United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 17, 2000 Decided March 2, 2001

No. 94-1035

Time Warner Entertainment Co., L.P.

Petitioner

v\.

Federal Communications Commission and

United States of America,

Respondents

BellSouth Corporation, et al.,

Intervenors

Consolidated with

95-1337, 99-1503, 99-1504, 99-1522,

99-1541, 99-1542, 00-1086

On Petitions for Review of Orders of the

Federal Communications Commission

David W. Carpenter argued the cause for petitioners AT&T Corporation and
Time Warner Entertainment Co., L.P. With him on the briefs were Peter
Keisler, David L. Lawson, C. Frederick Beckner III, Henk Brands and
Robert D. Joffe. Charles S. Walsh, Richard B Beckner, Stuart W. Gold and
Marc C. Rosenblum entered appearances.

Robert D. Joffe and Henk Brands were on the briefs for petitioner Time
Warner Entertainment Co., L.P. Charles S. Walsh, Richard B. Beckner and
Stuart W. Gold entered appearances.

Andrew Jay Schwartzman, Cheryl A. Leanza and Harold Feld were on the
briefs for petitioner Consumers Union.

James M. Carr, Counsel, Federal Communications Commission, argued the
cause for respondents. With him on the brief were Christopher J. Wright,
General Counsel, Daniel M. Armstrong, Associate General Counsel, Joel
Marcus and James M. Carr, Counsel, David W. Ogden, Acting Assistant
Attorney General, U.S. Department of Justice, Mark B. Stern and Jacob M.
Lewis, Attorneys, and Wilma A. Lewis, U.S. Attorney. William E. Kennard,
General Counsel, Federal Communications Commission, John E. Ingle,
Deputy Associate General Counsel, and Catherine G. O\'Sullivan, Robert
B. Nicholson and Robert J. Wiggers, Attorneys, U.S. Department of
Justice, entered appearances.

Henk J. Brands, Robert D. Joffe, Peter D. Keisler, David L. Lawson and
C. Frederick Beckner III were on the brief for intervenor Time Warner
Entertainment Co., L.P. in No. 99-1522. Mark C. Rosenblum entered an
appearance.

Before: Williams, Randolph and Tatel, Circuit Judges.

Opinion for the Court filed by Circuit Judge Williams.

Williams, Circuit Judge: Section 11(c) of the Cable Television Consumer
Protection and Competition Act of 1992, Pub. L. No. 102-385, 106 Stat.
1460 (\"1992 Cable Act\"), amends 47 U.S.C. § 533 to direct the Federal
Communications Commission to set two types of limits on cable operators.
The first type is horizontal, addressing operators\' scale: \"limits on
the number of cable subscribers a person is authorized to reach through
cable systems owned by such person, or in which such person has an
attributable interest.\" 47 U.S.C. § 533(f)(a)(1)(A). The second type is
vertical, addressing operators\' integration with \"programmers\"
(suppliers of programs to be carried over cable systems): \"limits on
the number of channels on a cable system that can be occupied by a video
programmer in which a cable operator has an attributable interest.\" 47
U.S.C. § 533(f)(a)(1)(B). The FCC has duly promulgated regulations. See
47 C.F.R. § 76.503-04. Petitioners Time Warner and AT&T challenge the
horizontal limit as in excess of statutory authority, as
unconstitutional infringements of their freedom of speech, and as
products of arbitrary and capricious decisionmaking which violate the
Administrative Procedure Act. Time Warner similarly challenges the
vertical limit. Together with AT&T, Time Warner also challenges as
arbitrary and capricious the rules for determining what counts as an
\"attributable interest.\" Concluding that the FCC has not met its
burden under the First Amendment and, in part, lacks statutory authority
for its actions, we remand for further consideration of both limits. In
addition we vacate specific portions of the attribution rules as lacking
rational justification.

Consumers Union also files a petition for review, which need not detain
us long. It objects to the Commission\'s action to the extent that it
continued a stay on enforcement of the horizontal limit. See
Implementation of Section 11(c) of the Cable Television Consumer
Protection and Competition Act of 1992, 14 F.C.C.R. 19098, 19127-28 p p
71-73 (1999) (\"Third Report\"). The Commission issued the stay after a
district court found the statute underlying that limit unconstitutional,
see Daniels Cablevision, Inc. v. United States, 835 F. Supp. 1 (D.D.C.
1993), and provided that in the event of Daniels\'s reversal the stay
would end. See Implementation of Sections 11 and 13 of the Cable
Television Consumer Protection and Competition Act of 1992, 8 F.C.C.R.
8565, 8609 p 109 (1993) (\"Second Report\"). We did reverse Daniels in
Time Warner Entertainment Co. v. United States, 211 F.3d 1313 (D.C. Cir.
2000) (\"Time Warner I\"), so the stay ended automatically.[^1] Thus the
stay issue is moot unless the issue posed is capable of repetition yet
evading review. Even if we assume that the issue evades review, its
recurrence is not probable enough to qualify it as \"capable of
repetition.\" See Spencer v. Kemna, 523 U.S. 1, 17 (1998) (requiring \"a
reasonable expectation that the same complaining party \[will\] be
subject to the same action again\") (internal citations omitted).
Although we find here that the regulations fail constitutional scrutiny,
the specific condition that led to the stay\--a pending challenge to the
statute\'s constitutionality\--is highly unlikely to recur. We therefore
find Consumers Union\'s claim moot and dismiss the petition.

\* \* \*

The horizontal rule imposes a 30% limit on the number of subscribers
that may be served by a multiple cable system operator (\"MSO\"). See 47
C.F.R. § 76.503; Third Report 14 F.C.C.R. at 19119 p 55. Both the
numerator and denominator of this fraction include only current
subscribers to multi-channel video program distributor (\"MVPD\")
services. See id. at 19107-10 p p 20-25. Subscribers include not only
users of traditional cable services but also subscribers to non-cable
MVPD services such as Direct Broadcast Satellite (\"DBS\"),[^2] a
rapidly growing segment of the MVPD market. See id. at 19110-12 p p
26-35. The Commission pointed out that under this provision the nominal
30% limit would allow a cable operator to serve 36.7% of the nation\'s
cable subscribers if it served none by DBS. See id. at 19113 p 37 &
n.82.[^3] In an express effort to encourage competition through new
provision of cable, the Commission excluded from any MSO\'s numerator
all new subscribers signed up by virtue of \"over-building,\" the
industry\'s term for cable laid in competition with a pre-existing cable
operator. See id. at 19112-13 p p 34, 37. Further, subscribers to a
service franchised after the rule\'s adoption (October 20, 1999) do not
go into an MSO\'s numerator, even if not the result of an overbuild. See
id. at 19112 p 33. As a result, the rule\'s main bite is on firms
obtaining subscribers through merger or acquisition.

The vertical limit is currently set at 40% of channel capacity,
reserving 60% for programming by non-affiliated firms. See 47 C.F.R. §
76.504; Second Report, 8 F.C.C.R. at 8593-94 p 68; Implementation of
Section 11(c) of the Cable Television Consumer Protection and
Competition Act of 1992, 10 F.C.C.R. 7364, 7368 p 14 (1995)
(\"Reconsideration Order\"). Channels assigned to broadcast stations,
leased access, and for public, educational, or governmental uses are
included in the calculation of channel capacity. See id. at 7371-73 p p
20-27. Capacity over 75 channels is not subject to the limit, so a cable
operator is never required to reserve more than 45 channels for others
(.60 x 75 = 45). See id. at 7374-76 p p 31-35.

