Warren E. Burger: We will hear arguments first this morning in 81-1304, on the consolidated case, National Association of Greeting Card Publishers against the United States Postal Service. Mr. Segal, you may proceed whenever you are ready.
Bernard G. Segal: Mr. Chief Justice, and may it please the Court, this case involves the rate-making provisions of the Postal Reorganization Act of 1970, which eliminated the Post Office Department and transferred its functions to the United States Postal Service. Since the new agency was to operate the first class letter monopoly as well as provide classes of mail competitive with enterprises in the private sector, Congress enacted unique rate-making provisions designed to prevent the Postal Service from utilizing the monopoly power, by overcharging first class mail users, and subsidizing other classes of mail. I shall discuss the statutory language which seeks to effectuate this Congressional purpose by requiring that the rates for each class of mail recover the costs caused by the class. Mr. Perlman, counsel for the other Petitioner, will demonstrate that the legislative history confirms the plain meaning of the statute. Initially, I note a very substantial concession made by the Postal Service in this Court. The Postal Service had participated in persuading the Second Circuit to rule that the Act does not require long-term, but calls only for short-term costing, variable costing. By virtue of this holding, the $3 billion of cost which formerly had been attributed to various classes of mail can now be shifted to the first class mail monopoly, this by virtue of the decision. Now, the Postal Service, in the Solicitor General's brief in this Court, concedes that costs vary with volume in the long run, and must be attributed that way. Although four Respondents still adhere to the view, nevertheless, the language of the statute clearly compels the concession, and calls for reversal of the Second Circuit decision. Despite the concession, the Postal Service still improperly limits attributable costs. The Postal Service says that attributable costs are only those costs that can be proven by statistics to vary with changes in volume, but the language of the Act contains no such limitation. Section 3622(b)(3), and I read the requisite provision, that "each class of mail or type of mail service bear the direct and indirect postal costs attributable to that class or type. " and that is all it says. Congress did not use technical language. It employed as the key word "attributable", which the dictionary says is caused or brought about by, and it couldn't have used the more all-inclusive word, I submit. As the District of Columbia Circuit stated so well, the Commission cannot stop with statistical variability in looking for causal connections between costs and classes of mail. It must go on, as does all business, to other inferences of causation, deductive analysis, logic, common sense. Section 3622(b)(3), the costing section, also couples the attributable cost requirement with a requirement that each class of mail must also bear that portion, and I am quoting, "of all other costs reasonably assignable to such class. " The fact that the reasonably assignable section is in the costing subsection makes it clear that some unattributed costs must be reasonably assigned on specific cost of service principles.
Warren E. Burger: What would be an example, Mr. Segal, of one in that category?
Bernard G. Segal: Well, for example, they have a contingency grant, one which provides for contingencies that might arise in the coming year. That one ought to be reasonably assigned based on the classes which cause the costs that lead to the concern of the contingency.
Sandra Day O'Connor: Mr. Segal, are there other causal costs that don't vary either directly or indirectly with the amount or weight or volume of the mail?
Bernard G. Segal: Yes, there are, and in our judgment, for example, they will amount to about $6 billion, or 25 percent of all costs which will be apportionable to the other eight factors in 3622.
Sandra Day O'Connor: Well, generally speaking, what do those consist of, the causal costs that don't vary?
Bernard G. Segal: The causal costs that don't--
Sandra Day O'Connor: With the volume or weight or number of pieces.
Bernard G. Segal: --Well, you might have a building which is up for 30 years without change, is a good example. The--
Sandra Day O'Connor: How about transportation costs, in your view?
Bernard G. Segal: --Well, the transportation cost is really an abomination as it is presently being... if it is hired, if they hire the equipment, then they attribute. If it is their own equipment going from place to place, then they do not. They say there that the vehicle must go regardless of the volume, and they will attribute for the sorting and then stop, and say, well, the rest of it, the truck is going anyway, and therefore we don't attribute. But that is a very big question, if I may suggest, and I have 13 minutes.
William H. Rehnquist: Does United Parcel Service run its business quite differently than that?
Bernard G. Segal: United Parcel Service does run its business quite differently. There is no cost that is not attributed to what causes the cost, or it would be a very unsound pricing situation. And the District of Columbia Circuit had them well in line. It is this new case which is causing us all of the concern. The first class letter monopoly, soon to become, by the way, the nation's largest monopoly after AT&T, will provide $13 billion of income this year, 57 percent of the total revenue of the Postal Service. Much of the remaining revenues from other types of mail where they compete with business in the private sector, the governors of the Postal Service in this very case in their opinion stated, and I quote, that "the Postal Service's goal is to encourage significant increases in volume in an increasingly competitive market situation. " That means, take just this case. Although they have had an enormous increase, virtually twice the CPI since 1971, they ask for an increase of 33 and one-third percent in the revenues of first class mail and 8.3 percent for parcel post, which competes with United Parcel Service and with thousands of others in the industry. So, I need not tell you how concerned those in the industry are.
