Before the

**FEDERAL COMMUNICATIONS COMMISSION**

**Washington, D.C. 20554**

In the Matter of )

) CC Docket No. 99-272

Merger of Qwest Communications )

International Inc. and ) File No. 18-EX-TC-1999

U S WEST, Inc. ) et. al.

**RESPONSE TO COMMENTS ON**

**APPLICATIONS FOR TRANSFER OF CONTROL**

+-----------------------------------+-----------------------------------+
| **QWEST COMMUNICATIONS            | **U S WEST, INC.**                |
| INTERNATIONAL INC.**              |                                   |
+-----------------------------------+-----------------------------------+
| Drake S. Tempest                  | Mark D. Roellig                   |
|                                   |                                   |
| Genevieve Morelli                 | Daniel L. Poole                   |
|                                   |                                   |
| Qwest Communications              | Sharon J. Devine                  |
|                                   |                                   |
| International Inc.                | U S WEST, Inc.                    |
|                                   |                                   |
| 555 Seventeenth Street            | 1801 California Street            |
|                                   |                                   |
| Denver, CO 80202                  | Denver, CO 80202                  |
+-----------------------------------+-----------------------------------+
| Peter A. Rohrbach                 | Kathryn A. Zachem                 |
|                                   |                                   |
| Mace J. Rosenstein                | Carolyn W. Groves                 |
|                                   |                                   |
| Hogan & Hartson L.L.P.            | Wilkinson Barker Knauer, L.L.P.   |
|                                   |                                   |
| 555 Thirteenth, N.W.              | 2300 N Street, N.W.               |
|                                   |                                   |
| Washington, D.C. 20004            | Suite 700                         |
|                                   |                                   |
|                                   | Washington, D.C. 20037            |
+-----------------------------------+-----------------------------------+
| Counsel for Qwest Communications  | William T. Lake                   |
| International Inc.                |                                   |
|                                   | Wilmer, Cutler & Pickering        |
|                                   |                                   |
|                                   | 2445 M Street, N.W.               |
|                                   |                                   |
|                                   | Washington, D.C. 20037            |
+-----------------------------------+-----------------------------------+
| Dated: October 18, 1999           | Counsel for U S WEST, Inc.        |
+-----------------------------------+-----------------------------------+

TABLE OF CONTENTS

Page

SUMMARY [1](#summary)

I. THE MERGER IS IN THE PUBLIC INTEREST AND SHOULD BE APPROVED WITHOUT
CONDITIONS.
[4](#i.-the-merger-is-in-the-public-interest-and-should-be-approved-without-conditions.)

> A. The Standard of Review. [4](#a.-the-standard-of-review.)
>
> B. Opponents Cannot Squeeze This Vertical Merger Into the "ILEC-ILEC"
> Box.
> [6](#b.-opponents-cannot-squeeze-this-vertical-merger-into-the-ilec-ilec-box.)
>
> C. Opponents Ignore the Merger's Affirmative Public Interest Benefits.
> [11](#c.-opponents-ignore-the-mergers-affirmative-public-interest-benefits.)

1\. Faster Deployment of Advanced Services.
[12](#faster-deployment-of-advanced-services.)

2\. Stronger Competition With Larger Firms Created by Other Mergers.
[15](#stronger-competition-with-larger-firms-created-by-other-mergers.)

3\. Powerful New Incentives for U S WEST to Satisfy Section 271.
[18](#powerful-new-incentives-for-u-s-west-to-satisfy-section-271.)

a\. Incentives to eliminate out-of-region competitive

b\. Incentives to make full use of the Qwest network asset.
[21](#b.-incentives-to-make-full-use-of-the-qwest-network-asset.)

> D. Complaints Regarding U S WEST Do Not Belong In This Proceeding.
> [23](#d.-complaints-regarding-u-s-west-do-not-belong-in-this-proceeding.)

II\. QWEST WILL DIVEST PROHIBITED INTERLATA SERVICES AS IT COMMITTED TO
DO IN THE APPLICATION.
[30](#ii.-qwest-will-divest-prohibited-interlata-services-as-it-committed-to-do-in-the-application.)

> A. The Commission Should Not Assume A Future Violation Of The Law.
> [30](#a.-the-commission-should-not-assume-a-future-violation-of-the-law.)
>
> B. Qwest Is Moving Forward Promptly To Prepare For Divestiture.
> [31](#b.-qwest-is-moving-forward-promptly-to-prepare-for-divestiture.)
>
> C. Commenters\' Other Divestiture Arguments Are Misplaced.
> [33](#c.-commenters-other-divestiture-arguments-are-misplaced.)
>
> D. Prompt Grant Of This Application Is Necessary To Help Ensure A
> Smooth Customer Transition.
> [37](#d.-prompt-grant-of-this-application-is-necessary-to-help-ensure-a-smooth-customer-transition.)

conclusion [38](#conclusion)

ATTACHMENT A: Declaration of Dennis Carlton and Hal Sider (Lexecon,
Inc.)

ATTACHMENT B: Declaration of Bruce Owen (Economists Inc.)

ATTACHMENT C: Qwest Plan For Divestiture of InterLATA Business In The
U S WEST Region (October 1999)

Before the

**FEDERAL COMMUNICATIONS COMMISSION**

**Washington, D.C. 20554**

In the Matter of )

) CC Docket No. 99-272

Merger of Qwest Communications )

International Inc. and ) File No. 18-EX-TC-1999

U S WEST, Inc. ) et. al.

To: The Commission

**RESPONSE TO COMMENTS ON**

**APPLICATIONS FOR TRANSFER OF CONTROL**

Qwest Communications International Inc. ("Qwest") and U S WEST, Inc. ("U
S WEST"), by their attorneys, submit this joint response to the comments
and petitions to deny filed in connection with the above-captioned
request for consent to the transfer of control of Commission
authorizations (the "Application").

# SUMMARY

The record in this proceeding clearly demonstrates that the merger of
Qwest and U S WEST is in the public interest and should be approved
without delay. Comments here fall into two basic categories. First, some
parties argue that the Commission should deny the merger unless it first
imposes a wide range of conditions, many of them drawn in cookie-cutter
fashion from the large ILEC-ILEC transactions. However, these parties
cannot establish any legal predicate for such conditions. They barely
try to demonstrate any public interest harm arising from the Qwest-U S
WEST merger itself. They ignore the fact that this vertical merger is
completely different from other combinations involving horizontal
expansion of ILEC market position.

Commenters also attempt to sweep the merger's important public interest
benefits under the rug. They ignore the applicants\' showing that the
merger will, among other benefits, promote the deployment of advanced
services both within and outside the US WEST region. Commenters do not
address the fact that the merger will permit the applicants to compete
better with the much larger telecom companies created by mergers that
already have occurred (or are in prospect).

In particular, commenters disregard the important new incentives the
merger will create for the combined company to satisfy Section 271 as
soon as possible. Pending 271 relief, Qwest will face significant
competitive disadvantages in the national interexchange market due to
the hole in its service territory created by divestiture. Meanwhile, the
combined company already will own a state of the art network asset it
could use for in-region interLATA service, and the opportunity cost of
leaving that wasting asset idle will be large. Together these business
problems will significantly increase incentives for the combined company
to re-enter the interLATA market in the U S WEST region.

At bottom, these commenters have simply cataloged their individual
complaints regarding U S WEST. But these grievances are not caused by
the merger, and are not relevant here. The merger clearly meets the
public interest standards of the Communications Act. Commenters should
pursue their issues in the other proceedings and forums that are
available to them.

The second category of comments relate to Qwest\'s commitment to divest
its in-region interLATA services prior to closing. Some parties assert
that the Commission should delay action on this Application pending
further scrutiny of Qwest's steps to carry out this divestiture. These
arguments are nothing but unsupported allegations that Qwest will
violate Section 271 by providing prohibited services after the merger
closing. However, the parties have no foundation for this suggestion
whatsoever. Qwest further demonstrates its commitment to comply with the
Act by providing a description of its divestiture plan here. But the
task for the Commission is only to review and rule on the merger
application. The Commission should not accept commenters' suggestion
that it also micro-manage the steps Qwest takes to divest before
closing.

That said, divestiture provides an important reason for prompt
Commission approval of this Application. Qwest has much to do to prepare
for divestiture, including negotiations with potential buyers of the
services to be discontinued, operational work to make the transition
trouble-free for customers, and coordination with customers themselves.
In order for that process to run smoothly, Qwest and the buyers will
need as much lead time as possible. However, Qwest anticipates that
potential buyers may be reluctant to expend the significant resources
required by this project while formal Commission approval remains
pending.

Given the lack of substantive issues presented by this merger, the
Commission can readily serve the interests of customers by approving the
Application as promptly as possible. The sooner it does so, the more
smoothly the divestiture process will run for all concerned. [^1]/

# I. THE MERGER IS IN THE PUBLIC INTEREST AND SHOULD BE APPROVED WITHOUT CONDITIONS.

## A. The Standard of Review.

This merger easily satisfies the public interest standards of Sections
214(a) and 310(d) of the Act. Qwest and U S WEST demonstrated in their
Application that the merger will be pro-consumer and pro-competition.
The merger will bring together two firms with complementary assets and
skill sets, and better position them to implement their shared goal: to
become a leading provider of broadband-based services as the Internet
revolutionizes communications in this country and around the world.

A handful of commenters nevertheless oppose the merger unless the
Commission attaches conditions to its approval. These commenters
(referred to here as the "Merger Opponents") consist entirely of parties
with preexisting disagreements with U S WEST over issues related to the
company's local exchange telephone activities. These parties urge the
Commission to hold this application hostage and address their individual
grievances through merger conditions.

The Merger Opponents, however, ignore the relevant legal standard. The
Commission is not free to attach conditions to a merger in order to
enhance the array of pro-competitive benefits offered by the
transaction; instead, any condition attached must address a specific
anti-competitive risk or harm created by the merger itself. [^2]/
Congress invested the Commission with only limited authority to attach
conditions to its approval of merger transactions. [^3]/ In recent
merger cases, the Commission has consistently acknowledged its limited
authority to impose conditions only "where necessary \* \* \* to ensure
that the public interest is served by \[a\] transaction." [^4]/

In this case the Merger Opponents utterly fail to establish the
predicate for conditions. They fail to show how the merger would in any
respect harm the public interest. And they entirely discount \-- or
simply ignore \-- the important consumer benefits that will flow from
the merger.

Before turning to the allegations made by the Merger Opponents, both
Qwest and U S WEST wish to recognize and affirm U S WEST\'s continuing
obligations, and the obligations of the merged company, as an incumbent
local exchange carrier under both state and federal law. The applicants
are committed to meeting those obligations and continuing to provide
high quality, reliable service to the millions of existing U S WEST
residential and business local exchange subscribers. The applicants
firmly believe the merger will benefit the mass of customers who depend
on telephone service for basic communications. The merger will create a
stronger entity better able to meet those needs, as well as future
telecommunications requirements.

## B. Opponents Cannot Squeeze This Vertical Merger into the "ILEC-ILEC" Box.

Merger Opponents predictably take their cue from the Commission's recent
consideration of other transactions where conditions were imposed, most
notably the Bell Atlantic-NYNEX and SBC-Ameritech combinations. [^5]/
However, the Qwest-U S WEST merger is fundamentally different from the
horizontal ILEC-ILEC deals the Commission has recently confronted. This
transaction is a vertical combination of (i) an ILEC and (ii) a
nondominant interexchange carrier with the large majority of its
operations outside the ILEC\'s region. This vertical merger creates none
of the risks to local or long distance competition that may be presented
when two major ILECs come together.

More specifically, the Commission and parties opposing the recent
ILEC-ILEC mergers have identified three principal anticompetitive risks
potentially created by those combinations. First, ILEC-ILEC mergers may
retard the development of new competition by eliminating a "significant"
potential independent competitor with extensive experience in the local
exchange market. In the Bell Atlantic-NYNEX proceeding, for example, the
Commission noted that the merger would "eliminate any prospect of NYNEX
competing with Bell Atlantic in the \* \* \* northeast corridor." [^6]/
Second, by increasing the size of one company's "footprint" of access
lines, ILEC-ILEC mergers may enhance the ability and incentive of the
merged entity to discriminate against CLECs. [^7]/ Finally, the merger
of two ILECs may impair the Commission's ability to monitor or
"benchmark" ILEC performance. [^8]/

None of those competitive concerns arise in connection with this
transaction. These matters are discussed in more detail in the attached
declaration of Dennis Carlton and Hal Sider of Lexecon, Inc.
(\"Carlton/Sider Declaration\"), provided here as Attachment A. As they
explain, Qwest is not an ILEC, and its CLEC business in U S WEST's
region is trivial. Qwest has purchased conduit in a fiber ring facility
under construction in Seattle that traverses both U S WEST and GTE
territory. [^9]/ Qwest otherwise is not a facilities-based local service
provider in any market in the U S WEST region. Furthermore, Qwest had
already decided to cease its local resale operations in the U S WEST
region well before entering into the proposed merger. The process of
exiting the local resale market is now substantially complete. [^10]/
Covad's assertion that the merger will result in heightened barriers to
entry in high speed access markets is also unfounded. [^11]/ Qwest has
begun to offer DSL service in U S WEST's region, but it does so only as
a reseller of the DSL services of Rhythms and of Covad itself. [^12]/

McLeod points to Qwest\'s partial interest in Advanced Radio Telecom
(ART), a nationwide 39 GHz wireless service provider, as additional
evidence of in-region Qwest CLEC activity. [^13]/ However, Qwest\'s 19
percent, non-controlling interest in ART does not make Qwest a provider
of competitive wireless services, and thus does not bear on Qwest\'s
status as an actual or potential competitor to U S WEST. But even if ART
were wholly-owned by Qwest, no competitive or other public interest
issue would arise. The Commission already has determined that ILECs such
as U S WEST should be allowed to hold licenses for 39 GHz spectrum
within their service areas. [^14]/ If U S WEST would be eligible to own
these licenses outright, there should be even less concern with the
merged company having a less than controlling interest in any such
licensee. 

Likewise, the proposed transaction raises no risk of increased incentive
to discriminate against CLECs. This matter is discussed in more detail
in the

Carlton/Sider Declaration. The simple fact is that Qwest is not an ILEC
and the merger will not increase the number of access lines controlled
by the merged entity. Because the transaction does not increase the
"footprint" of U S WEST's access lines, it will not augment the merged
entity's ability or incentive to discriminate against CLECs. [^15]/ Nor
will the Qwest-U S WEST combination eliminate any opportunities for
monitoring ILEC performance; every "benchmark" available to federal and
state regulators today will remain after the merger. Accordingly, the
Commission should dismiss any suggestion by commenters that conditions
deemed appropriate for the recent ILEC-ILEC mergers should apply here.

Allegiance Telecom, Inc. ("Allegiance") tries to make a backdoor
argument along the same vein, asserting that ILEC-ILEC merger conditions
are justified by BellSouth's 9.9% equity stake in Qwest. [^16]/ Congress
has already determined that equity interests of 10% or less do not raise
questions of common ownership, control, or affiliation. [^17]/ In any
event, Allegiance is confused regarding the facts. BellSouth's interest
in the combined company will be less than 5% due to dilution of its
interest from the merger. BellSouth is entitled to a single Board seat
once it has satisfied certain Section 271 requirements itself. None of
this gives BellSouth a control position in the combined company or
otherwise converts the Qwest-U S WEST merger into an ILEC-ILEC
combination. [^18]/ BellSouth's *de minimis* equity stake in Qwest is of
no relevance to this transaction; the merged entity and BellSouth each
will retain full autonomy to pursue their respective corporate
interests. [^19]/

In short, opponents' attempts to squeeze this application into the
"ILEC-ILEC" box disregard the facts. This vertical merger is entirely
different from those horizontal combinations. No public interest
problems arise here to complicate the Commission's analysis under
Sections 214 and 310.

## C. Opponents Ignore the Merger's Affirmative Public Interest Benefits.

In addition to alleging harms where none exist, Merger Opponents also
disregard the merger benefits identified in the Application. [^20]/
However, these pro-consumer and pro-competition benefits are far too
large and important to be swept under the rug. This merger is founded on
a conclusion by both Qwest and U S WEST that they must combine in order
to better serve the public as technology \-- and other larger mergers
\-- revolutionize the telecommunications landscape. Indeed, Qwest
believes so strongly in this principle that it is willing to take the
difficult step of divesting its in-region interLATA services now to
position itself to achieve these benefits in the future.

Qwest and U S WEST already have discussed these matters in their
Application. [^21]/ However, we will review the merger benefits of
primary concern to the Commission here so that they are not lost due to
the Opponents' failure to address them. [^22]/ Indeed, these benefits
actually argue for expedited approval of this transaction under Sections
214 and 310. The sooner the merger closes, the sooner the benefits will
start to flow to the public.

### 1. Faster Deployment of Advanced Services.

Merger Opponents first disregard the positive impact of the transaction
on the provision of advanced services, both inside and outside the U S
WEST region. This is a case of one plus one equaling far more than two.
Each company holds broadband assets and expertise that complement those
of the other. Together they will be better positioned to deploy those
resources more rapidly, and to become a regional, national and global
leader in the provision of advanced services and technologies.

For its part, Qwest recently completed the construction of a
state-of-the-art, nationwide, 18,500 mile OC-192 fiber optic, Internet
protocol network. This network operates at speeds of up to 10 Gigabits
per second and reaches 150 cities across the United States. The
currently lit portion of the 48-fiber network has sufficient capacity
today to handle all the traffic now carried by AT&T, MCI WorldCom, and
Sprint combined. [^23]/ In addition, Qwest's network has unused capacity
to permit the addition of ten times as many more fibers. Qwest has
invested heavily in broadband international facilities, [^24]/ and its
Internet and web hosting businesses also are global in scope.

U S WEST, in turn, has led the industry in its deployment of digital
subscriber line (DSL) technology in the local loop, enabling subscribers
-- both residential and business -- to maximize the speeds with which
they transmit data and access the Internet. U S WEST already is
providing DSL service in 40 in-region cities and serves about 40 percent
of all DSL customers nationwide. U S WEST has well over 100,000 Internet
access subscribers, and is offering them such advanced network-based
vertical services as site-blocking, virus protection, and privacy
measures. U S WEST also provides an innovative one-number PCS service,
and through its Yellow Pages business is building an electronic commerce
platform.

The merger recognizes the natural fit between these two companies. Qwest
has a high speed national network but needs to offer customers broadband
local connectivity to take full advantage of that asset. U S WEST is the
market leader in DSL deployment. Post-merger, U S WEST's technical and
market expertise immediately can be exported beyond the 14 state region,
helping the combined company more rapidly offer broadband connectivity
to the Qwest network.

Conversely, while U S WEST has DSL expertise, it does not own (even
within its own region) a long-haul network that would enable it to
provide the full range of advanced services to its customers. [^25]/
Once the combined company satisfies Section 271, it will be positioned
to expand its in-region broadband service offerings much more rapidly
using the springboard of the high speed Qwest network. [^26]/

In sum, the merger will benefit the public by enabling the combined
company to deploy advanced services more quickly, more broadly, and more
effectively than either company could standing alone. The merger will
promote the Congressional goal, embodied in Section 706 of the 1996
Telecom Act, of accelerating the deployment of advanced services to all
Americans. [^27]/ The beneficiaries will be consumers in the U S WEST
territory and beyond.

### 2. Stronger Competition With Larger Firms Created by Other Mergers. 

Merger Opponents also fail to credit a second public interest benefit of
the transaction: stronger nationwide competition. The Commission already
has approved \-- or is being asked to approve \-- other much larger
telecommunications combinations, including (a) SBC-Pacific
Telesis-SNET-Ameritech, (b) Bell Atlantic-NYNEX-GTE, (c)
AT&T-Teleport-TCI-MediaOne, and (d) WorldCom-MCI-MFS-Brooks-Sprint.
These huge combinations have significant horizontal elements that are
entirely lacking in the Qwest-U S WEST merger. The public clearly will
benefit from this merger insofar as it creates a stronger competitor to
these giants. [^28]/

This merger, for example, will strengthen the resources and ability of
the combined company to enter local markets outside the U S WEST region.
The Commission recently approved the SBC-Ameritech merger,
notwithstanding finding serious public interest concerns, in part
because the FCC so valued SBC's commitment to enter the local market
outside its territory. Indeed, the Commission established penalties if
SBC does not follow through with this entry. [^29]/ Yet here Qwest
*already* is active outside the U S WEST region, and its ability to draw
on U S WEST local exchange expertise will simply accelerate that
process.