As cable operators, Time Warner and AT&T \"exercise\[ \] editorial
discretion in selecting the programming \[they\] will make available to
\[their\] subscribers,\" Time Warner I, 211 F.3d at 1316, and are
\"entitled to the protection of the speech and press provisions of the
First Amendment,\" Turner Broadcasting System, Inc. v. Federal
Communications Commission, 512 U.S. 622, 636 (1994) (\"Turner I\")
(quoting Leathers v. Medlock, 499 U.S. 439, 444 (1991)). The horizontal
limit interferes with petitioners\' speech rights by restricting the
number of viewers to whom they can speak. The vertical limit restricts
their ability to exercise their editorial control over a portion of the
content they transmit.

In Time Warner I we upheld the statutory provisions against a facial
attack, after finding them subject to intermediate rather than, as the
cable firms argued, strict scrutiny. Time Warner I, 211 F.3d at 1316-22.
The regulations here present a related but independent set of questions.
Constitutional authority to impose some limit is not authority to impose
any limit imaginable.

In briefs written before the issuance of Time Warner I, petitioners
argued here for strict scrutiny. At oral argument they withdrew from
this position and said, euphemistically, that they were \"happy to stand
on intermediate scrutiny.\" Because of that concession and, in any
event, not seeing any distinction between the statute and the
regulations for level-of-scrutiny purposes, we apply intermediate
scrutiny. Under the formula set forth in United States v. O\'Brien, 391
U.S. 367, 377 (1968), and reaffirmed by Turner Broadcasting System, Inc.
v. Federal Communications Commission, 520 U.S. 180, 189 (1997) (\"Turner
II\"), a governmental regulation subject to intermediate scrutiny will
be upheld if it \"advances important governmental interests unrelated to
the suppression of free speech and does not burden substantially more
speech than necessary to further those interests.\" Id. (quoting
O\'Brien, 391 U.S. at 377).

The interests asserted in support of the horizontal and vertical limits
are the same interrelated interests that we found sufficient to support
the statutory scheme in Time Warner I: \"the promotion of diversity in
ideas and speech\" and \"the preservation of competition.\" Time Warner
I, 211 F.2d at 1319; see also Turner I, 512 U.S. at 662-64 (concluding
that both qualify as important governmental interests). After a review
of the legislative history, we concluded that Congress had drawn
\"reasonable inferences, based upon substantial evidence, that increases
in the concentration of cable operators threatened diversity and
competition in the cable industry.\" Time Warner I, 211 F.3d at 1319-20.
But the FCC must still justify the limits that it has chosen as not
burdening substantially more speech than necessary. In addition, in
\"demonstrat\[ing\] that the recited harms are real, not merely
conjectural,\" Turner I, 512 U.S. at 664, the FCC must show a record
that validates the regulations, not just the abstract statutory
authority.

\* \* \*

The FCC asserts that a 30% horizontal limit satisfies its statutory
obligation to ensure that no single \"cable operator or group of cable
operators can unfairly impede \... the flow of video programming from
the video programmer to the consumer,\" 47 U.S.C. § 533(f)(2)(A), while
adequately respecting the benefits of clustering[^4] and the economies
of scale that are thought to come with larger size. See Third Report, 14
F.C.C.R. at 19123-24 p 61. It interpreted this statutory language as a
directive to prohibit large MSOs\--either by the action of a single MSO
or the coincidental or collusive actions of several MSOs\--from
precluding the entry into the market of a new cable programmer. See id.
at 19116 p 43. In setting the limit at 30%, it assumed there was a
serious risk of collusion. See id., Part VI, at 19113-25 p p 36-65. But
while collusion is a form of anti-competitive behavior that implicates
an important government interest, the FCC has not presented the
\"substantial evidence\" required by Turner I and Turner II that such
collusion has in fact occurred or is likely to occur; so its assumptions
are mere conjecture. See Turner II, 520 U.S. at 195 (citing Turner I,
512 U.S. at 666). The FCC alternatively relies on its supposed grant of
authority to regulate the non-collusive actions of large MSOs. Congress
may indeed, under certain readings of Turner I and Turner II, have the
power to regulate the coincidental but independent actions of cable
operators solely in the interest of diversity, but \"\[w\]here an
administrative interpretation of a statute invokes the outer limits of
Congress\' power, we expect a clear indication that Congress intended
that result.\" Solid Waste Agency v. United States Army Corps of
Eng\'rs, \_\_ U.S. \_\_, 121 S. Ct. 675, 683 (2001). The 1992 Cable Act,
as we shall see, instead expresses the contrary intention.

Part VI of the Third Report lays out the calculations that lead the FCC
to the 30% limit. See Third Report, Part VI, 14 F.C.C.R. at 19113-25 p p
36-65. First the FCC determines that the average cable network needs to
reach 15 million subscribers to be economically viable. See id. at
19114-16 p p 40-42. This is 18.56% of the roughly 80 million MVPD
subscribers, and the FCC rounds it up to 20% of such subscribers. The
FCC then divines that the average cable programmer will succeed in
reaching only about 50% of the subscribers linked to cable companies
that agree to carry its programming, because of channel capacity,
\"programming tastes of particular cable operators,\" or other factors.
Id. at 19117-18 p 49. The average programmer therefore requires an
\"open field\" of 40% of the market to be viable (.20/.50 = .40). See
id. at 19117-18 p p 46-50.

Finally, to support the 30% limit that it says is necessary to assure
this minimum, the Commission reasons as follows: With a 30% limit, a
programmer has an \"open field\" of 40% of the market even if the two
largest cable companies deny carriage, acting \"individually or
collusively.\" Id. at 19119 p 53. A 50% rule is inadequate because, if a
duopoly were to result, \"\[t\]he probability of tacit collusion is
higher with 2 competitors than 3 competitors.\" Id. at 19118-19 p 51.
Even if collusion were not to occur, independent rejections by two MSOs
could doom a new programmer, thwarting congressional intent as the
Commission saw it. See id. A 40% limit is insufficient for the same
reason: \"two MSOs, \... representing a total of 80% of the market,
might decline to carry the new network\" and leave only 20% \"open,\"
which by hypothesis is not enough (because of the 50% success rate). Id.
at 19119 p 52. Although the Commission doesn\'t spell out the
intellectual process, it is necessarily defining the requisite \"open
field\" as the residue of the market after a programmer is turned down
either (1) by one cable company acting alone, or (2) by a set of
companies acting either (a) collusively or (b) independently but
nonetheless in some way that, because of the combined effect of their
choices, threatens fulfillment of the statutory purposes. We address the
FCC\'s authority to regulate each of these scenarios in turn.

The Commission is on solid ground in asserting authority to be sure that
no single company could be in a position single-handedly to deal a
programmer a death blow. Statutory authority flows plainly from the
instruction that the Commission\'s regulations \"ensure that no cable
operator or group of cable operators can unfairly impede, either because
of the size of any individual operator or because of joint actions of
operators of sufficient size, the flow of video programming from the
video programmer to the consumer.\" 47 U.S.C. § 533(f)(2)(A) (emphasis
added). Constitutional authority is equally plain. As the Supreme Court
said in Turner II: \"We have identified a corresponding \'governmental
purpose of the highest order\' in ensuring public access to \'a
multiplicity of information sources.\' \" 520 U.S. at 190 (quoting
Turner I, 512 U.S. at 663); see also Time Warner Entertainment Co. v.
Federal Communications Commission, 93 F.3d 957, 969 (D.C. Cir. 1996). If
this interest in diversity is to mean anything in this context, the
government must be able to ensure that a programmer have at least two
conduits through which it can reach the number of viewers needed for
viability\--independent of concerns over anticompetitive conduct.

