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    Oral Argument Has Not Been Scheduled

    _____________________

    No. 11-1117_____________________

    IN THE UNITED STATES COURT OF APPEALS

    FOR THE DISTRICT OF COLUMBIA CIRCUIT_____________________

    UNITED STATES POSTAL SERVICE,

    Petitioner,

    v.POSTAL REGULATORY COMMISSION,

    Respondent.

    _____________________

    On Petition for Review of an Order of the Postal Regulatory Commission

    _____________________

    BRIEF OF THE UNITED STATES POSTAL SERVICE_____________________

    MARY ANNE GIBBONSExecutive Vice President & General Counsel

    Of counsel:

    R. ANDREW GERMAN MICHAEL J. ELSTON*Managing Counsel, Legal Strategy Chief Counsel, AppellateUnited States Postal Service & Commercial Litigation475 L'Enfant Plaza, SW United States Postal ServiceWashington, D.C. 20260 475 L'Enfant Plaza, SW

    Washington, D.C. 20260(202) 268-7432

    Attorneys for the United States Postal Service

    FINAL BRIEF:OCTOBER 7, 2011 *Counsel of Record

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    i

    CERTIFICATE AS TO PARTIES,

    RULINGS AND RELATED CASES

    A. Parties, Intervenors and Amici

    Petitioner in this matter is the UNITED STATES POSTAL SERVICE.

    Respondent in this matter is the POSTAL REGULATORY COMMISSION (PRC).

    This is a petition for review of an agency decision. Numerous persons and

    entities filed comments in the agencys docket but did not seek to intervene in the

    proceedings. The AMERICAN CATALOG MAILERS ASSOCIATION (ACMA)

    intervened in this review proceeding on behalf of the Postal Service. VALPAK

    DEALERS ASSOCIATION, VALPAK DIRECT MARKETING SYSTEMS,

    INC., and L.L. BEAN, INC., intervened on behalf of the PRC.

    B. Ruling Under Review

    The ruling under review is that portion of the Postal Regulatory

    Commissions 2010 Annual Compliance Determination (ACD) relating to the

    pricing of Standard Mail Flats. The PRC issued the ACD on March 29, 2011. The

    PRCs docket number for its review of the Postal Services Annual Compliance

    Report for fiscal year 2010 was Docket No. ACR2010.

    C. Related Cases

    This matter has not previously been before this Court or any other court.

    Petitioners counsel are unaware of any related cases pending in this Court or any

    other court except that in this case the PRC reached a decision that appears to

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    contradict another order presently before this Court on a petition for review. See

    United States Postal Service v. Postal Regulatory Commission, No. 10-1324 (D.C.

    Cir.) (argued Sept. 21, 2011).

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    iii

    TABLE OF CONTENTS

    Certificate as to Parties, Rulings and Related Cases ..................................................i

    Table of Authorities ...................................................................................................v

    Glossary.................................................................................................................. viii

    Jurisdictional Statement.............................................................................................1

    Standing......................................................................................................................1

    Statutory Provisions...................................................................................................3

    Statement of the Issues...............................................................................................7

    Statement of the Case.................................................................................................8

    Statement of the Facts ................................................................................................9

    Summary of the Argument.......................................................................................17

    Argument..................................................................................................................21

    I. The PAEA specifically requires that market-dominant productscover their attributable costs by class while simultaneously requiringeach competitive product to cover its own costs by product.Standard Mail Flats is a product within the market-dominant class ofStandard Mail, not a competitive product, and thus it is not requiredby law to cover its own costs; the PAEA requires only that StandardMail products cover their costs as a class. Thus the PRCsconclusion that the Standard Mail Flats product must cover its own

    costs is contrary to law, arbitrary and capricious. .........................................21

    A. Standard of Review .............................................................................21

    B. Analysis ..............................................................................................21

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    iv

    TABLE OF CONTENTS

    (continued)

    II. The PRCs authority in the context of reviewing the Postal ServicesAnnual Compliance Report is limited by 39 U.S.C. 3653 todeterminations that any rates or fees in effect during such year (forproducts individually or collectively) were not in compliance withapplicable provisions of [Chapter 36] (or regulations promulgatedthereunder). In the 2010 ACD, the Commission concluded that therates for Standard Mail Flats violated 39 U.S.C. 101(d), which isnot in Chapter 36. Thus the PRC exceeded its statutory authority byconcluding that the Postal Services rates violated a policy statementfound outside of Chapter 36. .........................................................................28

    A. Standard of Review .............................................................................28

    B. Analysis ..............................................................................................28

    III. Under the PAEA, one of the PRCs objectives is [t]o assureadequate revenues, including retained earnings, to maintain financialstability. The PRC failed to even address the argument that itsdecision could result in the Standard Mail class as a whole makingless contribution toward costs because the volume of flats isdecreasing while the volume of letters is increasing. Thus the PRCsorder requiring the Postal Service to prioritize limited CPI price-capauthority to Standard Mail Flats without regard to the financialconsequences is arbitrary and capricious. .....................................................32

    A. Standard of Review .............................................................................32

    B. Analysis ..............................................................................................32

    Conclusion ...............................................................................................................35

    Certificate of Compliance........................................................................................36

    Certificate of Service ...............................................................................................37

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    v

    TABLE OF AUTHORITIES

    CASES

    Assoc. of Data Processing Serv. Orgs. v. Board of Governors of

    the Fed. Reserve Sys., 745 F.2d 677 (D.C. Cir. 1984) .................................32

    *Bowman Transportation, Inc. v. Arkansas-Best Freight System, Inc.

    419 U.S. 281 (1974).................................................................................32, 34

    *Chevron U.S.A. Inc. v. NRDC, Inc., 467 U.S. 837 (1984).....................................25

    Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402 (1971) .................32

    *FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, (2000) ....................25

    Halverson v. Slater, 129 F.3d 180 (D.C. Cir. 1997) ................................................31

    Morton v. Mancari, 417 U.S. 535 (1974) .......................................................... 26-27

    Pharmaceutical Research & Mfrs. of Am. v. Thompson,251 F.3d 219 (D.C. Cir. 2001).......................................................................25

    Pillsbury v. United Eng'g Co.,342 U.S. 197 (1952) ......................................... 30-31

    Qi-Zhuo v. Meissner, 70 F.3d 136 (D.C. Cir. 1995)................................................31

    Radzanower v. Touche Ross & Co., 426 U.S. 148 (1976).......................................26

    Simpson v. United States, 435 U.S. 6 (1978)...........................................................26

    S. Cal. Edison Co. v. FERC, 195 F.3d 17 (D.C. Cir. 1999) ....................................25

    United States v. Wong Kim Bo, 472 F.2d 720 (5th Cir. 1972) ................................23

    USPS v. PRC, 640 F.3d 1263 (D.C. Cir. 2011) .......................................................12

    *Wells Fargo Bank, N.A. v. FDIC, 310 F.3d 202 (D.C. Cir. 2002) ........................25

    * Authorities upon which we chiefly rely are marked with asterisks.

