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February 26, 1999
(A) Parties and Amici.
All parties and intervenors appearing before the Commission and in this Court (there are no amici) are listed in the Brief of United Parcel Service, one of the Petitioners in these proceedings. Pursuant to Circuit Rules 26.1 and 28(a)(1)(A), counsel certifies that the Association of Priority Mail Users, Inc. is a nonprofit trade association operating for the purpose of promoting the administrative, legislative, postal ratemaking, mail classification, service and other interests of users of Priority Mail. As an incorporated trade association, it has no parent companies, subsidiaries or affiliates which must be disclosed under Circuit Rule 26.1(b). District Photo Inc. is a privately held photofinishing company located in Maryland. It has no parent companies, subsidiaries or affiliates which have issued shares or debt securities to the public. During the pendency of the proceedings before the Postal Rate Commission in Docket No. R97-1, Nashua Photo Inc. was a wholly-owned subsidiary of Nashua Corporation, a Delaware corporation whose stock is traded on the New York Stock Exchange. In April 1998, Nashua Corporation sold its photofinishing operation to Images, L.L.C., a Maryland L.L.C. affiliated with District Photo Inc. Images, L.L.C. has no parent companies, subsidiaries or affiliates which have issued shares or debt securities to the public. Mystic Color Lab is a privately held photofinishing company located in Connecticut. It has no parent companies, subsidiaries or affiliates which have issued shares or debt securities to the public in the United States, but its parent company, Fotolab, S.A., is publicly traded on the Swiss stock exchange. (B) Rulings Under Review. References to the rulings at issue appear in the Brief for Respondent United States Postal Service.
(C) Related Cases. This case has not been before this or any other Court previously, nor is counsel for respondent aware of any related case pending before this or any other Court.
February 26, 1999
Pertinent provisions of the Postal Reorganization Act, 39 U.S.C. Section 101, et seq., are attached as a statutory addendum to the Brief of Respondent United States Postal Service, filed herein on January 8, 1999.
A description of the proceedings below is included in the Statement of the Case in the Brief of Respondent United States Postal Service, filed on January 8, 1999.
Did Priority Mail rates recommended by the Postal Rate Commission and approved by the Governors of the United States Postal Service reflect an allocation of costs permissible under 39 U.S.C. Section 3622(b)? (This question should be answered affirmatively.)
The Brief of Petitioner United Parcel Service failed to address adequately the appropriate standard of review of the decision below, which requires due deference to the Postal Rate Commission's judgment, and failed to demonstrate why the Court must now substitute its judgment for that of the Commission. Further, with respect to Priority Mail, UPS has unfairly and inaccurately characterized the record upon which the Commission and the Governors based their decisions, inaccurately implied that no new developments affecting Priority Mail have been recognized by the Commission, and ignored the fact that, under the Commission's recommended rates, the aggregate share of institutional costs paid by Priority Mail has actually increased vis-a-vis First-Class Mail. The decision below should be affirmed.
UPS DOES NOT ADEQUATELY ADDRESS THE APPROPRIATE STANDARD OF REVIEW.
