United Parcel Serv. v. Postal Regulatory Comm'n

112 F.4th 1122

UNITED PARCEL SERVICE, INC., Petitioner v. POSTAL REGULATORY COMMISSION, Respondent Amazon.com Services, LLC, et al., Intervenors.

No. 22-1029

United States Court of Appeals, District of Columbia Circuit

Argued December 5, 2023

Decided August 23, 2024

On Petition for Review of Orders of the Postal Regulatory Commission

Kathleen M. Sullivan argued the cause for petitioner. On the briefs were David M. Cooper and Steig D. Olson.

Michael Shih, Attorney, U.S. Department of Justice, argued the cause for respondent. With him on the brief were Brian M. Boynton, Principal Deputy Assistant Attorney General, Michael S. Raab and Kevin J. Kennedy, Attorneys, David A. Trissell, General Counsel, Postal Regulatory Commission, Lauren A. D'Agostino, Deputy General Counsel, and Reese T. Boone, Attorney.

Eric P. Koetting, Morgan E. Rehrig, and Michael D. Weaver, Attorneys, U.S. Postal Service, Michael F. Scanlon and John Longstreth were on the brief for respondent-intervenors.

Before: Srinivasan, Chief Judge, Garcia, Circuit Judge, and Rogers, Senior Circuit Judge.

Garcia, Circuit Judge:

The Postal Regulatory Commission is an independent agency that oversees the United States Postal Service. The Postal Service sells two kinds of products: "market dominant" products such as First-Class mail, where the Postal Service exercises monopoly power with congressional blessing, and "competitive" products such as package delivery, where the Postal Service competes with private companies. Congress tasked the Commission with ensuring that the Postal Service competes fairly in the competitive products market. The Commission must ensure, for example, that the Postal Service does not unfairly subsidize its competitive products business with earnings from its market-dominant products to the disadvantage of private competitors.

Petitioner United Parcel Service, Inc. ("UPS") is one such competitor. Dissatisfied with how the Postal Service prices competitive products, UPS petitioned the Commission to initiate rulemaking proceedings. UPS argued that the Postal Service underprices its competitive products by not holding those products responsible for "peak-season" costs caused by a spike in consumer demand for package deliveries every December.

The Commission denied UPS's petition and its motion for reconsideration. For the reasons explained below, we deny UPS's petition for review of those orders.

I

A

The Commission exercises regulatory authority under the Postal Accountability and Enhancement Act ("Accountability Act"), Pub. L. No. 109-435, 120 Stat. 3198 (2006). As we have explained, the Accountability Act

ensure[s] (among other things) that the Postal Service offers its competitive products on fair terms. To that end, the Accountability Act requires the Commission to promulgate regulations that ensure that the Postal Service is not using revenues from market-dominant products subject to its monopoly power to defray costs competitive products would otherwise have to be priced to cover.

United Parcel Serv., Inc. v. Postal Regul. Comm'n ("UPS II"), 955 F.3d 1038, 1042 (D.C. Cir. 2020) (cleaned up).

Specifically, the Commission must promulgate regulations to achieve three objectives. First, it must "prohibit the subsidization of competitive products by market-dominant products." 39 U.S.C. § 3633(a)(1). Second, it must "ensure that each competitive product covers its costs attributable," id. § 3633(a)(2), defined as "the direct and indirect postal costs attributable to such product through reliably identified causal relationships," id. § 3631(b). Third, the Commission must "ensure that all competitive products collectively cover what the Commission determines to be an appropriate share of the institutional costs of the Postal Service." Id. § 3633(a)(3).

The Postal Service implements the first two mandates using an "incremental-cost" approach that we broadly sanctioned in United Parcel Service, Inc. v. Postal Regulatory Commission ("UPS I"), 890 F.3d 1053 (D.C. Cir. 2018). The incremental costs of competitive products are the costs "that would disappear were the Postal Service to stop offering those products for sale." Id. at 1055. Under Section 3633(a)(1), the Postal Service identifies the incremental cost of competitive products as a whole. See id. at 1059. For Section 3633(a)(2), the Postal Service examines the incremental cost of each specific competitive product. See id. at 1066-69.

