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Case: 10-1324 Document: 1292961 Filed: 02/11/2011 Page: 1
Case: 10-1324
Document: 1292961
Filed: 02/11/2011
Page: 1

Oral Argument Has Not Been Scheduled

No. 10-1324

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

Of counsel:

R. ANDREW GERMAN Managing Counsel, Pricing & Product Development United States Postal Service 475 L'Enfant Plaza, SW Washington, D.C. 20260

MARY ANNE GIBBONS Executive Vice President & General Counsel

MICHAEL J. ELSTON* Office of the General Counsel United States Postal Service 475 L'Enfant Plaza, SW Washington, D.C. 20260 (202) 268-7432

Attorneys for the United States Postal Service

FINAL BRIEF:

FEBRUARY 11, 2011

*Counsel of Record

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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 agency rulemaking.

Numerous persons and

entities filed comments in the agency’s docket but did not seek to intervene in the

proceedings.

The

NATIONAL

POSTAL

POLICY

COUNCIL

moved

for

leave

to

intervene in this review proceeding, and this Court granted the motion.

B. Ruling Under Review

The ruling under review is the PRC’s Order Number 536 dated September

14, 2010, in Docket No. RM2009-3.

C. Related Cases

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

Petitioner’s counsel are unaware of any related cases pending in this Court or any

other court.

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TABLE OF CONTENTS

Certificate as to Parties, Rulings and Related Cases

i

Table of Authorities

iv

Glossary

vi

Jurisdictional Statement

1

Standing

1

Statutory Provision (39 U.S.C. § 3622)

2

Statement of the Issues

6

Statement of the Case

7

Statement of the Facts

8

Summary of the Argument

12

Argument

15

I. The Postal Service has flexibility to set rates for market-dominant products subject to limited statutory restrictions, including a statutory limitation on the amounts of four specific workshare discounts: presorting, prebarcoding, handling and transportation of mail. In its order, the PRC asserted authority to regulate nonworkshare characteristics of mail pursuant to its authority to regulate workshare discounts. Thus the PRC exceeded its statutory authority by concluding that it could regulate nonworkshare mail characteristics under the statutory limitation on workshare discounts 15

A. Standard of Review

15

B. Analysis

16

ii

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TABLE OF CONTENTS (continued)

II. Establishing a worksharing relationship between two types of mail for the purpose of calculating a workshare discount requires a benchmark and a discounted variant of the benchmark where the difference between the two prices is the costs avoided by worksharing. Under the PAEA, mail “products” are defined as having either different cost or market characteristics, and thus the difference in price between two products cannot be limited to costs avoided by worksharing. The PRC’s conclusion that the workshare discount provisions apply between products is contrary to law, arbitrary and

25

A. Standard of Review

25

B. Analysis

25

III. Establishing a worksharing relationship between two types of mail for the purpose of calculating a workshare discount requires a benchmark and a discounted variant of the benchmark where the difference between the two prices is solely the costs avoided by worksharing. Single-Piece First Class Mail and Presorted First Class Mail are distinct products that have different cost and demand characteristics beyond the costs avoided by worksharing. Thus the PRC’s conclusion that a worksharing relationship exists between the two products is contrary to law and arbitrary and capricious

36

A. of Review

Standard

36

B. Analysis

36

Conclusion

47

Certificate of Compliance

49

Certificate of Service

50

Addendum (Table of Contents)

51

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TABLE OF AUTHORITIES

CASES

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

15-16

Assoc. of Data Processing Serv. Orgs. v. Board of Governors of the Fed. Reserve Sys., 745 F.2d 677 (D.C. Cir. 1984)

25,

36

Mail Order Assoc. of America v. USPS, 2 F.3d 408 (D.C. Cir. 1993)

8

Mobile Communications Corp. v. FCC, 77 F.3d 1399 (D.C. Cir. 1996)

17

Nat’l Credit Union Admin. v. First Nat’l Bank & Trust Co., 522 U.S. 479 (1998)

15

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

15

STATUTES

5 U.S.C. §706

15,

25, 36

*39 U.S.C. § 102(6)

30,

34

39

U.S.C. § 201

8

39

U.S.C. § 3622

1,

33

39

U.S.C. § 3622(a)

9

*39 U.S.C. § 3622(b)

9,

19, 22, 31-32, 34, 44-45

39

U.S.C.

§ 3622(c)

28

39

U.S.C. § 3622(d)

27-28, 33

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

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TABLE OF AUTHORITIES (continued)

*39 U.S.C. § 3622(e)

7,

10, 12, 16-17, 19-22, 24-25, 30-35

39

U.S.C. § 3642

33

39

U.S.C. § 3652

34-35

39

U.S.C. § 3663

1,

8, 15, 25, 36

Postal Accountability and Enhancement Act (PAEA), Pub. L. No. 109-435,

120 Stat. 3198 (2006)

9,

11-13, 16, 22, 26-27, 29-34, 41, 43-45, 47

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

8

LEGISLATIVE HISTORY

Sen. Rep. No. 108-318 (2004)

28

DECISIONS OF THE PRC

Op. & Rec. Decision, Docket No. R90-1 (P.R.C. Jan. 4, 1991)

19

Op. & Rec. Decision, Docket No. MC95-1 (P.R.C. Jan. 26, 1996)

30

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

28

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

27,

29, 30

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

28

Order Reviewing Postal Service Market Dominant Price Adjustments, Docket No. R2009-2 (P.R.C. March 16, 2009) (Order No. 191)

8-9, 20

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GLOSSARY

Page: 7

BMM

Bulk Metered Mail

Order

Order Adopting Analytical Principles Regarding Workshare Discount Methodology, Order No. 536, Docket No. RM2009-3 (Sept. 14, 2010).

IBI

Information-Based Indicia

IMb

Intelligent Mail Barcode

PAEA

Postal Accountability and Enhancement Act

PCRA

Public Cost and Revenue Report

PRA

Postal Reorganization Act

PRC

Postal Regulatory Commission Postal Rate Commission (prior to 2006)

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JURISDICTIONAL STATEMENT

This petition challenges an order of the Postal Regulatory Commission

(“PRC”) adopting an analytical framework for its review of workshare discounts

pursuant to 39 U.S.C. § 3622(e). This Court has jurisdiction pursuant to 39 U.S.C.

§ 3663. The final order below was rendered on September 14, 2010, and this

petition was timely filed on October 13, 2010. See id.

STANDING

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

“adversely affected or aggrieved” by the PRC’s final order adopting analytical

principles regarding workshare-discount methodology.

The order substantially

increases

the

PRC’s

authority

to

review

non-workshare

rate

changes

and

undermines the Postal Service’s flexibility to set prices.

Any subsequent rule

adopted under the analytical framework will result in decreased pricing flexibility

and unjust and unreasonable rates.

This Court can redress these injuries by

granting the petition for review and setting aside the PRC’s conclusions as contrary

to law, arbitrary and capricious.

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STATUTORY PROVISION

Title 39, United States Code

§ 3622. Modern rate regulation

(a) Authority Generally.— The Postal Regulatory Commission shall, within 18

months after the date of enactment of this section, by regulation establish (and may from time to time thereafter by regulation revise) a modern system for regulating

rates and classes for market-dominant products.

(b) Objectives.— Such system shall be designed to achieve the following

objectives, 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 section

3691.

(4) To allow the Postal Service pricing flexibility. (5) To assure adequate revenues, including retained earnings, to maintain financial stability. (6) To reduce the administrative burden and increase the transparency of the ratemaking process. (7) To enhance mail security and deter terrorism. (8) To establish and maintain a just and reasonable schedule for rates and classifications, however the objective under this paragraph shall not be construed to prohibit the Postal Service from making changes of unequal magnitude within, between, or among classes of mail. (9) To allocate the total institutional costs of the Postal Service appropriately between market-dominant and competitive products.