More broadly, the Qwest-U S WEST merger will permit the combined company
to compete more effectively for the "national/local customer\" \-- that
is, the multi-location business customer that would prefer to buy all
its communications services (including its local exchange services) from
a single supplier. These are the customers that the FCC\'s conditions
will encourage SBC to solicit in the U S WEST region and elsewhere, and
that also will be the target of other merged ILECs with far more
extensive local footprints. [^30]/  For example, the recently merged
SBC-Ameritech will control approximately 33 percent of the customer
lines served by the nation\'s largest ILECs. [^31]/ Post-merger, Bell
Atlantic-

GTE will serve approximately 37 percent of these customer lines. [^32]/
In comparison, U S WEST has only 9.5% of these lines. [^33]/

The combined company also will be better positioned to compete with
AT&T, with its large long distance market share and its (current and
proposed) control over a large percentage of the nation's cable
television subscribers. If the MediaOne merger is approved, AT&T cable
systems would pass approximately one-third of the nation's homes in
addition to AT&T\'s exclusive arrangements with other operators. AT&T
will have sole use of those local cable facilities to serve customers.
The ability of AT&T to offer integrated packages of telephony, Internet,
and video services presents a serious challenge to all its competitors,
including the applicants here.

The Merger Opponents apparently hope the Commission will ignore the
benefits to consumers of creating stronger competition to the new
telecom giants. Qwest and U S WEST, however, are confident that the
Commission will not be misled.

### 3. Powerful New Incentives for U S WEST to Satisfy Section 271. 

Finally, the Merger Opponents ignore, or simply dismiss out of hand, the
applicants' observation that the merger will increase incentives for U S
WEST to enter the interLATA market as soon as possible. [^34]/ Yet these
incentives are a powerful additional reason for rapid Commission action
here. This matter is discussed in more detail in the declaration of
Bruce Owen of Economists, Inc., provided as Attachment B.

#### a. Incentives to eliminate out-of-region competitive disadvantages.

The first new incentive arises from the fact that, in divesting its
in-region interLATA business, Qwest is taking on a significant
competitive disadvantage compared with other national interexchange
carriers. [^35]/ The post-merger company will have a doughnut-shaped
footprint with a 14-state hole. Inside the hole the company will be
unable to provide originating long distance, terminating 800, private
line, and other prohibited interLATA services. [^36]/

As a consequence, Qwest will be seriously hampered in its ability to
retain the out-of-region business of its existing customers, to compete
for new customers out-of-region, and to grow its existing nationwide
business. Multi-location business customers generally purchase interLATA
services on a nationwide basis. They typically solicit nationwide
service proposals and negotiate nationwide price discounts. They also
generally prefer dealing with a single provider and having service
provisioned over a single integrated network. [^37]/

The interLATA prohibition, then, will have two effects. First, Qwest
will not be able to win all the customer business and revenues otherwise
available to it. It will lose all its in-region interLATA business, and
will suffer impacts in the out-of-region market from its inability to
offer "one stop shopping" for interexchange service. Second, Qwest's
marketing costs will increase, especially in the national account arena.
Qwest will face special challenges trying to market stand-alone
out-of-region services.

At the same time, Qwest's network costs will not be materially reduced
by the divestiture of the "doughnut hole." Qwest still will have to
maintain its nationwide network even though usage of that network will
be constrained. [^38]/ The costs of that network are largely fixed or
sunk. In addition, many costs related to network planning, operation,
maintenance and management (the cost of the Network Operations Center,
for example) do not vary with the capacity utilization rate. [^39]/ The
variable cost of using this in-place network to provide interLATA
services is therefore very small, particularly when compared to the cost
of leasing or building that network from scratch. [^40]/ Post-closing,
the unit cost of using the Qwest network to provide service to
out-of-region customers will increase because fixed costs now will be
spread over less traffic.

Indeed, it is highly significant that no RBOC to date has engaged in
major interexchange service activity outside its region, even though
such activity is permitted by the Telecom Act. This fact itself
demonstrates the serious disadvantages inherent in offering
interexchange services in competition with AT&T, MCI WorldCom and Sprint
without a national capability.

In sum, Qwest will face a significant opportunity cost for every month
that it cannot use its valuable interLATA network to offer nationwide
retail and wholesale products. [^41]/ Qwest and U S WEST are fully aware
of that cost, and partly for that reason are committed to satisfy
Section 271 on an accelerated basis.

#### b. Incentives to make full use of the Qwest network asset.

As discussed in the Owen Declaration, the post-merger company also will
have additional incentives to satisfy Section 271 because the company
now already will own an interLATA network. [^42]/ This fact is highly
significant. U S WEST has no such network today, either in-region or
out-of-region. [^43]/ But post-merger the combined company already will
have incurred most of the costs of providing interLATA service because
it already will own the interLATA facilities.

This fact has important consequences. First, it means that the merged
company will be able to enter the interLATA market immediately upon
Section 271 relief, with its own high capacity state of the art
interLATA network. It will not incur the time and cost involved in
constructing a facilities network on its own, nor will it have to depend
on reselling the services of another carrier. [^44]/

Second, and more important, the low variable cost of using the existing
Qwest interLATA network will make provision of in-region interLATA
services more profitable for the combined company than it would be for U
S WEST alone. The merger therefore will create a stronger incentive to
satisfy the Section 271 requirements. Expeditious Section 271 approval
will allow the combined company to take advantage of the more profitable
in-region interLATA business opportunities sooner.

As discussed in the Owen declaration, the fact that the combined company
already will own an interLATA network increases the return that can be
expected from an investment in work to accelerate satisfaction of
Section 271. [^45]/ Pre-merger U S WEST would expect to incur a certain
cost per unit (*e.g*. per-minute) of providing interLATA service
(whether it purchased capacity from a different underlying carrier or
built interLATA facilities itself). [^46]/

Post-merger the combined company will be in a different position than U
S WEST pre-merger. The unit cost of providing in-region interLATA
service will be much lower, since the company already will own an
operational interLATA network and the variable costs of using that
network for incremental traffic is low, as discussed above. Anticipated
margin and profits from interLATA entry by the combined company thus
would be greater as a result of the merger, and the opportunity cost of
delaying Section 271 compliance would be greater, than it would be for
pre-merger U S WEST.

An additional consideration adds to the incentives to obtain prompt
interLATA authority. The Qwest network required a substantial capital
investment by Qwest -- over \$2 billion. That network is
state-of-the-art and gives Qwest a substantial competitive advantage.
Because it was built with the latest technology, the Qwest network also
has a tremendous amount of excess capacity. [^47]/ As time goes by and
the combined company cannot make maximum use of that network due to the
interLATA prohibition, it will be losing the ability to earn the highest
return on its capital investment. [^48]/ In this sense, the network is a
\"wasting asset.\"

In sum, the Merger Opponents are wrong to dismiss the impact of the
transaction on the Section 271 process. Until the merged company
satisfies Section 271, it cannot reap the financial benefits of its
network investment in its own region \-- and its out-of-region activity
will be hobbled compared to other national interexchange carriers.

## D. Complaints Regarding U S WEST Do Not Belong in this Proceeding.

The preceding sections explain why Merger Opponents calling for
conditions have failed to demonstrate a legal foundation for their
request. They have failed to show that the merger of Qwest and U S WEST
will cause any public interest harm. Meanwhile, they have disregarded
the clear public interest benefits arising from the transaction.

In fact, the Merger Opponents barely pay lip service to the legal
standards governing the Commission's review of merger applications. They
transparently seek to convert this proceeding into a forum for redress
of their own private grievances, ranging from the scope of U S WEST's
specific obligations to them under Section 251, to its billing
practices, to the quality of its local service.

But the Merger Opponents have failed to demonstrate that this merger
proceeding is the appropriate forum for resolving such issues. Clearly,
it is not. First -- and fundamentally -- the commenters entirely fail to
demonstrate how grant of the Application and consummation of the merger
would cause the specific harms they claim; for that reason they lack
standing to raise them here. [^49]/ Second, they just as clearly fail to
establish that the merger would result in any harm to the public
interest; they therefore have not laid the necessary predicate for the
requested conditions on grant of the Application. Finally, and in any
event, these commenters fail to recognize that other more appropriate
forums exist for airing their issues, including interconnection
negotiations and arbitrations, and state and federal regulatory
commission complaint processes. Indeed, in some cases the Merger
Opponents already are taking advantage of those vehicles.

The complaints raised by the Merger Opponents principally fall into
three categories, none of them connected to the merger: (1) state issues
related to U S WEST local service quality, interconnection negotiations,
and similar matters; (2) open policy issues that already are pending in
Commission rulemaking or complaint proceedings (or are properly
addressed in such proceedings); and (3) previously resolved issues that
commenters seek to reopen collaterally in the context of this merger.
Again, none of these issues arises from the Qwest-U S WEST Merger. As
demonstrated below, none should be addressed in this transfer of control
proceeding.

The state-related objections include, for example, the contention of
McLeodUSA Telecommunications, Inc. ("McLeod") that the merged entity
should be required to "make the investments necessary" to improve the
quality and availability of U S WEST wholesale and retail
services. [^50]/ McLeod\'s only attempt to link this concern to the
merger is its speculative assertion that the merger could result in a
"diversion of resources" from in-region local exchange services to
efforts to compete in other telecommunications markets. [^51]/ But this
proceeding is clearly not the proper forum for such allegations. [^52]/
Service quality issues should be resolved in appropriate state
proceedings unrelated to this merger. [^53]/ Other complaints regarding
U S WEST service performance, [^54]/ or regarding the status of state
interconnection and arbitration proceedings, [^55]/ are equally out of
place.

Similarly, the Commission should reject attempts by Merger Opponents to
impose special conditions on the combined company addressing issues that
properly belong in generic rulemaking proceedings \-- and in some cases
already are the subject of such proceedings. Rhythms, for example,
proposes that the merger be conditioned on improvements in the provision
of OSS for advanced services, collocation at remote locations, and
work-arounds for the presence of digital loop carrier facilities. [^56]/
Covad requests conditions relating to UNE loop pricing, retail/wholesale
separation, and OSS for advanced services, and, as noted above,
Allegiance seeks a condition that the merged company adopt a regionwide
"most favored nation" policy for interconnection arrangements. [^57]/

But these generic issues belong in generic proceedings. They do not
arise because of the merger, and grant or denial of this Application
will not resolve the Merger Opponents' complaints. [^58]/ In previous
merger proceedings, the Commission repeatedly refused to consider
unrelated matters. [^59]/ In seeking a reversal of that policy here, the
commenters do not credibly suggest that the issues they pose arise out
of the merger. The Commission should decline to pluck issues out of
pending proceedings or address other generic issues in the limited
context of this Application.

Finally, some Merger Opponents have proposed conditions addressing
matters already conclusively resolved by the Commission or subject to
existing Commission rules. These comments are no more appropriate for
this proceeding. For example, the Coalition to Ensure Responsible
Billing ("CERB") argues that the merger should be conditioned on a
commitment by U S WEST to allow other service providers to include their
charges on its local bill. [^60]/ This dispute, however, was decided
thirteen years ago when the Commission deregulated billing and
collection services. [^61]/ CERB does not remotely justify using this
proceeding to reverse that decision, let alone only for the post-merger
company.

For similar reasons, the Commission should reject Allegiance's plea to
condition approval of the merger on compliance with the affiliate
transaction and collocation rules, and the Joint Commenters' request
that approval be conditioned on compliance with various local
competition regulations. [^62]/ Those rules are what they are and will
apply to the merged company just as to any other. [^63]/ There is no
cause for a condition requiring compliance for this single company. As
the Commission concluded in declining to impose a condition mandating
AT&T-TCI's compliance with the program access rules, because "nothing in
the merger transaction would shield the merged company from the program
access rules \* \* \* \[a\] condition therefore is unnecessary." [^64]/
The same answer applies here.

\* \* \* \* \* \*

This Application should not be controversial or difficult for the
Commission to grant promptly. Contrary to the suggestions of certain
commenters, the merger of Qwest and U S WEST raises no public interest
concerns, and promises significant benefits to consumers and
competition. It easily passes the standard for Commission approval under
the Communications Act.

# II. QWEST WILL DIVEST PROHIBITED INTERLATA SERVICES AS IT COMMITTED TO DO IN THE APPLICATION. 

##  A. The Commission Should Not Assume A Future Violation Of The Law.

The Application already includes a commitment that, in order to comply
with Section 271 of the Act, Qwest will discontinue providing prohibited
interLATA services in U S WEST's 14-state region as of the merger
closing. [^65]/ Notwithstanding, several commenters suggest that the
Commission should delay approval of the merger while it scrutinizes the
precise details by which Qwest will bring itself into compliance with
the Act. [^66]/ Essentially these commenters demand that the Commission
take on the job of micro-managing Qwest's divestiture.

These arguments amount to nothing more than unsupported allegations that
Qwest will not satisfy its divestiture commitment. Commenters making
these arguments, however, provide no evidence at all to support their
suggestion that Qwest will violate Section 271. The Commission routinely
rejects similar requests to deny or delay action on proposed
transactions based on such unsupported allegations. [^67]/ It should do
so again here. [^68]/

##  B. Qwest Is Moving Forward Promptly To Prepare For Divestiture.

Notwithstanding the implications of commenters, since filing the
Application Qwest already has made substantial progress in the complex
administrative process of implementing its divestiture. Qwest has been
engaged in a review of all retail and wholesale customer contracts to
identify interLATA services that must be divested as of closing. Qwest
also has been examining operational issues associated with divestiture.

For the convenience of the Commission, we are submitting as Attachment C
a detailed summary of Qwest's current plans for in-region interLATA
divestiture (the "Qwest Divestiture Plan"). This document should further
assure the parties here that Qwest will fully divest its in-region
interLATA business, and that post-merger, the company will comply fully
with Section 271.

The Qwest Divestiture Plan embodies two over-arching principles:
(1) minimize the impact of divestiture on customers, with a seamless
transition and no increase in rates, and (2) comply fully with Section
271. Qwest anticipates selling its prohibited interLATA service
offerings to one or more independent common carriers with Section 214
certificates and operating authority in the relevant states. Each of
these purchasing carriers will be technically and operationally able to
provide service over their own transmission facilities in a timely
fashion without customer disruption.

Qwest and the purchaser or purchasers will take the necessary steps to
make the transition smooth and uneventful for customers. The purchasers
will be obliged to assume all of Qwest's existing contractual
obligations for the divested in-region interLATA telecommunications, and
will commit not to raise rates for Qwest's tariffed customers for a
certain time period. Thereafter, however, the purchasing carrier or
carriers will have full rights to set their own rates for the divested
services, and in every other respect will operate completely
independently of Qwest. To the extent that the purchasers obtain any
interconnection, access, or other telecommunications services from the
U S WEST operating companies, they would do so at the same
non-discriminatory rates, terms, and conditions as all other carriers.

As the Qwest Divestiture Plan demonstrates, Qwest is preparing to
discontinue all of its prohibited interLATA service offerings within the
U S WEST region. The service offerings to be divested include all
relevant voice and data services offered to residential and business
customers (including both retail and wholesale services). Specifically,
Qwest anticipates divesting the following services:

-   interLATA switched long distance service originating in the U S WEST
    region;

-   interLATA 800 services terminating in the U S WEST region;

-   interLATA private line voice and data services originating or
    terminating in the US WEST region that cross LATA boundaries;

-   in-region interLATA calling card, prepaid phone card, and
    operator-assisted services; and

-   the in-region interLATA transmission component of dial-up and
    dedicated Internet access services and Internet-based hosting
    services.

The sale of these services will be final and irrevocable, with no right
for Qwest to re-acquire the services or customers at any point. Qwest
does not, however, plan to sell its existing fiber optic transmission
plant. It will continue to use that plant to provide out-of-region and
other telecommunications services permitted by Sections 271(b)(2) and
(3) of the Act.

The attached Qwest Divestiture Plan includes a detailed legal analysis
of the authority for the scope of the divestiture planned by Qwest. It
also describes the support functions useful in meeting customer
requirements that the purchaser or purchasers of the divested services
may acquire from Qwest under arm's length contracts, and explains why
Qwest may provide those functions consistent with Section 271 and other
governing legal authority.

In sum, the Qwest Divestiture Plan constitutes strong evidence that
Qwest will carry through its commitment to divest all of its in-region
interLATA services prior to closing the merger. Other commenting parties
have supplied no evidence to the contrary.

## C. Commenters\' Other Divestiture Arguments Are Misplaced.

AT&T, MCI WorldCom, and McLeod raise a number of misplaced contentions
regarding the scope of the divestiture plan. We show below that each of
these arguments is baseless, and the Commission should not allow any of
them to delay its approval of the proposed transfer of control.

First, the Commission should disregard AT&T's unsupported contention
that, in the context of Qwest's anticipated transfer of its in-region
originating switched long distance business, a waiver of the
Commission's customer authorization and verification requirements would
not be appropriate. [^69]/ The Commission has granted numerous waivers
of those requirements in comparable situations. [^70]/ Such a waiver is
necessary, and perfectly appropriate, to facilitate a simple and
straightforward sale of a non-dominant carrier's customer base and
enable the carrier to exit a market without inconveniencing
customers. [^71]/

Second, the Commission should not be diverted by MCI WorldCom's
oft-repeated, generic argument that Section 271 precludes BOC affiliates
from providing Internet access services. [^72]/ As described more fully
in the attached Qwest Divestiture Plan, [^73]/ Qwest will structure its
information service offerings to comply with the Commission's clear
statement that BOC affiliates may, consistent with Section 271, provide
in-region information services that do not "incorporate as a necessary,
bundled element an interLATA telecommunications transmission component,
provided to the customer for a single charge." [^74]/ Qwest\'s
continuing Internet access, web hosting, and other Internet-related
service offerings will be structured similarly to the existing offerings
of other BOCs and their affiliates.

MCI WorldCom concedes that it has raised this argument many times in
other contexts, [^75]/ but the Commission has never conclusively
addressed the issue. [^76]/ There is no reason to allow this merger
application proceeding to become bogged down by uncertainties that
affect the entire industry. If and when the Commission adopts relevant
conclusions regarding the status of particular interLATA information
services in the future, the merged company will comply fully with such
conclusions.

Third, McLeod's argument regarding dark fiber is incorrect. [^77]/
McLeod understands the distinction between the sale of dark fiber
facilities and the lease of dark fiber for a term of years. However,
McLeod mistakenly assumes that Qwest has leased dark fiber to Frontier,
GTE, and MCI WorldCom. [^78]/ To the contrary, Qwest has sold those
parties indefeasible rights of use ("IRUs") in fiber facilities,
conveying ownership rights in specific dark fibers for the economically
useful life of the fiber. The purchasers obtained full control over use
of the fiber and are the owners for tax and accounting purposes. Qwest
in turn booked the associated revenue as "network construction." Qwest
has no legal ability to unwind these completed sales.

Moreover, McLeod provides no support for its suggestion that Qwest's
provision of certain maintenance services in connection with these IRU
sales somehow converts them into provision of interLATA
telecommunications. [^79]/ As the Commission correctly concluded in the
*Second Reconsideration Order*, [^80]/ the sale of telecommunications
network facilities does not constitute "interLATA service," which the
Act defines as "telecommunications between a point located in a \[LATA\]
and a point located outside such \[LATA\]." [^81]/ In turn,
"telecommunications" is defined by the Act as "the transmission, between
or among points specified by the user, of information of the user's
choosing without change in the form or content of the information as
sent and received." [^82]/ In this case, the only activity at issue is a
maintenance service provided to an unaffiliated carrier, and Qwest is
not engaged in any transmission whatsoever. [^83]/

##  D. Prompt Grant Of This Application Is Necessary To Help Ensure A Smooth Customer Transition.

It is not surprising that certain Qwest competitors want the Commission
to delay approval of this Application. The Qwest divestiture is a large
undertaking. It will require substantial work to ensure that customers
are not adversely impacted. Qwest already is taking unilateral steps to
prepare for divestiture. But next it will need to deal with third party
purchasers, who in turn will need to devote resources of their own to
negotiate purchase agreements and then undertake their own tasks to
prepare to take over the divested services. Furthermore, both Qwest and
purchasers will need to address customer questions that already are
arising in the market, and in some instances work directly with
customers to address their specific requirements.