William H. Rehnquist: Well, you don't really care about what happens to first class mail, do you? You are worried that Parcel Post will compete more effectively with--
Bernard G. Segal: We are worried that the more they are subsidized, Justice Rehnquist, the less they will ask for money for Parcel Post. They are using the subsidization, the excess of the money that they get for first class, to subsidize these classes which compete, and there isn't any question about that. But I might say to Your Honor, that we are not the only ones concerned. Instrumentalities of the federal government are deeply concerned that the Postal Service not be permitted to take advantage of its enormous letter monopoly to subsidize services, as I have just said, which compete. Thus, within the past year, the Department of Justice, through the Antitrust Division, went to court to enjoin the Postal Service from instituting an electronic mail service known as ECOM, in competition with private enterprise. The Antitrust Division took this action because it said, and I quote, "ECOM would be subsidized and would pre-empt private sector activity. " Significantly also, just two months ago, the Committee on Government Operations of the House of Representatives published a unanimous report on the same new ECOM operation of the Postal Service in competition with private industry, a new service. This is the finding of the House Committee unanimous: "that the current ECOM rate is not compensatory, that the Postal Service has known for some time now that this is so, and therefore that ECOM is being subsidized by other Postal Services in violation of Section 3622(b)(3). " That is signed by William Baxter. So that, Your Honors, we are in a situation where Congress took very specific action. It had experienced, it knew the pressures over all the years, and incidentally, from the time Parcel Post was started in 1913, the ICC had... the Congress didn't even give itself jurisdiction over that. Now that it was all to be cost oriented, they thought it was all right to permit this very competitive role to be handled, and in a succession of opinions, three panels of the District of Columbia circuit have gradually brought under control more and more this situation. But the difficulty is that you have, as you have read, the desire, as I have just read to you, the desire of the governors to grow, to get bigger, and to compete in the market, and they are competing by subsidization. In concluding, so I will have time for rebuttal, I submit that anything but a literal application of Section 3622(b)(3), as in the decisions of the District of Columbia circuit, would greatly increase the opportunity of the Postal Service to subsidize competitive classes of mail out of excess revenues of monopoly first class letter mail. Certainly--
John Paul Stevens: --Mr. Segal, may I ask you just one question?
Bernard G. Segal: --Yes.
John Paul Stevens: Do you have... Can you give me an idea of what your view of the percentage of total costs that should be allocated under a proper reading of the statute?
Bernard G. Segal: That should be allocated?
John Paul Stevens: In other words, if you just take short-run variable costs, you allocate maybe 50 percent of that total cost.
Bernard G. Segal: That's right.
John Paul Stevens: What is your view of the--
Bernard G. Segal: We would believe 75 percent, and that 25 percent ought to be for the other eight factors distributed at the discretion of the agency. And I submit to Your Honors that certainly we would have the result which I have deplored if the Second Circuit decision in the Newsweek case were to be affirmed, and I respectfully urge that it be reversed.
Warren E. Burger: Mr. Perlman.
Matthew S. Perlman: Mr. Chief Justice, and may it please the Court, Mr. Segal has spoken to you from the point of view of the Postal Service's competitors. I speak for my client's customers, who are individual non-business first class mailers. When the Postal Service unilaterally increased its rates to meet its revenue requirements, it established a 20--
William H. Rehnquist: What do you mean by unilaterally increasing, Mr. Perlman?
Matthew S. Perlman: --Well, in the Rate Commission decision, the Rate Commission established a rate of 18 cents, and other rates for other classes. The Postal Service put this into effect under protest, and then returned the matter to the Rate Commission for reconsideration. The Rate Commission did not change its position, and under the statute, the board of governors may unilaterally increase rates if revenues are not sufficient.
William H. Rehnquist: You mean unilaterally, then, the board of governors acting without consent or approval of the Rate Commission?
Matthew S. Perlman: That is correct, sir. It established the 20-cent rate for first class, a rate of 7.9 to 10.9 cents for third class advertising circulars, depending on the degree of presortation, and a rate of 9 to 10 cents for Time and Newsweek, depending on the weight of the particular magazine and the advertising content. Discrepancies such as this result from full attribution of those costs which are borne most heavily by first class mail, such as collection and sorting, and treatment of other costs such as transportation, which... where weight and cubage or cubic volume are important factors as institutional costs. The problem is then compounded by using as a starting place for applying the other eight statutory factors a markup which is calculated as a percent of attributable costs. So, for first class mail you attribute most of the costs they incur. You don't attribute those costs that tend to be weight or cubage related, and then you apply a markup of the institutional costs as a percentage. That percentage is then adjusted by the other statutory factors.
William H. Rehnquist: Well, are you suggesting that there is only one way to handle these nine factors? You seem to be going through them and saying, this is the way to do this, this is the way to do that. I would have thought the board of governors would have had a good deal of discretion.
Matthew S. Perlman: Well, I believe that there is a great deal of discretion on how the other factors are applied. What I am reporting is the way the Rate Commission is in fact doing it. We are not attacking that per se.
William H. Rehnquist: I see.
Matthew S. Perlman: But we are just reporting it as a fact, but the result is that you have a very, very high percentage of costs far out of proportion to weight, volume, or number of pieces that is placed on first class mail.
Warren E. Burger: Mr. Perlman, there is... at least I understand there is a widespread and long-standing popular belief that junk mail has been carried on the shoulders of all the other mail, if you know what I mean by the junk mail. Now, courts don't take judicial notice of popular belief, because it may be mythology. Do you have any comment on whether there is an accurate allocation of the cost to carry the so-called junk mail?
Matthew S. Perlman: Your Honor, that is why we are here in this court. That is what we are complaining about. We believe that that--
Warren E. Burger: Well, your attack seemed to be, or your point seemed to be focused more on first class.
Matthew S. Perlman: --Well, we believe, as Mr. Segal stated, that second, third, and fourth class mail are undercharged, and that the difference is made up from first class. We are here urging lower first class rates, and we are not attacking revenue requirements, so the result of that is higher rates for second, third, and fourth class mail.
Byron R. White: Does your client for first class mail have a first class mail rate.
Matthew S. Perlman: That is correct. My clients are interested in low first class rates.
Byron R. White: Mister Segan's are competitors with second third and fourth class, i take it.
Matthew S. Perlman: Well, they're competitors with fourth class.
Byron R. White: They want high parcel post rates.
Matthew S. Perlman: That's correct.
