Court Rules for Cable in Cost Case

5/31/1998 8:00 PM Eastern

Washington -- The cable industry came out a rare winner May
22, when a federal court here decided that the Federal Communications Commission erred in
refusing to allow operators to recover the full amount of certain business costs.

For Time Warner Cable, which fought the FCC in the U.S.
Court of Appeals for the District of Columbia Circuit, the 2-1 panel ruling will, in
theory, allow the MSO to recover at least $14 million, unless the commission appeals the
decision and wins.

R. Bruce Beckner, a cable attorney with Fleischman and
Walsh, who represented Time Warner, said it was difficult to measure the broader financial
impact of the decision based solely on the amount of money that Time Warner will be able
to recover.

He said competition will prevent some operators from
implementing rate increases.

"I think that in a number of cases now, operators are
not charging the maximum legally permitted rate, for competitive reasons," Beckner
said. "Even when they have the legal right to take it, they might not take it, or
they may not take all of it."

Beckner indicated that the decision, while welcome,
wasn't that crucial of a financial break for cable operators, because they will no
longer be regulated by the FCC after March 31, 1999.

"For the system that has a small basic [tier] and a
big [expanded-basic tier], this isn't really going to do a whole lot, because
they're going to be able to charge whatever they want for the [upper tier],
anyway," he said.

The court's decision dealt with a narrow,
time-specific feature of the FCC's rate-regulation rules -- specifically, the
treatment of above-inflation increases in retransmission-consent fees, programming costs,
state and local taxes and franchise fees.

In 1994, the FCC said a regulated cable operator could not
recover external-cost increases incurred between Sept. 30, 1992, and the date when a cable
operator became subject to regulation, which turned out to be a point between Sept. 1,
1993, and Feb. 28, 1994.

The FCC thus created a "gap period" -- lasting no
shorter than 11 months and no longer than 17 months -- during which externals could not be

Time Warner appealed, and in June 1995, a panel from the
U.S. Court of Appeals for the District of Columbia Circuit overturned the FCC's
gap-period policy.

But 18 months later, the FCC responded to the court's
decision by telling operators to calculate their gap-period costs and to add them to
current rates.

However, the FCC refused to allow operators to capture the
additional revenue that they would have collected had gap-period costs actually been added
to rates in effect from Feb. 28, 1994, until late 1997 and, in some cases, 1998.

The court opinion indicated that the FCC's decision to
limit relief to cable operators was an intentional effort to avoid "politically
troublesome" rate increases.

"The commission had an opportunity to pass on the
question of whether operators should be allowed to recover their revenue deficiencies, but
it chose to duck. Its failure to address the point was not an accidental mistake,"
the court said in an opinion written by Circuit Judge Laurence Silberman.

In his dissent, Circuit Judge A. Raymond Randolph said Time
Warner's appeal was not presented properly before the court. He said the MSO should
have first given the FCC an opportunity to consider its criticisms of the revised
gap-period policy.

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