Last week the U.S. Court of Appeals, District of Columbia, issued a decision on the Postal Service’s challenge to a ruling by the Postal Regulatory Commission involving barcoding and a rate increase.  The ruling is here.

The Court’s ruling is essentially a rebuke to the Commission for failing to provide an adequate explanation for why changes in the Postal Service’s policies on mail preparation requirements constituted a de facto rate increase.

The Postal Service will probably be happy with the Court’s ruling.  The big mailers, who participated as intervenors in the case, will not be.

The ruling means that the Postal Service will now be able to proceed with implementation of the changes to the rates for barcode mail it had initially proposed in 2013.  The Postal Service had deferred these changes while the case worked its way through the PRC and District Court.

In order to qualify for the standard automation discounted rate, mailers will now have to upgrade their Intelligent Mail barcodes from the basic to full-service variety.

As discussed in a previous post, the origins of this case go back to April 2013, when the Postal Service changed its policies about mail preparation requirements for automation discounts.  

As of 2009, there were three different rates for bulk mail: one for mail sent without a barcode (the nonautomation rate); the “standard automation” rate for mail sent with a Basic Intelligent Mail barcode or a POSTNET barcode (the predecessor for IM barcode); and the “discounted automation” rate for mail sent with a Full-Service Intelligent Mail barcode).  (There’s more about IM barcodes in this 2009 technical resource guide.)

In April 2013, the Postal Service announced a change in its policy on these discounts.  Mail pieces prepared according to the Basic Intelligent Mail standard would no longer be eligible for the discounted rate for automation mail. To qualify for that discount, mailers would have to upgrade their barcodes to the Full-Service Intelligent Mail variety.

In the fall of 2013, the Postal Service filed a request to the PRC for a rate increase on Market Dominant products under the inflation-based price cap rules.  Such increases are typically granted, but this time things got a little more complicated.

The mailers argued that the change in mail preparation requirements for automation discounts constituted a rate increase that should be counted against the Postal Service’s price cap.

In response, the Postal Service claimed that mail preparation changes which did not actually alter the posted prices should not be seen as “changes in rates” or “classification changes.”   In its view, the changes in policy about barcode requirements were thus excluded from consideration under the price cap, and the Commission had no authority to include the changes in its decision about the price-cap rate increase.

On Nov. 21, 2013, the Commission decided in favor of the mailers (Order No. 1890).  It approved most elements of the Postal Service’s request for a rate increase on Market-Dominant products because they conformed to the price cap limitations, but the Commission did not approve the barcode changes, holding that “certain mail preparation requirements were governed by restrictions on rate increases set forth in 39 USC 3622(d).”

In other words, as explained in its 2016 Annual Report, the Commission found that “the Full Service IMb requirement constituted a classification change with rate implications.”  The Postal Service’s implementation of the Full Service IMb requirement simultaneously with its planned rate adjustment would thus violate the price cap.

Ruth Goldway, then the PRC Chairman, explained the Commission’s ruling this way: “While we encourage the Postal Service to expand its capacity to track and measure the performance of mail services, this cannot be accomplished in a manner that effectively raises rates by 4.1 and 4.9 percent for First Class and Standard Mail.”

Due to the Commission’s ruling, the Postal Service deferred implementation of the Full Service IMB requirement for automation price discounts.  Mailers who were not currently enrolled in Full-Service could thus still claim automation prices.

The Postal Service proceeded to appeal the Commission’s ruling in federal court.  In its filings with the Court, the Postal Service challenged the Commission’s authority to rule on the matter in the first place, and then argued that if the Commission did have jurisdiction, its decision was wrong.

A year and a half later, the Court issued its ruling.  The Court said that the Postal Service was wrong about the scope of the Commission’s authority but right about the flaws in the Commission’s decision.