Assuming the validity of the premises supporting the FCC\'s conclusion
that a 40% \"open field\" is necessary (a question that we need not
answer here), the statute\'s express concern for the act of \"any
individual operator\" would justify a horizontal limit of 60%. To reach
the 30% limit, the FCC\'s action necessarily involves one or the other
of two additional propositions: Either there is a material risk of
collusive denial of carriage by two or more companies, or the statute
authorizes the Commission to protect programmers against the risk of
completely independent rejections by two or more companies leaving less
than 40% of the MVPD audience potentially accessible. Neither
proposition is sound.

First, we consider whether there is record support for inferring a
non-conjectural risk of collusive rejection. Either Congress or the
Commission could supply that record, and we take them in that order. We
give deference to the predictive judgments of Congress, see Turner II,
520 U.S. at 195-96 (citing Turner I, 512 U.S. at 665), but Congress
appears to have made no judgment regarding collusion. The statute
plainly alludes to the possibility of collusion when it authorizes
regulations to protect against \"joint actions by a group of operators
of sufficient size.\" 47 U.S.C. § 533(f)(2)(A) (emphasis added). But
this phrase, while granting the Commission authority to take action in
the event that it finds collusion extant or likely, is not itself a
congressional finding of actual or probable collusion. Such findings
have not been made. No reference to collusion appears in the Act\'s
findings or policy, see 1992 Cable Act § 2, 106 Stat. at 1460-63, nor in
the legislative history discussing the horizontal or vertical limits.
See H.R. Rep. No. 102-628, at 40-43 (1992) (\"House Report\"); S. Rep.
No. 102-92, at 24-29, 32-34, reprinted in 1991 U.S.C.C.A.N. 1133, at
1156-62, 1165-67 (\"Senate Report\"). It was thus appropriate for the
FCC to describe Congress\'s reference to \"joint\" action as merely a
\"legislative assumption.\" Third Report, 14 F.C.C.R. at 19116 p 43
(emphasis added).

The Commission\'s own findings amount to precious little. It says only:

The legislative assumption \[about joint action\] is not unreasonable
given an environment in which all the larger operators in the industry
are vertically integrated so that all are both buyers and sellers of
programming and have mutual incentives to reach carriage decisions
beneficial to each other. Operators have incentives to agree to buy
their programming from one another. Moreover, they have incentives to
encourage one another to carry the same non-vertically integrated
programming in order to share the costs of such programming.

Id. None of these assertions is supported in the record. The Commission
never explains why the vertical integration of MSOs gives them \"mutual
incentive to reach carriage decisions beneficial to each other,\" what
may be the firms\' \"incentives to buy \... from one another,\" or what
the probabilities are that firms would engage in reciprocal buying
(presumably to reduce each other\'s average programming costs). After
all, the economy is filled with firms that, like MSOs, display partial
upstream vertical integration. If that phenomenon implies the sort of
collusion the Commission infers, one would expect the Commission to be
able to point to examples. Yet it names none. Further, even if one
accepts the proposition that an MSO could benefit from sharing the
services of specific programmers, programming is not more attractive for
this purpose merely because it originates with another MSO\'s affiliate
rather than with an independent.

The only justification that the FCC offers in support of its collusion
hypothesis is the economic commonplace that, all other things being
equal, collusion is less likely when there are more firms. See Third
Report 14 F.C.C.R. at 19118-19 p 51. This observation will always be
true, although marginally less so for each additional firm; but by
itself it lends no insight into the question of what the appropriate
horizontal limit is. Turner I demands that the FCC do more than \"simply
\'posit the existence of the disease sought to be cured.\' \" Turner I,
512 U.S. at 664 (quoting Quincy Cable TV, Inc. v. Federal Communications
Commission, 768 F.2d 1434, 1455 (D.C. Cir. 1985). It requires that the
FCC draw \"reasonable inferences based on substantial evidence.\" Turner
I, 512 U.S. at 666. Substantial evidence does not require a complete
factual record\--we must give appropriate deference to predictive
judgments that necessarily involve the expertise and experience of the
agency. See Turner II 520 U.S. at 196, citing Federal Communications
Commission v. National Citizens Comm. For Broadcasting, 436 U.S. 775,
814 (1978). But the FCC has put forth no evidence at all that indicates
the prospects for collusion.

That having been said, we do not foreclose the possibility that there
are theories of anti-competitive behavior other than collusion that may
be relevant to the horizontal limit and on which the FCC may be able to
rely on remand. See 47 U.S.C. § 533(f)(1). Indeed, Congress considered,
among other things, the ability of MSOs dominant in specific cable
markets to extort equity from programmers or force exclusive contracts
on them. See 1992 Cable Act § 2(a)(4)-(5), 106 Stat. at 1460-61; Senate
Report at 3, 14, 23-29, 32-34, reprinted in 1991 U.S.C.C.A.N. at 1135,
1146-47, 1156-62, 1165-67; House Report at 40-43. A single MSO, acting
alone rather than \"jointly,\" might perhaps be able to do so while
serving somewhat less than the 60% of the market (i.e., less than the
fraction that would allow it unilaterally to lock out a new cable
programmer) despite the existence of antitrust laws and specific
behavioral prohibitions enacted as part of the 1992 Cable Act, see 47
U.S.C. § 536, and the risk might justify a prophylactic limit under the
statute. See Time Warner I, 211 F.3d at 1322-23. So the absence of any
showing of a serious risk of collusion does not necessarily preclude a
finding of a sufficient governmental interest in preventing unfair
competition. (We express no opinion on whether exploitation of a
monopoly position in a specific cable market to extract rents that would
otherwise flow to programmers alone gives rise to an \"important
governmental interest\" justifying a burden on speech.) But the FCC made
no attempt to justify its regulation on these grounds.

We pause here to address an aspect of petitioners\' statutory challenge
that is relevant to a showing of non-conjectural harm. Congress required
that in setting the horizontal limit, the FCC \"take particular account
of the market structure \... including the nature and market power of
the local franchise.\" 47 U.S.C. § 533(f)(2)(C). Petitioners assert that
the Commission\'s failure to take adequate account of the competitive
pressures brought by the availability and increasing success of DBS make
the horizontal limit arbitrary and capricious. Although DBS accounts for
only 15.4% of current MVPD households, the annual increase in its total
subscribership is almost three times that of cable (nearly three million
additional subscribers over the period June 1999 to June 2000, as
against one million for cable). See Seventh Annual Report p p 6-8. To
the extent petitioners argue that the horizontal limit must fail because
market share does not equal market power, they misconstrue the statutory
command. The Commission is not required to design a limit that falls
solely on firms possessing market power.[^5] The provision is directed
to the Commission\'s intellectual process, and requires it, in
evaluating the harms posed by concentration and in setting the
subscriber limit, to assess the determinants of market power in the
cable industry and to draw a connection between market power and the
limit set.