In challenging the decision below with respect to Priority Mail, Petitioner United Parcel Service ("UPS") does not squarely address the standard this Court should employ to review the Governors' decision (implementing the Commission's recommendations).(1) UPS's Brief fails to provide the relevant context for its contention that the Commission did not correctly balance and apply the noncost ratemaking factors set forth in the Postal Reorganization Act ("Act"). Contrary to what UPS may imply, reviewing courts have not overturned the Commission's application of the "noncost" factors of 39 U.S.C. Section 3622(b) in a ratemaking proceeding. In Association of American Publishers, Inc. v. Governors of the United States Postal Service, this Court stated that all Section 3622(b) factors "are reminders of relevant considerations, not counters to be placed on scales.... All that the court may properly do is to consider whether the agency did take into account all the relevant factors and no others." 485 F.2d 768, 774-75 (D.C. Cir. 1973). In National Ass'n of Greeting Card Pubs. v. United States Postal Service, this Court expounded on the standard. "[O]ur task is simply to ensure that the Commission has followed proper procedures, that it has considered the relevant and excluded the irrelevant, and that its ratemaking order has produced no arbitrary result." 569 F.2d 570, 590 (D.C. Cir. 1976). The Supreme Court took the same view, stating that: "the Rate Commission determines the proportion of the revenue that should be raised by each class of mail. In so doing, the Rate Commission applies the factors listed in 3622(b). Its interpretation of that statute is due deference." National Ass'n of Greeting Card Pubs. v. United States Postal Service, 462 U.S. 810, 821-23 (1983). In Mail Order Association of America v. United States Postal Service, this Court determined that: "[b]ecause the Commission adequately considered the relevant statutory factors set out in 39 U.S.C. § 3622(b), its institutional cost assignment must be upheld." 2 F.3d 408, 426 (D.C. Cir. 1993). The same analysis applies to this case. UPS does not argue that no evidence supports the Priority Mail rates, or that the Commission failed to follow proper procedures. For reasons advanced by the Postal Service in its brief and for the reasons discussed below, UPS has failed to meet its burden to show why this Court should substitute its judgment for that of the Commission and Governors.
II. PRIORITY MAIL RATES RECOMMENDED BY THE COMMISSION AND APPROVED BY THE GOVERNORS ARE CONSISTENT WITH THE ACT.
The Commission's Determination that Priority Mail's Cost Coverage Should Be Reduced was Based on Substantial Record Evidence. UPS characterizes the evidence on the record regarding Priority Mail's value of service as "inconclusive at best." (UPS Brief, p. 28.) In fact, the Commission had substantial record evidence of the service actually received by Priority Mail which fully supported its conclusions. The Commission carefully weighed all testimony and evidence regarding Priority Mail's value of service. Its expert judgment should not be second-guessed. Three parties presented testimony addressing Priority Mail's cost coverage: the Postal Service, UPS and, acting jointly, Nashua Photo Inc., District Photo Inc., Mystic Color Lab, and Seattle FilmWorks, Inc. ("NDMS"). Both Postal Service witness O'Hara (USPS-T-30, pp. 26-27, J.A. 0218-9) and UPS witness Henderson (UPS-T-3, Tr. 25/13568-70, J.A. 0413-5) spoke of Priority Mail's value of service and competitive position, with relatively little data to support their respective conclusions.(2) NDMS witness John Haldi's testimony regarding Priority Mail's cost coverage in Docket No. R97-1 (NDMS-T-2, pp. 57-73, Tr. 20/10350-66, J.A. 0317-33) clearly set forth the specific (and essentially unrebutted) reasons underlying his view that Priority Mail's value of service was overestimated. The Commission apparently found Dr. Haldi, who had testified in nine prior Commission proceedings, the most credible witness presenting evidence on the features and performance of Priority Mail.(3) Op. & Rec. Dec., Docket No. R97-1 (J.A. Vol. 2), pp. 359-63.(4) Dr. Haldi identified and documented the following three reasons, inter alia, why the cost coverage for Priority Mail should be reduced. 1. Substantial New Evidence Demonstrated Priority Mail's Poor Delivery Performance. In previous dockets, the Commission has found that Priority Mail enjoyed a high value of service, citing such factors as its asserted handling and dispatch preferences, service standards, and ease of entry into the mailstream (e.g., Op. & Rec. Dec., Docket No. R90-1, pp. V-101-2, J.A. 0862-3). In Docket No. R97-1, the Commission looked at more detailed testimony about actual performance and cited serious concerns about Priority Mail's delivery performance (Op. & Rec. Dec. (J.A. vol. 2), p. 363), irrespective of its stated high service standards (and despite its very name).