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A. a.(1)(a) i) a)DocumentҲ2{ ep Tech InitInitialize Technical Style56 1 .1 .1 .1 .1 .1 .1 .1 TechnicalPleadingHeader for numbered pleading paper78   , X  y*dddyy*dddy H\1 H\2 H\3 H\4 H\5 H\6 H\7 H\8 H\9 H10 H11 H12 H13 H14 H15 H16 H17 H18 H19 H20 H21 H22 H23 H24 H25 H26 H27 H28   ӕHeading 2Underlined Heading Flush Left9: Heading 1Centered Heading;<* Ã  2)s e 0 Bullet ListIndented Bullet List=>` ` ` 1, 2, 3,Numbers ?@. %G\  P%P'C Z 6Times New Roman Regular% P WPC p1%G\  P%P'C Z 6Times New Roman Regular%XN\  PXP'C Z 6Times New Roman RegularXXN\  PXP(x-  Z 6Times New Roman RegularXXN\  PXP'C Z 6Times New Roman RegularXXN\  PXP(x-  Z 6Times New Roman RegularXXN\  PXP'C Z 6Times New Roman RegularXXN\  PXP(x-  Z 6Times New Roman RegularXXN\  P XP'C Z 6Times New Roman RegularXXN\  P XP(x-  Z 6Times New Roman RegularXXN\  P XP'C Z 6Times New Roman RegularXXN\  P XP(x-  Z 6Times New Roman RegularXXN\  P XP'C Z 6Times New Roman RegularXXN\  PXP(x-  Z 6Times New Roman RegularXXN\  PXP'C Z 6Times New Roman RegularXXN\  PXP(x-  Z 6Times New Roman RegularXXN\  PXP'C Z 6Times New Roman RegularXA\  PP'C Z 6Times New Roman Regular@\  PP'C Z 6Times New Roman RegularA\  PP'C Z 6Times New Roman RegularXN\  PXP'C Z 6Times New Roman RegularXA\  PP'C Z 6Times New Roman RegularXN\  PXP'C Z 6Times New Roman RegularX2))|x# P #  #%G\  P%P#ъ 1. a. i.(1)(a)(i) 1) a)#XN\  PXP# In the Matter of Application by BellSouth Corporation,CC Docket No. __________ BellSouth Telecommunications, Inc., and BellSouth Long Distance, Inc., for Provision of InRegion, InterLATA Services in South Carolina  Glenn A. Woroch, being duly sworn, deposes and says:  I am currently Visiting Professor of Economics and Executive Director of the Consortium for Research on Telecommunications Policy at the University of California, Berkeley. I received an M.A. in Statistics and a Ph.D. in Economics from Berkeley. I have taught economics at the University of Rochester and Stanford University as well as at Berkeley. My past research has examined the design of regulatory policy and the viability of competition in network industries, especially the telecommunications and computer industries. For more than six years I was a research economist at GTE Laboratories where I developed and managed several projects investigating the effects of deregulation and emerging competition on local telecommunications markets. In particular, I examined the market and strategic factors determining the incidence and timing of entry by competitive access providers in U.S. cities. My current research explores the structural effects of regulatory pricing rules on network competition and empirical estimation of market and regulatory determinants of competitive entry into local telecommunications markets. On several occasions, I have advised government agencies and private corporations"including Regional Bell Operating Companies ( RBOCs)"on these matters.  I have been asked by counsel for BellSouth Telecommunications ( BST) to examine BSTs Statement of Generally Available Terms and Conditions for South Carolina (the Statement) to determine its effectiveness to open and keep open the states local exchange markets to competition. I examined, among other issues, the ability of the Statement to remove strategic entry barriers to all feasible routes into the various local exchange markets. In making this evaluation I took into account the various interconnection and resale agreements (the Agreements) the company has negotiated with competitive local exchange companies ( CLECs) and their legal enforcement, as well as market conditions and statutory and regulatory barriers in the state. I also sought to determine whether conditions prevail that prevent BST from reversing the opening of its markets. Along these same lines, I was also asked to evaluate the effectiveness of BSTs Statement and Agreements to prevent exclusionary conduct before and after BSTs entry into inregion interLATA services in South Carolina.  In this affidavit I will not focus on the Statements compliance with each item on the competitive checklist. Before approving BSTs Statement, the South Carolina Public Service Commission ( SCPSC) verified each of the fourteen items and called for modifications where it determined them to be necessary.4 I. A. 1. a.(1)(a) i) a)ҍ SCPSC Order No. 97640, Order Addressing Statement and Compliance with Section 271 of the Telecom Act of 1996, July 31, 1997.4 Nor will I assess at any length the competitive impact of BSTs entry on the performance of interLATA markets in South Carolina. Rather, my focus is on economic conditions facing potential entrants into local service markets in South Carolina. In the process I set out to determine reasons for the lack of widespread, facilitiesbased entry into BSTs local exchange markets in the state.  In performing my analysis I received BSTs Statement and the various external documents that it references. I reviewed roughly two dozen interconnection and resale agreements signed by BST with competitive local exchange carriers in South Carolina. I have read the SCPSC decision on BSTs application to provide inregion interLATA services as well as other matters including arbitration proceedings. I examined the Ameritech and SBC applications for interLATA authority in Michigan and Oklahoma, respectively, and related comments and FCC decisions. Finally, I studied the evidence of local exchange competition in South Carolina and throughout BSTs ninestate serving area.  I conclude that BSTs Statement assures that efficient firms can enter local exchange markets in South Carolina and offers them the prospect of financial viability and sustained growth to the extent possible given market conditions in the state. It achieves this objective by creating an expansive array of entry options that give CLECs the freedom to adopt all manner of pricing, service, locational, technological and structural entry strategies. Such opportunities fulfill the FCCs goal of making available every conceivable commercial opportunity so as to maximize the likelihood that efficient entrants will succeed.  The scores of interconnection and resale agreements that BST signed with CLECs in South Carolina and elsewhere in its serving area further confirm the openness of its local exchange markets. These Agreements tailor the engineering and commercial parameters of interconnection and resale to the specific business conditions facing the CLECs. They represent the efforts of the parties to support mutuallybeneficial transactions essential to commercial relationships between verticallyrelated buyers and sellers.  Potential entrants in South Carolina local exchange markets have rationally chosen to delay extensive facilitybased entry and to seek out other profit opportunities. In fact, economic and demographic conditions in South Carolina do not support early, extensive entry into its local exchange markets. Low population density, long loop lengths and underrepresentation of large business customers and telecommunicationsintensive industries combine to explain CLECs lack of interest in facilitybased entry in this state.  While entry into local exchange markets in South Carolina has been limited, BST has experienced significant facilitybased entry elsewhere in its region. This evidence is consistent with local exchange markets that are open to competition. Through their negotiated agreements, competitors have entered BST local exchange markets using unbundled network elements and through resale. Removal of statutory and regulatory barriers at the state and local levels has assisted this entry. Furthermore, BSTs Statement and the agreements, in combination with market trends and regulatory safeguards, prevent BST from backsliding on their terms and from engaging in exclusionary conduct that could reverse competitive opportunities.  In my professional opinion, the Statement offered by BellSouth"along with its interconnection and resale agreements, the market conditions in South Carolina, and state and local laws and regulations"ensure that BSTs local exchange markets in South Carolina are open to competitors, and will remain open.  I.THE 1996 TELECOM ACT RECOGNIZES BOTH THE POTENTIAL AND THE LIMITATIONS OF ENTRY INTO LOCAL EXCHANGE MARKETS, ADOPTING MULTILATERAL, REDUNDANT POLICIES TO MAXIMIZE THE LIKELIHOOD OF COMPETITIVE BENEFITS  A.` ` ` The Act Embraces the Feasibility, Viability and Efficiency of Local Exchange Competition But Rejects a Policy of Entry for Entrys Sake  The 1996 Telecom Act put its faith in competition as the best means to achieve efficient provision of local services. This conclusion was grounded in the belief that monopoly was no longer the leastcost structure in many local exchange markets. Multiple facilitybased providers feasibly could serve the same exchange area as a consequence of advances in local service technology. In particular, the developments in optical fiber transmission and wireless access methods greatly reduced the cost of alternative networks. Furthermore, the possibility of unbundling the modern digital network expanded the opportunities for lessthanfullservice firms to participate in these markets. The Act correctly sees competition as the source of many economic benefits including lower prices and improved service as well as innovative services and technologies introduced by the incumbent or one of its challengers. To raise the likelihood that these benefits will be realized, the Act takes steps to facilitate entry by facilitybased carriers. At the same time, the Act recognizes that in certain areas construction of duplicate networks could be economically wasteful"net of the benefits of competition. And even in those areas where facilitybased competition is viable over the long run, entrants may find it impossible to achieve complete coverage or to offer the full range of services necessary for short run viability. Accordingly, the Act requires incumbent local exchange carriers ( ILECs) to terminate traffic originating on competitors networks and to share their landline networks with competitors"either through provision of unbundled network elements ( UNEs) or resale. By sharing network facilities, the local exchange realizes the scale and scope economies of unified production while securing the benefits of competition. Despite these measures, entry at any cost is not a purpose of the Telecom Act. It discourages inefficient entry, for example, by insisting that ILECs charge costbased rates: fees for interconnection and unbundled network elements must cover costs and may include a reasonable profit, I. A. 1. a.