Local Telephone Competition: A Brief Overview

Local Telephone Competition: A Brief Overview

Order Code RL31938
Report for Congress
Received through the CRS Web
Local Telephone Competition:
A Brief Overview
May 27, 2003
name redacted
Specialist in Telecommunications
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

Local Telephone Competition: A Brief Overview
Summary
One of the central goals of the Telecommunications Act of 1996 (P. L. 104-104)
is to promote competition in the local(exchange) telephone market. The 1996 Act
attempts to foster this competition by, among other provisions, requiring that the
local monopoly infrastructure be opened up to competitors. The Federal
Communications Commission (FCC) has been tasked with implementing a series of
rulemakings to achieve this goal. In the seven years since the Act’s passage, policy
makers have continued to debate the extent to which this goal has been realized.
Although the local telephone market had experienced limited competitive entry
in selected high end urbanized business markets since the 1980's, the birth of local
exchange competition can be traced, to a large degree, to changes that have occurred
since the implementation of the market opening provisions contained in the 1996
Act. The major players involved in this transition are: the incumbent local exchange
carriers or ILECs, who control, but have been required to provide access to, the
legacy network; and a wide range of entities known as competitive local exchange
carriers, or CLECs, who, through these market opening provisions, have been
encouraged to compete with the ILECs for market share.
The ILECs, or established carriers, are composed of exchange carriers that are
the historical holders of the franchise to provide exchange service, local transport,
and switching services within a designated service territory. Those who compete
with the incumbents, or CLECs, enter the market in any one, or any combination, of
three major ways: through resale of the ILEC’s retail services; through the use of
unbundled network elements; or through the building of their own facilities.
ILECs continue to dominate the local exchange market in terms of both revenue
share (87.4 percent) and number of access lines (88.6 percent), but CLECs have been
steadily making inroads. The CLEC industry has, overall, experienced a steady
increase, in both real and absolute terms, in industry revenues and access line market
share. Despite this overall increase, the level of competition has entered markets,
both in terms of service sector and geography, to varying degrees. In general, high
volume business markets have benefitted more from competitive entry as have more
densely populated markets. Competition in residential and small business markets
and in geographic markets outside of major metropolitan areas, while increasing,
generally tends to be less robust. ILECs continue to dominate in the residential
market. The growth of competition has been uneven with some individual markets
experiencing high levels of competitive entry and others experiencing next to none.
In the seven years since the passage of the 1996 Telecommunications Act
competition has grown, but perhaps at a slower pace than some envisioned. The
entrance of competition in the local exchange market, however, continues to be a
work in progress that remains subject to economic, legal and regulatory forces.
This report will be updated as events warrant.

Contents
Market Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Incumbent Local Exchange Carriers (ILECs) . . . . . . . . . . . . . . . . . . . . 1
Competitive Local Exchange Carriers (CLECs) . . . . . . . . . . . . . . . . . . 2
Cable Television Entry into Telephony . . . . . . . . . . . . . . . . . . . . . . . . . 4
Methods of Competitive Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Resale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Unbundled Network Elements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Facilities Based . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Market Share Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Access Lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
List of Figures
Figure 1. Local Exchange Market Revenues – 2001
Percentage Market Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
List of Tables
Table 1. End-User Switched Access Lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Table 2. CLEC Entry Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Table 3. End-User Switched Access Lines by Customer Type . . . . . . . . . . . . . . 10

