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PUC, Petn for CMRS Rate Reg'n, PR Dkt. 94105, FCC 95195 //$ $/ 300.332 Mobile services /$ $/ 20.13 State petitions for authority to regulate rates /$  ]-` (#g FCC 95195 ă  ]`-f! Before the\ FEDERAL COMMUNICATIONS COMMISSION ]2-\OWashington, D.C. #x6X@8;2X@#  \  \s -#Xxjp P79XP#In the Matter of hhCq) ` `  hhCq)  \E -Petition of the People of the hhCq)PR Docket No. 94105  \.-State of California and the PublichhCq)  \-Utilities Commission of the StatehhCq)  \-of California To Retain Regulatoryq)  \-Authority over Intrastate CellularhhCq)  \-Service Rates` `  hhCq)  xv;Zh #R P7"hRP## P7 bP#Report and Order # Xxjp P79XP#    X-\ ` `  #XP\  P6QXP#Adopted : May 5, 1995; Released: May 19, 1995 By the Commission: Commissioner Chong not participating.  X3- oKI. INTRODUCTION ă  X-` ` 1.ؠOn 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  X!-(``CMRS'').@! W9$-ԍ Petition of the People of the State of California and the Public Utilities Commission of the State of California To Retain State Regulatory Authority over Cellular Service Rates, PR Docket No. 94105, filed Aug. 8, 1994 (hereinafter ``California Petition'' or ``CPUC Petition'').@ Eighteen parties filed pleadings opposing the petition, and four parties filed  X"-pleadings supporting it.y" Wr(-ԍ A list of parties that filed pleadings in this proceeding appears at Appendix A.y By this action, we deny the Petition because it fails to satisfy the""0*0*0*e"" statutory standard Congress established for extending state regulatory authority over CMRS rates. "0*(("  X-    MII. BACKGROUND ă  X-` ` 2.ؠIn 1993, Congress amended the Communications Act (``Act'') to revise  X-fundamentally the statutory system of licensing and regulating wireless (i.e., radio)  X-telecommunications services.k W-ԍ See Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 10366, Title VI,  6002  W-(``OBRA'' or ``Budget Act''), codified in principal part at 47 U.S.C.  332. 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  Xa-symmetrically in ways that promote marketplace competition;@a@k WR -ԍ See Implementation of Sections 3(n) and 332 of the Communications Act, Regulatory Treatment of Mobile Services, Second Report and Order, 9 FCC Rcd 1411, 141718 (paras. 1113)  W -(1994) (CMRS Second Report and Order), reconsideration pending.@ (2) reallocated up to 200 megahertz of spectrum from government to private use so as to expand opportunities for  X3-innovative utilization of spectrum by the private sector;3k Wt-ԍ National Telecommunications and Information Administration Organization Act,  113(b)(1). 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  X -telecommunications technologies.? 0k W-ԍ The competitive bidding methodology is to promote ``the development and rapid deployment of new technologies, products, and services for the benefit of the public, including those residing in rural areas, without administrative or judicial delays ....'' 47 U.S.C.  309(j)(3)(A). Regulations for the conduct of such auctions, when they prescribe area designations and bandwidth assignments, are required by OBRA to promote ``investment in and rapid deployment of new technologies and services.'' 47 U.S.C.  309(j)(4)(C)(iii). ?  X -` ` 3.ؠCongress 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  X{-conditions'' of CMRS.O{k W4-ԍ See 47 U.S.C.  332(c)(3)(A).O 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  X-service for a substantial portion of the telephone land line exchange service within such State.''Ok W3'-ԍ See 47 U.S.C.  332(c)(3)(B).O"H0*(("Ԍ X-ԙ` ` 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  X-continued regulation is warranted.i k W4-ԍ See CMRS Second Report and Order, 9 FCC Rcd at 1504.i We also determined that the nature of a state's burden of  X-proof is delineated generally by the statute itself. Specifically, we found that:F hk W-ԍ Id., 9 FCC Rcd at 1421.F X[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  X -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.   X{-` ` 5. PARA252  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  XM-grounded on demonstrable evidence.F Mk W-ԍ Id., 9 FCC Rcd at 1504.F 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  X-and helpful to our consideration of a state petition.> k Wx-ԍ 47 C.F.R.  20.13.> 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  X-rules that it would continue or establish if we were to grant its petition.i Hk W-ԍ See CMRS Second Report and Order, 9 FCC Rcd at 1505.i We noted that the  X-standards for preemption established in Louisiana PSC do not apply to petitions submitted  X-under Section 332 of the Act, nor to Section 20.13 of our Rules.!k WG"-ԍ Under Louisiana PSC, the Commission may preempt state regulation of intrastate service when it is not possible to separate the interstate and intrastate components of the asserted  W#-Commission regulation. Louisiana Pub. Ser. Comm'n v. FCC, 476 U.S. 355, 375 n.4 (1986). In  W$-construing the ``inseparability doctrine'' recognized by the Supreme Court in Louisiana PSC, Federal courts have held that where interstate services are jurisdictionally ``mixed'' with intrastate services and facilities otherwise regulated by the states, state regulation of the intrastate service that affects interstate service may be preempted where the state regulation thwarts or impedes a valid"W' 0*(('"  W-Federal policy. See California v. FCC, 905 F.2d 1217 (9th Cir. 1990); Illinois Bell Tel. v. FCC, 883 F.2d 104 (D.C. Cir. 1989); National Ass'n of Reg. Util. Comm'ners v. FCC, 880 F.2d 422 (D.C. Cir. 1989). !  NOTE334 In Louisiana PSC the"0*((p" 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  X-services.''k W-ԍ Louisiana PSC, 476 U.S. at 373, quoting Communications Act,  2(b), 47 U.S.C.  152(b). 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  X-Section 2(b).  X_-   III. DECISIONAL FRAMEWORK ă  X1-` ` 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.  X- A. CellularOnly Regulation  Xb- 1. Pleadings of the Parties  X4-` ` 7.ؠVarious 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  X-because it seeks to impose a type of regulatory regime expressly rejected by Congress.k W-ԍ See, e.g., CTIA Comments at 810; GTE Reply Comments at iii, 13, 1826; McCaw Comments at 811. A variant of this argument also is present in the record. Essentially, some opponents of the  X|-petition argue that: (1) regulatory parity is required by statute; (2) in order to regulate any  Xg-CMRS a state must demonstrate that market conditions warrant regulating all CMRS; (3) the CPUC has not submitted a showing on noncellular CMRS market conditions; and (4)  X;-accordingly, the petition must be dismissed.K;0k W&-ԍ See, e.g., RCA Reply at 13.K "$ 0*((z"Ԍ X-` ` 8.ؠThe 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  X-under the Act.uk W4-ԍ See, e.g., CPUC Petition at 9698 & nn.132, 133; Nextel Reply at 35. u Many parties claim as well that differential regulatory treatment of cellular and noncellular services by a state not only is lawful, but should be required because there is no evidence in this record or elsewhere that noncellular CMRS providers currently possess  Xv-market power, thus making regulation of their activities inappropriate.vhk W -ԍ See, e.g., E.F. Johnson Comments at 45; AMTA Comments at 6; Mtel Comments at 45; PageMart Comments at 35; NCRA Comments at 910.  XH- 2. Discussion  X -` ` 9. We have determined in other proceedings that while regulatory parity is a significant policy that can yield important procompetitive and proconsumer benefits when  X -appropriately applied, parity for its own sake is not required by any provision of the Act. k W}-ԍ See Applications of Craig O. McCaw, Transferor, and American Telephone and Telegraph Company, Transferee, for Consent to the Transfer of Control of McCaw Cellular  W--Communications, Inc. and its Subsidiaries, 9 FCC Rcd 5836, 5858 (1994) (para. 32) (Craig O.  W-McCaw), appeal pending on other grounds sub nom. BellSouth Corp. v. FCC, D.C.Cir. No. 94639,  W-filed Sept. 23, 1994; see generally Implementation of Sections 3(n) and 332 of the Communications Act, Regulatory Treatment of Mobile Services, 9 FCC Rcd 7988 (1994).  Indeed, the Act allows us to adopt a flexible regulatory scheme that treats certain CMRS in a  X -streamlined fashion.c k W'-ԍ See CMRS Second Report and Order, 9 FCC Rcd at 1463.c Congress recognized that market conditions might warrant differential regulatory treatment of CMRS, and it explicitly granted us the authority to forbear from  X-applying certain provisions of the Act.X k W-ԍ Section 332(c)(1)(A) provides that the Commission may determine that any provision of Title II may be specified as ``inapplicable to [any] service or person'' otherwise treated as a common carrier. 47 U.S.C.  332(c)(1)(A).  That Congress understood such forbearance might be exercised selectively is not in doubt. As the OBRA Conference Report states in explaining our  Xb-forbearance authority:Xbk W!-ԍ H.R. Rep. No. 103213, 103d Cong., 1st Sess. 491 (''Conference Report''). The Conference Report further provides that ``[d]ifferential regulation of providers of commercial mobile services is  Wk#-permissible but is not required in order to fulfill the intent of this section.'' Id.X XX` ` 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"0*(( " 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. x` 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.  X - B. Burden of Proof   X - 1. Pleadings of the Parties  X -` `  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  Xy-characterize the burden of proof as ``stiff,''Ayk W-ԍ AirTouch Comments at 24.A ``substantial,''>yhk W-ԍ CTIA Comments at 57.> ``heavy''>yk W2-ԍ CCAC Comments at 25.> or ``extremely  Xb-demanding.''=bk W-ԍ McCaw Comments at 5.= Several cite, in support, our statement in the CMRS Second Report and Order  XM-that a petitioning state must ``clear substantial hurdles''_MHk WF-ԍ CMRS Second Report and Order, 9 FCC Rcd at 1421._ in order to overcome the statutory presumption of preemption and emphasize that a state must establish ``unique circumstances''  X-within its jurisdiction in order to prevail on the merits.Mk W-ԍ See, e.g., PCIA Comments at 5.M  X-` `  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  X-Petition ``moot.''> k W"-ԍ AirTouch Reply at 15.> McCaw and GTE argue that the state must prove the existence of collusive  X-behavior or price fixing in order to prevail.b( k W%-ԍ GTE Supplemental Comments at 18; McCaw Comments at 4041.b 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"~ 0*((P" CMRS/cellular market than exists at the national level; that Federal remedies be inadequate to  X-redress the problem; and that the benefits of state regulation outweigh its costs.c k Wb-ԍ McCaw Comments at 1115; McCaw Supplemental Comments at 8.c  X-` `  12. Several commenters filing pleadings in various of the state petition dockets  X-have suggested with respect to the burden of proof issue that our findings in the CMRS  X-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  Xc-conditions. They note, with respect to the latter, our determination in the CMRS Second  XN-Report and Order that ``there is some competition in the cellular marketplace.''_!Nhk Wg -ԍ CMRS Second Report and Order, 9 FCC Rcd at 1472._ 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  X -the filing of interstate rates for CMRS.o" k W-ԍ Comments of McCaw at 6; CCI at 1112; CTIA at 2, 4, 79; AMTA at 45. o  X -` `  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  X-petitioning process in the face of possible Federal forbearance from rate regulation.R#k W-ԍ CPUC Reply at 9596; Nextel Reply at 46.R The CPUC further contends that a costbenefit analysis of state regulation is not required under the statutory standard and that any suggestion to the contrary ``serves only to highlight the  XS-carriers' antipathy to any state regulation of their industry.''e$SHk WL-ԍ CPUC Reply at 7, referencing Comments of AirTouch at 61, 71.e It rejects McCaw's tripartite test  X<-as impossible to meet and statutorily indefensible in consequence.F%<k W-ԍ CPUC Supplemental Reply at 8.F In response to allegations that it must prove the existence of collusive behavior among cellular carriers, the CPUC  X-contends that Congress did not adopt an antitrust standard of proof in Section 332.9& k WG -ԍ CPUC Reply at 7.9  X-` `  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, markup sessions on S. 335, and a statement by Senator Byron Dorgan introduced into the record at the June 15 session,"m( &0*((O"  X-manifest congressional deference to continued state regulation of CMRS rates.'k Wy-ԍ No copies of these transcripts have been supplied; however, a copy of Senator Dorgan's statement is appended to the Cellular Resellers Reply. 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  X-affirmatively that competition exists....' ''(@k W-ԍ Cellular Resellers Reply at 3, citing Commerce Committee, U.S. Senate (May 25, 1993) (unpublished transcript) at 21. 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  X_-consumers and, hence, no reasonable basis for the State's petition.''8)_k W -ԍ Id. at 5.8  X1- 2. Discussion  X - ` `  X -` ` 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  X -are unjustly or unreasonably discriminatory.''B* Xk W-ԍ 47 U.S.C.  332(c)(3).B A question arises as to what showing is  X -necessary to sustain this burden. Although we addressed this issue in the CMRS Second  X-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  X8-conditions for cellular service+8k W-ԍ Although the provisions of Section 332(c)(3) of the Act apply to rate or entry regulation in the case of any commercial mobile radio service provider, the CPUC Petition is oriented to the provision of 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 illserve consumer interests by producing rates that are not just and reasonable, or are  X-unreasonably discriminatory.   X-` ` 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"iH +0*((" several senators that the burden not be placed on the states, the plain language of the statute  X-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  X-if such State demonstrates that market conditions ... fail to protect subscribers adequately  X-....''Y,k W!-ԍ 47 U.S.C.  332(c)(3)(A) (emphasis supplied).Y 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.  X5-` ` 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  X -the statute as a whole and its object and policy'' to give that phrase meaning.- hk W-ԍ See Crandon v. United States, 494 U.S. 152, 157 (1990); McCarthy v. Bronson, 500 U.S. 136, 139 (1991). We begin that task by reference to other Sections of the Communications Act, such as Section 201, which  X -also speak of just and reasonable rates.. k W<-ԍ See 47 U.S.C.  201; see also 47 U.S.C.  623 (b)(c) (provisions governing reasonableness of cable television rates). We have generally described the measure of reasonableness under these Sections in terms of rates that reflect or emulate competitive  X}-market operations./`}Xk W-ԍ See Policy and Rules Concerning Rates for Dominant Carriers, CC Docket No. 87313, 4  W^-FCC Rcd 2873, 2886 (para. 25), 28892900 (1989); see also Implementation of Sections of the Cable Television Consumer Protection and Competition Act of 1992: Rate Regulation, MM Docket Nos. 92266 & 93215, FCC 94286, released Nov. 18, 1994, at paras. 24, 3437, 6479. 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  X8-in being charged nonexploitative rates.''108 k Wi-ԍ See, e.g., FERC v. Pennzoil Producing, 439 U.S. 508, 517 (1979); AT&T v. FCC, 836 F.2d  WA -1386, 1390 (D.C. Cir. 1988); see also FPC v. Hope Natural Gas, 320 U.S. 591, 602 (1944); Duquesne Light Co. v. Barasch, 488 U.S. 299, 308 (1989).1 Regardless of how the test is characterized, it is well established that determinations whether rates fall within this zone are not dictated by  X -reference to carriers' costs and earnings,;1` k W$-ԍ See FERC v. Pennzoil Producing, 439 U.S. 508, 517 (1979) (the zone of reasonableness is not defined by a ``rigidly . . . costbased determination of rates, much less . . . one that bases each  W;&-[carrier's] rates on its own costs.'') (citation omitted); see also Permian Basin Area Rate Cases, 390  W'-U.S. 747, 769, 79798, 80005, reh'g denied, Bass v. FPC, 392 U.S. 917 (1968) (upholding ratemaking"'00*((='" based upon areawide average costs). ; but may take account of noncost considerations"  h10*((" such as whether rates further the public interest by tending to increase the supply of the item  X-being produced and sold.2 hk W-ԍ See, e.g., Mobil Oil Corp. v. FPC, 417 U.S. 283 (1974), in which the Supreme Court upheld a Federal Power Commission incentive plan that permitted an increase in rates in order to encourage increased production. In doing so, the Court emphasized that it was permissible for the agency to consider noncost factors: XMobil's argument assumes that there is only one just and reasonable rate possible for each vintage of gas, and that this rate must be based entirely on some concept of  W -cost plus a reasonable rate of return. We rejected this argument in Permian Basin and we reject it again here. The Commission explicitly based its additional ``noncost'' incentives on the evidence of a need for increased supplies.   