USPS v. PRC

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued November 20, 2014 Decided May 12, 2015
No. 13-1308
UNITED STATES POSTAL SERVICE,
PETITIONER
v.
POSTAL REGULATORY COMMISSION,
RESPONDENT
ALLIANCE OF NONPROFIT MAILERS, ET AL.,
INTERVENORS
On Petition for Review of an Order
of the Postal Regulatory Commission
David C. Belt, Attorney, U.S. Postal Service, argued the
cause for petitioner. With him on the briefs was Morgan E.
Rehrig, Attorney. Stephan J. Boardman, Attorney, entered an
appearance.
Dana L. Kaersvang, Attorney, U.S. Department of
Justice, argued the cause for respondent. On the brief were
Stuart F. Delery, Assistant Attorney General, Michael S.
Raab and Benjamin M. Shultz, Attorneys, David A. Trissell,
General Counsel, Postal Regulatory Commission, and R.
Brian Corcoran, Deputy General Counsel.
2
William B. Baker, David M. Levy, William J. Olson,
Jeremiah L. Morgan, and John S. Miles were on the brief for
intervenors Alliance of Nonprofit Mailers, et al. in support of
respondent.
Matthew D. Field entered an appearance.
Before: TATEL, Circuit Judge, WILKINS, Circuit Judge,
and EDWARDS, Senior Circuit Judge.
Opinion for the Court filed by Senior Circuit Judge
EDWARDS.
EDWARDS, Senior Circuit Judge: On November 21, 2013,
the Postal Regulatory Commission (“Commission”) issued
Order No. 1890, Order on Price Adjustments for Market
Dominant Products and Related Mail Classification Changes
(“Order on Price Adjustments”), reprinted at J.A. 361. The
Order rejected proposals that had been submitted by the
United States Postal Service (“Postal Service” or “Service”)
to implement price adjustments to certain of its market-
dominant products as well as classification changes in
conjunction with the price changes. The United States Postal
Service now seeks review of this Order.
The Postal Accountability and Enhancement Act (“Act”)
generally forbids the Postal Service from raising the rates on
its market-dominant products faster than the rate of inflation.
39 U.S.C. § 3622(d)(1)(A). Under the Act, the Commission is
charged with “regulating rates and classes for market-
dominant products,” id. § 3622(a), which includes
promulgating regulations implementing the inflation-based
price cap. Pursuant to this authority, the Commission has
adopted regulations requiring the Postal Service to account for
the effects that reclassifying mail would have on the rates
3
charged for that mail. See 39 C.F.R. § 3010.23(d). For
example, in accordance with these regulations, if the Postal
Service deletes a price from its price list, thus forcing a
reclassification of the mail that had been charged that price
during the prior year, it must account for the reclassification
when computing any accompanying changes in rates. Thus, if
the reclassified mail would now be charged a higher price –
for instance, because the deleted price was a temporary
discount – then the extra cost for shipping that mail counts
against the price cap. The deletion of the discounted rate
causes a reclassification of certain mail and effectively raises
the rate on the previously discounted mail.
In April 2013, the Postal Service amended its mail
preparation requirements so that mail pieces prepared
according to the “basic-service Intelligent Mail” standard
would no longer be eligible for a discounted “automation”
rate available to mailers who use technologies to increase the
Postal Service’s efficiency. Implementation of Full-Service
Intelligent Mail Requirements for Automation Prices, 78 Fed.
Reg. 23,137, 23,137 (Apr. 18, 2013). In subsequent rate
change proceedings before the Commission, mailers objected
that this change in mail preparation requirements constituted a
classification change resulting in an increase in rates that must
be counted against the Postal Service’s price cap. The Postal
Service disagreed, arguing that mail preparation changes that
did not actually alter the posted prices were not “changes in
rates” within the plain meaning of the price cap statute or
“classification changes” within the plain meaning of the
Commission’s regulations, and therefore their effects did not
count toward the price cap.
The mailers prevailed before the Commission. See Order
on Price Adjustments at 1–2. The Commission held “that the
new mail preparation requirements redefine rate cells because
4
they require mailers to alter a basic characteristic of a mailing
in order for the mailing to qualify for the same rate category
for which it was eligible before the change in requirements.”
Id. at 18. The Commission thus concluded that the rate effects
of the mail preparation requirements change, combined with
the Postal Service’s other proposed rate increases, would
violate the inflation-based price cap. Id. at 2.
The principal issue in this case is whether the
Commission is correct in its view that its rate cap authority
extends beyond the regulation of posted rates to regulation of
Postal Service operational rules that have “rate effects.” The
Postal Service contends that the Act and applicable
regulations plainly forbid the Commission from
characterizing mail preparation requirements as “changes in
rates.” In addition, the Postal Service argues that the
Commission’s Order on Price Adjustments is arbitrary and
capricious because the standard that it invokes to determine
when changes in mail preparation requirements constitute
“changes in rates” is incomprehensible.
In our view, the Act and applicable regulations are
ambiguous with respect to whether the Commission’s
authority extends to the regulation of operational rules that
have “rate effects.” We therefore reject the Postal Service’s
claim that the “plain meaning” of the Act and regulations
positively forbid the Commission from counting an
operational change that has rate effects as a “change in rates.”