Local Telephone Competition:
A Brief Overview
One of the central goals of the Telecommunications Act of 19961 is to promote
competition in the local exchange market, a market that, according to Federal
Communications Commission (FCC) statistics, generated revenues of $127.8 billion
in 2001. The 1996 Act attempts to foster this competition by, among other
provisions, requiring that the local monopoly infrastructure be opened up to
competitors. The Federal Communications Commission (FCC), in conjunction with
the 50 state public utility commissions, has been tasked with implementing a series
of rulemakings to achieve this goal. In the seven years since the Act’s passage policy
makers have continued to debate the extent to which this goal has been realized. This
report analyzes the status of competitive entry in the local (exchange) telephone
market.2
Market Structure
The local exchange market has begun the transition from regulated monopoly
to a less regulated, competitive market structure. This transition, while still in its
early stages compared to other telecommunications sectors, has been made possible
due to a combination of technological, regulatory and legal actions. The local
exchange market has experienced limited competitive entry in selected high end
urbanized business markets since the 1980's. However, the birth of local exchange
competition can be traced, to a large degree, to changes that have occurred since the
implementation of the market opening provisions contained in the 1996
Telecommunications Act. The major players involved in this transition are: the
incumbent local exchange carriers or ILECs, who control, but have been required to
provide access to, the legacy network; and a wide range of entities known as
competitive local exchange carriers, or CLECs, who, through these market opening
provisions, have been encouraged to compete with the ILECs for market share.
Incumbent Local Exchange Carriers (ILECs). The local, or exchange,
telephone service market is dominated by the incumbent local exchange carriers, or
ILECs. These ILECs, or established carriers, are composed of exchange carriers that
are the historical holders of the franchise to provide exchange service, local
transmission, and switching services within a designated service territory. They are
1 Telecommunications Act of 1996, P.L. No.104-104, 110 Stat. 56, codified at 47 U.S.C.
paras. 151 et. seq.
2 This report is confined to an analysis of the wireline exchange telephone market. The
impact of the wireless sector goes beyond the scope of this report.

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the owners of the “legacy monopoly infrastructure” known as the “local loop.”3
There are approximately 1,300 companies defined as ILECs ranging in size from
small rural telephone cooperatives with as few as 100 access lines to customers, to
large holding companies offering service to tens of millions of customers. ILECs
can be further divided into two subcategories: the Regional Bell Operating
Companies (RBOCs) and the independents.
The RBOCs are the remainder of the legacy Bell System’s 22 operating
companies, and were created as a result of the 1984 AT&T divestiture. At the time
of divestiture the 22 operating companies were broken up into 7 regional companies
called RBOCs. Due to a series of mergers and acquisitions and consolidations of the
initial seven RBOCs, four, BellSouth Corp., SBC Communications Inc., Qwest
Communications International Inc. and Verizon Communications Inc., remain.
RBOCs dominate the local exchange market in terms of both access lines and
revenue.
Those ILECs that historically are not part of, and have developed
independently of, the Bell System are called the independent carriers. These
“independents,” which make up the remaining 1300 ILECs are not affiliated with the
Bell companies, and range from diversified telecommunications companies such as
Alltel Corp. with 2001 year revenues of almost $8 billion4 to small rural telephone
cooperatives. They serve territories that cover approximately half of the United
States in terms of land mass but are substantially smaller than the RBOCs in terms
of revenue and access lines. Although the independent ILECs do service some
suburban and urban areas, in contrast to the RBOCs they have a more rural footprint.
The independent ILECs also differ in terms of regulatory requirements in that they
tend to be subject to less regulatory oversight, and, because of their presence in more
rural markets, are not as likely to face competition.

Competitive Local Exchange Carriers (CLECs). Those who compete
with the ILECs, for local exchange service market share are known as competitive
local exchange carriers, or CLECs. CLECs span a wide range of entities and own
none, part, or all of their facilities. CLECs can also vary in size from multi billion
dollar companies that may earn only a small fraction of their revenues from local
exchange service to small niche providers that earn all of their revenue from such
services. Some CLECs are comprised of newly formed entities that have entered the
market to provide telecommunications services. Established long distance carriers
have tended to become CLECs by deploying their own facilities to serve selected
business customers and leasing ILEC facilities to serve residential customers. While
still other CLECs, such as cable television companies and electric utilities, have
entered the telecommunications market as the result of diversification and are
3 Although often called the “local loop,” this infrastructure actually consists of switches,
transport facilities between switches, and the ubiquitous grid of local loops that connect
subscribers to the ILEC’s switches.
4 For additional financial information see the company’s web site at www.alltel.com.

