Time Warner Entertainment Co., L.P. v. F.C.C., 97-1263

• Decision Date: 22 May 1998
• Docket Number: No. 97-1263,97-1263
• Parties: , 12 Communications Reg. (P&F) 268 TIME WARNER ENTERTAINMENT CO., L.P., Petitioner, v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 75

144 F.3d 75

330 U.S.App.D.C. 126, 12 Communications Reg.

(P&F) 268

TIME WARNER ENTERTAINMENT CO., L.P., Petitioner, v. FEDERAL COMMUNICATIONS COMMISSION and United States of America, Respondents.

No. 97-1263.

United States Court of Appeals District of Columbia Circuit.

Argued Feb. 3, 1998.

Decided May 22, 1998.

On Petition for Review of an Order of the Federal Communications Commission.

R. Bruce Beckner argued the cause for petitioner, with whom Aaron I. Fleischman, Seth A. Davidson, and Jill K. McClelland were on the briefs.

James M. Carr, Counsel, Federal Communications Commission, argued the cause for respondents, with whom Joel I. Klein, Assistant Attorney General, United States Department of Justice, Robert B. Nicholson and Robert J. Wiggers, Attorneys, Christopher J. Wright, General Counsel, Federal Communications Commission, and Daniel M. Armstrong, Associate General Counsel, were on the brief.

Before: SILBERMAN, RANDOLPH, and TATEL, Circuit Judges.

Opinion for the Court filed by Circuit Judge SILBERMAN.

Opinion concurring in part and dissenting in part filed by Circuit Judge RANDOLPH.

SILBERMAN, Circuit Judge:

Time Warner Entertainment Company petitions for review of an order of the Federal Communications Commission setting forth the manner in which cable system operators may recoup external cost increases incurred between September 30, 1992 and the date their system first became subject to rate regulation. The Commission contends that because it had no opportunity to pass on the issue, or to correct its error, section 405 of the Communications Act bars our review. We grant the petition in part and remand.

I.

The Cable Television Consumer Protection and Competition Act of 1992, Pub.L. No. 102-385, 106 Stat. 1460 (codified in scattered sections of 47 U.S.C.), directed the FCC to regulate the rates that cable operators not subject to "effective competition," defined at 47 U.S.C. § 543(l)(1) (1994), could charge their subscribers. The Commission designed a scheme intended to ensure that any system not facing such competition would nevertheless charge approximately the same rates as if it were in a competitive market. Put simply, a system operator's initial permitted rate either was its rate in effect on September 30, 1992 reduced by a "competitive differential" (the "full reduction rate"), or was calculated in accordance with certain FCC formulas and worksheets without reference to rates in effect on September 30, 1992 (the "transition rate"). See 47 C.F.R. § 76.922(b) (1997). Most systems, the Commission has said, employed the former rate. See Implementation of the Cable Television Consumer Protection and Competition Act of 1992: Rate Regulation, Memorandum Opinion and Order (Order on Remand), 11 F.C.C.R. 20206, p 22 (1996).

In Time Warner Entertainment Co. v. FCC, 56 F.3d 151 (D.C.Cir.1995), we considered consolidated petitions for review of the FCC's orders implementing the Act. One of the cable operators' complaints in that case (and the only one relevant to Time Warner's instant petition) was that the FCC unreasonably did not allow "cable operators to adjust their rates to reflect external cost increases incurred during the gap period." Id. at 173. "[E]xternal costs" were those "effectively beyond the cable operator's control," including: "(1) the retransmission consent fees cable operators pay to broadcasters; (2) programming costs; (3) [state and local] taxes; and (4) franchise fees and the costs associated with other franchise requirements, including the provision of public, educational, and governmental-access programming." Id. at 171; see also 47 C.F.R. § 76.922(f)(1) (1997). The "gap period" refers to the time between September 30, 1992 and the date a system became subject to rate regulation. An operator's initial permissible rate, at least for those using the full reduction rate, was derived from its rate in effect on September 30, 1992, not the actual rate in effect on the date each system became subject to regulation, "lest [the FCC] build into the permitted initial rates any unwarranted rate increases that cable operators took after passage of the 1992 Cable Act." Time Warner, 56 F.3d at 173. The Commission did not permit operators to recoup any external cost increases incurred during the gap period; ¹ only those incurred after the date a system became subject to rate regulation could be taken into account. ² The length of the gap varied among full reduction rate-based operators because they became subject to rate regulation at different times, but was no shorter than 11 and no longer than 17 months long.