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    vi

    TABLE OF AUTHORITIES

    (continued)

    STATUTES

    5 U.S.C. 706..............................................................................................21, 28, 32

    39 U.S.C. 101...........................................................8, 10, 16, 21, 24, 26-27, 28-31

    39 U.S.C. 102........................................................................................................22

    39 U.S.C. 201..........................................................................................................9

    *39 U.S.C. 3622...........................................................11-13, 19, 21-25, 27, 30, 34

    *39 U.S.C. 3633..............................................................................................22, 25

    39 U.S.C. 3652 ...................................................................................... 8, 11, 30-31

    *39 U.S.C. 3653 .................................................................1, 7, 8, 11, 18-19, 28-31

    39 U.S.C. 3663 ..................................................................................1, 9, 21, 28, 32

    Postal Accountability and Enhancement Act (PAEA), Pub. L. No. 109-435,120 Stat. 3198 (2006) ........................................... 7, 10, 17, 22, 23, 29, 32, 33

    Postal Reorganization Act of 1970 (PRA),Pub. L. No. 91-375, 84 Stat. 719 (1970) ...................................................9, 29

    LEGISLATIVE HISTORY

    Sen. Rep. No. 108-318 at 8, 10 (2004) ..............................................................10, 23

    DECISIONS OF THE PRC

    Order No. 26, Docket No. RM2007-1 (P.R.C. Aug. 15, 2007) .........................10, 23

    Order No. 43, Docket No. RM2007-1 (P.R.C. Oct. 29, 2007) ................................11

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    TABLE OF AUTHORITIES

    (continued)

    DECISIONS OF THE PRC(continued)

    Order No. 66, Docket No. R2008-1 (P.R.C. Mar. 17, 2008)...................................10

    Order No. 536, Docket No. RM2009-3 (P.R.C. Sept. 14, 2010)................. 18, 23-24

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    viii

    GLOSSARY

    CPI Consumer Price Index

    ACR Annual Compliance Report orthe 2010 Annual ComplianceReport of the U.S. Postal Service (Dec. 29, 2010)

    ACD Annual Compliance Determination orthe 2010 AnnualCompliance Determination, PRC Docket No. ACR2010(Mar. 29, 2011)

    PAEA Postal Accountability and Enhancement Act

    PRA Postal Reorganization Act

    PRC Postal Regulatory CommissionPostal Rate Commission (prior to 2006)

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    JURISDICTIONAL STATEMENT

    This petition challenges an order of the Postal Regulatory Commission

    (PRC) issued pursuant to 39 U.S.C. 3653(c). This Court has jurisdiction pursuant

    to 39 U.S.C. 3663. The final order below was rendered on March 29, 2011, and

    this petition was timely filed on April 27, 2011.

    STANDING

    The Postal Service has standing under 39 U.S.C. 3663 because it is

    adversely affected or aggrieved by the PRCs Annual Compliance

    Determination. The order declares the Postal Services rates for Standard Mail

    Flats to be illegal and directs the Postal Service to increase the cost coverage of

    the Standard Mail Flats product 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 beginning

    with the next Notice of Market Dominant Price Adjustment. ACD at 106, 107

    (J.A. 44, 45). The PRC also ordered the Postal Service to present a schedule of

    future above-CPI price increases for Standard Mail Flats [w]ithin 90 days of the

    issuance of the FY 2010 ACD and to update the schedule annually until the

    revenue of the Flats product exceeds its attributable cost. ACD at 107 (J.A. 45).

    The statute governing the PRC and the Postal Service, however, does not require

    that each market-dominant product cover its attributable costs, and correcting the

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    long-standing cost-coverage issue with respect to Standard Mail Flats a product

    with a current downward trend in volume is not in the best interests of the Postal

    Service. Because such above-CPI price increases must be consistent with the

    price cap requirements, the PRCs order necessarily curtails the Postal Services

    limited price-cap increase authority and precludes it from allocating that authority

    in such a fashion as to maximize our ability to maximize retained earnings and

    achieve financial stability by, for example, allocating more of that increase to

    Standard Mail Letters, a product with a trend of increasing volumes. The PRCs

    order which it lacked authority to issue may well have the perverse effect of

    decreasing the Standard Mail Classs contribution to attributable costs of the Postal

    Service at a time when the Postal Service can ill afford to absorb such a loss in

    contribution. This Court may redress these injuries by granting the petition for

    review and setting aside the PRCs conclusions as contrary to law, arbitrary and

    capricious.

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    3

    STATUTORY PROVISIONS

    United States Code Title 39

    101. Postal policy***

    (d) Postal rates shall be established to apportion the costs of all postaloperations to all users of the mail on a fair and equitable basis.

    ***

    3622. Modern rate regulation

    (a) Authority GenerallyThe Postal Regulatory Commission shall . . . byregulation establish (and may from time to time thereafter by regulation revise) a

    modern system for regulating rates and classes for market-dominant products.

    (b) ObjectivesSuch system shall be designed to achieve the followingobjectives, each of which shall be applied in conjunction with the others:

    (1) To maximize incentives to reduce costs and increase efficiency.

    (2) To create predictability and stability in rates.

    (3) To maintain high quality service standards established under section3691.

    (4) To allow the Postal Service pricing flexibility.(5) To assure adequate revenues, including retained earnings, to maintainfinancial stability.

    (6) To reduce the administrative burden and increase the transparency ofthe ratemaking process.

    (7) To enhance mail security and deter terrorism.

    (8) To establish and maintain a just and reasonable schedule for rates andclassifications, however the objective under this paragraph shall not be

    construed to prohibit the Postal Service from making changes of unequalmagnitude within, between, or among classes of mail.

    (9) To allocate the total institutional costs of the Postal Serviceappropriately between market-dominant and competitive products.

    (c) FactorsIn establishing or revising such system, the Postal RegulatoryCommission shall take into account

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    ***

    (2) the requirement that each class of mail or type of mail service bear thedirect and indirect postal costs attributable to each class or type of mailservice through reliably identified causal relationships plus that portion

    of all other costs of the Postal Service reasonably assignable to such classor type;

    ***

    (d) Requirements

    (1) In general.The system for regulating rates and classes for market-dominant products shall

    (A) include an annual limitation on the percentage changes in ratesto be set by the Postal Regulatory Commission that will be equal to

    the change in the Consumer Price Index for All Urban Consumersunadjusted for seasonal variation over the most recent available12-month period preceding the date the Postal Service files noticeof its intention to increase rates;

    ***

    (2) Limitations

    (A) Classes of mailExcept as provided under subparagraph (C),the annual limitations under paragraph (1)(A) shall apply to a classof mail, as defined in the Domestic Mail Classification Schedule asin effect on the date of enactment of the Postal Accountability andEnhancement Act.

    ***

    3633. Provisions applicable to rates for competitive products

    (a) In GeneralThe Postal Regulatory Commission shall . . . promulgate (andmay from time to time thereafter revise) regulations to

    (1) prohibit the subsidization of competitive products by market-dominant products;

    (2) ensure that each competitive product covers its costs attributable; and

    (3) ensure that all competitive products collectively cover what theCommission determines to be an appropriate share of the institutionalcosts of the Postal Service.

