Opinion ID: 184914
Heading Depth: 2
Heading Rank: 1

Heading: The Overall Rate Increase

Text: During the three years (1995-1997) since its last rateincrease in Docket No. R94-1, the Postal Service has experienced revenue surpluses after decades of deficits. The Service feared, however, that its net income would be insufficient __________ 1 For a more detailed exegesis of the statutory scheme, see MailOrder Ass'n of Am. v. USPS, 2 F.3d 408, 413-16 (D.C. Cir. 1993). to cover planned increases in capital spending on severalmanagement-initiated projects designed to improve the PostalService's performance and infrastructure. The Service initially estimated that its total revenue requirement for FiscalYear 1998 would be $61.6 billion, including $60.564 billion inincurred costs, $605.6 million for a one-percent contingencyfund, and $446.9 million to recover one-ninth of the Service's$4.022 billion in accumulated debt. On this basis, it projectedthat it would need over $2.4 billion in additional revenue. The Service filed its request with the Commission in July1997, based on data from FY 1996, using 1998 as a testyear--a year that is to be representative of the period forwhich the proposed rates are to be in effect. PRC Op.R97-1 at 12; see also 39 C.F.R. s 3001.54(f)(2) (1998). While the request was pending before the Commission,subsequent data indicated that the Postal Service's originalrevenue estimates had been overly pessimistic. For example,although it had initially projected a surplus of only $636million for 1997, in fact the Service received a net income of$1.264 billion. In addition, although it originally projected a$1.4 billion shortfall in revenues for FY 1998,2 in the firstseven accounting periods of FY 1998, the Service received a$1.36 billion net income and would have to lose $2.6 billionover the remainder of the year to experience the initialestimated losses. As a result of these discrepancies, theCommission took the apparently unusual step of asking theGovernors to provide updated estimates for FY 1998 based on1997 actual results; although this request would delay theproceeding, the Commission observed that no pressing needfor new rates existed at the time. The Governors declinedthe Commission's request, rejecting an extension of the tenmonth deadline and stating that they did not wish to comment ... on the state of the evidentiary record and that theGovernors could use their discretion as to the timing ofimplementing rates to provide for the best transition to newrates. __________ 2 The Commission later identified this figure as $1.2 billion,without explaining the discrepancy. After it became apparent that its original revenue estimates were overly pessimistic, the Postal Service reported tothe Commission that it would face more costs than it hadinitially predicted. Specifically, it requested a new contingency figure of 1.5% instead of 1%, noting that in prior years thefigure had been as high a 3.5%. In addition, the Servicepredicted that it would need $300 million more than it hadinitially requested for discretionary programs, such as automated data processing. The Commission rejected what itviewed as attempts to avoid the full impact of the Service'sbright economic situation, labeling the new 1.5% contingencynumber a plug figure used by the Service to counterbalancethe decrease in the size of its contingency fund in light of1997's actual data. Further, the Commission dismissed asspeculative the Postal Service's claims that it would spendeven more money than it had initially projected in FY 1998,even though it continued to spend significantly less than itsrate case forecasts during the first half of the test year. The Commission pointed to a Postal Service document-- inadvertently included as evidence and initially disavowed bythe Service as inauthentic--that identified the Service's updating strategy as provid[ing] updated information on costincreases to offset the decreases resulting from 1997's actualfigures. The Commission found that although the documentmay not demonstrate an intent to mislead.... it indicatesthat the Service was looking for potential cost increases. The Commission therefore rejected the Service's effort toincrease its original estimate by $362 million. As to theinitial spending program estimates, however, the Commissionobserved that, despite having serious doubts about the Postal Service's forecasts in the area of other programs expense,... [the Commission] does not scrutinize the wisdom ofPostal Service spending plans. Lacking sufficient groundsto reduce this initial estimate of other programs expenses, theCommission reasoned that, [w]hile a proportional amount ofspending has not occurred in the first half of the test year, noparty has