and retransmitted over the cable: consequently, there existed no through interstate communication. The carriers also argued that since the input and output points of each system are located within the confines of one State, the transmission was purely intrastate. Furthermore, the local facility was contended to be a local branch line within the meaning of the exemption in section 214 (a) (2), as well as local exchange service within the meaning of section 221 (a) of the Communications Act. The Commission developed the premises for its action in the following manner: [t]he telephone company participates as a link in the continuous, unaltered relay of television signals to the viewer (since CATV systems fill much of their channels with the importation of distant television signals), and is thus performing an interstate communications service irrespective of the location of the carrier facilities. In conjunction with Southwestern Cable and the FCC's ruling in Common Carrier Tariffs, this basically established the rationale for Federal intervention. Second, while most of the construction at issue did not cross any State boundary, the Commission cited Southwestern Bell to reject the premise that only intrastate channels of communication were involved: Neither the wording of this definition [of the term "line" in the Communications Act] nor anything in the legislative history of section 214 indicates a congressional intent to limit the certification requirements thereof to cases where the physical facilities of the common carrier cross a State boundary. On the contrary, we believe that the definition of a line manifests a primary congressional concern over the channel of communication, rather than merely over the wires and cables; that is, the equipment used to establish the channel. Our view is reinforced by the fact that section 214 is not confined to the “extension" of a line-which might reasonably be construed as requiring some part of the common carrier facilities to cross a State boundary-but includes the "construction of a new line" even though wholly within a single State so long as it is part of an interstate "channel of communication" or “line.” Southwestern Bell Telephone Co., 6 FCC 529, 532 (1938). The broadcaster's signal is an interstate channel of communication and the CATV channel distribution system which is a link in the transmission of the signal to the television set of the viewer is a part of that interstate channel. Significantly, the telephone companies have been unable to point to anything in the statutory scheme of the Communications Act which would justify limiting the phrase "channel of communication" to a common carrier channel.13 The Commission quickly disposed of the contentions that the service constituted the exemption from Federal regulation as "local, branch, or terminal lines not exceeding 10 miles in length" and as local exchange service: Essentially, the exemption is intended to apply to minor additions or improvements to existing facilities or services and the expenditure involved is ordinarily small. 13 General Telephone Co., at 457-58 (reference omitted). The construction under consideration in this proceeding, however, involves far more than a minor addition for the improvement or "filling in" of existing services. The channel facilities necessitated a considerable amount of new construction by the telephone companies in order to provide new customers with a type of service significantly different from that theretofore provided in the said communities.11 * * * * * The construction attributed by the carriers to the phrase "telephone exchange service" must be rejected as inconsistent with the plain meaning of the words used. Manifestly, the phrase is intended primarily to apply to a telephone or comparable service involving "intercommunication;" that is, a two-way communication, not the one-way transmission of signals which takes place with respect to CATV channel service. Furthermore, such channel service does not require an exchange, does not go through an exchange, and is totally unrelated to the "exchange service charge." ***Since section 221(b) is not even remotely applicable to the construction of lines for CATV channel distribution service, we need not concern ourselves with the extent of any local government regulation of telephone exchange service.15 The decision reviewed Supreme Court construction of section I (18)-(22) of the Interstate Commerce Act to the effect that "the building of unnecesary lines involves a waste of resources and that the burden of this waste may fall upon the public[.]" 16 In conjunction with its reliance on Southwestern Bell, this reference clearly indicated that the Commission was pursuing its legislative directive to control additions to the rate base. Cease and desist orders were issued on pending construction in several systems until section 214 certificates were applied for and issued. 2. Industry structure a. "Open Entry" Throughout most of this century, domestic local exchange service and long-distance transmission have retained the market and regulatory structure that gained credence during the early decades. Communications suppliers, technologies, and the services they rendered were largely homogeneous and easy to classify. Startup operations, and the planning, extension, and maintenance of service demanded substantial capital and annual expense. The Commission required an application for the construction, extension, acquisition, or operation of any new channel of communication or transmission thereby, and the same was imposed on the discontinuance, reduction, or impairment of service. Competition between Western Union and A.T. & T. for private line services remained until recently the sole exception to the boundaries of monopoly that remained around the entire industry. 