U.S. Postal Service Performance 

Fiscal Year 2007

 Annual 

Compliance

 Determination

 Postal Regulatory Commission

Postal Regulatory Commission

Submitted 3/27/2008 4:29:47 pm

Filing ID: 59460

Accepted 3/27/2008
901 New York Avenue • Suite 200 • (202) 789-6801 • www.prc.gov

MARCH 27, 2008

Dan G. Blair

Chairman

On behalf of the Postal Regulatory Commission, I am pleased to present the first Annual 

Compliance Determination (ACD) of the performance of the U.S. Postal Service for Fiscal Year 

2007, pursuant to the Postal Accountability and Enhancement Act (PAEA). This ACD 

represents the first effort of the Commission to assess the Postal Service’s activities under the 

framework of the PAEA. This assessment represents an important part of the Commission’s 

mission to bring transparency and accountability to the U.S. Postal Service’s performance and 

finances, and provides a status report using data submitted by the Postal Service on December 

28, 2007.

Fiscal Year 2007 was an eventful year. R2006-1 was the last litigated omnibus rate 

case under the former cost-of-service structure of the Postal Reorganization Act of 1970. The 

Commission issued its new ratemaking rules in October 2007, setting forth a new structure for 

rate adjustments under the PAEA. An important aspect of future ACDs will be to gauge postal 

product pricing for compliance against this framework.

We commend the Postal Service for this effort in compiling essential cost and volume 

data required for this report. This will be an evolving process, and we look forward to working 

with the Service to improve the quality and timeliness of the data. Our determination and future 

reports will serve as action-forcing mechanisms in shedding light on postal operations and 

finances. These reports will provide customers, stakeholders, and the Postal Service with 

valuable information on which to assess annual performance.

Future ACDs will benefit from formal Commission rules that will govern Postal Service 

compliance submissions. Those rules will be forthcoming and the content will reflect the 

experiences of this first compliance proceeding. It is important to point out that the findings 

contained in this report reflect the criteria as established by the PAEA. Importantly, this report 

does not contain any formal direction to change or adjust postal rates or pending increase 

requests.

In closing, I wish to thank Vice Chairman Mark Acton, and Commissioners Goldway and 

Hammond for their valuable work and input in preparation of this report. On behalf of my fellow 

Commissioners, I want to acknowledge the Commission’s dedicated and committed staff for the 

timely completion of this analysis while reviewing and analyzing the rate adjustments proposed 

by the Service in February and March of this year. Our efforts to perform our new tasks as 

required by the PAEA could not be accomplished without the significant and substantial 

contributions of the Commission’s staff.
Table of Contents

i

Chairman’s Message

Principal Findings

Chapter I—Executive Summary....................................................................................... 1

Volume and Finance Trends ................................................................................ 1

Service Performance ............................................................................................ 1

Revenue Covering Costs ..................................................................................... 2

Postal Service Strategic Goals ............................................................................. 3

Worksharing ......................................................................................................... 3

Negotiated Service Agreement ............................................................................ 4

Data and Analysis Issues ..................................................................................... 4

Chapter 2—Background .................................................................................................. 5

Introduction .......................................................................................................... 5

Context of this ACR Proceeding .......................................................................... 6

Commission Evaluation Based Upon PAEA Policies ........................................... 7

Incorporating Changes In Analytical Methods ...................................................... 9

Description of Postal Service Filing .................................................................... 10

Procedural History .............................................................................................. 14

Notice ...................................................................................................... 14

Commission Requests For Additional Information .................................. 14

Chapter III—Summary of Public Comments.................................................................. 17

Chapter IV—Postal Service Financial Condition............................................................ 23

Summary of Cost and Revenue by Subclass ..................................................... 23

Financial Results ................................................................................................ 25

Overall Financial Condition ..................................................................... 25

Revenues and Volumes .......................................................................... 29

Expenses ................................................................................................. 33

Compensation and Benefits .................................................................... 34

Retiree Health Benefits ........................................................................... 34

Transportation ......................................................................................... 35

Chapter V—Postal Service Strategic Goals................................................................... 37

Generate Revenue ............................................................................................. 38

Improve the Value of Mailing Service ...................................................... 38

Tailor Shipping Services to Market Requirements .................................. 40

Create Recipient-Based Products and Services ..................................... 41

Build on Domestic Strengths to Grow International

Business. ................................................................................................. 42

Streamline Acceptance for Commercial Mailers ..................................... 42

Make Online Service a Key Competency ................................................ 42

Strengthen Customer Outreach .............................................................. 42

Increase Efficiency ............................................................................................. 43
Table of Contents

ii

Customer-Focused Culture ................................................................................ 46

Voice of the Employee ............................................................................. 47

Safety Performance ................................................................................. 47

Equal Employment Opportunity ............................................................... 47

Service Improvement .......................................................................................... 47

Additional Goals ................................................................................................. 48

Enhance Sustainability ............................................................................ 48

Expanding Environmentally-Friendly Business Practices ........................ 48

Accelerating Energy Conservation .......................................................... 49

Regulatory Studies and Reporting Obligations ........................................ 50

Compliance With the Sarbanes-Oxley Act of 2002 .................................. 50

Annual Reporting ..................................................................................... 50

Additional Reports and Studies ............................................................... 50

Chapter VI—Service Standard Performance.................................................................. 53

Speed of Delivery ............................................................................................... 53

Customer Satisfaction ........................................................................................ 55

Chapter VII—Market Dominant Classes ........................................................................ 57

Introduction ......................................................................................................... 57

First-Class Mail ................................................................................................... 60

Financial Analysis .................................................................................... 60

Worksharing and Rate Design ................................................................. 61

Methodology ............................................................................................ 61

Findings ................................................................................................... 64

Periodicals........................................................................................................... 66

FY 2007 Financial Analysis ..................................................................... 68

Incorporating Updates and New Analytical Methods in the Periodicals 

Cost Model ............................................................................................... 70

Worksharing ............................................................................................. 82

Standard Mail ..................................................................................................... 87

Financial Analysis .................................................................................... 87

Worksharing/Rate Design ........................................................................ 88

Methodology ............................................................................................ 88

Findings ................................................................................................... 91

Package Services ............................................................................................... 98

Financial Results ..................................................................................... 99

Worksharing Discounts .......................................................................... 101

Special Services ............................................................................................... 106

Chapter VIII—Competitive Products ............................................................................ 109

Legal Standard ................................................................................................. 109

Attributable Cost Recovery ............................................................................... 112

Competitive Products Contribution ................................................................... 113
Table of Contents

iii

Commenter Issues ........................................................................................... 113

ChapterIX—International Mail ...................................................................................... 115

Introduction ....................................................................................................... 115

Summary and Findings ..................................................................................... 115

Analysis of International Mail ............................................................................ 117

Market Dominant Products .................................................................... 117

Outbound Mail ....................................................................................... 117

Inbound Mail .......................................................................................... 118

Competitive Products ............................................................................. 121

Outbound Mail ....................................................................................... 121

Inbound Mail .......................................................................................... 122

Negotiated Service Agreements................................................................................... 125

Appendix A—International Mail........................................................................................ 1

Appendix B—Cost Attribution and Distribution Issues ..................................................... 1

Abbreviations and Acronyms
1

Principal Findings

This report is issued pursuant to 39 U.S.C. § 3653 of the Postal 

Accountability and Enhancement Act (PAEA). It is a written 

determination that analyzes and evaluates the Postal Service’s 

financial and service performance based on its FY 2007 Annual 

Compliance Report (ACR). The Commission findings are 

summarized here and discussed in greater detail in later sections.

FINANCIAL RESULTS • The Postal Service had a $1.6 billion profit on 

operations, however statutory funding requirements for 

retiree health benefits resulted in a net loss of 

$5.1 billion.

• Total First-Class Mail volume declined by 1.6 percent 

and First-Class single piece volume dropped 4.5 percent 

to continue a nine-year decline. 

• Total factor productivity improved by 1.7 percent, 

exceeding the Postal Service goal of a 1.0 percent 

improvement.Five market dominant postal services did 

not cover their attributable costs.

— Periodicals;

— Single-Piece Parcel Post;

— Media/Library Mail;

— Registered Mail; and

— First-Class Mail International (inbound).

Rate increases and rate design improvements were implemented 

during the second half of the year to eliminate such deficiencies in 

the future.
Principal Findings

2

• Two competitive postal services did not cover their 

attributable costs.

— Parcel Return Service; and

— International Surface Parcel Post at non-UPU rates 

(inbound).

• Competitive Products as a group slightly exceeded the 

requirement that they contribute at least 5.5 percent of 

Postal Service institutional costs.

• Negotiated service agreements provided a $2.5 million 

net benefit, largely through reduced forwarding and 

return costs.

SERVICE PERFORMANCE • First-Class single piece service exceeded the Postal 

Service plan, but future compliance reports should 

provide annual performance results without exclusionary 

periods.

• Delivery performance information is available for 

approximately one fifth of the mail. Establishing reliable 

service measurement systems for all mail should be a 

high priority goal.

• The Postal Service should provide more information on 

the “tail of the mail.” It also should provide narrative 

information regarding new initiatives to improve service 

performance.

• The customer satisfaction data provided by the Postal 

Service with its ACR is limited.

• The Postal Service goal of fostering a more “customerfocused culture” is measured by employee survey 

results, employee safety records, and equal employee 

opportunity performance. While these may be good 

indicators of employee satisfaction, they are not 

appropriate indicators of customer relations.
Principal Findings

3

DATA SUFFICIENCY • The Postal Service made a good first effort to provide the 

Commission with essential cost and volume data. 

Improvements are needed, especially in the area of 

International Mail, where reliable data are still 

unavailable.

• A number of workshare discounts exceeded avoided 

costs. The Postal Service should have addressed 

whether and how specific statutory exceptions may have 

justified such situations. 

• In future reports the Postal Service must provide 

additional information to explain anomalies in data, and 

how its operations and rate designs are intended to 

advance statutory policies.

• Future presentations must be timely, accurate, selfexplanatory, and not rely on undocumented calculations.
1

Chapter I—Executive Summary

VOLUME AND FINANCE 

TRENDS

The Postal Service experienced a net loss of $5.1 billion in FY 

2007, primarily due to obligations imposed by the PAEA. Before 

PAEA expenses are taken into consideration, net income is $1.6 

billion. The PAEA requires the establishment of a Postal Service 

Retiree Health Benefit Fund (PSRHBF) that results in a new FY 

2007 expense of $8.5 billion. This is somewhat offset by the elimination of planned FY 2007 Civil Service Retirement System payments of $1.6 billion. 

The PAEA requires the Postal Service to make payments of 

between $5.4 and $5.8 billion a year into the PSRHBF for the next 

10 years, after which a new payment schedule will be established. 

The Postal Service’s first Form 10-Q filing with the Commission for 

the first quarter of FY 2008 notes that meeting revenue goals for 

the year will be challenging.

SERVICE PERFORMANCE During 2007, the Postal Service, in consultation with the 

Commission and the Mailer’s Technical Advisory Council, revised 

delivery standards for all classes of mail between all 3-digit ZIP 

Code pairs. The new standards match current system capabilities 

and allow an increased number of days to delivery for a significant 

number of ZIP Code pairs. The new standards took effect after FY 

2007. Performance data presented in the ACR are relative to the 

old standards.

Delivery performance information is provided for approximately 

one fifth of the FY 2007 mail. Results are available for:

• Single-Piece First-Class

— Domestic: 95.6, 92.6, and 90.4 percent on-time for 

overnight, two-day delivery, and three-day delivery 

areas, respectively; and

— International: 91.4 percent for domestic portions.
Chapter I—Executive Summary

2

• Parcel Post: 57.7 percent on-time per standards.

No performance data exist for the remaining 80 percent of the mail 

due to the lack of measurement systems. Proposals are pending 

with the Commission for establishing systems that will measure all 

mail and many Special Services. The broader measurement 

results will be available starting in FY 2009. Until that time, it will 

not be possible to make assessments of performance for the 

majority of the mail.

REVENUE COVERING 

COSTS

The system for regulating rates of market dominant products 

includes the requirement that each class of mail or type of mail 

service bear its attributable costs, subject to the Consumer Price 

Index-based cap on rate changes. This requirement applies 

without limitation to all competitive products.

Market dominant products. Five market dominant postal services 

did not cover their attributable costs during FY 2007; that is, 

revenue as a percent of costs is less than 100 percent. First-Class 

Mail International (inbound) revenue is 73.1 percent of costs, 

Periodicals is 83 percent, Parcel Post retail is 98.7 percent, Media 

and Library Mail is 91.4 percent, and Registered Mail is 96.3 

percent.

Competitive products. Two competitive products did not cover 

attributable costs: inbound surface parcels not subject to Universal 

Postal Union rates, and Parcel Return Service. The loss on 

inbound surface parcels was incurred by the international bilateral 

agreement with Canada. Under the criteria of the PAEA, that 

agreement must be adjusted at the next opportunity for 

renegotiation. New Parcel Return Service rates that are 

scheduled to go into effect on May 12, 2008 provide an opportunity 

to address this problem. Sufficient data to evaluate International 

Customized Mail agreements were not made available in a timely 

fashion.

The Commission calculates the revenue from competitive 

products minus their attributable costs equals 5.66 percent of total 

institutional costs for FY 2007. This is over the minimum 5.5 

percent the Postal Service is required to generate.
Chapter I—Executive Summary

3

POSTAL SERVICE 

STRATEGIC GOALS

The PAEA requires the Commission to evaluate whether the 

Postal Service has met strategic goals established in compliance 

with the Government Performance and Results Act. For FY 2007, 

these goals were to Improve Service, Generate Revenue, 

Increase Efficiency, and Establish a Customer-Focused Culture. 

Significant progress has been made, but the results are mixed. 

Improve Service. The 2007 goal was to achieve First-Class single 

piece performance scores in overnight, 2-day, and 3-day delivery 

areas of 95, 92, and 90 percent, respectively. These values were 

exceeded slightly and have improved over the last three years. No 

performance goal had been set for Parcel Post, but on-time 

delivery was achieved only 57 percent of the time. Goals for all 

classes of mail are to be set in consultation with the Commission 

by June 20, 2008.

Generate Revenue. New products, such as the Priority Flat Rate 

Box, Confirm Service, Premium Forwarding Service, and 

Customized MarketMail have been introduced over the last 

several years, but the revenue from these is relatively small.

Increased Efficiency. Efficiency has increased over the last 

several years as measured by annual increases in Total Factor 

Productivity. Since 2000, the average annual increase is 1.5 

percent. This has allowed operating expense growth to stay under 

the Consumer Price Index.

Customer-Focused Culture. The Postal Service measures 

achievement of this goal through employee survey results, 

employee safety records, and equal employment opportunity 

performance. While these measures may be good indicators of 

employee satisfaction, they are not appropriate indicators of 

customer relations.

WORKSHARING 39 U.S.C. §3622(e) requires the Commission to ensure that 

worksharing discounts do not exceed the relevant avoided costs 

unless justified by at least one of four exceptions. Using the 

discounts in effect at the end of FY 2007 and the avoided costs 

calculated for the entire fiscal year, the Postal Service identifies 

worksharing discounts that exceed avoided costs in all classes.

The Postal Service did not provide with its annual report 

explanations of which exceptions apply to these discounts. This 
Chapter I—Executive Summary

4

type of supporting analysis must be part of future annual 

compliance reports submitted by the Postal Service.

NEGOTIATED SERVICE 

AGREEMENT

The ACR provides very limited discussion of these arrangements. 

Separately, the Postal Service has submitted annual data 

collection reports on all five of its current negotiated service 

agreements. The Commission analyzes this data and concludes 

that the current agreements generated little new volume, but 

provided a net benefit of $2.5 million to the Postal Service, largely 

in reduced costs. The Postal Service is urged to review this 

analysis and provide similar information in future compliance 

reports.

DATA AND ANALYSIS 

ISSUES

The Commission had not issued new data submission rules to 

guide the ACR submissions. This resulted in cost, volume, 

revenue, and performance data typically submitted with a rate 

case and without analysis relative to the factors and objectives of 

the PAEA. The Commission will soon issue proposed rules to 

establish the form and content of information that should be 

provided in future Postal Service reports to the Commission. In 

the meantime, this report provides a status report on Postal 

Service finances and service performance using the data that 

were provided. 

The analysis has been hindered by problems that should be 

remedied in future filings. Two examples are the late submission 

of some data, and the format of the Excel worksheets. Corrected 

cost and revenue analysis data became available as late as March 

20, 2008, one week before the deadline for submission of the 

Commission’s report. Hopefully, with more experience, fewer 

errata will be necessary and all data can be provided in the initial 

compliance report 90 days after the close of the fiscal year. 

Finally, the transparency of the Postal Service filing will be greatly 

enhanced if the practice of hard coding calculated values in Excel 

spreadsheets is abandoned and all calculated values are 

presented as formulae in the cells with links to other cells involved 

in the calculation.
5

Chapter 2—Background

INTRODUCTION The United States Postal Service filed with this Commission on 

December 28, 2007, the first Annual Compliance Report (ACR) 

required by the Postal Accountability and Enhancement Act, Public Law 109-435 (2006). The Postal Service is required to report to 

the Commission, within 90 days after the end of each fiscal year, a 

variety of data on "costs, revenues, rates, and quality of service" in 

sufficient detail to demonstrate that all products during each year 

complied with all applicable requirements of title 39 and, in such 

year, for each market dominant product, provide product information and measures of quality of service.

39 U.S.C.§ 3653(b) provides that the Commission shall make a 

written determination not later than 90 days after receiving the 

Postal Service’s ACR filed pursuant to 39 U.S.C. § 3652. That 

determination shall include whether any rates or fees in effect, 

during the year for products individually or collectively were not in 

compliance with applicable provisions of chapter 36 of title 39 or 

regulations thereunder, or whether any service standards in effect 

during the year were not met. If no instance of noncompliance is 

found for such year, the written determination shall be to that 

effect. A written determination finding no instance of 

noncompliance creates a rebuttable presumption of compliance 

with the matters regarding rates and fees and service standards in 

effect during such year in any complaint proceedings filed 

pursuant to § 3662 of the PAEA. 39 U.S.C. § 3653(e).

The PAEA further provides in § 3653(d) that the Commission shall 

evaluate annually whether the Postal Service has met the goals 

established under §§ 2803 and 2804 of title 39. Those sections 

require the Postal Service to prepare annual performance plans 

establishing performance goals by program activity (§ 2803) and 

to prepare a report on program performance each fiscal year to be 

included in the Postal Service’s annual comprehensive statement 

which is filed as part of the ACR (§ 2804). 39 U.S.C. § 3653(d) 

further states the Commission may provide recommendations to 
Chapter II—Background

6

the Postal Service related to the protection or promotion of the 

public policy objectives set out in title 39.

This report provides the written determination mandated by § 3653 

of the PAEA and includes the first annual evaluation of whether the 

Postal Service has met the specified goals of §§ 2803 and 2804. 

It also includes recommendations related to the protection or 

promotion of public policy objectives of title 39.

CONTEXT OF THIS ACR 

PROCEEDING

The Postal Service’s FY 2007 ACR is the first ACR filed with this 

Commission and represents a period of transition. The 

Commission commends the Postal Service for undertaking to file 

this ACR. The breadth and scope of this transitional filing is a 

worthy effort. The ACR will provide the opportunity for all 

stakeholders to consider the type of substantive information that 

will be necessary, in the future, for Commission assessment of the 

Postal Service rates and services. The Postal Service filing will 

also assist the Commission in drafting regulations prescribing 

format and detailed filing requirements of future ACRs. In the near 

future, the Commission expects to issue proposed and, after 

opportunity for public comment, final regulations for ACRs to be 

applicable for the next ACR, the first full fiscal year after the 

passage of the PAEA.

During FY 2007, the Postal Service’s rates and fees in effect were 

subject to change under the provisions of the Postal 

Reorganization Act (PRA). The data collecting and reporting in 

the ACR are based primarily on methodologies followed to support 

rate cases under the PRA. Consequently, the ACR includes Cost 

and Revenue Analysis (CRA) and the International Cost and 

Revenue Analysis (ICRA) formats used under the PRA. These 

analyses have not yet been modified to organize the data around 

the new “products” assigned to the market dominant and 

competitive services. The Postal Service anticipates the CRA and 

ICRA will correspond in the future to the new product listing. 

Some data presented in this ACR may not be provided in future 

ACRs. The Commission’s rulemaking will determine the 

appropriate data and types of material to be provided in the future.

The service performance and customer satisfaction data provided 

in the ACR are limited. The requirements of 39 U.S.C. § 3691 

pertaining to development and implementation of a complete set of 
Chapter II—Background

7

service standards for market dominant products had not been 

implemented during FY 2007. Similarly, the customer satisfaction 

survey data was not designed for the PAEA. Service performance 

information has been provided for First-Class single piece and for 

Package Services mail.

COMMISSION EVALUATION 

BASED UPON PAEA 

POLICIES

The PAEA does not clearly indicate whether Congress expected 

the Commission to apply the rate setting standards of the PRA or 

the PAEA to the various rates charged during FY 2007, the first 

year to be subjected to annual compliance review. Section 3622(f) 

of the PAEA addresses the problem of making the transition from 

the former regulatory regime under the PRA to the new regulatory 

regime under the PAEA. It made the rate-changing mechanism of 

the PRA available to the Postal Service for one year after 

enactment of the PAEA, while the building blocks of the PAEA 

rate-cap rate adjustment mechanism were being assembled.

Section 3622(f), however, is silent on the issue of what rate setting 

standards should apply when the Commission determines whether 

the myriad rates that were actually charged during FY 2007 

complied with applicable law. The Commission’s duty is located in 

section 3653. It directs the Commission to review the rates and 

service that were experienced during the most recent historical 

year for compliance with “this chapter.” Nothing in the PAEA 

suggests that “this chapter” refers to anything other than chapter 

36 of the PAEA, since section 3653 is located in chapter 36 of the 

PAEA, and chapter 36 contains all of the rate setting procedures 

and most of the ratesetting standards of title 39.

Nevertheless, it is the position of the Postal Service and numerous 

other commenters that where section 3653 refers to “this chapter,” 

the reference is to chapter 36 of the former law—the PRA. They 

infer that because section 3622(f) made the rate-changing 

mechanism of the PRA available for a year after the PAEA was 

adopted, Congress must have also intended that the Commission 

base its compliance determinations on chapter 36 of the PRA 

during the first year after the PAEA was adopted. (FY 2007 

coincides largely, but not entirely, with the first year of experience 

under the PAEA).

The Commission prefers a more straightforward reading of section 

3653. Where that section refers to compliance with “this chapter” 
Chapter II—Background

8

it is likely that Congress meant what it said, and that the chapter to 

be applied is the one in which section 3653 is actually 

found—chapter 36 of the PAEA. Congress was aware of the 

possibility that the rate adjustment mechanism of the PAEA might 

not be available to the Postal Service in time to adjust any rates 

during the first full year of experience under the PAEA. It could 

have provided that rates charged during the first full year of 

experience under the PAEA should be reviewed for compliance 

with “chapter 36 of the Postal Reorganization Act,” but it did not. 

This decision should not have far-reaching effects for a number of 

reasons. First, by the terms of the PAEA, Commission review of 

service performance is limited to those areas where service 

standards are in effect. For many of its products, the Postal 

Service did not have service standards and service measurement 

procedures in effect during FY 2007.

Second, with regard to rates, there is no controversy that the rates 

charged in FY 2007 were established under the PRA. They were 

intended to satisfy a similar, but nonetheless different combination 

of policies. Furthermore, under the PRA domestic rates were 

prospective, that is, they were designed to recover costs and 

reward worksharing savings achieved in a future fiscal year. The 

domestic rates in effect at the end of FY 2007 were actually 

designed with projected FY 2008 costs in mind. The Commission 

has reviewed FY 2007 data as the PAEA directs with these unique 

and non-recurring factors in mind.

Third, the Postal Service ACR was prepared without benefit of 

Commission rules keyed to evaluating the numerous standards 

established by the PAEA. The Commission appreciates the good 

faith effort of the Postal Service to provide useful available 

information to allow the Commission to fulfill its section 3653 

obligations. In future years, when the Postal Service has the 

benefit of such rules, a more rigorous level of scrutiny will be more 

justifiable.

Finally, comments on this topic seemed particularly concerned lest 

the Commission take action under 39 U.S.C. § 3653(c) to correct 

some particular rate or rates to make them consistent with PAEA 

policies. This concern has been obviated by events. On February 

11, 2008, the Postal Service filed market dominant product price 

adjustments with the Commission, and with one exception those 
Chapter II—Background

9

new prices were found by the Commission to be consistent with 

PAEA policies in Order 66, issued March 17, 2008. On March 12, 

2008, the Postal Service filed competitive products price 

adjustments with the Commission. In the normal course of events 

the Commission will respond to assure that rates for these 

products will be consistent with PAEA policies. To the extent rates 

during FY 2007 failed to meet the standards of PAEA policies, 

under the circumstances described above, sufficient remedial 

steps already have been undertaken.

INCORPORATING 

CHANGES IN ANALYTICAL 

METHODS

This docket provides a difficult context for evaluating changes in 

analytical methods by which the Postal Service estimates its costs, 

volume, and revenues. The Postal Service does not have 

experience producing annual cost, revenue, and volume figures so 

quickly after the close of the fiscal year. In addition, the 

Commission has not yet established the procedures that should be 

followed before changes in analytical methods are incorporated 

into the Postal Service’s periodic reports. Without such guidance, 

it is difficult for the Postal Service to anticipate the protocol that the 

Commission will ultimately settle upon for vetting changes in 

analytical methods before they may be relied on in producing the 

standard periodic reports that will be required by the Commission.

The dilemma of deciding what changes in inputs and analytical 

methods should be embraced in the unusual context of the Postal 

Service’s first annual compliance report is most pronounced with 

respect to Periodicals costs where the most far reaching changes 

have been employed. The public has had an opportunity to 

participate in two informal technical conferences on the issue of 

how best to model the costs of Periodicals. It has also had several 

weeks to comment on the vast amount of data and analyses that 

the Postal Service has submitted on Periodicals costs as well as 

all other aspects of postal operations and finances.

As the Postal Service and other commenters have pointed out, 

these opportunities would normally be sufficient to vet only simple, 

non-controversial changes in analytical methods. For this reason, 

in the Commission’s view, those who would advocate introducing 

changes in analytical methods in the Postal Service’s first annual 

compliance report bear the burden of persuasion. In this docket, 

the Commission follows a general policy that only changes that 

are reasonably balanced updates of input data, straightforward 
Chapter II—Background

10

reflections of operational changes, or simple, non-controversial 

changes to analytical methods will be approved. The Commission 

will approve a change that does not meet this description only if it 

has been shown that making an asymmetrical update of input 

data, or changing an analytical method from that which prevailed 

in the most recent fully-litigated rate case (Docket No. R2006-1) is 

necessary to avoid a much greater distortion that would result from 

rejecting the update or change.

Several parties have argued that there needs to be an opportunity 

to vet nonperfunctory changes to input data and to analytical 

methods in a more thorough and deliberate procedure than has 

been available here before they are relied upon in the Postal 

Service’s standard financial reporting to the Commission. NAPM 

Comments at 3-4, MMA Comments at 6, APWU Comments at 1, 

Valpak Comments at 36. The Commission is in complete 

agreement. In conjunction with future regulations articulating the 

Postal Service’s periodic reporting duties, the Commission is 

preparing proposals for regulations that require changes to 

analytical methods that the Postal Service uses to produce its 

periodic reports to be publicly proposed and evaluated in informal 

rulemaking proceedings, well in advance of the filing of its annual 

compliance report. The Commission also envisions a process that 

begins with a systematic inventory of research areas in which data 

samples or collection systems need to be updated or improved, or 

analysis of the data needs an overhaul, followed by a series of 

informal rulemakings designed to address these areas in 

sequence, according to an agreed-upon timetable. 

DESCRIPTION OF POSTAL 

SERVICE FILING

The Postal Service’s December 28, 2007 ACR filing consists of a 

34-page narrative, together with a substantial amount of detailed 

appended materials, both public and nonpublic, in formats similar 

to the library reference information previously provided in omnibus 

rate proceedings. The materials appended to the narrative consist 

of four distinct areas—the CRA report; the ICRA; intra-subclass 

cost analyses needed for workshare discount analysis; and billing 

determinants, including international mail, heretofore filed on an 

annual basis. The Postal Service explains it has included only a 

minimal number of new methodologies that differ from the 

Commission’s methodologies used in Docket No. R2006-1 or, if 

applicable, data reported in FY 2006. ACR at 4. They are 

identified in the materials appended to the ACR and in the 
Chapter II—Background

11

separate comprehensive roadmap document, library reference 

USPS-FY07-31, designed to assist in navigating the materials 

appended to the ACR. The required FY 2007 Comprehensive 

Statement was submitted on January 11, 2008.

The appended material includes 30 data compilations plus the 

above-mentioned roadmap. Library references USPS-07-1 

through USPS-07-30. In addition there are 10 designated items in 

a nonpublic annex, including FY 2007 Competitive Product Billing 

Determinants, library reference USPS-FY07-NP1, and the 

remainder of the documents included provide international mail 

information.

A significant proportion of the ACR narrative is comprised of a list 

of market dominant products and an indication of where and how 

the categories of mail under the PRA “match” the products in order 

to decompose the costs for FY 2007 into the new product list. For 

many products, the CRA does not isolate the FY 2007 costs. For 

those products the Commission is unable to determine precisely 

whether their revenues recover their attributable costs. On the 

other hand, an estimation of product volumes and revenues for FY 

2007 may be approximated using billing determinants.

One new methodology included in the ACR involves corrections 

and refinements to the Periodicals cost model used in Docket No. 

R2006-1. The Commission scheduled two technical conferences 

to facilitate understanding of the reasons for and nature of these 

changes. These open conferences were held on January 11, 

2008, and January 23, 2008, and useful and informative dialogues 

took place.1 The Postal Service filed correcting and explanatory 

comments and spreadsheets resulting from updating calculations 

with data from FY 2007. The Postal Service subsequently filed a 

notice of additional materials requested relating to the 

measurement of Periodicals cost avoidance and enhanced 

documentation to facilitate tracking of cost estimates.2

The Postal Service filed seven notices of revisions to its ACR with 

the final changes being submitted on March 20, 2008, only seven 

days before this report was due. Each of the notices details 

1 See Notice of Technical Conferences Supplementing Postal Service Annual 

Compliance Report, December 27, 2007.
Chapter II—Background

12

revisions to the materials appended to the filing. The first errata 

involved the inclusion of SAS programs in library reference USPSFY07, correction of minor errors in the Parcel Cost Models, library 

reference USPS-FY07-15, and a misclassification of Rest of World 

(ROW) Priority Mail costs in the nonpublic annex.3 In the second 

errata, revisions to the non-automation presort letters volumes 

were noted and the addition of a negative sign corrected nonautomation and nonmachinable additional costs from 31.90 cents 

and 53.412 cents to 7.78 cents and 24.964 cents for cards and 

letters, respectively, but did not impact the summary page. Also 

bundle probabilities were corrected and adjustments to bundle 

breakage rates and bundle handlings were made. Small errors in 

the Periodicals model were corrected.4

The third errata notice included small changes in previously 

revised workshare avoided costs. Minor errors were corrected 

and additional documentation was provided for First-Class Mail, 

library reference USPS-FY07-10 (revised January 18, 2008), and 

changes to Periodicals Outside County, Periodicals Bundle/

Container were made and a new Within County tab was added to 

library reference USPS-FY07-11 (rev. 1/18/08). Also, internal 

links were added to library reference USPS-FY07-4, and minor 

corrections for actual data errors were corrected in First-Class Mail 

Cards; Bound Printed Matter (an error in Presort Flats and Presort 

Parcels billing determinants that slightly overstated revenues); 

Special Services (small errors); and Periodicals (with minor 

corrections to formulas for Regular Rates and Nonprofit and 

Classroom).5

2 Notice of the United States Postal Service of Filing Additional Materials 

Requested at the January 23, 2008, Technical Conference on Periodicals Costs, January 28, 2008. The record also includes written summaries of the two technical conferences as well as three written comments from participants at the technical 

conferences.

3 Notice of the United States Postal Service of Minor Revisions to Materials 

Accompanying its FY 2007 Annual Compliance Report—Errata (Items 7, 15, NP2, 

NP3, NP4, NP6, and NP7), January 16, 2008.

4 Second Notice of the United States Postal Service of Minor Revisions to Materials Accompanying its FY 2007 Annual Compliance Report—Errata (Items 10, 11), 

January 18, 2008.

5 Third Notice of the United States Postal Service of Minor Revisions to Materials 

Accompanying its FY 2007 Annual Compliance Report—Errata (Items 3, 4), January 

22, 2008.
Chapter II—Background

13

The fourth notice of errata updated the nonpublic international mail 

settlement calculations to reflect more recent Universal Postal Unit 

(UPU) Circulars and properly capture inbound rates associated 

with Inbound Surface Parcel Post. This impacted both outbound 

and inbound letterpost products and Inbound Surface Parcel 

Post.6

The fifth notice of errata conformed First Class Auto 5-digit 

CSBCS/Manual sites for letter and cards to the DPS percentages 

in library reference USPS-FY07-10, causing very minor changes 

in the unit delivery costs.7

The sixth notice of errata revised Cost Segment 14, Purchased 

Tranportation, to change library references USPS –FY07-32 and 

USPS-FY07-NP2 due to adjustments in FedEx contract general 

ledger accounts. Also, library reference USPS-FY07-NP14 was 

revised for changes in ICRA costs.8

The seventh notice of revisions to the compliance report involved 

revisions to the domestic CRA and associated material caused by 

revisions to Cost Segment 14 arising from adjustments to certain 

FedEx accounts in the general ledger as indicated in the sixth 

notice of revisions.9 Specifically, the seventh notice involved 

revisions in four items: library reference USPS-FY07-1 (CRA); 

library reference USPS-FY07-2 (Costs Segments and 

Components); library reference USPS-FY07-5 (CRA Model); and 

library reference USPS-FY07-6 (CRA “B” Workpapers). The 

impact of shifting accrued FedEx costs from Night Turn to Day 

6 Fourth Notice of the United States Postal Service of Minor Revisions to Materials 

Accompanying its FY 2007 Annual Compliance Report—Errata (Item NP2), February 

4, 2008.

