**CAP COMPLIANCE FOR FIRST-CLASS MAIL PRICE CHANGES**

**I. PREFACE**

The overall percentage increase for First-Class Mail is 3.77 percent,
slightly below the 3.8 percent allowed under the Available Rate Change
Authority. USPS R2009-2/1 contains the workpapers which demonstrate that
the percentage change in First-Class Mail prices complies with the
Available Rate Change Authority. It consists of this summary document,
and three sets of Excel workpapers described in detail below.

**II. ORGANIZATION**

For purposes of calculating the percentage change in prices, First-Class
Mail

includes both domestic First-Class Mail and Single-Piece First-Class
Mail

International (FCMI). The Excel file labeled **CAPCALC-FCM-FY2009.xls**
contains the billing determinants, current prices, adjusted prices and

revenue calculations for First-Class Mail. The percentage rate change

calculations in that file include total revenue and pieces from
Single-Piece First-

Class Mail International (FCMI) derived from the Excel file labeled
**CAPCALC-FCMI-FY2009.xls**. This latter file contains the billing
determinants, current prices, adjusted prices, and revenue calculations
for Outbound Single-Piece FCMI.

Inbound Single-Piece First-Class Mail International -- Letter-Post
(Inbound FCMI)

is a service that the Postal Service is required to offer under the
treaty obligations of its membership in the Universal Post Union (UPU).
With the exception of Inbound FCMI received from Canada Post, the rates
for this service are set by the UPU. Rates for Inbound FCMI received
from Canada Post are set through a bilateral agreement between the
Postal Service and Canada Post. The rates for all Inbound FCMI provide
compensation for the cost of delivering inbound mail from foreign
countries. Rates are adjusted on a calendar year basis, with the most
recent rate change taking place on January 1, 2009. Since Inbound FCMI
is included in the First-Class Mail classification, this price change is
incorporated into the cap-compliance measurement. The billing
determinants, rates and detailed cap calculations for Inbound FCMI are
presented in **Inbound FCMI CAP February 2009.xls**.

In separate sections below, the remainder of this document describes the

contents of the above referenced workpapers: CAPCALC-FCM-FY2009.xls,

CAPCALC-FCMI-FY2009.xls, and Inbound FCMI CAP February 2009.xls.

**III. First-Class Mail**

A.  **Adjustments to the Billing Determinants**

As described below, the workpapers in CAPCALC-FCM-FY2009.xls are

based upon the FY2008 billing determinants from Docket No. ACR2008, USPS

FY2008 Annual Compliance Report, USPS-FY08-4 (December 29, 2008), but

reflect the adjustments discussed below. After the cover page and the
index there are thirteen tabs.

The first tab ("FY08 BD") has the annual billing determinants for
FY2008, as reported in the ACR. Minor volume adjustments are made to the
billing determinants to match the RPW which is based on new
classifications. Billing Determinants were prepared using the old
classifications. Absentee ballots and First-Class Mail Single-Piece
Military Mail that are reported as part of First-Class Mail Single-Piece
in the FY08 billing determinants are reported under Free Mail in the RPW
report. Besides these adjustments for Single-Piece, Automation Carrier
Route Letter volume, a rate category that does not currently exist, is
also used to adjust the billing determinants. This volume is added to
5-Digit Automation Letters to derive the volume distribution for cap
calculation. These adjustments are detailed in the second tab
"adjustments." As a result of these adjustments, the volumes in the
fourth tab "ADJ. FY08-Current Rates" match the RPW volumes.

The third tab "IM FS Incentive" calculates the dollar amount for
Intelligent Mail ® Barcode Full Service incentive for qualifying pieces.
Certain categories of letter- and flat-shaped mail will become eligible
for an Intelligent Mail® Full Service option price incentive, planned to
begin on November 29, 2009. The revenues calculated using the new prices
have been adjusted to account for a reasonable number of mail pieces
that will participate in the program and receive the planned 0.3 cent
per piece incentive.

Worksheet "IM FS Incentive" provides the details of this calculation. In
Row 2 Column C, a Full Service Adoption Fraction is provided for
First-Class Mail Automation Letters. In Row 16 Column C, similar
information is provided for First-Class Mail Automation Flats. Row 30
column C provides the Full Service Adoption Fraction for First-Class
Mail Automation Cards.