presented evidence suggesting that the PostalService will not spend funds for any particular programduring the remainder of 1998. It rejected, however, the Postal Service's position that it does not matter when themoney is spent because it will eventually be spent, on theground that it was antithetical to the test year ratemakingprocess. In revising the revenue request, the Commission observedthat it could not estimate the degree to which the error inforecasting 1997 results will continue into the test year,primarily because it lacks the Cost and Revenue Analysis for1997 (CRA), after the Governors declined to delay theproceedings to allow time for final FY 1997 data to becompiled. It did, however, adjust the Postal Service's original request based on the 1997 figures it had, with reductionsfor corrections provided by the Postal Service ($67 million), acost-of-living adjustment ($511.1 million, the largest singlechange), and corrections for cost reduction and other programs estimates ($101 million).3 It retained the 1% contingency figure and, in keeping with the Postal Service's nineyear amortization plan, it reduced by $69.9 million the amountthe Service could ascribe to prior year losses, or one ninth ofthe difference between actual and estimated 1997 profits. The Commission noted that [t]he nine year amortizationperiod is standard, having been used in Docket Nos. R80-1,R84-1, R87-1, R90-1, and R94-1, and that [t]he Servicestill believes it is appropriate. These figures, combined withattribution and miscellaneous adjustments adding $4 millionto the total revenue requirement, led the Commission toreduce the proposed rate increase by approximately $745million. At the same time, in light of the break-even requirement,39 U.S.C. s 3621, the Commission urged the Governors todelay implementing the new rates until additional revenuesare needed to offset actual (as opposed to planned) expenditures. In sum, despite the recent surpluses, the Commission __________ 3 The Governors criticized this last decrease of assumed supervisor cost savings as based on one party's unsupported speculationsthat such costs were overlooked. Despite this complaint, theGovernors elected not to challenge this reduction; nor do thepetitioners raise it as an issue. approved an increase of $1.6 billion in overall rates on theground that these changes will provide added funds toenable the Postal Service to proceed with its plans to spend$5.6 billion on equipment and service enhancement programsin the 1998 fiscal year.4 A month later, the Governors adopted most of the Commission's recommendations. See 39 U.S.C. s 3625. In theirview, [t]he revenue requirement was driven in large part bythe need to fund specific management initiatives and programs, many of which have been approved by the Board ofGovernors to maintain and improve service for the public, aswell as by the usual need to cover expenses and repay prioryears' losses. At the same time, they acknowledged that inFY 1998 they expected a gain in net income. Althoughcriticizing the Commission's rejection of certain costs and the1.5% contingency figure, the Governors accepted the revenuerequirement portion of the Commission's decision. Theyadded, however, that, under their Resolution No. 95-9,5 thePostal Service could recover for prior years' losses at a more rapid rate, if possible, than that based on the amount included in the revenue requirement. Continued surpluses above and beyond those anticipated will allow for the complete restoration of equity in the near future, obviating the need to include this provision in subsequent revenue requirements, and thus relieving the ratepayers of a burden they have carried for many years. Finally, in light of comments by mail customers to theGovernors and the Commission's request of a delay, theGovernors postponed implementing the rate changes untilJanuary 10, 1999. Among the factors influencing the delaywere the Service's current financial situation, as reflected inthe annual report for FY 1997 and reported expectations for __________ 4 This spending increase represented the first portion of a fiveyear plan to invest $17 billion in the Postal Service's operations. 5 Resolution 95-9, a policy statement by the Governors, providesthat the Postal Service will plan for cumulative net income ... toequal or exceed the cumulative prior years' loss recovery target. FY 1998, and the fact that January marked the four-yearanniversary of the last general rate increase. The Governorsalso concluded that applying the increase in January wasconsistent with the Postal Service's goal for equity restoration through FY 1998, in accordance with Resolution No. 95-9and the Commission's recommendation for the recovery ofprior years' losses.
