Opinion ID: 2800057
Heading Depth: 2
Heading Rank: 1

Heading: The Cap on Changes in the Postal Service’s Rates

Text: “In 1970, what was formerly the cabinet-level Post Office Department was transformed by statute into the modern government-owned corporation known as the United States Postal Service.” USPS v. Postal Regulatory Comm’n, 599 F.3d 705, 706 (D.C. Cir. 2010). As part of that transformation, Congress created the Postal Rate Commission to oversee a system in which the Postal Service established rates based on its actual costs, with the goal of breaking even. See United Parcel Serv., Inc. v. USPS, 184 F.3d 827, 829–30 (D.C. Cir. 1999). After criticism that the cost-based ratemaking model failed to incent the Postal Service to operate efficiently, and for other reasons, Congress reformed the ratemaking scheme by enacting the Postal Accountability and Enhancement Act in 2006. 6 The Act separated the Postal Service’s product classes into two differently regulated groups: “market-dominant products” and “competitive products.” See USPS v. Postal Regulatory Comm’n, 676 F.3d 1105, 1107 (D.C. Cir. 2012). “Market-dominant products” include the various products for which the Postal Service enjoys a statutory monopoly, or for which the Postal Service exercises sufficient market power so that it can effectively dictate the price of such products without risk of losing much business to competing firms. See 39 U.S.C. § 3642(b)(1), (2). Remaining products, for which the Postal Service faces meaningful market competition, are classified as “competitive products” and are not at issue in this case. The Act completely reformed the ratemaking system for market-dominant products. To alleviate concerns that the Postal Service would improperly leverage its monopoly powers over these products, the Act subjected them to a price cap, forbidding “changes in rates” to rise faster than inflation: The system for regulating rates and classes for marketdominant products shall— (A) include an annual limitation on the percentage changes in rates to be set by the Postal Regulatory Commission that will be equal to the change in the Consumer Price Index for All Urban Consumers . . . over the most recent available 12-month period preceding the date the Postal Service files notice of its intention to increase rates[.] Id. § 3622(d)(1)(A). The price cap does not apply directly to every individual product, however. Rather, it applies to each “class” of products, as defined by statute. Id. § 3622(d)(2)(A). As a 7 result, the Postal Service can raise the price of one product in a mail “class” by more than the rate of inflation if that overinflation increase is offset by lower rises or reductions in other products in the class. For example, the Postal Service can raise the rate of one kind of first-class mail by more than the rate of inflation as long as it offsets that increase with a lower rise in another kind of first-class mail. In addition, because market-dominant prices can be raised to track inflation regardless of the Postal Service’s actual costs, the Postal Service can keep savings it creates through cost cutting. On the other hand, if the Postal Service’s costs rise faster than the rate of inflation then, barring extraordinary circumstances justifying a rate increase, the Postal Service may not be able to cover its costs. Thus, the inflation-based price cap protects mailers from the “unreasonable use of the Postal Service’s statutorily-granted [and de facto] monopoly” power while creating new pricing flexibility, incentives for the Postal Service to reduce costs, and the opportunity for the Postal Service to earn a profit. S. REP. NO. 108-318, at 19 (2004). B. The Commission’s Implementation of the Price Cap The Act also reformed the Postal Rate Commission into the Postal Regulatory Commission and required it to promulgate regulations “whereby the Postal Service may adjust rates not in excess of the” price cap. 39 U.S.C. § 3622(d)(1)(D). The Commission’s regulations seek to ensure that the class-level price cap serves as an effective limit on the Postal Service’s rates by plugging several potential gaps in the cap. Thus, for example, the Commission’s rules ensure that the Postal Service may not generate extra revenue beyond the price cap by taking advantage of the different volume levels of different products 8 within a class to raise rates unevenly while technically complying with the class-level price cap. To achieve this, the Commission has promulgated regulations specifying that the calculation of a “change in rates” in a class should be weighted by the mail volume of any given rate cell in a class. 