(c) Factors.— In establishing or revising such system, the Postal Regulatory

Commission shall take into account— (1) the value of the mail service actually provided each class or type of mail service to both the sender and the recipient, including but not limited to the collection, mode of transportation, and priority of delivery; (2) the requirement that each class of mail or type of mail service bear the direct and indirect postal costs attributable to each class or type of mail service through reliably identified causal relationships plus that portion of all other costs of the Postal Service reasonably assignable to such class or type;

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(3) the effect of rate increases upon the general public, business mail users, and enterprises in the private sector of the economy engaged in the

delivery of mail matter other than letters; (4) the available alternative means of sending and receiving letters and other mail matter at reasonable costs; (5) the degree of preparation of mail for delivery into the postal system performed by the mailer and its effect upon reducing costs to the Postal Service; (6) simplicity of structure for the entire schedule and simple, identifiable relationships between the rates or fees charged the various classes of mail for postal services; (7) the importance of pricing flexibility to encourage increased mail volume and operational efficiency; (8) the relative value to the people of the kinds of mail matter entered into the postal system and the desirability and justification for special classifications and services of mail; (9) the importance of providing classifications with extremely high degrees of reliability and speed of delivery and of providing those that do not require high degrees of reliability and speed of delivery; (10) the desirability of special classifications for both postal users and the Postal Service in accordance with the policies of this title, including agreements between the Postal Service and postal users, when available on public and reasonable terms to similarly situated mailers, that—

(A) either—

(i) improve the net financial position of the Postal Service through

reducing Postal Service costs or increasing the overall contribution to the institutional costs of the Postal Service; or (ii) enhance the performance of mail preparation, processing, transportation, or other functions; and

(B) do not cause unreasonable harm to the marketplace.

(11) the educational, cultural, scientific, and informational value to the recipient of mail matter; (12) the need for the Postal Service to increase its efficiency and reduce its costs, including infrastructure costs, to help maintain high quality, affordable postal services; (13) the value to the Postal Service and postal users of promoting intelligent mail and of secure, sender-identified mail; and (14) the policies of this title as well as such other factors as the Commission

determines appropriate.

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(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 rates to be set by the Postal Regulatory Commission that will be equal to

the change in the Consumer Price Index for All Urban Consumers unadjusted for seasonal variation over the most recent available 12-month period preceding the date the Postal Service files notice of its intention to increase rates;

(B)

establish a schedule whereby rates, when necessary and appropriate, would change at regular intervals by predictable amounts;

(C)

not later than 45 days before the implementation of any adjustment in rates under this section, including adjustments made under subsection (c)(10)— (i) require the Postal Service to provide public notice of the adjustment; (ii) provide an opportunity for review by the Postal Regulatory Commission;

(iii) provide for the Postal Regulatory Commission to notify the

Postal Service of any noncompliance of the adjustment with the limitation under subparagraph (A); and

(iv) require the Postal Service to respond to the notice provided

under clause (iii) and describe the actions to be taken to comply with the limitation under subparagraph (A);

(D) establish procedures whereby the Postal Service may adjust rates

not in excess of the annual limitations under subparagraph (A); and

(2) Limitations.—

* *

*

(A) Classes of mail.— Except as provided under subparagraph (C),

the annual limitations under paragraph (1)(A) shall apply to a class of mail, as defined in the Domestic Mail Classification Schedule as in effect on the date of enactment of the Postal Accountability and Enhancement Act.

(B) Rounding of rates and fees.— Nothing in this subsection shall preclude the Postal Service from rounding rates and fees to the nearest whole integer, if the effect of such rounding does not cause the overall rate increase for any class to exceed the Consumer

Price Index for All Urban Consumers.

*

*

*

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(e) Workshare Discounts.— (1) Definition.— In this subsection, the term “workshare discount” refers to rate discounts provided to mailers for the presorting, prebarcoding, handling, or transportation of mail, under subsection (a). (2) Scope.— The Postal Regulatory Commission shall ensure that such discounts do not exceed the cost that the Postal Service avoids as a result of workshare activity, unless—

(A)

the discount is—

 

(i)

associated with a new postal service, a change to an existing

 

postal service, or with a new workshare initiative related to an existing postal service; and

 

(ii)

necessary to induce mailer behavior that furthers the economically efficient operation of the Postal Service and the portion of the discount in excess of the cost that the Postal Service avoids as a result of the workshare activity will be phased out over a limited period of time;

(B)

the amount of the discount above costs avoided—

 

(i)

is necessary to mitigate rate shock; and

(ii)

will be phased out over time;

(C)

the discount is provided in connection with subclasses of mail consisting exclusively of mail matter of educational, cultural,

scientific, or informational value; or

reduction or elimination of the discount would impede the efficient operation of the Postal Service. *

(D)

*

*

(4) Report.— Whenever the Postal Service establishes a workshare discount rate, the Postal Service shall, at the time it publishes the workshare discount rate, submit to the Postal Regulatory Commission a detailed report that—

(A) explains the Postal Service’s reasons for establishing the rate;

(B)

sets forth the data, economic analyses, and other information relied on by the Postal Service to justify the rate; and

(C)

certifies that the discount will not adversely affect rates or services provided to users of postal services who do not take advantage of the discount rate.

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STATEMENT OF THE ISSUES

I. The Postal Service has flexibility to set rates for market-dominant

products subject to limited statutory restrictions, including a statutory limitation on

the amounts of four specific workshare discounts:

presorting, prebarcoding,

handling and transportation of mail.

In its order, the PRC asserted authority to

regulate nonworkshare characteristics of mail pursuant to its authority to regulate

workshare discounts.

Did the PRC exceed its statutory authority by concluding

that it could regulate nonworkshare mail characteristics under the workshare

discount provisions?

II. Establishing a worksharing relationship between two types of mail for

the purpose of calculating a workshare discount requires a benchmark and a

discounted variant of the benchmark where the difference between the two prices

is the costs avoided by worksharing.

Under the PAEA, mail “products” are

defined as having different cost or market characteristics, and thus the difference in

price between two products cannot be limited to costs avoided by worksharing. Is

the PRC’s conclusion that the workshare discount provisions apply between

products contrary to law, arbitrary and capricious?

III. Establishing a worksharing relationship between two types of mail for

the purpose of calculating a workshare discount requires a benchmark and a

discounted variant of the benchmark where the difference between the two prices

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is solely the costs avoided by worksharing.

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Single-Piece First Class Mail and

Presorted First Class Mail are distinct products that have different cost and demand

characteristics beyond the costs avoided by worksharing. Is the PRC’s conclusion

that a worksharing relationship exists between the two products contrary to law,

arbitrary and capricious?

STATEMENT OF THE CASE

On March 16, 2009, the Postal Regulatory Commission (PRC) issued Order

No. 192.

In Order No. 192, the PRC gave notice of a proposed rulemaking to

examine methodologies for analyzing workshare discounts.

(J.A. 1.)

In response

to the order, interested persons, including the United States Postal Service (Postal

Service), filed comments with the PRC. (J.A. 1-2.) On August 11, 2009, the PRC

held a public hearing on its consideration of workshare rate design.

(J.A. 387.)

After the hearing, the PRC issued its Notice of Inquiry No. 1, which requested that

interested persons address certain questions from the PRC concerning workshare

discount methodology issues. (J.A. 144.) Several interested persons, including the

Postal Service, filed responses. (J.A. 3-4, 282.)

After receiving the comments, reply comments and supplemental comments

of all interested persons, the PRC issued Order No. 536 (“Order”) on September

14, 2010.

In the Order, the PRC adopted analytical principles regarding the

methodology used to evaluate workshare discounts under 39 U.S.C. § 3622(e).

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(J.A. 314-85.) On October 13, 2010, 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. Under

the PRA, the Postal Service initiated rate changes by requesting a recommended

decision from the PRC’s predecessor agency, the Postal Rate Commission.

The

Postal Rate Commission submitted its recommended decision to the Governors of

the Postal Service. The Governors could “approve the recommended decision and

order it placed in effect;

allow the recommended decision to take effect under

protest and seek judicial review of it;

allow the recommended decision to take

effect under protest and return it to the Commission for further consideration; or

reject the recommended decision and resubmit it to the Commission for further

consideration.” Mail Order Assoc. of America v. USPS, 2 F.3d 408, 414 (D.C. Cir.

1993).

Under the PRA, rates primarily were based on the Postal Service’s costs,

and “the Postal Service was entitled to rates that provided sufficient revenues to

cover projected costs in a future test year.”

Order Reviewing Postal Service

Market Dominant Price Adjustments, Docket No. R2009-2, p. 1 (P.R.C. March 16,

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2009) (available at http://www.prc.gov/Docs/62/62705/Order_No_191.pdf) (Order

No. 191).

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

Accountability and Enhancement Act (PAEA), Pub. L. No. 109-435, 120 Stat.

3198 (2006). The PAEA, among other things, greatly narrowed the PRC’s role in

pricing decisions, and the Postal Service now “enjoys a general prerogative to set

rates.”

Order at 16 (J.A. 333).

