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for the District of Columbia, and the Court of Appeals unanimously affirmed the Commission's decision. Although cost allocation was not an issue before the court, the entire court joined in a separate concurring opinion expressing concern over the method used by the Service to allocate costs among different classes of mail. The method was criticized because 51 percent of the costs were divided among the classes of mail on a judgmental basis described by the judges as "an unstructured and well-nigh unreviewable discretion * * *."

The Commission's second rate decision, issued on August 28, 1975, was approved by the Postal Service Governors, with reservations about certain jurisdictional assertions, on September 4, 1975. The decision was appealed to the U.S. Court of Appeals for the District of Columbia contesting most importantly the Service's and the Commission's costing methodology.

In January 1976 this case was consolidated for purposes of oral argument with two others related to postal ratemaking pending before the appellate court. The appellate court's decision in these cases was rendered on December 28, 1976. It struck down the Service's and the Commission's costing methodology. The Service, with the strong endorsement of the Commission, has taken steps to appeal the decision.

The Commission's third rate decision, issued on June 30, 1976, was approved by the Postal Service Governors on July 7, 1976. Seven appeals have been filed with the U.S. Court of Appeals for the District of Columbia from the decision in this case.

SCOPE OF REVIEW

Although we do not have specific legal authority to audit the Postal Rate Commission, the Commissioners agreed to cooperate with us in the review.

Our examination of the Commission included reviewing (1) the Report of the President's Commission on Postal Organization, where it pertains to ratemaking activities, (2) the legislative history of the Commission, (3) the several rate decisions issued by the Commission, (4) several volumes of background information supplied by the Commission, and (5) other information concerning organization, budgeting, and personnel. In addition, we held discussions with the Commissioners and their staff.

Discussions were also held with officials of the Postal

Service.

CHAPTER 2

CONGRESSIONAL INTENT UNCLEAR

REGARDING COMMISSION JURISDICTION

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We believe that the essential overall structure of the postal ratemaking process is sound and has been working. Nevertheless, a better definition of the role of the Postal Rate Commission and refinements in the Postal Reorganization Act would improve ratemaking performance.

The Postal Service and the Commission disagree on the role the Congress intended the Commission to play in postal affairs. Jurisdictional disputes have arisen on a broad range of issues involving the authority of the Commission with respect to setting certain postal rates, determining the validity of Service cost and revenue estimates, and investigating the efficiency and economy of management and the quality of mail service.

The Postal Reorganization Act is not clear on these matters, and both parties find support for their positions in the act and its legislative history.

The Commission argues that the functions given it under the act, as amended--rate determinations, mail classification, complaints, service change reviews, and Postal Service determinations to close or consolidate any post office--of、 necessity confer on its fact finding authority, akin

to that exercised by other regulatory bodies. The Commission reasons that without such authority no meaningful regulation can take place and it and the public would have to accept the unilateral determinations of the Service.

On the other hand, beginning with the fact that unlike most regulatory agencies the Commission's decisions are not final and must be approved by the nine Postal Service Governors, the Service has developed a rationale to support its position that the Commission's role was intended to be a limited one, with the Governors possessing broad discretionary powers subject to prior Commission review only where explicitly provided for in the act.

The first two rate cases took 17 and 23 months to complete. There is no appropriate standard against which the timeliness of these cases can be judged, but we note that other regulatory agencies have often taken longer to resolve

their cases. It is true, however, that the Service's finances were adversely affected by its inability to quickly adjust postal rates in response to swiftly rising costs.

We believe that the cases required the time that they did because of the need to (1) develop a data base for a new regulatory undertaking, and (2) determine an appropriate costing methodology from among a number of alternatives.

The Commission completed the third case in only 9-1/2 months; this was a major accomplishment. The reduced time can be attributed to (1) the Commission's use of improved, streamlined procedures and (2) a costing approach laid down by the Commission in the second rate case which the Service generally favored. It should be noted that the U.S. Court of Appeals recently rejected this costing approach. The Service, with the strong endorsement of the Commission, has taken steps to appeal the decision.

Despite this improvement in rate case timeliness, the basic question of the proper role of the Commission persists. The jurisdictional disputes between the parties largely spring from the differing interpretations of the Commission's role.

NEED TO RESOLVE JURISDICTIONAL
DISPUTES BETWEEN THE POSTAL RATE
COMMISSION AND THE POSTAL SERVICE

During ratemaking and classification hearings, a number of challenges to the Commission's authority have been raised by the Postal Service. None of the jurisdictional questions discussed below have been resolved.

We reviewed five areas of dispute which we considered to be the most important to determine whether the Commission had jurisdiction to

--examine the Service's level of cost and revenue estimates,

--evaluate the Service's management and quality of
service provided,

--recommend rate phasing,

--recommend adjusted rates, and

--determine conditions of mailability.

Commission review of Service's level

of cost and revenue estimates

Does the Commission have jurisdiction to inquire into or review the Service's estimates of its total costs and revenues that are filed in support of a request for a rate increase?

The Commission believes that to accomplish any meaningful regulation, it is essential that cost and revenue estimates submitted by the Service supporting a request for a recommended decision on changes in rates and fees be subject to the Commission's independent review.

The Commission argues that without an opportunity for it to verify the accuracy of the Service's total estimates, or for the public to examine those cost estimates, the public would be obliged to pay whatever total bill the Service unilaterally decided to charge.

The Commission concludes that it has the authority on the basis of:

--The act's emphasis on the Commission's independence.
--The direction in the act to Leommend a decision in
accordance with the policies of the act which includes
the policy to insure that

"Postal rates and fees shall provide
sufficient revenues so that the total
estimated income and appropriations
to the Postal Service will equal as
nearly as practicable total estimated
cost of the Postal Service."

--The indication in the act that Service requests be
subject to hearings and appellate review.

The Commission contends the purposes of the act can only be accomplished by actually examining the bases for Service requests for increased rates and fees. The Commission also argues that there is no compelling evidence in the act's legislative history that the Congress intended to withhold from the Commission the authority to examine the Service's estimates.

The Service's position is based on what it perceives

to be practical considerations. The Service is concerned that the postal system cannot be managed effectively if major management decisions are subject to modification or reversal by outside parties.

The Service, therefore, contends that the act necessarily confers responsibility to carry out policies not plainly expressed in the act on the postal structure's basic management machinery--the Governors, the Board of Governors, and the Service--not on the Commission. The Service would limit the Commission's ratemaking responsibilities to apportionment of postal costs among the several classes of mail to determine the rate each should pay.

The Service's management

and quality of service

Does the Commission have jurisdiction to determine whether the Service's management is honest, efficient, and economical for purposes of ratemaking or mail classification? and may the Commission take account of level and quality of service in determining proposed rates or mail classification?

The Commission contends that it has the authority to consider, for purposes of ratemaking, the Service's honesty, efficiency, and economy of management and the level and quality of postal service. In In regard to honesty, efficiency, and economical management, the Commission's assertion of authority is based on an interpretation of the language of the act similar to that made concerning its authority to consider independently the Service's total cost estimates.

Similarly, the Commission contends that it may review the level and the quality of service on the basis that those factors are generally inherent in the policies stated in the act and are necessary elements of the factors that the Commission is specifically directed to consider in preparing a recommended decision.

The Service contends that the Congress would not have left a major policy judgment, such as jurisdiction to review efficiency, to be arrived at by implication from general words of the act. Moreover, the Service argues that honesty, efficiency, and economy of management, and level and quality of service are strictly matters of management committed to the supervision of the Board of Governors and that fragmentation of responsibility for review of those factors would, in fact,

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