39 C.F.R. § 3010.23(b). So, if the Postal Service has two rate cells in a given class but one of them accounts for the lion’s share of the mail volume, any increase in the rate for that rate cell will be weighted according to volume when determining its contribution toward the class-wide rate change cap. Small increases in the rate for small-volume rate cells cannot be used to obscure large increases in the rate for the largevolume rate cells that generate the most revenue. By default, the volume levels of the various products are to “be obtained from the most recent available 12 months” of data. Id. § 3010.23(d)(1). The Commission’s regulations also seek to prevent the Postal Service from evading the price cap by shifting mail to more expensive rates. Because the Postal Service often changes the classification of its mail, for example by adding, deleting, or redefining rate cells, it is possible that some mail will shift between different rates. The Commission determined that shifting identical mailpieces between different rates would constitute “changes in rates” for those mailpieces. The Commission thus required the Postal Service to factor the effects of classification changes into the calculation of changes in rates by adjusting the volume associated with each rate cell in sync with any changes to the treatment of mailpieces. The applicable regulation states: The Postal Service shall make reasonable adjustments to the billing determinants [i.e., volume levels] to account for the effects of classification changes such as the introduction, deletion, or redefinition of rate cells. 9 Id. § 3010.23(d)(2). As noted above, this regulation prevents the Postal Service from circumventing the price cap by shifting mail volume into more expensive rate cells. If a discounted rate is “deleted,” forcing a mailer to pay a higher price for their piece of mail, that price increase would be captured and counted toward the price cap. The regulation thus codifies an important precept: that the rate on the discounted mail has essentially been raised by being forced into a higher rate cell, independently of whether the posted price in either the new or original rate cell has been changed. Moreover, at the urging of the Postal Service and to simplify the calculation of the effect of classification changes, the Commission has required the Postal Service to use historical volume data and known mail characteristics (rather than forecasts of changes in mailer behavior) when determining the effects of classification changes. The applicable regulation essentially requires the Postal Service to assume a “constant mail mix” – measuring changes in rates as if last year’s mail were being sent under the new proposed rates and rules. The regulation states: Whenever possible, adjustments shall be based on known mail characteristics or historical volume data, as opposed to forecasts of mailer behavior. Id. § 3010.23(d)(3). Although the precise language of the regulation has changed several times, its essence has remained the same: if last year’s market-dominant mail in a given class, sent according to the new rates and classification rules, allow the Postal Service to earn more revenues than the inflation-adjusted maximum, the rates violate the cap. 10 C. The Mail Preparation Requirements Change As indicated at the outset of this opinion, this case raises questions regarding the scope of the Commission’s authority to regulate “changes in rates” pursuant to the price cap statute and its own regulations. The issue between the Postal Service and mailers arose when the Service changed mail preparation requirements that would have the likely effect of changing rates paid by certain mailers for sending the same mailpieces that they sent in the prior year. The parties dispute, among other things, whether such a change is a “classification” change within the meaning of the Commission’s regulations, and whether such a classification change can result in a “change in rates” within the meaning of the Act. Understanding the mail preparation requirements change and its potential rate effects serves as a crucial starting point in this case. The Postal Service offers “automation discounts” on many of its market-dominant products to mailers who are willing to prepare and tender mailpieces using technologies that reduce the Postal Service’s costs. While the official, posted rates for these discounts are subject to approval by the Commission, the Postal Service retains discretion to define eligibility for many of these automation rates through its power to create mail preparation requirements. For example, the Postal Service may sometimes define which automation procedures entitle mailers to the discounts. These procedures are published in the Domestic Mail Manual (“Manual”), which contains the detailed operational rules governing the mail products described in the formal Mail Classification Schedule overseen by the Commission. See Br. of the U.S. Postal Serv. 13. 11 One form of automation approved by the Manual is the use of “Intelligent Mail” standards, which essentially involve affixing barcodes to mailpieces to enable the Postal Service to simplify mail acceptance, processing, and tracking. Since January 2009, the Postal Service has allowed mailers to use two different Intelligent Mail standards, receiving two different discounted rates: “basic-service” Intelligent Mail, a less demanding standard that receives a smaller discount; and “full-service” Intelligent Mail, a more demanding standard that receives a larger discount. Basic-service Intelligent Mail requires mailers to affix a barcode to each mailpiece containing some basic information about the shipment, and to schedule pick-up through a designated electronic scheduling system. See generally Implementation of Intelligent Mail® Barcodes, 73 Fed. Reg. 