The Full Service Adoption Fraction is the percentage of eligible volume
by major pricing category that the Postal Service expects will adopt the
Full Service Program. Within First-Class Mail, only Automation Letters,
Flats, and Cards will be eligible to participate in the program. Based
on interactions with mailers and other information, Postal Service
management has estimated the percentages of eligible mail that it
reasonably expects will participate in the Intelligent Mail Full Service
Program following implementation on November 29, 2009.

The Full Service Program Implementation Fraction is the fraction of
annual volume that is expected to qualify for the program incentive. It
is based on the fraction of the year that the incentive program will be
in effect: 23 weeks out of 52 weeks, or approximately 44.2 percent. This
ratio is provided in Worksheet "IMb FS Incentive Calculation", Column E.
Rows 2, 16, and 30 provide the Full Service Implementation Fraction for
Automation Letters, Automation Flats and Automation Cards, respectively.

The Full Service Implementation Fraction is used to estimate the volume
that is eligible for this discount. This volume is multiplied by \$0.003
to estimate the revenue included in the revenue calculation for
compliance with Available Rate Change Authority.

B.  **Revenue and Percentage Rate Change Calculations**

The prices for each First-Class Mail rate cell are presented in USPS
Notice of

Market-Dominant Price Adjustment, Appendix A.

In CAPCALC-FCM-FY2008.xls., subject to the adjustments discussed above,
the Docket No. ACR2008 billing determinants for FY2008, were used as

the basis for the weighting to calculate the percentage rate changes for
domestic

First-Class Mail.

The following pair of CAPCALC-FCM-FY2009.xls tabs \-- "ADJ. FY08-

Current Rates" and "ADJ. FY08 New Rates" \-- provide the adjusted volume

multiplied by current and adjusted rates. All of the volume cells are
linked to the

previous tabs. Revenue is calculated by multiplying the same volume by
the

current and adjusted rates. A row is added for Single-Piece First-Class
Mail

International in both of these tabs. The source data for Single-Piece
First-Class

Mail International are from the CAPCALC-FCMI-FY2009.xls tab labeled "Cap

Calculation."

The sixth tab (not including the cover page and index sheets) "Old
Classifications" calculates the percent changes using the old
classifications. Single-Piece Letters (including Flats and Parcels),
Single-Piece Cards, Presort Letters (including Flats and Parcels) and
Presort Cards.

The next four tabs in CAPCALC-FCM-FY2009.xls., provide the same
information

for each of the following:

▪ *SP* \[Single-Piece\] *Letters and Cards*;

▪ *Presort Letters & Cards*;

▪ *First-Class Flats*; and

▪ *First-Class Parcels*.

These tabs provide the Before and After Rates postage using the same
volume,

and calculate the percent increase for each product.

The next two tabs in CAPCALC-FCM-FY2009.xls (see "Workshare Passthroughs

L, F & P" and "Workshare Passthroughs Cards") replicate the First-Class
Mail

workshare passthrough tabs from ACR-FY08-03, but with one significant

difference. The discounts in these tabs are calculated on the basis of
the

adjusted Docket No. R2009-2 rates, as opposed to the rates implemented
as a

result of Docket R2008-1.

Each one of the passthroughs that significantly deviate from 100 percent
is discussed in USPS Notice of Market-Dominant Price Adjustment, in the
section Workshare Discounts.

The final tab in CAPCALC-FCM-FY2009.xls (appropriately labeled
"Summary")

provides a summary of percentage price changes by products.

**IV. Outbound Single-Piece First-Class Mail International**

Below are detailed descriptions of the revenue cap calculation for
Outbound Single Piece First-Class Mail International (FCMI) letters,
flats, parcels, and cards. The results of these calculations for U.S.
origin FCMI and the end result of the analogous calculation for Inbound
FCMI are consolidated in the *CAP CALCULATION* tab of
CAPCALC--FCMI--FY2009.xls. The collective rate increase for all
components of FCMI is 4.14 percent.

> **A. FCMI Letters, Flats and Parcels**
>
> **1. Starting Point**

The billing determinants for FY 2008 Outbound Single-Piece First-Class
Mail International (FCMI) are provided in the *FY 2008 FCMI* tab of
CAPCALC--FCMI--FY2009.xls. While the billing determinant volumes for
FCMI letters are organized in three one-ounce increments plus the 3.5
ounce weight step, the billing determinant volumes for FCMI flats and
parcels are organized in one-ounce increments up to 8 ounces and then
four-ounce increments (12,16,20,24, etc.) up to four pounds, in the same
way the rate schedule is delineated. A volume adjustment factor of
1.1167 was applied to all rate groups to match with the total FCMI
volume in the FY 2008 RPW Report. The volume adjustment factor was
derived by dividing total RPW volume by total billing determinant
volume.

