xcessive carrier access charges. Given the distortion in local residential rates and the highly skewed distribution of long-distance calling, a large share of local residential customers were generating negligi- ble net returns to local carriers. 4 But even with the profitable local cus- tomers included, incumbent local telephone carriers were not earning ex- cess returns at this time because they were tightly regulated. At the end of 1996, financial markets valued the large Bell companies' nonwireless assets at about $1,940 per switched access line, which was approximately equal to the book value of these companies' network assets per line.5 The value of their domestic local operations was undoubtedly even less because foreign operations, directories, and various other miscellaneous services are in- cluded in the nonwireless assets. Without these assets, the value of the local exchange operations was little more than $1,600 per line at the end of 1996, or probably no more than the reproduction cost of network assets. Thus the tightly regulated incumbent carriers were not likely earning monopoly rents that entrants could attack after 1996.7 Between 1996 and 2003, the incumbents' market value grew about $230 per line, or 12 percent. During this period, the S&P 500 index of equity prices rose by about 50 percent. Therefore the Bell companies' equi- ties increased in value by substantially less than the general stock market over this seven-year period, despite their considerable investment expendi- tures to upgrade their networks SO as to be able to offer advanced (digital subscriber line, DSL) services (see chapter 8). According to data from the Federal Communications Commission (FCC), the incumbent local carriers realized about $615 in annual revenue per switched access line in 1996-98. The larger incumbents had cash flows equal to approximately 42 percent of these revenues, or about $258 per switched access line.' A new entrant might be able to exceed the incumbents' revenue yield by targeting business customers,