Sandra Day O'Connor: Mister Perlman, I was a little confused as to whether you were concerned with the degree of proof required presently by the commission or with the underlying concepts employed. There was some confusion as I went through the briefs in my mind about whether the complaints you were making was really one of prescision of proof of variablitiy required by the commission or one that went further into the principles involved in the statute.
Matthew S. Perlman: Justice O Connor, the two really merge. The rate commission has taken the position as the Postal Service has that a cost cannot be attirubte if it does not vary by volume. The Rate Commission has used language, particularly in its early decisions, which indicated that it might consider other methodologies, but it never has, and in effect if you cannot prove it varies with volume, it is simply treated as an institutional cost.
Speaker: The result is that the Postal Service, which is really the only party able to do the variability studies, has attributed a relatively small percentage of the costs of operating the Postal Service. In the early proceedings, it was half. Then dropped to 45 percent. Now, with long-term variable costs considered, it is up around 65 percent. But perhaps that is an outgrowth of their perception of the degree of proof that is required more than it is a difference on what the statute requires.
Matthew S. Perlman: Well, I think they have articulated, and the Second Circuit has certainly articulated it by quoting the statement of Congressman Udall and interpreting the statute to mean only costs that vary with volume. We think that is incorrect, but we are urging the Court to apply the plain language of the statute and require, as the D.C. Circuit did, all reasonable inferences of cost causation, whether the cost is one that varies with volume or not. We believe that this is what the Act requires, and I would like to go into a little bit why we think the Act requires it. It is very simple. Direct and indirect costs, the words of the statute cover all costs. The cost is either direct or it is indirect. As Mr. Segal stated, the word "attribute", chosen by the Conference Committee and came out of the Senate bill, has no technical meaning. The Postal Service attempts to counter this by legislative history. They give a definition of a phrase, "costs demonstrably related", which was used by the Kaple Commission, which recommended establishing the Postal Service, and was used again in the House bill. Now, a variety of definitions were given to that phrase. We point in our brief to the various definitions. One set of definitions clearly is the one the Postal Service is relying on, but other definitions were used. But assuming for the moment that the Postal Service is correct, that that meaning of the House words and the House bill had a technical meaning, the Conference Committee rejected those words. They did not take the words of art and put them into the bill. They took words from the Senate bill, "attributable and assignable", with no technical meanings. And we think if they really meant volume variable cost, it would have been very easy for Congress to say that. Now, Respondents take the position that the House was tough on costing and the Senate wasn't, and they based that on the fact that there was no explicit rate floor in the Senate bill. The Senate bill said, you will consider costs with a list of factors, but didn't state explicitly that there was a rate floor. Now, that was corrected in conference. In the Conference Committee, the word "requirement" was added and the concept of a rate floor was made explicit. We think it was implicit in the Senate bill. But to indicate that the House was really taking the lenient attitude on cost, we have to look at another section of the bill. Section 1201(d) of the House bill provided that if the various statutory factors produced too much hardship, the governors could ignore them. Now, that was dropped in the Senate bill, in the conference. It was not in the Senate bill. It was dropped. And we think that is an indication by Congress that attribution was to be required and all means of attribution were to be used. The legislative history in the Senate is replete with concerns that first class was used as a cover-up it was used for the financial shortcomings of the Postal Service. That is the phrase of Chairman McGee. And the Senate was concerned that this historical practice not be continued when it wasn't cost justified. Now, Congressman Udall, who was the sponsor of the bill on the House side, was a supporter of cross-subsidization. He was a conferee. And after the conference, and after the Senate had voted, he made a speech, and it was also... similar language was in the statement of the House managers, which attempted to define what "attributable" meant, and it said that the House view was accepted, even though its language was changed. He said it was costs that varied in the short run. The Postal Service has now conceded that as incorrect, but they attempt to explain it away. Congressman Udall did not explain why the language was changed. He didn't explain why 1201(d) and its escape hatch was dropped. We suggest that Congressman Udall lost in the conference, and was simply attempting to make some... plant some legislative history that would throw doubt on what the Conference Committee did.
Sandra Day O'Connor: Mr. Perlman, do you think that Section 101(a), which provides that the costs of establishing and maintaining the Postal Service shall not be apportioned to impair the overall value of such service to the people is an indicator of some sort of discretion in the Commission over and above the expression in the statute which you have addressed in your petition?
Matthew S. Perlman: Well, we don't think so. We think that there is the requirement in (d)(3) which must be met. That is certainly something to be taken into consideration in apportioning the other 25 percent, roughly $5 billion of costs that we concede are institutional costs. There has been no suggestion that any conceivable rate is really going to impair the value of mail. All classes are basically inelastic, and--
Byron R. White: Can I ask you, Mr. Perlman, a question? I take it that the government's concession on long-range variable cost doesn't satisfy you.
Matthew S. Perlman: --That is correct, sir.
Byron R. White: And my question really is whether we should deal with this case at all in the light of the government's concession, because if the government... the case would come out differently in some respects in the Second Circuit if they had decided based on what the government's position now is.
Matthew S. Perlman: Well, we think that is a significant but only a part of the case. The D.C. Circuit and Administrative Law Judge Winner require... were talking about very... substantially greater attribution which we think is required.
Warren E. Burger: Mr. Garvey?
