[ORAL ARGUMENT NOT YET SCHEDULED] Nos. 16-1354, 16-1419 …

[ORAL ARGUMENT NOT YET SCHEDULED]

Nos. 16-1354, 16-1419

IN THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT

UNITED PARCEL SERVICE, INC.,

Petitioner,

v.

POSTAL REGULATORY COMMISSION,

Respondent.

On Petition for Review of Orders of the Postal Regulatory Commission

BRIEF FOR RESPONDENT

Of Counsel:

DAVID A. TRISSELL General Counsel

CHRISTOPHER J. LAVER Deputy General Counsel

MALLORY SMITH Attorney Postal Regulatory Commission

CHAD A. READLER Acting Assistant Attorney General

MICHAEL S. RAAB MICHAEL SHIH

Attorneys, Appellate Staff Civil Division, Room 7268 U.S. Department of Justice 950 Pennsylvania Avenue NW Washington, DC 20530 (202) 353-6880

USCA Case #16-1354 Document #1672446 Filed: 04/24/2017 of 95

CERTIFICATE AS TO PARTIES, RULINGS, AND RELATED CASES

Pursuant to D.C. Circuit Rule 28(a)(1), the undersigned counsel certifies as

follows:

A. Parties and Amici

Petitioner is United Parcel Service, Inc. Respondent is the Postal Regulatory

Commission. Intervenors-Respondents are Amazon Fulfillment Services, Inc.;

National Association of Letter Carriers, AFL-CIO; Parcel Shippers Association;

United States Postal Service; Valpak Direct Marketing Systems, Inc.; and Valpak

Franchise Association, Inc. J. Gregory Sidak is amicus curiae in support of petitioner.

B. Rulings Under Review

Petitioner seeks review of two orders of the Postal Regulatory Commission.

Order No. 3506 was issued in Docket RM2016-2 on September 9, 2016. The

Commission issued a notice of errata and updated order on October 19, 2016. The

original order is reproduced in the Joint Appendix at JA__. The notice of errata and

updated order are reproduced in the Joint Appendix at JA__-__.

Order No. 3641 was issued in Docket RM2016-13 on December 1, 2016,

and is reproduced in the Joint Appendix at JA__-__.


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C. Related Cases

The challenged orders have not previously been before this Court. Counsel for

the Commission is not aware of any other related cases within the meaning of D.C.

Circuit Rule 28(a)(1)(C).

/s/ Michael Shih MICHAEL SHIH


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TABLE OF CONTENTS

Page

CERTIFICATE AS TO PARTIES, RULINGS, AND RELATED CASES

GLOSSARY

INTRODUCTION................................................................................................................ 1

STATEMENT OF JURISDICTION ................................................................................. 3

STATEMENT OF THE ISSUE ......................................................................................... 3

PERTINENT STATUTORY AND REGULATORY PROVISIONS......................... 4

STATEMENT OF THE CASE .......................................................................................... 4

A. Statutory Background ..................................................................................... 4

B. Regulatory Background .................................................................................. 7

1. Principles of Cost Attribution ............................................................ 7

2. Cost Attribution for the Postal Service’s Competitive Products .............................................................................................. 12

3. Attribution of Inframarginal Costs .................................................. 16

C. Petitioner’s Proposal ..................................................................................... 21

D. Commission Proceedings ............................................................................. 25

SUMMARY OF ARGUMENT ......................................................................................... 26

STANDARD OF REVIEW ............................................................................................... 29

ARGUMENT ....................................................................................................................... 30

I. THE POSTAL REGULATORY COMMISSION’S REVISED COST-ATTRIBUTION METHOD IS REASONABLE. .............................................. 30


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A. The Commission reasonably determined that some but not all inframarginal costs should be attributed to postal products. ................... 30

B. The Commission properly determined that UPS’s method of attributing all inframarginal costs to products was flawed. ...................... 37

II. THE COMMISSION’S REVISED COST-ATTRIBUTION METHOD IS CONSISTENT WITH THE POSTAL ACCOUNTABILITY AND ENHANCEMENT ACT. ....................................................................................... 43

A. Inframarginal costs may properly be classified as “institutional costs” under § 3633(a)(3). ............................................................................. 43

B. The statutory definition of “costs attributable” does not require attribution of all inframarginal costs. .......................................................... 49

C. The Commission’s orders adequately explained the Commission’s reasons for attributing only some inframarginal costs. ............................. 53

CONCLUSION ................................................................................................................... 57

CERTIFICATE OF COMPLIANCE

CERTIFICATE OF SERVICE

ADDENDUM


v

TABLE OF AUTHORITIES

Cases: Page(s)

* Alliance of Nonprofit Mailers v. Postal Regulatory Comm’n, 790 F.3d 186 (D.C. Cir. 2015) ................................................................................... 30, 37

Butte County, Cal. v. Hogen, 613 F.3d 190 (D.C. Cir. 2010) ......................................................................................... 53

C.I.R. v. Keystone Consol. Indus., Inc., 508 U.S. 152 (1993) .................................................................................................... 51, 52

Chevron U.S.A. Inc. v. Natural Res. Def. Council, 467 U.S. 837 (1984) .................................................................................................... 29, 46

City of L.A. v. U.S. Dep’t of Transp., 165 F.3d 972 (D.C. Cir. 1999) ................................................................................... 27, 37

Direct Marketing Ass’n v. U.S. Postal Serv., 778 F.2d 96 (2d Cir. 1985) ............................................................................................... 46

Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117 (2011) ...................................................................................................... 54

Hardt v. Reliance Standard Life Ins. Co., 560 U.S. 242 (2010) .......................................................................................................... 47

LePage’s 2000, Inc. v. Postal Regulatory Comm’n, 642 F.3d 225 (D.C. Cir. 2011) ......................................................................................... 54

Mail Order Ass’n of Am. v. U.S. Postal Serv., 2 F.3d 408 (D.C. Cir. 1993) ............................................................................................. 46

Motor Veh. Mfrs. Ass’n of U.S. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983) ............................................................................................................ 29

* National Association of Greeting Card Publishers v. U.S. Postal Service, 462 U.S. 810 (1983) .................................................................. 4, 6, 12, 43, 45, 46, 52, 55

Sullivan v. Everhart, 494 U.S. 83 (1990) ...................................................................................................... 46, 51

* Authorities upon which we chiefly rely are marked with asterisks.


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Tourus Records, Inc. v. DEA, 259 F.3d 731 (D.C. Cir. 2001) ......................................................................................... 54

U.S. Postal Serv. v. Postal Regulatory Comm’n, 599 F.3d 705 (D.C. Cir. 2010) ......................................................................................... 29

U.S. Postal Serv. v. Postal Regulatory Comm’n, 785 F.3d 740 (D.C. Cir. 2015) ........................................................................................... 5

United States v. L.A. Tucker Truck Lines, Inc., 344 U.S. 33 (1952) ............................................................................................................ 55

UPS, Inc. v. U.S. Postal Serv., 184 F.3d 827 (D.C. Cir. 1999) ......................................................................................... 46

Statutes:

Administrative Procedure Act:

5 U.S.C. § 555(e) ............................................................................................................... 53

5 U.S.C. § 706(2)(A) ......................................................................................................... 29 Postal Accountability and Enhancement Act,

Pub. L. No. 109-435, 120 Stat. 3198 (2016) .............................................................. 4, 43

39 U.S.C. § 404(b) ................................................................................................................... 5

39 U.S.C. § 404a .................................................................................................................... 56

39 U.S.C. § 409(e)(1)(B) ....................................................................................................... 57

39 U.S.C. § 3622(c)(2) ...................................................................................................... 2, 57

39 U.S.C. § 3622(d)(1)(A) ...................................................................................................... 5

39 U.S.C. § 3631 ..................................................................................................................... 6

* 39 U.S.C. § 3631(b) .................................... 1, 3, 25, 26, 28, 30, 31, 44, 45, 49, 50, 51, 53

39 U.S.C. § 3632(a) ................................................................................................................. 5


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39 U.S.C. § 3633 ..................................................................................................................... 3

39 U.S.C. § 3633(a) .............................................................................................. 5, 17, 45, 48

39 U.S.C. § 3633(a)(1) .................................................................................................... 31, 55

* 39 U.S.C. § 3633(a)(2) ......................... 1, 2, 3, 6, 7, 17, 25, 26, 28, 29, 30, 42, 44, 54, 55

* 39 U.S.C. § 3633(a)(3) ...................................... 6, 7, 17, 21, 27, 43, 44, 47, 48, 49, 55, 56

39 U.S.C. § 3633(b)........................................................................................................... 7, 55

39 U.S.C. § 3642(b)(1) .......................................................................................................... 64

Regulations:

39 C.F.R. § 3015.7(b) ..................................................................................................... 26, 31

48 C.F.R. § 9904.418-30(a)(3) ............................................................................................. 52

Legislative Material:

* S. Rep. No. 108-318 (2004) .......................................................... 6, 26, 30, 46, 47, 48, 49 Other Authorities:

* Office of Inspector General, U.S. Postal Service, A Primer on Postal Costing Issues (2012), https://go.usa.gov/x54Dd ......................... 8, 12, 13, 14, 42

Charles McBride, The Calculation of Inframarginal Costs (Jan. 14, 2015),

https://go.usa.gov/x5C9W ............................................................................................. 22 Postal Regulatory Comm’n:

FY2016 Public Cost Segments and Components Report, (2016), https://go.usa.gov/x54x2 ........................................................................................... 13

Financial Analysis of United States Postal Service Financial Results and

10-K Statement: Fiscal Year 2016 (2017), https://go.usa.gov/x5kWz ................ 38, 50


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U.S. Postal Serv., Glossary of Postal Terms (2013),

https://about.usps.com/publications/pub32.pdf ....................................................... 47 Webster’s Third New International Dictionary of the English Language (1993) ......................... 44


GLOSSARY

NAGCP National Association of Greeting Card Publishers v. U.S. Postal Service, 462 U.S. 810 (1983)

Financial Analysis Postal Regulatory Comm’n, Financial Analysis of United States Postal Service Financial Results and 10-K Statement: Fiscal Year 2016 (2017)

McBride Report Charles McBride, The Calculation of Inframarginal Costs (Jan. 14, 2015)

Order No. 399 Order, Dkt. RM2010-4 (P.R.C. Jan. 27, 2010)

Order No. 1449 Order, Dkt. RM 2012-3 (P.R.C. Aug. 23, 2012)

Primer Office of Inspector General, U.S. Postal Service, A Primer on Postal Costing Issues (2012)

Senate Report S. Rep. No. 108-318 (2004)

UPS United Parcel Service, Inc.


INTRODUCTION

The U.S. Postal Service offers a range of products to the Nation’s consumers.

For some products, the Postal Service is the Nation’s sole supplier. For other

products, the Postal Service competes against private firms in the open market. To

prevent the Postal Service from exploiting its monopoly position and engaging in

predatory pricing, Congress instructed the Postal Regulatory Commission to ensure

that the Postal Service does not set rates for each competitive product below the

“costs attributable” to that product. 39 U.S.C. § 3633(a)(2). However, Congress

made clear that the term “costs attributable” does not encompass all costs. The term

reaches only those “direct and indirect postal costs attributable to such product

through reliably identified causal relationships.” Id. § 3631(b). The Commission has

broad discretion to determine whether a category of costs is sufficiently caused by a

product to warrant attribution under this provision.

These consolidated petitions for review concern two orders revising the

Commission’s cost-attribution method. For more than thirty years, the Commission

considered just two categories of costs to be attributable. These categories did not

account for the savings the Postal Service enjoys when it produces separate but similar

products in large quantities. Such economies of scope and scale make it more

expensive for the Postal Service to produce earlier units of a product than later ones.

Postal economists refer to such costs as inframarginal costs.


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United Parcel Service, Inc. (“UPS”), a private logistics company and one of the

Postal Service’s primary competitors, asked the Commission to expand its

interpretation of “costs attributable” to include all inframarginal costs. This

expansion would increase the price floor for the Postal Service’s competitive

products. The proposal relied on a novel method for (1) estimating the Postal

Service’s total inframarginal costs, and (2) distributing those costs among the Postal

Service’s competitive products.

The Commission rejected UPS’s proposal. In the Commission’s judgment,

UPS’s method failed to supply the “reliably identified causal relationship” required to

attribute all inframarginal costs under 39 U.S.C. § 3633(a)(2). The Commission

instead endorsed an alternative cost-attribution method—already used by the Postal

Service in a related context—to require attribution of some but not all inframarginal

costs. Later, the Commission promulgated a final rule to this effect. UPS petitioned

for review of both decisions.