The Commission’s interpretation of the Act thus does not fail
under Step One of Chevron U.S.A. Inc. v. Natural Resources
Defense Council, Inc., 467 U.S. 837 (1984). We agree with
the Postal Service, however, that the Commission’s Order
cannot survive arbitrary and capricious review. The standard
enunciated by the Commission to determine when
requirements changes are “changes in rates” seems boundless
5
and, thus, unreasonable; and the Commission’s inconsistent
application of the standard in this case proves the point.
An agency action must be supported by “reasoned
decisionmaking,” whether taken in the course of rulemaking
or adjudication. Allentown Mack Sales & Serv., Inc. v. NLRB,
522 U.S. 359, 374 (1998). The Commission’s judgment in
this case “lacks any coherence. We therefore owe no
deference to [the Commission’s] purported expertise because
we cannot discern it.” Tripoli Rocketry Ass’n, Inc. v. Bureau
of Alcohol, Tobacco, Firearms, & Explosives, 437 F.3d 75, 77
(D.C. Cir. 2006). We therefore remand the case to the
Commission to enunciate an intelligible standard and then
reconsider its decision in light of that standard.
I. BACKGROUND
A. The Cap on Changes in the Postal Service’s Rates
“In 1970, what was formerly the cabinet-level Post Office
Department was transformed by statute into the modern
government-owned corporation known as the United States
Postal Service.” USPS v. Postal Regulatory Comm’n, 599
F.3d 705, 706 (D.C. Cir. 2010). As part of that
transformation, Congress created the Postal Rate Commission
to oversee a system in which the Postal Service established
rates based on its actual costs, with the goal of breaking even.
See United Parcel Serv., Inc. v. USPS, 184 F.3d 827, 829–30
(D.C. Cir. 1999). After criticism that the cost-based
ratemaking model failed to incent the Postal Service to
operate efficiently, and for other reasons, Congress reformed
the ratemaking scheme by enacting the Postal Accountability
and Enhancement Act in 2006.
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The Act separated the Postal Service’s product classes
into two differently regulated groups: “market-dominant
products” and “competitive products.” See USPS v. Postal
Regulatory Comm’n, 676 F.3d 1105, 1107 (D.C. Cir. 2012).
“Market-dominant products” include the various products for
which the Postal Service enjoys a statutory monopoly, or for
which the Postal Service exercises sufficient market power so
that it can effectively dictate the price of such products
without risk of losing much business to competing firms. See
39 U.S.C. § 3642(b)(1), (2). Remaining products, for which
the Postal Service faces meaningful market competition, are
classified as “competitive products” and are not at issue in
this case.
The Act completely reformed the ratemaking system for
market-dominant products. To alleviate concerns that the
Postal Service would improperly leverage its monopoly
powers over these products, the Act subjected them to a price
cap, forbidding “changes in rates” to rise faster than inflation:
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 . . . over
the most recent available 12-month period preceding the
date the Postal Service files notice of its intention to
increase rates[.]
Id. § 3622(d)(1)(A).
The price cap does not apply directly to every individual
product, however. Rather, it applies to each “class” of
products, as defined by statute. Id. § 3622(d)(2)(A). As a
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result, the Postal Service can raise the price of one product in
a mail “class” by more than the rate of inflation if that over-
inflation increase is offset by lower rises or reductions in
other products in the class. For example, the Postal Service
can raise the rate of one kind of first-class mail by more than
the rate of inflation as long as it offsets that increase with a
lower rise in another kind of first-class mail.
In addition, because market-dominant prices can be
raised to track inflation regardless of the Postal Service’s
actual costs, the Postal Service can keep savings it creates
through cost cutting. On the other hand, if the Postal Service’s
costs rise faster than the rate of inflation then, barring
extraordinary circumstances justifying a rate increase, the
Postal Service may not be able to cover its costs. Thus, the
inflation-based price cap protects mailers from the
“unreasonable use of the Postal Service’s statutorily-granted
[and de facto] monopoly” power while creating new pricing
flexibility, incentives for the Postal Service to reduce costs,
and the opportunity for the Postal Service to earn a profit. S.
REP. NO. 108-318, at 19 (2004).
B. The Commission’s Implementation of the Price Cap
The Act also reformed the Postal Rate Commission into
the Postal Regulatory Commission and required it to
promulgate regulations “whereby the Postal Service may
adjust rates not in excess of the” price cap. 39 U.S.C.
§ 3622(d)(1)(D). The Commission’s regulations seek to
ensure that the class-level price cap serves as an effective
limit on the Postal Service’s rates by plugging several
potential gaps in the cap. Thus, for example, the
Commission’s rules ensure that the Postal Service may not
generate extra revenue beyond the price cap by taking
advantage of the different volume levels of different products
8
within a class to raise rates unevenly while technically
complying with the class-level price cap. To achieve this, the
Commission has promulgated regulations specifying that the
calculation of a “change in rates” in a class should be
weighted by the mail volume of any given rate cell in a class.
39 C.F.R. § 3010.23(b). So, if the Postal Service has two rate
cells in a given class but one of them accounts for the lion’s
share of the mail volume, any increase in the rate for that rate
cell will be weighted according to volume when determining
its contribution toward the class-wide rate change cap. Small
increases in the rate for small-volume rate cells cannot be
used to obscure large increases in the rate for the large-
volume rate cells that generate the most revenue. By default,
the volume levels of the various products are to “be obtained
from the most recent available 12 months” of data. Id.§ 3010.23(d)(1).