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modifying, or using, their existing infrastructure to provide telecommunications
services. 5
Technically the CLEC classification is bestowed upon an entity based on the
market circumstances in which it competes. Broadly stated, a CLEC is an entity that
is competing with the incumbent provider for market share. So the CLEC designation
is a market-specific one that changes with market circumstances. For example, the
RBOC Verizon when providing exchange service in its home territory of New York
would be classified as an ILEC. However, if Verizon were to provide local exchange
service in Texas, a market not included in its assigned service territory, it would be
classified as a CLEC in that specific market. Similarly, if an independent ILEC
chose to provide exchange service outside its assigned ILEC service territory it too
would be classified as a CLEC in that out-of-territory market. However, when
industry analysts refer to the CLEC sector they are generally referring to new entities
competing with the RBOCs and independent ILECs.
The recent significant decline in the number of CLECs and the financial
hardship experienced by the CLEC sector has caused some concern regarding this
market segment. Today it is estimated that there are approximately 80-100 CLECs
in operation in contrast to the estimated 300 at the end of 1999. Although any
number of factors can combine to contribute to an individual CLEC’s decline, a
number of investment analysts and economists cited an overly optimistic outlook for
customer demand, the financial burdens associated with the rapid build-out of costly
infrastructure, and an unsettled regulatory climate, coupled with an overall weak
economy, as some factors contributing to this decline.6 Despite this environment,
however, CLEC market share has continued to grow in terms of both revenue and
access lines. (See Market Share Overview, below.)
The report, Progress Report on the CLEC Industry, released in October 2002,
by the Association for Local Telecommunications Services (ALTS), an association
representing facilities-based CLECs, provides an optimistic outlook for this market
segment. This report, which compiled statistics on the 18 largest publicly traded
CLECs, states that the financial health of these companies is positive. That is, as a
group, they showed a positive EBITDA7 for the first 6 months of 2002 for the first
time in history, and two within that group have generated net income. Furthermore,
the report states, capital remains available with CLEC’s attracting more than $1
billion in investments over the first 9 months of 2002. Indications are, the report
claims, that the CLEC industry is “stabilized” and is poised to revive in 2003. A
follow-up report, The State of Local Competition 2003, issued by ALTS in April
2003, confirms the mid-year findings of its October 2002 report. The April 2003
report, which compiled end-of-year data for 21 publically traded CLECs, showed
5 Additional competitors include municipally owned telecommunications systems and the
more recent introduction of Internet telephony services offered through a broadband
connection.
6 Analysts, Economists Give FCC Pessimistic Outlook on Telecom Health.
Communications Daily, October 8, 2002. p.1.
7 EBITDA, earnings before interest, taxes, depreciation, and amortization does not indicate
profitability on a net basis but is a commonly used measure indicating financial health.

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results consistent with the October 2002 report. Eighteen of the 21 CLECs improved
their EBITDA over the previous year with 13 posting a positive EBITDA in 2002.
The April 2003 report concluded that “...the financial condition of the CLECs as a
whole has stabilized, although it is still quite tenuous.” The reports also note that
CLEC growth, while affected by the overall economic health of the Nation, is also
dependent on sufficient and timely access to ILEC networks and the enforcement of
existing rules to ensure that markets remain open and friendly to competition. The
reports also stress the need for policy makers and regulators to provide reasonable
certainty so that CLECs can attract capital investment from financial markets.8
Cable Television Entry into Telephony. The cable television industry has
expanded its service offerings beyond its original video programming to include,
among other products, the delivery of facilities-based circuit switched voice
telephone service to both residential and business customers.9 Although cable
delivered telephone service claims a small percentage (1 percent)10 of market share,
cable system operators have the potential to become significant players in the voice
market. According to the National Cable and Telecommunications Association
(NCTA), a leading industry trade group, cable companies offer both residential and
business voice service in over 30 cities and 15 states across the country and as of
year-end 2002 cable companies served approximately 2.5 million residential local
voice customers.
AT&T Broadband, the nation’s largest cable multiple system operator, had more
than half of the cable industry total with 1.2 million residential subscribers in 10
states at the end of the fourth quarter 2001. However, the November 2002 sale of
these cable assets to Comcast Cable, is anticipated to have a negative impact, at least
for the short term, on voice telephony expansion plans. According to Comcast
executives, deployment of telephone services faces financial, regulatory, and
technological hurdles and will not be a current priority. Comcast President Brian
Roberts stated that Comcast plans to focus on the implementation and expansion of
video-on-demand for 2003 and that the cable industry should be focusing its
resources on enhanced video services instead of telephony to combat the threat that
Direct Broadcast Satellite (DBS) service is posing for the industry.11
Despite the shift in focus by Comcast, other cable television companies are
continuing to pursue telephony as part of their service offerings mix. Cox
Communications, the fifth largest cable multiple system operator, with 6.3 million
subscribers, has made a commitment to use its infrastructure to further expand its
presence in the local voice telephony market. Cox had more than 516,000 residential
telephone subscribers as of mid-June 2002, making it the nation’s 12th largest local
8 For a copy of these reports see the Association’s web site [http://www.alts.org.]
9 Cable companies are also among those undertaking trials using packetized voice
technologies such as voice over Internet protocol, or VoIP, to transmit voice conversations.
10 According to FCC data, cable companies represent 1 percent of market share in terms of
switched access lines. See Market Share Overview, below.
11 Comcast Won’t Expand Telephony Next Year; Executives Cite Financial, Regulatory
Hurdles. Telecommunications Reports, December 15, 2003, P. 3.

