Opinion ID: 4525042
Heading Depth: 2
Heading Rank: 2

Heading: The Commission’s 2016 Order Addressing

Text: § 3633(a)(2) In 2016, the Commission issued an Order adopting a new method for calculating costs attributable under § 3633(a)(2). See Order Concerning United Parcel Service, Inc.’s Proposed Changes to Postal Service Costing Methodologies (UPS Proposals One, Two, and Three), No. 3506, Dkt. No. RM2016- 2 (P.R.C. Sept. 9, 2016) (updated Oct. 19, 2016) (“2016 Order”). UPS challenged this 2016 Order on various grounds. In UPS v. PRC, 890 F.3d 1053 (D.C. Cir. 2018), we upheld the 8 Commission’s cost-attribution method as “reasonable and reasonably explained.” Id. at 1069. Because the court’s 2018 decision thoroughly explains the Commission’s costattribution method, the decision provides important context for the questions at issue in this case. First, the court’s 2018 decision explains several concepts that the Commission uses to sort out the Postal Service’s costs. To start, the decision explains that “the Commission distinguishes (albeit necessarily imperfectly) between ‘fixed costs,’ . . . which remain constant regardless of overall product volume, and ‘variable costs,’ . . . which vary with the Service’s production levels.” Id. at 1056 (citing 2016 Order at 6). Examples of fixed costs include executive salaries and productspecific fixed costs like advertising. See id. In addition, the decision explains that the Commission distinguishes between variable costs that are “volume-variable” – i.e., which vary directly with the marginal cost of the cheapest relevant unit and the total number of units, id. at 1057 (citing 2016 Order at 36 n.56) – and variable costs that are not “volume-variable” in this sense, which the Commission calls “inframarginal costs,” id. at 1058 (citing 2016 Order at 35). The concept of inframarginal costs is not entirely intuitive. The basic idea is that, thanks to economies of scale, marginal costs tend to decrease with volume, and the sum of the differences between the marginal cost of earlier, more expensive units and the marginal cost of the last, cheapest unit is the inframarginal cost. See id. at 105758; 2016 Order at 35-36. Second, the court’s 2018 decision holds that the Commission’s decision to define “institutional costs” as “residual costs” – that is, as any costs not attributed to competitive products through reliably identified causal relationships under § 3633(a)(2) – was based on a permissible reading of the Accountability Act. UPS v. PRC, 890 F.3d at 9 1061-63. An important upshot of the Commission’s choice to treat institutional costs as “residual” is that the composition of the Postal Service’s institutional costs will (by definition) depend on how attributed costs are calculated. For example, if the Commission were to attribute to each competitive product its product-specific fixed costs and its volume-variable costs – which is what the Commission did until 2016 – then the Postal Service’s institutional costs would include all its other fixed costs and all of its inframarginal costs. See id. at 1056-58. Third, the court’s 2018 decision upholds the Commission’s revised method for attributing costs under § 3633(a)(2). See id. at 1066-69. In short, the Commission adopted a method that enables it to attribute product-specific fixed costs, volumevariable costs, and some (but not all) inframarginal costs to each competitive product. See id. at 1060. The Commission is able to tie a portion of the Postal Service’s inframarginal costs to specific competitive products through “reliably identified causal relationships” by calculating the “costs that would disappear were the Postal Service to stop offering those products for sale.” Id. at 1055. This “incremental cost” method accounts for not only a “product’s share of volume-variable costs, but also the inframarginal costs that would be removed if the product were not to be provided.” Id. at 1059 (internal quotation marks omitted) (quoting 2016 Order App’x A at 19). In the Commission’s view, “because the portion of inframarginal costs included within a product’s incremental cost has a causal relationship with that product, the Accountability Act requires the Postal Service to attribute it.” Id. at 1059-60 (internal quotation marks omitted) (quoting 2016 Order at 55, 61). The court’s 2018 decision finds the Commission’s position reasonable and reasonably explained. Id. at 1069. 10 Fourth, the court’s 2018 decision notes that the Commission’s cautious cost-attribution method leaves some of the Postal Service’s inframarginal costs unattributed. See id. at 1060 (“All other costs, including all remaining inframarginal costs, remain classified as institutional.”). Indeed, the decision concludes that the Commission’s caution was reasonable, given the Accountability Act’s requirement that attributed costs have “reliably identified causal relationships” to competitive products. See id. at 1068. For example, the 2018 decision rejects the argument that the Commission’s approach was arbitrary and capricious for assuming that competitive products are responsible for only the lowest-cost units associated with a given activity. The decision reasons that “[a]ttributing more than this amount . . . necessitates guesswork, and the Commission sensibly concluded that such guesswork was inconsistent with its statutory obligation to base attribution on only ‘reliably identified causal relationships.’” Id. (quoting 39 U.S.C. § 3631(b)). It is clear, then, that the court’s 2018 decision in UPS v. PRC upholding the Commission’s cost-attribution method under § 3633(a)(2) leaves open important questions that provide context for understanding and assessing the Commission’s § 3633(a)(3) determination in this case. These questions include: Are some of the Postal Service’s institutional costs – and especially its unattributed inframarginal costs – still related in some meaningful way to competitive products, even if those costs cannot be attributed under § 3633(a)(2)? And if so – if, for instance, some of those institutional costs are “uniquely or disproportionately associated with competitive products,” 39 U.S.C. § 3633(b) – might they need to be accounted for when the Commission issues regulations under another provision of the Accountability Act? 11