In 1970, Congress enacted the break even requirement,see 39 U.S.C. s 3621, as part of the Postal ReorganizationAct, Pub. L. No. 91-375, s 3621, 84 Stat. 719, 760 (1970)(codified as amended at 39 U.S.C. s 101, et seq. (1994)),following years of deficits by the then-Post Office Department. See National Ass'n of Greeting Card Publishers v.USPS, 607 F.2d 392, 425 (D.C. Cir. 1979) (NAGCP III); seealso H.R. Rep. No. 91-988 at 3, 6, 13 (1970). The HouseCommittee on Post Office and Civil Service explained thatthe 'break-even' requirement of H.R. 17070 represents acommitment that the Postal Service no longer rely on massiveannual infusions of general revenues of the Treasury at thetaxpayers' expense. H.R. Rep. No. 91-1104 at 17 (1970); see also H.R. Rep. No. 91-988 at 13. Even so, that version ofthe bill did not contemplate the Postal Service becomingself-sustaining--[i.e.] eliminating the postal deficit--untilJanuary, 1978. H.R. Rep. No. 91-1104 at 10. The finalversion of the legislation, however, replaced the 1978 targetdate with a requirement that revenue from rates and fees,plus annual appropriations for public service, debt service,and revenue foregone should cover full costs. H.R. Rep. No.91-1363 at 87 (1970) (conference report). Despite the restructuring of the postal system, however,the Service continued to operate budget deficits in all butnine of the 26 years from 1971, when it became an independent agency, to 1997. See PRC Op. R97-1, at i, 11; PostalRate Commission, Opinion & Recommended Decision, DocketNo. R94-1, at II-24 to II-26 (1994) (PRC Op. R94-1); seealso NAGCP III, 607 F.2d at 425, 431. As the Commissionobserved in the 1994 rate case, [w]hile reorganization led to improvements in the cumulative deficit trend, it has not livedup to the expectations of break-even operations. PRC Op.R94-1 at II-34. This problem began to change in the threeyears following the 1994 rate case when the Service experienced unprecedented operating surpluses totaling $4.6 billion. PRC Op. R97-1 at i. The Service's improved fortunes, however, lie at the heartof the Alliance's challenge to the overall rate increase. TheAlliance contends that the Governors' decision flies in the faceof evidence that the Service was operating at a surplus at thetime the Governors approved the Commission's recommendedrate increase and therefore the Governors' decision violatedthe break-even requirement of s 3621. The Service responds that the Commission (and therefore the Governors,who adopted the Commission's recommendation) carefullyconsidered its request, reducing the proposed increase whennew data became available, and that [n]o party filed factualevidence controverting the Postal Service's revenue requirement presentation. The plain language of s 3621, that total estimated incomeand expenses be equal as nearly as practicable, suggeststhat Congress did not contemplate the break-even provisionto require a strict dollar-for-dollar match when the Servicepresents its budget proposal to the Commission. The legislative history also recognizes that income and costs could beapproximately in balance and that the Commission shouldrecommend a decision balancing the two as nearly as possible. S. Rep. No. 91-912, at 14-15 (1970). The SenateCommittee on Post Office and Civil Services reported that theGovernors were to notify the Commission if estimated costsand estimated income were significantly different, at whichtime they were to request a change in the rate structure. Id.at 14. The statutory language and the legislative history recognize that ratemaking inherently involves some degree ofimprecision and, as this court has previously observed, it isnot an exact science. See Association of Am. Publishers v.Governors of the USPS, 485 F.2d 768, 773 (D.C. Cir. 1973). The Service makes projections about its costs and revenuethat may or may not come to pass; projections are no morethan educated guesses. The use of projections for futurecosts and revenues necessarily will involve some imprecisionwhen actual data becomes available. Of course, the Servicemust make its estimates in good faith. In addition, theCommission has a duty to evaluate the Service's proposalindependently. See Mail Order Ass'n of Am. v. USPS, 2F.3d 408, 422 (D.C. Cir. 1993). Nevertheless, the PostalService's request for a rate change shapes the Commission'spower to recommend. Dow Jones & Co. v. USPS, 110 F.3d80, 83 (D.C. Cir. 1997). The Alliance's challenge focuses, therefore, on the PostalService's estimate of its costs, noting that even the