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exchange carrier.12 Cox’s focus on market expansion continues with total telephony
subscribership increasing to 718,420 at year-end 2002, representing year-over-year
growth of 58 percent. Cox’s telephony revenues were $344.2 million for 2002.
Despite this trend, however, telephony revenues remain a small portion of Cox’s $5.0
billion 2002 revenue stream.13
While the provision of voice service has become an increasing factor in the
revenue strategy of some of the large cable multiple system operators, it has not, as
of now, been embraced to the same degree by the cable industry as a whole.
According to the NCTA, the cable television industry is more focused on the
deployment of high-speed Internet access, digital video and other new services. 14 As
a result, cable industry market share in the provision of local telephony, while
growing, still remains small with cable circuit switched residential telephony revenue
estimated to be $1.18 billion for 2002. In contrast, total cable industry revenue is
estimated at $48.15 billion for 2002.15
Methods of Competitive Entry
The 1996 Act allows CLECs to enter the market in any one, or any combination,
of three major ways: through resale of retail ILEC services; through the use of
ILECs’ unbundled network elements; or through the building of their own facilities.
Resale. Under the resale model, competitors resell the ILECs’ retail services
which the ILECs are required to make available to the reseller at wholesale rates.
Resellers market these services, at retail prices, to end users. Little or no investment
in facilities infrastructure is needed on the part of the competitive entrant. While this
eliminates a major obstacle - expensive start up costs, which can be a significant
deterrent to entry- the competitor is totally dependent on the incumbent to reach its
customer base; it cannot modify the service offering and its cost structure is
dominated by the ILEC retail price. Resale is often categorized as the first stage of
competitive entry, a method by which a competitor can enter a market to build a
subscriber base. Nonetheless, resale represents a significant, if declining, portion of
market share and some carriers have developed a permanent market niche as
resellers.
Unbundled Network Elements. The use of unbundled network elements
(UNEs) refers to the method of gaining market access through the use of selected
components, or elements, of the incumbent carrier’s network.16 Under this scenario,
12 Cable & Telecommunications Industry Overview Year-End 2002. National Cable and
Telecommunications Association.[ http://www.ncta.com.]
13 Cox Communications 2002 Annual Report available at [http://www.cox.com]
14 MSOs’ Plans for Cable Telephony Could be Dampened. Telecommunications Reports,
October 1, 2002, p.7.
15 Data from National Cable and Telecommunications Association.
16 Under provisions contained in section 251(d) of the 1996 Act, ILECs must make
(continued...)

