September 10, 2014

Oral Arguments are Held in Alliance of Nonprofit Mailers, et al. vs. Postal Regulatory Commission (PRC)

A very well prepared three-judge panel heard arguments yesterday in the U.S. Appeals Court for the D.C. Circuit about whether the PRC order on the exigent 4.3% rate surcharge should stand. Guessing at possible outcomes based on oral arguments is highly speculative, but here goes.

The judges probed the very difficult task the PRC had faced to quantify how much excess revenue the Postal Service should receive from its customers to cover losses solely due to the recession of 2007-2009. The job had been made more difficult because the Postal Service had “gone for it all” in the exigent rate case; it wanted to recover most of the revenue it lost during the recession and it wanted the price surcharge to be in place forever. The PRC correctly had ruled that the surcharge should not last forever because the Postal Service must at some point adjust to the smaller size of its market. But because the USPS (which bears the burden of proof) had taken an all or nothing strategy, the PRC was left to either reject the request outright or to devise a methodology to determine the appropriate amount of revenue. It was the PRC methodology that was the focus of yesterday’s arguments. And the judges’ doubts about the logic of the PRC rules lead to speculation that they will remand the case back to the PRC for further work.

The Postal Service outside attorney, Paul Clement, argued that the PRC decision was arbitrary and capricious, and the Department of Justice attorney for the PRC, Daniel Tenny, said they did the best they could with the information that they had. The Alliance et al. attorney David Levy largely defended the PRC methodology but also questioned some of the revenue losses that were included in the relief. Everyone including the judges seemed to agree that the PRC was right to accept the recession as an extraordinary event under the statute as well as the need for a special rate increase to cover the recession-caused losses.

The Postal Service charge of arbitrary and capricious was driven by two methods the PRC used—the “count once” rule and the “new normal” end point. The “count once” rule basically means that annual revenue losses due to the recession were counted only for the one year in which they first occurred. The PRC explained the necessity of the “count once” rule because continuing to count revenue lost from the recession year after year would include revenue that was going to leave the USPS anyway, but accelerated its departure because of the recession. For example, if someone lost their job during the recession and stopped receiving and paying cable bills, the mail loss arguably would have been caused by the recession. But if that person might have stopped receiving the bill by mail and paying by mail anyway because of the long-term trend of electronic diversion, counting the revenue loss for years to come would overstate the impact of the recession. The PRC lawyer agreed there might be a more accurate counting method, but said that they do not have adequate data or modeling to say what that is.

In addition to a rule on how to count the revenue, the PRC needed a basis for the end point of the extraordinary revenue. For this, they chose the “new normal” as the point when the Postal Service should be able to adjust to its new market size and the legal necessity for exigent revenue would end. The judges seemed to understand and accept the need for an end point, and were quite aware that the USPS had argued for no end to the surcharges. The judges asked many questions about how the “new normal” interacted with and perhaps duplicated the purpose of the “count once” rule. The USPS attorney argued that the new normal was set too early at the point when the recession “bottomed out” rather than when the economy had stabilized and started growing again.

The Postal Service lawyer was questioned about whether the agency had an econometric variable for electronic diversion in their model. He said they previously had used broadband penetration but no longer could because penetration is too close to 100%. Instead of a variable, they took a trend rate of 4.3% diversion per year at 2007, and subtracted that percentage from every year’s claimed recession revenue loss. He said that this amounted to taking away 39 billion pieces lost from the five year total of 190 billion they claimed. In other words, diversion was not a big issue in the Postal Service’s modeling. Alliance attorney David Levy and some of the judges noted an explosion of new electronic applications that replace hard copy with cheaper and easier alternatives.

David Levy rebutted USPS assertions by reminding the judges that the Postal Service has the legal requirement to prove what revenue losses were due to the recession. He pointed out that the annual percentage volume losses claimed by USPS were several times higher than national Gross Domestic Product (GDP) losses. Levy also explained defects in the USPS statistical models and the fact that correlation does not equal causation. When a judge asked whether he agreed that the PRC had a tough job with so many things going on at the same time and deserved deference, Levy agreed but said deference is not unlimited. After very thoroughly covering revenue loss components that the PRC should not have accepted from the USPS, Levy concluded by defending the general point that the PRC was left with little choice but to implement some “rough justice” rather than completely accepting or denying the full unlimited exigent rate increase the Postal Service sought.

The PRC was represented by Department of Justice attorney Daniel Tenny who did a good job explaining the difficult position the PRC was placed in by the USPS request to recover almost all the revenue loss and have the rates last forever. He described how the PRC dealt with the “due to” and “necessary” requirements in the rules. Tenny stressed that the requirement that exigent rates be “necessary” is a “forward-looking” standard that takes into account many factors regarding the USPS capability to recover from lost revenue on both the cost and revenue sides. Tenny explained in detail the risks from deviating from the “count once” rule and the fact that there is no empirical way to say that counting should continue beyond a year. One judge said “count once” was a fairly brutal tool to use and another said it didn’t make horse sense. There was back and forth about the PRC’s role not being to tell the Postal Service how to manage its business. Tenny tried to explain that because USPS sought to count almost all revenue loss as recession related and to recover it forever, the PRC had to devise an alternative methodology.

We can speculate that the judges are likely to reflect in their decision that the PRC was not clear in explaining its methodologies for “count once” and “new normal” which limited the amount of extra revenue customers will have to pay to offset recession-related losses. Then the judges likely will decide between two choices: to defer to the expert regulating agency and let the PRC order stand, or to remand the case back to the PRC and tell them to do a better job determining and implementing methods to quantify the revenue that the USPS lost as a result of the 2007-2009 recession. The big risk to mailers in the remand outcome would be a possible determination by the PRC that the exigent rates would need to raise more than the $3.2 billion in their original order. We can speculate that there seems to be little chance, however, that the court will determine that the exigent rates should last forever. Its ruling will come in one to three months.

(c) 2014 Alliance of Nonprofit Mailers