Capillary energy barriers have important consequences for immiscible fluid flow in porous media. We derive a time-and-space averaging theory to account for the non-equilibrium behavior and understand the role of athermal capillary fluctuations in the context of their relationship to larger scale phenomenological equations. The formulation resolves several key challenges associated with two-fluid flow in porous media: (1) geometric and thermodynamic quantities are constructed as smooth functions of time based on time-and-space averages; (2) averaged thermodynamics are developed for films; (3) multi-scale fluctuation terms are identified, which account for transient behaviors of interfaces and films that occur due to pore-scale events; (4) geometric constraints are derived and imposed on the averaged thermodynamics; (5) a new constitutive model is proposed for capillary pressure dynamics that includes contributions from films; and (6) a time-and-space criterion for representative elementary volume is established based on capillary fluctuations. Capillary fluctuations are assessed quantitatively based on pore-scale simulations and experimental core-flooding data.