(1)(a) i) a)ҍ  252(d)(1). and compensation for termination services must recover the additional costs. I. A. 1. a.(1)(a) i) a)ҍ  252(d)(2)(A). Entrants are also required to contribute their fair share toward support of universal service I. A. 1. a.(1)(a) i) a)ҍ  254(b)(4). and for use of public rights of way. I. A. 1. a.(1)(a) i) a)ҍ  253(c).  Implicitly and explicitly, the Act accepts that in certain markets a single facilitybased local exchange provider may be the efficient industry structure. Scale and scope economies, sunk network investment and demandside scale economies rule out the possibility that a large number of small facilitybased providers will serve this market efficiently. The tradeoff between efficient production (attained though large scale production) and competition (achieved through entry) is a common occurrence, one embraced by the DOJFTC Horizontal Merger Guidelines. I. A. 1. a.(1)(a) i) a)ҍ DOJFTC Horizontal Merger Guidelines, Washington, DC, April 2, 1992, especially pp. 4754. The Guidelines acknowledge the power of competitive entry to counteract potentially anticompetitive behavior of large incumbent firms. They also specifically take into account the possibility that production efficiencies lead to lower prices and improved products not possible with smaller firms. See Revision to the Horizontal Merger Guidelines, April 4, 1997 (replaces Sec. 4 of 1992 version). Fragmentation of the local exchange industry in South Carolina and elsewhere by subsidizing inefficient entrants could sacrifice scale economies leading to higher unit production costs and, in turn, higher prices.  As an inducement to open their markets to competition in compliance with the Acts standards, the Act offers the RBOCs the carrot of permission to enter inregion interLATA services. But when Congress devised the procedure for RBOC entry, it accepted that facilitybased competition for both business and residential customers might not and should not materialize in certain areas. Accordingly, Track B was created to grant interLATA authority in states where no legitimate facilitybased carriers had stepped forward"provided the RBOC demonstrates that its local exchange markets are open to efficient competitors.  Furthermore, some regulators and lawmakers foresaw the possibility that, absent the threat that RBOCs might enter interLATA services, interexchange carriers ( IXCs) may forebear from entering local exchange markets and defeat attempts to quickly bring competition to local exchange markets. Economic reasoning supports this possibility under fairly general conditions that likely hold in South Carolina and elsewhere. The logic follows from modeling the decisions of potential competitors as to when to enter new markets based on competitors threats to profits in their home markets. I. A. 1. a.(1)(a) i) a)ҍ An example of this approach applied to competition between telephone and cable television companies for switched broadband services is Michael Riordan, Regulation and Preemptive Technology Adoption, Rand Journal of Economics, 23:3, Autumn 1992, pp. 334349. To see how the availability of Track B alters IXC incentives to enter local exchange markets, we begin by considering how events would unfold if an IXC has already entered an RBOCs local exchange markets on a facility basis consistent with Track A. In the specific context of South Carolina, suppose that an IXC had entered BSTs local exchange markets, and answer the question: What would be the profitable response by BST? It is reasonable to expect that BST would find it more profitable to enter instate interLATA services compared with continuing to share its local markets with the IXC. #XN\  PXP#Its statutory right to jointly market local and long distance services will make it an especially potent competitor in interLATA services.#XN\  PXP# I#XN\  PXP#f permitted, #XN\  PXP#it is only a matter of when, not if, BellSouth will enter inregion interLATA markets through a separate subsidiary. Of course, the timing depends on the ease of entry. With a strong brand name and image, I. A. 1. a.(1)(a) i) a)ҍ In both 1996 and 1997, J.D. Power & Associates reported that residential subscribers rated BellSouth first among local phone companies in terms of several dimensions of customer service including corporate image. we can expect BellSouth swiftly to enter these markets through resale of long distance services the moment it receives authorization.  Backing up a step, consider the IXCs decision about whether to enter BST markets on a facilities basis. Given the prospect of BSTs rapid and devastating competitive response, any increment in overall earnings the IXC might hope to gain from building local exchange facilities would be shortlived. The IXC can forestall BellSouths incursion, however, by refraining from entering local services in the first place without a Track B alternative. When Track B is available, it is likely that an IXC will forebear throughout the waiting period established by the Act. The moment BellSouth enters long distance markets in South Carolina, however, we can expect the IXCs in the state to begin entering local exchange services.  In fact, other firms besides IXCs potentially could enter BSTs local exchange markets on a facility basis and trigger BSTs application under Track A. Furthermore, many of these"including Competitive Access Providers ( CAPs), cable companies, and electric power utilities"do not have home markets that are vulnerable to BST competition unlike instate IXCs. Nevertheless, the major IXCs are far more likely to enter residential exchange services given their formidable financial resources and powerful incentive to reduce access costs. NonIXC entry into BSTs local exchanges will set off a chain reaction in which BellSouth enters interLATA markets, in turn causing IXCs to enter local markets in competition with the other CLECs. CLECs profits will be dissipated in the process, discouraging or at least delaying their entry in the first place. B.` ` ` The Act Seeks to Open Every Possible Option for Efficient Entry into Local Service Markets, But Some Opportunities May Be Closed by Factors Outside the Incumbents Control  Keeping in mind the variety of entry paths desired by efficient competitors, and the range of unique characteristics they possess, the Act devised multilateral, redundant policies to promote local exchange competition. Generally, the Act imposes duties on ILECs to open their networks and assigns competitors rights to acquire ILEC services needed for successful entry. Besides a requirement to interconnect with CLECs, ILECs must unbundle their network services and offer them for sale along with retail services for resale. This policy creates three different but often complementary routes for CLECs to enter local exchange markets: facilitybased entry, purchase of UNEs and resale of retail services.  If and when entry occurs in any given local exchange market depends on many factors. Some of those factors are outside the control of the incumbent provider, and by creating Track B, Congress acknowledged that such factors should not determine the openness of local markets. For instance, business and residential demand and production economies together determine the number of local exchange providers that are viable in any given area. In general, market size and demand growth are well know to be positively related, both theoretically and empirically, to the rate of entry into industries.W  I. A. 1. a.(1)(a) i) a)ҍ See Paul Geroski, Richard Gilbert and Alexis Jacquemin, Barriers to Entry and Strategic Competition, Chur, Switzerland: Harwood Academic Publishers, 1990, p. 70.W Other factors affecting local exchange entry are within the ILECs control, yet not all of these are the proper target of the Acts policies. Most importantly, ILECs should not be prevented from competing on the merits in retail markets by offering lower prices and superior services. Strategic behavior by an ILEC would become a concern, however, when its control of bottleneck network services is used to discourage entry into downstream markets, especially retail local exchange and long distance services. The Act attacks this kind of strategic behavior on many fronts. First, it carves out the three entry paths"facilitybased entry, purchase of UNEs and resale"and enables potential entrants to use one or any combination of these means. In particular, sale of network elements and wholesale services nurtures fledgling firms who may aim one day to offer services over their own facilities; facilitybased entry may not become an attractive option until the CLEC has accumulated capital, technical expertise and favorable customer reputation. Clearly entry is facilitated by allowing CLEC strategies to evolve rather than forcing them to choose a single, unchanging strategy.  I. A. 1. a.