ORDER NO. 116

UNITED STATES OF AMERICA

POSTAL REGULATORY COMMISSION

WASHINGTON, DC 20268-0001

Before Commissioners: Dan G. Blair, Chairman;\
Mark Acton, Vice Chairman;\
Ruth Y. Goldway;

> Tony L. Hammond; and

Nanci E. Langley

Competitive Product Prices Docket No. MC2008-8

Priority Mail Contract

Priority Mail Contract 1

Competitive Product Prices Docket No. CP2008-26

Priority Mail Contract 1 (MC2008-8)

Negotiated Service Agreement

ORDER CONCERNING PRIORITY MAIL CONTRACT 1

NEGOTIATED SERVICE AGREEMENT

(Issued October 15, 2008)

# Background

On September 23, 2008, the Postal Service filed a formal request
pursuant to 39 U.S.C. 3642 and 39 CFR 3020.30 *et seq*. to add Priority
Mail Contract 1 to the competitive product list. The Postal Service
asserts that Priority Mail Contract 1 is a competitive product "not of
general applicability" within the meaning of 39 U.S.C. 3632(b)(3). This
Request has been assigned Docket No. MC2008‑8.[^1]

The Postal Service contemporaneously filed a contract related to the
proposed new product pursuant to 39 U.S.C. 3632(b)(3) and 39 CFR 3015.5.
The contract is assigned Docket No. CP2008-26. The Postal Service
represents that the contract fits within the proposed Mail
Classification Schedule (MCS) language.

In support of its Request, the Postal Service filed the following
materials: (1) a redacted version of the Governors' Decision, which also
includes an analysis of the Priority Mail Contract 1;[^2] (2) a redacted
version of the contract; which, among other things, provides that the
contract will expire 2 years from the effective date, which is proposed
to be 1 day after the Commission issues all regulatory approvals;[^3]
(3) requested changes in the MCS product list[^4]; (4) a Statement of
Supporting Justification as required by 39 CFR 3020.32;[^5] and (5)
certification of compliance with 39 U.S.C. 3633(a).[^6]

In the Statement of Supporting Justification, Kim Parks, Manager, Sales
and Communications, Expedited Shipping, asserts that the service to be
provided under the contract will cover its attributable costs, make a
positive contribution to coverage of institutional costs, and will
increase contribution toward the requisite 5.5 percent of the Postal
Service's total institutional costs. Attachment D at 1. Ashley Lyons,
Manager, Corporate Financial Planning, Finance Department, certifies,
based on the financial analysis provided by the Postal Service, that the
contract complies with 39 U.S.C. 3633(a). Attachment E.

The Postal Service filed much of the supporting materials, including the
Governors' Decision and the specific Priority Mail Contract 1, under
seal. In its Request, the Postal Service maintains that the contract and
related financial information, including the customer's name and the
accompanying analyses that provide prices, terms, conditions and
financial projections should remain under seal. Request at 2.

In Order No. 111, the Commission gave notice of the two dockets,
appointed a public representative, and provided the public with an
opportunity to comment.

# Comments

Comments were filed by the Public Representative.[^7] No filings were
submitted by other interested parties. The Public Representative's
comments focus on several aspects of the negotiated Priority Mail
Contract 1: adequate cost coverage for the product, identification of
the source and basis for projected volume figures; and use of reliable
adjustment factors. Public Representative Comments at 3-4. In addition,
the Public Representative comments on the public interest in ensuring
that the proposed competitive negotiated service agreements have been
considered by the Governors and that such agreements provide increased
options for consumers. *Id.* at 4-5.

Based on a review of materials filed under seal, the Public
Representative concludes that the contract comports with 39 U.S.C.
3633(a). *Id*. at 4. The Public Representative comments on the projected
contract volumes recommending that in future filings the Postal Service
should provide in general terms the nature and source of the volume
projections for evaluation and review by the Commission. *Id.* at 5-6.
Finally, the Public Representative comments that the contract's economic
adjustment factors appear to be reasonable and provide adequate revenue
protection for the Postal Service. *Id*. at 6.

