Before the

POSTAL REGULATORY COMMISSION

WASHINGTON, DC 20268-0001

Competitive Products Price Changes Docket No. CP2009-23

Rates of General Applicability

PUBLIC REPRESENTATIVE COMMENTS

(February 24, 2008)

Pursuant to Commission Order No.179,[^1] the Public Representative
hereby submits comments on the Postal Service's notice of price changes
for three types of competitive products.[^2] These price changes are to
take effect on May 11, 2009. For various reasons, these price changes
were not included with the recent price changes for most competitive
products that occurred in January, 2009.[^3]

The first of the changes relates to three categories of Parcel Select
(Origin BMC Presort, BMC Presort, and Barcoded Inter-BMC and Intra-BMC).
The rates for those categories are based on market dominant Single-Piece
Parcel Post prices being changed concurrently on May 11, 2009. Rates are
also increasing for Premium Forwarding Service (PFS), a special service.
The third type of competitive product price change relates to prices for
International Priority Airmail (IPA) and International Surface Air Lift
(ISAL) which are based on First-Class International prices scheduled to
change on May 11, 2009. Prices for International Ancillary Services are
also increasing and structural changes in international service were
noticed in the Postal Service's filing.

The Public Representative has carefully reviewed the information
submitted with the Notice. The classification changes appear to be
reasonable and, as required by section 3633(a)(3), 39 U.S.C. 3633(a)(3),
the information submitted pursuant to the Notice indicates that the
price changes will allow a contribution toward a minimum of 5.5 percent
of the Postal Service's total institutional costs.

However, the current filing suffers some of the same deficiencies cited
by the Public Representative in the previous competitive product price
change proceeding.[^4] These deficiencies hinder a firm conclusion that
the new prices comply with the prohibition on subsidization of
competitive products and cost coverage requirements in 39 U.S.C.
§3633(a). The models underlying the volume and revenue numbers in the
spreadsheets supplied in the non-public materials in
USPS-CP2009-23-8/NP2 are hard coded and it cannot be determined how they
were developed.[^5] For PFS, the volume reflects reshipments and does
not adequately indicate the estimated number of customers using the
service. The method of developing the anticipated impact of the PFS
price increase on the number of reshipments as well as the number of
customers using the service who pay the enrollment fee cannot be
determined and verified.

Also, as discussed below, the timing of the significant price increase
in PFS so soon after transferring to the competitive product list
suggests the need to carefully monitor future price increases for PFS.
Future rate increases resulting in price gouging of PFS users would
indicate a lack of price competition in the PFS market. In that event,
PFS should be moved back to the market dominant product list.

*[Premium Forwarding Service]{.underline}*

As recently as just over eight months ago, the Postal Service filed a
request with the Commission to transfer the Special Services Premium
Forwarding Service from the market dominant product list to the
competitive product list. In support, the Postal Service alleged that
private alternative options to PFS are available and that "PFS is
provided within a competitive market" so that "\[t\]he existence of
these various alternatives constrains the Postal Service from exercising
sufficient market power to raise prices, etc., without losing business."
[^6]

The Public Representative's responsive comments challenged the Postal
Service's assertions about the competitive nature of the market in which
PFS operates. The Public Representative's comments pointed out the
extremely limited nature of the competition in the PFS market.[^7]
Another comment noted, in addition, that all of the commercial services
the Postal Service claimed to be competitors of PFS require utilization
permanently rather than temporarily as PFS is designed.[^8]
Consequently, those comments opposed the transfer of PFS to the
competitive product list.

In response to the comments, the Postal Service agreed that while
alternatives for forwarding mail may not be exactly the same as PFS, it
argued that the alternatives are substantially similar to PFS and in
competition with PFS.[^9] The transfer request was granted.[^10]

Now, just seven months after successfully claiming that it has limited
market power in the PFS market, the Postal Service's actions have all
but confirmed a lack of competition in the PFS market and the Postal
Service's market power in the forwarding service market. The Postal
Service's notice of changes in its PFS rates includes a 50 percent
increase in the enrollment fee for PFS from \$10 to \$15. Further, a
rate increase of \$2.00 in the weekly PFS reshipment fee from \$11.95 to
\$13.95 amounts to an additional 16.7 percent price increase for each
weekly shipment. The Postal Services Notice acknowledges that overall
PRS prices will increase 20.2 percent on May 11, 2009.[^11] The
derivation of the claimed 20.2 percent increase is not provided. The
Commission should request the calculations underlying this
conclusion.[^12]

Inasmuch as PFS rates are comprised of two fees, the magnitude of the
rate increase applicable to any individual customer's service depends
upon the number of weeks of reshipments. For instance, PFS is available
for as short a period as two weeks, in which case the price increase
amounts to a whopping 26.6 percent (\$9/\$33.90). The Postal Service
calculates an overall 20.2 percent rate increase. The Postal Service
does not indicate the number of weeks, on average, that this assumes.
Even a full one year of PFS would result in a lower, but nevertheless
significant, rate increase of 17.5 percent.[^13]

These PFS price increases as high as 26.6 percent appear to be
significant. They are much higher than the estimated increases in other
competitive rates recently changed on January 18, 2009. In that case,
rates increased by the following average percentages: Express Mail-5.7
percent; Priority Mail-3.9 percent; Parcel Select-5.9 percent; Parcel
Return Service-5.3 percent; GXG International-11.2 percent; Priority
Mail International (PMI)-8.5 percent; and M-Bags-8.0 percent. The PFS
increase above 20 percent at least raises a *prima facie* possibility
that the Postal Service exercises sufficient market power that it is
market dominant in the PFS market.

