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United States Postal Service v. Postal Regulatory Commission

United States Court of Appeals, District of Columbia Circuit

May 12, 2015

UNITED STATES POSTAL SERVICE, PETITIONER
v.
POSTAL REGULATORY COMMISSION, RESPONDENT, ALLIANCE OF NONPROFIT MAILERS, ET AL., INTERVENORS

Argued: November 20, 2014.

Page 741

On Petition for Review of an Order of the Postal Regulatory Commission.

David C. Belt, Attorney, U.S. Postal Service, argued the cause for petitioner. With him on the briefs was Morgan E. Rehrig, Attorney. Stephan J. Boardman, Attorney, entered an appearance.

Dana L. Kaersvang, Attorney, U.S. Department of Justice, argued the cause for respondent. On the brief were Stuart F. Delery, Assistant Attorney General, Michael S. Raab and Benjamin M. Shultz, Attorneys, David A. Trissell, General Counsel, Postal Regulatory Commission, and R. Brian Corcoran, Deputy General Counsel.

William B. Baker, David M. Levy, William J. Olson, Jeremiah L. Morgan, and John S. Miles were on the brief for intervenors Alliance of Nonprofit Mailers, et al. in support of respondent.

Matthew D. Field entered an appearance.

Before: TATEL, Circuit Judge, WILKINS, Circuit Judge, and EDWARDS, Senior Circuit Judge. OPINION filed by Senior Circuit Judge EDWARDS.

OPINION

Page 742

Edwards, Senior Circuit Judge :

On November 21, 2013, the Postal Regulatory Commission (" Commission" ) issued Order No. 1890, Order on Price Adjustments for Market Dominant Products and Related Mail Classification Changes (" Order on Price Adjustments" ), reprinted at J.A. 361. The Order rejected proposals that had been submitted by the United States Postal Service (" Postal Service" or " Service" ) to implement price adjustments to certain of its market-dominant products as well as classification changes in conjunction with the price changes. The United States Postal Service now seeks review of this Order.

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The Postal Accountability and Enhancement Act (" Act" ) generally forbids the Postal Service from raising the rates on its market-dominant products faster than the rate of inflation. 39 U.S.C. § 3622(d)(1)(A). Under the Act, the Commission is charged with " regulating rates and classes for market-dominant products," id. § 3622(a), which includes promulgating regulations implementing the inflation-based price cap. Pursuant to this authority, the Commission has adopted regulations requiring the Postal Service to account for the effects that reclassifying mail would have on the rates charged for that mail. See 39 C.F.R. § 3010.23(d). For example, in accordance with these regulations, if the Postal Service deletes a price from its price list, thus forcing a reclassification of the mail that had been charged that price during the prior year, it must account for the reclassification when computing any accompanying changes in rates. Thus, if the reclassified mail would now be charged a higher price -- for instance, because the deleted price was a temporary discount -- then the extra cost for shipping that mail counts against the price cap. The deletion of the discounted rate causes a reclassification of certain mail and effectively raises the rate on the previously discounted mail.

In April 2013, the Postal Service amended its mail preparation requirements so that mail pieces prepared according to the " basic-service Intelligent Mail" standard would no longer be eligible for a discounted " automation" rate available to mailers who use technologies to increase the Postal Service's efficiency. Implementation of Full-Service Intelligent Mail Requirements for Automation Prices, 78 Fed. Reg. 23,137, 23,137 (Apr. 18, 2013). In subsequent rate change proceedings before the Commission, mailers objected that this change in mail preparation requirements constituted a classification change resulting in an increase in rates that must be counted against the Postal Service's price cap. The Postal Service disagreed, arguing that mail preparation changes that did not actually alter the posted prices were not " changes in rates" within the plain meaning of the price cap statute or " classification changes" within the plain meaning of the Commission's regulations, and therefore their effects did not count toward the price cap.

The mailers prevailed before the Commission. See Order on Price Adjustments at 1-2. The Commission held " that the new mail preparation requirements redefine rate cells because they require mailers to alter a basic characteristic of a mailing in order for the mailing to qualify for the same rate category for which it was eligible before the change in requirements." Id. at 18. The Commission thus concluded that the rate effects of the mail preparation requirements change, combined with the Postal Service's other proposed rate increases, would violate the inflation-based price cap. Id. at 2.

The principal issue in this case is whether the Commission is correct in its view that its rate cap authority extends beyond the regulation of posted rates to regulation of Postal Service operational rules that have " rate effects." The Postal Service contends that the Act and applicable regulations plainly forbid the Commission from characterizing mail preparation requirements as " changes in rates." In addition, the Postal Service argues that the Commission's Order on Price Adjustments is arbitrary and capricious because the standard that it invokes to determine when changes in mail preparation requirements constitute " changes in rates" is incomprehensible.

In our view, the Act and applicable regulations are ambiguous with respect to

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whether the Commission's authority extends to the regulation of operational rules that have " rate effects." We therefore reject the Postal Service's claim that the " plain meaning" of the Act and regulations positively forbid the Commission from counting an operational change that has rate effects as a " change in rates." The Commission's interpretation of the Act thus does not fail under Step One of Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). We agree with the Postal Service, however, that the Commission's Order cannot survive arbitrary and capricious review. The standard enunciated by the Commission to determine when requirements changes are " changes in rates" seems boundless and, thus, unreasonable; and the Commission's inconsistent application of the standard in this case proves the point.

