Texas Coalition of Cities for Utility Issues v. Federal Communications Commission

United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS
March 27, 2003
FIFTH CIRCUIT
Charles R. Fulbruge III
____________ Clerk
No. 01-60804
____________

TEXAS COALITION OF CITIES FOR UTILITY ISSUES;
NATIONAL ASSOCIATION OF TELECOMMUNICATIONS
OFFICERS AND ADVISORS (NATOA),

Petitioners,

versus

FEDERAL COMMUNICATIONS COMMISSION; UNITED
STATES OF AMERICA,

Respondents.

Petition for Review of an Order of
the Federal Communications Commission

Before SMITH, BARKSDALE, and EMILIO M. GARZA, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

The Texas Coalition of Cities For Utility Issues (“TCCFUI”) and the National Association

of Telecommunications Officers and Advisors (“NATOA”) petition this Court for review of a final

order of the Federal Communications Commission (“FCC” or “Commission”). The contested order

determined that cable system operators were permitted, at any time, to pass through to cable

subscribers the full amount of the franchise fees imposed on operators by local franchising authorities
(“LFAs”) and to identify the amount passed through on subscribers’ bills. TCCFUI and NATOA,

on behalf of several intervenors,1 contend that, where the franchise fee is based on a percentage of

the operator’s gross revenue, only the portion of that fee attributable to revenue from subscribers may

be passed through to subscribers. They argue that the FCC’s order should be reversed because it

conflicts with 47 U.S.C. §§ 542 and 543. They also contend that the order is arbitrary and capricious

because it contravenes the FCC’s regulations, orders, and policies. Because the Commission has

acted within its broad discretion, we deny the petition for review.

I

“States and municipalities routinely charge a franchise fee for the right to operate a television

cable system within [their] jurisdiction.” City of Dallas v. FCC, 118 F.3d 393, 393 (5th Cir. 1997).

“[T]he term ‘franchise fee’ includes any tax, fee, or assessment of any kind imposed by a franchising

1
The intervenors aligned with petitioners are the City of Pasadena, California; the
Metropolitan Government of Nashville and Davidson County, Tennessee; the City of Albuquerque,
New Mexico; and the National League of Cities. In addition, several Ohio LFAs and organizations
representing their interests have filed an amicus brief in support of petitioners. Charter
Communications Entertainment II, L.L.C. (“Charter”) and the National Cable and
Telecommunications Association have intervened and filed a separate brief in support of the FCC’s
order. To the extent that the intervenors have raised issues not addressed by petitioners, we decline
to consider them. See Texas Office of Pub. Util. Counsel v. FCC, 183 F.3d 393, 438 (5th Cir. 1999)
(“TOPUC I”) (“[I]ntervenors may not challenge aspects of the Commission’s orders not raised in the
petitions for review.” (quoting United Gas Pipeline Co. v. FERC, 824 F.2d 417, 437 (5th Cir.
1987)).

Intervenor Charter has also moved to strike portions of the joint appendix, contending that
the appendix violates Fifth Circuit Rule 30.2(a) because it contains portions of the record that were
not referred to in the parties’ briefs. Rule 30.2(a) states that a petitioner seeking review of an agency
order “must prepare and file with the court and serve upon the agency . . . a copy of the portions of
the record relied upon by the parties in their briefs.” Charter does not contend that the appendix
contains matters outside the record, nor does it cite any authority for the proposition that including
more of the record than required by Rule 30.2(a) is grounds for a motion to strike. Accordingly, the
motion to strike is DENIED.

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authority or other governmental entity on a cable operator or cable subscriber, or both, solely because

of their status as such. . . .” 47 U.S.C. § 542(g)(1). A franchise fee is “essentially a form of rent: the

price paid to rent use of public right-of-ways.” City of Dallas, 118 F.3d at 397. Although a LFA

may impose its franchise fee directly on cable subscribers, “it is not surprising that most governmental

entities have chosen not to follow this course,” since “such a fee would hardly be politically popular.”

Id. at 398.

Franchise fees imposed on the operator can be assessed in any number of ways so long as the

total amount does not exceed five percent of the operator’s annual gross revenue. See 47 U.S.C.

