Opinion for the Court filed by Circuit Judge HARRY T. EDWARDS.
HARRY T. EDWARDS, Circuit Judge:
Petitioners Yakima Valley Cablevision, Inc. ("Yakima") and the Connecticut Cable Television Association, Inc. ("CCTA") challenge orders of the Federal Communications Commission ("FCC" or "the Commission") dismissing requests for declaratory
The petitioners have challenged the legality of the FCC's decision to decline review of franchise-fee disputes arising under the Cable Act. However, we have no occasion here to reach this issue. The initial petitions for declaratory rulings involved solely the status of certain state and local taxes under the FCC franchise-fee regulation; the Cable Act issues were not raised until later in the proceeding. Furthermore, the Commission's policy of deferring franchise-fee issues to courts was enunciated in a separate rulemaking proceeding that is not the subject of this appeal. Indeed, the FCC has recently issued a second rulemaking order that more fully explains the agency's enforcement policy with respect to the franchise-fee provisions of the Cable Act. A challenge to this new policy is now pending before the court in a separate appeal brought by the ACLU;
We further hold, however, that the FCC has unreasonably failed to explain its decision not to address — under its now-rescinded franchise-fee regulation — disputes over franchise fees imposed before the enactment of the Cable Act. The petitioners in this case filed valid petitions requesting relief under a lawful FCC regulation pursuant to procedures established by the Commission. Beginning in 1972, the Commission routinely and consistently had settled franchise disputes under its franchise-fee regulation. Yet, in the instant case, although millions of dollars of past tax liability are at stake, and despite the fact that the FCC regulation unquestionably governs the legality of the taxes imposed before the enactment of the Cable Act, the FCC inexplicably has refused to resolve the franchise-fee disputes and has offered no explanation for its decision to apply retroactively its policy of forbearance. Under Motor Vehicle Manufacturers Association of United States, Inc. v. State Farm Mutual Automobile Insurance Co.,
In 1972, before enactment of the Cable Act, the FCC adopted cable television regulations pursuant to its authority under the Communications Act of 1934.
Between 1972 and 1984, the Commission resolved numerous franchise-fee disputes under the regulation;
Second, under the FCC regulation, either a cable company or a franchising authority could apply for a "waiver" of the franchise-fee limits. Most commonly, a franchising authority would request a waiver in order to impose a five percent fee rather than a three percent fee.
Finally, if — as in the instant case — a cable company believed that the franchising authority had increased a franchise fee beyond permissible levels after the company already had obtained a certificate of compliance, the company could seek relief in the form of a declaratory ruling from the FCC.
So far as we can tell, until the instant case, the FCC had not once declined to resolve any legitimate franchise-fee dispute brought before the Commission pursuant to any of the foregoing procedures.
In 1984, Congress enacted the Cable Act, with the goal of "establish[ing] a national policy that clarifies the current system of local, state and Federal regulation of cable television."
Unlike the FCC regulation, which did not define "franchise fee," the Cable Act provides a detailed definition:
Finally, section 622 limits the regulatory authority of the FCC and other federal agencies:
The instant case involves two petitions brought to the FCC before the enactment of the Cable Act. In January 1984, the cities of Sunnyside and Grandview, Washington sought a declaratory ruling from the Commission that the FCC franchise-fee regulation "does not apply to a business and occupation tax levied by" the two cities on cable television systems operating within their jurisdictions.
On October 30, 1984, while these two petitions were pending, Congress enacted the Cable Act, and soon thereafter, on December 19, 1984, the Mass Media Bureau dismissed all pending petitions that concerned the FCC franchise-fee regulation — e.g., petitions for special relief, petitions for waivers and petitions for declaratory rulings — including those of CCTA, Sunnyside and Grandview. The Bureau noted the recent enactment of the Cable Act, and reasoned that section 622 of that Act
All of the pending petitions were dismissed "as moot" without any distinction between requests for declaratory rulings and requests for waivers.
