  A major goal of the Telecommunications Act of 1996 is to promote competition
in both the local exchange and long distance wireline markets. In section 271
Congress permitted the Bell Operating Companies (BOCs) to enter the long
distance market only if they demonstrate to the FCC that they have complied
with the market-opening requirements of section 251. This paper examines the
logic behind section 271, to determine if it is a reasonable means of achieving
increased competition in both the local and long distance markets, given the
technical characteristics of the industry and the legal and informational
constraints on regulators who must ensure compliance. It also provides an
update on the extent of competitive entry in the local exchange market five
years after enactment of the Act.
  In this paper we examine a variety of schemes for ensuring BOC compliance
that Congress could have used. Given the characteristics of the industry and
the limitations on regulators' ability to observe BOC's efforts, we determine
that the use of a prize such as BOC entry into long distance is a superior
incentive mechanism. We further determine that conditioning a BOC's long
distance entry on its demonstrating compliance with section 251 is a logical
method of protecting the long distance market against a BOC discriminating
against long distance competitors once it has gained entry. The statistical
evidence we look at, using data we have collected on ILEC lines sold to CLECs
for POTS services, appears to confirm that section 271 has thus far been
effective in ensuring compliance.