§ 542(b) (“For any twelve-month period, the franchise fees paid by a cable operator with respect to

any cable system shall not exceed 5 percent of such cable operator’s gross revenues derived in such

period from the operation of the cable system to provide cable services.”). This dispute involves the

most common method of assessing franchise fees, under which the LFA maximizes the amount

collected by requiring the operat or t o pay a fee equal to five percent of gross revenue. A cable

operator’s gross revenue includes revenue from subscriptions and revenue from other sources))e.g.,

advertising and commissions from home shopping networks. See City of Dallas, 118 F.3d at 398

(“[G]ross revenue normally includes all revenue collected from any source.”).

It is undisputed by the parties that a cable operator may pass the portion of the franchise fee

attributable to subscription revenue through to subscribers and may identify that amount on the

subscribers’ bills. This litigation arises out of decisions by some operators in areas where the

franchise fee is five percent of gross revenue to pass through to subscribers the full amount of the fee.

A number of localities, including the City of Pasadena, California, requested that the FCC prohibit

this practice, contending that it constituted an improper shifting of costs onto subscribers and that

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each class of the operators’ customers should bear a proportionate amount of the franchise fee))i.e.,

the po rtion of the franchise fee attributable to advertising revenue should be passed through to

advertisers, and so forth. The localities also contended that, even if full pass through to subscribers

was permitted, operators could only increase the amount passed through at the intervals set by the

FCC’s regulations and could not inform subscribers that the full amount was included in their bills.

The Commission ruled against the localities on all issues. See The City of Pasadena, Cal., et al.,

Petitions for Declaratory Ruling on Franchise Fee Pass Through Issues, Memorandum Opinion and

Order, 16 FCC Rcd. 18,192 (released Oct. 4, 2001) (“Pasadena Order”).

II

TCCFUI and NATOA contend that, under Chevron U.S.A., Inc. v. Natural Resources

Defense Council, 467 U.S. 837 (1984), the Pasadena Order must be reversed because 47 U.S.C.

§§ 542 and 543 expressly prohibit cable operators from passing the entire franchise fee through to

subscribers. In the alternative, they contend that the FCC’s interpretation of those provisions is

arbitrary and capricious. We disagree on both counts.

When reviewing an agency’s construction of a statute, we apply Chevron’s two-step analysis.

Under step one, where “Congress has directly spoken to the precise question at issue,” we must “give

effect to the unambiguously expressed intent of Congress” and reverse an agency interpretation that

does not conform to the plain meaning of the statute. Chevron, 467 U.S. at 842-43. If the statute

is silent or ambiguous as to the question at issue, we proceed to the second step of the Chevron

analysis to determine “whether the agency’s answer is based upon a permissible construction of the

statute.” Id. at 843. Under this second st ep, we can reverse the agency’s decision only if it was

“arbitrary, capricious, or manifestly contrary to the statute.” Id. at 844. If the decision is based on

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a reasonable interpretation of the statute, we defer to the agency’s construction. Id. (“[A] court may

not substitute its own construction of a statutory provision for a reasonable interpretation made by

the administrator of an agency.”); see also Texas Office of Pub. Util. Counsel v. FCC, 265 F.3d 313,

320 (5th Cir. 2001) (“TOPUC II”) ( “The question is not whether we might have preferred another

way to interpret the statute, but whether the agency’s decision was a reasonable one.”).

TCCFUI and NATOA first argue that 47 U.S.C. § 543(b)(2)(C)(v) prohibits pass through of

the entire franchise fee to subscribers. The Cable Television Consumer Protection and Competition

Act of 1992 (“1992 Cable Act”) direct ed t he FCC to prescribe and periodically revise regulations

“protecting subscribers of any cable system that is not subject to effective competition from rates for

the basic service tier that exceed the rates that would be charged for the basic service tier if such cable

system were subject to effective competition.” Pub. L. No. 102-385, § 3(a), 106 Stat. 1460 (codified

at 47 U.S.C. § 543).2 Section 543(b)(2)(C) provides that the FCC “shall take into account” seven

factors when prescribing these regulations, including “the reasonably and properly allocable portion

of any amount assessed as a franchise fee, tax, or charge of any kind imposed by any State or local

authority on the transactions between cable operators and cable subscribers. . . .” 47 U.S.C. §