Commission expressed some doubts as to whether the Postal Servicewould spend all of the money in the test year that it initiallyprojected. The court has previously rejected efforts to definethe term cost under s 3621 too restrictively, lest we clampthe shackles of a narrow rule onto the Postmaster General'sattempt to return the Postal Service to financial stability. NAGCP III, 607 F.2d at 428. Although the Service is notfree to define total estimated costs so broadly as to makethe term meaningless, the court accepts the Service's determination as to costs unless it lies outside the range ofpermissible choices contemplated by the statute. Id. at 430(quoting Hardin v. Kentucky Utilities Co., 390 U.S. 1, 8(1968)). As the Supreme Court observed in New York v.United States, 331 U.S. 284, 328 (1947), [t]he appraisal ofcost figures is itself a task for experts, since these costsinvolve many estimates and assumptions and, unlike a problem in calculus, cannot be proved right or wrong. They are,indeed, only guides to judgment. The Alliance does notchallenge the type of expenses the Service proposes to countas costs, but only the amount of those expenses. In reviewing the record, the court must determine whetherthere was substantial evidence for the Commission to rely onthe Service's original cost estimates in calculating the revenuerequired for the Service to break even. See 5 U.S.C.s 706(2)(E) (1994); Mail Order Ass'n, 2 F.3d at 420. Such evidence need not be overwhelming, and the agency musthave latitude to draw permissible inferences from ... therecord. Mail Order Ass'n, 2 F.3d at 421. Here, the Commission noted, first, that the need for a revenue increasearose from the Service's plans to increase capital spending to$2.5 billion on ambitious management-initiated programs toimprove customer service. When data became available indicating that the Service's financial performance was betterthan expected in 1997, the Commission adjusted the Service'srevenue requirements, while noting that the factors causing1997's stellar performance might not continue into the testyear. It also rejected the Service's claim that its costs wouldbe even greater than it had initially projected. Thus, theCommission did not, as the Alliance suggests, set rates without regard to actual data. By contrast, in West Ohio Gas v.Public Utilities Comm'n of Ohio, 294 U.S. 79 (1935), theagency shut [its] eyes when presented with actual revenuefigures for 1930 and 1931, instead relying on estimates basedon 1929 data. Id. at 81. Here, the Commission adjusted itsfigures as new data became available and was not required todelay indefinitely the ratemaking process until all 1997 datahad been compiled, particularly in light of its statutory obligation to make its recommendation within 10 months. See 39U.S.C. s 3624(a), (c)(1). Second, although expressing doubts about whether theService could actually spend all the money it initially plannedfor during the test year, the Commission found that it had nobasis to reduce this estimate, observing that its role was notto pass judgment on the wisdom of the Service's proposedspending. See Governors of USPS v. United States PostalRate Comm'n, 654 F.2d 108, 115 (D.C. Cir. 1981). TheService offered evidence that it had plans in place to makesure its managers timely spent these funds, and it noted thata number of contracts had already been signed. The Alliancedoes not seek disallowance of any specific expenditure. Although the Alliance challenges the Service's claim that itwould in fact spend the millions of dollars during the testyear, reversing early fiscal year performance, it provided noevidence that such spending would not occur. The Commis- sion could reasonably presume, therefore, that the Service'sinitial estimates and managerial efforts reflected a good faithforecast of its spending needs.6 See FTC v. Owens-CorningFiberglas Corp., 626 F.2d 966, 975 (D.C. Cir. 1980); cf. WestOhio Gas v. Public Utilities Comm'n of Ohio, 294 U.S. 63, 72(1935). Because we conclude that the Commission's recommendeddecision to approve a revenue increase was based on suchrelevant evidence as a reasonable mind might accept asadequate to support [the] conclusion that the Service wouldspend its initial estimates on new programs during the testyear, making the rate increase necessary, see Mail OrderAss'n, 2 F.3d at 420 (citations and internal quotation marksomitted), we affirm the Governors' decision. The Governorscould reasonably rely on the Commission's conclusions. Although the Service's