WJ-Id. at 316. See also Farmers Union Cent. Exch. v. FERC, 734 F.2d 1486, 150203 (D.C. Cir), cert.  W"-denied, 469 U.S. 1034 (1984) (acknowledging agency authority to consider noncost factors in establishing just and reasonable rates); Public Service Comm'n of New York v. FERC, 589 F.2d 542, 559 (D.C. Cir. 1978) (stating that agencies have authority to adopt incentivebased regulatory approaches in order to serve the public interest). 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.  Xv-` ` 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  XH-any authority to regulate'' CMRS rates.B3Hk W-ԍ 47 U.S.C.  332(c)(3).B As we concluded in the CMRS Second Report and  X3-Order, that provision, as well as the title of Section 332(c)(3) (``State Preemption''), express  X -an unambiguous congressional intent to foreclose state regulation in the first instance._4 Pk W-ԍ CMRS Second Report and Order, 9 FCC Rcd at 1504._ 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  X -regulation,E5 k Wz!-ԍ 47 U.S.C.  332(c)(1)(A).E and it places on us the burden of demonstrating that continued regulation will  X -promote competitive market conditions.E6 k W$-ԍ 47 U.S.C.  332(c)(1)(C).E  X-` ` 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"f 060*((h" easily. It chose instead to delineate the circumstances in which such regulation might be  X-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  X-uses;7k W-ԍ OBRA  6001, amending the National Telecommunications and Information Administration Organization Act. (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  X_-stimulating economic opportunity and competition;u8_@k WP -ԍ See OBRA  6002(a), amending Section 309 of the Communications Act.u 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, competitionbased pricing decisions, and  X -responsiveness to consumer needs.9 k W}-ԍ See 47 U.S.C.  332(d)(1); CMRS Second Report and Order, 9 FCC Rcd at 1420.  X -` ` 20. Viewing all three components together, the statutory plan is clear. Congress envisioned an economically vibrant and competitive market for CMRS services. It understood  X-that such a market was still evolving,: k W-ԍ The Commission's effort to establish new personal communications services (PCS) was initiated in 1989, four years prior to enactment of OBRA, in response to several petitions for rulemaking. During that period we established a formal proceeding to consider PCS issues and adopted major policy decisions that resulted in an allocation to PCS of far more spectrum than is  W!-allocated to cellular service. See Notice of Inquiry, GEN Docket No. 90314, 5 FCC Rcd 3995 (1990); Policy Statement and Order, 6 FCC Rcd 6601 (1991); Notice of Proposed Rulemaking and Tentative Decision, 7 FCC Rcd 5676 (1992); Tentative Decision and Memorandum Opinion and Order, 7 FCC Rcd 7794 (1992); Second Report and Order, 8 FCC Rcd 7700 (1993); Memorandum Opinion and Order, 9 FCC Rcd 4957(1994); Third Memorandum Opinion and Order, 9 FCC Rcd 6908 (1994). We also made recommendations and participated, on behalf of the United States Government, in international allocations decision making fora that recognized and permitted the  W -use of such spectrum for PCS and other emerging technologies on a global scale. See Report, GEN Docket No. 89554, 6 FCC Rcd 3900 (1992). Congress was well aware of such activities, as witnessed by the fact that the Budget Act commanded us to begin granting licenses for such new  W"-services no later than May 1994. See OBRA  6002(d)(2)(B). and it provided the resources (e.g., additional  X{-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  X8-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"! :0*(("  X-telecommunications infrastructure. Robust investment is a prerequisite to achieving that goal.;k Wy-ԍ See CMRS Second Report and Order, 9 FCC Rcd at 1421; see also 47 U.S.C.  309(j)(4)(B), 309(j)(4)(c)(iii); OBRA Conference Report at 483, 49293.  X- 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  X-environment that facilitates prudent business planning.2<@k W-ԍ Id.2  Xv-` ` 21.ؠ 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.  X - ` ` 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 twocarrier cellular market structure in 1982, we have  X4-acknowledged that such a structure provided less than optimal competitive opportunities.=`4k W-ԍ See, e.g., Cellular Communications Systems, 86 FCC 2d 469, 474 (1981), modified on  W-reconsideration, 89 FCC 2d 58, 7174 (1982), modified on further reconsideration, 90 FCC 2d 571 (1982); Petitions for Rulemaking Concerning Proposed Changes to the Commission's Cellular  WM-Resale Policies, 6 FCC Rcd 1719, 1725 & n.67 (1991) (Cellular Resale Order).   X-Other Federal agencies have taken similar positions.]> k W-ԍ See Reply Comments of the United States Department of Justice, CC Docket No. 9134, filed June 19, 1991, at 45 (``[T]here is insufficient evidence to warrant the conclusion that the cellular service market is in fact workably competitive. In each service area there is still a duopoly[.]''); Comment of the Staff of the Bureau of Economics of the Federal Trade Commission, CC Docket No. 9134, filed July 31, 1991, at 7 (``[T]he staff disagrees with the tentative conclusion that cellular service is produced in a competitively structured market.''), 1012.] 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 twocarrier (duopoly) market system that" >0*(("  X-the FCC created may provide only limited competition in cellular telephone markets.''?k Wy-ԍ United States General Accounting Office, ``Telecommunications: Concerns About Competition in the Cellular Telephone Service Industry,'' GAO/RCED92220 (July 1992) (GAO Report). It strains credulity to assert that Congress was blind to these conditions in 1993 when it broadly  X-prohibited state regulation of CMRS.@`k W-ԍ Cf. Goodyear Atomic Corp. v. Miller, 486 U.S. 174 (1988) (Court generally presumes  Ws-Congress is knowledgeable about existing law pertinent to legislation it enacts); accord Miles v. Apex Marine Corporation, 489 U.S. 19 (1990); Cannon v. Univ. of Chicago, 441 U.S. 677 (1979); Minneapolis & St. Louis Railway Co. v. United States, 361 U.S. 173 (1959). Thus, we reject a reading of the statute that allows continued rate regulation merely on a showing of duopoly conditions, because it is not  X-plausible to conclude that Congress adopted a selfdefeating statutory scheme.A@k W -ԍ Cf. McNary v. Haitian Refugee Center, 498 U.S. 479 (1991) (Court generally presumes Congress legislates with knowledge of basic rules of statutory construction).  Xv-` ` 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  X1-heavyhanded regulation.B1 k W-ԍ See, e.g., GAO Report at 3 (The ``FCC is relying on the introduction of advanced personal communications services to bring competition to the cellular telephone marketplace.''). The Commission policy of avoiding heavyhanded regulation of the cellular market while it was  W"-developing also has been determined reasonable in court. See Cellnet Communication, Inc. v. FCC, 965 F.2d 1106, 1112 (D.C. Cir 1992) (petitions for review of FCC order declining to initiate rate regulation of cellular denied because ``the FCC could reasonably conclude, in light of the novelty of the service and the speed of technological change, to wait and see how the market evolved...''). 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  X -licensees in each local market.VC8 hk W-ԍ See Cellular Resale Order, 7 FCC Rcd at 400607. We have recently initiated a review of our resale policies to tailor them to conditions in an emerging wireless telecommunications market that  W-has been expanded to include PCS. See Equal Access and Interconnection Obligations Pertaining to  W -Commercial Mobile Radio Services, 9 FCC Rcd 5408 (1994) (Notice of Proposed Rulemaking and  We!-Notice of Inquiry), Second Notice of Proposed Rulemaking, FCC 95149, released Apr. 20, 1995.V We also have retooled policies initially tailored to promote competition in the wireline market upon determining that they were unlikely to have that  X -effect in the unique setting of wireless telecommunications.D hk W$-ԍ Bundling of Cellular Customer Premises Equipment and Cellular Service, 7 FCC Rcd 4028 (1992). Most especially, we have chosen to address the structural infirmity of the cellular market by vastly expanding the amount of" D0*(( " spectrum available for twoway wireless voice communications and other innovative wireless services and technologies.  X-` ` 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.  X_-Indeed, that statute is in a very real sense a validation of our approach.E_k W-ԍ If Congress had concluded our approach was deficient, or that we should travel in a different policy direction, it is reasonable to conclude that it would have directed us accordingly. As the legislative  XH-history of OBRA makes plain, Congress intended those building blocks to establish a national  X3-regulatory policy for CMRS,uF3@k W$ -ԍ See Conference Report at 48081, incorporating the findings set forth in the Senate Amendment, including the following:  W- X(# X[B]ecause commercial mobile services require a Federal license and the Federal Government is attempting to promote competition for such services, and because providers of such services do not exercise market power visavis telephone exchange service carriers and State regulation can be a barrier to the development of competition in this market, uniform national policy is necessary and in the public interest. u not a policy that is balkanized statebystate.  X -` ` 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  X -legislative history leaves no room for doubt on this point by providing that:`G k W-ԍ H.R. Rep. No. 103111, 103d Cong., 1st Sess. at 26162.` X[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.   X-` ` 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"~@ G0*((" have established two separate statutory procedures one to govern our forbearance, and  X-another to govern states' petitions~Hk Wb-ԍ See 47 U.S.C.  332(c)(1) (forbearance) and 332(c)(3) (state 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.  Xv-` ` 27. Such a demonstration begins but does not end with a showing of less than  X_-fully competitive market conditions. Almost all markets are imperfectly competitive,I_hk Wx -ԍ In general, perfect competition can exist only where goods are homogeneous, and all buyers  WP -and sellers have full information and accept price as given (i.e., they do not try to influence price).  W( -There are also certain necessary conditions regarding cost of production. See D. Carlton & J.  W -Perloff, Modern Industrial Organization 87 (1995). Under perfect competition, price equals marginal  W -cost , which is the incremental cost of producing the last unit of a good. Such conditions are theoretical constructs. and  XH-such conditions can produce good results for consumers.JH@k W9-ԍ See, e.g., W. Baumol, J. Panzar & R. Willig, Contestable Markets and the Theory of Industry  W-Structure 1546 (1982). 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.  X -` ` 28.ؠInstead, 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  Xy-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  XM-permits us to perform a StructureConductPerformance (``SCP'') analysis,K`M k W-ԍ Section 20.13(a)(1) requires states to include ``demonstrative evidence'' establishing failed  W-market conditions. See 47 C.F.R.  20.13(a)(1). Section 20.13(a)(2) provides an extensive, detailed list of the types of information that states are encouraged to supply in order to meet this evidentiary  W> -burden. See 47 C.F.R.  20.13(a)(2)(vi).  which is a  X6-standard paradigm of modern industrial organization analysis.xL6k W"-ԍ See, e.g., F. Scherer & D. Ross, Industrial Market Structure and Economic Performance, 47  W#-(3d ed. 1990) (``Scherer and Ross''); D. Carlton & J. Perloff, Modern Industrial Organization, chs. 1,  Ww$-9 (2d ed. 1994); J. Tirole, The Theory of Industrial Organization 13 (1988).x 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  X-technology. Conduct, in turn, depends on the structure of the market, e.g., on the number of"0L0*((" 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, interfirm 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.  X_-` ` 29.ؠNothing 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  X -behavior by commercial mobile radio service providers.''HM k W -ԍ 47 C.F.R.  20.13(a)(2)(vi).H 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  X4-probative.''IN4hk WM-ԍ 47 C.F.R.  20.13(a)(2)(vii).I  X-` ` 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  X-type of CMRS providers in the state as well as their respective customers,POk W-ԍ 47 C.F.R.  20.13(a)(2)(i) and (ii).P 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  X-in the state.''HPk W-ԍ 47 C.F.R.  20.13(a)(2)(iv).H We also requested information and complaint statistics revealing customer  X|-satisfaction with CMRS providers within the state.JQ|Hk Wu"-ԍ 47 C.F.R.  20.13(a)(2)(viii).J 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  X7-baseRR7k W&-ԍ 47 C.F.R.  20.13(a)(2)(ii) and (iii).R and on ``opportunities for new providers to enter into the provision of competing"7 R0*(("  X-services'' as well as ``an analysis of any barriers to such entry.''GSk Wy-ԍ 47 C.F.R.  20.13(a)(2)(v).G In short, although states have the discretion to adduce such evidence in support of continued rate regulation as they see  X-fit,_Thk W-ԍ CMRS Second Report and Order, 9 FCC Rcd at 1504._ 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.  Xv-` ` 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 twoway 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 cellularoriented petition, we will look with disfavor on any petition that fails to consider the immediate and nearterm impact of PCS. Given the general statutory purpose of facilitating PCStype services, it would be difficult to ignore or downplay the importance of fundamental structural changes when considering Section 332(c) petitions.  X -` ` 32.ؠWhile 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  Xy-question.hU8yk W2-ԍ See, e.g., McCaw Personal Communications, Inc. v. Pacific Telesis Group, 645 F.Supp. 1166, 1174 (N.D. Cal. 1986) (``the existence of low barriers to entry may rebut a prima facie showing of  W-illegality, even where the combined market shares of the merged firms is quite high''), citing United  W-States v. Waste Management, Inc., 743 F.2d 976, 982-83 (2d Cir. 1984). See also American Bar  W-Association, I Antitrust Law Developments (Third) 30711 (1992) and cases cited therein.h 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  XK-competitors,V K k W-ԍ See FTC v. OwensIllinois, Inc., 681 F.Supp. 27, 37 & n.23 (D.D.C. 1988), vacated on other  W-grounds, 850 F.2d 694 (D.C. Cir. 1988) (concerning ``the extensive present and future intermaterial competition in the glass and other packaging industries,'' ``[a]n important, but undisputed, assumption of the economic analysis in this case is that the relevant time frame within which to view elasticity is approximately two years. In other words, conversions by purchasers between types of containers must be feasible within this time frame for demand and supply to be considered  W!-elastic''); Department of Justice & Federal Trade Commission, Horizontal Merger Guidelines (Apr. 2,  W!-1992)(Merger Guidelines), reprinted in 4 Trade Reg. Rep. (CCH)  13,104 (Apr. 7, 1992) at 20,57310 (Entry Analysis, Timeliness of Entry: ``In order to deter or counteract the competitive effects of concern, entrants must quickly achieve a significant impact on price in the relevant market. The Agency generally will consider timely only those committed entry alternatives that can be achieved within two years from initial planning to significant market impact'') (footnote omitted). The  W$&-Merger Guidelines consider firms to be present competitors if, under certain conditions, they could  W&-shift production to a new product within only one year. Id. at 20,5734. and there is little doubt that PCS licensees will enter the market for CMRS in"KV0*(( " competition with cellular providers within this timeframe. We recently concluded an auction designed to license rapidly two additional competitive providers of wireless twoway 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.  