It also directed the PRC to develop a modern

system for regulating the rates of market-dominant products, such as First-Class

Mail, “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). As the PRC has

explained, “[t]he PAEA replaced [the PRA] model with a new process premised in

historical, rather than projected, costs” and establishing “a price cap ceiling on

increases for market dominant classes” of mail. Order No. 191 at 1.

When the Postal Service submitted its planned market dominant price

changes scheduled to take effect May 11, 2009, the PRC concluded that the Postal

Service’s workshare discounts for First-Class Mail and Standard Mail were not

based on the workshare cost avoidance methodologies employed under the PRA.

Order 191 at 19 & n. 14. As a result, the PRC initiated the rulemaking that is the

subject of the Postal Service’s Petition for Review. Id. at 23. The rulemaking was

about what worksharing is and how worksharing should be identified and analyzed

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under the PAEA. In simple terms, a workshare discount is a discount provided to a

mailer that does something with its mail that the Postal Service ordinarily would

do. By saving the Postal Service from doing that work, the mailer earns a discount

on the postage rate for that mail. For example, when an individual places outgoing

mail in his or her mailbox, the Postal Service is responsible for transporting that

mail from that mailbox all the way to its destination.

A large mailer in Seattle

targeting residences in the Washington, D.C. area can save some of the Postal

Service’s costs by arranging its own transportation from Seattle to a designated

Postal Service facility on the East Coast.

discounted postage rate for that mailing.

By doing so, the mailer can earn a

As the PRC explained in the Order that is under review, there are “three

pricing standards that are objective, quantitative, and framed in mandatory terms.”

(J.A. 335.)

One of those standards is that “[w]orkshare discounts are limited to

avoided costs,” J.A. 335, or, more precisely, workshare discounts may “not exceed

the cost that the Postal Service avoids as a result of workshare activity,” 39 U.S.C.

§ 3622(e)(2).

“Workshare discounts” under the PAEA consist of discounts for four

specific tasks that can be performed by mailers rather than the Postal Service: “the

presorting, prebarcoding, handling, or transportation of mail.”

39

U.S.C. §

3622(e)(1).

For example, “[m]ailers can present mail that has been correctly

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prebarcoded, or the Postal Service can apply barcodes to the mail itself.”

(J.A.

291.)

Mailers can “dropship mail closer to its destination,” or the Postal Service

can transport the mail all the way from the mailer to the customer. (Id.) All of the

worksharing activities have a common attribute: “the option exists for the function

to be performed by either the mailer or the Postal Service.” (Id.)

The costs avoided by worksharing, however, are not the only reason cost,

demand or pricing differences may exist between two different mail products. As

explained in more detail below (infra pp. 40-41), for example, the costs avoided

through worksharing do not represent the full cost differentials between Single-

Piece First-Class Mail and Presorted First-Class Mail.

Against this background,

the Postal Service argued before the PRC that the two products are not in a

worksharing relationship while the PRC has concluded that they are. As both the

PRC and the Postal Service recognize, the analytical principles employed to assess

the legality of workshare discounts have a significant impact on rates charged to

institutional mailers and on the Postal Service’s pricing flexibility.

The Order adopting analytical principles regarding workshare discount

methodology does not isolate factual findings from legal analysis or policy

discussions. Accordingly, additional facts are set forth below in the context of the

arguments to which they relate.

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SUMMARY OF THE ARGUMENT

In the rulemaking proceeding under review, the PRC expanded the definition

of worksharing well beyond work that can be performed by either the Postal

Service or a mailer. In so doing, it has created a discount tail that wags the pricing

dog.

Instead of providing the Postal Service with the pricing flexibility that the

PRC itself has said was a principal goal of Congress in enacting the PAEA, the

PRC has made the workshare discount the force that drives pricing decisions for

one of the Postal Service’s flagship products, Presorted First-Class Mail and, in

turn, restricts the Postal Service’s options regarding other First-Class products.

First, the plain language of the PAEA limits workshare discounts to four

discrete activities:

“the presorting, prebarcoding, handling, or transportation of

mail.”

39 U.S.C. § 3622(e)(1).

While the PRC has authority to further define

those four specified activities, it does not have authority to add to the list of

worksharing activities. Nonetheless, that is precisely what it has done in its Order

by purporting to regulate, pursuant to its authority under the workshare provisions,

“ancillary workshare characteristics” that have nothing to do with work that can be

performed by either the mailer or the Postal Service and that do not result in any

“avoided costs” for the Postal Service.

This Court should set aside the PRC’s

conclusion that it has the authority to regulate nonworksharing activities and mail

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characteristics pursuant to the worksharing provisions of the PAEA because that

conclusion is arbitrary, capricious and contrary to the plain language of the PAEA.

Second, the PRC incorrectly concluded that worksharing relationships can

exist between and across mail products.

By definition, mail products have

different cost characteristics, different demand characteristics or both. In contrast,

a worksharing relationship between two types of mail is predicated on the notion

that the only difference between the two is the costs avoided by a mailer’s

worksharing activity.

In other words, there is a benchmark type of mail and a

workshared variant of that type of mail that costs less for the Postal Service to

process.

That difference in costs – costs avoided – is reflected in a discount that

may not exceed the costs avoided by the worksharing activity.

Contrary to the

PRC’s Order, a type of mail in one product group cannot serve as the benchmark

for a type of mail in another product group because those separate products have

different cost or demand characteristics.

Thus separate products have cost

differentials or pricing differentials that are not related to any of the four specified

worksharing activities and do not reflect “costs avoided” by the Postal Service.

Moreover, this conclusion undermines the Postal Service’s pricing flexibility as

well as other objectives of the PAEA, while the PRC did not identify a single

objective of the PAEA that is served by its conclusion. In fact, the PRC suggested

that it could exercise its authority under the worksharing provisions of the PAEA

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without reference to the objectives of the PAEA. In these circumstances, it is clear

that the conclusion that worksharing relationships can exist between and across

separate mail products is arbitrary, capricious and contrary to the PAEA.

Third, even if a workshare-discount relationship could exist across products,

the PRC incorrectly concluded that there is a workshare relationship between

Presorted First-Class Mail and Single-Piece First-Class Mail. The evidence in the

record does not support the PRC’s conclusion.

To the contrary, the evidence

strongly

suggests

that

Presorted

and

Single-Piece

First-Class

Mail

are

fundamentally distinct types of mail, and it is inappropriate to benchmark one to

the other.

According to the PRC, a worksharing relationship exists if benchmark

mail is likely to convert in significant numbers to the workshared variant when the

discount is provided and if workshared mail is likely to revert to the benchmark

type when the discount is withdrawn.

The evidence in the record shows that the

historic process of conversion from Single-Piece to Presorted First-Class Mail is

largely over.

Additionally, a presort mailer faced with a price increase due to

elimination of the discount is more likely to convert, where possible, to lower cost

and less profitable Standard Mail or to leave the mail altogether.

Thus the

conclusion that a worksharing relationship must be maintained between some

unidentified subset of Single-Piece First Class Mail and Presorted First-Class Mail

is arbitrary and capricious, and this Court should grant the petition for review.

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ARGUMENT

Page: 22

I. The Postal Service has flexibility to set rates for market-dominant products subject to limited statutory restrictions, including a statutory limitation on the amounts of four specific workshare discounts:

presorting, prebarcoding, handling and transportation of mail. In its order, the PRC asserted authority to regulate nonworkshare characteristics of mail pursuant to its authority to regulate workshare discounts. Thus the PRC exceeded its statutory authority by concluding that it could regulate nonworkshare mail characteristics under the statutory limitation on workshare discounts.

A. Standard of Review

This Court’s review of the PRC’s 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). The

PRC’s statutory interpretation of the workshare discount provision of Title 39 is

governed by the familiar two-step standard first set forth in Chevron U.S.A. Inc. v.

NRDC, Inc., 467 U.S. 837 (1984). First, this Court must 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). Traditional tools require a court to

examine, inter alia, “the language and design of the statute as a whole.” S. Cal.

Edison, 195 F.3d at 24 (quotation marks omitted); see also, e.g., Nat’l Credit

Union Admin. v. First Nat’l Bank & Trust Co., 522 U.S. 479, 499-503 (1998). If

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there is ambiguity in the statutory language, a court will ordinarily defer to an

agency’s reasonable construction of that ambiguity. Chevron, 467 U.S. at 843.

B.