In January 1985, CCTA and Yakima (the cable system affected by the Grandview and Sunnyside petition) filed applications for review with the Commission. In their applications, Yakima and CCTA argued that the petitions were not moot because there remained a dispute over franchise fees imposed before the effective date of the Cable Act and that, in any event, the taxes at issue were also "franchise fees" within the definition provided by the Cable Act.
While these applications for review were pending, the FCC promulgated new rules to enforce the Cable Act. The Commission announced a new policy of leaving franchise disputes to the courts and stated that it was rescinding its old franchise-fee regulation because the Cable Act
In the rulemaking order, the FCC also "decline[d] to return [pending franchise-fee petitions] to active status. The Commission no longer has regulatory interest in adjudicating petitions that have been rendered moot by the Cable Act."
Subsequently, on July 19, 1985, the FCC dismissed the Yakima and CCTA applications for review on the basis of the forbearance policy announced in Implementation. According to the Commission, "all franchise fee disputes should be resolved through the courts," because "Congress has set new guidelines under which cable system franchise fees are to be handled,
These petitions for review followed.
A. Cable Act Issues
Yakima and CCTA urge this court to order the FCC to determine the current status of the taxes under the new franchise-fee provisions of the Cable Act. Although the Commission has announced a policy of leaving franchise-fee issues to the courts, the petitioners contend that this policy of forbearance is either illegal or, at the very least, arbitrary and capricious. Admittedly, the issues raised by Yakima and CCTA are not easy. Because of the operation of the Tax Injunction Act,
These difficult questions, however, should not be decided in this proceeding. Instead, we conclude that they are best left to our pending review of the new Cable Act regulations in ACLU v. FCC.
In other words, the forbearance policy was not promulgated in the instant case; rather, the new policy was developed in a separate rulemaking proceeding and was then relied upon in this case as one of the justifications for the dismissal of petitioners' requests for relief. Since the full sweep of the FCC's rationale is better understood in a careful review of the entire Cable Act rulemaking, we will decline to prejudge those issues in this appeal.
Accordingly, we conclude that the appropriate proceeding for review of the FCC's forbearance policy is in connection with the ACLU appeal now pending in this court.
B. The Franchise Fee Regulation
Although we leave the Cable Act issues for later resolution in ACLU v. FCC, the lawfulness of the Commission's decision not to resolve the status of taxes imposed on the cable companies before the enactment of the Cable Act is appropriately before us at this time. The petitioners in this case filed valid petitions requesting relief under a lawful FCC regulation, and pursuant to a procedure established by the Commission. For over ten years, the FCC had routinely and consistently resolved franchise-fee disputes. Indeed, apart from the instant case, we cannot find a single instance in which the Commission refused to resolve a franchise-fee dispute.
The only possible explanation for the agency's refusal to resolve the petitioners' franchise-fee disputes is that the Commission retroactively changed its longstanding policy of resolving disputes under its franchise-fee regulation; no other credible explanation has been offered. The problem with this is that, as even agency counsel concedes, there is absolutely no basis in the administrative record for the FCC's retroactive change in its enforcement policy. Therefore, we are constrained to hold, under the principles announced in Motor Vehicle Manufacturers Association of United States, Inc. v. State Farm Mutual Automobile Insurance Co.,
In State Farm, a unanimous Supreme Court ruled that an agency decision to rescind or modify a regulation is subject to review under the "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law" standard.
Because the FCC announced its change in enforcement practice in the order promulgating new rules to enforce the Cable Act, the principles of State Farm apply to the Commission's decision to leave franchise-fee issues to the courts. We need not decide whether the Commission's prospective change in its enforcement of the franchise-fee regulations would satisfy the requirements of State Farm. That issue is simply not before us; for the purposes of the instant case, we will assume without deciding that such a change in policy would be lawful. Rather, the question in this case is whether the Commission adequately explained its decision to change its enforcement policy retroactively.