XH-\ Broadband PCS Auction Results Đ\ c ddx !ddx `)c    "" California       X   ""  SS -t#&m P7E &P#MTA #+  Freq.  Blk. z @State e4Market %Winning Bidder LWinning BidX c   "u"  Y -#Xw P7=XP#M004q ACaliforniaSan Francisco- Oakland- San JosefuWirelessCo, L.P.fuV$206,500,000 c C   "uW" M004wz BwCaliforniawSan Francisco- Oakland- San JoseWPacific Telesis Mobile ServicesWV$202,150,000 C C f "WW" M002wq AwCaliforniawLos Angeles- San DiegogCox Communications, Inc.W Y1-R$251,918,526BW1" W-ԍ This figure represents the amount to be paid by the pioneer's preference licensee, as required  W-by Section 309(j)(13) of the Communications Act. See American Personal Communications, WashingtonBaltimore MTA #10, Frequency Block A; Cox Cable Communications, Inc., LosAngelesSan Diego MTA #2, Frequency Block A; Omnipoint Communications, Inc., New York MTA #1, Frequency Block A; For Initial Authorizations in the Broadband Personal Communications Service, Memorandum Opinion and Order, 10 FCC Rcd 1101 (1994).B "C Z  "Wg" M002]wz B]wCalifornia]wLos Angeles- San DiegoFgPacific Telesis Mobile ServicesFgV$493,500,000 Z Z  "gg" M030wq AwOregonwPortlandwWestern PCS Corporationg]G$34,155,030 Z   F "g" M030Az BAOregonAPortlandAWirelessCo, L.P.A]G$34,139,785     Y-` `  33.ؠThe nature of this impending competitive entry bears emphasis. Unlike the  Y-typical ``ease of entry'' case, where entry by new competitors is hypothetical or may occur  Y -only at an industry's margin, PCS activity is undeniably real. It is not something that ``may''" W0*((*!"  Y-occur, or that will occur only sporadically. It is happening, and it is happening on a nationwide scale. As the recentlycompleted auction demonstrates, some of this entry is being mounted by large, wellfinanced 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 nearterm entry of PCS, have reacted by preparing for  Yx-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  Y5-licensees.XH 5 f W -ԍ See, e.g., Comm. Daily, Apr. 24, 1995, ``Cellular Industry Eyes Further Cuts, Adjustments to  W -Challenge PCS'' (report on independent researcher's projection of cellular service rate cuts ``up to  W^ -40%'' over next two years); Comm. Daily, Telephony Section, Mar. 9, 1995 (NYNEX cellular company ``said it will begin offering PCS-type services in metro N.Y. under Geographic Option Plan trademark, giving customers greater flexibility in setting rates and using service. Monthly charge is $24.99, with additional min. at 29 cents in home county, 99 cents elsewhere''); M. Mills,  W-Wireless: The Next Generation, Wash. Post, Feb. 20, 1995, Washington Business Section at 1, 1415;  W-  M. Thyfault, Bell Companies Get Personal Bell Atlantic, NYNEX Plan to Merge Their Mobile and  Wn-Cellular Divisions as PCS Players Continue Consolidation, InformationWeek, Communications Section at 33, July 18, 1994 (Bell Atlantic announces a lowpriced, lowrange offering on its Annapolis, Philadelphia, and Pittsburgh cellular systems, intended to resemble PCS offerings).  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  Y -ventures in the wireless industry.Y f W-ԍ See, e.g., Applications of Bell Atlantic Corp. and NYNEX Corp. for Transfer of Cellular  Wh-Radio Licenses to Cellco Partnership, Report No. CL9517, File Nos. 00762CLAL195 et al., filed  W@-Oct. 18, 1994, Exhibit 2 (``Description of Transaction and Public Interest Statement'') at 12, 14; Id. , Attachment D, Affidavit of M. Lowenstein at para.18; Motorola, Inc., Order, DA 95890, released  W-Apr. 27, 1995, at para. 17 (Wireless Telecommunications Bureau), petition for reconsideration  W-pending; Craig O. McCaw,  9 FCC Rcd at 586263.   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). ` `  Y-` ` !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 facilitiesbased competition will occur at a level adequate to warrant reliance on market forces, rather than rate regulation, as a means of protecting consumer interests. "Y0*(("Ԍ Y-` ` "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  Yv-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 highgrowth 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.  YM-` ` #36. Finally, we note that SCP evidence typically may be segregated into two  Y6-categories: static factors and dynamic factors.Z6 f W-ԍ See, e.g., J. Tirole, #&a\  P6G;#&P#The Theory of Industrial Organization##&njp P7&P# 20970 (1988). 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  Y-relationship to static factors such as price in the future.=[l f W-ԍ Id. at 23970.= Thus, a rate of return that looks high today may be fair and reasonable when looked at in terms of its impact on future  Y-prices.\  f W-ԍ In particular, consumers may be better off facing somewhat higher prices today in exchange for high levels of investment by existing competitors. Furthermore, static factors are, as the name implies, static, or even temporary, whereas the longterm 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.  Y -` ` $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" \0*((!" 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.  X-4` IV. CONFIDENTIALITY Đ\  Y-` ` %38. Completion and consideration of the record in this proceeding was complicated by submission of confidential materials. The treatment of those materials in most  Y_-respects is resolved by the Bureau's prior confidentiality orders,]_ f W-ԍ Petitions of the Public Utilities Commission, State of Hawaii; the State of California and the Public Utilities Commission of the State of California; the Connecticut Department of Public Utility Control; and the New York State Public Service Commission, PR Docket Nos. 94103, 94105, 94106, 94108, DA 95111, order issued by Wireless Telecommunications Bureau on Jan. 25,  W8 -1995, (First Confidentiality Order); Petitions of the Public Utilities Commission, State of Hawaii; the State of California and the Public Utilities Commission of the State of California; the Connecticut Department of Public Utility Control; and the New York State Public Service Commission, PR Docket Nos. 94103, 94105, 94106, 94108, DA 95208, order issued by Wireless  W-Telecommunications Bureau on Feb. 9, 1995 (Second Confidentiality Order). and need not be recited here, but we summarize the Bureau's determinations and resolve a subsequent dispute arising  Y1-from an ex parte presentation to describe clearly certain elements that have been included, and other elements that have been excluded, from the record.  X - A. CPUC Supporting Materials  Y -` ` &39. The CPUC Petition was based partly upon commercial and financial data  Y -for which the CPUC requested confidential treatment under the Commission's Rules. In its  Y-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.  X- B. Data Underlying Hausman Affidavits  Y-` ` '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  Yi-to be included in the record.W^i( f WB%-ԍ First Confidentiality Order at para. 38.W 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"; ^0*((."  Y-considered that affidavit in determining the disposition of the CPUC Petition.Y_ f Wy-ԍ Second Confidentiality Order at para. 38. Y 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,  Y-accompanied by a request for confidential treatment.{`h f W-ԍ Letter from D. Gross, AirTouch, to W. Caton, Acting Secretary, FCC, Jan. 27, 1995.{ The two affidavits share some elements, but other data elements are distinctive. The Bureau noted AirTouch's production of  Y-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  Ya-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.  X - C. Ex Parte Presentation   Y -` ` (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,  Y-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  YR-Hausman's analysis.oaR f W -ԍ CPUC Motion to Strike AirTouch Ex Parte Filings, filed Mar. 16, 1995. o 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  Y -specified in OBRA for the disposition of such petitions. The CPUC also moved to strike all  Y-ex parte materials, even those not relying on confidential or undisclosed data, as violative of its due process rights.  Y-` ` )42. AirTouch opposes the CPUC motion, stating that the CPUC has not placed  Y-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  Yp-referred to certain of his data in the ex parte meeting, our rules required AirTouch to submit  Y[-them for the record.Db[ f W"-ԍ AirTouch Opposition at 34.D 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"Hb0*((,"  Y-CTIA.;c f Wy-ԍ CPUC Reply at 23.; CPUC finally notes that the secondary sources it relies upon are either public or  Y-accessible under protective order.8dh f W-ԍ Id. at 5.8  Y-` ` *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  Y-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  Y3-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.  Y -` ` +44. As to that aspect of California's motion that would have us strike any and  Y -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 morerestrictive approach with respect to state petition proceedings was incorporated when the procedures for  Y-consideration of these petitions were adopted.e f W8-ԍ See Public Notice, FCC Announces Establishment of Dockets for Materials Filed in Connection with State Petitions for Authority To Regulate Commercial Mobile Radio Service Rates, DA No. 941043 (Sept. 22, 1994). At this juncture, categorically striking all ex  Yj-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.  Y-+ V. CALIFORNIA PETITION ă  X- A. Regulation for Which Continued Authority Is Sought   Y-` ` ,45. The CPUC has exercised its regulatory authority over cellular service systematically for nearly a decade. The California regulatory regime was revised to  YY-essentially its present configuration in 1993.~fYX f Wb$-ԍ Subsequently, the CPUC commenced proceedings to unbundle wholesale rates.~ 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"f0*((,"  Y-ceiling, or lower rates to any level,pg` f Wy-ԍ The CPUC states that the 1993 decision allowed carriers to ``lower rates by any amount on one day's notice without Commission approval,'' and also states that the 1994 decision ``removed the ten percent maximum reduction for temporary tariffs so the rates could be dropped to any level on one day's notice.'' Petition at 1718.p on one day's notice without CPUC approval, so long  Y-as the wholesaleretail rate margin is maintained.2h f W-ԍ Id.2 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.  Y-` ` -46. In 1994 the CPUC further refined its guideline or ``band'' approach in D.9404043, 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  Y -affecting termination penalties, term limits, and written customer consent.<i  f W[-ԍ Id. at 1819.< Wholesale rate increases require 60 days' notice to resellers or master customers. The CPUC requires maintenance of a minimum wholesaleretail price margin.  Y -` ` .47. As it refined the existing regulatory mechanisms, the CPUC also initiated an investigation in December 1993, to develop an alternative, dominant/nondominant regulatory structure, employing trigger mechanisms that automatically would reduce regulation of dominant duopolists. In I.9312007 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.9408022, an interim decision released on August 3, 1994.  Y-` ` /48. The CPUC also has ordered the unbundling of competitive services currently bundled in the cellular carriers' wholesale rates to allow switchbased resellers the option of purchasing competitive services from another provider. Its purpose was to promote  Y-cost savings and the provision of valueadded service to California consumers.;j0 f W -ԍ Id. at iii. ;" j0*(("  X- B. Summary of CPUC Request   Y-` ` 049. 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  Y_-cellular service to California consumers.''qk_ f W-ԍ Id. at 81. California does not seek to regulate noncellular CMRS.q 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.9312007, is to adopt a program of wholesale rate unbundling based  Y -upon prices capped at existing rate levels.''2l h f W3 -ԍ Id.2 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  Y -advantages to resellers effected by the unbundling of wholesale rates.m8  f W-ԍ Id. at iii. See also CPUC Supplemental Reply at 3. The Cellular Resellers endorse the CPUC's arguments, agreeing that they are the only present source of competition in the California cellular industry, that their market shares have dropped ``precipitously,'' and that, absent continuing regulatory protection, they will be ``squeezed out'' of the cellular market. Cellular Resellers Reply at 57.  X - C. ``Grandfathering'' Rate Regulation by CPUC   Xy- 1. Background  YK-` ` 150. 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  Y-June 1, 1993. Section 332(c)(3)(B) provides as follows:Fn f W-ԍ 47 U.S.C.  332 (c)(3)(B).F XIf 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.  "7 n0*((L"Ԍ Y-` ` 251. 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  Y-obtaining interconnection directly from the local exchange carrier.ho f WK-ԍ CPUC Interim Opinion, Aug. 3, 1994 (August 3, 1994 CPUC Order).h The CPUC Order also  Y-gave resellers a block of telephone numbers directly from the number administrator.2ph f W-ԍ Id.2 The pleadings raise the question whether Section 332(c)(3)(B) barred the CPUC from enacting  Y-these particular regulatory provisions, or any others, after June 1, 1993. xxX  X_- 2. Pleadings of the Parties  Y1-` ` 352. 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  Y -regulatory framework as of that date.Iq`  f W-ԍ See Comments of AirTouch at 18; CCAC at 93100; L.A. Cellular Reply at 5354 (pointing out that ratebased regulation and reseller switching requirements were not in effect as of June 1,  WU-1993). See also Comments of McCaw at 2628 & n.64; US West at 1718. I 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 regulationspecific and that it refers only to ``any  Yy-[specific] regulation'' that was ``in effect on June 1, 1993.''Wry0 f WZ-ԍ See, e.g., McCaw Comments at 27 & n.64. W The various opponents contend that, as a result, the adoption of new regulations by the CPUC after June 1, 1993,  YK-was contrary to the Congressional mandate of Section 332(c)(3)(B)rsK f W-ԍ See, e.g., Comments of AirTouch at iiiii; McCaw Comments at 2428.r and was preempted by  Y4-the statute.xt4p f WU-ԍ See, e.g., US West Comments at 18.#Xj\  P6G; XP#x 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,  Y-unless and until its Petition is granted.$u f W"-ԍ See Comments of US West at 18 & n.13 (referring to CPUC investigations, e.g., I.9312007, initiated in December 1993, seeking to modify the existing California regulatory framework based on whether a carrier is dominant or nondominant). $  Y-` ` 453.ؠIn 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,"`u0*(("  Y-not the precise set of regulations in place as of June 1, 1993.ov f Wy-ԍ CPUC Reply at 8795. See also Cellular Resellers Reply at 4550.o 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  Y-until the Commission issues a final order in response to a petition....''ewh f W-ԍ CPUC Reply at 9093, citing Conference Report at 493. e 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  Yy-authority.''?xy f W2-ԍ Id. at 92 n.127.?  YK-` ` 554. 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  Y|-changes.=y| f W -ԍ Id. at 9394. =  XN- 3. Discussion  Y -` ` 655. 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 regulationspecific. Section 332(c)(3)(A) preempts states from regulating CMRS"Hy0*(( !" rates by providing that ``no state ... shall have any authority to regulate ... the rates charged  Y-by any commercial mobile service ....''Ez f Wb-ԍ 47 U.S.C.  332(c)(3)(A).E 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  Y-such authority over rates ... as the Commission deems necessary ....''2{h f W-ԍ Id.2  Yv-` ` 756. 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  Y -... on such petition.''F|  f W-ԍ 47 U.S.C.  332(c)(3)(B). F 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 regulationspecific 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.  Yy-` ` 857. 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  Y4-for licenses to provide commercial mobile services.''B}4 f W-ԍ Conference Report at 493.B What is meant by the concept ``regulatory certainty'' in this context is explained in the next sentence: ``The Conference  Y-Agreement clarifies that State authority to regulate is `grandfathered' only to the extent that it  Y-regulates commercial mobile services `offered in such State on such date.'''G~H f W-ԍ Id. (emphasis supplied).G 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"$~0*((K"  Y-state authority is preempted under subsection (c)(3)(A).''