitive bidding as a means of improving licensing efficiency within the context of the Act's public interest goals, which include promoting investment in new and innovative wireless telecommunications technologies. 3. Congress also provided that, as of August 10, 1994, no state or local government shall have authority to regulate ``the entry of or the rates charged'' for CMRS and PMRS services, although states are permitted to regulate the ``other terms and conditions'' of CMRS. As an exception to this general rule, Congress also provided that, if a state had ``any regulation'' concerning the rates for any commercial mobile radio service in effect as of June 1, 1993, it could retain its rate regulation authority by petitioning the Commission no later than August 9, 1994, and demonstrating that either: (1) ``market conditions with respect to such services fail to protect subscribers adequately from unjust and unreasonable rates or rates that are unjustly or unreasonably discriminatory;'' or (2) ``such market conditions exist and such service is a replacement for land line telephone exchange service for a substantial portion of the telephone land line exchange service within such State.'' 4. In our proceeding to implement OBRA, we concluded that, since Congress intended generally to preempt state and local rate and entry regulation of CMRS, a state seeking to retain regulatory authority must ``clear substantial hurdles'' in demonstrating that continued regulation is warranted. We also determined that the nature of a state's burden of proof is delineated generally by the statute itself. Specifically, we found that: [I]n implementing the preemption provisions of the new statute, we have provided that states must, consistent with the statute, clear substantial hurdles if they seek to continue or initiate rate regulation of CMRS providers. While we recognize that states have a legitimate interest in protecting the interests of telecommunications users in their jurisdictions, we also believe that competition is a strong protector of these interests and that state regulation in this context could inadvertently become as [sic] a burden to the development of this competition. Our preemption rules will help promote investment in the wireless infrastructure by preventing burdensome and unnecessary state regulatory practices that impede our Federal mandate for regulatory parity. 5. We also concluded that, while a state should have discretion to submit whatever evidence it believes is persuasive, a petition to retain regulatory authority must be grounded on demonstrable evidence. In that regard, we adopted Section 20.13 of our Rules as a guide to the kinds of evidence and information that we would consider to be pertinent and helpful to our consideration of a state petition. Moreover, in addition to the evidence, information, and analysis that a state must submit, we determined that a petitioning state also is required to identify and provide a detailed description of the specific existing or proposed rules that it would continue or establish if we were to grant its petition. We noted that the standards for preemption established in Louisiana PSC do not apply to petitions submitted under Section 332 of the Act, nor to Section 20.13 of our Rules. In Louisiana PSC the Supreme Court found that Section 2(b) of the Communications Act prohibits the Commission from exercising Federal jurisdiction with respect to ``charges, classifications, practices, services, facilities, or regulations for or in connection with intrastate communications services.'' Here, Congress has explicitly amended the Communications Act to preempt state and local rate and entry regulation of commercial mobile radio services without regard to Section 2(b). III. DECISIONAL FRAMEWORK 6. The pleadings present two threshold procedural matters that we must address before addressing the CPUC's Petition on its merits. First, some parties argue that the petition is fatally flawed because it requests regulatory authority only over cellular service rather than all CMRS services, thereby violating what these opponents claim is the fundamental OBRA goal of achieving symmetrical regulatory treatment of CMRS. Second, the parties take issue with each other's characterizations of the appropriate burden of proof in this proceeding. A. Cellular-Only Regulation 1. Pleadings of the Parties 7. Various opponents of the petition argue that: (1) Congress revised Section 332 to establish regulatory parity, remedy the disparate regulatory treatment of similar forms of CMRS, and create a uniform, nationwide regulatory regime; (2) by seeking to impose regulation only on cellular services, the CPUC would impose inconsistent regulations on different CMRS providers, thereby creating precisely the asymmetrical regulatory conditions Congress sought to remedy; and (3) accordingly, the CPUC's petition must be rejected because it seeks to impose a type of regulatory regime expressly rejected by Congress. A variant of this argument also is present in the record. Essentially, some opponents of the petition argue that: (1) regulatory parity is required by statute; (2) in order to regulate any CMRS a state must demonstrate that market conditions warrant regulating all CMRS; (3) the CPUC has not submitted a showing on non-cellular CMRS market conditions; and (4) accordingly, the petition must be dismissed. 8. The CPUC and its supporters dispute these arguments. While they acknowledge that regulatory parity is a goal of the OBRA, these parties argue that Congress expressly recognized that differential regulatory treatment of CMRS providers is permissible under the Act. Many parties claim as well that differential regulatory treatment of cellular and non-cellular services by a state not only is lawful, but should be required because there is no evidence in this record or elsewhere that non-cellular CMRS providers currently possess market power, thus making regulation of their activities inappropriate. 2. Discussion 9. We have determined in other proceedings that while regulatory parity is a significant policy that can yield important pro-competitive and pro-consumer benefits when appropriately applied, parity for its own sake is not required by any provision of the Act. Indeed, the Act allows us to adopt a flexible regulatory scheme that treats certain CMRS in a streamlined fashion. Congress recognized that market conditions might warrant differential regulatory treatment of CMRS, and it explicitly granted us the authority to forbear from applying certain provisions of the Act. That Congress understood such forbearance might be exercised selectively is not in doubt. As the OBRA Conference Report states in explaining our forbearance authority: The purpose of this provision is to recognize that market conditions may justify differences in the regulatory treatment of some providers of commercial mobile services. While this provision does not alter the treatment of all commercial mobile services as common carriers, this provision permits the Commission some degree of flexibility to determine which specific regulations should be applied to each carrier. Nothing in the record of this proceeding, or elsewhere to our knowledge, demonstrates that Congress intended to deny states similar flexibility with regard to the exercise of their CMRS regulatory authority. Thus, we are not persuaded by arguments that the CPUC's request to regulate only cellular services is fatally incongruent with the regulatory parity concepts established in OBRA. B. Burden of Proof 1. Pleadings of the Parties 10. A second threshold issue addressed by the parties concerns the evidentiary standard to be applied in assessing a state's petition on the merits. Commenters variously characterize the burden of proof as ``stiff,'' ``substantial,'' ``heavy'' or ``extremely demanding.'' Several cite, in support, our statement in the CMRS Second Report and Order that a petitioning state must ``clear substantial hurdles'' in order to overcome the statutory presumption of preemption and emphasize that a state must establish ``unique circumstances'' within its jurisdiction in order to prevail on the merits. 11. Several commenters argue that the CPUC has erroneously based its case on the duopoly market structure that has, in essence, been eliminated by Congress, rendering its Petition ``moot.'' McCaw and GTE argue that the state must prove the existence of collusive behavior or price fixing in order to prevail. McCaw also argues for a tripartite test, each element of which would be required to be satisfied before a state could continue to regulate intrastate CMRS rates: that there be substantially less competition in the particular state's CMRS/cellular market than exists at the national level; that Federal remedies be inadequate to redress the problem; and that the benefits of state regulation outweigh its costs. 12. Several commenters filing pleadings in various of the state petition dockets have suggested with respect to the burden of proof issue that our findings in the CMRS Second Report and Order on competition in the CMRS market, particularly in the cellular market, place a greater burden on petitioning states attempting to prove failed market conditions. They note, with respect to the latter, our determination in the CMRS Second Report and Order that ``there is some competition in the cellular marketplace.'' Others go further and claim that state rate regulation is ``presumptively inconsistent with the objectives of section 332(c),'' and is effectively barred in light of our decision to forbear from requiring the filing of interstate rates for CMRS. 13. In response, the CPUC and its supporters argue that regulatory parity does not preclude intrastate rate regulation even if the Commission has forborne from tariffing and that Congress could not have thought otherwise or it would not have provided for a state petitioning process in the face of possible Federal forbearance from rate regulation. The CPUC further contends that a cost-benefit analysis of state regulation is not required under the statutory standard and that any suggestion to the contrary ``serves only to highlight the carriers' antipathy to any state regulation of their industry.'' It rejects McCaw's tripartite test as impossible to meet and statutorily indefensible in consequence. In response to allegations that it must prove the existence of collusive behavior among cellular carriers, the CPUC contends that Congress did not adopt an antitrust standard of proof in Section 332. 14. The Cellular Resellers point out that the ``statutory language omits any reference to the particular standard which the Commission should apply to any State petition filed under Section 332'' and argue that recourse to the legislative history in order to define that standard is thus appropriate. They assert that unpublished transcripts of comments by Senator Richard Bryan in May 25 and June 15, 1993, mark-up sessions on S. 335, and a statement by Senator Byron Dorgan introduced into the record at the June 15 session, manifest congressional deference to continued state regulation of CMRS rates. According to the Cellular Resellers, Senator Bryan, in particular, ``suggested that `rather than have an automatic preemption [of State regulation] [Congress should] permit those states that currently regulate to do so and then require[] affirmatively that the FCC would have to determine affirmatively that competition exists....' '' Based on these statements, the Cellular Resellers contend that ``the Commission can deny a State's petition only if the Commission affirmatively concludes that there is sufficient competition in the marketplace to protect consumers and, hence, no reasonable basis for the State's petition.'' 2. Discussion 15. In order to prevail on the merits, the CPUC must sustain its statutory burden of demonstrating that ``market conditions with respect to [commercial mobile radio] services fail to protect subscribers adequately from unjust and unreasonable rates or rates that are unjustly or unreasonably discriminatory.'' A question arises as to what showing is necessary to sustain this burden. Although we addressed this issue in the CMRS Second Report and Order, we revisit it in view of the parties' debate in this record. As explained more fully below, we do not agree that our decision to forbear from regulating interstate CMRS under certain provisions of Title II makes it impossible to grant a state's petition. At the same time, we conclude that a state must do more than merely show that market conditions for cellular service have been less than fully competitive in the past. In order to retain regulatory authority, a state must show that, given the rapidly evolving market structure in which mobile services are provided, the conduct and performance of CMRS providers ill- serve consumer interests by producing rates that are not just and reasonable, or are unreasonably discriminatory. 16. As a threshold matter, we reject the Cellular Resellers' assertion that this Commission, rather than the petitioning state, has what amounts to the burden of proof with respect to questions of market conditions and reasonability of rates. Even if the legislative materials cited by the Cellular Resellers are read as unambiguously expressing an intention by several senators that the burden not be placed on the states, the plain language of the statute does place the burden there. The statute clearly provides that ``a State may petition the Commission for authority to regulate ... rates ... and the Commission shall grant such petition if such State demonstrates that -- market conditions ... fail to protect subscribers adequately ....'' Thus, those portions of the legislative history cited by the Cellular Resellers are without legal significance because they are at variance with the statutory language they purport to explicate. Where statutory language is clear, variant legislative history cannot be used to create ambiguity. 17. What is not clear from the statute, however, are the evidentiary parameters of the phrase ``market conditions ... fail to protect subscribers adequately from unjust and unreasonable rates or rates that are unjustly or unreasonably discriminatory.'' Since the Budget Act does not explicitly construe or elaborate on that phrase, we look to the ``design of the statute as a whole and its object and policy'' to give that phrase meaning. We begin that task by reference to other Sections of the Communications Act, such as Section 201, which also speak of just and reasonable rates. We have generally described the measure of reasonableness under these Sections in terms of rates that reflect or emulate competitive market operations. The more formal description, however, is whether rates fall within a ``zone of reasonableness'' that is bounded at one end by the ``investor interest in maintaining financial integrity and access to capital markets'' and at the other by the ``consumer interest in being charged non-exploitative rates.'' Regardless of how the test is characterized, it is well established that determinations whether rates fall within this zone are not dictated by reference to carriers' costs and earnings, but may take account of non-cost considerations such as whether rates further the public interest by tending to increase the supply of the item being produced and sold. These principles define basic components of a state's demonstration under Section 332. Specifically, a state must show that market conditions fail to produce rates that fall within a ``zone of reasonableness,'' which is defined by reference to investor and consumer interests viewed in the context of relevant public policy considerations. 18. We also consider the meaning of the relevant language in the statute in the context of the overarching command of Section 332(c)(3), which is: ``no State ... shall have any authority to regulate'' CMRS rates. As we concluded in the CMRS Second Report and Order, that provision, as well as the title of Section 332(c)(3) (``State Preemption''), express an unambiguous congressional intent to foreclose state regulation in the first instance. Moreover, OBRA reflects a general preference in favor of reliance on market forces rather than regulation. Section 332(c), for example, empowers the Commission to reduce CMRS regulation, and it places on us the burden of demonstrating that continued regulation will promote competitive market conditions. 19. Unlike some of the opponents of the CPUC Petition, we do not view the statutory preference for market forces rather than regulation in absolute terms. If Congress had desired to foreclose state and Federal regulation of CMRS entirely, it could have done so easily. It chose instead to delineate the circumstances in which such regulation might be applied. Tellingly, it did so in the context of a broad statutory framework with several other principal components. Under the OBRA: (1) substantial amounts of spectrum reserved for Federal government use are to be identified and transferred to commercial and public safety uses; (2) this and other available spectrum, if allocated to commercial telecommunications uses, are to be licensed ``rapidly'' through the use of competitive bidding systems to promote the development and deployment of new technologies, products, and services, with the goal of stimulating economic opportunity and competition; and (3) in contemplation of the deployment of spectrum to commercial wireless services, and to promote regulatory parity, Congress also articulated definitional criteria for determining common carrier status consistently so success in the marketplace will not be determined by regulatory strategies but by technological innovation, service quality, competition-based pricing decisions, and responsiveness to consumer needs. 20. Viewing all three components together, the statutory plan is clear. Congress envisioned an economically vibrant and competitive market for CMRS services. It understood that such a market was still evolving, and it provided the resources (e.g., additional spectrum) and administrative authority (e.g., licensing through competitive bidding) to accelerate that process. Finally, Congress delineated its preference for allowing this emerging market to develop subject to only as much regulation for which the Commission and the states could demonstrate a clear-cut need. The public interest goal of this Congressional plan is readily discernable. Congress intended to promote rapid deployment of a wireless telecommunications infrastructure. Robust investment is a prerequisite to achieving that goal. Thus, in implementing the statute, we have attempted to facilitate the achievement of this goal by ensuring that regulation creates positive incentives for efficient investment -- rather than burdening entrepreneurial activities -- and by establishing a stable, predictable regulatory environment that facilitates prudent business planning. 