[ORAL ARGUMENT NOT YET SCHEDULED]
Nos. 16-1354, 16-1419
IN THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT
UNITED PARCEL SERVICE, INC.,
Petitioner,
v.
POSTAL REGULATORY COMMISSION,
Respondent.
On Petition for Review of Orders of the Postal Regulatory Commission
BRIEF FOR RESPONDENT
Of Counsel:
DAVID A. TRISSELL General Counsel
CHRISTOPHER J. LAVER Deputy General Counsel
MALLORY SMITH Attorney Postal Regulatory Commission
CHAD A. READLER Acting Assistant Attorney General
MICHAEL S. RAAB MICHAEL SHIH
Attorneys, Appellate Staff Civil Division, Room 7268 U.S. Department of Justice 950 Pennsylvania Avenue NW Washington, DC 20530 (202) 353-6880
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CERTIFICATE AS TO PARTIES, RULINGS, AND RELATED CASES
Pursuant to D.C. Circuit Rule 28(a)(1), the undersigned counsel certifies as
follows:
A. Parties and Amici
Petitioner is United Parcel Service, Inc. Respondent is the Postal Regulatory
Commission. Intervenors-Respondents are Amazon Fulfillment Services, Inc.;
National Association of Letter Carriers, AFL-CIO; Parcel Shippers Association;
United States Postal Service; Valpak Direct Marketing Systems, Inc.; and Valpak
Franchise Association, Inc. J. Gregory Sidak is amicus curiae in support of petitioner.
B. Rulings Under Review
Petitioner seeks review of two orders of the Postal Regulatory Commission.
Order No. 3506 was issued in Docket RM2016-2 on September 9, 2016. The
Commission issued a notice of errata and updated order on October 19, 2016. The
original order is reproduced in the Joint Appendix at JA__. The notice of errata and
updated order are reproduced in the Joint Appendix at JA__-__.
Order No. 3641 was issued in Docket RM2016-13 on December 1, 2016,
and is reproduced in the Joint Appendix at JA__-__.
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C. Related Cases
The challenged orders have not previously been before this Court. Counsel for
the Commission is not aware of any other related cases within the meaning of D.C.
Circuit Rule 28(a)(1)(C).
/s/ Michael Shih MICHAEL SHIH
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TABLE OF CONTENTS
Page
CERTIFICATE AS TO PARTIES, RULINGS, AND RELATED CASES
GLOSSARY
INTRODUCTION................................................................................................................ 1
STATEMENT OF JURISDICTION ................................................................................. 3
STATEMENT OF THE ISSUE ......................................................................................... 3
PERTINENT STATUTORY AND REGULATORY PROVISIONS......................... 4
STATEMENT OF THE CASE .......................................................................................... 4
A. Statutory Background ..................................................................................... 4
B. Regulatory Background .................................................................................. 7
1. Principles of Cost Attribution ............................................................ 7
2. Cost Attribution for the Postal Service’s Competitive Products .............................................................................................. 12
3. Attribution of Inframarginal Costs .................................................. 16
C. Petitioner’s Proposal ..................................................................................... 21
D. Commission Proceedings ............................................................................. 25
SUMMARY OF ARGUMENT ......................................................................................... 26
STANDARD OF REVIEW ............................................................................................... 29
ARGUMENT ....................................................................................................................... 30
I. THE POSTAL REGULATORY COMMISSION’S REVISED COST-ATTRIBUTION METHOD IS REASONABLE. .............................................. 30
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A. The Commission reasonably determined that some but not all inframarginal costs should be attributed to postal products. ................... 30
B. The Commission properly determined that UPS’s method of attributing all inframarginal costs to products was flawed. ...................... 37
II. THE COMMISSION’S REVISED COST-ATTRIBUTION METHOD IS CONSISTENT WITH THE POSTAL ACCOUNTABILITY AND ENHANCEMENT ACT. ....................................................................................... 43
A. Inframarginal costs may properly be classified as “institutional costs” under § 3633(a)(3). ............................................................................. 43
B. The statutory definition of “costs attributable” does not require attribution of all inframarginal costs. .......................................................... 49
C. The Commission’s orders adequately explained the Commission’s reasons for attributing only some inframarginal costs. ............................. 53
CONCLUSION ................................................................................................................... 57
CERTIFICATE OF COMPLIANCE
CERTIFICATE OF SERVICE
ADDENDUM
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TABLE OF AUTHORITIES
Cases: Page(s)
* Alliance of Nonprofit Mailers v. Postal Regulatory Comm’n, 790 F.3d 186 (D.C. Cir. 2015) ................................................................................... 30, 37
Butte County, Cal. v. Hogen, 613 F.3d 190 (D.C. Cir. 2010) ......................................................................................... 53
C.I.R. v. Keystone Consol. Indus., Inc., 508 U.S. 152 (1993) .................................................................................................... 51, 52
Chevron U.S.A. Inc. v. Natural Res. Def. Council, 467 U.S. 837 (1984) .................................................................................................... 29, 46
City of L.A. v. U.S. Dep’t of Transp., 165 F.3d 972 (D.C. Cir. 1999) ................................................................................... 27, 37
Direct Marketing Ass’n v. U.S. Postal Serv., 778 F.2d 96 (2d Cir. 1985) ............................................................................................... 46
Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117 (2011) ...................................................................................................... 54
Hardt v. Reliance Standard Life Ins. Co., 560 U.S. 242 (2010) .......................................................................................................... 47
LePage’s 2000, Inc. v. Postal Regulatory Comm’n, 642 F.3d 225 (D.C. Cir. 2011) ......................................................................................... 54
Mail Order Ass’n of Am. v. U.S. Postal Serv., 2 F.3d 408 (D.C. Cir. 1993) ............................................................................................. 46
Motor Veh. Mfrs. Ass’n of U.S. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983) ............................................................................................................ 29
* National Association of Greeting Card Publishers v. U.S. Postal Service, 462 U.S. 810 (1983) .................................................................. 4, 6, 12, 43, 45, 46, 52, 55
Sullivan v. Everhart, 494 U.S. 83 (1990) ...................................................................................................... 46, 51
* Authorities upon which we chiefly rely are marked with asterisks.
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Tourus Records, Inc. v. DEA, 259 F.3d 731 (D.C. Cir. 2001) ......................................................................................... 54
U.S. Postal Serv. v. Postal Regulatory Comm’n, 599 F.3d 705 (D.C. Cir. 2010) ......................................................................................... 29
U.S. Postal Serv. v. Postal Regulatory Comm’n, 785 F.3d 740 (D.C. Cir. 2015) ........................................................................................... 5
United States v. L.A. Tucker Truck Lines, Inc., 344 U.S. 33 (1952) ............................................................................................................ 55
UPS, Inc. v. U.S. Postal Serv., 184 F.3d 827 (D.C. Cir. 1999) ......................................................................................... 46
Statutes:
Administrative Procedure Act:
5 U.S.C. § 555(e) ............................................................................................................... 53
5 U.S.C. § 706(2)(A) ......................................................................................................... 29 Postal Accountability and Enhancement Act,
Pub. L. No. 109-435, 120 Stat. 3198 (2016) .............................................................. 4, 43
39 U.S.C. § 404(b) ................................................................................................................... 5
39 U.S.C. § 404a .................................................................................................................... 56
39 U.S.C. § 409(e)(1)(B) ....................................................................................................... 57
39 U.S.C. § 3622(c)(2) ...................................................................................................... 2, 57
39 U.S.C. § 3622(d)(1)(A) ...................................................................................................... 5
39 U.S.C. § 3631 ..................................................................................................................... 6
* 39 U.S.C. § 3631(b) .................................... 1, 3, 25, 26, 28, 30, 31, 44, 45, 49, 50, 51, 53
39 U.S.C. § 3632(a) ................................................................................................................. 5
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39 U.S.C. § 3633 ..................................................................................................................... 3
39 U.S.C. § 3633(a) .............................................................................................. 5, 17, 45, 48
39 U.S.C. § 3633(a)(1) .................................................................................................... 31, 55
* 39 U.S.C. § 3633(a)(2) ......................... 1, 2, 3, 6, 7, 17, 25, 26, 28, 29, 30, 42, 44, 54, 55
* 39 U.S.C. § 3633(a)(3) ...................................... 6, 7, 17, 21, 27, 43, 44, 47, 48, 49, 55, 56
39 U.S.C. § 3633(b)........................................................................................................... 7, 55
39 U.S.C. § 3642(b)(1) .......................................................................................................... 64
Regulations:
39 C.F.R. § 3015.7(b) ..................................................................................................... 26, 31
48 C.F.R. § 9904.418-30(a)(3) ............................................................................................. 52
Legislative Material:
* S. Rep. No. 108-318 (2004) .......................................................... 6, 26, 30, 46, 47, 48, 49 Other Authorities:
* Office of Inspector General, U.S. Postal Service, A Primer on Postal Costing Issues (2012), https://go.usa.gov/x54Dd ......................... 8, 12, 13, 14, 42
Charles McBride, The Calculation of Inframarginal Costs (Jan. 14, 2015),
https://go.usa.gov/x5C9W ............................................................................................. 22 Postal Regulatory Comm’n:
FY2016 Public Cost Segments and Components Report, (2016), https://go.usa.gov/x54x2 ........................................................................................... 13
Financial Analysis of United States Postal Service Financial Results and
10-K Statement: Fiscal Year 2016 (2017), https://go.usa.gov/x5kWz ................ 38, 50
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U.S. Postal Serv., Glossary of Postal Terms (2013),
https://about.usps.com/publications/pub32.pdf ....................................................... 47 Webster’s Third New International Dictionary of the English Language (1993) ......................... 44
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GLOSSARY
NAGCP National Association of Greeting Card Publishers v. U.S. Postal Service, 462 U.S. 810 (1983)
Financial Analysis Postal Regulatory Comm’n, Financial Analysis of United States Postal Service Financial Results and 10-K Statement: Fiscal Year 2016 (2017)
McBride Report Charles McBride, The Calculation of Inframarginal Costs (Jan. 14, 2015)
Order No. 399 Order, Dkt. RM2010-4 (P.R.C. Jan. 27, 2010)
Order No. 1449 Order, Dkt. RM 2012-3 (P.R.C. Aug. 23, 2012)
Primer Office of Inspector General, U.S. Postal Service, A Primer on Postal Costing Issues (2012)
Senate Report S. Rep. No. 108-318 (2004)
UPS United Parcel Service, Inc.
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INTRODUCTION
The U.S. Postal Service offers a range of products to the Nation’s consumers.
For some products, the Postal Service is the Nation’s sole supplier. For other
products, the Postal Service competes against private firms in the open market. To
prevent the Postal Service from exploiting its monopoly position and engaging in
predatory pricing, Congress instructed the Postal Regulatory Commission to ensure
that the Postal Service does not set rates for each competitive product below the
“costs attributable” to that product. 39 U.S.C. § 3633(a)(2). However, Congress
made clear that the term “costs attributable” does not encompass all costs. The term
reaches only those “direct and indirect postal costs attributable to such product
through reliably identified causal relationships.” Id. § 3631(b). The Commission has
broad discretion to determine whether a category of costs is sufficiently caused by a
product to warrant attribution under this provision.
These consolidated petitions for review concern two orders revising the
Commission’s cost-attribution method. For more than thirty years, the Commission
considered just two categories of costs to be attributable. These categories did not
account for the savings the Postal Service enjoys when it produces separate but similar
products in large quantities. Such economies of scope and scale make it more
expensive for the Postal Service to produce earlier units of a product than later ones.
Postal economists refer to such costs as inframarginal costs.
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United Parcel Service, Inc. (“UPS”), a private logistics company and one of the
Postal Service’s primary competitors, asked the Commission to expand its
interpretation of “costs attributable” to include all inframarginal costs. This
expansion would increase the price floor for the Postal Service’s competitive
products. The proposal relied on a novel method for (1) estimating the Postal
Service’s total inframarginal costs, and (2) distributing those costs among the Postal
Service’s competitive products.
The Commission rejected UPS’s proposal. In the Commission’s judgment,
UPS’s method failed to supply the “reliably identified causal relationship” required to
attribute all inframarginal costs under 39 U.S.C. § 3633(a)(2). The Commission
instead endorsed an alternative cost-attribution method—already used by the Postal
Service in a related context—to require attribution of some but not all inframarginal
costs. Later, the Commission promulgated a final rule to this effect. UPS petitioned
for review of both decisions.