The sooner that the Commission grants this Application, the more
smoothly this divestiture process will run. The Commission will recall
that when the Bell System divestiture took place, approval of the
consent decree and plan of reorganization occurred well before
divestiture itself. The Qwest divestiture here is much more simple, but
the same general considerations apply. The sooner the Commission grants
this application, adding certainty to the merger process, the easier it
will be for Qwest and third parties to implement the divestiture plan in
a manner with the least impact on customers. Qwest and U S WEST fully
expect to close their merger in the second quarter of 2000. Prompt
approval of this Application will facilitate the divestiture activity
necessary before that closing, to the ultimate benefit of Qwest\'s
customers. In contrast, any material delay in this proceeding will
introduce unnecessary customer uncertainty, and may reduce the amount of
time available before closing to complete the necessary transitional
work.

# conclusion

For the reasons stated above and in the initial application, Qwest and U
S WEST urge the Commission to approve this merger promptly, and to do so
without attaching conditions. The merger does nothing to increase the
likelihood of anticompetitive or discriminatory activity by U S WEST. On
the contrary, this merger brings numerous public interest benefits to
consumers, including the acceleration of deployment of advanced services
by the combined company. The merger will advance competition both inside
and outside the U S WEST region, and will provide powerful new
incentives for satisfaction of Section 271 in the U S WEST region.

Respectfully submitted,

+-----------------------------------+-----------------------------------+
| **QWEST COMMUNICATIONS            | **U S WEST, INC.**                |
| INTERNATIONAL INC.**              |                                   |
|                                   | By\_\_                            |
| By\_\_                            | \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\ |
| \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\ | _\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ |
| _\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ |                                   |
+-----------------------------------+-----------------------------------+
| Drake S. Tempest                  | Mark D. Roellig                   |
|                                   |                                   |
| Genevieve Morelli                 | Daniel L. Poole                   |
|                                   |                                   |
| Qwest Communications              | Sharon J. Devine                  |
|                                   |                                   |
| International Inc.                | U S WEST, Inc.                    |
|                                   |                                   |
| 555 Seventeenth Street            | 1801 California Street            |
|                                   |                                   |
| Denver, CO 80202                  | Denver, CO 80202                  |
+-----------------------------------+-----------------------------------+
| Peter A. Rohrbach                 | Kathryn A. Zachem                 |
|                                   |                                   |
| Mace J. Rosenstein                | Carolyn W. Groves                 |
|                                   |                                   |
| Hogan & Hartson L.L.P.            | Wilkinson Barker Knauer, L.L.P.   |
|                                   |                                   |
| 555 Thirteenth, N.W.              | 2300 N Street, N.W.               |
|                                   |                                   |
| Washington, D.C. 20004            | Suite 700                         |
|                                   |                                   |
|                                   | Washington, D.C. 20037            |
+-----------------------------------+-----------------------------------+
| Counsel for Qwest Communications  | William T. Lake                   |
| International Inc.                |                                   |
|                                   | Wilmer, Cutler & Pickering        |
|                                   |                                   |
|                                   | 2445 M Street, N.W.               |
|                                   |                                   |
|                                   | Washington, D.C. 20037            |
+-----------------------------------+-----------------------------------+
|                                   | Counsel for U S WEST, Inc.        |
+-----------------------------------+-----------------------------------+
| Dated: October 18, 1999           |                                   |
+-----------------------------------+-----------------------------------+

ATTACHMENT A

DECLARATION OF\
DENNIS W. CARLTON AND HAL S. SIDER

**DECLARATION OF DENNIS W. CARLTON AND HAL S. SIDER**

**In the matter of**

**QWEST / U S WEST MERGER APPLICATION**

**October 18, 1999**

**I. QUALIFICATIONS**

1\. I, Dennis W. Carlton, am Professor of Business Economics at the
Graduate School of Business of The University of Chicago. I received my
B.A. in Applied Mathematics and Economics from Harvard University and my
M.S. in Operations Research and Ph.D. in Economics from the
Massachusetts Institute of Technology. I have served on the faculties of
the Law School and the Department of Economics at The University of
Chicago and the Department of Economics at the Massachusetts Institute
of Technology. I specialize in the economics of industrial organization,
which is the study of individual markets and includes the study of
antitrust and regulatory issues. I am co-author of [Modern Industrial
Organization]{.underline}, a leading textbook in the field of industrial
organization, and I also have published numerous articles in academic
journals and books. In addition, I am Co-Editor of the [Journal of Law
and Economics]{.underline}, a leading journal that publishes research
applying economic analysis to industrial organization and legal matters.
I have served as an Associate Editor of the [International Journal of
Industrial Organization]{.underline} and [Regional Science and Urban
Studies]{.underline}, and have served on the Editorial Board of
[Intellectual Property Fraud Reporter]{.underline}.

2\. In addition to my academic experience, I am President of Lexecon
Inc., an economics consulting firm that specializes in the application
of economic analysis to legal and regulatory issues. I have served as an
expert witness before various state and federal courts, and I have
provided expert witness testimony before the U. S. Congress and a
variety of state and federal regulatory agencies, including the Federal
Communications Commission (FCC). I also have served as a consultant to
the Department of Justice on the Merger Guidelines of the Department of
Justice and Federal Trade Commission, as a general consultant to the
Department of Justice and Federal Trade Commission on antitrust matters,
and as an advisor to the Bureau of the Census on the collection and
interpretation of economic data. I also have provided testimony on
telecommunications matters before Congress, the federal courts, and
federal and state regulatory agencies and have published academic
articles on telecommunications issues. A copy of my curriculum vitae is
attached as Exhibit 1 to this affidavit.

3\. I, Hal S. Sider, am a Senior Economist and Vice-President of Lexecon
Inc. I received a B.A. in Economics from the University of Illinois in
1976 and a Ph.D. in Economics from the University of Wisconsin (Madison)
in 1980. I have been with Lexecon since 1985, having previously worked
in several government positions. I specialize in applied microec­o­nom­ic
analysis and have per­formed a wide variety of economic and econometric
studies relating to industrial organiza­tion, antitrust and merger
analysis. I have published a number of articles in profes­sional
economics journals on a variety of economic topics and have testified as
an econom­ic expert on matters relating to industrial organization,
antitrust, labor economics and damages. In addition, I have directed
several studies of competition in telecommuni­cations industries and have
previously testified as an expert on telecommunica­tions matters before
the FCC and public utility commissions in New York, Colorado, West
Virginia, Florida, and Montana. I have also published an academic
article (with Kenneth Arrow and Dennis Carlton) on telecom­mu­ni­cations
issues. A copy of my curriculum vitae is attached as Exhibit 2 to this
affidavit.

4\. We have been asked to comment on certain aspects of the proposed
merger of U S WEST with Qwest. We conclude that demand and supply
conditions in the telecommunications industry are changing rapidly and
that transactions such as the proposed merger of Qwest and U S WEST can
enable firms to better respond to these changes. We also conclude that
the proposed transaction does not give rise to the competitive concerns
that the FCC raised in recent ILEC/ILEC mergers or that commenters have
raised in this proceeding. Accordingly, there is no competitive
justification for imposing conditions on approval of the proposed
merger.

**II. MERGERS CAN BE A RESPONSE TO CHANGES IN DEMAND AND SUPPLY
CONDITIONS**

5\. Mergers typically enable firms to realize efficiencies relative to
what each could achieve independently. These efficiencies can include
reduced costs of providing services and/or improving the ability of
firms to introduce and deploy new products and services. In this way,
mergers can enable firms to respond to changes in industry conditions
more rapidly than would be possible absent a merger.

6\. In this section, we first present a brief overview of the rapid
changes in demand and supply conditions now facing the
telecommunications industry. We then briefly review how recent
telecommunications mergers, including the proposed merger of Qwest and U
S WEST, are attempts to respond to these changes.

**A. OVERVIEW OF CHANGES IN DEMAND AND SUPPLY CONDITIONS**

**1. Increased demand for data services**

7\. The demand for data services has grown dramatically in recent years,
and this trend is expected to continue. Salomon Smith Barney, for
example, projects that over the next several years, revenue from circuit
switched services (i.e., traditional long distance voice services) will
grow by three to five percent annually; data services revenue will grow
20 to 25 percent annually, and Internet revenue will grow 40 to 45
percent annually.[^84] Between 1993 and today, the number of computers
with Internet access grew from 1.3 million to more than 80 million.[^85]

**2. New technologies**

8\. Closely related to the growing demand for data services is the rapid
deployment of high-capacity packet-switched fiber optic networks in
recent years. These technologies reflect a fundamental change in the
structure of telecommunication networks:

> The way that communications networks were designed and deployed in the
> past is under review because of the Internet and, in part, because of
> substantial improvements in digital processing. Instead of routing
> data over the voice network \[\...\] some players plan to route voice
> on networks designed to handle data. The new networks use
> packet-switched technology rather than circuit switching technology
> used in the voice network \...[^86]

9\. Packet switched technology is rapidly displacing circuit switched
technology. AT&T, for example, has announced that it intends to stop
buying traditional telephone switches by the end of 1999 and instead
will exclusively deploy other technologies including packet switches and
routers.[^87] Sprint and MCI WorldCom are also deploying packet-based
capacity in their networks.[^88] Packet-based long distance networks are
being deployed, or have been deployed, by Qwest, Williams,[^89] Level
3,[^90] and Frontier.[^91]

10\. Digital subscriber line (DSL) technology is also being deployed in
order to increase the capacity of existing copper networks, enabling
residential customers to obtain broadband Internet services. This
technology also enables businesses to use existing phone lines to
connect remote locations to private data networks as well as the
Internet. AT&T and other cable television companies are also upgrading
their cable television systems in order to deploy broadband Internet
services to residential customers.

**3. Increased demand for bundled services**

11\. There is also increased demand for bundled services among
residential and small business customers. For example, companies such as
SNET and GTE that have been permitted to provide long distance service
have been successful in providing bundled local and long distance
service. Between 1994 and 1998, SNET gained approximately 900,000 long
distance subscribers, roughly 40 percent of the local lines it
serves.[^92] GTE has gained more than 3 million long distance
subscribers since it began offering services roughly three years
ago.[^93] Customer satisfaction with bundled services is also reflected
in the J.D. Power and Associates 1999 Residential Long-Distance Customer
Satisfaction Study, which states that "\[a\]nother major finding from
the study reflects the positive impact bundling \[of local and long
distance service\] can have in meeting customer expectations in the
telecommunications industry."[^94]

**4. Increased demand for multilocation services among business
customers**

12\. Among business customers, the growing diversity and complexity of
telecommunications services has generated demand for telecommunications
firms to provide "one-stop shopping" for a bundle of services. There is
also increased demand for firms to provide an "end-to-end" service and a
"single point of contact" to multiple location customers. [^95] Analysts
have stressed that local exchange carriers that fail to provide such
services will be at a significant competitive disadvantage relative to
those that do.[^96]

**B. TELECOMMUNICATIONS MERGERS, INCLUDING THE PROPOSED TRANSACTION,
REFLECT ATTEMPTS TO RESPOND TO CHANGES IN INDUSTRY CONDITIONS**

**1. Motivations for recent mergers**

13\. Recent mergers in the telecommunications industries reflect various
responses to changes in demand and supply conditions. While
telecommunications mergers of recent years reflect diverse strategies,
they generally reflect attempts by firms to provide a more diverse range
of products over a broader geographic area.

14\. For example, WorldCom's acquisitions of MFS, UUNet, and MCI and its
proposed merger with Sprint, as well as AT&T's acquisitions of McCaw,
Teleport, and TCI and its proposed merger with MediaOne, reflect the
firms' view that these transactions will enable them to provide a broad
portfolio of services over a wide geographic area. Similarly, ILEC/ILEC
mergers, such as SBC's acquisitions of Pacific Telesis, SNET, and
Ameritech and Bell Atlantic's acquisition of NYNEX and its proposed
merger with GTE, reflect movements away from limitations on the
geographic scope of RBOC activities established at the time of the AT&T
divestiture. The ILEC/ILEC mergers also reflect the recognition that
many customers prefer a single provider of both "local" and "long
distance" services over a wide geographic area.

15\. Mergers among telecommunications firms in recent years indicate
that it is not always possible to use contractual relationships to take
advantage of synergies or integration opportunities between suppliers of
various telecommunications services. The mergers indicate that it often
is more efficient for a single firm to exploit these opportunities.[^97]
Telecommunications firms, for example, may be reluctant to share
technology through contract and/or joint ventures with other firms,
since this information may fall into rivals' hands if the partner is
acquired by another firm.

16\. Mergers may hold the promise of combining the complementary
managerial skills of two firms. It may be difficult for firms to share
the human capital that managers possess through contract and firms also
may be reluctant to share this information in joint ventures due to the
difficulty of conflicting objectives and/or risks of losing proprietary
information. Mergers can help avoid these concerns.[^98]

17\. Mergers also may enable firms to integrate networks, improve
performance and achieve efficiencies. For example, integration of
network monitoring functions may improve the reliability of end-to-end
service for multilocation customers and thus help assure customers of
the value of a single point of contact. Mergers may also improve
efficiency by eliminating or avoiding the need for redundant facilities
or functions.

**2. Qwest / U S WEST merger plans**

18\. Qwest and U S WEST expect that their merger will enable them to
realize significant savings in operating and capital costs from
coordinating their operations and also will enable them to facilitate
the deployment of a variety of services that will benefit both in-region
and out-of-region consumers.

19\. Qwest and U S WEST expect to realize significant cost savings by
consolidating a variety of functions including, for example, network
engineering operations, procurement, and managerial functions. The
parties anticipate that by 2002 they will realize annual capital cost
savings of \$450-500 million and operating cost savings of \$700-800
million.[^99]

20\. The companies plan immediately to market Qwest's Internet-based
application services, including e-commerce, web-hosting, and other
services, to U S WEST's large base of in-region customers. Qwest and U S
WEST also plan to offer bundled long distance and local telephone
services to in-region customers following 271 approvals. [^100]

21\. In addition, Qwest and U S WEST have announced plans to offer a
variety of out-of-region services to an array of customers following
their merger, including Competitive Local Exchange Carrier (CLEC)
services and DSL services. Qwest's out-of-region CLEC activities will
include offerings to business customers with demand at both in-region
and out-of-region locations.[^101] Qwest and U S WEST also have
announced plans for the merged company to deploy facilities-based DSL
services in 25 cities outside of U S WEST's territory that will be
marketed initially to small and medium size business customers.[^102]

**3. Potential Efficiencies**

22\. The transaction provides the opportunity for the merged company to
realize a variety of efficiencies that will benefit both in-region and
out-of-region customers. Although the companies have not yet fully
determined exactly how such opportunities are to be pursued, the
transaction creates possibilities for efficiencies that otherwise would
not exist.

23\. These potential efficiencies are the consequence of combining the
complementary attributes of the two firms.

24\. [First]{.underline}, the merger combines firms with complementary
managerial skills. Qwest's management understands how to succeed in a
rapidly changing industry, having recently completed its national fiber
optic network on time and under budget.[^103] Qwest, which only became a
public company in 1997, now has a market value in excess of \$25
billion. U S WEST, on the other hand, has extensive experience in
managing telecommunications networks that serve a mass market consisting
of millions of customers. Combination of these

management assets holds the potential for the rapid deployment of
innovative services to a large base of in-region and out-of-region
customers.

25\. [Second]{.underline}, the merger combines firms with complementary
physical assets. Qwest has a 18,500 mile, high-capacity fiber optic
network in the United States as well as networks in Mexico and Europe
and is deploying (or has completed) high capacity local fiber optic
networks in 19 U. S. cities. U S WEST, on the other hand, has extensive
experience as a provider of local services and has deployed DSL services
in more than 40 cities throughout its region.[^104] Combination of these
network assets creates the opportunity for the combined firm to provide
a broad range of products using an integrated network under the control
of a single firm. This holds the promise of enabling the merged firm to
better assure customers of network reliability and to provide customers
a single point of contact for service issues. This benefit would be
realized by in-region customers after U S WEST gains interLATA authority
under Section 271 and by out-of-region customers upon the transaction's
closing.

26\. [Third]{.underline}, the merger creates the opportunity for the
combined firm to improve the planning and deployment of new network
facilities in-region and out-of-region and to enable services to be
deployed more rapidly across a wide range of locations. We understand
that the parties believe that the transaction will enable them to deploy
DSL and CLEC services more rapidly than would have been possible by
either firm absent the merger. The merged company's plans to deploy
these services outside of U S WEST's region reflect an attempt to
realize these potential efficiencies, as well as the potential for the
merged firm to offer an integrated bundle of services. This and other
efficiencies would enable Qwest / U S WEST to compete more effectively
against AT&T, MCI WorldCom, SBC, Bell Atlantic and other firms offering
a broad range of services. The deployment of these services and
facilities would be likely to benefit in-region (as well as
out-of-region) customers by creating a more effective provider of
bundled services across a broad geographic area.

27\. [Fourth]{.underline}, the transaction also holds the potential for
enabling Qwest to take advantage of U S WEST's large in-region customer
base to more rapidly deploy its "Cybersolutions" market applications
services. Qwest Cybersolutions provides Internet based applications
services such as customer relationship management, production planning,
electronic purchasing, and e-commerce. These benefits would be realized
by in-region customers immediately because provision of these services
would not require that U S WEST receive approval to provide long
distance service under Section 271 of the Telecommunications Act.

**III. THE PROPOSED TRANSACTION DOES NOT GIVE RISE TO COMPETITIVE
CONCERNS**

**A. COMPETITIVE CONCERNS RAISED BY ILEC/ILEC MERGERS PROVIDE NO
RATIONALE FOR IMPOSING CONDITIONS IN THIS TRANSACTION**

28\. In its recent SBC/Ameritech Opinion, the FCC expressed concerns
about the effect of ILEC/ILEC mergers on competition. More specifically,
the FCC expressed concerns that the transaction may harm competition due
to: (i) increased risk of discrimination by ILECs against CLECs due to
increases in the size of an ILEC's "footprint";[^105] (ii) reduction in
the number of ILEC benchmarks available to regulators and thus a
reduction in the effectiveness of such benchmarks in evaluating local
market conditions; and (iii) elimination of a significant potential
competitor for the merging parties.[^106] The FCC imposed a variety of
conditions on the SBC/Ameritech transaction responding specifically to
each of these concerns.[^107]

29\. The merger-related concerns giving rise to these conditions do not
arise as a result of the merger of Qwest and U S WEST. The reason is the
simple fact that the Qwest and

U S WEST merger is [not]{.underline} an ILEC/ILEC merger. As a result:

-   The merger does not increase in any material way U S WEST's ILEC
    "footprint" and thus does not create increased risk of
    discrimination according to the FCC's theory;

-   The merger does not reduce the number of ILEC benchmarks available
    to regulators;

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-   As discussed in more detail below, the merger does not eliminate a
    significant potential competitor from U S WEST's territory.

30\. Thus, the competitive concerns raised by the FCC regarding
ILEC/ILEC mergers are not present here and therefore provide no
justification for imposing similar conditions on the proposed merger of
Qwest and U S WEST.

B. COMPETITIVE CONCERNS RAISED BY COMMENTERS PROVIDE NO RATIONALE FOR
IMPOSING CONDITIONS

31\. Several parties have submitted comments to the FCC requesting
imposition of conditions similar to many of those fashioned by the FCC
in ILEC/ILEC mergers. For example:

-   McLeod suggests that the FCC impose conditions to require Qwest to
    "bring U S WEST's wholesale service to an acceptable level of
    availability and quality" and "submit performance reports \...
    \[that\] reflect the availability, cost and quality of specific
    wholesale services\..."[^108]

-   NextLink suggests that the FCC impose conditions to impose "complete
    structural separation of wholesale and retail activities into two
    separate operations," to "commit to independent third party testing
    of \[OSS\]", and "commit to report and meet a comprehensive set of
    performance measures and standards subject to substantial
    remedies."[^109]

-   Covad Communications suggests that the FCC impose "structural
    separation of wholesale ILEC assets from all retail operations of
    the merged entity, \[o\]rder

-   improvements to US WEST OSS for advanced services; \[o\]rder and
    implement immediate revisions to U S WEST's unbundled loop prices .
    . ; \[o\]rder region-wide uniform installation intervals and
    incident-based liquidated damages for non-performance."[^110]

32\. None of the commenters, however, has shown that the proposed merger
would result in any adverse effect on competition. Therefore, there is
no basis for imposing the requested conditions.

**1. Comments regarding discrimination**

33\. As a preliminary matter, some commenters fail to link the requested
conditions to the proposed transaction. Rhythms Netconnections, for
example, states that "\[s\]ince U S WEST is the dominant incumbent local
exchange provider, only when there is full and irreversible competition
in the market for advanced services should the applicants be allowed to
merge without such pre-conditions."[^111],[^112] However, in the absence
of any claim that the transaction increases U S WEST's incentive to
discriminate, there is no rationale for dealing with such complaints in
the context of the merger proceedings.