The petitions should be denied. The Commission reasonably concluded that,

although inframarginal costs are “direct or indirect postal costs” a product may

lawfully be required to cover, UPS’s method failed the causality and reliability

requirements for cost attribution because it rested on unsubstantiated and unverifiable

assumptions. The Commission’s alternative method does not have these defects.

This Court should therefore decline UPS’s invitation to second-guess the

Commission’s reasonable exercise of its expert judgment.


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STATEMENT OF JURISDICTION

Petitioner seeks review of two Commission orders. The order in No. 16-1354

was entered on September 9, 2016, and the petition for review was timely filed on

October 7, 2016. See Order, Dkt. RM2016-2 (P.R.C. Sept. 9, 2016) (updated Oct. 19,

2016) (“Order”).1 The order in No. 16-1419 was entered on December 1, 2016, and

the petition for review was timely filed on December 12, 2016. See Order, Dkt.

RM2016-13 (P.R.C. Dec. 1, 2016) (“Adoption Order”). This Court has jurisdiction

under 39 U.S.C. § 3663.

STATEMENT OF THE ISSUE

The Postal Regulatory Commission must ensure that each of the Postal

Service’s competitive products covers the “direct and indirect postal costs attributable

to such product through reliably identified causal relationships.” 39 U.S.C.

§§ 3631(b), 3633(a)(2). The Commission declined to adopt petitioner’s method for

estimating and attributing all inframarginal costs to the Postal Service’s competitive

products. The Commission instead adopted a different method under which some

but not all inframarginal costs are attributed. The question presented is whether this

exercise of the Commission’s judgment was arbitrary, capricious, or contrary to law.

1 On October 19, 2016, the Commission issued a notice of errata updating its

original order. All citations are to the updated order.


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PERTINENT STATUTORY AND REGULATORY PROVISIONS

Pertinent statutory and regulatory provisions are reproduced in the appendix to

this brief.

STATEMENT OF THE CASE

A. Statutory Background

For most of the Nation’s history, postal rates were controlled by Congress.

National Ass’n of Greeting Card Publishers. v. U.S. Postal Serv., 462 U.S. 810, 813 (1983)

(“NAGCP”). That changed in 1970, when Congress established the Postal Rate

Commission to recommend rates in Congress’s place. Id. Congress renamed that

agency the Postal Regulatory Commission in the 2006 Postal Accountability and

Enhancement Act, Pub. L. No. 109-435, §§ 601, 604, 120 Stat. 3198, 3238, 3241. The

Act placed new restrictions on the rates the Postal Service may charge, and

empowered the Commission to enforce those restrictions by regulation.

The Act classifies all Postal Service products into one of two categories.

Market-dominant products are those over which the Postal Service “exercises

sufficient market power” to increase prices or decrease quality “without risk of losing

a significant level of business to other firms offering similar products.” 39 U.S.C.

§ 3642(b)(1). All other products are competitive products. This residual category

captures products “for which the Postal Service faces meaningful market

competition.” U.S. Postal Serv. v. Postal Regulatory Comm’n, 785 F.3d 740, 744 (D.C. Cir.

2015).


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Although the Postal Service may set “reasonable and equitable” rates for its

products, see 39 U.S.C. § 404(b), its discretion is bounded by statute.

Market-dominant products are subject to a price ceiling tied to the rate of inflation.

Id. § 3622(d)(1)(A). This provision prevents the Postal Service from “improperly

leverag[ing] its monopoly powers” to overcharge consumers. U.S. Postal Serv., 785

F.3d at 744.

Competitive products present different policy concerns. Unlike private firms,

the Postal Service enjoys a monopoly on some of its products. Conceivably, the

Postal Service could reduce rates for competitive products by increasing rates for

market-dominant products. By shifting costs in this manner, the Postal Service could

offer artificially low prices to consumers of its competitive products at the expense of

its competitors and consumers of its market-dominant products. Competitive

products are therefore subject to a price floor. 39 U.S.C. §§ 3632(a), 3633(a).

An improperly calibrated price floor generates distortionary effects of its own.

A floor that is too high “can lead to prices that will encourage inefficient entry and

production,” meaning that “[s]ociety will not benefit from having the least cost

producer provide the product.” Bradley Analysis 12(JA__). A floor that is too low

will not prevent predatory pricing. Thus, the Act does not specify price floors

applicable to competitive products, but rather instructs the Commission to set price

floors by reference to each competitive product’s costs.


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The Act divides all such costs into two categories: “costs attributable,” 39

U.S.C. § 3633(a)(2), and “institutional costs,” id. § 3633(a)(3). Only the term “costs

attributable” is defined by the Act. The Commission has interpreted “institutional

costs” as a residual category containing all costs that cannot be attributed under

§ 3633(a)(2). Order 36(JA__).

Section 3633(a)(2) establishes “costs attributable” as the primary driver of a

product’s price floor. The “costs attributable” to a product are the “direct and

indirect postal costs attributable to such product through reliably identified causal

relationships.” 39 U.S.C. § 3631. This narrow definition codifies the Supreme

Court’s decision in NAGCP, 462 U.S. at 829-34, which held that the Commission

could not “make classes [of mail products] responsible for the recovery of costs for

which an extended inference of causation was claimed.” See S. Rep. No. 108-318, at

9-10 (2004) (“Senate Report”). Following NAGCP’s lead, Congress declined to adopt

“specific rules for cost attribution.” Id. at 9. The provision leaves for the

Commission “the technical decision of what cost analysis methodologies are

sufficiently reliable at any given time to form the basis for attribution.” Id.

Section 3633(a)(3) gives the Commission discretion to increase minimum prices

for competitive products beyond what the price floor requires. This provision obliges

the Commission to “ensure that all competitive products collectively cover what the

Commission determines to be an appropriate share of the institutional costs”—that is,

all costs that are not attributable costs—“of the Postal Service.” 39 U.S.C.


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§ 3633(a)(3). The Commission must periodically evaluate whether this apportionment

“should be retained in its current form, modified, or eliminated.” Id. Its inquiry must

reflect, among other things, “the prevailing competitive conditions in the market.” Id.

§ 3633(b). The Commission can, with this tool, adjust the minimum prices for

competitive products above the § 3633(a)(2) price floor to correct any remaining

market distortions. Currently, 5.5% of institutional costs are apportioned to

competitive products. Order 2(JA__). That apportionment is now under review. See

Postal Regulatory Comm’n Dkt. RM2017-1, https://go.usa.gov/x53QF.

B. Regulatory Background

These consolidated petitions involve the Commission’s revised method for

calculating the costs attributable to a competitive product under § 3633(a)(2). That

method derives from the principles of cost attribution summarized below. A

complete discussion is available in Appendix A to the Order. JA__-__.

1. Principles of Cost Attribution

Suppose a firm that makes only one product wants to know how much that

product costs to makes. Economists characterize the firm’s costs as either “fixed” or

“variable.” Order, App. A (“App. A”), at 1(JA__). A fixed cost is “relatively static”

and does not vary with volume—that is, the number of units of the product the firm

produces. Id. at 1-2(JA__-__). A variable cost does vary with volume. Id. at 1(JA__).

The product’s total cost is the sum of its fixed and variable costs. Id. The product’s

average total cost is its total cost divided by its volume. Id. at 2(JA__).


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In a competitive market, the threat of competition prevents a single-product

firm from charging consumers more than its product’s average total cost. App. A, at

3(JA__). To determine how much to produce, a firm compares the product’s average

total cost to the product’s marginal cost, defined as the cost of producing one

additional unit of that product. Id. The firm must set production at a volume such

that the product’s average total cost is equivalent to its marginal cost; only at that

volume can the firm recover the costs of production. Id.

To illustrate these concepts, imagine a farmer who sells only apples. Her fixed

costs include, for instance, the cost of land, machinery, and software. Her variable

costs include, for instance, the cost of labor. Suppose these variable costs amount to

$10 per apple produced. The marginal cost of each additional apple is thus $10.

In reality, the marginal cost of apple production is not constant. This is due to

economies of scale: “efficiencies enjoyed from producing more of the same product.”

Office of Inspector General, U.S. Postal Service, A Primer on Postal Costing Issues 14

(2012) (“Primer”), https://go.usa.gov/x54Dd. The more apples the farmer produces,

the cheaper each additional apple becomes to produce, thanks to (for example)

increased worker productivity and more efficient use of resources.

This concept can be visualized by plotting volume on the x-axis against

marginal cost on the y-axis.


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Figure 1—Marginal-Cost Curve for Single-Product Firm

App. A, at 5(JA__). The resulting graph depicts the product’s marginal-cost curve.

The area under the curve represents total marginal cost. The slope of the curve

represents the product’s cost elasticity: the percentage change in marginal cost that

results from a percentage change in volume. Order 7(JA__).

Cost attribution in a single-product firm is straightforward: The firm makes

only one product, so all costs are caused by that product. The situation becomes

more complicated when a firm makes more than one product. To return to the

example, imagine that our farmer has branched out into strawberry production. The

farmer now makes two products whose contributions to total costs must be

disaggregated.

Some fixed and variable costs are specific to, and thus attributable to, a single

product. Suppose the farmer stores apples in one type of refrigerator and strawberries


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in another type of refrigerator. The cost of apple storage should not be attributed to

strawberries, nor should the cost of strawberry storage be attributed to apples.

Other fixed and variable costs are incurred by more than one product.

Common fixed costs, as their name suggests, are fixed costs incurred by multiple

products. App. A, at 6(JA__). These include, for instance, costs associated with the

creation of the farming business and the salary of the farm’s CEO. In a single-

product firm, these fixed costs must be attributed because all costs contribute to

producing the firm’s one product. Id. In a multi-product firm, common fixed costs

do not directly relate to any product and should therefore not be attributed. Id.

Common variable costs are costs that vary with volume but that do not directly

vary with any particular product’s volume. App. A, at 6(JA__). These costs result

from economies of scope: “the benefits a multi-product firm reaps from production

of two or more goods.” Id. Suppose the farmer pays truckers to deliver her fruits to

market. The cost of truckers varies in proportion to the volume of all fruit produced,

not just in proportion to the volume of strawberries or of apples.

A multi-product firm, like its single-product counterparts, uses marginal cost to

determine the optimal volume of fruit to produce. App. A, at 6(JA__). The marginal

cost of one unit of the firm’s products is still the change in cost resulting from the

production of an additional unit—which in the farmer’s case is one piece of fruit. But

average total cost is no longer a useful metric. Multi-product firms possess common

costs that are not caused by a single product, so dividing the firm’s total costs by the


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total volume of fruit paints an inaccurate picture of how much each unit of fruit

actually costs. Id. at 6-7(JA__-__).

Multi-product firms must instead base production decisions on the costs that

result from producing each of its products. App. A, at 7(JA__). These costs are

called the product’s incremental costs. Id. Incremental costs represent the marginal

cost of producing a particular type of product—here, apples or strawberries—as

opposed to the marginal cost of producing a single unit of fruit. They are defined as

“the sum of the marginal costs for all units [of that product] produced,” and are

calculated by subtracting the firm’s total costs without that product from the firm’s

total costs with that product. Bradley Analysis 20(JA__). Once the farmer has

calculated the incremental cost incurred by apples, she can determine whether she is

making or losing money from producing apples by comparing apple revenue to

apples’ incremental cost.

In the real world, it is difficult to calculate costs on a product-specific basis.

App. A, at 8(JA__). Many firms thus rely on activity-based costing. Id. Under this

method, a firm groups costs not by products but by activities, each with its own cost

curve. Id. The firm then identifies a cost driver for each activity. Id. at 9(JA__). A

cost driver is a unit of measurement that bears the most direct relation to the activity.

Id. The firm also estimates the relationship between the cost driver and the costs of

the activity. Next, the firm determines the percentage of the cost driver associated

with each product. This percentage is called a distribution key. Id. The firm applies


12

the distribution key to determine what proportion of the costs of a particular activity

are attributable to each of its products. Id. The sum of the product’s costs across

activities is that product’s attributable cost. Id. at 12(JA__).

Activity-based costing does not address all informational gaps. Order 8(JA__).

Most significantly, firms cannot know the complete shape of their marginal-cost

curves. App. A, at 12(JA__). The shape of these curves must be modeled using data

drawn from costs observed at existing levels of volume. Order 8(JA__). These

modeled extrapolations will have greater validity and better explanatory power when

they are close to typical operating volumes, and less validity and worse explanatory

power when they are different from typical operating volumes. Id.