John H. Garvey: Mr. Chief Justice, and may it please the Court, let me begin by allaying Justice White's concern about the government's concession in this case. As a matter of fact before the Postal Rate Commission in this case, the Postal Service attributed approximately 13 percent of the services... of the costs of the Postal Service as long-run variable costs, and took the position before the Rate Commission, as it has in each of the prior two general rate proceedings, that long-run variable costs are attributable. In the Second Circuit, what the government's... what the Postal Service's brief said in making the point that indirect costs are attributable by cost variation, they quoted the House conferees' report and said Congress did make quite plain that short-term cost variability, quoting from the conferee's report, "was the method prescribed for identifying direct and indirect attributable costs. " The court of appeals, contrary to the suggestion of UPS, did not hold that only short-term variable costs are attributable. As a matter of fact, in the... at Page 24 of the court of appeals' opinion, it said this: "The Commission", speaking of the Kaple Commission, on which the bill was... on whose labors the bill was in large part based, "The Commission suggested that discrimination in rates would not occur as long as each class covered as a minimum the long-run variable costs ascribable to it, the full added cost demonstrably related to that class. " And then the court goes on to say, "This suggestion was embodied in the administration's bill, H.R. 11750, and the subsequent House bill. " which the court then goes on to say is the language adopted by the conference.
Byron R. White: Is your position in your brief here perfectly consistent with what the Second Circuit held?
John H. Garvey: I believe it is. There are two references in the Second Circuit's opinion to short-run variability. The references are a quotation of the House conferees' report which did in fact use the term "costs which vary over the short term. " in response to line... on Page 25. On Page 27, they say, again, that, "As to the level of attribution required, we conclude that the definition of that term in the Conference Committee report is controlling. " speaking of the definition which addressed variability with volume and which addressed attribution of specific fixed costs. I think that it is only the most tortured reading of the court of appeals opinion which can limit it to short-run variable costs.
Warren E. Burger: What do you have to say, Mr. Garvey, about that general proposition, whether myth or reality, that upper class mails have been carrying the junk mail to people's doors at the expense of the upper class mails?
John H. Garvey: The Postal Reorganization Act was designed to eliminate or to preclude in the future if it had not happened in the past that sort of discrimination against not only third... not only first class mail, but other classes of mail as well. 3622(b)(3), the provision in the statute which is at issue in this case, says that each class of mail shall bear... as a minimum, sets a rate floor which each class must pay, what it calls the long-run... what the Kaple Commission called the long-run variable costs, what the House bill called demonstrably related costs, what the Senate report called incremental costs, and the reason for requiring each class of mail to pay those kinds of costs was that that's necessary to avoid what is a subsidy in the true economic sense. In the real economic sense, a subsidy exists when Class A would actually be better if Class B did not exist. So, for example, if, the example the Kaple Commission gave was, if you have a machine that is just used for sorting parcels, and first class mail were required to pick up some of the cost of purchasing that machine, then first class mail would actually be worse off if fourth class mail were served then if it were not. With respect to the kinds of mail that you are concerned about, bulk mail in third class is introduced into the postal system already presorted by zip code. It doesn't need to be cancelled because it hasn't got a stamp on it. It is already in sacks, and it is brought to the Post Office in that fashion. First class mail, the kind that is sent from one household to another, the kind that the Greeting Card Publishers are concerned with in this case, is collected by the Post Office from collection boxes. It is then brought to the Post Office facility, where it is cancelled, and then sorted according to zip code, and then it is sent to a destination where it is again sorted according to the last two digits of the zip code. All of those kinds of expenses are eliminated by presortation and the lack of need for cancellation and presacking of third class mail, so that it is really comparing apples and oranges to say that third class mail may cost ten cents and first class mail may cost 20 cents. For one thing, the statute requires that third class mail bear all the costs that are attributable to that class. For another thing, the Act permits the Postal Service to apportion the institutional costs above that minimum in accordance with the statutory factors set out by the Act. Justice O'Connor and Justice Rehnquist have suggested that it looks to them from reading the Act as though the Postal Rate Commission was probably left with considerable discretion in apportioning the costs of the Postal Service which were institutional costs above these long-run variable costs. In fact, what the Act says in Section 3522(b) is that in setting rates, the Postal Rate Commission is to implement a number of policies which Congress gave to the Commission as specific directives in setting costs of mail. The statute says that the Postal Rate Commission shall make the rates fair and equitable, that it shall consider the value of service rendered to each class of mail, that each class shall bear its attributable cost, that the Rate Commission shall consider the effect on the general public, on business mail users, on--
William H. Rehnquist: Mr. Garvey, I think you said the statute says that the Commission shall make the rates fair and equitable. Are you referring to Subsection 1 where it says the establishment and maintenance of a fair and equitable schedule?
John H. Garvey: --Yes.
William H. Rehnquist: Do you think that refers to schedule of rates?
John H. Garvey: Yes, that's correct. In addition to the five factors I have mentioned, 3622(b) goes on to say that the Commission shall consider the scientific, cultural, informational, educational value of the mail.
John Paul Stevens: Mr. Garvey, do you disagree with what I thought both courts accepted as a premise, that the cost factor, whatever it may be, has to be given priority?
John H. Garvey: No, we do not.
John Paul Stevens: You don't disagree with that?
John H. Garvey: No, we do not. 3622(b) begins with... (b)(3) begins with the statement--
John Paul Stevens: Of requirement.
John H. Garvey: --that it is a requirement that--
John Paul Stevens: Does that then... does that not necessarily mean that we must know the scope of (b)(3) before we reach the other factors?
John H. Garvey: --Yes, it does. And--
John Paul Stevens: And what is your view... let me just get it... as to what is the scope? You said 13 percent of the costs are long-run variable costs under the Second Circuit holding, as I understood you.
John H. Garvey: --Well, no, what I said was that in this general rate proceeding before the Postal Rate Commission of the costs which were attributed in the Postal Service's proposal, 13 percent were what are called long-run variable costs. I said that in order to indicate that the Postal Service has not taken the position in this proceeding, nor in the prior proceeding, nor in the proceeding before that, that it is only short-term variable costs that are--
John Paul Stevens: What is the total... What is the percentage of total costs that short-run variable costs reflect? Does the record tell us? As a general matter.
John H. Garvey: --What the Postal Service... the amount of attribution that the Postal Service proposed before the Commission in this proceeding was 59.3 percent of the total costs of the Postal Service.