(1)(a) i) a)ҍ For an analysis of the determinants of cable operators choice among modes to enter telephony see Glenn Woroch, Turning the Cables: Economic and Strategic Analysis of Cable Entry into Telecommunications, in Globalism and Localism in Telecommunications, edited by Eli Noam, Elsevier Science, 1996. Second, the Act takes deliberate steps to increase the size and diversity of the pool of potential entrants. It invites cable TV companies by eliminating the cabletelco crossownership ban.  I. A. 1. a.(1)(a) i) a)ҍ  651653. Restrictions on electric utility provision of telecommunication services in the Public Utility Holding Company Act of 1935 were also relaxed.  I. A. 1. a.(1)(a) i) a)ҍ 103. A large, diverse group of potential entrants, with their special capabilities and unique business strategies, should raise the likelihood that efficient entry will occur.  I. A. 1. a.(1)(a) i) a)ҍ It is possible that enlarging the pool of entrants could discourage entry as each potential entrant foresees subsequent entry whittling away its profits. See Roger Sherman and T. Willett, Potential Entrants Discourage Entry, Journal of Political Economy, v. 75, 1967, pp. 400403. In these models, potential entrants make their entry decisions ignorant of other firms decisions, significantly raising the likelihood of duplicate investment and postentry losses. Third, all local exchange services and all geographic areas should be opened for competition. Entry is an inherently risky prospect, and the possibility of entering multiple services and multiple areas allows new entrants to diversify their business risks and thereby to lower financing costs. Furthermore, challenged on every front, incumbent providers will be unable and unwilling to attempt predation in any single service, even aside from regulatory safeguards. To do so would require financing low prices in one service with high prices in another, with the latter attracting entrants who will undercut the incumbents rates and steal its sales.  By adopting this multilateral, redundant approach to facilitating entry into local exchange markets, Congress has acknowledged its inability to select the efficient competitors, or to choose the best business strategy or communications technology, now or in the future. However, these entry options invariably require the assistance of the incumbent carrier, and the Act dealt squarely with the crucial question: To what degree should ILECs facilitate competitors using each of the entry options?  In my evaluation, I judge #XN\  PXP#BSTs Statement and its Agreements#XN\  P XP# in terms of their ability to promote three policies reflected in the Act: (1) create multiple routes for efficient entrants, with the three identified by the Act and their various combinations being the minimum; (2) expand the size and diversity of the pool of potential entrants; and (3) open all local services and geographic areas to competition. Table 1 lists these three policies, the enabling provisions of the Act, and the specific provisions of BSTs Statement responsive to each. The intent of Congress was to ensure that, after initial entry, efficient competitors have the opportunity to achieve financial viability and sustained growth consistent with market conditions, and in the more distant future, for new efficient firms to enter local exchange markets. #XN\  P XP#BSTs Statement achieves these goals by offering competitors the opportunity to make tactical adjustments in response to their own growth and to changing market conditions, such as by changing the size and mix of their purchases. More strategic revisions to their business plans are also accommodated, including expansion into new products or geographic areas and the deployment of new technologies. #XN\  P XP#  II.BSTs STATEMENT AND AGREEMENTS, IN COMBINATION WITH MARKET AND REGULATORY CONDITIONS, OPEN SOUTH CAROLINA LOCAL EXCHANGE MARKETS TO COMPETITION  A.` ` ` BSTs Statement Establishes Conditions That Open Local Exchange Markets to Competition Meeting and Exceeding the Goals of the Act My evaluation of the Statement will assess whether it opens local exchange markets to the extent discussed above and prevents BST from erecting strategic entry barriers before or after it has entered interLATA services. This exercise takes place in two steps: first identifying novel provisions in the Statement, and then examining how it addresses the principal requirements of the Act.   The Bona Fide Request Process.  Many times throughout the Statement, the CLEC is offered the opportunity to use the bona fide request process. This procedure, developed jointly by BST and AT&T, allows a CLEC to make requests that are outside the scope of the Statement or to modify its current Agreement. I. A. 1. a.(1)(a) i) a)ҍ See Attachment B of the Statement. After the CLECs request, BST must respond according to a rapid timetable (e.g., BST must respond in 30 days with a preliminary analysis and rate quote) and obey certain procedural rules.  This process reduces entry barriers facing CLECs in a number of ways. First, it expands options available to a CLEC seeking to introduce an innovative service that requires new and unusual unbundled network elements from BST. It would also allow an established CLEC to adjust its production levels or expand its product line as market information arrives. More generally, the process gives the CLEC flexibility to respond to market uncertainties that are a major source of entry costs, and to create profit opportunities it did not contemplate originally.   Adoption of Industry Standards.  On many occasions, the Statement requires BST to adhere to industry technical standards for network interfaces, I. A. 1. a.(1)(a) i) a)ҍ See Sections I.H and XV.B of the Statement. standard accounting and reporting formats I. A. 1. a.(1)(a) i) a)ҍ See Sections I.B.6, I.F and XIV.P of the Statement. and service descriptions. I. A. 1. a.(1)(a) i) a)ҍ See Attachment C of the Statement. In most cases, these standards were developed by industry committees and consortia including Bell Communications Research (BellCore), the Alliance for Telecommunications Industry Solutions (ATIS), the Ordering and Billing Forum (OBF) and the American National Standard Institute (ANSI). BST is a member of these organizations which represent a broad cross section of the telecommunications sector including equipment manufacturers and vendors and large users as well as carriers and resellers. Membership is open to all firms with an interest in the standards. Each member has the opportunity to register its preferences either through formal polling with each company having a vote or through discussion that builds to a consensus. Besides publicizing the final standard, the proceedings are usually carefully documented and made public. Lastly, BST publishes all interface specifications so that interconnectors are able to achieve technical compatibility with its network. For all these reasons, it is highly unlikely that the resulting standards could be chosen to favor ILECs affiliates to the detriment of local exchange competitors.  By adhering to industry standards, facilitybased CLECs are spared the expense and delay of purchasing and configuring equipment to be compatible with proprietary specifications. Standardization of operations further reduces CLECs transaction costs as they attempt to interconnect with BST in multiple locations throughout its nine states as well as with other ILECs who adopt these same standards. In general, standardization of interfaces and procedures have the effect of leveling the playing field for various CLECs as well as the ILECs affiliates.   Requirements of Coordination and Cooperation.  On many occasions, the Statement requires BST and the CLECs to work together to address problems that interfere with smooth operation of their relationship. For instance, the parties agree to exchange traffic and engineering information and generally to cooperate so as to aid their respective network planning efforts. I. A. 1. a.(1)(a) i) a)ҍ See Sections I.G, III.B and XV.E of the Statement. BST is required, in addition, to notify the CLEC of changes in technical specifications, facilities and equipment upgrades affecting interconnection. I. A. 1. a.(1)(a) i) a)ҍ See Sections XV.A of the Statement.  Terms for mutual provision of access to interexchange carriers also reflects the Statements cooperative approach to interconnection. Under meet point trunking, both BST and the CLEC supply access to an IXC. Each collects access fees directly from the long distance company, and they settle up afterwards using a standardized meetpoint billing arrangement. I. A. 1. a.(1)(a) i) a)ҍ The Statement stipulates use of ATISs Multiple Exchange Carrier Access Billing System. A CLEC is able to achieve higher utilization of its network resources"especially tandem and other switching resources"lowering the capital outlays necessary for entry. Perhaps more importantly, CLECs deal directly with their IXC customers rather than through BST, giving them the opportunity to establish a reputation necessary for entry into other local exchange markets.   Variety of Interconnection Options.  In addition to offering the statutory minimum of interconnection through physical or virtual collocation and at technically feasible network points, the Statement offers CLECs several other interconnection options. For example, BST agrees to provide intermediary tandem switching and transport services I. A. 1. a.(1)(a) i) a)ҍ See Section I.A.5 of the Statement. which facilitates CLECs working together or with IXCs to offer competitive services. CLECs can request interconnection at additional network points by initiating the bona fide request process.   Supplementary Unbundling of Network Elements.  