543(b)(2)(C)(v). In setting the rates for the basic service tier, the Commission determined that,

because franchise fees are set by LFAs, they are outside the control of the cable operator and

therefore should be afforded external treatment))i.e., excluded from the calculation of the

2
“The basic service tier includes local broadcast channels; those non-commercial public,
educational, and government-access channels that the cable system is required by its franchise to
carry; and such additional channels as the cable operator may in its discretion include in this tier.”
Time Warner Entm’t Co. v. FCC, 56 F.3d 151, 162 (D.C. Cir. 1995); see also 47 U.S.C. § 543(b)(7).

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permissible rate for basic cable service and then added back in to the monthly subscriber charge.3

This determination was upheld as reasonable by the District of Columbia Circuit in Time Warner

Entertainment Company v. FCC, 56 F.3d 151 (D.C. Cir. 1995) (“Time Warner I”):

[T]he Commission’s decision to grant external treatment to [franchise
fees and other franchise-related costs] was in part meant to give effect
to the specific provisions of the [1992 Cable Act] that require the
Commission to take into account, in prescribing rate regulations for
the basic service tier, both franchise fees and other costs associated
with meeting franchise requirements. 47 U.S.C. §§ 543(b)(2)(C)(v),
(vi). . . . The Act is also intended to promote the expansion and
diversification of cable programming . . . which is more likely to come
about if cable operators may recoup their costs from subscribers
willing to pay for more expensive and therefore presumably better
programs. Although the statute may not require the Commission to
grant external treatment to franchise-related and programming costs,
the cited provisions surely give the Commission the authority to do so,
particularly in the absence of evidence indicating that cable operators
do in fact have substantial control over such costs.

Id. at 172 (citations omitted).

TCCFUI and NATOA do not contend that the Commission failed to take § 543(b)(2)(C)(v)

into account when it set the rates for the basic service tier. Instead, they appear to argue that, by

directing the FCC to “take into account . . . the reaso nably and properly allocable portion of any

amount assessed as a franchise fee . . . on the transactions between cable operators and cable

subscribers” when setting rates, Congress intended to prohibit cable operators from passing the

3
See 47 C.F.R. § 76.922(a) (“The maximum monthly charge per subscriber for a tier of
regulated programming services offered by a cable system shall consist of a permitted per channel
charge multiplied by the number of channels on the tier, plus a charge for franchise fees.”); In the
Matter of Implementation of Section of the Cable Television Consumer Protection and Competition
Act of 1992: Rate Regulation, Report and Order and Further Notice of Proposed Rulemaking, 8 FCC
Rcd. 5631 at ¶¶ 254, 256 (released May 3, 1993) (“1993 Rate Order”) (stating that franchise fees are
excluded from the calculation of rates because they are “largely beyond the control of the cable
operator”).

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remainder of the franchise fee through to subscribers. This is not the plain meaning of the statutory

language. Section 543(b)(2)(C)(v) says nothing whatsoever about the pass through of franchise fees.

The only mandate imposed by § 543(b)(2)(C) is that the Commission “take into account” the listed

factors. See Time Warner I, 56 F.3d at 165 (“[T]he text of the [1992 Cable Act] and its legislative

history do not even provide the Commission with any guidance about how to weigh the seven factors

that it is supposed t o take into account. . . .”). Significantly, in contrast to § 543(b)(2)(C)(iii),

§ 543(b)(2)(C)(v) does not state that the FCC may only take into account the portion of the franchise

fee attributable to transactions between operators and subscribers. See 47 U.S.C. § 543(b)(2)(C)(iii)

(“[T]he Commission . . . shall take into account . . . only such portion of the joint and common costs

(if any) of obtaining, transmitting, and otherwise providing . . . signals [for the basic service tier] as

is determined . . . to be reasonably and properly allocable to the basic service tier. . . .” (emphasis

added)).4 “The Congress thus refrained from micromanaging the Commission in the way that the .