John Paul Stevens: Which included the 13 percent long-run.
John H. Garvey: Yes, that's correct.
John Paul Stevens: So you subtract 13 from 59, and you get the... answered my question. Is that right?
John H. Garvey: I suspect, although I am always nervous about doing subtraction with those rates. 0 [Generallaughter.]
John Paul Stevens: What else is there in the variable cost factor that you think is correctly there other than the 46 percent and the 13 percent that should properly be there?
John H. Garvey: I'm sorry. I don't think I understand the question.
John Paul Stevens: What do you think the term "costs" includes? Let me ask you that. What are the proper statutory components of the concept?
John H. Garvey: I think it is perfectly clear from the report of the Kaple Commission, from the House conferees' statement, and from the indications in the Senate report that what Congress had in mind attributing by way of costs were, first of all, those costs that are specific to a particular class of mail. The example that the Kaple Commission gave, again, was a machine that you only use for sorting parcels, even though the cost of that might be a capital cost. The Kaple Commission said that it ought to be attributed to fourth class mail because it was used for that sort of mail.
John Paul Stevens: Then that is an example of something that is neither a short-run nor a long-run variable cost. Is that correct?
John H. Garvey: Strictly speaking, I think it would be a variable cost over the long run. Those kinds of machines, I think, might last about 15 years, and your volume predictions over 15 years might require you to acquire more of those machines, so that in a sense they are, although the Kaple Commission, having a more limited horizon of what long-run variable costs were... they suggested five years, I believe... said that in that time frame that something like a parcel sorter would be a specific fixed rather than variable cost.
Sandra Day O'Connor: Is that kind of equipment within your definition of volume variable cost?
John H. Garvey: No, that sort of equipment, again, it depends on the length of the time period that you are going to look at in defining variations, but that sort of--
Sandra Day O'Connor: Well, I thought your brief took the position that the subsection we are talking about only required as a rate floor the volume variable costs attributable to a class.
John H. Garvey: --I hope not, because we also believe, as the Kaple Commission stated and as the House conferees' report said, that the kinds of costs which the Postal Service is required to attribute are costs which... let me quote to you from the House conferees' report. After the conference was over, what the House conferees had to say about 3622(b)(3) was this. "Provision in the conference substitute with respect to costs attributable to a class of mail or type of mail service establishes a floor for each class of mail equal to costs which consist of those costs, both direct and indirect, that vary over the short term in response to changes in volume of a particular class or, even though fixed rather than variable, are the consequence of providing the specific service involved. "
Sandra Day O'Connor: You think they were wrong in saying short-term. They didn't mean that?
John H. Garvey: I'm not sure that it's fair to say that they were wrong in speaking of short-term. That provision was drafted for the conference by Assistant Postmaster General Hargrove, by the general counsel for the Post Office Department and by the general counsel for the... by the counsel for the Senate, the Senate which had said that only incremental costs are attributable. And Assistant Postmaster General Hargrove testified in hearings before the Subcommittee, the Rate Subcommittee in the House that the phrase "demonstrably related costs", the phrase used in the House bill, had precisely the same meaning that was given to attributable costs in the House conferees' report. In his testimony before the Subcommittee, Assistant Postmaster General Hargrove said that in the revenue and cost analysis about which he was testifying, what the Postal Service was doing was attributing costs over the shorter run, and then went on to say that postal ratemaking, being a continuous process, can take the longer-run variations into account as it goes along. That suggests that the meaning of short as he used it and perhaps as the House conferees used it meant the amount of time between one rate proceeding and the next.
William H. Rehnquist: Mr. Garvey, you have answered several questions about short-term costs and volume-variable costs. Is it the government's position that those terms are simply words of art which allow of only one meaning, either something is a short-term cost or it isn't, or that the postal authorities have some discretion in administering the Act to define those costs perhaps in a way different than someone else might?
John H. Garvey: The question in this case is really how far the Postal Service and the Commission are required to go in discovering what kinds of costs are caused by particular classes of mail, and the Postal Service does not take the position that it has to be proven by empirical studies to vary with volume to a specific percentage. But what the Postal Service and the Commission do have in mind is that volume variation, and when I say volume variation, I mean variation with the number of pieces, or with the weight, or with the cubic dimensions of the mail, is the way to identify the causes of common costs. For example, if you have a lot of different classes being sorted at the mail facility, and according to zip code, and stamped, and that sort of thing, if you have 100 letters to sort according to zip code and to stamp, it is going to take approximately twice as long as it would take to sort and cancel 50 letters. Those kinds of costs amounted to about five billion costs in this general rate proceeding, and the Postal Service attributed 100 percent of those costs to the various classes of mail. What the Petitioners are contending in this case is that what they call cost of service principles ought to be used to distribute various joint costs among the various classes of mail. For example, when the postman goes around his route with a bag full of mail, if he has 100 letters in his bag, it is not going to take him any longer to go around the route than it would if he had 50 letters in the bag. It may take him more time if he has got to make more stops, but those costs are attributive. Just the cost of going around the route itself, though, is one the Postal Service treats as a fixed cost. Or, the cost of collecting mail from collection boxes. It takes approximately the same amount of time to collect 100--
William H. Rehnquist: Well, what if in the example you just gave of the postman going around the letter route and the Post Office saying it shouldn't be attributed--
John H. Garvey: --Yes.
William H. Rehnquist: --because it is a fixed cost, as you call it, supposing there was... someone else comes in and says, well, under my theory of accounting, that is not a fixed cost, and the court were to conclude, well, you could go either way on this thing. You know, the protesters have something to say for them, but on the other hand, the Postal Service seems to have something to say, too. Is that the kind of decision that a court ought to defer to the Postal Commission on?
