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COMMUNICATIONS ACT OF 1934

SECTION 214

LEGISLATIVE BACKGROUND

I. INTRODUCTION

Section 214 of the Communications Act of 1934 establishes the regulatory charter over entry into common carrier communications, and subsequently, its industry structure. Section 214 (a) states that no carrier shall construct, extend, or acquire a "line" unless it has first applied for and received an instrument of authorization from the Federal Communications Commission. The FCC's stated responsibility is to determine whether such entry would be in the public interest, convenience, and necessity. The Commission may issue notice of pending action on an application, commence a hearing procedure, and issue a formal ruling on the matter. The same requirement is applied before a carrier may discontinue, reduce, or impair service. Section 214(a) contains certain exemptions from the requirements of the section; that is, any terminal or branch line less than 10 miles in length, or any changes in plant, operation, or equipment that does not involve new construction and does not impair the adequacy of the service provided.

Section 214(b) establishes procedures for notice of pending action on applications; 214 (c) permits the Commission to attach conditions on facilities authorizations (such as to limit the services which may be offered); 214(d) provides that the Commission may, after hearing, order a carrier to provide facilities, extend its lines, or to establish a public office.

Section 214 obligates the FCC to prevent the service supplier from unnecessarily extending, acquiring or abandoning lines. This scrutiny of corporate action is, in effect, a check on industry structure in the sense that it gives the Commission the discretion to regulate entry and effectively define the markets in which monopoly and competition may exist. It is also a major supplement to rate of return regulation in the form of a control on the addition of capital to the rate base. This precludes rate base inflation, that is, excessive or unwise investments which the rate of return ceiling does nothing to prevent.

This authority was meant to avoid economic waste and insure overall service continuity through several underlying schemes: It was to protect the subject carrier and other carriers already occupying the field from revenue diversion and instability. Second, it was to protect the public obligation to guarantee a profit to the telephone or telegraph utility. It was also to reinforce the status of common carrier with the guaranty of local service continuity once the requisite lines and equipment have been put into place. This report constructs the circumstances

that required this statutory imposition, and its history of interpretation and treatment.

The Section 214-type "solution" was no novelty in 1934; it derived from the Transportation Act of 1920. Therefore, this report traces the evolution of corporate practice and regulatory policy in the railroad industry to document the existence of problems in industry structure that that act was intended to resolve. This is followed by excerpts from the official documentation of the enacting legislature's purpose.

These sources indicate the extent of public awareness of problems and the example and experience of action taken elsewhere, i.e., the courts and State legislatures. Hearing and debate records provide evidence from several viewpoints of the scope of public consensus with the authorizing Congress. Opinion may vary as to the existence of a problem, and hence of the need for policy, or as to interpretation and appropriate legislative solution.

Because it was obviously transplanted from railroad law, the legislative purpose of section 214 was somewhat less integrated than its predecessor with the perspective of existing facilities, services, and industry structure. Substantial background is discussed on the state-ofthe-art of telephone service delivery and of existing communications utility law both at the Federal level for service to overseas points and in the States. It is apparent, for instance, that domestic service was based on a relatively uncomplicated network of "lines." Sophisticated techniques of delivering new capacity were in the experimental stage or were yet to come; and since regulation traditionally tends to lag after the pace of technological advance, the law reflected this status quo. Furthermore, section 214 was preceded by similar language in State utility law, as a method of limiting duplication of telephone exchanges and intercity lines. In contrast, the international services had been integrated with the opportunities of high-frequency radio under a rather liberal scheme of law that was reenacted into title III of the Communications Act.

International communications had been performed for several decades by record carriers competing in the use of submarine cables. Point-to-point radio technology was developed at first for ship-toshore service; and its long-distance capacity was refined during World War I. The introduction of service was motivated both by the cost efficiency of the radio mode and a policy directive in the Radio Act of 1927 that radiotelegraph carriers be allowed to freely compete with the established cable industry. A thorough legislative history of the Radio Act and its transposition into the Communications Act is not within the scope of this report. This early history is provided, however, in order to add perspective to the FCC's handling of service authorizations for the international sector.

When enacted in 1920, the legislative accountability of the railroads for market entry and major capital outlays was relatively unprecedented; and by 1934 there were several instances of court definition of the purpose and meaning of the words in the statute. In the absence of similar treatment of section 214, the FCC tended to refer to these cases for administrative guidance.

The FCC's initial authorization proceedings are given extensive treatment in casebook fashion. This explains the rationale by which it asserted jurisdiction over capital acquisition in the domestic sector,

and over both domestic and international market entry. The standard of investment control for rate base purposes was not devised for international service authorization until transatlantic submarine cables came into use much later, during the 1960's.

These early rulings, tested both in the courts and in subsequent administrative practice, have formed the basis for present-day regulation of competition and capital investments in both sectors. This report concludes with an explanation of pivotal, recently settled rulings in order to demonstrate this theme.