The Commission’s regulations also seek to prevent the
Postal Service from evading the price cap by shifting mail to
more expensive rates. Because the Postal Service often
changes the classification of its mail, for example by adding,
deleting, or redefining rate cells, it is possible that some mail
will shift between different rates. The Commission
determined that shifting identical mailpieces between
different rates would constitute “changes in rates” for those
mailpieces. The Commission thus required the Postal Service
to factor the effects of classification changes into the
calculation of changes in rates by adjusting the volume
associated with each rate cell in sync with any changes to the
treatment of mailpieces. The applicable regulation states:
The Postal Service shall make reasonable adjustments to
the billing determinants [i.e., volume levels] to account
for the effects of classification changes such as the
introduction, deletion, or redefinition of rate cells.
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Id. § 3010.23(d)(2).
As noted above, this regulation prevents the Postal
Service from circumventing the price cap by shifting mail
volume into more expensive rate cells. If a discounted rate is
“deleted,” forcing a mailer to pay a higher price for their piece
of mail, that price increase would be captured and counted
toward the price cap. The regulation thus codifies an
important precept: that the rate on the discounted mail has
essentially been raised by being forced into a higher rate cell,
independently of whether the posted price in either the new or
original rate cell has been changed.
Moreover, at the urging of the Postal Service and to
simplify the calculation of the effect of classification changes,
the Commission has required the Postal Service to use
historical volume data and known mail characteristics (rather
than forecasts of changes in mailer behavior) when
determining the effects of classification changes. The
applicable regulation essentially requires the Postal Service to
assume a “constant mail mix” – measuring changes in rates as
if last year’s mail were being sent under the new proposed
rates and rules. The regulation states:
Whenever possible, adjustments shall be based on known
mail characteristics or historical volume data, as opposed
to forecasts of mailer behavior.
Id. § 3010.23(d)(3). Although the precise language of the
regulation has changed several times, its essence has
remained the same: if last year’s market-dominant mail in a
given class, sent according to the new rates and classification
rules, allow the Postal Service to earn more revenues than the
inflation-adjusted maximum, the rates violate the cap.
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C. The Mail Preparation Requirements Change
As indicated at the outset of this opinion, this case raises
questions regarding the scope of the Commission’s authority
to regulate “changes in rates” pursuant to the price cap statute
and its own regulations. The issue between the Postal Service
and mailers arose when the Service changed mail preparation
requirements that would have the likely effect of changing
rates paid by certain mailers for sending the same mailpieces
that they sent in the prior year. The parties dispute, among
other things, whether such a change is a “classification”
change within the meaning of the Commission’s regulations,
and whether such a classification change can result in a
“change in rates” within the meaning of the Act.
Understanding the mail preparation requirements change and
its potential rate effects serves as a crucial starting point in
this case.
The Postal Service offers “automation discounts” on
many of its market-dominant products to mailers who are
willing to prepare and tender mailpieces using technologies
that reduce the Postal Service’s costs. While the official,
posted rates for these discounts are subject to approval by the
Commission, the Postal Service retains discretion to define
eligibility for many of these automation rates through its
power to create mail preparation requirements. For example,
the Postal Service may sometimes define which automation
procedures entitle mailers to the discounts. These procedures
are published in the Domestic Mail Manual (“Manual”),
which contains the detailed operational rules governing the
mail products described in the formal Mail Classification
Schedule overseen by the Commission. See Br. of the U.S.
Postal Serv. 13.
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One form of automation approved by the Manual is the
use of “Intelligent Mail” standards, which essentially involve
affixing barcodes to mailpieces to enable the Postal Service to
simplify mail acceptance, processing, and tracking. Since
January 2009, the Postal Service has allowed mailers to use
two different Intelligent Mail standards, receiving two
different discounted rates: “basic-service” Intelligent Mail, a
less demanding standard that receives a smaller discount; and
“full-service” Intelligent Mail, a more demanding standard
that receives a larger discount. Basic-service Intelligent Mail
requires mailers to affix a barcode to each mailpiece
containing some basic information about the shipment, and to
schedule pick-up through a designated electronic scheduling
system. See generally Implementation of Intelligent Mail®
Barcodes, 73 Fed. Reg. 1158, 1160 (Jan. 7, 2008). Full-
service Intelligent Mail requires mailers to affix to each
mailpiece a barcode that uniquely identifies that mailpiece; to
place specialized barcodes on trays, sacks, and other
containers; to submit postage and mail shipment information
electronically; and to schedule certain pickups using a
specified electronic system. See generally id. at 1159–60.
In April 2013, the Postal Service provided public notice
that it was amending the Manual to change the eligibility
requirements for its automation rates, promulgating the
regulation that is at the heart of the dispute in this case. 78
Fed. Reg. 23,137. The Postal Service announced that use of
the basic-service Intelligent Mail standard would no longer
entitle mailers for any automation discount. Meanwhile, the
full-service Intelligent Mail discount would remain
unchanged. For that reason, mailers using the basic-service
standard who wanted to retain an automation discount would
have to upgrade their systems to full-service Intelligent Mail,
but would be rewarded with the greater full-service discount.