John H. Garvey: Absolutely. That's what this Court has said in Colorado Interstate against FPC, that this kind of ratemaking is not a matter for the slide rule. It is a question of judgment on which the courts ought to defer to the agencies. Congress in fact set up the Postal Rate Commission as an expert agency in order to resolve those kinds of questions about what causes or what costs were really caused by a particular class of mail, and what costs ought to be treated as institutional and apportioned among the various classes of mail in order to implement the policies of the Act.
John Paul Stevens: Mr. Garvey, unfortunately, we tend to jump around a little bit in an argument like this. It would be helpful to me if you could tell me what the view of the Postal Service is with respect to, A, the properly included direct and indirect elements of cost, and secondly, in addition to those, what are the reasonably assignable costs that they should properly take into account? Could you describe them in any general fashion?
John H. Garvey: I think it is difficult to... I can give you examples, and I can give you the general definition of what they treat as properly attributable.
John Paul Stevens: I would like examples, if you could, because it seems to me that the Commission does have a duty to obey the statute.
John H. Garvey: Yes. Absolutely.
John Paul Stevens: And so, of course, we have to know what the statute means and know what components the Commission thinks belong in the various categories.
John H. Garvey: What the Postal Service contends are the costs that are attributable under the first part of Subsection (b)(3), as I mentioned before, are the costs that vary with the volume, number of pieces, weight, cubic dimensions of the mail, or costs that are specific to a particular class of mail, like the parcel sorter in the example that I gave. Examples of the first kinds of costs that vary with the volume of mail are the kinds of processing costs that I mentioned earlier, the costs of sorting letters according to zip code, the costs of cancelling letters, many of the costs of delivering mail. I said before that the cost of the postman going around his route was itself a fixed cost, but the cost of making individual stops in fact varies with the number of letters to a degree of 40 percent, 50 percent, and that fraction of what the Postal Service calls access costs, the deviation to go to each house, are attributed to the various classes of mail. In addition, the costs of transportation of mail on purchased transportation are attributed. When the Postal Service sends first class mail--
John Paul Stevens: But am I correct that the cost of using their own vehicles is not attributed?
John H. Garvey: --That's correct, although it's misleading to suppose that the sort of use of the Postal Service's own vehicles is the same as the use of vehicles for purchased transportation. The latter kind is used for transportation of mail between cities. The Postal Service, by contrast, uses vehicles for delivering mail, and in that case the vehicles, the drivers' time and the vehicle maintenance is treated as variable to the same extent as the postman's time would be when he was delivering letters on his route. The Postal Service also uses vehicles within cities to take mail from the main post office to the branches within the city. There may be about 100 of those in the city. And--
John Paul Stevens: Let me just interrupt you, if I may, on the vehicle cost again. It is the view of the Postal Service that not only that is not a direct or an indirect cost attributable to different classes, but also it is a cost which is not reasonably assignable to any one class.
John H. Garvey: --It is the Postal Service's position that the phrase 3622(b)(3) does not mean what Petitioner UPS contends.
John Paul Stevens: Well, what does it mean?
John H. Garvey: That is a reference to the remainder of the provisions in 3622(b). It is an indication that once the Commission distributes the attributable cost to each class of mail, it can't stop there, that it ought also to take account of each class of mail in apportioning the various institutional costs. It was just... that provision was put in by the Committee, and it--
John Paul Stevens: By reasonably assignable, you mean with respect to all other costs other than direct and indirect. They should be assigned on the basis of judgmental factors.
John H. Garvey: --That's right. You take all the other costs of the Postal System, and then you assign them reasonably. It doesn't make a whole lot of sense to say that a requirement, that reasonable assignment is itself a requirement that must be done according to particular characteristics. Otherwise, it is a little strange to--
John Paul Stevens: Well, you would agree, I assume, that there are cost accountants who could assign vehicle costs and also route time costs other than on a strictly volume basis.
John H. Garvey: --Yes. That... I don't mean to say that that method of apportioning costs is irrational. Maybe even that it is unfair.
John Paul Stevens: It may even be good accounting practice.
John H. Garvey: What I do... It is not the consistent practice of all accountants. The D.C. Circuit--
John Paul Stevens: No, but it may be good accounting practice for many accountants.
John H. Garvey: --I am not even sure that it is good accounting practice, because it tells you very little about what you want to know for purposes of ratemaking. Let me give an example. There was a study done of the cost ascertainment system, a system of fully distributed costs which the Postal Service used from 1926 until the Act was passed. In fact, one of the purposes of the Act was to eliminate this system of fully distributed costs which the cost ascertainment system exemplified. The study that was done for the government of the cost ascertainment system was done by Ernst and Ernst, who are respected accountants, I believe, and their conclusion was that the distribution of costs among the various classes of mail according to what they called unsubstantiated hypotheses of causation is singularly unhelpful for ratemaking purposes. It is something that can be done. As I said, it is not arbitrary. In a way, it is even fair. But it has very little to do with causation of the costs of mail, which is what Petitioners say is the reason for attributing these costs.
John Paul Stevens: Just to clarify, your view is that reasonably assignable means reasonably assignable in accordance with factors 4 through 9 of the statute?
John H. Garvey: Factors 1, 2, and 4 through 9.
John Paul Stevens: Right.
John H. Garvey: That's correct.
Byron R. White: At least you say that it is not unreasonable in assigning those costs to refer to those particular factors.
John H. Garvey: I believe it would not be, and I don't understand the Second Circuit's opinion to forbid that sort of technique in future rate proceedings.
Byron R. White: It may be that there is another way of assigning costs, but it is not unreasonable within the meaning of the statute to use these other factors to assign.
John H. Garvey: The factors for which Petitioners are plumping in this case?