. . petitioners now ask the court to do.” Time Warner I, 56 F.3d at 165 (declining to read additional

requirements into § 543(b)(2)(C)(i), which directs the FCC to “take into account . . . the rates for

4
For the first time at oral argument, petitioners referred to language from the legislative
history of § 543 “direct[ing] the Commission to attribute such costs to the basic t ier only to the
extent a portion of such costs are properly allocable to the costs of the basic cable service tier.” H.R.
REP. NO. 102-628, at 83 (1992) (emphasis added). From this, petitioners reason that the word “only”
should be incorporated into § 543(b)(2)(C)(v). “Needless to say, we do not generally consider points
raised for the first time at oral argument.” Herrmann Holdings Ltd. v. Lucent Techs. Inc., 302 F.3d
552, 562 n.2 (5th Cir. 2002). Moreover, “where Congress includes particular language in one section
of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts
intentionally and purposely in the disparate inclusion or exclusion.” Duncan v. Walker, 533 U.S. 167,
173 (2001) (quoting Bates v. United States, 522 U.S. 23, 29-30 (1997) (internal quotation marks and
brackets omitted)). We therefore decline to read the word “only” into § 543(b)(2)(C)(v).

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cable systems, if any, that are subject to effective competition”).5

We therefore conclude that the text of § 543 does not indicate an unambiguous intent on the

part of Congress to prevent operators from passing the entire franchise fee through to subscribers.

Moreover, petitioners have not shown that, under the second step of Chevron, the Pasadena Order

reached an arbitrary or capricious conclusion when it determined that “[t]here is nothing in either the

text or legislative history of Section [543] to indicate that Congress intended other than the full

amount of the franchise fee to be reflected in a cable operator’s rates, or that a specific class of

franchise fee should be excluded from such rates.” Pasadena Order ¶ 15.

TCCFUI and NATOA next contend that the Pasadena Order conflicts with 47 U.S.C.

§ 542(c)(1), which provides that “[e]ach cable operator may identify, consistent with the regulations

prescribed by the Commission pursuant to section 543 of this title, as a separate line item on each

regular bill of each subscriber . . . [t]he amount of the total bill assessed as a franchise fee and the

identity of the franchising authority to which the fee is paid.” They contend that the words “amount

of the total bill assessed as a franchise fee” mean that only the portion of the franchise fee attributable

to the charges on the subscriber’s bill can be passed through to the subscriber. Section 542(c)(1),

however, simply states that the operator may inform the subscriber of the amount included in the

subscriber’s bill that is attributable to the franchise fee imposed on the operator by the LFA. See also

47 U.S.C. § 542(f) (“A cable operator may designate that portion of a subscriber’s bill attributable

to the franchise fee as a separate item on the bill.”). The statute says nothing about how this amount

5
Petitioners also argue that the Pasadena Order is contrary to another of the § 543(b)(2)(C)
factors, which directs the Commission to “take into account . . . the revenues (if any) received by a
cable operator from advertising from programming that is carried as part of the basic service tier or
from other consideration obtained in connection with the basic service tier.” 47 U.S.C. §
543(b)(2)(C)(iv). For the reasons already stated, this argument fails.

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is to be determined.6

In an attempt to demonstrate that the Pasadena Order is based on an arbitrary and capricious

interpretation of § 542(c), TCCFUI and NATOA cite an excerpt from a report of the House Energy

and Commerce Committee on the 1992 Cable Act, which states that:

The cable operator shall not identify cost itemized pursuant to
[§ 542(c)] as separate costs over and beyond the amount the cable
operator charges a subscriber for cable service. The Committee
intends that such costs shall be included as part of the total amount a
cable operator charges a cable subscriber for cable service. For
example, a cable operator might itemize . . . a $1.50 per month charge
to account for a five percent franchise fee obligation. If a cable
operator charges $30 per month for basic cable service, the $1.50
itemized charge shall be included in such amount; the cable operator
cannot provide the cable subscriber a basic cable bill for $28.50, with
a $1.50 additional charge added as a franchise fee. Thus, the bill
would show a total charge of $30, but the cable operator would have
the right to include in a legend a statement that the $30 basic cable
service rate includes a five percent franchise fee, which amounts to
$1.50.