The petitions should be denied. The Commission reasonably concluded that,
although inframarginal costs are “direct or indirect postal costs” a product may
lawfully be required to cover, UPS’s method failed the causality and reliability
requirements for cost attribution because it rested on unsubstantiated and unverifiable
assumptions. The Commission’s alternative method does not have these defects.
This Court should therefore decline UPS’s invitation to second-guess the
Commission’s reasonable exercise of its expert judgment.
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STATEMENT OF JURISDICTION
Petitioner seeks review of two Commission orders. The order in No. 16-1354
was entered on September 9, 2016, and the petition for review was timely filed on
October 7, 2016. See Order, Dkt. RM2016-2 (P.R.C. Sept. 9, 2016) (updated Oct. 19,
2016) (“Order”).1 The order in No. 16-1419 was entered on December 1, 2016, and
the petition for review was timely filed on December 12, 2016. See Order, Dkt.
RM2016-13 (P.R.C. Dec. 1, 2016) (“Adoption Order”). This Court has jurisdiction
under 39 U.S.C. § 3663.
STATEMENT OF THE ISSUE
The Postal Regulatory Commission must ensure that each of the Postal
Service’s competitive products covers the “direct and indirect postal costs attributable
to such product through reliably identified causal relationships.” 39 U.S.C.
§§ 3631(b), 3633(a)(2). The Commission declined to adopt petitioner’s method for
estimating and attributing all inframarginal costs to the Postal Service’s competitive
products. The Commission instead adopted a different method under which some
but not all inframarginal costs are attributed. The question presented is whether this
exercise of the Commission’s judgment was arbitrary, capricious, or contrary to law.
1 On October 19, 2016, the Commission issued a notice of errata updating its
original order. All citations are to the updated order.
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PERTINENT STATUTORY AND REGULATORY PROVISIONS
Pertinent statutory and regulatory provisions are reproduced in the appendix to
this brief.
STATEMENT OF THE CASE
A. Statutory Background
For most of the Nation’s history, postal rates were controlled by Congress.
National Ass’n of Greeting Card Publishers. v. U.S. Postal Serv., 462 U.S. 810, 813 (1983)
(“NAGCP”). That changed in 1970, when Congress established the Postal Rate
Commission to recommend rates in Congress’s place. Id. Congress renamed that
agency the Postal Regulatory Commission in the 2006 Postal Accountability and
Enhancement Act, Pub. L. No. 109-435, §§ 601, 604, 120 Stat. 3198, 3238, 3241. The
Act placed new restrictions on the rates the Postal Service may charge, and
empowered the Commission to enforce those restrictions by regulation.
The Act classifies all Postal Service products into one of two categories.
Market-dominant products are those over which the Postal Service “exercises
sufficient market power” to increase prices or decrease quality “without risk of losing
a significant level of business to other firms offering similar products.” 39 U.S.C.
§ 3642(b)(1). All other products are competitive products. This residual category
captures products “for which the Postal Service faces meaningful market
competition.” U.S. Postal Serv. v. Postal Regulatory Comm’n, 785 F.3d 740, 744 (D.C. Cir.
2015).
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Although the Postal Service may set “reasonable and equitable” rates for its
products, see 39 U.S.C. § 404(b), its discretion is bounded by statute.
Market-dominant products are subject to a price ceiling tied to the rate of inflation.
Id. § 3622(d)(1)(A). This provision prevents the Postal Service from “improperly
leverag[ing] its monopoly powers” to overcharge consumers. U.S. Postal Serv., 785
F.3d at 744.
Competitive products present different policy concerns. Unlike private firms,
the Postal Service enjoys a monopoly on some of its products. Conceivably, the
Postal Service could reduce rates for competitive products by increasing rates for
market-dominant products. By shifting costs in this manner, the Postal Service could
offer artificially low prices to consumers of its competitive products at the expense of
its competitors and consumers of its market-dominant products. Competitive
products are therefore subject to a price floor. 39 U.S.C. §§ 3632(a), 3633(a).
An improperly calibrated price floor generates distortionary effects of its own.
A floor that is too high “can lead to prices that will encourage inefficient entry and
production,” meaning that “[s]ociety will not benefit from having the least cost
producer provide the product.” Bradley Analysis 12(JA__). A floor that is too low
will not prevent predatory pricing. Thus, the Act does not specify price floors
applicable to competitive products, but rather instructs the Commission to set price
floors by reference to each competitive product’s costs.
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The Act divides all such costs into two categories: “costs attributable,” 39
U.S.C. § 3633(a)(2), and “institutional costs,” id. § 3633(a)(3). Only the term “costs
attributable” is defined by the Act. The Commission has interpreted “institutional
costs” as a residual category containing all costs that cannot be attributed under
§ 3633(a)(2). Order 36(JA__).
Section 3633(a)(2) establishes “costs attributable” as the primary driver of a
product’s price floor. The “costs attributable” to a product are the “direct and
indirect postal costs attributable to such product through reliably identified causal
relationships.” 39 U.S.C. § 3631. This narrow definition codifies the Supreme
Court’s decision in NAGCP, 462 U.S. at 829-34, which held that the Commission
could not “make classes [of mail products] responsible for the recovery of costs for
which an extended inference of causation was claimed.” See S. Rep. No. 108-318, at
9-10 (2004) (“Senate Report”). Following NAGCP’s lead, Congress declined to adopt
“specific rules for cost attribution.” Id. at 9. The provision leaves for the
Commission “the technical decision of what cost analysis methodologies are
sufficiently reliable at any given time to form the basis for attribution.” Id.
Section 3633(a)(3) gives the Commission discretion to increase minimum prices
for competitive products beyond what the price floor requires. This provision obliges
the Commission to “ensure that all competitive products collectively cover what the
Commission determines to be an appropriate share of the institutional costs”—that is,
all costs that are not attributable costs—“of the Postal Service.” 39 U.S.C.
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§ 3633(a)(3). The Commission must periodically evaluate whether this apportionment
“should be retained in its current form, modified, or eliminated.” Id. Its inquiry must
reflect, among other things, “the prevailing competitive conditions in the market.” Id.
§ 3633(b). The Commission can, with this tool, adjust the minimum prices for
competitive products above the § 3633(a)(2) price floor to correct any remaining
market distortions. Currently, 5.5% of institutional costs are apportioned to
competitive products. Order 2(JA__). That apportionment is now under review. See
Postal Regulatory Comm’n Dkt. RM2017-1, https://go.usa.gov/x53QF.
B. Regulatory Background
These consolidated petitions involve the Commission’s revised method for
calculating the costs attributable to a competitive product under § 3633(a)(2). That
method derives from the principles of cost attribution summarized below. A
complete discussion is available in Appendix A to the Order. JA__-__.
1. Principles of Cost Attribution
Suppose a firm that makes only one product wants to know how much that
product costs to makes. Economists characterize the firm’s costs as either “fixed” or
“variable.” Order, App. A (“App. A”), at 1(JA__). A fixed cost is “relatively static”
and does not vary with volume—that is, the number of units of the product the firm
produces. Id. at 1-2(JA__-__). A variable cost does vary with volume. Id. at 1(JA__).
The product’s total cost is the sum of its fixed and variable costs. Id. The product’s
average total cost is its total cost divided by its volume. Id. at 2(JA__).
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In a competitive market, the threat of competition prevents a single-product
firm from charging consumers more than its product’s average total cost. App. A, at
3(JA__). To determine how much to produce, a firm compares the product’s average
total cost to the product’s marginal cost, defined as the cost of producing one
additional unit of that product. Id. The firm must set production at a volume such
that the product’s average total cost is equivalent to its marginal cost; only at that
volume can the firm recover the costs of production. Id.
To illustrate these concepts, imagine a farmer who sells only apples. Her fixed
costs include, for instance, the cost of land, machinery, and software. Her variable
costs include, for instance, the cost of labor. Suppose these variable costs amount to
$10 per apple produced. The marginal cost of each additional apple is thus $10.
In reality, the marginal cost of apple production is not constant. This is due to
economies of scale: “efficiencies enjoyed from producing more of the same product.”
Office of Inspector General, U.S. Postal Service, A Primer on Postal Costing Issues 14
(2012) (“Primer”), https://go.usa.gov/x54Dd. The more apples the farmer produces,
the cheaper each additional apple becomes to produce, thanks to (for example)
increased worker productivity and more efficient use of resources.
This concept can be visualized by plotting volume on the x-axis against
marginal cost on the y-axis.
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Figure 1—Marginal-Cost Curve for Single-Product Firm
App. A, at 5(JA__). The resulting graph depicts the product’s marginal-cost curve.
The area under the curve represents total marginal cost. The slope of the curve
represents the product’s cost elasticity: the percentage change in marginal cost that
results from a percentage change in volume. Order 7(JA__).
Cost attribution in a single-product firm is straightforward: The firm makes
only one product, so all costs are caused by that product. The situation becomes
more complicated when a firm makes more than one product. To return to the
example, imagine that our farmer has branched out into strawberry production. The
farmer now makes two products whose contributions to total costs must be
disaggregated.
Some fixed and variable costs are specific to, and thus attributable to, a single
product. Suppose the farmer stores apples in one type of refrigerator and strawberries
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in another type of refrigerator. The cost of apple storage should not be attributed to
strawberries, nor should the cost of strawberry storage be attributed to apples.
Other fixed and variable costs are incurred by more than one product.
Common fixed costs, as their name suggests, are fixed costs incurred by multiple
products. App. A, at 6(JA__). These include, for instance, costs associated with the
creation of the farming business and the salary of the farm’s CEO. In a single-
product firm, these fixed costs must be attributed because all costs contribute to
producing the firm’s one product. Id. In a multi-product firm, common fixed costs
do not directly relate to any product and should therefore not be attributed. Id.
Common variable costs are costs that vary with volume but that do not directly
vary with any particular product’s volume. App. A, at 6(JA__). These costs result
from economies of scope: “the benefits a multi-product firm reaps from production
of two or more goods.” Id. Suppose the farmer pays truckers to deliver her fruits to
market. The cost of truckers varies in proportion to the volume of all fruit produced,
not just in proportion to the volume of strawberries or of apples.
A multi-product firm, like its single-product counterparts, uses marginal cost to
determine the optimal volume of fruit to produce. App. A, at 6(JA__). The marginal
cost of one unit of the firm’s products is still the change in cost resulting from the
production of an additional unit—which in the farmer’s case is one piece of fruit. But
average total cost is no longer a useful metric. Multi-product firms possess common
costs that are not caused by a single product, so dividing the firm’s total costs by the
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total volume of fruit paints an inaccurate picture of how much each unit of fruit
actually costs. Id. at 6-7(JA__-__).
Multi-product firms must instead base production decisions on the costs that
result from producing each of its products. App. A, at 7(JA__). These costs are
called the product’s incremental costs. Id. Incremental costs represent the marginal
cost of producing a particular type of product—here, apples or strawberries—as
opposed to the marginal cost of producing a single unit of fruit. They are defined as
“the sum of the marginal costs for all units [of that product] produced,” and are
calculated by subtracting the firm’s total costs without that product from the firm’s
total costs with that product. Bradley Analysis 20(JA__). Once the farmer has
calculated the incremental cost incurred by apples, she can determine whether she is
making or losing money from producing apples by comparing apple revenue to
apples’ incremental cost.
In the real world, it is difficult to calculate costs on a product-specific basis.
App. A, at 8(JA__). Many firms thus rely on activity-based costing. Id. Under this
method, a firm groups costs not by products but by activities, each with its own cost
curve. Id. The firm then identifies a cost driver for each activity. Id. at 9(JA__). A
cost driver is a unit of measurement that bears the most direct relation to the activity.
Id. The firm also estimates the relationship between the cost driver and the costs of
the activity. Next, the firm determines the percentage of the cost driver associated
with each product. This percentage is called a distribution key. Id. The firm applies
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the distribution key to determine what proportion of the costs of a particular activity
are attributable to each of its products. Id. The sum of the product’s costs across
activities is that product’s attributable cost. Id. at 12(JA__).
Activity-based costing does not address all informational gaps. Order 8(JA__).
Most significantly, firms cannot know the complete shape of their marginal-cost
curves. App. A, at 12(JA__). The shape of these curves must be modeled using data
drawn from costs observed at existing levels of volume. Order 8(JA__). These
modeled extrapolations will have greater validity and better explanatory power when
they are close to typical operating volumes, and less validity and worse explanatory
power when they are different from typical operating volumes. Id.
2. Cost Attribution for the Postal Service’s Competitive Products
The Commission and its predecessor have consistently endorsed
cost-attribution methods that rely on “marginal-cost pricing principles.” See Op. &
Rec. Dec., vol. 1, at 137, Dkt. R80-1 (Postal Rate Comm’n Feb. 19, 1981) (“R80-1
Op.”). The Commission’s historical cost-attribution method reflects this practice.