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a competitor may have part or most of the infrastructure needed to provide service,
but fills in the pieces it is lacking (e.g., a switch) to complete access to the end user.
The competitor leases these network parts, or elements, from the ILEC at cost-based
rates.17 The competitor is dependent, to varying degree, on the incumbent to reach
its subscriber base. An outgrowth of this method is the use of the UNE platform
(UNE-P). The UNE-P, developed to help facilitate competition, consists of a fully
assembled package of network elements, consisting of the loop, local switching, and
shared transport, made readily available for lease by the competitor. The UNE-P
enables the competitor to provide end- to- end local exchange service.
Facilities Based. Under the facilities based method, the competitor owns its
own facilities independent of the incumbent’s infrastructure. The facilities-based
carrier does not need to access the incumbent’s network to reach its customer base.
Facilities-based competitors are often found in high volume areas serving end users
with substantial telecommunications needs, necessary conditions to justify the
investment in such costly infrastructure. Typically, their customers are located on, or
in very close proximity to, the CLEC’s fiber optic ring network.
Some policy makers view facilities-based competition as the most desirable
form of entry, citing, among other positives, increased economic growth in jobs and
innovation that result from the deployment of new infrastructure. Furthermore, they
state, facilities based competition decreases the sharing of infrastructure thereby
minimizing the need for government intervention. The ability to use UNEs and the
UNE-P in particular, they state, discourages investment in new infrastructure on
behalf of both the ILEC and the CLEC. Duplication of telecommunications
infrastructure is also seen as a positive byproduct in light of heightened national
security and emergency planning concerns. While acknowledging these benefits,
others claim that resale and unbundling are important entry methods that promote
competition particularly in markets, such as the residential market, that are less likely
to attract competitive entry. Furthermore, they claim, the use of resale and
unbundling will accelerate the development of facilities-based competition as it
allows CLECs to penetrate markets and develop their own customer base,
subsequently providing the scale economics needed to justify construction of new
facilities. Also, they claim the sharing of facilities, while providing customer choice,
does not necessitate the disruption of the rights-of-way.
16 (...continued)
available those elements of their network without which CLECs would be impaired
in their ability to offer local service.
17 The FCC requires that prices for UNEs must be based on a forward looking cost
methodology know as TELRIC , total element long run incremental cost. TELRIC is
based on a forward looking methodology. Under TELRIC the cost of the elements
is not based on the ILEC’s historical costs for its facilities but on the costs that would
be incurred if the network were built using today’s technology.

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Market Share Overview
In the telecommunications sector, market share, and subsequently the status of
local service competition, is often examined based on two factors: revenue share and
number of access lines. ILECs continue to dominate the local exchange market in
terms of both factors, according to FCC-compiled data, but CLECs have been
steadily making inroads.
Revenues. Local exchange market revenues, according to FCC-compiled
data, totaled $127.8 billion in 2001 with the ILECs continuing to hold the lion’s share
of these revenues. The Regional Bell Operating Companies (RBOCs) revenue
represented $94.1 billion, or 73.6 percent, of total 2001 market share. The
independent ILECs had $17.6 billion, or 13.8 percent, of market share revenues
giving the ILECs, as a whole, 87.4 percent of local exchange revenues. The CLECs
represented 12.6 percent of 2001 market share, or $16.1 billion, of revenues. (See
Figure 1.) While the ILECs, and in particular the RBOCs, continue to dominate the
local exchange market in terms of revenues, the 2001 CLEC market share
Figure 1. Local Exchange Market Revenues – 2001
Percentage Market Share
experienced an almost 3 percentage point increase over its 9 percent share for 2000.
This CLEC increase came at the expense of the RBOCs that, while keeping their
2001 revenues unchanged at $94.1 billion, lost 4.4 percent from its 78 percent 2000
market share. The RBOCs also lost market share to the independent ILECs whose