It follows naturally from our earlier discussion that we do not believe
the Commission has satisfied this obligation. Having failed to identify
a non-conjectural harm, the Commission could not possibly have addressed
the connection between the harm and market power. But the assessment of
a real risk of anti-competitive behavior\--collusive or not\--is itself
dependent on an understanding of market power, and the Commission\'s
statements in the Third Report seem to ignore the true relevance of
competition. In changing the calculation of the horizontal limit to
reflect subscribers instead of homes at which a service is available,
for instance, the Commission wrote:

\[W\]hether subscribership or homes passed data is used is largely a
mechanical issue in terms of the market power issue As the market
develops in terms of competition we believe \... that an operator\'s
actual number of subscribers more uniformly and accurately reflects
power in the programming marketplace.

Third Report, 14 F.C.C.R. at 19108 p 22.

But normally a company\'s ability to exercise market power depends not
only on its share of the market, but also on the elasticities of supply
and demand, which in turn are determined by the availability of
competition. See AT&T Corp. v. Federal Communications Commission, 236
F.3d 729, 736 (D.C. Cir. 2001). If an MVPD refuses to offer new
programming, customers with access to an alternative MVPD may switch.
The FCC shows no reason why this logic does not apply to the cable
industry. Indeed, its most recent competition report suggests that it
does. According to the Commission, \"several very small and rural cable
systems have used a variety of schemes to add digital channels, expand
their program offerings, and take preemptive action against aggressive
DBS marketing.\" Seventh Annual Report p 67.

Given the substantial changes in the cable industry since publication of
the Third Report in 1999 and our reversal on other grounds, there is
little point in our reviewing the Commission\'s assessment of
then-existing market power of cable MVPDs. But whatever conclusions are
to be drawn from the new data, it seems clear that in revisiting the
horizontal rules the Commission will have to take account of the impact
of DBS on that market power. Already when the Third Report was written,
DBS could be considered to \"pass every home in the country.\" Third
Report, 14 F.C.C.R. at 19107-08 p 20. The technological and regulatory
changes since then appear only to strengthen petitioners\' contention.
See Seventh Annual Report p p 60-82, 140.

With the risk of collusion inadequately substantiated to support the 30%
limit and no attempt to find other anticompetitive behavior, there
remains the Commission\'s alternative ground\--that programming choices
made \"unilaterally\" by multiple cable companies, Third Report, 14
F.C.C.R. at 19118-19 p 51; see also id. at 19119 p 53
(\"individually\"), might reduce a programmer\'s \"open field\" below
the 40% benchmark. The only support the Commission offered for
regulation based on this possibility was the idea that every additional
chance for a programmer to secure access would enhance diversity:

\[T\]he 30% limit serves the salutary purpose of ensuring that there
will be at least 4 MSOs in the marketplace. The rule thus maximizes the
potential number of MSOs that will purchase programming. With more MSOs
making purchasing decisions, this increases the likelihood that the MSOs
will make different programming choices and a greater variety of media
voices will therefore be available to the public.

Id. p 54. Petitioners challenge the FCC\'s authority to regulate for
this purpose on both constitutional and statutory grounds.

We have some concern how far such a theory may be pressed against First
Amendment norms. Everything else being equal, each additional \"voice\"
may be said to enhance diversity. And in this special context, every
additional splintering of the cable industry increases the number of
combinations of companies whose acceptance would in the aggregate lay
the foundations for a programmer\'s viability. But at some point,
surely, the marginal value of such an increment in \"diversity\" would
not qualify as an \"important\" governmental interest. Is moving from
100 possible combinations to 101 \"important\"? It is not clear to us
how a court could determine the point where gaining such an increment is
no longer important. And it would be odd to discover that although a
newspaper that is the only general daily in a metropolitan area cannot
be subjected to a right of reply, see Miami Herald Publishing Co. v.
Tornillo, 418 U.S. 241 (1974), it could in the name of diversity be
forced to self-divide. Certainly the Supreme Court has not gone so far.

We need not face that issue, however, because we conclude that Congress
has not given the Commission authority to impose, solely on the basis of
the \"diversity\" precept, a limit that does more than guarantee a
programmer two possible outlets (each of them a market adequate for
viability). We analyze the agency action under the familiar framework of
Chevron USA, Inc. v. National Resources Defense Council, Inc., 467 U.S.
837 (1984). If we find (using traditional tools of statutory
interpretation) that Congress has resolved the question, that is the end
of the matter. FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120,
132 (2000); National Resources Defense Council, Inc. v. Browner, 57 F.3d
1122, 1125 (D.C. Cir. 1995). We must place the statutory language in
context and \"interpret the statute \'as a symmetrical and coherent
regulatory scheme.\' \" Brown & Williamson, 529 U.S. at 133.

We begin with the statutory language. The relevant section requires the
FCC to

ensure that no cable operator or group of cable operators can unfairly
impede, either because of the size of any individual operator or because
of joint actions by a group of operators of sufficient size, the flow of
video programming from the video programmer to the consumer.

47 U.S.C. § 533(f)(2)(A).

The language addresses only \"unfair\[ \]\" impediments to the flow of
programming. The word \"unfair\" is of course extremely vague.
Certainly, the action of several firms that is \"joint,\" in the sense
of collusive, may often entail unfairness of a conventional sort. The
statute goes further, plainly treating exercise of editorial discretion
by a single cable operator as \"unfair\" simply because that operator is
the only game in town. (And Time Warner I authoritatively determines
that the government is constitutionally entitled to impose limits solely
on that ground.) But we cannot see how the word unfair could plausibly
apply to the legitimate, independent editorial choices of multiple MSOs.
A broad interpretation is plausible only for actions that impinge at
least to some degree on the interest in competition that lay at the
heart of Congress\'s concern.[^6] The Commission\'s reading of the
clause effectively deletes the word \"joint\" and opens the door to
illimitable restrictions in the name of diversity.

Looking at the statute as a whole does little to support the FCC\'s
position. The \"interrelated interests\" of promoting diversity and fair
competition run throughout the 1992 Cable Act\'s various provisions.
Turner II, 520 U.S. at 189.[^7] But despite the duality of interests at
work in this section, see Time Warner I, 211 F.3d at 1319, it is clear
from the structure of the statute that Congress\'s primary concern in
authorizing ownership limits is \"fair\" competition. The statute
specifies, after all, that these regulations are to be promulgated
\"\[i\]n order to enhance effective competition.\" 47 U.S.C. § 533
(f)(1). In only two of the other sections of the 1992 Cable Act does
Congress specify a dominant purpose.[^8] This statement of purpose
supports a reading that sharply confines the authority to regulate
solely in the interest of diversity.

The FCC points to the statutory findings that the \"cable industry has
become highly concentrated\" and that \"the potential effects of such
concentration are barriers to entry for new programmers and a reduction
in the number of media voices available to consumers.\" Third Report, 14
F.C.C.R. at 19118-19 p 51, 1992 Cable Act § 2(a)(4), 106 Stat. at 1460.
But reference to a congressional finding cannot overcome the clear
language and purpose of the actual provision. The quoted finding stands
as little more than support for the proposition that Congress was
concerned with the possibilities for market failure and the possible
impact on new programmers. The legislative history also offers little.
Again, the fact that Congress\'s interest in anti-competitive behavior
may have been animated by an interest in preserving diversity doesn\'t
give the FCC carte blanche to cobble cable operators in the name of the
latter value alone. After all, Congress also sought to \"ensure that
cable operators continue to expand, where economically justified, their
capacity,\" 1992 Cable Act § 2(b)(3), 106 Stat. at 1463, and it
specifically directed the FCC, in setting the ownership limit, to take
into account the \"efficiencies and other benefits that might be gained
through increased ownership or control.\" 47 U.S.C. § 533(f)(2)(D).