Mailers who did not upgrade their systems to comply with the
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full-service requirements would have to pay the higher,
undiscounted rates. The Manual change did not actually
change the posted automation rates; it changed only the
eligibility rules according to which mailpieces could qualify
for those rates.
D. The Proceedings Before the Commission
In September 2013, the Postal Service separately notified
the Commission that it intended to raise its posted prices for a
variety of market-dominant products. Order on Price
Adjustments at 1. The parties did not dispute that these
noticed price increases, by themselves, fell within the
inflation-based price cap established by statute. Various
commenters objected to the rate increases, however, stating
that they did not take account of the changes to mail
preparation requirements eliminating basic-service Intelligent
Mail’s eligibility for an automation discount. That change,
they argued, was a “classification change” within the meaning
of 39 C.F.R. § 3010.23(d) because it made basic-service mail
of the kind sent in the prior year ineligible for an automation
rate; in other words, it “redefined” the discounted rate cell and
reclassified the basic-service mail into a higher rate cell. The
commenters further argued that this change resulted in a
“change in rates” for basic-service Intelligent Mail within the
meaning of the price cap statute because those same basic-
service mailpieces would now be charged a higher rate. Thus,
the commenters argued that if the Postal Service’s rate change
proposal was adjusted to account for the supposed change in
rates arising from the mail preparation requirements, the
Postal Service had exceeded the price cap.
The Postal Service disagreed. In the proceedings before
the Commission, the Postal Service argued that the price cap
statute and regulation forbid the Commission from
13
considering the effects of Manual changes as changes in rates.
Regarding the price cap language of 39 U.S.C.
§ 3622(d)(1)(A), the Postal Service argued that Manual
changes were not “changes in rates” because they did not
actually change the rates posted in the formal Mail
Classification Schedule. According to the Postal Service,
changes to the mail preparation requirements in the Manual
merely changed the requirements to obtain an existing rate.
The Postal Service insisted that the plain language of the
statute could not apply to changes that left the posted rate the
same.
Regarding the Commission’s regulation, the Postal
Service claimed that Section 3010.23(d), requiring the Postal
Service to make adjustments for “classification changes such
as the introduction, deletion, or redefinition of rate cells,”
does not apply to operational changes made in the Manual.
Instead, the Postal Service contended that the only
“classification changes” subject to the rule were changes to
the Mail Classification Schedule overseen and approved by
the Commission. Order on Price Adjustments at 12. The
Postal Service additionally argued that it expected that most
mailers would comply with the changes to the mail
preparation requirements, and that the Commission should
therefore not assume when calculating the change in rates that
all basic-service mailers would begin paying higher rates. Id.
at 13.
Lastly, the Postal Service argued that construing the price
cap to apply to mail preparation changes would seriously blur
the line between the Postal Service’s authority to govern day-
to-day operational issues and the Commission’s authority to
manage rates and classes for market-dominant products, and
that doing so would be inconsistent with the Commission’s
treatment of mail preparation requirement changes in the past.
14
See id. at 12–13. The Postal Service expressed alarm that
interpreting “changes in rates” to apply to all mail preparation
requirement changes would greatly reduce the flexibility that
the Postal Service needs to run its business operations.
The Commission largely agreed with the objectors. The
Commission held that “[w]hether one characterizes the
[Manual] change as a redefinition or a deletion [of a rate cell],
or both, it is a classification change with rate effects that must
be recognized in calculating whether the proposed changes in
rates comply with the annual limitation established in 39
U.S.C. § 3622(d)(1)(A).” Order on Price Adjustments at 15.
Noting that “the focus of the comments has been on the
redefinition of rate cells,” id., the Commission set out its legal
standard for when a change in mail preparation requirements
constitutes a redefinition of a rate cell. The test, it held, was
whether
the new mail preparation requirements . . . require
mailers to alter a basic characteristic of a mailing in
order for the mailing to qualify for the same rate category
for which it was eligible before the change in
requirements.
Id. at 18 (emphasis added).
The Commission rejected the Postal Service’s arguments
that the “classification changes” mentioned by the regulations
were limited to the Mail Classification Schedule
superintended by the Commission, noting its own authority to
interpret the regulations and that the Postal Service and other
commenters had specifically discussed “when changes in mail
preparation requirements have significant rate implications”
during the regulations’ design. Id. at 19–20. Additionally, the
15
Commission dismissed the Postal Service’s fear that
“deeming some new mail preparation requirements to result in
rate adjustments will lead to deeming all new mail
preparation requirements to result in rate adjustments,” stating
that “[t]he Commission has not and will not indiscriminately
treat all new mail preparation requirements as rate
adjustments.” Id. at 25. Pointing to its “basic characteristic of
a mailing” standard, the Commission argued it would be able
to distinguish between new mail preparation requirements that
changed rates and those that did not.