Under that method, only two categories of costs are attributable: product-specific
fixed costs and volume-variable costs. Primer 23. All other costs are deemed
institutional costs. App. A, at 16(JA__). The Supreme Court approved this approach
in 1983. See NAGCP, 462 U.S. at 823.
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Product-specific fixed costs have their economic definition. They include, for
instance, the cost of advertising specific to a product. For most products, such costs
comprise a small proportion of their total attributable costs. Primer 23.
Volume-variable costs supply the bulk of a product’s attributable costs. This
term of art, developed in the context of postal ratemaking, “does not correspond to
the economic concept of variable cost.” Neels Report 9(JA__). The term refers only
to the “mathematical product of the marginal cost of a postal product and its
volume.” Primer 16. A product’s volume-variable cost is calculated using an
activity-based costing method with four steps.
First, the Postal Service divides its total costs into activities, which it calls “cost
segments.” Cost segments are subdivided into “cost components,” which are further
subdivided into “cost elements.” App. A, at 13-14(JA__-__). For example, Segment
14, which relates to mail transportation, contains components corresponding to air,
highway, rail, and water transportation. Postal Regulatory Comm’n, FY2016 Public
Cost Segments and Components Report, tab CS14 (2016), https://go.usa.gov/x54x2. The
Postal Service tracks how much money it spends on each element. Primer 16.
Second, the Postal Service identifies a cost driver that “reflects the essential
activity of that element.” App. A, at 14(JA__). For highway transportation, the
Postal Service assesses costs in terms of the “cubic-foot-mile”: the cost of
transporting one cubic foot of mail one mile. Id. The Postal Service estimates the
degree to which the cost of that element varies with each unit of cost driver—here,
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14
the relationship between cost and cubic-foot-miles. Id. The Postal Service then uses
econometric techniques to estimate the marginal cost of the last unit of cost driver.
Id. at 14-15(JA__-__).
Figure 2—Volume-Variable Costs in Marginal-Cost Curve
Id. at 16(JA__). On this stylized marginal-cost curve for highway transportation, the
element’s marginal cost is $1, and the Postal Service paid for 20 cubic-foot-miles.
Volume-variable costs are represented by the shaded blue area, totaling $20.
Third, the Postal Service uses distribution keys to apportion an element’s
volume-variable costs among the products to which that element contributes. Primer
17. These distribution keys are generated by statistical sampling systems that measure
the percentage of each cost driver associated with each product. Primer 18. The
element’s volume-variable costs are attributed to products in these proportions.
Suppose that, of the 20 cubic-foot-miles used by highway transportation, 5 units went
USCA Case #16-1354 Document #1672446 Filed: 04/24/2017 Page 24 of 95
to letters> 5 units went to parcels> and 10 units went to flats. Volume-variable costs
should be divided between these three products in these proportions.
Figure 3-Distribution-Key Alloca tion ofVolume-Variable Costs
6
Lett ers 5
4
~ Parcels -... 3 "' 0 u
2
1
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Cost Driver
App. A> at 160A_ ) (annotations added).
Importantly> the data systems used to develop the Postal Service>s distribution
keys do not track which units of cost driver were used to make specific products. See
Order 47> SOQA_ > _ ) . H ere> tl1e data do not specify whether the first cubic-foot-
mile was used to deliver letters> parcels> or flats. But because the volume-variable cost
of each cubic-foot-mile is tl1e same ($1 per unit» tl1e Postal Service does not need to
know which unit of cost driver was used to produce which product. Order
47-49QA_-_). So long as the distribution key accurately reflects the proportion of
cost driver used by each product> the element> s volume-variable costs will be
accurately attributed. This "illustrates a key characteristic of volume-variable costs:
15
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they are the minimal marginal costs that are incurred at every level of cost driver and
can therefore be attributed by a distribution key.” Order 49(JA__).
Fourth, the Postal Service determines a product’s total volume-variable cost by
summing the volume-variable costs for that product across elements. App. A, at
14(JA__).
Under the historical cost-attribution method, the sum of a product’s volume-
variable costs and product-specific fixed costs is the product’s attributable cost.
3. Attribution of Inframarginal Costs
The Commission’s historical method does not attribute the entire area under a
given marginal-cost curve. In particular, the method does not account for common
variable costs that result from economies of scale and scope. Order 35(JA__). These
efficiencies mean that the marginal cost of producing the next unit of cost driver
decreases with each unit of cost driver produced. Id. The additional costs incurred by
earlier units—which do not benefit from these efficiencies as much as later units do—
can be represented graphically by the area below the marginal-cost curve and above
the line signifying volume-variable costs. Id. This area is shaded green on the graph
below. Postal economists refer to these costs as inframarginal costs. Id.
USCA Case #16-1354 Document #1672446 Filed: 04/24/2017 Page 26 of 95
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Figure 4—Inframarginal Costs in Marginal-Cost Curve
App. A, at 17(JA__).
Because inframarginal costs are neither product-specific fixed costs nor
volume-variable costs, the historical cost-attribution method treated them as residual
institutional costs, and not as “costs attributable” to a particular product. 39 U.S.C. §
3633(a)(2)-(3). The method did not include a mechanism for calculating total
inframarginal costs or for allocating total costs among products. See Order 10
n.15(JA__).
In 2010, the Commission adopted, in a different context, a method for
estimating a portion of a product’s inframarginal costs. This method implemented
the Commission’s mandate to “prohibit the subsidization of competitive products by
market-dominant products.” 39 U.S.C. § 3633(a). The Commission embraced
incremental cost—the marginal cost of producing a product—as the “conceptually
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18
correct method” for determining the costs attributable to competitive products when
evaluating whether those products are being cross-subsidized. Order 2, Dkt.
RM2010-4 (P.R.C. Jan. 27, 2010) (“Order No. 399”), https://go.usa.gov/x5ZuK.
“There is widespread agreement that incremental cost is the correct cost measurement
in cross-subsidy testing.” Bradley Analysis 13(JA__). This method can be used to
estimate the incremental costs of competitive products collectively and the
incremental costs of a competitive product individually. See Order 41-42(JA__-__).
A product’s incremental cost has three components: (1) product-specific fixed
costs, (2) the product’s volume-variable cost, and (3) the sum of “the portion of [a
cost element’s] inframarginal costs that would be avoided by not providing that
product in the [element].” App. A, at 18(JA__). The first two are identical to the
categories that make up a product’s “attributable costs” under the historical cost-
attribution method. The third is unique.
First, the Postal Service determines whether a cost element contains
inframarginal costs. See Order 41(JA__). Consider the highway-transportation cost
element, which uses the cubic-foot-mile as its cost driver and which benefits from
economies of scale and scope. Just as before, suppose the Postal Service has used 20
cubic-foot-miles in all. Suppose further that these units of cost driver were used to
produce three products: letters, parcels, and flats.
Second, the Postal Service uses distribution keys—the same keys used to
calculate volume-variable costs—to determine what proportion of the cost driver the
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19
product is responsible for. See Order 50(JA__). Suppose the Postal Service is
interested in the incremental cost of letter delivery. Its data systems reveal that letters
consumed 8 of the 20 cubit-foot-miles of highway transportation expended.
Third, the Postal Service models the shape of the element’s marginal-cost curve.
This is necessary because earlier units of cost driver are associated with higher
marginal costs than later units of cost driver—and inframarginal cost reflects the
difference between a given unit’s marginal cost and the last unit’s marginal cost. To
estimate the marginal cost of previous units, the Postal Service extrapolates from
existing data by assuming that the marginal cost of each unit changes in the same
proportion. Order 41(JA__). This constant-elasticity assumption “has been
demonstrated to work at small levels of volume.” App. A, at 18(JA__).
Fourth, the Postal Service calculates the proportion of the element’s
inframarginal costs that can be attributed to the product by assuming that all of the
units of cost driver consumed by that product lie “at the end of the marginal cost
curve.” App. A, at 19(JA__). This assumption is justified because incremental cost is
defined as “the additional cost a product . . . causes when it is added to the Postal
Service’s current mix of products.” Bradley Analysis 21(JA__). To measure this
difference, the incremental-cost method must “act[] as though those units of cost
driver” associated with a product “were never provided.” App. A, at 21(JA__).
This assumption also reflects the reality that the Postal Service does not know
which specific units of cost driver went toward the production of that product. This
USCA Case #16-1354 Document #1672446 Filed: 04/24/2017 Page 29 of 95
knowledge matters because each unit has a different inframarginal cost. (In the above
diagram, supra, fig. 4, the inframarginal cost of the first unit is $4, while the
inframarginal cost of the last unit is $0.) Should the Postal Service attribute the first
unit to the product when the first unit was actually used to produce a different
product, the result would overestimate that product's inframarginal cost. Attributing
only the last units on the marginal-cost curve avoids this problem because the
inframarginal costs of those units are the minimum a product could have incurred.
In this example, the Postal Service's distribution keys have revealed that 8
cubic-foot-miles were used to produce letters. See supra, p . 19.
6
5
4
-e +'
"' 3
0 u
2
1
0
Figure 5-Attribution of lnframarginal Costs Using Incremental-Cost Method
lnframarginal Cost
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Cost Driver
20
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The Postal Service must therefore calculate, as illustrated above, App. A, at 18(JA__)
(annotations added), the inframarginal cost of the last 8 units of cost driver. The total
inframarginal cost of this element attributable to letters is shaded green.
To estimate the total inframarginal cost associated with letters, the Postal
Service repeats the above steps with all other cost elements that contribute to letter
production and sums the results. App. A, at 18(JA__).
C. Petitioner’s Proposal
UPS proposed that the Commission expand its interpretation of “attributable
costs” to include all inframarginal costs.2 UPS recognized that, to comply with the
causality and reliability requirements of § 3633(a)(2), its attribution method “must first
calculate the amount of these costs, and then identify a reliable and appropriate
methodology for distributing them to individual products.” Neels Report 19(JA__).
UPS claimed that Kevin Neels, an economist retained by the company, had created a
model that could accomplish both tasks.3
2 UPS’s proposal would also affect the attribution of inframarginal costs to
market-dominant products. See 39 U.S.C. § 3622(c)(2). Because UPS’s interest lies in the price floor for competitive products, this brief focuses on competitive products as well.
3 UPS submitted two other proposals to the Commission. First, UPS asked the
Commission to reclassify certain categories of costs, currently deemed institutional costs, as attributable costs. Order 2(JA__). The Commission declined to adopt that proposal because the “econometric analysis provided by UPS does not reliably identify” the costs at issue as attributable. Order 3(JA__). Second, UPS asked the Commission to reconsider the current proportion of institutional costs that
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Because the inframarginal cost of a unit of cost driver is the difference between
that unit’s marginal cost and the last unit’s marginal cost, the total inframarginal cost
of a cost element cannot be determined without knowing the shape of the element’s
marginal-cost curve at all levels of volume. Neels proposed to estimate the shape of
such curves using a method devised by Charles McBride, an economist retained by
the Commission to “develop . . . methodologies for calculating inframarginal costs.”
Charles McBride, The Calculation of Inframarginal Costs 1, 5-8 (Jan. 14, 2015),
https://go.usa.gov/x5C9W (“McBride Report”); see Neels Report 19-20(JA__-__).
McBride’s method extended the model used to calculate inframarginal costs as part of
the incremental-cost test. See McBride Report 5-6. That model uses the constant-
elasticity assumption to estimate the shape of the marginal-cost curve at small levels
of volume. Id. Following McBride, Neels adopted that assumption to extrapolate the
shape of the entire cost curve. Neels Report 20(JA__).
Neels recognized that, as a “necessary second step,” the total inframarginal
costs of an element must be divided among individual competitive products. Neels
Report 20(JA__). But the Postal Service does not track the product each unit of cost
driver was used to produce—and, as Neels further recognized, “[t]here is no
principled way to determine where along [the marginal-cost curve] any . . . individual
competitive products must collectively cover under 39 U.S.C. § 3633(a)(3). Order 4(JA__). That provision requires the Commission to reevaluate its apportionment every five years. The Commission declined to consider UPS’s proposal until it could engage in that review. Id. UPS has not petitioned for review of either decision.
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mail piece belongs.” Id. at 24(JA__). This information is critical to attributing total
inframarginal costs because every unit of cost driver has a different inframarginal cost.