The Statement offers several network elements besides those identified in the Act. These include several subloop elements such as channelization (e.g., multiplexing) and cross connection. Cross connection can be especially valuable to a CLEC who needs to link up with another CLEC to get a unique or less expensive network services meeting at a BellSouth central office. Centralized message distribution system is an additional unbundled network element that may assist entrants by permitting easier intercarrier billing. The Statement also offers dark fiber which is optical fiber strands without the lasers and detectors necessary for transmission. This unbundling of the electronics has been sought by some CLECs who claim that it aids their entry. Finally, as usual, other elements can be obtained through the bona fide request process.  Pricing of unbundled network elements satisfies the cost proxies proposed in the FCC Order. Charges for local loops at $18.00 per loop is at the ceiling of the FCC default range. The per minute charge of 0.3 for local switching is the midpoint of the FCC default range of 0.2  to 0.4 per minute. The rate of 0.15/min for tandem switching is at the FCC default ceiling for this unbundled network element. The rates for these and other elements are subject to a true up by the SCPSC intended to adjust rates to economic costs. CLECs would continue to pay the negotiated rate if the true up resulted in a higher rate. If rates fell, they would receive a refund equal to the difference going back to the first purchase. The SCPSC decision will be based on the results of BSTs verifiable cost studies which can be challenged by interested parties. BellSouth has already submitted its methodology as well as estimates of total element long run incremental costs ( TELRIC) for local interconnection and UNEs. I. A. 1. a.(1)(a) i) a)ҍ See BSTs cost model submission in SCPSC Docket 96358C, 1997.   Resale Opportunities.  BST offers its retail services to competitors at wholesale rates as required by the Act. These services may be bundled and resold with only those restrictions sanctioned by the Act. In particular, BST requires the reseller to offer the same functions, features and service levels as stipulated in its South Carolina retail tariffs. I. A. 1. a.(1)(a) i) a)ҍ See Section XIV.C of the Statement.  Resellers may purchase business and residential retail services at a discount of 14.8% off retail rates. This discount was selected by the SCPSC based on a calculation made in testimony submitted in the AT&T arbitration proceeding. I. A. 1. a.(1)(a) i) a)ҍ SCPSC Order on Arbitration (between AT&TSouthern States and BST), Order No. 97189, March 10, 1997. This calculation computed both avoided and avoidable cost of retailing these services. The SCPSC chose the larger avoidable cost estimate, and after adding some additional avoidable costs, arrived at 14.8% for both residential and business services. While this figure falls below the default range of 1725% proposed in the FCC Interconnection Order, it adheres to the FCCs preferred and more demanding methodology of avoidable, not avoided, cost. BST submitted estimates of both avoided and avoidable cost of retailing. The SCPSC chose the avoidable cost figure of 13.2% and arrived at 14.8% after adding expense items it determined to be avoidable. I. A. 1. a.(1)(a) i) a)ҍ See Guy Cochran affidavit at  31 and Exhibit A.   Favorable Reciprocal Compensation.  The Statement adopts the Acts requirement for mutual and reciprocal compensation between ILECs and CLECs for transmission and termination of traffic. Furthermore, the Statement accepts the symmetry of charges recommended by the FCC in its Interconnection Order.c I. A. 1. a.(1)(a) i) a)ҍ Implementation of the Local Competition Provisions of the Telecom Act of 1996, CC Docket 9698, released Aug. 8, 1996 (the FCC Interconnection Order) at  10851093.c B.` ` ` BSTs Interconnection and Resale Agreements Open South Carolina Local Exchange Markets to Competition BST has successfully negotiated an extraordinary number of agreements with CLECs for interconnection and resale. The first such Agreement was signed on February 14, 1996, just days after the Telecom Act was signed by President Clinton. The United States Telephone Association reports that, as of July 1, 1997, BST had signed 556 statelevel Agreements out of a total of 1,231 nationwide which alone represented over 45% of the RBOC total.#XN\  P XP#$ I. A. 1. a.(1)(a) i) a)ҍ See Competition Report: Interconnection Agreements by State, United States Telephone Association, July 1, 1997.$ #XN\  P XP#  #XN\  PXP#In South Carolina, BST has signed agreements with 83 CLECs for interconnection or resale to date. Nearly all of the BST Agreements were voluntarily negotiated with very few mediated or arbitrated by state commissions. Only BSTs agreement with AT&T was arbitrated in South Carolina by the SCPSC.#XN\  PXP# At this time, the SCPSC has approved agreements between BST and 67 CLECs. Elsewhere in BST territory, state commissions have approved approximately 38 agreements in Alabama, 57 in Florida, 55 in Georgia, 25 in Kentucky, 36 in Louisiana, 18 in Mississippi, 30 in North Carolina and 21 in Tennessee.  As with the Statement, BSTs various Agreements address each of the checklist items. But as before, my purpose is not to demonstrate that the agreements, either individually or collectively, satisfy all of these requirements. Instead I will identify unique features in the Agreements that promote competition in South Carolina local exchange markets. In particular, because they are the product of bilateral negotiations, the Agreements reveal the extent to which BST willingly cooperates with individual CLECs now and in the future. I will argue that this cooperation is inherent in well functioning commercial relationships.  One distinguishing characteristic of the companyspecific agreements is the fact that they cover all, or nearly all, of BellSouths territory. At a minimum, the multistate approach reduces negotiating costs and entry delays that can be murder on cashstrapped startups. Perhaps a more important cost saving of a regional agreement is the fact that it allows entrants to conduct uniform marketing and network planning. This is especially helpful to CLECs who wish to offer intercity services within BSTs region in their product line because the same conditions will prevail at both ends of a call. By signing regionwide agreements, BellSouth demonstrates that it is not attempting to contain the scope of competition to specific geographic areas. In fact, no fewer than six CAPs have five or more fiber networks operating in BST territory: ACSI has 14, ICI has 8, ICG and Time Warner have 7, MCImetro has 6 and Teleport Communications has 5. Most of these companies have interconnected their local networks. Recently, US LEC, a small but fast growing regional CLEC, announced its plans to interconnect its local exchange networks in Georgia, North Carolina and Tennessee. I. A. 1. a.(1)(a) i) a)ҍ Communications Daily, Sept. 11, 1997.  While the Agreements (and Statements) duration"typically two years"is not remarkable, it deserves mention because it bears upon CLEC entry conditions. A contract that ran very long, say five years or more, could lock in a CLEC by making it difficult for it later to switch to another supplier of exchange services (e.g., a current IXC or cable company). Very short contracts (e.g., a year or less)#XN\  PXP#, on the other hand,#XN\  PXP# would deny entrants the assurances regarding interconnection terms and conditions needed to undertake financial and operations planning.  Finally, many BST Agreements allow CLECs to renew their agreement for additional years under the prevailing terms and conditions. This clause provides successful entrants with protection against renegotiation that would result in new unfavorable terms. Furthermore, there are no contract termination penalties assessed against the CLEC, lowering the cost of exit should the local exchange business fail to meet their original expectations.  Aside from satisfying the specific requirements of the Act, the agreements reveal attempts by BST to support robust, productive transactions typical of commercial relationships found in almost any industry. As with any contract, the Agreements attempt to anticipate possible contingencies that threaten benefits of the relationship and stipulate a mutuallyagreeable response. In case of future disagreements, Agreements provide for private arbitration, I. A. 1. a.(1)(a) i) a)ҍ See Interconnection Agreement Between ACSI and BellSouth, Section XXV. private mediation, or both, supplementing the Acts arbitration procedures. The Agreements, as the Statement, provide for coordination and exchange of information that should avert many potential conflicts.  The Agreements also protect returns on the parties private assets. For instance, some Agreements ban disparaging remarks by BSTs repair workers to prevent devaluation of a CLECs brand name capital. Similarly, other provisions ensure that BST cannot misuse proprietary knowledge of CLECs customer records.: I. A. 1. a.(1)(a) i) a)ҍSee, e.g., Intermedia Communications, Inc. Interconnection Agreement, Article XXII (Treatment of Proprietary and Confidential Information). : The Agreements (as well as the Statement) spell out rights of the parties to intellectual property connected with their transactions.  I. A. 1. a.(1)(a) i) a)ҍ Section XX of the Statement; ACSI Interconnection Agreement, Article XXIV (Nondisclosure).  Most of the Agreements adopt a de minimus rule which limits disadvantages that an entrant could experience because it originates less traffic, on a per capita basis, than BST. Under this rule, no money changes hands for six months, so it is essentially a bill and keep system to begin with. Gradually over time, net payments between the carriers are allowed to increase. Always, however, the payments are limited by a ceiling equal to 105% of the smaller of the total charges incurred by the two carriers"where the charges are calculated using the total number of minutes of traffic each terminates for the other, multiplied by the per minute rate. C.