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A. Domestic common carrier

A.T. & T. has historically undertaken the construction of new plant for the benefit of both existing and future ratepayers, i.e., to maintain and expand existing levels of service and to introduce new communications offerings. Today's interstate toll network is the product of an effort to increase overall service quality through the maintenance of substantial capacity.

Nevertheless, it appears that the efficiency of providing and utilizing this network has a substantial impact on A.T. & T.'s allowed rate base, and thus has implications for the FCC's section 214 enforcement program over the acquisition and operation of major facilities. The Commission may not be capable, however, of undertaking thorough, systemwide audits of A.T. & T.'s plant. These were the implications of a 5-year assessment of the Bell System's interstate construction and acquisition program and associated rate base and revenue requirements.

The telephone company has also provided discrete local CATV distribution to entreprenuers who would otherwise be obliged to undertake construction on their own. The FCC has imposed section 214 jurisdiction on this service as an element from which the major communications carriers receive their aggregate return. What follows is a discussion of the Commission's findings and conclusions in docket 19129 with regard to network management and construction, and of its review in General Telephone Co. of California of the provision of local cable television facilities. In order to comprehend the size, complexity, and dispersion of the interstate network, and the function and predominance of switches, a brief description is provided of the present-day system. This is also the point of departure of the Commission's judgment in the docket 19129 proceeding. 1. Rate base control

a. Network management (1) The modern network. The toll switching model of 1930 was revised in the early 1950's to allow a natural outgrowth to the presentday system of nationwide customer dialing. Today's general toll switching plan consists of a five-level hierarchy of switching offices, with a maximum of nine switched connections used on any call. The basic capabilities of the newer system include three- and six-digit translation for routing, and automatic message accounting to record billing information. But the primary function of the present plan is automatic alternate routing—the use of an electromechanical switch to redirect calls to an alternate trunk group when all the trunks in a direct group are busy. One "final" trunk group, by handling the overflow from many high-usage routes, may be operated at both high oc

cupancy and sufficiently low blockage to guarantee low overall blocking to customers. Furthermore, a judicious division of the traffic load between direct and alternate routes yields a telephone network costing less than a nonalternate route network carrying the same amount of traffic. The prewar system of crossbar switches was adapted to these expanded requirements, and entailed new operating company methods and traffic rules to interconnect switching offices.

Prior to the conversion to direct-distance dialing and electromechanical switches, the queueing and switching functions performed by long-distance operators was designed to establish high blocking rates in order to keep the costly toll circuits occupied a greater percentage of time. The greater the occupancy, the longer the queueing delay. Engineering delay of 30 seconds was typical in 1950, before the introduction of direct distance dialing.

Because "delay" operation was impractical without an operator, a change to direct distance dialing required low blocking on toll networks. Sufficient capacity had to be provided to insure a lower probability that a call would be blocked and result in an "all circuits busy" signal to the caller. Since low blocking implied lower circuit utilization of a greater number of lines, direct distance dialing had to be introduced without increasing investment in transmission plant. Alternate routing by electromechanical switch was the answer.

This entailed a network that would fully utilize toll switching, not to limit it as was the original intent of the general toll switching plan of 1930. The high usage and final trunk groups were not to be engineered only for long-distance traffic as they were in the pre-war decades. Nor were these lines to be limited to the carriage of separable interstate or intrastate toll traffic. Today's network handles all toll traffic regardless of its identity. For example, it is quite possible, and indeed common, for a toll call intended between cities within a single State to be automatically routed to its destination through out-ofState lines at a higher level in the switching hierarchy. Engineering of toll trunks and switches, therefore, is accomplished on a comprehensive basis to insure automatic alternate routing achieves the maximum utilization of all telephone plant.