On the record before us, we conclude that the 30% horizontal limit is in
excess of statutory authority. While a 60% limit might be appropriate as
necessary to ensure that programmers had an adequate \"open field\" even
in the face of rejection by the largest company, the present record
supports no more. In addition, the statute allows the Commission to act
prophylactically against the risk of \"unfair\" conduct by cable
operators that might unduly impede the flow of programming, either by
the \"joint\" actions of two or more companies or the independent action
of a single company of sufficient size. But the Commission has pointed
to nothing in the record supporting a non-conjectural risk of
anti-competitive behavior, either by collusion or other means.
Accordingly, we reverse and remand with respect to the 30% rule.

\* \* \*

The FCC presents its 40% vertical limit as advancing the same interests
invoked in support of its statutory authority to adopt the rule:
diversity in programming and fair competition. As with the horizontal
rules the FCC must defend the rules themselves under intermediate
scrutiny and justify its chosen limit as not burdening substantially
more speech than necessary. Far from satisfying this test, the FCC seems
to have plucked the 40% limit out of thin air.

The FCC relies almost exclusively on the congressional findings that
vertical integration in the cable industry could \"make it difficult for
non-cable affiliated \... programmers to secure carriage on vertically
integrated cables systems\" and that \"vertically integrated program
suppliers have the incentive and the ability to favor their affiliated
cable operators \... and program distributors.\" Second Report, 8
F.C.C.R. at 8583 p 41 (citing 1992 Cable Act § 2(a)(5), 106 Stat. at
1460). Regulatory limits in response to these consequences would
\"increase the diversity of voices available to the public.\" Second
Report, 8 F.C.C.R. at 8583-84 p 42 (citing Senate Report at 80,
reprinted in 1991 U.S.C.C.A.N. at 1213). In Time Warner I we thought
these findings strong enough to overcome the First Amendment challenge
to the relevant provision of the 1992 Cable Act. In doing so, we held
that such a prophylactic rule was not \"rendered unnecessary merely
because preexisting statutes \[such as the antitrust laws and the
antidiscrimination provisions of the 1992 Cable Act\] impose behavioral
norms.\" Time Warner I, 211 F.3d at 1322-23. Beyond that we did not
assess the appropriateness of the burden on speech. We upheld no
specific vertical limit\--none was before us.

We recognize that in drawing a numerical line an agency will ultimately
indulge in some inescapable residue of arbitrariness; even if 40% is a
highly justifiable pick, no one could expect the Commission to show why
it was materially better than 39% or 41%. See Missouri Public Service
Comm\'n v. FERC, 215 F.3d 1, 5 (D.C. Cir. 2000). But to pass even the
arbitrary and capricious standard, the agency must at least reveal \"
\'a rational connection between the facts found and the choice made.\'
\" Dickson v. Secretary of Defense, 68 F.3d 1396, 1404-05 (D.C. Cir.
1995) (quoting Motor Vehicle Mfrs. Ass\'n v. State Farm Mut. Auto. Ins.
Co., 463 U.S. 29, 43 (1983). Here the FCC must also meet First Amendment
intermediate scrutiny. Yet it appears to provide nothing but the
conclusion that \"we believe that a 40% limit is appropriate to balance
the goals.\" See Second Report, 8 F.C.C.R. at 8593-95 p 68. What are the
conditions that make 50% too high and 30% too low? How great is the risk
presented by current market conditions? These questions are left
unanswered by the Commission\'s discussion.

The FCC argued before us that no MSO has yet complained that the 40%
vertical limit has required it to alter programming. This is no answer
at all, as it says nothing about plans that the rule may have scuttled.
Petitioners responded that their subsidiaries frequently must juggle
their channel lineups to stay within the cap. Furthermore, it appears
uncontested that AT&T\'s merger with MediaOne brings the vertical limits
into play. See In the Matter of Applications for Consent to the Transfer
of Control of Licenses and Section 214 Authorizations from MediaOne
Group, Inc. to AT&T Corporation, 15 F.C.C.R. 9816 (2000).

In fairness, the FCC does make an attempt to review some relevant
conditions. See Second Report, 8 F.C.C.R. at 8583-85 p p 41-45. The FCC
cites the House Report\'s conclusion that \"some\" vertically integrated
MSOs favor their affiliates and \"may\" discriminate against others. Id.
at 8583-84 p 42 (citing House Report at 43). But it also notes a report
that none of the top five MSOs \"showed a pattern\" of favoring their
affiliates. Id. at 8584 p 43. Indeed, the FCC concludes that \"vertical
relationships had increased both the quality and quantity of cable
programming services.\" Id. p 44. But still it settled on a limit of
40%. There is no effort to link the numerical limits to the benefits and
detriments depicted. Further, given the pursuit of diversity, one might
expect some inquiry into whether innovative independent originators of
programming find greater success selling to affiliated or to
unaffiliated programming firms, but there is none.

Quite apart from the numerical limit vel non, petitioners attack the
Commission\'s refusal to exclude from the vertical limit cable operators
that are subject to effective competition. The FCC had proposed
exempting cable operators who met the definition of effective
competition provided by § 623 of the Communications Act of 1934. See
Implementation of Sections 11 and 13 of the Cable Television Consumer
Protection and Competition Act of 1992, 8 F.C.C.R. 6828, 6862 p 231
(1993) (\"First Report\"); see also 47 U.S.C. § 543(l )(1) (defining the
categories of cable operators that are not subject to rate regulation
under that section).[^9] Of course our decision in Time Warner I
acknowledged the existence of incentives to use affiliated programming.
211 F.3d at 1322. For example, even where an unaffiliated supplier
offered a better cost-quality trade-off, a company might be reluctant to
ditch or curtail an inefficient in-house operation because of the impact
on firm executives or other employees, or the resulting spotlight on
management\'s earlier judgment. But petitioners argue, quite plausibly,
that exposure to competition will have an impact on a cable company\'s
ability to indulge in favoritism for in-house productions. After all,
while reliance on in-house suppliers offering an inferior price-quality
trade-off will reduce a monopolist\'s profits, it may threaten a
competitive firm\'s very survival. This analysis is not foreign to the
Commission, which endorsed it when proposing the exemption:

We believe that this proposal is appropriate since effective competition
will preclude cable operators from exercising the market power which
originally justified channel occupancy limits. Where systems face
effective competition, their incentive to favor an affiliated programmer
will be replaced by the incentive to provide programming that is most
valued by subscribers.

First Report, 8 F.C.C.R. at 6862 p 231.

The FCC makes two arguments to justify its refusal to exempt MVPDs that
are subject to effective competition. First, it says that the definition
of competition provided by 47 U.S.C. § 543 was \"not adopted for this
specific purpose\" but rather for relief from rate regulation. See
Reconsideration Order 10 F.C.C.R. at 7379 p 47. Indeed, we have
recognized that one of the ways in which the statutory standard is met
may be surprisingly defective as a mark of real competition. See Time
Warner Entertainment Co., L.P. v. Federal Communications Commission, 56
F.3d 151, 166 (D.C. Cir. 1995) (MVPDs satisfying subsection (A) of 47
U.S.C. § 543(l )(1) (low penetration) may do so more as a result of
geography than competition). But the Commission is free to carve out
subsections that are truly pertinent to competition, as it had proposed.
See First Report, 8 F.C.C.R. at 8662-63 p 232; Second Report, 8 F.C.C.R.
at 8602 p 85.