Analysis

In what can only be described as a remarkably bold attempt to re-write the

PAEA, the PRC concluded that the term “workshare discount” should be construed

to include mail characteristics that do not result from worksharing and do not

involve costs avoided by the Postal Service. That term, however, was fully defined

by Congress as follows:

rate discounts provided to mailers for the presorting, prebarcoding, handling, or transportation of mail, as further defined by the Postal Regulatory Commission.

39 U.S.C. §3622(e)(1). Admittedly, Congress authorized the PRC to further define

the four categories of workshare activities – presorting, prebarcoding, handling and

transportation – but nowhere in the statute did Congress authorize the PRC to add

to the list of workshare discounts. Nonetheless, that is what the PRC has done in

its order.

Moreover, it has defined workshare discounts to include characteristics

of mail that have nothing to do with the mailer performing work that the Postal

Service otherwise would have to perform.

In other words, the term “workshare

discount” – in the PRC’s view – includes things that involve no sharing of the

Postal Service’s work by the mailer.

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The plain language of the workshare-discount provision is clear. Section

3622(e)(1) defines worksharing as four distinct activities that, as an option, mailers

may perform themselves and therefore qualify for workshare discounts.

These

activities, when performed by mailers, allow the Postal Service to avoid work the

Postal Service would otherwise have done to process or deliver that mail.

The PRC’s expansion of the definition of “workshare discounts” is based on

its erroneous conclusion that “Section 3622(e) makes the Commission responsible

for establishing reasonable definitions of workshare discounts.”

(J.A. 361.)

The

plain language of the statute, however, does not support this conclusion. Congress

defined workshare discounts to include four specific activities and then authorized

the PRC to further define those four activities – not to add to the number of

worksharing activities. Because Congress has spoken directly to the issue of what

constitutes “worksharing,” no deference is owed to the views of the PRC, and the

rule of statutory construction expressio unis est exclusio alterius (the expression of

one is the exclusion of others) applies despite the administrative context.

Mobile

Communications Corp. v. FCC, 77 F.3d 1399, 1404-05 (D.C. Cir. 1996). At some

points in its order, the PRC appears to recognize that its authority is limited to

further defining the “four categories of worksharing activity that are named in

section 3622(e).” (J.A. 359.) But the PRC did not confine itself to that – instead it

has expanded the concept of “workshare” to include mail characteristics and mailer

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activities that are not listed in the statute and that do not substitute for work

performed by the Postal Service.

The PRC correctly notes that there are other mailer activities that change the

characteristics of the mail presented to the Postal Service for delivery, which in

turn result in cost savings to the Postal Service because those qualities of the mail

make it easier and more efficient to process that mail.

But the PRC fails to

recognize that those characteristics, or qualities, do not constitute worksharing with

the Postal Service. Attempting to obfuscate the real issue, the PRC refers to these

as “ancillary workshare characteristics.

(J.A. 360.)

The concept of “address

hygiene” is one example of these “ancillary workshare characteristics.”

Mailers

that check their mailing lists to make sure the addresses are valid (i.e., use a

cleansed mailing list) provide mail that results in more accurate sorting, cheaper

handling and less undeliverable-as-addressed mail.

But, contrary to the PRC’s

conclusion, this is not worksharing because the Postal Service could not perform

the work for the mailer if the mailer chose not to do it. Moreover, good “address

hygiene” on any type of mail – including Single-Piece First Class Mail sent by

individuals on a daily basis – reduces costs for the Postal Service, but no one

suggests that those individuals are entitled to a workshare discount off the price of

a First-Class stamp.

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Non-worksharing activities undertaken by mailers certainly impact mail

characteristics, which in turn can reduce costs and increase postal efficiency.

These differences in cost can be reflected in price differences between mail with a

given characteristic and mail without that characteristic (e.g., letters vs. flats)

without characterizing it as a “workshare discount.”

Long before the PRC’s

expansion of the definition of worksharing beyond things that actually involve

worksharing, those differences in costs were taken into account in pricing through

other means.

See, e.g., Op. & Rec. Decision, Docket No. R90-1, at V-225 to V-

231 (P.R.C. Jan. 4, 1991) (reprinted in

the

addendum)

(distinguishing rate

differentials between letters and flats from “traditional worksharing concepts”). In

other words, the Postal Service had the flexibility to recognize and price for such

non-workshare cost savings prior to the adoption of the PAEA, a law that was

meant to improve rather than restrict the Postal Service’s pricing flexibility.

U.S.C. § 3622(b)(4).

39

In its Order, the PRC essentially concludes that all cost differences between

non-workshared mail and its workshared variant reflect worksharing activity. This

is simply not true.

Sometimes a cost difference is just a cost difference, not an

avoided worksharing cost or cost passthrough that is subject to evaluation under

Section 3622(e).

If it does not involve one of the four specified worksharing

activities – each of which involves the mailer performing work that the Postal

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Service would otherwise have to do – then it is not worksharing.

If

it

is

not

worksharing, the PRC should not be permitted to regulate it under Section

3622(e)(1) as its Order purports to do.

The PRC has already recognized a non-worksharing price differential in

another context, so there is no reason to believe that other non-worksharing cost

differentials cannot be accommodated through non-worksharing price differentials

and the application of the just-and-reasonable-rates standard rather than the rigid

100 percent passthrough limitation of Section 3622(e). For example, within First-

Class Presort automation letter prices, there is a price differential if the barcode

used meets the requirements for “full-service IMb (Intelligent Mail Barcode).”

Essentially, this is a format that allows for additional information to be included in

the barcode, beyond what is needed to sort the mail. As the PRC summarized the

Postal Service’s argument,

the Postal Service contends that the full-service IMb option will not result in the Postal Service avoiding any additional worksharing-related costs. Thus it concludes that the full-service IMb is not worksharing. It argues that the price is “a policy-based differential to promote adoption of full service so that the promise of Intelligent Mail can be more fully and expeditiously realized.”

Order No. 191 at 26 (supra p. 8). The Commission found “the proposed discounts

justified.”

Id. at 28.

Thus there is no reason non-worksharing cost differentials

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need to be addressed under Section 3622(e) as if they were worksharing cost

differentials.

The PRC also misses the boat when it apparently concludes that mailers

must be encouraged to alter the characteristics of their mail through a rigid

workshare discount passthrough when that is hardly the case.

Taking address

hygiene as an example again, there are reasons why mailers would want to use a

cleansed mailing list rather than an uncleansed mailing list (J.A. 292-93), not least

of which is that use of a cleansed mailing list increases the chances that the

mailer’s mail actually reaches the intended recipient in a timely manner and that

the recipient responds. Other mail characteristics reduce damage to the mail in the

mail stream and speed delivery, and such advantages have nothing to do with costs,

let alone costs avoided by the Postal Service by having the mailer do work the

Postal Service would otherwise do. Id.

The error in the PRC’s approach is plainly demonstrated by the guidelines it

adopted.

The PRC explained that “section 3622(e)(1) should be construed to

include the mail characteristics resulting from the four workshare activities named

there, and closely related traits that, in the presence of the named activity” that

“affect the value

of the named worksharing activity,” are “practical for the

mailer to alter in response to the discount for the named worksharing activity,” and

“[w]hose cost impact cannot feasibly be isolated from the impact of the named

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(J.A. 363.)

In other words, the PRC concluded that the

definition of workshare discounts in Section 3622(e)(1) should be expanded to

include things that are not worksharing activities but “characteristics” that (1)

affect the value of a worksharing activity, (2) can be altered in response to the

workshare discount for other worksharing activities, and (3) produce a cost impact

that is different from, but cannot be isolated from, the worksharing activity.

This

cannot possibly be a legitimate way to define the four specified worksharing

activities – it is an obvious and unwarranted expansion of those terms to things that

plainly are not included within them.

It expands the PRC’s authority under the

workshare-discount provision to nonworksharing characteristics that relate to the

manner in which the mailer meets Postal Service specifications and has nothing to

do with work avoided by the Postal Service. This expansion of the PRC’s statutory

authority is at the expense of the Postal Service’s pricing flexibility 1 and makes

pricing workshare discounts needlessly complex.

As the Postal Service explained in response to an inquiry by the PRC, the

concept of a workshare discount is not that complicated:

1 As noted throughout this brief, allowing the Postal Service pricing flexibility is an explicit objective of the PAEA. 39 U.S.C. § 3622(b)(4). The Postal Service, of course, recognizes that there are limits to its pricing flexibility, and rightly so. However, when the PRC is adjusting its modern rate system or interpreting statutory limitations on its design, the PRC’s choice between alternatives should serve some objective identified in the PAEA if it undermines another. Here the PRC has identified no objective served by its expansive interpretation of workshare discounts.