21. We emphasize the important impact on our decisionmaking of these fundamental elements of the OBRA statutory framework, which have no counterparts in other sections of the Communications Act. They are devoted exclusively to wireless telecommunications services, and to CMRS in particular. Our analysis of ``market conditions'' in the context of Section 332(c)(3) necessarily is governed by that framework. 22. Section 332(c)(3) must be interpreted in this context; it is an exception to the general prohibition against state regulation. We conclude that California, or any other state, should not be allowed to continue regulating CMRS overall, or cellular service in particular, merely by demonstrating that the market for cellular service has been less than fully competitive. Such a standard would effectively allow an exception permitting regulation to nullify a general prohibition against it, because it is commonly understood that such conditions have in the past adhered in the cellular marketplace. On numerous occasions since the Commission established the two-carrier cellular market structure in 1982, we have acknowledged that such a structure provided less than optimal competitive opportunities. Other Federal agencies have taken similar positions. One year prior to adoption of the Budget Act, the General Accounting Office (GAO) -- the investigatory arm of Congress -- examined the industry and reported that ``[w]hile GAO found no evidence of anticompetitive or collusive behavior in the course of its work, the two-carrier (duopoly) market system that the FCC created may provide only limited competition in cellular telephone markets.'' It strains credulity to assert that Congress was blind to these conditions in 1993 when it broadly prohibited state regulation of CMRS. Thus, we reject a reading of the statute that allows continued rate regulation merely on a showing of duopoly conditions, because it is not plausible to conclude that Congress adopted a self-defeating statutory scheme. 23. It also is worth noting that this Agency's recognition of imperfect cellular market conditions has been matched by our commitment to rectify those conditions as quickly as possible by strengthening and expanding cellular competition rather than by resorting to heavy-handed regulation. For example, we have attempted to heighten cellular competition at the retail level by prohibiting restrictions on the resale of cellular services, except in narrow circumstances where we determined that restrictions intensify competition between the two licensees in each local market. We also have retooled policies initially tailored to promote competition in the wireline market upon determining that they were unlikely to have that effect in the unique setting of wireless telecommunications. Most especially, we have chosen to address the structural infirmity of the cellular market by vastly expanding the amount of spectrum available for two-way wireless voice communications and other innovative wireless services and technologies. 24. The framework of our CMRS regulatory policy -- moderate regulation, symmetrical regulation of all services as appropriate, and a preference for curing market imperfections by lowering entry barriers in order to encourage competition rather than by regulating existing licensees -- aligns closely with the principal building blocks of OBRA. Indeed, that statute is in a very real sense a validation of our approach. As the legislative history of OBRA makes plain, Congress intended those building blocks to establish a national regulatory policy for CMRS, not a policy that is balkanized state-by-state. 25. That intention informs our review of petitions filed by states under Section 332(c)(3). Put simply, Congress intended such petitions to be evaluated in light of a general preference for allowing the policies embodied in OBRA to have an opportunity to work. With regard to the statutory prohibition on state regulation in Section 332(c)(3) in particular, the legislative history leaves no room for doubt on this point by providing that: [i]n reviewing [state] petitions . . . the Commission also should be mindful of the Committee's desire to give the policies embodie[d] in section 332(c) an adequate opportunity to yield the benefits of increased competition and subscriber choice anticipated by the Committee. 26. In deference to the states, with whom we have and will continue to share telecommunications jurisdiction under the dual regulatory system of the Communications Act, we have not presumed to establish a rigid blueprint for the demonstration required under Section 332(c)(3). Moreover, unlike many opponents of the petition before us, we do not agree that a state's burden is so great that it is impossible to carry. For example, our decision to forbear from most CMRS regulation is not dispositive of the question whether states may initiate or continue rate regulation of such services. We think it unlikely that Congress would have established two separate statutory procedures -- one to govern our forbearance, and another to govern states' petitions -- if it intended our decisions under the former procedure to control automatically the outcomes under both of them. Instead, we conclude that the exemption in Section 332(c)(3) is designed to permit a state to demonstrate that market conditions in that state warrant a departure from national OBRA policies. 27. Such a demonstration begins but does not end with a showing of less than fully competitive market conditions. Almost all markets are imperfectly competitive, and such conditions can produce good results for consumers. In particular, as noted previously, Congress was aware of the duopoly cellular structure when it generally proscribed state regulation of CMRS. If a showing of less than perfect competition in the past could justify granting a state petition, regulation might be imposed in a great many circumstances. Nothing on this record convinces us that Congress intended that result. 28. Instead, we believe that a state must establish the existence of an environment of unjust and unreasonable, or unreasonably discriminatory, rates, given the dynamic and evolving structure in which CMRS is provided. When we implemented the Section 332(c)(3) state petition process in the CMRS Second Report and Order, we adopted a rule designed to elicit the information needed to make such a showing. Such information permits us to perform a Structure-Conduct-Performance (``SCP'') analysis, which is a standard paradigm of modern industrial organization analysis. This paradigm, as applied to the mobile telecommunications industry, holds that market structure is impacted by basic conditions such as the number of licenses issued by the Commission and the state of technology. Conduct, in turn, depends on the structure of the market, e.g., on the number of competitors, the cost structure, and the degree of integration with other wireless providers. Performance, in turn, depends on the conduct of providers and other industry participants with regard to activities such as pricing, inter-firm coordination, and technical standards. Such an analysis permits an evaluation of the degree of rivalry within a particular industry structure and allows us to determine whether and how consumer interests are being served by such activity. 29. Nothing in our rule governing the state petition process suggests that merely showing the existence of a cellular duopoly structure is enough to support a petition. In the first instance, the rule signals our insistence that a petition must be based on demonstrable evidence of anticompetitive activity, or unjust and unreasonable, or unreasonably discriminatory, rates. For example, in order to determine whether an anticompetitive environment presently exists within a state, we requested that a petitioning state produce ``specific allegations of fact,'' to be supported by a sworn affidavit of an individual with personal knowledge thereof, regarding ``anticompetitive or discriminatory practices or behavior by commercial mobile radio service providers.'' We also requested ``[e]vidence, information and analysis demonstrating with particularity instances of systematic unjust and unreasonable rates ... [or a] pattern of such rates, that demonstrates the inability of the commercial mobile radio service marketplace in the state to produce reasonable rates through competitive forces,'' and we indicated that we would consider such evidence ``especially probative.'' 30. In order to assess present market conditions so as to predict the future effectiveness of market forces within the state, we requested information on the number and type of CMRS providers in the state as well as their respective customers, and ``an assessment of the extent to which services offered by the commercial mobile radio service providers the state proposes to regulate are substitutable for services offered by other carriers in the state.'' We also requested information and complaint statistics revealing customer satisfaction with CMRS providers within the state. In addition to this information, and as a further aid in projecting CMRS growth rates and other trends within the state, we also requested information on ``trends'' in each commercial radio provider's rates and customer base and on ``opportunities for new providers to enter into the provision of competing services'' as well as ``an analysis of any barriers to such entry.'' In short, although states have the discretion to adduce such evidence in support of continued rate regulation as they see fit, the comprehensive list of anticipated documentation in Section 20.13 gives states guidance concerning the evidence of structure, conduct, and performance that we would find persuasive in evaluating their petitions. 31. The purposes to which such evidence must be put also are straightforward. For example, with regard to industry structure, while a state seeking to regulate two-way mobile voice services may draw attention to the cellular duopoly, it is incumbent on that state to consider factors that have a direct and substantial impact on that structure. In particular, in evaluating a cellular-oriented petition, we will look with disfavor on any petition that fails to consider the immediate and near-term impact of PCS. Given the general statutory purpose of facilitating PCS-type services, it would be difficult to ignore or downplay the importance of fundamental structural changes when considering Section 332(c) petitions. 32. While PCS is not yet available to the public, it is an accepted antitrust principle that a firm may be considered in competitive analysis if it could enter the market in question. Under the caselaw potential entry must be reasonably prompt, a typical period being two years from the present in order to expect a significant impact on existing competitors, and there is little doubt that PCS licensees will enter the market for CMRS in competition with cellular providers within this timeframe. We recently concluded an auction designed to license rapidly two additional competitive providers of wireless two-way voice and data communications in every local market in the country. As shown in the table below, the winning bidders in markets encompassing California have committed to pay substantial sums for the right to operate wireless systems in that state. Having done so, it is reasonable to conclude they will deploy the facilities necessary to become operational as quickly as possible so as to begin recouping their investment. Broadband PCS Auction Results California MTA # Freq. Blk. State Market Winning Bidder Winning Bid M004 A California San Francisco- Oakland- San Jose WirelessCo, L.P. $206,500,000 M004 B California San Francisco- Oakland- San Jose Pacific Telesis Mobile Services $202,150,000 M002 A California Los Angeles- San Diego Cox Communications, Inc. $251,918,526 M002 B California Los Angeles- San Diego Pacific Telesis Mobile Services $493,500,000 M030 A Oregon Portland Western PCS Corporation $34,155,030 M030 B Oregon Portland WirelessCo, L.P. $34,139,785 33. The nature of this impending competitive entry bears emphasis. Unlike the typical ``ease of entry'' case, where entry by new competitors is hypothetical or may occur only at an industry's margin, PCS activity is undeniably real. It is not something that ``may'' occur, or that will occur only sporadically. It is happening, and it is happening on a nationwide scale. As the recently-completed auction demonstrates, some of this entry is being mounted by large, well-financed entities with long experience and success in the telecommunications business. That field of competitors will be strengthened further upon completion of additional spectrum auctions in the near future. Available evidence indicates that cellular companies, faced with the near-term entry of PCS, have reacted by preparing for impending competition, i.e., by lowering prices and adopting new technologies. For example, there are reports that observable declines in cellular prices are attributable in part to cellular carriers' knowledge that reasonably soon they will face new competition from PCS licensees. The advent of PCS also appears unambiguously to be having an impact on the present marketplace; it is repeatedly cited as a precipitating factor in major mergers and joint ventures in the wireless industry. Thus, the available evidence indicates strongly that such entry is not speculative. Instead, all evidence suggests that it is empirically real and in the very near term will be substantial and pervasive. This warrants our consideration when evaluating a state petition to regulate rates under Section 332(c)(3). 34. Evidence of industry conduct and performance is also relevant. For example, a state might demonstrate specific instances of collusive behavior on the part of licensees. A state also might demonstrate that the statutory purposes of OBRA were not coming to fruition in that state, or were not likely to do so. We would find highly relevant any evidence that demand for CMRS services in general and cellular service in particular is too low to promote market entry by the number of licensees needed to ensure that facilities- based competition will occur at a level adequate to warrant reliance on market forces, rather than rate regulation, as a means of protecting consumer interests. 35. Moreover, a very strong indication that industry conduct and performance are failing to serve consumer interests adequately would be evidence of a lack of investment on the part of licensees in CMRS facilities, or a failure by licensees to deploy adequately new facilities, technologies, and services. Such a showing might support a conclusion that licensees were restricting the output of a service solely to increase its price, and such activity might warrant an appropriate regulatory response. Of course, a successful showing of this nature requires more than evidence that a licensee is earning economic rents (i.e., pricing above cost). It is readily conceivable that economic rents earned in the cellular industry also might advance important public policies, such as if they were applied in furtherance of the statutory goal of promoting investment in the cellular infrastructure. In that event, the rates underlying such profits would have been paid by those who ultimately benefit from reinvestment in cellular facilities. Specifically, as a cellular carrier adds large numbers of customers, it must expand capacity so that the quality of service to existing and new customers is not degraded. Thus, an analysis of economic performance must place great weight on reinvestment of profits in this high-growth industry, for, without such reinvestment, consumers might receive less value for their money. In short, the significance of economic rents under our Section 332(c)(3) analysis is found not simply in their existence in the first instance but in their subsequent application. 