According to the Court, the law about rate increases is ambiguous, and in such cases, it’s necessary to defer to the administrative body charged with implementing the law — in this case, the PRC.  (This is called “Chevron deference,” after a 1984 Supreme Court decision that says even if a court finds that another interpretation of a law is reasonable, deference is due to the agency responsible for administering the law.)

While the Commission therefore had authority to rule on the issue, the Court agreed with the Postal Service that the Commission’s decision was “arbitrary and capricious.”  That’s because the Court felt that according to the Commission’s reasoning all mail preparation requirements could be considered as changes in rates.

The Commission had assured the Postal Service that it would not “indiscriminately treat all new mail preparation requirements as rate adjustments,” but the Court found the language used by the Commission to define which operational changes would count as rate adjustments was “cryptic, to say the least.”

According to the Court, “the standard enunciated by the Commission to determine when requirements changes are ‘changes in rates’ seems boundless and, thus, unreasonable.”

As the Court put it in last week’s ruling, recalling what it said back in 2015, “Mystified by the Commission’s efforts to explain how it would decide when a mailing requirement actually was a rate change, we found its action arbitrary and capricious and remanded to the Commission for it to ‘enunciate an intelligible standard and then reconsider its decision in light of that standard.’”

The Commission took up the case on remand and heard again from all the parties, then issued Order No. 3047 (Jan. 22, 2016).  This order determined that a mail preparation change constitutes a change in rates if it results in the deletion or the redefinition of a rate cell (i.e., rate category). Using this standard, the Commission reaffirmed its earlier decision that the proposed mail preparation change constituted a change in rates.

On February 22, 2016, the Postal Service moved for reconsideration of Order No. 3047. On July 20, 2016, the Commission issued Order No. 3441 rejecting the Postal Service’s motion.

On August 11, 2016, the Postal Service again petitioned to the Court for review.  The Court’s ruling last week is a response to this petition.

As the new ruling explains, the Court has found that “the Commission’s new analysis adds no discernible clarity to the reasoning it supplied on the last round.”

The Court reviews the history of the case and the specific issues involved in considerable detail.  If you want to get into the weeds, the ruling is here.

The bottom line is this: The Court’s 2015 decision found that the Commission may have authority to treat some Postal Service changes in mail preparation requirements as changes in rates.  But, says the Court, “that potential authority depends on its articulating and applying a test consistent with the statute.  Its present orders have failed to do so.”

The Court therefore granted the Postal Service’s petition for review and vacated the Commission’s three previous orders: Order No. 1890 (Nov. 21, 2013), Order No. 3047 (Jan. 22, 2016), and Order No. 3441 (July 20, 2016).

It’s not clear what the practical impacts of the Court’s decision will be. Given that it’s been more than five years since the Postal Service first announced the changes in its policies on Intelligent Mail barcodes, it’s likely that many mailers seeking discounts have already switched from Basic to Full-Service.  For those mailers who have not made the switch, however, this ruling may mean extra costs.

According to the current USPS Price List, the price of a one-ounce First Class Commercial Letter is $0.458 for a pre-sorted letter.  The price ranges from $0.378 to $0.424 for automation letters.  For automation letters that comply with Full-Service Intelligent Mail, there’s a further discount of $0.003.  For standard Commercial letters (marketing mail), the additional discount for Full-Service is $0.001.

The differences in costs between non-automation and automation are a matter of pennies, and the discounts between basic automation and Full-Service are just a fraction of a cent.  But billions pieces of mail take advantage of such discounts, so for mailers who send millions of pieces, the cost differentials can be significant.

In a more general sense, the Court’s ruling may have importance as a precedent.  The ruling indicates that the Court felt that the Commission, an agency tasked with regulating rates, had not met the high bar of describing the connection between rates and mail preparation requirements.  While the Commission may be due Chevron deference, its orders in this case were too intrusive into the Postal Service’s autonomy.  Now the Postal Service may have free rein to alter mail preparation requirements in other ways that have the effect of raising rates.

(Image: Mailing Systems Technology)