# Commission Analysis

The Commission has reviewed the contract and the financial analysis
provided under seal that accompanies the agreement as well as the
comments by the Public Representative.

The Postal Service's filing is distinguishable from previously filed
negotiated service agreements. It seeks to establish a new domestic
Priority Mail product, but not as a shell classification. Rather, the
contract is predicated on unit costs for major mail functions, *e.g.*,
window service, mail processing, and transportation, based on the
shipper's mail characteristics.

The Commission's review of the supporting data uncovered certain
inconsistencies which, on further inspection, do not substantially alter
the financial results, but which nonetheless merit comment. Some of the
underlying cost figures were developed from the Postal Service's FY2007
Annual Report to the Commission instead of from the Commission's FY2007
Annual Compliance Determination. The latter, representing the latest
available information, is to be used in future filings.[^8]

With respect to volume mix, the Postal Service relies on two different
sources of information, namely, an existing special study and data
reported by Origin Destination Information System (ODIS). While the use
of these two sources of data does not cause the financial results to
vary significantly (compared to using only one source), any future
similar contracts should employ a single source to derive volume
distributions, or alternatively, provide adequate justification for
using more than one source.

Based on the data submitted, the Commission finds that the Priority Mail
Contract 1 should cover its attributable costs (39 U.S.C. 3633(a)(2)),
should not lead to the subsidization of competitive products by market
dominant products (39 U.S.C. 3633(a)(1)), and should have a positive
effect on competitive products' contribution to institutional costs (39
U.S.C. 3633(a)(3)). Thus, an initial review of the proposed Priority
Mail Contract 1 indicates that it comports with the provisions
applicable to rates for competitive products.

The Postal Service shall notify the Commission of the effective date of
the instant contract. In addition, the Postal Service shall promptly
notify the Commission when the contract terminates no later than the
actual termination date. The Commission will then remove the contract
from the Mail Classification Schedule at the earliest possible
opportunity.

In conclusion, the Commission approves Priority Mail Contract 1 as a new
product. The revision to the competitive product list is shown below the
signature of this Order and is effective upon issuance of this Order.

*It is Ordered:*

1.  Priority Mail Contract 1 (MC2008-8 and CP2008-26) is added to the
    competitive product list as a new product under Negotiated Service
    Agreement, Domestic.

2.  The Postal Service shall notify the Commission of the effective date
    and the termination date of the contract as discussed in this Order.

3.  The Secretary shall arrange for the publication of this Order in the
    *Federal Register*.

By the Commission.

Judith M. Grady

Assistant Secretary

CHANGE IN MAIL CLASSIFICATION SCHEDULE

CHANGE IN PRODUCT LIST

The following material represents changes to the Product List codified
at 39 CFR Appendix to Subpart A of Part 3020---Mail Classification
Schedule. These changes are in response to Docket Nos. MC2008-8 and
CP2008-26. The underlined text signifies that the text is new, and shall
appear in addition to all other Mail Classification Schedule text.

> PART B\-- COMPETITIVE PRODUCTS

2000 COMPETITIVE PRODUCT LIST

\*\*\*\*\*

NEGOTIATED SERVICE AGREEMENTS

Domestic

Express Mail Contract 1 (MC2008-5)

[Priority Mail Contract 1 (MC2008-8 and CP2008-26)]{.underline}

\*\*\*\*\*

[^1]: Request of the United States Postal Service to Add Priority Mail
    Contract to Competitive Product List and Notice of Establishment of
    Rates and Class Not of General Applicability, September 23, 2008
    (Request).

[^2]: Attachment A to the Request. The analysis that accompanies the
    Governors' Decision notes, among other things, that the contract is
    not risk free, but concludes that the risks are manageable.

[^3]: ^?^ Attachment B to the Request.

[^4]: Attachment C to the Request.

[^5]: Attachment D to the Request.

[^6]: Attachment E to the Request.

[^7]: Public Representative Comments in Response to Order No. 111,
    October 8, 2008 (Public Representative Comments).

[^8]: Modifications, if any, to such data to reflect changed
    circumstances would need to be fully supported.