34\. A number of other commenters attempt to argue that the proposed
transaction would increase U S WEST's incentive and/or ability to
discriminate against CLEC rivals. But the real focus of these
petitioners is on U S WEST's supposed [existing]{.underline} incentives
to discriminate against rivals, and none presents any plausible evidence
that the merger heightens this incentive. For example:

-   McLeod Telecommunications claims that the merger of U S WEST with an
    in-region CLEC increases U S WEST's incentive to discriminate
    "because such action will benefit not only the ILEC, but also the
    commonly-owned in-region CLEC services." [^113]

-   Nextlink, et al. claim that "the elimination of Qwest as an
    independent actor from those markets will give a combined Qwest/USWC
    an even more dominant position from which to discriminate against
    rivals \..."[^114]

35\. These commenters offer no convincing argument that any claimed
incentive of

U S WEST to discriminate would be enhanced by the proposed merger.
First, as discussed in more detail below, Qwest cannot be considered an
actual or significant potential entrant as a CLEC in U S WEST's
territory. Thus, any incremental incentive of the type claimed by these
commenters would be de minimis. In any event, no party even suggests
that regulators' ability to detect discrimination would be adversely
affected by the proposed transaction.

36\. Similarly, the Coalition to Ensure Responsible Billing (CERB), a
group of firms that has contracts with U S WEST and others to charge for
the telecommunications services of third parties on the bill U S WEST
sends to its customers, also claims that the transaction "generates
heightened concerns about U S WEST's efforts to discriminate against
competitive providers" by "denying nondiscriminatory access to the local
end user bill."[^115] They claim that "\[f\]ollowing the merger, U S
WEST would suddenly have a vested interest in the success of an
increased volume of ancillary (non-local) services."[^116]

37\. CERB, however, ignores the fact that billing services have been
deregulated and that U S WEST is under no obligation to provide such
services to unrelated providers of telecommunications services. Thus,
CERB's claim in fact reflects a call for imposition of regulation that
is unrelated to the proposed transaction.

38\. Allegiance Telecom, alone among the commenters, argues that the
proposed transaction should raise the same concerns as ILEC/ILEC mergers
due to BellSouth's investment in Qwest. We understand that BellSouth
will own less than five percent of the shares of the combined Qwest / U
S WEST. There is no reason to treat this transaction as an ILEC/ILEC
merger because of BellSouth's relationship with Qwest. It is highly
unlikely that the small ownership interest could enable BellSouth to
direct the business decisions undertaken by Qwest / U S WEST or that
Qwest could direct the business decisions of BellSouth. This level of
ownership should not give rise to the incentives to increase
discrimination that concerned the FCC in the SBC/Ameritech Opinion.

**2. Comments regarding potential competition**

39\. Covad claims that the proposed transaction will harm competition by
eliminating actual and potential competition. [^117] The proposed merger
of Qwest and U S WEST raises no realistic concerns that competition in
the provision of any service will be adversely affected by the merger.

40\. For services and geographic areas for which U S WEST and Qwest are
actual or potential competitors, there are typically several firms that
are at least as significant as Qwest that provide comparable services.
Thus, it is highly unlikely that the elimination of Qwest as an actual
or potential competitor in U S WEST's territory would adversely affect
competition. The fact that no consumers or consumer groups have filed
petitions with the FCC opposing this transaction provides support for
this proposition.

41\. The following section briefly reviews services for which Qwest and
U S WEST are actual or potential competitors.

**a. Local exchange services**

42\. As discussed in Section I above, Qwest either has deployed or is in
the process of deploying local fiber optic facilities in roughly 20
metropolitan areas throughout the United States. Seattle is the only one
of those areas in which U S WEST is the incumbent local exchange
carrier. In Seattle, we understand that Qwest is not yet providing
service to any customers over these facilities. We also understand that
Qwest's local service resale activities in U S WEST's region have been
substantially eliminated, pursuant to a decision made before the merger
agreement. Qwest does not have any local switches in the U S WEST
region.

43\. Qwest cannot be considered a significant potential competitor in
the provision of CLEC services whose elimination would adversely affect
competition in Seattle, or elsewhere in U S WEST's territory.

-   [First]{.underline}, a variety of CLECs already offer local exchange
    services in U S WEST's region. For example, data from the [UNE Fact
    Report]{.underline} indicate that as of March 1999, 9 CLECs operated
    switches in the Seattle MSA; 9 CLECs had switches in Denver; 8 CLECs
    operated switches in Phoenix; 9 had switches in Minneapolis and 7
    had switches in Portland.[^118] As noted above, Qwest operates no
    local switches in U S WEST's territory.

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-   [Second]{.underline}, data collected and published by the FCC
    indicate that Qwest does not hold numbering codes in any LATA served
    by U S WEST, which is a prerequisite to offering facilities-based
    services as a CLEC. In contrast, many other firms hold such
    codes.[^119] The FCC data for the second quarter of 1999 indicate
    that 12 firms held numbering codes in Seattle, 11 held codes in
    Denver, eight firms held codes in Phoenix; 7 firms held codes in
    Minneapolis, and 9 held codes in Portland.

44\. Thus, if Qwest is considered a significant potential provider of
CLEC services, then it faces competition from a large number of other
actual and potential CLECs, each of which appears to be further along
than Qwest in terms of providing local exchange services.

**b. IntraLATA toll**

45\. Qwest provides intraLATA toll services in U S WEST territory as a
facilities-based carrier and a reseller. There have been significant
inroads by competitors to U S WEST in the provision of intraLATA toll
services in recent years. We understand that Qwest accounts for roughly
one percent of the presubscribed intraLATA toll lines across the U S
WEST region. Thus, Qwest cannot be considered a significant competitor.
In contrast, we understand that AT&T, MCI WorldCom, Sprint and others
together have captured roughly one-third of the intraLATA toll business
in U S WEST's territory.

**c. DSL**

46\. As discussed above, U S WEST has deployed DSL facilities and
services in more than 40 in-region cities. In August, Qwest launched DSL
services in 13 areas nationwide with plans to offer service in 30 areas
by the end of 1999.[^120] These areas include six cities in

U S WEST's region: Seattle, Denver, Minneapolis, Phoenix, Portland, and
Salt Lake City. Qwest now provides DSL in the U S WEST region only by
reselling services provided by Covad Communications and Rhythms
NetConnection.

47\. There are several facilities-based providers of DSL services in U S
WEST's territory in addition to U S WEST, including Covad, Rhythms,
Northpoint and JATO. In addition to Qwest, there are many resellers of
these services. Each of the five major cities in U S WEST's territory is
served by 4 or more facilities-based DSL providers (including U S WEST)
and 9 or more resellers.[^121] It is highly unlikely that a reduction by
one in the number of resellers of DSL services would adversely affect
competition under these circumstances.

**d. ISP Services / Web Hosting**

48\. Both U S WEST and Qwest provide Internet services and web hosting
services within U S WEST's territory. Both, however, are among a large
number of firms providing such services in U S WEST territory. Data from
Boardwatch Magazine's 1999 Directory of Internet Service Providers
indicate that there are more than 50 ISPs serving each of the five
largest cities in U S WEST's territory, and more than 40 firms offering
web hosting facilities. Given the number of firms offering such
services, the elimination of Qwest as an actual or potential competitor
would not be expected to adversely affect competition.

**CONCLUSION**

49\. Recent mergers in the telecommunications industry reflect attempts
to respond to rapid changes in demand and supply conditions in the
industry. These transactions, including the proposed merger of Qwest and
U S WEST, generally reflect attempts by firms to provide a more diverse
range of products over a broad geographic area.

50\. The proposed transaction provides the opportunity for the merged
company to accomplish this goal. The merger combines firms with
complementary assets and skills. These include U S WEST's expertise in
providing DSL services; U S West's large base of customers that have
headquarters inside its region and significant out-of-region operations;
and U S WEST's experience providing a wide range of local exchange and
other services to millions of customers. Qwest has a national
high-capacity fiber optic network as well as metropolitan area networks
now under construction. In addition, Qwest's management has been highly
successful in anticipating and rapidly responding to changes in industry
conditions.

51\. The proposed transaction raises none of the competitive concerns
identified by the FCC in the context of ILEC/ILEC mergers. The merger
does not increase U S WEST's footprint as an ILEC. In addition, the
transaction does not reduce the number of benchmarks available to
regulators. Finally, the merger does not result in the elimination of a
significant actual or potential entrant in U S WEST's home territory.

52\. Nor has any of the commenters shown that the proposed merger would
adversely affect competition.

53\. Thus, the proposed transaction does not give rise to competitive
concerns. Imposition of conditions on the transaction therefore is not
justified.

ATTACHMENT B

DECLARATION OF BRUCE M. OWEN

Economic Consequences of the Hole in the Doughnut

## Declaration of Bruce M. Owen

## Summary

Qwest Communications International, Inc. (Qwest) and U S WEST, Inc.
(U S WEST) have applied for authority to merge. I have been asked to
consider the effect of such a merger on the economic incentive of the
combined company to satisfy the conditions set out in Section 271 of the
1996 Telecommunications Act. Once an RBOC such as U S WEST has satisfied
Section 271, it is permitted to enter the long distance business within
its region. Qwest contends that the merged company will have stronger
incentives to satisfy Section 271 quickly, stronger incentives than
U S WEST alone would have. I agree with this assessment.

What is needed in order to analyze the effect of the merger on
incentives is a comparison of the profit opportunities facing the
combined company after the merger with the profit opportunities that
would have faced U S WEST alone, absent the merger. Issues related to
current or potential competition between Qwest and U S WEST and the
business rationale for the deal are addressed by others.

Of course, U S WEST is required by law to satisfy many of the Section
271 conditions, and would have some economic incentives to obtain
Section 271 authority in any case. For purposes of my analysis, I assume
that U S WEST has, within the law, discretion as to the pace at which it
seeks approval to provide in-region interLATA service. After all, the
Commission and the courts have not yet, or at best only recently,
defined the conditions fully and no RBOC has yet obtained such
authority. Once the conditions are clearly defined, moreover,
satisfaction of them requires the expenditure of hundreds of millions of
dollars on systems and equipment, along with negotiations with carriers
and regulators, testing, audits, and so on. This process doubtless could
be accelerated by spending more money, or at a faster rate, than
whatever is reasonably required merely to comply with Section 251. For
example, Bell Atlantic, which claims to have satisfied the Section 271
conditions in New York, reports having spent \$1 billion on its effort.
If Bell Atlantic had spent somewhat less, or at a slower rate,
presumably it would not be in a position to claim satisfaction of the
requirements until some number of months later than it has.

######### Pre-merger incentive structure

I assume that the costs and benefits of satisfying Section 271
requirements will affect the timing of an RBOC's satisfaction of Section
271. The primary benefit is the anticipated profit from entering into
the provision of interLATA long distance service to in-region customers.
In order to compete effectively against inter-exchange carriers with
nationwide service areas, an RBOC also will have an incentive to provide
out-of-region interLATA service for its in-region customers with
multi-region locations. This out-of-region business would be incremental
to the RBOC's in-region business. Furthermore, an RBOC with such a
national presence is likely to find it profitable to begin offering
interLATA service to customers located primarily out-of-region.

There are two categories of cost. First, there is the cost associated
with direct investment in equipment, systems and personnel necessary to
satisfy Section 271. Second, an RBOC will also factor in the cost,
measured in lost profits, from any reduction in its local exchange
market share due to increased CLEC entry that is directly attributable
to satisfaction of Section 271. If the costs, including the opportunity
costs, of being barred from in-region interLATA markets increase, on
account of the merger, then the incentives to satisfy Section 271 will
become more powerful.

######### Post merger incentive structure

There are several reasons why the combined company can expect to earn
greater net profits from entering the long distance business than
U S WEST alone could expect. First, unlike many RBOCs, U S WEST
currently owns virtually none of its interLATA "official services"
network and it owns no interLATA switches. For this reason, U S WEST
entering on its own would have to construct or lease nationwide
interexchange network capacity at prevailing market prices, whereas the
combined company would already own capacity on its interLATA network
whose cost is sunk.

Second, unlike U S WEST alone, the combined company will already have an
established national marketing identity, customer base and specialized
products out-of-region. However, the combined company will have a
fourteen-state hole in its footprint. Demand from present and potential
out-of-region long distance customers will be enhanced by the combined
firm's ability once again to offer nationwide service. Further, the
incremental revenues and profits available to the combined company after
271 approval, building on Qwest's established brand identity, customer
base and existing interconnection arrangements, would exceed the initial
revenues and profits available to U S WEST as a new entrant into
out-of-region long distance markets. Thus, the present value of long
distance revenues and profits arising out-of-region would be greater for
the combined company than for U S WEST alone.

Third, many potential in-region long distance customers of U S WEST will
prefer to be served by a national facilities-based carrier. As a result,
the combined company will have an initial advantage in selling to such
customers compared to U S WEST alone, which would be unable immediately
to offer an established nationwide facilities-based service. Thus, the
present value of long distance revenues and profits arising in-region
would be greater for the combined company than for U S WEST alone.

The direction of the net effects of the incentives described above on
the combined company is indisputable---it is to make in-region entry,
and thus satisfaction of Section 271, more profitable than before the
merger. The merger causes no incentives working in the other direction.
As Dennis Carlton and Hal Sider point out in their paper, the merger
also creates no new incentives to restrict competition. The merger's
only effect relevant to economic policy is its clear tendency to
accelerate satisfaction of Section 271 in the fourteen-state U S WEST
region.

######### The Comments

Commenting parties do not dispute the points made in the merger
application about the combined company's incentives to obtain Section
271 authority. Several of the commenters nevertheless attempt to show
that incentives to discriminate post-merger will actually increase.
However, the commenting parties fail to articulate a sound economic
basis for their positions on Qwest's post-merger incentives.

First, some commenters state that U S WEST has the incentive to
discriminate against its local exchange competitors and claim that
U S WEST has, in fact discriminated in the past. Whether true or not,
this argument is not relevant to the issue of whether the merger is in
the public interest. It does not address the combined firm's incentives
to satisfy Section 271 or any other effect of the merger itself. The
issue is whether a post-merger Qwest has a greater incentive to satisfy
Section 271 than U S WEST would have as a separate entity. It is the
change in this incentive due to merger that is the key point---and a
point that commenters fail to acknowledge.

Second, some commenters claim that the merger will increase the
incentive of the merged entity to discriminate against local exchange
competitors, based on Qwest's current CLEC activities in the U S WEST
region. However, these activities are trivial and will have no
meaningful impact on Qwest's post-merger incentives to satisfy Section
271 conditions.

Third, two commenters speculate that a post-merger Qwest will divert
dividends from shareholders to out-of-region investment opportunities
and will generally direct investment funds out-of-region to the
detriment of in-region service. So far as dividends are concerned, this
is a non-sequitur. If dividends are reduced on account of the merger,
more rather than less funds will be available for investment both
in-region and out-of-region. More generally, out-of-region investment is
no less likely to be procompetitive than in-region investment. Finally,
the commenters ignore the combined firm's increased incentive to satisfy
Section 271, and thereby to increase its focus on in-region investment.

**I. Qualifications**

I am an economist, president of Economists Incorporated, and visiting
professor of economics at Stanford University's Stanford-in-Washington
internship program. Previously, I served as chief economist of the
Antitrust Division of the U. S. Department of Justice, and the White
House Office of Telecommunications Policy. I testified on behalf of the
United States in the case that led to the dissolution of AT&T. I have
consulted for and filed testimony on behalf of various
telecommunications firms, including AT&T, MCI and Sprint. I have written
a number of articles and books on topics related to antitrust and to
telecommunications policy. In particular, I co-authored with Roger Noll
two articles[^122] explaining the economic theory of the lawsuit that
led to the breakup of AT&T and the basis for the prophylactic
restrictions placed on the RBOCs by the Modification of Final Judgment.
A copy of my curriculum vitæ is attached to this paper.

**II. Premerger incentives**

The basic incentive structure facing an RBOC with respect to Section 271
is not complicated. There are costs and benefits, and each will differ,
depending on the timing of authorization and other factors. The benefits
are the potential profits to be earned from entering the long distance
business. As discussed above, an RBOC will have the incentive to provide
not only in-region interLATA services to local customers but also
out-of-region services. The cost of satisfying Section 271 has two
parts. The first is the direct investment in systems and facilities
required by the Section 271 conditions. The second is the loss of
profits associated with a lower market share of and competitive entry
into the local exchange business.

Each of these costs and benefits is a flow which can be expected to
change over time as market shares, costs and prices respond to changing
market conditions. In other words, an RBOC's market shares in long
distance and in local exchange markets are not likely to be the same
immediately after Section 271 authority is obtained as they will be two
or three years later. In addition, there are market risks that affect
the rates at which future costs and revenues must be discounted to
present value. If we regard the amount and timing of expenditure on
obtaining Section 271 authority as the policy variables, an RBOC will
rationally---within relevant legal constraints---try to schedule that
expenditure so as to maximize the discounted expected value of net
profits resulting from these streams of costs and benefits.[^123]

**III. Postmerger incentives**

The Qwest/U S WEST combined company will of course inherit U S WEST's
current incentive structure. I assume that the management of the
combined company will be at least as efficient as that of U S WEST at
present. But ILEC business opportunities will no longer be the only
factor influencing the combined company's incentives. I understand that
currently US WEST leases in excess of 98 percent of its interLATA
"official services" network from other carriers and that U S WEST owns
no interLATA switches. By contrast, the combined company will own a
nationwide long distance business and a national fiber optic network
with substantial excess capacity. However, unlike other national long
distance competitors, such as AT&T, MCI, and Sprint, the combined
company will be handicapped by a service area that is "doughnut-shaped."
That is, so long as its ILEC business fails to satisfy Section 271, the
combined company will be unable to provide long distance service
originating in a fourteen-state region of the country.

If the combined company could serve the "hole" in the doughnut it would
have greater revenues and lower costs. Its revenues would be greater
because of direct sales opportunities in the fourteen-state region and
because it could offer a more attractive nationwide service to customers
in all parts of the country. In particular, it would be better able to
compete for the business of customers that require service at both
in-region and out-of-region locations and the business of wholesale
customers seeking regional or nationwide network capacity. Its unit
costs would be lower because of higher utilization of its
newly-constructed network, the cost of which is sunk.

The combined company's potential profit from entering the long distance
business in the fourteen-state U S WEST region therefore will be greater
than U S WEST's current potential profit from satisfying Section 271. It
is this difference in the potential profitability of supplying long
distance service that bears on the combined company's incentive to
achieve Section 271 authority more rapidly.

The combined company can expect greater net profits from satisfying
Section 271 than U S WEST alone could expect for three reasons:

First, and probably most important, the combined company will already
have a nationwide network with substantial capacity, while U S WEST
entering on its own would have to obtain national network capacity at
prevailing market prices or through new construction. The combined
company will own Qwest's new Macro Capacitysm Fiber Network. This
network connects approximately 150 metropolitan areas, areas that
originate over 95% of all telephone calls made in the United
States.[^124] The network has a speed of up to 10 gigabits per second;
can carry voice, video, and data; and can support any Internet-enabled
services, including Internet protocol voice transmissions. U S WEST, on
the other hand, as noted above, does not own a national network or even
an in-region official services network that might be adaptable to
provide interLATA services.

The combined company's inheritance of a nationwide network significantly
increases its incentives to compete for long distance traffic, relative
to those of U S WEST. The combined company will want to attract long
distance traffic to fill its network capacity and ensure that it can
profit on its investment in a nationwide network. In considering the
profitability of attracting long distance traffic, the combined company
would not take into account the cost of the capacity, because that cost
is already sunk. Further, the combined company will not take into
account operating costs that might vary with network capacity or route
distance, but which do not vary with capacity utilization rates, because
these also are costs that will be incurred regardless of whether the
combined company has in-region traffic.

Even apart from the loss of revenue that will result from the applicable
interLATA restrictions after the merger, the Qwest network will have
substantial excess capacity, including the enormous capacity associated
with dark fiber. The current capacity of Qwest's network exceeds the
combined capacities of AT&T, MCI WorldCom, and Sprint.[^125] The new
company will have a strong incentive to satisfy Section 271 as quickly
as possible to begin utilizing the capacity already available on the
Qwest network. Put differently, as long as the combined company fails to
satisfy Section 271, it will incur an opportunity cost for the portion
of the network that Section 271 compliance would permit it to fill,
because the stream of services that could be supported by the idle
capacity is perfectly perishable---it cannot be stored for later use.