2. Cost Attribution for the Postal Service’s Competitive Products

The Commission and its predecessor have consistently endorsed

cost-attribution methods that rely on “marginal-cost pricing principles.” See Op. &

Rec. Dec., vol. 1, at 137, Dkt. R80-1 (Postal Rate Comm’n Feb. 19, 1981) (“R80-1

Op.”). The Commission’s historical cost-attribution method reflects this practice.

Under that method, only two categories of costs are attributable: product-specific

fixed costs and volume-variable costs. Primer 23. All other costs are deemed

institutional costs. App. A, at 16(JA__). The Supreme Court approved this approach

in 1983. See NAGCP, 462 U.S. at 823.


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Product-specific fixed costs have their economic definition. They include, for

instance, the cost of advertising specific to a product. For most products, such costs

comprise a small proportion of their total attributable costs. Primer 23.

Volume-variable costs supply the bulk of a product’s attributable costs. This

term of art, developed in the context of postal ratemaking, “does not correspond to

the economic concept of variable cost.” Neels Report 9(JA__). The term refers only

to the “mathematical product of the marginal cost of a postal product and its

volume.” Primer 16. A product’s volume-variable cost is calculated using an

activity-based costing method with four steps.

First, the Postal Service divides its total costs into activities, which it calls “cost

segments.” Cost segments are subdivided into “cost components,” which are further

subdivided into “cost elements.” App. A, at 13-14(JA__-__). For example, Segment

14, which relates to mail transportation, contains components corresponding to air,

highway, rail, and water transportation. Postal Regulatory Comm’n, FY2016 Public

Cost Segments and Components Report, tab CS14 (2016), https://go.usa.gov/x54x2. The

Postal Service tracks how much money it spends on each element. Primer 16.

Second, the Postal Service identifies a cost driver that “reflects the essential

activity of that element.” App. A, at 14(JA__). For highway transportation, the

Postal Service assesses costs in terms of the “cubic-foot-mile”: the cost of

transporting one cubic foot of mail one mile. Id. The Postal Service estimates the

degree to which the cost of that element varies with each unit of cost driver—here,


14

the relationship between cost and cubic-foot-miles. Id. The Postal Service then uses

econometric techniques to estimate the marginal cost of the last unit of cost driver.

Id. at 14-15(JA__-__).

Figure 2—Volume-Variable Costs in Marginal-Cost Curve

Id. at 16(JA__). On this stylized marginal-cost curve for highway transportation, the

element’s marginal cost is $1, and the Postal Service paid for 20 cubic-foot-miles.

Volume-variable costs are represented by the shaded blue area, totaling $20.

Third, the Postal Service uses distribution keys to apportion an element’s

volume-variable costs among the products to which that element contributes. Primer

17. These distribution keys are generated by statistical sampling systems that measure

the percentage of each cost driver associated with each product. Primer 18. The

element’s volume-variable costs are attributed to products in these proportions.

Suppose that, of the 20 cubic-foot-miles used by highway transportation, 5 units went


to letters> 5 units went to parcels> and 10 units went to flats. Volume-variable costs

should be divided between these three products in these proportions.

Figure 3-Distribution-Key Alloca tion ofVolume-Variable Costs

6

Lett ers 5

4

~ Parcels -... 3 "' 0 u

2

1

0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Cost Driver

App. A> at 160A_ ) (annotations added).

Importantly> the data systems used to develop the Postal Service>s distribution

keys do not track which units of cost driver were used to make specific products. See

Order 47> SOQA_ > _ ) . H ere> tl1e data do not specify whether the first cubic-foot-

mile was used to deliver letters> parcels> or flats. But because the volume-variable cost

of each cubic-foot-mile is tl1e same ($1 per unit» tl1e Postal Service does not need to

know which unit of cost driver was used to produce which product. Order

47-49QA_-_). So long as the distribution key accurately reflects the proportion of

cost driver used by each product> the element> s volume-variable costs will be

accurately attributed. This "illustrates a key characteristic of volume-variable costs:

15


16

they are the minimal marginal costs that are incurred at every level of cost driver and

can therefore be attributed by a distribution key.” Order 49(JA__).

Fourth, the Postal Service determines a product’s total volume-variable cost by

summing the volume-variable costs for that product across elements. App. A, at

14(JA__).

Under the historical cost-attribution method, the sum of a product’s volume-

variable costs and product-specific fixed costs is the product’s attributable cost.

3. Attribution of Inframarginal Costs

The Commission’s historical method does not attribute the entire area under a

given marginal-cost curve. In particular, the method does not account for common

variable costs that result from economies of scale and scope. Order 35(JA__). These

efficiencies mean that the marginal cost of producing the next unit of cost driver

decreases with each unit of cost driver produced. Id. The additional costs incurred by

earlier units—which do not benefit from these efficiencies as much as later units do—

can be represented graphically by the area below the marginal-cost curve and above

the line signifying volume-variable costs. Id. This area is shaded green on the graph

below. Postal economists refer to these costs as inframarginal costs. Id.


17

Figure 4—Inframarginal Costs in Marginal-Cost Curve

App. A, at 17(JA__).

Because inframarginal costs are neither product-specific fixed costs nor

volume-variable costs, the historical cost-attribution method treated them as residual

institutional costs, and not as “costs attributable” to a particular product. 39 U.S.C. §

3633(a)(2)-(3). The method did not include a mechanism for calculating total

inframarginal costs or for allocating total costs among products. See Order 10

n.15(JA__).

In 2010, the Commission adopted, in a different context, a method for

estimating a portion of a product’s inframarginal costs. This method implemented

the Commission’s mandate to “prohibit the subsidization of competitive products by

market-dominant products.” 39 U.S.C. § 3633(a). The Commission embraced

incremental cost—the marginal cost of producing a product—as the “conceptually


18

correct method” for determining the costs attributable to competitive products when

evaluating whether those products are being cross-subsidized. Order 2, Dkt.

RM2010-4 (P.R.C. Jan. 27, 2010) (“Order No. 399”), https://go.usa.gov/x5ZuK.

“There is widespread agreement that incremental cost is the correct cost measurement

in cross-subsidy testing.” Bradley Analysis 13(JA__). This method can be used to

estimate the incremental costs of competitive products collectively and the

incremental costs of a competitive product individually. See Order 41-42(JA__-__).

A product’s incremental cost has three components: (1) product-specific fixed

costs, (2) the product’s volume-variable cost, and (3) the sum of “the portion of [a

cost element’s] inframarginal costs that would be avoided by not providing that

product in the [element].” App. A, at 18(JA__). The first two are identical to the

categories that make up a product’s “attributable costs” under the historical cost-

attribution method. The third is unique.

First, the Postal Service determines whether a cost element contains

inframarginal costs. See Order 41(JA__). Consider the highway-transportation cost

element, which uses the cubic-foot-mile as its cost driver and which benefits from

economies of scale and scope. Just as before, suppose the Postal Service has used 20

cubic-foot-miles in all. Suppose further that these units of cost driver were used to

produce three products: letters, parcels, and flats.

Second, the Postal Service uses distribution keys—the same keys used to

calculate volume-variable costs—to determine what proportion of the cost driver the


19

product is responsible for. See Order 50(JA__). Suppose the Postal Service is

interested in the incremental cost of letter delivery. Its data systems reveal that letters

consumed 8 of the 20 cubit-foot-miles of highway transportation expended.

Third, the Postal Service models the shape of the element’s marginal-cost curve.

This is necessary because earlier units of cost driver are associated with higher

marginal costs than later units of cost driver—and inframarginal cost reflects the

difference between a given unit’s marginal cost and the last unit’s marginal cost. To

estimate the marginal cost of previous units, the Postal Service extrapolates from

existing data by assuming that the marginal cost of each unit changes in the same

proportion. Order 41(JA__). This constant-elasticity assumption “has been

demonstrated to work at small levels of volume.” App. A, at 18(JA__).

Fourth, the Postal Service calculates the proportion of the element’s

inframarginal costs that can be attributed to the product by assuming that all of the

units of cost driver consumed by that product lie “at the end of the marginal cost

curve.” App. A, at 19(JA__). This assumption is justified because incremental cost is

defined as “the additional cost a product . . . causes when it is added to the Postal

Service’s current mix of products.” Bradley Analysis 21(JA__). To measure this

difference, the incremental-cost method must “act[] as though those units of cost

driver” associated with a product “were never provided.” App. A, at 21(JA__).

This assumption also reflects the reality that the Postal Service does not know

which specific units of cost driver went toward the production of that product. This


knowledge matters because each unit has a different inframarginal cost. (In the above

diagram, supra, fig. 4, the inframarginal cost of the first unit is $4, while the

inframarginal cost of the last unit is $0.) Should the Postal Service attribute the first

unit to the product when the first unit was actually used to produce a different

product, the result would overestimate that product's inframarginal cost. Attributing

only the last units on the marginal-cost curve avoids this problem because the

inframarginal costs of those units are the minimum a product could have incurred.

In this example, the Postal Service's distribution keys have revealed that 8

cubic-foot-miles were used to produce letters. See supra, p . 19.

6

5

4

-e +'

"' 3

0 u

2

1

0

Figure 5-Attribution of lnframarginal Costs Using Incremental-Cost Method

lnframarginal Cost

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Cost Driver

20


21

The Postal Service must therefore calculate, as illustrated above, App. A, at 18(JA__)

(annotations added), the inframarginal cost of the last 8 units of cost driver. The total

inframarginal cost of this element attributable to letters is shaded green.

To estimate the total inframarginal cost associated with letters, the Postal

Service repeats the above steps with all other cost elements that contribute to letter

production and sums the results. App. A, at 18(JA__).

C. Petitioner’s Proposal

UPS proposed that the Commission expand its interpretation of “attributable

costs” to include all inframarginal costs.2 UPS recognized that, to comply with the

causality and reliability requirements of § 3633(a)(2), its attribution method “must first

calculate the amount of these costs, and then identify a reliable and appropriate

methodology for distributing them to individual products.” Neels Report 19(JA__).

UPS claimed that Kevin Neels, an economist retained by the company, had created a

model that could accomplish both tasks.3

2 UPS’s proposal would also affect the attribution of inframarginal costs to

market-dominant products. See 39 U.S.C. § 3622(c)(2). Because UPS’s interest lies in the price floor for competitive products, this brief focuses on competitive products as well.

3 UPS submitted two other proposals to the Commission. First, UPS asked the

Commission to reclassify certain categories of costs, currently deemed institutional costs, as attributable costs. Order 2(JA__). The Commission declined to adopt that proposal because the “econometric analysis provided by UPS does not reliably identify” the costs at issue as attributable. Order 3(JA__). Second, UPS asked the Commission to reconsider the current proportion of institutional costs that


22

Because the inframarginal cost of a unit of cost driver is the difference between

that unit’s marginal cost and the last unit’s marginal cost, the total inframarginal cost

of a cost element cannot be determined without knowing the shape of the element’s

marginal-cost curve at all levels of volume. Neels proposed to estimate the shape of

such curves using a method devised by Charles McBride, an economist retained by

the Commission to “develop . . . methodologies for calculating inframarginal costs.”

Charles McBride, The Calculation of Inframarginal Costs 1, 5-8 (Jan. 14, 2015),

https://go.usa.gov/x5C9W (“McBride Report”); see Neels Report 19-20(JA__-__).

McBride’s method extended the model used to calculate inframarginal costs as part of

the incremental-cost test. See McBride Report 5-6. That model uses the constant-

elasticity assumption to estimate the shape of the marginal-cost curve at small levels

of volume. Id. Following McBride, Neels adopted that assumption to extrapolate the

shape of the entire cost curve. Neels Report 20(JA__).

Neels recognized that, as a “necessary second step,” the total inframarginal

costs of an element must be divided among individual competitive products. Neels

Report 20(JA__). But the Postal Service does not track the product each unit of cost

driver was used to produce—and, as Neels further recognized, “[t]here is no

principled way to determine where along [the marginal-cost curve] any . . . individual

competitive products must collectively cover under 39 U.S.C. § 3633(a)(3). Order 4(JA__). That provision requires the Commission to reevaluate its apportionment every five years. The Commission declined to consider UPS’s proposal until it could engage in that review. Id. UPS has not petitioned for review of either decision.


23

mail piece belongs.” Id. at 24(JA__). This information is critical to attributing total

inframarginal costs because every unit of cost driver has a different inframarginal cost.