Applying its new standard to the Manual change
involving the Intelligent Mail standards, the Commission
concluded that the new rules require mailers to “make
changes to the basic characteristics of their mailings in order
to continue to qualify for the automation discounts for which
they are currently eligible.” Id. at 29. In reaching this
conclusion, the Commission noted that mailers must apply
unique barcodes to each mailpiece; apply barcodes to trays,
tubs, sacks, and containers; ensure that the barcodes at each
level are interconnected; and use a designated electronic
system to schedule appointments and provide electronic
documentation. According to the Commission, these
“change[s to] their mailing practices” constitute “change[s to]
the basic characteristics of a mailing.” Id. at 30. The
Commission also concluded, in the alternative, that the
Manual change was the “deletion” of a rate cell because, after
the change, no mailers would be eligible for the lower
discounted rate previously applied to basic-service Intelligent
Mail users. Id. at 31–33.
The Commission also dismissed the Postal Service’s
objections to its requirement that the Postal Service use
historical data, assuming that no basic-service mailers would
upgrade to full-service mail, when calculating the rate effects
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of the Manual change. Id. at 33–35. While the Postal Service
argued that, in its experience, most mailers would make the
needed upgrades and therefore qualify for the lower rate, the
Commission pointed out that its rate change calculation rules
require the Postal Service to use known mail characteristics or
historical volume data whenever possible, as opposed to
forecasts of mailer behavior. Id. at 33; see also 39 C.F.R.
§ 2010.23(d)(3). It noted that the historical volume approach
had been proposed by and, until recently, supported by the
Postal Service as a necessary and wise expedient given the
difficulties and controversies surrounding use of forecasts of
mailer behavior in ratemaking proceedings. Order on Price
Adjustments at 33–35.
The Commission concluded that, since the mail
preparation requirement changes resulted in increases in rates
on basic-service mailpieces, the Postal Service could not
implement both the Manual changes and the noticed price
increases without violating the price cap. Id. at 35–36. The
Commission therefore gave the Postal Service an option: it
could either implement the Manual change as scheduled and
resubmit proposed rates that fell within the price cap; or it
could elect not to implement the Manual change and proceed
with its noticed price changes. Id. at 36. The Postal Service
elected to delay the Manual change and implement its noticed
price increases.
This petition for review followed. The Postal Service
argues that the plain language of the price cap statute and
applicable regulations forbid the Commission from deeming
changes to mail preparation requirements to be changes in
rates. In addition, the Postal Service argues that the
Commission’s decision is arbitrary and capricious because it
fails to establish a clear and rational standard for which
changes to mail preparation requirements it would consider
17
“changes in rates,” resulting in inconsistent application of the
standard within the Commission’s decision. Finally, the
Postal Service argues that the Commission’s decision is
arbitrary and capricious because the Commission
unreasonably refused to consider whether mailers will shift to
using full-service Intelligent Mail.
II. ANALYSIS
“Because the Congress expressly delegated to the
Commission responsibility to implement [the price cap
statute], we review its interpretation” of that statute under the
standards enunciated in Chevron and its progeny. USPS v.
Postal Regulatory Comm’n, 640 F.3d 1263, 1266 (D.C. Cir.
2011). Under Chevron’s First Step, if “Congress has directly
spoken to the precise question at issue . . . , that is the end of
the matter; for the court, as well as the agency, must give
effect to the unambiguously expressed intent of Congress.”
Chevron, 467 U.S. at 842–43. If the statute is ambiguous,
Chevron’s Second Step then requires us to consider whether
the Commission has acted pursuant to delegated authority
and, if so, whether its interpretation of the statute is
“permissible.” Id. at 843.
Even if the statute is ambiguous and does not foreclose
the Commission’s interpretation, however, the Commission’s
exercise of its authority must be “reasonable and reasonably
explained” in order to survive arbitrary and capricious review
under the Administrative Procedure Act. Mfrs. Ry. Co. v.
Surface Transp. Bd., 676 F.3d 1094, 1096 (D.C. Cir. 2012).
Furthermore, we review the Commission’s interpretation of
its own regulations with “substantial deference,” allowing that
interpretation to control unless “plainly erroneous or
inconsistent with the regulation.” Thomas Jefferson Univ. v.
18
Shalala, 512 U.S. 504, 512 (1994) (internal quotation marks
omitted).
At the heart of this case is the Commission’s
interpretation of its statutory and regulatory price cap
authority as extending beyond regulation of posted rates to
allow regulation of Postal Service mail preparation
requirements that may represent classification changes with
“rate effects.” We hold that the statute and regulations are
ambiguous and that, contrary to the Postal Service’s
arguments, their “plain language” does not forbid regulation
of mail preparation requirement changes with rate effects.
We hold, however, that the Commission’s decision is
arbitrary and capricious because it is not “reasonably
explained.” Mfrs. Ry. Co., 676 F.3d at 1096. We therefore
grant in part the petition for review and remand to the
Commission to more clearly enunciate the standard it is using
to determine which mail preparation requirement changes are
“changes in rates,” and to consider again how that standard
applies to the preparation requirement changes at issue in this
case.
A. The Statute and Regulations Are Ambiguous
The Postal Service’s primary objection to the
Commission’s Order is that the Commission lacks authority,
under both the price cap statute and its implementing
regulations, to consider mail preparation requirement changes
in the Manual as “changes in rates” that count against the
price cap. We disagree.
The Postal Accountability and Enhancement Act’s price
cap provision states that
19
[t]he 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 . . . over
the most recent available 12-month period preceding the
date the Postal Service files notice of its intention to
increase rates[.]