` ` ` State and Local Legal and Regulatory Barriers to Local Exchange Entry Have Been Removed  South Carolina state laws governing telecommunications effectively eliminate barriers to entry into local exchange markets. The statutes empower the SCPSC to certify competitive carriers provided they meet minimum conditions of all exchange service providers and file informational tariffs.  I. A. 1. a.(1)(a) i) a)ҍ SC Code,  589280 (B). All certified local exchange carriers must interconnect, arrange for phone number portability and unbundle their networks.! I. A. 1. a.(1)(a) i) a)ҍ SC Code,  589280 (C). At this time the SCPSC has certified at least 16 competitive local exchange carriers." I. A. 1. a.(1)(a) i) a)ҍ Up to this time, the SCPSC has authorized 12 parties to BST Agreements to provide local services: ACSI, AT&T, DeltaCom, Hart Communications, ICI, KMC Telecom, LCI, MCImetro, OmniCall, Preferred Carrier Services, TelLink and TTE. Four other carriers who have not signed agreements with BST were also certified. See Gary Wright Affidavit, Exhibit 1, Attachment WPEA. Consistent with the 1996 Telecom Act, the SCPSC has taken a procompetitive approach to local exchange markets, for instance by streamlining certification and tariffing procedures.4# I. A. 1. a.(1)(a) i) a)ҍ SC Code,  589280 (G). It is important to note that SCPSC orders have the full force and effect of law. SC Code  589390.4 There has been scant evidence that municipalities in South Carolina have pursued policies that hinder competition on the local level. To my knowledge, no claims have been filed regarding local taxation of CLECs, restrictions on access to or excessive charges for local public rights of way, or imposition of municipal minimum buildout requirements. I have examined BSTs standard franchise contract used to acquire access to necessary local public rights of way. This contract is nonexclusive and provides for only reasonable restrictions on use of this property and charges for its use.  South Carolinas statutes and its Commissions policy are designed to counteract possible exclusionary behavior on the part of BellSouth. First of all, BST has opted for incentive regulation under the Commissions policy. Basic and interconnection rates were frozen for five years and three years, respectively, after which they are allowed to rise by the inflation rate less a 2.1% productivity offset.!$ I. A. 1. a.(1)(a) i) a)ҍ SCPSC Order No.9619, Order Granting Alternative Regulation and Approving Plan as Modified, Jan. 30, 1996.! Specific measures are included which safeguard consumers of noncompetitive local services, including other telecommunications companies,% I. A. 1. a.(1)(a) i) a)ҍ SC Code  589575 (B)(4). and which prohibit cross subsidization of competitive services.& I. A. 1. a.(1)(a) i) a)ҍ SC Code  589575 (B)(5). The Commission has also adopted the FCC accounting rules which are specifically designed to prevent cross subsidization."' I. A. 1. a.(1)(a) i) a)ҍ SCPSC Order 871396, Adoption of Revised Uniform System of Accounts for Telephone Companies, Dec. 22, 1987." Finally, policies creating these safeguards have been adopted throughout BSTs nine states,u( I. A. 1. a.(1)(a) i) a)ҍ See, generally, NARUC Report on the Status of Competition in Intrastate Telecommunications, September 1, 1994 and 1995/96: Local Telecom Competition Report, Connecticut Research Reports.u making it more likely that the company will adopt a uniform procompetitive response throughout the region.  III.BSTs STATEMENT AND AGREEMENTS, IN COMBINATION WITH MARKET TRENDS AND REGULATORY SAFEGUARDS, PREVENT BST FROM REVERSING COMPETITIVE OPPORTUNITIES  As stated above, the mere fact that a competitor has accepted BSTs invitation to enter its local exchange markets is not alone sufficient to ensure those markets will remain open to competition in the future. In this section I will demonstrate that the provisions contained in the Statement and Agreements prevent BST from closing its South Carolina local exchange markets.A perennial fear of telecommunications regulators is the possibility that a local exchange carrier could use its ownership of exchange facilities to exclude competitors. This fear is addressed repeatedly throughout the new Telecom Act, and not just with regard to RBOC entry into interLATA services. It is important to remember, moreover, that a dominant market share does not imply abuse of market power. What matters is any residual monopoly power, given competitive forces in the market and after enforcement of the Statement and the Agreements and statutory and regulatory safeguards. There are several potential anticompetitive practices which an integrated ILEC such as BellSouth might theoretically undertake. For any anticompetitive practice to be successful, (1) the ILEC must necessarily possess nontrivial market power in the relevant exchange markets, and (2) existing regulatory or legal safeguards must be ineffective in containing this market power. In each case, the Statement and Agreements work to neutralize BSTs ability and incentive to carry out such practices. Table 2 collects together specific terms found in the Statement that eliminate the possibility of any of these practices along with the relevant provisions in the Act.  Nonprice Foreclosure.  An extreme expression of a networks market power is the simple refusal to deal with competitors. By foreclosing a rival, the incumbent trades off the sales of intermediate services against lost revenue as final consumers migrate to the rival. The Act, however, mandates that BST and other ILECs interconnect their networks with rivals and provide some form of collocation. They must also provide nondiscriminatory access to exchange infrastructure such as conduits, poles, and rights of way. The FCC has, in addition, begun to take steps to ensure public infrastructure is open to all carriers.L) I. A. 1. a.(1)(a) i) a)ҍ FCC Local and State Advisory Committee, Policy Statement on State and Local Rights of Way and Telecommunications Services Competition, June 27, 1997.L More fundamentally, the presence of actual and potential competitors who could supply substitute services on short notice contradicts claims of market power. Highcapacity local access and transport services are available from alternative suppliers in major cities in BSTs region including South Carolina as explained in the Gary Wright affidavit. Switching services can be self supplied using a PBX, or alternatively, by turning to an IXC or a Commercial Radio Mobile Service ( CRMS) who has substantial local switching capacity. Vertical services such as voice mail, operator services and yellow pages directories are all competitively supplied. In comparison, competitive supply of residential access and switching services is in an embryonic stage. Each day, however, brings additional competitive exchange services to residential customers with the deployment of cable telephony and wireless access alternatives. The new Telecom Act does not tolerate refusals to interconnect, and is vigilant against more subtle strategies such as inferior interconnection or discriminatory pricing of network elements. Not only do BSTs interconnection agreements conform to these provisions, they go to great lengths to coordinate the engineering decisions between BST and the CLECs.  Unequal Access . A less drastic tactic to discourage competition is the provision of inferior network services to lessthanfullservice entrants. Such services may have fewer features, be less reliable, or be provisioned with a longer delay. The Statement and Agreements take several steps to ensure equal access by CLECs. First, the Agreements repeatedly demand that CLECs receive service of equal qualityp* I. A. 1. a.(1)(a) i) a)ҍ See Statement, Sections I.I, II.F, IV.D, V.C, VI.C and X.D for interconnection, network elements, local loops, local transport, local switching, and signaling/signaling databases, respectively.p and with equal ordering and provisioning+ I. A. 1. a.(1)(a) i) a)ҍ See Statement, Sections I.J, II.I, IV.E, V.D, VI.D, VII.B.5, VII.C.7 and X.C for interconnection, network elements, local loops, local transport, local switching, directory assistance, operator call completion and signaling/signaling databases, respectively. when compared to BSTs affiliate. Second, by adopting industry standards for technical interfaces, uniformity is assured or at least departures from the standards are easily detected. Third, the agreements establish arrangements to monitor quality of the interconnection and network elements that are supplied. Fourth, BST also agrees to notify CLECs well in advance of any change in the interconnection configuration or the equipment it uses.  Price Squeeze. An incumbent might, in theory, discourage or forestall competitors by raising the price of some essential input (e.g., local loops or local switching) sold to its downstream competitors. In that case a CLEC will operate at a cost disadvantage relative to the ILECs downstream affiliate. First of all, this strategy is ineffective when the CLECs have alternative sources should they suspect they are the victim of a squeeze. This is currently true for highcapacity access purchased by large business customers and will increasingly be the case for lowervolume customers. When no close substitute exists for ILECs services, detailed regulations are nevertheless in place to prevent the incumbent from disadvantaging rivals. Most significantly, the new Act imposes various forms of imputation on an ILECs rates, in which case an ILEC charges its competitors no more than it charges itself implicitly. Under the Act, imputation is applied to transport and termination services and to wholesale purchases for resale. BSTs Statement and Agreements conform to the Acts application of imputation rules. In particular, provisions for resale adhere to the avoided cost rule, and parties agree to accept any interpretation of avoided costs decided by regulators or the courts. Furthermore, pricing of interconnection is required to be nondiscriminatory between internal operations and competitive carriers. Finally, attempts at a price squeeze are easily detected especially given CLECs rights to undertake an audit of BSTs operation under the Statement and the Agreements.  