In its absence, there is no way to know which units of cost driver were used to make a

product—and thus no way to know what proportion of total inframarginal costs

should be attributed to that product. Neels nonetheless proposed to allocate these

costs using the Postal Service’s existing distribution keys, which reflect the proportion

of cost driver used by a given product. Id. at 28-29(JA__-__). Under this approach,

“a product [that] uses 15% of a cost driver . . . would be attributed 15% of that

driver’s” total inframarginal costs. Pet. Br. 24.

Neels did not argue that this attribution method accurately captured the actual

distribution of cost drivers to products. Neels argued instead that the results of his

method were consistent with a concept invented by Lloyd Shapley in the field of

“cooperative game theory.” Neels Report 22(JA__). This concept, called the Shapley

value, was developed in response to a stylized allocation problem: how best to divide

“gains achieved through cooperation” among a “coalition of players” who have

worked together to “achieve[] some benefit that they could not obtain individually.”

Id. This problem has three characteristics. First, due to the players’ “different

situations and bargaining powers,” each player is assumed to have contributed a

different proportion of resources to that goal. Id. at 22-23(JA__-__). Second, the

magnitude of each player’s contribution “depend[s] upon the number and identity of

the p[l]ayers that have already joined the coalition.” Id. at 23, 26(JA__, __). Third,


24

the order in which a player joins the coalition is random. “Each possible sequence of

decisions to join the coalition could potentially result in a different set of incremental

contributions.” Id.

To “avoid[] having arbitrary ordering decisions dictate the” allocation of gains,

the Shapley method assigns gains using “the average of a player’s incremental

contributions over all possible sequences.” Neels Report 23(JA__). This average is

the Shapley value. Because the Shapley value is a weighted average, it “is not sensitive

to the order in which” the players actually joined the coalition. Id. at 24(JA__).

Indeed, its entire purpose is to avoid having the actual “order[] . . . dictate the results.”

Id. at 26(JA__). Each player “share[s] equally in the attribution” of the total gain the

coalition accrued. Id. at 28(JA__).

Neels analogized the coalition-building game to the problem of postal-cost

attribution. He equated a given player in the Shapley game to a single unit of cost

driver. Neels Report 26(JA__). Neels posited that, just as the contribution of each

player turned on the order in which that player joined the coalition, the inframarginal

cost of each unit of cost driver turns on the location on the marginal-cost curve where

that unit was produced. Id. at 26-27(JA__-__). Neels further assumed that, just as

each player was equally likely to join the coalition in a particular order, each unit of

cost driver is equally likely to be produced at all positions on the curve. See Order

46(JA__). Under these assumptions, the Shapley value for the inframarginal cost for

that unit is “the average inframarginal cost per cost driver unit.” Neels Report


25

28(JA__). By extension, the inframarginal costs of a product are equal to “that

product’s share of the distribution key for that cost driver.” Id. The Shapley-value

approach thus distributes inframarginal costs to products in “essentially” the same

way as the distribution-key approach. Id.

Neels estimated that, had the Postal Service used his attribution method in

Fiscal Year 2014, the statutorily mandated price floor for competitive products would

have increased by 21%, or $2.3 billion. Neels Reply Report 23(JA__).

The Commission invited public comment on UPS’s proposal. All but one

commenter advised against adopting it. Order 20-22(JA__-__). Most advised the

Commission to retain its historical approach to cost attribution, under which no

inframarginal costs are attributed to products. Id. Several commenters who opposed

UPS’s proposal advised the Commission to use “incremental costs instead of marginal

costs as the basis for cost attribution.” Order 29(JA__).

D. Commission Proceedings

The Commission declined to adopt UPS’s proposal. The Commission

identified serious flaws in Neels’s method for calculating total inframarginal costs.

Order 38-40(JA__-__). The Commission also determined that, even if Neels’s

method were capable of estimating total costs reliably, his method of allocating those

costs did not evince the “reliably identified causal relationship” required by the

definition of “costs attributable” in 39 U.S.C. § 3631(b). Order 43-51(JA__-__).


26

Importantly, the Commission did not conclude that inframarginal costs can

never constitute “costs attributable” under 39 U.S.C. § 3633(a)(2). The Commission

observed that the Postal Service already attributes a portion of a cost element’s

inframarginal cost to its products when calculating incremental cost to test for cross-

subsidization. Order 60(JA__). In the Commission’s judgment, the incremental-cost

method does not suffer from the flaws that attend UPS’s proposal. Order 41-

42(JA__-__). Thus, the Commission promulgated a final rule interpreting “costs

attributable” to include “those inframarginal costs calculated as part of a competitive

product’s incremental costs.” 39 C.F.R. § 3015.7(b); Adoption Order 13.

SUMMARY OF ARGUMENT

This case involves a quintessential exercise of the Postal Regulatory

Commission’s technical expertise. The Commission must ensure that the Postal

Service’s competitive products covers their “costs attributable.” 39 U.S.C.

§ 3663(a)(2). The narrow definition of “costs attributable” includes only those “direct

and indirect postal costs attributable to [a] product through reliably identified causal

relationships.” Id. § 3631(b). Congress delegated to the Commission the “technical

decision of what cost analysis methodologies are sufficiently reliable . . . to form the

basis for attribution.” Senate Report 9. In the challenged orders, the Commission

revised its historical cost-attribution method to require attribution of some—but not

all—inframarginal costs. This reasonable exercise of the Commission’s expert

judgment merits deference.


27

Under the revised method, the Postal Service must attribute to a product

“those inframarginal costs calculated as part of [that] product’s incremental costs.” 39

C.F.R. § 3015.7(b). This calculation reflects the portion of inframarginal costs that

would disappear if the Postal Service stopped producing the product. Thus, the

Commission reasonably concluded that the incremental-cost method “accurately

calculates the inframarginal costs that can be causally related to a product’s provision

as a whole.” Order 42(JA__).

UPS faults the Commission for declining to adopt its proposal to attribute all

inframarginal costs to products. But the Commission reasonably concluded that

UPS’s approach suffers from two methodological defects that do not afflict the

incremental-cost method. First, UPS’s method cannot reliably measure total

inframarginal costs because its model stretches the constant-elasticity assumption

beyond its breaking point. Second, even if UPS’s method could reliably estimate total

inframarginal costs, it cannot reliably identify a causal relationship between a product

and the portion of inframarginal costs the method would attribute to that product.

Although UPS quibbles with the Commission’s economic analysis, its rejoinders lack

merit—and in any event, the Commission’s “reasonable” judgments are entitled to

judicial deference even if “some or many economists would disapprove of the

[Commission’s] approach.” See City of L.A. v. U.S. Dep’t of Transp., 165 F.3d 972, 977

(D.C. Cir. 1999).


28

UPS’s statutory arguments also lack merit. UPS contends that the

Commission’s approach unlawfully classifies inframarginal costs as “institutional

costs” under 39 U.S.C. § 3633(a)(3), which UPS reads to exclude any cost that

economists would deem variable. But the provision’s text, structure, and history

confirm the Commission’s long-held interpretation of “institutional costs” as a

residual category containing all costs not “attributable” under § 3633(a)(2).

UPS also contends that the Commission’s approach reads the term “indirect

costs” out of the definition of “costs attributable” in 39 U.S.C. § 3631(b), which UPS

interprets to unambiguously include costs (such as inframarginal costs) that are jointly

caused by multiple products. But the Commission did not conclude that common

costs can never be attributed under § 3633(a)(2); to the contrary, the Commission’s

revised method attributes a portion of inframarginal costs. Even if the Commission

had so concluded, UPS’s interpretation of “indirect cost” contradicts the settled

meaning of this term of art, which has for decades been used to denote costs linked to

the volume of a single product by at least one intermediate factor.

UPS alleges that the Commission did not adequately answer these statutory

arguments. But the Commission properly rejected UPS’s reading of “institutional

costs” as inconsistent with the statutory structure, and properly declined to address

UPS’s reading of “indirect costs” because its reasoning did not depend on the fact

that inframarginal costs are common to multiple products. Since the Commission’s


29

interpretations are well-known and well-documented, remand for additional

explanation would serve no purpose.

Finally, UPS faults the Commission for not addressing UPS’s concern that,

even if the Commission’s revised method complies with § 3633(a)(2), the method

could still allow the Postal Service to engage in predatory pricing. This argument is

waived because, in Commission proceedings, UPS disavowed the theory that

§ 3633(a)(2) requires the Commission to consider policy when determining what costs

are attributable. It is also incorrect. In contrast to another subsection of the

provision, § 3633(a)(2) does not require consideration of policy outcomes. And even

if it did, the record does not support UPS’s allegations of predatory pricing.

STANDARD OF REVIEW

The Commission’s orders may be set aside only if they were “arbitrary,

capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C.

§ 706(2)(A); 39 U.S.C. § 3663. “The scope of review under the ‘arbitrary and

capricious’ standard is narrow and a court is not to substitute its judgment for that of

the agency.” Motor Veh. Mfrs. Ass’n of U.S. v. State Farm Mut. Auto. Ins. Co., 463 U.S.

29, 43 (1983).

The Commission’s reasonable interpretation of the statutes it administers

receives Chevron deference. U.S. Postal Serv. v. Postal Regulatory Comm’n, 599 F.3d 705,

710 (D.C. Cir. 2010); see Chevron U.S.A. Inc. v. Natural Res. Def. Council, 467 U.S. 837,

842-44 (1984).


30

ARGUMENT

I. THE POSTAL REGULATORY COMMISSION’S REVISED COST-ATTRIBUTION METHOD IS REASONABLE.

A. The Commission reasonably determined that some but not all inframarginal costs should be attributed to postal products.

Congress requires the Commission to set price floors for the Postal Service’s

competitive products that are tied to the “costs attributable” to each product. 39

U.S.C. § 3633(a)(2). Only “direct and indirect postal costs attributable to such

product through reliably identified causal relationships” are “attributable” for this

purpose. Id. § 3631(b). Congress did not further specify what relationships are

sufficient to satisfy this statute. Instead, Congress left to the Commission the

“technical decision of what cost analysis methodologies are sufficiently reliable at any

given time to form the basis for attribution.” Senate Report 9. These technical

decisions are entitled to deference so long as they are “reasonable.” Alliance of

Nonprofit Mailers v. Postal Regulatory Comm’n, 790 F.3d 186, 197 (D.C. Cir. 2015).

This case involves a quintessential exercise of the Commission’s technical

expertise. For decades, the Commission and its predecessor attributed only two

categories of costs under § 3633(a)(2): product-specific fixed costs and volume-

variable costs. Order 9(JA__). Because neither category contains inframarginal costs,

neither adequately accounts for efficiencies of scale and scope. In the challenged

orders, the Commission updated its historical cost-attribution method to include, in


31

addition to the existing categories, “those inframarginal costs calculated as part of a

competitive product’s incremental costs.” 39 C.F.R. § 3015.7(b).

The Commission reasonably concluded that this calculation satisfies the

reliability and causality requirements of 39 U.S.C. § 3631(b). A product’s incremental

cost is “the difference between the total costs of the enterprise and the total costs

without one product.” Order 58(JA__). This concept “tests the change in total costs

from providing” every unit of a product, just as “marginal cost examines the change

in total costs from providing” a single unit of that product. Order 57(JA__).

Although the incremental-cost method does not attribute all inframarginal costs, it

accounts for a portion of inframarginal costs because a product’s incremental cost is

the sum of the marginal cost for each unit of cost driver used to make that product—

not merely the last unit. See Order 40-42(JA__-__). And it attributes to a product

only those inframarginal costs that would disappear if the Postal Service stopped

producing the product. Order 49, 52, 57(JA__, __, __). Thus, “[t]his model for

incremental cost calculation accurately calculates the inframarginal costs that can be

causally related to a product’s provision as a whole.” Order 43(JA__).

Confirming the Commission’s findings is its determination, in a related context,

that the incremental-cost test is the “conceptually correct method” for evaluating

whether the Postal Service is “subsidiz[ing] . . . competitive products” with revenues

from “market-dominant products.” Order No. 399, at 2; see 39 U.S.C. § 3633(a)(1).

The method “precisely tests for cross-subsidy” because “incremental costs are the


32

entire set of costs that a product incurs, including those inframarginal costs

attributable to it.” Order 58(JA__). “There is widespread agreement that incremental

cost is the correct cost measurement in cross-subsidy testing,” and the incremental-

cost test is “now standard in both economic theory and regulatory practice.” Bradley

Analysis 13(JA__); see Corr. Panzar Decl. 2-3 & n.4(JA__-__) (citing sources). Indeed,

UPS previously argued that the Commission “should require that each competitive

product cover its incremental cost” because, “[b]y definition, the incremental costs of

a product are the costs incurred as a result of providing that product” and are

therefore “attributable to that product.” UPS Comments 2, Dkt. PI2008-2 (P.R.C.

