Showtime Networks Inc. v. Federal Communications Commission
Docket: Nos. 87-1259, 87-1270, 87-1274, 87-1279, 88-1353, 89-1627 and 89-1745
Court: Court of Appeals for the D.C. Circuit; May 3, 1991; Federal Appellate Court
Circuit Judge Ruth Bader Ginsburg authored an opinion affirming the Federal Communications Commission's (FCC) approval of rate increases for RCA American Communications, Inc. (Americom) that began in 1981. The case involves several cable programmers who subscribed to Americom's service and contested these rate increases. Americom initially offered a ten-year service plan in 1978 with lower early rates, intending to attract customers to satellite services. In 1980, Americom filed for a 15% rate increase and made structural changes to the service, which the FCC investigated and ultimately rejected, finding that Americom failed to demonstrate a "substantial cause" for these changes.
The court supported the FCC's substantial cause standard, emphasizing that any changes must not impose undue burdens on customers who relied on the original rates. The court clarified that this standard should align with the statutory requirement for "just and reasonable" charges under 47 U.S.C. § 201(b). Following the FCC's assurance that the substantial cause test was a refinement of the just and reasonable standard, the court upheld the FCC's disapproval of Americom's 1980 tariff filing.
In 1987, the FCC ruled that unforeseen events, including higher-than-expected inflation and operational challenges, justified Americom's increased rates. The Commission found that these factors adequately explained the necessity for the rate adjustments, thus supporting the rationale behind the increases approved by the FCC.
The FCC's 1987 order resolved nine of ten investigative issues in favor of Americom, with the exception of a $20.8 million portion of insurance proceeds related to SATCOM F-3, which the Commission ruled should be credited to 1988 fixed-term customers. The Commission deferred a decision on whether a refund or rate adjustment was necessary. In 1989, the FCC determined that Americom was not required to issue refunds or adjust rates, concluding that even if the insurance proceeds were counted as revenue, Americom had not achieved its authorized return on rates.
Americom filed a petition for review, asserting that it was doing so "out of an abundance of caution." Although the FCC ruled that Americom's 1981 rate increases were lawful, it ruled against Americom on two intermediate issues: the application of a "substantial cause" test to rate increases and the consideration of launch insurance proceeds in assessing rate reasonableness. The document expresses skepticism about Americom's standing to appeal since it generally cannot appeal favorable rulings. Notable exceptions to this rule do exist, but they do not apply here. Americom could have participated as an intervenor, which would have allowed it to challenge adverse rulings without appealing. However, Americom characterized the issues it raised as "moot" if the cable programmers’ petitions were denied. Consequently, the focus shifted to the cable programmers' petitions, leading to an affirmation of the orders under review.
In its 1989 Order, the Commission determined that Americom would not be required to refund 1988 Fixed Term Transponder customers, referencing its prior acknowledgment that Americom aimed for a 15 percent rate of return. However, Americom's actual returns from 1980-1986 did not reach this target. The cable programmers did not contest Americom's assertion that the value of the 1988 service significantly exceeded its tariffed rates, even after price increases. The Commission found that the cable programmers' claims regarding the 'substantial cause' test were unfounded, noting that although the Commission did not quantify the impact of unforeseen events (such as inflation and satellite loss) on service costs, it accepted Americom's justification for its rate increases. The FCC highlighted that even after the increases, Americom's returns remained below the target. While the cable programmers argued that the Commission's previous order required a detailed showing of cost connections, the Commission clarified that a clear connection exists between rising costs and revenue needs. Furthermore, the FCC noted that Americom had removed early termination fees, allowing customers to switch providers if desired, yet most chose to remain with Americom despite competition. The court found no basis to mandate a stricter application of the 'substantial cause' test to Americom’s rate increases, reiterating that the test should assist in determining the reasonableness of tariff modifications rather than serving as an additional obstacle.
The FCC's application of the 'substantial cause' test aligns with its intended limited function, as noted in RCA American Communications, Inc. v. FCC. The programmers challenge the FCC's decision to allow Americom to include construction costs for satellites launched over twelve months after the 1981 tariff filing. The Commission has broad discretion to include 'plant under construction' in the rate base, and as long as it provides a rational justification for its decision, courts will not intervene. Various acceptable rate base theories exist, requiring consistency and a reasonable return.
The programmers argue that two satellites, SATCOM I-R and II-R, were initially dedicated to non-cable services and thus should not have their construction costs included. They also claim that Americom limited access to SATCOM IV for certain customers and sold capacity on its spare satellite non-commonly. In contrast, Americom argues its satellites are fungible, with all capable of providing C-band services, and thus it tariffs services on a system-wide basis, justifying the inclusion of costs for all four satellites in the rate base.