Of course competition that is adequate to justify dispensing with rate
regulation could still leave an undue likelihood of improper favoritism
for affiliated programmers. But the possible failure of readily
available criteria does not itself justify the use of so blunt a blade.
Congress expressly directed the Commission to take \"particular account
of the market structure\..., including the nature and market power of
the local franchise.\" 47 U.S.C. § 533(f)(2)(C) (emphasis added).
Because competition raises the stakes for a firm that sacrifices the
optimal price-quality trade-off in its acquisition of programming, the
issue seems to trigger the legislative directive. Yet the Commission
seems to ignore its own conclusions about cable companies\' incentives
and constraints, and the dynamics of the programming industry. See First
Report, 8 F.C.C.R. at 6862 p 231. If the criteria of § 543(l )(1) are
unsuitable, the Commission can consider concepts of effective
competition that it finds more apt for these purposes.

Second, the FCC comments that if a competing MVPD favored its own
affiliated programmers, the presence of competition would have no
tendency to create room for independent programmers. See Reconsideration
Order 10 F.C.C.R at 7379 p 47. But this theory seems contradicted by the
Commission\'s own observation, mentioned earlier, that no vertically
integrated MPVD has complained of reaching the 40% limit. Vertically
integrated MVPDs evidently use loads of independent programming.
Further, although cable operators continue to expand their interests in
programmers, \"\[t\]he proportion of vertically integrated channels \...
continue\[d\] to decline\" for each of the last two years. Sixth Annual
Report, 15 F.C.C.R. at 1058-59 p 181, Seventh Annual Report p 173
(emphasis added). Even if competing MSOs filled all of their channels
with affiliates\' products (as unlikely as that seems), the Commission
nowhere explains why, in the pursuit of diversity, the independence of
competing vertically integrated MVPDs is inferior to the independence of
unaffiliated programmers. In any event, the Commission\'s point here
does not respond to the intuition that competition spurs a firm\'s
search for the best price-quality trade-off.

In its brief the Commission adds the argument that truly effective
competition under § 543(l )(1) existed only for a tiny fraction of cable
systems. Indeed, it said in its Sixth Annual Report that of the
nation\'s 33,000 cable community units, only 157 satisfy the definition
through being in a market offering more than one wireline MVPD. Sixth
Annual Report, 15 F.C.C.R. at 1045-46 p 142. (In the Seventh Annual
Report we learn that now 330, or 1% of the total, meet the competition
standard through exposure to another MVPD; in this report the qualifier
\"wireline\" is absent. See Seventh Annual Report p 138.) But in
determining whether or not the regulations burden substantially more
speech than necessary, it is a weak move to point to the paucity of
MVPDs facing competition if, as seems the case, it is easy to exempt
them from the limit.

We find that the FCC has failed to justify its vertical limit as not
burdening substantially more speech than necessary. Accordingly, we
reverse and remand to the FCC for further consideration.

\* \* \*

We turn, finally, to several aspects of the rules for attributing
ownership for purposes of the horizontal and vertical limits, recently
revised by the FCC and challenged by petitioners. See Implementation of
the Cable Television Consumer Protection and Competition Act of 1992, 14
F.C.C.R. 19014 (1999) (\"Attribution Order\"). Petitioners suggest that
these rules affect their ability to \"speak\" to subscribers because of
their connection to the horizontal and vertical limits. But
petitioners\' speech rights are implicated only where their interest
allows them to exercise editorial control, in which case attribution
would be proper and it is the horizontal or vertical limit that
constrains speech. The only effect of the attribution rules where no
control is exercised is to limit the extent of petitioners\' investments
in a particular class of companies. We therefore review the agency
actions under the APA standards, to determine whether they are
\"arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with law.\" See 5 U.S.C. § 706(2)(A).

The FCC adopted as its starting point the pre-existing rules for
attributing ownership of broadcast television stations, finding that the
purposes of the rules are the same. See Attribution Order, 14 F.C.C.R.
at 19030 p 35; Second Report 8 F.C.C.R. at 8577-79, 8593-96 p p 30-35,
56-63. Under that standard, attribution is triggered by ownership of 5%
of the voting shares of a company, with various exceptions. See
Attribution of Ownership Interests, 97 FCC 2d 997 (1984). Because the
decisions in the Attribution Order tracked, to a large degree, similar
decisions related to the broadcast attribution rules, the FCC
incorporated by reference much of the reasoning from the broadcast
orders. See Attribution Order, 14 F.C.C.R. at 19015-16 p 1.

Petitioners challenge the sufficiency and relevance of the Commission\'s
evidence in support of the 5% attribution rule and its failure to adopt
an alternative proposed by cable industry interests. They begin by
asserting that the FCC improperly relied on two studies that were
mentioned neither in the FCC\'s notice nor in any party\'s submission.
See Notice of Proposed Rulemaking, 13 F.C.C.R. 12990 (1998). Although it
is true that an agency cannot rest a rule on data \" \'that, \[in\]
critical degree, is known only to the agency,\' \" Community Nutrition
Institute v. Block, 749 F.2d 50, 57 (D.C. Cir. 1984) (quoting Portland
Cement Ass\'n v. Ruckelshaus, 486 F.2d 375, 393 (D.C. Cir. 1973); see
also International Union, UAW v. OSHA, 938 F.2d 1310, 1324-35 (D.C. Cir.
1991) (approving reliance on documents not exposed to comment if not
\"vital\" to agency\'s support for rule), obviously not every cited
document is \"critical.\"

Here, although petitioners assert that the studies were the sole
evidence cited by the FCC, the Commission also relied on a survey, used
to support the 1984 broadcast attribution rules, showing that in widely
held corporations, an owner of 5% or more would ordinarily be one of the
two or three largest shareholders. See Attribution Order, 14 F.C.C.R. at
19034 p 46; Block, 749 F.2d at 58 (1984) (new information \"expanded on
and confirmed information\"). The earlier rulemaking had inferred that
with such ownership a holder of 5% or more would be able \"to
potentially affect the outcome of elective or discretionary decisions
and to command the attention of management.\" Attribution of Ownership
Interests, 97 FCC 2d at 1005-06 p 14. This hardly seems implausible.
Presumably an owner of 5% or more typically has enough of an interest to
justify the burden of informing himself about the company\'s activities
and trying to influence (or supplant) management, a fact that management
would bear in mind in deciding to whose exhortations it should pay
attention. Petitioners have not pointed to any evidence suggesting that
the FCC\'s survey is no longer accurate, or that the conclusion they
draw from it has been undermined.

Furthermore, in attacking the relevance of the new studies, the
petitioners fail to acknowledge that the FCC sought a rule that would
capture \"influence or control,\" not just control. Attribution Order,
14 F.C.C.R. at 19015-16 p 1 (emphasis added). The Commission
specifically noted that a \"firm does not need actual operational
control over \... a company in order to exert influence.\" Id. at
19030-31 p 36. This distinction also tends to rebut petitioners\'
critique of the Commission\'s reliance on the Securities and Exchange
Commission\'s requirement that investors report to the SEC when their
holdings exceed 5% of any class of a firm\'s shares. See 15 U.S.C. §
78m(d)(1). The FCC noted that the purpose of the SEC\'s requirement was
to alert investors to potential changes in control, and reasoned that
this was similar to its own purpose in the attribution rules,
encompassing not merely control but influence. See Attribution Order, 14
F.C.C.R. at 19035 p 49 (citing Securities and Exchange Comm\'n v. Savoy
Indus., Inc., 587 F.2d 1149 (D.C. Cir. 1978)).