Apr. 1, 2008), https://go.usa.gov/x54av. The Commission reasonably extended this

test to § 3633(a)(2)—a different subsection of the same provision.

At the same time, the Commission reasonably rejected UPS’s proposal to

attribute all inframarginal costs using a two-step method devised by Kevin Neels, its

retained expert. That method first attempts to “calculate the [total] amount of these

costs” the Postal Service has incurred. Neels Report 19(JA__). It then attempts to

“distribut[e]” these costs “to individual products” using a “reliable and appropriate

methodology.” Id. The Commission determined that both prongs of UPS’s proposal

were methodologically deficient.

With respect to the first prong, the Commission noted that total inframarginal

costs cannot reliably be measured. Inframarginal costs are the sum of the differences

between the marginal cost of a given unit of cost driver and the marginal cost of the


33

last unit of cost driver. See Order 35-36(JA__-__). There is no way to determine the

total inframarginal cost of a given cost element without knowing the marginal cost of

every unit of cost driver consumed. “[R]eal-world” firms such as the Postal Service

“do[] not have the information necessary to define the entire cost function of each”

element. Order 8(JA__).

Neels proposed to solve this problem by extending an existing model for

projecting a cost curve’s shape. The key feature of this model is its constant-elasticity

assumption. Although this assumption is “useful” to visualize the “curve of a cost

function across its entire cost driver,” it has substantial limitations. Order 38(JA__).

Specifically, the Commission found that the assumption may “inaccurately represent

the shape of the cost curve at very low levels of volume,” where inframarginal costs

are highest. Order 38-39(JA__-__). Neels’s report contained “no evidence

suggesting” that his estimates are “acceptably accurate over the total range of

volume,” Bradley Analysis 38(JA__), and the Postal Service has never “experienced

the levels of volume necessary to verify” Neels’s model empirically, Order 39(JA__).

Because Neels’s method applies the constant-elasticity assumption “to levels of

volume far beyond the range of actual experience,” it “produces results that are

inadequately supported and unreliable.” Order 39(JA__).

With respect to the second prong, the Commission noted that total

inframarginal costs cannot reliably be attributed. The inframarginal cost of each unit

of cost driver differs depending on where on the marginal-cost curve the unit falls.


34

But each cost element contributes to multiple products. And the Postal Service “does

not precisely know the order in which it [produced] each product,” much less which

product each unit was used to produce. Order 49(JA__). So even if the Postal

Service could determine the inframarginal cost associated with every unit of cost

driver on an element’s marginal-cost curve, it could not determine which of those

units contributed to the production of the product at issue.

Neels proposed to solve this problem by attributing inframarginal costs to

products using the Postal Service’s existing distribution keys, which are currently used

to allocate volume-variable costs. Those distribution keys do not contain any

information about where on a curve a unit of cost driver falls; they speak only to what

proportion of the cost driver was used to produce a particular product. App. A, at

9(JA__). Proportional allocation produces valid results in the context of volume-

variable costs, where the cost associated with each unit of cost driver is identical.

Order 47-48(JA__-__). But this is unlikely to be true in the context of inframarginal

costs, as shown below.


35

Figure 6—Comparison of Distribution-Key Allocation for Volume-Variable Costs and Inframarginal Costs

Order 48(JA__). On this graph, the first six units of cost driver were used to produce

one product, the next six were used to produce a second product, and the last eight

were used to produce a third product. All three products incur volume-variable costs,

represented by the blue area, in equal proportion. But the same cannot be said about

inframarginal costs, represented by the green area, because each unit has a different

inframarginal cost that corresponds to its position on the element’s marginal-cost

curve. A proportional allocation of inframarginal costs would allocate too much to

the last product and too little to the first product. The Commission thus declined to

repurpose the Postal Service’s distribution keys in this manner.


36

For the same reason, the Commission reasonably rejected Neels’s attempt to

prove causation by comparing distribution-key-based allocation to an allocation model

invented by game theorist Lloyd Shapley. Shapley’s approach to cost attribution has

nothing to do with causation because, as Neels admitted, it “attribute[s] cost

responsibility in a manner that is independent” of a unit of cost driver’s location on

the marginal-cost curve. Neels Report 22(JA__). The Shapley approach assigns each

unit of cost driver an inframarginal cost equal to the “mean inframarginal cost of

every point on” the curve—which in most circumstances will not correspond to the

unit’s actual inframarginal cost. Order 46(JA__). As such, Shapley’s approach

“weakens” and may even “fully eliminate” any “causal relationship” between a unit

and the inframarginal cost assigned to it. Id.

The Commission rejected Neels’s invocation of Shapley’s approach to

attribution for a second and separate reason: the approach may not accurately

approximate the actual distribution of units of cost driver along each element’s

marginal-cost curve. Shapley’s model assumes that all units of cost driver are “equally

likely to be at any point in a marginal cost curve.” Order 46(JA__). Neels supplied

no evidence supporting such an assumption in the postal-costing context. And as the

Commission noted, it is possible that “the ordering of the units of the cost driver

within the marginal cost curve is not random.” Id. Should this assumption be

incorrect, a Shapley allocation would produce “inaccurate” results. Id.


37

B. The Commission properly determined that UPS’s method of attributing all inframarginal costs to products was flawed.

UPS does not contend that the incremental-cost method fails the “reliably

identified causal relationship” standard. Instead, UPS claims that, by refusing to

attribute all inframarginal costs, the Commission did not go far enough. To that end,

it disputes the Commission’s economic analysis with a litany of highly technical

objections. But this Court is not a “peer review board for an academic journal of

econometrics.” Alliance of Nonprofit Mailers, 790 F.3d at 197. The Court is “obliged”

to affirm a Commission order if it is “reasonable,” even when “some or many

economists would disapprove of the [Commission’s] approach.” See City of L.A. v.

U.S. Dep’t of Transp., 165 F.3d 972, 977 (D.C. Cir. 1999). Because the Commission’s

revised cost-attribution method is reasonable, this Court should decline UPS’s

invitation to second-guess the Commission’s expert judgments.

In any event, UPS’s economic arguments lack merit.

1. UPS asserts (Pet. Br. 60-63) that, because the incremental-cost method uses

the constant-elasticity assumption to extrapolate the shape of part of an element’s cost

curve, the Commission cannot criticize Neels for using the same assumption to

extrapolate the shape of the entire cost curve. This argument rests on a false

equivalence between the Commission’s revised method and UPS’s proposal. The

incremental-cost method does not require extrapolation of the entire curve because,

unlike UPS’s proposal, it does not seek to attribute all inframarginal costs. Order 42


38

& n.63, 52 n.70(JA__, __). By “restricting itself to limited amounts of volume (i.e., the

volume of each product),” the test “only estimates inframarginal costs in a very small

range of a component’s cost curve where the constant elasticity assumption has been

empirically verified based on observed volumes.” Order 42(JA__).

UPS responds (Pet. Br. 61) that the constant-elasticity assumption is not limited

to very small ranges because the incremental-cost method, as used to test for cross-

subsidies, operates by “removing the entire class of competitive products from Postal

Service costs.” But UPS omits that, by volume, competitive products make up a small

percentage of the products the Postal Service provides. See Postal Regulatory

Comm’n, Financial Analysis of United States Postal Service Financial Results and 10-K

Statement: Fiscal Year 2016, App. A, at 1 (2017) (“Financial Analysis”),

https://go.usa.gov/x5kWz. In consequence, the incremental-cost test need only

extrapolate the shape of a relatively small portion of the Postal Service’s total cost

function. And even if the constant-elasticity assumption could be used for

significantly larger ranges, it still cannot reliably project inframarginal costs for very

low levels of volume—which UPS’s proposal must project but the incremental-cost

method need not.

UPS further responds (Pet. Br. 62) that, even if the Postal Service cannot

reliably calculate the shape of a cost element’s marginal-cost curve, the shape “is

irrelevant if the Postal Service knows its variable costs for that [element].” However,

the Postal Service does not actually know whether all costs associated with an element


39

are variable costs in the economic sense. Order 39(JA__). Even if this information

were available, UPS would still be confronted with the dilemma of attributing those

total costs to products.

2. UPS asserts (Pet. Br. 51-56) that the Commission demanded empirical

verification of causality without requiring similarly stringent proof for the

incremental-cost method. It argues that Neels’s ordering assumption (that the units

of cost driver used to make a product are incurred by the Postal Service at random) is

more plausible than the Commission’s ordering assumption (that the units of cost

driver used to make a product are the last units of cost driver for which the Postal

Service pays). Id.

This argument rests on the same false equivalence. The incremental-cost

method calculates the “difference between the total costs of the enterprise and the

total costs without one product.” Order 58(JA__). Although this calculation almost

certainly underestimates the inframarginal costs a product actually incurred, it has one

critical feature: Because the difference represents the marginal cost of producing a

product, the incremental-cost method is the minimum inframarginal cost the product

could possibly have incurred. Order 57(JA__). In the Commission’s judgment, this

minimum is the only cost that bears sufficient indicia of reliability and causality to

warrant attribution for purposes of setting a price floor—which can distort the

marketplace if set too low or too high. Order 59(JA__).


40

By contrast, UPS’s proposal is not limited to the question of which

inframarginal costs would disappear if the Postal Service stopped producing a

product. UPS instead seeks to allocate all inframarginal costs to all products. Thus,

UPS must ask, and identify a reliable answer to, the wholly separate question of how

the entire bucket of costs should be “distribut[ed] . . . to individual products.” See

Neels Report 19(JA__). It is with respect to this question—which, unlike the first

question, is sensitive to the location of particular units of cost driver on the marginal-

cost curve—that empirical verification of cost-driver location is required.

UPS acknowledges that the Postal Service, like other real-world firms, “lacks

perfect knowledge of cost components, cost elasticity, and other factors affecting cost

calculations.” Pet. Br. 55 (citation and quotation marks omitted). UPS nevertheless

insists that Neels’s model—which assumes that the Postal Service consumes units of

cost driver in a random order—is a close-enough approximation of the reality of mail

delivery. See Pet. Br. 54. However, UPS can only speculate, in conclusory fashion,

that the distribution of products is actually random. See id. In the absence of such

evidence, the Commission reasonably declined to rely on Neels’s model. Nor is it

significant that the Commission did not ask whether the ordering assumptions

underlying the incremental-cost method were similarly speculative. To reiterate, the

incremental-cost method—unlike Neels’s model—does not depend on the order in

which the units of cost driver are produced.


41

3. UPS asserts (Pet. Br. 56-60) that the Commission could not rationally reject

Neels’s distribution-key-based allocation scheme because the incremental-cost

method also uses distribution keys. Here again, the two approaches are not

comparable. The validity of the incremental-cost method does not depend on

identifying the exact location on the marginal-cost curve where a given unit of cost

driver was produced. The test calculates the proportion of inframarginal costs that

would disappear if the UPS ceased production of that product. See Order 50-

51(JA__-__). As such, the incremental-cost method can safely rely on existing

distribution keys, which reveal how many units of cost driver—but not which units of

cost driver—were associated with a product. Order 50(JA__). The same cannot be

said for UPS’s proposal to allocate all inframarginal costs to all products. To ensure

that a product only bears those inframarginal costs it caused, UPS must identify some

causal mechanism linking the product to the amount of costs UPS thinks the product

must bear—and, by extension, to where on an element’s marginal-cost curve the units

of that product were produced. Order 51(JA__). The Postal Service’s existing

distribution keys cannot serve this function.

4. UPS asserts (Pet. Br. 43-45) that the Commission previously concluded that

that all variable costs possess a “reliable causal relationship with products.” This

argument misreads the relevant precedent.

In the world of postal costing, there is a significant difference between

“variable costs” and “volume-variable costs.” The former, an economic term,


42

denotes all costs that “vary with the amount of goods produced.” Order 6(JA__).

The latter, a term of art specific to postal costing, denotes the “mathematical product

of the marginal cost of a postal product and its volume.” Primer 16. Because volume-

variable costs vary with product volume, all volume-variable costs are variable costs.

But not all variable costs are volume-variable costs. Of particular note, inframarginal

costs—which vary with product volume—are not volume-variable costs. The

Commission’s revised order makes this distinction clear. See Notice of Errata

1(JA__).

