United States Court of Appeals, District of Columbia Circuit
January 22, 2018
Petitions for Review of Orders of the Postal Regulatory
Jeffrey A. Lamken argued the cause for petitioner. With him
on the briefs were James A. Barta, Steig D. Olson, and Sara
N. Tramont and Craig E. Gilmore were on the brief for amicus
curiae J. Gregory Sidak in support of petitioner.
Michael Shih, Attorney, U.S. Department of Justice, argued
the cause for respondent. With him on the brief were Michael
S. Raab, Attorney, David A. Trissell, General Counsel, Postal
Regulatory Commission, and Christopher J. Laver, Deputy
E. Rehrig and Eric P. Koetting, Attorneys, U.S. Postal
Service, Peter DeChiara, David M. Levy, John F. Cooney, and
James Pierce Myers were on the brief for intervenors in
support of respondent.
Before: Tatel, Srinivasan, and Pillard, Circuit Judges.
U.S. Postal Service holds congressionally authorized monopoly
power over the market for some of its products, like
first-class mail delivery, but for other products, like
parcel post, it competes with private companies. To promote
fair competition, Congress tasked the Postal Regulatory
Commission with ensuring that the Postal Service sets
competitive products' prices high enough to cover all
"costs attributable to [those] product[s] through
reliably identified causal relationships." 39 U.S.C.
§ 3631(b); see also id. § 3633(a)(2). In
two 2016 orders, the Commission directed the Postal Service
to include among the "costs attributable" to
competitive products those costs that would disappear were
the Postal Service to stop offering those products for sale.
United Parcel Service, Inc., which competes with the Postal
Service, petitions for review of both orders, arguing that
the cost attribution methodology the Commission embraced is
both inconsistent with the statute that gives the Commission
its regulatory authority and arbitrary and capricious. For
the reasons that follow, we deny the petitions.
created what is now the Postal Regulatory Commission (the
"Commission") in 1970 to oversee the U.S. Postal
Service's efforts to set "reasonable and equitable
rates of postage and fees for postal services." Postal
Reorganization Act, Pub. L. No. 91-375, § 3621, 84 Stat.
719, 760 (1970) (codified as amended at 39 U.S.C. §
404(b)); see also id. § 3601, 84 Stat. at 759
(establishing the Commission). The 2006 Postal Accountability
and Enhancement Act (the "Accountability Act"),
Pub. L. No. 109-435, 120 Stat. 3198 (2006), provides the
framework within which the Commission currently exercises
this oversight authority.
the Accountability Act, all Postal Service products are
either "market-dominant" or
"competitive." See 39 U.S.C. §
3642(b)(1). Market-dominant products are those over which
"the Postal Service exercises sufficient market power
that it can effectively" raise prices or decrease
quality "without risk of losing a significant level of
business to other firms offering similar products."
Id. To prevent the Postal Service from
"improperly leverag[ing]" this market power,
U.S. Postal Service v. Postal Regulatory Comm'n,
785 F.3d 740, 744 (D.C. Cir. 2015), the Act requires the
Commission to limit rate increases for market-dominant
products, see 39 U.S.C. §§ 3622(a),
(d)(1); see also 39 C.F.R. §§
3010.1-3010.66 (implementing this mandate).
concerns attend competitive products-products over which
"the Postal Service faces meaningful market
competition." U.S. Postal Service, 785 F.3d at
744. For such products, Congress wished to "ensure that
the Postal Service competes fairly, " S. Rep. No.
108-318, at 15 (2004) ("Senate Report")-that is,
without using revenues from market-dominant products subject
to its monopoly power to defray costs competitive products
would otherwise have to be priced to cover. The
Accountability Act therefore requires the Commission to
promulgate regulations that "prohibit the subsidization
of competitive products by market-dominant products, "
39 U.S.C. § 3633(a)(1); "ensure that each
competitive product covers its costs attributable, "
id. § 3633(a)(2), defined as "the direct
and indirect postal costs attributable to such product
through reliably identified causal relationships, "
id. § 3631(b); and "ensure that all
competitive products collectively cover what the Commission
determines to be an appropriate share of the institutional
costs of the Postal Service, " id. §
effect, the Accountability Act subjects each competitive
product to a "price floor, " U.S. Postal
Service v. Postal Regulatory Comm'n, 842 F.3d 1271,
1272 (D.C. Cir. 2016) (per curiam), which must be set high
enough to cover both that product's "costs
attributable, " 39 U.S.C. § 3633(a)(2), and a
portion of the Postal Service's "institutional
costs, " id. § 3633(a)(3), which the
Commission construes to mean "residual costs, "
i.e., all costs that are not costs attributable,
see Order Concerning United Parcel Service,
Inc.'s Proposed Changes to Postal Service Costing
Methodologies (UPS Proposals One, Two, and Three), No.
RM2016-2, at 10 (Postal Regulatory Comm'n Sept. 9, 2016)
(updated Oct. 19, 2016) ("Order").
case concerns the Commission's rules for apportioning
postal costs between "attributable" and
"institutional" costs. 39 U.S.C. §§
3633(a)(2), (a)(3). Treating the latter category as
"residual" of the former, Order at 10, Commission
regulations focus on identifying which costs are
"attributable to [a specific] product through reliably
identified causal relationships, " 39 U.S.C. §
3631(b). In doing so, the Commission distinguishes (albeit
necessarily imperfectly) between "fixed costs, "
such as executive salaries, which remain constant regardless
of overall product volume, and "variable costs, "
such as wage labor or raw materials, which vary with the
Service's production levels. Order at 6; see
also Responses of the United States Postal Service to
Questions 1-4 of Chairman's Information Request No. 2,
No. RM2016-2, at 11 n.9 (Postal Regulatory Comm'n Dec.
