More specifically, does CL require the user to have a data connection? Or is it possible to just use the phones service connection?
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It actually uses several mechanisms.
There are tradeoffs based on speed, precision, and available hardware. A first Gen iPad will only have the 3 option available while the iPhone simulator makes use of the last mechanism.
You can observe the difference in these systems in the map application where it initially guesses based on the cell tower, then refines the guess via GPS.
Only options #3 requires a data connection.
And for the humor impaired including #4 was not totally serious although it is functionally correct. (I think they simulate the GPS reporting that location rather than just hard coding it, but I haven’t checked.)