UPS is well aware of this distinction. Pet. Br. 9 (explaining that volume-

variable costs are “not what economists call ‘variable costs’”). Nonetheless, UPS cites

an appendix from an order discussing volume-variable costs in the postal-costing

sense as if the appendix were discussing variable costs in the economic sense. See

R80-1 Op., vol. 2, app. B, at 26. The purpose of that appendix, issued in 1981 and

titled “Historical Development of Costing Principles,” was to survey the history of

the Commission’s cost-attribution procedures. Read in context, the appendix states

only that, once a cost is determined to be a volume-variable cost in the postal-costing

sense, it is by definition attributable to a product. Id. The appendix did not state that

all costs that vary with volume in the economic sense automatically satisfy the

causality and reliability requirements of § 3633(a)(2). Were it otherwise, UPS’s

proposal would have been wholly unnecessary.


43

UPS’s reliance on NAGCP, 462 U.S. 810, is similarly misplaced. The Supreme

Court there affirmed that “a sufficient causal nexus” must be “establish[ed] . . . before

costs may be attributed.” Id. at 826. The Court held that the Commission, an “expert

ratesetting agency,” has “authority to decide which methods sufficiently identify the

requisite causal connection.” Id. Applying these principles, the Court approved sthe

Commission’s historical “two-tier approach to ratesetting,” id. at 823, under which

only product-specific fixed costs and volume-variable costs were deemed attributable.

The Court concluded that such costs ought to be attributed because, in the

Commission’s judgment, they were calculated using “methods [that] reliably indicate

causal connections between classes of mail and postal rates.” Id. at 830. The Court

did not hold that all variable costs, as the term is understood by economists, possess

the “causal connection” that is a prerequisite for attribution.

II. THE COMMISSION’S REVISED COST-ATTRIBUTION METHOD IS CONSISTENT WITH THE POSTAL ACCOUNTABILITY AND ENHANCEMENT ACT.

UPS separately contends that the Postal Accountability and Enhancement Act

unambiguously requires the Commission to attribute all inframarginal costs to

products. That argument lacks merit.

A. Inframarginal costs may properly be classified as “institutional costs” under § 3633(a)(3).

UPS observes (Pet. Br. 34) that, by declining to classify most inframarginal

costs as “costs attributable,” the Commission’s approach results in those costs being


44

classified as “institutional costs” under § 3633(a)(3). UPS believes this is unlawful

because the category of “institutional costs” cannot include any costs defined as

variable in the economic sense—that is, costs that vary with product volume. But

UPS’s interpretation of “institutional costs” is foreclosed by the text, structure, and

history of § 3633(a)(3), which unambiguously indicate that the term is a residual

category containing all costs that are not “costs attributable” under § 3633(a)(2).

Section 3633 divides all costs of competitive products into “costs attributable,”

39 U.S.C. § 3633(a)(2), and “institutional costs of the Postal Service,” id. § 3633(a)(3).

The Act defines only one of these terms: “[T]he term ‘costs attributable’ . . . means

the direct and indirect postal costs attributable to such product through reliably

identified causal relationships.” Id. § 3631(b). The Act does not define “institutional

costs,” whose ordinary meaning is susceptible to different interpretations. Because

“institutional” means “of, relating to, involving, or constituting an institution,”

Webster’s Third New International Dictionary of the English Language 1171 (1993),

“institutional costs” are those costs that “relat[e] to . . . an institution.” This definition

is broad enough to operate—as the Commission has interpreted it to operate—as a

residual category into which any postal cost not classified as a “cost attributable” must

fall. Order 9-10(JA__-__). There is no reason to think, as UPS asserts, that costs

which vary with the volume of products the Postal Service produces can under no

circumstances “relat[e] to” the Postal Service.


45

To the extent the textual meaning of “institutional costs” is unclear, the

provision’s structure resolves that ambiguity in the Commission’s favor. As UPS

acknowledges, § 3633(a) classifies all Postal Service costs as either “attributable” or

“institutional.” Order 9(JA__); Pet. Br. 34. But the Act only defines the term “costs

attributable”—and narrowly at that. 39 U.S.C. § 3631(b). This indicates that the

proper way to classify a postal cost is to determine whether it is attributable to a

product “through [a] reliably identified causal relationship[].” Id. A cost that is not

attributable is institutional. By contrast, UPS’s interpretation of “institutional costs”

treats “costs attributable” as the residual category by requiring the Postal Service to

first determine if a given cost is variable in the economic sense. If so, the cost cannot

be institutional and must be attributed to products whether it satisfies the statutory

definition of “costs attributable” or not. That approach turns § 3633(a) on its head.

The legislative history also forecloses UPS’s reading of “institutional costs.”

Congress enacted § 3633(a) against the backdrop of the Postal Reorganization Act of

1970. That statute authorized the Commission’s predecessor to recommend rates

consistent with the principle that “each class of mail [must] bear the direct and

indirect postal costs attributable to that class . . . plus that portion of all other costs of

the Postal Service reasonably assignable to such class.” NAGCP, 462 U.S. at 814 n.3.

The statute did not define “costs attributable,” which at the time possessed “no

technical meaning or significant antecedent legislative history.” Id. at 832. Nor did


46

the statute use the term “institutional costs,” instead requiring each class of mail to

bear “that portion of all other costs . . . reasonably assignable” to it. Id. at 814 n.3.

The Commission’s predecessor interpreted “costs attributable” to encompass

only product-specific fixed costs and volume-variable costs—the same approach to

cost attribution historically employed by the Commission, and the same approach

upheld by the Supreme Court in NAGCP. The Commission’s predecessor then

adopted the term “institutional costs” as a gloss on the phrase “all other costs.”

Specifically, the Commission defined “institutional costs” as “[a]ll . . . costs” “other”

than “certain costs that are variable with volume, plus certain specific fixed costs.”

Op. & Rec. Dec., vol. 1, at 99, Dkt. R74-1 (Postal Rate Comm’n Aug. 28, 1975); see

Op. & Rec. Dec., vol. 1, at 227, Dkt. R97-1 (Postal Rate Comm’n May 11, 1998).

This Court and others followed suit. See UPS, Inc. v. U.S. Postal Serv., 184 F.3d 827,

844 (D.C. Cir. 1999); Mail Order Ass’n of Am. v. U.S. Postal Serv., 2 F.3d 408, 425 (D.C.

Cir. 1993); Direct Marketing Ass’n v. U.S. Postal Serv., 778 F.2d 96, 101 (2d Cir. 1985).

The legislative history states that Congress borrowed these terms of art to codify the

“existing regulatory structure” endorsed by NAGCP in 1983 and refined by

subsequent judicial and administrative decisions. Senate Report 9-10.

UPS’s contrary interpretation of “institutional costs” is foreclosed by the

two-step Chevron framework.

At step one, UPS must prove that its interpretation is the “only possible

interpretation” of “institutional costs.” Cf. Sullivan v. Everhart, 494 U.S. 83, 89 (1990).


47

That it cannot do. Even if the traditional tools of statutory interpretation do not

compel the Commission’s view, they show that the Commission’s view is at least

available. Moreover, the text of § 3633(a)(3) does not expressly exclude costs that

vary with product volume in the economic sense. UPS’s attempt to inject this

limitation into a provision where the limitation is “conspicuously absent more closely

resembles inventing a statute than interpreting one.” Hardt v. Reliance Standard Life Ins.

Co., 560 U.S. 242, 252 (2010) (citation and internal quotation marks omitted).

UPS’s rejoinders are unpersuasive. UPS cites (Pet. Br. 35-36) several

nonstatutory definitions of “institutional costs” that purportedly reflect its preferred

interpretation. But none forecloses the Commission’s interpretation—and most

actually support it. For instance, the Postal Service’s Glossary of Postal Terms

defines “institutional costs” as “[p]ostal costs that cannot be directly or indirectly

assigned to any mail class or product.” U.S. Postal Serv., Glossary of Postal Terms 104

(2013), https://about.usps.com/publications/pub32.pdf. To explain what costs

cannot be assigned, the glossary cross-references its definition of “attributable cost”:

“the sum of volume-variable cost plus product-specific cost.” Id. at 19. This

definition recapitulates the settled meaning of “institutional costs.” Similarly, UPS

quotes one sentence from the legislative history describing institutional costs as

“costs, such as salaries for management and other overhead costs, that the Postal

Service says cannot be attributed to any specific product.” Senate Report 9. The fact

that these exemplar costs do not vary with volume in the economic sense does not


48

support the remarkable inference that Congress included these examples to endorse

UPS’s restrictive view of “institutional costs.” The full paragraph makes the opposite

point: that Congress intended § 3633(a) to reflect the “existing regulatory structure,”

which treated “institutional costs” as residual costs that cannot “reliably be said to

have been incurred to provide . . . specific postal services.” Id.

UPS also relies (Pet. Br. 47) on one sentence from another Commission order,

which states that “by definition, institutional costs [are those that] do not vary with

volume.” See Order 23, Dkt. RM 2012-3 (P.R.C. Aug. 23, 2012) (“Order No. 1449”),

https://go.usa.gov/x5Zuy. But UPS has again conflated the economic concept of

variable costs with the postal-costing concept of volume-variable costs. This order

concerns § 3633(a)(3)’s requirement that competitive products bear an “appropriate

share” of institutional costs. Id. at 1. It was issued when the historical cost-attribution

method was still in effect—under which “institutional costs” were defined as any cost

that was neither a product-specific fixed cost nor a volume-variable cost. In context,

the order simply restates the Commission’s long-held view that institutional costs are

“by definition” not volume-variable costs, which have historically been attributable to

products. Id. at 23. The concept of volume-variable costs does not encompass all

costs that vary with volume in the economic sense. See supra, pp. 41-42.

At step two, UPS has failed to demonstrate that the Commission’s

interpretation was unreasonable. UPS argues (Pet. Br. 38) only that, under the

Commission’s approach, some 45.6% of the Postal Service’s costs are currently


49

classified as “institutional.” But it is entirely reasonable for a residual category to

include a significant minority of postal costs in light of how narrowly Congress

defined “costs attributable.” Congress itself contemplated that “institutional costs”

would encompass “40 percent of the Postal Service’s costs” when it enacted

§ 3633(a)(3). Senate Report 9.

B. The statutory definition of “costs attributable” does not require attribution of all inframarginal costs.

UPS contends (Pet. Br. 39-43) that the Commission’s revised cost-attribution

method is inconsistent with the definition of “costs attributable,” which are “direct

and indirect postal costs attributable to [a] product through reliably identified causal

relationships.” 39 U.S.C. § 3631(b). The Commission’s method attributes to a

product only the portion of total inframarginal costs that can be causally related to

that product using the incremental-cost method. UPS believes this method renders

the term “indirect costs” irrelevant, on the theory that “indirect costs” must mean

“costs that are jointly caused by multiple products.” Pet. Br. 39.

This argument misunderstands the Commission’s decision. Inframarginal costs

arise in part from economies of scope, so they are common variable costs that are

caused by multiple products. Order 35(JA__). If the Commission had determined

that no costs caused by multiple products are attributable under § 3631(b), it would

have declined to classify any inframarginal costs as attributable. But the Commission

concluded that certain inframarginal costs can qualify as “costs attributable,” and its


50

revised method in fact attributes a portion of inframarginal costs to products. Thus,

the Commission could not have rejected UPS’s proposal to attribute all inframarginal

costs on the theory that such costs are “jointly caused by multiple products.” Instead,

the Commission rejected UPS’s proposal because its attribution method failed

§ 3631(b)’s independent requirements of reliability and causality.

UPS cannot prevail even assuming that its characterization of the

Commission’s decision is correct. The term “indirect costs,” as used in § 3631(b),

does not mean “costs caused by multiple products” but is rather a term of art. The

term, and the corresponding term “direct costs,” have for decades been understood to

mean whether a cost is directly or indirectly linked to the volume of the product that

cost was incurred to produce—as indicated by testimony in a ratemaking proceeding

held by the Commission’s predecessor. See Direct Testimony of Howard Alenier on

Behalf of the U.S. Postal Service 6, Dkt. R80-1, USPS-T-7 (Postal Rate Comm’n Apr.

21, 1980), Add. A12. The Postal Service calculates the indirect costs that can be

linked to products through a reliably identified causal relationship using so-called

“piggyback factors.” See Order 9(JA__); Financial Analysis 49 & n.40.4

To illustrate this distinction, consider the costs of letter delivery. Direct costs

include the salaries paid to line-level mail clerks: The more letters the Postal Service

4 For a description of how piggyback factors operate, see Direct Testimony of

Marc Smith on Behalf of the U.S. Postal Service 21-22, Dkt. R2006-1, USPS-T-13 (Postal Rate Comm’n Sept. 1, 2006), Add. A23-A24.