In contrast, U S WEST on its own would have to obtain capacity to carry
long distance traffic either by building or leasing facilities or acting
as a reseller on others' networks. As a result, U S WEST would have to
take into account the cost of new capacity it would have to obtain in
evaluating the profitability of entering into the long distance
business.

Second, the combined company would earn greater profits from long
distance service outside the U S WEST region if it were able to offer
interLATA service within the U S WEST region. After Section 271
authority is obtained, demand from present and potential out-of-region
long distance customers will be enhanced by the combined firm's ability
once again to offer service on a national network. In the meantime,
until Section 271 is satisfied, Qwest's out-of-region business will
suffer because of Qwest's inability to offer national service.

Many customers, including multi-location businesses and long distance
wholesale customers, insist on dealing with a long distance provider
that can offer ubiquitous service. Other customers may want to reduce
their transactions costs by purchasing long distance service from a
single long distance carrier even though the carrier may lease some of
its network from other carriers.

There are various reasons why many customers, including multi-location
businesses, prefer to deal with a single long distance provider that can
offer national service on an integrated basis.[^126] According to AT&T
President John Zeglis, "Customers are looking for one source to provide
seamless voice and data service."[^127] Single source procurement of
telecommunications services offers a number of advantages for large
companies and other entities. For example, high volume business
customers often prefer single contracts with one telecommunications
supplier because all of their traffic volume can be combined to achieve
better volume discounts.[^128] When AT&T acquired Teleport
Communications Group in 1998, AT&T reported that it would "...\[O\]ffer
single points of contact for local and long-distance services and
customer care, enterprise solutions for businesses with multiple
locations, volume discounts across services and an integrated bill for
customers who want it."[^129]

Third, Section 271 satisfaction should be more attractive to the
combined company than it would be to U S WEST alone because the combined
company, with its existing national network and customer base, would
have both a demand-side and a supply-side head start and thus be able to
develop the business much faster than U S WEST alone. The incremental
revenues and profits available to the combined company after satisfying
Section 271, building on Qwest's national network, established brand
identity, specialized products, customer base and existing
interconnection arrangements, would exceed the initial revenues and
profits available to U S WEST as a new entrant to long distance service.
Thus, the present value of long distance revenues and profits arising
out-of-region would be greater for the combined company than for
U S WEST alone, both for the reason just discussed and because Section
271 authority will be obtained sooner with the merger than without.

**IV. The Comments**

The commenting parties do not dispute the points made in the merger
application about the combined company's incentives to satisfy Section
271. Several of the commenters nevertheless attempt to show that
incentives to discriminate post-merger will actually increase. However,
the commenting parties fail to articulate a sound economic basis for
their position on Qwest's post-merger Section 271 incentives.

These commenters make three basic points. First, they contend that
U S WEST, as an incumbent local exchange carrier, has the ability and
incentive to discriminate against CLEC competitors who require access to
U S WEST's local exchange facilities.[^130] Second, they claim that
Qwest now offers CLEC services in U S WEST territory, directly or
through affiliates, and that this fact increases the incentive and
ability of the combined firm to discriminate against other CLECs and in
favor of affiliated CLECs.[^131] Third, they claim that the merged
entity will direct U S WEST profits away from shareholder dividends and
in-region service improvements toward out-of-region projects.[^132]

None of these arguments refutes the point that the combined firm will
have a greater incentive to satisfy Section 271 requirements than does
U S WEST alone, and that this is procompetitive. For example, it is not
U S WEST's former incentive or ability to discriminate against local
exchange competitors that matters, but the change in that incentive
arising from the merger. As long as the combined company's incentive to
facilitate competition is enhanced because its desire to achieve Section
271 authority is greater than U S WEST's alone, consumers will benefit.
The greater the increase in this incentive, the greater the benefit to
consumers, but even a small increase will benefit consumers.

Similarly, even assuming for the sake of argument that RBOCs who also
operate in-region CLECs may have some special discrimination or evasion
of regulation opportunities, there is nothing about the Qwest/U S WEST
transaction to exacerbate this situation. Qwest simply does not have
significant in-region CLEC facilities today.[^133] More important, Qwest
brings nothing to U S WEST in this regard that U S WEST could not
readily, and much more easily than through this transaction, arrange for
itself. U S WEST does not need to merge with Qwest in order to create
in-region CLEC businesses on the trivial scale of Qwest's current
interests.

Finally, commenters' arguments about diversion of funds, including
shareholder dividends, away from in-region investments such as
improvements in service quality to out-of-region investment projects are
entirely speculative. With regard to the argument about stockholder
dividends, if stockholder dividends are instead reinvested in the
business, those additional funds would become available for all
investment purposes; it makes little sense to argue that an increase in
internally generated investment funds would reduce investment. U S WEST
today makes investment and dividend payout decisions on the basis of
whatever incentives and opportunities its management perceives. U S WEST
does not need to merge with Qwest in order to make out-of-region
investments, including at least some of those contemplated by the merger
parties. The merged company also will have some new investment
opportunities arising from the combination itself. As I have
demonstrated above, one of the new in-region opportunities will be the
increased profitability of gaining Section 271 authority. More
generally, out-of-region investment is no less likely to be
procompetitive than in-region investment. Capital markets, generally
regarded as efficient, would facilitate such investments whether or not
dividends were reduced. The commenters have not offered any reason to
doubt that investment resources will be allocated in an economically
efficient manner among the opportunities facing the combined firm, or to
doubt that the incentive to achieve Section 271 approval will be
enhanced by the merger.

In conclusion, there is no logical policy basis for the imposition of
merger-related conditions on Qwest, not only because (as Dennis Carlton
and Hal Sider point out) there are no merger-related anticompetitive
incentives or opportunities, but also because the merger's only effect
on in-region competition is to promote it.

**V. Conclusion**

The direction of the net effects of the incentives described above on
the combined company is indisputable. The combination tends to make
achieving Section 271 authority more profitable than before the merger.
The merger causes no incentives working in the other direction, and more
generally, creates no new incentives to restrict competition. The
merger's only effect relevant to economic policy is its clear tendency
to accelerate satisfaction of the Section 271 conditions in the
fourteen-state U S WEST region.

  ----------------------------------- -----------------------------------
  The foregoing is true and complete  
  to the best of my knowledge and     
  belief.                             

  October 18, 1999                    
  ----------------------------------- -----------------------------------

Bruce M. Owen

ATTACHMENT C

QWEST PLAN FOR DIVESTITURE OF INTERLATA BUSINESS IN THE U S WEST REGION

QWEST PLAN FOR DIVESTITURE OF INTERLATA

BUSINESS IN THE U S WEST REGION

October 1999

TABLE OF CONTENTS

[Page]{.underline}

Introduction and Overview [1](#introduction-and-overview)

I. Originating InterLATA Long Distance and Terminating 800 Services
[2](#i.-originating-interlata-long-distance-and-terminating-800-services)

A. Description of Divestiture Plan
[2](#a.-description-of-divestiture-plan)

B. Legal Analysis [3](#b.-legal-analysis)

II\. Private Line VOICE and Data Services
[4](#ii.-private-line-voice-and-data-services)

A. Description of Divestiture Plan
[4](#a.-description-of-divestiture-plan-1)

B. Legal Analysis [5](#b.-legal-analysis-1)

C. Support Functions [6](#c.-support-functions)

1\. Switch ports. [7](#switch-ports.)

2\. Billing and collection. [8](#billing-and-collection.)

3\. Customer care and provisioning.
[8](#customer-care-and-provisioning.)

4\. Monitoring, trouble-shooting, maintenance, and repair.
[11](#__RefHeading___Toc464816449)

III\. Calling Card, Prepaid card, And Operator Services
[12](#iii.-calling-card-prepaid-card-and-operator-services)

A. Description of Divestiture Plan
[12](#a.-description-of-divestiture-plan-2)

B. Legal Analysis [13](#b.-legal-analysis-2)

IV\. interLATA Information Services
[15](#iv.-interlata-information-services)

A. Description of Divestiture Plan
[15](#a.-description-of-divestiture-plan-3)

B. Legal Analysis [15](#b.-legal-analysis-3)

CONCLUSION [16](#conclusion-1)

**QWEST PLAN FOR DIVESTITURE OF INTERLATA**

**BUSINESS IN THE U S WEST REGION**

# Introduction and Overview

Qwest is currently providing interLATA interexchange services throughout
the country, including in the U S WEST region. Qwest does not anticipate
that U S WEST will have received interLATA relief before the pending
merger of the two companies closes in the second quarter of 2000. As a
result, prior to closing Qwest will take all steps necessary to
discontinue providing interLATA services in the U S WEST region, and
assign all existing service obligations to one or more independent
interexchange carriers.

Qwest has adopted two over-arching principles for divestiture:
(1) minimize impact on customers, with seamless transition and no
increase in rates; and (2) fully comply with the requirements of Section
271 of the Telecommunications Act of 1996. To that end, Qwest is
currently engaged in the complex administrative process of implementing
its divestiture. Qwest is completing the work of reviewing all customer
contracts to identify interLATA services that must be divested as of
closing. This has been a large undertaking, covering both retail and
wholesale accounts. Simultaneously, Qwest has been addressing the
operational issues associated with divesting services.

The divestiture plan set forth here is the product of this activity.
Next Qwest will begin to meet with potential buyers of the services to
be divested. For simplicity, this plan generally refers to a singular
"Buyer," but in fact Qwest may divest different services to different
carriers, and the plan should be understood as referring to any Buyer
unless otherwise noted.

In each case Qwest\'s divestiture of services will be final and
irrevocable, with no right for Qwest to reacquire the customers at a
later point. Buyer will be independent of Qwest. It will be expected to
hold FCC Section 214 authority and certificates in the relevant states,
and to be technically and operationally able to take on service
obligations in a timely fashion without customer disruption.

It should be emphasized that Qwest does not plan to sell its existing
fiber optic transmission plant. Qwest will continue to use that plant to
provide telecommunications services originating outside the U S WEST
region, or incidental interLATA services, as permitted by Section 271 of
the Act. To the extent that Buyer needs to supplement its existing
transmission network in order to meet the interLATA service obligations
it assumes, it will have to obtain wholesale transmission services from
a different carrier. Qwest may be a vendor to the Buyer of certain
support functions such as billing and collection, but Qwest is cognizant
that it may not provide wholesale interLATA telecommunications services
as defined by the Act.

As a condition of acquiring Qwest's in-region service business, Buyer
will be obliged to assume all of Qwest's existing contractual
obligations and agree not to raise rates for Qwest-tariffed services for
a specified interval. Qwest and Buyer will provide advance notification
of the change in service provider, and take other actions to make the
transition smooth and uneventful for customers.

Set forth below is a detailed description of how Qwest intends to divest
each of its in-region interLATA service categories. This memorandum also
provides a summary of how the divestiture plan meets the statutory
requirements of Section 271. Again, Qwest\'s objective is to satisfy the
Telecom Act without adverse impact on customers as they are assigned to
a new carrier. Qwest may continue to adjust the plan in minor respects
as it negotiates with potential buyers, pursues operational issues, and
meets with its customers. However, Qwest is confident that its
divestiture process will move forward expeditiously so as to permit a
closing in the second quarter of 2000.

# I. Originating InterLATA Long Distance and Terminating 800 Services

## A. Description of Divestiture Plan

Qwest will irrevocably transfer its in-region interLATA originating
switched long distance business, and in-region interLATA terminating 800
business, to a certificated carrier as of closing. The cutover to the
new carrier will be done on a seamless and transparent basis, just as
customers change long distance service providers routinely today.

Customers located wholly outside the 14 U S WEST states will not be
affected by divestiture. Qwest will continue to provide out-of-region
long distance and terminating 800 service. Where Qwest currently is
providing service to large business accounts with locations both inside
and outside the U S WEST region, Qwest will divest the in-region
interLATA services to Buyer under the same processes discussed here.

This divestiture will not result in rate increases to consumers. The new
carrier will agree, as a condition of buying the divested business, not
to increase rates to customers taking service under tariff for a fixed
period still to be determined. [^134]/ Any rate changes made by the
Buyer thereafter will be subject to the regulatory policies of the FCC
and state public utility commissions. Customers will receive advance
notice of the change in their long distance carrier, including a
reminder that they have the ability to take their business to another
IXC.

Insofar as customers take service under contracts, the new carrier will
assume responsibility for meeting all terms of those contracts
(including price and service quality conditions) related to the
in-region interLATA services. When the contract expires, the customer
may negotiate new interLATA arrangements with any carrier it wants, but
not Qwest prior to Section 271 relief.

The Buyer will be independent of Qwest, and will provide service to
customers over its own transmission network and local access. Qwest will
not provide the new carrier with any prohibited in-region wholesale
interLATA transmission services. Buyer may contract with Qwest for
certain support functions that do not constitute the provision of
"telecommunications" under the Act, especially where doing so will
minimize impact on customers. For example, Buyer may lease the use of
ports on Qwest interexchange voice switches, and/or request specific
billing and collection or customer care support. However, it is
premature to determine the Buyer's need for these functions.

## B. Legal Analysis

This divestiture plan will completely remove Qwest from the in-region
interLATA services market with respect to originating long distance and
terminating 800 service, as required by Section 271. Qwest is allowed to
provide out-of-region and incidental interLATA services pursuant to
Section 271(b)(2) and (3) of the Act.

Purely as an implementation measure, Qwest and Buyer would jointly seek
a waiver of 47 C.F.R. §§ 64.1100 *et seq.* in order to assign
tariff-based customers from Qwest to Buyer without obtaining individual
Letters of Authorization and verification from each end user. The Bureau
has granted numerous such LOA waivers recently in similar
circumstances. [^135]/ Qwest and Buyer will design the divestiture
transition to meet the conditions identified in previous LOA waivers. As
noted above, Qwest will ensure that customers taking service under
tariff are fairly protected through commitments by Buyer to provide
service to these customers at the same or more favorable rates for a
certain period of time. Qwest and Buyer also will provide customers with
information about their right to move to a different IXC. No LOA waiver
is required in the case of business customers who have signed contracts
consenting in advance to assignment to another service provider.
However, Qwest and Buyer will contact those customers, notify them of
the assignment, assure them that Buyer will meet the contract terms, and
answer any questions.

Qwest expects the support functions to be provided in connection with
these switched services to be limited. These matters are addressed in
detail in Section II.C below, and that legal analysis is incorporated
here.

# II. Private Line VOICE and Data Services

## A. Description of Divestiture Plan

Qwest will irrevocably assign a new carrier (or carriers) all retail and
wholesale private line voice and data services where a circuit provided
to a customer crosses a U S WEST LATA boundary. The Buyer will assume
all Qwest tariff and contract commitments to customers, including those
related to price and service quality. Qwest and the Buyer will
communicate with customers in advance of the cutover to explain the
change in service provider and address any customer questions.

As permitted by the Telecom Act, Qwest will continue to provide private
line voice and data services outside the U S WEST region. Where a
customer network has locations both inside and outside U S WEST LATAs,
Qwest only will provision out-of-region circuits, and will interconnect
with the Buyer at a location outside the U S WEST region. The Buyer will
become the customer's carrier of record for circuits crossing U S WEST
LATA boundaries and assume all responsibility for providing that
service.

The Buyer will be required to provision any Qwest-prohibited interLATA
circuit over a transmission network that it owns or controls. Qwest will
not provide such wholesale transmission service. Buyer may contract to
lease the use of ports on Qwest data switches, connecting non-Qwest
interexchange and access transmission circuits to those switches. Buyer
may also contract with Qwest for other support functions useful in
meeting customer requirements. This support may include some combination
of billing and collection, customer care and provisioning, and/or
monitoring, troubleshooting and related repair activities. Any such
support would be provided pursuant to arm\'s length contracts, under the
direction and control of Buyer, and consistently with the Telecom Act.

Qwest provides dark fiber under term leases in a few instances where the
fiber path crosses U S WEST LATA boundaries. Qwest will discontinue or
divest these arrangements. By contrast, Qwest also has sold IRUs in its
network outright. These sales conveyed ownership rights in specific dark
fibers for the economically useful life of the fiber. The purchaser
obtained control over the fiber, and is treated as the owner for tax and
accounting purposes. Qwest has no legal ability to unwind these
completed sales. [^136]/ In some instances Qwest separately receives
recurring revenue for work to maintain the IRU fibers and buildings
where the IRU owner has installed regeneration or amplifier equipment,
or related monitoring and repair activity. Qwest will continue to
provide these functions.

## B. Legal Analysis

Divestiture of all dedicated voice and data interLATA services in the
U S WEST service area that cross LATA boundaries completely satisfies
the requirements of Section 271. Qwest may continue to provide
out-of-region and incidental services pursuant to Sections 271(b)(2) and
(3) of the Act.

No issue arises from the fact that other parties previously have
purchased ownership rights through IRUs in fiber facilities that Qwest
has constructed. Section 271 prohibits BOCs from prematurely providing
"interLATA service," which Section 3(21) defines as "telecommunications
between a point located in a \[LATA\] and a point located outside such
\[LATA\]." In turn, "telecommunications" is defined by the Act as "the
transmission, between or among points specified by the user, of
information of the user's choosing without change in

the form or content of the information as sent and received." 47 U.S.C.
§(3)(43). In this case, Qwest is not engaged in any transmission
whatsoever.

Qwest is aware of the Commission\'s dictum that a BOC may violate
Section 271 if it owns a fiber and \"merely leases it to the customer
for a term of years.\" [^137]/ This statement appears to rest on pre-Act
law. [^138]/ Nevertheless, in the interest of expediting the merger
closing, Qwest is undertaking to divest itself of dark fiber leases
where the fiber in question crosses U S WEST LATA boundaries.

However, the sale of dark fiber facilities is different from a term
lease. The Commission itself has contrasted such a lease with the sale
of a facility used in a network: \"The one-time transfer of ownership
and control of an interLATA network is not an interLATA service, which
means it falls entirely outside the section 271/272 framework that
governs interLATA services.\" [^139]/ Qwest\'s IRU sales are in this
category. Ownership and control has passed to the IRU buyers, and those
completed transactions cannot be unwound.

## C. Support Functions

Buyer may enter into arm\'s length commercial contracts with Qwest for
one or more support functions. Such functions may reduce the impact of
divestiture on customers, improve the quality or efficiency with which
Buyer meets its interLATA service obligations, or reduce Buyer\'s costs.
It is important to emphasize that none of these support functions would
be provided by the U S WEST local exchange company (with the possible
exception of billing and collection). Rather, the support would come
from the Qwest out-of-region interexchange

affiliate. In that sense, the arrangements would be akin to the
assistance that non-dominant IXCs routinely contract to provide one
another in the industry.

Because this support activity does not constitute "telecommunications,"
Qwest may provide such assistance to Buyer without violating the
Act. [^140]/ The legal status of specific support functions is discussed
below.

### 1. Switch ports. 

First, Buyer may contract for the ability to lease ports on Qwest data
switches. This accommodation would permit Qwest customers to be
transitioned to Buyer without reprovisioning of their access
connections, thereby eliminating the possibility of access-related
outages or other disruptions. Use of Qwest switch ports by Buyer also
can simplify network routing activity. Qwest would assign Buyer its
rights to any ILEC- or CLEC- provided local access used to reach the
customer locations Qwest no longer can serve. [^141]/ Buyer would leave
that access physically in place, leasing the associated ports on the
Qwest-owned switches. Qwest would permit Buyer to collocate at its data
switch premises and connect non-Qwest interexchange transmission to the
Buyer-leased ports. All Qwest-prohibited services would be transmitted
by Buyer over Buyer's own interLATA circuits. Going forward, Buyer would
supplement its network as necessary to serve the growth requirements for
the in-region interLATA business it has assumed. Qwest would agree to
lease additional ports as necessary to support new Buyer access and
interexchange facilities.

The lease of a switch port is not the provision of "telecommunications,"
let alone interLATA service. Rather, the switch port is
"telecommunications equipment", defined in Section 3(45) of the Act as
"equipment \* \* \* used by a carrier to provide telecommunications
services." The switch port also can be seen as a "network element," that
is, "a facility or equipment used in the provision of a
telecommunications service" under Section 3(29) of the Act. The
Commission has specifically held that "\[a\] 'network element' is not a
'telecommunications service.'" [^142]/

The Commission similarly has found in other situations that a party is
not engaged in "telecommunications" when it supplies equipment used for
transmitting information, but is not itself the transmitter. [^143]/

### 2. Billing and collection. 

Buyer also may contract with Qwest for billing and collection services.
This function would permit customers to continue to receive a single
bill for their in-region and out-of-region interexchange services. To
avoid customer confusion, any bill would make clear that Buyer alone is
the provider of the in-region interLATA services. As noted above, Qwest
would have no role in setting or influencing the prices charged by the
Buyer (except insofar as Buyer assumes Qwest's pre-existing contractual
obligations for the balance of the contract term). Nor would Qwest share
in the revenues received by the Buyer.