Tying and Bundling.  Another way an ILEC could theoretically disadvantage its rivals is by conditioning the availability of a service over which it has market power (e.g., residential exchange access) on the purchase of a competitive service (e.g., voice mail). The BST Statement and Agreements take pains to ensure that network services are unbundled in conformance with the Act, in most cases incorporating the exact wording of the law. In addition, as mentioned above, the Statement and Agreements unbundle network services beyond what is required by the Act. A CLEC can always request additional elements through the Bona Fide Request Process.  Cost Shifting. When firms participate in both regulated and unregulated markets, there may be an opportunity to report costs that are caused by unregulated activities as if they were incurred in supply of regulated services. Under costbased regulation, the dominant carrier is able to subsidize activities in unregulated markets using revenues from protected local exchange services. To be effective, this practice requires, among other conditions, that the higher reported costs result in higher prices for the regulated services. In certain exchange markets such as highcapacity business access, attempts to raise rates will be met with losses in market share to competing carriers. The Act limits the ability to cross subsidize by banning rate of return regulation of charges for network elements and for transport and termination. Additionally, the Act prescribes accounting procedures to prevent misallocation of costs, and separates local and long distance divisions to minimize the possibility of cost shifting. Perhaps more important of all, BST has adopted price cap regulation of basic local services and interconnection services in South Carolina as well as for interstate services at the federal level. This scheme effectively eliminates the companys ability and desire to engage in cost shifting. BSTs Statement and Agreements often set rates based on its intrastate or interstate tariffs. To the extent that SCPSC and FCC proceedings have purged unattributable costs from these rates, and incentive regulation reduces the desire to cost shift, BSTs competitors will not subsidize its competitive ventures. In addition, the Agreements give CLECs the right to conduct an audit of BST accounts which could expose cost shifting. Several agreements also adopt a transparent accounting system. Misappropriation of Proprietary Information. The close working relationship between incumbent and entrant local exchange carriers creates the potential for misuse of critical business information, especially information about current or prospective customers. The BST Statement and Agreements specifically address the proper use of confidential information by the parties including directory information and service change requests. They also ensure that BST does not withhold critical engineering and customer information from its competitors. Recently, the FCC has opened a docket examining appropriate policy towards customer network proprietary information.9, I. A. 1. a.(1)(a) i) a)ҍ Notice of Proposed Rulemaking, Carrier Use of Customer Proprietary Network Information, FCC Docket 96115, released Feb. 20, 1997.9 More generally, the Statement and Agreements impose little in the way of restrictions on how CLECs conduct their business. Resale of retail services are unencumbered by limitations, aside from the terms of the offering specified in BSTs tariff. No requirement of exclusivity is made or obstruction in CLECs dealings with other carriers or equipment suppliers. They explicitly permit CLECs to purchase network elements from third parties in addition to BellSouth, and so no implication of an exclusive relationship is warranted. Generally, a CLEC has access to the full array of entry options even while it plans to use only one, at least initially. This freedom gives it the option of adjusting its strategic approach without the need to renegotiate another agreement.  IV.THE PATTERN OF LOCAL EXCHANGE ENTRY THROUGHOUT BSTs SERVING AREA IS CONSISTENT WITH SOUTH CAROLINAS LOCAL EXCHANGE MARKETS BEING OPEN TO COMPETITION  A.` ` ` Entry Has Been Early, Extensive and Persistent in BSTs Serving Area   Many different companies are providing local exchange services of some kind in BSTs serving area or are in the process of building their network or starting a business. The rich variety that characterizes this collection of competitors attests to the wide range of entry opportunities they face in BSTs local exchange markets. Entrants into the BST region take on all characteristics. Several are startup companies responding to the opportunities created by the Telecom Act and by new technologies (e.g., Hart Communications). Many others are established firms in neighboring communications industries who have chosen to diversify into local exchange services. These include inregion and outofregion LECs (e.g., ALLTEL- I. A. 1. a.(1)(a) i) a)ҍ ALLTEL to Offer Fiber to Charlotte, Fiber Optic News, 17:37, Sept. 22, 1997. and US Wests MediaOne, respectively), long distance retailers and wholesalers (e.g., MCI and Intermedia Communications, respectively), competitive access providers (e.g., Brooks Fiber and American Communications Services, Inc.), cable operators (e.g., Time Warner and Hyperion), cellular/wireless operators (e.g., Bell Atlantic/NYNEX Mobile, GTE Mobilnet), pay phone operators (e.g., Payphone Consultants) and paging companies (e.g., American MetroComm). Some plan to offer services as pure resellers (e.g., Georgia Comm South), others are entirely facilitybased (e.g., Time Warner Communications in North Carolina), and some intend to employ a mixture of facilities, UNEs and resale (e.g., AT&T). The CLECs vary in terms of the territory they serve or intend to serve. Some have targeted specific metropolitan areas (e.g., US Wests MediaOne in Atlanta, GA) or the southeastern region (e.g., Intermedia Communications, Inc. ( ICI)) In addition to purchasing unbundled network elements and reselling BST retail services, the CLECs are deploying a wide variety of telecommunications technologies. They include the standard landline networks made up of copper and optical fiber cable as well as new technologies putting twoway voice over existing coaxial cable networks (e.g., Time Warner AxS). Traditional wireless technologies such as cellular are also being deployed (e.g.,360 Comm) as well as new digital personal communications networks (e.g.,Sprint PCS) and wireless fiber (e.g., WinStar Communications). Facilitybased Competitive Access Providers long ago entered the BST region to provide access services to business customers. Table 3 documents entry of wireline CAPs by each of the nine BST states, excluding wireless competitive access providers. Among the access services CAPs provide are highcapacity dedicated and switched access, private line, ISDN, PBX trunks and internet access. In terms of exchange services, business customers have available Centrex, ISDN and direct inward dialing. To my knowledge, the first competitive facilitybased entry into BST territory occurred in 1988 when Intermedia Communications, Inc. (ICI) built its first fiber ring in Orlando, FL. Since then, at a minimum, 22 CAPs have built a total of 68 urban networks in 33 cities in BSTs territory. (See Table 3.) Much of this entry occurred before passage of the Telecom Act and so was motivated by market and regulatory conditions that prevailed at the time. Over time the pace of CAP entry has accelerated in the southeast region. The recent surge is due in part to the opportunities created by the Telecom Act but also to efforts by CAPs to serve small and medium business customers and to venture into smaller cities. This facilitybased entry has been persistent over time. There has been no reported case of exit in BST territory that resulted in scrapping the network. Several networks have been built and then sold to subsequent entrants who went on to expand their coverage and capabilities. This exit rate is exceptionally low for facilitybased entrants when compared, for instance, against the high exit rate among cable television entrants. Overbuilds in the cable industry are rare but when they occur in an overwhelming majority of the cases they result in bankruptcy or merger with the incumbent franchise. . I. A. 1. a.(1)(a) i) a)ҍ In 1989, a mere 55 communities out of the roughly 11,000 franchise territories in the U.S. were identified in the Television and Cable Factbook (Vol. 58, Washington, DC: Warren Publishing, 1990) as having overlapping and competing cable firms. See Paul Kagan & Associates, Cable Television Franchising, Roundup Edition, Oct. 31, 1989. ֌B.