Before TAMM and LEVENTHAL, Circuit Judges, and WILLIAM B. BRYANT,* Chief Judge, United States District Court for the District of Columbia.
UNITED STATES COURT OF APPEALS, DISTRICT OF COLUMBIA CIRCUIT
OF AMERICA, INC., COUNCIL OF PUBLIC UTILITY MAILERS,
GROWERS & SHIPPERS LEAGUE OF FLORIDA, ET AL., ASSOCIATED
THIRD CLASS MAIL USERS, AMERICAN BANKERS ASSOCIATION,
AMERICAN BUSINESS PRESS, INC., MAGAZINE PUBLISHERS
ASSOCIATION, INC., DIRECT MAIL/MARKETING ASSOCIATION, INC.,
READER'S DIGEST ASSOCIATION, INC., AMERICAN COUNCIL ON
EDUCATION, UNITED PARCEL SERVICE OF AMERICA, AMERICAN
NEWSPAPER PUBLISHERS ASSOCIATION, and the NATIONAL
NEWSPAPER ASSOCIATION, DOW JONES & COMPANY, INC., NATIONAL
FOUNDATION -- MARCH OF DIMES, UNITED PARCEL SERVICE OF
AMERICA, INC., INTERVENORS; NATIONAL ASSOCIATION OF
POSTAL SERVICE, RESPONDENT; TIME INCORPORATED, APPELLANT v.
UNITED STATES POSTAL SERVICE; GROWERS AND SHIPPERS LEAGUE
OF FLORIDA, and FLORIDA GIFT FRUIT SHIPPERS ASSOCIATION, APPELLANTS v. UNITED STATES POSTAL SERVICE, APPELLEE;
AMERICAN NEWSPAPER PUBLISHERS ASSOCIATION and NATIONAL
NEWSPAPER ASSOCIATION, PETITIONERS v. UNITED STATES POSTAL
SERVICE, RESPONDENT; AMERICAN BUSINESS PRESS, INC., PETITIONER v. UNITED STATES POSTAL SERVICE, RESPONDENT;
AMERICAN BUSINESS PRESS, INC., APPELLANT v. UNITED STATES
POSTAL SERVICE; MAGAZINE PUBLISHERS ASSOCIATION, INC., APPELLANT v. UNITED STATES POSTAL SERVICE; MAGAZINE
PUBLISHERS ASSOCIATION, INC., PETITIONER v. UNITED STATES
POSTAL SERVICE, RESPONDENT; STATE OF MAINE, STATE OF INDIANA, STATE OF FLORIDA, STATE OF RHODE ISLAND, STATE OF
WASHINGTON, and STATE OF ARKANSAS, PETITIONERS v. UNITED
STATES POSTAL SERVICE, RESPONDENT, AMERICAN BUSINESS PRESS, INC., STATES OF UTAH, IOWA AND ILLINOIS, DIRECT
MAIL/MARKETING ASSOCIATION, INC., MAGAZINE PUBLISHERS
ASSOCIATION, INC., READERS DIGEST ASSOCIATION, INC., TIME, INC. & UNITED PARCEL SERVICE OF AMERICA, INC., ASSOCIATION
OF AMERICAN PUBLISHERS, INC., MAIL ORDER ASSOCIATION OF
AMERICA, PARCEL SHIPPERS ASSOCIATION, AMERICAN NEWSPAPER
PUBLISHERS ASSOCIATION & NATIONAL NEWSPAPER ASSOCIATION,
DOW JONES & CO., INC., INTERVENORS; COMMONWEALTH OF
MASSACHUSETTS, PETITIONER v. UNITED STATES POSTAL SERVICE, RESPONDENT, MAGAZINE PUBLISHERS ASSOCIATION, INC., TIME INCORPORATED, UNITED PARCEL SERVICE OF AMERICA, INC.,
AMERICAN NEWSPAPER PUBLISHERS ASSOCIATION, NATIONAL
NEWSPAPERS ASSOCIATION, STATE OF CONNECTICUT, DIRECT
MAIL/MARKETING ASSOCIATION, INC., DOW JONES & CO., INC., INTERVENORS*
Nos. 78-1448, 78-1449, 78-1453, 78-1483, 78-1484, 78-1494, 78-1509, 78-1517, 78-1518, 78-1531, 78-1532, 78-1683, 78-1684 1979.CDC.92
Petitions for Review of and Appeals from an Order of the United States Postal Service.
DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE TAMM; LEVENTHAL
In these cases the court reviews and affirms orders of the Governors of the United States Postal Service approving a recommended decision of the Postal Rate Commission on increases in postal rates and fees. There are two opinions for the court. Judge Leventhal's opinion recounts the background of the litigation and considers the various objections of the parties to the cost allocation approaches of the Postal Service. Judge Tamm's opinion deals with claims that the Governors and Commission erred 1) in rejecting a proposed first-class "citizens' rate; " 2) in including in revenue requirement an item to recover past losses incurred by the Service; and 3) in imposing "constraints" on parcel post rates found to be otherwise cost-justified.
In this case the court again has occasion to consider the response of the United States Postal Service ("USPS" or "Postal Service") to the "special, and quite demanding, ratemaking requirements" *fn1 of the Postal Reorganization Act of 1970 ("Act")2 and to this court's views concerning those requirements.
This case arises from the fourth general ratemaking proceeding under the Act. Our principal focus here, as in our cases reviewing earlier ratemaking proceedings,3 is on the methods by which the Postal Service, in setting the rates for the various classes of mail, allocates its costs among those classes. In particular, we must assess the Postal Service's "service related cost" methodology, by which it undertook in response to this court's mandate in National Association of Greeting Card Publishers v. USPS 4 to assign to certain classes of mail fixed delivery costs deemed to result from the maintenance of a six-day-a-week, as opposed to a three-day-a-week, mail delivery schedule.
Secondarily, we also consider certain additional claims: By first-class users contending that the approved rate structure unduly discriminates against first-class mail; and by second-class users challenging certain specific cost attributions and rate decisions.
As to the cost allocation issues that are the subject of this opinion, we affirm. The ratemaking process under the Act has reflected a constructive interaction between the Postal Service and this court that has, to a large extent, developed and sharpened the governing concepts. While certain gaps remain that will be highlighted, the efforts of the Postal Service in this ratemaking proceeding represent a reasonable response to these governing concepts. I. ADMINISTRATIVE PROCEEDINGS
The decision that we review was the culmination of a proceeding, known as Docket No. R77-1, carried out in accordance with the Act's complex ratemaking procedures.5 The Postal Service initiated the process on July 13, 1977, by filing with the Postal Rate Commission a request for a recommended decision on changes in postage rates and fees for postal services. As required by applicable regulations,6 the request contained detailed information on the Postal Service's current financial position, its anticipated revenue needs, and its proposed cost allocation and rate schedule. The request was accompanied by the direct testimony and workpapers of 11 supporting witnesses, and numerous exhibits.
The request, as subsequently amended, stated that without increases in rates and fees, USPS would incur a revenue deficiency in the "test year"7 of $2,410 million.8 USPS proposed increases in most rates and fees to eliminate the projected deficiency. Perhaps the most notable rate proposal was one to bifurcate the rate for first-class mail then 13 cents for the first ounce into a 16 cent regular first-class rate and a special 13 cent citizens' rate. USPS projected that its proposed rate schedule would substantially fulfill a revenue requirement of $17,642 million.9
Because of a statutory deadline mandating transmittal of a recommended decision within 10 months,10 the proceedings were conducted before the Commission en banc, without initial reference to an administrative law judge. A total of 62 intervenors and limited participants, together with an Officer of the Commission appointed to represent the interests of the general public, took part. The Commission heard 75 witnesses in 62 days of hearings. The record was closed on February 22, 1978, briefs were submitted, and oral argument was heard for two days on March 28 and 29, 1978.11
The PRC issued its opinion and recommended decision on May 12, 1978. The decision modified slightly USPS's projected revenue requirement from $17,642 million to $17,585 million.12 The Commission also modified USPS's proposed rates in several respects. Most significant was its rejection of the bifurcated first-class rate in favor of a single 15 cent rate.
In two separate decisions, one addressed to the citizens' rate and one to the other determinations of the PRC, the Board of Governors of the Postal Service approved the recommended decision on May 19, 1978. The rate increases took effect on May 29, 1978. Numerous parties then filed the petitions for review that are now before us. II. JUDICIAL CONSTRAINTS
A. Controlling Principles
Full understanding of the specific issues raised in this case requires some discussion of the broader regulatory context: the manner in which this court has reviewed the Postal Service's efforts to develop and to apply workable principles of ratemaking under the Act. This court has stressed the congressional purpose to reduce the subjectivity inherent in the political ratemaking process that prevailed before enactment of the Act, and has required the Service to fashion methods that ensure that the rates for the various mail classes and postal services reflect as closely as possible the cost of providing these services.
