Opinion ID: 697242
Heading Depth: 4
Heading Rank: 2

Heading: Overbuild Data

Text: 37 The cable petitioners next challenge the FCC's decisions to: (1) give the greatest weight to the overbuild data; (2) adjust the overbuild differential from 13 percent to 16 percent; and (3) adjust the final competitive differential further from 16 percent to 17 percent. 38 The cable petitioners' statutory challenge to the Commission's decision to give the greatest weight to the overbuild data is based upon the same premise as its statutory challenge to the agency's decision to give little weight to the low penetration data, and therefore fails for the reasons discussed in the previous section. Therefore it remains for us to decide only whether the Commission's action was arbitrary and capricious. 39 The FCC reasoned that because overbuilds face actual head-to-head competition, they provide the most accurate data for the purpose of simulating competitive cable rates, Second Reconsideration, 9 F.C.C.R. at 4612, a proposition that seems at first glance to be nearly self-evident. The cable petitioners point out, however, that the competitive differential for overbuilt systems falls over time. That trend, they argue, suggests that newly overbuilt cable systems engage in price wars: Either the incumbent system charges below-cost rates designed to drive the entering competitor out of the market or the new entrant charges below-cost rates in order to greenmail the incumbent into offering to buy it out upon favorable terms. Accordingly, the companies suggest that the overbuild sample reflects artificially low rates and, correspondingly, an artificially large differential from non-competitive systems. 40 In the Second Reconsideration, 9 F.C.C.R. at 4163-64, the Commission offered its own hypothesis that the diminution in the competitive differential over time could be due to the emergence of parallel or coordinated pricing. Id. at 4163-64. According to that theory, competing cable companies learn over time how to collude in, or tacitly to coordinate, their pricing and therefore exercise greater market power than would be possible if they were truly competing. As the Commission suggested, this theory gains support from the fact that there are typically only two systems in any overbuilt area, which makes collusion or tacit coordination more plausible than it otherwise would be. Moreover, because information about rates is readily available and cable companies do not enter into long-term contracts with their subscribers, each duopolist would be able to detect and to retaliate against the other's slightest departure from the rate upon which the two had expressly or impliedly agreed. Id.; see also William J. Baumol & Alan S. Binder, Economics: Principles and Policy 599 (5th ed. 1991) (ability to offer secret discounts undermines ability of oligopoly to cartelize). The FCC's explanation therefore suggests that in light of the structure of the local cable market, it may be only in the early stages of direct head-to-head competition that overbuilt systems actually charge competitive rates. Although the Commission's explanation cannot be proven without additional data, and although [a] theory of ratemaking must be reasonable, explained, and supported, it is not subject to the same substantiation principle as the substantial evidence test applicable to factfinding. National Ass'n of Greeting Card Publishers v. United States, 607 F.2d 392, 401 (D.C.Cir.1979) (quoting Continental Airlines Inc. v. CAB, 551 F.2d 1293, 1301 (D.C.Cir.1977)). The Commission's theory is not so implausible that reliance upon it is unreasonable, especially when one considers that there is no evidence in the record, either anecdotal or analytical, to provide empirical support for the cable companies' price war hypothesis. Therefore we reject the cable petitioners' claim that the Commission's decision to rely primarily upon the overbuild data is arbitrary and capricious. 41 As mentioned above, the FCC adjusted the overbuild figure from 13 to 16 percent by factoring in the percentage overlap between each pair of overbuilt systems in that group. Second Reconsideration, 9 F.C.C.R. at 4162, 4284-85. The Commission hypothesized that not all overbuilds are equal because the intensity of the competition that an overbuilt system faces is likely to vary with the extent to which it actually overlaps with a competing system. Id. at 4284. That assumption seems completely reasonable, and the cable petitioners do not take issue with it as a theoretical matter. They argue, however, that the Commission unreasonably assumed that the intensity of competition is directly proportional to the percentage of overlap, and, where it lacked adequate data, unreasonably assumed that the percentage of overlap was the least possible given the percentage of the total franchise area covered by the respective systems. 42 With regard to the first objection, we simply note that the Commission's assumption of a linear relationship between the two variables certainly was reasonable, if only because it would have been virtually impossible to derive a more precise understanding of the relationship between the extent of overlap and the intensity of competition in the time available. See NARUC, 737 F.2d at 1124 (The scope of agency expertise is often pragmatically circumscribed ... by the need to respond to ... regulatory problems ... within a reasonable period of time). 43 As for the second objection, while it would have been possible to determine the actual amount of overlap between each pair of competing systems for which it did not already have that datum, the Commission's decision not to do so was a logical one; a new competitor, before attempting to compete head-to-head with the incumbent, typically will lay cable in areas of the franchise to which the existing cable system does not already provide service. Especially in light of the time constraint the Commission faced and the difficulty of gathering additional information, we see nothing unreasonable in its making that simplifying assumption. 44 The cable companies' challenge to the FCC's adjusting the overbuild differential of 16 percent to the final competitive differential of 17 percent fares no better. They argue that this adjustment is improperly based upon the Commission's assumption that parallel or coordinated pricing between overbuilt systems resulted in an artificially small overbuild differential. We have already held that the Commission's reliance upon the parallel or coordinated pricing theory is not arbitrary and capricious. Moreover, the Commission did not rely solely upon that theory in reaching its decision to adopt the 17 percent figure; in the Second Reconsideration, 9 F.C.C.R. at 4166, the Commission made it clear that it also relied upon the data for municipal systems (which indicated a much larger differential) and the availability of the cost-of-service ratemaking alternative for any system the rates of which would otherwise be unduly reduced. Cumulatively, those factors adequately support the Commission's decision to adjust the competitive differential upwards by the additional one percent. 45