    ***

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    3652. Annual Reports to the Commission

    (a) Costs, Revenues, Rates, and Service.Except as provided in subsection (c),the Postal Service shall, no later than 90 days after the end of each year, prepareand submit to the Postal Regulatory Commission a report (together with such

    nonpublic annex the report as the Commission may require under subsection (e))(1) which shall analyze costs, revenues, rates, and quality of service, using

    such methodologies as the Commission shall by regulation prescribe, and insufficient detail to demonstrate that all products during such year complied withall applicable requirements of this title; and

    (2) which shall, for each market-dominant product provided in such year,provide

    (A) product information, including mail volumes; and

    (B) measures of the quality of service afforded by the Postal Service inconnection with such product, including

    (i) the level of service (described in terms of speed of delivery andreliability) provided; and

    (ii) the degree of customer satisfaction with the service provided.

    The Inspector General shall regularly audit the data collection systems andprocedures utilized in collecting information and preparing such report (includingany annex thereto and the information required under subsection (b)). The resultsof any such audit shall be submitted to the Postal Service and the Postal RegulatoryCommission.

    ***

    3653. Annual Determination of Compliance

    (a) Opportunity For Public CommentAfter receiving the reports requiredunder section 3652 for any year, the Postal Regulatory Commission shall promptlyprovide an opportunity for comment on such reports by users of the mails, affectedparties, and an officer of the Commission who shall be required to represent theinterests of the general public.

    (b) Determination of Compliance or NoncomplianceNot later than 90 daysafter receiving the submissions required under section 3652 with respect to a year,the Postal Regulatory Commission shall make a written determination as to

    (1) whether any rates or fees in effect during such year (for productsindividually or collectively) were not in compliance with applicable provisionsof this chapter (or regulations promulgated thereunder); or

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    (2) whether any service standards in effect during such year were not met.

    If, with respect to a year, no instance of noncompliance is found underthis subsection to have occurred in such year, the written determinationshall be to that effect.

    (c) Noncompliance With Regard to Rates or ServicesIf, for a year, a timelywritten determination of noncompliance is made under subsection (b), the PostalRegulatory Commission shall take appropriate action in accordance withsubsections (c) and (e) of section 3662 (as if a complaint averring suchnoncompliance had been duly filed and found under such section to be justified).

    ***

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    STATEMENT OF THE ISSUES

    I. The PAEA specifically requires that market-dominant products covertheir attributable costs by class while simultaneously requiring each competitive

    product to cover its own costs by product. Standard Mail Flats is a product within

    the market-dominant class of Standard Mail, not a competitive product, and thus it

    is not required by law to cover its own costs; the PAEA requires only that Standard

    Mail products cover their costs as a class. Is the PRCs conclusion that the

    Standard Mail Flats product must cover its own costs contrary to law, arbitrary and

    capricious?

    II. The PRCs authority in the context of reviewing the Postal ServicesAnnual Compliance Report is limited by 39 U.S.C. 3653 to determinations that

    any rates or fees in effect during such year (for products individually or

    collectively) were not in compliance with applicable provisions of [Chapter 36] (or

    regulations promulgated thereunder). In the 2010 ACD, the Commission

    concluded that the rates for Standard Mail Flats violated 39 U.S.C. 101(d), which

    is not in Chapter 36. Did the PRC exceed its statutory authority by concluding that

    the Postal Services rates violated a policy statement found outside of Chapter 36?

    III. Under the PAEA, one of the PRCs objectives is [t]o assure adequaterevenues, including retained earnings, to maintain financial stability. The PRC

    failed to even address the argument that its decision could result in the Standard

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    Mail class as a whole making less contribution toward costs because the volume of

    flats is decreasing while the volume of letters is increasing. Is the PRCs order

    requiring the Postal Service to prioritize limited CPI price-cap authority to

    Standard Mail Flats without regard to the financial consequences arbitrary and

    capricious?

    STATEMENT OF THE CASE

    On December 29, 2010, the Postal Service filed its Fiscal Year 2010 Annual

    Compliance Report (ACR) as required by 39 U.S.C. 3652. After providing for a

    period of public comment, on March 29, 2011, the Postal Regulatory Commission

    (PRC) issued its Annual Compliance Determination Report for Fiscal Year 2010

    (ACD) as required by 39 U.S.C. 3653.

    In its ACD, the PRC noted that the postal product known as Standard Mail

    Flats is covering only 81.6 percent of its costs. Despite the fact that Congress

    explicitly chose not to require each market-dominant product to cover its costs, the

    PRC concluded that the prices in effect for the Standard Mail Flats product do not

    comply with section 101(d) of Title 39 because they do not cover the costs

    attributable to the product. ACD at 106 (J.A. 44). Accordingly, purporting to act

    pursuant to its authority under 39 U.S.C. 3653(c), the PRC directed the Postal

    Service to increase the cost coverage of the Standard Mail Flats product through a

    combination of above-average price adjustments, consistent with the price cap

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    requirements, and cost reductions until such time that the revenues for this product

    exceed attributable costs. Id. While the PRC did not set a deadline for the Postal

    Service to exceed full cost coverage for the Standard Mail Flats product, it ordered

    the Postal Service to present a schedule of future above-CPI price increases for

    Standard Mail Flats within 90 days1 and to begin the process of transitioning

    Standard Flats prices to full cost coverage starting with the next Notice of

    Market Dominant Price Adjustment. ACD at 107 (J.A. 45).

    On April 27, 2011, the Postal Service filed a timely Petition for Review by

    this Court pursuant to 39 U.S.C. 3663.

    STATEMENT OF THE FACTS

    Under the Postal Reorganization Act of 1970 (PRA), Pub. L. No. 91-375, 84

    Stat. 719 (1970), the Postal Service became an independent establishment of the

    executive branch of the government of the United States. 39 U.S.C. 201. From

    1971 to 2006, the Postal Service initiated rate changes by requesting a

    recommended decision from the PRCs predecessor agency, the Postal Rate

    Commission. In 2006, Congress adopted and President George W. Bush signed

    1 On May 17, 2011, the Postal Service moved the PRC to stay those portionsof the ACD requiring the Postal Service to provide schedules or take otherremedial actions regarding Standard Mail Flats. The Commission granted thePostal Services motion on May 27, 2011, and the stay is in effect until 30 daysfollowing the resolution of this petition for review. PRC Order No. 739 (availableon-line at http://www.prc.gov/Docs/73/73096/Order_No_739.pdf).

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    into law the Postal Accountability and Enhancement Act (PAEA), Pub. L. No.

    109-435, 120 Stat. 3198 (2006). The PAEA, among other things, greatly narrowed

    the PRCs role in pricing decisions, and the Postal Service now may set prices

    within certain express limitations. The PAEA also directed the PRC to develop a

    modern system for regulating the prices of market-dominant products, such as

    Standard Mail Flats, designed to achieve a statutory list of objectives, each of

    which shall be applied in conjunction with the others. 39 U.S.C. 3622(a)&(b).

    A prominent goal of the PAEA was to provide the Postal Service with increased

    flexibility in pricing, as compared to the prior pricing regime. This is evident both from

    the language of the statute and from its legislative history. See, e.g., 39 U.S.C.

