Docket No. R2013-1 Dissent in Part of Commissioner Taub Page 1 of 7

DISSENT IN PART OF COMMISSIONER TAUB

I.

For the pending Docket No. R2013-1 Notice of Market Dominant Price Adjustment (Notice), I concur with the Commission’s findings that the Postal Service’s pricing proposals are consistent with the requirements of title 39. However, I find that the Postal Service has complied with the Commission’s most recent mandates in regard to Standard Mail Flats.

In Order No. 1472, issued September 21, 2012, the Commission required, at page 3, that

"the Postal Service shall provide information on the general remedial actions as described on pages 106-107 of the 2010 Annual Compliance Determination." (ACD) (Emphasis added). In response, in its Notice, the Postal Service provided information on the general remedial actions by explaining how it believed its proposed prices for Standard Mail Flats would capture additional revenue and contribution and move toward 100 percent cost coverage. Notice at 19-25. The Postal Service responded further in several substantive filings.

On October 18, 2012, the Commission requested from the Postal Service more detailed explanations on specific remedial actions outlined in the Commission’s ACD for Fiscal Year 2010. The Postal Service provided its response on October 23, 2012, noting that although it has not given Standard Mail Flats an above-cap price increase, it believes that it will still be able to comply with the intent of the Commission’s FY 2010 ACD to move Standard Mail Flats toward 100 percent cost coverage given its proposed price increases and anticipated processing savings. In this regard, the Postal Service explains that the reason it did not give Standard Mail Flats an above-average price cap increase is that it believes such an increase would impair the ability of the Postal Service to enhance its revenue/contribution under the price cap. In the Postal Service’s

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view, this decision reflects an appropriate balance between the need to improve the cost coverage for Standard Mail Flats pursuant to the Commission’s order, and the need for the Postal Service to increase contribution in order to remain economically viable.

The Postal Service further elaborated on this approach and its analysis on October 31, 2012, in response to Valpak’s Motion to Strike the Standard Mail price adjustments. In addition, the Chairman issued five subsequent Chairman’s Information Requests seeking clarity on how the Postal Service was calculating the rates. The Postal Service responded on October 24, 25, 26, and November 1, and 5, 2012. Most recently, in its filing in response to comments from Valpak and the Public Representative, the Postal Service explained, "it believes that the proposed prices…represent the best balance between the need to improve Flats’ cost coverage and the need to protect the Postal Service’s long-term contribution (and thus, financial stability). Of course, as volume trends and other factors change each year, the Postal Service will reevaluate its pricing proposals to ensure that they achieve the best balance." Reply Comments of the United States Postal Service, November 9, 2012, at 5.

As the law provides, the Commission will have the opportunity to assess the Postal Service’s success in achieving this balance in future ACDs for the relevant fiscal year.

Moreover, as outlined in the second part of this dissent, the Commission clarified just three months ago in response to a remand from the United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit) that substantive explanations provided by the Postal Service (along the lines of those in the pending Notice) could be considered when it undertakes the remedial actions ordered in the 2010 ACD. However, the Commission today demands formulaic adherence to the original remedy devised more than a year and a half ago. In footnote 61 of today’s Order, the

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Commission makes just passing reference to the most legally significant finding: "

The Commission provisionally finds that the price increases proposed for the Standard Mail class satisfy the requirements of [law]." (Emphasis added). Yet, the Commission is sending proposed rates back to the Postal Service until they reflect a level of price increases for Standard Mail Flats satisfying to the Commission. The approach of the Commission is a step back in time toward its ratesetting role that was abolished with the former Postal Rate Commission.

Until the Postal Accountability and Enhancement Act passed in 2006, former title 39 declared that the Governors were authorized "to establish reasonable and equitable classes of mail and reasonable and equitable rates of postage and fees for postal services" (former section 3621), but this authority was severely circumscribed by the active role given the Commission. Former section 3622(a) stated that "[t]he Postal Service may submit

such suggestions for rate adjustments as it deems suitable." After submission of suggestions by the Postal Service, the statute required the Commission to make a "recommended decision" in accordance with the policies of title 39 and specific statutory factors. With respect to each Postal Service proposal, the Commission was obliged to exercise its best judgment as to which among a spectrum of lawful rates or classifications was the outcome most consistent with the statutory criteria. A "recommended decision" by the Commission was recommended in name only. In almost all cases, the Commission’s decision was a final determination because the statute provided little scope for change by the Governors. As the U.S. Supreme Court explained, "Although the Postal Reorganization Act divides ratemaking responsibility between two agencies, the legislative history demonstrates ‘that ratemaking . . . authority [was] vested primarily in [the] Postal Rate Commission.’ . . . The structure of the Act supports this view." National Association of Greeting Card Publishers v. United States Postal Service, 462 U.S. 810, 820 (1983) (footnotes omitted). Docket No. R2013-1 Dissent in Part of Commissioner Taub Page 4 of 7

In contrast, in the revised statute, the authority to establish reasonable and equitable classes of mail and rates of postage is vested primarily in the Postal Service. The legislative history and structure of the act support this revised view. While the contours of a modern system of regulation must be determined by the Commission, it would be inappropriate for the Commission to assume its former role of selecting from among a spectrum of lawful rates and classifications the set of rates which is, in its judgment, most consistent with statutory criteria. In its new role of regulator rather than ratemaker, the function of the Commission is to define the spectrum of lawful rates. Within this spectrum, the Postal Service is responsible for selecting the set of rates which, in its judgment, is most consistent with its statutory mission. The Commission may

reject a given rate or classification as unlawful, but it should no longer recommend rates and classifications except in the most extraordinary cases.