` ` ` Competition in South Carolinas Local Exchange Markets Has Been More Limited Entry into South Carolina local markets has been neither early nor extensive when compared to some of the other states in BSTs territory or other regions of the country. In particular, it appears that facilitybased entry has occurred in South Carolina"but only in larger cities and only for business services, especially exchange access. The first instance of facilitybased entry in South Carolina known to me occurred in 1994 when Piedmont Teleport was constructing a fiber ring in Greenville. In October of that same year, Piedmont was purchased by American Communication Services, Inc. (ACSI). ACSI began operating in Greenville in May of 1995. Notice the late date of first entry in South Carolina compared with other BST states (especially Florida, Georgia and Kentucky) in Table 3. Subsequently ACSI entered the remaining three of South Carolinas largest cities: Columbia (September 1995), Charleston (July 1996) and Spartanburg (June 1996). In each of these four cities served by BST, the company deployed an urban fiber ring to deliver highcapacity access and data transmission services to business customers. It is instructive that the experience with facilitybased entry has been quite different in cities which lie on South Carolinas northern and southern borders. Each of three border towns"Augusta and Savannah, GA and Charlotte, NC"has experienced entry by multiple facilitybased providers. Augusta, Georgia has two operating fiber networks providing various local and interexchange services"Jones Lightwave and Interstate Fibernet"along with AT&T which has begun to resell residential service./ I. A. 1. a.(1)(a) i) a)ҍ Communications Daily, June 25, 1997. Savannah, Georgia also has two fiber networks: ACSI and Jones Lightwave. Charlotte, North Carolinas first CAP, Privacom Ventures, began operating in June of 1991 and was acquired by IntelCom Group two years later, followed by Time Warner AxS in 1994 and US LEC in 1996. There are currently two switches installed in Charlotte. Each of the three border towns is larger than any of South Carolinas largest four cities, and in the case of Charlotte, larger than all four combined.&0 I. A. 1. a.(1)(a) i) a)ҍ The 1990 Census population figures are 234,358 for Augusta, GA, 137,560 for Savannah, GA and 395,934 for Charlotte, NC.& Clearly, metropolitan size and population density is crucial to attracting facilitybased entry, and not the overall regional economy since these cities are within 10 miles of the state line. Furthermore, since BST serves all three cities and provisions of its Agreements with these particular CLECs are the same as for South Carolina, differences in competitive experience cannot be attributed to unequal treatment by the incumbent local company. Nonfacilitybased entry has occurred throughout BSTs region, but to a limited extent in its South Carolina local exchange markets. As the SCPSC documents in its approval of BSTs Statement, there has been sale of local loops, unbundled network elements, termination of CLEC traffic and extensive resale of BSTs retail services throughout its region..1 I. A. 1. a.(1)(a) i) a)ҍ As of June 1, 1997, BST provisioned 2,654 unbundled loops and 716 dedicated trunks in its territory but none of either had been requested in South Carolina; as of May 31, 1997, BST had provided 56 physical and 133 virtual collocation arrangements, whereas no physical collocation had been ordered in South Carolina though five virtual collocation arrangements have been provided; as of May 15, 1997, CLECs had purchased 88,000 resold services throughout BST territory with 596 in South Carolina; as of June 23, 1997, BST activated 496 NPA/NXX codes for CLEC in its territory and 25 in South Carolina. See SCPSC Order No. 97640, op. cit.. C.` ` ` Economic and Demographic Conditions in South Carolina Do Not Support Early, Extensive Entry into its Local Exchange Markets The incidence of local exchange entry depends on many factors. As discussed above, they can be grouped in categories: market conditions, legal and regulatory rules, and behavior of the incumbent provider. My earlier discussion establishes that the latter two are not determinative of current and future competition in South Carolina: BST has taken steps open its local markets to competition and statutory and regulatory barriers to entry have been removed. Instead, we find past and current conditions of demand and supply in South Carolina local exchange markets simply are not conducive to facilitybased entry. On the demand side, entrants must anticipate healthy profit margins on the customers and the lines they attract away from the incumbent. Rapid growth in the number of lines and line usage makes entry even more attractive since, upon entering, traffic will be shared among more carriers. South Carolina demographics do not indicate either the level or growth of telecommunications demand in either the business or residential segment is attractive. Importantly, current demographic conditions in South Carolina are not likely to support multiple, facilitybased carriers in many areas. South Carolinas population is small and dispersed. The 1994 state population was 3,664,000 and had grown by 5.1% since 1990, slightly above countrys growth rate for this period of 4.7%.+2 I. A. 1. a.(1)(a) i) a)ҍ Population figures taken from the Statistical Abstract of the U.S., 1995, Washington, DC: Government Printing Office. + The 1990 Census classified a mere 54.6% of population as urban compared with 75.2% nationwide. No city in South Carolina had a population of 100,000"and so the state was not represented among the largest 200 cities in the U.S. South Carolinas four largest cities are tiny relative to most any other state: Columbia (pop. 98,052), Charleston (pop. 80,414), Greenville (pop. 58,282) and Spartanburg (pop. 43,467). Residential telephone business in South Carolina does not represent a particularly lucrative opportunity. First, the telephone penetration rate in the state has been low historically: in 1996 it was 91.3% compared with the national average of 93.9%.c3 I. A. 1. a.(1)(a) i) a)ҍ Trends in Telephone Service, op. cit., Table 2. Back in 1984, with a penetration rate of 83.7%, South Carolina was lower than all states except New Mexico and Mississippi.c Usage tends to be higher than average: South Carolina had 15,367 local dialequipment minutes per switched access line in 1996 compared with 14,470 for all U.S. local carriers.4 I. A. 1. a.(1)(a) i) a)ҍ Data for 1995 from Monitoring Report, FCC, July 1997. The greater line usage could be detrimental for competitive exchange carriers because it will raise costs but, under standard flat rate pricing, will result in no additional revenue. In another dimension, South Carolina lagged significantly in broad measures of economic activity. In 1994, the state had a per capita state gross product of $20,959, far below the U.S. average of $25,004 and placing it 41st out of the 50 states and District of Columbia. Between 1990 and 1994, South Carolinas gross state product grew by 10%, slightly above the national average of 9% over this period and giving it a rank of 29.+5 I. A. 1. a.(1)(a) i) a)ҍ U.S. Department of Commerce, Bureau of Economic Analysis, Gross State Product by Industry, 19771994, June 1997.+ The customers who have been the primary engines of competitive entry into urban markets elsewhere in the country are missing in South Carolina. Of 1,508,537 switched access lines in South Carolina, 28% are purchased by business customers compared to an average of 32% nationally.<6 I. A. 1. a.(1)(a) i) a)ҍ FCCs Monitoring Report, op. cit. and Statistics of Communications Common Carriers, Preliminary 1996 Edition, Table 2.5.< More importantly, the composition of South Carolina business lacks characteristics that have supported facilitybased entry in cities across the country. Elsewhere, it has been large business users with huge data demands that justify facilitybased entry. These businesses come disproportionately from the Financial, Insurance and Real Estate ( F.I.R.E.) sector which includes depository and nondepository institutions, security brokers, insurance carriers and agents and real estate. Two other sectors which historically have been telecommunicationsintensive are Services and Business Services. Figure 1 displays percapita gross state products of these sectors for South Carolina and selected other states.7 I. A. 1. a.(1)(a) i) a)ҍ Nearly identical orderings were obtained when gross state products were expressed on a per access line basis. I chose California, Illinois and New York for comparison because these states have led the nation in terms of facilitybased local exchange competition. I also chose Florida because it stands out in BST territory in terms of early and extensive facilitybased entry. While these other highly competitive states rank in the top third in these sectors, South Carolina falls in the bottom quintile. Furthermore, South Carolina experienced a 4.35% growth rate in the crucial F.I.R.E. sector between 1990 and 1994, well below the 7.57% national average and placing it 43rd out of 51.8 I. A. 1. a.(1)(a) i) a)ҍ Bureau of Economic Analysis, op. cit. On the cost side, some of the same demographic factors that resulted in low revenues tend to also raise costs of entering South Carolina local exchange markets. As is well known, low population density leads to long loop lengths raising the cost of facilitybased entry, and is a significant explanatory variable in most models of local exchange costs. One indicator of loop length that can be computed from available data is sheath feet of copper cable per switched access line: the average for the state of South Carolina is 180.1 compared with 123.6 nationwide.u9 I. A. 1. a.