    3622(d)(4), (c)(7); Sen. Rep. No. 108-318 at 8, 10 (2004). This is not just the Postal

    Services view. The PRC has also recognized that increased flexibility is central to the

    Congressional design of the PAEA. See, e.g., Order No. 66, Docket No. R2008-1, p. 51

    (P.R.C. Mar. 17, 2008) (http://www.prc.gov/Docs/59/59312/R2008-1FINAL.pdf);

    Order No. 26, Docket No. RM2007-1, p. 78 at 3070 (P.R.C. Aug. 15, 2007) (The

    revamped ratemaking under the PAEA is designed to achieve various goals, principal

    among them are to afford the Postal Service enhanced pricing flexibility. . . .)

    (http://www.prc.gov/Docs/57/57348/RM2007-1FINAL.pdf). In another order, the PRC

    stated as follows:

    The Commission concludes that one of Congresss mainmotives in enacting the PAEA was to simplify and expedite

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    the setting of postal rates. It further concludes that Congressintended to give the Postal Service wide latitude in designingspecific rates and rate relationships, expecting that theCommission would alter those decisions only wheredisregard of particular statutory standards is clear.

    Order No. 43, Docket No. RM2007-1, 2025 at p. 11 (P.R.C. Oct. 29, 2007).

    Price changes for market-dominant products under the PAEA are now an

    almost annual occurrence. The overall increase for each class of mail products that

    have been designated as market-dominant products is essentially capped at the

    level of inflation. 39 U.S.C. 3622(d)(1)(A). Price averaging is allowed within

    classes to meet the overall cap, but is not allowed between classes. 39 U.S.C.

    3622(d)(2)(A).

    Within 90 days of the end of each fiscal year, the Postal Service is required

    to submit to the PRC an annual report that, among other things, shall analyze

    costs, revenues, rates, and quality of service, using such methodologies as the

    Commission shall by regulation prescribe, and in sufficient detail to demonstrate

    that all products during such year complied with all applicable requirements of this

    title. 39 U.S.C. 3652(a). The PRC then provides an opportunity for public

    comment, id. 3653(a), and makes a written determination regarding, among other

    things, whether any rates . . . in effect during such year (for products individually

    or collectively) were not in compliance with applicable provisions of this chapter

    (or regulations promulgated thereunder), id. 3653(b)(1).

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    After the Postal Service submitted its 2010 Annual Compliance Report, the

    PRC concluded that [c]ost coverage for Standard Mail Flats was 81.6 percent,

    and that neither commercial flats nor nonprofit flats covered their costs, resulting

    in a cost coverage below 100 percent for the whole product. ACD at 103 (J.A.

    41). As the PRC explained, it had expressed its concerns with what it called a

    growing intra-class cross subsidy on several occasions since 2008. ACD at 103-

    04 (J.A. 41-42). In the 2009 ACD, for example, the PRC stated that the failure of

    the Standard Mail Flats product to cover its costs directly implicates the

    requirement of section 101(d), which directs the Postal Service to apportion

    [attributable costs] on a fair and equitable basis[,] and section 3622(b)(5), which

    requires that rates must be set to ensure adequate revenues to maintain financial

    stability. ACD at 104 (quoting 2009 ACD at 86) (J.A. 42). In response to the

    directive to devise a plan to improve the cost coverage of the Standard Mail Flats

    product, the Postal Service presented such a plan in its request for an exigent rate

    increase. The PRC, however, denied the request for an exigent rate increase. See

    generally USPS v. PRC, 640 F.3d 1263 (D.C. Cir. 2011) (granting in part petition

    for review of decision denying exigent rate increase).

    In its 2010 Annual Compliance Report, the Postal Service stated that the

    PRCs denial of the exigent rate increase made its plan which had relied on a

    one-time 5.1 percent increase that could not be made within the limitations of the

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    inflation-based price cap unworkable and suggested that the PRC decide whether

    it could use any of its powers to remedy the cost coverage shortfall of the

    fourteen products that did not cover full attributable costs, including the Standard

    Mail Flats product. ACD at 105 (J.A. 43) (quoting ACR at 8-9 (J.A. 14-15)).

    In addition to the Postal Services comments in the ACR and its reply

    comments, the American Catalog Mailers Association (ACMA), L.L. Bean, the

    Public Representative and Valpak submitted comments regarding the cost coverage

    of Standard Flats. ACD at 105 (J.A. 43). Although the PRC ignored it, one of the

    most important comments offered was the ACMAs comment regarding the impact

    on the Postal Services overall revenue of implementing above-CPI changes on

    Standard Mail Flats. The ACMA wrote as follows:

    Further, within the framework of a cap for a class of mail withmore than one [Section 3622](c)(2) category, (c)(2) is notaimed at any net-income improvements that might result fromfixing any shortfall. ACMA noted this phenomenon in its replycomments in Docket No. R2010-4 (pp. 3-5). The workings arereasonably simple. If a shortfall in Category 1 is fixed byraising the rates for Category 1 and lowering them forCategories 2 and 3, staying within a cap, the net effect dependson the various elasticities (own-price and cross-price) andwould in all cases be no more than a small fraction of theshortfall at issue. It is obvious, then, that (c)(2) does not

    highlight money that is available to improve the PostalServices net income position.

    ACMA Comments at 8-9 (J.A. 62-63).

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    Put another way, if the Postal Service implements above-average price

    increases on one product and below-average price increases on other products

    within the class in order to comply with the price cap, the result is not necessarily

    an improvement in the overall contribution that the class of mail makes toward

    attributable costs. The charts on the next page demonstrate this issue with a simple

    hypothetical example.2

    The chart assumes that the volume of Standard Mail

    Letters was 700 in 2009 and the volume of Standard Mail Flats was 100 in 2009,

    which reflects the approximate ratio of the volumes of the two products. It also

    assumes a price cap of five percent and a decrease in the volume of flats in 2010 by

    10 percent and an increase in the volume of letters by 10 percent, which stands

    proxy for the present volume trends of these two products.3 The first box assumes

    2 This hypothetical example is in no way intended to be a proxy for thecomplicated business of ratemaking, and the Postal Service acknowledges thatother factors bear on these calculations. For example, changes in price may impactvolumes. Instead, the hypothetical is intended merely to illustrate the point that thePRC's approach can result in less money for the Postal Service. To perform all ofthe actual calculations is beyond the scope of this brief as well as the publiclyavailable data.

    3 Compare Annual Compliance Determination: Fiscal Year 2009, PostalRegulatory Commission (Mar. 29, 2010), at Table VII-11 (p. 83) (listing the Fiscal

    Year 2009 volumes for Standard Mail Letters and Standard Mail Flats), withAnnual Compliance Determination: Fiscal Year 2010, Postal RegulatoryCommission (Mar. 29, 2011), at Table VII-15 (p. 102) (listing the Fiscal Year 2010volumes for Standard Mail Letters and Standard Mail Flats, showing a one-yearincrease in Standard Mail Letters volume of approximately 1.64 billion pieces anda one-year decrease in Standard Mail Flats volume of approximately .75 billionpieces) (both available on-line at www.prc.gov).