In its absence, there is no way to know which units of cost driver were used to make a
product—and thus no way to know what proportion of total inframarginal costs
should be attributed to that product. Neels nonetheless proposed to allocate these
costs using the Postal Service’s existing distribution keys, which reflect the proportion
of cost driver used by a given product. Id. at 28-29(JA__-__). Under this approach,
“a product [that] uses 15% of a cost driver . . . would be attributed 15% of that
driver’s” total inframarginal costs. Pet. Br. 24.
Neels did not argue that this attribution method accurately captured the actual
distribution of cost drivers to products. Neels argued instead that the results of his
method were consistent with a concept invented by Lloyd Shapley in the field of
“cooperative game theory.” Neels Report 22(JA__). This concept, called the Shapley
value, was developed in response to a stylized allocation problem: how best to divide
“gains achieved through cooperation” among a “coalition of players” who have
worked together to “achieve[] some benefit that they could not obtain individually.”
Id. This problem has three characteristics. First, due to the players’ “different
situations and bargaining powers,” each player is assumed to have contributed a
different proportion of resources to that goal. Id. at 22-23(JA__-__). Second, the
magnitude of each player’s contribution “depend[s] upon the number and identity of
the p[l]ayers that have already joined the coalition.” Id. at 23, 26(JA__, __). Third,
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the order in which a player joins the coalition is random. “Each possible sequence of
decisions to join the coalition could potentially result in a different set of incremental
contributions.” Id.
To “avoid[] having arbitrary ordering decisions dictate the” allocation of gains,
the Shapley method assigns gains using “the average of a player’s incremental
contributions over all possible sequences.” Neels Report 23(JA__). This average is
the Shapley value. Because the Shapley value is a weighted average, it “is not sensitive
to the order in which” the players actually joined the coalition. Id. at 24(JA__).
Indeed, its entire purpose is to avoid having the actual “order[] . . . dictate the results.”
Id. at 26(JA__). Each player “share[s] equally in the attribution” of the total gain the
coalition accrued. Id. at 28(JA__).
Neels analogized the coalition-building game to the problem of postal-cost
attribution. He equated a given player in the Shapley game to a single unit of cost
driver. Neels Report 26(JA__). Neels posited that, just as the contribution of each
player turned on the order in which that player joined the coalition, the inframarginal
cost of each unit of cost driver turns on the location on the marginal-cost curve where
that unit was produced. Id. at 26-27(JA__-__). Neels further assumed that, just as
each player was equally likely to join the coalition in a particular order, each unit of
cost driver is equally likely to be produced at all positions on the curve. See Order
46(JA__). Under these assumptions, the Shapley value for the inframarginal cost for
that unit is “the average inframarginal cost per cost driver unit.” Neels Report
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28(JA__). By extension, the inframarginal costs of a product are equal to “that
product’s share of the distribution key for that cost driver.” Id. The Shapley-value
approach thus distributes inframarginal costs to products in “essentially” the same
way as the distribution-key approach. Id.
Neels estimated that, had the Postal Service used his attribution method in
Fiscal Year 2014, the statutorily mandated price floor for competitive products would
have increased by 21%, or $2.3 billion. Neels Reply Report 23(JA__).
The Commission invited public comment on UPS’s proposal. All but one
commenter advised against adopting it. Order 20-22(JA__-__). Most advised the
Commission to retain its historical approach to cost attribution, under which no
inframarginal costs are attributed to products. Id. Several commenters who opposed
UPS’s proposal advised the Commission to use “incremental costs instead of marginal
costs as the basis for cost attribution.” Order 29(JA__).
D. Commission Proceedings
The Commission declined to adopt UPS’s proposal. The Commission
identified serious flaws in Neels’s method for calculating total inframarginal costs.
Order 38-40(JA__-__). The Commission also determined that, even if Neels’s
method were capable of estimating total costs reliably, his method of allocating those
costs did not evince the “reliably identified causal relationship” required by the
definition of “costs attributable” in 39 U.S.C. § 3631(b). Order 43-51(JA__-__).
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Importantly, the Commission did not conclude that inframarginal costs can
never constitute “costs attributable” under 39 U.S.C. § 3633(a)(2). The Commission
observed that the Postal Service already attributes a portion of a cost element’s
inframarginal cost to its products when calculating incremental cost to test for cross-
subsidization. Order 60(JA__). In the Commission’s judgment, the incremental-cost
method does not suffer from the flaws that attend UPS’s proposal. Order 41-
42(JA__-__). Thus, the Commission promulgated a final rule interpreting “costs
attributable” to include “those inframarginal costs calculated as part of a competitive
product’s incremental costs.” 39 C.F.R. § 3015.7(b); Adoption Order 13.
SUMMARY OF ARGUMENT
This case involves a quintessential exercise of the Postal Regulatory
Commission’s technical expertise. The Commission must ensure that the Postal
Service’s competitive products covers their “costs attributable.” 39 U.S.C.
§ 3663(a)(2). The narrow definition of “costs attributable” includes only those “direct
and indirect postal costs attributable to [a] product through reliably identified causal
relationships.” Id. § 3631(b). Congress delegated to the Commission the “technical
decision of what cost analysis methodologies are sufficiently reliable . . . to form the
basis for attribution.” Senate Report 9. In the challenged orders, the Commission
revised its historical cost-attribution method to require attribution of some—but not
all—inframarginal costs. This reasonable exercise of the Commission’s expert
judgment merits deference.
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Under the revised method, the Postal Service must attribute to a product
“those inframarginal costs calculated as part of [that] product’s incremental costs.” 39
C.F.R. § 3015.7(b). This calculation reflects the portion of inframarginal costs that
would disappear if the Postal Service stopped producing the product. Thus, the
Commission reasonably concluded that the incremental-cost method “accurately
calculates the inframarginal costs that can be causally related to a product’s provision
as a whole.” Order 42(JA__).
UPS faults the Commission for declining to adopt its proposal to attribute all
inframarginal costs to products. But the Commission reasonably concluded that
UPS’s approach suffers from two methodological defects that do not afflict the
incremental-cost method. First, UPS’s method cannot reliably measure total
inframarginal costs because its model stretches the constant-elasticity assumption
beyond its breaking point. Second, even if UPS’s method could reliably estimate total
inframarginal costs, it cannot reliably identify a causal relationship between a product
and the portion of inframarginal costs the method would attribute to that product.
Although UPS quibbles with the Commission’s economic analysis, its rejoinders lack
merit—and in any event, the Commission’s “reasonable” judgments are entitled to
judicial deference even if “some or many economists would disapprove of the
[Commission’s] approach.” See City of L.A. v. U.S. Dep’t of Transp., 165 F.3d 972, 977
(D.C. Cir. 1999).
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UPS’s statutory arguments also lack merit. UPS contends that the
Commission’s approach unlawfully classifies inframarginal costs as “institutional
costs” under 39 U.S.C. § 3633(a)(3), which UPS reads to exclude any cost that
economists would deem variable. But the provision’s text, structure, and history
confirm the Commission’s long-held interpretation of “institutional costs” as a
residual category containing all costs not “attributable” under § 3633(a)(2).
UPS also contends that the Commission’s approach reads the term “indirect
costs” out of the definition of “costs attributable” in 39 U.S.C. § 3631(b), which UPS
interprets to unambiguously include costs (such as inframarginal costs) that are jointly
caused by multiple products. But the Commission did not conclude that common
costs can never be attributed under § 3633(a)(2); to the contrary, the Commission’s
revised method attributes a portion of inframarginal costs. Even if the Commission
had so concluded, UPS’s interpretation of “indirect cost” contradicts the settled
meaning of this term of art, which has for decades been used to denote costs linked to
the volume of a single product by at least one intermediate factor.
UPS alleges that the Commission did not adequately answer these statutory
arguments. But the Commission properly rejected UPS’s reading of “institutional
costs” as inconsistent with the statutory structure, and properly declined to address
UPS’s reading of “indirect costs” because its reasoning did not depend on the fact
that inframarginal costs are common to multiple products. Since the Commission’s
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interpretations are well-known and well-documented, remand for additional
explanation would serve no purpose.
Finally, UPS faults the Commission for not addressing UPS’s concern that,
even if the Commission’s revised method complies with § 3633(a)(2), the method
could still allow the Postal Service to engage in predatory pricing. This argument is
waived because, in Commission proceedings, UPS disavowed the theory that
§ 3633(a)(2) requires the Commission to consider policy when determining what costs
are attributable. It is also incorrect. In contrast to another subsection of the
provision, § 3633(a)(2) does not require consideration of policy outcomes. And even
if it did, the record does not support UPS’s allegations of predatory pricing.
STANDARD OF REVIEW
The Commission’s orders may be set aside only if they were “arbitrary,
capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C.
§ 706(2)(A); 39 U.S.C. § 3663. “The scope of review under the ‘arbitrary and
capricious’ standard is narrow and a court is not to substitute its judgment for that of
the agency.” Motor Veh. Mfrs. Ass’n of U.S. v. State Farm Mut. Auto. Ins. Co., 463 U.S.
29, 43 (1983).
The Commission’s reasonable interpretation of the statutes it administers
receives Chevron deference. U.S. Postal Serv. v. Postal Regulatory Comm’n, 599 F.3d 705,
710 (D.C. Cir. 2010); see Chevron U.S.A. Inc. v. Natural Res. Def. Council, 467 U.S. 837,
842-44 (1984).
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ARGUMENT
I. THE POSTAL REGULATORY COMMISSION’S REVISED COST-ATTRIBUTION METHOD IS REASONABLE.
A. The Commission reasonably determined that some but not all inframarginal costs should be attributed to postal products.
Congress requires the Commission to set price floors for the Postal Service’s
competitive products that are tied to the “costs attributable” to each product. 39
U.S.C. § 3633(a)(2). Only “direct and indirect postal costs attributable to such
product through reliably identified causal relationships” are “attributable” for this
purpose. Id. § 3631(b). Congress did not further specify what relationships are
sufficient to satisfy this statute. Instead, Congress left to the Commission the
“technical decision of what cost analysis methodologies are sufficiently reliable at any
given time to form the basis for attribution.” Senate Report 9. These technical
decisions are entitled to deference so long as they are “reasonable.” Alliance of
Nonprofit Mailers v. Postal Regulatory Comm’n, 790 F.3d 186, 197 (D.C. Cir. 2015).
This case involves a quintessential exercise of the Commission’s technical
expertise. For decades, the Commission and its predecessor attributed only two
categories of costs under § 3633(a)(2): product-specific fixed costs and volume-
variable costs. Order 9(JA__). Because neither category contains inframarginal costs,
neither adequately accounts for efficiencies of scale and scope. In the challenged
orders, the Commission updated its historical cost-attribution method to include, in
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addition to the existing categories, “those inframarginal costs calculated as part of a
competitive product’s incremental costs.” 39 C.F.R. § 3015.7(b).
The Commission reasonably concluded that this calculation satisfies the
reliability and causality requirements of 39 U.S.C. § 3631(b). A product’s incremental
cost is “the difference between the total costs of the enterprise and the total costs
without one product.” Order 58(JA__). This concept “tests the change in total costs
from providing” every unit of a product, just as “marginal cost examines the change
in total costs from providing” a single unit of that product. Order 57(JA__).
Although the incremental-cost method does not attribute all inframarginal costs, it
accounts for a portion of inframarginal costs because a product’s incremental cost is
the sum of the marginal cost for each unit of cost driver used to make that product—
not merely the last unit. See Order 40-42(JA__-__). And it attributes to a product
only those inframarginal costs that would disappear if the Postal Service stopped
producing the product. Order 49, 52, 57(JA__, __, __). Thus, “[t]his model for
incremental cost calculation accurately calculates the inframarginal costs that can be
causally related to a product’s provision as a whole.” Order 43(JA__).
Confirming the Commission’s findings is its determination, in a related context,
that the incremental-cost test is the “conceptually correct method” for evaluating
whether the Postal Service is “subsidiz[ing] . . . competitive products” with revenues
from “market-dominant products.” Order No. 399, at 2; see 39 U.S.C. § 3633(a)(1).
The method “precisely tests for cross-subsidy” because “incremental costs are the
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entire set of costs that a product incurs, including those inframarginal costs
attributable to it.” Order 58(JA__). “There is widespread agreement that incremental
cost is the correct cost measurement in cross-subsidy testing,” and the incremental-
cost test is “now standard in both economic theory and regulatory practice.” Bradley
Analysis 13(JA__); see Corr. Panzar Decl. 2-3 & n.4(JA__-__) (citing sources). Indeed,
UPS previously argued that the Commission “should require that each competitive
product cover its incremental cost” because, “[b]y definition, the incremental costs of
a product are the costs incurred as a result of providing that product” and are
therefore “attributable to that product.” UPS Comments 2, Dkt. PI2008-2 (P.R.C.