14 Id., at 459. 15 Id., at 460. 16 Id., at 456, citing Texas & Pacific Railway Co. v. Gulf, Colorado & Santa Fe Railway do. Today, neither the Bell operating companies nor the independents are franchised by regulatory agencies to operate in areas served by one another; and Western Union has held a monopoly in public message telegraph service since 1943. Nonetheless, the generalization no longer holds that only one communications entity can serve a single geographic area most efficiently. While telephone exchange service has been retained as a local monopoly, local operating companies provide intracity distribution facilities to a new class of communications suppliers called specialized common carriers. These microwave radio systems have captured a small share of the data communications market; as have domestic satellite systems and "value-added" carriers-companies which lease transmission lines from the "underlying" supplier and add extra capacity to offer such services as packet-switched data and facsimile networks. There are also shared users, which provide communications service on a nonprofit basis, and a greatly expanded number of private communications systems, which were once limited to railroad and other right-of-way companies. This new industry structure had its beginning in 1959. At that time the FCC began to favor new entry with respect to the use of private microwave systems 17 and later the grant to Microwave Communications, Inc. (MCI) to construct a network between Chicago and St. Louis.18 The Commission proceeded in a market-by-market fashion to implement an "open entry" policy which has enlarged the number of submarkets and competitive vendors available to specialized users. Authorizations of point-to-point terrestrial microwave stations, with associated towers and dish-shaped antennae, require title III licensing as does radiotelegraph. The Commission's new policy was nonetheless fashioned as a section 214 entry question, and its rationale was explained in accordance with the RCA opinion. The FCC has had difficulty, however, in maintaining control over the scope of authorized entry, as MCI's Execunet service illustrates. What follows is a brief explanation of the characteristics of the data transmission market and the policy issues it raised, and a review of the formulation of the Commission's stance in the Specialized Common Carrier Services decision. The philosophy of that decision was extended to open entry of resale arrangements, and a determination of was made of section 214 jurisdiction over these entities which compete through service extensions rather than facility ownership. Also discussed are the court directives for section 214 treatment of services which duplicate message telephone service. Microwave transmission, which was developed during World War II, requires relatively little capital investment for the startup and maintenance of a system. Within 15 years, its capacity for data communication and general flexibility seemed suitable to meet the emerging demand for computer networks. This innovative medium had also been coming into use in conjunction with the coaxial cable facilities of the voice-switched network. It was a matter of question whether this technology demonstrated the existence of economies of scale for the purpose of serving the customized market, requiring a certain level of 17 Allocation of Frequencies in the Bands Above 890 Mc., 29 FCC 359 (1959). 18 Microwave Communications, Inc., 18 FCC 2d 953 (1969), reconsideration denied, 21 FCC 2d 190 (1970). demand to attract entry and introduce service. Since the new market was of recent origin, with no clear relationship to the services offered by the established carriers, the Commission could not expect guidance in the Communications Act for regulating it. After MCI was permitted to establish its initial route, several other groups, some affiliated with that carrier, began seeking to enter the market, proposing nation- or region-wide networks. A general endorsement of market entry constituted an issue of economic impact on A.T. & T.'s existing services; and a new policy was considered in the context of duplication and public need. (1) Specialized Common Carrier Services (docket 18920), Notice of Inquiry, 24 FCC 2d 318 (1970), First Report and Order, 29 FCC 2d 870 (1971).-Docket 18920 was instituted to facilitate the handling of title III radio license applications by determining "[w]hether as a general policy the public interest would be served by permitting the entry of new carriers in the specialized communications field [.]" 19 The First Report and Order created a Commission policy in favor of new entry with the observation that there existed a large potential market and a public need and demand for the proposed services. It anticipated that this philosophy would result in no degradation to the regular telephone service provided by the established carriers. 