These planned rate increases belie the Postal Service's recent claims to
the Commission in Docket No. MC2008-4 that competition exists in the PFS
market and that an important test required by the Commission rules in
subsection 39 C.F.R. 3020.32 (implementing 39 U.S.C. § 3642) are met. In
order to justify transfer of a product to the competitive products
lists, the Commission's Rules require the Postal Service to, "Verify
that the change does not classify as competitive a product over which
the Postal Service exercises sufficient market power that it can,
without risk of losing a significant level of business to other firms
offering similar products: ...(2) raise prices significantly...."
3020.32(d). The PFS rate increase and the supporting documents indicate
the Postal Service at least assumes it has sufficient market power that
it can, without risk of losing a significant level of business to other
firms offering similar products, "raise prices significantly."[^14]
However, as noted above, the Postal Service has not provided the sources
for its conclusions in the non-public spreadsheets to support its
estimates. Although, in light of the circumstances regarding this
relatively new service, these significant price increases are not
unreasonable,[^15] future PFS increases should be measured against the
Commission's admonition in Order No. 88. There, the Commission Order
granting transfer of PFS to the competitive product list stated:

> The Commission notes that a transfer of a product between product
> lists is not necessarily permanent. If circumstances should warrant in
> the future, for example, if the Postal Service appeared to be price
> gouging users of this service, the Commission under section 3642 and
> its own rules can initiate a transfer of PFS from the competitive
> product list back to the market dominant product list. Moreover, users
> of the mail also can request such a transfer. *See* 39 U.S.C. 3642 and
> 39 CFR 3020.30 *et. seq*. (Order No. 88 at 8.)

Although each of the increases in the overall fees to PFS customers are
high, the Public Representative does *not* believe the Commission should
take action for failure to meet 3633(a) and reject the proposed PFS
price increases or even enter into a proceeding to consider further the
price increase at this time. However, the Public Representative urges
that future pricing increases of PFS should be closely monitored to
insure against price gouging of PFS customers and to insure that the PFS
properly belongs in the competitive product list.

It would be useful for the Commission to interpret the meaning of the
two phrases in section 3642(b)(1): "raise prices significantly" and
"without risk of losing a significant level of business." Using this
interpretation as a guideline, if the Postal Service could raise prices
by a percentage as high as the guideline without losing a significant
level of business (as defined), that would be *prima facie* evidence the
product is market dominant. The absence of a sufficiently competitive
market for a particular product would prevent its transfer to the
competitive product list or, conversely, justify its return to the
market dominant list of products.

Respectfully submitted,

Kenneth E. Richardson

Public Representative

901 NY Avenue, NW, Ste 200

Washington DC 20268-0001

202-789-6859

email: richardsonke@prc.gov

[^1]: Notice and Order Concerning Changes in Rates of General
    Applicability for Competitive Products, February 11, 2009.

[^2]: Notice of the United States Postal Service of Changes in Rates of
    General Applicability for competitive Products Established in
    Governors' Decision No. 09-01, February 10, 2009.

[^3]: Review of Notice Concerning Changes in Rates of General
    Applicability for Competitive Products, Order No. 146, Docket No.
    CP2009-8.

[^4]: Public Representative Comments, Docket No. CP2009-8, December 1,
    2008.

[^5]: Response of the United States Postal Service to Chairman's
    Information Request No. 1, February 19, 2009. Notice of the United
    States Postal Service of Filing of USPS-CP2009-23/NP2, February 19,
    2009.

[^6]: Request of the United States Postal Service, Docket No. MC2008-4,
    Attachment B, May 30, 2008 at 3-5.

[^7]: Public Representative Comments on Postal Service Request to
    Transfer Premium Forwarding Service to the Competitive Products
    Category, June 16, 2009.

[^8]: Initial Comments of David Popkin, Docket No. MC2008-4, June 16,
    2008 at 2.

[^9]: Motion of the United States Postal Service for Acceptance of Reply
    Comments, June 20, 2008 (Postal Service Reply Comments).

[^10]: Order Granting Postal Service's Request to Transfer Premium
    Forwarding Service to the Competitive Product List, July 16, 2008.

[^11]: Decision of the Governors of the United States Postal Service on
    Changes in Rates and Classes of General Applicability for Certain
    Competitive Products (Governors' Decision No. 09-01) at 2.

[^12]: The Commission filed a similar request in Docket No. CP2009-8 for
    the weights used to derive the overall average percentage price
    increase for each product. See Chairman's Information Request No. 2,
    December 3, 2008, question 2.

[^13]: The Postal Service is raising IPA prices by 20.8 percent but that
    is driven by "new cost information for noncontractual volumes."
    Attachment A to Governors' Decision 09-01 at 2. The Postal Service
    does not assert that costs drive its PFS rate increase proposal.
    Other price increases for international services are no greater than
    6.7 percent. *Id.*

[^14]: The estimated after rate volumes for this service are not
    adjusted significantly.

[^15]: The Postal Service points out that PFS commenced in 2005 and that
    there has not been a price increase since that time. Attachment A to
    Governors' Decision 09-01 at 1.