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share increased 0.8 percent from its year 2000 market share of 13 percent.18 The
revenue market share trends experienced in 2001 and 2000, that is of CLEC growth
in revenue in real terms as well as in market share, appear to be consistent with prior
years following the enactment of the 1996 Act.19
Access Lines. In addition to revenues, market share can also be determined
based on the number of local telephone, or switched access lines, in service to end-
user customers. While some customers are more lucrative than others in terms of
revenue generated, the ability to compete in the local exchange market is based, to
a significant degree, on access to the customer base and its potential revenues As in
the case of revenue market share, FCC access line data 20 show that in terms of raw
numbers ILECs continue to dominate. However, despite this dominance, CLEC
access line share continues to grow, but most recently at a slower pace. Analysis of
FCC- collected access line data, as of June 30, 2002,21 reveals the following market
trends.
Of the 189 million total switched access lines in service, CLECs accounted for
11.4 percent, or 21.6 million. Percent of market share has increased steadily for the
CLECs since December 1999 when they claimed 4.3 percent of switched access
lines. However, the pace of growth has slowed with a 10 percent rate of increase for
the first half of 2002 versus 14 percent for the previous six months. (See Table 1.)

Table 1. End-User Switched Access Lines
Date
ILEC Lines
CLEC Lines
Total
CLEC Share
December
181,307,695
8,194,243
189,501,938
4.3 %
1999
June 2002
167,472,318
21,644,928
189,117,246
11.4 %
Source: Data from Federal Communications Commission.
18 Telecommunications Industry Revenues 2001. Federal Communications Commission.
Wireline Competition Bureau. Industry Analysis and Technology Division. March 2003.
[http://www.fcc.gov/wcb/iatd/stats.html]
19 According to FCC data for 1999, CLEC revenues were more than $5 billion, an increase
of 60 percent over 1998, accounting for almost 5 percent of local service revenue market
share. The lack of consistent and systematic data for earlier years limits the ability to make
direct comparisons.
20 Local Telephone Competition: Status as of June 30, 2002. Federal Communications
Commission. Wireline Competition Bureau. Industry Analysis and Technology Division.
December 2002. [http://www.fcc.gov/web/iatd/stats.html]
21 Data reflects information provided by “qualifying carriers,” that is carriers with at least
10,000 local telephone lines in a particular state.

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Access line data also reveal the type of entry method used by CLECs to
penetrate the market. (See Table 2.) As of June 2002, half (50.5 percent) of CLEC
access lines were provided using UNE loops from other carriers, 20.7 percent were
provided through resale, and the remaining 28.8 percent were provided by local loop
facilities owned by the CLECs (facilities-based.) Of the 6.24 million CLEC
facilities-based access lines, 12 percent (2.6 million) of those lines were provided by
cable television companies over coaxial cable, with those lines representing 1 percent
of total switched access lines.
Table 2. CLEC Entry Method
(End-User Switched Access Lines in Thousands)
Date
Resold
Percent
UNEs
Percent
CLEC
Percent
Lines
Owned
Dec.
3,513
42.9 %
1,959
23.9 %
2,723
33.2 %
1999
June
4,478
20.7
10,930
50.5
6,236
28.8
2002
Source: Data from Federal Communications Commission.
In terms of total number, CLEC access lines of all three types of entry have
increased. However, CLEC entry methods have changed significantly since
December 1999. The use of resale has declined steadily in favor of the use of UNEs.
Also CLEC-owned lines, as a percentage of total lines, has decreased slightly.
According to FCC data, CLEC access lines using resale, while increasing in real
terms from 3.5 million to 4.5 million, decreased as a percentage of total lines from
42.9 percent in December 1999 to 20.7 percent in June 2002. During the same time
period, the use of UNEs increased in both real terms and as a percentage of lines
from 2 million to11 million, or from 23.9 to 50.5 percent.22 While the total number
of CLEC-owned (i.e., facilities- based) lines has increased from 2.7 to 6.2 million,
from December 1999 to June 2002, the percentage of the total that are facilities-based
decreased from 33.2 to 28.8 percent during that same time period. (See Table 2.)
FCC data also show that ILECs and CLECs tend to serve different markets. (See
Table 3.) While ILECs have more lines in total, the percentage of total lines serving
the various market segments differs significantly. In June 2002, slightly more than
half, or 51.2 percent, of CLEC access lines served residential or small businesses,
with the remaining 48.8 percent serving large businesses, institutional, and
government customers. In contrast, ILECs continue to dominate in the residential
market with 78.3 percent of their access lines serving the residential and small
business market. CLECs, however, have increased their penetration of the
residential and small business market. The total number of CLEC access lines in
22 UNE lines include UNE loops leased from an unaffiliated carrier on a stand-alone basis
and also UNE loops leased in combination with UNE switching or any other unbundled
network elements.

