"connecting carrier" classification successfully limits regulation

In 1934, the U.S. Communications Act established a class of common carriers subject to only a subset of common-carrier (Title II) regulation.  This class of common carriers, called “connecting carriers”, included:

any carrier engaged in interstate or foreign communication solely through physical connection with the facilities of another carrier not directly or indirectly controlling or controlled by, or under direct or indirect common control with such carrier[1]

Connecting carriers were subject to only Sections 201 to 205 of Title II of the Communications Act.[2]   These Title II provisions authorize the U.S. Federal Communications Commission (FCC) to require telephone company interconnection, to prohibit anti-competitive practices, and to ensure that telephone rates are just and reasonable.  Connecting carriers were exempted from Title II regulation outside of regulation associated with these core concerns about interconnection, competition, and consumer protection.

Telephone companies classified as connecting carriers were a significant component of the U.S. telephone industry in 1934.  When it was established, the FCC carefully reviewed a poorly maintained list of 6,500 telephone companies that it received from the Interstate Commerce Commission.[3]  The FCC collected relevant facts, established classificatory rules, and, when necessary, held hearings.[4]  In its 2’nd Report to Congress in 1936, the FCC reported on its classificatory determinations:

Approximately 250 companies from the three classes [size classes based on gross revenue] are fully subject to the act; a very large number of companies are subject to sections 201-205 only [connecting carriers]; and a substantial number of companies are outside the jurisdiction of the Commission.[5]

From its beginnings, the U.S. telephone industry has had a large number of telephone companies.  Connecting-carrier classification limited the burden of Title II regulation on many telephone companies.  The classification scheme also allowed the FCC to focus its regulatory efforts under Title II on key concerns and on the telephone companies most relevant to the FCC’s national regulatory responsibilities.

Telephone companies that the FCC classified as connecting carriers were not required to file statistical reports with the FCC.  Nonetheless, some connecting carriers, apparently recognizing the value of the FCC’s compilation of industry data, voluntarily filed reports with the FCC.  In 1942, connecting carriers voluntarily filing statistical reports with the FCC accounted for 37% of the revenue of all non-Bell-System telephone companies that filed reports.  Connecting carriers included telephone companies that were among the largest non-Bell-System companies.  For example, Associated Telephone Co., a California-based operating company under General Telephone, later to become GTE, was classified as a connecting carrier.  Associated Telephone in 1942 was the third-largest non-Bell-System telephone operating company.  It had annual operating revenue equivalent to about $88 million in 2009 dollars.[6]

Limited Title II regulation for connecting carriers was a stable, relatively uncontroversial regulatory structure.  In 1910, the Mann-Elkins Act extended federal Interstate Commerce Commission jurisdiction to telephone companies engaged in sending messages interstate.  About that year, individual states rapidly enacted laws authorizing state commissions to regulate telephone companies.  Subsequent changes in judicial interpretations of the Commerce Clause allowed federal telephone regulation of intrastate messages and all other aspects of the telephone business.  Despite this significant change in constitutional law, neither Congress nor the FCC changed the limited Title II regulation of connecting carriers.  A number of connecting carriers continued to file voluntarily statistical reports at the FCC at least through 1951.[7] While some minor proceedings at the FCC have addressed the definition of connecting carriers, limited Title II regulation for connecting carriers has largely been a well-understood, well-settled, regulatory certainty at the FCC for the past seventy-six years.

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Data:  connecting carriers voluntarily filing statistical reports in 1942; years in which state commission regulation of telephone companies was established (Excel version)

Notes:

[1] Communications Act of 1934, Sess. 2, ch. 652, 48 Stat. 1064, Section 2(b)(2).  In Section 3(u), a “connecting carrier” is specified to be a carrier described under Section 2(b)(2).  Here’s the original text of the Communications Act of 1934 (starts at pdf page 1090).

[2] For a recent proposal to limit Title II regulation, see FCC, Framework for Broadband Internet Service, GN Docket No. 10-127, Notice of Inquiry (June 17, 2010), Section II.B.2.

[3] The FCC’s 2’nd Report to Congress observed:

When the Federal Communications Commission was organized July 11, 1934, it received from the Interstate Commerce Commission a mailing list of some 6,500 telephone companies. It was soon ascertained that many of these companies had long since gone out of existence.

See p. 23.

[4] On the collection of facts, see id., and FCC, 1’st Report to Congress, p. 14.  The early FCC order Classification of Telephone Companies, 3 FCC 37 (1935), established the classificatory rules. For only about 25 companies did disputes arise.  The disputes mainly concerned questions of corporate control.  See FCC, 2’nd Report, p. 23.

[5] Id.

[6] Associated Telephone’s operating revenue in 1942 was $6.7 million, much more than the operating revenue threshold for the largest class of telephone companies (Class A telephone companies, which were defined to be telephone companies with more than $100,000 in operating revenue). Using the increase in the Consumer Price Index from 1942 to 2009 (13.2) gives the equivalent 2009 dollars.

[7] After 1951, the FCC’s annual Statistics of the Communications Industry did not indicate any connecting carriers filing statistical reports.

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