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Mailers can present mail that has been presorted to the final sort, or the Postal Service can sort the same mail to that level itself. Mailers can present mail that has been correctly prebarcoded, or the Postal Service can apply barcodes to the mail itself. Mailers can undertake the handling and transportation necessary to dropship mail closer to its destination, or the Postal Service can undertake such handling and transportation itself. In each instance, the option exists for the function to be performed by either the mailer or the Postal Service, and the intended measure of worksharing cost avoidance is the cost avoided by the Postal Service by virtue of not having to perform the function already performed by the mailer.

(J.A. 289.)

Under the PRC’s guidelines, simply meeting the prerequisites for a

workshare discount would constitute “worksharing” even though it has nothing to

do with costs avoided by the Postal Service. This approach makes no sense. For

example, a mailing must be compatible with the Postal Service’s automation

equipment in order to receive a discount. As the Postal Service explained,

If the mailer presents a mailpiece [that] cannot be run through the Postal Service’s automation equipment, the Postal Service would not be incurring any costs to barcode that piece. It would make no sense, therefore, for the Postal Service to grant a discount for prebarcoding such a piece, as no costs would be avoided by the mailer engaging in that activity under those circumstances. The costs avoided by prebarcoding must presuppose that the mailpieces in question can be run through postal automation equipment, as it is such equipment that would print any Postal Service-applied barcode.

(J.A. 291.)

While designing a mailing to be compatible with the Postal Service’s

automation

equipment

meets

the

PRC’s

guidelines

for

mail

characteristics

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governed by Section 3622(e)(1), and it certainly makes processing that mail more

efficient and less costly for the Postal Service, it has nothing to do with allowing

the Postal Service to avoid work it otherwise would do, and there are no “avoided

costs” that can be passed on to the mailer. That is, preparing an envelope so that it

is automation compatible is not worksharing.

The PRC notes that these “mail characteristics” are not listed in Section

3622(e) but claims that their “impact on the value” of a worksharing activity “must

be reflected in the size of the

discount if the purpose of the discount is to be

fulfilled.”

(J.A. 362.) That simply is not correct. The purpose of the discount is

to allow the Postal Service to pass along to its customers the costs avoided by

having the mailer perform work that the Postal Service would otherwise do.

It

does

not

serve

the

purpose

of

the

discount

to

expand

its

reach

to

mail

characteristics that have nothing to do with work that the Postal Service would

otherwise have to perform.

Because the guidelines for construing the four explicit types of worksharing

in Section 3622(e)(1) adopted by the PRC exceed the authority granted to the PRC

by Congress and are contrary to the plain language (as well as the explicit

objectives) of the statute, this Court should vacate that portion of the PRC’s order

and limit the PRC’s Section 3622(e)(1) authority to the review of discounts for the

four specified worksharing activities only.

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II. Establishing a worksharing relationship between two types of mail for the purpose of calculating a workshare discount requires a benchmark and a discounted variant of the benchmark where the difference between the two prices is the costs avoided by worksharing. Under the PAEA, mail “products” are defined as having either different cost or market characteristics, and thus the difference in price between two products cannot be limited to costs avoided by worksharing. The PRC’s conclusion that the workshare discount provisions apply between products is contrary to law, arbitrary and capricious.

A. Standard of Review

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); see also 39 U.S.C. § 3663.

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. Analysis

Workshare discounts are “rate discounts provided to mailers for the presorting,

prebarcoding, handling, or transportation of mail.” 39 U.S.C. § 3622(e)(1). Unless a

specific exception applies, a workshare discount may not “exceed the cost that the

Postal Service avoids as a result of workshare activity.” 39 U.S.C. § 3622(e)(2). Thus,

as the PRC explained, the statute contemplates two reference points: a benchmark type

of mail, or base group, and a discounted variant of that mail. (J.A. 336.) The two rates

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are linked in that the discounted variant provides a mailer with an incentive to do work

that the Postal Service would otherwise have to do, i.e. avoided costs.

Under the new system for rate regulation imposed by the PAEA, the workshare-

discount provisions of the PAEA apply only within products, not across products,

because (as explained more fully below) different mail products, by definition, do not

share the same cost and market characteristics. Thus the price differences between two

products are not limited to “costs avoided,” which means one product cannot serve as

the workshare benchmark for another product. Moreover, if, as the PRC has concluded,

the workshare-discount provisions apply across separate products (such as Single Piece

First-Class Mail and Presort First-Class Mail), the pricing flexibility intended for the

Postal Service under the PAEA is severely undermined.

To understand the current rate-setting system, some familiarity with the prior

system is necessary. Under the rate system in place prior to the adoption of the PAEA,

the Postal Service initiated omnibus rate cases at multi-year intervals as necessary to

maintain financial breakeven. In other words, rates were set in order to cover the Postal

Service’s anticipated costs over a designated period. Workshare discounts, when first

introduced, were based on cost models intended to estimate avoided costs (i.e., an

educated guess) rather than on direct measurement of the cost difference between actual

mail that had been and had not been workshared.

Neither the Postal Service nor the

PRC knew how much mail would convert to workshared variants and at what price that

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conversion would take place.

In 2006, Congress adopted the PAEA and made

substantial changes to the rate-setting system that had been in place since 1971.

Over the past two decades, the Postal Service has collected a great deal of data

regarding mail that has and has not been workshared, and workshared products such as

Presorted First-Class Mail – which was originally a variant of Single-Piece First-Class

Mail – have become institutionalized and matured into separate products with their own

cost and demand characteristics.

After the adoption of the PAEA in 2006, the PRC

recognized the two as separate products, explicitly deciding that they had different cost

or demand characteristics, when it designated Presorted First-Class Mail and Single-

Piece First-Class Mail as separate products. Order No. 43, Docket No. RM2007-1, ¶

4016 at p. 103 (P.R.C. Oct. 29, 2007) (available at www.prc.gov/Docs/58/58026/

FinalRuleswithTOC.pdf).

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

to be an annual occurrence.

The overall increase for each class of mail 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).

For First-Class Mail, the whole-integer constraint 2 prevents the Postal

2 The “whole-integer constraint” is not mandated by statute or regulation, but it reflects the very real constraint imposed on the Postal Service by the fact that many of its customers purchase stamps one at a time. If the price of a first-class stamp were increased to 44.7 cents, for example, customers would have to buy at least 10 stamps per transaction. As a matter of customer service, these

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Service from taking full advantage of the price cap each year, at least with respect to the

price of the First-Class stamp (which today is set at 44 cents).

To interpret the

workshare-discount provision to apply between products – such as single-piece First-

Class Mail and Pre-Sort First-Class Mail – will impose an additional constraint that will

make it even harder to obtain the full price increase authorized by law. This is not the

result that Congress intended, which is why the PRC’s conclusion that the workshare-

discount provisions could be applied on an inter-product as well as an intra-product

basis should be set aside.

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

Service’s 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

circumstances have constrained the Postal Service from implementing a rate increase that would result in a First-Class rate involving a fraction of a penny. The PAEA recognizes this constraint and permits rounding to the nearest whole integer, but the resulting rate may not cause a class of mail to exceed the price cap. 39 U.S.C. §3622(d)(2)(B).

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among them are to afford the Postal Service enhanced pricing

.”)

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

stated as follows:

The Commission concludes that one of Congress’s main motives in enacting the PAEA was to simplify and expedite the setting of postal rates. It further concludes that Congress intended to give the Postal Service wide latitude in designing specific rates and rate relationships, expecting that the Commission would alter those decisions only where disregard of particular statutory standards is clear.

Order No. 43, ¶ 2025 at p. 11 (P.R.C. Oct. 29, 2007) (supra p. 27). Thus the PRC has

implicitly acknowledged that an interpretation of the PAEA that undermines pricing

flexibility should be suspect. Instead of confining itself to altering the Postal Service’s

design of specific rates and rate relationships when they clearly “disregard

particular

statutory standards,” the PRC is attempting to expand one of those statutory standards –

the workshare discount – well beyond the statutory language in a manner that

undermines what the PRC itself has concluded was Congress’s intent in enacting the

law.

Where, as here, the PRC fails to identify how such an interpretation serves any

other purpose of the law, an interpretation inconsistent with the clear and recognized

intent of Congress should be set aside.