= f Wy-ԍ Id. at 49394.= That which is preempted is jurisdictional in nature; likewise, that which is grandfathered also is jurisdictional in nature.  Y-` ` 958. 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.     Yy-` ` :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  Y-pendency of its Petition, pursuant to investigations initiated after June 1, 1993.  (#(#  Y- D. Elements of the CPUC Case a`h f W-ԍ Our discussion of the pleadings uses as an organizational methodology the components of the StructureConductPerformance paradigm, with the result that issues that arguably could be categorized under more than one heading have necessarily been assigned to that which best facilitates our discussion as a whole. a  X- 1. Market Structure  Y-` ` ;60. The CPUC argues that the FCCcreated duopoly market structure for cellular services has created ``near absolute'' barriers to entry and a consequent lack of  Yf-potential competitors' access to ``bottleneck facilities,''f f W"-ԍ The CPUC defines ``bottleneck facilities'' in this context as the cellular radio spectrum and  W#-switching facilities. See CPUC Petition at 2527; see also Comments of CATA at 78. 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"8 0*((="  Y-``cellular exchange service markets are not competitive today.''p` f Wy-ԍ See CPUC Petition at 27, citing Memorandum in Response to the Bell Companies' Motions for Generic Wireless Waivers with the United States District Court for the District of Columbia  W)-Circuit, Civil Action No. 820192, filed July 25, 1994, at 1314; see also Comments of Cellular Resellers at 23.p California argues that this market structure, together with interlocking ownership interests within and among California  Y-cellular markets,` f Ws-ԍ California points out that a total of 16 MSAs, including the major markets of Los Angeles and San Francisco, and four RSAs are affected by interlocking directorates and emphasizes that we  W# -voiced concern about this situation in the CMRS Second Report and Order, 9 FCC Rcd at 1468. CPUC Petition at 2728 & Appendix C. have inhibited the emergence of competition in California's cellular  Y-industry.@ f W -ԍ CPUC Petition at 6870.@ Adopting the Merger Guidelines in order to facilitate its analysis of this duopolist  Y-market, f W-ԍ Id. at 2123; CPUC Supplemental Reply at 10. For arguments critical of using the Merger  W-Guidelines in this context, see McCaw Comments at 36. the CPUC defines the relevant market in terms of the substitutability of other  Y-mobile communications services@0 f Wp-ԍ CPUC Petition at 2325.@ and identifies cellular service as the relevant market  Yx-because it concludes that no viable alternatives to cellular service presently exist.Cx f W-ԍ Id. at 2125, 6570.C California points out that meaningful deployment of wide area SMR by Nextel will not occur  YJ-until 1995 or laterNJp f Wk-ԍ Id. at 65; CPUC Reply at 1517.N 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  Y -offer service at competitive prices.^  f W-ԍ CPUC Petition at 7578; CPUC Supplemental Reply at 2.^ The CPUC estimates that, until these comparable services can provide adequate competition, the only viable source of competition will  Y -continue to be the cellular resellers.J  f WO -ԍ CPUC Supplemental Reply at 1114.J  Y -` ` <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  Yd-fiveyear period and that it has steadily increased at the expense of the cellular resellers.@dP f We'-ԍ CPUC Petition at 2934.@"d0*((g" California also has employed the HerfindahlHirschman 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  Y-evidence of market power by the duopolist cellular carriers.d` f W-ԍ Id. at 3134. See also CPUC Supplemental Reply at 1517. The HerfindahlHirschman Index (HHI) is determined by summing the squares of the market share of each competitor in the market. The higher the H value, the less competitive the industry. An industry is highly concentrated if its HHI exceeds 1800.d  Yv-` ` =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  Y -as well as entry regulation of CMRS.W`  f W-ԍ See, e.g., Supplemental Comments of AirTouch at 4. GTE argues that the state must establish the existence of collusive behavior in order to prevail. GTE Supplemental Comments at 1213. The CPUC contends that the statute does not require an antitrust analysis. CPUC Supplemental Reply at 7, 2223.W They also contend that the cellular carriers do not  Y -exercise bottleneck control.  f W-ԍ See, e.g., Comments of AirTouch at 3031; Affidavit of B. Owen for McCaw at 3, citing  W-finding to this effect in CMRS Second Report and Order. Contra, NCRA Comments at 12. Several assert that relative wholesale market shares between duopolist carriers in a particular geographic market did change during the period in  Y -question.h f W-ԍ See, e.g., Supplemental Comments of McCaw at 4; GTE at 8.h 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  Y-of the carriers' respective coverage areas.J0 f Wq-ԍ GTE Supplemental Comments at 78.J With respect to resellers and market share, they assert that the resellers' decline is attributable to a proportionately lesser increase in  Yb-customers than that for cellular carriers,Jb f W -ԍ McCaw Supplemental Comments at 6.J that the CPUC's data ignore the market share of  YK-retail chains,Kp f Wl#-ԍ Supplemental Comments of AirTouch at 12. Hausman contends that large retail chains are the most efficient distribution method for cellular equipment and service. that there is no proven correlation between reseller market share and  Y4-competition,4 f W&-ԍ Supplemental Comments of AirTouch at 12; McCaw at 5; Supplemental Reply of AirTouch at 8; McCaw at 5. and that OBRA protects customers, not competitor inefficiencies.P4` f W-ԍ Supplemental Reply of AirTouch at 10.P McCaw"4h0*(()" 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  Y-petition.bh f W-ԍ McCaw Comments at 67 & Supplemental Reply at 56. b 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  Y-entity when calculating the HHI,T f WF -ԍ See, e.g., Comments of CCAC at 1728.T 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  YH-service; i.e., competition in the cellular industry ``takes place at the margin.''d`H f W-ԍ See, e.g., Supplemental Comments of AirTouch at 1011; McCaw at 7. In his affidavit filed with AirTouch's Comments, Hausman cites the example of the airline industry in support of his contention that market share data are largely irrelevant where the market is characterized by new entrants. Hausman at 2324.d  X - 2. Conduct  Y -` ` >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,  Y -including the use of ``lockdown'' contracts to obligate customers for longer commitments= f W*-ԍ CPUC Petition at 45.= and parallel pricing, which the CPUC alleges is facilitated by the existence of interlocking  Y{-ownership interests within and among the various geographic markets.N{p f W-ԍ Id. at 4045; CPUC Reply at 72.N 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  Y6-behavior by cellular carriers.6 f W -ԍ CPUC Petition at 74; CPUC Supplemental Reply at 3337. These confidential data have been considered in rendering a determination in this proceeding but are nowhere discussed with specificity in this Order. Cellular Agents Trade Association (CATA) contends that the cellular carriers have shifted distribution modes from independent agents to multioutlet mass merchandisers such as Circuit City and Sears, that preferential treatment accorded the latter" `0*((" has driven many independent agents out of business, and that this constitutes a strategy by  Y-the cellular carriers to monopolize the market for cellular equipment.> f Wb-ԍ CATA Comments at 57.>  X-` ` a. ``LockDown'' Contracts  Y-` ` ?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,  Y -and customer notice prior to contract renewal.P h f W-ԍ See CPUC Petition at 1819.P  X -` ` b. Parallel Pricing  Y -` ` @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  Yy-combined with other factors, is consistent with a noncompetitive market.:y f W2-ԍ CPUC Reply at 72.: It contends that tariffs for the two facilitiesbased 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  Y-tacitly aware of each other's pricing strategies.''2 f WH-ԍ Id.2  Y-` ` A66.ؠSeveral 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  Y7-Angeles market.I7H f W0%-ԍ CCAC Comments at 20, Appendix B.I  X - 3. Indicia of Performance " !0*((;"Ԍ Y-ԙ` ` B67. 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.  X_-` ` a. Q Ratios and Spectrum Value  Y1-` ` C68. 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 19611985 period. It alleges that, in contrast, cellular firm Q ratios ranged  Y -from 6.68 for small firms to 13.52 for large firms, nationwide, f We -ԍ The Q Ratio analysis was developed by Thomas W. Hazlett. See T. Hazlett, Market Power in the Cellular Telephone Duopoly, A Report Prepared for Time Warner Telecommunications, August 1993. According to the analysis, market price is based on the discounted stream of expected profits, and an excessive market price when compared to asset replacement cost reflects investor expectations of profits above the competitive level. In a subsequent paper, Hazlett recalculated the Q Ratio for cellular carriers as 5.9, based upon adjustments advocated by critics of his earlier  Wu-estimates. See Hazlett, ``Errors in the Haring & Jackson Analysis of Cellular Rates,'' attached to CPUC Reply as Appendix M. and that the Q ratios for  Y -cellular firms in Los Angeles and San Francisco were among the highest in the Nation.Z P f W-ԍ Petition at 6263; CPUC Supplemental Reply at 18.Z 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  Yb-the present per ``POP''b f W-ԍ The term ``POP'' is a term of art referencing each person of the resident population in a given service area. 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  Y4-cellular carriers' ability to extract duopoly rents.Y4h f WM -ԍ See, e.g., CPUC Supplemental Reply at 23. Y  Y-` ` D69. The Cellular Resellers are in accord with the CPUC's Q ratio analysis.N f W#-ԍ Comments of Cellular Resellers at 26.N However, several cellular carriers challenge the relevance of Q ratios to market power and""0*((" claim that a high Q ratio is as consistent with spectrum scarcity as with extraction of  Y-monopoly rents.n f Wb-ԍ See, e.g., Comments of AirTouch at 6061; GTE at 27 n.16, n.17.n Others allege that factors such as growth exaggerate a firm's Q ratio.eh f W-ԍ See, e.g., Comments of McCaw, Owen Affidavit at 3132.e 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  Y-market with only two carriers. f W] -ԍ See, e.g., GTE Comments, Appendix A at 8; AirTouch Comments at 59; CPUC Reply at 7477.  Xv-` ` b. Cellular Service Rates  YH-` ` E70. California contends that, although rates have been somewhat suppressed by state regulation, cellular rates for the major California cellular carriers remain among the  Y -highest in the Nation.G  f WK-ԍ CPUC Petition at 4546, citing, in support, U.S. General Accounting Office, ``Telecommunications Cellular Service Competition,'' Testimony before the Senate Committee on  W-Energy and Public Utilities, Legislature of the State of California, Jan. 12, 1993, at 7. G 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  Y -capital investment per subscriber.@ f Wm-ԍ CPUC Petition at 4042.@ The CPUC states that its study of rates for the 19891993 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,  Yy-and varied by less than 7 percent in all other markets except Sacramento.<yp f W-ԍ Id. at 3435.< When inflation is considered, California states, rates for basic plans in all markets have declined by an average  YK-of 14.9 percent, compared to the nominal reduction of 0.8 percent,K f W -ԍ Neither California's Petition nor Appendix I specifies the inflation adjustor applied to cellular carriers' rates. while operating expenses per subscriber have fallen by 47 percent in real terms and capital investment per  Y-subscriber has also declined substantially. f WV$-ԍ California cites a CTIA exhibit in its state proceeding that showed capital investment per cellular subscriber had declined from $1,816 to $978 between June 1988 and June 1993. CPUC Petition at 35 n.15. "#0*(( "Ԍ Y-` ` F71. California's 19891993 study examined pricing data from all plans offered by facilitiesbased 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  Y1-technologies as they become available.<1 f W -ԍ Id. at 3637.< California recognizes that, while most customers subscribed to the basic or ``unrestricted'' plan in the first years of cellular service, by 1993  Y -only 37 percent of subscribers in major markets still were on that plan.< h f W-ԍ Id. at 4041.<  Y -` ` G72. 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  Y -trends for cellular service do not track declining costs.  f W`-ԍ Id. at 39, citing May 5, 1994, Wall Street Journal, ``Cellular Phone Rates Spark Static From Users.'' 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  Yb-lasted more than three months in any market.Bb f W-ԍ CPUC Petition at 39 n.21.B The CPUC invokes an analysis proffered by a party in its ongoing investigation, Cellular Services, Inc., purporting to show that most  Y4-price reductions asserted by carriers either failed to reduce rates or expired.R4  f W-ԍ CPI's analysis asserts that by March 1994, only two of fifteen filings made in the year following adoption of the 1993 rate band guidelines remained in effect, and that of 34 pricereducing  W-tariffs referenced by L.A. Cellular, only five actually reduced rates. Id. at 40.R 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  Y-foregone access to emerging technologies.''9p f W"-ԍ Id. at 43.9 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,  Y-e.g., term contracts and discounts on customer premises equipment (CPE).  Y~-` ` H73. 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"g$ 0*((" 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  Y-Protective Order.m f WK-ԍ See discussion of Confidentiality in Section IV, supra. m  Y-` ` I74. 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  Y_-declined over the past several years.b_h f Wx -ԍ See, e.g., CCAC Supplemental Reply Comments at 67.b 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  Y -lower usages also benefitted; e.g., 10 MOU nominal prices decreased by 8.0 percent (a real  Y -16.3 percent).k  f W-ԍ AirTouch Supplemental Comments at 8; Hausman Affidavit at para. 3.k 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  Y -for its own subscribers and those actually tariffed.R  f W-ԍ L.A. Cellular Supplemental Comments at 5.R  Y-` ` J75. 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  Y6-of prices could entail a ``complete rate application'' hearing lasting as long as two years.q`6H f W/-ԍ Hausman Affidavit at para. 4 n.2. Hausman contends that regulation by the CPUC is costing California cellular subscribers $240 million per year in higher cellular prices. L.A. Cellular also cites these regulatory requirements as impediments to cellular carriers' lowering rates. L.A. Cellular Supplemental Reply Comments at 78.q 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  Y-``promotional'' if they are to be implemented with minimal delay.`p f W"-ԍ L.A. Cellular Supplemental Comments at 12. See also its Supplemental Reply Comments alleging that alternative, discount plans have proliferated as a direct consequence of partial regulatory reforms introduced by the CPUC beginning in 1990, such as temporary tariffs and rate decreases on shorter notice. L.A. Cellular Supplemental Reply at 78. It contends that complaints that these plans are not permanent in nature and that a basic rate reduction is"%0*((" preferable also ignore market mechanisms and the need to appeal to specific customer groups.  Y-` ` K76. 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  Y-service. f W-ԍ See, e.g., Charles River Associates for CCAC at 13; Supplemental Comments of AirTouch at 67; CCAC at 69; Supplemental Reply Comments of CCAC at 24; L.A. Cellular at 34. 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  Y -prices are ``stagnant or slowly declining.'' @ f W-ԍ AirTouch Supplemental Comments at 67. See also CCAC Supplemental Comments at 67.  Y -` ` L77. 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  Yb-by more recent subscribers.Mb f W-ԍ AirTouch Supplemental Comments at 9.M 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  Y4-offering greater discount plans. 