Automatic alternate routing requires some measurement of usa ge and capacity to assess overall performance. A.T. & T. measures circuit usage as the proportion of time the average trunk in a group is used during the busy (peak) hour of the busy season, and the aggregate of trunk groups is engineered for high peak occupancy. Because calls arrive on a given trunk essentially at random, in accordance with the operation of low blockage, 100-percent utilization is never achieved in practice. The incidence of blockage is measured as a function of the number of trunks and trunk groups, more explicitly, the number of calls blocked in a particular group because no trunks are available. A.T. & T. has sought to achieve the goal of accommodating 99 percent of the calls offered to a final group in the busy hour of the average business day of the busy season. Since blockage is measured under the most extreme conditions, very little actual blockage occurs, and the actual quality of service for most periods of time is usually higher than this figure.

1 Macurdy and Ritchie, op. cit. III, n. 1.
? See discusion above, pp. 17-18.
3 Docket 19129, below, p. 36. Final Decision at 50–51.

These procedures and standards are centrally coordinated through A.T. & T.'s network management program, balancing circuits and switching equipment on a continentwide basis in order to insure the maximum utilization of facilities and the completion of as many messages as possible (this is a continentwide activity because the American telephone network is integrated with that of Canada). Network management was established in 1963 after A.T. & T.'s discovery from experience that the switched network had to be comprehensively monitored and controlled to insure trouble-free, efficient utilization.

(2) The Switch-in-Network.”—As the network has been modernized over the past generation, the importance of switches, which once (as manual toll boards) represented a small portion of plant investment, have so increased that they currently represent one of the largest portions of a carrier's investment in operating plant. This has been true particularly as No. 1 electronic switching systems (EES) have been installed to supplement the capacity of the electromechanical No. 4A toll crossbar. Based in part on computer technology, the newer electronic systems appear to have the technical potential of providing new information services such as credit authorization and electronic funds transfer. Some feel that because of their financial importance and capacity for sweeping social and industrial changes, switches can no longer be ignored as questions of regulatory control. This viewpoint is held particularly in the context of whether forecasts might prove incorrect of these services' great revenue potential. In this event, regulation is advocated in order to make revenues sufficient to return the carriers' investment, and so prevent cross-subsidies from monopoly services.

(3) Charges for Interstate Telephone Service (docket 19129), phase 1,38' FCC 20 21! (1972), phase II, Initial Decision, 64 FCC 28 131, Final Decision, 64 FCC 20 1 (1977).- This investigation was the FCC's response to interstate rate increases filed by A.T. & T. in 1970. The agency concluded in phase I that Bell should be permitted to earn a minimum return of 8.5 percent on its interstate plant. A.T. & T. was allowed to file rate adjustments for its MTS and WATS services that were designed to accrue revenues to achieve that goal. Concurrently with the ongoing phase I proceeding, phase II of docket 19129 was designated as a broader inquiry into all the expenses that compose the telephone company's rate base, to which is applied the percentage rate of return in determining its allowable earnings. (Phase II also assessed the effects of vertical integration on A.T. & T.'s procurement practices.)

The Commission said that the traditional method of valuating the "used and useful” portion of carrier plant is based on two counteracting principles, the fifth amendment rights of the utility, and the necessity for control of rate levels through judicious rate base valuation. This tension is implicit in the rate base control purpose of section 214, since that section actually relates the "used and useful” standard to rate base regulation:

* * * The idea of basing utility rates on the value of the assets used and useful is rooted in American legal theory and particularly in the constitutional limitations on the taking

4 See, e.g., S. 611, Communications Act Amendments of 1979, U.S. Senate, Committee on Interstate Commerce, 96th Cong., 1st sess., introduced by Senator Hollings (Mar. 12, 1979), which amends sec. 214 to assert jurisdiction over switches.

of private property for public use. *** Accordingly, courts
have felt that the owners of public utilities must be compen-
sated for the use of their property in providing service to the
public. In view of its origins, it was only to be expected that
judicial and regulatory inquiry should focus on the idea of
compensating the utilities' owners for the use of their prop-
erty in providing public service.

Équally central to the used and useful concept, however,
is the equitable principle that the ratepayers may not fairly
be forced to pay a return except on investment which can
be shown directly to benefit them. Thus, imprudent or ex-
cess investment, for example, is the responsibility and coinci-

dent burden of the investor, not the ratepayer." Phase II drew the overall conclusion that the Commission's section 214 authorization procedures needed regular reporting to permit better oversight of the telephone company's programs of construction and network management, both of which were regarded as directly affecting the value of A.T. & T.'s rate base. This implied that greater regulatory attention must be paid to the engineering of the telephone network in advance of acquisition and operation of major facilities.