In addition to changing the pricing provisions of the law, the PAEA made

equally substantial changes in mail classification. Congress replaced subclasses of mail

with “products.” Under the prior regime, the PRC held that the establishment of

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separate subclasses required the showing of differences in both cost and demand. Op. &

Rec. Decision, Docket No. MC95-1, at III-10 (P.R.C. Jan. 26, 1996) (reprinted in the

addendum).

In the PAEA, however, Congress enacted language that unambiguously

loosened the new classification criteria. It did so by defining a product as “a postal

service with a distinct cost or market characteristic for which a rate or rates are, or may

reasonably be, applied.” 39 U.S.C. § 102(6) (emphasis added). And while subclass was

the primary level of classification to which the pricing factors were applied before

2006, products are now the primary level of classification under the PAEA. Therefore,

while a failure to establish both cost and demand differences foreclosed treatment as a

subclass prior to 2006, the existence of either cost or demand differences is sufficient

under the PAEA to require treatment as a separate product.

Based on the PAEA’s new definition of product, the Postal Service concluded in

2007 that Presorted and Single-Piece First-Class Mail are separate products, and the

PRC agreed.

According to the PRC, Presorted and Single-Piece products “represent

postal services with distinct cost or market characteristics.” Order No. 43, ¶ 4016 at p.

103 (supra p. 27).

The new statutory definition of product hinges on differences in costs or demand.

The determination that two types of mail are different products is relevant to the

application of the workshare discount provisions of section 3622(e) of the new law in

that one product cannot serve as a benchmark for the other without sacrificing the

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Postal Service’s ability to take into account other costs and demand characteristics.

With different cost characteristics or different demand characteristics, the “discount”

between the two products should not be limited to costs avoided by worksharing as

required by Section 3622(e)(2) – there are other differences in cost and market

characteristics that may require or permit the “discount” between the two products to be

greater than the amount of costs avoided. This, of course, is not really a “discount” at

all (let alone a “workshare discount”) – but a recognition that the two products have

different cost and market characteristics. In other words, one product cannot serve as

the “benchmark” for a lower-priced, separate product.

It is only when the cost and

market characteristics of two types of mail are the same that one type can serve as the

workshare-discount benchmark for the type that is discounted due to worksharing.

That is not to say that the PRC plays no role in setting the rates of individual

market-dominant products.

As the Postal Service explained at length in its reply

comments to the PRC, the PRC may review the Postal Service’s pricing decisions with

respect to these products through the “just and reasonable” rate schedule objective of

section 3622(b)(8).

(J.A. 249-65.)

But to expand the workshare provision to apply

across and between separate products does not serve any objective of the PAEA and

serves to place the greatest part of the burden of future rate increases on the most

efficient, highest value mail in the system, as the intervenor will no doubt explain in its

brief. This makes no sense, especially given the clear intent of Congress that the rate

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system should “maximize incentives to reduce costs and increase efficiency,” “allow

the Postal Service pricing flexibility,” and “assure adequate revenues, including

retained earnings, to maintain financial stability.” 39 U.S.C. 3622(b)(1, 4 & 5).

The Postal Service’s interpretation of the workshare provision serves multiple

objectives of the PAEA, while the PRC failed to identify a single objective served by its

interpretation.

Instead, the PRC ignored the fact that pricing flexibility for the Postal

Service was one of the nine explicit objectives of the PAEA, 39 U.S.C. § 3622(b)(4),

and concluded that “there is no need to posit the existence of an overarching standard of

‘pricing flexibility’ that trumps not just the other qualitative standards of the [PAEA],

but its quantitative standards as well.” (J.A. 334-35.) The PRC’s refusal to interpret the

workshare provisions with the objective of pricing flexibility in mind – or any other

objective of the PAEA, for that matter – resulted in a decision that will certainly limit, if

not totally undermine, the Postal Service’s pricing flexibility with respect to one of its

most significant products (Presorted First Class Mail). The Order fails to identify any

other

objective

of

the

PAEA

that

this

inconsistency with the law.

interpretation

serves,

highlighting

its

The PRC, through a tortured and mistaken reading of subsection headings,

claims that it can interpret Section 3622(e) without reference to the objectives of the

PAEA.

(J.A. 351, 353.)

To be charitable, this is a novel approach to statutory

interpretation and rulemaking.

Nowhere in its order does the PRC explain how its

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interpretation furthers any of the objectives of the PAEA.

Apparently, the PRC

believes that it can interpret the workshare provision and other “quantitative standards” 3

without reference to the objectives of the PAEA because each “requirement” is framed

“in objective terms, in its own self-contained section

.” (J.A. 353.)

The PRC is simply wrong.

The PAEA’s headings refer only to subsection

3622(d) as “requirements” for the design of the “system for regulating rates and classes

for market-dominant products.”

The workshare-discount provision is in a separate

subsection of Section 3622.

Even if subsection (d) could arguably be interpreted

without reference to the objectives of the PAEA because Congress described its

provisions as “requirements,” the same cannot be said for subsection (e).

There is

nothing in the plain language or structure of Section 3622 that suggests that the PRC

should craft rules regarding workshare discounts without reference to the objectives of

the PAEA.

The PRC’s conclusion that “obtaining separate ‘product’ status on [the list of

products maintained by the PRC under Section 3642] implies nothing about whether

products on that list have, or do not have, a worksharing relationship” (J.A. 339), is also

plainly wrong. If the PRC is doing its job, then the list of products is a list of types of

mail that do not share cost characteristics or market characteristics or both. The PRC

3 The PAEA itself, of course, makes no distinction between quantitative and qualitative standards.

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correctly noted that workshare discounts are appropriate only where there is a clear

relationship between a “base group” (the benchmark) and the discount group.

This

relationship

exists

only

when

both

groups

share

that

same

cost

and

demand

characteristics. (J.A. 338.) This is consistent with the definition of a “product” in the

PAEA:

“a postal service with a distinct cost or market characteristic.”

39 U.S.C. §

102(6).

Thus two “products” within the meaning of Section 102(6) cannot have a

worksharing relationship because, by definition, they do not share the same cost and

demand characteristics.

Thus application of Section 3622(e) to the relationship between separate

products is inappropriate. Instead, the PRC should review the Postal Service’s pricing

decisions with respect to these products through the “just and reasonable” rate schedule

objective of section 3622(b)(8). This approach is required by the statute, as it is the

approach that harmonizes the various elements of Section 3622 and other provisions of

the law into a coherent, workable regulatory scheme. On the other hand, the language

and legislative history of the PAEA demonstrates that Section 3622(e) was not

considered to codify the rate relationship between Single-Piece and Presort First-Class

Mail that existed under the prior ratemaking regime.

The structure of the PAEA’s reporting requirements bolsters the argument that

the worksharing rule does not apply across products. For each workshare discount, the

Postal Service is required annually to provide the PRC with “[t]he per-item cost

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avoided by the Postal Service by virtue of such discount,” “[t]he percentage of such

per-item cost avoided that the per-item workshare discount represents,” and “[t]he per-

item contribution made to institutional costs.”

39 U.S.C. § 3652(b)(1-3).

But this

requirement exists only for “each market-dominant product for which a worksharing

discount was in effect” during the relevant period.

39 U.S.C. § 3652(b) (emphasis

added). The statute does not require any cost information across products. It is illogical

for the PRC to conclude that there are worksharing relationships between different

products (rather than simply within market-dominant products) when Congress clearly

did not contemplate such relationships.

If Congress had contemplated workshare

relationships across products, it would have required the Postal Service to provide

detailed cost-avoidance data to the PRC in a different manner.

For all of these reasons, this Court should set aside the PRC’s decision that the

workshare-discount provisions of Section 3622(e) apply between products with

different cost or market characteristics as arbitrary, capricious and contrary to law.

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III. Establishing a worksharing relationship between two types of mail for the purpose of calculating a workshare discount requires a benchmark and a discounted variant of the benchmark where the difference between the two prices is solely the costs avoided by worksharing. Single-Piece First Class Mail and Presorted First Class Mail are distinct products that have different cost and demand characteristics beyond the costs avoided by worksharing. Thus the PRC’s conclusion that a worksharing relationship exists between the two products is contrary to law and arbitrary and capricious.

A. Standard of Review

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); see also 39 U.S.C. § 3663.

An agency action that is

“devoid of needed factual support” may be struck down as arbitrary or capricious.

Assoc. of Data Processing Serv. Orgs., 745 F.2d at 683.