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Beside endowing discretionary, although limited, administrative authority to the new Interstate Commerce Commission (ICC), the act prohibited pooling arrangements in reflection of the popular view that enforced competition was the best protection against unreasonable rates. There was considerable opposition to this provision from those who saw that pooling was necessary to prevent destructive competition. The legislature, however, fearing railroad monopoly, was unwilling to permit it.10 It was to this enactment that additional provisions were attached by the predecessor language of the Communications Act of 1934, and, of particular interest, of section 214 of that statute. What follows is a presentation of evidence demonstrating the intent of the 1920 amendments to the Interstate Commerce Act, and tracing the conversion of section I(18)-(22) to section 214. Included is a brief discussion of the history and purpose of the attending legislation, with an emphasis on that related to communications. B. Section I(18)–(22)

The passage of the new railroad legislation was a response to the reasoning, slowly evolved after 1887, that competition might be extravagant and wasteful, and that it could result in unnecessary duplication of railway facilities and the impairment of the revenues of needed lines. The occasion for its enactment was the transition of railroad ownership from wartime operation by the Federal Government back to the private sector. The English used the same opportunity to nationalize their entire inland transport system. Likewise, the U.Š. Congress at this time reviewed its entire policy of rail regulation. The total scheme of the act was designed to answer complaints that the regulatory system was restrictive, did not do justice to conditions of rising costs, and encouraged destructive competition among the railroads. The main intent of the act was to improve the financial position of the railroads as a group, while avoiding conferring unnecessarily high returns on the strong companies. The primary method was a directive to the ICC from Congress that a plan be drafted for the consolidation of the Nation's railroads into a limited number of systems of comparable efficiency, profitability, and financial strength.11 It was not true, however, that a complete reversal of policy occurred. The Commission was to allow pooling arrangements when they did not "unduly restrain competition." 12 Consolidation was to take place in accordance with the plan, during the preparation of which Congress specifically required that "competition shall be preserved as fully as possible." 13

As mentioned, pooling had previously been forbidden for fear of allowing groups of firms to attain an unseemly amount of market power; similarly, mergers had been attacked under antitrust laws. The changes initiated by the Transportation Act do indicate, despite their qualifications, a significant reversal of the prior faith in the market

Locklin, op. cit., n. 1, p. 212.

10 Loc. cit.

11 Alfred E. Kahn, "The Economics of Regulation: Principles and Institutions" (New York: John Wiley & Sons, Inc., 1971), II, 79. 12 Loc. cit. See act of Feb. 28, 1920, ch. 91, 41 stat. 481.

place to induce fair practices and earnings sufficient to attract investment. The act directed the Commission to take a more active role in directing both the industry's structure and its performance. The inclusion of a provision giving control to the ICC over extensions and abandonments of lines was consistent with this design.

The report of the Interstate Commerce Commission to the Congress, submitted in 1918, recognized a need for a new railroad competition policy. One of its four recommendations was "the limitation of railway construction to the necessities and convenience of the government and of the public and assuring the construction to the point of these limitations." 14 This option was provided for in "a new provision which prohibits the construction or abandonment of lines of railway except upon the authority of the regulating tribunal." 15 The amendment of Section I of the Interstate Commerce Act by Section 402 (18)(22) of the Transportation Act invested control to the Commission over the construction and abandonment of railway property. It was patterned after such certification requirements as existed in state law. The scope of the Commission's authority was the issuance of certificates of public convenience and necessity after application, hearing, and notice to the appropriate State authority. Its proceedings were to relate to the construction of new lines, to the acquisition or operation of any line of railroad or its extension, and to the abandonment of all or any portion of a line of railroad or its extension. This include those lines which, although lying wholly within one State, still affected interstate commerce, even though built by corporations not previously subject to the ICA.16 These provisions applied only to railroads even though section 400 (3) of the same amending act specifically defined common carriers to include, inter alia, telegraph, telephone, and cable companies operating by wire or wireless.17

The purpose of the certification requirement was to prevent the needless duplication of existing routes and the construction of unprofitable lines. Senator Cummins, chairman of the Interstate Commerce Committee and sponsor of the Senate's version of the bill, defended the language of the provision in the following manner:

I do not remember how many States have legislation of this character, but there is a very considerable number of States which for the protection of their people and the better regulation of their commerce have adopted provisions substantially like the one now sought to be eliminated from the bill.

It presents to the country a question which ought to be considered and ought to be decided without passion or prejudice, and ought to be decided without respect to the effect which it is supposed it would have upon any particular part of the United States. If there is any one thing which the transportation system of the country taken as a whole, is now

14 Testimony of Edgar Clark, Commissioner, Interstate Commerce Commission, U.S. House of Representatives. Committee on Interstate and Foreign Commerce, Hearings on H.R. 4378, Return of the Railroads to Private Ownership, 66th Cong., 1st Sess., I, 53 (1919) citing 15 Id., p. 54; see Act of Feb. 28, 1920, ch. 91, 41 Stat. 477-78; 49 U.S.C. I 18(a)-(e), Ia (1)-(11).

18 See Texas & New Orleans Railroad Co. v. Northside Belt Railway Co. 276 U.S. 475, 479 (1928). The court felt that as long as the railroad confined its operations to intrastate commerce, construction without a certificate would not violate federal law.

17 Act of Feb. 28, 1920, op. cit., n. 12, at 474.

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