Unfortunately, I believe that with this Order, the Commission is at risk of regressing to its past role vis-à-vis rates for Standard Mail.

II.

Nearly 20 months ago, on March 29, 2011, the Commission issued its FY 2010 ACD, which reviewed rates and fees in effect from October 1, 2009 through September 30, 2010. In its report, the Commission concluded that the Standard Mail Flats product was not in compliance with title 39, which prompted the Commission to order certain remedial measures. Less than a month later on April 27, 2011, the Postal Service filed a petition with the D.C. Circuit seeking review of the Commission’s determination of non-compliance for the Standard Mail Flats product.

While the Court was still considering the matter, nearly a year later on March 28, 2012, the Commission’s FY 2011 ACD noted that shortly after the close of the fiscal year, the Postal Service had announced a planned increase for 2012 in Standard Mail Flats rates of 2.209 percent,

which was slightly above the class average. "Ordinarily, the Commission would consider the Postal Service’s subsequent filing. Given Docket No. R2013-1 Dissent in Part of Commissioner Taub Page 5 of 7

the pendency of the appeal before the D.C. Circuit, however, the Commission will hold action in this area in abeyance pending receipt of the Court’s decision. Following that, the Commission will take action as appropriate."

(Emphasis added). FY 2011 ACD at 16.

On April 17, 2012, the D.C. Circuit found the Commission’s interpretation of the law "a reasonable one" in that "the ambiguous relationship between" several statutory provisions helped "tilt the scale to the Commission

" in what otherwise "seems a close call." United States Postal Service v. Postal Regulatory Commission, 676 F.3d 1105 (D.C. Cir. 2012) at 1108. Yet, the Court remanded the case to the Commission for a definition of the extreme circumstances that trigger application of the law (section 101(d)), and for an explanation of the appropriateness of the particular remedy imposed by the Commission.

On August 9, 2012, the Commission issued its Order on Remand, Order No. 1427, to respond to the Court’s Opinion. In explaining the remedy originally ordered in March 2011, the Commission for the first time explicitly clarified that the magnitude and duration of the shortfall and subsidization required either ameliorative steps to improve cost coverage,

"or an explanation justifying the failure to take ameliorative steps." (Emphasis added). As the Commission explained, the Postal Service had failed to attempt to do either, leading to the finding of non-compliance for fiscal year 2010. See Order No. 1427 at 12.

Note that the Commission in March 2011 mandated an increase in cost coverage "through a combination of above-average price adjustments, consistent with the price cap requirements, and cost reductions until such time that the revenues for this product exceed attributable costs."

Id. at 13. In regard to this specific remedy, 17 months later, the Commission explained to the Court in the Order on Remand that its approach going forward "…afforded the Postal Service an opportunity to tailor appropriate remedial actions under section 101(d)’s ‘fair and equitable’ standard to the Docket No. R2013-1 Dissent in Part of Commissioner Taub Page 6 of 7

specific circumstances of Standard Mail Flats."

Id. (Emphasis added). The Court expressed concern that "the Commission’s order implied that only 100% cost coverage, and nothing short of 100%, would bring Standard Flats into compliance with section 101(d)." The Commission responded that the Postal Service could be compliant at less than full cost coverage, "provided the Postal Service has either taken adequate steps toward elimination of the shortfall or presented adequate reasons to explain the shortfall." Id. (Emphasis added).

The Commission further explained: "ACDs involve a

post hoc review of the Postal Service’s prior fiscal year results, including, where relevant, remedial rate actions proposed or taken. In the matter at hand, the Postal Service has the right to explain whether, and at what point, increased cost coverage for Standard Mail Flats might become infeasible or undesirable in light of the statutory cap and other statutory considerations. The Commission does not interpret section 101(d) to require "only 100% cost coverage, and nothing short of 100%, to satisfy the fair and equitable cost apportionment standard, provided an adequate explanation for failure to improve cost coverages is offered." Id. at 14. (Emphasis added).

The Commission acknowledges in today’s Order that the Postal Service’s explanations are not restricted to an ACD, but are also appropriately considered when the Service proposes new rates. Therefore, the matter before the Commission is whether it finds the Postal Service’s explanation sufficient, particularly in the context of the framework of current law. One year ago, in the first price change after the Commission’s March 2011 ACD finding, the Postal Service proposed and then implemented an above-average increase for Standard Mail Flats. In this docket, the second proposed price change since that March 2011 ACD finding, the Postal Service seeks to raise rates for Standard Mail Flats and explains how it considers increases of a greater magnitude to be counterproductive. I find that the Postal Service has complied

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with the Commission’s most recent mandates in regard to Standard Mail Flats for the pending Notice of Market Dominant Price Adjustment, consistent with the current statute and associated regulations for establishing postal rates.

Robert G. Taub

Commissioner