Apr. 1, 2008), https://go.usa.gov/x54av. The Commission reasonably extended this
test to § 3633(a)(2)—a different subsection of the same provision.
At the same time, the Commission reasonably rejected UPS’s proposal to
attribute all inframarginal costs using a two-step method devised by Kevin Neels, its
retained expert. That method first attempts to “calculate the [total] amount of these
costs” the Postal Service has incurred. Neels Report 19(JA__). It then attempts to
“distribut[e]” these costs “to individual products” using a “reliable and appropriate
methodology.” Id. The Commission determined that both prongs of UPS’s proposal
were methodologically deficient.
With respect to the first prong, the Commission noted that total inframarginal
costs cannot reliably be measured. Inframarginal costs are the sum of the differences
between the marginal cost of a given unit of cost driver and the marginal cost of the
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last unit of cost driver. See Order 35-36(JA__-__). There is no way to determine the
total inframarginal cost of a given cost element without knowing the marginal cost of
every unit of cost driver consumed. “[R]eal-world” firms such as the Postal Service
“do[] not have the information necessary to define the entire cost function of each”
element. Order 8(JA__).
Neels proposed to solve this problem by extending an existing model for
projecting a cost curve’s shape. The key feature of this model is its constant-elasticity
assumption. Although this assumption is “useful” to visualize the “curve of a cost
function across its entire cost driver,” it has substantial limitations. Order 38(JA__).
Specifically, the Commission found that the assumption may “inaccurately represent
the shape of the cost curve at very low levels of volume,” where inframarginal costs
are highest. Order 38-39(JA__-__). Neels’s report contained “no evidence
suggesting” that his estimates are “acceptably accurate over the total range of
volume,” Bradley Analysis 38(JA__), and the Postal Service has never “experienced
the levels of volume necessary to verify” Neels’s model empirically, Order 39(JA__).
Because Neels’s method applies the constant-elasticity assumption “to levels of
volume far beyond the range of actual experience,” it “produces results that are
inadequately supported and unreliable.” Order 39(JA__).
With respect to the second prong, the Commission noted that total
inframarginal costs cannot reliably be attributed. The inframarginal cost of each unit
of cost driver differs depending on where on the marginal-cost curve the unit falls.
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But each cost element contributes to multiple products. And the Postal Service “does
not precisely know the order in which it [produced] each product,” much less which
product each unit was used to produce. Order 49(JA__). So even if the Postal
Service could determine the inframarginal cost associated with every unit of cost
driver on an element’s marginal-cost curve, it could not determine which of those
units contributed to the production of the product at issue.
Neels proposed to solve this problem by attributing inframarginal costs to
products using the Postal Service’s existing distribution keys, which are currently used
to allocate volume-variable costs. Those distribution keys do not contain any
information about where on a curve a unit of cost driver falls; they speak only to what
proportion of the cost driver was used to produce a particular product. App. A, at
9(JA__). Proportional allocation produces valid results in the context of volume-
variable costs, where the cost associated with each unit of cost driver is identical.
Order 47-48(JA__-__). But this is unlikely to be true in the context of inframarginal
costs, as shown below.
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Figure 6—Comparison of Distribution-Key Allocation for Volume-Variable Costs and Inframarginal Costs
Order 48(JA__). On this graph, the first six units of cost driver were used to produce
one product, the next six were used to produce a second product, and the last eight
were used to produce a third product. All three products incur volume-variable costs,
represented by the blue area, in equal proportion. But the same cannot be said about
inframarginal costs, represented by the green area, because each unit has a different
inframarginal cost that corresponds to its position on the element’s marginal-cost
curve. A proportional allocation of inframarginal costs would allocate too much to
the last product and too little to the first product. The Commission thus declined to
repurpose the Postal Service’s distribution keys in this manner.
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For the same reason, the Commission reasonably rejected Neels’s attempt to
prove causation by comparing distribution-key-based allocation to an allocation model
invented by game theorist Lloyd Shapley. Shapley’s approach to cost attribution has
nothing to do with causation because, as Neels admitted, it “attribute[s] cost
responsibility in a manner that is independent” of a unit of cost driver’s location on
the marginal-cost curve. Neels Report 22(JA__). The Shapley approach assigns each
unit of cost driver an inframarginal cost equal to the “mean inframarginal cost of
every point on” the curve—which in most circumstances will not correspond to the
unit’s actual inframarginal cost. Order 46(JA__). As such, Shapley’s approach
“weakens” and may even “fully eliminate” any “causal relationship” between a unit
and the inframarginal cost assigned to it. Id.
The Commission rejected Neels’s invocation of Shapley’s approach to
attribution for a second and separate reason: the approach may not accurately
approximate the actual distribution of units of cost driver along each element’s
marginal-cost curve. Shapley’s model assumes that all units of cost driver are “equally
likely to be at any point in a marginal cost curve.” Order 46(JA__). Neels supplied
no evidence supporting such an assumption in the postal-costing context. And as the
Commission noted, it is possible that “the ordering of the units of the cost driver
within the marginal cost curve is not random.” Id. Should this assumption be
incorrect, a Shapley allocation would produce “inaccurate” results. Id.
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B. The Commission properly determined that UPS’s method of attributing all inframarginal costs to products was flawed.
UPS does not contend that the incremental-cost method fails the “reliably
identified causal relationship” standard. Instead, UPS claims that, by refusing to
attribute all inframarginal costs, the Commission did not go far enough. To that end,
it disputes the Commission’s economic analysis with a litany of highly technical
objections. But this Court is not a “peer review board for an academic journal of
econometrics.” Alliance of Nonprofit Mailers, 790 F.3d at 197. The Court is “obliged”
to affirm a Commission order if it is “reasonable,” even when “some or many
economists would disapprove of the [Commission’s] approach.” See City of L.A. v.
U.S. Dep’t of Transp., 165 F.3d 972, 977 (D.C. Cir. 1999). Because the Commission’s
revised cost-attribution method is reasonable, this Court should decline UPS’s
invitation to second-guess the Commission’s expert judgments.
In any event, UPS’s economic arguments lack merit.
1. UPS asserts (Pet. Br. 60-63) that, because the incremental-cost method uses
the constant-elasticity assumption to extrapolate the shape of part of an element’s cost
curve, the Commission cannot criticize Neels for using the same assumption to
extrapolate the shape of the entire cost curve. This argument rests on a false
equivalence between the Commission’s revised method and UPS’s proposal. The
incremental-cost method does not require extrapolation of the entire curve because,
unlike UPS’s proposal, it does not seek to attribute all inframarginal costs. Order 42
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& n.63, 52 n.70(JA__, __). By “restricting itself to limited amounts of volume (i.e., the
volume of each product),” the test “only estimates inframarginal costs in a very small
range of a component’s cost curve where the constant elasticity assumption has been
empirically verified based on observed volumes.” Order 42(JA__).
UPS responds (Pet. Br. 61) that the constant-elasticity assumption is not limited
to very small ranges because the incremental-cost method, as used to test for cross-
subsidies, operates by “removing the entire class of competitive products from Postal
Service costs.” But UPS omits that, by volume, competitive products make up a small
percentage of the products the Postal Service provides. See Postal Regulatory
Comm’n, Financial Analysis of United States Postal Service Financial Results and 10-K
Statement: Fiscal Year 2016, App. A, at 1 (2017) (“Financial Analysis”),
https://go.usa.gov/x5kWz. In consequence, the incremental-cost test need only
extrapolate the shape of a relatively small portion of the Postal Service’s total cost
function. And even if the constant-elasticity assumption could be used for
significantly larger ranges, it still cannot reliably project inframarginal costs for very
low levels of volume—which UPS’s proposal must project but the incremental-cost
method need not.
UPS further responds (Pet. Br. 62) that, even if the Postal Service cannot
reliably calculate the shape of a cost element’s marginal-cost curve, the shape “is
irrelevant if the Postal Service knows its variable costs for that [element].” However,
the Postal Service does not actually know whether all costs associated with an element
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are variable costs in the economic sense. Order 39(JA__). Even if this information
were available, UPS would still be confronted with the dilemma of attributing those
total costs to products.
2. UPS asserts (Pet. Br. 51-56) that the Commission demanded empirical
verification of causality without requiring similarly stringent proof for the
incremental-cost method. It argues that Neels’s ordering assumption (that the units
of cost driver used to make a product are incurred by the Postal Service at random) is
more plausible than the Commission’s ordering assumption (that the units of cost
driver used to make a product are the last units of cost driver for which the Postal
Service pays). Id.
This argument rests on the same false equivalence. The incremental-cost
method calculates the “difference between the total costs of the enterprise and the
total costs without one product.” Order 58(JA__). Although this calculation almost
certainly underestimates the inframarginal costs a product actually incurred, it has one
critical feature: Because the difference represents the marginal cost of producing a
product, the incremental-cost method is the minimum inframarginal cost the product
could possibly have incurred. Order 57(JA__). In the Commission’s judgment, this
minimum is the only cost that bears sufficient indicia of reliability and causality to
warrant attribution for purposes of setting a price floor—which can distort the
marketplace if set too low or too high. Order 59(JA__).
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By contrast, UPS’s proposal is not limited to the question of which
inframarginal costs would disappear if the Postal Service stopped producing a
product. UPS instead seeks to allocate all inframarginal costs to all products. Thus,
UPS must ask, and identify a reliable answer to, the wholly separate question of how
the entire bucket of costs should be “distribut[ed] . . . to individual products.” See
Neels Report 19(JA__). It is with respect to this question—which, unlike the first
question, is sensitive to the location of particular units of cost driver on the marginal-
cost curve—that empirical verification of cost-driver location is required.
UPS acknowledges that the Postal Service, like other real-world firms, “lacks
perfect knowledge of cost components, cost elasticity, and other factors affecting cost
calculations.” Pet. Br. 55 (citation and quotation marks omitted). UPS nevertheless
insists that Neels’s model—which assumes that the Postal Service consumes units of
cost driver in a random order—is a close-enough approximation of the reality of mail
delivery. See Pet. Br. 54. However, UPS can only speculate, in conclusory fashion,
that the distribution of products is actually random. See id. In the absence of such
evidence, the Commission reasonably declined to rely on Neels’s model. Nor is it
significant that the Commission did not ask whether the ordering assumptions
underlying the incremental-cost method were similarly speculative. To reiterate, the
incremental-cost method—unlike Neels’s model—does not depend on the order in
which the units of cost driver are produced.
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3. UPS asserts (Pet. Br. 56-60) that the Commission could not rationally reject
Neels’s distribution-key-based allocation scheme because the incremental-cost
method also uses distribution keys. Here again, the two approaches are not
comparable. The validity of the incremental-cost method does not depend on
identifying the exact location on the marginal-cost curve where a given unit of cost
driver was produced. The test calculates the proportion of inframarginal costs that
would disappear if the UPS ceased production of that product. See Order 50-
51(JA__-__). As such, the incremental-cost method can safely rely on existing
distribution keys, which reveal how many units of cost driver—but not which units of
cost driver—were associated with a product. Order 50(JA__). The same cannot be
said for UPS’s proposal to allocate all inframarginal costs to all products. To ensure
that a product only bears those inframarginal costs it caused, UPS must identify some
causal mechanism linking the product to the amount of costs UPS thinks the product
must bear—and, by extension, to where on an element’s marginal-cost curve the units
of that product were produced. Order 51(JA__). The Postal Service’s existing
distribution keys cannot serve this function.
4. UPS asserts (Pet. Br. 43-45) that the Commission previously concluded that
that all variable costs possess a “reliable causal relationship with products.” This
argument misreads the relevant precedent.
In the world of postal costing, there is a significant difference between
“variable costs” and “volume-variable costs.” The former, an economic term,
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denotes all costs that “vary with the amount of goods produced.” Order 6(JA__).
The latter, a term of art specific to postal costing, denotes the “mathematical product
of the marginal cost of a postal product and its volume.” Primer 16. Because volume-
variable costs vary with product volume, all volume-variable costs are variable costs.
But not all variable costs are volume-variable costs. Of particular note, inframarginal
costs—which vary with product volume—are not volume-variable costs. The
Commission’s revised order makes this distinction clear. See Notice of Errata
1(JA__).