Without doubt, the decision whether to make a new policy prospective or retroactive is "an important aspect of the problem"
Obviously, in many instances, a retroactive change in policy is perfectly appropriate; however, the law requires that an agency explain why it has decided to take this rather extraordinary step. The agency must explain how it determined that the balancing of the harms and benefits favors giving a change in policy retroactive application. Only if an agency explains its rationale for retroactively changing its prior practice can a reviewing court determine whether that decision is a product of rational analysis. The Commission's failure to explain why it retroactively applied its new policy of leaving franchise-fee issues to the courts differs not at all from a failure to consider obvious alternatives to an agency's course of action. The FCC failed to consider an obvious and less drastic alternative to a retroactive change in enforcement policy — the prospective application of this new policy — and its failure to consider such an important alternative was arbitrary and capricious under the settled law of this circuit.
Although counsel for the Commission conceded at oral argument that there is absolutely no basis in the record for the agency's decision to change its enforcement policy retroactively, the FCC contends that we should affirm the Commission's exercise of its "sound discretion"
Furthermore, although the Commission has broad power to refuse to grant declaratory relief, its decision to do so is subject to judicial review.
Similarly, we reject the contentions of the intervening franchising authorities. They argue that the Cable Act applies retroactively, and, therefore, that the Act mandates the retroactive rescission of the agency's regulation. Under this view, the substantive provisions of the franchise-fee regulation, and not merely the remedy provided by the FCC, would be retroactively ineffective. This argument has absolutely no merit. First, nothing in the Cable Act even remotely implies that the rescission of the regulation must be retroactive. Instead, the Cable Act merely mandates that "[a]ny Federal agency may not regulate the amount of the franchise fee paid by a cable operator,"
Second, the legislative history of the Cable Act makes clear that Congress intended to make only one narrow exception to the prospective effect of the Cable Act's franchise-fee provisions. Under the old FCC regulation, franchising authorities required Commission permission to increase a franchise fee from three percent to five percent. The Cable Act, however, permits a five percent fee without FCC approval. The Conference Report for the Cable Act makes it clear that any payments of franchise fees already made by a cable system up to five percent would be lawful without FCC permission if the franchise agreement established such a fee:
The Report states, however, that cable companies need not make retroactive payments.
Finally, because the Cable Act unambiguously declares a prospective effective date, the case law on retroactivity discussed at length by the parties is simply not relevant. However, even if the Cable Act is somehow viewed as ambiguous on the question of retroactivity, the prevailing case law creates a presumption of prospective effect. In its most recent treatment of retroactivity, in Bennett v. New Jersey,
Similarly, this circuit views statutes that change substantive rights as differing from those — as in Bradley — that merely change substantive remedies.
In sum, by the FCC counsel's own admission, we are left without explanation for the Commission's refusal to resolve the petitioners' franchise-fee disputes. We therefore hold that the FCC decision to change retroactively its longstanding policy of resolving disputes over the franchise-fee regulation was arbitrary and capricious.
Because this court will review the Commission's Cable Act regulations in ACLU v. FCC, we do not address the FCC's policy of forbearance in this action. Instead, the petitioners shall be given the right to intervene in ACLU v. FCC for the purpose of challenging the Commission's policy of leaving franchise-fee disputes to the courts. However, because the Commission has not justified its refusal to resolve franchise-fee disputes arising before the enactment of the Cable Act, we remand that issue to the FCC for further consideration.
We note that, in a post-hearing submission from the FCC, the agency purports to have considered the issue of retroactivity which is the subject of our remand. We need not determine the adequacy of this submission at this juncture. If what the agency has done in its reconsideration order satisfies the terms of our remand, we assume that the entire reconsideration order, including the issue of retroactivity, will be subject to judicial scrutiny in ACLU.
5 U.S.C. § 554(e) (1982).