36. Finally, we note that SCP evidence typically may be segregated into two categories: static factors and dynamic factors. For example, prices or rates of return in a given year are static factors. Growth and investment are dynamic factors. In addition, a dynamic analysis views price and other static factors at a given point in time in their relationship to static factors such as price in the future. Thus, a rate of return that looks high today may be fair and reasonable when looked at in terms of its impact on future prices. Furthermore, static factors are, as the name implies, static, or even temporary, whereas the long-term impact of dynamic factors is more important because their effects are cumulative and more permanent. Thus, we believe that evidence concerning dynamic factors is a more persuasive market indicator than evidence concerning static factors. Given the rapidly changing nature of the market in which wireless services are provided and the statutory purposes of OBRA, we conclude that evidence of where a market is going is more relevant than evidence of where it has been. 37. No single factor, standing alone, necessarily would tip the balance for or against a particular state petition. The statute allows the states flexibility to make their showings in the best manner they see fit, and it is conceivable that we might find a showing based primarily on one factor to be persuasive. Those demonstrations that are tied most closely to the statutory scheme are, of course, the most determinative. Our decisions in this proceeding and similar proceedings are based on the totality of the evidence. IV. CONFIDENTIALITY 38. Completion and consideration of the record in this proceeding was complicated by submission of confidential materials. The treatment of those materials in most respects is resolved by the Bureau's prior confidentiality orders, and need not be recited here, but we summarize the Bureau's determinations and resolve a subsequent dispute arising from an ex parte presentation to describe clearly certain elements that have been included, and other elements that have been excluded, from the record. A. CPUC Supporting Materials 39. The CPUC Petition was based partly upon commercial and financial data for which the CPUC requested confidential treatment under the Commission's Rules. In its confidentiality orders the Bureau granted interested parties access to these data, subject to a protective order, and established a supplemental comment round for submission of analysis of these materials. The CPUC data thus are included in the record; the supplemental comments, while subject to protected disclosure to the extent they specifically refer to confidential CPUC data, raise no confidentiality issues because they do not include any additional data. B. Data Underlying Hausman Affidavits 40. In the First Confidentiality Order, the Bureau granted the CPUC motion to compel production of data underlying affidavits filed by Dr. Jerry Hausman on behalf of CTIA and AirTouch, which were associated with those parties' original oppositions. The Bureau recognized that those data could be submitted with a request for confidential treatment, but required their submission if the analyses Hausman developed from them were to be included in the record. Because CTIA failed to submit such data, the Bureau subsequently determined that the Hausman affidavit in support of CTIA's Opposition to California's Petition would not be considered; we affirm that result here and have not considered that affidavit in determining the disposition of the CPUC Petition. In contrast, AirTouch provided the information underlying its Hausman affidavit to counsel for CPUC under a confidentiality agreement, and subsequently submitted that data to this Commission, accompanied by a request for confidential treatment. The two affidavits share some elements, but other data elements are distinctive. The Bureau noted AirTouch's production of underlying Hausman data in the Second Confidentiality Order, but did not act on its confidentiality request, as no parties other than California had moved to compel production of the underlying data. Thus, the Hausman affidavit submitted by CTIA is not considered in reaching the result herein, but the Hausman affidavit submitted by AirTouch, and the underlying data, are considered. C. Ex Parte Presentation 41. Several parties submitted ex parte communications after the deadline for supplemental comments expired, and confidentiality issues raised with respect to such materials have not previously been considered by the Bureau. One such filing, submitted by AirTouch on March 8, 1995, was supported by a Hausman study dated January 3, 1995, which again relies upon undisclosed data. California moved to strike that study, stating that it had no opportunity to determine the accuracy of the underlying data or its application in Hausman's analysis. California notes that the Hausman study could have been submitted months earlier and further asserts that it is ``fundamentally unfair'' to allow any party to introduce new materials after the close of a comment cycle restricted by a time frame specified in OBRA for the disposition of such petitions. The CPUC also moved to strike all ex parte materials, even those not relying on confidential or undisclosed data, as violative of its due process rights. 42. AirTouch opposes the CPUC motion, stating that the CPUC has not placed in the record data that it relies on from secondary sources. As to ex parte filings in general, AirTouch asserts they are allowed for by Commission rules, and states that after Hausman referred to certain of his data in the ex parte meeting, our rules required AirTouch to submit them for the record. The CPUC replies that AirTouch does not dispute the unavailability of the data in the additional Hausman study, and questions why it was not submitted during the formal pleading cycle, as the study is dated January 3, 1995. CPUC adds that the study relies in part on data used, but not disclosed, in the Hausman study originally submitted by CTIA. CPUC finally notes that the secondary sources it relies upon are either public or accessible under protective order. 43. Consistent with the Bureau's previous determinations in the referenced orders, which we affirm, we will strike the January 3, 1995 Hausman study submitted by AirTouch as part of the March 8, 1995 ex parte statement to the extent it is based upon confidential data not provided to other parties or subject to their review. As we stated in our confidentiality orders, the same fundamental considerations of access to the record should be applied to the carriers as have been applied to the Petitioner. In this instance, and aside from any issues associated with the pleading cycles or its ex parte nature, the supplemental Hausman study relies on materials not made a part of the record or provided to other parties, and to that extent will not be considered. 44. As to that aspect of California's motion that would have us strike any and all ex parte communications submitted after the close of formal comments, we note that the Commission's Rules provide for such communications and that no more-restrictive approach with respect to state petition proceedings was incorporated when the procedures for consideration of these petitions were adopted. At this juncture, categorically striking all ex parte communications would constitute a significant departure from the norms of Commission due process when the Commission's Rules place parties on notice that such communications are permitted, and in the absence of any circumstances warranting such a departure from usual practice. California has not persuaded us that such a course is justified here. V. CALIFORNIA PETITION A. Regulation for Which Continued Authority Is Sought 45. The CPUC has exercised its regulatory authority over cellular service systematically for nearly a decade. The California regulatory regime was revised to essentially its present configuration in 1993. One component of that regime is a series of rate band guidelines, which the CPUC adopted partly in response to carrier contentions that the previous rate filing process had discouraged rate reductions. Under the guidelines approach the carriers establish ``ceiling'' rates, and they are permitted to raise rates to the ceiling, or lower rates to any level, on one day's notice without CPUC approval, so long as the wholesale-retail rate margin is maintained. Guidelines apply only to tariffed rates; changes to tariffed terms and conditions, including termination penalties, are not permitted to be combined with rate band tariff filings. 46. In 1994 the CPUC further refined its guideline or ``band'' approach in D.94-04-043, issued April 1994, allowing for provisional tariffs (new service plans with termination dates) and withdrawal of optional plans without CPUC approval if customer notification requirements are met. In that decision the CPUC also allowed automatically renewable contract services to remain, provided certain changes were made to the tariffs affecting termination penalties, term limits, and written customer consent. Wholesale rate increases require 60 days' notice to resellers or master customers. The CPUC requires maintenance of a minimum wholesale-retail price margin. 47. As it refined the existing regulatory mechanisms, the CPUC also initiated an investigation in December 1993, to develop an alternative, dominant/non-dominant regulatory structure, employing trigger mechanisms that automatically would reduce regulation of dominant duopolists. In I.93-12-007 the CPUC proposed additional measures for dominant providers, including the unbundling of radio links to reduce the ``market bottleneck'' of cellular duopolists, which the CPUC refused to stay in D.94-08-022, an interim decision released on August 3, 1994. 48. The CPUC also has ordered the unbundling of competitive services currently bundled in the cellular carriers' wholesale rates to allow switch-based resellers the option of purchasing competitive services from another provider. Its purpose was to promote cost savings and the provision of value-added service to California consumers. B. Summary of CPUC Request 49. California requests that it be authorized to retain its existing regulatory authority over the rates of cellular service in California, including the unbundled rate elements of cellular service, ``for 18 months, commencing September 1, 1994, after which time the CPUC expects that market forces, triggered by the widespread deployment of alternative competitive providers in California, will ensure just and reasonable rates for cellular service to California consumers.'' California asserts that, in the interim, and in the face of the continued potential for anticompetitive behavior, ``[o]ur solution as adopted in our August 3 order in I.93-12-007, is to adopt a program of wholesale rate unbundling based upon prices capped at existing rate levels.'' California contends that, without continued authority to regulate rates, it will be unable to forestall cellular carriers' attempts to defeat increased competition from resellers by increasing their wholesale rates so as to nullify the advantages to resellers effected by the unbundling of wholesale rates. C. ``Grandfathering'' Rate Regulation by CPUC 1. Background 50. The pleadings raise a question concerning the status, under Section 332(c)(3)(B), of any regulations concerning CMRS rates enacted by a petitioning state after June 1, 1993. Section 332(c)(3)(B) provides as follows: If a State has in effect on June 1, 1993, any regulation concerning the rates for any commercial mobile service offered in such State on such date, such State may, no later than 1 year after the date of enactment of the Omnibus Budget Reconciliation Act of 1993, petition the Commission requesting that the State be authorized to continue exercising authority over such rates. If a State files such a petition, the State's existing regulation shall, notwithstanding subparagraph (A), remain in effect until the Commission completes all action (including any reconsideration) on such petition. 51. In August 1994, the CPUC ordered the unbundling of access charges from cellular wholesale rates, giving resellers the option of maintaining their own switches and obtaining interconnection directly from the local exchange carrier. The CPUC Order also gave resellers a block of telephone numbers directly from the number administrator. The pleadings raise the question whether Section 332(c)(3)(B) barred the CPUC from enacting these particular regulatory provisions, or any others, after June 1, 1993. 2. Pleadings of the Parties 52. Several opponents of the CPUC Petition, including AirTouch, CCAC, L.A. Cellular, McCaw, and US West, point out that none of the regulations in the August 3, 1994 Order of the CPUC was in effect on June 1, 1993, or was a part of the California regulatory framework as of that date. They argue that the August 3, 1994 CPUC Order is an attempt to ``grandfather'' these regulations along with those CPUC regulations that were in effect as of June 1, 1993, for the duration of the state petition proceeding. In support, they focus on the phrase ``existing regulation'' in the second sentence of Section 332(c)(3)(B), arguing that the grandfathering provision is regulation-specific and that it refers only to ``any [specific] regulation'' that was ``in effect on June 1, 1993.'' The various opponents contend that, as a result, the adoption of new regulations by the CPUC after June 1, 1993, was contrary to the Congressional mandate of Section 332(c)(3)(B) and was preempted by the statute. Similarly, one commenter also contends that the CPUC is barred from issuing any rules as a result of its two investigative proceedings commenced after June 1, 1993, unless and until its Petition is granted. 53. In its Reply, the CPUC asserts that it is a state's authority to continue to regulate CMRS rates that is preserved from preemption during the pendency of its petition, not the precise set of regulations in place as of June 1, 1993. In support, the CPUC focuses on repeated references to a state's ``authority over rates'' in Sections 332(c)(3)(A) and 332(c)(3)(B) and explanations in the underlying legislative history concerning Congress's intention to adopt ``a `grandfathering' provision that permits states that regulate the rates for any commercial mobile services as of June 1, 1993 to continue to exercise such authority until the Commission issues a final order in response to a petition....'' The CPUC emphasizes that Section 332(c)(3)(A) is articulated solely in terms of ``authority,'' that Section 332(c)(3)(B) reiterates the provision in subparagraph (A) that any grant of a petition by this Commission ``shall authorize the State to exercise under State law such authority over rates, for such period of time, as the Commission deems necessary to ensure that such rates are just and reasonable and not unjustly and unreasonably discriminatory,'' and that Section 332(c)(3)(B) expressly references Section 332(c)(3)(A) and should be read in the context of that subparagraph. The CPUC concludes that, when the phrase in Section 332(c)(3)(B) referring to ``existing regulation'' is read in the entire context of Section 332(c)(3), it is apparent that Congress intended to ``grandfather'' a state's authority to regulate rates, rather than those specific regulations in place as of June 1, 1993, and that use of the term ``regulation'' in Section 332(c)(3)(B) was ``simply a shorthand reference to regulatory authority.'' 54. California also invokes the Congressional policy underlying Section 332(c)(3) as an aid to statutory interpretation and asserts that Section 332(c)(3) and the underlying legislative history demonstrate that Congress viewed the role of the states as significant in furthering the transition to competition within intrastate markets for CMRS services. It argues that, given this policy and the rapid and dynamic technological changes beginning to emerge in the wireless industry, it makes no sense to believe that Congress intended to lock a state in to a particular set of regulations that could be as many as two years old and might no longer serve the public interest, rather than giving it the flexibility during this transition to adapt its regulations to continuing technological and market changes. 3. Discussion 55. We do not believe that the language of Section 332(c)(3) lends itself to the interpretation advocated by the cellular carriers, particularly in light of the statutory objectives underlying that Section. The phrase ``such authority over rates'' is clearly generic, rather than regulation-specific. Section 332(c)(3)(A) preempts states from regulating CMRS rates by providing that ``no state ... shall have any authority to regulate ... the rates charged by any commercial mobile service ....'' The exception to this preemption, set forth in both subparagraphs (A) and (B), is also articulated in jurisdictional terms: ``If the Commission grants such petition, the Commission shall authorize the State to exercise under State law such authority over rates ... as the Commission deems necessary ....'' 56. Subparagraph (B) also addresses the question of interim regulation for petitioning states that had ``in effect, on June 1, 1993, any regulation concerning ... rates'' and provides, with respect to such states, that ``the State's existing regulation shall, notwithstanding subparagraph (A), remain in effect until the Commission completes all action ... on such petition.'' We conclude that the use of the term ``regulation'' in these provisions of subparagraph (B), rather than the phrase ``authority to regulate rates,'' is without significance because subparagraph (B) is framed as an exception to a jurisdictional rather than a regulation-specific preemption. Thus, we agree with the CPUC that use of the term ``regulation'' in subparagraph (B) is merely a ``shorthand'' or alternative reference to a state's rate regulation authority. 57. Our conclusion is supported by the legislative history of the grandfathering provision. The Conference Report notes that the Senate Amendment ``grandfathering provision'' was added in part in order to provide ``regulatory certainty to potential bidders for licenses to provide commercial mobile services.'' What is meant by the concept ``regulatory certainty'' in this context is explained in the next sentence: ``The Conference Agreement clarifies that State authority to regulate is `grandfathered' only to the extent that it regulates commercial mobile services `offered in such State on such date.''' The inference from the emphasized language is clear: if the rates for a certain class of CMRS, such as paging, are not regulated as of June 1, 1993, a state cannot assert such jurisdiction after that date or during the pendency of its petition. What is grandfathered is the state's assertion of jurisdiction, not the particular regulations promulgated as an exercise of this jurisdiction. This conclusion is buttressed by the Conference Report's exclusive use of the phrase ``authority to regulate'' in explaining the provisions of subparagraph (B), in general, and the grandfathering provision in particular. The latter is further elucidated by the following statement in the Conference Report: ``State authority to regulate is only `grandfathered' if the state files a petition seeking such authority ...; if the state fails to file [such] a petition ... the state authority is preempted under subsection (c)(3)(A).'' That which is preempted is jurisdictional in nature; likewise, that which is grandfathered also is jurisdictional in nature. 58. Finally, and of equal importance, we base our interpretation concerning the scope of the grandfathering provision on the policies underlying Section 332(c)(3). We agree with the CPUC that, given the Congressional objectives of relieving presumptively unnecessary intrastate rate regulation of CMRS and promoting the operation of market forces to effect just and reasonable rates, Congress could not have intended to calcify regulations adopted by California as many as two years prior to final action by this Commission on the CPUC's petition to continue such rate regulation. Such a denial of flexibility would be particularly imprudent given the rapid technological innovation characteristic of the present CMRS market and anticipated changes in market structure and performance resulting from the advent of PCS and wide area Specialized Mobile Radio (SMR) services. At its extreme, such an interpretation would prohibit a state from alleviating regulatory burdens that events subsequent to their enactment had rendered unnecessary. Such Congressional deference to outmoded regulation is nowhere evident in the statute. 