7 Fifth Notice of the United States Postal Service of Minor Revisions to Materials 

Accompanying its FY 2007 Annual Compliance Report—Errata (Item 19), March 12, 

2008.

8 Sixth Notice of the United States Postal Service of Revisions to Materials 

Accompanying its FY 2007 Annual Compliance Report – Errata (Items NP2 and 

NP14), March 17, 2008. See also, Notice of the United States Postal Service of Filing 

of USPS–FY07-32, March 17, 2008, noting non-trivial effects of the revision on at 

least one category of domestic mail.

9 Seventh Notice of United States Postal Service of Revisions to Materials Accompanying its FY 2007 Annual Compliance Report – Errata (Items 1, 2, 5, and 6), March 

20, 2008 (Seventh Notice of Errata).
Chapter II—Background

14

Turn was to reduce Express Mail costs by $13 million and 

International Mail costs by $11 million and to increase First-Class 

Mail costs by $9 million and Priority Mail costs by $16 million.

PROCEDURAL HISTORY Notice. The Postal Service’s ACR was noticed on December 31, 

2007, requesting comment on “the degree to which the Postal 

Service’s operations and financial results comply with the policies 

of title 39.”10 By notice, pursuant to 39 U.S.C. § 3653, a public 

representative was appointed on January 8, 2008. Comments 

were due to be filed on January 30, 2008, and reply comments 

were due on February 13, 2008.

Commission Requests For Additional Information. The 

Commission submitted three sets of information requests to the 

Postal Servic11e. Technical conferences on matters relating to 

Periodicals, noted above, were held on January 11, 2008 and on 

January 23, 201208. In addition, the staff has informally 

questioned the Postal Service to clarify ambiguities in the ACR. 

The Commission appreciates the Postal Service’s responsiveness 

to the questions posed and information requested. The responses 

have been helpful in the Commission’s evaluation.

However, responses to two questions posed January 25, 2008 

were not received by the Commission until March 12, 2008, when 

the Postal Service filed library reference USPS-FY07-NP14. The 

delay in the responses has impeded the Commission’s ability to 

promptly and satisfactorily resolve important issues related to 

International Mail. The first question relates to important 

information regarding International Customized Mail (ICM).13 The 

Commission requested the FY 2007 revenue, pieces, weight, 

volume variable cost, and product specific cost for each ICM 

contract by accounting period, separated by product. The 

10 Notice of Filing of Annual Compliance Report by the Postal Service and Solicitation of Public Comment, December 31, 2007.

11 Commission Information Request No. 1, January 25, 2008; Commission Information Request No. 2, February 1, 2008; and Commission Request No. 3, February 

15, 2008.

12 See Notice of Technical Conferences Supplementing Postal Service Annual 

Compliance Report, December 27, 2007.

13 Commission Information Request No. 1, question 1, January 25, 2008.
Chapter II—Background

15

Commission requested revisions showing revenue, cost, and 

volume data without including ICM data. Further, the Commission 

requested a description of the volume variable cost computation 

for each ICM contract, worksheets and any revised initiative data 

that exclude ICM data. 

The second question requested a table summarizing FY 2007 

International Mail Billing Determinants for Market Dominant and 

Competitive Products. Id., question No. 26. The table is to include 

for each mail category and special service: Volume, Postage 

Revenue, Fees, Total Revenue (Postage Revenue plus Fees), 

and Revenue per Piece (Total Revenue divided by Volume). The 

Postal Service was requested to provide the number of 

transactions and revenue for each international mailing fee listed 

in an attachment, and how they are distributed to mail categories 

separately from the rest of the fees. The Postal Service was also 

asked to add mail categories, special services, or mailing fees, or 

assign them to different groupings, if needed.
17

Chapter III—Summary of Public Comments

Comments and reply comments were received from 21 

participants. (See Table III-1 at the conclusion of this chapter.) 

The comments cover a wide variety of issues, many of which 

involve matters of first impression concerning the Commission’s 

procedures, the policies of the PAEA, and the application of those 

policies in evaluating this first Postal Service ACR. Several 

comments offer views of a general nature as to the impact of the 

procedures in this case upon the rate adjustment process, as well 

as upon future Postal Service ACRs.

Following is an evaluation of the comments that raise general 

issues such as the Commission’s approach to evaluating the ACR, 

the lack of discussion in the ACR regarding costs and changes in 

costs, and the limited opportunity for discovery. Other comments 

are discussed in the appropriate context throughout this report. 

Those comments relate primarily to costs (including costs 

avoided), revenues, volumes, pricing (including workshare 

discounts), and competitive product issues.

Some comments express concern about information and 

explanations the Postal Service has not included in its ACR. 

Valpak requests that the Commission’s future rules require 

sufficient information to be filed with the ACR to reduce the 

amount of information the Commission will need to seek from the 

Postal Service during review. Valpak Comments at 7. It points out 

that the ACR is devoid of any testimony or discussion of the 

costing results presented, with no comparisons with previous 

costs, no explanations of costs that appear out of line, and no 

information on changes in operations. Id. at 36. Valpak expresses 

concern about future rate increases if the Commission does not 

provide mailers with an opportunity to inquire into anomalies in 

reported Postal Service costs. Id. at 34-35. These comments will 

be considered in formulating proposed rules to govern the 

subsequent Postal Service reports.
Chapter III—Summary of Public Comments

18

The National Association of Presort Mailers (NAPM) raises the 

related concern that partial updates (of avoided costs) raise 

fairness and accuracy issues, particularly as the workpapers are 

just data summaries with pasted values. It fears that because of 

the overlap in the timing of ACRs and price adjustments, mailers 

may have no opportunity to weigh in on these issues. NAPM 

Comments at 3-4. MMA also notes that partial updating results in 

changed model outputs. It, too, fears there may be no opportunity 

to adequately explore the matter. MMA Comments at 6.14 

Therefore, MMA suggests that new methodologies and other 

changes should be subject to advance review in a separate forum 

between ACR filings. MMA Comments at 7. See also NAPM 

Comments at 4, APWU Comments at 3, and Postal Service Reply 

Comments at 8 and 15. The Commission will give that new 

procedural approach very close consideration during deliberations 

on the forthcoming ACR rules.

The Public Representative expresses concern about the lack of 

specific explanations to demonstrate that all products comply with 

applicable requirements. See 39 U.S.C. § 3652(a)(1). It contends 

that because 39 U.S.C. § 3622(c)(14) requires the modern system 

of regulation to factor in the policies of title 39, the ACR should 

include a discussion of the manner in which costs attributed and 

assigned to products comply with 39 U.S.C. § 101. Section 101(a) 

requires that costs not be apportioned to impair the overall value of 

service, and § 101(d) requires rates that “apportion the costs of all 

postal operations to all users of the mail on a fair and equitable 

basis.” It notes that the ACR also lacks a narrative explaining how 

the rates and fees are reasonable and equitable as required by 

39 U.S.C. § 404(b). Public Representative Comments at 3-4 and 

Valpak Reply Comments at 2. Further, it suggests the Postal 

Service should have described the steps it is taking to ensure 

14 Valpak suggests the Commission should consider allowing a period 

of discovery during the annual review. Valpak at 7. The 90-day time constraint 

of 39 U.S.C. § 3653 leaves little opportunity for discovery during the annual 

compliance review, although the Commission stands ready to moderate its 

current process if this proves to be necessary, such action should await the 

accumulation of experience to determine the extent and seriousness of this 

problem, and the sufficiency of alternative means of obtaining clarification of 

Postal Service data.
Chapter III—Summary of Public Comments

19

future compliance with the policies and provisions of the PAEA. 

Id. at 6. See also Valpak Reply Comments at 4.

The Postal Service agrees that 39 U.S.C. § 3652 provides for an 

explanation of why the market dominant products met polices and 

provisions of the PAEA, although it believes there is no need for a 

narrative explanation this year. Postal Service Reply Comments 

at 6-7.

The Commission appreciates the Postal Service’s recognition of 

the benefits of such a narrative in future ACRs. As for the present 

requirement for a narrative, the unique transitional nature of this 

proceeding allows for omission of the requested discussion. The 

rates and fees in effect during FY 2007, and under review here, 

were recommended by the Commission in Docket Nos. R2005-1 

and R2006-1. Those cases were conducted pursuant to the 

policies of the PRA including sections 101 and 3621. Section 101 

of the PRA was not amended by the PAEA, and section 3621 of 

the PRA (repealed) contained the reasonable and equitable 

mandate reiterated in the current § 404. Therefore, the rates in 

effect during FY 2007, and under review here pursuant to the 

PAEA, were found to meet the policy standards referred to by the 

Public Representative. Furthermore, the Commission is familiar 

with the application of the statutory requirements that costs not be 

apportioned so as to impair the overall value of service, that costs 

be apportioned in a fair and equitable manner, and that rates and 

fees be reasonable and equitable. The Commission has been 

able to perform its review and to evaluate any specific violation of 

these standards presented by participants in this proceeding. 

Again, the prospective rules on Postal Service reports to the 

Commission should address this topic.

Several comments express the view that the rates established 

pursuant to the PRA are not subject to review in this proceeding. 

ANM-MPA Comments at 1-3, Pitney Bowes Comments at 2, 

NPPC Comments at 1-6 and GCA Reply Comments at 1. The 

National Postal Policy Council, Inc. (NPPC) and Major Mailers 

Association (MMA) posit that the lawfulness of the rates previously 

approved by the Commission in Docket Nos. R2005-1 and 

R2006-1 are not in question and should not be re-litigated. NPPC 

Comments at 3-6 and MMA Comments at 8.
Chapter III—Summary of Public Comments

20

The Commission agrees that existing rates should not be relitigated. Nonetheless, the PAEA added many new and modified 

considerations for the Postal Service to consider in designing rates 

and operations. The Commission’s findings are most useful as 

guides for future action. This review focuses upon the policies of 

the PAEA and providing guidance for the future. As suggested by 

the American Postal Workers Union, AFL-CIO (APWU), the 

Commission’s findings should encourage improvements in future 

Postal Service rate design and service performance. APWU 

Comments at 3.

This first ACR is transitional and necessarily has not included 

information that will be available in the future after the product lists 

are matched to the CRA and other documentation.

It has been useful to identify data reporting needs and potential 

procedures for reviewing changes to established methodologies 

and analyses. Time Warner Comments at 29-30. The 

Commission will soon be proposing rules prescribing the 

information to be filed in future ACRs. The rules will foster 

simplifying and expediting the setting of postal rates, one of 

Congress’s main motives in enacting the PAEA. See Order No. 

43, ¶ 2025.

Comments to Annual Compliance Report, 2007

Commenter Comment Citation Citation 

Short Form

ANM-MPA

Alliance of Nonprofit Mailers

Magazine Publishers of America, Inc.

Comments of Alliance of Nonprofit 

Mailers and Magazine Publishers of 

America, Inc., January 30, 2008.

ANM-MPA 

Comments

ANM, et al.

Alliance of Nonprofit Mailers

American Business Media

Dow Jones & Company, Inc.

Magazine Publishers of America, Inc.

The McGraw-Hill Companies, Inc.

National Newspaper Association, Inc.

Reply Comments of Alliance of 

Nonprofit Mailers, American Business 

Media, Dow Jones & Company, Inc., 

Magazine Publishers of America, Inc., 

The McGraw-Hill Companies, Inc., and 

the National Newspaper Association, 

Inc., February 13, 2008.

ANM, et al. 

Comments
Chapter III—Summary of Public Comments

21

Comments to Annual Compliance Report , 2007 (cont’d)

Commenter Comment Citation Citation Short 

Form

ABM

American Business Media

Supplemental Reply Comments of 

American Business Media, February 13, 

2008.

ABM 

SupplementaCom

ments

APWU

American Postal Workers Union, 

AFL-CIO

Comments of the American Postal 

Workers Union, AFL-CIO on Postal 

Service Annual Compliance Report, 

January 31, 2008.

APWU 

Comments

DMA

Direct Marketing Association, Inc. 

Parcel Shippers Association, Inc.

Comments of Direct Marketing 

Association, Inc. and Parcel Shippers 

Association, Inc. Pursuant to PRC Notice 

of Filing of Annual Compliance Report, 

January 30, 2008.

DMA Comments

GCA

Greeting Card Association

Reply Comments of the Greeting Card 

Association, February 13, 2008. GCA Comments

MMA

Major Mailers Association

Initial Comments of Major Mailers 

Association, January 30, 2008. MMA Comments

NAPM

National Association of Presort 

Mailers

Initial Comments of the National 

Association of Presort Mailers on the 

2007 Annual Compliance Report of the 

United States Postal Service, January 30, 

2008.

NAPM 

Comments

NPPC

National Postal Policy Council, Inc.

Comments of National Postal Policy 

Council, January 30, 2008. NPPC Comments

Pitney Bowes Inc.

Pitney Bowes

Initial Comments of Pitney Bowes Inc. in 

Response to Notice of Filing of Annual 

Compliance Report by the Postal Service 

and Solicitation of Public Comment, 

January 30, 2008.

Pitney Bowes 

Comments

Reply Comments of Pitney Bowes Inc. in 

Response to Notice of Filing of Annual 

Compliance Report by the Postal Service 

and Solicitation of Public Comment, 

February 13, 2008.

Pitney Bowes 

Reply Comments
Chapter III—Summary of Public Comments

22

Comments to Annual Compliance Report , 2007 (cont’d)

Commenter Comment Citation Citation Short 

Form

Public Representative

Public Representative Initial Comments on 

FY 2007 Annual Compliance Report, January 30, 

2008.

Public 

Representative 

Comments

Public Representative Reply Comments on 

FY 2007 Annual Compliance Report, February 13, 

2008.

Public 

Representative 

Reply Comments

Reply Comments of Time Warner Inc. on FY 2007 

Annual Compliance Report, February 13, 2008.

Time Warner 

Reply Comments

The Nation

The Nation Company, L.P.

Comments of the Nation Magazine, L.P. Teresa 

Stack, President Pursuant to PRC Notice of Filing 

of Annual Compliance Report, January 31, 2008.

The Nation

Comments

Reply Comments of the Nation Company, L.P. The Nation Reply 

Comments

Time Warner

Time Warner Inc.

Initial Comments of Time Warner Inc. on FY 2007 

Annual Compliance Report, January 30, 2008.

Time Warner 

Comments

Reply Comments of Time Warner Inc. on FY 2007 

Annual Compliance Report, February 13, 2008.

Time Warner 

Reply Comments

United Parcel Service

Reply Comments of United Parcel Service on the 

United States Postal Service’s FY 2007 Annual 

Compliance Report, February 13, 2008.

United Parcel 

Service 

Comments

Postal Service

United States Postal Service

Reply Comments of the United States Postal 

Service, February 13, 2008.

Postal Service 

Reply Comments

Valassis

Valassis Direct Mail, Inc.*

Reply Comments of Valassis Direct Mail, Inc. 

Concerning the Postal Service’s FY 2007 Annual 

Compliance Report, February 13, 2008.

Valassis Reply 

Comments

Valpak

Valpak Direct Marketing Systems, 

Inc. and Valpak Dealers’ 

Association, Inc.

Valpak Direct Marketing Systems, Inc. and Valpak 

Dealers’ Association, Inc. Initial Comments on the 

United States Postal Service FY 2007 Annual 

Compliance Report, January 30, 2008.

Valpak 

Comments

* Formerly knowns Advo, Inc. See Valassis Direct Mail, Inc. Notice of Name Change from Advo, Inc., February 13, 

2008.
23

Chapter IV—Postal Service Financial 

Condition

SUMMARY OF COST AND 

REVENUE BY SUBCLASS

Table IV-A-1 is a version of the Appendix G, Schedule 1 table 

presented in the Commission’s Opinion and Recommended 

Decision in previous rate cases under the Postal Reform Act 

(PRA) of 1970. It has been modified to show separately the 

Market Dominant classes and Competitive classes. However, the 

same information that has been historically shown in the Appendix 

G, Schedule 1 tables is retained.

Several results are problematic.

Periodicals Within County has a cost coverage, after fees, of 85.8 

percent while Periodicals Outside County has a cost coverage of 

82.9 percent. Total Periodicals has a cost coverage of 83.0 

percent. A cost coverage below 100 percent indicates that 

revenues failed to cover attributable costs in FY 2007. In the case 

of Periodicals, the contribution to institutional costs as a class was 

a negative $448 million. New rates went into effect in the fourth 

quarter of FY 2007. If these rates had been in effect for the entire 

year then the contribution would have been higher. However, it is 

unlikely that a full year of new rates would have resulted in a 

positive contribution.15 The recommended rates in R2006-1 did 

include a number of incentives designed to encourage efficiencies. 

While it is too early to assess the impact of these incentives, the 

Commission is hopeful that they will result in lower overall costs for 

Periodicals as a whole.

As a class, Package Services has a cost coverage of 102.3 

percent and thus covers its attributable costs. However, Bound 

Printed Matter is the only product within the class that has a cost 

coverage above 100 percent. Media Mail has a cost coverage of 

91.4 percent and Market Dominant Parcel Post has a cost 

15 The average increase for periodicals was 11 percent, which is not high enough 

to raise an 83 percent cost coverage to over 100 percent.
Chapter IV—Postal Service Financial Condition

24

coverage of 98.7 percent. The Commission believes that this 

situation must be carefully monitored to avoid cross-subsidization 

among products.

Two competitive products fail to cover attributable costs. 

International Inbound Bulk Surface Parcels has a cost coverage of 

90.1 percent and Parcel Return Service has a cost coverage of 

97.7 percent.16 The Postal Service will need to address these two 

products in order to conform to the requirements of the PAEA.

All other market dominant and competitive products cover 

attributable costs.

16 To the extent that there are carrier cost savings for parcel return service, the 

coverage may higher. However, the Postal Service did not provide these data. 

Table IV-A-1

Fiscal Year 2007 Volum e, Cost, Revenue, and Cost Coverage by Class

Contribution to Contribution to

Attributable Institutional Institutional

Volum e Revenue Cost Cost Rev./Pc. Cost/Pc. Cost/Pc. Cost

(000) ($ 000) ($ 000) ($ 000) (Cents) (Cents) (Cents) Coverage

COM PETITIVE M AIL

Priority Mail 896,865 5,233,793 4,059,098 1,174,696 583.566 452.588 130.978 128.9%

Express M ail 54,764 950,570 608,230 342 ,34 0 1,7 35.7 71 1,110.648 625.123 156.3%

Parcel Select 1/ 237,297 475,346 426,104 49,242 200.317 179.566 20.751 111.6%

Parcel R eturn S ervice (P R S) 1/ 11,032 31,380 32,135 (755) 284.440 291.281 (6.841) 97.7%

C om petitive International M ail 430,958 1,217,812 997,465 220,347 282.582 231.453 51.130 122.1%

Total Com petitive M ail 1,630,916 7,908,902 6,123,032 1,785,870 484.936 375.435 109.501 129.2%

MARKET DOMINANT MAIL

First-Class M ail

Letters 90,100,184 36,279,353 18,324,235 17,955,118 40.266 20.338 19.928 198.0%

Cards 5,797,959 1,281,904 791,920 489,984 22.110 13.659 8.451 161.9%

Periodicals

W ithin C ounty 736,458 73,423 85,556 (12,132) 9.970 11.617 (1.647) 85.8%

O utside County 8,059,373 2,114,512 2,550,327 (435,814) 26.237 31.644 (5.408) 82.9%

Standard Mail

Regular 56,555,118 13,026,450

Nonprofit 12,113,798 1,680,819

Regular and Nonprofit 68,668,917 14,707,268 9,964,963 4,742,306 21.418 14.512 6.906 147.6%

Enhanced Carrier Route (ECR) 32,177,311 5,787,178

Nonprofit ECR (NECR) 2,669,884 285,884

ECR and NECR 34,847,195 6,073,062 3,188,202 2,884,859 17.428 9.149 8.279 190.5%

Package Services

Parcel Post 100,299 701,422 710,732 (9,309) 699.334 708.615 (9.282) 98.7%

Bound Printed Matter 637,595 690,563 602,111 88,452 108.308 94.435 13.873 114.7%

Media Mail 164,088 378,567

Library Rate 12,527 28,342

Media and Library 176,615 406,909 445,319 (38,410) 230.393 252.141 (21.748) 91.4%

U SP S Penalty M ail 1,008,380

Free-for-the-Blind M ail 68,501 61,168 (61,168) 89.295

M arket D om inant International M ail 401,629 817,982 782,252 35,730 203.666 194.770 8.896 104.6%

Total Market Dom inant M ail 210,603,104 63,146,400 37,506,784 25,639,615 29.984 17.809 12.174 168.4%

Total All Mail 212,234,020 71,055,302 43,629,817 27,425,485 33.480 20.557 12.922 162.9%

Special Services

Registry 4,321 53,320 55,397 (2,077) 1,233.974 1,282.032 (48.058) 96.3%

C ertified 280,226 698,219 508,749 189,471 249.163 181.549 67.614 137.2%

Insurance 57,005 156,685 129,331 27,354 274.863 226.877 47.985 121.2%

CO D 1,407 9,563 6,514 3,049 679.908 463.106 216.801 146.8%

Money O rders 162,899 251,473 148,923 102,550 154.374 91.421 62.954 168.9%

Stam ped Cards 106,164 2,123 1,320 804 2.000 1.243 0.757 160.9%

S tam ped Envelopes 331,874 15,064 14,860 203 4.539 4.478 0.061 101.4%

B ox/C aller S ervice 15,263 836,931 601,541 235,391 5,483.573 3,941.293 1,542.280 139.1%

O ther Special Services 686,972 483,164 203,808

Other Incom e 949,351 949,351

Total Mail & Services 212,234,020 74,715,005 45,579,615 29,135,390 35.204 21.476 13.728 163.9%

Institutional Costs 31,577,171

Escrow Funding R econciliation 2,958,427

Appropriations 63,075

Investm ent Incom e 194,734

Total Revenues 74,972,813

Total Costs 80,115,213

Net Incom e (Loss) (5,142,399)

1/ Attributable costs for P arcel Select and P arcel R eturn Service w ere calculated outside the C R A using a m ethod proposed by the Postal Service in U SP S-FY07-9

Source: PRC-ACR2007-LR1
Chapter IV—Postal Service Financial Condition

25

FINANCIAL RESULTS Much of the following discussion is developed from the FY 2007 

Postal Service Annual Report at pages 21 through 31, and the FY 

2007 Cost and Revenue Analysis Report submitted to the 

Commission in ACR FY 2007, which was filed on December 28, 

2007. Other data come from the FY 2007 audited financial 

statements and other reports filed by the Postal Service with the 

Commission over the course of FY 2007.

Overall Financial Condition. The Postal Service incurred a net 

loss of $5.1 billion in FY 2007 based on revenues of almost $75 

billion and expenses of $80.1 billion. The primary cause of such a 

large financial loss is the funding requirements of the Postal 

Service Retiree Health Benefits Fund (PSRHBF) established 

under the PAEA. The new law, which was enacted in the first 

quarter of FY 2007, established specific funding requirements for 

postal retiree health benefits. These included the establishment of 

the PSRHBF within the purview of the Office of Personnel 

Management (OPM).

The PAEA also eliminated two provisions of Public Law 108-18 by 

transferring back to the Treasury Department the portion of Civil 

Service Retirement System (CSRS) pensions attributable to postal 

employees’ military service time. This eliminated the deficit in the 

CSRS, and OPM has estimated that those retirement obligations 

of the Postal Service are fully funded. With the Postal Service’s 

CSRS obligation now fully funded, the PAEA eliminated the 

matching CSRS payment of 17.4 percent of basic compensation, 

saving approximately $1.3 billion. Eliminating the CSRS unfunded 

liability obviates the need for an interest and principal payment 

saving an additional $250 million. The PAEA also mandated that 

any surplus in the CSRS fund be transferred to the new PSRHBF 

fund. OPM estimated the surplus at $17 billion as of September 

30, 2006, and these funds were transferred to the PSRHBF in FY 

2007.

The PAEA also eliminated the escrow requirement that had been 

established by PL 108-18 in FY 2003 and mandated that the funds 

escrowed be placed into the PSRHBF. The Postal Service placed 

into the escrow $2.958 billion in FY 2006, and subsequently 

transferred the escrow requirement to the PSRHBF in FY 2007. 
Chapter IV—Postal Service Financial Condition

26

While the Postal Service recognized the escrow in the FY 2006 

Cost and Revenue Analysis report, because there was no 

declared purpose for the funds at the time, Generally Accepted 

Accounting Principles would not allow the Postal Service to 

recognize these funds as an expense. The escrow in FY 2006 

was treated as a restricted asset (cash) on the balance sheet. 

However, the enactment of P.L. 109-435 established a purpose for 

the restricted asset, and it was then recognized in the income 

statement as an expense.

Beginning in FY 2007 and over the next 10 years, the Postal 

Service is required to pay into the PSRHBF an annual amount 

ranging from $5.4 billion to $5.8 billion. The FY 2007 payment of 

$5.4 billion was paid into the PSRHBF at the end of the fiscal year.

The above actions mandated by the PAEA had a significant effect 

on the Postal Service’s FY 2007 financial statements. Total 

expenses for the year increased over $6.7 billion, despite 

significant cost savings from increased productivity and workhour 

reductions, in addition to savings from the elimination of the CSRS 

matching payment. The Commission has restated the Postal 

Service’s FY 2007 Income Statement to highlight the effects of 

PAEA in Table IV-B-1.
Chapter IV—Postal Service Financial Condition

27

Table IV-B-1

USPS Income Statement

FY 2007

($ Millions)

FY FY $ %

2007 2006 Variance Variance

Mail & Special Services Revenue 74,715 $ 72,551 $ 2,164 $ 3.0%

Appropriations 63 99 (36) -36.3%

Investment Income 195 167 28 16.6%

 Total Revenue 74,973 $ 72,817 $ 2,155 $ 3.0%

Expenses:

 Compensation & Benefits 55,768 $ 54,896 $ 872 $ 1.6%

 Retiree Health Benefits 1,726 1,637 89 5.4%

 Transportation 6,502 6,045 457 7.6%

 Other Expenses 9,343 9,339 4 0.0%

 Total Expenses before PAEA 73,339 $ 71,917 $ 1,422 $ 2.0%

Net Income prior to PAEA 1,634 $ 900 $ 

PAEA Changes:

 Expense FY 2006 Escrow (2,958) $ 

 FY 2007 PSRHBF Payment (5,400) 

 FY 2007 CSRS Savings 1,582 

Total Net PAEA Changes (6,776) $ 

Net Loss After PAEA (5,142) $ 900 $ 

Source: USPS Annual Report, FY 2007, Item 7, Management's discussion 

 and analysis of financial condition and results of operations
Chapter IV—Postal Service Financial Condition

28

Valpak Comments at 16-17 note that the operating deficit in FY 

2007 indicates that the Postal Service is “... not in a long-run 

sustainable financial ‘equilibrium’ and that if continued will 

eventually be a significant liability to the federal government.” 

Summarizing the FY 2007 CRA, Valpak states that before 

accounting for the FY 2006 escrow the Postal Service had an 

operating deficit of $2.184 billion and that this result represented a 

revenue shortfall of 2.9 percent. Furthermore, actual operating 

expenses for FY 2007 exceed the Commission’s Docket No. 

R2006-1 estimated accrued expenses for FY 2008 by 0.5 percent, 

intimating that the CPI-capped rate increases expected to be 

implemented in May 2008, may not provide revenues sufficient to 

cover FY 2008 operating expenses.

Valpak’s concerns regarding the large financial loss of the Postal 

Service in FY 2007 are legitimate, even though the reasons for the 

loss are readily apparent and have been known since the passage 

of the PAEA. The additional cost burden imposed by the funding 

requirements of the PSRHBF will continue into FY 2008.

The Postal Service, in its presentation of the FY 2008 Integrated 

Financial Plan (IFP) to the Board of Governors in September 

2007, estimated that the PAEA would have a direct negative 

impact on net income of $1 billion compared to the assumptions 

used in Docket No. R2006-1. Yet, the bottom line estimate in the 

FY 2008 IFP is a net loss of only $600 million, which does not 

include any additional revenues from the proposed new rate 

increase. A different estimate of FY 2008 finances included in the 

FY 2009 Federal Budget projects the Postal Service will have a 

net income for FY 2008 of $160 million.17 Whether this new 

estimate includes additional revenues from an additional rate 

adjustment is not known, but the Postal Service has filed with the 

Commission notices of rate adjustments under the new rules 

promulgated by the Commission in October 2007.

Whether the additional revenues provided by the new rates will be 

adequate will be determined in the future as there are many 

uncertainties for the remainder of FY 2008. The economy is in the 

midst of a significant slowdown and the Postal Service’s mail 

volume is already feeling the cumulative effects of the housing 

17 U. S. Federal Budget for FY 2009, Appendix at 1219.
Chapter IV—Postal Service Financial Condition

29

market downturn and problems in the financial industry. In the 

Postal Service’s first Form 10-Q filing with the Commission for the 

first quarter of FY 2008, it notes that meeting revenue goals for the 

year will be challenging.18 

Revenues and Volumes. Total revenue of $74.973 billion in FY 

2007 was 3 percent better than in 2006, despite a decline in total 

volumes of 0.4 percent. This increase in revenue was due to the 

increase in rates from both Docket No. R2005-1 and Docket No. 

R2006-1.

Chart IV-B-1 depicts annual mail volume changes since FY 2000.

18 Quarterly Report 10-Q, Quarter 1, FY 2008 at 20, filed February 11, 2008. 

Chart IV-B-1

 Total Mail Volume 

Annual Growth Rates 2000 - 2007

-0.2

-2.3

-0.3

1.9

2.7

0.6

-0.4

2001 2002 2003 2004 2005 2006 2007

Fiscal Year

Average Growth = 0.6%

from USPS 

ght Reports
Chapter IV—Postal Service Financial Condition

30

Chart IV-B-2 illustrates the continuing decline in First-Class singlepiece mail volumes. Single-piece volumes dropped 4.5 percent 

and led to total First-Class volume decline of 1.6 percent during 

2007, despite offsetting increases in presorted First-Class letters 

and cards. First-Class revenues benefited from the rate increases 

and increased 1.6 percent during 2007.

Standard mail volumes continued to increase, albeit at a much 

slower rate than in FY 2007, as shown on Chart IV-B-3. The 

increase of 1.0 percent occurred despite a decrease of 2.3 percent 

in Enhanced Carrier Route volumes. Standard Mail revenues, 

also benefiting from the effects of increased rates, increased 4.5 

percent during 2007.

Chart IV-B-2

First-Class Single-Piece Volume 

Annual Growth Rates 2000 - 2007

-2.8 -2.7

-3.2

-5.6

-2.9

-3.8 -3.7

-4.5

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

2000 2001 2002 2003 2004 2005 2006 2007

Fiscal Year

Annual Percent Change

Average Growth = -3.7%

Source: PRC developed from USPS 

Revenue Pieces and Weight Reports
Chapter IV—Postal Service Financial Condition

31

Priority and Express Mail revenues increased 3.2 percent and 3.5 

percent respectively. Again, the effect of the rate increases 

benefited Priority and Express Mail even though their volumes 

declined, 3.2 percent for Priority Mail and 2.1 percent for Express 

Mail. These drops in volumes follow two consecutive years of 

volume increases.

Periodicals mail volumes continued to decline in FY 2007, falling 

2.5 percent from 2006. See Chart IV-B-4. Revenues also 

declined 1.2 percent from 2006.

Chart IV-B-3

Total Standard Mail Volume 

Annual Growth Rates 2000 - 2007

5

-0.1

-3.1

3.7

5.5 5.5

1.5

1

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2000 2001 2002 2003 2004 2005 2006 2007

Fiscal Year

Annual Percent Change

Average Growth = 2.4%

Source: PRC developed from USPS 

Revenue Pieces and Weight Reports
Chapter IV—Postal Service Financial Condition

32

Package Services volumes dropped 1.1 percent from 2006 levels, 

as shown on Chart IV-B-5. Bound Printed Matter volumes 

increased, but not enough to offset reductions in volumes for 

Parcel Post and Media Mail.

Chart IV-B-4

Periodicals Volume 

Annual Growth Rates 2000 - 2007

0.9

-2.8

-3.9 -3.9

-2

-0.7 -0.5

-2.5

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

2000 2001 2002 2003 2004 2005 2006 2007

Fiscal Year

Annual Percent Change

Average Growth = -1.9%

Source: PRC developed from USPS 

Revenue Pieces and Weight Reports
Chapter IV—Postal Service Financial Condition

33

International Mail volumes and revenues showed healthy growth 

in FY 2007, with volume increasing 5.0 percent over 2006 and 

revenues increasing 13.3 percent. The Postal Service attributes 

this healthy growth to the May 2007 simplification of the 

International mail product list as much as the rate increases that 

took effect in FY 2007. ACR at 23.

Expenses. The Postal Service’s total expenses of $80.115 billion 

for FY 2007 were $8.198 billion, or 11.4 percent, greater than 

2006. The primary cause of the significant increase in expenses 

was the employee and annuitant retirement financing 

requirements under the PAEA. Other major increases in 

expenses were for transportation and utilities, driven in part by 

increases in the price for fuel.

The Postal Service generally divides its expenses into six major 

categories: Compensation and Benefits, Retiree Health Benefits, 

Transportation, Supplies and Services, Depreciation and 

Amortization, and Other Expenses.

Chart IV-B-5

Package Services Volume 

Annual Growth Rates 2000 - 2007

7.9

-3.2

-1.7

4.9

0.3

2.9

0.8

-1.1

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2000 2001 2002 2003 2004 2005 2006 2007

Fiscal Year

Annual Percent Change

Average Growth = 1.4%

Source: PRC developed from USPS 

Revenue Pieces and Weight Reports
Chapter IV—Postal Service Financial Condition

34

Appendix B of this report discusses cost attribution and distribution 

issues faced by the Commission in developing FY 2007 cost 

results.

Compensation and Benefits. Personnel compensation 

and benefits are the largest expense component of the Postal 

Service comprising about 70 percent of total expenses. During FY 

2007, compensation and benefits expenses decreased $479 

million primarily due to the effect of the PAEA and a reduction of 

workers compensation expenses. As noted earlier, the CSRS 

obligations of the USPS are now fully funded. This eliminates the 

need for the matching CSRS contribution, which was 17.4 percent 

of basic compensation, and the principal and interest payments on 

the now non-existent unfunded retirement obligations. The 

savings associated with these CSRS payments are $1.582 billion.

