L and is apparently allowing them to narrow the gap with cable modem service (see chapter 8). Together, these forces have eroded Bell company revenues. All incum- bent local companies' revenues fell by 2.5 percent in 2002, from $117.9 bil- Effect of the 1996 Act on Incumbent Local Companies lion to $115.0 billion, and a further 4.5 percent in 2003. 22 Furthermore, analysts were predicting that the Bell companies' fixed-line revenues would decline slowly for the next few years as increases in DSL revenues failed to offset the revenue losses from the rapid growth in UNE-P lines. 23 Given the uncertainty surrounding FCC and state regulation of wholesale prices, ser- vices, and VoIP, these projections are subject to substantial error, but they are obviously reflected in the performance of Bell company equities, as fig- ure 5-1 shows. Capital Expenditures The pessimism surrounding the Bell companies has obviously affected their capital expenditure budgets. After substantially increasing capital spending between 1998 and 2000 to prepare for the broadband revolution (see figure 5-2), incumbent carriers trimmed their budgets in 2002-03. The problem was not "excess capacity"-so common elsewhere in the telecommunications sector-since the Bell companies were blocked from interLATA services between 1996 and 2000. If anything, they lack the cap- ital facilities to deliver the new DSL services (see chapter 8). Rather, the economic and regulatory environment forced incumbent local carriers, including the Bell companies, to reduce their capital spending more than their major rivals in local communications markets, namely, the cable com- panies and wireless carriers. Of course, CLEC investment has collapsed because none of these companies has found a sound business mode (for an analysis of entrants, see chapter 4). How far the wholesale unbundling regime affected Bell companies' incentives to invest is the subject of lively debate. Many claim that the low wholesale UNE and UNE-P rates and the requirement of line sharing reduce th