59. On the foregoing bases, we conclude that, pursuant to Section 332(c)(3)(B), the regulations promulgated under state authority after June 1, 1993, remain in effect, if the state has preserved that authority by filing a petition to continue to exercise authority over CMRS rates. This would include regulations adopted by the CPUC during the pendency of its Petition, pursuant to investigations initiated after June 1, 1993. D. Elements of the CPUC Case 1. Market Structure 60. The CPUC argues that the FCC-created duopoly market structure for cellular services has created ``near absolute'' barriers to entry and a consequent lack of potential competitors' access to ``bottleneck facilities,'' citing, in support, DOJ's Memorandum in Response to the Bell Companies' Motions for Generic Wireless Waivers, concluding that ``cellular duopolists plainly have market power in cellular service'' and that ``cellular exchange service markets are not competitive today.'' California argues that this market structure, together with interlocking ownership interests within and among California cellular markets, have inhibited the emergence of competition in California's cellular industry. Adopting the Merger Guidelines in order to facilitate its analysis of this duopolist market, the CPUC defines the relevant market in terms of the substitutability of other mobile communications services and identifies cellular service as the relevant market because it concludes that no viable alternatives to cellular service presently exist. California points out that meaningful deployment of wide area SMR by Nextel will not occur until 1995 or later and that PCS, which also is a likely substitute for cellular service, will have to develop a geographically dispersed and operational network before being able to offer service at competitive prices. The CPUC estimates that, until these comparable services can provide adequate competition, the only viable source of competition will continue to be the cellular resellers. 61. The CPUC has offered various data and accompanying analyses in support of its contention that the cellular carriers have market power and that the California cellular market is insufficiently competitive, in consequence. It argues that the market share between the duopolist cellular carriers in the same markets has remained substantially the same over a five-year period and that it has steadily increased at the expense of the cellular resellers. California also has employed the Herfindahl-Hirschman Index (HHI) to calculate a market concentration of 3750 for the California cellular industry, argues that this result provides evidence that the cellular market is highly concentrated ``even if Nextel were a viable competitor today,'' and contends that this high degree of market concentration is further evidence of market power by the duopolist cellular carriers. 62. The cellular carriers take issue with several points in the CPUC's structural analysis of the cellular market in California. They argue that mere proof that the cellular industry is a duopoly is insufficient to sustain the state's burden of proving that market conditions are inadequate to protect subscribers, since Congress was well aware of the duopolist structure of the cellular market when it nevertheless preempted states from rate as well as entry regulation of CMRS. They also contend that the cellular carriers do not exercise bottleneck control. Several assert that relative wholesale market shares between duopolist carriers in a particular geographic market did change during the period in question. However, they also maintain that market share is not necessarily reflective of insufficient competition and may, in some instances, be attributable to differences in the size of the carriers' respective coverage areas. With respect to resellers and market share, they assert that the resellers' decline is attributable to a proportionately lesser increase in customers than that for cellular carriers, that the CPUC's data ignore the market share of retail chains, that there is no proven correlation between reseller market share and competition, and that OBRA protects customers, not competitor inefficiencies. McCaw suggests that any future unfair practices against resellers by cellular carriers can be remedied through this Commission's complaint authority and contends, further, that this Commission has acquired jurisdiction over intrastate CMRS rates, in the absence of a successful state petition. Several cellular carriers challenge the CPUC's market concentration data and analysis, arguing that the CPUC has erroneously treated both carriers in a market as a single entity when calculating the HHI, that California's is the least concentrated cellular market in the Nation and that the effect of competitors' relatively small market shares nevertheless may be significant because prices are determined by reference to those customers initiating service; i.e., competition in the cellular industry ``takes place at the margin.'' 2. Conduct 63. The CPUC contends that the activities of cellular carriers in California have exacerbated the inherently noncompetitive nature of cellular's duopoly market structure. It asserts that several practices employed by the cellular carriers have anticompetitive effects, including the use of ``lock-down'' contracts to obligate customers for longer commitments and parallel pricing, which the CPUC alleges is facilitated by the existence of interlocking ownership interests within and among the various geographic markets. The CPUC also contends that confidential data obtained by the California Attorney General as part of a study of the cellular industry buttress the CPUC's arguments on the issue of anticompetitive behavior by cellular carriers. Cellular Agents Trade Association (CATA) contends that the cellular carriers have shifted distribution modes from independent agents to multi-outlet mass merchandisers such as Circuit City and Sears, that preferential treatment accorded the latter has driven many independent agents out of business, and that this constitutes a strategy by the cellular carriers to monopolize the market for cellular equipment. a. ``Lock-Down'' Contracts 64. The record compiled by the CPUC demonstrates that the CPUC has acted to constrain carriers' marketing practices affecting cellular service contracts, in particular the ``automatic renewal'' provision. The CPUC indicates that it will permit renewable contract services to remain, provided that the contract term is limited to three years, that any termination penalties are prorated, and that in no case do termination penalties apply after the first year. In addition the CPUC requires customer signatures on contracts with penalties, and customer notice prior to contract renewal. b. Parallel Pricing 65. The CPUC contends that a review of the prices charged by cellular carriers in the major California markets reveals a pattern of parallel pricing which, when combined with other factors, is consistent with a noncompetitive market. It contends that tariffs for the two facilities-based carriers in the Los Angeles market show nearly identical discount plans which were filed within two days of each other, as well as discount plans with identical features. The CPUC rejects the carriers' argument that this synchronicity of pricing is attributable to the anticompetitive effects of tariffing and resultant notice of competitors' price changes and ascribes the phenomenon, instead, to the fact that the ``two carriers are tacitly aware of each other's pricing strategies.'' 66. Several commenters observe that a more competitive market structure than the cellular duopoly might manifest ``parallel pricing'' between different firms because production, marketing, and consumer preference considerations are accurately and consistently perceived by multiple firms. They also contend that pricing similarities are facilitated by regulation because tariffing requirements provide advanced notice of impending price changes by competitors. CCAC disagrees that discount plans are similar in the Los Angeles market. 3. Indicia of Performance 67. The CPUC contends that the duopolist market power of the cellular carriers in California is reflected in their rates of return and the prices charged for cellular service, which it alleges have been maintained at an artificially high level by the carriers' deliberate underutilization of cell sites. It also points to other indicia of performance such as the lesser prices paid for PCS, as opposed to cellular, spectrum, and the Q Ratios derived from the market values for cellular firms. a. Q Ratios and Spectrum Value 68. A firm's Q Ratio is the ratio between its market price and the replacement cost of its assets. California states that a recent study of 20 U.S. industries shows a Q ratio of 3.32 in the 1961-1985 period. It alleges that, in contrast, cellular firm Q ratios ranged from 6.68 for small firms to 13.52 for large firms, nationwide, and that the Q ratios for cellular firms in Los Angeles and San Francisco were among the highest in the Nation. The CPUC argues that this disparity between market price and asset value is attributable to the supracompetitive rates charged by cellular carriers with market power sufficient to control prices in the California market. The CPUC derives additional support for this argument from the market prices for cellular, as opposed to PCS, spectrum. It contends that the present per ``POP'' value for PCS spectrum, including major urban areas, is $14, whereas that for cellular spectrum is $200 per POP. It ascribes this disparity in values to cellular carriers' ability to extract duopoly rents. 69. The Cellular Resellers are in accord with the CPUC's Q ratio analysis. However, several cellular carriers challenge the relevance of Q ratios to market power and claim that a high Q ratio is as consistent with spectrum scarcity as with extraction of monopoly rents. Others allege that factors such as growth exaggerate a firm's Q ratio. With respect to spectrum value, several carriers contend that high prices, both for cellular licenses and cellular service, reflect the scarcity of spectrum, rather than a noncompetitive market with only two carriers. b. Cellular Service Rates 70. California contends that, although rates have been somewhat suppressed by state regulation, cellular rates for the major California cellular carriers remain among the highest in the Nation. It states that its review of basic and discounted rate plans disclosed ``[s]tagnant or slowly declining cellular rates'' in a context of lower costs and declining capital investment per subscriber. The CPUC states that its study of rates for the 1989- 1993 period determined that the average, nominal rate (before inflation adjustment) for the basic plan remained unchanged in three markets, including the State's largest, increased in one market, and decreased by 5 percent or less in the other four markets studied. It also found that the basic retail rates were ``nearly identical'' in Los Angeles and Santa Barbara, and varied by less than 7 percent in all other markets except Sacramento. When inflation is considered, California states, rates for basic plans in all markets have declined by an average of 14.9 percent, compared to the nominal reduction of 0.8 percent, while operating expenses per subscriber have fallen by 47 percent in real terms and capital investment per subscriber has also declined substantially. 71. California's 1989-1993 study examined pricing data from all plans offered by facilities-based carriers in the top five California Metropolitan Service Areas (MSAs) and two small Rural Service Areas (RSAs). California recognizes that carriers offer a variety of retail plans with different combinations of charges, terms and conditions, and states that the prevalence of discount plans makes comparing cellular prices over time difficult. The CPUC also states that a direct comparison of rates between discount plans and basic plans is ``not valid, because discount plans have a number of restrictions and conditions which reduce their value.'' These include, according to the CPUC, the customer's loss of contractual flexibility, exposure to termination charges, and the possible denial of immediate access to new technologies as they become available. California recognizes that, while most customers subscribed to the basic or ``unrestricted'' plan in the first years of cellular service, by 1993 only 37 percent of subscribers in major markets still were on that plan. 72. California states that nominal rates for basic plans for both carriers in three of the markets studied have not changed in five years and asserts that national price trends for cellular service do not track declining costs. The CPUC notes that, although it established rate guideline procedures in April 1993 that permit carriers who lower rates to restore them to previous levels on one day's notice, no single significant rate reduction has lasted more than three months in any market. The CPUC invokes an analysis proffered by a party in its ongoing investigation, Cellular Services, Inc., purporting to show that most price reductions asserted by carriers either failed to reduce rates or expired. The CPUC concedes that discount plans offer ``modest rate relief to some customers,'' but insists that these reductions be considered ``in terms of reduced flexibility, risk of termination fees and foregone access to emerging technologies.'' To consider the effect of discount plans on rates, California contends, its study would have to be based on a random sample of customer bills and consider as well the costs of any restrictions or benefits outside the direct rates, e.g., term contracts and discounts on customer premises equipment (CPE). 73. The cellular carriers' initial comments on pricing were made without the benefit of access to the confidential pricing data submitted by the CPUC with its Petition and, in consequence, are of correspondingly lesser importance than their supplemental comments and replies filed after their examination of these materials under the terms of the Protective Order. 74. The carriers raise several issues in their supplemental comments and replies concerning the pricing arguments proffered by the CPUC. Several commenters emphasize, in the first instance, the CPUC's acknowledgment that cellular rates have declined over the past several years. AirTouch asserts that, from 1990 to 1993, its prices in Los Angeles decreased almost five times more than costs decreased -- by a nominal 12.0 percent (a real 20 percent), while expenses dropped only 2.5 percent. It concedes that its analysis is based on rates for 200 minutes of use (MOU) but alleges that customers with lower usages also benefitted; e.g., 10 MOU nominal prices decreased by 8.0 percent (a real 16.3 percent). L.A. Cellular states that the rate data contained in Appendices I and J to the CPUC Petition are inaccurate, citing, in support, discrepancies between reported best rates for its own subscribers and those actually tariffed. 75. Several carriers allege that, to the extent that high prices have existed, they are attributable, in some measure, to regulatory practices employed by the CPUC. Specifically, AirTouch asserts that its own usage prices did not decline between 1986 and 1990 because during that period rate reductions required 40 days' notice and the restoration of prices could entail a ``complete rate application'' hearing lasting as long as two years. L.A. Cellular contends that price initiatives have taken the form of promotions because of ``regulatory inhibitions'' that persist. It states that ``new rate plans'' still require significant advance notice and that CPUC procedures require characterization of rate reductions as ``promotional'' if they are to be implemented with minimal delay. It contends that complaints that these plans are not permanent in nature and that a basic rate reduction is preferable also ignore market mechanisms and the need to appeal to specific customer groups. 76. Other commenters take issue with the CPUC's use of rates for basic plans, rather than discount plans, to support its contentions with respect to the pricing of cellular service. For example, based on its review of the confidential data concerning the percent of subscribers in the Los Angeles, San Diego and San Francisco markets that have remained on basic plans, AirTouch states that the vast majority of subscribers in the major California MSAs use discount plans providing greater savings, that the migration to discount plans accelerated in 1994 when AirTouch filed 16 new service plans during pendency of the CPUC Petition, and that the CPUC thus improperly relied on basic rate plans to assert that cellular prices are ``stagnant or slowly declining.'' 77. In addition, AirTouch states that the CPUC's comparison of prices to income per subscriber is flawed. It contends that, while plant investment per subscriber and operating expenses remained roughly constant from 1990 to 1993 (varying under 7 percent), income per subscriber decreased 47 percent. AirTouch attributes this decline to discount plans offering savings to subscribers that the CPUC has chosen to ignore and to lower usage by more recent subscribers. It observes that, unlike AT&T's behavior when tariffing long distance service options, cellular carriers have not raised the price of basic plans when offering greater discount plans. 78. In response to these comments, the CPUC states in its Supplemental Reply that price declines for cellular service do not determine whether current price levels are just and reasonable or whether the cellular industry is competitive and that a customer's choice between rate plans, none of which contains reasonable prices, terms and conditions, says nothing about the reasonableness of the discount plan selected. The CPUC notes that some carriers concede that a comparison limited to discount rates, without consideration of other terms, may overstate the extent of savings, and contends that high growth rates or customer migration between plans does not indicate the competitiveness of services or the reasonableness of prices. 