failure in the early part of the fiscal yearto keep pace with its initial spending projections might suggest an inability to meet its spending targets for the remainder of the test year, this is not the only conclusion reasonablyto be drawn from the evidence. Reviewing courts may notoverturn an agency finding simply because evidence existedsupporting an alternative finding. Direct Marketing Ass'nv. USPS, 778 F.2d 96, 108 (2d Cir. 1985) (quoting Newsweek,Inc. v. USPS, 663 F.2d 1186, 1210 (2d Cir. 1981)). TheService's witnesses testified, and the Commission accepted,that a number of contracts for such spending had been signedand that the Service was taking steps to ensure that managers would be accountable for spending the money in theirbudgets on the new programs.7 These programs were consis__________ 6 Although the Alliance makes much of the fact that the PostalService earned a $550 million net income during FY 1998 and $611million during the first four months of FY 1999, these figures werenot available to the Commission and the Governors when they madetheir respective decisions. See 39 U.S.C. s 3628 (1994); see alsoCommercial Drapery Contractors, Inc. v. United States, 133 F.3d 1,7 (D.C. Cir. 1998); Direct Marketing Ass'n v. USPS, 778 F.2d 96,109 (2d Cir. 1985). 7 The Alliance is therefore mistaken when it contends that theService is engaging in post hoc rationalization by suggesting that tent with the Service's obligation to maintain and develop thepostal system and to improve its service to customers. Seegenerally 39 U.S.C. s 3621. The Alliance's requested relief,complete disallowance of the proposed rate increases in theirentirety, would seriously interfere with the Governors' determination that additional funds were needed to improve service, and hence the Commission could reasonably reject itsrequest. We also reject the notion that the Postal Servicecould implement rates only once its profits were exhausted: the Service can rely on the test-year estimates, so long as theCommission has substantial evidence with which to supportthose calculations. See Mail Order Ass'n, 2 F.3d at 420. In light of the inherent mismatch that can occur whenusing a test year and estimates to project revenue requirements, the Commission necessarily faces the prospect thatsome of the data initially provided to it by the Service maylater prove to be inaccurate. The Commission considered thedata before it, rejected the Service's late-breaking spendingincrease projections, and reduced the initial estimates basedon what data it had. Although the Commission requested athree-month delay to allow time for the submission of updatesto its FY 1997 data, once the Governors rejected this request,the Commission was within its discretion to proceed based onthe evidence before it and to decline to reopen the record andthereby endanger its statutory obligation to complete the rateproceeding within ten months. See 39 U.S.C. s 3624(c)(1); see also Direct Marketing Ass'n, 778 F.2d at 107 (citing Cityof San Antonio v. Civil Aeronautics Bd., 374 F.2d 326, 329(D.C. Cir. 1967)). The Alliance acknowledges that the recordbefore the Commission need not be continually updated toreflect the latest, most accurate data. Indeed, in enacting thePostal Reorganization Act, Congress was concerned thatprotracted disputes over rates and classifications not blockthe adequate flow of revenues to the Postal Service. MailOrder Ass'n, 2 F.3d at 419 (citing H.R. Rep. No. 91-1104 at19). __________ the delays in spending at the beginning of the fiscal year were onlytemporary. See SEC v. Chenery Corp., 332 U.S. 194, 196 (1947). The Alliance contends, however, that whatever evidencewas before the Commission, the Governors in effect admittedthat a rate increase in FY 1998 would violate the break-evenprovision when they stated in their decision adopting theCommission's recommendation a month later that [i]n FY1998, the Board once again expects the Postal Service to gaina net income. This statement, divorced from any specificdata in the record to support it, is somewhat ambiguous, inthat it indicates nothing about the size of the expectedsurplus or whether it would be more than the $19 millionsurplus projected by the Commission for 1998 if the newrates were implemented. Furthermore, the Governors madethis observation in the context of explaining why they weredelaying implementation of the rates until January 1999. Hence, the statement is hardly a precise calculation of theService's revenue requirements based on evidence in therecord.8