Workers Compensation expenses declined $399 million from 

2006, a result of a decrease in claims and the adoption of new 

actuarial valuations and changes to inflation and discount rates 

used to estimate the total liability.

While total compensation and benefits costs decreased compared 

to 2006, there were some significant increases in components of 

the expenses. Total wages increased $1.118 billion, primarily 

driven by increases of $871 million in cost-of-living adjustment 

(COLA) costs. Additionally, the new labor contracts included 

general pay increases which contributed to the increased labor 

costs. These increases were mitigated by a reduction of 36 million 

workhours.

Retiree Health Benefits. Prior to the passage of PAEA the 

Postal Service recognized as an expense only the cost of its share 

of the premium payments paid annually for Postal Service 

annuitants health benefits. These costs amounted to $1.726 

billion in FY 2007, a 5.4 percent increase over 2006.

With the passage of the PAEA, however, the method of funding 

and recognizing retirement health benefits changed significantly. 

As noted earlier, the Postal Service must now fund the future 

obligations for retiree health benefits through the OPM managed 

PSRHBF. The total obligation for retiree health benefits, as 

estimated by OPM, amounted to almost $81 billion as of the end of 

FY 2007. Under the PAEA these obligations are to be funded by 
Chapter IV—Postal Service Financial Condition

35

the surplus funding of the CSRS obligations, transfer of the FY 

2006 escrow obligation, and a specified schedule of payments 

over 10 years ranging from $5.4 to $5.8 billion. The Postal Service 

must continue paying separately its annual share of retiree health 

benefits premiums over the next ten years, after which the annual 

amount of the premiums will be paid out of the PSRHBF.

The Postal Service FY 2007income statement expansed FY 2006 

escrow of $2.958 billion and the scheduled payment of $5.4 billion 

to the PSRHBF, adding $8.4 billion to the retiree health benefits 

expense.

Transportation. Total transportation expenses increased 

$457 million, or 7.6 percent, over 2006. This increase was driven 

largely by increases in air transportation of $219 million, highway 

transportation of $173 million, international air transportation and 

international terminal dues.

Most of the increase in air transportation was due to the increasing 

amount of mail transported by air during the peak mailing season 

and the increase in the Christmas network costs to improve 

service during the peak mailing season. During the non-peak 

season, the Postal Service transports more mail by highway, 

leading to an increase in costs for highway transportation. Fuel 

cost increases also drove expenses for transportation higher in 

FY 2007.

Total other expenses in FY 2007 remained almost equal to other 

expenses for 2006. Increases in vehicle maintenance and utilities 

due to higher fuel costs were mitigated by decreases in supplies 

and services, rents, IT and communications. Depreciation costs 

increased slightly over 2006 as more postal operating equipment 

and equipment enhancements came on line.
37

Chapter V—Postal Service Strategic Goals

The Commission is required to include in this report a review of the 

Performance Plan and the Program Performance Report prepared 

by the Postal Service pursuant to 39 U.S.C. §§ 2803 and 2804; 

and to evaluate whether the Postal Service has met its goals. The 

Postal Service provided this documentation in the 2007 

Comprehensive Statement at 51-53. The Commission also 

reviewed the Postal Service’s Strategic Transformation Plan 2006-

2010 and the 2007 Update to gain a better understanding of the 

Postal Service’s goals.

The Postal Service faces many challenges in the years to come. 

First-Class single piece volume, long the mainstay of the Postal 

Service’s business model, continues to decline. Chart V-1 shows 

the trend in total mail volume and accrued expenses since 

FY 2000. It can be seen that volume in FY 2007 was slightly 

higher than in FY 2000 while expenses have grown substantially. 

Under the PAEA, the Postal Service must now limit its rate 

increases on a class level to CPI. To remain viable, the Postal 

Service must reduce its operating expenses and generate revenue 

from additional sources. 

Chart V-1 

Trends in Total Volume and Accrued Costs

FY 2000 to FY 2007

95

100

105

110

115

120

125

2000 2001 2002 2003 2004 2005 2006 2007

Fiscal Year

Index 

(FY 2000=100)

Total Accrued Costs

Volume
Chapter V—Postal Service Strategic Goals

38

In its Performance Plan, the Postal Service identifies four primary 

strategic goals, each supported by several measures of 

advancement toward those goals. Comprehensive Statement at 

53. The four goals are:

• Generate Revenue;

• Increase Efficiency;

• Customer-Focused Culture; and

• Improve Service.

Table V-1 provides a summary of the Postal Service’s progress 

toward those goals.

GENERATE REVENUE In the Strategic Transformation Plan 2007 Update, the Postal 

Service outlines seven approaches it will take to grow revenue: 

(1) improve the value of mailing service; (2) tailor shipping 

services to market requirements; (3) create recipient-based 

products and services; (4) build on domestic strengths to grow 

international business; (5) streamline acceptance for commercial 

mailers; (6) make online services a key competency; and 

(7) strengthen customer outreach.

Improve the Value of Mailing Service. Currently, First-Class and 

Standard Mail represents 94 percent of all mail volume and 83 

percent of postal revenues. Id. at 2. Even though there are 

alternatives to First-Class Mail such as online bill payments and 

direct debits, the Postal Service will continue building customer 

relationships while conveying the benefits of hard copy mail in 

regards to its security and reliability.

When expounding on the benefits of mail reliability, the 

Commission recommends that the Postal Service consider 

mailers’ expectations on the number of days-to-delivery and the 

reliability of those standards as it formulates the performance 

goals which are due to be published in June 2008.

Table V-1

Postal Service Goal Met Goal?

Generate Revenue Marginally

Increase Efficiency Yes

Customer-Focused Culture Unknown

Improve Service Yes
Chapter V—Postal Service Strategic Goals

39

The Postal Service plans to promote Standard Mail as a method 

for mailers to promote their products. “Market research has shown 

that those receiving mailpieces typically buy more items and 

consequently, spend more money. In fact, a revenue lift of 

163 percent was reported for Web sites supported by catalogs as 

opposed to those that were not.” Id. at 3. To ensure mailpieces 

reach their intended audience, the Postal Service plans on 

working with the direct mail industry to improve the quality of mail 

and their mailing lists.

At present, the complexity of Standard Mail preparation deters 

many potential mailers from using Standard Mail. “With a 

simplified Standard Mail option, more mailers could benefit from 

the targeted value that direct mail offers for acquiring and retaining 

customers.” Id. Therefore, in FY 2008, the Postal Service plans to 

conduct market research to determine which Standard Mail 

features and prices attract the most advertising dollars, in order to 

better target mailers needs.

The Postal Service plans on developing new mailing opportunities 

that integrate mail and marketing opportunities. For example, 

recently mail has been used to vote by mail and to rent games and 

movies. The Postal Service will investigate more means of 

capitalizing on the complementary nature of ordering merchandise 

online and having the Postal Service deliver it.

The Postal Service believes that under the PAEA it has more 

opportunities to add new and experimental services to allow for 

more rapid product testing and introduction. The Postal Service 

plans to explore “strategic alliances to encourage innovation and 

identify new applications.” Id. While the PAEA may facilitate rapid 

product testing and the addition of new experimental services, the 

Commission recommends that the Postal Service continue to 

exercise caution when contemplating the rapid introduction of 

experimental services to minimize product failures and 

subsequent financial losses. Setting new product hurdle rates with 

regard to return on investments may facilitate the implementation 

of realistic opportunities, diminish losses, and result in financial 

gains.

Currently, approximately 200 postal customers are using the 

Intelligent Mail Barcode (IMB), and by May 2009, all mailers must 

use the IMB to receive automation discounts. The benefit of the 
Chapter V—Postal Service Strategic Goals

40

IMB is the ability to track mail as it moves through the postal 

mailstream. The Postal Service indicates that it is developing new 

products based upon the Intelligent Mail infrastructure. Id. at 4.

The Postal Service may offer a First-Class Mail service for 

businesses that omits the automatic forwarding and return service. 

The advantage for businesses is “a lower priced First-Class Mail 

offering ... [that] may offer advertisers a better value for specific 

campaigns or targeted customers.” Id. at 5.

Tailor Shipping Services to Market Requirements. To better 

serve customer needs, the Postal Service expects that it must 

enhance shipping operations and pricing to meet customer needs. 

The Postal Service plans to design new shipping services that 

take advantage of its first and last mile competency. Id. at 5. The 

Postal Service plans to introduce more shape-based pricing to 

reflect shape-based costing. Consequently, the Postal Service 

anticipates revising its product structure to align costs, pricing, and 

customer incentives in an effort to increase revenue and expand 

market share. The Postal Service realizes customers expect 

payment options and terms. Therefore, the Postal Service will 

explore invoicing and credit alternatives when revenue growth 

outweighs the cost of providing and managing credit payment 

options. Id. at 6.

While ensuring that pricing proposals cover costs and make a 

contribution to institutional costs, new sales skills and marketing 

tools will be developed to enable the sales force to respond quickly 

to customer requests for pricing proposals.

The Commission is encouraged by the Postal Service’s views 

regarding meeting more of its clients’ needs, while maintaining a 

pricing structure that ensures cost coverage, in addition to making 

a contribution to institutional costs. Chart V-A-1 shows the growth 

in revenue and the contribution to institutional costs postal 

products made from FY 2000 to FY 2007. While there has been a 

slow but steady increase in revenue ($64.6 billion in FY 2000 to 

$75.0 billion in FY 2007), the contribution to institutional costs has 

been declining since FY 2003 ($32 billion in FY 2003 to 

$29.5 billion in FY 2007).
Chapter V—Postal Service Strategic Goals

41

Create Recipient-Based Products and Services. Approximately 

73 percent of all mail destinates in households. Consequently, the 

Postal Service anticipates developing new household shipping 

services to accommodate customer needs. For example, the 

Postal Service is considering the expansion of Premium 

Forwarding Service (PFS) to allow for more than one mail 

forwarding shipment each week and/or the possibility of upgrading 

the weekly shipment to Express Mail. Id. at 6. Also, a temporary 

PFS international option could provide customer convenience for 

those individuals traveling overseas. Another opportunity to 

increase revenues is the development of more relationships with 

retailers so that they offer the Postal Service as an option for 

delivering purchases to individual homes.

Package Return Services are expected to grow as the Postal 

Service plans on taking advantage of the 20 percent return rate for 

merchandise ordered online. Allowing customers to return 

packages through the Postal Service offers household mailers the 

convenience of giving the package to the local carrier or taking it to 

the nearest post office. Id. at 7.

Product malfunctions, recalls, and the shipment of items for repair 

offers further opportunities for the Postal Service to expand its 

Chart V-A-1 

Revenue and Contribution 

FY 2000 to FY 2007

$64.6 $65.8 $66.7 $68.8 $69.0 $70.0

$72.8 $75.0

$27.0 $27.4 $28.3

$32.0 $31.8 $30.4 $30.7 $29.5

2000 2001 2002 2003 2004 2005 2006 2007

Fiscal Year

Source: USPS Cost and Revenue Analysis Reports Revenue Contribution (revenue - volume variable costs)
Chapter V—Postal Service Strategic Goals

42

service options. Given current environmental concerns, the Postal 

Service is investigating the possibility of expanding its package 

services to handle recycling and disposal of used products such 

as ink and toner cartridges, cell phones, compact fluorescent light 

bulbs, consumer electronics, and pharmaceuticals. Id.

Build on Domestic Strengths to Grow International 

Business. In FY 2007, the Postal Service redesigned its 

international product line. Eight products were reduced to four 

thereby eliminating product redundancy and reducing customer 

confusion. Now, international products are linked to their domestic 

counterparts, and the Postal Service intends to use its domestic 

strengths to grow international revenues.

Streamline Acceptance for Commercial Mailers. The Postal 

Service will continue its efforts to streamline postage payments, 

documentation, and verification of commercial mail entered 

through the business mail entry system. Service performance will 

be enhanced by creating an infrastructure that allows mailers to 

send their manifests electronically. The Postal Service can 

capture scans of containers, trays, and mailpieces with Intelligent 

Mail Barcodes throughout the mailstream and determine service 

performance by mailer and by mailing.

Make Online Service a Key Competency. The Postal Service 

will update www.usps.com with more convenient features and 

services in an effort to remain competitive in the growing electronic 

environment. The Postal Service partnered with eBay for postal 

shipping services and due to that partnership success, the Postal 

Service will seek additional partnerships to ensure that 

e-commerce sites offer the Postal Service as a method of 

shipment.

Given the growth and dependence of the public on online services, 

the Commission believes that the Postal Service is correct in 

seeking additional e-commerce partnerships and updating its 

online services to be more user friendly.

Strengthen Customer Outreach. The entire postal workforce will 

be tasked with growing business through the use of new tools, 

training, and teamwork. Small business markets will be handled 

by the Customer Connect and Business Connect programs, which 

encourage carriers, postmasters, and station and branch 
Chapter V—Postal Service Strategic Goals

43

managers to promote the convenience and value of postal 

services. The cooperative efforts of employees and employee 

organizations are expected to boost revenue generation 

particularly from small business mailers.

Additional Business Development teams will be formed for local 

sales initiatives and to conduct face-to-face meetings and 

seminars with businesses to help them understand the value and 

convenience of U.S. mail.

Approximately three-quarters of total postal revenues are 

generated by high-volume commercial customers. Id. at 11. 

Consequently, the Postal Service sales force will continue to work 

closely with both the mailer and the service providers to match 

postal solutions with corporate business objectives.

With the advent of the Intelligent Mail Barcode, the Postal Service 

sales force will work with mail owners and service providers to 

improve mail identification and tracking and to foster the flow of 

information between the Postal Service and its clients.

Finally, the Postal Service and its customers benefit from 

collaborations through local organizations such as the Postal 

Customer Councils, and national groups like the Mailers’ 

Technical Advisory Committee. The Postal Service plans to 

promote greater participation, new structures and programs to 

ensure that participants get the most value for their investment in 

mail. Id. at 12.

INCREASE EFFICIENCY The Postal Service uses a multifactor productivity measurement 

known as Total Factor Productivity (TFP) to measure postal 

efficiency. TFP measures the changes in selected outputs per unit 

of inputs and is expressed as an annual percentage. The Postal 

Service stresses that due to lag factors such as efficiencies gained 

through capital investments, TFP is best judged over a longer 

period of time. As such, the Postal Service frequently references 

cumulative TFP gains.

In chapter 5 of the Postal Service’s Comprehensive Statement of 

Postal Operations, the Postal Service notes that TFP measures 

productivity while distinguishing controllable factors from those, 
Chapter V—Postal Service Strategic Goals

44

such as the price of fuel or the volume of mail, that are largely 

externally driven. Id. at 53.

In the 2007 Comprehensive Statement on Postal Operations, the 

Postal Service states it planned to increase TFP by 1 percent for 

FY 2007; however, it actually achieved 1.7 percent. This is 

credited largely to a reduction of 36 million workhours – a $1.2 

billion cost savings. Id. at 28. For FY 2008, the TFP goal again is 

1 percent. Id. at 53. The Strategic Transformation Plan sets a 

goal of saving $1 billion each year. Id.

As illustrated in Chart V-B-1, the increase in TFP continues an 

impressive trend that began in FY 2000.

The Postal Service has been successful in lowering total 

workhours as shown in Chart V-B-2. However, overtime hours 

have increased slightly during the same period. Overtime hours in 

FY 2000 were 145 million, peaking in FY 2006 to 161 million and 

then declining to 146 million in FY 2007.

Chart V-B-1

U.S. Postal Service

 Total Factor Productivity (TFP) 1970-2007

100

105

110

115

120

125

1970197219741976197819801982198419861988199019921994199619982000200220042006

Fiscal Year

Index (1970=100)

TFP

Average Annual Growth

1970 - 99 = 0.3%

2000 - 07 = 1.5%

Source PRC developed
Chapter V—Postal Service Strategic Goals

45

As shown in Chart V-B-3, the Postal Service has managed to keep 

increases in total operating expenses below the rate of inflation 

since FY 2002. The task will become more difficult over the next 

few years due to the funding requirements for the retiree health 

benefit costs.

Chart V-B-2

Total Workhours

FY 2000 to FY 2007

1,300

1,350

1,400

1,450

1,500

1,550

1,600

1,650

2000 2001 2002 2003 2004 2005 2006 2007

Fiscal Year

Workhours

 (in millions)

0

20

40

60

80

100

120

140

160

180

Overtime 

(in millions)

Workhours

Overtime

Source: USPS National Payroll Hour Summary Reports.
Chapter V—Postal Service Strategic Goals

46

CUSTOMER-FOCUSED 

CULTURE

The Postal Service will continue to create a more “customerfocused culture—employees with the right skills and behaviors for 

today’s customer-centric environment.” Strategic Transformation 

Plan 2007 Update at 43. The Postal Service recognizes that in 

order to meet customer needs, the Postal Service must continue 

to train, offer leadership opportunities, and reward the valued 

performance of its employees. Id. The future of the Postal 

Service is dependent on its employees being “committed 

stakeholders with a mutual and vested interest in fulfilling the 

Postal mission and vision.” Id. at 45. Currently, postal employees 

are “engaged with postal customers through Customer Connect 

and Business Connect.” Id. The programs allow employees to 

become involved in the growth of the business, workplace safety, 

and security.

Under the customer-focused culture, the Postal Service reports 

three forms of evaluation: (1) Voice of the Employee (VOE); 

(2) Safety Performance; and (3) Equal Employment Opportunity 

(EEO). These reports provide important information on employee 

satisfaction. However, as can be seen from the descriptions of 

these reports, they provide little information on whether employee 

behavior reflects a customer focus, or on what steps the Postal 

Service may be taking to identify and incent such behavior.

Chart V-B-3 

Operating Expense and Consumer Price Index

 FY 2000 to FY 2007

80

85

90

95

100

105

110

115

120

125

2000 2001 2002 2003 2004 2005 2006 2007

Fiscal Year

Index: FY 2000=100

CPI

Operating Expense

Source: USPS Cost and Revenue Analysis Reports and Bureau of Labor Statistics.
Chapter V—Postal Service Strategic Goals

47

Voice of the Employee. On a quarterly basis, the Postal Service 

surveys approximately one-fourth of its career employees. The 

survey, known as the VOE survey, consists of six questions that 

measure the employee’s perception of recognition, accountability, 

harassment, discrimination, supervisory communications, and 

treatment (referring to dignity and respect). The Postal Service 

plans to update the survey in FY 2008 to include measurements 

on entrepreneurship, innovation, customer focus, and employee 

engagement. Comprehensive Statement at 53. The survey 

methodology and a description of how the VOE Index is used by 

postal management is not described. Therefore, it is difficult to 

draw conclusions regarding the efficacy and utility of the VOE 

Index.

Safety Performance. The FY 2007 planned safety performance 

goal for Occupational safety and Health Administration’s (OSHA) 

illness and injury rate was 5.5 per 100 full-time employees. Id. 

The Postal Service met its plan. 

Equal Employment Opportunity. The PAEA requires the Postal 

Service to begin tracking the number of EEO complaints it 

receives. Prior to the PAEA, the Postal Service did not specify a 

target for formal EEO investigations per 100 full-time employees. 

Instead, the goal was expressed as one of “continuous 

improvement.” The per capita rate of EEO investigations has 

slowly declined. Throughout FY 2007, the Postal Service provided 

EEO training to its supervisors stressing the importance of open 

communications and resolving complaints at the lowest level of 

management possible.

SERVICE IMPROVEMENT The Postal Service has identified Service Improvement as an 

important goal for FY 2007. Toward that end, the Service 

measures the percentage of domestic First-Class single-piece 

letters delivered on-time. Separate scores are presented for mail 

designated with an overnight, 2-day, or 3-day delivery standard. 

The 2007 Comprehensive Statement on Postal Operations, at 

page 51, reports the following:
Chapter V—Postal Service Strategic Goals

48

For FY 2007, the First-Class on-time performance exceeded the 

plan. The plan for FY 2008 is to build on this achievement and 

provide still better performance. The practice of gradually raising 

and then meeting goals is an appropriate way to improve service 

and increase customer satisfaction.

In a separate section of this report, chapter VI, the Commission 

reviews progress toward extending service goals and performance 

measurement to all classes and services. This important step 

should become a performance goal in future years.

ADDITIONAL GOALS The Strategic Transformation Plan 2007 Update included two 

additional strategic goals the Postal Service will address: 

enhanced sustainability, and regulatory studies and reporting 

obligations.

Enhance Sustainability. The Postal Service defines sustainability 

as the ability to meet present needs without compromising the 

future. To date, the Postal Service has measured its success via 

the awards it has received. For example, for the eighth year, the 

Postal Service won the Environmental Protection Agency’s highest 

award – “WasteWise Partner of the Year.” The Postal Service 

plans on focusing future efforts in two areas: (1) expanding 

environmentally-friendly business practices, and (2) accelerating 

energy conservation. Strategic Transformation Plan 2007 Update, 

at 49.

Expanding Environmentally-Friendly Business Practices. In 

its 2007 Environmental Impact of Mail study, the Postal Service 

found that advertising mail has a net benefit to the environment by 

encouraging people to shop from home which reduces travel time, 

fuel usage, and the resulting automobile pollutants. In 2007, the 

Postal Service reinstated a former “Greening of the Mail Task 

Table V-D-1

Percentage of First-Class Mail On-Time

FY 2007 Plan FY 2007 Actual FY 2008 Plan

Overnight 95 95.6 96

2-Day 91 92.6 92.75

3-Day 90 90.4 90.5
Chapter V—Postal Service Strategic Goals

49

Force” which consists of industry groups, suppliers, and 

regulators. The goal is to improve mailpiece design and 

addressing. An additional goal is to improve the quality of mailing 

lists and expand recycling and waste disposal of mail-related 

products and report the impact on the economy and society. Id.

Accelerating Energy Conservation. The Postal Service delivers 

to 148 million addresses and approximately 2 million more delivery 

points are added annually. Id. at 52. The Postal Service is 

committed to reducing the miles driven while maintaining service 

to each address. Computer modeling is being used to create more 

efficient routes and thus use less fuel, and mail processing 

improvements are expected to facilitate the reduction of the 

number of vehicles on the road.

Currently, the Postal Service has a fleet of 36,000 E85 flux-fuel 

vehicles and is working with the Department of Energy’s National 

Renewable Energy Laboratory and Clean Cities Programs to 

determine where the best places are for using the E85 vehicles. 

Id. at 52-53.

The Postal Service has partnered with General Motors to 

determine the applicability of using fuel cell vehicles for mail 

delivery. The partnership is generating information on several 

issues, one of which is the infrastructure needed to support 

hydrogen-fueled vehicles. Information gleaned from the 

partnership may provide multiple benefits for the nation regarding 

fuel efficiency, energy dependence, and emissions reduction. Id. 

at 53.

Comprehensive energy audits are being conducted in postal 

plants and facilities and the Postal Service is developing an 

energy management system to quickly identify areas needing 

repairs and modifications. In facility design and alterations, the 

Postal Service is using concepts that are intended to be more 

energy efficient and have less of an impact on the environment. 

Id. at 54.

The Commission commends the Postal Service’s attention to 

energy conservation and the environment.
Chapter V—Postal Service Strategic Goals

50

Regulatory Studies and Reporting Obligations. Over the next 

10 years, the Postal Service will be required to adjust financial 

practices and prepare several studies as part of PAEA. 

Compliance With the Sarbanes-Oxley Act of 2002. Compliance 

involves “identify[ing], assess[ing] and report[ing] on internal 

controls affecting financial reporting.” Id. at 57. The Postal 

Service will follow best practices and guidance as published by the 

Public Company Accounting Oversight Board (PCAOB) and the 

Securities and Exchange Commission. PAEA requires the Postal 

Service to achieve compliance by 2010. 

Annual Reporting. PAEA requires the Postal Service to prepare 

and file several new reports regarding postal operations, including: 

(1) the Annual Compliance Report; (2) SEC-Formatted Financial 

Reports; (3) Competitive Products Fund; and (4) Financial Firewall 

and Competitive Products Fund. Table V-E-1 identifies each 

required annual report and its purpose.

Additional Reports and Studies. PAEA requires the Postal 

Service and various agencies to prepare additional reports with 

designated timelines. While most of the reports have a December 

Table V-E-1

Annual Reports Purpose

Annual Compliance Report Provided to the Postal Regulatory Commission 

(PRC) to present analysis of costs, revenue, 

pricing, and quality of service for all products. For 

market dominant products, the report presents 

measures of customer satisfaction, and information 

about discounts and market tests.

SEC-Formatted Financial Reports Provided to the PRC to present detailed financial 

information: quarterly (10-Q format), yearly (10-K 

format), and significant financial events (8-K 

format).

Competitive Products Fund Provided to both the U.S. Treasury and the PRC to 

account for withdrawals from revolving Competitive 

Products Fund to pay costs attributable to 

competitive products and all other costs incurred by 

Postal Service.

Financial Firewall and Competitive 

Products Fund

Provided to the U.S. Treasury, the PRC, and the 

Office of Inspector General (OIG) to show 

separation of financial accounting between 

competitive and market dominant products.

Source: Strategic Transformation Plan 2007 Update at 58.
Chapter V—Postal Service Strategic Goals

51

2007 timeframe, the entire list of reports, their purpose and the 

due dates are shown in Table V-F-2.

Additionally, the PAEA requires the Postal Service to prepare and/

or consult on several additional studies. Work on several of these 

topics was ongoing in 2007.
53

Chapter VI—Service Standard Performance

SPEED OF DELIVERY 39 U.S.C. § 3652(a)(2)(B) requires the Postal Service to provide 

information on the quality of service provided each market 

dominant product, including the speed and reliability of delivery, 

and the degree of customer satisfaction provided.

The Postal Service’s ACR2007 filing provides limited information 

from its existing service performance measurement systems. The 

Postal Service is currently developing, in consultation with the 

Commission, systems for measuring the performance of all market 

dominant products. The existing measurement systems are: (1) 

the External First-Class Measurement System (EXFC) for SinglePiece First-Class Mail; (2) the International Mail Measurement 

System (IMMS) for Single-Piece First-Class International Mail; and 

(3) the Delivery Confirmation service for retail Package Services.

EXFC measures delivery performance from the collection box to 

mailbox. The system is managed by an independent contractor, 

and uses test mailpieces sent to a nationwide panel of receivers19. 

In FY 2007, the Postal Service’s on-time performance for SinglePiece First-Class overnight delivery areas was 95.6 percent. Twoday and three-day on-time delivery performances were 92.6 and 

90.4 percent, respectively. Id. at 14-15.

Results in 2007 exclude ZIP Code areas 700 and 701 due to the 

suspension of testing there following Hurricane Katrina. Id. at 17, 

n.1. The results in 2007 also exclude the period December 2–29, 

2006, because those dates involve heavy holiday mail volumes. 

The 2007 First-Class performance results without the exclusionary 

periods are: 95.6 percent (overnight), 92.4 percent (2-day), and 

89.6 percent (3-day). Response to CIR No. 3, question 1. The 

19 The ZIP Code areas are selected on the basis of geographic and volume 

density. By 2009, the Postal Service plans to expand the sampled ZIP Code areas to 

virtually all 3-digit areas. ACR at 15.
Chapter VI—Service Standard Performance

54

Commission finds that future annual compliance reports should 

provide annual performance results without exclusionary periods.

The IMMS measures performance based on domestic transit 

times. Outbound International Mail is measured from the 

collection box to the designated U.S. International Mail processing 

center. Areas measured conform to the areas tested in EXFC. 

The transit time measured for Inbound International Mail begins 

when the mailpiece arrives at the international processing center 

and ends when the mailpiece is delivered. For FY 2007, the IMMS 

Single-Piece First-Class international on-time service performance 

for letters, cards, and flats was 91.4 percent.

Delivery Confirmation is used to measure on-time delivery 

performance for retail package services. When retail clerks 

receive parcels with the Ancillary Delivery Confirmation Service, 

they scan the Delivery Confirmation barcode at a point-of-service 

terminal or with an intelligent mail handheld scanning device to 

“start-the-clock.” At the delivery point, the barcode is scanned 

again to “stop-the-clock.” For FY 2007, the actual on-time retail 

Package Service performance was 57.7 percent. ACR at 17.

In its initial comments, Valpak indicates its belief that the Postal 

Service is making a good faith effort to comply with 39 U.S.C. § 

3653(b)(2). However, Valpak states that a 57.7 percent on-time 

performance level is unacceptable. Further, Valpak notes that no 

mention has been made regarding the service provided to the 

remaining 42.3 percent (also known as the “tail of the mail”). Id. at 

12. Valpak opines that more in-depth information regarding the 

disposition of the tail of the mail is important and should be 

reported. Id. at 13. Valpak recommends that performance 

measurements should provide year-to-year comparisons, thereby 

allowing evaluation of the improvement or degradation in service 

performance.

NPPC states that mailers are concerned about the impact of the 

price cap on the quality of postal services and whether the Postal 

Service will require additional uncompensated mail preparation 

and worksharing activities from mailers to help it achieve its goals. 

NPPC posits that “cost-of-service regulation” for a price cap 

regulated firm provides the firm with an incentive to reduce its 

quality of service in an effort to reduce costs and increase profits. 

NPPC Reply Comments at 2-3. NPPC recognizes that the 
Chapter 6—Servoce Standard Performance

55

Commission has stated it will defer consideration of any 

adjustment to the price cap to reflect service performance until 

after the promulgation of rules for the collection of service 

performance data. Id. at 3. See Order No. 26, ¶ 2068.

Although the Postal Service is working to develop more complete 

service performance measurement systems, the implementation 

date for these new systems is somewhat uncertain. In the interim, 

the Commission is concerned about the level of service 

performance detail provided for each of the market dominant 

products. 

The Postal Service should provide days-to-delivery data on tail of 

the mail in its filings. Data reflecting days-to-delivery until 99 

percent delivery is achieved would be extremely useful. Tail of the 

mail is a substantial concern of the Commission due to its 

disproportionate effect on perceived service quality. It is also an 

important measure of service consistency. In future annual 

compliance reports, the Postal Service also should provide yearto-year performance comparisons, and include narrative 

information regarding any new initiatives to improve service 

performance.

CUSTOMER SATISFACTION The Postal Service is required to measure the level of customer 

satisfaction with the service provided by each market dominant 

product. However, the FY 2007 year-to-date data collected 

through the Postal Service’s Customer Satisfaction Measurement 

System were not designed to meet the requirements of 39 U.S.C. 

§ 3652(a)(2)(B)(ii). Consequently, the Postal Service plans on 

redesigning its surveys so that the data better reflect the needs of 

the PAEA. ACR at 19.

Currently, the Postal Service relies on two surveys when 

evaluating customer satisfaction. One survey evaluates small 

business satisfaction on a quarterly basis. Small businesses with 

1 to 19 employees are surveyed about Parcel Post and Media Mail 

services. Businesses base their responses on actual experience. 

For 2007, the rating, which is the sum of the excellent, very good, 

and good responses, was 91 percent.

The second survey measures the satisfaction of large business 

accounts—those with 500 or more employees. The independent 
Chapter VI—Service Standard Performance

56

external measurement survey consists of questions addressing 

client satisfaction with both retail and delivery services. In 

addition, the survey provides the Postal Service with information 

regarding how it measures up to its competitors’ performance. Id. 

at 18.

The combined excellent, very good, and good responses reflecting 

FY 2007 year-to-date large business ratings, are: (1) First-Class 

Mail – 96 percent; (2) Standard Mail – 91 percent; and (3) 

Periodical mail – 85 percent.

The Commission is aware of the limited scope of the Customer 

Satisfaction Measurement System and withholds conclusions until 

the Postal Service redesign is complete. The Postal Service is 

advised to include a copy of each questionnaire or measurement 

instrument as a library reference in the next and subsequent 

annual compliance report filings. This will facilitate evaluation of 

whether the Postal Service is meeting the needs of its customers. 

Additionally, the Commission anticipates that the Postal Service 

will survey households, in addition to small and large businesses, 

so that all mailers are given the opportunity to evaluate Postal 

Service performance.
57

Chapter VII—Market Dominant Classes

INTRODUCTION For each class of mail, the Commission presents its analysis of the 

financial results and rate design. The financial analysis focuses 

on cost coverage and pricing issues, including whether the class 

and its products or subclasses generate adequate revenue to 

cover attributable costs.20 The analysis of each class also 

contains a discussion of rate design issues. Methodological 

issues affecting the development of estimates of worksharing 

related cost avoidances are addressed, the resulting cost 

avoidances are compared with the corresponding discounts, and 

the discounts and other rate relationships are analyzed. Rate 

design and worksharing issues relevant to several classes are 

discussed below, followed by the analysis of each class.

Several commenters address issues related to evaluating the 

consistency of rates with the worksharing limitations of the PAEA 

that are not specific to any class. The comments address three 

main topics: (1) updating inputs to the cost avoidance models; 

(2) the temporal mismatch between the discounts at the end of the 

fiscal year and the cost avoidances based on the full fiscal year; 

and (3) a suggestion that estimated cost avoidances from an 

annual compliance report should be adjusted for inflation when 

used in a notice of rate adjustment.

The Postal Service updated several inputs in the worksharing cost 

avoidance models, including mail characteristics and volumes, 

MODS productivities, and some (but not all) read/accept rates. 

Other inputs, including downflow densities, are not updated from 

those used in Docket No. R2006-1. Pitney Bowes, NAPM and 

MMA are critical of the approach, which Pitney Bowes contends 

“has denigrated the accuracy of the models [.]” Pitney Bowes 

Comments at 7; see also NAPM Comments at 3-4 and MMA 

Comments at 6.

20 The Postal Service’s data systems have not yet been reconfigured to report 

financial data by product. In many cases, it is not possible to perform the analysis of 

products.
Chapter VII—Market Dominant Classes

58

In response to these criticisms, the Postal Service points out that 

practical considerations make it unrealistic to expect that all of the 

inputs can be simultaneously updated, and that preventing the use 

of updated data because updates for all other relevant data are 

not available “would make the perfect the enemy of the good.” 

Postal Service Reply Comments at 10-11. The Public 

Representative agrees with the Postal Service, concluding that the 

argument against partial updating “is really a demand for no 

upgrading, ever.” Public Representative Reply Comments at 4.