(5) Also, under a new Postal Service security policy, Priority Mail has significantly less ease of entry than it had in Docket No. R94-1, because stamped Priority Mail weighing more than one pound can no longer be deposited in collection boxes.(6) The decision recommended by the Commission and approved by the Governors reflected an updated assessment of Priority Mail's value of service based on new evidence. 2. Priority Mail Is Losing Ground in a Highly Competitive Market. The market in which Priority Mail participates is fast-growing and highly competitive. Although Priority Mail's volume has grown over the past decade, its market share has declined. See NDMS-T-2, pp. 70-71, Tr. 20/10363-64, J.A. 0330-1. Market share by volume was 76 percent in 1990, falling to 72 percent in 1993. Op. & Rec. Dec., Docket No. R94-1, p. V-36, J.A. 0894. By 1996, Priority Mail's market share by volume had declined to 62.3 percent. See NDMS/USPS-T33-30, Tr. 4/1973-75, J.A. 0245-7. This loss of market share is a strong indication that Priority Mail is not unfairly competing with private firms such as UPS. When weighing the various factors in 39 U.S.C. Section 3622(b), the Commission appropriately took into account declining market share.(7) In addition to poor delivery performance (as discussed supra), both Postal Service witness Sharkey and Dr. Haldi blamed Priority Mail's declining market share on a lack of service features. Missing features that reflect negatively on the value of service include: consolidated billing and payment options; guaranteed delivery days and times; variety in available delivery/pricing schedules; delivery confirmation with track-and-trace; volume discounts; reliable pickup services; and inclusion of an insurance coverage minimum in the basic fee. Op. & Rec. Dec., Docket No. R97-1 (J.A. vol. 2), p. 361; NDMS/USPS-T33-25, Tr. 4/1968-69, J.A. 0243-4. 3. The Commission Properly Considered the Likely Effects of the New Priority Mail Processing Network. NDMS witness Haldi testified that the Postal Service's recent contract with Emery Worldwide Airlines to operate a network of Priority Mail Processing Centers ("PMPCs") would likely degrade performance for some Priority Mail. The Commission, citing Dr. Haldi's testimony, describes three ways in which the PMPC contract would likely cause Priority Mail service to decline even further during Test Year. First, Emery's 2-day standard may mean that Priority Mail processed by Emery would be less likely receive 2-day end-to-end delivery by the Postal Service. Second, since all Priority Mail either originating from or being delivered to addresses within the service area of the contract must be processed through the 10 PMPCs, Priority Mail with an overnight service standard may often be routed circuitously through the network, with delivery deteriorating to two days. Third, Priority Mail users who currently plant-load directly to Airport Mail Centers will no longer be able to do so, with detrimental effect on service. Op. & Rec. Dec., Docket No. R97-1 (J.A. vol. 2), p. 361. In addition, the Commission took note of the fact that "100 percent of the costs of implementing the PMPC network were added to test year Priority Mail costs," and Dr. Haldi's testimony "that Priority Mail will be doubly penalized during Phase I of implementation through higher costs and degraded delivery performance." Id.
B. Priority Mail's Share of Institutional Costs is Increasing. UPS states that "the Commission has not adequately supported its drastic reduction in the share of [institutional] costs it has historically assigned to Priority Mail" (UPS Brief, p. 14). In fact, rather than a "drastic reduction," the share of institutional costs assigned by the Commission to Priority Mail has actually increased vis-a-vis First-Class Mail, when viewed in the aggregate. Table 1 below shows the contribution to institutional costs(8) at Commission-proposed rates in Docket No, R97-1 and the four preceding omnibus rate cases. As shown in column 5 of Table 1, and as the Commission was doubtless aware, Priority Mail's share of institutional costs is increasing.
Of course, the above analysis is based on an aggregate view of Priority Mail's contribution to institutional costs, and reflects growth in Priority Mail volume. Nevertheless, the Commission's proper pricing of Priority Mail has made this increased contribution possible -- the same proper pricing which UPS now seeks to have this Court second-guess. Furthermore, UPS's focus on cost coverage ignores the elasticity of demand. The sharp rate increase (32 percent) recommended by UPS could actually be self-defeating by reducing volume and total contribution to institutional costs. Such a result would increase the load on monopoly classes, just the reverse of what Congress intended.