Billing and collection is an unregulated, non-common carrier
service [^144]/ that BOCs (including U S WEST) have been providing for
unaffiliated IXCs operating in their regions since the AT&T divestiture.
It is not a "telecommunications" service as defined by the Act. There is
clearly no Section 271 impediment to Qwest's provision of billing and
collection to the Buyer in this context.

### 3. Customer care and provisioning. 

Buyer also may contract with Qwest for other customer care and
provisioning functions. Any such functions would be performed on behalf
of, and under the direction of, the Buyer. This activity may be
particularly useful to support a smooth transition of in-region
customers to Buyer, and to support customers who continue to receive
out-of-region services from Qwest post-divestiture. In all cases the
Buyer will be clearly identified to customers as the provider of the
in-region interLATA services.

The scope of customer care support required by the Buyer remains to be
determined. However, in principle, Buyer customers could call a customer
service representative employed by Qwest to place service orders,
discuss their bills or make payment arrangements, obtain other
information about the services

available, or report technical trouble with their service. Buyer would
be identified as the interLATA service provider in all such customer
contacts.

Similarly, Buyer could contract with Qwest for assistance in
provisioning activity. Qwest might act as Buyer\'s agent to arrange
local access, interface with national 800 numbering organizations,
physically install circuit connections to leased ports in the Qwest
premise, or handle similar back-office functions.

None of these activities constitute the provision of
"telecommunications" as defined by the Act. None of them are regulated
common carrier services. BOCs, including U S WEST, provide these
functions today. Qwest may similarly provide them to the Buyer of its
divested services. [^145]/

Qwest recognizes that, in the *Teaming Order,* the Commission expressed
concern regarding customer care provided by BOCs on behalf of an
in-region IXC. [^146]/ The Commission concluded that Section 271 issues
arise where "a BOC's involvement in the long distance market enables it
to obtain competitive advantages, thereby reducing its incentive to
cooperate in opening its local market to competition."[^147] /

This situation, however, is entirely different. As noted above, it is
relevant that customer care support would be offered by the Qwest
out-of-region IXC affiliate, and not the U S WEST ILEC. Nothing in the
Telecom Act prevents an out-of-region RBOC affiliate from providing
support services to another IXC, even when, as here, the two carriers
would be serving the same customer.[^148] /

In any event, the *Teaming Order* is distinguishable on its own terms.
First, neither Qwest nor U S WEST would obtain "material benefits \* \*
\* uniquely associated with the ability to include a long distance
component in a combined service offering."  [^149]/ The customer care
functions contemplated here do not involve "one-stop shopping" or "full
service" combined local/long-distance offerings (with which the
Commission was concerned in the *Teaming Order*).* *[^150]/

Second, the BOC would not be "effectively holding itself out as a
provider of long distance service" within its region,[^151] / because
Qwest and the Buyer will make it clear that long distance service in the
U S WEST region is to be provided by the Buyer. Qwest's customer care
role would not "permit \[a BOC\] to use \[its\] local-market dominance
in support of \[its\] offering in a manner that other carriers seeking
to offer a similar combined service could not do." [^152] /

Finally, the customer care functions that Qwest might perform would not
include activities that are central to the legal or contractual
responsibilities of an interLATA service provider. Most critically,
Qwest would have no involvement in setting the prices that the Buyer
will charge to end users. [^153]/ The Commission has previously stated
that customer care functions "would be analogous to billing and
collection arrangements and would be permissible under section 271" in
these circumstances.  [^154]/

[]{#__RefHeading___Toc464816449 .anchor}4. Monitoring, trouble-shooting,
maintenance, and repair.

Because Qwest will continue to operate as an out-of-region facilities
based IXC, it will continue to engage in various monitoring,
trouble-shooting, maintenance and repair activities. Qwest anticipates
that some potential buyers may want to contract with Qwest for it to
provide similar functions on their behalf.

Qwest already provides these kind of support functions, and is prepared
to offer them to the Buyer here under arm\'s length contracts. For
example, Qwest has the capability to monitor circuits and make
predetermined routing changes at its switch ports leased by Buyer in the
event of faults (based on Buyer\'s advance instructions, and assuming
Buyer has arranged to have alternate facilities in place). Qwest also
could begin fault isolation on Buyer\'s behalf; effect repairs to the
switch if the problem is in a Buyer-leased port; or open trouble tickets
with other carriers as Buyer\'s agent to obtain repair activity by them.

Importantly, in all circumstances Qwest would provide these support
functions under the absolute control and direction of its customer, the
Buyer. The Buyer would bear all responsibility for directing Qwest
employees regarding actions that might affect Buyer's interLATA
services. Buyer would designate policies and standards, and make all
material decisions, related to operation of the particular network
elements.

Buyer will contract for such support activities to the extent that they
permit Buyer to offer customers better service quality more efficiently
and at lower cost. These support functions may be particularly useful as
Buyer assumes the service quality and other obligations present under
existing Qwest customer contracts. Qwest is sensitive to ensuring
customers that the divestiture process will be as transparent to them as
possible. If by providing these support functions Qwest can contribute
to limiting the impact on customers of the assignment to a new carrier,
the public interest is clearly served.

None of these support functions itself constitutes the provision of
\"interLATA telecommunications\" because in no case will Qwest be
engaged in the transmission of information. [^155]/ Nor will Qwest be
holding itself out as an interLATA service provider. Thus, this activity
does not violate Section 271.

# III. Calling Card, Prepaid card, And Operator Services

## A. Description of Divestiture Plan

Qwest plans to discontinue the in-region interLATA components of its
current calling card and operator service-related offerings, including:
(1)  calling cards, (2)  prepaid phone cards, and (3) operator-assisted
long-distance services using 0+, 0−, 101-XXXX, and similar dialing
patterns.

[Calling Cards]{.underline}. Qwest will divest its in-region calling
card service to another certificated carrier and discontinue providing
this service to card customers. Cardholders will continue to receive
service as before, without interruption, from the new carrier over that
carrier\'s network. The new carrier will commit not to increase customer
rates for a specified period after the cutover, and thereafter will
modify rates only pursuant to applicable regulatory rules. Where calling
card services also are provided under contract, the buyer will assume
the applicable contract obligations.

Qwest will not provide Buyer any wholesale in-region interLATA
telecommunications services. Buyer may contract with Qwest to license
use of Qwest\'s proprietary calling card platform and to receive
customer care and billing support functions from Qwest. The Qwest
platforms are located outside the U S WEST region in Dublin, Ohio and
San Antonio, Texas. Buyer would obtain its own transport to and from the
platform for purposes of transmitting customer traffic. All Qwest
support would be provided under the control and direction of Buyer. All
interfaces with customers will make clear that telecommunications
services are provided by Buyer.

Qwest also expects to market calling card services as an agent of Buyer.
Again, however, Buyer will establish all prices and be identified
clearly to customers as the service provider. Qwest will not share any
revenues from the provision of in-region interLATA services provided by
Buyer.

[Prepaid Cards]{.underline}. Qwest will divest its prepaid long distance
card business to another interexchange carrier. That carrier will assume
all responsibility for provisioning the prepaid service.

Service to customers will not be interrupted. Cards will work as normal,
with traffic routed to Buyer for delivery. Buyer will commit to continue
to serve customers at the applicable rates promised for cards
circulating in the marketplace at divestiture. When customers contact
the customer service number on the cards, they will be informed that
Buyer is now the provider of interLATA services.

After the merger closing Qwest will market new prepaid cards, but only
as the agent of the Buyer. The Buyer will establish all service rates
and continue as the identified carrier. Qwest will not share in
in-region interLATA service revenues.

[Operator Services]{.underline}. Qwest will discontinue handling
operator-assisted in-region interLATA calls using 0+, 0−, 101-XXXX, and
similar dialing patterns. Any contractual commitments to provide
operator services on behalf of hospitality, COCOT or other aggregators
will be assigned to a new carrier who will abide by the contract terms,
but otherwise will be free to establish its own rates, terms, and
conditions going forward. This new carrier will be responsible for
obtaining its own telecommunications network facilities to handle these
calls.

## B. Legal Analysis

Qwest has structured its divestiture plan to fully exit the provision of
in-region interLATA card and operator services consistently with the
terms of the Telecom Act. Qwest will discontinue providing either retail
or wholesale in-region interLATA telecommunications services used with
these products.

Qwest\'s residual marketing activity in this area will conform to prior
precedent. For example, ever since the AT&T divestiture BOCs have
offered their customers calling cards that enable customers to place
interLATA calls, using the telecommunications services of other
authorized carriers. [^156]/ Since the enactment of the Telecom Act, U S
WEST and other RBOCs have continued to provide such calling card
offerings pursuant to Section 271(f), which permits RBOCs and their
affiliates to continue providing previously authorized services. In this
regard, Qwest is patterning its continuing in-region calling card
services on the existing offerings of U S WEST and other RBOCs and their
affiliates. [^157]/ Like those

companies, Qwest will inform consumers that a different carrier will
handle in-region originating interLATA calls.

Qwest\'s provision of calling card platform and customer care support
would not change this analysis. As discussed in the preceding section,
such support functions do not constitute the provision of
\"telecommunications\" services, and hence are permitted by the Act.

Similarly, Qwest\'s marketing of prepaid cards would not violate the
Act. Qwest will conform its operations to accord with the structure
recently approved by the Common Carrier Bureau in the context of
BellSouth\'s prepaid activities. The Bureau held that BellSouth's
prepaid card was distinguishable from unlawful teaming arrangements
because it did not "capitalize on, or directly utilize, the company's
local market base," nor did it "entrench\[ \] its local market share or
effectively pre-position\[ \] itself in the long-distance
market." [^158]/ The Bureau also found that even though BellSouth's
brand appears on the card, BellSouth "does not hold itself out as
providing long-distance service" through the card offering. [^159]/ For
these reasons, and because BellSouth did not control the price, format,
or other aspects of the long distance service and the prepaid card did
not raise other competitive concerns, [^160]/ the Bureau held that the
prepaid card was consistent with Section 271. The same will be true with
respect to Qwest\'s activities.  [^161]/

# IV. interLATA Information Services

## A. Description of Divestiture Plan

Qwest will discontinue the interLATA information services, as well as
the interLATA telecommunications services used in connection with other
providers' information services, that it currently provides in the U S
WEST region. It will continue to provide such services outside the U S
WEST region, and as well as in-region information services that do not
"incorporate as a necessary, bundled element an interLATA
telecommunications transmission component, provided to the customer for
a single charge." [^162]/

This change will affect two categories of Qwest offerings: (i) web
hosting services for e-commerce and other Internet-based applications;
and (ii) dial-up and dedicated Internet access services. Where customers
currently connect to Qwest information services across U S WEST LATA
boundaries, Qwest will ensure that those customers obtain transport
service from another carrier. Similarly, where Qwest provides Internet
access or information services that incorporate interLATA transport in
the U S WEST region, it will restructure those services to separate the
interLATA transport component. Insofar as Qwest has preexisting
contractual commitments to provide interLATA transport or Internet
access in the U S WEST region, it will divest those transport
commitments to another carrier who will assume responsibility for
providing the services on the same terms and conditions.

## B. Legal Analysis

The Commission has held that prior to receiving Section 271 clearance,
BOCs and their affiliates may offer an information service, even if an
interLATA transmission service is necessary for a customer to obtain
access to such a service, as long as the interLATA transmission
component is separately provided by another carrier and is neither
provided nor resold by the BOC. [^163]/ Qwest will take the necessary
measures to structure its information service offerings in a manner that

does not incorporate, as a necessary, bundled element, in-region
interLATA transmission. It also will ensure that all prohibited
interLATA transmissions in the U S WEST region are provided by a
third-party carrier or carriers, who will have the direct contractual
relationship for the provision of such services to customers who
subscribe to Qwest's information services.

Qwest recognizes that a number of proceedings now before the Commission
raise questions about whether, and to what extent, Internet-related
information service offerings constitute interLATA information services.
In the context of certain Internet-related offerings, the line
separating information services from telecommunications services is not
entirely clear. [^164]/ The issues raised in these proceedings are
generic to the entire industry. To the extent the Commission resolves
questions regarding the status of particular interLATA information
services in the future, post-merger Qwest will comply fully with such
conclusions.

# CONCLUSION

Qwest has designed its divestiture plan to comply fully with Section 271
of the Telecommunications Act. The plan also will permit the divestiture
of its existing in-region interLATA business with the least possible
impact on customers. Qwest is proceeding promptly to implement this plan
so that its merger with U S WEST can close as soon as possible.

Qwest looks forward to the day when it will be able to reenter the
in-region interLATA market following successful implementation of the
Section 271 process in the U S WEST region. Qwest is committed to
working actively toward that end once the merger is closed. We have
noted elsewhere how the merger will increase the incentives of U S WEST
to satisfy the requirements of Section 271. The sooner the merger
closes, the sooner those incentives can take effect.

CERTIFICATE OF SERVICE

I, Barbara E. Clocker, hereby certify that on this 18th day of October,
1999, copies of the foregoing "Response to Comments on Applications for
Control" were served by hand delivery or by overnight delivery (where
indicated) to the following:

Michael G. Jones\
Willkie Farr & Gallagher\
(Attorneys for McLeod USA Telecommunications Services)\
1155 21^st^ Street, NW\
Suite 600\
Washington, DC 20036

Ruth Milkman\
Lawler, Metzger & Milkman\
(Attorneys for Allegiance Telecom, Inc.)\
1909 K Street, NW\
Suite 820\
Washington, DC 20006

Robert W. McCausland, Vice President\*\
Regulatory and Interconnection\
Allegiance Telecom, Inc.\
1950 Stemmons Freeway, Suite 3026\
Dallas, TX 75207-3118

Daniel M. Waggoner\
Gregory J. Kopta\
Robert S. Tanner\
Davis Wright Tremaine\
(Attorneys for Nextlink, ATGI, GST and\
Firstworld)\
1500 K Street., NW\
Suite 450\
Washington, DC 20005

R. Gerard Salemme\
Daniel Gonzalez\
Alaine Miller\
NEXTLINK\
1730 Rhode Island Ave., NW, Suite 1000\
Washington, DC 20036

Kath Thomas\*\
Advanced Telecom Group, Inc.\
100 Stony Point Road, Suite 130\
Santa Rosa, CA 95401

Brian D. Thomas\*\
Gary Yaquinto\
GST Telecommunications, Inc.

4001 Main Street\
Vancouver, WA 98663

Victoria T. Aguilar\*\
First World Communications Inc.\
8390 E. Crescent Parkway, Suite 300\
Greenwood Village, CO 80111

Gary Slaiman\
Kristine Debry\
Swidler Berlin Shereff & Friedman\
(Attorneys for Ensure Responsible\
Billing)\
3000 K Street, NW\
Suite 300\
Washington, DC 20007

James R. Scheltema\
Blumenfeld & Cohen\
(Attorneys for Rhythms Netconnections, Inc.)\
1625 Massachusetts Ave., NW\
Suite 300\
Washington, DC 20036

Jeffrey Blumenfeld\*\
Chief Legal Officer -- General Counsel

5933 S. Revere Parkway\
Englewood, CO 80112

Richard S. Becker\
James S. Finerfrock

Richard S. Becker & Associates\
(Attorneys for TSR Wireless LLC)\
1915 Eye Street, Suite 800\
Washington, DC 20006

J. Carl Wilson\
Lisa B. Smith\
MCI WorldCom, Inc.\
1801 Pennsylvania Ave.\
Washington, DC 20006

Mark Rosenblum\*\
Roy Hoffinger\
Aryeh S. Friedman\
AT&T\
295 N. Maple Ave.\
Basking Ridge, NJ 07920

Thomas M. Koutsky\
Jason Oxman\
Covad Communications Company\
600 14^th^ Street, NW, Suite 750\
Washington, DC 20005

Clay Deanhardt\*\
Covad Communications Company\
2330 Central Expressway, Building B\
Santa Clara, CA 05050

J. Richard Smith\*\
Craft Fridkin & Rhyne\
1100 One Main Plaza\
4435 Main Street\
Kansas City, MO 64111

Peter Froning, Executive Director\*\
New Mexico Rural Dev. Response Council\
Alvarado Square, Mail Stop 0402\
Albuquerque, NM 87158

John W. Mooty\*\
Gray, Plant, Mooty, Mooty & Bennett\
(Attorneys U S WEST Retiree Assoc.)\
3400 City Center

33 South Sixth Street

Minneapolis, MN 55402

Kathryn Brown\
Chief of Staff

Federal Communications Commission\
445 Twelfth Street, SW, Room 8-B201E\
Washington, DC 20554

Thomas Power\
Legal Advisor to Chairman Kennard\
Federal Communications Commission\
445 Twelfth Street, SW, Room 8-B201L\
Washington, DC 20554

Linda Kinney\
Legal Advisor to Commissioner Ness\
Federal Communications Commission\
445 Twelfth Street, SW, Room 8-B115D\
Washington, DC 20554

William Bailey\
Legal Advisor to Commissioner\
Furchtgott-Roth\
Federal Communications Commission\
445 Twelfth Street, SW, Room 8-A302E\
Washington, DC 20554

Kyle Dixon\
Legal Advisor to Commissioner Powell\
Federal Communications Commission\
445 Twelfth Street, SW, Room 8-A204E\
Washington, DC 20554

Kathryn Brown\
Chief of Staff

Federal Communications Commission\
445 Twelfth Street, SW, Room 8-B201E\
Washington, DC 20554

Adam Krinsky\
Legal Advisor to Commissioner Tristani\
Federal Communications Commission\
445 Twelfth Street, SW, Room 8-C302B\
Washington, DC 20554

Lawrence Strickling, Chief\
Common Carrier Bureau\
Federal Communications Commission\
445 Twelfth Street, SW, Room 5-C450\
Washington, DC 20554

Robert Atkinson\
Deputy Chief\
Common Carrier Bureau\
Federal Communications Commission\
445 Twelfth Street, SW, Room 5-C356\
Washington, DC 20554

Carol Mattey, Chief\
Policy and Program Planning Division\
Common Carrier Bureau\
Federal Communications Commission\
445 Twelfth Street, SW, Room 5-B125\
Washington, DC 20554

ITS\
1231 20^th^ Street\
Washington, DC 20554

Office of Public Affairs\
445 12^th^ Street, SW, Room CY-C314\
Washington, DC 20554

Margaret Egler\
Common Carrier Bureau\
445 12^th^ Street, SW, Room 5-C100\
Washington, DC 20554

Lauren Kravetz\
Wireless Telecommunications Bureau\
445 12^th^ Street, SW\
Room 4-A163\
Washington, DC 20554

Joanna Lowry\
International Bureau\
445 12^th^ Street, SW, Room 6-A831\
Washington, DC 20554

CeCi Stephens\
Policy & Program Planning Divison

Common Carrier Bureau\
Federal Communications Commission

445 12^th^ Street, SW, Room 5-C140\
Washington, DC 20554

Barbara E. Clocker

[^1]: / As the Commission knows, the Department of Justice and the FTC
    already have given early termination to their review of this
    transaction in the Hart-Scott-Rodino process. Although state
    approval processes also are pending, divestiture activity will be
    less affected by them. Section 271 is a federal issue, and once the
    Commission has approved this merger the work to implement
    divestiture can proceed in full.

[^2]: / In the AT&T-TCI and MCI-WorldCom merger proceedings, the
    Commission repeatedly declined invitations to impose conditions not
    directly related to anti-competitive effects of those transactions.
    In the AT&T-TCI proceeding, for example, the Commission declined to
    impose a condition granting competitors a right of access to the
    merged company's multichannel video programming facilities in light
    of its conclusion that the merger would be "unlikely to result in
    the loss of a significant source of current or future competition in
    MVPD services." *Application for Transfer of Control of
    Tele-Communications, Inc. to AT&T*, ("*AT&T-TCI Order"*), 14 FCC Rcd
    3160, 3173 ¶ 22 (1999). Likewise, because the Commission concluded
    that the MCI-WorldCom merger was "not likely to have anticompetitive
    effects on the provision of \* \* \* private line service on any
    U.S. international route," it refused to condition its approval on a
    divestiture of any such facilities. *Application for Transfer of
    Control of MCI Communications to WorldCom, Inc.* ("*MCI-WorldCom
    Order*"), 13 FCC Rcd 18025, 18101, *¶* 135 (1998).