10, 2015) ("Postal Service Responses")
(acknowledging that "fixed costs can be difficult to
identify in practice"). Except for certain
product-specific costs not at issue, fixed costs are not
attributed to particular products and so are considered
institutional. See Order at 9 & n.12
(attributing only those fixed costs "that are uniquely
associated with an individual product, " id. at
9, such as product-specific advertising costs). The issue
here is what portion of the Postal Service's
variable costs can be reliably attributed.
speaking, the Postal Service, in implementing Commission
regulations, attributes variable costs on an
activity-by-activity basis. After drawing up a list of the
discrete production activities, such as highway
transportation, that collectively account for its total
variable costs, the Postal Service calculates what share of
each activity's costs can be attributed to each product.
See Order App'x A at 13-14 (laying out this
process); Postal Regulatory Comm'n, FY16 Public Cost
Segments and Components Report (2016),
https://go.usa.gov/x54x2 (listing production activities). To
perform this calculation, it first identifies an
activity's "cost driver, " defined as the unit
of measurement that best captures the activity's
"essen[ce]." Order App'x A at 14. For example,
highway transportation is measured in cubic-foot-miles, such
that one "unit" of cost driver in this context
represents one cubic foot of mail being transported one mile.
See id. Then, the Postal Service determines the
share of each activity's cost-driver units that each
product is responsible for generating, typically by
conducting worksite observations in order to produce a
"distribution key" that, like a pie chart,
illustrates an activity's product-by-product breakdown.
See id. at 9; see also Order at 9 n.14;
Office of Inspector General, U.S. Postal Service, A
Primer on Postal Costing Issues 17-18 (Mar. 20, 2012),
https://go.usa.gov/x54Dd (explaining the role of distribution
present dispute stems from the uncertainty inherent in
translating this product-by-product breakdown of activity
quantity into a similar breakdown of activity
costs, given the cost savings that accrue as total
production volume increases. If every cost-driver unit were
equally costly, the distribution keys could be used to
apportion all an activity's costs to specific
products: a product responsible for 5% of the
cubic-foot-miles accrued in highway transportation, for
example, could be linked to 5% of that activity's costs.
But not all cost-driver units are created equal. Under the
principle of diminishing marginal costs, the cost of adding
each new unit- in economic parlance, that unit's
"marginal cost"-decreases as production quantity
increases, due to the efficiency gains that result from
scaling up operations. See Order at 35 ("As a
result of economies of scale and scope, the marginal cost of
individual units of volume . . . decreases with
volume."); see also Order App'x A at 2
(defining marginal cost). To transport one cubic foot of
mail, for instance, the Postal Service must make an initial
outlay to hire a driver and maintain a truck. But throwing a
second cubic foot of mail onto the truck carries fewer
additional costs, and a third cubic foot carries fewer still.
Given this variability, introducing a new product line that
increases the Postal Service's total cubic-foot-mileage
by 5% may well increase highway transportation costs by
something less than 5%. Due to diminishing marginal
costs, therefore, the share of cost-driver units a particular
product generates might not determine the share of costs that
can be reliably linked to that product.
the Commission dealt with this uncertainty by directing the
Postal Service to attribute to specific products only that
portion of an activity's costs that would result if every
cost-driver unit cost only as much as the unit with the
lowest marginal cost. Put into agency lingo, the Commission
had the Postal Service attribute only an activity's
"volume-variable cost[s], " defined as the marginal
cost of the "last, " i.e., cheapest,
cost-driver unit, multiplied by the total number of units
accrued. Order at 36 n.56; see also id. at 9. A
Commission graph, reproduced below as Figure 1, illustrates
volume-variable costs. The downward-sloping curve shows a
hypothetical activity's diminishing marginal cost (marked
on the vertical axis) as production quantity (marked on the
horizontal axis, and measured in cost-driver units)
increases. The shaded rectangle represents this
activity's volume-variable costs-the $1 marginal cost of
the twentieth cost-driver unit, applied to all twenty units.
App'x A at 15 fig. A-7.
that every cost-driver unit contributes an identical dollar
amount to an activity's volume-variable costs, the Postal
Service, in attributing only these costs, could securely rely
on its distribution keys and assign each product a share of
volume-variable costs equivalent to that product's
contribution to cost-driver quantity. For example, consider a
truck carrying six cubic feet of mail-two cubic feet each of
letters, postcards, and parcels-for one mile. Imagine too
that the marginal cost of the first cubic-foot-mile is $60,
the marginal cost of the second is $50, the marginal cost of
the third is $40, and so forth. The activity's
volume-variable costs are $60, or the marginal cost of the
"final" cubic-foot-mile ($10) multiplied by the
total number of cubic-foot-miles (six). Because letters,
postcards, and parcels each account for one-third of the
cost-driver units, volume-variable costs can be apportioned
among them in like manner, with one-third of those costs
($20) attributed to each product.
example shows, the Commission's historic approach left
some variable costs unattributed to any one product. Although
the volume-variable costs in this example amount to only $60,
total highway transportation costs are $210 ($60 plus $50
plus $40 plus $30 plus $20 plus $10). The remaining $150 left
unattributed represents "variable costs that are not
volume-variable costs." Order at 35. The Commission
calls these "inframarginal costs." Id.
These costs can be visualized as the white space in Figure 1
that lies between the downward-sloping marginal cost curve
and the shaded rectangle that represents volume-variable
costs. Historically, the Commission classified all
inframarginal costs as institutional costs, only a limited
share of which competitive ...