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    2009Volume

    100

    Year

    Pro

    duc

    t

    Vo

    lume

    R

    ev

    /Pc

    Cos

    t/Pc

    Con

    t/Pc

    To

    tCon

    t

    To

    tal

    2009RevenueP

    erPiece

    36

    Flats

    100

    36

    44

    -8

    -800

    2009&2010Co

    stPerPiece

    44

    Letters

    700

    19

    10

    9

    6300

    2010VolumeCh

    ange%

    -10%

    Flats

    90

    36

    44

    -8

    -720

    2010PriceCapAppliedtoFlats

    0%

    Letters

    770

    20.2

    0714

    10

    10.2

    0714

    7

    859.5

    2009Volume

    700

    2009RevenueP

    erPiece

    19

    2009&2010Co

    stPerPiece

    10

    2010VolumeCh

    ange%

    10%

    2010PriceCapAppliedtoLetters

    5%

    2009Volume

    100

    Year

    Pro

    duc

    t

    Vo

    lume

    R

    ev

    /Pc

    Cos

    t/Pc

    Con

    t/Pc

    To

    tCon

    t

    To

    tal

    2009RevenueP

    erPiece

    36

    Flats

    100

    36

    44

    -8

    -800

    2009&2010Co

    stPerPiece

    44

    Letters

    700

    19

    10

    9

    6300

    2010VolumeCh

    ange%

    -10%

    Flats

    90

    44.4

    5

    44

    0.4

    5

    40.5

    2010PriceCapAppliedtoFlats

    5%

    Letters

    770

    19

    10

    9

    6930

    2009Volume

    700

    2009RevenueP

    erPiece

    19

    2009&2010Co

    stPerPiece

    10

    2010VolumeCh

    ange%

    10%

    2010PriceCapAppliedtoLetters

    0%

    RESULTS

    Flats

    Letters

    INPUTS

    7139.5

    5500

    2010

    2009

    Letters

    FULLPR

    ICECAPAPPLIEDTO

    LETTERS

    FULLPRICECAPAPPLIEDTO

    FLATS

    INPUTS

    RESULTS

    Flats

    2009

    5500

    2010

    6970.5

    15

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    that the entire price increase allowed under the cap is applied to letters while the

    second box assumes that the entire price increase is applied to flats. Relatively

    simple math demonstrates that increasing the price for standard flats (a product in

    decline) while holding the price steady for standard letters (a product with

    increasing volume) may result in less class-wide contribution toward attributable

    costs at a time when it is common knowledge that the Postal Service can hardly

    afford such a course of action.

    After considering the comments and reply comments, the PRC concluded

    that despite the price cap the Postal Service has pricing and operational

    flexibility to increase the cost coverage of Standard Mail Flats but that [i]t has

    simply chosen not to utilize that flexibility with respect to Standard Mail Flats.

    ACD at 106 (J.A. 44). As a result, the negative contribution per piece continues

    to grow. Id. According to the PRC, [t]he Postal Service has lost $1.4 billion in

    contribution from Standard Mail Flats over the last three years, which reflects an

    unfair and inequitable apportionment of the costs of postal operations to all

    Standard Mail users. Id. Based on these reasons, the PRC concluded that the

    Standard Mail Flats prices in effect for the 2010 fiscal year do not comply with

    section 101(d) of title 39, id., which provides that [p]ostal rates shall be

    established to apportion the costs of all postal operations to all users of the mail on

    a fair and equitable basis. The PRC, however, did not address the ACMAs

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    comments regarding the impact of lower Standard Mail Letter rates on the overall

    contribution of the class of Standard Mail toward the Postal Services attributable

    costs.

    SUMMARY OF THE ARGUMENT

    The PRCs directives regarding the cost coverage of the Standard Mail flats

    product should be set aside as contrary to law, arbitrary and capricious because

    they are contrary to the plain language of the PAEA and inconsistent with other

    orders of the PRC. When it enacted the PAEA, Congress decided that each

    competitive product should cover its attributable costs, but it provided more

    flexibility to the Postal Service regarding market-dominant products.

    Market-dominant products need not cover their attributable costs; instead

    market-dominant classes must cover their costs, and the individual products within

    any given class may or may not do so. Congress was explicit in this regard.

    Moreover, price averaging is allowed within classes to meet the overall cap, but is

    not allowed between classes. To justify its directive to raise the cost coverage of a

    single, market-dominant product, the PRC relied on a vague, standardless policy

    statement while at the same time ignoring an entire market-dominant class that

    fails to cover its attributable costs. Such an interpretation of the PAEA is

    impermissible when the traditional tools of statutory constriction are applied to the

    statute. That analysis reveals Congresss clear intent to allow the Postal Service

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    the flexibility to price products within a class in the manner that it thinks will

    maximize its revenue, even if some products do not individually cover their costs.

    The PRCs insistence that a single market-dominant product must exceed

    full cost coverage is inexplicable given that the same PRC wrote in a September

    2010 order that [t]he concept of product takes on significance in the system for

    regulating market dominant services only in areas that are unrelated to price.

    Order No. 536, Docket No. RM2009-3, p. 27 n.17 (P.R.C. Sept. 14, 2010). This

    failure to be consistent from order to order is the hallmark of a regulator acting in

    an arbitrary and capricious fashion.

    The PRCs order also exceeds its authority in the context of making its

    annual compliance determination. Congress limited the PRCs authority to

    enforcing applicable provisions of this chapter [Chapter 36] (or regulations

    promulgated thereunder), 39 U.S.C. 3653(b)(1), but the ACD does not conclude

    that the pricing for Standard Mail Flats violates any provision of Chapter 36.

    Indeed, it could not do so as Chapter 36 does not require market-dominant

    products to cover their costs on a product-by-product basis. Instead, the PRC

    concluded that the pricing of that product violates a standardless policy statement

    in Chapter 1 of Title 39. If Congress had intended for the PRC to enforce the

    policy statements in Chapter 1 in the context of the annual compliance

    determination, it would have written this title rather than this chapter.

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    Moreover, the same section of the PAEA that limits the scope of the PRCs

    enforcement authority to Chapter 36 permits the PRC to provide

    recommendations to the Postal Service related to the protection or promotion of

    public policy objectives set out in this title. 39 U.S.C. 3653(d). That provision

    hardly suggests that the PRC may enforce those same policy objectives.

    Finally, the PRCs directives regarding the pricing of the Standard Mail

    Flats product should be set aside as arbitrary and capricious because the PRC failed

    to consider the larger picture of the Postal Services financial condition, even

    though one of objectives Congress established for the PRCs modern system for

    regulating rates and classes for market-dominant products is [t]o assure adequate

    revenues, including retained earnings, to maintain financial stability. 39 U.S.C.

    3622(b)(5). In the context of an inflation-based price cap, judgments have to be

    made about how to allocate limited pricing flexibility in order to maximize profit

    (or contribution to attributable costs). It makes little sense to use a

    disproportionate share of the Postal Services limited pricing authority to raise the

    prices of a product with a trend of declining volumes. But that is precisely what

    the PRC has ordered here, even though the Postal Service exercising its business

    judgment has chosen not to do so. It is certainly a possibility that the course of

    action mandated by the PRC in the ACD will decrease the amount of contribution

    generated by the Standard Mail class of products as a whole. The Postal Services

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    goal at this time in its history must be to maximize contribution, not reduce it; it is

    unclear why the Postal Services regulator refused to even consider this issue.