The Commission uses the updated inputs in its analysis of 

worksharing cost avoidances. As a general matter, the estimates 

of costs for a given year will be more accurate if all inputs reflect, 

as nearly as practicable, the year in question. The Commission 

intends to propose rules that will require inputs to be updated with 

some minimum level of frequency.21 However, preventing the 

update of any input because it is not possible to update every input 

simultaneously would be more likely to reduce the accuracy of the 

cost estimates than to improve the accuracy.

In response to Commission Information Request No. 1, question 

14, the Postal Service provided one additional updated accept rate 

(for the MLOCR-ISS operation) which is incorporated into the 

models.22 See response to CIR No. 1, question 14. The Postal 

Service also stated that it considers the actual FY 2007 MODS 

productivities for ATHS operations to be reliable. Response to 

CIR No. 1, February 1, 2008, question 17. Therefore, the 

Commission uses the actual productivities for these operations in 

place of the proxies used in the Postal Service’s filing.23

Pitney Bowes and Direct Marketing Association, Inc. (DMA)/Parcel 

Shippers Association (PSA) point out the Postal Service’s filing 

compares discounts that were in effect for only part of the year 

21 A further discussion of the Commission’s plans for developing rules governing 

the Postal Service’s ACR filing appears in the section on Background.

22 Response of the United States Postal Service to Questions 8, 9, 11, 14, 15, 22, 

and 24 of Commission Information Request No. 1, February 11, 2008.

23 The Postal Service developed proxies based on non-ATHS AFSM 100 

productivities. This was the approach used by the Commission in Docket No. R2006-1 

because the ATHS equipment had not been fully deployed in the base year, and 

therefore reliable actual productivities were not available.
Chapter VII—Market Dominant Classes

59

(post-Docket No. R2006-1 implementation) with cost avoidances 

that reflect the full fiscal year. They argue in favor of comparing 

the weighted average discounts over the full fiscal year to the 

avoided cost estimates. Pitney Bowes Comments at 3-4 and 

DMA-PSA Comments at 2-3. The Postal Service responds that an 

exact temporal alignment of discounts and costs are not required, 

and that the comparison with the discounts at the end of the year 

serves the intent of highlighting discounts that are, or may be 

getting, out of line with costs. Postal Service Reply Comments at 

21.

The Commission agrees that the year-end discounts are the more 

relevant discounts to be evaluated in the ACR. If a discount is 

found to be inconsistent with the requirements of the PAEA and 

corrective action were to be ordered, the year-end discounts would 

have to be modified. In addition to providing a backward-looking 

review of the results of the past year, the ACR is intended to 

provide some degree of forward-looking guidance. Focusing on 

the (as nearly as practicable) current state of affairs helps to 

ensure that the report will be useful in this regard. However, in 

some situations, a comparison of avoided costs with weighted 

average discounts might provide relevant information.

Pitney Bowes and DMA-PSA also discuss the use of cost 

avoidance estimates from the ACR to design worksharing 

discounts in the Notice of Rate Adjustment. They urge the Postal 

Service to inflate the cost avoidances by the rate of inflation to 

adjust for cost level changes in the intervening time between the 

basis of the ACR and the period when the new rates will be in 

effect. Pitney Bowes Comments at 5 and DMA and PSA 

Comments at 5. The Public Representative opposes this 

argument. Public Representative Reply Comments at 3.

The Commission does not endorse the suggestion that estimated 

cost avoidances from the ACR be adjusted exclusively for inflation 

in the subsequent Notice of Rate Adjustment. It has not been 

demonstrated that a simple inflating of the cost avoidances would 

accurately approximate the combination of changes that affect 

actual cost avoidances from one year to the next. In Docket No. 

R94-1, the Commission rejected a similar proposal by the Postal 

Service. PRC Op. R94-1, ¶ 5304.
Chapter VII—Market Dominant Classes

60

The rates for market dominant mail are discussed in the following 

sections. Each class includes a discussion of a financial analysis, 

methodological issues raised by commenters, and the findings on 

worksharing discounts and other rate design issues.

FIRST-CLASS MAIL Financial Analysis. The table below presents selected FirstClass Mail financial data. First-Class Mail rates recovered 

196.6 percent of attributable costs in FY 2007. Financial data 

were not yet aligned with the new product designations, so it is not 

possible at this time to perform analysis of the pricing relationships 

within the class by product. The discussion of International FirstClass Mail appears in the section on International Mail.

Several commenters address the relative contributions to 

institutional costs of single-piece and workshared letters. NAPM 

asserts that the higher unit contribution of First-Class presort 

letters, as compared with single-piece letters, “demonstrates that 

First-Class Mail presort letters, as a group are contributing more 

than their fair share of the costs of the Postal Service.” NAPM 

Comments at 4. NPPC makes a similar argument, and further 

asserts that the difference in unit contribution cannot be justified 

based on elasticity differences, because the elasticities are 

“virtually identical [.]” NPPC Comments at 6-7.

GCA responds that there is no basis to assume that ECP pricing 

principles, which lead to a preference for equal unit contributions, 

continue to apply now that the Postal Service has classified singlepiece and presort letters as separate products. It goes on to argue 

that the elasticities provided by the Postal Service reflect an 

analysis of the demand when the two were not separate products, 

Table VII-B-1

First-Class Mail

Fiscal Year 2007 Volume, Revenue, Cost, Contribution, and Cost coverage

Contribution to Contribution to

Attributable Institutional Institutional

Volume Revenue Costs Costs Rev./Pc. Cost/Pc. Costs/Pc. Cost

(000) ($ 000) ($ 000) ($ 000) (Cents) (Cents) (Cents) Coverage

MARKET DOMINANT MAIL

First-Class Mail: 

Single-Piece Letters, Flats & Parcels 40,121,742 19,773,536 12,417,026 7,356,511 49.284 30.948 18.335 159.2%

Workshared Letters, Flats & Parcels 49,978,441 16,505,817 5,907,210 10,598,607 33.026 11.820 21.206 279.4%

Total Letters, Flats & Parcels 90,100,184 36,279,353 18,324,235 17,955,118 40.266 20.338 19.928 198.0%

Single-Piece Cards 2,141,669 556,971 508,093 48,878 26.006 23.724 2.282 109.6%

Workshared Cards 3,656,291 724,933 283,827 441,106 19.827 7.763 12.064 255.4%

Total Cards 5,797,959 1,281,904 791,920 489,984 22.110 13.659 8.451 161.9%

Total First Class 95,898,143 37,561,257 19,116,155 18,445,102 39.168 19.934 19.234 196.5%

Source: PRC-ACR2007-LR1
Chapter VII—Market Dominant Classes

61

and are therefore inappropriate to use for future pricing decisions. 

GCA also asserts that the relative price-elasticities are not as 

important as how the demand for each “is affected by the 

increasing competition from nonpostal alternatives.” GCA Reply 

Comments at 2-6.

At this time it is premature to comment extensively on these 

issues. The unit contributions in question combine data from 

several different products, and the demand differences between 

the recently designated products has yet to be evaluated.

Worksharing and Rate Design. 

Methodology. MMA raises several objections to the cost 

avoidance methodology adopted by the Commission in Docket 

No. R2006-1 and used in this report. Specifically, it objects to the 

use of a single CRA adjustment factor for automation and 

nonautomation presort letters, and to the use of modeled DPS 

percentages to estimate in-office delivery cost differences 

between rate categories. MMA Comments at 10-17.

The Postal Service points out that MMA made very similar 

arguments in Docket No. R2006-1, and that the Commission did 

not accept the alternatives proposed by MMA. It argues that the 

comparisons MMA draws between various types of mail are not 

valid, and that the arguments about DPS seem to be “largely a 

results-driven criticism” that should not be accepted in the 

Compliance Report. Postal Service Reply Comments at 12-13.

While the Commission has taken notice of some apparently 

anomalous aspects of the letter cost avoidance models identified 

by MMA and others,24 it did not accept the solutions proposed by 

MMA in Docket No. R2006-1, which are reprised here. Prior to 

Docket No. R2006-1, the Commission used separate CRA 

adjustment factors for automation and nonautomation presort 

letters because the models used two separate CRA cost inputs for 

automation and nonautomation presort letters. 

Over time, the use of two CRA costs (and adjustment factors) led 

to increasingly counterintuitive results, including estimates of 

24 See, for example, PRC Op. R2005-1, ¶ 6027.
Chapter VII—Market Dominant Classes

62

negative cost avoidance for nonautomation presort letters. In 

Docket No. R2005-1, the Postal Service explained that it attributed 

the problem to difficulty in distinguishing nonautomation and 

automation letters in the IOCS sampling process. See PRC Op. 

R2005-1, ¶¶ 6018-6024. The solution it proposed, which the 

Commission ultimately accepted in Docket No. R2006-1, was to 

develop worksharing cost avoidance estimates from a single 

presort letter CRA cost. This decision led directly to the use of a 

single CRA adjustment factor. 

MMA’s proposed alternative was not accepted by the Commission 

in the last rate case because of flaws enumerated in the Postal 

Service’s Docket No. R2006-1 reply brief, including flawed 

assumptions about the cost similarities of Bulk Metered Mail 

(BMM), metered letters, and non-automation presort letters. The 

Commission also found the Postal Service’s criticism of MMA’s 

proposed delivery cost adjustment convincing, including the 

observation that MMA’s unit delivery cost estimates did not 

reconcile with total delivery costs. This Compliance Report is not 

the appropriate forum to revisit these methodological decisions. 

The section on Background contains a discussion of the 

Commission’s intentions regarding the development of rules to 

address potential methodological changes.

In its presentation of worksharing passthroughs, the Postal 

Service, taking its cue from the language of 39 U.S.C. 3652(b) 

which calls for the provision of worksharing data “with respect to 

each market-dominant product[,]” does not present an analysis of 

passthroughs for inter-product worksharing discounts. For FirstClass Mail, this means that the cost avoidances for automation 

mixed AADC letters and non-automation presort letters, both of 

which were compared to a BMM benchmark in the past, are not 

presented. ACR at 20-22.

In the case of non-automation presort letters, the Postal Service 

submits an analysis of the cost and rate differences between nonautomation letters and an automation mixed AADC letter 

benchmark. The method of estimating the additional cost of nonautomation is different from most of the other worksharing 

analysis, in that the costs are adjusted to reflect differences in the 

mix of presort levels, and delivery cost differences are excluded.
Chapter VII—Market Dominant Classes

63

DMA and PSA support the intra-product approach, as does Pitney 

Bowes, which asserts that products are “analogous to separate 

‘subclasses’ under the prior nomenclature.” Pitney Bowes 

Comments at 8, DMA/PSA Comments at 2. In its response to 

NPPC’s arguments in favor of equal unit contributions, GCA also 

suggests that separate products are equivalent to separate 

subclasses. GCA Reply Comments at 4. NAPM argues that 

incremental passthroughs are not the proper approach, and that 

3-digit presort should be the starting point for the analysis. NAPM 

Comments at 2.

APWU argues in favor of maintaining BMM as the cost benchmark 

for workshared First-Class letters, calling the Postal Service’s 

presentation “inconsistent with the Commission’s Docket No. 

R2006-1 decision[.]” APWU Comments at 2-3. The Postal 

Service points out that it did provide the information necessary to 

perform the “linked” passthrough analysis used by the 

Commission, but reiterates its interpretation of section 3652(b) as 

suggesting that the proper analysis is done on an intra-product 

basis. Postal Service Reply Comments at 19-20.

For this report, the Commission is using the same analytical 

framework for evaluating worksharing discounts as it used to 

design the worksharing discounts in Docket No. R2006-1. 

Therefore the passthroughs for each presort level are based on a 

comparison with the next-least workshared rate category including 

automation mixed AADC and non-automation presort, each of 

which is compared to the BMM benchmark. The Commission also 

presents the comparison of non-automation presort letters to 

automation mixed AADC letters calculated using the methodology 

used by the Postal Service.

A decision to change the framework used for measuring 

worksharing cost avoidance should await a more complete airing 

of the pros and cons of the alternatives. The logic of restricting 

worksharing analysis to intra-subclass rates does not necessarily 

translate directly into restricting analysis to intra-product rates. 

Whereas subclasses under the PRA were defined as having 

distinct cost and demand characteristics, products are defined in 

the PAEA as having distinct cost or demand characteristics. 

Whether or not a rate differential is a worksharing discount may 
Chapter VII—Market Dominant Classes

64

depend, in part, on whether the categories in question have 

substantially similar demand characteristics.25

Findings. The results of the Commission’s analysis of 

First-Class worksharing discounts are presented in Table VII-B-2 

(Letters, Flats, and Parcels) and VII-B-3 (Cards).

25 For example, a Standard ECR Basic letter is more finely sorted than a Standard 

Regular 5-digit automation letter, but the rate distinction between these categories 

reflects more than a worksharing cost avoidance.

Table VII-B-2

First-Class Mail Letters, Flats and Sealed Parcels

W orkshare Discounts and Benchmarks

ACR 2007

Type of W orksharing

Year-End 

Discount

Unit Cost 

Avoidance

Passthrough

(Benchmark) (cents) (cents)

First-Class Mail Automation Letters

Barcoding & Presorting

Autom ation M ixed AADC Letters 5.0 5.0 100.3%

(Bulk Metered Mail (BMM ) Letters)

Autom ation AADC Letters 1.9 1.8 103.1%

(Autom ation M ixed AADC Letters)

Autom ation 3-digit Letters 0.7 0.5 147.4%

(Autom ation AADC Letters)

Autom ation 5-digit Letters 2.2 2.2 101.1%

(Autom ation 3-digit Letters)

First-Class Mail Automation Flats

Barcoding & Presorting

Autom ation ADC Flats 11.9 13.8 86.0%

(Autom ation M ixed ADC Flats)

Autom ation 3-digit Flats 8.3 9.6 86.8%

(Autom ation ADC Flats)

Autom ation 5-digit Flats 10.1 11.9 85.0%

(Autom ation 3-digit Flats)

First-Class Mail Presorted/Business Parcels

Barcoding & Presorting

Presort ADC Parcels 16.4 50.9 32.2%

(Presort Mixed ADC Parcels 

placeholder)

Presort 3-digit Parcels 5.4 19.4 27.9%

(Presort ADC Parcels)

Presort 5-digit Parcels 13.3 47.1 28.2%

(Presort 3-digit Parcels)

First-Class Mail Nonautomation Letters & Flats

Presorting [1]

Nonautomation Presort Letters 3.7 5.5 66.8%

(Bulk Metered Mail (BMM ) Letters)

Nonautomation Presort Letters 1.3 2.2 59.7%

(Autom ation M ixed AADC Letters)

Qualified Business Reply M ail

Barcoding

QBRM [2] 2.5 3.0 122.2%

(Handwritten Reply Mail)

Source: PRC-ACR2007-LR3.

Notes

W here discounts are equal to unit avoided costs, the calculated passthroughs m ay deviate from 100% because 

passthrough percentages are based on unrounded unit avoidable costs.

[1] USPS treats Nonautom ation Presort Letters price and cost differentials as surcharges over Autom ation Mixed 

AADC letters.

[2] The QBRM cost avoidance presented here is estim ated using the USPS m ethodology. The Com m ission found in 

R2006-1 that this underestimated avoided costs, but that the alternative on the record overestim ated avoided costs.
Chapter VII—Market Dominant Classes

65

Table VII-B-3

First-Class Mail Cards

Workshare Discounts and Benchmarks

ACR 2007

Type of Worksharing

Year-End 

Discount

Unit Cost 

Avoidance

Passthrough

 (Benchmark) (cents) (cents)

First-Class Mail Automation Cards

Barcoding & Presorting

Automation Mixed AADC Cards 2.1 2.5 84.0%

 (Nonautomation Presort Cards)

Automation AADC Cards 1.2 1.0 120.0%

 (Automation Mixed AADC Cards)

Automation 3-digit Cards 0.4 0.3 133.3%

 (Automation AADC Cards)

Automation 5-digit Cards 1.3 1.2 108.3%

 (Automation 3-digit Cards)

First-Class Mail Nonautomation Cards

Presorting [1]

Nonautomation Presort Cards 2.1 1.0 204.3%

 (Automation Mixed AADC Cards)

Qualified Business Reply Mail

Barcoding

QBRM [2] 3.0 2.5 122.2%

 (Handwritten Reply Cards)

Source: PRC-ACR2007-LR3.

Notes

Where discounts are equal to unit avoided costs, the calculated passthroughs may deviate from 100% 

because passthrough percentages are based on unrounded unit avoidable costs.

[1] USPS treats Nonautomation Presort Cards price and cost differentials as surcharges over Automation 

Mixed AADC cards.

[2] The QBRM cost avoidance presented here is estimated using the USPS methodology. The Commission 

found in R2006-1 that this underestimated avoided costs, but that the alternative on the record 

overestimated avoided costs.
Chapter VII—Market Dominant Classes

66

The automation AADC and 3-digit presort discounts for letters and 

the automation AADC, 3-digit, and 5-digit presort discounts for 

cards are greater than the associated cost avoidances. For each 

of these discounts, the excess discount is either 0.1 or 0.2 cents. 

The movement away from avoided cost is due to cost changes 

(methodological and empirical), and to the fact that existing rates 

were set with reference to estimated cost avoidances for 2008.

Both the letter and card QBRM discounts also exceed the 

computed cost avoidances using the methodology proposed by 

the Postal Service in Docket No. R2006-1, which the Commission 

found to understate the actual cost avoidance.26

The PAEA does not impose a minimum passthrough of avoided 

costs for worksharing discounts, although 39 U.S.C. § 3622(b)(1) 

encourages maximization of incentives to increase efficiency. Full 

recognition of avoided costs is generally viewed as consistent with 

this objective. Because the business parcel categories were new 

and flats bundles were used as proxies to develop estimated 

avoided costs, the presort passthroughs were set at 33 percent. 

The Commission anticipates that the Postal Service will collect 

actual cost data for business parcels and consider moving 

discounts towards 100 percent of avoided costs.

PERIODICALS Prior to Docket No. R2006-1, Periodicals rates were based on 

pieces and pounds. Discounts were offered to reflect the costs 

avoided by presorting, barcoding, and dropshipping. In Docket 

Docket No. R2006-1, the Commission recommended a new rate 

structure to reflect additional cost drivers, including bundles, 

containers, automation, and machinability, whose effects had 

been obscured in the prior rate structure. Rates reflecting these 

cost drivers give Periodicals mailers incentives to avoid certain 

costs. The Commission believed that these incentives would 

increase efficiencies in mail handling and bring down the costs of 

Periodicals overall.

26 As the Postal Service notes in its ACR, the Commission did not endorse either 

the Postal Service proposal or the alternative endorsed by some commenters. In the 

absence of a Commission endorsed methodology, the Postal Service reverted to its 

proposed approach; it should have reverted to the previously accepted approach.
Chapter VII—Market Dominant Classes

67

The new rate structure requires a more complete cost model to 

accurately capture the costs imposed by the larger set of cost 

drivers. While the new rate structure was clearly a conceptual 

improvement, implementation of that structure involves estimates 

in lieu of direct data concerning some aspects of Periodicals 

handling. Some of the assumptions and cost data relied on in the 

cost model have become obsolete. Accordingly, the Postal 

Service “made several improvements to the Commission’s model, 

undertaken in order to resolve internal inconsistencies and permit 

transparent updates of the inputs ....” Library reference USPSFY07-11 at 1.

Improvements adopted by the Commission are: (1) changes 

made to the bundle flow model that better reflect the proportion of 

5-digit bundles that are likely to receive mechanized sorting at 

various entry points in the system; (2) an adjustment to the 

Automated Package Processing System (APPS) and Small Parcel 

Bundle Sorters (SPBS) productivities to account for sweeping 

time; (3) accounting for the time spent opening containers at 

Destination Sectional Center Facilities (DSCFs) in container 

handling costs rather than in the calculation of container flows; 

(4) changing the proportion of pallets that are assumed to be 

opened at DSCFs; and (5) using the unit delivery cost of Standard 

Mail Regular flats rather than using the unit delivery cost of 

Periodicals as a whole, as a proxy for the unit delivery cost of noncarrier route Periodicals.

To achieve at least a partial vetting of the changes that the Postal 

Service incorporated in its Periodicals cost model, and to help 

determine whether those changes should be employed by the 

Commission in its evaluation of FY 2007 rates, the Commission 

held two informal technical conferences in which the Postal 

Service and mailers discussed the issues raised by the Postal 

Service’s modifications of the Docket No. R2006-1 cost model. 

Oral and/or written comments were received from The Nation, 

Magazine Publishers of America (MPA), American Business 

Media (ABM), Alliance of Nonprofit Mailers (ANM), Dow Jones & 

Company, Inc. (Dow Jones), The McGraw-Hill Companies, Inc. 

(McGraw-Hill), National Newspaper Association (NNA), and Time 

Warner Inc. (Time Warner). Time Warner presented an Outside 

County Periodicals model with its initial written comments. The 

general principles that the Commission followed in accepting the 

five changes to the Periodicals cost model described above, and 
Chapter VII—Market Dominant Classes

68

not accepting other proposed changes, are described in Section 

II.D. of this report.

Subsection 1 below contains analysis of the FY 2007 financial 

performance of the Periodicals class. Subsection 2 contains 

analysis of proposed changes to costing methods. Subsection 3 

contains analysis of current worksharing discounts.

FY 2007 Financial Analysis. Cost Coverage. In FY 2007, 

the Periodicals class did not generate revenue sufficient to cover 

attributable costs, achieving only an 83.0 percent cost coverage. 

Table VII-C-1 details the financial performance of Periodicals in 

2007.

Participants’ comments. The comments submitted by Valpak 

argue that the failure of Periodicals to cover attributable costs 

violates the statute. It asserts that “Periodicals continue to be 

cross subsidized by other classes despite the PRA and PAEA 

requirement that each class cover its attributable costs.” Valpak 

Comments at 44-51. It proposes that the Commission take 

immediate remedial action. In arguing that immediate action must 

be taken, it characterizes the requirement in both the PRA and 

PAEA that each class of mail bear its direct and indirect 

attributable costs as “not a vague criterion which can be either 

tempered or disregarded depending on other circumstances, but a 

firm requirement imposed on both the Commission and the Postal 

Service.” Id. at 45. Valpak asserts that the requirement that each 

class must cover its attributable cost is not being met, and the 

Commission must find the Periodicals class in violation of this 

requirement.

Specifically, Valpak takes issue with the proposal made by 

ANM-MPA in Docket No. RM2007-1 that:

Periodicals

Fiscal Year 2007 Volume, Revenue, Cost, Contribution, and Cost coverage

Contribution to Contribution to

Attributable Institutional Institutional

Volume Revenue Costs Costs Rev./Pc. Cost/Pc. Costs/Pc. Cost

(000) ($ 000) ($ 000) ($ 000) (Cents) (Cents) (Cents) Coverage

Periodicals:

Within County 736,458 73,423 85,556 (12,132) 9.970 11.617 (1.647) 85.8%

Regular Rate 6,220,157 1,760,792 28.308

Nonprofit 1,783,472 338,835 18.999

Classroom 55,744 14,885 26.702

Outside County 8,059,373 2,114,512 2,550,327 (435,814) 26.237 31.644 (5.408) 82.9%

Total Periodicals 8,795,831 2,187,936 2,635,882 (447,946) 24.875 29.967 (5.093) 83.0%

Source: PRC-LR-ACR07-1

Table VII-C-1
Chapter VII—Market Dominant Classes

69

[I]f a particular class or service is not bearing its 

attributable costs, the Postal Service (or, under 

procedures authorized by the Act, the Commission) may 

continue to increase the rates for that class or service by 

the full amount of the CPI until full coverage of 

attributable costs is attained.

ANM Comments at 6.

Valpak argues that this proposal would “need to be in effect for at 

least a decade—and perhaps far longer—before the cross-subsidy 

would be corrected ....” Valpak Comments at 50.

As a possible immediate solution, Valpak proposes that rate 

increases be concentrated in those components of the Periodicals 

mailstream that are the largest per-piece contributors to the deficit 

in Periodicals cost coverage. It asserts that these are primarily low 

volume, high-cost magazines. Id. at 50-51. Doing this, it argues, 

would produce either “supply side” benefits for the system as a 

whole, as high-cost publications dropped out of the mailstream, or 

“demand side” benefits, as publications with inelastic demand for 

postal services provided a greater contribution to overhead. 

Valpak Reply Comments at 12-14.

ABM, ANM, Dow Jones, MPA, McGraw-Hill, and NNA disagree. 

See generally, ANM, et al. Reply Comments. They argue that this 

issue was decided by the Commission when it recommended 

Periodicals rates in Docket No. R2006-1. In their joint comments 

they state:

Valpak gains nothing by citing CRA data purporting to 

show in hindsight that Periodicals revenue did not cover 

attributable costs in FY 2007. Valpak at 21 & 46. The 

PRA required the Commission and the Governors to 

establish rates based on a reasonable projection that 

revenues would cover costs in the rate case test year. 

The Commission and the Governors used a test year of 

FY 2008, not FY 2007—a choice that Valpak did not 

challenge. The Commission and the Governors had no 

obligation to project that revenues would cover costs in 

FY 2007, or to revise the FY 2008 projections in light of 

subsequent developments.

ANM, et al. Reply Comments at 6. Time Warner concurs. See

Time Warner Reply Comments at 2-3.
Chapter VII—Market Dominant Classes

70

These commenters also take issue with the 83 percent cost 

coverage estimate relied on by Valpak. They contend that cost 

coverage for FY 2007 would have been at least 90 percent if the 

rates implemented on July 15, 2007 had been in effect for the 

entire fiscal year. They echo comments made separately by ANMMPA and Time Warner that the CPI-based rate cap requirement is 

the fundamental statutory objective of the PAEA and overrides all 

others where a conflict among objectives and factors arises. 

Accordingly, ANM, et al. reiterate their proposal made in Docket 

No. RM2007-1 that:

[I]t would be reasonable for the Commission to 

require that a class of mail that fails to recover 

attributable cost take the full amount of the 

CPI-based and banked increase authority.

ANM-MPA Comments at 10.

Commission evaluation. As explained in the Introduction to this 

report, 39 U.S.C. § 3653 requires the Commission to apply PAEA 

rate setting standards, rather than those of the prior law (the PRA), 

in conducting its annual review of rates and service, including its 

initial review. Under either law, however, there is a requirement to 

consider whether rates generate revenue in excess of attributable 

costs in the year under review. The attributable costs of 

Periodicals in FY 2007 clearly exceeded their revenues.

In addition to increasing efficiencies, the rates implemented in July 

2007, were designed to generate a very substantial increase in 

revenue. The recent further rate increases approved for the 

Periodicals class in Docket No. R2008-1 reasonably approximate 

the allowable CPI cap. At this point in time, it is most appropriate 

to allow the recently adopted strategy for overcoming the 

Periodicals revenue-cost relationship a reasonable interval of time 

to succeed.

Incorporating Updates and New Analytical Methods in 

the Periodicals Cost Model. An important objective of this report 

is to analyze the rates of each product for their consistency with 

the PAEA in order to provide guidance to the Postal Service.

To perform its analysis, the Commission had to make tentative 

decisions about the merits of alternative proposals for calculating 
Chapter VII—Market Dominant Classes

71

Periodicals costs. Unfortunately, the Postal Service did not have 

sufficient time in this transition period to prepare a filing that was 

thorough and complete, nor did the mailers and the Commission 

have sufficient time to evaluate all aspects of the Postal Service’s 

filing. With respect to the Postal Service’s modifications of the 

Periodicals cost model, trade-offs had to be made between 

improving the apparent accuracy of the estimates in the 

Commission’s annual compliance report and allowing a full 

measure of public input and Commission deliberation.

Changes to the Docket No. R2006-1 bundle flow model. Library 

reference USPS-LR-I-88, which the Postal Service filed in Docket 

No. R2000-1, is the most recent available study of bundle flow 

density that is based directly on sample data. Since the data for 

this study was collected in 1998, the results of the study reflect the 

flat processing environment that existed before deployment of the 

AFSM 100. Deploying the AFSM 100 allowed a dramatically 

higher percentage of bundled flats to receive a mechanical 

incoming secondary sort in processing plants, instead of being 

forwarded to delivery units, where the bundles were broken and 

sorted manually. See Docket No. R2006-1, Direct Testimony of 

Halstein Stralberg on Behalf of Time Warner, September 6, 2006, 

at 11-14 (TW-T-2).

To ameliorate this problem in its FY 2007 compliance report, the 

Postal Service judgmentally altered the results of the LR-I-88 

study. A key assumption underlying the Commission’s Periodicals 

flats processing cost estimates in Docket No. R2006-1 was that 

85 percent of incoming secondary piece sorts would be 

mechanical. This assumption was based on a number of 

qualitative arguments accepted by the Commission in Docket No. 

R2006-1 that such an adjustment was needed to reflect the 

proportion of flats known to have been sorted manually. See PRC 

Op. R2006-1, ¶ 5734, referencing TW-T-2 at 11-14 (Stralberg).

In order to be consistent with this assumed 85/15 ratio of 

mechanized to manual sorting at the incoming secondary stage, 

the Postal Service adjusted its model of how incoming 5-digit 

bundles would be sorted if they entered the system at various 

processing plant levels in the network. The Postal Service further 

adjusts the 85 percent of mechanized incoming secondary sorting 

to reflect the fact that not all facilities are equipped to perform 
Chapter VII—Market Dominant Classes

72

incoming secondary flat sorts on a machine,27 which reduces the 

overall mechanized/manual split at the incoming secondary to 

.747/.253. It then applies this split factor to the number of 5-digit 

bundles that are entered at DSCFs. See Table VII-C-2, column 

(3).

Under this assumption, roughly 75 percent of flats arriving at 

DSCFs in 5-digit bundles are assumed to be broken out and given 

a mechanized incoming secondary sort, and 25 percent are 

assumed to be sent to delivery units to be broken out and 

manually sorted. See Table VII-C-2, column (1). This assumed 

75/25 ratio is almost the inverse of the 20/80 mechanized/manual 

ratio that was observed at the DSCF in the Docket No. R2006-1 

flat processing flow model. The Postal Service assumes that the 

75/25 ratio better reflects the current flat sorting environment, 

which is dominated by the AFSM 100 technology.

27 The flat-sorting machine coverage factor is 87.88 percent. See library reference 

USPS-FY07-11, PER OC, flats 07ACRv011608errata.xls, tab ‘Bundle Density’, cell 072.

Entry Point Operation

I-88 

Distribution FY07 Bundles 

Modified 

ACR2007 

Distribution FY07 Bundles

MADC Direct to Piece Sort 0.75% 10,295 10.32% 142,423 

DDU Bundle Sort 13.07% 180,309 3.49% 48,164 

 1,380,064 1,380,064 

ADC Direct to Piece Sort 9.41% 3,809,875 55.62% 22,518,107 

DDU Bundle Sort 65.05% 26,333,971 18.84% 7,627,493 

 40,485,629 40,485,629 

SCF Direct to Piece Sort 21.69% 28,019,001 74.70% 96,496,975 

DDU Bundle Sort 78.31% 101,160,350 25.30% 32,682,376 

 129,179,351 129,179,351 

Total FY07 Bundles 171,045,044 171,045,044 

All Direct to Piece Sort 18.61% 31,839,171 69.66% 119,157,505 

DDU Bundle Sort 74.64% 127,674,630 23.59% 40,358,033 

93.26% 159,513,801 93.26% 159,515,537 

NOTES

Table VII-C-2

Bundle Density

Source: USPS-LR-I-88 Flats Bundle Study, 'FINAL_DENSITY.XLS.'

Docket No.ACR2007 USPS-FY07-11, file: PEROC flats 07ACR011608 errata.xls
Chapter VII—Market Dominant Classes

73

Because most flats are entered in 5-digit or carrier route bundles 

and are not processed upstream of the DSCF, the Postal Service’s 

modified assumption about what happens at the DSCF accounts 

for most of the total cost of processing flats. See TW-T-2 at 11. 

To account for the minority of flats that are entered upstream of 

the DSCF, however, the Postal Service modifies the distribution 

that flats in 5-digit bundles are shown to receive in the Docket No. 

R2006-1 flow model when they are entered at the MADC and the 

ADC. For both facility types, it sums the number of flats receiving 

piece distribution and the number being forwarded to the delivery 

unit and then multiplies that sum by the same 75/25 split factor 

that it applies to 5-digit bundles entered at the DSCF level. This 

increases the overall percentage of 5-digit-bundle flats receiving a 

piece sort if entered at a MADC from less than 1 percent to roughly 

10 percent. If entered at an ADC, 55 percent are assumed to 

receive a piece sort under the Postal Service’s modification of the 

Docket No. R2006-1 model. See Table VII-C-2, column (3).28 

The Postal Service asserts that without the above-mentioned 

modifications, the cost of sorting 5-digit bundle flats will be 

overstated.29

The Commission accepts the Postal Service’s modifications to the 

Docket No. R2006-1 bundle flow model. It concludes that this is 

an instance in which changing an analytical method from that 

prevailed in the most recent fully-litigated rate case (Docket No. 

R2006-1) is necessary to avoid a much greater distortion that 

would result from rejecting the update or change. Reinforcing this 

decision is the fact that no commenter objected to the Postal 

Service’s modifications to the Docket No. R2006-1 bundle flow 

model.

28 The Postal Service’s modification intends to provide a plausible scenario by 

which only 25 percent of 5-digit bundle flats receive a manual sort at the delivery unit. It 

appears to assume that 5-digit bundles that the Postal Service was sorting to the ADC or 

3-digit level under the Docket No. R2006-1 model were not eligible for an incoming 

secondary sort by either manual or mechanized means. Therefore, the Postal Service’s 

modification of the Docket No. R2006-1 model does not change that model’s distribution 

of 5-digit bundle flats sorted to ADC and 3-digit level in a MADC, or sorted to the 3-digit 

level in an ADC.