1158, 1160 (Jan. 7, 2008). Fullservice Intelligent Mail requires mailers to affix to each mailpiece a barcode that uniquely identifies that mailpiece; to place specialized barcodes on trays, sacks, and other containers; to submit postage and mail shipment information electronically; and to schedule certain pickups using a specified electronic system. See generally id. at 1159–60. In April 2013, the Postal Service provided public notice that it was amending the Manual to change the eligibility requirements for its automation rates, promulgating the regulation that is at the heart of the dispute in this case. 78 Fed. Reg. 23,137. The Postal Service announced that use of the basic-service Intelligent Mail standard would no longer entitle mailers for any automation discount. Meanwhile, the full-service Intelligent Mail discount would remain unchanged. For that reason, mailers using the basic-service standard who wanted to retain an automation discount would have to upgrade their systems to full-service Intelligent Mail, but would be rewarded with the greater full-service discount. Mailers who did not upgrade their systems to comply with the 12 full-service requirements would have to pay the higher, undiscounted rates. The Manual change did not actually change the posted automation rates; it changed only the eligibility rules according to which mailpieces could qualify for those rates. D. The Proceedings Before the Commission In September 2013, the Postal Service separately notified the Commission that it intended to raise its posted prices for a variety of market-dominant products. Order on Price Adjustments at 1. The parties did not dispute that these noticed price increases, by themselves, fell within the inflation-based price cap established by statute. Various commenters objected to the rate increases, however, stating that they did not take account of the changes to mail preparation requirements eliminating basic-service Intelligent Mail’s eligibility for an automation discount. That change, they argued, was a “classification change” within the meaning of 39 C.F.R. § 3010.23(d) because it made basic-service mail of the kind sent in the prior year ineligible for an automation rate; in other words, it “redefined” the discounted rate cell and reclassified the basic-service mail into a higher rate cell. The commenters further argued that this change resulted in a “change in rates” for basic-service Intelligent Mail within the meaning of the price cap statute because those same basicservice mailpieces would now be charged a higher rate. Thus, the commenters argued that if the Postal Service’s rate change proposal was adjusted to account for the supposed change in rates arising from the mail preparation requirements, the Postal Service had exceeded the price cap. The Postal Service disagreed. In the proceedings before the Commission, the Postal Service argued that the price cap statute and regulation forbid the Commission from 13 considering the effects of Manual changes as changes in rates. Regarding the price cap language of 39 U.S.C. § 3622(d)(1)(A), the Postal Service argued that Manual changes were not “changes in rates” because they did not actually change the rates posted in the formal Mail Classification Schedule. According to the Postal Service, changes to the mail preparation requirements in the Manual merely changed the requirements to obtain an existing rate. The Postal Service insisted that the plain language of the statute could not apply to changes that left the posted rate the same. Regarding the Commission’s regulation, the Postal Service claimed that Section 3010.23(d), requiring the Postal Service to make adjustments for “classification changes such as the introduction, deletion, or redefinition of rate cells,” does not apply to operational changes made in the Manual. Instead, the Postal Service contended that the only “classification changes” subject to the rule were changes to the Mail Classification Schedule overseen and approved by the Commission. Order on Price Adjustments at 12. The Postal Service additionally argued that it expected that most mailers would comply with the changes to the mail preparation requirements, and that the Commission should therefore not assume when calculating the change in rates that all basic-service mailers would begin paying higher rates. Id. at 13. Lastly, the Postal Service argued that construing the price cap to apply to mail preparation changes would seriously blur the line between the Postal Service’s authority to govern dayto-day operational issues and the Commission’s authority to manage rates and classes for market-dominant products, and that doing so would be inconsistent with the Commission’s treatment of mail preparation requirement changes in the past. 14 See id. at 12–13. The Postal Service expressed alarm that interpreting “changes in rates” to apply to all mail preparation requirement changes would greatly reduce the flexibility that the Postal Service needs to run its business operations. The Commission largely agreed with the objectors. The Commission held that “[w]hether one characterizes the [Manual] change as a redefinition or a deletion [of a rate cell], or both, it is a classification change with