    That refusal renders the PRCs order regarding Standard Mail Flats arbitrary and

    capricious.

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    ARGUMENT

    I. The PAEA specifically requires that market-dominant productscover their attributable costsby class while simultaneously requiring

    each competitive product to cover its own costsby product. Standard

    Mail Flats is a product within the market-dominant class of

    Standard Mail, not a competitive product, and thus it is not required

    by law to cover its own costs; the PAEA requires only that Standard

    Mail products cover their costs as a class. Thus the PRCs

    conclusion that the Standard Mail Flats product must cover its own

    costs is contrary to law, arbitrary and capricious.

    A. Standard of ReviewThis Courts review of the PRCs order is governed by the Administrative

    Procedure Act, 5 U.S.C. 706. See 39 U.S.C. 3663. The order below thus must

    be held unlawful and set aside if, inter alia, it is arbitrary, capricious, an abuse of

    discretion, or otherwise not in accordance with law. 5 U.S.C. 706(2)(A).

    B. AnalysisThe PRCs decision regarding the pricing of Standard Mail Flats is based on

    the false premise that every market-dominant product must cover its attributable

    costs in order to apportion the costs of all postal operations to all users of the mail

    on a fair and equitable basis. 39 U.S.C. 101(d). But Congress has already

    spoken to this precise issue and reached the opposite conclusion. Instead of

    requiring that each market-dominant product cover its attributable costs, Congress

    required that each class of market-dominant products cover their attributable costs

    as a group. Thus the plain language of the statute recognizes that, within a

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    particular class of mail, individual products may cover more or less of their

    attributable costs as long as the class as a whole covers at least 100 percent of its

    attributable costs. Because the PRCs decision conflicts with the PAEA, it must be

    set aside as contrary to law.

    When Congress decided to enhance the pricing flexibility of the Postal

    Service and restrict the role of the PRC in setting prices, it established a distinction

    between competitive products and market-dominant products and established

    different rules for pricing the two types of products. See 39 U.S.C. 102(8)&(9)

    (defining market-dominant product and competitive product by reference to

    the subchapter of Chapter 36 of Title 39 that governs each of the two types of

    products). With respect to market-dominant products, the PAEA requires that

    each class of mail . . . bear the direct and indirect postal costs attributable to each

    class . . . plus that portion of all other costs of the Postal Service reasonably

    assignable to such class or type. 39 U.S.C. 3622(c)(2) (emphasis added). In

    contrast, Congress decided that the PRC should ensure that each competitive

    productcovers its costs attributable. 39 U.S.C. 3633(a)(2) (emphasis added).

    Had Congress intended for each individual market-dominant product to

    cover its costs, it would have written Section 3622(c)(2) to match Section

    3633(a)(2). Because it did not do so, the only conclusion that can be drawn from

    the plain language of the statute is that its intention was to provide the Postal

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    Service pricing flexibility for products within each market-dominant class of mail.

    [W]here Congress includes particular language in one section of a statute but

    omits it in another section of the same Act, it is generally presumed that Congress

    acts intentionally and purposely in the disparate inclusion or exclusion. United

    States v. Wong Kim Bo, 472 F.2d 720, 722 (5th Cir. 1972).

    Allowing pricing flexibility within each class of mail is entirely consistent

    with one of the purposes of the PAEA. As described above, supra pp. 9-11,

    Congress designed the PAEA to provide the Postal Service with increased

    flexibility in pricing, as compared to the prior pricing regime. See, e.g., 39 U.S.C.

    3622(d)(4), (c)(7); Sen. Rep. No. 108-318 at 8, 10 (2004). Likewise, the PRC has

    recognized that increased flexibility is central to the Congressional design of the

    PAEA. See, e.g., Order No. 26, Docket No. RM2007-1, p. 78 at 3070 (P.R.C.

    Aug. 15, 2007) (The revamped ratemaking under the PAEA is designed to

    achieve various goals, principal among them are to afford the Postal Service

    enhanced pricing flexibility. . . .) (http://www.prc.gov/Docs/57/57348/RM2007-

    1FINAL.pdf). Moreover, the PRCs decision in this case, which elevates the role

    of a single product in connection with regulating prices, is strangely at odds with

    the PRCs order six months earlier establishing an analytical framework for

    workshare discounts in which the PRC stated that [t]he concept of product takes

    on significance in the system for regulating market dominant services only in areas

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    that are unrelated to price. PRC Order No. 536 at 27 n.17 (Sept. 14, 2010)

    (emphasis added).4 As the Postal Service pointed out in the ACR, the PRC

    concluded that the product level is not the appropriate level for applying pricing

    standards, suggesting instead that the class level is the appropriate level. (J.A. 15-

    16). The PRC made no effort to explain how it reached the opposite conclusion

    with respect to the Standard Mail Flats product just over six months later, and thus

    its decision is arbitrary and capricious in addition to being contrary to law.

    Allowing pricing flexibility within each class of market-dominant mail

    products is entirely consistent with the structure of the PAEA. As explained

    above, the overall increase for each class of mail products that have been

    designated as market-dominant products is essentially capped at the level of

    inflation. 39 U.S.C. 3622(d)(1)(A). Price averaging is allowed within classes to

    meet the overall cap, but is not allowed between classes. 39 U.S.C.

    3622(d)(2)(A). It would make little sense to allow price averaging within a class if

    Section 101(d) required the Postal Service to ensure that market-dominant products

    such as Standard Mail Flats cover their costs on a product-by-product basis

    rather than collectively as a class.

    4 Order No. 536 is the subject of a separate petition for review argued beforea panel of this Court on September 21, 2011, and still pending as of the date of thefiling of this brief. USPS v. PRC, No. 10-1324 (D.C. Cir.).

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    No Chevron deference is owed to the PRCs decision on this issue because

    its decision is directly contrary to the plain language of the statute. Under Chevron

    U.S.A. Inc. v. NRDC, Inc., 467 U.S. 837 (1984), this Court must first exhaust the

    traditional tools of . . . construction to determine de novo whether the statute

    unambiguously addresses the matter at issue. Id. at 843 & n.9; S. Cal. Edison

    Co. v. FERC, 195 F.3d 17, 23 (D.C. Cir. 1999). The traditional tools of statutory

    construction include the statutes text, structure, purpose, and legislative history.

    Pharmaceutical Research & Mfrs. of Am. v. Thompson, 251 F.3d 219, 224 (D.C.

    Cir. 2001). Where Congress has spoken to the precise question at issue, Wells

    Fargo Bank, N.A. v. FDIC, 310 F.3d 202, 205 (D.C. Cir. 2002) (quoting Chevron,

    467 U.S. at 842), the inquiry is at an end; the court must give effect to the

    unambiguously expressed intent of Congress. FDA v. Brown & Williamson

    Tobacco Corp., 529 U.S. 120, 132 (2000) (quoting Chevron, 467 U.S. at 843).