The FCC upheld this system-wide approach, recognizing Americom's flexibility to relocate customers between satellites and the overall benefit of the satellites to all users. The Commission noted the broad latitude afforded to regulatory bodies in determining rate bases and found no unreasonableness in its decision regarding the satellites' usefulness or rate-base treatment. Additionally, the programmers contend the FCC erred by allowing rate-base inclusion for the satellites as of 1981, arguing that costs should have been deferred until full operational status was achieved in 1983 and 1984, respectively. They assert that the Commission has historically disallowed long-term plant under construction from rate bases without adequate explanation for this departure.
The FCC addressed the misconception among programmers that the 'used and useful' principle excludes plant under construction. The Commission clarified that investments do not need to be immediately 'used and useful'; rather, carriers can include property in their rate bases if it will be 'used and useful' in providing service to ratepayers either now or in a reasonable timeframe. The determination of what constitutes a 'reasonable period' is not strictly defined and depends on the specific circumstances of each case. The Commission aims to prevent ratepayers from paying a return on investments that are not immediately needed. In the current situation, the FCC found that four newer satellites were beneficial to Americom’s subscribers even before their launch, serving as ground spares to ensure system reliability. The construction costs of these satellites were deemed necessary for maintaining service, aligning with prior FCC decisions regarding satellite construction. Additionally, after the loss of the SATCOM F-3 satellite, Americom received insurance proceeds for both the satellite's asset value and lost revenues. Since the subscribers paid the insurance premiums, the Commission mandated that Americom credit its 1988 fixed term transponder service customers for some portion of the SATCOM F-3 insurance proceeds, and requested further briefing on how this credit should be applied.
In its 1989 Order, the FCC credited $20.8 million to Americom’s customers as revenue over the projected useful life of SATCOM F-3, reasoning that Americom had not achieved its authorized rate of return, thus not requiring refunds or rate adjustments. The cable programmers contended this decision constituted a retroactive rate increase, a claim the FCC rejected, clarifying that it merely refused to mandate a rate reduction for programmers since Americom had still earned less than its authorized return, even with the credited revenue.
The programmers raised additional concerns regarding Americom’s use of a 30 percent debt/70 percent equity ratio, a change in cost methodology, and the inclusion of an inflated number of transponders in its rate base. The FCC found these issues insufficient to overturn its orders. It noted that Americom had consistently used the 30/70 ratio since 1975, and changes in corporate structure made the actual debt/equity ratio somewhat artificial. The FCC deemed the acceptance of the 30/70 ratio reasonable given Americom's actual returns were significantly lower than even a reduced permissible rate of return.
Regarding cost methodology, while the programmers argued that Americom changed from an "average net investment" method to a "first cost less accumulated depreciation" method without substantial cause, the FCC maintained that Americom had not altered its accounting methods and deemed the selected method reasonable. The FCC clarified that it had never determined the methods used by Americom in 1981 were consistent with previous filings.
The Commission dismissed the cable programmers’ appeal regarding Americom's tariff changes based on three determinations: 1) Americom had substantial cause for modifying its tariffs due to unforeseen cost increases; 2) Americom's choice of a 'first cost' accounting method was deemed reasonable and aligned with standard practices; and 3) the overall results of these changes were reasonable. The Commission clarified that the substantial cause standard applies only to 'material provisions' of a tariff, while changes in cost methodology are assessed under a reasonableness standard. The Commission's view on Americom's 1981 'first cost' method was upheld as reasonable.
Furthermore, the Commission addressed the cable programmers' claim regarding inflated protection transponders in Americom’s rate base, stating that no change occurred in the number of transponders, as Americom had been authorized to use a satellite originally intended as an in-orbit spare. The cable programmers later acknowledged a mischaracterization of the transponder issue in their initial brief but did not introduce new arguments that warranted consideration. Consequently, the Commission ruled out this recast reply.
The conclusion of the opinion resulted in the dismissal of Americom’s petition for review, denying the cable programmers' petitions as the Commission had adequately addressed all raised issues. Americom was noted to have changed its name to GE American Communications, Inc. after being acquired by General Electric Co. The petitioners included Showtime Networks Inc., Viacom International Inc., The Christian Broadcasting Network, Inc., and New Heritage Acquisition Corp. The rulings being reviewed were documented from several FCC decisions between 1987 and 1989.