> **2. Calculating Revenue under the May 2008 Rates**

The adjusted billing determinants are the basis of all revenue
calculations using the May 2008 rates in the *FCMI REVENUE COMPARISON*
tab of CAPCALC--FCMI--FY2009.xls. For each rate group, the May 2008
rates at each weight step for FCMI letters, flats, and parcels (cells G2
-- I312) are multiplied by the corresponding volumes (cells A2 -- D312)
to produce the revenue for each FCMI shape at each weight step under the
May 2008 rates (cells R2 -- T312). These totals are then summed to
determine the total revenue for each weight step (cells W2 -- W312).

The total revenue of \$698,303,024 (cell W314) generated from the May
2008 rates for all rate groups is the benchmark for the comparison with
the total revenue generated by the adjusted rates.

> **3. Calculating Revenue under the Adjusted Rates**

The adjusted billing determinants are the basis of all revenue
calculations using the adjusted rates in the *FCMI REVENUE COMPARISON*
tab of CAPCALC--FCMI--FY2009.xls. For each rate group, the adjusted
rates at each weight step for FCMI letters, flats, and parcels (cells J2
-- L312) are multiplied by the corresponding volumes (cells A2 -- D312)
to produce the revenue for each FCMI shape at each weight step under the
adjusted rates (cells N2 -- P312). These totals are then summed to
determine the total revenue for each weight step (cells V2 -- V312).

The total revenue of \$730,281,984 (cell V314) generated from the
adjusted rates for all rate groups is 4.58 percent greater than the
total revenue obtained from the May 2008 rates.

> **4. Cap Calculation for the Nonmachinable Surcharge**

A \$0.20 per-piece surcharge is currently applied to any Outbound FCMI
letter weighing three and a half ounces or less with one or more
nonmachinable characteristics. For cap-calculation purposes, the volume
of FCMI pieces that incurred the surcharge was estimated using FY 2008
data. The FY 2008 data showed that 0.61 percent of FCMI was
nonmachinable. Applying this proportion to the benchmark volume of
395,954,815 for FCMI yields 2,415,324 total pieces that incurred the
surcharge in FY 2008. Multiplying this volume by \$0.20 yields \$483,065
in total revenue for both revenue columns in the *CAP CALCULATION* tab.

> **B. FCMI Cards**

1.  **Starting Point**

The billing determinants for First-Class Mail International (FCMI) Cards
are

provided in the *FY 2008 FCMI CARDS* tab of CAPCALC--FCMI--FY2009.xls. A
volume adjustment factor of 1.07944 was applied to all rate groups to
match with the total FCMI Card volume in the FY 2008 RPW Report. The
volume adjustment factor was derived by dividing total RPW volume by
total billing determinant volume.

2.  **Calculating Revenue under the May 2008 Rates**

The first step presents the volumes for FCMI rate groups 1 and 2 and
combines rate groups 3 -- 9 into a "rest-of-the-world" rate group to
produce three rate groups (Canada, Mexico, and Rest of World) for FCMI
Cards. The volumes for the three rate groups appear in cells C21 -- E21
of the *FY 2008 FCMI CARDS* tab and are referenced in cells D11 -- D15
of the *CAP CALCULATION (CARDS)* tab.

The next step involves multiplying the May 2008 rate for each rate group
(cells F11 -- F15) by the respective volume (cells D11 -- D15) to obtain
the total revenue for each group (cells H11 -- H15). Summing the revenue
for each rate group yields \$21,336,550 (cell H18) in total revenue,
which is the benchmark for the comparison with the total revenue
generated by the May 2009 rates.

3.  **Calculating Revenue under the Adjusted Rates**

The adjusted rates for FCMI Cards in 2009 (cells J11 -- J15) are
multiplied by the same rate-group volumes (cells D11 -- D15) to produce
the total revenue for each group under adjusted rates (cells L11 --
L15). The resulting total revenue of \$22,246,822 (cell L18) is a 4.27
percent increase over the revenue generated from the May 2008 rates.