    Here, Congress has spoken unambiguously in Sections 3622 and 3633:

    competitive products must each cover their own costs; market-dominant products

    need not do so individually but must as a class cover the costs attributable to the

    class. In these circumstances, the PRCs order requiring the Postal Service to raise

    prices so that a single market-dominant product covers its costs is contrary to law,

    and this Courts inquiry should be at an end.

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    Section 101(d), which was part of the PRA and was not amended by the

    PAEA, is a general statement of policy, does not speak to the precise question at

    issue, and does not create any ambiguity. Section 101 is titled Postal Policy,

    and subsection (d) provides as follows:

    Postal rates shall be established to apportion the costs of allpostal operations to all users of the mail on a fair and equitablebasis.

    Subsection (d) does not say anything about products market-dominant or

    otherwise and it does not in any way suggest that the only way to apportion costs

    in a fair and equitable way is for each market-dominant product to cover its

    costs.

    Even if subsection (d) could be stretched to loosely address market-

    dominant product cost coverage, it would not create an ambiguity in Section

    3622(c)(2) because the traditional tools of statutory construction require that the

    specific controls the general. It is a basic principle of statutory construction that a

    statute dealing with a narrow, precise, and specific subject is not submerged by a

    . . . statute covering a more generalized spectrum. Radzanower v. Touche Ross &

    Co., 426 U.S. 148, 153 (1976); see also Simpson v. United States, 435 U.S. 6, 15

    (1978) (Precedence [is given] to the terms of the more specific statute where a

    general statute and a specific statute speak to the same concern, even if the general

    provision was enacted later.); Morton v. Mancari, 417 U.S. 535, 550-51 (1974)

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    (Where there is no clear intention otherwise, a specific statute will not be

    controlled or nullified by a general one, regardless of a priority of enactment.)

    (cited cases omitted).

    Section 3622(c)(2), enacted in 2006, is a specific statute. It explicitly

    requires that each class of mail . . . bear the direct and indirect postal costs

    attributable to each class . . . plus that portion of all other costs of the Postal

    Service reasonably assignable to such class or type. 39 U.S.C. 3622(c)(2)

    (emphasis added). Section 101(d), enacted in 1970, is a general policy statement,

    and it cannot control or nullify the more specific requirements of Section

    3622(c)(2).

    In sum, Title 39 requires only that the Postal Service sets prices for its

    market-dominant products so that each class of products covers its costs. The

    PRCs ACD requires a single market-dominant product in the Standard Mail class

    to cover its costs, and it relies on Section 101(d) as authority to do so. Section

    101(d), however, provides the PRC with no such authority, and thus this Court

    should set aside the PRCs order regarding the Standard Mail Flats product as

    contrary to law.

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    II. The PRCs authority in the context of reviewing the Postal Services

    Annual Compliance Report is limited by 39 U.S.C. 3653 to

    determinations that any rates or fees in effect during such year (for

    products individually or collectively) were not in compliance with

    applicable provisions of [Chapter 36] (or regulations promulgated

    thereunder). In the 2010 ACD, the Commission concluded that the

    rates for Standard Mail Flats violated 39 U.S.C. 101(d), which is not in

    Chapter 36. Thus the PRC exceeded its statutory authority by

    concluding that the Postal Services rates violated a policy statement

    found outside of Chapter 36.

    A. Standard of ReviewThis Courts review of the PRCs order is governed by the Administrative

    Procedure Act, 5 U.S.C. 706. See 39 U.S.C. 3663. The order below thus must

    be held unlawful and set aside if, inter alia, it is arbitrary, capricious, an abuse of

    discretion, or otherwise not in accordance with law. 5 U.S.C. 706(2)(A).

    B. AnalysisEven if Section 101(d) required the Postal Service to set the price of the

    Standard Mail Flats product so as to cover its attributable costs (which it does not),

    the PRC lacked the authority to order the Postal Service to do so in the context of

    its Annual Compliance Determination. The PRCs enforcement authority in an

    ACD proceeding is limited to the requirements of Chapter 36 of Title 39, and

    Section 101(d) appears in Chapter 1 not Chapter 36.

    In connection with an annual compliance determination, the PRC has the

    authority to take appropriate action in accordance with subsections (c) and (e) of

    section 3662 if a timely written determination of noncompliance is made under

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    subsection (b). 39 U.S.C. 3653(c). Subsection (b), in pertinent part, requires

    the PRC to make a written determination as to . . . whether any rates or fees in

    effect during such year (for products individually or collectively) were not in

    compliance with applicable provisions of this chapter (or regulations promulgated

    thereunder). The words this chapter refer to the chapter in which they appear:

    Chapter 36. This makes perfect sense, of course, because the general policy

    statements in Section 101 are given definition by the specific requirements of

    chapter 36, such as the allocation of institutional costs between the market-

    dominant and competitive product groupings and the requirement that market-

    dominant classes and competitiveproducts cover their attributable costs. In other

    words, Congress authorized the PRC to enforce through the ACD process the

    specific requirements of the PAEA in Chapter 36, but not the general, standardless

    policy statements of the PRA in Chapter 1 of Title 39.

    Moreover, the same section of the PAEA that limits the scope of the PRCs

    enforcement authority to Chapter 36 explicitly permits the PRC to provide

    recommendations to the Postal Service related to the protection or promotion of

    public policy objectives set out in this title. 39 U.S.C. 3653(d). It seems

    unlikely that Congress would have thought it necessary to authorize the PRC to

    make recommendations regarding the policy objectives of Title 39 in subsection

    (d) if it had already given the PRC the authority to enforce those objectives in

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    subsections (b) and (c). Indeed, by explicitly authorizing the PRC to make

    recommendations to the Postal Service, Congress implicitly prohibited the PRC

    from doing more than that. At the very least, subsection (d) provides further

    support for the intentional use of the words this chapter rather than this title in

    subsection (b). In any event, as noted previously, the general policy of Section

    101(d) finds expression in the specific provisions pertaining to cost in Chapter 36;

    that is, if rates are in compliance with the specific provisions of Chapter 36, they

    cannot fail to be in compliance with general guidance of Section 101(d).

    It is no answer to suggest, as the PRC did in the ACD (ACD at 15 (J.A. 37)),

    that all of the policies of Title 39 are incorporated within Chapter 36 because those

    policies are collectively described as a factor the PRC was to take into account in

    establishing or revising [its] system of modern rate regulation in 39 U.S.C.

    3622(c)(14). Congress restricted the PRCs authority in the ACD context to

    compliance with applicable provisions of this chapter, 39 U.S.C. 3653(b)(1)

    (emphasis added), even though the Postal Service is required to report whether all

    products . . . complied with all applicable requirements of this title, 39 U.S.C.

    3652(a)(1) (emphasis added). The PRCs expansive view of its authority in the

    ACD context renders meaningless Congresss choice of the words this chapter,

    and therefore violates basic canons of statutory interpretation. See Pillsbury v.

    United Eng'g Co.,342 U.S. 197, 199 (1952) (holding that Congress is presumed to

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    mean different things when it uses different words); Qi-Zhuo v. Meissner, 70 F.3d

    136, 139 (D.C. Cir. 1995) (all words in a statute are to be assigned meaning); see

    also Halverson v. Slater, 129 F.3d 180, 185 (D.C. Cir. 1997) (Congress cannot be

    presumed to do a futile thing.). If Congress had meant this title in Section

    3653, it would have said this title as it did in section 3652.