29 This overestimate of bundles broken and sorted at delivery units is reduced 

somewhat when the assumptions about the accidental breakage of bundles meant to be 

mechanically sorted is factored in. 
Chapter VII—Market Dominant Classes

74

The Docket No. R2006-1 model used 10-year-old sample data to 

identify what proportion of bundles at each level of entry would 

flow to various particular mechanized manual operations. It is 

undisputed that since these flows were sampled in 1998, there has 

been a sea change in the flat processing environment. The Postal 

Service has not sampled these proportions for a decade. The 

testimony of Postal Service operations witnesses in recent rate 

cases has confirmed that the large majority of incoming secondary 

flat sorting was done in delivery units when data underlying the 

Docket No. R2006-1 model were sampled. See Order No. 1446, 

¶ 4009. Experts have also testified that the majority is now done 

at DSCFs on AFSM 100s. See TW-T-2 at 11. There is a wide 

difference between the costs of breaking 5-digit bundles at SCFs 

and sorting flats on the AFSM 100 and doing it manually at the 

delivery unit. Consequently, continuing to employ a ratio of 

mechanized/manual sorting of roughly 20/80 would grossly 

overstate the costs of breaking and sorting 5-digit bundles to 

carrier routes in FY 2007, as the Postal Service asserts. The 

Commission accepts the 75/25 ratio as the Postal Service applies 

it, but without imbuing it with the weight of precedent. 

While this avoids the gross and obvious distortion that a 20/80 

ratio represents, the 75/25 ratio that it hypothesizes generates 

some implausible results of its own. Of particular concern is that 

when this ratio is applied to 5-digit-bundle distribution at the ADC 

level, it indicates that 55 percent of such bundles are broken there 

and sorted manually. This implies that the typical ADC functions 

as a DSCF with respect to the majority of delivery units in its 

service area. This is a questionable assumption. However, the 

error that results from applying the assumed 75/25 ratio to the 

distribution of 5-digit bundles at the ADC is a good deal less 

serious than the error of applying the obsolete 20/80 ratio at the 

DSCF, as the Docket No. R2006-1 model did, because there are 

far fewer 5-digit bundles processed at ADCs than at DSCFs.

This illustrates the urgent need for sample data that records 

bundle flows that reflect current operations as one element of a 

comprehensive plan to model current flat processing and delivery 

costs. Such a modeling effort is needed to provide an appropriate 

framework for designing an unbundled rate structure. It is also 

needed to satisfy the requirement of section 708 of the PAEA, 

which mandates a study of the costs of Periodicals.
Chapter VII—Market Dominant Classes

75

APPS/SBPS productivity adjustment. The Postal Service adjusted 

the APPS and SPBS productivities in the Docket No. R2006-1 

model to reflect time associated with the sweeping function. In the 

LR-I-88 study that witness Stralberg relied on in Docket No. 

R2006-1, SPBS staffing was estimated to be allocated 1/7th to 

dumping, 3/7th to sweeping, and 3/7th to keying. Witness 

Stralberg excluded both the dumping and sweeping hours in the 

development of a pure keying productivity for the SPBS and 

APPS. The dumping activity was modeled separately, but the 

sweeping activity was not explicitly modeled.

It is apparent that sweeping time should be included in developing 

the SPBS productivities, although the validity of including 

sweeping time in the APPS productivities is less clear. Time 

Warner states that more study of this matter is needed, but 

accepts these new productivities in this instance. Time Warner 

Comments at 27-28. No other commenter objects to this change.

Container flows. The Postal Service shifts the time associated 

with DSCF container opening from the calculation of container 

flows to the calculation of container handling costs. This is a 

change in the model’s mechanics, but not a change in the model’s 

results. No commenter has objected to this change.

5-digit pallet opening at the DSCF. Less than 2.5 percent of the 

mail on 5-digit pallets is prepared in 5-digit bundles; the remainder 

is in firm or carrier route bundles. Opening and processing 

bundles on 5-digit pallets would result in two bundle sortations 

whereas only one sortation is necessary if the pallet is not opened. 

The Postal Service asserts that the assumption that 21 percent of 

these pallets are opened at the DSCF is not supported. The 

Commission agrees. No commenter has objected to this change 

in the Docket No. R2006-1 cost model.

Delivery cost calculation. In Docket No. R2006-1, library reference 

USPS-LR-67 was used to estimate unit delivery costs (UDC) by 

rate category. It contained a UDC for Periodical flats as a whole. 

In an effort to use the best available data, the Commission used 

the UDC of Periodicals flats as a whole as a proxy for non-carrier 

route presorted Periodicals. It used the Standard ECR UDC as a 

proxy for carrier route presorted Periodicals. In Docket No. 

R2006-1, the UDC of Periodicals as a whole nearly equaled that of 
Chapter VII—Market Dominant Classes

76

Standard Mail Regular flats. Therefore, using the UDC of 

Standard ECR as a proxy for the UDC of presorted carrier route 

Periodicals provided a valid basis for estimating the costs avoided 

by presorting Periodicals to carrier route. In library reference 

USPS-LR-FY07-19, however, the Standard Mail Regular flats 

UDC is 1.77 cents larger than the Periodicals flats UDC. Because 

they now differ substantially, MPA, Time Warner, and the Postal 

Service propose a change in the method for calculating the 

delivery costs avoided by presorting Periodicals to carrier route.

MPA hypothesizes an ideal environment where a proxy is not 

needed, stating:

[I]deally, the delivery costs avoided by Periodicals 

Carrier Route Basic flats relative to non-Carrier Route 

flats would be estimated using Periodicals delivery cost 

data by presort level. However, for the reasons 

discussed at the technical conference held at the 

Commission on January 23, 2008, such data are not 

available.

MPA Comments at 12. In the Postal Service’s worksharing cost 

avoidance model, which was replicated in the comments and 

model proffered by Time Warner, the Standard Mail Regular flats 

UDC is used as a proxy for the non-carrier route Periodicals flats 

UDC when calculating the cost avoided by presorting to carrier 

route. The Commission finds that using the Standard Mail Regular 

flats UDC as a proxy for the UDC of non-carrier route Periodical 

flats is now more appropriate.

MODS operation 140 costs. Both Time Warner and ANM-MPA 

propose a change to the mail processing model to reflect a change 

in the current mail processing environment. Summarizing this 

change, Time Warner states:

In particular, MODS data indicate that a very substantial 

number of workhours were spent at operation 140, which 

is part of the AFSM 100 cost pool and is used by 

employees that prep bundles and feed flats to machines 

via the AI attachments that have been installed on many 

AFSM 100 machines in the past couple of years. The 

associated costs are not represented anywhere in the 

model, causing the model to understate the piece-sorting 

costs that the CRA charges to Periodicals flats.
Chapter VII—Market Dominant Classes

77

Time Warner Comments at 15. ANM-MPA proposed two possible 

methods to include the operation 140 costs in the current model. 

The first proposal would alter the productivity of the AFSM 100. 

MPA Comments at 18. The second proposal would allocate the 

operation 140 hours to rate categories in the same fashion as the 

traditional flats preparation hours in operation 035 are currently 

allocated.

Time Warner proposes two different changes in methodology 

whose purpose is the same as the ANM-MPA proposals. Time 

Warner Comments at 20. In response to these proposals, the 

Postal Service states:

Time Warner (as well as ANPM/MPA) has specific 

concerns regarding the AFSM 100 cost pool, operation 

140 costs, and the CRA cost adjustments. The Postal 

Service agrees that the cost model, as it currently 

stands, does not provide the best cost estimates 

because of the inclusion of OP 140 flats prep costs in the 

AFSM 100 pool. There are dozens of short-term 

solutions that could be applied, and all would be 

imprecise. At this time, the Postal Service has not 

evaluated the merits of each possible solution. The 

long-term solution will require more investigation to find 

the best possible method to address flats prep costs in 

the model.

Postal Service Reply Comments at 15 (footnote omitted).

The Commission finds that the burden of persuasion for altering 

the model to adjust for operation 140 costs in the context of this 

truncated docket has not been met.

Cost and Revenue Analysis (CRA) adjustment. The Periodicals 

mail processing cost model disaggregates cost pools by rate 

category to develop unit costs. However, before the modeled unit 

costs can be considered accurate, they need to be modified (as a 

whole) to conform with the costs reported by the CRA. In Docket 

No. R2006-1, the CRA adjustment was calculated for other 

modeled costs (bundles, containers, and allied piece costs), but 

the CRA adjustment factor is set to 1.0. This pro forma setting of 

the CRA adjustment factor for direct piece sorting operations to 

1.0 is equivalent to determining that the direct piece costs are 

equal to the CRA costs.
Chapter VII—Market Dominant Classes

78

The Postal Service considers setting CRA adjustment factors 

equal to 1.0 to be anomalous. In the Preface to library reference 

USPS- FY-07-11 it states:

The Postal Service notes that it is unusual in engineering 

models like these to assume that the costs for a single 

component, direct pieces, are perfectly modeled, while 

costs of other components (bundles, containers and 

allied piece operations) are subject to error and require 

the CRA adjustment.

Library Reference USPS-FY-07-11 at 2.

Time Warner agrees and suggests several changes in the 

calculation of the CRA adjustment. They propose including direct 

piece costs in the adjustment calculation, creating a CRA 

adjustment with two parts. In comments at the first technical 

conference, Halstein Stralberg, speaking for Time Warner, states 

“[m]y intention in developing two parts of the CRA adjustment was 

to minimize the distortion caused by an overall adjustment.” 

Comments on the USPS Filing of FY 2007 Annual Compliance 

Review Data, January 11, 2008, at 2. Time Warner reiterates 

these comments in its initial comments in its initial comments at 

11-14.

Before determining what changes should be made to the CRA 

adjustment, it is important to recognize the role of the CRA 

adjustment. Changing the nature of the CRA adjustment in the 

instant docket would ignore the significant change that has 

occurred in Periodicals costs. The following table details the 

change in unit direct piece mail processing costs.
Chapter VII—Market Dominant Classes

79

R2006-1 ACR 2007 Percent

(Cents) (Cents) Change

Non-Barcoded Non-Machinable

MADC 41.4 40.7 -1.7%

ADC 31.8 31.4 -1.5%

3-Digit 25.5 25.1 -1.8%

5-Digit 11.4 10.4 -9.2%

Barcoded Non-Machinable

MADC 36.4 35.2 -3.6%

ADC 27.9 26.7 -4.2%

3-Digit 22.4 21.4 -4.8%

5-Digit 11.3 10.1 -11.2%

Non-Barcoded Machinable

MADC 24.5 22.2 -10.1%

ADC 18.7 16.4 -13.7%

3-Digit 16.2 13.9 -16.2%

5-Digit 8.8 7.1 -24.4%

CR 0.1 0.3 76.2%

Barcoded Machinable

MADC 21.6 19.4 -11.5%

ADC 16.6 14.4 -14.7%

3-Digit 14.4 12.2 -17.5%

5-Digit 8.0 6.3 -26.8%

By Bundle Presort, Barcode and Machinability

Table VII-C-3

Periodicals Unit Direct Piece Mail Processing Cost

Source:R2006-1 from USPS file: R2006-1_PER_PRC_-_R06_Replication.xls tab 

Summary' submitted in ACR2007; ACR2007 from Docket No.ACR2007 USPSFY07-11, file: PEROC flats 07ACR011608 errata.xls tab 'Summary' 
Chapter VII—Market Dominant Classes

80

As a class, modeled direct piece costs decreased 17.9 percent. 

Table VII-C-4 details the change in the relationship between 

modeled costs and CRA costs between Docket No. R2006-1 and 

Docket No. ACR2007. In TY 2008, the gap between modeled and 

reported costs was projected to be just over $ 30 million. In 

FY 2007, this difference increased to over $180 million. It is 

reasonable to assume that unit modeled cost and unit CRA cost 

should move in the same direction. This seemingly inconsistent 

result has many possible causes, many of which have been raised 

in the instant docket. These costs should be re-examined. After 

the deficiencies recognized in the model can be corrected, a fresh 

look at the CRA adjustment methodology is certainly appropriate. 

Work required under section 708 of the PAEA to study Periodicals 

attributable cost may provide the appropriate forum for examining 

these effects.

Allied piece costs. In Docket Nos. C2004-1 and R2006-1, Time 

Warner witness Mitchell proposed a rate design based on cost 

avoidances calculated using the current Periodicals mail 

processing model. In those dockets, witness Stralberg calculated 

both “direct” and “allied” piece and bundle costs. In both dockets, 

witness Mitchell included the direct piece costs in the rate design, 

but excluded the allied cost differences. However, as Periodicals’ 

costs continue to evolve, an unexpected drop in modeled direct 

piece costs has occurred simultaneously with an increase in 

modeled allied piece costs. In the instant docket, both Time 

Warner and ANM-MPA propose to include allied piece and bundle 

costs in the analysis of worksharing passthroughs. Time Warner 

states:

Model CRA Model CRA

Direct Piece Costs $ 584,730,319 403,282,924 $ 507,250,283 $ 537,737,504 $ 

Volume 7,976,359,505 7,976,359,505 8,231,944,062 8,231,944,062 

Unit Direct Piece $ 0.073 0.051 $ 0.062 $ 0.065 $ 

Change from TY 2008 -17.9% 12.2%

Comparison of Periodicals Direct Mail Processing Costs

 Source:R2006-1 from USPS file: R2006-1_PER_PRC_-_R06_Replication.xls tab 'Summary' submitted in 

ACR2007; ACR2007 from Docket No.ACR2007 USPS-FY07-11, file: PEROC flats 07ACR011608 

Table VII-C-4

FY 2007 TY 2008
Chapter VII—Market Dominant Classes

81

In its FY 2007 ACR model, the Postal Service confirms 

the existence of [allied] costs. In fact it proposes 

changes that increase the "allied" piece costs. But it did 

not include these costs in the LR-3 worksharing discount 

table.

Yet these are marginal costs .... The fact that such 

costs were not used in previous rate designs, and in fact 

were not identified in the Postal Service's earlier models 

(and still are not identified in their First Class or Standard 

flats models), does not mean that they are not costs 

which additional worksharing will help avoid. So in 

providing, for the ACR, a comparison between 

worksharing discounts and actual costs avoided, the 

Postal Service should include these costs in its 

avoidance estimates.

Time Warner Comments at 22.

ANM-MPA argues for the same outcome, but for the opposite 

reason.

[E]xcluding allied costs is inconsistent with the general 

cost avoidance approach used by the Commission in 

Docket No. R2006-1 to estimate presort and 

prebarcoding cost avoidances. Specifically, in Docket 

No. R2006-1, the Commission included allied costs in 

First-Class Mail and Standard Mail worksharing cost 

avoidances by treating allied cost pools as piggyback 

cost pools in the CRA adjustment, i.e., worksharingrelated proportional to the same extent as all direct cost 

pools.

ANM-MPA Comments at 14.

The Postal Service believes that this is not the appropriate 

proceeding to make such a fundamental change. It states:

[T]his entire line of discussion merely underscores the 

need, in the context of the still relatively new Periodicals 

price structure, for a comprehensive re-evaluation that 

seeks both a sound theoretical construct for the concept 

of “cost avoidance,” and the identification of practical 

means to provide the best available empirical estimates 

of the parameters necessary to implement the 

appropriate theoretical framework. 

Postal Service Reply Comments at 17.
Chapter VII—Market Dominant Classes

82

The Commission agrees with the Postal Service. The appropriate 

treatment of allied costs in cost avoidance models is an issue that 

should be resolved in a more deliberative manner than is possible 

in the context of this docket. It is better dealt with in the context of 

the joint Postal Service/Postal Regulatory Commission study of 

Periodicals costs that section 708 of the PAEA requires.

Worksharing. The current rate structure contains four 

fundamental cost drivers: pieces, bundles, containers, and 

pounds. Of these basic elements, three are considered to be 

worksharing related (pieces, bundles, and containers) and the 

other is not (pounds). The recent introduction of the bundles and 

containers rate elements necessitates a period of limited 

passthroughs to mitigate rate shock and allow the mailing industry 

time to adapt. Nevertheless, the Commission believes that the 

traditional ECP discount tree for the piece rate element is 

consistent with the worksharing standards articulated in 39 U.S.C. 

§ 3622(e) and should be retained.

Table VII-C-5 contains the FY 2007 piece worksharing discount 

passthroughs.
Chapter VII—Market Dominant Classes

83

Passthrough

Non-Barcoded Non-Machinable

MADC

ADC 9.4 10.2 109%

3-Digit 6.3 5.9 94%

5-Digit 14.7 8.4 57%

Barcoded Non-Machinable

MADC 5.6 3.0 54%

ADC 8.4 9.2 109%

3-Digit 5.4 5.0 93%

5-Digit 11.2 7.7 69%

Non-Barcoded Machinable

MADC 18.5 10.3 56%

ADC 5.8 6.1 105%

3-Digit 2.5 2.2 88%

5-Digit 6.8 7.2 105%

CR 9.6 10.7 111%

Barcoded Machinable

MADC 21.3 13.0 61%

ADC 5.0 5.4 109%

3-Digit 2.2 1.9 86%

5-Digit 5.9 6.3 106%

 Source:R2006-1 from USPS file: R2006-1_PER_PRC_-_R06_Replication.xls tab 

'Summary' submitted in ACR2007; ACR2007 from Docket No.ACR2007 USPS-FY07-11, 

file: PEROC flats 07ACR011608 errata.xls tab 'Summary' 

Table VII-C-5

Periodicals Per Piece Worksharing Discounts

By Bundle Presort, Barcode and Machinability

ACR 2007

Cost Avoidance

(Cents)

Discount

(Cents)
Chapter VII—Market Dominant Classes

84

The diverse range of cost drivers recognized in the current rate 

structure makes analysis of worksharing discounts difficult. In the 

current environment of fluctuating Priodicals costs, it is important 

for the Postal Service to give mailers the incentives to minimize 

cost. In practical terms, this means maintaining a reasonable set 

of discount opportunities.

Tables VII-C-6 through VII-C-8 detail the bundle and container 

worksharing discounts.

Container 

Level

Bundle 

Level

Mixed ADC

MADC $0.360 $0.100 27.8%

ADC $0.580 $0.129 22.2%

3-D/SCF $0.628 $0.134 21.3%

5-D $0.594 $0.161 27.1%

Firm Bundle $0.713 $0.079 11.1%

ADC

ADC $0.223 $0.038 17.0%

3-D/SCF $0.351 $0.063 18.0%

5-D $0.315 $0.095 30.1%

CR $0.448 $0.104 23.2%

Firm Bundle $0.442 $0.048 10.8%

3-D/SCF

3-D/SCF $0.216 $0.039 18.1%

5-D $0.274 $0.084 30.6%

CR $0.411 $0.095 23.1%

Firm Bundle $0.404 $0.045 11.1%

5-D/CR

5-D $0.182 $0.008 4.4%

CR $0.182 $0.039 21.4%

Firm Bundle $0.181 $0.027 14.9%

Bundle Pricing by Container Level

Table VII-C-6

 ACR 2007 

Cost Price

 Source: Docket No.ACR2007 USPS-FY07-11, file: PEROC flats 

07ACR011608 errata.xls tab 'Summary' 

Price as 

Percent of 

Cost
Chapter VII—Market Dominant Classes

85

Container 

Level

Bundle 

Level

Mixed ADC

OSCF $2.275 $0.420 18.5%

OADC $1.889 $0.420 22.2%

ADC

OSCF $5.229 $1.800 34.4%

OADC $5.097 $1.800 35.3%

OBMC $4.497 $1.800 40.0%

DBMC $3.375 $1.100 32.6%

DADC $1.889 $0.600 31.8%

3-D/SCF

OSCF $5.599 $1.900 33.9%

OADC $5.342 $1.900 35.6%

OBMC $4.669 $1.900 40.7%

DBMC $3.474 $1.200 34.5%

DADC $2.928 $1.000 34.2%

DSCF $1.889 $0.600 31.8%

5-D/CR

OSCF $6.360 $2.240 35.2%

OADC $6.079 $2.240 36.8%

OBMC $5.321 $2.240 42.1%

DBMC $4.040 $1.500 37.1%

DADC $3.418 $1.300 38.0%

DSCF $2.419 $0.900 37.2%

DDU $2.084 $0.700 33.6%

 Source: Docket No.ACR2007 USPS-FY07-11, file: PEROC flats 

07ACR011608 errata.xls tab 'Summary' 

Price as 

Percent of 

Cost

Sack Pricing by Container Level

Table VII-C-7

ACR 2007 

Cost Price
Chapter VII—Market Dominant Classes

86

Container 

Level

Bundle 

Level

ADC

OSCF $57.187 $18.610 32.54%

OADC $51.075 $18.610 36.44%

OBMC $45.093 $18.610 41.27%

DBMC $37.529 $13.000 34.64%

DADC $19.823 $8.900 44.90%

3-D/SCF

OSCF $69.364 $22.980 33.13%

OADC $64.454 $22.980 35.65%

OBMC $53.903 $22.980 42.63%

DBMC $41.769 $14.400 34.47%

DADC $36.290 $12.200 33.62%

DSCF $19.447 $6.700 34.45%

5-D/CR

OSCF $88.136 $26.950 30.58%

OADC $77.370 $26.950 34.83%

OBMC $67.728 $26.950 39.79%

DBMC $56.503 $17.500 30.97%

DADC $53.280 $15.500 29.09%

DSCF $36.117 $8.000 22.15%

DDU $3.525 $1.200 34.04%

 Source: Docket No.ACR2007 USPS-FY07-11, file: PEROC flats 

07ACR011608 errata.xls tab 'Summary' 

Price as 

Percent of 

Cost

Pallet Pricing by Container Level

Table VII-C-8

ACR 2007 

Cost Price
Chapter VII—Market Dominant Classes

87

These price-to-cost ratios are based on estimates of direct costs of 

various drivers. Therefore, they are not identical to workshare 

passthroughs, but conceptually are very similar. They show cost 

differentials caused by worksharing activity.

STANDARD MAIL Financial Analysis. Standard Mail’s cost coverage as a class, for 

FY 2007 is 158 percent. As Table VII-D-1 shows, total revenue 

from Standard Mail for FY 2007 was $20.8 billion, which covered 

its attributable cost of $13.2 billion and contributed $7.6 billion to 

institutional cost. The Postal Service did not submit data that were 

aligned with the new product designations, so the Commission 

was unable to perform analysis by product of the pricing 

relationships within the Standard Mail class. The Commission 

anticipates that the Postal Service will provide this data in future 

filings. No commenters addressed the financial data or the lack of 

data at the product level.

39 U.S.C. § 3626(a)(6) requires nonprofit rates to be set in relation 

to their commercial counterparts regardless of nonprofits’ 

independent costs. Nonprofit rates are set to yield per-piece 

revenues that are 60 percent of commercial revenues. The 

Commission calculates that in FY 2007 the actual per-piece 

revenue from Standard nonprofit pieces was 62 percent of 

Standard commercial per-piece revenues.

The law does not require the actual, nonprofit revenues to equal 

exactly 60 percent of commercial revenues. It instead requires a 

forward-looking estimate in setting rates. Thus, the Commission’s 

review of nonprofit revenues in the Annual Compliance Report is 

somewhat limited. However, if over the span of several 

compliance reports, there is a discernable pattern whereby the 

actual nonprofit per-piece revenues are consistently too high or 

Contribution to Contribution to

Attributable Institutional Institutional

Volume Revenue Costs Costs Rev./Pc. Cost/Pc. Costs/Pc. Cost

(000) ($ 000) ($ 000) ($ 000) (Cents) (Cents) (Cents) Coverage

Standard Mail:

Regular 56,555,118 13,026,450 23.033

Nonprofit 12,113,798 1,680,819 13.875

Regular and Nonprofit 68,668,917 14,707,268 9,964,963 4,742,306 21.418 14.512 6.906 147.6%

Enhanced Carrier Route (ECR) 32,177,311 5,787,178 17.985

Nonprofit ECR (NECR) 2,669,884 285,884 10.708

ECR and NECR 34,847,195 6,073,062 3,188,202 2,884,859 17.428 9.149 8.279 190.5%

Total Standard Mail 103,516,112 20,780,330 13,153,165 7,627,165 20.074 12.706 7.368 158.0%

Source: PRC-LR-ACR07-1

Table VII-D-1

Standard Mail

Fiscal Year 2007 Volume, Revenue, Cost, Contribution, and Cost coverage
Chapter VII—Market Dominant Classes

88

too low, the Commission may find that the methodology used in 

setting rates to achieve the nonprofit revenue target should be 

changed or improved.

Worksharing/Rate Design. 

Methodology. The Commission made three changes to the 

Postal Service’s filing which affect Standard Mail costs. As a 

result of the Postal Service’s response to the Commission’s 

Information Request No. 1, Questions 14 and 16, the Commission 

updated the MLOCR-ISS Accept Rate from 86.79 percent to 94.53 

percent in the letter cost model. In the flat cost model, the 

Commission updated the AFSM100 ATHS productivities. See

section VII.A for a more complete discussion of these changes. 

The unit delivery costs used by the Commission in its calculations 

also differs from the Postal Service’s filing. See Appendix B for a 

complete discussion of this change. Additionally, the Postal 

Service updated transportation costs from the original filing on 

March 20, 2007 through the 7th Notice of the United States Postal 

Service of Revisions to Materials Accompanying Its FY 2007 

Annual Compliance Report – Errata (Items 1, 2, 5 and 6) (Seventh 

Notice of Errata).

In its initial comments, Valpak contends that many of the FY 2007 

ECR costs in the Postal Service’s report are anomalous. In 

particular, Valpak compares the costs of several rate categories 

and questions the changes in cost from prior years. Valpak 

highlights the following perceived anomalies:

• The combined mail processing and carrier cost of 

saturation letters has increased 16.3 percent, while 

that of basic carrier route letters has increased 23.3 

percent;

• The combined mail processing and carrier cost of 

saturation flats has declined 2.0 percent, while the 

cost of basic carrier route flats has increased 9.6 

percent;

• The unit cost for high-density parcels has increased 

1,700.3 percent, and that of saturation parcels has 

increased 67.7 percent;
Chapter VII—Market Dominant Classes

89

• Although they are processed in different 

mailstreams, the carrier cost for saturation letters is 

shown to be 3.708 cents, nearly the same as that of 

saturation flats at 3.749 cents; and

• Street-time cost for saturation letters on city routes is 

1.64 cents, and saturation flats, which, unlike letters, 

always require individual handling, is 1.55 cents. 

Valpak Comments at 38-39.

Valpak also contends that it is unclear whether the volume and 

revenue data for Detached Address Labels (DALs) in the FY 2007 

Billing Determinants reflect all DALs in FY 2007 or just those which 

were subject to the surcharge established in Docket No. R2006-1. 

Valpak raises a question about there being a greater number of 

DALs associated with parcels than the number of saturation 

parcels. Valpak believes that occasionally, “fundamental changes 

occur with data recorded in and made available only via the Billing 

Determinants, and transparency necessitates explanation, 

because the new data do not speak for themselves.” Id. at 41 to 

42. 

In reply comments, both Valassis and the Postal Service attempt 

to explain the data in question and offer several reasons for the 

changes in cost noted by Valpak. In response to Valpak’s concern 

about potential anomalies in ECR costs, Valassis offers the 

following explanations:

• The FY 2007 DAL volume estimate is now derived 

from data collected as part of the City Carrier Cost 

System (CCCS) and Rural Carrier Cost System 

(RCCS). Previously, in Docket No. 2006-1, DALs 

were estimated and distributed to their respective 

cost systems on the basis of an industry estimate 

multiplied by its respective ECR saturation letter 

distribution factor.

• The FY 2007 proportions of ECR saturation letters 

and flats on city routes that are sequenced are now 

estimated using data directly from the CCCS. 

Previously, this was estimated using IOCS costs in 

conjunction with saturation casing productivities.
Chapter VII—Market Dominant Classes

90

• The FY 2007 rural boxholder volume is now 

distributed to shape based on new information 

collected as part of the RCCS. Previously, 

boxholder volume was distributed to shape based on 

RPW proportions.

• Due to the introduction of the DAL surcharge, the 

number of DALs in the system has declined, thus the 

total delivery cost of saturation flats declined.

• The Postal Service has disaggregated the dropshipadjusted mail processing costs to reflect the large 

differences in average piece-weight among the 

various ECR rate categories.

Valassis Reply Comments at 3-4.

In reference to Valpak’s concerns about changes in unit costs for 

ECR parcels between the Docket No. R2006-1 estimates and 

FY 2007 actuals, Valassis notes that ECR parcel costs are likely to 

be affected by sampling errors, by costing improvements in the 

allocation of delivery cost among ECR rate categories, and by the 

development of the ECR dropship-adjusted mail processing costs. 

Id. at 4-5.

Valassis also addresses the similarity between the delivery cost of 

saturation letters and flats with the following observations:

• Saturation flats (without DALs) correctly show a 

slightly lower unit city delivery cost than saturation 

letters because only about 65 percent of saturation 

letters bypass carrier casing and are delivered in 

pre-sequenced bundles while over 74 percent of 

saturation flats bypass carrier casing.

• Conversely, rural delivery cost is slightly higher for 

saturation flats than for saturation letters because a 

greater share of saturation letters are delivered as 

either DPS or boxholder mail (the lowest cost mail to 

deliver).

• Thus, when city and rural carrier unit costs by shape 

are averaged together on a weighted-volume basis, 

the results for saturation letters and saturation flats 

are similar.
Chapter VII—Market Dominant Classes

91

With respect to the questions Valpak raises regarding DALs and 

parcels, the Postal Service provides the following explanation: 

For Standard Mail flats, detached address labels may 

only be used with pieces mailed at Saturation rates. 

(DMM 602.4.1.2) In contrast, for Standard Mail parcels, 

detached address labels are required on city delivery 

routes for merchandise samples mailed to at least 25 

percent of the addresses in any 5-digit ZIP Code delivery 

area. This requirement applies to pieces qualifying for 

ECR Basic, ECR High-Density, and ECR Saturation 

rates. (DMM 602.4.1.3) For this reason, the number of 

DALs for ECR parcels may well exceed the number of 

Saturation parcels.

Response to Commission Information Request No. 2, question 14.

While the explanations offered by Valassis and the Postal Service 

may be legitimate, Valpak raises an important issue. The Postal 

Service should support its annual report with more complete 

explanations, and discuss data which may be perceived as 

anomalous, such as large variations in unit costs. With only 90 

days available for the Commission to make its findings and even 

less time for interested parties to analyze the data and submit 

comments, it is crucial to the process that the data filed by the 

Postal Service is accompanied by accurate descriptions and a 

thorough analysis. 

The Postal Service’s first annual report does offer some 

explanation of methodological changes as well as the flow of 

inputs and outputs, but more complete explanations in the future 

will be very helpful.

Findings. The Commission has reviewed the passthrough 

calculations submitted by the Postal Service in USPS-FY07-3 and 

has updated the costs as discussed above. Table VII-D-2 below 

shows the passthroughs based on the updated costs for the 

Standard Mail Class.
Chapter VII—Market Dominant Classes

92

Type of Worksharing

Discount 

(cents)

Unit Cost 

Avoidance 

(cents)

Passthrough

(Benchmark)

Standard Mail Regular Automation Letters

Presorting (dollars / piece)

Automation AADC Letters 1.4 1.3 104.0%

(Automation Mixed AADC Letters)

Automation 3-digit Letters 0.5 0.3 145.4%

(Automation AADC Letters)

Automation 5-digit Letters 1.5 1.6 94.9%

(Automation 3-digit Letters)

Pre-barcoding (dollars / piece)

Automation Mixed AADC Letters 0.3 (0.0) -2184.9%

(Nonautomation Machinable Mixed ADC Letters)

Standard Mail Regular Nonautomation Letters

Presorting (dollars / piece)[1]

Nonautomation AADC Machinable Letters 0.9

(Nonautomation Mixed AADC Machinable Letters)

Nonautomation ADC Nonmachinable Letters 8.0 10.1 79.6%

(Nonautomation Mixed ADC Nonmachinable Letters)

Nonautomation 3-digit Nonmachinable Letters 2.9 2.3 125.4%

(Nonautomation ADC Nonmachinable Letters)

Nonautomation 5-digit Nonmachinable Letters 8.3 9.5 87.2%

(Nonautomation 3-digit Nonmachinable Letters)

Standard Mail Regular Letters

Drop Ship (dollars / pound)

DBMC Letters 15.9 18.6 85.7%

(Origin Letters)

DSCF Letters 20.3 22.5 90.1%

(Origin Letters)

Standard Mail Regular Automation Flats

Presorting (dollars / piece)

Automation ADC Flats 5.3 6.8 78.0%

(Automation Mixed ADC Flats)

Automation 3-digit Flats 3.2 5.4 58.5%

(Automation ADC Flats)

Automation 5-digit Flats 5.7 10.0 57.2%

(Automation 3-digit Flats)

Pre-barcoding (dollars / piece) [2]

Automation Mixed ADC Flats 3.8 2.3 162.6%

(Nonautomation Mixed ADC Flats)

Standard Mail Regular Nonautomation Flats

Presorting (dollars / piece)

Nonautomation ADC Flats 5.4 7.0 76.6%

(Nonautomation Mixed ADC Flats)

Nonautomation 3-digit Flats 3.4 3.2 107.1%

(Nonautomation ADC Flats)

Nonautomation 5-digit Flats 6.4 8.5 74.9%

(Nonautomation 3-digit Flats)

Source and Notes displayed on the following page.