UPS is well aware of this distinction. Pet. Br. 9 (explaining that volume-
variable costs are “not what economists call ‘variable costs’”). Nonetheless, UPS cites
an appendix from an order discussing volume-variable costs in the postal-costing
sense as if the appendix were discussing variable costs in the economic sense. See
R80-1 Op., vol. 2, app. B, at 26. The purpose of that appendix, issued in 1981 and
titled “Historical Development of Costing Principles,” was to survey the history of
the Commission’s cost-attribution procedures. Read in context, the appendix states
only that, once a cost is determined to be a volume-variable cost in the postal-costing
sense, it is by definition attributable to a product. Id. The appendix did not state that
all costs that vary with volume in the economic sense automatically satisfy the
causality and reliability requirements of § 3633(a)(2). Were it otherwise, UPS’s
proposal would have been wholly unnecessary.
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UPS’s reliance on NAGCP, 462 U.S. 810, is similarly misplaced. The Supreme
Court there affirmed that “a sufficient causal nexus” must be “establish[ed] . . . before
costs may be attributed.” Id. at 826. The Court held that the Commission, an “expert
ratesetting agency,” has “authority to decide which methods sufficiently identify the
requisite causal connection.” Id. Applying these principles, the Court approved sthe
Commission’s historical “two-tier approach to ratesetting,” id. at 823, under which
only product-specific fixed costs and volume-variable costs were deemed attributable.
The Court concluded that such costs ought to be attributed because, in the
Commission’s judgment, they were calculated using “methods [that] reliably indicate
causal connections between classes of mail and postal rates.” Id. at 830. The Court
did not hold that all variable costs, as the term is understood by economists, possess
the “causal connection” that is a prerequisite for attribution.
II. THE COMMISSION’S REVISED COST-ATTRIBUTION METHOD IS CONSISTENT WITH THE POSTAL ACCOUNTABILITY AND ENHANCEMENT ACT.
UPS separately contends that the Postal Accountability and Enhancement Act
unambiguously requires the Commission to attribute all inframarginal costs to
products. That argument lacks merit.
A. Inframarginal costs may properly be classified as “institutional costs” under § 3633(a)(3).
UPS observes (Pet. Br. 34) that, by declining to classify most inframarginal
costs as “costs attributable,” the Commission’s approach results in those costs being
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classified as “institutional costs” under § 3633(a)(3). UPS believes this is unlawful
because the category of “institutional costs” cannot include any costs defined as
variable in the economic sense—that is, costs that vary with product volume. But
UPS’s interpretation of “institutional costs” is foreclosed by the text, structure, and
history of § 3633(a)(3), which unambiguously indicate that the term is a residual
category containing all costs that are not “costs attributable” under § 3633(a)(2).
Section 3633 divides all costs of competitive products into “costs attributable,”
39 U.S.C. § 3633(a)(2), and “institutional costs of the Postal Service,” id. § 3633(a)(3).
The Act defines only one of these terms: “[T]he term ‘costs attributable’ . . . means
the direct and indirect postal costs attributable to such product through reliably
identified causal relationships.” Id. § 3631(b). The Act does not define “institutional
costs,” whose ordinary meaning is susceptible to different interpretations. Because
“institutional” means “of, relating to, involving, or constituting an institution,”
Webster’s Third New International Dictionary of the English Language 1171 (1993),
“institutional costs” are those costs that “relat[e] to . . . an institution.” This definition
is broad enough to operate—as the Commission has interpreted it to operate—as a
residual category into which any postal cost not classified as a “cost attributable” must
fall. Order 9-10(JA__-__). There is no reason to think, as UPS asserts, that costs
which vary with the volume of products the Postal Service produces can under no
circumstances “relat[e] to” the Postal Service.
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To the extent the textual meaning of “institutional costs” is unclear, the
provision’s structure resolves that ambiguity in the Commission’s favor. As UPS
acknowledges, § 3633(a) classifies all Postal Service costs as either “attributable” or
“institutional.” Order 9(JA__); Pet. Br. 34. But the Act only defines the term “costs
attributable”—and narrowly at that. 39 U.S.C. § 3631(b). This indicates that the
proper way to classify a postal cost is to determine whether it is attributable to a
product “through [a] reliably identified causal relationship[].” Id. A cost that is not
attributable is institutional. By contrast, UPS’s interpretation of “institutional costs”
treats “costs attributable” as the residual category by requiring the Postal Service to
first determine if a given cost is variable in the economic sense. If so, the cost cannot
be institutional and must be attributed to products whether it satisfies the statutory
definition of “costs attributable” or not. That approach turns § 3633(a) on its head.
The legislative history also forecloses UPS’s reading of “institutional costs.”
Congress enacted § 3633(a) against the backdrop of the Postal Reorganization Act of
1970. That statute authorized the Commission’s predecessor to recommend rates
consistent with the principle that “each class of mail [must] bear the direct and
indirect postal costs attributable to that class . . . plus that portion of all other costs of
the Postal Service reasonably assignable to such class.” NAGCP, 462 U.S. at 814 n.3.
The statute did not define “costs attributable,” which at the time possessed “no
technical meaning or significant antecedent legislative history.” Id. at 832. Nor did
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the statute use the term “institutional costs,” instead requiring each class of mail to
bear “that portion of all other costs . . . reasonably assignable” to it. Id. at 814 n.3.
The Commission’s predecessor interpreted “costs attributable” to encompass
only product-specific fixed costs and volume-variable costs—the same approach to
cost attribution historically employed by the Commission, and the same approach
upheld by the Supreme Court in NAGCP. The Commission’s predecessor then
adopted the term “institutional costs” as a gloss on the phrase “all other costs.”
Specifically, the Commission defined “institutional costs” as “[a]ll . . . costs” “other”
than “certain costs that are variable with volume, plus certain specific fixed costs.”
Op. & Rec. Dec., vol. 1, at 99, Dkt. R74-1 (Postal Rate Comm’n Aug. 28, 1975); see
Op. & Rec. Dec., vol. 1, at 227, Dkt. R97-1 (Postal Rate Comm’n May 11, 1998).
This Court and others followed suit. See UPS, Inc. v. U.S. Postal Serv., 184 F.3d 827,
844 (D.C. Cir. 1999); Mail Order Ass’n of Am. v. U.S. Postal Serv., 2 F.3d 408, 425 (D.C.
Cir. 1993); Direct Marketing Ass’n v. U.S. Postal Serv., 778 F.2d 96, 101 (2d Cir. 1985).
The legislative history states that Congress borrowed these terms of art to codify the
“existing regulatory structure” endorsed by NAGCP in 1983 and refined by
subsequent judicial and administrative decisions. Senate Report 9-10.
UPS’s contrary interpretation of “institutional costs” is foreclosed by the
two-step Chevron framework.
At step one, UPS must prove that its interpretation is the “only possible
interpretation” of “institutional costs.” Cf. Sullivan v. Everhart, 494 U.S. 83, 89 (1990).
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That it cannot do. Even if the traditional tools of statutory interpretation do not
compel the Commission’s view, they show that the Commission’s view is at least
available. Moreover, the text of § 3633(a)(3) does not expressly exclude costs that
vary with product volume in the economic sense. UPS’s attempt to inject this
limitation into a provision where the limitation is “conspicuously absent more closely
resembles inventing a statute than interpreting one.” Hardt v. Reliance Standard Life Ins.
Co., 560 U.S. 242, 252 (2010) (citation and internal quotation marks omitted).
UPS’s rejoinders are unpersuasive. UPS cites (Pet. Br. 35-36) several
nonstatutory definitions of “institutional costs” that purportedly reflect its preferred
interpretation. But none forecloses the Commission’s interpretation—and most
actually support it. For instance, the Postal Service’s Glossary of Postal Terms
defines “institutional costs” as “[p]ostal costs that cannot be directly or indirectly
assigned to any mail class or product.” U.S. Postal Serv., Glossary of Postal Terms 104
(2013), https://about.usps.com/publications/pub32.pdf. To explain what costs
cannot be assigned, the glossary cross-references its definition of “attributable cost”:
“the sum of volume-variable cost plus product-specific cost.” Id. at 19. This
definition recapitulates the settled meaning of “institutional costs.” Similarly, UPS
quotes one sentence from the legislative history describing institutional costs as
“costs, such as salaries for management and other overhead costs, that the Postal
Service says cannot be attributed to any specific product.” Senate Report 9. The fact
that these exemplar costs do not vary with volume in the economic sense does not
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support the remarkable inference that Congress included these examples to endorse
UPS’s restrictive view of “institutional costs.” The full paragraph makes the opposite
point: that Congress intended § 3633(a) to reflect the “existing regulatory structure,”
which treated “institutional costs” as residual costs that cannot “reliably be said to
have been incurred to provide . . . specific postal services.” Id.
UPS also relies (Pet. Br. 47) on one sentence from another Commission order,
which states that “by definition, institutional costs [are those that] do not vary with
volume.” See Order 23, Dkt. RM 2012-3 (P.R.C. Aug. 23, 2012) (“Order No. 1449”),
https://go.usa.gov/x5Zuy. But UPS has again conflated the economic concept of
variable costs with the postal-costing concept of volume-variable costs. This order
concerns § 3633(a)(3)’s requirement that competitive products bear an “appropriate
share” of institutional costs. Id. at 1. It was issued when the historical cost-attribution
method was still in effect—under which “institutional costs” were defined as any cost
that was neither a product-specific fixed cost nor a volume-variable cost. In context,
the order simply restates the Commission’s long-held view that institutional costs are
“by definition” not volume-variable costs, which have historically been attributable to
products. Id. at 23. The concept of volume-variable costs does not encompass all
costs that vary with volume in the economic sense. See supra, pp. 41-42.
At step two, UPS has failed to demonstrate that the Commission’s
interpretation was unreasonable. UPS argues (Pet. Br. 38) only that, under the
Commission’s approach, some 45.6% of the Postal Service’s costs are currently
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classified as “institutional.” But it is entirely reasonable for a residual category to
include a significant minority of postal costs in light of how narrowly Congress
defined “costs attributable.” Congress itself contemplated that “institutional costs”
would encompass “40 percent of the Postal Service’s costs” when it enacted
§ 3633(a)(3). Senate Report 9.
B. The statutory definition of “costs attributable” does not require attribution of all inframarginal costs.
UPS contends (Pet. Br. 39-43) that the Commission’s revised cost-attribution
method is inconsistent with the definition of “costs attributable,” which are “direct
and indirect postal costs attributable to [a] product through reliably identified causal
relationships.” 39 U.S.C. § 3631(b). The Commission’s method attributes to a
product only the portion of total inframarginal costs that can be causally related to
that product using the incremental-cost method. UPS believes this method renders
the term “indirect costs” irrelevant, on the theory that “indirect costs” must mean
“costs that are jointly caused by multiple products.” Pet. Br. 39.
This argument misunderstands the Commission’s decision. Inframarginal costs
arise in part from economies of scope, so they are common variable costs that are
caused by multiple products. Order 35(JA__). If the Commission had determined
that no costs caused by multiple products are attributable under § 3631(b), it would
have declined to classify any inframarginal costs as attributable. But the Commission
concluded that certain inframarginal costs can qualify as “costs attributable,” and its
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revised method in fact attributes a portion of inframarginal costs to products. Thus,
the Commission could not have rejected UPS’s proposal to attribute all inframarginal
costs on the theory that such costs are “jointly caused by multiple products.” Instead,
the Commission rejected UPS’s proposal because its attribution method failed
§ 3631(b)’s independent requirements of reliability and causality.
UPS cannot prevail even assuming that its characterization of the
Commission’s decision is correct. The term “indirect costs,” as used in § 3631(b),
does not mean “costs caused by multiple products” but is rather a term of art. The
term, and the corresponding term “direct costs,” have for decades been understood to
mean whether a cost is directly or indirectly linked to the volume of the product that
cost was incurred to produce—as indicated by testimony in a ratemaking proceeding
held by the Commission’s predecessor. See Direct Testimony of Howard Alenier on
Behalf of the U.S. Postal Service 6, Dkt. R80-1, USPS-T-7 (Postal Rate Comm’n Apr.
21, 1980), Add. A12. The Postal Service calculates the indirect costs that can be
linked to products through a reliably identified causal relationship using so-called
“piggyback factors.” See Order 9(JA__); Financial Analysis 49 & n.40.4
To illustrate this distinction, consider the costs of letter delivery. Direct costs
include the salaries paid to line-level mail clerks: The more letters the Postal Service
4 For a description of how piggyback factors operate, see Direct Testimony of
Marc Smith on Behalf of the U.S. Postal Service 21-22, Dkt. R2006-1, USPS-T-13 (Postal Rate Comm’n Sept. 1, 2006), Add. A23-A24.