Byron R. White: Well, no, the factors which you say the Postal Service uses in assigning costs.
John H. Garvey: Absolutely not. In fact, I believe that what Congress intended in including those other factors in the Act was to have the Postal Rate Commission implement the policies which underlay those factors in its apportionment of institutional costs.
Byron R. White: You don't even need to win on that. You don't need to, I don't suppose, say that the... that Congress required reference to these other factors in assigning costs. Even if they didn't require it, you can argue that it is not unreasonable to use those factors.
John H. Garvey: Absolutely, although--
Byron R. White: And... At least that is a fallback position, isn't it?
John H. Garvey: --I am not concerned about falling back in this case, because I believe that anyone who reads the report of the Senate, the report of the House conferees, and the Kaple Commission report, will find that it is perfectly clear what Congress intended to do, that Congress did not mean to limit... to distribute costs according to the three tiers for which UPS contends in this case, that Congress in fact explicitly rejected the system of fully distributed costs for which Petitioners are contending, that Congress meant to require only as a minimum that incremental or long-run variable costs be attributed to each class of mail. Petitioners contend in this case that what happened--
John Paul Stevens: May I interrupt? You said only incremental or long-run variable, but one of your examples you gave me was the sorting machine, which is neither.
John H. Garvey: --The reason I keep slipping with respect to that sort of example is that at least in this rate proceeding, and in the ones which have preceded it, as a matter of fact, the kinds of costs which are specific to only one class of mail have been relatively minor. In fact, even the example of the parcel sorter which the Kaple Commission gave is a little bit misleading, because the parcel sorter, although there is such a thing, is also used to sort third class parcels.
John Paul Stevens: No, but we are talking about concepts now. I don't know the dollars. But you have said that that is an example of a cost item that the statute requires to be assigned on the basis of cost, and then you keep saying, though, it is only long-run or variable costs and incremental costs, and your example doesn't fit your test.
John H. Garvey: It is a slip of the tongue when I do that, because--
John Paul Stevens: Well, but which is your view?
John H. Garvey: --The government's view--
John Paul Stevens: Is the fixed cost required to be allocated in the example you gave?
John H. Garvey: --Fixed costs, if they are specific to a particular class of mail.
John Paul Stevens: All right, so it is a broader category than the way you have defined it.
John H. Garvey: Yes. What the Petitioners contend in this case is that it was really the view of the Senate which required the full allocation of costs, which was incorporated in the Act. What the Senate report says is this. Petitioner UPS testified in hearings before the Senate, and they pushed for a system of fully distributed costs like that which governed parcel post before the Act was passed. The Senate report had this to say in response to that contention. "Express companies in the private sector of the economy have expressed their very keen desire to include language in the bill which would require the recovery of fully allocated costs for parcel post. " "The Committee rejects the suggestion on the principle that no particular cost accounting system is recommended, and no particular classification of mail is required to recover a designated portion of its costs beyond its incremental costs. " "That decision is for the Postal Rate Commission to determine in accordance with the general criteria enacted by law. " On the Committee which signed that report were Senator McGee, Senator Fong, Senator Randolph, Senator Yarborough, and Senator Bayh. Those five gentlemen who signed that report were the Senate conferees in the conference with the House. If what Petitioners contend is correct, they would have us believe that those five conferees who signed that report saying that only incremental costs should be attributed, that full allocation of costs was specifically rejected, changed their position and somehow succeeded in persuading the House as well to change its position, and to require full allocation of costs, or 75 percent allocation of costs under Subsection (b)(3) as they contend here, or 80 to 90 percent of allocation of costs, as the Greeting Card Publishers contended before the Postal Rate Commission in this proceeding.
John Paul Stevens: What is your view of the proper percentage that should be allocated?
John H. Garvey: It is difficult to say what the proper percentage is, because it depends on studies which the Postal Service is continually making to identify costs. The percentage which the Postal Service identified in this case was 59.3 percent of the total revenue requirement. The Postal Rate Commission itself in this case attributed 64 percent of the total cost, and then, according to the principles of service-related cost, assigned another approximately 9 or 10 percent of the costs of the postal system. So that what was actually done by the Commission was an attribution and assignment of 74 percent of the costs. Let me just summarize briefly. What the Postal Reorganization Act requires is that the Postal Service and the Postal Rate Commission in setting rates for the various classes of mail engage in essentially a two-step process. The first of those steps is the requirement that each class of mail bear the direct and indirect costs attributable to that class of mail, which include both specific fixed costs and costs that vary with volume over the long run. After that sort of attribution is done, 3622(b)(3) goes on to say that the Postal Service should assign all of the other costs of the Postal Service in some reasonable fashion, and what Congress had in mind in structuring that sort of assignment of the remaining costs were the policies embodied in 3622(b)(1), (b)(2), and (b)(4) through (9), the last of which is any other factors which the Commission considers relevant. Thank you.
John Paul Stevens: May I ask one more question before you sit down? Does the service think that the allocation of service-related costs was proper?
John H. Garvey: The service believes that the allocation of service-related costs is not proper, although the service believes that it is not forbidden by the Act. The reason the service is concerned about the allocation of service-related costs is that for one thing the principles of causation which would be the reason for tracing those kinds of costs are somewhat diminished by the fact that Congress has now said that even if there aren't preferential classes of mail, the service is still required to adhere to the same delivery system, and what is more, even if they were caused by the preferential classes of mail, there is no denying that other classes of mail are delivered six days a week along with the preferential classes, so that they would be getting a free ride if those costs were only charged to first and second class mail. On the other hand, the Postal Service concedes, as the court of appeals held and as the Commission believes in this case, that there are similarities between service-related costs and what in utility ratemaking generally are called peak load costs or there are also similarities between service-related costs and the kinds of specific fixed costs with which you have been concerned, and those similarities suggest that that question about the proper distribution of service-related costs is perhaps one which ought to be left to the expert judgment of the Postal Rate Commission and in a proper case the Postal Service.