[^3]: / Section 214(c) of the Communications Act permits the Commission
    to attach to a certificate only "such terms and conditions as \* \*
    \* the public convenience and necessity may require." 47 U.S.C. §
    214(c). Likewise, section 303(r) of the Act restricts the Commission
    to "prescrib\[ing\] such restrictions and conditions \* \* \* *as
    may be necessary* to carry out the provisions of the chapter." 47
    U.S.C. § 303(r) (emphasis added).

[^4]: / *See e.g., AT&T-TCI Order*, 14 FCC Rcd at 3169, ¶ 15;
    *MCI-WorldCom Order*, 13 FCC Rcd at 18032, ¶ 10.

[^5]: / *See, e.g.,* Covad Comments at ii (comparing this proceeding to
    those involving the "SBC-PacTel, SBC-SNET, SBC-Ameritech, Bell
    Atlantic-NYNEX, and Bell Atlantic-GTE mergers" without any analysis
    of similarities or differences between those mergers and the merger
    at issue here).

[^6]: / *Applications for Consent to Transfer Control of NYNEX to Bell
    Atlantic* ("*Bell Atlantic-NYNEX Order*"), 12 FCC Rcd 19985, 19991,
    ¶ 9 (1997).

[^7]: / *Id*. at ¶ 103.

[^8]: / *Id*. at ¶ 151.

[^9]: / In any event, other facilities-based CLECs are active in
    Seattle. *See* Carlton/Sider Declaration, Attachment A, at 15.

[^10]: / The only exception relates to minimal local resale associated
    with service to payphones.

[^11]: / Covad Communications Comments at 9-10.

[^12]: / The merger clearly will not block the development of any long
    distance competition. U S WEST, of course, has no in-region
    interexchange business, and its out-of-region business constitutes a
    minuscule percentage of any competitive market.

[^13]: / McLeod Comments at 16. McLeod also points to Qwest\'s ownership
    interest in Covad as evidence of its in-region CLEC activity. McLeod
    Comments at 17. However, Qwest\'s tiny ownership interests in Covad
    and Rhythms (less than three percent in each case) are too small to
    create any competitive issues.

[^14]: / The Commission determined that the restrictions it had imposed
    on ILEC use of frequencies in a different band \-- the LMDS band \--
    were not necessary in the 37-40 GHz band because of the differences
    in the nature of the spectrum and because of the wide range of
    potential and actual competitors to licensees in the band.
    *Amendment of the Commission's Rules Regarding the 37.0-38. GHz and
    38.6-40.0 GHz Bands, Report and Order and Second Notice of Proposed
    Rulemaking*, FCC 97-391, released Nov. 3, 1997, 12 FCC Rcd 18600,
    18617-18628 (1997), *aff'd on recon., Amendment of the Commission's
    Rules Regarding the 37.0-38.6 GHz and 38.6-40.0 GHz Bands*, ET
    Docket No. 95-183 (released July 29, 1999) ("*39 GHz Order*").

[^15]: / Quite the contrary, powerful new incentives for the merged
    entity to obtain Section 271 authority, as discussed below, can only
    result in increased opportunities for competitive entry into these
    markets. *See* Section I.C.3, *infra*; Declaration of Bruce M. Owen,
    Economists Inc. (\"Owen Declaration\"), provided as Attachment B.

[^16]: / Allegiance Comments at 3-5, 10-13.

[^17]: / *See* 47 U.S.C. § 153(1).

[^18]: / Allegiance erroneously states that BellSouth has an "option" to
    acquire up to 20% of the combined company. *See* Allegiance Comments
    at 2. This is incorrect. BellSouth does not have any right to
    purchase shares from Qwest, nor does Qwest have any obligation to
    sell BellSouth additional shares. Allegiance may be confused about a
    former standstill provision that limited BellSouth's ability to
    acquire more than 20% of Qwest without Qwest board approval. That
    provision is no longer in effect.

[^19]: / Indeed, throughout the Hart-Scott-Rodino process for the
    Qwest-U S WEST merger, the Department of Justice was well aware of
    BellSouth's equity stake in Qwest. It did not object or request any
    changes to the merger. While Qwest and BellSouth will retain their
    existing marketing agreement, both parties are fully aware that any
    coordinated marketing must comply with the restrictions outlined in
    recent Commission orders. *See, e.g.,* *AT&T Corp. v. Ameritech
    Corp.*, 13 FCC Rcd 21438 (1998), *aff'd*, *U S WEST v. FCC*, 177
    F.3d 224 (D.C.Cir. 1999) *(\"Teaming Order\")*; *Implementation of
    the Non-Accounting Safeguards of Sections 271 and 272 of the
    Communications Act of 1934, as amended,* Third Order on
    Reconsideration, CC Docket No. 96-149, FCC 99-242, ¶39 (rel. Oct. 1,
    1999).

[^20]: / *See, e.g*., Covad Comments at 22-23 (asserting that the merger
    has no benefits).

[^21]: / *See* Application at 14-18.

[^22]: / These benefits also are described in more detail in the
    attached Carlton/Sider Declaration, Attachment A, at 8-10.

[^23]: / *See* Backgrounder Fact Sheet -- Next Generation Network
    www.qwest.com/press/qwest-uswest.html.

[^24]: / Qwest's network extends 1,400 miles into Mexico, and includes
    undersea cables in the Atlantic Ocean. In addition, Qwest is part of
    a joint venture with KPN, the Dutch Telecommunications Company
    (KPNQwest), which is building an 18,100 mile European network that
    will connect 39 cities. Qwest also is part of a consortium that is
    building undersea fiber links to Japan and in the Asia Pacific
    Region.

[^25]: / Unlike many of the other RBOCs, U S WEST does not own, but
    rather leases, about 98 percent of its in-region interLATA
    facilities. These facilities today are used for official (internal)
    communications. It also does not own any interLATA long distance
    switches.

[^26]: / As discussed below, the incentive to make early use of the
    Qwest network for in-region interLATA services constitutes a strong
    added incentive for U S WEST to satisfy Section 271's requirements.
    *See* Section I.C.3.b., *supra*.

[^27]: / *See* 47 U.S.C. § 706.

[^28]: / *See* Carlton/Sider Declaration, Attachment A, at 6-7, 9.

[^29]: / *Applications for Consent to the Transfer of Control of
    Licenses and Section 214 Authorizations from Ameritech Corp. to SBC
    Communications, Inc.,* CC Docket No. 98-141, FCC 99-279 at ¶¶398-99
    (released Oct. 6, 1999) (\"SBC-Ameritech Order\").

[^30]: / *Id.; see also Application of GTE Corp., Transferor, and Bell
    Atlantic Corp., Transferee, for Consent to Transfer of Control*, CC
    Docket No. 98-184 (filed Oct. 2, 1998.)

[^31]: / *Preliminary Statistics of Communications Common Carriers*,
    Report, 1998 WL 1058118, available at
    [http://www.fcc.gov/Bureaus/Common_Carrier/Re­ports/FCC-State_Link/SOCC/98psocc.pdf](http://www.fcc.gov/Bureaus/Com%1Fmon_Carrier/Reports/FCC-State_Link/SOCC/98psocc.pdf),
    at p.3 (released May 28, 1999) (\"*Statistics of Common
    Carriers*\"). The FCC\'s \"Statistics of Communications Common
    Carriers\" compiles data from the country\'s largest incumbent local
    exchange carriers, which include all of the RBOCs, ALLTEL Corp.,
    Citizens Utilities Co., Frontier Corp., GTE Corp., and Sprint Corp.,
    and their various holding companies, if any.

[^32]: / *Id*.

[^33]: / *Id.* As noted *supra*, these figures are based only on data
    from the nation\'s largest ILECs. However, if data from the
    remaining, smaller, local exchange carriers were also incorporated,
    these percentages of total customer lines would, at most, decrease
    only nominally. For example, the marginal effect of including all
    carriers, as opposed to only those reporting for *Statistics of
    Common Carriers*, can be seen in the example of SBC-Ameritech.
    *Compare*, *Id*. at 3 (reflecting SBC-Ameritech combined control of
    33% of lines), *with SBC- Ameritech Order*, FCC 99-279, at ¶ 31
    (reporting SBC-Ameritech combined control of 31.9% of nation\'s
    access lines).

[^34]: / *See, e.g.*, McLeod Comments at 28-32.

[^35]: / *See* Owen Declaration, Attachment B, at 8, 10-12.

[^36]: / *See generally* 47 U.S.C. § 271 (listing of prohibited and
    permitted interLATA services).

[^37]: / In the wholesale market, post-merger Qwest will be the only
    carrier's carrier with a nationwide network but without a nationwide
    offering.

[^38]: / Qwest will continue to use network facilities in the U S WEST
    region for certain services permitted by Section 271, including
    delivery of long distance service originating out of region, and
    transmission of services that transit but do not originate or
    terminate in the region. However, Section 271 restrictions will
    constrain the usage of such facilities following divestiture and
    prior to Section 271 relief.

[^39]: / Such costs could vary, however, if new capacity is added and
    the geographic reach of the network is expanded.

[^40]: / Once a fiber optic network is in place, the marginal cost of
    transmission over that network is quite low. *See, e.g.*, W.K.
    Viscusi, J. M. Versons, and J.E. Harrington, *Economics of
    Regulation and Antitrust, MIT, 1995*, at 496 (\"\[T\]he investment
    of MCI and Sprint in their long-distance networks, whether microwave
    or fiber optics, is largely sunk so that the marginal cost of
    operation is relatively low.\"); *Telegeography* *1999*,
    Telegeography Inc., 1998 at 20 (\"The cost of routing calls is
    diminishing exponentially . \* \* \* The per minute cost of carrying
    a voice call on \[new trans-oceanic submarine\] cables is
    miniscule.\")

[^41]: / *See* Owen Declaration, Attachment B, at 10-12.

[^42]: / Owen Declaration, Attachment B, at 12.

[^43]: / As noted above, U S WEST leases about 98 percent of the
    interLATA facilities it uses today to provide official services in
    its region, unlike many other RBOCs.

[^44]: / Owen Declaration, Attachment B, at 9-10.

[^45]: / *Id.* at 8-12.

[^46]: / This "unit cost" would take into account both operational costs
    and investment costs (if U S WEST chose to build facilities rather
    than lease them).

[^47]: / As noted above, the Qwest network has more bandwidth than the
    networks of AT&T, MCI, and Sprint combined. *See* \"Building the
    Future-Proof Telco,\" *Wired,* May 1998 at 127.

[^48]: / Owen Declaration, Attachment B, at 10.

[^49]: / *See California Ass\'n of the Physically Handicapped, Inc. v.
    FCC*, 840 F.2d 88, 91 n.6 (D.C. Cir. 1988) (*\"CAPH v. FCC\"*)
    (opponents of broadcast license transfer lack standing where their
    objections are based on alleged practices of transferor and
    speculative assertions that transferee will perpetuate those
    practices). The merger Opponents, like the petitioners in *CAPH v.
    FCC*, cannot trace the harms they allege, pertaining to U S WEST\'s
    obligations under Section 251 and other related issues, to the
    transaction at issue. Instead, their \"real plea is that the
    transfer will furnish no cure -- it will not cause the injury to
    abate.\" *California Ass\'n of the Physically Handicapped, Inc. v.
    FCC*, 778 F.2d 823, 825 (D.C. Cir. 1985). But this plea is not
    sufficient to establish standing. *Id. See also Microwave
    Acquisition Corp. v. FCC,* 145 F.3d 1410, 1413 (D.C. Cir. 1998)
    (appellant lacked standing because, inter alia, the relief sought
    would not remedy the alleged injury).

[^50]: / McLeod Comments at 28, 42.

[^51]: / *Id*. at 28.

[^52]: / Similarly, the suggestion by McLeod and NEXTLINK
    Communications, Inc., *et al.*, that the merged entity may cut its
    dividend to invest more heavily in advanced service facilities
    obviously does not transform their service quality complaints into a
    merger concern. *See* McLeod Comments at 27; Joint Comments of
    NEXTLINK Communications, Inc., Advanced Telcom Group, Inc., GST
    Telecommunications, Inc., and FirstWorld Communications, Inc., at
    14. The suggestion misses the mark in any event. This Commission can
    have no issue with any future Qwest decision to invest capital in
    its network rather than distribute dividends to shareholders.

[^53]: / As the Commission concluded in the *AT&T-TCI Order*, "\[the\]
    enforcement of state regulations \[is\] best carried out at the
    state level." *AT&T-TCI Order* ¶ 58. U S WEST would note that more
    than one of the service quality grievances referenced in McLeod\'s
    comments, including the alleged restrictions on the number of U S
    WEST service conversions, *see* McLeod Comments at 14, already have
    been resolved in state commission proceedings.

[^54]: / *See e.g.,* New Mexico Rural Development Response Council
    Comments at 2 (specific service problems in rural New Mexico are
    properly addressable to state regulators).

[^55]: / The comments of Allegiance and FirstWorld with respect to
    interconnection agreements are confusing at best to U S WEST because
    they do not conform to actual experience. Allegiance, for example,
    argues that as a condition of approval the combined company should
    be required to enter into region-wide interconnection agreements
    (which U S WEST already is willing to negotiate) and be subject to
    MFN obligations with respect to both in- and out-of-region
    interconnection agreements. *See* Allegiance Comments at 12--13.
    Yet, in August 1999, Allegiance opted into existing interconnection
    agreements with U S WEST in Washington and Colorado. The negotiation
    process was completed in both states without arbitration; the
    Washington agreement has been approved by the PUC, and the Colorado
    agreement is signed and pending approval; interim collocation
    arrangements have been made; and no disputes exist. Meanwhile,
    FirstWorld (filing jointly with NEXTLINK, *et al.*) demands
    conditions relating to interconnection and provision of unbundled
    network elements. Comments of NEXTLINK, *et al.*, at 20-26. Yet
    FirstWorld has requested to opt into an existing interconnection
    agreement in Oregon and Colorado. U S WEST has agreed to these
    opt-in agreements and is waiting for their signed return from
    FirstWorld. Again, no disputes are pending in either state.

[^56]: / *See* Rhythms Comments at 6, 12. Rhythms, meanwhile, recently
    initiated a state commission proceeding against U S WEST in Colorado
    on the OSS issue. *See* Docket No. 99F-493T.

[^57]: / Covad Comments at 24-26; Allegiance Comments at 10.

[^58]: / TSR Wireless LLC ("TSR") makes the novel claim that its
    disagreement with U S WEST over whether Section 251(b)(5) of the Act
    requires LECs to provide unlimited free interconnection to one-way
    paging providers (such as TSR) constitutes a "basic qualifications"
    issue requiring dismissal of the Applications. *See* Comments of TSR
    at 7. This argument is plainly without merit and constitutes yet
    another grievance with U S WEST having no real relation to this
    merger. The obligations of LECs under Section 251 to carriers such
    as TSR are currently being considered by the Commission in
    industry-wide proceedings. Moreover, TSR has already filed a
    complaint with the Commission based on this disagreement.

[^59]: / *See, e.g., Applications for Consent to Transfer of Control of
    Southern New England Telecommunications Corp.*, 13 FCC Rcd 21292,
    21306, ¶ 29 (1998); *AT&T-TCI Order,* 14 FCC Rcd at 3183, ¶ 43;
    *Bell Atlantic-NYNEX Order*, 12 FCC Rcd at 20083, ¶ 210. In each
    instance, the Commission specifically declined to review matters
    being considered in rulemaking proceedings because it determined
    that the public interest would be better served by deciding the
    matter in "a broader proceeding of general applicability." *See
    AT&T-TCI Order*, 14 FCC Rcd at 3183, ¶ 43.

[^60]: / CERB Comments at 2.

[^61]: / *Detariffing of Billing and Collection Services*, 102 FCC 2d
    1150 (1986) (concluding that a BOC is neither required to, nor
    precluded from, billing its customers for the interexchange services
    of any interexchange carrier), *recon. denied*, 1 FCC Rcd 445
    (1986).

[^62]: / *See* Allegiance Comments at 6, 11; Joint Commenters\' Comments
    at 3. U S WEST would note that McLeod is raising "dated" grievances
    that already have been resolved. For example, McLeod's concerns with
    the elimination of the "Assumed 9" function and the provision of
    station message detail recording service have been settled through
    business-to-business solutions. *See* McLeod Comments at 14.

[^63]: / *See Accounting Safeguards under the Telecommunications Act of
    1996*, 12 FCC Rcd 2993 (1996); *Implementation of the*
    *Non-Accounting Safeguards of Sections 271 and 272 of the
    Communications Act*, 11 FCC Rcd 21905 (1996); *Deployment of
    Wireline Services Offering Advanced Telecommunications Capability,*
    CC Docket No. 98-147, First Report & Order (March 31, 1999).

[^64]: / *AT&T-TCI Order*, 14 FCC Rcd at 3179, ¶ 34; *see also
    [id]{.underline}.* at 3179-81, ¶¶35-40.

[^65]: / Application at 11, 13-14.

[^66]: / *See, e.g.,* AT&T Comments at 10-15; MCI WorldCom Comments at
    7; McLeod Comments at 33-34; NEXTLINK et. al. Comments at 16-18.

[^67]: / *Application of WorldCom, Inc., and MCI Communications
    Corporation for Transfer of Control*, 13 FCC Rcd 18025, 18068-69,
    18134, 18145-48, ¶¶ 73-74, 193, 211, 213 (1998); *see also AirTouch
    Communications, Inc., Transferor, and Vodafone Group, PLC,.
    Transferee, for Consent to Transfer of Control of Licenses and
    Authorizations*, 16 C.R. (P & F) 125, 1999 FCC LEXIS 3007, ¶ 9 (WTB
    1999); *Pacific Telesis Group, Transferor, and SBC Communications,
    Inc., Transferee, for Consent to Transfer of Control*, 12 FCC Rcd
    2624, 2637-28, ¶¶ 25-28, 31, 42 (1997).

[^68]: / The applicants take strong exception to AT&T's suggestion that
    the Commission\'s rejection of an earlier joint marketing
    arrangement between Qwest and U S WEST has any relevance to this
    proceeding. *See* AT&T Comments at 2-3, 8-10, citing *AT&T Corp. v.
    Ameritech Corp.*, 13 FCC Rcd 21438 (1998) ("*Teaming Order*"),
    *aff'd sub nom. U S WEST Communications, Inc. v. FCC*, No. 98-1468
    (D.C. Cir. June 8, 1998). Qwest and U S WEST are fully committed to
    comply with the Telecom Act. *The Teaming Order* clarified the law
    with respect to joint marketing and other matters in important
    respects, and actually makes it easier for Qwest to carry out its
    divestiture.

[^69]: / AT&T Comments at 12 & n.43.

[^70]: / *See*, *e.g.*, *Implementation of the Subscriber Carrier
    Selection Changes Provisions of the Telecommunications Act of 1996,
    One Call Communications, Inc. d/b/a Opticom Request for Waiver*, CC
    Docket No. 94-129, DA 99-1033 (Com. Car. Bur., released May 28,
    1999); *Implementation of the Subscriber Carrier Selection Changes
    Provisions of the Telecommunications Act of 1996, Sprint
    Communications Co., L.P., Request for Waiver*, CC Docket No. 94-129,
    DA 99-1112 (Com. Car. Bur., released June 17, 1999); *Implementation
    of the Subscriber Carrier Selection Changes Provisions of the
    Telecommunications Act of 1996, AT&T Corp. Request for Waiver*, CC
    Docket No. 94-129, DA 99-1718 (Com. Car. Bur., released Aug. 27,
    1999).

[^71]: / In any event, AT&T's point is also procedurally improper. Qwest
    has not requested such a waiver in the instant proceeding. It will
    do so once a buyer for the applicable services is identified, and
    AT&T can comment then.

[^72]: / MCI WorldCom Comments at 6-7.

[^73]: / Attachment C at 15-16.

[^74]: / *Implementation of the Non-Accounting Safeguards of Sections
    271 and 272 of the Communications Act of 1934, as amended*, 11 FCC
    Rcd 21905, 21961-62, ¶ 115 (1996) ("*Non-Accounting Safeguards
    Order*").

[^75]: / *Id.* at 7 & n.2.

[^76]: / *Bell Atlantic Tel. Cos. Offer of Comparably Efficient
    Interconnection to Providers of Internet Access Services*, 11 FCC
    Rcd 6919, 6935-36, ¶¶ 49-51 (Com. Car. Bur. 1996), *pet. for review
    dismissed sub nom. Computer III Further Remand Proceedings: Bell
    Operating Company Provision of Enhanced Services*, 14 FCC Rcd 4289,
    4312-13, ¶¶ 36-37 (1999); *Non-Accounting Safeguards Order,* 11 FCC
    Rcd at 21966-68, ¶¶ 125-27.