51

processes, the more money it must pay the people who do the processing. Indirect

costs include the salaries of supervisors, who manage not only letter delivery but the

delivery of flats and parcels as well. Op. & Rec. Dec., vol. 1, at 766, Dkt. R87-1

(Postal Rate Comm’n Mar. 4, 1988). These salaries do not directly relate to the

volume of letters the Postal Service processes. But they do directly relate to the

number of line-level mail clerks—which number directly relates to the volume of

letters the Postal Service delivers. The portion of supervisor salaries expended on

letter delivery is therefore attributable to mail. Id. Because indirect costs are not

inframarginal, the Commission’s revised cost-attribution method will not affect their

attribution.

Congress “presumptively was aware” of this “settled . . . administrative

interpretation” of the term “indirect cost” when it incorporated it into the Postal

Accountability and Enhancement Act. See C.I.R. v. Keystone Consol. Indus., Inc., 508 U.S.

152, 159 (1993). It is “proper to accept” the term’s “already settled meaning.” Id.

UPS nevertheless insists that “indirect costs” must refer only to costs

associated with more than one product. That interpretation is foreclosed under the

Chevron framework. At step one, UPS cannot reasonably contend that its reading of

“indirect costs” is the only permissible reading. Cf. Sullivan, 494 U.S. at 89. If

anything, it is UPS’s interpretation that contradicts the provision’s text, which speaks

of products not in the plural but in the singular. See 39 U.S.C. § 3631(b) (explaining

that, when assessing whether a cost is attributable to “a product,” the Commission


52

must link that cost “to such product”). The nonstatutory definitions of “indirect

costs” cited by UPS (Pet. Br. 39-40) do not help its cause because they establish only

that “indirect costs” could include costs related to multiple products. Indeed, one

definition recognizes that indirect costs can be identified either “with at least one

intermediate cost objective” (the Commission’s view) or with “two or more final cost

objectives” (UPS’s view). 48 C.F.R. § 9904.418-30(a)(3).

UPS also claims that Congress intended “indirect costs” to refer only to costs

associated with multiple products. But UPS has not backed up that claim with a

single legislative-history citation. In any event, Congress is presumed to have ratified

the Commission’s settled construction of “indirect costs”—and not UPS’s cherry-

picked definitions—by incorporating the term into the Postal Accountability and

Enhancement Act. See Keystone, 508 U.S. at 159.

At step two, UPS argues (Pet. Br. 43) that the Commission’s interpretation is

unreasonable because it allows the Postal Service to “ignore” inframarginal costs

entirely. The Commission did nothing of the sort. Instead, consistent with § 3631(b),

the Commission decided that inframarginal costs are attributable to the extent

permitted by principles of causality and reliability. Although UPS believes that the

Commission should attribute a higher percentage of inframarginal costs, that is no

reason to disregard § 3631(b)’s robust causation requirements. As the Supreme Court

held with respect to the provision’s predecessor, “when causal analysis is limited by

insufficient data, the statute envisions that the . . . Commission will press for better


53

data, rather than construct an attribution based on unsupported inferences of

causation.” NAGCP, 462 U.S. at 827 (citation and internal quotation marks omitted).

C. The Commission’s orders adequately explained the Commission’s reasons for attributing only some inframarginal costs.

Finally, UPS argues (Pet. Br. 45-46) that the Commission’s orders did not

adequately explain the Commission’s reasoning. That is inconsistent with the

Administrative Procedure Act (“APA”), which requires only a “brief statement of the

grounds for denial.” 5 U.S.C. § 555(e). The Commission explained that it was

rejecting UPS’s proposal because UPS’s method of attributing all inframarginal costs

did not satisfy the causality and reliability requirements of § 3631(b). Its detailed

analysis clears the APA’s “minimal” bar. Cf. Butte County, Cal. v. Hogen, 613 F.3d 190,

194 (D.C. Cir. 2010).

UPS protests (Pet. Br. 46) that the Commission did not sufficiently address its

two statutory counterarguments. But the Commission rejected UPS’s idiosyncratic

reading of “institutional costs” as inconsistent with the statutory structure. Order 10,

36(JA__, __). And the Commission reasonably declined to address UPS’s claim that

“causality does not have to be exclusive to individual products to be attributable

under the statute” because its reasoning did not depend on that characteristic of

inframarginal costs. See Order 32(JA__). Moreover, remand would not be

appropriate even if these responses were too spare. The Commission’s interpretations

of “institutional costs” and “indirect costs” are well-known and well-documented, and


54

the Commission’s revised method is consistent with them. Because the Commission

“could and no doubt would simply” recite its existing precedent on remand, relief of

that nature would “serve no purpose.” See Tourus Records, Inc. v. DEA, 259 F.3d 731,

739 (D.C. Cir. 2001).

UPS argues (Pet. Br. 45) that, at a minimum, the Commission’s interpretations

should not benefit from Chevron deference. But the cases UPS cites involve agencies

that changed existing interpretations without explanation. See Encino Motorcars, LLC v.

Navarro, 136 S. Ct. 2117, 2125-26 (2011); LePage’s 2000, Inc. v. Postal Regulatory Comm’n,

642 F.3d 225, 231 (D.C. Cir. 2011). The same is not true here. At any rate, the above

discussion demonstrates that the Commission’s statutory interpretations survive de

novo scrutiny.

Finally, UPS argues (Pet. Br. 47-50) that the Commission failed to discuss

UPS’s policy arguments, which boil down to the claim that competitive products must

bear all inframarginal costs to prevent the Postal Service from using cross-subsidized

pricing to undermine its competitors. UPS asserts that the Commission was required

to consider these effects because Congress intended § 3633(a)(2)’s attributable-cost

requirement to level the playing field between the Postal Service and its competitors.

This argument is waived. In Commission proceedings, UPS pressed the exact

argument it now criticizes: that “[t]he relevant inquiry” when determining whether a

cost is attributable under § 3633(a)(2) “is whether the Postal Service’s cost attribution

practices comply with” the statutory definition, “not whether doing so will have an


55

impact that some would prefer to avoid.” UPS Reply Comments 33(JA__). UPS

cannot now challenge the Commission’s decision on a theory it disavowed, much less

fault the Commission for not sufficiently addressing the argument. See United States v.

L.A. Tucker Truck Lines, Inc., 344 U.S. 33, 37 (1952).

The argument is also incorrect. Congress enacted § 3633 “to ensure that the

Postal Service competes fairly in the provision of competitive products.” Order

121(JA__) (citation omitted). But, as UPS told the Commission, Congress did not

incorporate a separate fair-competition requirement into § 3633(a)(1)’s prohibition on

cross-subsidization or § 3633(a)(2)’s price floor, neither of which makes any reference

to generalized market impacts. UPS Reply Comments 35; see Order 58(JA__). To

underscore these omissions, Congress expressly required the Commission to consider

“the prevailing competitive conditions in the market” in a different subsection of the

provision. 39 U.S.C. § 3633(a)(3), (b); see UPS Reply Comments 36(JA__); Order 58

n.78(JA__). This indicates that Congress intended rate attribution to turn only on the

substantive requirements of § 3633(a)(2). UPS Reply Comments 35(JA__). Because

the Commission’s revised cost-attribution method is consistent with these

requirements, it satisfies the statute’s objectives. The Supreme Court held as much in

NAGCP, where it rejected an identical policy argument brought by UPS more than

three decades earlier. See 462 U.S. at 829 n.24.

UPS could not prevail even if § 3633(a)(2) incorporated an independent fair-

competition requirement because no evidence indicates that the Postal Service


56

improperly subsidized competitive products. The near-unanimous opposition to

UPS’s proposal, from users of competitive and market-dominant products alike,

suggests that these market-manipulation concerns are overblown. E.g., Amazon

Comments 3-4(JA__-__); Market-Dominant Mailers Comments 5(JA__). According

to these commenters, it is UPS’s proposal that would have a distortionary effect on

the market: By imposing “artificially inflated [price] floors” on the Postal Service, the

proposal would “free” the Postal Service’s “private competitors to raise their own

prices” at consumers’ expense. Amazon Comments 3(JA__). UPS’s only evidence of

predatory pricing is that, in 2014, the Postal Service reduced its parcel-delivery rates.

See Pet. Br. 16. But as other commenters observed, “these rate decreases were offset

by increases in other” areas such that “the net effect of the implemented price change

was zero.” See Order 115 n.139(JA__). Moreover, “overall competitive product

prices have significantly increased.” Order 116(JA__). And UPS’s share of the

parcel-shipping market “remained relatively stable” despite the 2014 price reduction.

Id. The record thus does not support UPS’s price-fixing allegations.

Nor is the § 3633(a)(2) price floor UPS’s only defense against predatory pricing.

Section 3633(a)(3) directs the Commission to attribute an additional, “appropriate”

share of institutional costs to all competitive products if it finds merit in the very

policy arguments UPS advances here. The Commission is currently reassessing this

attribution, and UPS has played an active role in those proceedings. See Postal

Regulatory Comm’n, Dkt. RM2017-1, https://go.usa.gov/x53QF (comments


57

accessible by entering “UPS” into the “Filing Party” dropdown bar). Additionally, 39

U.S.C. § 404a prohibits the Postal Service from seeking an “unfair competitive

advantage” over its competitors. If UPS believes the Postal Service is manipulating

rates, it may file a complaint with the Commission, which can issue any necessary

orders to bring the Postal Service into compliance. Id. § 3662(c)-(d). Finally, UPS

may file an antitrust claim under 39 U.S.C. § 409(e)(1)(B). UPS has not invoked either

of these latter options.

CONCLUSION

For the foregoing reasons, the petitions for review should be denied.

Respectfully submitted,

Of Counsel:

DAVID A. TRISSELL General Counsel

CHRISTOPHER J. LAVER Deputy General Counsel

MALLORY SMITH Attorney Postal Regulatory Commission

CHAD A. READLER Acting Assistant Attorney General

MICHAEL S. RAAB /s/ Michael Shih

MICHAEL SHIH Attorneys, Appellate Staff Civil Division, Room 7268 U.S. Department of Justice 950 Pennsylvania Avenue NW Washington, D.C. 20530 (202) 353-6880 [email protected]

April 2017


CERTIFICATE OF COMPLIANCE

I hereby certify that this brief complies with the requirements of Federal Rule

of Appellate Procedure 32(a). This brief contains 12,945 words.



CERTIFICATE OF SERVICE

I hereby certify that on April 24, 2017, I electronically filed the foregoing brief

with the Clerk of the Court for the United States Court of Appeals for the District of

Columbia Circuit by using the appellate CM/ECF system. Participants in the case are

registered CM/ECF users, and service will be accomplished by the appellate

CM/ECF system.



ADDENDUM


TABLE OF CONTENTS

Page(s)

39 U.S.C. § 3631 .................................................................................................................. A1 39 U.S.C. § 3633 .................................................................................................................. A2 39 C.F.R. § 3631 .................................................................................................................. A3 Excerpts from Direct Testimony of Howard S. Alenier

on Behalf of the United States Postal Service, before the Postal Rate Commission (Dkt. R80-1) ..................................................... A4

Excerpts from Direct Testimony of Marc A. Smith

on Behalf of the United States Postal Service, before the Postal Rate Commission (Dkt. R2006-1) ............................................... A17


A1

39 U.S.C. § 3631—Applicability; definitions and updates.

(a) Applicability.—This subchapter shall apply with respect to—

(1) priority mail;

(2) expedited mail;

(3) bulk parcel post;

(4) bulk international mail; and

(5) mailgrams;

subject to subsection (d) and any changes the Postal Regulatory Commission may make under section 3642.

(b) Definition.—

For purposes of this subchapter, the term “costs attributable”, as used with respect to a product, means the direct and indirect postal costs attributable to such product through reliably identified causal relationships.

(c) Rule of Construction.—

Mail matter referred to in subsection (a) shall, for purposes of this subchapter, be considered to have the meaning given to such mail matter under the mail classification schedule.


A2

39 U.S.C. § 3633—Provisions applicable to rates for competitive products.

(a) In General.—The Postal Regulatory Commission shall, within 18 months after the date of enactment of this section, promulgate (and may from time to time thereafter revise) regulations to—

(1) prohibit the subsidization of competitive products by market-dominant products;

(2) ensure that each competitive product covers its costs attributable; and

(3) ensure that all competitive products collectively cover what the Commission determines to be an appropriate share of the institutional costs of the Postal Service.