79. California asserts that the decline in operating income per customer noted by AirTouch is irrelevant to cellular firms' financial performance but does demonstrate that cellular carriers have found that serving comparatively few customers is advantageous. The CPUC adds that AirTouch's explanation that high cellular rates in New York and Los Angeles are attributable to capacity constraints contradicts its claim that regulation had caused higher prices in those markets. The CPUC states that the cost of providing cellular service is declining faster than prices and that AirTouch has confused expenses with costs, using operating expenses per customer to show the competitiveness of cellular prices when the relation of cost to price is the proper focus. The CPUC concedes that its annual reports do not adequately allocate between wholesale and retail operations and that a more accurate view of relevant expenses for providing cellular services would come from wholesale operations, but asserts the industry's prices are so unrelated to costs that ``any convergence between revenue and expenses is meaningless.'' 80. The CPUC states that the Hausman price study provided by AirTouch in its second-round comments demonstrates that state regulation has not dampened pricing flexibility, and confirms the difficulty of using published rates to analyze price changes. California argues the rate decreases shown by the AirTouch study are similar to those in unregulated markets, at the same time raising varied methodological issues about the study. The CPUC specifically challenges AirTouch's argument that capacity constraints explain high Los Angeles rates, as unsupported and inconsistent with the argument that regulation has occasioned higher rates there and in New York. The CPUC asserts that the Hausman study also disregards conflicting data, ignores standard econometric techniques for establishing causality, and misuses the economic control variables it does consider, so that no relation between state regulation and rates, much less causality, is demonstrated. c. Capacity Utilization 81. The CPUC and its supporters contend that cellular carriers' capacity is not being fully utilized and that this fact, rather than spectrum scarcity, accounts for the excessive rates and profits characteristic of cellular service. The CPUC points out that the capacity for carriers in the Los Angeles and San Francisco MSAs, in particular, is significantly underutilized. 82. The cellular carriers argue that the dramatic growth rates for cellular systems in California, demonstrated by the CPUC's own subscriber growth data, contradict the CPUC's contention that carriers are intentionally restricting capacity. Several commenters also point out that excess capacity is consistent with efficient network planning because cellular service does not experience economies of scale, so that additions to capacity are best made in ``lumpy'' investments. 83. The cellular carriers also assert that the CPUC has ignored the effects of uneven usage attributable to variations in population density within a market and commuting patterns for which cellular systems must be able to accommodate demand during the busiest hours. AirTouch notes that 19 percent of subscriber usage in Los Angeles is concentrated in less than one percent of that area served and asserts that the overall increase in demand sought by the CPUC would not increase usage of less heavily used sites or spare already- congested ones. The carriers emphasize their ``legitimate'' concerns for high quality transmission and call-completion ratios and point out that the potential for blockage and service degradation increases when cell cites are used in excess of full capacity. d. Rates of Return 84. As the gravamen of its argument, California alleges that cellular carriers in the State are earning excessive rates of return. The CPUC defines excessive returns as ``profits due solely to a failure to compete in a duopolistic market,'' and states that evidence of improper pricing would be pricing so high that it discourages use of the system, or failure to invest in system expansion when it is economically justified. The CPUC believes that rates of return, when considered together with other factors, are relevant indicators of the market power of cellular carriers. 85. California asserts that the six cellular carriers in the three major urban markets earned returns during the period 1988 to 1993 averaging 30.9 percent. For example, California states that L.A. Cellular earned an average after-tax accounting rate of return of 56.2 percent for the last five years, while the Los Angeles MSA earned 37.9 percent. Similarly, California states that BACTC's rates of return ranged from 31.1 percent in 1992 to 49.5 percent in 1993. It finds no evidence that the risk faced by cellular carriers justifies returns as high as those in the major metropolitan areas. California attributes the existence of high profit margins to the lack of perfect substitutes for cellular service and the exclusion of potential market entrants due to the dual license structure. 86. The CPUC's analysis is based on after-tax accounting rates of return on net plant derived from carrier-provided unaudited annual reports to the CPUC. The CPUC and its supporters argue that, as in the case of this Commission's cable and telephone rules, the rate base should not include the value of spectrum because carriers do not own the airwaves and including their value in the rate base ``masks the duopoly profits.'' 87. The cellular carriers disagree with the CPUC's analysis of the rate of return data. They argue that higher rates of return are appropriate because cellular is riskier than other telecommunication services and that growth is an important factor in assessing market conditions and rates of return. They also argue that operating profits are not excessive when they are used to increase service availability and enhance capacity, and GTE states that it has invested substantial sums for these purposes. L.A. Cellular notes that, in an earlier decision, the CPUC found that cellular rates and rates of return were neither unreasonable nor excessive. They also disagree with the CPUC's methodology for computing rates of return. 88. Specifically, the cellular carriers assert that California has erred by using an ``accounting'' as opposed to an ``economic'' rate of return; i.e., by failing to consider return over the entire life of the system. AirTouch contends that accounting rates of return are often a poor guide to true economic rates of return, which must take account of decreasing equipment prices, rapidly depreciating network infrastructure (resulting from conversion to digital), the inherent problems in valuating spectrum, and the replacement cost of acquiring new customers. BACTC agrees, asserting that the CPUC should not use an accounting analysis because it is static and unable to assess future changes or results, including new competition and opportunity costs. 89. In response, California reiterates its argument that rates of return for cellular carriers are twice as high as those earned by the average firm in the telecommunications industry and notes that they are understated to the extent that investments have been financed with leveraged capital. It points out that accounting returns are relied upon by Federal regulators and the investment community and that the cellular carriers concede that an economic rate of return is difficult if not impossible to compute for an entire firm. 90. In support, the Cellular Resellers argue that accounting rates of return represent return on investments actually made, whereas economic rates of return represent return on replacement or reproduction value of an entire system, including spectrum. They argue that the carriers ``would like to earn money on investments they have not made,'' but that this Commission, like other regulatory agencies, has for decades rejected such arguments on the grounds that investors are only entitled to a fair return on their actual investment and not a return on the reproduction or replacement value of the company's assets. 91. The cellular carriers also criticize the CPUC for relying on rate of return figures for only the largest and most profitable markets. AirTouch asserts that in Santa Barbara, the RSAs, San Diego, and San Francisco Block B, the rates of return are at or below competitive levels and that rates of return for the two cellular carriers in the Los Angeles market have decreased by 46 percent and 52 percent over the last five years and would decrease more if the CPUC would stop rate-regulating those markets. CCAC adds that the wide differences in rates of return between large and medium or small markets are not indicative of market power since all markets are duopolies. 92. In response, the CPUC asserts that the largest California markets represent most consumers of cellular services and that rates of return in these markets have ranged from 18.7 percent to 56.2 percent in the last five years, even though this was a period of severe economic recession in the State. The Cellular Resellers agree with the relative weight to be placed on rate of return data in smaller as opposed to larger cellular markets and note that the carriers in the smaller markets serve only 15 percent of California's subscribers, have been in operation fewer years and serve markets with lower population densities. 93. The cellular carriers also argue that California erred in disregarding the value of scarce spectrum in calculating rates of return, even where a system was obtained via a set-aside rather than purchase. L.A. Cellular contends that ``[w]hen account is taken of up-front acquisition costs, the profit levels cited by the CPUC must be reduced by at least 50%.'' The carriers suggest several methodologies for valuating spectrum, including using the results of the narrowband PCS auction as a guide. 94. In response, California points out that a majority of carriers acquired their spectrum for free but adds that, in any event, there can be no opportunity cost for cellular spectrum because it has no alternative use under present guidelines established by this Commission. The CPUC argues that including spectrum value in the rate base would artificially reduce the apparent profit and that, following this approach, any entry barrier could be eliminated as the source of duopoly profits and simply turned into a ``cost of doing business'' through reclassification as a capitalized investment. California notes that the carriers' capital accounts may already reflect at least some measure of the costs that cellular carriers have incurred in license acquisition, and observes that L.A. Cellular, trying to avoid increased tax liability, admitted to the California Board of Equalization that spectrum holds no value and should not be factored into earnings. 95. In support of the CPUC's position, L.A. County contends that, because cellular licenses are scarce, their market price is bid up well in excess of actual cost. It contends that ``only about one-tenth of the capitalized 'value' of a cellular franchise is attributable to investments in tangible system assets, the balance representing the premium ... either paid by a purchaser of a cellular franchise or imputed ... even where the license was acquired without any cost whatsoever ....'' E. Discussion 96. In order for a state to prevail on the merits, Section 332(c)(3)(B) requires it to demonstrate that market conditions fail to protect subscribers adequately from unjust and unreasonable rates, or unjustly or unreasonably discriminatory rates. Based on a preponderance of the evidence, we conclude that California's demonstration does not satisfy the statutory standard. Therefore, we deny the CPUC's request to retain cellular rate regulation authority through March 1, 1996. 97. The principal bases for our decision are straightforward. First, unrebutted evidence shows that cellular rates in California are declining. Second, the CPUC Petition does not address the direct and fundamental changes to the duopoly cellular market structure that are being realized by PCS and other services, such as wide area SMR. Third, the CPUC presents no evidence of systematically collusive or other anticompetitive practices concerning the provision of any CMRS. Fourth, the CPUC does not present evidence showing widespread consumer dissatisfaction with CMRS providers in that state, or discuss what specific rate regulations are needed to address whatever level of dissatisfaction may exist. Fifth, the CPUC fails to advance any persuasive analysis regarding the critical issue of investment by cellular licensees (or by any other CMRS providers). An important indicator of market failure, in our view, would be evidence that cellular firms are withholding investment in facilities as a means of restricting output and thus boosting price. No such demonstration exists on this record. 98. Another weakness of the CPUC's Petition is that it views any evidence of market imperfection as proof of a need for continued rate regulation, while all countervailing evidence is attributed to its regulatory oversight. Even assuming such an argument is reasonable in theory, the CPUC has not established its factual predicate. The CPUC does not appear to have prescribed any particular pricing or rate development formula, and with minor exceptions, all currently effective and previously effective cellular rates in California appear to have been carrier-initiated. On this record, we are not persuaded by the CPUC's implicit argument that, absent continuation of its rate regulation authority, even for a limited period of time, cellular rates will quickly fall outside the zone of reasonableness. 99. We find the CPUC case, when viewed as a whole, to be unpersuasive. Examining each element of that case leads us to the same conclusion. 1. Structure 100. The CPUC's case consists in major part of a traditional antitrust analysis of the market for cellular services in California. The analysis includes empirical calculations of the market's level of concentration, and is fleshed out by references to the conclusions of others who had examined the market prior to the CPUC's filing in August 1994 and found it to be less than fully competitive, including the U.S. Department of Justice. California also highlights the existence of interlocking ownership interests among various carriers, and argues that these relationships weaken competition. We do not dispute the analysis of past market conditions offered by the CPUC, nor doubt the existence of the ownership arrangements it cites. Indeed, as noted previously, the CPUC could have presented even more analysis of this nature, including various examinations of the cellular market structure by this Commission and the General Accounting Office. 101. Several observations about these materials are in order, however. First, although the market analyses offered by California are conducted from the perspective of the antitrust laws, the CPUC disclaims the argument that antitrust standards are the appropriate measure of market conditions in a proceeding under Section 332(c)(3)(A). Taking that disclaimer at face value, it is not obvious why antitrust-oriented analyses should be accorded decisional weight in this proceeding. Moreover, as noted previously, Congress was well aware of the historical condition of the market for cellular service in 1993 when it broadly prohibited state rate regulation of CMRS. It easily could have made traditional antitrust considerations the yardsticks for evaluating state petitions, but it did not. To the contrary, the record indicates that Congress affirmatively declined to adopt this approach. California has not explained how a standard apparently rejected by Congress could thereafter become the centerpiece of the test for evaluating state petitions. 102. Second, although the CPUC claims that interlocking ownership interests weaken competition among the cellular carriers involved, its case on this point is entirely theoretical. The CPUC offers no direct or indirect proof that such arrangements actually are having any impact on competition. Moreover, the mere existence of such arrangements demonstrates little because this ownership pattern is partly a consequence of our initial cellular licensing procedures, which encouraged settlements and thus led to the creation of partnerships in certain instances. Thus, we accord little weight to the CPUC's claims on this point. 103. Third, the CPUC's analysis does not fairly reflect the speed at which CMRS market structure conditions affecting cellular services are evolving. To some degree this may be attributed to the fact that the CPUC's petition dates back to August 1994 and, as witnessed by the substantial presentation the state makes, required several months' preparation before then. During the intervening period we, inter alia: (1) completed our proceeding to establish broadband PCS services, pursuant to which we will license six new CMRS competitors to existing cellular providers; (2) utilized our pioneer preference procedures to award a 30 MHz broadband PCS license in the Los Angeles MTA; and (3) concluded an auction of the remaining 30 MHz MTA broadband PCS licenses throughout California (and the Nation). During this period an additional two-way mobile voice and data service provider, Nextel, also has significantly developed as a competitive alternative to cellular services. The CPUC was not in a position to factor these developments into its own estimate that competitive market conditions will be sufficiently developed to warrant elimination of state rate regulation authority by March 1, 1996. The more relevant observation, however, is that their occurrence provides a reasonable basis to conclude that the CPUC's estimated timetable should be shortened. 104. Our own view is that an influx of additional competitors is a far superior solution to perceived cellular market inadequacies than continued rate regulation. More importantly, Congress embedded in the OBRA this preference for permitting market forces to develop rather than to rate regulate existing licensees, and that informs our judgment of petitions under Section 332(c)(3)(A). On this record, we conclude the CPUC has failed to demonstrate that the structure of the market for cellular service provides a basis for continuing state rate regulation authority. 