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processes, the more money it must pay the people who do the processing. Indirect
costs include the salaries of supervisors, who manage not only letter delivery but the
delivery of flats and parcels as well. Op. & Rec. Dec., vol. 1, at 766, Dkt. R87-1
(Postal Rate Comm’n Mar. 4, 1988). These salaries do not directly relate to the
volume of letters the Postal Service processes. But they do directly relate to the
number of line-level mail clerks—which number directly relates to the volume of
letters the Postal Service delivers. The portion of supervisor salaries expended on
letter delivery is therefore attributable to mail. Id. Because indirect costs are not
inframarginal, the Commission’s revised cost-attribution method will not affect their
attribution.
Congress “presumptively was aware” of this “settled . . . administrative
interpretation” of the term “indirect cost” when it incorporated it into the Postal
Accountability and Enhancement Act. See C.I.R. v. Keystone Consol. Indus., Inc., 508 U.S.
152, 159 (1993). It is “proper to accept” the term’s “already settled meaning.” Id.
UPS nevertheless insists that “indirect costs” must refer only to costs
associated with more than one product. That interpretation is foreclosed under the
Chevron framework. At step one, UPS cannot reasonably contend that its reading of
“indirect costs” is the only permissible reading. Cf. Sullivan, 494 U.S. at 89. If
anything, it is UPS’s interpretation that contradicts the provision’s text, which speaks
of products not in the plural but in the singular. See 39 U.S.C. § 3631(b) (explaining
that, when assessing whether a cost is attributable to “a product,” the Commission
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must link that cost “to such product”). The nonstatutory definitions of “indirect
costs” cited by UPS (Pet. Br. 39-40) do not help its cause because they establish only
that “indirect costs” could include costs related to multiple products. Indeed, one
definition recognizes that indirect costs can be identified either “with at least one
intermediate cost objective” (the Commission’s view) or with “two or more final cost
objectives” (UPS’s view). 48 C.F.R. § 9904.418-30(a)(3).
UPS also claims that Congress intended “indirect costs” to refer only to costs
associated with multiple products. But UPS has not backed up that claim with a
single legislative-history citation. In any event, Congress is presumed to have ratified
the Commission’s settled construction of “indirect costs”—and not UPS’s cherry-
picked definitions—by incorporating the term into the Postal Accountability and
Enhancement Act. See Keystone, 508 U.S. at 159.
At step two, UPS argues (Pet. Br. 43) that the Commission’s interpretation is
unreasonable because it allows the Postal Service to “ignore” inframarginal costs
entirely. The Commission did nothing of the sort. Instead, consistent with § 3631(b),
the Commission decided that inframarginal costs are attributable to the extent
permitted by principles of causality and reliability. Although UPS believes that the
Commission should attribute a higher percentage of inframarginal costs, that is no
reason to disregard § 3631(b)’s robust causation requirements. As the Supreme Court
held with respect to the provision’s predecessor, “when causal analysis is limited by
insufficient data, the statute envisions that the . . . Commission will press for better
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data, rather than construct an attribution based on unsupported inferences of
causation.” NAGCP, 462 U.S. at 827 (citation and internal quotation marks omitted).
C. The Commission’s orders adequately explained the Commission’s reasons for attributing only some inframarginal costs.
Finally, UPS argues (Pet. Br. 45-46) that the Commission’s orders did not
adequately explain the Commission’s reasoning. That is inconsistent with the
Administrative Procedure Act (“APA”), which requires only a “brief statement of the
grounds for denial.” 5 U.S.C. § 555(e). The Commission explained that it was
rejecting UPS’s proposal because UPS’s method of attributing all inframarginal costs
did not satisfy the causality and reliability requirements of § 3631(b). Its detailed
analysis clears the APA’s “minimal” bar. Cf. Butte County, Cal. v. Hogen, 613 F.3d 190,
194 (D.C. Cir. 2010).
UPS protests (Pet. Br. 46) that the Commission did not sufficiently address its
two statutory counterarguments. But the Commission rejected UPS’s idiosyncratic
reading of “institutional costs” as inconsistent with the statutory structure. Order 10,
36(JA__, __). And the Commission reasonably declined to address UPS’s claim that
“causality does not have to be exclusive to individual products to be attributable
under the statute” because its reasoning did not depend on that characteristic of
inframarginal costs. See Order 32(JA__). Moreover, remand would not be
appropriate even if these responses were too spare. The Commission’s interpretations
of “institutional costs” and “indirect costs” are well-known and well-documented, and
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the Commission’s revised method is consistent with them. Because the Commission
“could and no doubt would simply” recite its existing precedent on remand, relief of
that nature would “serve no purpose.” See Tourus Records, Inc. v. DEA, 259 F.3d 731,
739 (D.C. Cir. 2001).
UPS argues (Pet. Br. 45) that, at a minimum, the Commission’s interpretations
should not benefit from Chevron deference. But the cases UPS cites involve agencies
that changed existing interpretations without explanation. See Encino Motorcars, LLC v.
Navarro, 136 S. Ct. 2117, 2125-26 (2011); LePage’s 2000, Inc. v. Postal Regulatory Comm’n,
642 F.3d 225, 231 (D.C. Cir. 2011). The same is not true here. At any rate, the above
discussion demonstrates that the Commission’s statutory interpretations survive de
novo scrutiny.
Finally, UPS argues (Pet. Br. 47-50) that the Commission failed to discuss
UPS’s policy arguments, which boil down to the claim that competitive products must
bear all inframarginal costs to prevent the Postal Service from using cross-subsidized
pricing to undermine its competitors. UPS asserts that the Commission was required
to consider these effects because Congress intended § 3633(a)(2)’s attributable-cost
requirement to level the playing field between the Postal Service and its competitors.
This argument is waived. In Commission proceedings, UPS pressed the exact
argument it now criticizes: that “[t]he relevant inquiry” when determining whether a
cost is attributable under § 3633(a)(2) “is whether the Postal Service’s cost attribution
practices comply with” the statutory definition, “not whether doing so will have an
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impact that some would prefer to avoid.” UPS Reply Comments 33(JA__). UPS
cannot now challenge the Commission’s decision on a theory it disavowed, much less
fault the Commission for not sufficiently addressing the argument. See United States v.
L.A. Tucker Truck Lines, Inc., 344 U.S. 33, 37 (1952).
The argument is also incorrect. Congress enacted § 3633 “to ensure that the
Postal Service competes fairly in the provision of competitive products.” Order
121(JA__) (citation omitted). But, as UPS told the Commission, Congress did not
incorporate a separate fair-competition requirement into § 3633(a)(1)’s prohibition on
cross-subsidization or § 3633(a)(2)’s price floor, neither of which makes any reference
to generalized market impacts. UPS Reply Comments 35; see Order 58(JA__). To
underscore these omissions, Congress expressly required the Commission to consider
“the prevailing competitive conditions in the market” in a different subsection of the
provision. 39 U.S.C. § 3633(a)(3), (b); see UPS Reply Comments 36(JA__); Order 58
n.78(JA__). This indicates that Congress intended rate attribution to turn only on the
substantive requirements of § 3633(a)(2). UPS Reply Comments 35(JA__). Because
the Commission’s revised cost-attribution method is consistent with these
requirements, it satisfies the statute’s objectives. The Supreme Court held as much in
NAGCP, where it rejected an identical policy argument brought by UPS more than
three decades earlier. See 462 U.S. at 829 n.24.
UPS could not prevail even if § 3633(a)(2) incorporated an independent fair-
competition requirement because no evidence indicates that the Postal Service
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improperly subsidized competitive products. The near-unanimous opposition to
UPS’s proposal, from users of competitive and market-dominant products alike,
suggests that these market-manipulation concerns are overblown. E.g., Amazon
Comments 3-4(JA__-__); Market-Dominant Mailers Comments 5(JA__). According
to these commenters, it is UPS’s proposal that would have a distortionary effect on
the market: By imposing “artificially inflated [price] floors” on the Postal Service, the
proposal would “free” the Postal Service’s “private competitors to raise their own
prices” at consumers’ expense. Amazon Comments 3(JA__). UPS’s only evidence of
predatory pricing is that, in 2014, the Postal Service reduced its parcel-delivery rates.
See Pet. Br. 16. But as other commenters observed, “these rate decreases were offset
by increases in other” areas such that “the net effect of the implemented price change
was zero.” See Order 115 n.139(JA__). Moreover, “overall competitive product
prices have significantly increased.” Order 116(JA__). And UPS’s share of the
parcel-shipping market “remained relatively stable” despite the 2014 price reduction.
Id. The record thus does not support UPS’s price-fixing allegations.
Nor is the § 3633(a)(2) price floor UPS’s only defense against predatory pricing.
Section 3633(a)(3) directs the Commission to attribute an additional, “appropriate”
share of institutional costs to all competitive products if it finds merit in the very
policy arguments UPS advances here. The Commission is currently reassessing this
attribution, and UPS has played an active role in those proceedings. See Postal
Regulatory Comm’n, Dkt. RM2017-1, https://go.usa.gov/x53QF (comments
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accessible by entering “UPS” into the “Filing Party” dropdown bar). Additionally, 39
U.S.C. § 404a prohibits the Postal Service from seeking an “unfair competitive
advantage” over its competitors. If UPS believes the Postal Service is manipulating
rates, it may file a complaint with the Commission, which can issue any necessary
orders to bring the Postal Service into compliance. Id. § 3662(c)-(d). Finally, UPS
may file an antitrust claim under 39 U.S.C. § 409(e)(1)(B). UPS has not invoked either
of these latter options.
CONCLUSION
For the foregoing reasons, the petitions for review should be denied.
Respectfully submitted,
Of Counsel:
DAVID A. TRISSELL General Counsel
CHRISTOPHER J. LAVER Deputy General Counsel
MALLORY SMITH Attorney Postal Regulatory Commission
CHAD A. READLER Acting Assistant Attorney General
MICHAEL S. RAAB /s/ Michael Shih
MICHAEL SHIH Attorneys, Appellate Staff Civil Division, Room 7268 U.S. Department of Justice 950 Pennsylvania Avenue NW Washington, D.C. 20530 (202) 353-6880 [email protected]
April 2017
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CERTIFICATE OF COMPLIANCE
I hereby certify that this brief complies with the requirements of Federal Rule
of Appellate Procedure 32(a). This brief contains 12,945 words.
/s/ Michael Shih MICHAEL SHIH
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CERTIFICATE OF SERVICE
I hereby certify that on April 24, 2017, I electronically filed the foregoing brief
with the Clerk of the Court for the United States Court of Appeals for the District of
Columbia Circuit by using the appellate CM/ECF system. Participants in the case are
registered CM/ECF users, and service will be accomplished by the appellate
CM/ECF system.
/s/ Michael Shih MICHAEL SHIH
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ADDENDUM
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TABLE OF CONTENTS
Page(s)
39 U.S.C. § 3631 .................................................................................................................. A1 39 U.S.C. § 3633 .................................................................................................................. A2 39 C.F.R. § 3631 .................................................................................................................. A3 Excerpts from Direct Testimony of Howard S. Alenier
on Behalf of the United States Postal Service, before the Postal Rate Commission (Dkt. R80-1) ..................................................... A4
Excerpts from Direct Testimony of Marc A. Smith
on Behalf of the United States Postal Service, before the Postal Rate Commission (Dkt. R2006-1) ............................................... A17
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A1
39 U.S.C. § 3631—Applicability; definitions and updates.
(a) Applicability.—This subchapter shall apply with respect to—
(1) priority mail;
(2) expedited mail;
(3) bulk parcel post;
(4) bulk international mail; and
(5) mailgrams;
subject to subsection (d) and any changes the Postal Regulatory Commission may make under section 3642.
(b) Definition.—
For purposes of this subchapter, the term “costs attributable”, as used with respect to a product, means the direct and indirect postal costs attributable to such product through reliably identified causal relationships.
(c) Rule of Construction.—
Mail matter referred to in subsection (a) shall, for purposes of this subchapter, be considered to have the meaning given to such mail matter under the mail classification schedule.
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A2
39 U.S.C. § 3633—Provisions applicable to rates for competitive products.
(a) In General.—The Postal Regulatory Commission shall, within 18 months after the date of enactment of this section, promulgate (and may from time to time thereafter revise) regulations to—
(1) prohibit the subsidization of competitive products by market-dominant products;
(2) ensure that each competitive product covers its costs attributable; and
(3) ensure that all competitive products collectively cover what the Commission determines to be an appropriate share of the institutional costs of the Postal Service.