An agency action must be supported by " reasoned decisionmaking," whether taken in the course of rulemaking or adjudication. Allentown Mack Sales & Serv., Inc. v. NLRB, 522 U.S. 359, 374, 118 S.Ct. 818, 139 L.Ed.2d 797 (1998). The Commission's judgment in this case " lacks any coherence. We therefore owe no deference to [the Commission's] purported expertise because we cannot discern it." Tripoli Rocketry Ass'n, Inc. v. Bureau of Alcohol, Tobacco, Firearms, & Explosives, 437 F.3d 75, 77, 369 U.S. App.D.C. 327 (D.C. Cir. 2006). We therefore remand the case to the Commission to enunciate an intelligible standard and then reconsider its decision in light of that standard.

I. Background

A. The Cap on Changes in the Postal Service's Rates

" In 1970, what was formerly the cabinet-level Post Office Department was transformed by statute into the modern government-owned corporation known as the United States Postal Service." USPS v. Postal Regulatory Comm'n, 599 F.3d 705, 706, 389 U.S. App.D.C. 443 (D.C. Cir. 2010). As part of that transformation, Congress created the Postal Rate Commission to oversee a system in which the Postal Service established rates based on its actual costs, with the goal of breaking even. See United Parcel Serv., Inc. v. USPS, 184 F.3d 827, 829-30, 337 U.S. App.D.C. 247 (D.C. Cir. 1999). After criticism that the cost-based ratemaking model failed to incent the Postal Service to operate efficiently, and for other reasons, Congress reformed the ratemaking scheme by enacting the Postal Accountability and Enhancement Act in 2006.

The Act separated the Postal Service's product classes into two differently regulated groups: " market-dominant products" and " competitive products." See USPS v. Postal Regulatory Comm'n, 676 F.3d 1105, 1107, 400 U.S. App.D.C. 168 (D.C. Cir. 2012). " Market-dominant products" include the various products for which the Postal Service enjoys a statutory monopoly, or for which the Postal Service exercises sufficient market power so that it can effectively dictate the price of such products without risk of losing much business to competing firms. See 39 U.S.C. § 3642(b)(1), (2). Remaining products, for which the Postal Service faces meaningful market competition, are classified as " competitive products" and are not at issue in this case.

The Act completely reformed the ratemaking system for market-dominant products. To alleviate concerns that the Postal Service would improperly leverage its monopoly powers over these products, the Act subjected them to a price cap, forbidding " changes in rates" to rise faster than inflation:

The system for regulating rates and classes for market-dominant products shall--

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(A) include an annual limitation on the percentage changes in rates to be set by the Postal Regulatory Commission that will be equal to the change in the Consumer Price Index for All Urban Consumers . . . over the most recent available 12-month period preceding the date the Postal Service files notice of its intention to increase rates[.]

Id. § 3622(d)(1)(A).

The price cap does not apply directly to every individual product, however. Rather, it applies to each " class" of products, as defined by statute. Id. § 3622(d)(2)(A). As a result, the Postal Service can raise the price of one product in a mail " class" by more than the rate of inflation if that over-inflation increase is offset by lower rises or reductions in other products in the class. For example, the Postal Service can raise the rate of one kind of first-class mail by more than the rate of inflation as long as it offsets that increase with a lower rise in another kind of first-class mail.

In addition, because market-dominant prices can be raised to track inflation regardless of the Postal Service's actual costs, the Postal Service can keep savings it creates through cost cutting. On the other hand, if the Postal Service's costs rise faster than the rate of inflation then, barring extraordinary circumstances justifying a rate increase, the Postal Service may not be able to cover its costs. Thus, the inflation-based price cap protects mailers from the " unreasonable use of the Postal Service's statutorily-granted [and de facto] monopoly" power while creating new pricing flexibility, incentives for the Postal Service to reduce costs, and the opportunity for the Postal Service to earn a profit. S. Rep. No. 108-318, at 19 (2004).

B. The Commission's Implementation of the Price Cap

The Act also reformed the Postal Rate Commission into the Postal Regulatory Commission and required it to promulgate regulations " whereby the Postal Service may adjust rates not in excess of the" price cap. 39 U.S.C. § 3622(d)(1)(D). The Commission's regulations seek to ensure that the class-level price cap serves as an effective limit on the Postal Service's rates by plugging several potential gaps in the cap. Thus, for example, the Commission's rules ensure that the Postal Service may not generate extra revenue beyond the price cap by taking advantage of the different volume levels of different products within a class to raise rates unevenly while technically complying with the class-level price cap. To achieve this, the Commission has promulgated regulations specifying that the calculation of a " change in rates" in a class should be weighted by the mail volume of any given rate cell in a class. 39 C.F.R. § 3010.23(b). So, if the Postal Service has two rate cells in a given class but one of them accounts for the lion's share of the mail volume, any increase in the rate for that rate cell will be weighted according to volume when determining its contribution toward the class-wide rate change cap. Small increases in the rate for small-volume rate cells cannot be used to obscure large increases in the rate for the large-volume rate cells that generate the most revenue. By default, the volume levels of the various products are to " be obtained from the most recent available 12 months" of data. Id. § 3010.23(d)(1).

The Commission's regulations also seek to prevent the Postal Service from evading the price cap by shifting mail to more expensive rates. Because the Postal Service often changes the classification of its mail, for example by adding, deleting, or redefining rate cells, it is possible that some mail will shift between different rates. The Commission determined that

Page 746

shifting identical mailpieces between different rates would constitute " changes in rates" for those mailpieces. The Commission thus required the Postal Service to factor the effects of classification changes into the calculation of changes in rates by adjusting the volume associated with each rate cell in sync with any ...


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