B. Analysis

Even if, theoretically, a workshare-discount relationship could exist across

products, the PRC incorrectly concluded that there is a workshare relationship

between First-Class Bulk and Single-Piece First-Class Mail. In its order, the PRC

acknowledged that the bulk metered mail (BMM) benchmark that it had used for

analyzing

whether

the

pre-sort

rates

are

greater

than

the

avoided

costs

is

“obsolete.” (J.A. 357.) Nonetheless, it also concluded that there is still some other

unidentified “portion of single-piece mail that is likely to become workshared

given appropriate price incentive.” Id. This conclusion is contrary to the evidence

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in the record before the PRC and is therefore arbitrary and capricious and should

be set aside.

Presorted and Single-Piece First-Class Mail are fundamentally distinct types

of mail, and it is inappropriate to benchmark one to the other.

Doing so would

allow the rigid workshare-discount requirement to become the primary, or perhaps

exclusive, driver of the relative prices between the two products.

In other words,

the price difference between the two products could not account for the intrinsic

cost differences between the two products.

Specifically, presort mail costs

significantly less to process than single-piece even without considering the costs

avoided through worksharing. Tying the cost of presort to any type of First-Class

Mail and limiting the “discount” for presort to costs avoided would keep the

presort rates artificially high.

Doing so will not drive presort mailers to single-

piece; it will drive them out of the mail into less expensive alternatives.

As the Postal Service explained to the PRC, “[w]orksharing in First-Class

Mail has

been

a

fact of

life for over thirty years. For the vast majority of

customers, the choice as to whether to retool and redesign processes to enable

presortation and making mail automation compatible was made long ago.”

(J.A.

74.)

At the PRC’s public hearing in this matter, Robert J. Brinkman, the

representative of one large mailer, explained that after the PAEA, “the basic

structure should be

individual products. Each individual product should have a

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cost based on real data, and from that point the Postal Service should use its

pricing flexibility to maximize its profit.”

(J.A. 391.)

With respect to the

connection between Single-Piece and Presorted First-Class Mail, Brinkman said he

did not see the connection that the PRC based its order on, explaining that “it’s like

… if Honda goes in to decide whether it’s going to raise the price of a Civic by

$500 or $2000, it doesn’t bump up the price of the Accord to make up for it.

It

prices each product separately based on the market characteristics.”

(J.A. 392.)

Under the PAEA, that is what the Postal Service is supposed to be able to do. (Id.)

The fact that presort mailers are unlikely to revert to single-piece even if the

presort rate increases materially demonstrates that the two products do not have a

worksharing relationship. Contrary to the PRC’s conclusions in the decision under

review, the evidence before it strongly suggests that it is now unlikely that a

reduction in presort discounts (and corresponding increase in the presort rate)

would result in large quantities of presorted First-Class Mail re-converting to

Single-Piece First Class Mail.

Mailers and mail consolidators have invested in

equipment and determined procedures for presorting mail.

Unless there were

almost no price difference at all, it seems unlikely that large mailers would

abandon these procedures and choose to send their mail via Single-Piece First-

Class Mail.

Instead, increasing the presort rates could cause them to abandon the

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mail entirely.

In its comments to the PRC, the Postal Service provided this

example:

 

a

bank considering mailing notices to cardholders

advertising optional new service features is unlikely to ponder whether to send the notices as Single-Piece or

Presort. The bank is far more likely to consider whether

to

send them by mail at all, particularly if many of the

same customers can be reached with the same message via the Internet. Even if the mail is the preferred method

to

reach a customer, the bank is much more likely to

consider whether Standard Mail is the appropriate substitute for Presorted First-Class Mail, rather than Single-Piece First-Class Mail.

(J.A. 75.)

The Postal Service, however, cannot be indifferent to the choice

between Presorted First-Class Mail and Standard Mail (which generally consists of

advertising mail) because Standard Mail is not as profitable as Presorted First-

Class Mail. In the Public Cost and Revenue Analysis Report for fiscal year 2010,

the unit contribution 4 for Presorted First-Class Mail letters is reported at 23.5 cents

while the unit contribution for Standard Mail letters is on 8.5 cents. PCRA Report

Spreadsheet

Tab

“Cost1”

(filed

Dec.

29,

2010)

(available

at

http://www.prc.gov/Docs/71/71348/FY10PublicCRA.xls). When that fifteen-cent

4 Unit contribution is the difference between unit revenue and unit costs, i.e., the amount a piece of mail (the “unit”) contributes to institutional costs that are not attributable to any particular mail product but are nonetheless necessary to maintain the Postal Service’s operational networks and administration.

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difference is multiplied by billions of pieces of mail, 5 the impact of such a

migration on the Postal Service’s finances is obvious.

Empirical evidence strongly suggests that Presorted First-Class Mail is a

mature product in its own right.

Over the past five years, metered and IBI

(information-based indicia) mail – long considered to be the single-piece mail most

likely to convert to presorted (J.A. 368) – has remained remarkably steady at

approximately 36 percent of the volume of Single-Piece First Class Mail. (J.A. 75-

76.)

This confirms that the conversion from single-piece to presorted “has

generally run its course.”

(J.A. 76.)

In other words, the overlap between the

markets for these two types of mail (assuming any overall exists at all) is very

small.

Costs avoided by worksharing form only a part of the cost differences

between the two products.

Even now – with the Postal Service substantially

exceeding the 100 percent limit on the workshare passthrough 6 – there is a five-

5 The Postal Service reported the volume for Presorted First-Class Mail for fiscal year 2010 at approximately 43.3 billion pieces. PCRA Report Spreadsheet Tab “Volume” (filed Dec. 29, 2010) (available from the PRC website at

http://www.prc.gov/Docs/71/71348/FY10PublicCRA.xls).

6 In fact, the current discounts exceed 120 percent. The PRC recognized that

current workshare discounts for Presorted First-Class Mail exceed 100 percent but

the discounts below their

decided not to require the Postal Service to “reduce

current levels” (J.A. 357) because it has not yet decided on a new benchmark

(which is the starting point for that calculation).

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cent difference between the average contribution per piece for the two products. 7

If the worksharing discount was encompassing all of the cost differentials between

the two products, and that discount is more than 100 percent, then the contribution

of presorted mail should be less than – not more than – single piece mail.

It makes little sense (and is inconsistent with the PAEA) to impose a rigid

price relationship between single-piece and presorted mail based on only one facet

of the differences in cost and demand between the two.

Moreover, it creates

significant practical problems and undermines one of the major objectives of the

PAEA:

pricing flexibility.

Despite their different cost structures and different

markets,

the

pricing

of

these

two

types

of

First-Class

Mail

is

necessarily

interrelated because the inflation-based price cap applies to First-Class Mail as a

group.

Tying them together significantly reduces the Postal Service’s pricing

flexibility.

Rigid price-design constraints (such as those imposed by the Order) result in

untenable prices and pricing relationships.

The Postal Service explained this

problem in detail in its comments to the PRC. (J.A. 77-83.) In short, matching the

stamp prices to the inflation-based price cap is already difficult. Assuming a price

cap of 1.741 percent and a stamp price of 44 cents, the price of a stamp would rise

7 The average unit contribution for Single-Piece First Class letters is 18.3 cents while the average unit contribution for Presorted First Class letters is 23.5 cents. PCRA Report Spreadsheet Tab “Cost1” (filed Dec. 29, 2010) (available at

http://www.prc.gov/Docs/71/71348/FY10PublicCRA.xls).

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to 44.766 cents if the Postal Service applied the average cap amount directly to the

stamp price.

Due to the whole-integer constraint – the bias against requiring

fractions of a penny to buy a First-Class stamp – such a stamp price is untenable,

and the Postal Service has to choose between rounding up or down, and then

adjusting the other First-Class Mail rates, such as Presorted First-Class Mail, to

level the overall increase in First-Class rates to a percentage at or just below the

cap.

The assumptions in this example are precisely the numbers faced by the

Postal Service in its most recent Notice of Market Dominant Price Adjustment.

Notice of Price Adjustment, Docket No. R2011-2, p. 3 (filed Jan. 13, 2011)

(available

online

at

www.prc.gov/Docs/71/71550/Notice%20of%20Rate%20

Adjustment.Final.pdf); see also J.A. 78 (setting out similar example).

Using the numbers from the example above, suppose the Postal Service

wanted to round the stamp price up to 45 cents.

Then the above-average stamp

price increase would need to be balanced by below-average increases for presorted

mail.

The combination of above-average increases in stamps and below-average

increases in presorted mail would necessarily cause an increase in the effective

pricing differential for presorted mail.

But this is not permissible.

