UPS goes back to court on USPS costing methodology

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The United Parcel Service has gone back to court to continue its challenge of a ruling by the Postal Regulatory Commission concerning how the Postal Service determines the costs of its products.

In September 2016, the Commission, in Order No. 3506, denied a petition by UPS proposing changes in the way the Postal Service allocates costs among its various products.  UPS then petitioned the D.C. Circuit Court of Appeals for review.  In May of this year, a three-member panel of the Court rejected the UPS appeal.

Earlier this month, UPS filed a new petition, this one for a “rehearing en banc,” asking the full Court to reconsider the panel’s earlier decision. The petition is available here.

rehearing en banc refers to a court proceeding in which the entire bench votes on whether to grant the petition, not just the three judges on the original panel.  There are currently seventeen judges on the DC Circuit Court of Appeals, and they may all vote on whether to grant the UPS petition.  The Court includes, by the way, Merrick Garland, Obama’s nominee for the Supreme Court, and Brett Kavanaugh, Trump’s current nominee.

As noted in the Handbook of Practice for the DC Circuit Court of Appeals, “petitions for rehearing en banc are frequently filed but rarely granted.”  The case has to be considered extremely important.

According to the Circuit Rules, a petition for a rehearing en banc must explain how the Court’s decision “conflicts with a decision of the United States Supreme Court” or how “the proceeding involves one or more questions of exceptional importance.”

The UPS petition addresses both of those criteria. The first section of the petition argues that the panel’s decision in May “conflicts with Supreme Court precedent on the limits of Chevron deference and with the text and purpose of the [Postal] Accountability Act.”  The second argument of the petition is that “the panel decision will have extraordinarily important practical consequences” because it permits the Postal Service to use its “artificial cost advantage to increasingly dominate the package delivery market,” which will lead to higher prices and less innovation.

Postal stakeholders know that cost and rate issues can have consequences measured in the billions of dollars, but it turns out that these issues can have significant legal implications as well. 


The limits of Chevron deference

The reference in the UPS petition to “Chevron deference” goes back to a famous Supreme Court case in 1984, Chevron, U.S.A., Inc. v. Natural Resources Defense Council.  “Chevron deference” refers to the doctrine, established by this case, that “the court should defer to the agency’s answer or interpretation, holding that such judicial deference is appropriate where the agency’s answer was not unreasonable, so long as the Congress had not spoken directly to the precise issue at question.”

In its decision in May, the Court of Appeals panel determined that the main question was not whose interpretation of the Postal Accountability and Enhancement Act — UPS’s or the PRC’s — was more reasonable or correct.   It was just a matter of determining if the Commission’s interpretation was itself reasonable and permissible.

In last week’s petition, UPS argues that the Court’s decision in May was wrong because the PRC’s ruling, in the way it interpreted PAEA, 39 U.S.C. § 3631 and 3633, was indeed “unreasonable.”

Unless you are up to speed on the various types of postal costs, the issues in the case are pretty arcane and technical, but basically UPS claims that the “inframarginal costs” currently classified as “institutional costs” should be reclassified as “attributable costs” that are assigned to individual products.  (For more explanation, see this previous post about the Court’s decision in May.)

While the Commission did eventually decide to assign a very small portion of these inframarginal costs to particular products, it would not go as far as UPS wanted, and the effect on postal costing was probably negligible.

Technicalities aside, UPS’s basic goal has been clear enough: UPS wants the Postal Service to assign more of its operating costs to parcels, which will force it to raise its shipping rates.  That would obviously be to UPS’s advantage, since it could then raise its rates as well, or at least be in a better competitive position to increase its market share.


The threat of a state-owned monopolist

The second argument in the UPS petition focuses on the significance of the case and why it merits en banc review.

According to UPS, the Postal Service is “systematically underestimating the costs of package delivery” and leveraging “its statutory monopoly over letter delivery into a monopoly over package delivery, where it competes with private carriers.”

“Unless overturned by the full Court,” argues UPS, “the panel decision [the original decision in May] will allow the Postal Service to use its artificial cost advantage to increasingly dominate the package delivery market, potentially leading to higher prices for consumers and less innovation in a market that is critical to the national economy.”

Or, as UPS puts it elsewhere in the petition, “The Postal Service’s extension of its government-sanctioned monopoly over letter delivery into a monopoly of the package-delivery market is exactly what Congress was trying to prevent in the Accountability Act.  With a monopoly over package deliveries, prices could increase in the long run.”

In other words, UPS is saying that the Postal Service is currently undercharging on parcels so that it can become a government-sanctioned parcel-shipping monopoly and then raise prices at will, without the limits that competition ensures.

It’s a rather curious argument, considering that UPS’s main goal in pushing for changes in the costing methodology is to force the Postal Service to raise prices.  Essentially UPS is saying that the Postal Service should be required to raise its parcel prices now so that it doesn’t turn into a parcel monopoly that can raise its prices later.


Looking at market share

In order to justify the claim that the Postal Service threatens to become a parcel monopoly, UPS points to a USPS press release about a FY 2016 financial report, in which the Postal Service boasted that it delivers “more e-commerce packages to the home than any other shipper.”

The UPS petition doesn’t get into the numbers on market share, but they are worth a look.

According to this Revenue, Piece, Weight (RPW) report, the Postal Service’s competitive products (shipping and packages) had volumes of 5.1 billion pieces in 2017.  Not all of them were e-commerce packages delivered to homes, but the number gives some sense of USPS volumes.

