III. THE COMMUNICATIONS VERSION OF I(18)-(22)

A. Industry structure and regulation prior to 1934

1. Domestic common carrier

The first Federal entry into the regulation of the domestic industry was the enactment in 1866 of the Post Roads Act. This statute allowed for the grant of franchised rights-of-way for the construction of telegraph poles and lines, primarily in association with railroad tracks and public thoroughfares. Much like that of the railroads, this subsidy represented a policy of stimulating the growth of communications facilities. However, never in the history of common carier communications did there evolve the degree of investment and wholesale risk on the part of the various levels of government as occurred during the growth of railroad service.

What little State public utility law existed into the early twentieth century was handled mostly by franchise, with stipulations regarding maximum rates and certain aspects of service. As the domestic industry grew, Western Union achieved dominance in telegraph during the 1870's through mergers with its competitors. It remains the main source of telegraphy to the present day, with the American Telephone & Telegraph Company, Inc., becoming its counterpart for voice telephone service.

A.T. & T. was organized in 1885 as the central and controlling company of the Bell System, several years after the invention of the telephone and the incorporation of the American Bell Telephone Co. It has since grown into a role as the major planning authority and manufacturing source for the development of a nationally coordinated telephone system. It provides local exchange service in concert with several hundred independent local companies; and Bell Long Lines manages the long-distance intercity network. This service is a complete contrast to the fragmented development of the railroad system, in which each regional and local corporation provided a fraction of the total service of moving people and freight nationwide. Never did the requisities for rational, end-to-end planning of railroad performance develop, either before or after the passage of the 1920 act.

(a) The network.-The construction of manual switchboards to interconnect telephone lines immediately followed the invention of the telephone. Local exchange networks developed rapidly in the United States, and the interconnection of local networks spread as quickly as advances in the art of transmission permitted. Exchanges in both New York and California opened early in 1878, following the installation of the first experimental switchboard in Boston the year before. Circuits were first placed in service between the east and west coasts in 1915.1

1 William B. Macurdy and Alistair S. Ritchie. The Network: Forging Nationwide Telephone Links, 53 Bell Lab. Records, No. 1 (January 1975), p. 6.

By 1925, trunk-switching tandem offices had come into being to interconnect local offices in areas, such as New York City, with dense telephone utilization. These offices were similar in design to local switching systems; and there was a natural tendency to extend the local tandem networks to serve shorthaul toll connections. Automatic alternate routing-the use of switching among alternate trunk groups when all the trunks in a direct group are busy-was not introduced until the early 1950's, in conjunction with direct distance dialing.

Toll service in the mid-1920's was accomplished by the use of direct intercity lines. Toll callers were requested to hang up, and their calls were queued until a circuit was free; then the calling party was contacted to complete the connection. Three to four operators were originally needed to complete the call through the distant local office to the called party. The switchboard and procedure were designed to make the most efficient use of costly toll circuits.

A landmark event occurred in 1925 with the combined line and recording method of toll handling, by which no more than one operator received the call from the customer, recorded charge details, and handled the connection. There were continual difficulties however, in connecting widely scattered points with traffic demand too light to justify the installation of direct lines. Calls between such areas required manual switching between two or more indirect or "shortdistance" lines through intermediate offices, resulting in customer difficulty, substantial transmission losses, and delay in establishing the connection. During the 1930's the bulk of long-distance calls (e.g., 80 percent in 1936) were still handled by direct lines between cities in order to avoid service degradation associated with manual toll-board switching.

Nevertheless, it was evident by the late 1920's that a master plan was needed to systematically organize the telephone plant so as to limit as much as practicable the number of switches required for a toll connection, and to provide satisfactory transmission over any route. A.T. & T. announced a mandatory general toll switching plan in 1930. As gradually introduced during the next several years, the plan established a hierarchy of manual toll offices and an upgrading of some indirect toll lines to permit their switched interconnection to form longdistance circuits comparable to the then prevalent direct lines. The plan included direct lines wherever economically justified. The number of switched connections necessary to build a long-distance circuit was limited to a maximum of six, including the toll centers to which the local offices connected; and this required the introduction of costly wire and coaxial cable of higher transmission quality than other indirect toll lines. These were to interconnect the relatively inexpensive tollboard switches. These changes were the precursor to the installation of nationwide customer dialing in the postwar era, with its associated nationwide numbering plan, heavily utilized five-level hierarchy of switching offices, and automatic translation and routing features.