84 f We-ԍ Hausman Affidavit at para. 6 n.3. Hausman also asserts that the declining profit per  W=-subscriber demonstrates the effect of competition. Id. at 34. He states that ``[t]he decreased margins demonstrate an effective increase in competition of approximately 50% during this time period using the best known model of the markup of price over marginal cost with imperfect competition  W-and large fixed costs found in the economic literature.'' Id. at 4 n.6.   Y-` `   M78. 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  Y-nothing about the reasonableness of the discount plan selected.J f W$-ԍ CPUC Supplemental Reply at 2627.J 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"|& 0*((" migration between plans does not indicate the competitiveness of services or the  Y-reasonableness of prices. f Wb-ԍ Id. at 2526. The Cellular Resellers state that in the 19891993 period basic rates changed  W:-negligibly while number of customers increased substantially. See Cellular Resellers Supplemental Comments at 23.  Y-` ` N79. 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  YH-caused higher prices in those markets.GH f W -ԍ CPUC Supplemental Reply at 32.G 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  Y -the relation of cost to price is the proper focus.<  f Wl-ԍ Id. at 2829.< 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  Y -between revenue and expenses is meaningless.''< X f W-ԍ Id. at 2930.<  Yy-` ` O80. The CPUC states that the Hausman price study provided by AirTouch in its secondround 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  Y-occasioned higher rates there and in New York.< f W -ԍ Id. at 3132.< 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  Y-between state regulation and rates, much less causality, is demonstrated.< f W$-ԍ Id. at 3233.<"'8 0*(("  X-` ` c. Capacity Utilization  Y- ` ` P81. 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  Y-excessive rates and profits characteristic of cellular service. f W-ԍ CPUC Petition at 5154. See also, e.g., Comments of Utility Consumers' Action Network and Towards Utility Rate Normalization (UCANTURN) at 12; Supplemental Comments of the Cellular Resellers at 4. The CPUC points out that the capacity for carriers in the Los Angeles and San Francisco MSAs, in particular, is significantly underutilized.  YH-` ` Q82. The cellular carriers argue that the dramatic growth rates for cellular systems in California, demonstrated by the CPUC's own subscriber growth data, contradict  Y -the CPUC's contention that carriers are intentionally restricting capacity.8  f W-ԍ See, e.g., Comments of Bakersfield at 10; BACTC at 34; GTE at 20; Supplemental Comments of AirTouch at 1617; L.A. Cellular at 39. AirTouch, in particular, contends that, from 1984 to 1994, the Los Angeles system increased customers dramatically, increased cell sites from 13 to 415, and expanded capital investment from $10 million to $550 million. AirTouch Supplemental Comments at 1718. 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  Y -are best made in ``lumpy'' investments.  f W-ԍ Comments of CCAC, Appendix A at 28; Supplemental Comments of CCAC at 1517; AirTouch at 17.  Y -` ` R83. 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  Yb-hours.b f W-ԍ See, e.g., Supplemental Comments of L.A. Cellular at 89; CCAC at 1517; Supplemental Reply of GTE at 34. 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 Y-congested ones.Q f W"-ԍ AirTouch Supplemental Comments at 1617.Q The carriers emphasize their ``legitimate'' concerns for high quality transmission and callcompletion ratios and point out that the potential for blockage and  Y-service degradation increases when cell cites are used in excess of full capacity.< f WH&-ԍ Id. at 1415.<"(H0*(("  Y-` ` d. Rates of Return  Y-` ` S84. As the gravamen of its argument, California alleges that cellular carriers in  Y-the State are earning excessive rates of return.< f W5-ԍ Id. at 4651.< 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  Yw-to invest in system expansion when it is economically justified.Fwh f W -ԍ CPUC Petition at 5051.F The CPUC believes that rates of return, when considered together with other factors, are relevant indicators of the  YI-market power of cellular carriers.9I f W -ԍ Id. at 47.9  Y -` ` T85. California asserts that the six cellular carriers in the three major urban  Y -markets earned returns during the period 1988 to 1993 averaging 30.9 percent.G  f W]-ԍ CPUC Supplemental Reply at 17.G For example, California states that L.A. Cellular earned an average aftertax accounting rate of return of 56.2 percent for the last five years, while the Los Angeles MSA earned 37.9  Y -percent.M H f W-ԍ CPUC Petition at 4849 & Appendix F.M Similarly, California states that BACTC's rates of return ranged from 31.1  Y -percent in 1992 to 49.5 percent in 1993.2  f WA-ԍ Id.2 It finds no evidence that the risk faced by cellular  Y-carriers justifies returns as high as those in the major metropolitan areas.] f W-ԍ Id. at 48; CPUC Supplemental Reply at 17 n.34.] California attributes the existence of high profit margins to the lack of perfect substitutes for cellular  Yc-service and the exclusion of potential market entrants due to the dual license structure.=c( f W<-ԍ CPUC Petition at 50.=  Y5-` ` U86. The CPUC's analysis is based on aftertax accounting rates of return on  Y-net plant derived from carrierprovided unaudited annual reports to the CPUC.= f W"-ԍ Id. at App. F.= The CPUC and its supporters argue that, as in the case of this Commission's cable and telephone rules,")h0*(('" the rate base should not include the value of spectrum because carriers do not own the  Y-airwaves and including their value in the rate base ``masks the duopoly profits.''" f Wb-ԍ CPUC Petition at 5661. The CPUC adds that ``[t]he difficulty in quantifying spectrum value is one of the reasons the CPUC has declined to adopt a costofservice regulatory structure for the  W-cellular industry.'' Id. at 57."  Y-` ` V87. The cellular carriers disagree with the CPUC's analysis of the rate of  Y-return data. They argue that higher rates of return are appropriate because cellular is riskier  Y-than other telecommunication services f WV -ԍ See Comments of AirTouch, Hausman Affidavit at 17, in which he advocates use of the capital asset pricing model and a 20.7 percent benchmark as a fair rate of return. and that growth is an important factor in assessing  Yv-market conditions and rates of return.Xv f W -ԍ See, e.g., Comments of Bakersfield at 11.X They also argue that operating profits are not excessive when they are used to increase service availability and enhance capacity, and GTE  YH-states that it has invested substantial sums for these purposes.cH0 f W)-ԍ GTE Comments at 20; L.A. Cellular Reply at 3637 & Fig. 8.c L.A. Cellular notes that, in an earlier decision, the CPUC found that cellular rates and rates of return were neither  Y -unreasonable nor excessive.D f W-ԍ L.A. Cellular Reply at 67.D They also disagree with the CPUC's methodology for computing rates of return.  Y -` ` W88. Specifically, the cellular carriers assert that California has erred by using  Y -an ``accounting'' as opposed to an ``economic'' rate of return; i.e., by failing to consider  Y -return over the entire life of the system. p f W-ԍ See, e.g., Comments of AirTouch at 5556; BACTC at 26; CCAC at 16 & Appendix A at 22; GTE at 19; McCaw at 4344 (also asserting that startup losses should have been capitalized and included in firms' rate bases). 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  Yd-conversion to digital), the inherent problems in valuating spectrum, and the replacement cost  YM-of acquiring new customers.DM f W!-ԍ AirTouch Comments at 5556.D BACTC agrees, asserting that the CPUC should not use an accounting analysis because it is static and unable to assess future changes or results,  Y-including new competition and opportunity costs.>` f W0%-ԍ BACTC Comments at 26.> ` `  (# "*0*(("Ԍ Y-` ` X89. 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  Y-have been financed with leveraged capital. f W4-ԍ CPUC Reply at 37; Supplemental Reply at 18. California states that firms in Value Line's Telecommunications Services Industry group have, on average, a 13.9 percent rate of return. It points out that accounting returns are relied  Y-upon by Federal regulators and the investment community:@ f W-ԍ CPUC Reply at 36.: and that the cellular carriers concede that an economic rate of return is difficult if not impossible to compute for an entire  Yv-firm.9v f W -ԍ Id. at 41.9  YH-` ` Y90. In support, the Cellular Resellers argue that accounting rates of return represent return on investments actually made, whereas economic rates of return represent  Y -return on replacement or reproduction value of an entire system, including spectrum.K  f WK-ԍ Cellular Resellers Reply at 3945.K They  Y -argue that the carriers ``would like to earn money on investments they have not made,''9  f W-ԍ Id. at 40.9 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  Y -assets.O f W-ԍ Id. at 41, citing, inter alia, Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 60514 (1944); 1990 Rate Rep., 5 FCC Rcd 7507, 7521 (1990) (common carriers not entitled to a return on the ``fair value'' of their investment on the basis of the company's market value).O  Yy-` ` Z91. The cellular carriers also criticize the CPUC for relying on rate of return  Yb-figures for only the largest and most profitable markets.rb f W#-ԍ GTE Comments at 1920; accord L.A. Cellular Reply at 11, 28, 3031.r 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  Y-would decrease more if the CPUC would stop rateregulating those markets.z f Wg$-ԍ AirTouch Comments at 5657; see also L.A. Cellular Supplemental Reply at 6.z CCAC adds"+P0*(( " that the wide differences in rates of return between large and medium or small markets are  Y-not indicative of market power since all markets are duopolies.J f Wb-ԍ CCAC Supplemental Comments at 12.J  Y-` ` [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  Yv-severe economic recession in the State.:vh f W -ԍ CPUC Reply at 35.: 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  Y -densities.  f W-ԍ Cellular Resellers Supplemental Comments at 4 & Supplemental Reply at 7. But see Supplemental Reply of L.A. Cellular at 45, disputing allegation that major markets were given a ``head start.''  Y -` ` \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  Y -a setaside rather than purchase.  X f W-ԍ See Comments of AirTouch at 59 & n.185, Exhibit E at 15 & n.18; L.A. Cellular at 2527;  W-CCAC at 2952; CCAC Reply at 14. See also Comments of McCaw at 45, Owen Affidavit appended thereto at 2224.  L.A. Cellular contends that ``[w]hen account is taken of upfront acquisition costs, the profit levels cited by the CPUC must be reduced by at least  Y-50%.''O f W-ԍ L.A. Cellular Supplemental Reply at 6.O The carriers suggest several methodologies for valuating spectrum, including using  Yy-the results of the narrowband PCS auction as a guide.`yH f Wr-ԍ L.A. Cellular Comments at 27. But see CPUC Supplemental Reply at 23, arguing that a comparison of the per POP spectrum value for narrowband or, more appropriately, broadband PCS based on auction results with that for cellular spectrum reveals cellular's present and continuing ability to extract economic rents reflective of the duopoly market structure.  YK-` ` ]94. In response, California points out that a majority of carriers acquired their  Y4-spectrum for freeG4p f WU$-ԍ CPUC Supplemental Reply at 22.G 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",0*(("  Y-Commission.9 f Wy-ԍ Id. at 21.9 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  Y-business'' through reclassification as a capitalized investment.h f W-ԍ CPUC Reply at 5156, citing Hazlett, ``Errors in the Haring & Jackson Analysis of Cellular  W-Rates,'' attached as Appendix M, at 9. See also CPUC Supplemental Reply at 2122. California notes that the carriers' capital accounts may already reflect at least some measure of the costs that cellular  Y-carriers have incurred in license acquisition,: f W -ԍ CPUC Reply at 48.: and observes that L.A. Cellular, trying to avoid increased tax liability, admitted to the California Board of Equalization that spectrum  Y_-holds no value and should not be factored into earnings.<_ f W-ԍ Id. at 5456.<  Y1-` ` ^95. In support of the CPUC's position, L.A. County contends that, because  Y -cellular licenses are scarce, their market price is bid up well in excess of actual cost.N  f W-ԍ L.A. County Comments at 2728, 3942.N It contends that ``only about onetenth 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  Y -acquired without any cost whatsoever ....''9 f W/-ԍ Id. at 35.9  X- E. Discussion   Yb-` ` _96.ؠIn 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  Y-the statutory standard. Therefore, we deny the CPUC's request to retain cellular rate regulation authority through March 1, 1996.  Y-` ` `97.ؠThe 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"N-` 0*((z" widespread consumer dissatisfaction with CMRS providers in that state, or discuss what  Y-specific rate regulations are needed to address whatever level of dissatisfaction may exist.L f Wb-ԍ The CPUC concedes that consumers ``rarely'' file formal complaints against cellular carriers. CPUC Reply at 85. Although the CPUC asserts it receives ``hundreds'' of informal consumer  W-complaints annually, it provides no other details about such complaints. See id. L 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.  YH-` ` a98.ؠAnother 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  Y -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  Y -to have been carrierinitiated.`  f W-ԍ It is our understanding that the percentage difference between wholesale and retail rates in  W_-carriers' tariffs (i.e., the socalled``reseller margin'') was structured initially by carriers themselves,  W7-not the CPUC. There has never been a Federal requirement that carriers offer separate wholesale  W-and retail rates. See Cellular Resale Order, 6 FCC Rcd 1719, 1726 (1991). 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.  Yb-` ` b99.ؠWe find the CPUC case, when viewed as a whole, to be unpersuasive. Examining each element of that case leads us to the same conclusion.  X- 1. Structure  Y-` ` c100.ؠThe 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  Y-of the market's level of concentration,x@ f W -ԍ The most widely used measure is the socalled HerfindahlHirschman Index, or HHI. See Scherer and Ross at 72. The HHI is calculated by squaring the market share of each market participant and then adding the squares, with the sum representing the degree of market concentration. In merger cases this calculation is made for both ``pre'' and ``postmerger'' markets, the difference being the increase in market concentration that will result from the merger. The higher the premerger number, and the greater the increase to that number a merger will cause, the  W%-more likely the merger may violate the antitrust laws. See FTC v. PPG Industries, Inc., 798 F.2d  W&-1500, 1503 (D.C. Cir. 1986); see also Scherer and Ross at 72. One portion of the CPUC's case  Wr'-appears to utilize a derivative of the HHI (i.e., a Herfindahl Index), but the use of this alternative"r'0*(('" measure is without analytical or decisional significance because the two indices are essentially the same.x and is fleshed out by references to the conclusions".@0*((" of others who had examined the market prior to the CPUC's filing in August 1994 and found  Y-it to be less than fully competitive, including the U.S. Department of Justice.i@ f W-ԍ On July 25, 1994, the U.S. Department of Justice filed a Memorandum in Response to the Bell Companies' Motions for Generic Wireless Waivers with the United States District Court for the District of Columbia Circuit, Civil Action No. 820192 (DOJ Memorandum). In that document,  Wb-DOJ states that the ``cellular exchange service markets are not competitive today.'' Id. at 1314. The  W: -DOJ Memorandum is referenced at various points in the filing of the CPUC and its supporters. See,  W -e.g., CPUC Comments at 27.i California  Y-also highlights the existence of interlocking ownership interests among various carriers,G f W -ԍ Petition at 2728, Appendix C.G 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.  Y1-` ` d101.ؠSeveral 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 antitrustoriented 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  Yb-record indicates that Congress affirmatively declined to adopt this approach.b f W-ԍ Legislative history materials submitted by the Cellular Resellers suggest that amendments designed to make antitrust standards the test of Section 332(c)(3)(A) petitions were offered in committee and explicitly rejected. California has not explained how a standard apparently rejected by Congress could thereafter become the centerpiece of the test for evaluating state petitions.  