As explained

above, the pricing differential between the two products already exceeds 100

percent of the costs avoided through worksharing.

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round down, leaving the price of a stamp at 44 cents and raising the prices of other

First-Class products by more than the rate of inflation.

In this example of a current pricing decision, the PRC’s conclusion in its

Order regarding the relationship between Presorted and Single-Piece First-Class

Mail has the bizarre effect of eliminating the Postal Service’s basic choice between

whether to round up the price of a First-Class stamp to 45 cents or to round down

to 44 cents. As long as the Postal Service’s avoided costs act as a rigid ceiling on

the price differential, it may be impossible to accommodate any increase in that

differential, and the option of rounding up the price of a First-Class stamp is

unavailable to the Postal Service.

by the PAEA.

This is not the pricing flexibility contemplated

The negative practical result of the PRC’s insistence in maintaining a rigid

relationship between single-piece and presorted mail can be shown further by the

Postal Service’s most recent notice of price adjustments.

To obtain an overall

price increase for First-Class products that matches the price cap, the price of

presorted letters and cards will increase by an average of 1.796 percent, the price

of flats by 5.343 percent, parcels by 3.753 percent, and international mail by 3.974

percent.

Notice of Price Adjustment, Docket No. R2011-2, p. 12.

By tying the

prices for Presorted First-Class Mail to Single-Piece First Class Mail, the Order

gave no flexibility for the Postal Service to keep the price of Presorted First-Class

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Mail steady (even though it is the more efficient and more profitable product and

the Postal Service should be encouraging more of it rather than less) without even

more drastic increases in the prices for First-Class flats, parcels and international

mail.

Driving up the price of First-Class presorted mail, flats, parcels and

international mail because of an artificial connection drawn between products is

inconsistent with the objectives of the PAEA because it results in an arbitrary

schedule of rates rather than “a just and reasonable schedule of rates.” 39 U.S.C. §

3622(b)(8). It is also a far cry from the “pricing flexibility” that was, according the

PRC, the intent of Congress.

Adding a rigid relationship between some category of single-piece and

presorted mail makes dealing with the price cap substantially more difficult, as the

examples set forth above and in the Postal Service’s comments show.

Of course,

the problem can be overcome by the Postal Service lowering rates to stay under the

cap and preserve a 100 percent workshare of avoided costs, or it can pass through

less than 100 percent of avoided costs, but these options could result in less

revenue when inflation and costs are rising.

(J.A. 80-82.)

Or, as the Public

Representative suggested in its comments and the example above demonstrates, the

Postal Service can use the rest of its First-Class products as a “plug” to fill the gap

between the price cap and the rates for single-piece and presorted mail.

But that

“plug” represents more than 20 percent of the entire volume of First-Class Mail.

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(J.A. 83.)

First-Class Parcels alone generated more than $700 million in revenue

in fiscal year 2008. (Id.) These products are too significant to relegate their prices

to

the

status

of

a

“plug.”

Indeed,

the

necessity

of

a

“plug”

reveals

the

inconsistency between the Order and the objectives of the PAEA.

These illustrations demonstrate that not only is it impractical to link the rates

for single piece and presorted mail, but it undermines important objectives of the

PAEA. Not only does it inhibit pricing flexibility (39 U.S.C. § 3622(b)(4)), it also

makes it harder to “assure adequate revenues” for the Postal Service “to maintain

financial stability” (39 U.S.C. § 3622(b)(4)), undermines “predictability and

stability in rates” (39 U.S.C. § 3622(b)(2)), and jeopardizes the Postal Service’s

ability to “maintain high quality service standards” (39 U.S.C. § 3622(b)(3)).

On

the other side of the ledger, linking the price of presorted mail to single-piece mail

does nothing to “maximize incentives to reduce costs and increase efficiency” (39

U.S.C.

§

3622(b)(1)),

“reduce

the

administrative

burden

and

increase

the

transparency of the ratemaking process” (39 U.S.C. § 3622(b)(6)), “enhance mail

security and deter terrorism” (39 U.S.C. § 3622(b)(7)), or “allocate the total

institutional costs of the Postal Service appropriately between market-dominant

and competitive products” 39 U.S.C. § 3622(b)(9)).

While one could argue that

the PRC’s decision helps to “maintain a just and reasonable schedule for rates and

classification” (39 U.S.C. § 3622(b)(8)) in some narrow way, the PRC did not

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make that argument, and it is just as easy to show that the decision may result in

unjust and unreasonable rates.

As explained above, in certain circumstances the

Postal Service would have to raise prices for the most efficient and profitable mail

in the system to take full advantage of the available room under the price cap.

The PRC – citing no actual evidence in the record – suggests that there is a

“pool of single-piece mail that can be considered amenable to conversion to presort

mail” that is “quite large” merely because that mail is “machinable, homogeneous,

not barcoded but with machine-printed addresses.”

(J.A. 368 & n.34.)

The PRC

also notes that “[a] significant industry exists for the purpose of seeking out current

users of” such mail “for conversion to presort mail.”

(J.A. 369.)

But the

conclusion it draws does not follow.

If there really is a substantial amount of

single-piece mail that could convert to presort, that industry would have made

headway over the past five years in converting that mail. The data provided by the

Postal Service shows just the opposite: the combined volume of bulk metered mail

and information-based indicia mail has remained a relatively constant percentage

of single-piece mail over the past five years.

converting at only a marginal rate, if at all.

In other words, that mail is

The PRC falls back on the conclusion that “[c]lose similarities between the

economic

purpose

and

the

functionality

of

presort

First

Class

Mail

and

a

substantial minority of Single-Piece First Class Mail indicates[s]” that the two

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distinct products are “in a worksharing relationship.”

(J.A. 371.)

Upon closer

examination, however, this rationale appears silly. The PRC’s order states that the

economic purpose of the two products is the same:

“secure transmission of

individualized, confidential, time-sensitive messages and documents. The main

uses for both are transactions (bills, invoices and statements) or correspondence.”

(J.A. 367-68.) That description is so broad that it also includes portions of Priority

Mail, Express Mail and, amazingly, e-mail.

The fact that all of these types of

“mail” fit the market described by the PRC certainly does not demonstrate that

these very different products are in a worksharing relationship.

In these circumstances, the PRC’s decision that the price of Presorted First-

Class Mail should be tied directly to the price of some to-be-determined subset of

Single-Piece First Class Mail is unsupported by the record evidence, arbitrary and

capricious, and plainly wrong.

portion of the Order.

Accordingly, this Court should set aside that

CONCLUSION

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

remand the matter for the PRC to adopt an analytical framework for applying the

worksharing provision of the PAEA that (a) does not apply the worksharing

provision to activities and mail characteristics that are not one of the four

worksharing activities specified in the statute; (b) does not apply the worksharing

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provision across separate product groups; and (c) recognizes that neither Single-

Piece First Class Mail nor any subset thereof is in a worksharing relationship with

Presorted First-Class Mail because the two separate products have cost and

demand differences unrelated to any worksharing activities of the mailer.

Dated: February 11, 2011

Respectfully submitted,

MARY ANNE GIBBONS Executive Vice President & General Counsel

/s/ Michael J. Elston

MICHAEL J. ELSTON Office of the General Counsel United States Postal Service

475 L’Enfant Plaza, SW

Washington, DC 20260 (202) 268-7432 michael.j.elston@usps.gov

Of Counsel:

R. ANDREW GERMAN Managing Counsel, Pricing & Product Development

United States Postal Service

475 L'Enfant Plaza, SW

Washington, 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

11,415

words, excluding the parts of

the brief exempted by Fed. R. App. P. 32(a)(7)(B)(iii), or

this brief uses a monospaced typeface and contains

lines

of 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 using

Times New Roman

in

14 point

, or

this brief has been prepared in a monospaced typeface using

with

.

/s/ Michael J. Elston

Attorney for the U.S. Postal Service Dated: February 11, 2011

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CERTIFICATE OF SERVICE

I hereby certify that on February 11, 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. Elston

MICHAEL J. ELSTON Office of the General Counsel United States Postal Service 475 L’Enfant Plaza, SW Washington, DC 20260 (202) 268-7432 michael.j.elston@usps.gov

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ADDENDUM

Table of Contents

Op. & Rec. Decision, Docket No. R90-1,

p. V-225 to V-231 (P.R.C. Jan. 4, 1991)

Op. & Rec. Decision, Docket No. MC95-1,

p. III-10 (P.R.C. Jan. 26, 1996)

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