2. Conduct 105. The ``conduct'' component of SCP analysis may be thought of as an examination of a market to identify any specific acts by participants that illustrate imperfect market conditions. The CPUC presents two examples in this regard. First, it claims that cellular carriers tacitly collude to price their services in parallel. Second, it asserts that carriers are using long-term service contracts in ways that demonstrate market conditions warrant continued state rate regulation. 106. The CPUC's case on these points is flawed in several significant respects. To begin with, parallel pricing is consistent with a variety of economic models of industrial organization, and some of these models include situations in which the subject prices are reasonable (such as perfect competition). Absent evidence of actual pricing collusion or a related indication of market failure -- and the CPUC has provided none -- the existence of pricing similarities does not automatically demonstrate unreasonable market conditions. We are particularly constrained from according significant weight to this aspect of the CPUC's case in view of its tariffing requirement, a regulatory device that tends to facilitate pricing commonality. 107. We also are unpersuaded by the CPUC's presentation regarding carriers' uses of long-term service contracts. The CPUC's problem is not with such contracts per se, as it continues to permit their use. Rather, California contends that ``automatic renewal'' provisions within such contracts, and evidence obtained by the California Attorney General's Office suggesting that certain carriers may be attempting to utilize such contracts to thwart PCS entry, demonstrate that market conditions are unjust and unreasonable. 108. Even if we take as given the CPUC's determination that certain automatic renewal provisions are unreasonable, it does not follow that the existence of such provisions demonstrates market failure under Section 332(c)(3)(A). Unreasonable business practices can and do arise in competitive markets. Without more, such practices are not necessarily suggestive, much less conclusive, with respect to market conditions. This portion of the CPUC's case simply fails to establish a sufficient nexus between the narrow practice complained of and the relevant, and much broader, statutory test. 109. These considerations alone are sufficient to discount these practices as insufficiently material to the statutory standard to warrant according them significant weight. We also note, however, that we are not prepared on this record to determine whether state oversight of such practices is precluded under the terms of OBRA as ``rate regulation,'' or whether such oversight may be retained by the states as ``terms and conditions'' regulation. See Section VI, infra, Regulation of Other Terms and Conditions. 110. The more troublesome CPUC allegation concerns the use of long-term contracts to ``lock down'' cellular carriers' customer bases and thereby prevent or delay subscribers from taking advantage of competitive PCS alternatives. We view this allegation seriously because such conduct, if true, strikes at the heart of Congress's plan to build a robustly competitive mobile telecommunications marketplace by significantly increasing the spectrum available for such services. We accord more weight to this CPUC allegation than its parallel pricing contentions because the former is buttressed by evidence drawn from the record of an on-going investigation by the California Attorney General's Office. In the context of the instant proceeding, however, the key term here is ``on-going.'' To our knowledge, neither the Attorney General nor the CPUC has acquired sufficient evidence to support even the initiation of formal action against the carriers to whom the ``lock-down'' evidence relates. Since the existing evidence apparently is inadequate to support CPUC action under its existing authority, we conclude that such evidence does not constitute an adequate brief for continuing such authority. 3. Indicia of Performance 111. The ``indicia of performance'' component of SCP analysis may be thought of as an examination of empirical evidence of market behavior. We perform such an examination here to determine whether the CPUC has satisfied the statutory requirement of demonstrating that ``market conditions ... fail to protect subscribers adequately from unjust and unreasonable rates or rates that are unjustly or unreasonably discriminatory.'' As discussed previously, we view this as a question whether market operations fail to produce rates that fall within a ``zone of reasonableness,'' which is defined by reference to consumer interests, investor interests, and broad-based public policy considerations. Such an inquiry focuses foremost on cellular prices and profits. a. Prices 112. The initial issue we confront is how to analyze the wealth of price data in the record. Although the two major standard components of cellular prices are monthly, flat- rate access charges and per-minute airtime charges, customer bills are driven in part by other variables, including ``free'' airtime offered with certain pricing plans, termination charges (if any) and contract length (monthly or for a period of months or years). Such variables complicate the task of analyzing pricing data and raise two questions: (1) can the record data be categorized in a way that facilitates meaningful analysis; and (2) what data are the most meaningful? 113. The first of these questions is the easier to answer. In general, most parties, including the CPUC, analyze prices by focusing on monthly price for standardized usage levels (e.g., 60, 120, 480 minutes). Although this is not the only way to address the data, we agree it is a reasonable one. 114. There is less agreement among the parties on the second question. The CPUC claims that each carrier's ``basic'' monthly rate supplies the most meaningful point of reference for price analysis. They argue that nominally cheaper packages typically require the customer to sign a long-term contract (one year or more) and thus are not necessarily better deals. On the other hand, most carriers claim the ``best price'' available in the market at any given point in time should be the focal point of analysis, on the theory that customers for cellular service are rational consumers who may be presumed to respond to price incentives. This is not an academic debate. California notes that basic prices were largely unchanged during the 1989-1993 period to which the CPUC-supplied evidence relates. Carriers note that customers have, in fact, responded to price signals to the point where by 1994 less than 20 percent of cellular subscribers remain on a basic plan. 115. All parties agree that prices are not going up. The CPUC claims that price data demonstrate poor market price performance from a consumer standpoint, however, given the returns that prices are generating for carriers. The CPUC also notes that the rates of major California carriers remain among the highest in the Nation, and claims that ``regulation in California probably has prevented rates from being even higher and certainly has not contributed to higher rates.'' 116. In contrast, the carriers claim that prices actually decreased substantially when nominal price changes are adjusted to account for inflation (yielding the ``real'' price change). They note that service coverage areas have improved, giving customers more for their money. Certain carriers also argue that their mix of customers has changed during the relevant period, resulting in a sharp decline in revenue per subscriber that also should be factored into our analysis. The carriers also assert that our analysis should focus on recent price movements because such movements provide a more accurate indications of the current state of market conditions. Finally, carriers assert that CPUC regulation is the principal cause of high cellular prices in California. Hausman, for AirTouch, estimates that such regulation causes California cellular customers to pay at least $240 million per year in higher cellular prices. To illustrate this, he submits data on prices in 10 cellular service areas across the nation showing that, of those markets, four were state-regulated and those four had the highest prices. 117. The parties also vigorously debate the question whether the high price of cellular services in California, relative to prices in some other areas of the country, are driven by a shortage of spectrum. The CPUC views this question in the negative, while other parties assert that spectrum scarcity is a major contributor to cellular rate levels. 118. Many of these arguments are unpersuasive. For example, the CPUC's focus on basic prices is unconvincing, because only a minority of customers remain on basic plans, and that minority gets smaller each year. As a result, focusing on movements of basic prices does not provide an accurate picture, or a reasonable surrogate indicator, of overall cellular market performance. The CPUC's argument that market conditions must be unreasonable because cellular prices are ``too high'' (i.e., they exceed accounting measures of underlying costs) also is unpersuasive, since on this record it appears the CPUC has never exercised its existing authority to require ``cost-based'' rates, and it presents no persuasive argument concerning the degree to which rates must be ``cost-based'' in order to fall within a zone of reasonableness. The carriers' claim that adjusting nominal price data for inflation would improve our analysis of price performance is theoretically sound, but it suggests that potentially countervailing technical adjustments would need to be made to preserve analytical integrity. Since the record does not contain the information needed to make even the most basic of these additional adjustments (e.g., productivity), it is reasonable to limit our analysis to nominal prices. 119. Before doing so we consider the carriers' principal argument. Essentially, they claim that no matter what condition the market is in, state regulation makes that condition worse from a consumer standpoint. As a threshold matter, it is not obvious that the quality or effectiveness of a state's rate regulations are necessarily matters of decisional significance in a proceeding under Section 332(c)(3)(B). We need not resolve that legal issue here, however, in view of the evidence the carriers and the CPUC offer on this point. California's assertion that its regulation keeps prices from being even higher is based indirectly on work by Shew. This is contrasted in this record by Hausman's work purporting to demonstrate that state regulation raises cellular prices. Both Hausman and Shew use econometric models in an attempt to determine what factors have a statistically significant impact on cellular prices. A key difference between Shew's and Hausman's work is that Hausman uses a single dummy variable for regulation, whereas Shew uses several more descriptive variables, including a variable for the number of days prior to a price change becoming effective (Filetime), a variable for whether regulatory approval is required for a price change, and a variable for a state legislative ban against state regulation of cellular. Shew finds that the threat of regulation lowers prices, but that specific regulatory regimes may raise prices. When one substitutes California's description of its current regulatory regime into Shew's equations, including one day for the Filetime variable, the results show the predicted impact of regulation is extremely minimal. Using thirty days as the Filetime variable yields a more pronounced impact. Although certain carriers claim that California mischaracterizes its regulatory regime, and this suggests it might be appropriate to use thirty days for the Filetime variable, the record on this point is not sufficiently strong to resolve the issue. Since these econometric models appear to produce results that are insufficiently robust with regard to the exact model specified, we do not accord them any weight in our analysis. 120. We also do not agree with the claim that price levels result in substantial part from spectrum scarcity. Essentially, this is an argument that market performance in California is not influenced by the number of licensed cellular systems. We are not persuaded by this argument. The theoretical case that the number of competitors in a market significantly effects rivalry therein is strong, and nothing on this record convinces us that this traditional thinking is inapplicable to cellular. Assertions about scarcity run counter to the carriers' demonstrated ability to accommodate additional demand by, inter alia, splitting cells and deploying digital technologies that vastly expand spectrum efficiency. Even in Los Angeles, where demand appears to be strongest, claims of capacity constraints are belied by continued subscriber growth. 121. As a check on the reasonableness of the parties' presentations on the issue of cellular prices, we performed our own analysis of price and cost data. In so doing we created three indices of ``best prices'' available to a new customer for 60 minutes, for 120 minutes and for 480 minutes (80 percent of the minutes being peak use). To allow us to consider the price and cost data on a state-wide basis, we weighted the data by carrier- specific subscribership information supplied by the CPUC. Since data for every carrier during every time period were not supplied by the parties, we created several indices covering slightly different time periods and groups of carriers. We also focused on prices in a smaller geographic area (Los Angeles). Finally, we created cost-per-subscriber indices to correspond to our price indices. 122. Our analysis indicates that depending on the number of minutes, average nominal prices fell between 10.5 and 15.5 percent overall during the 5 year period for which data are available (1989-93). The bottom line is unambiguous: cellular prices are falling, and falling appreciably. Moreover, a major portion of the decline occurred in the last year. The average best 60 minute price fell from 1989 to 1990 by $1.60, and by two more cents between 1990 and 1992. Between 1992 and 1993, however, this index fell $4.56. Since 1993, prices have continued to fall. The best price in the Los Angeles area for a 60 minute plan fell by more than 15 percent during 1994 alone. Carriers also have offered promotions, such as waiving activation fees, not reflected in our indices but that clearly reduce the price available to consumers. Average revenue per subscriber is falling faster than the average cost of serving subscribers, demonstrating that carriers' per-subscriber profit margins are shrinking. On the whole, this evidence reflects a positive price performance pattern, and undercuts the CPUC's claim that market conditions fail to protect consumers adequately from unjust and unreasonable, or unjustly and unreasonably discriminatory rates. b. Profits 123. The CPUC points to carriers' profits as evidence that conditions in the market for cellular services are unreasonable from a consumer standpoint. In brief, the CPUC argues that carriers consistently earn returns far above competitive levels, and that such returns are evidence of market power, as opposed to a reflection of the riskiness of the cellular business or spectrum scarcity. The CPUC argues that the numerical level of such returns are not unreasonable per se, but should be viewed as such in this context because they reflect a failure to compete, as opposed to being used to expand capacity and increase service availability. 124. A few preliminary observations are in order before we address the merits of the CPUC's presentation in detail. First, we agree with the CPUC that the numerical level of an entity's profits, standing alone, generally does not determine whether such profits are reasonable. The appropriate measure of profits is whether they fall within a zone of reasonableness, which is defined by reference to consumer and investor interests viewed in the context of relevant public policy considerations. Second, it bears emphasis that the purpose of this proceeding is to determine whether the CPUC will retain cellular rate regulation authority by demonstrating that market conditions fail to protect consumers adequately against unjust, unreasonable, and unreasonably discriminatory cellular rates. The CPUC has raised the issue of profits in support of its argument for retaining such authority, and we are evaluating it on that basis and toward no other end. This is not a proceeding to determine whether any particular carrier's profits are reasonable or what rate of return (if any) is reasonable industry-wide. (1) Measures of Profits 125. We begin our analysis by considering available profit data. As a threshold matter, we disagree with commenters who claim that profit analysis is infirm insofar as it focuses on accounting rates of return. The CPUC could not be expected to provide a direct measure of economic profits because that would require financial data from an investment's beginning to end. Even assuming such data exist, they would be too dated to be meaningful for purposes of the instant proceeding, which is focused on contemporary market conditions. We agree with the CPUC that, with exceptions no party shows are present here, accounting profits tend to be high when economic profits exist. The contention that only economic profits should be considered is extreme and inconsistent with the reality that agencies such as ourselves and the CPUC must make decisions on available information. Thus, we conclude it is reasonable to use accounting data as a baseline for analyzing profits in the context of a Section 332(c)(3)(B) proceeding. 126. California provides a significant amount of data relating to profits, including after-tax rates of return and gross plant investment, for 16 of the 40 carriers in that state. These carriers serve markets covering about 90 percent of the state's population. We also reviewed financial reports filed by certain carriers with the CPUC, which added 7 additional carriers to our data set. Using these data, we estimate the after-tax rate of return for these carriers as a whole, weighted by gross plant, to be approximately 30 percent for the period from 1989-1993. 