Opinion ID: 370472
Heading Depth: 1
Heading Rank: 4

Heading: first-class users' claims

Text: 87
88 Several petitioner and intervenor states, large users of first-class mail, mount a generalized attack on both the rate schedule adopted by the Board of Governors in approving the PRC decision, and the cost allocations underlying that rate schedule. The cornerstone of their position is a comparison of the rates charged for allegedly similar pieces of first- and second-class mail receiving identical service. Thus, the rate for mailing a piece of presorted first-class mail weighing four ounces would be 52 cents, while the rate for a piece of second-class red tag mail weighing four ounces would 10.8 cents or less, depending on the degree of presortation. 80 The States point to por tions of Postal Service witness Jellison's testimony supposedly proving that first-class and red tag receive identical service. 81 89 The States claim that this disparity demonstrates discrimination Per se, since unequal rates are being charged for identical services. 82 They also infer that first-class users are subsidizing the costs of providing second-class service. Adjusting for differences in cost coverage 83 between first- and second-class rates, the States surmise that the actual cost under the PRC's cost calculation of mailing the four ounce first-class piece is approximately 40 cents and the cost of the comparable second-class red tag service is 10 cents. To the states, simple common sense suggests that, since both classes receive identical service, the rate for second-class red tag service cannot be covering the true cost of providing that service. 90 This argument does not undercut the reasonableness of the rate schedule. In the first place, it is not at all clear from the record that the service accorded red tag mail is identical to that given first-class. Jellison's testimony was that while second-class red tag mail is processed, transported and delivered concurrently with first-class mail the majority of the time, red tag was deferred as against first-class in heavy volume periods. 84 This deferrability undercuts any easy conclusion that the services are identical, even though its cost consequences are unclear, since relative deferrability within the preferential category did not enter into the PRC's model for assigning service related costs. 85 Further, in handling first-class mail, USPS must perform a number of functions such as pickup at a multitude of locations (mailboxes, office buildings) that are not required for handling second-class, which must be delivered presorted to the post office. It is accordingly likely that the cost of handling second-class is lower than the cost of handling first-class mail. 91 A more fundamental difficulty is that the States' charge of a gross disparity in the rates charged first-class and second-class pieces of identical weight presumes that cost responsibility is a function only of weight, and that weight alone is the proper basis for comparison. Yet, depending on the particular cost segment, cost responsibility may result from any one or a combination of a number of factors, including not only weight but such factors as cubic volume and number of pieces mailed. The PRC employs these factors as distribution keys to distribute the costs of any one segment among the classes based on an inference as to causation of the costs of providing that segment of service to that particular class. 92 It may be enlightening to compare the rates charged the average pieces of first-class mail and second-class red tag mail. The average weight of all first-class letters and sealed parcels is 0.5 ounce; 86 the rate for this average piece would be 15 cents. The average weight of second-class regular rate publications is six ounces, 87 and using a piece comparable to that hypothesized by the states, 88 would be charged a rate of approximately 13.1 cents or less. After adjustment for cost coverage similar to that made by the States in their comparison, the cost to mail a first-class letter is 12 cents, to mail the second-class piece 13.1 cents. When comparison is made on a per piece basis, the claims of discrimination and subsidization lose their force. The point is not that this comparison proves absence of discrimination, but that reliance on any one key as the only test is inadequate. 93 We are sensitive to the first-class users' concern that the historical discrimination against first-class mail a concern that permeated the passage of the Act and the decision in NAGCP I 89 may persist. We do not advance these defects in the States' model as demonstrating decisively that first-class is not the subject of discrimination and does not subsidize other classes. But they do expose in high relief the States' failure to relate their claims to the extensive cost data relied upon by USPS and the PRC. Artificial comparisons cannot substitute for a showing that the PRC's specific cost allocations were not supported by substantial evidence.
94 The States make an additional argument that the PRC relied upon value of service criteria to an impermissible extent, in contravention of the command of NAGCP I. Under a value of service approach costs are allocated not by tracing of cost causality, but by judgments as to the value of the service to the user or what the traffic will bear. 95 We find the States' complaint hard to comprehend. It is directed at the testimony of Postal Service witnesses Sobin and McCaffrey. Sobin testified about projections of mail volume in the test year and estimates of price parameters, or elasticities of demand, for the various classes of mail and mail services. These latter estimates of elasticity both entered into the projections of volumes in the test year before rate changes, and provided a basis for estimating the reduction in volume that would result from the increased rates recommended by the rate design witness. 90 That witness was McCaffrey, who determined the appropriate cost coverages for the various mail classes and subclasses, applying the rate criteria of 39 U.S.C. § 3622(b). According to McCaffrey, Based on my proposed rates, witnesses Sobin and Kluttz (the Postal Service's revenue requirement witness) computed after-rates volumes and revenues. 91 96 In determining the appropriate cost coverages, which measure the allocation of residual costs after attribution and assignment, McCaffrey applied the discretionary criteria of § 3622(b), including the value of the mail service actually provided each class or type of mail service to both the sender and the recipient. 39 U.S.C. § 3622(b)(2) (1976). We do not understand the States to challenge to the use of value of service in the allocation of residual costs to the various classes. Rather, they seem to challenge the reliance, in the initial determination USPS' costs, on projections of the volumes that will be mailed at the proposed increased rates, because these volume projections are derived by applying estimated elasticities of demand to the projected test year volumes at the rates prevailing before the increases. Since any estimate of demand elasticity will incorporate judgments as to the value to the consumer of obtaining the service, reliance on these estimates permits value of service to creep somehow into the process of cost attribution and assignment. 97 Giving the States' argument the most generous cast, we nonetheless find it without merit. 98 Contrary to the States' suggestion, it is not at all clear that volume projections based on demand elasticity enter into the process of cost attribution and assignment. Conceptually, attribution and assignment are functions discrete from determination of the revenue requirement or designation of the appropriate rate schedule. By definition, attributable and assignable costs vary, at least by inference, with volume. Unless there is an assumption of significant economies of scale, not here posited, the process of attribution and assignment of costs is not materially affected by total volume projection; whatever the volume, a rate will recover attributable and assignable costs. Total volume projections enter the calculation because it is necessary to design the rate schedule to recover not only variable (attributed and assigned) costs but also institutional (residual) costs. It can only be determined whether a given rate schedule will recover all institutional costs when there is an accurate projection of the volume that will be generated under that schedule. Demand elasticity is pertinent only in the stage of designing rates to recover residual costs, and that is precisely the area where the statute permits value of service to be considered. 99 Even if, for purposes of discussion, one were to accept the States' supposition that demand elasticity enters into cost attribution and assignment, such an effect would be incidental to analysis based on volume estimates. Volume estimates are vital to sound ratemaking. It is difficult to envision a ratemaking scheme that does not require estimates of volume, and it would be absurd to preclude the use of volume projections because their ascertainment requires some consideration of the relative value to consumers of the services. 100 Nothing in NAGCP I requires such a result. The court condemned the overt use of value of service criteria, I. e., assigning almost half of the costs of the Postal Service on the basis of the relative inelasticities of demand of the mail classes. 92 The court commended the use of cost-of-service principles. But whether the costs so ascertained, and rates based thereon, will suffice to cover revenue needs naturally requires volume projections, even though these involve some ascertainments of demand elasticity. This is inherent in any rational scheme of cost allocation.