(b) Review of Minimum Contribution.—
Five years after the date of enactment of this section, and every 5 years thereafter, the Postal Regulatory Commission shall conduct a review to determine whether the institutional costs contribution requirement under subsection (a)(3) should be retained in its current form, modified, or eliminated. In making its determination, the Commission shall consider all relevant circumstances, including the prevailing competitive conditions in the market, and the degree to which any costs are uniquely or disproportionately associated with any competitive products.
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39 C.F.R. § 3015.7—Standards for compliance.
For purposes of determining competitive products’ compliance with 39 U.S.C. 3633, the Commission will apply the following standards:
(a) Incremental costs will be used to test for cross-subsidies by market dominant products of competitive products. To the extent that incremental cost data are unavailable, the Commission will use competitive products’ attributable costs supplemented to include causally related, group-specific costs to test for cross-subsidies.
(b) Each competitive product must recover its attributable costs as defined in 39 U.S.C. 3631(b). Pursuant to 39 U.S.C. 3631(b), the Commission will calculate a competitive product’s attributable costs as the sum of its volume-variable costs, product-specific costs, and those inframarginal costs calculated as part of a competitive product’s incremental costs.
(c) Annually, on a fiscal year basis, the appropriate share of institutional costs to be recovered from competitive products collectively is, at a minimum, 5.5 percent of the Postal Service’s total institutional costs.
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ORIGINAi.:
BEFORE THE POSTAL RATE COMMISSION WASHINGTON, D.C. 20268
POSTAL RATE AND FEE INCREASES, 1980
DIRECT TESTIMONY OF HOWARD S. ALENIER
ON BEHALF OF
I • II
USPS-T-7
Arn 21 i:+ zs ru 'Bn
Docket No. VtfJ.1
UNITED STATES POSTAL SERVICE r ...... ,v,_ ~· · . . ~"""--
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USPS-T-13 FINAL September 1, 2006
BEFORE THE POSTAL RATE COMMISSION
WASHINGTON, D.C. 20268-0001
Postal Rate and Fee Changes, 2006 Docket No. R2006-1 _______________________________ _____________________________
DIRECT TESTIMONY OF
MARC A. SMITH ON BEHALF OF THE
UNITED STATES POSTAL SERVICE
Postal Rate CommissionSubmitted 9/1/2006 9:50 amFiling ID: 53041Accepted 9/1/2006
A17
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i
TABLE OF CONTENTS 1
2
Page 3
LIBRARY REFERENCES TO BE SPONSORED WITH TESTIMONY 4 USPS-T-13…………………………………………………………………………………......ii 5
6 AUTOBIOGRAPHICAL SKETCH……………….…………………………………….......…iii 7 8 I. PURPOSE AND SCOPE OF TESTIMONY AND GUIDE 9 TO SUPPORTING DOCUMENTATION ……………………………………………1 10 11 II. EQUIPMENT AND FACILITY-RELATED COSTS 12 IN THE BASE AND TEST YEAR………………………….…………………………6 13 14
A. Mail Processing and Other Equipment-Related Costs…………………….7 15 1 Development of Cost Pools for Base Year and Test Year………..7 16 2. Variability of Equipment-Related Costs……...………………….…11 17 3. Distribution of Equipment-Related Costs…………………………..12 18 4. Distribution of Cost Reductions and Other Programs Costs…….13 19 20 B. Facility-Related Costs………………………………………………………..14 21 1. Development of Cost Pools……..…………………………………..15 22 2. Variability of Facility-Related Costs……..……………………….…19 23 3. Distribution of Facility-Related Costs………………………………19 24 25 26 III. PIGGYBACK FACTORS……………………………………………….……………21 27 28 A. Piggyback Factors by Major Function and Subclass………………….…22 29
B. Piggyback Factors for Final Adjustments………………..……….…..…...25 30 C. Mail Processing Operation Specific Piggyback Factors…………………25 31 D. Calculation of Caller Service Costs …………………………………….....30 32
33 IV. MAIL PROCESSING UNIT COSTS BY SHAPE 34 FOR TEST YEAR………………………………………………………….…………32 35 36 V. SUMMARY…………………………………………………………….…….………..37 37 38 VI. PROPOSED CHANGES RELATIVE TO PRC METHODOLOGY ……………..39 39 40 List of Attachments 41 42
43
44
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Library References To Be Sponsored With Testimony USPS-T-13 1 2 3 USPS-LR-L-22 APC Cost Reduction Distribution Factors and Volume 4
Variability 5 6 7 USPS-LR-L-52 Development of Piggyback and Related Factors 8
9 USPS-LR-L-53 Mail Processing Unit Costs by Shape 10 11 12 USPS-LR-L-54 Equipment and Facility Related Costs 13 14 15 16 17
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AUTOBIOGRAPHICAL SKETCH 1
2
My name is Marc A. Smith. I have been employed by the Postal Service since 3
February, 1987, as an Economist in the Cost Attribution group of Finance. 4
In Docket No. R2005-1, I provided testimony, USPS-T-13, on the non-volume variability 5
of the test year escrow funding, the study of Facility Space Usage in 1999, on mail 6
processing costs by shape, the development of base year and test year plant and mail 7
processing equipment costs, piggyback factors and other inputs needed for the 8
worksharing avoided costs calculation. 9
In Docket No. R2001-1, I provided testimony, USPS-T-15, on mail processing 10
costs by shape, the development of base year and test year plant and mail processing 11
equipment costs, piggyback factors and other inputs needed for the worksharing 12
avoided costs calculation. In Docket No. R2000-1, I provided testimony, USPS-T-21, 13
covering the development of the same costs. 14
In Docket No. R97-1, I provided testimony, USPS-ST-45, on mail processing 15
costs by shape, piggyback factors and other inputs needed for the worksharing avoided 16
costs and testimony, and USPS-ST-46, on Standard A dropship discount cost 17
avoidances. 18
In Postal Rate Commission Docket No. MC95-1, I testified for the Postal Service, 19
USPS-T-10, on First-Class letter mail processing costs. In Docket No. R94-1, I worked 20
in support of the base year witness Dana W. Barker regarding facility-related and mail 21
processing equipment-related costs. In Docket No. R90-1, I provided testimony on 22
behalf of the Postal Service, USPS-T-8 and USPS-RT-3, to improve the development of 23
plant and equipment costs and the new development of piggyback factors for specific 24
mail processing operations to better determine the indirect costs for cost avoidance 25
A20
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calculations. In Docket No. R87-1, I worked in support of Paul R. Kleindorfer’s 1
testimony on the peak load cost issue. 2
Prior to coming to the Postal Service, I was a Senior Economist with the New 3
York Department of Public Service. I testified as an expert witness in numerous electric 4
and telephone rate proceedings, primarily on the marginal costs of electricity. This 5
testimony was in support of both retail and co-generation electric rate proposals. In 6
1981, I served as an economist at the Interstate Commerce Commission. There, I 7
worked on modifying railroad regulations to conform with the Staggers Rail Act of 1980. 8
I received a B.A. with honors in Economics from the George Washington 9
University in 1975. I received a M.A. in Economics from the University of Michigan in 10
1978. While at the University of Michigan, I completed all requirements toward a Ph. D 11
in Economics except the dissertation. As a graduate student, I served as a teaching 12
fellow, in introductory economics and econometrics courses. I also worked as a 13
research assistant at the Institute for Social Research in Ann Arbor, Michigan on a study 14
of electric utility load management and peak load pricing experiments. 15
16
My papers, publications and presentations are as follows: 17
18 Evaluation of the Federal Energy Administration’s Load Management and Rate Design 19 Demonstration Projects, with Daniel Hill et al., Electric Power Research Institute,1979. 20 21 Analysis of Residential Response to Time-of-Day Prices, with Daniel Hill et al., Electric 22 Power Research Institute, 1981. 23 24 “The Effect of Maintenance Requirements in Peak Load Pricing”, with Mark Reeder. 25 Presented at the Advanced Workshop in Regulation and Public Utility Economics, May, 26 1983. 27 28 “Pricing Rivalry Between Railroads in the Transportation of Coal in Western United 29 States in the 1970s.” Presented at the Advanced Workshop in Regulation and Public 30 Utility Economics, May, 1984. 31 32
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“Econometric Evaluation of Electric Utility Operation and Maintenance Expenses” in 1 Proceedings of the Fifth NARUC Biennial Regulatory Information Conferences, National 2 Regulatory Research Institute, September 3-5, 1986 pp. 1871 - 1912. 3 4 “Peak-Load Pricing in Postal Services” with Michael A. Crew and Paul R. Kleindorfer, 5 Economic Journal, September, 1990. 6 7
“The Analytical Basis for Cost Measurement at the United States Postal Service” with 8 Michael D. Bradley and Jeffrey L. Colvin. Presented at the Advanced Workshop in 9 Regulation and Public Utility Workshop in Cooperstown, NY, May 1991. 10 11
“Measuring Product Costs for Ratemaking: The United States Postal Service,” with 12 Michael D. Bradley and Jeffrey L. Colvin, edited by Michael A. Crew and Paul R. 13 Kleindorfer Regulation and the Nature of Postal and Delivery Service. Boston: Kluwer 14 Academic Publishers, 1993, pp. 133-157. 15 16 “Peak Loads and Postal Services: Some Implications of Multi-Stage Production” with 17 Michael A. Crew and Paul R. Kleindorfer, edited by Michael A. Crew and Paul R. 18 Kleindorfer Managing Change in Postal and Delivery Industries. Boston: Kluwer 19 Academic Publishers, 1997, pp. 42-64. 20 21
“Balancing Competition and Public Utility: Postal Service Here and Abroad.” 22 Presented at the Advanced Workshop in Regulation and Competition at Rutgers 23 University in Newark, NJ, January, 2004. 24 25
26
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III. PIGGYBACK FACTORS 1
Attachments 8 to 12 contain the various piggyback factors, and related 2
costs provided by my testimony. Piggyback factors are used to incorporate 3
indirect costs into the cost avoidance estimates and are used to compute final 4
adjustments. For example, piggyback factors are employed in cost avoidance 5
studies to augment labor cost estimates by adding the costs associated with 6
supervisors and administration, as well as facility-related costs and equipment-7
related costs, in the same way that such costs are treated in the development of 8
base year and test year costs by witnesses Milanovic and Waterbury. 9
The costs used in calculating test year piggyback factors are those 10
developed in the test year before rates costs of witness Waterbury, USPS-T-10.23 11
Generally, piggyback factors are ratios of total volume variable cost to volume 12
variable labor cost for specific functions or operations (e.g. city carriers or OCRs). 13
Total costs, contained in the numerator, include labor, supervisor, administrative, 14
service-wide benefits, facility-related and equipment-related costs. Labor costs, in 15
the denominator, are all non-supervisory, non-administrative labor cost associated 16
with the function or operation. Division of the numerator by the denominator 17
produces a ratio that indicates the relationship between total costs and non-18
supervisory, non-administrative labor costs. The ratio is greater than 1.00, since 19
the numerator includes all costs, while the denominator includes only the non-20
supervision, non-administrative labor costs. The amount by which the ratio is 21
23 The specific costs referred to are the test year before rates costs (with mix adjustment) of witness Waterbury in Exhibit USPS-10J.
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greater than 1.00 indicates the degree to which all costs exceed non-supervision 1
and non-administrative labor costs. 2
For example, the test year mail processing piggyback factor for First-Class 3
Mail, single-piece letters & parcels, is 1.577 as shown in Attachment 8. This ratio 4
indicates that in the average mail processing operation, for every dollar of labor 5
costs for First-Class single-piece letters & parcels, the Postal Service incurs 57.7 6
cents of supervision, administrative costs, service-wide benefits, facility-related 7
costs and equipment-related costs. 8
There are three main sets of piggyback factors for the test year: factors by 9
major function and subclass, shown in Attachment 8; factors used for final 10
adjustments, shown in Attachment 9; and mail processing cost pool factors, shown 11
in Attachment 10. Attachment 11 contains some additional piggyback factors and 12
related costs, used in developing cost avoidance estimates. Attachment 12 13
contains the results of the calculation of test year Caller Service costs used by 14
witness Kaneer, USPS-T-41, in setting rates. The detailed calculations of the 15
results shown in Attachments 8 to 12 are contained in USPS LR-L-52. The 16
methodology used is essentially the same as that employed in Docket No. R2005-17
1 in USPS LR-K-52. There are some changes, which I discuss below, for the 18
three main sets of piggyback factors and the Caller Service costs. 19
A. Piggyback Factors by Major Function and Subclass 20
Attachment 8 contains the test year piggyback factors by major function and 21
subclass. The major functions are shown at the top of the columns. They are mail 22
processing, window service, city delivery carriers, vehicle service drivers, rural 23
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