    The PRCs directives regarding the cost coverage for Standard Mail Flats are

    based on the purported failure of the current prices to comply with the

    requirements of Section 101(d), not the provisions of [Chapter 36] (or regulations

    promulgated thereunder). The relevant portion of the ACD does not conclude that

    the prices in effect for Standard Mail Flats are inconsistent with any provision of

    Chapter 36. It states only that the Commission finds that the prices in effect in

    FY 2010 for Standard Flats do not comply with section 101(d) of title 39. ACD at

    106 (J.A. 44). There is no reference to any regulation of the PRC, let alone one

    promulgated under the provisions of Chapter 36.

    Because the PRC lacked the authority to enforce the purported requirements

    of Section 101(d) in an Annual Compliance Determination proceeding, this Court

    should set aside its attempt to do so as contrary to law.

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    III. Under the PAEA, one of the PRCs objectives is [t]o assure adequate

    revenues, including retained earnings, to maintain financial stability.

    The PRC failed to even address the argument that its decision could

    result in the Standard Mail class as a whole making less contribution

    toward costs because the volume of flats is decreasing while the volume

    of letters is increasing. Thus the PRCs order requiring the Postal

    Service to prioritize limited CPI price-cap authority to Standard Mail

    Flats without regard to the financial consequences is arbitrary and

    capricious.

    A. Standard of ReviewThe PRCs directives should be set aside if they are arbitrary, capricious, an

    abuse of discretion, or otherwise not in accordance with law. 5 U.S.C.

    706(2)(A); see also 39 U.S.C. 3663. An agency action is arbitrary and capricious

    if the decision was not based on a consideration of the relevant factors or if there

    has been a clear error of judgment. See BowmanTransportation, Inc. v. Arkansas-

    Best Freight System, Inc., 419 U.S. 281, 285 (1974) (quoting Citizens to Preserve

    Overton Park, Inc. v. Volpe, 401 U.S. 402, 416 (1971). Similarly, an agency action

    that is devoid of needed factual support may be struck down as arbitrary or

    capricious. Assoc. of Data Processing Serv. Orgs. v. Board of Governors of the

    Fed. Reserve Sys., 745 F.2d 677, 683 (D.C. Cir. 1984).

    B. AnalysisIt is a matter of public record that the Postal Service is in the midst of a

    financial crisis and has been for several years. Thus it seems incredible that the

    Postal Services regulator would make decisions without reference to their impact

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    on the overall financial condition of the Postal Service, yet that is exactly what the

    PRC did when it ordered the Postal Service to increase the cost coverage of the

    Standard Mail Flats product 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. ACD at 106

    (J.A. 44).

    As the ACMA pointed out in its comments, requiring above-CPI increases

    for one product within the framework of a cap for a class of mail may not

    generate any net-income improvements . . . . ACMA Comments at 8-9 (J.A. 62-

    63). As set forth in the Statement of Facts, supra pp. 13-16, there are

    circumstances in which such a course of action will actually result in less coverage

    of attributable costs for the class of mail. The simple hypothetical example above

    shows how that can happen when the price-cap authority is used to raise prices on

    a product with decreasing volumes while no price increase is allocated to a product

    with increasing volumes. The conclusion is not complicated. If a business is

    limited to a certain level of price increases that may be allocated to a basket of

    products, maximization of profit (or, in the Postal Service context, contribution)

    would usually be best served by allocating the price increase to the product or

    products with increasing volumes. That is a business judgment left to the Postal

    Service by the PAEA.

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    From fiscal year 2009 to fiscal year 2010, the total volume of Standard Mail

    Letters increased by approximately 1.64 billion pieces of mail while the volume of

    Standard Mail Flats decreased by approximately 750 million pieces. See supra p.

    14 n.3. In these circumstances, it makes little sense to apply the most significant

    increases in Standard Mail prices to flats rather than letters for several years

    running as the PRCs directives contemplate. As the charts above suggest, it is

    certainly a possibility that such a course of action will decrease the amount of

    contribution generated by the Standard Mail class of products. The Postal

    Services goal at this time in its history must be to maximize contribution, not

    reduce it.

    The failure to address the ACMAs argument or even consider the overall

    impact of the Standard Mail Flats order on the Postal Services overall financial

    condition satisfies is arbitrary and capricious because the Postal Services financial

    condition is, by statute, a relevant consideration. See BowmanTransportation, 419

    U.S. at 285. Under the PAEA, one of objectives Congress established for the

    PRCs modern system for regulating rates and classes for market-dominant

    products is [t]o assure adequate revenues, including retained earnings, to

    maintain financial stability. 39 U.S.C. 3622(b)(5).

    This Court should set aside the PRCs order regarding the cost coverage of

    the Standard Mail Flats product because the PRC failed to even consider a relevant

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    factor the impact of the decision on the revenues of the Postal Service and its

    financial stability. This failure renders the PRCs order arbitrary and capricious.

    CONCLUSION

    For the reasons stated, this Court should grant the petition for review and set

    aside the PRCs directives relating to the cost coverage of the Standard Mail Flats

    product as arbitrary, capricious and contrary to law.

    Dated: October 7, 2011 Respectfully submitted,

    MARY ANNE GIBBONSExecutive Vice President & General Counsel

    /s/ Michael J. ElstonMICHAEL J. ELSTONChief Counsel, Appellate &

    Commercial LitigationUnited States Postal Service475 LEnfant Plaza, SWWashington, DC 20260(202) [email protected]

    Of Counsel:

    R. ANDREW GERMANManaging Counsel, Legal StrategyUnited States Postal Service475 L'Enfant Plaza, SWWashington, D.C. 20260

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    CERTIFICATE OF COMPLIANCE

    Certificate of Compliance With Type-Volume Limitation,Typeface Requirements, and Type Style Requirements

    1. This brief complies with the type-volume limitation of Fed. R. App. P.32(a)(7)(B) because:

    X this brief contains 7,792 words, excluding the parts ofthe brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii), or

    this brief uses a monospaced typeface and contains linesof text, excluding the parts of the brief exempted by Fed. R. App. P.32(a)(7)(B)(iii).

    2. This brief complies with the typeface requirements of Fed. R. App. P.32(a)(5) and the type style requirements of Fed. R. App. P. 32(a)(6) because:

    X this brief has been prepared in a proportionally spaced typeface usingTimes New Roman in 14 point , or

    this brief has been prepared in a monospaced typeface usingwith .

    /s/ Michael J. ElstonAttorney for the U.S. Postal ServiceDated: October 7, 2011

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    CERTIFICATE OF SERVICE

    I hereby certify that on October 7, 2011, the foregoing brief and its

    addendum were electronically filed with the U.S. Court of Appeals for the District

    of Columbia Circuit by using the CM/ECF system. I further certify that counsel

    for the respondent and intervenors are registered as ECF filers and that they will be

    served by the CM/ECF system.

    /s/ Michael J. ElstonMICHAEL J. ELSTONOffice of the General CounselUnited States Postal Service475 LEnfant Plaza, SWWashington, DC 20260(202) [email protected]

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