rate effects that must be recognized in calculating whether the proposed changes in rates comply with the annual limitation established in 39 U.S.C. § 3622(d)(1)(A).” Order on Price Adjustments at 15. Noting that “the focus of the comments has been on the redefinition of rate cells,” id., the Commission set out its legal standard for when a change in mail preparation requirements constitutes a redefinition of a rate cell. The test, it held, was whether the new mail preparation requirements . . . require mailers to alter a basic characteristic of a mailing in order for the mailing to qualify for the same rate category for which it was eligible before the change in requirements. Id. at 18 (emphasis added). The Commission rejected the Postal Service’s arguments that the “classification changes” mentioned by the regulations were limited to the Mail Classification Schedule superintended by the Commission, noting its own authority to interpret the regulations and that the Postal Service and other commenters had specifically discussed “when changes in mail preparation requirements have significant rate implications” during the regulations’ design. Id. at 19–20. Additionally, the 15 Commission dismissed the Postal Service’s fear that “deeming some new mail preparation requirements to result in rate adjustments will lead to deeming all new mail preparation requirements to result in rate adjustments,” stating that “[t]he Commission has not and will not indiscriminately treat all new mail preparation requirements as rate adjustments.” Id. at 25. Pointing to its “basic characteristic of a mailing” standard, the Commission argued it would be able to distinguish between new mail preparation requirements that changed rates and those that did not. Applying its new standard to the Manual change involving the Intelligent Mail standards, the Commission concluded that the new rules require mailers to “make changes to the basic characteristics of their mailings in order to continue to qualify for the automation discounts for which they are currently eligible.” Id. at 29. In reaching this conclusion, the Commission noted that mailers must apply unique barcodes to each mailpiece; apply barcodes to trays, tubs, sacks, and containers; ensure that the barcodes at each level are interconnected; and use a designated electronic system to schedule appointments and provide electronic documentation. According to the Commission, these “change[s to] their mailing practices” constitute “change[s to] the basic characteristics of a mailing.” Id. at 30. The Commission also concluded, in the alternative, that the Manual change was the “deletion” of a rate cell because, after the change, no mailers would be eligible for the lower discounted rate previously applied to basic-service Intelligent Mail users. Id. at 31–33. The Commission also dismissed the Postal Service’s objections to its requirement that the Postal Service use historical data, assuming that no basic-service mailers would upgrade to full-service mail, when calculating the rate effects 16 of the Manual change. Id. at 33–35. While the Postal Service argued that, in its experience, most mailers would make the needed upgrades and therefore qualify for the lower rate, the Commission pointed out that its rate change calculation rules require the Postal Service to use known mail characteristics or historical volume data whenever possible, as opposed to forecasts of mailer behavior. Id. at 33; see also 39 C.F.R. § 2010.23(d)(3). It noted that the historical volume approach had been proposed by and, until recently, supported by the Postal Service as a necessary and wise expedient given the difficulties and controversies surrounding use of forecasts of mailer behavior in ratemaking proceedings. Order on Price Adjustments at 33–35. The Commission concluded that, since the mail preparation requirement changes resulted in increases in rates on basic-service mailpieces, the Postal Service could not implement both the Manual changes and the noticed price increases without violating the price cap. Id. at 35–36. The Commission therefore gave the Postal Service an option: it could either implement the Manual change as scheduled and resubmit proposed rates that fell within the price cap; or it could elect not to implement the Manual change and proceed with its noticed price changes. Id. at 36. The Postal Service elected to delay the Manual change and implement its noticed price increases. This petition for review followed. The Postal Service argues that the plain language of the price cap statute and applicable regulations forbid the Commission from deeming changes to mail preparation requirements to be changes in rates. In addition, the Postal Service argues that the Commission’s decision is arbitrary and capricious because it fails to establish a clear and rational standard for which changes to mail preparation requirements it would consider 17 “changes in rates,” resulting in inconsistent application of the standard within the Commission’s decision. Finally, the Postal Service argues that the Commission’s decision is arbitrary and capricious because the Commission unreasonably refused to consider whether mailers will shift to using full-service Intelligent Mail.