e incumbent local companies' incentives to invest because they are forced to share the fruits of their investments with rivals at low, total- element, long-run incremental cost (TELRIC). Others argue that low wholesale rates prod the Bell companies to invest more SO as to fend off the competition unleashed by low UNE and UNE-P rates. In support of this suggestion, Robert Willig and his associates have found that Bell company capital expenditures across forty-eight states in 1996-2000 and 1996-2001 varied inversely with UNE-P rates in June 2002, holding other influences constant.²4 While it is possible that lower wholesale rates induce the Bell companies to invest more in their networks to cope with prospective increases in competition, such a response seems unlikely. Why would a Effect of the 1996 Act on Incumbent Local Companies Figure 5-2. Capital Expenditures by U.S. Local Telecom Operators, 1996-2003 Billions of dollars Bell fixed-wire Wireless Cable TV Source: Author's estimates from company annual reports to the SEC (www.sec.gov/cgi-bin/ srch-edgar); and CTIA, Semi-annual Wireless Survey (December 2003). company invest more in facilities that it has to lease at lower rates? Further- more, one cannot assume that investment responds to UNE-P rates if those rates are measured for a period after the capital expenditures take place. One would have to show that subsequent investment expenditures fall or rise with differences in UNE-P rates. Given that twenty-one states reduced UNE rates between early 2001 and July 2002, it is useful to consider how the Bell companies adjusted capital spending in these states compared with other states.25 Between 1996 and 2000 (that is, before the reductions), the Bell companies' capital spending in both groups of states grew at the same rate. In 2001, however, capital spending grew more rapidly in the states that did not change UNE rates than in those that lowered their UNE rates. 26 In 2002 Bell company capital spending fell dramatically in response to the economy and continuing