As for the third mandate, the Act does not define the term "institutional costs," but we have upheld the Commission's interpretation of that term to refer to residual costs that cannot be attributed to any specific product via reliably identified causal relationships. See id. at 1055-56. The Postal Service thus treats as "institutional costs" all costs that are not "costs attributable." See id. It then requires competitive products to cover "an appropriate share" of those institutional costs. See United Parcel Serv., Inc. v. Postal Regul. Comm'n ("UPS III"), 96 F.4th 422, 424 (D.C. Cir. 2024). In sum, the Act effectively "subjects each competitive product to a price floor, which must be set high enough to cover both that product's 'costs attributable'" and an appropriate share of the Postal Service's "institutional costs" under Section 3633(a)(3). UPS I, 890 F.3d at 1055 (cleaned up).

In 2020, we remanded a Commission order adopting a formula for the appropriate share of institutional costs under Section 3633(a)(3), with instructions to better explain its reasoning in certain respects. See UPS II, 955 F.3d at 1051-52. On remand, the Commission revised its analysis while readopting the same formula. UPS challenged that order in a petition for review that was heard—and decided—by this panel in a companion case to this one. See UPS III, 96 F.4th 422. We concluded that the Commission adequately addressed the issues identified in UPS II and reasonably exercised its statutory discretion in adopting the appropriate share formula. Id. at 429. We therefore denied UPS's petition for review.

B

In this case, UPS challenges the Commission's implementation of Sections 3633(a)(1) and (a)(2). In broad terms, UPS believes the Commission is allowing the Postal Service to underprice its competitive products by failing to fully acknowledge that those products drive a yearly spike in costs every December and, in turn, failing to raise those products' price floors accordingly. On May 29, 2020, UPS petitioned the Commission to initiate rulemaking to rectify that alleged problem. J.A. 6-49.

UPS focused on what it termed "peak-season costs." J.A. 8. According to UPS, every holiday season the Postal Service faces increased commercial demand to deliver packages, which are largely competitive products. To meet that demand, the Postal Service incurs "hundreds of millions of dollars" in increased costs. J.A. 46. The Postal Service must, for example, hire "tens of thousands of temporary workers," open "temporary delivery annexes," pay "additional overtime wages," and send "carriers out on a host of additional runs to deliver packages." J.A. 9. In its petition, UPS's core argument was that competitive products "largely, if not exclusively," caused these costs. J.A. 21. As support, UPS presented calculations from consultants purporting to show that, absent the need to deliver competitive products, the Postal Service would not incur these dramatically increased costs. Thus, UPS urged, these peak-season costs are incremental costs of competitive products and must be attributed to those products under Sections 3633(a)(1) and 3633(a)(2). According to UPS, however, the Postal Service's models instead "systematically shift these costs into institutional costs, which are predominantly covered with market-dominant revenues." J.A. 46. UPS asked the Commission to require the Postal Service to adopt a version of its consultants' methodology and treat the entire peak-season cost increase as incremental costs of competitive products. J.A. 46-47; see J.A. 27-29.

The Postal Service acknowledged "that the existence of a seasonal peak in volume can cause seasonal costs" and agreed with UPS that "package volumes are an important part of that peak." J.A. 113. But it disagreed with the rest of UPS's analysis. The Postal Service noted that several other products, including market-dominant products such as First-Class mail, also have significantly increased volumes each December. See J.A. 119-21. The Postal Service explained that to the extent that the increased costs were driven by competitive products, the Postal Service had long understood that fact and "has performed, and will continue to perform, appropriate costing exercises to ensure that package volumes bear the seasonal peak costs that they cause." J.A. 113. Its models therefore already "accurately account for peak costs" caused by competitive products. Id. According to the Postal Service, UPS's calculations attempting to show that even more of those costs should be attributed to competitive products lacked grounding in "both solid economic theory and actual operational practice" and provided no basis to reject the Postal Service's current cost-attribution approach. Id.

On November 29, 2021, after holding a technical conference and accepting written comments on UPS's petition, the Commission denied the petition. See J.A. 213-44. The Commission concluded that "UPS has failed to demonstrate that either the attribution of peak-season costs has become significantly inaccurate or the calculation of [c]ompetitive products' incremental cost can be significantly improved by applying the methodology UPS advocates." J.A. 224. The Commission found that UPS's calculations "contain[ ] numerous errors and ... do[ ] not produce any reliable estimates of peak-season costs." J.A. 225. And the Commission further concluded that the existing cost-attribution framework already accounts for those costs arising from the seasonal spike that are properly attributable...