Opinion ID: 697242
Heading Depth: 4
Heading Rank: 3

Heading: Large System Data

Text: 46 The cable petitioners note that when the rate data gathered by the Commission are divided between large and small systems, the line of demarcation being set at 5,000 subscribers, the competitive differential for large systems is statistically insignificant. Based upon that observation, they conclude that large systems that do not face effective competition (as defined in the Act) do not exercise market power (i.e., do not charge supracompetitive rates), and thus the Commission's decision to apply the 17 percent reduction of initial rates to large systems was arbitrary and capricious. When the cable petitioners made the same argument to the Commission they did not offer any explanation of why large systems that do not face effective competition either cannot or for some reason do not exercise market power to raise their rates. In their brief before this court, however, the cable companies suggest that large systems are generally located in areas that have more entertainment alternatives (e.g., broadcast television channels, video stores, cinemas, and live entertainment, including sporting events) and that these substitutes deprive the cable companies of market power. 47 The FCC responds to the cable companies' theory by noting that it has already analyzed one of those substitutes--additional broadcast television channels--and found no evidence that it limits the market power of cable companies. Although it is, of course, possible that the other proffered substitutes do limit cable's market power, the finding concerning broadcast television--which intuitively seems to be the closest substitute for cable television--takes much of the wind out of the cable petitioners' sails. 48 More important, however, the FCC's response when originally faced with the issue in the course of rulemaking demonstrates that its decision not to treat large systems differently was not arbitrary and capricious. Concerned that the cable companies' approach was statistically risky because it involved subdividing the already small sample of systems facing effective competition into still-smaller sub-samples, Second Reconsideration, 9 F.C.C.R. at 4160, the Commission analyzed the data for systems of all sizes in an effort to discern the relationship (if any) between system size and rates. Id. at 4159-4160, 4301-03. The results lent no support to the cable companies' contention that large systems without the constraint imposed by effective competition charge rates nearer to the competitive level than do small systems. Id. Moreover, the separate statistical analysis that the FCC did to take account of the percentage overlap between overbuilt systems--which, as we have seen, the Commission reasonably believes gives a more accurate measure of the competitiveness of a cable market--showed that the effect of system size on the competitive differential is not significant. Id. at 4159-60. In light of both the Commission's statistical analyses and the failure of the cable petitioners to provide any support (beyond the comparison of systems on either side of the 5,000 subscriber mark) for their new theory, we cannot conclude that the FCC was unjustified in applying the 17 percent competitive differential to both large and small systems. 49 d. Application of the 17 Percent Initial Rate Reduction to All Systems Not Facing Effective Competition 50 The cable petitioners (including Blade Communications) attack the 17 percent initial rate reduction as, in effect, too blunt an instrument. Specifically, they argue that it is arbitrary and capricious because it falls equally upon all regulated systems, without regard to whether and by how much a particular system's past rates exceeded the amount it would have charged had it been subject to effective competition. 51 To impose an across-the-board 17 percent rate reduction upon all regulated systems might indeed force an historically low-priced system to lower its rates below the competitive level, but that is not what the Commission has done here. Faced with the statutory command to avoid placing an undue administrative burden upon franchising authorities, cable operators, subscribers, and itself, 47 U.S.C. Sec. 543(b)(2)(A), and armed with express statutory permission to adopt formulas in order to meet this requirement, 47 U.S.C. Sec. 543(b)(2)(B), the Commission established not only the general 17 percent rule but also a number of important exceptions thereto. Specifically because it recognized the possibility that some low-priced systems may not have exercised significant market power to raise past rates, the Commission accorded those systems (as well as unaffiliated systems with 15,000 or fewer subscribers) transition relief from the 17 percent rule. Second Reconsideration, 9 F.C.C.R. at 4167-69, 4172-82. Low-priced systems--defined by the Commission as systems the rates of which would be below their revised benchmark rates if the full 17 percent reduction were imposed--are required to reduce their rates only to their revised benchmark level until the Commission completes an analysis (still on-going) of whether such systems face unusual demand, cost or other influences that would render the 17 percent reduction excessive. Id. at 4168-69, 4176-79. Presumably any system that kept rates near the competitive level, notwithstanding the absence of effective competition, did so not out of charity but because it faced an unusual [elasticity of] demand, meaning that consumers in its area were more inclined than consumers in the average market to forego subscribing to cable if rates were higher. We fully expect the Commission's current study to address the plight in which Blade claims to find itself. 52 Recognizing that the 17 percent reduction could be excessive for still other systems--those facing high costs rather than high elasticity of demand--the Commission also adopted the cost-of-service safety valve, whereby any system for which the 17 percent reduction would result in unreasonably low rates can instead opt to have its rates set on the basis of its individual costs. Second Reconsideration, 9 F.C.C.R. at 4195-97; Rate Order, 8 F.C.C.R. at 5797-5800. By thus establishing an easily applied general rule along with well-targeted exceptions, the FCC effectively balanced its twin responsibilities of ensuring reasonable rates and reducing administrative burdens. 53 In sum, Blade's concern with the plight of low-priced systems, though not fanciful, has been adequately addressed by the Commission. So too has the Commission addressed, via the cost-of-service safety-valve, the concerns of systems that face unusually high input costs. 1