Communications Act of 1934, Section 214, Legislative Background

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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