The Act Directs the Commission to Recommend Fair Postal Rate and Fee Changes, Not to Adhere Slavishly to Cost Coverage Formulae. UPS relies heavily on the Commission's statement in Docket No. R87-1 that "[t]he existing rate relationships are presumptively reasonable" (UPS Brief, p. 18). UPS would have the Commission focus on existing coverage relationships, without regard to the effect on rates or rate relationships. The Commission's concern is rather with the effect of rate increases and the fairness of the postal rates it recommends. With respect to rate relationships, the Commission designed rates carefully and deliberately so as to preserve the existing relationship between First-Class and Priority Mail rates. First-Class letter rates range up to $2.97 for a 13-ounce piece, reflecting an incremental rate of 22 cents for each additional ounce. Rates for Priority Mail begin at $3.20, just 23 cents above the highest rate for First-Class Mail. The Commission preserved this traditional rate relationship both by raising the maximum weight of First-Class Mail (Op. & Rec. Dec., Docket No. R97-1 (J.A. vol. 2), pp. 337-39) and by tempering coverage to mitigate the effects of an increase in costs attributed to Priority Mail resulting from newly attributed incremental costs. The UPS proposal for a 32-percent rate increase for Priority Mail would have eliminated the "smooth transition between the two subclasses" which the Commission emphasized (id., p. 338), thereby destroying the traditional rate relationship between First-Class Mail and Priority Mail solely to preserve myopically the prior docket's coverages. For the foregoing reasons, the decision appealed from with respect to Priority Mail should be affirmed. Respectfully submitted,
February 26, 1999 1. Respondent Postal Service's Brief (pp. 11, 24-25) addresses the statutes and several cases establishing the appropriate standard of review. By contrast, the UPS Brief brushes by the standard of review issue, to criticize the Commission's opinion. UPS actually documents that the Commission applied the appropriate factors (pp. 19-29). 2. The parties to this brief associate themselves with the analysis of Sections 3622(b)(4) and (b)(5) of the Act included as Section One of the brief of the Other Intervenors, Parcel Shippers Association, et al. 3. By comparison, the Commission perhaps found it difficult to give much weight to the testimony of UPS witness Henderson, when he admitted that he did not know whether UPS offered volume discounts to its customers, whether insurance was included in the base price, was uncertain whether UPS offered more flexible billing and payment arrangements than the Postal Service, and was unable to compare Priority Mail's delivery performance with that of UPS. See response to NDMS/UPS-T3-5, Tr. 25/13608, J.A. 0418, and Tr. 25/13636-42, J.A. 0424-30. 4. The Commission also relied on Dr. Haldi's testimony to raise the maximum weight of First-Class Mail (Op. & Rec. Dec. (J.A. vol. 2), pp. 337-39), to retain even rate increments for unzoned Priority Mail (id., p. 367), and to eliminate the presort rate category within Priority Mail (id., p. 365). 5. Priority Mail's performance has been consistently worse than First-Class Mail's performance. See comparison of Priority Mail and First-Class Mail Origin-Destination Information System ("ODIS") data for FY 1995-97, Tr. 2/412-15, J.A. 0235-8. Although Priority Mail and First-Class Mail have different 2-day service standards (UPS Brief, p. 28), Dr. Haldi's testimony presented several meaningful comparisons between the two which demonstrated the poor performance of Priority Mail. Tr. 20/10354-58, J.A. 0321-5. 6. See response of witness Sharkey to NDMS/USPS-T33-11, Tr. 4/1959, J.A. 0242. 7. The Commission found in Docket No. R94-1 that market share deterioration supported a below-system-wide-average rate increase. Op. & Rec. Dec., Docket No. R94-1, p. V-36, J.A. 0894. Nevertheless, in Docket No. R97-1, Priority Mail received a rate increase (5.6 percent) twice the systemwide average (2.8 percent). See Op. & Rec. Dec. (J.A. vol. 3), Appendix G, Schedule 1. Even this sizable increase is not viewed as sufficient by UPS. 8. Contribution to institutional cost is equal to revenues at Commission-determined rates minus attributable costs. 9. R97-1 (J.A. vol. 3), Appendix G, Schedule 1; R94-1, J.A. 0905; R90-1, J.A. 0869; R87-1, J.A. 0812; R84-1, J.A. 0797. | |||||||||||||||||||||||||||||||||||||||||||||||||||||
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