39 U.S.C. § 3622(d)(1)(A). Under this statute, the
Commission’s authority extends only to regulate “changes in
rates.” A related provision defines “rates” as including
“fees for postal services.” Id. § 102(7).
The critical statutory question in this case is whether
“changes in rates” encompasses only changes to the official
posted prices of each product, as the Postal Service argues, or
also changes to the prices actually applied to particular
mailpieces, as the Commission argues. The language of the
Act is ambiguous: “Changes in rates” is not specifically
defined, and could apply either to the posted rates or the rates
that customers actually pay. Neither interpretation conflicts
with the statutory definition of “rates” as “fees for postal
services,” since fees, like rates, can be both posted on a list
and charged to specific mailpieces. See id. § 3622(d)(1)(A).
The language of the statute therefore does not conflict with an
interpretation of “changes in rates” as changes in the fees as
applied to specific classifications of mailpieces.
Moreover, nothing in the language or purpose of the
statute renders unreasonable the Commission’s interpretation
of “changes in rates” as extending to changes in the rates as
they are applied to specific mailpieces. First, as noted, the
language of the statute does not provide any relevant
20
limitation on the rates considered. Second, the Commission
points out that the purpose of the price cap statute is to
prevent the Postal Service from using its market-dominant
power to charge customers unreasonably high prices. The
Commission’s interpretation of the statute prevents the Postal
Service from evading the price cap by shifting mailpieces to
higher rates through manipulation of its mail preparation
requirements. The Commission’s interpretation is therefore
consistent with the price cap’s language and purpose, and the
Commission’s delegated authority to administer the cap.
The Postal Service’s arguments to the contrary are
unavailing. Its plain language argument, as demonstrated
above, simply does not fit the terms of the statute. The Postal
Service attempts to bolster its reading of the statute by
pointing out that the statute refers to “the Postal Service
fil[ing] notice of its intention to increase rates.” Id. The Postal
Service argues that this provision clarifies that “rates”
therefore means only those rates for which the Postal Service
must file notice. The Postal Service then argues that it is not
required to file notice of its mail preparation requirement
changes, and therefore “changes in rates” should not be
considered to encompass mail preparation requirement
changes. But this argument begs the question: If the
Commission’s interpretation of the statute is correct, the
Postal Service may, indeed, have to file a notice with the
Commission when it makes certain mail preparation
requirement changes that result in mailpieces being charged
higher prices. That is in part the question at issue in this case.
Therefore the “filing” language identified by the Postal
Service clarifies no ambiguity about whether changes in rates
encompass both changes to the posted rates and changes to
rates brought about through the modification of the Postal
Service’s classification system.
21
Nor are we convinced by the Postal Service’s observation
that the Act sometimes distinguishes between “rates” and
“classifications,” which the Postal Service argues requires the
conclusion that a change in rates cannot be the same thing as a
change in classification. See, e.g., id. § 3622(d)(1) (creating
requirements for a system for regulating “rates and classes”).
This argument ignores the fact that the Commission is not
stating that changes in classifications are themselves changes
in rates; rather, the Commission merely points out the self-
evident fact that changes in classifications can cause changes
in the rates experienced by mailers, a point the Postal Service
does not dispute. It is those changes in rates paid by mailers
that the Commission seeks to regulate, whether they occur
through the posting of new prices to a list or through changes
in classification.
In short, the Postal Service has failed to show that
“Congress has directly spoken to the precise question at
issue,” Chevron, 467 U.S. at 842, or that Congress has
precluded the Commission’s interpretation of the statute. The
statute therefore leaves a gap to be filled by the Commission
pursuant to its delegated authority to regulate rates and classes
for market-dominant products.
Nor can the Postal Service show that the Commission’s
price cap authority over mail preparation changes is
constrained by regulation. The regulations governing
classification changes are also ambiguous as to whether they
cover mail preparation requirement changes outside the Mail
Classification Schedule. The relevant regulation reads,
The Postal Service shall make reasonable adjustments to
the billing determinants [i.e., volume levels] to account
for the effects of classification changes such as the
introduction, deletion, or redefinition of rate cells.
22
39 C.F.R. § 3010.23(d)(2). Nothing in the plain language of
the regulation forbids the Commission from considering
whether mail preparation requirement changes such as those
in the Manual “redefine” a rate cell. As the Postal Service
concedes, operational changes in the Manual can define and
redefine the “eligibility” for a rate cell. The regulation is
silent as to whether redefining the eligibility for a rate cell –
in other words, defining which mailpieces can fit into that rate
cell – is a redefinition of the rate cell itself. Certainly,
however, the regulation does not foreclose the Commission’s
interpretation, and we are bound to defer to that interpretation
unless it is “plainly erroneous or inconsistent with the
regulation.” Thomas Jefferson Univ., 512 U.S. at 512 (internal
quotation mark omitted).
We are not convinced by either of the Postal Service’s
arguments attempting to limit the scope of this regulation.
First, the Postal Service argues that “classification changes”
in the regulation refers only to changes made to the official
Mail Classification Schedule (which establishes rates for mail
services), not changes made to the Postal Service’s
operational Manual (which sets mail preparation
requirements). But nothing in the language of the regulation
limits its scope to classification changes contained in the
Schedule. On the other hand, changes in the Manual that
reclassify a mailpiece from one product or rate cell to another
fall comfortably within the plain meaning of the phrase
“classification changes.”
