The initial assumption was that the local exchange carriers would retain their franchise monopolies over access and service within the LATA's, but that competition would be allowed to emerge for interLATA service. To assure the stability of this structure and to avoid the re-emergence of a vertically integrated monopoly, the RBOC's were prohibited from entering the interLATA market.

Of course, it was understood at the outset that the boundary between intraLATA and interLATA service was in many cases arbitrary and that the interexchange carriers would seek to compete with each other and with the local exchange carriers (LEC's) for this market. The competitive status of this market, however, was left to be resolved by individual state public service commissions. A substantial portion of the regulatory debate in the first decade following divestiture has been devoted to determining whether these markets would be opened to competition and under what terms. While initially many states resisted opening these markets to competition, it soon became clear that competition in them would occur regardless of the regulatory structure. Most states now permit both facilities-based carriers and resellers to compete in these markets. However, since LEC's can serve these markets but not the interexchange markets, state commissions have not permitted customers to presubscribe to competitive service in the intraLATA market. Doing so would give interexchange carriers -- who could then provide one stop shopping for toll service -- too great a competitive advantage. Consequently, in most states, intraLATA calls are automatically carried by the local exchange carrier unless the customer dials an access code to reach the long distance supplier. This balance is likely to remain in place until the restriction on LEC entry into the interLATA market is lifted.

The direct competition between local exchange and interexchange carriers in the intraLATA market has raised important issues about the prices charged by LEC's for access to the their networks. In principle, by setting their own toll prices low but charging relatively high access prices, LEC's could prevent interexchange carriers from effectively competing in the intraLATA market, even when they had a cost advantage. To avoid this problem, most state commissions have imposed an imputation test on the LEC's toll and access prices. While there are many variants, the principal requirement is that the price charged for toll service by the intra-exchange carrier must cover at least the incremental cost of toll service plus the imputed price for access service. This requires that the LEC charge itself and the interexchange carrier the equivalent price for access service. If correctly applied, this principle should assure that local and interexchange carriers compete for the intraLATA market on an even footing.

Although competition for the intraLATA market was to be expected, a much more surprising development has been the apparent competitiveness of at least portions of the access and local exchange markets. In many cities, alternative access providers have built fiber optic networks, providing high volume business customers with direct access to interexchange markets. This service competes directly with the access service supplied by the LEC's. As the networks of alternative access providers expand they also offer direct substitutes for some of the local exchange service provided by LEC's. In addition, private networks using satellite facilities, which many