This evolving network constituted a stage of technological development that was implicitly obvious to the common carrier community in 1934. Hence, as the medium which provided telephone service, and as the aggregate of "lines" over which section 214 was to apply, this state-of-the-art was not documented and defined as a matter of record during the passage of the Communications Act. The effect of this

omission was for both the FCC and the Congress to attempt to define jurisdiction by later rulemaking and amendment. Technological advances were to make this task a difficult and controversial one, and jurisdiction was adopted over significant elements of transmission capacity and equipment in order to control the introduction of service and investment.

(b) Early communications law. The expiration of the original Bell System patents in 1893 enabled independent entreprenuers to construct and operate competing telephone companies and intercity lines. The Bell System companies attempted sporadically to purchase these competing exchanges, and it was not long before this practice became established policy. It aroused criticism from the independents, who felt that their existence was being threatened by monopoly. In most States, moreover, the granting of exclusive franchises was either unconstitutional or contrary to statutory law. Nonetheless, the issuance of competitive franchises was regularly followed by combination. among franchisees, despite the efforts of legislatures to prevent it. The State utility service commissions created during the first decade of the century initially had very limited powers, although they extended their jurisdiction to telephone and telegraph companies as well as railroads.

Attempts to string parallel lines and to build duplicate facilities had come to be regarded as perverse and wasteful by the industry and a large segment of the public. Therefore, the emergence of the State commissions was the logical corollary to the development of the concept of "natural monopoly." This theory gradually appeared from the franchise experience to explain, on the one hand, the persistent tendency of direct, duplicative competition to produce inferior results and to disappear, and, on the other hand, to justify its abandonment.2 Regulation came about at a time when the voice network performed by means of wire-line cable systems associated with high capital costs and extensive rights-of-way. When one firm can supply the entire market at decreasing per-unit costs than several firms attempting to compete (for example, in communications), the "natural" result of market forces is the elimination of all firms but one. This is an allembracing and traditional characteristic of natural monopoly, defined as economies of scale. The evolution of natural monopolies became the major rationalization of governmental restriction of entry.

Thus, State commissions throughout the country made the decision to supplant competition with active regulation. They typically refused to certify competing exchanges, and encouraged and endorsed mergers of existing companies. They also granted franchises to individual telephone companies to exclusively provide service within their operating territories.

The early State commissions were also empowered to prevent the competition that had been to some degree responsible for bringing about regulation in the first place. Most often, a carrier required a commission's "certificate of public convenience and necessity" prior to commencing "construction or operation of service or extension thereof." This certification requirement was part of a general trend

2 Kahn, op. cit., II. n. 11. I. 118.

3 U.S. v. Amer. Tel. and Tel. Co., et al., "Defendants' First Statement and Contentions of Proof". Civil Action No. 74-1698 [D.C. Cir.], p. 104, citing 1927 N.D. Sess. Laws ch. 198 para. 1, etc.

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of policy toward public utilities. Railroad companies were also made subject to the same requirement in State law and in the yet-to-be enacted Transportation Act, with the same controlling goals, that is, to prevent wasteful duplication and to protect existing lines from competition.

In return for these protective charters, the telephone companies were made subject to some form of rate regulation, and were made to assume the obligations of common carriers. The notion of common carrier is rooted in the common law duty to render adequate service at fair rates. This obligation was codified and greatly expanded for the telephone industry to include the conception that the company has the general responsibility to extend supply as broadly as possible, and to continue to provide service even when it is uneconomical to do so. Thus, State law commonly empowered regulatory commissions to order a company "to extend its line, plant, or system into, and to render service to, a locality not already served when the existing public convenience and necessity require such extension and service," or to improve and maintain existing facilities. They also required commission approval of the "removal or discontinuance of any plant."5 As was the requisite certification to establish a "service or extension thereof," these obligations preceded and were analogous to those passed into the Transportation Act and reenacted into the Communications Act of 1934.