Table VII-D-2

Standard Regular and Standard Nonprofit Regular

Workshare Discounts and Benchmarks

ACR 2007
Chapter VII—Market Dominant Classes

93

Type of Worksharing

Discount 

(cents)

Unit Cost 

Avoidance 

(cents)

Passthrough

(Benchmark)

Standard Mail Regular Flats

Drop Ship (dollars / pound)

DBMC Flats 15.9 18.6 85.7%

(Origin Flats)

DSCF Flats 20.3 22.5 90.1%

(Origin Flats)

Standard Mail Regular Parcels

Presorting (dollars / piece)

BMC Machniable Parcels 19.3 17.9 107.6%

(Mixed BMC Machniable Parcels)

5-digit Machniable Parcels 37.0 34.4 107.6%

(BMC Machniable Parcels)

ADC Irregular Parcels 21.5 104.0 20.7%

(Mixed ADC Irregular Parcels)

3-digit Irregular Parcels 26.1 104.0 25.1%

(ADC Irregular Parcels)

5-digit Irregular Parcels 4.6 17.6 26.2%

(3-digit Irregular Parcels)

Pre-barcoding (dollars / piece)[3]

Mixed BMC Machniable Barcoded Parcels 5.0

(Mixed BMC Machniable Nonbarcoded Parcels)

Mixed ADC Irregular Barcoded Parcels 5.0

(Mixed ADC Irregular Nonbarcoded Parcels)

Standard Mail Regular NFMs

Presorting (dollars / piece)

BMC/ADC NFMs (Irregular Parcels) 26.1 104.0 25.1%

(Mixed BMC/ADC NFMs (Irregular Parcels))

3-digit NFMs (Irregular Parcels) 26.1 104.0 25.1%

(BMC/ADC NFMs (Irregular Parcels))

5-digit NFMs (Irregular Parcels) 4.6 17.6 26.2%

(3-digit NFMs (Irregular Parcels))

Pre-barcoding (dollars / piece)[3]

Mixed ADC Barcoded NFMs 5.0

(Mixed ADC Nonbarcoded NFMs)

Standard Mail Regular Parcels, NFMs

Drop Ship (dollars / pound)

DBMC Parcels, NFMs 15.9 18.6 85.7%

(Origin Parcels, NFMs)

DSCF Parcels, NFMs 20.3 22.5 90.1%

(Origin Parcels, NFMs)

DDU Parcels, NFMs 24.8 26.7 92.8%

(Origin Parcels, NFMs)

Source: PRC-ACR2007-LR5.

Notes

[1]

[2]

[3]

The Postal Service letters mail processing cost model only estimates costs for the combined nonautomation 

machinable AADC and Mixed AADC categories.

Standard Regular discount is shown. Nonprofit discount is $0.035 resulting in a passthrough of 150 percent 

for ACR 2007. All other commercial and nonprofit discounts are equal

The Postal Service Standard Mail NFM / Parcel mail processing cost model does not estimate costs 

separately for pre-barcoded and non-barcoded pieces. 

Table VII-D-2 (continued)

Standard Regular and Standard Nonprofit Regular

Workshare Discounts and Benchmarks

ACR 2007
Chapter VII—Market Dominant Classes

94

The Commission identifies several presort discounts that, when 

compared with avoidable cost, produce passthroughs that were 

over 100 percent in FY 2007. Three letter categories have above 

100 percent passthroughs: Automation AADC Letters, Automation 

3-digit Letters, and Non-automation 3-digit Nonmachinable 

Letters. They have passthroughs that are 104.0 percent, 145.4 

percent, and 125.4 percent, respectively. 

Non-automation 3-digit Flats, BMC Machinable Parcels, and 

5-digit Machinable Parcels presort discounts also produce 

passthroughs above 100 percent, 107.1 percent, 107.6 percent, 

and 107.6 percent, respectively. The pre-barcoding discount for 

Automation Mixed ADC Flats had a passthrough of 162.6 percent 

in FY 2007.30 In Docket No. R2006-1, the Commission found it 

appropriate for the differential between the MAADC nonautomation flat and the MAADC automation flat to be greater than 

100 percent to alleviate rate shock from classification changes that 

disaggregated the “basic” rate category into a Mixed ADC rate 

category and an ADC rate category. PRC Op. R2006-1, ¶ 5594.

For each of the other categories, the Commission had set 

passthroughs in Docket No. R2006-1 at or below 100 percent. 

The Commission’s passthroughs were based on estimated unit 

cost avoidances for FY 2008. The FY 2007 cost avoidances 

necessarily differ from the Docket No. R2006-1 projections for 

FY 2008. Future annual compliance reports will be comparing 

actual data between fiscal years which will make comparisons of 

passthroughs more meaningful.

In its passthrough calculation, the Postal Service calculates the 

cost avoidance for pre-barcoding letters using only the difference 

in mail processing unit costs for Non-automation Machinable 

Mixed ADC letters and Automation Mixed AADC letters. The 

accepted methodology for calculation of cost avoidances identifies 

unit cost differences consisting of both unit mail processing costs 

and unit delivery costs. The Postal Service should use the 

accepted methodology or provide a convincing explanation for 

30 The corresponding nonprofit pre-barcoding discount differed from the 

commercial discount in this instance. The nonprofit pre-barcoding had a passthrough of 

150 percent. The Commission’s rationale and discussion of this passthrough in this ACR 

applies to both commercial and nonprofit discounts.
Chapter VII—Market Dominant Classes

95

deviating from accepted practice of including both mail processing 

and delivery cost in calculating cost avoidance.

Standard Mail dropship discounts are shown in Table VII-D-3.

Type of Worksharing

Discount 

(cents)

Unit Cost 

Avoidance 

(cents)

Passthrough

(Benchmark)

Standard Mail Letters, Flats, Parcels

Drop Ship (dollars / pound)

DBMC Letters 15.9 18.6 85.7%

(Origin Letters)

DSCF Letters 20.3 22.5 90.1%

(Origin Letters)

DDU Letters 24.8 26.7 92.8%

(Origin Letters)

DBMC Flats 15.9 18.6 85.7%

(Origin Flats)

DSCF Flats 20.3 22.5 90.1%

(Origin Flats)

DDU Flats 24.8 26.7 92.8%

(Origin Flats)

DBMC Parcels 15.9 18.6 85.7%

(Origin Parcels)

DSCF Parcels 20.3 22.5 90.1%

(Origin Parcels)

DDU Parcels 24.8 26.7 92.8%

(Origin Parcels)

Source: PRC-ACR2007-LR5.

Table VII-D-3

Standard Mail Enhanced Carrier Route and Nonprofit Enhanced Carrier Route

Workshare Discounts and Benchmarks

ACR 2007
Chapter VII—Market Dominant Classes

96

Table VII-D-4 shows the presort cost differentials and resulting 

passthroughs for ECR categories of Standard Mail.

Table VII-D-4

Standard Mail Enhanced Carrier Route and Nonprofit Enhanced Carrier Route

Workshare Discounts and Benchmarks

Unit Cost

Avoidance Discount Pass-

(cents) (cents) through

Letter Presort Cost Differentials

Basic Letter 11.5

High Density Letter 4.9

Presort Differential 6.6 4.0 61%

High Density Letter 4.9

Saturation Letter 5.1

Presort Differential -0.2 0.9 -416%

Flat Presort Cost Differentials

Basic Flat 12.7

High Density Flat 8.1

Presort Differential 4.6 4.4 96%

High Density Flat 8.1

Saturation Flat 5.3

Presort Differential 2.8 1.8 64%

Parcel Presort Cost Differentials

Basic Parcel 113.7

High Density Parcel 362.2

Presort Differential -248.6 12.1 -5%

High Density Parcel 362.2

Saturation Parcel 34.5

Presort Differential 327.7 0.9 4%

Source: PRC-ACR2007-LR5

ACR 2007
Chapter VII—Market Dominant Classes

97

For the ECR categories, the Commission calculated the 

passthroughs for presorting and its analysis found that the 

passthroughs for High density letter-Saturation letter and Basic 

parcel-High density parcel are negative. Additionally, the 

passthrough for High density Parcel-Saturation Parcel is only 4 

percent. Further analysis indicates that the mail processing unit 

costs may be causing the seemingly anomalous results.

In Docket No. R2006-1 the Commission used both mail processing 

and delivery costs in determining the cost avoidance for ECR mail. 

In the Postal Service’s filing in that case, the mail processing costs 

were only disaggregated between the basic and high-density/

saturation rate categories. In the Commission’s Docket No. 

R2006-1 Opinion, the Commission urged the Postal Service to 

disaggregate these costs. PRC Op. R2006-1, ¶ 5598.

In its submission in this year’s compliance report, the Postal 

Service submitted separate mail processing costs for high-density 

and saturation rate categories. The Commission appreciates the 

Postal Service’s responsiveness in this area. However, the 

disaggregated costs appear to contain anomalies. In particular, 

the mail processing cost for high density parcels and saturation 

parcels was 328.996 cents and 1.278 cents, respectively. The 

mail processing unit cost for high density letters (1.128 cents) is 

less than that of saturation letters (1.435 cents). The Postal 

Service should take a closer look at these costs, identify the 

source of these seemingly anomalous results and take steps to 

correct them, if necessary.

For the entire class, there are several passthroughs that are 

significantly below 100 percent. Although the requirements of the 

PAEA do not directly address workshare discounts that are below 

100 percent of avoidable costs, the first objective in 39 U.S.C. 

§ 3622(b) is “[t]o maximize incentives to reduce costs and 

increase efficiency.” Passthroughs below 100 percent typically 

indicate inefficiencies. The Postal Service should examine such 

potential inefficiencies and work to set rates which more fully 

reflect efficient component pricing.

The Postal Service did not calculate passthroughs for shapebased differences citing the definition of worksharing established 

by PAEA Section 3622(e)(1) which defines the term “workshare 

discount” as “rate discounts provided to mailers for the presorting, 
Chapter VII—Market Dominant Classes

98

pre-barcoding, handling, or transportation of mail . . . .” See Order 

No. 43 in which the Commission provided that “workshare 

discounts, as defined in the PAEA, do not include shape-based 

differences.” 

In its comments, The National Postal Policy Council (NPPC) 

agrees with the Commission’s decision in Docket No. R2006-1 to 

recognize shape-related differences between letters and flats in its 

recommended rates. Additionally, NPPC contends that “progress 

toward full recognition of the cost effects of shape is still 

incomplete.” NPPC Comments at 8. NPPC compares the cost 

differential for Test Year 2008 in Docket No. R2006-1 with the cost 

differential in the Postal Service’s report for FY 2007. It then 

analyzes the difference in unit revenue between Standard Regular 

letters and flats produced by the Docket No. R2006-1 rates. NPPC 

argues that not only has the cost differential between Standard 

Regular letters and flats increased since Docket No. R2006-1 but 

that the FY 2007 cost differential “exceeds by approximately 20 

percent the difference in unit revenue between Standard Regular 

letters and flats”. NPPC also asserts that there is no evidence to 

indicate a sizable difference in demand elasticities which some 

may argue justifies the difference in unit contribution made by 

letter-shaped and flat-shaped pieces. Id. at 9.

In Docket No. R2006-1, the Commission set forth the principle that 

within a subclass, the postage paid for each mailing should cover 

the corresponding attributable cost plus make the same 

contribution per piece as every other mailing within the same 

subclass. See Docket No. R2006-1 PRC Opinion at ¶4001-4037. 

By virtue of this principle, the Commission extended an ECP 

approach to all mail characteristics because it would promote endto-end cost minimization, i.e., productive efficiency. In the section 

above on First-Class worksharing, the Commission discusses the 

benefits of product demand information when determining how to 

reflect cost differences in rates. 

PACKAGE SERVICES Under the Postal Reorganization Act, Package Services mail 

consisted of four subclasses as follows: Parcel Post, Bound 

Printed Matter, Media Mail, and Library Mail. The PAEA classifies 

Bound Printed Matter, Media Mail, and Library Mail as market 

dominant. It bifurcates Parcel Post between market dominant and 

competitive, classifying single-piece Parcel Post as market 
Chapter VII—Market Dominant Classes

99

dominant. In addition, the PAEA classifies single-piece Parcel 

Post International Mail as market dominant. 39 U.S.C. § 3621. 

In Order No. 43, the Commission accepted the Postal Service’s 

proposal that Package Services mail consists of the following five 

products: Single-Piece Parcel Post, Bound Printed Matter Flats, 

Bound Printed Matter Parcels, Library/Media Mail, and Inbound 

Surface Parcel Post (at UPU rates).31 See PRC Order No. 43, 

October 29, 2007, ¶¶ 3029-31; Appendix A at 5. 

Financial Results. As reported by the Postal Service, FY 2007 

financial results for Package Services are shown in Table VII-E-1.

An examination of Table VII-E-1 reveals the following:

Single-Piece Parcel Post attributable costs exceed revenues, 

resulting in a cost coverage of 98.7 percent.32 As a point of 

reference, at the rate category level, the Inter-BMC and Intra-BMC 

cost coverages are 99.7 percent and 95.2 percent, respectively. 

FY 2007 revenues for Bound Printed Matter (BPM) exceed 

attributable costs, producing a cost coverage of 114.7 percent. 

Pursuant to Order No. 43, BPM now consists of two products, 

Flats and Parcels. The Postal Service reports BPM revenue and 

volume data separately by shape for flats and parcels. 

31 Inbound Surface Parcel Post (at non-UPU rates) is discussed in Chapter IX on 

International Mail.

32 Docket No. ACR2007, USPS-FY07-9, File: PP_contribution.xls contains a 

methodology for calculating separate mail processing and transportation attributable 

costs for each rate category within Parcel Post, Parcel Select, and Parcel Return 

Service. Distributing “other” attributable between market dominant and competitive 

products on a per-piece basis provides a basis for computing contribution. 

Table VII-E-1

Package Services

Fiscal Year 2007 Volume, Revenue, Cost, Contribution, and Cost coverage

Contribution to Contribution to

Attributable Institutional Institutional

Volume Revenue Costs Costs Rev./Pc. Cost/Pc. Costs/Pc. Cost

(000) ($ 000) ($ 000) ($ 000) (Cents) (Cents) (Cents) Coverage

Package Services:

Market Dominant Parcel Post:

Inter-BMC 70,885 547,527 549,128 (1,602) 772.412 774.671 (2.260) 99.7%

Intra-BMC 29,413 153,896 161,603 (7,708) 523.218 549.422 (26.205) 95.2%

Total Market Dominant Parcel Post 100,299 701,422 710,732 (9,309) 699.334 708.615 (9.282) 98.7%

Bound Printed Matter 637,595 690,563 602,111 88,452 108.308 94.435 13.873 114.7%

Media Mail 164,088 378,567 230.710

Library Rate 12,527 28,342 226.245

Media and Library 176,615 406,909 445,319 (38,410) 230.393 252.141 (21.748) 91.4%

Total Package Services 914,509 1,798,895 1,758,162 40,732 196.706 192.252 4.454 102.3%

Source: Docket ACR2007, PRC-ACR2007-LR1
Chapter VII—Market Dominant Classes

100

Attributable costs, however, are reported on a consolidated basis. 

Accordingly, cost coverage by BPM product is not available for FY 

2007. The Commission anticipates that costs, too, will be reported 

separately for BPM Flats and BPM Parcels in subsequent ACR 

filings. 

As a result of Public Law 106-384, 114 Stat. 1460 (2000), the 

Postal Service collects cost data for Media Mail and Library Mail 

on a consolidated basis. Thus, since that time cost coverage has 

been calculated for the combined product. For FY 2007, Media/

Library Mail costs exceed revenues, resulting in a cost coverage of 

91.4 percent.33

Only the Public Representative raises any compliance issue 

regarding Package Services products. Noting that Media/Library 

Mail rates did not cover attributable costs, the Public 

Representative concludes that Media/Library Mail is being crosssubsidized by other market dominant products and contends that 

such cross-subsidization raises questions of compliance with a 

number of policies and provisions of the PAEA.34 The Public 

Representative suggests that the Postal Service should provide a 

narrative explanation describing how market dominant products 

comply with the PAEA. Id. 

The Postal Service dismisses any need for a narrative in this 

proceeding as irrelevant, based on its interpretation that the PRA, 

not the PAEA, is the applicable legal standard in this proceeding. 

Postal Service Reply Comments at 5-7. 

The issues raised by the Public Representative’s suggestion and 

the Postal Service’s response may be disposed of briefly. As 

discussed above, the Commission did not adopt the legal standard 

advocated by the Postal Service. The Commission interprets the 

Public Representative’s suggestion for a narrative as forwardlooking, i.e., what the Postal Service should be required to submit 

in ACR proceedings. That issue and others may be appropriately 

considered in a future proceeding to develop the Commission’s 

regulations under 39 U.S.C. §§ 3652 and 3653. 

33 In Docket No. R2006-1, the cost coverage for Media/Library Mail was set at 

103.7 percent. PRC Op. R2006-1, ¶ 5972.

34 Public Representative Comments at 5-6 (footnote omitted). 
Chapter VII—Market Dominant Classes

101

With respect to the reported cost coverages for Single-Piece 

Parcel Post and Media/Library Mail, subsequent events obviate 

the need to take further action with respect to those products. In 

Docket No. R2008-1, the Postal Service increased the rates for 

both products, on average, by more than the applicable price cap, 

2.9 percent. The Postal Service indicates that these increases, 

3.30 percent of Single-Piece Parcel Post and 4.54 percent for 

Media/Library Mail, are designed to improve the profitability of both 

products. ACR at 19; see also Postal Service Reply Comments at 

6, n.9 The changed rates are scheduled to become effective May 

12, 2008. In Order No. 66, the Commission addressed the 

planned rate changes for these products, and, for purposes of that 

proceeding, did not find them inconsistent with applicable 

provisions of the PAEA. PRC Order No. 66, at 43-44. 

Accordingly, for purposes of Docket No. ACR2007, the 

Commission finds that no further action is necessary. 

Worksharing Discounts. Section 3652(b) requires that the Postal 

Service report, with respect to each market-dominant product for 

which a workshare discount was in effect during the reporting 

year, (1) the per-item cost avoided by the Postal Service by virtue 

of such discount (2) the percentage of such per-item cost avoided 

that the per-item workshare discount represents, and (3) the peritem contribution made to institutional costs. The passthrough 

percentages for BPM Flats, BPM Parcels and Media/Library Mail 

reported by the Postal Service in Docket No. ACR2007 are shown 

on Table VII-E-2, Table VII-E-3, and Table VII-E-4, respectively.
Chapter VII—Market Dominant Classes

102

Table VII-E-2

Bound and Printed Matter Flats

Workshare Discounts and Benchmarks 

ACR 2007

Type of Worksharing

Year-End 

Discount 

(Cents) 

Cost 

Avoidance 

(Cents) 

Passthrough [3]

(Benchmark)

BPM Flats

Presorting (cents / piece)[1]

Basic Flats 40.1 See Note [1]

(Single Piece Flats)

Carrier Route Flats 11.1 10.7 103.8%

(Basic Flats)

Presorting (cents / pound)[1]

Basic, Carrier Route Flats

(Single Piece Flats)

 Zones 1&2 5.8 See Note [1]

 Zone 3 6.2 See Note [1]

 Zone 4 5.5 See Note [1]

 Zone 5 5.1 See Note [1]

 Zone 6 3.9 See Note [1]

 Zone 7 4.1 See Note [1]

 Zone 8 3.3 See Note [1]

Pre-barcoding (cents / piece)[2]

Single Piece Automatable Flats 3.0 See Note [2]

(Single Piece Nonautomatable Flats)

Basic Automatable Flats 3.0 See Note [2]

(Basic Nonautomatable Flats)

Carrier Route Automatable Flats 3.0 See Note [2]

(Carrier Route Nonautomatable Flats)

Drop Ship (cents / piece)

Basic, Carrier Route DBMC Flats 31.7 18.7 169.3%

(Basic Origin Flats)

Basic, Carrier Route DSCF Flats 70.0 57.3 122.2%

(Basic Origin Flats)

Basic, Carrier Route DDU Flats 78.4 74.4 105.4%

(Basic Origin Flats)

Source: PRC-ACR2007-LR6.

Notes:

[1] The BPM cost model does not estimate cost differences between single piece and presorted BPM. Single 

piece BPM is a residual category with low volume and adequate data are not available. Previously, rate 

differences between single piece and presorted BPM were based on an assumption that unit mail processing 

costs for single piece BPM were twice that of presorted BPM. See Docket No R2006-1, USPS-T-38, p. 8.

[2] Separate estimates of pre-barcoding cost savings are not available for BPM flats. Based on the cost savings 

for Parcel Post parcels, the pre-barcoding discount for BPM flats implies a passthrough of 96.8%. 

See Docket ACR2007 USPS-FY07-15, 'Parcel Post MP.xls' 

[3] Where discounts are equal to unit avoided costs, the calculated passthroughs may deviate from 100% 

because passthrough percentages are based on unrounded unit avoidable costs.
Chapter VII—Market Dominant Classes

103

ACR 2007

Type of Worksharing

Year-End 

Discount 

(Cents) 

 Cost 

Avoidance 

(Cents) 

Passthrough [2]

(Benchmark)

BPM Parcels / IPPs

Presorting (cents / piece)[1]

Basic Parcels / IPPs 40.3 See Note [1]

(Single Piece Parcels / IPPS)

Carrier Route Parcels / IPPs 11.1 10.7 $ 103.8%

(Single Piece Parcels / IPPS)

Presorting (cents / pound)[1]

Basic, Carrier Route Parcels / IPPs

(Single Piece Parcels / IPPs)

 Zones 1&2 5.8 See Note [1]

 Zone 3 6.2 See Note [1]

 Zone 4 5.5 See Note [1]

 Zone 5 5.1 See Note [1]

 Zone 6 3.9 See Note [1]

 Zone 7 4.1 See Note [1]

 Zone 8 3.3 See Note [1]

Pre-barcoding (cents / piece)

Single Piece Barcoded Parcels / IPPs 3.0 3.1 $ 95.3%

(Single Piece Nonbarcoded Parcels / IPPs)

Basic Barcoded Parcels / IPPs 3.0 3.1 $ 95.3%

(Single Piece Nonbarcoded Parcels / IPPs)

Carrier Route Barcoded Parcels / IPPs 3.0 3.1 $ 95.3%

(Single Piece Nonbarcoded Parcels / IPPs)

Drop Ship (cents / piece)

Basic, Carrier Route DBMC Parcels / IPPs 31.7 18.7 $ 169.3%

(Basic Origin Parcels / IPPs)

Basic, Carrier Route DSCF Parcels / IPPs 70.0 57.3 $ 122.2%

(Basic Origin Parcels / IPPs)

Basic, Carrier Route DDU Parcels / IPPs 78.4 74.4 $ 105.4%

(Basic Origin Parcels / IPPs)

Source: PRC-ACR2007-LR6.

Notes:

[1] The BPM cost model does not estimate cost differences between single piece and presorted BPM. Single

piece BPM is a residual category with low volume and adequate data are not available. Previously, rate 

differences between single piece and presorted BPM were based on an assumption that unit mail processing 

costs for single piece BPM were twice that of presorted BPM. See Docket No R2006-1, USPS-T-38, p. 8.

[2] Where discounts are equal to unit avoided costs, the calculated passthroughs may deviate from 100% 

because passthrough percentages are based on unrounded unit avoidable costs.

Table VII-E-3

Bound and Printed Matter Parcels

Workshare Discounts and Benchmarks 
Chapter VII—Market Dominant Classes

104

BPM workshare discounts for flats and parcels are available for 

presorting (Presorted and Carrier Route), for dropshipping (to the 

DBMC, DSCF and DDU) and for barcoding.

The BPM cost model does not estimate cost differences between 

single-piece and presorted BPM; however it is assumed that mail 

processing costs for single-piece BPM is twice that of presorted 

BPM. The Postal Service notes in USPS-FY07-3, that singlepiece BPM is a residual category with low volume and adequate 

data are not available. Nonetheless, single-piece BPM flats and 

parcels serve as the benchmark for basic and presorted BPM flats 

and parcels. The proxy used is inadequate for determining the 

relationship between the discount offered for basic presorting and 

the costs avoided by the workshare activity. To enable such a 

determination to be made, the Postal Service should undertake a 

study of the costs avoided by the workshare activity from the 

relevant benchmark.

In Docket No. R2006-1, the Commission recommended a $0.111 

discount for Carrier Route Flats, passing through 100 percent of 

the costs avoided. In Docket No. ACR2007, the Postal Service 

reports that the avoided costs have decreased to $0.107, resulting 

in a passthrough of 103.8 percent.

In Docket No. R2006-1, none of the dropshipped discounts 

recommended by the Commission passed through more than 100 

percent of the estimated test year FY 2008 avoided costs. See

PRC Op. R2006-1, ¶¶ 5142-47. In this proceeding, the Postal 

Service reports that during FY 2007 the discount for carrier route 

flats, and each of the dropship passthroughs for BPM flats and 

parcels exceeds 100 percent.
Chapter VII—Market Dominant Classes

105

Table VII-E-4

Media/Library Mail

Workshare Discounts and Benchmarks 

ACR 2007

Type of Worksharing

Year-End 

Discount 

(Cents) 

Cost 

Avoidance 

(Cents) 

Passthrough [1]

(Benchmark)

Media Mail

Presorting (cents / piece)

Basic 33.0 33.4 98.7%

(Single Piece)

5-digit 50.0 18.2 275.4%

(Basic)

Pre-barcoding (cents / piece)

Single Piece Barcoded 3.0 3.1 95.3%

(Single Piece Non-barcoded)

Library Mail

Presorting (cents / piece)

Basic 31.0 33.4 92.7%

(Single Piece)

5-digit 47.0 18.2 258.9%

(Basic)

Pre-barcoding (cents / piece)

Single Piece Barcoded 3.0 3.1 95.3%

(Single Piece Non-barcoded)

Source: PRC-ACR2007-LR6.

Notes:

[1] Where discounts are equal to unit avoided costs, the calculated passthroughs may 

deviate from 100% because passthrough percentages are based on unrounded unit 

avoidable costs.
Chapter VII—Market Dominant Classes

106

Media/Library Mail workshare discounts are available for 

presorting (Basic and 5-Digit) and for barcoding. In Docket No. 

ACR2007, all the passthroughs are (slightly) below 100 percent 

except for 5-Digit. Regarding the discount for 5-Digit presort, in 

Docket No. R2006-1, the Commission found that reducing 

passthroughs would result in significantly higher rates for this mail. 

See PRC Op. R2006-1 at ¶¶ 5986-5988. Passthroughs reported 

for 5-Digit Media/Library Mail, however, are less than those in the 

last rate case.

SPECIAL SERVICES Pursuant to Order No. 43, the Commission approved the list of 

postal products to be included in the Mail Classification Schedule 

(MCS). Within market-dominant products, certain “ancillary” 

Special Services are grouped into one product, while other special 

services are classified as separate products. Special Services 

within the Ancillary Services product can be purchased only in 

conjunction with the purchase of mail services. Other Special 

Service products can be purchased on a “stand-alone” basis. 

The Postal Service acknowledges that it is unable to isolate 

FY 2007 costs, revenues or volumes for the Ancillary Services 

product or certain “stand-alone” Special Services products. ACR 

at 12-14. Nor is the Postal Service able to segregate costs, 

revenues or volumes for Ancillary Services and “stand alone” 

products between market-dominant and competitive, where such 

products are offered as both. As a result, the Commission will 

review domestic special services individually for consistency with 

the applicable requirements of the PAEA.35

The Postal Service’s Annual Compliance Report provides costs, 

revenues, and volume data for the following special services: 

Registered Mail, Certified Mail, Insurance, COD, Money Orders, 

Stamped Cards, Stamped Envelopes, Special Handling, Post 

Office Box/Caller Service, and Other Special Services collectively. 

Other Special Services include Address Correction Services, 

Certificate of Mailing, Delivery/Signature Confirmation, and Return 

Receipt, among others.

35 International special services are discussed elsewhere in this report in the 

section on International Mail.
Chapter VII—Market Dominant Classes

107

During FY 2007, special services as a whole provided a 

contribution to the institutional costs of the Postal Service, 

generating a cost coverage of 139.1 percent. Money Orders, 

Stamped Cards, and COD generated a cost coverage of 168.9 

percent, 160.9 percent, and 146.8 percent, respectively. With the 

exception of Registered Mail, all special services—including Other 

Special Services—made a contribution to institutional costs. 

Registered Mail cost coverage was 96.3 percent. For FY 2006, 

the Registered Mail cost coverage was 55.9 percent. The 

improvement results from a change in the Postal Service’s 

treatment of Cost Segment 3 mail processing costs. The change 

is consistent with the Commission’s Opinion and recommended 

Decision in Docket No. R2006-1.

In Docket No. R2006-1, the Commission found that mail 

processing costs for Registered Mail increased substantially 

between FY 2005 and FY 2006, as a result of Postal Service 

redesign of its data collection system—the In-Office Cost System 

(IOCS). According to the Postal Service, the redesigned IOCS 

would more accurately distinguish mail processing costs 

associated with Registered Mail sent by the Postal Service from 

Registered Mail sent by the public. However, the Commission 

concluded that the resulting distribution of Registered Mail costs 

was unreliable. Instead, the Commission applied an adjustment 

factor used in previous rate proceedings to remove mail 

processing costs associated with the Postal Service’s use of 

Registered Mail.36

For FY 2007, the Postal Service applied the Commissionrecommended adjustment factor. The effect of this change is to 

reduce unit attributable mail processing costs for Registered Mail 

by 50.6 percent, from $13.75 to $6.80, between FY 2006 and FY 

2007, thereby improving the Registered Mail cost coverage for FY 

2007.

For Stamped Envelopes, the Commission revised the Postal 

Service’s initial estimate of revenue from $14.8 million to $15.1 

million, based upon the Postal Service’s response to CIR No. 1, 

Question 25. The effect of this change increased the cost 

36 PRC Op. R2006-1, ¶ 5276.
Chapter VII—Market Dominant Classes

108

coverage for Stamped Envelopes from 99.6 percent initially 

estimated by the Postal Service to 101.4 percent, as revised.

With respect to service performance, the Postal Service 

acknowledges that service performance measurement systems 

are not fully operational. ACR at 15. Consequently, the Postal 

Service did not provide any service performance measurement 

data for special services.
109

Chapter VIII—Competitive Products 

LEGAL STANDARD Section 3653(b)(1) of title 39 requires the Commission to 

determine “whether any rates or fees in effect during [the prior 

fiscal] year (for products individually or collectively) were not in 

compliance with applicable provisions of this chapter (or 

regulations promulgated thereunder)[.]” Section 3633(a) of title 39 

sets forth the legal standards applicable to rates for competitive 

products, directing the Commission to promulgate regulations to:

• Prohibit subsidization of competitive by market dominant 

products;

• Ensure that each competitive product covers its 

attributable costs; and 

• Ensure that collectively competitive products cover an 

appropriate share of institutional costs of the Postal 

Service.

The Commission implemented section 3633 in Order No. 43, 

adopting regulations establishing standards for determining the 

lawfulness of competitive products’ rates (prices). PRC Order No. 

43, October 29, 200737. In brief, these regulations: (1) identify the 

tests the Commission will apply to determine whether or not 

market dominant products are subsidizing competitive products; 

(2) require each competitive product to recover its attributable 

costs as defined in section 3631(b38); and establish the 

requirement that competitive products collectively recover, at a 

minimum, 5.5 percent of the Postal Service’s total institutional 

costs. See 39 C.F.R. § 3015.7.

37 These regulations became effective December10, 2007. 72 Fed. Reg. 64155 

(November 15, 2007).

38 Section 3631(b) defines attributable costs to mean “the direct and indirect costs 

attributable to such product through reliably identified causal relationships.” In Order No. 

43, the Commission concluded that negotiated service agreements, including 

International Customized Agreements, meet the definition of separate products. It 

recognized, however, the possibility that functionally equivalent agreements could be 

grouped as a single product. PRC Order No. 43, ¶ 2177.
Chapter VIII—Competitive Products

110

In Order No. 43, the Commission identified the following as 

competitive products:

 TABLE VIII-A-1

Competitive Products

Express Mail

Domestic Express Mail

Inbound International Expedited Services

Outbound International Expedited Services

Priority Mail

Domestic Priority Mail

Outbound International Priority Mail

Parcel Select

Parcel Return Service

International

International Priority Airlift (IPA)

Internatioal Surface Airlift (ISAL)

International Direct Sacks—M-Bags

Global Customized Shipping Services

Inbound Surface Parcel Post at non-UPU rates

International Money Transfer Service

International Ancillary Services

Competitive Negotiated Service Agreements (NSAs)

Domestic NSAs

Outbound International

Source: PRC Order No. 43, Appendix A, Part B – Competitive Products, §§ 2000-01.

The Postal Service states that “[w]ith the proposed grouping of international 

customized agreements, section 2520 (Global Customized Shipping Services) no 

longer has relevance and should be eliminated from the MCS.” See United States 

Postal Service Submission of Additional Mail Classification Schedule Information in 

Response to Order No. 43, Docket No. RM2007-1, November 20, 2007, at 5, n.7.
Chapter VIII—Competitive Products

111

In its report, the Postal Service identifies 16 competitive 

products.39 ACR at 24-26. In related library references, it 

provides cost, revenue, and volume data for these products, 

noting that the new products do not always directly match the 

previous categories of mail under the PRA. Id. at 23.

The Postal Service takes the position, as it did with respect to 

market dominant products, that domestic and international 

competitive products’ rates in effect during FY 2007 were 

governed by the provisions of the Postal Reorganization Act and, 

thus, for purposes of section 3653, fully complied with the 

applicable requirements of the PRA. Id. at 22. As discussed 

above, the Commission does not find the Postal Service’s 

interpretation persuasive.

^^The prohibition against cross-subsidies

Rule 3015.7(a), which implements section 3633(a)’s prohibition 

against cross-subsidies by market dominant products, establishes 

the standards the Commission will employ to test for crosssubsidies. The Commission has expressed its intention to use the 

incremental cost test, but acknowledges that it presently lacks the 

data necessary to conduct that test. Until reliable incremental cost 

data are available, the Commission has stated that it would test for 

cross-subsidies by comparing whether revenues from competitive 

products were greater than the sum of their attributable costs, plus 

causally related, group-specific costs.

The Postal Service provides revenue and attributable cost data for 

competitive products, but indicates that no estimate of groupspecific costs is available. The Postal Service states that it has 

begun the process of identifying causally related, group-specific 

costs. Id. at 27. Until this analysis is completed, the Commission 

can not compare revenues and to more than attributable costs. 

39 The Postal Service distinguishes between Inbound and Outbound International 

Direct Sacks–M-Bags on the basis of the cost, revenue, and volume data underlying 

each product. Under the MCS, these two “products” constitute a single product called 

“International Direct Sacks–M-Bags.” Omitted from the Postal Service’s listing on pages 

24-26 of the ACR are two further competitive products that are included in the MCS: 

Global Customized Shipping Services and Domestic Negotiated Service Agreements. 

As noted, infra, the latter product, Domestic Negotiated Service Agreements, is 

discussed by the Postal Service on page 14 of the ACR.
Chapter VIII—Competitive Products

112

Thus, no separate analysis of potential cross-subsidy is provided. 

The Commission anticipates that such data will be available in 

future Postal Service ACR filings.

ATTRIBUTABLE COST 

RECOVERY

By statute and regulation, each competitive product must recover 

its attributable cost. 39 U.S.C.§3633(a)(2); 39 C.F.R. § 3015.7(b). 