The Postal Service has provided no principled reason,
originating in the statute or regulations, for why the price cap
should treat classification changes in the Manual differently
than classification changes in the Schedule when either
change can cause a change in the rates paid by mailers. The
23
regulation is therefore ambiguous and does not preclude the
Commission’s reasonable assertion of authority over some
mail preparation requirement changes with rate effects.
The Postal Service’s final argument regarding the
interpretation of the regulation is that the Commission’s
reading of “classification changes” as extending beyond the
Mail Classification Schedule would wreak havoc with the
Postal Service’s ratemaking by requiring it to count “[a]ny
mail-preparation requirement” as a classification change that
may change rates. Br. of U.S. Postal Serv. 41. The Postal
Service is certainly correct that the implications of the
Commission’s interpretation of its authority are potentially
staggering. Nonetheless, this does not change the fact that, in
regulating the price cap, the Commission has some authority
to take account of operational rules that have rate effects. This
does not mean that the Commission has unfettered authority.
Any regulatory approach must be a product of reasoned
decisionmaking. We now turn to this issue.
B. The Commission’s Decision Is Arbitrary and
Capricious
As noted above, the statute and regulations do not
foreclose the Commission’s claim that, in regulating the
inflation-based price cap, it has some authority to assess mail
preparation requirements that have rate effects. However, the
Commission’s Order in this case fails under arbitrary and
capricious review. “Put simply, the [Administrative Procedure
Act] requires that an agency’s exercise of its statutory
authority be reasonable and reasonably explained.” Mfrs. Ry.
Co., 676 F.3d at 1096. The agency fails to reasonably explain
its decision if it gives “differential treatment of seemingly like
cases.” LePage’s 2000, Inc. v. Postal Regulatory Comm’n,
642 F.3d 225, 232 (D.C. Cir. 2011). And we owe no
24
deference to an agency determination that is “largely
incomprehensible.” Coburn v. McHugh, 679 F.3d 924, 926
(D.C. Cir. 2012).
At its core, the Commission’s Order is arbitrary and
capricious because it fails to articulate a comprehensible
standard for the circumstances in which a change to mail
preparation requirements such as the one in this case will be
considered a “change in rates.” The failing is particularly
concerning because the Commission acknowledges that its
interpretation of its authority could have broad consequences
for the Postal Service, theoretically allowing the Commission
to superintend not only the changes in posted rates listed in
the Mail Classification Schedule, but also any of the myriad
operational changes that reclassify mailpieces and have “rate
effects.” The Commission does not claim this unbridled
authority. Indeed, the Commission concedes that it has a
responsibility to provide “clear guidance to the Postal Service
and its customers about the scope and contours of the price
cap requirements.” Order on Price Adjustments at 15. In
response to the Postal Service’s concern that the
Commission’s reasoning would lead it to deem all mail
preparation requirements to be changes in rates, the
Commission sought to reassure the Postal Service with these
words: “The Commission has not and will not
indiscriminately treat all new mail preparation requirements
as rate adjustments.” Id. at 25. Unfortunately, the
Commission’s decision fails to set forth a standard that will
ensure that this promise is kept.
In attempting to define which operational changes would
count as rate adjustments, the Commission is cryptic, to say
the least. It says that a change in rates occurs when the mail
preparation requirement change at issue “require[s] mailers to
alter a basic characteristic of a mailing in order for the
25
mailing to qualify for the same rate category for which it was
eligible before the change in requirements.” Id. at 18. This
purported standard does not come close to satisfying the
requirement of reasoned decisionmaking, most notably
because the reference to a “basic characteristic of a mailing”
has no content and is not accompanied by an adequate
explanation of how the standard applies to the facts of this
case. As a consequence, the purported standard is
indiscriminate and offers no meaningful guidance to the
Postal Service or its customers on how to treat future changes
to mail preparation requirements. Indeed, the Commission’s
application of the standard in this case appears to be
inconsistent and inadequately explained.
In the same Order that determined that the revised
Intelligent Mail requirements constituted “changes in rates,”
the Commission considered whether another change in
“preparation requirements constitute[d] a price change.”
Order on Price Adjustments at 71. The second operational
change involved the Postal Service’s rules for preparing flat-
shaped mailpieces for shipment. Previously, the Postal
Service had recommended that certain flat-shaped mailpieces
be stacked in bundles of equal height so that they could more
efficiently interact with the sequencing machines used by the
Postal Service. In its notice of rate adjustment, however, the
Postal Service proposed making the “bundling” rule
mandatory for such flat-shaped mailpieces to qualify for
certain rates. By making the “bundling” rule mandatory, the
Commission acknowledged that “the new preparation
requirements may result in some mailers paying higher
prices” because those mailers who did not change their
shipping methods would be forced into a higher rate cell. Id.
Nevertheless, the Commission concluded that these
operational changes do not count as changes in rates because
26
the requirements “do not change the basic characteristics of a
mailing.” Id. This is hard to fathom.
The Commission’s attempt to explain the differences
between the bundling rule and the Intelligent Mail change
does not withstand scrutiny. In considering the Intelligent
Mail change, the Commission stated that the requirement
“change[d] the basic characteristics of a mailing” because it
“compel[led] mailers to change their mailing practices in
order to qualify for the same rates they currently qualify for.”
