Opinion ID: 370472
Heading Depth: 2
Heading Rank: 2

Heading: Use of Value of Service Criteria

Text: 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.