In considering the Service's rate requests, the Postal Rate Commission faced the formidable task of developing ratemaking principles of nationwide applicability and importance on a virtually clean slate. In 39 U.S.C. § 3622(b) (1976), Congress enumerated the factors the Commission must take into account in formulating its recommended decision. The crucial criterion has emerged out of § 3622(b)(3), which establishes
the requirement that each class of mail or type of mail service bear the direct and indirect postal costs Attributable to that class or type plus that portion of all other costs of the Postal Service reasonably Assignable to such class or type.13
(Emphasis supplied). The central concern of prior ratemakings, as well as this one, has been to give content to the references to "attributable" and "assignable" costs.
In its first two rate proceedings under the Act, the Commission adopted a two-step approach to the allocation of the costs of operation of the Postal Service among the classes of mail. The Commission first "attributed" to the various mail classes and postal services only those costs demonstrably caused by providing the particular service, thereby establishing a rate floor for each class and service. The key to determining causation was a strict requirement of a showing of cost variability that a particular cost varied with a change in volume of the service provided. Excluded from this calculus were all cost allocations that might be derived by approximation or estimation but for which causation could not be conclusively demonstrated under the variability analysis. Thus, "(t)he stricture of this approach and the unavailability of complete data led in the first two rate proceedings to recommended decisions which, by the Commission's own account, did not attribute to each class all the costs that likely were the result of providing the particular service."14
In the second step, the costs remaining after the attribution in the first step were "assigned" to the various classes under a "value of service" or demand theory approach. Specifically, the Commission developed an "inverse elasticity rule," under which final rates were derived "by assigning to the various classes of mail different markups (above attributed costs) in inverse proportion to the relative elasticity of demand for each of the classes."15 In this way, the Commission purported to " "assign costs in a manner that fully takes into account the noncost factors of the statute.' "16
In our first consideration of the ratemaking requirements of the Act, we affirmed the decision of the Governors approving the PRC's recommended decision in the first postal ratemaking proceeding, Docket No. R71-1. Association of American Publishers, Inc. v. Governors of USPS, 157 U.S.App.D.C. 397, 485 F.2d 768 (1973). Despite the affirmance, we took pains to express our concern over the ratemaking approach adopted by the PRC. Judge Bazelon's concurring opinion, which was joined by the other two members of the panel, noted that the Commission's attribution in that proceeding accounted for only 49 percent of the Postal Service's total costs. The remaining 51 percent was "reasonably assigned" by two USPS employees using what that opinion called a "vague formula" that consisted essentially of value-of-service considerations. Id., 157 U.S.App.D.C. at 406-07, 485 F.2d at 777-78. The concern was that the approach permitted unstructured and essentially unreviewable discretion in the USPS staff to allocate more than half the costs of the Service. The result was emphasis on non-cost considerations, the kind that Congress had intended to excise as much as possible from postal ratemaking. The court chose not to disturb the decision, however, in view of the presumption accorded initial efforts under a novel regulatory scheme,17 and the prospects for improved tracing of costs under PRC and USPS procedures. Id., 157 U.S.App.D.C. at 407-08, 485 F.2d at 778-79.
The Service and the Commission failed to heed the cues of American Publishers. In Docket No. R74-1, the second general postal ratemaking, the Commission again applied the two step approach, "attributing" only 52.5 percent of all costs and "assigning" the remainder under the "inverse elasticity" principle. In doing so, the Commission rejected entirely the initial decision of the Administrative Law Judge. His initial decision had attributed 70.6 percent of the total costs by means of cost accounting principles that permitted allocation of costs to particular classes even where direct cost variability could not be demonstrated. It assigned the remaining costs primarily in accordance with cost-of-service, rather than value-of-service, principles.18
On judicial review, we held that this two step approach of the PRC did not comply with the requirements of the Act. National Association of Greeting Card Publishers v. USPS , 186 U.S.App.D.C. 331, 569 F.2d 570 (1976), Vacated as to other issues, 434 U.S. 884, 98 S. Ct. 253, 54 L. Ed. 2d 169 (1977). In the language of § 3622(b)(3) and the legislative history of the Act, we discerned an obligation to apply cost-of-service ratemaking principles to the greatest extent possible. Id., 186 U.S.App.D.C. at 346-50, 569 F.2d at 585-89. Thus, of the ratemaking criteria enumerated in § 3622(b), only § 3622(b)(3) was framed as a "requirement," emphasizing the special role played by cost considerations. The requirement that each class or type of service bear the "direct and indirect costs attributable" to it necessitated an "extended attribution" that would take into account indirect costs that were not measurably variable but that could, by employing cost allocation formulae based on accounting principles, "be determined with reasonable confidence to be the consequence of providing the service." Id., 186 U.S.App.D.C. at 347, 569 F.2d at 586. Further, by referring to "all other Costs of the Postal Service reasonably assignable to such class or type," the section required that even the process of assignment was to be carried out in accordance with cost-of-service principles. Finally, we found that the proper locus for allocation on non-cost principles was to be found in the language of § 3622(b)(3), which contemplated that not all postal costs were to be attributed or assigned to a particular class or service. As to the residuum of costs, the other, "discretionary" criteria of § 3622(b) would come into play.
We found this reading of the statutory language supported by the legislative history of the Act. The central purpose of the Act was to "get politics out of the Post Office" to eliminate the discretion to set rates that had resulted in discrimination against certain classes of mail. We noted:
Prior to the Act the Service enjoyed broad discretion in the allocation of postal costs, a discretion which in the past had made the setting of postal rates susceptible to political bartering and the frequently abusive influence of lobbyist efforts. . . . t would be anomalous to construe subsection 3622(b)(3) as permitting a grudging use of cost-of-service principles which, by expanding the residuum of costs subject to discretionary allocation, simply preserves the potential for continuing the very same discriminatory treatment that the Act so clearly intended to remedy.
Id. 186 U.S.App.D.C. at 350, 569 F.2d at 589. Under this standard, we found a deficiency in the Postal Service approach, which employed cost-of-service principles only where direct cost variability could be demonstrated, leaving about one half of total costs subject to discretionary allocation. We summarized the statute's requirements as follows:
he Postal Rate Commission must first of all attribute to each mail class or postal service all postal costs which may reasonably be determined, through variability theory as well as through other reasonable inferences of causation, to be the consequence of providing the service. It must then distribute among the mail classes and services that significant portion of all remaining costs of the Postal Service that may reasonably be assigned to each on the basis of best available cost-of-service estimates. The residuum of costs is subject to discretionary allocation in accord with the noncost factors set forth in the Act.
Our principal function in the previous postal rate cases lay in ascertaining the broad approaches mandated by Congress for the PRC's exercise of its ratemaking authority. Sound principle bids us accompany any further judicial review of the specifics of these approaches and tracing methodologies with diffidence and restraint.19
While cost allocations often possess a patina of scientific precision, they remain ultimately matters more of judgment and appraisal than of mathematical certainty.20 Recognizing the crucial play of judgment in this area, reviewing courts have traditionally deferred to agency expertise and have abstained from imposing unrealistic technical requirements or standards of precision on the administrative process. As we have pertinently summarized the matter, selection of ratemaking theories is more a question of policy than of fact: "A theory of ratemaking must be reasonable, explained, and supported, but is not subject to the same substantiation principle as the substantial evidence test applicable to fact-finding."21 Similarly, a method of cost allocation may not be rejected simply because difficulties can be identified. Justice Brandeis long ago remarked that "experience teaches us that it is much easier to reject formulas presented as being misleading than to find one apparently adequate."22
In NAGCP I, we recognized our obligation to defer to the PRC's expert judgment in the selection of cost allocation methodologies. 186 U.S.App.D.C. at 353-54, 569 F.2d at 592-93. We noted that "to be acceptable, a methodology need only be reasoned, non-arbitrary and permissible under the statute." Id., 186 U.S.App.D.C. at 352, 569 F.2d at 591. Our deference is particularly great where the PRC has gone beyond even the "reasonable inferences of causation" that permit "extended attribution" into the zone of "assignment." While both attribution and assignment involve inferences of causation, we observed in NAGCP I that "the latter concept ...