Y-` ` e102.ؠSecond, 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  Y-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"/0*((}"  Y-partnerships in certain instances. f Wy-ԍ See Amendment of the Commission's Rules To Establish New Personal Communications Services, 9 FCC Rcd 4957, 5002 (1994). Thus, we accord little weight to the CPUC's claims on this point.  Y- ` ` f103.ؠThird, 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'  Y_-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 twoway mobile voice and data service provider, Nextel, also has significantly developed as a competitive alternative to  Y -cellular services.8 @ f W-ԍ Although the record contains various expressions of doubt concerning Nextel's ability to  W-mount viable competition to cellular operators, the company recently appears to have secured over $1 billion in financial backing from investors with long experience and success in mobile  W9-telecommunications operations. See Business Week, Apr. 17, 1995, ``McCaw Is Getting A Lot More Than A Chunk Of Nextel.''  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.  Y6-` ` g104.ؠOur 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.  X~- 2. Conduct  Yg-  YP-` ` h105.ؠThe ``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" 0@0*(("  Y-carriers are using longterm service contracts in ways that demonstrate market conditions  Y-warrant continued state rate regulation.i f Wb-ԍ CATA presents a third ``conduct'' example. Specifically, CATA asserts that cellular carriers increasingly distribute services through their own sales forces and ``major mass merchandisers,'' rather than through independent agents, in an attempt to monopolize the cellular equipment market. This assertion is all sail and no rudder, as CATA supplies no evidence to buttress its claim. We previously have rejected bare allegations that the impact on resellers of cellular carriers' choice of product distribution systems constitutes adequate evidence of an attempt to monopolize the  Wr-markets in which cellular service and equipment are provided. See Bundling of Cellular Customer Premises Equipment and Cellular Service, 7 FCC Rcd at 4028, 403132 (1992). CATA provides no basis to revisit those issues here. i  Y-` ` i106.ؠThe 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  Y-organization,`( f Wf-ԍ See Scherer and Ross at 20015. Predictions of similar prices can arise in two ways. First, if two firms produce products that are similar, a firm charging substantially more would lose most of its customers. Second, if cost and demand are similar, then mathematical calculations of the companies' optimal pricing strategies tend to be similar. 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.  Y -` ` j107.ؠWe also are unpersuaded by the CPUC's presentation regarding carriers'  Y -uses of longterm 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.  Y6-` ` k108.ؠEven 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. "1P 0*((n"Ԍ Y-` ` l109. 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.  Y-See Section VI, infra, Regulation of Other Terms and Conditions.  Ya-` ` m110.ؠThe more troublesome CPUC allegation concerns the use of longterm 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 ongoing investigation by the California Attorney General's Office. In the context of the instant proceeding, however, the key term here is ``ongoing.'' 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 ``lockdown'' 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  Y6-brief for continuing such authority.6 f W-ԍ We note that our denial of the CPUC's petition to retain its rate regulation authority does not prevent that agency, or the California Attorney General, from continuing to monitor the  W_-business practices of CMRS providers in that state. If such oversight yields more conclusive evidence that cellular carriers are attempting to forestall competitive PCS entry, or are engaging in other specific anticompetitive activities, we would entertain a CPUC petition to initiate targeted rate regulation measures designed to address such carrier actions, and would consider initiating such measures under our own authority, even absent a filing by the CPUC.  X- 3. Indicia of Performance  Y-` ` n111.ؠThe ``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 broadbased public policy considerations. Such an inquiry focuses foremost on cellular prices and profits.""2x0*(("  Y-` ` a. Prices  Y-` ` o112.ؠThe 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, flatrate access charges and perminute 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?  Y -` ` p113.ؠThe first of these questions is the easier to answer. In general, most  Y -parties, including the CPUC, analyze prices by focusing on monthly price for standardized  Y -usage levels (e.g., 60, 120, 480 minutes). f WO-ԍ California actually uses price per minute. The use of price per minute for 60 minutes vs. price per month for 60 minutes is exactly equivalent. Although this is not the only way to address the data, we agree it is a reasonable one.  Y-` ` q114.ؠThere 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 longterm contract (one year or more) and thus are not necessarily better  Y7-deals.=7@ f W(-ԍ CPUC Petition at 37.= 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  Y-during the 19891993 period to which the CPUCsupplied evidence relates.< f Wl-ԍ Id. at 4042.< Carriers note that customers have, in fact, responded to price signals to the point where by 1994 less than  Y-20 percent of cellular subscribers remain on a basic plan. f W-ԍ See, e.g., CCAC Comments at 13 (Charles Rivers Associates study); L.A. Cellular Comments at 1011, 18.  Y-` ` r115. 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"Q30*((\"  Y-of major California carriers remain among the highest in the Nation,M f Wy-ԍ Petition 4546. Their source for this statement is the U.S. General Accounting Office,  WQ-Telecommunications Cellular Service Competition, Testimony before the Senate Committee on Energy and Public Utilities, Legislature of the State of California, Jan. 12, 1993, at 7.M and claims that ``regulation in California probably has prevented rates from being even higher and certainly  Y-has not contributed to higher rates.''= f W-ԍ CPUC Petition at 46.=  Y-` ` s116.ؠIn 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  Y_-their money.e_ f W -ԍ Comments of Bakersfield Cellular Telephone Company at 1011.e 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  Y1-factored into our analysis.1X f W:-ԍ See, e.g., AirTouch Supplemental Comments at 9 (revenue per subscriber decreased 47 percent between 1990 and 1993). 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  Y -cause of high cellular prices in California.G f Wm-ԍ AirTouch Opposition at 4345. G Hausman, for AirTouch, estimates that such regulation causes California cellular customers to pay at least $240 million per year in higher  Y -cellular prices. p f W-ԍ AirTouch Opposition, Hausman Affidavit at para. 11 and AirTouch Comments to Confidential Data, Hausman Affidavit at para. 22 & n.9. To illustrate this, he submits data on prices in 10 cellular service areas across the nation showing that, of those markets, four were stateregulated and those four  Y-had the highest prices.= f W)-ԍ Hausman at para. 9. =  Yb- ` ` t117.ؠThe 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  Y4-driven by a shortage of spectrum. The CPUC views this question in the negative,=4 f Wm#-ԍ CPUC Reply at 7477.= while  Y-other parties assert that spectrum scarcity is a major contributor to cellular rate levels.b( f W%-ԍ GTE Comments, Appendix A at 8; AirTouch Opposition at 59.b "40*(('"Ԍ Y-` ` u118. 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  Y-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 ``costbased'' rates, and it presents no persuasive argument concerning the degree to which rates must be ``costbased'' 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  Y -basic of these additional adjustments (e.g., productivity), it is reasonable to limit our analysis  Y -to nominal prices.` f W;-ԍ In this regard, we note that the telecommunications portion of the consumer price index  W-increased only about one percent for the whole period from 1989 through 1993. Productivity gains in the telecommunications sector of the economy are generally thought to have been much higher  W-during this period. ĉ  Y-` ` v119. 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  Y-indirectly on work by Shew. ` f W-ԍ See California Petition at n. 27; and AirTouch Opposition, Appendix G (Statement of Professor Kahn). California cited to comments by Alfred Kahn concerning an American Enterprise Institute study on cellular rates and regulation. AirTouch included a transcript of those comments, which revealed that the research was Shew's and was ambiguous on the impact of regulation. This is contrasted in this record by Hausman's work  Y-purporting to demonstrate that state regulation raises cellular prices.  f W -ԍ AirTouch Opposition at Appendix E. Hausman also uses a table (at Appendix E, 4) of cellular prices in the top 10 MSAs to illustrate that cellular prices are higher in markets with state regulation than in markets without state regulation. We find this illustration unconvincing because we note that the populations in the those MSAs with state regulation in Hausman's table are much  W$-higher (about double on average) than in MSAs without regulation in that table. See Appendix B at 14. It is therefore unclear from that limited sample whether state regulation (as opposed to population density or some other cause) really causes higher 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"5 0*((" 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  Y-cellular.  f W-ԍ W. Shew, Regulation, Competition, and Prices in Cellular Telephony, working paper prepared for American Enterprise Institute for Public Policy Research, June 2, 1994, at 5762. 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  Y_-results show the predicted impact of regulation is extremely minimal. _@ f WP -ԍ See Shew Table 51. Actually, the predicted effect is to lower prices by about two dollars per month. Using thirty days as the Filetime variable yields a more pronounced impact. Although certain carriers claim that  Y1-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.  Y - ` ` w120. 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  Y-continued subscriber growth. ` f WA-ԍ Data supplied by the CPUC indicate that the 1993 customer base of the two licensees in Los Angeles is several multiples larger than the customer base of the two licensees in San Francisco that year. This differential does not appear to be attributable to differences in the relative sizes of the geographic areas served by licensees in those cities.  Y-` ` x121.ؠAs 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 statewide basis, we weighted the data by carrierspecific 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" 6 0*((-"  Y-covering slightly different time periods and groups of carriers.L f Wy-ԍ See Appendix B at Tables 23.L We also focused on prices  Y-in a smaller geographic area (Los Angeles).Bh f W-ԍ See id. at Table 6.B Finally, we created costpersubscriber indices  Y-to correspond to our price indices.E f W-ԍ See id. at Tables 45.E  Y-` ` y122. 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 (198993). 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' persubscriber 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.  YK-` ` b. Profits  Y-` ` z123. 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  Y-cellular business or spectrum scarcity.Q f W-ԍ See CPUC Petition at 4650, 5461.Q 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  Y}-service availability.@}H f Wv"-ԍ See id. at 5054.@  YO-` ` {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" 70*((;" 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 industrywide.  X -` `  (1) Measures of Profits  Y -` ` |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  Y -focuses on accounting rates of return. f W7-ԍ Accounting rates of return measure the return for a company or subsidiary for a fixed period of time, typically annually. Economic rates of return measure the return for a specific investment or set of investments over the life of that investment. These two measures of return also differ in their treatments of certain costs. For example, depreciation rates for accounting purposes are determined by factors, such as the tax code, which may not perfectly correspond to the actual useful life of  Wo-equipment. Economic rates of return are based on actual useful life. See, e.g., Oppositions of  WG-AirTouch at 5556 and Bay Area at 26.  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  YK-profits tend to be high when economic profits exist.`Kx f Wt-ԍ California Reply at 3841. See also F. Fisher & J. McGowan, Firm Interdependence in  WL-Oligopolistic Markets, 73 Am. Econ. Rev. 82 (Mar. 1983); W. Long & D. Ravenscraft, Misuses of  W$-Accounting Rates of Return: Comment, 74 Am. Econ. Rev. 494 (June 1984); S. Martin, Misuses of  W-Accounting Rates of Return: Comment, 74 Am. Econ. Rev. 501 (June 1984).  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  Y-is reasonable to use accounting data as a baseline for analyzing profits in the context of a Section 332(c)(3)(B) proceeding.  Y-` ` }126.ؠCalifornia provides a significant amount of data relating to profits, including aftertax 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"~8 0*((^"  Y-additional carriers to our data set.x` f Wy-ԍ Cellular Communications Licensees (Wholesalers) Annual Reports to the Public Utilities Commission, State of California. These reports are publicly available. We also developed an econometric model to estimate rate of return and gross plant for the remaining carriers in  W-California. See Appendix B at Table 16.x Using these data, we estimate the aftertax rate of return for these carriers as a whole, weighted by gross plant, to be approximately 30 percent for the  Y-period from 19891993.I f Ws-ԍ See Appendix B at Table 1.I  Y-` ` ~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  Y_-return than local exchange carriers.S_ f W-ԍ AirTouch Comments, Hausman Appendix at 17.S 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  Y -business.8 0 f W-ԍ AirTouch ex parte, Mar. 9, 1995, Hausman Attachment at 3 (assertions that demand for cellular service was clear and substantial prior to licensing of cellular spectrum during early 1980s). This expression of opinion by Hausman does not appear to be based on confidential data unavailable to other parties, and, in any event, we consider it only for the limited purpose indicated in the text.  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,  Y -have declined to adopt such methods when estimating appropriate returns. 0 f W-ԍ See, e.g., Represcribing the Authorized Rate of Return for Interstate Service of Local Exchange Carriers, 5 FCC Rcd 7507, 7518 (1990). Nothing in this record causes us to reconsider that determination.  Y- ` ` 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  Y6-secondary market.86 f W#-ԍ For example, by one report McCaw had approximately $9 billion in assets as of the end of 1993, of which $1.6 billion was plant and equipment, $4.0 billion was licensing cost and $2.0 billion  W?%-was other investments (such as an approximately 52 percent interest in Lin Broadcasting). See Standard & Poor's Industry Survey: Telecommunications, Basic Analysis, June 2, 1994, T40.  W&-McCaw also reported had $5.1 billion in long term debt on its books that year. See Moody's OTC"&0*(("'"  W-Industrial Manual (1994), 1887. McCaw has an interest in many licenses in California. See California  Wh-Petition, Appendix C, C1. The financial reports those licensees submit to the CPUC do not appear to show interest expense burdens of the magnitude attributed to McCaw elsewhere. For example, L.A. Cellular reports to the CPUC show no debt. McCaw Communications of Stockton, Inc., had  W-about $800,000 interest expenses against about $13 million in operating profits. See Cellular Communications Licensees (Wholesalers) Annual Report to the Public Utilities Commission, State of California. The level of activity in that market was fueled to some degree by the"69x0*(( " 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.  Y -For purposes of this proceeding, it is enough to note that the potential impact is significant.G x f WC-ԍ See CPUC Petition at 56.G The CPUC notes that this issue, if decided in favor of the carriers, has the potential to  Y -``erase[]'' their reported profits.   