H.R. REP. NO. 102-628, at 86. TCCFUI and NATOA contend that this example demonstrates that

Congress intended the amount of the franchise fee passed through to the subscriber to be based solely

on the monthly subscription charge. Consistent with the text of § 542(c)(1), however, this example

simply illustrates how a franchise fee should be identified on a subscriber’s bill. It does not indicate

congressional intent to prevent pass through of the entire franchise fee to subscribers.7 Moreover,

6
Relying on § 542(c)’s statement that operators may identify the amount passed through
“consistent with the regulations prescribed by the Commission pursuant to section 543,” petitioners
urge us to read § 542(c)(1) and § 543(b)(2)(C)(v) together. For the reasons di scussed above,
however, these provisions do not, separately or together, evidence an unambiguous congressional
intent to prohibit pass through of non-subscription revenue to subscribers.
7
Our use of a similar example in City of Dallas was intended only to demonstrate that the
amount passed through to subscribers could be easily calculated. 118 F.3d at 397 (rejecting argument
that including amounts collected as franchise fees in operators’ gross revenue would result in “a

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the FCC, relying on different legislative history, not ed that “the policy of Section [542(c)] was to

permit subscribers to be fully apprised of the effect of the enumerated governmentally imposed costs

on their bills.” Pasadena Order ¶ 7; see 138 CONG. REC. S561-02 (1992) (statement of Sen. Lott)

(“I would like to offer my amendment . . . dealing with the subscriber bill itemization to give the cable

companies an opportunity to itemize these so-called hidden costs, to explain to the people what is

involved in the charges so they will know it is not just the cable company jacking up the prices.”).

Thus, the Pasadena Order’s interpretation of § 542(c) was not arbitrary and capricious.8

TCCFUI and NATOA also argue that the FCC reached an unreasonable conclusion in

construing the 1992 Cable Act’s amendment of § 542(c) to indicate a congressional intent to permit

pass through of the entire franchise fee to subscribers. Prior to the 1992 Cable Act, § 542(c)

provided that “[a] cable operator may pass through to subscribers the amount of any increase in a

franchise fee, unless the franchising authority demonstrates that the rate structure specified in the

franchise reflects all costs of franchise fees and so notifies the cable operator in writing.” This

language was replaced with the current version of § 542(c), which authorizes itemization of specified

amounts on subscribers’ bills. Pub. L. No. 102-385, § 14. The Commission interpreted the pre-1992

language as “expressly limit[ing] a cable operator’s franchise fee pass through to fee increases” and

never-ending series of calculations”). City of Dallas held that, for purposes of calculating five
percent of a cable operator’s gross revenue, gross revenue included money collected from subscribers
for payment of the franchise fee. Id. at 398-99. Despite petitioners’ repeated claims to the contrary,
the Pasadena Order does not run afoul of City of Dallas, which did not consider the question
presently before us.
8
Petitioners also argue t hat, even if the full franchise fee may be passed through to
subscribers, § 542(c)(1) nevertheless precludes operators from identifying the portion of the fee not
attributable to subscription revenue. The text of § 542(c)(1) does not compel this result, and the
Commission’s determination that identification of the entire amount is consistent with the political
accountability purpose of § 542(c) was not arbitrary and capricious. See Pasadena Order ¶ 23.

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concluded that “[t]he apparent intent of [the] amendment was to enable cable operators to pass

through to subscribers the ent ire amount of the franchise fee assessed by the LFA at any time

regardless of whether the cable operator passed through the entire amount of the franchise fee at the

first opportunity, or subsequently opted to do so.” Pasadena Order ¶ 19; see also id. ¶ 15 (stating

that the amendment to § 542(c) appears to support an inference that Congress intended to permit pass

through of the entire franchise fee to subscribers). While not the only conceivable interpretation of

the amendment, the Commission’s construction does not rise to the level of arbitrary and capricious

action under step two of Chevron.