The Postal Service indicates that available FY 2007 cost and 

revenue data do always match the new product list. Thus, while it 

is confident that “major competitive products” recover their 

attributable costs, the Postal Service states that whether some 

smaller competitive products failed to do so cannot be determined 

from the available data. Id. at 27-28. 

Revenue and cost data submitted by the Postal Service filed with 

its annual report suggest that each competitive product except two 

recovers its attributable cost. With respect to international 

negotiated service agreements (or International Customized 

Mailing Agreements), information provided by the Postal Service is 

insufficient to enable the Commission to make a definitive 

determination.

FY 2007 data for Parcel Return Service (PRS) indicate that 

attributable costs exceed revenues, yielding a cost coverage of 

approximately 98 percent. On March 12, 2008, the Postal Service 

filed a notice of changes in rates of general applicability for 

competitive products, including PRS.40 In Docket No. CP2008-3, 

the Commission issued an information request regarding the 

sufficiency of the planned PRS rate changes.41 Rates for Parcel 

Return Service must be set to recover to attributable costs of that 

product.

Inbound Surface Parcel Post (at non-UPU rates) data indicate that 

attributable costs exceeded revenues in FY 2007. Rates for this 

product are set through bilateral agreement. It is the 

40 See Notice of United States Postal Service of Governors’ Decision No. 08-03, 

March 12, 2008. The Commission docketed the Postal Service’s filing as Docket No. 

CP2008-3. 

41 See Commission Information Request No. 1, Docket No. CP2008-3, March 19. 

2008 and Response of the United States Postal Service to Commission Information 

Request No. 1, March 26, 2008. To the extent that there are carrier cost savings for 

parcel return service, the coverage may higher. However, the Postal Service did not 

provide these data.
Chapter VIII—Competitive Products

113

Commission’s understanding that the agreement may be subject 

to periodic adjustment. At the next opportunity for renegotiation, 

rates under this agreement must be adjusted so that revenues for 

this product recover its attributable costs consistent with 

applicable PAEA requirements. 

International Customized Mail (ICM) agreements are a form of 

Negotiated Service Agreement. These are reviewed in chapter IX.

COMPETITIVE PRODUCTS 

CONTRIBUTION

In implementing § 3633(a)(3), the Commission established the 

initial contribution from competitive products collectively at 5.5 

percent of the Postal Service’s total institutional costs. 39 C.F.R. 

§ 3015.7(c). The Postal Service estimates that the aggregate 

competitive products share of institutional costs for FY 2007 is 

5.66 percent. ACR at 28; USPS-FY07-9.

Based on its review of the data FY 2007 data submitted by the 

Postal Service, the Commission confirms that competitive 

products’ contribution to institutional cost exceeded the threshold 

established in rule 3015.7(c).

COMMENTER ISSUES Only one public comment addressed competitive products issues. 

DMA and PSA suggest that there may be a need for the 

Commission to reevaluate competitive products’ contribution 

based on the “razor thin margin” reported by the Postal Service in 

this proceeding as well as the general findings offered by the 

Federal Trade Commission in its recent report.42 In addition, Joint 

Commenters suggest that possible changes to Postal Service 

costing systems may have an effect on the estimated costs for 

competitive products and thus affect their share of institutional 

costs. Joint Commenters urge the Commission “to hold 

competitive products harmless for the impact of adjustments in 

how costs are measured.” Id. at 7.

This proceeding is not the forum for considering Joint 

Commenters’ suggestion that the Commission reevaluate 

competitive products’ current contribution. Nor is it necessary for 

the Commission to speculate on what it might do in the future in 

42 DMA-PSA at 6, citing “Accounting for Laws that Apply Differently to the United 

States Postal Service and Its Private Competitors,” A Report by the Federal Trade 

Commission (December 2007) at 55.
Chapter VIII—Competitive Products

114

response to possible changes in costing methods. The 

Commission recognizes that, pursuant to section 3633(a), 

regulations applicable to competitive products may be revised 

from time-to-time. 
115

Chapter IX—International Mail

INTRODUCTION The Commission’s Annual Compliance Determination marks the 

first Commission report to publicly review the financial and service 

performance (where applicable) of the international mail services 

offered by the Postal Service.43 Appendix A describes 

international mail services, organizes such services into market 

dominant and competitive products as listed in the MCS, and 

briefly discusses the origin and development of international mail 

volumes, revenues and costs. The rates and fees in effect for 

international mail during FY 2007 were set by the Postal Service 

without prior Commission review pursuant to the provisions of the 

PRA. 

SUMMARY AND FINDINGS The distinction between outbound rates and inbound rates has 

important ramifications for the Postal Service’s financial 

performance. The Commission’s major findings for FY 2007 

follow:

• Revenues exceeded attributable costs for international mail as a whole, providing a contribution of 

$256.1 million;

• Revenues for each outbound product exceeded their 

corresponding attributable costs;

• Revenues from market dominant inbound First-Class 

Mail International were substantially less than their 

corresponding attributable costs;

• Revenues for competitive inbound Surface Parcel 

Post (at non-UPU rates) did not cover their corresponding attributable costs by a relatively small 

amount.

43 Pursuant to section 3663 of the Postal Reorganization Act, the Commission 

issued eight annual reports to Congress, covering Fiscal Years 1998 through 2005. See

Docket Nos. IM99-1, IM2000-1, IM2001-1, IM2002-2, IM2003-1, IM2004-1, IM2005-1 

and IM2006-1. However, the content of these reports are not public. See 112 Stat. 

2681-527.
Chapter IX—International Mail

116

Since the Commission began issuing its Reports to Congress on 

the revenues, volumes and costs of international mail in FY 1998, 

the revenues for inbound mail have been problematic. The noncompensatory nature of market dominant inbound mail means that 

domestic mailers are subsidizing foreign mailers who use the 

same postal infra-structure, but bear none of the burden of 

contributing to its institutional cost. This problem stems primarily 

from the rate-setting procedure for inbound letter post44, the 

largest inbound category of mail. Rates for this category are 

established by international agreement through the UPU,45 of 

which the United States is a member. However, changes in rates 

embodied in the agreement (i.e., the UPU Convention) are only 

made once every four years and must be approved by a majority 

of the UPU’s 191 member countries. While the UPU is moving, in 

principle, towards more cost-based, country specific rates, 

progress has been slow.

In accordance with the UPU Convention, the Postal Service (or 

any postal administration) can opt out of the UPU-established 

rates by negotiating bilateral or multilateral rate agreements with 

other countries for some or all of its international mail. As noted 

above, inbound Surface Parcel Post at non-UPU rates do not 

provide revenues that cover attributable cost. While the resulting 

loss of contribution is relatively small, the non-compensatory 

nature of the non-UPU rates for inbound Surface Parcel Post is 

particularly troublesome as these rates were negotiated on a 

bilateral basis.

44 The term “letter post” refers to mail that is not Parcel Post or Express. Thus, 

letter post, also referred to as LC/AO mail, basically contains mail similar to domestic 

First-Class Mail, Periodicals, Standard Mail, Bound Printed Matter, and Media/Library 

Mail, weighing up to four pounds.

45 The Universal Postal Union (UPU) is a United Nations technical agency 

through which international treaties governing the exchange of international mail, 

including rates, are negotiated among its 191 members. The U.S. is a member of the 

UPU.
Chapter IX—International Mail

117

ANALYSIS OF 

INTERNATIONAL MAIL

Market Dominant Products. 

Outbound Mail. For FY 2007, the Postal Service reports 

that outbound First-Class Mail International generated a net 

contribution to institutional costs of $188.8 million on revenues of 

$680.3 million and costs of $491.5 million. ACR at 8. Outbound 

International Ancillary (Special) Services, covered their costs and 

generated a small contribution to the institutional costs of the 

Postal Service during FY 2007. 

In the Postal Service’s ACR, service performance for First-Class 

Mail International is reported with, but separately from, domestic 

First-Class Mail. According to the Postal Service, on-time service 

performance is measured for the “domestic leg of transit” for both 

outbound and inbound single-piece First-Class Mail International 

“using the same set of service standards as domestic First-Class 

Mail.”46 For outbound mail, the transit time begins when test 

letters are retrieved from collection boxes, etc., and ends when the 

letters are sorted at designated international mail processing 

facilities in the U.S. For inbound mail, the transit time begins with 

“arrival at the international processing center and ends with 

delivery to the intended recipient.” Id. at 16. 

The Postal Service reports on-time delivery performance of 91.4 

percent for single-piece First-Class Mail International. Id. at 17. 

As with domestic First-Class Mail service performance, the 

reported percentage represents the performance of single-piece 

First-Class Mail letters, cards, and flats, combined. Unlike 

domestic First-Class Mail, this percentage is a composite of 

overnight, 2-day, and 3-day performance, as well as performance 

for both outbound and inbound First-Class Mail International.

The Postal Service did not provide any service performance 

measurement data for outbound International Ancillary (Special) 

Services.

46 Id., at 16. Service performance for First-Class Mail International letters is 

measured by the International Mail Measurement System (IMMS), operated by an 

external service performance measurement contractor, using methods comparable to 

EXFC. See “United States Postal Service: Service Performance Measurement,” 

November 2007, at 28-29, incorporated in Notice of Request for Comments on Service 

Performance Measurement Systems for Market Dominant Products, December 4, 2007.
Chapter IX—International Mail

118

Based upon the financial results discussed above, the 

Commission finds the rates and fees for outbound First-Class Mail 

International to be consistent with the applicable provisions of 

chapter 36 of the PAEA. With respect to service performance, the 

Commission can not evaluate outbound First-Class Mail 

International service performance against the established 

overnight, 2-day, and 3-day service standards using the 

performance score of 91.4 percent, as the reported score is a 

composite of the overnight, 2-day, and 3-day performance for both 

outbound and inbound First-Class Mail International service. The 

Postal Service should revise its reporting of First-Class Mail 

International service performance and provide overnight, 2-day, 

and 3-day performance for both outbound and inbound, 

separately. 

Inbound Mail. In contrast with outbound First-Class Mail 

International, however, inbound First-Class Mail International 

revenues did not cover costs, and therefore made no contribution 

to institutional costs. For FY 2007, the Postal Service reports a 

loss from inbound First-Class Mail International of $72.8 million on 

revenues of $197.9 million and costs of $270.7 million. Id. at 9. In 

addition, revenues from inbound Registered Mail did not cover 

costs.47 Consequently, market dominant inbound products as a 

whole did not make any contribution to the institutional costs of the 

Postal Service.

Losses in inbound First-Class Mail International and Registered 

Mail were offset slightly by a positive contribution from inbound 

Surface Parcel Post at UPU rates. Although representing a very 

small amount of volume, inbound Surface Parcel Post at UPU 

rates not only generated sufficient revenues to cover costs, but 

produced the highest cost coverage of any international mail 

product—market dominant or competitive—during FY 2007. 

For inbound First-Class Mail International, the net loss in 

contribution is caused by the failure of revenues from foreign 

postal administrations, with the exception of Canada, to cover 

47 The Postal Service’s ability to increase revenues for inbound Registered Mail is 

limited in the short term because reimbursement rates are subject to negotiations in the 

UPU. Those negotiations occur once every four years. The Commission understands 

that the Postal Service plans to press for more compensatory rates for inbound 

Registered Mail during future negotiations in the UPU.
Chapter IX—International Mail

119

attributable costs. Such revenues, also known as terminal dues, 

are determined by rates set by the UPU, and are not 

compensatory. Revenues from Canada, on the other hand, are 

determined by a bilateral agreement, whose rates are 

compensatory. The fact that UPU terminal dues rates are 

insufficient to cover costs is exacerbated by the Postal Service’s 

failure to obtain the maximum terminal dues revenues as a result 

of its failing to meet UPU quality-of-service “targets” for inbound 

First-Class Mail International, as discussed below. 

The impact of non-compensatory UPU terminal dues rates on 

Postal Service revenues is a long-standing problem identified by 

the Commission in previous international mail reports to Congress. 

The Commission here reiterates the recommendation provided in 

its most recent international mail report to Congress:48

The Postal Service should negotiate compensatory 

bilateral or multilateral rates with industrialized countries 

and those developing countries that are sources of 

significant volume.

Non-compensatory terminal dues revenues cause domestic 

mailers to cross-subsidize foreign mailers of inbound First-Class 

Mail International. 

With respect to service performance, measurement of the 

domestic leg of inbound First-Class Mail International is 

incorporated into the composite performance of all First-Class Mail 

International, and is not separately provided by the Postal Service. 

Service performance data for inbound Surface Parcel Post and 

International Ancillary (Special) Service is not yet available from 

the Postal Service. 

Quality of Service-Linked Terminal Dues 

Revenues. Terminal dues revenues are derived from 

payments for handling and delivering inbound letter post. Under 

the UPU’s “quality of service link to terminal dues” system, 

payments are adjusted for the quality of delivery service provided 

in the country of destination for inbound letter post coming from 

other countries participating in the system. The United States 

48 Docket No. IM2006-1 (Non-Public), Report to the Congress: FY 2005 

International Mail Volumes, Costs, and Revenue, June 30, 2006, at 3.
Chapter IX—International Mail

120

participates in a quality of service-linked terminal dues system with 

other industrialized countries, and a few developing countries. 

Service performance is measured by the UNEX monitoring 

system, which is operated by the International Post Corporation, a 

cooperative association of 24 member postal administrations in 

Europe, North America and Asia-Pacific. The UNEX monitoring 

system is separate from the IMMS that is used to develop the 

composite service performance score for outbound and inbound 

international mail. 

In accordance with the quality of service-linked terminal dues 

system, each participating country receives, as an incentive, a 

2.5 percent increase in their terminal dues payments for 

participation. In addition, each participating country is eligible for 

another 2.5 percent increase if service performance for inbound 

mail achieves the UPU-established annual performance 

“target”—the percentage of inbound mail delivered within the 

service standard of the recipient country. Based upon these 

bonuses, each participating country could earn up to 105 percent 

of its otherwise expected terminal dues revenues for achieving the 

established target when delivering inbound mail. However, each 

participating country can also be penalized if the annual service 

performance target is not met. The penalty is a 1/3 percent 

(0.0333%) reduction of their expected terminal dues payment for 

each percentage point that service performance falls below the 

annual service performance target, not to exceed 5 percent.49

Service performance is measured based upon the elapsed time 

between the time of entry with, or transfer to (after customs 

clearance), the Postal Service, whichever is later, and delivery of 

the inbound mail to the intended recipient. In addition, 

measurement is undertaken only on inbound mail delivered to 

addresses in a select number of metropolitan areas. For the 

Postal Service then, quality of service performance is measured 

based upon the percentage of inbound First-Class Mail 

International delivered to those metropolitan areas that achieves 

49 Universal Postal Union, Quality of Service Link to Terminal Dues for Countries 

in the Target System: Users Manual (24 March 2007), Module 3 – Remuneration 

Principles. The remuneration formula is: Remuneration = 100% - [(Quality of Service 

Target – Actual Quality of Service) x Penalty Factor] + 2.5% Participation Incentive. If, 

for example, Actual Quality of Service were 70%, remuneration would be 100% - [(85% - 

70%) x 1/3%] = 95% + 2.5% = 97.5%. Id.
Chapter IX—International Mail

121

the service “targets” for overnight, 2-day, and 3-day First-Class 

Mail. The UPU-established quality of service “targets” that 

determine bonuses and penalties were set at 85 percent and 86 

percent for calendar years 2006 and 2007, respectively. 

In FY 2007, terminal dues payments to the Postal Service for 

delivering inbound First-Class Mail International from participating 

countries did not to cover attributable costs, producing a cost 

coverage far below 100 percent. Because the Postal Service did 

not meet the UPU quality of service target for calendar year 2006, 

it received less than the 5 percent maximum terminal dues bonus 

payment for the first quarter (October-December, 2006) of 

FY 2007. Moreover, preliminary service performance data for 

January through November 2007 suggests that the Postal Service 

will likely not meet the UPU quality of service target for calendar 

year 2007.50 Failure to meet the UPU quality of service target for 

calendar year 2007 means that the Postal Service will fail to 

receive the maximum terminal dues revenues, equal to 

105 percent, for the last three quarters of FY 2007, which would 

improve the cost coverage for inbound First-Class Mail 

International by a relatively small amount.

Competitive Products. 

Outbound Mail. During FY 2007, competitive outbound 

products, including outbound International Ancillary (Special) 

Services,51 generated sufficient revenues to cover costs, and 

therefore made a contribution to the institutional costs of the 

Postal Service. Among competitive outbound products, Priority 

50 It should be noted, however, that the Postal Service does not consider the 

quality of service performance results for purposes of terminal dues payments 

comparable to any other data heretofore reported in its Annual Compliance Report. 

More specifically, the Postal Service does not consider this service performance data, 

which is compiled on a calendar year basis, as strictly comparable to the FY 2007 period 

covered by this report. As a result, the year-to-date performance omits data for the 

October-December 2006 period and includes data for the October-November 2007 

period. 

51 In the draft MCS, International Money Orders, both outbound and inbound, are 

classified as services within the separate "stand alone" competitive product, International 

Money Transfer Service (MCS § 2530). See Order No. 43, Appendix A, at 3. 

International Money Orders as a whole covered its costs and generated a positive 

contribution to the institutional costs of the Postal Service. For analysis, however, Money 

Orders are included with all other competitive special services. 
Chapter IX—International Mail

122

Mail International ranked highest in contribution. International 

Expedited Services, consisting of Global Express Guaranteed and 

Express Mail International, ranked second highest. International 

Parcel Airlift (IPA) Service ranked third highest among competitive 

outbound products, followed by International Surface Airlift (ISAL). 

Global Direct Outbound and International Direct Sacks-M-bags 

ranked fifth and sixth, respectively. Collectively, however, IPA, 

ISAL, M-Bags, and Global Direct Outbound provided a relatively 

small amount of contribution to institutional costs. 

Within competitive outbound products, International Customized 

Mail (ICM) agreements as a whole provided a positive contribution 

to institutional costs. Based upon additional data provided by the 

Postal Service, however, the Commission found ICMs in the 

competitive product, International Direct Sacks-M-Bags, did not to 

cover costs. Moreover, the additional data permitted the 

Commission to make a preliminary determination as to whether 

individual ICMs, as separate competitive products in the Mail 

Classification Schedule, covered costs. This matter is discussed 

more fully below.

Inbound Mail. Inbound competitive products collectively 

comprise the smallest source of contribution to the institutional 

costs of the Postal Service. While inbound competitive products 

as a whole generated a positive contribution to institutional costs, 

revenues for inbound Surface Parcel Post at non-UPU rates did 

not cover costs. Given that revenues for inbound Surface Parcel 

Post at non-UPU rates are derived from inward land charges 

established through bilateral negotiations, the Postal Service 

should direct its efforts in upcoming negotiations to conclude an 

agreement that ensures all inward land charges for competitive 

inbound Surface Parcel Post at non-UPU rates are compensatory. 

International Customized Mail 

Agreements. ICM agreements made a positive 

contribution to the institutional costs of the Postal Service. 

However, each ICM is classified as a separate competitive product 

in the Mail Classification Schedule (MCS). Order No. 43, ¶¶ 2177, 

3001. As such, each ICM must be evaluated for its consistency 

with section 3633(a)(2) of the PAEA, which requires that each 

competitive product cover its costs attributable. 
Chapter IX—International Mail

123

To make this evaluation, the Commission asked the Postal 

Service to provide “revenue, pieces, weight, volume variable cost, 

and product-specific cost for each ICM contract” in effect during 

FY 200752. The Postal Service provided the requested 

information on March 19, 2008, just prior to the statutory 

publication data for this report. This was not sufficient time to 

permit a complete Commission analysis. The Commission’s 

analysis was hampered further by difficulties in reconciling 

differences between specific revenue, cost and volume data 

provided by the Postal Service for each ICM and summary data for 

those same ICMs.

Nevertheless, the Commission’s preliminary analysis suggests 

that in FY 2007, about 10 percent of active ICMs produced a loss. 

These ICMs reduced the total contribution from ICMs by 

approximately 45 percent.

These preliminary results suggest that more vigorous oversight 

and management of certain ICM agreements is warranted. The 

Commission finds that the Postal Service must negotiate more 

favorable contract terms in successor ICM agreements so that 

those agreements that did not recover their attributable costs will 

do so as soon as legally possible.

Furthermore, it is evident that in the past the Postal Service did not 

collect, maintain, and review international operations data with the 

same attention as was given domestic services. Neither the 

Commission nor Postal Service management can exercise their 

respective responsibilities without timely access to sufficient, 

reliable data on costs and performance. The Commission views 

correction of these deficiencies as a matter of highest importance.

52 Commission Information Request No. 1, question 1, January 24, 2008, at 1-2.
125

Chapter X—Negotiated Service Agreements

In 2002, the Postal Service proposed the first Negotiated Service 

Agreement (NSA) with Capital One Services, Inc. (Docket No. 

MC2002-2). The agreement combined two main elements: 

(1) declining block rates intended to encourage additional use of 

First-Class Mail for soliciting customers, and (2) the substitution of 

electronic notices in lieu of the physical return of undeliverable 

solicitations. The Commission approved the NSA with the addition 

of a stop loss provision that limited discounts to the estimated 

savings from the electronic return provision. Since then, the 

Commission has approved five additional NSAs, with HSBC North 

American Holdings Inc., (HSBC); Bank One Corporation, (Bank 

One);53 Discover Financial Services, LLC (Discover); Bookspan; 

and Bank of America Corporation. Two more, with Life Line 

Screening and The Bradford Group, are pending.

In the past year, the Commission has received data collection 

reports from the Postal Service for Bookspan (August 14, 2007 

covering June 2006-May 2007); Capital One (January 31, 2008 

covering October 2006- August 2007); Bank One/Chase (February 

25, 2008 covering April 2006-March 2007); HSBC (February 25, 

2008 covering January 2007-December 2007); and Discover 

(February 26, 2008 covering January 2007-December 2007). 

Each of these agreements includes declining block rates to 

encourage additional use of solicitation mail. All but Bookspan 

also contain provisions to substitute electronic notices for physical 

return of undeliverable solicitations.54

The Postal Service’s annual compliance report addresses NSAs in 

a very limited way, presenting the discounts paid to the one 

company that earned them (Discover) during the fiscal year. See

53 As a result of a merger, the successor NSA partner is referred to as Bank One/

Chase.

54 The Bookspan NSA is designed to encourage Standard Mail volume, which is 

not entitled to forwarding and return service without an additional fee.
Chapter X—Negotiated Service Agreements

126

Response of the United States Postal Service to Questions 15-16 

of Commission Information Request No. 2, February 26, 2008, 

question 15. In the short time between the filing of the data 

collection reports and the Commission’s deadline, some limited 

analysis could be done, the results of which follow. 

For two of the NSAs (Capital One and HSBC), the volumes sent 

by the mailer failed to achieve the levels anticipated, and no 

discounts were awarded. Capital One continued to utilize the 

electronic return provisions, which resulted in an estimated net 

benefit of $2.2 million for the Postal Service. HSBC did not utilize 

electronic returns, and therefore it did not generate any benefit for 

the Postal Service.

The remaining three NSAs (Bookspan, Discover, and Bank One/

Chase) did achieve volumes above the thresholds for the declining 

block rates. The following table presents a comparison of actual 

NSA volumes with the pre-implementation forecasts of the volume 

each mailer would send in the absence of an NSA (before rates 

volume).

These variances influence the evaluation of the impact of the 

declining block rates on each mailer’s behavior. The Postal 

Service’s data collection reports make a simplifying assumption 

that all variance from the forecast before-rates volume is a direct 

result of the discounts. This approach can distort the results of the 

analysis because it does not control for the effects of changes in 

TABLE X-1

Summary of NSA Volumes 

(millions)

Forecast 

Volume

Actual 

Volume Variance Percent Variance

Capital One 1,109 1,061 (49) -4%

HSBC 856 582 (274) -32%

Discover 441 424 (17) -4%

Bank One/Chase 944 1,104 160 17%

Bookspan 78 97 19 24%
Chapter X—Negotiated Service Agreements

127

non-price (exogenous) factors that can influence mail volumes.55 

The Postal Service acknowledges this problem in its report on the 

Discover NSA. 

The Commission has previously suggested an alternative 

approach to estimating the effect of marginal discounts (or 

declining rates) which uses the price elasticity of the mailer, or a 

reasonable proxy. See PRC Op. and Further Recommended 

Decision, MC2004-3, ¶¶ 5001-38. The Postal Service included 

this type of analysis in its report on the Bookspan NSA, and the 

result is that the discounts are estimated to have benefited the 

Postal Service by generating new volume for a $92 thousand net 

increase in contribution. This estimate uses the average elasticity 

of all mail in the same subclass (-0.296) to identify the amount of 

new volume that is attributable to the discounts.56 It is 

substantially different than the results of the Postal Service 

method, which estimates a $1.5 million net increase in contribution 

from the discounts. The higher estimate relies on the volume 

forecast at the time of the original filing of the NSA, and implies an 

own-price elasticity of -1.93 for Bookspan. While it is not possible 

to know with certainty the effects of discounts on the behavior of 

any given mailer, the Commission finds the estimation method 

which utilizes reasonable proxies for a mailer’s elasticity to be 

more likely to generate reasonable results than simply assuming 

that the forecast made before the filing of the NSA remains valid 

despite constantly shifting economic conditions.

The Discover NSA actual volumes fell just short of the before-rates 

forecast, but just above the threshold to earn discounts. 

Therefore, the analysis in the data collection report indicates that 

there was no additional volume sent in response to the discount 

55 The potential for exogenous factors to alter mail volume and result in a net loss 

in contribution due to the payment of discounts on mail that would have been sent absent 

the NSA was the primary reason for the Commission’s adoption of stop loss caps based 

on cost savings.

56 In response to CIR No. 1, question 16, the Postal Service provided an estimate 

of $160 thousand net increase in contribution using a more recent elasticity (-0.368).
Chapter X—Negotiated Service Agreements

128

incentives. Just as in the Bookspan NSA, this static approach 

generates an unrealistic result, in this case a $330 thousand net 

loss in contribution from the discounts. If the same own-price 

elasticity as was used for Bookspan (-0.296) is applied to 

determine the increase in volume resulting from the discounts, the 

estimated net benefit for the Discover NSA is $878 thousand in 

additional contribution.57 Adding the net savings from electronic 

returns, the total estimated net benefit is $946 thousand in 

increased contribution.

Analysis of the Bank One/Chase NSA presents additional 

complications. As with most of the other NSAs, this one included 

a stop loss cap set at the amount of savings expected to result 

from the substitution of electronic notices for physical returns of 

undeliverable solicitations. Shortly after the NSA was filed with the 

Commission, the merger of Bank One and Chase was announced. 

Because the terms of the agreement and the financial analysis 

supporting it were developed for a pre-merger with Bank One, an 

added level of uncertainty existed that made the stop loss cap 

critical to the Commission’s approval of the agreement.

The Postal Service reports that the stop loss cap was reached in 

the second year of the agreement. As a result, it is not possible to 

estimate any effect the discounts may have had on volume using 

the elasticity-based approach. The change in volume is estimated 

by applying the elasticity to the change in price at the margin (i.e.,

the discount on the last piece). Since the cap was reached well 

57 The elasticity is used for illustrative purposes. This should not be construed as 

endorsing this as the best proxy for Discover’s eligible mail, but the Commission finds 

that it provides a more reasonable basis for estimating the effects of the NSA than the 

analysis presented in the data collection report. In response to CIR No. 1, question 16, 

the Postal Service provided an estimate of $2.3 million net increase in contribution using 

a more recent elasticity (-0.368). However, the estimate assumed that all of the volume 

increase was new First-Class Mail, and none was converted from Standard Mail. 

Previous analysis conservatively assumed that any increase in volume would come in 

the form of converted Standard Mail solicitations. It should also be noted that all of these 

estimates apply the discount response (elasticity) to all of Discover’s First-Class Mail 

volume, two-thirds of which was statement mail. It is widely believed that statement mail 

is less price elastic than solicitation mail.
Chapter X—Negotiated Service Agreements

129

before the end of the year, the marginal price was not discounted, 

and no change in volume can be attributed to the discounts.

It could be argued that marginal purchasing decisions for mailings 

were being made at discounted rates, and therefore some 

increase in volume occurred at the time of those purchases. 

However, the cap was reached roughly halfway through the threeyear agreement,58 and about six months after implementation, 

Bank One/Chase indicated that it believed it was possible to reach 

the cap less than one year into the agreement.59 This seems to 

suggest that from a very early date in the agreement, Bank One/

Chase anticipated that it would receive the full amount of 

discounts allowable under the cap well before the agreement 

expired. If this were the case, the discounts would not be 

perceived as dependent on any mailing decisions, but rather as an 

inevitable fixed refund, unaffected by any change in behavior.60

The following table summarizes the impact of NSAs on the 

contribution of the Postal Service. It shows that the NSAs 

collectively improved the net financial position of the Postal 

Service by about $2.5 million, virtually all of which was a result of 

the cost savings from substituting electronic notices for physical 

return of undeliverable solicitations. The net loss in contribution 

from the Bank One/Chase NSA occurred despite the stop loss 

cap, which was designed to protect the Postal Service from harm 

even if no benefit was realized as a result of the discounts. The 

cap was developed using the estimated savings from eliminating 

the physical return of undeliverable solicitations, and the bulk of 

the savings (about $2 million per year) were projected to come 

from avoiding the return of flats. However, sometime before the 

implementation of the agreement, Bank One/Chase ceased 

mailing flat-shaped First-Class Mail solicitations and the 

anticipated savings were not realized.

58 Since Bank One/Chase is not the one NSA for which discounts were awarded in 

FY 2007, it can be inferred that the cap was reached before October 2006, which was 

roughly one-and-a-half years after implementation.

59 See Docket No. MC2004-3, Petition of J.P. Morgan Chase & Co. to Reopen 

Record, September 14, 2005, at 6.

60 The only way the mailer’s behavior would affect the discounts would be in the 

timing of payment, not the amount.
Chapter X—Negotiated Service Agreements

130

TABLE X-2

Summary of NSAs Net Effect on Postal Service Contribution

($ thousands)

Discount 

Incentives

ACS Net 

Savings

Total Net 

Benefit

Capital One – 2,243 2,243

HSBC – – –

Discover 878 68 946

Bank One/Chase (957) 174 (783)

Bookspan 92 – 92

Total 13 2,484 2,497

Note: The time period covered varies for each NSA, but each reflects one year.
1

Appendix A—International Mail

This Appendix describes outbound and inbound international mail categories offered by the 

Postal Service. The Appendix also organizes the international mail categories into market 

dominant and competitive products as listed in the Mail Classification Schedule. Finally, the 

Appendix briefly discusses the origin and development of international mail volumes, 

revenues and costs.

Description of International Mail. For purposes of analysis, the Postal Service categorizes 

international mail by its place of origin, either U.S. or foreign. U.S. origin, or “outbound” mail, 

begins as collection mail or other domestically entered mail dispatched from U.S. processing 

facilities to foreign postal administrations for delivery. Foreign origin, or “inbound” mail, is 

entered in foreign countries and is transported to the Postal Service for delivery in the U.S.

Postal Service International Mail Categories. Based upon existing data systems, 

the Postal Service’s annual compliance report (and supporting documentation) presents 

international mail data organized into outbound and inbound categories rather than market 

dominant and competitive products. Table A-1 displays both outbound and inbound 

international mail categories offered by the Postal Service.

Table A-1

International Mail Categories and Services by Origin as Presented

by the Postal Service, FY 2007

Outbound Mail Inbound Mail

First-Class Mail International Surface

Letter, Flats, IPPs and Parcels LC/AO

International Cards Parcel Post

International Expedited Services Air

Global Express Guaranteed (GXG) LC/AO

Exprses Mail International Express

International Packages Parcel Post

PMI Flat-Rate Envelopes Inbound Extra Services

PMI Flat Rate Boxs Global Direct

PMI Parcels

International Priority Airmail (IPA)

International Surface Airlift (ISAL)

International Direct Sacks–M-Bags

Outbound Extra Services
Appendix A—International Mail

2

The primary categories of outbound international mail, shown in the upper half of Table A-1, 

are: First-Class Mail International, International Expedited Services, International 

Packages, and Outbound Extra Services. In addition, there are three categories of 

outbound international mail for bulk business (i.e., large-volume) mailers. 

First-Class Mail International consists of single-piece letters, cards, flats, irregular pieces 

and packages (IPPs), and parcels weighing up to 4 pounds. International Expedited 

Services consists of two separate but related services. The first, Global Express 

Guaranteed (GXG), is a high-speed delivery service for documents and non-documents 

(including merchandise), featuring a date certain, money-back delivery guarantee to over 

190 countries. 71 Fed. Reg. 76232 (December 20, 2006). The other, Express Mail 

International, is also a high-speed delivery service for documents and non-documents to 

over 190 countries with a money-back delivery guarantee to select destinations. Id.

International Packages consists of three separate services similar to domestic Priority Mail: 

Priority Mail International (PMI) Flat-Rate Envelope, PMI Flat-Rate Boxes, featuring two flatrate box-size options,1 and PMI Parcels.2 Outbound Extra Services is the name given to 

several special services that are similar to those available to domestic mailers. The 

Outbound Extra Services offered by the Postal Service during FY 2007 were Insurance, 

Money Orders, Registered Mail, Restricted Delivery and Return Receipt.

The three bulk business categories of outbound mail are International Priority Airmail (IPA), 

International Surface Airlift (ISAL), and International Direct Sacks-M Bags. IPA is a bulk 

service for mailpieces that can be entered as First-Class Mail International. ISAL is also a 

bulk service for First-Class Mail International mailpieces that meet a 50-pound minimum per 

mailing. M-Bags provide outbound service for printed matter, such as magazines, catalogs, 

and other publications, entered in “direct” sacks for delivery to one addressee.