**V. Inbound Single-Piece First-Class Mail International**

Inbound Single-piece First-Class Mail International

Inbound Single-piece First-Class Mail International (Inbound FCMI) is a
service the Postal Service is required to offer under the treaty
obligations of its membership in the Universal Post Union (UPU). With
the exception of Inbound FCMI received from Canada Post, the rates for
this service are set by the UPU. Since the rates for Inbound FCMI
received from Canada Post are set under a negotiated agreement between
the Postal Service and Canada Post, under Rule 24 of Section 3010, the
Canada Inbound FCMI volume and weight totals are excluded from the cap
calculation. The rates for Inbound FCMI, also known as terminal dues,
provide compensation for the cost of delivering inbound mail from
foreign countries. Rates are adjusted on a calendar basis with the most
recent rate change taking place on January 1, 2009.

Inbound Air Letters and Surface AO volume and weight data were used from
the FY 2008 inbound FCMI billing determinants, which are included in the
FY 2008 International Cost and Revenue Analysis (ICRA) Report. Since
Inbound Registered Mail is not considered to be Inbound FCMI volume, the
only adjustment to the billing determinants was the exclusion of Inbound
Registered Mail from the Other Countries data. The *Inbound FCMI BD* tab
of Inbound FCMI CAP February 2009.xls contains the modified billing
determinants and references to where the data are located in the ICRA
files.

The *Inbound FCMI Rates* tab of Inbound FCMI CAP February 2009.xls
contains the rates we charge for delivery of inbound FCMI. These rates
consist of one per item charge and one per kilogram charge and are
denominated in Special Drawing Rights (SDRs). Rate changes take place on
a calendar year basis so the rate change is the difference in the rates
from December 31, 2008, to January 1, 2009. *The Inbound FCMI Rates* tab
also contains data on the conversion of the item and kilogram charges
from SDRs to \$U.S. The conversion factor used was the January 5, 2009
exchange rate of 1 SDR equals \$1.519413. *The Inbound FCMI Rates* tab
also contains the factor for the conversion of the kilogram charge to
pounds, which is 1 kilogram equals 2.2046 pounds.

The *Inbound FCMI CAP Calculation* tab of Inbound FCMI CAP February
2009.xls contains the volume and weight data from the *Inbound FCMI BD*
tab and the 2008 and 2009 rates from the *Inbound FCMI Rates* tab.
Multiplying the volume and weight by the CY 2008 rate equals the
"current" revenue. Multiplying the volume and weight by the CY 2009 rate
equals the "new" revenue. The *Inbound FCMI CAP Calculation* tab then
shows the Percent Change by dividing the new revenue by the current
revenue. The total Percent Change of Inbound FCMI total revenue is 1.95
percent (cell J31).

One addition to the Percent Change is included in the *Inbound FCMI CAP
Calculation* tab. Air conveyance charges are the UPU rates that the
Postal Service is allowed to charge for remuneration of additional air
transportation delivery costs of Inbound FCMI. Air conveyance charges
are based on SDRs per kilogram and changed on January 1, 2009. The
*Inbound FCMI BD* tab contains the weight in kilograms from the FY 2008
ICRA (cell H8). This weight is converted to pounds by multiplying the
kilogram total by 2.2046 (cell H16).

The *Inbound FCMI Rates* tab contains the rates that the Postal Service
charges for air conveyance. The rates are converted from SDRs per
kilogram to \$U.S. per pound in the same manner described above.

The *Inbound FCMI CAP Calculation* tab contains the weight data from the
*Inbound FCMI BD* tab and the 2008 and 2009 rates for air conveyance
from the *Inbound FCMI Rates* tab. Multiplying the weight by the CY 2008
rate equals the "current" revenue. Multiplying the volume and weight by
the CY 2009 rate equals the "new" revenue. The *Inbound FCMI CAP
Calculation* tab then shows the Percent Change for air conveyance by
dividing the new revenue by the current revenue. The total Percent
Change of air conveyance revenue is 0.94 percent (cell J33).

The *Inbound FCMI CAP Calculation* tab then combines the air conveyance
revenues with the terminal dues revenues. The total Inbound FCMI rate
increase is calculated to be 1.93 percent (cell J35). This figure feeds
into the final tab (CAP CALCULATION) of the CAPCALC--FCMI--FY2009.xls
spreadsheet.