(1)(a) i) a)ҍ Both sheath kilometers and total switched access lines were taken from Tables 2.2 and 2.5, respectively, in the FCCs Statistics of Communications Common Carriers, Preliminary 1997 edition.u This represents a 37.5% increase above the national average in the length of lines. It is possible, of course, that the number of copper wires per sheath in South Carolina is much smaller than the national average, explaining this discrepancy. Computing the length of copper wire per switched access line leads to a similar conclusion: there were 19.752 kilometers of copper wire per switched access line in South Carolina as compare to 16.329 for the entire country, a 21% difference. In sum, South Carolina offers facilitybased entrants relatively thin profit margins given the meager revenues and relatively high costs per line even for business services. Entry becomes a nonstarter because it is profitable large business services that underwrite the initial entry that later justifies entry into other local exchange services. Repeatedly throughout the U.S., facilitybased carriers have successfully penetrated highend business services before expanding into adjacent markets such as switched services for smaller businesses and exchange service for residential customers. Through this strategy they take advantage of the scope economies between fiber networks and local exchange services as well as the significant learning the occurs while entering these markets. In addition, the presence of CAPs has facilitated entry by other carriers"especially long distance carriers and PCS providers"who require transmission capacity or dark fiber to complete their service offering.  V.CONCLUSION  The Telecom Act takes a shotgun approach to achieving its goal of creating competition in the countrys local exchange markets. It creates multiple entry routes for entrants, expands the size and diversity of the entrant pool, and opens all service and geographic markets to potential competitors. The purpose is to maximize the likelihood that efficient entry will take place, whether facility based or otherwise, and that the corresponding benefits of competition will be realized. Nevertheless, aware that certain local exchange markets may not be efficiently served by facilitybased exchange carriers, Congress offered Track B as an alternative means for the RBOCs to gain authority to enter inregion interLATA services. In fact, market and demographic conditions in South Carolina local exchanges are not conducive to early, extensive entry by facilitybased carriers. Competition in both local and long distance markets may be postponed if long distance carriers can stymie BellSouths entry into interLATA services by forbearing from entering the local exchange. The fact that facilitybased carriers have not entered BSTs local markets in South Carolina to offer residential services as well as business services is a product of the states market and demographic conditions. The Statement gives efficient entrants every opportunity to enter these local exchange markets and to achieve viability and sustained growth. Along with BSTs interconnection and resale Agreements, the states market conditions and state and local laws and regulations, the Statement prevents BST from withdrawing these competitive opportunities now or in the future.  '3Letter Landscape ^ 44T   44T  ^ Table 1: Policies for Opening Local Exchange Markets under the Telecom Act and BSTs Statement in South CarolinaPP POLICYPROVISIONS OF THE ACT & FCCs IMPLEMENTATION PROENTRY EFFECTS TERMS OF BSTs SOUTH CAROLINA STATEMENTPP #A\  PP#Create Multiple Entry Routes ܩ Interconnection at technically feasible points [251(c)(2)] Physical and virtual collocation [251(c)(6)] Sale of UNEs at technically feasible points [251(c)(3)] Resale of retail services [251(c)(4)] Combine UNEs [251(c)(3), 47 CFR 51.315] ܩ Allows facilitybased entry in dense markets, resale elsewhere Permits entrants to follow evolutionary growth path. Accommodates entrants having different initial strategic assets. ܩ Interconnect at technically feasible points [I.A.1] Additional interconnection points provided if technically feasible [I.A.2] additional elements via bona fide request [II.A] Offer local loop transmission, local transport, local switching, signaling, operating support systems, dark fiber [II.B] Unbundle local loops [IV.A] and subloops [IV.B] Three transport elements plus requests for additional elements [V] Three local switching options, plus requests for additional options and selective routing [VI.A] P P  Increase Size and Diversity of Entrant Pool ܩ Removal of cabletelco crossownership ban [651653] Relax restrictions on electric utility provision of phone service [103]ܩ Raises likelihood of inviting efficient entrants. Increases entry threats through joint ventures and alliances. Broader range of entrants capabilities increases chance of success. ܩ Available to any CLEC certified by SCPSC to offer local exchange service in South Carolina [Sec. 0.A] Negotiated agreements may be utilized by other parties [Preamble]P   P    Open All Services and Areas ܩ No unreasonable limitations on resale [251(c)(4)(B)] Branded or unbranded resold services [47 CFR 51.613(c)] and for 911, call completion and directory assistance [47 CFR 51.217(d)] No restrictions that would impair CLEC ability to serve [47 CFR 51.309(a)] All switching capabilities [251(c)24)(B)(iv)] All tandem switching capabilities [47 CFR 51.319(c)(2)] ܩ Assists entrants in differentiating their services and evolving their product line over time. Reduces entry risk by permitting geographic specialization and product diversification. Counteracts attempts at ILEC crosssubsidization.ܩ Additional elements and subelements via bona fide request process [II.A] BSTs UNEs may be combined in any manner [II.G] Nondiscriminatory access to 911/E911 services [VII.A.2] CLEC subscribers listed at no charge [VII.B.1] Unbranded directory assistance [VII.B.2] selective routing to CLEC directory assistance [VII.B.3] Operator services to CLEC equal to BSTs [VII.C] Listing of CLEC business and residential customers in BST white pages at no charge [VIII.A] Directory assistance listing at no charge [VIII.E] Delivery of directories at no charge [VIII.H] Offers unbundled signaling links and STPs [X.A.1] Offers SCP databases on unbundled basis plus selective routing [X.A.3] #@\  PP# #A\  PP# T 44TQH  44TQH T #XN\  PXP#Table 2: Safeguards Against Exclusionary Conduct Found in the Telecom Act and BSTs StatementEXCLUSIONARY PRACTICE(S) PROVISIONS IN THE ACT TERMS OF BSTs STATEMENT#A\  PP#PPNonprice Foreclosureܩ Mandatory direct or indirect interconnection [251(a)(1)] for access or exchange services [251(c)(2)(A)] at technically feasible points [251(c)(2)(C)] Provide physical collocation, or virtual if no space [251(c)(6)] Provide access to poles, ducts, conduits, ROWs under rates, terms, conditions [251(b)(4)] Offer retail services for resale [251(c)(4)(A)]ܩ Interconnect at 5 different network points [I.A.1] and additional interconnection points provided if technically feasible [I.A.2] Interconnect two CLECs at common tandem [I.A.5] Physical or virtual collocation or purchase of facilities [I.C] Nondiscriminatory access to any pole, duct, conduit or right of way owned or controlled by BST [Att. D]P P Unequal Accessܩ Equal quality of interconnection to a rival and affiliate [251(c)(2)(C)] Collocation arrangements must be nondiscriminatory [251(c)(6)] Industry technical standards for interconnection specifications [251(a)(2)] Give notice of change of interconnection conditions [251(c)(5)] Nondiscriminating access to operator services and directory assistance [251(b)(3)]; 911/E911, directory assistance, operator call completion services [271(c)(2)(B)(vii)]; directory listings [251(b)(3)]; white pages [271(c)(2)(B)(viii)]; phone numbers [251(b)(3)]; databases and associated signaling information [271(c)(2)(B)(x)] Duty to provide dialing parity for both exchange and toll [251(b)(3)] and nondiscriminatory access to services/info needed to provide dialing parity [271(c)(2)(B)(xii)] Biennial federal/state audit [252(d)(1)] ܩ Adhere to industry technical standards [I.H] Advanced notice of change of service Quality at least equal to BSTs for interconnection [I.I], network elements [II.E], local loops [IV.D], transport [V.C], switching [VI.D], signaling databases [X.C] Parity in treatment of resellers and BST customers [XIV.F] BST provides engineering information [III.B] Number portability with minimum impairment of service to CLEC customer [XI.C] BST accepts industry/national standards for transmission and traffic blocking [XV.B] Parity in treatment of CLEC and BST customers [XIV.F]P P Price Squeezeܩ Nondiscriminatory charges for interconnection [252(d)(1)(A)(ii)] Imputation by RBOCs for pricing interLATA origination and information services sold to competitors and affiliates [272(e)(3)] Wholesale rates for resold services equal retail rates less avoided retailing [252(d)(3)]d Biennial federal/state audit [252(d)(1)] ܩ Uniform, nondiscriminatory rates for local loops [IV.C], local transport [V.B], local switching [VI.B] P P Tying and Bundlingܩ Nondiscriminatory access to unbundled network elements at technically feasible points; able to combine for use [251(c)(3)] Not prohibit and not impose unreasonable, discriminatory conditions on resale [251(b)(1)] ܩ All required UNEs [II.B] Additional UNEs via bona fide request process [II.D]P P Cost Shiftingܩ Adopts accounting methods to prevent subsidies [254(k)] Separate books, people and credit, plus arms length transactions [272(b)] Prohibits rates for network elements based on an ILECs rate of return [252(d)(1)] Prohibits use of a rate regulation proceeding to assess the level of mutual transport and termination charges [252(d)(2)] P  P  Misappropriation of Proprietary Informationܩ Confidentiality of carrier proprietary information required [222(b)] Maintain privacy of customer proprietary network information [222(c)] ܩ BST has limited contact with CLEC resale customers [XIV.L] Proper treatment of confidential and proprietary information required [XX.A]X` hp x%'0*,.8135@8: