UNITED PARCEL SERVICE, INC., PETITIONER v. POSTAL REGULATORY COMMISSION, RESPONDENT VALPAK FRANCHISE ASSOCIATION, INC., ET AL., INTERVENORS
No. 16-1354
United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued January 22, 2018 Decided May 22, 2018
Consolidated with 16-1419 On Petitions for Review of Orders of the Postal Regulatory Commission
Jeffrey A. Lamken argued the cause for petitioner. With him on the briefs were James A. Barta, Steig D. Olson, and Sara E. Margolis.
Bryan N. Tramont and Craig E. Gilmore were on the brief for amicus curiae J. Gregory Sidak in support of petitioner.
Michael Shih, Attorney, U.S. Department of Justice, argued the cause for respondent. With him on the brief were Michael S. Raab, Attorney, David A. Trissell, General Counsel, Postal Regulatory Commission, and Christopher J. Laver, Deputy General Counsel.
Morgan E. Rehrig and Eric P. Koetting, Attorneys, U.S. Postal Service, Peter DeChiara, David M. Levy, John F. Cooney, and James Pierce Myers were on the brief for intervenors in support of respondent.
Before: TATEL, SRINIVASAN, and PILLARD, Circuit Judges.
Opinion for the Court filed by Circuit Judge
TATEL, Circuit Judge: The U.S. Postal Service holds congressionally authorized monopoly power over the market for some of its products, like first-class mail delivery, but for other products, like parcel post, it competes with private companies. To promote fair competition, Congress tasked the Postal Regulatory
I.
Congress created what is now the Postal Regulatory Commission (the “Commission“) in 1970 to oversee the U.S. Postal Service‘s efforts to set “reasonable and equitable rates of postage and fees for postal services.” Postal Reorganization Act, Pub. L. No. 91-375, § 3621, 84 Stat. 719, 760 (1970) (codified as amended at
Under the Accountability Act, all Postal Service products are either “market-dominant” or “competitive.” See
Different concerns attend competitive products—products over which “the Postal Service faces meaningful market competition.” U.S. Postal Service, 785 F.3d at 744. For such products, Congress wished to “ensure that the Postal Service competes fairly,” S. Rep. No. 108-318, at 15 (2004) (“Senate Report“)—that is, without using revenues from market-dominant products subject to its monopoly power to defray costs competitive products would otherwise have to be priced to cover. The Accountability Act therefore requires the Commission to promulgate regulations that “prohibit the subsidization of competitive products by market-dominant products,”
In effect, the Accountability Act subjects each competitive product to a “price floor,” U.S. Postal Service v. Postal Regulatory Comm‘n, 842 F.3d 1271, 1272 (D.C. Cir. 2016) (per curiam), which must be set high enough to cover both that product‘s “costs attributable,”
This case concerns the Commission‘s rules for apportioning postal costs between “attributable” and “institutional” costs.
Broadly speaking, the Postal Service, in implementing Commission regulations, attributes variable costs on an activity-by-activity basis. After drawing up a list of the discrete production activities, such as highway transportation, that collectively account for its total variable costs, the Postal Service calculates what share of each activity‘s costs can be attributed to each product. See Order App‘x A at 13–14 (laying out this process); Postal Regulatory Comm‘n, FY16 Public Cost Segments and Components Report (2016), https://go.usa.gov/x54x2 (listing production activities). To perform this calculation, it first identifies an activity‘s “cost driver,” defined as the unit of measurement that best captures the activity‘s “essen[ce].” Order App‘x A at 14. For example, highway transportation is measured in cubic-foot-miles, such that one “unit” of cost driver in this context represents one cubic foot of mail being transported one mile. See id. Then, the Postal Service determines the share of each activity‘s cost-driver units that each product is responsible for generating, typically by conducting worksite observations in order to produce a “distribution key” that, like a pie chart, illustrates an activity‘s product-by-product breakdown. See id. at 9; see also Order at 9 n.14; Office of Inspector General, U.S. Postal Service, A Primer on Postal Costing Issues 17–18 (Mar. 20, 2012), https://go.usa.gov/x54Dd (explaining the role of distribution keys).
The present dispute stems from the uncertainty inherent in translating this product-by-product breakdown of activity quantity into a similar breakdown of activity costs, given the cost savings that accrue as total production volume increases. If every cost-driver unit were equally costly, the distribution keys could be used to apportion all an activity‘s costs to specific products: a product responsible for 5% of the cubic-foot-miles accrued in highway transportation, for example, could be linked to 5% of that activity‘s costs. But not all cost-driver units are created equal. Under the principle of diminishing marginal costs, the cost of adding each new unit—
Historically, the Commission dealt with this uncertainty by directing the Postal Service to attribute to specific products only that portion of an activity‘s costs that would result if every cost-driver unit cost only as much as the unit with the lowest marginal cost. Put into agency lingo, the Commission had the Postal Service attribute only an activity‘s “volume-variable cost[s],” defined as the marginal cost of the “last,” i.e., cheapest, cost-driver unit, multiplied by the total number of units accrued. Order at 36 n.56; see also id. at 9. A Commission graph, reproduced below as Figure 1, illustrates volume-variable costs. The downward-sloping curve shows a hypothetical activity‘s diminishing marginal cost (marked on the vertical axis) as production quantity (marked on the horizontal axis, and measured in cost-driver units) increases. The shaded rectangle represents this activity‘s volume-variable costs—the $1 marginal cost of the twentieth cost-driver unit, applied to all twenty units.
Figure 1
Order App‘x A at 15 fig. A-7.
Given that every cost-driver unit contributes an identical dollar amount to an activity‘s volume-variable costs, the Postal Service, in attributing only these costs, could securely rely on its distribution keys and assign each product a share of volume-variable costs equivalent to that product‘s contribution to cost-driver quantity. For example, consider a truck carrying six cubic feet of mail—two cubic feet each of letters, postcards, and parcels—for one
As this example shows, the Commission‘s historic approach left some variable costs unattributed to any one product. Although the volume-variable costs in this example amount to only $60, total highway transportation costs are $210 ($60 plus $50 plus $40 plus $30 plus $20 plus $10). The remaining $150 left unattributed represents “variable costs that are not volume-variable costs.” Order at 35. The Commission calls these “inframarginal costs.” Id. These costs can be visualized as the white space in Figure 1 that lies between the downward-sloping marginal cost curve and the shaded rectangle that represents volume-variable costs. Historically, the Commission classified all inframarginal costs as institutional costs, only a limited share of which competitive products are obliged to cover. See id. at 10;
Dissatisfied with this approach, United Parcel Service, Inc. (UPS), which runs a parcel delivery service that competes with the Postal Service‘s, petitioned the Commission in 2015 “to initiate rulemaking proceedings to change how the United States Postal Service accounts for the costs of competitive products.” Petition of United Parcel Service, Inc. for the Initiation of Proceedings to Make Changes to Postal Service Costing Methodologies, No. RM2016-2, at 1 (Postal Regulatory Comm‘n Oct. 8, 2015); see also
UPS proposed a two-step process for performing this attribution. The Postal Service would first calculate each production activity‘s inframarginal costs, and then apportion those inframarginal costs among products according to the distribution keys that show what proportion of cost-driver units each product generates. See id. at 19–21. By way of example, recall our mail truck that carries two cubic feet each of letters, postcards, and parcels, and that incurs $60 in volume-variable costs and $150 in inframarginal costs. Because the three products account for equal quantities of cost driver, UPS‘s proposal would attribute inframarginal costs, like volume-variable costs, equally among them. In this scenario, the highway transportation costs attributable to each product would be $70—one-third of the $60 in volume-variable costs ($20) plus one-third of the $150 in inframarginal costs ($50)—with no remaining
The Commission rejected UPS‘s proposal in a September 2016 order, finding that it relied on “unverifiable assumptions” for both “the calculation and allocation of inframarginal costs.” Order at 55–56. As to calculation, the Commission explained that a central assumption underlying UPS‘s model for estimating a production activity‘s total inframarginal costs “lack[ed] an empirical basis.” Id. at 39. As to allocation, the Commission faulted the proposal‘s use of distribution keys to determine any given product‘s share of an activity‘s inframarginal costs, believing that such an approach relied on the unsupported assumption “that the proportion of inframarginal costs incurred by that product is identical to the proportion of the cost driver [generated by] that product.” Id. at 51. Accordingly, the Commission concluded, UPS‘s proposal was inconsistent with the Accountability Act‘s directive to attribute only those costs that can be linked to a particular product “through reliably identified causal relationships.”
Having rejected UPS‘s request that all inframarginal costs be attributed to individual products, the Commission then considered whether some such costs could nonetheless be reliably attributed. In particular, the Commission observed that in the course of fulfilling its separate statutory obligation to “prohibit the subsidization of competitive products by market-dominant products,”
To illustrate, consider one last time the truck that carries six cubic feet of assorted mail and incurs $60 and $150 of, respectively, volume-variable and inframarginal costs. What happens if the driver removes the two cubic feet of parcels before the truck sets off? In that case, the truck would carry only four cubic feet of mail, for a total cost of $180—$60 plus $50 plus $40 plus $30. The incremental cost of parcels is $30, or the difference between the $210 in total costs incurred when parcels are included and the $180 incurred when they are not. This $30 includes parcels’ one-third share of highway transportation‘s volume-variable costs, or $20, as well as the $10 in inframarginal costs that would not have been incurred but for the fifth and sixth cubic feet of mail.
Here, the Commission concluded that because “the portion of inframarginal costs” included within a product‘s incremental cost has “a causal relationship” with that product, Order at 55, the Accountability Act “require[s] the Postal Service
Figure 2
Petitioner‘s Br. 37 (adapting Order App‘x A at 18 fig. A-9).
The parties have produced a helpful graphic depiction of the Commission‘s new incremental-cost approach, reproduced above as Figure 2. The shaded area represents the incremental cost of a product that is responsible for a share of a hypothetical activity‘s cost-driver units. This area includes not only a corresponding share of the activity‘s volume-variable costs—the only costs that would have been attributed to the product under the Commission‘s prior approach—but also the inframarginal costs associated with the “final,” lowest-priced share of cost-driver units, which are included among the product‘s costs attributable under the new approach.
The approach the Commission adopted under the 2016 orders is responsive to UPS‘s complaint that the historic approach, by attributing no inframarginal costs, left unattributed some costs that could be reliably linked to specific products. It differs from UPS‘s proposed approach, however, in that it attributes to a product responsible for x% of a given activity‘s cost-driver units only those inframarginal costs associated with the lowest-priced x% of units, rather than, as UPS would prefer, x% of that activity‘s total inframarginal costs.
Unhappy with its partial victory, UPS petitioned this court for review of the 2016 orders, arguing that the Commission‘s decision not to require the Postal Service to attribute all inframarginal costs to specific products was both inconsistent with the Accountability Act and arbitrary and capricious. See
In Part II, we consider whether the challenged orders are, as UPS claims, contrary to the Accountability Act. In Part III, we consider UPS‘s argument that the orders reflect arbitrary and capricious decision-making. We are grateful to counsel for both sides for their excellent briefs and fine oral argument, which have helped us considerably.
II.
UPS presses two statutory arguments as to why, in its view, the challenged orders conflict with the Accountability Act. We reject both.
A.
UPS first argues that the Commission‘s classification of all inframarginal costs not included in a product‘s incremental cost as “institutional costs,”
Even though the Accountability Act nowhere defines “institutional costs,” it does define the complementary category of “costs attributable.”
Instead, UPS hinges its argument on three pieces of evidence that, it says, establish unambiguously that “institutional costs” exclude variable costs. First, it cites a dictionary that defines “institutional” to mean “of, relating to, involving, or constituting an institution.” Petitioner‘s Br. 34-35 (quoting Webster‘s Third New International Dictionary 1171 (2002)). This definition, however, is fully consistent with classifying some variable costs as institutional. Variable postal costs, such as the hourly wages of employees who deliver the mail, “relate to” the Postal Service no less than do fixed postal costs, such as the Postmaster General‘s annual salary. UPS next cites its own amicus‘s statement in a law review article that “[i]nstitutional costs are fixed overhead and capital costs that are not volume-sensitive.” Id. at 36 (emphasis omitted) (quoting J. Gregory Sidak & Daniel F. Spulber, Monopoly and the Mandate of Canada Post, 14 Yale J. on Reg. 1, 56 (1997)). But this lone characterization—which itself cites no authority—falls far short of demonstrating that UPS‘s definition of “institutional costs” is so universally accepted that Congress must have
With no indication that the statute requires UPS‘s reading, we are left to ask whether the Commission‘s own interpretation is “permissible,” deferring to the agency under Chevron, 467 U.S. 837 (1984), if it is. U.S. Postal Service, 785 F.3d at 750 (quoting Chevron, 467 U.S. at 843). As we have explained, the Commission understands the undefined category of “institutional costs” to consist of all “residual” Postal Service costs, fixed or variable, that fall outside the statutory definition of “attributable” costs. Order at 9-10. In addition to its consistency with statutory structure, this reading gains support from the established meaning “institutional costs” held in the postal ratemaking context long prior to the Act‘s 2006 enactment. As early as 1975, the Commission observed that “the Postal Service considers certain costs . . . to be attributable” and that “[a]ll other costs are classified as institutional.” Opinion and Recommended Decision, No. R74-1, at 99 (Postal Rate Comm‘n Aug. 28, 1975). And since then, the Commission has continued to conceive of “the institutional cost pool” as “[t]he remaining portion” of total costs after attributable costs are subtracted. See United Parcel Service, Inc. v. U.S. Postal Service, 184 F.3d 827, 842 (D.C. Cir. 1999) (per curiam) (alteration in original) (internal quotation marks omitted) (quoting Opinion and Recommended Decision, No. R97-1, at 220 (Postal Rate Comm‘n May 11, 1998)).
The Commission‘s interpretation of the Accountability Act in line with this longstanding usage is perfectly reasonable under Chevron. We typically presume that Congress is “aware of established practices and authoritative interpretations of the coordinate branches,” United States v. Wilson, 290 F.3d 347, 357 (D.C. Cir. 2002), and here the Act‘s legislative history confirms that the enacting Congress knew the Commission took “institutional costs” to mean those costs that “cannot be attributed to any specific product,” Senate Report at 9. One could reasonably infer that, in employing a known term of art in the statute, “Congress intended it to have its established meaning.” McDermott International, Inc. v. Wilander, 498 U.S. 337, 342 (1991).
UPS challenges the idea that the meaning the Commission now assigns to “institutional costs” has such a consistent pedigree in the postal ratemaking context that the agency could reasonably construe the Accountability Act to accommodate it. UPS‘s evidence of inconsistency is underwhelming. It first points to a Postal Service publication stating that institutional costs “can be considered common costs or overhead costs needed for overall operations,” but that same publication, consistent with longstanding practice, defines institutional costs as those “[p]ostal costs that cannot be directly or indirectly assigned to any mail class or product,” and then expressly contrasts such costs with “attributable cost[s].” U.S. Postal Service, Glossary of Postal Terms 104 (2013), https://about.usps.com/publications/pub32.pdf. Next, UPS pulls a sentence from a 2012 Commission order saying that “institutional costs do not vary with volume.” Order Reviewing Competitive Products’ Appropriate Share Contribution to Institutional Costs, No. RM2012-3, at 23 (Postal Regulatory Comm‘n Aug. 23, 2012) (“2012 Order“). But this remark, which appeared
Finally, UPS emphasizes that the Commission‘s approach leaves nearly half the Postal Service‘s costs in the “institutional costs” category. True enough, but UPS has failed to show why reading “institutional costs” to permit this outcome is unreasonable under the statute. Indeed, in passing the Accountability Act, Congress found “no reason for changing” existing attribution standards, Senate Report at 10, under which, it recognized, institutional costs made up “40 percent of the Postal Service‘s costs,” id. at 9; see also Newsweek, Inc. v. U.S. Postal Service, 663 F.2d 1186, 1200 (2d Cir. 1981) (“There is nothing in the legislative history [of the Accountability Act‘s predecessor statute] to suggest that attribution of fifty percent of postal costs is inadequate.“).
Given our conclusion that the Commission‘s reading of “institutional costs” is reasonable and so merits our deference, we need not consider the Commission‘s argument that, under Chevron, its reading is not only permissible, but also unambiguously correct.
B.
UPS next argues that the Commission‘s orders give no effect to the word “indirect” in the Accountability Act‘s requirement that a product‘s “costs attributable” include the “direct and indirect postal costs attributable to such product through reliably identified causal relationships.”
Even if UPS has correctly interpreted “indirect postal costs” to mean joint costs, the Commission has reasonably concluded that its approach in fact attributes some such costs. See U.S. Postal Service, 785 F.3d at 750 (where statute‘s meaning is not at issue, court asks whether “the Commission‘s exercise of its authority [was] ‘reasonable and reasonably explained‘” (quoting Manufacturers Railway Co. v. Surface Transportation Board, 676 F.3d 1094, 1096 (D.C. Cir. 2012))). Observing that both volume-variable and inframarginal costs “contain common costs,” Order at 50, defined as “costs that are shared by multiple products but do not directly vary with any of those individual products,” id. at 7, the Commission explained that its new cost-attribution methodology “do[es] not exclude all common costs, but only those without a reliably identified causal relationship to [a specific] product,” id. at 52.
For example, the cost of fueling a truck that delivers letters and parcels may, we think, be viewed as a common cost. It is “shared by” the two products that contribute to it, but it “do[es] not directly vary”
In any event, the Commission does not agree that “indirect postal costs,”
The Commission‘s reading of “indirect postal costs” to include this sort of single-product piggyback cost is reasonable. Past testimony before the Commission has, after all, repeatedly confirmed that “indirect costs,” in the specific context of postal accounting, has long included costs that vary only indirectly with product volume due to the presence of an intermediate factor. See, e.g., Alexandrovich Testimony at 3 (“Direct and indirect variable costs are terms distinguishing whether or not there is at least one intervening link between cost and volume.“); Alenier Testimony at 6 (“The terms direct and indirect [cost] indicate whether or not at least one intermediate element links cost to volume.” (footnote omitted)).
UPS argues that the statute forecloses the Commission‘s reading, but here too its evidence is insufficient. It first notes the Supreme Court‘s observation that a study upon which Congress relied in enacting a predecessor statute defined indirect costs as “[t]hose elements of cost which cannot unequivocally be associated with a particular output or product.” National Ass‘n of Greeting Card Publishers v. U.S Postal Service (“NAGCP“), 462 U.S. 810, 827 n.21 (1983) (alteration in original) (internal quotation marks omitted). This definition, however, is not necessarily inconsistent with the Commission‘s view that indirect costs include those that are associated only indirectly with product volume, or “output,” even if they can be associated with a single “product.” Id. Next, UPS cites a federal
Put simply, UPS has failed to show that the Accountability Act unambiguously compels a reading of “indirect postal costs” that includes only those costs that are shared across products. Under Chevron, we therefore defer to the Commission‘s reasonable view that the term can include those single-product costs that vary indirectly with volume.
C.
UPS argues that even if the Commission‘s interpretations of “institutional costs” or “indirect postal costs” are permissible, Chevron deference is inappropriate because the Commission made “no ‘reasonable attempt to grapple’ with or even refer back to the statutory text.” Petitioner‘s Br. 45 (quoting BP Energy Co. v. FERC, 828 F.3d 959, 965 (D.C. Cir. 2016)). In our view, the Commission had no need to say anything more. “Institutional costs” and “indirect postal costs” have established meanings in the postal ratemaking context, see supra at 14–21, and the orders are faithful to these meanings, see Order at 10 (describing “institutional costs” as “residual costs“); id. at 103 (explaining that “the piggyback method” applies to “cost components that contain support activities“). To be sure, “no amount of historical consistency can transmute an unreasoned statutory interpretation into a reasoned one.” Southeast Alabama Medical Center v. Sebelius, 572 F.3d 912, 920 (D.C. Cir. 2009). Here, however, the longstanding definitions upon which the Commission relied create no anomalies and flow sensibly from text, history, and statutory structure. Cf. id. at 919–20 (requiring agency to explain its historical view that a hospital‘s “wage-related costs” include postage costs where, even in litigation, the agency offered but “one somewhat opaque rationale” that was itself apparently inconsistent with the agency‘s treatment of certain other costs). The Commission therefore had no duty to expressly justify its decision to continue embracing them. See Hall v. McLaughlin, 864 F.2d 868, 872 (D.C. Cir. 1989) (“Where the reviewing court can ascertain that the agency has not in fact diverged from past decisions, the need for a comprehensive and explicit statement of its current rationale is less pressing.“).
UPS believes that this rationale cannot save the orders’ treatment of either “institutional costs” or “indirect postal costs.” With respect to “institutional costs,” UPS argues that the interpretation reflected in the orders represents an unexplained deviation from the Commission‘s prior reading of the term. See Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117, 2125 (2016) (agency must provide “a reasoned explanation” for a change in policy position). By including some variable costs among institutional costs, UPS argues, the Commission has departed from its previous statements that “institutional costs do not vary with volume,” 2012 Order at 23, and that “variability with volume should be sufficient to establish causality” and thus attribution, Appendices to Opinion and Recommended Decision, App‘x B, No. R80-1, at 26 (Postal
With respect to “indirect postal costs,” UPS argues that the orders failed to make clear what meaning the Commission assigned to the term because, as the Commission acknowledges, they “‘declined’ to pass on whether ‘indirect costs’ include joint costs.” Reply Br. 13 (quoting Respondent‘s Br. 53). But the Commission had no need to opine on whether “indirect postal costs” include joint costs in addition to single-product costs that vary indirectly with product volume: recognizing that the term includes at least the latter, as the Commission has consistently done, was sufficient to defeat UPS‘s argument that no indirect costs would be attributed under the Commission‘s newly adopted cost-attribution scheme.
III.
This brings us to UPS‘s argument that the challenged orders are “arbitrary, capricious, [or] an abuse of discretion.”
A.
UPS first argues that the Commission failed to “reasonably explain[]” the adoption of its incremental-cost methodology. Id. (quoting Manufacturers Railway Co., 676 F.3d at 1096). Given that we have already considered and rejected UPS‘s claim that the Commission inadequately explained its statutory interpretation, see supra at 22–24, UPS is left with its argument that the Commission failed to explain how its chosen approach “serve[d] the [Accountability Act‘s] objectives,” Northpoint Technology, Ltd. v. FCC, 412 F.3d 145, 151 (D.C. Cir. 2005). We find the Commission‘s explanation perfectly adequate.
Though recognizing that the Accountability Act was “intended to ensure that the Postal Service competes fairly in the provision of competitive products,” Order at 121 (quoting Senate Report at 19), the Commission rejected UPS‘s complaint that attributing
The Commission properly recognized that its role is to carry out the particulars of the scheme Congress created, not to engineer specific market outcomes. The Supreme Court, while acknowledging that “Congress’ concern about cross-subsidies, of course, was one motive for including [a] rate floor” in a predecessor statute, observed that Congress also took care to provide that cost attribution be methodologically sound. NAGCP, 462 U.S. at 829 n.24. Indeed, before the Commission, UPS itself recognized that “[t]he relevant inquiry” in selecting a cost attribution approach “is whether the Postal Service‘s . . . practices comply with [the Accountability Act],” Reply Comments of United Parcel Service, Inc. Regarding UPS Proposals One and Two, No. RM2016-2, at 33 (Postal Regulatory Comm‘n Mar. 25, 2016), not the approach‘s effects on “market conditions,” id. at 36. This is correct. “Congress,” as UPS explained, “did not direct the Commission to consider prevailing market conditions in connection with” cost attribution. Id. at 37. In any event, despite its fear that leaving some inframarginal costs unattributed “might allow the Postal Service to monopolize otherwise competitive markets,” Petitioner‘s Br. 49, UPS offers no reason to doubt that the Accountability Act‘s prohibition on cross-subsidization,
B.
Next, UPS argues that the Commission‘s adoption of an incremental-cost approach to attribution was itself arbitrary and capricious, insisting that this approach suffers from the very same features that led the Commission to reject UPS‘s proposal that all inframarginal costs be attributed. See U.S. Postal Service, 785 F.3d at 753 (“The agency fails to reasonably explain its decision if it gives ‘differential treatment of seemingly like cases.‘” (quoting LePage‘s 2000, Inc. v. Postal Regulatory Comm‘n, 642 F.3d 225, 232 (D.C. Cir. 2011))). In support, it offers three arguments, none persuasive.
It begins by challenging the Commission‘s rejection of the assumption that any given product is just as likely to be responsible for “early,” more expensive cost-driver units as it is for “later,” less expensive units. This assumption, which the Commission deemed “empirically unverifiable,” Order at 46, underlay UPS‘s proposal to distribute inframarginal costs among products according to each product‘s contribution to cost-driver quantity. The Commission‘s rejection of this assumption was arbitrary, UPS argues, because the Commission‘s own incremental-cost approach was “based on [the] even more unverifiable assumption” that all products use only the latest, lowest-priced cost-driver units and
UPS misunderstands the Commission‘s statutory task, namely to attribute only those costs that can be linked to a product “through reliably identified causal relationships.”
UPS‘s second argument—that the Commission acted arbitrarily in rejecting distribution keys as a means of apportioning inframarginal costs—fails for the same reason. As the Commission saw it, attributing inframarginal costs on the basis of distribution keys, which measure only the share of cost-driver units for which a given product is responsible, would rely on the “unverifiable assumption that the proportion of inframarginal costs incurred by [a] product is identical to the proportion” of cost-driver units generated by that product. Order at 51. Here, too, the Commission reasonably declined to make this assumption absent supporting evidence. Nor, contrary to UPS‘s argument, did the Commission act inconsistently by using distribution keys as part of its incremental-cost approach. After all, the Commission uses them only for their intended purpose—to determine how many of any given activity‘s cost-driver units derive from any one product. From there, the Commission calculates “the marginal cost of providing [each of these] specific unit[s]” without further recourse to the distribution keys. Id. at 50.
The third and final argument takes aim at the Commission‘s rejection of UPS‘s proposed method for estimating an activity‘s total inframarginal costs in the first place, prior to any question of attribution. To arrive at an estimate of an activity‘s total costs, the Postal Service would have to estimate the cost of each cost-driver unit, even the earliest, most costly units associated with low levels of volume. As the Commission explained, though, “[a] real-world multi-product firm does not have the information necessary” to estimate costs at such volume levels because “it has not experienced” them. Id. at 8. UPS proposed to get around this problem by employing an assumption of constant elasticity—i.e., an assumption that each added unit of product quantity corresponds to an equal decrease in marginal cost—that would allow the Postal Service to extrapolate backwards from present, observed volumes. Id. at 38; see also Order App‘x A at 4-5 (explaining constant elasticity). The Commission rejected this approach as untenable because “[a]pplying the constant elasticity assumption to levels of volume far beyond the range of actual experience produces results that are inadequately supported and unreliable.” Order at 39.
Here, too, UPS responds that the Commission itself relies on a constant-elasticity assumption when extrapolating backward from present values to estimate a product‘s incremental cost. The Commission, however, explained that the incremental-cost test “avoids the issues facing UPS‘s proposed method by restricting itself to limited amounts of volume” and by “estimat[ing] inframarginal costs in a very small range of [an activity‘s] cost curve where the constant elasticity assumption has been empirically verified.” Id. at 42.
Alternatively, UPS suggests that the Commission could calculate inframarginal costs by simply subtracting one known quantity—an activity‘s volume-variable costs—from another—that activity‘s total costs. The Commission, however, reasonably concluded that this method of calculation would “result[] in an overstatement of the inframarginal costs of that” activity because it disregards the fact that fixed costs—neither volume-variable nor inframarginal—comprise part of an activity‘s total costs. Order at 39. UPS responds that “the Postal Service can subtract those fixed costs from the [activity‘s] total costs.” Petitioner‘s Br. 62. But the Postal Service informed the Commission that it does not currently “determine which of its costs are fixed,” and that doing so would require it to “answer[] difficult counterfactual questions” about “which costs would remain if the Postal Service handled no volume.” Postal Service Responses at 11 & n.9. UPS has proposed no reliable means of calculating fixed costs, merely claiming without support that additional data from the Postal Service would, if made available, suggest a way forward.
IV.
The Accountability Act requires a competitive product to cover only those costs that can be attributed to the product “through reliably identified causal relationships.”
So ordered.