Id. at 30. This is precisely what the bundling rule requires.
Yet the Commission ruled that the rate effects of the bundling
rule do not count in assessing the inflation-based price cap.
The Commission never satisfactorily explains why one
change in mailing practices alters “a basic characteristic of a
mailing” while the other does not. Nor is it obvious or
intuitively clear why putting a barcode on a mailpiece is
different from moving an address label or changing the
bundling configuration of mailpieces, both of which the
Commission has said would not constitute changes to a basic
characteristic of mailpieces. Id. at 72.
The Commission relies on a factually contested point that
one change is greater in magnitude than the other, with
barcoding requiring “significant” changes, id. at 29, while
bundling requires “minor modifications,” id. at 72. But, even
accepting this as true, it is unclear from the Commission’s
decision why the size of the change determines the “type” of
the change – i.e., why a small change that admittedly affects
rates is not a “change in rates.” It is likewise unclear why the
magnitude of the change determines whether the change
affects “a basic characteristic of a mailing.”
27
The Commission’s brief to this court belatedly asserts
that “trivial preparation changes are the most likely to have
virtually universal adoption by mailers” and therefore may not
actually change rates paid by mailers. Br. for the Postal
Regulatory Comm’n 42. This claim is nowhere to be found in
the Commission’s decision. Therefore, “whatever the merits
of this position, we cannot consider it because the
Commission did not set it forth below.” LePage’s 2000, Inc.,
642 F.3d at 231. Furthermore, the assertion cannot be squared
with the Commission’s rule that the Postal Service may not
rely on forecasts of mailer behavior.
Neither the Commission’s unelaborated “basic
characteristic” standard nor its application here effectively
explains the Commission’s reasoning or resolves the
ambiguity about the treatment under the price cap of future
mail preparation requirement changes. As the Commission
itself has noted, indiscriminately treating mail preparation
requirement changes as rate changes could have far-reaching
and enormous consequences for the day-to-day and month-to-
month operations of the Postal Service, including its ability to
reasonably manage its own policies. While the Commission
may well be able to determine a basis for treating the
Intelligent Mail rule and the bundling rule differently, it has
not enunciated that basis in this case or provided guidance for
future cases. “At the least, the Commission must explain this
differential treatment of seemingly like cases,” and “explain
how it can read the same evidence differently when applied”
to apparently similar changes. Id. at 232.
Although the Commission may have the authority under
the price cap statute and regulations to consider mail
preparation requirement changes of the kind at issue in this
case as changes in rates, its decision here “must be remanded
because of a basic inconsistency in its reasoning.” Air Line
28
Pilots Ass’n v. FAA, 3 F.3d 449, 453 (D.C. Cir. 1993). During
oral argument, counsel for the Commission argued that the
Commission’s decision is “rulemaking through adjudication,”
as if to suggest that it is not subject to serious scrutiny. The
case law surely does not support this view.
[T]he arbitrary and capricious standard governs review of
all proceedings that are subject to challenge under the
APA. Thus, if an action is subject to review under the
APA, it does not matter whether it is a formal or informal
adjudication or a formal or informal rulemaking
proceeding – all are subject to arbitrary and capricious
review under Section 706(2)(A).
EDWARDS, ELLIOTT, & LEVY, FEDERAL STANDARDS OF
REVIEW 203 (2d ed. 2013) (citation omitted); see also
Allentown Mack, 522 U.S. at 374 (“[A]djudication is subject
to the requirement of reasoned decisionmaking as well.”).
We have previously remanded adjudications to the
Commission when we have found “that the Commission acted
within its statutory authority” but “the Commission’s
explanatory gap [was] palpable” with respect to its
“inconsistent” application of its rules or “the bounds of its
authority.” USPS, 676 F.3d at 1106–08; see also LePage’s
2000, Inc., 642 F.3d at 234 (remanding to allow the
Commission to explain the “inconsistencies in its order”);
Checkosky v. SEC, 23 F.3d 452, 463 (D.C. Cir. 1994)
(discussing the authority of courts to “remand to the agency
for a more complete explanation of a troubling aspect of the
agency’s decision” in an adjudication); Plumbers and
Steamfitters Local 342 v. NLRB, 598 F.2d 216, 217 (D.C. Cir.
1979) (“[W]e remand to the NLRB to clarify its decision.”).
Given the noted deficiencies in the Commission’s decision in
this case, we have no choice but to remand.
29
****
We find no merit in the Postal Service’s other arguments,
including its objection to the Commission’s application of the
historical-volume rule in this case, so we deny the petition for
review with respect to these matters.
III. CONCLUSION
For the reasons given above, we deny the petition for
review in part and grant in part. We hold that the price cap
statute and the applicable regulations do not entirely foreclose
the Commission from determining that some mail preparation
requirements constitute “changes in rates.” We also hold,
however, that the Commission's decision in this case is
arbitrary and capricious for lack of reasoned decisionmaking.
We therefore remand the case to the Commission to enunciate
an intelligible standard and then reconsider its decision in
light of that standard. Because the changes to the Manual
should continue to be held in abeyance pending the outcome
of the remand, it is unnecessary for us to vacate the
Commission’s decision.
So ordered.