127. Several arguments in the record have a bearing on how this aggregate profit estimate should be evaluated. Hausman (for AirTouch) asserts that cellular is a riskier business than local wireline telephony, and therefore cellular carriers are entitled to a higher return than local exchange carriers. According to Hausman, this risk argues for use of a capital asset pricing model (CAPM) to estimate an appropriate return for cellular, a process that he claims results in earnings calculations exceeding 20 percent. We note that other record materials authored by Hausman disclaim the notion that cellular is a particularly risky business. Even if we assume it is, arguendo, we previously have determined that CAPM estimates often are distorted by firms' use of unrealistic risk assumptions and, consequently, have declined to adopt such methods when estimating appropriate returns. Nothing in this record causes us to reconsider that determination. 128. We accord some weight to arguments that the baseline accounting data overstate rates of return because those data may not adequately reflect interest payment obligations. Interest expenses for some companies are known to be substantial, and some portion of these expenses undoubtedly is attributable to acquisition of cellular licenses in the secondary market. The level of activity in that market was fueled to some degree by the inefficiency of the lottery method we used to award cellular licenses initially. Since such acquisition costs were incurred after the initial grant of license, they normally would be excluded from the ``rate base'' used to calculate a carrier's earnings under traditional regulatory accounting methods, which are designed to prevent companies subject to rate of return regulation from artificially expanding their rate bases through sham transactions. Cellular carriers in California never have been subject to rate of return regulation, so the question of whether the aforementioned accounting methods should be applied to them arguably is legitimate. The task of resolving that question is beyond the scope of this proceeding, however, in part because the record does not contain sufficient data to permit anything but the crudest estimate of the impact of this issue on the returns under review here. For purposes of this proceeding, it is enough to note that the potential impact is significant. The CPUC notes that this issue, if decided in favor of the carriers, has the potential to ``erase[]'' their reported profits. 129. Notwithstanding this debate, we think the component parts of the industry-wide return we have calculated is more illuminating than the number as a whole, for several reasons. First, although the CPUC contends that carriers' earnings are consistently high, the actual data per carrier present a different picture. Viewed by individual carrier, earnings differ substantially from year-to-year and from carrier-to-carrier. In 1993, for example, many of the carriers realized earnings at levels that raise no plausible concern. Some were only marginally profitable for the period as a whole. Earnings also differed appreciably between carriers in the same geographic area. This evidence undercuts the CPUC's claim that earnings are largely a function of market power created by a duopoly licensing structure. Other factors are at work here. In particular, differences between carriers in the same area suggest that some carriers are more efficient than others, and this is not a cause for regulatory concern. (2) Capacity Utilization Rates 130. The CPUC's argument that market conditions are unreasonable places great weight on capacity utilization data. Extensive data of this kind are included in Appendix M to the CPUC Petition. These data show actual usage of each cell measured against a theoretical ``peak load'' level (i.e., a level considered to constitute the point above which usage would produce an unacceptable percentage of blocked calls). The data show an uneven cell usage. We conclude that the CPUC's reliance on such data is misguided. As several carriers point out, no reasonable carrier would engineer its network to operate all or even most of cells at peak load capacity. Investment in cell sites tends to be ``lumpy.'' In addition, carriers may legitimately construct additional capacity to improve quality beyond the peak load standard. This evidence does not support the weight the CPUC has asked it to carry. (3) Growth 131. In assessing profit levels, the CPUC Petition does not address the relationship between reported earnings and industry growth. This oversight is significant. We believe the long term effect of growth on pricing and investment decisions is substantial, and is at least as important a consideration in evaluating cellular industry returns as the short term effect of such decisions on consumer surplus. Cellular is one of the fastest growing industries in this country, with carriers typically experiencing intramarket annual subscriber growth rates of 30 to 50 percent. Gross investment by California cellular carriers increased by 270 to 475 percent between 1989 and 1993 according to the data provided by the CPUC. This represents growth on a substantially different scale than one typically finds in other capital-intensive segments of the telecommunications industry, and it must be factored into any reasonable analysis of industry performance. 132. A key element of the study of markets is the recognition that not all industries and markets are at the same stage of development. Thus, the comparison necessary for determining whether rates of return are ``too high'' is not with mature industries, but with high growth industries. It has been shown that the rate of growth of output is one of the most important determinate of profitability; that is, all other things being equal, high growth firms (such as the cellular industry) tend to earn high profits. Thus, a showing that reported cellular industry profits are higher than realized by other telecommunications service providers, such as local exchange carriers, is not automatically disturbing. 133. To illustrate this, we consider the interrelationship of growth of demand and plant investment. Demand growth can be modelled as a process of diffusion; that is, a learning process by consumers. Diffusion simply means that potential consumers ``learn'' how much consumer surplus (value above the amount they pay) they will receive from cellular service by observing actual consumers. This process is intertwined with carriers' investment decisions. Specifically, while a cellular carrier's failure to invest in additional capacity does not automatically discourage additional subscribership in the near term, ultimately it will have that effect because adding new customers without expanding system capacity will reduce service quality and, thus, consumer surplus. Potential subscribers will receive that signal and not sign up for service; existing subscribers may cancel service. Subscribership will not grow or, potentially, will decline. This negative subscribership pattern obviously does not characterize the cellular industry, which typically has experienced 30 to 50 percent subscriber growth in an environment historically marketed by somewhat static pricing and not particularly elastic demand. 134. From a consumer perspective, the interrelationship of diffusion and carriers' investment decisions is directly relevant to the issue of whether reported industry profits are ``too high.'' Imagine a situation in which cellular prices, and hence profits, were reduced. Lower prices would induce some additional consumers to take service, but lower profits arguably would discourage carriers from expanding system capacity. Service quality degradation then would reduce available consumer surplus. Thus, consumers are not necessarily better off under a scenario in which carriers earn are precluded from earning some economic rents. 135. It is not possible to determine what rate of return would be associated with optimal consumer surplus, but that is not our task in this proceeding. The relevant point for present purposes is that in that optimal consumer surplus in the context of a rapidly growing industry occurs at some positive level of economic rents, such as are reflected on this record, and that such rents do not necessarily show that market conditions fail to protect consumers adequately from unreasonable rates, as the CPUC contends. (4) Investment 136. The CPUC observes that cellular profits are not improper ``to the extent that cellular carriers used the profits to expand capacity and increase service availability to the public.'' As a general proposition, we do not agree with the assertion that high profits are reasonable per se if they are reinvested in capacity expansion because it is easy to imagine instances in which such investment would be inefficient and contrary to the public interest. In the CMRS setting, however, Congress has expressed some degree of interest in facilitating investment in wireless infrastructure. Thus, in this setting, we consider evidence of sustained cellular investment material to the statutory standard for evaluating petitions filed pursuant to Section 332(c)(3)(B). 137. Although the CPUC presents this test of reasonableness in its Petition, it failed to examine whether cellular carriers, in fact, applied their earnings in the identified manner. This oversight is significant. For the period for which data are available, record evidence shows increases in gross investment per carrier on the order of between 180 and 475 percent. In fact, most carriers experienced a point when their accounting rate of return might be viewed as high yet, as a financial investment, their operations yielded no return because most or all of that return was reinvested to support expansion. Even in the largest markets, in certain years increases in net plant were substantially above after-tax operating profits. In 1990, over 80 percent of the net income earned in the top three markets was reinvested to increase net plant. Over the four-year period studied, LA SMSA, Bay Area and Pactel reinvested approximately 35 percent, 32 percent, and 47 percent of their profits. Many carriers in middle sized markets continue to reinvest beyond their profits. In 1993, Sacramento Valley, Fresno Cellular, Fresno MSA and GTE of Santa Barbara each increased net plant by more than double their net operating profits. By contrast, available evidence indicates that net plant of cable television fell over this same timeframe. The net plant of companies in more mature segments of the market for telecommunications services increased, but apparently by less than one percent per year. 138. This evidence strongly suggests that the California cellular industry is, in fact, using its profits ``to expand capacity and increase service availability to the public,'' thereby meeting the CPUC's own test for evaluating whether profit levels are reasonable. We note that such investment has had beneficial effects. Without it, the quality of service would have declined as additional subscribers were added. We also stress that the money earned by serving cellular customers was applied to expand service to additional cellular customers. Thus, the class of customers who paid for the increased plant and equipment is the very same class of customers who benefited from the carriers' pricing and investment decisions. We view this fact to be decisionally significant. 139. Apart from that, we note that such investment has important long-term competitive implications. Specifically, investment made in the 1990's will be in place when cellular carriers face significant competition from broadband PCS providers. In theory, cellular carriers might have chosen the alternative strategy of ``cashing-out'' in the face of this competition. That is, cellular carriers might have decided that because they cannot sustain high returns on marginal investments made during the 1990's, they would stop increasing net plant, possibly even let it shrink, so as to expand their rate of return prior to facing more intense competition. The data in this record do not demonstrate that carriers are pursuing this alternative strategy. This, too, is decisionally significant. 140. The record also provides no persuasive evidence that investment by cellular carriers represents an undertaking designed to deter entry. That is, in some circumstances incumbent firms may aggressively invest in plant and equipment to send a message to potential entrants that ``your entry would prove unprofitable, because my large capacity will allow me to compete vigorously.'' All available evidence indicates that PCS entry is a certainty, which means incumbent firms have no apparent incentive to employ a predatory investment strategy. The far more reasonable interpretation of cellular carriers' investment pattern is that they plan to be vigorous competitors for the foreseeable future. This, too, is decisionally significant. 141. Against this background, we conclude that carriers' actual profitability arguably is lower than reported, and appears to satisfy the CPUC's own standard of reasonableness because it has been devoted to a substantial extent to system expansion needed to serve consumer demand for cellular service. This evidence does not, as the CPUC claims, unambiguously demonstrate that market conditions fail to protect consumers adequately from unjust and unreasonable rates, or unjustly and unreasonably discriminatory rates. VI. REGULATION OF OTHER TERMS AND CONDITIONS 142. Prior to OBRA, Section 332 prohibited the states from imposing ``rate ... regulation'' upon certain wireless telecommunications carriers. This prohibition was construed broadly to preclude almost all state regulatory activity. As revised by OBRA, Section 332(c)(3) now prohibits states from regulating ``the rates charged'' for CMRS, but it expressly reserves to them the authority to regulate the ``other terms and conditions of commercial mobile services.'' Although there is no definition of the term ``the rates charged'' in the statute or its legislative history, there is legislative history regarding the ``other terms and conditions'' language. We believe it is sufficient to allow us to comment in a preliminary manner on what regulatory activities the CPUC is entitled to continue, despite our denial of its Petition. 143. The House of Representatives Committee on Energy and Commerce, reporting on the House bill that was incorporated into the amended Section 332, noted that even where state rate regulation is preempted, states nonetheless may regulate other terms and conditions of commercial mobile radio services. The Committee stated: By ``terms and conditions,'' the Committee intends to include such matters as customer billing information and practices and billing disputes and other consumer protection matters; facilities siting issues (e.g., zoning); transfers of control; the bundling of services and equipment; and the requirement that carriers make capacity available on a wholesale basis or such other matters as fall within a state's lawful authority. This list is intended to be illustrative only and not meant to preclude other matters generally understood to fall under ``terms and conditions.'' 144. Establishing with particularity a demarcation between preempted rate regulation and retained state authority over terms and conditions requires a more fully developed record than is presented by the California Petition and related comments. Thus, we will not expound at any length on this matter. The legislative history largely speaks for itself. It is possible to extrapolate certain findings from the legislative history, however, and we do so here in the interest of minimizing future proceedings directed at this issue. 145. First, although the CPUC may not prescribe, set, or fix rates in the future because it has lost authority to regulate ``the rates charged'' for CMRS, it does not follow that its complaint authority under state law is entirely circumscribed. Complaint proceedings may concern carrier practices, separate and apart from their rates. In consequence, it is conceivable that matters might arise under complaint procedures that relate to ``customer billing information and practices and billing disputes and other consumer matters.'' We view the statutory ``other terms and conditions'' language as sufficiently flexible to permit the CPUC to continue to conduct proceedings on complaints concerning such matters, to the extent that state law provides for such proceedings. 146. Second, under the same logic, we also conclude that several other aspects of California's existing regulatory system may fall outside the statutory prohibition on rate regulation. For example, a requirement that licensees identify themselves to the CPUC, or whatever other agency the state decides to designate, does not strike us as rate regulation, so long as nothing more than standard informational filings is involved. Moreover, nothing in OBRA indicates that Congress intended to circumscribe a state's traditional authority to monitor commercial activities within its borders. Put another way, we believe the CPUC retains whatever authority it possesses under state law to monitor the structure, conduct, and performance of CMRS providers in that state. We expect that, to the extent any interested party seeks reconsideration on this issue, it will specify with particularity the provisions of California's existing rate regulation practice at issue. 147. Finally, we do not consider it necessary at this time to address the contention that we have jurisdiction over intrastate rates for CMRS, following termination of the CPUC's rate regulation authority, which we can employ to protect resellers. The question whether we have jurisdiction over CMRS intrastate rates has been raised in petitions for reconsideration of the CMRS Second Report and Order and will be addressed some time in the future in the context of that proceeding. If we are persuaded upon reconsideration of the instant proceeding that it is necessary to address that issue here, we will do so, but only upon a showing by petitioners that resolution of the issue is necessary to resolve a material issue raised in this record. That showing must consist of evidence and argument establishing such a nexus and supporting the substantive position argued, i.e., that we have or have not inherited intrastate rate regulation over CMRS. VII. ORDERING CLAUSES 148. Accordingly, pursuant to Section 332(c)(3) of the Communications Act, 47 U.S.C.  332(c)(3), IT IS ORDERED that the Petition of the People of the State of California and the Public Utilities Commission of the State of California To Retain Regulatory Authority over Intrastate Cellular Service Rates IS DENIED for the reasons set forth above. 