Warren E. Burger: Do you have anything further, Mr. Segal? You have four minutes remaining.
Bernard G. Segal: May it please the Court, obviously, I cannot in four minutes answer, and you will have to rely on our briefs. So many statements have been made, the very last one, that we are arguing for fully distributed costs. Your Honor, my friend heard me say in response to a question by Justice Stevens, that we believe that as much as 25 percent, $6 billion, is allocable under the other factors other than the costing factor of (b)(3). It has been asked here what Congress intended. Congress was disgusted with the politics of rate fixing, had decided to get rid of it, and had decided to give it to an independent agency, but it was wise enough to know that it had to set up all kinds of safeguards, and it did it in the simplest, wisest way in 3622(b)(3). It did it by the requirement of attribution, by the requirement of reasonable assignment, and then left it to the discretion. Now, what has Judge Meskel done? To me, what he has done is remarkable. He has said, oh, no, short-term is enough, and that is 50 percent, but this doesn't mean that they can't do whatever they want. They can go up to 100 percent. Well, I suggest to Your Honors that that was not what Congress intended. Congress intended to give the discretion to run a business within rules. Congress intended that the... not simply that they could set a rule that long-term variable costs... it would be the only business in America that would go on that basis only, namely, long-term variable. Every business goes on the other items which I have mentioned to Your Honor. So, there is no doubt, to answer the questions of Justice O'Connor and Justice Blackmun and Justice Stevens, they did intend to give discretion to the Commission. They gave a discretion to the Postal Service unheard of in the past in American life to under certain conditions fix its own rates, different from the Commission, which indeed it has done on the 20 cents, when the Commission said it should be 18 cents. But it has got to do it by rules. And it has put the rules into effect to give it control, and now Judge Meskel comes along and says, no, we only have to give them 50 percent. Well, if they give them 50 percent, and 50 percent of all costs are in the discretion of someone whom the Department of Justice has gone to court, and I won't repeat here the language which the Department used in describing the conduct of the head of the Postal Service in that case, and the Department of Commerce has come out in despair, and now a Committee of Congress. Why? Because they are not adhering to the requirements of the Act. Every year they are doing better under the decisions of the District of Columbia. The Second Circuit decision, Your Honors, would catapult us back to 1971, when the District of Columbia circuit court in desperation said, here are rules, but you are not following any of them, so we can't reach a decision. All we can tell you is what to do next time. Then, in the second decision, they told them what to do. And the Commission did it, but the Postal Service wouldn't do it. And so in the third case, the court got stronger, and they have come up closer. Now, today, what remains?
William H. Rehnquist: Well, there is no reason why the Postal Service should feel obliged to follow the decision of one of eleven courts of appeals, when its actions can be reviewed in all eleven?
Bernard G. Segal: That court has said we will never fix a rate. That is not our business. But it is our business to see that the statute is complied with. I suggest to Your Honor if you read the District of Columbia circuit opinions, you will find the most careful reluctance, the most careful--
William H. Rehnquist: I read them, and I didn't find any reluctance. 0 [Generallaughter.]
Bernard G. Segal: --Well, I must say to Your Honor that in my judgment, and there is... which I have here... there is a specific statement, we have no power to send this back with any decision as to any rate, and what they are trying to do is to get the Postal Service to do its job, to exercise its discretion within the rules, and I suggest to this Court that it is not following the rules, and if Judge Meskel's opinion can prevail whereby only 50 percent is required, but you can go to 100 percent if you want, 120 percent, that kind of discretion certainly--
Byron R. White: Mr. Segal, you seem to be... you and the government read the court of appeals opinion for the Second Circuit considerably differently. Let's assume that the opinion is to be read as Mr. Garvey suggests it should be read.
Bernard G. Segal: --Well, Mr. Garvey says that it doesn't apply, the short-term. Let me read you what Judge Meskel said.
Byron R. White: Well, but let's assume that we read it the way he reads it.
Bernard G. Segal: You can't read it that way.
Byron R. White: Well, I know, but--
Bernard G. Segal: But let's assume that. Very good.
Byron R. White: --Yes. All right. Just assume it. Apparently it can be read that way, because he honestly represents that that is what it means.
Bernard G. Segal: But I have got a sentence to the contrary.
Byron R. White: Well, that may be.
Bernard G. Segal: All right.
Byron R. White: But assume that is the correct reading of it. Then what? A lot of the things you say then are--
Bernard G. Segal: Mr. Garvey--
Byron R. White: --Then you are just disagreeing with what his--
Bernard G. Segal: --Mr. Garvey hasn't said a word--
Byron R. White: --Then you would just be disagreeing with what the long-term variable costs are.
Bernard G. Segal: --Long-term variable isn't enough, Your Honor. Long-term variable will never suit the entire purpose. It requires what all business in the country does. It requires the exercise of judgment. You can't say that you are going to operate a multi-billion dollar business solely on statistics. You have to apply judgment. You have to apply discretion. You have to apply the rules which govern business. They have not done that.
Byron R. White: Well, if we read the Second Circuit's opinion the way you do, then what we have is that one of the litigants before them now in effect confesses error. Namely, the Postal Service.
Bernard G. Segal: Justice White, there is a footnote to the brief, very remarkable, I think, of the Solicitor General, which says that the Commission now agrees with the opinion of the Second Circuit. Do you know why? Because it gives the Commission a discretion that Congress has denied it for eleven years. Because it says to the Commission, only 50 percent is required, but this doesn't mean that I am barring you from doing whatever you want.
Warren E. Burger: Very well. Thank you, gentlemen. The case is submitted.