Finally, petitioners contend that it was arbitrary for the FCC to reject
a \"control certification\" approach, such as it adopted for
partnerships, under which a partner can avoid attribution if (but only
if) it certifies to the absence of certain relationships that might
betoken control. In this argument, petitioners make a classic
apples-and-oranges mix, since the bases that they proposed for
self-certification, see Attribution Order at 19024 p 22, are quite
different from those adopted by the Commission for partnerships, see id.
at 19038 p 57 n.163. Even if corporations and partnerships were
virtually identical, the Commission would hardly be guilty of
self-contradiction if it rejected certification scheme A for
corporations and accepted certification scheme B for partnerships. In
any event, for corporations the Commission rejected a case-by-case
approach on conventional grounds, observing that a bright-line rule was
to be preferred because it \"reduces regulatory costs, provides
regulatory certainty, and permits planning of financial transactions.\"
Id. at 19035 p 48; see also id. at 19031 p 38. Given an agency\'s very
broad discretion whether to proceed by way of adjudication or
rulemaking, see N.L.R.B. v. Bell Aerospace Co., 416 U.S. 267, 294
(1974), and the reasonableness of the 5% criterion, we doubt there was
need to explain further. The Commission did, however, observe that the
certification proposals offered did \"not take into account the variety
of ways that an investor may exert influence or control over a
company.\" Id. at 19030-31 p 36. And it implicitly distinguished its
treatment of partnerships when it said that a limited partner\'s
influence may not be proportional to equity interest \"because the
extent of its power may be modified by contract.\" Id. at 19039 p 61.
Indeed, the Commission\'s certification rules for partnerships require
voting restrictions that would not normally, and perhaps could not, be
paralleled in the corporate world (such as abnegation of any power to
remove the general partner except under extremely limited circumstances,
see id. at 19038 p 57 n.163). We find the Commission\'s discussion
adequate.

We also uphold the FCC\'s adoption of an \"equity-and-debt\" rule to
capture \"nonattributable investments that could carry the potential for
influence.\" Id. at 19047 p 83. The rule triggers attribution \"to an
investor that holds an interest that exceeds 33% of the total asset
value (equity plus debt) of the applicable entity.\" Id. at 19046-47 p
82.[^10] Petitioners attack the sufficiency of evidence to support both
the rule itself and the selection of 33% as limit. They observe in
particular that the Commission\'s own claims seem to depend on
combinations of debt and equity with contractual rights. See, e.g., id.
at 19047 p 83. But the Commission explicitly relied on an earlier
rulemaking, see, e.g., id. at 19047 p 83, citing Review of the
Commission\'s Regulations Governing Attribution of Broadcast and
Cable/MDS Interests, 14 F.C.C.R. 12559 (1999) (\"Broadcast Attribution
Order\"), which in turn relied on academic literature, see id. at 12589
p 62 nn.132, 134. Petitioners offer no critique of that literature\'s
relevance, and it is not our role to launch one on our own. So we must
accept the Commission\'s basic finding.

Although petitioners independently attack the Commission\'s selection of
33% as the debt-and-equity limit, we are constrained in our review by
the sketchy character of their attack on the basic theory. The
Commission\'s choice of 33% certainly has modest support. It recited the
numbers offered by various parties, which ranged from 10% to 50%, in
some cases with variations dependent on the presence of special contract
provisions. Attribution Order, 14 F.C.C.R. at 19048-49 p p 85-86.
Obviously 33% is not far off the median, but, as the Commission says
nothing to evaluate the numbers recited, that tells us little.

The Commission also cited its own past decisions, saying that it had
used the same percentage for the parallel rule in its broadcast
cross-interest policy, and that there it \"does not appear to have had a
disruptive effect,\" id. at 19048-49 p 86, though without indicating
what (if any) assessment it had made. And it referred to two prior
adjudications. Id. (citing Cleveland Television Corp., 91 FCC 2d 1129
(Rev. Bd. 1982), aff\'d, Cleveland Television Corp. v. Federal
Communications Commission, 732 F.2d 962 (D.C. Cir. 1984), and Roy M.
Speer, 11 F.C.C.R. 18393 (1996)). In Cleveland Television it had simply
held that a one-third preferred stock interest conferred \"
\'insufficient incidents of contingent control\' \" under various
policies, Attribution Order, 14 F.C.C.R. at 19048-49 p 86 (emphasis
added). In Roy M. Spear, it relied on Cleveland Television to impose a
33% ownership on a creditor\'s purchase option, but deferred
establishment of any general rule. See 11 F.C.C.R. 18393 p 126 n.26.
These prior adjudications provide thin affirmative support for the
choice of 33%, though they at least suggest that the Commission has not
indulged in self-contradiction. But given the absence of a real probe of
the Commission\'s underlying reasoning for having the restriction at
all, the inevitable difficulty in picking such a number, and the
deference due the Commission, we cannot find the choice of 33%
arbitrary. See Cassell v. Federal Communications Commission, 154 F.3d
478, 485 (D.C. Cir. 1998).

Petitioners also challenge the Commission\'s elimination of an exemption
that prevailed in the broadcast attribution rules at the time the cable
attribution rules were promulgated. In the broadcast context, an
otherwise covered minority shareholder in a company with a single
majority shareholder was exempted, on the principle that in such a case
the minority shareholder would ordinarily not be able to direct the
activities of the company.[^11] See Attribution of Ownership Interests,
97 FCC 2d at 1008-09 p 21; Attribution Order, 14 F.C.C.R. at 19044-46 p
p 74-81. There were contentions in the Broadcast Attribution Order
proceeding that the majority shareholder exemption was being used
evasively. See 14 F.C.C.R. at 12574-75 p 29. The Commission neither
rejected nor accepted these claims, but retained the exemption. See id.
at p 36. In dispatching the exemption here, the Commission cited only
its concern that a minority shareholder might be able to exercise
influence even in these circumstances, the \"lack of a record \... that
the exemption should be retained,\" and the fact that no one claimed to
be using the exemption. Attribution Order, 14 F.C.C.R. at 19046 p 81.

The Commission argues here that petitioners lack standing because they
have not shown that they are using the exemption. Again, the FCC
disregards the impact the rule can have on investment plans. Petitioners
say that they are continually reviewing investment opportunities and
that they are constrained by the absence of the single majority
exemption. See supra p. 20. This is an actual \"injury in fact\" that is
\"fairly traceable\" to the administrative action. See Lujan v.
Defenders of Wildlife, 504 U.S. 555, 561 (1992); see also Committee for
Effective Cellular Rules v. Federal Communications Commission, 53 F.3d
1309, 1315-16 (D.C. Cir. 1995). And of course the absence of current use
is no reason to delete an exemption. Removal of the exemption is a
tightening of the regulatory screws, if perhaps a minor one. It requires
some affirmative justification, cf. State Farm, 463 U.S. at 41-42
(requiring justification for removal of a restriction), yet the
Commission effectively offers none. Its \"concern\" about the
possibility of influence would be a basis, if supported by some finding
grounded in experience or reason, but the Commission made no finding at
all. Accordingly, deletion of the exemption cannot stand.