In Time Warner, we held that the Commission's "decision to preclude a rate adjustment designed to recover changes in external costs incurred during the gap period [was] arbitrary and capricious," id. at 174, and "vacate[d] the rule insofar as the FCC denied [cable operators] recovery of their gap-period external cost increases." Id. at 178. In our view, the FCC had offered "no reason to doubt that cable operators incurred external costs during the gap period, yet under its regulations they would never be able to recoup those costs short of opting for cost-of- service regulation--which would be akin to shooting a fly with a blunderbuss." Id. at 174. ³ We also thought the Commission's defense of its rule--that allowing recovery of the gap-period external cost increases would be too administratively burdensome, both for the cable operators and the FCC--"completely unacceptable." Id.

Eighteen months after our decision, and without issuing a proposed rule or seeking public comment on how to proceed, the Commission issued an order in response to our remand. See Order on Remand, pp 21-28. The order "permit[s] operators to adjust their current permissible rates to [the level] the operators would currently be charging if they had been permitted to include increases in external costs occurring between September 30, 1992 and their initial date of regulation." Id., p 25 (emphasis added). But the Order does not allow cable operators to recover in future rates or otherwise the difference between the rates they would have charged in 1994, 1995, 1996, and 1997, had they been allowed to account for external cost increases incurred during the gap period, and their allowable rates in those years. Time Warner did not petition for reconsideration after the Commission issued its Order on Remand; it instead sought review here. Petitioner claims that the FCC's order unreasonably denies operators the ability to recoup the revenue deficiency--which Time Warner estimates at more than $14 million dollars--they sustained during the four years, and that the order does not comply with our mandate in the first Time Warner case. It also contends that those operators which employ a transition rate are unreasonably denied the opportunity to take advantage of the prospective relief afforded full reduction rate-based operators.

II.

The Commission did not explain why its order permitted cable operators to charge current rates as if the gap period external cost increases had been included, but did not allow them to recover their revenue deficiencies, other than to say that "[t]he scope of relief requested is reflected in Time Warner's Emergency Motion for Expedited Review (May 3, 1994 ...)" filed in this court before argument on the first petition. Id., p 24 n. 40. Petitioner had said in that motion that "cable operators lose millions of dollars in revenue every day. If they eventually succeed in persuading this Court to rule in their favor, those losses cannot be recouped. Their unrecoverable economic loss thus constitutes irreparable injury." The FCC construed that statement as a concession (or waiver) that the cable operators were not even seeking to recover their revenue loss.

Petitioner contends that it was absurd for the Commission to have drawn a distinction between past revenue deficiencies attributable to unrecovered external cost increases and prospective rates predicated on, but not totally recovering, those past external cost increases; its claim to the Commission never made that distinction. ⁴ Even worse, Time Warner argues, the passage on which the FCC relied pertained solely to the Commission's choice of a 17% "competitive differential," see supra at 128, not the gap period at all. The FCC's counsel insists that it was "entirely understandable" for the Commission to decide as it did because Time Warner never indicated that it had "changed" its position in a submission to the FCC after our remand, or in a petition for reconsideration. He contends that the other arguments Time Warner raises in its petition--that it was unreasonable for the Commission not to provide a way for operators to recoup all their revenue deficiencies, that the FCC's order treated full reduction rate-based operators more favorably than those using the transition rate, and that the order did not comply with our remand--were never presented to the Commission (presumably in a petition for reconsideration because it was not foreseeable that the Commission would draw the remedial distinction that it did). Petitioner therefore has not exhausted its administrative remedies and our review is foreclosed by section 405(a) of the Communications Act. Time Warner's primary response is that the issues it raises were directly implicated in the reasoning of our prior decision and were therefore covered in the remand order.

Section 405(a) is worded somewhat differently than the normal exhaustion provision. It provides:

After an order, decision, report, or action has been made or taken in any proceeding by the Commission ... any party thereto, or any other person aggrieved or whose interests are adversely affected thereby, may petition for reconsideration ... and it shall be lawful for ... the Commission ..., in its discretion, to grant such a reconsideration if sufficient reason therefor be made to appear.... The...