[^77]: / McLeod Comments at 37, citing *Implementation of the
    Non-Accounting Safeguards of Sections 271 and 272 of the
    Communications Act of 1934*, CC Docket No. 96-149, Second Order on
    Reconsideration, 12 FCC Rcd 8653, 8683 n.110 (1997), *aff'd*, Bell
    Atlantic Telephone Companies v. FCC, 131 F.3d 1044 (D.C. Cir. 1997)
    ("*Second Reconsideration Order*").

[^78]: / McLeod Comments at 39. As noted in the Qwest Divestiture Plan,
    Qwest plans to discontinue its activity of leasing dark fiber that
    crosses LATA lines in the U S WEST region. *See* Attachment C at 7.

[^79]: / McLeod Comments at 39.

[^80]: / *Second Reconsideration Order*, 12 FCC Rcd at 8683 n.110. Qwest
    and U S WEST disagree with the Commission's dictum, in the same
    footnote, that the lease of dark fiber constitutes a
    telecommunications service and could violate Section 271. That
    dictum is based, incorrectly, on a pre-1996 Act decision of the
    Commission that is inconsistent with the statutory definitions
    enacted in 1996. Nonetheless, as noted above, Qwest plans to divest
    its existing offerings of in-region, interLATA dark fiber *leases*.

[^81]: / 47 U.S.C. § 153(21).

[^82]: / *Id.* at § 153(43).

[^83]: / *C.f.,* *Federal-State Joint Board on Universal Service*,
    Fourth Order on Reconsideration, 13 FCC Rcd 5318, ¶ 290 (1997)
    (satellite operator providing transponders, including related
    operations and maintenance, is not transmitting information, and
    thus is not engaged in "telecommunications").

    We note that McLeod\'s out-of-context quotations from a letter from
    a Qwest attorney, McLeod Comments at 35-36, are not relevant to this
    proceeding. The Qwest attorney wrote the letter at a time of
    significant uncertainty regarding the Qwest divestiture plan, and
    certain statements in the letter are not correct.

[^84]: [ ]{.underline}/ Salomon Smith Barney, "FON Long Distance
    Industry Worries Provide Good Investment Opportunity," August 23,
    1999.

[^85]: . Oxman, J., "The FCC and the Unregulation of the Internet," FCC
    Office of Plans and Policy Working Paper No. 31, July 1999.

[^86]: . Pershing Investment Research, Industry Brief, February 16,
    1999, p. 4.

[^87]: . NY Times, March 8, 1999, Section C, p. 1; PC Week, March 22,
    1999.

[^88]: . Communications News, March 1999; NY Times, March 8, 1999,
    Section C, p. 1.

[^89]: . http://www.williamscommunication.com/network/index.html.

[^90]: . <http://ws0den.level3.com/companynews/may>1099_ipcross.html.

[^91]: . Information Week, July 26, 1999.

[^92]: . SBC-SNET Memorandum Opinion and Order, FCC 98-276, October 15,
    1998, ¶3.

[^93]: . http://www.gte.com/AboutGTE/Investor/2Q99/summary.html.

[^94]: . J.D. Power and Associates Press Release, "SNET and Sprint Top
    Performers in Residential Long-Distance Customer Satisfaction," July
    29, 1999. \[http://www.jdpower.com/jdpower/

    releases/usld072999.htm\].

[^95]: . "Telcom Tangle," PC Week, June 28, 1999; MCI WorldCom Opinion
    and Order, FCC 98-255, September 14, 1998, ¶199.

[^96]: . Salomon Smith Barney, "Review of Our Position on RBOCs," March
    11, 1999.

[^97]: . Motivations for mergers are discussed in D. Carlton and J.
    Perloff, [Modern Industrial Organization]{.underline}, 2nd edition,
    pp. 36-40.

[^98]: . Shapiro and Willig, "On the Antitrust Treatment of Production
    Joint Ventures," [Journal of Economic Perspectives]{.underline},
    vol. 4, no. 3, Summer 1990, p. 114.

[^99]: . Qwest / U S WEST Strategic Overview, Slide 24
    \[www.uswest.com/is/qwest/analyst.ppt\].

[^100]: . Potential efficiencies associated with these services are
    discussed in the accompanying affidavit of Bruce Owen, as are the
    increased incentives to satisfy Section 271 of the
    Telecommunications Act that flow from the merger.

[^101]: . Reply Comments of Qwest / U S WEST.

[^102]: . Qwest / U S WEST Strategic Overview, Slide 21
    \[http://www.uswest.com/is/qwest/

    analyst.ppt\].

[^103]: . Qwest Press Release, September 13, 1999
    \[http://www.qwest.net/press/story.asp?id=140\].

[^104]: . Qwest / U S WEST Applications for Transfer of Control, August
    19, 1999, p. 15.

[^105]: . For reasons described in our reports submitted to the FCC in
    the SBC/Ameritech proceeding, we did not find any evidence
    supporting this footprint theory.

[^106]: . SBC/Ameritech Order, ¶66.

[^107]: . Conditions addressing discrimination concerns are addressed in
    ¶429-435 in the FCC's SBC/Ameritech order; conditions addressing
    benchmarking concerns are addressed in ¶423-428; conditions
    addressing potential competition concerns are addressed in ¶420-422
    of the Order.

[^108]: . Petition to Deny of McLeod Telecommunications Services, Inc.,
    pp. 42-43.

[^109]: . Joint Comments of Nextlink Communications, Advanced Telecom
    Group, Inc., GST Telecommunications, Inc. and Firstworld
    Communications, pp. 18-25.

[^110]: . Comments of Covad Communications Company, p. iii.

[^111]: . Comments of Rhythms Netconnections, Inc., p. 6.

[^112]: . TSR Wireless also fails to link its request to the proposed
    transaction. (See Petition to Dismiss or Deny or to Defer Action by
    TSR Wireless LLC.)

[^113]: . Petition to Deny of McLeod Telecommunications Services, p. 17.

[^114]: . Joint Comments of Nextlink Communications, Inc., Advanced
    Telecom Group Inc., GST Telecommunications, Inc, and Firstworld
    Communications, p. 15.

[^115]: . Comments of the Coalition to Ensure Responsible Billing, p. 2.

[^116]: . [Ibid]{.underline}., p. 6.

[^117]: . Comments of Covad Communications Company, pp. 9-11.

[^118]: . P. Huber and E. Leo, [UNE Fact Report]{.underline}, p. I-22.
    Submitted to the FCC by the United States Telephone Association,
    Prepared for Ameritech, Bell Atlantic, BellSouth, GTE, SBC, and U S
    WEST (May 26, 1999), CC Docket No. 96-98.

[^119]: . The FCC states that it uses this measure to track the extent
    and growth of CLEC activity. See, for example, the press release
    accompanying the FCC's Local Competition Report, August 31, 1999.
    The FCC states in the SBC/Ameritech Opinion that that this variable
    may not be adequate to measure the effects of discrimination.
    Nonetheless, the FCC presents these data to track "new entrants in
    the switched market." (FCC Local Competition Report: August 1999, p.
    43) This is precisely the purpose to which we apply these data here.

[^120]: . Qwest press release, August 4, 1999
    \[http://www.qwest.net/press/story.asp?id=140\]

[^121]: . [http://www.covad.com;]() [http://www.jato.com;]()
    [http://www.northpoint.net;]() http://www.rhythms.net;
    [http://www.uswest.com.]() Reseller information from U S WEST.

[^122]: R. G. Noll and B. M. Owen, "United States v. AT&T: An Interim
    Assessment," in Hausman and Bradley, eds., Future Competition in
    Telecommunications, Harvard Business School Press, 1988; R. G. Noll
    and B. M. Owen, United States v. AT&T: The Economic Issues, in Kwoka
    and White, eds., The Antitrust Revolution, Scott Foresman, 1988; 2nd
    ed. 1994.

[^123]: A quantitative analysis of the costs and benefits of seeking
    Section 271 authorization would attempt to estimate such factors as
    incremental lost local service revenues net of payments for UNEs,
    and gained net profits from long distance service. I have no basis
    for making such a quantitative analysis for U S WEST. However, the
    proposed merger with Qwest would change nothing in such an analysis
    except to increase the potential profits from long distance service,
    which would tend to increase the profit-maximizing rate of
    expenditure on compliance. In particular, I am aware of nothing
    about the U S WEST/Qwest merger, relative to the situation with
    U S WEST alone, that will increase the cost of satisfying Section
    271, aside from the acceleration of efforts to gain long distance
    authority predicted by my qualitative analysis.

[^124]: Qwest completed 18,500 route miles of this network last month
    and plans to complete a final 300 mile route later this year, to
    bring the network's final length to 18,800 route miles.

[^125]: "The combined company will take the nation's fastest, most
    reliable advanced fiber-optic network---with more bandwidth than the
    networks of AT&T, Sprint, and MCI Worldcom combined---and link it
    directly to 29 million customers." Backgrounder Fact Sheet---Next
    Generation Network \<www.qwest.com/press/qwest_uswest.html\>.

[^126]: The Commission itself has recognized the advantages a
    multi-location customer may realize from having a single
    long-distance carrier. In its decision on the MCI---Worldcom merger,
    the Commission wrote, "We also find persuasive Applicant's
    assertions that the merger will allow them to service multi-location
    customers over their own networks, and that this will enable such
    customers to receive higher quality and more reliable services than
    each company is currently able to offer separately." In the Matter
    of Application of WorldCom, Inc. and MCI Communications Corporation
    for Transfer of Control of MCI Communications Corporation to
    WorldCom, Inc., adopted September 14, 1999, ¶ 199.

[^127]: AT&T Annual Report, 1998, page 22.

[^128]: MCI WorldCom advertising supplement to the Wall Street Journal,
    Oct 1, 1998, p. R3.

[^129]: AT&T press release announcing completion of merger with TCG,
    July 23, 1998.

[^130]: See, e.g.,McLeod at 11-15; Nextlink, et al., at 5-14.

[^131]: See McLeod at 15-21; Nextlink, et al., at 4-5, 14-15.

[^132]: See McLeodUSA at 21-28, Nextlink et al., at 14.

[^133]: As noted in the text of the reply comments, Qwest holds very
    small ownership shares (less than 3%) in two DSL providers, Covad
    and Rhythms Net. In addition, Qwest has just begun to resell DSL
    services of those companies in the U S WEST region. Qwest has agreed
    to purchase conduit in a fiber ring facility in Seattle that
    traverses both U S WEST and GTE local service territories. Qwest has
    substantially completed its phase-out of local resale activity in
    the U S WEST region.

[^134]: / The designated \"no rate increase\" period will supplement and
    extend the regulatory rules already applicable to rate changes by
    non-dominant interexchange carriers, and therefore will give
    customers more protection than they have today.

[^135]: / *See*, *e.g.*, *Implementation of the Subscriber Carrier
    Selection Changes Provisions of the Telecommunications Act of 1996,
    AT&T Corp. Request for Waiver*, CC Docket No. 94-129, Order,
    DA 99-1718 (Com. Car. Bur., released Aug. 27, 1999); *Implementation
    of the Subscriber Carrier Selection Changes Provisions of the
    Telecommunications Act of 1996, Sprint Communications Co., L.P.,
    Request for Waiver*, CC Docket No. 94-129, Order, DA 99-1112 (Com.
    Car. Bur., released June 17, 1999); *Implementation of the
    Subscriber Carrier Selection Changes Provisions of the
    Telecommunications Act of 1996, One Call Communications, Inc. d/b/a
    Opticom Request for Waiver*, CC Docket No. 94‑129, Order, 14 FCC Rcd
    7942 (Com. Car. Bur. 1999).

[^136]: / The primary IRU purchasers are Frontier, GTE and MCI WorldCom,
    each of whom acquired their IRUs in connection with the construction
    of the Qwest network. Revenue was booked as "network construction."

[^137]: / *See* *Implementation of the Non-Accounting Safeguards of
    Sections 271 and 272 of the Communications Act of 1934, as Amended*,
    CC Docket 96-149, Second Order on Reconsideration, 12 FCC Rcd 8653,
    8683, ¶ 54 n.110, *aff'd*, *Bell Atlantic Telephone Companies v.
    FCC*, 1197 WL 783993 (D.C. Cir. 1997) ("*Second Reconsideration
    Order*").

[^138]: / In decisions prior to passage of the Telecom Act, the
    Commission concluded that it had jurisdiction over dark fiber
    because it could regulate \"wire communication\" and facilities
    \"incidental\" to wire communication. Dark fiber, it held, fell into
    that category. Subsequently, however, the Commission simply assumed
    that provision of dark fiber *also* falls within the new term
    \"telecommunications\" added by the 1996 Act. *Second
    Reconsideration Order*, 12 FCC Rcd at 8683, ¶ 54 n.110. On closer
    examination, Qwest would expect the Commission to find that,
    whatever its jurisdiction to regulate dark fiber, the provision of
    dark fiber by itself does not include the activity of
    \"transmission\" necessary to render it \"telecommunications\" under
    the Act.

[^139]: / *Second Reconsideration Order*, 12 FCC Rcd at 8683, ¶ 54
    n.110.

[^140]: / As noted in Section I above, Buyer of Qwest's originating long
    distance and terminating 800 in-region services may contract for
    certain of these support functions. For example, Qwest may be
    willing to lease ports on its interexchange toll switches to the
    Buyer, or provide billing and collection for the Buyer. The same
    legal analysis would apply in those instances.

[^141]: / Qwest itself does not have material local access facilities in
    the U S WEST region.

[^142]: / *Federal-State Joint Board on Universal Service*, CC Docket
    No. 96-45, First Report and Order, 12 FCC Rcd 8776, 8864-65, ¶ 157
    (1997), *aff'd sub nom. Texas Office of Pub. Util. Counsel v. FCC*,
    183 F.3d 393 (5th Cir. 1999).

[^143]: / *See*, *e.g.*, *Federal-State Joint Board on Universal
    Service*, CC Docket No. 96-45, Fourth Order on Reconsideration, 13
    FCC Rcd 5318, 5479, ¶ 290 (1997) (satellite operator leasing
    transponders is not transmitting information, and thus is not
    engaged in "telecommunications").

[^144]: / *See Detariffing of Billing and Collection Services*, CC
    Docket 85-88, Report and Order, 102 FCC.2d 1150 (1986), *recon.
    denied*, 1 FCC Rcd 445 (1986).

[^145]: / *See Implementation of the Non-Accounting Safeguards of
    Sections 271 and 272 of the Communications Act of 1934, as amended*,
    CC Docket No. 96-149, First Report and Order and Further Notice of
    Proposed Rulemaking, 11 FCC Rcd 21905, 21991, ¶ 179 (1996)
    ("*Non-Accounting Safeguards Order*") (BOC may share customer care
    services with a Section 272 affiliate); *Applications of Ameritech
    Corp., Transferor, and SBC Communications, Inc., Transferee, For
    Consent to Transfer Control*, CC Docket No. 98-141, Memorandum
    Opinion and Order, FCC 99-279, ¶ 469 (released Oct. 8, 1999)
    (SBC/Ameritech may provide customer care services on an exclusive
    basis to advanced services affiliate).

[^146]: / *AT&T Corp. v. Ameritech Corp.*, File No. E-98-41, et al.,
    Memorandum Opinion and Order, 13 FCC Rcd 21438, ¶ 46 (1998)
    ("*Teaming Order*"), *aff'd sub nom. U S WEST Communications,
    Inc. v. FCC*, 177 F.3d 224, (D.C. Cir. 1999).

[^147]: / *Id.* at ¶ 39.

[^148]: / *AT&T Corp. v. BellSouth Corp.*, File No. EAD-99-001,
    Memorandum Opinion and Order, 15 C.R. (P&F) 634, 1999 FCC LEXIS
    1301, ¶ 19 (Com. Car. Bur., released Mar. 30, 1999, corrected Marc.
    31, 1999) ("*BellSouth Prepaid Card Order*"). The Commission held
    there that  BellSouth's offering of prepaid cards "does not,
    however, confer on BellSouth the unique advantage, about which the
    Commission was concerned in \[the *Teaming Order*\], of being able
    to offer a service which included both local and long-distance
    calling in a manner that was not avail­able to non-BOC competitors in
    the market." *Id.*; *see also Motion of AT&T Corp. to be
    Reclassified as a Non-Dominant Carrier*, Order, 11 FCC Rcd 3271
    (1995) (competitiveness of national long-distance marketplace).

[^149]: / *Id.* at ¶ 37.

[^150]: / *Id.* at ¶¶ 39-44.

[^151]: / *Teaming Order* at ¶ 39.

[^152]: / *BellSouth Prepaid Card Order* at ¶ 25.

[^153]: / *Cf.*, *id.* at ¶¶ 46-47.

[^154]: / *Teaming Order* at ¶ 50; *see also* *BellSouth Prepaid Card
    Order* at ¶¶ 35-37.

[^155]: / 47 U.S.C. § (3)(43).

[^156]: / *United States v. Western Electric Co., Inc.*, 698 F.Supp.
    348, 352 (D.C. 1988). In that case, the MFJ court held that RBOCs
    must provide all IXCs the same billing validation data services that
    they had been providing to AT&T, and must do so on a
    non-discriminatory basis. QWEST-branded calling cards, like the
    calling cards of most other IXCs, are "proprietary" and do not
    utilize the BOCs' billing validation data.

[^157]: / *Id.*, 698 F.Supp. at 357 (RBOCs required to notify customers
    that calling card service provided by other carriers). *See, e.g.,*
    "1-800-4USWEST Calling Guide," available at
    [http://www.us­west.com/home/pdf/18004USWESTguide.pdf](http://www.uswest.com/home/pdf/18004USWESTguide.pdf)
    ("When you dial 1-800-4USWEST, your call will be handled by: --U S
    WEST Communications for calls that originate and terminate in the
    same LATA in a U S WEST state. --U S WEST Long Distance for calls
    that originate outside of U S WEST states. --Frontier Communications
    Services for long distance calls that originate in the U S WEST
    territory and terminate in a different LATA, plus U.S. territory
    originating, U.S. terminating calls.") (explanatory notes omitted).

[^158]: / *BellSouth Prepaid Card Order* at ¶¶ 25, 27.

[^159]: / *Id.* at ¶ 30. The Bureau concluded that the BellSouth card
    did not raise equal access concerns because "with prepaid cards, the
    customer makes the choice at the point of purchase as to which
    carrier will carry its traffic, whereas with its post-paid card, the
    choice is made at the time the call is placed. Under either
    scenario, however, consistent with equal access concerns, the
    BellSouth calling card customer has the clear *choice* of carriers."
    *Id.* at ¶ 32 (emphasis in original).

[^160]: / *Id.* at ¶¶ 36-37.

[^161]: / The analysis in the *BellSouth Pre-paid Calling Card Order*
    should apply with equal force to Qwest\'s planned post-paid cards.
    Most significantly, QWEST-branded calling cards will not utilize or
    capitalize on U S WEST's local customer base. Rather, those cards
    will "function\[ \] merely as a form of currency" -- or as a billing
    mechanism -- "that permits holders to place both local and
    long-distance calls when they are away from the phone that carries
    their presubscribed service." *BellSouth Pre-paid Calling Card
    Order, at* ¶ 38.

[^162]: / *Implementation of the Non-Accounting Safeguards of Sections
    271 and 272 of the Communications Act of 1934, as amended*, 11 FCC
    Rcd 21905, 21961-21962, ¶ 115 (1996) ("*Non-Accounting Safeguards
    Order*").

[^163]: / *Non-Accounting Safeguards Order*, 11 FCC Rcd at 21962-63,
    ¶ 117.

[^164]: / *See* *Federal-State Joint Board on Universal Service*, CC
    Docket No. 96-45, Report to Congress, 13 FCC Rcd 11501, 11532-53,
    ¶¶ 66-106 (1998); *see also* *Bell Atlantic Tel. Cos. Offer of
    Comparably Efficient Interconnection to Providers of Internet Access
    Services*, CCBPol 96-09, Order, 11 FCC Rcd 6919, 6935-36, ¶¶ 49-51
    (Com. Car. Bur. 1996), *pet. for review dismissed sub nom. Computer
    III Further Remand Proceedings: Bell Operating Co. Provision of
    Enhanced Services*, CC Docket Nos. 95-20, 98-10, Report and Order,
    14 FCC Rcd 4289, 4312-13, ¶¶ 36-37 (1999); *Non-Accounting
    Safeguards Order,* 11 FCC Rcd at 21966-68, ¶¶ 125-27.