III

TCCFUI and NATOA next argue that the Pasadena Order co ntravened established FCC

policies and was otherwise unreasonable under § 706 of the Administrative Procedure Act (“APA”),

which empowers courts to set aside agency actions that are “arbitrary, capricious, an abuse of

discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A). While step two of the

Chevron analysis focuses on the agency’s interpretation of the relevant statutory provisions, review

under § 706(2)(A) “focuses on the reasonableness of the agency’s decision-making process pursuant

to that interpretation.” Alenco Communications, Inc. v. FCC, 201 F.3d 608, 619 (5th Cir. 2000).

Like Chevron step-two, however, “APA arbitrary and capricious review is narrow and deferential,

requiring only that the agency ‘articulate a rational relationship between the facts found and the

choice made.’” Id. at 619-20 (quoting Harris v. United States, 19 F.3d 1090, 1096 (5th Cir. 1994)

(internal brackets omitted)). “This standard is even more deferential where, as here, a Court is

reviewing an agency’s application and interpretation of its own regulations.” Citizens for Fair Util.

Regulation v. U.S. Nuclear Regulatory Comm’n, 898 F.2d 51, 54 (5th Cir. 1990) (citing Robertson

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v. Methow Valley Citizens Council, 490 U.S. 332 (1989)).

After reviewing the record and the abundance of administrative material cited by the parties,

we conclude that TCCFUI and NATOA have not demonstrated that any pre-existing FCC policy

prohibited cable operators from passing the entire franchise fee through to subscribers. Much of the

administrative material cited by TCCFUI and NATOA simply does not apply in this context,9 and the

applicable materials do not indicate that the FCC ever intended that franchise fees would be passed

through to anyone other than subscribers.10 Indeed, the FCC has consistently stated that the entire

franchise fee may be passed through to subscribers,11 and, on at least one occasion, has expressly

9
Many of the materials cited by petitioners address the allocation of costs under the “cost of
service” regime, an alternative rate system used by operators who believe that the prescribed rates
do not accurately account for their costs. See In the Matter of Implementation of Sections of the
Cable Television Consumer Protection and Competition Act of 1992: Rate Regulation and Adoption
of a Uniform Accounting System for Provision of Regulated Cable Service, Report and Order and
Further Notice of Proposed Rulemaking, 9 FCC Rcd. 4527 at ¶ 3 (released Mar. 30, 1994) (“The
cost-of-service approach was to serve as a backup to the [standard rate-calculating] mechanism which
a cable operator could invoke if it believed that the maximum rate under the [standard] formula would
not enable the operator to recover costs that it reasonably incurred in the provision of regulated cable
services.”). That system is not at issue here. Other materials refer to cost allocation between service
tiers, a now-irrelevant concept because only the basic service tier is still regulated by the FCC. See
47 U.S.C. § 543(c)(4) (providing that regulation of the cable programming service tier “shall not
apply . . . after March 31, 1999”).
10
The only materials directly supporting petitioners’ argument are forms and worksheets in
which the FCC instructed operators that “any franchise fees you pay for the basic service tier should
be added to your monthly rate as part of the service when billing your subscribers.” FCC Form 393,
Determination of Maximum Initial Permitted Rates for Regulated Cable Programming Services and
Equipment at 3 (August 1993); see also FCC Form 1200, Setting Maximum Initial Permitted Rates
for Regulated Cable Services Pursuant to Rules Adopted Feb. 22, 1994, at 22 (May 1994) (same).
By themselves, however, these materials do not amount to an explicit policy against full pass through
to subscribers, particularly in light of the strong evidence to the contrary.
11
See 1993 Rate Order at ¶ 256 (“[W]e will permit the total amount of franchise fees to be
included in determining the lawful regulated per channel rate for the basic service tier as of the initial
date of regulation.”) (emphasis added and footnote omitted); see also In re Franchise Fee “Pass
Through” and Dallas v. FCC, Memorandum Opinion and Order, 13 FCC Rcd. 4566 at ¶ 4 (released

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informed operators that they may pass the portion of the franchise fee attributable to non-subscription

revenue through to subscribers. See Letter from Meredith J. Jones, Chief, Cable Servs. Bureau, FCC,

to Thomas R. Nathan, Vice President/General Counsel, Comcast Cable Communications, Inc., 13

FCC Rcd. 9254 (released Sept. 18, 1997) (“The Commission has made clear that rates for basic and

[cable programming service or ‘CPS’] tiers may include pass-throughs o f all franchise fees paid,

including fees assessed on revenues obtained from sources other than the sale of basic and CPS

service. . . . Thus, the Commission’s regulations and policies permit a cable television operator to

pass through to subscribers all franchise fees which are attributable to both regulated and unregulated

services.” (footnote omitted)). We therefore conclude that petitioners have not demonstrated that

the Pasadena Order is contrary to FCC policy.