According to its 2017 10-K, UPS averaged 16.9 million domestic package deliveries a day, 254 operating days in the year, for a total of 4.3 billion deliveries.  According to its 2017 10-K, FedEx averaged 10.6 million domestic shipments (7.9 million ground and 2.7 million express), for a total of about 2.7 billion packages.  (It’s worth noting, by the way, that many of those UPS and FedEx shipments — perhaps as many as 875 million of them — used the Postal Service for “last mile” delivery.)

So yes, as UPS points out in its petition, the Postal Service did deliver more packages than UPS and FedEx.  Of the 12 billion packages delivered in the U.S. by the three entities, the Postal Service accounts for over 40 percent.  If you include all the other shipping companies, the Postal Service is responsible for delivering “one-third of all domestic packages in the United States,” according to PMG Megan Brennan, as noted by UPS in comments to the PRC.

In terms of revenue, however, the market shares tell a different story.  According to the Postal Service’s 10-K, revenues on shipping services were about $19.5 billion.  According to their 10-Ks, FedEx had domestic revenues of $40.2 billion, and UPS brought in $40.8 billion on domestic shipments.

Overall, that’s about $100 billion in revenues.  The Postal Service’s revenues represent about 20 percent of the total.  That percentage has been going up over the past ten years (as indicated by the chart on page 38 of this report), but the numbers show there is plenty of competition in the parcel business.


The issue of innovation

The Postal Service is clearly a long way from dominating the parcel market.  In fact, it’s probably more concerned about maintaining its current parcel volumes than expanding into monopoly domination.  As noted in many recent news reports, Amazon — the biggest customer for USPS, UPS, and FedEx — is increasing its own delivery capacities, which could eat into USPS volumes.   There’s even been speculation that one day Amazon will become a shipping rival of the big three.

Despite the Postal Service’s relatively small market share, revenue-wise, in its petition UPS claims there is a danger that the Postal Service will become a “a state-owned monopolist” in the parcel industry, and as such, it “will not be as innovative as competitive private firms.”

“It is unlikely,” says UPS, “that the Postal Service will continue to develop the new innovations that have powered the logistics sector over the past few decades. E-commerce — which is highly dependent on effective logistics networks — would therefore suffer from a Postal Service monopoly over package delivery.”

As for innovation, UPS may be right about one thing.  If the future of delivery is going to be all about drones delivering for Amazon, then yes, the Postal Service will probably not be an “innovative force” — nor does it seem like UPS will be one either.

But maybe the future will be about something else, something not quite so “innovative,” like the simple fact that a Postal Service letter carrier stops at every address in the country, six days a week.  This allows the Postal Service to charge less on packages that the private shippers, perhaps Amazon as well, and it’s a situation not likely to change anytime soon.


Why the unlikely could happen

The chances that the Circuit Court of Appeals will actually grant the UPS petition for en banc review are extremely small, but it could happen.

Thanks to Trump’s tweets about the Postal Service undercharging Amazon, there’s a lot of public interest in postal pricing policies right now.  Plus, the President’s Task Force on the Postal Service is likely to address the same issues raised by the UPS case — cross-subsidization, postal rate setting, and the expanding parcel business

In fact, UPS concludes its petition with a reference to the Task Force, as well as a 2015 letter from Congressmen Jason Chaffetz and Mark Meadows to the Postal Service seeking the kind of information that would buttress claims that market-dominant products are cross-subsidizing competitive products, as UPS alleges.

The financial magnitude of the UPS case may also make it interesting to the Court.  In its proposal for changing cost allocation to the PRC, UPS presented testimony indicating that over $13 billion in institutional costs should be treated as variable costs.  If implemented, such a proposal would have significant impacts on the pricing of nearly every postal product.

The case might also be of interest to the Circuit Court because of the unusual nature of the confrontation between UPS, a private corporation; the Postal Service, a quasi-government entity operating in the commercial marketplace; and the PRC, a regulatory body authorized by Congress to interpret postal laws and regulations.

Considering that the case involves Chevron, monopoly issues, and the future of the Postal Service, it’s indeed possible, albeit unlikely, that the Circuit Court will do something it rarely does and grant the UPS petition for a rehearing en banc.


The future of Chevron

Another possibility is that UPS is preparing to take the case to the Supreme Court, the next step after a request for en banc review.  The Justices may actually be willing to hear the case because of the importance of the Chevron angle.

As UPS points out in its petition, “a recent opinion by Justice Kennedy cautioned that ‘reflexive deference’ in applying Chevron has the potential to undermine ‘constitutional separation-of- powers principles and the function and province of the Judiciary,’ and thus may warrant more intensive Supreme Court scrutiny.”

UPS notes that Kennedy’s opinion also cited opinions of Chief Justice Roberts, Justice Thomas, and Justice Gorsuch, who, it should be noted, has previously expressed his own reservations about Chevron.

Chevron is also likely to come up in the Kavanaugh confirmation hearings.  According to this article on the Brookings website, as both an appellate judge and legal commentator, Kavanaugh has been critical of the doctrine.

In a 2016 article in the Harvard Law Review, Kavanaugh states that Chevron “has no basis in the Administrative Procedure Act” and represents “an atextual invention by courts.” In fact, he adds, the decision is “nothing more than a judicially orchestrated shift of power from Congress to the Executive Branch.”

At some point in the future, Chevron will probably be revisited by the Supreme Court. Perhaps the UPS case will provide that occasion.  If so, the arcane issues of postal costing methodologies may turn out to be not so esoteric after all.

UPDATE, July 27, 2018: The Court denied the request for a rehearing en banc, as noted in a footnote in a PRC Order, August 7, 2018.  The Court’s order is here.

For more about the UPS case, see these previous posts:

(Photo: Delivery trucks)