In 1910, largely through agitation by the independents, the Federal Mann-Elkins Act extended the jurisdiction of the ICC to "wire or wireless" telephone, telegraph and cable companies. There was some doubt, however, as to what classes of service and what companies were subject to the 1910 act. It was later revised somewhat through title IV of the Transportation Act of 1920. Very briefly, these amendments contained orders establishing standards for the provision of telecommunications services and facilities, for the establishment of charges by carriers, for investigations conducted by the Commission, and for the submission of reports.

In 1921, by amendment of the Transportation Act, the jurisdiction of the ICC over telephone companies was extended to consolidations and acquisitions of control. It was provided that once the Commission had issued a certificate approving a proposed consolidation, any act or acts of Congress which otherwise might make the action unlawful would not apply. This amendment was explicitly for the purpose of allowing mergers of locally competing telephone exchanges, the legality of which might otherwise be questioned. This was an extension of existing State law and was not, as in the case of the railroad legislation enacted the year before, a systematic plan to directly bolster languishing returns of the affected companies. The 1970 language, as amended in the years 1920-21, was the basis for that enacted in title II of the Communications Act.s

See. e... Warren A. Searer, ed. Cases of the Law of Public Utilities, 2d ed. (St. Paul: West Publishing Co., 1936), pp. 1-6.

$7.8 1.4767 Co., op. cit. n. 3. p. 102, citing Ore. Laws, ch. 164. para. 2; N.D. Sess. Laws, ch. 29 para 9

* Act of June 18, 1910, ch. 309, Sect. 7. 36 Stat. 539 (Commerce Court Act).

↑ Act of June 10, 1921, ch. 20. 42 Stat. 27 (Willis-Graham Act).

$1 Bill to Rerulate Interstate and Foreign Communications, H.R. Rep. No. 1850, to accompany H.R. 8801, 73rd Cong., 2d Sess. (1984), pp. 3–7.

2. International common carrier

Regulatory concern with international communications also had its beginning in the mid-nineteenth century. During the time period of 1857 to 1884, the landing of telegraph cables between the United States and foreign countries was, when needed, authorized by Congress. After 1879, in the absence of specific legislation, submarine cable landings were controlled by the Chief Executive. The authority given to the Interstate Commerce Commission over the transmitting of messages in foreign commerce applied only insofar as the transmission took place within the United States. The President's right to issue cable landing licenses was codified in the Cable Landing License Act of 1921. By executive order, this authority was transferred to the Department of State (it was again delegated by the Eisenhower administration to the FCC through Executive Order No. 10530 in May, 1954, subject to the approval of the grant of landing licenses by the Secretary of State). There had been several telegraph cable carriers serving the U.S. mainland since the 1880's, both directly and through connecting carriers. These were Western Union Cables, Inc. (a subsidiary of Western Union Telegraph Co., which itself was organized in 1851), All America Cables, Inc. (operating principally between the United States and Latin America, and within Latin American countries; its corporate name was changed to All America Cables and Radio Inc. in 1938), and the Commercial Cable Co.

British companies already had been operating across the Atlantic for some years by 1881, the year that a cable laid between Nova Scotia and England was leased to the Western Union Telegraph Co. By the 1920s, a number of cables were laid between the North American and European continents. These major communications routes serving the industrialized nations were owned predominantly by the British; their companies had also pioneered in service in Latin American countries and across the Pacific. Throughout most of the world, then, cable landing sites existed at British naval stations and were connected to London. This British control continued through the first quarter of the twentieth century, when the newly developing radio medium decreased the importance of cables.10

After experiments with radio transmission at the turn of the century, the effort in the United States was to direct its use to areas that would not compete with the well-established cable industry. Radiotelegraph was capable of a function that cable couldn't provide-marine communications, particularly for safety of life at sea. Consequently, radio was confined primarily to ship-to-shore services extending over relatively short distances. The lack of effort expended to develop efficient transmitting and receiving equipment made transoceanic radio communication generally unsuccessful.

Just as early cable ownership was largely British, early radio operation between the United States and Europe, such as it was, was conducted by a British firm, established in 1895, the Marconi Wireless Telegraph Co., Ltd. In 1899, Marconi organized and retained control

Act of Feb. 28, 1920, op. cit., II, n. 12, at 474, Sec. 400 (1) (c).

10 Asher H. Ende, International Communications, Federal Communications Bar Journal, vol. 28, nos, 2 & 3 (special combined issue, 1975), p. 149.