TCCFUI and NATOA also argue that the Pasadena Order contravenes 47 C.F.R. §§ 76.922

and 76.933. Section 76.933(g)(5) provides that, “when the franchising authority is regulating basic

service tier rates, a cable operator may increase its rates for basic service to reflect the imposition of,

or increase in, franchise fees.” Petitioners contend that, because the LFAs have not increased

franchise fees, an operator wishing to increase the amount passed through to subscribers must wait

until the following quarter or year to increase charges to subscribers in accordance with 47 C.F.R.

§§ 76.922(d) or (e). Section 76.933(g)(5) clearly provides, however, that rates may be raised to

reflect “the imposition of . . . franchise fees.” Thus, the Pasadena Order was not unreasonable in

concluding that “[t]he[se] provisions do not . . . stand for the proposition . . . that only increases in

Mar. 2, 1998) (“Although cable operators are responsible for paying the franchise fee, under the
Commission’s subscriber rate regulations, cable operators may, in turn, ‘pass through’ to subscribers
the full amount of the fee, which is an ‘external cost’ that is calculated separately from the maximum
monthly charge per subscriber.” (emphasis added and footnotes omitted)).

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franchise fees are permitted to be passed through to subscribers, or that cable operators that have

elected not to pass through the entire amount of a franchise fee are prohibited from subsequently so

doing.” Pasadena Order at ¶ 20.

TCCFUI and NATOA next observe that, under a regime in which the franchise fee is set at

five percent of the operator’s gross revenue, the fees collected by LFAs will increase as the operators’

advertising and other non-subscription revenue grows. If operators are permitted to pass the entire

cost of these fees through to subscribers, pet itioners argue, operators will reap all the benefits of

growth in non-subscription revenue while subscribers will bear all of the burden. The Commission

acknowledged this possibility, but concluded that it was “constrained by [its] determination that such

pass through is permissible under the Communications Act [of 1934, as amended] and [FCC] rules

and that this process is consistent with the political accountability purposes of [§ 542].” Pasadena

Order ¶ 16. Although the FCC conceded at oral argument that it was not actually compelled to reach

any particular result, this conclusion is nevertheless entitled to deference because the Commission did

not act irrationally in finding itself constrained to permit a practice that was allowed by the governing

statutes and regulations and was consistent with congressional intent. Moreover, the Commission

noted that, “[i]f LFAs and cable operators do not want to burden subscribers with higher franchise

fee pass throughs, they may expressly omit certain items, such as advertising revenue and home

shopping commissions, from the gross revenue definition.” Pasadena Order ¶ 16. As discussed

above, “the agency’s decision need not be ideal,” and must be upheld, “so long as it is not arbitrary

and capricious. . . .” Harris, 19 F.3d at 1096 (quoting Louisiana v. Verity, 853 F.2d 322, 327 (5th

Cir. 1988)).

We have considered the petitioners’ remaining arguments and conclude that they are

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insufficient to demonstrate that the Pasadena Order is arbitrary and capricious under § 706(2)(A).12

For the foregoing reasons, the petition for review is DENIED.

12
Petitioners also contend that certain cable operators misled subscribers by stating that the
franchise fee had been raised, when in fact only the amount passed through had been increased. The
Commission concluded that such “peripheral franchise fee matters . . . are not appropriately addressed
in the context of this order and are more appropriately resolved in proceedings related to the specific
factual circumstances in which they arise.” Pasadena Order ¶ 24. The Commission’s refusal to
consider fact-specific complaints in the context of a request for a general declaratory order was not
unreasonable.

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