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both categories has increased in absolute terms, over the past few years, but the ratio
between the two categories has shifted with CLECs increasing their presence in the
residential and small business market. In December 1999, the percentage of CLEC
access lines serving residential and small businesses was only 41.1 percent, slightly
more than 10 percentage points less than in June 2002. On the other hand, the ratio
has remained fairly consistent for the ILECs with 77.1 percent of access lines serving
the residential and small business market in December 1999, a figure only 1.2
percentage points below 2002.
Table 3. End-User Switched Access Lines by Customer Type
ILEC
CLEC
Date
Residential and
Other1
Percent
Residential
Other1
Percent
Small Business
Residential
and Small
Residential
and Small
Business
and Small
Business
Business
Dec.
139,758,434
41,549,261
77.1 %
3,368,702
4,825,541
41.1 %
1999
June
131,051,178
36,421,140
78.3
11,080,676
10,564,252
51.2
2002
1Medium and large business, institutional, and government customers.
Source: Data from Federal Communications Commission
FCC data collected by state and zip code reveals that competition is increasing
nationwide. As of June 2002, at least one CLEC was serving customers in 67 percent
of the Nation’s zip codes, with 93 percent of U.S. households residing in these zip
codes. Also, at least one CLEC operates access lines in all 50 states, the District of
Columbia and Puerto Rico, and in 14 states, ten or more CLECs reported serving
local service customers. In general, however, the most populous states tend to
contain the largest number of CLEC lines, with the three most populous states -
California, Texas and New York - ranking third, second and first respectively in
terms of CLEC access lines. Texas (36 percent), Florida (27 percent) and New York
(25 percent) had at least 25 percent of zip codes served by 10 or more CLECs
compared to 6 percent of zip codes nationwide. However, when comparing CLEC
lines as a percentage of total access lines within a state, some of the less populous
states such as Rhode Island and Nebraska report a higher percentage than many
populous ones.
Conclusion
In the seven years since the passage of the 1996 Telecommunications Act
competition has grown, but perhaps at a slower pace than some envisioned, in the
local exchange market. In terms of local exchange revenue share and access lines,
the incumbent local exchange carriers (ILECs) continue to dominate the overall
market, with the Regional Bell Operating Companies (RBOCs) holding the lion’s
share of both. Competitive local exchange carriers (CLECs), however, have

CRS-11
continued to steadily increase their market share in terms of both indicators, and
competition is spreading nationwide. Despite this overall increase, the level of
competition, both in terms of service sector and geography, varies. In general, high
volume business markets have benefitted more from competitive entry as have more
densely populated markets. Competition in residential and small business markets
and in geographic markets outside of major metropolitan areas, while increasing,
generally tends to be less robust. ILECs continue to dominate in the residential
market. The growth of competition has been uneven, with some individual markets
experiencing high levels of competitive entry and others experiencing next to none.
In terms of infrastructure, the ILECs continue to dominate as a result of their
ownership of the legacy infrastructure, and especially the “local loop.” While the
total number of CLEC access lines that are facilities-based is increasing, their
percentage of the mix has decreased slightly. Although the use of resale has dropped
significantly, many CLECs continue to be dependent on the ILECs for market access.
CLECs’ most common method of entry is the use of UNEs with the UNE-P
increasing in popularity. CLEC dependence on the ILEC infrastructure is seen by
some as a natural transition to promote competition, while others feel it thwarts the
development of “true” competition.
The recent financial turmoil experienced in the CLEC market has resulted in
a significant decline in the number of CLECs in operation, but some feel that in the
long run this will be a positive factor resulting in fewer, but stronger competitors.
Despite this decline in numbers, the CLEC industry has, overall, experienced a steady
increase, in both real and absolute terms, in industry revenues and access line market
share. The entrance of competition in the local exchange market, however, continues
to be a work in progress that remains subject to economic, legal and regulatory
forces.

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