Y -` ` 129.ؠNotwithstanding this debate, we think the component parts of the industrywide 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 yeartoyear and from carriertocarrier. In 1993, for  YK-example, many of the carriers realized earnings at levels that raise no plausible concern.b`K f W-ԍ See id. (Fresno MSA LP, 10.7 percent; GTE MobileNet of Santa Barbara, 7.5 percent; Modoc RSA LP, 6.2 percent; Redding Cellular, 3.1 percent; Sacramento Valley LP, 6.4 percent; Salinas Cellular, 7.2 percent; Santa Barbara Cellular, 10.5 percent; Santa Cruz, 14 percent; US West Cellular, 2.9 percent).b  Y4-Some were only marginally profitable for the period as a whole.4@ f W%!-ԍ See id. (US West: 9 percent (1990), 4.3 percent (1991), 7.4 percent (1992), 2.9 percent (1993)). Earnings also differed  Y-appreciably between carriers in the same geographic area.{ f W$-ԍ Compare, e.g., Bay Area (49.5 percent) with GTE (18.1 percent) (1993).{ 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":X0*((" in the same area suggest that some carriers are more efficient than others, and this is not a cause for regulatory concern.  X-` `  (2) Capacity Utilization Rates  Y-` ` 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  YH-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  Y -even most of cells at peak load capacity. Investment in cell sites tends to be ``lumpy.''I f Wg -ԍ CCAC Comments, Appendix A at 28.I 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.  X{-` `  (3) Growth  YM-` ` 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  Y-term effect of such decisions on consumer surplus.[ 8h f W -ԍ The effect of market structure on investment and technological innovation is a major topic  W-in industry organization economics. See Scherer and Ross, 61360. Many economists have long  W-believed that market power can in the long run lead to favorable results for consumers. See, e.g., J.  W-Schumpeter, Capitalism, Socialism, and Democracy (1942); L. Switzer ``The Determinants of  Wj-Industrial R & D,'' 66 Review of Economic and Statistics, 16368 (Feb. 1984).[ 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  Y-CPUC.K!h f W!-ԍ See Appendix B at Table 10. K This represents growth on a substantially different scale than one typically finds in other capitalintensive segments of the telecommunications industry, and it must be factored  Yg-into any reasonable analysis of industry performance."g f W %-ԍ Mature and emerging industries have different characteristics, and these differences are relevant to any analysis of industry performance. For example, some studies show that market share is significant determinant of rate of return on investment in mature industries but not in emerging"&!0*((&"  W-industries. See, e.g., J. Prescott, A. Kohli & N. Ven Katraman, ``The MarketshareProfitability  Wh-Relationship: An Empirical Assessment of Major Assertions and Contradictions,'' Strategic  W@-Management Journal, Spring 1986, at 386. "g;"0*((]"Ԍ Y- Ù ` ` 132. A key element of the study of markets is the recognition that not all  Y-industries and markets are at the same stage of development.o# f W-ԍ For example, Prescott, Kohli, and Ven Katraman have shown that the determinants of rate  W-of return on investment vary between mature industries and emerging industries. See J. Prescott, A. Kohli & N. Ven Katraman, ``The MarketshareProfitability Relationship: An Empirical Assessment of Major Assertions and Contradictions,'' Strategic Management Journal, Spring 1986, 37794. They found, for example, that high market share is correlated with high rates of return in mature  W -industries, but not for emerging industries. Id. at 386.o 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  Y-equal, high growth firms (such as the cellular industry) tend to earn high profits.$ f W.-ԍ D. Ravenscraft ``StructureProfit Relationship at the Line of Business and Industry Level,''  W-Review of Economic and Statistics, Feb. 1983, at 2231. 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.  Y -` ` 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  Y -learning process by consumers.% h f W-ԍ See, e.g., N. Vettas, ``Demand and Supply in New Markets: Diffusion with Bilateral  W-Learning,'' presented at Allied Social Science Associations Meeting, Jan. 8, 1995. 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  Y-static pricing and not particularly elastic demand.  & f W%-ԍ See Appendix B at Table 16. Some cellular growth must be attributed to reductions in the cost of end user equipment. "<X&0*(("Ԍ Y-` ` 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  Y-degradation then would reduce available consumer surplus.i' f W-ԍ Consider, for example, that our statistical model (Appendix B at Table 15, Regression 2)  W- predicts that a 10 percent price reduction would only increase demand in the current period by about 4 percent, and growing 7 percent after two years, and to about 12 percent after five years. On the other hand, if reduced quality of service reduces consumer surplus enough to reduce the diffusion effect by 4 percent then the increase in customers would from the second year on would only be 4 percent. Reducing consumer surplus through reduced investment enough to reduce the  W -diffusion effect by 10 percent would result in a net loss of customers of about 3.5 percent per year (16 percent over 5 years). Finally, of course, there is the direct loss of consumer surplus by actual consumers.i Thus, consumers are not necessarily better off under a scenario in which carriers earn are precluded from earning  Y_-some economic rents.<(8_( f W8-ԍ All of this analysis is consistent with the phenomenon that other things being equal, the effect of cash flow on investment tends to be larger for firms in growing sectors. In addition, cash  W-flow effects investment more for young firms (under 12 years old) than for mature firms. See M.  W-Devereux & F. Schiantarelli, ``Investment, Financial Factors, and Cash Flow,'' in Asymmetric  W-Information, Corporate Finance, and Investment 279306 (1990)(R. Hubbard, ed.).<  Y1-` ` 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  Y -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.  X- ` `  (4) Investment  Yd- ` ` 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  Y6-the public.''=)6( f W"-ԍ CPUC Petition at 50.= As a general proposition, we do not agree with the assertion that high profits  Y-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)."=)0*(("Ԍ Y-ԙ` ` 137.ؠAlthough 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  Y-475 percent.I* f W-ԍ See Appendix B at Table 8.I 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  Yv-because most or all of that return was reinvested to support expansion.+vh f W -ԍ See, e.g., Appendix B at Table 9 (drawn from Standard and Poor's, Industry Surveys:  Wg -Telecommunications, Basic Analysis, June 2, 1994). Even in the largest markets, in certain years increases in net plant were substantially above aftertax 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 fouryear 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  Y -net plant by more than double their net operating profits. By contrast, available evidence  Y -indicates that net plant of cable television fell over this same timeframe.C,  f WQ-ԍ See id. at Table 12.C The net plant of companies in more mature segments of the market for telecommunications services increased,  Y-but apparently by less than one percent per year.-` f W-ԍ See id. at Table 13. We express no opinion here on the adequacy of this investment or that of  W-the cable television industry cited supra. The contrast is shown solely to illuminate the fact of pronounced reinvestment of profits by cellular telephone companies in California. Aggregate investment by the cited industries is substantial by any measure.   Yd-` ` 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,''  Y6-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  Y-have declined as additional subscribers were added. We also stress that the money earned by  Y-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.  Y-` ` 139. Apart from that, we note that such investment has important longterm 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,  Y;-cellular carriers might have chosen the alternative strategy of ``cashingout'' in the face of";> -0*((L" 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.  Yv-` ` 140. The record also provides no persuasive evidence that investment by  Y_-cellular carriers represents an undertaking designed to deter entry.._ f W-ԍ See, e.g., J. Ordover & R. Willig, ``An Economic Definition of Predation: Pricing and  W -Product Innovation,'' 91 Yale L.J. 8 (1981). 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.  Y-` ` 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.  Y-   VI. REGULATION OF OTHER TERMS AND CONDITIONS#Xw P7=XP#  Y-` ` 142.ؠPrior to OBRA, Section 332 prohibited the states from imposing ``rate ...  Y-regulation'' upon certain wireless telecommunications carriers."/@ f W-ԍ The statute provided in relevant part that ``[n]o state or local government shall have any authority to impose any rate or entry regulation upon any private land mobile service . . . .'' 47 U.S.C.  332(c)(3)(prior to revisions enacted by OBRA). " This prohibition was  Y-construed broadly to preclude almost all state regulatory activity.00  f W -ԍ See, e.g., Telocator Network of America v. FCC (Millicom), 761 F.2d 763 (D.C. Cir. 1985) (upholding Commission's interpretation of Section 332(c)(1), 47 U.S.C.  332(c)(1), in determining  W"-whether preemption provisions of that section apply to a given communications system). See also,  W]#-e.g., American Teltronix (Station WNHM552), 3 FCC Rcd 5347 (1988)(``Congress did not intend that a private land mobile licensee who, either intentionally or inadvertently, provides service to ineligible users would thereby subject itself to state regulatory authority, including possible  W%-sanctions, for operating as a common carrier.''), recon. denied, 5 FCC Rcd 1955, 1956 (1990)(note omitted) (``state entry and rate regulation of a communications service offered by a private land mobile radio system is preempted by statute .... [A]ccompanying legislative history reveals that"'/0*(('" Congress recognized the Commission's broad discretion to dictate which land mobile systems are to be regulated as private.''). The Commission again stated its view of preemptive authority under that provision when it adopted a Notice of Inquiry respecting Personal Communications Services. Amendment of the Commission's Rules To Establish New Personal Communications Services, Notice of Inquiry, 5 FCC Rcd 3995, 3998 n.19 (1990): XX` ` If these services are considered to be, or classified as, radio common carrier telephone exchange services, then the states, under Section 2(b) of the Act, may impose entry and rate regulations upon intrastate operations. If we classify these services as private land mobile, such state regulation would be expressly preempted under Section 332(c)(3).x` 0 As revised by OBRA,"? 00*((n" 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.  YH-` ` 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  Y -and conditions of commercial mobile radio services. The Committee stated:]1 f Wd-ԍ H.R. Rep. No. 103111, 103d Cong., 1st Sess. at 261.] XBy ``terms and conditions,'' the Committee intends to include such matters as customer billing information and practices and billing disputes and other  Y -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.''   Y-  Y-` ` 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. "~@P 10*((O"Ԍ Y-` ` 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  Y-proceedings may concern carrier practices, separate and apart from their rates.Q2 f W4-ԍ E.g., Section 208(a) of the Communications Act authorizes complaints by any person  W -``complaining of anything done or omitted to be done by any common carrier subject to this Act, in contravention of the provisions thereof.'' 47 U.S.C.  208(a) (emphasis added).Q 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.  Y -` ` 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  Yb-performance of CMRS providers in that state.38b f W+-ԍ We remind the CPUC that the certification process is precluded by the provision in amended Section 332 that categorically preempts state and local entry regulation and that the statute makes no provision for continuance or extension of this authority by this Commission. As of the effective date of the amendment, therefore, California's certification jurisdiction over commercial  W-mobile radio service was terminated. See H.R. Rep. No. 103111, 103rd Cong., 1st Sess. at 261.  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.  Y-` ` 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  Y-the CPUC's rate regulation authority, which we can employ to protect resellers.4` f W -ԍ See Comments of McCaw at 67; Supplemental Reply at 56. McCaw contends that, absent a successful state petition, Federal regulatory principles of nondiscrimination and just and reasonable  WQ"-rates ``are enforceable solely by federal regulators'' and ``are not terms and conditions to be  W)#-implemented by the states.'' Id. at 7 n.21 (emphasis in original). The question whether we have jurisdiction over CMRS intrastate rates has been raised in petitions  Y-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"~A@ 40*((m" 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  Y-such a nexus and supporting the substantive position argued, i.e., that we have or have not inherited intrastate rate regulation over CMRS.  Y-. VII. ORDERING CLAUSES ă  Yb-` ` 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.  Y -` ` 149.ؠ  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  Y -8 by AirTouch as part of a written ex parte communication), IS GRANTED to the extent indicated herein.  Yg-` ` 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  Y"-action is given. 5" f W-ԍ Although we assigned the CPUC Petition a docket number for administrative convenience, this is an adjudicatorytype proceeding, not a rulemaking. ` ` ` `  hhCFEDERAL COMMUNICATIONS COMMISSION ` `  hhCWilliam F. Caton ` `  hhCActing Secretary "SB@50*((/"  Y-1 C Z APPENDIX A ă  Y-{ List of Parties Filing Comments ă  W-Party (and Short Title)  Y- 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)"(C510*0*0*0*"  Y-_   List of Parties Filing Reply Comments ă 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) "!D50*(("  Y-  List of Parties Filing Supplemental Comments ă 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)  Y-  List of Parties Filing Supplemental Reply Comments ă 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) " E50*((!"  a<     #Xxjp P7XP#     #Xj\  P6G; XP#  HX  XX S#i\  P@Q(i:P# APPENDIX B #(XZ\  P@Q XP#  X -kI TABLE 1  X-Y  After Tax Rates of Return on Net Plant and Equipment  S-#&a\  P6G;#&P# T | !ddx `) AXXdxFP T | "   X " *g*  Company4 Starting Date g Pops g 1989 g 1990 g 1991 g 1992 g 1993X `  *gh*  Bakersfield Cellularlh 3/88lh 543477lh lh lh lh lh 61.5` `   Bay Area Cellularh 9/86h 5184169h 43.7h 48.1h 43.5h 31.1h 49.5` ` l Cagal Cellular, h 1/89, h 388222, h , h 1.2, h 17.6, h 17.0, h 35.8` `  California 2 Cellular h 8/91 h 57015 h  h  h ܩ49.0 h ܩ55.0 h ` 8 ,  *hI*  Contel Cellular of CA (RSA # 7) I 10/90 I 109303 I  I ܩ32.2 I ܩ19.5 I 6.0 I 35.48 `   *Ih*  Fresno Cellular$h 10/87$h 979411$h ܩ19.6$h 11.9$h 24.0$h 31.3$h 25.7` `   Fresno MSA LPh 4/86h 1624357h h 8.0h 7.6h 11.2h 10.7` ` $ GTE Mobilnet of Californiah 3/85h 6826133h 22.8h 15.8h 16.4h 20.0h 18.1` 8  *hI*  GTE Mobilnet of Santa BarbaraI 11/87I 369608I 2.6I 2.0I 8.5I 6.7I 7.58 `  *Ih*  Los Angeles Cellular|h 12/86|h 13862513|h 71.4|h 58.5|h 52.4|h 51.6|h 47.0` `  LA SMSA LPh 6/84h 14531529h 49.4h 43.3h 34.8h 28.0h 33.8` 8 | *hI*  McCaw Communications of StocktonI 12/87I 857150I I 31.4I 27.0I 26.0I 32.28 `  *Ih*  Modoc RSA LPth 10/90th 57015th th ܩ15.0th ܩ24.4th ܩ19.2th ܩ6.2` `  Napa Cellularh 4/88h 451186h h 7.4h 19.5h 32.7h 32.5` ` t PacTel Cellular4h 8/854h 24980164h 33.04h 32.94h 23.94h 21.44h 30.4` `  Redding Cellularh 3/89h 237734h h h h h 3.1` ` 4 Sacramento Cellularh 10/87h 1477750h ܩ2.9h 21.4h 22.1h 22.2h 17.4` `  Sacramento Valley LPT!h 7/85T!h 2836582T!h 17.6T!h 10.1T!h 2.8T!h 0.8T!h 6.4` `  Salinas Cellular"h 3/89"h 355660"h "h ܩ21.6"h ܩ8.3"h 5.2"h 7.2` ` T! Santa Barbara Cellular$h 12/87$h 369608$h ܩ39.4$h ܩ10.4$h ܩ9.7$h 5.0$h 10.5` ` " Santa Cruzt%h 1/89t%h 229734t%h t%h t%h ܩ2.7t%h 9.5t%h 14.0` ` $ US West Cellular&h 4/86&h 2498016&h 5.2&h 9.0&h ܩ4.3&h ܩ7.4&h 2.9` ` t% Ventura Cellular4(h 7/874(h 6690164(h 4(h 39.34(h 27.14(h 21.54(h 24.5`   & *h*  Weighted Sum) ) ) 34.4) 33.2) 28.7) 26.7) 30.2  4( S)-.XWeighted 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."v+F5---HHy,")"  X- ##Xj\  P6G; XP#nTable 2  * Đ.X  X-> 14 Carrier Monthly Price Indices Đ.X w AXXdxFP T aXddxG w   4(  #Year5 19905 19915 19925 1993 q  h  Best Priceh h h h q q 5  X.