The Initial Decision in phase II had concluded that neither the State commissions nor the FCC had ever conducted in-depth review of A.T. & T.'s construction plans department and operating company construction budgets. The final decision concurred, after reviewing the telephone company's service requirements and engineering standards. It discovered that the aggregate of its trunk groups were engineered for greater peak usage and lower blockage than had actually been needed for the test years 1969–72. Although caused by errors in planning, this inferred excessively high overall quality of service. In economic terms, this result is a measurable phenomenon of diminishing returns: Service improvements decrease at progressively greater levels of investment. The indication was of an excessive amount of underutilization and idle plant, hence "much excess capacity and thus a general over-building of the interstate toll network."6 The Commission acknowledged, however, that it must bear some responsibility for this situation because of its obligations under section 214:

*** A.T. & T. accepts some responsibility--as it reasonably must—for the chronic forecasting errors which have led to present network underutilization. However, we also agree that, because of our authorization authority under section 214 of the Communications Act, this Commission must also bear some responsibility for the present situation. * * * We agree with A.T. & T. that continuing network management and planning of future construction to avoid inefficient usage is vital. Consequently, we shall direct the staff of the common carrier bureau to develop regular reporting requirements and changes to our section 214 authorization procedures which will permit better oversight of network management and utilization. In the interim, we shall require A.T. & T. to demonstrate as part of its regular section 214 justification, that any

5 Phase II, Final Decision, at 47 (references omitted). o Id., at 51.

proposed addition to the network will not exacerbate the
present underutilization of the network and to take remedial
action to correct that which presently exists *** [T]his Com-
mission (also] needs more effectively to review the Bell Sys-
tem's construction program *** [W]e shall require A.T. & T.
to submit to the staff periodic reports on various aspects of
its construction program which have a bearing on the mat-
ters we discussed above with respect to the underutilization
of the interstate network. We shall further direct the com-
mon carrier bureau staff to develop more effective oversight

procedures as discussed [above].? Docket 19129 did not focus on switching facilities as a matter of section 214 oversight, although the Initial Decision discussed A.T. & T.'s switching installations in high-usage metropolitan areas. It also criticized the trial staff's challenge of A.T. & T.'s switching procurement methods as an exercise in hindsight unfair to carrier management."

b. Local distribution facilities The FCC has made clear that the telephone company is subject to section 214 regulation when it constructs an interstate "channel of communication” pursuant to furnishing any common carrier service. The reasoning in General Telephone Co. of California et al.10 determined the reach of section 214 to the construction of wire distribution facilities for CATV systems, a common method of providing local channel capacity to subscriber premises. These networks are discrete and are not interconnected with any telephone exchange or toll service facility. The conclusion was devised according to the 1938 Southwestern Bell decision in order to enable the Commission to control additions to the carrier rate base. General Telephone consolidated the certification issue from several dockets which were reviewing the lawfulness of tariffs establishing pole line attachment arrangements and other services provided by carriers to CATV operators.

The Commission had held that the furnishing by telephone companies of channels of communication to CATV operators “is clearly a common carrier undertaking.” 11 The decision in General Telephone came shortly after the Supreme Court ruling in United States et al. v. Southwestern Cable Co. et al.12 which upheld the Commission's authority to regulate CATV systems; that decision had classified CATV channel service as interstate communications even if originated from the same State in which the particular system operated.

The General Telephone System and the Bell System companies approached the issue as the furnishing of a purely local service, and hence exempt from the FCC's jurisdiction: The television broadcast loses its identity at the CATV system headend, where it is processed

? Id., at 51-53 (reference omitted). 8 Id., at 336-41. o Id., at 319; see also the general remarks of the Initial Decision at 489–90. 10 13 FCC 2d 448 (1968). 11 Id., at 454 ; see Oommon Carrier Tariffs for CATV Systems, 4 FCC 20 257 (1966). 12 392 U.S. 157 (1968).

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