The lower half of Table A-1 shows the primary categories of inbound international mail, 

which includes LC/AO (i.e., letter post), Express, Parcel Post, and Special Services. As 

described previously, LC/AO includes mail similar to domestic First-Class Mail, Periodicals, 

Standard Mail, Bound Printed Matter, and Media/Library Mail. LC/AO is presented 

separately for surface or air transportation. Surface and Air LC/AO and Express are 

equivalent services that correspond to outbound First-Class Mail International and Express 

Mail International, respectively. Parcel Post is also presented separately by mode of 

transportation (i.e., surface or air). Surface and Air Parcel Post offer service for virtually any 

1 In FY 2007, the Postal Service proposed (and subsequently approved) combining three preexisting service 

offerings—Economy Parcel Post, Air Parcel Post, and Global Priority Mail—into a new service, Priority Mail International 

(PMI). 71 Fed. Reg. 76232 (December 20, 2006).

2 In the Postal Service’s presentation, PMI Flat-Rate Boxes and PMI Parcels were combined into one line item for 

analysis. They are listed here as separate services within Priority Mail International for informational reasons only.
Appendix A—International Mail

3

mailable matter other than correspondence with weight limits that vary by destination 

country, which range from 44 pounds to 70 pounds. Inbound Special Services are called 

Extra Services. Inbound Extra Services consist of Money Orders and Registered Mail.

Global Direct, available for outbound and inbound international mail, is displayed separately 

in the last line of Table A-1. As an outbound service, mailers tender to the Postal Service 

items meeting the applicable makeup and preparation requirements for domestic mail in the 

destination country. However, Global Direct is available only pursuant to an International 

Customized Mail (ICM) agreement—an individually negotiated agreement between the 

Postal Service and a qualifying mailer. Such agreements often require minimum volume 

and revenue commitments by the mailer in exchange for volume discounts from the Postal 

Service. In addition to Global Direct, ICMs are (predominantly) utilized for IPA and ISAL 

qualifying mail, as well as Express Mail International and PMI items, with volumes typically 

dispatched to Western Europe and other industrialized countries. As an inbound service, 

Global Direct often involves agreements with foreign postal administrations.

Market Dominant and Competitive Products. As required by the PAEA, and 

pursuant to Order No. 43, the Commission approved the list of postal products to be 

included in Mail Classification Schedule (MCS). The MCS classifies mail services, including 

international mail categories, into market dominant and competitive products. Table A-2 

displays market dominant and competitive products, including Global Direct and 

International Ancillary (Special) Services, by origin according to the classifications in the 

MCS.

Table A-2

International Mail Categories and Services by Origin as Presented

by the Postal Service, FY 2007

MCS

Market Dominant Products Competitive Products

Outbound Mail Outbound Mail

1125 First-Class Mail International 2110 International Expedited Services

Letters, Flats, IPPs, Parcels Global Express Guaranteed (GXG)

Cards Express Mail International

1510 Internationl Ancillary (Special) Services 2210 Priority Mail International

Inbound Mail PMI Flat Rate Envelopes

1130 First-Class Mail International PMI Flat Rate Boxes

Surface LC/AO PMI Parcels

Air LC/AO 2505 International Priority Airmail (IPA)

1410 Surface Parcel Post 2510 International Surface Airlift (ISAL)

Surface Parcel Post (at UPS rates) 2515 International Direct Sacks–M-Bags

1510 International Ancillary (Special) Services 2520 Global Direct Outbound
Appendix A—International Mail

4

For market dominant products, outbound First-Class Mail International is comprised of 

single-piece letters, flats, aerogrammes, packages and cards, consistent with the Postal 

Service’s initial presentation. Inbound First-Class Mail International consists of Surface and 

Air LC/AO. Unlike the Postal Service’s initial presentation, however, both Outbound and 

Inbound Extra Services were subsequently separated into market dominant and competitive 

products by the Postal Service at the request of the Commission. See Response of the 

United States Postal Service to Quesetion 4 of Commission Information Request No. 1, 

February 4, 2008. Market dominant outbound special services are Registered Mail, Return 

Receipt, and Restricted Delivery. Registered Mail is the only inbound special service. 

Based upon data provided by the Postal Service, the Commission also separated inbound 

Surface Parcel Post into market dominant and competitive products; that is, Surface Parcel 

Post (at UPU rates) and Surface Parcel Post (at non-UPU rates), respectively.

With respect to competitive products, seven are classified as outbound—International 

Expedited Services, Priority Mail International, International Priority Airmail (IPA) Service, 

International Surface Airlift (ISAL), International Direct Sacks-M-Bags, Global Direct 

Outbound, and International Ancillary (Special) Services. International Expedited Services 

consists of GXG and Express Mail International. Priority Mail International consists of PMI 

Flat-rate Envelopes, PMI Flat-Rate Boxes, and PMI Parcels. International Priority Airmail 

(IPA), International Surface Airlift (ISAL), International Direct Sacks-M Bags, and Global 

Direct Outbound are unchanged from the Postal Service’s presentation. Competitive 

outbound special services are Insurance, Money Orders,3 and Registered Mail.

2535 International Ancilliary (Special Services)1 2215 Air Parcel Post

Inbound Mail Air Parcel Post

2115 International Expedited Services 2520 Global Direct Inbound

Express 2525 Surface Parcel Post (at non-UPU rates)

2530 International Ancillary (Special) Services1

1 Competitive outbound and inbound Money Orders are classified as a service within the separate “stand alone” 

product, International Money Transfer Service (MCS § 2530). For analysis, Money Orders will be discussed with all 

other competitive Special Services.

3 Competitive outbound and inbound Money Orders are classified as a service within the separate "stand alone" 

product, International Money Transfer Service (MCS § 2530). See Order No. 43, Appendix A, at 3. However, Money 

Orders will be discussed with all other competitive special services. 

Table A-2 (Continued)

International Mail Categories and Services by Origin as Presented

by the Postal Service, FY 2007

MCS
Appendix A—International Mail

5

Separate from, but included within, competitive outbound International Expedited Services, 

PMI, as well as IPA, ISAL, International Direct Sacks-M-Bags, and Global Direct, are 

numerous International Customized Mail (ICM) agreements, each of which is classified as a 

separate product pursuant to the Mail Classification Schedule (MCS).

Competitive inbound products include International Expedited Services, Air Parcel Post, 

Global Direct Inbound, Surface Parcel Post (at non-UPU rates), and International Ancillary 

(Special) Services. International Expedited Services consists of Express. Money Orders 

are the only competitive inbound special service.

Postal Service Volumes, Revenues and Costs. The Postal Service reports 

volume, revenue and cost data separately for each outbound and inbound international mail 

category. Depending upon the mail category, volumes represent pieces dispatched or 

received for delivery or, in the case of Extra Services, transactions. 

The Postal Service reports revenues from several sources. For outbound mail categories, 

revenues are obtained from postage paid, or fees for Outbound Extra Services.4

The Postal Service also receives revenues in the form of settlement charges—payments 

from foreign postal administrations for handling, transporting, and delivering inbound mail in 

the U.S.5 There are three types of settlement charges:

• Terminal dues are charges imposed on all inbound letter post. The Postal Service assesses terminal dues at rates set by the Universal Postal Union (UPU) on 

all developing countries (DCs) and industrialized countries (ICs), except Canada, 

which pays terminal dues based upon rates established in a negotiated bilateral 

agreement, i.e., non-UPU rates.

• Imbalance charges, established by the Postal Service, are payments received for 

handling inbound Express.

• Inward land charges consist of payments received for handling inbound Surface 

and Air Parcel Post. For the Postal Service, country payments for inward land 

charges parallel payments of terminal dues. All countries pay inward land 

charges at UPU rates, except Canada, which pays such charges at non-UPU 

rates based on a bilateral agreement.

4 In addition to fees, revenues for outbound Money Orders include interest earned on the balance of outstanding 

money orders, and funds taken into revenue from unredeemed money orders more than one year old. The Postal 

Service also receives revenues from a money wire transfer service. For inbound Money Orders, revenues are derived 

from a commission for redeeming international foreign issue money orders, and the gain (or loss) on foreign exchange 

transactions. 

5 For purposes of analysis, the Commission will use the term settlement “charges” when referring to payments 

(revenues) received from foreign postal administrations, and the term settlement “costs” when referring to Postal 

Service payments to foreign postal administrations.
Appendix A—International Mail

6

With respect to costs, outbound and inbound mail utilize similar and different resources. For 

outbound mail, the Postal Service incurs costs for collection, processing, domestic 

transportation, international transportation and associated overhead costs, as well as 

payments to foreign postal administrations to deliver the mail. These latter expenses are 

referred to as settlement costs. Inbound mail requires processing, domestic transportation, 

delivery and the overhead costs associated with performing these activities. Note that 

outbound mail incurs virtually no delivery costs while inbound mail incurs no international 

transportation costs on the part of the Postal Service. 6

The Postal Service develops and reports these international mail costs according to the 

Commission’s volume variable costing methodology. Volume variable costs are those costs 

that change in response to a small change in mail volume. The Postal Service organizes 

volume variable costs into six cost functions: (1) Processing, (2) Delivery, (3) Domestic 

Transportation, (4) International Transportation, (5) Settlement Costs, and (6) All Other 

(primarily administrative costs associated with the other five cost functions). Total and unit 

volume variable costs, as well as total and unit volume variable costs by cost function, are 

reported for each outbound and inbound mail category.

In addition, the Postal Service reports international service incremental costs, representing 

costs that can not be reliably assigned to any specific international mail and therefore are 

treated as incremental to international mail as a whole. Such costs include expenses for 

salaries and benefits for personnel, supplies and services, rents, utilities and other related 

expenses of providing international mail services.

6 Postal Service reports a small amount of delivery costs incurred for outbound international mail resulting from 

carrier pick-up of such mail from postal customers or collection boxes. 
1

Appendix B—Cost Attribution and Distribution Issues

In its ACR FY 2007 filing, the Postal Service adopted the cost attribution and distribution 

methodology used by the Commission in Docket No. R2006-1 in general but made a 

number of relatively minor changes. Some of these changes were a result of better data 

collection methods and were non-controversial. These include: new allocation and 

distribution of LDC 15 and LDC 48 cost pools; distribution of rural delivery costs by shape; a 

new source for detached address label volumes; the estimation of the percentage of 

saturation letters that are sequenced; and the disaggregation of delivery confirmation costs 

by shape. The Commission finds these changes to be appropriate in this instance. 

In cost segment 14, purchased transportation, the Postal Service used an improved 

distribution key to allocate the costs of the Christmas network. No parties commented on 

this change and the Commission finds it acceptable.

The largest change in attributable costs in the FY 2007 CRA was the determination of the 

variability and the distribution of costs for the Retiree Health Benefits and CSRS retirement 

obligations. The Postal Service explains its treatment of these costs in the Supplement to 

USPS-FY07-02. The Postal Service says that the costs of $7.1 billion, which is the sum of 

the $5.4 billion payment into the Retiree Health Benefits Fund and the $1.7 billion payment 

for the health benefit premiums for current retirees is included in Cost Segment 18, and is 

treated as it treats the costs for Workers Compensation. The costs for Retiree Health 

Benefits is divided into “current year” and “prior year” amounts, with the current year amount 

of $4.5 billion having the same variability as all labor, which adds $2.7 billion to attributable 

costs. The prior year amount of $2.6 billion was determined to be institutional.

In this Annual Compliance Report, USPS-FY-07-7 documents:

• The formation of Cost Segment 3 cost pools;

• Development of mail processing accrued costs and volume-variable subclass 

costs by cost pool; and

• Other related calculations that are inputs to the B Workpapers, CRA model, and 

Special Cost Studies. 

In light of the difficulty in quickly converting the main-frame SAS programs to PC SAS and 

then successfully running the programs in a timely manner, the submission of “linked” output 

summary tables within the Cost Segment 3 costs materials are helpful. The Commission 

finds the linked tables submitted in response to Commission Information Request No. 2 (CIR 
Appendix B—Cost Attribution and Distribution Issues

2

No. 2), question 10 helpful in its review and anticipates linked tables will be submitted with 

future annual compliance reports at the time of the filing. 

A hard copy review of the Cost Segment 3 SAS programs and documentation provides the 

following insights into and suggestions regarding the SAS programs and the Cost Segment 

3 costs.

Express Mail. Prior to FY 2007, the Postal Service grouped the out-of-office clerk Express 

Mail delivery costs with the non-handling costs and then distributed them to the subclasses 

on the basis of the in-office subclass handling costs. In FY 2007, the out-of-office Express 

Mail delivery costs are now separately identified using In Office Cost System (IOCS) tally 

information that is now available in the IOCS redesign of FY 2005. Also in FY 2007, the 

Postal Service now uses a 0.43 percent volume-variability (VV) factor to calculate the 

volume-variable portion of out-of-office Express mail delivery costs. The volume-variability 

is calculated using Base Year 2000 data for the now obsolete cost segment 3.4 for Special 

Delivery Messengers. There is no justification given for why this Base Year 2000 data on 

Special Delivery Messengers appropriately represents the current activities of clerks sent off 

the premises as needed to collect and deliver Express mail pieces. The Commission 

recommends that the Postal Service review its method for calculating out-of-office Express 

Mail Delivery/Collection costs volume-variability factors to ensure that this method reflects 

the current Express Mail collection/delivery environment. The results of the review should 

be submitted to the Commission before the end of FY 2008 and subjected to public 

comments.

Once calculated, the volume-variable costs are then allocated to domestic and international 

Express Mail based on in-office Express Mail IOCS tallies in the MODS LDC 18 Express 

Mail cost pool and all LDC 48 cost pools as well as the NON-MODS Express Mail cost pool. 

In FY 2007, total Express Mail volume was 69.9 million pieces (domestic 54.8 million + 14.4 

million (in-bound and out-bound international)). Of the 69.2 million pieces, 79 percent (54.8 

/ 69.2 = 79 percent) was domestic Express Mail. However, the Postal Service allocated 96 

percent of the out-of-office Express mail delivery costs to domestic Express mail on the 

basis of IOCS tallies. 

Given the large disparity in the FY 2007 volume split between domestic and international 

Express Mail and the split based on IOCS tallies1, the Commission recommends that the 

Postal Service review its IOCS allocation methodology to ensure that the actual cost 

allocation of the out-of-office Express Mail costs, is appropriate.

1 96 percent domestic and 4 percent international; Docket No. ACR2007, Responses of the United States Postal 

Service to Questions 9, 10, 12, 13, and 17 of the Commission Information Request No. 7, February 14, 2008.
Appendix B—Cost Attribution and Distribution Issues

3

In FY 2007, the Express Mail volume-variability factor, under the Mail Processing-NONMODS Group of the Cost Segment 3 Clerk and Mailhandler cost pools Table 1, is a 

calculated as 0.7723. This volume-variability (VV) factor is significantly lower than the VV 

factor of 1.00 used in past rate cases including the VV factor used in Docket No. R2006-1. A 

review of this change suggests that this calculated VV factor is a weighted average of inoffice Express Mail (1.00 volume-variability) and out-of-office Express Mail (0.4305 volumevariability). Response to CIR No. 3, question 2 (d). The Commission recommends that for 

useful reviews, any weighting factors used in calculations, as well as the calculations 

themselves are adequately described and their justifications are adequately explained in 

future compliance reports. 

Bulk Mail Centers. Prior to FY 2007, the Postal Service used IOCS tallies to distribute the 

cost of bulk mail centers (BMC) to classes of mail because the MODS system was not used 

at BMCs. Since FY 2006, the MODS system was expanded to include BMCs, and these 

costs are now distributed based on MODS instead. In library reference USPS-FY07-7, the 

Postal Service provided information on the changes it made to mail processing accrued 

costs and volume-variable subclass costs in the segment 3 cost pools.2 The PRC-version 

methodology used for MODS 1&2 facilities was extended to BMCs to align “function 1” cost 

pools. In FY 2007, MODS hours were used to allocate BMC data into the same cost pools 

as those used in Docket No. R2006-1. In addition, MODS hours were used to identify two 

additional cost pools and segregate those costs from the “OTHER” cost pool. The two new 

pools are the LDC 13 Tray Sorter/Robotics and the LDC 14 manual parcel sorting.

The Commission believes it is logical to align all “function 1” cost pools to ensure 

consistency in the appropriate application of distribution keys. Rather than combining costs 

into an “OTHER” category, the establishment of unique LDC 13 and 14 cost pools allows 

costs to be properly disaggregated and facilitates the alignment of costs to those activities 

that generated them.

Non-MODS Offices. Prior to FY 2007, the nonMODs mail processing break-time was 

included as an input to the B workpapers. The clocking in/out time was subsequently 

allocated to subclass costs in the B workpapers. In FY 2007, both break-time and clocking 

in/out costs are included as mail processing NonMODs input subclass costs for the B 

workpapers. While the methodology used for allocating clocking in/out costs remains the 

same, the location of where and how the costs are included has changed. The Postal 

Service has indicated that the inclusion of clocking in/out time in the MODS hours of the cost 

pools facilitates downstream data processing. 

In FY 2007, the Postal Service added code to the file “ADMWIN.sas” to allocate clocking in/

out time for the NonMODS subclass costs to be consistent with its handling of the clocking 

2 Docket No. ACR2007, USPS-FY07-7, files “Preface.Part.1.USPS-FY07-7.doc.” 
Appendix B—Cost Attribution and Distribution Issues

4

in/out time for the BMCs and the MODS 1&2 facilities. No change in methodology appears 

to have taken place – rather, the change is in the location of where the allocation occurs – 

internal to the SAS program versus external to the program. The change appears 

reasonable.

Delivery/Collection Costs. 

Postal Service Changes. 

1. Methodology Changes—In the FY 2007 Annual Compliance Report (ACR), 

the Postal Service made three methodological changes to the Commission’s approved 

methodology that affected the attribution of city carrier in-office and street time costs in 

Segments 6 and 7. First, the Postal Service treated approximately $60 million in nonvolume variable collection box costs as product-specific costs attributable to First-Class 

single-piece letters, rather than treating these costs as institutional costs, according to the 

Commission’s established method. Second, it allocated approximately $5 million nonvolume variable collection costs from Express Mail collection boxes, previously considered 

institutional, to Express Mail. Third, the Postal Service assigned approximately $25 million 

associated with delivery confirmation scans performed by carriers directly to Special 

Services – Other.

2. Data Collection Changes—The Postal Service made three data collection 

changes that could affect the development of unit delivery costs. First, it estimated the 

volume of detached address labels (DALs) from samples taken from the City Carrier Cost 

System (CCCS) and Rural Carrier Cost System (RCCS), rather than using mailer-provided 

data to obtain estimates of DAL volumes. This allowed the breakout of DALs by shape of 

the mailpiece with which they were associated. 

Second, the Postal Service estimated the proportion of city saturation letters and flats taken 

directly to the street (sequenced mail) using the difference between saturation and cased 

volumes of ECR saturation letters and flats taken from the CCCS. This is in contrast to the 

method used prior to FY 2007 which used data from the In-Office Cost System (IOCS) 

combined with an old productivity casing study. 

Finally, the Postal Service used the RCCS to estimate the relative volumes of boxholder 

ECR saturation flats and parcels rather than relative flat and parcel volumes from the 

Revenue, Pieces, and Weights (RPW) sample. In all other substantive respects, the Postal 

Service followed the methodology utilized by the Commission in Docket No. R2006-1.3

3 Opinion and Recommended Decision, PRC Op. R2006-1, ¶5155. Specifically, the Postal Service incorporated the 

Commission’s model of disaggregating automation and non-automation delivery costs by using the delivery point 

sequenced (DPS’d) percentage associated with each rate category. The Commission also changed the percentages of 

mail that was DPS’d based on the updated accept rates it requested. 
Appendix B—Cost Attribution and Distribution Issues

5

Comments of Parties. Valpak raises general concerns about the small unit cost 

difference between the unit delivery costs for saturation letters and flats. Valpak Comments 

at 38. It reiterates concerns it raised in both R2005-1 and R2006-1, namely that saturation 

letter unit costs should be lower. See, Valpak Initial Brief, Docket No. R2006-1. 

Valpak also questions the validity of delivery data in general, pointing to various 

discrepancies involving the measurement of DALs. It first points out a possible discrepancy 

between the approximately 529 million DALs identified in the Billing Determinants, and the 

number of DALs used to distribute FY 2007 delivery costs. Id. at 42. Similarly, Valpak 

questions whether and how mixed Basic ECR letters will be used for ratemaking purposes, 

since this category was eliminated May 15, 2007. Id. at 44. Finally, Valpak identifies a 

possible DAL discrepancy involving parcels, by pointing out that there are approximately 1.6 

billion DALs associated with parcels, but approximately 900 million saturation parcels that 

would need DALs. Id., at 43.

Valassis responds to Valpak’s key delivery arguments in its Reply Comments. It first argues 

that the new method of using the RCCS, coupled with the shift away from DALs associated 

with flats due to the DAL surcharge, has increased the volume of non-DAL rural saturation 

letters by 60 percent. Valassis argues that the large increase in non-DAL saturation letters 

is primarily due to correcting the misidentification of rural DALs and their proper identification 

as rural saturation letters. Since the costs associated with DALs had been attributed to 

saturation flats, a reduction in DAL volumes would tend to reduce rural saturation flat with 

DALs costs. Valassis Reply Comments at 3 and 4, n. 4.

Valassis rebuts Valpak’s implication that saturation letters should be substantially less costly 

to deliver than saturation flats delivered as sequenced mail. It contests Valpak’s contention 

that nearly all saturation letters are DPS’d. Rather, Valassis asserts that the new estimates 

of DALs, proportions of saturation letters and flats taken to the street, and rural boxholder 

volumes by shape, show that only 49.4 percent of city saturation letters are DPS’d and 

approximately 15.5 percent of city saturation letters were taken directly to the street. These 

two low-cost delivery options constituted approximately 65 percent of city saturation letters, 

a lower percent than the low cost delivery options available to city saturation flats, 74 

percent of which were delivered as sequenced mail. Id. at 6. Valassis makes a similar 

argument with regard to rural saturation letters. It states that 56 percent of rural saturation 

letters were delivered as either DPS’d mail or boxholder mail, while 50 percent of rural 

saturation flats were delivered as boxholder mail. Valassis concludes that both saturation 

letters and flats take advantage of lower cost delivery options to similar degrees. Id., at 6.

Valassis argues that the Postal Service’s measurement of DAL volumes is correct. It states 

that only 529 million DALs appear in the Billing Determinants, because those DALs were 

connected with the revenue collected once the DAL surcharge was implemented. In 

contrast, the 3.1 billion DALs delivered by city and rural carriers used for unit delivery cost 

development, represented all DALs measured by the CCCS and RCCS in FY 2007. Id., at 
Appendix B—Cost Attribution and Distribution Issues

6

7. Valassis also notes that the use of DALs with parcels includes basic and high density 

parcels in addition to saturation parcels. This accounts for the discrepancy between DALs 

associated with parcels and the volume of saturation parcels. Id., at 7.

Major Mailers Association (MMA) disagrees with the method the Commission used in 

Docket No. R2006-1 to separate casing from non-casing costs of disaggregated rate 

categories. In that docket the Commission used modeled mail processing DPS’d 

percentages associated with individual rate categories to perform this task. MMA does not 

question the desirability of using DPS’d percentages to separate casing from non-casing 

costs for individual rate categories. Rather, it contends that the Commission should have 

tied DPS’d percentages for individual automation and non-automation rate categories to the 

more aggregated DPS’d percentages for automation and non-automation mail taken from 

the CCCS, instead of using model-derived DPS’d percentages to perform the rate 

disaggregation. MMA-FY07-_FCM_Delivery_Cost_Savings.xls, worksheet “Corrected 

DPS%s,” and Initial Comments of Major Mailers Association (MMA Comments), Docket No. 

ACR2007, at 15. 

MMA proposes this method for two reasons. First, it contends that actual DPS’d percentage 

data is superior to model-derived DPS’d percentage data. MMA Comments at 16. In 

addition, MMA’s method increases the difference between non-automation machinable 

presort and automation DPS’d percentages, thereby increasing avoided unit delivery casing 

costs for automated mail categories. MMA Comments at 17. Specifically, it solves what 

might be considered an anomaly, namely that Non-Auto Machinable mail for all presort 

levels had higher delivery workshared savings than Auto-Mixed AADC. 

Finally, MMA identifies an error in the DPS’d percentage for Auto 5-Digit Letters CSBCS/

Manual Sites entered into the delivery spreadsheets from the First-Class mail flow 

spreadsheet. Id., at 16, n. 13.

The Postal Service rebuts MMA’s argument in favor of tying the percent of modeled DPS’d 

mail to the percent of mail estimated to be DPS’d by the CCCS. It first argues that the 

Commission should generally treat criticisms of its pre-existing methodologies as being 

prospective in effect; that is, as suggestions on how to improve the cost models for future 

compliance reports, and it then notes that the Commission has used modeled percentages 

of DPS’d mail to develop unit delivery costs by rate category for the last four omnibus rate 

cases. Reply Comments Of The United States Postal Service, Docket No. ACR2007, at 9 

and 13.

Commission Analysis. 

1. Methodology Changes—The Postal Service associated approximately $60 

million non-volume variable collection box costs with First-Class Single-Piece Letters as 

product-specific costs, rather than treating these costs as institutional costs according to the 
Appendix B—Cost Attribution and Distribution Issues

7

Commission’s established method. The Commission asked the Postal Service to justify this 

change in light of the fact that First-Class Single-Piece Cards, Priority Mail, Express Mail, 

Zone Rated Parcels, U.S. Postal Service Mail, Free Mail, and International Mail were 

collected from general collection boxes. CIR No. 2, question 1, February 1, 2008. The 

Postal Service confirmed the mail products were collected in general collection boxes, but 

justified assigning all non-volume variable collection costs to First-Class single-piece letters 

since the collection boxes “...are put into service for collecting First-Class Single Piece 

letters....” Responses of the United States Postal Service to Questions 1 – 5, 7, 8, 14, and 

19 of Commission Information Request No. 2, February 11, 2008.

The Commission does not find this explanation a sufficient basis for a methodology change. 

Not only are numerous mail products other than First-Class single-piece letters collected in 

general collection boxes, the boxes themselves do not state that their use is solely for the 

collection of First-Class single-piece letters. Consequently, the Commission will retain the 

costs as institutional costs.

The Postal Service also associated approximately $5 million non-volume variable collection 

costs from Express Mail collection boxes as costs specific to the delivery of Express Mail. 

The Commission accepts this change because Express Mail collection boxes are identified 

to the general public as being for the collection of Express Mail. 

Third, the Postal Service assigned approximately $25 million associated with Delivery 

Confirmation Scans directly to Special Services – Other. The Commission asked the Postal 

Service whether delivery confirmation scans were used for competitive services (e.g., 

Priority Mail). CIR No. 2, question 2, February 1, 2008. The Postal Service response 

agreed that delivery confirmation scans were associated with both competitive and market 

dominant products, but it stated that delivery confirmation scans have been classified as 

market dominant, and so their costs should be assigned to a market dominant product.

The Commission accepts the Postal Service treatment for purposes of this filing in the 

absence of information on how to accurately adjust this allocation. However, the 

Commission finds it would be more appropriate to distribute the cost of these scans in 

proportion to the volume of the specific products for which the scans are made, keeping in 

mind that Priority Electronic and Parcel Select Electronic include the recovery of costs 

associated with delivery confirmation scans in their rates. The Postal Service should correct 

this cost distribution in future filings. The proper allocation of the costs of delivery scans is 

particularly important given the distinction between Market Dominant and Competitive 

products outlined in the PAEA. 

2. Data Collection Changes—The Commission agrees with Valassis that the 

percentage of saturation letters delivered by low cost delivery letter mechanisms (DPS’d, 

sequenced mail and rural boxholder) are approximately the same as the percentage of 

saturation flats delivered by the low cost flat delivery mechanisms of sequenced mail and 
Appendix B—Cost Attribution and Distribution Issues

8

rural boxholder. The Commission reproduced Valassis’ calculation for city routes that 65 

percent of saturation letters are delivered either as DPS’d or sequenced mail, while 74 

percent of saturation flats are delivered as sequenced mail.4 The Commission also 

reproduced Valassis’ calculation for rural routes that 50 percent of saturation flats are 

delivered as boxholder mail5. The Commission was not able to exactly reproduce Valassis’ 

calculation for rural routes 56 percent of saturation letters are delivered as either DPS or 

boxholder mail. Rather, the Commission calculated a lower percent, 45 percent for these 

rural letter delivery methods.6

The Commission also agrees that the data anomalies identified by VALPAK are readily 

explained. The discrepancy between the volume of DALs with the DAL surcharge in the 

Billing Determinants, and the total volume of DALs in the CCCS and RCCS is explained by 

the fact that the DAL surcharge only applied to DAL volumes subsequent to May 15, 2007 

when the DAL surcharge was implemented, while the DALs recorded in the CCCS and 

RCCS are recorded for the entire FY 2007. The Postal Service also confirmed that the 

volume of DALs associated with ECR parcels would be greater than the volume of DALs 

associated only with ECR saturation parcels, since basic and high density ECR parcels 

must also be sent with DALs. Response of the United States Postal Service to Commission 

Information Request No. 2, Question 14. 

The Commission finds additional reasons to support the new data collection methods. First, 

In R2006-1, the Postal Service estimated the FY 2005 volume of DALs by taking a mailerprovided annual 2004 DAL volume, and increasing it by the ratio of FY 2005 saturation flats 

to FY 2004 saturation flats.7 This method is no longer valid because a DAL surcharge was 

implemented in FY 2007. PRC Op. R2006-1, ¶5422. The prior method of estimating DALs 

does not account for the volume effect of this price change. For this reason, the 

Commission accepts the new method of collecting data on DAL volumes. Second, the 

Commission finds the use of data sampled from a current and established dataset to 

estimate the volume of sequenced mail an improvement over relying on an outdated casing 

productivity study. Finally, the new data on rural boxholder saturation flats shows that, since 

the test year 2008 estimates made in R2006-1, saturation flats have increased by 13 

percent compared to 5 percent for saturation letters, thereby offering an additional reason 

for the narrowing of unit cost difference between saturation letters and flats.8

4 SeeVolAdj071211.xls,“SaturationVols.” Cells: D15/D11; F20/(D20+D15+D11); and F20/(D20+D15+D11).

5 See UDCInputs.xls, “RCSECRVOls: BoxholderbyShape!D13/(BoxholderbyShape!D13+RCSECRVols!C27).

6 See UDCInputs.xls, “RCSECRVOls”: BoxholderbyShape!D13/(BoxholderbyShape!D13+RCSECRVols!C27).

7 See Docket No. R2006-1, PRC-LR-11, UDCInputs.PRC.xls, “DALS.”

8 See UDCModel07211.xls, “7.Boxdrs.ByShape,” UDCmodel.PRC.xls, “7.Boxdrs.ByShape.”
Appendix B—Cost Attribution and Distribution Issues

9

While the Commission finds the new data collection methods to be an improvement, it is 

concerned about the growth of in-office direct labor costs attributed to certain mail 

categories. See CIR No. 1, question 12. The Postal Service responded to a question from 

the Commission regarding these increases. It stated that because modeled DPS’d 

percentages increased from the previous rate case, in-office unit direct labor costs 

increased due to a decline in cased mail volumes. Response of the United States Postal 

Service to Commission Information Request No. 1, Question 12b. While the answer is 

technically satisfactory, it raises a theoretical concern, at least for certain non-automation 

rate categories identified in the table above. If the volume of cased mail has declined, and 

the variability of casing is approximately 100 percent (which should certainly be true for nonautomation, non-machinable mail), the percentage decline in volume should be matched by 

a similar percentage decline in cost. That is not the case for the identified mail categories, 

and is an area that warrants further examination.

Regarding MMAs comments, the Commission agrees with the Postal Service that using 

modeled DPS’d percentages to develop unit delivery costs for individual rate categories is 

an established Commission practice. The Commission concludes that it would be imprudent 

to make such a substantial change in methodology in this proceeding. However, the use of 

sampled DPS’d delivery percentages rather than DPS’d percentages developed in mail 

processing models may be appropriate for the development of unit delivery costs. The 

Postal Service should review this issue prior to its next annual report. This is an issue the 

Commission also may examine after it establishes rules to alter cost or pricing 

methodologies outside of annual compliance reviews and/or annual price cap filings. 
1

Abbreviations and Acronyms

Long Version Abbreviation/Acronym

FY 2007 Annual Compliance Report ACR

area distribution center ADC

automated area distribution center AADC

Automated Flat Sorting Machine AFSM

Automated Package Processing System APPS

Automated Tray Handling System ATHS

bulk mail centers BMCs

Bulk Metered Mail BMM

City Carrier Cost System CCCS

Civil Service Retirement System CSRS

Collect on Delivery COD

Consumer Price Index CPI

Consumer Price Index for all urban consumers CPI-U

cost and revenue analysis CRA

Cost of Living Adjustments COLA

Customer Satisfaction Measurement CSM

delivery point sequence DPS

delivery point sequenced DPS’d

Destinating Sectional Center Facilities DSCF

detached address label DAL

educational, cultural, scientific or informational [value] ECSI

enhanced carrier route ECR

Equal Employment Opportunity EEO

External First-Class Measurement System EXFC

Global Express Guaranteed GXG

Integrated Financial Plan IFP

Intelligent Mail Barcode IMB

International Cost and Revenue Analysis ICRA

International Customized Mail ICRA

International Mail Measurement System IMMS

International Priority Airmail IPA
2

International Surface Airlift ISAL

irregular pieces and packages IPPs

letter post LC/AO

Labor Distribution Code LDC

Mail Classification Schedule MCS

Mailers Technology Advisory Council MTAC

Management Operating Data System MODS

mixed area distribution center MADC

multiline optical character reader information system service MLOCR-ISS

Negotiated Service Agreement NSA

Office of Personnel Management OPM

Occupational Safety and Health Administration OSHA

personal computer software and solution PC SAS

Postal Accountability and Enhancement Act PAEA

Postal Reorganization Act PRA

qualified business reply mail QBRM

Remote Encoding Center REC

Postal Service Retirement Health Benefits Fund PSRHBF

Premium Forwarding Service PFS

Priority Mail International PMI

Revenue, Pieces, and Weights RPW

Rural Carrier Cost System RCCS

Small Parcel Bundle Sorter SPBS

software and solution SAS

Strategic Transformation Plan 2007 Update Strategic Transformation Plan

Total Factor Productivity TFP

unit delivery costs UDC

United States Postal Service FY 2007 Annual Compliance Report ACR

Universal Postal Union UPU

Voice of the Employee VOE

Abbreviations and Acronyms

Long Version Abbreviation/Acronym