(b) Review of Minimum Contribution.—

Five years after the date of enactment of this section, and every 5 years thereafter, the Postal Regulatory Commission shall conduct a review to determine whether the institutional costs contribution requirement under subsection (a)(3) should be retained in its current form, modified, or eliminated. In making its determination, the Commission shall consider all relevant circumstances, including the prevailing competitive conditions in the market, and the degree to which any costs are uniquely or disproportionately associated with any competitive products.


A3

39 C.F.R. § 3015.7—Standards for compliance.

For purposes of determining competitive products’ compliance with 39 U.S.C. 3633, the Commission will apply the following standards:

(a) Incremental costs will be used to test for cross-subsidies by market dominant products of competitive products. To the extent that incremental cost data are unavailable, the Commission will use competitive products’ attributable costs supplemented to include causally related, group-specific costs to test for cross-subsidies.

(b) Each competitive product must recover its attributable costs as defined in 39 U.S.C. 3631(b). Pursuant to 39 U.S.C. 3631(b), the Commission will calculate a competitive product’s attributable costs as the sum of its volume-variable costs, product-specific costs, and those inframarginal costs calculated as part of a competitive product’s incremental costs.

(c) Annually, on a fiscal year basis, the appropriate share of institutional costs to be recovered from competitive products collectively is, at a minimum, 5.5 percent of the Postal Service’s total institutional costs.


ORIGINAi.:

BEFORE THE POSTAL RATE COMMISSION WASHINGTON, D.C. 20268

POSTAL RATE AND FEE INCREASES, 1980

DIRECT TESTIMONY OF HOWARD S. ALENIER

ON BEHALF OF

I • II

USPS-T-7

Arn 21 i:+ zs ru 'Bn

Docket No. VtfJ.1

UNITED STATES POSTAL SERVICE r ...... ,v,_ ~· · . . ~"""--

A4


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USPS-T-13 FINAL September 1, 2006

BEFORE THE POSTAL RATE COMMISSION

WASHINGTON, D.C. 20268-0001

Postal Rate and Fee Changes, 2006 Docket No. R2006-1 _______________________________ _____________________________

DIRECT TESTIMONY OF

MARC A. SMITH ON BEHALF OF THE

UNITED STATES POSTAL SERVICE

Postal Rate CommissionSubmitted 9/1/2006 9:50 amFiling ID: 53041Accepted 9/1/2006

A17


i

TABLE OF CONTENTS 1

2

Page 3

LIBRARY REFERENCES TO BE SPONSORED WITH TESTIMONY 4 USPS-T-13…………………………………………………………………………………......ii 5

6 AUTOBIOGRAPHICAL SKETCH……………….…………………………………….......…iii 7 8 I. PURPOSE AND SCOPE OF TESTIMONY AND GUIDE 9 TO SUPPORTING DOCUMENTATION ……………………………………………1 10 11 II. EQUIPMENT AND FACILITY-RELATED COSTS 12 IN THE BASE AND TEST YEAR………………………….…………………………6 13 14

A. Mail Processing and Other Equipment-Related Costs…………………….7 15 1 Development of Cost Pools for Base Year and Test Year………..7 16 2. Variability of Equipment-Related Costs……...………………….…11 17 3. Distribution of Equipment-Related Costs…………………………..12 18 4. Distribution of Cost Reductions and Other Programs Costs…….13 19 20 B. Facility-Related Costs………………………………………………………..14 21 1. Development of Cost Pools……..…………………………………..15 22 2. Variability of Facility-Related Costs……..……………………….…19 23 3. Distribution of Facility-Related Costs………………………………19 24 25 26 III. PIGGYBACK FACTORS……………………………………………….……………21 27 28 A. Piggyback Factors by Major Function and Subclass………………….…22 29

B. Piggyback Factors for Final Adjustments………………..……….…..…...25 30 C. Mail Processing Operation Specific Piggyback Factors…………………25 31 D. Calculation of Caller Service Costs …………………………………….....30 32

33 IV. MAIL PROCESSING UNIT COSTS BY SHAPE 34 FOR TEST YEAR………………………………………………………….…………32 35 36 V. SUMMARY…………………………………………………………….…….………..37 37 38 VI. PROPOSED CHANGES RELATIVE TO PRC METHODOLOGY ……………..39 39 40 List of Attachments 41 42

43

44

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Library References To Be Sponsored With Testimony USPS-T-13 1 2 3 USPS-LR-L-22 APC Cost Reduction Distribution Factors and Volume 4

Variability 5 6 7 USPS-LR-L-52 Development of Piggyback and Related Factors 8

9 USPS-LR-L-53 Mail Processing Unit Costs by Shape 10 11 12 USPS-LR-L-54 Equipment and Facility Related Costs 13 14 15 16 17

A19


iii

AUTOBIOGRAPHICAL SKETCH 1

2

My name is Marc A. Smith. I have been employed by the Postal Service since 3

February, 1987, as an Economist in the Cost Attribution group of Finance. 4

In Docket No. R2005-1, I provided testimony, USPS-T-13, on the non-volume variability 5

of the test year escrow funding, the study of Facility Space Usage in 1999, on mail 6

processing costs by shape, the development of base year and test year plant and mail 7

processing equipment costs, piggyback factors and other inputs needed for the 8

worksharing avoided costs calculation. 9

In Docket No. R2001-1, I provided testimony, USPS-T-15, on mail processing 10

costs by shape, the development of base year and test year plant and mail processing 11

equipment costs, piggyback factors and other inputs needed for the worksharing 12

avoided costs calculation. In Docket No. R2000-1, I provided testimony, USPS-T-21, 13

covering the development of the same costs. 14

In Docket No. R97-1, I provided testimony, USPS-ST-45, on mail processing 15

costs by shape, piggyback factors and other inputs needed for the worksharing avoided 16

costs and testimony, and USPS-ST-46, on Standard A dropship discount cost 17

avoidances. 18

In Postal Rate Commission Docket No. MC95-1, I testified for the Postal Service, 19

USPS-T-10, on First-Class letter mail processing costs. In Docket No. R94-1, I worked 20

in support of the base year witness Dana W. Barker regarding facility-related and mail 21

processing equipment-related costs. In Docket No. R90-1, I provided testimony on 22

behalf of the Postal Service, USPS-T-8 and USPS-RT-3, to improve the development of 23

plant and equipment costs and the new development of piggyback factors for specific 24

mail processing operations to better determine the indirect costs for cost avoidance 25

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iv

calculations. In Docket No. R87-1, I worked in support of Paul R. Kleindorfer’s 1

testimony on the peak load cost issue. 2

Prior to coming to the Postal Service, I was a Senior Economist with the New 3

York Department of Public Service. I testified as an expert witness in numerous electric 4

and telephone rate proceedings, primarily on the marginal costs of electricity. This 5

testimony was in support of both retail and co-generation electric rate proposals. In 6

1981, I served as an economist at the Interstate Commerce Commission. There, I 7

worked on modifying railroad regulations to conform with the Staggers Rail Act of 1980. 8

I received a B.A. with honors in Economics from the George Washington 9

University in 1975. I received a M.A. in Economics from the University of Michigan in 10

1978. While at the University of Michigan, I completed all requirements toward a Ph. D 11

in Economics except the dissertation. As a graduate student, I served as a teaching 12

fellow, in introductory economics and econometrics courses. I also worked as a 13

research assistant at the Institute for Social Research in Ann Arbor, Michigan on a study 14

of electric utility load management and peak load pricing experiments. 15

16

My papers, publications and presentations are as follows: 17

18 Evaluation of the Federal Energy Administration’s Load Management and Rate Design 19 Demonstration Projects, with Daniel Hill et al., Electric Power Research Institute,1979. 20 21 Analysis of Residential Response to Time-of-Day Prices, with Daniel Hill et al., Electric 22 Power Research Institute, 1981. 23 24 “The Effect of Maintenance Requirements in Peak Load Pricing”, with Mark Reeder. 25 Presented at the Advanced Workshop in Regulation and Public Utility Economics, May, 26 1983. 27 28 “Pricing Rivalry Between Railroads in the Transportation of Coal in Western United 29 States in the 1970s.” Presented at the Advanced Workshop in Regulation and Public 30 Utility Economics, May, 1984. 31 32

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“Econometric Evaluation of Electric Utility Operation and Maintenance Expenses” in 1 Proceedings of the Fifth NARUC Biennial Regulatory Information Conferences, National 2 Regulatory Research Institute, September 3-5, 1986 pp. 1871 - 1912. 3 4 “Peak-Load Pricing in Postal Services” with Michael A. Crew and Paul R. Kleindorfer, 5 Economic Journal, September, 1990. 6 7

“The Analytical Basis for Cost Measurement at the United States Postal Service” with 8 Michael D. Bradley and Jeffrey L. Colvin. Presented at the Advanced Workshop in 9 Regulation and Public Utility Workshop in Cooperstown, NY, May 1991. 10 11

“Measuring Product Costs for Ratemaking: The United States Postal Service,” with 12 Michael D. Bradley and Jeffrey L. Colvin, edited by Michael A. Crew and Paul R. 13 Kleindorfer Regulation and the Nature of Postal and Delivery Service. Boston: Kluwer 14 Academic Publishers, 1993, pp. 133-157. 15 16 “Peak Loads and Postal Services: Some Implications of Multi-Stage Production” with 17 Michael A. Crew and Paul R. Kleindorfer, edited by Michael A. Crew and Paul R. 18 Kleindorfer Managing Change in Postal and Delivery Industries. Boston: Kluwer 19 Academic Publishers, 1997, pp. 42-64. 20 21

“Balancing Competition and Public Utility: Postal Service Here and Abroad.” 22 Presented at the Advanced Workshop in Regulation and Competition at Rutgers 23 University in Newark, NJ, January, 2004. 24 25

26

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21

III. PIGGYBACK FACTORS 1

Attachments 8 to 12 contain the various piggyback factors, and related 2

costs provided by my testimony. Piggyback factors are used to incorporate 3

indirect costs into the cost avoidance estimates and are used to compute final 4

adjustments. For example, piggyback factors are employed in cost avoidance 5

studies to augment labor cost estimates by adding the costs associated with 6

supervisors and administration, as well as facility-related costs and equipment-7

related costs, in the same way that such costs are treated in the development of 8

base year and test year costs by witnesses Milanovic and Waterbury. 9

The costs used in calculating test year piggyback factors are those 10

developed in the test year before rates costs of witness Waterbury, USPS-T-10.23 11

Generally, piggyback factors are ratios of total volume variable cost to volume 12

variable labor cost for specific functions or operations (e.g. city carriers or OCRs). 13

Total costs, contained in the numerator, include labor, supervisor, administrative, 14

service-wide benefits, facility-related and equipment-related costs. Labor costs, in 15

the denominator, are all non-supervisory, non-administrative labor cost associated 16

with the function or operation. Division of the numerator by the denominator 17

produces a ratio that indicates the relationship between total costs and non-18

supervisory, non-administrative labor costs. The ratio is greater than 1.00, since 19

the numerator includes all costs, while the denominator includes only the non-20

supervision, non-administrative labor costs. The amount by which the ratio is 21

23 The specific costs referred to are the test year before rates costs (with mix adjustment) of witness Waterbury in Exhibit USPS-10J.

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22

greater than 1.00 indicates the degree to which all costs exceed non-supervision 1

and non-administrative labor costs. 2

For example, the test year mail processing piggyback factor for First-Class 3

Mail, single-piece letters & parcels, is 1.577 as shown in Attachment 8. This ratio 4

indicates that in the average mail processing operation, for every dollar of labor 5

costs for First-Class single-piece letters & parcels, the Postal Service incurs 57.7 6

cents of supervision, administrative costs, service-wide benefits, facility-related 7

costs and equipment-related costs. 8

There are three main sets of piggyback factors for the test year: factors by 9

major function and subclass, shown in Attachment 8; factors used for final 10

adjustments, shown in Attachment 9; and mail processing cost pool factors, shown 11

in Attachment 10. Attachment 11 contains some additional piggyback factors and 12

related costs, used in developing cost avoidance estimates. Attachment 12 13

contains the results of the calculation of test year Caller Service costs used by 14

witness Kaneer, USPS-T-41, in setting rates. The detailed calculations of the 15

results shown in Attachments 8 to 12 are contained in USPS LR-L-52. The 16

methodology used is essentially the same as that employed in Docket No. R2005-17

1 in USPS LR-K-52. There are some changes, which I discuss below, for the 18

three main sets of piggyback factors and the Caller Service costs. 19

A. Piggyback Factors by Major Function and Subclass 20

Attachment 8 contains the test year piggyback factors by major function and 21

subclass. The major functions are shown at the top of the columns. They are mail 22

processing, window service, city delivery carriers, vehicle service drivers, rural 23

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