149. IT IS FURTHER ORDERED, that California's motion to strike, filed March 16, 1995, and directed to the supporting affidavit of Jerry Hausman (submitted March 8 by AirTouch as part of a written ex parte communication), IS GRANTED to the extent indicated herein. 150. IT IS FURTHER ORDERED, pursuant to Sections 1.4(b), 1.4(b)(2), and 1.106(f) of the Commission's Rules, that any petition for reconsideration of this order SHALL BE FILED within thirty days of the day after the day on which public notice of this action is given. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary APPENDIX A List of Parties Filing Comments Party (and Short Title) AirTouch Communications (AirTouch) American Mobile Telecommunications Association, Inc. (AMTA) Bakersfield Cellular Telephone Co. (Bakersfield) Bay Area Cellular Telephone Co. (BACTC) Cellular Agents Trade Association (CATA) Cellular Carriers Association of California (CCAC) Cellular Resellers Association, Inc., Cellular Service, Inc., and Comtech Mobile Telephone Company (Cellular Resellers) Cellular Telecommunications Industry Association (CTIA) County of Los Angeles (L.A. County) E.F. Johnson Company (E.F. Johnson) GTE Service Corporation, On Behalf of its Telephone and Personal Communications Companies (GTE) Los Angeles Cellular Telephone Company (L.A. Cellular) McCaw Cellular Communications, Inc. (McCaw) Mobile Telecommunication Technologies Corporation (Mtel) National Cellular Resellers Association (NCRA) Nextel Communications, Inc. (Nextel) Paging Network, Inc. (Pagenet) Personal Communications Industry Association (PCIA) Utility Consumers' Action Network and Towards Utility Rate Normalization (UCANTURN) US West Cellular of California, Inc. (US West) List of Parties Filing Reply Comments AirTouch Communications (AirTouch) Cellular Carriers Association of California (CCAC) Cellular Resellers Association, Cellular Service, Inc., and ComTech Mobile Telephone Company (Cellular Resellers) Cellular Telecommunications Industry Association (CTIA) County of Los Angeles (L.A. County) GTE Service Corporation, On Behalf of its Telephone and Personal Communications Companies (GTE) Los Angeles Cellular Telephone Company (L.A. Cellular) McCaw Cellular Communications, Inc. (McCaw) Mobile Telecommunication Technologies Corporation (Mtel) Nextel Communications, Inc. (Nextel) PageMart, Inc. (PageMart) People of the State of California and the Public Utilities Commission of the State of California (CPUC) Rural Cellular Association (RCA) US West Cellular of California, Inc. (US West) List of Parties Filing Supplemental Comments AirTouch Communications (AirTouch) Cellular Carriers Association of California (CCAC) Cellular Resellers Association, Inc., Cellular Service, Inc., and ComTech Mobile Telephone Company (Cellular Resellers) GTE Service Corporation, On Behalf of its Telephone and Personal Communications Companies (GTE) Los Angeles Cellular Telephone Company (L.A. Cellular) McCaw Cellular Communications, Inc. (McCaw) List of Parties Filing Supplemental Reply Comments AirTouch Communications (AirTouch) Cellular Carriers Association of California (CCAC) Cellular Resellers Association, Inc., Cellular Service, Inc., and ComTech Mobile Telephone Company (Cellular Resellers) GTE Service Corporation, on Behalf of its Telephone and Personal Communications Companies (GTE) Los Angeles Cellular Telephone Company (L.A. Cellular) McCaw Cellular Communications, Inc. (McCaw) APPENDIX B TABLE 1 After Tax Rates of Return on Net Plant and Equipment Company Starting Date Pops 1989 1990 1991 1992 1993 Bakersfield Cellular 3/88 543477 61.5 Bay Area Cellular 9/86 5184169 43.7 48.1 43.5 31.1 49.5 Cagal Cellular 1/89 388222 1.2 17.6 17.0 35.8 California 2 Cellular 8/91 57015 -49.0 -55.0 Contel Cellular of CA (RSA # 7) 10/90 109303 -32.2 -19.5 6.0 35.4 Fresno Cellular 10/87 979411 -19.6 11.9 24.0 31.3 25.7 Fresno MSA LP 4/86 1624357 8.0 7.6 11.2 10.7 GTE Mobilnet of California 3/85 6826133 22.8 15.8 16.4 20.0 18.1 GTE Mobilnet of Santa Barbara 11/87 369608 2.6 2.0 8.5 6.7 7.5 Los Angeles Cellular 12/86 13862513 71.4 58.5 52.4 51.6 47.0 LA SMSA LP 6/84 14531529 49.4 43.3 34.8 28.0 33.8 McCaw Communications of Stockton 12/87 857150 31.4 27.0 26.0 32.2 Modoc RSA LP 10/90 57015 -15.0 -24.4 -19.2 -6.2 Napa Cellular 4/88 451186 7.4 19.5 32.7 32.5 PacTel Cellular 8/85 2498016 33.0 32.9 23.9 21.4 30.4 Redding Cellular 3/89 237734 3.1 Sacramento Cellular 10/87 1477750 -2.9 21.4 22.1 22.2 17.4 Sacramento Valley LP 7/85 2836582 17.6 10.1 2.8 0.8 6.4 Salinas Cellular 3/89 355660 -21.6 -8.3 5.2 7.2 Santa Barbara Cellular 12/87 369608 -39.4 -10.4 -9.7 5.0 10.5 Santa Cruz 1/89 229734 -2.7 9.5 14.0 US West Cellular 4/86 2498016 5.2 9.0 -4.3 -7.4 2.9 Ventura Cellular 7/87 669016 39.3 27.1 21.5 24.5 Weighted Sum 34.4 33.2 28.7 26.7 30.2 Weighted sum is by gross investment and includes estimates for missing markets. See Appendix 71. Source: Cellular Communications Licensees (Wholesalers) Annual Reports to the Public Utilities Commission, State of California for the Years 1989, 1990, 1993; California Petition at Appendices G and H. Table 2* 14 Carrier Monthly Price Indices Year 1990 1991 1992 1993 Best Price 60 $63.03 $63.03 $62.95 $58.48 120 $85.09 $84.95 $84.87 $76.93 480 $219.42 $218.05 $216.76 $191.06 Table 3* 11 Carrier Monthly Price Indices Year 1989 1990 1991 1992 1993 Best Price 60 $64.72 $63.12 $63.12 $63.10 $58.60 120 $87.89 $85.19 $85.06 $85.04 $77.05 480 $226.64 $219.67 $218.29 $217.17 $191.31 Table 4* 14 Carrier Annual Operating Expense Indices Year 1990 1991 1992 1993 Annual Per Subscriber Operating Expense $701.53 $699.51 $662.11 $589.63 Table 5* 11 Carrier Annual Operating Expense Indices Year 1989 1990 1991 1992 1993 Annual Per Subscriber Operating Expense $685.43 $669.79 $680.01 $654.76 $586.10 *Source: California Petition at Appendices H and J. Averages are weighted by number of subscribers in 1991. Prices assume 80% of minutes are peak-use minutes. Table 6 Los Angeles Prices Single User Best Volume Discount Price 60 minutes 120 minutes 480 minutes 60 minutes 120 minutes 480 minutes 12/31/93 69.84 85.08 201.60 56.86 75.96 198.72 12/31/94 56.39 85.08 201.60 56.86 75.96 198.72 2/28/95 56.39 84.03 200.72 49.49 69.98 185.90 The technique used to develop this table is similar to that those used by the State of California and the carriers. These are best available prices for a new user on the given day. The best price is not necessarily the same for both carriers. The price shown is the best available from some carrier for a new customer. This table shows that prices have fallen since the data proved by California. For example, the best price for 60 minutes fell 19% between 12/31/93 and 12/31/94. This was due to a new rate plan, plus a temporary promotional plan available for the first few months the new plan was made available. Only one of the carriers had that promotion in effect on 2/28/95. Sources: CPUC Petition at Appendix J; AirTouch ex parte (3/17/95); BellSouth ex parte (3/23/95). Table 7 Hazlett's Estimates of q ratios for Cellular Telephone Markets Market Size Replacement Cost of All Tangible Assets (per pop) Average Sales Prices (per pop) q ratios Small $19.67 $131.46 6.68 Medium 13.59 168.62 12.41 Large 18.57 250.98 13.52 Source: Thomas W. Hazlett, ``Market Power in the Cellular Telephone Duopoly,'' Report prepared for Time Warner Telecommunications, (1993) at 14. Table 8 Gross Plant and Equipment Company 1989 Average Gross Plant 1993 Average Gross Plant % Change Bay Area Cellular Telephone Company $60,944,400 $167,085,340 274.16 % Contel Cellular (RSA # 7) $843,876* $2,033,262 240.94 %** Fresno Cellular Telephone $7,611,804 $36,202,848 475.61 % Fresno MSA LP $29,210,172* $59,878,844 204.99 %** GTE Mobilnet of California $71,249,619 $223,211,160 313.28 % GTE Mobilnet of Santa Barbara $4,987,380 $23,510,773 471.41 % Los Angeles Cellular Telephone Company $103,256,492 $356,808,969 345.56 % Los Angeles SMSA LP $155,537,562 $436,892,736 280.89 % Modoc RSA LP $222,496* $406,134 182.54 %** PacTel Cellular Corp. $25,171,848 $74,410,848 295.61 % Sacramento Cellular Telephone $17,783,992 $75,240,207 423.08 % Sacramento Valley LP $24,503,636 $86,134,277 351.52 % Santa Barbara Cellular $4,558,632 $15,010,065 329.27 % US West Cellular $20,500,963 $62,091,140 302.87 % *1990 Average Plant and Equipment. **Percentage change between 1990 and 1993. Source: Cellular Communications Licensees (Wholesalers) Annual Reports to the Public Utilities Commission, State of California, for the Years 1989, 1990, 1993. Table 9 After Tax and Interest Rates of Return Return on Revenues (%) Return on Assets (%) Return on Equity (%) Wireless Service Company 1989 1990 1991 1992 1993 1989 1990 1991 1992 1993 1989 1990 1991 1992 1993 AirTouch Communications Inc. NA NA NA NM 3.8 NA NA NA NM 1.2 NA NA NA NM 3.8 Lin Broadcasting 22.9 NM NM NM NM 9.1 NM NM NM NM 12.5 NM NM NM NM McCaw Cellular Communications NM 35.8 NM NM NM NM 6.3 NM NM NM NM 23.0 NM NM NM Mobile Telecommunications Tech NM NM NM NM 12.9 NM NM NM NM 5.8 NM NM NM NM 9.0 Nextel Communications NA NM NM NM NA NA NM NM NM NA NA NM NM NM NA US Cellular Corp NM NM NM 3.8 NM NM NM NM 0.8 NM NM NM NM 1.5 NM Vanguard Cellular Sys. NM NM NM NM NM NM NM NM NM NM NM NM NM NM NM Source: Standard and Poor's, Industry Surveys:Telecommunications, Basic Analysis, June 2, 1994. Table 10 Growth of Net Plant and Reinvestment of Profits Large Markets 1990 1991 1992 1993 Totals LA Cellular $96,688,679 58.5% $114,743,744 52.4% $123,679,819 51.6% $117,062,349 47.0% $79,035,183 62.8% $28,050,707 13.7% $13,314,843 5.7% $5,953,922 2.4% 100.4% $17,653,496 81.7% $86,693,037 24.4% $110,364,976 10.8% $111,108,427 5.1% 27.9% LA SMSA $78,333,706 43.3% $75,885,956 34.8% $67,588,920 28.0% $107,060,669 33.8% $47,999,081 30.7% $26,880,596 13.1% $19,490,570 8.4% $20,301,980 8.1% 73.2% $30,334,625 61.3% $49,005,360 35.4% $48,098,350 28.8% $86,758,689 19.0% 34.9% Bay Area $30,154,000 48.1% $34,169,000 43.5% $43,421,000 31.1% $46,965,000 49.5% $20,939,820 40.2% $10,665,985 14.6% $12,803,201 15.2% $4,490,405 4.6% 93.8% $9,214,180 69.4% $23,503,015 31.2% $30,617,799 29.5% $42,474,595 9.6% 31.6% GTE $14,093,498 15.8% $19,561,031 16.4% $27,987,242 20.0% $56,820,926 18.1% $38,022,816 108.4% $15,119,123 26.1% $24,054,868 49.1% $2,773,285 32.8% 160.5% ($23,929,318) 269.8% $4,441,908 77.3% $3,932,374 85.9% $19,676,415 65.4% 96.5% Pactel $9,420,334 32.9% $8,695,668 23.9% $9,029,050 21.4% $13,763,336 30.4% $4,967,020 19.0% $10,638,868 34.2% $798,841 1.9% $2,773,285 6.5% 73.4% $4,453,314 52.7% ($1,943,200) 122.3% $8,230,209 8.8% $10,990,051 20.1% 46.9% US West $2,061,320 9.0% ($2,289,155) -4.3% ($3,306,232) -7.4% $1,105,499 2.9% $11,169,558 72.4% $7,654,099 23.5% ($4,086,613) -10.2% $4,749,174 16.5% 91.2% ($9,108,238) 541.9% ($9,943,254) na $780,381 na ($3,643,675) 429.6% na % of Profit 87.6% 39.5% 24.7% 13.4% See Table 11 for source and key. Table 11 Growth of Net Plant and Reinvestment of Profits Middle Markets 1990 1991 1992 1993 Totals Sacramento $5,807,217 21.4% $9,319,977 22.1% $11,584,920 22.2% $13,084,721 17.4% Cellular $12,470,559 59.5% $11,740,368 35.1% $2,601,171 5.1% $8,130,246 15.2% 166.8% ($6,663,342) 214.7% ($2,420,391) 126.0% $8,983,749 22.5% $4,954,475 62.1% 87.8% Sacramento $3,146,079 10.1% $1,161,634 2.8% $408,726 0.8% $3,816,168 6.4% Valley $11,925,787 47.4% $9,107,329 24.6% $9,233,474 20.0% $7,855,037 14.2% 151.5% ($8,779,708) 379.1% ($7,945,695) 784.0% ($8,824,748) 2259% ($4,038,869) 205.8% 446.8% Fresno $1,206,532 11.9% $3,691,182 24.0% $7,020,723 31.3% $7,386,001 25.7% Cellular $3,499,594 41.9% $7,041,408 59.4% $7,083,749 37.5% $5,478,937 21.1% 276.4% ($2,293,062) 290.1% ($3,350,226) 190.8% ($63,026) 100.9% $1,907,064 454.1% 119.7% Fresno MSA $3,102,821 8.0% $3,259,573 7.6% $6,078,225 11.2% $7,810,658 10.7% $3,165,709 14.2% $4,200,037 17.3% $13,360,763 49.2% $14,496,542 38.1% 157.8% ($62,888) 102.0% ($940,464) 128.9% ($7,282,538) 219.8% ($6,685,884) 467.2% 173.9% (3 Yrs) Santa ($465,319) -10.4% ($632,347) -9.7% $406,513 5.0% $1,150,016 10.5% Barbara $2,375,008 72.0% $1,750,983 30.9% $1,473,543 19.9% $4,073,408 45.8% 293.4% ($2,840,327) na ($2,383,330) -277% ($1,067,030) 362.5% ($2,923,464) 354.2% 2108% GTE of $110,579 2.0% $781,663 8.5% $681,700 6.7% $1,495,884 7.5% Santa Barb. $756,332 14.7% $6,514,901 110.5% $5,960,377 82.7% $6,448,918 48.9% 382.7% ($645,753) 684.0% ($5,733,238) 833.5% ($5,278,677) 874.3% ($4,953,034) 431.1% 641.1% % of Profit 264.9% 229.5% 151.7% 133.8% Key After-Tax Income Rate of Return Increase in Net Plant % Increase in Net Plant Net Cash Flow % of Profits Reinvested Table 12 Investment By Cable TV Providers Operator 1989 1993 Net Plant (Millions) Households Passed (Thousands) Net Plant (Millions) Households Passed (Thousands) Adelphia 320.4 1365.7 398.9 1758 Cablevision Systems 521.0 2429.6 643.5 3563 Century Communications 352.5 1500 431.9 1653 Comcast 612.9 2638.6 1021.0 4219 C-TEC 266.2 287.7 343.8 417 E.W. Scripps 552.4 961 712.7 1159 Falcon Cable 63.4 1048 66.8 1287 Galaxy Cable M.L.P 34.3 116.9 18.9 76 Jones Spacelink 159.1 2146.6 194.9 2163 Media General 421.7 282.2 515.2 324 Multimedia 175.4 598.8 240.8 694 TCA Cable 121.1 677.5 106.4 645 Tele-Communications 4179 9461.2 4935 17425 Times Mirror 1543.6 1846.7 1756.3 2069 Time Warner 2944 3317 3866 12012 Viacom 380.3 1653.3 554.2 1730 Totals 12647.3 30330.8 15806.3 51194 Net Plant per Household passed $417 $309 Source: Paul Kagan Associates, Inc., ``The Cable TV Financial Databook,'' June 1990, June 1994. Table 13 Telephone Company Investment 1989 Gross Plant (Thousands) 1989 Net Plant (Thousands) 1993 Gross Plant (Thousands) 1993 Net Plant (Thousands) % Increase in Gross Plant % Increase in Net Plant All Reporting LECs* 233,445,021 149,538,600 263,556,374 156,380,052 12.9% 4.6% 7 RBOC's 187,215,720 119,574,753 207,636,503 122,693,261 10.9% 2.6% AT&T Communications, Inc. 26,116,103 16,135,201 25,231,150 16,130,858 -3.4% -0.0% Note: In total, all reporting carriers reinvested about 11% of net profits (before interest). * LECs must report these data to the FCC if their gross revenues exceed $100 million. There were 53 reporting entities in 1989, 55 in 1993. Source: Federal Communications Commission, Statistics of Communications Common Carriers, 1989/1990, 1993/1994. TABLE 14 Reordering Hausman's Table MSA No. In Hausman Table MSA Population Monthly Price Regulated 2 Los Angeles 13862513 99.99 Yes 1 New York 13698478 110.77 Yes 3 Chicago 7261176 58.82 4 Philadelphia 4856881 80.98 5 Detroit 4531636 66.76 7 Boston 4029662 82.16 Yes 6 Dallas 3949075 59.78 9 San Francisco 3686582 99.47 Yes 8 Washington 3660758 76.89 10 Houston 3493644 80.33 Using CMSA Pops MSA No. In Hausman Table Cluster Population Monthly Price Regulated 2 Los Angeles 13862513 99.99 Yes 1 New York 13698478 110.77 Yes 3 Chicago 7865702 58.82 4 Philadelphia 6107248 80.98 8 Washington 6008977 76.89 9 San Francisco 5184169 99.47 Yes 7 Boston 4739367 82.16 Yes 5 Detroit 4531636 66.76 6 Dallas 4044096 59.78 10 Houston 3711043 80.33 Hausman notes that the average price in regulated MSAs is 39% higher than in unregulated MSAs. We note that average population in regulated clustered MSAs is 74% higher than in unregulated clustered MSAs. MSA to MSA, the difference is 91%. TABLE 15 We used the confidential data provided by California, supplemented by information on growth by specific carriers during 1994, filed in ex parte presentations, to estimate demand relations. Two such regressions are included below. Regression 1 Dependent Variable is Logit(Penetration) CoefficientStd. Error T-StatisticProb. Constant -14.33973 2.319734 -6.181625 0.0000 Log(Highinc) 1.425076 0.353007 4.036957 0.0001 Log(Age) 1.045669 0.118845 8.798619 0.0000 Log(Drive Time) 6.334967 1.190043 5.323310 0.0000 Log(Pops) -0.864417 0.134228 -6.439905 0.0000 Log(P120/GCPI) -1.261171 0.354760 -3.554996 0.0007 Observations: 76 R-squared 0.723044 Adjusted R-squared 0.703262 Regression 2 Dependent Variable is Logit(Penetration) CoefficientStd. Error T-StatisticProb. Constant 0.540140 0.680719 0.793485 0.4308 Log(Highinc) 0.101609 0.190845 0.532417 0.5965 Log(Age) -0.250573 0.114829 -2.182142 0.0333 Log(P120/GCPI) -0.327574 0.215884 -1.517358 0.1348 Log(Lagged Penetration) 0.806344 0.052959 15.22596 0.0000 Observations: 61 R-squared 0.875118 Adjusted R-squared 0.866197 ``Penetration'' is Subscribers/Population; ``Age'' is the number of months since construction of the system; ``Pops'' is the population based on the 1990 census; ``High Income'' is the percent of households with income greater than $50,000 in 1991; ``Drive Time'' is the average number of minutes to commute to work; ``P120'' is the best price for 120 minutes available from a carrier; ``GCPI'' is the general Consumer Price Index. Sources: 1992 Survey of Buying Power Demographic USA, 1990 US Census and Cellular Communications Licensees (Wholesalers) Annual Reports to the Public Utilities Commission, State of California. Table 16 To obtain an estimate for the rate of return for the whole state, we used the following two regressions to estimate rate of return and gross plant: Regression No. 1 Dependent Variable is Ln(GROSSPLANT) CoefficientStd. Error T-StatisticProb. Constant 0.379602 1.642788 0.231072 0.8178 Ln(YEAR-1983) 1.553820 0.474709 3.273203 0.0015 Ln(POPS) 0.957653 0.059366 16.13130 0.0000 RSA -0.819740 0.231829 -3.535974 0.0006 Ln(Age) -0.359661 0.296603 -1.212601 0.2284 Ln(Age)2 0.089599 0.067273 1.331876 0.1862 Wireline -0.142455 0.096554 -1.475390 0.1436 Observations: 98 R-squared 0.963382 Adjusted R-squared 0.960967 Regression No. 2 Dependent Variable is Ln(Rate Of Return+100) CoefficientStd. Error T-StatisticProb. Constant 0.962987 0.613016 1.570900 0.1196 Ln(Pops) 0.162373 0.023126 7.021266 0.0000 Wireline 0.039833 0.028285 1.408258 0.1624 Min(0,Age-48) -0.010266 0.001800 -5.703254 0.0000 Max(0,48-Age) -0.000992 0.001927 -0.514704 0.6080 ln(High Income) 0.045439 0.052989 0.857512 0.3933 ln(Year - 1983) 0.821929 0.149831 5.485705 0.0000 Observations: 101 R-squared 0.639238 Adjusted R-squared 0.616210 ``Age'' is the number of months since construction of the system; ``Pops'' is the population based on the 1990 census; ``High Income'' is the percent of households with income greater than $50,000 in 1991. Sources: 1992 Survey of Buying Power Demographic USA, 1990 US Census and Cellular Communications Licensees (Wholesalers) Annual Reports to the Public Utilities Commission, State of California.