-60DDgh $63.03h $63.03h $62.95h $58.48q q  120 h $85.09 h $84.95 h $84.87 h $76.93q    h  480)  $219.42)  $218.05)  $216.76)  $191.06     X -n Table 3  * ă  X -> @ 11 Carrier Monthly Price Indices Đ.X m aXddxG XddxG m        ""  YearG 1989G 1990G 1991G 1992G 1993 q  "h"  Best Priceh h h h h q q G 60)h $64.72)h $63.12)h $63.12)h $63.10)h $58.60q q  120h $87.89h $85.19h $85.06h $85.04h $77.05q   ) "h"  480; $226.64; $219.67; $218.29; $217.17; $191.31  @  X - nTable 4  * ă  X-  14 Carrier Annual Operating Expense Indices ă m XddxG XddxG4d m     #YearY  Xp-1990X X X X X X Y 1991Y 1992Y 1993    v  Annual Per Subscriber Operating Expensev $701.53v $699.51v $662.11v $589.63  Yv "!G5-?,?,HH9!"  X-\n Table 5  * ă  X-  11 Carrier Annual Operating Expense Indices Đ.X\` ` m XddxG4d XddxH488888 m     Y  "" #YearL 1989L 1990L 1991L 1992L 1993    "v"  Annual Per Subscriber" " " " " " " " " " " " " " Operating Expensev $685.43v $669.79v $680.01v $654.76v $586.10  Lv  X- ă \  Xz - * Source: California Petition at Appendices H and J. Averages are weighted by number of subscribers in 1991. Prices assume 80% of minutes are peakuse minutes."c H5-?,?,HH^ V"  X-p Table 6 ă  X-I Los Angeles Prices ă w XddxH488888 XddxIZZZZZZZ """"""w &     L& &&  L"d Single UserL"Best Volume Discount Price$  z $ &g&  "60 minutesg" 120  minutesg"Q480 E_minutesg"60 minutesg"120 minutesg"Q480 EUminutesz q L &gh&  12/31/937h"69.847h"_ 85.087h"I201.607h"56.867h"m75.967h"I}198.72q q  12/31/94 h"56.39 h"_ 85.08 h"I201.60 h"56.86 h"m75.96 h"I}198.72q   7 &h&  2/28/95I "56.39I "_ 84.03I "I200.72I "49.49I "m69.98I "I}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.  Xz-Sources: CPUC Petition at Appendix J; AirTouch ex parte (3/17/95); BellSouth ex parte (3/23/95)."zI5-?,?,HH` "  X-p Table 7 Ã  X-\@` ` > Hazlett's Estimates of q ratios for Cellular Telephone Markets m XddxIZZZZZZZ """""" ddxJ """m  c   H  Market SizeL" Replacement Cost of  All Tangible Assets %(per pop)H"hAverage Sales Prices H(per pop)H"Tq ratiosc q  Hh  Smallh"-$19.67h"}$131.46h"]6.68q q  Medium h"0C13.59 h"168.62 h"Zg12.41q    h  Large "0C18.57 "250.98 "Zg13.52    Source: Thomas W. Hazlett, ``Market Power in the Cellular Telephone Duopoly,'' Report prepared for Time Warner Telecommunications, (1993) at 14. "\ J5-?,?,HH "  X- pTable 8 ă  X-(2 Gross Plant and Equipment ă ^ ddxJ """ !XddxKh ^   z   g  Company 5g 1989 Average Gross Plant5g 1993 Average Gross Plant5g % Changez q  gh  Bay Area Cellular Telephone Companyh $60,944,400h $167,085,3403 h 3274.16 %q q 5 h  Contel Cellular (RSA # 7)h  X.-$843,876* $2,033,2623  3 X.-240.94 %**q q  h  Fresno Cellular Telephone h $7,611,804 h $36,202,8483  h 3475.61 %q q  h  Fresno MSA LP h  X -$29,210,172*  $59,878,8443   3 X -204.99 %**q q   h  GTE Mobilnet of Californiaj h $71,249,619j h $223,211,1603 j h 3313.28 %q q   GTE Mobilnet of Santa Barbara h $4,987,380 h $23,510,7733  h 3471.41 %q q j  Los Angeles Cellular Telephone CompanyLh $103,256,492Lh $356,808,9693 Lh 3345.56 %q q   Los Angeles SMSA LPh $155,537,562h $436,892,7363 h 3280.89 %q q L h  Modoc RSA LP.h  XE-$222,496*. $406,1343 . 3 XE-182.54 %**q q  h  PacTel Cellular Corp.h $25,171,848h $74,410,8483 h 3295.61 %q q . Sacramento Cellular Telephoneh $17,783,992h $75,240,2073 h 3423.08 %q q  Sacramento Valley LPh $24,503,636h $86,134,2773 h 3351.52 %q q  Santa Barbara Cellularh $4,558,632h $15,010,0653 h 3329.27 %q    h  US West Cellular $20,500,963 $62,091,1403  3302.87 %    X|-*1990 Average Plant and Equipment.  WBe  X-**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."K5-?,?,HH"  yO- 3'3'Standard'3'3StandardHPLA4MPC.PRS&njp>XXHXL #X\  P6G;-IP# Table 9 ă  X-\ #-o\  PC XP#After Tax and Interest Rates of Return #o\  PC XP# ă #Xj\  P6G; XP# !XddxKh AX00xL DDDDLDDDDDDDDDD :     *( *: JJ  +"0Return on Revenues (%)+"Return on Assets (%) +" &Return on Equity (%)<*( *q) ( ) < JhJ  Wireless Service Companyh 1989h 1990h 1991h 1992h 1993h 1989h 1990h 1991 h 1992 h 1993 h 1989 h 1990 h 1991h 1992h 1993:q) ( ) q) ( ) +: JhhJ  AirTouch Communications Inc. h NA h NA h NA h NM h 3.8 h NA h NA h NA  h NM  h 1.2  h NA  h NA  h NA h NM h 3.8:q) ( ) q) ( ) : JhhJ  Lin Broadcasting~h 22.9~h NM~h NM~h NM~h NM~h 9.1~h NM~h NM ~h NM ~h NM ~h 12.5 ~h NM ~h NM~h NM~h NM:q) ( ) Z) ( )  : JhIJ  McCaw Cellular Communications I NM I 35.8 I NM I NM I NM I NM I 6.3 I NM  I NM  I NM  I NM  I 23.0  I NM I NM I NM:Z) ( ) Z) ( ) ~: Mobile Telecommunications Tech2 I NM2 I NM2 I NM2 I NM2 I 12.92 I NM2 I NM2 I NM 2 I NM 2 I 5.8 2 I NM 2 I NM 2 I NM2 I NM2 I 9.0:Z) ( ) q) ( )  : JIhJ  Nextel Communicationsh NAh NMh NMh NMh NAh NAh NMh NM h NM h NA h NA h NM h NMh NMh NA:q) ( ) q) ( ) 2 : US Cellular Corph NMh NMh NMh 3.8h NMh NMh NMh NM h 0.8 h NM h NM h NM h NMh 1.5h NM:q) ( ) )  * )  : JhJ  Vanguard Cellular Sys. NM NM NM NM NM NM NM NM  NM  NM  NM  NM  NM NM NM')  * )  '  X-Source: Standard and Poor's, Industry Surveys:Telecommunications, Basic Analysis, June 2, 1994. "L58" HH "  X- XXXX O Table 10 `aGrowth of Net Plant and Reinvestment of Profits  X-Large Markets  X-\` ` 1990 hhCq1991pp  )1992xxX (#(#%%1993''0*0*>,,l..Totals8181  AX00xL DDDDLDDDDDDDDDD aXd(vMkkkk\ 6)  * )    6 : : LA Cellularj$96,688,679  58.5%lu$114,743,744 [52.4%&$123,679,819  51.6%S$$117,062,349 G9*47.0% s, C0 3'    v ' aXd(vMkkkk\ Xd(\Mkkkk\ <    v< : : mj$79,035,183 m 62.8%mr$28,050,707 m[13.7%m,H$13,314,843 m.!5.7%m%$5,953,922 mM*2.4% ms, m-100.4% m3'\ ' Xd(\Mkkkk\ Xd(BMkkkk\ <    \< : : Sj$17,653,496 c 81.7%cr$86,693,037 c[24.4%c&$110,364,976 c 10.8%cS$$111,108,427 cM*5.1% cs, c;.27.9% c3'    B ' Xd(BMkkkk\ Xd((Mkkkk\ <        B< : : LA SMSA9 j$78,333,706 I  43.3%I r$75,885,956 I [34.8%I ,H$67,588,920 I  28.0%I S$$107,060,669 I G9*33.8% I s, I C0 I 3'    ( ' Xd((Mkkkk\ Xd( Mkkkk\ <    (< : :  j$47,999,081   30.7% r$26,880,596  [13.1% ,H$19,490,570  .!8.4% $$20,301,980  M*8.1%  s,  ;.73.2%  3' ' Xd( Mkkkk\ Xd( Mkkkk\ <     < : :  j$30,334,625   61.3% r$49,005,360  [35.4% ,H$48,098,350   28.8% $$86,758,689  G9*19.0%  s,  ;.34.9%  3'     ' Xd( Mkkkk\ !Xd( Mkkkk\ <         < : : Bay Area j$30,154,000   48.1% r$34,169,000  [43.5% ,H$43,421,000   31.1% $$46,965,000  G9*49.5%  s,  C0  3'     ' !Xd( Mkkkk\ AXd( Mkkkk\ <     < : :  j$20,939,820   40.2% r$10,665,985  [14.6% ,H$12,803,201   15.2% %$4,490,405  M*4.6%  s,  ;.93.8%  3' ' AXd( Mkkkk\ aXd( Mkkkk\ <    < : :  $9,214,180   69.4% r$23,503,015  [31.2% ,H$30,617,799   29.5% $$42,474,595  M*9.6%  s,  ;.31.6%  3'     ' aXd( Mkkkk\ Xd( Mkkkk\ <         < : : GTEj$14,093,498  15.8%r$19,561,031 [16.4%,H$27,987,242  20.0%$$56,820,926G9*18.1% s, C0 3'     ' Xd( Mkkkk\ Xd(rMkkkk\ <     < : : j$38,022,816  108.4%r$15,119,123 [26.1%,H$24,054,868  49.1%^%$2,773,285G9*32.8% s, -160.5% 3'r ' Xd(rMkkkk\ Xd(XMkkkk\ <    r< : : i%($23,929,318)y 269.8%yx=$4,441,908 y[77.3%y2$3,932,374 y 85.9%y$$19,676,415yG9*65.4% ys, y;.96.5% y'    X ' Xd(XMkkkk\ Xd(>Mkkkk\ <        X< : : PactelO$9,420,334 _ 32.9%_x=$8,695,668 _[23.9%_2$9,029,050 _ 21.4%_$$13,763,336 _G9*30.4% _s, _C0 _3'    > ' Xd(>Mkkkk\ Xd($Mkkkk\ <    >< : : 5$4,967,020 5 19.0%5r$10,638,868 5[34.2%5;D$798,841 5.!1.9%5%$2,773,285 5M*6.5% 5s, 5;.73.4% 53'$ ' Xd($Mkkkk\ !Xd( Mkkkk\ <    $< : : $4,453,314 + 52.7%+s($1,943,200)+122.3%+2$8,230,209 +.!8.8%+$$10,990,051 +G9*20.1% +s, +;.46.9% +3'      ' !Xd( Mkkkk\ AXd(Mkkkk\ <         < : : US West$2,061,320 P9.0%s($2,289,155){-4.3%-g($3,306,232) -7.4%%$1,105,499 M*2.9% s, C0 3'     ' AXd(Mkkkk\ aXd(Mkkkk\ <    < : : j$11,169,558  72.4%x=$7,654,099 [23.5%-g($4,086,613) -10.2%%$4,749,174 G9*16.5% s, ;.91.2% 3' ' aXd(Mkkkk\ Xd(Mkkkk\ <    < : : ($9,108,238) 541.9%s($9,943,254)na;D$780,381  na$($3,643,675)A)429.6% s, i.na 3(     ( :; : % of Profit Reinvested; ; 87.6%;;k39.5%;kw; 24.7%;%(;HI*13.4% ;s, ;C0 ;3  ; X- See Table 11 for source and key."M58" HH1"  X-O Table 11 `aGrowth of Net Plant and Reinvestment of Profits  X-Middle Markets \` ` hhCqpp  X-\` ` 1990 hhCq1991pp  )1992xxX (#(#%%1993''0*0*>,,l..Totals8181  Xd(Mkkkk\ Xd(vNkkkk\ *     * : : Sacramento$5,807,217  21.4%x=$9,319,977 [22.1%,H$11,584,920  22.2%$$13,084,721 G9*17.4% s, C0 3'    v ' Xd(vNkkkk\ Xd(aNkkkk\ <    v< : : Cellularrj$12,470,559 r 59.5%rr$11,740,368 r[35.1%r2$2,601,171 r.!5.1%r%$8,130,246 rG9*15.2% rs, r-166.8% r3'a ' Xd(aNkkkk\ Xd(LNkkkk\ <    a< : : ]($6,663,342)m 214.7%ms($2,420,391)m126.0%m2$8,983,749 m 22.5%m%$4,954,475 mG9*62.1% ms, m;.87.8% m3'    L ' Xd(LNkkkk\ Xd(7Nkkkk\ <        L< : : SacramentoH $3,146,079 X  10.1%X x=$1,161,634 X 2.8%X ;D$408,726 X .!0.8%X %$3,816,168 X M*6.4% X s, X C0 X 3'    7 ' Xd(7Nkkkk\ !Xd(" Nkkkk\ <    7< : : Valley3 j$11,925,787 3  47.4%3 x=$9,107,329 3 [24.6%3 2$9,233,474 3  20.0%3 %$7,855,037 3 G9*14.2% 3 s, 3 -151.5% 3 3'" ' !Xd(" Nkkkk\ AXd( Nkkkk\ <    " < : :  ($8,779,708).  379.1%. s($7,945,695). 784.0%. -g($8,824,748).  2259%. $($4,038,869). A)205.8% . s, . -446.8% . 3'     ' AXd( Nkkkk\ aXd( Nkkkk\ <         < : : Fresno $1,206,532   11.9% x=$3,691,182  [24.0% 2$7,020,723   31.3% %$7,386,001  G9*25.7%  s,  C0  3'     ' aXd( Nkkkk\ Xd( Nkkkk\ <     < : : Cellular $3,499,594   41.9% x=$7,041,408  [59.4% 2$7,083,749   37.5% %$5,478,937  G9*21.1%  s,  -276.4%  3' ' Xd( Nkkkk\ Xd( Nkkkk\ <    < : :  ($2,293,062)  290.1% s($3,350,226) 190.8% <c($63,026) f 100.9% %$1,907,064  A)454.1%  s,  -119.7%  3'     ' Xd( Nkkkk\ Xd( Nkkkk\ <         < : : Fresno MSA$3,102,821 P8.0%x=$3,259,573 7.6%2$6,078,225  11.2%%$7,810,658 G9*10.7% s, C0 3'     ' Xd( Nkkkk\ Xd(Nkkkk\ <     < : : $3,165,709  14.2%x=$4,200,037 [17.3%,H$13,360,763  49.2%$$14,496,542 G9*38.1% s, -157.8% 3' ' Xd(Nkkkk\ Xd(Nkkkk\ <    < : :  ($62,888) 102.0%|($940,464)128.9%-g($7,282,538)f 219.8%$($6,685,884)A)467.2% s, -173.9% (3 Yrs)'     ' Xd(Nkkkk\ !Xd(zNkkkk\ <        < : : Santa ! ($465,319) -10.4%|($632,347){-9.7%;D$406,513 .!5.0%^%$1,150,016G9*10.5% s, C0 3'    z ' !Xd(zNkkkk\ AXd(eNkkkk\ <    z< : : Barbarav$2,375,008 v 72.0%vx=$1,750,983 v[30.9%v2$1,473,543 v 19.9%v^%$4,073,408vG9*45.8% vs, v-293.4% v3'e ' AXd(eNkkkk\ aXd(PNkkkk\ <    e< : : a($2,840,327)qnaqs($2,383,330)qK-277%q-g($1,067,030)qf 362.5%q$($2,923,464)qA)354.2% qs, q-2108% q3'    P ' aXd(PNkkkk\ Xd(;Nkkkk\ <        P< : : GTE ofLf $110,579 \P2.0%\$781,663 \8.5%\;D$681,700 \.!6.7%\%$1,495,884 \M*7.5% \s, \C0 \3'    ; ' Xd(;Nkkkk\ Xd(&Nkkkk\ <    ;< : : Santa Barb.7f $756,332 7 14.7%7x=$6,514,901 7110.5%72$5,960,377 7 82.7%7%$6,448,918 7G9*48.9% 7s, 7-382.7% 73'& ' Xd(&Nkkkk\ Xd(Nkkkk\ <    &< : : "! ($645,753)2 684.0%2s($5,733,238)2833.5%2-g($5,278,677)2f 874.3%2$($4,953,034)2A)431.1% 2s, 2-641.1% 23(     ( :; : % of Profit Reinvested=; =; 264.9%=;=;229.5%=;kw=;v 151.7%=;%(=;B)133.8% =;s, =;C0 =;3  ; "Key  X-\ ` ` hhCqpp | Xd(Nkkkk\xd(N | A  ;  AfterTax Income; Rate of ReturnA !  ;   X-Increase in Net Plant % Increase in Net Plant! Q  J   X<-Net Cash FlowUJ % of Profits ReinvestedQ J ">N58" HHW!,"  X- '3'3StandardHPLA4MPC.PRS&njp3'3'StandardHPLA4MPC.PRS&njpXXHXLO sl Table 12 ă  X-  Investment By Cable TV Providers ă Yxd(N XXd(O ""Y  Q A    ;   Operator;  R1989;"T1993 A  *   ;  "N Net Plant  (Millions)& eHouseholds Passed w(Thousands)&"Net Plant (Millions)&"gHouseholds Passed y(Thousands)* !    AdelphiaG"N l 320.4G"1365.7G"398.9G"!1758! ! & Cablevision Systemsh" l 521.0h"2429.6h"643.5h"!3563!   G   Century Communicationsr " l 352.5r "1500r "431.9r "!1653  ! h   Comcast " l 612.9 "2638.6 " Z1021.0 "!4219! ! r  CTEC " l 266.2 "287.7 "343.8 "P!417! !   E.W. Scripps " l 552.4 "H961 "712.7 "!1159! !   Falcon Cable" 63.4"1048"66.8"!1287! !   Galaxy Cable M.L.P" 34.3"116.9"18.9"!76! !  Jones Spacelink8" l 159.18"2146.68"194.98"!2163! !  Media GeneralY" l 421.7Y"282.2Y"515.2Y"P!324! ! 8 Multimediaz" l 175.4z"598.8z"240.8z"P!694! ! Y TCA Cable" l 121.1"677.5"106.4"P!645! ! z TeleCommunications"  4179"9461.2"4935" 17425! !  Times Mirror": 1543.6"1846.7" Z1756.3"!2069! !  Time Warner"  2944"3317"3866" 12012! !  Viacom" l 380.3"1653.3"554.2"!1730! A  ;  Totals`;" 12647.3`;"30330.8`;"(15806.3`;" 51194 A :    ;+  Net Plant per Household passed+  R$417+"T$309:  `+ Source: Paul Kagan Associates, Inc., ``The Cable TV Financial Databook,'' June 1990, June 1994."O5-?,?,HH"  X- 3'3'StandardHPLA4MPC.PRS&njp'3'3StandardHPLA4MPC.PRS&njp>XXHXOP O Table 13 ă  X-I Telephone Company Investment ă rXXd(O ""!XXd(P 444444 r $:   `$ &&  ; 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%! Q   &J&  AT&T Communications, Inc.a J 26,116,103a J 16,135,201a J 25,231,150a J 16,130,858a J ܩ3.4%a J ܩ0.0%Q  J 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 $100 million. There were 53 reporting entities in 1989, 55 in 1993. Source: Federal Communications Commission, Statistics of Communications Common Carriers, 1989/1990, 1993/1994. " P58" HH "  X- '3'3StandardHPLA4MPC.PRS&njp3'3'StandardHPLA4MPC.PRS&njpXXHXPQ g TABLE 14  X-+ Reordering Hausman's Table Đ.X r!XXd(P 444444 AXddxQ r Q z  g  MSA No. In Hausman Table5g MSA5g Population5g Monthly Price5g Regulatedz q  gh  2h Los Angelesh 13862513h 99.99h Yesq q 5 1h New Yorkh 13698478h 110.77h Yesq q  3 h Chicago h 7261176 h 58.82 h q q  4 h Philadelphia h 4856881 h 80.98 h q q   5j h Detroitj h 4531636j h 66.76j h q q   7 h Boston h 4029662 h 82.16 h Yesq q j  6Lh DallasLh 3949075Lh 59.78Lh q q   9h San Franciscoh 3686582h 99.47h Yesq q L 8.h Washington.h 3660758.h 76.89.h q    h  10 Houston 3493644 80.33    .  X-N Using CMSA Pops ă h AXddxQ aXddxsQ h   z . g  MSA No. In Hausman Tableg Clusterg Populationg Monthly Priceg Regulatedz q s gh  2^h Los Angeles^h 13862513^h 99.99^h Yesq q  1h New Yorkh 13698478h 110.77h Yesq q ^ 3@h Chicago@h 7865702@h 58.82@h q q  4h Philadelphiah 6107248h 80.98h q q @ 8"!h Washington"!h 6008977"!h 76.89"!h q q  9"h San Francisco"h 5184169"h 99.47"h Yesq q "! 7$h Boston$h 4739367$h 82.16$h Yesq q " 5u%h Detroitu%h 4531636u%h 66.76u%h q q $ 6&h Dallas&h 4044096&h 59.78&h q   u% h  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%."B+Q5-?,?,HH*%"  X-g TABLE 15  .XWe used the confidential data provided by California, supplemented by information on growth by specific  X-carriers during 1994, filed in ex parte presentations, to estimate demand relations. Two such regressions are included below. eRegression 1  .XDependent Variable is Logit(Penetration)  X -\` `  CoefficienthhCStd. ErrorT-StatisticProb.  X -Constant` `  -14.33973 hhC2.319734-6.1816250.0000  X -Log(Highinc)` `  1.425076 hhC0.353007 4.0369570.0001  X -Log(Age)` `  1.045669 hhC0.1188458.7986190.0000  X -Log(Drive Time)` `  6.334967hhC1.1900435.3233100.0000  X-Log(Pops)` `  -0.864417hhC0.134228-6.4399050.0000  X{-Log(P120/GCPI)` `  -1.261171hhC0.354760-3.5549960.0007  XM-Observations:` `  76  X-R-squared` `  0.723044  X-Adjusted R-squared` `  0.703262 eRegression 2 .X Dependent Variable is Logit(Penetration)  X~-\` `  CoefficienthhCStd. ErrorT-StatisticProb.  XP-Constant` `  0.540140hhC0.680719 0.7934850.4308  X9-Log(Highinc)` `  0.101609hhC0.190845 0.5324170.5965  X"-Log(Age)` `  -0.250573hhC0.114829-2.1821420.0333  X -Log(P120/GCPI)` `  -0.327574hhC0.215884-1.5173580.1348  X-Log(Lagged Penetration) 0.806344hhC0.052959 15.225960.0000  X -Observations: ` `  61  X!-R-squared` `  0.875118  X"-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.")R5-?,?,HHn(%"  X-ls Table 16  .XTo 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:  X-Q Regression No. 1 Đ.X Dependent Variable is Ln(GROSSPLANT)  X1-\` `  CoefficienthhCStd. ErrorT-StatisticProb.  X -Constant` `  0.379602hhC 1.642788 0.2310720.8178  X -Ln(YEAR-1983)` `  1.553820hhC 0.474709 3.2732030.0015  X -Ln(POPS)` `  0.957653hhC 0.059366 16.131300.0000  X -RSA\` `  -0.819740hhC 0.231829-3.5359740.0006  X -Ln(Age)` `  -0.359661hhC 0.296603-1.2126010.2284  X-Ln(Age)2` `  0.089599hhC 0.067273 1.3318760.1862  Xy-Wireline` `  -0.142455hhC 0.096554-1.4753900.1436  XK-Observations:` `  98  X4-R-squared` `  0.963382hhC  X-Adjusted R-squared` `  0.960967  X- QRegression No. 2 ă Dependent Variable is Ln(Rate Of Return+100)  X-\` `  CoefficienthhCStd. ErrorT-StatisticProb.  Xe-Constant` ` 0.962987hhC 0.613016 1.5709000.1196  XN-Ln(Pops)` `  0.162373hhC 0.023126 7.0212660.0000  X7-Wireline` ` 0.039833hhC 0.028285 1.4082580.1624  X -Min(0,Age-48)` ` -0.010266hhC 0.001800-5.7032540.0000  X -Max(0,48-Age)` ` -0.000992hhC 0.001927-0.5147040.6080  X-ln(High Income)` ` 0.045439hhC 0.052989 0.8575120.3933  X-ln(Year - 1983)` ` 0.821929hhC 0.149831 5.4857050.0000  X!-Observations:` `  101  X"-R-squared` `  0.639238hhC  X#-Adjusted R-squared` `  0.616210hhC ``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.