Finally, petitioners object to one of the seven criteria that a cable
operator must satisfy in order to be exempt from attribution of limited
partnership. The general rule is that any partnership interest, no
matter how small, leads to attribution, Attribution Order, 14 F.C.C.R.
at 19039-40 p 61, but a limited partner can secure exemption if it
certifies compliance with certain criteria intended to ensure that the
partner \"will not be materially involved in the media management and
operations of the partnership.\" Id. The Commission interprets one of
these criteria to bar exemption when a limited partner that is a
vertically integrated MSO also sells programming to the partnership. See
id. at 19055 p 106. This criterion applies even though the limited
partner, to achieve exemption, must have certified that it does not
\"communicate with the licensee or general partners on matters
pertaining to the day-to-day operations of its video-programming
business.\" Id. at 19040-41 p 64.

We agree with petitioners that the no-sale criterion bears no rational
relation to the goal, as the Commission has drawn no connection between
the sale of programming and the ability of a limited partner to control
programming choices. Of course a programmer might secure contract terms
giving it some control over a partnership\'s programming choices, but,
given the independent criterion barring even communications on the
video-programming business, see Attribution Order, 14 F.C.C.R. at
19040-41 p 64, exercise of that power would seem to be barred. Even if
it weren\'t, the bargaining opportunity would depend on the desirability
of the partner\'s programming, not on its status as a partner. The FCC
does not even offer a hypothetical to the contrary.

\* \* \*

To summarize, we reverse and remand the horizontal and vertical limits,
including the refusal to exempt cable operators subject to effective
competition from the vertical limits, for further proceedings. We also
reverse and remand the elimination of the majority shareholder exception
and the prohibition on sale of programming by an insulated limited
partner. We uphold the basic 5% attribution rule and the creation of a
33% equity-and-debt rule.

So ordered.

[^1]: The cross-appeals of the government and the cable firms from the
    district court\'s decision in Daniels were originally consolidated
    with the cable firms\' petitions for review of earlier iterations of
    the implementing regulations. See Time Warner I, 211 F.3d at
    1315-16. After a date for oral argument was set, the FCC initiated a
    new rulemaking as part of its planned quinquennial review of the
    horizontal regulations. We therefore severed the Daniels appeals
    from the challenges to the regulations, holding the latter in
    abeyance until the completion of the new rulemaking. See id. The
    challenge to the new horizontal rules has supplanted that portion of
    the earlier challenges.

[^2]: DBS \"is a nationally distributed subscription video service that
    delivers programming via satellite to a small parabolic \'dish\'
    antenna located at the viewer\'s home.\" Annual Assessment of the
    Status of Competition in the Market for the Delivery of Video
    Programming, Seventh Annual Report, CS Docket No. 00-132, FCC 01-01
    (rel. Jan. 8, 2001) p 71 (2000) (\"Seventh Annual Report\").

[^3]: 30% of roughly 80 million MVPD subscribers would be about 24
    million subscribers, which in turn would be 36.69% of roughly 66
    million cable subscribers. Under the Commissions most recent
    subscriber estimates, this provision would allow an MSO to serve
    37.4% of cable subscribers, or approximately 1.1 million more
    customers than when the Third Report was written. See Seventh Annual
    Report at p p 6-7.

[^4]: \"Clustering\" refers to the strategy under which MSOs concentrate
    their operations within a particular geographic region, giving up
    scattered holdings around the country. The benefits are thought to
    be in achieving economies of both scale and scope, allowing MSOs to
    spread fixed investment costs over a larger customer base and to
    better compete with telephone companies owning local loops that are
    actual or potential substitutes. See Seventh Report p p 152-53.

[^5]: Contrast Congress\'s requirement that the FCC \"make such rules
    and regulations reflect the dynamic nature of the communications
    marketplace.\" 47 U.S.C. § 533(f)(2)(E) (emphasis added).

[^6]: The Commission\'s economic theory\--that cable operators have an
    incentive to contract with the same programmers in order to lower
    the programmers\' average costs (see discussion in the collu sion
    context, supra p. 11)\--would seem to apply regardless of any
    horizontal limit. Putting various special cases aside, any
    profit-maximizing firm will have an incentive to lower its costs. In
    a market where a cable operator is a monopolist, the resulting
    benefit to the firm would be classified as monopoly rents. In a
    market where an operator is in competition, it can be expected to
    pass the benefits on to its customers. But the FCC has not shown why
    such pursuit of lower costs, by the monopolist or the competitive
    firm, is by itself \"unfair,\" and the statute allows for regulation
    only if unfairness can be shown.

[^7]: The 1992 Cable Act is a wide-ranging statute that includes,
    besides the ownership limits, must-carry and leased-access
    requirements, rate regulation, behavioral prohibitions, and privacy
    protections. See 1992 Cable Act, 106 Stat. 1460.

[^8]: The leased access provision was amended to add the words \"to
    promote competition in the delivery of diverse sources of video
    programming\" to the section\'s previously stated purpose of
    assuring \"that the widest possible diversity of information sources
    are made available.\" 1992 Cable Act § 9(a), 106 Stat. at 1484; 47
    U.S.C. § 532(a). The various behavioral rules designed to prevent
    cable operators from abusing their market power were passed for the
    stated purpose of promoting \"the public interest, convenience, and
    necessity by increasing competition and diversity in the
    multichannel video programming market.\" 1992 Cable Act § 19, 106
    Stat. at 1494; 47 U.S.C. § 547.

[^9]: The term \"effective competition\" means that\--

    \(A\) fewer than 30 percent of the households in the franchise area
    subscribe to the cable system;

    \(B\) the franchise area is\--

    \(i\) served by at least two unaffiliated multichannel video
    programming distributors each of which offers comparable video
    programming to at least 50 percent of the households in the
    franchise area; and

    \(ii\) the number of households subscribing to programming services
    offered by multichannel video programming distributors other than
    the largest multichannel video programming distributor exceeds 15
    percent of the households in the franchise area; or

    \(C\) a multichannel video programming distributor operated by the
    franchising authority for that franchise area offers video
    programming to at least 50 percent of the households in that
    franchise area; or

    \(D\) a local exchange carrier or its affiliate (or any multichannel
    video programming distributor using the facilities of such carrier
    or its affiliate) offers video programming services \... in the
    franchise area of an unaffiliated cable operator which is providing
    cable service in that franchise area, but only if the video
    programming services so offered in that area are comparable to the
    video programming services provided by the unaffiliated cable
    operator in that area.

    47 U.S.C. § 543(l )(1).

[^10]: The Commission often writes as if investors owned the assets of
    the companies in which they hold stock or bonds. See, e.g.,
    Attribution Order, 14 F.C.C.R. at 19047-48 p 84 n.230. No issue is
    made here of how its calculations are to be made, e.g., percentage
    of book value, percentage of market capitalization, or some other
    method, although the Commission has attempted \"clarification\" in
    the broadcast context by allowing applicants to choose their
    valuation method. See Review of the Commission\'s Regulations
    Governing Attribution of Broadcast and Cable/MDS Interest, MM Docket
    No. 94-150, FCC 00-438 (rel. Jan. 19, 2001) p p 26-28 (2001)
    (\"Attribution Clarification Order\").

[^11]: The FCC has since eliminated the single majority owner ex-emption
    in the broadcast rules to bring it into conformity with the cable
    rules. See Attribution Clarification Order at p p 41-44.