20 In adopting this policy, the Commission noted that the specialized communications market, particularly for data transmission, was growing and would continue to expand very rapidly. The new carriers were "seeking primarily to develop new services and markets, as well as to tap latent, but undeveloped submarkets for existing services S.. The record indicated, the Commission felt, that "entry by more than one private-line carrier should be generally reasonably feasible, in view of the large potential market and it (sic) heterogeneous character." 21 It noted also that the proposed plant investment and revenue requirements were not of a magnitude anywhere near those of an A.T. & T. or even a Western Union. In a market of this type and size, the Commission said, a number of small but viable carriers may be able to coexist in any particular region. It regarded as unlikely the prospect that facilities duplication would bankrupt all competitors, leaving no one to provide the service; the demise of a carrier would simply result in the customers' shifting to another commercial entity.22 The established carriers and related interests argued that this analysis did not comport with the applicable legal standard for authorizing new entry. Specifically, they referred to the standards of section 214 and of the Supreme Court decision in the RCA case. It was asserted that under section 309, in which the applicant for a radio license is a carrier, the Commission must apply the standards of section 214. The carriers pointed out that the statute was enacted to avoid wasteful competition and uneconomic duplication of facilities. Consequently, the argument continued, section 214 "requires a finding that there is a need for the proposed services which existing carriers are not now adequately meeting and could not in the future adequately meet.” 23 19 Notice of Inquiry, at 327. 20 First Report and Order, at 906. 21 Id., at 925. 22 Id., at 925-26. 23 Id., at 900. The proposed standard was reintroduced in H.R. 12323, the Consumer Communications Reform Act of 1976. See generally, U.S. House of Representatives, Committee on Interstate and Foreign Commerce, Hearings on Competition in the Telecommunications Industry, 94th Cong., 2d sess. (1976). Presumably, this standard would influence any benefit of the doubt, based on the evidence and the agency's experience, in favor of the established carriers to react to market demand and introduce service. The Commission concluded that this test was too narrow a construction of its responsibilities under sections 309 and 214. The adequacy or capacity of the established carriers to meet future requirements should not be the determinative factor of new entry, "where growing future traffic is involved and new services are proposed." 24 It questioned whether the major carriers, whose facilities and practices were developed on the basis of serving a large and steadily growing market for voice communications, could or should be expected to respond to computer users' needs. Based on its "cumulative knowledge" of the industry and evidence in the record, the Commission perceived "sufficient ground for a reasonable expectation that new entry here will have beneficial effects." 25 Small, specialized entities would provide flexibility and a wider range of choice to a data communications market that was much smaller than that serviced by the switched voice network, was growing more rapidly, and had different operating characteristics. The Commission believed that this judgment adequately treated the standards of the RCA case. Furthermore, there existed "no uniform requirement [in public utility law] that new entry may be authorized only if existing carriers are unable or unwilling to provide the proposed services." 26 The consensus of case law and public utility literature seemed to be that the public should not be deprived of the benefit of new and improved services solely because of the prospect of traffic diversion; and the adequacy of the existing market was only one element of importance to be considered when assessing the desirability of competition. Since this rulemaking, the Commission's policy toward small, specialized carriers has been to permit them to grow and coexist with a message toll monopoly characterized by economies of scale and large capital requirements. All carriers operating through the microwave radio spectrum enter into service through the issuance of title III radio licenses subject to 5-year renewals. The Commission grants permission for the operation or extension of new lines through section 214 rather than title III construction permits. The section 214 procedure is used because, unlike radio broadcast operations, radio carriers derive pointto-point "channels of communication" from the spectrum. In addition to the fact that both the specialized and established carriers must file tariffs under title II. it is apparent that the "open entry" policy is qualified in accordance with economic impact considerations. (2) Packet Communications, Inc., 53 FCC 2d 922 (1973).-Packet Communications Inc. proposed a "packet switching" service by which small groups (packets) of digitized data are transmitted to computers through a "store and forward" operation. The service was to be offered over channels leased from other carriers. The PCI decision was the first time that the Commission ruled on the capabilities of "value added" carriers. PCI submitted a section 214 application to initiate its service, and it stated that it was willing to have itself treated as a traditional common carrier until the Commission should decide its policy toward such service. The Resale and Shared Use proceeding 24 Td., at 909. 25 Id., at 910 (reference omitted). 26 Id., at 902 (reference omitted). |